Strategy: Exploring the money trail:: Kotak Sec,

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Strategy
Exploring the money trail. Our analysis of exports from India and FII inflows into India
in FY2011 shows wide gaps between reported official and bottom-up data. We
attribute this to data limitations partly but highlight that a better understanding of the
nature and type of exports and foreign inflows is critical (1) to fully appreciate the
drivers of exports and implications for BOP, reserves and exchange rate and (2) to
mitigate risks to the India economy from illicit ‘foreign’ flows, if any.


Difficult to explain surge in exports of engineering goods in FY2011 and the few prior years
Our study of exports data of major engineering companies (including automobiles and metals)
shows that the increase in their exports does not reconcile with the steep increase in official
exports data. In fact, the gap is quite substantial. Reported exports of engineering goods as per
official data jumped 79% yoy (US$30 bn) to US$68 bn in FY2011. On the other hand, exports of
the ‘engineering’ companies in the BSE-500 Index increased 11% yoy to `638 bn in FY2011 from
`577 bn in FY2010. Our observation holds true for the past few years too.
Difficult to explain surge in FII inflows in FY2011
Our bottom-up study of flows of FII funds and ETFs does not reconcile with the reported US$22 bn
of FII inflows in FY2011. At best, we can account for US$4.5 bn of FII flows based on data of listed
FIIs, ETFs and estimates of EPFR Global. We admit that EPFR Global data does not capture all the
sources of foreign institutional investment (sovereign and private equity funds, for example) that
can invest in India. Nonetheless, the difference is stark.
A few examples of remarkable growth in exports; hard to reconcile with publicly available data
A study of official exports data shows remarkable growth in two areas in the broad category of
engineering goods—(1) metal and metal products and (2) transport equipment. Exports of copper
cathodes grew 444% to `317 bn in FY2011 and was the key driver of US$17 bn growth in
exports in metal products. Similarly, a huge jump in exports of cars, drilling rigs and unclassified
ships accounted for the major portion of the US$9 bn increase in exports of transport equipment.
We didn’t see the same growth in exports of large listed companies.
Looking for credible explanations; better and more disclosures imperative
The gap between the surge in exports as per official data and a more muted performance of the
listed entities would suggest that (1) exports are largely being driven by smaller listed players or
unlisted entities or (2) the quality of data is suspect. We would like to believe credible explanations
exist for the aforementioned gaps with respect to (1) exports from India and (2) FII inflows into
India.

India Telecoms NTP 2011 draft - key takeaways: JPMorgan,

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India’s telecom minister, Kapil Sibal today announced its draft National
Telecom Policy 2011 (NTP 2011). Key positives include increased
availability of spectrum, spectrum sharing and pooling and a focus on
broadband, while key negatives are removal of roaming and market
determined spectrum pricing. What is also disappointing is that the draft NTP-
2011 is silent on key spectrum and licensing issues which are deferred to a
Spectrum Act, and also on M&A policy. While we are encouraged to see
progress toward clarity on the regulatory front and that the draft was released
within Mr. Sibal’s previously indicated timeframe, several issues remain
pending. The minister will seek responses from industry participants and plans
to announce a final policy by year-end. For full details, please see
http://www.dot.gov.in/NTP-2011/final-10.10.2011.pdf. Key issues below:
 NTP-2011 promises more spectrum: NTP 2011 targets making available
500Mhz of spectrum by 2020 (300MHz by 2017, another 200MHz by
2020). We are encouraged to see more spectrum as a key initiative but we
expect a lot of this to be back-ended as we believe existing spectrum users
need to be first moved elsewhere.
 One nation = no roaming: NTP 2011 proposes to remove the roaming
charge across the nation. For Bharti, we estimate the impact at 60bp of
consolidated group revenue and ~2pp on EBITDA, while for Idea we
believe this is 1pp of revenue and ~4pp of EBITDA. While telcos generate
~8-9% of their mobile revenue from roaming, we believe only national
roaming, which we believe is the majority of roaming volume but only
~20% of value, is impacted. International roaming stays intact.
 Several pending issues: The NTP 2011 proposes to enact a separate
Spectrum Act which will deal with re-farming/withdrawal of allotted
spectrum, spectrum pricing, cancellation or revocation of spectrum license,
exemptions on use of spectrum, spectrum sharing, spectrum trading, etc.
This implies that key issues like [1] spectrum pricing [2] potential payments
for “excess spectrum” [3] payments at time of spectrum renewal [4]
spectrum re-farming [5] license/spectrum fee and more remain outstanding.
The timing of further clarity here remains uncertain but we are hopeful for
further details by year-end before the final NTP 2011 is announced.
 We continue to expect Bharti to be relatively better placed to absorb
potential outflows once pending issues are resolved and to be less impacted
from removal on roaming.

Monthly: August 2011 – US market review:: US IMS review for August 11 and expected catalysts ::Nomura research,

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For August 2011, the US Rx increased 5.3% y-y. Market share in Aricept
and Valtrex stood at 31% and 28%, respectively. There are indications of
a potential resolution of FDA/DOJ issues and launch of generic Lipitor in
Nov 2011. Uncertainty remains on potential upside for the Lipitor
opportunity as settlement may involve payment of damages. We value
the Lipitor exclusivity at INR60/sh and build in a penalty of INR30/sh in
our valuation.
Sun Pharma + Taro
Prescriptions rose 11.5% y-y. Sun has not been able to garner
meaningful market share in generic Femara (USD650mn). For the week
ended 23 Sep, Sun had a 13% share in generic Uroxatral (USD200mn).
Dr. Reddy’s
Dr Reddy’s (DRRD) US TRx grew 33.2% y-y. Prograf market share grew
to 18.1% and Prevacid market share is 22.4%. Amongst the recent
launches, DRRD has 17.8% and 7.4% market share in generic Levaquin
(USD1.5bn) and generic Arixtra (USD340mn), respectively. We note that
the performance of Arixtra is a negative surprise as we were expecting
30-40% market share. During the month, DRRD received tentative
approval for generic Zometa (USD650mn). Key near-term product
opportunities: Zyprexa, Geodon, Seroquel, Prevacid OTC.
Lupin
Overall, Rx recorded 14.9% y-y growth for August 2011; Suprax TRx
grew at 10% y-y while Antara grew 2% y-y. LPC garnered 41% market
share in generic Levaquin (USD1.5bn) and received its first OC approval
for generic Nor QD (USD52mn) and tentative approval on generic Avapro
(USD500mn), which we expect to be launched in Sep 2013. Key nearterm
opportunities: Fortamet, OCs, Geodon.
Zydus Cadila
CDH’s US prescription grew 42.3% y-y in August 2011. CDH filed a Para
IV ANDA with Asacol HD (USD150mn) as the reference-listed drug. We
believe CDH may be FTF on the product. The company has not been
sued yet. As the patent challenged is a formulation patent, we believe the
generic challenge may prevail.
Glenmark
Overall prescriptions grew 26% y-y. Traction for older products and recent
launches like Ondansetron, omeprazole and Mupirocin fueled growth. A
district court ruled against Glenmark in Tarka (USD50mn) litigation. The
court upheld the ‘244 patent and granted supplemental damages to Abbott
over and above the USD16mn already granted by the jury. We estimate
supplemental damages to be a fraction of USD16mn.

BPCL: Further evidence of positive E&P outlook - but well discounted, stay Neutral:: JPMorgan,

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Anadarko Petroleum, the operator of the Mozambique gas block where
BPCL holds a 10% stake, announced a successful test well, post which
Anadarko expects the block to hold ~10TCF of recoverable gas reserves.
Plans for 2 LNG trains are now being drawn up. While this continues the
positive news flow on BPCL's emerging E&P portfolio, we believe E&P
successes are well discounted in valuations and maintain Neutral rating.
 Successful test well in Mozambique: Anadarko Petroleum announced
that the Camarao test well encountered 380 net feet of natural gas play.
This continues successful exploratory/appraisal efforts in the
Mozambique block (4 earlier successful wells).
 Now expect 10TCF of recoverable reserves: Anadarko sees static
connectivity between the Camarao well and the previously drilled
Windjammer and Lagosta wells. Anadarko now expects the
Windjammer, Barquentine, Lagosta and Camarao complex to hold
~10TCF of recoverable reserves (6TCF earlier). Anadarko is hopeful of
further upward revisions to resource estimates, post evaluation of 2 new
3D seismic datasets and further exploratory activities. A second drillship
has been mobilized to speed up activities.
 2 LNG trains planned: Based on the expanded resource base potential,
2 LNG trains (5mmtpa each) are being planned, with the flexibility to
develop additional trains on further exploration and appraisal results.
 E&P newsflow upbeat, but well discounted: While continuing
successes in E&P is sentiment positive, and help de-risk earnings in the
long-term, we believe given the long time-lines and potential geopolitical
risks, the Mozambique E&P option is well-discounted in current
valuations for BPCL (we build Rs55/share). We have made marginal
adjustment to BPCL earnings, updating for FY11 disclosures, but our PT
remains unchanged at Rs715. Near-term risk on higher subsidy sharing
will continue to weigh on the stock, we maintain our Neutral rating.

Media: Mandatory Addressable Digitization, finally: Part 2:: Kotak Sec,

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Media
India
Mandatory Addressable Digitization, finally: Part 2. The government has cleared
the ordinance approving Mandatory Addressable Digitization in India. We continue to
foresee the transformation of organized C&S TV as a result: (1) increased channel
capacity, (2) consumer choice of channels but most important, (3) transparency of
subscriber ARPUs resulting in improved financial returns. We highlight upside for
(1) C&S broadcasters (Zee, Sun, TV18: improved subscription revenues, reduced
placement fees) and (2) C&S distributors (Dish TV, Hathway, DEN: growth in paying
subscriber base, higher ARPUs, consolidation). The 3-year timeline is aggressive (given
>100 mn subscriber converting to digital) and likely to be revised, in our view.


What is the Mandatory-Addressable-Digitization (MAD)-ness all about?
Exhibit 1 presents the current state of the C&S distribution market in India, which shows that
analog cable is the dominant platform in India. From the consumer point of view, the simple
change from analog to digital (Digitization) would imply that a set-top- box (STB) would be
required to watch the C&S TV channels. However, digital TV is significantly superior to analog in
terms of (1) bandwidth efficiency (ability to carry ~1,000 channels versus 100 channels in analog)
and (2) picture quality (consistent across channels versus ~40 good-quality channels in analog).
The shift to digital from analog would be Mandatory as per the sunset dates (Exhibit 2) proposed
by MIB (analog signals of C&S TV channels will be switched off).
However, the key factor behind all the MAD-ness is Addressability (as opposed to un-addressable
digitization currently being voluntary implemented). The key issue as regards organized C&S TV in
India has been under-declaration of subscribers by unorganized local cable operators (LCOs) in the
analog cable system; this has resulted in (1) low MSO and C&S broadcaster share in subscriber
ARPU (Exhibit 3) and (2) low subscriber ARPUs (Exhibit 4). The subscriber base will become
transparent in Addressable Digitization; this would likely result in more equitable revenue sharing
between LCOs, MSOs and broadcasters in the C&S TV value chain.
Positive for C&S broadcasters: higher subscription revenue, reduced placement fees
Exhibit 6 presents our assumed breakdown of C&S TV subscriber base in Mandatory Addressable
Digitization scenario in India in FY2015E (versus current assumptions). Exhibit 7 presents the
increase in broadcaster share of consumer ARPU in case of digital cable, largely equivalent to DTH.
Exhibit 8 presents the potential upside to Zee’s domestic subscription revenues in FY2015E in
Mandatory Addressable Digitization scenario (versus current assumptions). We highlight 44%
higher domestic subscription revenues given value derived from digital subscriber is 2-3X analog;
incremental revenues will directly flow to EBITDA/FCF given modest incremental cost. However,
the positives need to be weighed against micro issues with Zee (sharp decline in Zee TV ratings)
and Sun (complex operational, political and legal issues).
Positive for C&S distributors: Subscriber growth and likely higher ARPUs for Dish TV
We revisit our assumed breakdown of C&S TV subscriber base in a Mandatory Addressable
Digitization scenario in India in FY2015E (versus current assumptions) in Exhibit 6; large MSOs
concede in our discussions that 20-40% churn in cable subscriber base is possible (25% higher
DTH subscriber base). Cable ARPUs may increase, assuming LCOs would wish to maintain prior
revenue/profitability levels and MSOs improved returns on investment (Exhibit 9). Most important,
DTH may break into urban markets given subscriber shift to HD services (not available on cable).
Exhibit 10 presents the sensitivity of Dish TV valuation to various key operating variables. However,
the positives need to be weighed against rise in competitive intensity (land-grab), likely resulting in
higher subscriber acquisition cost (~Rs3,000 from ~Rs2,000 currently).

Cognizant Results: Implications for Indian IT 􀂉 CLSA

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Cognizant Results: Implications for Indian IT
􀂉 Cognizant (CTSH US, Not Rated) will report Sep-11 qtr (3Q11) results
and give updated guidance for 2011 on 2nd Nov, pre US market open.
􀂉 For 3Q11: 8.8%QQ revenue growth is possible (c.f. 5.7% guidance).
This is likely to be at the top end of peers in the IT off-shoring space, inline
with Cognizant’s historical sector-leading performance.
􀂉 For 4Q11 (Dec-11): We expect revenue growth guidance of ~4.5%QQ.
􀂉 For full year 2011: We expect revenue growth guidance to be increased
to ~34%YY growth from at least 32%YY currently.
􀂉 While the results will once again re-inforce Cognizant’s sector-leading
position, the street will look for cues on 2012 trajectory.
􀂉 We remain cautious on the IT services space for now.
Cognizant: Set to become the 2nd largest Indian IT vendor?
Cognizant employs over 118,000 professionals, making it the 3rd largest offshore
IT services vendor after TCS and Infosys. While we do not cover the stock, readthrough
from its results is important for peer stocks, and we expect the upcoming
report on 2nd November to be a strong one though it is unlikely to give clarity on
the key question that matters; how will 2012 demand shape-up?
In Mar-09 quarter, Infosys’ quarterly revenues were 50% higher than Cognizant
and that gap will likely be reduced to just 8% in the Sep-11 quarter. Cognizant’s
revenue now trails Infosys by just 2 quarters and assuming Infosys and Cognizant
continue at their recent growth rates, Cognizant will most likely overtake Infosys on
quarterly revenues by the end of 2012. Interestingly, the quarterly revenue gap
between Infosys and Cognizant in Sep-11 will likely reach the one seen back in
Dec-02 quarter, almost 9 years back.

News Update:: CLSA India - 16 October 2011

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News headlines: Corporate
􀂉 Maruti would shut its Gurgaon plant for two days due to
component supply constraints from Suzuki Powertrain India, where
workers were on a stir in support of the strike at the company's
Manesar plant. (BS)
􀂉 HPCL had shut fuel supply for four-five hours to Kingfisher
Airlines on Thursday evening across all airports over non-payment
of dues. This forced the airlines to reschedule flights for second
time in four months. (ET)
􀂉 Hyundai Motor has launched its entry level compact car Eon at
an introductory price of Rs0.27mn (ex-showroom Delhi). (BS)
􀂉 As per sources, the process of merging the cement business of
Century Textiles with Ultratech may have started. (BS)
News headlines: Economic and political
􀂉 Food inflation measured by WPI declined marginally, but was still
high at 9.32%YoY for the week ended October 1. (BS)
􀂉 The World Steel Association has cut India's steel use growth
forecast to 4.3%YoY in 2011 from earlier projection of 13.3%. (BL)


􀂉 Cabinet has approved a new policy for acquisition of raw material
assets abroad by central PSUs with a three year record of profit,
vesting more powers with Maharatna and Navratna companies for
such buy-outs. (BS)
􀂉 A Group of Ministers (GoM) headed by the Finance Minister has
accepted most of the recommendations made by the Ashok Chawla
committee. Amongst other things, the panel had suggested a
movement towards market determined natural gas prices. (ET)
􀂉 The Cabinet approved the introduction of the Enforcement of
Security Interest and Recovery of Debts Laws (Amendment) Bill,
2011, in the next Winter Session of Parliament. The proposed
amendments would enable banks to improve their operational
efficiency, deploy more funds for credit disbursement to retail
investors, home loan borrowers, etc, without fearing for recovery,
thus bringing about equity. (BS)
News headlines: Corporate
􀂉 The Oil Ministry has allocated 7.23 mmscmd of natural gas from
ONGC’s fields to power and fertiliser firms, including Reliance
Infra, NTPC and National Fertilisers Ltd. (BS)
􀂉 The Coal Mines Officers Association (CMOAI), which represents
Coal India’s management cadres, has called for a nation wide
strike on November 15, to demand payment of salary arrears. (ET)
􀂉 Volvo Buses plans to invest about Rs4bn in India in a new plant
as well as expand its existing facility near Bangalore. (BL)
􀂉 Suzlon has disposed of its remaining 26.06% stake in Hansen
Transmissions and has received sale proceeds of Rs8.9bn. (BS)
􀂉 Infosys has clarified that it was not in talks to acquire the
healthcare business of Thomson Reuters Corp. (BS)
􀂉 HDFC Bank has tied up with Diners Club International to issue
Diners Club International credit cards in India. (BL)
􀂉 Amazon has agreed to invest US$100 million more on their facility
in the state of Andhra Pradesh. (BL)
􀂉 As per a government official, the Orissa State Pollution Control
Board has issued a closure notice to 10 sponge iron units of the
Bhushan Group of companies over violation of pollution control
norms. (FE)
􀂉 As per the secretary of Financial Services, the government plans to
infuse Rs8-45bn of funds in SBI by March 2012. (BS)
􀂉 Indian Railways plan to issue tax-free bonds to raise around
Rs100bn. (BS)
􀂉 Tata Steel may cut production further in Europe in the next few
months if steel orders weaken. The company had already cut
production capacity from 85-90% in the first half this year to 80-
85% currently. (BS)

upgrade to BUY:: IRB Infrastructure: Sector remains hyperactive, IRB seems well positioned:: Kotak Sec,

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IRB Infrastructure (IRB)
Infrastructure
Sector remains hyperactive, IRB seems well positioned. The road sector bustles with
activity (over 3,330 km awarded in FY2012 so far, potential sell downs of earlier
projects by developers, PE investors). Recent bidding reflects some reduction in the
number of bidders, competition is unlikely to ease as new bidders are entering the pool.
We upgrade IRB to BUY (TP: Rs200 from Rs185 earlier)) on (1) about 20% upside to TP,
(2) strong balance sheet and execution, (3) reassuring data from Tumkur project and
(4) higher inflation and blending overseas borrowings aiding value.


Sector in the throes of activity with increased awards, sell downs, private equity transactions
We note the continued flurry of activities in the road sector such as (1) strong pick up in award
activity by NHAI; has already awarded over 3,300 km of road projects in FY2012 so far (targets to
award 7,300 km in FY2012), (2) several projects have not yet started construction despite being
awarded more than a year ago (Reliance Infra, Transtroy, KMC and HCC), (3) potential sell down
of several projects (may come in at reasonable valuations for acquirers) and (4) private equity
money still pouring in (Soma, Isolux, HCC, Sadbhav); may be an impediment to reducing
competition.
Recent projects had slightly fewer bidders but we do not expect overall competition to ease up
There have fewer bidders per project in the recent past (8-10 bidders per project versus over 20
previously), however, the competitive intensity may not have eased as (1) several projects which
witnessed lower interest were in relatively unattractive geographies (Orissa, Bihar, UP), (2) entry of
several new names into the bidding pool (Atlanta-Essar, Abhijit, Essel etc.) and (3) equity
requirements is lower than what it appears as construction helps generate part of the equity.
IRB seems well positioned with a strong project portfolio, balance sheet; upgrade to BUY
Upgrade to BUY (from ADD) based on (1) 18-19% upside to TP (substantial correction post
Ahmedabad-Vadodara win), (2) positive data from Tumkur-Chitradurg project reassuring us on
projected toll collections on under construction projects, (3) higher inflation aiding toll revenues,
(4) strong balance sheet and execution capability and (4) potential for lower interest cost with
likely increase in foreign borrowing being used to fund projects. TP implies 1.8X P/B (18-20%
equity IRR including construction) + value for Mumbai Pune (excess returns separately added).
Key risk is of incremental project wins at relatively lower returns. Concerns seem to be in the price
as we (1) do not ascribe any value to incremental wins, (2) construction business is valued only for
NPV of cash flows over the next four years and (3) of the seven projects which at present do not
have established cash flows, four were won in a relatively low competitive environment and
Tumkur-Chitradurg has demonstrated stronger-than-expected toll collections in 1QFY12

Economy: August IIP: Clear signs of slowdown: Kotak Sec,

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Economy
Industrial Production
August IIP: Clear signs of slowdown. The August outturn of IIP pointed to signs of
moderation in the economy with growth at 4.1% against consensus expectations of
4.7%. Intermediate goods and consumer durables have continued to see weak growth.
Seen in conjunction with other indicators like the manufacturing PMI and the trend in
excise duty collections, industrial production is clearly slowing. However, we do not
expect a hard landing of the economy as enablers from the fiscal side as also higher
rural incomes keep the domestic consumption momentum intact. July IIP growth was
revised to 3.8% from 3.3%.


Manufacturing sector grows at 4.5%; mining production contracts by 3.4%
In line with our expectations of a tepid growth in August, the manufacturing sector grew by 4.5%
on a yoy basis even as it contracted by 2.8% mom. In fact, on a sectoral basis all three sectors
(mining, manufacturing and electricity) fell from July levels. This is not entirely unexpected given
the monsoons in August (seasonal effect) and a general slowdown in the economy. At a 2-digit
level, sectors like ’basic metals‘ (11.2%), ’radio, TV and communication equipment & apparatus‘
(12.5%) and ’other transport equipment‘ (12.1%) showed strong growth while ’textiles‘ ((-)3.8%)
and ’machinery and equipment n.e.c.’ ((-)0.7%) have continued to be weak. Mining sector
contracted by 3.4% (contraction of 6% mom) after a growth of 1.5% in July. Electricity sector
came in at 9.5%, higher than 8.9% indicated in core sectors production release.
Signs of slowdown in economy showing in consumer durables and intermediate goods
From a use-based perspective the signs of slowdown are more evident. Consumer durables
production grew by 4.6% but more importantly it saw contraction of 9.6% on an mom basis.
Passenger cars production, which forms a significant part of this index, contracted by 9.3% in
August and 9.4% in September which is likely to negatively affect consumer durables index in
September too. Intermediate goods continued to remain muted at 1.3%, up from (-)0.5% in July.
Capital goods production came in at 3.9% while basic goods came in at 5.4%.
Growth slowdown is being indicated by other key variables
Along with the IIP being on a moderating path, other key leading indicators point towards a
slower growth. The manufacturing PMI has dipped close to the contraction zone of 50 (see Exhibit
1), while the services PMI is already below 50. Excise duty collections growth, which has historically
been closely correlated with industrial production, is also on a downward trend (see Exhibit 2). We
also expect that earnings growth for the BSE-30 companies (ex-energy) to be lower in 2QFY12E
compared to 1QFY12, indicative of the pressures faced by the companies (see Exhibit 3). Concerns
on the investment cycle due to high interest costs and low investor confidence (due to an almost
full policy paralysis from the government) is also likely to keep growth bias on the lower side.
A policy dilemma for the RBI – need to now choose between inflation and growth
Inflation is still expected to be high (September print likely at 9.86%). However, growth concerns
have now increased, also clearly evident in some of the lead indicators that we follow. On the
other hand, the momentary return to risk appetite notwithstanding, the overall concerns of a
global slowdown and European debt issues are unlikely to be resolved soon. Even as the RBI’s
stance of monetary policy might not change due to the high inflation levels, it may be ideal for the
RBI to pause now and assess the implications of the previous policy hikes, especially in an
atmosphere of heightened risks to global growth and thus a possible downward bias to energy
prices in the medium term. Thus, the RBI could lean towards a pause on October 25.

Infosys Technologies: On balance, positive:: Kotak Sec,

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Infosys Technologies (INFO)
Technology
On balance, positive. Infosys reported an in-line operational quarter; however,
substantial revision in earnings guidance, led by Rupee depreciation, surprised us
positively. After a series of execution hiccups, Infosys is finally getting back on track.
New organization structure with reduced number of P&Ls, people movement across
roles, greater volume focus, aggressive deal participation, and investments in consulting
are important enablers that will lead to catch up with peers on revenue growth. We
increase FY2012/13E EPS estimate by 5%/1% and TP to Rs3,000 (Rs2,900 earlier). BUY.


Volume growth encouraging after a long time
Revenue momentum at Infosys is finally building up after a series of execution challenges over the
past few quarters and ‘lack of active participation in deals’ which weakened the order book.
Infosys reported decent volumes growth of 4.5% in 2QFY12. Revenues growth of 4.5% qoq (5%
constant currency) to US$1,746 mn was broad-based barring very strong qoq growth in the lowbase
healthcare vertical. EBITDA margins increased by 190 bps qoq to 31% due to Rupee
depreciation and offshore pricing gain; note Infosys has not utilized any levers to shore up margins.
Net income of Rs19.1 bn (+11% qoq, +10% yoy) was marginally lower than our estimate.
Revenue guidance unchanged on constant currency, a strong indicator
Infosys reduced FY2012E revenue guidance by 1% to 17-19% from 18-20% earlier. Confidence
of sustained growth reflects in the strong 3.2-5.4% qoq growth guidance for 3Q and the implied
3.3-5.6% growth in 4Q. Infosys could have very easily assumed a flat March quarter citing macro
uncertainty, that is has chosen not do so reflects the strength of demand environment for offshore
players. EPS guidance revision to Rs143-145 from Rs128-130 is primarily Rupee driven; guidance is
based on Re/US$ rate of 48.98 for 2H. We believe that the company has adequate buffers to
deliver EPS in this range even if Rupee was to appreciate a tad from these levels.
Getting execution engine back on track; BUY for a turnaround
Infosys’ performance has been impacted by a series of execution challenges including staffing, lack
of flexibility in strategic contracts and reorganization distractions (these concerns were construed
as business model challenges by the Street). However, several factors indicate that turnaround is
around the corner for Infosys including (1) strong deal pipeline and wins and (2) positive
management commentary, (3) improvement in utilization rates and reduction in attrition rates and
(4) strong recruitment. Foundation for turnaround was led by reorganization which has
accelerated decision making, tightening of sales execution, increased flexibility on deal structures
and aggressive deal participation. We revise FY2012/13E EPS to Rs141/162 from Rs134/160 earlier;
our estimates are based on a Re/US$ rate of 46.6/45.6. BUY; TP revised to Rs3,000/share.

Buy Sobha Developers: Sales soar but stock remains weak:: Kotak Sec,

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Sobha Developers (SOBHA)
Property
Sales soar but stock remains weak. Sobha’s 2QFY12E sales at 0.9 mn sq. ft are the
highest over the past 10 quarters despite concerns of a demand slowdown. The stock
though trades at 1XFY2012E book value and factors in only the carrying cost of land
holdings. Potential triggers: meeting the sales target of 3-3.5 mn sq. ft in FY2012E and
further evidence of a steady Bengaluru market; meanwhile, any softening in global IT
services demand would impact sales. Retain BUY with target price of Rs370/share.

2QFY12 sales fairly robust for Sobha and likely for Bengaluru market
Sobha has sold 0.94 mn sq. ft in 2QFY12E which is the highest in 10 quarters which have
otherwise had a range of 0.25-0.74 mn sq. ft. Sobha has launched projects in two new locations –
Mysore and Gurgaon, with sales of 0.12 mn sq. ft in 2QFY12E. Sobha’s FY2012E sales guidance
of 3-3.5 mn sq. ft now appears more plausible, having sold 1.6 mn sq. ft in 1HFY12E.
Launches also as per calendar with 3.3 mn sq. ft launched in 1HFY12E
Sobha has launched 8 mn sq. ft of projects in 1HFY12E, of which 3.3 mn sq. ft is available for sales
and the company seems within range of its launch guidance of 11.3 mn sq. ft in FY2012E. Projects
launched are across the pricing spectrum and include 0.4 mn sq. ft of plotted development, 0.2
mn sq. ft of presidential apartments, 0.1 mn sq. ft of row houses, 1.4 mn sq. ft of luxury and
super luxury projects and 1.1 mn sq. ft of township development.
Bengaluru market continues to witness steady growth
Absorption in the Bengaluru residential market (Sobha’s primary market) remains stable with
monthly absorption (based on 3-month rolling averages) of 4 – 4.9 mn sq. ft since October 2010.
Inventory is in line with the trend (16-17 months) and prices have also remained stable though we
see a possible marginal increase. We expect Bengaluru demand to continue to remain robust given
(1) the positive outlook on IT services demand which indicates a robust hiring trend and (2) a lack
of evidence of any significant speculative element built into either volumes or prices.
But stock refuses to budge despite trading at 1XFY2012E book value
We find Sobha attractive at current price levels as (1) Sobha is trading at FY2012E BV with an RoE
of 10% and (2) All of Sobha’s current EV is accounted for only by the PV of expected net cash
flows from current projects + book value of land + value of the contracting business. Our target
price is Rs370/share based on March 2013 NAV assuming a WACC of 15%. Key triggers include
meeting their sales target of 3-3.5 mn sq. ft in FY2012E and further evidence of a steady
Bengaluru market. Softening global IT services demand is the key risk as 35% of Sobha’s
customers are IT/ITES employees and around 60% take out a mortgage to buy Sobha’s
apartments.

Dr Reddy's Laboratories: Rs100 EPS in sight, but 17% of it is not sustainable:: Kotak Sec,

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Dr Reddy's Laboratories (DRRD)
Pharmaceuticals
Rs100 EPS in sight, but 17% of it is not sustainable. We believe DRL will not meet
its FY2013E sales guidance but will achieve ROCE guidance of 25%. We highlight that
the model of balanced growth is missing as 42% of its sales come from slow-moving
segments (PSAI, India, Germany), which are likely to grow at 6-8% over FY2012-13E.
With growth coming largely from the US, we believe the stock is highly susceptible to
earnings shocks on account of volatility in earnings (17% of FY2013E EPS is not
sustainable). Also, in the US, earnings are exposed to regulatory risks, delays in approval
and scale-up in market share. We maintain our REDUCE rating, PT at Rs1,660—(1) 20X
base business EPS of Rs82 (2) Rs16 from limited competition US launches.


Limited visibility of US$2.6-2.7 bn sales guidance; 17% of FY2013E EPS not sustainable
We see limited visibility of DRL’s FY2013E sales guidance and factor in sales of US$2.4 bn in
FY2013E (see Exhibit 3). However, we expect DRL to achieve its FY2013E ROCE guidance of 25%.
We expect capital employed of Rs84.6 bn in FY2013E versus Rs69.5 bn in FY2011 (CAGR of
around 10%) and estimate ROCE at 25% in FY2013E, implying EBIT of Rs21 bn, base business
EBIT margin of 17%. This implies an EPS of Rs98.5, however, we estimate 17% of FY2013E EPS is
not sustainable (see Exhibit 1).
Balanced growth model missing in DRL
We believe the model of balanced growth is missing in DRL as (1) 28% of DRL’s sales still come
from slow-moving PSAI segment and Germany, which has historically grown at a single-digit rate
since FY2009 (sales from Germany has declined). The PSAI segment saw poor gross margin of 26-
30% in FY2009-11, (down from 34% in FY2008), which is half of the levels seen in the generics
segment (60-65%). Coupled with a poor growth rate in India (14% of sales), we expect 42% of
DRL’s sales to grow between 6-8% over FY2012-13E in light of the FDA ban on the Mexico facility.
Higher sales and marketing expenses likely to keep base business margin subdued
Despite a significant pick-up in US sales in the past four quarters, EBITDA margin expansion has
not been commensurate for DRL (see Exhibit 5) due to higher SG&A cost led by an increase in MRs
in branded generics markets of India/Russia (30% of sales). DRL has doubled its sales force in India
and increased it by over 50% in Russia in FY2010-11 (see Exhibit 7) while increasing marketing
and promotional spend in India. We expect the base-business margin, adjusted for exclusive
launches in US, to remain under pressure and accordingly factor 21.5% EBITDA margin in
FY2012E versus 22% in FY2011/1QFY12. We estimate base business profit declining marginally in
FY2012E and factor in 24-28% growth over FY2013-14E (Exhibit 1). We estimate 2QFY12E PAT to
remain flat yoy at Rs2.8 bn despite sales growth of 14% due to (1) higher SG&A spend leading to
EBITDA margin remaining flat yoy, (2) higher interest cost and (3) higher tax rate

MotoGaze–October, 2011: ICICI Securities

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Festive season brightens volumes…
Volumes perk up but outlook remains cautious…
The commencement of the festive season saw the automotive industry
shift gears and post robust volume numbers. However, demand remains
under pressure as the outlook remains cautious on account of multiple
macro headwinds. The Society of  Indian Automobile Manufacturers
(SIAM) has significantly lowered its  passenger car growth forecast for
FY12 to 2-4% from its earlier estimate of 10-12% due to lower production
by the market leader Maruti Suzuki due to labour issues and also on
account of higher lending rates. The industry registered figures of ~1.83
million units in September 2011, up 9.2% on an MoM basis. The demand
remained buoyant in the two-wheeler segment driven by robust demand
from Tier-II cities and rural areas  coupled with lesser dependency on
vehicle financing (up 26.5% YoY). The volume growth of the industry in
September 2011 has been 21.9% on a YoY basis. Passenger car (PV)
segment grew tepidly at 3.1% YoY but a robust 21.3%  YoY (ex-Maruti).
The commercial vehicle (CV) segment continued its robust growth
resulting in a volume increase of 22% YoY driven by the LCV space, up
40.8% YoY.
New festive launches help revive consumer sentiment…
The early start of the festive season due to Navratri beginning in
September vis-à-vis October last year bundled with promotional schemes
and fresh product launches boosted volumes for the month. Moreover,
pre-season dealer stocking was higher during the month with impending
festivities. The companies endeavoured to lure back customers with an
array of new launches notable among which were Honda’s Brio, Nissan’s
Sunny and Mahindra XUV500. Also, Hyundai Eon, which is expected to be
launched in October,  will help boost further consumer sentiment. In the
two-wheeler space, the newly launched Bajaj Boxer 150 cc received a
good response selling ~20,000 units during the month.
Unrelenting macro headwinds remain an overhang on volumes…
The cost of ownership continues to remain high with fuel and commodity
prices holding up and high interest rate hurting buyer sentiment,
especially in the passenger vehicle space. Commodities have shown
mixed signs with rubber showing signs of correction while aluminium and
steel witnessed stiffness. According to estimates, global commodity prices
may remain at similar levels or soften slightly in the near to medium term
as the global growth outlook seems to have tapered off from earlier
estimates. Also, another interest rate hike of 25 bps during the month (12
th
hike in 18 months) added to the waning consumer sentiments. The petrol
price hike of | 3.14/litre during September added to the woes. Its impact is
evident in the passenger vehicle category (up 4.8 % YTD).
Industry outlook
We maintain our optimistic outlook towards volume growth in the sector.
We expect an industry wide volume growth of ~13% for FY12E. On an
index performance basis, the BSE Auto index has outperformed the BSE
Sensex with YoY return  of -14.7% as compared to -18.2% during the
same period. The demand, which remained buoyant in FY11, has shown
signs of slowing down due to fuel price hikes and higher interest rates.
Among our ICICIdirect.com auto coverage, we remain bullish on frontline
OEM stocks like Tata Motors. In the ancillary coverage, we find favourable
valuation in Exide Industries.

Telecom Sector: NTP - more hype than substance:: ICICI Securities,

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M o r e   h y p e   t h a n   s u b s t a n c e   i n   N T P   2 0 1 1 . . .
The Telecom Ministry has announced the draft of the New Telecom
Policy 2011. The draft on the new policy did seem to be consumer and
industry friendly and took cognizance of the need for enhanced
broadband penetration in the country and need for additional
spectrum. However, lack of clarity and strict timelines for
implementation was a dampener.
Key Highlights
• There would be a separate spectrum act with clear policies on
spectrum sharing, pooling and even trading of spectrum
• Allocation of spectrum would be delinked from telecom licenses
and be done through market mechanisms
• A “one nation – one license” strategy eliminating roaming charges
for consumers and eventual convergence of local and STD
charges. This would shave off ~4-6% of EBITDA of large
operators with Idea being most impacted. However, this would be
compensated with increase in headline tariffs and volume up tick
• “Infrastructure” status to be awarded to telecom industry, thus
making it eligible for fiscal and other incentives
• Make available additional 300 MHz spectrum for international
mobile telecommunications services by 2017 and another 200
MHz by 2020
• Frame an exit policy for telecom operators, which would further
aid in freeing up unutilised spectrum
• Review the Trai and Indian Telegraph Act
• Increase the rural teledensity to 35-60% by 2017 and 100% by
2020
• Achieve 175 million broadband connections at a minimum of 2
Mbps and up to 100 Mbps on demand by 2020
• Meet at least 80% of the telecom demand domestically by 2020.
This would help service providers bring down their costs
• Ease M&A rules for telecom service providers. However, we
believe none of the small operators are an attractive buy out
option  since most  of  them  are  caught  up  in  the  2G  scam  in  some
way or the other
O u t l o o k
The draft has been posted on the website of DoT for feedback. After
receiving feedback, an updated version will be prepared that will be
discussed by Trai and telecom operators.
Though the draft talked about the  spectrum management act and that
future spectrum would be given only through auction and conducting
regular spectrum audit, it did not mention one-time spectrum fees or
spectrum re-framing explicitly. Hence, the uncertainty regarding spectrum
pricing and fees continues. Both Bharti Airtel and Idea Cellular (under our
coverage universe) would be impacted the most by one-time spectrum
fees and spectrum re-farming. However, till further clarity emerges, we
maintain our  BUY  rating on Bharti Airtel and Idea Cellular with a target
price of | 450 and | 104, respectively. Though Reliance Communication
would be least impacted by spectrum pricing in the near term, we remain
cautious due to large debt and poor operating performance. We
recommend a HOLD rating on the stock with a target price of | 84.

Buy NTPC Target: Rs.220 ::Kotak Sec,

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NTPC
PRICE: RS.167 RECOMMENDATION: BUY
TARGET PRICE: RS.220 FY12E P/E: 14.2X
q Generation during the quarter has remained flat due to fuel supply constraints
as well as low demand from state utilities.
q Company plans to commission 4980 MW in FY12 but expect capacity addition
to remain at 3820 MW.
q We prefer NTPC in view of the strong balance sheet, dependence on domestic
coal and a fixed return model. We maintain BUY with a DCF price
target of Rs 220 (unchanged), thus valuing the stock at 2.4x FY12 BV.
q Concerns: continued to delay in capacity additions and fuel supply risk.
Highlights
n Power generation volume remained muted during the July-Aug 2011 period
partly due to grid restrictions as several SEBs backed away from buying power.
Most of the company's gas based units operated at lower PLF due to low demand
from state distribution utilities.
n Coal shortage continues to constrain power generation in the country. During the
April-Aug 2011 period, thermal power generation from coal was constrained due
to 89% realization of the overall coal requirement. During the month of August
2011, as against a coal estimated requirement of 31.3 MT only 27.9 MT of coal
was made available to the thermal power station. In case of NTPC, its
Kahalgaon unit continues to operate at sub-optimum levels due to shortage of
coal.
n The unit 6 of 500 MW at Farakka was commissioned in FY11 and is yet to stabilize
hence COD (Commercial Operation Date) has been delayed.
n Since mid-September, supply to NTPC's Ramagundam super thermal power
project, located in Andhra Pradesh, has been disrupted due to agitation by miners
at Singareni collieries (SCCL). The SCCL miners are agitating in support of
separate statehood of Telangana. The Ramagundam unit has a capacity of 2600
MW, of which it was generating about 1,520 MW with six units.
n During the quarter, the company commenced commercial operation of unit 3 of
500 MW at Simhadri. The company also declared commercial operation of unit 1
of phase II of 660 MW at Sipat in Q3 FY12, which was originally scheduled for
completion in FY11.
n So far as capacity addition in FY12 is concerned, the company has a plan of
adding 4320 MW consisting of 1320 MW at Sipat, 500 MW each at Simhadri
and Mauda and 1000 MW each at Vallur and Jhajjar. Out of this, the completion
of Mauda unit is on best-efforts basis.
n The company is contemplating reworking of capacity addition targets. It now
plans to add 4980 MW (660 MW spillover from FY11) in FY12. Instead of 1000
MW each at Vallur and Jhajjar, the company plans to commission 500 MW each
at these locations. The balance 1000 MW would be contributed Vindhyachal and
Rihand. In view of the company's past track record of missing out on capacity
addition targets, we expect the company to add 3820 MW in FY12.
n There has been some increase in receivables however there has not been any
cases of defaults by state utilities. By not paying on time these state distribution
utilities are forgoing rebate on timely payment. Recent tariff hikes 5-25% by
state utilities is a significant positive so far as restoring the financial health of
power sector is concerned.


n The company incurred a capex of Rs 101.4 bn in FY10 and had envisaged a
capex of Rs 223.5 bn in FY11. However, actual capex was much lower at Rs 128
bn. For FY12, the utility plans to spend Rs 264 bn towards capacity additions.
n With a view to expedite capacity addition and at the same time ensure competitive
price, the company placed orders on a bulk basis. During the quarter, the
company completed the awarding of 9 units of 800 MW on a bulk basis to 2-3
players.
Valuation and Recommendation
n NTPC is currently trading at 14.2x FY12 earnings and on a P/BV basis, the stock
trades at 1.9x FY12 book value.
n We maintain BUY with an unchanged DCF based price target of Rs 220, thus
valuing the stock at 2.4x FY12 BV.

Godrej Properties - Vikhroli option - Apparently not worth much ::JPMorgan

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 Announces agreement with Godrej & Boyce for Vikhroli land- GPL
has entered into an agreement with Godrej & Boyce to act as a
development manager for future development of company’s entire
Vikhroli land parcel (large land parcel in prime Mumbai suburb). GPL
will be responsible for conceptualization, design, sales & marketing of
all the phases of the project and will receive 10% of the overall revenues
from the project development as management fee. While the
announcement does provide clarity on the GPL’s economics in the
future Vikhroli development, it limits the role of GPL to development
manager against market expectations of being the JDA partner.
 Potential value accretion from Vikhroli lower than expected – In our
view, value accretion from Vikhroli development as development
manager would be much lower than GPL’s role as a JDA partner (which
the street was expecting). However, it would be ROE accretive given the
cost of construction would be borne by Godrej & Boyce. Note that the
first project (35 acre) is being executed as a JV agreement with 50%
stake implying even higher economics for GPL. Factoring a ~0.6msf of
project launch (residential project also announced today), it would be
earnings accretive by 1.1/share from FY14/15 onwards, on our estimates.
 Under a development manager agreement, we factor in sales and
marketing expense of 5% of revenues (50% margin) which are to be
borne by GPL. This is against the 6-7% S&M to sales ratio reported by
most developers. For JDA agreement, we factor in 40% stake in line with
most of the company’s JDA agreements.

12th UBS Auto Dealer Survey- Dealers expect seasonal uptick in sales

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UBS Investment Research
12th UBS Auto Dealer Survey
D ealers expect seasonal uptick in sales
􀂄 Improving demand due to upcoming festive season
Our UBS Composite Auto index at 60 indicates that the demand environment has
improved since our last survey due to improved outlook for new and used car sales
and improvement in finance availability. 79% of dealers expect sales to increase in
next two months, of which 58% expect sales to increase by more than 15% due to
upcoming festive season.
􀂄 Sales conversion dips a little; Finance rates higher but liberal lending
26% of dealers reported a drop in sales conversion while 68% said it remains at
normal. 47% of dealers (36% in our last survey) noticed that finance availability
has become more liberal than normal. Higher finance costs remain a concern with
74% of dealers reporting increase in interest rates in the past 2 months.
􀂄 Footfalls decline, discounts increase but inventory normalizes
45% of dealers report decline in footfalls in last two months of which 21% (5% in
our last survey) of dealers noticed a decline of more than 15%. Inventory levels
have declined with 39% of dealers (54% in last our survey) reporting inventory of
more than 4 weeks. 47% of dealers (62% in our last survey) indicated discounts
have increased further in the last 2 months.
􀂄 UBS India Auto Dealer Survey provides on the ground feedback
This is the 12th edition of the UBS India Auto Dealer Survey based on responses of
38 auto dealers based in 12 states across India. This product provides a detailed
analysis of the Indian Auto market based on a proprietary primary survey.

UBS :: Asia Tech Alpha Preferences

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UBS Investment Research
Asia Tech
A lpha Preferences
􀂄 Removing ZTE from our Most preferred list
We remove ZTE from our most preferred list as we believe it would face near term
headwind from a market-to-market loss of Nationz (around Rmb85m), where ZTE
holds 10% stake and FX losses of around Rmb 200mn. However, the UBS Buy
thesis remains unchanged, as expect GM to improve sequentially in 3Q driven by
the smartphone segment. Next catalyst for stock would be the capex hike by China
telcos, especially China Mobile and Unicom (likely to announce early next year).
􀂄 Removing Pegatron from Least pref. list
We remove Pegatron from our least preferred list after the stock is down 31% YTD
and has underperformed the broader market by 12.4%. The company registered
strong 3Q11 sales driven by stronger comm. revenue, which UBS Analyst Patrick
Chen ests. were up 10-15% QoQ (vs. flat guidance) on ramping iPhone 4S
shipments. Patrick believes there could be upside to Q3 margins due to higher
utilisation at both NB and smartphones on stronger than expected shipments.
However, maintains the Sell rating as he does not expect company to turn Op.
Profit in Q3.
􀂄 Remain O/W Wireless, Memory & Foundries
Most Preferred: Kinsus, Hynix Semiconductor, Samsung Electronics, TPK
Holding, & TSMC; Least Preferred: Acer, Nanya PCB, HCL Tech Hon Hai and
Wintek

Pantaloon Retail - Still waiting for cash flow….downgrade to Neutral ::JPMorgan

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 Pantaloon has witnessed a substantial decline (~38%) in market value
over the past month: This has been led by a) expectations of easing of FDI
regulations in multi-brand retail being belied, and b) cyclical concerns about
slowing discretionary spending, high leverage, increased working capital
requirements, and the inability to divest stake in non-retail businesses.
These concerns may continue to pose risks to our earnings estimates and are
an overhang on stock valuations, notwithstanding the low valuation (20x
FY12E and 16x FY13E P/E). We downgrade the stock to Neutral with a
Jun-12 PT of Rs210. We could become more constructive on the stock
closer to trough valuations (~16-17x). That said, the relaxation of FDI
norms in the multi-brand retail segment in India could lead to a significant
re-rating for the stock and poses an upside risk.
 Red flags on balance sheet make us more cautious: PRIL’s core retail
gross debt stood at Rs41.9B as of Jun-11. The increase in debt has been on
account of higher capex and increased working capital. Inventory as of
FY11 rose to 32.5% of sales (118 days) from 27% (99 days) in FY10. The
inventory rise was led by higher apparel (cotton) prices and aggressive store
expansion. With an estimated Rs20B of capex and working capital
requirements over FY11-13, we forecast the net debt/equity ratio (including
CCDS) for the company to rise to 1.6x. Pantaloon’s board has approved
fund-raising plans of upto Rs15B, although the timing remains uncertain in
the current volatile markets.
 We cut our FY12/FY13 EPS estimates by 26%/30% respectively largely
on the back of 1) lower sales growth (on deteriorating discretionary
spending), 2) increased depreciation charges, and 3) higher interest payouts.
We have raised our debt, capex, and working capital assumptions and now
expect Pantaloon to have negative FCF in FY12 and FY13.
 What could surprise from current levels? Any improvement in the
funding climate (monetisation of non-retail investments, relaxation in FDI
regulations in multi-brand retail) would make us more positive. Better-thanexpected
sales growth and an improved working capital cycle are upside
risks to our earnings and cash flow estimates. Key downside risks include a
deterioration in product mix and working capital, and weakness in consumer
demand.

Resurgent Euro weakens Dollar, aids Rupee :: Business Line

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After its steep fall against the US Dollar in the fortnight ended September 23, the Indian rupee has more-or-less held its ground , hovering around the 49 per dollar level.

Taking cues from the improving sentiment in the Euro zone and a strengthening Euro, the USD-INR pair has moved in the range of 48.75 to 49.46 over the past three weeks. On Friday, the INR closed at 49.02 a dollar, up 0.8 per cent from 49.43 on September 23.

EURO LIFT

If RBI intervention was considered instrumental in the rupee not breaching the 50 per dollar level during its free-fall in September, the subsequent range-bound movement in the USD-INR pair seem to be influenced, in good measure, by positive developments in the Euro Zone. The German Parliament approved a crucial increase in the EU bailout fund in the fag end of September. Now, with approval from Slovakia (the last country in the zone to ratify the fund) finally coming through last week, the decks seem to have been cleared for the €440 billion European Financial Stability Facility.

This resulted in a marked improvement in sentiment towards the Euro, which gained as much as 3.8 per cent against the USD last week to close at 1.388.

The sharp gain registered by the Euro suggests a reversal in the risk-aversion induced flight-to-the-dollar seen in September.

This seems to have rubbed off positively on many other currencies including the INR, which over the last week has gained 0.3 per cent against the dollar.

The rupee's gains against the dollar, though, seem to have been tempered by continuing concerns on the macro-economic front. The latest industrial production numbers were lacklustre, and inflation stubborn.

Also, the INR has weakened against the Euro, given the sharp rally in the latter.

As on Friday, a Euro yielded Rs 67.60, up 1.7 per cent from Rs 66.50 on September 23, and up 2.4 per cent from 66.04 on October 7.

RUB-OFF ON COMMODITY PRICES

The rupee, if it continues to strengthen against the dollar, may bring relief to Indian importers. However, this may be offset by an increase in commodity prices which seem to have received a fillip from the improving economic sentiment in Europe.

The price of crude oil (Brent), for instance, has gone up almost 9 per cent over the last week to around $115 a barrel.

Also, demand for gold seems to be again picking up with the price for the yellow metal up 1.2 per cent over the past week, and up 3.3 per cent over a fortnight.

Oct 16: Economy News & Corporate News: Kotak Sec,

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Economy News
4 The Maharashtra government and the Maharashtra Chamber of Housing
Industry (MCHI) have estimated that there has been at least 30 per cent
reduction in the real estate business in Mumbai (BS).
4 Finance ministry has accepted most of the recommendations of the
Ashok Chawla Committee that has suggested a transparent and marketbased
framework for allocation of natural resources (ET).
4 Bilateral trade between India and Africa is set to double from the current
$53 billion in the next five years, primarily triggered by the transport
equipment, services, healthcare and agriculture sectors (BS).
4 Food inflation declined marginally to 9.32% for the week ended October
1 (ET).
Corporate News
4 The sixteen-day tool-down strike declared by Bosch's union is called off
after the government of Karnataka issued a prohibitory order. The
employee union was against the firm's decision to outsource non-core
and support processes (ET).
4 Century Textile's cement biz set to merge with UltraTech. The deal is
likely to get over in next few months (BS).
4 Zenith Infotech has defaulted on the payment due to its FCCB holders
on September 21,2011. The company had raised $33 million through
FCCB, which were due for payment in September 2011 and another
tranche of $50 million due for repayment or conversion in August 2012
(ET).
4 Moser Baer is looking to set up 200 megawatt (Mw) solar power
capacities in India in next one year with 95 Mw to be set up in Gujarat.
Company has laid out plans to make heavy investments in clean energy
vertical of its operations as it intends to set up nearly 1500 Mw of solar
power generation capacities in India by 2015 (BS).
4 Coal India's management has called for a nationwide strike on
November 15 to demand payment of salary arrears (ET).
4 Pantaloon Retail has announced that it would raise up to Rs 15 bn
through a convertible issue or debt instruments with warrants. It is also
looking to exit non-core (non-retail) businesses, including Future Capital
Holdings, within a year. This could fetch the company around Rs 35 bn
(BS).
4 Lupin has launched the generic version of Watsons Fortamet despite an
impeding patent suit against Lupin in the US (ET).
4 GAIL, in association with other companies, is planning to set up an RLNG
terminal with a capacity of 2.5 mtpa or 10 mmscmd keeping in view the
natural gas shortage faced by power plants and other industries located
in Andhra Pradesh (BS).
4 Reliance Infrastructure is in talks to acquire national highway road
projects in Tamil Nadu and Karnataka worth Rs20 bn (ET).
4 Sebi is again investigating some employees of HDFC Asset Management
Company (subsidiary of HDFC) for allegedly indulging in front-running
(ET).


News Round-up
􀁠 Fearing slowdown in exports due to external head-winds, the government
announced a slew of measures to boost exports from the high-value engineering,
pharma and chemical sectors as well as traditional textile items, at a review of the
Foreign Trade Policy, will have revenue implications of USD 163-183 mn this fiscal.
Along with a 2% interest subvention on rupee export credit to some labour intensive
sectors announced by RBI two days back, these steps will hit the exchequer by USD
347 mn this fiscal. (BSTD)
􀁠 In what could cripple real estate companies' ability to raise capital, the government
has closed a circuitous route which these firms have been using to attract foreign
funds into their businesses. The Department of industrial policy and promotion (DIPP),
which anchors policymaking on FDI, has clarified that equity instruments like fully
convertible debentures with in-built put options would now be treated as ECB, not
FDI. (FNLE)
􀁠 15% higher rail freight rates to jack up industrial costs. Higher expenditure behind
steep rise; industry to take USD 1.22 - 1.42 bn hit. (BSTD)
􀁠 Private equity funds are caught in a fix as both raising funds and exits become tough,
along with some regulations posing hurdles to investment. Limited partners (LPs),
who invest in PE funds, are now more cautious to invest money in India-focused PE
funds as the internal rate of return or IRR does not match their expectations. (FNLE)
􀁠 Telecom policy mum on M&As as DoT, Trai differ on spectrum consolidation. As per
existing rules, there can be no merger between a big telecom operator and a small
one, which is required to bring about the much-needed consolidation in the sector.
(FNLE)
􀁠 Analogue transmission in Indian cable television is all set to be phased out with the
govt. deciding to promulgate on ordinance that makes digitization of such services
mandatory. (ECNT)
􀁠 Tax collection by way of tax deducted at source (TDS) rose 33% for the April-Sept.
period, which could be a pointer to higher tax receipts by the end of the fiscal.
(ECNT)
Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line.

SIEM: Margins likely to come under pressure  HSBC Research,

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SIEM: Margins likely to
come under pressure
 Margins are likely to decline to 9-10% in FY12 in the face of
competition, limiting moderate earnings growth
 A further increase in the parent’s stake remains unlikely; hence, we
believe the stock warrants a discount to historical average multiple
 We have trimmed our FY12-13 EPS estimates by c4-5%; this
reduces our TP to INR940 from INR985; remain Neutral


Investment thesis
With strong growth in revenues (c33%) and
earnings (c17%) in the first 9 months of FY11,
Siemens is likely to record robust earnings growth
for the full year. However, we note its profit
margin has now started to be eroded by increasing
competition, as being evident in the last quarter
when the EBITDA margin contracted to 9.0% in
3Q from 14.5% in 1H. While the decline in
margins was much more severe in the power
generation, and oil and gas businesses, the bigger
impact came from margin erosion in the power
transmission business, which contributed c44% to
overall profit. The margins in the power
transmission business came down to 12-13% from
18-20% in previous quarters.
Consequently, we believe that while Siemens can
continue to deliver strong revenue growth over the
next couple of years, earnings growth may remain
modest. We currently expect the group’s overall
EBITDA margins to contract to 12.4% in FY11e
and 11.9% in FY12e from 13.7% in FY10. This
would limit EPS growth to within 10-12% during
FY12. We currently forecast EPS growth of 9.2%
for FY12.
Driven by our cautious view on margins, we
have lowered our FY12-13 EPS estimates by
c4-5%, which trims our target price to INR940
from INR985.
Based on our revised numbers, the stock trades at a
28.2x FY12e PE compared to a historical average
12m forward PE of 31x for the past 5 years.
We strongly believe that Siemens AG is unlikely
to increase its stake in Siemens India beyond the
current 75% holding as the company wants to
position itself as a domestic player (rather than
just a subsidiary of a foreign company).
Therefore, we think the stock no longer warrants
the takeover premium which it has historically
enjoyed and believe the current valuation discount
to historical average is justified. Therefore, we
expect the stock to remain range-bound and
reiterate our Neutral rating.
Our new target price of INR940 is derived from
our preferred EVA valuation methodology and

implies that 12 months from now, the stock
should trade at a 12m forward PE of 27x on 24m
forward EPS of INR35.
We highlight the key bull and bear factors related
to SIEM below.
Bull factors
 Relatively strong order book of c1.3x
FY11 sales
 One of the technology leaders, with a strong
presence on the power grid
 Balance sheet remain under-levered providing
enough room for acquisitions or investments
in green-field projects
 One of the best performing firms in the sector
in our view in terms of fundamental
measures, such as returns, working capital
management and coverage ratios
Bear factors
 Failing to win a lot of orders in the 765kV
segment, which is expected to witness
significant order inflow going forward
 Low visibility on likely margin erosion
 Valuation not attractive at the moment


Valuation
Our target price of INR940 is derived from our
preferred EVA valuation methodology, assuming
target sales growth of c9%, through-cycle
operating return margin of c12% and WACC of
c11.3%. Our target price implies that 12 months
from now, the stock should be trading at a 12-
month forward PE of 27x on 24 month forward
EPS of INR35.
Under HSBC’s research model, for stocks without
a volatility indicator, the Neutral rating band is
5ppt above and below the hurdle rate for India
stocks of 11%. This translates into a Neutral
rating band of 6% to 16% around the current share
price. Our 12-month target price of INR940
suggests a potential return of c12% (excluding
dividends), which is within the Neutral rating
band; hence, we reiterate our Neutral rating.
Risks
We highlight the key risks related to our
investment case for SIEM below:
Upside risks
 Significant order wins
 Better-than-expected improvement in margins
Downside risks
 Delay/cancellation of domestic transmission
projects
 Excessive pricing pressure

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ABB: Valuation defies weak fundamentals  HSBC Research,

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ABB: Valuation defies
weak fundamentals
 With a scarcity of large orders and competition undermining
margin recovery, an earnings disappointment is on the cards
 At 34.4x CY12e PE, we believe a significant takeover premium is
built in, despite ABB denying its parent will increase its stake
 We lower our CY12-13 EPS estimates by 5-8%; this reduces our
TP to INR570 from INR590, which remains 12-16% below
consensus; reiterate UW


Investment thesis
ABB witnessed a significant decline in its order
intake in CY10, particularly in the power business,
where new orders fell by c45% for systems and
c33% for products. Consequently, we expect ABB
to deliver a single digit growth in revenues this year.
We expect order intake to pick up somewhat this
year (c13%), driven by improving demand for
discrete automation and low voltage products,
driving sales growth of c14-16% during CY12-13.
We note large orders remain scarce; however, the
company has highlighted in the previous quarters
that they expect a pick-up in large orders in the
second half of this year. If large orders materialize,
then there could be upside to our order intake
forecasts this year.
In addition to declining orders, the erosion in
margins has been a key detriment to ABB’s
earnings. EBITDA margins fell to c2.5% in CY10
from c9.4% in CY09 and the company continues
to suffer from pricing pressures. We expect
margins to improve to c6.4% this year and go
back to c9-10% level in CY12-13. We note that
our margin estimates remain optimistic at this
stage and in case the pricing pressure remains
intense, the recovery can get delayed.
We have trimmed our CY11-12 EPS estimates by
a low single digit rate driven by our cautious view
on execution. While our EPS estimates of
INR11.9 for CY11 and INR19.3 for CY12 remain
23% and 16% below consensus, we believe it may
be difficult for ABB to deliver on our estimates let
alone consensus expectations.
ABB remains expensive based on our new
estimates, trading at a 56.1x CY11e PE and
c34.4x CY12e PE versus its historical average 12-
month forward PE of 38.7x for the last five years.
We note, historically, valuations have benefited
from a regular increase in the parent’s stake in the
company; however, ABB has recently highlighted
to investors the parent company does not intend to
increase its stake further (i.e. beyond 75%). Hence

we believe the stock no longer warrants a
takeover premium and should be de-rated.
Our downward earnings revisions lead us to trim
our target price on the stock to INR570 from
INR590. Our target price is derived from our
preferred EVA valuation methodology and
implies that 12 months from now, the stock
should trade at a 12-month forward PE of 25.4x
on a 24-month forward EPS of INR22.4. We
believe ABB’s lofty valuation is at odds with its
weak fundamentals and reiterate our UW rating.
The key bull and bear factors related to ABB are
as follows.
Bull factors
 Base orders have started improving in the last
couple of quarters
 Restructuring benefits and relief from RE exit
should support margins from here on
 Balance sheet remains under-levered and
could provide strong fire power
Bear factors
 Sales growth likely to remain sluggish due to
weak orders in the last 18 months (excluding
the last quarter)
 Visibility on the margin recovery remains
low, while expectations remain steep

 Returns have deteriorated significantly and
working capital needs to be better managed
 The stock remains unjustifiably expensive, in
our view, versus its peers and historical
trading average
 Low probability of another open offer from
the parent company
Valuation
Our target price of INR570 is derived from our
preferred EVA valuation methodology, assuming
a target sales growth of c9%, through-cycle
operating return margin of c10.0% and WACC of
c11.7%. Our target price implies that 12 months
from now, the stock should be trading at a 12
month forward PE of 25.4x on 24-month forward
EPS of INR22.4.
Under HSBC’s research model, for stocks without
a volatility indicator, the Neutral rating band is
5ppt above and below the hurdle rate for India
stocks of 11%. This translates into a Neutral
rating band of 6% to 16% around the current share
price. Our 12-month target price of INR570
suggests a potential negative return of 14%
(excluding dividends), which is below the Neutral
rating band; hence, we reiterate our UW rating.
Risks
We highlight the key upside risks related to our
investment case for ABB below:
 Significant pick-up in execution
 Better-than-expected improvement in margins
 Resurgence of large orders

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ATD: Upside to margin unlikely to materialize  HSBC Research,

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ATD: Upside to margin

unlikely to materialize

 With a weak order book and significant pricing pressure from
competition, the anticipated margin recovery is likely to be muted
 We lower our CY11-12 EPS estimates by 8-14%, c15-18% behind
consensus; this brings down our TP to INR235 from INR270
 We expect the stock to remain range bound unless there is more
clarity on the demerger; downgrade to Neutral from OW


Investment thesis
Areva T&D is largely a domestic T&D play. But
given its weak order intake last year (-c1%) and
anticipated weakness in domestic transmission
orders this year, we believe revenue growth will
likely remain muted this year at c4% and improve
modestly to c12% the year after.
More importantly, we are now turning increasingly
cautious on the anticipated margin recovery at
Areva T&D given that both Siemens and Crompton
have reported significant margin erosion in face of
competition. In such an environment, we believe it
will be difficult for Areva to report any substantial
improvement in margins. We also note Areva
reported a margin decline of c60bp q-o-q and
c140bp y-o-y in 2Q of CY11.
Consequently, we have reduced our margin
expectations, with our forecast of the EBITDA
margin cut from c12.2% to c10.4% for CY11 and
from c12.5% to c11.0% for CY12. As a result, we
have lowered our EPS estimates by c14% for
CY11 and c8% for CY12. This places our EPS
estimates c15-18% below consensus, with
disappointment on margins potentially acting as
the driver of downgrades. On the flip side, betterthan-
expected profitability in the coming quarters
remains a key upside risk to our estimates.
Based on our new estimates, the stock is currently
trading at 29.0x CY11e PE and c21.9x CY12e PE
compared to its historical average 12m forward
PE of c33x for the last 5 years. We think this
discount to the historical average is justified as:
market conditions have deteriorated significantly
and the possibility of the parent company further
increasing its stake has diminished considerably.
Given our earnings downgrade, we have reduced
our target price for Areva T&D to INR235 from
INR270 earlier. Our target price is derived from
our preferred EVA valuation methodology and
implies that 12 months from now the stock should
be trading at a 12-month forward PE multiple of
c19.7x on 24-month forward EPS of INR11.9.


We note that the demerger of the transmission and
distribution business at Areva will take place over
the next 6 months and until more clarity emerges
on this process and the valuation, the stock will
most likely remain range-bound. Hence, we
downgrade the stock to Neutral from OW.
We highlight the key bull and bear factors below.
Bull factors
 Key beneficiary of domestic transmission
growth as the company has strong presence
on the power grid
 Margins should be supported by increasing
localization and the company’s restructuring
 The announced demerger of the distribution
business is likely to lead to de-leveraging of
the balance sheet
 The company is likely to benefit from
Alstom’s transmission equipment sourcing
requirement
Bear factors
 Low exposure to other EPC growth areas,
either domestically or internationally
 Increasing competition in the 765kV
substation space could impair margin recovery
 Valuation not attractive


Little clarity on the demerger process or the
proceeds it will generate
Valuation
Our target price of INR235 is derived from our
preferred EVA valuation methodology, assuming
a target sales growth of c9%, through-cycle
operating return margin of c9.5% and WACC of
c12.1%. Our target price implies that 12 months
from now, the stock should be trading at a 12-
month forward PE of c19.7x on 24-month forward
EPS of INR11.9.
Under HSBC’s research model, for stocks without
a volatility indicator, the Neutral rating band is
5ppt above and below the hurdle rate for India
stocks of 11%. This translates into a Neutral
rating band of 6% to 16% around the current share
price. Our 12-month target price of INR235
suggests a potential return of c7% (excluding
dividends), which is within the Neutral rating
band; hence, we downgrade our rating on the
stock to Neutral from OW.
Risks
We highlight the key risks related to our
investment case on ATD below:
Upside risks
 Significant pick-up in execution
 Better-than-expected improvement in margins
 Early conclusion of the ongoing demerger
Downside risks
 Delay/cancellation of domestic transmission
projects
 Excessive pricing pressure

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Indian Capital Goods - EPC space offers better value picks ::HSBC Research

CRG: Earnings risk undermines valuation  HSBC Research,

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CRG: Earnings risk
undermines valuation
 With significant exposure to troubled overseas economies,
visibility on demand recovery remains low
 We believe margins will bottom in 1H, but don’t expect a sharp
recovery thereafter; our FY12-13 EPS estimates, revised down 2-
9%, are 20-21% below consensus
 At a 12m forward PE of 14.7x, valuation does not look particularly
attractive; remain Neutral with TP cut to INR170 from INR205


Investment thesis
We believe Crompton remains in a difficult spot
as far as the demand outlook is concerned. We
believe its power business (c65% of group sales)
is likely to witness no growth in orders this year,
due to: disruption in demand for power
equipments in the US and Europe (c25-30% group
sales) and anticipated weakness in domestic
transmission orders this year.
In addition, we believe order intake growth in
industrials business will also moderate this year to
c15% from c39% in FY11, as domestic GDP
growth and industrial capex slows down. The
outlook for the consumer business also remains
bleak and, while we anticipate a pick-up in
demand from the levels of 1Q, we don’t expect
growth to return to the 20-25% range seen in the
past couple of years.
With no other significant levers for growth,
except for its recent acquisitions of Emotron and
QEI, we believe Crompton is likely to record sales
growth of only c9-13% for FY12-13.
The biggest risk, however, pertains to margins,
which are likely to erode significantly in FY12
and remain under pressure going into FY13. We
expect the biggest margin erosion to come in the
power business, where we believe the
international business will most likely remain
loss-making this year and the margins in the
domestic business will fall to c12-13% (from
c18% in FY10-11 in the face of stiff competition.
In addition, we expect margins in the industrial
and consumer businesses to remain under
pressure, due to a lower-margin acquisition in the
case of former and a significant decline in growth
in the latter. Driven by these factors, we currently
forecast the EBITDA margin to decline to c9.1%
in FY12 and c10.0% in FY13 compared to
c13.4% in FY11.
Given a deteriorating international environment,
we have taken a more cautious view on CG’s

international power business going into FY13 and
have revised down our FY13-14 EPS estimates by
c8-9%. Subsequently, we have reduced our target
price on Crompton to INR170 from INR205
earlier. Our target price is driven by our preferred
EVA valuation methodology (please see
Valuation section for details) and implies that 12
months from now the stock should trade at a 12m
forward PE of c13.0x on a 24-month EPS estimate
of INR13.1.
We note that margins and earnings visibility in the
coming quarters are key swing factors for the
stock. Our FY12-13 EPS estimates are c20-21%
below consensus and the only upward risk to our
estimates we see is in a much lower tax rate of
c14-15% (as guided by management) compared to
our current assumption of c26%.
In addition to earnings risk due to macroeconomic
environment, we believe the stock will
likely suffer from the loss of investor confidence
and hence a higher equity risk premium in the
near term. Therefore, at a 14.7x 12m forward PE
(versus an historical average of 18x), valuation
does not look particularly attractive and we expect
it to remain range bound until earnings visibility
improves. Hence, we reiterate our Neutral rating.
The key bull and bear factors related to CRG are
as follows.


Bull factors
 Recent acquisitions likely to provide some
impetus to earnings growth
 Company has strong presence in all its
business segments and has significantly
improved its product range
 Balance sheet remains under-levered and
working capital requirements remain low
 Current valuation at c20% discount to
historical average
Bear factors
 Demand remains under pressure in all
business segments
 Low visibility on potential margin erosion in
the power business
 The crisis in 1Q and the subsequent loss of
investor confidence warrants a higher risk
premium, in our opinion
 Order book remains weak at c0.7x FY11
group sales or c0.9x FY11 group sales
excluding the consumer business
Valuation
Our target price of INR170 is derived from our
preferred EVA valuation methodology, assuming
a target sales growth of c7%, through-cycle
operating return margin of c8.5% and WACC of
c14.9%. Our target price implies that 12 months
from now the stock should be trading at a 12-
month forward PE of c13.0 on 24-month forward
EPS of INR13.1.
Under HSBC’s research model, for stocks without
a volatility indicator, the Neutral rating band is
5ppt above and below the hurdle rate for India
stocks of 11%. This translates into a Neutral
rating band of 6% to 16% around the current share
price. Our 12-month target price of INR170
suggests a potential return of c14% (excluding
dividend), which remains within the Neutral
rating band; hence, we reiterate our Neutral rating
on the stock.
Risks
We highlight the key risks related to our
investment case on CRG below:
Upside risks
 Significantly lower ‘sustained’ tax rate
 Significant pick-up in consumer business
growth
Downside risks
 Prolonged economic crisis in the West
 Delay/cancellation of domestic transmission
projects
 Excessive pricing pressure
 Expensive acquisition

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