Midcaps - 2014 Value Buys: ENIL, Navneet, TTK Prestige:: ELARA

Value buys
Entertainment Network India – steady revenue growth
Entertainment Network India has continued on its robust growth path
despite a weak ad market through innovation and improved offerings.
We expect the company to report 11% revenue growth, driven by
higher volume. EBITDA margin is expected at a healthy 35%, about
50bp higher YoY, on account of operating leverage. With limited free
capacity, we expect it to drop low-yield clients and improve ad rates.
TRAI’s upcoming recommendation on license renewal and phase III
hold key to growth opportunity.
Navneet Publication – shift of gov orders to Q4 to impact sales
Navneet Publication should face pressure on top line in Q3FY14, due
to the absence of INR 20mn in government orders awarded in
Q2FY14. However, the company has received clearance from the
government, and orders should be received in Q4FY14, thus
compensating for flat growth expected in Q3FY14. If we were to
exclude government orders, revenue would grow at 15%. Increased
competition in the stationery segment should lower revenue and
impact EBITDA significantly, leading to a sharp fall in EBITDA of 62%
YoY. However, this should be offset in Q4FY14. Management is
confident of 15% growth over the next 2-3 years, owing to the
syllabus change schedule until FY16. We believe the stock is valued
attractively based on 9.7x FY15E earnings, given its asset-light balance
sheet, consistent FCF, robust 25%-plus return ratios and no macro risk.
TTK Prestige – macro concerns, given lack of growth drivers
TTK is battling several issues like power shortages in Tamil Nadu,
geopolitical concerns in Andhra Pradesh, and the government’s policy
to increase cap of subsidized LPG cylinders to 9 from 6, affecting
revenue. We expect top line to decline by 6.5%, with about 100bp
margin contraction, leading to a 22% YoY drop in PAT. With limited
signs of new product categories launches, the company should face
growth issues over the next 2-3 years. The stock is trading at 29x
FY15E earnings despite deteriorating financials.

India Confronts the Impossible Trinity: Elara

Caught on the wrong side
Indian policymaking is struggling in the maze of
impossible trinity. The choice between pegged
exchange rate and an independent monetary
policy becomes important since the Indian
business cycles may not be fully aligned with that
of the US. Now that US yields have firmed up,
either INR can remain a float or pegged to the
USD, the later involving monetary tightening and a
loss of monetary independence. Central banking in
India is inclined towards the later for now while
keeping doors for former wide open. Clearly, the
choice to pursue the middle path may be
distortionary and would inherently include very
short-term patchwork policymaking.
CAD funding: the 21bn dollar question
Looming BoP crisis for India stems from the fact
that capital account, for all optimistic assumptions
may fail to fund the deficit of USDbn88.9 in FY14E.
Assuming more-than-expected long term flows in
(FDI+ Loans + NRI deposits); our estimates show
that there is excessive reliance on "hot money"
flows of around USDbn21 over FY14E. As the US
yields rise and narrow the gap between India and
US paper, the possibility of outflows in debt (early
indication seen in last three months) may be a
prolonged reality. Equity inflows, meanwhile could
suffer a vicious cycle of weakening INR and a
worsening outlook on overall business cycle.
Flows
ETF flow direction has seen an increased
concentration towards US, Japan and European
markets as investors look to avoid the volatility of
Emerging Markets and commodities in the short
term. Recent FII net outflows have significantly
countered the strong YTD start and is now
pushing Indian bourses into a delayed sell off as
hiding places become exposed.
Investment Strategy
The Model Portfolio has seen an outperformance
of 200 bps in the last 3 months. Our contrarian
picks have been working well for us. The structural
construct has remained unchanged and our
preferred investment categories are Oil & Gas,
Automobiles, Power and Consumption. Our
underweights in banks continue and we expect
the benchmark index to see another 10-15%
correction. We would like to highlight that under
recovery theme might reverse with the INR looking
to hold its levels in the current quarter. Notably, as
is the market we have only OWs and UWs and no
Neutral positions.

Reliance Power: On a steady track:: Elara Capital

On a steady track
Operational efficiency at ROSA boosts revenues
The 1200 MW ROSA operated at an availability of 103% and a PLF of
~91% but on the back of higher tariffs (~ INR 5.6/unit) due to
escalated coal costs. Being a cost plus model, this acted as a blessing in
disguise and aided the 220% increase in operating revenue YoY. The
receivable position at ROSA seems to be under control with less than 2
months of outstanding.
Butibori continues its previous quarter run rate
Though the 2nd phase of 300MW has just been synchronized and the
1st 300MW already commissioned and in spite of no coal supply from
WCL, Butibori plant seems to continue with its power „trading‟
arrangement under the already signed PPA. The plant reported ~INR
320mn of profits this quarter as well. It is expected to start generation
from April 1, 2013, while the short term sales to Reliance Infra would
continue till April 2014. The company has already filed a petition with
MERC to convert the plant in to a „cost-plus‟ basis which would
mitigate the fuel risk.
Increased visibility: Chhatrasal stage 1 clearance and SASAN
expansion
The 5MTPA chhatrasal mine has received stage 1 forest clearance and
the management expects stage 2 clearance to come by in the next 8
months. This has increased the visibility of Chitrangi plant. With
regards to the TATA Power case pending at the Supreme Court, we
learn that the date for the 1st hearing has not been scheduled yet.
Added to this, the 1st 660MW unit at SASAN is expected to get
synchronized in next few days. The coal mining operations for the
same has been stabilized.
Valuations
With all approvals in place for the 3 mines at Indonesia and land
acquisition in progress for ID-2, we are comfortable assigning an INR
10/share value to the entity. We maintain our target price at INR
110/share and re-iterate our positive stance on the scrip with an
„Accumulate‟ rating.

Govt hikes diesel price by INR 5; caps LPG cylinders at 6/year: Elara

On a day of taking tough decisions, the
Government took the most difficult of all:
Raise diesel prices by Rs 5 a litre
(excluding VAT). The late-evening move
also capped the number of subsidised
LPG cylinder a household can get at six
per year. Earlier in the day, the
Government de-allocated four coal
blocks. Diesel will now cost
approximately INR 47 a litre in Delhi. The
price revision comes after more than a
year. However, PDS kerosene was left
untouched. While not tampering with
the retail price of petrol, the Government
decided to reduce the excise duty on the
fuel by INR 5.30 a litre from INR 14.35
(plus education cess of 3 per cent making
it 14.78 per cent). But this benefit is not
being passed on to the consumer. An
official statement said the Cabinet
Committee on Political Affairs’s (CCPA)
decision would be implemented with
effect from midnight of September 13/14.
The revised diesel price in Delhi will be
approximately INR 47 a litre.

Lupin’s surprising rise in Quetiapine:: Elara

We notice Lupin’s surprising rise in prescription (Rx) share in August
2012 in Quetiapine (Seroquel) after staying moderate at 8-10% market
share. The drug went off-patent in March 2012 and Lupin received
approval on day-one of generic competition along with other para-IV
challengers. We believe that Lupin’s growth to 35,208 Rx in August
2012 from average 8,063 Rx in April-July 2012 need an insight in the
cause, while other competitors remains at similar number of Rx in
August 2012. Though management explains the rise is normal
business progression, we believe the reason could be aggressive price
cut/special incentive to attract distributors’ in Seroquel. The growth
could also be a result of falling supply in market from leading
competitors. At innovator price, the Alzheimer drug’s market value
was USD4.5bn in US before being generic.

India Strategy - “Accumulate” India- 2012: Year of turning points:: Elara Securities

“Accumulate” India
[Elara Rating Guide: “Accumulate” indicates positive bias in
fundamentals with a five to 15% upside]
2012: Year of turning points
It was on January 10, 2008 that the Indian market hit its all-time high.
Today, 4 ½ years hence and potentially the longest bear market, we
see reason to turn mildly bullish on Indian equities. The cliché - ‘Wall of
Worries’ will get conquered this year and 2012 might well be the year
where the economic variables of the nation will see the maximum
turning points in Peak inflation, Interest rates, Fiscal deficit, Current
account deficit and the lows of GDP, IIP and INR, all of which will likely
turn favorable in 2013.

PSU Banks: Time to use a finer brush : Elara capital

Chennai Petroleum: Poor fare; but bottom closer ::Elara

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Poor fare; but bottom closer
Forex losses continue to hit hard
CPCL reported another poor quarter with in-line revenue of INR111bn
but forex losses hitting the EBITDA and bottom-line. The Q3FY12
EBITDA came in at INR619mn, significantly below Street estimates of
INR1.5-2.0bn, while CPCL reported a net loss of INR634mn. The
company reported GRMs of USD3.36/bbl, below our estimate of
USD4.3/bbl. The Q3FY12 throughput was also affected marginally due
to the cyclone hitting the east coast leading to a standstill in crude
supply around Dec’11-end.
Key takeaways from concall: GRMs break-up and refinery plans
􀂃 The inventory gain for Q3FY12 was INR1.48bn (USD1.48/bbl),
while the exchange related losses net of crude (INR2.23bn) and
product gains (INR0.20bn) were INR2.03bn (USD2.04/bbl). With
the reported GRMs of USD3.36/bbl, our analysis suggests that the
operational margin was ~USD3.9/bbl. We expect better Q4FY12
GRMs, as well as FY13 due to recovery in spreads of light products.
􀂃 CPCL achieved ~70% of distillate yield in Q3FY12 (22% light and
47.9% middle distillates) while the fuel and loss was higher 9.8%
due to additional fuel consumption for secondary units. Post the
residue upgradation project in FY13, CPCL expects the distillate
yield to reach 85-90%. Also, CPCL would be taking a 2-month
shutdown in Jun/Jul 2012, post which another 0.6MMT of
capacity will be blended in through debottlenecking.
􀂃 Capex for FY12 so far stands at INR3.2bn, and it should be INR5bn
for FY12 and around INR8bn for FY13.
Still some pain left, but bottom getting closer; Upgrade to Reduce
We upgrade CPCL to Reduce from Sell as we see the stock bottoming
out after declining 14% and under-performing the Sensex by 23%
since our downgrade in Oct’11. We see operational concerns hurting
earnings for another 2-3 quarters, which should keep CPCL under
pressure. In the near term, we would turn positive only if CPCL corrects
another 10-12% from the current levels. CPCL trades at 6x EV/EBITDA
on FY14 estimates, a slightly rich multiple for a simple refiner. We value
CPCL at 5.5x EV/EBITDA, revising our TP to INR160/sh.

Cairn India: Operationally in-line, triggers in store :: Elara

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Operationally in-line, triggers in store
Operational results in-line with estimates
Cairn reported its Q3FY12 results with EBITDA of INR23.69bn vs our
est. of INR23.45bn. The company reported a 17% QoQ revenue
growth largely driven by the rupee depreciation. The Mangala field
continued to average 125kbpd in Q3FY12 as well, while the Rajasthan
crude oil realizations stood at USD100.3/bbl, about 8.3% discount to
Brent. The crude pricing showed lower discount to Brent due to the
light-heavy crude spreads contracting this quarter. Cairn’s net profit
came in higher than estimate at INR22.6bn vs our est. of INR19.4bn,
mainly due to the higher forex gains and low effective tax rate of 5%.
Going forward, Cairn has maintained an tax rate guidance of 5-9% in
FY13/14. Additionally, Cairn’s management also guided towards a
gross capex guidance of USD1bn-USD1.25bn for FY13, which should
cover the majority of the investment entailed for pipeline capacity
addition and output enhancement to 240kbpd during CY13/14.
Mangala approval a matter of time, FY12 exit rate at 175kbpd
With the recent Bhagyam field start, the output is expected to be
150kbod by Feb-end. With Cairn guiding towards 175kbpd exit rate
for FY12, we believe that the approval for Mangala field ramp-up from
125kbpd to 150kbpd is near. For FY13, the Aishwarya field start is also
expected in H2CY12; but with the pipeline capacity restricted to
175kbpd, the production from all these three fields may be rationed.
Approvals, field starts to provide newsflow triggers; Accumulate
With the favorable macro variables of robust oil prices and weak
rupee, Cairn has outperformed the Sensex by 20% during the last two
quarters. Though we expect some profit booking due to this in the
near term, we back Cairn to remain strong as a result of positive
newsflow triggers through approvals and field starts. We see the
current levels as attractive for long-only investors as significant
exploration upside can get unlocked during the next two years.
Currently, Cairn factors in USD100/bbl of long-term oil prices, and we
remain buyers of the stock on dips. Accumulate, TP: INR370/sh.

Paints :: Q3FY12 Preview: Elara Capital

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Decisive quarter for volumes
Volumes likely to hold steady at ~11-12%
Post a weak Q2, due to shifting of volumes on account of extended
monsoons, we expect volume off-take to hold steady at ~11-12% YoY,
partially hit by high base (last year too sales had shifted to Q3). Despite
overall macro-slowdown, volumes have held up for paint companies,
though we expect moderation in FY13E and await cues from current
quarter. Value growth will continue to remain strong at ~10% YoY
driven by sustained price hikes (~10-11% price hikes in FY12YTD, most
recent hike of ~2% taken in Dec, 2011). We expect Asian Paints to post
a revenue growth of ~23% YoY in the domestic business while Kansai
will post the weakest growth of ~18% YoY due to weak growth in
auto particularly passenger vehicles.
Expect sequential dip in gross margins due to currency movement
Due to adverse currency movement (~10% rupee depreciation), we
expect gross margins to contract ~50bps QoQ (~30% of inputs are
imported). However, we highlight, raw material prices, particularly
crude oil (~30-40% of inputs are crude derivatives) and Tio2 (~20% of
total input costs) have started stabilising. Our Paint RM Index indicates
a QoQ inflation of ~2% (excluding rupee impact) down from ~7-8%
QoQ inflation in Q1FY12/Q2FY12. Further, ~10-11% price hikes YTD in
FY2012 coupled with favourable base in H2FY12E should curtail gross
margin contraction to ~50-100bps in H2FY12E.
Maintain Reduce on Asian Paints and re-iterate Berger as top pick
We wait Q3 quarter for cues/commentary on volume growth and
impact of currency movement and inventory management on gross
margins before taking cuts in our estimates. We maintain Reduce on
Asian Paints due to rich valuation and lack of any near term catalysts,
while we re-iterate Berger Paints as our top pick owing to its superior
margin management, market share gains driving steady volume
growth, potential incremental gains in margins likely to play out with
product mix enrichment (higher contribution from premium
emulsions) and attractive valuations

Midcaps:: Q3FY12 Preview: Elara Capital

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Earnings risk mitigated
Navneet Publications– low earnings beta
The current macro risk, pose limited risk to Navneet with 60% revenues
derived from school publications. We expect topline and bottomline to
grow at CAGR of 18% and 25% respectively over FY11-13E, on the
back of curriculum changes in Maharashtra and Gujaratstate boards.
Further new initiatives like e-learning, school management business
and diversification in other states are gaining traction. Q3FY12 is
seasonally an insignificant quarter; in FY12E it contributed only 14% of
revenues. We expect topline and bottomline to grow at 16% and 15%
respectively. At 11x one year forward earnings, it looks attractive,
considering a healthy ROC of 25%, high competitive barriers and
limited revenue risk.
TTK Prestige – No sharp slowdown
There is anticipation of sharp deceleration of growth in consumer
durables space, butour channel checks with sales heads and company
management indicate brown goods have witnessed minimal impact.
We expect Q3FY12 sales to remain steady with 34% growth on YoY.
However, sharp currency movement will impact Chinese imported raw
material cost. Also the newly commenced capacities will inflate fixed
cost. In Q3FY11,TTK achieved peak EBITDA margins of 17.9%, thus on
YoY, we expect margins to dip 180bps, leading to PAT growth of 19%.
Growth of below 20% may correct stock price 10%-15%, which should
be a good level to accumulate with long term target of INR3,320.
Techno Electric and Engineering – Derisking business
Techno’s relatively healthy order book of 1.5x sales vis-à-vis peers and
diversification in wind business will stand in good stead in the current
environment. While EPC is no longer the flavour of the market,
Techno’s wind business has gained traction. The newly commenced
100MWcapacity and REC offtake at robust prices on the exchange are
positives. Over Q3FY12, the EPC is expected to report 13% revenue
growth while wind business revenue should grow at 50% considering
corporate revenues in Q1FY11.

Hospitality :: Q3FY12 Preview: Elara Capital

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Season begins on a positive note
FY12 season begins with 9.6% growth in foreign tourist arrivals
Foreign tourist arrivals in Oct-Dec ‘11 were strong, up by 9.6% to
1.9mn. Although the hospitality business is very sensitive to the overall
economic well being, the sector sees strong demand coming from
overall buoyant tourist arrivals, up 10% for the year to 6.1mn. INR
depreciation of 11.6% in Q3FY12 has been another positive with India
emerging as more affordable. During the quarter the average
occupancy rate (OR) in six major destinations (Mumbai, Delhi, Kolkata,
Chennai, Bengaluru and Goa) remained flattish at 70% YoY while the
average room rates (ARRs) dropped 9%YoY to INR9100. Consequently,
the average RevPAR (revenue per adjusted room) for premium
segment hotels was down by 8% to INR6400. We expect Q4FY12 to
ring in better occupancies and thereby improvement in ARRs. The
hospitality sector has slowly but surely recovered in FY12, although
the global economic sentiment would determine the speed of
recovery going forward.
Coverage universe to report 13.8% sales growth in Q3FY12
We expect our hospitality universe to register sales growth of ~13.8%
YoY in Q3FY12, driven by improved ARR and OR. Both Indian Hotels
and EIH are expected to benefit from the robust demand by reporting
topline growth of 13% and 15% respectively. We expect EBIDTA
margins of our coverage spectrum to expand marginally by ~2bps YoY
to 31.7% in Q3FY12.
Valuations compelling for IHCL
We expect the hospitality sector to maintain the demand momentum
with an improvement in global macros. The ARR and OR are expected
to retain their expansion in H2FY12. The focus in FY12 and H1FY13
would clearly be on new properties be it Pierre for IHCL and Trident
BKC, Oberoi Mumbai for EIH. We are positive on the sector, as it
revives with strong macro support, and maintain IHCL as our top pick

Infrastructure :: Q3FY12 Preview: Elara Capital

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Base effect respite
Earnings to remain weak despite a seasonally strong quarter
Construction and infrastructure stocks are expected to persist with
their poor performance amidst a still challenging macro environment.
Despite being a strong quarter seasonally, earnings are expected to
nosedive YoY as a majority of companies remain trapped in the vicious
cycle of higher working capital needs higher borrowings higher
interest outgo low profitability, poor return ratios, stretched balance
sheets decline in overall industry attractiveness.
Amidst our coverage universe, revenues are set to register a moderate
growth of 16.9% QoQ and 13.8% YoY, led primarily by the base effect.
While on the operating front, we estimate 5.1%/9.7% QoQ/YoY rise in
EBIDTA for our universe (OPMs (168bps)/(56bps) QoQ/YoY); on the
earnings front, rising interest costs and quantum of borrowings are
expected to take a heavy toll on the anticipated performance. We
estimate a depressing 24.8% YoY de-growth in earnings for the
quarter; earnings growth however, is expected to be 8.1% QoQ.
Headwinds to persist till Sep’12, pick up in order flows decisive
The infrastructure sector continues to reel under severe strain given
inconsistent order flows from the public sector coupled with gradual
but continuously declining inflows from the private sector. This
coupled with the usual lacunas in basic policy framework relating to
the PPP format has dented the developer/investor confidence severely.
We re-iterate our sectoral stance that even if the broader operating
environment commences easing up, core construction companies may
take at least a year to repair their balance sheets and come out of the
existing slump. Our Distress Case scenario indicates further possible
downsides (assuming continuation of existing operating and financing
challenges till Mar’13) besides identifying potential investment
opportunities. We continue to back structurally strong road
infrastructure plays in Sadbhav, ITNL and IRB Infra and recommend
adding long positions on dips.

Media:: Q3FY12 Preview: Elara Capital

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Limited surprises
Only Zee Entertainment to post earnings growth
We see limited revenue growth momentum in Q3FY12E for
broadcasters, notwithstanding the recently concluded festival season,
as ad growth pick-up post festival season remains weak, even as
subscription growth pick-up waits to happen post first phase of
digitization (June, 30th). However, base effect is expected to help Zee
Entertainment positively, as earnings in Q3FY11E were highly
depressed on sports business losses. On the other hand, Sun TV
Network will be impacted adversely by the base effect as it released its
successful movie ‘Endhiran’ in the same quarter last year. TV18
Broadcast is expected to post minor loss due to launch of new
channels during the quarter, even as ad growth may pick-up
sequentially.
Another painful quarter for print media
Though print players would see low double digit ad revenue growth
for the quarter, elevated newsprint prices on steep rupee depreciation
are expected to offset any operating leverage. All print players except
HMVL are expected to post moderate to negative earnings growth.
We expect HMVL to post another quarter of robust earnings growth
on low base and HT media to post a steep fall in earnings on a high
base. Further investment in circulation would be a key observable
event post results.
Valuation
While most media stocks are trading at attractive valuations, Q3FY12E
results are expected to provide limited triggers to stock prices, as
modest ad revenue growth trend is now expected to spread into
FY13E as well. We continue to like players with high exposure to
distribution revenues and strong presence in the value chain, as we
expect subscription revenues in the pay TV space to pick up from
Q1FY13E onwards, even as ad revenue growth remains doubtful.
Trend in newsprint prices would be another trigger for print stocks.

Cement :: Q3FY12 Preview: Elara Capital

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Higher prices to cement earnings
Favourable margin scenario to drive earnings
We expect most cement players to report QoQ and YoY improvement
in profits from an increase in cement prices, higher volume and
positive impact of operating leverage. Improvement in profitability is
expected to be much higher for players having presence in northern
region (viz Shree Cement) and Gujarat (viz: JK Lakshmi) due to
significant increase in cement prices and strong demand in these
regions. Players in the South (viz: Orient Paper & India Cement) are
likely to report modest improvement in earnings due to weak demand
and stable prices.
Q3 volume likely to be up by ~10% YoY
In Q3FY12, cement industry is expected to report growth in volumes
of 10% YoY. Even on sequential basis cement volumes are likely to
grow by ~9%. Improvement in demand is also attributed to high
spending by the state government (such as UP and Gujarat) prior to
election and strong rural demand.
Cement prices up ~13.1% YoY
All India average cement prices are expected to improve 13.1% YoY
due to series of price hikes taken by cement players during Oct-
Nov’11. On QoQ basis we expect cement realisations to improve by
~9% from sharp increase in prices in northern, eastern and central
regions.
Cost like to show mix trend
We expect players dependent on petcoke (viz Shree Cement, JK
Cement, JK Lakshmi) to report decline in power& fuel cost due to
softening in petcoke prices on account of slowdown in Europe.
However, players dependent on domestic coal are likely to report
increase in power& fuel cost due to lower availability of linkage coal
and increase in e-auction prices.
Net profit to surge
Increase in revenue and margins of our coverage universe is expected
to translate into ~64.5% QoQ and 44.4% YoY growth in profits.

Pharmaceuticals :: Q3FY12 Preview: Elara Capital

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Mixed bag
Domestic slowdown and US launches to play out in topline
We expect 14% YoY growth and 3% QoQ growth in our coverage
universe in Q3FY12. The growth in the sector to have major
contributions from higher USD conversion value, launches in US and
expansion in semi-regulated market. The benefits from USD
appreciation would be partially mitigated by declining currencies of
emerging market exports, significant import of raw materials and
slowdown in India formulations. We however expect improvement in
domestic sales for Dr Reddys’ Lab, Glenmark, and Cipla in Q3FY12. The
growth in operating margin however, has to cope with higher
increase in key costs items. The lag effect of higher raw material prices,
rising employee costs with sticky inflation, and increasing forex debt
with higher interest costs would increase operating and financial
leverage in the sector. Ranbaxy and Lupin would benefit from para-IV
launches and inorganic growth.
EBITDA to be maintained sequentially, forex to play spoilsport
With high inflation rate and crude prices, we expect 15% YoY growth
and 5% QoQ decline in EBITDA in Q3FY12. Ranbaxy, Sun Pharma,
Cipla, and Dr Reddy’s Lab are major contributors of sector EBITDA. Sun
Pharma’s robust contribution is attributed to Taro’s growth in US while
others are expected to grow from para-IV launches in US.
Valuation remains high in comparison with core EPS
We are underweight on the sector as core-EPS valuations remain high
despite price correction. With aggravation of macro fundamentals in
India, we expect PEx compression for the sector, though it would
maintain premium valuation vis-à-vis other sectors due to inherent
defensive nature. The majority of large-cap companies have faced
stagnation in price appreciation over the last six months. We observe
that majority companies in our coverage have moderate price
correction except Ranbaxy and Cipla as expected. While risk-return
matrix remains unfavourable for overall sector, we believe that CRAMS
companies, of which Jubilant is in the forefront, have an edge in
valuations.

FMCG:: Q3FY12 Preview: Elara Capital

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Growth not under question
Coverage universe expected to report 18% topline growth
We expect our FMCG universe to register robust topline growth of
~18% YoY in Q3FY12, driven by healthy volumes and price hikes. In
our large cap coverage, companies like Hindustan Unilever, ITC and
Nestle are expected to post YoY sales growth of 16.2%, 17.6%, and
20.6% respectively; while mid-caps should see Dabur (25%) and
Marico (24%) in the vanguard. Godrej Consumer would likely post
31% growth on the back of the Darling group acquisition.
Price hikes, benign raw material spur margins
Price hikes, benign raw materials (baring few like palm oil and Mentha
oil) are expected to boost margins on YoY basis to most players in
Q3FY12. We expect our coverage universe EBITDA margin to expand
by 119bps YoY to 15.5% (excluding ITC) in Q3FY12. The biggest
contributors to EBITDA margin expansion are expected to be HUL
(153bps), Nestle (136bps) and Colgate (479bps) on lower ad spend vs
Sensitive launch related high expenses in Q3FY11). Average palm oil
price, used for soaps, was up by 1.3% over the past three months and
is on a firm footing with continuing rupee depreciation. Higher palm
oil price could impact HUL’s and GCPL’s margins in Q4FY12; however
judicious price hikes and stable LAB (Linear Alkyle Benzene) prices
(used for detergent) is expected to arrest margin contraction. Copra
(coconut oil), cocoa (chocolate), high-density polyethylene (HDPE) and
coffee have declined by 10%, 18.4%, 4% and ~10.4% respectively over
the past three months. Marico, Nestle, and Tata Global Beverage are
expected to gain from the correction going ahead.
Net profit surges by 21%; top picks–HUL, Nestle, Marico & Dabur
Net profit for our coverage universe is expected to grow by 21.4% YoY
in Q3FY12. The rupee depreciation of 11.6% QoQ could impact
earnings of GCPL by 14.4% due to MTM loss of INR 261.5mn arising on
US$50mn inter-company loans in overseas subsidiaries. After recent
price correction, we find comfort in valuations and earnings growth
prospects of HUL, Nestle, ITC, Marico and Dabur.

Metals :: Q3FY12 Preview: Elara Capital

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Riding uncertain tides
Rupee depreciation to offset metal price declines
The third quarter of the FY12 was characterised by the depreciation of
rupee and decline in the prices of the base metals on the LME. The
base metal prices declined 12% to 18% QoQ as the global economic
uncertainty continued. However, the depreciation in the rupee (11.4%
QoQ) partially offset the declines in the base metal prices. We believe,
the performance for non ferrous players will be more or less flattish
during Q3FY12 while the same will show a decline YoY due to lower
end metal prices. On the ferrous side, we expect integrated players to
post strong performance due to firm steel prices. JSW Steel is likely to
post sequential EBITDA growth on the back of higher production as
well as better raw material security.
Volumes not expected to provide positive surprise
The domestic economy hasn’t been robust in the recent past. The
same has plagued the capacity utilizations in the country and the
ferrous players have been facing the lower capacity utilizations.
However, the steel consumption has posted an increase in the third
quarter of FY12 but still is lower than the previous growth rates, which
equaled or surpassed GDP growth.
On the non ferrous side, we believe, the quarter will not bring any
huge positive or negative surprises. The realizations although suffered
on the LME, the Indian companies should thank rupee depreciation for
offsetting the same to an extent.
Things to watch out for going ahead
We believe, the metal sector companies will witness continued margin
pressure going ahead as well. The lack of full capacity utilizations for
the ferrous companies and steeper energy costs for the non ferrous
companies will act as a dampener for profits in the coming years. We
prefer companies with completed projects and operational mining
assets in the non ferrous space (Hindustan Zinc), while we continue to
be cautious on the ferrous space.

Two wheeler industry :: Q3FY12 Preview: Elara Capital

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Margin twist
Hero Motocorp - margin expansion story continues to unfold
The gross margin expansion story that started in Q2FY12 for the
company is expected to continue in Q3FY12E, as we expect stable
realisations and raw material costs adding 132bps to gross margin. We
further note that a sequential weakness in raw material prices (though
quite visible in dollar terms, but gets negated by rupee depreciation),
as witnessed in Q2FY12 may add to margin surprise. The company
may also surprise on lower than expected spend on advertisement
and brand building costs, although it would again have to take MTM
hit of ~300-350mn on royalty payments, due to 11.6% QoQ
depreciation in rupee.
Bajaj Auto – margin surprise in store
Similar to Q2FY12, when it surprised on its EBITDA margin on the
upside, due to 3.4% uptick in exports realisation on rupee
depreciation, Bajaj Auto is expected to repeat the trend in Q3FY12E, if
not better its last reported margins. We expect exports realisation to
move up by 8% QoQ, and domestic realisation by 2.5% due to better
product mix, leading to a 150bps improvement in EBITDA margins
sequentially and a YoY earnings growth of 26%.
TVS Motor – high operating leverage turns a foe
With only 1% YoY improvement in volumes, TVS Motor is in for a rude
shock as high operating leverage takes toll on margins. We expect
15% correction in earnings and contraction of 90bps in operating
margins.
Valuation and recommendations
We continue to remain positive on Hero Motocorp given comfort over
volume growth and strong possibility of margin expansion, while we
remain negative on Bajaj Auto over lack of comfort over FY13E volume
growth and possibility of high FY13E effective tax rate eroding
earnings growth. We turn cautious on TVS Motor, despite cheap
valuations, as volume growth appears iffy post weak Q3FY12 volume
growth trend.

Oil & Gas :: Q3FY12 Preview: Elara Capital

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Pains continues for PSUs, RIL; Cairn gains
Weak INR, rising under-recoveries to hit Oil PSUs yet again
The weakening INR has meant a sharp rise in under-recoveries,
leading to the OMCs staring at Q3FY12 under-recoveries of
~INR350bn. Post the price hikes and duty cuts in Jul’11, the annual
under-recoveries were estimated to be ~INR1.2trn; however the weak
INR has single-handedly lifted this estimated figure to INR1.4trn. The
Government has announced INR150bn support for OMCs in Q3FY12
(INR300bn for FY12 so far), while upstream companies look certain at
take a much bigger burden than in H1FY12. The upstream PSUs would
have shared ~INR600bn (pre- duty cuts in Jul’11), and we believe that
these companies would now eventually end-up sharing this burden by
FY12-end anyways, implying a 42% share. This also means that ONGC
and OIL will bear 55% share in H2FY12; however whether it is evenly
divided in Q3/Q4 remains to be seen. Assuming the Government’s
usual pattern for Q4 adjustments, we have assumed 33% sharing for
upstream companies in Q3FY12 giving USD62/bbl and INR70/bbl net
realizations for ONGC and OIL respectively.
Weak for RIL, strong for Cairn
We expect a weak quarter for RIL driven mainly through soft GRMs of
~USD7.5/bbl and lower KGD6 gas volumes at ~42mmscmd. We also
expect weakness in petchem spreads despite better product prices due
to INR depreciation. However, we expect a sharp rise in other income
due to the cash influx of the BP deal and estimate RIL to report an
EBITDA of ~INR82bn and net profit of INR48.7bn. Cairn India on the
other hand, as the sole sector beneficiary of the INR depreciation,
should report strong Q3FY12 numbers due to higher realizations. We
also expect Cairn to come out with some positive announcements on
field ramp-up/start approvals post the results in the coming months.
Maintain Cairn India as our top pick, maintain Reduce on RIL.