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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MARKET OUTLOOK
Domestic markets continued to reel under a spate of negative
newsflow. In the telecom spectrum controversy, political scoresettling
seems to be getting the better of prudence in policy
making. Globally, Egypt and its neighbouring countries are
witnessing unprecedented political upheavals. This has brought
political risk to the fore in EM investing, even as the US enjoys
growth from its trough compared to its peers ie Europe &
Japan.
Thus, in the backdrop of such tumult we continue to
recommend the bar‐bell risk reward portfolio approach as
enumerated in our strategy report dated Jan 11. Which
translates for largecaps (> $ 5 bn) now at CMP:
Defensives: RIL, ONGC, Infosys, Maruti, Mundra, PGCIL, Tata
Power, Canara Bank, Cairns, and Coal India.
Outsize 1 yr returns: L&T, Axis Bank, ICICI Bank, PFC, Hero
Honda.
We provide short notes on 2 Buy Ideas ICICI Bank and Tata
Power.
A. ICICI Bank: On growth trajectory (praveen.agarwal@enam.com; 91 22 6754 7609)
Business getting back on track: Credit growth to gain pace, which until recently has been slow. The mgmt has
guided for a loan book growth of 18‐20% by Mar‐11 and ~25% by Mar‐12.
Lower delinquencies to reduce provisioning requirement: The pace of NPA accretion has slowed down over
the past few quarters. Moreover, with increase in share of secured loans, delinquency levels are likely to
remain under control.
Healthy capitalization level: The bank has one of the best capital adequacy ratios in the industry with CAR at
19.98% (Dec‐10). With increase in leverage levels, the return ratios are likely to improve.
Branch expansion due to Bank of Rajasthan merger: Number of ICICI’s branches has crossed 2,500 mark by
Dec‐10, which will help in increasing traction in retail business and CASA accumulation.
Value unlocking potential from listing of subsidiaries: The bank is aiming at monetizing its stake in the nonbanking
subsidiaries including life insurance over the next few years.
Continued strong performance in 3QFY11: PAT grew 30.5% YoY along with smart balance sheet growth and
improved asset quality.
We have a BUY rating with a target price of Rs 1,324 [2.5 x FY12E Adj. BV (adjusting for value and cost of
investment) + Rs 354 value of investments]
B. Tata Power: Potential upside of 25%. Current CMP = Operational coal assets + generation &
distribution biz (bhavin@enam.com; 91 22 6754 7634)
The power sector is facing ambiguities on merchant tariffs, coal availability (impact on PLF) and rising coal
prices. Some SEBs have been disallowed the desired increases in end‐consumer level tariffs due to the
current inflationary environment. On the fuel front, internationally, coal prices have zoomed to USD 120/t.
Notably, CIL has announced its intention to raise prices further than the 11% indicated earlier and has also
lowered its production estimated for FY12 from 486 MMT to 447. In FY12, ~13 GW additions (based on CIL
linage) require ~60 mn tons p.a vs. corresponding availability of ~7 mn tons p.a. Hence, the balance will have
to be bridged from global spot market purchases which would drive costs higher than anticipated earlier.
In this uncertain environment, Tata Power emerges as good defensive pick offering a potential upside of
~25% (CMP: 1185 & TP: 1483).
On the back of its 30% stake in Indonesian mines of BUMI, Tata Power is net long on imported coal to the
tune of 15 mn tons p.a. The coal assets from Bumi mines contributes ~Rs 550/sh. Also, USD 5/ton change
in coal prices impacts consolidated PAT by ~12%.
Tata Power also has no sensitivity to merchant prices: It has ~3 GW of operational generation capacities
which is 100% regulated and based on imported fuel / hydro / wind. It has its own distribution circles in
Mumbai and Delhi. These assets (generation + transmission) contributes Rs 503/sh.
Other assets like 4GW of Mundra (COD: FY13), 1GW of Maithon (COD: FY12) contributes Rs 191/sh Cash
and investments are values at Rs 241/sh.
2. SUMMARIES OF REPORTS RELEASED THIS WEEK:
A. Automonitor: Car sales continue to be buoyant (3rd Feb) (sahil.kedia@enam.com; 91 22 6754 7621)
Pass. vehicle vols remained robust in Jan’11, despite price hikes of ~1‐3% across the board and lower
discounts. 2Ws continued to be steady, while CV segment saw muted performance with pre‐buying in Dec’10.
2Ws: HH’s vols declined by 7% MoM to 466,524 units (↑ 20% YoY); while Bajaj’s motorcycle sales
increased by 13% MoM (↑ 18% YoY) to 275,622 units. TVS’ vols fell by 4% MoM to 161,725 units (↑ 29%
YoY), on account of 7‐day maintenance shutdown in Jan’11.
CVs: TAMO’s dom. M&HCV vols slipped 5% MoM (↑ 5% YoY) to 16,487 units; but that for ALL rose 7%
MoM to 6,830 (↓ 7% YoY).
Cars: Maruti’s dom. volumes were healthy at 100,422 units (↑ 12% MoM, 24% YoY), with strong showing
from A3 segment. Tata Motors’ saw 52% MoM growth in dom. car sales at 25,750 units (↑ 13% YoY).
Nano sales increased to 6,703 (vs. 5,784 in Dec’10.
Q3FY11 Highlights: Vols for our auto universe rose by 3% QoQ (↑ 26% YoY), with a 9% sequential decline in
M&HCVs. But higher commodity costs have significantly impacted op. profitability across the board in Q3,
despite ~1‐3% pricing action by most OEMs
With macro headwinds on tightening interest rates and hardening commodity costs, we believe that twowheelers
remain well poised, in terms of the ability to take timely pricing action and lower proportion of
credit sales. Top picks: Maruti (TP of Rs 1,605, 32% upside), Bajaj (TP of Rs 1,584, 31% upside).
B. Manappuram Gen Fin: Change in Gold loan classification for NBFCs (3rd Feb)
(praveen.agarwal@enam.com; 91 22 6754 7609)
RBI recently changed the regulation regarding classification of loans against gold jewellery:
Loans sanctioned to NBFCs for lending against gold jewellery, cannot be classified as Agri loans
Investments by banks in securitized assets originated by NBFCs, where underlying assets are loans against
gold jewellery, and purchase/assignment of gold loan portfolio from NBFCs are also not eligible for
classification under agri sector
We expect cost of funds to increase by ~100 bps, leading to ~40 bps moderation in margins
Assignment route will be less attractive for NBFCs like MGFL, which will spur cost its of funds
We have revised our EPS and ABV estimates by 6% and 1% downwards respectively and consequently revised
our book value multiple downwards to 2.8x (earlier 3x) to factor in the regulatory pressures
However, MGFL has corrected by 43% from its recent high in November 2010 and looks attractive at current
levels. We do not see any significant impact of the recent regulation on MGFL’s operating performance
We maintain our BUY rating with a revised TP of Rs 160 (2.8x FY12E ABV and 12x FY12E EPS)
C. Persistent Systems Ltd: Broadening its spectrum persistently (3rd Feb)
(priya@enam.com; 91 22 6754 7611)
Persistent announced acquisition of the Offshore Product Development business of Infospectrum Inc. (~200
employees) for an all‐cash deal of ~USD 6 mn (~1x current revenue base). With similar profitability margins as
that of Persistent (~18% NPM), the deal is valued at ~6x PE.
The key value propositions include:
Rich clientele acquisition and minimum overlap: The acquisition adds 20 clients with just 2 clients in
common btw the 2 entities. 3 / 20 clients have a > USD 1 bn topline.
Help strengthen European presence: Infospectrum derives ~50% of revenues from Europe vs. ~5% for
Persistent (Q3FY11) providing the latter increased access to European clients.
Access to niche verticals: Infospectrum caters to niche verticals such as Aerospace, Defence (combined
rev share of ~15%), Maritime Systems, Network Surveillance & Monitoring (rev share of ~35%).
Better DSO but lower billing rates vs. Persistent
We have revised Persistent’s FY12E topline upwards by ~2% & PAT by ~1.4% to factor in: 1) rev stream from
the acquisition; 2) lower other income on account of cash outgo; & 3) integration related expenses in the first
year of operations. Our revised TP of Rs 540 (vs. Rs 533 earlier) at 15x FY12E EPS implies an upside of 39%
from CMP (as of 3rd Feb 2011). Maintain BUY.
3. EAR TO THE GROUND
A. Visit/Call Anecdotes
Cap Goods: Anecdotes & key trends from Q3FY11 results (bhavin@enam.com; 91 22 6754 7634)
The earnings of majority of Capital Goods companies have been announced. We summarize the key trends and
anecdotes of the same
Order intake growth slowed down from 20‐50% last year to 0‐(10) % for most companies due to various
reasons such as high base, delay in ordering of large projects, end‐markets demand etc. There were slippages
in ordering from most user‐industries esp for large segments such as power plant equipments (thermal/
hydro), T&D and Oil & Gas. Reasons for this slowdown, according to various managements, include:
regulatory hassles (land/ environment), political issues, liquidity tightening, etc. However, certain segments
such as small/ mid‐size captive power plants, mining & construction equipments and textile machinery
reflected strong trends.
Exports outlook has improved: In the recent earnings con‐calls, global companies such as Siemens AG,
Cummins Inc etc. have highlighted significant uptick in developed regions like the US, EU etc. This trend was
corroborated by results of Crompton (int'l subsidiaries sales up 11% & orders up 83%) & Cummins (export up
200% & guidance of ~30% growth).
Execution on track, for now, but likely to get impacted due to low intake: Overall sales was largely in‐line/
ahead of our estimates (excl Cummins), reflecting that execution was on track. However, given slower‐thanexpected
order intake, FY12 growth could get affected. Anecdotally, Crompton (standalone) & Thermax have
lowered their growth guidance in Q3 vs Q1 due to lower intake.
Pricing pressure due to rising competitive intensity; passing the input cost inflation would be a challenge:
Gross contribution across the board (Ex BHEL, Cummins) have declined by 100‐500 bps in 9mFY11 owing to a
combination of factors such as adverse sales mix & inability to fully pass on input cost inflation. While certain
companies have a prop. of their existing backlog with price variation clause (BHEL/ CG) & the ones with fixed
price orders may have hedged the near term exposure, the impact of rising input costs will be visible with a
lag of a few quaters. Margin pressures will be further compounded due to: a) increased capacity by most cap
goods companies; b) rising threat of imports (esp from China); & c) lower‐than‐anticipated demand growth.
Op. leverage may not support margins now: Overall operating leverage (employee/ overhead) has added
100‐200 bps to OPM in the last 3 yrs (Siemens by 700 bps). However, with low utilization/ capacity additions,
operating leverage may not support margins in the near‐term.
Rise in capital employed reflects increasing working capital: 3 out‐of 5 companies reported higher % rise in
capital employed vs sales, indicating possible increase in working capital requirements.
Stock Preference: We believe that companies with respectable exposure to int'l markets (US/ EU), through
exports/ int'l subsidiaries would be a better play in the current environment, where domestic demand is showing
signs of sluggishness and int'l demand is picking up. Hence, we prefer Crompton Greaves (~40% of int'l exposure)
& Cummins (30% of biz). We also prefer BHEL at current valuations of FY12 PER of 15x ((10 year lower quartile) –
as risk‐reward is favorable with potential triggers such as possible upside to order inflow guidance
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MARKET OUTLOOK
Domestic markets continued to reel under a spate of negative
newsflow. In the telecom spectrum controversy, political scoresettling
seems to be getting the better of prudence in policy
making. Globally, Egypt and its neighbouring countries are
witnessing unprecedented political upheavals. This has brought
political risk to the fore in EM investing, even as the US enjoys
growth from its trough compared to its peers ie Europe &
Japan.
Thus, in the backdrop of such tumult we continue to
recommend the bar‐bell risk reward portfolio approach as
enumerated in our strategy report dated Jan 11. Which
translates for largecaps (> $ 5 bn) now at CMP:
Defensives: RIL, ONGC, Infosys, Maruti, Mundra, PGCIL, Tata
Power, Canara Bank, Cairns, and Coal India.
Outsize 1 yr returns: L&T, Axis Bank, ICICI Bank, PFC, Hero
Honda.
We provide short notes on 2 Buy Ideas ICICI Bank and Tata
Power.
A. ICICI Bank: On growth trajectory (praveen.agarwal@enam.com; 91 22 6754 7609)
Business getting back on track: Credit growth to gain pace, which until recently has been slow. The mgmt has
guided for a loan book growth of 18‐20% by Mar‐11 and ~25% by Mar‐12.
Lower delinquencies to reduce provisioning requirement: The pace of NPA accretion has slowed down over
the past few quarters. Moreover, with increase in share of secured loans, delinquency levels are likely to
remain under control.
Healthy capitalization level: The bank has one of the best capital adequacy ratios in the industry with CAR at
19.98% (Dec‐10). With increase in leverage levels, the return ratios are likely to improve.
Branch expansion due to Bank of Rajasthan merger: Number of ICICI’s branches has crossed 2,500 mark by
Dec‐10, which will help in increasing traction in retail business and CASA accumulation.
Value unlocking potential from listing of subsidiaries: The bank is aiming at monetizing its stake in the nonbanking
subsidiaries including life insurance over the next few years.
Continued strong performance in 3QFY11: PAT grew 30.5% YoY along with smart balance sheet growth and
improved asset quality.
We have a BUY rating with a target price of Rs 1,324 [2.5 x FY12E Adj. BV (adjusting for value and cost of
investment) + Rs 354 value of investments]
B. Tata Power: Potential upside of 25%. Current CMP = Operational coal assets + generation &
distribution biz (bhavin@enam.com; 91 22 6754 7634)
The power sector is facing ambiguities on merchant tariffs, coal availability (impact on PLF) and rising coal
prices. Some SEBs have been disallowed the desired increases in end‐consumer level tariffs due to the
current inflationary environment. On the fuel front, internationally, coal prices have zoomed to USD 120/t.
Notably, CIL has announced its intention to raise prices further than the 11% indicated earlier and has also
lowered its production estimated for FY12 from 486 MMT to 447. In FY12, ~13 GW additions (based on CIL
linage) require ~60 mn tons p.a vs. corresponding availability of ~7 mn tons p.a. Hence, the balance will have
to be bridged from global spot market purchases which would drive costs higher than anticipated earlier.
In this uncertain environment, Tata Power emerges as good defensive pick offering a potential upside of
~25% (CMP: 1185 & TP: 1483).
On the back of its 30% stake in Indonesian mines of BUMI, Tata Power is net long on imported coal to the
tune of 15 mn tons p.a. The coal assets from Bumi mines contributes ~Rs 550/sh. Also, USD 5/ton change
in coal prices impacts consolidated PAT by ~12%.
Tata Power also has no sensitivity to merchant prices: It has ~3 GW of operational generation capacities
which is 100% regulated and based on imported fuel / hydro / wind. It has its own distribution circles in
Mumbai and Delhi. These assets (generation + transmission) contributes Rs 503/sh.
Other assets like 4GW of Mundra (COD: FY13), 1GW of Maithon (COD: FY12) contributes Rs 191/sh Cash
and investments are values at Rs 241/sh.
2. SUMMARIES OF REPORTS RELEASED THIS WEEK:
A. Automonitor: Car sales continue to be buoyant (3rd Feb) (sahil.kedia@enam.com; 91 22 6754 7621)
Pass. vehicle vols remained robust in Jan’11, despite price hikes of ~1‐3% across the board and lower
discounts. 2Ws continued to be steady, while CV segment saw muted performance with pre‐buying in Dec’10.
2Ws: HH’s vols declined by 7% MoM to 466,524 units (↑ 20% YoY); while Bajaj’s motorcycle sales
increased by 13% MoM (↑ 18% YoY) to 275,622 units. TVS’ vols fell by 4% MoM to 161,725 units (↑ 29%
YoY), on account of 7‐day maintenance shutdown in Jan’11.
CVs: TAMO’s dom. M&HCV vols slipped 5% MoM (↑ 5% YoY) to 16,487 units; but that for ALL rose 7%
MoM to 6,830 (↓ 7% YoY).
Cars: Maruti’s dom. volumes were healthy at 100,422 units (↑ 12% MoM, 24% YoY), with strong showing
from A3 segment. Tata Motors’ saw 52% MoM growth in dom. car sales at 25,750 units (↑ 13% YoY).
Nano sales increased to 6,703 (vs. 5,784 in Dec’10.
Q3FY11 Highlights: Vols for our auto universe rose by 3% QoQ (↑ 26% YoY), with a 9% sequential decline in
M&HCVs. But higher commodity costs have significantly impacted op. profitability across the board in Q3,
despite ~1‐3% pricing action by most OEMs
With macro headwinds on tightening interest rates and hardening commodity costs, we believe that twowheelers
remain well poised, in terms of the ability to take timely pricing action and lower proportion of
credit sales. Top picks: Maruti (TP of Rs 1,605, 32% upside), Bajaj (TP of Rs 1,584, 31% upside).
B. Manappuram Gen Fin: Change in Gold loan classification for NBFCs (3rd Feb)
(praveen.agarwal@enam.com; 91 22 6754 7609)
RBI recently changed the regulation regarding classification of loans against gold jewellery:
Loans sanctioned to NBFCs for lending against gold jewellery, cannot be classified as Agri loans
Investments by banks in securitized assets originated by NBFCs, where underlying assets are loans against
gold jewellery, and purchase/assignment of gold loan portfolio from NBFCs are also not eligible for
classification under agri sector
We expect cost of funds to increase by ~100 bps, leading to ~40 bps moderation in margins
Assignment route will be less attractive for NBFCs like MGFL, which will spur cost its of funds
We have revised our EPS and ABV estimates by 6% and 1% downwards respectively and consequently revised
our book value multiple downwards to 2.8x (earlier 3x) to factor in the regulatory pressures
However, MGFL has corrected by 43% from its recent high in November 2010 and looks attractive at current
levels. We do not see any significant impact of the recent regulation on MGFL’s operating performance
We maintain our BUY rating with a revised TP of Rs 160 (2.8x FY12E ABV and 12x FY12E EPS)
C. Persistent Systems Ltd: Broadening its spectrum persistently (3rd Feb)
(priya@enam.com; 91 22 6754 7611)
Persistent announced acquisition of the Offshore Product Development business of Infospectrum Inc. (~200
employees) for an all‐cash deal of ~USD 6 mn (~1x current revenue base). With similar profitability margins as
that of Persistent (~18% NPM), the deal is valued at ~6x PE.
The key value propositions include:
Rich clientele acquisition and minimum overlap: The acquisition adds 20 clients with just 2 clients in
common btw the 2 entities. 3 / 20 clients have a > USD 1 bn topline.
Help strengthen European presence: Infospectrum derives ~50% of revenues from Europe vs. ~5% for
Persistent (Q3FY11) providing the latter increased access to European clients.
Access to niche verticals: Infospectrum caters to niche verticals such as Aerospace, Defence (combined
rev share of ~15%), Maritime Systems, Network Surveillance & Monitoring (rev share of ~35%).
Better DSO but lower billing rates vs. Persistent
We have revised Persistent’s FY12E topline upwards by ~2% & PAT by ~1.4% to factor in: 1) rev stream from
the acquisition; 2) lower other income on account of cash outgo; & 3) integration related expenses in the first
year of operations. Our revised TP of Rs 540 (vs. Rs 533 earlier) at 15x FY12E EPS implies an upside of 39%
from CMP (as of 3rd Feb 2011). Maintain BUY.
3. EAR TO THE GROUND
A. Visit/Call Anecdotes
Cap Goods: Anecdotes & key trends from Q3FY11 results (bhavin@enam.com; 91 22 6754 7634)
The earnings of majority of Capital Goods companies have been announced. We summarize the key trends and
anecdotes of the same
Order intake growth slowed down from 20‐50% last year to 0‐(10) % for most companies due to various
reasons such as high base, delay in ordering of large projects, end‐markets demand etc. There were slippages
in ordering from most user‐industries esp for large segments such as power plant equipments (thermal/
hydro), T&D and Oil & Gas. Reasons for this slowdown, according to various managements, include:
regulatory hassles (land/ environment), political issues, liquidity tightening, etc. However, certain segments
such as small/ mid‐size captive power plants, mining & construction equipments and textile machinery
reflected strong trends.
Exports outlook has improved: In the recent earnings con‐calls, global companies such as Siemens AG,
Cummins Inc etc. have highlighted significant uptick in developed regions like the US, EU etc. This trend was
corroborated by results of Crompton (int'l subsidiaries sales up 11% & orders up 83%) & Cummins (export up
200% & guidance of ~30% growth).
Execution on track, for now, but likely to get impacted due to low intake: Overall sales was largely in‐line/
ahead of our estimates (excl Cummins), reflecting that execution was on track. However, given slower‐thanexpected
order intake, FY12 growth could get affected. Anecdotally, Crompton (standalone) & Thermax have
lowered their growth guidance in Q3 vs Q1 due to lower intake.
Pricing pressure due to rising competitive intensity; passing the input cost inflation would be a challenge:
Gross contribution across the board (Ex BHEL, Cummins) have declined by 100‐500 bps in 9mFY11 owing to a
combination of factors such as adverse sales mix & inability to fully pass on input cost inflation. While certain
companies have a prop. of their existing backlog with price variation clause (BHEL/ CG) & the ones with fixed
price orders may have hedged the near term exposure, the impact of rising input costs will be visible with a
lag of a few quaters. Margin pressures will be further compounded due to: a) increased capacity by most cap
goods companies; b) rising threat of imports (esp from China); & c) lower‐than‐anticipated demand growth.
Op. leverage may not support margins now: Overall operating leverage (employee/ overhead) has added
100‐200 bps to OPM in the last 3 yrs (Siemens by 700 bps). However, with low utilization/ capacity additions,
operating leverage may not support margins in the near‐term.
Rise in capital employed reflects increasing working capital: 3 out‐of 5 companies reported higher % rise in
capital employed vs sales, indicating possible increase in working capital requirements.
Stock Preference: We believe that companies with respectable exposure to int'l markets (US/ EU), through
exports/ int'l subsidiaries would be a better play in the current environment, where domestic demand is showing
signs of sluggishness and int'l demand is picking up. Hence, we prefer Crompton Greaves (~40% of int'l exposure)
& Cummins (30% of biz). We also prefer BHEL at current valuations of FY12 PER of 15x ((10 year lower quartile) –
as risk‐reward is favorable with potential triggers such as possible upside to order inflow guidance
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