2017 Picks CLSA: ITC, Maruti, ICICI, Power Grid, Vedanta

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GREED & fear - 21 August 2014 - Jokowi update

·         GREED & fear continues to view the Ukraine situation as one likely to trigger more stress for markets since there is, so far as GREED & fear can tell, no concrete evidence that Russian President Vladimir Putin has backed down.

·         The incremental reduction in tapering represents a rising risk for US equities as does the fact that the US Treasury bond market is still not confirming the narrative of the consensus, namely an assumed cyclical acceleration in the American economy. Still the coming days of central bank speech making at Jackson Hole should make markets even more sanguine as Chairwoman Janet Yellen is likely to remind investors further that she is the uber-dove.

·         GREED & fear views the recent US dollar strength as primarily driven by changing perceptions elsewhere. In the case of the euro, the probability is growing that Flexible Mario will be embarking on quanto easing sooner rather than later. As for sterling, the forex markets are having second thoughts about the imminence of Bank of England tightening given recent inflation and wage data.

·         The other development which has been helping the dollar of late is rising government bond yields relative to European counterparts. If this is a signal that the Eurozone is heading in the deflationary direction of Japan, it also raises the potential that US Treasury bond yields have the potential to decline significantly from current levels if the hopes for accelerating cyclical momentum are dashed.

·         The biggest risk to GREED & fear’s recommended short JGB trade has been a rally in the US Treasury bond market. This is why the best way to play the JGB trade, for those like GREED & fearsceptical about US cyclical momentum, is to hedge the JGB short by being long the 10-year Treasury.

·         The fact that the JGB yields are still so low is not exactly sending a signal to Japanese institutional investors that there is an urgent need to reallocate from bonds to equities. The BoJ will need to allow the yield curve to steepen gradually by incrementally reducing its purchases at the long end, if and when it becomes convinced that its policy is working.

·         The best reason for Japanese institutional investors to raise equity allocations, aside from cheap valuations, is mounting ‘evidence’ of a change in corporate governance in terms of a growing focus on return on equity. It is also encouraging, from a retail investor perspective, that the number of NISA accounts have been growing though it is far from clear if all the accounts have invested in equities.

·         With the military firmly in charge for now in Thailand, public sector investment will be relied upon to drive GDP growth in 2015. Still the key variable for the macro outlook will be whether the private sector is sufficiently confident to increase its own investment. The evidence is initially encouraging in the sense that business confidence has bounced in recent months. Still it would be naïve in the extreme to assume that Thailand’s political issues are behind it.

·         Thailand’s renewed cyclical momentum is far from guaranteed. Reported domestic demand data remains weak as does credit growth. The current account surplus has also been improving sharply, and the baht has remained strong, precisely because domestic demand has been weak.

·         The country in Southeast Asia where the current account has not been improving is Indonesia which remains far too reliant on the export of commodities. It remains critical that President-elect Jokowi implements energy reform given that Indonesia is on course to become a net importer of energy in three years.

·         GREED & fear is hoping Jokowi will address energy reform, just as GREED & fear is also hoping that he will phase out energy subsidies and implement infrastructure programmes. If Jokowi phases out the fuel subsidy over three years as he has advocated, it will provide savings on the budget of more than US$50bn over a three-year period, freeing up funds to be spent on infrastructure.

·         The issue of land procurement, not money, is the key hurdle that needs to be overcome if Indonesia is to address properly its infrastructure problem, with all the resulting benefits in terms of improved logistics and the like. GREED & fear is hopeful given Jokowi’s evident intention to prioritise the infrastructure issue. Still successful execution cannot be taken for granted.

·         What is perhaps most positive about Jokowi is that he is a new face in a country where politics has for too long been dominated by the same old elite but one with a proven track record in local government.

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GREED & fear - 08 November 2013 - Shifting consensus:: CLSA

Greed & Fear - 08 November 2013 - Shifting consensus

·         There is now no real consensus among investors on the state of the American economy. In the first half of this year there was such a consensus with the belief that the economy was finally “normalising”. This is no longer the case with the renewed weakness in housing revealing fundamental fragility.

·         But there is a growing consensus that continuing trend real GDP growth around 2% is likely to lead to continuing balance sheet expansion at the current rate of US$85bn a month under a Yellen run Fed. The consensus is also of the view that continuing QE at this pace is likely to remain bullish for the stock market.

·         While it is natural that indexation should grow in popularity in a trending rising market, it is important to understand that indexing, otherwise known as “passive” investing, makes no fundamental sense for those who believe in free markets.

·         The increasing conviction that quanto easing is continuing is the main reason for fund managers’ reluctance to bet against the stock market. But this is predicated on the assumption that the Fed will be run by the doveish Janet Yellen and that the Fed governors will remain team players. The politics of the Fed has now become more important than usual.

·         A return to contentious voting patterns at the Fed would trigger a lot of investor angst and uncertainty, and would clearly not be bullish. Still GREED & fear’s base case is that Yellen will take charge once formally appointed and seek to ensure a common consistent line based on the “data dependent” view of quanto easing.

·         There appears to be a new wrinkle to the “data dependent” view on quanto easing with a new Fed research paper arguing that the Fed’s unemployment threshold for triggering interest rate hikes would be more effective if lowered from the current 6.5% to “possibly” as low as 5.5%. If this happens, it will be a signal that the Fed is not yet willing to consider the argument that America’s declining labour force participation rate is more structural than cyclical.

·         Janet Yellen’s view that deflationary pressures have been far from vanquished remains GREED & fear’s view, even if GREED & fear’s prescription on how to deal with these deflationary pressures remains the precise opposite of Mrs Yellen’s.

·         The financial markets have been reminded of the global deflationary backdrop over the past week by the sharp fall in Eurozone inflation. The only surprise to GREED & fear about the Eurozone situation is that inflation in the Eurozone had not fallen more already. But sooner or later Flexible Mario will have to respond to the growing deflationary outlook, as seen in the ECB rate cut today.

·         This is a deflationary adjustment in the Eurozone which is more bond friendly than equity friendly so long as investors assume, as they do for now, that the euro will remain in its present form. The latest American complaints about Germany’s rising current account surplus will only make Germany less inclined to take the stimulatory action demanded by the “demand” obsessed neo-Keynesians.

·         The stronger euro is a negative headwind for Germany, while soaring energy costs courtesy of Frau Merkel’s precipitous decision to abandon nuclear energy by 2022 puts German industry at a competitive disadvantage, most particularly relative to America.

·         While Germany continues to resist for now further moves towards debt mutualisation in the Eurozone, the reality is that such debt mutualisation is likely to happen involuntarily, if not voluntarily, in response to future crises and related debt restructurings. That is so long as the political determination remains in Berlin to retain the euro and the Eurozone in its present construct.

·         An attempt by the Yingluck government to get an amnesty bill through the legislature in Thailand has backfired in the sense that it has triggered renewed anti-Thaksin demonstrations over the past week which have seemingly been enough to cause the Yingluck government to back off for now.

·         The amnesty bill strategy seems to be based on a hoped for deal, where Thaksin’s return would be a quid pro quo for Democrat Party leaders like former Prime Minister Abhisit Vejjajiva being let off charges relating to the killing of 91 red-shirt demonstrators in 2010. But it appears that this is not happening as yet, which means that the passage of the economically critical infrastructure bill may also be delayed.

·         The Indian stock market has staged a decent bounce in the past 11 weeks. Part of this rally relates to the end of tapering neurosis but part also relates to growing hopes that BJP prime ministerial candidate Narendra Modi can win the pending general election which has to be held by May next year.

·         The problem for Modi is that it is still six months from the national election. The reality is that his electoral prospects grow the greater the sense of economic crisis and the weaker the rupee. Still there remains no evidence of a turn in the investment cycle, and the current account deficit remains a large 5% of GDP. This is why the recent stock market rally is on fragile ground.

·         Still the Indian stock market will have a dramatic rally if the BPJ candidate can achieve a viable majority. This is because business confidence will rise dramatically, and with it the chances of a new investment cycle.

·         The consolidation continues in the Japanese stock market. Still the latest data on surging construction orders is a signal that an infrastructure cycle is under way. GREED & fear continues to advise investors to stick with the Japanese story with the current consolidation trend representing healthy market action.

-- 

CLSA: Technicals; Nifty and Currency (Rupee)

The Nifty’s technical structure has deteriorated further following the break below 5,500 support. This breakdown ends over 10-months of ranging price action and provides us with a downside target of 4,916, the width of the old trading range project from the old support level at 5,500. Below this measured move next chart support is at the 4,537-4,700 area which includes the 2010 and 2011 lows. On the currency side the Rupee continues to work its way higher following the breakout from the 2012-2013 triangle consolidation pattern. The recent break above the July 2013 highs opens the door for further weakness towards next chart resistance at the 67-68 area.

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CLSA upgrades Cipla to OPF, Tgt 470 from 400

CLSA upgrades Cipla to OPF, Tgt 470Cipla 1QFY14 results were higher than expectations with net sales growth of
20%+ as both exports formulations (28% YoY) and domestic (17%) performed well. Notwithstanding sharp rise in staff costs (29% QoQ), Ebitda margins recovered 390bps QoQ but down YoY due to high margin product in the base. Milestone payment from partner Meda boosted other income resulting in substantial beat to our profit estimates. We have raised our estimates by 3-5% due to operational beat as well as inclusion of Medpro acquisition. With valuations at median level, we upgrade to O-PF. Target Rs 470 from Rs 400

Fitch must be regretting outlook upgrade of India: CLSA

Indian markets have been resilient on the back of global liquidity conditions, so long-term investors may still find the ongoing correction attractive, says Rajeev Malik of CLSA.

The "band-aid" measures taken to address current account deficit (CAD) and  protect the free falling rupee have failed to yield desired result making India vulnerable to ratings downgrade, says Rajeev Malik of CLSA.  Finance minister P Chidambaram's promise on Wednesday to contain fiscal deficit (FD) at 4.8 percent in FY14 appears far-fetched since India's fiscal deficit in the April-June quarter came in at 48.4 percent compared to 37.1% in the previous year. It remains to be seen if the present rate of inflows can add  the USD 80 billion projected by the finance minister.

“The government has to take stern steps to fix the underlying rupee problem. Given macro economic mess we don’t need temporary solutions. Relative to the issues faced, the steps undertaken have been inadequate. Fitch must be regretting its outlook upgrade," he told CNBC-TV18 in an interview.

In June, Fitch had upgraded India's sovereign ratings outlook to "stable" from "negative" citing government measures to contain the budget deficit and the progress made in improving investment and economic growth.

However, he added that Indian markets have been resilient on the back of global liquidity conditions, so long-term investors may still find the ongoing correction attractive.

Meanwhile, CLSA maintains its 2014-end rupee target at 65/USD. Malik believes that rupee’s deprecation may not stop there. The Indian currency has tumbled 9 percent in the last one quarter against the US dollar.

CLSA Greed & Fear - Loose cannons

CLSA Greed & Fear - Loose cannons 18-07-2013

·         Markets will doubtless continue to trade on every comment coming out of Fed governors and on every US data point. GREED & fearcontinues to believe there will be more of a normalisation scare over the American and European summer.

·         The potential for market nervousness has been further increased by press reports last week that former Treasury Secretary Lawrence Summers is lobbying hard to replace Billyboy Ben when his term expires on 31 January. The lack of certainty over who will replace Bernanke has created added uncertainty to increase the already significant neurosis over “tapering off”.

·         Many are arguing that the neurosis over “tapering off” is overdone even if tapering begins. First, the Fed will only be reducing the amount of securities it buys, not liquidating existing holdings. Second, the whole process will be done extremely incrementally.

·         Still in GREED & fear’s view the market reaction to the first hint of tapering highlights the potential for market dislocation from any attempt to exit though the fallout is likely to be much greater in the emerging market debt space than in, say, US equities. The outstanding amount of emerging market debt issuance has grown considerably in recent years.

·         As for the timing of any theoretical rate hike, Bernanke’s testimony before Congress on Wednesday confirmed that the Fed will net out any effect on the employment data stemming from Americans leaving the workforce.

·         If the prospect of “tapering off” and a resulting stronger US dollar represents one continuing threat to Asia and emerging markets, slowing China growth is obviously another. The latest data from China indicates continuing slowing growth if not a collapse with the slowing trend extending to the all-important credit data.

·         The comment by Chinese Finance Minister Lou Jiwei last week that a real GDP growth rate of 6.5% was now acceptable is a sign that the new China leadership is more focused on real restructuring than its predecessor. Still the pressure to ease up from the various vested interests will be immense so GREED & fear will take nothing for granted in terms of a potential move back to stimulus.

·         Pressure to ease in China will grow, via a cut in the reserve requirement ratio, if capital continues to flow out. China certainly has the room to cut the reserve requirement ratio.

·         There is a growing argument for a depreciation of the renminbi given the substantial appreciation of the real effective exchange rate in recent years. A managed depreciation has certainly become a distinct possibility, even if China has not yet reached the stage where it would be prepared to announce a one-off large depreciation of the currency as happened in early 1994, a move which would certainly put pressure on Asean.

·         There is growing noise about the new China leadership moving faster to liberalise the capital account. If this is really the case, andGREED & fear is highly sceptical because of the control-freak instincts of the PRC leadership, then it would be very risky. This is because it is dangerous to deregulate fully and open a capital account when there is a pre-existing problem in a banking system. GREED & fear’s base case is that further opening moves will be very limited. 

-- 

CLSA Greed & Fear - Exit neurosis and getting tough in China

         CLSA Greed & Fear- Exit neurosis and getting tough in China

The past week has seen an escalation of the normalisation scare with the surge in the 10-year US Treasury bond yield. GREED & fear’s guess is that the US yield curve has seen most of its steepening for now.

·         GREED & fear would personally be surprised if Ben Bernanke is not himself surprised, if not alarmed, by the extent of the sell-off prompted by his rather anodyne comments. GREED & fear takes the Fed chairman at his word that policy will remain data dependent.

·         The degree of the market turmoil must be viewed as hard evidence of the scale of the leverage in carry trades taken on as a consequence of the remarkably seductive incentive to put on such a carry trade provided by Bernanke’s “forward guidance”. It is not only US Treasury bond yields that have risen sharply but government bond yields almost everywhere as the “from-risk-on-to-risk-off” trade has once again proved to be highly correlated.

-- 

CLSA HCL tech

Business as usual
Solid confidence on margin performance (ex-currency) was the key
positive takeaway from our interaction with HCL. Company margin
guidance of 18-19% for FY14 at Rs55/$ could well be beaten in our view.
Revenue growth should likely continue the trend seen in recent times –
strong infra services and modest growth elsewhere. Overhang from
immigration bill & a soft overall market sentiment implies stock re-rating
is unlikely but earnings should be good enough to support the stock.

CLSA - ITC

Cash machine
ITC’s FY13 annual report highlights: a) ROE expanding to an all-time high led by an
improvement in new FMCG and agri; b) while increase in working capital
moderated OpCF growth, lower capex helped and FCF rose 26%; c) cigarette prices
in India today are highest relative to income and illegal cigarettes form ~18% of
the market; d) ESOPs granted at ~0.8% of outstanding capital. We continue to rate
ITC as O-PF and revise up our SoTP based target price to Rs370/sh.

M&M : Auto-comp ambitions get a boost :CLSA

M&M has announced a strategic alliance with Spain-based auto-components
firm – CIE Auto. M&M will buy 13.5% stake in CIE Auto while CIE will buy
stakes in M&M's auto-comp subs in a largely cash-neutral deal. The key
rationale is to widen the geographical, customer & product footprint for both
firms given that there are minimal overlaps in these three areas. M&M has
struggled in the auto-comp space for the last 8 years and we believe that this
alliance has the potential of becoming value-generative in the long-term. The
fact that the transaction is largely cash-neutral also gives comfort given the
tough business environment in India and overseas. We await more details in
the concall but view it favourably based on details shared so far. Retain O-PF.

Takeaways from Infosys AGM: CLSA

Annual General Meeting
In his maiden interaction with investors after taking over as Executive
Chairman, Narayana Murthy warned that it could take up to 3 years to
take Infosys to the investor-desired level of performance. He also
admitted that this would require him to change some of his long-held
beliefs about the business (now open to chasing revenue growth at cost
of margins). His speech suggested that keeping employees happy and
improving communication with all stakeholders (Infosys has been poor in
these in last 2 years) are his key near-term target areas. In this
backdrop, money-making in Infosys remains a game of patience. We are
believers in company’s new-found direction and maintain Outperform.

Investment cycle to pick up pace in FY14: Christopher Wood, CLSA in ET

India's investment cycle could pick up steam before the end of the current fiscal just ahead of parliamentary polls, with the government showing resolve in passing key reforms in the energy and power sectors, and the Cabinet Committee on Investment playing a decisive role in clearing projects.

India politics -Game begins :: CLSA

Game begins

The first ever opinion poll for the next general elections predicts a more fragmented verdict, greater share for regional parties  - not a desirable outcome from policy / Government stability perspective. The key deciding factor  as  to  who  will  form  the  next  Government  will  be  a  function  of which  of  NDA or  UPA  will  form  the  right  alliances  with  these  regional parties. If BJP is able to win support of all its pre-2004 allies, it would be a big positive for it. These are still early days and the election would be 6-
12  months  away.  Also  small  swings  in  vote  share  can  cause  a  large impact on the outcome. But in the interim, the risk of Government going slow on fuel / electricity price hikes exists.

CLSA on Banks::: Cracking the code Secrets of annual reports revealed

Cracking the code
For more than six centuries, the world has struggled to decipher the smile of
Leonardo Da Vinci’s Mona Lisa. Thankfully, Indian banks’ annual reports are
not so mysterious. However, it would be naïve to regard them as artless. In
endeavouring to decode the cryptex of 13 such reports, we discover that
banks have reined in exposure to risky segments but asset quality between
public and private lenders is diverging. Further, current and savings accounts
growth has decelerated while the investment cycle slowdown has hurt fee
income. Our top picks are ICICI, Axis and HDFC Bank

Tata Motors- Buying opportunity:: CLSA

Cipla - OUTPERFORM -CLSA

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Near term triggers
We expect Cipla to deliver stronger operating performance over the
coming quarters on back of multiple near term triggers, namely Lexapro
supplies to Teva and weakening currency. Further milestone and royalty
income on recently approved Meda’s (partner) product Dymista will
provide longer term accretion to earnings as the product sales ramp up in
the US. After recent correction in the stock, we find valuations reasonable
and upgrade the stock to O-PF while maintain target of Rs360/ share.
Dymista approval a tad positive for Cipla
US FDA approved Meda’s drug Dymista for Allergic Rhinitis. Being a partner,
Cipla will benefit through product supplies over the longer term. The product
is widely estimated to reach US$300-500m in annual sales over the coming
years. Apart from approval (outside North America) related milestone
payment (US$5m), we expect gradual increase in Cipla’s sales from product
related supplies to Meda. Assuming Cipla supplies product at 10-15% of
sales, it could earn US$50-75m at peak sales.
Rupee weakening likely to aid margins
Cipla is one of strongest beneficiaries of a weakening rupee. We expect
improving margins over the coming quarters on back of a weak rupee and a
low base. We expect strong operating profit growth over coming quarters led
by margin expansion and high margin product supplies.
Lexapro supplies to Teva, a short term boost
Teva launched Lexapro in March 2012 under six months exclusivity. Cipla
benefits from formulation supplies (likely at high margin) during this period.
This will help Cipla reported numbers though should be excluded while
assigning a price to core earnings multiple. Additionally, a low base in
domestic formulations could result in reasonable India growth. AIOCD data on
domestic market suggests improving growth for Cipla.
Reasonable valuations, Upgrade to O-PF
Post 3QFY12 results, Cipla’s share has corrected more than 10%. We believe
margin blip shown in 3Q could correct with multitude of positive triggers like
Lexapro supplies and continued weakness in rupee. While we expect modest
12% growth in sales to Rs18.2bn, we see margins expanding by nearly
500bps YoY (low base) and flat QoQ resulting in 47% Ebitda growth and 36%
PAT growth to Rs2.9bn (assuming higher tax rate). We upgrade the stock to
O-PF on back of multiple triggers and reasonable valuations while maintaining
our target of Rs360/ share based on 19x one year forward earnings.

Reliance Industries: The fifth year and counting… ::CLSA

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The fifth year and counting…
After its recent 15% correction, 2012 is now Reliance’s fifth straight year of
relative under-performance. We foresee some triggers emerging by year-end but
singular variables, such as a gas price hike or the telecom foray, may not be
enough for a sustained re-rating. Reliance needs to create a deep portfolio of
projects to rekindle investor interest. Further, these may need to be in the energy
chain; its ~US$8.5bn non-core portfolio has been a drag on performance. Reliance
has been more reticent here than we had expected clouding its long term outlook.
Reliance has now been under-performing for five years
After its 15% correction since mid-Feb, Reliance’s stock is now under-performing the
Sensex in 2012 – the fifth year in succession. Over this time, FY09-14 earnings have
been cut 18-44%. This is continuing; we recently cut FY12-14 EPS by 2-7% to factor in
lower KG-D6 volumes and SOTP by Rs25/sh to factor in a 30% cut in D1-D3 reserves
to 7tcf. Our current FY13 estimate (~Rs69/sh, similar to consensus) implies a ~30%
rise in EPS over the 4Q run-rate. This is predicated on a weaker currency (Rs53/US$),
a US$1/bbl rebound in GRMs and higher other income but we concede downside risks.
Triggers may emerge by end 2012 but may be short-lived
We expect the EPS momentum to start rebounding when the polyester expansions
begin to come on-stream from early 2013. By this time, we expect the 4G telecom
launch, indications of higher gas prices and more detail on the retail foray to help.
These triggers are likely to short-lived, however, as singular variables may not be
enough for a re-rating. For example, while higher gas prices will renew the E&P thrust,
NAV impact is limited (US$1 = 1.5%) while EPS impact (US$1 = ~3%) will accrue only
from FY15. Similarly, our telecom analyst cautions that infra challenges and lack of a
4G device eco-system may force Reliance to bundle 2G voice implying higher capex.
Reliance needs to build a deep portfolio of projects in the core energy chain
In our view, therefore, Reliance needs to create a portfolio of +15-20 projects like its
global energy peers have, to rekindle investor interest. Historically, sustained project
growth has driven stock performance by driving EPS growth across cycles. This is now
sorely missing; ten year profit Cagr has dipped below 20% for the first time in history.
Reliance can take on another ~US$30bn of projects but has been reticent
Reliance has been more reticent on new projects than we had expected it to be,
though; perhaps because of poor returns from the US$17bn KG-D6, RPET projects and
the +50% fall in US gas prices since the time it acquired its shale gas assets. For
example, gross block will be flat over FY10-15 despite US$12bn outlay on downstream
projects as the olefins, IGCC projects are yet to commence in earnest. Indeed, given
its cash (US$15bn), operating cashflow (US$6-7bn annually) and capital serving
needs, it can easily invest an additional ~US$30bn without stressing its balance sheet.
Non-core investments have been a drag on returns and stock performance
Further, these projects may need to be in the core energy chain. Its ~US$8.5bn noncore
investments (~20% of balance sheet) across multiple verticals have been a drag
shaving off ~3ppt from ROACE; the retail venture, for example, is still incurring losses
even after five years of operation. Nonetheless, with the stock trading at 11x PE and a
25% discount to our NAV and triggers emerging by end-2012, we maintain O-PF.

Tata Motors: Volume surprise continues :CLSA

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Volume surprise continues
JLR’s volumes have continued to surprise on the upside with Feb and Mar
volumes coming in 5-16% above estimates boosted by strong Evoque
demand. Rising proportion of China in volumes, operating leverage benefits
and stable currencies have also improved margin outlook for JLR. In India,
LCV and car volumes have improved in 4Q and profit outlook for India
business is also improving. We upgrade FY13-14 EPS by 16-18% factoring in
higher volumes in both JLR and India and anticipate upgrades by street in
weeks ahead. We upgrade Tata Motors from O-PF to BUY with a TP of Rs370.
JLR’s volumes continue to surprise positively
JLR’s monthly global sales improved further in March with volumes at 36.5K units
rising 51% YoY and 16% above estimates. This is the second month in a row that
volumes have beaten our estimates handsomely. Evoque sales seem to have
stabilized at the 10K level and demand outlook for the vehicle remains robust. The
recent addition of a third shift at the Halewood plant has effectively increased
JLR’s total annual capacity to 390-400K units – enough for FY13 and debottlenecking
measures are being planned to take the capacity further up by
FY14. Industry premium vehicle demand remains strong as evidenced by the
monthly sales of JLR’s peers. More important, China sales of the industry were
also strong over Feb and Mar, which should allay concerns of slowing China
demand. We upgrade FY13/14 JLR volumes by 7% to 391K/422K units.
Improving margin outlook at JLR as well
Operating leverage benefits from higher volumes are fairly meaningful for JLR.
Share of China in volumes has improved from 17% in 3Q to 19% in 4Q and
should improve further in FY13. The principal currencies relevant to JLR’s margins
have been stable from 3Q to 4Q. This has improved our outlook for JLR’s margins
and we now build in 18.6% EBITDA margins over FY13-14 (~17.5% previously).
Rising LCV and car volumes in India
India LCV volumes have improved substantially in 2HFY12 and we expect strong
growth in FY13 backed by higher capacity at the Pantnagar and Dharwad plants.
The launch of a new platform for non-Ace LCVs will also boost volumes in FY13.
India car volumes (incl Nano) have picked up in 2H. However, outlook for trucks
remains subdued with industry growth slowing down to -4% in Mar-12.We
upgrade Tata’s India volumes by 9-10% factoring in higher LCV/car volumes.
Upgrading FY13-14 EPS by 16-18%; upgrade from O-PF to BUY
We now build in JLR’s capex at £2bn per year (£1.5bn before). Our estimates are
12-14% above consensus and we anticipate EPS upgrades by the street in coming
weeks. A strong response to the new Range Rover platform that will be launched
by end-CY12 could drive further upgrades to FY14 EPS. Upgrade to BUY.

Rupee woes: end-2012 forecast of INR55:USD. ::CLSA

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Rupee woes
INR remains one of the riskiest currencies. India’s large and widening
current account (CA) deficit and its dependence on volatile capital inflows
make it vulnerable to becoming a casualty of swings in global risk appetite
and crude oil prices. INR’s recovery in January was due partly to RBI’s
aggressive currency intervention, although global risk-on, RBI’s antispeculative
measures and deregulation of NRI deposit rates also
helped. However, INR has been weakening against USD since early
February, despite a surge in portfolio inflows into India (1Q12: around
USD13.5bn). Global risk-on will likely boost volatile capital inflows unless
domestic factors, such politics and policy coordination, are turn-offs. But
capital inflows may not be adequate to eliminate concerns about smooth
financing of the CA deficit. On our forecast, the CA deficit of 3.9% of GDP
in FY13 is beyond the RBI’s comfort level. This, along with our
expectations of a stronger dollar, sets the stage for INR to weaken. We
maintain our end-2012 forecast of INR55:USD.