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ƒ In Focus
Auto sector: FY11/12 EPS cut by 5‐10%, Share TP cut by 12‐25%, SELL
We cut earnings forecasts and TP on Auto stocks under our coverage. We anticipate
companies would scale down their sales targets in Q4 and for FY12 following worse‐
than‐expected Nov industrial growth of 2.7%. This is because 1) the sharp fall in Nov
industrial growth is mainly due to slowing demand of vehicles and other consumer
durables, 2) weakness in Nov could extend further because consumer affordability is
reduced by avg increase of Rs10k‐25k in vehicle prices and Rs300 increase in monthly
installment due interest rate increase of 150‐200bp (11.5% to 13.5%) in the past 6
months. An expected hardening of interest rates by 25‐50bp in the central bank
meeting of this month could further pressurize affordability. We believe high PER of
15x‐20x FY11F for the auto sector could moderate to 10x‐15x unless evidence of high
and sustainable growth is visible.
ƒ News and Comments
ILFT: No trouble in funding Andhra Pradesh road project is positive, Maintain BUY
For IL&FS Transport Network (ILFT), this is positive because the Rs9.5bn build‐
operate‐transfer (BOT) project is located in the politically troubled state of Andhra
Pradesh. The company expects to complete the project by FY13. Nearly 80% of the
CAPEX will be funded via debt and balance from internal CF. The project accounts for
4% of our ‘sum‐of‐the‐parts’ valuation of Rs382/sh. We maintain BUY on the stock.
ƒ News and Comments
BHARTI: Forms JVwith SBIN to offermobile banking services, Long‐termis positive
The JV will focus on rural areas where banking services are inaccessible. Bharti
Airtel (BHARTI) would benefit from increased data usage and State Bank of India
(SBIN) would benefit from cost‐effective expansion into rural India. However, we
maintain our FY12 assumptions as contribution of the JV would be negligible. We
maintain BUY on BHARTI with a TP of Rs399/sh. We believe Bharti would benefit
from easing pricing pressure, turnaround in its African operations and a strong B/S.
MLIFE: Development of 2 new industrial parks in Gujarat is positive, Maintain BUY
Mahindra Lifespace Developers (MLIFE) will invest Rs30bn to develop 2 projects in
Gujarat close to the Mumbai‐Delhi Industrial Corridor. We believe the new project
would start only after 24 months. We like MLIFE for strong EPS growth of 50% in
FY11 and 35% in FY12 from current projects.
ƒ Analyst Meeting
Dalmia Bharat Enterprise Ltd – DBEL (To be listed this month)
On 24 Sep 2010, Dalmia Cement Bharat (DCB) spun off its sugar and cement
businesses. The sugar business is listed as Dalmia Bharat Sugar Enterprise and the
cement business would be listed this month.
Key takeaways:
• Cement demand growth in South India is negative by 1% Y‐T‐D.
• Utilization of capacities at DBEL’s new plants is low at 30‐40%.
• Prices in South India are holding up on informal discipline by producers.
• New capacities of 24mt this year will add to earnings volatility of cement
companies in South India in FY11 and FY12.
• DBEL expects its 2 new plants to turn marginally profitable in H2FY11 vs.
loss in H1FY11.
• B/S is better on new equity from private equity firm KKR, D/E down to 0.5x
from 1x.
Comment: Stabilization of the political scenario and resumption of infrastructure
spending in the state of Andhra Pradesh hold the key for DBEL and the cement
sector in the short term. We expect its listing at a price of Rs120‐150/sh at which its
enterprise value would be US$50–60 per ton (EV per ton for new projects is US$80‐
100). Its peers in South India trade at a similar range of EV/ton. We are not valuing
DBEL based on PER because for FY11, we expect it to make net losses. We maintain
our negative view on cement sector in the near term and recommend SELL on DBEL
if it lists above Rs150/sh.
ƒ Earnings Preview
GPL: Expect Q3 earnings of Rs100m, down 70% Q/Q
We expect Godrej Properties’ (GPL) earnings to decline because the company did
not sell equity in any of its project in Q3. In Q2, the company sold stake in
Bangalore Project for Rs450m to a private investor. For the full year, we forecast
flat earnings owing to few new launches this year. We maintain SELL on the stock
due to high PER of 23x FY12F (avg sector PER is 15x FY12F).
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