23 October 2010

Global Emerging Markets Strategy Small Is Beautiful?:: Citi

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Global Emerging Markets Strategy
Small Is Beautiful?
 Outperformance — This year has seen significant outperformance by ‘small’
markets within GEMs, rising by an average of 25.2% YTD, compared to average
‘large’ market gains of “only” 13.9%. This relative performance extends a trend
that has been in place for the past decade. In the months ahead, conditions are
becoming more favorable for larger markets to ‘move to the front of the line’ again.
 The Mighty Mites — We attribute this year’s outperformance by small markets to:
i) reversal of the pattern of large market gains in 2009; ii) the lower beta feature of
small markets in a very volatile year; iii) funds flows into all emerging markets
which have been very strong, while flows from ‘crossover’ investors have
diminished; iv) sector performances; and v) specific regional and country factors.
 Large Market Comeback — Several factors suggest that large markets are due for a
comeback: i) the bull market is better established such that the beta factor begins
to work in favor of large markets; ii) large market underperformance in 2010; iii)
conditions are more favorable for the return of crossover money to GEMs; iv) the
rebound in Chinese stocks suggests the ‘Anything But China’ theme is less valid.
 Neutral Valuations — The valuation factor is neutral for the large v. small market
decision. Small markets have become more expensive than large markets on both
forward P/E and trailing P/B ratios (~10% premium on both); however, once
valuations are adjusted for earnings growth (P/E) and ROE (P/B), the relative case
for the larger markets is far less compelling.
 Strategy — We expect a return to large market outperformance over the months
ahead. Within this view, however, there are still several small markets that we
favor from a strategy viewpoint, including Thailand and the Czech Republic
(Overweight) and Chile, Peru, Poland and Turkey (Neutral).

sesa goa, Expansion plans hit an air pocket - Reduce:: Kotak Sec,

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Expansion plans hit an air pocket. Sesa lowered FY2011E volume growth guidance
to 10% from 20%. In addition, the path to expansion of iron mining capacity to 50 mn
tons is also unclear on account of regulatory hurdles. We incorporate Cairn India
financials in our model, lower iron ore volumes by 13% to 21.7 mn tons and TP by 6%
to Rs320. REDUCE on (1) delay in capacity expansion plans; (2) regulatory hurdles; (3)
expensive valuations and (4) value destruction from acquisition of stake in Cairn India.


Lowers volumes growth guidance; capacity expansion may be at risk
Sesa lowered FY2011E iron ore volume growth guidance to 10% from 20% earlier citing
(1) impact on ban of iron ore exports by the Karnataka Government; and (2) continued logistics
constraints for iron ore shipments in Orissa and Goa. We believe that even the revised volume
growth guidance is dependent on the lifting of ban on iron ore exports imposed by the Karnataka
Government by November ’10. Note that Karnataka contributed to ~20% of iron ore shipments in
FY2010.
Further, Sesa’s plans to expand iron ore production capacity to 50 mn tons by end-FY2013E may
be at risk on account of delays in getting environment clearance from MOEF. Sesa currently has EC
approval to mine up to 25 mn tons per annum. Sesa indicates that the Goa Government is not
taking up any mine expansion request pending further announcements on revised MMDR draft.
Expansion of Orissa mine has also hit an air pocket. We lower our iron ore sales estimates to 21.7
mn, 24.1 mn and 29.7 mn tons for FY2011E, FY2012E and FY2013E from 25 mn, 30.5 mn and
29.7 mn earlier.
Cairn transaction may be EPS accretive but value destructive
We assume that Sesa’s open offer to acquire 20% in Cairn India at Rs355/share is fully subscribed
and consolidate earnings starting FY2012E. Note, in case of a shortfall in open offer, it will acquire
the balance shares from Vedanta at Rs405/share. Our FY2012E and FY2013E EPS estimates
increase by 11.1% and 20.2% for this consolidation. Our energy team values CAIR at Rs280/share
as compared to Rs355 paid by Sesa for the stake; this leads to value destruction of 21%.
Maintain REDUCE rating; multiple headwinds ahead
Delays in iron ore capacity expansion by the non-Big 3 miners underpin our outlook for iron ore
prices—we now model iron ore prices of US$120, US$115 and US$105/ton for FY2011E, FY2012E
and FY2013E, respectively; this partially offsets the decline in our volume assumptions. Our core
EBITDA estimates reduce by 17.2%, 2.2% and -0.6% to 53.1 bn, 55.9 bn and 60.8 bn for the
next three years. EPS estimates increase to Rs52.5, Rs54 and Rs61.5 per share on proportionate
earnings consolidation of Cairn India. We value Sesa’s core business at Rs197/share and stake in
Cairn India at Rs119/share. We lower our fair value to Rs320, from Rs340 earlier.

Mahindra Holidays & Resorts - BUY- Prominent player in leisure hospitality --SKP Securities

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Company Profile
Mahindra Holidays & Resorts India Ltd (MHRIL) is a leading player in the
leisure hospitality industry, provides family holidays primarily through
vacation ownership memberships. Mahindra Holidays currently has a pan-
India presence through its extensive network of 33 resorts and 1476
apartments. Currently company has 109,884 vacation ownership members as
on March 31, 2010.
Investment Rationale
Prominent player in leisure hospitality
• Club Mahindra has the highest brand equity among timeshare
companies in India. With the escalating demand of VO products,
MHRIL with its strong brand and pan India presence is well poised to
take advantage of it.
• In terms of market share, MHRL has accounted for 72% of the total
active members across the vacation ownership industry in India with
Resort Condominiums International (RCI) up to end May 2009.
Mounting member base – strengthening top line
Membership enrollment has increased at a CAGR of 31% over the last
five years and reached to 113829 as on June 30 2010.
Company has launched new services offerings such as, Zest – targeting
young urban consumers, club mahindra fundays, club mahindra travel
etc, which will help company to capture more potential members in
near future. Increasing the membership base and the number of resorts
would enable company to increase the total income from vacation
ownership.
Distinctive and a Vigorous Business Model
Company follows a mixed use model by generating revenue from
selling vacation ownership to members and also provides accessibility
to non members for its unused apartments on a per night room tariff.
This enables MHRIL to enhance its revenue through optimum
occupancy and sales from restaurants and other services.
Company also provide financing option to its members, and attract a
interest a rate of 15-16% in a year.
Members pay an upfront membership fee and are also required to pay
an annual subscription fee each year thereafter.
Valuation
Vacation Ownership Industry is at its nascent stage and MHRIL is favorably
placed with 70% market share of total VO memberships in India. Innovative
and distinctive product in its portfolio, constant growth in membership, high
quality of services makes MHRIL a prominent player in VO industry.
At the current market price of Rs. 462, MHRIL is trading at PE of 26.4x
and 22.1x of FY11E and FY12E earnings of Rs. 17.5 and Rs. 20.9
respectively. We expect revenues and PAT to post CAGR of 25% and
30%, respectively, over FY10-12 E. We recommend BUY rating on the
stock with a target price of Rs. 580/- (25% upside) in 12 months.

Praj Industries:: Short term pain for long term gain BUY:: KRChoksey

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Recently we had the opportunity to meet management of Praj Industries Ltd. We
had discussion with Mr Pramod Chaudhary, Executive Chairman of Praj Industries
along with his team members to understand current state of business and various
measures company is taking to bring itself back on growth track.
The synopsis of our discussion is as follows:
• On recurring disappointing performance of Praj for last few quarters:
There has been order cancellations both in Europe and North America due to
recession and though some orders were not cancelled officially by client,
financial commitment was not made towards the same. This is reflected into
Rs 150 cr order write-off by the company during September quarter. As on
September 30,2010 confirmed order-book of the company stands at Rs 600cr
to be executed over 12-14 months period.
• US senate has passed the law making 15% ethanol mixing mandatory: US
senate has cleared the bill making it mandatory for Oil companies to mix
15% ethanol. This move by US will create demand for additional bio refinery
capacity of approx 4bn gallons per annum. Current benchmark suggests
capex requirement of USD 1.75 for each gallon of bio refinery capacity
creation. Thus US Government’s move will present a business opportunity
of USD 7-8 Bn for Praj Industries. Company has informed that they have
started receiving enquiries for the same. However, they refused to divulge
any further details.
We are of the opinion that this move by US government to allow additional
ethanol mix is prompted by motive for employment generation and this
business opportunity is very real in nature. Praj will be able to win good
chunk of this business.
We expect positive announcement on this front during visit of US
president in November 2010.
• Company is taking measures to enhance management bandwidth: As with
most of the small to mid size companies, Praj had limitations on its
management bandwidth which was reflecting in muted project execution
and lack of new order wins. They had people with good technological
background but with limited relevant project execution capability. Recent
management shuffling with induction of Mr Prakash Kulkarni ( Exec
Chairman- Gabriel india, Ex MD- Thermax) can be seen as an effort to
address this crucial issue. They have shortlisted another industry stalwart as
replacement for Mr shasank Inamdar who is expected to lead the ship with
more vigour.
• Company has chalked out a sustainable long term strategy: The
management has drawn a clear roadmap to sustain momentum in existing
stream of business while at the same time nurturing R&D to tap emerging
and untapped opportunities to add additional basis points to bottomline

Tanla Solutions: Disappointment – yet again…in Q2FY11 says ICICI Sec

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Disappointment – yet again…
Tanla Solutions once again reported disappointing set of numbers for
Q2FY11. The top line stood at Rs 78.3 crore against our expectations of
Rs 109.3 crore. Revenue declined 12.3% YoY while it improved by 3.5%
QoQ. EBITDA declined 27.7% YoY and improved 5.1% QoQ to Rs 21.5
crore on the back of lower revenue realisation. EBITDA margin stood at
27.4%, declining 584 bps YoY. PAT for the quarter stood at Rs 3.2 crore
aided by negative tax outgo.
􀂃 Highlights for the quarter
Tanla solutions have once again reported disappointing set of
numbers though the company claims to have added new clients in
this quarter as well. Mobile payments segment has further declined
to due to lower transaction volumes from the Nokia license manager
deal. Revenue from aggregation and product services stood at Rs
52.4 crore against Rs 47.8 crore in Q1FY11. Subscription and Mobile
payments revenues improved to Rs 2.0 crore and Rs 15.0 crore vs
Rs 1.3 crore and Rs 17.9 crore in Q1FY11, respectively.
The company has added nine new customers for providing billing
and aggregation services in various geographies such as UK, South
Africa and India. The company would also be handling spot
messaging for the reality show KBC, revenues from same would
kick in from Q3FY11E.
Valuation
At the current market price of Rs 29 the stock is trading at 28.1x FY11E
EPS of Rs 1.0 and 7.8x FY12E EPS of Rs 3.7. Company’s performance has
been quite erratic over the past few quarters. Though Tanla claims to add
several new clients in VAS related services, the revenue growth does not
reflect the same. The stock is under review and we advise our clients to
avoid this stock until there is clarity on the performance of the company.

Tulip Telecom: Initiate OW: The benefits of a high fibre diet:: HSBC Research,

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Tulip Telecom (TTSL)
Initiate OW: The benefits of a high fibre diet
 Well placed to ride growth in enterprise data; we forecast a
three-year EPS CAGR of 19%
 Change in business mix implies margin expansion as
management monetises previous capex
 Initiate OW with a TP of INR235, implying 9.4x FY12 PE


Niche player thinking big. TTSL offers domestic and international corporate data services
and leads the Indian market in providing remote offices with secure access to their
organisations’ networks (known as Virtual Private Connectivity). After investing heavily in
fibre optic connections, the company is now focusing on high volume, high revenue markets in
bigger cities rather than the low volume, low revenue business of providing bandwidth in
smaller towns. TTSL has 1,600 clients, accounting for 90% of India’s top 500 companies.

Time to sell its new capacity. TTSL should benefit from robust growth in the enterprise data
market. The company is starting to sell access to its new fibre capacity after rolling out
4,000km of fibre across c300 cities in the last 18 months. It should also continue to benefit
from increased government spending on large IT projects. Now that the fibre build-out is
complete, margins should improve as capex falls; we forecast a three-year EPS CAGR of 19%.

Benefits of fibre. The company generates 25% of its revenue from fibre and aims to raise this
to 70% by 2012. Despite its late entry into the big business/urban market, TTSL should benefit
from: a) acquiring new, larger clients; b) upgrading existing subscribers; c) large companies
needing alternative back up systems (e.g. fibre as well as wireless). But competition is
increasing and we expect TTSL’s share of the important market that covers corporate Internet
services and moving data between network nodes (Multiprotocol Label Switching) to fall from
c30% to c27% by FY13. This should be offset by TTSL’s ability to provide a wider range of
products in the overall enterprise data market through its fibre network.

Valuation and risks. TTSL has underperformed telecom peers on concerns about revenue
visibility, increased competition and emerging technologies. We believe the concerns are
overdone as the company’s fibre and wireless capabilities should deliver growth. We derive
our target price of INR235 using a SOTP approach using a mix of PE and DCF. Our TP
implies a FY12 PE of 9.4x (18% discount to its three-year average PE) and EV/EBITDA of
c5.7x. Key downside risks: stronger than expected competition and lower corporate spending.

India Macro : On why deposits are bottoming out:: Bank of America Merrill Lynch

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India Macro Weekly
On why deposits are bottoming
out
􀂄 Focus: On why deposits are bottoming out
We grow more confident of our June call of deposits bottoming out in September.
Deposit growth should pick up to 17.5% by March from 14.3% in September.
Nonetheless, we still expect lending rates to go up another 50bp in the busy
season with 20% loan demand. Why are deposits bottoming? Because base
effects are done. Second, the RBI will likely inject US$25bn of liquidity with
inflation coming off. Given that our US economists expect the Fed to launch QE-II
on November 3, we reckon that the RBI should be able to buy US$11bn of fx by
March 11. Third, public demand for pocket money should come off as inflation
recedes. Finally, rising deposit rates should raise the attraction of bank deposits.
17.5% deposit growth + 20% loan demand = 50bp rate hike
We continue to expect lending rates to go up by another 50bp in the October-
March busy season. This assumes 20% credit growth. Our BofA ML liquidity
model estimates that banks will face an excess loan demand of 8.6% of deposits
even if deposit growth scales back up to 17.5% as we expect. In fact, SBI hiked
prime lending rates 25bp yesterday, over and above August’s 50bp.
#1. RBI to inject US$25bn of liquidity to fund loan demand
We expect the RBI to inject US$25bn of liquidity by March 11 to meet excess loan
demand. Its 100bp CRR hike has pulled money growth down to far too tight 15%
levels to fund 8.5% growth. Second, the RBI should have greater headroom in
stepping up liquidity as inflation comes off. Finally, the RBI, naturally, would like to
buy fx and build up fx reserves rather than gilts and ‘monetize’ the fiscal deficit.
Given that our US economists expect the Fed to launch QE-II on November 3, we
reckon the RBI should be able to buy US$11bn. It also just announced “buyback”
of gilts maturing till February to “prepone” inflows into the money market.
#2. Lower inflation = lower pocket money = higher deposits
We expect public transactions demand for pocket money to come off as inflation
ebbs. High inflation typically leads to a drawdown of bank balances as the public
requires more cash for day-to-day transactions. Lower inflation will reduce the
preference for cash, pull down the cash deposit ratio and add to deposits.
#3: Higher deposit rates to attract household savings
We expect higher bank deposit rates to attract deposit flows from household
savings. Bank deposit rates have gone up 50bp since our June report. All said
and done, this will not be as important a factor as the previous two because the
hemorrhage to postal savings – that is a primary alternative to bank deposits - has
really been limited to Rs300bn a year (0.6% of outstanding bank deposits).
Week ahead: All eyes on September results
We expect markets to focus on on-going September results. Our India strategist,
Jyoti Jaipuria, expects Sensex companies to report 45.2% profit growth

Educomp Solution Limited Buy: Sept 2010 RESULTS REVIEW: Indiabulls research

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Expansion plans to add value
In Q1’11, Educomp Solutions experienced a 17.6% yoy growth in top line to
Rs. 2.28 bn, driven by robust growth across all the segments. However, the
EBITDA margins plunged 13.8 pps (percentage points) to 30.4% in Q1’11
mainly on the back of higher salary cost and accounting for hardware for Smart
Class for which revenues has not been booked. Going forward, we expect the
Company to grow at a CAGR of ~24% over the period FY10-12E on account of
increase in allocation and emphasis by the government on the Education
sector during the Union Budget 2010-2011 which is currently pursuing newer
initiaves in the sector. Besides, our DCF valuation gives a target price of
Rs. 758, which provides an upside of 19.4% over the CMP. Consequently, we
give a Buy rating to the stock.
Strong operational efficiency in SLS and other segments: Educomp’s
robust revenue growth was mainly driven by a 15% yoy growth in School
Learning Solutions (SLS) business comprising of Smart Class and ICT
Solutions. Other segments of the company also contributed towards the
revenue with K-12 and Higher Learning Business registering a growth of 37%
and 32%, respectively. Moreover, the Company in order to reduce costs in the
future have changed the business model for Smart Class from BOOT model to
the Securitization based Edusmart model which leads to transferring of old
schools from current model to new one. Educomp is on a move to upgrade its
education distribution systems by developing quality courseware and
multimedia in regional languages and providing training to teachers in ICT,
which will improve the overall education system.
Expansion plans to drive revenues further: In addition to the aggressive
expansion plans in the Smart Class segment, the Company is also investing a

considerable amount in newer initiaves, in terms of setting up its own K-12 high
schools, and has embarked on expanding its On-line Supplementary business.
Moreover during the quarter, the Company has also entered into a Joint
Venture with Lavasa Corporation, to set up International Residential school in
its Hill City near pune.
Result Highlights
Net Sales
· In Q1’11, Educomp saw a 17.6% yoy revenue growth to Rs. 2.28 bn backed by
growth in all the segments of the Company. The K-12 and Higher Learning
Business registered an individual growth of 37% and 32%, respectively.
EBITDA margin
· EBITDA margin contracted by 13.8 pps yoy to 30.4% in Q1’11 impacted by
higher salary cost and accounting for hardware for Smart Class for which
revenues has not been booked. EBITDA declined by 19.2% yoy to Rs. 692.7
mn.
Net Profit
· The Company’s net profit appreciated 6.6% to Rs. 364.8 mn. The net profit
margin also declined to 16.0% in Q1’11 as compared to 17.7% in Q1’10.
Segment Highlights
· For the quarter, the School Learning segment revenues grew 15% at Rs. 1.59
bn, contributing 70% to the net income.
· The K-12 segment revenues grew 37% at Rs. 305 mn contributing 13% to the
sales.
· The Higher Learning segment’s revenue at Rs. 89.6 mn, contributed 4% to the
total revenues with a growth of 32%.
Key Events
· Educomp Solutions, through its Singapore subsidiary, Ask Learn has signed an
agreement with China Distance Education Holdings (CDEL) to license and

distribute its products in China. The Company has granted CDEL exclusive
rights to license and distribute Educomp`s Smart Class, Edulearn and Wiz
learn products in the people’s Republic of China.


Valuation
The stock is currently trading at forward PE of 18.0x and 15.6x for FY11E and
FY12E. Moreover, using DCF valuation (assuming a WACC of 18.5%, Rf of
7.52%, and terminal growth of 5%), we arrive at a fair value of Rs. 758,
suggesting an upside of 19.4% over the CMP. Consequently, we assign a ‘Buy’
rating to the stock.

IndusInd Results Sept 2010 qtr Review Bank: Indiabulls Research

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Near-term growth priced -in
For the quarter ended June 2010, IndusInd Bank reported net profit of Rs.
1.2 bn, indicating robust growth of 37.1% yoy. This is attributable to a
sharp rise in its net interest income (NII), which grew 76.7% yoy to Rs. 3.0
bn in Q1'11, as the Bank's net interest margin (NIM) rose sharply from
2.45% in Q1'10 to 3.32% in Q1'11. There was an improvement in the asset
quality of the Bank as indicated by its gross NPA ratio, which declined from
1.46% in Q1’10 to 1.26% in Q1’11. The Bank's CASA ratio increased from
20.2% in Q1'10 to 24.3% in Q1'11. However, we remain concerned about
the Bank’s CASA ratio, which is still low by industry standards. We believe
the market has factored in all the positives and therefore, we do not
foresee any significant upside in the share price in the near term. Our
valuation model indicates a fair value estimate of Rs. 294, implying a
limited upside potential of 8.8% from the current market price (CMP) of Rs.
270.3. Thus, we give a Hold rating to the stock.

Margins to improve: The NIM rose from 2.45% in Q1'10 to 3.32% in
Q1'11, since the yield on advances declined by 1.19% yoy, whereas the
cost of deposits dipped at a faster pace of 1.67% yoy. The Bank's CASA
ratio increased from 20.2% in Q1'10 to 24.3% in Q1'11 as the Bank opened
44 branches between Q1'10 and Q1'11; this took its branch network to a
total of 224 as of June 30, 2010. We expect the CASA ratio to improve
further in the coming quarters as the Bank is looking at expanding its
presence in the Retail space by setting up 127 branches during the current
financial year and the Bank aims to have a branch network of 700 in three
years from now.

FAG Bearings Performance Highlights:3QCY2010 Result Update (Sept 2010): Angel broking

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FAG Bearings (FAG) recorded strong 3QCY2010 performance. Top-line broadly
came in line with our estimates aided by the robust performance registered by
the auto and industrial segments. Operating performance improved on better
operating leverage. Net profit surged on better operating performance and
higher other income. We rollover to CY2012E and recommend Buy on the stock.
In-line performance: For 3QCY2010, net sales grew 31.5% yoy to `272cr
(`207cr) exceeding our expectation of `276cr. This was largely driven by the
substantial jump in overall auto volumes and sharp recovery in the industrial
bearings segment. EBITDA margin expanded by a significant 381bp yoy to
17.7% (13.8%) basically due to the decline in raw material costs by 480bp
during the quarter and favourable currency movement. Bottom-line spiked by
90.1% yoy to `31.4cr (`16.5cr) on robust top-line growth and improvement in
operating performance. Higher other income also aided net profit growth, which
helped FAG register NPM of 11.4% (8%).
Outlook and Valuation: We believe that robust demand in the auto and
industrial segments will aid FAG in registering a CAGR of ~17% in net sales and
~25% in net profit over CY2009-12E. We broadly maintain our estimates for the
company. The stock is currently trading at 12.4x CY2010E and 11.4x CY2011E
EPS. We rollover to CY2012E and recommend Buy on the stock, with a Target
Price of `1,035, valuing the stock at 12x CY2012E earnings.

23/10/2010: Gray Market Premium for Indian IPOs; Coal India, Gyscoal, Prestige and BS Transcomm

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Company Name
Offer Price
Premium
(Rs.)
(Rs.)



B S Trans
248
(Lower
band)
DISCOUNT
Prestige Estates
183
(Upper Band)
DISCOUNT
Gyscoal Alloys
 71
(Upper Band)
12 to 14
Coal India
225 to 245
24 to 26
+  5% discount for retail

ACC Valuations provide relative comfort :: Edelweiss

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􀂄 PAT lower than estimate; lower realisation & higher costs
ACC’s Q3CY10 performance was below our and consensus estimates. Drop in
realisation and decline in volumes led revenues to decline 17% Y-o-Y and 19%
Q-o-Q. Realisation was down by ~INR 22/bag Q-o-Q and ~INR 27/bag Y-o-Y on
account of significant price corrections across regions. Volumes dipped 8.3% Qo-
Q and 3.6% Y-o-Y due to poor demand, maintenance shutdowns, heavy
monsoons and floods and non-availability of fly ash. Other income includes INR
100 mn on account of air pollution control.

􀂄 Higher raw material, staff costs and other expenses hit margins
Higher purchase of clinker and increase in slag and fly ash prices, Q-o-Q, pushed
input cost per tonne from INR 501/t to INR 686/t (including stock adjustments).
Other expenses increased by 13.8% Y-o-Y because of increase in royalty,
repairs, advertisement and consultancy charges. Employee cost was up 17% Yo-
Y and 10.4% Q-o-Q in Q3. Higher coal and power cost was offset by lower
clinker production, leading to flat power & fuel costs. Lower clinker production
was due to temporary shutdown of Wadi II plant to accommodate expansion.

􀂄 Capacity expansion projects on track
The expansion projects in Orissa (Bargarh) and Karnataka (Wadi) have begun
commercial operations and are stabilising. The 3 mtpa cement plant at Chanda
(Maharashtra; capex of INR 14.5 bn), along with 25 MW of CPP, is nearing
completion and is likely to come on stream in Q4CY10. With completion of the
above, ACC’s capacity will reach 30 mtpa from 26 mtpa currently. The company
acquired 45% stake in Asian Concrete and Cement for INR 368 mn during the
last quarter. Asian Concrete and Cement currently has a 0.3 mtpa grinding unit
in Himachal Pradesh which is likely to increase to 1.3 mtpa .

􀂄 Outlook and valuations: Turning favourable; upgrade to ‘HOLD’
We continue to maintain our negative view on the sector as we believe oversupply
is likely to hamper realization growth. However, considering unsustainably low
price levels in Q3CY10, we expect part of the recent hikes of ~INR 10-50/bag to
sustain. We raise our blended realisation estimate for ACC, resulting in 17%
upgrade to our CY11E PAT. At CMP of INR 980/share, the stock is trading at
EV/tonne of USD 122 on CY11E. We prefer ACC since it is a pan-India player and
given its cheaper valuations than its peers - Ultratech (EV/t USD 142) and Ambuja
(EV/t USD 169). Thus, we upgrade the stock to ‘HOLD’ and rate it ‘Sector
Outperformer’ on relative return basis

HDFC Bank:In line performance - Sept 2010 qtr: Alchemy

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In line performance
NII for HDFC Bank for 2QFY11 expanded by 29% YoY and net profit expanded by
33% YoY led by lower provisions. The business growth stood strong at 34% YoY
and we maintain growth for FY11E at 33% and 23% for FY12E. The NIM at 4.2%
is lower by 10bps QoQ, on account of fall in yield on advances. The cost of funds
expanded by 22bps QoQ, partially guarded by 120bps increase in proportion of the
CASA deposits to 50%. We estimate margins at 4.3% (calculated) for FY11E, to
remain stable hereon led by rising yields compared to cost of funds. The fee income
at Rs 8.5bn stood higher at 23% YoY and 15% QoQ partially due to change in
accounting policy. Slippages remained under control and despite lower provisions
(1.1% of advances) the NPA coverage stood stable sequentially at 77%. We
maintain Accumulate with a price target of Rs2,605.
Business growth strong : Margins dip led decline in yields on advance
The business growth stood strong at 34% YoY and 7% QoQ led by advances which
grew by 38% YoY. The loans to the non retail segment have expanded by 56% YoY,
which constitutes 48% of the total loans. The deposits have grown by 30% YoY and the
proportion of the low cost deposits stood firm at 50.6%, up by 140bps QoQ. We
maintain FY11E business growth of 38% for FY11E and 24% for FY12E. The reported
NIM at 4.2% is lower by 10bps QoQ. This dip is on account of 10bps decline in yield on
advances at 9.69% (calculated) for Q2FY11. With hike in its PLR and base rate in late
Q2FY11 we expect the yields to rise hereon, stabilizing margins. We estimate the
calculated margins to be at 4.3% for FY11E.
Fee income spike driven by change in accounting policy
Other income has decreased by 4.6% YoY to Rs9.6bn. This primarily consists of fee
income of Rs8.5bn, which has increased by 16% YoY, partly led by change in accounting
policy. In 2QFY11 the bank has netted off the fees of Rs0.5bn relating to transactions
done by the customers on other bank’s ATMs to its fee income, which was earlier
deducted from fees and commissions under operating expenses. This also partly led to
increase in cost to income ratio by 200 bps to 48.2%.
Stable asset quality
The gross NPA has remained stable sequentially at 1.2% and net NPA has decreased
marginally by 2 bps to 0.3%. The restructured assets have remained stable, QoQ at
0.3% of the gross advances, amongst the lowest in the system. Though the provisions
have declined sharply by 23.5% YoY and 18.1% QoQ to Rs4.5bn, the coverage ratio
was stable sequentially at 78%. We estimate the gross slippages ratio at 1.2% for FY11E
and 1% for FY12E.

Bajaj Auto- Sept 2010 qtr - EBITDA in line, other income surprises: RBS

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Bajaj Auto
EBITDA in line, other income surprises
September results surprised us with higher other income, even though EBITDA
was in line. We upgrade FY11-12F EPS by 5% on favourable festival demand and
product mix, but rupee appreciation could impact FY12 exports. Maintain Hold
with upgraded TP as valuations look rich.


September quarter EBITDA in line, other income surprises
Ashok reported September-quarter EBITDA of Rs9.12bn, in line with our Rs8.85bn estimate.
Strong product mix in favour of three wheelers and premium bikes helped drive EBITDA
margin expansion of 100bp qoq to 21%. Lower-than-expected depreciation and higher-thanexpected
other income led to a +7% PAT surprise at Rs6.97bn. EPS for the quarter was
Rs24.1, bringing 1HFY11 EPS to Rs44.5. We consider the Rs150m loss on an aeroplane
sale an extraordinary item.

Export markets and currency movement are key items to watch
New capacity additions helped Bajaj benefit from tight demand/supply conditions in the
domestic two-wheeler market. Meanwhile, the domestic three-wheeler market enjoyed a
demand explosion in Tamil Nadu State, which scrapped regional transport office (RTO)
permits for this vehicle class. However, management says this may not continue beyond the
December quarter. Key things to watch include: 1) export market growth outlook; and 2)
potential rupee appreciation (70% hedged) which could impact FY12 exports. We raise our
F11-FY12 EPS forecasts by about 5% on strong other income and three-wheeler sales.
Maintain Hold and raise target price To Rs1,387.10

Bajaj Auto trades at what we see as rich valuation of 15.3x FY12F EPS. The stock has been
a strong performer, as the company’s likelihood of meeting aggressive FY11F sales volume
and profit guidance has risen. Vehicle shortages in India have helped profitability. Going
forward, we believe Bajaj’s strength in the premium bike category will allow it to benefit from
strong demand expected on anticipated improving IT sector employment. However, profits
will also be impacted by the unpredictable three-wheeler and export markets. We expect
export market growth will be subject to exploration of new markets in Africa and political
stability in key markets. We raise our PE-based TP to Rs1,387.10 as we increase our FY12F
PE target to 14x to reflect the EPS and ROE growth. Hold.

Bajaj Auto - Raising estimates and target price; Buy :: Anand Rathi

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Bajaj Auto - Raising estimates and target price; Buy

n       Upswing continues. Bajaj Auto’s (BAL) good results show profit bettering the previous peak of 1QFY11. While BAL has seized the low-hanging fruit in terms of rapid increase in market share and operating leverage; positives from sustained volume growth, good operating performance, higher other income, and enhanced capacity at Pantnagar (thereby reducing short-term constraints) would continue to benefit it ahead. We re-iterate a Buy and raise our target price to Rs1,846 from Rs1,299.
n       Good 2Q results, though as expected. In 2QFY11, BAL’s yoy sales growth was 50.4%, EBITDA growth 41% and profit growth 56.8% to Rs6.8bn. EBITDA margin was 20.7%, a 70-bp qoq improvement, attributable to steady commodity costs and lower staff costs (since bonuses and incentives are paid in 1Q).
n       Raising estimates; introducing FY13e EPS. We raise our FY11e and FY12e earnings 17.7% and 17.4% respectively, to reflect good motorcycle demand (40% yoy growth in FY11), stable EBITDA margins in the range of 20% and higher other income (by ~3x yoy in FY11 on higher free cash flow generation). We also introduce FY13e EPS of Rs122.2 (14.2% yoy growth).
n       Valuation and risks. We raise our target price to Rs1,846 (based upon 17x FY12e core EPS of Rs96 and value of cash & investments at Rs213. We re-iterate a Buy. Risks would be keen competition leading to destructive price wars, export strategy not panning out as expected, and a steep rise in commodity prices.

Container Corp Of India:: Accumulate:Strong performance in EXIM despite JNPT port shutdown: Alchemy

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Strong performance in EXIM despite JNPT
port shutdown
Impressive growth in EXIM volumes despite one month deadlock at JNPT
CONCOR reported strong set of results with volume growth of 2.3% YoY to 624,781 TEU
(against our expectation of 5% YoY volume decline) due to strong performance in EXIM
segment. EXIM volumes grew 1.8% YoY to 493,233 TEU despite a month long deadlock at
JNPT (due to ship collision). This was due to partial shift of traffic to Mundra and Pipavav.
Domestic volumes grew 6.6% YoY to 131,548 TEU. The Revenues marginally declined 1.2%
YoY to Rs9.44bn due to 4.3% YoY decline in realisation to Rs15, 112/TEU. This was mainly
due to 6.8% decline in EXIM relalisation (due to decline in average lead distance). The
domestic realisation grew 6.1% YoY to Rs16, 031/TEU.
EBIDTA margin improve due to lower empty running in EXIM
The EBIDTA margin improved by 130bps YoY to 27.7% led by lower empty running in EXIM
segment. This was on account of sharp recovery in exports reducing mismatch between
exports and imports. In 1HFY11, the empty running (as a percentage of rail freight expenses)
stood lower at 8.5% (Rs900mn) against 9.9% (Rs1080mn) in same quarter last year. While
the EBIT margin in EXIM grew by 150bps YoY to 28.5%, that in domestic declined by 290bps
YoY to 9.9%.
Management maintains 12% volume growth guidance for FY11E; but we remain
cautious
Despite only 5% volume growth in 1HFY11, the company still maintains its FY11E volume
growth guidance of 12% on the back of favorable economic outlook and recovery in exports.
This implies volume growth 18.6% in 2HFY11.
We are cautious about this magnitude of growth in context of a) recent hike in haulage
charges by IR from October 1, 2010 on select commodities such as iron, steel, cement and
POL (would reduce competitiveness against roadways and impact 20% of CONCOR volumes)
and, b) declining market share of CONCOR in EXIM segment. Our channel checks suggest
there can be a partial roll back of haulage charges but it is unlikely to result in any major relief
for operators. We have assumed volume growth of 10.5% for FY11E implying growth of
15.8% in 2HFY11E.
Valuations
CONCOR is the best bet in the logistics sector to capitalise on the revival in container traffic.
It enjoys its strong competitive advantage, both in terms of infrastructure and financials. The
recent policy measures (PFT, SFTO) are expected to open up new avenues of growth for
container operators by allowing them to handle non-conventional bulk cargo traffic such as
chemicals, fertilisers and fly ash. The key risks to our view include a) shift of container traffic
to roads due to decline in hinterland movement on account of development of new ports and
b) any sharp increase in haulage charges by IR and the inability to pass this to customers. We
maintain Accumulate rating on the stock.

India Consumer - 2QFY11 - Stable performance:: Anand Rathi

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India Consumer - 2QFY11 - Stable performance

We expect consumer companies in our coverage to register steady revenue growth, largely driven by volumes. With intensifying competition, we expect higher ad-spend to slightly impact margins. Further, given higher taxes, we expect yoy net profit growth in the sector to be 11%.
n       Steady revenue growth. The sector is likely to register 18% revenue growth, mainly driven by volumes. The full impact of select price hikes in Aug and Sep ’10 would be felt in 3QFY11. We expect Dabur, GSK-CH, Colgate and Marico to report decent volume growth; HUL’s revenue growth will remain muted.
n       EBITDA margin to be a mixed bag. With agro-product prices coming off their peaks, we expect the EBITDA margins of some consumer companies to expand.  The major positive effect of lower raw material prices and price hikes would be seen from 3QFY11. We expect keener competition to push up ad-spend.
n       Rising competition. With HUL spending aggressively to re-gain lost market share, P&G introducing products at lower prices and domestic players such as ITC launching new products aggressively, we expect sector revenues to be squeezed by the lower prices. Higher ad-spend and promotions would also trim margins.
n   Stock calls. We retain a Buy on Colgate, Marico, GCP, GSK-CH and Emami; Hold on Asian Paints and Dabur; and a Sell on ITC, HUL, Nestlé India and Britannia.

HCL Technologies: Key highlights Sept 2010 qtr: IDFC research

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Key highlights
• Revenues in line, margins decline: HCL Tech reported revenues of US$804m, up 9.0% qoq and 27.6% yoy (our
estimate: US$794m). EBIT margin fell ~240bp qoq to 12.9% (our estimate: ~160bp decline) largely due to wage hikes.
Higher-than-expected tax (Rs0.8bn) with lower margins led to lower-than-expected net profit of Rs3bn (our estimate:
Rs3.4bn). All business segments grew qoq; IT/Infra services grew by ~9% while BPO services grew by ~6%.
• Strong hiring indicates confidence on business pipeline: The company saw gross hiring of ~11,800 and net hiring of
~5,600 (9% of the base a quarter ago) on the back of similar hiring in the previous quarter. The hiring is in
anticipation of deal ramp-ups as also pipeline conversion, which indicate the management’s confidence in the
business pipeline. HCLT absorbed across-the-board wage hikes and promotions this quarter.
• Margins likely bottomed out in Q1: HCLT lost ~700bp in EBIT margins over the past 8-10 quarters. We believe
margins have bottomed out and expect a 200-300bp improvement over the next 3-4 quarters. The companyindicated
margins will largely be maintained despite an SG&A step-up in Q2; it spoke of a recovery starting Q3 with several
levers across utilization, SG&A leverage, fresher hiring, etc. Margins remain a key monitorable for HCLT.
• Growth in constant currency terms in key segments: All geographies and verticals reported qoq growth. Europe
grew by ~13%, North America by ~3%, and RoW by 17%. Retail & CPG and Healthcare grew 10-11% while Media &
Entertainment grew just 1.3%. All other verticals reported 6-8% growth. Among services, ADM grew ~13%, Infra
services ~8%, EAS ~5%, Engineering/R&D ~3% and BPO services ~4%.
• Other highlights: Dividend of Rs1.50; hedges of US$197m; cash of US$537m; debt of US$577m; receivables of 80
days and an effective tax rate of ~20% till Mar’11 and 25% thereafter.
Valuations and View: High leverage to discretionary spend (EAS, R&D/Engg and AppDev) and focus on large deals
position HCLT well to deliver strong volume-led revenue growth (in line with Tier1 peers). The ~700bp margin decline
over the last 8-10 quarters is expected to partly reverse over the next 3-4 quarters. Healthy revenue growth, margin
improvement and forex losses swinging to gains would lead to stellar ~29% EPS CAGR over FY10-13E. Our lower-than-
Street FY11 earnings estimates and higher-than-Street FY12 estimates are largely unchanged. We have introduced FY13E
EPS estimates which are ~4% higher than Street numbers. We value HCL Tech at a 12-month price target at Rs500, based
on 16x FY12E EPS. Trading at 13.5x FY11E and ~11x FY12E EPS, we maintain Outperformer on the stock.

HCL Tech: Bottom quarter done; play the spike: Elara

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Bottom quarter done; play the spike
In-line with our estimates; deal flow gets thicker and faster
HCL Tech numbers came in precisely in-line with our expectations on
margins and bottom-line. In congruence with our view for the quarter,
SAP practice of Axon seems to have led the growth. Most of the
current strength in numbers is coming from a comeback of financial
services, cost optimization programs in the IMS space and
implementation/consolidation in the ERP space. Though the TCVs for
the 14 "major" deals were not disclosed in the call, we sense from the
management comments that the deals in the quarter and more
importantly, the deal pipeline for the next quarter is more robust than
most of our other coverage universe stocks.
Holding back on bullets; expect the margin uptick from here on
While HCL Tech has been consistently delivering industry leading
topline growth, it has been holding back on almost all of the margin
levers of utilization, SG&A spend and pyramid structure for delivery.
While management has guided for a flat margin for the next quarter
we will model a gradual improvement in margins from the next
quarter to moving to around 18.4% levels in Q4FY11. Going forward,
in FY12, we expect the company to use more of its margin levers.
BPO turnaround on track; breakeven likely in another 2 quarters
BPO topline has grown qoq for the first time in six quarters by 6.7%.
EBITDA margins have moved on a qoq basis from -11.4% to -8.7%.
While earlier BPO was largely voice based in telecom and insurance,
now BPO is decidedly moving towards financial services and logistics
with transformational multi geography deals now coming into play.
Upping FY12 estimates; upping target price to INR 460
While we are already aggressive on the FY11 topline and bottomline
estimates, we now upgrade both our topline and bottomline estimates
materially for FY12. We now put our target price at INR 460 for
HCLTech. At FY12 numbers, our FY12 TP implies a multiple of 14.8x
(against 18.6x on our Infosys target price of INR2,706)

TCS A magnificent quarter:: UBS

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UBS Investment Research
First Read: TCS
A magnificent quarter
􀂄 Quarterly revenue touches US$2bn, volumes up 11% QoQ
TCS reported 2Q FY11 revenue of Rs92.9bn, up 13% QoQ, 3% ahead of UBS
estimates. The outperformance was contributed by both international and domestic
businesses; India-based revenue jumped 27% QoQ versus our estimates of 4%.
Dollar revenue crossed US$2bn, 4.7% ahead of our estimates. Net profit was
Rs21.1bn, 4% ahead of our estimates. We think it likely that some large deals came
on stream, pushing volumes up by 11.2% QoQ, ahead of our estimate of 6.5%.
􀂄 Margins rise by 70bp QoQ despite promotions, 10,700 net addition
EBITDA margins increased by 72bp QoQ to touch 30% (last seen in Dec 04)
despite a 166bp impact due to promotions and higher variable pay, and increase in
total headcount by 10,717 to 174,417 employees. This was due to favourable
exchange (100bp), higher productivity (95bp) and SG&A improvements (54bp).
􀂄 Revenue growth, margin resilience stronger than anticipated
Underlying revenue momentum for TCS has continued to surprise on the upside
for the last several quarters, defying the base effect. EBITDA margin performance
has also been stronger than anticipated, and the gap to Infosys has narrowed to
3.3% from a range of 5.5-7% over FY08-10. If such outperformance were to
continue, we see no reason for the stock to trade at a discount to Infosys.
􀂄 Valuation: Neutral rating
We believe that TCS would remain the clear leader in the sector on the back of the
resilience seen in the growth and margin profile of the company so far. We are
reviewing estimates. Our price target is based on DCF.

Regional coal Heading into perfect thermal storm? Macquarie Research,

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Regional coal
Heading into perfect thermal storm?
Event
􀂃 Newcastle coal prices have surged by 15% from its low in mid-August to
about US$101.5/t currently. This is in line with our positive outlook on coal
driven by a seasonally stronger demand period from the Northern Hemisphere
and reduction in hydro capacity in China. Further, there are increasing risk of
supply disruption in major producing countries (e.g. Indonesian and Australia),
which will also tighten the supply-demand balance in the short term. This
predicates our positive view on the regional thermal coal sector, especially
Asean coal names given its high leverage to the global coal price.
Impact
􀂃 Entering into seasonally higher demand period. We believe that shortterm
coal demand will be partially driven by the recovery in demand in the
Northern Hemisphere as it enters into winter period. Historically, we have also
seen Chinese hydro generation (+/-20% of Chinese power generation)
decrease by about 40–50% QoQ in Q4.
􀂃 Chinese imports up 14% MoM in September, which is reinforced by our
channel checks with coal traders that China import demand is increasing
(especially for off-spec coal -both Indonesian sub-bituminous and Queensland
coal). This is also supported by the pickup in the Chinese coal price (driven by
power stations stocking up ahead of winter period).
􀂃 Supply disruption leading to tighter market. We expect Indonesian coal
supply will remain tight following nine months’ worth of rain (which has caused
producers to cut the 2010 target by 5–10%). This is especially as we enter the
wet season in Q4 and pre-stripping work has not hit budgets YTD. We have
also seen evidence of disruption coming out from Australia; including Xstrata
having recently suspended some deliveries from the Rollestone mine in
Queensland (with other producers seemingly having a similar problem). Our
channel checks also suggest that some coal traders have a short position in
Q4 deliveries and need to find coal to avoid liquidation damages.
􀂃 Potential for spot price to trade above our US$105/t coal price forecast.
Given the potential for a tightening supply and demand balance (we forecast
roughly an 11mt deficit in 2011), we believe that any supply disruption could
lead to large spike in coal price (ie, the spot price to trade above our US$105/t
coal price forecast). As a sensitivity analysis, for every US$1/t change in the
benchmark coal price assumption, we could see roughly 2–3% swing in
earnings.
Outlook
􀂃 We therefore reiterate our Overweight view on the regional coal sector with
Asean coal names as our preference given the high global price exposure and
relatively strong production growth profile. Our preferred picks in the sector
are Adaro, ITMG and SAR. We also find the Asean coal sector still relatively
attractively valued at 10.6x 2011E PER vs the historical average of 12–13x.
􀂃 Further, given we think that sentiment towards the sector will remain relatively
positive, we believe that the Chinese coal stocks will also benefit. Within China,
we believe that Yanzhou Coal has the largest global coal price exposure.
However, we also like China Coal given its strong production growth profile and
China Shenhua given it has been lagging the other coal names.

Angel Broking: TVS Motor - 2QFY2011 Result Update

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For 2QFY2011, TVS Motor (TVSM) posted 43% yoy top-line growth, in line with
our estimates. The bottom line grew by 123.1% yoy, above our expectations,
largely due to lower interest cost. Going forward, we broadly maintain our
earnings estimates for TVSM. However, future valuation of the stock would be
determined by consistent volume growth, improvement in market share and an
uptick in margins. We believe that the recent run-up in the stock price factors in
the higher volume and earnings growth expected over FY2010–12E.
We remain Neutral on the stock.

Volume growth at 33%, earnings driven by margin expansion: TVSM reported
turnover of `1,616cr (`1,130cr), a jump of 43% yoy, which primarily came on the
back of the substantial 33.4% yoy increase in total volumes and about 6.8% yoy
jump in average realisations. During the quarter, TVSM’s OPM witnessed a
marginal 20bp qoq expansion to 6.7%, marginally below our estimates.
Net profit grew by 123% yoy to `54.8cr (`24.6cr). Robust volume, EBITDA margin
expansion and lower-than-expected interest cost and tax rate helped TVSM to
report robust earnings growth in 2QFY2011.

Outlook and valuation: We estimate TVSM to post a 26.8% CAGR in top line and
around 61.2% CAGR in net profit over FY2010–12E, aided by around 21.9%
CAGR in volume and improving operating performance owing to change in
product mix and better operating leverage. Thus, we expect TVSM to report EPS of
`4.5 in FY2011E and `5.9 in FY2012E. However, considering TVSM’s inconsistent
track record, we remain cautious on its relative performance vis-à-vis peers.
At `75, the stock is trading at 16.9x FY2011E and 12.8x FY2012E earnings.
We continue to maintain our Neutral view on the stock.

Essar Oil: F2Q11 Analysis; Takeaways from Refinery Visit: Morgan Stanley

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Essar Oil: F2Q11 Analysis; Takeaways from Refinery Visit
F2Q11 broadly in line: Essar Oil reported EBITDA of
Rs6.1bn for F2Q11, up 53% QoQ and 74% YoY, and
25% ahead of our expectation. However, adjusting for a
forex gain of Rs1.15bn, adjusted EBITDA of Rs4.97bn is
broadly in line with our expectation.
Strong refining margins: F2Q11 GRMs were
US$6.49/bbl (including sales tax benefit), up 129% QoQ,
marginally ahead of our expectation of US$6.3/bbl.
Adjusting for sales tax advantage of US$1.84/bbl, pure
GRM stands at US$4.65/bbl, implying a positive spread
of US$0.41/bbl over Singapore GRMs. Essar Oil
processed 30kb/d of Mangala Crude, adding another
US$0.50/bbl to GRMs
Following are the key takeaways from Essar Oil’s
Analyst meeting, held at the refinery site at Vadinar.
Phase I expansion – completion in 2QCY11: The
refinery expansion project is broadly on track to be
mechanically completed by March 2011. However, the
coker and the VGO unit of the Phase I expansion are
lagging behind schedule by a quarter. Essar Oil is
looking to complete the upgrading and expansion
around 2Q CY11. It will take 30-35 days of full shutdown
for integration of refinery units.
Mangala Crude processing ramped up: Essar Oil
processed 30 kb/d of Mangala crude during the quarter,
which helped to improve GRMs by US$0.50/bbl.
KG D6 Gas supply agreement yet to be signed:
Reliance is yet to sign the agreement for supply of gas to
Essar Oil; however, it estimates that the use of 0.6
mmscmd of KG gas at the refinery will add about
US$0.30/bbl to GRMs.
Raniganj CBM Development on track: The block is
currently producing 18,000 scm and management
expects Raniganj commercial sales to begin by
December 2010.

MindTree Ltd: Sept 2010 qtr update: IDFC research

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Key result highlights
• Healthy revenues; margins a miss – MindTree reported revenues of US$83m (+7% qoq and +26% yoy) ahead of
IDFC exp. of US$81m. Revenue growth was driven by volume growth of ~8.2% while price realization declined by
~0.8%. Sequentially EBITDA margins declined by 100bp to 11.6% (IDFC exp of 55bp decline) led by higher product
losses and partial wage hikes. Net profit was Rs232m (+47% qoq and -53% yoy) vs. IDFC exp of Rs304m.
• Product bets turn sour – Company has decided to exit out of the product business as market conditions have
deteriorated and now entailed higher investment requirement (vs. company’s previous estimates). The handset
product will be completely dumped while 4G infra IP will be used for design services and IP licensing. Beyond the
initial investment of around US$5.5 m in last 8 months, company expects business closure costs of up to US$12m-
14m (related to employee severance, cancelled purchase orders, etc) – to be incurred in 2HFY11.
• Services business on track – MindTree’s core services business continues to show traction – the company reported
volume led revenue growth of ~7% with EBITDA margin expansion of ~110bp qoq. We expect services business to
continue to grow well as it is levered to discretionary IT spend.
• Other highlights – MindTree added 1,373 employees on gross basis (comparable to previous quarter), LTM attrition
inched up to ~22%. Company added 6 new Fortune 500 accounts during the quarter. Sequentially, revenues from
Europe and India grew by 13-14% while US and RoW grew by 5-6%.
• Estimates revision – We raise recurring net profit/ EPS estimates for MindTree by ~20% and ~15% for FY11 and FY12
respectively. However, accounting for product business closure costs, we reduce our reported FY11E EPS by ~38%.
Valuations and View: While the unexpected closure costs will weigh on the stock in near term, there is limited
downside as its valuations are amongst the lowest in comparison to peers. Even after ascribing negative US$15m value to
product business, services business valuations are at ~8x FY11E and ~6x FY12E EV/EBITDA. Also, we see overhang of
investor concerns (unrelated diversification into product business) gets cleared. We expect to see volume growth and
margin expansions in the services business to continue in coming quarters. We value MindTree for a 12 month target
price at Rs680 – based on 14x FY12E EPS (from Rs790 based on SOTP methodology earlier). Target multiple of 14x is at
~40% discount to Tier1 IT target multiple and ~13% discount to target multiple for HCL Tech. Trading at ~16x FY11E and
~12x FY12E EPS, we maintain MindTree stock as Outperformer (~30% upside from CMP).

NTPC: Positive updates from meeting with management:: HSBC

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NTPC (NATP IN)
N: Positive updates from meeting with management
 Improving PLF at various plants including Farakka and
Kahalgaon bodes well
 Progress on development of captive mines may lead to value
being ascribed to them
 Reiterate INR225 target and Neutral rating. Likely
disappointment on capacity addition an overhang

Takeaways from a recent meeting with NTPC management to discuss the progress of
projects and the company’s outlook:
Plant Load Factor (PLF) improving: We were informed that NTPC has obtained
additional wagons to transport coal to its power plants after NTPC’s CMD met senior
officials of the Railways. This has resulted in improvement in the PLF of their power plants.
Our visit to NTPC’s control room indicated that few of its plants were actually running at
c100% PLF. Further, the PLF at Farakka (73% in FY10) and Kahalgaon (55% in FY10)
power plants improved to 91% and 74%, respectively, on improved availability of coal. We
have not factored the improved PLF into our estimates and wait for it to be sustained.
Progress on captive mining: NTPC is in the final stages of awarding the Mine Developer
cum Operator (MDO) contract for its Pakri Barwadih coal mine. This is a significant
milestone in terms of expediting the production process. As per the company, the mine is
expected to produce 15m tons of coal per annum at full production capacity, which is
expected to be operational by end-FY13. If we estimate net post tax income of INR600
per ton this translates into an income of INR1.1 per share (FY14) implying an upside of
INR15 to our target price at our implied target multiple.
Valuation of captive coal reserves could be a catalyst: NTPC has been allocated
captive coal mines with reserves of c3.6bn tons in addition to c2.3bn tons of mines in a JV
with Coal India Limited (CIL). Overall, the reserves are c30% of CIL’s reserves of 18.9bn
tons. Total production from these mines is expected to be 86m tons per annum at full
capacity as compared to the current production of 431mt of CIL in FY10. However,
given the delays in the development of these mines (and being captive mines), the street as
well as HSBC and investors have not ascribed any value to these mines.
Valuation and risks: We use DCF to value NTPC. We reiterate our Neutral rating and
INR225 target. We expect the company to disappoint on its capacity addition plan, which
will likely keep the share price range-bound. The key upside risk is faster-than-expected
execution of projects under construction.

Asia Equity Strategy Are equity investors to blame for FX moves?:: UBS

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UBS Investment Research
Asia Equity Strategy
Are equity investors to blame for FX
moves?
􀂄 Significant foreign capital flows so far this year…
Currencies have gained significant momentum in the region this year. Especially so
after renewed expectations of Quantitative easing. Many central banks have started
adopting capital control measures. Are equity investors to blame for these?
􀂄 Equity flows strong but not extreme
Based on our data for six countries in Asia ex Japan, equity flows have been strong
this year but not exceptionally so. A total of US$ 43bn flowed into equities in these
markets year to date. This takes the stock of foreign ownership in equities since
2004 to 12% of their market cap, still below the peak of 14% in 2007. Indonesia
and India have surpassed their pre-crisis peaks of foreign stock since 04 beginning.
􀂄 Equity flows significant relative to GDP; not dominant relative to bonds
Equity flows have been significant relative to GDP on a 12 months basis in Korea,
Taiwan India, and also Thailand in the last three months. Relative to bond flows,
equity flows look dwarfed in Indonesia, comparable in Korea and The Philippines,
and bigger in India.
􀂄 Equities mattered for FX; FX mattered more for Equities
Currencies have played a crucial role in equity returns this year, and we expect it to
continue. Our economists expect the Indian Rupee to appreciate the most by 2011
end, one of the reasons why we continue to like the market notwithstanding
valuation.