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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Alpha Bet
Macro-economic views govern inter-sector trade. We have initiated three new
trades—(1) Long ITC, Short Asian Paints, (2) Long AXSB, Short LT and (3) Long HDFC,
Short ACC. We close our Long Infosys, Short Wipro trade initiated on June 9, 2011 with
a gross return of 8.4%. We keep open the Long Cadila, Short Ranbaxy trade, which has
recovered after the negative surprise in Cadila’s 1QFY12 results.
Initiating Long ITC, Short Asian Paints
We expect ITC to outperform Asian Paints (APNT) based on the following—(1) ITC’s relatively
cheaper valuations versus APNT’s, (2) stronger performance for ITC in terms of EPS growth and
EBITDA margins as strong underlying demand could assist cigarette volumes to grow in excess of
~5% in FY2012E, (3) likely slowdown in paints volumes due to high inflation and extended
weakness in real estate demand and (4) pressure on APNT’s FY2012E EBITDA on the back of rising
input costs and freight rates.
Initiating Long Axis Bank, Short Larsen & Toubro
We recommend going Long Axis Bank, Short Larsen & Toubro (LT) based on the following
reasons—(1) softening wholesale funding rates and resilient performance in terms of asset quality
and margins will reverse the negative sentiments faced by AXSB in recent times. In comparison,
(2) LT’s current valuation could come under pressure if order inflows miss management guidance
(15-20% yoy), amidst recent disappointments by peers (like BHEL and Crompton) and (3) EBITDA
margins for LT may not sustain current peak levels due to a weak market, rising costs and a
change in revenue mix. Higher-than-expected increase in policy rates by the RBI would be a
negative for both the stocks.
Initiating Long HDFC, Short ACC
We recommend going Long HDFC, Short ACC based on the following reasons—(1) declining
cement prices across most of the geographies would affect ACC’s profitability going forward,
(2) low capacity utilization for the Indian cement industry will likely put pressure on prices and
(3) empowerment of Competition Commission of India (CCI) may make price collusions more
difficult. In comparison, (4) recent decline in wholesale borrowing rates will help reduce costs for
HDFC, (5) its core earnings will likely remain strong in the near term (17% for FY2012E) as lowticket
mortgage loans will likely remain strong and (6) HDFC remains an implicit ‘safe haven’ in
uncertain times despite expensive valuations.
Long Cadila, Short Ranbaxy: Trade open currently 2.7% out of the money
The current trade was hurt by weaker-than-estimated results by Cadila. Sales (at Rs11.7 bn) were
~12% below our estimates while operational PAT (Rs1.9 bn) was 11% lower than our estimates.
Despite rich valuations and a poor quarter operationally, we believe underlying growth is intact
with 20% estimated PAT growth in FY2012-14E (19% operational PAT growth reported in
1QFY12). We still expect Cadila to outperform Ranbaxy based on the following—(1) Ranbaxy’s rich
valuations with below-par EBITDA margins and disappointing US base business (excluding FTF
products) and (2) likely negative news flows in RBXY such as impending US FDA response on
penalty amount and delays in Lipitor launch
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strategy
Alpha Bet
Macro-economic views govern inter-sector trade. We have initiated three new
trades—(1) Long ITC, Short Asian Paints, (2) Long AXSB, Short LT and (3) Long HDFC,
Short ACC. We close our Long Infosys, Short Wipro trade initiated on June 9, 2011 with
a gross return of 8.4%. We keep open the Long Cadila, Short Ranbaxy trade, which has
recovered after the negative surprise in Cadila’s 1QFY12 results.
Initiating Long ITC, Short Asian Paints
We expect ITC to outperform Asian Paints (APNT) based on the following—(1) ITC’s relatively
cheaper valuations versus APNT’s, (2) stronger performance for ITC in terms of EPS growth and
EBITDA margins as strong underlying demand could assist cigarette volumes to grow in excess of
~5% in FY2012E, (3) likely slowdown in paints volumes due to high inflation and extended
weakness in real estate demand and (4) pressure on APNT’s FY2012E EBITDA on the back of rising
input costs and freight rates.
Initiating Long Axis Bank, Short Larsen & Toubro
We recommend going Long Axis Bank, Short Larsen & Toubro (LT) based on the following
reasons—(1) softening wholesale funding rates and resilient performance in terms of asset quality
and margins will reverse the negative sentiments faced by AXSB in recent times. In comparison,
(2) LT’s current valuation could come under pressure if order inflows miss management guidance
(15-20% yoy), amidst recent disappointments by peers (like BHEL and Crompton) and (3) EBITDA
margins for LT may not sustain current peak levels due to a weak market, rising costs and a
change in revenue mix. Higher-than-expected increase in policy rates by the RBI would be a
negative for both the stocks.
Initiating Long HDFC, Short ACC
We recommend going Long HDFC, Short ACC based on the following reasons—(1) declining
cement prices across most of the geographies would affect ACC’s profitability going forward,
(2) low capacity utilization for the Indian cement industry will likely put pressure on prices and
(3) empowerment of Competition Commission of India (CCI) may make price collusions more
difficult. In comparison, (4) recent decline in wholesale borrowing rates will help reduce costs for
HDFC, (5) its core earnings will likely remain strong in the near term (17% for FY2012E) as lowticket
mortgage loans will likely remain strong and (6) HDFC remains an implicit ‘safe haven’ in
uncertain times despite expensive valuations.
Long Cadila, Short Ranbaxy: Trade open currently 2.7% out of the money
The current trade was hurt by weaker-than-estimated results by Cadila. Sales (at Rs11.7 bn) were
~12% below our estimates while operational PAT (Rs1.9 bn) was 11% lower than our estimates.
Despite rich valuations and a poor quarter operationally, we believe underlying growth is intact
with 20% estimated PAT growth in FY2012-14E (19% operational PAT growth reported in
1QFY12). We still expect Cadila to outperform Ranbaxy based on the following—(1) Ranbaxy’s rich
valuations with below-par EBITDA margins and disappointing US base business (excluding FTF
products) and (2) likely negative news flows in RBXY such as impending US FDA response on
penalty amount and delays in Lipitor launch
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