22 June 2011

IT Services:: Sector downgrade ::CLSA

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Sector downgrade
We are downgrading our sector recommendation for Indian IT from
Neutral to Underweight as we watch the margin of safety in Indian IT
stocks recede. We see three extant islands of optimism being tested in
Indian techs in coming months. 1) 20%+ growth is achievable in
FY13/14 for Tier-1 vendors. 2) Visa issues are unlikely to alter business
prospects. 3) Valuations of Tier-1 techs are not at risk. We expect the
upcoming months to be a downward inflexion point for trends in all three
parameters driving stock prices down, though June quarter results are
unlikely to show any material proof points. Indian IT holds little promise
of sustainable absolute returns hereon. We are downgrading TCS and
Infosys to Underperform and have no positive ratings in the sector now.
Three questions before Indian IT
q Is 20%+ growth achievable in FY13/14? While demand trajectory is good for now,
it has flat-lined after the surge last year, posing risks to street revenue forecasts
for future years. Also, CLSA’s strategist Russell Napier’s forecast of a rise in US
treasury yields to potentially deflationary levels could impact growth prospects.
q How much is the visa issue hurting? Newsflow on the visa front continues to be
negative across countries with rejection rates in US currently running at almost
40%, up from 5%, 18 months back. We see the visa issue fundamentally altering
the business model for Indian techs with its operational (inability to staff projects
on time) as well as commercial (higher visa/subcontracting costs) impact.
q Can valuations of Tier-1 techs sustain? Valuations of Tier-1 techs need to contend
with lower (mid to high teens) revenue/EPS Cagr outlook, as well as the challenges
from business transformation that lie ahead. The risk of a potential IT spending
slowdown further raises the spectre of valuation compression.
Where is the disconnect with bullish management commentary?
q Bullish management commentary is comforting, but perhaps not actionable given
the already high street expectations (20%+ growth for tier-1 techs over next few
years) and the history of the sector’s major moves (2001, 2003 and 2007), where
company talk remained positive well into the demand flux.
q Moreover, while confidence on near-term demand remains strong across vendors,
commentary on FY12 growth achievement has gradually shifted from the confident
certainty earlier this year to hopes of a 2H pick-up.
q Past trends indicate that expectations of back-ended growth have seldom borne
fruit and have been de-railed due to a range of unanticipated causes. We believe
that the current macro overhang could likely cause an encore later this year.
See absolute downsides in all stocks
q As our checks point to moderating growth, within a more challenging business
(visas + need for non-linearity) and cost (wage hikes + local hiring) dynamic, we
see absolute downsides for tech stocks, especially over the short to medium term.
q While a major upgrade of the current earnings trajectory is a necessary trigger for
stock performance, even minor EPS downgrades could have a disproportionate
impact on valuations and stock price. As such, investment in IT stocks has an
unfavourable risk-reward equation for now.
q We now have a negative rating on all stocks in our Indian IT coverage list.
Stock-specific issues
q TCS: Within the sector, company credentials remain very strong but the stock
needs to contend with high expectations and over-ownership.
q Infosys: FY12 hopes have moderated but FY13 expectations remain elevated.
Internal issues seem sorted but an unfavourable macro will likely play spoilsport.
q Wipro: Achievement of street expectations is contingent on a 2HFY12 pick-up by
which time we expect demand environment to soften. Internal issues will take time
to sort out limiting financial performance c.f. peers.
q HCL Tech: Aggression in the market could drive industry-leading growth but at the
cost of margin impairment. High expectations leave little room for disappointment.


Goldman Sachs:: Hike inline with expectations; markets in risk-off mode as RBI fights inflationary pressure

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India Weekly Kickstart
Portfolio Strategy Research
Hike inline with expectations; markets in risk-off mode as RBI fights inflationary pressures
 The decline was broad-based with CNXIT Index (-4.5%) and CNX Energy Index (-4%) faring the worst wow.
 Mild foreign outflows of US$ 203mn wow and domestic inflows of US$ 251mn, as of the close of June 15, 2011.
 WPI print came in at 9.1% yoy for May, higher than expectations of 8.7% yoy. Core & food prices rose sharply.
 De-risking continued across Asia as markets fell almost 3% for the second consecutive week.
Overview
Although the 25bp hike was inline with expectations,
markets lost 2.2% wow after the RBI reiterated its
hawkish stance despite softer domestic demand and
mainly due to sticky inflation. The WPI print for May
came in at 9.1% yoy vs. expectations of 8.7% yoy. As
expected, March headline inflation was revised up to
9.7% yoy vs. 9% previously. Rate sensitive stocks
such as CNX Pub. Sector Banks declined 2.2% wow
while CNX Info. Tech. slid 4.5% wow as the Eurozone
debt crisis deepened. Overall, the macro-cyclical
environment remains challenging for Indian equities
amid sharp valuation compression.
NIFTY price performance
NIFTY fell 2.2% last week, down 12.5% ytd
Source: NSE, Datastream, GS Global ECS Research.
Foreign and domestic flows
FIIs have sold US$ 178mn ytd, while DIIs bought
US$ 3.4bn ytd as of the close of June 15, 2011.
Earnings sentiment and relative valuation
MSCI India Telcos. & Financials saw the weakest
EPS sentiment wow. MSCI India is currently
trading at 13.9X forward earnings. FY12E and
FY13E Earnings continue to be revised down.
Commodities
MCX Commodities declined 3.2% last week as
Energy (-5.9%), Metals (-1.4%) and Agri
commodities (-2.6%) pulled back sharply.
Focus
Hiking Away – A stream of poor macro data has
led to renewed expectations of policy tightening
despite the RBI having hiked rates by 75bps since
May 2011.


Coal India,-A monopoly with supply-side constraints:: HSBC Research,

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Coal India (COAL)
Initiate N(V): A monopoly with supply-side constraints
 State-owned monopoly set to benefit from spiralling demand,
which should double by FY17
 But supply constraints and limited flexibility on pricing could
cramp earnings growth
 Stock up c60% since IPO, so valuation stretched. Initiate with a
Neutral (V) and a TP of INR425

India Macro Watch- Raining worries ::BofA Merrill Lynch,

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India Macro Watch
Raining worries  
Bottom line: Rains under a cloud…    
„ We grow increasingly worried at the prospect of poor rains when agflation is
already running high for almost 2 years. The Met has just announced that the
south-west monsoon will most likely be below normal at 90-96% of normal
downgrading its earlier 98% of normal forecast. Of even greater concern is that
rains during the sowing months of July (93%) and August (94%) are seen to be
relatively weak. As we have warned, the premature end of the La Nina, the
cooling of the Pacific that brings India rains, is hurting. Heavens forbid, but a
poor monsoon could pose a 50-75bp downside risk to our 7.8% FY12 growth
forecast. For details, do read our La Nina report.  
Why it matters?  … fuels agflation, growth risks
„ We assess that a poor monsoon, if it materializes, could pose a 50-75bp
downward risk to our 7.8% FY12 growth forecast. Given that the autumn
harvest is 7% of GDP, the direct impact of a poor crop on growth should be a
relatively muted 25bp. The bigger damage will likely come from RBI action to
anchor inflation expectations. Note a 5% swing in agflation impacts inflation by
175bp (Table 2). If poor rains do indeed sustain high agflation for a third year,
Governor Subbaro will find it very difficult to pause even in October (after our
expected 50bp of rate hikes). As it is, rising lending rates are already slowing
growth. We will review our macro forecasts in mid-July. Do see our growth
stress test report here.
Key points: What to watch: SOI, rains, sowing    
„ SOI: We advise investors to track the Southern Oscillation Index, (calculated
from the monthly or seasonal fluctuations in the air pressure difference
between Tahiti and Darwin) as a lead indicator for Indian rains. The SOI has
dropped to 2.6 from 25.1 on May 1 (Chart 1). If it stabilizes in the current
neutral zone between the La Nina (which needs a +8 read) and the El Nino
(which needs a -8 read), as the Australian weather bureau expects, the
monsoons may not be too badly affected. For daily readings, hit:
http://www.bom.gov.au/climate/enso/monitoring/soi30.png.
„ July-August rains: We would also watch the precipitation during the sowing
months of July-August. Besides, how much it rains, it is also important to see
where it rains. The only saving grace is that the Met expects a better spatial
distribution with all regions projected to get 90+% of normal rains.
„ Sowing: We would also monitor the sowing data that the Government has
already begun releasing every Friday. For ready reference, Table 3 presents
the cropping calendar for rice, the principal crop of the autumn harvest. A bit of
good news is that sugarcane cropping is slightly better than last year. Early
leads suggest a 25% jump in raw cotton sowing that should pull down prices

Bharti Airtel : Market Share Loss – More Than Just a Leader’s Curse ::Citi

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Bharti Airtel (BRTI.BO)
 Market Share Loss – More Than Just a Leader’s Curse
 
 Bharti’s top line has been slower than peers — Bharti’s topline has grown slower v/s
peers (Voda/Idea) over the last few qtrs; generally attributed to scale, and a lesser
extent to its less aggressive pricing approach. A deeper analysis over last 10qtrs, in
their top 5 circles (45-55% of revs) suggests Bharti has a) grown top-line slower in its
biggest circles b) lost rev/share across more circles (4/5 v/s1/5 & 1/5 for Idea/Voda);
and 3) GSM peers have done relatively better in key overlapping circles.
 Revenue share loss in 4/5 top circles – While Bharti’s overall revenue growth at
1.4% has lagged peers (Voda – 2.6%, Idea- 3.9%), it has lost share in 4/5 of its largest
circles; ranging from 180-590bps (Karnataka, its biggest market -11% of rev, lost
300bps). In contrast, Idea/Voda have lost mkt share in only 1/5  of their biggest circles
(20/180bps respectively ) –  with  revenue share gains of 110-470bps (Vodafone) and
120-660bps (Idea) respectively, in the remaining 4/5 circles. Bharti is losing ground in
its biggest sectors – its competitors are gaining share in their own biggest circles.
 Idea & Vodafone have done better where they lead or overlap — Idea, even its
largest circle (Maharashtra), saw higher topline (4.4% v/s 1% for Bharti in last 10 qtrs).
Vodafone too has done better in overlapping circles (TN/Delhi) - gaining 360/470bps
rev share v/s Bharti’s 180/590 loss. Interestingly even in Mumbai, Vodafone’s rev share
loss (180bps) is low compared to Bharti (310bps). Bottom-line, Bharti’s revenues have
lost ground to its major and marginal competitors.
 Combination of premium pricing and a reluctance to match competition – In our
view, Bharti’s sub-par performance is because of its reluctance to match tariffs, even as
competition does so. It’s imputed ARPU (even in circles where it lags Idea/Voda), has
been at a premium to peers; potentially leaving it susceptible even in a stable pricing
market.  Most recent data (4Q11) suggests some rebalancing by Bharti (7% ARPU fall
in top 5 circles; 2-4% for Voda/Idea), but further risks remain.
 Some further trade-off ahead? – We believe some of the premium pricing pain has
already been borne by Bharti – but some risks remain given its still premium pricing /
ARPU (30% higher), and recent revenue trends vis-à-vis its primary competitors.  

FII & DII trading activity on NSE and BSE as on 22-Jun-2011

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FII trading activity on NSE and BSE on Capital Market Segment
The following is combined FII trading data across NSE and BSE collated on the basis of trades executed by FIIs on 22-Jun-2011.
FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
CategoryDateBuy ValueSell ValueNet Value
FII22-Jun-20111842.762130.16-287.4

 
 
Domestic Institutional Investors trading activity on NSE and BSE on Capital Market Segment
The following is combined Domestic Institutional Investors trading data across NSE and BSE collated on the basis of trades executed by Banks, DFIs, Insurance, MFs and New Pension System on 22-Jun-2011.
DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
CategoryDateBuy ValueSell ValueNet Value
DII22-Jun-2011824.99667.62157.37
 


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FII DERIVATIVES STATISTICS FOR 22-Jun-2011

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FII DERIVATIVES STATISTICS FOR 22-Jun-2011 
 BUYSELLOPEN INTEREST AT THE END OF THE DAY 
 No. of contractsAmt in CroresNo. of contractsAmt in CroresNo. of contractsAmt in Crores 
INDEX FUTURES854062244.02690271808.4764479616971.58435.55
INDEX OPTIONS1865274926.441992175249.45182015948035.82-323.02
STOCK FUTURES700621783.11642171664.80127995029758.75118.31
STOCK OPTIONS339187.40279173.4825708628.8013.92
      Total244.76

 

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BSE, Bulk deals, 22/6/2011

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Deal DateScrip CodeCompanyClient NameDeal Type *QuantityPrice **
22/6/2011524412Aarey DrugsURMILABEN GOVINDBHAI PATELS2502723.05
22/6/2011522150Aditya ForgeNITIN RASIKLAL PAREKH (HUF)B250007.82
22/6/2011590114Arunjyoti EnterprisesNARENDRAKUMAR SHAHB3500041.57
22/6/2011590114Arunjyoti EnterprisesARJUN JAGDISH DUNGARSHIS4000041.66
22/6/2011531591Bampsl SecSURENDRA KUMAR GUPTAB9152722.03
22/6/2011531591Bampsl SecSANTOSH KUMAR GUPTAS5880002.03
22/6/2011530839Clio InfotechCHHAYA UMESHCHANDRA TRIVEDIS1564473.70
22/6/2011524590Dinesh AllorgaSITABEN PRAVINBHAI PATELB3400023.18
22/6/2011524590Dinesh AllorgaPRADHANJI PRATAP THAKORS2110023.18
22/6/2011524590Dinesh AllorgaBHAILAL DAHYABHAI PATELS2240023.10
22/6/2011533218Emami InfrastructureMILESTONE SHARES & STOCK BROKING PRIVATE LIMITEDS26942930.00
22/6/2011533104GLOBUS SPRCITIGROUP GLOBAL MARKETS MAURITIUS PRIVATE LIMITEDS192706136.00
22/6/2011530579Golden SecGBK RESOURCES PRIVATE LTDS1620017.53
22/6/2011500160GTLGENUINE STOCK BROKERS PVT. LTD.B888081119.97
22/6/2011500160GTLCROSSEAS CAPITAL SERVICES PRIVATE LIMITEDB1203920120.29
22/6/2011500160GTLA K G SECURITIES AND CONSULTANCY LTDB743826119.27
22/6/2011500160GTLA K G SECURITIES AND CONSULTANCY LTDS743826119.35
22/6/2011500160GTLCROSSEAS CAPITAL SERVICES PRIVATE LIMITEDS1205380120.50
22/6/2011500160GTLGENUINE STOCK BROKERS PVT. LTD.S888081120.06
22/6/2011532758KEW IndsREKHA KIRAN MEHTAB1056059.13
22/6/2011506128Krishna DeepRAJ REALESTATE & FINVEST P LTDB45350106.72
22/6/2011531731Kuvam IntlVANRAJSINGH KAHORB57754222.66
22/6/2011533343LOVABLECROSSEAS CAPITAL SERVICES PRIVATE LIMITEDB93487400.10
22/6/2011533343LOVABLECROSSEAS CAPITAL SERVICES PRIVATE LIMITEDS93487401.39
22/6/2011512167Matra RltyTRIPURARI PROPERTIES PRIVATE LIMITEDB832513.59
22/6/2011531843MYM TechRICHA AGARWALB487007.85
22/6/2011532641Nandan EximCHIRIPAL INDUSTRIES LIMITEDB30000002.60
22/6/2011532641Nandan EximBRIJMOHAN DEVKINANDAN CHIRIPALS30000002.60
22/6/2011530557NCL ResearchVRP FINANCIAL SERVICES PVT LTDS27974146.00
22/6/2011530557NCL ResearchSURFACE FINANCE PVT LTDS37000146.00
22/6/2011530557NCL ResearchRUPAK DEVELOPERS PRIVATE LIMITEDS34584146.0

NSE, Bulk deals, 22-June-2011

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DateSymbolSecurity NameClient NameBuy / SellQuantity TradedTrade Price /
Wght. Avg.
Price
Remarks
22-Jun-2011ANSALAPIAnsal Properties & Ind LtIPRO FUND LTDSELL18,07,48539.00-
22-Jun-2011ANSALAPIAnsal Properties & Ind LtLOTUS GLOBAL INVESTMENTS LIMITEDBUY18,07,48539.00-
22-Jun-2011CREWBOSCrew B.O.S. Products LimiSAL REAL ESTATES (P) LTDSELL69,04890.45-
22-Jun-2011EMAMIINFRAEmami Infrastructure LtdMILESTONE SHARES AND STOCK BROKING PRIVATE LIMITEDSELL2,50,91330.00-
22-Jun-2011GLOBUSSPRGlobus Spirits LimitedCITIGROUP GLOBAL MARKETS MAURITIUS PRIVATE LIMITEDSELL2,02,994136.00-
22-Jun-2011GOLDINFRAGoldstone Infratech Ltd.D K JAIN.SELL2,25,00018.02-
22-Jun-2011GTLGTL LimitedCROSSEAS CAPITAL SERVICES PVT. LTD.BUY12,12,572120.38-
22-Jun-2011GTLGTL LimitedCROSSEAS CAPITAL SERVICES PVT. LTD.SELL12,12,761120.30-
22-Jun-2011GTLGTL LimitedGENUINE STOCK BROKERS PVT LTDBUY14,04,311119.78-
22-Jun-2011GTLGTL LimitedGENUINE STOCK BROKERS PVT LTDSELL14,04,311119.83-
22-Jun-2011LOVABLELovable Lingerie LtdCROSSEAS CAPITAL SERVICES PVT. LTD.BUY93,556401.12-
22-Jun-2011LOVABLELovable Lingerie LtdCROSSEAS CAPITAL SERVICES PVT. LTD.SELL93,556400.17-
22-Jun-2011TIMBORTimbor Home LimitedA K G SECURITIES AND CONSULTANCY LTD.BUY1,13,57284.43-