Poor monsoon impairs Agri-input’s outlook ::Espirito Santo

Poor monsoon impairs Agri-input’s outlook
The progress of the monsoon has been pretty weak to date, with
overall rainfall deficient to the tune of 22%, triggering us to do a sense
check on agri-input demand. Our channel checks suggest that demand
has indeed been seriously impacted by a weak monsoon, late sowing,
changing crop patterns, on top of the 25-30% hike in complex fertilizer
prices and 8-10% hike in Agrochem prices. We maintain our cautious
near-term stance on the sector and expect volume growth to be
sluggish if the monsoon continues to be deficient. Agri-inputs is a
structural growth theme, and we’re likely to see good entry points
coming up in the face of short-term demand weakness.

JSW Steel -Better days ahead ::Espirito Santo,

JSW Steel
Better days ahead
Our on the ground and industry checks indicate swift progress on
approvals for category A/B leases with final go-ahead for the mines
expected, once the Forest bench at the Supreme Court of India
resumes court hearings, from the second week of July onwards. We
think JSW Steel is poised to enter a sweet spot with low raw material
costs and higher volume growth, once category A/B iron ore mines in
Karnataka are opened. The shift from the current e-auction pricing
mechanism towards leaseholder determined base/floor prices should
result in falling fines’ prices. Interestingly, with the impending MMDR
bill, we think JSWS is well insulated on earnings impact, given its nonintegrated
nature. Factoring in concerns over ongoing CBI
investigations, we value JSWS at a 15% discount to its historical
average EV/EBITDA and have a FV of Rs755/share. JSWS now trades
at a 26% discount (4.9x FY13E EV/EBITDA) to its historical 5-year
average EV/EBITDA and we see value in the stock. Reiterate BUY.

Mundra Port & SEZ To reap benefits of cargo shift --Espirito Santo,

Mundra Port & SEZ
To reap benefits of cargo shift
Adani Port & SEZ (ADSEZ) is our silver bullet idea in the infrastructure
space. Tariff reduction at the major ports and infrastructure
bottlenecks at JNPT are likely to aggravate congestion at JNPT,
driving additional volumes at Mundra Port. We expect ADSEZ’s
superior growth profile to continue (FY13 volume growth at 35% yoy),
based on capacity expansion by its assured customers and the benefit
of its own timely capacity expansion. We aren’t too concerned with
its leveraged acquisition of Abbot Point, as the port has take or pay
agreements for its entire capacity (in a phased manner) and scope for
margin improvement. We think the current price presents an entry
point with an attractive valuation. But despite being a rare defensive
growth stock in the Infrastructure space, the governance risk means
caveat emptor.

Hindustan Unilever (HUL) Gearing up for next leg of growth :Espirito Santo,

Hindustan Unilever (HUL)
Gearing up for next leg of growth
HUL has underperformed the BSE-FMCG index by ~12% YTD. The
trend should reverse as HUL starts to deliver in FY13 on the very high
base of FY12. HUL is the best positioned consumer company to
exploit the Indian demographic advantage and premiumization trend.
While companies like Nestle are still ramping up production
capabilities to meet consumer demand, HUL is ahead of the curve
with no such constraints. We reiterate our BUY on HUL.

IDFC- Consistency should be rewarded ::Espirito Santo,

IDFC
Consistency should be rewarded
We rate IDFC as the high quality franchise in the Infrastructure
finance segment, the with best quality book among its peers. Gross
NPAs at the end of FY12 were a mere 0.3% and only 2.6% of the
book is exposed to fuel risk. Also, we expect the company to be one
of the key beneficiaries of a decline in interest rates and any
improvement in Infrastructure segment. Q1 results could be a
catalyst to re-rate the stock as we expect high growth in the loan
book (as compared with last year) and no negative surprises either
on credit quality or margins. We reiterate our Buy stance on IDFC
and rate it as silver bullet buy for Q3 CY12.

Tata Consultancy Services (TCS) Flawless execution, but perfectly priced : Espirito Santo

TCS’ Q1FY13 results indicate flawless execution. The company has
been able to report growth across most verticals in a tough
environment. While revenue growth was in line with expectations,
EBIDTA margins were 100bp lower than our estimates and 50bp
lower than consensus. While revenue growth has been broad based,
we note that one mega deal won in November 2011 (effective March
2012) and one large telecom deal won last quarter contributed c.40%
of incremental revenues in Q1FY13. Management commentary was
positive indicating no change in stance v/s commentary of the past
six months. We continue to believe that current valuation does not
take into account client and vertical concentration risks. While we
don’t rule out a near term churn in favour of TCS from Infosys given
consistent underperformance by the latter, we find it increasingly
difficult to justify TCS’ valuation. Reiterate Neutral.

Infosys Are we still convinced? : Espirito Santo

Infosys has consistently disappointed the street for almost 6 quarters
now. By any stretch of the imagination that is a long wait for a
company like Infosys to deliver and it has tested investor’s patience
on the resumption of growth. However post Q1FY13 we are
incrementally convinced that growth will resume sooner rather than
later. Our core thesis has been that we are seeing Infosys become
more flexible on price and less averse to risk in the commoditized
area of the business, in an effort to drive volume growth and boost
utilization rates which are now close to historic lows. Q1FY13 results
build on our thesis with volume growth at 3% v/s street expectations
of flat volumes. The decline in pricing is largely like-for-like and
broad based which indicates that better volume growth and
improving utilization will follow. We reiterate BUY.

Report:: Biocon-- Questioning accounting practices-- Espirito Santo,

Biocon - Questioning accounting practices ::Espirito Santo

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Biocon
Questioning accounting practices
BIOS’ shares have had an uninspiring run post the termination of the
PFE deal, which dealt a body blow to its biosimilar insulin aspirations.
Whilst the deal is now terminated, it will continue to throw its shadow
over future earnings, thanks to an aggressive accounting policy that
will see BIOS shift biosimilar insulin R&D costs off the P&L. This, along
with use of a creative transaction structure for AxiCorp, leaves us
frustrated with corporate governance standards at the company, and
we downgrade our accounting and corporate governance rating from
AMBER to RED. Stripping out biosimilar insulin (90% valuation
haircut) and Dificid, BIOS is currently trading at ~12x FY13E EPS. We
cut our FV by 47% to Rs. 186 (from Rs.350 earlier) and switch to SELL.
PFE deal termination was a body blow
Earlier in the year, BIOS’ biosimilar insulin aspirations were dealt a body blow
following the termination of its global development and commercialization deal with
PFE. This sent the shares down by ~10% on the day, with shares continuing to drift
post Q4’FY12 results earlier in the month. Post the deal’s termination, the focus now
shifts to BIOS’ internal progress on the biosimilar insulin program.
Another incidence of aggressive accounting policies
There has been considerable confusion over the timing and accounting treatment of
PFE milestones through the P&L, as BIOS currently has deferred revenues of
~Rs.4930m on the balance sheet. In our experience, globally, post a deal termination,
the balance of deferred revenues lying on the balance sheet is typically recognised in
year-1 as a one-off revenue item. This is in line with matching principle as the
revenues from a terminated deal should not ideally be matched against costs of
another deal (internal or external). Based on the guidance provided by the
management, we believe that the company is likely to recognize the deferred
revenue in line with R&D costs associated with biosimilar insulin program in a
particular year. We see this accounting policy as aggressive (the auditors have drawn
an emphasis in this regards). This marks the third instance of aggressive accounting
with regards to recognition of income/costs for biosimilar insulin. We believe it will
lead to consistent over-reporting of EPS (and potentially over-valuation) to the
tune of 20% every year during FY13-15 while also leaving investors blind-sided with
the clinical spend and progress in biosimilar insulin development.
Concerned with AxiCorp “circular” transaction
In April ’11, BIOS sold its 77% stake in AxiCorp to existing minority investors for a
~EUR40m valuation, ~33% higher that its acquisition cost of EUR30m, and implying a
P/E of ~7.4x. However, the nature and structure of the transaction raises eyebrows as
BIOS used a creative deal structure at the time of acquisition that allowed it to pay
~EUR16m cash for AxiCorp but required it to transfer the rights to biosimilar human
insulin and glargine for Germany to AxiCorp for EUR14m. Our analysis indicates that
BIOS received only ~EUR5m in cash for the divestment, which is surprising given that
AxiCorp had a net profit of ~EUR5m in FY11. Moreover, while it seems that BIOS made
a profit of ~EUR10m on the transaction, in reality, there was a cash loss of ~EUR10m
and a notional loss of ~EUR21m in buying back the IP rights. Despite this, the deal
structure ensured that BIOS was not required to report any loss on sale in the P&L.
Cash drain not reflected in EPS – Valuing BIOS on SOTP
With the PFE deal terminated, we see little reason to own BIOS shares in the wake of
only modest growth prospects for the base business. We expect the FCF generation
to be further pushed out by 2-3 years resulting in a haircut of ~90% on rNPV of insulin
deal from Rs.40 to
R&D costs and Dificid, BIOS is currently trading at ~12x FY13E earnings. We value
Biocon’s base business at Rs.172 or (v. Rs.265 earlier), as we reduce the target P/E
multiple to ~10x FY13E EPS (v. 15x earlier), a 30% discount to mid-cap Indian pharma
peers, which we see as justified given the modest growth prospects for the base
business, and persistent accounting and corporate governance issues. A combination
of lower base business valuation and substantial haircut on biosimilar insulin means
that our FV now stands reduced by 47% to Rs.186 (from Rs.350 earlier). We
downgrade to SELL, 14% downside. Our EBIT and EPS estimates stand reduced by
16%/28% and 10%/25% for FY13/14 respectively.