09 July 2014

Financials - Sector Update - Slowly stepping out of the problem zone :: Centrum

The inherent nature of problems including inflation, interest rates
and asset quality makes us believe that current sector valuations are
a bit stretched in the context of expected policy reforms across core
sector growth. Though initial actions of the new government show
efforts in reviving growth and the upcoming Union budget could lay out
the roadmap for fiscal consolidation, we expect the re-rating to be a
gradual process. We stick with our preference for well-positioned
private banks - ICICI Bank, DCB Bank and City Union Bank. Within PSUs,
we prefer SBI to PNB.

$ Domestic factors improve: Easing twin deficits, efforts towards
reviving core sectors of growth and macro-recovery provide comfort on
the economic front. The decisive election outcome and efforts by the
central bank to arrest NPAs (creation of joint lender forum), address
capital issues (deferring of Basel-III by one-year) and ensuring
adequate liquidity in the system (term repo auctions) have helped
valuations swiftly adjust to these expectations.

$ Inflation, interest rate and asset quality, key challenges: In our
last updates, we pointed out that the limited fiscal room will
restrict the scope of material easing in interest rates. Interactions
with industry experts point to continued levels of stress asset
additions that is evident from a) 44% yoy increase in referrals to CDR
cell for FY14 b) slippages from the restructured pool at 25% (avg) and
c) huge surge in assets sold to ARCs. Compliance with Basel III norms,
though postponed by one year, effective management is vital to prevent
the risk of frequent dilution and consequently impact RoEs.

$ Budget expectation: While the roadmap for fiscal consolidation will
remain the key focus area and determine the trajectory of interest
rates, we  need to watch out for measures taken on a) recapitalisation
of PSU banks b) creation of holding company structure / reduction in
government holding in PSU banks and c ) creation of bad bank (to
absorb NPAs). Sops to the housing sector in the form of interest
subvention / increase in affordable housing limit / increase in tax
deduction limits could add further impetus to the sector.

$ Q1FY15E Quarterly preview – Sluggish quarter; asset quality, a
concern: We expect modest 14% yoy growth in net interest income and
flat margins. The larger challenge remains with a) lower fee income
(could be offset by treasury gains b) employee expenses, specifically
for PSU banks and c) asset quality related provisioning. We expect our
coverage universe (6 banks) to report 12% yoy / 5% yoy growth in
operating profit / net profit for Q1FY15. Housing finance companies
will continue to witness stable growth. Mahindra Finance will face
challenges on AuM growth and asset quality. CARE and CRISIL should
witness 17.5% yoy growth in revenues and expansion in EBIDTA margins.

Thanks & Regards


Metals & Mining - Sector Update - Volumes to drive uptick in earnings for the quarter:: Centrum

Volumes to drive uptick in earnings for the quarter

We expect smart improvement in operational performance YoY for our
metals & mining universe during Q1FY15 on account of i) higher volumes
led by expansions, improved logistics and better marketing, ii) higher
realizations for miners and non-ferrous producers but flattish for
ferrous and iii) cost benefits due to lower raw material prices. We
expect positive earnings surprise from NMDC, Hindalco & GMDC while
negative earnings surprise from Sesa Sterlite, HZL and Coal India.
Volatility in stock prices remains high and we continue to maintain
Sell on producers due to expensive valuations. We prefer miners and
refractory producers as our long term bets.

$ Ferrous & Mining – higher volumes and lower RM costs to drive
earnings: Volumes for ferrous names like Tata Steel, JSW and SAIL are
expected to be higher by 9-18% YoY led by expansions and strong
marketing effort. Volume growth for mining companies like Coal India
and GMDC is expected to remain subdued due to production issues but
robust for NMDC led by strong demand for fines and improvement in
logistics.  Higher pellet volumes are expected to lift GPIL’s
earnings. Smart pick up in EBITDA seen YoY for ferrous names due to
lower coking coal costs.

$ Non Ferrous - LME shows sequential improvement: LME prices for Al
and Zn moved up by 5.3% and 2.3% QoQ which are expected to keep
earnings momentum up for non-ferrous stocks. We expect weak
performance from HZL due to lower MIC volumes while Hindalco is
expected to deliver higher earnings YoY led by strong aluminium and
copper volumes. Sesa Sterlite’s performance is expected to be lower
QoQ due to weak earnings from zinc, copper, power and iron ore

$ Budget expectations for metals sector: Removal of import duty (2.5%)
on iron ore, reduction in export duty on iron ore (from 30% to 20%),
higher export duty on bauxite (10% currently), higher export duty on
pellets (5% currently) and lower import duty on copper concentrate
(largely imported by domestic custom smelters). Other key expectations
which are unlikely to be met are higher import duty on steel (7.5%
currently) and aluminium (5% currently).

$ Recommendation – remain cautious, prefer miners and refractory
makers: We maintain cautious stance on the metals sector and believe
that the sharp rally was largely due to market preference for
cyclicals and high beta effect rather than change in fundamentals and
thus believe that broad-based metals sector rally will fizzle out
soon. We continue to be sellers of ferrous names like SAIL/Tata Steel
but maintain positive stance on miners like NMDC/GMDC. We continue to
prefer HZL over Sesa Sterlite and Hindalco in the non-ferrous space
due to its superior fundamentals. Among midcaps, we prefer GPIL and

Thanks & Regards


FMCG - Sector Update - Prefer midcaps to large caps :: Centrum

Prefer midcaps to large caps

Q1FY15 results are expected to be moderate for our coverage universe
with mere 8.7% topline growth. Weak volume growth will continue to
impact all categories as consumers continue to cut discretionary
spends. While category leaders Colgate andGSK Consumer will expand
margins, Nestle’s margins will contract on the back of negative volume
growth. Midcap companies will continue to outperform large caps.
Operating profit and PAT are expected to grow by 7.9% YoY and 6.6%
respectively. We expect positive surprise from Colgate and La Opala
and negative surprise from Nestle.

$ Moderation in sales growth: We expect 8.7% YoY sales growth for our
coverage universe. Large cap MNC companies, Colgate and GSK Consumer,
are expected to report 9% volume growth while Nestle could report
negative volume growth. We believe midcap companies will grow faster
than large cap players with strong volume growth. La Opala would have
~20% volume growth while Speciality Restaurant and Talwalkars 17% &
21% growth respectively.

$ Operating margin to decline: We have modeled operating margin
compression of 15bps YoY for companies under coverage. GSK Consumer
and Colgate would post margin expansion despite high A&P spends on the
back of healthy volume growth while Nestle’s margins could compress on
the back of cost inflation and low single digit topline growth. La
Opala and Talwalkars’s margin will expand while Speciality Restaurants
will post a decline on the back of high RM and employee costs.
Operating profit will grow by 7.9% YoY for the coverage universe.

$ Profitability under pressure: PAT for our coverage universe is
expected to grow by mere 6.6% YoY. Colgate and GSK Consumer are
expected to post healthy PAT growth of 14.9% and 22.1% respectively on
the back of strong topline growth coupled with margin expansion.
Nestle’s PAT will decline by 4.4%YoY.  Among small cap stocks,
Talwalkars is expected to grow by 25.3% while La Opala will grow by
42.4%YoY. Speciality Restaurant will continue to disappoint with PAT
decline of 10.7%.

$ Valuation & Risk: We downgrade GSK Consumer to Hold on the back of
steep valuations and believe the upside from healthy volume growth is
factored in the current stock price. We maintain Sell rating on
Colgate and Nestle due to increasing competitive intensity and down
trading by customers could impact volume growth and hence valuations.
In the current situation, we prefer midcap companies La Opala RG,
Talwalkars and Speciality Restaurants as they are market leaders in
their respective categories and any upswing in the economy will
benefit them first. Key risks to our call would be slowdown in rural
demand and higher than expected A&P spends impacting margins.

Thanks & Regards

Media - Sector Update - Ad growth under pressure : Centrum

Ad growth under pressure

We expect Q1FY15 results to be subdued for media companies with
advertisement growth in single digits. Election benefits will not flow
in for print companies but economic slowdown could impact
broadcasters. Subscription and circulation revenues are also expected
to moderate during the quarter. However, we expect gross addition to
be healthy for Dish TV and predict healthy revenue growth for internet
players. Operating margins for our coverage universe will be under
pressure on the back of lower topline growth.

$ Ad revenue to be under pressure: Subdued macro environment coupled
with high base will impact ad growth in the quarter. Benefit from
elections led advertisements will be offset by the blackout of
Government advertisement due to the election code of conduct for print
& radio companies. Jagran, DB Corp and HT Media are expected to post
~8-9% ad growth in the quarter with English print continuing to be
under pressure. High base will impact Sun TV and hence we have
modelled merely 1% growth, while ZEEL could post 14% ad growth. ENIL
may report 9% YoY ad growth on the back of high inventory utilisation
and inability to improve yields.

$ Circulation & subscription revenue growth to moderate: Circulation
revenue growth for print players will moderate with DB Corp and HT
Media each growing at ~10-11% and Jagran by 4% on the back of marginal
price hikes during the year. The impact of cuts in cover price in
Bihar market will be felt by both HT Media and Jagran. On the back of
high base, benefits of digitization in Phase-I/II in the system and
closure of MediaPro JV, ZEEL is expected to report ~9% growth in
domestic subscription revenues while Sun TV is likely to grow analog
subscription revenues by 27% and DTH by 17% YoY. Dish TV’s gross
subscriber addition is expected to be at 0.5mn while ARPU remains flat
sequentially at Rs170.

$ Operating margins to be under pressure: With revenues under
pressure, operating margins are expected to compress by 148bps YoY for
our coverage companies. Broadcasters like Sun TV and ZEEL’s OPM will
compress due to lower ad growth and high programming cost. However, DB
Corp’s margins are set to decline by 267bps due to high RM cost and
impact of Bihar launch. Jagran will post flat margins while HT Media’s
margin will expend by 67bps with traction in Hindi business. High A&P
expenses will impact Just Dial while strong operating leverage will
help Info Edge expand margins by 255bps. Hence, operating profit for
our coverage universe is set to grow by mere 5.2% YoY and PAT by 4.3%

$ Recommendation & key risks: We continue to prefer Jagran Prakashan
among print companies and maintain our recommendation to switch to Sun
TV from ZEEL as we believe margins for ZEEL would be under pressure on
new channel launches while Sun TV will benefit significantly from
digitization. Among internet companies we suggest a switch from Just
Dial to Info Edge as we believe the transaction driven business model
of Just Dial will need significant investment. We maintain Buy rating
on Jagran Prakashan, DB Corp, Sun TV Network, HT Media, Info Edge,
Dish TV but Hold on ENIL, ZEEL and Just Dial. Key risks to our call
will be 1) Continuing economic slowdown, and 2) Delay in digitization.

Thanks & Regards


07 July 2014

Pharma - Sector Update - Strong growth leads to re-rating: Centrum

Strong growth leads to re-rating

We expect pharma industry to perform well on both domestic and global
fronts due to good growth across geographies. Despite price cuts under
NPPP, the domestic pharma market is expected to report good growth in
FY15 on a lower base. On exports too, companies are likely to report
strong growth for existing products and new launches in the US
generics market.  All these should lead to companies under our
coverage to report 19%YoY growth in revenues, 24% growth in EBIDTA and
30% growth in net profit during Q1FY15. Lupin, Aurobindo Pharma (APL)
and Pfizer remain our best picks. Key risks to our assumptions include
slowdown in the domestic pharma market and risks from global
regulatory agencies.

$ Domestic pharma market –  on a growth path: The domestic pharma
market is likely to report good growth from Q1FY15 onwards as the
Government has allowed 6.3% increase in prices for the 348 price
controlled drugs and up to 10% per annum for drugs outside price
control. This is likely to benefit the entire pharma industry. After
the announcement of price control on 348 drugs, the domestic pharma
market fell to 6.8% in Sept’13 from 8.2% in August’13. We expect the
growth momentum to continue due to the recent price revision and new
product introductions.

$ Companies under coverage to report healthy growth:  For Q1FY15, we
expect the 13 pharma companies under our coverage to report 19%YoY
growth in revenues, 24% growth in EBIDTA and 30% growth in net profit.
We expect 90bps improvement in EBIDTA margin to 24.4% from 23.5% due
to good growth in both domestic and export markets. Companies under
our coverage constitute 36% of the domestic pharma market and are
expected to perform well due to the recent price revision by NPPA and
lower base.

$ Expectations from Union Budget: The pharma sector expects exemption
for exports from service tax and MAT and also for SEZ units from MAT.
The industry expects further exemption on R & D equipment and capital
goods from excise and customs duties. There is a demand to allow 100%
FDI in pharma and biotech sectors through the automatic route. The
200% weighted average deduction for in-house R & D should also include
patent filing fees and global clinical trial expenses. We expect the
Government to exempt exports from service tax and MAT and SEZ units
from MAT.

$ Recommendation & key risk:  We have rolled our target prices to
June’16E EPS from Mar’16E EPS.  We have changed the target multiple
for Dishman Pharma (DPCL) to 10x from 8x and for Pfizer to 19x from
18x in expectation of improved performance. Pharma companies have
outperformed the Nifty during the last month due to a sector switch.
Lupin, APL and Pfizer remain our preferred picks in the pharma space.
Key risks to our call will be 1) slowdown in the domestic pharma
market 2) Regulatory risks from international agencies for
manufacturing facilities located in India.

Thanks & Regards


Granules India - Initiating Coverage - Achieving higher altitude in performance: Centrum

Rating: Buy; Target Price: Rs720; CMP: Rs545; Upside: 32%

Achieving higher altitude in performance

We initiate coverage on Granules India (GIL) with a Buy
recommendation. GIL has a unique business model with its presence over
the entire pharma value chain and derives over 80% of its revenues
from exports. The company is the world’s largest producer of PFIs and
hence is a preferred supplier to MNC pharma companies. With the recent
acquisition of Auctus Pharma (APL), the company has expanded product
offerings and added new customers.  We expect GIL to achieve 25%CAGR
in revenues, 30%CAGR in EBIDTA and 33%CAGR in net profit over the next
three years. Our target price of Rs720 is based on 10xJune’16E EPS of
Rs71.5. Key risks to our call include quality rejections and failure
impact due to large batch size and regulatory risks for its
manufacturing facilities.

$ Unique business model: GIL offers all three components of pharma
value chain namely APIs, PFIs and finished dosages thus giving the
customer flexibility and choice. The company has the largest PSI
facility in the world with 6MT batch size thereby offering economies
of scale. GIL offers end-to-end solutions for pharmaceutical
manufacturers’ requirements. The company has an installed capacity of
20,200tpa for APIs and 14,400tpa for PFIs and 18bn dosage forms per
annum. It is among the largest in the world and attracts MNC pharma
companies. We expect global pharma companies to immensely benefit from
the unique use of PFIs as it will lead to significant savings in cost
and time.

$ Substantial cost savings: GIL offers large capacity and batch size
thereby giving price-value proposition and effective supply chain
management. The use of PFIs results in substantial cost saving as it
forms ~80% of the asset cost in oral dosage manufacturing thereby
offering an ‘Asset Light Model’. The use of PFIs also reduced process
time leading to substantial reduction in working capital and number of
vendors. We expect improvement in GIL margins with increased usage of
PFIs by MNC pharma companies.

$ Acquisition to widen product basket: GIL offers five APIs to its
customers namely paracetamol, metformin, ibuprofen, guaifenesin and
methocarbamol. With the acquisition of APL in February’14, GIL has
added 12 new APIs to its product offerings. These products have a
potential market size of $37bn (Rs2,220bn). GIL has plans to supply
PFIs and finished formulations for these APIs and widen its product
offerings. The company offers unique rapid release tablets, bilayer
tablets and extended release (ER) tablets, strengthening the
customer’s competitive advantage. We expect the company to increase
the client base with additional offerings of APL products.

$ Valuation and key risks: GIL has achieved 26%CAGR in revenues,
27%CAGR in EBIDTA and 33%CAGR in net profit over the past 10 years.
We expect the company to maintain the growth momentum due to its
presence over the entire pharma value chain and additional product
offerings from APL. We expect GIL to report 25%CAGR in revenues,
30%CAGR in EBIDTA and 33%CAGR in net profit over FY14-17. We initiate
coverage on GIL with a Buy rating with a target price of Rs720 based
on 10x June’16E EPS of Rs71.5 with an upside of 32.1% from the CMP.
Key risks to our call include quality rejections and failure impact
due to large batch size and regulatory risks for its manufacturing

Thanks & Regards

03 July 2014

IT Services - Sector Update - INR affects quarter, but demand environment strengthens :: Centrum

INR affects quarter, but demand environment strengthens

Given the improved demand environment (per multiple indicators) and
with INR appreciation worries receding, we think several Tier-1 firms
warrant re-rating. We expect strong growth in TCS, HCLT and TechM this
quarter but expect the commentary to be positive across all Tier-1
firms. We think that sustained demand improvement will be visible
towards 1HCY15. We expect a fairly immediate re-rating for HCLT and
Wipro while Infosys’ re-rating will be contingent on large deal wins
(we expect it in 1HCY15). Among mid-caps we favour Cyient and NIIT
Ltd, expecting client-specific issues to continue to weigh on eClerx.

$ Rupee woes earlier overdone, rerating across sector large-caps:
Considering the sharp de-rating that happened to the IT Sector
post-election results in India, a rebound could have been expected in
several names. We think the improved demand environment in the US, and
likely stable currency from here on warrant a rerating across most of
our Tier-1 universe barring TCS which already trades at a steep
premium. We argue for rerating of HCLT, Wipro and TechM, with Infosys’
being contingent on large deal wins (USD200Mn+).

$ Margins to be hit this quarter due to rupee appreciation and wage
hikes: In addition to the impact of lower INR realizations, margins
for TCS, Infosys, Cyient and eClerx will also be impacted this quarter
due to salary hikes. Wage hikes for Wipro will be effective for only
one month this quarter while for HCLT, only for part of the workforce.
Despite the margin-hit this quarter and the unfavourable margin
comparisons YoY and QoQ for most firms, we think valuations have
bottomed out considering the strong demand environment.

$ Demand environment firming up per multiple sources: From our
analysis of long-term CIO-spending (vide note dated Oct-07-2013), a
pickup in other areas including IT strategy consulting precedes
spending on IT Services. As per Accenture’s recent commentary,
management consulting is seeing traction, a good leading indicator for
IT Services spending. Our channel checks indicate that ticket sizes of
discretionary spends on new projects in cloud and digital have risen
to USD5-10Mn YoY from USD 1-3Mn.

$ Recommendation and key risks: We maintain BUY on Wipro, HCLT,
Infosys and Cyient and HOLD on TCS, TechM and eClerx, as also BUY on
NIIT Ltd with a TP of Rs70 (Rs55 earlier). We have changed our target
multiple for HCLT to 16x from 14x considering its continued leadership
in large infrastructure deals and improving traction in application
services. We also increase target multiples for Wipro and TechM to 15x
and 14x respectively in view of continued improvements to their
service portfolios and key contract wins. Key risks: (1) currency
volatility and (2) Regulatory changes such as the US Immigration Bill.

Thanks & Regards