Takeaways from Apple CY2Q results ::Macquarie Research

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Takeaways from Apple CY2Q results
Event
 Apple (AAPL US, NR) posted strong CY2Q11 results ahead of expectations,
driven by robust shipment in iPhone (+142% YoY despite no new model) and
iPads (+183% YoY as supply chain production has improved) and stock is
+5% in after-market. Mgmt guided conservatively (per tradition) for CY3Q
given “future product transitions”. With our view of upcoming launch of new
iPhone 4S in Sept and strong momentum in tablets, we continue to
overweight on Apple plays over Android into CY2H11. In the APPL supply
chain we favour Catcher (casing), TPK (touch panel), Hon Hai/Pegatron
(EMS), Largan (lens), Toshiba/Samsung (NAND flash, TXC (crystal),
Radiant/TSMT (backlight) and Samsung SDI (battery).
Impact
 CY2Q results far above consensus. CY2Q sales +16% QoQ and EPS of
US$7.8 (+122% YoY) was far above street estimates. Despite lack of a new
model launch in 2Q, iPhone units of 20.3m, up +142% YoY (+21% ahead of
consensus), with growth particularly strong in Asia-Pac (sales quadrupled,
likely iPhone 4 and 3GS) and beating expectations. iPad units (+183% YoY)
also grew to 9.3m units (4.7m in 1Q) as supply chain production improved and
mgmt noted they "sold everything they could make.” Mac (desktops + NBs)
units of 3.95m rose +14% YoY, above the +3% PC industry YoY growth, with
strong demand again from AsiaPac. iPod units was only weaker area, -20%
YoY. Inventory levels across all product segments are "extremely healthy".
 Expect product transition in 3Q. Apple gave usual conservative guidance
for 3Q sales of US$25bn and EPS of US$5.5, citing ”future product transition”
and new iOS 5 launch as major reasons, consistent with our view of new
iPhone 4S launch and potentially upgraded iPad2 version in Sept. Apple sees
more favourable components in areas such as NAND, DRAM, battery, optical
drive, panel in 3Q, and expects pricing to fall at or above the historical range.
The only exception is HDD, where it sees supply as being more constrained.
 Apple will aggressively enter mainstream smartphone in 2H. In the highend
market, we expect to see robust shipments for Apple's iPhone 4S when it
is launched globally in Sept. In the mid to lower end markets, we believe the
market is unaware that, in addition to iPhone 3GS, (likely to reach 12m in
2011), Apple may de-spec iPhone 4 with a slashed price to further gain share
in 4Q in mainstream segment. We believe Apple's total iPhone sales (iPhone
4S, 3GS, and de-spec iPhone 4) in 4Q11 could see significant growth.
 Increasing patent cost for Android players. MSFT and Apple have recently
been chasing Android players for licensing deals on patent infringement
claims. MSFT reportedly has asked Samsung to pay a royalty on Android
smartphone; other Android makers are likely to face rising patent costs.
Apple, on the other hand, has recently filed a patent lawsuit against major
Android smartphone players like HTC and Motorola on touch-related patent.
On the earnings call, Apple stated it will “vigorously defend its IP patent
portfolio.” We believe Android's low cost advantage will be eroded due to
mounting patent fees, and thus prefer to be overweight Apple supply chain
plays as highlighted above over Android camp going into 2H11.

Power sector-- SEB reforms ::ICICI Securities,

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S E B   r e f o rms   a t   l a s t ,   imp l eme n t a t i o n   t h e   k e y…
The State Power Ministers’ Conference on “Distribution Sector
Reforms” organised in New Delhi on July 14, 2011 has underlined the
need for urgent steps to arrest and reverse the growing losses in power
distribution (which are outlined below). According to the 13
th
 Finance
Commission, SEB’s losses are pegged at ~ | 70,000 crore in FY11 (from
| 52,623 crore in FY09). Our take on the proposed reforms is that in the
near term no immediate material  impact will be seen on utilities
(although sentimentally positive). In  the long term, however, it is the
need of the hour as utilities (NTPC, Lanco Infratech under our coverage
universe) had to be backed by SEBs. If implemented, it could curtail
losses of SEBs, improve their financial situation (to buy power from
IPPs), open up franchise routes to more cities and capex by state SEBs
triggering a possible re-rating of the entire power and power ancillary
space, i.e. IPPs (NTPC, Lanco Infratech), distribution companies (Tata
Power, CESC), T&D equipment (KEC, Kalpataru, Jyoti Structure) and
NBFCs (REC).
The conference agreed upon a set  of measures to bring down the
distribution losses. These are as follows:
1. The state governments would ensure that the accounts of the utilities
are audited up to 2009-10 and also  ensure that the accounts of a
financial year are audited by September of the next financial year,
henceforth. Computerisation of accounts would be undertaken on
priority, if not done already
2. The states would ensure that the distribution utilities file their annual
tariff revision petition every year, by December–January of the
preceding financial year to the state regulators as stipulated by the
national tariff policy
3. The annual tariff revision petition  would be filed before the SERC,
keeping in view the increase of the power purchase cost (which
accounts for nearly 70-80% of the cost of supply) and states will
ensure that the difference between ARR and ACS is not only bridged
but is positive to generate internal surpluses that can be used for
network expansion and maintenance
4. The state governments would ensure automatic pass through in tariff
for any increase in fuel cost by incorporating the same in the
regulations, as provided in Section 62(4) of Electricity Act, 2003.
(State governments can issue directions to SERCs under Section 108
of the Electricity Act, 2003)
Our take: Measures 2, 3 and 4 would clearly pave the way for tariff
hikes bringing down the losses of SEBs. It would also ensure that
increase in fuel cost (by Coal India or imported coal) would not affect
the profitability of IPPs (who would supply to SEBs)
5. The state governments would not  only clear all the outstanding
subsidies to the utilities but ensure advance payment of subsidy as
per the Section 65 of the Electricity Act, 2003 in future

India IT Services - BM June-11 results: unexciting growth in developed markets, discretionary spend::Credit Suisse

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India IT Services Sector----------------------------------------------------- Maintain OVERWEIGHT
IBM June-11 results: unexciting growth in developed markets, discretionary spend


● IBM reported its 2Q FY12/11 results overnight. We analyse global
services business of IBM to deduce trends for Indian IT services.
● Overall services revenues grew 2% YoY versus 3% YoY growth
(cc terms) in the previous quarter. Global Technology Services
sub-segment grew 3% YoY (cc terms), same as last quarter,
Global Business Services sub-segment which is more
discretionary grew by just 1% YoY versus 3% YoY (cc terms) in
previous quarter
● Both revenues and signings increase was skewed towards
‘growth markets’ (BRIC countries, Africa, etc). Services revenue
grew 10% YoY in ‘growth markets’ and 2% YoY overall (cc terms).
Services backlog in these markets was up 50% YoY at actual
rates.
● Unexciting growth in discretionary spend and in the developed
markets reinforces our cautious view. We believe that Infosys,
TCS are fairly priced at 18-20x one-year forward EPS. Wipro and
HCLT are our preferred picks, given their valuation discount (20-
25% vs Infosys) and a greater probability of positive surprise
versus larger peers.

IBM reported its 2Q FY12/11 results overnight. We analyse global
services business of IBM to deduce trends for Indian IT services.
Services revenue growth slows, dragged by discretionary
spend slowdown
IBM reported overall services revenue growth of 2% YoY in cc terms.
While the Global Technology Services (GTS) sub-segment grew 3%
YoY in cc terms, same as last quarter; Global Business Services
(GBS) sub-segment which is more discretionary grew by just 1%YoY
in cc terms.
Within GBS, application outsourcing grew 4%YoY in cc terms
whereas consulting and systems integration, which includes
consulting, AMS systems integration and the US federal business was
flat in cc terms.
Revenue increase from ‘growth markets’, increasing share
Services revenue grew 10% YoY in ‘growth markets’ and 2% YoY
overall (cc terms). In GTS, ‘growth markets’ (BRIC countries, Africa,
etc) grew 10% YoY in cc terms, versus just 3% YoY growth in cc
terms for the entire GTS subsegment. In GBS, ‘growth markets’ grew
10% YoY in cc terms while ‘major markets’ revenue was down 1%
YoY in cc terms.
Management also indicated that growth was driven by increasing
share in GTS outsourcing in both the ‘growth markets’ and ‘major
markets’.
For the consolidated company, North America revenue grew 8% YoY
in cc terms versus growth of 3% YoY in cc terms for Asia and Europe.
Signings increase also oriented towards ‘growth markets’,
non-discretionary spend
IBM’s services backlog grew to by US$2 bn to US$144 bn. Total
services signings grew 8% in cc terms. Signings in the transactional
sub-segment, which is more discretionary in nature grew slightly
slower, at 7% in cc terms.
Management mentioned that services backlog in ‘growth markets’ was
up 50% at actual rates over the last two years. It explained that this
was driven by expansion into new markets and build out of IT
infrastructure in these regions.
Readthrough for Indian IT services
Unexciting growth in discretionary spend and in the developed
markets reinforces our cautious view. While we do not think that our
FY12 $-revenue growth estimates of 21%/28% for Infosys, TCS are at
risk; there may not be significant upside to these numbers either.
Further, valuations are also not cheap as these stocks are trading at
18-20x one-year forward EPS.
Wipro and HCL Tech are our preferred picks, given their valuation
discount (20-25% versus Infosys) and a greater probability of positive
surprise versus larger peers.

WTI differential is structural -Revising oil price forecasts ::Macquarie Research

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WTI differential is structural
Revising oil price forecasts
Brent the marker to watch; forecast changes tactical
We are making modest changes to our Brent price forecast and more severe
changes to our WTI price forecast. Specifically, we are lowering our Brent
forecast by 7% for 2H11 to recognize the negative implications of the IEA’s
release of crude and products from strategic inventories and the ongoing
uncertainty of sovereign risk issues in Europe. We believe these negative factors
are short-lived (at least as regards the oil markets) and will give way to strong
demand growth in the non-OECD, and do not see any need to change our
forecasts in 2012-2013, which are frankly now hugging the futures strip. From
1Q12, our forecast ranges between 1% and 5% above the strip.
Extending the WTI-Brent differential
We believe that WTI will continue to price at a significant discount to Brent and
other sweet crudes due to a structural change in inland US crude supply/demand
dynamics. We have reduced our WTI price assumptions accordingly, by an
average of 8% through 2013. In particular, we see three sustainable factors as
the primary causes of a continuing surplus of light crude inventories at Cushing:
 New incoming pipeline capacity in the form of TransCanada's 155kb/d
Keystone Cushing pipeline, which became active in February.
 A material increase in inland US oil production that feeds into Cushing.
 Inland US refineries switching to heavier Canadian crude slates. As such, we
believe crude production and supply in the Cushing region will outpace
demand by a wide margin for potentially years to come.
Integrated oil effects
Our EPS estimates on average decrease 6% in 2011, 2% in 2012 and 3% in
2013 in local currency terms. We highlight the negative impact on the Euro
reporting companies from updates to our EUR/USD assumptions. This is
compounded by a more bearish near-term view on the Iberian and
Mediterranean Downstream environment. The stocks most impacted are Eni
(new TP €20), Galp, Repsol and Total (new TP €47). We also set a new €33 TP
for OMV post the share placing.
Outlook
Despite what we would consider modest revisions to our underlying commodity
assumptions strong cash generation should drive stock prices through the
upcoming reporting period. We estimate that anunalised free cashflow yields for
the sector will be 7% in 2Q11 and 9% in 2012. While we do not expect the
market to expand sector earnings multiples until it becomes more comfortable
with the sustainability of commodity prices, we do expect that the market will pay
for cash that is accruing.
Outperform rated names: BG Group (BG LN), BP (BP LN), Chevron (CVX US),
ExxonMobil (XOM US), Galp (GALP PL), InterOil (IOC US), Occidental (OXY
US), and Royal Dutch Shell (RDSA LN).

Asia tech takeaway from Intel results ::Macquarie Research

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Asia tech takeaway from Intel results
Event
 Intel posted 2Q results ahead of expectations and guided for +7% QoQ in 3Q,
in line with seasonality. Emerging Market and corporate demand are strong,
while the developed market consumer is weak. Similar to Intel, we see
opportunity for PC brands with Ultrabook NBs in 2012 representing a new
segment of growth. Overall, the numbers were good, but no huge surprise.
For Asia, we are Neutral on substrate names and prefer PC brands with high
EM exposure such as Asustek and Lenovo, and Synnex for its aggressive
positioning in the China market. SPE names such as Tokyo Electron could
also benefit from Intel’s slight capex increase to prepare for 14nm.
Impact
 2Q11 results beat: Intel reported 2Q11 sales of US$13bn (up +1% QoQ,
21% YoY) and EPS of US$0.54, both better than Macq's expectation. 2Q11
ASP was flat (processor unit shipment fell ~3% QoQ, in line with expectation).
Inventory days fell from 75 days in 1Q11 to 72 days in 2Q11, below normal.
 Commercial and Emerging Market PC are strong. 50%+ Intel’s sales come
from EM now. Turkey and India units are +70%; India +17%; Russia +15%;
China +14%; and LatAm +12% in 2Q11; Brazil is the key driver and could be
the third largest PC market by 2012. Weakness persists in developed markets’
consumer demand, particularly Europe. This underscores our view that EM
will be a key driver of PC growth and sustain +6% world chip sales in the
coming years, and we see Asustek, Lenovo and Synnex as best leveraged to
this play. Strength in server processor demand is also a positive indicator for
tech-related demand, and is underscored also by strong indications from IBM.
 3Q normal seasonality. 3Q11 guidance of sales +7% QoQ, GM ~64%, flat
ASP and strength coming from enterprise segment and emerging market and
softer demand in consumer segment and Europe. This is consistent with our
view of +6% QoQ in NB unit in 3Q. Intel still sees +8-10% YoY PC unit growth
this year (lowered from double digit growth) due to weak netbook while PC/NB
should remain strong (double digit growth). We think its downward revision is
directionally right but could still be too high (more like low/mid single digit).
 Flip chip – expect weak set of numbers. While Intel's 2Q beat, our checks
with JPN flip chip substrate suppliers indicate that 1Q FY3/12 volume is
weaker than expected, and total volume is likely to decline 10-15% QoQ due
to correction in MPU orders. Following the order correction in 2Q, we estimate
flip chip volume is likely to rise by high-single digit QoQ in September quarter.
We maintain a Neutral rating on Ibiden and Shinko Electric. We are relatively
more positive on Ibiden due to growth potentials in PCB and FC-CSP and
think a better buying opportunity would arise following a set of weaker 1Q
FY3/12E results.
 Capex raised. Capex was raised by +3% from US$10.2bn to US$10.5bn vs
US$5.2bn in 2010. Given market concerns of a capex cut, we believe this
should be positive for the shares of SPE vendors such as Tokyo Electron.
 Ultrabooks worth watching. Intel will continue to support Ultrabooks, and we
see this as a potential opportunity for PC brands to derive a new segment of
growth and value up instead of cost down in 2012. Apple just launched
refreshed Macbook Air models this week and we expect Asustek will roll out
its UX-21 model in Sept, and expect other brands such as Dell and Acer to
have "Macbook Air like" models by year-end.

BuyYes Bank ; Target : Rs 398::ICICI Securities,

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L e a n   f i r s t   q u a r t e r ,   l o  n g - t e r m   s t o r y   i n t a c t …
Yes Bank reported a PAT of | 216 crore, slightly below our estimate of |
232 crore. This was primarily due to lower-than-expected NII growth as
business de-grew 4.5% QoQ to | 76680 crore and other income was
subdued at | 1653 crore. However, pressure on the bottomline eased as
provisions came in at a mere | 1.5 crore due to a write-back of |15 crore.
Positives include NIM maintained at 2.8% for the past three quarters with
CASA growing 50% YoY (CASA ratio at 10.9%). Asset quality was best in
class  as  NNPA  declined  20  bps  QoQ  to  0.01%  with  PCR  at  95%.
Moreover, the bank is on track with its version 2.0 to strengthen its retail
presence with retail share increasing from ~5% in Q1FY11 to ~12% in
Q1FY12. We expect the bank to deliver on its strategy and estimate 40%
CAGR in business with profits growing by 39% CAGR over FY11-13E.
ƒ Version 2.0 intact: bank in investment mode…
The bank has added ~75 branches in the last two quarters taking
the total to 255 branches and plans to add 30-35 branches each
quarter in line with its strategy to improve its retail presence. It aims
to increase its employee strength from 4,385 in Q1FY12 to 5,400 by
the  end  of  FY12.  We  estimate  the  cost  to  income  ratio  will  stay
elevated at 37%, which is still better than industry range of 40-45%.
ƒ Well positioned to improve NIM ahead
NIM was maintained at 2.8% despite lower CASA and 70 bps QoQ
jump in CoF. The bank was able to pass on rising costs with YoA
increasing 90 bps QoQ as ~65% of the loan book is floating and the
tenor of the remaining loan book is less than a year. Moreover, with
the bank targeting a higher retail  proportion, we expect CASA to
reach 12.5% by FY12E and increased retail loan book to result in
greater pricing power. This, we believe, would lead to NIM
improving in the medium term.
V a l u a t i o n
The long-term story for the bank remains intact with the bank focusing on
retail expansion, which will boost NIM. The bank has delivered RoA and
RoE of over 1.5% and 20%, respectively, for the past 11 quarters. Hence,
we maintain our target multiple for the bank at 2.2x FY13E ABV and value
the bank at | 398.

Sell Kotak Mahindra Bank; Target : Rs 436 ::ICICI Securities

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Kotak Mahindra Bank


L o w e r   N I I   i n   s p i t e   o f   r o b u s t   c r e d i t   g r o w t h …
The banking and financing business again contributed 80% of profits at |
346 crore (| 252 crore & | 94 crore) in the total consolidated PAT of | 436
crore rising 33% YoY. Margins declined to 5% from a comparable 5.3%
sequentially mainly due to rising cost of funds. As we expect loan growth
momentum of 30% to continue, standalone NII and PAT are estimated to
grow at 25% and 22% CAGR over FY10-12E to | 3596 crore and | 1221
crore, respectively.

Adjusted NIMs decline to 5%, now sustainable….
Loan book growth remained strong at 39% YoY and 10.3% QoQ to |
32,339 crore. Deposits also grew a healthy 29% YoY and 6.1% QoQ to |
31,047 crore. However, cost of funds rose sharply leading to NIM
declining 5.3% to 5%. Also, there was a change in the NIM calculation as
processing fees earlier classified as interest income will henceforth be
classified under non interest income. This resulted in 25-30 bps
adjustments in NIMs. NII grew 17% YoY to | 567 crore as against
estimated | 627 crore, marginally due to other adjustment.
CASA  declined  to  27%  from  30%  sequentially  on  high  current  A/c
deposits of year-end run off from the books. We expect the bank to
maintain 5% NIM with NII growth of 25% CAGR over FY11-13E. We
expect 25% CAGR in advances against management guidance of 30%
growth.
Capital markets related profits decline….
Kotak Securities average daily turnover stood at | 3582 crore for Q1FY12
declining 10% YoY and 22% sequentially with market share declining to
under 2.7% from 3% in Q4FY11. It generated PAT of | 23 crore in
Q1FY12E providing 16% PAT margin against over 20% earlier. Insurance
continues to be profitable with | 46 crore due to lower premiums earned.
V a l u a t i o n
We have revised our PAT estimates leading to FY13E RoE declining to
~15% and NIM at 5%. We have valued the bank at 2.4x FY13E ABV and,
on an SOTP basis, revised the target price to | 436. Considering the
recent run-up in the stock due to inorganic growth story, which remains
uncertain, we have assigned a SELL rating to the stock.

UBS -- Asia Steel Insights -- Market mixed now. But rebound in end Q3

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UBS Investment Research
Asia Steel Insights
M arket mixed now. But rebound in end Q3
􀂄 Asia steel price still a mixed bag
CSC cut Sep domestic price by 1.6% on 13Jul which was a surprise as Baosteel
had kept Aug prices flat/up earlier in the week. China spot price modestly
rebounded (US$624/t excl VAT) but unlikely to break out of range. HRC price in
Korea though is down 1-2% (US$830-850) given high inventory, lack of demand
and increased supply.
􀂄 China market to set to rebound in end Q
Amidst rhetoric to cut more capacity (31.2/27.9mt in iron/steel making capacity) in
2011, crude output hit record 737mt annualized rate in last 10days of June. This,
coupled with declining inventories suggests decent demand, especially for
construction. But rebounding auto sales bode well for the rather doldrums flat steel
market.
􀂄 Key issues to watch
1) Earnings a key focus: Asian mills profits will be largely flat to up QoQ in CY
Q2 but fall sharply in Q3, while JP mills show flat QoQ both in CY Q2 and Q3; 2)
V shaped recovery in JP auto production to help improve Asian market at the
margin; 3) Ex-div for CSC on 18Jul. We see downside risk to share price given
potential earnings revision and capital raising.
􀂄 Stock view: Asian steel price set to recover by end Q3, albeit modestly
We remove CSC from our most preferred list. We continue to have CMR, Tata
Steel and Sanyo Special Steel in our most preferred list, and Angang and Kobe
Steel as our least preferred list.

Mahindra Life Space Developer: Sales better than expected; revenue recognition drags:: Kotak Securities

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Mahindra Life Space Developer (MLIFE)
Property
Sales better than expected; revenue recognition drags. MLIFE reported revenues at
Rs815 mn (+20% yoy, -50% qoq) and PAT of Rs171 mn (+18% yoy, -44% qoq). We
retain our ADD rating and increase FY2012-14E net profit by 1-4% while we reduce
our March 2013E target price to Rs450/share (Rs470/share earlier) due to a marginally
longer working capital cycle. We retain our valuation estimates for the Chennai (DCFbased)
and Jaipur MWC (1X P/BV) and our WACC at 16%.


Lesser-than-expected revenue recognition impacts reported numbers
MLIFE reported revenues of Rs815 mn (+20% yoy, -50% qoq) versus our expectation of Rs1,437
mn, EBITDA of Rs172 mn (+6% yoy, -57%qoq, 55%) and PAT of Rs171 mn (+18% yoy, -44%
qoq) versus our expectation of Rs279 mn. For the first time since 1QFY10, EBIDTA margin fell
below 22% and came in at 21.2%, a decline of 347 bps over 4QFY11 margin and 276 bps from
1QFY11 margin. Revenue recognition declined qoq due to absence of projects (Eminente Angelica
and Aura Phase 2) crossing revenue recognition threshold. Staff costs as a proportion of sales
increased to 7% in 1QFY12 versus 3% in 4QFY11 which was the main driver of margin decline.
Residential sales remain healthy though pick-up in Jaipur MWC is still elusive
MLIFE had a 36% growth in sales volume qoq selling 0.34 mn sq. ft (sales of Rs1.7 bn) in 1QFY12
versus 0.25 mn sq. ft (sales of Rs1.2 bn) in 4QFY11. Average sales realization came in at
Rs5,060/sq. ft versus Rs4,760/sq. ft in 4QFY11. MLIFE has launched two projects in 1QFY12 – (1)
Aura Phase 3 at in Gurgaon (85% sold) which contributed to bulk of the sales in 1QFY12 and (2)
Royal Ivy at Kanjur Marg in Mumbai (0.25 mn sq. ft) in June.
At MWC Jaipur, total customers remained stagnant qoq at 34 though numbers of operational
customers increased to five (versus three as of end-FY2011) while only eight are in development
stage now versus 11 earlier.
Retain ADD rating; cut target price marginally led by higher debt assumption
We retain our ADD rating and downgrade target price marginally to Rs450/share led by reducing
our FY2013E cash and liquid investments to Rs3 bn versus Rs3.8 bn due to (1) longer land holding
period and (2) a marginally longer working capital cycle while (3) retaining our valuation estimates
for the Chennai and Jaipur SEZ. Key risks to our recommendation are (1) macro risks to demand
and pricing in Mumbai and (2) uncertainty caused by DTC impacting progress at World Cities. We
see possible upsides from Jaipur SEZ as we value Jaipur SEZ at 1X P/B and would assign full DCFbased
value as and when we see (1) clarity on DTC and absorption happening post that and (2) at
least a couple of residential launches in the SEZ. Our target price of Rs450 comprises Rs167/share
for the World City business.


Residential sales volume up 36% qoq
Despite a sector-wide concern on volumes, MLIFE’s residential volume sales grew 36% qoq
to 0.34 mn sq. ft in 1QFY12 at an average realization of Rs5,059/sq. ft versus 0.25 mn sq. ft
at an average realization of Rs4,760/sq. ft in 4QFY11. A large part of these volumes would
likely be Aura – III at Gurgaon but with an average rate over Rs5,000/sq. ft, we would expect
the balance sales from Mumbai (Splendour II) and Eminente Angelica. In fact, as per our
channel checks, MLIFE has actually taken a price increase for their Splendour projects.


The table below gives the status of MLIFE’s projects at end-3QFY11 and end-4QFY11 (the
presentation for 1QFY12 is not available yet). Based on this we can make the following
observations:
􀁠 MLIFE had sold 79% of its ongoing residential projects at end-4QFY11 vs. 70% at end-
3QFY11.
􀁠 The company had enjoyed qoq price increases in its Chennai projects in 4QFY11 - Aqualily
Villas (10%), Iris Court Phas1 (5%) and Aqualily Apartments (4%), though Iris Court must
have sold only a few units at this hiked price.
􀁠 While MLIFE has delayed targeted completion across projects (exhibit below) as of end-
4QFY11, we would await data from MLIFE if there are any further delays which could
lead to lengthening of the cash flow and revenue recognition cycle.
􀁠 MLIFE has likely launched over 0.5 mn sq. ft across the two projects it launched in
1QFY12 – Aura III at Gurgaon which is 85% sold and Royal IVY at KanjurMarg, Mumbai
in June 2011.


We reduce NAV marginally to Rs450/share from Rs470/share on lower cash
assumption
We retain our ADD rating and downgrade target price marginally to Rs450/share led by
reducing our FY2013E cash and liquid investments to Rs3 bn versus Rs3.8 bn due to (1)
longer land holding period and (2) a marginally longer working capital cycle while (3)
retaining our valuation estimates for the Chennai and Jaipur SEZ.
We see possible upsides from Jaipur SEZ as we value Jaipur SEZ at 1X P/B and would assign
full DCF-based value as and when we see (1) clarity on DTC and absorption happening post
that and (2) at least a couple of residential launches in the SEZ. Our target price of Rs450
comprises Rs167/share for the World City business.
Also, MLIFE has entered into two MoUs with the Government of Gujarat during the recently
held Vibrant Gujarat Summit for the setting up of an Integrated Business City at Dholera
Special Investment Region (in the Delhi Mumbai industrial corridor) and for the setting up of
an Industrial Park near Ahmedabad. Given these projects are in fairly nascent stage, we have
not factored in any value (positive or negative) for either of these projects. The Integrated
Business City will be spread across 3,000 acres and need investment of Rs20 bn. Once
functional, the facility will have the potential to employ 100,000 people and attract
investments of greater than Rs100 bn. The Industrial Park will be spread across 500 acres
and will be close to an existing commercial center near Ahmedabad. Once fully developed,
the industrial park is expected to create 25,000 jobs and attract investments of over Rs10 bn
􀁠 We maintain our WACC estimate at 16%

Buy YES Bank: Strong earnings, driven by lower provisions:: Kotak Securities

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YES Bank (YES)
Banks/Financial Institutions
Strong earnings, driven by lower provisions. Yes Bank reported strong 38%
earnings growth, driven by steady margins and lower provisions. Despite a high interest
rate environment, the bank has been able to maintain margins at 2.8%, which is
commendable, in our view. Branch openings have been strong over the last 6 months –
added 70 branches. However, CASA % at 10.9% remained weak this quarter despite a
slower balance sheet growth. Valuations are attractive at 2.4X book and 12X FY2012E
EPS for 20%+ RoE business. Increasing liability focus in its next leg of growth will be
crucial to sustain its high valuations. Retain BUY and TP of `420.

Impressive performance on net earnings, but weak show on CASA and fee income
Yes Bank’s 1QFY11 performance has been impressive, led by lower provisions on the back of a
decline in gross NPLs. Aggressive re-pricing has enabled margins to be maintained for the quarter.
With interest rates close to peak levels, we expect a more comfortable margin environment for the
bank. Though cost-income ratio has gone up marginally, it is still healthy at below 40% levels. The
bank has increased its workforce by 12% qoq, strengthening its front-end sales force.
However, we are somewhat disappointed by two key aspects and expect improvement over next
few quarters (1) CASA ratio improved by only 60 bps qoq despite de-growth in overall deposits. (2)
Fee income trends have been weaker, especially on transaction banking and financial advisory
resulting. Overall fee income to assets has declined to 1.1% from about 2% levels in FY2007-09.
We maintain our loan growth expectation for Yes Bank at 32% CAGR over FY2011-13E with
margins declining by about 25 bps yoy. Valuations at 2.4X book and 12X FY2012E EPS are
attractive for consistently returning high RoEs of about 20%. Retain BUY and target of `420
valuing the bank at 2.6X FY2013E book and 13X EPS.
Sequential decline of gross NPLs result in negligible provisions
Yes Bank reported another strong performance on asset quality with negligible slippages and
better recovery resulting in gross NPLs declining qoq. Gross NPLs are at 0.2% while net NPLs are at
0.01% of loans. Restructured asset are flat at `870mn (0.3% of loans). Write-back of provisions in
a fully provided account (recovered during the quarter) resulted in lower provisions. Asset quality
remains comfortable for the bank as of now, but given strong loan growth over last couple of
years, we expect gross NPL’s to rise to 0.8% by FY2012.

Exide Industries: Operationally weak quarter:: Kotak Securities

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Exide Industries (EXID)
Automobiles
Operationally weak quarter. 1QFY12 net profit of Rs1.63 bn (-1% yoy, flat qoq) was
8% below our estimates due to lower-than-estimated revenues, higher material costs
and adverse product mix. Revenues were 6% below our expectations due to slowdown
in inverter volumes and lower-than-estimated increase in replacement automotive
battery volumes. We will review our rating and earnings estimates post conference call
today.


Lower industrial revenues impacted profitability in 1QFY12
Exide reported a 1% yoy decline in net profits due to 5% yoy decline in EBITDA margins. Revenues
were 6% below expectations due to lower inverter revenues and lower-than-forecasted increase in
automotive replacement battery volumes. We had forecasted a 8% qoq increase in revenues as we
expected an improvement in inverter battery volumes and improvement in replacement/OEM
automotive battery product mix. EBITDA margins improved sequentially to 17.9% (+50 bps qoq)
aided by a 16% qoq decline in staff costs while raw material costs increased during the quarter.
Other expenses to net sales were in line with estimates. Other income increased sharply during the
quarter (after excluding Rs207 mn of one-off gain in 4QFY11 due to prepayment of sales tax loan
to Tamil Nadu government).
We expect EBITDA margins to remain subdued in 2QFY12E due to delay in ramping up capacities
and expect an improvement in EBITDA margins from 3QFY12E onwards. We are, however,
concerned on the increasing competitive intensity in the industrial battery segment given
aggressive expansion plans of Mahindra powerol and other local brands.
We will review our rating and estimates post conference call today
We see downside risks to our earnings estimates given delay in ramping up automotive battery
capacities and increase in competitive intensity in the industrial battery segment. We expect stock
price to remain under pressure in the near term as we do not expect 2QFY12E EBITDA margins to
improve significantly from current levels. We would review our rating and earnings estimates post
conference call today.

BUY Crompton Greaves: Weak numbers across the board but improvement possible hereon:: Kotak Securities

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Crompton Greaves (CRG)
Industrials
Weak numbers across the board but improvement possible hereon. CG reported
weak numbers with standalone revenue growth of 9% (on weak consumer sales) and
margin contraction of 230 bps (led by power, industrial segments). Potential one-offs in
overseas subsidiaries further marred consolidated results. However, improvement may be
possible with absence of one-offs and pick-up in domestic business. The stock may not be
a sell at present levels as valuations appear reasonable even in stress-case earnings.


Numbers disappoint across the board led by weak consumer revenues and power margins
Crompton reported consolidated revenue growth of 6% yoy (7% below estimates) and sharp
margin contraction (550 bps). Sedate consumer sales led the revenue disappointment while power
and industrial segments led the margin contraction. Potential one-offs in overseas subsidiaries
further marred results. Reported net PAT of Rs778 mn was down 58% yoy (estimate of Rs2.1 bn).
Demand weakness exacerbated by price hikes; seasonal factors may have marred consumer sales
Crompton reported weak consumer segment revenues of Rs5.4 bn, recording a marginal growth
of 2.2% yoy, about 11% below our estimates. The lower-than-expected revenues were likely led
by broad demand weakness across consumer segments, further exacerbated by (1) price
escalations and (2) seasonal factors such as lighter summer and early onset of monsoon (about
47% of annual consumer revenues are from fans alone).
Power: Possible one-offs in overseas subsidiaries and domestic competitive intensity impact results
The power segment reported consolidated revenues growth of 4% and low EBIT margins of 2.6%.
􀁠 Overseas subsidiary business. We believe that overseas revenue growth (1% yoy despite
favorable currency of about 6%) and profitability were impacted by certain one-offs such as
quality issues, cost escalations in certain orders, slowdown in wind energy market, customers
delaying deliveries of orders and slowdown in MENA region.
􀁠 Standalone power. Lower profitability in standalone power was likely led by excessive
competitive intensity and investment demand slowdown.
Sensitivity: Stock may not be a sell at current levels; retain estimates, rating
The stock may not be a sell at current levels (post sharp correction) as even in stress case as per 1Q
segmental numbers and ignoring possible one-off in overseas, it would be trading at 13-14X
FY2013E EPS. Retain estimates and TP (Rs310) for now; would revisit post today’s conference call.
Results reflect weak demand environment across industrial, infrastructure, consumer businesses
Results reflect weak demand environment across industrial, infrastructure and consumer business
segments implying weakness for other peer industrial companies such as Thermax, Voltas and L&T


1QFY12 results: Revenue underperformance exacerbated by margin contraction
Crompton reported consolidated revenues of Rs24.4 bn in 1QFY12 recording a yoy growth
of about 6%, about 7% below our estimates. The revenue disappointment was further
exacerbated by sharp margins contraction - EBITDA margin recorded a sharp decline of 550
bps yoy in 1QFY12 to 7.5% versus our estimate of 15% (down 540 bps on sequential basis
as well). The sharp decline in margin was led by higher raw material costs as a percentage of
sales. Higher tax rate for the quarter (of 38%) led to a net PAT of Rs778 mn, down 58% yoy
(from Rs1.9 bn in 1QFY11), versus our estimate of Rs2.1 bn.


Standalone: Revenues miss on weak consumer sales; power, industrial segments
drag margin down
Crompton reported 1QFY12 standalone revenues of Rs14.7 bn, up 9.4% yoy and about 3%
lower than our expectation of Rs15 bn. EBITDA margin declined by about 230 bps yoy to
12.7% on account of higher raw material cost as percentage of sales, versus out estimate of
15%. Sharp margin contraction led to an 11% yoy decline in standalone EBITDA. Crompton
reported standalone net PAT of Rs1.3 bn in 1QFY12, down 9% yoy and about 15% below
our estimates.


Revenues weak on consumer segment while power and industrials drag margins
We highlight that standalone revenue disappointment was led by consumer segment sales
while power and industrial segments led the margin contraction.
􀁠 Power systems. This segment reported revenues of Rs5.7 bn, up 11.5% yoy and about
7.2% ahead of our estimates. Growth was likely to be partially aided by low base effect
(reported flat power segment revenues in 1QFY11). This segment, however, reported
sharp margin contraction (EBIT margin) to 12.6% in 1QFY12 versus our estimate of flat
yoy margins - reported margin of 16.6% in 1QFY11 and 18% in 4QFY11. We believe that
the low profitability in the power segment was likely led by excessive competitive intensity
(leading to pricing pressure) and demand slowdown (from private and industrial utilities)
in the domestic T&D segment.
􀁠 Industrials systems. The industrials systems segment reported a strong revenue growth
of 16% yoy to Rs3.6 bn (marginally below estimates). However, profitability of this
segment took a hit with EBIT margins of 15.9% from 1QFY11 levels of 20.6% likely on
the back of higher input costs.


Consumer products. Crompton reported sedate consumer segment revenues of Rs5.4
bn, relatively flat (up 2.2%) on a yoy basis versus our expectation of a strong growth of
15% in this segment. Broad demand slowdown in the consumer segment may have been
further exacerbated by (1) price escalations - Crompton had taken three price increases in
motors and pumps of about 5-6% each over March-June and (2) seasonal factors such as
milder summer and early onset of monsoons - note that about 47% of Crompton’s
consumer business is from fans alone. Price escalation in fans was done but needed to be
rolled back based on demand weakness affecting margins and growth.


Stock may not be a sell at current levels
We believe that the stock may not further underperform from current levels. Even if we
build in assumptions implied in the reported standalone and overseas segments in the
current quarter, Crompton may still have an EPS of about Rs15-16 in FY2013E. This is versus
our current projection of about Rs18. This would imply valuations of about 13-14X FY2013E
EPS at current trading levels and thus we do would not suggest selling at current levels. The
key assumptions include:
􀁠 Decline in standalone power segment margins to about 14% versus 18% reported in
FY2011 (our present assumption of 16.5%) with 5% and 15% growth FY2012E and
FY2013E,
􀁠 Consumer revenue growth of 5% and 10% in FY2012E and FY2013E, respectively (versus
25% growth in FY2011) with 14% margins,
􀁠 Industrial segment revenue growth of 15% with 16% EBIT margins (19% reported in
FY2011), and
􀁠 5% and 10% revenue growth in overseas business in FY2012E and FY2013E, respectively
with relatively flat margins (assuming this quarter’s overseas loss is a one-off).


Key risks to earnings relate to (1) aggressive competition and large capacity additions in the
domestic power T&D segment may pressure revenue growth and margins, and (2) slowerthan-
expected pick-up in international demand, (3) Euro area business (17% of business)
and Euro currency (translation), and (4) change in guard at the top.

HDFC Bank: Steady earnings; downgrade to REDUCE on expensive valuations, limited upside:: Kotak Securities

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HDFC Bank (HDFCB)
Banks/Financial Institutions
Steady earnings; downgrade to REDUCE on expensive valuations, limited upside.
HDFC Bank reported another strong quarter of earnings growth on the back of steady
margins, lower provisions and lower operating expenses. We remain positive on the
bank from an earnings perspective given the headroom available on provisions, but we
have limited comfort on valuations. Over the last few months, HDFC Bank has seen
significant outperformance over its peers. Valuations at 3.5X FY2013E book and 18X
EPS are very expensive for RoEs in the range of 18-20% levels. We see limited upsides
from current levels and downgrade the stock to REDUCE from ADD.


Limited upsides despite stretching valuations multiples; downgrade to REDUCE
HDFC Bank declared another consistent quarter with healthy earnings growth of 34% yoy.
Balance sheet and P&L continues to remain in the best of health. For the quarter, loan growth was
at 21% yoy, reported margins were stable at 4.2% (calculated margins down 20 bps qoq) and
marginal increase in gross NPLs mainly from MFI and change in guidelines on investments.
While we continue to maintain a favorable outlook on the bank, we have limited comfort from a
valuation perspective. The bank has been one of the best performers among BFSI companies
across most time periods and currently trades at 3.5X FY2013E book and 18X EPS for RoEs in the
range of 18-20%. The bank has outperformed the markets by 4% over a 1-month period and
20% over the last one year. We believe that the recent outperformance is also account of
increasing macro concerns and higher interest rates – which would have lower impact on HDFC
Bank than other financial entities. With short-term interest rates coming off, we are getting
comfortable in select wholesale funded institutions which trade attractively on valuations. We do
not expect the outperformance for HDFC Bank to continue.
Valuations at peak levels; premium expanded in recent months compared to peers
We highlight that valuations for HDFC Bank are at peak levels compared to its historical valuation
band, despite the bank being larger in size and incremental growth not as strong as witnessed
previously. Further, the valuation premium over its peers, i.e. ICICI Bank and Axis Bank are at peak
levels and has increased over last 3-6 months. HDFC Bank is now trading at 70% premium to Axis
Bank (average of 40% since July 2009) and 90% premium to ICICI Bank (average premium of
70% since July 2009).
While we do not expect the valuation premium to expand further, the key risk to our
recommendation would be prolonged fear of asset quality risks in the sector, especially emerging
from infrastructure portfolio in PSU banks as well as cyclical effects emerging from interest
rates/economic cycle which would result in HDFC Bank being the preferred pick.

Accumulate Thermax: Target Rs 683: Kotak Securities

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THERMAX LTD
PRICE: RS.587 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.683 FY12E P/E: 16.3X
q The management highlights the need to accelerate order intake in FY12
to secure growth in FY13. The company has taken several initiatives to
tap the renewable energy space mainly biomass and solar-thermal.
q The company has three plants coming up in the next 18 months including
supercritical boilers, chemicals and air pollution control equipments.
q Subsidiary performance in FY11 has been in line with parent. The company
has not consolidated the numbers of Danstoker A/S in FY11 (being
a Nov year-end).
q Thermax has ended FY11 with an order backlog of Rs 64.5 bn up 8%. We
have thus built in moderation in earnings growth in FY12.
Concerns
n The annual report highlights competition from Chinese players in energy segment,
which has the potential to spread to other segments as well.
n With the firming up of the interest rates, order finalization is taking longer.
Key highlights of from Annual Report
n In the power EPC segment, the company commissioned 8 plants totaling 133
MW in FY11, thus taking the cumulative capacity of power plants commissioned
to 900 MW. The company has consolidated its strong position in the sub-15 MW
power plants with a 40% market share. In this segment, the company won several
orders based on waste or renewable energy.
n Competition has been intense in the HRSG space especially from foreign suppliers.
The company is working on optimizing the product cost to take on competition
in this segment. These systems are used in gas based power plants for improving
the overall efficiency of the power plant.
n The heater division (small boilers) posted modest growth in revenue in FY11.
With spiraling liquid fuel prices users are looking at shifting to solid fuels, which
is resulting in demand for such boilers.
n The water and waste water treatment division is expecting healthy business
growth in FY12 from the municipal corporations. Apart from this, spending under
the JNNURM funding is also expected to drive business opportunities.
n The profitability of chemicals business was under pressure due to higher commodity
and crude prices. The company has signed MOU with technology partners
to expand product offerings.
Capacity expansion
n The capacity expansion initiatives are progressing on schedule. Construction
work at the manufacturing facility for supercritical boilers set up by its joint venture
(with Babcock Wilcox) is going on and the plant is expected to be commissioned
in September 2012. TBW has been prequalified for the recent NTPC tenders.
n At Jhagadia, Gujarat, the manufacturing plant for performance chemicals is coming
up. Construction work is progressing and subject to statutory clearances, the
facility is due for commissioning by the end of the year.
n Commercial production from manufacturing and assembly shop for air pollution
control equipment at Solapur is expected to begin in the last quarter of FY12.

Buy NIIT TECHNOLOGIES : Target Rs 280: Kotak Securities

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NIIT TECHNOLOGIES
PRICE: RS.202 RECOMMENDATION: BUY
TARGET PRICE: RS.280 FY12E P/E: 6.2X
NIITT's 1QFY12 results were almost in line with estimates. While the volume
growth beat our estimates, margins were marginally lower than what we
had assumed. The 10% revenue growth in international business was a
positive surprise. Volume growth in international business was at 7%. This
is the seventh successive quarter of high volume growth. Average
realizations remained stable. EBIDTA margins, excluding the BSF order, were
lower by about 220bps due to the salary revisions given during the quarter.
PAT was lower QoQ largely due to higher taxes in absence of the tax cover
WEF FY12. Non-linear revenues continued to grow at the company average
and formed about 27% of revenues. Acquisition of a healthcare platform in
the previous quarter is a step further in the direction of non-linear revenues.
ROOM revenues are also showing consistent growth. The order bookings
were high at $86mn, indicating a conducive macro scene. The company is
bidding for a few larger orders in the $10mn - $50mn range. We have
tweaked our FY12E estimates on the back of slightly lower EBIDTA margins.
Our FY12E EPS stands at Rs.32.5 (Rs.33.2). Our DCF - based price target
stands unchanged at Rs.280, based on FY12 earnings. At our TP, our FY12
earnings will be discounted by about 8.6x which, we believe, is
undemanding. We maintain BUY. NIITT has been achieving consisting
revenue growth and margins over the past few quarters.

INFOTECH ENTERPRISES -- TARGET : Rs.155:: Kotak Securities

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INFOTECH ENTERPRISES LTD (IEL)
PRICE: RS.139 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.155 FY12E P/E: 10.4X
Infotech's results were disappointing. While volumes grew at a decent 5.6%
QoQ, EBIDTA margins fell more than expected. The management has
indicated that, pricing improvements have not materialised to the desired
extent. We had assumed some benefit in margins because of the expected
increase in billing rates. The margin performance reflects the continuing
pressure of attrition and salaries on mid-tier company, which also have to
invest in demand generating initiatives. Overall, we tweak our earnings
estimates for FY12. FY12E earnings now stand at Rs.13.3 per share (Rs.14.9).
Consequently, our PT stands revised to Rs.155 v/s Rs.174 earlier. At our
target price FY12 estimates will be discounted by about 12x. We believe this
discount to larger peers is justified due to the pressure on margins. We
maintain ACCUMULATE. We believe that, Infotech will have to address the
above mentioned concerns before we turn more positive on the stock. We
are also concerned about the relatively high proportion of project-based
revenues (in N&CE), in addition to currency fluctuations


Revenues were up 6% - Volume growth in line
n Revenues for the quarter grew by 6.4% QoQ. Volumes were 5.6% higher QoQ.
n While ENGG vertical reported a 6.3% rise in volumes, N&CE (Network and Content
Engineering) saw volumes grow by 4.4%.
n Infotech bagged 7 new accounts during the quarter of which, 3 were in the
ENGG vertical and the balance in N&CE.
n In N&CE, revenues from Europe were impacted in 4QFY11 as two of the top 5
clients (BT and Rural Payment Agency) reduced / tightened their budgets. However,
we understand that, the company has been able to tide over this impact in
1QFY12.

Castrol India (CSTRL) -- Up, up and away. :: Kotak Securities

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Castrol India (CSTRL) 
Energy 
Up, up and away. We have been baffled by the recent spurt in Castrol’s stock price
post the announcement of cut in customs duty on LOBS. We retain our SELL rating on
the stock with a revised target price of `420 (`385 previously) given the stock is trading
at 25.7X CY2011E EPS. We do not agree with the view adopted by a section of the
Street that the stock should command a multiple in line with FMCG companies as we
see glaring difference in the earnings profile between the two. We have revised our
earnings to reflect (1) CY2010 annual report, (2) changes in customs duty on LOBS and
(3) revised exchange rate assumptions.


The recent run-up in stock prices is hard to justify
We are perplexed by the recent sharp run-up (+17%) in the stock since the announcement of
reduction in customs duty for base oils to 5.15% (10.3% previously) on June 24, 2011 given the
relatively moderate positive impact of `1.5 (+7%) to CY2012E EPS. The cut in customs duty results
in addition of Rs39 to the fair value even if we assuming the market-ascribed multiple of 25.7 X
(which itself seems stretched). However, the stock has already run up by `81 since the
announcement.  
26X multiple for 6% earnings CAGR in CY2010-13E
We find the valuation of the stock expensive at 26X CY2011E EPS given relatively modest CAGR of
6% for earnings in CY2010-13E. The stock has historically traded in band of 14-18X (see Exhibit
1). We rule out higher growth in earnings as it will be challenging for the company to increase
market share and/or expand already high EBITDA margins (24-25%) in an increasingly competitive
market due to increased focus of OMCs (BPCL, HPCL and IOCL) and other players (Tide Water Oil,
Gulf Oil, Savita Oil, Helix, Petronas and Valvoline Cummins). We currently assume a net realization
of `69.3/liter for CY2011E, which is significantly higher versus `62.1/liter in CY2010, `61.1/liter in
CY2009 and `40.7/liter in CY2008.
Revision in earnings and target price
We have revised our EPS estimates for Castrol to `22.4, `23.2 and `23.7 in CY2011E, CY2012E
and CY2013E from `20.7, `21.3 and `21.8 to reflect (1) CY2010 annual report, (2) revised rupee
exchange rate assumptions, (3) recent reduction in customs duty for base oils to 5.15% (10.3%
previously) and (4) other minor changes. We maintain our SELL rating on the stock with a revised
target price of `420 (`385 previously) given (1) 26% downside from current levels and (2)
expensive valuations with stock trading at 24.8X CY2012E EPS of `23.2.  


Closure of Tondiarpet plant due to higher operating costs
Castrol India has announced closure of its manufacturing facility at Tondiarpet from August
1, 2011 due to high manufacturing cost per liter resulting from high landed cost of LOBS on
the east coast. The company has decided to phase out the manufacturing activities at the
plant which is fully depreciated. However, the management has not decided on the course
of action to be taken for the disposal of land and assets.
Comparison to FMCG companies may not be judicious
We do not conform to the idea of ascribing a higher multiple to Castrol on the argument
that the business of the company is similar to the FMCG companies. In our opinion, the
multiple to be ascribed to a company is dependent on the earnings/cash flow growth
irrespective of the sector classification of the company. We analyze the various drivers for
Castrol’s earnings and draw a comparison with FMCG companies to substantiate our
investment thesis on the stock.  
` Volume growth will be muted for Castrol given its nature of business. We highlight
that the sales volumes for Castrol for CY2010 are 2.3% lower than the sales volumes in
CY2004. The absence of volume growth for Castrol despite a sharp increase in automotive
sales reflects (1) increase in oil-drain intervals for commercial vehicles and (2) lower
lubricant consumption at the time of replacement given technology advancements.
In comparison, we note that FMCG companies have reported a robust volume growth
CAGR of 10-25% over FY2007-11. Exhibit 2 gives the volumes growth of the key
segments for some FMCG companies. In addition, we do not rule out downside risks to
our volumes assumption for Castrol in light of intense competition from PSUs and new
players in the industry. We assume volume growth of ~2% for CY2011-12E which
reflects higher consumption from (1) passenger cars and two-wheelers and (2) industrial
segment. However, the growth in these segments will be mitigated by reduction in
consumption from commercial vehicles given increase in oil-drain interval.  


` Earnings growth driven by margin expansion may not be sustainable. We note that
the growth in earnings for Castrol in CY2006-09 has largely been driven by expansion in
margins/net realization (per liter). Castrol’s net realization has increased from `24.2/liter in
CY2006 to `62.1/liter in CY2010. We are already factoring a very strong net realization at
`69.3/liter in CY2011E and `70.5/liter in CY2012E. We see limited upside risks to our
assumption.
We expect a modest earnings growth for Castrol of 2-3% over CY2012-13E given (1)
modest volume growth and (2) modest increase in net realization. In contrast, FMCG
companies are expected to report a healthy ~22% growth in earnings in FY2012E. We
find it difficult to justify the use of a similar multiple for FMCG companies and Castrol
given the sharp contrast in their earnings profile. We highlight that the sharp yoy growth
in CY2011E EPS is on account of recent reduction in customs duty for base oils to 5.15%
(10.3% previously).

UBS-- Asia Oil Explorer -- Petchem spreads rebound WoW

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UBS Investment Research
Asia Oil Explorer
P etchem spreads rebound WoW
􀂄 Refining margins decline WoW
The ethylene-naphtha spread rose 20% WoW to US$193/t, after touching its lowest
level since October 2009 last week. The PX-naphtha spread also rose 21% WoW
closing at US$533/t, while the HDPE spread rose 19% WoW. The Reuters
Singapore complex refining margin index averaged US$7.4/bbl last week down
from an average US$8.7/bbl the previous week. Gasoline and fuel oil spreads (to
Dubai crude) declined US$2.6/bbl and US$1.1/bbl, respectively.
􀂄 US crude stocks decline on lower imports
The WTI crude oil price rose 1.1%, ending last week at US$97.2/bbl, while Brent
remained flat at US$117.7/bbl. Crude prices were impacted after rating agencies
put the US on a negative watch, warning that its credit rating may be cut. The US
is also considering a second round of strategic oil reserves releases. According to
the US Department of Energy (DOE), for the week ended 8 July, crude inventories
fell 3.1mbbls as imports declined 0.9mbpd. Gasoline stocks fell 0.8mbbls, while
distillate stocks rose 3.0mbbls.
􀂄 Refining stocks have outperformed in the past month
For the month ended 15 July and based on simple average performance, refining
and marketing stocks in Asia under UBS coverage rose 2.3%, while, on an
average, integrated stocks rose 1.0% and E&P stocks fell 2.0%.
􀂄 Top picks
Our most preferred stocks in Asia are Sinopec, SinoTech, PTT Chemical, Reliance
Industries and SK Innovation.

India Oil & Gas:: Yet another effort to curtail subsidies::CLSA

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Yet another effort to curtail subsidies
The recently released interim report of a government panel renews the debate on
effective targeting of LPG/Kero subsidies through direct cash transfers. A pilot will
be implemented by end-2011 but effective implementation is still years away and
will be predicated on the Ministry of Finance agreeing to directly fund subsidies.
We are more enthused by the near term hope of capping subsidized LPG
availability to 4-6 cylinders per connection that could cut u-r by US$1-2bn and lift
SOE EPS by 3-17%. We prefer upstream (ONGC, OIL, Gail) over downstream.
Another shot at effective targeting of subsidies
q The government has long being cognizant of the leakages in various subsidies that
it has administered; overall subsidies in India now approach ~2.5% of GDP.
q It renewed this debate earlier this year by constituting a panel to recommend ways
to implement direct cash transfer of LPG, kerosene and fertiliser subsidies.
q The Nandan Nilekani headed panel recently released its interim report proposing a
general solution framework while also making some specific recommendations.
Rollout of CSMS, UID and financial inclusion; a pilot by end 2011
q The panel recommends the implementation of a core subsidy management system
(CSMS) integrated with the UID enabled bank accounts of customers.
q This will allow LPG and kerosene to be sold at market prices while also
automatically transferring cash to customers in lieu of the subsidy. Over time, the
government will also restrict the allowances to those who really need it.
q The panel recognises the need for a gradual transition and recommends that pilot
studies be undertaken by end-2011 to understand these issues.
q Indeed, the creation of CSMS, rollout of UID and financial inclusion will take time.
Implementation will take time
q The proposal to target subsidies to those that need it is not new and piecemeal
proposal in LPG and kerosene have been attempted before.
q These have faced headwinds from state governments, dealers and vested interests
thriving in the dual price regime. Systems of OMCs also need to gear up.
q While the government does seem more focussed now than before, effective
implementation will take time as our interactions with industry participants suggest.
Will subsidies be funded by MOF; will MOPNG give up control
q In particular, direct cash transfers require the Ministry of Finance (MoF) to
administer subsidies via the budget instead of ad-hoc mechanisms in place today.
q With LPG and kerosene subsidies at US$14bn (0.7% of GDP, US$10 = US$2.3bn)
at current Brent of US$118/bbl, the decision will not be easy to take.
q It may also require the MoF and Ministry of Petroleum (MoPNG) to agree on a way
to formalise the upstream subsidy burden. This will have to take the form of a
special oil tax that will be collected by the MoF. The MoPNG has always opposed
this, instead favouring an adhoc formula which allows it to dictate SOE cashflows.
More hopeful of volume cap on subsidised LPG but not without headwinds
q We are more enthused by the near term proposal to cap the availability of
subsidized LPG cylinders to 4-7 per connection; current averages are at ~7.3.
q Given the distribution of LPG consumed, even a cap at the current average will take
down LPG consumption by 15-20% cutting annualised u-r by ~Rs35bn.
q A cap at six cylinders will cut u-r by US$1.2bn; at four will cut this by US$2bn.
Continue to prefer upstream over downstream
q There are headwinds here too (political opposition, pushback from states, need to
hike dealer commissions, OMC systems, validation of rationing, false or duplicate
connections) but if implemented, it is akin to 14-24% price hikes that will lift EPS.
q Under our framework (one-third upstream, 50% govt, 17% OMCs), a cap at four
cylinders will lift IOC’s EPS by 4-5%, BPCL by 8-9% (higher sales per connection),
and HPCL by 14-15% (max relative share of LPG subsidies as share of core PBT).
q ONGC, Oil India EPS will rise by 4-5%. Gail, which shares only LPG-kero subsidies,
will see EPS rise by 6%. We continue to prefer upstream over downstream to play
policy interventions where ONGC and Oil India (~3.5x EV/Ebitda) are our top picks.

Unconventional Wisdom -- Made in Germany::Macquarie Research

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Unconventional Wisdom
Made in Germany
Event
 The sovereign debt crisis in Europe has worsened with Italian bond yields
rising at an alarming rate.
Impact
 The assault on the Italian bond market has been a surprise. While
government debt levels are very high, this has been the case for many years
and Italy does not have the acute budget deficits of countries such as Greece.
 So there is uncertainty about why financial markets should have turned on
Italy. But while there are a range of possible explanations, one contributing
factor has been monetary policy in the Euro Area.
 One of the big differences this year compared to the upheavals of 2010 is
tighter monetary policy in the Euro Area. Catering to the needs of the German
economy has put additional pressure on peripheral Europe. If Germany
remains insistent on tough austerity measures, can the ECB still conduct
policy according to the needs of the German economy? This will be a huge
issue over coming months.
Analysis
 The massive increase in yields on Italian bonds in such a short period of time
must be triggering alarm bells for European policymakers. The Italian 10-year
yield started July around 4.75% and then surged to a peak around 6% in just
a few weeks. It is one thing for yields to jump in small markets. But in a big
bond market like Italy’s, such an increase is alarming.
 Especially when benchmark bond yields are falling elsewhere. As Italian
yields have jumped over recent weeks, the US and German 10-year yields
have fallen by 30bp. As a result, the spreads of Italian rates over German
rates have widened substantially.
 Although Italy was viewed as potentially at risk as the sovereign debt crisis
intensified, there was a widespread belief that the differences between Italy
and countries such as Greece would limit the damage. The primary budget
balance (which excluded interest payments) is in much better shape in Italy, a
large proportion of Italian government debt is held locally and the high
accumulated debt level has been known for years. Yet it seems that these
differences have been insufficient to prevent a rout.
 So why should Italy suddenly be a focus of market attention? A wide range of
causes have been suggested including a dispute between the prime minister
and the finance minister and ratings downgrades of some Italian banks. But
there is still enormous uncertainty about the real reason for the market assault
on Italian bonds.
 There is, however, one very unhelpful development that probably played a
part – monetary policy in the Euro Area.

BUY Havells India Ltd -- Stock undone by others' follies? ::JPMorgan

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Havells India Ltd Overweight
HVEL.NS, HAVL IN
Stock undone by others' follies?


 Stock reacting to weak Crompton Greaves results: HAVL stock is
down 5.9% today, following weak results from Crompton (covered by
JPM analyst Sumit Kishore). While Crompton is not strictly comparable
to Havells, its domestic consumer business has some overlap. Crompton
had guided to 25% growth in consumer division but reported just 2.2%
growth in 1Q. According to Crompton, the main weakness came from
Fans sub-division which constitutes around 45% of Consumer division.
 Why we think HAVL stock is over-reacting: 1) Fans comprises only
about 8% of HAVL's consolidated revenues. If we reduce our fans
growth assumption from 24% currently to 5% growth, FY12E EPS
impact is only 1.3%. 2) HAVL management had guided to 15-20%
growth for their domestic consumer business. We discussed the
Crompton results with HAVL management and asked them for
implications on their business. While management admitted that there is
some demand softness in the quarter, they say that it is in line with their
expectations and HAVL is on course to deliver on its guidance.
 HAVL stock is down 11% over past 1 month, enhances buying
opportunity in our view: First it was guidance cut by Philips in Europe,
and now a disappointment from Crompton that have been a drag on
HAVL stock performance. While we acknowledge the softer demand
environment, we believe that disappointments in both Philips and
Crompton are specific to the companies not meeting their guidance. In
this context, we believe that HAVL management has been more
measured in their guidance and we see slim chances for disappointment.
HAVL is now trading at 11.3xFY12E P/E and 9.0xFY13E P/E, which
we believe are attractive valuations even after considering any potential
growth disappointments ahead.

Reliance Industries - Roadmap to growth - Part I: Energy Businesses::JPMorgan

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Reliance Industries Ltd Overweight
RELI.BO, RIL IN
Roadmap to growth - Part I: Energy Businesses


We believe market concerns on RIL’s growth visibility are misplaced. In
its core energy business, RIL will be investing US$17bn over FY11-15E
(39% increase in gross block). Bulk of these investments will be in
downstream petrochemicals (US$12bn) – based on FY11 spreads, we
estimate just these investments will double petrochem earnings over
FY12-15E, potentially driving a 7% EBITDA CAGR. Separately, shale
investments should add US$2bn to RIL revenues by FY15E.
 RIL is adding significant petrochem capacities: RIL is doubling its
polyester intermediate volumes over FY11-15E. Also, total polyester
capacity is slated to increase 50% from 2.4mMTPA to 3.6mMTPA.
1.5mMTPA off-gas cracker at Jamnagar will add to ethylene derivatives
capacity. Importantly, it will confer significant feedstock cost advantage
– auguring well for profitability. Based on FY11 spreads, we estimate
the cap adds will double petchem netbacks over FY12-FY15E
 Counter-cyclical investments have paid off in the past. With these
projects getting executed in an uncertain cyclical environment, RIL will
be looking to leverage project scale and strong execution track record to
contain capital costs which will aid project economics.
 Upstream investments in Shale should add US$2bn to revenues.
Shale gas is no longer un-proven technology – it contributes >13% to
US natural gas production and is the key reason for low gas prices there.
RIL’s shale investments will contribute US$2bn to revenues by FY15E.
 Refining, E&P should also contribute to growth: D6 output is
currently below potential, BP’s technical involvement could enable
ramp-up. Apart from margin uplift, RIL could also grow refining EBIT
through de-bottlenecking refineries/pushing throughput in a conducive
environment.
 Reiterate OW: Near-term we expect margin uplift in refining to be a
driver for RIL profit growth – however there is visibility on significant
volume led growth in petrochems, shale. We reiterate OW rating on RIL
with a SOTP based PT of Rs1200. Downside risks emanate from a
prolonged downcycle in refining, petchem, harsh regulatory action.

Crompton Greaves - Transition pain or transitory pain? Downgrade to UW ::JPMorgan

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Crompton Greaves Limited
▼ Underweight
Previous: Overweight
CROM.BO, CRG IN
Transition pain or transitory pain? Downgrade to UW


CG’s consistent healthy operational performance and margin track record over
several consecutive quarters in the past was the key underpin to our OW call.
Previous management’s ability to meet and surprise the Street on profitability had
given its guidance high credibility. Two disappointing quarters in succession,
accompanied by a sharp deterioration of business outlook without any forewarning,
have undermined this confidence. Equally sharp earning cuts imply that even after
a 27% correction over the last two days, the stock is trading expensively at 20x
FY12E EPS. We downgrade to UW.
 We cut FY12E EPS by 44% and FY13E by 36%. New management cited intense
competition, pricing and RM cost pressures for the sharp step-down in previous
margin guidance (by ~350-550bps). This led the negative surprise and our revised
FY12 estimates imply 10% consolidated top-line growth and ~450bps lower margin
of ~9%. There appears to be a significant shift in RoE, which has consistently
been above 30% for the past 10 consecutive years, to <20%. From management
commentary, we infer that beyond FY12, too, the margins are likely to remain well
below historical levels. In our view, near-term quarterly results could remain
strained and drive stock underperformance. Jun-q order inflows declined ~18%
YoY; expectation of a recovery appears more back ended.
 Not too late, it’s expensive even now. At CMP, CG is trading at 20x FY12E EPS.
Pre-estimate cuts, over the last three years the stock has traded at 14.5x avg. oneyear
forward P/E. In the early part of the decade, the market gave CG single digit
multiples- the re-rating was led by credibility built by ex-MD and superior
operational performance. BHEL (BHEL.BO, Rs1,956.15, OW), which offers
significantly higher assurance on near-term growth, is trading at 14.2x FY12E EPS.
Revised Mar-12 DCF-based PT of Rs135 (vs. Rs300 earlier), implies 15x FY12E
EPS vs. 18.75x earlier - we expect a sharp deterioration of profitability to lead the
P/E de-rating. We recommend a switch to Siemens India (SIEM.BO, Rs916.55,
OW) within the T&D space, industry and domestic power segment growth of CG in
Jun-q has been relatively strong. Healthy order inflow growth in the near term, or a
‘guidance’ upgrade could be an upside risk to PT and estimates.

Bharat Forge – 2011 Annual report highlights::RBS

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Management states FY12 focus is to bring non linear growth from new businesses and new
customers. Even though international ventures have shown sharp turnaround, the CY10 losses in
US and Sweden subsidiary concern us. With good demand outlook for US and Europe heavy
trucks, we maintain Buy.


Strong improvement in parent realisations and efficiency
􀀟 Chairman defines FY12 goal as "non linear growth from new businesses and new customers"
highlighting the ambition to increase the revenue from non auto businesses which contributed
25% to the total consolidated sales in FY11.
􀀟 From the annual report, we derive that per kg realisations have increased by sharp 14% yoy
as compared to 16.4% rise in metal cost. Management highlights improved non-auto and
commercial vehicle components led the improvement.
􀀟 Machined forgings increased its share in total sales mix to 44.8% from 43.1%, primarily at the
cost of raw forgings (down to 45.6%) even though the sales mix in the tonnage remained
almost unchanged. This bodes well for the overall profitability of the company as machined
forged products have higher margins.
􀀟 Revenue from new facilities increasing their contribution to consolidated sales to 8.3% in
FY11 from 5.6% in FY10.
􀀟 It also highlighted that while in the US its primary addressable segment (the class 8 category-
M&HCV) recorded ~31% yoy growth in CY10, it is still 27% below the output seen in CY07. It
also highlighted that the main addressable segment in Europe (HCV) grew by 8% yoy in
CY10.
􀀟 Capacity addition: In automotive business, the company is setting up a press line and expects
it to be operational by April 2012. It also plans to increase machining capacity by 36% to 1.2m
crankshafts per annum in 2 years. The total investment will be Rs3.0bn to be spent over the
next two years.
􀀟 Its non-auto customer base has increased from less than 15 in FY06 to over 30 in FY11. In
this way, BFL has significantly increased its potential market size. Going forward, Chairman
says he sees many more related business opportunities - in thermal, nuclear and renewable
energy; railways; in building aerospace components, to name a few.
􀀟 Freight forwarding expenses for the year were at 2.4% of net sales, around the historical peak
of 2.5%.
􀀟 The internal process efficiency seems to have improved sharply as its electricity and furnace
oil consumption drop sharply by 12% and 3% yoy respectively for per tonne of forging
produced.


International ventures record impressive turnaround except Sweden, US entity
􀀟 Global subsidiaries: Global business of the company posted PBT of Rs34m in CY10 vs a loss
of Rs2.5bn in CY09.
􀀟 The FAW BF Chinese JV reported a PAT of Rs168m in CY10 vs a loss in CY09 as the
utilisation improved to 60% and new customers have been added. However, recent month
weakness in China heavy truck sales volume is a cause of concern for this JV performance.
􀀟 China JV emerges as the largest PAT making entity amongst Bharat Forge's international
forays. However, US subsidiary net loss remains high at Rs210.5m, whereas Sweden entity
net loss shrinks sharply to Rs214m.
􀀟 The company was able to reduce its consolidated net core working capital to 20days in FY11
from 22days in FY12. The reduction was primarily driven by leaner inventory.
Power equipment JV on gradual build-up phase
􀀟 The JV with Alstom has been qualified as the lowest bidder to supply 5 of 11 super critical
turbine generators of 660MW each for NTPC, the largest ever power contract in India. The
value of the company's work is estimated at Rs44bn by the management.
􀀟 Significant investment in Power JV's in FY11 : Rs474m into Alstom Bharat Forge JV leading
to total investment of Rs733m. Management guides for its total equity requirement of Rs3bn
in JVs to be invested by FY14F.

Buy Cadila Healthcare: Near term headwinds ::CLSA

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Near term headwinds
Notwithstanding Cadila’s strong long term prospects, we believe near
term growth faces headwinds from US FDA warning letter and a high
base emerging because of Taxotere. While we maintain our estimates, we
believe earning downgrades by street would result in pressure on the
stock in the near term. At 20x FY13 EPS, the stock leaves little scope for
appreciation. Pick up in domestic growth and launch of additional
products by Hospira joint venture would serve as positive triggers over
the coming quarters.
Management guides for pick up in domestic growth
Cadila’s 1QFY12 domestic growth was one of weakest in any quarter over last
four years. A part of this is due to up fronting of sales in 4QFY11 that was
done to achieve US$1bn guidance. The management guides for higher than
market average growth over coming quarters. Zydus Wellness reported flat
sales due to Nutralite facility shut down for two weeks and a margin reduction
for distributors across all products.
US growth looks difficult in wake of the warning letter
The US generic market has been a key business segment for Cadila in terms
of revenue growth while the profitability remains much lower than other
businesses. We believe this growth could come down over coming quarters as
fresh approvals become hard to come by while existing products face
competition and price erosion. Integration of Nesher in second half would add
US$10-15m in revenues for FY12 and help reported sales.
Taxotere setting a high base
Profit contribution from Hospira joint venture (while not disclosed this
quarter) likely sustained at high levels as Hospira maintains high market
share in Taxotere. However, this product contribution is likely to face decline
as more competitors gain approvals. At the same time, launch of additional
products by the JV should help manage some growth.
Rich valuations
With Cadila trading at c. 20x FY13 EPS, it leaves little scope for appreciation.
We believe that the company faces headwinds due to warning letter and with
Taxotere resulting in a high base for next year. We believe that the stock
could take a hit in the near term, while longer term pipeline remains strong.
While we maintain our estimates, we see the consensus would have to
downgrade estimates resulting in pressure on the stock.

Director’s Cut --Clouds clearing on bank rules::Macquarie Research

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Director’s Cut
Clouds clearing on bank rules
The Basel Committee for Banking Supervision has said 28 banks would count at
Globally Systemically Important Banks (G-SIBs), and would soon face a capital
surcharge of 100 to 150 basis points because they are “too big to fail.” So far
there are no banks in the 250 basis points bucket.
Michael Wiblin believes the G-SIB requirements go some way in attempting to
slow growth amongst the global banks. He also thinks this could further lengthen
the period in which these banks continue to deleverage and in reality just
formalises the diseconomies of scale for the largest global banks.
More importantly this is likely to see growth taken up by banks outside the 28 GSIBs,
reducing the systemic risk from any one particular bank failure. This is why
Al Savastano has a preference for the regional banks in the US, with two of his
top picks being M&T Bank (MTB US) and Zions Bancorp (ZION US).
The Committee also said the list of G-SIBs will be reviewed annually. So even if
a bank escapes this round, the regulations provide food for thought for the
borderline G-SIBs in terms of their expansion plans. It’s yet to be seen whether
there are any advantages to trade off the extra cost of being a G-SIB, with one
possible advantage being the perception the bank will not be allowed to fail, and
hence less risky for depositors. It also seems likely the effect of being on the list
will vary across the cycle, as there will be times when the surcharge restricts a
bank’s freedom and ability to compete with banks not on the list. There is also
the question of whether banks on the list will attempt to game the system in
order to reduce their surcharge is also open to question, according to Michael,
as the process is sufficiently complex and well controlled by the regulator.
Still on the post GFC banking theme, Alessandro Roccati does not expect the
European bank stress test results to restore confidence in the sector. This
seems right given the recent stress tests did not account for a default even
though one appears likely in Greece. Given the still heightened risk for
European banks, he therefore maintains a preference for well capitalised and
well funded banks, with ING (INGA LN) a top pick. >> Read Report
Highlights
 Julian Wentzel has launched a Macquarie Marquee that includes the
European team’s highest conviction bottom up stock calls.
 John Conomos has updated Australia’s macro distance model, and he
says the results continue to favour momentum over value.
 Nigel Browne has upgraded his estimates for Halliburton (HAL US) after the
company posted a strong quarterly result.
 HDFC Bank (HDFCB IN) has delivered yet another quarter of 30% year on
year growth, and Suresh Ganapathy is still a buyer.
 Christian Faitz’ likes Akzo Nobel (AKZA NA), as he sees the company as
one of the cheapest ways to enter the paints sector.
 With copper our favoured base metal, and after a solid quarterly, Martin
Stulpner recommends to buy OZ Minerals (OZL AU).