Hindustan Unilever: Why we remain positive on HUL?::Kotak Sec,

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Hindustan Unilever (HUVR)
Consumer products
Why we remain positive on HUL? We continue to recommend ADD rating on HUL as
we see (1) detergents margins have likely bottomed out—the 24% price increase in
‘Rin’ powder in February-July 2011 evidences it, in our view, (2) continuing good
volume growth in personal products (though rest of FY2012E may likely witness
moderation in overall volume growth due to impact of pantry stock adjustments),
(3) moderation in adspends in soaps and detergents is not a worry as adspends in lesser
penetrated personal product categories is still high, and (4) can irrational competition
impact more categories? Unlikely, in our view.


We revisit our positive arguments in our HUL upgrade note of May 2011 and do a status
update on the key drivers.
Detergents margins have likely bottomed out
The recent price increases by HUL and competition in 1HCY11 clearly indicate that the rational
competitive environment in detergents category is likely coming back. We highlight that HUL has
implemented significant price increases in Surf Excel powder (~10% in most variants), Rin powder
(24% price increase in five months between February and July 2011 – Rs67/kg in July 2011 versus
Rs54/kg in February 2011) and Wheel powder (~10% effective price hike).
The current soaps and detergents margins are the lowest ever; the management recently
commented that double-digit margins are possible (without guiding on the timeline though).
While we believe that the road to recovery could be long and winding in detergents business, the
category EBITDA margins of ~2% currently (implying that mid and mass segment are likely
operating at negative EBITDA) are clearly not sustainable for the industry—HUL as well as for
competition.
Continuing good growth in personal products
Sustained good growth in personal products (PP) provides comfort. HUL’s personal products
business (comprising hair care, oral care and skin care) has demonstrated good volume-led growth
over the past two years. Moreover, personal care now accounts for ~60% of HUL’s profits
implying that the reliance on highly commoditized soaps and detergents business has reduced.
HUL’s PP has grown at ~13% in volumes in FY2009-11, in our view and we expect the trajectory
to continue. The company has relaunched most of the categories within PP as well as had a spate
of new launches. Contribution of personal products in the overall sales mix has increased over the
years.

Buy Omkar Speciality Chemicals-“Unique play on pharmaceutical intermediates”::LKP

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Investment Rationale
 Omkar Specialty Chemicals Ltd (OSCL) is a unique play on pharmaceutical intermediates & speciality chemicals that find application in healthcare, glass, poultry feed, water treatment and agrochemicals among others. We call it unique as OSCL cannot be benchmarked to any comparable peers.
 OSCL promoted by technocrat entrepreneur Pravin Herlekar has grown its revenues at a 5 year CAGR of 35% and is now in an expansion phase to expand capacities four fold and we expect revenues to grow at a CAGR of 45% over the next two years.
 OSCL has recorded an impressive 100% growth in its headline net profit at `40 million during Q1FY‟12 on yoy basis, on the back of over 90% growth in revenues at `425 million as against `224 million during the corresponding period last year. On sequential basis, revenue growth stood at 36% against `311million and net profit grew by 34% from `30million during Q4‟FY11.
 OSCL‟s product portfolio comprise of more than 80 products and with new product introductions and operating leverage due to the ongoing capacity expansion, we expect net profits to grow at a CAGR of more than 50% over the next two years.
Valuation
OSCL has reported strong financial performance in FY‟11 and would continue to grow at CAGR of 45% over the next 2-yrs (FY‟12E and FY‟13E) net profit is expected to grow at CAGR of 50% for the period under review. The higher growth trajectory will be supported by production boost from capacity expansion from 950mtpa to 3,650mtpa, along with robust demand for its products. Growing product offerings along with growth in end-user industries will lift its future revenues.
OSCL has successfully demonstrated its ability to grow its gross margins from 12% in FY‟06 to 20% in FY‟11. Given its consistent and proven track record in high margin molecules, we rate the stock as „BUY‟ at current market price of `59 with one year price target of `120. OSCL has P/BV of 1.2 and trades at 7xFY‟12E and 5xFY‟13E earnings.

Buy Jindal SAW; Target : Rs 138 :ICICI Securities,

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R e s u l t  s   l a r g e l y   i n   l i n e   w i t h   e x p e c t a t i o n…
The Q1FY12 results of Jindal SAW were broadly in line with our
expectation with sales coming in at | 1133.1 crore as against our
expectation of | 1181.0 crore. Sales volumes on a YoY comparison have
declined ~11% and QoQ by ~10%. However, the topline is supported by
higher realisations, which has improved ~12% YoY and ~9% QoQ,
respectively. EBITDA also came in line with our estimates at | 178.2 crore
(I-direct estimate: | 170.9 crore).  EBITDA margins in Q1FY12 have
contracted significantly by 645 bps YoY to ~15.7% but sequentially the
margin has marginally improved by 52 bps. The net profit of the company
was higher at | 82.8 crore, which is higher than our estimate of | 72 crore.
On a YoY comparison, net profit has declined significantly ~45% YoY
due to higher depreciation cost (increased ~5% YoY) and higher tax rate
(increased from 25% in Q1FY11 to 30% in Q1FY12).
ƒ Sales impacted despite higher production
Production for the quarter stood  at ~2,80,000 million tonnes (MT)
whereas sales were significantly  lower at ~1,85,000 MT. This was
due to a bottleneck in the coating plant, which led to an increase in
the WIP stock (~| 399.5 crore).
ƒ Order book position
The order book of the company  stood at $800 million. The order
book in tonnage terms stands at ~4,70,000 MT for large diameter
pipes, ~1,60,000 MT for ductile  iron pipes and ~35,000 MT for
seamless pipes. Export orders share stands at 65% (which has
improved as compared to ~ 55% in Q4FY11) of the total order book.
V a l u a t i o n
At the current market price of | 118, the company is discounting its FY12E
and FY13E EV/EBITDA by 5.4x and 4.4x, respectively. We have valued the
company on an SOTP basis assigning 4.5 EV/EBITDA to the core business
and giving a 50% holding company discount to the investments (| 39 per
share). We have arrived at a target price of | 138. We are upgrading our
rating on the stock from HOLD to BUY.


Concall highlights
• The current order book includes export orders of ~65%. The major
exports orders are from the Middle East, Gulf region, South East
Asia, China and the Far East
• During the quarter under review, total production volumes stood at
~2,80,000 MT. Out of this, ~1,86,000 MT was LSAW and HSAW
combined, ~37,000 MT was seamless pipes while ~55,000 MT was
for ductile iron pipes
• In Q1FY12, the total sales volume stood at ~ 1,84,800 tonnes, out of
which ~77,800 tonnes was LSAW pipes, ~14,500 tonnes was
HSAW pipes, ~55,800 tonnes was ductile iron pipes (including pig
iron) and ~36,700 tonnes was seamless tubes
• In terms of geographical break-up, sales in India were 48% while
sales outside India were 52%
• The sales realisation in Q1FY12  for LSAW was ~70,000 per tonne,
for HSAW it was ~45,000 per tonne, seamless pipes were at
~75,000/tonne while for ductile iron pipes it was ~45,000 per tonne
• With regard to iron ore mines,  the company has already initiated
steps to roll out the project implementation including civil work,
finalisation of engineering details and installation of the plant and
machinery. It is expected that the trails should commence and
commercial production could begin in Q4FY12
• The company is setting up a ductile iron plant with additional waste
heat recovery based power project and coke oven plant. This
expansion will provide additional 200,000 MTPA ductile pipe with a
wider range of sizes. The project, with a capital outlay of ~| 400
crore, is expected to commence operations in Q4FY12
• The greenfield ductile iron pipe facility in the United Arab Emirates,
which has an installed capacity of 300,000 MTPA is progressing well
and is expected to commence  operations by Q4FY12. The
estimated cost outlay for this facility has been estimated at ~US$60
million
• The drill pipe facility in the US  has already commenced trial runs
and the necessary approvals are awaited. Commercial operation is
expected to commence shortly upon receipt of approvals
• The company has given  a production volume guidance of ~1-1.1
MT in FY12


Outlook and Valuation
Due to the slowdown in the global economic scenario and recent decline
in crude prices, we expect the demand for pipes to witness a weak trend
in the short-term. We believe that once the global economic recovery
gains momentum and investment in the pipes sector picks up, this will
lead to higher demand for pipes. Also, on the cost front, the pressures
that the company is witnessing currently will ease out post
commissioning of its captive iron ore mine (which we expect to happen
by the end of FY12). This will lead  to an improvement in the margins,
going forward. We believe the current stock price factors in all the
negatives and it is a very attractive level to enter the stock.
At the current market price of | 118, the stock is discounting its FY12E
and FY13E EV/EBITDA by 5.4x and 4.4x, respectively. We have valued the
stock on an SOTP basis assigning 4.5 EV/EBITDA to the core business
and giving a 50% holding company discount to the investments (| 39 per
share). We have arrived at a target price of | 138. Hence, we are
upgrading our rating on the stock from HOLD to BUY.

Sell Varun Shipping; Target : Rs 17 :ICICI Securities,

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P e r f o r m a n c e   d e t e r i o r a t e s   f u r t h e r …
Varun Shipping Co (Varun Shipping) continued its dismal performance in
Q1FY12 with topline remaining flat at | 83.2 crore. At the EBITDA level,
Varun Shipping reported a loss of | 15.1 crore compared to a loss of | 3.1
crore in Q4FY11. The interest (| 55.9 crore) and depreciation (| 32.7 crore)
resulted in an operating net loss from operations of | 84.8 crore in
Q1FY12. The company has booked an extraordinary profit on sale of
crude tanker and AHTS to the tune of | 49.5 crore in Q1FY12, which has
resulted in reducing net loss to | 35.3 crore. The operational performance
of Varun Shipping is likely to be under pressure for another couple of
years as freight rates continue to  remain subdued. Varun Shipping’s
owned fleet has been reduced to just six vessels and the remaining eight
assets are on a sale and lease  back arrangement with associate
companies. The sale and lease back arrangement would continue to put a
strain on the EBITDA margin due to a rise in charter hire expenses.
ƒ Operating performance worsens in Q1FY12
Varun Shipping reported a flattish QoQ performance with 0.3% increase
in revenues to | 83.2 crore in Q1FY12 as against | 82.9 crore in Q4FY11.
The continued weakness in crude tanker freight rates and AHTS charter
rates as well as reduction in the fleet size has kept the revenue growth
muted. The company reported a loss of | 15.0 crore at the EBITDA level
in Q1FY12. The dismal EBITDA can be attributed to depressed freight
rates along with a rise in charter hire expenses on account of a sale and
lease back arrangement executed in the previous few quarters. The
company reported a net loss of | 35.3 crore in Q1FY12, which included a
gain of | 49.5 crore on sale of assets. Excluding this, the operating net
loss would have been | 84.8 crore. Going ahead, we expect Varun
Shipping’s revenue to decline in  FY12E by 5% to | 466.4 crore and
increase by 13% in FY13E to | 528 crore.
V a l u a t i o n
At the CMP of | 20, the stock is trading at 1.2x FY13E book value of | 17.
We  have  valued  the  stock  at  1x  FY13  P/BV  to  arrive  at  a  price  target  of  |
17. We maintain our SELL recommendation on the stock.

India Cements: Strong 1QFY12 results ::CLSA

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Strong 1QFY12 results
India Cements’ earnings rose 300% to Rs1bn, sharply ahead of estimates. This
was largely driven by pricing discipline which management expects would continue
in the coming months and also indicated that Competition Commission of India
(CCI) has put aside the cement price hike probe. The company has also announced
its foray into unrelated infra space but has not mentioned the scope. Even while we
are concerned on this as well as the on-going capacity surpluses in the industry,
we see value emerging post 30% correction in the last 12-months as valuations at
US$65/t (45% discount to est. replacement cost) are cheap; raise to Opf.
1Q results sharply above our estimates
ICem’s 1Q earnings rose 300% YoY to Rs1bn, sharply above our estimates; while
cement volumes declined 13% YoY reflecting weak demand trend in south, realisations
rose to highest ever level of Rs208/bag (+8%QoQ). The impact of 30% rise in linkage
coal price was offset by lower imported coal price, better efficiency, which also helped.
Resultant cement Ebitda/t rose 40% QoQ to Rs983/t, highest in last 7-quarters.
Management expects this discipline to sustain despite weak demand-supply
Management expects the pricing discipline to continue in the region which should
continue to help realisations. This is despite its weak outlook for demand for 2HFY12.
Interestingly, while there would be two new entrants in the region in the next few
months (JP Associates, JSW), the management is still hopeful of stable pricing. The
management also indicated the Competition Commission of India has put aside the
ongoing enquiry on price hikes and the possibility of cartelisation in the industry.
Rs6bn of capex over FY12-13 even while current CWIP is at Rs10.4bn
In the standalone entity, ICem has spent Rs5.5bn of capex in FY11 and currently
carries a CWIP of Rs10.4bn. Despite this, the capex guidance on on-going projects
(power plants, land) looks high at Rs6bn for FY12-13.
Watch out for the unrelated diversification into infra sector
ICem has also announced its foray into infrastructure space, though has not shared
any details on the likely quantum of investment, areas of focus etc. The management
believes that the sector has close linkage with its current cement business and it may
look at acquisition opportunity to build capability. We recall that ICem also entered
into shipping, Cricket-IPL in 2008 which have not yielded much returns so far.
Value emerges post 30% correction in last 1-y; Opf now (high risk-reward)
We raise our EPS estimates by 5-40% over FY12-13 as we raise our realisation
estimates. While we remain concerned on the sector and note that south is likely to
have the lowest utilisations in the next 2-3 years, we see value post ~30% correction
in the stock price in the last 12-months and upgrade the stock to O-PF. Revising target
price to Rs85/sh as we continue to value its capacities at US$75/t.

Lanco Infratech: 1QFY12 results ::CLSA

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1QFY12 results
Lanco’s 1Q results are below expectations even after adjusting for higher
elimination of EPC revenues. Merchant realizations have fallen sharply
and Anpara and Udupi projects are further delayed. We will seek more
clarity on the expansion projects in the conference call on 16th August.
The earnings for FY12 however are most likely to be revised downwards.
We are increasing the discount to fair value to 50% given the
uncertainties regarding the possible liabilities due to the ongoing dispute
with Perdaman and cutting the target to Rs24/sh.
1Q result below expectations – adjusted for higher elimination
Lanco’s 1Q results are below expectations even after adjusting for higher
elimination of EPC revenues – cash profit at Rs3.7bn is up 1.3% YoY. Short
term realizations dropped sharply (Rs3.8/kWh) for merchant power plants
while Udupi project (regulated return project) made losses due to lower
availability of the plant. The company eliminated Rs11.5bn of EPC revenues
during consolidation as more construction work is currently on for the
subsidiaries - Kondapalli and Amarkantak. Lanco booked 20% margins on this
eliminated revenue.
More delays for Udupi and Anpara
Udupi (2 x 600MW) project would have more delays as the units are yet to
stabilize and the transmission line is delayed. The company has recently
changed the debt repayment schedule for this project. Anpara project (2 x
600MW) is also delayed after the accident during the pre- commissioning
exercise for the first unit.
No clarity on Perdaman litigation. Process could be long drawn.
Perdaman Industries had filed a case in Australia against Lanco demanding an
AUD3.5bn compensation for not complying with the coal supply contract.
Recently, Perdaman’s application for a “freezing order” to refrain Griffin from
entering into any charge or security without informing it has been dismissed.
However, the key point of contention still remains unresolved. The legal
process could be a long drawn one.
FY12 earnings would be cut sharply. TP cut to Rs24/sh.
We will seek more clarity on the progress of expansion projects in the
conference call on 16th August. The earnings for FY12 however are most likely
to be revised downwards. We are increasing the discount to fair value to 50%
given the uncertainties regarding the possible liabilities due to the ongoing
dispute with Perdaman and cutting the target to Rs24/sh.

Understanding Asset Allocation :: "Don't put all your eggs in one basket!":: BNP Paribas

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"Don't put all your eggs in one basket!" This age old proverb that most of us have grown up with has diversification of risk as the focal point. Some of the most basic and fundamental principles of investing can often be learnt through simple, real life experiences. Have you ever noticed that shops often sell seemingly unrelated products - such as umbrellas and sunglasses? They may seem odd - when would you buy both of these at the same time? Probably never. And that's the point. When it is raining, it is easier to sell umbrellas but harder to sell sunglasses. And when it's sunny, the reverse is true. By selling both of these, or by diversifying the product line - the shopkeeper reduces the risk of losing money. Let's say you have a portfolio of Mutual Funds and all of them are tech funds. To some degree, they are all correlated. When the tech bubble blew up in March of 2000, every tech stock went down and so did the tech funds. So if you had that portfolio, your portfolio went down big. Let's say you have a portfolio that has some tech funds, some banking funds, some fast moving consumer goods (FMCG) funds, some real estate, some bond funds, and some cash in it. When the tech bubble bursts, you get hit, but your portfolio does not "blow up." That is the power of diversification at work. If this approach makes sense, you would already appreciate the benefits of diversification and asset allocation. What is Asset Allocation? Historical market data shows us that asset classes perform differently depending on economic conditions. However, it is very difficult to predict which among the various asset classes will perform in the future. Asset allocation involves dividing an investment portfolio among different asset classes such as mutual funds, stocks, gold, real estate, bonds and cash. The process of determining which mix of assets to hold in your portfolio is unique to each individual. Asset allocation is the task of identifying how much of your portfolio will be invested in different asset classes and helping you balance the expected returns with a level of risk that is acceptable to you. It should be based on your financial goals, the time horizon in which you wish to achieve them and your risk tolerance level. Time Horizon If your goals are long term in nature, you may be comfortable investing in a riskier or more volatile asset class like equities because you can wait out slow economic cycles and the numerous ups and downs of markets. However, if your time horizon is short, you are likely to assume lower risk. Generally, the younger you are, the more risk you can afford to take. As you grow older, you may be more interested in preserving your capital/savings since a large decline near your retirement may need you to compromise your lifestyle or even make it impossible to retire. Risk Tolerance Your ability and willingness to lose some of your principal/savings in the near term in exchange for greater potential returns is called risk tolerance and is a major factor in deciding your asset allocation. How Do You Execute An Asset Allocation Plan? Once you have decided your time horizon and the level of risk you are willing to take, the next step is to identify the investment options that are suitable for you. The thumb rule used is to subtract your age from 100 to determine the percentage of your investments in equities. If you are 40, you may invest 60% in equities and the rest in bonds and cash. A smarter way to achieve asset allocation objectives is to use mutual funds. All you have to do is invest in equity funds, bond funds and liquid funds in the desired ratios to achieve diversification among asset classes. You can even take your asset allocation plan a step further by diversifying among each of the broad asset classes. Mutual funds can also help you here since you have several options within funds in every asset class Types of Equity Funds Large Cap Mid & Small Cap Growth Value International Types of Debt Funds Bond Gilt Balanced Funds Fixed Maturity Plans Cash Impact Of Asset Allocation On Portfolio Performance Many financial experts believe that determining your asset allocation is the most important decision that you need to make regarding your investments. Given that it is such an important decision, you may even consider taking professional advice to help you come up with an optimal asset allocation plan. Research has proven that Asset Allocation is the single largest contributor to portfolio performance. 88% of the portfolio performance can be attributed to the right asset allocation decision. As with every investment you make, discipline and regular reviews are critical to help your achieve your goals. Happy Investing!

An AAA rating for the US isn’t likely soon, may be cut to AA from AA+ within two years: S&P in Economic Times

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Standard & Poor's said it was an "oversimplification" to blame its stripping the US of the top AAA sovereign rating for recent market volatility, adding that many investors agreed with its action. Markets were also responding to a weaker global growth outlook, David Beers, global head of sovereign and international public finance ratings at S&P , told reporters in Singapore today. 

The company is untroubled by dissenting views on its decision, he said in response to questions. His comments follow criticisms by investors including Warren Buffett, the world's most successful investor, who said that the US should be "quadruple-A " and the decision doesn't reflect any inability of the US to pay its debts. 

The market value of global stocks plunged by $2.5 trillion on the first trading day after S&P on Aug. 5 cut the US by one level to AA+, citing the political failure to reduce record deficits. "It's at the very least an oversimplification to say that all this is happening because of S&P's change of opinion," Beers said. Amid evidence of slowing world economy, "markets digesting all these news have concluded that the near-, perhaps medium-term, outlook for global growth has become less certain. This was all happening before the downgrade and has continued after some of the noise around the downgrade," Beers said. 

The Obama administration criticised the S&P move, with the Treasury Department telling the company it had overestimated future national debt by $2 trillion. S&P said the discrepancy didn't affect its decision, and based its conclusion on the US government becoming "less stable, less effective and less predictable." The US growth trajectory faces downside risks, and the medium-term fiscal adjustment in the world's biggest economy may be impacted by a slowdown, Beers said today. An AAA rating for the US isn't likely in the near term, he said. 

S&P kept the outlook on the US debt rating at "negative" on Aug. 5. The ranking may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or "new fiscal pressures" result in higher general government debt, the New York-based firm said.

HDIL:: Mumbai logjam ::CLSA

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Mumbai logjam
HDIL’s 1Q results were driven land sales. TDR revenues dropped 22%
QoQ on lower volumes as stagnant Mumbai property markets continue to
impact TDR demand. With local elections approaching in Mumbai,
visibility on redevelopment projects or airport project gaining traction
anytime soon is bleak. We lower NAV & TP by 12% as we build in delays
in rehab projects and raise Mar’12 net debt target by Rs4bn.
FSI sale recognition boosts 1Q; TDR revenues down
HDIL’s 1QFY12 profits fell 11% YoY / grew 6% YoY to Rs2.1bn – higher than
initial expectations as HDIL booked remaining Rs3.3bn revenues on a FSI sale
deal (Andheri) concluded earlier in Dec’10. TDR revenues declined 22%
QoQ/47% YoY to Rs1.7bn as volumes fell c.25% QoQ to 0.65m sf. TDR
pricing was flat QoQ @Rs2600/sf, down 15% from peak recorded in 3QFY11.
Ebitda margins moved up 4ppts QoQ to 53% on higher land sale component.
City projects stuck; looking to far-off suburbs for growth
No progress was made towards taking the airport project ahead to Phase II
during the quarter. Legal/approval related issues also continue to hinder any
significant progress on HDIL’s high-value redevelopment projects viz. Malvani
(HDIL appealing cancellation), BKC (more approvals needed), Ghatkopar,
Santacruz, Kandivali (slow pace of rehab). With sales slow on existing
Mumbai city projects as well (10% sold at one new launch during 1Q); HDIL
is looking to launch projects in suburbs (Panvel, Shahad) for growth.
Additionally, company plans to increase FSI sales pace at Vasai-Virar.
Small debt reduction QoQ; Sceptical on management target
HDIL reduced its net debt by Rs534m or 1% during 1Q, helped by excess
cash received from its large deals done earlier in FY11. Management targets
to reduce debt by Rs15-20% (Rs6-8bn) during FY12 as Rs8bn of inflows are
still outstanding on its land deals. However, given HDIL’s weak track record of
balance sheet discipline, we build in a lower Rs4bn reduction now.
Lower NAV and TP by 12%; Maintain U-PF
With progress on Mumbai redevelopment projects slow, we build in delays to
project launches. We also increase our Mar12 net debt estimate by Rs4bn to
Rs37bn. Overall, we cut HDIL’s Mar12 NAV 12% to Rs183/share and set our
TP at a 30% discount. With no visible progress on airport project or Mumbai
property market recovery, we maintain U-PF.

Reliance Industries - Risk reward analysis „::BofA Merrill Lynch,

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Reliance Industries Ltd.
   
Risk reward analysis
„Risk-reward even; key is will US recession probability rise?
The risk of US recession is rising (US Economic Weekly, 19 August 2011). A US
recession will hit petrochemical and refining margins (GRM) of Reliance Industries
(RIL). RIL’s bear-case fair value implies 19% potential downside. RIL’s PO implies
20% potential upside. Risk-reward, thus, is evenly poised. The key is whether the
probability of a US recession, which we now estimate at 40%, rises. Bear-case
FY12-13E EPS are 17-32% lower than base case and would mean no growth.
Cut PO by 11% to Rs909; Bear case fair value Rs612
We are now valuing RIL’s refining and petrochemicals conservatively, at 6x FY13
EBITDA (DCF earlier), resulting in a cut in our PO by 11%, to Rs909. RIL’s bear-
case fair value, which assumes a US recession and, therefore, lower GRM
(US$7/bbl in FY13) and petrochemical margins, works out to Rs612. RIL’s share
price is unlikely to test October 2008 lows (Rs510). RIL had a net debt of
Rs174/share then, while it will turn net cash in the next 12 months. Though RIL’s
balance sheet is stronger, its E&P business has got de-rated and its EPS CAGR
in FY08-11 was just 5%. In the bear case, the FY11-13 EPS CAGR will be minus
3% (base case 17%).
Singapore GRM strong, but demand and capacity concerns
Reuters’ Singapore GRM to date in FY12 is US$8.7/bbl, which is even higher than
during the FY05-09 super-cycle. However, global oil demand is weakening. 2Q
2011 demand is the lowest in 7 quarters. In 2012, global oil demand may fall by
0.4m b/d in case of a mild US recession (Global Energy Weekly, 05 August 2011).
IEA expects global refining capacity addition at 2.4m b/d (highest since 1999) in
2012. Thus, refining over-capacity may rise by 2.8m b/d in 2012, causing a sharp
fall in GRM. RIL’s FY13 GRM could fall to US$7/bbl and cut EPS and fair value.


Risk-reward analysis
Risk of US recession
40% chance of US recession in 2012
There is a concern that the US may slip into recession. The BofAML US
economics team now believes that there is a 40% chance of a recession in 2012
(see US Economic Weekly, 19 August 2011), up from 35% earlier (see Economic
Commentary, 04 August 2011). Our baseline view is that the US economy will
continue to muddle through with trend-like growth, which will probably feel like a
recession to many, even if it is not officially one.
Refining & petrochemical margins
Singapore GRM to date in FY12 higher than super cycle
Singapore GRM TD in FY12 US$8.7/bbl; US$5.8-7.6/bbl in FY05-FY09
Reuters’ Singapore complex GRM, at US$8.7/bbl to date in FY12, is higher than
even the US$5.8-7.6/bbl during the refining super-cycle in FY05-FY09. Reuters’
Singapore GRM was US$8.5/bbl in 1Q FY12, while to date in 2Q it is at
US$8.7/bbl. The main factors driving strength in GRM are:
„ Strong global oil demand growth of 2.7m b/d (second strongest in 32 years)
in 2010 and refinery closures of over 2m b/d. This helped take care of at
least 80% of the refining over-capacity created in 2008-2009
„ Strong Chinese diesel demand growth due to power shortages (see PRC
Power, 04 August 2011) and consequent use of diesel to generate power.
Chinese apparent diesel consumption grew by 12% YoY in 1H 2011 as per
data from the National Bureau of Statistics
„ Boost to GRM from Japanese Tsunami in March 2011 and from the
shutdown of the Formosa refinery in Taiwan after an accident in end-July
2011. Reuters’ Singapore GRM had declined to US$7.8/bbl in July 2011 from
US$8.5/bbl in 1Q FY12. Singapore GRM has surged to US$10.2/bbl to date
in August 2011 after the accident at the Formosa refinery.


Polyester main driver of RIL blended margin strength
Polyester chain margins off peak as demand and cotton price declined
The main driver of the blended petrochemical margin strength since 3Q FY11
was strong polyester chain margins. Polyester chain margins, which touched an
all-time high in 4Q FY11, have since corrected, hit by decline in Chinese and
Indian demand and fall in cotton prices.
US recession & capacity addition risk to GRM
Weakening oil demand & large refining capacity addition
We see two main risks to prevailing strength in GRM sustaining
„ Weakening of global oil demand as OECD demand is hit by high oil prices
and emerging market demand by monetary tightening
„ Large refining capacity addition in 2012-2013
OECD demand decline main risk to global oil demand
Global oil demand fell in 2008-2009 as OECD demand fell 1.6-1.9m b/d
Global oil demand declined in 2008 and 2009 by 0.4-0.6m b/d, mainly due to a
decline in OECD oil demand by 1.6-1.9m b/d. Chinese oil demand grew in 2008-
2009, but it was also weak at 0.2-0.3m b/d. In fact, OECD oil demand had also
declined in 2006-2007 and is expected to decline in 2011-2012, even in the base
case.



OECD 52% of global oil demand & China just 10% in 2010
OECD oil demand growth is a crucial factor influencing global oil demand growth.
This is because OECD countries still account for over 50% of global oil demand.
In 2010, OECD countries accounted for 52% of global oil demand, while China
accounted for just 10%.
Global oil demand growth in 2Q 2011 lowest in 7 quarters
Global oil demand up 0.6m b/d in 2Q11; 0.9-3.4m b/d in last 6 quarters
Global oil demand growth was just 0.6m b/d in 2Q 2011, as per IEA estimates. It
is the lowest since 3Q 2009 (i.e., in 7 quarters). Global oil demand growth was
0.9-3.4m b/d in the last six quarters. It was last lower than in 2Q 2011 in 3Q 2009,
when it declined by 0.3m b/d.
Chinese oil demand growth in 2Q 2011 also lowest in 7 quarters
Chinese oil demand growth was 0.4m b/d in 2Q 2011, which is also the lowest in
7 quarters. Chinese oil demand growth was 0.5-1.4m b/d in last 6 quarters. It was
last lower than in 2Q 2011 in 3Q 2009, when it was up by just 0.3m b/d.



Bear-case fair value at Rs612/share
Refining and petrochemical valued at 6x FY13 EBITDA; 6.6x at 2008 low
Our bear-case fair value of RIL is Rs612/share. Bear-case fair value is based on
„ 6x FY13 bear-case refining EBITDA. RIL’s EV/EBITDA based on its October
2008 low of Rs510/share was 6.6x.
„ 6x FY13 bear-case petrochemical EBITDA
„ Bear-case E&P DCF valuation of Rs166/share. Bear-case E&P valuation
assumes KG D6 gas production never rises above current levels. Thus, it
does not ramp to 80mmscmd in FY15 as assumed in the base case. It also
assumes no 7-year income tax holiday for gas production.
Bear-case fair value 33% lower than base case
Biggest cut in refining valuation of Rs150/share
Our bear-case fair value is 33% lower than base case. Bear case
„ Refining EV at Rs196/share is 43% (Rs150/share) lower than base case
„ Petrochemical EV at Rs236/share is 20% (Rs58/share) lower than base case
„ E&P EV at Rs166/share is 20% (Rs42/share) lower than base case
„ Net cash at Rs13/share is 78% (Rs47/share) lower than base case


RIL’s share price unlikely to touch 2008 low of Rs510
Bear-case fair value at Rs612/share is 20% higher than 2008 low
The lowest level RIL’s share price declined to in October 2008 was Rs510/share.
We do not expect RIL’s share price to decline to that level in 2011-2012, even in
case of a US recession and a global slowdown.
RIL’s balance sheet stronger now than in 2008
Net debt Rs174/share in FY09; to be net cash in the next 12 months
RIL is unlikely to decline to the 2008 low of Rs510 in 2011-2012, as its balance
sheet is much stronger than in 2008. In end-FY09, RIL's net debt was
Rs174/share, while it is likely to turn net cash in the next 12 months. The main
drivers of this change from net debt to net cash are
„ Free cash flow generation by RIL in FY10-FY12E
„ Sale of 30% stake in Indian E&P assets at US$7.2bn to BP Plc in 2011



RIL’s de-rating
RIL’ 5-year average PE 16.8x in FY07-11; 7.3x in FY02-06
Re-rating driven by FY03-08 EPS CAGR of 36% & high E&P valuation
RIL’s 5-year average forward PE multiple rose from 7.3x in FY02-FY06 to 16.8x
in FY07-FY11. The main reasons for this re-rating were
„ Strong 5-year EPS CAGR of 36% in FY03-FY08
„ High valuation for its E&P business
RIL de-rated; trading at 10.5x FY12E base case EPS
RIL has under-performed BSE-30 by 69% since April 2009
RIL has under-performed the BSE-30 by 69% since April 2009. While the BSE-30
is up by 65% during this period, RIL’s share price has declined by 4%. RIL’s derating is apparent from the fact that it is now trading at just 10.5x FY12E EPS. As
discussed, its 5-year average forward PE was 16.8x in FY07-FY11.
Hit by 3-year EPS CAGR to FY11 of 5% and E&P de-rating
RIL’s de-rating is mainly due to the following factors
„ Its earnings growth since FY08 is very weak, with 3-year CAGR to FY11
being just 5%
„ Its E&P business has got de-rated due to production problems in KG D6 and
as no significant discoveries have been made in the last few years


Retain Buy on RIL
Risk-reward evenly poised
Bear-case fair value implies 19% downside; PO implies 20% upside
Risk-reward analysis of RIL suggests risk-reward is evenly poised. The bear-case
fair value of RIL of Rs612, which assumes a US recession and, therefore, lower
GRM and petrochemical margins, implies 19% potential downside. Our new,
lower, PO (base-case fair value) of Rs909/share implies 20% potential upside.
Probability of US recession 40% now; Will it rise further?
Risk-reward is evenly poised, as potential upside in the base case is similar to
potential downside in the bear case, which assumes a US recession. The key,
therefore, is whether the probability of US recession rises further. We estimated
probability of a US recession in 2012 at 35% earlier. We have now raised the
probability of a US recession in the next 12 months to 40%.
GRM most at risk in case of US recession
At a bear-case FY13 GRM of US$7/bbl, hit to fair value & EPS 19-21%
In case of a US recession, refining over-capacity could rise by 2.8m b/d in 2012,
as demand declines by 0.4m b/d and 2.4m b/d of capacity is added. Refining
over-capacity added since 2007 could rise back to 3.5m b/d in 2012, like it did in
2009. RIL’s GRM in that case could decline to US$7/bbl in FY13 (US$6.6/bbl in
FY10) vis-à-vis US$10.6/bbl in the base case. This would mean a hit to basecase EPS of Rs17.8 (21%) and to fair value (refining EV down by Rs150 and net
cash down by Rs23) of Rs173/share (19%).

Jubilant Food:1QFY12: strong results ::CLSA

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1QFY12: strong results
Jubilant reported better than expected results for 1QFY12 with sales
growth of 60% YoY and net profit growth of 52% YoY despite a higher
tax rate. Same store growth was better than expected at 36.7% despite
the tough base of 37% in 1QFY11. Ebitda margins were up 50bps YoY
and 200bps QoQ, driven by operating leverage benefits. The company has
not seen any signs of a slowdown in demand so far and looks well set to
beat its guidance of 20% SSG and at-least flat margins. We have
upgraded our FY12-13 forecasts by 9-10% to reflect higher same store
growth, raising our target price to Rs865. The rich headline valuations
supported by a strong franchise and growth potential. Retain O-PF.
Healthy top line growth; cost pressures under control
Jubilant’s 60% YoY sales growth in 1QFY12 was underpinned by 36.7% same
store sales growth. This was delivered against a base of 59% sales growth
and 37% same store sales in 1QFY11. Jubilant added 14 stores during the
quarter, taking the base to 392 across 93 cities. Ebitda grew 65% YoY while
PBT grew 81%. Net profit growth was a more modest 52% due to taxes.
Gross margins were down 100bps YoY at 74.5% and were flat QoQ. Costs
grew slower than sales on a YoY as well as QoQ basis, driving Ebitda margin
expansion. The company is planning another 2.5-3% price hike in August and
raw material cost pressures should remain under control.
Growth momentum continues, no signs of a slowdown yet
This was the sixth successive quarter of 30%+ same store sales growth for
Jubilant Foods. Whilst the base is tougher still in 2QFY12 (48% same store
growth), the pace of sales/store already achieved should help Jubilant
maintain 20%+ same store growth on a YoY basis. Unlike mainstream
retailers, Jubilant has not seen demand slacken in June-August and the risk of
earnings disappointments in the coming quarters is lower than retail peers.
Whilst wage hikes in 2Q will prevent margins from being maintained at the
19%+ level, they should still remain significantly stronger on a YoY basis.
Earnings upgrades from extra stores
We expect Jubilant to beat its guidance of 20%+ same store growth and at
least flat Ebitda margins, modelling in 28%+ SSG and 90bps of margin
expansion for the year. We have upgraded our FY12-13 estimates by 9-10%.
This, along with a 3 month roll forward, drives a 15% increase in our DCF
based target price to Rs865 (FY13 PE of 36x and EV/Ebitda of 20.1x). The
company has not invested any additional amounts in ICDs. Over FY11-14, we
expect revenue to become 2.7x and PBT 3.4x with substantially more
headroom for long term growth. This, along with lower earnings risks in the
near term, makes Jubilant our preferred pick in retail. Retain O-PF.

Unitech: Revenue disappointment ::CLSA

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Revenue disappointment
With revenues continuing to lag sales by 40%, Unitech’s 1Q results were
a disappointment. Unitech also took an additional write-off on an
investment, which depressed reported margins by 5ppts. Key positives
from the results were continued new project launch activity and a small
net debt reduction. The sales rate is maintained at 2m sf/qtr and Rs8bn
of customer inflows during the quarter was a positive. Progress/outcome
of the telecom investigations remain the biggest stock price driver.
Results disappointment on lower revenues
Unitech’s 1QFY12 net profit of Rs1.0bn, down 4% QoQ/ Down 45% YoY - was
below expectations. Revenues, at Rs6.0bn were down 28% YoY, and were a
big disappointment. Unitech’s real estate revenues have trailed sales by 40%
over the last five quarters. This highlights either a lack of ramp-up in
execution or previous sales being over reported, possibly due to cancellations.
Lower margins were partly made up by a retail property sale gain of Rs500m
reported in other income.
Investment write-off hits margins; Debt down
Reported Ebitda margins at 20% were below expectations of mid-20s as
Unitech took a further write-off of Rs300m on the remaining Rs1.15bn on an
investment (refer to our FY11 Annual Report Analysis note). We now build in
a further Rs300m loss during FY12. Adjusted for this, margins were 25%.
Unitech’s net-debt declined by Rs0.7bn QoQ; helped by inflows of Rs8.0bn
from business. Unitech also repaid Rs2.0bn of debt, Rs1.3bn via cash, as
refinancing/new loans remain tough to procure. Receivables rose a small
Rs0.3bn, much better than a sharp rise of Rs8.8bn during FY11.
New launches strong but tough macro dampens sales
Unitech launched 3.2m sf of new properties during 1Q, much better than
2.6m/sf average during FY11. Sales though were stagnant at 1.9m sf (65%
outside NCR), down 3% QoQ, as high mortgage rates have dampened a
quicker sales rate. Gurgaon launches, at 0.3m sf were low, and have been
bunched up in 2Q; which should help Unitech maintain its Rs10bn/quarter
sales rate. Deliveries, at 1.6m sf, were the highest over past seven quarters.
Earnings estimates cut by 5-8%
We cut our FY12-14 earnings 5-8% to build in slower execution and 4-9%
lower volumes. We now build in 6% volume sales growth in FY12. With
availability of financing limited, Unitech’s ability to improve its execution and
thereby cashflows is important. A continued sales rate implies that customer’s
confidence in Unitech has not been shaken much.

ENGINEERING & CAPITAL GOODS -Macro headwinds erode profitability::Edelweiss Securities

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Q1FY12 was a lackadaisical quarter for the sector with revenue growth at
14.8% Y-o-Y. Core OPMs remained under pressure (ex BHEL, Punj Lloyd)
owing to input cost pressures. Further, rising interest cost marred the
sector’s profitability with profit margins dipping 80bps to 6.9%. Order
intake for the sector dipped 17% Y-o-Y to INR 302 bn, courtesy BHEL,
whose order intake took a massive 75% tumble. We remain cautious on
the overall execution pick up in the sector over the next few quarters
owing to the prevailing macro headwinds.
Macro headwinds took a toll on execution
Execution in the sector was decent during Q1FY12, up 14.8% Y-o-Y against our
expectation of 19.0%. Amongst large caps, BHEL, Crompton Greaves, Cummins and ABB
reported dismal set of numbers, much below ours and Street expectations. Project
deferments and client issues took a toll on execution of companies in the power T&D
space. We remain cautious on the overall execution pick up in the sector over the next
few quarters owing to the prevailing macro headwinds.
Rising input costs and interest rates hurt profitability
Over the past few quarters, raw material prices have touched new highs, pressurising
margins. High input costs continued to impact the sector with EBITDA margins sliding
110bps Y-o-Y to 11.2%. Rising interest costs further singed the sector’s profitability,
leading to flat profit growth, lowest in the past three quarters.
Inflationary pressures dent order inflow
Order inflow was sluggish, primarily due to an overall slowdown owing to inflationary
pressures apart from various other issues such as environmental clearance, coal linkage
issues, among others, which led to project deferrals. Order intake for the sector
declined 17% Y-o-Y to INR 302 bn, courtesy BHEL, whose order intake took a massive
75% tumble.
Outlook: Cautious; stay selective
Q1FY12 was tepid in terms of ordering momentum owing to limited tender awards in
power and infrastructure (ex roads) in the country and do not expect any major pick up
in Q2FY12 as well; we expect ordering momentum to pick up pace only in H2FY12. Also,
we expect H2FY12 to see higher interest cost and input cost impact eating into the
sector’s profitability, those some respite is likely from declining input cost as low cost
inventory is utilised. In our view, pricing pressure is likely to continue in the T&D space
and also expect heightened competition in the BTG space. Hence, we prefer diversified
entities like L&T and Siemens in the large-cap space.
Top Picks: L&T, Havells, KEC International, Siemens

HPCL: 1QFY12 results ::CLSA

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1QFY12 results
HPCL’s 1QFY12 net loss of Rs30.8bn was larger than our estimate. Weak
core GRMs, a large inventory write-down in refining segment, lower than
expected product inventory gains and large loss on petrol sales were the
key drags. While decline in crude prices will help the macro for all state
owned oil & gas stocks, we continue to prefer the upstream SOEs; the
R&Ms have larger EPS sensitivity to a change in subsidy sharing formula
while large crude price corrections may also predicate inventory losses.
Given its single digit return ratios, HPCL’s 1x PB is unattractive. U-PF.
1QFY12 PAT came lower than our estimate
HPCL’s 1QFY12 net loss of Rs30.8bn was larger than our estimate. Lower than
expected core GRMs (US$2.3 cf. US$6.9/bbl), a large inventory writedown
(US$1.5/bbl impact on GRMs, Rs1.6bn), smaller than expected product
inventory gain (Rs2.2bn) and loss on petrol sales of Rs6bn weighed on
performance. MTM losses on bonds and one time provision on revision of nonmanagerial
salaries of Rs0.7bn further added to already large losses.
Fall in crude to lower under-recovery but inventory losses will rise
Driven by rise in concerns around global growth and in turn oil demand, crude
prices have corrected by +10% in Aug-11. While this improves the macro for
all SOEs in India by cutting under-recoveries, refiners like HPCL would also be
impacted by a rise in inventory losses. We continue to prefer upstream
stocks, therefore, over the downstream SOEs as a play on this theme.
Uncertainty on subsidy framework is a headwind
While upstream sharing reverted to one-third in 1QFY12 from 39% in FY11,
lower government support at 34.5% dragged HPCL into losses. We model
government’s share at 55% for FY12 (downstream 11.7%) but note that this
framework will be uncertain till May-12. With a 1ppt change impacting FY12
EPS by 8%, HPCL’s FY12 EPS will be indeterminable for another nine months.
Maintain U-PF; prefer upstream over downstream
As high capex will keep HPCL FCF negative and pressure return ratios even in
a benign subsidy scenario, its 1x FY12 PB appears unattractive. Nonetheless,
decline in crude prices, possibility of a cap on subsidised LPG volumes or
newsflow around likelihood of formalisation of a subsidy sharing formula may
benefit all state owned oil & gas stocks. However, we would prefer to play
these through upstream names because of their higher historical stability and
lower earnings sensitivity to a change in the subsidy formula. Maintain U-PF.

UBS : Ranbaxy -Meeting with the CEO

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UBS Investment Research
First Read: Ranbaxy
M eeting with the CEO
􀂄 Mgmt. remains confident on Lipitor; unwilling to speculate on the fine
Inline with their previous stand mgmt. refused to give any timelines for resolution
of USFDA/DoJ issues. However, mgmt. remains fairly confident on the Lipitor
launch. The co. believes Lipitor exclusivity may not be linked to USFDA/DoJ
resolution (similar to other Valtrex and Aricept FTFs). Validity assessment, plant
reinspection etc. are only likely to happen post reaching a settlement. However,
mgmt. believes Rbxy case has no precedence and therefore not willing to draw a
parallel with fines paid by other generic and innovator companies.
􀂄 Base business margins to improve over next 12-18 months
Mgmt. expects base business EBITDA margins to move into the ‘healthy’ teens
within the next 12-18mths. Expects US base business to be in the vicinity of
US$400 – US$450mn by then. Margins remain under pressure as the company has
not scaled down costs post US issues. However, mgmt. continues to focus on
profitability and is carrying out annual reviews to rationalize presence in
unprofitable markets.
􀂄 Focus on maximising benefits from hybrid business model
Mgmt. indicated that they are focused on maximising benefits from the hybrid
business model evolved with DS. Whichever company has the stronger presence
will sell products for both companies in that market. The company is unwilling to
acquire just for growth, and will focus on market access, technology, and
complementary product portfolios.
􀂄 Valuation: Maintain Buy, PT Rs 630
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool with a WACC of 11%.


􀁑 Ranbaxy
Ranbaxy, one of India's largest pharmaceutical companies, manufactures and
markets generics, branded generic pharmaceuticals, and active pharmaceutical
ingredients. Ranbaxy's products are sold in over 125 countries. It has
manufacturing operations in 11 countries and a presence in 49. It was
incorporated in 1961 and was listed in 1973. Daiichi Sankyo acquired a 64%
stake in Ranbaxy in 2008. Ranbaxy's key markets, in terms of revenue, are India,
Romania, Russia, the US, and Africa and the EU.
􀁑 Statement of Risk
We believe risks include regulatory risks, FDA approval, timing of approvals,
litigation (including the appeal process), accounting/disclosure, and product
pricing risk from generics competition. Pricing pressure in the US market
because of increased competition may continue. Margin pressure on account of
appreciation of the rupee could also negatively impact earnings.

Bharat Petroleum: 1QFY12 results :: CLSA

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1QFY12 results
BPCL’s 1QFY12 net loss of Rs25.6bn was larger than our estimate. Weak
GRMs due to partial shutdown of upgrader units at Kochi, loss on petrol
sale, forex loss, MTM writedowns on bonds and one-off staff related
charges were key drags. While decline in crude prices will help the macro
for all state owned oil & gas stocks, we continue to prefer the upstream
SOEs; the R&Ms have larger EPS sensitivity to a change in subsidy sharing
formula while large crude price corrections may also predicate inventory
losses. Given its low return ratios, BPCL’s 1.5x PB is unattractive. U-PF.
1QFY12 PAT came lower than our estimate
BPCL’s 1QFY12 net loss of Rs25.6bn was much larger than estimate. Lower
core GRMs (US$3.6 cf. US$8.9/bbl) as partial shutdown of key upgrader units
at Kochi because of upgrades, extended planned and unplanned shutdowns
pulled the refinery’s GRMs to a mere US$0.15/bbl and loss on petrol sales of
Rs6.7bn were key drags on EBITDA. Forex loss, MTM writedown on bonds and
one time staff related charges further added to already large losses.
Fall in crude to lower under-recovery but inventory losses will rise
Driven by rise in concerns around global growth and in turn oil demand, crude
prices have corrected by +10% in Aug-11. While this improves the macro for
all SOEs in India by cutting under-recoveries, refiners like BPCL would also be
impacted by a rise in inventory losses. We continue to prefer upstream
stocks, therefore, over the downstream SOEs as a play on this theme.
Uncertainty on subsidy framework is a headwind
While upstream sharing reverted to one-third in 1QFY12 from 39% in FY11,
lower government support at 34.5% dragged BPCL into losses. We model
government’s share at 55% for FY12 (downstream 11.7%) but note that this
framework will be uncertain till May-12. With a 1ppt change impacting FY12
EPS by 5%, BPCL’s FY12 EPS will be indeterminable for another nine months.
Maintain U-PF; prefer upstream over downstream
While BPCL generated Rs25-30bn in FCF in FY11, as management embarks on
new round of expansion return ratios will remain under pressure even in a
benign subsidy scenario, its 1.5x FY12 PB appears unattractive. Nonetheless,
decline in crude prices, possibility of a cap on subsidised LPG volumes or
newsflow around likelihood of formalisation of a subsidy sharing formula may
benefit all state owned oil & gas stocks. However, we would prefer to play
these through upstream names because of their higher historical stability and
lower earnings sensitivity to a change in the subsidy formula. Maintain U-PF.

UBS : Punjab National Bank - Adverse loan mix

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UBS Investment Research
Punjab National Bank
Adverse loan mix
􀂄 NPL risks should increase as economy slows
Among the Indian banks under our coverage, we think Punjab National Bank’s
(PNB) loan book has the highest risk. Its high exposure to the power, SME, and
commercial real estate sectors could face greater risk given sector-specific issues
and slowing economic growth. Moreover, a complete transition to system-based
NPL recognition may lead to higher slippage in Q2.
􀂄 Lower earnings estimates by 5-10% due to higher loan loss charges
We increase our FY12/13 loan loss charges assumptions by 15%/30%. We believe
slowing loan growth, higher NPL additions, and a re-pricing of term deposits will
lead to a 20bp decline in margins over the next three quarters. We lower our
FY12/13 earnings estimates by 5%/10% and forecast a 7% earnings CAGR over
FY11-13.
􀂄 Falling ROA and adverse loan mix could lead to a de-rating
We estimate its ROA will decline from 1.4% in FY11 to 1.1% in FY13, which
would lead to lower-than-historical valuations. We expect consensus to cut
earnings over the next two quarters by 10% for FY12/13. Although we think it has
a good management team, its P/BV could de-rate due to an adverse loan mix and
lower ROA.
􀂄 Valuation: lower price target to Rs1,050.00; downgrade to Sell
The stock is trading at 1.5x FY13E adjusted book value and 6.5x FY13E earnings.
We derive our price target using the residual income method, assuming a terminal
ROE and cost of equity of 13.5%. We adjust our FY12/13/14 EPS estimates from
Rs155.6/178.7/211.7 to Rs147.5/160.2/198.1. We downgrade our rating from
Neutral to Sell.

INDIA PRODUCTION – Strong headline, weak details ::CLSA

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INDIA PRODUCTION – Strong
headline, weak details
A disturbing feature of India’s monthly industrial
production (IP) data has been the significant volatility
it has been exhibiting, often because of the wild
swings in the capital goods sub-sector. Now, capital
goods are by nature a volatile category but the
magnitude of its swings in recent months has been
bizarre. It is in this context that the significantly
better-than-expected IP growth of 8.8% YoY in June
appears less scintillating when it is noted that the
output of capital goods unexpectedly surged 37.7%.
It had posted average growth of 6.7% in the prior two
months. This sub-sector alone contributed a massive
5ppt to the headline 8.8% YoY increase in IP. While it
is encouraging that there is life in the capital goods
sector, the IP details ex capital goods are weak.
Manufacturing output jumped 10%, while mining
remained down in the dumps (+0.6%). Electricity
production was decent at 7.9%, although lower than
May’s 10.3%. Consumer durables rose a mere 1%
YoY, the slowest pace of increase in almost two years.
Intermediate goods (+1.8% YoY) were weak, while
the growth in the production of basic goods (+7.5%)
was largely unchanged. Basically, further moderation
in industrial activity remains in store.

Overall, the growth slowdown continues to play out.
IP growth moderated to 6.8% YoY in 2Q11 from
7.9% in 1Q11, hinting that GDP growth in 2Q11 will
moderated further - as expected - from 7.8% in 1Q11.
We maintain our FY12 GDP growth forecast of 7.5%
(RBI: 8%) but note that the worsening global demand
could create downside risk of around 0.5ppt.
The RBI will surely dig into the IP details and is
unlikely to be influenced only by the headline
number. Further, apart from the ongoing adverse
global developments and the sustainability of
softer commodity prices, the RBI’s decision on 16
September will also be influenced by two more
WPI inflation reports, another IP release and the
April-June GDP. Production and GDP data and
adverse global developments will favour a waitand-
see approach (does not mean easing). The first
inflation report (due this week) will show slightly
higher inflation due to impact of hikes in fuel
prices (supporting tightening), but the second one
for August will likely capture the positive impact
of the fall in commodity prices. There are reasons
for the RBI to tighten, but a wait-and-see approach
cannot be ruled out if the global backdrop worsens