Financials Focus The land of smiles 􀂃 ::Macquarie Research

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Financials Focus
The land of smiles
􀂃 Many travel brochures describe Thailand as the land of smiles. And Thai
banks’ price performance likely brought a smile to investors’ faces over the
past couple of years. This year, though, has been a different story. The price
performance of the Thai banks has been the proverbial two sides of a coin,
with direction seemingly dictated by the top down call. However, beyond the
macro, there were two sector issues I wanted to delve into during my recent
round of bank visits in Bangkok: margins and corporate lending.
Margins: Under pressure
􀂃 Post my meetings with the various Thai banks, I would say that the street
estimates on margins have been too high. Earlier this year, several banks
were reportedly taking a more aggressive stance on deposits, with the step-up
program on deposits a prominent feature of this campaign. The first quarter
results bear out part of the impact from higher funding costs.
Corporate loans: Flash
􀂃 Corporate-related lending may continue to lead growth for another quarter.
We’ve been a bit surprised to find corporate lending driving loan growth. The
question for us had been whether this is simply a flash in the pan or whether
there’s sustainability behind this trend.
􀂃 I’m, however, in agreement with our man-on-the-ground, Passakorn
Linmaneechote, that corporate loans will slow down in the latter part of the
year. Corporates are cashed-up and the outlook for rising interest rates will
likely see companies pay down their loans quicker.
Thai macro: Wants to break free
􀂃 The macro background on Thailand is looking good and this may be the
biggest draw to the Thai banks. There could be upside surprise to GDP and,
with it, loan growth could break out as well.
􀂃 The key concern as far as macro is concerned seems to be inflation. More
specifically, the lifting of the oil subsidy that could create a jump in inflation. If
inflation persists, inflation expectations could change.
Play the game
􀂃 Rising rates, funding cost pressure (to go with the competition on loan yields),
and resilience of corporate lending for the time being: in such an environment,
I’d prefer banks that have good liquidity, a high share of lower costing CASA,
or banks that are able to garner a higher proportion of longer-term deposits
within their fixed deposit mix. Banks with good non interest income would
also be preferred.
􀂃 Taking the points I just mentioned into consideration, SCB (SCB TB,
Bt115.00, OP, TP Bt130.00) could continue to outperform in the near term. I
sense momentum is with this bank. However, further down, I can see why
KBank (KBANK TB, Bt127.00, OP, TP Bt150.00) is our top pick, as it seems
well positioned in the operating environment that we just described.

To Quant or Not to Quant: That is the Question .:Macquarie Research

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To Quant or Not to Quant:
That is the Question
Highlights from North American Quant
Conference
Event
 We held our North American Quant Conference, To Quant or Not to Quant: That
is the Question, in Boston on May 17th. We had consultants from Rogerscasey
and Russell Investments, buy-side managers from State Street Global Advisors,
PanAgora Asset Management and AXA Rosenberg, as well as a sell-side
perspective from Macquarie‟s George Platt, who shared their opinions on the
challenges that quants currently face and the future of quant strategies.
 The following pages contain the key highlights from each of our speakers and
our panel discussion. Each speaker and their presentation titles are listed below:
George Platt - Co-Head of Global Quantitative Research, Macquarie
Capital: The case for the Affirmative – Perspectives from the Sell-side
Arman Gevorgyan - Director, Investment Research, Rogerscasey: A
Long Road Ahead for Quantitative Strategies
Mark Thurston - Head of Global Equity Research, Russell Investments:
Will quants provide diversification and alpha opportunities?
Mark Hooker - Head of Advanced Research Center, State Street Global
Advisors: The case for the Affirmative – Perspectives from the Buy-side
Additionally we had a panel discussion that included the above speakers as
well as Eric Sorensen - President, PanAgora Asset Management and
Jeremy Baskin - Global CEO, AXA Rosenberg.
 For additional information about our conference and presentations please
contact a member of the Macquarie Quant team.

Asian Paints- Domestic volumes healthy; cost pressures continue: Prabhudas Lilladher,

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􀂄 Paints volume grow 15‐16%; cost pressures impact profitability: Asian Paints’
(APNT’s) Q4FY11 consolidated sales; EBITDA and PAT came in at Rs19.7bn (up
5% YoY), Rs2.9bn (up 8.5%) and Rs1.86bn (down 3% YoY) against our
expectations of Rs20.08bn, Rs3.3bn and Rs2.2bn, respectively. Reported
numbers are not comparable as base quarter includes six months performance
of international division. Like to like consolidated sales and PBT grew 24% and
2%, respectively. We estimate 15‐16% volume growth in decorative paints for
the quarter. For the full year, volume growth came in at 17% which is impressive
given the series of price hikes taken by APNT in FY11, amounting to 12.4%
(weighted average ~7.5% for FY11). Given the steep inflation in key RM costs,
APNT plans to hike prices again in May and June by 4.3% and 2.4%, respectively.
Performance of international division continued to remain weak owing to poor
demand in Caribbean and political disruptions in Middle East. (19% and 23%
revenue and EBIT decline, respectively)
􀂄 Gross margins decline ~300bps YoY; RM price inflation 14% for FY11: Pressure
from rising input costs was reflected in ~300bps decline in gross margins despite
series of price hikes in the previous 6 months. Material Price index for Q4 moved
to 121.8 from 115 in Q3 (indicating ~22% increase in RM prices vs FY10 average)
with FY10 base as 100. Management expects the input cost pressure to
continue in the near term as incremental supply addition in Tio2 remains subpar.
Operating margins decline was restricted to 180bps owing to savings of
140bps in employee costs.
􀂄 Maintain ‘BUY’: We have revised our estimates downward by 3‐5% for FY12e
and FY13e, to account for higher than estimated increase in raw material prices.
Volume growth has remained strong so far despite higher than average price
hikes. We roll forward our model to Mar‐13e and continue to maintain our
‘BUY’ rating on the stock, with one‐year price target of Rs3,000.

ASHOKA BUILDCON: Migrating to clarity::PINC

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Migrating to clarity
Ashoka Buildcon Ltd (ABL) Q4FY11 results, key highlights was
change in BOT depreciation policy from SLM to traffic
proportion and shift from AS21 to IFRS for booking of revenue
and profit from internal EPC work. Hence on a YoY basis the
results are not comparable, without accounting changes the
PAT for FY11 would have been Rs710mn i.e. 12% down YoY
basis, while the adjusted PAT is Rs1008mn, but excluding the
one time loss of Rs580mn for BOT projects (Rs450mn overlay
exp and Rs130mn revenue loss), the adjusted PAT would have
been Rs1300mn. Based on the new order book we marginally
increase standalone earnings, while BOT valuation is brought
down as revenue estimates for 4 BOT projects have been
marginally lowered. We maintain our BUY recommendation
with a lower target price of Rs364 (Rs390 earlier).
Change in accounting policy…
Depreciation on BOT assets will be henceforth booked on traffic
proportion against SLM earlier. The total impact is Rs537.4mn
increase in reserves on a retrospective basis of which Rs162.6mn is
the impact for FY11. Similarly now internal EPC revenues would be
recognised as income as per IFRS, accordingly Rs2859.9mn of
revenue and Rs168.8mn of profits has been booked in FY11. On a
like to like basis if such changes are excluded the PAT for FY11
would have been ~Rs710mn i.e. 12% lower than FY10.
One time expense impact profitability…
ABL has incurred Rs450mn towards overlaying for 2 BOT projects,
and during the process lost Rs130mn of revenue. Hence with the
above mentioned accounting changes the adjusted PAT for FY11
would have been ~Rs1300mn. The management has mentioned that
this overlaying is one-time in nature. No major maintenance exp is
likely for the next two years.
VALUATION AND RECOMMENDATION
Equity invested till date by ABL is ~Rs4.5bn, which would increase to
Rs7bn & Rs10bn by FY12E and FY13E, we value BOT (DCF) at
equity multiple of 1.6x times and 1.1x times on FY12E and FY13E i.e.
Rs11bn. Over FY10-13E, we expect revenue for standalone business
to grow at 22.3% CAGR and PAT to grow at 12.4% CAGR. We value
this business at 9x FY12E adjusted earnings of Rs17.3 (EPC).

State Bank of India: Big clean-up act: 􀁠 Kotak Sec

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State Bank of India (SBIN)
Banks/Financial Institutions
Big clean-up act. SBI reported sharply lower earnings for the quarter, but addressed
most of its pending issues. Full impact of pension was taken through reserves/P&L, a
majority of gratuity is provided for and slippages have been aggressively reported in
SME/agri, on account of the move to system recognition. Higher slippages and
somewhat lower margins in 4Q were key disappointments. The new management
guides for better margins (has aggressively raised lending rates recently) and lower
slippages. The earnings profile will remain strong in FY2012E and FY2013E. Valuations
at 1.2X FY2013E book and 7X (adjusted) EPS are comforting but expect subdued price
performance in the near term. Maintain BUY with TP of `3,100 (`3,400 earlier).

Equity Strategy -- Trip notes from America:: Credit Suisse

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Global Equity Strategy ----------------------------------------------------------------------------------------
Trip notes from America


● Little visibility: An appropriate title of our trip notes might have
been ‘waiting for something to happen’. Clients had very little
visibility on the three key issues: the end game in Europe, the
degree of overheating in China, the withdrawal of QE 2.
● Asset allocation: There was a strong consensus call for a pullback
in the equity market on this uncertainty. Yet, nearly everyone
wanted to buy on dips suggesting a limited pull-back. Clients were
also confused about how much of a growth slowdown is occurring.
● Consensus longs: Oil (OFS within that), tobacco and software
stood out. Thematic consensus longs were the GEM/NJA
consumer, rising food prices and water. Consensus shorts: Food
producers/food retailing, energy utilities in Europe, UK REITs,
companies competing against China (the list varies) and the USD.
● Few questions on banks, insurers and Japan: We almost had
no questions on banks (investors seem to accept that long-term
RoTE will revert to their pre-1990 trend), insurers and Japan (this
is very unusual and usually a good sign).
Clients had little visibility on three key issues
An appropriate title of our trip notes might have been ‘waiting for
something to happen’. Clients had very little visibility on the three key
issues: the end game in Europe, the degree of overheating in China,
the withdrawal of QE 2.
Asset allocation
There was a strong consensus call for a pull-back in the equity market,
given uncertainty about the issues mentioned above. Yet, nearly
everyone wanted to buy on dips (suggesting the pull-back will
probably be limited). There were big concerns on margins, which are
at record high in the US, owing to accelerating GEM wage growth,
high commodity prices and strong capex growth.
Macro issues
Clients were confused about how much of a growth slowdown is
actually occurring. Most macro funds felt this is part of the normal
business cycle, while bottom-up funds were concerned that the
peaking in US lead indicators at a time when US GDP is just 1.7%
shows that growth will continue to be anaemic. Inflation was a
dominant issue: nearly everyone believed that inflation is on the rise –
and investors were, consequently, on the look-out for inflation hedges.
There was huge uncertainty over the degree of overheating in
emerging markets, and particularly in China. The lack of quality data
and uncertainty over China’s degree of overheating, we believe, will
make the market particularly vulnerable to changes in the news-flow
from China. Investors thought the end game in China was clear (a
property bust and IRRs falling below interest rates, owing to
overinvestment), while the timing of this end game was very unclear.
Half of US clients expected the euro to break up at some point. On the
whole, investors seem quite relaxed about the end of QE 2.
Consensus longs
Oil (OFS within that), tobacco and software stood out. Thematic
consensus longs were the GEM/NJA consumer, rising food prices and
water. Style consensus longs were high dividend yield (yield being a
hedge against both uncertainty and inflation) and big cap. Regionally,
the consensus was clearly to be long the US.
Consensus shorts
Food producers/food retailing, energy utilities in Europe, UK REITs,
companies competing against China (though the list varies) and the
dollar.
There were very mixed views on mining, telecoms (value vs value trap)
and drugs as well as emerging markets as an asset class (top-down
funds were short of India, bottom-up were long).
Virtually no questions
We almost had no questions on banks (investors seem to accept that
long-term RoTE will revert to their pre-1990 trend), insurers and Japan
(this is very unusual and usually a good sign).

Credit Suisse,::Gammon 4Q11 disappoints on loss-making legacy orders

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Gammon India----------------------------------------------------------------- Maintain OUTPERFORM
4Q11 disappoints on loss-making legacy orders


● Gammon’s reported PAT needs to be adjusted for: 1) Rs1.8 bn
received from its real estate subsidiary, Metropolitan Infrahousing,
2) Rs1.7 bn of loss provisioning on revaluation of old fixed-price
orders (Kosi & Gorakhpur) and claims writeoff (DMRC order) and
3) Rs250 mn of gains from sale of its stake in Sadbhav Engg.
● 4Q11 recurring PAT of Rs273 mn fell 56% YoY (4% below CS
estimate), mainly impacted by its old loss-making fixed-price orders.
● Although Gammon claims it has improved its working capital cycle
sequentially, our calculation suggests its working capital cycle (net
of cash) increased from 132 days in FY10 to 147 days in FY11.
● Gammon plans to focus on cash flow improvement during FY12
rather than focussing on growth. It therefore guided for just 7-11%
top-line growth in FY12. However, it expects margins to improve to
9% as loss-making orders are expected to be completed by
December 2011.
● Gammon did not provide any details on its Italian and real estate
businesses. We cut our FY12-13E EPS by 1-5% on rising interest
rates and reduce target price to Rs164 (from Rs182), based on
the value of its construction business, which is at 10x FY12E EPS
(vs 12x previously).
4Q11 disappoints as legacy orders impact margins
Gammon’s legacy fixed-priced orders that constituted 25% of its order
book have fallen to about 10% now. However, led by delays (including
external factors such as floods, insurgency, etc.) and rising commodity
costs, these orders are now loss-making. Loss at these projects
continue to impact Gammon’s performance. 4Q11 operating margins
were just 6.3% vs our expectation of 8% and 119 bp lower YoY.
Gammon expects to complete these loss-making orders by December
2011. Its reported PAT needs to be adjusted for several one-time items
such as: 1) Rs1.8 bn interest income received on debentures of Rs0.8
bn of its real estate subsidiary taken over from ICICI Bank 4-5 years
back, 2) Rs1.7 bn loss provisioning on revaluation of its legacy road
projects, Kosi & Gorakhpur and claims writeoff for its DMRC order and
3) Rs250 mn of gains from the sale of its stake in Sadbhav Engg.
Working capital cycle though has improved on a sequential basis as
guided by the company, we note that it (net of cash) deteriorated
during FY11 to 147 days versus 132 days during FY10. Gammon
plans to focus on improving working capital cycle during FY12.
Figure 1: Gammon India – 4Q FY11 standalone results summary
(Rs mn) 4QFY10 4QFY11 % YoY 4QFY11E % difference
Order book 113,595 150,000 32.0% 155,000 -3.2%
Net Sales 16,678 17,379 4.2% 14,500 19.9%
Total operating expenses (15,426) (16,282) 5.5% (13,340) 22.1%
EBITDA 1,252 1,097 -12.4% 1,160 -5.4%
EBITDA margin (%) 7.5% 6.3% (119) 8.0% (169)
Depreciation (189) (249) 31.7% (261) -4.8%
EBIT 1,063 848 -20.2% 899 -5.6%
Net interest expenses (230) (405) 76.4% (520) -22.1%
Tax (212) (170) -19.9% (95) 79.2%
Tax Rate (%) 25.5% 38.3% 1,286 25.0% N.A.
Recurring PAT 621 273 -56.0% 284 -3.9%
Exceptionals (73) 331 Nmf - N.A.
Reported PAT 548 604 10.3% 284 112.7%
Source: Company data, Credit Suisse estimates
Muted FY12 sales guidance; expects margin improvement
Gammon guided for muted sales growth during FY12 of 7-11%, led by
its almost flat order book over the past four quarters and focus on
improving cash flow generation and margins during FY12 rather than
focussing on growth. Gammon expects the legacy loss-making orders
to be completed by December 2011. Besides, on a conservative basis
it has already provided for potential loss from these orders until
December 2011. This should allow it to improve margins going
forward. Gammon plans to reach 9% operating margin during FY12.
Order inflows could provide positive surprise, led by order
wins at subsidiaries
However, order inflows could surprise on potential large road project
wins on BOT basis by its subsidiary, GIPL, and potential of it winning
the NTPC bulk tender, if it wins its litigation to participate in NTPC’s
bulk tender. Besides, our sales growth estimate for FY12 already
factors in lower growth, as guided by the company.
No clarity provided on its Italian and real estate businesses
During the post-results conference call, Gammon provided no details
on the performance of its Italian business as well as on the media
articles that suggests Gammon is looking to divest its stake in the
Italian business. Besides, we await clarity on details of the land bank
and development plans for Gammon India’s real estate business.
Cut FY12-13E EPS by 1-4%; maintain OUTPERFORM
We cut our FY12-13 earnings estimates by 1-5% to factor in rising
interest costs. We also cut our price target to Rs164 from Rs182 as we
now value its construction business at 10x FY12E EPS versus at 12x
earlier led by expectation of lower growth and fall in peer valuation.
However, adjusted for valuation of its infrastructure business, the stock
now trades at 4-5x core construction earnings, which we believe is
inexpensive and thus maintain our OUTPERFORM rating for the stock.

Credit Suisse, Rising Emerging Market Costs --- The impact to margins and corporate strategy

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New survey: A new proprietary Credit Suisse global survey of
senior corporate executives indicates that cost pressures from
emerging economies will continue to rise over the next 12-24
months, pressuring profit margins.
● Costs: Labour costs continue to be a major area of concern with
China and India posing the largest threat. Executives are also
worried about commodity and transportation costs.
● Margins: While only 21% of respondents expect to have enough
pricing power to maintain margins, this is actually up from 7% in
our August 2010 China cost survey.
● Strategic reaction: Almost 50% of respondents said they would be
at least ‘somewhat likely’ to move sourcing in reaction to
continued cost acceleration, although this could require
considerable time and resources.
● Investment conclusions: We think the key is to identify industries/
companies with sufficient pricing power to offset the relentless
cost increases discussed in this report.
Survey indicates cost pressures to continue to rise
A new proprietary Credit Suisse global survey of senior corporate
executives indicates that cost pressures from emerging economies
will likely continue to rise over the next 12-24 months, pressuring profit
margins. While this continues to be an area of significant worry for our
surveyed executives, the level of concern has fallen compared with
our August 2010 China cost survey, perhaps due to the continued
economic recovery and associated boost to executive confidence.
Notably, 40% of our 84 respondents were from private companies.
Among the results of our survey
Costs: Labour costs continue to be a major area of concern with
China and India posing the largest threat. Executives are also worried
about commodity and transportation costs. Examples of companies
exposed to rising EM costs (especially labour costs) include BBY,
DKS, TGT, FL, MFB, Home Retail (HOME.L), Tieto (TIE1V.HE), Nitori
Holdings (9843 – Japan), Anhui Conch Cement (0914.HK) and China
Overseas L&I (0688.HK). The other side of this issue is that rising EM
labour costs do represent a structural bull case for some consumer
companies – one of our key strategic themes (e.g., Tingyi (0322.HK)
and Belle Intl. Holdings (1880.HK)).
Margins: While only 21% of respondents expect to have enough
pricing power to maintain margins, this is actually up from 7% in our
August 2010 China cost survey.
Strategic reaction: Almost 50% of respondents stated they would be
at least ‘somewhat likely’ to move sourcing in reaction to continued
cost acceleration, although this could require considerable time and
resources. Notably, 80% respondents are considering greater
investment in tech and automation to offset higher sourcing costs.
Potential beneficiaries include ROK, ACN, ORCL, SAP, TXN, MXIM,
ABB (ABBN.VX), Schneider (SCHN. PA) and Keyence (6861 – Tokyo).
Investment conclusions: We believe the key is to identify industries/
companies with sufficient pricing power to offset the relentless cost
increases discussed in this report. Perhaps surprisingly, consumer
discretionary companies appear relatively confident about their ability
to raise prices while health care and telecom respondents were less
optimistic on average.

JPMorgan:: Government avails fuel hike window for petrol - One cheer for reforms

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Government avails fuel hike window for petrol - One
cheer for reforms


• Petrol price hiked 8%; inadequate, but quantum is positive:
Downstream oil companies have raised petrol prices by Rs5/ltr (8%)
over the weekend as against a required hike of Rs8 (13%). Fuel price
hikes were expected soon after the assembly elections – however, in our
view, the quantum of the petrol price hike augurs well for other potential
reforms, which would be politically less palatable.
• Petrol hikes are politically less difficult: While petrol prices were
theoretically decontrolled last year, price hikes have been held in
abeyance over the last 4 months due to political compulsions. Gasoline
accounts for only 10% of Indian fuel consumption and is primarily used
for private cars - a constituency that is seen as affluent and hikes are less
likely to cause a political backlash.
• Diesel and cooking fuels will be the real test of reform resolve: Over
the coming weeks, we expect price hikes in the politically more sensitive
transportation fuel diesel (43% of India consumption) and cooking fuels.
We estimate a 35% hike is needed for diesel to stem subsidies. We would
view a 8-10% (Rs4/ltr) diesel price hike as positive from a reforms
perspective.
• Inflationary impact could temper political will: Diesel hikes have a
wider impact on transportation cost as well as input costs for agriculture.
While the RBI has favored a hike in fuel prices and factored it into their
inflation expectations; political will to push through tough reforms is yet
to be tested.
• Fiscally – there is little room for maneuvering…: Fuel subsidies
would amount to Rs1.2trn in FY12E using our estimate of US$106/bbl
crude in FY12. We are factoring in significant auto fuel price hikes and
average crude levels significantly lower than current prices.
• …but a smooth reform path is unlikely, stay cautious on oil SOEs:
SOE oil cos have rallied 14-23% over the past 2 months in anticipation
of reforms and on crude volatility. We believe the government will move
slowly on pricing reform for diesel and LPG, especially in the light of the
current volatility in crude. We continue to prefer the upstream SOE oil
companies as they have leverage to reform and relatively lower downside
if hard reform measures are not pushed through.

JPMorgan : Siemens- Delivers on growth promise: Reiterate OW

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Siemens India
Overweight
SIEM.BO, SIEM IN
Delivers on growth promise: Reiterate OW


• Strong Mar-q results. Siemens India posted sales growth of 40% YoY,
well ahead of our estimate of 21-25% growth. Results beat expectations set
post disclosures by Siemens AG for Mar-q . Order inflow of
Rs33bn (up 47% YoY) was healthy. OPM was up 100bps to 14.3%; higher
RM costs were more than compensated by lower SG&A expenses. PAT of
Rs2.8bn (up 53% YoY) was ~14% ahead of estimate.
• Segmental update. Energy segment sales grew a very strong 73% YoY in
Mar-q to Rs17.5bn. The performance indicates that execution of large cycle
orders from Qatar and Torrent Group constituting ~25% of order backlog
(~Rs154bn) is progressing well. Industry segment sales grew just 4.4% (to
Rs13.3bn) mainly on account of weak revenue booked in mobility and
industry solutions. Given healthy inflows and positive outlook on industry
segment growth by ABB and CG we expect a recovery in coming quarters.
Healthcare segment sales were up 53% to Rs2.6bn and included
contribution of Rs552mn from SHDL which has been amalgamated in the
standalone company.
• We have raised FY11, 12 estimates by ~5%: After 1H topline growth of
38% YoY, 2H asking rate of 19% appears achievable (with room to do even
better). We expect 2H margins of 13.3% (+120bps YoY), ~100bps below
1H level, to build in buffer for RM cost pressures. Strong quarterly results
are expected to continue – implied 2H PAT growth is 31% YoY.
• Siemens delivers on growth promise, we reiterate OW: As a result of our
estimate changes our DCF-based Mar-12 PT is raised to Rs950 (vs. Rs870
earlier), implying ~23.8x FY13E (fiscalized) EPS. The ~40%+ valuation
discount to ABB (UW) makes us more positive on Siemens on a relative
basis. The factors behind our Jan-end upgrade (see note) of Siemens to OW
remain: comfort on earnings' visibility, recent healthy execution + margin
track record, easing of past concerns related to inter-group M&A, and order
inflow momentum expected to continue. Key downside risks: Weak inflows,
RM led pricing pressure.

JPMorgan : Metals Volatility spikes up sharply

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• Industrial metals grind lower as commodity volatility spikes up: JPM
Global Metals Research analyst Michael Jansen expects investors to further
de-risk which ‘implies the market bias in industrial commodities in coming
weeks will be to trade on the short side’. Michael expects copper to trade
below $8,000 aluminum to move back towards $2500-$2550 and nickel to
trade down to $22,000. Lead and zinc should trade $2200 and $2050
respectively and has downside biases on those targets. Beyond Q2,
Michael highlights that ‘fundamentally driven more bullish outlook on a
6mo+ basis is incredibly reliant on China’s stance on monetary policy.
When the policy handbrake is lifted is thus incredibly important for the
physical metals market as it will determine how much inventory China’s
consumers and merchants can hold and the cost of holding that inventory
(which is sharply escalating currently).
• Steel update- Spot steel bottoming out?: CIS HRC spot steel prices have
held up near $650/MT levels. From here, steel companies should start seeing
the higher cost coking coal flow through (MT in its conference call indicated
40% impact in Q2 and 35% in Q3). Spot scrap steel prices have moved up
recently, though iron ore has remained $185-190/MT levels.
• Interesting updates from India on steel: Usha Martin (NR) in its analyst
conference call indicated that their coking coal purchases from BHP are
now on monthly basis (April at $331/MT and May at $324/MT). We find
this interesting though the larger Indian mills have not yet indicated any
agreement being reached on move from quarterly to monthly contracts.
Another interesting update was NMDC (NR) move to cut domestic iron ore
fines prices (effective April) by 15%. While NMDC has followed an export
FOB parity pricing model (adjusted for levies), the recent sharp increase in
railway freight for iron ore exports and the 20% export taxes, have
sharply reduced the parity price. Lack of meaningful export from Karnataka
has also created a domestic supply glut in iron ore fines. The price cut does
provide some relief to the non integrated domestic steel companies
(though NMDC increased lumps prices). The recent gas issues in Western
India could likely impact near term HRC production, providing steel
companies with a breather in the current over supplied markets. Lastly
Siemens has announced an order win to supply a 1.2MT corex gas based
DRI plant to JSW Steel, scheduled by mid 2013. While JSW is in a quiet
period, we believe a corresponding EAF mill is also likely.
• April numbers from China- Slowdown in imports across commodities
continues: Highlighting the recent de-stocking underway, imports across
metals like iron ore (-4% y/y and -11% m/m), copper (-14% m/m and -40%
y/y), and aluminum declined on a m/m and y/y basis. Steel net exports in April
however spiked up m/m to 3.4MT. Even as Aluminum production continues to
move up in China (+2% m/m), aluminum scrap imports also picked up sharply
m/m (+21% m/m).

JPMorgan : Coal India - High level meeting called by PM underscores severity of coal shortage; Potential clarity on multiple regulatory issues

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Coal India
Underweight
COAL.BO, COAL IN
High level meeting called by PM underscores severity
of coal shortage; Potential clarity on multiple
regulatory issues


• High level meeting called on Coal as supply situation remains weak : As per
media reports (BS, DNA), the Prime Minister has called a high level meeting of
the ministers of Power, Coal, Environment, Finance and the Planning
Commission, Deputy Chairman, on May 16th to discuss the coal situation in the
country. The recent miss in coal production and subsequent reduction in
production targets, in our view has aggravated the coal situation (at a time when
global thermal coal prices are sharply higher). Recent media reports (ET) have
highlighted a 1000MW TPP of Damodar Valley lying idle given the coal
shortage. The Prime Minister getting involved and calling a meeting, indicates
the severity of the coal deficit situation. As per media report (BL) the Central
Electrical Authority (CEA) has asked that future boilers be designed to accept
30% imported coal, from the current design of 10-15% imported coal. We
continue to see upside risk to our total thermal coal import numbers of
72/90MT in FY12/13E respectively.
• What are the key issues impacting domestic coal supplies: Coal India
(COAL) which accounts for 80% of India’s coal production, has seen both
production and off-take remain mostly flat. COAL has attributed the production
impact to Environment related issues (CEPI) and off-take on lack of railway
rakes. More importantly many of COAL’s projects have also not yet got the
necessary Environment clearances, putting a question mark on the +6% yearly
growth. Recently a high level EGOM has been meeting regularly to discuss the
GO-NO area. We believe the high level meeting is likely to address the above
issues to increase domestic supplies. J.P. Morgan Utility analyst Shilpa Krishnan
indicates total power capacity addition of 14GW in FY12E and 18GW in
FY13E.
• Potential positives and negatives for Coal India: Any easing of environmental
regulations would be positive for COAL as it would provide credibility on +6%
yearly production growth plans, while higher rake availability would allow
COAL to liquidate part of inventory (nearly 70MT) in FY12E (not part of our
estimates). We believe negatives for COAL could possibly emerge if COAL is
asked to lower e-auction coal sales to cater more to the power segment in the
near term, which is right now facing a crunch (power FSA for FY12E are at
329MT v/s 309MT in FY11E, while e-auction coal sales volumes are at 10-12%
of production volumes). The above is not part of our base case and we believe
this is a very low probability event in our view.
• Imported coal- Coal India’s tenders: Coal India has floated tenders for long
term (10 year) import volumes. We believe the implementation of this would not
be easy, given that back to back contracts would be required with power utilities
to make sure COAL does not carry price risk on the imported coal. More
importantly, given that imported coal is significantly more expensive than
domestic coal and merchant tariffs have been under pressure, COAL also needs
to reduce credit risk from its customers of imported coal.

JPMorgan:: Bajaj Auto 4QFY11 Results first take: Margins surprise on upside; Await clarity on Volume outlook

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Bajaj Auto
Neutral
BAJA.BO, BJAUT IN
4QFY11 Results first take: Margins surprise on
upside; Await clarity on Volume outlook


• 4Q reported PAT at Rs. 14.0B, included an exceptional gain of Rs. 7.2B.
Adjusting for the same, the PAT came in at Rs.6.8B (+20% yoy), which
was above ours and street estimates – driven by improved profitability.
4Q EBITDA margins came in at 20.5% (+20bp qoq), which was led by a
healthy product mix and cost control measures.
• Healthy volumes +17% yoy and higher realizations (+5% yoy) led to a
+24% yoy revenue growth at Rs.42.0B. EBITDA margins came in at
20.5% - (-240bp yoy but + 20bp qoq). The raw material costs ratio
declined to 70.9% qoq (-50bp qoq), given price hikes taken in the
quarter as well as a richer product mix. The selling & distribution
expenses were contained in the quarter as well.
• The company booked exceptional of Rs. 7.2B. This included sales tax
deferral incentives of Rs. 8.3b and an impairment loss of Rs.1B related to
the Bajaj Indonesia venture. Other Income at Rs.1010m (vs. 425m in
4QFY10), was sharply higher – given increasing cash surplus with the
company. Investments as of Mar’ 11 stood at over Rs.40B. Tax rates
were also lower at 15.5% (vs. 28% yoy).
• Key takeaways from press meet: Volume Outlook: While management
has guided for double digit growth rate, they highlighted that the
domestic industry growth is likely to moderate (given inflationary
pressures). They expect growth in the exports market to remain healthy.
Further, demand for three wheelers will continue to be driven by the
replacement segment. Margin Outlook: The management believes that
the commodity inflationary pressures appear to be easing (given that
input prices are moderating). This will be supportive of margins.
• The company will be hosting a conference call tomorrow at 3:30pm –
dial in nos are +9122 3065 0143 / +91 22 6629 0365. We would await
clarity on the growth outlook – (given that while industry growth is
likely to moderate, the OEM has been losing market share in the
domestic segment over 4Q).

JPMorgan:: Opto Circuits 4QFY11: Cardiac Science turnaround bodes well, FY12E guidance pared

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Opto Circuits (India) Ltd
Overweight
OPTO.BO, OPTC IN
4QFY11: Cardiac Science turnaround bodes well,
FY12E guidance pared


Opto reported Q4/FY11 numbers better than street expectations. Cardiac
Science reported profit for first time indicating strong turnaround. We cut
estimates on lower than expected guidance for FY12, higher interest and
depreciation costs. Remain OW with a revised PT of Rs385.
• Cardiac Science turnaround. Management attributed signifcant cost
savings to overall reduction of employee headcount, alignment of various
functions with Criticare and Untexis’ US operations and moving of backend
R&D to India. CSC reported a PAT margin of 9% (for 4 month period)
indicating strong turnaround. For FY12, Management guided to flat
revenues and EBITDA margin of 10%-12% for CSC.
• Concerns on working capital: Opto’s inventory days worsened to 100
days in FY11 from 75 days in FY10. Management indicated that the rise in
inventory in primarily due to stocking up of supplies at new plants of
Malaysia and Vizag. Inventory is expected to come down over the next
couple of quarters as production ramps up at new plants.
• FY11 results highlights. Revenues were up 27% YoY (excl. CSC) with
Invasive up 27% YoY and Non-Invasive up 27% YoY. EBITDA margin
came in at 28% (-600bps YoY) mainly on account of higher staff expenses
(from CSC acquisition) and higher overheads (CSC acquisition/increased
trade shows particpation). PAT was up 39% YoY with tax rates at 6% (vs.
10% in FY10). Management guided to revenue growth of 15%-20% for
Non-Invasive and 35%-40% for Invasive products in FY12.
• Estimates and Price target changes: We cut our FY12/13 estimates by
3%/11% on back of lower than expected revenue guidance for FY12 and
higher depreciation and interest costs. We roll forward our PT to Mar-12
(Sep-11 earlier), now at Rs385 based on 15x Sep-12E P/E, in-line with
global peer group. Key risks include potential large ticket acquisitions,
increase in working capital intensity, failure to get accreditation for products
in new markets and adverse foreign currency.

Emami --In-line 4Q; early signs of costs ease .:Macquarie Research

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Emami
In-line 4Q; early signs of costs ease
Event
 Emami reported in-line 4Q’FY11 results; sales grew by 26%YoY and PAT grew
by 17%YoY. While net profit was almost in-line with our expectation, sales were
4% ahead of our estimates. The company reported 19% domestic volume
growth with strong growth across all key products. Export growth was a robust
34% YoY, backed by South Asia and Africa. We reiterate our Outperform.
Impact
 Robust 26% sales growth, assisted by 19% volume growth. Emami’s 4Q
FY11 sales grew by 26%YoY to Rs3.5bn, led by 19% domestic volume and
the impact of a ~4% weighted price hike in India. Sales growth was supported
by strong growth in key brands: Navratna Hair Oil (↑19%), Zandu Balm (↑
20%) and Navratna Cool Talc (↑ 90%), Mentho Plus Balm (↑ 21%),
International sales (↑34%) and Boroplus Prickly Heat Powder (↑ 11%).
 Early signs of ease in raw material (RM) prices. Emami’s EBITDA margin
declined 489bp due to a 273bp drop in gross margin on higher RM costs, and
an increase in employee costs due to the addition of a 300 sales force to grow
international sales and increase rural penetration. Prices of key raw materials
like menthol (↑75% YoY) and LLP (↑25% YoY) has impacted gross margins.
Early signs of a cool-off in raw material costs are visible as menthol prices
have come down ~13% since their April peak ahead of fresh crop in June. We
see low probability of downside risks to margins from 2Q’FY12E.
 Net profit grew by 17% YoY to Rs550mn. PAT growth was aided by strong
26% top-line growth, interest income (compared to expense in the previous year)
and higher other income. We believe stabilisation in raw material prices along with
a fast growing product portfolio with a low near-term competitive threat will help
the company post a ~20% earnings CAGR over the next three years.
 New product initiatives continue. Emami has been aggressive in new product
launches with significant successes over the last 4-5 years. Emami is planning
to enter underpenetrated skincare categories with technology from Mibelle
Biochemistry and it intends to roll out these products from 2H’FY12. The
company also plans to roll out coconut-based Ayurvedic hair oil nationally.
Earnings and target price revision
 We have cut our FY12E EPS by ~4% and maintain our TP to Rs550.
Price catalyst
 12-month price target: Rs550.00 based on a DCF methodology.
 Catalyst: Decline in raw material prices
Action and recommendation
 Outperform maintained. We maintain our positive view on Emami, given its
strong growth momentum, healthy product pipeline and new initiatives, which
should add growth and maintain leadership in key products. We expect
Emami to record a 20% earnings CAGR over the next three years.

CESC - Passing on higher fuel costs in Kolkata .:Macquarie Research

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\

CESC Limited
Passing on higher fuel costs in Kolkata
Event
􀂃 CESC has increased power tariffs by Rs.0.46/kWh in Kolkata from April
2011 and has moved to a Monthly Variable Cost Adjustment (MVCA) model.
Structurally this is a positive as higher fuel costs can be offset by passing on
to customers sooner (reducing working capital requirements).
􀂃 With the stock price recently weakening, we highlight that CESC trades at a
compelling valuation of 0.7x FY12 cons P/BV and 10x FY12 cons NPAT (vs
market at 15x and sector at 12x). Preferred mid-cap in Utilities.
Impact
􀂃 Significant price hike by Coal India drives tariff lift: around 40% of CESC's
regulated generation assets in Kolkata (1,225MW) source Grade A and B coal
from Coal India (Eastern Coalfields) via linkages. The Rs.0.46/kWh tariff hike
to all customers follows CIL's substantial price hikes in February 2011
for Grade A and B coal (ECL Grade A-B was increased 73%-115%).
􀂃 Fuel cost pass-through on a monthly basis with truing up at year end:
CESC will now be able to pass-through coal price increases on a monthly
basis, which helps during a period of rising fuel price volatility and reduces
large working capital requirements. We understand that there will be a true-up
at the end of each year based on audited accounts to ensure that CESC
is not over/under charging customers based on actual fuel costs.
􀂃 WBERC notification hasn’t seen any change to regulated operating
norms: the dull 321pg notification doesn’t seem to suggest any change in key
operating norms for the regulated CESC assets over FY12-FY14 such as
PLF, availability, heat rate and OM norms.
􀂃 Retail results, end of June: the FY11 results for Spencer's should be out in
the last week of June, when the CESC consolidated results have been
audited. We expect losses of around Rs.1.4bn (an improvement of Rs.1.2bn
from FY10). Recent feedback from our CESC NDR in Asia highlighted that
management forecasts losses in Spencer’s to fall to Rs1.1bn in FY12,
Rs0.7bn in FY13 and zero in FY14, while expecting property to add Rs0.25bn
NPAT from mid-FY13. This implies material upside to our earnings forecasts
(18% FY13, 33% FY14).
Earnings and target price revision
􀂃 No change.
Price catalyst
􀂃 12-month price target: Rs384.00 based on a Sum of Parts methodology.
􀂃 Catalyst: 1. Private Equity invest in power growth portfolio; 2. loss reduction in
retail over next 12 months, 3. FDI law relaxed for multi-format retailers.
Action and recommendation
􀂃 Outperform.

Indian utilities - merchant power Bullish April fwd curve + data points ::Macquarie Research

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Indian utilities - merchant power
Bullish April fwd curve + data points
Event
 And up it goes. Both volume and forward power price got a kick up the curve
in April with 96% of total volume contracted >Rs.4/kWh. A positive data point
from power traders over the week was that 600MW of merchant capacity had
been contracted for 1yr from July-11 at Rs.4.70/kWh – a positive result vs. our
FY12 forecast at Rs.4.00/kWh. It begs the question, with such an important
State election for Congress in 1Q13, will UP’s appetite for merchant (UP
base-load deficit -17% in FY10) be the talking point of FY12?
 News flow from bilateral power buyers Punjab (tariff hikes), Delhi (talking
tough on load shedding) and Tamil Nadu (Jayalalitha win) seemed to be
positive for power, while stranded coal-fired units of DVC and new power
plant policy from CEA (new plants to be built for 30% import blend) continued
to highlight the biggest near term risk of IPPs – fuel supply.
 Speaking about fuel shortage concerns, we do a scenario analysis on Adani
Power’s Tiroda project, which suggests that even using 60% imported coal at
US$120/t FOB, the contract it has with MSECL breaks even (not including the
merchant sales that will likely boost the projects ROE) – Outperform.
Impact
 April contract volumes 5.6x higher than March: with an implied power
price of Rs.4.02/kWh in June (similar to March fwd curve) while in July-August
prices were stuck at Rs.4.56/kWh – bullish for early monsoon months with
new merchant capacities coming up.
 Positive data points: such as a 1yr 600MW merchant contract at
Rs.4.70/kWh with UP and potentially positive signs from State Governments:
Punjab (11% of merchant market*): PSERC increased tariffs by 9.2% to
both domestic and agricultural customers, halving its revenue/cost gap.
Delhi (12% of merchant market*): reports implied DERC would take
‘serious action’ against discoms resorting to loadshedding. As one power
trader commented, however, ‘this sort of bravado is shown by regulators
only against privately held discoms’. They have a good point.
Tamil Nadu (14% of merchant market*): with Jayalalitha winning the TN
State election, power tariffs in the State may now rise (positive). We also
understand that renegade buying leading up to the TN State election has
led to delayed power payments to genco’s who supplied to the state,
which may also put pressure on tariff increases.
Outlook
 Over the past week we have seen some positive newsflow for power markets.
Our preferred IPP remains Adani Power due to its strong volume growth over
FY12, competitive cost position (fuel cost ~1/kWh in FY11) and attractive
valuation (8x FY13E NPAT). In this market we also like defensive names with
growth optionality such as Tata Power (large cap) and CESC (mid cap).
*buyers of bilateral power market over past 12 months

The nickel is coming ::Macquarie Research

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The nickel is coming
Feature article
 We review and summarize the outlook for nickel supply in 2011 and 2012.
Despite some short-term disruptions, we foresee steady supply growth in the
coming quarters.
Latest news
 Year to date, the copper market appears to have been in balance, despite
anaemic growth in Chinese copper semis output and significant de-stocking of
scrap and copper concentrate. Year-to-date LME copper stocks have risen by
~90kt, Comex stocks have risen by ~15kt, and bonded stocks have risen by
100kt (from 400kt as at end 2010 to around 500kt at present). Largely
offsetting this has been a fall in SHFE and consumer stocks of almost 50kt
(note that over 30kt of previously bonded stock was included in SHFE stock
numbers in March 2011) and 100-150kt respectively over the year to date.
Recently stocks have been falling significantly, and we expect a tight 2H11
will result in higher copper prices.
 After recent declines, pricing sentiment in the steel market is showing signs of
stabilising. The latest market survey by The Steel Index shows that 17% of
global participants now expect higher prices in the coming three months, up
7% WoW. However, with 57% still anticipating a price decline, the shift in
mood has some way to go. We expect to see European and US prices
decline further as end users cut back purchases ahead of the summer.
 The NDRC has issued China's 2011 list for encouraged imports, which took
effect on 17 May. In commodities, the big changes are that uranium
concentrates and fines (but not processed uranium) have been removed,
while molybdenum concentrates has been added. This reflects our view that
after stocking 20,000tU over recent years, Chinese appetite for further
uranium stocking is waning. However, we expect imports from Kazakhstan to
maintain steady volumes over the rest of 2011, keeping the ex-China market
in slight deficit. Meanwhile, the addition of molybdenum (coupled with the
supposed export quotas) reflects the government’s concern over raw material
sourcing availability for its rapidly growing stainless steel sector – nickel ores,
ferronickel and chrome ores are already on the list.
 The International Lead & Zinc Study Group's (ILZSG) latest data showed a
zinc market surplus of 111,000t for January to March 2011, which was over
20% lower than in Q1 2010. However, it is important to recognise that
ILZSG’s data reports apparent consumption for China and does not make any
adjustment for unreported stock changes. Other data suggests there has
been a continuing drawdown of unreported zinc stocks in China in Q1 2011.
China's galvanised steel production increased by 17% YoY to 6.8mt in Q1
2011 (which was a new first quarter record), whereas apparent zinc demand
rose only 12%. The same data points (39% and 5%, respectively) suggest an
even deeper drawdown of unreported zinc stocks occurred in China in 2010.
We also note that open zinc warrants on SHFE are now falling for the first
time in about six months. In lead, ILZSG's data showed a surplus of 24,000t
for the three months January to March 2011, compared with 10,000t in Q1
2010.

India – Retail Monthly sector update -MAY 2011::CLSA

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What’s making news?
News reports suggest that the government may move on FDI policy (BS)
The DIPP, which had floated the discussion paper last summer, is reportedly close to completing its final
report on the issue of FDI in multi brand retailing after getting approval from concerned ministeries
The rule change would likely be done in a phased manner, keeping in mind possible opposition and
may include conditions around use of FDI funds and cities that FDI funded retailers can operate in
We note that such reports have been persistent since the DIPP paper in July
Tesco’s cash & carry plans hit snag (Hindu)
The Karnataka state government has refused to issue the company a license for sale of food products in
the state, bowing to pressure from local traders
Tesco was planning to set up its first cash & carry store in Bangalore
The existing portfolio of 700 stores sells fabrics, garments and accessories
KFC to expand in India (IndiaRetailing)
The company plans to scale up to 500 stores by 2015 against 114 store currently across 24 stores
Each outlet entails an investment of Rs20-25m. KFC is also planning to expand its menu
ICICI Ventures to pick up stake in Devyani International (ET)
ICICI ventures has reportedly invested Rs2.25-2.5bn for a 10% stake
Devyani International is a franchisee for Yum Brands (KFC & Pizza Hut) and the master franchisee for
Costa Coffee in South Asia. It currently operates ~200 stores with ~150-160 more planned.

Titan Industries- Titan above 5 year average PE now::CLSA

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Titan Industries- TTAN IN (U-PF)
Business description:
Titan is India's largest manufacturer /retailer of watches (21% FY10
sales) and jewellery (63% FY10 sales)
In the watches segment Titan sells high, mid as well as low end
watches
In jewellery, Tanishq is Titan’s luxury jewellery retail format and
GoldPlus is its new mass market offering
Goldplus (mass market jewellery) portfolio now stable at 29 stores
with no major store additions planned
Eye+ (prescriptive eye-wear) formats are being scaled-up and is now
present in over 40 cities
Precision engineering division is expected to break-even in FY12
Growth drivers
As of March 2011, Titan has over 624 stores spread over 0.7m sf
‘World of Titan’ stores: 308
Fastrack stores: 43
Helios stores: 3
Tanishq stores: 117
Gold Plus stores: 29
Zoya stores: 2
Eye+ stores: 122
Titan above 5 year average PE now
News and updates
Titan plans to add 250 stores across formats in FY12
against 150 stores in FY11. 85%+ of these will be
franchisee owned. Capex for the year will be ~Rs1bn.
The new stores will include over 35 Helios outlets, 60-70
Fastrack stores, 20 Tanishq stores (including a 20k sq ft
outlet in Mumbai), 6-7 Goldplus stores and 30-40 World
of Titan stores besides continuing rollout in Eye+
Tanishq has opened a 20,000 sq ft flagship store in
Mumbai
Akshay Tiritya sales were reportedly strong this year
despite high gold prices

Jindal Saw 4Q :: results weak; order book healthy ::Macquarie Research

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Jindal Saw Limited
4Q results weak; order book healthy
Event
􀂃 JSAW reported 4Q FY11 net sales and profit of Rs11.6bn and Rs802m,
respectively. Results were below our expectations due to a lower margin and
a marginal miss in volume. The blended EBITDA margin was Rs8,212/tonne
in 4Q. Reaffirm our Outperform recommendation, but cut our TP to Rs245.
Impact
􀂃 Volumes marginally missed expectations. During 4Q, SAW pipes volume
dropped by 13.5% to 104k tonnes (35k tonnes of HSAW and 69k tonnes of
LSAW) due to a shipment delay of ~20kt. Overall, JSAW sold 204k tonnes of
pipes in 4Q and 725k tonnes in FY11. We have reduced our volume estimate
for FY12 to 970k tonnes from 1.1m tonnes.
􀂃 Blended EBITDA was lower due to mix change. Blended EBITDA margin
was ~US$185/tonne in 4Q, affected by execution of 35k tonnes of low margin
HSAW pipes. Higher coking coal prices (above US$325/t) affected margins,
especially in ductile iron pipes. Margins were US$325/t for seamless pipes,
US$200/t for LSAW, US$30/t for HSAW and US$180/t for DI.
􀂃 JSAW’s current order book is above US$1bn. The company has an order
book of US$1bn, which it expects to execute by March 2012. The order book
includes LSAW pipes (390k tonnes), HSAW pipes (190k tonnes), DI pipes
(100k tonnes) and seamless pipes (40k tonnes). 55% of the order book is
from the export markets. We estimate the average EBITDA on its current
order book to be ~US$175/tonne.
􀂃 Expansion projects on track. The company’s current expansion plans for a
new DI pipe facility (US$75m, Sep-2011), Mundra DI plant expansion
(US$60m, Sep-2011) and a drill pipe facility in the US (trial to start in June-
2011) are on track.
􀂃 Iron ore mines to start in 1Q CY12, provide 30% valuation upside. JSAW
plans to invest ~US$70m on mine development and to set up a beneficiation
and pelletization plant. Based on our iron ore price forecast, we believe these
resources have a value of US$375m (using NPV methodology). This
translates to a value of US$2/t, which is significantly lower than that of other
listed iron ore mine companies.
Earnings and target price revision
􀂃 We cut our FY12E earnings by 25% on lower volume and margin
assumptions. We roll forward our model and cut our TP to Rs245 from Rs300.
Price catalyst
􀂃 12-month price target: Rs245.00 based on a Sum of Parts methodology.
􀂃 Catalyst: New order inflow and start of production at iron ore mines.
Action and recommendation
􀂃 Outperform maintained. JSAW is our preferred pick in the pipe space, given
its healthy order book and multiple triggers. We believe the start of iron ore
mines in 1Q CY11 will provide a significant boost to its earnings.

Indian Banks 4Q11: Looking at the quarter gone by ::Macquarie Research

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Indian Banks
4Q11: Looking at the quarter gone by
Event
�� We summarise the 4QFY11 results for banks and financials and also
comment on what is to be expected going ahead.
Impact
�� Significant margin compression yet to happen for banks: Banks largely
haven’t witnessed any significant margin compression this quarter, as lending
rate hikes have protected margins and deposit re-pricing has yet to catch up.
On average, the cost of funds was up 35bps QoQ for banks less reliant on
wholesale funding. Margins compressed roughly only 10bps QoQ on average
for these banks. As far as wholesale-funded institutions and banks dependent
more on wholesale deposits were concerned, cost of funds moved up by 50-
60bps QoQ and margin compression was severe at 45-50bps QoQ.
�� Asset quality pains continue for PSU banks: PSU banks continue to face
issues with respect to asset quality due a sharp rise in slippage/delinquencies
due to restructured assets and moving to online method of classification of
NPLs. Private Banks, on the other hand, due to their large retail portfolio
(where NPLs have already peaked) witnessed lower delinquencies this
quarter and asset quality improved further.
�� Opex was the big negative surprise for PSU banks this quarter: PSU
banks had to take pension provisions for the retirees upfront this quarter,
which bloated opex. The one-time pension hit due to retirees constituted
nearly 10% of FY11 profits. Some of them managed to report a lower opex by
writing back the gratuity provisions done in earlier quarters, as RBI had
allowed them to be amortised over five years.
�� What to look forward going ahead – 1QFY12 and subsequent quarters:
We expect the deposit re-pricing plus the savings rate increase to result in
roughly 25bps NIM compression for banks, especially the PSUs, in 1QFY12.
Note that lending rate hikes in 1QFY12 were done mid-quarter and hence the
full impact will be felt only in 2QFY12. Loan growth is also expected to be
weak, on top of which we expect pressure on asset quality due to restructured
assets to continue for one more quarter, as the principal moratorium on some
restructured assets will continue to be there till June-2011. Also the deadline
for migration to online (CBS) method of classification of NPLs is extended till
Sep-2011 and hence more NPLs are likely to come out. To summarise,
1QFY12 results are expected to be bad for the sector and we don’t rule out
the possibility of negative surprises.
Outlook
�� Wait for 1QFY12 to buy banks: We believe 1QFY12 results for banks
especially for PSUs is expected to be bad, and we don’t think that the bad
numbers are fully priced in. Hence around July ’11 we believe there could be
a better entry point into the sector. Valuations are getting to look cheap now.
Hence from a 12-18m perspective we are fine accumulating on corrections.
The positive surprise on earnings could happen in second half – due to lower
credit costs and opex in our view. Our top picks are Union Bank of India and
PNB in the PSU space and amongst the privates we like ICICI Bank and
HDFC Bank.

Tata Power Co F2011 Consolidated Profit Lower than Estimate ""Morgan Stanley Research,

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Tata Power Co
F2011 Consolidated Profit
Lower than Estimate
Quick Comment – Impact on our views: Tata Power
reported F2011 adjusted standalone revenue of
Rs69.2bn (up 1% YoY), EBITDA of Rs15.5bn (down 4%
YoY), and adjusted profit of Rs8.7bn (up 26% YoY). We
had estimated profit of Rs7.4bn primarily due to higher
tax expense.
For F2011, consolidated revenue was Rs192.8bn (up
3% YoY), EBITDA was Rs40.9bn (up 11% YoY) and
adjusted profit was Rs15.4bn (up 16% YoY). Our
consolidated profit estimate was Rs16.6bn.
Key developments: The company has completed 80%
of the work on the Mundra UMPP and is expecting to
commission the first unit in September 2011. On the
Maithon project, 95% of the work is completed, and the
first unit is expected to be commissioned in June 2011
and the second unit four months later. The progress on
company’s other plants are shown in Exhibits 3 and 4.
During F4Q11, the company sold 314 MUs of merchant
power at an average realization of Rs4.1/unit. The coal
companies sold 14mt of coal at a realized price of
US$87/t, although the cash cost was higher at US$41/t.
For coal supplies of 2.6 mtpa from the Indonesian coal
assets to Mundra UMPP, where coal prices are fixed for
the first five years, there is a possibility that the
Indonesian government may demand higher prices. If
this goes through, the purchase cost could increase by
US$30-35/t, thus affecting the fair value of the power
project. The regulated equity in the Mumbai License
Area is Rs22.2bn and in NDPL is Rs8.3bn. The
company announced a dividend of Rs12.50/sh and a
stock split of 10 for 1.
Investment thesis: We believe the company is meeting
its execution timeline for the Mundra and Maithon power
projects, setting it apart from its peers. However, the
stock is trading at ~2x P/B and 9.3x EV/EBITDA on our
F2012 consolidated estimates; we maintain our
Equal-weight rating on the stock.

Larsen & Toubro (LT) OW: Back with a bang ::HSBC research

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Larsen & Toubro (LT)
OW: Back with a bang
While Q4 earnings were 4% lower than expected, order
inflow growth of 27% surprised positively
Management’s confident push for 15-20% order inflow
guidance for FY12 improves visibility (HSBC est of 18%)
We believe recent stock underperformance offers attractive
opportunity; retain OW rating with a marginally lower TP of
INR2,187 (from INR2,341)

ITC- Strong growth momentum continues ::Macquarie Research,

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ITC
Strong growth momentum continues
Event
 ITC reported 4Q and FY11 results with strong performance across all
businesses. FY11 consolidated net sales and profit increased 16% and 20.4%
respectively. Key highlight was margin expansion across all businesses and
14% reduction in other FMCG business losses as margin expanded 183bp.
We believe other FMCG business is on track to become breakeven by the
end of FY12 as we highlighted earlier. Reiterate OP with a new TP of Rs225.
Impact
 Strong sales and profit growth. While net sales grew 16% YoY in FY11
(Rs222.7bn) and 4Q’FY11 (Rs59.6), net profit grew 25% and 20.4% YoY to
Rs12.8bn and Rs50.2bn in 4Q’FY11 and FY11 respectively. The company’s
EBITDA margin expanded 57bp and 21bp in 4Q’FY11 and FY11 respectively.
We believe pricing power in cigarette business coupled with flat tobacco leaf
prices and sourcing advantage provides little downside risks to ITC’s margins.      
 Strong performance in cigarette business despite volumes decline. ITC’s
cigarette net sales (Rs27.7bn) increased 13% YoY despite 2% volume
decline. Cigarette EBIT increased 18% YoY with EBIT margin expansion of
107bp, 10
th
quarter of margin expansion in the last 12-quarter. We think 5%
price hike in January without duty hike in Feb-2011 union budget and lack of
any worthy competitor will pose little threat to ITC’s cigarette revenue and
EBIT growth.
 FMCG business – growth momentum remains strong. ITC is seeing
strong growth in its foods and personal care portfolio with sales growth of 17%
and 23% YoY in 4QFY11 and FY11 respectively. EBIT losses (Rs678m)
declined 14% YoY in 4Q with improved margin.  Branded packaged food
sales grew 25% in FY11 and personal care portfolio is also performing well.
 Strong growth and margin performance in other businesses. Hotel
business reported sales growth of 17%, Paperboard and Packaging 14% and
agri business 9% YoY in 4Q. Hotel, agri business EBIT margin expanded by
219bp and 332bp and paper and packaging business margins were flat.  
Earnings and target price revision
 We raise our target price to Rs225 from Rs209 as we roll forward our model.
Price catalyst
 12-month price target: Rs225.00 based on a Sum of Parts methodology.
 Catalyst: Reversal of cigarette volume growth, breakeven of FMCG business
Action and recommendation
 Outperform maintained. ITC is our preferred play amongst large-cap FMCG
companies, given its robust core cigarette business along with expanding food
and personal care portfolio.
 It is trading at 19% discount to Hindustan Unilever (HUVR IN, Rs310, UP, TP:
Rs265) despite superior earnings growth, which we think is unwarranted.

Dr Reddy's Labs: Upcoming triggers : CLSA

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Upcoming triggers
Dr Reddy’s has three key triggers over the coming six months that will help the
stock perform relative to other pharma companies. While the US revenues for Dr
Reddy’s would come down in immediate quarter (as Allegra D24 goes away), we
expect branded formulations segment to sustain momentum. Authorized generic
launches of the US penicillin facility products (by Sept 2011) should also support
reported growth. Dr Reddy’s trades at attractive valuations on reported earnings in
comparison to the peer group. Maintain BUY.
Three key triggers over next six months
q We expect the stock to perform on back of three major product approvals and
launch. Each of these three products (Allegra D 24 OTC, Arixtra (fondaparinux)
and Zyprexa) would result in 5%+ upgrade to FY12 EPS.
q While the earnings in 1Q and 2QFY12 might not be as much as this quarter, we
expect strong YoY performance to be maintained. The quarterly earnings could
look even better as and when the approvals come in for above three products.
Key driver: US generics
q Revenues from North America grew 68% YoY and 24% QoQ for the quarter helped
by market share gain in Prilosec OTC, Prevacid and Allegra D 24 launch.
q While Allegra D24 will go away as the market has moved to OTC version where Dr
Reddy’s approval is awaited, we expect continued strength in the US revenues
based on ramp up in Prevacid, Prilosec OTC and Allegra OTC.
Except India, branded formulations growth sustains
q India formulations for the quarter grew only 5% YoY way below market average
due to high price discounts (bonus products) by competitors. The company
introduced 48 products during FY11 including one biosimilar.
q Branded export formulations grew 20% YoY led by strong performance in Russia
(OTC portfolio representing 25% of business there grew strongly).
q Margins were slightly lower during the quarter due to higher than expected R&D
spend. The company filed 20 ANDAs during the year higher than in FY10.
Valuations reasonable, exponential earnings growth
q Dr Reddy’s trades at reasonable valuations in comparison to some of the other
large cap pharma names and with a number of niche prospects going forward
valuations on reported basis look attractive.
q We expect c. 40% reported profit growth over FY11-13CL. Major opportunities like
Zyprexa and Geodon provide substantial uptick to FY12 profits. Approval of
fondaparinux ANDA could provide an immediate trigger.
q Authorized generic launches of the products from the US penicillin facility (by Sept
2011) should also support reported growth.

Tata Motors – JLR update - volume & bond funding ::RBS

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JLR recorded 8.5% yoy growth in sales volume to 19,431 vehicles for April month, which is
marginally below peer BMW but better than Daimler growth. It also concluded long-term bond
fund raising at around 8% per annum interest rate, which seems on higher side and will be
impacting short-term profitability.
April JLR sales volume performance
Volume no's YoY growth MoM growth
Jaguar 3,079 -13.5% -18.4%
Land Rover 16,352 13.9% -19.6%
JLR 19,431 8.5% -19.4%
Source: Company data
JLR sales volume growth eases to 8.5% yoy in April
􀀟 Jaguar sales volume continue to remain weak with dip of 13.5% yoy and 18.4% mom.
􀀟 Relatively, Land Rover performance was better with 13.9% yoy but 19.6% dip mom.
􀀟 JLR performance for April was sandwiched between global major performance for the month
as it was better than Daimler (7.8% yoy) but lower than BMW(14.8% yoy).
􀀟 Our strong volume growth assumptions for FY12F are based on new product Evoque launch
in CY11 with attractive pricing and product features.
JLR concludes long-term fund bond fund raising, but at high interest rates
􀀟 JLR today concluded long-term bond fund raising of £1bn at around 8% per annum coupon
rate, a combination of dollar and pound bonds with 8-10 years tenure.
􀀟 It concluded £500mn bond raising due in 2018 at 8.13% p.a., $410mn bond due in 2018 at
7.75% and $410mn bond due in 2021 at 8.13%.
􀀟 Management highlighted that the funds raised will be used to repay part of existing £1.65bn
net debt and fund FY12F increased capex of £1.5bn.
􀀟 The increased capex for FY12F (by 50% to £1.5bn of capex and R&D budget) and high
interest rates for long-term bonds to fund it will be putting pressure on short-term profitability
of the company.

HDFC Bank -Upgrade to OUTPERFORM :: Standard Chartered Research,

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 We upgrade HDFC Bank to OUTPERFORM from
IN-LINE.
 HDFC Bank stands out as a defensive play in a tough
macro environment. We expect it to continue to deliver
strong earnings growth of 30%/32% in FY12/13E.
 Strong loan growth of 25%, 10bps decline in NIMs and
low credit cost and lower cost ratios likely to be the key
earnings drivers in FY12E. Strong earnings growth with
high earnings visibility and higher-than-sector RoA of
1.6% are the key rating drivers for the stock.
 We tweak our price target as we build in 10bps lower
sustainable credit cost. We raise price target to Rs2,625
from Rs2,575. We value it at target P/BV of 4.2x.

Hindustan Unilever – Tailwinds improving ::RBS

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The recent 12% fall in oil prices likely improves the prospect of more moderate cost inflation
after a 21% jump in oil-related costs in 4QFY11. HUVR's advertising expenses to net sales
have been falling over the last three quarters. We upgrade to Buy due to these positive
tailwinds on margins and volume growth.

US dollar and copper – a surprising finding .:Macquarie Research

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US dollar and copper – a surprising
finding
Feature article
 An appreciating US dollar does not necessarily correlate with falling copper
prices. In 6 out of 12 ‘episodes’ of US dollar appreciation that we identify over
the past 10 years, copper prices actually increased. What appears to matter is
what is driving the appreciation of the US dollar – if it is an improving US
economy this is actually bullish for copper and commodities more generally.
We expect the US economy will continue to improve through 2011 and 2012.
Any resultant US dollar strength is therefore not a major concern for copper
or, indeed, for other commodity prices.

Adding Jiangxi Copper as a Buy and China Unicom as a Sell; .:Macquarie Research

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Adding Jiangxi Copper as a Buy and
China Unicom as a Sell; removing
Tencent from the Sell list
Changes to our Hong Kong list
We are adding Jiangxi Copper to the MarQuee Buy list and China Unicom to the
Sell list, and at the same time removing Tencent from the Sell list. Our analyst
Christina Lee believes Jiangxi Copper is the best Asia play on the rise in copper
prices and this week reiterated her Outperform rating on the stock.
Contrasting this, our China Unicom analyst Lisa Soh believes the stock to be
pricing in far too much optimism in light of 1Q11 earnings showing that earnings
have yet to bottom and subsequently the shares are overvalued.
Meanwhile, we are also removing Tencent from the Sell list despite Jiong Shao‟s
belief the company continues to be in a structural crossroads in which it will
struggle to find the next growth catalyst. The stock remains as an Underperform.
Jiangxi Copper – a play on higher copper forecasts
Our commodities team lead by Bonnie Liu in China has increased our 2012
copper price forecast from 500USc/lb to 525USc/lb as she believes Chinese
buying will start to increase given that demand remains strong and that inventory
levels have fallen to more reasonable levels. With a 90% correlation to
movements in the underlying copper price, analyst Christina Lee identifies
Jiangxi Copper as the best way to gain equity exposure to our bullish outlook for
copper. Christina estimates the company‟s earnings should increase by 1.3% for
every 1% hike in the copper price and that now is the time to buy the stock.
Jiangxi Copper (358 HK, HK$24.70, Outperform, TP: HK$37.00, Christina Lee)
China Unicom – losing a growth lustre
We are also adding China Unicom to the MarQuee Sell list. The stock is up more
than 40% YTD as the market prices in not only continued sharp improvement in
3G subscriber additions but also a strong revenue and earnings trajectory. With
the market now already factoring in continued momentum in 3G subscriber
additions and after the company posted a far weaker than expected 1Q result,
Lisa sees the balance of risk firmly to the downside. The shares are trading at a
36% and 78% EV/EBITDA premium to peers China Telecom and China Mobile.
China Unicom (762 HK, HK$15.20, Underperform, TP: HK$12.40, Lisa Soh)
Tencent – why we’re keeping it as an Underperform
Our final change among Hong Kong/China stocks is taking Tencent off the Sell
list although Jiong Shao keeps his Underperform rating. He believes the market
is not pricing in the maturity of Tencent's gaming business and the lack of growth
drivers while it is also investing in a variety of areas such as travel, tablet PCs,
social networking, video, etc, none of which he expects to be meaningful to
revenue in the near term. However, given the lack of a clear catalyst that would
lead to a sell off, we are removing it from the Sell list.
Tencent (700 HK, HK$218.40, Underperform, TP: HK$135.00, Jiong Shao)