Paints :: Q3FY12 Preview: Elara Capital

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Decisive quarter for volumes
Volumes likely to hold steady at ~11-12%
Post a weak Q2, due to shifting of volumes on account of extended
monsoons, we expect volume off-take to hold steady at ~11-12% YoY,
partially hit by high base (last year too sales had shifted to Q3). Despite
overall macro-slowdown, volumes have held up for paint companies,
though we expect moderation in FY13E and await cues from current
quarter. Value growth will continue to remain strong at ~10% YoY
driven by sustained price hikes (~10-11% price hikes in FY12YTD, most
recent hike of ~2% taken in Dec, 2011). We expect Asian Paints to post
a revenue growth of ~23% YoY in the domestic business while Kansai
will post the weakest growth of ~18% YoY due to weak growth in
auto particularly passenger vehicles.
Expect sequential dip in gross margins due to currency movement
Due to adverse currency movement (~10% rupee depreciation), we
expect gross margins to contract ~50bps QoQ (~30% of inputs are
imported). However, we highlight, raw material prices, particularly
crude oil (~30-40% of inputs are crude derivatives) and Tio2 (~20% of
total input costs) have started stabilising. Our Paint RM Index indicates
a QoQ inflation of ~2% (excluding rupee impact) down from ~7-8%
QoQ inflation in Q1FY12/Q2FY12. Further, ~10-11% price hikes YTD in
FY2012 coupled with favourable base in H2FY12E should curtail gross
margin contraction to ~50-100bps in H2FY12E.
Maintain Reduce on Asian Paints and re-iterate Berger as top pick
We wait Q3 quarter for cues/commentary on volume growth and
impact of currency movement and inventory management on gross
margins before taking cuts in our estimates. We maintain Reduce on
Asian Paints due to rich valuation and lack of any near term catalysts,
while we re-iterate Berger Paints as our top pick owing to its superior
margin management, market share gains driving steady volume
growth, potential incremental gains in margins likely to play out with
product mix enrichment (higher contribution from premium
emulsions) and attractive valuations

Midcaps:: Q3FY12 Preview: Elara Capital

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Earnings risk mitigated
Navneet Publications– low earnings beta
The current macro risk, pose limited risk to Navneet with 60% revenues
derived from school publications. We expect topline and bottomline to
grow at CAGR of 18% and 25% respectively over FY11-13E, on the
back of curriculum changes in Maharashtra and Gujaratstate boards.
Further new initiatives like e-learning, school management business
and diversification in other states are gaining traction. Q3FY12 is
seasonally an insignificant quarter; in FY12E it contributed only 14% of
revenues. We expect topline and bottomline to grow at 16% and 15%
respectively. At 11x one year forward earnings, it looks attractive,
considering a healthy ROC of 25%, high competitive barriers and
limited revenue risk.
TTK Prestige – No sharp slowdown
There is anticipation of sharp deceleration of growth in consumer
durables space, butour channel checks with sales heads and company
management indicate brown goods have witnessed minimal impact.
We expect Q3FY12 sales to remain steady with 34% growth on YoY.
However, sharp currency movement will impact Chinese imported raw
material cost. Also the newly commenced capacities will inflate fixed
cost. In Q3FY11,TTK achieved peak EBITDA margins of 17.9%, thus on
YoY, we expect margins to dip 180bps, leading to PAT growth of 19%.
Growth of below 20% may correct stock price 10%-15%, which should
be a good level to accumulate with long term target of INR3,320.
Techno Electric and Engineering – Derisking business
Techno’s relatively healthy order book of 1.5x sales vis-à-vis peers and
diversification in wind business will stand in good stead in the current
environment. While EPC is no longer the flavour of the market,
Techno’s wind business has gained traction. The newly commenced
100MWcapacity and REC offtake at robust prices on the exchange are
positives. Over Q3FY12, the EPC is expected to report 13% revenue
growth while wind business revenue should grow at 50% considering
corporate revenues in Q1FY11.

Hospitality :: Q3FY12 Preview: Elara Capital

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Season begins on a positive note
FY12 season begins with 9.6% growth in foreign tourist arrivals
Foreign tourist arrivals in Oct-Dec ‘11 were strong, up by 9.6% to
1.9mn. Although the hospitality business is very sensitive to the overall
economic well being, the sector sees strong demand coming from
overall buoyant tourist arrivals, up 10% for the year to 6.1mn. INR
depreciation of 11.6% in Q3FY12 has been another positive with India
emerging as more affordable. During the quarter the average
occupancy rate (OR) in six major destinations (Mumbai, Delhi, Kolkata,
Chennai, Bengaluru and Goa) remained flattish at 70% YoY while the
average room rates (ARRs) dropped 9%YoY to INR9100. Consequently,
the average RevPAR (revenue per adjusted room) for premium
segment hotels was down by 8% to INR6400. We expect Q4FY12 to
ring in better occupancies and thereby improvement in ARRs. The
hospitality sector has slowly but surely recovered in FY12, although
the global economic sentiment would determine the speed of
recovery going forward.
Coverage universe to report 13.8% sales growth in Q3FY12
We expect our hospitality universe to register sales growth of ~13.8%
YoY in Q3FY12, driven by improved ARR and OR. Both Indian Hotels
and EIH are expected to benefit from the robust demand by reporting
topline growth of 13% and 15% respectively. We expect EBIDTA
margins of our coverage spectrum to expand marginally by ~2bps YoY
to 31.7% in Q3FY12.
Valuations compelling for IHCL
We expect the hospitality sector to maintain the demand momentum
with an improvement in global macros. The ARR and OR are expected
to retain their expansion in H2FY12. The focus in FY12 and H1FY13
would clearly be on new properties be it Pierre for IHCL and Trident
BKC, Oberoi Mumbai for EIH. We are positive on the sector, as it
revives with strong macro support, and maintain IHCL as our top pick

Infrastructure :: Q3FY12 Preview: Elara Capital

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Base effect respite
Earnings to remain weak despite a seasonally strong quarter
Construction and infrastructure stocks are expected to persist with
their poor performance amidst a still challenging macro environment.
Despite being a strong quarter seasonally, earnings are expected to
nosedive YoY as a majority of companies remain trapped in the vicious
cycle of higher working capital needs higher borrowings higher
interest outgo low profitability, poor return ratios, stretched balance
sheets decline in overall industry attractiveness.
Amidst our coverage universe, revenues are set to register a moderate
growth of 16.9% QoQ and 13.8% YoY, led primarily by the base effect.
While on the operating front, we estimate 5.1%/9.7% QoQ/YoY rise in
EBIDTA for our universe (OPMs (168bps)/(56bps) QoQ/YoY); on the
earnings front, rising interest costs and quantum of borrowings are
expected to take a heavy toll on the anticipated performance. We
estimate a depressing 24.8% YoY de-growth in earnings for the
quarter; earnings growth however, is expected to be 8.1% QoQ.
Headwinds to persist till Sep’12, pick up in order flows decisive
The infrastructure sector continues to reel under severe strain given
inconsistent order flows from the public sector coupled with gradual
but continuously declining inflows from the private sector. This
coupled with the usual lacunas in basic policy framework relating to
the PPP format has dented the developer/investor confidence severely.
We re-iterate our sectoral stance that even if the broader operating
environment commences easing up, core construction companies may
take at least a year to repair their balance sheets and come out of the
existing slump. Our Distress Case scenario indicates further possible
downsides (assuming continuation of existing operating and financing
challenges till Mar’13) besides identifying potential investment
opportunities. We continue to back structurally strong road
infrastructure plays in Sadbhav, ITNL and IRB Infra and recommend
adding long positions on dips.

Media:: Q3FY12 Preview: Elara Capital

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Limited surprises
Only Zee Entertainment to post earnings growth
We see limited revenue growth momentum in Q3FY12E for
broadcasters, notwithstanding the recently concluded festival season,
as ad growth pick-up post festival season remains weak, even as
subscription growth pick-up waits to happen post first phase of
digitization (June, 30th). However, base effect is expected to help Zee
Entertainment positively, as earnings in Q3FY11E were highly
depressed on sports business losses. On the other hand, Sun TV
Network will be impacted adversely by the base effect as it released its
successful movie ‘Endhiran’ in the same quarter last year. TV18
Broadcast is expected to post minor loss due to launch of new
channels during the quarter, even as ad growth may pick-up
sequentially.
Another painful quarter for print media
Though print players would see low double digit ad revenue growth
for the quarter, elevated newsprint prices on steep rupee depreciation
are expected to offset any operating leverage. All print players except
HMVL are expected to post moderate to negative earnings growth.
We expect HMVL to post another quarter of robust earnings growth
on low base and HT media to post a steep fall in earnings on a high
base. Further investment in circulation would be a key observable
event post results.
Valuation
While most media stocks are trading at attractive valuations, Q3FY12E
results are expected to provide limited triggers to stock prices, as
modest ad revenue growth trend is now expected to spread into
FY13E as well. We continue to like players with high exposure to
distribution revenues and strong presence in the value chain, as we
expect subscription revenues in the pay TV space to pick up from
Q1FY13E onwards, even as ad revenue growth remains doubtful.
Trend in newsprint prices would be another trigger for print stocks.

Cement :: Q3FY12 Preview: Elara Capital

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Higher prices to cement earnings
Favourable margin scenario to drive earnings
We expect most cement players to report QoQ and YoY improvement
in profits from an increase in cement prices, higher volume and
positive impact of operating leverage. Improvement in profitability is
expected to be much higher for players having presence in northern
region (viz Shree Cement) and Gujarat (viz: JK Lakshmi) due to
significant increase in cement prices and strong demand in these
regions. Players in the South (viz: Orient Paper & India Cement) are
likely to report modest improvement in earnings due to weak demand
and stable prices.
Q3 volume likely to be up by ~10% YoY
In Q3FY12, cement industry is expected to report growth in volumes
of 10% YoY. Even on sequential basis cement volumes are likely to
grow by ~9%. Improvement in demand is also attributed to high
spending by the state government (such as UP and Gujarat) prior to
election and strong rural demand.
Cement prices up ~13.1% YoY
All India average cement prices are expected to improve 13.1% YoY
due to series of price hikes taken by cement players during Oct-
Nov’11. On QoQ basis we expect cement realisations to improve by
~9% from sharp increase in prices in northern, eastern and central
regions.
Cost like to show mix trend
We expect players dependent on petcoke (viz Shree Cement, JK
Cement, JK Lakshmi) to report decline in power& fuel cost due to
softening in petcoke prices on account of slowdown in Europe.
However, players dependent on domestic coal are likely to report
increase in power& fuel cost due to lower availability of linkage coal
and increase in e-auction prices.
Net profit to surge
Increase in revenue and margins of our coverage universe is expected
to translate into ~64.5% QoQ and 44.4% YoY growth in profits.

Pharmaceuticals :: Q3FY12 Preview: Elara Capital

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Mixed bag
Domestic slowdown and US launches to play out in topline
We expect 14% YoY growth and 3% QoQ growth in our coverage
universe in Q3FY12. The growth in the sector to have major
contributions from higher USD conversion value, launches in US and
expansion in semi-regulated market. The benefits from USD
appreciation would be partially mitigated by declining currencies of
emerging market exports, significant import of raw materials and
slowdown in India formulations. We however expect improvement in
domestic sales for Dr Reddys’ Lab, Glenmark, and Cipla in Q3FY12. The
growth in operating margin however, has to cope with higher
increase in key costs items. The lag effect of higher raw material prices,
rising employee costs with sticky inflation, and increasing forex debt
with higher interest costs would increase operating and financial
leverage in the sector. Ranbaxy and Lupin would benefit from para-IV
launches and inorganic growth.
EBITDA to be maintained sequentially, forex to play spoilsport
With high inflation rate and crude prices, we expect 15% YoY growth
and 5% QoQ decline in EBITDA in Q3FY12. Ranbaxy, Sun Pharma,
Cipla, and Dr Reddy’s Lab are major contributors of sector EBITDA. Sun
Pharma’s robust contribution is attributed to Taro’s growth in US while
others are expected to grow from para-IV launches in US.
Valuation remains high in comparison with core EPS
We are underweight on the sector as core-EPS valuations remain high
despite price correction. With aggravation of macro fundamentals in
India, we expect PEx compression for the sector, though it would
maintain premium valuation vis-à-vis other sectors due to inherent
defensive nature. The majority of large-cap companies have faced
stagnation in price appreciation over the last six months. We observe
that majority companies in our coverage have moderate price
correction except Ranbaxy and Cipla as expected. While risk-return
matrix remains unfavourable for overall sector, we believe that CRAMS
companies, of which Jubilant is in the forefront, have an edge in
valuations.

FMCG:: Q3FY12 Preview: Elara Capital

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Growth not under question
Coverage universe expected to report 18% topline growth
We expect our FMCG universe to register robust topline growth of
~18% YoY in Q3FY12, driven by healthy volumes and price hikes. In
our large cap coverage, companies like Hindustan Unilever, ITC and
Nestle are expected to post YoY sales growth of 16.2%, 17.6%, and
20.6% respectively; while mid-caps should see Dabur (25%) and
Marico (24%) in the vanguard. Godrej Consumer would likely post
31% growth on the back of the Darling group acquisition.
Price hikes, benign raw material spur margins
Price hikes, benign raw materials (baring few like palm oil and Mentha
oil) are expected to boost margins on YoY basis to most players in
Q3FY12. We expect our coverage universe EBITDA margin to expand
by 119bps YoY to 15.5% (excluding ITC) in Q3FY12. The biggest
contributors to EBITDA margin expansion are expected to be HUL
(153bps), Nestle (136bps) and Colgate (479bps) on lower ad spend vs
Sensitive launch related high expenses in Q3FY11). Average palm oil
price, used for soaps, was up by 1.3% over the past three months and
is on a firm footing with continuing rupee depreciation. Higher palm
oil price could impact HUL’s and GCPL’s margins in Q4FY12; however
judicious price hikes and stable LAB (Linear Alkyle Benzene) prices
(used for detergent) is expected to arrest margin contraction. Copra
(coconut oil), cocoa (chocolate), high-density polyethylene (HDPE) and
coffee have declined by 10%, 18.4%, 4% and ~10.4% respectively over
the past three months. Marico, Nestle, and Tata Global Beverage are
expected to gain from the correction going ahead.
Net profit surges by 21%; top picks–HUL, Nestle, Marico & Dabur
Net profit for our coverage universe is expected to grow by 21.4% YoY
in Q3FY12. The rupee depreciation of 11.6% QoQ could impact
earnings of GCPL by 14.4% due to MTM loss of INR 261.5mn arising on
US$50mn inter-company loans in overseas subsidiaries. After recent
price correction, we find comfort in valuations and earnings growth
prospects of HUL, Nestle, ITC, Marico and Dabur.

Metals :: Q3FY12 Preview: Elara Capital

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Riding uncertain tides
Rupee depreciation to offset metal price declines
The third quarter of the FY12 was characterised by the depreciation of
rupee and decline in the prices of the base metals on the LME. The
base metal prices declined 12% to 18% QoQ as the global economic
uncertainty continued. However, the depreciation in the rupee (11.4%
QoQ) partially offset the declines in the base metal prices. We believe,
the performance for non ferrous players will be more or less flattish
during Q3FY12 while the same will show a decline YoY due to lower
end metal prices. On the ferrous side, we expect integrated players to
post strong performance due to firm steel prices. JSW Steel is likely to
post sequential EBITDA growth on the back of higher production as
well as better raw material security.
Volumes not expected to provide positive surprise
The domestic economy hasn’t been robust in the recent past. The
same has plagued the capacity utilizations in the country and the
ferrous players have been facing the lower capacity utilizations.
However, the steel consumption has posted an increase in the third
quarter of FY12 but still is lower than the previous growth rates, which
equaled or surpassed GDP growth.
On the non ferrous side, we believe, the quarter will not bring any
huge positive or negative surprises. The realizations although suffered
on the LME, the Indian companies should thank rupee depreciation for
offsetting the same to an extent.
Things to watch out for going ahead
We believe, the metal sector companies will witness continued margin
pressure going ahead as well. The lack of full capacity utilizations for
the ferrous companies and steeper energy costs for the non ferrous
companies will act as a dampener for profits in the coming years. We
prefer companies with completed projects and operational mining
assets in the non ferrous space (Hindustan Zinc), while we continue to
be cautious on the ferrous space.

Two wheeler industry :: Q3FY12 Preview: Elara Capital

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Margin twist
Hero Motocorp - margin expansion story continues to unfold
The gross margin expansion story that started in Q2FY12 for the
company is expected to continue in Q3FY12E, as we expect stable
realisations and raw material costs adding 132bps to gross margin. We
further note that a sequential weakness in raw material prices (though
quite visible in dollar terms, but gets negated by rupee depreciation),
as witnessed in Q2FY12 may add to margin surprise. The company
may also surprise on lower than expected spend on advertisement
and brand building costs, although it would again have to take MTM
hit of ~300-350mn on royalty payments, due to 11.6% QoQ
depreciation in rupee.
Bajaj Auto – margin surprise in store
Similar to Q2FY12, when it surprised on its EBITDA margin on the
upside, due to 3.4% uptick in exports realisation on rupee
depreciation, Bajaj Auto is expected to repeat the trend in Q3FY12E, if
not better its last reported margins. We expect exports realisation to
move up by 8% QoQ, and domestic realisation by 2.5% due to better
product mix, leading to a 150bps improvement in EBITDA margins
sequentially and a YoY earnings growth of 26%.
TVS Motor – high operating leverage turns a foe
With only 1% YoY improvement in volumes, TVS Motor is in for a rude
shock as high operating leverage takes toll on margins. We expect
15% correction in earnings and contraction of 90bps in operating
margins.
Valuation and recommendations
We continue to remain positive on Hero Motocorp given comfort over
volume growth and strong possibility of margin expansion, while we
remain negative on Bajaj Auto over lack of comfort over FY13E volume
growth and possibility of high FY13E effective tax rate eroding
earnings growth. We turn cautious on TVS Motor, despite cheap
valuations, as volume growth appears iffy post weak Q3FY12 volume
growth trend.

Oil & Gas :: Q3FY12 Preview: Elara Capital

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Pains continues for PSUs, RIL; Cairn gains
Weak INR, rising under-recoveries to hit Oil PSUs yet again
The weakening INR has meant a sharp rise in under-recoveries,
leading to the OMCs staring at Q3FY12 under-recoveries of
~INR350bn. Post the price hikes and duty cuts in Jul’11, the annual
under-recoveries were estimated to be ~INR1.2trn; however the weak
INR has single-handedly lifted this estimated figure to INR1.4trn. The
Government has announced INR150bn support for OMCs in Q3FY12
(INR300bn for FY12 so far), while upstream companies look certain at
take a much bigger burden than in H1FY12. The upstream PSUs would
have shared ~INR600bn (pre- duty cuts in Jul’11), and we believe that
these companies would now eventually end-up sharing this burden by
FY12-end anyways, implying a 42% share. This also means that ONGC
and OIL will bear 55% share in H2FY12; however whether it is evenly
divided in Q3/Q4 remains to be seen. Assuming the Government’s
usual pattern for Q4 adjustments, we have assumed 33% sharing for
upstream companies in Q3FY12 giving USD62/bbl and INR70/bbl net
realizations for ONGC and OIL respectively.
Weak for RIL, strong for Cairn
We expect a weak quarter for RIL driven mainly through soft GRMs of
~USD7.5/bbl and lower KGD6 gas volumes at ~42mmscmd. We also
expect weakness in petchem spreads despite better product prices due
to INR depreciation. However, we expect a sharp rise in other income
due to the cash influx of the BP deal and estimate RIL to report an
EBITDA of ~INR82bn and net profit of INR48.7bn. Cairn India on the
other hand, as the sole sector beneficiary of the INR depreciation,
should report strong Q3FY12 numbers due to higher realizations. We
also expect Cairn to come out with some positive announcements on
field ramp-up/start approvals post the results in the coming months.
Maintain Cairn India as our top pick, maintain Reduce on RIL.

Tata Consultancy Services (TCS) :: Less upbeat this time:: Nomura research

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Commentary moderation and
high Street expectations make
us cautious; reaffirm Neutral

Action: Results and commentary fail to excite; reaffirm Neutral
While we like TCS for its potential to drive market share gains, we believe
3Q disappointments led by 1) commentary moderation, 2) inferior results
compared with INFO despite upbeat commentary, and 3) weakening in
cash generation trends are likely to weigh on the stock in the interim. We
remain cautious on the stock given: 1) high Street expectations built into
valuations and 2) higher risk perception associated with greater exposure
to Europe and BFSI – two segments most susceptible to a slowdown. We
would wait for better valuation comfort given these risks and hence
reaffirm our Neutral rating. We prefer HCLT/CTSH/INFO over TCS.
Catalysts: Demand moderation in BFSI/Europe key downside risk
Management commentary shows some signs of demand moderation
TCS is seeing delays in deal closures and decision making in the
discretionary segments, similar to concerns raised by INFO a quarter
back. However, it remains more upbeat on run-the-business spending. We
continue to believe that TCS will grow faster than Infosys in FY13F, but
the outperformance is likely to be moderate to 2.5% (vs ~8% in FY12F).
Further, we see greater comfort in margins and valuations at Infosys and
hence reiterate our preference for INFO over TCS.
Valuation: TP reduced to INR1,200; maintain Neutral
We expect a USD revenue CAGR of 20% and EPS CAGR of 18% over
FY11-13F. Our target price declines to INR1,200 (from INR1,230) based
on 18x one-year-forward earnings (methodology unchanged).

IT Services:: Q3FY12 Preview: Elara Capital

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Focus squarely on CY12 IT budgets
IT budgets likely to signal a move away from discretionary
Commentary on CY12 IT budgets is likely to indicate a shift away from
discretionary to getting more out of flat IT budgets. We expect
difference in commentary across our coverage on Infosys and HCL
Tech pointing to tightening of discretionary budgets. We expect
Infosys to cut its FY12 USD guidance range from 17.1% to 19.1% to
16.5% to 17.5%. With the stock price having run up beyond INR2,800,
we believe the stock does not price in the risk of a 110bps cut in USD
guidance. The recent miss from Oracle (on middleware, database and
application new license sales) is also likely to make managements
increasingly cautious on discretionary budgets and Infosys with its
31% exposure is poorly placed.
Negative cross currency on USD revenue; INR a tailwind
We expect a negative impact of 100bps to 220bps (QoQ) on the USD
revenue growth from cross currency headwinds. INR has depreciated
by around 11% on a period average basis QoQ. INR revenue is likely to
be upwards of 11% QoQ across most of our coverage stocks. Across
the coverage, we expect QoQ volumes to grow in a range capped at
5%. We expect Infosys and TCS EBITDA margins to improve by 160bps
and 140 bps respectively on currency. Other than Wipro (which
reports forex above the line), all other companies will report forex
losses with TCS losses likely to stand at INR4.5bn. Infosys and HCL Tech
are best placed with the current currency rates on the forex losses
front.
Maintain IT as an OW; cut Infosys to a Neutral
We believe that the risk-reward is unfavourably stacked against Infosys
at current stock prices in spite of the currency tailwind and would
recommend cutting our OW position to Neutral. We continue to back
our IT OW through TCS and HCL Tech in spite of expectations of a
relatively soft quarter for HCL Tech (led by softness in enterprise
applications business). We believe a slew of deal wins and low
valuations will create a floor for the stock. TCS also remains our play on
the ‘cost take out’ slant of the CY12 IT budgets.

Q3FY12 Preview: Elara Capital

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Towards the end of the downhill ride
Elara coverage universe to show 16.2 % revenue growth
We expect the Elara coverage universe to report a 16.2% revenue
growth (including downstream oil and gas) with flattish margins. Ex of
downstream oil and gas, there is still 170bps yoy margin dip. Though
most of the sectors still continue to report margin dips, margin
expansion in consumption (FMCG and two wheelers) and cement
have limited the fall. Also, the rupee depreciation fillip has taken the
wind out of the steep margin contraction on metals, pharma and IT
services. Cement will continue its strong showing as higher rural
demand along with softer input prices is expected to result in 44.4%
PAT growth. Ex of our preview numbers, our banking analyst expects
bank earnings growth to soften led by both muted loan growth and
stable NIMs. We believe that the asset cycle deterioration has
bottomed out and focus will now shift to movement in restructured
assets. In line with our model portfolio we expect the outperformance
of private over public to continue.
Heads up on the possible portfolio changes for the quarter
While FMCG (seasonally strong quarter), a key overweight in our
model portfolio, continues to show strong 21.4% PAT growth and
EBITDA margin expansion; we feel that full valuations might lead us to
cut the extent of our OWs. We would also cut our Infosys OW before
the guidance but an OW on IT through TCS and HCL Tech. Other than
Hindustan Zinc, we continue to be negative on both the ferrous and
the non-ferrous pack. In the cement space, we prefer players using
petcoke like Shree Cement, JK Lakshmi, JK Cement and Ultratech on
softening petcoke. Price action in ACC might also lead us to change
our negative view post quarter numbers. Other than our recent Cairn
upgrade, we maintain our cautious medium term stance on the oil and
gas sector with a negative view on RIL.
Our top picks are across bottom up rather than sector specific
Our top picks include ITC, HUVL, Grasim, TCS, HCL Tech, BPCL, HPCL,
HMCL, Hero Motocorp, Grasim, Berger Paints, Sadbhav and ITNL.

ICICI Securities, Top Delisting Candidates in India

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In June 2010, the Ministry of Finance, Government of India, had issued guidelines pertaining to minimum public
shareholding for all listed corporates. The guidelines were later revised in August 2010. As per the guidelines, all private
sector listed corporates must have at least 25% public holding while listed PSUs should maintain a minimum public
holding of at least 10%. The corporates were given time of three years to abide by the guidelines. The deadline for
companies to achieve the stated level of public holding is June 2013.
The corporates, particularly fundamentally strong multinational companies (MNC) may not have the inclination to increase
their public holding and may resort to delisting to have better flexibility in taking business decisions. The case for delisting
becomes stronger in the current weak trend prevailing in the equity markets, which has led to a substantial fall in stock
prices providing an opportunity for such corporates to buy out the remaining stake with the public at lower valuations. The
chances of a delisting offer succeeding also appears higher due to a moderation in return expected by the public
shareholders and the enhanced willingness to exit the stock even at a marginal premium to current stock prices.
We have analysed and identified MNC companies, which would be probable delisting candidates. We have filtered the
companies based on the criteria of a minimum promoter holding of 75% and return on capital employed (RoCE) higher
than 10%. We have further looked into the availability of funds to buy back the public holding

Coal India: GCV-based notified prices set to be normalized:: Nomura

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What’s new: GCV-based pricing structure to be reviewed on Jan 20
In a news report by Business Line (citing Press Trust of India dated January 18, 2012),
Mr. Sripakash Jaiswal (Union Minister of Coal) is quoted stating, “this [new pricing
mechanism] will be reviewed on January 20. We will come out with a solution within a
week of the review, so that there should not be overall price increase or the increase
should not be more than required, if it is necessary for certain grades [of coal[. Price
fixed by them (Coal India), in my opinion, is more than required.” Furthermore, the
report cites Mr. Jaiswal clarifying that the new GCV-based pricing of coal will not be
annulled, but the variation in prices would be reviewed. Our channel checks corroborate
that (1) the review is based on the representation by IPPs (including NTPC) via the
Ministry of Power (MoP) against the hike built into the coal prices notified under the new
17-grade structure and apprehension on the declared GCV of coal measured by the new
apparatus, and (2) broad direction from the Ministry of Coal (MoC) was to keep the new
pricing structure ‘largely revenue neutral’ for Coal India (CIL).
What's the ground status on adoption of new pricing mechanism?
Our discussion with IPPs indicates [1] provisional billing of coal dispatched in the past
fortnight has been made as per the new pricing structure, but not by all CIL subsidiaries,
[2] instead of a grade slippage, declared GCV of coal under the new GCV structure has
moved up in some cases, thus attracting a sharply higher price point, and [3] IPPs have
limited say in joint sampling of coal being done at the loading point. Our discussion with
CIL indicates that since January 1, 2012, coal is being dispatched and billed as per the
new pricing mechanism across all subsidiaries apart from ECL (where the switchover
has been put in abeyance until mid-February on a ‘request’ by the Calcutta High Court).
Analysis: review was expected, nominal price hike still probable
In our January 3 note “GCV-based pricing switch turns EPS accretive”, we mentioned –
[1] price discovery based on 17 grades vs. 7 grades (in the previous mechanism) will
typically lead to higher blended realization, [2] base price for the lowest-grade coal
(2200GCV) is 10-20% higher than the lowest price point in the previous pricing regime,
[3] CIL appears to have built-in a typical margin of safety of two grade slippage in the
new pricing structure, and [4] assuming no grade slippage, blended notified price could
effectively rise by 15-20%. Further, our calculations suggest that [a] if we assume
across-the-board slippage of one coal grade under the new calorie-meter based
measurement of GCV, blended notified price would effectively rise by ~7%, and [b] if we
were to keep the coal prices for the core sectors (power, fertilizer & defence) at the
minimum level under the previous grading structure, the effective hike in blended notified
prices would still be about 5-7%.
Implications – Maintain BUY, we see an upside risk on realizations
Inferences from our recent interactions with IPPs and policymakers suggests that a
nominal hike in notified coal price would probably be ‘acceptable’; accordingly, we
maintain that CIL would eventually be able to push through a hike in notified prices for
FY13. CIL’s 1HFY12 blended realization has surprised us positively (Rs1382/ton vs. our
FY12 forecast of Rs1377/ton); our current earnings forecast for CIL (under review) builds
in a 3.4% hike in blended realization for FY13F. Ceteris paribus, a 1% increase in
blended ASP could increase CIL’s EPS by ~3%, based on our calculations. We maintain
our Buy recommendation; on our FY13 earnings forecasts for CIL (under review), the
stock trades at 12.5x FY13F P/E and 7.4x FY13F EV/EBITDA.

Commercial Engineers & Body Builders Company Ltd :: Target Price: INR 91.00 ::SPA

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CEBBCO is the largest organized player in outsourced body building fabrication for CVs in India. It also provides refurbishment of
wagons, and designing and manufacturing of components for wagons and locomotives. It has set up a new wagon manufacturing
factory to capture significant demand in the Indian railway sector. The company has also ventured into the power sector with
manufacturing of structurals for boilers and electrostatic precipitators (ESPs) for clients such as BHEL and L&T.


Investment Rationale
Expected beneficiary of the changing trend
CEBBCO is the largest player in outsourced body building
fabrication for CVs in India with 40% share of Tata Motors' CV
portfolio and also a preferred vendor by all major OEMs viz. Ashok
Leyland, Volvo Eicher, MAN, AMW etc. We expect CEBBCO to be the
major beneficiary of the increasing demand of Fully Built Vehicles
(FBVs) in India with the gradual shift in focus towards building FBV
by CV manufacturers. The share of FBVs has risen to 20% in the
current fiscal vis-à-vis 12% in FY10. We expect the share of FBVs to
rise substantiality over the next decade, as in developed economies
all vehicles are sold in FBVs only.
Foray into higher margin segments
CEBBCO has recently forayed into wagon manufacturing and is
setting up a plant with a capacity to manufacture 1200 wagons &
120 EMU coaches by March 2012. It has recently bagged orders
worth INR 385 mn from Braithwaite for 247 wagons likely to be
executed in FY13E. It has already bid for another 500 wagons, the
outcome of which will be known in the coming months. We expect
railways to contribute c. 23-24% at EBITDA levels in FY13E and
register a CAGR of 196% in revenues over the next 2 years.
Strong presence in the railways refurbishment business
CEBBCO is one of the key vendors for wagon refurbishment
business of Indian Railways (IR). Through refurbishment, IR
attempts to expand the quantity of rolling stock inventory in
circulation. The cost advantages of refurbishment over new
wagons are a key factor in this, as refurbishment costs per wagon
are lower than the costs incurred for a new wagon. We expect
CEBBCO’s refurbishment business to register a CAGR of 37% in
January 17, 2012 INITIATING COVERAGE
revenues over the next 2 years and contribute 7-8% at EBITDA
levels in FY13E.
Strong Order Book
CEBBCO's order book stands at ~INR 7.54 bn, out of which CV business
has contribution of ~INR 6.9 bn. In railways segment it has an order
size of INR 385 mn for manufacturing of wagons and INR 150-200 mn
for refurbishment business of Indian Railways. The current order
book size of the power segment is ~INR 100-150 mn. The average
execution period for the order book is ~1.50-1.75 years.
Expansion plans
CEBBCO is planning to incur a capex of INR 1 bn to enhance its CV
body building capacity by ~50% by FY13E. This capex is expected
to be funded by INR 600 mn of term loan and balance through
internal accruals. The Company is looking to double its fabrication
capacity of power segment to 2000 MT/month by FY14E.
Outlook & Valuation
CEBBCO which derives majority of its revenues from body building
business for CVs segment is expected to gain substantially from
the increasing FBV penetration. We expect share of FBVs to rise to
25% in FY13E & 30% in FY14E vis-à-vis c.20% in FY12E. We expect
domestic volumes of CVs sector to register a CAGR of 16% over
FY11-13E, resulting in sustained growth for CEBBCO. We expect
CEBBCO’s topline & bottomline to register a CAGR of 80% & 231%
respectively over FY11-FY13E on the back of increased focus on
FBVs by OEMs coupled with lack of organized players in this space
and foray into wagons manufacturing & power sector. We expect
EBITDA margins of 16.28% in FY13E vis-à-vis 6.11% in FY11. We
recommend a "BUY" with a target Price of INR 91 in 15 months, at
6x FY13E EV/EBITDA.

Reliance rally on buyback buzz Ø CSEC Research

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Reliance rally on buyback buzz

Ø  Indian markets opened on a flat note and remained subdued throughout the day. Mild selling pressure was observed during the mid session. However, Reliance and HDFC Bank remained firm and guided Sensex to close above 16450 mark.

Ø  Reliance surged 5 percent as the management informed that they are planning for a buy back of the Company's equity shares. Meanwhile, a meeting of the Board of Directors of the Company will be held on January 20 to announce Q3 results and buy back details.

Ø  Metal stocks snapped their multiple day winning streak and weighed on index movement. Tata Steel, SAIL shed more than 4 percent and topped the nifty losers list.

Ø  Coal India declined sharply after Coal Minister Mr. Sriprakash Jaiswal stated that the firm may not raise prices after it finalizes a wage increase agreement with its workers later this month.

Ø  Result impact was witnessed in TCS and NIIT Technologies. The former declined 3 percent while the later surged 4 percent on the back of strong Q3 numbers.

Outlook

Ø  The S&P 500 Index closed above 1,300 for the first time since July 28, on improved sentiment in housing and as Goldman Sachs Group Inc.’s earnings beat expectations.

Ø  In today’s trade Asian markets are up two third of a percent and the SGX Nifty is trading at 5000. Going ahead, the Indian market is likely to open on a soft note with positive bias.Q3 results of HDFC Bank, Hero motors, Bajaj Auto and Godrej properties are to be announced today.

 

Regards,

CSEC Research

Earnings Update - HCL Technologies :: CSEC Research

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Earnings Update - HCL Technologies

Dear All,

Lower than expected top line growth…

HCL Technologies revenue growth was below our estimates. Revenue sequentially grew by 2% in dollar terms to US$1,022mn against our expectation of US$1,050mn. Though the revenue from IT services and BPO services were inline with our estimates, subdued performance of Infrastructure Management services in Indian public sector space due to rupee depreciation was the cause for variance in revenue estimate.

Demand Environment

Despite having a challenging global macro economic condition, the deal pipeline continues to remain robust, with 18 large deal wins during the quarter (total TCV of US$1bn), which spread across all verticals. Management expects vendor consolidation to fuel momentum and it has indicated that vendor consolidation will provide business opportunity of ~US$47bn in CY12 of which 30% is likely to be bid by HCL Technologies.

Hedge Position

HCL Tech has outstanding hedge of US$1.2bn (US$980mn cash flow hedge & US$171mn balance sheet hedge). The cash flow hedge consists of US$545mn @ Rs.49.5 and remaining at Rs.54.4.

Dividend

HCL Tech declared a dividend of Rs.2 per share; 36^th consecutive quarter of dividend payout

Outlook & Valuation

At CMP of Rs.418.9, stock trades at 12.6X and 11.2X to FY12 and FY13 earnings estimate of Rs. 33.2 and Rs. 37.5 respectively. We maintain an Outperformer rating on HCL Tech with a target price of Rs. 487. We assign a multiple of 13X FY13 EPS based on a 30% discount to Infosys target PER.

Regards,

CSEC Research

FII DERIVATIVES STATISTICS FOR 19-Jan-2012

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FII DERIVATIVES STATISTICS FOR 19-Jan-2012
	BUY		SELL		OPEN INTEREST AT THE END OF THE DAY
	No. of contracts	Amt in Crores	No. of contracts	Amt in Crores	No. of contracts	Amt in Crores
INDEX FUTURES	134084	3333.78	88470	2200.43	582658	14528.61	1133.35
INDEX OPTIONS	537900	13225.37	516197	12672.97	1539326	38590.04	552.40
STOCK FUTURES	182817	4697.00	161929	4160.71	1092292	28466.40	536.29
STOCK OPTIONS	25649	640.13	27405	674.92	64711	1693.98	-34.78
						Total	2187.26

 

-- 

19/1/12:: Categories Turnover (BSE) (Rs. crore) Clients NRI Proprietary Trade Data

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Categories Turnover (BSE)

(Rs. crore)
	Clients			NRI			Proprietary
Trade Date	Buy	Sales	Net	Buy	Sales	Net	Buy	Sales	Net
19/1/12	1,622.51	1,677.05	-54.53	0.35	0.52	-0.18	575.78	540.33	35.45
18/1/12	1,709.60	1,681.51	28.09	2.16	0.30	1.86	586.40	589.19	-2.80
17/1/12	1,716.10	1,781.39	-65.29	2.32	0.65	1.67	607.83	594.84	12.99
Jan , 12	21,198.53	21,372.97	-174.44	10.57	7.42	3.14	7,443.01	7,238.66	204.35
Since 1/1/12	21,198.53	21,372.97	-174.44	10.57	7.42	3.14	7,443.01	7,238.66	204.35