Goldman Sachs:: Buy Oil & Natural Gas Corp. (ONGC) Return Potential: 24%

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ACTION
Buy
Oil & Natural Gas Corp. (ONGC.BO)
Return Potential: 24% Equity Research
Improving fundamentals and regulations, still inexpensive; CL-Buy
Source of opportunity
We revisit our positive investment view on ONGC by taking a deep dive
into the improving fundamentals, regulatory tailwinds and valuation of
individual segments. We believe the following trends provide attractive
investment opportunities over the medium term at inexpensive valuations:
1) rising domestic production from the increased JV share, IOR/ EOR gains
and marginal field developments, 2) transparent subsidy-sharing
mechanism that is likely to help ONGC’s cash flows, 3) increased
production overseas improving overall realization as oil prices stay robust
4) likely natural gas price hikes by govt. to incentivize further investment.
Catalyst
1) Higher-than-expected overseas production, 2) continued improved
performance in mature, domestic fields as EOR/IOR projects show results,
3) likely implementation of a formal subsidy-sharing mechanism, which
would reduce uncertainty around cash flow, 4) likely increase in consensus
earnings as subsidy burden declines in new mechanism, 5) Rajasthan
royalty and cess issues could be settled in favour of ONGC.
Valuation
We reiterate Conviction Buy on ONGC with 12-m EV/GCI vs. CROCI-based
TP of Rs340, implying 24% upside. A US$1/bbl change in net oil price
realization has a 1.8% impact on FY12E EPS and a US$1/mmbtu change in
natural gas prices has a 6.6% impact. With FY12E EV/1P reserves of
US$7.1/boe, it is one of the most inexpensive stocks globally. Despite low
operating and F&D costs, reasonable reserve replacement , high reserve
life and attractive returns, ONGC is trading at FY12E EV/DACF of 5.5x vs.
an 8-yr historical range of 4.0x-9.5x. The SOTP valuation is Rs365 per/sh.
Key risks
1) Delay in the transparent subsidy mechanism; 2) high subsidy burden, 3)
lower volume from legacy fields, and 4) overpaying for acquisitions.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List

LTFHL completes pre-IPO placement; Maintain Buy on L&T ::Goldman Sachs

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LTFHL completes pre-IPO placement; Maintain Buy on L&T
News
L&T Finance Holdings (wholly owned by Larsen & Toubro) has raised Rs3.3
bn (US$ 74.4 mn) from a pre-IPO placement at Rs 55 per share to Capital
International PE fund. The Company intends to launch its IPO later in the
month. The company expects to raise close to Rs 17.5 bn (US$390 mn)
through the IPO which would be used for repayment of ICD and
strengthening the capital base of the finance business.
Analysis
We currently value L&T Finance Holdings in our SOTP at 1.5XFY12E P/B for
the retail and infrastructure finance business and asset management
business at 5% of AUM. We add the market value of the investment
portfolio to arrive at a valuation of Rs 67 bn (US$ 1.49 bn) (pre-money). In
our value for LTFHL above, we do not incorporate the impact of the
company obtaining a banking license, given limited visibility on eligibility
criteria and the timeline.
Based on the pre-IPO placement price of Rs 55 per share, L&T
management estimates the pre money valuation for the company would be
close to Rs 80 bn (US$ 1.78 bn) which is at a 20% premium to our current
valuation. If the IPO goes through at the valuation at which the pre-IPO
placement has been completed, we estimate there could be potential
upside of Rs 23 (1%) to our current SOTP.
Implications
We make no change to our TP and retain our Buy rating on the stock.

India Contenders favour Autos:: BofA Merrill Lynch,

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India Contenders favour Autos
�� Preference for cyclicals continues but no clear leadership
In July, the India Contenders are mainly dominated by Auto/Dur/Services, Energy
and Software. While the Implied Allocation model is most overweight cyclical
Consumer Discretionary, Information Technology and Energy, it is underweight
Industrials, Financials, Materials suggesting that there is no clear sector
leadership in terms of earnings and price momentum. Defensive sectors are
bunched together in the middle of the spectrum (cover chart).
India Contenders: Unchanged but favors Autos/Dur/Services
The India Contenders are unchanged this month. The longest standing
Contenders are Bajaj Auto, Bank of Baroda and Tata Motors (11 months). The
other India Contenders are Coal India, HCL Technologies, Mahindra & Mahindra,
Petronet LNG, Sterlite Industries (India), Tata Consultancy Services, and Titan
Industries. Three of the ten Contenders are from Autos/Dur/Services and the only
stock which looks unattractive in our model is Maruti Suzuki (chart 6).
New India Defenders: Ashok Leyland, IRB and Lanco
The new India Defenders are Ashok Leyland, IRB Infrastructure Developer, and
Lanco Infratech. The longest standing Defender is DLF Ltd (11 months). The
other India Defenders are Housing Development & Infrastructure, Mphasis,
Oriental Bank of Commerce, Reliance Communications, Steel Authority of India,
and Unitech.


India Contenders
Company Name Sector BofAML Fundamental Page
Opinion
Bajaj Auto Auto/Dur/Services Underperform
Bank of Baroda Banks Neutral
Coal India Energy Neutral
HCL Technologies Software Buy
Mahindra & Mahindra Auto/Dur/Services Neutral
Petronet LNG Energy Underperform (
Sterlite Industries (India) Materials Buy
Tata Consultancy Services Software Buy
Tata Motors Industrials Buy
Titan Industries Auto/Dur/Services –
* New Contenders this month



India Defenders
Company Name Sector BofAML Fundamental Page
Opinion
Ashok Leyland* Industrials Underperform
DLF Ltd Div Financials Buy
Housing Development & Infrastructure Div Financials Neutral
Irb Infrastructure Developer* Industrials
Lanco Infratech* Industrials Buy
Mphasis Limited Software Underperform
Oriental Bank of Commerce Banks Buy
Reliance Communications Telecom Underperform
Steel Authority of India Limited Materials Underperform
Unitech Limited Div Financials Neutral
* New Defenders this month

Oberoi Realty ): Preferred India Property Play :: Morgan Stanley Research,

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Oberoi Realty (OEBO.BO): Preferred India Property Play

What’s Priced in? What’s the Market Missing?
 The market expects Oberoi to be negatively affected by the ongoing
slowdown in the Mumbai property market caused by adverse macro
factors and sticky high property prices. We believe the slowdown will
be short term, since the mid- to longer-term demand drivers (GDP
growth, employment creation, salary growth) are intact.
 The market we believe is discounting the Garden City and Splendor
projects while Oasis (Worli) and Exotica (Mulund) do not appear fully
priced in. Successful launches of Oasis and Exotica in the next few
months should allow better discounting of these two projects.
 Oberoi has a much stronger balance sheet (Rs14.6bn net cash, zero
debt) and cash flow situation compared to its peers in the Mumbai
market. It is well positioned for new land/project acquisition which are
now happening frequently (NTC Land auctions, Raymond Land Sale,
HUL Worli property sale). The stock we believe is not pricing this in
(28% discount to March 2011e NAV compared to 31% for our
coverage universe).
 Oberoi being a premium developer in the land scarce Mumbai market
is an ideal choice for JDA partner. This brand upside is missed by the
market, we believe.
Near-term Catalysts
 Launch of Exotica (upon regulatory clearances), Oasis and Exquisite
III projects
 Pre-leasing of Commerz II – Phase 1
 Pre-sales ramp-up of Exquisite, Esquire and Splendor Grande
 Outcome of HUL Worli land sale and Raymond Thane land sale
 10-15% price correction in Mumbai residential market
 Peaking out of interest rate

Bear case assumes tough Mumbai residential market

conditions (Rs80/share), stagnant commercial market

(Rs28/share), idle cash (Rs29/share) and loss of

Sangamwadi project (Rs8/share)

13x F12e

EPS

Bear

Rs225

Includes March 2011e NAV of Rs337 with base case at

10% premium to this forward NAV. Valuation assumes 15%

discount rate, 5% cost-price inflation and 9.5% cap rate

21x F12e

EPS

Base

Rs370

Bull case assumes boom in physical property markets

(Rs36/share), new land acquisition (Rs26/share), pricing

upside for commercial property (Rs19/share) and Juhu

hotel materialises (Rs18/share)

27x F12e

EPS

Bull

Rs469

Derived from Base Case

Price Target

Rs370

Oberoi Realty

Methodology: We value Oberoi using a net asset value methodology, wherein we calculate the value of the real estate

business in two parts – the current land bank and surplus cash (land acquisition expectations). We arrive at our price target

of Rs370 (10% premium to our March 2011 NAV estimate of Rs110.5bn; Rs337/share) by adding the value of saleable

projects (Rs53.1bn), lease assets (Rs25.8bn), hospitality assets (Rs4.4bn), use of surplus cash (Rs9.6bn), and F2011

estimated net debt (Rs17.5bn cash surplus).

Key Risks: Unable to find value-enhancing land bank in Mumbai; planned projects (Juhu, Sangamcity) currently facing

hurdles do not materialize; sharp slowdown in Mumbai property market; enhanced regulatory risks; inability to maintain

premium pricing over peers.

India Strategy 1QFY12 Preview: Weak results to drive more downgrades �� BofA Merrill Lynch

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India Strategy
1QFY12 Preview: Weak results
to drive more downgrades
�� Weak results expected; 4 key points
First, our bottom up Sensex EPS growth estimate at under 12% (10.5% ex-PSU
oil cos) is the weakest forecast in the past 7 quarters. We expect markets to give
up recent gains and correct back to below the 18,000 levels. Second, profit
growth continues to remain concentrated with top-5 companies contributing more
than 70% of the growth. We expect 6 out of the 30 companies to show a decline
in profits. Third, margins on an aggregate basis are expected to continue showing
decline on a YoY basis across most sectors. Lastly, we continue to expect
downgrades to our Sensex EPS from 1225 currently to below the 1200 levels.
EBITDA margin decline to continue; Telecom & IT likely worst hit
Aggregate Sensex EBITDA margins are expected to show a decline by 40bp.
This is largely led by Real Estate (-640bps YoY), Telecom (-250bps YoY) and
Software (-200bps YoY).
Energy, Pvt banks lead growth; Autos, Telecom & SBI drag
Among Sensex companies, Energy (RIL), Pvt. Banks (ICICI & HDFC Bk), Sterlite
& Infy are expected to be the key contributors of the growth. On the other hand
SBI, Autos (Maruti, Tata Motors), Telecom (Bharti) & TISCO are expected to drag
down growth.
Downgrade phase expected to continue
FY12E Sensex EPS has seen significant downgrades over the last quarter.
Because of rising interest rates and input costs, we continue to expect more
downgrades to our bottom-up FY12E Sensex EPS of Rs1225 (to below 1200).
Result Buys: ICICI Bank, HCL Tech, Lupin
Results Underperforms: Ambuja, SAIL, Ashok Leyland
Mid Cap Buys: Apollo, Eicher, Havells, Divis

IT Services ::1QFY12 Preview:: BofA Merrill Lynch,

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IT Services
Potential result outperformers: TCS, HCLT
Potential result underperformers: Wipro
Volume growth this qtr should be seasonally better than
Mar quarter
We expect volume growth of ~3-5% for tier 1 vendors except Wipro (flattish
volumes qoq) and a positive rub-off from price realizations. TCS and HCLT are
likely to continue leading volume performance while Infy is likely to see modest
Q1 volumes post the revenue run-down in insurance and telecom verticals seen
last quarter.
Wage hikes/visa costs to impact op margins this qtr
This is a wage hike quarter for Infosys, Wipro, TCS, Hexaware and other
vendors, and margins are expected to sequentially dip. June quarter also should
see visa application costs impacting margins by 50-80bps qoq this quarter.
Utilization should move up qoq and help to offset wage increase partly


Realization should move up, though pricing still tough
Price realization for vendors should continue to show a positive uptick in quarter
helped by an Improving revenue mix with pick up in higher margin services like
application development and enterprise solutions and Cost-of-living-adjustment
(COLA) related increases. Billing rate increases beyond COLA look difficult at this
point of time and are contingent upon demand environment remaining strong.
Demand, pipeline commentary to stay positive
We expect the vendors to maintain a bullish tone on the deal flow and pipeline
opportunities, based on (1) continued shift towards use of “off-shoring”, (2) market
share gains for Indian vendors from a strong deal renewal pipeline and (3) limited
exposure to European banks (4-6% of revenues). Key risk: Further deterioration
in macro outlook from here on could impact decision making and discretionary
spend.
Expect positive surprise from TCS & HCLT
TCS: Expect 5-6% USD rev growth and ~200bps wage hike led EBIT margin
decline. Strong yoy revenue growth 30% (Rupee Terms) and earnings growth of
21%. The impact of promotions will be seen in the Sep quarter for TCS
HCL Tech: Full year results for HCLT. We expect them to show industry leading
revenue growth and margin expansion on operating leverage. They will likely
announce wage hike for FY12 which will hit them next quarter.
Infosys: May not beat USD revenue guidance of 3.5% at upper end by more than
1-1.5%. We forecast ~5% revenue growth for Infy, but lower margin decline of
~250-300bps vs the guided 400bps, given likely pricing uptick. We might see
them leaving revenue and earnings guidance largely unchanged, except for
margin beat in Q1
Wipro: Weak quarter due to management distraction post CEO change and
organization restructuring. Margin decline less than for peers given they will be
impacted by only one month of wage hike.

India Financials::1QFY12 Preview:: BofA Merrill Lynch,

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Sector Name: India Financials
Potential result outperformers: ICICI Bk
Potential result underperformers: Axis Bank & IDFC
Result Expectations – Key Highlights
1Q earnings: weakness ahead for most govt. banks
Bank stocks have corrected by 5-15% in past quarter on expectations of rising
rates, slowing growth / weak margins and asset quality pangs. We, however,
believe most of this is priced in and likely to be captured in 1QFY12 earnings.
Earnings growth: a mixed-bag; weak for govt. banks, private bks at+30%
Earnings growth expected to be a mixed-bag for banks, with private banks
(barring Axis Bk) leading the pack at +30%. Most govt. banks may show decline in
earnings. ICICI Bk and HDFC Bk, to stand out with +30-35% earnings growth driven
by +21-22% topline growth as margins hold up yoy for both. Axis Bk may disappoint
(+24-25% yoy growth) owing to margin pressure (+20-25bps yoy decline) and higher
than estimated hit on corporate bond book owing to rise in yields. Amongst smaller
names, Yes Bk and Federal Bk likely to report +30% yoy growth.


Govt. banks’ earnings likely to show similar trend of 1) topline growth of +15-16%
yoy led by volume growth of +20-22% yoy, but margin compression of 15-25bps.
Operating earnings to grow +10-12% yoy for most govt. banks. However, net
profit to decline for most owing to higher regulatory provisions ‘/ normalized credit
costs and possible MTM hits. SBI likely to show 30% decline. Few govt. banks
likely to show +8-12% growth may be PNB, BOB and Indian.
Topline growth in mid-teens for govt banks, as margins decline yoy
We estimate govt. banks to report topline (NII) growth of +15-16%. This is driven
by an 21% loan growth and 15-25bps decline in margins yoy led by 1) lower
incremental LDRs; 2) Higher PSL (priority sector lending) requirements; 3) impact
of savings rate increase by 50bps and; 4) rise in funding costs (ahead of lending
rate hikes). ICICI Bk and HDFC Bk stand out with +21-22% yoy topline growth.
NPL: ‘area of watch’; credit costs to remain high on regulatory req.
NPL slippages likely to remain elevated in 1QFY12, partly due to the residual
impact of online NPL recognition (~15-25% of loans not yet covered for most
govt. banks). Credit costs to be also higher yoy on low base effect and RBI’s new
provisioning norms (on restructured loans and NPL aging). ICICI Bk and HDFC
Bk to still have the best asset quality (though may also see qoq NPL rise).
MTM loss on bonds could add on to earnings woes for few govt. banks
MTM losses on bonds to be minimal. The 10 year yield was at 7.9% on June 30th
(up 39bps in the qtr). Most banks have a cushion of upto ~8% and for every
10bps rise in yields, impact on earnings is est. at 1-1.2%. SBI (Rs6bn) in the large
banks and OBC, BOI and Corporation Bk may be hit the most. We are not
factoring impact arising from shifting of the AFS portfolio to the HTM category.
NBFCs: volume growth strong, but some margin pressure
We expect most NBFCs to show a +20-25% yoy volume growth. However,
margins for some may be down +20-30bps owing to rise in funding costs. HDFC
Ltd., in our view, will maintain its spread of 2.3%, but LIC Hsg. and STFC may
see a margin decline of +20-30bps qoq.

Cement ::1QFY12 Preview:: BofA Merrill Lynch,

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Cement
Potential result outperformers: UltraTech, India Cements
Potential result underperformers: Ambuja
Result Expectations – Key Highlights
􀂄 Stable profits; demand weakness to offset tad better margins: For Apr-
Jun ’11 (1Q FY12), we expect sector EBITDA to be up 5% YoY and flat QoQ.
The YoY uptick will be primarily due to higher realizations (up 11% YoY). On
a QoQ basis, profits will be stable as price increases (+1-2% QoQ) will be
offset by higher costs (+2% QoQ). The sector’s overall EBITDA per ton is
forecast at ~Rs1000/ton, up 3-4% YoY & QoQ.
􀂄 Mixed price trends in 1Q FY12; west & central witness weakness:
Cement prices on a pan-India basis averaged ~Rs263/bag in 1Q FY12
largely in line with 1Q levels. Prices were up QoQ in north & south India while
west and central India posted decline and east was stable QoQ.
􀂄 Costs continue to rise: Input costs for the industry are likely up 13% YoY
led by higher coal prices esp. for linkage coal. On a QoQ basis, the impact of
higher coal prices will likely be moderated by lower overheads versus a yearend
push that is often seen in 4Q.
􀂄 UltraTech, India Cements expected to outperform; Ambuja expected to
underperform: Among pure cement majors, companies like UltraTech and
India Cements with relatively large exposure to south India will likely post
both YoY & QoQ EBITDA growth as cement prices in south are up strongly
both YoY & QoQ. Ambuja, that has the highest volume exposure to west &
central India, is likely to be a relative underperformer.

Sector Name - Autos ::1QFY12 Preview:: BofA Merrill Lynch,

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Sector Name - Autos
Potential result outperformers: Eicher Motors
Potential result underperformers: Maruti Suzuki
Result Expectations – Key Highlights
􀂄 We expect double digit YoY growth in sales for the sector. However on a
sequential basis, sales are expected to decline, mainly due to seasonality
(CVs) and slowdown in cars as well as strike at Maruti. Profits are expected
to grow much slower due to inflationary cost pressures impacting margins.
􀂄 Two wheeler companies will likely register the strongest yoy growth rates,
followed by tractors. Commercial vehicle majors will report modest growth,
whereas car industry will register yoy declines.
􀂄 We expect Tata Motors’ consolidated sales to grow 21% YoY, driven by 27%
increase in JLR sales. However, standalone sales would be a drag, up just
12% yoy. We expect consolidated margins to decline 30bps yoy to 14.3%
due to unfavourable currency movements (impacting JLR) as well as higher
costs, reflected in EBITDA increase of 18% yoy to Rs.46.6bn. We expect
profit to decline 2% at Rs.19.7bn to reflect sharp decline in standalone
operations (down 28% yoy) and high interest and depreciation due to JLR
fund raising and capex respectively).
􀂄 Amongst other commercial vehicle companies, we expect Ashok Leyland’s
sales to increase just 6% yoy, despite significant increase in realization due
to 10% decline in volumes. Similarly margins are expected to decline 30bps
yoy, and net profit by 19% yoy. We expect Eicher to register strong 91%
profit growth in tandem with 54% increase in EBITDA due to higher sales and
improved efficiencies post-integration with Volvo.
􀂄 We expect Maruti’s sales to grow just 1% YoY, due to slight decline in
volumes following slower domestic consumption and strike at Manesar plant.
Margins are expected to decline 155bps due to higher input costs, rising
incentives and discounts and negative operating leverage. We therefore
expect EBITDA to decline by 17% yoy and net profit by 22% yoy to Rs.4.1bn.
􀂄 We expect M&M to register 31% yoy growth in sales, driven by 22% increase
in volumes. EBITDA will grow 14% yoy despite mix favourable high margin
tractor business, on expected margin decline due to higher input costs and
vat drawback. We expect profit to grow 7% yoy and decline 1% qoq to
Rs.6.0bn, restricted by increase in depreciation and tax expense.
􀂄 In the two wheeler space, Hero Honda is expected to record the strongest
growth (32% yoy) in sales driven by volumes (up 24% yoy). EBITDA growth
will however be restricted to 13% yoy on expectations of lower margins due
to cost pressures, thereby restricting profit growth to 13%. On a sequential
basis, we expect profit to grow 9%. Bajaj Auto will be the strongest performer
with 24% yoy increase in sales and similar 24% yoy increase in profit. We
expect margins to decline slightly on higher input costs. TVS Motor will
register 20% YoY sales growth. EBITDA will however improve 12% yoy and
profit 20% yoy due to operating leverage.

SKS Microfinance -Finance ministry introduces the MFI bill, Retain UW ::JPMorgan,

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SKS Microfinance Underweight
SKSM.BO, SKSM IN
Finance ministry introduces the MFI bill, Retain UW


RBI to get autonomy to regulate MFIs: The Finance ministry released
the “The Micro Finance Institutions Bill” which gives RBI the
authority to decide on the ceiling and tenure of the MFI loan, quantum
of maximum interest and fees to be charged and set net-worth
requirements for MFI operations. The bill does not specify any operating
parameters for MFIs but gives complete autonomy to RBI to regulate
MFIs. The bill will come into force once approved by the cabinet and
notified in the official Gazette.
 The MFI bill to override other laws: The bill clearly stipulates that
the provisions of the bill would override any state laws relating to
money lending. This could be positive for SKS given severe operational
restrictions under the APMF act but we believe collections would not
improve materially from existing AP portfolio, given the large time gap
since the introduction of the AP MFI act in Oct-10.
 RBI’s accepted recommendations in May-11 may apply: After
Malegam committee’s recommendations in Jan-11, RBI had accepted the
recommendations with some modifications. Given the regulatory
autonomy given to RBI for MFI regulations, we believe those accepted
guidelines would be operational framework for MFIs.
 Maintain Underweight: This is a positive development for SKS
Microfinance as the bill clearly stipulates RBI’s regulation to overrule
any state legislation on MFIs. In spite of this regulation, we continue
with our Underweight stance as (1) we believe that the business has
fundamental flaws, (2) recoveries from AP are unlikely, in our view, in
spite of this bill, and (3) current valuations at 2.4x FY12E book still look
expensive.

ITC:: Rich valuation; remains our relative pick -Credit Suisse,

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● We assume coverage with an OUTPERFORM rating and a target
price of Rs226 (based on DCF, 29x fwd. P/E). At 26x fwd P/E, we
find ITC’s valuation rich; however, we prefer ITC to HUL due to its
superior growth profile and relative discount.
● Drivers for cigarette consumption in India are strong (favourable
penetration, rising affordability, only 14% of tobacco consumption
as cigarettes), but volume growth over the past decade has been
a modest 3% (attributed to punitive taxation). We believe that
although duty increases will continue, no increase in central
excise duty in FY12 would enable volumes to recover.
● We also expect margins to stay resilient due to the consolidated
nature of the industry and the fact that raw material cost accounts
for a small proportion of sales. ITC’s diversification efforts have
seen a marked acceleration over the past decade and its noncigarette
business accounts for over 40% of sales and 20% of
profit. We expect the profit mix to shift more in favour of new
segments.

Gujarat Gas- Cogent strategy to meet challenges; Upgrade to OW ::JPMorgan

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Gujarat Gas Ltd
▲ Overweight
Previous: Neutral
GGAS.BO, GGAS IN
Cogent strategy to meet challenges; Upgrade to OW


We recently hosted GGAS management for an investor roadshow. The
stock has consolidated over the last 9 months, reflecting supply, margin
challenges. We believe the company has a cogent strategy to meet these
challenges and the stock valuations now offer an attractive entry level. We
are upgrading the stock to OW and see regulatory authorization, success in
new bids as catalysts. Gujarat Gas remains our preferred pick in the CGD
space; we project robust 15% earnings CAGR for the company based on
c.13% volume growth and increased focus on margin protection
 LNG will increase in supply mix: With limited visibility of domestic
gas supply ramp-up, Gujarat Gas is looking to secure additional LNG to
meet growth requirement in its existing geographies. Strong parent
linkage (BG owns 65% of GGAS) would be an advantage to secure
additional LNG given BG's global LNG portfolio (20mtpa by 2015). We
project LNG will rise to ~50% of supply mix over next 3 years and note
this would require additional 1.6mmscmd LNG by 2013.
 Focus will be on spread preservation. With higher cost LNG pushing
up input costs, GGAS will target industrial segments which use gas to
replace more expensive liquid fuels and in Combined Heat and Power
applications. These segments form 79% of GGAS’s industrial customer
base and provide headroom for price hikes to preserve gas spreads.
 Existing geographies, new bid provide growth visibility, catalysts.
Regulatory authorization (due in a few months) for Surat and Bharuch
district (currently operations are only in the towns) provide visibility for
sustained 8-10% volume growth. GGAS is hopeful of winning its bid for
Bhavnagar district, which should provide an inorganic growth
opportunity. Authorization and winning of new geography will be
catalysts for GGAS, in our view.
 Upgrade to OW; June 2012 PT of Rs460. Our PT basis is June 2012
(Sept 2011 earlier). Our fair value for the company is based on a 3 stage
DCF (WACC – 12.5%) with 5 years of explicit forecasts, intermediate
growth of 8% and 3% terminal growth. Lower volumes are key risk.

Hindustan Unilever: Volume recovery priced in:: Credit Suisse,

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Assuming coverage with UNDERPERFORM at a target price of
Rs301 (DCF). While volume growth should sustain in the near term,
profit growth will remain challenging. Since the rerating is not
backed with EPS upgrades (YTD consensus EPS estimate down
5%), we do not expect it to sustain, especially given the current
steep valuation.
● Given the lack of an identifiable factor driving volumes, street is
concerned on its sustenance. We, however, believe that with thr
management focus on volumes and a fairly buoyant demand
environment, it would be reasonable to expect volume growth to
sustain (at over 10%) in the near term.
● While input prices have moderated, margins in soaps and
detergents should recover; the gains in that segment could be lost
in personal products, given the stiff competition. With less room to
cut A&P expenses (could impact volumes), levers to counter
commodity and competitive pressures are limited.
● HUL’s stock is trading at the past ten- year peak valuations and
pricing in an unrealistic medium-term earnings scenario.

1QFY12 Earnings Preview- Steel relatively better off, while non ferrous, cement to be hit by higher coal, lower ASP: JP Morgan

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1QFY12 Earnings Preview- Steel relatively better off, while non ferrous, cement to be hit by higher coal, lower
ASP


 Steel- Lagged flow through of coking coal, higher long product prices to
benefit: While HRC price correction did take place through the quarter, long
product prices firmed up. Given that March quarter saw volumes being
impacted partly driven by de-stocking, June quarter volumes have been okay, as
import substitution has driven volumes in an overall weak market. High cost
coking coal would be partly there for the quarter. We expect TATA to report
India EBITDA/MT at $410/MT (flat q/q) helped also by the lagged flow
through of contract price increases in flat products. Corus should be more
muted at $70/MT given volumes have been weak even as ASP-RM mismatch
was in company’s favor in the qrtr. Reported earnings at TATA would have one
time gains from recent asset sales. We expect JSW EBITDA/MT at $175/MT
 Non Ferrous: HNDL- cost pressures to hit upstream aluminum, STLTlower
zinc earnings: We expect consolidated EBITDA at STLT at Rs24.3bn ,
down 20% q/q driven by 6% q/q decline in zinc prices and increasing coal costs.
We expect refined metal production at the zinc subsidiary at 175KT as the
smelter ramp up has been below expectations. Mined metal production (zinc +
lead) for the data available for April and May while +17% y/y at the zinc
subsidiary, is down only 3% q/q for the 2 month period (april+may over
Jan+Feb), suggesting that concentrate sales are likely to be there. STLT would
likely be impacted in aluminum and power segments negatively on higher coal
costs,though copper smelting should benefit from strong TC/RC. We expect
HNDL's standalone EBITDA to decline 7% q/q as the full impact of higher coal
costs and higher carbon costs impact earnings.
 Mining- COAL to report strong earnings as ASP hikes flow through: We
expect off take growth of 5% y/y and ASP increase of 16.5% y/y (given the
price increase in Feb and e-auction coal price increase). Q/Q ASP increase
would be muted given one offs are in the March quarter. We expect EBITDA at
Rs47bn, with wage costs increase flowing through next quarter. For MOIL we
expect earnings decline of 7% q/q given lower Mn ore prices.

India Two Wheelers- What's in a name? Hero- Honda Split... JP Morgan

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 As Hero and Honda have ended their joint venture, there are investor
concerns about the impact of the split and the perceived brand image of the
local entity going forward. To assess the changing customer perception of
the OEM and its products (Splendor & Passion), we ran a survey among
consumers. Methodology: We surveyed customers who are either existing
Hero Honda users or potential buyers who intended purchasing a bike in the
next 12 months. The survey was carried out across three cities – Mumbai,
Pune and Sonipat – to enable a well spread geographic representation. The
customers were selected across different socio-economic classes (SEC B &
C) across age group 18-40 years. However, the findings from our survey
cannot be considered to be a nationally representative trend.
 Key Findings: Based on consumer responses, the key highlights of our
survey were: Consumer awareness of the recent split: While a majority of
the consumers (63%) are aware of the split, they were unsure of the changes
in the product pipeline/branding post the split. Corporate brand is an
important driver of sales: A majority ~ 60% of the consumers highlighted
that they bought the bikes due to the brand equity of Hero Honda, while
40% bought the “Splendor” and “Passion” products. That said, consumers
perceived the local “Hero” group to be dependable as c.75% of the
participants highlighted that they would continue to purchase Hero products
post the split. SEC B consumers appeared more sensitive: as 29% of the
consumers in this segment highlighted that they would hold back on
purchases citing concerns relating to product/technology post the split.
Important criteria for purchasing decision: Customers believe that mileage
and cost effectiveness of the bike are the most important criteria in their
buying decisions.
 Our View: We believe that while the ‘Hero’ group enjoys a healthy brand
recall amongst consumers, there will be a gradual market share loss probably
driven by the more affluent customers. We believe that the current stock
valuations are not factoring in the potential loss of brand equity at Hero
Honda post the split. We reiterate our UW stance.

The Keen Observer: Where shall we shop today?: Credit Suisse,

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● Significant differences in prices. Beneath the neat trends in
headline inflation numbers lie surprising variances in prices aross
the country. Given the socio-economic diversity of India, some
differences are expected. Price ratios vary 3–8x among cities for
commodities like milk and flour, which still manages to surprise.
● ‘Mix’ and infrastructure. Both drive price dispersion. For
products such as tea leaf where quality can vary, variance in
affordability drives the differences. For uniform quality products,
infrastructure bottlenecks restrain prices from equalizing.
● Key takeaways. (1) The market is integrated: Dispersion exists, but
price trends for products such as soaps and onion are surprisingly
uniform across regions; (2) The integration is far from seamless
likely due to poor infrastructure, making the economy inefficient and
fuelling inflation, while wheat now sells below MSP in the North
(overproduction), prices stay high in the south; (3) For items where
mix differs between cities, steady high dispersion shows that
relative affordability is not changing; (4) Tempting as it is, we advise
caution in using anecdotal evidence to assess inflation.

Torrent Pharma: Growth in chronic therapies  TP of INR715::HSBC Research,

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Torrent Pharma: Growth
in chronic therapies
 Strong positioning in two large branded generic markets, India
and Brazil, with two-thirds of portfolio focused on chronic
therapies
 US small but scaling up; RoW market has potential to surprise,
with increasing contribution from alliances
 Initiate as N(V) with a TP of INR715

Ipca Labs: Changing mix  TP of INR407; :: HSBC Research,

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Ipca Labs: Changing mix
 Growth outlook strong on strong domestic and export
formulations, sales growth guidance of 18-20% in FY12
 Product mix improves with gradual shift from acute (anti-malarials)
to chronic therapies like CVS and pain management
 Initiate as N(V) with a TP of INR407; key catalyst is FDA approval
for Indore SEZ facility

JPMorgan: Steel June data confirms demand growth essentially coming from exports; Import substitution helping producers in weak market

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Steel
June data confirms demand growth essentially coming
from exports; Import substitution helping producers in
weak market


 June data shows consumption growth essentially coming from EXPORT
INCREASE: As has been the trend over the last few months across materials,
Indian steel consumption (apparent) stood at 0.9% y/y in June (in April
and May it stood at 1.9/1.8% y/y). However, this is headline steel
consumption, which also takes into account the net of import/export
balance. Continuing the trend over the last few months, imports declined
sharply, while exports increased materially. In June, India turned a very modest
net steel exporter. We believe the very sharp movement in the net import
numbers suggests that whatever modest apparent consumption growth we are
currently seeing is coming from increase in exports. Apparent consumption
increased by 0.1MT in June, while exports increased by 0.2MT, implying that
actual domestic demand declined. For the quarter of April-June, apparent
consumption increased by 0.3MT, while exports increased by 0.5MT, implying
domestic demand declined y/y for the quarter
 Sharp decline in imports, a silver lining for Indian steel producers, but
explains why prices did not move up: Indian steel imports declined sharply in
June (down 56% y/y, -0.6MT) and for the April-June quarter imports declined
by 1.5MT (38%). We believe this sharp decline has been supportive for Indian
steel producers. Steel production increased in June by 14% (+0.8MT) and for
the April-June quarter it increased by 1.3MT (+8% y/y). Import substitution in
our view has been helpful for the Indian steel producers to sell volumes. We
had highlighted this possibility in our report ('Analyzing steel export-import
data highlights no easy way out from FLATS over capacity' published on 22-
Jun-11). However, import substitution would require lower prices (moving
to quasi export parity from import parity) ad this is what has happened
over the last 3 months, with domestic flat product prices lower than import
parity prices. Not surprisingly media reports in the metals press (MB, SBB)
have indicated that mills would keep prices unchanged in July.
 Inventory situation has not worsened, but has neither eased: Given the
increase in finished steel production, compared to apparent steel
consumption on a m/m basis, we believe there is some increase in system
inventories, though not by a large amount. Inventories in our view,
remain relatively high, though reducing imports have some what eased
the situation
 Demand weakness- More in FLATS compared to LONGS: While June data
is not yet out, analyzing the April+May data indicates, sharp decline in
FLAT steel demand particularly in HR Coils, while long steel demand is
still in positive territory. We believe some of the HR Coil demand
decline is driven by de-stocking. The differing demand trajectories of
FLAT and LONGS is reflected in pricing, with LONG product prices
increasing in April and May while FLAT products had discounts

BANKING & NBFCs Outlook: Neutral :1Q results preview: Kotak Sec,

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BANKING & NBFCS
Outlook: Neutral
q During Q1FY12, core income for Banks & NBFCs under our coverage is
expected to register a growth of 19.2% (YoY). Our private banking universe
is likely to grow faster at 21.3%, while PSU banks under our coverage
is likely to grow at 18.5%; at the same time, NBFCs are likely to
grow at 19.5%. Net profit for Banks & NBFCs under our coverage is likely
to be subdued with only 2.9% growth (YoY) mainly on back of subdued
performance by SBI (excluding SBI, PAT for our coverage universe is likely
to grow at 18.4%).
q Credit growth saw marginal drop to 20.7% YoY (as on June 17, 2011) as
against 21.1% witnessed in prior fortnight (June 03, 2011); however, it
was higher than 19.5% growth witnessed a year ago. Deposit mobilization
has slightly improved to 18.2% (as on June 17, 2011) as against
13.9% witnessed a year ago.
q We expect 15-20 bps compression in NIM during Q1FY12 (QoQ) on back
of lagged impact of deposit re-pricing at higher rates. However, this
would be partly compensated by the recent hike in lending rates as assets
are re-priced faster than the deposits. However, banks are likely to
witness stable NIMs on YoY basis due to slightly lower base in Q1FY11.
q We expect asset quality deterioration to stabilize during Q1FY12. PSU
banks are likely to report slightly higher slippages with the shift to system-
based NPA recognition. However, strong recoveries & upgradation
are likely to cushion from any sharp rise in overall NPAs. At the other
end, private sector banks would further witness improvement in their
asset quality leading to lower credit costs.
q 10-Yr G-Sec yield (7.8% 2021) has moved up by 34 bps to 8.33% during
Q1FY12. Hence, we expect few banks having higher share of AFS/HFT
book to take MTM depreciation hit on their Investment portfolio. We
also expect moderate growth in non-interest income for banks under our
coverage due to muted treasury profit along with lower 3rd party distribution
income.
q Top Picks: ICICI bank, Axis Bank, SBI, BoB, Union Bank

Cadila Healthcare: A perfect medley  TP of INR1,085:: HSBC Research,

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Cadila Healthcare: A
perfect medley
 Diversified sources of growth from leadership position in India and
growing contribution from international operations
 Hospira JV and niche opportunities in the US to offer material
upside with healthy margins; we forecast c30% net profit CAGR
for FY10-13
 Initiate with an OW and a TP of INR1,085

CESC- Stepping on the growth accelerator ::Motilal Oswal

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Stepping on the growth accelerator
Exploring funding options
CESC is stepping on the growth accelerator across business divisions. The company
will expand power generation capacity from 1.2GW to 3.7GW by FY15/16 and the area
under operations in the retail business from 0.8msf to 2.5msf by FY15. The company
will require Rs40b over the next four years for its power and retail business expansion
(including funding of retail business losses) and is exploring funding options. Valuations
are reasonable, cash balance is Rs6.2b and regulated core business PAT is Rs4b, which
offer comfort.
Regulated business provides steady cash flow; target to commission additional
2.5GW by FY15/16
CESC’s regulated business, largely comprising generation (1,225MW) and distribution
assets in Kolkata generates steady profit of Rs4b+ a year. This enables CESC to
fund equity contribution towards new power generation capacities and other expansion
plans. CESC has embarked on a two-pronged strategy in its power vertical: (1) to
increase generation capacity from 1.2GW to 3.7GW by FY15/FY16, and (2) entry
into new distribution circles. Projects of 2.5GW are in advanced stages of development/
have entered the construction phase, with initial clearances (water, environment) and
land acquisition largely in place. This comprises a 600MW project in Haldia, a 600MW
unit in Chandrapur and 1.3GW unit in Orissa.
Retail business expansion to reach 3x current space over FY11-14, investment
likely
CESC is working on expanding the area under operations in its retail business from
0.85msf to 2.5msf over the next three years. Strategies are being formulated to attain
‘profitable growth’ and plans to enhance store level EBITDA from the current Rs20/sf
to Rs50/sf over the next one year. Lately, revenue traction has been good and FY11
same-store revenue growth was ~14%. CESC will need funding for its capex, expansion
and to tide over initial losses.
Funding inevitable; CESC explores options
We estimate the funding requirement for CESC’s power and retail businesses at
~Rs40b over the next four years. This comprises Rs30b+ equity funding requirement
(including Rs5b invested) for 2.5GW of generation capacity addition, Rs3b-5b towards
funding of Spencer’s losses (FY11 estimate Rs1.1b-1.3b) and capex funding (~Rs0.6b
per year), plus funding requirements for the distribution business. CESC is exploring
fund raising options for its power and retail businesses.
Valuations reasonable; maintain Buy
Our SOTP-based target price is Rs439, with the existing power business at Rs277/
share (8x FY12E EPS), investment in Spencer’s at Rs39/share (Rs5b; EV of 1x FY10
sales), investment in Haldia and Chandrapur projects at Rs57/share (Rs7b) and cash
at Rs50/share (Rs6.2b). Maintain Buy

INFORMATION TECHNOLOGY :1Q results preview: Kotak Sec,

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INFORMATION TECHNOLOGY
We expect companies under our coverage to report a sequential revenue
growth of about 3%, largely driven by volumes. Volumes for the Top 4
companies are expected to rise between 3.5% - 5%. Average realizations are
expected to remain stable. Currency volatility should help revenues
marginally - about 50 - 90bps for the top companies.
EBIDTA margins are expected to be lower on a QoQ basis. Several companies
give salary increments to employees during this quarter and we expect that
to have an impact on margins. Apart from the increase in salary bill, other
factors like the appreciation in rupee (1.2% QoQ, approx) may have some
impact on margins.
With tax benefits u/s 10 of the Income Tax Act, 1961 not available WEF FY12,
tax rates for companies are expected to rise. Consequently, PAT is expected
to fall by about 5% for the Top 4 companies and by about 9% for the whole
coverage universe. Among the Top 4, HCLT is expected to report QoQ
growth in PAT of about 9% as compared to de-growth for the remaining 3.
HCLT's EBIDTA margins are expected to improve in line with the stated focus
on profitability. We have given quarterly expectations of Mahindra Satyam
but understand that, the numbers can be materially different from our
expectations.
The guidance from Infosys will be important. While the guidance for 1Q
was muted, Infosys has guided for a strong 5% CQGR for the remaining 3
quarters. Management comments on the macro scene and client spending
will thus gain additional importance.
Among other things, we will also watch out for :
a) Pricing improvements and expectations about the same, b) Comments on
opening up of new opportunities like Cloud Computing, etc c) Further
insights into sustainability of discretionary spends and d) commentary on
concerns relating to visas, etc.
We maintain our optimistic view on the medium-to-long term prospects of
the sector. Over the medium term, we expect large caps to out-perform as
they are better equipped to counter the impact, if any, of appreciating rupee
and any variation in the demand scenario. We will keep a close watch on
the evolving macro scene in developed economies, where recent economic
data is not very encouraging.
Infosys and TCS remain our preferred large-cap picks. In mid-caps, we prefer
NIIT Technologies and KPIT Cummins. Mphasis is not covered here because
quarter ends in July.

Lanco (LITL) : Valuation offers comfort, capacity addition looks up :Motilal Oswal

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Valuation offers comfort, capacity addition looks up
Fuel, PPA uncertainties remain; funding requirement high
Lanco Infratech (LITL) is set to increase capacity from 3.3GW to 5.3GW by FY14, but
earnings growth faces headwinds like evacuation infrastructure, fuel security and PPA
issues. Higher leverage (~4.5x in March 2011) and funding requirements (Rs16b-18b over
FY12-14) are other near term operational challenges. However, the stock's correction
discounts concerns and we estimate earnings CAGR of 37% over FY11-13. We initiate
coverage with a Buy rating and a target price of Rs55.
Capacity addition looks up but fuel/PPA uncertainties remain
Lanco Infratech's (LITL) operating capacity will rise from 3.3GW to 5.3GW by FY14
as it commissions new units. However, LITL faces PPA issues for Unit-2 at Amarkantak,
and the lack of transmission line and fuel security have imapcted returns on its capacity
at Udupi (600MW) and Anpara (1.2GW). Merchant capacity is exposed to fuel
availability/cost risks and its Unit-2 at Amarkantak faces a tariff cap of Rs2.34/unit,
which is under contesting. LITL recently acquired stake in Griffin Mines with a view to
fulfilling its long term fuel requirements but the benefits are unlikely before FY13/Y14.
EPC business: Captive in-house business offers equity cash flow
A robust in-house project pipeline and large third-party contracts contributed to LITL's
Engineering, Procurement and Construction (EPC) division's order book, which was
Rs301b in March 2011. More than half of this is from three large in-house projects.
The in-house power segment contributes ~70% of LITL's outstanding order book.
However, we expect moderation even as it provides LITL with strong upfront cash flow.
Capacity addition leads earnings growth
LITL will post consolidated PAT of 37% CAGR over FY11-13, and the power sector will
account for over 80% of earnings in FY12 and FY13. We expect a decline in the
contribution of merchant earnings to total PAT, as we assume Amarkantak-I on a
regulated returns basis from mid-FY12. We expect LITL's operating cash flow to be
sustained at over Rs30b a year and DER is unlikely to taper off in the near term, as
debt for new projects is added. We have not assumed consolidation/contribution from
Griffin Mines, given lack of clarity on their operational/financial details.
Valuations offer comfort, initiating coverage with a Buy, target price: Rs55
LITL's stock has corrected by 60% over the past 12 months (relative under-performance
of 54%), due to a lack of clarity on PPAs, fuel security issues, accounting policy
changes, higher gearing and funding issues. Although these concerns have not all
receded, a price correction has largely discounted them. Our estimates are based on
a conservative stance on various issues/operating rates and so we believe current
valuations offer comfort. We initiate coverage with a Buy rating and a target price of
Rs55.

Biocon: Insulin turnaround awaited  TP of INR405::HSBC Research,

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Biocon: Insulin
turnaround awaited
 Biopharma business growth potential hinges on insulin
turnaround; Pfizer deal heightens expectations
 Syngene has seen good traction post BMS commencement and is
likely to support margins
 Initiate as a Neutral with a TP of INR405

Reliance Infrastructure- FY12-14 an important phase in growth trajectory::Motilal Oswal

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FY12-14 an important phase in growth trajectory
EPC to be key near-term earnings driver; assuming status quo for regulatory earnings
Reliance Infrastructure (RELI) has been facing several legal/regulatory issues in its
Mumbai/Delhi distribution business, and execution/clearance issues for its power/
infrastructure business. Such issues have also partially impacted its EPC business in
the past. Given that its subsidiary, Reliance Power will be adding ~16GW of power projects
and RELI will be commissioning infrastructure projects of Rs230b over FY12-14, this
period will mark an important phase in its growth trajectory. We believe that
transformation/change the company's outlook is contingent on its successful transition
through this phase. We assume status quo in its regulated business earnings. We
maintain our Buy recommendation, with SOTP-based target price of Rs879.
Near-term uncertainties have impacted business outlook
RELI has been facing several business headwinds: (1) Mumbai distribution business
license expiry in August 2011 and unrecovered tariff arrears, (2) Delhi distribution
business facing cash flow issues, given tariff under-recovery, (3) EPC business traction
subject to progress of power and infrastructure business, which in-turn faces possible
legal/regulatory issues and execution delays. In addition, there are market
apprehensions on the nature of investments of surplus funds and impending grouplevel
issues.
FY12-14 an important phase in growth trajectory
FY12-14 will be an important phase in RELI's growth trajectory, given the planned
commissioning of large-scale power and infrastructure assets during this period.
Reliance Power (45% subsidiary) expects operating capacity to expand to ~16GW
by FY15. In the infrastructure development business, RELI plans to commission
cumulative projects worth Rs230b during this period. Accelerated project execution
will also accelerate momentum in the EPC division, providing a virtuous growth cycle.
However, execution remains a key challenge and is contingent on several external
factors.
EPC to be key near-term earnings driver; assuming status quo for
regulatory earnings
Till FY13, the EPC business will drive RELI's standalone earnings, with the regulatory
business facing headwinds. We expect the EPC business to report revenue CAGR of
53% and EBIT CAGR of 30% over FY11-13. We assume status quo in RELI's regulated
earnings and believe that even in the event of an adverse judgment, the 'wire business'
earnings will not be impacted.
Valuations/buy back provide comfort
We expect RELI to report a net profit of Rs12b (up 11%) in FY12 and Rs14.4b (up
20%) in FY13. The stock has significantly underperformed peers/broader indices.
Commencement of Rs10b buy back (up to Rs725/share) and fund infusion of ~Rs40b
(Rs918/share) by the promoters provide downside support. We maintain our Buy
recommendation, with SOTP-based target price of Rs879.

JSW Energy: The balancing act ::Motilal Oswal

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JSW Energy: The balancing act
Exposure to merchant power sales, spot coal purchases
Merchant power sales and spot coal purchases are the cornerstones of JSW Energy's
(JSWEL's) business model in the medium term, which could lead to earnings volatility in
an uncertain environment. JSWEL will commission 1.7GW capacity in FY12/FY13 and will be
among the largest private sector power utilities. Development pipeline of 8GW offers
value maximization opportunities but will contribute to capacity additions from FY15. The
management has an impeccable track record for execution. Robust operational cashflows
and comfortable DER at 1.7x imply the growth option is not equity dilutive. Our SOTP based
target price is Rs74. We maintain Neutral rating.
Merchant power sales, spot coal purchases, could lead to earnings volatility
JSWEL's business model in the medium term combines merchant power sales and
spot coal purchases, resulting in earnings volatility. Of the 3.1GW operational capacity
planned by FY12, 56% of the offtake will be merchant sales and 65% of the fuel
purchases will be on a spot basis (imported). Merchant sales will contribute over 80%
to FY12 earnings and 67% in FY13 and Rs0.50/unit lower realization can result in 40-
50% earnings decline.
Robust near term cashflows, but FY13-14 could be a growth holiday
JSWEL will commission 1.7GW capacity in FY12 / FY13 and installed capacity will
be 3.4GW in FY13. Given the front ended capacity commissioning, operational cashflow
will be robust (Rs25b in FY13). The development pipeline of 8GW offers value
maximization possibilities, but large parts of the pipeline are in initial stages of
development and hence capacity addition over FY13-14 will be limited. Given JSWEL's
robust cashflows, we believe the growth will not be equity dilutive.
Superior RoE until FY12, earnings CAGR of 17% over FY11-13
We expect JSWEL to post net earnings CAGR of 17% over FY11-13 driven by capacity
addition (3.1GW by FY12 v/s 1.7GW now). We expect RoE of 19% in FY12 (up from
15.5% in FY11) but it will decline to 16% in FY13 due to low profitability from merchant
sales and high project investments, given a fresh round of capacity additions.
Valuation and view - Neutral with target price of Rs74
We value JSWEL based on the SOTP methodology, arriving at a target price of Rs74.
This comprises projects under operation/construction worth Rs44/share (DCF), growth
option comprising planned/developed projects of Rs14/share (DCF) and investments/
cash of Rs16/share. We believe the price largely reflects the robust near term capacity
addition and strong cashflows. The group's record of execution, project management
and robust cashflows offer comfort. We maintain Neutral rating.

India Equity Strategy:Jun11 preview Strong topline but cost headwinds:: Deutsche Bank

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Sensex revenue to grow at 26% yoy, but margins to shrink by 200bps
We expect to see a continuing trend of robust revenue growth in the June
reporting quarter (Sensex: +26%yoy; DB universe: +24%yoy) - underscoring the
strong underlying demand dynamic in the economy. However, corporate margins
should remain under pressure on account of high input costs - leading to a lower
Sensex’ EBITDA growth of 15%yoy with EBITDA margin shrinking by ~200bps.
However, Sensex earnings growth will likely move back into double digits
(+13%yoy, after a disappointing Mar-qtr) while for DB univ (ex- PSU OMCs),
earnings should grow by +11% yoy.
Key leaders: IT Services, FMCG, Telecom and Utilities
We expect following sectors to post above trend EBITDA growth: (i) IT Services
(+22% yoy) – where top tier IT companies will likely benefit from (a) normalization
in revenue growth after seasonally weak Mar-qtr and (b) better utilization, (ii)
FMCG (+20% yoy) - as we expect both HUVR and ITC to post healthy volume
growth, with ITC benefitting from 5% growth in cigarette volumes. In addition, we
have factored in a ~300bps cut in ad/sales for HUVR – which should mitigate the
raw material cost pressures. (iii) Utilities (+18%yoy) – driven primarily by NTPC’s
fresh capacity commissioning of 3000 mw. (iv) Telecom (+17%yoy) – as the
sector will likely benefit from moderating competitive intensity, slowing decline in
tariffs and robust minutes growth. Additionally, Bharti should be positively
impacted from a continuing momentum of turnaround in African operations.
Key Laggards: Pharmaceuticals, Real Estate and Autos
Following sectors are expected to be key laggards in EBITDA growth: (i)
Pharmaceuticals (-8% yoy), as we expect Cipla to be hit by dual headwinds of
pricing pressure and rising input costs; (ii) Real Estate (+9.6% yoy), as continuing
pressure on account of input costs dilutes the strong revenue growth of 36% on
account of plot sales; (iii) Automotives (+10% yoy) – as we expect the sector to
be impacted by continuing input cost pressures and a slowdown in demand
growth in Jun-qtr. However, M&M and Bajaj Auto are expected to buck the trend
by posting 19%yoy EBITDA growth as demand for tractors and 2-wheelers
remained above trend.
We see a continuation in tactical upmove for Indian equities
While the earnings season will be one of the key determinants of market
performance in the near term, we continue to believe that the recent
outperformance of the Indian markets should sustain further driven primarily by (i)
a perceptible improvement in the policy environment, (ii) a softening in stance of
environment ministry, as evident in the recent clearance of 5 coal blocks in the No-
Go forest area, (iii) expectation of positive signals from the likely cabinet reshuffle,
(iv) expected softness in global commodities prices, (v) a reasonable monsoon
season thus far, propping up consumption demand in the hinterland and (vi) rate
tightening cycle approaching its peak. Maintain year-end Sensex target of 21000.

Pharmaceuticals - Where mid-caps have an edge:: HSBC Research,

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 Mid-caps thrive on Indian domestic
growth and emerging markets
 Shift in focus to chronic therapies as
lifestyle-related disorders increase
 Initiate OW on CDH, N(V) on IPCA and
TRP and N on BIOS. CDH is our top pick
A different path to growth. While Indian large-cap generic
drug makers are banking on the US for growth as patents
start to expire, the mid-caps are taking a different route.
Latecomers to the US, they are thriving in their vibrant home
market as well as fast-growing emerging markets.
India: The lifestyle factor. India’s pharma industry
continues to grow at double-digit rates and is expected to be
worth USD20bn by 2020. As the country gets richer,
demand for pharma products is rising and the number of
lifestyle-related disorders has also increased. Cadila
Healthcare (CDH), Torrent Pharma (TRP) and Ipca Labs
(IPCA) are benefiting from switching their focus to therapies
for these chronic conditions (e.g. cardiovascular, arthritis).
Booming emerging markets. Pharma sales in emerging
markets are expected to double in the next five years. The
growth of CDH and TRP (in Brazil) and IPCA (in Russia)
reflects the strong brand power of their products. Biocon
(BIOS), more of a biopharma player, has signed a deal with
Pfizer to manufacture insulin for emerging markets. We
expect these companies to achieve an average of 20% annual
sales growth in these markets over the next five years.
Prefer CDH. We think CDH, our top pick, is on the cusp of
joining the ranks of the large-caps. It has a strong domestic
business with robust international operations and profitable
joint ventures. Additionally, it has been filing niche products
in the US. We forecast a 30% EPS CAGR over FY10-13.
IPCA has strong domestic sales and has successfully
switched its focus to chronic therapies. TRP is the biggest
Indian player in Brazil and has a strong portfolio of chronic
therapies. Insulin remains the key driver for BIOS

India Autos - Management meeting takeaways ::JP Morgan

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 We hosted the managements of Ashok Leyland and Mahindra and
Mahindra in the US. Key takeaways follow:
 Mahindra & Mahindra – volume outlook: Management indicated that
industry growth rates are likely to be in the range of 10-12% for tractors
and 11-13% for UVs in FY12. The OEM is ramping up production of
the ‘Yuvraj’ tractor to 20,000 units in the year (from 10,000 in FY11);
on UVs – they expect to launch the new W201 SUV by the end of the
year.
 Financing trends: Given the current regulatory changes regarding bank
funding for NBFCs, funding costs could rise by 150bps for institutions
that provide financing in rural areas. The proportion of tractors bought on
financing has reduced to 75% currently (vs.90% earlier) as agri incomes
have risen considerably.
 Ssangyong: In FY12, management is targeting volume growth of 50% to
c.120,000 units and sales of $3B. While the OEM will likely have a cash
break even, they do not expect to break even at the PBT level. They will
have to incur higher expenditures on branding and product development,
given the underinvestment in the business over the past few years by
previous management teams.
 Ashok Leyland – volume outlook: Management expects domestic
M/HCV industry growth to come in at 8% yoy, with buses growing at
5% and trucks growing at 9% yoy. They highlighted that their sales
growth in FY12E was likely to come in at 107,000 units (+14% yoy). Of
the above, the domestic sales would likely come in at 95,000 units, while
exports would come in at 12,000 units.
 On near-term market share loss: Sales in southern India (which is
Ashok Leyland’s dominant market) were weak due to the postponement
of purchases ahead of the recent state elections in Tamil Nadu. They
expect sales growth to revive over 2HFY12E given: a) economic
activity/infrastructure investments will likely pick up, and b) a benign
base effect (due to the preponement of purchases in 1HFY11 ahead of
the roll-over to BSIII norms in Oct’10).
 Margin outlook: Ashok Leyland management is expecting margins to
come in at 10.5 – 11% (flat yoy) during FY12. The ramp up of
production at the tax-free Uttarakhand will drive cost savings, which will
protect profitability. The production is targeted to expand to 36,000
units in FY12 (from 13,000 units in FY11). Given tax savings of
c.Rs.40,000 per unit, it should lead to cost savings of c.Rs.1.5B.

PTC India- At the cusp of a big leap ::Motilal Oswal

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At the cusp of a big leap
Consolidated PAT to witness 37% CAGR till FY13, value unlocking possibilities exist
PTC India is likely to witness strong business momentum, driven by the addition of
~4.6GW of projects to its LT trading portfolio over FY12/13. In addition, the tolling
arrangements (350MW) will start contributing meaningfully to cash flows in FY12/13. PFS
continues to be on a strong footing, post the recent IPO. We expect consolidated profit
to double from Rs1.7b in FY11 to Rs3.2b in FY13. Defaults on few LT PPAs, lower ST prices
impacting margins, and exposure to a single project/group are key risks in our view.
Power trading volumes to double by FY13; long-term drivers intact
PTC India has a long-term (LT) power trading portfolio of ~1GW. We expect the addition
of 1.7GW in FY12 and 2.9GW+ in FY13. We believe trading volumes will increase
from 24.5BU in FY11 to 28.6BU in FY12 (up 17%) and 38.4BU in FY13 (up 34%).
Also, the composition of trading volumes is changing, with the share of low-margin
cross-border trades expected to decline from 22% in FY11 to 9% in FY13.
PTC Financial Services (PFS) on strong footing; earnings CAGR of
52% till FY13
As at March 2011, PFS' equity base was Rs4.6b and net worth was Rs6.8b, which
will increase to Rs5.6b and Rs10.2b, respectively post issue. Being a relatively new
company, PFS' loan book has grown at a rapid pace from Rs200m in FY09 to Rs2.7b
in FY10 and further to Rs8b as at end-FY11. Equity investments increased from Rs1.4b
in FY08 to Rs4.6b by December 2010. We expect PFS to report a net profit of Rs875m
in FY13, up from Rs95m in FY09 and Rs377m in FY11 (CAGR of 52%), driven by
increased disbursements.
PTC Energy witnessing business traction, driven by tolling projects
100% subsidiary, PTC Energy's tolling arrangement will start contributing to profitability
from FY12, as 350MW of capacity is available for sale. The management has tied up
coal supply for the project for 10 years, with fixed CIF price for five years (subject to a
floor and cap). Based on the current fuel rates, we estimate fuel cost at Rs2.2/unit.
We believe that this provides earnings possibilities of Rs577m in FY12 and Rs884m in
FY13.
Cash on books provides downside protection; Buy
PTC has cash and equivalents of Rs9.6b, and has investments of Rs7b in subsidiaries/
project SPVs. We expect PTC to report consolidated net profit of Rs2.5b in FY12 (up
47%) and Rs3.2b in FY13 (up 28%). Maintain Buy, with a price target of Rs127.

Adani Power : Sailing on synergies ; target price is Rs109. :Motilal Oswal

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Sailing on synergies
Accelerated project execution, leveraging on group synergies
Adani Power (APL) is in an accelerated execution phase. The company expects capacity
of 4.6GW by the end of FY12 (the largest private IPP) and capex spending of Rs129b in FY11
(among the largest capex spenders in the economy). Mundra (4.6GW) is the most profitable
project in the portfolio, contributing 70% to SOTP and 90%+ of FY12/FY13 expected
consolidated earnings. At Mundra, as large parts of the capacity have fuel tied-up under
long-term contracts and power sales under PPA, ‘coal earnings’ have been converted
into ‘annuity streams’. Consolidated DER in FY12/13 is high at 3.3x/2.7x respectively but
funding is comfortable as 82% of the capex on a 6.6GW pipeline, to be commissioned by
FY13, has been incurred. Fuel availability is a challenge in the interim for Tiroda (3.3GW)
and Kawai (1.3GW), given constraints of coal linkages.
Accelerated project execution; comfortably placed on several parameters
APL’s generation capacity is likely to increase to 4.6GW by FY12 and 6.6GW by
FY13, and it will be the largest private sector IPP in India. Given the strong parent
advantage, APL is comfortably placed on key parameters such as land availability
and fuel security. Of the 16.5GW of project portfolio, 10.6GW are being commissioned
at Mundra and Dahej, where parent Adani Enterprises (AEL) has access to vast
tracts of land. AEL has access to 8b tons of reserves in Indonesia and Australia and
controls over 50% market share in overall coal trading/imports into India.
Mundra project key driver of earnings/valuations; ‘coal earnings’ converted
to ‘annuity stream’
Mundra (4.6GW) is APL's most profitable project given contracted fuel supplies from
its captive mines in Indonesia at CIF of US$36/ton, translating into competitive fuel
cost of Rs1.1-1.2/unit. While the imported coal requirement is 7mt, we understand
part of the shortfall in domestic linkages (10mt requirement) will also be met on similar
terms. Given that 80% of the 4.6GW capacity has been tied up under long-term PPAs
at levelized tariffs of Rs2.8/unit, the Mundra project has an annuity earnings profile.
Merchant profitability to contribute sizably to FY12/13 earnings
Merchant profitability will be APL's key near-term earnings driver as the trigger points
for PPA for a large part of capacities commissioned are in phases from mid-FY13.
This will lead to increased merchant sales in the interim period. Key risks are delays
in project commissioning (as merchant sales have a limited window opportunity),
volatility in merchant prices and fuel availability/pricing. Merchant sales in FY11 was
just 12% of total power sales, and is lower than available after meeting contractual
PPAs – continued disappointments could lead to earnings downgrades. The use of eauction
coal for Mundra/imported coal bought on a spot basis (due to shortages in
domestic linkages) would impact profitability.
Multi-fold earnings growth; maintain Neutral
We expect APL’s net profit to increase from Rs5.1b in FY11 to Rs29.7b in FY13.
Consolidated DER in FY12/13 is high at 3.3x/2.7x respectively. Funding is comfortable
as 82% of the capex on a 6.6GW pipeline, to be commissioned by FY13 has been
incurred. Our SOTP-based target price is Rs109. Neutral

Tata Power : Commodity earnings drive medium term profitability :Motilal Oswal

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Commodity earnings drive medium term profitability
FY12 to be an inflexion point, possibly the peak year of earnings until FY14
FY12 will be an inflexion point for Tata Power, due to the (1) commissioning of the first
unit of the Mundra UMPP, (2) 1GW of the Maithon project becoming operational in phases,
providing merchant upsides (as PPA starts from FY13), and (3) greater visibility on KPC/
Arutmin Mines production ramp-up and continued robust realizations. However, FY12
could also be Tata Power's peak year of earnings in the medium term, given (1) increasing
losses from Mundra UMPP, (2) one-time merchant gains from the Maithon project, and (3)
no new visibile capacity addition before FY16, as most projects are in the initial stages of
development. Re-negotation of fixed price contract for coal supply with KPC/Arutmin
Mines remains a key variable to watch for in the near term. We maintain Neutral.
Commodity earnings to drive medium-term profitability
Over FY11-13, we expect Tata Power's consolidated earnings to increase from Rs19.4b
in FY11 to Rs25.3b in FY13 (CAGR of 14%). However, commodity earnings will drive
a very meaningful part of the increase, as Tata Power is net long on coal by 19-20mt
a year. The contribution of commodity earnings to consolidated profitability increased
from 9% in FY08 to 44% in FY11, and we expect this to increase to 59% in FY13.
Mundra UMPP commissioning to impact profitability from FY13
Given the competitive tariff bid and increasing prices of imported coal (from US$35-40/
ton in 2007 to US$70-75/ton currently), we expect Mundra UMPP to post meaningful
losses. Year-1 quoted tariff is Rs1.9/unit and given permissible escalations, we estimate
applicable tariff of Rs2.3/unit, resulting in annual losses of ~Rs6b on full commissioning
in FY14. After it commissions the Mundra UMPP the profitability of the chain (coal
mining + Mundra UMPP) will decline from Rs13.6b in FY12 to Rs10.6b in FY14.
Projects under construction largely have regulated/controlled returns
We expect Tata Power to commission 5.1GW capacity until FY14, including the
Mundra UMPP (4GW) and Maithon (1GW), where offtake has been tied up. Tata
Power's merchant capacity is 200MW (commissioned); ~600MW from its Maithon
project will also be available for merchant sale in FY12 (as the PPA is effective from
April 2012). The incremental project pipeline is 6.9GW, of which 1.3GW is based on
captive mines. For other capacities, fuel sourcing has yet to be tied up.
Valuation and view
We expect Tata Power to post consolidated PAT of Rs27.2b in FY12 (up 40%). Our
SOTP-based target price is Rs1,272, comprising Rs527/share for Mumbai distribution
(DCF, WACC of 10.5%), Rs80/share for Delhi distribution (15x FY12E PER), defense
business Rs14/share (15x FY12E EV/EBIDTA), Rs10/share Tata BP Solar Rs40/
share (20x FY12E PER), Powerlinks Transmission Rs14/share (1.4x FY12E P/BV),
investment Rs236/share (BV or market price, with 25% holdco discount), Mundra
UMPP + mining JVs at Rs320/share (DCF), Maithon project at Rs78/share, projects
under development at Rs80/share and net debt of Rs122/share. Indonesian regulations
specify mineral exports at reference prices and strict implementation could possibly
impact earnings by Rs3b a year (~3mt to be procured at fixed prices). We maintain
our Neutral recommendation.

NHPC: Bunching of capacity to drive core earnings growth :Motilal Oswal

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Bunching of capacity to drive core earnings growth, RoE
Growth visibility poor; risks include higher cost, delays and generation linked recovery
NHPC is facing delays in project execution and related cost escalation, which impacted
earnings growth/RoE improvement. The CEA's latest review of hydro power projects
indicates NHPC's 4.2GW capacity, which is under construction, will be commissioned by
FY15, doubling capacity to 9.5GW from 5.3GW in March 2011. Earnings growth is thus
expected to be robust at 14.7% over FY11-13. However, RoE improvement will be limited
to ~7.5% by FY13 vs 6.3% in FY11, as cash/CWIP comprise 42% of capital employed in FY11
and FY13. NHPC is executing only one project of 330MW due to be commissioned beyond
FY15, which provides poor growth visibility. The key risk to the business includes lower
than normal monsoons leading to delay in recovery of RoE, non-approval/delays in project
costs and delays in capacity addition. We initiate coverage with a Neutral rating.
We expect bunching over FY12-14 due to execution delays
Hurdles such as geological surprises, local unrest and environmental issues have led
to delays in NHPC's project commissioning by six months to three years for its
4.5GW of projects under construction. This is despite NHPC having spent 40-80% of
its cost on the projects as at March 2010. According to CEA's latest review and in our
view, the projects will bunch up for commissioning over FY12-14. We expect NHPC to
commission 515MW in FY12, 1.1GW in FY13,1.8GW in FY14 and 750MW in FY15.
Cost overruns, lower generation could impact RoEs
Cost overruns are inevitable in hydro power projects due to complexities and delays.
For projects under construction, NHPC has witnessed a 30-80% increase in its cost
and thus, cost approvals by state regulators/discoms pose a risk to earnings. NHPC
had faced issues of cost overruns not being allowed initially for its Dulhasti, Chamera
and Teesta V projects. Besides, as per new tariff norms NHPC's recovery of RoE is
partly linked to generation and thus, hydrology risk is passed on to it. Although this is
allowed to be recovered over the years, the shortfall in generation may delay recovery
of RoE and impact NHPC's reported earnings/RoE. NHPC's reported RoE moved up
from 5% in FY06 to 7% in FY10 as it received tariff arrears on projects for which its
higher costs were approved.
Earnings CAGR of 15% over FY11-13, RoE expansion limited
We expect NHPC to report earnings CAGR of 14.7% over FY11-13, driven by
commissioning of 1.6GW of projects, and its RAB to grow from Rs70b in FY11 to
Rs94b in FY13. Our estimates assume latest cost estimates and delays in approval/
disapproval could impact earnings. We expect NHPC's reported RoE to be subdued
over FY11-13, as CWIP remains high and cash on books yields lower returns (together
accounting for 42% of capital employed in FY11, expected to fall to 35% by FY14).
Reported RoE is thus expected to grow from 7% in FY10 to 9% in FY14.
Valuations fair, growth option limited
The stock offers very limited growth opportunity, with a PER of 12.9x FY13E (in line
with 12.6x for NTPC, with a better growth profile) and 1x P/BV (a large part of net
worth deployed in cash/CWIP) and are reasonable in our view. We initiate coverage
with a Neutral rating and a target price of Rs27.