18 December 2011

Global Equity Strategist --Euro Crisis, Global Contagion :: Citi Research

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Global Equity Strategist
Euro Crisis, Global Contagion
 Sovereign Crisis, Banking Crisis, Recession — Our economists believe the
sovereign and banking crisis in the Euro Zone will lead to a protracted recession.
With the help of CIRA economists, strategists and sector analysts we consider what
a Euro Crisis will mean for equity markets around the world.
 Euro Recession, Global Consequences — CIRA economists forecast Euro Zone
real GDP to contract for 6 consecutive quarters and not get back to previous peak
levels for many years to come. Non-European companies with significant revenue
exposure to the region include Johnson Controls, Paccar, Nikon, HTC and
Cochlear.
 Bank Deleveraging — CIRA analysts show that Continental European Banks are
amongst the most leveraged in the world. Further deleveraging may weigh on credit
growth in Central and Eastern Europe which is most reliant on Euro Bank financing.
 Global Opportunities — The Euro Crisis also brings global opportunities. CIRA
Banks analysts believe US and UK Financials may win market share from their Euro
peers. CIRA equity strategists expect Euro exporters and Emerging Market equities
will outperform as they benefit from a weaker currency and easier policy.

ENAM - >> Update | Ranbaxy

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Ranbaxy has finally put an end to the long drawn uncertainty around launch of generic Lipitor (Atorvastatin), as it launched the product in US on 30th Nov’11. Owing to its ongoing issue with the US FDA at Poanta Sahib (originally Atorvastatin was filed from this facility), Ranbaxy has done a site transfer to Ohm Labs, USA. Further, Ranbaxy has entered into a profit sharing agreement with Teva during its 180-day exclusivity.

Our assumptions
q       Market share – We believe getting a high market share would be very difficult for Ranbaxy. Given Pfizer is targeting 40% market share and an aggressive AG, we assume Ranbaxy can get 30% market share (from earlier 40%).
q       Price erosion – We are assuming a significant price erosion of 50% (from earlier 30%) in the near term.
q       Agreement with Teva – We believe this is for marketing and distribution support (assuming a 50% profit sharing).

Reduce estimates and TP; Maintain HOLD (8% upside from CMP of Rs 435)
Given the profit sharing agreement with Teva, we reduce our CY11E and CY12E EPS by 29% and 20% to Rs 37 and Rs 43 resp. Accordingly, we reduce our value of Lipitor to Rs 16/ share (Rs 43 earlier) and our TP to Rs 468 (Rs 418 for base biz at 20xCY12E EPS of Rs 21 and Rs 50 for settlements) from Rs 495 earlier. At CMP of Rs 435, the stock is trading at 12x CY11E and 10x CY12E EPS.

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Crash of rupee is crash of confidence: Swaminathan Aiyar in ET

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The rupee has crashed from Rs 45 to Rs 54 to the dollar, before recovering slightly to Rs 52.80 on Friday. Dismayed corporations and politicians want the Reserve Bank of India (RBI) to intervene in currency markets and prop up the rupee.

This would be a terrible mistake. The rupee's fall is not a technical monetary phenomenon. Rather, it signifies a loss of confidence in India by foreign investors, and by Indians too.

Till recently confidence in India was high, and dollars flooded in from overseas Indians and foreign investors. Much of the black money that had earlier left returned through the Mauritius window. But now dollars are flooding out because people have lost confidence in the ability of the political system to make decisions or implement reforms. As long as confidence in India ebbs, so will the rupee.

This creates problems. Corporations and banks that have taken dollar loans suddenly face hugely higher repayment and interest rates in rupee terms. Importers face much higher rupee bills. By making imports more expensive, the rupee's fall can stoke inflation at a time when it is already over 9%.

For all these reasons, people want the RBI to sell dollars and prop up the rupee. Caution, please. Remember that exactly the same arguments were put forward in Thailand by businesses and banks in 1997 to prop up that country's falling currency.

That propping up helped only temporarily, emptied Thailand's treasury and sparked the Asian financial crisis. We must not fall into that same trap. India's foreign exchange reserves of $308 billion may look big enough to warrant spending tens of billions on propping up the rupee. Danger: the benefit will be temporary but the damage to reserves may be permanent.

Foreign loans coming up for repayment in the next six months total almost $150 billion. In normal times, lenders would happily re-lend this sum. But with investor confidence in India ebbing and the Eurozone crisis deepening, lenders cannot be depended on to re-lend maturing loans.

The Eurozone banking system could go bust if European government bonds are downgraded sharply by rating agencies, something entirely on the cards. In the accompanying financial panic, investors will withdraw from all markets associated with ris, including emerging markets like India, and rush into safe havens like the US and just sit on cash.

If that happens, dollar flows into India could come to a sudden stop. In that case, repayments of old loans will halve our foreign exchange reserves in six months, and deepen the panic.

That is an extreme scenario. But even without a Eurozone banking collapse, confidence in India is ebbing. Several Indian businessmen are saying it is easier to get decisions and make investments abroad than in India. If even Indians are losing faith in India, will foreigners be any different?

In this murky situation, the RBI must conserve its forex reserves and not squander its dollars in a vain attempt to strengthen the rupee. But it should use other weapons in its armoury.

On Thursday, it issued new rules limiting the net open positions of banks in foreign exchange, limiting some forms of currency speculations, and reducing the ability of importers and exporters to bet on the future of the rupee. These steps helped the rupee to recover from 54.25 to 52.80 to the dollar.

However, technical fixes of this kind can have only a limited impact. They cannot reverse something as fundamental as loss of confidence in India.

How do we restore that confidence? There is no quick-fix for this. Reputations are built slowly but lost quickly. Anger against corruption has reached boiling point, and that is a good thing. But the political reaction to public anger has not inspired confidence.

Several people are being arrested on evidence that looks very thin, and seems guided more by politicking than a genuine attempt to catch the guilty. The opposition desperately wants to involve P C Chidambaram somehow in a scam originating in the DMK. The Congress government has responded by filing a case against telecom decisions taken by Pramod Mahajan when the BJP was in power.

Many bureaucrats and businessmen have indeed been complicit in big corruption. But the current wave of arrests looks increasingly like vendetta than a genuine desire to root out corruption. So, no bureaucrat wants to take any decision for fear of being hauled up by a vendetta in later years. Businessmen are reluctant to invest in such a murky atmosphere.

Optimists say the darkest hour is before dawn, economic fundamentals will soon reassert themselves and decision making will resume after the UP elections. Maybe so. But the immediate portents are not bright.

Infotech Enterprises - In the value zone; company update; Buy :: Edelweiss

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Infotech Enterprises (INFTC IN, INR 120, Buy)

Our recent meeting with the Infotech Enterprises (Infotech) management indicates that the weak macro environment has not impacted demand. While seasonal and one-off event may result in H2FY12 volume growth in the 3-4% range, we expect the company grow 20% (USD) in FY13E. Further, we  expects operating margins to continue to expand from 15.7% to over 19.0% driven by rightsizing the employee pyramid, turnaround in Daxcon (acquired company) and major benefit from weak INR. We revise our EBITDA margin assumption up to 16.8% for FY12 and 16.0% for FY13 leading to 6% EPS upgrade for FY13E. With P/E at 7x and EV/EBITDA at 2.9x FY13E, we reiterate ‘BUY’.  

Heavy engineering, aero and hi-tech lend growth visibility
We note that none of Infotech’s top10 clients are under stress or have witnessed demand breakdown from their end customers. This, in addition to new wins and ramp-up plans, is leading to 20% plus growth visibility in the engineering segment (contributes 70% to revenue). This is essentially spread across verticals such as heavy engineering, aerospace, utilities and energy segment.

No price pressure; sustainable margin improvement expected
Except for one large client in the telecom segment (where Infotech will consciously ramp-down, impacting growth in N&CE in Q4FY12) the company has not seen any pricing pressure. Infact, in one of Daxcon’s client pricing discount given earlier has been rolled back. This is likely to improve profitability of Daxcon (acquired company) that has so far not contributed to company profitability. Further, as FY12 growth will also be serviced by lower experienced employees, margin leverage will play out in H2FY12.

Outlook and valuations: Attractive; maintain ‘BUY’
At CMP of INR120, valuations at 7x P/E and 2.9x EV/EBITDA are attractive. Healthy revenue growth, margin accretion and increased dividend payout ratio will lead to upward re-rating of the stock. We reiterate ‘BUY/Sector Outperformer’

Aviation - Air India toes the line by hiking fares :: Edelweiss

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Recent media reports suggest that Air India (AI) has raised fares. This implies that the national carrier has abandoned its earlier strategy of undercutting competition to regain market share after the recent employee strike (May 2011). The fare hike is in line with our view that post attaining its pre-strike 15-16% market share in October 2011, the airline has no incentive to keep fares artificially low. We believe this move will induce some rationality in industry fares considering the current high cost environment. We view this as a positive development and believe that 20% plus hike in fares taken by all industry players at the beginning of November 2011 is expected to sustain in the current busy season. Jet Airways (JAL), considering its 25% market share and prominence among business class passengers, stands to gain the most.

Event: Air India falls in line with industry, hikes fares
With AI’s market share at 16.6% (domestic) in October 2011 versus 15.4% in April 2011, the airline’s market share is back to the pre-strike level. Media reports suggest that as the airline’s market share has stabilized, it has also effected a hike in fares, in line with other industry players. Our analysis suggests that fares in general have increased by 20-25% across all routes/sectors. This is positive for JAL and for the industry in general considering the current high cost environment.

Our view: Fares to remain high during ongoing busy season
With all industry players upping the ante considering the ongoing high oil prices and losses suffered during Q2FY12, we believe current fare hikes will sustain for the entire ongoing busy season. We continue to value JAL at FY13E EV/EBIDTAR of 7.25x and maintain our target price of INR400. We maintain ‘BUY’ recommendation.

FIIs sell over $260 million in equities on bleak global economic conditions ::ET

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With Indian equities markets in a firm bearish grip because of slowing domestic growth and bleak global economic conditions, foreign funds pulled out over $260 million during the week ended Dec 16.

The effect of the sell-off was evident on the markets. The 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE) fell 4.45 percent or 722.11 points in the week ending Friday at 15,491.35 points -- the lowest in 25 months.

At the National Stock Exchange, the 50-scrip S&P CNX Nifty also tumbled to a two year-low and closed the week with a 4.42 percent or 215.1 points loss at 4,651.6 points.

Foreign institutional investors (FIIs) have been far from optimistic about Indian stocks as the economy started showing signs of slowdown and interest rates shot up after 13 successive rate hikes by the Reserve Bank of India (RBI) since early 2010.

The gross domestic product grew by the slowest in nine quarters at 6.9 percent in the July-September period. Industrial output fell into the negative, recorded at (-) 5.1 percent in October.

Although, the RBI hit a pause button in the last review on Friday, companies are still burdened with high cost of credit.

According to data available with the Securities and Exchange Board of India (SEBI), FIIs have been net buyers in December to the tune of a paltry $174.41 million. However, for the whole of 2011 they are net sellers, having sold off stocks worth $214.9 million as of Dec 16.

Compare this to the record $28.83 billion overseas funds pumped into the Indian markets in 2010.

The lack of enthusiasm for Indian stocks from overseas funds has seen equities markets settle into a bearish trend for most of the year. The Sensex has lost over 22 percent or 4,373.5 points from last year's levels.

FIIs were net sellers in November off loading stocks worth $787 million, while in October they had poured in $346.51 million.

Ranbaxy Laboratories - Management upbeat, edgy base biz; visit note; Hold :: Edelweiss

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Ranbaxy Laboratories (RBXY IN, INR 418, Hold)

Post the Lipitor launch, Ranbaxy is upbeat and more confident about the future course. While it aims to monetize all FTFs and resolve looming FDA issue, core focus is on improving the base business performance. Slower growth in India is on a wider base where apart from Anti-infectives, CVS and CNS segments are also witnessing muted growth. We maintain HOLD and believe that improvement in base business will be key for valuations.

Lipitor launch - A crucial milestone
RBXY has taken 50% price erosion and is assertive to gain higher market share. The management is also confident of maintaining its market share post exclusivity. Further, scale-up in Ohm facility will enable supplies without impacting existing products.

Closer to resolution of manufacturing issues
Post the Lipitor launch, management is confident of monetizing all FTF opportunities though own launches. While it is nearing a resolution, concern over the timing and penalty will remain an overhang over the stock. We estimate a penalty of USD200mn.

Domestic growth remains a concern
Management views the slowdown in anti-infectives and higher inventory push as a primary cause for the slowdown though the closing stock at distributor level in CY11 is lower than CY10. Further, RBXY is struggling for growth in CVS and CNS segments.

Margins to improve to mid-teens over CY13E
Mgmt has guided for improvement in core margins to mid-teens by CY13E led by an improved mix and better asset utilization. Further, RBXY is expected to supply Nexium formulations by end of CY11 which will render high growth and margins to business.

Outlook and Valuation: Base business traction; Maintain ‘HOLD’
While Lipitor has played out for RBXY, future valuations will be driven by base business performance and resolution of FDA issue. We maintain ‘HOLD’.


Dish TV India - All eyes on progress of digitization drive; visit note; Buy :: Edelweiss

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Dish TV India (DITV IN, INR 68, Buy)

Our recent interaction with Dish TV management has given us confidence that the company will maintain its earlier FY12 guidance for subscriber additions and ARPU. The expansion in EBITDA margins is also likely to continue. In the post-digitisation scenario, DTH companies could potentially add ~50% incremental market share due to their strong brand equity and better access to funds as compared to cable companies. We expect Dish TV to be a key beneficiary and maintain ‘BUY’.

Subscriber acquisition slows down marginally post festive season
We expect Dish TV to add ~0.9mn subscribers in Q3FY12 (0.58mn in Q2FY12, 0.73mn in Q1FY12, 1.1mn in Q3FY11). It had added ~0.43mn subscribers in the festive month of Oct 2011. However, post the end of the festive season and a hike in set top box and base pack prices, subscriber additions have gone down slightly in the second half of Nov 2011. If Dish TV adds 0.9mn subscribers in Q3FY12, total subscriber additions till the end of Q3FY12 will be 2.2mn. FY12 guidance by Dish TV is at ~3-3.5mn.

ARPU guidance maintained, EBITDA margins to scale up
The management has been guiding for an exit ARPU of ~INR160-165 in FY12 and feels that the recent price hike of INR10 in the base pack will help Dish TV to maintain its ARPU guidance.  Also, the expansion in the EBITDA margin is expected to continue. Recently, the Foreign Investment Promotion Board (FIPB) has approved Dish TV’s application to raise ~INR9.8bn. The funds raised will act as a war chest to help the company get ready for digitisation and HD. As per Mr. Venkateish, CEO, Dish TV the company expects to turn free cash flow positive from Q4FY12 or Q1FY13 (same as earlier guidance) for current operations.

Outlook and valuation: Stays our top pick in media sector
Compared to 0.58mn subscriber additions in Q2FY12, we expect Dish TV to add ~0.9mn subscribers in Q3FY12 which will boost the EBITDA growth. At CMP of INR68, the stock is trading at EV/EBITDA of 15.6x and 10.6x FY12E and FY13E respectively. We maintain ‘BUY’recommendation and ‘Sector Outperformer’ rating.

Havells India Myth Resolved, Growth On Track, Retain BUY : Emkay

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Havells India
Myth Resolved, Growth On Track, Retain BUY


BUY

CMP: Rs437                                       Target Price: Rs460

We met Havells to analyze its stellar operational performance in H1FY12 and get an outlook on the business in this testing environment
n     New product launches across business segments and expansion in distribution network to drive 14-15% domestic revenue growth 
n     Europe business fairly stable; LATAM and Asia to continue as revenue growth drivers for Sylvania. Margins to be sustained at 7.3% for FY12E
n     Strong H1FY12; Continuity of growth momentum in domestic operations and sustainability of Sylvania profitability in H2FY12 as well
n     Retain Buy with price target of Rs 460, thereby implying target multiple of 8.6x FY13E EV/EBIDTA.

Oil & Gas - GRMs pounded on lower spreads; ::Edelweiss

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Brent crude prices were flat in November averaging USD111.3/bbl. INR depreciated further by 1.5 over high trade deficit concerns. Indian complex GRMs and Singapore GRMs dipped significantly by USD3.1/bbl and USD4.8/bbl due to a reduction in gasoline spreads. Light product cracks eased while Heavy product cracks improved MoM. In marketing, diesel/kerosene under-recoveries spiked due to INR depreciation and continued high spreads. LPG under recoveries decreased by 2.3% MoM. Top Picks – ONGC, RIL and PLNG.

Some major company events during the month
ü  Petrol prices were reduced twice during the month, first after the de-regulation, on 16th and 30th November after having hiked once on 2nd of November.
ü  RIL filed arbitration against the Govt for full cost recovery in the KG-D6 basin. It also denied any further investment in the block without resolving the legal issues.
ü  BPCL announced a major gas discovery in its Mozambique block with recoverable reserves of up to 15-30+ tcf from the same.
ü  RIL-BP announced formation of India Gas Solutions Pvt Ltd, a 50:50 JV, for sourcing, marketing, and transportation of natural gas in India

Cement Sector -Dec 2011 Update: Centrum

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Cement Sector


Low base of last year to result in strong despatches growth in November ‘11
Top three players (ACC, Ambuja and UltraTech) in the Indian cement industry have cumulatively reported 16.1% YoY despatches growth for the month of November ’11 benefitting from the low base of last year. Last year, the despatches declined 19.8% MoM in November ‘10 after posting a robust 20.4% YoY growth in October ’10. We believe the industry will report ~15% despatches growth in the month and maintain our growth assumption of 5.5% for FY12E. The industry will have to grow at ~8.6% between Dec ’11- Mar ’12 to achieve the growth rate we forecasted. Cement prices have started improving post monsoon and pan- India average increased by ~8% to Rs270/bag in the last two months in expectation of demand revival in 2HFY12E. We do not foresee a steep hike in cement prices from current levels and maintain our cautious stance on the sector considering a sluggish demand scenario (housing construction activities and real estate sector are under pressure). We maintain Sell on ACC, Ambuja and Ultra Tech considering expensive valuations. We have a hold rating on Grasim and Shree Cement and Buy on mid-cap stocks including India Cements, JK Cement and Orient Paper & Industries.
m  Steep volume growth of top three players: Top three players of Indian cement industry cumulatively recorded 16.1% YoY volume growth in November ’11 benefitting from the low base of last year. Ambuja Cements recorded 29.2% YoY (and 2.8% MoM) growth in despatches to 1.83mt. UltraTech and ACC’s despatches grew 16.3% YoY and 5.2% YoY to 3.09mt and 1.83mt respectively.
m  November ’11 despatches growth could be ~15%: We believe that industry despatches for the month of November ’11 could be ~15% considering the stellar volume growth of top three players who control ~35% market share of cement industry. The primary reason for a steep growth is the low base of last year as in November ’10, industry’s volume had declined 19.8% MoM after a 20.4% YoY growth in October ’10.
m  Cement prices increase post-monsoon: Dealer interactions reveal that pan- India average cement prices have increased by ~8% to Rs270/bag over the last two months in expectation of demand revival in 2HFY12E. Average price in North, Central and East regions increased by 10-13% in the last two months, while in South and West regions it increased by 3-4%. We do not foresee a steep hike in cement prices from current levels and maintain our cautious stance on the sector considering the sluggish demand scenario (housing construction activities and real estate sector are under pressure).
m  Maintain Sell on large caps; prefer mid-caps due to attractive valuations: We maintain Sell rating on large cement companies (ACC, Ambuja and UltraTech) considering the expensive valuations. We maintain Hold rating on Grasim and Shree Cement and Buy on mid-caps under our coverage (India Cement, Orient Paper & Industries and JK Cement).

Mphasis Ltd Top client woes continue to drag revenue performance ::Emkay

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Mphasis Ltd
Top client woes continue to drag revenue performance


REDUCE

CMP: Rs325                                        Target Price: Rs325

n     Op performance missed exp with below par rev growth (-4% QoQ in US$ terms) while mgns declined by ~150 bps QoQ to 17.9% aided by weak currency, improvement in utilization
n     Profits at Rs 1.8 bn (-5.5% QoQ, -35.4% YoY) missed est. driven by lower op performance and lower than expected forex gains ( Rs 199 mn V/s est of ~Rs 459 mn)
n     Raise our Oct’12E earnings by ~9% to Rs 35.4 aided by lower currency resets( to Rs 48/$ V/s Rs 45/$ earlier) despite further cut to modest rev growth expectations
n     Retain REDUCE with an unchanged TP of Rs 325. Cash at ~27% of mkt cap will limit sharp downsides post ~ 50% fall in price in last 1 yr, however see no end to co’s woes

DISH TV Buy Target Price: Rs83 CMP: Rs65 Upside: 28%:: centrum,

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DISH TV

Buy
Target Price: Rs83
CMP: Rs65             
Upside: 28%

Concerns Overdone
We upgrade Dish TV to BUY as we believe the current price does not capture the upside from changing industry dynamics due to digitization, steadily increasing ARPU and high subscriber additions. Concerns over $200mn fund raising plans are overdone and we continue to value the stock at Rs83 (12x FY13E EV/EBIDTA).
m  Price hike to meet ARPU guidance of Rs160-165: Dish TV has raised prices in mid November by Rs10 (6% increase) in the base pack which accounts for ~40% of the subscribers. This price hike is the third in the last 15 months by the management. Constant re-vamping of packages and providing more value to customers is helping the company upgrade customers to higher price points and steadily increase the ARPU. We believe the company is on track to achieve its year-end exit ARPU target of Rs160-165.
m  High Definition to provide further fillip to ARPU and subscriber addition: 6% of its incremental subscribers opt for HD and Dish TV plans to further scale this up to 10%. ARPU for HD subscribers in Q2FY12 was Rs454 compared to Rs152 for SD subscribers. Hence HD would provide ample scope for ARPU expansion going forward.
m  Taking measures to reduce subscriber acquisation cost : Over the last few quarters, Dish TV has taken steps to reduce the SAC by Rs300-400 by increasing the price of the Set Top Boxes, reducing dealer commission and at the same time reducing the free viewing period with entry price at Rs1390 from Rs990 previously. This would also help in reducing the churn rate.
m  Equity dilution concerns – overdone: We believe Dish TV is set to be FCF positive by early FY13 and does not need funding for normal ~3mn gross subscriber addition run rate. However, the mandatory digitization of ~90mn potential analog subscribers in next 3 years is a significantly large opportunity for DTH / MSOs together and would need capital of ~Rs60-70bn. We believe Dish TV would raise ~$100mn for incremental subscriber addition due to digitization and at the same time market HD STBs which need higher capital to gain traction.
m  Upgrade to BUY: Post our downgrade to Hold in August 2011 on the back of stiff valuations, lower subscriber addition and high churn, the stock has fallen 27%. We believe now the company is on track for high subscriber addition on the back of mandatory digitization. Churn rate is set to reduce or in the worst case remain at current levels on the back of measures taken to increase STB price, lower dealer commission and reduced free viewing. The recent price hike will increase ARPU. Dish TV is currently being valued at 9.6x FY13E EV/EBIDTA. We continue to value the stock at Rs83 (12x FY13E EV/EBIDTA) and upgrade the stock to BUY.

Adani Enterprises - In fine fettle; company update; upgrade to Buy ::Edelweiss

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Adani Enterprises (ADE IN, INR 339, upgrade to Buy)

The recent 30% plunge in Adani Enterprises (AEL) stock seems unwarranted as we continue to believe that the company’s business/revenue model remains unscathed. Notwithstanding the decline in global trade due to the economic slowdown during FY09, Mundra Port did not face any significant decline in cargo. A stress test on the possible scenarios across AEL’s three businesses (power, port and coal trading/mining) reveals that at CMP of INR 339/share the stock is trading close to the lower end. Hence, we upgrade our recommendation on the stock to ‘BUY’ with SOTP based target price of INR442/share.

Stock correction: Misplaced over reaction
A few probable reasons behind the recent 30% plunge in AEL’s stock are:
(a) introduction of mining tax in Australia: Post adjustment of future mining expenses, the charge is expected to be 
~AUD1/ton; (b) promoter selling shares: The ~3.7 mn sales of shares between September 21, 2011 and October 17, 2011 have been intra-promoter transactions (inter se transfer), hence there is no change in promoter holding; and (c) Mundra Port bid for Dudgeon port: In July 2010, Mundra Port was selected as the preferred bidder to develop the port, post which it acquired Abbot Point port terminal. The company has an option to continue/withdraw its bid.

Stress test indicates stock trading close to lower end
We have done a stress test across key AEL businesses. Values under various scenarios are: (i) stress case value of INR303/share (higher coal cost and lower merchant price, decline in port cargo and value erosion due to Australian coal mines); and (ii) base case of INR442/share based on realistic growth in power and port subsidiaries and not assigning any value to the coal mining businesses (neither Australian nor domestic).

Outlook and valuations: Business intact; upgrade to ‘BUY’
With the stock trading close to the stress case value providing 30% upside based on our SOTP value of INR 442/share, we are upgrading our recommendation to ‘BUY’ from HOLD. On relative return basis we upgrade it to ‘Sector Performer


PVR - The big picture emerges; visit note; Buy :: Edelweiss

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PVR (PVRL IN, INR 140, Buy)

Recently, we met with the management of PVR. Having outlined huge expansion plans for its exhibition business, PVR plans to increase the total number of screens to ~195 and ~250 at the end of FY12 and FY13 respectively. The occupancy levels and footfalls in Q3FY12 remain on track. Overall, we remain positive on the stock and maintain ‘BUY’.

Expects 30% occupancy levels in coming quarter
PVR is confident of achieving ~30% occupancy levels in Q3FY12 with the release of major movies like Rockstar, Desi Boyz, The Dirty Picture, Twilight and Don-2. PVR plans to add ~50 new screens every year and targets to be the primary or secondary player in every market. With its increased focus on footfalls, PVR has dropped prices over weekdays in some cities in specific theatres to test price elasticity of consumers. The Average Ticket Price (ATP) in Q3FY12 is ~INR150.

To focus on retail entertainment, leveraging exhibition business
Through its 51:49 JV with Major Cineplex, a leading film and retail entertainment company based out of Thailand, PVR plans to build various retail formats like bowling alleys, ice skating rinks and karaoke rooms. Currently, PVR-BluO operates two bowling centres in India (50 lanes) and plans to add seven more centres (134 lanes) in the next couple of years. Also, the company plans to open at least one big skating rink in the next twelve months at a premier location and at a high-end property. PVR plans to use cross-leverage with the exhibition business to expand its retail entertainment business. 

Outlook and valuations: Positive; maintain ‘BUY’
In spite of the change in its pricing strategy, PVR’s primary focus remains Tier 1 cities. As compared to its US peers, PVR is trading at a significant discount in terms of P/E valuation (refer Table 2). At CMP of INR140, the stock is trading at P/E of 11.1x and 9.2x FY12E and FY13E respectively. We maintain ‘BUY’ recommendation on the stock and rate it ‘Sector Performer’ on a relative return basis.

DLF - Noida IT Park sale - a drop in a ocean :: Edelweiss

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Event: First tranche of Noida IT Park stake sale proceeds received has informed in a filing to stock exchanges that it has received ~INR 2bn from IDFC in the first tranche of stake sale proceeds for its IT Park in Noida out of total amount of ~INR 4.5-5 bn (as per media sources). The balance money is expected to be received in tranches over the next 12-18 months subject to progress on leasing in the IT Park. The IT Park has a total leasable area of ~1.3 msf with average rentals of ~INR 40/sf/month.

Impact: Asset monetization in line with company’s guidance
DLF had earlier indicated in its Q2FY12 analyst call that the Pune SEZ/Noida IT Park deals were nearing closure and the Noida IT Park stake sale is part of its stated target to reduce debt levels (net debt currently at ~INR 225 bn). DLF currently holds ~71% stake through a subsidiary - Galaxy Mercantile with 3C being the other JV partner.

Outlook and valuation: Stake sale factored in valuations
We believe that the stake sale of Noida IT Park and Pune SEZ are currently factored in the valuations. The key monitorable remains progress on asset monetization on Aman Resorts sale (~INR 20 bn) in H2FY12. While receipts from asset sales of ~INR10bn in H2FY12 may prop up cash inflows, we believe that DLF is having a ’treadmill effect’ as these sales may only serve to bring back net debt to Q1FY12 levels (INR215bn) hence closure of Aman deal/pick-up in new launches becomes key. We currently have a ‘HOLD’ recommendation on the stock with NAV of ~INR 240/share.


Capital/Infra & Pharma Update:: IIFL

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Capital Goods & Infra Sector
·         In the construction space, valuations are cheap but order inflows and competition is a concern. In addition , the average debtor days for construction companies is on the rise reaching 200 days.
·         In the Infrastructure space Road, T&D are areas where order inflow is relatively strong.
·         Problems continue to persist in order book, execution of projects and operating margins.
·         Our view is that one should not look at capital goods space at these levels as more pain is expected there.
·         Government paralysis has severely affected firms like IVRCL and Nagarjuna
·         Companies such as Voltas and L&T having some exposure to middle east will help them to ward off the domestic blues.

Pharmaceutical Sector
·         Moderation in expected growth rate (low double digit)  is visible in the Pharma sector after the rapid growth seen over the last 2-3 years.
·         Increasing competitive pressures and trade discounts are putting further pressure on margins of the companies.
·         Specialties / chronic therapeutics will be less impacted in the domestic market. Select players could benefit from domestic market consolidation. Sales force in the domestic market has increased by manifold over the last few years.
·         Inorganic growth would continue over the next 6-12 months in order to bridge the gap in expectations. However, acquisitions in emerging markets / US will be key growth avenue. Sun Pharma is the only company to have added value through acquisitions. Rest players have broadly not been very successful with acquisitions.  
·         US Pharma market is also seeing some growth moderation. Base effect, patent cliff impact just about to start on US business.
·         Emerging markets contribution to generics markets is set grow at 15% for next 5-10 year . Their market share is expected to reach 27% from the current global share of 18%

Motilal Oswal 16th Annual Wealth Creation Study

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Motilal Oswal 16th  Annual Wealth Creation Study

Reliance Industries, Sanwaria Agro Oils & Kotak Mahindra Bank –
Biggest, Fastest & Most Consistent Wealth Creators
Back to basics; revealing the Secret of ‘Creating Wealth from Dividends’
 
 
 
Key Conclusions of Motilal Oswal 16th Wealth Creation Study

  • Reliance Inds, Sanwaria Agro Oils & Kotak Mahindra Bank – Biggest, Fastest & Most Consistent Wealth Creators respectively.

  • Financials have emerged as the largest wealth creating sector for the first time ever. Going forward, expect the sector to maintain its top slot led by existing and new private banks, and eventual listing of insurance companies.

  • Very fast growth in stock prices creates transitory multi-baggers. In most cases, what follows is prolonged and painful price and/or time correction.

  • Blue chips are fountains of dividend, and offer as much, if not more, investment growth potential than lesser quality companies, but with far less risk.

  • In investing, there is no profitable substitute for quality. Understanding quality of the company doesn't stop at profits and profitability, it must extend to dividend payouts and longevity.

  • Most Blue Chips enjoy premium valuation. In deciding when to buy, one should focus not only on P/E, but also consider payout ratio, relative dividend yield, and earnings growth potential.

  • In India, over last 20 years, Blue Chips have significantly outperformed benchmark indices with much lower risk.
Part 1) Wealth Creation Study findings
 
The Wealth Creation Study analyzes the top 100 wealth creating companies during the period 2006-11. Wealth created is calculated as change in the market cap of companies between 2006 and 2011, duly adjusted for corporate events such as mergers, de-mergers, fresh issuance of capital, buyback, etc. The Study based on research data for the period 2005-10 analyses capital market behavior, plots key trends in wealth creation, provides insights into winning companies and examines the reasons behind their success. This in-depth analysis is thereafter crystallized in the form of a study to identify the Fastest, Biggest and Most Consistent wealth creators.
Study Highlights – Wealth Creation

·       Reliance Industries has emerged as the biggest wealth creator for the 5th time in a row from 2007. This is a record, beating HUL’s four times in a row from 1996 to 1999.
 
·       Sanwaria Agro emerged as a surprise fastest wealth creator, adding INR43b to its market cap at a CAGR of 119% per annum. But "Speed thrills … also also kills!" Most of the fastest wealth creating companies have lost anywhere between 30-98% of their peak value in next 3 years.
 
·         For the first time more than 10 companies have qualified for the title of Most Consistent Wealth Creators, by featuring among the top 100 wealth creators in 10 consecutive studies. In such a case, 10-year price CAGR is used as the tie-breaker, and Kotak Mahindra Bank has emerged the fastest on that count.
 
·         The contribution of the top 10 wealth creators has been declining steadily from 76% in 2003 to 42% in 2011 indicating a more widespread wealth creation.
 
·         Successful investments are those which prove to be enduring (not transitory) multi-baggers, which are an outcome of high quality business and high quality management. Blue Chip Investing is one such sound strategy.
 
·         Besides Kotak Mahindra Bank, HDFC and HDFC Bank also figure in the list of top 10 Most Consistent Wealth Creators. Clearly, private sector financials are emerging as blue chip stocks with high, and more importantly, consistent growth performance (e.g. HDFC Bank has delivered 30% PAT growth for the last 38 consecutive quarters).
 
·         Quality of management is a key factor behind consistent wealth creation. The top 10 list also features two cement majors - ACC and Ambuja (now, both owned by Holcim). Change in management has significantly contributed to their consistent performance.
 
·         Wealth creating companies' earnings performance is superior to benchmark not only in terms of higher 5-year CAGR but also lower volatility, with standard deviation of annual returns at 13% compared to 16% for the Sensex.
 
·         For the first time ever, Financials have emerged the largest wealth creating sector. The new leader has steadily increased its share of wealth from 12% in FY06 to 24% in FY11.
 
·         Size apart, Financials is also the fastest wealth creating sector with price (i.e. market cap) CAGR of 28%, significantly higher than the average of 18%.
 
·         Going forward, importance of Financials will increase further as insurance companies get listed, and new banking licenses get issued.
 
·         Markets are slaves of earnings power. Pace of wealth creation is almost singularly decided by quantum of earnings growth, at least in the short- and medium term. Over the longer term, however, it is the quality of earnings which decides their sustenance, translating into premium valuations. Two indicators of earnings quality are RoE and Dividend Payout.
 
·         Payback Ratio less than 1 continues to deliver the highest level of returns to the largest number of companies (23 companies had Payback ratio of < 1 in 2006). (Payback is a proprietary ratio of Motilal Oswal, defined as current market cap divided by estimated profits over the next five years. We back-test this in 2006, based on the actual profits reported over the next five years.)