05 December 2011

Adani Enterprises (ADEL.BO) 2Q12 Results – A Mixed Bag   Citi Research

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Adani Enterprises (ADEL.BO)
2Q12 Results – A Mixed Bag
 2Q12 Recurring PAT - 5% below CIRA — Despite a beat at the (1) sales level by 12%
and (2) EBITDA margin level by 30bps, ADE’s Recurring PAT at Rs5.9bn +5% YoY was
5% below CIRA at Rs6.2bn on account of higher-than-expected interest costs at
Rs4.1bn v/s CIRA at Rs2.1bn. The debt equity ratio ballooning up to 3.0x end 2Q12
from 1.9x end FY11 is concerning.
 Coal Trading: Strong volumes - margins disappoint again — Volumes at 9.8m tons
were up 45% YoY (ahead of CIRA at 8.45m tons). But EBITDA margins at 7.5% were
below CIRA of 8.4%. To meet our FY12E volume assumption of 45m, ADE needs to do
25m tons in 2H12E, up 36% YoY, which we believe is very much achievable.
 Adani Power: Recurring PAT 11% below CIRA — APL’s 2Q12 Recurring PAT at
Rs2.0bn (CIRA Rs2.3bn) was +59% YoY/ +13% QoQ. Net sales at 2959 mnkWh were
lower than CIRA at 3388 mnkWh on lower generation and high auxiliary consumption.
Merchant realizations were high at Rs4.70/kWh on account of sales to UPPCL.
Receivable days have moved up from 58 days to 74 days over the last year.
 MPSEZ: Marginally ahead — PAT of Rs2.73bn, up 29% YoY and marginally ahead of
CIRA (Rs2.68bn). Revenues were 9% ahead of CIRA and were up 44% YoY. Although
EBITDA margins of 64.4% were weaker than expected (67.6%), the impact was offset
by higher-than-expected other operational income. MPSEZ registered a 34% YoY
cargo growth, largely driven by strong growth in coal (70% YoY) and liquid cargo (33%
YoY).Container growth in 2QFY12 was 17% YoY.
 Target price cut to Rs522 — We lower EPS estimates by 14-31% over FY12E-15E to
factor in (1) -3% to +2% change in sales and (2) 238 to 372bps lower EBITDA margins.
We also cut our target price to Rs522 (from Rs568 earlier) to factor in our EPS revision
and (2) roll forward of all DCF values to Mar12E (Dec11E) and (3) roll forward of all
P/BV and EV/EBITDA multiples to Mar13E (Dec12E).

Lupin (LUPN.BO) : Adding Muscle in Japan  Citi Research

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Lupin (LUPN.BO)
Alert: Adding Muscle in Japan
We expect Lupin’s acquisition of I’rom Pharma to strengthen its presence in Japan by
providing exposure to injectables & the growing DPC hospitals segment. While
financial details are sketchy, the management has indicated that the deal would be
earnings accretive from the outset. Lupin remains one of our top picks in the sector.
 The deal – Lupin’s Japanese subsidiary (Kyowa) entered into an agreement with I’rom
Holdings of Japan to acquire up to 100% stake in the latter’s subsidiary I’rom
Pharmaceuticals. This is Lupin’s second acquisition in the Japanese market.
 About I’rom Pharmaceuticals – I’rom Pharma is a specialty injectables company in
Japan, established in 1947 and has its headquarters in Tokyo. It primarily caters to the
Diagnosis Procedure Combination (DPC) hospitals in Japan. DPC hospitals are fixed
rate/flat sum reimbursement hospitals and hence more likely to promote generics.
These account for over 35% of overall hospital beds in the country. It had revenues of
JPY5,361m (cUS$69m) in FY11 (year to March), with single-digit margins.
 Consolidating its presence in Japan – With this acquisition, Lupin further
strengthens its presence in the high potential Japanese market. The combined entity
(Kyowa + I’rom) would have revenues of cUS$230-240m in Japan – c15% of Lupin’s
overall turnover. I’rom’s injectables portfolio is complementary to Kyowa’s oral portfolio.
Besides, Lupin can now seek to leverage I’rom’s strong position in Japan’s hospitals to
introduce injectables from its own product basket in this market. Lupin remains the only
Indian play, with any degree of scale, on the Japanese generics opportunity.
 What is the financial impact? – Very few financial details are available, making it
difficult for us to independently ascertain the financial impact at this stage. The
management has indicated that the transaction would be accretive to earnings from the
outset. We understand that margins are well below Lupin’s corporate average (would
improve going forward) but this is offset by the valuation (undisclosed) and low cost of
funds (possible low cost debt raised in Japan). Lupin’s track record on inorganic
initiatives also gives us comfort on this front.

FII & DII trading activity across NSE and BSE 05-12-2011

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CategoryBuySellNet
ValueValueValue
FII
1506.921360.19146.73
DII650.91613.2437.67

 

Cummins India (CUMM.BO) Maintain Sell – Too Early to Bottom-Fish Citi Research

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Cummins India (CUMM.BO)
Maintain Sell – Too Early to Bottom-Fish
 PAT down 23% YoY — PAT at Rs1.28bn was 23% below CIRA at Rs1.68bn. Domestic
sales declined 5% YoY, while exports were up 15% YoY. EBITDA margins at 14.5%
were down 358bps YoY on the back of (1) inflation in raw materials and (2) poor
product mix with the upper end experiencing a bigger slowdown vs the lower end of the
range.
 Sales guidance cut as expected — Export growth guidance maintained at 5-10% but
domestic growth guidance has been cut to 5-10% from 10-15% earlier. Competitor
KOEL has also revised down sales growth guidance for FY12E twice this year from 15-
20% (Post FY11 results) to 10% (Post 1Q12 results) to 0% (Post 2Q12 results).
 Margin expectations lowered — PBT margins could contract 100bps over next two
quarters from ~ 17% end 2Q12: (1) inflation seems to be leveling but pig iron continues
to climb and (2) mix could be poor, similar to what it was in 2Q12, over the next two
quarters. The impact of price increases in earlier part of the year is already baked into
numbers now and hence cannot provide upside to margins.
 FY12E-14 EPS cut by 17-20%— This is to factor in 5-8% lower sales. For FY12E we
factor in domestic growth of 5% (vs guidance of 5-10%) and export growth of 10% (vs
guidance of 5-10%). 57-138bps lower margin. We assume EBITDA margins will
contract from 14.5% in 2Q12 to 14.1% in 3Q12 to 13.6% in 4Q12. We also factor in
99bps and 66bps improvement in FY13E and FY14E.
 Too early to bottom fish - Maintain Sell — Though we believe CIL is a quality
company with sustained +ve CFO and dividend yield of 3%+, we believe it might be a
little to early to bottom-fish this name, as we believe there are significant downside
risks to consensus expectations (our EPS estimates are 14-22% below consensus for
FY12E-14E). We revise down target price to Rs334 (Rs387 earlier) to factor in (1) 17-
20% EPS cut and (2) roll forward of target P/E multiple of 15x to Mar13E from Dec12E.

Infrastructure Sector-Quarterly Compendium:: Nirmal Bang

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Asset developers perform better than EPC players
2QFY11 earnings (net profit) of the infrastructure sector (seven EPC players and
six infrastructure developers) showed a declining trend because of higher
interest costs and slower project execution by EPC players. Interest costs as a
percentage of sales rose by ~200bps to 500bps following higher interest rates
coupled with increase in working capital requirement. Bloomberg consensus
estimate earnings of the infrastructure sector for FY12 and FY13 were
downgraded by 3%. In our sector report dated 26 September 2011, we had
stated the performance of infrastructure companies would be subdued in the
coming quarters. However, concerns over rising interest rates, regulatory
issues and projects execution delay are likely to subside in the short term,
thereby leading to outperformance by infrastructure stocks. We retain our
positive view on the sector.
Key highlights:
Infrastructure developers companies reported robust net sales as compared to
pure EPC players. Net sales growth of EPC players was up 8% YoY, but down
3% compared to Bloomberg consensus estimate due to rising working capital.
Infrastructure developers’ net sales growth was up 30% YoY and 12% higher than
Bloomberg consensus estimate, primarily driven by execution of captive projects.
EBITDA of pure EPC players increased 6% YoY, but was down 7% compared to
Bloomberg consensus estimate, primarily in line with lower revenue growth.
EBITDA of infrastructure developers rose 20% YoY, which was 5% higher than
Bloomberg consensus estimate.
Interest costs, as a percentage of sales, increased by ~200bps to 500bps for
infrastructure companies during the quarter, which has impacted EPC players’ net
profit.
Net profit of EPC players declined 68%, which was 44% lower than Bloomberg
consensus estimate, primarily due to subdued revenue growth and higher interest
costs. Net profit of infrastructure developers declined 23%, which was 15% lower
than Bloomberg consensus estimate, because of declining margins following the
rising contribution of lower margin segment business to revenue and also higher
interest costs.
Net working capital requirement of EPC players increased 17% (as against sales
growth of 7%), but for infrastructure developers it declined 6%, primarily due to
increase in current liabilities.
Bloomberg consensus FY13 net profit estimate post 2QFY12 results was
downgraded primarily because of HCC (down 17%), NCC (down 14%) and GMR
Infrastructure (down 4%).
Our view: Going ahead, infrastructure companies will continue to show a declining
trend in terms of profitability in the coming quarters, which is largely discounted by the
market. However, concerns over rising interest rates, regulatory issues and project
execution delay are likely to subside in the short term. The valuation of the sector is
close to its bottom and therefore we retain our positive view on the sector.

TV 18 Restarted accepting FDs at 11.5% p.a. (12.00% p.a. for Senior Citizen)

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Dear Investor,

Kindly note that TV-18 Broadcast Ltd. has restarted accepting Fresh Deposits w.e.f 2nd Dec’11 & they haveincreased the interest rate by 0.50%. & it’s closing on 7th Dec’11.


Scheme (A) – Non Cumulative
Scheme (B) – Cumulative

Period

Minimum
Amount

Interest Rate % p.a.

Period
Minimum
Amount
Interest Rate % p.a.
Amount Payable on Maturity
Effective Yield %
OLD
NEW
OLD
NEW
6 Months
10,000
9.00 %
9.00 %
-
-
-
-
-
-
1 Year
10,000
11.00 %
11.50 %
1 Year
10,000
11.00 %
11.50 %
11,201
12.10 %
2 Year
10,000
11.00 %
11.50 %
2 Year
10,000
11.00 %
11.50 %
12,545
12.73%
3 Year
10,000
11.00 %
11.50 %
3 Year
10,000
11.00 %
11.50 %
14,051
13.50 %
v  Interest is compounded quarterly.
v  0.50% p.a. additional interest for senior citizens age above 60 Yrs.


TV-18 Fixed Deposit:
·          High attractive interest rate 11.50% p.a for 1 yr, 2 yrs, 3 yrs FDs.
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Reliance Capital: Valuations inexpensive, performance in ::Kotak Securities

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Reliance Capital (RCAPT)
Banks/Financial Institutions
Valuations inexpensive, performance in. Challenges in the financial sector (higher
rates, subdued insurance collections, provisions in housing finance, lower brokerage)
continue to affect profitability of Reliance Capital. The recently-concluded deal with
Nippon Life will boost its ability to deal with the aforesaid challenges. We upgrade our
rating to ADD (from REDUCE) on the back inexpensive valuations, retain SOTP-based
target price of Rs470. We believe that developments at the ADA Group and
simplification of intra-group holdings key would be catalysts for stock performance.

Ambuja Cements: 8X EV/EBITDA—earnings risk may supersede control premium ::Kotak Sec

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Ambuja Cements (ACEM)
Cement
8X EV/EBITDA—earnings risk may supersede control premium. Despite the
correction in the stock over the past week, we continue to maintain our SELL rating on
Ambuja Cements (ACEM) as current trading multiples (8.3X EV/EBITDA) do not take
cognizance of earning pitfalls from a bleak demand environment (2.8% YTD). ACEM’s
stock performance over the past few years has been driven by multiple expansion
(8-15X) likely influenced by control premium paid by its promoter (Holcim), which may
be less inclined to increase ownership in the current turbulent times with key leverage
ratios precariously near targets.

Oil & Natural Gas Corporation: All is well abroad, not so well in India:: Kotak Sec

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Oil & Natural Gas Corporation (ONGC)
Energy
All is well abroad, not so well in India. We take comfort from OVL’s reported
EBITDA of `64.1 bn (+59.4% yoy) and net income of `27.2 bn (+263% yoy) in 1HFY12.
We expect OVL’s profitability to improve in 2HFY12E given (1) likely weaker Rupee and
(2) higher oil and gas production. We reiterate our BUY rating on ONGC stock given
(1) attractive valuations at 7.6X FY2012E EPS and (2) 35% potential upside to our
12-month target price of `355 based on 9X FY2013E estimates.

Accumulate LIC HOUSING FINANCE :TARGET PRICE: RS.240: Kotak Sec

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LIC HOUSING FINANCE LTD
PRICE: RS.220 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.240 FY13E P/E: 8.5X; P/ABV: 1.9X
Q2FY12: NIM disappointed, likely to improve in H2FY12. Net Income
was pulled down by additional standard asset provisions.
q NII grew at moderate pace (9.5% YoY) on back of lower NIM (2.45% in
Q2FY12; contraction of 48bps) despite 29.3% growth in loans book. NIM
disappointed during Q2FY12, however, likely to improve in H2FY12 as
50bps rise in lending rates (Q2FY12) would start reflecting in interest income.
Net Income was down by 58.0% YoY mainly on back of huge provisions
(Rs.2.05 bn) done on standard assets to meet the recent NHB regulations.
q Disbursements picked-up (45.2% QoQ) during Q2FY12; Individual disbursements
grew at healthy pace (24.0% YoY) during Q2FY12 as compared
to 14.9% witnessed in the previous quarter. Although, developer
lending grew at moderate pace (8.0% YoY) during Q2FY12, it was better
than the previous quarter (2.2% YoY).
q Asset quality improved during Q2FY12 after rising sharply during last
quarter (seasonal phenomena!!). In absolute terms, gross NPA and net
NPA declined 19% and 64%, respectively. In percentage terms, both gross
as well as net NPAs declined to 0.64% and 0.12%, respectively.
q At the CMP, stock is trading at 1.9x its FY13E ABV and 8.5x its FY13E
earnings. We have tweaked earnings estimate downward for FY12E to
factor-in higher provisions done during Q2FY12. With limited upside
from current levels, we maintain the ACCUMULATE rating on the stock
with unchanged TP of Rs.240 based on 2.0x its FY13 ABV.

Buy ALLCARGO GLOBAL LOGISTICS ; TARGET PRICE: RS.190 :Kotak Sec

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ALLCARGO GLOBAL LOGISTICS LTD
PRICE: RS.121 RECOMMENDATION: BUY
TARGET PRICE: RS.190 CY12E P/E: 7.4
We met the management of Allcargo Global Logistics (AGL) to get an insight
on the latest developments in the company.
Multimodal Transport Operations (MTO) showing signs of slowing
Allcargo generated its ~10% MTO volume (25,875 TEUs in CY10) from Indian market
and it generates remaining 90% MTO volume (~211,700 TEUs in CY10) through
ECU Line which has its presence in over 59 countries. MTO business largely depends
upon the performance of the container shipping segment. However, the global container
freight rates has fallen across routes by more than 40% in the last 10 months
with no signs of immediate recovery. For instance India - UK per TEU rate has fallen
from $ 1300 per TEU in January 2011 to $700 per TEU currently. But AGL being a
Less than Container Load (LCL) consolidator won't be much impacted by the weakness
in the container shipping market. Hence we are not bearish for MTO volume
growth for AGL. Increasing containerization especially in India supports our argument.
In Q3CY11, domestic MTO volumes grew by 13.2% YoY to 7,367 TEUs and
ECU Line volumes grew by 12.3 % YoY to 63,010 TEUs. We estimate domestic
volume to increase at a CAGR of 13% CY10 - CY12E to 32.894 TEUs in CY12E with
Indian economy is expected to grow ~7% for the next two years. While remaining
cautious, we estimate ECU Line's volume to increase at a CAGR of 4.5% over CY10
- CY12E to 234,477 TEUs in CY12E.

Page Industries: Hold:: Business Line

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A unique presence has come in handy for Page Industries, whose stock has climbed 60 per cent since the start of this year even as most other retail and textile stocks faltered. The company primarily operates in the mid-to-premium innerwear market which has little competition in the listed space. Expansion in product lines, an ability to pass on cost increases, a wide distribution network and a strong brand presence helped sustain positive sentiments.
Still, the stock's impressive run has left it at high valuations. At Rs 2,506, it trades at 35 times the trailing 12-month earnings, a premium to most textile stocks and on a par with larger and more diversified retail stocks.
The Indian consumer has borne the brunt of high fuel and food bills for a long time now and has begun to scale back spending. The mid-to-premium of Page's products may deter purchases, especially by the vast middle income segment.
The company is further not invulnerable to fluctuating input costs, given negligible margin improvements over the past three quarters. The stock also suffers from a relatively lower float. Investors can retain their holdings, but refrain from fresh buying at current levels.

WIDE PRESENCE

Page markets its products through a combination of exclusive Jockey stores and other lingerie retailers. Exclusive brand outlets currently number 70 while the company distributes products through more than 20,000 retail outlets. This presence across the country helps it target a wide consumer base.
Page's flagship brand, Jockey, has a strong standing in the high-quality category, with quality-conscious consumers willing to fork out more. Extending this brand into related garment categories has proved successful for Page, which has introduced categories, apart from men and women's innerwear over the past couple of years.
For instance, it added sportswear and other leisure wear such as stretch pants and shorts for men and women. Such a diversification helps address a wider market and increase its share in the customer's wallet.
In July this year, Page became the exclusive licencee of global swimwear major, Speedo. Page will begin rolling out swimwear from the March '12 quarter onwards. Significant revenue contribution from this line is likely to kick in from the next financial year.

SUSTAINED GROWTH

Revenues have grown at a compounded annual rate of 37 per cent over the past three years. Net profits have similarly grown 35 per cent. Cotton, the primary input, had seen prices spiralling last year. Excise duties on branded apparel also took a toll on costs. Page accordingly took price hikes, but faced dented demand.
The March '11 quarter saw revenues and net profits grow at their most sedate pace of 35 and 29 per cent respectively against the 40-plus growth rates of the earlier quarters. Operating margins in the quarter too dipped two percentage points to 15 per cent compared to the same quarter the year before.
However, cotton prices have cooled off over the past few months. Demand has also adjusted to higher prices, and growth picked up by the September '11 quarter.
Revenues grew 43 per cent while net profits jumped 55 per cent. Operating margins however showed no improvement, staying at 20 per cent. A lower materials bill in the quarter was compensated by a hike in other expenses as the company stepped up promotional campaigns. Given its new product line in Speedo swimwear, advertising outgo may sustain at higher levels.
Page has also brought down its debt in the September '11 quarter. Debt-to-equity now stands at 0.44 against 0.93 at end-March '11. Interest costs and debt, therefore, do not pose a risk to earnings. The company is also well-placed to fund expansion.

CONSUMPTION SLOWDOWN

Even strong brands and a diversified presence cannot beat an overall consumption slowdown. Inflation has eaten into disposable incomes with consumers already cutting down on discretionary spends.
Page's products are present in the mid-to-premium price range while being more or less non-discretionary in nature. Even so, the middle-income segment's shrinking disposable income could result in down-trading into less pricey products.
Given the fragmented innerwear market, there is plenty of competition in lower-priced products.

Reliance Industries Ltd. RIL may bid for US refiner Valero 􀂄 BofA Merrill Lynch,

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Reliance Industries Ltd.
RIL may bid for US refiner
Valero
􀂄 Possible RIL bid for largest independent US refiner Valero?
According to press speculation, RIL may bid for US refiner Valero (see Valero
Energy Corp., 27 October 2011). Valero is the largest independent US refiner with
2.8m b/d of refining capacity (Nelson complexity of 11.3). Valero can process
heavier/sourer, cheaper crudes, which means lower earnings volatility vis-à-vis
peers. A bid for Valero at US$48/share (as per some press reports) appears
aggressive but would be earnings accretive if Valero’s profit is over US$2.2bn in our
opinion. At BofAML’s estimate of US$3.1bn, a Valero acquisition would boost FY13
earnings by 8-19%. Retain Buy.
Acquisition EPS accretive if Valero profit over US$2.2bn
RIL’s net debt is US$3.5bn (gross cash US$15.6bn) and is set to turn net cash
assuming no big acquisition by end of FY12. RIL has been looking for acquisitions
and had even bid for LyondellBasell in 2009. We believe RIL could bid for Valero.
Some reports suggest RIL’s bid may be at US$48/share (82% higher than Oct 27
closing of US$26.2) while BofAML PO for Valero is US$36. Acquiring a 100%
stake in Valero at US$48/share would cost US$27.5bn (net debt US$4,6bn).
Valero’s acquisition would be earnings accretive if Valero's FY13 net profit is
higher than US$2.2bn. BofAML net profit for 2012 is US$3.1bn and consensus is
US$2.5bn. At US$48/share its 2011-12 PE is 9.0-9.6x and EV/EBITDA 4.7-5.4x.
US and Valero’s refining outlook the key
Paying US$48/share for Valero would mean 65% higher valuation per complex
barrel vis-à-vis RIL’s new refinery built in 2009. We believe some premium is
justified if Valero’s stronger GRM in 2Q 2011 (US$11.6/bbl vis-à-vis RIL’s
US$10.3/bbl) is sustainable. 17% of Valero’s throughput in US mid-continent gains
from weak WTI prices but a key question is how long are these gains sustainable?

Accumulate GE Shipping :TARGET PRICE: RS.300 : Kotak Sec

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GE SHIPPING
PRICE: RS.230 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.300 FY13E P/E: 8.8X
Subdued operational performance
Weak shipping market (especially tanker market), rupee depreciation, high
bunker and insurance cost, and depleted shipping fleet resulted in GESCO
reporting subdued net profit of Rs 275 million for the quarter decreasing
more than 75% QoQ and even YoY. Weak performance was reported by the
tanker and the product segment in the quarter. Even the bulk segment
continues to be weak which is reflected in the Time Charter Equivalent (TCE)
figures. Over supply of ships continues to put pressure on the freight rates
affecting the performance of most of the ship-owners including GESCO.
However the offshore subsidiary Greatship India Ltd (GIL) has shown
healthy performance and has contributed almost 90% of the earnings and
40% of the revenues for the company. We are cautious on the shipping
business and believe that GIL would be the key earnings driver for the
company in near term. We are reducing the target price by 5% to reflect the
fall in shipping asset prices by 5 to 10 % in the last 4 months. We reiterate
Accumulate on the stock with a reduced TP of Rs 300 for the stock.

RELIANCE COMMUNICATIONS Focusing on quality of customers :: Edelweiss

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Reliance Communications’ (RCOM) Q2FY12 revenue was below
estimates, but the 1.6% QoQ growth in overall minutes compared to 2.0%
decline for Bharti and Idea was a surprise. Though it reported a marginal
surge in RPM, margins still declined. We are revising our earnings down
by 11% and 3% for FY12 and FY13 respectively. It is running aggressive ad
campaigns to improve its brand positioning, but the competition remains
intense. In our view, the management’s confidence on redeeming the
USD1bn FCCB in March 2012 without additional debt hints at probable
tower sale in the next few months. At 5.7x FY13E EV/EBITDA, we see
limited downside hence upgrade to ‘HOLD’.
Wireless operating metrics a surprise
RCOM’s wireless revenue grew 2% QoQ driven by 1.6% QoQ growth in total minutes on
the network and 0.4% QoQ surge in RPM. The growth in total minutes was surprising as
Bharti and Idea reported a decline and Vodafone managed to keep them stable. As per
the management, this was achieved despite the absence of ‘free minutes’. RCOM has
started aggressive advertising campaigns and is probably seeing some early benefits.
Its ARPU declined by 1.9% QoQ in Q2, but might go up due to its focus on better quality
customers. It claims to be increasing the proportion of postpaid customers. RCOM
reported an increase of 0.4% QoQ in RPM and expects it to rise further by about 2.2%
over the next two-three quarters.
Higher SG&A costs dent margin, no forex loss recognised
The company’s wireless margin declined 50bps QoQ primarily due to higher SG&A
costs. RCOM has not recognised any forex loss arising from exchange rate fluctuations
(as per permission granted by Mumbai High Court) as it is likely to take the impact at
the end of the year. It also continues to have no tax incidence.
Outlook and valuations: Towerco sale to be key; Upgrade to ‘HOLD’
RCOM generated free cash flow (post capex) of INR6.4bn in H1FY12. While there are
signs of improvement in the business, for an improvement in ROCE at 3.2%, the sale of
towerco is necessary. At 5.7x FY13E EV/EBITDA, we believe downside is limited and
upgrade the stock to ‘HOLD/Sector Underperformer’ recommendation/rating.

Sobha Developers: Robust sales with steady financials :: Kotak Sec

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Sobha Developers (SOBHA)
Property
Robust sales with steady financials. Sobha had sales of 0.9 mn sq. ft in 2QFY12
which is a ten-quarter high while EBITDA and PAT beat our estimates. A marginal
increase in net debt qoq is the only negative. We maintain our BUY recommendation
on Sobha with a revised target price of Rs350/share (Rs370/share earlier). At current
market price, we find minimal value being ascribed to either (1) development more than
ongoing projects, (2) brand and (3) Sobha operating as a going concern.

Tata Power: Structuring the coal hedge :: Kotak Sec

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Tata Power (TPWR)
Utilities
Structuring the coal hedge. Tata Power’s 2QFY12 earnings call was dominated by a
discussion of the proposed transfer of the coal assets to Mundra--thereby lending
comfort to lenders on cash flow support and to prevent impairment of the equity
invested. In our view, varied interpretations of the proposed re-structuring and the
accounting treatment may keep a check on stock performance. We continue to remain
positive on the prospects of the coal business, and maintain our BUY rating with a
revised target price of Rs125/share

Divi's Laboratories : Revival on cards:ICICI Securities

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R e v i v a l   o n   c a r d s …
We met the management of Divi’s Laboratories (DLL) to get insight of
business model and growth plans. DLL is engaged in manufacture of
generic APIs, custom synthesis of  active ingredients for innovator
companies and other speciality chemicals like peptides and
nutraceuticals. DLL’s product portfolio comprises of two broad segments-
(i) Generic APIs including Nutraceuticals and (ii) Custom Synthesis of
APIs, Intermediates and Speciality ingredients for innovator pharma
giants. It also includes peptide building blocks. The sales break-up
between these two segments is almost 50:50 (FY11). The company
remains committed to only few research driven opportunities as was the
case when it started commercial operations in the early nineties. This is
why so far it has filed just 39 odd DMFs and doesn’t want to increase its
count drastically. To enter custom synthesis space in the nineties, the
company made its own case to the innovators which, until then were
relying on services provided by major players such as BASF, Degussa
etc. As these players grew and became as big as the innovators
themselves, companies like DLL on  account of their capabilities and
commitment towards strict IP regime, started getting assignments. DLL
currently owns 3 manufacturing facilities- One in Nalgonda near
Hyderabad and two in Vizag. It is in the process of setting up 4th
manufacturing facility also in Vizag.
Business model
Generic APIs
The company manufactures generic APIs and advanced intermediates for
off patented APIs. So far it filed 39 DMFs with the USFDA and 10 DMFs
with the EDQM. Generic APIs account for nearly 50% of total sales. The
key APIs are Naproxen, Dextromethorphan Hydrobromide, Lopamidol &
Phenylephrine. DLL enjoys more than 70% market share across the globe
for APIs like Naproxene and Dextromethorphan hydrobromide.
Naproxen is a non-steroidal anti-inflammatory drug (NSAID) used in the
treatment of arthritis, spondilitis and other inflammatory conditions.
Around 18% of DLL’s total revenues come from Naproxen. Its DMF was
approved by both USFDA and by EDQM. Other players which
manufacture Naproxen API are Roche, Teva, Albemarie, Farchemia and
Dr Reddy’s Laboratories. Around 9% of the total revenues come from the
Dextromethorphan Hydrobromide API. The API is a cough suppressant,
which is a widely used ingredient in the formulation of cough syrups and
tablets. Other players which manufacture this API are Roche, Dr Reddy’s
Laboratories and Wockhardt