15 October 2010

Positives priced-in; Neutral on Axis says BoA ML

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Raise PO on higher earnings, but maintain Neutral
We raise our PO on Axis Bank to Rs1700 (US$39 per GDR) to factor in 6/7%
increase in earnings for FY11/12 and the possibility of the bank continuing to
trade (3.2-3.3x fwd book) at a sharp premium to theoretical P/B multiples due to
strong earnings momentum, improving macro, and likelihood of asset quality
improving. We est. earnings growth to sustain at +28-30% and +20% RoEs
(FY12). But, we maintain Neutral as a lot of this is priced in.
2QFY11: Reported earnings beat est. on higher fees
Axis Bk reported earnings of Rs7.4bn, +38% yoy growth (6% ahead of est.) driven
by fees. Topline grew +40% yoy (<2% ahead of estimates) on expanding margins
(up 16bps yoy to 3.7%) and strong volume growth of +36% yoy (bulk of the
growth came from large corp. book). CASA ratio down +120bps yoy to 41.5%.
While fees grew only 10% yoy, it was largely driven by corporate fees (up +50%
yoy). Retail, SME and biz. banking fee disappointed.
Slippages still a worry, but asset quality manageable
While headline asset quality appears stable qoq (gross and net NPLs rose by only
2%), the pace of slippages was a tad higher qoq at Rs4.5bn (Rs4.2bn in 1Q).
The rise in slippages came from SME, agri and unsecured retail loans. Fresh relapse
from restructured book was only Rs600mn in 2QFY11, but overall re-lapse
ratio is amongst the highest at ~20% and could rise to 25% according to the bank.

Infotech Enterprises Ltd 2QFY11 analysis by Religare Research

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Infotech Enterprises Ltd
2QFY11: Strong revenue performance, but margins disappoint
Infotech reported 2QFY11 revenues of Rs2,955mn, up 17% QoQ and 10%
above our estimates, however net profit before minorities came in at Rs314mn,
up 8% QoQ and 4% below expectations. EBITDA margins declined 70bps to
15.3%(including the Wellsco acquisition) but on like for like basis was flat at
16%. The revenue growth was primarily driven by strong volume growth (11%
QoQ) in both EMI and UTG verticals. However margins were impacted due to
another round of wage hikes and higher investments in sales and marketing.
Large deals won earlier this year have begun to ramp up and the management
has guided to a sustained 8-10% sequential volume growth in EMI segment and
a 5-6% growth in UTG segment. We are adjusting our FY11/12 EPS by
-15%/-8% to factor lower than expected margin improvement and adjust our
price target to Rs250.
Strong volume growth this quarter: Infotech reported a solid 17% QoQ rise in
revenues led primarily by strong volume growth (13.2% in EMI and a 15.8% in
UTG segment - 9.4% Wellsco + 6.4% organic). This includes 7 weeks of
revenues from the Wellsco acquisition amounting to Rs85mn. As per the
management ramp ups at all three Hamilton, Seawell and Westinghouse projects
have started and should provide adequate growth visibility.
Margins impacted by wages and higher investment in sales: EBITDA margins
excluding Wellsco remained flat at 16%, against expectations of improvements
starting this quarter. The margins were mainly impacted due to wage hikes given
to a particular set of employees amounting to Rs48mn. Besides sales related
expenses were higher as the company hired a new sales team from IBM. The
company added 454 employees and attrition was at 4.6% during the quarter.
Management guidance and change to estimates: The management has guided to
a sustained 8-10% sequential volume growth in EMI segment and a 5-6% growth
in UTG segment. Further company expects margins to improve to 18% by year
end driven by higher volumes and improving utilization. We raise our FY11/12
revenues by 7%/10% but lower our EPS estimates by 15%/8% on account of
lower than expected margins.
Valuation: We adjust our price target and roll over our time frame to Dec-11.
Our new target price is Rs250 (previously Rs238), based on a 12x one year
forward EPS. We remain positive on Infotech and continue to believe that it is
one of the few good quality differentiated midcaps in offshore engineering
services space to own with a 2-3 year view and maintain our Buy rating. Key
risks to our thesis include deterioration in global IT spending, continued wage
pressures and sharp rupee appreciation.

EARNINGS REVIEW of Axis Bank by Goldman Sachs

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Above expectations on lower provisions, core in line
What surprised us
Axis Bank reported 2QFY11 net profit of Rs7.35 bn, up 38% yoy and 7% above
our estimate on lower provisions (38% below GSe). Key highlights: (1) Loan
growth was strong (+36% yoy but just 2% qoq), driven by loans to large- and
mid-sized corporates (up 59% yoy). Management expects industry credit
growth yoy at <20% and Axis growth to moderate from 36% currently to
around 26%-27% in FY11 (1.3X industry). (2) NII growth at 40% yoy was
supported by growth in balance sheet, while NIMs declined 3 bp qoq to
3.68%—management maintained guidance of 3.5% for FY11. Around 43.5% of
Axis' 2Q deposits were institutional and we believe this could lead to margin
pressure, unless it increases lending rates. (3) Fees grew in line by 18% yoy,
driven by the corporate business as retail fees declined 89% yoy. Management
stated this was because of the new insurance tie-up and will likely pick up in
subsequent quarters. Capital gains declined 52% yoy, a reflection of weak debt
market and a one-off last year. (4) Gross NPA rose 20% yoy, but just 2% qoq to
Rs13.6 bn (1.2% of loans), while net NPLs remained low at 0.37%. The bank’s
incremental slippage ratio was 2.2%, including Rs900 mn or 4.2% of opening
restructured loans, that slipped into NPLs.
What to do with the stock
We fine-tune FY11E-FY13E EPS by 1.2%/1.6%/3.2% to factor in lower
provisions. We remain Neutral and raise our 12-month target price to
Rs1,450 (vs. prior Rs1,380) as we roll forward BVPS by one quarter to
September 2011. We note that our implied valuation would be Rs1,510 if
we were to base it on our March 2012E BVPS. Key risks: Higher
dependence on bulk term deposits

JPMorgan: Axis Bank: Strong results, attractive cyclical play

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• In-line 2Q11: Axis Bank reported 2Q11 net profit at Rs7.35bn, up 38%
y/y, in line with our and consensus forecasts. Positive surprise on
margins and non-interest income was netted off by cost pressures. We
stay positive — loan growth and normalizing credit costs drive strong
EPS for the bank.
• Margin surprises, but expect moderation: A minuscule margin
contraction drove a positive NII surprise. Axis’ 2Q NIM came in at
3.68% (1Q11- 3.71%, JPM - 3.6%). Acceleration in its investment yield
was a key factor, which we attribute to the sharp spike in short-term
yields from June. We expect margins to moderate as wholesale term
deposits rise and the book leverages up.
• Large corporate segment driving revenue growth: The large
corporate segment delivered loan growth at 59% y/y and fee income
growth of 54% y/y. Growth from the SME segment is slow as asset
quality for SMEs is still stabilizing and credit standards are tighter.
• Asset quality stable, not robust yet: GNPAs held at 1Q11 levels, but
incremental gross delinquency stayed above 2%. Credit costs were in
line at 1.1-1.2%, and the impact of the improving economy is yet to flow
through completely. Management flagged that retail delinquencies had
stabilized but the SME book continues to be soft – stopped short of
guiding improvement in 2H11.
• Maintain Overweight, classic cyclical play: We see strong credit
growth and lower credit costs driving ~24% EPS growth for Axis over
FY10-12E. Margin moderation is unlikely to be a risk, with short-term
investments cushioning rising wholesale deposit costs. We maintain our
OW rating with a Sep-11 PT of Rs1800. The key risks are continued
SME delinquencies and an interest rate shock from aggressive RBI
action.

Infotech quarterly update by Morgan Stanley Research

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Infotech Enterprises; Strong 15% qoq Revenue Growth but Stability in UTG Segment Margins Is Key
Quick Comment: Infotech reported strong 15% qoq
US$ revenue growth in the Sep-10 quarter. The strong
revenue outperformance was a pleasant surprise in our
view. However, investments in SG&A and wage hikes
led to flattish margins for the quarter (excluding the
Wellsco acquisition). Management remains hopeful of
achieving ~18% margins in FY11.
We believe margins for Infotech are likely to be ~16-17%
for FY11e and management is likely to miss its EBITDA
margin forecast. However, stronger than expected
revenues for the company should still help it deliver
FY11e net profits closer to our forecasts. We raise our
revenue estimates for Infotech and lower our margin
assumptions. The net result is 3-4% trims to our EPS
estimates for FY11 to FY13. Overall, we forecast
revenue and net income CAGR of 20% and 16%
respectively for FY11e-13e.
Margin outlook: We believe that currently Infotech is
operating at drained margin levels, below which it is
unlikely to fall further. As management deals with the
supply-side challenges, we believe the margins are
likely to recover. However, the pace of improvement
may be significantly slower than management has
suggested, partly due to rupee appreciation of 4-5% in
3Q, in our view
What’s next? We believe management has to focus on
rationalizing SG&A over the coming quarters to drive
profitability. Our interaction with management indicates
that SG&A expenses have peaked and are likely to stay
flattish in absolute terms in coming quarters. We believe
that achieving the stated SG&A outlook could give the
stock further upside from current levels. Maintain OW.
Key risks: Rupee appreciation, slower than expected
turnaround in Wellsco margins

Citi on Dr Reddy : Fondaparinux Update & 2Q Preview

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Dr Reddy : Fondaparinux Update & 2Q Preview
We now believe that REDY’s generic fondaparinux launch in the US may slip into
4QFY11, as against our assumption of a 3Q launch. However, any shortfall on this
count could be made up if FDA approval for generic lansoprazole (attractive
limited competition opportunity) comes through soon. We expect developments on
these products along with 2Q results due next week to be the key things to watch
out for in the near term. Maintain Hold (2M).
 Arixtra (fondaparinux) Update: Alchemia, REDY’s partner for the product, has
indicated that the facility in which syringes are filled with fondaparinux will be
inspected by the FDA in Nov ‘10. While REDY manufactures the API, the filling is
done in an outside facility. REDY confirmed that fondaparinux is one of the
products covered under this inspection. We believe that approval & launch may
thus get pushed out to 4Q – we have built in upside from 3Q.
 Prevacid (lansoprazole) could compensate: REDY has been awaiting approval and
we expect this to come through soon. Lansoprazole is an attractive opportunity.
Despite being genericised almost a year back, market size is healthy at cUS$2bn,
with only 3 generic players in the fray. If REDY gets approval without too much
delay, this should compensate for lower FY11 sales of fondaparinux.
 2Q Preview: Stronger than 1Q: REDY reports next week. We expect it to improve on
its subdued 1Q numbers, with sales, operating income & adjusted net income of
Rs20.8bn (+13% YoY, +24% QoQ), Rs3.1bn (+6% YoY, +16% QoQ) & Rs2.4bn
(+6% YoY, +15% QoQ) in 2Q. Higher sales in generic Lotrel (amlodipine besylate
plus benazepril HCl) & Prograf (tacrolimus) would be the key drivers, along with
continued strong growth in India & Russia/CIS.

Morgan Stanley: AXIS Bank; Good Core Earnings; Maintain EW on Valuations

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AXIS Bank; Good Core Earnings; Maintain EW on Valuations
What's Changed
Price Target Rs1,150 to Rs1,485

Axis Bank reported a PAT of Rs7.3 bn (+38% YoY /
-1% QoQ): This was marginally ahead of our estimate of
Rs7.2 bn. Headline growth was affected by lower capital
gains, but adjusted for those, core pre-provision profits
were up 9% QoQ and 36% YoY.
Loan growth was muted, but deposits growth
picked up: Axis Bank’s loan book grew by 36% YoY,
partly reflecting base effect. Sequential growth was
weaker at 2% QoQ. However, deposit growth picked up,
growing 6% QoQ– ahead of system deposits growth of
4% QoQ. We expect Axis’s loan growth to pick up in the
second half of the year to about 26% YoY by Mar-11.
NII grew 7% QoQ as margin compression was
limited to 3 bps QoQ. Rising funding costs and fading
free funds impact were countered by higher investment
yield and improved CASA (+130 bps QoQ). We expect
NIMs to normalize gradually to 3.6% by year-end, driven
by higher wholesale funding costs (but expect them to
be higher than management guidance of 3.5%).
Asset quality remained under pressure; however,
we expect gradual improvement: New slippages
remained high at 1.6% of loans and loan loss provisions
were at 1.2% of loans (both metrics were stable QoQ).
However, given macro improvement, we expect to
trends to improve towards the end of F11 and in F12.
Raise PT, but maintain EW on valuations: Axis is
trading at 15x revised F2012e earnings (up 4%) and
2.9x BV – implying that the scope for further re-rating is
low. We have take up our price target to factor in better
margin progression, and we are now assigning a 25%
weight to the bull case scenario.

Morgan Stanley: LIC Housing Finance: Strong Growth Trends Continue

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LIC Housing Finance: Strong Growth Trends Continue


LIC HF reported a profit of Rs2.34 bn (+10% QoQ
and 37% YoY). Our estimate was Rs2.16 bn.
The following were the key points from the results:
a) Volumes remained strong with loan book growing
8% QoQ and 36% YoY. This compares with 5%
QoQ and 37% YoY in the previous quarter.
b) Margins contracted by 8 bps QoQ to 2.93% – in line
with expectations. Management indicated that the
PLR hike of 50 bps effected on October 1 will
provide a buffer against funding cost increases and
will help maintain margins between 2.8-2.9% for the
rest of the year. (We project margins to compress to
2.8% by end-F2011 and 2.7% in F2012.)
c) Non-interest income picked up owing to processing
on new loan disbursements.
d) Cost:income ratio moved up from the previous
quarter’s low level of 11.3% to 13.6%. The key
driver here was an increase in commissions paid on
fresh loan disbursements.
e) Asset quality trends registered improvement with
GNPLs falling 13% QoQ / 22% YoY. As a result,
provisions during the quarter were negligible.
LICHF is trading at 12.7x F12e earnings and 2.8x BV.
We believe these valuations are attractive, since loan
growth – the key catalyst for the stock – is likely to
remain strong. With expectations of QE2 increasing and
capital flows to India strengthening, we believe that
funding costs may be capped even as growth remains
strong – hence, LICHF could be heading for a sweet
spot.

Ambit on Axis bank: Bellwether sets the pace

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Bellwether sets the pace
 NII growth at 40%; net profit growth marginally ahead of expectations
 YoY loan book growth at 36% suggests disproportionate mkt share gain
 Sequential dip in NIMs arrested on account of strong CASA accretion
 Restructured portfolio behaves better than earlier anticipated
 Maintain loan book growth forecast of ~26% for current fiscal
 Maintain ‘HOLD’ with revised target price of Rs1,725 (rounded-off)
 Assumptions on asset quality remain conservative through FY11E
Axis Bank reported its Q2/H1FY11 results broadly ahead of expectations.
While the NII clocked in at a stronger-than-anticipated Rs16.15bn, net profit
clocked in at Rs7.35bn, marginally ahead of expectations. While the P&L has
panned out more or less in line with expectations, what has clearly surprised
us is the balance sheet growth – loan book growth at 36% is visibly out of sync
with the systemic growth and indicates a disproportionate market share gain
during the quarter.
Although the bank continued to witness slippages from the SME portfolio, the
asset quality ratios continue to remain at comfortable levels.
Valuation and recommendation: Axis Bank currently quotes at 3.0x our
FY12E ABVPS of Rs531. While we have maintained our forecasts, our EVA
approach yields a higher target price due to the lower discounting factor.
While we maintain our 'HOLD' recommendation with a revised TP of Rs1,725,
we continue to advocate caution on the asset quality front in light of
the high skew towards BBB-rated large corporates.

Religare on Axis bank - earnings review

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Axis Bank Ltd
NII surprises, PAT in-line
Axis Bank’s (AXSB) Q2FY11 results surprised positively at the NII level on
better-than-expected margins and investment income; PAT, however, was
largely in line due to higher operating expenses and lower growth in other
income (on lower trading gains; core fee income remained strong). Incremental
slippages were higher at 1.9% (ann.); however, this was in line with the
management guidance. We continue to like AXSB among private banks as we
believe it is best placed to capitalise on the rising corporate demand in the
backdrop of strong economic growth. We are upgrading our earnings estimates
for FY11/FY12 by 2%/4% to factor in the better-than-expected margins and
lower credit costs. We restate BUY with a revised price target of Rs 1,800. At
our price target, the stock will trade at 3.3x FY12 BV and 18x FY12 EPS.
NII growth at 40% YoY; advances growth in line with industry: NII growth
during the quarter was driven by a sharp increase in income on investments (Fig
2); we believe this could have primarily stemmed from migration of some
advances towards the CP market on account of the introduction of base rate and
higher income from investments in mutual funds. Advances grew by 1.8% QoQ
and 36.5% YoY mainly driven by higher exposure to the corporate segment;
growth in SME/retail segments remained muted at 6%/17% YoY (Fig 3).
NIMs beat estimates: Despite a sharp increase in wholesale rates in the last six
months and lower incremental C/D (only 21% during Q2FY11), the bank’s NIMs
slipped only 3bps to 3.68% due to a hike in the PLR and a ~140bps QoQ
improvement in CASA to 41.5%. Lower incremental C/D ratio could have risen
from a higher focus on deposit mobilisation and migration of some credit to the
CP market. We are increasing our NII estimates by 4%/2% for FY11/FY12 to
factor in the lower-than-expected contraction in NIMs.
Fee income lower due to accounting change; costs high: Other income growth
dropped 3% YoY largely due to a 52% decline in trading profits (Fig 4). Fee
income growth, at 19% YoY, was lower than historical rates; however, this can
be partially attributed to the change in accounting policy on commissions. After
adjusting for this change, fee income growth stood at 23%. Costs rose 9% QoQ
primarily due to a 17% QoQ growth in other expenses. As a result, cost/income
ratio increased from 42.3% in Q1FY11 to 43.9% in Q2FY11.
Delinquencies in line with guidance: Slippages at 1.9% (ann.) were in line with
that seen in Q1FY11. Of the total slippages of Rs 4.6bn during Q2FY11, Rs 0.9bn
came in from restructured assets (cumulative slippages now stands at Rs 5.4bn;
18% of restructured assets). While slippages could remain high in FY11 (we are
factoring in a slippages ratio of 1.8% for FY11), we expect it to decline to 1.5%
in FY12, in sync with the economic recovery.

Macquarie Research: Axis Bank: Better-than-expected quarter but concerns remain

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Axis Bank: Better-than-expected quarter but concerns remain
Event
 Axis Bank reported 2Q11 net profit of Rs7.4bn, which was up 38%YoY and
9% above our estimate. The earnings surprise was mainly driven by the top
line, which was partially offset by higher opex and provisions. We revise our
target price to Rs1,450 from Rs1,300 and maintain our Neutral rating.
Impact
 Loan growth healthy but should decline. Loan growth was healthy on a
YoY basis, at 36%, and ahead of our estimates. Growth, however, is still not
broad-based, coming mainly from infrastructure, cement and metals. Retail
lending was moderate at 18% YoY. Management expects loan growth to
decline to around 25% for FY11, which is in line with our estimate.
 Pressure on margins. Management is seeing wholesale deposits reprice
~200bp upwards, a quantum which we believe may not be compensated by
higher loan rates in a moderate-growth environment. Around 40% of deposits
for Axis are wholesale, and 55% of total deposits are repriced within one year
compared to only 30% of assets, amplifying the impact of higher deposit
rates. However, in the quarter there was a strong jump in interest income from
investments, which has helped nullify the cost but may not be sustainable.
NIMs were flat QoQ at 3.7%, but management sees some downside to these.
 Good performance on fees. Fees were up 18% YoY on a higher base in
2Q10 and were ahead of our expectations. Management is seeing strong
traction in loan syndication fees, which we expect to continue. Third-party
product fees have been lukewarm, but management expects these fees to
pick up.
 Asset quality stable. Asset quality was stable, with new delinquencies at
1.6% of loans, remaining flat QoQ. The SME portfolio remains under stress.
However, retail delinquencies have declined. Provision coverage improved
further to 80% from 77% in 1Q11, without technical write-offs.
Earnings and target price revision
 We have marginally increased our FY11 and FY12 estimates by 4% and 7%,
respectively, on the back of higher fees. Our TP increases to Rs1,450 from
Rs1,300 on the back of higher FY12E ROE, resulting in a higher multiple.
Price catalyst
 12-month price target: Rs1,450.00 based on a Gordon Growth Model
methodology.
 Catalyst: Continued momentum in loan growth.
Action and recommendation
 We maintain our Neutral rating. While the performance in the quarter was
good, we are mindful of near-term headwinds. Accordingly, we believe the
stock is fairly priced in at 2.9x FY12E BV.

FII DERIVATIVES STATISTICS FOR 15-Oct-2010

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FII DERIVATIVES STATISTICS FOR 15-Oct-2010 
 BUYSELLOPEN INTEREST AT THE END OF THE DAY 
 No. of contractsAmt in CroresNo. of contractsAmt in CroresNo. of contractsAmt in Crores 
INDEX FUTURES428721312.86598641838.9751726015753.17-526.11
INDEX OPTIONS3056459295.272699328256.33208908363327.481038.94
STOCK FUTURES441751380.50625522043.88146395044312.72-663.38
STOCK OPTIONS14021505.0914776533.33402081316.20-28.24
      Total-178.79

 

FII & DII trading activity on NSE and BSE as on 15-Oct-2010

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FII trading activity on NSE and BSE on Capital Market Segment

The following is combined FII trading data across NSE and BSE collated on the basis of trades executed by FIIs on 15-Oct-2010.

FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
CategoryDateBuy ValueSell ValueNet Value
FII15-Oct-20102281.712394.46-112.75
Domestic Institutional Investors trading activity on NSE and BSE on Capital Market Segment
The following is combined Domestic Institutional Investors trading data across NSE and BSE collated on the basis of trades executed by Banks, DFIs, Insurance, MFs and New Pension System on 15-Oct-2010.
DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
CategoryDateBuy ValueSell ValueNet Value
DII15-Oct-20101150.442203.89-1053.45

15th Oct, 2010 :Grey Market Premium Prices for India IPO

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Company Name
Offer Price
Premium
(Rs.)
(Rs.)
Commercial   Engg
127
(Upper Band)
DISCOUNT
Oberoi Realty
260
(Upper Band)
8 to 10
B S Trans
247 to 257
DISCOUNT
Prestige Estates
172 to183
DISCOUNT
Gyscoal Alloys
65 to 71
8 to 10
Coal India
225 to 245
11 to 12

BSE, Bulk deals, October 15th 2010

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Company
Client Name
Deal Type *
Quantity
Price **
Amar Remedies
MORGAN STANLEY MAURITIUS COMPANY LIMITED
B
254587
129.46
Avon Corp
DELIGHT FINANCIAL ADVISOR PVT LTD
B
646559
5.05
Avon Corp
PAYAL GUPTA
B
438858
5.03