03 April 2011

SBI, Entering a Cyclically Tough Spot; EW: Rs3,000 target: Morgan Stanley Research,

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State Bank of India
Entering a Cyclically Tough Spot; EW
What's Changed
Rating Overweight to Equal-weight
Price Target Rs3,290.00 to Rs3,000.00
% EPS Chg F2011e/12e/13e -2% / -8% / -8%
We are changing rating to EW. NIM compression in
the near term is likely to be greater than our
previous estimates. This, coupled with recent
performance, drives our view.

Cement: Feb demand recovery driven by very few states

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India Hard Hat
Feb demand recovery driven by very few states


• Feb dispatch recovery too early if recent trend has been reversed: Industry
dispatches as per our estimates stood at 18.5MT, up 8.2% y/y. While this is
positive given the very weak growth trends since June-10, we believe it is too
early to say if the recent trend of demand weakness is behind us for two reasons:
a) long steel prices have not seen any sharp increase indicating that there is not
yet a very broad based demand recovery on the ground; and b) our recent
cement dealer checks indicate the on-ground demand has weakened again after
the spurt in February. Capacity creep up was 1.4MT taking industry capacity to
282MT. In terms of growth, ACC +17% y/y, ACEM + 4.7% y/y, UTCEM
+6.5% y/y, JPA +27% y/y , while South based companies had a mixed picture.
Reported clinker inventory stood at 7.46MT which in our view remains
uncomfortably high.
• State wise consumption break down–what has driven improvement over the
last two months: Analyzing the state wise end consumption data (sans ACC and
ACEM), AP remains weak (recently there were announcements of low cost
housing schemes re-starting, however this does not seem to have translated into
on-ground demand). WB accounted for 31% of incremental demand growth over
Jan-Feb (pre election spending possibly), while Rajasthan has also seen a spurt
in demand (33% of incremental demand against a normalized share of ~6%).
Gujarat, Maharashtra and UP were the other strong states. However, demand in
other key consuming markets like NCR, South India, Eastern India remained
weak and was down y/y, implying that the recent improvement is not driven by
new projects
• JPA- Can it repeat in FY12E what it did in FY11, and if it does what would
be the implications in terms of market share and pricing: JPA (N) has YTD
accounted for 50% of incremental industry growth. Its ability to gain market
share in new markets has been impressive. With YTD dispatches at 13.3MT,
JPA is on track to hit its ~16MT target for FY11. YTD JPA’s dispatch share has
increased to 7.1% v/s 5.2% YTD FY10 in sync with the capacity increase. JPA
expects to increase dispatches by a similar growth rate (~37%) in FY12E, while
we estimate over all industry growth rate of 15MT (~7%). This means for JPA to
grow dispatches by ~37%, it would result in them again cornering nearly 50% of
the expected market growth in FY12E. With all other players sitting on surplus
capacity, for cement prices to sustain, we believe market share changes would
need to continue in the cement market.
• Cement prices near record highs in most markets, recently some pressure
building up: Cement prices increased in most markets by Rs5-35/bag over Febearly
March with the sharpest increases seen in Central and Western India.
These price increases are significantly ahead of cost pressures and should result
in strong EBITDA/MT expansion (even as volume growth remains tepid) in the
March quarter and possibly even in the June quarter. However, March demand
has not been very strong, and given that this is the last month of the financial
year for many companies, there is an element of channel stuffing. This should
result in some pull back in cement prices in April as well as weak dispatches.
Given the recent run up in stock prices (UTCEM/ACEM up ~25% in last 1
month), we would look to take some money off the table here.

Coal India: FY12E MoU off take target based on sharp increase in rail movement --JP Morgan

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Coal India Neutral
COAL.BO, COAL IN
FY12E MoU off take target based on sharp increase in
rail movement (13% v/s average of 2% over last 3 years)


• COAL production, off take target broadly in line with JPM
estimates: As per the MOU signed by Coal India with the ministry, the
FY12 production and despatches target of 452MT and 454MT
respectively are marginally ahead of what COAL had been indicating
over the last few months, and broadly in line with JPM estimates (prod
of 457MT, off-take of 451MT). Given the recent CEPI related issues,
management had indicated production of 446MT in FY12, and to that
extent the MoU production target of 452MT is ahead.
• Rake availability remains key to achieve the offtake target:
Railways accounts for ~47% of coal movement for CIL. COAL’s
FY12 target offtake volumes are based on the increase in the rake
availability from an average of 162 rakes per day in FY11 to nearly
175 rakes in FY12. Last 2 years, the growth in rake availability has been
less than 5 rakes per day every year. As per the MOU signed for FY11
target, the estiamted rake availability was pegged at 185 rakes per day
and the actual availability has been 12% below this target (~162 rakes).
Coal movement growth through rail has been ~2% over the last
three years while COAL has highlighted that to achieve its MoU
target for FY12E, coal transportation by rail has to grow by 13.5%
in FY12E. This in our view raises questions on whether the FY12E
off take target can be achieved if the railway rake availability again
becomes an issue. While Coal India highlighted high-level interactions
with Railways (under current rules of railways, users in the coal sector
cannot order their own wagons) to have a longer-term solution, we are
yet to see any solutions to the logistic bottlenecks of coal movement in
India. Longer term we need to see a step up in rake availability from
current levels or COAL allowed to set up its own railway infrastructure
in order to achieve 6-7% long term off take growth.
• Next few events to watch out for: While the FY12E targets have now
been set (FY11E would likely be even below the revised targets), the
next few key events are-a) FY13E production and off take targets; b)
Wage provisions made from July-11; c) coal price hikes taken to off set
the above wage provisions. The stock has seen a sharp run up post the
coal price increases, but has been soft recently. At current valuations of
15.6x FY12E P/E (we are 5% ahead of consensus estimates), COAL is
not cheap and the positive catalysts of a) coal price increases and b)
Environment related positives news flows has largely played out. While
we do not dispute the multi year long term structural story of COAL,
near term valuations are rich and for investors with a shorter investment
horizon, we would recommend taking some money off the table at
current levels.

Sasken Communication Technologies : Management Meeting: ICICI Sec

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Sasken Communication Technologies- Recently we met the management of Sasken to understand its current
business model, industry trends and execution strategy, going forward.
Sasken Communications, established in 1989, employs more than 3500
people and offers a combination of R&D consultancy, wireless software
products and software services and works with network OEMs,
semiconductor vendors, terminal device OEMs and operators across the
world. The key takeaways are highlighted below.

Commodities Comment Putting silver to good use:: Macquire

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Commodities Comment
Putting silver to good use
Feature article
 The Silver Institute and GFMS have shed some light on quantifying silver
usage from industrial end-use demand sectors like solar cell production and
electronics. While growth in these sectors should be solid in the medium term,
we point out to investors that these factors could easily be swamped by shifts
in holding bullion for investment purposes.

Wipro -Acquisition to strengthen Oil & Gas industry group 􀂄 BofA Merrill Lynch

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Wipro Ltd.
Acquisition to strengthen Oil &
Gas industry group
􀂄 Acq. to broaden offerings in Energy vertical; Rate Neutral
After the India market close, Wipro announced an all-cash acquisition of the
Global Oil and Gas IT Services unit of SAIC. In our view, the deal strengthens
Wipro’s offerings in the Energy and Utility space which forms ~10% of Wipro IT
Services’ revenues and adds key customers in the upstream oil and gas industry.
We estimate the acquisition likely to be EPS neutral for FY12 and valuations
appear fair at 7x EV/EBITDA (trailing). The key risk in our view is employee and
client retention post acquisition. We have a Neutral rating for Wipro as we believe
it is less favorably positioned than peers in an environment where discretionary IT
spend is picking up, and there may be employee churn post the recent change in
top management.
Penetration into upstream oil and gas clients
The acquisition adds ~4% (LTM basis) to Wipro’s IT revenues and six new fortune
500 companies to its client base. Rev / employee of the acquired entity is
significantly higher than company average on account of higher value services
like domain consulting and systems integration for upstream Oil and gas
companies and lower offshore mix. It derives majority of its revs from the US with
the top 10 clients constituting ~90% of the revenue stream.
Valuation appears fair at ~7x trailing EV/EBITDA
Deal consideration of USD150m (cash) implies a ~7x EV/EBITDA (trailing) and is
comparable to valuations of mid-tier vendors like Mphasis, Patni. EBITDA margins
for the company (slightly higher than 10%) are below those for Wipro IT given
lower offshore mix (30%) and have a potential to gradually improve as Wipro
seeks to improve the offshore mix. We estimate the deal is likely to be neutral to
marginally accretive for FY12 EPS.


Price objective basis & risk
Wipro (WIPRF / WIT)
Our Price Objective of Rs500 is set at 17x FY13e EPS, at a 20% discount to our
target multiple for Infosys. This is higher than the average P/E discount of about
15% in past 3 years due to slower earnings growth trajectory. Downside risks to
our price objective are delays in recovery of IT spending by technology and
telecom verticals apart from macro risks relating to IT spending and Rupee.
Upside risks are faster than expected success of new CEO in the rebuild process
and mining top accounts.

BANKS - Pipeline capital raising :: CLSA

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Over the next 12-18 months Indian banks may raise up to US$16bn in
equity to meet tighter regulatory requirements and healthy credit demand.
Leverage for some banks is above 25x while the sector average is near
15x. Many state-owned banks are levered up to 17-20x and would see
their ROE compress as they raise equity. We prefer banks with high ROA
and low leverage as they should see ROE expansion, leading to a possible
re-rating. We rate ICICI and HDFC Bank as BUYs.
Indian banks have high leverage. Even though the Indian financial
system has been a tightly and well regulated market, the leverage ratio of
many banks is reasonably high. As at March 2010, the average asset-toequity
ratio for the sector was 15x with some banks at 25x or higher.
Reported ROEs overstate profitability for banks that make sub 1% ROA
and have high leverage. Reported capital adequacy ratios don’t reflect high
leverage as 22% of bank balance sheets are in government bonds, which
carry a zero risk weight.
Capital of US$16bn needed. For a 20% Cagr in assets over 10-12CL, we
estimate that banks (with sub 10% tier I ratio as at March 2010) may
need to raise up to US$16bn by March 2012 to maintain a comfortable
capital adequacy. Additionally, even private banks that are currently well
capitalised, may need to raise capital in 12-13CL. The Central bank’s
recent move to disallow banks from recognising unaudited profits in tier I
capital may require higher margins of safety. Tighter norms under new
Basel (higher risk weight, exclusion of hybrids) may also bump up the
need for core equity. Unfunded pension liability is estimated at 6-14% of
net worth, which would dilute the capital base further if provided upfront.
ROA and not ROE may drive valuations. As regulators globally clamp
down on leverage, we prefer banks with high ROA. Banks with higher ROA
(+1.4%) and high Tier I capital are ICICI Bank (ICICIBC IB - Rs1,099.3 -
BUY) and HDFC Bank (HDFCB IB - Rs2,306.7 - BUY). We expect these
firms to see ROE expansion of 500bps or more, driving re-rating. Banks
with low ROA (<1%) and low tier 1 (<7%) are IDBI Bank, Central Bank
and Uco Bank (none of which are covered) and will need to raise equity
and should report ROE compression. We also like IDFC (IDFC IB - Rs156.8
- BUY) and HDFC (HDFC IB - Rs682.8 - BUY), which generate +3% ROA.

Pipavav Shipyard:: World class facilities… ICICI Securities

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World class facilities…
Pipavav Shipyard Ltd (Pipavav) is one of the largest shipyards in the
world capable of constructing vessels up to 4,00,000 DWT. The shipyard
has one of the best infrastructure facilities and uses modular
construction technology, which allows Pipavav to reduce the
construction and delivery time of vessels. The company has also
entered into strategic tie-ups with Sembcorp, KOMAC, SAAB,
Rosoboron and Northrop, which would provide access to the latest
technology and enable Pipavav to procure large defence orders. In
addition, a strong and diversified order book also provides good
earnings visibility to Pipavav.
World class infrastructure set-up with modular construction technology
Pipavav operates one of the largest single location shipyards in the world
capable of constructing vessels up to 4,00,000 DWT. The facilities include
shipbuilding, ship repair and fabrication complex. It has adopted a
modular construction technology, which constructs parts of the ship in
fabrication workshops that are then lowered in the dry dock for final
assembly and launching. This is the most advanced technology and is
adopted by the largest and best shipyards in the world i.e. Samsung and
Hyundai. It would enable Pipavav to reduce construction time of vessels.
Strong and diversified order book provides earnings visibility
Pipavav has a strong order book comprising defence, offshore and dry
bulk vessels with gross order book of | 6300 crore. This provides revenue
visibility for the next three years. Further, almost 50% of the order book
comprises non-commercial vessels, which is an added advantage.

UBS:: Downgrade Ashok Leyland to Neutral, Reduce PT to Rs. 65

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UBS Investment Research
Ashok Leyland
Muted growth, downgrade to Neutral
􀂄 Cut to Neutral on high leverage to volume growth
We downgrade ASOK to a Neutral as we cut our domestic MHCV growth outlook
for FY12 from 20% to 11%YoY. Given high operating and financial leverage the
earnings are significantly levered to volume growth. The stock valuation is now at
mid-cycle levels and offers limited upside potential given the uncertain macro
environment.

Reliance Capital - A new life :Target: Rs740: JP Morgan

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• Initiate with OW, Mar-12 PT of Rs740: Reliance Capital, which runs
India's largest MF and a top-5 lifeco, is a quintessential bull-market
stock. Valuations have now turned reasonable and the individual
businesses are turning profitable. The recent Nippon Life deal validates
the model and relieves balance sheet stress.
• Insurance – the worst is over. The post-September meltdown affected
RCAP asymmetrically, but we see the internal restructuring efforts and
fresh product focus bearing fruit in FY12. Margins will probably
stabilize at ~12% and growth should turn positive in 2HFY12. The
Nippon Life deal raises credibility and could provide a critical capital
buffer.
• Peripheral businesses turning around. The turnaround is proceeding
well, and we expect consolidated PAT CAGR growth of 27% FY10-13.
Growth opportunities in the niche businesses are a bit constrained, but
this isn’t a near term issue given the low base. There are regulatory
upsides too - the AMC has seen the worst on regulatory pressures, and
there could be positive movement on bank licensing too.
• Key catalysts: a) Consummation of the Nippon Life deal in 1HFY12, b)
RBI announcements on bank licenses in 1QFY12, c) sales momentum
returning to insurance in 2HFY12 and mutual funds in 2QFY12.
• Valuation, key risks: Our SOTP valuation of Rs 740/share – Our
lifeco valuation is significantly below Nippon Life’s, adjusting
downward for the strategic premium. The other businesses are pegged at
peer or acquisition valuations, and implies a reasonable 12.6x PER on
FY13(ex-insurance).We estimate (page 26) the option value of a bank
licence at Rs 153/share, but have not captured that in valuations. A key
risk is that the story and valuation rests to a degree on strong
markets. 55% of RCap’s value comes from businesses (life and mutual
fund) that depend on buoyant stock markets, raising its beta. The opaque
structure of the lifeco holding and the large investment book are the other
risks. The holdco structure, necessitating SOTP valuations, also deters
many investors.

Buy Glenmark Pharma -Rs335 TP– Poised for growth :: RBS

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Despite the generic Tarka setback, we believe the US will continue to drive growth given a spate
of recent approvals and potential niche opportunities. Also, Glenmark's NCE pipeline could
surprise – we believe in-licensing interest among big pharmaceutical companies will revive. Buy;
new Rs335 TP (16% lower).

Lupin – Favourable mix; steady growth ahead :: RBS

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Lupin's favourable business mix, with c75% of revenues from lucrative markets, augurs well for
growth. We acknowledge ongoing challenges – headwinds in its US brand business and pressure
on EBITDA margins – but we believe risk/reward is in Lupin's favour. We cut our target price to
Rs465; Buy on attractive valuation.

Ranbaxy Laboratories – We see unattractive risk-return :: RBS

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Ranbaxy's FTF pipeline looks strong but could disappoint due to US FDA issues and increased
competition. The core business and margins remain weak, in our view, due to operating leverage
issues. We cut our TP by 21% to Rs365 and maintain our Sell rating on weak margins, US FDA
troubles and a rich valuation.

Cipla – Growth momentum to accelerate :: RBS

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We view Cipla as the best defensive Indian pharma stock with a strong presence in domestic
formulations. We expect growth to accelerate (19% EPS CAGR over FY10-13F) on operating
leverage gains, potential supply deals, the US patent cliff and inhaler opportunities in the EM/EU.
We initiate at Buy with a Rs371 TP.

Dr Reddy's Laboratories – Expensive despite US pipeline :: RBS

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The US pipeline remains robust and we expect domestic business to improve, but the overall mix
remains unattractive to us – c38% faces headwinds. Despite aggressively factoring into our
model one-offs in the US, we still find valuations unattractive. Sell with a reduced target price of
Rs1,355 (from Rs1,460).

Sun Pharmaceutical – Well positioned; upgrade to Hold :: RBS

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Sun Pharma post Taro looks structurally well positioned, as 83% of its revenues are now from the
US (robust ANDA pipeline) and India (stable growth). US FDA issues at Caraco and EBITDA
margin pressure remain our concerns. Even so, we raise our TP 11% to Rs420. With limited
upside, however, we upgrade to Hold.

Pharmaceuticals – Shifting sands; we cherry-pick :: RBS

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Indian pharmaceuticals look poised for growth given their exposure to the US (drugs going
off-patent) and India (stable growth). However, the US opportunity seems overhyped and
margin pressure could be a concern. We favour Cipla, LPC and GNP, raise Sun to Hold, and
keep our Sell on DRRD and RBXY.

UBS:: Buy Welspun Corp -New order win supports outlook; target Rs250

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UBS Investment Research
Welspun Corp
New order win supports outlook
􀂄 Wins new orders worth Rs11.8bn, expands order book to Rs61.5bn
Welspun Corp (WLCO) bagged new orders worth Rs11.8bn, taking their order
book to ~Rs61.5bn currently from Rs50bn, as at end Q3FY11. This indicates total
order book of ~932kMT of pipes and 40kMT of plates (excludes Q4FY11
execution). This indicates an 8-10 months revenue visibility. This is in line with
our positive and reviving pipes industry outlook.

Unconventional Wisdom - Federal Reserve scare stories: Macquarie Research,

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Unconventional Wisdom
Federal Reserve scare stories
Event
 It is now just three months before the US Federal Reserve is scheduled to
end its latest round of unconventional monetary easing.
Impact
 The looming end of QE2 has triggered a round of scare stories about the
likely impact on both the US economy and financial markets.
 A lot of this analysis is based on claims that the termination of QE1 was the
trigger for a downturn in the US economy and a slide in equity markets.
 Such analysis does not survive even a cursory scrutiny. And putting in place a
strategy designed to capture a market shakeout after the end of QE2 is high
risk.
Analysis
 The Federal Reserve terminated its first round of major quantitative easing in
March 2010. Starting in late 2008 and expanding dramatically in March 2009,
this programme had a heavy emphasis on purchases of mortgage-backed
securities.
 Judging by the improvement in credit spreads, QE1 was a success. But there
were any number of commentators arguing that once the Fed stepped out of
the market, the mortgage-backed market would be in turmoil again. Well it
didn’t happen and this should be a cautionary tale for anyone anticipating a
disaster when QE2 ends.
 Of course the focus of QE2, which was authorised by the FOMC in November
2010, is purchases of Treasuries rather than mortgage-backed securities. So
this time there are fears that the absence of Fed buying will lead to a huge
rise in US government bond yields which would amplify the hit to the US
economy from the withdrawal of Fed liquidity support. One result of this
analysis would be a renewed downturn in US equity markets.
 The fact that the US mortgage-backed market did not fall apart after QE1 has
been largely ignored. Even though the trigger for renewed turmoil was absent,
the significant downturn in US equity markets in 2Q10 and the weaker US
economy towards the middle of the year has been blamed on the end of QE1.
It is also interesting that US government bond yields plunged despite claims
that it was only the Federal Reserve that was depressing yields.

Jaypee Infratech - Cash engine :Target: Rs80: JP Morgan

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Jaypee Infratech
Initiation
Overweight
JYPE.BO, JPIN IN
Cash engine


Jaypee Infratech (JPIN) offers an attractive risk-reward profile, in our
view. The stock is trading at an EV/psf (implied land cost) of Rs190,
below estimated replacement cost. The company has a forward cash flow
yield (FCFE) of 13%, and one of the best sector ROEs (+25%). With work
on the toll road largely done and low-cost land locked in, we believe the
company will become the cash cow in JPA’s portfolio. This raises the
possibility of JPIN returning capital to the parentco (83% shareholder) via
dividends (FY12E yield of 5%). Initiate with OW, Mar-12 PT of Rs80,
in line with our DCF-based sum of the parts, which values cash flows for
next five years and remaining land at average of Rs270 psf.
• Key share price catalysts are largely 2H-weighted and relate to 1)
start of toll collection in 4Q12, 2) announcements of dividends by
JPIN (maiden DPU of Rs0.75 announced in 3Q10), 3) launch of two
additional land parcels (Agra, GB Nagar), and 4) opening of a Formula
One racetrack, (Oct-11). This should serve as a high profile brandbuilding
exercise for residential developments nearby.
• Noida growth – Is it real? Noida region offers quality infrastructure,
easy connectivity to Delhi, and affordable housing. However, sales
numbers emanating out of the market are high relative to the
population base of the city or history. Level of construction in the area
is commensurate with the creation of a virtually new megapolis. Each
of JPIN’s 1,000 acre+ parcels along the expressway is a mini-city in
itself. The true test of this market/model may come up in FY12/13
when big deliveries start to happen. Until then fundamental concerns
about the market may weigh on the stock.
• Political risks could come to the fore around mid2012, even as
controversies surrounding the YE project seem to be subsiding. We
note that now there is a Supreme Court verdict as well which has
validated land acquisition by JPIN. The project also had received an
approval from the principal opposition party (SP) in 2007. However
there are still some protests around the project and certain
environmental issues still need to be resolved for a few parcels.



Key share price catalysts
Over the next one year we see six key fundamental share price catalysts. These are
1. Commencement of Yamuna Expressway (expected by 3QCY11).
2. Guidance on dividend payment: After recording its maiden interim
dividend of 0.75p, we do expect JPIN to start returning more cash to
parentco (and investors) via dividends. Any positive guidance (30-40%
payout) or increase in the same in FY12 would be a positive.
3. Start of Formula 1 race (Oct -11) in Noida (First time in India): This
should serve as a high-profile brand building exercise for Jaypee group and
have a knock-on effect on nearby residential developments.
4. Auctions in Noida market: Noida RE market is witnessing a number of
auctions and transactions around the region should help set a benchmark
(atleast for parcel 1) for JPIN. The latest transaction in Noida was by Wave
group (for Rs70B) done at almost Rs180MM/acre and Logix group (for
Rs10B) for Rs150MM/acre.
5. Response to the planned launches at parcel 3 in Gautam Buddha Nagar.
Company expects the same to be launched around by 2QCY11.


Key risks to our view
1. Political news flow - A new political combination at the helm in mid-2012
could start creating some overhang. Yamuna Expressway project has seen
significant delays since its inception (in 2003) given farmer protests over
land acquisition, environmental issues and political opposition. Most of the
land acquisition/work on the project has been completed under the current
UP government (BSP). The previous government (SP) too gave it clearance
in 2007, albeit after having blocked it for four years. There is however still
some political opposition (notably from BJP) to the project. This could
create an overhang around FY13 when Uttar Pradesh elections get
underway.
2. Noida – Is the “unreal” growth real? Noida/G Noida region offers quality
infrastructure, easy connectivity to Delhi, and affordable housing. However,
sales numbers emanating from the market are high relative to the population
base of the city or history. The level of construction in the area is
commensurate with the creation of a virtually new megapolis. Each of
Jaypee’s 1,000 acre+ parcels along the 165KM expressway is a mini-city in
itself. The true test of this market/ model may then come up in FY12/13
when big deliveries start to happen. Noida’s big leap into a bustling city
may well happen at a faster pace than Gurgaon but will still take some time.
Until such time, fundamental concerns about the market may weigh on the
stock.
3. Percieved non-accretive acquisitions by the company from the parentco
potentially at a later stage: We note that JPA (parentco) also has an
interest in high-end real estate (in Noida/ G Noida) and via Sports city
venture (2500 acres). JPIN over time is expected to become the main
vehicle for executing RE projects for the group. This raises the possibility of
the company buying out assets from the parent. If such a buyout were to
occur at a price higher than the “perceived market rate” it could create an
overhang.
4. A big part of our Overweight thesis is that JPIN will become the cash cow
in JPA’s portfolio and will possibly start returning capital to the parentco
via dividends. If such dividends are lower than expected (Rs3/share in
FY12) due to lower payout ratios, it could lead to accumulation of nonperforming
cash assets on the B/S and question our dividend yield
argument.
5. Low free float at 17% - JPA still holds 83% of the company and over time
needs to bring its float down to 75% ( to comply with SEBI listing norms).
This creates a dilution overhang and also the potential usage of new capital
(since capex on core business is largely done).


Attractive risk-reward ratio: Trading at EV psf of sub Rs200,
+20% ROE, high dividend payout, and 13% cash flow yield
JPIN’s valuations are at compelling levels, in our view, and we believe the stock
offers an attractive risk-reward profile from here. The company satisfies most of the
criteria that we would define for a value pick, i.e.:
1. Trading below replacement cost: The company is currently trading at an
EV/psf of land at Rs190 (for converted land), significantly below
replacement cost. At a 1.5-2x FSI this translates into a land cost of
Rs15MM/Acre. Land in similarly priced locations in NCR is available for
>Rs500psf (e.g. New Gurgaon) or Rs30MM/Acre. Over and above this, the
developers also have to incur conversion charges of Rs150-200 psf. JPIN’s
land is completely aggregated (where premiums are very high) and use
conversions are in place.


2. High FCFE yield: Given that the investments from toll road are largely
done, JPIN should start becoming a massive FCF generator. We estimate
the company to start generating Rs11-12B in cash flow (after interest/tax),
which would put the stock at a 13% FCFE yield starting in FY12. At a 5-6x
forward P/E the stock looks reasonable.
3. Positive earnings surprise thus far and low P/E: The company has
surprised positively on earnings thus far (current FY11E consensus EPS of
Rs10.6 vs. Sep-10 levels of Rs7.5), and even on consensus estimates the
stock is trading at 6x forward earnings.
4. High level cash collections despite concerns on "broker" sales: A key
concern about the Noida market has been potentially high involvement of
broker underwriting inventory for RE developers. We note that JPIN’s cash
collections thus far have been very robust (Rs92B sold and Rs41B
collected). This suggests at least some level of end-user buying, as a US$1B
amount is pretty much above capabilities of multiple brokers to pay up.
5. High ROE (FY12 25%) and low gearing: The company is likely to finish
FY11 at an average ROE of 30% (FY12E 25% thanks to cheap land cost).
The company currently has net debt of Rs36B (0.7x Net D/E) which can be
easily serviced from toll annuities of Rs3B+ and cash collections from RE
development (Rs92B locked-in sales).


6. Possibility of high dividend payouts: With a large part of toll road capex
completed, JPIN will probably become one of the first high-dividend-payout
companies in the RE space (FY12E DPS of Rs3). Even if JPIN chooses to
retire a substantial part of debt in the near term, the payout ratios should
remain healthy (30-40%).
7. Strong contractor in parent: Execution thus far on toll road construction
is running ahead of schedule. JPA is a well known contractor, having built
large-scale power projects in the country. Thus far RE construction has been
on track. It also helps that most of the approvals for key land parcels are
already in place.
Cheap even on relative basis in a “beaten-down” sector
Comparing JPIN to other listed developers, despite a better ROE, operating cash flow
and positive earnings revisions (sector has seen negative revisions), the stock is
trading below peer group on P/E and EV/psf basis. The dividend yield of the
company is the highest across the space. On a P/BV basis, though, it is at a premium;
however, we believe a best-in-sector ROE more than compensates for this.


Free cash flow generator: JPIN should become the “cash
cow” in the group’s portfolio
With capex on the expressway largely completed (~95% already incurred) and the
majority (87%) of the land parcels for township projects already in place, JPIN is
well placed to throw up substantial operating cash surplus. We expect the company
to generate FCFE of Rs10-11B or Rs8 per share per annum aided by collections from
the real estate pre-sales (Rs92B achieved to date) and steady toll revenues (Rs3B+
from FY13) from Yamuna Expressway.
These cash flows will likely be used to:
1. Retire some debt – JPIN’s current net debt of Rs36B is primarily long-term
infrastructure debt with repayments starting in FY13 and amortizable over
the next 12-13 years (by 2025). Once the toll road starts, a large part of this
can be serviced by securitizing toll revenues, leaving core RE business
almost free of any debt. Nonetheless we expect to JPIN to reduce its gross
debt by Rs 10B over the next two years.
2. Repatriate capital to parentco via dividends: JPA holds 83% of JPIN and
JPIN is the cash cow of JP's portfolio. Therefore it is reasonable to assume
that the company could look to repatriate capital back to the parent co via
dividends. Assuming a 30% payout ratio (vs. management guidance of
50%) and Rs10 EPS, the annual dividends from the company could rise to
Rs3/share.
3. Buyout RE assets from the parentco: We note that JPA too has substantial
real estate assets (32 msf high end land in Noida and 2500 acre sports city
complex). Increasing cash flows in the core RE business in JPIN could then
be used to support a buyout of the RE business from JPA sometime later. In
such a scenario th evaluation of the assets will be critical.


We believe our estimates are conservative: Modeling 15%
booking decline in FY11 and approx 30% below guidance
JPIN’s focus on volumes has yielded impressive results. The company has achieved
bookings of over 31msf/Rs92B over the last two years from its Noida parcel (Jaypee
Greens Township). The average ticket size across Jaypee’s product offering is
Rs2.5M-6.5M and the average selling price is currently in the range of Rs3,000-
3,300 psf, one of the most affordable products available in NCR region.
The company has now achieved decent success in monetization of its Noida parcel 1
(Wishtown) launch (31msf of 78msf sold). However, incremental sales from this
township are likely to be limited as company expects realizations to increase once the
initial deliveries happen and Yamuna Expressway is fully operational.
Incrementally, sales are likely to pick up from Parcel 3 in Gautam Buddha Nagar.
Initial master planning for the same has already begun and is expected to be launched
by 1QFY12. The two parcels in Gautam Budha Nagar (parcel 2 & 3) are adjacent to
the JP Associate's (JAL) sports city project and overall plan is to develop an
integrated mixed use township of 5,000acres across the three parcels.
Our assumptions on incremental sales are conservative and much lower than
company targets. Against management expectations of Rs45B bookings and
FY11 bookings run rate of Rs37B, we are modeling in a 15% de-growth in FY12
(Rs 32B). This is on account of lower realizations from parcels 2 and 3 (Average
realizations taken at Rs 2300-2400 psf).








Jaiprakash Power Ventures - Potential Energy :: JP Morgan

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Jaiprakash Power Ventures Ltd
Initiation
Neutral
JAPR.BO, JPVL IN
Potential Energy


• Initiate coverage with Neutral; Mar-12 PT of Rs44. JPVL is India’s
largest private hydropower generator; 76.25% is held by flagship Jaiprakash
Associates. It has an operating hydro capacity of 700MW, with 1000MW
due for commissioning over the next 4 months. Currently ~5.1GW of
domestic coal-based capacity is under construction and ~6.9GW is under
development. We expect JPVL to ramp up capacity ~10x to 6.82GW by
Mar-15 resulting in a PAT CAGR of ~80% over FY11-15E.
• The stock has underperformed and is now at 1.2x FY13E P/B, among the
cheapest in the IPP space, due to (a) sector-wide constraints on linkage coal
and poor visibility on captive mine development, which weakened outlook
for PLF, (b) higher interest burden and leverage, as partial equity
requirement of under-construction projects was funded with corporate level
debt, (c) potential dilution to earnings from announced fundraising plans
(we estimate an equity funding gap of ~Rs30bn) and (d) ~20% exposure in
PPAs to falling merchant prices. Although these factors are largely “in
the price” and the stock appears to have found support, we expect these
overhangs to limit near-term upside and the stock to deliver marketneutral
returns, at least until funding issues are fully addressed.
• Modest risk-adjusted returns with potential variance to earnings. Case-
II bids for 3.3GW projects in UP appear aggressive and are est. to yield
<11% return on invested equity over the first 5 years. Our consolidated RoE
estimates are 13-16% through FY16, and on that basis the stock appears
reasonably valued at 9.4x FY13E P/E and 1.2x FY13E P/B. Clarity on
1000MW Karcham Wangtoo PPA is a key variable to the earnings outlook
– a 10% lower project cost approval would reduce FY12E PAT by ~14%.
• Our SOP based Mar-12 PT of Rs44 includes- (a) Rs54 for business cash
flows – Rs11 for operations and Rs43 for projects under development; (b) a
Rs10 debit to account for corporate level net-debt and the net-NPV of equity
funding gap (adj. for sale of treasury shares). A return of risk appetite for
IPPs is a potential +ive trigger and would help remove the funding gap
discount. Improvement in coal visibility is also SOP accretive – 10% higher
PLF (from ~75% base case) would result in Rs10 upside to our PT.

Jaiprakash Associates - Wait for the cement to set, Neutral:: JP Morgan

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Jaiprakash Associates Ltd
Initiation
Neutral
JAIA.BO, JPA IN
Wait for the cement to set, initiate with Neutral


• Initiate coverage with Neutral, PT of Rs100. JPA is the flagship company of
the Jaypee group, with cement assets of 23mtpa, a captive hydropower
construction business, and real estate of ~690mn sft around Noida. It is also the
holding co. for the group’s listed IPP, Jaiprakash Power Ventures and listed
property developer Jaypee Infratech. JPA has successfully achieved size and
scale in each of its businesses: it is India’s 3rd largest cement producer, the
largest property developer in and around NCR, and the largest private
hydropower generator and hydropower construction company.
• Negative sentiment across real estate, power and cement over the past year
has led to underperformance. The stock looks to have found support, but
we see 2 broad overhangs which could limit a sustained rally in the shares over
the next few quarters: A) P/L and B/S related: As a result of capacity ramp-ups
in cement and power, higher debt could make earnings vulnerable to operational
and pricing risks and accelerate the need for new capital at JPVL, B) Sentiment
related: i) Even with strong real estate sales at Noida, sentiment remains
cautious towards developers and their stocks are trading at discounts to NAV,
ii) Despite efforts to diversify geographically, the run-up to UP state elections
(likely in 2011) could create some near-term uncertainty for share performance
due to the group’s perceived political affiliations.
• Recycling of cashflows into new growth areas remains a common investor
concern across the conglomerate space, and on a fully consolidated basis we see
continued near-term gearing and cash flow pressures at JPA. However, we see
the company coming out of the woods by the end of FY12, when we expect
stronger cash flows from real estate and cement, reduction in gearing, clarity on
election outcomes, and possible improvements in fund-raising sentiment for
JPVL. Until then we see JPA as a relative market performer. We would become
stronger buyers of the shares at Rs80, representing 7.5x FY12E EV/EBITDA.
• Our SOP-based PT of Rs100 gets 52% of its value from real estate, 30%
from power, 12% from cement, 14% from construction, and incorporates a
20% conglomerate discount to account for remaining overhangs. Upside risks:
a revival in RE sentiment and political clarity would be potential stock catalysts
and would make us more positive on the upside potential of the shares.

UBS:: Consumer Sector: Are staples a good inflation hedge?

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UBS Investment Research
Q-Series®: India Consumer Sector


􀂄 Qualifying the view that consumer staples are a good inflation hedge
Inflation in 2011-12 will be driven by supply and demand factors, putting pressure
on companies’ volume and profit growth. The view that consumer staples
companies are a good inflation hedge needs to be qualified. To do this, we built a
proprietary database on the top 15 companies (43% of sector revenue) to study the
impact of inflation and their performance in an inflationary environment.

Delta Corp, DELTA IN, Buy, TP Rs89 (+23%) — A play on the emerging Indian casino story

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Delta Corp, DELTA IN, Buy, TP Rs89 (+23%) — A play on the emerging Indian casino story


Delta Corp is the first aggressive and quality casino gaming operator in India, a country with very low casino gaming penetration, but enormous potential. It is the largest operator in the Goa casino market (has three of six offshore licences), where a combination of limited offshore gaming licences, low gaming tax rates and low capital requirements guarantee high returns. The company is well capitalised to pursue exciting growth opportunities in Sri Lanka and Daman.
Delta Corp’s first mover advantage in this high operating leverage business has the potential to yield disproportionate returns for investors over the long term. We initiate with a Buy and a 12-month price target of `89.
Indians have high proclivity to gambling, so low awareness of casinos an opportunity
In India, while enormous amounts are wagered in other forms of gambling like lottery tickets (Industry valued at $12.5bn), cricket ($1.5bn wagered in a single world cup match!) and horse racing (annual turnover of >$250mn), the annual turnover of casinos in Goa was just `1.6bn (or $35mn) in FY10. We believe that with higher advertisement & marketing spends, and changing demographics (higher exposure of the younger generation to casino gaming), the penetration of casino gaming in India will rise rapidly.
First mover advantage and operating leverage to drive cash flows and returns
Delta Corp made an aggressive foray into the offshore Goa casino market with its flagship Casino Royale vessel two to three times the size of the competition’s. In ten months, the Horseshoe boat will be operational and will be three times the size of Casino Royale. Our visits to offshore casinos in Goa convinced us that quality developments see higher visits and we estimate that limited supply of quality developments will be a constraint in the future. As close to 80% of a casino’s costs are fixed, we expect a higher number of visits to result in cash flows from operations of ~`3bn over the next two years and casinos to recover the capital employed within two to three years of starting operations.‎‎
Horseshoe and Daman casino openings, key catalysts for gaming growth
We estimate FY12 and FY13 gaming revenue growth of 88% and 69%, respectively, primarily driven by the opening of two casinos in Goa, Caravela and Horseshoe, and the Daman casino. FY13 EBITDA growth is estimated at 92%, further driven by operating leverage.
Valuation and risk to thesis
Our SoTP-based valuation values the Goa casino gaming business using a13x multiple on FY13E gaming EBITDA (see Exhibit 10 for details). Our 12-month price target is `89 and we initiate with a BuyWe see possible changes in regulations like gaming tax rates, licence fees, entry taxes, etc, as key risks. Also, we note that casino gaming will always be a politically sensitive issue for the Goa government.

Voltas – Business outlook - a mixed bag :: RBS

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Voltas has released a business outlook and itself terms the outlook a mixed bag. The key is the
projects business where the company has admitted margins may remain under pressure in the
international segment. The engineering products and the unitary cooling businesses are expected
to do well on an overall basis.

Nestle India – Great outlook, buy only on dips :: RBS

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NI's 23% sales CAGR in last five years is impressive and seems sustainable. Its ongoing
capex clearly indicates management's confidence in growth. NI's payback period on capex
have been impressive in the past; however the stock is expensive, given the near-term
earnings outlook. We downgrade to Hold.

EXECUTIVE BRIEFING - April 4, 2011: Money control

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AUTOS 
Surging auto sales in March brings cheer
Hope to sell 40000 Discover 125-cc per month: Bajaj Auto
BANKING & FINANCE    
R Sridharan named Acting Chairman of SBI
See rupee in 44-45.20 range in next quarter: Axis Bank
CEMENT & CONSTRUCTION       
Ambuja Cements March production at 19.54-lakh tonnes
Macquarie SBI Infra invests $200m in GMR Airport
CONSUMER DURABLES
Blue Star hikes prices of ACs, refrigerators
Philips India is betting big on its healthcare segment
ENERGY               
SEBI okays Sesa Goa open offer for Cairn India
Essar Energy to buy Stanlow refinery from Shell UK
FMCG  
P&G cuts shampoo rates, HUL may have a bad hair day
Cargill India eyes higher market share in edible oil space
INFORMATION TECHNOLOGY   
IT companies smile on ballooning client budget
Why does Nomura India give thumbs up to IT sector?
PHARMACEUTICALS      
Glenmark finds cancer drug, gains to reflect in long term
Pfizer arm recalls 500 bottles of 2 mislabelled drugs
REAL ESTATE     
Realty loan relief: Sources say Rs 6000cr rescheduled
Muthoot group forays into home loans for low income group
TELECOM            
Spectrum mismanagement a concern for telecom sector: Sibal
Telecom stocks set for outperformance this year: Expert
TRANSPORT & LOGISTICS            
New airport ground handling policy deferred again: Sources
Macquarie SBI Infra invests $200m in GMR Airport

Franklin India Flexi Cap: Consistent record: INVEST: Business Line

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Investors planning to add a flexi-cap fund to their portfolio can consider Franklin India Flexi Cap Fund. Besides consistent track record, the fund scores in its ability to protect downside during market corrections despite presence of mid- and small-cap stocks in the portfolio. The fund, over a three- and five-year period, clocked compounded annualised return of 12.4 per cent and 12.7 per cent, respectively, and outpaced its benchmark CNX 500 by seven and three percentage points, respectively. However, it trailed one of the top funds, HDFC Equity, by about six percentage points over a three- and five-year period.
The fund has a superior return record through the SIP route over the above period suggesting that it tends be volatile. Investors willing to take exposure to the fund can phase out their investment through SIPs. Though it has bettered its multi-cap peers, its exposure to mid- and small-cap stocks failed to reward investors for the risk assumed, especially post the market correction. Hence the fund can be considered as a diversification option.
Performance: The fund clocked an absolute return of 12.3 per cent, over a one-year period, outperforming its benchmark CNX 500 by seven percentage points. However, over a six-month period, its NAV was down by 5 per cent compared with 6.5 per cent lost by its benchmark. The fund's conservative exposure to sectors and stocks helps it to contain the losses.
Portfolio strategy: The fund has a well-diversified portfolio of 47 stocks. The top three sectors held by the fund — banks, IT and telecom — make up for as much as 44 per cent of its portfolio. Stock-specific exposure is restricted to 8.5 per cent of its entire portfolio. The fund's February 2011 portfolio sports a 68 per cent exposure to large-cap stocks while the mid- and small-caps make up for 25 per cent.
Though it had higher exposure to consumer non-durables at the start of 2009 market rally, the fund has systematically pruned its exposure to the sector since then. This could have partially dampened its returns. An exposure of 10 per cent to telecom, one of the underperforming sectors, may also have dragged returns

ITC: Low probability events which can impact ITC: Kotak Sec

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ITC (ITC)
Consumer products
Headwinds that are less likely, but still counts. While reiterating our long-standing
positive view on ITC, we look at ‘what can go wrong?’—(1) increase in VAT to 40%
from 20% in Rajasthan probably indicates that there is no upper limit for State VAT, (2)
aggressive marketing by Philip Morris (possible, not probable), (3) Supreme Court’s
activism related to the tobacco sector, (4) Australia could potentially set a precedent in
stricter norms for cigarette packaging and (5) FMCG losses could potentially be higher
in FY2012E. ADD.

Stock Strategy: Consider going long in Punj Lloyd, Orchid Chemicals: Business Line

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Punj Lloyd: After remaining at the receiving end for quite some time and touching its 52-week low at Rs 58, the Punj Lloyd stock is showing signs of resilience. It finds a near-term resistance at Rs 76 and the next one at Rs 93 and has support at Rs 62.5.
One more conclusive close above Rs 68 could trigger fresh buying in the stock. This could take the stock towards Rs 92 and even to Rs 107.
F&O pointers: The Punj Lloyd futures (market lot: 2000) saw a fresh accumulation of open interest in April futures.
While it also witnessed a healthy rollover of 88 per cent, it was lower than the three-month average of 90 per cent.
However, trading in options suggest little upside for the stock, as both 70 and 75 calls witnessed huge accumulation. Puts weren't active enough to discern any view.
Strategy: Traders can consider going long on Punj Lloyd futures if the stock moves past Rs 68. In that event, traders can keep the stop loss at Rs 68 on a closing day basis (spot price). Traders can consider exiting from the stock at Rs 76. If the stock maintains momentum, traders can also consider holding the long by shifting the stop-loss to Rs 92. Traders with appetite to take risk could hold Punj Lloyd futures till expiry with a tight stop-loss at Rs 62.5.
Orchid Chemicals: The outlook for Orchid Chemicals remains neutral as the stock is moving in a narrow band between Rs 270 and Rs 340. Only a break from this level could set a clear trend for the stock. The immediate-term outlook remains positive, as the stock could touch the upper band of Rs 340.
A forceful close above Rs 340 could set the stock in a fresh round of bull rally that could help it pierce its all-time high level of about Rs 380. It finds an immediate support at Rs 307.
F&O pointers: The Orchid Chemicals futures (market lot: 2000) added fresh long on Friday. It also witnessed a healthy rollover of about 90 per cent. Options are not active.
However, cues from option trading indicate limited upside, as 320-strike and 340-strike calls witnessed heavy accumulation of open interests.
Strategy: Traders can consider going long in Orchid Chemical futures with a tight stop-loss at Rs 307.
Follow-up: Last week, we had advised traders to consider going long in Bharti Airtel and writing (selling) a 210 call on LIC Housing Finance. While the former moved in line with our expectations, the latter would have resulted in heavy losses, as the stock moved up sharply

UBS- Blue Star:: Proxy to Indian infra; initiate with Buy :: Rs430 target

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UBS Investment Research
Blue Star
Proxy to Indian infra; initiate with Buy
􀂄 Beneficiary of high MEP spend in India; 42% FY06-10E EPS CAGR
Blue Star is a mechanical, electrical and plumbing (MEP) contractor, which also
manufactures air conditioners (AC) and commercial refrigeration systems. We
believe it is a structural growth story and a beneficiary of growing infrastructure
spending in India. While H1 FY12 performance could be muted due to lower
billing, a pick up in domestic activity could lead to a share price re-rating. We
estimate its non-MEP markets—commercial refrigeration/AC—will grow 25-30%
YoY over the next few years and we expect contributions to rise.
􀂄 Integrated offerings, experience, broader market focus, de-risk business
We believe earnings will be supported by its integrated project execution ability in
MEP, significant experience, a presence in the high-growth AC and commercial
refrigeration segments, a broader market focus and its de-risking by focusing on
the industrial and infrastructure sectors. Slower execution should reduce
receivables, while project selection could improve its balance sheet.
􀂄 FY11-13E EPS CAGR of 21%; high-return business
We estimate an EPS CAGR of 21% in FY11-13 and 44% ROIC in FY12. Positives
include its asset-light business model, low leverage and Rs21bn order book for
electro-mechanical projects, which provides visibility for about one year. A good
economic environment could lead to an upside surprise on its outlook.
􀂄 Valuation: initiate coverage with Buy rating and Rs430.00 price target
We believe the share price is attractive, after the correction since September 2010.
We would likely view any near-term weakness on the stock (due to muted results),
as an attractive buying opportunity. Our price target implies 16.5x FY13E PE. We
derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (12.2% WACC).


Investment Thesis
We initiate coverage of Blue Star with a Buy rating and a price target of
Rs430.00, 18.5% above the current share price. While its share price has
corrected 37-45% from a 52-week high of Rs524.00 at end-September 2010, we
view current levels as attractive. We would likely view any near-term weakness
from its potentially muted results for the next one to two quarters as an attractive
buying opportunity. We see Blue Star as a long-term structural story and a
beneficiary of Indian infrastructure spending (we estimate US$500bn in
spending in India overall, of which MEP is a segment). A pick up in domestic
capex could lead to a significant re-rating given Blue Star’s high growth
potential, better returns than most its peers, stronger balance sheet and good
growth of its non-MEP businesses (we estimate the AC and commercial
refrigeration markets will have a 25-30% YoY growth rate over the next few
years; and these segments will contribute to around 45% of EBIT). Our
estimates are slightly more conservative than consensus, but we are likely to
revisit our assumptions with a better economic environment. While
electromechanical projects (MEP projects) are ‘Segment 1’, the AC and
commercial refrigeration business falls under ‘Cooling Products’ or ‘Segment
2’. It also markets and maintains hi-tech professional electronic and industrial
products (professional electronics or ‘Segment 3’).
We believe key catalysts for the share price will be a broad recovery in domestic
capex spending given significant infrastructure outlay, better project execution
and billing, continued strong performance in ‘Segment 2’, high returns and the
easing of working capital. Although performance could be muted in the near to
medium term, we focus more on the company’s long-term catalysts. Its
integrated project execution ability in MEP, five decades of experience and
broader market focus should support earnings, in our view. In FY11-13, we
estimate an EPS CAGR of 20.9% and 40-50% ROIC (assuming some easing).
Positives include its asset-light model, low leverage and Rs2.1bn order book in
electro-mechanical projects (‘Segment 1’), which provides visibility for about
one year. A good economic environment could lead to a surprise on its outlook.
Blue Star is trading at FY12/FY13E PE of 17.5x/13.9x, a slight discount to the
peer capital goods median. It is also trading near its historical median range.

Key catalysts
Although its share price performance could be muted in the near to medium term
as the company is slowing its billing slightly to lower its receivables (we estimate
EBIT for MEP or ‘Segment 1’ at 52-55% through FY11-13), we think the longterm
structural story is attractive given Blue Star’s presence in India, which has a
strong focus on infrastructure. The company has had strong growth (EPS CAGR
in FY06-10 was 42%) in a good environment. Furthermore, we think its cooling
products and professional electronics segments should continue to grow well (we
estimate 45-48% contribution to EBIT in FY11-13). Hence, we focus more on its
long-term catalysts and would likely view any near- to medium-term


weaknesses/corrections in its share price as an attractive buying opportunity. Blue
Star continues to have low leverage, high return on capital employed (ROCE) and
about one year of visibility on its order book.


􀁑 Improvement in India project execution and awards. Barring one to two
quarters of muted order flow/execution, we expect a significant pick up in
new orders given the high spending allocation for infrastructure in India. We
believe a pick up in infrastructure spending is the biggest catalyst and could
lead to a re-rating.
􀁑 Continued strong performance of cooling products segment. Comprising
ACs and commercial refrigeration products, we think this market and
segment is on a fast growth trajectory of 25-30% YoY growth for the next
few years. A growing middle class population, rising consumption and
aspirations, rapid urbanisation and agriculture growth should continue to
support the segment. Any progress and implementation of the budget
proposals on cold chains should further strengthen market opportunities.
􀁑 Diversification of end-markets. Blue Star’s focus on the infrastructure and
industrial segments could facilitate order book growth at a time when
commercial activity is expected to remain subdued over the near to medium
term.
􀁑 High returns due to asset-light model and working capital management.
Blue Star’s business model has historically generated high returns.
Management attributes this to a fixed asset-light model, judicious project
selection, execution, and working capital management. Although we assume
returns will ease, they are still higher than those of other companies in the
sector. We believe this will continue to boost investor sentiment and interest.


Risks
We believe the key risks are as follows.
􀁑 An extended delay in project execution and a significant economic
slowdown in India. Blue Star’s EMP segment contributes significant revenue
and earnings, and has an order book of Rs21bn, ensuring about one year of
revenue visibility. Management highlighted it is slowing order execution and
focusing on lowering receivables. Hence, a longer-than-expected delay in
execution (beyond one to two quarters), a delay in the awarding of new projects
and a weak economic environment would adversely impact our growth estimates
for FY12-13.
􀁑 Volatile commodity prices could impact margins. Most of Blue Star’s
contracts are fixed priced contracts, with its major raw materials being steel and
copper. The company tries to take into account rising prices and as it uses endproducts
(where there is a lag), the impact of volatile commodity prices is
slightly lower. Many recent government contracts take into account price
escalation.
􀁑 Higher-than-expected working capital, unattractive payment terms in new
projects. These could hamper returns and stretch the company’s balance sheet.
􀁑 Stronger competition and limited product differentiation. Many MNCs
are planning a foray into India’s MEP segment. While Blue Star’s brand and
experience should help it get new orders, most products in the AC segment
have become Energy Star rated, which limits product differentiation.


We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We believe DCF captures
Blue Star’s long-term growth potential in infrastructure-focused markets such as
India, where sales of similar companies have typically grown substantially in a
good economic environment. We assume a WACC of 12.2%, higher than those
for capital goods and construction companies under our coverage. Given MEP is
an asset-light business, we forecast high ROCE over our forecast horizon.
However, we assume an easing from its high levels in FY10.
Peer and historical valuation
Blue Star is trading at FY12/FY13E PE of 17.5x/13.9x, a slight discount to the
peer capital goods median. It is also trading near its historical median range. On
metrics such as EV/EBITDA and P/BV, it is either trading in line or at a slight
premium. Blue Star recorded the highest EPS CAGR of 42% in our capital
goods coverage universe in FY06-10. Given our cautious stance, we forecast
21% EPS CAGR in FY11-13, in line with the peer median. There is potential
upside risk to our estimates over the long term, as the company has historically
posted robust growth in a favourable economic environment.


UBS versus consensus
We are broadly in line with consensus earnings for FY11. However, we are around
12% below consensus on FY12 earnings. This is because we assume there will be
slow execution of orders in H1 FY12, with an improvement only in the second half
of the year. While consensus estimates are higher, they could be lowered after a
quarter of muted results. We also assume higher working capital than previous
levels. For FY13 earnings, we are marginally below consensus. While we think its
near-term outlook is muted, we remain positive on the company and the industry in
the long term.


􀁑 Blue Star
Blue Star is a turnkey electromechanical or MEP (mechanical, electrical,
plumbing, fire fighting) contractor catering to commercial real estate, IT parks,
industries and infra sectors such as airports, ports, power plants and
manufacturing establishments. It also caters to requirements of commercial
refrigeration equipment ranging from water coolers to cold storages. Blue Star
has three business segments: electro-mechanical products and packaged air
conditioning systems, cooling products, and professional electronics and
industrial systems.
􀁑 Statement of Risk
We believe the key risks for Blue Star are delays in project execution, a
significant economic slowdown and volatility in commodity prices.






Deutsche Bank:: TCS: ; Pantaloon:

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Tata Consultancy: Better than expected pricing could provide further upside [Aniruddha Bhosale]
Mr. Chandrasekaran -CEO TCS, mentioned in an interview on television that they should ‘definitely see a pricing uptick during the next fiscal year across the board’. For the first time since the recent downturn, has the senior management of any Indian IT services company admitted to broad based price increase. This along with the fact that discretionary IT services spend by customers is on the rise, augurs well for FY12E revenue and earnings outlook of the company in particular and the sector in general. We expect the company to report a revenue growth of 30%yoy for FY12E. With a potential upside to our and consensus price increase assumption of ~2.5%yoy in FY12E, we believe there could be further earnings upgrades through the year.

Pivotals: Reliance Industries, Infosys, SBI, Tata Steel: Business Line

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Pivotals: Reliance Industries (Rs 1,035.3)

After testing our first target of Rs 1,055, the stock retreated on Friday witnessing selling pressure. Inability to rally beyond Rs 1,055 will signal that the stock could slip to Rs 1,015, Rs 990 or Rs 956 in the ensuing days. Therefore, short-term traders should tread with caution. Only a strong dive below Rs 1,015 will be a signal for initiating fresh short positions. However, a decisive move above Rs 1,055 will lift the stock higher to Rs 1,076 or Rs 1,090.
In the medium-term, the stock continues to be moving sideways in the broad range between Rs 880 and Rs 1,160. Emphatic rally above Rs 1,090 will take the stock higher to Rs 1,150-1,160 range and then to Rs 1,200 in the medium-term. Key medium-term support for the stock is at Rs 880.
State Bank of India (Rs 2,719.5)
The stock did volte-face on Thursday and formed a bearish engulfing candlestick pattern, signalling short-term bearishness. It however gave away most of its initial gains, finishing the week marginally higher. Traders can initiate fresh short position while maintaining stop loss at Rs 2,780. Downward targets for the stock are Rs 2,650 and then Rs 2,565. SBI is likely to trade sideways in a narrow band between Rs 2,460 and Rs 2,820.
The stock appears to have resumed its medium-term downtrend as it reversed lower after testing the key level Rs 2,875. Break through of an important medium-term support at Rs 2,500 will reinforce its downtrend and pull it down to Rs 2,200 and Rs 1,900 in the medium-term. Conversely, a strong close above Rs 2,875 will signal that the stock can head to Rs 3,100 level in the upcoming months.
Tata Steel (Rs 625.6)
Tata Steel gradually inched higher and ended the week with 2 per cent gains. The fact that the stock's gradual up move has been backed by low volumes signals cautiousness. Hence, short-term traders should tread with caution and take profits off the table, if the stock fails to move above Rs 640 in the ensuing weeks. A reversal from this level can pull the stock down to Rs 610 or Rs 600. Next supports are at Rs 592 and Rs 575.
On the other hand, strong jump above Rs 640 will take the stock higher to Rs 660, a key medium-term resistance level. Strong close above Rs 660 is required to mitigate the downtrend that has been in place since this January.
Infosys Technologies (Rs 3,218.2)
The stock advanced 1.8 per cent last week in line with our expectations and achieved our first target of Rs 3,204. Short-term traders can hold their long positions with stop loss at Rs 3,140. Upward targets are Rs 3,276 and Rs 3,318. The stock is hovering well above its 21 and 50-day moving averages. Supports for the week ahead is at Rs 3,100, Rs 3,014 and Rs 2,900.
The stock is currently hovering just below its medium-term trend deciding level of Rs 3,276. Failure to move above this level will pull the stock down to Rs 3,100 in the medium-term. Strong move above Rs 3,276 will mitigate the stock's medium-term bearishness and take it higher to Rs 3,400 or Rs 3,450 in the coming months

NHPC: Low-cost generator with no fuel risk: Kotak Sec

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NHPC (NHPC)
Utilities
Low-cost generator with no fuel risk. We upgrade NHPC to BUY (from REDUCE
previously), as the recent underperformance offers an opportune entry point with a
20% upside to our fair value estimate. In our view, the current macro concerns over the
overall utility space least affect NHPC—a low-cost producer with no fuel risk, while the
CMP of Rs23/share implies no value ascribed to the growth portfolio and trading
multiples of 1X P/B and 14X P/E on FY2012E net worth and earnings, respectively.