J.P. Morgan - Reliance Power

Reliance Power (RPWR IN) Meeting takeaways		Underweight Price: Rs67.30 08 May 2014 Price Target: Rs54.00 PT End Date: 31 Mar 2015

Reliance Power is hopeful that under a new government relief for non-remunerative power purchase agreements (and ongoing litigations) would be fast tracked or some one-time scheme be evolved to allow relief on fuel cost in tariff over the next 2-3 years. However, management acknowledges that the latter would be extremely challenging to implement. It is hopeful that private sector participation in coal mining would be stepped up by identifying and awarding blocks where clearances are not time consuming and CIL shall be pushed to raise production. A marked step-up in environmental clearances is not going to prove easy, as per management.

· Inputs on Sasan UMPP (6x660MW). (a) The commissioning of the 6^th660MW unit may stretch up to Sep-14 vs. Jun-14 guided earlier. As per CEA data, three units are fully commissioned as of now and operated at 71% PLF in Apr-14. (b) RPWR’s plea to CERC for relief in tariff in light of the unprecedented currency depreciation (see ‘India Power Sector: Eliminating FX risk would be a masterstroke’, 20 Mar-14) was heard on 6^th May. As per the Financial Express, CERC has asked Reliance Power to elaborate on benefits to the company from its Feb-2008 IPO and implications on cost of equity for Sasan UMPP. A favorable verdict from CERC in this matter is crucial for the long term profitability of Sasan. We have already factored in Rs0.15/kWh relief in our base case starting FY15 over the balance of the life of the PPA. (c)Management was confident that they shall get permission to sell 5-6MTPA of excess coal from operating Moher & Moher Amlohri mines at CIL notified rates (Rs1,030/ton for 4300-4600kcal/kg) in the medium term which can boost profitability. As per management coal mining cost (excluding capital cost of mine development which is already included in Sasan UMPP project cost) is ~Rs300/ton, implying post tax profit of ~Rs500/ton. We have not factored sale of coal in our base case earnings and PT; (d) the regulator’s verdict in the matter of FY13 being treated as year 1 of the Sasan PPA (with tariff of Rs0.7/kWh) is still pending; the last hearing was on 6^th May.

· Implications of new CERC tariff regulations on Rosa (1,200MW). The returns of Rosa are based on UPERC tariff regulations. Management is of the view that UPERC may not replicate the tightening of O&M norms and sharing of 40% of financial gains with Discoms as suggested by CERC. Under UPERC regulations incentive calculations is already based on PLF (Rs0.25/kWh above 85% PLF in UP, which could be raised to Rs0.5/kWh same as new CERC regulations). UP may follow CERC in implementing a shift in the coal cost pass through mechanism using GCV “as received” vs. GCV “as fired” earlier.

· Inputs on Butibori (600MW). The PPA for 600MW on regulated return basis with Reliance Infrastructure in Mumbai kicked off on 1^st Apr, as planned. As per CEA data, the project operated at 55% PLF in Apr-14. The FSA has been signed with WCL (subsidiary of CIL) for unit 1 (300MW) so far, and coal for unit 2 is being received on MoU basis currently. Sufficient Coal receipt from WCL could prove to be an issue and management plans to supplement requirement using e-auction coal.

· Inputs on pipeline projects. Management is hopeful of faster progress on pending stage-II clearance of Chhatrasal mine post elections, which is a hurdle for commencement of capex on Sasan expansion project. A quick solution on issues related to gas based projects in India (and RPWR’s Samalkot) appears improbable. Management is in no hurry to go ahead with Krishnapatnam UMPP even if compensatory tariff is offered on coal (like TPWR, ADANI) given the steep INR depreciation since the project was awarded has changed project economics adversely.

 

Investment Thesis

RPWR has an operating capacity of 4GW and 4.4GW under construction and 17.8GW under development. We have an UW rating given that CMP partially prices in pipeline projects on which material progress has not been made.

Valuation

We maintain our Mar-15 PT of Rs54. Our PT includes Rs39 for fully operational projects, Rs10 for Sasan and an 80% probability of Chitrangi being executed at Rs5/share. We don't include Samalkot, for which there is no gas visibility, despite Rs31B of equity (equates to Rs11/share) being invested, or Tilaiya UMPP, for which land acquisition is not yet complete.

Risks to Rating and Price Target

Upside risks to our UW rating and price target include: (1) meaningful progress on pipeline projects warranting inclusion in SOTP; (2) a grant of more than Rs0.15/kWh tariff hike by CERC against petition for Sasan; (3) gas availability for Samalkot; and (4) better-than-expected RoIE for Butibori post-commencement of PPA.

J.P. Morgan - NDA sweeps the National Election. What next?

India Equity Strategy NDA sweeps the National Election. What next?

· BJP-led NDA coalition wins an overwhelming mandate. The much maligned opinion/exit polls got it right this time. In line with their estimates, the NDA alliance is poised to form the next government in Delhi, on the back of a sweeping mandate. The margin of victory was, however, significantly higher than expectations. The BJP, with more than 280 seats, has a majority on its own (the lower house of Parliament, the Lok Sabha, has 543 seats). With other coalition partners faring well too, the NDA alliance has more than 330 seats. This represents one of the most decisive mandates in a National Election since 1984.

· The strength of the mandate and the increased bargaining power it gives the incoming Government vis a vis other Parties and State Governments augurs well not only for better governance, but also meaningful policy reforms over the medium term.

· But financial markets’ response was relatively muted. Markets surged in early trade as the better-than-expected results trickled in. At one stage, benchmark equity indices were up 6%, the INR was up 1% and yields on the benchmark 10-year bond declined 9 bps. But, subsequently most of the gains subsided. Equities ended the trading session up a relatively sedate 1%. The bond markets in fact saw Yields on the benchmark 10-year Bond end 5 bps higher.

· The correction in equities could be attributed to a) Profit taking; remember equities were up 7% over the last week in the run-up to the results, and b) some sectoral rotation in favour of domestic cyclicals. Though the gains subsided in these sectors too late into the trading session.

· Separately, the recent rally has taken Valuations to a zone (nearly one standard deviation higher than mean) where they can no longer be termed ‘cheap’, although they are not in frothy territory yet.

Figure 1: MSCI India 1 year forward PER Input Title Here

Source: MSCI, IBES, Datastream

· What next? Going forward, we would expect to see an upturn in economic activity (a position we have held for a while), coupled with a better policy environment and governance. That said, we believe investors will have to reckon with the following:

a) While the NDA has an overwhelming majority in the Lok Sabha, it does not have a majority in the Rajya Sabha, the upper house of Parliament. This could potentially constrain the Government’s ability to pursue reforms that require legislative action, and underscores the imperative to reach out to the Opposition and build consensus.

b) Monetary and Fiscal policy could be constrained to tight over the near term. So even as medium-term economic prospects may have increased after today’s electoral majority, near-term challenges still bind (for more details please refer to J. P. Morgan Economics, India’s Election: BJP coalition on course to sweeping victory; Modi set to be Prime Minister; May 16, Sajjid Chinoy). It is pertinent to highlight here that Bond markets have not participated in the Equity markets’ enthusiasm over the last three months and the yield on the 10-year benchmark bond at 8.83% is only marginally lower than the highs of 9%. This would suggest that cost of capital remains a headwind for a full blown economic recovery, particularly one driven by the investment cycle.

· In this backdrop, we believe investor attention would now focus on the Government’s initial policy priorities to be announced over the next 1-2 months. Over the interim, our base case remains for equity market returns to be driven mainly by earnings growth (we currently estimates earnings growth of about 12-14% over FY14E-16E) subsequent to the recent re-rating.

· Sector Stance: Given the nature and extent of challenges facing the economy, we expect the recovery in the economy and corporate earnings over the near term to be relatively muted in relation to current market expectations.

· Consequently, we would avoid companies with high leverage or where expectations of a turnaround are premised on regulatory / political largesse. We would particularly caution against chasing beta in the financials (State-Owned Banks and NBFCs) and investment cycle space (private sector infrastructure conglomerates).

· Since the beginning of the year we have been advocating playing a potential economic recovery through high-quality Financials, Commercial Vehicles, Cement and Resources – Metals and Private sector Energy.

· We believe any policy reform by the incoming Government to kick start the investment cycle will initially have to start with the Resources sector. Reforms herein will be key to resolving bottlenecks in the Infrastructure sector and subsequently the Credit cycle in the financial sector. Note that Energy and Metals have been among the best performing sectors in the beta rally over the last few months.

Table 1: J.P. Morgan India Model Portfolio

Current	Portfolio Stance	Top Picks	Avoids
CONSUMER DISCRETIONARY	Underweight	Zee, Tata Motors	Hero Moto, Maruti
CONSUMER STAPLES	Neutral	ITC,GSK Consumer	Hindustan Unilever, Asian Paints
ENERGY	Neutral	RIL
FINANCIALS	Underweight	ICICI Bank, HDFC Bank	Second tier banks, NBFCs
HEALTH CARE	Overweight	Dr. Reddy's Lab	Apollo Hospital
INDUSTRIALS	Underweight		BHEL
INFORMATION TECHNOLOGY	Overweight	Infosys, Tech Mahindra
MATERIALS	Overweight	Grasim, Tata Steel, Sesa Sterlite
TELECOM	Underweight
UTILITIES	Neutral	Power Grid, Tata Power	Private Sector Infra/ IPPs

Source: J. P. Morgan

Table 2: 2014 Lok Sabha Election: Party wise Win and Lead

NDA			UPA			Other Key Parties
BJP	284		INC	45		ADMK	37
TDP	16		RJD	3		TMC	34
SS	18		NCP	6		BJD	19
LJP	6		JKNC	3		TRS	11
SAD	4		JMM	1		CPI (M)	9
Others	7		Others	3		SP	5
						AAP	4
Total	335		Total	61		JD(U)	2
						JD(S)	2

Source: Election Commission of India

J.P. Morgan - Glenmark Pharmaceuticals Ltd

Glenmark Pharmaceuticals Ltd. (GNP IN) 4QFY14 First Cut: EBITDA beat in the quarter highlights upside from emerging markets		Overweight Price: Rs603.05 07 May 2014 Price Target: Rs645.00 PT End Date: 30 Sep 2014

Glenmark reported a better-than-expected operating results with 4Q FY14 EBITDA at Rs3.8bn (+30% YoY), which was ahead of JPMe and consensus of Rs3.6bn driven by the strong revenue growth of 28%. The outperformance in revenue was entirely driven by the Emerging Markets (SRM-RoW, LatAm), API and Europe. While US revenue was mostly in line with our expectation, domestic revenue growth at 8% YoY in the quarter was disappointing (similar to Lupin’s results). The press release outlined increasing pace of ANDA filings in FY15 and also highlighted focus on new therapy area filings in the US, which should support medium-term growth for the company. Adjusted PAT (adjusted provision for Tarka litigation claim and apportioning tax on PBT) was at Rs2.15bn (vs. JPMe Rs2bn). Net debt as of Mar-14 was Rs24.7bn, declining QoQ (vs. Rs25.6bn in Dec-13).

· Emerging market performance better than expected. GNP’s emerging market exposure provides the balance in quarters with muted trends in US. SRM revenue grew by 49% YoY (+14% QoQ) with continued strong performance in Russia, Ukraine and ME&A/Asia market. Revenue growth in LatAm was +34% YoY as growth in Mexico, Venezuela and also some upside from launch of generic Seritide in Mexico in the quarter. The company indicated that its Brazil subsidiary recorded moderate growth at 10% in local currency in 4Q. While approvals from Brazil regulatory authority are still delayed, the 10% growth highlights some improvement, in our view. GNP’s Europe revenue growth of 29.5% was aided by continued strong trend in Central Eastern Europe region (27% growth in secondary sales while the market stagnated).

· US growth inline, but prospects improving post FY16. As expected, GNP reported muted US revenue growth of 3% YoY on constant-currency basis; however, declined sequentially ($81mn vs. $85mn in 3Q FY14) impacted by the lumpiness and lag in ANDA approvals. In its press release, GNP highlighted 20 ANDA filings in FY14 and expects to file another 10 applications in 1Q FY15. Out of the 20 filings last year, only two were immediate release products with other filings in niche segments like dermatology (3), Oncology injectables (4), OCs (4), complex oral solids (4) and filing in new therapy areas (like immunosuppressant and complex injectable). GNP indicated that it expects to file another six complex injectables in FY15.

· India growth was below expectations: Similar to LPC, GNP growth was lower than our expectation at ~8% (vs. JPMe of mid-teen growth). As per the press release (ORG IMS MAT Mar-14 data), GNP growth was 17.65% in the quarter vs. industry growth of 10.1% and the company witnessed market share expansion in all key segments.

· NCE/NBE Pipeline update: On GRC 15300 (licensing agreement with Sanofi), GNP indicated that TRPV3 inhibitor for chronic pain did not meet the primary endpoint in the Phase II proof of concept trial. On mPGES-1 inhibitor, GNP has filed a Phase 1 application for first-in-human trial with the MHRA, UK, which will be initiated soon (likely to get completed by Jan-15). On GBR 500, GNP indicated that Sanofi has terminated the Ulcerative Colitis Phase II POC study but announced a new phase II POC study for Multiple Sclerosis (paid $5Mn milestone payment in 1QFY15).

· Conference call at 8.30AM tomorrow (9th May): Dial in (+91 22 6000 5900); PIN: 11766567#. On the call we will look for commentary on: (1) FY15E revenue and EBITDA guidance (JPMe Rs14.5bn vs. Street Rs15bn); (2) the growth outlook in key markets (US, India, LatAm, SRM); (3) net debt reduction guidance; (4) the R&D spend and margin outlook for the medium term; and (5) the innovative R&D pipeline update.

Table 1: GNP: Segmental Summary

Rs MM, YE Mar.	4QFY13	4QFY14	% YoY	3QFY14	% QoQ	FY13	FY14	% YoY
India	3,550.3	3,830.0	7.9	3,812.3	0.5	13,095.8	15,104.9	15.3
RoW-SRM	2,293.8	3,425.3	49.3	3,009.6	13.8	8,493.0	9,869.0	16.2
Latin America	792.7	1,061.7	33.9	1,139.3	(6.8)	3,467.9	4,045.5	16.7
Europe	1,491.8	1,932.0	29.5	1,358.4	42.2	3,723.7	5,060.7	35.9
US	4,291.4	5,008.5	16.7	5,213.6	(3.9)	16,887.4	20,270.2	20.0
API	938.6	1,530.6	63.1	1,479.1	3.5	3,976.4	5,353.5	34.6
Total	13,358.6	17,035.6	27.5	16,017.5	6.4	50,137.2	60,069.4	19.8

Source: Company reports.

Table 2: GNP: Quarterly Results Snapshot

Rs MM, YE Mar.	4QFY13	4QFY14	% YoY	3QFY14	% QoQ	FY13	FY14	% YoY
Total Revenues	13,354.9	16,817.4	25.9	16,012.2	5.0	50,123.4	59,838.5	19.4
Other operating Income	3.8	218.2	5,702.7	5.3	4,024.4	13.8	230.8	1,572.6
Total Income	13,358.6	17,035.6	27.5	16,017.5	6.4	50,137.2	60,069.3	19.8
EBITDA (Adj)	2,746.5	3,568.8	29.9	3,649.7	(2.2)	10,369.6	12,735.0	22.8
EBITDA Margin (%)	20.6	21.3		22.8		20.9	21.3
Depreciation	(318.1)	(603.0)	89.6	(611.0)	(1.3)	(1,270.1)	(2,168.0)	70.7
Interest	(435.9)	(464.3)	6.5	(472.7)	(1.8)	(1,600.1)	(1,885.9)	17.9
Other income	(49.6)	(120.7)	143.5	50.8	(337.7)	93.7	97.5	4.1
Out-licensing Income	0.0	247.4		0.0		493.0	365.5
MTM Forex Gain / Loss	(146.0)	0.0		0.0		(696.0)	0.0
Profit before tax	1,796.9	452.9	(74.8)	2,616.8	(82.7)	7,390.1	6,968.8	(5.7)
Tax Expense	(45.7)	(18.7)	(59.0)	(473.5)	(96.0)	(1,107.2)	(1,512.7)	36.6
Tax Rate (%)	2.5	4.1		18.1		15.0	21.7
Pre-exceptional PAT	1,751.3	434.1	(75.2)	2,143.3	(79.7)	6,282.9	5,456.0	(13.2)
Minority Interest	(30.4)	(3.5)		19.1	(118.3)	(82.6)	(33.3)	(59.7)
Reported PAT	1,720.9	430.7	(75.0)	2,162.4	(80.1)	6,200.3	5,422.8	(12.5)
FD EPS	6.36	1.59	(75.0)	7.98	(80.1)	22.9	20.0	(12.6)
Raw materials	3,770.0	4,438.7	17.7	5,373.1	(17.4)	16,536.0	18,730.2	13.3
as % of sales	28.2	26.4		33.5		33.3	31.4
Employee cost	2,034.5	2,773.9	36.3	2,734.7	1.4	7,829.5	10,261.5	31.1
as % of sales	15.2	16.5		17.1		15.8	17.2
Other Expenditure	4,953.7	6,006.8	21.3	4,260.0	41.0	15,605.1	17,977.1	15.2
as % of sales	37.1	35.8		26.6		31.4	30.1

Source: Company reports. Note: 4QFY14 includes Rs2.17bn exceptional (Tarka liability claim).

Investment Thesis

We believe that GNP’s generic business growth, aided by a pick-up in US and emerging markets growth momentum, EBITDA margin expansion and a reduction in leverage through sustained increases in cash flow generation, should help narrow the valuation gap to its domestic peers. Further, GNP’s innovation R&D pipeline provides scope for upside surprise with new out-licensing opportunities