State Bank of India - Meeting snippets: problems continue Macquarie Research, :

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State Bank of India
Meeting snippets: problems continue
Event
􀂃 Multiple problems: We met with management of State Bank of India (SBI) to
get an update on the company. The key takeaway was that asset quality and
pension issues are unlikely to abate in the near term. Maintain Underperform.
Impact
􀂃 Asset quality – no way out yet: Management sees headwinds in multiple
sectors across the small- and mid-corporate segments. With the
macroeconomic environment seemingly taking a turn for the worse, a material
decrease in delinquencies in FY12 may not come through. Moreover, the
stress is now becoming broad-based vs previously, when only a few sectors
like textile and gems and jewellery were producing more NPLs. Agri debt
waivers have created a moral hazard in the sector. However, management
sees better agri income from a healthy Kharif crop this season, which should
lead to some improvement in loan recovery. Retail loan asset quality is still
good. Overall slippages are expected to remain relatively high, similar to the
levels seen in 1Q FY12, and we believe any improvement is going to be very
slow and gradual.
􀂃 Additional pension provisioning from Nov 2012: SBI will begin to provide
an additional Rs17bn of pensions per year from November of next year. This
will take care of pension obligations arising out of the wage revision expected
in the 10th bipartite settlement w.e.f. Nov-12 and are based on preliminary
expectations of a 15% wage hike. This is on top of the Rs20–24bn pension
provisioning the bank does each year anyway.
􀂃 Confident of maintaining FY12E NIMs above 3.5%: In 2Q12, some benefit
is likely to come from Rs300bn of 1,000-day term deposits being repriced
downward to ~9.25% from the current 10.2–10.8%. Also, because the bank
was late compared with peers in raising rates, the lagged impact of hiking
loan rates should continue in the quarter.
􀂃 Loan growth likely to be on the lower side of guided 16–18% range:
Growth has indeed slowed in the project lending space, particularly for
infrastructure. Overall demand across sectors has slowed considerably.
􀂃 No visibility on capital yet. Management has not yet received definite
indications from the government on the capital injection. The capital raising is
likely to be much smaller than the Rs200bn initially planned by the bank. For
FY12E, the bank may receive just enough capital infusion from the
government to maintain Tier I at 8%. Additional capital may be budgeted for
and provided in FY13 by the government.
Earnings and target price revision
􀂃 No change.
Price catalyst
􀂃 12-month price target: Rs1,700.00 based on a sum of parts methodology.
􀂃 Catalyst: Continued increase in slippages, negative surprises on opex.
Action and recommendation
􀂃 Premium valuations unwarranted: SBI shares trade at a ~10% premium to
large-cap peers despite the bank having inferior return ratios

UBS : Voltas- Improved risk-reward profile 􀂄 target Rs170

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UBS Investment Research
Voltas Ltd
I mproved risk-reward profile
􀂄 Event: management meeting to gauge business; FY12 will be challenging
The management meeting indicated a challenging FY12 due to Qatar project costs,
lower retail air conditioner (AC) sales in Q1 FY12, higher working capital and
poor sentiment impacting order flow (Rs44-45bn order book). The next six months
will be critical for order flow to support FY13 visibility. It will be net cash in
FY12E. An exceptional gain of Rs815m booked in Q1 FY12 from the sale of the
material handling business will boost yearly results.
􀂄 Impact: lower estimates and price target on Qatar costs, weak AC sales
We lower our FY12 EPS (excluding exceptionals) estimate by 27.3% and
including exceptionals estimate by 5.6% on the above reasons, and our FY13
estimate by 14.5% assuming peaking of rates, macro improvement, and better
room AC sales, and given UBS does not expect a global recession. We also lower
our price target sharply from Rs225 to Rs170, with lower implied valuations of
14.5x FY13E PE (historical mean of 17.5x) on medium-term uncertainties.
􀂄 Action: better risk-reward profile on valuations, infra story & high returns
Post significant underperformance (26.3% YTD to Nifty) and near trough
valuations (FY13E PE of 10x), the risk-reward profile of the stock has improved.
Long-term mechanical, electrical and plumbing (MEP)/retail AC opportunity in
India/MENA, the company’s net cash position, Tata management and high ROCEs
make us positive on the stock over the long term, albeit with medium-term
uncertainty (difficult to estimate the trough of negative newsflow).
􀂄 Valuation: maintain Buy; long term levered to infra story
We maintain our Buy rating. We derive our price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool (assume a 12.7% WACC). Our price target implies 14.5x FY13E PE.

UBS- GMR Infrastructure; To sell 30% stake in Island Power at 30% premium 􀂄 price target of Rs38

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UBS Investment Research
GMR Infrastructure
To sell 30% stake in Island Power at 30%
p remium
􀂄 Event: to sell 30% stake in 800MW Island Power project to Petronas
GMR will sell a 30% stake in Island Power to Petronas of Malaysia. The company
had earlier indicated that it is looking at divesting its stake partially in this project
(please refer to our note ‘Island Power: Company expects high project
profitability’ dated 9 September 2011). It will not look for further partners in this
project as of now. Our sum-of-the-parts (SOTP) valuation currently does not
include any value for this S$1.2bn project.
􀂄 Impact: to realise part of the project value upfront
This stake sale lends confidence to the overall project profitability (GMR had
earlier stated that it expects equity IRRs of about 18% from this project), in our
view (this is GMR’s only power project outside India). It enables the company to
realise some value upfront (GMR could realise about S$50m from the stake sale)—
the project is likely to be commissioned in Q413. The net equity investment from
GMR (parent) in this project is now likely to be about S$32m.
􀂄 Action: expects 555km Kishangarh-Ahmedabad project cost to be Rs72bn
GMR has been formally awarded the project and it expects a total cost of Rs72bn
(NHAI estimate was Rs54bn). The company stated that it has studied the traffic
patterns on this corridor for about two years and expects growth to be robust given
the project covers 39% of the Delhi-Mumbai Golden Quadrilateral.
􀂄 Valuation: Buy rating with SOTP-based price target of Rs38
We have a Buy rating and the risk-reward profile is favourable, in our view.

UBS:: Adani Power - May appeal in SC against tribunal order

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UBS Investment Research
Adani Power
M ay appeal in SC against tribunal order
􀂄 Event: Adani Power may appeal to Supreme Court in 1,000MW PPA case
According to media reports, Adani Power plans to appeal against the order of the
Appellate Tribunal for Electricity after the tribunal rejected the company's
argument that a low tariff bid (Rs2.35/unit) was contingent on Adani Power
receiving coal supply from GMDC (a Gujarat government company). Please refer
to our note, Adani Power: Appellate Tribunal rejects company’s plea, published on
8 September 2011.
􀂄 Impact: the issue is relevant for other imported coal-based projects as well
We think that if Adani Power files an appeal in the Supreme Court for a review of
the coal cost recovery mechanism, the court’s view on this issue will be important
for other imported coal-based power projects which do not have fuel cost passthrough.
Our estimates for Adani Power remain unchanged as we assumed the
power purchase agreement (PPA) will remain valid and that tariffs will not be
raised.
􀂄 Action: we are negative on the stock as risks do not seem to be priced in
We acknowledge the company’s strong execution, but we believe that the current
stock price does not fully factor in risks such as: a) a decline in merchant tariffs;
and b) no fuel escalation in its long-term PPAs. Hence, we believe the stock may
have some more downside at current levels.
􀂄 Valuation: maintain Sell rating and price target of Rs80.00
We derive our price target using a plant-by-plant DCF assuming COE of 13.8% for
under-construction projects and 12.3% for operational projects. We currently value
6,600MW capacity (4,620MW at Mundra and 1,980MW at Tiroda

UBS: Redington India - Distribution powerhouse ; target Rs120

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UBS Investment Research
Redington India
D istribution powerhouse [EXTRACT]
�� Initiate coverage with a Buy rating
Redington India (REDI) is a leading IT distributor with a presence in key highgrowth
emerging markets—it was the second-largest distributor in India and
Turkey, and the largest in the Middle East and Africa in terms of revenue in FY11.
REDI has also expanded beyond IT products; non-IT products contributed
14%/18% of revenue in FY10/11. We expect the company’s strong growth and
robust ROE to continue in this highly consolidated industry.
�� Smartphones, tablet PCs and new geographies should drive growth
REDI’s non-IT business recorded a 111%/28% revenue CAGR in India/the Middle
East over FY08-11 (IT business CAGR was 6%/21%). BlackBerry drove revenue
growth over the past two years in the non-IT segment, and REDI expects
smartphones and tablet PCs to drive growth in the future. It also plans to expand
Arena (Turkey’s second-largest IT distributor in terms of revenue, and in which it
has a stake) beyond Turkey and into the non-IT product segments.
�� High ROE and robust growth are underappreciated; potential re-rating
We believe REDI’s robust growth and high 29% core ROE in FY11 are
underappreciated by the market. We expect the share price to rise on improving
return ratios and strong revenue growth.
�� Valuation: Rs120.00 price target
We value REDI on 12.5x FY13E PE. This is supported by 24% consolidated ROE
and 29% ex-cash ROE in FY11, and our 25% EPS CAGR forecast over FY12-15.
Our PE multiple is in line with REDI’s three-year historical average, and in line
with Synnex Technology International’s (Synnex) 2012E PE


Investment Thesis
REDI is one of the top two IT distributors in India and the leading IT distributor
in the Middle East and Turkey. In November 2010, it acquired a 49.4% stake in
Arena, Turkey’s second-largest IT distributor. We believe REDI’s revenue and
earnings have risen due to the following.
�� Its presence in new markets. REDI entered the Middle East in 1997—it is
now the largest IT distributor in these regions in terms of revenue, larger
than the second- and third-largest companies combined. REDI is also the
only international IT distributor with presence in the Middle East-Turkey-
Africa (META) region after Tech Data’s (second-largest IT distributor
globally) exit from the Middle East in July 2007.
�� Strong distribution, which helps it enter new product categories and
establish leadership. REDI was originally a distributor of IT products. It
later entered the non-IT product segments (telecommunication and digital
lifestyle products as well as digital printers, which the company categorises
as non-IT), which have grown faster than IT products. Over FY08-11, its
IT/non-IT product segments posted a CAGR of 6%/111% in India and
21%/28% internationally.
�� Margin and ROE improvements. REDI’s India/international gross margins
have risen from 4.3%/4.6% to 5.5%/5.3% over FY07-11. Over the same
period, its consolidated EBITDA margin rose from 2.15% to 2.61%, while
core ROE (ex-cash ROE) increased from 23% to 29%.
�� Good management of working capital risks across business cycles; lower
working capital. IT distribution is a low-margin business. Thus, working
capital risk management is critical. During the peak of the credit crisis in
FY09, its inventory/credit provisioning peaked at 11/10bp compared to its
five-year average of 6/9bp. REDI’s working capital for India also improved
from 38 days of revenue in FY07 to 26 days in FY11. We expect this trend to
continue.
As a result of margin and working capital improvements, REDI’s core ROE has
increased from 23% in FY07 to 29% in FY11. We estimate this will rise to 35%
in FY16.
Our price target implies 15.9x/12.5x FY12/13E PE. Our target PE is in line with
its historical three-year average—we believe this is conservative given REDI’s
improving margin and return ratios as well as its stable earnings, which could
drive a stock re-rating.


Key catalysts
�� Growth in non-IT segments from telecom and tablet PC products. REDI
entered the non-IT product space in FY06. Over FY08-11, non-IT products
recorded a CAGR of 111%/28% in India/internationally, significantly above
IT products’ 6%/21%. We believe continued growth in smartphones (RIM’s
BlackBerry and others) will continue to drive its non-IT expansion (REDI
has distribution relationships with LG, Huawei and other smartphone
vendors). Tablet PCs (which REDI categorises as non-IT products) could
also drive rapid growth in the non-IT category as REDI has a distribution
relationship with Apple. Given REDI’s strong distribution network in India,
we believe other vendors will use REDI as one of their key distribution
partners.
�� Accelerated growth in IT products. Non-IT products have grown faster
than IT products and this is likely to continue. However, we think
government spending on IT products will reignite IT growth. REDI is
participating in various government tenders in partnership with other vendors
and system integrators. Our expectation of above-industry growth rates
factor into our IT revenue growth assumptions for the company.
�� Improved mix of higher-margin ‘value’ products in the international
segment). In META/India, higher-margin ‘value’ products contributed to
8%/30% of its revenue and 11%/50% of profit before tax in FY11. REDI has
a portfolio of 29 brands in META compared with 80 in India. In META,
REDI has a set up separate team focusing on adding lower-volume, highermargin
products (brands) to its portfolio, which it plans on expanding to 55-
60 products within the next two to three years.
�� Continued margin and ROE improvements. We expect continued margin
and ROE improvements to be driven by: 1) improvement in its product mix
from volume products to higher-margin ‘value’ products; 2) operating
efficiencies driven by automated distribution centres (ADC); and 3) its
efforts in working capital optimisation. This should improve operating cash
flow and help re-rate the stock, in our view.
�� Increased investor awareness and comparability to Synnex. Synnex is a
leading distributor of IT products in Taiwan and the second-largest in China by
revenue; it also has a 23.9% stake in REDI (with two members on REDI’s
board). However, we think REDI has better revenue and net income growth
prospects than Synnex, on top of its higher ROE. Over time, we believe
investors will start comparing REDI with Synnex. This should help REDI rerate
to comparable multiples. Our target PE multiple for REDI is in line with
Synnex’s 2012E PE multiple.
Risks
�� A macroeconomic slowdown. We believe the key perceived risks for REDI
is in inventory write-downs and credit. However, we believe credit and
inventory risks will not materially impact P&L or ROE, similar to the last
credit crisis. During the peak of the credit crisis in FY09, REDI’s
inventory/credit provisioning peaked at 11/10bp compared to its five-year
average of 6/9bp.


— Credit risks. REDI provides credit to its channel partners and minimises
its risk in this area by: 1) accepting post-dated cheques from the channel
partners it provides credit to; and 2) having long-standing relationships
with its channel partners.
— Inventory write-down risks. IT distributors play a vital role in the IT
vendors’ go-to-market strategies. There are two large IT distributors in
India, with industry dynamics and historical precedence suggesting that
IT vendors provide inventory support to their distributors. Given REDI’s
2.6% EBITDA margin, we do not think inventory/credit provisioning
losses present a significant risk.
— A macroeconomic slowdown could hurt revenue growth. REDI’s
India/international business grew 6%/11% YoY in FY10 compared to its
FY07-11 YoY average of 15.3%/20.4%.
�� Exposure to the Middle East. REDI derives around 50% of its revenue
from the META region. Further political turbulence there could hurt REDI’s
revenue and profitability. While REDI has no exposure to the countries with
political turmoil, uncertainty could delay its entry into countries such as
Tunisia.
Valuation and basis for our price target
We use a comparable valuation approach and a target PE multiple to value
REDI. REDI has few directly comparable companies; global IT distributors and
those in the emerging markets trade at significantly different multiples due to
their different growth profiles and return ratios. IT distributors in the developed
markets are estimated to post a net income CAGR of 5% over FY11-13, while
those in the emerging markets will record a 20% CAGR.
Synnex is an IT distributor focused on the China and Taiwan markets (it is also
a major shareholder and strategic partner of REDI). We believe Synnex is a
meaningful comparable company for REDI.
Synnex is trading at 12x 2012E PE (December financial year-end). We value
REDI at 12.5x FY13E PE (March financial year-end, in line with Synnex’s
2012E PE multiple). This is supported by our estimates of 24% for consolidated
ROE, 29-30% for ex-cash ROE, and a 25% EPS CAGR over FY12-15. Our
valuation is in line with REDI’s 12.4x three-year historical average PE.


�� Redington India
Redington India is a leading IT distributor in India, the Middle East and Africa.
It derives around 50% of its revenue from India and the rest internationally. It
also has presence in the non-IT segments such as smartphones, consumer
durables and printers, with plans to enter the tablet PC space.
�� Statement of Risk
We believe Redington faces two key risks—the risk of inventory losses and
credit risk on its channel receivables. However, historically (and even during the
previous downturn), each of these risks were limited to 10-11bp of revenue, with
an average of 9.25bp/6.25bp.

UBS: Redington India - Distribution powerhouse ; target Rs120

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UBS Investment Research
Redington India
D istribution powerhouse [EXTRACT]
􀂄 Initiate coverage with a Buy rating
Redington India (REDI) is a leading IT distributor with a presence in key highgrowth
emerging markets—it was the second-largest distributor in India and
Turkey, and the largest in the Middle East and Africa in terms of revenue in FY11.
REDI has also expanded beyond IT products; non-IT products contributed
14%/18% of revenue in FY10/11. We expect the company’s strong growth and
robust ROE to continue in this highly consolidated industry.
􀂄 Smartphones, tablet PCs and new geographies should drive growth
REDI’s non-IT business recorded a 111%/28% revenue CAGR in India/the Middle
East over FY08-11 (IT business CAGR was 6%/21%). BlackBerry drove revenue
growth over the past two years in the non-IT segment, and REDI expects
smartphones and tablet PCs to drive growth in the future. It also plans to expand
Arena (Turkey’s second-largest IT distributor in terms of revenue, and in which it
has a stake) beyond Turkey and into the non-IT product segments.
􀂄 High ROE and robust growth are underappreciated; potential re-rating
We believe REDI’s robust growth and high 29% core ROE in FY11 are
underappreciated by the market. We expect the share price to rise on improving
return ratios and strong revenue growth.
􀂄 Valuation: Rs120.00 price target
We value REDI on 12.5x FY13E PE. This is supported by 24% consolidated ROE
and 29% ex-cash ROE in FY11, and our 25% EPS CAGR forecast over FY12-15.
Our PE multiple is in line with REDI’s three-year historical average, and in line
with Synnex Technology International’s (Synnex) 2012E PE


Investment Thesis
REDI is one of the top two IT distributors in India and the leading IT distributor
in the Middle East and Turkey. In November 2010, it acquired a 49.4% stake in
Arena, Turkey’s second-largest IT distributor. We believe REDI’s revenue and
earnings have risen due to the following.
􀁑 Its presence in new markets. REDI entered the Middle East in 1997—it is
now the largest IT distributor in these regions in terms of revenue, larger
than the second- and third-largest companies combined. REDI is also the
only international IT distributor with presence in the Middle East-Turkey-
Africa (META) region after Tech Data’s (second-largest IT distributor
globally) exit from the Middle East in July 2007.
􀁑 Strong distribution, which helps it enter new product categories and
establish leadership. REDI was originally a distributor of IT products. It
later entered the non-IT product segments (telecommunication and digital
lifestyle products as well as digital printers, which the company categorises
as non-IT), which have grown faster than IT products. Over FY08-11, its
IT/non-IT product segments posted a CAGR of 6%/111% in India and
21%/28% internationally.
􀁑 Margin and ROE improvements. REDI’s India/international gross margins
have risen from 4.3%/4.6% to 5.5%/5.3% over FY07-11. Over the same
period, its consolidated EBITDA margin rose from 2.15% to 2.61%, while
core ROE (ex-cash ROE) increased from 23% to 29%.
􀁑 Good management of working capital risks across business cycles; lower
working capital. IT distribution is a low-margin business. Thus, working
capital risk management is critical. During the peak of the credit crisis in
FY09, its inventory/credit provisioning peaked at 11/10bp compared to its
five-year average of 6/9bp. REDI’s working capital for India also improved
from 38 days of revenue in FY07 to 26 days in FY11. We expect this trend to
continue.
As a result of margin and working capital improvements, REDI’s core ROE has
increased from 23% in FY07 to 29% in FY11. We estimate this will rise to 35%
in FY16.
Our price target implies 15.9x/12.5x FY12/13E PE. Our target PE is in line with
its historical three-year average—we believe this is conservative given REDI’s
improving margin and return ratios as well as its stable earnings, which could
drive a stock re-rating.


Key catalysts
􀁑 Growth in non-IT segments from telecom and tablet PC products. REDI
entered the non-IT product space in FY06. Over FY08-11, non-IT products
recorded a CAGR of 111%/28% in India/internationally, significantly above
IT products’ 6%/21%. We believe continued growth in smartphones (RIM’s
BlackBerry and others) will continue to drive its non-IT expansion (REDI
has distribution relationships with LG, Huawei and other smartphone
vendors). Tablet PCs (which REDI categorises as non-IT products) could
also drive rapid growth in the non-IT category as REDI has a distribution
relationship with Apple. Given REDI’s strong distribution network in India,
we believe other vendors will use REDI as one of their key distribution
partners.
􀁑 Accelerated growth in IT products. Non-IT products have grown faster
than IT products and this is likely to continue. However, we think
government spending on IT products will reignite IT growth. REDI is
participating in various government tenders in partnership with other vendors
and system integrators. Our expectation of above-industry growth rates
factor into our IT revenue growth assumptions for the company.
􀁑 Improved mix of higher-margin ‘value’ products in the international
segment). In META/India, higher-margin ‘value’ products contributed to
8%/30% of its revenue and 11%/50% of profit before tax in FY11. REDI has
a portfolio of 29 brands in META compared with 80 in India. In META,
REDI has a set up separate team focusing on adding lower-volume, highermargin
products (brands) to its portfolio, which it plans on expanding to 55-
60 products within the next two to three years.
􀁑 Continued margin and ROE improvements. We expect continued margin
and ROE improvements to be driven by: 1) improvement in its product mix
from volume products to higher-margin ‘value’ products; 2) operating
efficiencies driven by automated distribution centres (ADC); and 3) its
efforts in working capital optimisation. This should improve operating cash
flow and help re-rate the stock, in our view.
􀁑 Increased investor awareness and comparability to Synnex. Synnex is a
leading distributor of IT products in Taiwan and the second-largest in China by
revenue; it also has a 23.9% stake in REDI (with two members on REDI’s
board). However, we think REDI has better revenue and net income growth
prospects than Synnex, on top of its higher ROE. Over time, we believe
investors will start comparing REDI with Synnex. This should help REDI rerate
to comparable multiples. Our target PE multiple for REDI is in line with
Synnex’s 2012E PE multiple.
Risks
􀁑 A macroeconomic slowdown. We believe the key perceived risks for REDI
is in inventory write-downs and credit. However, we believe credit and
inventory risks will not materially impact P&L or ROE, similar to the last
credit crisis. During the peak of the credit crisis in FY09, REDI’s
inventory/credit provisioning peaked at 11/10bp compared to its five-year
average of 6/9bp.


— Credit risks. REDI provides credit to its channel partners and minimises
its risk in this area by: 1) accepting post-dated cheques from the channel
partners it provides credit to; and 2) having long-standing relationships
with its channel partners.
— Inventory write-down risks. IT distributors play a vital role in the IT
vendors’ go-to-market strategies. There are two large IT distributors in
India, with industry dynamics and historical precedence suggesting that
IT vendors provide inventory support to their distributors. Given REDI’s
2.6% EBITDA margin, we do not think inventory/credit provisioning
losses present a significant risk.
— A macroeconomic slowdown could hurt revenue growth. REDI’s
India/international business grew 6%/11% YoY in FY10 compared to its
FY07-11 YoY average of 15.3%/20.4%.
􀁑 Exposure to the Middle East. REDI derives around 50% of its revenue
from the META region. Further political turbulence there could hurt REDI’s
revenue and profitability. While REDI has no exposure to the countries with
political turmoil, uncertainty could delay its entry into countries such as
Tunisia.
Valuation and basis for our price target
We use a comparable valuation approach and a target PE multiple to value
REDI. REDI has few directly comparable companies; global IT distributors and
those in the emerging markets trade at significantly different multiples due to
their different growth profiles and return ratios. IT distributors in the developed
markets are estimated to post a net income CAGR of 5% over FY11-13, while
those in the emerging markets will record a 20% CAGR.
Synnex is an IT distributor focused on the China and Taiwan markets (it is also
a major shareholder and strategic partner of REDI). We believe Synnex is a
meaningful comparable company for REDI.
Synnex is trading at 12x 2012E PE (December financial year-end). We value
REDI at 12.5x FY13E PE (March financial year-end, in line with Synnex’s
2012E PE multiple). This is supported by our estimates of 24% for consolidated
ROE, 29-30% for ex-cash ROE, and a 25% EPS CAGR over FY12-15. Our
valuation is in line with REDI’s 12.4x three-year historical average PE.


􀁑 Redington India
Redington India is a leading IT distributor in India, the Middle East and Africa.
It derives around 50% of its revenue from India and the rest internationally. It
also has presence in the non-IT segments such as smartphones, consumer
durables and printers, with plans to enter the tablet PC space.
􀁑 Statement of Risk
We believe Redington faces two key risks—the risk of inventory losses and
credit risk on its channel receivables. However, historically (and even during the
previous downturn), each of these risks were limited to 10-11bp of revenue, with
an average of 9.25bp/6.25bp.

UBS - IT Services: Read through from Accenture Q4 results

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UBS Investment Research
Indian IT Services
R ead through from Accenture Q4 results
􀂄 Record bookings, strong FY12 guidance—no macro impact seen
Accenture (ACN) posted record bookings of US$8.4bn in Q4 FY11, with
consulting bookings of US$4.2bn, well above the UBS estimate of US$3.7bn.
ACN reiterated its FY12 revenue guidance of 7-10% constant currency growth,
which our analyst Arvind Ramnani thinks will be achievable given strong bookings
over the past several quarters. ACN’s management acknowledged increased macro
risks, but continued to see strong demand.
􀂄 Strong financial services growth is positive near-term read through
ACN recorded 13% YoY growth in financial services in constant currency terms, a
positive read through for Indian vendors over the near term. We expect revenue
momentum to remain robust in Q2 FY12 for most Indian vendors.
􀂄 Accenture is late cycle, Indian vendors are more sensitive to budget turns
Indian vendors have historically been more sensitive to changes in demand than
IBM and ACN due to their higher exposure to discretionary spending and shorter
project durations. In the recent recession, Indian vendors saw revenue slow ahead
of IBM and ACN, and recovered three to four quarters earlier than the larger global
vendors. We therefore hesitate to extrapolate the confidence exhibited by ACN,
which has seen strong bookings/upgrades only in the last few quarters, to the
demand outlook for Indian vendors.
􀂄 Remain cautious, maintain recommendations
We expect a demand slowdown for Indian IT services by late 2011/early 2012. We
reiterate our cautious view on the sector despite the current rally. We maintain our
Neutral ratings on Tata Consultancy Services (TCS) and Infosys and our Sell
ratings on all other stocks under our coverage.


􀁑 Statement of Risk
We believe a sharp decline in IT spending or currency appreciation could result
in downward revisions to our earnings estimates.

UBS::Colgate-Palmolive - Brand power reaffirmed

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UBS Investment Research
Colgate-Palmolive India
B rand power reaffirmed
􀂄 Event: Colgate #1 in The Economic Times’ Brand Equity Survey 2011
Colgate has emerged as the most trusted brand by Indians in The Economic Times’
India’s most trusted brands survey 2011. This is after four years of being in the #2
position. According to AC Nielsen, Colgate has a ~52% market share in the Indian
toothpaste market with product offerings across price points.
􀂄 Impact: reaffirming its dominance
We believe any competition in the oral care category will not pose a significant
threat to Colgate in the long term. We believe any new competitor would likely
take market share from local brands rather than the market leader given Colgate’s
dominance. Any serious competition would be met with increase in ad spend,
which could affect quarterly profitability—presenting an attractive opportunity for
the stock, in our view. Colgate has the best brand equity of all brands, which
should enable it to remain market leader.
􀂄 Potential launches from parent portfolio
To leverage its market presence and de-risk its Indian portfolio, we expect product
launches from the parent’s portfolio. This, in our view, will be a key trigger for
stock price performance. We have an anti-consensus Buy rating on Colgate as we
believe it will benefit from: 1) consumer upgrades; 2) high market growth
opportunity; 3) a strong distribution network; and 4) powerful brand equity.
􀂄 Valuation: maintain Buy with price target of Rs1,250
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
11% and a beta of 0.55.


􀁑 Colgate-Palmolive India
Colgate-Palmolive India is the leading oral care company in India with a 51%
share of the toothpaste market. Oral care contributes to 96% of sales and
personal care 2%. It has a wide distribution network with 1,713 direct stores and
about 4 million indirect stores. Colgate's rural market contributes 40% of sales.
􀁑 Statement of Risk
We believe the key risks to Colgate’s earnings and valuation are loss of market
share due to increased competition, commodity price risk, an inability to pass on
price increases in an increasingly competitive market, the risk of a single
segment focus, and a change in tax rates in locations designated as tax benefit
zones.

Union Bank: Management meeting update ::CLSA

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Management meeting update
Our recent meeting with management indicates that loan growth may
slowdown due to lower demand for infrastructure loans and loss of some
market share to banks with lower cost of deposits. CASA growth is under
pressure, but recent hike in lending rates and management’s focus on
profitable lending will help to defend margins. Asset quality pressure may
continue partly due to transition to automated NPL recognition system;
focus is on recoveries. We expect 17% Cagr in loans, but earning growth
may be lower due to rise in credit costs. Maintain U-PF.
Growth to slow
Growth is likely to slowdown due to slower offtake on investment linked loans
and lower demand from SME segments. Bank has turned cautious on the
power sector loans– both to SEBs and private sector. While working capital
demand is holding-up, it may loose some market share to banks with higher
CASA ratio that helps to offer lower interest rate on loans. During FY12,
management expects loans to grow by ~18%.
CASA ratio and margins may improve
While high interest rates are putting pressure on CASA growth, bank may see
some improvement in CASA ratio as it is focussing on improving deposit mix
through slower loan growth; it is reducing focus on wholesale term deposits.
Recent hike in lending rates and focus on profitable lending may also help to
improve margins and management expects NIMs in FY12 to be near 3.2%.
Asset quality pressure may continue
Over past two years, bank has seen higher slippages with delinquency ratio of
2.5% in FY11. Slippages may be high in coming quarters also partly due to
transition to automated NPL recognition on the balance ~10% of loans that is
mostly in the small ticket agricultural segment. Bank is also focusing on
recoveries and expects faster recoveries in small-ticket loans. Power sector
forms 7% of fund-based exposures and bank is not seeing signs of stress
there; nearly 70% of power sector exposure is to SEBs.
Maintain U-PF
Over FY11-14, we expect bank to report 17% Cagr in loans, but profit growth
would be lower at 14% due to pressure on margins and higher credit costs.
With Tier I CAR of 8.8%, bank may need to raise fresh capital over next 12
months- part of this may come through preferential issue to government. We
maintain U-PF with target price of Rs230 based on 1.1x FY13CL adjusted PB.

Sell Colgate India: Market share gains but Valuations are expensive::CLSA

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Market share gains
Global consumer major, Colgate Palmolive’s Franck Moison presented on
the emerging market opportunity at IF last week. Emerging markets have
in aggregate grown ahead of the overall group in the past six years
(5ppt/pa) with market share gains despite a high base. The growth
momentum is likely to continue and in India, the group plans to retain its
focus on oral care given the opportunity. While we too expect revenue
momentum to continue for India business, EPS should rise at a modest
11% Cagr over FY12-14 due to higher cost, rising tax rates. Retain Sell.
Emerging market a priority for the parent…
Colgate is a global giant with an estimated topline of around US$17bn in 2011
and a diversified portfolio spreading across oral care (42%), personal care
(22%), home care (22%) and pet nutrition (14%). While the group enjoys
leadership in most segments, the focus in Asia continues to be on oral care
which is ~60% of Asia revenues, given the opportunity. Colgate today derives
52% of revenues from emerging markets which have grown at ~11% in the
last six years cf. 6% for the overall group.
… and focus has helped in share gains in oral care across regions
This focussed approach has helped Colgate in gaining market shares in the
emerging markets which have moved up by ~1.5ppt to 51.9% in the last 10
years. Interestingly, in markets like Brazil, despite a high base, Colgate has
gained shares by 8ppt in the last 10 years to 70% now. Similarly, despite
being a relatively late entrant in China and a highly competitive/ fragmented
structure, its shares are now at 32% (cf. 12% in 1995).
While we too are not concerned on topline for India business…
Colgate India too has performed strongly with the last 5-year revenue Cagr of
14.5% and share gains of 6ppt+ to >53% (toothpaste). We expect growth
momentum to continue and build in ~13.5% Cagr over FY11-14 despite
potential entry of P&G into the segment. The management also indicated that
the focus would continue on oral in the strategic markets of India given low
penetrations (~60%) and there are no plans to expand into other segments.
… higher costs/ taxes would impact EPS growth; rich valuations
Despite building in a strong topline, we estimate Ebitda to rise at a lower
12.7% Cagr as we expect A&P expenses to average higher due to rise in
competition. Growth in earnings would be even lower at 11% Cagr due to rise
in tax rates which are likely to go up by >2ppt/pa over the next three years
(with Baddi facility coming out of tax free benefit, gradually). Valuations at
28.5x one year forward earnings are expensive, in this context. Maintain Sell.

Rupee depreciation ::India strategy:: CLSA

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Rupee depreciation
INR depreciation against USD and JPY, is still not well factored into the
stock prices and we see more downside to Maruti, Bharti and R Comm.
Several other corporates will also see a hit to the 2QFY12 results. Key
global commodities of brent and steel have seen only a small correction in
Sep’11 which means that the issue of inflation becomes more prominent
as the prices now higher in INR terms. On the other hand, positive impact
on stocks such as Reliance and BHEL has not reflected as yet.
INR down sharply against US$ and JPY; partially against GBP
q INR has depreciated by 9% since June 30th with bulk of the depreciation coming
through in August and September. INR weakness against JPY has been even higher
at 15%. Against GBP it has been 6.5%
q INR weakness in September (5.7%) has been a part of a much larger global event
and our economists team believes that INR (and other Asian currencies) will likely
recover against US$ as the dimensions of risk aversion change.
q RBI is generally known not to intervene in the currency market, although during
2HFY12 RBI will have flexibility to do so if they so wish given that the liquidity
situation will likely improve with deposit growth expected to outstrip loan growth.
Key commodities not corrected; inflation outlook gets complicated
q While several global commodities have corrected, the two most important global
commodities (from an India perspective) viz. steel and brent crude has seen
minimal correction – which has been more than offset by INR depreciation.
q We believe that the issue of inflation gets further compounded with the rupee
depreciation and the RBI pausing the rate hikes a little less of consensus.
2QFY12 results will be impacted due to balance sheet impact
q Depreciation of INR against USD will mean that the liabilities of the corporate
running unhedged USD debt will go up in INR terms. We understand that most of
the corporates keep the principal unhedged though some forex cover is bought for
interest payments.
q Companies that get hit due to the above are Reliance Comm, Bharti, Tata Steel,
Tata Motors, Suzlon and Jet Airways.
q Accounting for the same is unclear but many corporates will route these losses
through P&L in 2QFY12 itself. Certain others viz. Godrej Consumer will directly
adjust in the networth.
More downside to Maruti and Bharti. Positive for RIL, BHEL
q If INR vs USD sustains at 49.5, IT companies will see FY13 earnings upgraded by
10-12%. Other exporters viz. Pharma cos and Suzlon also benefit, though in case
of Ranbaxy, the impact of long-term forward currency contracts would mean large
losses and Sep quarter might be a loss. Reliance and Cairn India will also see a
10%+ earnings upgrade.
q On the negative side, Maruti will be the most severely impacted and we believe the
stock price reaction doesn’t capture this impact fully. Other stocks, where believe
that stock price reaction doesn’t capture the full impact are Reliance
Communication, Bharti, India Cement and Ultratech.
q On the other hand, we believe that positives on BHEL (INR has depreciated against
RMB as well) and Reliance have not not been well understood yet. Also, Godrej
Consumer stock has over-reacted on the downside, in our view.

IT Services:: Sep-11 quarter preview: No big surprise expected in either direction, be it positive or negative:: JPMorgan,

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 Sep-11 quarter likely to be along expected lines for large-cap Indian IT:
We expect TCS to lead on Q/Q revenue growth, with Infosys/HCLT coming in
behind. Wipro is likely to have a muted quarter, with its promise of growth
catch-up with peers by 4Q FY12 intact. TCS could see 5.5%+US$ revenue
growth (Q/Q). We estimate Infosys’ Q/Q revenue growth at 5%, and HCLT’s,
being affected the most by US$ strength (cross-currency), at 4%. Wipro’s
organic growth is likely to remain weak at ~1% Q/Q, within its guidance range
of 0-2%. We expect the cross-currency impact (strong US$ vs. other currencies)
to pose Q/Q revenue (US$) growth headwinds of 0.4%-0.6% for
Infosys/TCS/Wipro (with the impact on HCLT the most adverse at ~ 1.2%).
 Infosys could reduce its FY12 (US$) revenue growth guidance from 18-
20% to 16-18% due to US$ appreciation (negative cross-currency), and
delays in decision-making: We expect cautious commentary from Infosys and
Wipro on the demand outlook, although Wipro might acknowledge that the
weakness stems from its own restructuring. Wipro’s revenue guidance for 3Q
FY11 is critical, in our view, as it would indicate whether the company is on
track to meet its stated intent to catch up with peers’ growth by 4Q FY12 (3Q
FY12 is the connecting bridge). We estimate 3% Q/Q growth guidance.
 Despite macro concerns, commentary from TCS on the IT services
spending outlook (including discretionary spending) is likely to remain
confident, though with incremental due caution: We believe that IT Services
spending since 2008 has been largely disciplined and thougtful after declining
significantly after the Lehman crisis. Since 2008, US IT services spending as a
percent of US GDP and as a percent of corporate profits has moderated,
signifying that excesses have not been built in the system. Further, Accenture
reported (in its 4Q FY11 earnings results, earlier this week) heartening bookings
of $4.2B for consulting and $4.3B for outsourcing, with a book-to-bill ratio of
1.1x and 1.5x, respectively, suggesting that clients continue to invest for growth
beyond the current potential downturn. Moreoever, within the IT Services
spectrum, offshore IT services tend to be the least cyclical and more of a play on
operations/IT than capex/discretionary spend. We expect HCLT to reiterate its
confidence in large deals opening up in 2H CY11. Companies are likely to stay
away from commentary on CY12 IT budgets (it’s too early).
 We expect Infosys’ EBIT margin to expand 200bp Q/Q due to higher
utilization, weak Rs and wage normalization: TCS’ operating margin could
increase ~50bp, lower than Infosys’ Q/Q increase, on account of promotionrelated
wage rises in Sep-11 (80bp margin headwind). HCLT’s/Wipro’s (IT
services) EBIT margins are likely to decline about 150bp due to wage rises.
 Keep an eye on forex (hedging) losses due to the sharp Rs depreciation and
cross currency movements: We expect TCS’ hedging loss due to its larger
hedged book to be Rs1.75B. Infosys (Neutral) and HCLT (OW) should report
much lower hedging losses due to their lower hedge book.
 Stay OW on selected stocks: We would view a further rally in Infosys, either
towards or beyond our Mar-12 PT of Rs2,700, as an opportunity to book profit.
We foresee a replay of what happened this time last year, when the stock rallied
ahead of 2Q FY11 results and subsequently fell. TCS (OW) still our top pick.

Accenture: 4QFY11 results :CLSA

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4QFY11 results
Accenture continued to defy sceptics with yet another stellar quarter.
23.4%YY growth in revenues and record quarterly bookings of US$8.4bn
were key positives for the quarter. Economic uncertainty
notwithstanding, Accenture maintained that visibility of business was as
high as last year at least for 1HFY12. While FY12 revenue guidance of 7-
10%YY in constant currency was maintained, organic growth
expectations are lower c.f. 5 months back with acquisitions filling the gap.
Given higher expectations, adverse currency moves and likely macro
issues, an encore of last year looks unlikely for Accenture. That said, its
increasing deal win-rate and solid margin defence will likely keep it ahead
of peers. OPF stays amidst an overall challenging year for outsourcers.
Strong quarter; FY12 revenue growth target maintained
4QFY11 revenue of US$6.69bn, up 23.4%YY beat the top end of company
guidance. Record order booking of US$8.4bn and strong 1QFY12 guidance
(US$6.8-7bn) indicates that business momentum remains strong for
Accenture for now. While FY12 revenue growth guidance was maintained at
7-10%YY (constant currency terms), it now builds in lower organic growth
than assumed earlier. Acquisitions of Zenta and Duck Creek and
consummation of the Nokia deal is picking up the slack from the lower
organic growth. A section of the street has been sceptical on Accenture’s
ability to improve margins. However guidance of 10-30bpsYY improvement in
operating margin for FY12 should address that concern.
Cautiously optimistic commentary on demand trends
While confidence on near-term demand remains high, management tone
seemed a tad cautious c.f. the previous earnings call. Per Accenture, deals are
sitting longer in the pipeline than earlier but the management hasn’t seen any
significant change in client decision making cycles. Accenture has tried to
balance this uncertainty by winning a higher proportion of deals and that
remains a key driver of their superior performance. Accenture had over
US$100m in bookings from 10 of its clients in this quarter, primarily in
outsourcing. Optimistic demand commentary on outsourcing was tempered
by some caution in consulting and Europe.
Better positioned than peers
In our view, Accenture remains the best positioned IT Services provider.
Accenture has strengthened its business in the past few years, cutting
delivery costs while building on its leading position in consulting and systems
integration. Accenture’s willingness to invest in platforms/solutions should
further increase its competitiveness as the game in IT Services shifts away
from labour costs. Stabilisation in the ratio of manpower across high and low
cost locations should aid Accenture’s revenue and margin metrics ahead.

1 Oct: News headlines ::RBS

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News headlines
Oil & Gas
􀀟 BG Group inks LNG pact with Gujarat State Petroleum Corporation for 20 years. (Economic
Times)
􀀟 CNG prices to rise by Rs 2 per kg this week. (Economic Times)
􀀟 HPCL defers crude unit shutdown at Mumbai plant. (Economic Times)
􀀟 GAIL to pick up 20% in Carizzo's Eagle Ford shale assets in US. (Economic Times)
􀀟 HC rejects Essar plea for gas from RIL's KG-D6 basin. (Economic Times)
Banks
􀀟 Banks see no demand for drafts. (Business Line)
􀀟 Axis Bank offers lifetime fixed interest rate home loan scheme. (Business Line)
􀀟 Banks make U-turn on prepayment. (Live Mint)
Pharma
􀀟 Pharma buy-outs by MNCs will not result in price hikes: Pfizer. (Economic Times)
Commodity
􀀟 NALCO plans to diversify into nuclear power. (Economic Times)
􀀟 Lanco to serve notice to Perdaman before mortgaging Griffin assets. (Economic Times)
􀀟 Environmental clearance for Sesa Goa's Pirna project cancelled. (Economic Times)
􀀟 Tata Steel's rail facility ready now after 35mn euro upgrade. (Economic Times)
􀀟 ACC eyes larger pie. (Business Standard)
Consumer
􀀟 MCCormick in JV pact with Kohinoor Foods. (Economic Times)
􀀟 United Spirits to focus on emerging markets. (Business Line)
Retail/ Real Estate
􀀟 Reality FDI curbs not to be imposed on colleges, old-age homes. (Economic Times)
􀀟 Unitech cancels dividend payout. (Economic Times)
􀀟 HUL shortlists 6 bidders including Gautam Adani, Oberoi Realty and Peninsula Land for Worli
sea-facing plot. (Economic Times)
􀀟 Oberoi Realty buys out ICICI Venture's stake in Mumbai project. (Economic Times)
􀀟 Oberoi Group in talks to buy 50% in south Mumbai project held by ICICI Venture. (Economic
Times)
IT & Telecom
􀀟 Wipro is Microsoft Software Development Partner of 2011. (Economic Times)
􀀟 BSNL likely to get Rs 55 bn more for defence network . (Economic Times)
􀀟 Bharti Airtel in pact with Nokia Siemens Networks for network expansion in Africa. (Economic
Times)
􀀟 SSTL gets $ 200 mn loan from ICICI, Barclays Bank. (Economic Times)
􀀟 Bonanza for Indian IT vendors as Europe's banks eye offshoring more work.(Business Line)
Power, engineering & infrastructure
􀀟 Gujarat power Discom slaps record penalty on Essar. (Economic Times)
􀀟 NTPC ties up Rs 24.1 bn loan for Bihar project. (Business Line)

􀀟 NTPC plans long-term coal offtake deal. (Business Standard)
Automobiles
􀀟 Hyundai’s Alto challenger Eon coming next month. (Economic Times)
􀀟 M&M rolls out first Global SUV XUV 500 at Rs 1.08 mn. (Economic Times)
􀀟 Mahindra & Mahindra eyeing African market for new SUV XUV500. (Economic Times)
􀀟 Maruti Suzuki to double sales network by 2015 across India. (Economic Times)
􀀟 Tata's Jaguar Land Rover journey needs direction. (Economic Times)
􀀟 Royal Enfield targets LatAm, Asean as part of global strategy. (Business Line)
􀀟 Ashok Leyland bags $37m order from Tanzania. (Business Line)
􀀟 Honda Motorcycle to invest Rs 10 bn in third plant. (Business Standard)

ITC Limited - Confident, not Complacent:: JPMorgan,

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Recent discussions with ITC’s management reinforced our positive stance on the
company. While uncertainty related to excise hikes could constrain near-term
share price performance, we would use any weakness in the stock price as a
buying opportunity. ITC has outperformed the broad market by 33% YTD and in
the current volatile markets, we think it should do relatively better than its peers.
 Cigarette demand trends remain encouraging and we expect ITC to register
mid to high single digit volume growth in FY12. The premiumisation trend
continues with the Kings segment (~15%+ volume share) growing ahead of the
Regular segment, and this should be positive for margins. The company has
taken ~5% price hike on wtd. avg. basis and any further price increases could
add to earnings upside. Procurement costs for leaf tobacco remain stable,
further supporting margin growth. Market share trends remain healthy.
 Tobacco and Taxes. There has been an uptick in VAT rates in most states this
year with the blended VAT rate for ITC rising from 15% in FY11 to ~17.5%
this year. VAT being an ad-valorem tax (charged on MRP) has a more adverse
impact on margins compared to excise, hence any further significant increase
in VAT levels would be a concern. In addition, there are concerns related to
the extent of excise duty hikes likely on cigarettes in FY13, particularly against
the backdrop of no change in excise rates in FY12. As demand trends are
healthy, we believe the industry can absorb excise duty hikes of up to 10%
(implying price hikes of 4-6%) without impacting demand meaningfully. At
constant prices we estimate current sensitivity to earnings of excise duty is 1%.
 Non-tobacco business update. Other FMCG continues to see healthy
revenue growth and better profitability benefiting from mix improvement in
foods, consolidation of market share gains in soaps and extension of skin
care portfolio on a national basis. Paper business expansion and performance
remain on track with product mix improvement (share of value added paper
now 50%+) a key driver for realisation/margin growth. Hotel business
performance, which was below expectations in the June’11 qtr, could be
adversely impacted with the slowdown in overall economic growth.
 Maintain OW. We build the higher VAT rates into our earnings model and now
expect ITC to deliver an EPS CAGR of 17% over FY11-13E. We roll our SOTP
price target end date to Sep-12, bringing it to Rs217 vs Rs209 (Mar-12)
previously. We find current valuations reasonable and see the stock as attractive
relative to other staple names. We believe high FCF generation could result in
higher dividend payout in the medium term as capex needs are likely to remain
limited to Rs15-18bn per annum.

Castrol India: Pricing power continuing, margins sensitive to base oil movement::JPMorgan,

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Castrol is sanguine on earnings visibility with 1) resilient demand being
driven by personal mobility and industrial segments and 2) a potential
correction in prices for key raw material - base oil
Key takeaways from the meeting
 Base oil prices - a key driver: Base oil prices have had a downtick in
the last month, with decline in crude prices. While Castrol management
does not see base oil prices collapsing from current levels
(US$1,500/MT), they do believe a 13-15% fall in prices is warranted on
account of crude/base oil margins correcting on weaker global demand.
Castrol’s earnings have a 7% sensitivity to a 5% change in base oil
price, according to the company.
 Volumes steady, pricing power intact. Castrol expects volumes to be
led by the personal mobility segment (cars, motorcycles) and the
industrial segment (dumpers, earthmovers). Diesel Engine Oil sales are
expected to remain flat. Castrol has taken product price hikes in Dec-10
and Mar-11, aggregating 15%, based on a prognosticated base oil range
of US$1400-1450 –further hikes may not be needed in Castrol’s view.
 Castrol trades at 22x CY11P/E (based on Bloomberg consensus data), inline
with Indian FMCG companies. The company attributes this to its
strong brand/pricing power and high capital efficiency ratios.
 The stock has outperformed benchmark indices over the last 12 months.
Management attributes earnings resilience to the company's ability to
pass through raw material cost pressures.
NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS
A RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL
INFORMATION, OBTAINED BY THE ANALYST DURING MEETINGS WITH
MANAGEMENT. J.P. MORGAN DOES NOT COVER THIS COMPANY AND HAS
NO RATING ON THE STOCK.

GAIL (India) – Shale gas acquisition not material:RBS

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GAIL has acquired 20% stake in the Carrizo operated shale gas assets in Eagle Ford shale (US)
for US$95m. Though it’s a producing asset, due to its small size, it will not materially impact
GAIL’s prospects where we remain pessimistic due to under-utilization of new pipelines for the
lack of gas supply sources


20% stake in Eagle ford shale
􀀟 GAIL has announced that its US subsidiary has entered into a joint venture to acquire 20%
stake in Carrizo operated Eagle Ford shale at the cost of US$95m. This comprises of
US$63.65m of upfront cash payment and additional US$31.35m of drilling carry. Carrizo
expects the $31.35 million drilling carry to be fully realized in less than one year
􀀟 The acquisition would be funded through debt-equity mix of 70:30.
The assets are already under production
􀀟 The Eagle ford shale is a liquid rich play. The assets under JV are already under production
with eight horizontal wells currently producing approximately 1,700 net bopd (340bopd net to
GAIL) and 3,800 net mcfd of rich gas (760mcfd net to GAIL). In mid 2011, Carrizo has
estimated proved reserves of 13.8mmboe (2.76mmboe to GAIL) of which 2.5mmboe are
classified as proved developed (0.5 million boe net to GAIL). A drilling rig is currently in the
process of drilling a four well pad on the JV assets which is expected to be completed and
brought on production near the end of this year.
Acquisition not material for GAIL
􀀟 This acquisition is in line with GAIL’s strategy of buying oil & gas assets outside the country
and bringing equity LNG into the country to support its pipeline business. That said, given the
small size of the acquisition, it would not have any material impact of its core pipeline
business which we believe would continue to remain under pressure due to lower utilization of
the new pipelines on account of lack of gas supply sources.
􀀟 On per acre basis, cost for GAIL comes to US$23,515/acre which prima facie looks expensive
compared to other deals in the Eagle ford shale. For eg , RIL had acquired 45% stake in
Pioneer Natural Resources operated assets in Eagle Ford shale in June 2010 for

US$11,110/acre. That said, we note that per acre based cost comparison may not be most
appropriate due to heterogeneity in shale gas plays and different production profiles etc.
􀀟 We believe that the returns on this acquisition, like all other shale gas acquisitions, would
depend upon rebound of natural gas prices in US which contrary to expectations have shown
no signs of improvement.

Bharti Airtel: Re-farming and risks ::CLSA

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Re-farming and risks
Even as recent sharp INR depreciation against USD and JPY could cause
an 8% downgrade to Bharti Airtel FY12CL earnings, our key concern
remains regulatory uncertainty on spectrum policies. The much awaited
New Telecom Policy is now expected only in 2012 and carries significant
risks not just on one time spectrum charges and 2G licence renewal costs
but also re-farming. Re-farming of 900MHz spectrum carries serious risk
of business disruption and could cause additional financial burden.
Bharti’s ROIC has dropped 11pptsYoY to 10% and regulatory risks will
further hit returns and hinder planned deleveraging efforts. Maintain UPF.
Re-farming of 900MHz can cause business disruption
NTP will be the final word on re-farming of 900MHz spectrum as 2G GSM
licences expire. Bharti possesses 23% industry share (107MHz) of 900
spectrum maximum amongst private telecom operators (57% higher than
Vodafone India) and has its most important Delhi circle licence come up for
renewal in November 2014. Even as GSM incumbents claim that refarming is
really a proposed redistribution and reallocation and is unwarranted, refarming
if implemented will cause serious business disruption. If 900MHz is
re-farmed Bharti will require complete redesign/recast of network RF
architecture including more base stations and significant increase in capex.
Consequently operators in order not to disturb RF network will be willing to
pay additional fee to retain the golden spectrum.
Multiple spectrum issues and delays to telecom policy
Also the NTP itself has been further delayed and is now expected only in early
2012, extending the high regulatory overhang. The NTP will bring forth risks
of US$5-6bn of regulatory payments on spectrum for Bharti. These include
US$800m for excess 2G spectrum >6.2MHz, US$2.7bn NPV for 2G licence
renewals and investments required to complete spectrum footprint in 3G
(nine circles) and 4G (18 circles). NTP also holds back M&A which is critical
for the sector’s sustenance including providing an exit route to certain
operators and change from an environment of fragmented spectrum and an
alternative for leading operators like Bharti to acquire further spectrum.
Risk of 8% earnings cut in FY12CL; Maintain U-PF.
Meanwhile INR depreciation of 9% against USD and over 15% against JPY in
2QFY12 has added risks to earnings. Bharti FY11 annual report specifies 5%
move in INR/USD impacts PBT by Rs5.2bn and INR/JPY by Rs1bn. Accordingly
FY12CL earnings could see 8% downgrade assuming no change in hedging
post FY11. Including USD currency debt, equipment supply payable and
creditors Bharti total exposure is US$13bn. While translation loss on Bharti’s
US$9bn of Africa acquisition debt is routed through Balance Sheet. Bharti’s
ROIC has already dropped 11pptsYoY to 10% and upcoming significant
regulatory risks will further hit returns and hinder its planned deleveraging
efforts. We maintain our Underperform rating.

OBEROI REALTY- Worli land deal indicates prudent cash utilisation::Edelweiss,

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Oberoi Realty (OBER) has purchased 50% stake in I‐Ven Realty from ICICI
Ventures holding a 4 acre land parcel in Worli (Mumbai). Deal value of
~INR 3 bn (as per media reports) is marginally value accretive for OBER at
INR 1.44 bn (INR 5/share) assuming 2.67x FSI (including public parking FSI)
and NAV neutral assuming normal FSI of 1.33x in the island city. We
believe the deal demonstrates the company’s prudent cash utilisation
policy. Maintain ‘BUY’ with a target price of INR 278/share.
Event: Stake purchase in I‐Ven Realty marginally value accretive
As per media reports, the indicative deal value for OBER’s stake purchase from I‐Ven
Realty is ~INR 3 bn. As per the company, the plot size is ~4 acres and is eligible for FSI of
2.67x (assuming public parking FSI of 4x on a portion of the property). As per our
estimates, the plot will have a potential saleable area of 0.73 msf (with parking FSI) and
our key assumptions are an average sale value of ~INR 36,000/sf and construction costs
of INR 5,000/sf for free sale and INR 1,500/sf for public parking with project lifecycle of
five years.
As per revised public parking norms for Mumbai, ~40% profits from incentive FSI will
also have to be handed over to BMC. Factoring in all these assumptions, we estimate
marginal value accretion for OBER at INR 1.44 bn (INR 5/share) assuming parking FSI
and NAV neutral assuming normal 1.33x FSI.
Impact: Minimal impact on valuations; maintain ‘BUY’
We believe the deal is NAV neutral even after assuming normal FSI and an elongated
project cycle with limited pricing upside. We believe the deal demonstrates OBER’s
prudent cash utilisation and we remain positive on the stock given the net cash of ~INR
13 bn (post the I‐Ven deal) in its kitty. We currently have a ‘BUY/Sector Outperformer’
recommendation/rating on the stock with FY12E NAV of INR 278/share.

Oberoi Realty: Deploying cash ::CLSA

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Deploying cash
Oberoi realty has finally started making use of its cash by deploying
Rs3bn (reported, not confirmed by the company) of Rs16bn cash that it
had. At the base case, its NAV neutral though potential parking FSI can be
additional. Sales rate at its existing properties remain sluggish and we cut
FY12 and FY13 earnings by 18-30% as we push back commercial / new
launches. Yet, simplicity of its business model coupled with better
corporate governance makes it our top pick in the sector.
50% stake purchased in a prime plot…
Oberoi Realty has purchased 50% stake in a 4.12acre plot situated at Worli,
Central Mumbai from ICICI Ventures - a private equity investor. The
remaining stake rests with the promoters; who had bought the land from
Glaxo in 2004; and will continue to remain invested. The land has remained
undeveloped due to an issue regarding BMC charging 50% transfer fee on any
transactions in such properties which have been given on long term leases.
The Supreme Court, earlier this month, had upheld an earlier High Court
judgement which disallowed the levy of 50% transfer fee by BMC.
… not NAV additive in short term though
Media reports put the purchase cost of land at Rs3.0bn. Assuming a
residential saleable area potential of c.0.40m sf for the land (1.33x base FSI,
40% loading), the NAV breakeven for the project will be around a selling price
Rs32,000/sf. With approvals from BMC yet to be obtained; a
sales/construction launch may be an FY14 event. Additional parking FSI
related benefits will be an upside.
Cut earnings, NAV to factor in Mumbai property issues
We factor in flat property prices in FY12 and FY13 for both residential and
commercial property now. With large scale sales of commercial property also
slow to come by, we push out sale of Oberoi’s Andheri commercial properties
into FY13. Also, pending no movement on the Mulund property approvals, we
push its launch to FY13 now. These lead to cut in its earnings by 18-30%.
Balance sheet strong, Worli launch awaited
Oberoi is working on finalizing its partner for the Worli project and the project
launch is expected by early 4Q. Post the stake purchase above, Oberoi still
has Rs12-13bn of net cash on its balance sheet; making future NAV upgrades
a possibility. Oberoi remains our favourite pick in the sector thanks to
simplicity of its business model coupled with better corporate governance.

News headlines:: Oct 1 2011: CLSA,

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News headlines: Corporate
􀂉 GAIL has agreed to buy 20% stake in one of Carrizo Oil & Gas’
shale gas assets in US and will invest US$300m over the next five
years. (BS)
􀂉 NTPC is considering long-term offtake of coal from foreign coal
companies to meet the target of imported coal besides scouting for
acquisitions. (BS)
􀂉 M&M has launched its global sports utility vehicle, XUV500. (BS)
News headlines: Economic and political
􀂉 India will borrow Rs2.2tn in 2HFY12 higher than the budgeted
Rs1.67tn. (BS)
􀂉 Food inflation has increased to 9.13% for the week ended
September 17 from 8.84% in the previous week. (BS)
􀂉 The Mines and Mineral Development and Regulation Bill 2011 is
reportedly scheduled to be placed before the Cabinet today. (BS)
􀂉 Indian Banks’ Association has written to RBI arguing against
abolishment of penalties on the early repayment of floating rate
home loans. (Mint)
News headlines: Corporate

􀂉 Tata Steel’s rail facility in France has been upgraded to produce
longer 108m rails for high-speed networks. (BS)
􀂉 Bharti Airtel has entered into an agreement with Nokia Siemens
Networks to expand its 2G network and roll-out its 3G network in
seven African countries. (BS)
􀂉 Oberoi Realty has bought ICICI Venture’s entire 50% stake in a
luxury residential project proposed to be developed in Worli. (ET)
􀂉 Shareholders of Unitech have rejected the management’s
proposal for payment of dividend of Rs0.1 per equity share for
FY11. (BS)
􀂉 Axis Bank has unveiled a fixed home loan scheme which will
charge 11.75% interest for a 20-year loan. (mint)
􀂉 United Spirits has decided to invest Rs3.5bn in a glass bottle
manufacturing facility in Vijaywada. (FE)
􀂉 NTPC has tied up a syndicated loan of Rs.23.4bn for its 390MW
power plant in Muzhaffarpur, Bihar. (BL)
􀂉 Maruti Suzuki has drawn up plans to double its sales network by
2015 across India with a focus on small towns and cities. (BS)
􀂉 Essar Steel’s plea against Ministry of Petroleum and Natural Gas
decision asking Reliance Industries to cut gas supply to it from KGD6
basis has been rejected. (BS)
􀂉 Bank of Maharashtra has raised Base rate by 20bps to 10.7%.
(BS)
􀂉 BG Group has signed an agreement to sell up to 2.5mtpa of LNG
to Gujarat State Petronet (GPSC) on a long-term contract. (BS)
􀂉 Ashok Leyland has secured a Rs1.78bn order from the
government of Tanzania to supply 723 trucks, buses and
application vehicles. (BS)
􀂉 The shareholders of Spicejet have approved issuing over 35.9m
shares estimated around Rs1.3bn to Kalanithi Maran on
preferential basis. (BS)
􀂉 Nalco has drawn up plans to invest Rs115bn to diversify into
nuclear power. (BS)
􀂉 Sistema Shyam Teleservices has received a loan totaling
US$200m from ICICI bank (50%) and Barclays Bank (50%).
(BS)
􀂉 Dewan Housing Finance plans to raise up to Rs10bn through
share sale. (BS)
􀂉 Wockhardt has decided to the dues to its bondholders amounting
to Rs3.6bn. (Mint)

UBS: Buy Bajaj Electricals - Electrical appliances leader charging on ; price target - Rs285

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UBS Investment Research
Bajaj Electricals 
Electrical appliances leader charging on 

„ Initiate coverage with a Buy rating
Bajaj Electricals (BJEL) is the leader in India’s electrical appliances market, with a
market share of approximately 18%. In FY06-11, BJEL’s consumer durables
(electrical appliances and  fans) division recorded a 31% revenue CAGR through
market share gains driven by new product and brand launches. We think BJEL
could continue to gain market share, given the highly fragmented market. We
initiate coverage with a Buy rating and Rs285.00 price target.
„ Consumer oriented, high ROE businesses have legs
Penetration in tier two/three cities is a key growth drive of consumer durable and
lighting products (consumer products) in India. BJEL’s’ROE in consumer products
is higher than the company average. It has products and brands across price ranges
to address various consumer segments. We forecast FY11-FY16 revenue CAGRs
of 23%/16% for the durables/lighting divisions, which contribute 80% of our
valuation for BJEL. Its consumer durables/lighting divisions were 47%/23% of
revenue and 58%/13% of EBIT FY11.
„ E&P business: worst is behind the division
The engineering and projects (E&P) division (30% of FY11 revenue, 18%
historical ROIC) reported an EBITDA loss in Q1 FY12. However, we believe the
worst is behind the division and expect EBITDA margin to rise to 7.2% in FY12,
and stabilise at 10.5% thereafter. This should improve investor sentiment.
„ Valuation: initiate coverage with a price target of Rs285.00
We derive our price target from a sum-of-the-parts methodology. We value the
products (lighting and consumer durables) business at 12.5x FY13E EPS and the
E&P business at 1x FY13E P/BV. Our price target implies 11x FY13E PE

Indian Financials: Infrastructure debt funds ::CLSA

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Infrastructure debt funds
Government had proposed to set-up infrastructure debt funds (IDF) to
broaden sources of long-term finances to infrastructure projects. These
funds may take the form of a mutual fund (IDF-MF) or NBFC (IDF-NBFC).
IDF-NBFCs could offer low cost refinancing to operative projects in publicprivate
partnership (PPP) hence, they will get tax concessions, lenient
exposure and risk-weight norms. While the format may take time to be
implemented, over 3-4 years IDFs may emerge as a key source of
refinancing and competition for banks and NBFC. On the positive side, IDF
will also help banks and NBFCs to (1) manage peaking exposure caps and
(2) focus on high yielding under-construction infra-projects.
IDF to bridge funding gap in financing of infrastructure
q The IDFs were proposed to bridge the funding gaps envisioned against the planned
investment in India’s infrastructure, especially as many banks and NBFCs were
reaching close to their borrower and sector exposure caps.
q Accordingly, the government had proposed that IDFs may be set either in the form
of a mutual fund or a non-bank finance company (NBFC).
q The targeted investors would primarily be domestic and off-shore institutional
investors, especially insurance and pension funds who have long term resources.
q Banks and financial institutions would only be allowed to invest as sponsors.
q To attract off-shore funds, the government lowered withholding tax on interest
payments by IDFs from 20% to 5% and exempted income of the fund from tax.
IDF-NBFC to refinance operative PPPs, IDF-MF have wider scope
q IDF-NBFCs are expected to provide refinancing to less risky infrastructure projects
and hence their scope has been restricted to refinance PPP projects after their
construction is complete and have successfully operated for at least one year.
q Additionally, there should be a tripartite agreement between the concessionaire and
the project authority for ensuring a compulsory buyout with termination payment.
q These would typically include projects in sectors like roads, ports, airports,
railways, metro-rail etc.
q Due to lower risks, IDF-NBFC will enjoy lenient exposure and risk-weight norms-
50% risk-weight on eligible assets of IDF-NBFC versus 100% for others.
q On the other hand, the IDF-MF structure is being proposed to fund all infrastructure
sectors, project-stages and project-types; but their scope of refinancing bank loans
may be restricted to operative infrastructure projects.
q As the IDF-NBFC will focus on less risky projects it may attract insurance and
pension funds; IDF-MF may attract investors that seek higher returns.
q Refer Figure 1 for details on the two structures; RBI shall announce detailed
guidelines for IDF-NBFC separately.
IDFs may gain scale in focus areas
q Over the longer-term the IDF model may gain scale, especially in the refinancing of
operative PPP projects.
q The competitiveness of IDFs, especially IDF-NBFC, will originate more from the tax
concessions and lenient risk-weights rather than ability to mobilise low cost funds.
q While cost of international borrowing is lower than domestic borrowings in India,
high cost of forex hedging (adds 300-400bps) makes the all-in cost of long-term
overseas and domestic borrowings almost comparable.
q Therefore, lower tax rate for IDF (0%) versus bank (~33%) and Infrastructure
Financing Companies (effectively ~25%) will be a key to the former making similar
ROA even at lower yields; lower risk weight will improve capital-efficiency.
q Banks and IDFC may face increased competition in segments like roads, highways,
ports etc; IDF may not focus much in power and telecom sector.
q On the positive side, IDF will also help banks and NBFC to (1) manage peaking
exposure caps and (2) focus on high yielding under-construction infra-projects

Bharat Forge (BFRG.BO) More than Just Bharat – All the World’s a Stage  Citi Research

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Bharat Forge (BFRG.BO)
 More than Just Bharat – All the World’s a Stage
 
 BHFC’s growth drivers are now global — With 41% of revenues (standalone) from
overseas markets, BHFC has transitioned from an Indian auto ancillary into a globally
diversified component manufacturer with linkages to the global auto/machinery/
diversified equipment sectors. We therefore take a fresh look at our model and
valuation approach. While diversification  is a long-term positive, the flipside is
heightened sensitivity to industrial production across developed/emerging markets.
CIRA recently cut industrial production forecasts for the US/EU zone to 2.8%/1.1%
(down from 3.8%/2.7%) for CY12. These  geographies accounted for 20%/18% of
BHFC’s standalone revenues (FY11).  
 We forecast BHFC’s consolidated revenue/EBITDA growth to decelerate  —
Globally, our analysts are more bullish on commodity linked markets like Ag equipment,
oil & gas and mining; less so on trucks as lower GDP implies lower freight volumes. We
estimate BHFC’s revenue growth to decelerate to ~7% in FY13, reflecting macro
slowdown and 2 strong years (FY11/12) of recovery. Consolidated EBITDA growth
should also decelerate to ~15%/11% over FY12/13.
 BHFC is better positioned today — than in the previous downturn, with a healthy net
debt – equity ratio (0.62 end FY11), relatively lower capex outlay (~Rs 5bn over
FY12/13), diversification through domestic non auto businesses and restructured
overseas subsidiaries (especially China).
 Valuations: Secular de-rating — We assign Rs240 (13x FY13E cons EPS) to the
consolidated operations. BHFC’s past trading range is of little relevance, given its
global thrust and shift into non auto. The multiple will continue to evolve, as the
earnings contribution from the various JVs (turbine generators, balance of plant
equipment) increase. At 13x, BHFC would trade at a c30% premium to global peers,
justified given slightly better growth prospects in India. We add Rs21 for the Alstom JV,
to arrive at our Rs261 TP. Revising risk rating to Low from High.
 Key risks — a) Growth in end industries is greater than forecast, b) global GDP/IP
upgrades, c) Non auto business grows at faster than anticipated rate.

GSK Consumer Healthcare- Core volume growth strong; margins to inch up – Upgrade to OP ::Standard Chartered Research,

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 We upgrade GSKCH to Outperform with a revised price
target of Rs2,643 (valuing it at forward P/E of 22x).
 Volume growth in core business continues to be strong.
We expect it to improve from 8.5% in CY11E to 10.5%
in CY12/13E.
 Margin expansion a possibility because of lower
adspend (pace of new launches have come down) and
softening in some of the agri-inputs.
 The stock has been range bound in the past one year –
YTD underperformance of 10% over BSE FMCG Index,
offers a good entry point.


Upgrade to Outperform. We upgrade GSKCH given i)
volume growth in core business remains strong, ii) likely
margin improvement and iii) recent underperformance. At
one-year forward P/E of 22.7x, we find valuations
reasonable, especially when compared to P/E of 25.3x for
the FMCG sector. Pricing power and earnings sustainability
in inflationary environment will enable it to sustain premium
valuations. We roll forward to Sep ’13 EPS with a revised
price target of Rs2,643 (earlier Rs2,461).
Volume growth continues to be strong. Lower-thanexpected 6% volume growth in 1Q CY11 was an aberration
as volumes rebounded smartly in 2Q with 14-15% growth.
Our channel checks suggest that core volume growth
continues to remain strong even in 3Q CY11. Driven by
innovation, volume momentum has picked up in the past
few years (3-year volume CAGR at 13% compared to 7%
in past 10 years). Variant led innovations (like Horlicks
Gold) and wider positioning (new campaign positions it as
the best additive to milk) should help in driving sustained
double digit volume growth in the medium term.
High possibility for margin increase. Raise CY12/13
EPS by 2/3%. New product launches raised adspend-tosales from 11.8% in CY04 to 16.1% in CY10. With pace of
new launches coming down, we expect adspend-to-sales
to reduce. With lower MSP increases in wheat, price
softening in sugar and barley we also expect raw material
cost-to-sales to come down from its 10-year high of ~38%.
Any softening in milk can lead to significant margin
improvement. We expect OPM to improve from 18.4% in
CY10 to 20.1% by CY13E leading to an EPS CAGR of
20.8% over CY10-13E.
Near-term triggers & key risks. Lower adspend can lead
to 25-30% PAT growth in the next couple of quarters and
act as a positive trigger. Failure in new launches may affect
investor sentiment negatively

Larsen & Toubro :: Bear and bull case scenarios; Target: Rs2,100:: JPMorgan

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L&T has underperformed the market by 15% last month and is down
to its  52-week  low. At  16x FY12E earnings (vs low  of  10.7x  - Feb-09
and high of 26x - Sep-09), we explore the bull and bear case scenarios.
Given our view that overseas orders could be a joker in the pack, we
think  market  concern  on  headline  order  flows  could  be  exaggerated.
However,  the  bear-case  is  that  multiples  might  converge  towards  its
regional peers, following the change in geographical mix of orders.
 Investors  are  most  concerned with L&T’s  order  flows  this  year. In
the  past  9  out  of  10  years,  L&T’s  relative  performance  has  shown
positive response to order flow growth. Mgt has been guiding to 15-20%
growth in orderflows for FY12 (i.e.Rs917-Rs957B). Recently, L&T lost
large  power  plant  equipment  orders  to  stiff  competition  from  Doosan
and BGR. L&T could have budgeted at least Rs50B wins from here, in
our  view. Besides this  prominent  order loss, there  have  been  anecdotal
instances  of  L&T  losing  orders  in  domestic  hydrocarbons,  metals  and
nuclear power construction over the past 6 months.
 Over  the  past  6  months,  amidst  rampant  fears  of  domestic  capex
disappointment,  a  renewed  thrust  for  export  order  wins  is
discernible. In Jun-q, overseas inflows rose sharply to 16% of total. The
Sep-q  marks  a  quantum  shift  in  the  proportion:  L&T  has  reported
Rs82bn of order inflows of which as much as Rs51B was from overseas.
 What is the stock pricing in? That is the 20Bn$ question. The Mkt cap to
order  flow  ratio  is  0.86x based  on  Rs917B  of  FY12E,  vs  the  last  2  year
average of 1.2x and previous trough of 0.54x (Feb-09). From  this, it appears
an 18-20% decline is already being priced in by the market. However, from
our  conversations  with  investors,  it  seems  a  decline  of  10%  is  widely
expected. Currently, we think the markets are getting more bearish on order
flows than needed,  given the M-E upside which might be bigger than most
believe. The devil’s advocate, of course, would say that the stock should be
de-rated on the back of this, and that remains a risk to our call.