India Strategy: Run with the bull! (Antique)

India Strategy

Run with the bull!

The Indian equity market witnessed interesting twists and turns throughout 2013. Beginning with high hopes, the market saw extremely depressed levels in Aug-13, as economic growth fell to new lows. What followed thereafter was equally dramatic. Buoyed by hopes of a recovery, changing political landscape, and growing thrust on reforms and investments, the market rebounded swiftly. Going forward, we expect the Indian economy to show a meaningful pick-up, led by manufacturing and agriculture sectors. Key macro indicators also appear on track after witnessing extreme lows.

Market Strategy

With GDP growth at 5.5%, we expect Sensex earnings to grow at 18% in FY15, on a base of 8% growth in FY14. We expect CY14 year-end Sensex at 24,515, based on 16x FY15 Sensex EPS of INR1,532. In our opinion, markets would see significant volatility before elections, on account of fluctuating 'noise levels' around political events. As a result, markets may see divergent trends before and after elections.

Key themes

1.      Increase weight in cyclicals, reduce defensives: Buy industrials, automobiles, NBFCs and private banks.

2.      Play the export theme through IT and pharmaceuticals (against commodities), despite significant re-rating through CY13.

3.      Watch out for energy sector reforms.

4.      Continue to depend on bottom-up approach. Buy good quality companies in growth sectors with healthy RoEs. Select buying opportunities across many sectors (monopolistic FMCG businesses, infrastructure, power utilities).

5.      Avoid playing deleveraging story. Risk remains high for highly levered companies.

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1QFY14 results recap - The good, the bad and the ugly : Antique

India's corporate sector posted dismal performance in 1QFY14. While a large
part of it was on expected lines, earnings decline in a few sectors was alarming.
Though companies under Antique coverage (ex-oil) posted revenue growth of
7.3%, which was in line with expectations, and similar to growth registered in
3QFY13 (9%) and 4QFY13 (7%), PAT grew by 3.6%, against our expectation of
growth of 6.2% YoY. Earnings growth is pulled down by autos, cement,
industrials and utilities. We see earnings trajectory to worsen in remainder of
the year, with rising costs and falling demand. We are cutting down our FY14
Sensex EPS estimate by 5% to INR 1295 (earlier INR 1365) and Sensex target to
19425 (15 x FY14e EPS). We remain defensive and believe that bottom-up
approach is the best strategy for beating market return. Among sectors, prefer
IT, pharmaceuticals, media, energy and auto.
Sharp earnings moderation across sectors
􀂄 Only Media and Financials posted 15%+ revenue growth during the quarter.
Pharmaceuticals, FMCG and IT posted reasonable growth of 11%, 12% and 13%, but
growth rates have been moderating meaningfully. Moderation is revenue growth is more
pronounced in FMCG sector, from around 17-18% a couple of quarters ago to 12% now.
With respect to our estimates, media and oil & gas sectors beat our revenue estimates
by over 5%, while industrials fell short by 10%. Most other sectors grew in line with estimates.
􀂄 Cement and industrials witnessed sharp compression in margins during the quarter, YoY,
while automobiles and oil & gas sectors saw margin expansion.
􀂄 Sectors that posted strong YoY earnings growth during the quarter are: FMCG (12%), IT
(15%), Media (18%), Pharma (13%) and Financials (11%). Oil & Gas sector performed
better than expected as a refineries cut down their losses during the quarter. Industrials
disappointed the most with 25% miss in earnings, as L&T and BHEL missed earnings
expectations by 24% and 40%, respectively. Utilities were another sector with 16% miss in
earnings. Auto, Cement, FMCG, IT, Pharma and Financials sectors performed in line on
aggregate basis, but with significant variations within respective sectors.
􀂄 Key large cap earnings beaters: Bosch, Sun Pharma, Zee, Bank of Baroda, HCL
Tech, BPCL.
􀂄 Key large cap earnings disappointments: Tata Power, Coal India, L&T, BHEL,
United Spirits, ACC, Asian Paints, Godrej Consumer, Dr. Reddys, Ranbaxy, Oil India, ONGC.

􀂄 Key mid-cap earnings beaters: Shree Cement, Jyothy Labs, IL&FS Transportation,
Spicejet, Gujarat Pipavav, Hexaware, Hathway, GSPL, Bank of India, HPCL.
􀂄 Key mid cap earnings disappointments: ABB, Voltas, KEC, Dish TV, Petronet, Union
Bank of India, Mahindra Finance.
Worsening economic outlook!
The Indian markets, after outperforming most of its peers in CY12, have declined 5.8%
since the beginning of CY13. Against expectations earlier that the Indian economy will start
showing signs of improvement, growth outlook has worsened in past 3 months. The Index of
Industrial Production remains depressed, and capex cycle refuses to pick up. While the
Government has tried its best to bring about certain substantial reforms, such as increasing
diesel prices and raising FDI limits in several key sectors, the impact of these have been
limited on the industry and the economy. Another big worry is high current account deficit,
which is playing havoc with the currency. Currency at INR 63 / $ is at all time low, and has
fallen by 15% in the year so far. Rising oil prices and falling INR will significantly impact the
Indian industry in the next few quarter, thereby putting a lot of pressure on profitability of
Indian corporate sector, which are staying away from making fresh investments. On the
other hand, interest rates have started showing signs of rising yet again. Yields on the 10-
year benchmark bond hit a five-year high of 9.24 percent. A clear political landscape,
sharp focus on reform and concerted effort to stem fall in INR are key requisites for reviving
sentiments going forward.
Sensex to grow 8%: Prefer bottom-up, balanced approach
We cut our FY14 Sensex EPS targets by 5.1% to INR 1295, on the back of 3.5% cut in
4QFY13. This implies 8% YoY Sensex earnings growth in FY14. Given meaningful slowdown
in industrial output, possible demand moderation in the consumer space, and likely cost
push due to falling INR, a farther downside to current estimates cannot be ruled out. We set
out Sensex target at 19425 based on 15x FY14e Sensex EPS. We continue to believe that
India will remain bottom-up market in CY13 - 14.
We broadly maintain our sectoral preferences. Our preferred sectors include IT,
Pharmaceuticals, Media, automobiles, energy and select private sector banks. We remain
cautious on PSU banks, Industrials, infrastructure, metals, cement and select oil refineries.

Bharat Forge Limited - Forging ahead :Antique

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Nestlé India -Gearing up for growth : Antique

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Nestlé India
Gearing up for growth
Nestlé India's performance has been below expectations with a further
slowdown in volume growth during 1QCY12 due to substantial price
hikes (13%). However, going ahead, over the next six months, we believe
that it would post a recovery in volumes with ramp up in marketing
spends and increase in distribution. Additionally, the rising awareness
for nourishment in the rural markets augurs well for the long-term growth
plans of the company. We maintain a HOLD recommendation.
􀂄 Net sales grew by 13.1% to INR20.5bn in the backdrop of a 13.7% growth in
domestic sales at INR19.5bn and 3.3% growth in export sales at INR1.01bn. In
our view domestic volume growth during the quarter has been almost flat.
􀂄 EBITDA grew by 19% to INR4.57bn and EBITDA margin expanded by 104bps to
22.3%. The improvement in EBITDA margin was on account of 301bps drop in
raw material cost to 45.8%. However, this improvement in EBITDA margin was
below our expectations due to a 90bps increase in staff cost to 7.6% of net sales
and 107bps increase in other expenses to 24.3% of net sales. The increase in staff
cost has been due to increase in headcount to support the company's expansion
initiatives. Additionally, the increase in other expenditure we believe has been
because of ramp up in marketing expenditure.
􀂄 Profit before tax grew by 14% to INR4.16bn while recurring PAT grew at a lower
rate of 10% to INR2.9bn due to an increase in effective tax rate by 248bps to
30.6% of PBT.
􀂄 Our channel checks suggest a substantial increase in marketing initiatives to fuel
strong growth in sales during the next three years backed by the capacity expansion.
Therefore, we believe that volume growth will recover over a period of six months
led by the substantial ramp up in operations and subsiding of the impact of the
price hikes. Additionally, the company's medium to long-term growth potential
remains strong with rising awareness of nourishment even in the rural markets.
Valuation and outlook
At the CMP of INR4,938, the stock is trading at a PE of 40.5x CY12e and 33x CY13e.
We believe that Nestlé India would witness a strong recovery in sales momentum
during CY13e backed by the ramp up in production and distribution. We therefore
upgrade our EPS estimates by 2.4% for CY13e to INR149.8. We maintain our HOLD
recommendation on the stock at the current levels with a target price of INR4,495

Indian Oil Corporation -- The entry tax jolt:: Antique

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Key highlights
􀂄 IOCL lost UP entry tax case in Allahabad High court, liability of
INR84bn: Allahabad High Court has dismissed IOCL's petition and upheld the
UP Entry Tax Act 2007, whereby UP govt is entitled to levy an entry tax/octroi on
crude oil at 5% (USD5.5/bbl at current oil prices) for its Mathura refinery. IOCL
will have net liability of INR84bn (refer table on page 2) including last ten-year
demand with interest. Hon'ble Supreme Court while accepting the review petition
has asked IOCL to deposit 50% of the accrued tax liability (INR42bn) and furnish
bank guarantee for the balance within next few months. Hon'ble Supreme Court
has also asked IOCL to pay the tax at the prevailing rates for the future period till
the review petition is decided.
􀂄 Entry tax - an irrecoverable item for refiners, to make Mathura
refinery unviable: Entry tax has been an irrecoverable item for refiners and not
included as part of the refinery transfer price (RTP) as it is based on import parity
price and does not include local taxes. Entry tax burden of USD5.5/bbl is huge
with respect to average USD6.1/bbl GRMs made by Mathura refinery (8mmtpa)
during FY09-11 and an average net margin of USD3.9/bbl.
􀂄 Full price hike in marketing looks difficult, we expect 2.5% underrealisation:
IOCL will require MoP&NG approval (largely political clearance)
for raising prices on regulated products in UP to cover this additional tax. On nonregulated
products, IOCL will face the problem of substitution, as products imported
from nearby states will attract entry tax in UP, which can be fully set-off against
VAT. We believe that when Central Govt. itself is looking to raise prices of regulated
products, it would be very difficult for IOCL to separately raise price in UP to pass
through the entire entry tax leading to irrecoverable expense of ~2.5%.
􀂄 Impact on earnings: IOCL has to provide for this entire liability of INR84bn in
one go, wiping off FY12e earnings. Also payment of INR42bn in next few months
will increase interest liability by INR3.4bn in FY13e. Assuming 2.5% less pass
through, IOCL recurring EBITDA would be impacted by INR7.4bn annually (INR2.1/
sh post tax) on IOCL's recurring earnings.
Valuation and outlook
􀂄 Downgrade to HOLD: Considering Hon'ble SC doesn't reverse High Court
order, we have reduced our earnings for FY12-14e. We have revised our valuation
methodology and now value IOCL at an average of: i) FY12e 0.8x BV at INR174/
share; and ii) FY13e 10x EPS at INR200/share (FY13e revised EPS of INR20).
We value listed investments at INR80/share. We downgrade the stock to HOLD in
light of the above changes with a revised target price of INR267/share (earlier
INR314/share).

Muthoot Finance- Business momentum strong; regulations remain an overhang ::Antique

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Muthoot Finance Limited
Business momentum strong; regulations remain an
overhang
Results highlights
Muthoot Finance Ltd. (Muthoot) for the quarter reported a PAT of INR2.5bn (+61% YoY
and +17% QoQ) and the same was above street expectations. This was on the back of
strong growth in net interest income (aided by 66% loan growth) and lower operating
expenses. However, despite yield on assets being stable, NIMs exhibited a 60bps
QoQ decline because of high cost borrowings during the quarter. Overall, operating
performance was strong, but sharp decline in gold prices and adverse regulations pose
challenges to growth as well as earnings.
Strong loan growth momentum continues
Loan growth continues to remain buoyant and Muthoot reported loan book (including
loans sold down) of INR222bn, up 66% YoY and 9.3% QoQ. During the quarter, it
garnered incremental lending of INR19bn (INR29bn in 2QFY12, translating into a
YTD loan growth of 44%. However, loan growth is expected to moderate due to high
base effect. Additionally, the company in face of volatile gold prices has enhanced risk
management metrics and have reduced its LTV to 68%, to tackle the same.
Strong NII growth; NIMs decline on high borrowing cost
NII registered a strong growth of 64% YoY (7% QoQ) despite a spike up in interest
expenses (+126% YoY; +16% QoQ). NIMs stood at 10.81% in 3QFY12 as compared to
11.4% in 2QFY12 and 11.2% in 2QFY11. The compression in NIMs were because of
sharp jump in borrowing costs during the quarter. Muthoot had raised lending rates in
3QFY12 to offset sharp rise in borrowings costs. The removal of agriculture priority-sector
status for gold-loan NBFCs has raised concerns on financial flexibility of gold-loan NBFCs.
Muthoot has not faced any significant pressure as yet. However, we believe that the
company will find it challenging to sell down loans if the proposed revised draft
securitization guidelines are implemented. The regulator has also proposed to ban loan
sell-down for assets that have bullet repayment and increase minimum holding period
for loans sold down by NBFCs to banks.
Valuation
The stock is trading at a valuation of 1.7x FY13e P/B and 6.2x P/E.

Outlook for 2012: Emerging out of a maze:: Antique,

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Foreword
The year CY11 commenced on an uncertain note as dark clouds on our economy re-emerged from international quarters, and domestic factors like inflation, political and policy making
slowly turned adverse. Even then, the consensus was that FY11 growth would be maintained and FY12 growth, while a bit muted would still be encouraging. Broader market indices were
expected to maintain their sluggish/sideways trend and end the year on an encouraging note.
Come December, Murphy’s law seems to be reigning supreme in India. On the macro front, inflation is yet to be tamed (though early signs of respite emerging now) despite our central
bank using most of the tools in its arsenal. The unenviable tightrope walk of RBI has resulted in the high interest rates (inflicting pain on India Inc.) with an imminent danger of demand
slowdown. In conjunction, elevated crude prices and weakening rupee could emerge as a major derailing factor for all budgetary/financial parameters. The waters have been further
muddled by the paralysis on the policy making front resulting in big ticket capex being derailed. Consequently all growth/economic monitoring parameters are exuding negativity.
In this back drop, our markets have undergone a consistent derating along with multiple earnings downgrades. Retardation of earnings growth has been visible and uncertainty is
widespread with most observers taking it as given, that the ongoing global slowdown will have an adverse rub off on us. That brings some pertinent questions to the fore: Are we entering
a secular bear market, or is it just a corrective phase?; Is the deterioration of performance of India Inc. divergent (less/more) from what is being perceived?; The frames of reference have
moved fundamentally, but is it being adequately captured by the markets?
Indications are that our GDP growth will be lower than estimates at the beginning of the year, and mid year review conveys the same. However, the broad consensus is veering towards
7.1-7.2% level and that seems to be achievable. This despite the blip in manufacturing as services and agriculture seem to be on a stable growth path. While demand growth is slowing
down, the fears of demand destruction seem to be farfetched at the current juncture. However, sentiments convey that the same is being considered a distinct possibility.
On the corporate front, data flows indicate that large players sensed the rough road ahead and tightened operations on all fronts i.e raw material/manufacturing costing, leverage,
financial costs etc. While inflation may have become structural along with high interest rates, India Inc. seems to have aligned its operational metrics to these changed frames of reference
much faster that the capital market observers and participants. Hence, most of the numbers flow is usually met with disbelief and skeptics abound on the sustainability of the same.
We at Antique believe that while factors for being a pessimist abound, the stock markets seem to have factored the same to a large extent, much earlier. The consistent downgrade in
consensus earnings estimates for FY12e and FY13e was preempted by the flight of smart money (as usual). While the markets have exhibited a slide on a P/E basis, we believe that a
large part of the same was on account of P/B derating as India inc. was perceived to have softening RoE and risk free returns (G-Sec, Interest rates) were on a rising trend. As both these
anticipated trends fructified and are close to their turning points, a slow reversal of these two key measurable is expected. Thus, we anticipate the markets to exit the calendar year with
better P/B ratio and the rub off on P/E could come later, may be nurtured by slow and grudging earning upgrades by the street in 2HFY13e. However, a long term overhang factor could
be the derailed/deferred capex which could pose a risk to the FY13e and FY14e earnings growth and can prove to be the proverbial spoilsport.
Thus, we are of the opinion that the markets would find its sweet spot at around the P/E level of 14.5-15 and P/B level of 2.6-2.8 for our FY13e earnings
and hence our Sensex target for End CY12e is 18600-19200. However, the route to those levels would be quite tortuous. While there exists a good chance
that the valuation and earnings metrics could get revised upwards, indication of the same would be received post 2QFY13e numbers.

JSW Steel Limited Volumes on the uptick ::Antique

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JSW Steel Limited
Volumes on the uptick
Key highlights
Iron ore procurement getting streamlined
JSW Steel Ltd. (JSTL) iron ore procurement is improving in near term. The court suggested
e-auction process is improving with higher receipts and NMDC is allowed to fix prices for
its produce. Coking coal prices have been on a declining trend and 4QFY12e contract
prices are at USD235/tn (19% QoQ lower; 40% lower from peak). JSTL benefits most with
declining raw material prices as it is lowest integrated compared to SAIL and Tata Steel.
New capacity and product mix will favour contribution
JSTL's traditional flat:long product mix of 78:22 is flexible with capacity utilisation in the
present scenario, providing higher contribution from long products. Also, new 3mtpa
blast furnace (BF) is the most efficient out of 8 BFs with low coke rate and will lead to
cost savings on raw material. The lower utilisation levels will mask the efficiency gains
for FY12e, but going forward, JSTL will move along the profitable path. Already JSTL
had 68% utilisation at Vijaynagar facilities in Nov 2011.
Expectations at the lowest
JSTL had unhedged forex exposure of ~USD2.3bn at FY11 end. In 2QFY12, JSTL had
forex losses of INR5.13bn related to acceptances (coking coal import) through P&L
while INR5.3bn related to MTM loss of forex loans was adjusted in balance sheet and
similar quantum is expected in 3QFY12e. Overseas subsidiaries and JSW ISPAT Ltd.
will need support till economic improvement. JSTL has FCCB redemption of USD274m
in July 2012 with 42.8% premium and will have to be replaced by new loan. The
expectations are at the lowest from the operational performance so improved utilisation
and reducing capex intensity will improve the outlook going ahead.
Valuation and outlook, reiterate BUY
We believe JSTL will chalk out long-term strategy for iron ore procurement while the
existing mining industry in Southern region will undergo overhaul and cleanup due to
judicial activity. We have adjusted for lapse of promoter warrants (17.5m shares) and
increased debt estimates on account of forex losses. With reducing iron ore and coking
coal prices, JSTL is best placed compared to SAIL and Tata Steel as a converter. We
reiterate BUY with a revised target price of INR709 (earlier TP of INR750) at 6.5x
FY13e EV/EBITDA, giving an upside of 36%.

JSW Steel Limited Volumes on the uptick ::Antique

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JSW Steel Limited
Volumes on the uptick
Key highlights
Iron ore procurement getting streamlined
JSW Steel Ltd. (JSTL) iron ore procurement is improving in near term. The court suggested
e-auction process is improving with higher receipts and NMDC is allowed to fix prices for
its produce. Coking coal prices have been on a declining trend and 4QFY12e contract
prices are at USD235/tn (19% QoQ lower; 40% lower from peak). JSTL benefits most with
declining raw material prices as it is lowest integrated compared to SAIL and Tata Steel.
New capacity and product mix will favour contribution
JSTL's traditional flat:long product mix of 78:22 is flexible with capacity utilisation in the
present scenario, providing higher contribution from long products. Also, new 3mtpa
blast furnace (BF) is the most efficient out of 8 BFs with low coke rate and will lead to
cost savings on raw material. The lower utilisation levels will mask the efficiency gains
for FY12e, but going forward, JSTL will move along the profitable path. Already JSTL
had 68% utilisation at Vijaynagar facilities in Nov 2011.
Expectations at the lowest
JSTL had unhedged forex exposure of ~USD2.3bn at FY11 end. In 2QFY12, JSTL had
forex losses of INR5.13bn related to acceptances (coking coal import) through P&L
while INR5.3bn related to MTM loss of forex loans was adjusted in balance sheet and
similar quantum is expected in 3QFY12e. Overseas subsidiaries and JSW ISPAT Ltd.
will need support till economic improvement. JSTL has FCCB redemption of USD274m
in July 2012 with 42.8% premium and will have to be replaced by new loan. The
expectations are at the lowest from the operational performance so improved utilisation
and reducing capex intensity will improve the outlook going ahead.
Valuation and outlook, reiterate BUY
We believe JSTL will chalk out long-term strategy for iron ore procurement while the
existing mining industry in Southern region will undergo overhaul and cleanup due to
judicial activity. We have adjusted for lapse of promoter warrants (17.5m shares) and
increased debt estimates on account of forex losses. With reducing iron ore and coking
coal prices, JSTL is best placed compared to SAIL and Tata Steel as a converter. We
reiterate BUY with a revised target price of INR709 (earlier TP of INR750) at 6.5x
FY13e EV/EBITDA, giving an upside of 36%.

Antique: Initiating Coverage: Indian Telecom Sector – At best a “hope”- Bharti (HOLD) and Idea Cellular (Hold)

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Indian Telecom Sector - At best a “hope”

Investment rationale

· Indian rural region ... low teledensity with high BPL population: Today India is one of the fastest growing telecom markets in the world with penetration level as high as 150% in urban areas. Future growth is expected to be driven by rural areas (which accommodates ~70% of the Indian population) where penetration levels (~33%) are still low, though we believe that incremental subscriber addition will come at low ARPUs and at a slower pace due to presence of a huge BPL (below poverty line) population.

· Indian wireless market - highly competitive: Currently there are six major players in the telecom space fighting viciously to increase their market share in the low ARPU rural market. Till now all the above players were busy in tariff war and were launching unique schemes to lure subscribers (TTSL per second plan, Reliance 0.50/minute and R2R unlimited calls plan), however to our surprise for the first time all the major players have come out with tariff revisions as recently as July 2011; although we still need to wait and watch the possible impact of the same in coming quarters.

· Sector facing internal as well as external headwinds: We believe that Indian telecom sector has gone through a massive transformation during the last two decades and has gained a significant presence in the global arena. However, currently a number of challenges are faced by the sector including: Industry challenges - High penetration levels, high BPL population, limited 3G demand and fierce competition; Sector challenges - Resource constraints, new telecom policy, lower availability of 3G spectrum, excess spectrum charges, and abolition of 3G roaming charges; Regulatory challenges - Non-clarity on M&A, exit policies and 2G Spectrum overhang.

Initiating coverage on Bharti and Idea with a “HOLD” rating

· Bharti Airtel: Although Bharti Airtel is our preferred pick in the Indian telecom services space based on its capability to turnaround Africa operations, we believe that incremental subscribers in Africa will have lower ARPUs comparatively. Moreover, presence of multiple operators competing for the wallet share of Indian households act as a bottleneck for any meaningful tariff hike and ARPU growth. Considering the above factors, we value Bharti at INR379 or at a P/E multiple 17x on our FY13e EPS, implying a 10% upside from current levels. We initiate coverage on Bharti with a HOLD recommendation.

· Idea Airtel:  Although Idea has added 12.3m subscribers in the last seven months, we believe the same will slow down due to high penetration levels. We also strongly believe that although there will be a nominal increase in ARPU due to growth in 3G services but the overall macro factor of low per capita income will put a cap on the usage/monthly spend by a subscriber/household, and will take away the benefits of recent tariff hikes resulting in lower MOU going forward. Considering the above factors, we value Idea at a P/E multiple 24x on our FY13e EPS of INR3.2, implying a target price of INR74, or 10% downside from current levels. We recommend a HOLD on Idea.

-- 

News Update: Antique: March 16, 2011

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Global News
􀂄 Federal Reserve policy makers said U.S. growth is becoming more durable and higher
energy prices will have a temporary effect on inflation as they affirmed plans to buy
USD600bn of Treasuries through June.
􀂄 U.S. stocks escaped the brunt of a global selloff that sent Tokyo shares to the worst twoday
drop since 1987, paring losses as Japanese officials made progress stabilizing
damaged nuclear reactors and the Federal Reserve

Antique, Essar Oil Limited- Taking the Big Leap

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Essar Oil Limited
Taking the big leap 8 March 2011
Investment summary
We initiate coverage on Essar Oil Limited (EOL) with a BUY recommendation
and a target price of INR171/share. We expect refinery margins to remain
strong for the next 2-3 years led by strong diesel demand and recovery in light
heavy spreads. Vadinar refinery expansion is thus expected to come at the
right time of investment cycle, benefitting EOL. Company's foray into CBM
and commencement of production at Raniganj would provide significant early
mover advantage. Furthermore, signing of PSC agreement for Ratna R series
field and progress on exploration process in other prolific E&P blocks (both
domestic and international) are likely to act as future catalysts for growth.
Capacity expansion comes at the right time of investment cycle
EOL's Vadinar refinery expansion, from 14mmtpa to 20mmtpa, comes at the
right time of refinery investment cycle. Post expansion, EOL would benefit from:
i) larger refinery at competitive capital cost; ii) product slate biased towards
higher value-added products; and iii) improving light-heavy differentials. We
expect EOL to post a clean GRM of USD7.4/bbl and USD8.3/bbl in FY12e
and FY13e, respectively (excl. sales tax benefit).
CBM - early mover advantage
EOL's CBM portfolio comprises of five blocks with total 2P reserves of 201bcf
and prospective best estimate resource of 5.5tcf. Raniganj is the only producing
CBM block currently. EOL joins the league with GEECL and ONGC of being
the only players to start CBM production in India, thus providing early mover
advantage to EOL. We assign an NPV value of INR39bn (INR29/share) for
its Raniganj block implying a resource multiple of USD5.2/boe. We assign a
significantly lower resource multiple of USD1.2/boe for the Rajmahal CBM
block due to early stages of exploration. EOL has another 4.4tcf of unrisked
resource in place, where exploration activity is yet to commence, and thus, not
accounted in our valuations.
Option values - to act as future catalysts
Signing of PSC agreement for Ratna R-series field will help unlock an option
value of INR23/share. We employ DCF methodology to value the field implying
a valuation of INR46/share but currently assign a 50% valuation weight to
our valuations. Progress on diesel price de-control would also enable EOL to
capitalise on its strong retail network.
Valuation and outlook
We recommend a BUY on EOL with SOTP-based target price of INR171/
share implying a potential return of 53% from current levels.


􀂄 Refining and marketing divisions has been valued at INR213bn (INR156/share)
using DCF methodology. We have assumed expansion of Vadinar refinery to
18mmtpa by 1HFY12e and to 20mmtpa by 2HFY13e. Our valuations also include
sales tax deferral benefit of INR91bn implying an NPV benefit of INR10/share.
􀂄 We value EOL's Raniganj CBM block at INR39bn (INR29/share) using DCF
methodology, implying a resource valuation of USD5.2/boe. Our valuation
comprises both Phase-1 and Phase-2 development.
􀂄 We value Ratna and R-series field at INR62bn (INR46/share) using DCF
methodology implying a resource valuation of USD20/bbl. We however assign a
50% valuation weight to our DCF valuations as we await signing of PSC agreement
for the block. We are currently assuming INR2,625/ton of cess and 10% of royalty
in our valuations for the block.
􀂄 Rajmahal CBM block is valued using a resource multiple of USD1.2/boe, significantly
lower than that derived for Raniganj CBM block due to early stages of exploration.
􀂄 For the Nigerian block, we currently account for only oil reserves in our valuations.
Resource valuation includes 2C net oil reserves of 11MMbbl and 50% of prospective
oil resources of 49MMbbl. We assign a resource multiple of USD4/boe implying
a valuation of INR5/share.


Key macro risks to our earnings forecasts and ratings
􀂄 Domestic or global economic slowdown may dampen refining demand and thus
impact our refinery margin assumptions.
􀂄 Volatile crude and oil product prices may affect refining margins and earnings.
􀂄 Delays in commissioning of Vadinar expansion project could affect our throughput
assumption and valuation.
􀂄 Regulatory delays in signing of PSC agreement for Ratna R series field beyond
1QFY12e could impact our DCF assumptions for the field.
􀂄 Volatility in foreign exchange may increase costs of key feedstock (crude oil), which
is denominated in US dollars.
􀂄 Any adverse regulatory change with respect to direct or indirect taxation may
affect our earnings and DCF estimates.

Indiabulls Real Estate- Strong execution; leasing on an upmove : Antique

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Indiabulls Real Estate
Strong execution; leasing on an upmove 
Result highlights
Strong execution of residential projects
IBREL registered revenues of INR4bn for 3QFY11, up 967% YoY and 33%
QoQ. Net profit increased to INR770m from INR28m in 3QFY10 and INR510m
in 2QFY11. The YoY increase is significant since residential projects had not
begun contributing to revenues in 3QFY10. Even on a QoQ basis, net profit
has grown by 51% on account of better than anticipated execution of
residential projects and better margins. EBITDA margins improved 367bps
QoQ to 30.7% in 3QFY11 from 27.1% in 2QFY11.

Suzlon Energy–Affinity Wind - Suzlon close the joint venture agreement, BUY:: Antique

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Suzlon Energy–Affinity Wind - Suzlon close the joint venture agreement, reiterate BUY

CMP: INR52
Target Price: INR66
Potential Upside: 25%
Reco: BUY


Affinity forms development partnership for 150MW Illinois Project
􀂄 Affinity Wind, a St. Louis-based wind development company, has formally closed its
joint venture agreement with Chicago-based Suzlon Wind Energy Corp., a subsidiary
of Suzlon Energy Ltd.
􀂄 Through the joint-venture entity, which is called Surity Wind LLC, both the companies will
jointly develop a 150MW project located in Illinois, as well as similar future jointdevelopment
projects.
􀂄 Suzlon will be responsible for turbine supply to this first project and potential future projects.
􀂄 Commercial operation of this project is expected to commence 2011 onwards.

3QFY11 Results Preview: Antique

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3QFY11 Results Preview


Sectors (click of sector for details)
􀂄 Automobiles


􀂄 Cement


􀂄 Financials


􀂄 FMCG & Retail


􀂄 Industrials


􀂄 Information Technology


􀂄 Media


􀂄 Metals


􀂄 Oil & Gas


􀂄 Pharmaceuticals


􀂄 Real Estate



􀂄 Shipping


􀂄 Sugar


􀂄 Utilities & Infrastructure


􀂄 Miscellaneous

Miscellaneous: 3QFY11 Results Preview: Antique

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ABNL
􀂄 ABNL will continue its growth momentum witnessed since 2QFY10. So, 3QFY11 will
see revenue growth of 33% YoY to reach IRN16.7bn with the growth driven by garments,
carbon black, textiles and fertilisers.
􀂄 The cost structure would be similar sequentially with rise in raw material costs for carbon
black segment due to higher crude oil prices. So, EBITDA would see an increase of
13% YoY to INR2.7bn but rise sequentially 8%.
􀂄 Similarly, PAT would be boosted by lower charges on account of financial costs and
would rise by 38% YoY.

Utilities & Infrastructure:: 3QFY11 Results Preview: Antique

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We expect a sales growth of 18% for our Utilities and Infra coverage universe mainly aided
by higher revenues from NTPC, Power Grid and Lanco Infratech. We expect profit to degrow
by ~6% YoY) mainly on account of NTPC and GMR Infra. Excluding them both, profit
is expected to grow by ~12%. Power Grid and Lanco Infratech are expected to register
earnings growth in excess of 20%. These two stocks remain our top picks as well.

Sugar: 3QFY11 Results Preview: Antique

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Balrampur Chini Mills
􀂄 BCML is expected to post revenues of INR5bn in 5QFY11, an increase of 14% YoY. This
will be mainly on account of higher contribution from cogen division and a marginal
increase in revenues of sugar and distillery divisions. On the performance of sugar
division, we expect volumes to rise by 14% to 155,000mt and average realisations to
decline by 12% to INR26,500/mt.
􀂄 We expect OPM to shrink by 1,790bps to 12.1% as the December 2009 quarter was
one of the best quarter. Accordingly, operating profits should decline by 54% to
INR602m.
􀂄 Capital charges should increase by 10% to INR490m on account of higher interest
outgo. We expect net profits to decline by 87% to INR101m.

Shipping: 3QFY11 Results Preview: Antique

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Freight rates in tanker segment reported significant increase on a YoY basis from low base
in 3QFY10 and marginal recovery on a QoQ basis in crude tanker segment (i.e., Dirty
Index). Baltic Dirty Index for crude carriers increased by 31.2% YoY to 848, while Baltic
Clean Index for product carriers increased by 34.2% YoY to 684. However, product rates
remained weak on QoQ with 6.7% decline in Baltic Clean Index. The freight rates for very
large crude carriers (VLCC) remained weak compared to smaller vessels. The time charter
yield in VLCC declined by 61.4% YoY to USD6,832pd. The freight rates index for dry bulk
commodity, Baltic Dry bulk Index (BDI) declined by 31.7% on a YoY basis (marginal increase
of 0.6% on QoQ basis) to 2,363 in 3QFY11.

Real Estate: 3QFY11 Results Preview: Antique

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DLF
􀂄 Key launch of Alameda plots in Sector 73 of Gurgaon during the quarter is expected to
help boost EBITDA margins QoQ.
􀂄 Forthcoming launches include Horizon Centre in Phase V Gurgaon and plots in Indore.
􀂄 We believe it will be difficult for the company to achieve its target of >12m sq ft of
residential sales in FY11.