Larsen & Toubro -- Value Unlocking at L&T IDPL? :: Morgan Stanley

Larsen & Toubro
Quick Comment: Value
Unlocking at L&T IDPL?


No impact on our views, based on the current
information: We would wait for more clarity on this
news. We know what the foreign investor might be
looking to put into L&T IDPL (Rs20 bn +) – but the stake
that IDPL is likely to hand out for it is not yet known.
Hence, it is not possible to judge the impact of the deal.
 If the stake ends up at less than 20%, then there
would be upside risk to our target price.
 If the stake is higher than 20%, then there would be
downside risk.
On a probability-weighted basis, at Rs110/share (Rs101
bn), IDPL is around 12% of our target price for L&T
(Exhibit 3) – the biggest chunk after the core business.
We remain on the sidelines pending more visibility
on the revival of Indian capex: An exceptional
long-term story and strong management are being offset
by near-term challenges – both macro and micro.
The first step in management’s vision – delinking
IDPL’s growth from L&T’s balance sheet: On Friday,
L&T informed the exchanges that L&T IDPL (the
subsidiary housing its infrastructure development
business) has submitted an application to the Foreign
Investment Promotion Board (FIPB) for approval of a
foreign direct investment. Due diligence is yet to be
completed and some terms of the transaction still have
to be agreed upon – but according to the company, the
investor is looking to put in an initial Rs10 bn, followed
by another Rs10bn or more in the next 12 months.
Over the next five years (F14-18e), IDPL estimates an
equity requirement of Rs82 bn (Exhibit 1), with ~75%
needed for projects now on hand. Our meeting with
IDPL management in September 2013 (for details, see
our QC of September 23) had indicated that the
company planned to raise 60% of the money from
monetization (including securitization) and 40% from
bringing equity investors into both IDPL and the
Hyderabad metro (mezzanine equity).

Eicher Motors Royal Enfield targets 250,000 units next year (+40% y/y), CV sales to be driven by Pro series - Company Visit Note::JPMorgan

We met with Eicher Motors management. Key takeaways: Management is
upbeat on the two-wheeler business, as demand continues to surprise on the
upside, while growth in the CV business will be driven by the rollout of the
new “Pro” series, even though industry conditions remain challenging.
 Royal Enfield: The demand for lifestyle bikes continues to surprise on the
upside, with the products continuing to have waiting periods despite
increased production. Management targets production of 250,000 units next
year (vs. ~175K this year). The OEM will focus on exports, as well,
wherein it will position its bikes in the mid-segment 300-500cc category
with the launch of the new Cafe Racer – 500cc Continental GT bike. This
model is positioned below the larger bikes currently offered by Harley
Davidson, Triumph, etc.
 Eicher Volvo targeting to double market share in CV segment: Eicher
currently has a market share of ~4% in the heavy duty truck range (16t and
above) and ~13% in the M/HCV category (7-49t). The existing CV platform
was improved following the tie-up with Volvo in 2008, with inputs from the
Swedish OEM. The new “Pro” series models that will be rolled out from
next year will be built on an entirely new platform developed by VECV for
the Indian market. The new models will be rolled out gradually across
segments over the next 12-15 months. The new heavy duty truck range will
be powered by new-generation engines adapted from the Volvo Group with
power capacity of 180-280hp (please see our earlier note: Pro Series launch).
 CV demand remains soft: The commercial vehicle cycle remains weak,
with no near-term signs of a pickup visible.
 The OEM will invest Rs7 billion in capex next year.
 Valuation: Consensus EPS (Bloomberg) for the stock is Rs149, Rs217 and
Rs276 for CY13E, CY14E and CY15E, respectively, implying P/E multiples
of 33x, 23x and 18x, respectively.
NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS
A RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL
INFORMATION, OBTAINED BY THE ANALYST DURING MEETINGS WITH
MANAGEMENT. J.P. MORGAN DOES NOT COVER THIS COMPANY AND HAS
NO RATING ON THE STOCK

Call auction revamp :CAPITAL MARKET

A rallying cry
Many quality small caps trapped by the illiquid norms
are set to be released by the revised criteria Small-cap stocks are set to fly in 2014. The
Securities and Exchange Board of India (Sebi)
made significant changes in the definition of
illiquid stocks mid December 2013. With
this review, a large number of companies
will come out of the periodic call auction
mechanism devised by the market regulator
to control the menace of price manipulation
and rigging on the trading floor.
Sebi has retained call auction for
illiquid stocks. But the tweaking of the
definition of illiquid stocks will leave only a
few stocks under the mechanism. These
stocks should make no difference to small
investors. This is because the stocks that
remain in the call auction system are too
small, with not-so-impressive record of
operational and financial performance.
The capital market regulator had
announced the launch of call auctions in
February 2013 to discipline punters and
prevent price manipulation. The mechanism
was only applicable to illiquid counters,
which are susceptible to price manipulation
by street-smart traders.
The decision in 2010 to introduce call
auction for illiquid stocks in the pre-opening
session to reduce volatility in prices at the
opening of the market was partially based on
global best practices. The system is deployed
in some leading stock exchanges of the world
such as the New York Stock Exechange, London
Stock Exchange, and Deutsche Bourse AG.
Indeed, the mechanism has several
merits. First, and probably the most
important, advantage is it can reduce
volatility. Illiquid stocks are playgrounds for
punters and volatility could be chilling. The
single price discovered through call auction
takes care of the breathtaking fluctuation.
The next obvious benefit is the lower impact
cost to investors. The transaction takes place
at a single auction price in a particular session.
Another positive is that all the
participants — one with greater information
and a common investor with limited or no
street-smart information — are treated
equally. Again, this is possible because of
single price. In short, there is no danger of
asymmetric information.
There is risk of front-running in
execution of large orders in a normal market.
This pitfall is eliminated in call auction as
the orders are accumulated over a period of
time, matched and executed at a single
auction price.
However, the introduction of the system
killed volumes on the trading floor and
adversely impacted the process of price
discovery as well. Not only share prices of
illiquid stocks, but even companies with
decent track record of profit and dividends
witnessed a sharp drop in volume and price
as well after being branded as illiquid stocks
due to the sweeping definition. Call auction
not only prevented new investors from
coming in but trapped several investors for
want of exit at the right price.
It was an ironic situation of a regulatory
move with good intentions triggering wealth
erosion. Since April 2013, when the call
auction for illiquid stocks became effective,
the situation so emerged was akin to the
medicine being worse than the ailment of
price rigging.
The mechanism was widely criticized.
This was rightly so because several hundred
illiquid stocks witnessed a sharp plunge in
trading volume: a few as high as 90% and
more. This was no less than a death-knell
for a market known to be shallow. Thus,
the annoyance of market participants was
not surprising.
Between 14 February 2013, when the
stock market watchdog announced the call
auction mechanism, and 19 December 2013,
when it was relaxed, the BSE Small-Cap index
corrected 5.6% and the Mid-Cap index
3.3%. The S&P BSE Sensex, the broader
index reflecting the overall market mood,
moved up 6.2% in this period. Clearly, the
call auction mechanism had played havoc
with small-cap stocks.
Post introduction of call auction for
illiquid stocks, Sebi received feedback from
market participants and stock exchanges as
well. Based on the issues raised and their
examination, the Secondary Market
Advisory Committee decided to rationalise
the periodic call auction mechanism.
The significant changes made include a
stock trading in the normal market and not
shifted to trade-for-trade settlement being
classified as liquid subject to few conditions.
In short, this criterion is not applicable to
trade-for-trade stocks.
Second, as per the new guidelines, a
stock can be termed as illiquid if the average

Media - Q3FY14 Results Preview - Print set to surge as TRAI rule slows broadcasters: Centrum

Print set to surge as TRAI rule slows broadcasters



We expect Q3FY14 results to be divergent, with print companies set to
post healthy ad revenue growth and margin expansion, while
broadcasters should get impacted by TRAI (10+2) rule and high sports
losses (for ZEEL) coupled with margin compression. Digitization
benefit will accrue to broadcasting players with Dish TV’s subscriber
addition remaining high on festive season demand. Among
non-broadcasters, margins are expected to expand with internet
companies demonstrating strong operating leverage. We expect positive
surprise from Jagran Prakashan, Dish TV and ENIL but negative surprise
from ZEEL and Sun TV Network.

$ Festive season and elections to benefit ad growth: Advertisement
growth for the industry could remain strong on the back of festive
season demand and state elections while the full impact of TRAI’s
(10+2) inventory cap will be felt during the quarter. Print companies
will benefit from elections boosting ad growth with Jagran and HT
Media expected to post 11.7% and 7% YoY ad growth respectively. Sun TV
will get impacted by the TRAI rule and hence we have modelled a 4%
decline while ZEEL may post 7% ad growth (ex-sports). ENIL may report
an 11% YoY ad growth on the back of inventory utilisation.

$ Digitization benefits to continue: ZEEL is expected to post a growth
of 13% YoY in domestic subscription revenues while Sun TV is likely to
grow analog subscription revenues by 35% and DTH by 17.5% YoY. Dish
TV’s gross subscriber addition is expected to be healthy at 0.75mn
while ARPU will remain at Rs166. Circulation revenue growth for print
players will be healthy with Jagran and HT Media growing at 11.7% and
9.7% respectively on the back of increase in circulation and price
hikes. The impact of the cut in cover price in Bihar market will be
felt during the quarter for both print players.

$ Operating margins to compress: Margins are expected to compress by
151bps YoY for our coverage companies. Broadcasters like Sun TV and
ZEEL’s OPM will compress on the back of lower advertisement growth
(for Sun TV) and high sports losses (for ZEEL). However, Jagran and HT
Media’s margins are set to expand by 102bps and 18bps respectively.
Internet companies will also post margin expansion on the back of
operating leverage. Hence, operating profit for our coverage universe
is set to grow by 6.3% YoY and PAT by 9.9% YoY.

$ Recommendation & key risks: We have increased our target price for
Just Dial (Hold) while downgrading Dish TV to Hold on the back of a
steep rally in the stock price in the past three months. We maintain
Buy rating on Jagran Prakashan, Sun TV Network and HT Media but Hold
on Dish TV, ENIL, Info Edge, ZEEL and Just Dial. Key risks to our call
will be 1) Delay in digitization, and 2) the TRAI (10+2) rule.



Thanks & Regards.

--

Index Outlook: Watchful beginning :: Business Line

Index Outlook: Watchful beginning

 

Sensex and the Nifty are expected to tread water ahead of the third quarter earnings.

 

It is not the best of beginnings for the stock market this year. The Sensex ended the week 342 points lower while the Nifty lost 103 points. If you belong to the superstitious section of investors, this does not portend well for the prospects of equity for the rest of 2014.

 

In the past five years — 2009 to 2013 — the first few days of January have quite accurately mirrored how the rest of the year would turn out to be.

 

Investors appeared edgy at the beginning of the week. Fear of the government over-shooting its fiscal deficit target, weak core sector growth in November and contraction in Purchasing Manager’s Index for December dampened sentiment. The Prime Minister’s press conference on Friday did nothing to alleviate the mood and the indices slumped further in that session.

 

In the absence of any significant news flow next week, markets could tread water, awaiting a slew of third quarter earnings announcement that will start flowing in from the next weekend. FII flows will be keenly watched to see if the tapering of bond purchase by the US Federal Reserve has any material impact on these flows.

 

Cash volumes were moderate while derivative volumes were significantly lower. FIIs were seen nibbling at both stocks and debt last week. Index put-call ratio declining below 1 indicates that market remains overbought at these levels.

 

Oscillators in the daily chart are in the neutral zone but the negative divergence in the rate of change oscillator and relative strength index imply that there is no momentum in the short term. Weekly price rate of change oscillator dipping in the negative is worrying because it means that the medium-term trend is under threat. We will, however, need to see how this oscillator behaves next week to confirm this trend.

 

There is a bearish engulfing candlestick in the weekly chart of the Sensex and the Nifty that is negative from a short-term perspective. That both the indices are poised just above the 50-day moving averages also means that they are at a critical point from a medium-term standpoint.

 

Nifty (6,211.1)

 

The Nifty too, is in a short-term downtrend since the peak of 6,415. Continuation of this downtrend can take the index lower to 6,130; 6,072 and 5,964.

 

It needs to be noted that the index is currently poised just above its 50-day moving average.

 

A bounce from these levels can take the index to 6,288 or 6,360. Inability to move above the first resistance will be the cue for short-term traders to initiate fresh short positions.

 

Key short-term support for the index is at 5,922.

 

Fibonacci support as well as the presence of the 200-day moving average at this level, lends credence.

 

Short-term investors can buy during declines as long as the index trades above this level.

 

Subsequent supports are 5,770 and 5,617.

 

Global cues

 

It was a quiet start to 2014 for most global markets. Stock trading was marked by low volumes with many market participants still away for the New Year break.

 

European markets closed slightly lower while many Asian markets were closed during the later part of the week for New Year.

 

The US markets witnessed a mild sell-off on Thursday and Friday making the CBOE volatility index close around 10 per cent higher for the week.

 

The VIX however, continues to trade in the 10-15 band that denotes a very positive sentiment in the market.

 

The Dow hit the intra-week high of 16,588 before ending the week down 8 points.

 

We stay with the view that the index needs to close below 16,174 to make the short-term view negative.

 

The medium-term trend in the index will turn negative only on close below 14,700. Medium-term targets for the current upmove are 16,616 and then 17,790.

 

The US 10-year treasury note prices declining to 2011 level of 123 does not bode well for asset classes, such as gold and emerging market equity. These notes are poised at critical Fibonacci support. Any further decline will take them to 121 or 118.

IRFC TFB public issue collection figures at 2.00 p.m. as on 06-01-2014

Dear All,

 

Thanks & Regards

_________________

IIFCL, IRFC Tax Free Bonds and Muthoot Finance/SREI Infrastructure Finance/Manappuram Finance Ltd - NCD public issue collection figures at 11.30 a.m. as on 06-01-2014

Thanks & Regards

Automobiles - Q3FY14 Results Preview - Earnings growth to be strong despite weak Volumes: Centrum

Earnings growth to be strong despite weak volumes



All auto OEMs under our coverage universe, except Hero MotoCorp and
Eicher Motors, saw YoY decline in volumes in their domestic operations
in 3QFY14. But, most companies except Ashok Leyland are likely to see
YoY expansion in margins due to company-specific factors and hence
will see strong earnings growth. However, on a sequential basis, we
expect EBITDA margin for our universe to decline due to the rise in
discount levels, increase in raw material costs and adverse impact of
currency (especially on Maruti Suzuki and Tata Motors). We expect CV
players, Tata Motors (domestic ops) and Ashok Leyland, to continue to
report losses.

$ Revenue growth to remain muted (Excluding for Tata Motors): Overall
for our coverage universe, we expect volume drop of 8.5% YoY (growth
of 4.5% QoQ). On the revenue side, we expect a growth of 20% YoY and
10% QoQ largely driven by TAMO and Hero MotoCorp. On a sequential
basis, we expect CV players Tata Motors (standalone ops), Ashok
Leyland and Eicher Motors’ revenues to decrease due to sharp drop in
volumes.

$ YoY expansion in margins due to company-specific factors: EBITDA
margins for our coverage universe are expected to increase by 190bps
YoY but contract by 69bps QoQ. On a YoY basis, we expect only Ashok
Leyland to report margin contraction, while other players are likely
to report margin expansion. On a sequential basis, while we expect
margins for our universe to contract by 69bps,  Hero MotoCorp and
Eicher Motors (RE) is likely to see margin improvement driven by
strong volume growth.

$ Earnings growth to be strong despite weak volumes:  We expect PAT
for our coverage universe to register a strong YoY growth of 52%
largely driven by Tata Motors, Hero and Maruti. On a QoQ basis, we
expect PAT growth of 9%. We expect Tata Motors to register strong
earnings growth of 120%/6% YoY/QoQ respectively.

$ Valuations and recommendations: We maintain Buy on Tata Motors
(strong traction in JLR), Maruti (new model cycle yet to play out),
Hero MotoCorp (retains market share, strong rural focus and presence
in scooter segment), MRF (replacement demand continues to grow despite
weak OE demand, benign rubber prices to aid margins), M&M and Swaraj
engines (strong traction in tractor segment). We upgrade Bajaj to Buy
from Hold (reasonable valuations, launch of new Discover models from
Jan’14 onwards to help market share gains). We maintain Hold on Eicher
Motors and Ashok Leyland due to the lack of visible signs of an uptick
in the CV sector.



Thanks & Regards