Tech Mahindra- Initiating Coverage - Synergy from recent acquisitions to power near-term:: Centrum

Rating: Buy; Target Price: Rs2,090; CMP: Rs1,670; Upside: 25.1%



Synergy from recent acquisitions to power near-term



TechM is a Tier-1 equivalent in Telecom and Enterprise Svcs and has
strengthened its position with strategic acquisitions over FY13
(vCustomer, Hutch Global Services, Comviva and Complex IT). In
verticals where it lags Tier-1 providers, TechM can target
IT-Outsourcing contracts with mid-market clients while maintaining
relationships with top-tier clients through niche services. We expect
price realization to decline slightly over 2HFY13 as BT restructuring
fees run out but bounce back as deals in transition currently move to
billing. We initiate TechM with a Buy Rating and a price target of Rs
2,090 (13x 1-year Fwd EPS in Sep’14).

$   Tier-1 level capabilities in Telecom and Enterprise Services,
niche in others: We think TechM’s management has a pragmatic approach
- focusing on areas of strength such as Telecom and Enterprise Svcs
where their capabilities match that of bigger Tier-1 peers. It has
supported this strategy with carefully chosen acquisitions (which we
expect to see results of over FY15). For other verticals such as BFSI,
the strategy is to use chosen niches such as enterprise mobility to
maintain relevance to Tier-1 clients while exploring larger deals for
IT outsourcing with mid-sized firms that will want to be given high
mindshare by their vendor.

$   Strategy to support increasing wallet-share with Telecom
customers: The six pillar strategy in Telecom (IT, Networks,
Infrastructure, BSG - Business Svcs Group, VAS and Security) will
yield results as Telecom Service Providers are under increasing
pressure to lower cost of operations as they invest in network
upgrades. Acquisitions of Comviva and Hutch Global Services have also
been towards supporting this strategy. The managed services deal with
BASE in Belgium is an example of this strategy at work and we expect
to see deal traction pick up over FY15 for Managed N/w Svcs and BSG
both - with Customer Support in particular seeing very good growth.

$   Deftly positioning itself differently even for mainstream
services: TechM’s focus strategy enables it to match Tier-1
investments thereby avoiding the disadvantages of lower scale –
especially in Europe where its scale comes closer to Tier-1 peers. Its
strength in Enterprise Svcs is maintained with investments in internal
IP even as acquisitions such as Complex IT (in Brazil) increase its
addressable market. In commoditized services such as Testing, TechM
has chosen to differentiate with a focus on niche services,
open-source tools and outcome-linked pricing.

$   Valuation and key risks: TechM’s EPS is understated as 24Mn of its
shares (~10.4% of shareholding) are under the TML Benefit Trust. Even
without adjusting for this, TechM is trading at an attractive
valuation of 12.3x 1-year forward EPS. While there are near-term
margin headwinds as BT’s contract restructuring fee for Barcelona and
Andes contracts run out in 4QFY14, we expect this to be not as
dilutive as many others view it. We assign a Buy rating, with a TP of
Rs 2,090 based on 13x 1-year Fwd EPS at Sep’14.  A key risk is the
potential loss of some contracts from BT as these are up for renewal.
Other major risks come from the exposure to the global economy and the
concentration of revenue in Telecom (47%) and Manufacturing (19%)
verticals.

Power Sector Worst on SEB losses is behind, but the road to recovery is still uphill :: JPMorgan

Financial health of State Electricity Boards (SEBs) touched a new low in FY12.
Consolidated losses of state electricity distribution companies (DISCOMs)
without subsidies were kissing US$15bn, and for the first time in a decade the
combined net-worth entered negative territory. Tough measures were called for. A
stern ruling from the Appellate Tribunal of Electricity (APTEL) saw states
pushing through even up to two rounds of rather steep tariff hikes since. Basing
our analysis around PFC's FY12 annual report for state power utilities published
in Oct-13, we conclude that the gap between revenue (without subsidy) and cost
for DISCOMs has reduced over 25%, to ~Rs0.78/kWh in FY14. We estimate
FY14 losses ex-subsidy at US$10bn, still high but healing.
 Plug the leaks, as simple (difficult) as that! Aggregate technical and
commercial (AT&C) losses reduced 360bps to 27% over FY07-12 (in fact
increased 100bps YoY in FY12). The leak is big and repair work still slow. In
our analysis the 27% leak can be broken up into: inefficiencies in metering
installation, meter reading and theft of electricity (18%), billing inefficiencies
(3%) and collection inefficiencies (balance 6%).
 The logical (and not so logical) conclusions: (1) Discipline in tariff hikes is
an imperative for loss reduction; (2) Low AT&C losses correspond to low
DISCOM loss. Uttar Pradesh, one of the loss leaders among SEBs, has 45%
AT&C leak and accounted for 17% of pan-India loss. West Bengal and MP
are other high AT&C loss, high power demand states in India. (3) States
where tariffs are higher counter intuitively have lower power theft and thus
lower losses. These states could have benefited from lower populism by
respective governments or an empowered regulator, in our view.
 Devil is in the detail, we see possible challenges to a steep reduction in
losses. We deduce that amid weak macro the share of industrial consumption
(~32% of total in FY12) may have tapered and this raises the challenge of
cross-subsidizing agricultural and residential consumers. Higher interest rates
and fuel cost than what the regulator bargained for while awarding tariff hikes
may be difficult to ‘pass through’ in SEB topline. Finally can government
subsidies (US$4bn in FY12) keep pace with tariff hikes? (Or should they even
try to?)
 SEBs backing down on power procurement, why? Despite our estimated
loss reduction for SEBs, over the last couple of quarters the distribution
utilities have refrained from buying expensive power, in a bid to contain their
loss levels. In our view, the lenders have the upper hand among stakeholders
and may not be willing to fund working capital required to sustain such a high
run-rate of losses annually.
 Conclusion. DISCOM financial health is a structural risk for generation and
transmission utilities. Over FY07-12 the creditor days in SEB balance sheets
increased from 60 to 150. This is on a slow mend. Yesterday 3 more states –
AP, Jharkhand and Bihar – have been entitled to opt for the ST liability
restructuring scheme. We maintain OW on PGCIL, NTPC and JSW Energy
among IPPs – companies which have been able to manage debtors better.

Asia Auto Driver While Tokyo/Guangzhou auto shows are concluding, a new era of competition has just begun :: JPMorgan

 Two shows; same focus: We spent a week visiting companies and the
two largest auto shows in the region, Tokyo and Guangzhou Motor
Shows, both platforms for global OEMs showcasing new models in
coming years. Two common observations in these two events:
1. Huge number of new models or global debuts: 76 in Tokyo and
80 in Guangzhou. What is especially noticeable in China is not the
number of new models but the price concentration of those modelshalf are below Rmb200,000 in mid to lower end segments with <2 .0="" nbsp="" p="">liter engine as this is the fastest growing area but also the most
bloody battlefield. Brand recognition and perception by Chinese
customers will be the key to success as these models all look pretty
alike and attractive- namely, without the logo, one can hardly tell
whether it is a foreign or local brand or by which OEM (Figure 5-8).
2. Eco-friendly car is the main theme in both Tokyo and Guangzhou
but apparently automakers in Japan and China are adopting different
approaches. Japanese OEMs believe pure EV (electric vehicle) will
remain a small portion of global auto market even by 2020 and hence
focus more on enhancing the efficiency of traditional combustion
engine (i.e. turbocharger and compression ratio) and its application
and combination with hybrid and plug-in hybrid vehicle. The
Chinese, conversely, are pursuing EV, which is however a policydriven game. NDRC's recent announcement that subsidies for new
energy cars cover only pure EV and plug-in hybrid but not hybrid
clearly indicates where China aims to move.
 Key drivers of selective automakers under our coverage in 2014
based on our management meetings during the trip:
1. Brilliance China (OW) is expected to see robust growth of BMW 3-
series with monthly volume doubling to ~10k from current ~5k units
by 2015. Potentially lower R&D expense in own brand Zinoro EV
business could be an upside surprise to 2013/14 earnings.
2. Great Wall's (OW) H8 SUV (priced Rmb202-237k) receives strong
orders, most the highest end 4WD version. We believe the stock can
re-rate if H8 reaches monthly sales of 4k units in 2Q14.
3. Geely’s (OW) new model cycle will kick in toward 4Q14 and its EV
business model in Hangzhou is interesting which can bring sizable
profit if it rolls out to other cities in China. Besides, Volvo's asset
injection could happen before 2015 in our view.
4. Guangzhou Auto (OW) has several new models in 2014 which
should lead its volume growth.
5. Other OEMs we visited include Toyota, Nissan, Mazda and BYD
(all not-rated) as well as Kia (Neutral).
 We raise China’s 2013-15 PV sales growth forecast to 15%/9%/7% to
reflect our positive view. We still prefer SUVB and premium car

IndiaHydro Power Capacity addition‐ Abale ofturtles: Prabhudas Lilladher

With an operating capacity of 40GWs and plagued by a relatively slower pace of
capacity addition and cost/time overruns therein, the hydro power (HEP) scenario
in India has not altered much since the first 5‐year plan. Below are the brief
highlights ofthe currentscenario in terms of capacity addition in the sector:
 Only 7.3% capacity addition has been achieved in the first 18 months of the
12th Plan: The 12th Plan had envisaged 10.8GWs capacity addition, of which, only
798MWs has come on stream to which the Central sector contributed 66%,
Private sector 21% and State sector contributed 13%. The total capacity under
construction (CWIP) stands at 10GWs under the 12th plan, of which, 54%
pertains to the Central sector, 31% to Private and balance to the State. Within
the CWIP, in PSUs, NHPC’s share - 3GWs, NTPC - 1GW and NEEPCO - 0.8GWs;
State-wise, HP and AP each have a share of close to 500MWs of CWIP, while in
the private sector, it is scattered amongst players like NCC, NSL, GVK, L&T and
others.
 Cost/time overrun substantial: A total of 10GWs of projects have been
currently delayed, thus, leading to time and cost overruns. A total of 6.9GWs
pertain to Central, 1.5GWs to State Sector and 3GWs to Private which are
reeling under both, time and cost over runs. In terms of time, the projects
currently under CWIP are delayed by over 30-40 months and in some cases,
beyond six years. Poor geology, delays from contractors, local resistance (Land
acquisition/forest clearance) and adverse weather conditions affecting logistics
and operations were the main reasons for the delays. In terms of cost, the
projects currently under CWIP have crossed over 30% on an average of their
original cost (average PC being Rs8-10bn) approved in the DPR. Out of the total
projects in CWIP, 5247MWs has been awarded to BHEL, 100MWs to Chinese
players and balance 4752MWs to Indian (VA Tech), French (Alstom), European
(Litostroj Slovenia) and Chinese (Dongfang) TG suppliers. Major EPC contractors
for these projects are SNC, Patel Engineering, Jaiprakash, HCC, DSC Engineering,
Om Metals, Gammon India etc.
 Overall progress to remain slow, target may be missed by 30%: With geopolitical hindrances within India and outside likely to remain the same, the
progress of HEPs continue to remain dismal. Around 265MWs is expected to
come up in H2FY14 and another 2500-3000MWs in FY15-16. Looking at the
progress of CWIP, we expect the capacity addition target to be missed by 30% in
the 12th Plan. In the listed space, while SJVN has the least risk of capacity
addition as Rampur 412MWs is expected to come on stream by FY14, NHPC’s
Kishanganga, Parbati St. II and Subansiri Lower may slip into the 13th Plan.
However, on account of a regulated model of earnings and healthy dividend
yields within the power sector, NHPC and SJVN are relatively safer bets and
hence, we maintain ‘Accumulate’ on both.

HSBC- India Perspectives- Fiscal food for thought

 Revenues are running well-below

budgeted levels and spending above

 As a result, the H1 budget deficit has

reached 80% of the annual target

 Spending will, therefore, have to be

squeezed in H2 to hit the deficit target

A spending squeeze please

Despite the last couple of months of relative calm, India has

not completely shaken its vulnerabilities to Fed tapering. It

will, therefore, be important to further guard against spillovers

by sticking to monetary and fiscal policy tightening, and

stepping up implementation of structural reforms. This is not

an easy task at this juncture, given the soft economy and

upcoming elections.

Delivering fiscal tightening will likely be a challenge. Revenues

commanded just 35% of the full-year budget target during the

first half of FY2014 (April-September) against the roughly 40%

normally achieved. Meanwhile, expenditure execution has been

faster than normal. As a result, the cumulative fiscal deficit has

reached 3.8% of GDP midway through the fiscal year, around

80% of the full-year target of 4.8% of GDP.

To address this, the government has announced expenditure

rationalisation measures. Steps to mobilise more dividend

payments have also been flagged. Despite this, we believe there

will be a need for further spending compression to meet the

deficit target. Ideally, high-quality steps such as deregulation of

diesel prices would be introduced, but that is not feasible in a

pre-election year, in our view. However, an ad hoc hike in

diesel prices is possible. In addition, the government will have

to take broad-brushed steps to rein in spending and will likely

also resort to postponing payments to the following fiscal year.

However, the Minister of Finance has put a line in the sand

when it comes to the deficit and he last year delivered on his

promises. We, therefore, believe that the deficit will end up

quite close to the target, but slightly higher at 5.1% of GDP.

This figure even factors in spending compression worth around

1% of GDP during the latter half of the fiscal year, which will

shave at least 0.5-0.7% off GDP growth and, therefore, make it

difficult for GDP to recover further in annual terms near term.

MS- India Utilities- CERC’s Draft Regulations Made More Stringent

Quick Comment – Impact on our views: CERC

released the draft regulations that apply to inter-state

generation and transmission utilities for the period April

2014 to March 2019. While CERC has maintained ROE

at 16% (comprised of 15.5% plus an additional 0.5% for

scheduled commissioning), in line with the existing

regulations, it has made the normative operating

parameters more stringent. Hence, these draft

regulations in the current form seem neutral to negative

for NTPC and Power Grid. However, as in the past, the

final regulations (to be released before April 2014) could

relax some of these norms. A public hearing on these

regulations will be held on January 15-16, 2014.

Key changes for NTPC: We believe our earnings and

fair value would remain largely unchanged due to the

following key changes in the draft:

1. The incentive earned due to grossing up of tax is

likely to go away. This may take away about 1% of

additional ROE.

2. Heat rate incentive could fall, as the range from

actuals has been lowered (6.5% to 4.5%), and 25%

of the benefit needs to be shared with beneficiary

states.

3. Availability-linked incentive can now vary a bit more

than earlier on either side. A PLF-linked incentive

(Rs0.5/unit for PLF in excess of 85%) has been

introduced but it may not yield much given lower

PLFs due to SEB and domestic coal issues.

4. The key positive is recovery of water charges on

actuals, which was had been underabsorbed (about

Rs4bn in F2013).

Key changes for Power Grid: The draft regulations

have increased uptime availability norms and reduced

normative O&M expenses. We believe if implemented,

they could negatively affect earnings and fair value by

about 2%.