11 August 2013

Glenmark Pharmaceuticals - PAT tax-hit, outlook positive; Buy :: Anand Rathi Institutional Research

Glenmark Pharmaceuticals - PAT tax-hit, outlook positive; Buy


Key takeaways
Results below estimates. Glenmark Pharmaceuticals’ (Glenmark) revenues grew 19% yoy to `12.4bn, below our expected `13bn, due to lower sales in the US. EBITDA margin declined 110bps yoy, to 20%, owing to higher R&D spend versus our expected 20.5%. Owing to lower revenue and EBITDA margin, coupled with higher effective tax rate of 23.1%, adjusted PAT grew just 2.2% yoy to `1.3bn (versus our expected `1.6bn).
Revenue growth continues. Revenue growth was slightly less than estimated, chiefly because of just 13.9% yoy rise in the US generics and decline in revenue from EU specialty formulations. However, domestic formulations remained strong, with 17.4% yoy revenue growth, driven by focus on high growth segments like cardiac, respiratory and dermatology. RoW specialty formulations recorded 25% yoy growth, led by UkraineAfrica and other emerging markets.
Change in our estimates. Considering the favourable currency environment and continued strong growth in domestic formulations, we raise our FY14 and FY15 revenue estimates 3.9% and 4%, respectively. We, however, reduce our PAT estimates by 0.8% for FY14 and 0.2% for FY15 to factor in higher R&D spend and effective tax rate.     
Our take. We believe the strong growth momentum would continue, led by the US generics, domestic formulations and recovery in RoW and Latam. We also expect the base business to register a strong 17.6% CAGR over FY13-15, and 21.8% in adjusted PAT (excl. out-licensing income).
We maintain Buy on the stock, with a revised target of `658 based on 18x FY15e earnings, `27 for the R&D pipeline and `12 for Para-IV products (earlier `602 based on 18x Sep’14e).  Risks. Currency fluctuations, regulatory hurdles.


Thanks & Regards
Anand Rathi Institutional Research

Standard Chartered Research,Global gold All that glitters

Following our commodities team‟s gold price revisions, we cut our 2013-14E earnings
forecasts for gold equities under our coverage 12-41%. Our new gold price assumptions are
USD 1,437/1,400/1,300/oz for 2013/2014/2015.
 We downgrade Zhaojin Mining and G-Resources to In-Line (from Outperform) and Philex
Mining to Underperform (from In-Line).
 Zijin Mining remains our top sell in the China gold sector, given its rapidly rising gold
production costs – we forecast a 2012-15E CAGR of 15%, compared to 8% for Zhaojin
Mining.
On 10 and 16 July 2013, our commodities team lowered its 2013-15 gold and copper price
forecasts by 3-13% and 2-17%, respectively, along with other precious metal and base metal
prices. (See the full reports: Gold – Searching for a floor, as lease rates spike and Metals –
Precious metal markets lead the way down) We highlight key points and summarise the changes
to their forecasts below.
 For gold, it is still too early to conclude that the wave of investor selling has ended, but strong
outflows through 1H13 have been replaced by a more neutral picture so far this month.
 The physical market for gold is currently mixed and demand is not as strong as it was in late
April. We expect weak import numbers for India in July and August, following an 80%
decrease in June from May‟s very strong number. Demand from China and Vietnam has
helped offset the weakness in India.
 Central banks, including those of Kazakhstan, Russia and Turkey, have continued to buy.
In his 10 July note, our commodity analyst, Dan Smith, expected gold prices to find a floor soon
and then slowly rise over the next year, as supply is likely to be choked off by lower prices and
demand should slowly recover. A rising cost floor should provide support over the long term.

Aug 11 Pivotals: Reliance Ind, SBI, Infosys and Tata Steel ::Business Line,


Goldman Sachs, HDFC- Below expectations on lower top line/spreads; Retain Sell

EARNINGS REVIEW
Housing Development Finance Corporation
Sell Equity Research
Below expectations on lower top line/spreads; Retain Sell
What surprised us
HDFC reported 1QFY14 PAT of Rs11.7bn (+17% yoy), 6% below GSe and
2% below Bloomberg consensus. Adjusting for dividends, PAT grew 13.5%
yoy and missed our estimates by 11%. Key highlights: 1) NII came in at
Rs15.2bn (+17% yoy), 10% below Gse as cost of funds (calculated) came in
higher than our estimates. 2) Lending spreads (calculated) declined 34bp
yoy on higher cost of funds and lower yields as high yield developer book
grew at a modest pace of 11% yoy. 3) Non-interest income was 6% ahead
of Gse on higher dividend (Rs 2.2bn, +28% vs Gse) and fee income (+4% vs
Gse, +12% yoy) while capital gains booked during the quarter were nil. 4)
Disbursements grew a healthy 17% yoy, 2% above GSe, driven by the
individuals segment. Loan book grew 19% yoy, led by loans to individuals,
which grew a strong 24% yoy (+6% qoq). 5) Asset quality remained stable
as gross NPLs were at 0.8% of loans but NPLs on the non-individual loan
book have now moved up to 1.1% (+17bps qoq and +8bps yoy). HDFC
booked provisions of Rs300mn (33% below GSe) vs. GSe of Rs448mn.
Going forward, with the interest rate shifting upwards (1Y/10Y yields up
40-140bps respectively), lending spreads could remain under pressure in
the coming quarters.
What to do with the stock
We fine tune our FY14E-FY16E EPS estimates to incorporate trends seen in
1QFY13 but retain our 12m SOTP-based TP of Rs740. HDFC is currently
trading at 3.5X FY14E core mortgage book and 18X standalone FY14E EPS,
valuations which are at a premium and not reflective of the rising
competition in the housing finance space which could put pressure on
profitability. Risks: higher spreads, lower-than-estimated competition

Index outlook: Poised at key support ::Business Line


Larsen & Toubro (LART.BO) Hold Your Horses, Don’t Bottom Fish :: Citi Research

Larsen & Toubro (LART.BO)
 Hold Your Horses, Don’t Bottom Fish
 What bothers us? — Over the next 2 years if standalone sales grow 12-15%, margins
contract 100bps given internationalization drive, bottom-line growth would be < 10%
(ex dividends from S&A companies). How much loss could Gujarat roads, shipyard &
forging facilities contribute in FY14E when they run for the full year? When will Rajpura
& Hyderabad Metro come online (FY15E, 16E or 17E) and what will be the quantum of
losses in initial years? Will finance/ IT subsidiaries’ growth negate the impact of the
above subsidiaries? Are our consolidated estimates too aggressive?”
 Disappointing 1Q — L&T’s Recurring PAT at Rs7.6bn -15% YoY was 25% below Citi
on tepid +5% sales growth, 56bps margin decline and lower other income. Inflows were
strong at Rs252bn +28% YoY resulting in backlog growth of +8% YoY (post order
cancellation of Rs6bn). The QoQ spike up in working capital and debt is worrying.
 View on sales growth post 1Q — Adjusting for slow moving orders, underlying
backlog growth in FY13 was 11%, which is what L&T should achieve as sales growth in
FY14E (unless execution cycle changes). Pre 1QFY14 we gave L&T the benefit of the
doubt and assumed +15% sales growth. We take that down to 12% now.
 View on margins post 1Q — 1Q EBITDA margins were -56bps YoY. Adjusted for MTM
on loans they were -104bps. We assume margins would contract 50bps (vs. 30bps pre
1Q) in FY14E and 50bps (vs. 30bps pre 1Q) in FY15E. We are more worried about
FY15E given plans to increase international inflows from FY13 - 17% to FY14E - 24%.
 View on inflows post 1Q — Achieving the inflow guidance is not impossible and is a
function of the inflows vs. margins compromise. We assume +15% in our estimates.
 Maintain Neutral - Target price cut to Rs1,007 — To factor in consolidated and
parent EPS cut of 7-8% and 5-9% respectively (on 3% lower sales, 22-42bps lower
margins and change in subsidiary estimates), roll forward of target P/E to Dec14E and
lower parent multiple of 14x on a deteriorating operating environment.

Reliance Industries (RELI.BO) 1Q: Repeat of 4Q Trends; Operationally Muted, Headline In-line :: Citi Research

Reliance Industries (RELI.BO)
 1Q: Repeat of 4Q Trends; Operationally Muted, Headline In-line
 4Q déjà vu; operationally muted1Q, higher other income — PAT of Rs53.5bn was
in-line, though in a near repeat of 4Q, was largely supported by higher other income
(rose even further to Rs25.3bn; ~34% of EBIT vs. ~27% in FY13), while overall
EBITDA fell 10% qoq. Operational weakness continued, with flat petchem profitability, a
continued decline in KG gas (15 mmscmd), and lower GRMs ($8.4 vs. $10.1 in 4Q).
 Refining in-line, petchem disappoints again — GRMs in-line (at a premium to Sing.
GRMs of $6.5), as cracks weakened seasonally and L-H spreads narrowed, though
partly offset by higher throughput qoq (17.1 MMT; 4Q impacted by a shutdown).
Petchem, however, disappointed, with strong PE and PET margins being offset by
weak PX, MEG, and BD cracks, leading to sequentially flat EBIT.
 E&P updates and other analyst meet takeaways — (1) All pending approvals for
producing fields (D1,D3,MA) have been received ($1.2bn capex approved for FY14),
though no major boost in vols is expected and stabilisation may take c12-18 mths; (2)
2-3 well appraisal prog. for MJ-1 discovery to be submitted shortly and to commence in
2HFY14; (3) R-series FDP approval expected in c2-3 mths; production from all new
fields (satellite, R-series, MJ-1) targeted for FY18; (4) NEC-25 FDP approval has been
delayed; (5) ROGC and petcoke gasifier on schedule for mid-CY15 commissioning; (6)
Shale EBITDA rose to $165m (+6% qoq), though capital employed rose to $6.0bn; (7)
INR depreciation is favourable, though LT $ borrowings partly act as a natural hedge.
 Maintain Neutral — We raise our FY14/15E earnings 6/5% to factor in changes to our
currency assumptions, partly offset by lower KG gas volumes and a delayed petchem
recovery. Our GRMs remain unchanged at $9.0/8.5. Given the recent run-up in the
stock (+17% in 3M) on the back of the weaker rupee, seasonally strong GRMs, and the
gas price hike announcement, valns at ~12/11x P/E and ~1.3/1.2x P/B are no more
compelling. In addition, E&P volume recovery will be protracted notwithstanding the
much-anticipated gas price hike, while refining is at its seasonal peak with margins in
Europe already buckling, and near-term earnings growth remains subdued barring the
rupee weakness persisting/worsening. Reiterate Neutral, new TP Rs988.

Hero Motocorp - 1QFY14 Review: Higher tax rates offset operating margin gains; re-iterate UW :: JPMorgan

 HMCL’s reported 1Q PAT at Rs.5.5B (-11% y/y) was below our
estimates. While the EBITDA margin (+100bp q/q) surprised, as the
other expenditure cost ratio declined -100bp q/q, tax rate increased
sharply to 26.9% (as the exemptions from the Uttarakhand plant have
partially expired). Our view: We re-iterate our UW stance on Hero
Motocorp given that: i) industry growth outlook remains weak, ii)
scooters are gradually expanding in the product mix, and iii) competition
is intensifying across segments.
 Conference call takeaways: Demand outlook: Management continues
to guide for an uncertain demand environment and expects single digit
growth over FY14E (while they had initially guided to 7-8% growth in
the year, the sharp decline in sales over 1Q has surprised negatively).
During the quarter, realizations declined by -2% q/q due to lower sales
of premium bikes, given the ongoing slowdown. The OEM will launch
new variants during the festive season, which will likely drive sales over
2H. On exports, while the management is targeting sales of 300,000
units in FY14E, given the decline in industry exports over 1Q, they
highlighted that the demand environment is uncertain. Margins: The
OEM took a price hike of Rs.1,000 in April, which aided margins.
However, as the OEM imports components from overseas, the impact of
the weaker INR will impact over 2Q. Tax Rates: The benefits from the
Uttarakhand plant have partially expired and management expects tax
rates to sustain at current rates of ~27%.
 Price Target: While our estimates are largely unchanged, we are rolling
forward our PT timeframe to Dec'13 and set a revised PT of Rs.1,620,
based on 12.5x PE multiple (in line with our earlier methodology). Key
upside risks: a recovery in industry sales, robust growth in exports at
Hero Motocorp.

Bajaj Auto Q1 margin beat, but clouded demand outlook „: BofA Merrill Lynch,

Bajaj Auto
Q1 margin beat, but clouded
demand outlook
„Raise forecasts & PO, Maintain Undperform
Q1 profit, at Rs 7.4bn, was slightly ahead of expectations, despite lower financial
income. This was led by a 2% beat in realizations, reflected in a ~6% surprise in
EBITDA, at Rs 9.07bn (up 4% yoy). We raise our profit forecasts by 3%-4% over
FY14-15E to factor in USD/INR at Rs 58 (vs. Rs 55 earlier). Our PO is similarly
raised to 1,915. However, we retain our Underperform rating and prefer Hero
(HRHDF, Rs1772.9, C-1-7) in this space. Hero trades at a 19% P/E discount on
our FY15E estimates and a 9% P/E discount on consensus expectations, with
similar growth trajectories.
Margins surprise, could sustain
Q1 EBITDA margins increased 55bps yoy, at 18.5%, higher than our estimate of
17.6%, solely due to better mix (three wheeler exports up 44%) and higher
realizations. Although USD:INR continues to be favourable, we raise margins by
just 20-30bps/year, as (1) our current volume forecasts already assume a shift in
mix to pricier segments, i.e., bikes, three wheelers, and (2) export of three
wheelers should normalize (up 44% in Q1), thereby restricting ASP increases.
Demand outlook muted
Aggregate Q1 volumes declined 9% yoy, both domestic and export. We expect
the economic and competitive environment to remain challenging. Our volume
forecast is tweaked to 4.4mn in FY14E (+4% yoy) and 4.9mn in FY15E (+10%),
which imputes recovery across segments. This is driven by (1) bike launches,
mostly in the commuter segment, (2) three wheeler permits in Hyderabad and
Maharashtra, (3) new export destinations, leveraging on Kawasaki’s distribution
network, and (4) back-ended economic recovery. Although our forecasts seem
conservative, we note the company fell well short of indicative guidance last year

Buying with margin of safety India Strategy :: Axis Capital

Stress Case Exercise for Nifty stocks
♦ Considered worst possible earnings growth assumptions for FY14 & 15 based on critical variables relevant to each
stock (and also referenced their cyclical history)
♦ Worst-case earnings used to determine Stress case Target prices, keeping target P/E (FY15) unchanged*
♦ For eg Reliance Inds has a Stress case target price of 1,010 (v/s Base Case TP of 1,160), which is 14% over CMP.
Hence the least vulnerable stock
♦ Note that multiples can expand/ contract with earnings, resulting in double whammies, which are ignored here
♦ Cumulation of all worst-case TPs provide Nifty downside of just 8%**
♦ Top 5 stocks with the most upside at stress-earnings (unless they de-rate): Reliance Inds, Cairn, NTPC, ICICI Bank,
Tata Motors
♦ Top 5 stocks with the most downside at stress-earnings: BHEL, Ambuja Cement, Bharti, Asian Paints,
Hindustan Unilever
♦ You could use our “short models” to change these variables as you choose, to decide vulnerabilities and reach your
own conclusions

Power Grid Corporation of India (PGRD.NS): F1Q14: Good Results; FPO an Overhang :Morgan Stanley Research

Power Grid Corporation of India (PGRD.NS): F1Q14: Good Results; FPO an Overhang :Morgan Stanley Research

Quick Comment: Power Grid reported F1Q14 revenue of Rs35.6bn (up 23% YoY), EBITDA of Rs30.6bn (up 24% YoY) and adjusted PAT of Rs10.4bn (up 14% YoY). While EBITDA was 5% better than our estimate, PAT was in-line due to a higher than estimated interest and depreciation expense. The board approved a fresh issuance of 694 mn equity shares (15% dilution on existing base) through an FPO which was the key reason for the ~12% fall in the stock today. The rationale for equity-raising is to bring the debt:equity ratio within comfortable limits and build enough firepower to take on additional projects.

What's new: Some key points from F1Q14:
·The company has incurred capex of Rs65bn by July end. This compares with Rs30bn of capex in F1Q13. The company targets the addition of 12,000 GW-ckm of lines, 17 substations and 4,200 MW of inter-regional capacity in F2014.
·Commissioning was strong at Rs 29.5bn in F1Q14 and Rs39.5 bn by July end. However, this was lower on a YoY basis (Rs 41 bn in F1Q13) which could have been due to the early onset of monsoons.
·The company has raised its capex target for the 12th Plan by 10% to Rs 1.1 trillion. The increase in estimate reflects new tariff based bidding projects, new projects assigned by the government, the planned Green Energy Corridors, intra-state projects and the transnational Interconnections.

Impact on our views: Power Grid remains our top pick in the sector given its regulated business model, high market share and visible earnings growth. While the FPO will remain an overhang on the stock, it is important to note that we expect the price to rise from here. We would use opportunities from price drops to build long-term positions in the stock.

Anand Rathi - Canara Bank - Core earnings, asset quality weak; Sell

Canara Bank - Core earnings, asset quality weak; Sell


Key takeaways
Weak credit growth; CASA share and NIM decline. While Canara Bank’s advances rose 10.8% yoy (3.2% qoq), deposits grew faster, at 14.2% yoy, thereby decreasing credit-deposit 199bps yoy to 65.4%. Advances growth was driven by the priority sector (27.3% yoy) and farm loans (38% yoy). While NIM fell 17bps yoy (3bps qoq) to 2.2%, the proportion of CASA decreased 16bps yoy (106bps qoq) to 23.1%.
Modest fee income, robust trading profits, declining productivity. While fee income grew 16.2% yoy (3% qoq), trading profits rose 349% yoy to `4.4bn and comprised 23.4% of pre-provisioning profits (7.1% in 1QFY13). Productivity worsened, with core cost-to-income increasing 92bps yoy to 47.8%. With modest business growth prospects, fee income and operating leverage are unlikely to improve substantially. Over FY13-15, we expect fees to post a 15.7% CAGR, with cost-to-assets at ~1.3%.
Asset quality worsens, large loan restructuring, low NPA coverage. Gross NPA grew 17.1% qoq, with fresh slippages of `26.9bn (annualised, 4.5% of loans). NPA coverage fell 41bps qoq to 15.3% and is still the lowest of peers. In 1QFY14, `16.8bn of loans were restructured, with total restructured loans at `199bn (8% of loans).
Our take. Due to lower credit growth and higher NPA assumptions, we slash our FY14 and FY15 net profit estimates 33.1% and 28.4% respectively. Hence, we lower our target from `405 to `239. We maintain our Sell rating, since we expect near-term profitability to be constrained by sluggish business and weak asset quality.Also, the RBI's recent liquidity-tightening measures are a valuation overhang. While the present valuation appears to price in asset-quality concerns, persistingperceptions of default risk would restrict a valuation re-rating. At our Mar’14 target, the stock would quote at PABV of 0.6x FY14e and 0.5x FY15e. Our target is based on the two-stage DDM (CoE: 14.5%; beta: 0.9; Rf: 8%). Risks. Faster credit growth, sharp decline in defaults.


Thanks & Regards
Anand Rathi Institutional Research

Goldman Sachs, Yes Bank - In line with expectations on core, growth at attractive valuations; Buy

EARNINGS REVIEW
Yes Bank (YESB.BO)
Buy Equity Research
In line with expectations on core, growth at attractive valuations; Buy
What surprised us
YESB reported 1QFY14 PAT of Rs4bn (+38% yoy), which is 9% above GSe and
6% above Bloomberg consensus. Core was inline. Key highlights: 1) NII grew
40% yoy to Rs6.6bn (2% below GSe) driven by 24% yoy growth in advances and
20bps yoy improvement in NIMs to 3% (flat qoq). We believe the spike in shortterm borrowing costs will be offset by higher CASA and lending rates. 2) CASA
ratio increased 130bps qoq to 20.2% driven by 10% qoq growth in savings
deposits while total deposits declined 3% qoq. We expect CASA to improve to
30% by FY16 vs. management guidance of 30% by FY15. 3)Non-interest
income saw robust growth of 53% yoy (28% above GSe) led by financial market
income that grew 84% yoy due to MTM gains on investments. However, given
recent rise in bond prices, YESB will likely not have any gains to book. Income
excluding treasury grew 37% yoy. 4)Operatingexpenses rose sharply (+40%
yoy, 9% above GSe) as the bank added 45 branches and over 430 employees in
1QFY14. 5) Asset quality remained stable with gross/net NPLs at 0.2%/0.03% of
loans. YESB made provisions of Rs971mn (GSe Rs687mn) or 0.8% of loans,
most of it towards floating provisions. While PCR dropped to 88.5% from 92.6%
in 4QFY13, the bank’s general and floating provisions stood at 1% of loans. Tier
1 ratio (Basel III) stands at 9.5%, comfortable to grow book modestly.
What to do with the stock
We tweak FY14E-16E EPS on 1QFY14 trends and retain our 12m RIM-based TP
of Rs600. Recent RBI moves to reduce liquidity in the system have led the stock
to fall 13% in the last 1M. While cyclical pressures exist, we think the market has
overreacted and is ignoring YESB’s growth potential as it expands its branch
presence, CASA ratio and market share. YESB is trading at 2X FY14E BV vs. EPS
CAGR of 23% (FY13-FY16E) and avg. ROA of 1.6% (FY14E-16E). We find
valuations compelling; still Buy. Risks: higher interest rates, slower growth

Jubilant Foodworks Ltd (JUBI.NS): 1QF14: SSG Disappoints :Morgan Stanley Research

Jubilant Foodworks Ltd (JUBI.NS): 1QF14: SSG Disappoints :Morgan Stanley Research

Quick Comment: JUBI reported SSG of 6.3% for 1QF14, lower than MSe (7-8%), with an EBITDA margin that declined by 140 bps (including impact of Dunkin Donuts). JUBI reported earnings 4% below MSe, largely on account of higher depreciation - investment in commissaries to support store expansion. Following a ~20% cut in consensus earnings YTD, the 1Q results will likely catalyze another round of earnings cut on the stock - we remain EW.

Earnings miss MSe by 4%: JUBI reported revenue, EBITDA and adjusted PAT growth of 26%, 16% and 5% vs. our expectations of 28%, 16% and 10%, respectively. We believe management has revised its SSG guidance to 8-10% for F14 vs. earlier estimate of 'at least' 10% and an EBITDA margin of 16.5% for F14e.

Key Highlights:

1) Revenue growth of 26% with SSG of 6.3% for 1QF14.

2) Opened 26 new stores for the quarter. There are now 602 Domino's stores in 128 cities in India. Management guidance for F14 remains unchanged at 125 stores vs. MSe of 135.

3) The gross margin up by 70bps (vs. MSe -40bps) was the key positive of the result. This margin expansion must be viewed in context of delayed pricing action during the quarter and likely increased promotional activity, we believe. Input costs, led by cheese prices, have likely contributed to this margin expansion. We expect a large part of this gross margin flexibility to be reinvested in catalyzing volume growth hereon.

4) Staff costs increased by 60bps in 1QF14. As of 1QF14, JUBI has 21,070 employees, 7% higher QoQ and 24% YoY.

5) Rent costs increased by 90bps during the quarter to 8.8%. Rent costs continue to rise, due to several factors, including the impact of lease renewals at higher rates and higher rental expenses for Dunkin stores.