India Monthly Wrap- Sept 2011: Reflecting European hope and despair:: JPMorgan

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 MSCI India (US$) lost a meaningful 7% over the month, but
outperformed the MSCI EM index (down 15%) significantly.
Globally, risk assets sold off on risk aversion due to the European
sovereign crises. India equities fared relatively better given lower
exposure to the global economy. IT Services, Consumer Discretionary
and Energy were relative outperformers, while Telecom, Industrials and
Materials underperformed.
 RBI hiked benchmark rates by 25 bps. In line with market
expectations, the Repo rate was hiked to 8.25% in the mid-quarter policy
review. The Central Bank emphasized that inflation remains
significantly above its comfort zone and that any premature change of
monetary stance would risk hardening inflationary expectations.
 INR depreciated significantly. INR depreciated a significant 7% over
the month, in line with the depreciation of most other key EM currencies,
ex China. Disappointing policy developments in Europe led to
heightened risk aversion and a sharp appreciation of US$.
 July IP disappointed. July IP increased at a significantly lower-thanexpected
3.3% oya. The negative surprise came from a sharp contraction
in the Capital goods segment.
 DIIs and FIIs buyers. FIIs invested a marginal US$ 6 mn into Indian
equities. DII remained buyers over the month. Insurance companies
bought US$496 mn, while domestic mutual funds sold US$153 mn over
the month.
 Other key developments over the month:
 Headline WPI Inflation for August reported at 9.8%.
 10 year treasury yield increased by 11 bps to 8.43% over
September.

Larsen & Toubro - Analysis Bear and bull case scenarios:: 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

World Growth Slows as Europe Stagnates :: Goldman Sachs

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World Growth Slows as Europe Stagnates
The further deterioration in the economic and financial situation in the Euro area has led us to
downgrade our global GDP forecast significantly, from 4.3% to 3.5% in 2012. Over the next
few quarters, we now expect a mild recession in Germany and France, and a deeper downturn
in the Euro periphery. The increase in financial risk is likely to lead the European Central Bank
to ease its liquidity policies further this month, and the economic weakness will probably result
in a cut in the repo rate by 50bp to 1% by December.
The increase in spillovers from the Euro area, primarily via tighter financial condition, is the
primary reason why we have also downgraded our forecasts for the US further. We now see the
risk of a renewed US recession as around 40%. We expect additional easing of monetary policy
beyond the ‘operation twist’ announced recently, although this may not come until sometime in
the first half of 2012. In addition, the market’s focus on changes in the Fed’s guidance on future
policies - including a greater emphasis on the employment part of the ‘dual mandate’ and/or a
temporarily higher inflation target - is likely to intensify.
Despite the deterioration in the advanced economies, Table 1 shows that our baseline global
growth forecast for 2012 remains at 3.5%—a downgrade of 0.8ppt from our prior forecast and
well below the pace seen in 2010-2011, but still decent by historical standards. The main reason
is that we expect only a modest slowdown in China and other emerging economies. Although
the recent Chinese policy tightening and the downturn in export demand are likely to weigh on
growth in the next few quarters, we expect the waning inflationary pressures to lead to a
renewed easing of policy later this year, and this should underpin a moderate reacceleration in
2012.
The downgrade to our growth forecasts has led us to lower our targets for bond yields,
commodity prices and equity prices. While even the new targets are generally above the
forwards, the downside ‘skew’ to our market views has increased notably.
The Euro Crisis Intensifies
On account of the intensifying financial dislocations in Europe, we have substantially revised
down our outlook for economic activity in the Euro area over the next two years. The Euro area
economy entered the year strongly, with first-quarter growth of 0.8%qoq, or 3.1% at an annual
rate. A slowdown from this strength was expected, but the weakness in official and survey data
through mid-year has gone further than we expected. The new forecasts embody significant
downward revisions to Euro area growth for both 2011 and 2012. Our projections for year-onyear
growth rates in 2011 and 2012 are 1.7% and 0.1% respectively, with a recession—defined
as two successive quarters of negative growth—foreseen at the turn of the year.

Hindalco Industries - Takeaways from site visits ::Motilal oswal,

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Mahan: Only one pot erected so far
Renukoot: Gradual improvement
Maintain estimates for FY12/13; Buy with TP of INR226
 Targeting to commission 359ktpa smelting capacity at Mahan by January
2013 - ambitious, given that only one pot of the two lines of 180 pots each
has been erected till now.
 Intends to increase metal production at the Renukoot plant by 10ktpa
through efficiency improvement and debottlenecking.
 Maintain our earnings estimates for FY12 and FY13. Buy, with a target price
of INR226.


Mahan: Only one pot erected so far though civil work at smelter is
nearly complete; first 150MW CPP targeted by December
 HNDL is setting up a 359ktpa smelter along with a 900MW CPP in the Sidhi district of
Madhya Pradesh over an area of ~3,700 acres. The smelter (360KA-AP36S technology
from RTA) will consist of two pot lines of 180 pots each, capable of producing 2.7tons
of metal per pot per day. The state of the art (ALPSYS) pot controller will ensure high
degree of automation. Manpower costs are estimated to be USD12/ton i.e. almost 1/
5th of the existing smelting operations at Renukoot.
 Construction work on site is in full swing, as HNDL is targeting to commission 40 pots in
the first line by December 2011 and the balance 140 pots of the first line will come on
stream by July 2012. The second pot line is expected by January 2013. Over 10,000
workers are working on the site. The first cast house will consist of 360ktpa ingots and
SOW ingots capacity. This is a very ambitious target - only one pot has been erected so
far, though civil work is nearly complete.
 Though HNDL expects 204k tons of hot metal production in FY13, we believe that
commercial production will take some time after first metal tapping and expect
meaningful production to start only in 2HFY13. We have built in ~40k tons of production
from Mahan in our estimates.
 Construction work at the 900MW CPP (6x150MW) is also in full swing. BTG and other
equipment from BHEL have already reached the site and commissioning is under
progress. The first unit of 150MW is likely to undergo hydraulic test in the first week of
October. Coal and ash handling units are expected to be ready by December. Distribution
line to connect output to the state grid is almost ready.
 HNDL intends to commission the first unit of 150MW by the end of December and the
full 900MW will be ready by June 2012. Though this appears ambitious, we expect
commissioning of the entire CPP by the end of 2QFY13.
 There is yet no clarity on the expected cost of production at Mahan, as both captive
coal and bauxite remain elusive in the near term. HNDL is hopeful of receiving tapering
coal linkage for the near-term CPP requirement and remains positive on developments
related to Mahan coal block. Though the Mahan project was envisaged with sourcing of
alumina from Utkal, it may have to depend on surplus alumina production at Belgaum
and Muri in the interim. As a result, third party sale of alumina will decline.


Renukoot: Focus on continuous improvement to reduce costs and
increase production
 HNDL's aluminum smelting and refining operations at Renukoot started in 1962, with a
20ktpa metal smelter and 40ktpa alumina refinery. In 49 years, the plant has increased
its capacities to 350ktpa of metal and 0.7mtpa of refinery through brownfield expansions
and technology upgradation.
 ~30% of the bauxite required for the refinery (of the total ~3mtpa) is procured through
external purchases under long-term contracts while the rest is sourced from captive
mines in Jharkhand and Chhattisgarh.
 Over the last few years, the grade of captive bauxite has fallen from 42% to 38%. Total
R&R of captive bauxite (including bauxite mines attached to Utkal project) mines is now
147m tons. HNDL has already applied of more leases in Jharkhand, Chhattisgarh and
Madhya Pradesh, which will increase R&R to 443m tons.
 The 350ktpa smelting plant is based on AP technology and involves 2,139 pots, with
72KA capacity arranged in 11 lines, giving ~0.55 tons of production per pot per day. The
increased pot capacity to 72KA from 52KA earlier is a result of continuous upgradation
and improvement to increase efficiencies. The operations at Renukoot also contain
downstream facilities, with fabrication units, which include extrusion products (35ktpa),
wire rods, and rolled sheets (95ktpa).
 HNDL intends to increase metal production at the Renukoot plant by 10ktpa through
efficiency improvement and debottlenecking. Over the next few years, it plans to increase
smelting capacity at Renukoot by ~16% by utilizing full pot potential. In FY11, the plant
produced 410ktpa of aluminum metal. HNDL arranged for additional alumina for this
from its existing Muri and Belgaum refineries.
 Power required for the smelting operations is supplied through its 742MW captive power
plant at Renusagar. ~60% of the coal required for the CPP is procured through linkage
from NCL (Northern Coalfields of Coal India) and the rest through external purchases (eauction
and washed coal).
Valuations attractive; maintain Buy
We maintain our earnings estimates for FY12 and FY13. We factor in incremental metal
production of ~40k tons and no alumina production from Utkal in our FY13 estimates. Over
FY11-14, we expect volumes of both alumina and aluminum to grow at a strong CAGR of
22%, driving earnings growth. The entire benefits of the ongoing expansions in India (Mahan
and Utkal) as well as Novelis are likely to come only in FY14. The stock is attractive at 1.1x
FY13E BV, an EV of 5x FY13E EBITDA, and at a 44% discount to NAV. We value the stock at
INR226 (EV of 7x FY13E EBITDA). Maintain Buy.

Bank of England pumps economy with 75 billion pound of new cash (Economic Times)

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The Bank of England on Thursday reactivated extraordinary stimulus measures by agreeing to inject £75 billion into British economy caught up in a global slowdown and raging eurozone debt crisis.

Following a two-day policy meeting, the BoE voted in favour of increasing its quantitative easing (QE) policy by £75 billion (86 billion euros, $115 billion) to £275 billion over a four-month period.

Its nine policymakers also decided to keep the BoE's main interest rate at a record-low 0.50 percent.

The decision to hold interest rates had been widely expected, while many economists had forecast more stimulus measures as the country's economic recovery falters.

In reaction, the pound hit a 14-month low against the dollar but the London stock market was up 2.30 percent.

"The Bank of England's Monetary Policy Committee (MPC) today voted to maintain the official bank rate paid on commercial bank reserves at 0.5 percent," the BoE said in an official statement.

"The Committee also voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £75 billion to a total of £275 billion."

Also on Thursday, the European Central Bank held its key interest rate at 1.5 percent, shrugging off speculation it could cut borrowing costs to help combat the region's sovereign debt debacle.

The Bank of England announcement came one day after official data showed the British economy had flatlined over the past nine months and that the 2008/2009 recession was worse than previously thought.

The BoE on Thursday said that Britain's recovery was being endangered by a flat world economy and the vicious eurozone debt crisis that has sparked massive EU/IMF bailouts for Greece, Ireland and Portugal.

"The pace of global expansion has slackened, especially in the United Kingdom's main export markets," the British central bank said.

"Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery."

The BoE's key interest rate has stood at 0.50 percent since March 2009, when the bank also decided to begin pumping new cash into the economy under quantitative easing -- which is more commonly referred to as "printing money".

Under QE, a central bank pumps out new cash by purchasing assets such as government and corporate bonds in a bid to encourage lending and in turn boost economic activity.

The Bank of England had injected a total of £200 billion into the economy between March 2009 and January 2010.

Howard Archer, chief European economist at the IHS Global Insight consultancy, said the BoE had good reasons for not cutting its key interest rate to below 0.50 percent in a bid to boost growth.

"It is notable that even at the height of the 2008/9 recession, the MPC was reluctant to take interest rates below 0.50 percent, partly because of the negative repercussions that this could have on the profitability of banks and on their capacity to lend," he said.

"There are also serious doubts about just how much benefit even lower interest rates would have."

Some experts claim that while QE can help to kick-start an economy, it also threatens to fuel inflation, which in the long run can actually hinder growth.

With British annual inflation currently at 4.5 percent -- far above the BoE's 2.0 percent target -- the bank faces a tricky balancing act.

Britain's economy almost ground to a halt in the second quarter slowed by weak consumer spending and industrial output, revised data showed on Wednesday.

Gross domestic product (GDP) -- the combined value of all services and goods produced in the economy -- grew by just 0.1 percent in the three months to June, meaning that it flatlined over the past nine months.

Britain hauled itself out of a deep recession in the third quarter of 2009, but its recovery has also been severely constrained by the impact of collapsing consumer confidence and painful state austerity cuts.

FMCG- Should the sector trade at 20x+ PE? :: UBS

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S hould the sector trade at 20x+ PE?
􀂄 Are high consumer sector multiples justified?
We believe the sector deserves to trade at a premium to other sectors. In this report,
we analyse the reasons why consumer staples companies continue to trade at a
premium to other sectors. We have used a two-stage forward PE target multiple
model to derive our sector target PE of 25.7x FY13E.
􀂄 Analysing ROE, FCF and staple consumption spending in India
We have looked at key metrics—return on equity and free cash flow yields—and
compared them with similar metrics in other sectors. We have also analysed
consumption spending growth vis-à-vis historical savings growth and the sector’s
risk-adjusted returns and standard deviation of returns. Based on this analysis, we
have divided the consumer stocks under our coverage into two baskets.
􀂄 Conclusions: sector has highest risk-adjusted returns and FCF yield
Our key conclusions are: 1) ROEs in the consumer sector are the highest across
sectors; 2) the consumer sector has the highest risk-adjusted free cash flow (FCF)
yields among the sectors we analysed; 3) savings have hedged consumption in the
past and we believe they will continue to do so; 4) over FY05-FY11 the risk-adjusted
returns of the consumer sector were the highest and the most consistent of the sectors
analysed; and 5) the sector’s corporate governance is among the best in India.
􀂄 Analysis supports our top picks
Our top picks are ITC, Colgate-Palmolive India and Titan Industries. These
companies have high ROEs, positive FCF yields and low leverage. We also like
United Breweries and Godrej Consumer Products. We upgrade our rating for
Marico from Neutral to Buy. We have Neutral ratings on Nestle India and Dabur
India. We have a Sell rating on Hindustan Unilever.

UBS:: Asian Paints - Superior model, short-term hiccups

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UBS Investment Research
Asian Paints Ltd.
Superior model, short-term hiccups
[ EXTRACT]
􀂄 Improved demand conditions with onset of festivities
We expect the onset of the festive season to improve the demand outlook for the
decorative paint segment this quarter and the next, since most Indian households
will have their homes painted. Though the festive season bodes well for demand,
raw material pressure continues for the Indian paint industry.
􀂄 ROE improvement
Asian Paints’ ROE rose from 29.7% in FY03 to 38.5% in FY11 due to
improvements in net income margin and asset efficiency. We consider the
company’s corporate governance standards among the best in the mid-cap Indian
consumer sector. The company has demonstrated steady returns over the past three
years.
􀂄 Raw material pressure to continue
We expect raw material pressure to continue for Asian Paints, with titanium
dioxide prices high. Though the rate of increase in raw material prices has
moderated, we expect prices to remain high, forcing Asian Paints to raise prices
further.
􀂄 Valuation: maintain Sell rating and price target of Rs2,750.00
We maintain our Sell rating and price target of Rs2,750.00. 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 10.4%.


􀁑 Asian Paints Ltd.
Asian Paints is the leading paint manufacturer in India with a 45% share of the
organised sector paint market. It ranks among the top 10 decorative coatings
companies in the world. Asian Paints operates in 20 countries across the world.
International business accounts for 17% of sales. Decorative paints accounted
for around 80% of the group's sales in FY08.
􀁑 Statement of Risk
We think key risks for Asian Paints include continued high raw material prices
impacting margins and continued slowdown in the market leading to a
slowdown in volume growth for the company.

UBS:: Colgate-Palmolive- India’s #1 brand

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UBS Investment Research
Colgate-Palmolive India
I ndia’s #1 brand [EXTRACT]
􀂄 Believe in the brand
We have an anti-consensus Buy rating on the stock as we believe Colgate-
Palmolive India (Colgate) will benefit from: 1) consumer upgrading; 2) strong
market growth opportunities; 3) its effective distribution network; and 4) its
powerful brand equity. We expect launches by Colgate-Palmolive India from the
parent company’s portfolio to be a key trigger for the share price.
􀂄 High ROE due to high margins, improvement in asset efficiencies
ROE improved from 26% in FY02 (the year Pepsodent was launched) to 105% in
FY11 (when Colgate had established itself as the #1 brand in India). The
improvement in ROE is due to improvements in net income margins and asset
efficiencies and exceptional working capital management.
􀂄 Competition to have limited impact
We think new entrants in the oral care business will only be able to take market
share from local brands, not market leader Colgate, due to the unorganised nature
of the retail market. We believe additional ad spend by Colgate to counter any new
competition will aid volume growth due to its better distribution and presence.
􀂄 Valuation: price target of Rs1,250.00
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 our earnings forecasts 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.

UBS :: Marico- Upgrade post share price correction

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UBS Investment Research
Marico Ltd
Upgrade post share price correction
[ EXTRACT]
􀂄 Upgrade to Buy
We upgrade our rating from Neutral to Buy on valuation. We believe the share
price decline following management’s 14 September profit warning has brought
the valuation to an attractive level. We believe the strength of its flagship
Parachute brand will ensure good volume growth for the company. We think
management’s strategy of not increasing prices despite high commodity prices to
encourage consumers to upgrade during periods of inflation or economic
uncertainty will be viewed positively by investors due to strong volume growth.
􀂄 Flat ROE, will remain under pressure near term
In FY11, ROE declined to 26%, approximately the FY01 level. ROE improved
through FY07 and then started to fall due to declining asset turnover. We expect
ROE to remain under pressure in FY12 but improve from FY13.
􀂄 With all negatives factored in, expect good year ahead
With all the negatives factored in, any improvement on the cost front should result
in earnings upside for Marico, in our view. Extending its flagship Parachute brand
to the value added hair oil segment and recently the skin cream segment should
help Marico garner market share in these segments. We believe Marico will benefit
from: 1) rising incomes in rural India as consumers upgrade to branded hair oil and
2) higher spending on health foods and male grooming in India.
􀂄 Valuation: upgrade rating to Buy, maintain Rs185.00 price target
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
10.8%.


􀁑 Marico Ltd
Marico is the leading producer and distributor of hair oil, which it sells under the
Parachute and Nihar (33-35% of sales) brands. Other hair oils contribute 13% to
sales. The company also manufactures cooking oil under the Saffola brand (15%
of sales). It operates a chain of beauty and well-being clinics under the brand
name Kaya (7% of sales). International sales, mainly in Bangladesh, Egypt,
Malaysia, Singapore, South Africa, and the Middle East, contribute 23%.
􀁑 Statement of Risk
We believe the potential risks for Marico include unfavourable copra price
movements, smaller-than-expected volume growth due to declining trends in
hair oil consumption and the failure to take incremental share from the
unorganised hair and edible oil market.

UBS : ITC- Indian tobacco kings

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UBS Investment Research
ITC
I ndian tobacco kings [EXTRACT]
􀂄 VAT increase noise presents opportunity to buy
The recent VAT increases by states have had some impact on the share price.
However, we believe this is not warranted. ITC has raised prices to pass on the
VAT increases and we expect it to benefit as it raised prices throughout India not
just the states that increased VAT. We view the impact on the share price as a
buying opportunity.
􀂄 ROE improvement
ROE has improved from 28.4% in FY00 to 31.3% in FY11 due to increases in net
income margin and asset turnover. The improvement in net margin is a result of the
improving margins in the cigarette business. ITC has delivered consistent
shareholder returns through economic cycles, despite increases in excise duties or
VAT.
􀂄 Key catalysts ahead
In our view, the key catalysts for ITC’s share price include: 1) quarterly volume
growth; 2) higher cigarette prices; 3) an improving consumer environment; 4)
declining losses in the FMCG business; and 5) improvement in payout ratios.
􀂄 Valuation: maintain Buy rating, and price target of Rs240.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool (assuming a 10.5% WACC
and a 12% interim growth rate). At our price target, ITC would trade at 25x one
year forward PE.


􀁑 ITC
ITC is the leading cigarette manufacturer in India with a 67% share of the
market by volume and 83% by value. ITC has identified tobacco and
paperboard, hotels and agribusiness as its core businesses.
􀁑 Statement of Risk
We believe a higher excise duty is the key risk to ITC’s earnings growth and our
valuation. A steady increase in excise duty would adversely affect the
company’s long-term growth trend and lead to lower purchases by smokers.

UBS :: Pantaloon Retail (India) -. Dilution on the cards

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UBS Investment Research
Pantaloon Retail (India) Ltd.
D ilution on the cards
􀂄 Event: Pantaloon to raise Rs15bn
Pantaloon Retail’s (PRIL) board has cleared a proposal to raise Rs15bn by issuing
equity-linked securities. The securities to be issued could either be convertible
instruments, debt instruments with attached warrants giving the holder the right to
subscribe for Equity Class B shares, or issue of Class B shares. Class B shares
issued by PRIL have the right to an additional dividend over Class A shares. The
board has agreed on some upper limits: 1) stake dilution of less than 15%; and 2)
debt to equity less than or equal to 1.33x.
􀂄 Impact: EPS dilution near term if the issue goes through
If PRIL issues shares and uses the entire proceeds to repay its debt, there could be
a potential dilution of ~8-10% in FY12E PAT. The debt to equity ratio for core
retail was 1.12x as at FY11. The discount for high leverage has been built into the
stock.
􀂄 Action: key catalyst for the stock is non-core divestment
We believe the key catalyst for the stock is divestment of its non-core business,
which we fear could be pushed now given the urgency of capital issuance in a riskoff
market. We believe the stock will likely remain range-bound due to the delay in
divestment of non-core businesses and the announcement of a share dilution.
􀂄 Valuation: maintain Buy with price target of Rs400
We maintain our Buy rating and price target of Rs400. 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 12%.


􀁑 Pantaloon Retail (India) Ltd.
Pantaloon is India's largest listed retailer. It is rapidly building retail capacity in
its two main retailing formats: lifestyle and value retailing. In the lifestyle
segment, its Pantaloon stores and the upcoming Central stores offer apparel and
fashion items targeting the middle-income market. Its Big Bazaar discount
stores target the price-conscious apparel and grocery markets (the latter through
the Food Discount brand).
􀁑 Statement of Risk
The retail sector is closed to foreign competition, but this could change. The
entry of large format foreign retailers with skills in merchandising and supply
chain management could affect the sales and margins of Indian companies such
as Pantaloon.

UBS:: Nestle India- Best exposure to Indian food consumption

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UBS Investment Research
Nestle India Ltd.
Best exposure to Indian food consumption
[ EXTRACT]
􀂄 Tale of two halves
We expect commodity cost pressures to keep margins under pressure in H1 FY12,
but think declining prices of cocoa and coffee will benefit Nestle India (Nestle) in
H2 FY12 and lead to margin improvement.
􀂄 Highest ROE among companies under coverage
Nestle has the highest ROE in our consumer coverage universe, in part because it
has access to the parent company’s nutritional expertise (R&D) and food
technology. Its margins have been high as Nestle sells high quality products at a
premium to competitive products in the same categories. We expect ROE to
improve from FY11 levels in FY12 and FY13.
􀂄 Fundamentals intact
We believe Nestle’s strategy will help the company drive growth across all
segments. Nestle is focusing on: 1) catering to the lower end of the F&B segment;
and 2) increasing product offerings across the mid and premium segments. The
company is expanding capacity to support its growth plans. We believe the
capacity expansions reflect its bullish plans in India’s packaged food market.
􀂄 Valuation: maintain Neutral rating and price target of Rs4,750.00
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 beta of 0.41.


􀁑 Nestle India Ltd.
Nestle is a 65%-owned subsidiary of Nestle SA, Switzerland. The company is
the market leader in its key product categories of infant nutrition, coffee,
noodles, and chocolate. The company's diversified product portfolio is sold
primarily in urban markets to middle- and upper-income households. The
company is increasing distribution reach into small cities, driving growth for the
company. In the domestic market, the company has been aggressively launching
new products to expand its consumer base. The company is diversifying its
export business to reduce dependence on Russia.
􀁑 Statement of Risk
We believe the key risk to our earnings forecast and valuation is a slowdown in
the consumer market, which, we believe could affect earnings and valuations in
the sector. In a high-raw-material-cost environment, sluggish sales could also
affect earnings.

UBS - Hindustan Unilever:: Competition and profitability are risks

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UBS Investment Research
Hindustan Unilever
Competition and profitability are risks
[ EXTRACT]
􀂄 Changing focus to a highly competitive category
Hindustan Unilever (HUL) is changing focus from its largest category, soaps and
detergents (about 40% of revenue) to personal products. The change in focus is a
result of HUL’s high penetration in the soaps category and the increased
profitability of the personal products segment. However, the personal products
category is witnessing increased competition as other companies, including ITC,
are also increasing their focus on the segment. HUL’s cuts in advertising and
promotion spending to maintain profitability could have an impact on volume
growth, in our view.
􀂄 ROE declines due to margin compression
ROE has declined from 123% in FY08 to 81.8% in FY11, as net profit margin has
fallen. Net profit margin declined from 12.9% in FY08 to 11.1% in FY11. We
believe margins will remain under pressure.
􀂄 Negative catalysts to play out in ensuing quarters
We maintain our Sell rating as we think: 1) competitive intensity will remain high;
2) reduced advertising spend could result in single digit volume growth in the
coming quarters; and 3) high volume growth expectations that might not
materialise are built into the share price.
􀂄 Valuation: maintain Sell rating , price target of Rs275.00
We maintain our Sell rating and price target of Rs275.00. 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 10.8%.

IT Services – Bear-case scenario analysis: RBS

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With low global GDP growth looking increasingly likely, we analyse the potential impact on
earnings and valuations. Under our bear-case scenario, our FY13 EPS for Indian IT large caps is
5-7% lower than our current estimates which would result into 20-22% cut in our price targets.


Background to our analysis
Many commentators are now suggesting that Europe and the US will tip into recession later this
year and into the next. We have examined our EPS forecasts for FY13 and estimated potential
recession valuations assuming a material slowdown under such a bear-case scenario. However,
assuming more economic pain in Europe (contributes 25-30% for Indian IT) than in the US (60-
65% of revenue), we expect the impact on Indian IT to be lower than in the 2008-09 slowdown. A
depreciating rupee would also provide earnings support, limiting the FY13F EPS impact to 5-7%
on our estimates for Indian IT large caps.
Valuation approach: today and under a recessionary outlook
We generally value our coverage on PE multiples based on the average historic multiples and
premiums/discounts to our sector benchmarks Infosys and TCS. As earnings fall in our bear case
scenario, multiples would also fall. In our bear case scenario, our target PE multiple for the large
caps falls c15% from our current estimates (though we do not rule out stocks touching materially
lower multiples before stabilising at our target multiples in a bear case scenario). Our target PE
multiple for most mid caps falls by 18-20% accounting for their smaller size, lesser diversification
and increasing risk of vendor consolidation.



Free cash flow variance and balance sheet vulnerability
We do not expect any significant changes in long-term capex programmes. However, if there
were a prolonged recession, we would expect players to delay facility expansion. Given negligible
leverage of balance sheet and significant exposure to Fortune/Global 1000 clients, we do not
anticipate any major cash flow issues in this scenario. All large caps are net cash positive with
only HCL Tech and Wipro carrying relatively high gross debt. The same is even true for all mid
caps we cover which are net cash positive. This is positive for the sector given the rising interest
rates in India.

UBS:: Godrej Consumer - International acquisitions to fire

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UBS Investment Research
Godrej Consumer Products
International acquisitions to fire
[ EXTRACT]
􀂄 Upside from international acquisitions
We maintain our Buy rating on Godrej Consumer Products (GCPL) as we think
there is potential upside to our earnings estimates as the company begins to benefit
from cost synergies and scale efficiencies arising from its June 2011 acquisition of
the Darling Group. A good distribution network will provide GCPL the platform to
quickly introduce its products in African markets.
􀂄 ROE dilution near term
ROE has declined from 79% in FY02 to 28% in FY11. This is due to a decline in
asset turnover. ROE improved until FY05 but has steadily declined since FY06.
􀂄 Currency risk remains an overhang
With US-dollar denominated debt taken for the Darling Group acquisition and the
recent depreciation of the Indian rupee, the risk of exchange rate fluctuation is high
for GCPL. GCPL’s foreign debt is not hedged and its total forex exposure as at 31
March 2011 was US$350m.
􀂄 Valuation: maintain Buy rating and Rs500.00 price target
We derive our price target from a sum-of-the-parts analysis of each business.


􀁑 Godrej Consumer Products
Godrej Consumer Products (GCPL) focuses on home care, hair care and
personal wash products in Asia, Africa and Latin America. In FY10, personal
wash was its largest revenue contributor at 41%, while hair care and home care
contributed 20% each. Following the GHPL and Megasari acquisitions,
homecare contributed 9% of total revenue in Q1 FY11, while personal wash and
hair care contributed 33% and 18%, respectively. GCPL's FY10 turnover was
US$443m, of which US$365m was from domestic operations (including GHPL)
and the remaining US$79m from international operations.
􀁑 Statement of Risk
We think the key risks to our earnings forecasts and valuation include
intensifying competition, increasing raw material costs and slowing economic
growth. With its expansion in international markets the company also has
exposure to multiple country and currency risks.

UBS: Dabur India- Shaky business model

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UBS Investment Research
Dabur India Ltd.
S haky business model
􀂄 Muted volume growth with new product launches postponed
We remain Neutral on Dabur India (Dabur) as we believe there are no near term
catalysts for the share price. Faced with a high input cost environment,
management has indicated that most new product launches have been postponed to
calendar year 2012. Management has also guided for flattish margins in the current
fiscal year.
􀂄 ROE up versus FY00, but has declined lately
ROE rose from 24% in FY00 to 40% in FY11 due to improvements in net income
margins and leverage. However, over the past four years ROE has fallen as net
income margins have stagnated and asset turnover has declined.
􀂄 International acquisitions and domestic market competition
Given the high competitive intensity in the personal care business in India, we
expect it to be tougher for Dabur to acquire market share in the consumer care
division. We believe the company will focus more on its healthcare (CHD), OTC
and international businesses over the next two to three years.
􀂄 Valuation: maintain Neutral rating and price target of Rs120.00
We maintain our Neutral rating and our price target of Rs120.00. 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%.


􀁑 Dabur India Ltd.
Dabur is the market leader in consumer products based on the traditional Indian
ayurvedic herbal system of medicine. It has evolved to become one of the largest
Indian-owned consumer goods companies. It has a fairly well-diversified
product profile. It operates in the following consumer product categories: hair
oil, health supplements (Chyawanprash and digestives), oral care, shampoos,
baby care, skin care, home care, and foods (juices and cooking pastes).
􀁑 Statement of Risk
We believe the key risk to Dabur is the limited appeal of traditional Ayurvedic
products as consumer lifestyles change. Another risk is low tax rates because of
factory locations in areas that are designated as tax benefit zones; any change in
this law could affect earnings, in our view.

Eye on India Fasting and feasting ::Macquarie Research,

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Eye on India
Fasting and feasting
Event
 Post Anna Hazare‟s campaign, many politicians have latched on to the idea of
“fasting”, with some even arguing that this may be the best way to control food
inflation! That aside, a recent report has raised the issue of increasing
incidence of NCDs (non-communicable diseases) amongst Indians due to
changing lifestyle and food habits, making India the diabetes capital of the
world. The government too launched a programme yesterday, touted as the
world's largest programme to combat NCDs, to address issues like obesity,
junk food and tobacco consumption.
 This week we look at the changing diet and health trends of the Indian
population. Increased demand for packaged foods by the urban middle class
augurs well for companies like ITC. Some other players in this segment are
Nestle, Agro Tech, GSK Consumer and Jubilant Foods. Rising health
concerns could be played through Apollo, Fortis, Opto Circuits and Sun
Pharma. Other players in this segment include Biocon and Torrent.
What caught our eye
 Bouncing on hope: This week markets across the globe bounced back in the
hope of Germany‟s support to enhance the EFSF, which it did yesterday.
Indian benchmark indices were up around 2-3% vs a 3.2% rise in the MSCI
World index. IT was the best performing sector (5.9%) while consumer
durables (-4.3%) was the worst performing. FIIs net sold US$625m while MFs
net bought US$8m worth of equities. Amongst our top-10 stocks, Infosys
(+8.4%) was the best performing while L&T was the worst performing (-8.2%);
the top-10 list continues to outperform MSCI India by 630bps since Aug-10.
 High energy and food prices making RBI’s task difficult: The Deputy
Governor put part of the blame for the ineffectiveness of monetary tightening
in controlling inflation on persistent high global energy prices and continued
high food inflation in India, especially in protein foods. (Link)
 Government to borrow more: The 10Y yield rose by 10bps as the
government announced its intention to borrow nearly US$10bn more than it
had budgeted for 2HFY12, ostensibly to cover the shortfall in small savings.
Our economist, Tanvee Gupta Jain, expects FY12 headline fiscal deficit to be
5.8% of GDP (including oil subsidy). (Link)
 Data corroborates weak infra activity: The core infra sector, which includes
8 industries and constitutes 38% of India‟s factory output, showed 3.5% yoy
growth in August compared to 7.5% in July. Watch out for the Aug IIP data on
12th Oct, 2011. (Link)
Outlook
 Markets as volatile as they can be: Markets have managed to see-saw with
global news and most domestic fund managers we met last week seem to be
buying on dips. Some old hands are adding beta (read beaten down stocks) in
the hope of a turnaround because defensives in any case look expensive.
This might work over a 2yr period but right now it appears to be 6 months too
early for this trade. Remain defensive.

UBS:: Titan Industries - Gains from increasing affluence

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UBS Investment Research
Titan Industries
G ains from increasing affluence
�� Expect demand uptick in festive season
We believe volume growth will be good in Q3 FY12 as festive season buying
begins. After management guidance for muted volume growth in Q2 FY12 due to
higher gold prices, we expect healthy growth in gold jewellery volumes in Q3
FY12. We think the key potential risk to the share price is the weakness in the
underlying commodity (gold) despite Titan Industries (Titan) not having gold in its
inventory, since the stock is perceived as a gold play.
�� ROE improvement due to improving mix
ROE improved from 6% in FY02 to 42% in FY11 as the company continued to
expand its jewellery business and improve scale. Better asset turnover also
contributed to the increase in ROE. Net margin improved from 1.4% in FY02 to
6.6% in FY11 with the high-margin jewellery business increasing in the mix. For
every 1% increase in jewellery net profit margin, we estimate a 3.7% increase in
PAT for the company.
�� Titan’s focus on the premium segment should increase margins
With consumers upgrading, we expect Titan’s strategy of focusing on the premium
segment—with Helios as a pan-India premium watch retailer and Tanishq’s new
strategy of setting up six to eight super-premium company-owned stores—to result
in better margins, as margins are higher in the premium segment.
�� Valuation: maintain Buy rating with price target of Rs250.00
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
11.2% and an intermediate growth rate of 17%.


􀁑 Titan Industries
Titan Industries is a diversified specialty retailer in India with exposure to the
watch, jewellery and eyewear segments. It began operations as a watch company,
diversifying into the jewellery business in 1995, and the eyewear business in
2007. Watches contributed 22%, jewellery 75%, and eyewear 2% of its revenue
in FY10. The company operates around 0.7m sqf of retail space. Its brands
include Sonata, Titan, Fastrack, Xylus in watches; Tanishq, GoldPlus and Zoya
in jewellery; and Titan Eye+ in its eyewear division
􀁑 Statement of Risk
We believe the key risks that could affect the sector include continued upward
movement of downstream petrochemical products and higher agri-commodity
based raw material costs and the inability of branded consumer companies to
pass on price increases in an increasingly competitive market. The sector enjoys
low corporate tax rates because of factory locations in areas that are designated
as tax benefit zones; any change in this law could affect earnings.

UBS : United Spirits - Negatives priced in, acquisition is key risk

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UBS Investment Research
United Spirits Ltd
Negatives priced in, acquisition is key risk

􀂄 All negatives priced in
We maintain our Buy rating on United Spirits (USL) as we believe USL will: 1) remain
a beneficiary of India’s growing young population and rising discretionary spending; 2)
benefit from investments in primary capacity; and 3) benefit from its focus on the
premium segment. We think the debt issues and the perception of poor corporate
governance have been factored into the share price and view the current level as a good
buying opportunity.
􀂄 Low return on equity
USL’s return on equity has been low compared to our consumer coverage universe due
to its international acquisition—White & Mackay (W&M). W&M has not been able to
generate financial returns, which has lowered returns for USL. Any additional debt
taken on for international acquisitions would result in further deterioration of the
already low ROE if the acquisitions did not generate returns for USL.
􀂄 International acquisitions remain biggest risk
While the W&M acquisition has weighed down the share price, additional international
acquisitions financed through debt remain the biggest potential risk for the company.
Management has indicated there are niches within the alcohol product portfolio that it
believes need to be bridged by brand acquisitions. Any additional debt taken to finance
an international acquisition could increase the company’s financial risk, in our view.
􀂄 Valuation: maintain Buy rating and price target of Rs1,250.00
We derive our price target from a DCF-based methodology and explicitly forecast longterm
valuation drivers using UBS’s VCAM tool. We assume a WACC of 10.4% and an
intermediate growth rate of 8%.


􀁑 United Spirits Ltd
United Spirits is 38.7% owned by Vijay Mallaya and the amalgamated company
of the former McDowells, Shaw Wallace and other companies. It holds about
48% of the IMFL (liquor) market by volume and is the market leader. It is a
driver of sector consolidation. The company has 19 'millionaire' brands (each
sells more than one million cases per year) and has 64 manufacturing facilities
across India.
􀁑 Statement of Risk
We believe the key risks that could affect the sector include continued upward
movement of higher agri-commodity based raw material costs and the inability
of branded consumer companies to pass on price increases in an increasingly
competitive market.

UBS :: United Breweries- Volume growth driving margin expansion

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􀂄 Reiterate Buy as best exposure to rise in disposable incomes
We maintain our Buy rating on United Breweries (UBL) as we believe it remains
the best exposure to rising disposable incomes and changing social norms in India.
We expect the healthy volume growth momentum to continue through FY12,
especially with the launch of Heineken in the Indian market. We expect volume
growth to remain a key catalyst for the stock.
􀂄 ROE improved
The company’s ROE has improved from negative returns in FY02 to 15.6% in
FY11, due to better asset efficiency and net income margins. While net income
margins improved from -10% in FY02 to 6% in FY11, asset turnover improved
from 67% in FY02 to 102% in FY11.
􀂄 Improving profitability—key catalyst
We expect UBL’s profitability to improve as: 1) breweries achieve scale; 2) the
revenue mix improves, 3) the contribution from profitable states increases; and 4)
the company increases its focus on the premium segment. We think it deserves to
trade at a premium to consumer peers because of: 1) the high price elasticity of
beer (1.7x); 2) its dominant market share; and 3) the complementary ownership by
Heineken and the UB Group.
􀂄 Valuation: maintain Buy rating and price target of Rs650.00
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
12.4% and an interim growth rate of 14%.


􀁑 United Breweries
United Breweries has a 56% share of the beer market in India. Heineken holds
38.7% of United Breweries and UB Group 37.5%. The company's flagship
brand 'Kingfisher' is the most popular Indian beer brand globally. As state
governments do not allow the inter-state movement of alcoholic beverages, UBL
owns 18 breweries and operates nine contract manufacturing facilities.
􀁑 Statement of Risk
State governments can increase taxes on beer and this could make a significant
difference to business dynamics, as taxes constitute around 45% of beer prices
for consumers. We expect young people in India to move from drinking spirits
to drinking beer and softer beverages. The risk is that this change could be
slower than we anticipate. Another risk is increasing health consciousness
among consumers.

UBS:: India Industrials - Low visibility on order inflow in the sector; BHEL top pick

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UBS Investment Research
India Industrials
Low visibility on order inflow in the sector;
B HEL top pick
􀂄 BHEL is down 36% YTD; we think this is an attractive buying opportunity
BHEL is among the weakest performers in India capital goods as many key events have
been negative for BHEL over the past 12 months: a) a slowdown in the power sector
leading to lower order inflow; b) concerns on increased domestic competition; c)
announcement of a 5% stake sale through follow-on public offering (FPO) by the
government; and d) muted sales growth and order inflow in Q1 FY12. We think this
could change due to: a) the likelihood of imposition of duty on imports; and b)
postponement of FPO if market conditions do not improve. We maintain our Buy rating
on BHEL.
􀂄 We are negative on Crompton Greaves and Thermax
We think the near-term outlook for Crompton is still uncertain because: a) Indian T&D
equipment manufacturers continue to face severe competition from overseas
manufacturers; b) the overseas markets remain challenging; and c) inflation is not under
control, which is a negative for consumer products. Thermax management has guided
for a slowdown in ordering activity and we think its diversification strategy (in high
MW boilers) could also be risky. Hence, we think there could be more downside in
these stocks and we maintain our Sell ratings on Crompton Greaves and Thermax.
􀂄 ABB India is expensive on valuation; maintain Sell on Suzlon
ABB India continues to post disappointing quarterly results, and recently management
also guided for slower order inflows and pressure on margins. Hence, we think it is
expensive at 30x 2012E EPS. We have a Sell rating on Suzlon.
􀂄 BHEL is our key pick in the Indian capital goods space
We maintain our Buy rating and price target of Rs2,750 on BHEL. This is our top pick
among capital goods stocks.

UBS :: India Metals & Mining -- Cabinet approves draft Mining Bill

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UBS Investment Research
India Metals & Mining
C abinet approves draft Mining Bill
􀂄 Event: Cabinet approves draft Mining Bill; approved by GoM in July
As per media reports, the Union cabinet has passed the draft Mining Bill which
was approved by the GoM (group of ministers) headed by the Finance Minister in
July, 2011. The bill will now be presented to the Parliamentary Standing
Committee for further discussion with all stakeholders after which it will be tabled
in the Parliament for voting. There is no clarity on the timelines as of now. Key
features of the bill- a) Non-coal minerals: Royalty to be doubled from the existing
rates; applicable to merchant/captive miners b) 26% tax on PAT for coal applicable
to both existing and upcoming mines.
􀂄 Impact: Pure miners could get hit most; Steel/metals less impacted
As we had already highlighted in our note “GoM approves draft mining bill” dated
Jul 11, 2011, worst case analysis (assuming no offset against CSR expenses/no
increase in prices) shows that earnings of a) pure miners such as Coal India/Sesa
Goa could get hit most (c19%/23% of PAT) b) value adders’ profits (steel/metal
companies) would be less impacted (<12-13%). 26% profit share for CIL is only
applicable to mining PAT (excluding other/interest income - is c30% of PAT).
􀂄 Action: Clarifications awaited; Draft bill could still see some delay/changes
We await clarity on issues such as 1) Profit sharing methodology for captive coal
mining of steel/metal/power companies 2) Will companies like Coal India increase
prices to offset potential impact of 26% profit share. Coal India in the past had said
it will raise prices if it’s required to share 26% of PAT 3) Will 26% tax on PAT be
tax deductible for tax accounting.


Impact on Coal India
Other income accounts for close to 30% of Coal India’s PAT. 26% profit share
is applicable only to mining profits; it is not applicable to other income/interest
income. Hence worst case impact on CIL will be close to 19%. CIL might
increase prices to offset the impact.

􀁑 Assuming other income is not taxable and the resultant mining tax outflow is
not tax deductible for income tax accounting, the effective mining tax would
have been 17%/18% for FY10/11 and c19% for FY12/13 which is
significantly lesser than the 26% headline number.
􀁑 We believe the applicable financial year for this bill to be effective would be
no earlier than FY13.
􀁑 Coal India spent c20%/21% of FY10/FY11 PAT on social expenditure. Our
channel checks suggest that social spending will not be allowed to set off
against mining tax. However, if CIL wants it can lower the social
expenditure, in which case the final impact on PAT is likely to be lower than
19% for FY12/FY13.
􀁑 Additionally, there is also a probability of CIL passing on a part of/complete
impact due to the mining tax to its customers as it does with some of the
state/level surcharges/cess etc. Alternatively, CIL can increase prices to
partially/fully offset the impact.


Additional tax or a much needed reform?
Apart from doubling royalty for non-coal minerals and imposing 26% tax on
PAT for coal companies, the bill (as per media reports) proposes to:
􀁑 Create a Mineral Development Fund in every district, in which profit and
royalty shared by miners will be deposited and spent on the local population
and area development.
􀁑 Give automatic mining approvals once a discovery is made after prospecting.
Currently, miners need separate approvals for surveying deposits,
prospecting and mining.
􀁑 Free state governments from taking the federal government's approval for
granting mining leases.
􀁑 Set up a) National Mining Regulatory Authority to address cases of illegal
mining and b) special courts in the State level for quicker resolution of the
cases.
􀁑 Allow mining of small deposits in clusters where cooperatives can also apply.
􀁑 Introduce a:
— Central cess equivalent to 2.5% of excise or customs duty to meet the
expenditure of an independent National Mining Tribunal and National
Mining Regulatory Authority at the Central level, and the capacity
building of the Indian Bureau of Mines.
— State cess of 10 % of total royalty.
We believe that though the mining bill is likely to increase the tax burden on the
miners, it will help reform the mining sector and facilitate investments. However,
earnings for companies with mining operations are likely to be negatively
impacted.
There are concerns that these higher taxes could make mining investment
unattractive, which we believe will not necessarily be the case. For ex: State run
companies like NMDC/CIL despite being public sector companies (and selling
iron ore/coal at discount to international prices) have had average ROEs during
FY07-FY11 of 40%/31% respectively.
We believe there is enough scope for the sector to absorb these additional costs
by efficiency gains etc.


Areas of Uncertainty/ Clarity Awaited
􀁑 Coal India’s stance on whether it will raise coal prices to offset any –ve
impact due to the new policy. As per our estimates Coal India would require
to increase prices by c5-6% in FY12/13 to offset the impact of a 26% profit
sharing.
􀁑 Treatment of over-burden, depreciation, depletion for the purpose of
computation of PAT in the case of Coal India and captive coal consuming
companies?
􀁑 Will the mining tax outflow be treated as an expense for income tax
computation?
􀁑 There is no clarity on the definite timeline by when this would be
implemented. Media reports indicate that the bill could be tabled in the
Parliament for voting in the winter session. However, there is always a
possibility that there could be procedural delays and prolonged deliberations
in the standing committee. We are not sure whether this would impact
companies’ earnings’ even for FY13.
􀁑 Statement of Risk
We believe a sharp fall in metal prices which are linked to global economic
growth, would be the key risk factor for the stocks in the sector.

UBS:: Motherson Sumi -SMFL files draft IPO document

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UBS Investment Research
Motherson Sumi Systems
S MFL files draft IPO document
􀂄 Event: SMFL files draft IPO prospectus with SEBI
Samvardhana Motherson Finance Ltd (SMFL) has filed a draft red herring
prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) for an
IPO aggregating Rs17.5bn (new share issuance of Rs14.13 bn and Rs3.4bn stake
sale by promoter group company). SMFL has a 36.34% stake in Motherson Sumi
Systems (MSSL), 49% in Samvardhana Motherson Reflectec (SMR), and is
present in other businesses (see next page).
􀂄 Impact: proposed capital raising in SMFL could support capex, lower debt
MSSL, which has businesses partly similar to SMFL, is currently trading at a
trailing PE of 17.3x FY11. SMFL consolidated restated net profit was Rs1.4bn in
2011, as per the DRHP. Capital raising in SMFL could support capex and lower
debt for its subsidiaries SMR and Peguform (acquisition under process). Group
structure continues to be complex due to cross-holdings and could impact investor
sentiment, in our view.
􀂄 Action: good management track record, SMR/Peguform scale-up
We maintain our Buy rating with a price target of Rs280. Our positive stance is
premised on management track record, historical capital discipline, high return
ratios, and scale-up potential of SMR and Peguform. The MSSL stock is trading at
a FY12/13E PE of 14.3x/11.0x. Key risks are a global recession, Europe macro
risks, and the outcome of any proposed group capital-raising activity, which could
impact investor sentiment on the stock.
􀂄 Valuation: maintain Buy rating with Rs280 price target
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 12.0% WACC

Commodities - Consideration of the cost curve again ::Macquarie Research,

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Commodities Comment
Consideration of the cost curve again
Feature article
 We assess current commodity prices against the cost of the marginal
producer. After the recent sell-off, more metals prices are now impacting the
curve, but in most cases it remains Chinese supply under pressure.
Latest news
 After a torrid last week, base metals suddenly surged on Tuesday as
expectations of a coordinated effort to sort out (or at least patch over) Europe
fuelled both risk-on and short covering. Lead and tin both jumped over 7%,
while copper jumped 4.5% to back above $7,500/t.
 Precious metals also gained, with gold up 3.8% as the rush to liquidate
positions reversed. With this, gold is now trading almost $90/oz above
platinum, and we would reiterate that the fundamentals for the latter look
much better, given the lack of supply growth and mine destocking this year.
The silver yo-yo was on an upswing today, up 19% to $33.5/oz.
 Workers at Teck's Highland Valley copper mine 280km north of Vancouver in
British Columbia, Canada, have voted to strike unless the company accedes
to their contract demands, including a significant increase in wages.
Negotiations between management and the union are set to resume on 28
September and the current labour contract is due to expire on 30
September. Highland Valley is the company's largest copper mine, producing
99,000t of copper-in-concentrate in 2010, equal to 0.5% of world output. The
strike vote comes only days after Teck announced a C$475m investment to
raise output and extend the life of the mine and is indicative of increasingly
fractious industrial relations in the mining industry, which raises the risk of
further disruptions to supply. In the case of copper, of course, such
disruptions have been a major contributory factor to the deficits seen in the
market in six of the last eight years.
 The latest data release from the American Iron and Steel Institute (AISI)
shows signs of a slight pullback in crude steel output last week. The body
estimates output at 87.3mtpa, down 1.8% WoW and equivalent to a utilisation
rate of 75.7%. However, this remains close to three-year highs, and the YTD
average of 86.2mtpa is up 6.6% YoY.
 ArcelorMittal has confirmed the commencement of iron ore output at its Mt
Nimba operation in Liberia, making it one of the very few West African iron ore
projects to have broken ground as yet. The project included reconstruction of
the necessary infrastructure to support the operation, including the 240km
railway and redevelopment of Buchannan port. The area had previously been
mined by Liberian state-owned miners until the 1980s. The company expects
to ship 4mt in 2012, in line with our current modelling.
 India’s JSW Steel has been forced to scale down production at its Vijayanagar
plant to just 30% of capacity due to an “abrupt disruption” to iron ore supply.
The catalyst was an order by the Supreme Court over the weekend that
material from state-owned miner NMDC must be sold via e-auction,
regardless of long-term contracts. Such a move makes it difficult for any
steelmaker to run furnaces practically given the lack of certainty in ore supply.
Macquarie hosted a call with senior JSW Steel management on Tuesday; for
replay details please contact your Macquarie sales representative.

UBS :: TVS Motor Company- Positive catalysts ahead

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UBS Investment Research
TVS Motor Company Ltd.
P ositive catalysts ahead
􀂄 Event: Positive catalysts ahead
TVS reported strong Sept. vol. growth of 17% yoy led by scooters and exports vol.
growth of 30% & 27% yoy. We believe continued strength in volume growth in
festive season and strong Q2FY12 results (primarily due to softening of
commodity prices and operating leverage) will be key driver of stock price
performance in near term. Lower losses in Indonesia, favourable mix and
increasing scale are key catalysts for earnings growth in next two years.
􀂄 Impact: raise EPS estimate by 10%/13% in FY12/13
We revise our volume estimates in line with company’s ytd performance resulting
in increase in proportion of 3W and exports in total volumes to 3.0%/3.7% and
14.7%/16.1% in FY12/13 from prior estimate of 2.5%/2.8% and
13.9%/14.7%.resp. We lower losses in Indonesian operations in FY12/13 to
Rs628m/Rs.491m from Rs.899m/Rs.801m. Higher than expected export incentive
rate of 5.5% also contributes to earning upgrades.
􀂄 Action: Reiterate Buy, raise price target to Rs.80
We raise PT to Rs.80 (from Rs.70) in order to reflect better earnings outlook (we
expect EBITDA margin increase of 120bps and EPS CAGR of 54% over FY11-
13). High competitive intensity in domestic and Indonesian market remains a key
overhang.
􀂄 Valuation: attractive at 5.2x EV/EBITDA FY13E
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. At our price target, the
stock’s implied valuation would be 12.4x FY13E PE

Reiterate Buy
We reiterate Buy and raise PT to Rs.80 in order to reflect better earnings outlook.
We increase our earnings estimate for FY12/13 by 10%/13% respectively
mainly to reflect
1. lower losses in Indonesian operations in FY12/13 to Rs628m/Rs.491m
from Rs.899m/Rs.801m (although we maintain it is unlikely that
company will be able to achieve cash breakeven by FY13)
2. favourable mix-We revise our volume estimates in line with company’s
ytd performance resulting in increase in proportion of 3W and exports
in total volumes to 3.0%/3.7% and 14.7%/16.1% in FY12/13 from prior
estimate of 2.5%/2.8% and 13.9%/14.7%.resp.
3. higher than expected rate of export incentives (replacing DEPB) at
5.5% (versus our estimate of 3%).
Valuation remains compelling
TVS is trading at significant discount of ~40% to its peers on EV/EBITDA
FY13E despite expectation of superior earnings growth (mainly due to low base).
We expect 60% and 49% EPS growth in FY12 and FY13, compared with
18%/20% for Hero Honda and 7%/7% for Bajaj Auto.
We believe current level of discount is not justified and stock should re-rate
from current levels following continued strength in scooter and motorcycles and
recovery in mopeds volume growth in festive season and sequentially strong
Q2FY12 (primarily due to softening of commodity prices and operating
leverage).


Volume mix to improve
We revise downwards our domestic volume growth assumption (primarily
moped and 3W) to reflect company’s ytd performance.
— We decrease domestic moped volume growth estimate to 12%/10% in
FY12/13 (from 18%/15%). Company has reported ytd moped volume
growth of 13%.
— We decrease domestic 3W volume growth estimate to -20% in FY12
(from 0%). We maintain our FY13 estimate at 15%. Ytd, company has
reported domestic 3W volume growth of -53%. We expect volume
growth to recover with opening up of new permits in Tamil Nadu,
Karnataka and West Bengal markets.
— We increase 3W exports volume growth estimate to 200%/50% in
FY12/13 (from 120%/40%). Company has reported ytd volume growth of
245%.
We believe our volume estimates capture growing competitive intensity in the
2W space primarily in scooters and TVS’s comparatively weaker product
portfolio in motorcycles segment. New product launches (potentially in FY13)
presents upside risk to our volume estimates.
The above revision in volume estimates results in overall mix improvement with
share of 3W and exports rising in proportion of total volumes.


􀁑 TVS Motor Company Ltd.
TVS Motor is India's third-largest two-wheeler company by volume. It has a
presence in all the product categories including mopeds (25% of two-wheeler
sales), where it has a 100% market share. TVS also has a strong position in the
scooter segment (22%); and motorcycles form the rest of its two-wheeler sales
(54%). TVS entered the three-wheeler (passenger) segment in FY08 and has
gained an around 5% market share. Exports and auto component sales constitute
about 11% and 15% of its total consolidated sales, respectively.
􀁑 Statement of Risk
The principal risks to our earnings estimates for auto companies are fluctuations
in sales volumes and raw material prices. Also demand is linked to various
factors including the economic growth rate and interest rates and this could
affect a company’s operations.

India Life Insurance Tracker Aug-11 : Volumes remain weak:: JPMorgan

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 Aug-11: Sluggish volumes: Volumes continue to remain sluggish due
to weak capital markets with just 2% m/m growth. The y/y
comparison is impacted by a high base impact. Our estimate of 5%
contraction for FY12 implies ~25% growth for the next 7mnts, which
we believe is achievable given positive growth expected after Sep-11
when base impact turns favorable.
 Base impact to turn favorable; most positive for ICICI/Reliance:
SBI Life gained sequential market share as HDFC/Max New York lost
share. Large insurers (ICICI/HDFC/SBI) has seen tick-up in market
share over last 3mnts. We expect positive volume growth for private
insurers from Oct-11, with base impact turning most favorable for
ICICI/Reliance.
 Product mix: Share of traditional policies continue to remain high at
~40%. In ULIP, there is a shift to NAV guarantee products given weak
capital markets. Ancedotal evidence from our recent visit to ICICI Pru
Life's branch in Kerala (South India financials trip) indicate that
agency force is now adjusting to new product mix and reduced ULIP
commission payouts but higher share of traditional policies have aided
overall agent incomes given higher commision payouts.
 Weak capital markets and high base impact continue to affect
growth. Though y/y growth is expected to improve, capital market
sluggishness may cap a sharp rebound in volumes. Reliance Capital
is the purest play on insurance with ~40% value from insurance -
Our conservative valuations for Rcap implies significant upside but
discounts may persist in the near term due to weak sentiment.

India: manufacturing PMI falls to a 2 year low accentuating fears of an industrial slowdown:: JPMorgan

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India: manufacturing PMI falls to a 2 year low accentuating fears of an industrial slowdown

Manufacturing PMI falls for a fifth successive month to its lowest level in 30 months, and is now barely in expansionary territory Output falls sharply reflecting the secular decline in new orders since March Surprisingly, however, new export orders tick back up, though it’s too early to assess if they have bottomed out While this is more evidence that industrial growth is expectedly moderating appreciably, services growth continues to remain relatively buoyant inducing us to retain our current GDP forecasts for FY12 While input prices moderate in September, output prices continue to remain sticky setting the stage for another sobering monthly inflation print The 2Q11 current account deficit widens sharply led by strong import growth and a widening of the trade deficit However, FDI flows bounce back sharply to ensure the BoP ends up in a healthy surplus   September manufacturing PMI barely in expansionary territory   Confirming fears that the industrial slowdown is likely to get more pronounced, India’s manufacturing PMI fell to 50.4 in September – barely in expansionary territory – from 52.6 in August. This is the lowest PMI reading since March 2009 – in the aftermath of the global financial crisis.   The drop in the PMI was led by a plunge in output, which fell almost 5 pts to 51.1 in September from 56 in August. That output would fall was not surprising, even if the magnitude did surprise on the upside. New orders have been on a secular decline since March, and the new orders/inventory ratio has followed suit. As such, it was inevitable that output would eventually follow       Today’s survey data is further confirmation that industrial growth (which printed at only 5.1 % in 1QFY12) is likely to slow further. In contrast, however, services growth is expected to remain relatively buoyant (consistent with strong service tax collections, for example) and agricultural growth is also likely to surprise on the upside. With services making up the bulk of economic activity (~ 60 % of GDP) we retain out FY12 growth forecasts of about 7.5% oya for now.     New orders fall but export orders surprisingly tick-up   If there was a ray of light in today’s survey data, it was on new orders. While new orders, at an aggregate level, continued to moderate (to 51.3 in September from 53.1 in August), new export orders surprisingly ticked up to 46.4 in September from 45 in August. It is, however, hazardous to read too much into this for now. The September increase could just be payback to the sustained moderation of new export orders over the last 4 months and the level still remains below the 50 threshold.     If, however, this is not an aberration and export orders continue to tick-up next month, it would add credence to the view that India’s increased geographical diversity of exports – with only a third of merchandise exports directed to the US and Euro Are – has relatively insulated its external sector, compared to some other Asian economies, from the slowdown in DMs     Mixed news on the price front   On the price front the news was mixed. There was some relief on the input price front (which fell to 62.1 in September from 65.6 in August) reflecting the fact that the sharp depreciation of the currency was more than offset by a moderation of global commodity prices in September. While this bodes well for future output prices, there was no joy in September. The output price index continued to remain sticky (55.5 in September vis-à-vis 55.6 in August) and, given that it is a good leading indicator of core manufacturing inflation, suggests that September core inflation is unlikely to moderate to any appreciable degree     2Q11 current account deficit rise sharply….   Contrary to market expectations, the 2Q current account deficit rose sharply to $14.2 billion from $5.4 billion the quarter before. The increase was driven both by a widening of the merchandise trade deficit as well as disappointing service export growth, reflecting slowing of activity in the US and Euro Area.   While merchandise exports continued their buoyant growth in the quarter (printing at $80.6 billion compared to $77.2 billion the quarter before), the trade deficit widened on strong import growth. As we have long been highlighting, the strength of imports reflects both that (i) the economy did not slow materially in 2Q, and (ii) that the inflation differential between India and her trading partners induced more imports at the margin.   Services, and software services in particular, disappointed which is understandable given that the bulk of these exports are concentrated to the US and Euro Area, and growth in the Euro area fell off sharply in 2Q.   With export growth likely to moderate in 3Q, it is possible that the current account deficit might widen further before it begins to narrow in response to a slowing domestic economic. As such, despite the CAD surprising on the upside, its run-rate is not inconsistent with that assumed in our BoP forecasts.     …but capital flows rise to the occasion   Despite the elevated CAD, capital flows rose to the occasion such that the BoP ended with the largest surplus in 7 quarters.   The most striking difference between 1Q11 and 2Q11 was in FDI flows. Recall, net FDI flows ground to a complete halt in 1Q ($ 0.6 billion), but rebounded sharply to $7.2 billion in 2Q – a level higher than that received all of last fiscal! This likely reflects the fact that governance bottlenecks that were holding back FDI flows into some of the large projects likely got clearances in 1Q. With the Reliance-BP deal accounting for another $6 billion in FDI flows (not reflected in the 1Q data), the risk to our FDI estimate for FY12 ($17 billion) is to the upside.   Portfolio flows were predictable muted and, equity flows in particular, are likely to remain that way until global risk aversion abates. Debt flows have been more stable and could get a boost in the coming quarters as authorities have relaxed the constraints on FII investment into corporate bonds.   Incoming ECB’s continued to stay buoyant in Q2 (almost $6 billion) as the onshore-offshore interest rate differential continued to widen. However, with a number of ECB’s coming up for redemption this fiscal and next, the net number was more modest. However, total loans (ECBs and short term trade credits) are still tracking in line with our BoP forecasts for this fiscal.