Maruti Suzuki India -Awaiting inventory correction ::RBS

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Maruti Suzuki India
Awaiting inventory correction
Maruti is suffering the effects of a sharp deterioration in demand and an adverse
product mix due to 1Q's workers strike. After also factoring in the strong yen and
intensifying competition, we trim our FY12 and FY13 EPS forecasts by 15%. With
inventory correction looking likely, we cut our TP to Rs1083.


Volumes may continue to decline for a few more months
Maruti’s 1Q domestic dispatches were flattish yoy due to weak demand for petrol cars and
the impact of the workers strike on diesel car supplies. Our channel checks indicate that in
spite of a steep hike in discounts, retail sales volumes lagged company dispatches by around
15% in 1Q, thereby pushing dealer inventory substantially above the company norm of three
weeks. We believe this will lead to inventory correction in the coming months; hence, the yoy
decline seen in June may worsen before returning to normal levels in 3Q. Based on these
assumptions, we trim our sales volume growth estimates by 9% for FY12-13, which
translates into growth of 3% in FY12F and 10.5% in FY13F.
We believe the poor product mix will affect June quarter results
We estimate a 23% yoy drop in 1Q EPS to Rs14.1 as we expect margins to slip to 8.3%,
down 210bp yoy and 150bp qoq given the poor product mix following the workers strike and
higher discounts on petrol cars. We expect margins to bottom out in 2Q as the impact of the
strong yen on imports plays out with the expiry of hedges in July, and as the company takes
action to reduce dealer inventory levels. Consequently, we trim our FY12-13F EPS 14-16%.
Short-term concerns to peak in 2Q; Hold maintained
The stock has underperformed the Sensex over the last seven quarters as the competition
has intensified since FY11, with industry volumes flattening in recent months. We believe the
worst will be over soon as competition in the compact car segment peaks due to new product
launches (Hyundai Ha, Honda Brio and GM Beat diesel are set for a 2Q debut) and Maruti
feels the pain of inventory correction and a strong yen. Based on our revised EPS forecasts
(16% below consensus for both FY12 and FY13), we trim our three-stage DCF-based TP to
Rs1,083, which is 12.1x FY13F EPS. We expect qoq improvements from 3Q due to festivals,
enhanced diesel engine production capacity and new product launches. The current P/BV
shows that valuation is not yet attractive, and with 7% potential downside we stay at Hold.

UBS - Havells India - Management meeting reinforces our confidence

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UBS Investment Research
Havells India
Management meeting reinforces our
c onfidence
􀂄 Event: appliances launch expected in August 2011
We met Havells management recently. The company intends to launch electric
irons, sandwich makers, induction heaters, rice cookers, ovens & toasters, and
juicer mixer grinders in August 2011—it expects to achieve Rs0.6bn revenue
during the August 2011-March 2012 period. As per the company, this is a Rs45bn
market, which is highly fragmented. Similar to its strategy in fans, the company
plans to focus on high-end products. We believe appliances could accelerate the
company's revenue growth.
􀂄 Impact: we retain our estimates
We retain our estimates for Havells and reiterate our Buy rating. The stock has
been weak over the past one month due to uncertainties in Europe and we think is
now pricing in the worst-case scenario with regard to Sylvania. We believe the
share price weakness provides an attractive opportunity.
􀂄 Action: reiterate Buy rating and Rs510 price target
We reiterate our Buy rating and price target of Rs510 for the stock.
􀂄 Valuation: Buy rating, Rs510 price target
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (assuming a WACC of
13.19%). The stock is trading at 12.5x FY12E PE. We believe this is very
attractive for a high-quality business: for FY11-15, we forecast 30%+ ROE and
20%+ EPS growth.

UBS:: India Banking & Finance Sector - Proposed SEB reforms +ve for power fincos

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UBS Investment Research
India Banking & Finance Sector
P roposed SEB reforms +ve for power fincos
􀂄 Event: Meeting of state power ministers to discuss rising distribution losses
In a meeting yesterday power ministers of various state governments adopted
measures to lower losses of distribution utilities and ensure financial sustainability
of DISCOMs. Key measures include: conversion of state loans to equity; annual
tariff revision in lieu of costs; clearing of outstanding subsidies; bidding out
distribution franchises (to help improve efficiency); and financial auditing. Rising
state electricity board (SEB) losses (Rs780bn, 1% of GDP as per media reports)
have been an oft cited concern regarding the financial viability of state utilities.
􀂄 Impact: Improving financial health is a positive for REC and PFC
State utilities account for 83% of REC’s and 65% of PFC’s loan books. Valuations
for PFC/REC have de-rated on concerns of a default by SEBs, especially after the
State of Tamil Nadu (TN) approached the centre for a bailout (please refer to our
note of 20 June, TN SEB US$9bn bailout package). Recent measures, while
advisory in nature according to UBS Utilities analyst Pankaj Sharma, underline the
systemic importance of SEBs and the low likelihood of a default by a state utility.
􀂄 Action: Buy REC, PFC; valuations remain attractive
PFC/REC’s share prices reacted strongly today to the news. We believe valuations
are not factoring in possible high medium-term growth of 20%+ and ROE of 18-
20%. Our price targets imply 29% potential upside for PFC and 25% potential
upside for REC from current levels. A risk is a lack of implementation of the
reforms by various states.

UBS: TCS - A nother strong quarter

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UBS Investment Research
First Read: TCS
A nother strong quarter
􀂄 TCS 1Q profits in line with our estimates, beats street by 5%
TCS reported another strong quarter, with revenue at US$2.4bn (up 7.5% QoQ)/
Rs108bn (up 6.3% QoQ) in line with our estimates. Net profit met our estimates at
Rs23.8bn, down 1% QoQ, but was 5% ahead of consensus. EBIT margins were
down 190bp QoQ to 26.1%, slightly lower than our estimate of 26.1% due to
seasonal wage hikes. Volumes were up 7.4% QoQ vs. our expectations of 6%.
Banking, Financial Services and Insurance grew 5.8% QoQ (vs. 3.3% in 4Q
FY11), while Telecom grew 14.3% QoQ after a sluggish 2H FY11.
􀂄 TCS sees no impact of macro on IT decision making
Contrary to the cautious commentary from Infosys, TCS management believes that
the ongoing uncertainty in macro economic environment has had no impact so far
on IT budget decisions. However, the management believes that the macro
environment remains challenging, which could delay pricing power for the sector.
􀂄 Strength in TCS numbers suggests Infosys’ problems are company specific
While we still await other major vendors like Cognizant and Wipro to report
earnings for the quarter, the inherent strength reflected in TCS’ 1Q FY12 earnings
suggest that the weaker numbers reported by Infosys could be company specific
and related to the ongoing restructuring.
􀂄 Valuation: maintain Neutral
We expect TCS to go back to a 8-10% premium to Infosys on the back of 1Q
earnings surprise to consensus. We are reviewing estimates. Our PT is based on
DCF.


􀁑 Tata Consultancy Services Ltd.
Tata Consultancy Services (TCS), incorporated in 1968, is the largest Indian IT
services company with revenue of US$6bn in FY09 and more than 143,000
employees. TCS offers services in application development and maintenance,
enterprise solutions, IT infrastructure management, consulting, and business
process outsourcing to its clients. TCS's customers are from the banking,
financial services and insurance, manufacturing, telecom, retail and distribution,
energy and utilities, and life sciences verticals. Its key markets are the US (about
52% of FY09 revenue) and Europe (about 29%).
􀁑 Statement of Risk
A sharp decline in IT Services spending could result in downward revision of
our earnings estimates.

UBS:: Idea Cellular - Spice merger – Not a big issue

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UBS Investment Research
Idea Cellular
Spice merger – Not a big issue
􀂄 Event: Idea challenges order on Spice merger to division bench (Delhi HC)
Idea has challenged the earlier Delhi high court (HC) ruling on Spice merger to a
division bench. Delhi HC had stayed the transfer of six mobile licenses of Spice to
Idea stating that the company did not comply with M&A guidelines. It had asked
Idea to seek DoT permission for merging Spice service areas. The court has also
imposed a fine of Rs 10m on Idea for concealing information. Idea has maintained
that it has not concealed any information and will contest the judgement.
􀂄 Impact: Maximum fine is likely to be Rs3,300m or Rs1 per share
Based on our discussions with industry contacts, we believe that the most likely
outcome is that Idea pays a fine to DoT of Rs3,300m or Rs1 per share. Of the 6
Spice service areas, Punjab and Karnataka are operational. Idea is the number two
player in Punjab with rev market share of 20.6% while in Karnataka Idea is
number four with rev market share of 7.6%. Based on AGR data, Punjab
contribution 5.4% to AGR in Mar11 while Karnataka contribution was 4%
􀂄 Action: Idea is our top pick in the Indian mobile sector
Idea continues to outperform its peers both in terms of revenue and earnings
growth. Further, we expect Idea to benefit the most from improvement in pricing,
regulatory environment given it’s a pure play on Indian mobile sector. We think
Idea could also be an M&A candidate as and when consolidation plays out in the
sector.
􀂄 Valuation: Maintain Buy rating with SoTP based PT of Rs100
We value Idea at Rs93, Idea’s share in Indus at Rs20 and also incorporate a charge
of Rs13 towards one time spectrum fees and spectrum renewal fees.


􀁑 Idea Cellular
Idea Cellular is a GSM mobile operator in India with a nationwide subscriber
base of 43.0m (including Spice) for a market share of 11.1% as of March 2009.
The company operates in 16 of 22 service areas in India and has access to 900
MHz spectrum in nine of 16 service areas. The company is part of the Aditya
Birla Group.
􀁑 Statement of Risk
We believe irrational competition among operators presents the biggest industry
specific risk factor for Idea Cellular. In terms of company-specific risks, we
identify the following: new circle strategies, and Idea’s ability to scale up to
meet burgeoning demand in the Indian mobile sector.
There is low visibility for capex associated with the new circles as it will depend
on the amount of spectrum allocated as well as which circles are likely to be
allocated spectrum.

UBS :: Bajaj Auto Q 1FY12: Delivering inline

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UBS Investment Research
Bajaj Auto
Q 1FY12: Delivering inline
􀂄 Event: Sales, EBITDA, PAT inline with UBS-e
Net sales increased by 13%qoq to Rs 45.9bn (+23%YoY) vs UBS-e of Rs 46.3bn,
helped by 15%qoq growth in volumes. Domestic ASP declined 2%qoq on lower
3W mix while exports ASP was up 3%qoq. EBITDA margin declined 140bps qoq
due to sharp increase raw material cost inline with UBS-e of 19.8%. PAT was up
20%YoY to Rs 7.1bn inline with UBS-e of Rs 7.04bn.
􀂄 Impact: Margins likely to hold up despite rise in RM cost
Mgmt. expects the raw material cost per unit to remain in similar vicinity in
Q2FY12. The co. believes the domestic 2W demand environment remains stable.
Mgmt. expects domestic 3W shipments to increase in Q2 and the co. to continue to
outperform the industry growth. Mgmt. continues to maintain its guidance of 20%
overall growth for FY12.
􀂄 Action: Maintain Buy, Await more details on the Conf. call on 18 Jul
Q1 FY12 conf. call at 10:00 A.M. IST on 18th Jul (Mon); primary dial in: (+91 22)
6629 0048/ 3065 0020. We will look to revisit our nos. post the conference call.
We look for further clarity on the post DEPB scenario and export growth outlook.
􀂄 Valuation: Maintain Buy and PT of Rs.1,600
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers with UBS’s VCAM tool with a WACC of 11.5%.


􀁑 Bajaj Auto
Bajaj Auto was India's largest two-wheeler manufacturer until 2000. It is present
in all product segments, including three-wheelers. Bajaj has a technical tie-up
with Kawasaki in the motorcycle segment. Bajaj was strongest in scooters,
although its position has declined sharply in recent years. Bajaj is now
attempting to gain market share through the launch of new motorcycle models.
The company is also trying to gain a foothold in the two-wheeler markets in
Southeast Asia and Latin America via CKD assembly facilities set up by its
distributors.
􀁑 Statement of Risk
We think key risks for Bajaj remain rising commodity prices, a potential price
war with Hero Honda in the domestic market, a sharp decline in 3W volumes,
and a drop in export sales

OIL & GAS --Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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OIL & GAS
In Q1FY12, Brent crude oil touched a high of USD$128/bbls but later settled
to USD$ 111.4/bbls (30th June '11), which is 7.1% lower from the beginning
of the quarter. However, due to various geo-political issues the crude oil
again surged and is currently trading ~USD$115-120/bbls. Brent crude
throughout the quarter was trading above USD$106/bbls, which is big
positive for private oil exploration companies like Cairn India, etc.
In Q1FY12, Singapore refining margins averaged ~USD$5.2/bbls. We believe
refining companies to declare decent set-of numbers on account of higher
demand and GRMs. However, the fall in the crude oil price at the quarter
end will have marginal negative on the refining companies in the form of
inventory losses, so to that extent GRMs can be muted.
Recently, OMCs have received a cash subsidy of ~Rs 70 Bn to cover losses
incurred in the Q4FY11. They are further expected to get Rs 130 Bn in two
tranches in July'11. The actual payment of cash compensation for Q4FY11
(already accounted in Q4FY11) will improve liquidity and bring down
borrowings to Rs 1 Tn.
The natural gas supply in India was lower due to delay in ramp-up of the
natural gas producti on from KG-D6 by RIL. This will not only negatively
impact the performance of RIL but will also impact gas-utility companies
such as GSPL, GAIL, Gujarat Gas, etc. However, part of the gas volume loss
was compensated by higher import of LNG by PLNG.

SHIPPING -- Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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As per the data available with Bloomberg, the global shipping fleet grew by 9.8 YoY
and 5% in the last six months. Of this, the dry bulk segment saw the maximum
supply (+14.4 % YoY), followed by container and then the tanker segment. While
ocean trade of bulk commodities is estimated to grow by 6% in CY11E (Source:
WTO) and demand for oil is estimated to grow by 2% in CY11E (Source: IEA). This
demand supply mismatch is one of the strong reasons for continuous pressure on the
shipping freight rates.
We estimate the supply side pressure to continue with 45% or 275 mn dwt of the
current dry bulk fleet, 40% or 111 mn dwt of the current tanker fleet and 28% or
50 mn dwt in container segment currently on order with deliveries over CY11E to
CY13E.


The key dry bulk market indicator - the Baltic Dry Index has lost about 106 points or
~7% during the quarter. Similarly the other key dry bulk indices have lost from 5 to
15% during the quarter. However the Capesize index gained ~8% during the quarter.


Tanker market
In the tanker market, Q1FY12 was better for VLCC owners, while other size segments
(Panamax and Aframax) experienced drop in earnings. Put together, the global
tanker market looked in better shape in the quarter. Global geo-political problems,
increased demand from Japan and increased gulf production with Brent at
$110 per barrel supported the market. Going forward, the increased Saudi Arabian
production is expected to provide intermediate term support for the tanker rates, but
more increased production is needed to sustain the long term tanker recovery. Saudi
Arabia is currently reported to produce more than 3 million barrels per day in excess
and is looking to increase production to 10 million barrels per day by July, as long as
the spot Brent crude price remains above $110/ barrel. The oversupply is a serious
concern in the crude tanker market and International Energy Agency (IEA) is expected
the demand to be driven by non OECD nations


Oil demand and tanker supply
There is a strong correlation between demand for tankers and the demand of oil.
The International Energy Agency in June 2011 predicted that the average world oil
demand could rise by 1.1 million barrels a day (1.5% per annum) to 95.3 million by
2016. And we estimate tanker tonnage to increase by 3.2 % (11.9 mn dwt) for the
next two years. So there would be pressure on freight rates in the tanker segment.
Container market
The container market has been weak in the quarter with liners facing falling box
rates. The global container fleet has increased by ~ 10% YoY (as per Bloomberg)
with demand increasing in the range of 5 to 6% (as per Maersk).This mismatch has
put tremendous pressure on the rates. An increasing number of large ships are getting
delivered on the Far East to Europe trades. The spot rates for shipping of containers
out of Shanghai to Europe has now slipped below the USD 1,000 per TEUmark
(Source: BIMCO) for the first time since March 2009. The same was USD
1,400 a year ago.
Global cargo volumes for CY11 are expected to rise by minimum 5%, driven mainly
by the strong development in demand in the first quarter. We estimate the supply to
be roughly about 3.2% of the current fleet or 5.5 mn dwt per annum over CY11 to
CY13. The container shipping rates are expected to remain firm in most of the
routes in longer term.
Asset prices
Shipping asset prices typically move in tandem with the shipping freight rates but
with a lag of 3 months. With the fall in the shipping markets, the Shipping asset
prices have come down by 3 to 6 % YoY. The correction has been stronger for 2nd
hand vessels. With this we believe, the Net Asset Values (NAV) or the replacement
cost of ships per share may have come down by 3 to 6 % for Indian Shipping companies.


Price of bunker oil (fuel for shipping vessels) rose to record levels of $660 per barrel
during Q1FY12 vs. $460/bbl last year increasing ~45% YoY. We believe this would
hurt the spot market operations of Indian shipping companies increasing their cost of
operations. Bunker cost about 15 to 20% of the total operating cost of ship owners.


Shipping Corporation of India (Reduce: Target Price -Rs 122)
n We expect SCI's Q1FY12 revenues to decrease YoY by 3.5 % and increase 1.2
% QoQ to Rs 8,751 mn, led by improved tanker market and fleet expansion
n Operating profit is expected at Rs 1500 mn which translates into an operating
margin of ~17 %, falling almost 745 bps YoY from 24.5% primarily due to
higher bunker cost and subdued freight market.
n Net profit is expected at Rs 675 mn against loss of Rs 62 mn in Q4FY11 and
profit of Rs 1,915 mn in Q1FY11. The YoY fall would be primarily due to lower
gains from sale of ships and higher interest impact this quarter vs. last year.
n During the quarter, SCI contracted to buy two resale Supramax Bulk Carriers
from Grand Yard Investments of 57,000 dwt each. The company also scrapped a
product tanker of 29,755 dwt.
Great Eastern Shipping Company (Accumulate: Target Price -Rs
315)
n Q1FY12 consolidated revenue is expected to decline 3.5 % YoY and increase
3.3% QoQ to Rs 6,215 mn, primarily driven by the improvement in tanker freight
rates. Even the offshore segment is expected to do well in the quarter with crude
sustaining above $110 per barrel in the quarter.
n Operating profit is expected at Rs 3850 mn which translates into an operating
margin of ~38 %, falling almost 850 bps YoY from 24.5% primarily due to
higher bunker cost and subdued freight market.


n Net profit is expected at Rs 955 mn against negligible profit of Rs 107 mn in
Q4FY11 and profit of Rs 1,719 mn in Q1FY11. The YoY fall would be primarily
due to lower gains from sale of ships. It is also important to note here that the
company had provided for impairment of Rs 857 mn in Q4FY11.
n During the quarter, the company took delivery of one new build Kamsarmax
(80,700 dwt) dry bulk carrier. It also sold (scrapped) its 1989-built suezmax crude
carrier "Jag Lakshya" (152,000 dwt) leading to the profit from sale of ship during
the quarter.
Mercator Lines Ltd (Buy: Target Price - Rs 50)
n Q1FY12 consolidated revenue is expected to increase ~ 33 % YoY and increase
~ 3% QoQ to Rs 8000 mn with significant contribution from the coal segment.
Even the offshore segment is expected to do well in the quarter with crude sustaining
above $110 per barrel in the quarter. However the shipping segment with
heavy exposure to dry bulk segment is expected to report subdued numbers. The
coal segment (Oorja holdings) is expected to report revenue of Rs 4800 mn
(+12% QoQ; +110 % YoY).
n Operating profit is expected at Rs 1300 mn which translates into an operating
margin of ~16.25 %, declining almost 1950 bps YoY from 33.69% primarily due
to higher bunker cost, weak dry bulk market and increasing share of low Ebidta
margin coal business.
n Net profit for Q1FY12 is expected at Rs 135 mn against loss of Rs 685 mn in
Q4FY11 and profit of Rs 619 mn in Q1FY11. The YoY fall would be primarily due
to lower Ebidta margins because of weak dry bulk market. It is also important to
note here that the company had booked a total loss of Rs 447 mn in Q4FY11 as
loss on sale of the only jack up rig with the company had and sold to GE Shipping
in Q4FY11.

MEDIA-- Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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MEDIA
1QFY12 earnings season shall see moderated top-line performance from
media companies under our coverage universe. Entertainment broadcasters'
topline shall be adversely impacted by the extended cricketing season (IPL),
while newspaper publishers are likely to see softer growth on account of
weaker advertising from the education category. In terms of subscription
revenues, we expect broadcasters to continue benefiting from DTH
proliferation/ digitization. Expenses shall rise strongly, however, and place
a cap on earnings growth. Newspaper publishers shall be burdened with
newsprint prices that have risen ~30% y/y, while broadcasters shall face
higher content/ publicity expenses in a bid to remain competitive. Net-net,
we expect our coverage universe PAT to rise 4.1% y/y in the aggregate; and
see muted impact of the earnings season on the sector. We expect strong
earnings performance from ENIL (BUY, PT: Rs 280), and Sun TV
(ACCUMULATE, PT: Rs 238); we expect poor earnings growth in UTV
Software (SELL, PT: Rs 358).
We believe that strong growth in consumption shall continue to drive advertising
expenditures through the quarter gone by, and our discussions with companies suggest
that the impact of higher interest rates and inflation is yet to be felt on advertising
budgets in the aggregate; even as there may be a slight slowdown in the
quarter for certain genres. Broadcasters as well as newspaper publishers have raised
advertising rates over the past few quarters, and are likely to see benefits of a degree
of pass-through. However, entertainment broadcasters are likely to have felt
softness on account of a strong cricket season (IPL); Newspaper publishers are likely
to feel the impact of lower advertising from education sector in the quarter, as
school results have been delayed this year, thus rolling forward some advertising
expenditures to 2QFY12.
Expenditures are unlikely to moderate for most industry players. Newspaper publishers,
in particular, shall face the burden of significantly higher newsprint prices during
the quarter. We note that newsprint prices have risen ~22% y/y. Most newspaper
publishers, in our understanding, have taken cost rationalization measures in the
past year, with regard to the quantity of newsprint consumed. Given that yields are
likely to contribute ~50% to revenue gains, newspaper publishers are set to witness
a significant (3-4 ppt) decline in gross margins.
Companies are also likely to incur significant expenses on account of new launches/
promotional expenditures: DB Corp continues to invest aggressively in new editions
(Marathi) in Maharashtra, which is likely to continue impacting margins, Zee Entertainment
has undergone a significant rebranding exercise, while HT Media has continued
to raise circulation for various editions. Long-term growth continues to be
viewed as a given; as a result, general promotional/ other expenses shall continue to
rise meaningfully. In sum, we believe that the current quarter shall bring forth a 0.6
ppt (y/y) EBITDA margin contraction on the average, over our coverage universe.
We see PAT growth in our coverage universe at 4.6% y/y. For the sector as a whole,
we do not anticipate the result to have an impact. However, we are bullish on
growth prospects for ENIL (232% y/y growth in PAT), and Sun TV (+23.0% y/y
growth in PAT). We expect weak 1QFY12 from UTV Software, and Zee Entertainment.

METALS & MINING (NEGATIVE OUTLOOK) Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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METALS & MINING (NEGATIVE OUTLOOK)
Steel
(i) While steel price hikes since Dec'10 was captured in Q4FY11result, Q1FY12e saw
little softening of prices (>Rs.750/t Q/Q). Impact of sharp jump in key raw material
prices would just start to flow in Q1FY12e but full impact of raw material price hike
would be seen in Q2FY12e only as most companies were still carrying 1.5-2 months
of raw material inventory. So while we would see beginning of operating margin
compression in Q1FY12e but the margins would be severely squeezed in Q2FY12e.
(ii) Domestic steel consumption growth has slowed down to a mere ~2% Y/Y in Q1
FY12e against a production increase of ~8% Y/Y. Steel volumes are expected to
decline on a Q/Q basis on account of seasonal factors and slowing domestic steel
consumption but its likely that listed large steel producers might still see muted Y/Y
growth on low base and gaining market share against fragmented small steel producers.
Non-ferrous metals
n LME average aluminium prices for Q1FY12e were up 23%Y/Y and 3.6%Q/Q;
LME average zinc prices for Q1FY12e were up 10.9%Y/Y but down 5.4%Q/Q;
LME average copper prices for Q1FY12e were up 30.6%Y/Y but down 4.1%Q/Q.
n LME average inventory levels for aluminium have been stable as up just ~2%Y/
Y and Q/Q; LME average inventory levels for zinc have been growing alarmingly,
up by massive 41.7%Y/Y and 15.1%Q/Q; LME average inventory levels for copper
are down 4.2Y/Y but up sharply by 14% on Q/Q basis.
n Power costs for aluminium producers would rise substantially in Q1FY12e as
sharp hike in coal prices by Coal India would be impacting from Q1 onwards.
n For zinc producers, fall in price realisations coupled with increase in coal costs
from this quarter onwards would lead to margin compression.
n Copper TC/RC realisations had shot up since March 2011, post closure of large
smelting capacity in Japan due to natural calamity. This would lead to substantial
improvement in earnings for Indian copper smelters.
n Silver prices have corrected sharply over last two months or so but average
realisations are still better on Q/Q basis and much better on Y/Y basis.
n As QE2 in US has ended on 30 June 2011, we expect reasonable correction in
LME base metal prices and precious metal prices in Q2FY12e. This should lead to
lower earnings by base metal companies in next quarter and hence decent earning
performance for Q1FY12e might not help much to support stock prices.
Mining
n Coal producers would see significant improvement in earnings on Q/Q basis as
full benefit of coal price hikes by Coal India would be realised from Q1FY12e onwards.
But good results might be already in stock prices post stupendous returns
over last four months. There are market expectations of further coal price hike
by Coal India in near term to neutralize expected increase in labour costs from
July 2011 onwards. However, we believe coal price hike might be few months
away and this might lead to coal company stock prices underperforming despite
very good results likely for Q1FY12e.
n Iron ore spot export prices have been reasonably stable (down 2-3% Q/Q) but
there has been sharp fall in volumes due to continued restrictions of exports from
Karnataka. Timely arrival of monsoon would also impact Q1FY12e volumes.
Weak seasonality in Q2 due to monsoons would mean no near term stock out
performance would be probable in next two months.

INFORMATION TECHNOLOGY -- Q1FY12 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.
3.5% - 5% sequential volume growth expected for top tier companies
We expect top-tier companies to report volume growth of about 3.5% - 5% QoQ.
The expected growth is on the back of consistently improving demand and higher
market share. We understand that, Indian companies have been witnessing continuous
business flows as customers look for better value and reduced costs. In this process,
they are likely gaining additional market share. Infosys is expected to report
subdued growth of about 3.5% in volumes due to volatility in client spending experienced
by it. Recent commentary from peers though, indicates that, they have not
faced any such volatility.
Over the past few quarters, M&A activity in the global BFSI vertical had resulted in
increased business flows. This is now being substituted by more long term and annuity
type of businesses, we believe. Moreover, verticals like manufacturing, which
were slower to start spending, are now seeing increased deal flows, we understand.

BANKING & NBFCS Outlook:Q1FY12 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
Core income expected to grow at 19.2% for banks & NBFC under
our coverage; however, net income growth to be much subdued
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%).
In terms of Net Interest Income (NII), public sector banks under our coverage are
likely to report 18.5% growth. However, in terms of net profit, we expect them to
witness decline (11.33% YoY) mainly on back of subdued performance by the SBI.
We are expecting SBI to report 40.2% decline in its bottom-line on back of higher
operating expenses and higher provisions (management has guided that they need
to provide Rs.11.0 bn in next two quarters to meet RBI's coverage requirements).
We expect BoB and IOB to deliver relatively better numbers in our PSU banking
space. Similarly in private banking universe, we expect Axis bank, HDFC bank and
ICICI bank to deliver better bottom line growth.


Credit growth saw some marginal drop vis-à-vis last fortnight;
gap between deposits and credit growth is narrowing
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.


Over last six months gap between credit growth and deposit growth has declined
from 9.0% (as on December 17, 2010) to 2.5% (as on June 17, 2011) on back of
two factors - rise in interest rate with RBI's tightening is affecting the credit off-take,
while sharp rise in deposit rates in recent past is helping in more deposit mobilization.
We believe that rise in term deposit rates is leading to higher term-deposit mobilization
as compared to demand deposit mobilization. Demand deposits for the system
have declined by 3.75% as on June 17, 2011. We are expecting loan growth to be
around 18-19% during FY12 and deposit growth in the system is likely to calibrate
the loan growth.
NIM to compress by 15-20 bps QoQ; however to remain stable
YoY
We expect 15-20 bps compression in NIM during Q1FY12 QoQ (again depending on
the CASA mix or liability franchise of the individual banks) 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.
Banks to report higher MTM depreciation hits; treasury gains are
also likely to be muted
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.
Asset quality to stabilize; PSU banks to witness higher slippage
while Pvt banks to see improvement
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. Hence, we are expecting stable gross NPA with some negative
bias.
On the other hand, we have seen NPA formations in retail segment have reduced.
Therefore, we are expecting private sector banks to report further improvement in
their asset quality leading to lower credit costs.

FMCG --Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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FMCG
ITC: We expect strong earnings performance from ITC Ltd, as a result of: 1/ stronger
margins in cigarette business, 2/ continued improvements in profitability of non-cigarette
FMCGs, and 3/ continued strength in margins/ revenue growth in other business
interests (paper, hotels and other commodities) Cigarette volumes, which have
registered a decline in FY11 on the back of price hikes taken by the company, are
expected to register strong growth in FY12, and we expect 14% growth in cigarette
net sales. We forecast 21.4% growth in net revenues for the company. We expect
margins to improve 760 bps y/y, and expect EPS growth of 25% for the quarter.

AUTOMOBILE -- Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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AUTOMOBILE
Auto volume moderates in 1QFY12, performance varies across
segments
Volume growth during 1QFY12 has moderated significantly as compared to the runup
that we witnessed in the past couple of years. Various macro factors and higher
base have led to slowdown in the automobile volume growth in 1QFY12. 2W sector
remained the least impacted by the negative macro indicators. Among the 2W players,
Hero Honda has clearly outperformed the peers with a 24% YoY jump in volumes.
Other 2W majors like Bajaj Auto and TVS Motors has seen healthy 18% and
15.6% YoY volume growth helped by exports. Passenger car segment has slowed
down on account of rising interest rates and increasing fuel prices. For MSIL apart
from the general slowdown in car demand, strike at their Manesar plant has also
impacted its 1QFY12 volume performance where growth remained flat YoY for the
company. Within the CV sector, while the demand for the LCV segment remained
robust in 1QFY12, M&HCV sector witnessed a major slowdown in demand on back
of moderation in IIP numbers and detoriating truck operator's viability. In nutshell,
volume growth in 1QFY12 has been sluggish for the passenger and M&HCV segment
and healthy for the LCV and 2W category.
Revenues to grow YoY helped by price hikes and volumes
Revenues for the auto companies in 1QFY12 are expected to grow on account of 1.
Volume growth 2. Increase in realizations. For the 2W, companies we expect a decent
revenue growth rate helped by healthy volumes and various rounds of price increase
taken in the past one year due to rising input cost. For MSIL we expect volumes
in 1QFY12 to remain similar to that in 1QFY11 as volumes growth remained
flat. Escorts is expected to report 11% dip in revenues on back of poor tractor sales
during the quarter.
Margins to skid on higher input cost
Rising raw material prices have been the major concern for the auto companies
since the past one year and this quarter is no different. While prices of key raw
material like steel, aluminum and rubber are up significantly YoY, prices on QoQ
basis have largely remain the same. Accordingly we see sharp dip in margins for the
companies YoY. Sequentially though we expect MSIL and Escorts margins to see a
steep drop due to poor performance on the volume front. While we have seen some
price correction in the rubber prices, the impact of the same will be visible from
2QFY12 onwards. On the other hand metal prices continue to remain firm and pose
risk to the auto company's profitability in FY12.
Profit growth to fluctuate immensely among companies
Net profit for the company is expected to be impacted by moderation in volumes
and dip in EBITDA margin. YoY change in profit is expected to vary considerably
among companies. For the companies under our coverage, while on one hand we
expect BAL's YoY profit to grow by 26%, on the other hand Escorts profit during the
quarter is expected to come down by 69% YoY. Maruti Suzuki too is expected to
report a 8% drop in profit while Hero Honda and TVS Motors profits are expected to
increase by 15% and 5% respectively. On sequential basis we expect Hero Honda
to report 12.5% higher profits.


Key points to watch out for...
n Bajaj Auto - Company's EBITDA margin has been strong over the past several
quarters and is expected to remain healthy in 1QFY12.
n Hero Honda - Post split with Honda Motors in 3QFY11, margins improved in
4QFY11. We expect the trend to continue into 1QFY12. Volumes have grown at
a strong pace for the company during the quarter.
n Maruti Suzuki - With volumes remaining flat YoY, we expect tremendous pressure
on the company's margin in FY12. Furthermore the impact of strike needs
on the profitability needs to be watched out.
n TVS Motors -Volumes for the company has at a decent pace in the past few
quarters, but the company has been unable to improve its margins which remains
at a relatively low levels as compared to its peers.
n Escorts - Tractors volumes in the quarter has seen a sharp decline. We expect
significant impact of this on the company's margins.

NIIT Technologies – Bags largest ever deal:: RBS

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NIIT Tech announced a US$85m 5-year deal (to be executed by a 60% JV). We believe this deal,
the earlier announced Eurostar deal and beefing up of the sales organization showcase more
aggressive intent on growth.


60% JV with Morris to execute business of US$85m over 5 years
􀀟 NIIT Technologies announced a Joint venture with Morris Communications for providing
integrated IT & BPO services to Morris Communication.
􀀟 Under the contract the JV will provide services for an aggregate amount of US$85 m over a
period of 5 years.
􀀟 According to management, NIIT Tech will hold 60% stake in the JV, and hence it will be fully
consolidated on the books.
􀀟 As part of the contract the JV will take over key assets from Morris including IT Infrastructure,
people and application landscape.
Recent deals show that sales engine is revving up
􀀟 This is clearly the largest ever contract for NIIT Tech (the BSF deal which was announced last
year was of US$50m). In terms of annual contract value this translates into US$17m. The
company also announced a multi-million dollar deal with Eurostar, where we believe the
annual deal value could be US$5-10m. These two deals can can potentially add c8-10% to its
FY11 reported topline of US$276m.
􀀟 We also note that the deal is in the Media space, not one of the focus verticals of NIIT Tech
(Travel, BFSI and Retail/Manufacturing). We believe the company has become fairly
aggressive in its sales efforts of late. We note that the company has recently appointed
Global and European heads of Sales, versus a somewhat diffused sales organization earlier.


We await more clarity on margins, which could be dilutive in the near term
􀀟 We are yet to get clarity on margins for the deal, given that it involves people takeover from
onsite locations, in addition to assets.
􀀟 However, over the lifetime of the deal, there is opportunity to improve margins, through
shifting work offshore.
􀀟 We await details on the contractual terms between NIIT Tech and Morris, in terms of call/put
options on their stake in the JV.
􀀟 We will look to revise our forecasts, once we have more clarity on the deal economics.
􀀟 We reiterate our Buy on the stock. It trades at 6.7x FY12F EPS, at the lower of mid-cap peer
group

UBS:: L & T - Meeting with management - key takeaways

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UBS Investment Research
L & T
M eeting with management - key takeaways
􀂄 Event: We met with the management of L&T recently
Key takeaways from our meeting were: 1) Pick-up in activity levels in general this
year compared to last year; 2) Ordering is likely to be strong in Hydro-carbons,
metals and infrastructure. In the power sector, the generation segment has some
issues, while transmission/distribution are likely to be strong; 3) Key reason for
L&T’s margins being higher compared to peers is its integrated business model,
wherein it participates along the entire E&C value chain - design, engineering,
project management, construction and manufacturing.
􀂄 Impact: Margin downside due to growth in overseas markets unlikely
The company also stated that: 1) Growth in export markets is a diversification
strategy and not for filling-up capacity - overseas growth is not at the cost of
margins and 2) the objective of entering the development business is to benefit
from the equity upside that arises from ownership of complex projects that L&T
executes. So far, L&T has made ~25% returns on projects that the development
business has exited.
􀂄 Action: Reiterate Buy, Top pick in Indian infrastructure space
The company believes that government action is key and financing is unlikely to
be a key constraining factor for the development of the infrastructure sector in
India. We like L&T for its strong competitive advantages, across-the-spectrum
presence, good execution track record and robust balance sheet.
􀂄 Valuation: SOTP-based PT of Rs2,100, trading at lower end of band
The stock is currently trading lower than the average of its historical range.

CONSTRUCTION - Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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CONSTRUCTION
We expect construction sector to post a subdued performance in comparison
with Q4FY11. Construction activity during Q1FY12 was to some extent
impacted by state assembly elections in eastern and southern region.
Revenues in our construction universe (exc Punj Lloyd) are likely to grow by
11.4%YoY while operating margins may decline by 25-50 bps for most of
the companies. Net profit is expected to decline by 3% YoY due to higher
interest outgo. As far as order inflow is concerned, companies have
mentioned that project bidding has increased in comparison with last year
but simultaneously competition has also increased, thereby impacting
margins or project IRR's. Though we expect order inflow to improve during
FY12, but we believe that next one quarter is extremely important to watch
out for order inflows. Lack of order inflow during H1FY12 may shift the
execution towards FY13 and may further impact the revenue growth during
FY12.
Operating margins are expected to be marginally lower than FY11 due to
higher competition as well as higher raw material costs. Though companies
are hedged to a larger extent with variable pricing clauses but fixed rate
contracts may be impacted by higher costs. Interest rates continue to stay
high so we expect net profit growth to be impacted by higher interest
outgo.
Though valuations have already come down to very attractive levels, we
would now be selective in construction sector and would prefer companies
with low valuations, higher revenue visibility or where order inflow is
expected to be very strong. Our top picks in the sector would be IRB Infra,
IVRCL infra, BGR Energy, Pratibha Industries and Unity Infra etc Key risks to
our recommendations would come from lower than expected revenue
execution and further delay in order inflows.
Key highlights during Q1FY12
Order inflow ramped up only in selective segments
NHAI had come out with a monthly target for project awards but has till now lagged
behind its targets. During Q1FY12, only 4 projects worth Rs 55 bn have been
awarded as against its target of 14 projects worth Rs 185 bn. Out of these, one large
project for Ahmadabad-Vadodara stretch is awarded to IRB and another large project
for Beawar-Pali stretch is awarded to L&T. Other two projects were awarded to JMC
projects and KTG respectively. Award of two projects worth Rs 30 bn in West Bengal
got delayed due to state assembly elections and are expected to be awarded in next
few months. International segment awards especially from MENA region also remained
weak due to tensions prevailing in that region. Along with this, building segment
remained lackluster due to slow offtake from real estate sector while irrigation
segment is yet to show signs of pick up. In urban infra, few projects from metro
have picked up while in power segment, large contracts are still to be awarded.


Revenue growth may be impacted by lower order inflow during
FY11
Revenue growth during Q1FY12 is expected to be impacted by lower order inflow
witnessed during FY11. Along with this, construction activity was also impacted by
state assembly elections during Q1FY12 in southern and eastern regions. Though we
have already lowered down our forecast for FY12 revenues due to lackluster order
inflow in FY11, any further delay in ramping up of order inflows may further put a
risk on revenue growth during FY12.
Operating margins may go down in comparison with last year
We expect operating margins to go down marginally during Q1FY12. Although order
books of most of the companies have variable pricing clauses, but companies having
higher proportion of fixed price contracts may witness some margin contraction due
to hike in commodity prices. However for full year FY12, we expect margins to correct
by nearly 25-50 bps for FY12 to factor in increased competition as well as hike
in the commodity prices seen in past few months.
Net profit growth is expected to be impacted by higher interest
outgo
Interest rates continue to stay high during Q1FY12 and due to higher working capital
requirements of the construction sector, interest outgo is expected to remain high.
Along with this, interest outgo may also remain high for companies that have redeemed
their FCCB's during Q1FY12 (eg Punj Lloyd). Thus net profit growth is expected
to be impacted by low revenue growth as well as high interest outgo.

CEMENT -- Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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CEMENT
Lower than expected demand coupled with higher supplies is expected to
come in focus once again after witnessing two quarters of supply discipline.
We had expected cement prices to stay firm only till Q1FY12 and now we
have started witnessing signs of price declines. Though we expect
improvement in cement realizations for cement companies during Q1FY12
on yearly basis but we expect that prices will remain under pressure in the
coming quarters. We expect revenues in our coverage universe to decline by
8.6% on QoQ basis and grow by 11.5% on YoY basis excluding Ultratech's
numbers. Operating margins may stay flat sequentially or improve
marginally but are likely to decline in comparison with last year. Net profit
during Q1FY12 is expected to decline 20% QoQ due to lower volumes and
higher costs but may remain flattish on yearly basis.
Though we expect cement demand to grow at a CAGR of 9% between FY11-
FY13 but it will not be sufficient to absorb incremental supplies. We thus
continue to maintain our cautious stance on the sector and would only
recommend players which are available at attractive valuations. Our top
picks in the cement sector are Grasim industries and Shree Cements.
Demand growth to improve during FY12 but next two quarters
are important to watch out for.
Demand growth during FY11 was lower than our expectations but we expect demand
to witness an improvement in FY12 due to improvement expected in infrastructure
order awards as well as low base effect. However, we believe that next 3-
6 months are very important to watch out for infrastructure award process. Any delay
in awards would shift the demand revival further by six months to FY13.
Cement prices have started witnessing correction during Q1FY12
Cement prices have started witnessing correction during Q1FY12 due to lack of demand
revival as well as low construction activity during state assembly elections.
Prices witnessed sharp increases during Q4FY11 primarily led by supply discipline in
anticipation of demand growth going ahead. However, demand growth failed to
revive sharply. This coupled with issues related to labor availability and onset of
monsoons led to price declines in most of the regions. Our dealer interactions suggest
that prices may remain weak going ahead due to incremental supplies as well
as monsoons.
Overall costs continue to remain high
Cost pressures will continue to weigh on operating margins during Q1FY12. Though
average cement prices during Q1FY12 are expected to be better than Q1FY11, but
costs are likely to remain high due to higher coal prices as well as freight costs. Full
impact of hike in domestic coal prices is expected to be visible during Q1FY12.
Though imported coal prices have come off a bit, but its impact would be reflected
only in next quarter since companies normally have an inventory of 2 months. We
expect EBITDA/tonne to improve on yearly basis while we expect it to decline on a
sequential basis. With recent increase in the diesel prices, freight costs are likely to
increase further.

India Autos: 2Ws and LCVs still holding up In Jun-11::CLSA

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2Ws and LCVs still holding up
In Jun-11, India’s car sales grew 4% YoY, 2Ws grew 15% YoY while CVs
grew 17% YoY. 2Ws and goods LCVs are the only segments which continue to
report double digit growth. We expect growth of 10%, 13% and –5% for cars,
2Ws and M&HCVs respectively in FY12. FY12 is set to be a tough year for
Indian auto stocks given the weak demand environment and continued input
cost pressures. FY13 might be better if interest rates start to decline and
demand recovers. M&M remains our top 12m pick.
Cars & UVs: Single digit growth rates continue in June
q Domestic car sales rose just 4% YoY in Jun-11. YTD growth stands at 9%. Car sales
volumes in Jun-11 were partly impacted by the strike at Maruti’s Manesar plant.
q We expect car industry volumes to grow at 10% in FY12.
q Maruti’s market share was down 8ppts MoM to 43% in Jun due to the strike; Tata
Motors was the key beneficiary gaining 3ppts MoM market share
q UV sales grew just 6% YoY for the 3rd month in a row.
CVs: Trucks growth has moderated; goods LCVs still robust
q Truck sales rose a modest 9% YoY in Jun. YTD growth stands at 7%. We expect 5%
YoY decline in volumes in FY12 post two years of 30%+ growth.
q Goods LCVs growth was still robust at 32% YoY in Jun-11.
q Tata Motors lost some market share in trucks (to ALL) and in goods LCVs (to M&M).
2Ws/3Ws: 2W growth is holding up better but 3Ws have slowed down
q 2W sales grew at 15% YoY in Jun-11. 2Ws growth is holding up better than 4W
growth. Scooters growth was relatively modest at 11% YoY and has been lower
than motorcycles in FY12.
q Hero Honda gained 1.8ppt MoM market share in motorcycles while Bajaj lost 1ppt
market share in Jun.
q Passenger 3W sales were flat YoY in Jun. Market shares of Bajaj and Piaggio
remained almost stable MoM
Tough year for autos; 2Ws near-term defensive, favour M&M on 12m view
q We see FY12 as a tough year for auto stocks given weakening demand, rising
competition and no respite in input cost pressures.
q 2Ws might be a better near-term defensive given better volumes and earnings
growth, but we see limited absolute return potential due to rising competition FY13
onwards.
q 4W stocks could underperform in the near-term but should recover towards end-
FY12 if interest rates start moving down and demand recovers. Our top pick on
12m view is M&M (BUY, TP Rs800).

CAPITAL GOODS & POWER - Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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CAPITAL GOODS & POWER
The capital goods index has clearly lost further momentum in the first
quarter of FY12. Few pointers.
q While for April 2011, capital goods index posted a healthy growth of
14.5% yoy, we expect to see moderation in the following months as the
underlying investment trend is weak. Consumer durables grew at a slow
pace of 3.8% yoy in April 2011.
q Gross fixed capital formation has declined from 17.4% in the first quarter
of 2010-11 to a mere 0.4% in the fourth quarter of 2010-11.
q The total outstanding project investment as of March 2011 grew at a
lower rate of 16.1% as against 22.9% recorded a year ago. Fall in fresh
investment by the Private sector was the main reason for the overall decline
in project investment.
q Increasing protests from land owners, environmentalists, uncertainty
over the availability of raw materials in the form of coal or iron ore mining
leases, saw more number of projects being stalled by promoters in
FY11. In all, the year saw 692 projects worth Rs 1,702 bn put on the back
burner by project promoters. During FY10, 477 projects worth Rs 1512 bn
were abandoned by the promoters.
q Major capital goods players have pointed out that apart from the policy
related bottlenecks, higher interest rates are resulting in longer project
finsalisation cycle.
q Another area to monitor is the material prices which have been ruling
high (though they are off from highs). Managements have generally been
cautious on margin outlook.
Preview Highlights
n We expect aggregate revenue growth of 19% yoy in the first quarter, driven
mainly by BHEL, L&T, Suzlon.
n Aggregate EBITDA is expected to grow at a smart rate of xx% yoy mainly driven
by BHEL and L&T.
n Aggregate PAT excluding Suzlon is expected to grow 20% yoy in Q1 FY12.
n The business outlook for Capital Goods remains healthy but it is nowhere closer
to the boom times in FY06-07.
n To profit from the capital goods sector, we recommend investors to follow a
stock specific buying strategy.
n We would recommend selective buying in stocks like Havells India, Voltas,
Greaves Cotton, Diamond Power and Bajaj Electricals.
Stock Performance
By and large, the capital goods sector stocks remained lackluster for the quarter.
Weak order intake and rise in material prices were the main concerns which led to
the derating of stocks. L&T was the standout performer for the quarter on the back
of strong set of Q4 numbers that surprised the market. BHEL reported strong numbers
for Q4 which were partly boosted by accounting changes. This along with
government's decision to sell 5% equity in the company led to sell-off in the stock.
Thermax, Voltas and Blue Star disappointed with their Q4 FY11 order intake, which
weighed on their stock prices. Mid-caps like Time Technoplast and Everest Kanto
outperformed on the back of strong Q4 numbers. .

Q1FY12 RESULTS PREVIEW ::Kotak Sec,

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Q1FY12 RESULTS PREVIEW
18% revenue growth expected during the quarter (ex Oil & Gas)
We expect stocks under our coverage (ex-banking / NBFCs) to report revenue
growth of about 26% on a YoY basis. This is partly helped by the scale up in
revenues of Cairn India. Ex - Oil & Gas, revenue growth is expected to be about
18.1%. Among others, Cement, Capital Goods and IT are expected to propel this
growth. Revenues of Auto and IT companies are expected to be driven by volumes.
Higher execution levels should drive revenues of capital goods companies. We will
watch our for execution issues, if any, in construction and capital goods sectors.
Banks / NBFCs under our coverage are expected to post a 19.2% rise in NII. 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.
Moreover, 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.
Margins are expected to be steady for our coverage universe (ex-
Oil & Gas)
EBIDTA margins for the companies under our coverage are expected to remain
steady on a YoY basis (ex Oil & Gas). Most of the sectors, except Capital Goods &
Power, Cement and FMCG are expected to witness pressure on margins. The
pressure on margins is due to higher raw material prices, which companies have not
been able to pass on fully. Moreover, higher attrition and salaries are expected to
hurt margins of IT companies.
As far as banks are concerned, pre-provisioning profits are expected to rise by about
8.6% v/s a 19.2% rise in NIIs. A relatively lower treasury profit is expected to have
an impact. We also expect asset quality to stabilize during Q1FY12. PSU banks are
likely to report slightly higher slippages with the shift to system-based NPA
recognition. However, strong recoveries & up-gradation 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. NBFCs are
expected to report a growth of about 14.8% in pre-provisioning profits, better than
the banking space.
Focus on concerns
While 1QFY12 results will be important, the focus has been and is expected to be on
some of the other pressing concerns.
Domestically, we will focus hard on the execution issues, if any, faced by capital
goods and construction companies. More importantly, the order bookings by large
capital goods and construction companies during the quarter will be of interest to us.
The past few quarters have seen a slow-down in order flows, though there have
been some signs of pick up in 1QFY12. We will also keenly hear the management
comments on any momentum in decision - making and order - flows for these
companies.
Inflation and the increase in interest rates will remain a focus point for the markets.
To that extent, stocks of debt heavy companies are expected to remain under
pressure. Also all rate sensitive sectors will be watched with caution by the markets
in the short term, we understand.


We will also maintain a close watch on the global commodity prices. These are
expected to impact margins in 1QFY12. While prices have moderated a bit in
1QFY12, further moderation is expected. However, increase in the commodity prices
from these levels may keep margins of corporate India under pressure, if the
increases are not fully passed on. Any lingering impact may dampen sentiments.
Conclusion
Markets have been on an uptrend since the past two weeks on expectations of
reduction in commodity prices and early indications of reforms by the Government.
In such a scenario, corporate results assume greater importance if the markets have
to sustain and move higher from the current levels. Expectations are not very high,
in our view, in the backdrop of un-enthusing IIP numbers and high inflation / interest
rates, which is a positive for the markets.
We opine that, if the markets have to sustain the current levels and move up, it will
need to have more confidence in the medium-to-long term growth rates of
Corporate India. Also, the above-mentioned concerns have to be effectively and
immediately addressed.
The room for disappointment is very limited, in our view. Disappointment in earnings
or on future outlook may result in corresponding specific corrections.

Glenmark Pharma – Momentum picking up in US markets:: RBS

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Glenmark received an approval for Ursodiol tablets which adds on to its existing limited
competition product pipeline of Oxycodone and generic Malerone. With momentum picking up in
Oral Contraceptives and R&D milestone payment also on track, we continue to see upside
potential in the stock.


List of limited competition products expands with approval of Ursodiol tablets
􀀟 Glenmark has received final USFDA approval for Ursodiol tablets (generic version of Urso
250 and Urso Forte tablets by Axacan) indicated for the treatment of patients with primary
biliary cirrhosis (PBC) where it is used to dissolve gallstones in patients who do not want
surgery.
􀀟 Sales achieved for Ursodiol tablets were US$60m of which branded sales was US$15m and
generic sales by Teva was US$45m -as per IMS for 12 months ending March 2011.
􀀟 Glenmark would be the 3rd player to market these tablets (we however note that there is
greater competition in the capsule market) thereby making this a limited competition drug. We
have assumed 30% price erosion on the generic market of US$45mn and 20% market share
thus expecting the product to add US$8mn to its US revenues and US$4.5mn of PAT on an
annualised basis.
􀀟 This adds on the existing limited competition product pipeline for Glenmark - Oxycodone
(ramping up market share now) and generic Malerone (expected launch in Sept-October
2011)
Momentum picking up in OCs
􀀟 The recent approval of Norgestimate and Ethinyl Estradiol tablets (gTri-Cyclen) marks
Glenmark's 4th oral contraceptive (OC) product and 5th hormone product approval for the US
market. As per IMS, this product has total market sales of US$226m for 12 month period
ending March 2011. This is already a generic product but marketed as branded generics due
to limited competition. There are only 3 players in the market - Ortho McNeil Janssen
Pharmaceutical, a division of Johnson & Johnson (innovator), Teva and Watson. Glenmark
expects to launch the product soon and start monetising the same.
􀀟 With this approval, Glenmark would be addressing total market size of US$365m (as the
earlier 4 female hormonal product approvals were addressing small market sales of only
US$140mn). Glenmark remains the only Indian company to be granted ANDA approval for an
OC product. Glenmark indicates that it had made 15 filings as of now (which has 5 approvals
now) - the remaining 10 filing would address market sales of US$580mn. The other approvals
are:
􀀟 a) Heather tablets: The Company received approval in April 2010 for Heather tablets (gNor-
QD) tablets which had achieved sales of US$38mn in 2009.
􀀟 b) Norethindrone: The Company received approval in July 2010 for Norethindrone 0.35mg
tablets, g(Micronor) which had reported total sales of US$43mn for the 12 month period
ending March 2010.
􀀟 c) Norethindrone Acetate: The company received approval in July 2010 for Norethindrone
Acetate 5 mg tablets, g(Aygestin) which had reported sales of US$27mn for the 12 month
period ending March 2010.
􀀟 d) Norethindrone and Ethinyl Estradiol: The company received approval in March 2011, the
generic version of Ovcon 35 tablets marketed under the trade name Brielly. Sales were
US$30mn for the 12 month period ending December 2010.
R&D milestone payment also on track
􀀟 In May 2011, Glenmark out-licensed its GBR 500 molecule to Sanofi Aventis, the first novel
biologics out-licensing deal by an Indian pharma company, with an upfront payment of
US$50mn subject to customary conditions to be taxed at 9-10% under Swiss norms. Potential
milestone receipts could total US$613mn plus royalty payments and rights to sell in a few
markets (India, etc).
􀀟 Management expects commercialisation of this molecule in 2017. We ascribe a value of
Rs20/share after applying a 20% success probability rate and building in a delay of three
years in commercialisation.
􀀟 Company earlier had guided to receive the upfront milestone of US$50m in 2 tranches - US$
25m by end of June 2011 and the remaining US$ 25m in July 2011. We note that this
payment schedule has been adhered to which leads to optimism that its other R&D milestone
payments would also be on track.


􀀟 Thus Glenmark's GBR 500 licensing deal with Sanofi Aventis re-validates its business model
of investing in innovative R&D. Glenmark seems well poised to benefit from the reviving
interest in in-licensing from big pharma as we believe its NCE pipeline is not fully priced in
yet.
Reiterate Buy with TP of Rs350
􀀟 We maintain our Buy rating with TP of Rs350 - base business at 18.2x FY12F PE (a 15%
discount to its peers), which yields a value of Rs293/share. To this we add Rs54/share for its
NCE pipeline and Rs3.5/share for one-off Para IV products.

Tata Consultancy Services :: Reasserting its supremacy yet again with a strong quarter; reiterate OW ::JPMorgan

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Tata Consultancy Services Overweight
TCS.BO, TCS IN
Reasserting its supremacy yet again with a strong
quarter; reiterate OW


 TCS reasserted its superiority in the Indian IT sector once again with an excellent,
well-rounded quarter. The twin highlights of the quarter, in our view, were: (a)
the 7.5% revenue growth Q/Q (overall and in Europe) – overcoming concerns
that the very tough macro-environment may affect offshore IT spending
especially in Europe, (b) the all-roundedness of growth. TCS is demonstrating
that it is continually raising the bar in the sector and extending its lead in
indefatigable fashion. However, already high expectations may limit operating EPS
upgrades in the Street despite such a good quarter.
 Management commentary is positive notwithstanding stiff difficulties in the
macro-environment. TCS reiterates strong demand (even for discretionary
projects) and sees a robust pipeline even in Europe. This is in contrast to the
commentary of Infosys that it is witnessing some slowness in decision-making on
discretionary spending – which supports our contention that growth issues at Infosys
are largely company-specific. Also, this echoes our view that enterprise IT spending
geared toward cost rationalization, streamlining and restructuring of business
processes and even for growth-oriented initiatives is still healthy.
 Any immediate concern(s) on TCS that the investor might perceive? The
investor might point out that for the quarter, net employee addition was just over
1.5% Q/Q. Coupled with red-hot utilization at over 83% (ex-trainees), investors
could ask whether supply is rather tight to capitalize fully on growth opportunities
in 2QFY12. We believe, however, that TCS has the best execution engine in the
industry, demonstrating continued ability to realize growth despite running on tight
utilization. Also, laterals (readily deployable resources) can be hired in short order
and trainees recruited in 1QFY12 could come on stream to contribute to billing in
2QFY12. In short, we do not see this as a concern.
 Reiterate OW and top pick status. TCS has been among our top picks for a while.
The TCS earnings story has been one of continual & significant EPS upgrades over
the past 6-8 quarters. This has been a structural call for us (versus Infosys rated
Neutral) for over a year. Performance of the two in 1QFY12 suggests that we may
still not be near the end of the relative re-rerating story of TCS vis-à-vis Infosys.
Indeed, TCS is now recognized as the absolute valuation benchmark in the sector.
We value TCS at 22x FY13E P/E (a 10% premium to our ascribed valuation for
Infosys, we expect this premium to sustain).

Dr Reddy's Laboratories – Fondaparinox - exit opportunity?:: RBS

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Dr Reddys has received the US approval for the much awaited fondaparinox, which is a positive
but already priced in, in our view. We attribute Rs4/sh as core EPS for FY12F. Management
guides for a phased sales ramp up due to the product complexity. We maintain Sell on weak
business-mix and rich valuations.


DRL finally gets fondaparinox approval; management indicates phased ramp up
􀀟 DRL has finally received the much delayed approval for fondaparinox in US. We had recently
shifted our approval and launch assumption of this product from April 2012 to July 2012.
􀀟 GSK had booked worldwide sales of US$480m in 2010 of which US sales were US$285m.
We have assumed c35% price erosion and 35% market share for DRL and have penciled in
revenues of US$52m in FY12 (July 2011-Mar 2012). We have built in 70% margin, tax rate of
20% and profit share of about 50% (as DRL is in partnership with Alchemia) which translates
into US$15m in PAT and Rs4 of EPS for FY12.
􀀟 We have also built in European approval and launch in FY13 and expect cumulative (US+EU)
earnings accretion of US$35m and EPS accretion of Rs9 in FY13. If EU launch is delayed to
FY14, EPS accretion could be Rs6.5.
􀀟 While we acknowledge that fondaparinox is a significant product for DRL, we highlight that we
have already built it in our forecasts (EPS of Rs4.1 in FY12 and Rs9.3 in FY13) and value it
as core earnings (unlike the 1x DCF based valuations of one-off opportunities).
􀀟 We also highlight that management is guiding to a phased launch due to the complexity of the
product which could translate into a slower than expected ramp up in sales from this product.
Management has commented that "Dr. Reddy's will promptly execute a phased launch that
initially plays to our strengths in select wholesale and retail outlets, and subsequently
enhance share over time in the coming quarters".
Business-mix remains weak and headwinds persist
􀀟 We reiterate that DRL's Pharma Services and Active Ingredients (PSAI) and Betapharm
businesses (together 34% of FY11 revenues) continue to face headwinds due to pricing
pressure.
􀀟 The recent US FDA Import Alert regarding DRL's active pharmaceutical ingredients (API)
manufacturing unit in Mexico could hit the recovery of its PSAI business, in our view.

􀀟 Domestic formulation revenues (16% of FY11 revenues) were also muted in 4QFY11 (5%
yoy) due to competition intensifying.
􀀟 Russia/CIS (15% of revenues) could also face challenges due to the ongoing healthcare
reforms in Russia (the 2020 programme).
􀀟 The US business (25%), which has been DRL's key growth driver, is now also facing
headwinds. Its track record in monetising products has recently been unimpressive, in our
view with delays in approval of gArixtra (approval received after much delay), plus reduced
upside potential from gAllegra D-24 (prescription switch to OTC).
US pipeline attractive, but priced in
􀀟 We acknowledge that DRL has a robust ANDA pipeline. However, we believe that we have
already factored in the potential upside from most one-offs that we think have a reasonable
chance of monetisation:
􀀟 Launched in FY11: gLotrel, gPrevacid, gPrograf, gAccolate, etc, which should continue to
provide a benefit in the next few years, although at a lower pace.
􀀟 Launches in FY12F: gArixtra (fondaparinox), gAllegra D-24 OTC, gExelon, gClarinex and
gZyprexa
􀀟 Launches in FY13F: gGeodon and gPropecia
􀀟 We also factor in our DCF contribution for the opportunities not disclosed by the company,
such as gSeroquel, gAciphex, gLipitor etc.
Fondaparinox approval - an exit opportunity?
􀀟 The stock has already moved up 3% in response to this launch news. The fondaparinox
approval is a positive, but has already been priced in, in our view. Our SOTP-based TP of
Rs1,360 is derived by valuing its core business at Rs1,309 (FY12F PE of 21.4x, in) and its
Para-IV pipeline at Rs51. We reiterate our Sell rating on a weak business mix and rich
valuations.

Buy Sintex:: 1QFY12 results- price target of Rs200,:: CLSA

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1QFY12 results
Sintex’s 1QFY12 results saw healthy operational performance with sales
growth of 22% and 200bps Ebitda margin expansion. However, bottom
line performance was tempered by higher interest costs (+41% YoY) and
taxes, dragging down PAT growth to 20%. Whilst interest costs are likely
to remain elevated, the tax rate should normalise on a full year basis and
momentum in key businesses (particularly monolithic) remains strong.
Given the 22% earnings CAGR over FY11-13, positive FCF and 8.5x
FY12PE, rerating potential for Sintex remains high. Retain BUY.
4QFY11: healthy headline performance
Sintex reported results for 4QFY11 results. Revenue growth was a healthy
22%, with the building products business growing at 32% YoY (monolithic at
57%) while composites grew at 16% YoY. Ebitda margins expanded 200bps
YoY to 16.8%. However, this was offset by higher interest costs and tax rate,
pulling back net profit growth to 20%. QoQ revenues declined 24% and
profits 44%, in line with seasonal trends in the business.
Operating performance strong
The overall business momentum remains strong. The order book in the
monolithic business stood at Rs30bn (Rs29bn in March, gross order booking
of Rs3.75bn) even as revenues grew 57% YoY in the quarter. The prefab
business continues to gain traction and expects to benefit from new states,
which should be visible in 2H. In custom mouldings, growth is being driven by
new customers in India and new products at Nief. We have made modest
upgrades to our operating forecasts (+2% at Ebitda), driven by monolithic.
Interest and taxes drag down profit growth
Interest costs rose 41% YoY to Rs350m (+19% QoQ). Whilst Rs27m of this
came from the ONGC settlement, the remainder was driven by higher rates
and commissioning of three plants, the interest costs from which has started
to come into the P&L. However, there was no major QoQ change in working
capital or debt. We raise our interest cost estimates by 20%, which offsets
the Ebitda upgrade. Whilst tax rate for the quarter was high at 26% due to a
plant coming out of its tax holiday, the company expects this to normalise on
a full year basis as two new plants start contributing.
Maintain forecasts, BUY
We maintain FY12-13 forecasts as the modest operating upgrade is offset by
higher interest costs. We like Sintex due to its strong growth drivers in India’s
social infrastructure spend, synergy driven opportunities in the composites
business and healthy earnings growth alongside positive FCF. Maintain BUY
with a SOTP based price target of Rs200, 17% upside.

GVK Power :: Growth plans entail more risk: Downgrade to UW ::JPMorgan

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GVK Power & Infrastructure
▼ Underweight
Previous: Neutral
GVKP.BO, GVKP IN
Growth plans entail more risk: Downgrade to UW


GVK’s quest for long-term growth and fuel security, though legitimate from
the company’s perspective, raises risk for equity investors substantially over
the medium term. We downgrade to UW.
 GVK may take a stake in Kevin and Alpha coal mines, owned by
Hancock, in Queensland, Australia. As per news reports (Livemint), the
mine is valued at A$2.4B. The % stake to be taken and how this would be
shared between GVK and its promoters is not known. But even in a
conservative scenario, we believe GVK would have to dilute at least 11% of
equity and might have to bear at least Rs3B of additional interest burden (4x
of FY13E profit). We believe any adverse movement in interest rates, coal
prices, Australia's mineral taxes, or delay in production ramp-up or creation
of rail/port infrastructure could expose GVK equity holders to huge risk.
 GVK continues to have more growth aspirations, ranging from airports
in Indonesia (likely US$1.6B) to India (likely US$2B) to more power
projects in India (est. US$1.7B). In the context of GVK’s current market
cap, we think the balance sheet cannot support all this growth, and might
necessitate more risk / dilution going ahead.
 Playing the devil’s advocate – at 0.9x P/B, and given the sharp value
erosion over 1-yr, is all bad news in the price? The foll. datapoints
suggest that risk is worsening and stock may have to correct further before
offering meaningful risk-adjusted returns to the equity holder: 1) RoE at
4.7%, inching up to barely 8.4% by FY14, 2) FY13E NDER rises to 2.6x,
while EBITDA to interest ratio drops to 1.6x, even without any additional
debt for these acquisitions
 We would use any relief rally, emanating from a potential solution to
the Mumbai airport real estate issue, to exit the stock. The government
has proposed a relaxation to eligibility norms for slum dwellers’ rehab,
which might potentially pave the way for RE lease-outs: this is already in
our PT. Our new PT of Rs17 factors in higher discounting rate for key
assets considering higher risk. Any measures by management to limit its
equity and debt exposures to new acquisitions would constitute upside risk
to our PT.