Coal India Limited 2Q profit hit by wage hike 􀂄 􀂄 BofA Merrill Lynch

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Coal India Limited
2Q profit hit by wage hike
􀂄 2Q profit miss on higher costs; cut EPS & PO, Neutral
Profit grew 51%YoY (-38%QoQ) to Rs25.8bn vs. our Rs27.4bn est. EBITDA was
Rs24.8bn (+32%YoY) vs. our Rs27.5bn est. ASP was ahead & vols. were weak as
expected but higher wage cost & other expenses led to lower PAT. We have cut our
FY12-13E EPS by 4% & PO to Rs370 as we cut our vol. est. by 3.5% & lift our ASP
& wage cost est. CIL is likely pricing in lower volumes to some extent, but we see
limited upside triggers as CIL is likely to miss FY12 target & news flow around wage
negotiations will likely remain an overhang. Hence our Neutral rating.
Volume in line, ASP 3% ahead but wage cost higher
EBITDA pre OBR was Rs29.1bn (+31%YoY, 8% below est.) 2Q coal off take was
93.7mt (-5%YoY) vs. output of 80.3mt (-11%YoY) as vols. were hit by heavy rains
& internal logistics issues including transporting coal to coal loading point. ASP
grew 3%QoQ to Rs1403/t. This may be led by higher e-auction revenues. Wage
cost grew 17%QoQ (19% YoY, 7% ahead) as CIL started providing for wage
hikes. 2Q wage cost run rate implies a 20%YoY wage cost increase in FY12.
Off take to improve in 2H, but FY12 target to be missed
Volumes have improved in Oct, but CIL is unlikely to achieve19%YoY off take
growth over the remaining months in FY12 required to meet its FY12 off take
target (454mt). Rake availability has been adequate YTD, but may constrain coal
offtake in 4Q when output ramps up (over 200 rakes/day needed to meet target).
We cut offtake est. for FY12 to 439mt (3.5%YoY) & for FY13 to 462mt (5.3%YoY).
E-auction has resumed in Nov
E-auction was on hold in Oct & Oct e-auction quota (4mt) was offered to power
cos at notified prices to ease coal shortage. E-auction has resumed in November.
Though some coal (carry forward quantity from Oct quota) may be earmarked for
power companies, we understand pricing will be thru e-auction.

Power Grid Corporation of India (PGRD.BO) Top Pick With a Target Price of Rs121  Citi Research

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Power Grid Corporation of India (PGRD.BO)
Top Pick With a Target Price of Rs121
 Top India electric utility pick — We expect PGCIL to deliver 15% EPS growth in
FY11-14E with an average RoE of 14%. The company remains, in our view, the safest
play in the Indian electric utilities sector, which has been riddled with coal shortages,
falling merchant prices and deteriorating SEB finances. The above risks could impede
PGCIL’s growth due to delayed capacity additions. However, we adequately factor in
the risk (XIth Plan capex of Rs504bn v/s target of Rs550bn and XIIth Plan capex of
Rs700bn v/s tentative target of Rs1000bn).
 Target price increased to Rs121 from Rs118 — We revise EPS by 0-2% for FY12E-
15E and roll forward our target P/BV of 2.2x to Mar13E (from Dec12E).
 Solid 2Q FY12 PAT growth — PGCIL’s 2Q FY12 recurring PAT was Rs7.1bn, +18%
yoy (CIRA: Rs7.1bn), driven by sales of Rs22.6bn (+10% yoy) and an EBITDA margin
of 83.8%. Adjusted for forex, PAT growth is higher at 32% yoy. PGCIL delivered PAT of
Rs14.1bn in 1H FY12, +18%, and is on track to meet our target of Rs29.2bn.
 Improvement in receivable days — PGCIL’s 1H FY12 receivable days came off to
105 from 133 days a year back, a significant improvement. Management expects
debtor days to decline to 1 month by Mar 12.
 Capitalization update — Capitalized Rs40.6bn in 1HFY12 and Rs51bn till Oct11 and
on track to meet CIRA FY12E of Rs90bn (below management estimate of Rs110bn).
 XIIth Plan capex — The capex plan for XIIth Plan (Rs750bn on 11 high capacity power
transmission corridors)of Rs1,000bn. According to management, coal shortages will not
affect future capex because even if a plant operates at low PLFs, it would need a
transmission line. Much of the XIIth Plan capex is for transmission corridors, which
have multiple beneficiaries. Even if 1 or 2 beneficiaries do not complete projects, it
would not matter because other beneficiaries would need the transmission line.

Cummins India Multiple headwinds take toll on margins ::Prabhudas Lilladher

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􀂄 Results disappoints: Sales for the quarter was flat YoY at Rs10.9bn. Domestic
sales were down 5% YoY and flat QoQ. Strong growth in export (up 14% YoY)
cushioned sales. The Power gen business was down 20% YoY, Industrial business
was down 6% YoY and Auto business was up 50% YoY. The company highlighted
that consistent rise in interest rates has dampened demand, especially in power
generation segment. EBITDA margin was down 380bps YoY and 170bps QoQ to
16.1% (lowest margin in the last ten quarters). Increased commodity prices
(mainly pig iron), unfavourable currency and adverse sales mix (in favour of
smaller engines) led to pressure on margins. Adj. PAT was down 23% YoY to
Rs1.2bn.
􀂄 Guidance revised downwards: The company had guided for sales growth of 10-
15% which has been downgraded to 5-10%. It has guided further 100bps
reduction in PBT margin (from Q2FY12 levels of 16.7%) as it expects adverse
sales mix in favour of low HP engines to continue for the rest of the year. It
highlighted that if volumes come back and inflation continues at current levels,
then it could see margins improve next year.
􀂄 Outlook and valuation: The stock is currently trading at 15.4x FY13E earnings.
We have downgraded our estimate for FY12 and FY13 by 18% and 15%,
respectively. Though there might be some near-term pain, we believe the
company is on track to double its turn over the next five years. With investment
in capacity and technology leadership, the company will be able to capitalize
once the market bounces back. Strong balance sheet and cash flow will continue
to support valuations. We maintain our ‘BUY’ rating on the stock.

Tata Steel (TISC.BO) 2QFY12: Europe a Wildcard; Subsidiary/JV Losses Citi Research

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Tata Steel (TISC.BO)
2QFY12: Europe a Wildcard; Subsidiary/JV Losses
 2QFY12 adj cons PAT down 75% yoy — Tata Steel’s consol. adj PAT came in at
Rs3.6bn (reported Rs2.1bn), below estimates. The underperformance is due to $77m
of EBITDA losses – accounted for by subsidiary losses/inter-company adjustments;
and higher tax. Some subsidiaries making losses are 1) Tata Steel KZN (90%) - ferro
chrome business in S. Africa (FY11 loss of $11m) hit by low chrome ore availability/high
power costs - likely to remain weak; 2) Tata Metaliks (50%), EBITDA loss of $9m in
2QFY12 – Redi unit sold now; 3) Dhamra Port (50%) recently commissioned; 4)
Mothballing impact of mini blast furnace (BF) in Tata Steel Thailand. Standalone tax
was higher than consolidated tax despite consolidated PAT being lower.
 1Q India highlights — Adj PAT at Rs16.5bn rose 3% yoy, in line with Citi est. EBITDA
margin (incl other income) was 36% vs 38% last year (40% in 1QFY12). EBITDA/t was
$365 (adj) vs $336 in 2QFY11 and $403 in 1Q. Management expects an EBITDA level
of $350-375/t to sustain. Sales volumes fell marginally to 1.65mt (flats rose 3% yoy).
Average steel realizations rose 20% yoy and 2% qoq. Margins declined on higher raw
material/power costs and weak performance of the ferro alloys division. EBIT margin
fell to 18% vs 33% on lower demand from Japan’s stainless steel industry/lower prices.
 Europe EBITDA/t down 42% yoy — EBITDA/t was $30 in 2Q (Citi est $25) vs $51 last
year and $71 in 1Q. The quarter was impacted by higher raw material prices. Volumes
fell marginally to 3.48mt (3.53mt last year). Europe remains a wildcard and
management expects EBITDA/t to be weaker in 3Q vs 2Q. They have taken steps to
mothball 1mtpa BF capacity in Scunthorpe and close the construction products
business in South Wales. Pension surplus was £106m inSep11 vs £350m in June11.
 Tata Steel Asia EBITDA/t fell 81% yoy — EBITDA/t was $6 vs $34. Volumes were flat
yoy at 0.78mt. Asia was impacted by floods in Thailand/weak Australian demand.
 Risks — There is downside risk to our forecasts. We await further clarity from
management on the performance of the subsidiaries/JVs; following which we will
review our estimates.

Hold Bharati Shipyard; Target : Rs 75 :: ICICI Securities

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N o   o r d e r   v i s i b i  l i t y … .
Bharati Shipyard (BSL) reported a QoQ topline growth of 5.8% to | 465.2
crore in Q2FY12 mainly on account  of higher subsidy income booked
during the quarter. The company booked subsidy to the tune of | 107
crore as against | 74 crore in Q1FY12. The EBITDA margin excluding
subsidy improved 40 bps to 18.7%. BSL has been able to report a profit
of | 23.5 crore mainly on account of subsidy income. The company’s total
order book and order book pending execution has declined by 8% and
55% to | 3913 crore and | 287 crore, respectively, in Q2FY12. BSL is left
with just one quarter’s order book, which is a cause for grave concern.
Even though we have factored that the company would get an order to
the  tune  of  |  1200  crore  by  the  end  of  Q3FY12,  high  interest  burden  and
lower subsidy income booking in FY13 would lead to a substantial decline
in the net profit.
ƒ Higher subsidy accounting enables BSL to report profit
During Q2FY12, BSL accounted subsidy to the tune of | 107 crore, which
enabled it to report a net profit of | 23 crore. Excluding the subsidy the
company reported a loss of | 52 crore.
ƒ Earnings revision
We have revised downwards BSL’s earning estimates to factor in the
impact of lower subsidy income in FY13 and lower share of profits from
Great Offshore (GOL) as we have downgraded GOL’s FY13 earning
estimates by 43%. We have assumed that BSL would secure an order to
the tune of | 1200 crore by the end  of Q3FY12. If the order does not
fructify in Q3FY12, we would revisit our numbers. We are concerned by
the inability of BSL to secure orders and are closely monitoring the
progress in this respect.
V a l u a t i o n
At the CMP of | 83, the stock is trading at 0.21x FY13E book value of |
392. We have valued the company on an SOTP basis with a price target of
| 75 and recommend a HOLD rating. Existing investors can exit the stock
at any up move in the price.

Category-Wise Turnover 2-Dec-11

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Trade Date	Category	Buy Value in Rs.Crores	Sell Value in Rs.Crores
2-Dec-11	Mutual Funds	174.43	175.88	-1.45
2-Dec-11	Proprietory Trades	49736.87	50225.66	-488.79
2-Dec-11	Others	43537.16	44060.07	-522.91
Notes :
1.  Buy / Sell value at the end of day:
Options Value (Buy/Sell) = Strike price * Qty
Futures Value (Buy/Sell) = Traded Price * Qty
2. Others exclude FIIs, Mutual Funds, Proprietory Trades

 

FII & DII trading activity across NSE and BSE 02-12-2011

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Category	Buy	Sell	Net
	Value	Value	Value
FII	2588.37	1991.48	596.89
DII	838.13	945.66	-107.53

 

 

Banking - Woes common, but pace uneven; ;Edelweiss

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Executive Summary

In our earlier report ‘Macro challenges getting serious’, dated 29th August, 2011, we had downgraded some of the state owned banks on rising asset quality concerns.  Since then macro challenges - policy paralysis, elevated commodity prices and high interest rates - have stayed put, unabated and unabridged. In this broad note, we encapsulate our stance that asset quality risks are here to stay; Q2FY12 results were a lucid curtain raiser.

Key differentiator: Meticulous slicing of stressed sectors into fine parts

The key differentiator of our NPL Analysis is our attempt - to dig up the ultimate fault line - by slicing stress sectors into outmost sub-segments, specifically in textiles, power, airlines among others. Our exhaustive analysis of upcoming private power projects suggests that ~35% of these (in MW terms) falls under `risky’ category. For airlines, risk emanates from challenging business matrix. Here, we peg the NPV hit due to restructuring at 20-25% of the overall exposure. In textile sector, we see the stress revolving around spinning companies, accounting for 25% of the bank debt. On the retail banking front, our assessment deems stress surrounding teaser loans as `manageable’   since much of the impact from ~18% rise in EMIs can be dealt with by a growth in personal incomes and an extension of tenures. As we pore over the debt exposure of top 25 business group/companies, we note the rising share (in the debt) of private business groups that has ballooned over the past five years from just 36% of bank debt to a whopping 75% now. To our discomfiture, we also observe that a large portion of this has been channelized into infrastructure projects which are braving a rough weather, having not completed a full business cycle. In a stress case scenario, we  anticipate the strain to swell further with stressed assets of banks (GNPL + restructured assets) under coverage inching up from current levels of 6.7% to 10.8% by FY13, albeit that asset quality trends might differ among banks based on their underwriting skills.

Asset quality: Private banks to endure shocks, SOE banks to get jitters

Earnings: Sensitivity of credit cost (applying LGD to stress sectors) bares the fact that private banks with high ROAs and lower exposure to stressed sectors are conspicuous in their ability to endure asset quality shocks. Large cap SOE banks like PNB and SBI could see earnings impact of about ~20% whereas mid-sized SOE banks like IOB, OBC and Union of more than 25%. Assigning a 50% probability to the stress situation, we arrive at the base case earnings estimate which are 5% below consensus.

Valuation: Cutting TPs; maintain underweight on SOE banks

Bank stocks have seen corrections (Bankex underperformed 5% over the past three months) even as investors stay Underweight on the sector. Though we believe that RBI is over and done with the tightening in the current cycle, we believe challenges would prevail for at least next 6-9 months. Stock performance in the near term could swivel more towards perception rather than fundamentals. We reiterate our underweight call on state owned banks, favouring private sector banks which are better prepared to brave an asset quality shock. To factor in the asset quality stress, we lower our target prices (to capture lower multiples) across stocks under coverage by 5-14%. Our top picks are Axis Bank, ICICI Bank, Federal Bank. We maintain ‘REDUCE’  on PNB and ‘HOLD’ on SBI. Our change of view towards the sector would be influenced more by a dilution of asset quality risks. This would be a combination of signals on the reversal of interest rate cycle, an improvement in the policy initiatives in power sector and the global scenario.

Buy Orchid Chemicals :: 2QFY2012 Result Update :: Angel Broking

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Orchid Chemicals (Orchid) reported in-line numbers for 2QFY2012. Going
forward, for FY2012, management has guided 25% revenue growth to
US$500mn, EBITDA margin at ~24% and EPS of `30 on current equity.
The company plans to raise `1,000cr primarily to repay FCCBs due in February
2012; the balance amount would be used to repay debt and pursue organic and
inorganic opportunities. We maintain our Buy view on the stock.
In-line set of numbers: For the quarter, on a consolidated level, Orchid reported
net sales of `459cr (`413cr), up 24.6% yoy. The company’s gross margin dipped
by 240bp yoy to 50.9%; however, OPM expanded by 3.8% to 21.2%, much
lower than expectation of 17.4%. The rise in operating profit was on account of
muted rise in other expenses, which dipped by 6.8% yoy during the quarter.
Further, higher interest expenses during the quarter led to a dip in net profit,
which came in at `20.7cr vs. our expectation of `39cr.
Outlook and valuation: We expect Orchid to post net sales of `2,143cr with
EBITDA margin of 21.8% in FY2012E. The stock is currently trading at 6.1x
FY2012E and 4.7x FY2013E earnings. We maintain our Buy rating on the stock
with a revised target price of `270

National Aluminium Co.: Earnings miss on spike in power costs ::Kotak Securities

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National Aluminium Co. (NACL)
Metals & Mining
Earnings miss on spike in power costs. Nalco’s 2QFY12 EBITDA of Rs1.5 bn was
50.3% below our estimate on an increase in raw material costs and higher-thanexpected
power and fuel cost. The aluminium segment reported PBIT loss of Rs0.9 bn.
Profit of chemical and electricity segment declined. We align Nalco’s earnings estimate
with our revised aluminium price forecast and accordingly lower our FY2012-14E
earnings estimates by 7%% and 21%, respectively. We maintain our SELL rating with a
revised target price of Rs55/share.

Insurance: Business traction remains weak ::Kotak Sec

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Insurance
India
Business traction remains weak. Despite the benefit of a low base in October 2011,
private insurance companies continued to report a decline in APE collections. APE was
down 26% mom for private players which maintained focus on single and group
businesses. Notably, ULIP mobilizations remain weak as within the non-single individual
business, the impetus was more on traditional business. The current YTD trend and
investment climate clearly poses downside risk to premium estimates for 2012E.

Strategy: 2QFY12 results: Forex the profit slayer:: Kotak Sec

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Strategy
India
2QFY12 results: Forex the profit slayer. The BSE-30 Index’s 2QFY12 adjusted new
profits grew 10.8% yoy, marginally below our pre-results expectation of 11.5% yoy.
Rupee depreciation disrupted earnings through forex losses (un-hedged ECB exposure)
in several companies. Other highlights: a sharp jump in the NPLs of banks and net debt
of infra companies, low sales growth in the pharma sector and weak order booking for
Industrial and Construction companies. We now estimate the BSE-30 Index’s FY2012E
net profits to grow at 14.4% versus our 19% pre-results estimate.

Dishman Pharma :TP: INR63 : Motilal Oswal

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Dishman Pharmaceuticals and Chemicals (DISH) posted 2QFY12 performance that was lower than our estimates.
 DISH reported 2QFY12 revenue growth of 26.5% YoY to INR2.69b (against our estimate of INR2.68b), led mainly by
its Marketable Molecule (MM) business. EBITDA increased by 27.4% YoY to INR471m (against our estimate of
INR543m) and DISH reported a net loss of INR64m (against our profit estimate of INR171m) impacted by poor
operational performance coupled with increased interest and depreciation expenses and INR187m of forex losses.
 Top-line growth was led by the MM segment, which posted strong revenue growth of 93% YoY to INR1b. CRAMS
revenue reported muted growth of 5% YoY to INR1.69b (63% contribution to revenue) led by a 16% YoY growth in
Carbogen AMCIS (CA) revenue to INR1.06b.
 EBITDA increased by 27.4% YoY to INR471m (against our estimate of INR543m) led by healthy top-line growth.
Overall EBITDA margins remained flat YoY at 17.5% (against our estimate of 20.3%).
 DISH reported net loss of INR64m due to poor operational performance coupled with an increase in interest and
depreciation charges and INR187m of MTM forex loss due to foreign currency debt.
Outlook and view: The macro environment for the CRAMS business remains favorable, given India's inherent cost
advantages and chemistry skills. We believe DISH's India operations will benefit from increased outsourcing from India,
given its strengthening MNC relations and expansion of some existing customer relationships. However, the adverse
business environment for CA will continue to impact earnings growth in FY12 and FY13. We expect revenue CAGR of
8.6%, EBITDA CAGR of 19.4% and earnings CAGR of -11% over FY11-13. Earnings growth will be impacted mainly by
a significant increase in tax rate (due to expiry of EoU benefits), forex losses and increase in interest costs. Based on
our revised estimates, the stock trades at 8.3x FY12E and 5.8x FY13E earnings. RoE will continue to be below 10%
until new facilities and CRAMS contracts ramp up. Maintain Neutral rating with a target price of INR63 (8x FY13E EPS).

Oil Refining & Marketing RIL’s 3Q GRM may be lower than Reuters’ Singapore GRM 􀂄 BofA Merrill Lynch,

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Oil Refining & Marketing
RIL’s 3Q GRM may be lower
than Reuters’ Singapore GRM
􀂄 Sing GRM TD in 3Q US$9.8/bbl; RIL GRM US$7.5-8.9/bbl
Reuters’ Singapore complex refining margin (GRM) to date in 3Q FY12 at
US$9.8/bbl is at the highest level since at least 1998. Singapore GRM to date in
FY12 at US$9.0/bbl is also higher than US$7.6/bbl at the peak of the last supercycle
in FY08. Theoretical GRM of Reliance Industries (RIL) for 3Q works out to
US$7.5-8.9/bbl. RIL’s 3Q GRM is likely to be lower than Singapore GRM and also
QoQ and YoY lower. However, a weaker rupee, strong petrochemical margins
and higher other income may help RIL make up for GRM weakness. Retain Buy.
3Q Singapore GRM highest at least since 1998; up 8% QoQ
Singapore GRM in 3Q is 8% QoQ and 79% YoY higher. The QoQ rise is driven by
QoQ rise in diesel (US$0.8/bbl), jet fuel (US$1.0/bbl) and fuel oil (US$3.4/bbl)
cracks. These products are 58% of Reuters’ product slate. However, cracks of
light distillates (42% of Reuters’ product slate) petrol (US$0.5/bbl), naphtha
(US$5.4/bbl) and LPG (US$2.1/bbl) are QoQ lower. Naphtha and petrol cracks
have slumped since the start of 3Q and are US$5.6-9.0/bbl below 3Q average.
RIL’s 3Q theoretical GRM US$7.5-8.9/bbl down 12-26% QoQ
RIL’s 3Q theoretical GRM at US$7.5-8.9/bbl is US$1.1-2.5/bbl below Singapore
GRM. It is also QoQ and YoY lower. The QoQ decline is mainly due to decline in
propylene, naphtha and LPG cracks and in discount of heavier crude RIL can use
to Dubai crude. Singapore GRM TD in FY12 is higher than the peak in FY08 but
RIL’s 1H FY12 GRM at US$10.2/bbl is well below its FY08 peak of US$15/bbl.
RIL is hit by FY12 light-heavy crude spread, naphtha and LPG crack (US$9-
18/bbl) being lower than in FY08.
R&M companies hit by high Bonny light-Dubai premium
HPCL and BPCL’s GRM in 1H FY12 is 28-53% YoY lower at US$1.5-2.3/bbl even
as Singapore GRM is up 124% YoY. They have been hit by jump in premium of
Bonny light and similar domestic crude (50-55% of crude mix) to Dubai to US$9-
10/bbl in 1H FY12 from US$3-4/bbl in 1H FY11. BPCL and HPCL’s theoretical
GRM for 3Q works out to US$2.1-2.6/bbl.
Diesel cracks strong but petrol weakening; closures to help
Singapore GRM would fall in 2012 if weak global oil demand coincides with large
capacity add. However, demand holding up and larger capacity closures than
expected could salvage GRM. Diesel and jet fuel cracks TD in FY12 are US$19-
20/bbl (current US$20-21/bbl) but petrol (US$8/bbl) and naphtha cracks (minus
US$14) have fallen. If demand holds up middle distillate utilization would remain
high at 98% in 2012-13 while petrol would be just 82%. Closure of petrol biased
refineries would tighten diesel balance and boost diesel cracks.

RELIANCE INDUSTRIES Gasoline spreads correct, but INR depreciation to provide support :: Edelweiss

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Product spreads have corrected sharply of late, driven by gasoline
spreads in particular. While this may impact refining margins in the
second half of the year, we still see RIL’s GRMs for the full year not falling
below USD 9/bbl. Also, the depreciation in INR will aid RIL’s earnings
given that its businesses are USD denominated. Our sensitivity analysis of
RIL’s EPS to lower refining margins and lower INR suggests a not more
than 0‐3% risk to FY12 and FY13 earnings. We maintain our ‘BUY’ rating
on the stock with a target price of INR 1,148.
Refining margins correct, driven by gasoline
Complex refining margins have seen a sharp correction recently, falling by nearly USD
3/bbl compared to Q2FY12. Restarting of refineries in Singapore and weaker than
expected Asian gasoline demand growth have been the drivers behind this. Diesel
demand remains strong though, rising by about USD 3/bbl compared to Q2FY12.
RIL’s margins will not fall as much
RIL’s GRMs have averaged USD 10.2/bbl in the first half of the year. Our proprietary
model to predict RIL’s margins indicates that complex refining margins have come off
by USD 3/bbl. Having said that, we believe the recent fall in margins is not a strict
indicator of quarterly margins. Moreover, RIL being a diesel‐heavy refiner (~45% diesel
output w/w) is impacted to a lesser extent compared to other global refiners.
INR depreciation will also provide cushion to RIL’s earnings
All of RIL’s business segments (E&P, refining and petrochemicals) are USD
denominated. Our sensitivity analysis indicates that a 1% fall in INR will lead to a 1.5%
rise in FY12 and FY13 EPS. We see low risk to RIL’s FY12/13 consensus earnings
and stress case GRMs may lead to a not more than 0‐3% cut in FY12 and FY13 EPS. We
maintain our BUY rating on the stock with a target price of INR1,148. At INR 810, the
stock is trading at 11.3x FY12 earnings and 10.5x FY13 earnings.

Investment Focus - Cipla: Buy:: Business Line

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Investors looking for long-term additions to their portfolio can use the ongoing market correction to accumulate the stock of Cipla. Improving financial performance, better utilisation of its newly set up manufacturing facility at Indore SEZ, besides promising growth prospects make the stock an attractive investment bet. At the current market price of Rs 316, the stock trades at about 20 times its likely FY13 per share earnings. This seems justified considering the company's strong generic pipeline, entry into bio-similars and the likely commercialisation of its CFC-free inhalers in the next couple of years. A manageable debt on its books is also a positive.

In the quarter ended September 2011, Cipla reported a 10 per cent increase in sales to Rs 1,732 crore and 17 per cent increase in profits to Rs 309 crore. While its domestic business grew by about 12 per cent (48 per cent of total sales), exports reported a growth of 9 per cent. Thanks to an improved product mix and higher output at its Indore SEZ facility, the company reported a 2.2 percentage point expansion in operating margins to 24.6 per cent. Notably, Cipla's new facility at Indore SEZ had so far only added to its overheads and had dogged its performance in the last few quarters. The September quarter has seen a significant improvement on this score, with the facility contributing about Rs 150 crore in sales. While these are early signs — it would take a couple of years before the facility reaches optimum utilisation levels — it does reduce uncertainty.

While a strong domestic sales network, and entrenched presence in inhalers and acute/chronic therapies provided Cipla a stronghold in the local market, it is exports that hold the key to future growth. It is currently developing eight CFC-free inhalers for the US and European markets — the management hopes to launch the inhalers in Europe in the next three-four years. It has filed 11 products related to the inhaler business in the EU market and has received four approvals; six are under various stages of processing.

Cipla has maintained its growth guidance of a revenue growth of about 10-12 per cent this year. It expects its bottom-line growth to be in line with its half-year performance (about 8 per cent). The planned higher focus on exports and reduction in sales of its low-margin antiretroviral would help the company improve its margins. While the draft national pharmaceutical pricing policy, if implemented, could affect realisations , the company expects only a 2-3 per cent impact on its domestic sales.

CONSTRUCTION SECTOR REVIEW - Q2FY12 :Kotak Sec

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Construction sector performance during Q2FY12 was largely in line with our
estimates. We had expected execution to remain impacted during Q2FY12
by monsoons while high interest rates continued to impact net profit
margins adversely. Working capital cycle remained stubbornly high led by
higher inventories as well as loans and advances which led to jump in
overall borrowings. Though interest rates are not expected to increase
sharply from the current levels, but working capital cycle may continue to
remain high for next few quarters till companies are able to raise funds at
subsidiary level. Companies continue to remain conservative in giving future
guidance and expect ramp up in execution and order inflows from Q4FY12
onwards.
We believe that near term stress may continue to impact FY12 earnings.
However, any fund raising done by the companies at SPV level or decline in
working capital cycle or interest rate cuts would be positive for the sector.
Thus in the current scenario, we continue to be selective in the construction
sector and would prefer companies where stock prices are already factoring
in these concerns and where Q2FY12 numbers are in line with our
estimates. We prefer IRB Infra, Unity Infra and Pratibha industries in the
current scenario.
Order inflows improve selectively but still below expectations
Order inflows have improved during Q2FY12 for most of the companies in comparison
with Q1FY12. However, they continue to remain lower than expectations due to
slow decision making from the government side, delayed environmental clearances
as well as land acquisition related issues. Key areas witnessing increased traction
include roads, buildings, urban infra and water supply. However, order inflow from
sectors such as power, mining and international continue to remain subdued due to
issues related to coal availability, mining ban and unrest in middle-east region respectively.
Along with this, on domestic front, order inflow from hydro power segment
remained lackluster and impacted order inflow of companies like Patel Engineering,
JP Associates and HCC. Though competition has come off a bit in the road
sector but other sectors continue to witness increased competition. This may result in
putting pressure on operating margins going forward.

Ranbaxy Laboratories - After Lipitor high, back to basics; ;Edelweiss

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Ranbaxy Laboratories  (RBXY IN, INR 443, Hold)

Ranbaxy (RBXY) approval for generic Lipitor is an important milestone. While the generic will be manufactured from Ohm’s facility, Teva will share a portion of profit during 180-days exclusivity. Assuming 50% price erosion and ~30% market share we estimate USD400mn sales during exclusivity. However, given profit sharing with Teva, we estimate NPV value at INR22 per share, lower than the earlier estimated INR32. We cut our target price to INR500 per share and believe that incremental value will be based on base business performance. Maintain ‘HOLD’.

Lipitor launch a key milestone

Lipitor has annual sales of USD5.4bn and Watson (AG) has launched along with RBXY. We estimate USD400mn sales during exclusivity and earnings of INR1.6 per share post exclusivity. Overall, Lipitor’s NPV value is INR54 per share (including recurring earnings). RBXY had also settled for launch of Caduet in US, effective November 30, 2011. However, it has not bagged approval as yet. Caduet has sales of ~USD300mn in US and Mylan is the AG. We estimate NPV of INR3.1 per share during exclusivity.

FDA resolution awaited

As per media reports, RBXY has received USFDA approval for Mohali plant, which could be a precursor to FDA-DOJ resolution. FDA resolution is subject to settlement with potential penalty of ~USD200-400mn. We have built in USD200mn penalty and believe that resolution will add INR4.7 per share to earnings (option value of INR74per share). However, penalty higher than USD200mn will reduce the option value to that extent.

Outlook and valuations: Risk-reward unfavorable; maintain ‘HOLD’

While the most important trigger has played out for RBXY, the road ahead will be determined by base business performance and resolution of FDA issue. As in Q3CY11, base business improvement is slower-than-anticipated and will remain an overhang on valuations. We maintain ‘HOLD’ and expect the stock to underperform.

TATA MOTORS Mixed bag ::Edelweiss,

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Tata Motors (TTMT) Q2FY12 performance was mixed bag where domestic
performance disappointed while JLR was ahead of expectations mainly
on sales being higher than expectations. Adjusted PAT at INR23bn (up
11% YoY) was 16%/11% ahead of ours/consensus expectations. We
disliked it for: (1) it being FCF negative on both standalone and
consolidated, (2) increase in capitalization despite a drop in capex, (3)
sequential low margins in JLR in spite of having the benefit of operating
leverage and forex and (4) exceptionally low and non sustainable other
expenditure to sales ratio. On the positive side, JLR sales performance
has been much stronger than what we had anticipated in the face of
tough macro conditions. We raise our FY12/13 EBITDA by +13%/0.3% to
factor in strong sales performance by JLR and weak standalone numbers.
We maintain Hold as in our view strong volume growth momentum from
new launches is the key positive trigger while poor macro condition
would cap upside. Adjust TP to INR174.
JLR sales traction strong despite macro headwinds
Notwithstanding recession like economic conditions in the Europe and slowdown in the
US, JLR continues to post strong sales performance mainly due to new launches namely
Evoque and strong demand from China. Sales ramp up of Evoque should ensure
volume visibility for the next two quarters.
Domestic performance, margins disappoint
Despite the product mix improvement, domestic business EBITDA margins declined to
7.2% due to losses in car business. It coupled with capex and deteriorating working
capital implies that TTMT posted negative FCF for Q2 which offset meager positive FCF
of JLR. Other disappointment was sequential margin pressure on consolidated
financials despite recording very low other expenditure and favorable forex movement
for JLR.
Outlook and valuations: Balanced; maintain ‘HOLD’
Risk–rewards are balanced given the new product launches as positive triggers and
deteriorating macro environment as a negative trigger. We maintain ‘Hold/SP’
recommendation/rating on the stock. We adjust our SOTP to INR 174 from INR 166.

Indian Bank Raise PO on 2Q earnings beat and positive risk return 􀂄 BofA Merrill Lynch,

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Indian Bank
Raise PO on 2Q earnings beat
and positive risk return
􀂄 Raise PO to Rs260 on positive risk-return
We raise our PO to Rs260 factoring in +6% 2Q earnings beat driven by topline
surprise. We have also raised earnings by only +4/3% for FY12/13 (earnings
growth at +14/18% in FY12/13), as we normalize credit costs at +70bps (vs.
50bps reported). Risk-return remains positive, with stock trading at +1.1-1.2x
FY12E book / 1.0x FY13E book, with RoEs of still +20/21%, resp. We believe
Indian Bk can trade up to ~1.2x FY13E book owing to healthy return ratios. Our
target multiple is still at a +15% discount to Gordon multiples owing to low stock
liquidity (Govt. owns 80% of stock) and higher exposures to riskier sectors (~20%
of loans to Infra; +4% to textiles).
2Q: +6% beat (adj. earnings) on topline surprise
Indian Bank reported earnings of Rs4.7bn, 13% yoy growth (+15% headline beat)
driven by topline surprise and in part, also owing to int. on IT refund of Rs400mn
(incl. in other income). Adjusted for this, earnings beat of +6%. Topline grew 16%
yoy driven by 24% yoy loan growth and flat margins (up 33bps qoq). Other
income (core) was up +6% yoy. CASA down ~250bps yoy and 75bps qoq to 30%.
Capital remains very healthy, with Tier 1 at ~11% (total at 13.3%).
Asset quality manageable, despite higher qoq slippages
Slippages for Indian Bk increased by +125% qoq (to Rs3.8bn). However, almost
+40-50% of this rise qoq was driven by ~3 corporate / SME a/c’s (Dye unit, Steel
unit and a Hotel), which the mgmt believes will be upgraded in the subsequent
quarters. Owing to higher slippages, headline gross NPLs are up 30% qoq (at
1.2%) and net up 42% (at 0.7%). But provision cover stands healthy at +79%. We
estimate slippages at +Rs11.5bn for FY12 and credit costs at ~75bps.

Oil and Gas - Higher crude supplies to keep prices in check; Edelweiss

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Brent crude price has maintained strength so far in CY11 due to a combination of stronger than expected non-OECD demand and supply side issues arising from unplanned outages (non-OPEC) and the unrest in MENA (Libya, Nigeria). We continue to believe that crude is poised for a correction due to: (a) faster than expected production scale-up from Libya/Kuwait/Iraq, (b) worsening economic conditions and (c) an increase in non-OPEC supplies, especially the US. We maintain our call of USD95/bbl for Brent in FY13 while adjusting FY12 Brent crude to USD110/bbl to account for higher YTD average. We are also increasing long-term crude price to USD95/bbl to account for higher fiscal break-even crude prices for OPEC.

CY11 supply-demand trends to reverse in CY12

Crude prices remained strong in CY11 driven by strong non-OECD growth (3%), particularly in Asia and Russia. Japanese demand for crude post nuclear shutdowns too boosted OECD demand. Further, supply shortages due to the unrest in MENA and unplanned outages in North Sea played spoilsport. Going into CY12, we see this trend reversing. Demand growth at 1.1% will be soft given worsening economic conditions. Several leading indicators point to a slowdown outside OECD as well. On the other hand, a sharp ramp up in supplies from OPEC (Libya, Kuwait and Iraq) as well as U.S. (non-conventional oil) will ensure supply is adequate.

OPEC CY12 spare capacity at ~5.0mbpd as Libya/Iraq up output

OPEC spare capacity is set to inch over 5.0 mbpd as the increase in non-OPEC supplies and higher production from OPEC (Kuwait, Iraq, Libya) come at a time when there are significant downside risks to demand estimates. OPEC spare capacity currently stands at around 4.6 mbpd against the lows of ~3.4 mbpd in Jun 2011, seen just after the price peak. We expect CY12 OPEC spare capacity at 4.97 mbpd against 4.63 mbpd in CY11.

Maintain FY13 Brent crude at USD95/bbl, FY12 up at USD110/bbl

Higher Q4 seasonal demand and recent geopolitical tensions have kept crude prices elevated. We expect crude prices to correct post winter as supplies from Iraq/Libya are expected to scale up during the period when demand seasonally trends downwards. Accounting for historical prices and short-term expectation of stable prices, we are increasing our FY12 crude price to USD110/bbl. Factoring in higher CY12 OPEC spare capacity, we maintain our FY13 crude price estimate at USD95/bbl. We are also increasing our long-term crude price to USD95/bbl (USD90/bbl earlier) to account for high fiscal break-even for OPEC countries.

Eicher Motors Ltd: Accumulate on Decline: Nirmal Bang

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On a boulevard to success !!!!!!
Eicher Motors Ltd (EML) is present in commercial vehicles, two wheelers and related component and design services. Volvo entered into a JV (VECV- Volvo Eicher Commercial Vehicles) with EML as joint promoter of the commercial vehicles business.
Increasing demand for Royal Enfield
EML rides high on success of its Royal Enfield business. The brand has now been highly recognised and leading to exceptional growth in demand (6-8 months waiting period). EML is increasing capacity for Royal Enfield from existing ~70,000 units to ~150,000 units in CY13.
Commercial Vehicles to benefit from JV
Combined efforts of Volvo's technological proficiency and high quality standards, together with EML's distribution and low cost manufacturing will lead the road to success in HCV space
Global Manufacturing Hub
Volvo Group plans to make VECV’s plant in Pithampur the base for its futuristic Medium Duty Engine global Platform involving an initial investment in industry of Rs 2880 mn. The 5 and 8-litre engines will be produced and assembled in India.
Slowdown in the CV industry
The overall CV industry is facing a slowdown in line with the overall automobile sector and raising concerns of lower economic growth. As Eicher follows calendar year the overall impact of this slowdown will not be visible in its CY11 numbers. However, going forward we believe that Eicher will also witness pressure in this segment in CY12. Despite this, the long term story remains intact. With recovery in demand in late CY12 and CY13 and enhanced capacity we believe that Eicher is poised for strong growth in the long term.
Valuation & Recommendation
Although, the final results of the steps taken by the company will be clearly visible from Q1CY13 onwards, we believe that the company has taken the right steps in the right direction and the initial success signs are visible.
Considering the robust earnings growth and strong balance sheet, we believe that EML will continue its growth story in the coming years.
At CMP, the stock is trading at P/E of 14.8x CY11E, 12.2x CY12E and 11.1x CY13E. Though the near term outlook for the stock is slightly subdued, we believe that the stock can be ‘accumulated on decline’ from a long term perspective. On consolidated basis cash per share comes to Rs 629.

CIPLA Superior product mix, SEZ boost profits :: Edelweiss

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Cipla’s Q2FY12 adjusted PAT at INR2.98bn grew 20% YoY, ahead of our
estimate of INR2.79bn, led by better product mix and higher utilization at
Indore SEZ. Revenue growth of 10% YoY was in line; however domestic
growth of 12% YoY was ahead of the estimated 9% and was on higher
base of 20% YoY in Q2FY11. We believe the company’s domestic business
has gained momentum and should deliver strong performance in H2FY12.
We maintain our estimates and reiterate ‘BUY’ with TP of INR350.
Profitable growth and sustained improvement in margin
Cipla’s sales grew 10% YoY, in line, led by strong growth in domestic and ROW markets.
Despite lower tech income (INR77mn vs. est. INR100mn), operating performance was
strong driven by improved product mix and higher utilization from Indore SEZ. EBITDA
margin (ex‐tech income and forex gain) catapulted 247bps YoY and 163bps QoQ.
Notably, gross margin improved 6.3% YoY on back of higher sales from domestic
business and improved efficiency.
Domestic growth surpassed our expectations
Domestic growth at 12% YoY surpassed our expectation and was on a higher base of
20% YoY in Q2FY11, reflecting improved performance (refer our Monthly review dated
Oct 20, 2011). Cipla’s recent focus on high growth chronic segment and mature brands
led to superior growth in the portfolio. We believe visible growth traction and strong
seasonal respiratory sales should lead to better trajectory in ensuing quarters.
Inhaler opportunity in EU could be medium term growth driver
Inhaler opportunity offers USD2.3bn‐6.0bn addressable market opportunity in ROW
and EU markets. After initial regulatory hurdles, the company has launched Salmeterol
inhaler in a few EU markets. It has also launched Seroflo combination inhaler in Russia,
which has gained strong traction. Cipla plans to launch Seroflo in EU markets (12‐15
months) which could be a medium term growth driver to export formulations.
Outlook and valuations: Positive; maintain ‘BUY’
We believe that expected recovery in domestic business and margin improvement in
SEZ will impart higher earnings growth (21% CAGR over FY11‐13E). Risk‐reward is in
favor and, hence, we reiterate ‘BUY/Sector Outperformer’.