31 December 2011

HAPPY NEW YEAR 2012 :: IndiaER.blogspot.com

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HAPPY NEW YEAR 2012 :: IndiaER.blogspot.com

Aurobindo Pharma :Normalisation post one-offs restrained 1H; cut estimates: Deutsche Bank

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Normalisation of operations after one-off driven weak-1H to drive 2H
Everything that could go wrong, did in 1H - FDA issues at 2 units leading to
shutdown to improve processes were aggravated by logistical issues. This was
exacerbated by poor mix & its operating leverage. Normalisation since Nov will
drive production, product-mix & margins. Company is on-track to address FDA
issues. We expect positive free cashflow from next 1H. Other concerns seem
overdone. Cut estimates mainly for current fiscal and TP by 25%. Maintain Buy

2011: Year of steep losses, volatility for Indian equities ::ET

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Indian equity markets, a favourite among foreign investors just a year ago, presented one of the worst performances among emerging economies during 2011, resulting in a key index shedding a fourth of its valuation when the year drew to a close.

The 30-share sensitive index (Sensex) of the Bombay Stock Exchange (BSE), which stood at 20,389.07 points as on Dec 30 last year, lost a whopping 4,934.15 points during the year to close at 15,454.92, with a loss of 24.20 percent.

At the National Stock Exchange (NSE) the story was similar with the S&P CNX Nifty ending the year 2011 at 4,624.30 points, against 6,134.50 points at the close of 2010, with a loss of 1,510.20 points, or 24.1 percent.

At the BSE, the Sensex had gained 17.43 percent in 2010 and 81.03 percent in 2009, in what was its best performance since 1999, after losing 52.45 percent the year before, when it logged the third worst performances among indices in emerging markets.

The top performing stock among the 30 Sensex shares was ITC with a 52-week gain of 15.36 percent. Bajaj Auto was next with 3.33 percent with 2.52 percent, followed by TCS (-0.33 percent), Sun Pharma (-2.52 percent) and Bharti (-4.32 percent).

The worst performance was from Hindalco (-52.95 percent), followed by Sterlite (151.98 percent), Tata Steel (-50.62 percent), Jaiprakash Associates (-50.52 percent) and Larsen and Toubro (-in 49.72).

The reason was also evident. Foreign institutional investors (FIIs), which had pumped the market the previous year with a net investment of $29.36 billion in equities and $10.11 billion in debt instruments, turned net sellers during 2011.

Their net sales were worth $357.8 billion in equity and $3.4 billion in debt.

"The first half of 2011 saw FIIs staying away because the prevailing valuations did not encourage them," said D.K. Aggarwal, chairman and managing director, SMC Investment and Advisor, a leading brokerage and market research institution.

"These FIIs continued to stay away even in the second half as they found Indian equities risky. As a result, these foreign funds remained net sellers during 2011, unlike in the past when the drove the market," Aggarwal told IANS.

For many of these funds, economic woes in their home markets, especially the European debt crisis, and a perceived policy paralysis in India after a string of alleged scams exacerbated their pull-out.

"Reforms were not there as was expected by the government. Reforms bring growth. Growth raises confidence in a market and the country as a whole. Reforms are the key to bring foreign money," said Shrikant Chouhan, head of technical research at Kotak Securities.

Yet, 2011 saw a slew of second generation reforms from the market regulator, Securities and Exchange Board of India (SEBI), including norms to help companies raise funds while rationalising the guidelines on mergers and acquisition.

SEBI effected changes in the takeover code, allowing companies to buy up to 25 percent in another company without triggering the mandatory open offer. Prior to this the trigger was at 15 percent.

The acquirer will now have to buy a further 26 percent stake in the acquiring company through an open offer, up from 20 percent set by earlier norms. So if the open offer is successful, the acquirer will get a controlling 51 percent stake in the target company.

Before the year ended the market watchdog started a review of the process involving initial public offerings. The development came after SEBI banned seven small companies from fund-raising as they violated the norms of IPO.

FII investment limit in government securities and corporate bonds was also raised by $5 billion each. They can now invest up to $15 billion in government securities and $20 billion in corporate bonds.

As the world rings in the New Year, uncertainly still looms large whether Indian indices have touched the bottom yet.

"Fading economic growth, lack of reforms, fiscal constraints, volatility in currency, margin pressures on corporate are some of the major factors that are haunting our markets," said SMC Capital.

"However, we expect from next year things would start looking bright post second-half, as policymakers are expected to come up with pro-growth policies."

Reliance Communications: Cashflows are crucial and growth is the only option:: Deutsche Bank

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Stabilising operations but debt burden constrains valuations
RCOM’s key challenge is to build momentum in its wireless business and
generate sufficient cashflows to reduce its debt burden (current net debt to
EBITDA 4.7x). Over the last six quarters, revenue/min has been stable, but
mobile EBITDA has stagnated. Weak cashflows have forced RCOM to
constrain capex to generate sufficient cash to repay around $1.2bn in FCCBs
maturing in March 2012. We are reducing our FY13E EPS and target price by
c.50% to reflect RCOM’s operating and financial challenges. Maintaining Hold
(target price Rs80).
Wireless business – growth is critical, but could be harder to achieve
Over the last ten quarters, RCOM’s wireless revenue-share fell from 12% to
8%. We believe it could be challenging for RCOM to maintain market share;
we forecast FY13/14 revenue growth of 13%/11% (below sector growth of
15% p.a.). Margins should improve by 200bps to 29% by FY14 as RCOM has
also raised tariffs following hikes by incumbents. Unlike in the past, we believe
RCOM’s ability to precipitate a tariff war is limited due to its leveraged balance
sheet.
Debt burden a key concern, economic cost of debt difficult to estimate
At end-2QFY12, RCOM’s net debt stood at Rs319bn, which includes a recent
drawdown of $1.3bn out of a $1.93bn loan facility extended by a consortium
of Chinese banks. Cash flows in 1HFY12 have also been weak, likely on
account of payments to capex creditors. While we forecast cumulative FCF
(FY12-14) of Rs88bn, our FY14 net debt to EBITDA remains at an elevated level
of 3x. RCOM’s interest costs are hard to fathom from its quarterly disclosures.
However, we note that its convertible, due in March 2012, is trading at YTM of
around 27%.
High leverage relative to peers results in a valuation discount
Our DCF-based target price for RCOM is Rs80/share, implying 6.3x FY13E
EV/EBITDA (20% discount to Bharti’s implied valuation). Our DCF
assumptions: RFR of 6%, risk premium of 8.5%, CoE of 17%, Kd of 10.5%,
WACC of 13.1% and terminal growth rate of 2%. A reversal in market share
losses would be a key upside risk. A resumption of the tariff war would be a
downside risk.

Idea Cellular: Tight execution but low FCF cushion to shield policy impact: Deutsche Bank

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Strong performance but weak FCF; target price Rs105, maintaining Hold
Idea’s operating performance has been the strongest among its incumbent
peers. It has creditably defended its revenue-share in legacy markets and
managed to improve its cost competitiveness relative to the sector leader,
Bharti. We have increased FY13E/14E EBITDA by 16%/18%, EPS by 0%/10%
and target price by 50% implying a rerating which reflects its competitive
position. The two concerns are a) relatively higher impact of likely regulatory
costs and b) weaker FCF profile compared to its peers. Our EPS factors the
cost of excess spectrum.
Closing the cost gap with sector leader Bharti
Over the last eight quarters, Idea has maintained its revenue-share in its legacy
markets at c.21% despite dramatic changes in competitive dynamics. More
recently (last 2 quarters), it has improved EBITDA margin in these markets by
c.150bps to 29.4%, driven by improving revenue per minute. We estimate that
Idea has largely closed the gap with Bharti on network and SG&A cost/min
and its lower EBITDA per minute (Rs0.09 vs Rs0.15 for Bharti) is primarily due
to higher regulatory and interconnect costs.
Regulatory costs and FCF are the key concerns
We estimate Idea’s cost for ‘excess spectrum’ and license extension at
Rs19bn and Rs46bn. While the excess spectrum cost is factored in our EPS
estimates, the cost of extension should be incurred in FY15/16. Though Idea’s
debt/EBITDA at 2.5x is manageable, its FCF in FY12E/13E/14E of Rs-
30/15/24bn is low relative to its likely cost of license extension. We note that
Idea could monetise its stake in Indus towers (valued at Rs32bn) to bridge
cashflow gaps.
Three-year EBITDA CAGR (FY11-13E) of 33%, trading at 6xFY13E EV/EBITDA
We value Idea on a sum-of-the-parts (SoTP) basis by valuing the core telecom
business using DCF. Our DCF-based target price is Rs105/share: Rs95/share
for core operations and Rs10/share for its 13.5% effective stake in Indus
Towers. Our DCF assumptions are RFR of 6%, risk premium of 8.5%, WACC of
13.5%/10.8% for Idea/Indus and terminal growth rate of 2%. Upside risks
include lower-than-expected spectrum and license extension costs. Adverse
policy decisions are key downside risks.

Titan Industries :Good franchise, great opportunity; maintaining buy: Deutsche Bank

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29% increase in jewellery retail space to support volume growth
Our recent interaction with some of the leading jewellery retailers seems to
suggest that jewellery volume growth during the current wedding season could be
muted due to high gold prices. However, we are confident that despite a possible
slowdown in gold demand, Titan will be able to show strong earnings growth
because of a) aggressive new store openings (29% increase in jewellery retail
space, which would support overall volume growth even if same store volume
growth were to decline) and b) gold price (up 37%) is a pass through.

Bharti Airtel:: Thriving on the strength of scale:: Deutsche Bank

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Strong FCF and African operations should temper India policy risk
Our Buy rating on Bharti reflects strong FCF generation (Rs368bn over FY12-
14E) and relative resilience to global factors. We highlight improving business
momentum in India driven by tariff increases and 3G rollout, and the solid
progress in its African operations. However, these should be partially offset by
negative impact of policy changes, which we factor in our estimates. We
reduce our FY13E/FY14E EBITDA by 14%/12% and target price by 9% to
Rs420. The EPS cut is higher (35%/24% in FY13E/14E) due to Bharti’s
operating and financial leverage.
India: steady progress but policy risk is material
We expect Bharti's Indian operations to generate FCF (before spectrum/license
payments) of Rs80bn/138bn/186bn in FY12E/13E/14E. The impact of higher
tariffs (c20%) should percolate through the subscriber base over the next six
months, leading revenue growth to inch back to 15% YoY. Our estimates
factor the likely cost of excess spectrum (around Rs43bn) but not the cost of
extension of key licenses during FY15/16 (around Rs57bn). While the impact of
regulatory costs is material, Bharti is better placed than its incumbent peers to
absorb them.
Africa: we expect operations to close the cashflow gap by FY14E
Bharti's revenue and EBITDA run-rate in Africa stands at $3.7bn/$1bn. Margin
has continued to improve (26.3% 2QFY12), and we forecast a level of
30%/32% in FY13/FY14. Bharti has increased its FY12E capex guidance to
$1.5bn and believes that its unit capex costs are lower than competition.
Results commentary of its key competitors suggests that it has made
aggressive tariff cuts in markets such as Ghana and Kenya but has been more
restrained in Nigeria. We forecast FY13/FY14 EBITDA and FCF at $1.4/$1.7bn
and $350m/$85m, respectively.
Target price of Rs420, trading at 6.5xFY13E EV/EBITDA and 7% FCF yield
We use DCF to value Bharti (details on pg 13). Our target price implies
7.8xFY13 EV/EBITDA for Indian ops assuming 5.0x for Africa. The reduction in
target price is due to Indian operations (Rs460 vs Rs500 earlier); we continue
imply African ops at equity value of Rs40/shr. Adverse policy outcome is the
key risk.

Coromandel International: Riding the reform wave; Buy :: Deutsche Bank

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Robust volume growth to drive EPS CAGR of 15% over FY11-14E
We initiate coverage on CIL with a Buy rating and target price of INR340, implying
13% upside potential. Including a bonus debenture of INR15, our target price
implies 18% total return potential. Our positive investment case is premised on 1)
robust volume growth in complex fertilisers driven by capacity expansion of 25%,
2) 186bps improvement in EBITDA margins over the next five years driven by
higher phosphoric acid availability, and 3) increasing share of margin-accretive nonsubsidised
businesses. We are 10%/ 5% above consensus on FY12/13 EPS.

Reliance Industries: The second coming RIL: Secures pan-India spectrum for LTE ::Deutsche bank

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Reliance Industries: The
second coming
RIL: Secures pan-India spectrum for LTE
In June 2010, RIL secured 2x20Mhz unpaired spectrum in the 2.3Ghz band at Rs120bn.
It has announced its intention to rollout LTE (FDD version). At this juncture, RIL has not
made any announcements about its key equipment vendors or its strategy to source
towers for the network rollout. We expect a service launch over the next 18 months.
Our assumptions for RIL’s telecom foray:
􀂄 RIL would also need to provide voice services to build a viable business.
ô€‚„ LTE is both a boon (for data) and bane (for voice) – standards for provisioning
voice over LTE have not crystallised.
􀂄 Headroom for disruptive pricing, especially on voice, is limited. However, we
believe RIL would be impacted by data tariffs. RIL would be better placed than
the incumbents to offer higher data speeds, which it is likely to leverage to
drive down data pricing.
􀂄 RIL could acquire/merge with another player to gain access to GSM spectrum.
The proposed M&A guidelines are favourable for such an outcome
We expect RIL to target and enter both voice and data markets
We believe it would be difficult to build a viable business only focussed on the data
market. Assuming the Indian data market scales up to 20% of the total telecom
revenues by FY16E, an optimistic estimate of the market size would be around Rs350-
400bn. Assuming RIL corners a 20% marketshare (an optimistic estimate), its top line
would be around Rs75-80bn. As a comparison, Idea’s current top line is around
Rs200bn. Given that RIL plans to invest around $5bn in telecom, a $1.6bn top line is
likely to fall short of its ambitions.
RIL’s ability to disrupt pricing, especially voice, would be limited
Our discussions with clients indicate that there is an expectation that RIL will focus on
data and offer cheap (or free) voice calls on VoIP technology as a loss leader strategy to
build a subscriber base. In addition, this would significantly impact the voice revenues
of the incumbents.
While RIL can offer on-net calls at any rate, off-net calls will need to be priced at a
minimum of the termination charge. As for VoIP calls, we note that they are not
'costless’. Hence we would surprised if RIL elects to provide free voice calls and use it
as a loss leader strategy for an extended period.
Incumbents’ strategies and tactics have evolved since RIL’s last foray
During its first foray into telecom (as RCOM in 2003), RIL entered the market with
disruptive voice pricing, which quickly helped build operating scale and volume of
minutes. Ironically, incumbents such as Bharti recognised the value of this 'minutes
factory' approach rather than their ARPU-based business model and re-jigged their
operating strategy and business processes.

Cashflow cake in sight, but government demands a bigger slice:: Deutsche Bank

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Indian telcos are forced to contend with significant policy flux in an improving
competitive environment. We expect mobile revenues to grow at 15-16% YoY,
aided by 3-4% growth in revenue/minute and 12-13% YoY growth in minutes.
Higher tariffs should drive 200-400bps margin expansion by FY14E. However,
we assume negative impact of policy shifts on incumbents as our base case.
Based on strength of balance sheet, cash flows and relative impact of likely
regulatory costs, our ladder of preference is Bharti, Idea and RCOM.
Bharti – Strong FCF and African operations would temper policy risk
Our Buy rating on Bharti reflects its strong competitive position and relative
resilience to global factors. We highlight its improving business momentum in
India, driven by tariff increases and 3G rollout, and solid progress in African
operations. Our FY12E/13E/14E EPS estimates are Rs14.8/25/34.4. Key metrics
to watch: India revenue growth (est: 15% YoY), FCF in African operations (est:
$-500m). We maintain Buy (target price Rs420).
Idea – Robust performance but burden of regulatory costs could be onerous
Idea’s operating performance has been the strongest among incumbents. It
has increased its revenue share and improved its cost position relative to sector
leader Bharti. The two concerns on Idea are that compared to its peers it has:
a) relatively higher impact of likely regulatory costs and b) a weaker FCF profile
over the next three years. Our FY12E/13E/14E EPS estimates are Rs1.5/3.9/5.4.
We maintain Hold (target price Rs105).
RCOM – Stabilising operations but debt burden constrains valuations
RCOM’s operations have stabilised, but it has been forced to constrain capex
to generate cash. It is due to repay around $1.2bn in FCCBs in March 2012.
While it is favourably placed with respect to policy issues, RCOM’s key
challenge is to build momentum in its wireless business, where its EBITDA has
been stagnant for the last seven quarters. Maintaining Hold (target price Rs80).
Three key policy issues for the incumbents (Bharti, Idea, Vodafone)
The cost of ‘excess spectrum’ and licence extension and a government
decision on intra-circle data roaming are key focus areas. The estimated cost of
excess spectrum/licence extension is Rs43/57bn for Bharti and Rs19/46bn for
Idea. We factored excess spectrum cost in the EPS estimates but the cost of
the licence extension will impact FY15E/16E cashflows. The policy decision on
intra-circle roaming will effect the 3G investment case for the incumbents.
Incumbents likely to be left out of sector consolidation
It is increasingly clear that the incumbents would not be able to meaningfully
participate in an industry consolidation. Rather, consolidation would provide
additional strategic options for well-funded players such as Reliance Industries
(RIL) to enter the telecom market in a more significant manner. The proposed
guidelines on spectrum trading, refarming and auction of new spectrum bands
(700Mhz) are also unfavourable to incumbents.
Valuation and risks
This report changes estimates and target prices (pg 3 for details). Our sector
valuation methodology is DCF. Key upside/downside risks include competition
and policy.

Auto: Dealer feedback ::Nomura research,

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Dealer feedback
TVS
Location: Mumbai, Bangalore
• The company has taken a price increase of INR600-1,200 across all models (except Star City) effective 3 November, 2011. This implies a price hike of 1.2-1.4%.
• Volumes of the Star City model have picked up this month with the launch of bikes with the signature of M.S. Dhoni. The company has also introduced new colors and made minor changes in design which has also helped demand.
• Overall, as expected demand is slightly weak this month post the strong festive season.
• The company continues to offer discount in terms of free accessories worth around INR2,300 across all models.
• Inventory levels remain stable at around 10-12 days.
M&M (Automotive)
Location: Mumbai
• Demand for Scorpio remains strong despite the launch of XUV500; Xylo and Verito also continue to do well despite higher competition in these segments

NTPC :Takeaways from Non-deal Roadshow in UK :Nomura research,

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Takeaways from Non-deal Roadshow in UK
We hosted the top management of NTPC – Mr. Arup Roy Choudhury (Chairman & MD) and Mr. A.K. Singhal (Director, Finance), together with Ms. Renu Narang (AGM, Finance-ISD/Bonds & PDS) – for a non-deal roadshow (NDR) in the UK last week (Nov 23-25). NTPC’s first NDR in Europe/UK seemed to be well received – clients appreciated the top brass’ initiative to be in front of investors to field queries / allay concerns and present their case on why NTPC is well positioned relative to private IPPs amidst the persistent concerns over the power sector in India.
Overall, management’s commentary on key issues (payment security, fuel security, capacity addition, funding /capex and cash deployment) was largely along expected lines. However, amidst the persistent negativity surrounding investment in Indian power utilities, management’s summary of its low-risk business model and the potential implications of APTEL’s recent court order to address the financial health of SEBs did come across as a positive surprise for a few clients. NTPC remains our preferred IPP on relative fuel/payment security; we expect FY12F-17F EPS CAGR at ~11%. Stock trades at 1.7x FY13F P/Book; maintain BUY.
Management commentary on five key issues/concerns –
[1] Financial health of SEBs and payment security
NTPC’s management reiterated that, although only a handful of SEBs were paying up within the first few days of the billing cycle, none of the SEBs had dues outstanding for more than 60 days for current billings. While the RBI guarantee for recovery of dues under a payment security mechanism is in place up to 2016, the NTPC management emphasized that recent order by the Appellate Tribunal (APTEL) ensuring annual tariff revisions by State Regulators (SERCs) is the potential inflexion point from where SEB losses will begin to get curtailed.
[2] Coal demand/supply balance for XIIth Plan project pipeline
With the backdrop of growing concern over a ramp-up of production by Coal India (CIL) and delay in restoration of captive coal blocks to NTPC by the Ministry of Coal (MoC), NTPC's coal demand/supply balance was a ubiquitous topic of discussion.
As per the NTPC management –
· Materialization of coal supply under the FSAs (for 125mtpa) and linkage (LoAs) stood at nearly 100% for NTPC; advance payment to CIL for the coal dispatches together with focused personnel on logistical issues are likely to ensure its ‘effective’ preferred customer status
· Boilers at its existing units can typically accommodate 15-20% of coal blending. However, management would strive to keep the blending at ~10% in order to minimize the rise in variable cost. As regards securing imported coal, preferred option is to enter into long-term supply agreements with mine owners.
· Although the official communiqué on restoration of the five de-allocated coal blocks is awaited, physical work on the captive coal blocks is underway. Coal production from Pakri Barwadih coal mine is on schedule to begin in 3QFY12.
· Mineable reserves in its five captive coal blocks aggregate ~2bn tons. Five additional coal blocks, which MoC has in-principle agreed to allot to NTPC would fuel ~7.7GW of upcoming capacity.
· For its FY2017 target generation capacity of 66GW (~35GW currently), NTPC would require 260-270mt of coal; supply build-up would be 125mt under FSA, ~50mt captive coal (~20% of requirement), 30-35mt equivalent imported coal (implying12-15% blending) and ~60mt incremental supply (~23% of requirement) from CIL.

HCL Technologies: Takeaways from our interaction with management ::Nomura research,

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We summarize below key highlights of HCL Tech management views on
demand and margins:
Looking to reinvest excess of stated 14% margin to drive higher
growth
Margins made above its guided levels of 14% will be redeployed in the
business to drive higher growth. The investments would be made in 1)
sales 2) solutions/platforms and 3) Passing on benefits of rupee
depreciation to customers for large long term assured business on select
deals.
Rupee depreciation benefit to be passed to customers on select
deals: HCL Tech is looking to price new deals at USD-INR rates of 48-
49 (vs 45-46 earlier), whereby the company makes 14% margin and
gives the benefit of rupee depreciation to the client. HCL Tech would
protect itself against future rupee appreciation by taking long term
hedges over the deal duration, as getting longer terms hedges is not an
issue according to the management (current USD/INR forward premium
is at ~3-3.5%, which leaves some rupee depreciation benefit to HCL
Tech). The company indicates this would not be a blanket policy, but
could apply to larger transactions which provide 3-5 years of significant
visibility or situations where HCL Tech needs to pay entry ticket premium
to get a look in. The company is confident that at renewal of these deals,
the contract structuring would ensure that they make similar margins
even in a rupee appreciation scenario. HCL says it is taking advantage
of the rupee volatility by giving customers the benefit.
Employee pyramid more a long term lever: Increasing fresher
proportions is a long term margin lever according to the company. (HCL
Tech has been hiring ~80% laterals in the past, which have over the last
two quarters come down to 55-60% levels). HCLT currently has training
centre at Manesar and is building one at Nagpur, which will have
capacity of 5000-6000 people to be trained at one go (completion over
the next 3 years). Utilisation including trainees is a marginal lever
according to the company and can move up by 100-200bps.
Demand outlook continues to be strong, deal signings on track
Increased offshoring due to crisis: Euro crisis and weak global macro
is leading to 1) increased outsourcing and 2) higher vendor churn as
customers look to cut costs more and fund change-the-business projects
(CTB) from savings from run-the-business (RTB) projects. Most of the
vendor churn is happening on the Application management outsourcing
side. In BPO/SAP projects no major vendor change is happening.
Vendor management functions are ill developed in large organisations as
they have too many vendors and this is being re-assessed.
Indian offshore vendors gaining market share: Indian vendors are
gaining market share as a result of consolidation and vendor churn.
Indian offshore providers (IOP) have increased market share from 12%
to 17% over the last 2-3 years. Vendor change is happening on 1) better

pricing 2) better flexibility. Global vendors are less flexible than Indian
vendors as the cost of redeployment of resources is high. In contrast,
IOP’s can be flexible as the growth rate is high and resources can easily
be redeployed.
Deal activity robust but vendors cautious on announcements:
OND’11 will be biggest quarter in terms of deal decision making. TPI
indicates that HCL is among the top 6 vendors across all regions.
Despite robust deal activity, deal win announcements might be limited as
it remains a sensitive subject for vendors/clients in the current high
unemployment scenario in developed markets. HCLT says its deal-win
ratio is better than that during 2008. According to the company, the
revenue impact of the deal pipeline will be seen in the AMJ quarter
(4QFY12); OND quarter will see normal seasonality; BFS and
Manufacturing continue to see a good pipeline; while stress in the
Telecom vertical continues.
CTB activity has dried out: 50% of HCL Tech business comes from
CTB work. Cost cutting is not a trigger in CTB as work can’t be moved
offshore because it is higher up the value chain.
SAP license growth mostly in analytics and not ERP: According to
the management, most of the SAP new license growth is being driven by
analytics – which are short term spends. The implementation work on
analytics licenses is only 0.7x of the license fee, unlike ~3x in ERP
rollouts. This trend does not benefit HCL Tech’s Axon piece, which is
purely core ERP work. Analytics and middleware is reported under
Custom applications for HCL Tech.
Nomura view:
 We remain convinced about HCL Tech’s large deal winning prowess
and revenue surety stemming from the 1) biggest deal pipeline and
better deal win rates than the company is guiding for and 2) the rampup
in 32 transformational deals signed over the past 2 quarters.
Management commentary on deal signings and pipeline was
reassuring.
 Management intention of reinvesting excess margins into sales
investments to drive higher growth is acceptable, if it generates
desired results the stock can re-rate, in our view.
 However, we view HCL Tech’s intention of passing the benefits of
rupee depreciation to clients to gain market share on select deals as a
negative. This practise comes with an additional risk of lower reported
EBIT margins, if discounting becomes widespread. This is because
the company is expected to price deals at ~49 USD/INR and then
hedge it; if the rupee were to appreciate, gross margins would be
lower, while gains on the hedges would be reported at the forex line
(below EBIT). We will be watching gross margin movements at HCL
Tech to ascertain if this practice is becoming widespread and going
against management statements. Our current assumptions build in
flattish margin expectations at ~14% over FY12-13F.
We expect US$ revenue CAGR of 18% and EPS of CAGR of 24% over
FY11-13F and find the stock attractively valued at ~11x FY13F earnings.
Maintain Buy.

5 things Indian investor needs to watch carefully in 2012 (Money Control)

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Moneycontrol Bureau
Supporters of the India growth story would like to treat the year 2011 as a bad dream. In a departure from big gains in the past two years, investors saw around Rs 20 lakh crore of their wealth eroded as Indian equities tanked in 2011 because of inflation, high interest rates and the uncertain global growth environment accentuated by the euro zone debt crisis.
The participation of local and foreign institutions in Indian equity markets has been marginal. Fiscal deficit is likely to be around 5.5% against the target of 4.7%. In short, things, which were looking positive at the beginning of the year, seem to have lost steam and the situation looks grim.
While it is very difficult to make a guess given the uncertainty in many quarters, the equity markets seems to have substantially priced in the worst. It is trading at a PE of 12 times financial year 2013 estimates. But one is for certain and that is it will get worse before it gets any better.
Most market watchers would agree that the eurozone will hold the key to any semblance of a bull market in 2012. There was across-the-board change of the guard in 2011, as struggling European countries brought in the technocrats, or voted out governments which had failed to solve their economic crises. In 2012, there could be an even bigger shift, with several key countries facing possible changes at the top.
There is also a chance that Italy will have a new election, which could kick out the current technocratic government, if President Giorgio Napolitano fails to reverse former Prime Minister Silvio Berlusconi’s electoral reforms of 2005. Berlusconi still controls the Senate. Elections are not due until April 2013, but Italian politics are famously unpredictable.
However, the euro's dramatic slide to the year’s lows in light trading is a likely prelude to more weakening in the New Year and highlights the long haul ahead for the euro zone’s debt crisis.
On the flipside, the US economy is expected to do much better in 2012. The economy has generated at least 100,000 new jobs for five months in a row -- the longest such streak since 2006. The number of people applying for unemployment benefits has dropped to the lowest level since April 2008. The trend suggests that layoffs have all but stopped and hiring could pick up.
More importantly for us, the growth trajectory of the country will watched very carefully. And as things stand, India could definitely suffer a little bit more and market is possibly taking that into account right now.
Next up, would be the tattered condition of the government coffers . The Centre will need to be more proactive in terms of addressing investor concerns and provide more clarity as to how they plan on controlling the ballooning deficits of the nation.
The Reserve Bank, meanwhile, announced that India will borrow an additional Rs 40,000 crore through dated securities in the current fiscal year ending in March.
With Iran threatening to cut off about a fifth of the world's oil supply by closing the Strait of Hormuz and unrest in Iraq endangering the ability to increase production there, financial analysts say prices for two important oil benchmarks will average from USD 100 a barrel to USD 120 a barrel in 2012.
But the joker in the pack will definitely be the Indian rupee , Asia's worst performing currency this year.  If the US dollar gains against major currencies, it is bound to gain against the rupee. And the outlook, for the short-term at least, suggest that the global demand for the US dollar is expected to stay strong.

Rs 40,000-crore tax mop-up SHORTFALL looms

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Barely four months are left for the financial year to end and the government has reached only the halfway mark of its tax revenue collection target.
After admitting to possible slippages in its fiscal deficit and disinvestment targets, the finance ministry is now jittery about its tax collection target too.
If that is also missed, it will be the third time in four years that the Budget target is missed.
According to finance ministry officials, direct tax collections could be around Rs 5,00,000 crore (Rs 5 trillion) by the end of the current financial year, while indirect tax mop-up could be in the range of Rs 3,85,000 crore (Rs 3.85 trillion) to Rs 3,90,000 crore (Rs 3.9 trillion) -- an overall shortfall of about Rs 40,000 crore (Rs 400 billion).
This may exert further pressure on fiscal deficit, which could go above the Budget estimate of 4.6 per cent.


With extra expenditure having been incurred and a shortfall in non-tax revenue target likely, the ministry was banking heavily on tax collections, so much so that targets for revenue boards had been increased by 10 per cent to make up for the unrealised revenue from the government's disinvestment programme.
In the first eight months of this financial year, total tax collections stood at only 52.4 per cent, or Rs 4,87,877 crore (Rs 4,878.77 billion), of the Budget Estimate (BE) of Rs 9,30,467 crore (Rs 9,304.67 billion).
Of this, direct tax mop-up was 44 per cent, or Rs 2,35,333 crore (Rs 2,353.33 billion), of the Rs 5,32,651-crore (Rs 5,326.51 billion) BE. Indirect tax collections fared a little better, achieving about 63 per cent, or Rs 2,52,544 crore (Rs 2,525.44 billion), of the estimated Rs 3,97,816 crore (Rs 3,978.16 billion).
The revenue department now has a mammoth task of collecting over Rs 1,10,000 crore (Rs 1,100 billion) per month in the remaining part of 2011-12, if it has to meet the Budget Estimate.
The required mop-up per month would shoot up by another Rs 14,000 crore (Rs 140 billion) if it has to meet the revised target of about Rs 9,85,000 crore (Rs 9,850 billion).

The heads of the Central Board of Direct Taxes (CBDT) and the Central Board of Excise & Customs (CBEC) have already conceded that the targets, especially the revised ones, would be difficult to achieve.
If past records are anything to go by, the BE might also be missed. Last year, when the government exceeded both its BE and RE, about 56 per cent of the total target had been achieved by November.
In 2009-10 and 2008-09, when the targets were missed, only about 50 per cent of the target had been met till November.
However, a closer look -- at both direct and indirect tax mop-up so far this year -- tells more than what meets the eye.
The growth of net direct tax collections is not as bad as it appears, because the CBDT has frontloaded refunds this year.

The department has already cleared tax refunds of over Rs 72,000 crore (Rs 720 billion) and another Rs 20,000 crore (Rs 200 billion) is likely to be given in the next four months. These had stood at Rs 57,000 crore (Rs 570 billion) in 2009-10 and Rs 39,000 crore (Rs 390 billion) in 2008-09.
Moreover, advance tax collections for the third and fourth quarters would reflect in the December and March numbers.
So, direct tax collections are expected to get somewhat better from here. On the other hand, going forward, indirect tax collections are expected to falter.
A major area of worry for the ministry is central excise collections, which have declined 6.5 per cent from those in the same month last year.
An indicator of economic activity, excise duty may slip further, as industrial output has been slumping. It dropped 5.1 per cent in October.

Another reason for a slowdown in indirect tax collections is the cut in duties on petroleum products in June, which resulted in a loss of Rs 38,000 crore (Rs 380 billion) to the government in the remaining part of 2011-12.
The government had removed the Customs duty of 5 per cent it levied on crude oil, brought down import duty on petrol and diesel from 7.5 per cent to 2.5 per cent and on other petroleum products to 5 per cent from 10 per cent.
It also abolished the Rs 2.6 per litre basic excise duty on diesel. Service tax collections, continuing the high growth trajectory, have emerged as a face-saver for the revenue department.
The growth, however, does not mean much, as the estimated revenue from service tax comprises only about 20 per cent of the total indirect tax collection target, compared with 41 per cent from excise and 39 per cent from Customs.
Another reason for a slowdown in indirect tax collections is the cut in duties on petroleum products in June, which resulted in a loss of Rs 38,000 crore (Rs 380 billion) to the government in the remaining part of 2011-12.
The government had removed the Customs duty of 5 per cent it levied on crude oil, brought down import duty on petrol and diesel from 7.5 per cent to 2.5 per cent and on other petroleum products to 5 per cent from 10 per cent.
It also abolished the Rs 2.6 per litre basic excise duty on diesel. Service tax collections, continuing the high growth trajectory, have emerged as a face-saver for the revenue department.
The growth, however, does not mean much, as the estimated revenue from service tax comprises only about 20 per cent of the total indirect tax collection target, compared with 41 per cent from excise and 39 per cent from Customs.

Rupee fall: How it has changed currency traders' lives (Business Standard)

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Though Santosh Shetty is furiously punching away on his keyboard, his eyes are locked on the terminal.
The life of this senior currency trader at Alpari India, a foreign exchange firm, has completely changed in the last six months.
With the rupee falling 20 per cent since June 30, the Reserve Bank of India first intervened, and later introduced policy measures to control the outflow and improve dollar liquidity.
"We have to give clients trading calls within a couple of seconds to take advantage of arbitrage opportunities," Shetty says.

Kotak's top 5 picks for 2012

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One of the largest private sector banks has been a showcasing consistency in its earning growth. It has grown around 30% y-o-y in the past 38 quarters.

In the September quarter, its standalone net profit rose 31.49% to Rs 1,199 crore on y-o-y basis. It has consistently delivered one of the highest CASA mix in the industry.

Its CASA mix remained healthy at 47.3% at the end of Q2FY12, despite the rise in FD rates in last few quarters.

Valuations: P/ABV - 3.1x FY13.


The IT bellwether stock replaced Mukesh Ambani led Reliance Industries as the number one stock in the BSE Sensex and the NSE Nifty weightage wise in December.

Kotak remains positive on the medium-to- long-term strategy of the company. It  also witnessed a management change as SD Shibulal took over as the new CEO.

Management has reiterated its long term commitment to increase the proportion of non-linear revenues. Kotak concur with the management's view that this is necessary to ensure profitable growth, while providing more value to customers.

Valuations: PE - 16.8x FY13


ITC has a long track record of high market share in the cigarette business. Coupled with pricing power, this creates an improving profit profile, and high visibility in revenue and earnings growth for the segment.

Tobacco constitutes only 15% of India's consumption pie; which explains ITC's entry in the space. ITC's products show encouraging trends in market share, creating portents for profitability toward the end of FY13.

Over a cycle all other businesses of ITC are self-sustaining, and gel strategically with growth objectives of the company.

Valuations: PE - 21.8x FY13E


This infra company is an experienced player in road Built-operate-transfer (BOT) segment and is likely to benefit from upcoming project awarded in road segment.

The company has a strong order book of Rs 9,600 crore which can drive growth in revenues at a CAGR of 36% between FY11-FY13.

Valuations: PE of 9.4x FY13

The Pune based company is one of the largest diesel and natural gas engine manufacturers for power generation, industrial and automotive markets. It is well poised to benefit from recovery in the infrastructure spending in the country.

It has recently set up a greenfield facility in Phaltan near Pune.  Commencement of this mega production site is likely to ease out capacity constraints and would add to cash flow generation.

Valuations: PE 14x FY13E




India to borrow Rs 40000cr more in 2011-12: RBI

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India will borrow an additional Rs 400 billion  through dated securities in the current fiscal year ending in March, the RBI said on Friday.
The government will borrow 140 billion rupees each in January 2-6 week, January 9-13 week and January 16-20 week, it said in a statement.
The government will borrow 130 billion rupees each in January 23-27 week and January 30-February 3 week.
It will also borrow Rs 120 billion each in February 6-10 week, February 13-17 week, February 20-24 week and March 5-9 week.

FinMin finalises cabinet note to wind down SUUTI

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The government’s strategy to bridge the fiscal deficit seems to have taken a concrete shape. The Finance Ministry is learnt to finalise cabinet note for winding down SUUTI and setting up a new asset management company (AMC) in its place, reports CNBC-TV18’s Aakansha Sethi. This is a slight silver lining in the government’s fiscal deficit map. CNBC-TV18 reported last week that the cabinet note for winding down SUUTI has now been finalized and contours have taken shape. The AMC that will be setup in place of SUUTI will be managed by an independent fund manager. It will pledge the holdings of SUUTI which was setup after UTI restructuring and holds shares in ITC , L&T and Axis Bank . It has valuation of about Rs 32,000 crore. The money that will come in from pledging these shares will be used to buy shares in PSUs. The government is expected to borrow about Rs 50,000-60,000 crore for the same. As per current regulation, only about 50% of the portfolio can be leveraged. But according to sources in the government, they have spoken to both public and private sector banks and financial institutions like LIC to give them more than 50% by which, the government is hoping to raise about Rs 50,000-60,000 crore. This money will be transferred to the government’s account which will help it meet the fiscal deficit gap. There is no specific mention with regards to timeline when the government will sell these shares. The government says that at a time when the PEs of the markets is at sufficiently high level for it to make a profit it will sell these shares. It will use the profits made to repay loans. This company is expected to be setup latest by the end of January. The cabinet note is expected to come for approval anytime in the next two weeks.

9 mutual funds that survived the market crash in 2011 :: Investment-mantra

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Here's what helped these nine mutual funds stand tall amidst a falling market and what you can expect from them in 2012.
2011 has been a tough year for Indian equity markets. The markets have being struggling to stay afloat amid global dramatic turn of events at the global and the domestic level.

On the global front, Europe has taken the centre-stage with a powerful cross current of events roiling the markets. Concerns about the sustainability of Greece debt and later on, Italy, dented the market sentiments.

On the domestic front, poor earnings season, downgrade of banks by Moody's, huge current account deficit and depreciating currency have played spoilsport. Given the current fluid situation both on the global and domestic front, it appears that financial situation is far from stabilising and will take some time to improve.
Among these uncertain times, some mutual funds have stood tall and have shown resilience in this market downturn. We visit some of these mutual funds which have protected investor's portfolio with their relatively better showing as compared to its peers (they have fared better than their benchmarks or lost value lesser than their benchmarks). Of course investing in mutual funds is a long-term investment and consistency is the key to their success going forward.
Here's the list and what you can expect from them in 2012...

Gold ETF and gold funds
Gold had a phenomenal run in 2011. Gold investing has been a popular choice for quite some time now. This elusive commodity has a long list on functional uses, including its abilities to act as an inflation hedge and the fact that it is often sought out as a safe haven in times of market turmoil. The popularity of this precious metal was cracked wide open with the widespread release of exchange traded funds, which allowed investors to gain exposure to their favourite metal with low costs, high liquidity, and a transparency that can be matched nowhere else in the financial world.
Reliance Gold ETF, SBI Gold Exchange Traded Fund, Quantum Gold Fund, Kotak Gold ETF, Axis Gold ETF are a few Gold ETF's which have given handsome returns to investors in 2011. These funds have given close to 42 per cent returns during the last one year
What holds for gold ETFs and gold funds in 2012?
Gold is likely to continue its upward trend as economy continue to pass through uncertain times and investors are likely to prefer commodities such as gold rather than investing in equities.

1. ICICI Prudential FMCG Fund
With a return of 17.71 per cent return over last one year, this fund has surprised quite a few with its excellent performance. This fund seeks to optimise the risk-adjusted return by a 'Bottom-up' strategy, to identify and pick stocks in the FMCG Sector.
The portfolio comprises of a smaller number of stocks to reflect the prospects of the FMCG sector and also holds stocks across various sub-sectors, within the broad definition of the sector. A smaller allocation to other sectors is permitted purely for defensive considerations.
What holds for ICICI Prudential FMCG Fund in 2012?
Being a sector fund, ICICI Prudential FMCG Fund is a high risk, high reward fund. FMCG is generally tagged as 'defensive sector' and in spite of the likelihood of economic uncertainty continuing going forward in 2012 , FMCG funds will continue to do well riding well on domestic consumption theme.
Note: Returns calculated on NAVs as shown in the images

Banking - Union Bank trims base rate: Industry-wide rate cuts some time away; Edelweiss

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Union Bank has cut base rate by 10 bps to 10.65%. The rationale stems from easing cost of funds for the bank, primarily on wholesale deposits front. The bank is first in the lot to implement a rate cut, surely signaling the peak of the current high interest rate regime. However, we do not foresee other banks to match the move as any meaningful decline can take place only after retail deposit rate cut –direct consequence of a repo rate cut by RBI or post the end of busy credit season (till March 2012).

Base rate cut driven by easing pressure on cost of funds
Our interaction with the management indicates that this is in response to 5-6bps benefit on cost of funds witnessed by the bank in December due to some downward repricing of high cost wholesale deposits coupled with reduced proportion of CDs (came off from INR100bn to INR40bn over Q3FY12). The bank expects further moderation in funding costs in the coming quarter. At present, 60% of its loans are linked to base rate which will now be reprised lower by 10bps.

Across the board rate cuts still some time away
Union Bank is the first to cut base rate. While directionally, it marks the peak of lending rate cycle, we do not expect rates to come down in a hurry till banks start cutting retail deposit rates as well (which may not be the case during the busy credit season till March). Higher rates offered on NRE/NRO deposits will also keep cost of deposits a bit stickier on its way down. Along with this, any rate hike on savings bank accounts by a large bank (SBI, ICICI, PNB etc.) can restrict decline in cost of deposits for the industry.