Goldman Sachs, Asia: Conviction List Update - Tata Motors, Bajaj

Asia: Conviction List Update
Equity Research
Our best stock ideas in Asia
Add Trade Me, TMSC and Tata Motors; Remove Bajaj Auto
Trade Me: On July 23, we added Neutral rated Trade Me to our ANZ
Conviction List (ANZ CL) given the company’s structural migration to
online media from print classified businesses; solid 2H13 growth; and
undemanding valuations.
TMSC: On July 24, we added the stock to our Asia ex-Japan Conviction
List (AEJ CL) as we believe its recent share price correction is overdone.
We expect higher capex, new launches, and a cyclical recovery to underpin
share price performance.
Tata Motors: On July 29, we added the stock to our AEJ CL on the back of
a strong upcoming multi-year product cycle, which could drive solid
earnings expansion.
Bajaj Auto: On July 29, we removed Bajaj Auto from the AEJ CL as we
replaced the stock with Tata Motors.
CL performance
For the period between July 22 and July 29, AEJ CL generated -0.2% alpha
hedged with MSCI AEJ and currently consists of 44 stocks; the Japan CL
generated +1.8% alpha hedged with TOPIX and consists of 16 stocks; the
ANZ CL generated -0.4% alpha hedged with ASX200 Accumulation Index
and consists of 14 stocks.
Director of Research (DOR) Asia Focus List
For the period between July 22 and July 29, Focus List alpha hedged with
the MSCI Asia Pacific index was +2.0% (ytd: -13.8%). There were no
changes during the periods.
Our Focus List consists of the following 8 Buy-rated CL stocks:
AIA Group, Anhui Conch (H), China Eastern Airlines (H), HCL Technologies,
Hyundai Development, Lonking Holdings, Ping An (A), and Sumitomo
Mitsui Financial Group.

Titan Industries Ltd (TITN.NS): Correction: F1Q14: Strong Revenue, Weak Margin; Outlook Murky :Morgan Stanley Research

Titan Industries Ltd (TITN.NS): Correction: F1Q14: Strong Revenue, Weak Margin; Outlook Murky  :Morgan Stanley Research

Quick Comment: Titan reported F1Q revenue, EBITDA and net income growth of 41%, 16% and 17%, respectively, which compares with our expectations of 28%, 24%, and 20%. Gross margin of 22.1% (down 420bp yoy) was the lowest ever for Titan, driven primarily by adverse product mix in both the jewellery (higher plain gold and coins sales) and watch business. Interestingly, even with poor visibility on the jewellery business with recent policy changes governing gold imports, management held to its 25% revenue growth guidance for F2014.

Jewellery Business - Strong revenue growth but at cost of margins: 1)Jewellery revenue growth of 47% YoY (MSe 30%) was driven by the acquisition of a new customer following the recent sharp drop in gold prices. 2) Tanishq and Gold Plus reported SSG of 29% and 37%, respectively. 3) Operating margin contracted by 130bp YoY (MSe 20bp decline), driven by a combination of adverse product mix on lower studded share (16% in F1Q14 vs. 25% in F1Q13) and inventory accounting loss (details on page 2), partially offset by the positive impact of a customs duty hike. 4) Adjusting for the inventory loss (Rs340mn) and duty increase (Rs150mn), jewellery EBIT margin would have declined 50-60bp yoy. 5) Titan added 37k sq feet under the Tanishq format in F1Q and has guided for 75K sq feet of addition in F2014.

Recent policy action by the RBI clouds long-term growth visibility. Our calculations suggest 40 tons of gold export from Domestic Tariff Area (DTA) in F2013. Based on these numbers, the new policy will entail imports of only 160 tons pa (vs. ~573 tons of jewellery demand and ~923 tons of total demand in F2013). However, management has alluded to F2013 gold export of 70 tons. We expect multiples to compress as markets factor in uncertainties around low visibility on long-term growth. We note that Titan management is confident of sufficient gold allocation to meet its operational requirements even against the backdrop of potential lower imports in F2014.

Religare Research | HCL Technologies: Mixed rev. growth but margins surprise again; HOLD

Mixed rev. growth but margins surprise again; HOLD
HCLT reported in-line US$ revenues (+3% QoQ) but a positive margin surprise
(+140bps QoQ). Infrastructure services continued to drive growth (+8.6% QoQ)
while Software services was sluggish (+0.6% QoQ). Software volume growth of
1.4% QoQ was below peers (Infy/TCS). We raise FY14 earnings estimates by
11% to factor in better margins and INR depreciation. While HCLT’s earnings
performance remains ahead of expectations, further re-rating hinges on more
broad-based growth and recovery in Software Services. Maintain HOLD.

Grasim Industries (GRAS.NS): June 2013: Beat on Core Driven by Lower Costs :Morgan Stanley Research

Grasim Industries (GRAS.NS): June 2013: Beat on Core Driven by Lower Costs  :Morgan Stanley Research

Quick Comment - Grasim reported standalone PBT at Rs2.4bn, down 28% YoY, but 25% higher than MSe of Rs1.9bn. The beat was driven by better than expected performance in the VSF segment (primarily given lower costs) and higher other income. Our EPS change factors lower than earlier expected earnings for cement business and lower margins in VSF business.

Standalone EBITDA declined 31% YoY to Rs2bn, but was 19% ahead of MSe,given lower costs and 7% beat on the revenues. EBITDA margins at 17.6% were down by 621bps YoY but were 180bps better than MSe.

Management re-iterated that the business environment remains volatile, with tough macro and increased global VSF production capacity and high cotton inventory. This will continue to have some pressure on realization. Over the next few quarters, while we expect some gains to Grasim from commissioning / ramp up of new capacity, realizations are unlikely to improve, which could limit margin gains.

Standalone revenue progression was better than expected: Grasim reported standalone revenues at Rs11.5bn (MSe Rs10.8bn), down 7% YoY. The beat was driven by better than expected volumes in both VSF and chemical segments. Realization was broadly in line with estimate, down ~2% QoQ, as global VSF prices remained weak. EBITDA margins declined 621bps YoY at 17.6%, though they improved 206bps QoQ. This was better than MSe of 800bps YoY decline - primarily aided by lower material costs, some of which could reverse in ensuing quarters. Core PAT however declined 17% YoY, given lower taxes, which we expect should reverse in quarters ahead. PAT was also supported by other income of Rs959mn, which grew 14% YoY.

On a consolidated basis, Grasim reported revenues of Rs69bn, 1% YoY growth. Core PBT at Rs11.1bn was down 20%, though was 4% ahead of MSe. EBITDA at Rs12.7bn, down 20% YoY, was broadly in line with MSe, given marginally lower EBITDA (vs. MSe) for cement subsidiary, Ultratech Cement.

Sterlite Industries - Tiding over adversities; Hold (Anand Rathi Institutional Research)

Sterlite Industries - Tiding over adversities; Hold

Key takeaways

Decent performance amidst adversities. Sterlite Industries’ (Sterlite) revenues for Q1FY14 decreased 22.5% yoy, following shutdown of Tutitcorin copper refinery. Ex copper, revenue grew 5%, on higher volumes in zinc & power and depreciation of rupee, which partly offset lower metal prices. Q1FY14 EBITDA grew 8% yoy, to `21.7bn, on higher volumes in zinc, silver and power, together with greater mined metal production at HZL. Higher interest expenses (due to greater debt) were offset by higher other income. Tax rate increased, leading to PAT decline of 22.3% yoy, to `9.3bn.

Zinc business segment a key growth driver. In Q1FY14, HZL produced 238,000 tons of mined metal (up 27% yoy), in line with the management guidance of 1mt production in FY14e. Refined zinc production grew 8% yoy, to 174,000 tons, due to higher metal-in-concentrate (MIC) production in 1HFY13. Integrated lead production grew 1% yoy, to 31,000 tons, and silver was up 9% yoy, to 77 tons. HZL’s PAT grew 5.7% yoy, driven by higher EBITDA and other income.

Aluminium sound, power surprises positively. Aluminium benefited from higher metal premium, offsetting lower LME. However, higher power costs generated losses of `630m. Net sales realisation above LME was at US$445 and US$320 in BALCO and Vedanta Aluminium, respectively. Power volumes increased 32% yoy, as PLF improved to 54% due to better evacuation and higher capacity. Power realisations improved marginally and EBITDA per unit declined due to higher costs (+6% yoy), but higher volumes pushed EBITDA to grow at 22.2% yoy.

Our take. Sterlite is valued in proportion to its share in Sesa Sterlite (SSL), as per the proposed Vedanta group restructuring.We have valued SSL on SOTP with multiples in line with peers and holdco discount of 20% for HZL and Cairn. Sterlite is valued at `88/share to reflect lower multiples in the present macro backdrop. We maintain Hold, since re-rating is constrained by lack of access to cheaper inputs. Risks. Adverse regulations.

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Thanks & Regards Anand Rathi Institutional Research

Petronet LNG Limited - Earnings miss on lower trading gains and higher costs ::Credit Suisse

● PLNG's EBITDA missed our estimates by 18% (consensus by 

13%) primarily on lower volumes (4% behind expectations), a fall 

in trading gains and higher costs. Management commentary 

suggests demand for LNG continues to be sluggish.

● We estimate c.20-25% of the EBITDA miss is on account of lower 

volumes. Depreciation and interest costs were in line, while tax 

rates were 170 bp ahead, leading to a Rs0.7 bn miss on PAT.

● The second Dahej Jetty is expected to be operational by Apr-14, 

and could provide some volume upside to PLNG. Financial 

closure for the Dahej expansion has been achieved, and the EPC 

is likely to be awarded in the next few months.

● While PLNG appears inexpensive on headline (10.4x FY15 EPS), 

we think the stock lacks catalysts near term. Media reports (e.g., 

ET) quote GAIL officials stating there is unprecedented resistance 

to the Tamil Nadu pipeline, the completion of which is critical for 

profitable Kochi LNG operations. We maintain NEUTRAL.

BHEL (BHEL.NS): Derating Continues, Stay UW : Morgan Stanley Research

BHEL (BHEL.NS): Derating Continues, Stay UW : Morgan Stanley Research

It is not over by a long shot: Given the 94% underperformance of BHEL over the last 4 years, clients keep asking - where is the bottom? We continue to stick to our stance that it is still a ways away. Our thesis has been for a three "M" derating on BHEL - Market share, Margins and Multiples. The first stage has already played out with marketshare losses to both foreign and domestic competition, leading to part of the third driver (multiple) also playing out. The second stage of the derating began in F3Q13 and continues - EBITDA margins were down 860 bps YoY to just 4.5%, and we think more multiple pain is likely to follow.

1Q is a small quarter, but we think drawing some conclusions makes sense: Reported revenues for F1Q14 of Rs66.7 bn were down 24% YoY (Exhibit 1), around 17% behind MSe and 20% below consensus. Even adjusted for the backdrop of the revenue performance in F1Q13 and hence the base (Exhibit 2), the 2 year CAGR continued to be disappointing, with the company registering the first decline on a quarterly basis in the last 10 years, showing the lack of any base effect. Despite a 34% YoY jump in other income, the collapse in margins led to a 52% YoY fall in net profit to Rs4.6 bn.

Back to Weak Inflows & Strong Cash Burn, after the Seeming Improvement in F4Q13: The orders inflows booked in the quarter were down 74% YoY to Rs14.7 bn, with the sales outstripping inflows again (Exhibit 4), pulling order backlog down 17% YoY. More importantly, BHEL continues to burn cash, with net cash (after removing debt) moving down to Rs14 / share from Rs26 / share in F2013 (Exhibit 11.)

We Continue to Advise Switching: Despite consistent underperformance over the last 3 years, given the high competitive (domestic) intensity, and slack demand for power generation capacity, we think investors should consider Adani Ports (APSE.NS, OW, 125.25 INR) which has strong earnings growth coming up, or even L&T (LART.BO, EW, 830.15 INR), which is undergoing a cyclical downturn at the moment.

Kotak India Daily: Results - Tata Chemicals, KEC International

Results

Tata Chemicals: Disappoints across the board

l Margins under pressure across the board l FY2014E looks like another subdued year; no positive triggers in the near term

KEC International: Weak margins though improving sequentially; strong on other counts

l Strong revenues but margins still remain weak, though sequentially better l Domestic T&D, power systems, cables lead; margin up despite higher contribution from new segments l Scope for margin improvement; expects meaningful improvement in 2HFY14E l Revise estimates; reiterate BUY (TP: Rs70) as near-term negativity is likely priced in

Goldman Sachs, Ambuja to acquire 50% stake in ACC from Holcim

Ambuja to acquire 50% stake in ACC from Holcim
Proposed transaction wherein Ambuja will acquire ACC
In a proposed transaction announced July 24, the holding co. (HIPL)
between Holcim and Ambuja/ACC will effectively be removed and Ambuja
will acquire 50.01% in ACC from Holcim. The deal will be funded part cash
and part via stock issuance. Now: Holcim owns: i) 50.3% in ACC via 50.01%
in Holcim India (P) Ltd (HIPL), 0.29% via HolderInd Investment ii) 50.55% in
Ambuja through 40.79% in HolderInd, 9.76% via HIPL. Post deal: i) Holcim
will own 61.39% in Ambuja and a 0.3% direct stake in ACC. Holcim's
economic interest in ACC will fall to 31%. Holcim will also receive cash of
Rs35bn. The deal has been approved by Ambuja and HPIL’s boards but still
requires 75% Ambuja shareholder approval and regulatory approval.
Ambuja pays Rs35bn in cash; balance in new stock issue to Holcim
Under the terms of the deal, Ambuja will: 1) Buy out a 24% stake in HIPL
for Rs35bn (from HolderInd Investment). 2) Issue 584mn shares to Holcim
for the remaining 76% in HIPL. HIPL's 9.76% stake in Ambuja will be
cancelled (150.7mn shares); net equity dilution of Ambuja will be 443mn
shares (from 1.544bn to 1.9775bn).
Under the terms, we calculate a consideration of Rs117.7bn
Based on the market close of July 24, the implied total consideration of the
transaction is Rs117.7bn: Rs35bn in cash and Rs82.7bn via new net share
issuance (433mn at July 24 close Rs191.1/share for Ambuja). Based on
July 24th closing price of Rs1,231/share (market cap of Rs231bn), the
current value of 50.01% of ACC is Rs115.6bn.
Other points: Use of cash; Holdco structure; tax implications
1) The Rs35bn cash is paid only to Holcim, not to Ambuja minorities; 2)
Ambuja will become a holding co. of ACC; which may affect the way
investors perceive it. We note Grasim’s cement assets (Ultratech) have
traded at a discount to Ultratech share price; 3) The tax impact from the
deal Ambuja’s tax impact will be Rs250mn, according to Ambuja.
Maintain cautious view on Ambuja (Sell); ACC (Neutral)
We retain Sell on Ambuja and Neutral on ACC. Ambuja 2QCY13 earnings
were largely in line – PAT/EBITDA at Rs3.2bn/Rs4.9bn (-31% yoy/-32% yoy)
vs our est of Rs3.2bn/4.8bn. We do not factor the deal into our valuations

Goldman Sachs : SUSTAIN-Long Term Winners-Near term Value

Long-term winners, near-term value July 2013: Growth & resilience
Growth on the agenda for H2 2013
Looking ahead through the remainder of 2013 and
into 2014, our expectations are for further
stabilization and growth expansion. The GLI
continues in positive territory, with the advanced
July GLI +2.7% yoy. Should positive macro data
continue, QE tapering and rising rates are likely to
follow – a positive for quality companies as we
analysed last month (GS SUSTAIN: Long-term
winners, near-term value; June 25, 2013).
As we cycle into earnings, resilience is key
With the onset of quarterly earnings we probe the
continued earnings resilience of high quality
companies: year to date one year fwd consensus
EBITDA estimates for stocks on the GS SUSTAIN
Focus List have been revised upwards by 190 bp.
In contrast the lower quality stocks (fourth quartile
returns and positioning) have seen estimates fall
140 bp, with the Datastream market down 70 bp.
GS SUSTAIN Focus List stocks also have a track
record of beating at quarterly earnings – since
mid-2007 they have beaten 48% of the time vs.
44% for the S&P and 41% for the STOXX 600.
The premium for quality continues to fade
Continued earnings resilience is key as the
premium for stocks on the GS SUSTAIN Focus List
continues to contract. Year to date, the average
EV/EBITDA premium for the list has fallen 5 pp vs.
global peers. Currently, the premium is 23.4%,
210 bp below the historical average. The premium
for stocks that generate 2x the market cash
returns, are forecast to generate faster top-line
and earnings growth and have substantially
stronger balance sheets than the market, has not
been this low since October 2010.
10 quality stocks flagged by value screens
In re-running our valuation overlays for stocks on
the GS SUSTAIN Focus List, we identify 10 stocks
that are flagged by one or more of our value
screens.
Stocks highlighted on absolute and/or relative
value are: Fortum, Qualcomm, BBVA, Belle, Itau
Unibanco, Lojas Renner, Roche and Shire. Stocks
that have de-rated recently (with consensus
earnings upgrades, but sector-relative
underperformance) are: Novo Nordisk and TSMC

ICICI Bank - Religare

Results in line but slowdown to hurt earnings growth
ICICIBC’s Q1FY14 NII came in marginally below estimates but PAT in line
(+25% YoY to Rs 23bn) buoyed by strong trading profits (of Rs 4bn vs. Rs 1bn
in Q4FY13). Advances grew at 3.8% QoQ (12.3% YoY) while NIMs contracted
~6bps QoQ to 3.27%. Asset quality was under pressure with incremental
slippages/restructuring at Rs 11.2bn/Rs 8bn. We believe a poor macro could
hurt credit offtake/asset quality, and therefore trim our FY14/FY15 earnings
estimates and our Mar’14 TP to Rs 1,075 (from Rs 1,225). Maintain HOLD.
 Advances growth lower than expected:Overall advances growth moderated to
12.3% YoY (from 14.4% YoY in Mar’13) driven by slower domestic credit growth (at
14% YoY). The overseas book grew by ~8% YoY largely due to INR depreciation. The
retail book grew only by 12.6% YoY, but growth was healthy at 26.6% adjusted for
buyouts. Corporate growth picked up with advances growing by 3.9% QoQ while
the SME segment remained weak. Deposits were up 3.7% QoQ and the domestic
LDR was higher by 80bps QoQ. SA deposits mobilisation wasstrong at 3.7% QoQ
(14% YoY) and the average CASA proportion improved by 90bps QoQ to 39%.
 Asset quality slips; credit costs higher: Slippages were higher at Rs 11.2bn (slippage
ratio: 1.6%), while incremental restructuring at Rs 8bn was in line. Gross retail NPLs
shot up to Rs 54.1bn from Rs 41.8bn in Q4FY13. Outstanding netrestructured loans
rose from Rs 53.1bn to Rs 59.1bn. Credit costs were higher than expectations at
82bps; however,the bankmaintained its FY14 credit cost guidance at 75bps.
 NIMs decline marginally; fee income sluggish:Domestic NIMs declined by 7bps
QoQ to 3.63%, leading to a 6bps QoQdrop in Q1FY14NIMs even as international
NIMs improved to 1.6%. The uptick in NIMs was due to a dip in the yield on
advances. The management has maintained its guidance for a 10bps NIM expansion
in FY14. Fee income remained muted (+9% YoY). A sharp slowdown in corporate fee
income coupled with negligible growth in other fee avenues hurt fee growth. The
C/I ratio was flat QoQ at 40%.

Modest expectations ■ Upgrade ONGC to OUTPERFORM:: Credit Suisse,

Modest expectations
■ Estimating implied expectations. ONGC stock has fallen 20% since its
recent peak and has given up almost all outperformance earned during the
recent rally. We use global comparable multiples to estimate implied FY15
EBITDA, which helps estimate 'implied subsidy' payments by ONGC under
various oil price and USD-INR assumptions.
■ Pricing in status quo. At Rs270/sh, we estimate ONGC is broadly pricing in
1) no net gains from higher gas prices, 2) oil prices (in INR terms) close to
current levels, 3) minimal further retail diesel price increases (or LPG
distribution savings) and 4) Govt. subsidy payments of around Rs600 bn in
FY15 (FY12/13 actual payments between Rs835 bn and Rs1,000 bn). The
stock would then have downside risks if rupee crude prices increased
materially, or if the govt. stopped price hikes and attempted to reduce its
payments in FY15 to below amounts it has paid historically. Lower rupee
crude prices and continued / meaningful diesel price increases could drive a
material upside, however.
■ Low downside, option on continued diesel reforms. Other than for large
volatility in USD-INR/Brent, these expectations have low downside. Govt.
discipline on monthly diesel price increases can now be a catalyst. ONGC’s
domestic crude production could increase to 29.9 MT in FY15 from 26.4 MT
in FY13, with improving momentum in 2H14, which is likely to help the stock
in the near term.
■ Upgrade to OUTPERFORM. Our target price of Rs345/sh is based on 4.1x
FY15 EBITDA. Consensus numbers are higher than ours – but are not in the
stock price anymore. As ONGC volumes improve, earnings could nonetheless
grow c.25% from FY13 lows. Upgrade ONGC to OUTPERFORM.

Shop smart for your wedding ::Business Line

Going nuts, shopping for your wedding? Wait, we have a few things to add to your laundry list. No, it’s not an additional piece of antique jewellery or an extra pair of stone studded bangles that we are talking about. Smart women need to have other things in their list.

Yes to gold, not jewellery

Don’t splurge on jewellery before your wedding. One, you might wear it only once in a blue moon and two, you will have to painfully safe-keep it for the rest of your life. Gold is indeed a good long-term investment but buying it in the form of ornaments is not a prudent way of investing in the yellow metal. This is because the returns get eaten away by wastage and other charges both at the time of buying the ornament and at the time of its resale. So, we suggest that you put the money in gold ETFs (exchange traded funds). These are exchange-listed mutual fund units of gold and can be traded in the platform of a stock exchange. You just need to have a demat and trading account to buy and sell these units. If you sign in for an online trading account from a stock broker, you can put through the trades sitting at home. As and when you purchase, the units of gold get credited to the demat account while the underlying gold will be held safely by the mutual fund. On selling the units, you will get the amount credited in your bank account in two days, ensuring liquidity.

BROKERAGES rating and price target on BHEL

JPM: Maintain UW, TP 145 from 180

GS: Maintain Sell, TP 136 from 165

CS: Maintain UPF, TP 164

UBS: Maintain Buy, TP 285

Bofa: Maintain UPF, TP 143 from 174

MS: Maintain UW, TP 184

Citi: Maintain Sell, TP 140 from 185

Nomura: Maintain Reduce, TP 185

Barclays: Maintain UW, TP 148 from 195

DB: Downgrade to Sell from Hold, TP 126 from 169

CLSA: Downgrade to Sell from UPF, TP 130 from 195

HSBC: Maimtain UW, TP 130 from 151

Edel: Downgrade to Reduce from Hold, TP 105 from 195