India outlook 2012:: Nomura research,

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Macro risks near term but
largely discounted, see much
improved second half
We expect growth in India to stay slow, inflation to slowly ease, the
rupee to be weak near term and rate cuts to happen with a lag.
In this environment, we prefer banks and exporters such as IT and
pharma to capital goods and autos. We are also underweight the
consumer sector. We would play the investment cycle through
cement rather than infrastructure.
Our top picks are SBI and Axis Bank on a more benign rate
environment, and exporters like Infosys and Lupin on the weak
rupee. We like Power Grid’s regulated return profile.
Key analysis in this anchor report includes:
• Outlook for economic growth and the investment cycle
• Why we expect the rate-cutting cycle to be back-ended in 2012 if
further rupee pressure disrupts the fall in inflation momentum
• A look at the near-term currency headwinds due to concerns about
capital flows and Europe
• How valuations stack up historically. We see 15-20% market upside
through the year

Lupin (LPC IN) OW: Higher costs and tax clip upside  HSBC Research,

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OW: Higher costs and tax clip upside
 Sales beat our estimates by c7% largely because of favourable
rupee depreciation. India up 30%, US 24% and Japan 43% yoy
 US outlook strong on c25 launches in FY13 – Geodon,
Combivir, Tricor and oral contraceptives – Yaz, Yasmin
 Costs remain high, tax to increase. Maintain OW,
TP unchanged at INR560

ACC: Profitability lags peers, multiples lead :: Kotak Securities

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ACC (ACC)
Cement
Profitability lags peers, multiples lead. At 20X CY2012E earnings and 10.7X
EV/EBITDA, the ACC stock price is not taking cognizance of potential pitfalls to our
judicious earnings assumptions from (1) continued demand-supply imbalance, and
(2) higher input costs. ACC’s profitability at Rs650/ton (4QCY11) is significantly inferior
to peers and reflective of higher operating costs. We maintain our SELL rating with a
revised target price of Rs1,030 (previously Rs980) as we remain watchful of the
continued risks to earnings.

Accumulate ARSHIYA INTERNATIONAL :: price target of Rs 185. :: Kotak Securities

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ARSHIYA INTERNATIONAL
PRICE: RS.165 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.185 FY13E P/E: 6.6X
Strong operational performance in Q3FY12-FTWZ grows at
healthy pace
Arshiya has reported its Q3FY12 net profit at Rs 345 million (+65% YoY).
This was on account of increased share of FTWZ revenues in the overall
revenues which has increased from 3% in Q3FY11 to 16% in Q3FY12. FTWZ
revenues have grown from Rs 60 mn in Q3FY11 to Rs 443 mn in Q3FY12. As
FTWZ is a high margin business, the increased share has helped the overall
margins expand from 19.9% in Q3FY11 to 25.7% in Q3FY12. The company
currently operates 4 warehouses at Panvel FTWZ and we estimate the
company to ramp it up to 8 warehouses by end of FY13E. ARST has also
started its Khurja FTWZ in Q4FY13E with 2 warehouses and we estimate the
company to ramp it up to 4 by end of FY13E. We also expect the VAS to
rental ratio to improve from current 1x to 1.5x by FY13E and further to 2x by
FY14E. In the rail segment the company operates 16 rakes currently which
they would ramp up to 20 by end of FY13E. The company also intends to
take about 10 rakes on lease during the same period. Rail segment has
reported 70% YoY growth in revenues with EBIT margins expanding to
15.5%. The company wants to integrate its entire rail operations with is
logistics business and FTWZ business and run these rakes primarily on the
domestic segment. The company continues to grow steadily in its core third
party logistics (3PL) businesses. Total revenues have grown to Rs 2.7 bn
(+28% YoY). The stock at CMP of Rs 165 trades at 6.6 times FY13E earnings,
below the average one year forward trading multiple of peer companies of
10x. We expect the company to deliver revenue CAGR of 24% over FY11 to
FY13E to ~ Rs 12.7 bn with improvement in operating margins from 19.4%
in FY11 to 24.2% in FY12E and 26.9% in FY13E. With improvement in
margins and benefits of aggressive capex accruing to the company going
ahead, we expect the return ratios of the company to improve. High
leverage, execution delays and poor acceptability of the key FTWZ concept
are some of the pitfalls and can be a drag for the company. Consequently
we value the company at 25% discount to the one year forward multiple of
peer group companies in the Logistics space which comes at Rs 185. The
discount captures the risks on account of the high leverage position of the
company. We rate the stock Accumulate with a one year price target of Rs
185.

Nava Bharat Ventures: Higher fuel cost & maintenance shutdown - dents profitability:: SPA

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NBVL came out with lower than expected set of numbers due to lower power generation on the back of forced and planned
maintenance outage of its power plant. However, this adverse impact on Power business was neutralized to some extent
by improved contribution from Ferro Alloys & Sugar segment, leading to YoY decline of 34% in net profit to INR 325 mn
(+33% QoQ). Improving merchant power rates & scheduled commissioning of 214 MW power plant will lead to improved
contribution from power segment. We maintain a BUY rating on the stock with a target price of INR 298.

Crompton Greaves: Belied expectations; downgrade to Reduce : Nomura research,

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Receding hopes of a near-term
turnaround; downgrade to Reduce


Action: Margin pressure may continue; Downgrade to Reduce
CRG surprised negatively again in 3Q as subsidiary margins deteriorated
further, belying expectations of an improving trend. Management clarified
subsequently that the poor margins were not due to inventory liquidation
at a discount (in contrast to our initial belief). While we note few positives
from the results such as a strong pick-up in power system revenue as well
as strong order intake, we are now increasingly concerned over CRG’s
medium-term margin outlook. Our concerns emanate from the following
key observations (in sync with investors who saw this much before us):
 Margins continue to worsen across segments despite a revenue pickup;
inspires little confidence in margin recovery when growth stabilises.
 Order inflow in the current environment might continue to deliver subnormal
margins due to heightened competitive intensity.
 Management has refrained from giving guidance for the FY13 outlook
and has further hinted that the FY12F guidance could be at risk.
Catalysts: Europe overhang and competition
Profitability in overseas subsidiaries, delayed recovery are key triggers.
Valuation: Still expensive on our lowered est.; downgrade to Reduce
We believe that CRG is yet to hit the cyclical trough and further
downgrade in FY13F earnings is possible. Our revised estimates are still
based on the hope of a recovery and we would wait for visible recovery
signals. Deteriorating ROE profile and uncertainties prompt us to assign a
discount to average sector multiples; we now value the stock at 11x Sep-
13F EPS to arrive at our new TP of INR130. Downgrade to Reduce

Nomura | Tech Mahindra ::Still more pain left in BT business

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Nomura | Tech Mahindra
Still more pain left in BT business

TECHM 3QFY12: Revenue and margins below expectations
 TechM reported a US$ revenue decline of 2.5% q-q – which was
worse than our expectation of 0.6% decline. The decline was driven by
~8% q-q decline in BT business (on the back of ~6% in 2Q).Non-BT
business had a muted quarter, with 0.6% q-q growth.
 EBITDA margin improvement of 90bps q-q was below our expectation
(of 150bps). The margin improvement of 90bps was despite 11% q-q
gain in USD/INR realized rate, (our expectation of 150bps was based
on 9% q-q improvement in USD/INR assumption) and appears to be
the result of pricing cuts in BT business along with increasing skew of
business towards BPO.
 PAT excluding Satyam contribution at INR14.4bn was ahead of our
expectation (of INR13.3bn) on account of other income gains and
lower taxation (16.7% tax rate against 23% expected).
Maintain Reduce; our TP of INR580 implies 11% downside
 The 3Q result reinforces our weak near-term revenue and margin
outlook for the company given 1) more revenue and margin pain likely
in BT business (35% of revenues), 2) an anaemic outlook for
discretionary spending in Telecom; and 3) an increasing skew in
TechM’s business mix towards the low-margin BPO/emerging markets
business.
 Upsides from Mahindra Satyam (SCS IN, Not rated) where TechM has
~43% ownership also look unlikely in our view post its weak 3Q result.
Satyam reported weaker than expected revenue growth (of 1.6% q-q
decline) in 3Q. Margins at Satyam are likely to decline going ahead, in
our view, given the sharp rupee appreciation against the USD in the
quarter-to-date (spot 8% higher vs 3QFY11 closing rate) and limited
operating levers left.
 TechM has run-up by 8% over the last month, outperforming the
CNXIT index by 6%. We see significant downside to the stock at
current levels and reiterate our Reduce rating on Tech M. Our target
price of INR580 implies ~11% downside.
BT retendering to close by 1QFY13; still more pain left
Management expects the retendering of business at BT to come to a
close by 1QFY13. In the bidding that has happened so far, Tech M has
retained its market share according to management. However, the
company still sees headwinds to revenue and margins from the BT
business in the near term.
Muted activity in Europe; demand revival seen in US
Decision making is taking longer and clients are more cautious in
spending, according to management. They expect activity to remain
Tech Mahindra

Ambuja Cements: CY2011 also bereft of earnings growth :: Kotak Securities

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Ambuja Cements (ACEM)
Cement
CY2011 also bereft of earnings growth. Ambuja Cement ended CY2011 with an
EPS of Rs7.8—the fourth consecutive year of no-growth; this despite the fact that
realizations grew an impressive 12% yoy and volumes 3% yoy. We note that despite
our judicious assumptions—Rs172/ton improvement in profitability and 8% volume
growth, ACEM trades at an EV/EBITDA of 9.5X on CY2012E, with risks to earnings from
lower-than-estimated volume growth and rising input costs. Maintain SELL with a
revised TP of Rs145/share (previously Rs135).

NHPC - Results loaded with negative surprises ::Prabhudas Lilladher,

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􀂄 Adjusted sales flat YoY: Revenues from operations at Rs7.7bn (PLe: Rs7bn) for
Q3FY11, flat YoY, was on account of underutilisation of operating capacities,
with generation down by 5.8% YoY. The company has included items in
revenues to the tune of Rs1.1bn, mainly arising out of water cess billing and
recovery of tariffs and interest on that amount. Expenditure also had major
extraordinary items of Rs800m pertaining to provisions created for Kotli Bhel
Stage-1&2 projects, as these projects have less chances of getting approved by
MOEF.
􀂄 Adjusted PAT up 16.8%: Adjusted PAT stands at Rs2.6bn (PLe: Rs2.4bn) as
against reported PAT of Rs2.1bn (grossed up at MAT rate).
􀂄 Fails to reach the target of 500MWs commissioning in FY12E: NHPC’s Chutak
HEP Unit 1 will now get commissioned by March 2012 instead of November
2011, mainly due to bad weather conditions. Chamera and Uri 2 will now get
now commissioned by June 2013 instead of March 2012, mainly due to nonavailability
of load from Discoms and bad weather conditions. The company has
plans to add close to 822MWs in FY13E. Cash stands at Rs40bn. Regulated
equity stands at Rs71bn. Also, the company will take a hit on P/L as Parbati 2 is
delayed which will affect the COD of Parbati 3. NHPC will book the capitalisation
cost from FY13E on Parbati 3, whereas the tariffs will be booked when the full
plant achieves COD in FY16E.
􀂄 Valuation and Recommendation: NHPC currently has been lagging behind in
terms of capacity addition which will lead to a flat generation growth in FY12E.
We have changed our estimates to factor in capacity delays and adverse effect
of Parbati 3 capitalisation into FY13E and beyond numbers. We have, thus,
reduced our target price and believe that the stock is fairly priced with negative
bias. The stock is trading at a P/BV of 0.9x FY13E/14E. We maintain
‘Accumulate’ just because it is the safest play (non-fossil fuel) in the Power
Sector, but lower our target price from Rs24.

When you don't leave a will ::Business Line

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Assets may not be apportioned to beneficiaries in the manner one desires.

If a Hindu dies without a will, all the assets acquired by him will be equally shared by his legal heirs as per Hindu Succession Act 1956.

For inherited assets, his share alone will be equally divided by the legal heirs. But this will not be applicable to Christians and Muslims, as they are subject to different inheritance laws.

INTESTATE

What happens if one fails to write a will?

Assets may not be apportioned to beneficiaries in the manner one desires.

For instance, in bequeathing property, one may want to give special attention to children who are not well-settled in their life. If a will is written, such heirs may be given a higher share than those better off. But if one dies without a will, the property will be equally shared among the legal heirs.

In such a case, where family members are willing to relinquish their share in favour of a beneficiary, they can do so by executing a relinquishment deed.

Take another case where an individual has aged parents, spouse, a son and daughter and dies without leaving a will. As per the Hindu Succession Act, the assets are equally shared between mother, spouse, son and daughter. The father is not eligible for any share.

SUCCESSION CERTIFICATE

What should beneficiaries do if an individual dies intestate? They should apply for a succession certificate from the Court for distributing the assets such as shares, fixed deposits and other financial assets.

Bankers say that they insist on a death certificate, legal heirship certificate, affidavit and indemnity to transmit or to repay the deposits to one of the legal heirs, provided he has been authorised by the other legal heirs.

If there is any rival claim or dispute, then succession certificate is insisted upon.

In case of equity shares, if legal heirs want their respective share, companies will transfer equity shares accordingly.

The succession certificate is, however, mandatory in cities such as Chennai, Kolkata and Mumbai.

In case of immovable assets, legal heirs can share the assets equally among themselves.

But where a Hindu investor has dependents — both male and female heirs specified in the Act and his or her property includes a dwelling-house wholly occupied by his/her family, then female heirs cannot claim partition of the dwelling-house until the male heirs choose to divide their respective shares.

Overall, given the complex nature of laws that come into play when a will isn't in place, it may be wise for an individual to write a will, to ensure the heirs enjoy the fruits of inheritance.

Union Bank of India (UNBK IN) OW: 3QFY12 - Taking it on the chin  \HSBC Research,

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Union Bank of India (UNBK IN)
OW: 3QFY12 - Taking it on the chin
 A reasonably robust operating performance was countered
by a spike in restructured loans; union could potentially be
taking the stress upfront
 Lower-than-peer exposures to aviation and risky SEBs likely
to help a quicker recovery in 2H FY13 as the new Chairman
takes charge
 Retain OW; cut TP to INR236 (from INR250), implying
potential returns of 18% including dividend

ACCUMULATE':: Kalpataru Power, target price of Rs.130:: Kotak Sec

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KALPATARU POWER TRANSMISSION LTD (KPTL)
PRICE: RS.110 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.130 FY13E P/E: 9X
q KPTL reported Q3FY12 nos lower than our estimates on revenue and
profitability front. Slower execution in domestic T&D projects has led to
the significant drop in PAT in 9MFY12.
q Stock has been underperforming the broader market through past two
quarters. Muted order book growth and company's fund raising in last
fiscal that has met with skepticism are the primary reasons for this.
q We reduce our earnings estimate for FY13 to factor in 1) increasing competition
leading to pricing pressure in new orders 2) increase in input
prices 3) continuing wage inflation.
q We change our recommendation to 'ACCUMULATE' (from BUY earlier)
and arrive at a DCF based target price of Rs.130 (Rs 140 earlier).

Andhra Bank : TP: ` 135 Buy :: Dolat Cap

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Core & operating income in-line with our estimates; higher provisioning
impacts bottomline
We reiterate our positive stance on the stock; improvement in GNPA
and provision coverage levels provides comfort. Lesser than estimated
bottom-line was mainly due to NPV losses on a telecom restructured
loan book
􀁊 In Q3 FY12, Andhra Bank’s net interest income (NII) grew 17% YoY to `
9.8bn — in line with our estimates. Margin remained stable at 3.81% in Q3
FY12 on sequential basis. Net profit de-grew 8.4% YoY to ` 3bn as against
our estimates of ` 3.7bn and consensus estimate of ` 3.1bn.
􀁊 The deviation at net profit level was primarily on account of higher provisioning
on restructured loan book NPV losses and Investment depreciation (` 190mn
as against ` 1mn in Q3 FY11).
􀁊 There was 5.2% decline in gross NPAs on sequential basis; a key positive
surprise in the result. Further, lower NPL provisioning (` 395mn as against
` 1.5bn in Q3 FY11) resulted in decline in credit cost to 22bps in Q3 FY12
as against 130bps in Q2 FY12 and 104bps in Q3 FY11). PCR increased to
66.4% as against 61.7% in Q2 FY12.
􀁊 The quarterly result was broadly in line on core income level, with a positive
surprise on GNPL front — sequential decline in GNPL and stable margins
improved overall performance. The asset quality (particularly on restructuring
front) will be a key parameter to watch out for going ahead. We reduce our
earnings estimates by 3% and 2% for FY12 and FY13 respectively. We cut
the target prices by 9% to ` 135 at 1x adjusted book value (ABV) FY13 and
maintain our Buy rating.

Telecom: Data points from Vodafone/Uninor Dec 2011 quarter earnings reports :: Kotak Securities

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Telecom
India
Data points from Vodafone/Uninor Dec 2011 quarter earnings reports. Key data
points from Vodafone and Uninor’s 3QFY12 earnings reports are: (1) healthy volume
growth of 4.3% qoq for Vodafone and 21% qoq for Uninor (low base), (2) RPM inched
up about 1% qoq for Vodafone and declined 6% qoq for Uninor, (3) increased churn
for the industry, as reflected in Vodafone’s report (in line with that reported for Bharti
and Idea) and (4) slow 3G offtake, as reflected in muted data growth across players.

Choosing between tax-saving and tax-free bonds ::Business Line

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The market has been flooded with a spate of bond issues in recent times. Several companies

The market has been flooded with a spate of bond issues in recent times. Several companies such as IDFC, L&T infra, IFCI, REC, PTC Financial Services, HUDCO, IRFC, NHAI have lured us into parking our money with them by offering attractive interest rates.

Although the ‘tax benefit' aspect of these issues has been the scoring point, did you know that all these offers do not carry the same benefit? While the ‘tax-free' nature of the bonds was the highlight of those like HUDCO or NHAI or IRFC , the other issuers concentrated on the ‘tax-savings' that their bonds would enable.

Yes, in both cases post-tax yields are much superior compared to most other debt instruments.

But there stops the similarity between them.

INITIAL INVESTMENT

A ‘tax-saving' bond is one in which the initial investment is exempt from tax.

Similar to the deduction you get from your total income for your PPF investments or for paying your daughter's school fees under Section 80C of the Income-Tax Act, the investment in such bonds will be allowed as a deduction under Section 80CCF. This debt instrument typically targets those who exhaust the Rs 1 lakh savings limit under Section 80C but still have taxes to pay.

INTEREST INCOME

On the other hand, for ‘tax-free' bonds, the deduction on initial investment is not available. ‘Tax-free' simply means that the interest income you earn from the investment in these bonds is free from being taxed. The tax-saving bonds don't enjoy this benefit. Hence, like how you may be paying taxes on the interest on your fixed deposit investments, interest income here will be subject to tax.

That said, the interest and hence the tax outgo on the interest might not be substantial.

This is because Section 80CCF allows only a maximum of Rs 20,000 to be invested in these bonds.

In comparison, in the tax-free bonds, retail investors like you and I could invest up to Rs 5 lakh. These bonds typically offer slightly higher interest rates to retail investors as well.

Again, considering the Rs 20,000 restriction, tax-saving bonds would not be of great help in parking your surplus funds or in bringing in a meaningful stream of regular cash flows in the form of interest income.

But the tax-free bonds would serve both purposes. Retired individuals looking to invest a lumpsum and earn a fixed income annually from the corpus can lock into this.

Given the high ceiling on the investible amount, tax-free bonds would also be ideal for HNIs (High Net worth Individuals). These issues have a 30 per cent reservation for HNIs.

BUY-BACK PLAN

However, while tax-free bonds require you to keep your money invested for 10/15 years, tax-saving bonds offer a buyback clause at the end of five/seven years.

The advantage of opting for a buy-back plan is that you can exit if at the end of five years, you find that the interest rates on alternative investment options are better.

But even if tax-free bonds require a longer-commitment period, it is worth locking into, especially in a year like this in which interest rates are at their peak.

Also, it is not that these instruments are illiquid.

Tax-free bonds can be traded in the stock exchange.

If you choose to sell in the market, you will incur capital gains tax – if sold within one year, short-term capital gains tax at the normal slab rates; if not, at ten per cent without indexing the cost (long-term capital gains tax).

Tax-saving bonds too would be listed albeit, at the end of a lock-in period of five years. So besides opting for the buyback, you can exit through this route also.

However, capital gains tax will be applicable.

Remember that any exit in both cases will be exposed to interest rate movements which can depress or shoot up bond prices.

Jyoti Structures Ltd BUY:: KJMC

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Jyoti Structures Ltd (JSL) Q3FY12 results were below our expectation on
execution getting impacted due to delay in clearances and payments by
clients. During the quarter, the company reported 6.5% yoy growth in net
revenue at Rs 6 bn and PAT declined by 44% yoy to Rs 138 mn. The decline in
PAT was on account of 127 bps decline in EBITDA margins and 63.7% yoy
rise in interest expenses. The company added Rs 5.1 bn of new orders
resulting in an order backlog of Rs 42.9 bn at the end of the quarter. The
achievement of 20% revenue growth guidance would depend upon the
clearances and payments made by the clients.
Key Highlights
Q3FY12 revenue grew in single digit at 6.5% yoy: The net revenue of JSL
witnessed single digit growth of 6.5% on yoy in Q3FY12 and was below
our expectations. The delay in clearances from various government
departments and payment related issues from certain clients resulted into
slower execution of orders. Currently 15-20% of the projects are slow
moving and these are from state utilities from UP, Tamil Nadu, DVC, etc.
The achievement of the guidance of 20% revenue growth would depend
upon the clearances and payments made by the clients.
PAT declined on lower margin and higher interest expenses: In the quarter,
the EBITDA margin declined by 127 bps yoy to 10.1% on higher erection
& subcontracting expenses and other expenses which included MTM
forex losses. The EBITDA for the quarter declined by 5.3% yoy to Rs 595.5
mn. The interest cost grew by 63.7% yoy to Rs 310 mn on account of
increase in working capital loan. The delay in payment from some of the
SEBs resulted into this. In addition the average cost of debt also remained
high at 12-12.5%. As a result, the PAT for the quarter declined by 44.2%
yoy to Rs 138 mn.

Idea Cellular Ltd (IDEA) Upgrade to OW: Well placed to benefit from voice market  HSBC Research,

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Idea Cellular Ltd (IDEA)
Upgrade to OW: Well placed to benefit from voice market
 3Q was an operationally strong quarter with revenue growth of
c10% in both new and established circles
 Benefits from subscriber growth to continue; tariff hikes and
minutes from recently-acquired subscribers to drive growth
 We upgrade to OW from N and raise TP from INR97 to INR104
on higher subscriber estimates

BGR Energy Systems (BGRE.BO) Order Drought Continues to Impact Numbers::Citi Research

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BGR Energy Systems (BGRE.BO)
Order Drought Continues to Impact Numbers
 PAT down 38% YoY — BGRL’s 3Q12 PAT at Rs547mn, down 38% YoY, was 23%
below CIRA at Rs713mn. Despite EBITDA margins expanding 489bps to 16.2% (1)
sales decline of 36% YoY to Rs8.0bn (v/s management guidance of > Rs10bn) and (2)
interest costs ballooning up 2.8x YoY to Rs462mn contributed to the profit miss.
 WC might not have improved — In 2Q12 BGRL faced severe working capital (WC)
stress with debtor days ballooning up to 478 days of sales end 2Q12 from 258 days
end 2Q11. WC intensity (NCA – cash days of sales) was up to 289 days end 2Q12
from 119 days end 2Q11. The fact that (1) capital employed has gone up 5% QoQ
when sales are up QoQ only 4% YoY and (2) interest costs growing 53% QoQ could
imply that the WC might not have improved sequentially.
 Significant downside risk to CIRA estimates — In 9M12 BGRL made sales of only
Rs23bn vs management FY12E guidance of Rs48.5bn. We believe BGRL will also not
achieve our FY12E sales estimate of Rs40.5bn. The fact that the company has only
won orders to the tune of Rs22bn in 9M12 v/s CIRA FY12E of Rs110bn also puts our
FY13E sales estimate of Rs47.6bn at risk. 3Q12 end backlog at Rs80bn is down 14%
YoY. BGRL reported profits of Rs1.6bn in 9M12 vs our current PAT estimates of
Rs2.8bn, implying a significant downside risk to our estimates.
 Maintain Sell (3H) — Given: (1) even if orders rebound we expect margins to decline
structurally and BGR, with its weak BS, could find the going tough. (2) Structurally
declining RoEs FY11 - 39% to FY14E – 16%, (3) EPS decline of 10% over FY11-14E
vs 55% growth over FY08-11 and (3) we expect negative OCF over the next three
years.

Buy tax-exempt bonds ::Business Line

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You should choose tax-exempt bonds in such a way that it fulfils your asset allocation decision.

It is that time of the year when most individuals get busy stashing away their savings into tax-exempt investments. In this article, we explain how you should optimally choose such tax-savings products.

INVESTMENT ALLOCATION

We ask you to set aside the compelling urge to save taxes! Instead, first decide on how much you want to allocate to equity and bonds based on your investment objectives. By bonds, we mean your investments in bank fixed deposits, Public Provident Fund (PPF), Provident Fund (PF), bond mutual funds and other interest-bearing instruments.

Your decision to allocate between equity and bonds is a function of two variables- your investment horizon and your ability to assume risk. Consider investment horizon. Invest in equity only if you have an investment horizon of more than 5 years. You can allocate more to equity as you increase your investment horizon beyond 5 years. Likewise, your equity allocation can be higher if you have greater ability to assume risk. Your ability to take risk, in turn, is a function of your age, income and your savings potential.

Suppose you have decided to invest, say, 55 per cent in equity and 45 per cent in bonds for your retirement portfolio. This is called your asset allocation decision. Your choice of tax-exempt equity or bonds should be aligned with your asset allocation decision. That is, the tax-exempt products you buy should be a step in fulfilling your asset allocation decision, not just an action to save taxes.

TAX-SAVINGS ALLOCATION

Most individuals typically buy more tax-exempt equity than bonds. We explain below why you should consider bonds as part of your tax-exempt investments.

One, tax-exempt equity products such as Equity Linked Savings Scheme (ELSS) require you to hold the investment for three years. But if you hold equity for more than one year, long-term capital gains are tax-exempt. So, why invest in products that can offer you tax savings anyway?

Two, given the reason stated above, you should consider tax-exempt bonds. This includes investment in PPF and PF. Such products also offer tax-exempt interest during the life of the investment. Moreover, withdrawal of investments at maturity is also tax-free. Stated another way, post-tax returns on bonds are lower, as bond investments are taxable, unlike equity investments. So, take advantage of investing in tax-exempt bonds to fulfil your asset allocation decision.

Three, your benefit of investing in tax-exempt products is Rs 30,000 on an investment of Rs 1 lakh, assuming marginal tax rate of 30 per cent. We want you to think of this as subsidy that you receive from the government each year for investing Rs 1 lakh. You will receive this subsidy whether you invest in tax-exempt equity or bonds. You should nevertheless choose tax-exempt bonds because they increase your post-tax returns.

The amount you invest in tax-exempt products is based on your contribution to your PF, which is essentially a non-discretionary investment. Below, we provide easy-to-follow process to plan your tax investments:

One, calculate the insurance amount you require to cover your mortality risk. Buy term insurance and not investment-linked insurance products.

Two, calculate the available room for further tax investments by deducting Rs 1 lakh from your insurance premiums and contributions to PF. Invest in PPF to exhaust this limit. Begin investing from April of a financial year to enjoy the benefits of compound interest.

Three, consider New Pension Scheme (NPS) if you have the available room and do not want to exhaust your PPF limit.

City Union Bank : TP: ` 53 Buy ::Dolat Capital

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Core interest income in-line with expectations, higher growth in other
income and lesser tax provisioning led to higher than expected bottomline
􀁊 In Q3 FY12, City Union Bank’s (CUB) NII grew 17.3% YoY to ` 1.2bn — in
line with our estimates. However, NIM fell to 3.24% from 3.48% in Q3 FY11
and 3.41% in Q2 FY12.
􀁊 Operating expenses rose 34% to ` 686mn, whereas other income grew
40% to ` 508mn from ` 363mn in Q3FY11, resulting in a 17% YoY jump in
operating profit to ` 1.05bn (Dolat est: ` 1.01bn).
􀁊 CUB reported a bottom-line of ` 722mn compared to our estimates of `
628mn and consensus estimate of ` 677mn. Sharp decline of 67% YoY in
tax expenses to ` 71mn from ` 215mn aided bottom-line growth.
􀁊 During the quarter, gross NPA ratios largely remained stable at 1.17% on
sequential basis. Provision coverage ratio decreased to 76% from 79% in
Q2 FY12. Overall, asset quality remains firm, though the bank made lesser
NPA provisions.
􀁊 We see business growing 28% CAGR in FY11-13. We factor in margin
compression of 25bps in FY12 as well as FY13 to 3.07% and 2.82%
respectively (yearly average). We estimate that CUB will report RoAA of
1.3-1.6% and RoAE of 19-24%.
􀁊 We increase our FY12 earnings estimates by 6% due to better asset quality;
however, we maintain our FY13 earnings estimates and target price at ` 53
at 1.5x adjusted book value FY13. We reiterate our Buy rating on the stock
with a potential 23% upside. At current market price, it trades 1.2x FY13
(ABV) respectively.

Reduce ACC:: TARGET PRICE: RS.1246 :: Kotak Securities

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ACC
PRICE: RS.1389 RECOMMENDATION: REDUCE
TARGET PRICE: RS.1246 CY12E PE : 19.4X
q Revenues for Q4CY11 and CY11 registered a growth of 28% and 22%
YoY respectively led by improvement in cement volumes and realizations.
This was inline with our expectations. Cement realizations for the
quarter as well as full year were also inline with our estimates.
q Operating margins for Q4CY11 and full year CY11 stood below our expectations
due to steep increase in overall costs.
q Net profit for Q4CY11 was boosted by tax write back of Rs 2279 mn related
to previous years resulting which net profits registered a growth of
86% YoY.
q We tweak our estimates to factor in higher cement realizations and
higher costs. We arrive at a revised price target of Rs 1246 (Rs 1086 earlier)
after factoring in 10% improvement in cement prices from current
levels, 10% improvement in cement volumes and better margins. Stock
has moved up quite sharply in recent past and is factoring in improved
cement pricing scenario. At current price of Rs 1389, stock is trading at
19.4x P/E and 10x EV/EBITDA multiples on CY12 estimates. We continue
to maintain REDUCE recommendation on the company

Transport Corp of India :Slowdown in freight segment impacts performance : Centrum

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Slowdown in freight segment impacts performance
Transport Corporation of India’s (TCI) Q3FY12 results were marginally lower than
our expectations. Revenue growth was slower across segments and declined in the
freight business due to a slowdown in the manufacturing sector. The operating
margin though up 20bp YoY, was down sequentially to 7.7%, 58bp lower than
8.3% estimated mainly on the back of decline in freight segment’s PBIT margins.
We have lowered our estimates to factor in slower revenue growth and margin
pressure felt mainly by the freight business. However, we continue to maintain our
positive view on TCI on the back of healthy growth in SCS and XPS divisions and
attractive valuations.
�� Q3 results marginally below expectation: Standalone Q3FY12 revenue grew
4.5% YoY to Rs4,644mn, 4.2% lower than estimated. Operating profit increased
7.3% YoY to Rs360mn (10.8% below our estimate of Rs403mn) on the back of
higher-than-expected operating costs in the freight division. However, lower tax
provisioning led adjusted net profit to increase 24.7% YoY to Rs148mn, just 3.2%
below estimate.
�� Pressure in freight segment impacts overall margins: Operating margins
though up 20bp YoY to 7.7%, was 58bp below estimates. This was mainly led
by a 172bp YoY decline in freight division’s EBIT margins to 3.0%. Margins for
other divisions remained stable with express business’ margins improving
14bp YoY to 8.3% and SCS segment’s margins expanding 47bp YoY to 7.6%.

Sterlite Industries India : Metal czar’s steep discounting to end :: Centrum

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Metal czar’s steep discounting to end as
concerns recede
Sterlite Industries India Ltd (SIIL) which provides diversified
exposure to major base metals, silver and power and boasts of a
promising future on the back of organic growth across assets has
been trading at a big discount to its fair value during the last one
year, thereby underperforming the benchmark Nifty by over 25%.
The main reasons for this underperformance in our view has been
i) VAL’s expansion and backward integration plans going for a
toss due to government intervention and subsequent huge losses
by VAL wiping out SIIL’s invested equity ii) delay in expansion
project of BALCO and SEL and shortage of coal for running captive
and merchant power plants and iii) pumping of excessive cash by
SIIL into Vedanta owned VAL which has resulted into poor returns
for SIIL shareholders and raised investor concerns.
Though we agree these concerns are valid, we also infer that the
discounting done by the market for valuing SIIL stock has been
more than pessimistic and does not capture the full value of zinc
businesses nor does it account for the future volume growth
across assets and future positive triggers. We have seen a smart
upmove in the stock recently and believe that SIIL stock ‘s
discount to its fair value has come to an end on account of i)
better clarity from management on cash use through increased
dividends ii) volume growth across assets and improving
profitability ahead and iii) positive triggers from possible
minority stake buyouts and starting of BALCO captive coal block.
With SIIL’s expansion pipeline across assets coming on-stream by
FY13E, we expect sales volume CAGR of 7.4%, 45.3% and 9.7%
across zinc & lead, silver and aluminium operations during FY11-
14E. We expect net sales and EBITDA CAGR of ~12% and ~16%
during FY11-14E. We initiate coverage on SIIL with a Buy rating
and a SOTP target price of Rs 149.
􀂁 Zinc: domestic – best in class, international – shows potential:
Domestic zinc operations under HZL remain best in class with low
cost, increase in volumes of lead and silver and robust balance
sheet. We expect HZL to register EBITDA CAGR of ~11% during
FY11-14E. International assets have stable operations and show
potential for future with increasing exploration at Scorpion &
Lisheen and from the proposed 400 ktpa new project at Gamsberg.
􀂁 Aluminium: mixed bag with high costs and VAL: SIIL’s aluminium
operations remain a mixed bag with high COP at BALCO and losses
at VAL. With expansions in aluminium and power at BALCO in
FY13E, we expect EBITDA CAGR of ~13% during FY11-14E. We see
VAL retaining PAT losses on account of non-integration, high raw
material costs and very high interest.
􀂁 Power: lacks steam sans coal, but growth seen ahead: Power
portfolio lacks steam without captive coal but volume growth is
seen ahead despite challenges with expansions coming on-stream
by FY13E and coal feed from linkage and e-auctions. We expect
~15.3bn units of power sales from BALCO and SEL in FY14E. Starting
of captive coal block of BALCO would be the key trigger.
􀂁 Positive triggers in store: We see the possibility of positive triggers
for the stock from successful minority stake buyouts in BALCO and
HZL and starting of captive coal block of BALCO going ahead.
􀂁 Valuations – trading at discount, BUY: We see SIIL trading at a
sharp discount to fair value. We see earnings growth ahead driven
by volumes and value the stock on a SOTP basis giving no value to
its investments in VAL. We initiate coverage on SIIL with a Buy rating
and target price of Rs 149.
􀂁 Key Risks: Lower sales volumes on project delays, drop in LME
prices, higher losses in VAL and ineffective use of the cash pile.

Incomes of Ordinarily Residents are taxable in India ::Business Line

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I am an OCI card holder with Canadian citizenship and doing business in Canada and India. My question is whether I have to pay taxes for my Canadian income in India?

— Joseph

Taxability of income in India depends upon your tax residential status during the Financial Year (FY). Residential status is in turn determined by the physical presence of the individual in India during the FY and immediately preceding seven FYs. It is important to determine your residential status in India on year-on-year basis to ascertain the taxability of income in India. Just for understanding, there are three categories of residential status in India:

Non Resident (NR);

Not Ordinarily Resident (NOR); and

Ordinarily Resident (OR).

Depending upon your stay in India, in case you qualify as either NR or NOR during the FY, you shall be taxable in India only on India sourced income i.e. any income from your business in India. Accordingly, income which you have earned and directly received outside India (i.e. Canada) would not be taxable in India.

However, if you qualify as OR in India in any of the FY, your global income should be taxable in India irrespective of source or place of receipt of such income. The benefits under the Double Tax Avoidance Agreement have to be examined separately.

Therefore, in your case, determining your residential status in India in each of the FY and understanding the actual operations in India would be crucial to ascertain taxability of your income in India.

I have closed my PPF A/c on maturity. After that till now, I was contributing to the PPF A/c of my minor daughter. However, my daughter is an adult now. But she is a student and does not earn any income. Kindly inform whether I can still contribute to the PPF A/c of my daughter and still get the benefit under Section 80C, till she completes her studies and gets a job?

— V Srinivasan

An individual is eligible to claim deduction from total taxable income in respect of contributions to PPF, up to the overall limit of Rs 1,00,000 under Section 80C of the Act. The deduction could be claimed in respect of contributions made in his own PPF account or in the account of spouse or any child. Accordingly, you should be eligible to claim deduction in respect of contributions made by you in your daughter's PPF account.

A flat was bought in Oct 2006 for Rs 25, 00,000 for lump sum payment. Got possession in May 2009 and registration was done in Oct 2009. There is a buyer for for Rs 45, 00,000 now. The current registration value for such type of flat is now Rs 35, 00,000. How to calculate the capital gain? Is it on the registered value or on the actual sale value? If capital gain has to be calculated on the registered value how to pay tax for the remaining 10 lakh? Since lump sum amount is paid in 2006, can that year be taken for an indexation? Please clarify this through your column.

— Rani

The gains arising from sale of flat shall be taxable in your hands as capital gains. Further, the capital gain has to be classified into Long Term Capital Gain (LTCG) or Short Term Capital Gain (STCG) depending upon the period of holding of the property from date of acquisition (i.e. date of transfer of title in the property) to the sale date. Though you had paid lump sum amount in October 2006, it is imperative to determine when the title to the flat has been transferred to you. The year when you have acquired the title would be considered as the year of purchase acquisition. In case, you hold the flat for more than 36 months from the date of acquisition, the resultant gains shall be termed as LTCG. If the flat is held for less than 36 months from the date of acquisition, the resultant gains shall be termed as STCG.

The Capital gains shall be computed as difference between the ‘net full value of consideration' and the ‘cost of acquisition including cost of improvement'. The net full value of consideration would be the consideration you would receive towards sale of flat as reduced by transfer charges incurred in connection with the sale such as commission/brokerage, etc. In your case, if the full value of consideration you receive is Rs 45,00,000, then Rs 45,00,000 will be the sales consideration. The cost of acquisition shall be the actual cost of the flat (i.e. Rs 25,00,000) as increased by cost of improvement made subsequently, if any.

Further, for computing the LTCG, the cost of acquisition and cost of improvement should be appropriately indexed based on the cost inflation index published by the Income tax Department. The LTCG is taxable at the rate of 20.6 per cent (including education cess). The STCG is taxable according to the normal slab rate applicable to the individual.

You could claim exemption on LTCG by re-investing in new residential house or in specified Bonds within the prescribed time limit and subject to conditions under the Act.

(The author is Executive Director, Tax, KPMG.)

Power Grid Corp of India: Solid 3QFY12; capitalisation broadly on track: Nomura research,

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3QFY12 – Sales, EBITDA in line, net profit 12% above forecast
At Rs8.1bn, PWGR’s 3QFY12 net profit was 12% and 10% above our
and consensus forecasts, respectively; while revenues / EBITDA were in
line with our forecast (2%/4% above consensus), the positive surprise at
the bottom line was on account of lower-than-expected ‘net’ interest
outgo, and an exchange fluctuation ‘gain’ (elaborated below). If we were
to normalise for the net exchange ‘gain’, 3QFY12 adjusted net profit
would be Rs781mn – still 8% and 6% above our and consensus
forecasts, respectively.
9MFY12 capitalisation at Rs63bn; our FY12F target (Rs88bn)
appears in sight
We understand that incremental capitalisation in 3QFY12 stood at
~Rs22bn, expectedly lower than the Rs32.5bn capitalisation in 3QFY12.
As 9MFY12 capitalisation stood at Rs63bn, while our FY12F
capitalisation (Rs88bn) appears very much achievable, management’s
long-standing FY12 capitalisation target of Rs100bn may just be a
stretch – we expect more colour on this at the 10 Feb analysts’ meeting.
Transmission revenues up 10.4% q-q, a tad above our forecast
At Rs22.5bn, 3QFY12 transmission revenues posted a 10.4% q-q rise
(up 18% y-y), which was largely expected as capitalisation in 2QFY12
was back-ended and Phase-I of the Mundra UMPP transmission system
was capitalised on 1 Oct, 2011. However, overall revenues were a tad
below our forecast (but 2% above consensus) as revenue from shortterm
open access (STOA) and telecom business lines came in over 20%
below expectations. We note that rebate to customers during the quarter
stood at 0.6% of transmission revenues, sharply lower than ~1.3% in
1HFY12, potentially indicating lengthening of the revenue recovery
period (debtor days).
Positive surprise on lower ‘net’ interest outgo, f/x fluctuation ‘gain’
At Rs3.6bn, 3QFY12 net interest expense (excluding rebate to
customers and exchange fluctuation gain/loss) was ~7% below our
forecast. Notably, despite the magnitude of INR/USD depreciation in
3QFY12 being similar to 2QFY12, PWGR posted an exchange
fluctuation gain of Rs110mn (vs. our forecast exchange fluctuation loss
of ~Rs600mn) on account of: (1) reassessment of f/x loss recoverable
from beneficiaries on the back of a Dec 2011 clarification from the
regulator (CERC) given to a regulated return generating company, and
(2) PWGR adopting Rule 46A provision (notified by the government on
29 Dec, 2011), which allows capitalisation of exchange variation loss on
account of settlement/restatement of long-term monetary liabilities
related to depreciable capital assets. Had PWGR not adopted the Rule
46A provision (which is now the default policy going forward), net profit
would have been lower by Rs314mn, implying an adjusted net profit of
Rs781mn (still, 8% and 6% above our and consensus forecasts,
respectively).


We await management’s commentary at 10 Feb analysts’ meeting
At PWGR’s upcoming analysts’ meeting in Mumbai (on Friday, 10 Feb),
we particularly await management’s commentary regarding: (1)
capitalisation/ capex outlook (and its broad build-up) for FY12/FY13 and
the XIIth Plan; (2) debtor days, payment realisation from SEBs, and (3)
revenue growth and profitability prospects of ancillary business lines.
Maintain BUY, we believe long-term mid-teen EPS growth prospects
remain intact
PWGR remains our top pick in the power utilities space; prospects of
mid-teen FY11-17F EPS CAGR remain intact, in our view. On our FY13F
earnings forecast, the stock trades at 14.4x P/E and 2.0x P/BV, implying
a 15%/10% discount to its three-year average rolling one-year forward
multiples, and a 7% premium to NTPC on its FY13F P/BV multiple (in
line on P/E).

What made the Vodafone case complex ::Business Line

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Unless the Direct Tax Code plugs the loopholes in cross-border transactions, the Vodafone verdict may set a precedent.

The Supreme Court's verdict on the Vodafone tax case brings to closure a very contentious chapter in the telecom player's Indian story. More importantly, it sheds light on certain litigious tax issues in cross-border transactions involving Indian companies.

The verdict, simply put, means that the Income-Tax authorities in India will not have any jurisdiction over a sale transaction that happened elsewhere, with neither the buyer nor the seller being Indian residents.

COMPLEXITY

If you are wondering what was so contentious about a case, whose verdict sounds seemingly uncomplicated, here's what led to the complexity. For one, the Indian company was owned through a rather intricate holding structure. There were multiple layers between the Indian company and the ultimate owners of the business.

Vodafone International of Netherlands bought shares of a Cayman Island-located company from another Cayman Island-based firm. The Cayman company that was sold, held controlling stake in Hutchinson Essar (later called Vodafone Essar) in India. By buying the Cayman company, Vodafone International indirectly purchased the Indian company. Effectively, the Indian company was not party to the transaction. The buyer, the seller and the company being sold were multiple layers away from the Indian telecom company in the tree of holding.

Interestingly though, Vodafone had applied to the Foreign Investment Promotion Board (FIPB) in India for acquisition of 52 per cent stake in Hutchinson Essar. This change in controlling stake led to the tax authorities contend that there was transfer of assets of the Indian company and that the buyer Vodafone should have withheld tax on the capital gains.

Besides, one of the provisions in The Income Tax Act (Section 9) deems that ‘‘all income arising directly/indirectly… through transfer of a capital asset situated in India, to accrue or arise in India'' . This provision too was quoted by the tax department to demand the tax.

Thus, the multi-layered holding structure, regulatory aspects such as FIPB approval, the intricacy in controlling interest and whether the sale consideration was for transfer of Indian assets were aspects which dragged this case to court. Not to mention, the lucrative income (Rs 11,200 crore of tax and Rs 7,900 crore of penalty) for the revenue department.

SHEDDING LIGHT

The Court's verdict clarified that a complex structure need not automatically warrant a ‘pierce the corporate veil' approach, unless the tax authorities can prove that such a structure was a sham or meant to avoid taxes. Hence the onus was on the tax authorities to prove this.

In this case, the upstream company formed by the Hutchison group was in place since the 1990s and clearly was not formed for the purpose of this sale.

Through such an arrangement, the group has been bringing in investments into India. It had business interest in India and, therefore, cannot be viewed as a means to tax avoidance.

The Court also ruled that the case involved share sale and not asset sale. Section 9 quoted by the Income-Tax authorities talks of ‘income arising directly/indirectly from transfer of capital asset'. The court stated that the term ‘indirectly' needs to be read as income arising from the asset and not the transfer of the asset itself.

The provision cannot, therefore, be extended to cover indirect transfers of capital assets or property situated in India.

There is also no provision in this clause for sale of any underlying asset. Besides, that the Direct Tax Code, 2010 proposes to add a specific clause to tax indirect transfers, is proof that the current law does not provide for the same, asserted the Court.

WHAT THE VERDICT MEANS

Simply put, international investors can structure their investments in India through holding companies in locations such as Mauritius or Singapore for both tax and commercial reasons. They cannot be denied tax benefits simply because the structure enabled tax planning or helped avoid any lengthy registration or approval process in India.

The tax authorities, to ascertain whether the structure was built to avoid tax, can look at the duration for which such a structure has been in existence; the period of operations in India; the timing of the exit and continuity of business in India after such exit.

As of today, a number of international deals, including Idea Cellular-AT&T, GE-Genpact, Mitsui-Vedanta, Sabmiller-Fosters and the Sanofi Aventis-Shantha Biotech have tax cases pending in various high courts in the country.

Most of these cases involve transfer of assets between two foreign companies by way of shares, where the underlying asset is in India.

Unless the Direct Tax Code plugs the loopholes in cross-border transactions and tax avoidance issues suitably, the Vodafone verdict may set a precedent for at least some of the pending cases.