Subscribe to Oberoi Realty IPO, says Angel Broking,

Strong brand in the most resilient Mumbai real estate market: Oberoi Realty
(ORL) has a proven track record having been involved in the business of real
estate development in Mumbai since 1983. The company develops projects, with
an emphasis on contemporary architecture, strong project execution and quality
construction. ORL has been able to achieve bookings of an average 455 units
annually since the last five years except in FY2009 when the market conditions
were dismal. A strong brand name also allows ORL to charge premium prices for
its projects, besides obtaining development rights, pursuant to which it develops
land owned by a third party on a revenue-share basis.
Well-capitalised balance sheet with healthy leasing portfolio: ORL had net cash of
Rs331cr as on June 2010. ORL recorded rental income of Rs83cr from Oberoi
Mall and Commerz in FY2010. We expect ORL to report rental income of Rs177cr
in FY2012 with Westin Hotel and Oberoi International School getting operational.
Replenishing land bank on sustainable basis will be a key challenge: ORL has
land bank of ~20mn sq ft (94% is in Mumbai), which will be developed over the
next 6-7 years. This is lower than its other listed peers and the company proposes
to increase its land bank to ensure longer term growth. Currently, SRA, block
redevelopment and sale of mill land are primary sources of supply of land in
Mumbai where competition is intense. We believe that it would be a challenging
task for ORL to reinvest cash flow from its existing projects and replenish its land
bank on sustainable basis over longer term.
Outlook and Valuation: We remain bullish on the Mumbai realty market and
developers listed in that space. Most of the developers are trading at a discount to
our one-year forward NAV. However, ORL differentiates itself from its peers on
account of having a strong brand, timely execution of projects and quality
infrastructure coupled with well capitalised balance sheet. Hence, we expect the
company to trade at its one-year forward NAV of Rs295/share. At the higher
band of the issue price, the company is trading at 12% discount to our one-year
forward NAV. We recommend Subscribe to the IPO with a long-term perspective.

Edelweiss: IT - result preview - market share gains to continue

September quarter results are likely to endorse the market share gain thesis for the Indian IT. While MNC vendors defend their turf in large deals, the offshoring proposition along with domain expertise of large Indian vendors is resulting in the latter wining ~30% of deals renewed in a year. Overall, the offshore outsourcing story has once again gained steam post the downturn.

n  Result expectations for the sector and stocks under coverage

We expect yet another strong quarter from the tier-1 companies with healthy 7-8% USD revenue growth (8-10% INR terms) over the previous quarter. Demand recovery, earlier driven by pent up demand, is now supported by revival of spend focused towards revenue strategies (discretionary) that will lead to this sustained strong growth. Changing nature of spend in BFSI vertical, full services deals being awarded and furtherance to infrastructure outsourcing initiative, are all driving growth. Also, as evinced from the recent Accenture results, demand for outsourcing is strong leading to stronger built up of its outsourcing order book.

Margins to be a mixed bag: With strong growth in business volumes, operating margins are expected to increase with Infosys leading the Q-o-Q increase of 160bps (from lower base). TCS and Wipro, face margin headwind from promotions, while benefit from currency and high volume growth will partly offset the margin pressure. Margins for HCLT, due to salary increases are expected to decline 260bps Q-o-Q. 

Infosys’ guidance: We see Infosys surpassing its Q2FY11 revenue guidance (5.1% growth) with ease, and expect the full year FY11 USD revenue guidance to be raised by 2% to 21-23%. However, as the company rebases its INR/USD assumption to ~44.95 from 46.45, we see ~3% negative impact on EPS (INR terms). But the outperformance vis-à-vis guidance in Q2 and improved outlook for the remaining year will lead to INR EPS guidance being marginally upped at ~INR 119. Guidance for Q3FY11 revenue growth is expected at 5%.

Selective mid-caps to report strong growth: We expect tier-2 companies to report strong sequential growth that comes after a lag of few quarters to tier-1 companies. This is expected to be driven largely by existing large client ramp up. We expect double-digit revenue growth for Infotech & Hexaware and 1.8% & 1.3% improvement in EBITDA margins, Q-o-Q, respectively.

n  Outlook over the next 12 months

Strong demand environment over short term reinforces our confidence on increased visibility for FY12. However, companies may be cautious about growth going into FY12, given slowing global growth and low visibility of CY11 client budgets. With stock prices at 20-22x FY12 earnings for tier-1 stocks, we believe upward re-rating is unlikely though earnings upgrade will provide further stock returns. On the other hand, we expect tier-2 companies with improvement in revenue growth and increase in operating margins to see some upward valuation re-rating. Current P/E and EV/EBITDA discount of tier-2 to tier-1 companies stand at 50% and 60%, respectively, which we expect to reduce in the next six months. 

n  Top picks: Large caps - TCS and HCLT; Mid caps - Infotech and Hexaware 

IIFL: Corporate Front Page: Oct 7th

Corporate Front Page:

- According to Canada based Niko resources which hold 15% stake in K-G Basin D4 block ”the prospective gas reserve in Reliance Industries K-G basin D4 block could be significantly higher then previously estimated (BS)

- GAIL places Rs6.8bn orders for pipelines for laying a gas pipeline from Dabhol in Maharashtra to Bangalore. (BS)

- Maruti Suzuki plans to expand its service network to over 4,200 outlets from current 2,700 outlets across India. (ET)

- Cairn Energy to seek shareholders nod for the Cairn India Vedanta deal today. (ET)

- JSW Energy seeks lower rate for Rs33.8bn Ratnagiri project loan. (ET)

- Glenmark gets exclusive pain molecule worldwide licence by Lay Line Genomics. (BL)

- HCL Technologies sees US$300mn opportunity in new technology such as cloud computing. (ET)

- Oil marketing companies like BPCL and HPCL losses to rise on higher crude oil prices. (BS)

- Bank of India raises base rate by 50bps to 8.5%. (ET)

- IDBI targets Rs60bn small and micro enterprise (SME) loan in the current fiscal year. (BS)

- GVK Power and Infrastructure plans to raise US$300mn through share sale in the next few months. (BS)

- Shree Renuka Sugars has bagged an order to supply 118mn litre of ethanol to oil marketing companies in five states for a period of 1 year. (BL)

- Binani Cement promoters to buy public stake, de-list company. (ET)

- Oriental Bank of Commerce raises base rate by 50bps to 8.5%. (ET)

- Neyvelli Lignite plans 50MW wind project in Tirunelveli. (BL)

- Income Tax department raids Nagarjuna Construction offices. (BS)

- Parsvnath Developers raises Rs2.7bn through QIP. (BS)

Listing of recent IPOs -tentative dates

Tentative Listing dates for recent IPO : TO BE CONFIRMED: Rumors as of now

Ramky Infrastructure: October 8th (Friday)

Electro Steel: October 8th (Friday)

Orient Green Power: October 8th (Friday)

Gallantt Ispat: October 11th (Monday)

VA TechWabag: October 12th  (Tuesday)

CantabilRetail: October 12th  (Tuesday)

Tecpro Systems: October 13th  (Wednesday)

AshokBuildcon: October 13th  (Wednesday)

Sea TV Network: October 14th  (Thursday)

Q&A: Mark Mobius, Templeton Emerging Markets Group

Emerging markets guru Mark Mobius believes the Indian market is no longer cheap but the country has been enjoying a premium over peers due to its growth prospects. In an interview with Mehul Shah, the executive chairman of Templeton Emerging Markets Group says India’s relatively strong fundamentals and accumulation of foreign exchange reserves put it in a much stronger position to weather external shocks. Edited excerpts:

The Indian stock market has received record inflows of $20.52 billion from foreign institutional investors (FIIs) this year. Do you think this is sustainable?
The combination of global liquidity, interest rate differentials and search for yields has led to higher allocations for emerging markets such as India. As a result, asset prices in emerging markets (especially Asia) are turning out to be clear beneficiaries of the quantitative easing in the developed world. As with any market run-up, investors should expect corrections along the way.

Religare: Bharat Electronics Ltd Structural play on Indian defence capex – BUY

Bharat Electronics Ltd
Structural play on Indian defence capex – BUY
We initiate coverage on Bharat Electronics (BEL) with a Buy rating and a
December ’11 price target of Rs 2,200. BEL is a state-owned company in the field
of defence electronics which supplies products to the Indian army, navy and
air force. In our view, BEL is attractively placed to benefit from the increase in
electronic defence spending in India. The company’s order book currently stands
at Rs 125bn (book-to-bill ratio of 2x), which we expect to grow to Rs 170bn by
FY13. Revenues are forecast to grow at a 17% CAGR over FY10-FY13 to Rs 89bn.
In our view, BEL is a safe defensive bet for investors looking for consistent returns
over the next 2–3 years. While order inflows are lumpy in nature, we believe the
downside risk would be cushioned by the stable nature of defence spends, BEL’s
high cash balance (~Rs 450/sh), strong cash generation and growing order book.
Beneficiary of rising electronic defence spending: India has a planned budget of
~US$ 33bn on defence expenditure for FY11, which is ~3% of GDP. We believe
that BEL is an attractive play on defence expenditure, which we expect to grow in
line with GDP at least. In our view, the spend on electronics in the defence budget
will increase as defence modernisation picks up. This would benefit BEL as it has
the strongest expertise in radar systems (~23% of its revenues) and communication
systems (~37%). The company also has a healthy R&D culture and a headstart over
new players, having already absorbed several technologies from foreign players.
Margins to come under pressure: BEL recently received an order for supplying
two squadrons of the Akash missile system to the air force for a total of Rs 15bn.
While the order size is quite significant, a substantial portion of it (~40%)
comprises low-margin hardware that the company buys from other suppliers. We
believe that there will be an increasing trend towards such integrated systems,
leading to fast topline growth, but pressure on margins. Besides this, increasing
competition from private players could also lead to some margin pressures. We
estimate that EBITDA margins will drop from 19% in FY10 to 16.5% by FY12.
Strong balance sheet to enable growth: In our view, the company has a healthy
balance sheet (cash balance of ~Rs 36bn, cash generation of Rs 4bn–5bn and
low debt), which should provide adequate scope for expansion in the form of JVs
with international players, technology transfers and funding of any R&D. We
note that debtor days are high at 162 days due to the long gestation period for
projects, but the risk of default is low as the government is the major customer.
Initiate with Buy: BEL is currently trading at 18x/15x FY11E/12E EPS. While there
may be margin pressure, higher order inflows (as defence modernisation picks up)
should lead to a 14% EPS CAGR over the next three years. We value BEL at 16x
12m forward earnings, giving us a December ’11 target of Rs 2200.

Nomura research: JSW Steel -Solid but remember valuations

 One of the best performing steel stocks globally
JSW Steel is one of the best performing steel stocks globally with
YTD returns of 30%. While steel stocks in general were supported by
strong steel prices, JSW Steel was helped in particular by
deleveraging of the balance sheet, with the stake sale to JFE and
3.2mn tonne expansion expected to come online by end FY11. Most
of the benefits from improvement product mix have also come through.
 Catalysts already played out – little to look forward to
The stock has already reacted to reduced leverage and strong
earnings growth in FY12. However, we see limited earnings growth as
further volume growth will likely be limited, owing to issues with
greenfield capacities. With moderation in our view on the steel cycle,
we do not see a catalyst for the stock in the near term. The stock is at
10x FY12F EPS, a premium to local and global peers. JSW will likely
see limited earnings growth after FY12, until there is more visibility on
greenfield expansion. We expect raw material prices to remain high,
hence JSW Steel will likely see margin pressure despite improving
product mix and efficiency. Therefore, we believe the stock has limited
upside thus downgrade the stock to NEUTRAL from Buy.
 US operations still in losses — mining operations ramp up
JSW Steel’s US pipes business is at 30-35% utilisation and despite
turning EBITDA positive will likely be loss-making in the near term.
JSW Steel’s iron ore mines in Chile and coking coal mines in the US
will likely start producing at the rate of one mtpa by end 2010 and
should start getting positive value with the ramp up of production. We
ascribe a negative value of US$164mn to the US pipes business;
however, we give a positive value of US$141mn to iron ore mines and
US$315mn to US coking coal mines.

Edelweiss: Annual Report Analysis - Bharti Airtel

Increased customer base and forex gains drive profitability

n  Bharti Airtel’s (Bharti) subscriber base increased substantially from 97 mn in FY09 to 131 mn in FY10. This rise catapulted the company’s revenues 11.9% to INR 418.3 bn in FY10 (FY09: INR 373.5 bn) despite 20.8% dip in ARPU on back of stiff tariff war in the sector.

n  PBT margin improved from 21.1% in FY09 to 24.6% in FY10, primarily on account of foreign exchange gain of INR 7.9 bn (FY09: loss INR 17.9 bn). Excluding forex impact, the company’s PBT margin dipped from 25.8% in FY09 to 22.8% in FY10 primarily on account of increase in network operating expenditure and new business ventures, currently under gestation period, making losses.

n  Bharti’s network operation expenditure increased significantly from INR 62.5 bn in FY09 to INR 89.1 bn in FY10 (from 16.7% of sales to 21.3%) which was partially offset by decrease in access charges from INR 52.9 bn in FY09 to INR 44.8 bn in FY10 (from 14.2% in FY09 to 10.7% in FY10).

n  During the year, provision for doubtful debts increased to INR 12.5 bn (28.1% of debtors) from INR 9.8 bn in FY09 (25.3% of debtors).

n  Bharti provided INR 277.9 mn (FY09: INR 60.6 mn) in FY10 towards dimunition in the value of inventory which is 36.5% of inventory (FY09: 5.9%).

n  Auditors have highlighted that funds amounting to INR 6.5 bn raised on short-term basis (primarily represented by capital creditors) have been used for long-term investments (primarily represented by fixed assets).

n  During FY10, the company had revised estimates for assets retirement obligations (ARO) and consequently, reversed provision of INR 5.8 bn with corresponding reversal from fixed assets. The change in estimate led to INR 269.6 mn increase in PBT.

Segmental analysis

n  Mobile services segment continued to be the highest revenue and segmental EBIT contributor. However, EBIT margins were the highest and continued to grow in the enterprise services segment.

n  Revenue share from passive infrastructure segment increased from 3.4% in FY09 to 8.4% in FY10.

Other highlights

n  In FY10, Bharti Infratel converted interest free unsecured convertible debentures of INR 32.0 bn into 40.3 mn equity shares at an average price of INR 793.9. Consequently, Bharti’s stake in Bharti Infratel dipped from 92.5% to 86.1%. The imputed valuation for Bharti Infratel on this basis stands at INR 461.2 bn.

n  The company acquired 55% stake in Bharti Telemedia for INR 73.8 mn from Bharti Enterprises. This led to its stake in Bharti Telemedia increasing to 95%. Also, the company extended an INR 14.9 bn (FY09: INR 6.4 bn) interest free loan to Bharti Telemedia.

n  As at FY10 end, accumulated losses of a few subsidiaries including Bharti Telemedia, Bharti Airtel Lanka, etc., exceed the networth of respective companies.

n  During the year, the company remitted USD 311.5 mn (INR 14.1 bn) to its subsidiary Bharti Airtel Holdings (Singapore) for acquisition of 70% stake in Warid Telecom, Bangladesh.

Standard Chartered Reseach: Hero Honda will underperform

Monthly growth below expectations – In Sep ’10 Hero
Honda’s volume increased 8.1% yoy and 2.1% mom to 433,641
units (below our expectation). YTD growth was 9.5% yoy at
2,519,983 units. On our estimate, residual growth would be
23.9% for 2H FY11.
We expect market share losses – On a quarterly basis,
volume grew 8.7% yoy and 4.2% qoq, much below those of the
other two-wheeler manufacturers. We expect 2Q FY11 to be
one of the worst quarters for Hero Honda in terms of market
share deterioration. (Bajaj Auto and TVS Motor reported volume
growth much higher than Hero Honda’s in Sep ’10 both on yoy
and qoq basis.)
Market dominance, but likely to lose premium over sector –
We expect Hero Honda to maintain its market share dominance
given its brand image, distribution strengths and successful
product/variant launches. Nevertheless, we expect HH to lose
the premium at which it had traded over the sector given that its
volume growth has underperformed the industry and it has
been losing market share. In addition, we expect it to lose
market share in the high-margin executive segment, leading to
product mix deterioration in the coming quarters. We, however,
expect volume growth to be robust in the festival season.
Maintain Underperform.

IIFL says buy Chennai Petro: Limited downside to GRMs from current levels

Chennai Petro: Limited downside to GRMs from current levels
With outlook for global economic growth on the weaker side primarily
in the developed economies, GRMs have remained muted over the
past few quarters. Furthermore, fear of refining supply glut at global
scale added to the woes. However, demand side worries will be
offset by a strong demand emanating from emerging economies such
as India and China. On the supply side refinery closures and delay in
new capacities would provide cushion to GRMs. We expect GRMs to
remain at current levels over the medium term.
CPCL upgrading capacities to improve yields and GRMs
Historically, CPCL’s core GRMs (excluding inventory gains or losses)
have been in line with the benchmark Singapore GRMs. However, we
believe that going ahead, CPCL’s GRMs could turn out to be better
than the benchmark owing to the initiatives its taking to improve its
distillate yield and reduce costs. The key projects towards these
process include 1) Implementing auto fuel quality upgradation
program, 2) Residue Upgradation Project, 3) Tie-up with Shell for
improving refinery efficacy and 4) Single Point Mooring and Crude Oil
Terminal Project. Furthermore, higher production of crude oil from
RIL’s MA-1 oil field will result in improved utilization rates for its
Cauvery basin refinery leading to better operating performance.
Capacity to increase by 70% by 2015
CPCL is also planning to set up a 9.0 MMTPA brown-field refinery
project at Manali, replacing the aging original 2.8 MMTPA refinery at
a cost of Rs100bn to be commissioned by 2015. Following the
completion of project key operating parameters such as complexity
of the refinery, distillate yields, fuel & loss and GRMs would improve.
Undervalued relative to regional pure refining players
Despite substantial improvement in operating performance of CPCL,
the stock continues to trade at a discount to global averages for
refining companies. The stock, currently trades at P/E of 4.7x and
EV/EBIDTA of 5.1x based on FY12 estimates vis-à-vis global average
P/E of 10.5x and EV/EBIDTA of 6.1x. We value the stock at 5.5x
FY12E EV/EBIDTA to derive a target of Rs291. Recommend BUY.

Buy Tata Steel; target Rs 846

Firm Indian operations, Corus uncertain
 Corus to remain under pressure despite strong Q1FY11
Corus’ (TATA Steel UK) Q1FY11 results reinforced the operational
turnaround. However, we expect the next two quarters to be
challenging for the company due to: 1) pressure on utilisation and
2) higher raw material prices should squeeze margins. Despite this,
we believe Corus should be cash positive and EBITDA/t will stabilize
in the range of US$50-70/t from Q3FY11F up from US$30-35/t
expected in Q2FY11F.
 However domestic business to remain highly profitable
The company’s Indian operation’s profitability has surprised the street
both through higher realizations and lower costs. Although we expect
EBITDA/t to come down from Q1FY11 levels with the fall in steel
prices, we believe higher volumes will keep absolute profits strong.
Volumes have picked up in Q2FY11, after higher imports had
impacted sales in Q1FY11. We expect consensus earning upgrades
for the India business due to positive surprises in Q1FY11.
 Valuations attractive, already factoring uncertainty
We believe steel prices should start stabilizing after the recent
turbulence, as indicated by high scrap prices. The Indian business
remains strong with EBITDA/t of US$ 350-400/t despite the correction
in steel prices. Since there is consensus about strength of Indian
business, we believe the current stock price is ascribing significant
negative value to Corus. We estimate the value domestic business at
Rs753/share (at 10x FY12E EPS). Therefore, the negative value
ascribed to Corus is closer to Rs100/sh. This is unjustified, in our view,
given our expectation that Corus will be cash positive in Q2FY11,
which is typically the worst quarter for them. We value Corus at 5x
EV/EBITDA at EV of US$ 5bn and contributes Rs34 to our target price.
South East Asia business is also valued at 5x EV/EBITDA and
contribute Rs15/share. Rs44 comes from its stake in Riversdale
mining (RIV AU, not covered).

IIFL recommends buy Bombay Dyeing

Bombay Dyeing :Poised to unlock value
Bombay Dyeing owns two prime mill land properties in central Mumbai, one of which has received the
commencement certificate (CC) for launch. The first phase will be launched by December 2010, and
would likely generate revenues of over Rs20bn. With losses in its textiles business down c50% YoY in
FY10 and its PSF business expected to breakeven at the EBITDA level in 2QFY11, we expect the
company to register earnings CAGR of c80% over FY10-13ii. The company’s stock trades at a discount
to our NAV estimate of Rs827/share. We recommend BUY with 30% upside.
Launching 1m sq ft of prime residential in central Mumbai: Bombay Dyeing owns 9.5m sq ft in Worli
and Wadala in central Mumbai. Of this, it has received CC to launch 1 m sq ft residential development in
Wadala. The project is expected to be launched by December 2010, and we reckon it will generate over
Rs20bn in revenues over FY11-14ii. It has also received approval for incentive FSI to provide public parking
in Wadala.
Polyester business expected to break even in FY11; losses down in textile business: The Group’s
textile and polyester businesses have been making losses since FY06. Management expects the polyester
business to achieve EBITDA breakeven in 2QFY11 on improving utilisation, better realisations and lower
energy costs. Losses in the textile business have been cut c50% YoY in FY10. Hence, lower loss-funding
requirement from real-estate cashflows will aid faster monetisation of the land bank.
Strong earnings growth in FY10-13ii; BUY for 30% upside: The imminent launch of over Rs20bn
worth of real estate in Wadala will drive c80% earnings CAGR over FY10-13ii. Even after assigning negative
equity value to textiles and PSF businesses, our assessment of NAV is Rs827/share. We recommend BUY
with a 30% upside from current levels.

Nomura research: Buy SAIL - target Rs 264

Expansion remains the key
 Momentum back after sharp correction
After correcting 20-25% during April-August, SAIL’s stock price has
turned up mainly on strong steel prices, in our view. The stock first
corrected on concerns about the government divesting its stake at a
discount and then on softening steel prices and delayed expansion
plans. With steel prices strengthening again, we think valuations look
attractive.
 Upside from the extensive modernisation programme …
SAIL is undertaking a major modernisation plan for existing plants that
should not only improve the product mix but also enhance its cost
structure. SAIL is going for higher coal injection in blast furnaces and
100% continuous casting which will likely reduce energy costs. The
company is also setting up new coke oven batteries and sinter plants
to increase efficiency and start the usage of captive iron ore fines.
 … and capacity expansion
SAIL plans to increase production capacity from 13mn tonnes now to
25mn tonnes by FY13-14F, according to management. The expansion
should lead to significant operating leverage as employee costs per
tonne for the company, the highest in the industry, will likely fall in line
with the industry standard. However, the company has indicated that
significant production from expansion will start only in FY14.
 Maintain BUY with revised price target of INR264
We maintain BUY on the stock with a price target of INR264 (from
INR260), implying 16% potential upside. We lower earnings for FY11
from INR18.9 to INR16.9 on account of higher employee costs and
lower deliveries. However, FY12 earnings are largely flat as volumes
should pick up and we think the company will benefit from lower
coking coal prices.

Edelweiss: Banking sector update- base finally moves

In response to hike in deposit rates over June-September 2010, banks across the board have started raising their base rates (the new benchmark) after increasing PLR in the first instance. So far, amongst large banks, ICICI Bank, Axis Bank, and HDFC Bank have raised their base rates by 25bps each, while Punjab National Bank (PNB) and Bank of Baroda (BoB) raised it by 50bps; however, State Bank of India (SBI) kept its base rate unchanged.

In the current cycle: (a) banks have raised both deposit and lending rates in tandem against a lag last time around; and (b) PSU banks have been quicker in response, not waiting for the leader (SBI) to react. This reinforces our belief that monetary transmission is more effective via base rate and the banking system still has pricing power—evidence of resilience of strong margin performance. 

·         Structural positive for PSU banks: PSU banks being more acquiescent to moral suasion from policy makers increase PLR less readily than private banks. However, the objective methodology for determining base rate is now playing out as these banks are raising base rates much earlier than the PLR hike in the previous cycle—a structural positive for PSU banks.

·         Risk of disintermediation: Though disintermediation is set to rise as top rated corporates are likely to opt more for commercial papers (CP), we expect limited migration as 3M-CP rates over the past three months have picked up by ~150-200bps, gyrating to the liquidity tightness and are currently hovering at ~7.5%, paring down the differential significantly. Also, given that the CP market is not very deep (limited appetite below P1/P2+ rated corporate), we believe mid size corporates will continue to depend on the banking system.

·         Wielding pricing power: The fact that small PSU banks like Indian Overseas Bank (IOB) and Andhra Bank (ANDBK) raised their base rates despite SBI keeping it unchanged is a testimony of managements’ confidence in their ability to push higher costs to the borrower, reflecting pricing power in the system. This, in turn, reflects the systems’ ability to maintain NIMs at current level.

Morgan Stanley Research: India IT Services preview

India IT Services: Revenue Growth to Surprise in Sep10 Quarter - but Will Earnings Move Higher?
Quick Comment: We believe large Indian IT
companies are on track to deliver very strong revenue
growth in the Sep-10 quarter. Infosys is likely to have the
strongest revenue and margin performance, in our view.
We expect a further 5-7% rise in large-cap stocks over
the coming weeks in the run-up to the results.
Use the quarter to reduce exposure to the industry:
Despite the strong quarter, valuations remain stretched
and growth rates over the coming years are likely to
remain in the 20%-25% yoy range versus the 30-40%
yoy seen earlier. Valuations are in the expensive zone
and approaching peaks seen in 2004-08. Large-cap IT
stocks are likely to peak in the Oct-Dec period, in our
view; we believe it would be apt to use the current
strength to reduce exposure to the industry. 1HCY11 is
likely to offer more attractive entry points in our view.
TCS looks most vulnerable to a correction.
Expect uniformly strong revenue growth… We
expect large vendors to report US$ revenue growth of
7-8% qoq in 2Q. We believe reported revenue growth
could even be in the ~8-10% qoq range.
…and divergent margin performance: Even though
we expect companies to show strong revenue growth,
margin performance could diverge from investor
expectations. In our view, Infosys is the only company
likely to deliver a qoq margin improvement; TCS and
Wipro are likely to report a qoq margin decline. For the
quarter we expect revenue and profit growth of 7.6%
and 5.9% for our coverage universe.
Infosys guidance: We expect Infosys to raise its FY11e
US$ revenue guidance to 21-23% yoy and EPS
guidance to Rs120-122. Wipro is likely to give similar
guidance of 6-8% qoq for 3Q. We maintain an In-Line
industry view.

HSBC Research: buy PTC – trade growth, investment unlocking

PTC – trade growth, investment unlocking
 Strong and stable growth phase with c42% earnings CAGR
expected over next three years
 Assured long term PPA and PSA make business model robust
compared to historical trends
 Subsidiaries and associate investment to deliver significant value
creation in FY11 and FY12. Upgrade to OW(V) from N(V); raise
TP to INR161 from INR122


Investment summary
Significant potential for re-rating
We believe that the company has entered a high
growth phase for its core business which we
expect to continue for a few more years. We also
expect there to be significant opportunity for
value enhancement over the next two years from
the group’s investments in subsidiaries and
associates companies. And although the net cash
position of PTC is a bit of a concern, we upgrade
the stock to Overweight (V). Our view is driven
largely by the following factors.
Entering a stable high growth phase
We believe PTC remains well placed to benefit
from strong and stable growth in the power trade
business in the medium term. In our opinion, the
visibility around future growth has significantly
improved lately, as the company has successfully
achieved both backward and forward linkages,
through PPAs (c16,000MW), PSAs (c5,500 MW)
and several short-term power contracts from its
traditional segments. The company has also won
several Case I bids for both long- and mediumterm
power supply to various distribution utilities
(recent wins include c1.5 GW of long term and
c1.0 GW of medium-term power sale to the state
of Karnataka). Consequently, we expect the
power trade business to witness a CAGR of c32%
over the next three years, leading to a trading
income growth of c27%. In addition to growth in
volumes, the trading income growth should also
find support from (i) c75% higher margins on
power sold at more than INR3/kwh, and (ii) an
increase in the proportion of long-term power
contracts (which typically have higher returns) to
over 60% of sales.
Assured supply of c4.2GW to support growth
over the next 3 years
The company has also made significant progress in
addressing its supply side bottlenecks by expanding
beyond its core Bhutan projects.

Edelweiss: Cement (Sep 2010 despatches: no meaningful recovery yet)

Cement (Sep 2010 despatches: no meaningful recovery yet):

- The initial set of cement despatch numbers for September 2010 indicate despatch growth of 5-7% YoY for the industry.

- Severe floods in north India and sluggishness in infrastructure segment are likely to have led to muted growth, despite a low base (industry despatches had risen 6% YoY in September 2009).

- Cement prices in the southern markets have shot up 50-80% in the past one month, as producers refrained from under-cutting; prices in other regions have increased by 2-15%.

- We believe this pricing discipline will be tough to sustain, as demand continues to fall short of supply.

Edelweiss: HDFC Bank (HDFCB IN, INR 2,448, Hold)

HDFC Bank (HDFCB IN, INR 2,448, Hold)

We recently met HDFC Bank management to discuss the bank’s growth strategy and understand the current business environment. Key highlights of our interaction are:

n  Business growth to remain ahead of industry

Management expects both wholesale and retail books to grow at same pace—faster than the system. In the wholesale segment, while focus continues to remain on working capital funding, growth opportunities are also being targeted in the term/project lending space, especially with existing customers. In the retail segment, competition is heating up as State Bank of India (SBI) has extended the teaser rates offer till December and ICICI has re-entered the space. However, intensity of underlying demand is too strong for disruptive pricing to act as a growth deterrent in the segment.

n  Impeccable asset quality, high credit standards paying off

High credit standards maintained are paying rich dividends with the bank’s delinquencies declining across all segments of the loan book. While credit costs dropped from 256bps in Q1FY10 to 110bps (including floating provisions of INR 500 mn) in Q1FY11, the bank expects the period of 110-120bps bps credit cost to extend by a couple of quarters. Management guided for 140bps credit cost (including standard provisioning) over FY12.

n  NIMs to sustain at current level; ROAs to touch new highs

HDFC Bank recently raised deposit rates. However, barring a few maturity buckets, rates continue to remain lower than peers. The bank is expected to raise the base rate soon. Since the bank is currently not holding any excess SLR, a further credit growth will warrant balance sheet expansion. Weak deposit growth at the system level could be a cause of concern, posing a potential risk of deposit rate hike in H2FY11. However, management believes that with limited liquidity in the banking system, banks will exhibit pricing power and pass on this cost to borrowers. This will help sustain NIMs at the current level, which, coupled with decline in credit costs, could boost RoAs to a new high of ~1.7% (FY06-10 average 1.5%) and RoAE to ~20% by FY12E.

n  Outlook and valuations: Rich; maintain ‘HOLD’

Overall, the meeting gave us positive insight into HDFC Bank’s credit growth, NIMs and credit costs. The stock is currently trading at rich valuation of 4.0x FY12E adjusted book and 22x FY12E earnings. We believe that the bank has hit a sweet spot – strong growth and lower credit cost which will enhance return ratios and support the current multiples. We maintain ‘HOLD’ recommendation on the stock and rate it ‘Sector Performer’ on relative return basis.

Standard Chartered Research: Maintain Outperform on Tata Motors

M&H CVs, PCs and UVs drive volume – Tata Motors reported
strong 23.1% yoy (down 1.9% mom) volume growth in Sep ’10
to 64,668 units (in line with our expectations). Domestic volume
grew 19.7% yoy, while exports grew 77% yoy.
M&H CV continues its strong performance – Domestic M&H
CV reported volume growth of 28% yoy (12% mom). Given
good FY11 GDP growth expectation, the government’s thrust
on infrastructure and normal monsoons, we expect the CV
segment to post good growth in coming quarters. Given Tata
Motors’ dominant position in the CV industry, we expect it to
benefit the most from this upturn.
Strong performance by PVs – Domestic car sales grew 29.4%
yoy (down 7.8% mom) to 20,561 units. Of these, 5,520 were
Nanos (+61% yoy), 6,258 were Indicas (-37% yoy), while Indigo
sales were 8,783 units (+248% yoy). Domestic UV volume was
3,340 units (+40% yoy; 15.8% mom). Domestic LCVs grew 3%
yoy and declined 7.8% mom.
Price increases – Tata Motors increased the prices of the
Indica and Indigo ranges by around Rs4,500 to Rs14,000,
depending on the model. In the UV segment, the prices of the
Sumo and Grande MK II were increased by around Rs7,800 to
Rs10,300, mainly because of higher input costs. For CVs,
prices were increased by around Rs5,000 to Rs40,000 to reflect
higher input costs and costs associated with upgrading the
products to meet BSIII emission norms.
Valuation – Tata Motors is attractive for multiple reasons –
uptrend in CV cycle, Nano production ramp up, strong product
pipeline and re-rating of JLR. Maintain Outperform.

IIFL recommendations: OnMobile Global (Dilithium acquisition – to bolster M-Video aspirations, BUY)

OnMobile Global (Dilithium acquisition – to bolster M-Video aspirations, BUY): Onmobile acquired the technology solutions developed by Dilithium, a US-based mobile-video technology company. Dilithium’s CTO and co-founder will join OnMobile and report to the COO. The technologies are currently licensed to several operators around the world, including Vodafone, Singtel, BSNL and China Mobile.

HSBC says BUY CESC- Doubling capacity

CESC- Doubling capacity
 Growing equity base of regulated business with cash flow margin
of over 30% protects any downside and provides stable growth
 Chandrapur and Haldia projects with 400-500MW merchant
capacity provides strong growth momentum in FY13 and 14
 Spencer performance disappoints but to become less significant
compared to earnings from power (50% in FY10 vs 10% in FY13)
 Reiterate OW rating with TP of INR475 (INR518 previously)


Investment summary
We assume coverage of CESC with an
Overweight rating and a price target of INR475,
which offers c25% potential return from the
current levels. We believe that the group remains
well positioned to continue to grow its regulated
power business with a gradual expansion in its
equity base.


Steady regulated business
We believe that the regulated business of CESC
provides the company with strong and steady
income flow. The business, servicing mainly the
Calcutta region and with a capacity of 1,225 MW
(1,600 MW peak load) has two clear streams of
Return on Equity (RoE). While the group earns a
RoE of c15% on distribution, it earns an
additional RoE of c14% for equity invested in
their generation capacity (including the latest 250
MW Budge Budge III plant)
We expect the equity base of the regulated business
to grow to cINR24.6bn by FY13 from the current
levels of cINR21bn in FY10. CESC currently
earns a steady return of c18-20% on average on
their total regulated power business. We expect this
business to grow at a CAGR of c5.4% over the next
three years and provide a cash flow margin of c30-
32%. This should provide the group with sufficient
additional cash and equity to execute their existing
expansion plans.

IIFL recommendations: Shriram City Union Finance (Strong franchise, BUY)

Shriram City Union Finance (Strong franchise, BUY): Shriram City Union Finance (SCUF) is a niche player offering small business and personal loans in the rural and semi-urban markets of south India. We expect penetration into new geographies and the Group's large captive client base to drive a CAGR of 27% and 23% in assets and earnings, respectively over FY10-13ii. Valuations at FY12ii P/B of 2.3x are attractive given the well-established business model, robust earnings growth and return expectations. We initiate with BUY and Rs790 target price.

BoA ML: Buy IVRCL - target Rs 210

Raising of Rs4bn project equity improve EPS visibility; Buy
IVRCL Assets (IVRA), 80% subs. of IVRC, has raised Rs4bn in last two weeks.
This will not only meet ~30% of its equity requirement for its road projects till
FY12E but it will also kick-start EPS growth for the parent from 3/4QFY11E. This
is as equity funding at IVRA improves visibility of execution of 30% of its backlog.
Buy IVRC on a) pick-up in execution from 3QFY11E on resurgence in road
orders, b) benign material prices and c) peaked interest costs, drive 28% EPS
CAGR over FY10-12E vs flat FY08-10 and d) stock is inexpensive at 8.8x (core
business) FY12E EPS.
Smart funding – Raise ~30% of equity till FY12; less dilutive
Last week, IVRA raised Rs2.5bn @13.5%YTM from IFCI through Compulsory
Convertible Debentures (CCD) to fund ‘equity’ of its Indore-Gujarat and
Chenagapally tollways. The CCDs with ‘call-and-put option’ though will pressure
on P&L via interest of ‘debt-for-equity’ but it is non-dilutive for IVRC and will fund
~36% IVRA’s equity required till FY12E of these projects. Further, IVRA today
proposed placement of Rs1.5bn through 11.6mn equity shares @Rs129/share on
preferential basis to UTI Private equity, which will reduce IVRC stake to 75.7% (vs
80.5%) in IVRA. We expect IVRA to tie-up equity required till FY12E by 4QFY11
despite challenges it faces in concluding its proposed QIP.
Bullish On Roads; Parent balance sheet is OK on funding
We see mgt's renewed bullishness on roads as key driver of surprise ahead.
Road BOOT model has improved on a) higher govt. Grant (40%), b) Govt. support
on land acquisition promised by the new minister and c) lower interest rates. IVRC
has a well funded balance sheet to meet this growth – net D/E of 0.6x in FY10,
while its Infra arm, IVR Asset, will have to raise equity to fund new assets.

HSBC Research: Buy Tata Power- Ultra mega

Tata Power- Ultra mega
 Growth in regulated equity base and new power projects to
contribute to overall EBIT growth of 24% over FY11-13
 New projects Mundra (first UMPP) and Maithon will help capacity
triple to 8.2GW by FY14
 Coal margin expected to decline but not a major negative
 Reiterate OW and raise TP to INR1,565 from INR1,525


Investment Summary
We believe Tata Power’s business can be divided
into three major segments, all of which in our
opinion have different drivers and growth
trajectory. We discuss each of them below.
Standalone business to witness steady
growth; margins may come under pressure
The first segment is the standalone business of Tata
Power (c37% of the group revenues), which includes
the original generation business (current capacity of
c3.1 GW), the transmission business and the
Mumbai distribution business. We believe that the
growth outlook for this business remains robust in
the medium term supported by the expected equity
infusion of cINR4.5bn over FY11-13e. In addition,
we believe that growth in the distribution business
and the currently 200 MW merchant power business
may surprise on the upside, particularly in FY11 and
FY12. However, in spite of robust growth, we
believe EBITDA margins may come under pressure
in the near term, driven largely by increasing fuel
costs and rising outlay on short-term power
procurement in lieu of growing demand. This should
offset the tax benefits under the 80IA tax regime,
leading to stable PAT margins of c11-12% over the
next three years

Gray Market Premium Prices for India IPO: Oct 7, 2010

Company Name	Offer Price	Premium
	(Rs.)	(Rs.)
Ramky Infrastructure Ltd.	450 (middle)	18 to 20
Orient Green Power	47 (Lower Band)	DISCOUNT
Electro Steel	11 (Upper Band)	0.90 to 1.00
Gallantt Ispat	50 (Fixed Price)	1 to 2
VA TechWabag	1310 (Upper Band)	395 to 425
CantabilRetail	135 (Upper Band)	DISCOUNT
Tecpro Systems	355 (Upper Band)	40 to 45
AshokBuildcon	324 (Upper Band)	23 to 26
Sea TV Network	100 (Upper Band)	10 to 15
Bedmutha Ind	95 to 102	8 to 9
Commercial Engg	125 to 127	DISCOUNT
Oberoi Realty	253 to 260	3 to 5
B S Trans	257 to 266	10 to 12
Coal India	250 to 270 (rumored)	DISCOUNT