ACCUMULATE MindTree : Pinc

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We recently met the management of MindTree at corporate office
in Bangalore. Following are the key points of discussion.
Clients’ budgets are flat to marginally positive – Based on
feedback by top 30 clients, the indications are flat to marginally
positive growth in budgets for the next year.
IT services to lead, Prod. Engg. Services (PES) to be muted –
According to the management, IT services growth should maintain
the high growth trajectory and PES is likely to be muted.
Nevertheless overall growth rate is expected to be higher than
NASSCOM’s initial estimates of 11-14% for FY13.
Pricing is expected to be stable – There has been pricing increase
of~5% in FY12 due to increase in onsite pricing in Q1 and Q2 and
offshore pricing in Q2 and Q3. Even though current macro
environment is weak, the pricing is expected to be stable going
ahead.
Europe to be slower than US – Europe has grown significantly
~72%YoY in 9MFY12. However, the management expects a slower
growth in FY13 for Europe compared to US.
3,000 campus offers for FY13- The joining ratio is expected to be 75%
of the campus offers. The headcount at the end of Q3FY12 is 10,934.
Utilisation has dipped 300bpsQoQ to 68.3% but the highest level in
last 5-6 years was 72.5% in Q1FY12.
Employee pyramid is the primary margin lever – According to the
management, the main lever for improving the operating margin is
change in the employee age pyramid.
No client attrition to Happiest Minds – There has been no client
attrition to Ashok Soota’s venture Happiest Minds. However, a few
senior management have exited to join the rival firm in past but the
situation is stable now.
Outlook and Recommendation – MindTree has been able to deliver
good growth in IT services and even after weakness in Product Engg.
Services the overall growth rate is higher than the industry. Q3FY12
margin of 17.3% was at higher INR/USD of 50.1 and Q4 margin is
likely to dip significantly due to rupee appreciation. We have
concerns on improvement in the operating margin and sustainability
of the same. Maintain ‘ACCUMULATE’ recommendation on the stock
with a TP of Rs520 based on 10x PER multiple on 18-months forward
earnings.

Sasken :REDUCE:: PINC

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We recently met the management of Sasken at their corporate
office in Bangalore. Following are the key points of discussion.
Large account to stabilise in FY13– The shift of revenues from
Sasken to other vendor in case of a large account has happened in
recent quarter but still some part of the work is with Sasken. A stable
annual run rate might be in the range of USD14-15mn after the June
2012 quarter.
Semiconductor stable – TI is the largest client in this segment
where projects are coming in Android platform. In this platform, a
latest large deal is won in Q3 with TI. Also, due to changes in wireless
technologies there are some project wins with Intel and Qualcomm.
Emerging segments gaining traction – Consumer electronics,
healthcare, education, enterprise mobility and automotive (rear-seat
entertainment) are newer areas of interest for Sasken. These new
segments are likely to attain quarterly run-rate of USD3mn during
FY13.
Attrition declined but still very high – Most of the replenishment is
done in the form of freshers (~30 freshers are added every month).
There are efforts to retain employees and reduce attrition further.
With improved operations utilisation is also expected to increase.
Operating margin likely to remain muted– Operating margin is
likely to remain muted due to lack of growth which takes away
potential benefits of scale. Also, the recent currency movement will
reflect in lower margins in Q4 compared to Q3. Long term
sustainability of margin is threatened due to decline in revenue.
Open offer at maximum price of Rs180 per share – payable in cash
for an aggregate amount not exceeding Rs8,64.8mn. The offer size
represents 22% of the aggregate of the Company's paid up equity
capital and free reserves as on March 31, 2011. At the end of Q3,
Sasken has cash and equivalent of ~Rs1,800mn.
Outlook and Recommendation - There is further decline expected in
top account and margin sustainability is also a concern. The
fundamental problem is revenue growth which can be mitigated only
through some deal wins. The stock has recently run up with the news
of open offer. We downgrade the recommendation to ‘REDUCE’ with
a target price of Rs120 based on PER multiple of 6x 18-months
forward earnings.

Wipro: ‘REDUCE’: Pinc

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We recently met the management of Wipro at corporate office in
Bangalore. Following are the key points of discussion.
Clients’ budgets are flattish – Clients have largely finished their
budget exercise by January end and it is flattish on an average. The
decision cycle on discretionary projects is taking longer time and
actual spending of the budget will depend on macro environment.
BFSI and Energy & Utilities (E&U) have traction, hi-tech weak –
The management has not witnessed pressure in BFSI and deal wins
are pretty strong in manufacturing and E&U. However, telecom OEM
and hi-tech verticals are posing issues and likely to be weak.
Europe opening up but lacks momentum – Europe has performed
decently well in the last quarter but a large scale movement to
outsourcing something similar to what happened in US might not be
the case. This is due to current political backlash and complex labour
laws in European nations. US will continue to be a growth driver and
witness some early signs of recovery.
Operating margin expected to be better– Operating margin for IT
services is just better than HCL Tech but lower than Infosys and TCS.
The company expects the margin to improve with increase in growth
rates providing leverage in SG&A and employees expense through
improved pyramid.
Growth rate difference with peers expected to lower down- For the
last two years, the company has shown lower volume growth
compared to peers. The difference in revenue growth rates is likely to
narrow down in FY13 and Wipro’s revenue growth rate should be
closer to its peers. According to the management, Q4FY12 revenue
should be somewhere in middle of the guided range of 1-3%QoQ
growth in dollar terms.
Outlook and Recommendation – Wipro has shown some early
positive signs due to restructuring but the full benefit will reflect
when growth rates are higher which will also help increase its
margins. We believe this process is likely to take longer time to
materialise especially under current macro environment. The stock
has also run recently to factor in the early benefits of restructuring
exercise. Maintain ‘REDUCE’ recommendation on the stock with a TP
of Rs445 based on 16.5x PER multiple on 18-months forward
earnings.

Infosys: ‘ACCUMULATE’ ::Pinc

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We recently met the management of Infosys at their corporate
office in Bangalore. Following are the key points of discussion.
Clients’ budget are flat to marginally negative – Clients have
largely finished their budget exercise and at this moment it indicates
that budgets are flattish to negative. The momentum in project ramp
ups is expected to begin from Q1FY13.
Bid to outperform NASSCOM projections; guidance likely to be
conservative though – The company has not given indication for
next year but expects to beat NASSCOM projections of 11-14%
growth in FY13. According to the management, Q4FY12 guidance is
realistic. Q4 guidance was given at INR/USD rate of 52 and expected
30bpsQoQ decline in margin which could now be higher in the range
of 180-200bps due to rupee appreciation in the current quarter.
BFSI steady and emerging verticals are looking good – BFSI is
steady except capital markets which are showing some weakness.
Retail, Life Sciences and Energy & Utilities are showing traction.
Telecom will be weak due to shift in services from wireline to wireless
pulling down the growth but efforts in wireless will absorb some of
this. Focus on Products, platforms and Solutions (PPS) - Among
services lines, PPS will be the focus area along with steady efforts in
ADM. Acquisitions might be target to gain platforms which will also
help to increase non-linear revenues.
VISA rejection rates and the impending litigation – Due to political
backlash VISA rejections have increased but this will either result in
increased offshoring or hiring locals in the west. We believe the
solution lies in the mix of two and hence it should not significantly
dent the profitability. The litigation in US is continuing and all
support is provided by the firm.
23,000 campus offers, salary hike expected to be lower – The
campus offers are 23,000 for next year and the attrition is expected to
dip which will also result in lower salary increase (in the range of 9-
11%) compared to last two years.
Outlook and Recommendation – Infosys is likely to benefit from
improving situation in the west and expected financial stability. In
FY13, no significant pressure on operating margin due to lower
salary increment and stable currency compared to FY12 on an
average. Maintain ‘ACCUMULATE’ recommendation with a TP of
Rs3,200 based on 18x PER multiple on 18-months forward earnings.

IT: “Budgets frozen, waiting for spending :PINC

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“Budgets frozen, waiting for spending”
We recently met the management of Infosys, Wipro, MindTree
and Sasken at their corporate offices in Bangalore. Infosys and
Wipro pointed toward flattish budgets of clients in this year.
However, MindTree expected a marginal increase in budgets.
NASSCOM’s projection and Cognizant’s CY12 revenue guidance
indicated a better second half in terms of demand environment.
We revisit and tweak our earnings estimates. Our preference
among large caps is Infosys, TCS and HCL Tech in that order.
Among mid-caps, we prefer NIIT Tech, MindTree and Hexaware.
Clients’ budget frozen – Clients have broadly finished their budget
exercise and the global macro uncertainty is likely to delay
discretionary spending but thrust offshoring. The momentum in
project ramp-up is expected to begin from Q1FY13.
NASSCOM projection provides some direction – Companies have
not revealed their hiring plan for the next fiscal. But the large tier
firms have given a commentary to outperform the guidance.
Aggressive mid-tier IT firms confident to grow above industry
average.
Competitive pressures leading to innovation – Due to soft demand
environment, firms want to innovate through IP revenues and build
expertise in emerging technologies like cloud computing and
mobility. This will allow participation in complex and innovative deals
which are incrementally growing at faster pace.
Mid-cap IT firms’ growth and margins – A few mid-cap firms have
kept the revenue growth momentum to match the higher end of the
spectrum. Margin fluctuations in certain companies have been higher
leading to uncertainty. The possibility of pricing increase in FY13 is
low hence levers like offshoring, utilisation will come into play.
Companies with good revenue growth momentum can benefit from
change in employee mix.
Top picks - Infosys among large caps; NIIT Tech, MindTree and
Hexaware among mid-caps.

CESC- Higher RoE to boost future earnings ::PINC

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Higher RoE to boost future earnings
CESC on 6th March 2012 was finally awarded the tariff order for FY12 by WBERC. The commission not only
allowed CESC to raise tariffs by 13.3% for the current fiscal but also raised blended RoE to 16% for the tariff
period. We understand that the company has already started to bill its clients as per the new order from the
current billing cycle. The arrears of FY12, along with interest, will be collected over a period of 48 months. In the
retail business, we assume a further delay in its breakeven owing to a slower growth in the overall economy.
However, we believe the stock continues to offer value even after assuming increased cash infusion into the loss
making retail business. Maintain BUY on the stock with a target price of Rs350/share.
13.3% tariff hike approved
Tariff hike approved by the regulator, although late, is in our view both sentimentally and fundamentally positive for the stock.
Despite raising tariffs by Rs0.46/unit at the start of FY12 - thereby increasing tariffs to Rs5.21/unit - CESC's earnings were
marred by growing under-recoveries of its fixed costs. We believe the company had under-recoveries of Rs350-450mn for the
preceding three quarters. This latest increase of Rs0.69/unit, in our view, should adequately compensate CESC for these
under-recoveries.
Blended rate of return increased to 16%
The regulator has allowed CESC to earn 15.5% and 16.5% post tax RoE for the block FY12-14 for its generation and
distribution business respectively. We believe this a key positive as it will aid the company to earn an incremental Rs250-
300mn/year. This coupled with interest on arrears translates into 6.7% and 6.2% increase in our FY13 and FY14 earnings
estimate.
Tariff order hints at consuming lower grade coal
The tariff order highlights that CESC will consume lower grade coal going forward. Budge Budge (highest capacity) will
consume 3,476kcal/kg grade coal - lowest amongst CESC's stations compared to 3,713kcal/kg as per the 2008-11 multi
year tariff (MYT) order. Also, its New Cossipore station will consume 5,800kcal/kg grade coal - lower than 6,035kcal/kg
reported in its previous order. New Cossipore is CESC's only station which consumes high grade coal. This will lead to an
increase in coal consumption to >7mtpa.
Outlook and recommendation
CESC is one of the most efficient power generators and distributors in the country with its stations being available for over
90%. Despite this, we believe the company will continue to trade at discounted valuation given the cash infusion from its
generation business into its loss making retail venture. However, we believe the parent shall be able to generate sufficient
cash to fund Spencer's losses and other capex. We upgrade our earnings estimates to reflect higher RoE and interest on
arrears for FY12. We estimate standalone earnings to be at Rs5.0bn and Rs5.4bn during FY12 and FY13 respectively.
Maintain BUY on the stock with a target price of Rs350/share, implying 20% upside.

MEDIA & ENTERTAINMENT CONFERENCE NOTE :Pinc

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We hosted PINC Media & Entertainment Conference on 28th Feb, 2012. Players from across the platforms of media
participated in the event. Sony Entertainment, Industry Experts, Media planners and unlisted players helped us
understand better about the Industry scenario and the competitive landscape of the respective segment. The
conference clearly elucidated short term apprehensions and integral long term growth story.
Given below are the key highlights of the conference.
Broadcasting: Not a great year but an exception for few
The year started on a positive note, however slowdown in the economy and high inflationary environment resulted in ad
budgets being hampered and hence only necessary advertising was done especially for second rung channels and regional
players like Sun TV. However, lead channels like Sony Entertainment and Star Plus performed well. TV advertisement
registered growth of 9% in 2011. In 2012 Television is expected to maintain a marginal growth rate of 10%.
Print: Regional outperformed English
The Print advertising segment grew at 8% in 2011. The growth rate was down mainly in English press advertising (regional
print revenue in double digits, however English Print grew at low single digit rate) which led to slow growth in the entire print
segment. Advertisers, specifically from BFSI and telecom spent cautiously on print in the second half of the year. No big
IPOs and no big launches impacted the advertising revenues. The entire focus was on regional consolidation with existing
players launching new editions into existing and new markets. Print media advertising is expected to reflect a growth of 6%
in 2012.
Radio: Bleak performance
Radio advertisements grew marginally by 2% in 2011 owing to lack of innovation in the medium. The only happening factor
was Phase III policy announcement by the government. Radio advertisement growth rate in 2012 is expected to be better at
5% mainly because of Phase III.
Outdoor: Blank period
Outdoor advertising revenue fell 10% in 2011 with its share in the total ad pie falling from 6.1% in 2010 to 5.1%. Spends on
outdoor have decreased in the major metros but some respite is seen on the back of rising spends in Tier II and Tier III cities.
2012 is expected to see some revival with a modest growth of 5%.
Cinema: Blockbuster year
The segment performed exceptionally well on account of blockbuster releases like – Ready, Bodyguard, Dabaang, Don 2,
RaOne, Rockstar etc. The Ad revenue grew 18% in 2011 pocketing Rs1.4bn revenues. Cinema advertising is expected to
increase its contribution in 2012 to 0.6% of the total ad pie from the current 0.4%.
Our View:
We reiterate that regional players will be better placed during the current economic slowdown. Despite slowdown in national
advertising, local spending (Automobile, FMCG, Clothing) will provide support to the regional players. Rising newsprint cost
for print players and surging content cost for broadcasting players remain a concern. With mandatory digitisation we expect
MSOs and broadcasters to gain immensely on account of increase in the declared subscriber base and higher subscription
revenue.

NHAI TO MISS FY12 TARGET: PINC

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A tall job at hand
With only one month left to meet its targets of 7300km, NHAI is putting its act together to award the remaining
~3015km of road projects. Considering the awarded projects, current bid stage and execution, we believe NHAI
will miss both its target of awarding and completion. Till date (FY12), NHAI has awarded ~4,285km of road
projects worth Rs408.9bn. We believe it's difficult for NHAI to award ~7300km this fiscal, as current bid stage of
projects suggest possibility of awarding ~1635km by end of March. Though NHAI may stretch and award ~2000-
2200km, still it will fall short by ~800-1000km of awarding. The Cabinet Committee on Infrastructure yesterday
had approved three projects worth Rs35bn spanning 332km (Exhibit 1, highlighted) and awarding of these projects
will start from today. Though we have witnessed very competitive bidding throughout the last year, we believe
competition would ease going forward, as already developers are facing challenges regarding financial closures
and our channel check suggest ~40 projects are on the block. Our stance get further vindicated by looking at the
recent bid of Kiratpur-Ner Chowk in Himachal Pradesh won by ILFS Transportation that witnessed only four
bidder.

MphasiS -Muted HP channel puts pressure on growth ::PINC

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Muted HP channel puts pressure on growth
HP channel led to revenue decline - Revenue declined 3%QoQ to
USD265.6mn, below expectation. Rupee revenue grew 4.1%QoQ to
Rs13,672mn. HP channel revenue remained flattish in rupee terms
with 58% contribution but direct channel revenue grew 14.4%QoQ
with 42% contribution, up from 31% contribution from a year back.
EBITDA margin expanded 57bpsQoQ to 18.4%, below our expectation.
PAT was Rs1,848mn, 1%QoQ growth. EPS was Rs8.8, 1%QoQ growth.
Onsite pricing for Applications declines, stable for other towers –
Onsite pricing for applications segment declined 2.9%QoQ to
USD67/hr. All other pricing including offshore and onsite for
Applications, ITO and BPO remained stable. The management
expects no pressure from HP in terms of price negotiation. Overall
pricing is also expected to be stable.
US and Europe decline - In dollar terms, America (65% contribution)
declined 4.5%QoQ, Europe (15% contribution) declined 9.1%QoQ and
Emerging Markets (20% contribution) grew 7.7%QoQ.
All service lines decline except IMS - In rupee terms, Application
maintenance (32% contribution) grew 1.8%QoQ, application
development (28% contribution) grew 4.6%QoQ, IMS (24%
contribution) grew 11.9%. Technical help desk (5% contribution)
declined 16%QoQ and customer service (5% contribution) declined
3.3%QoQ.
Employee headcount declines; robust new client addition – Total
headcount declined 4%QoQ to 38,798. Utilisation (including trainees)
for Application, BPO and ITO grew 100bpsQoQ each to 77%, 71% and
81% respectively. Added 28 new clients (17 from direct channel and
11 from HP channel). Top client declined 3%QoQ, top 10 clients
declined 3%QoQ.
Outlook and Recommendation – Q1FY12 financials are below
expectations with higher than expected decline from HP. As HP is
not performing well in its Enterprise Solutions segment, we expect
pressure on revenue growth in MphasiS as well with a risk of pricing
cut in future. The stock was at attractive valuations after the last
quarter’s earnings and it has given 37% absolute returns. We
downgrade the recommendation from BUY to ‘REDUCE’ with a target
price of Rs400 based on 10x PER multiple on 18-months forward
earnings.

Pharmaceuticals: COMPULSORY LICENSING: PINC

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A Landmark Order
Natco Pharma (Natco) has won the Compulsory License (CL) to manufacture and sell generic version of Bayer’s
Nexavar used in the treatment of advanced stage liver and kidney cancer. Natco would price the drug at Rs8,800
per month (97% discount to the innovator price) and pay 6% royalty to Bayer under the CL. The Controller of
Patent has granted CL to Natco based on all the three grounds 1) Nexavar drug demand was not met by Bayer
2) Nexavar was not manufactured in India in spite getting approval in 2005 3) Nexavar was not available at a
reasonably affordable price. Further, the CL was issued in spite of the fact that Cipla had entered the market
with a generic product priced at 89% discount to the innovator price. Natco expects to clock sales to the tune of
Rs250-300mn from the opportunity. We expect the company to generate OPM of ~20% before any royalty payments.
While the order could be challenged by Bayer in the court of law, it paves the way for domestic pharma
companies to go for CL of costlier drugs (primarily Oncology and ARV) in addition to launching the generic
version of the product. On the other hand, from the innovator pharma companies’ point of view, they could
become more selective in launching and pricing of patented products in India.
What is Compulsory Licensing?: CL under the patent system is an involuntary contract between a willing buyer and an
unwilling seller imposed and enforced by the State. The WTO states that CL is where a government allows the local
industry to produce the patented products or process without the consent of the patent owner. CL are being issued by
developed as well as developing countries even in recent times. Under Section 84 of the Patent Act at any time after
expiration of three years from the date of grant of a patent any person can make an application to the controller for grant of
CL on the patent on any of following grounds:
􀁺 The reasonable requirements of the public with respect to the patented invention have not been satisfied.
􀁺 The patented invention is not available to the public at a reasonably affordable price.
􀁺 The patented invention is not worked in the territory of India.
Background of Nexavar CL: Bayer launched the drug in 2005 for treatment of kidney cancer and received an additional
approval in 2007 for liver cancer. The drug needs to be taken by the patient throughout his lifetime and the cost of therapy
is Rs2,80,428/- per month and Rs3.4mn per year. Natco had approached Bayer with a voluntary license to manufacture and
distribute generic Nexavar in India which was rejected by Bayer. As a result, Natco filed for an application for CL on 29th July
2011. The application for CL was filed after lapse of three years from the grant of patent. Natco under the application
proposed to sell the drug at a price of Rs8,800 per month.
Other Probable CL launches: As per media reports Cipla has applied for voluntary licenses for Raltegravir (ARV drug) to
Merck while Natco has also applied for Maraviroc (ARV drug) to Pfizer/Glaxo. In case the innovator declines the voluntary
license application then the domestic companies could go for CL. Further, few of the patented drugs in India such as
Nilotinib (Novartis), Sunitinib (Pfizer) and Dasatinib (BMS) could be on the domestic player’s radar.
Exhibit 1: Natco's pricing and manufacturing cost of Nexavar
Source: Intellectual Property India, PINC Research; Note: The cost excludes any royalty payment to Bayer
Particulars Amount (Rs)
MRP (inclusive of sales tax) 8,900
Margin to distributor, stockist and retailer (approx 30% on MRP) 2,670
Cost of manufacture of the product Nexavar 4,856
Billing price of company to distributors 6,105
Margin to the company 1,250

BATA INDIA: Buy -TP Rs805 :: PINC

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We visited a few large ‘Bata India’ stores in Mumbai recently and met the store managers. We observed that
these stores are doing really well with respect to sales and footfalls. Post our visit, we continue to believe that
Bata is an attractive long term buy at CMP of Rs688. At CMP the stock trades at 1-year forward P/E of 23.9x.

MEDIA Company Overview: Pinc

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Eros
􀁺 Dependence on theatrical business is reducing even though it commands 30% CAGR
growth
􀁺 They have adapted to the Studio model followed by Disney and Warner
􀁺 They enter into exclusive licensing contracts for selling satellite rights to broadcasters
and most of the rights are sold even before the release of the movie.
􀁺 The company follows a portfolio approach wherein they do a huge bouquet of films
across genres, ~70-75 movies helping them de-risk their portfolio.
􀁺 They expect to do more than 75 movies a year in the coming years of which 15%
would be bollywood and rest regional. They target to do 8-10 high budget movies
yielding high margins, with 2 being self production.
Hathway Cable
􀁺 The company expects to roll out 1.2mn boxes in FY13. It currently has an inventory of
0.64mn boxes.
􀁺 For Phase I and II, the company will incur a capex of ~Rs6bn.
􀁺 Post some debt raising, its current Debt:Equity of 0.3 may rise to 0.5 by June, 2012.
􀁺 Hathway has no plans for raising equity in the near term, however if an interesting
acquisition of a cable operator comes up, they may consider.
􀁺 The company has a contract with Intelenet to set up call centres in Mumbai for its
broadband services, which if works out well, it will extend for its cable services as well.
INCableNet (Hinduja Ventures)
􀁺 The JVs contribute 10% of the subscription revenues for the company, balance is
contributed through direct points.
􀁺 The company expects to digitise ~2.5mn customers in Phase I, of which 0.5mn are
already digitised.
􀁺 60% of their revenue is contributed by carriage fee which may reduce to 20-30% post
digitisation.
􀁺 In a digitized scenario, the basic tier price would be Rs150 including only FTA channels.
Revenue received for FTA channels through direct points will solely be owned by the
company and not paid to the broadcaster. Will receive 20% of FTA revenues from JVs.
􀁺 The company expects an ARPU of ~Rs200 in Mumbai and Delhi in Phase I.
􀁺 INCableNet plans to reach 0.2mn broadband subscribers by 2014 from the current
40,000 broadband homes.


Balaji Telefilms
􀁺 The company is not into acquisition model for movies because of the cost and risk
associated. They work on a co-production model where the creative risk is shared but
the financial risk remains with Balaji.
􀁺 The company has 4-6 movies lined up for 2012.
􀁺 Their content business continues to make losses due to large volumes.
􀁺 The business has high operating leverage depending on volumes.
DB Corp
􀁺 Highest ad growth market for the company is MP followed by Rajasthan.
􀁺 Chhattisgarh is expected to see 17 new power projects leading to increase in advertising
through Print.
􀁺 The company will launch its 5th Marathi edition in Sholapur in March, 2012. Bihar
edition launch slated for FY13.
􀁺 DB Corp earns Rs5-6 mn per month from Ujjain edition.
􀁺 The company is present mainly in markets where the per capita income is above the
national average.
􀁺 With Phase-III, the company may add 25-30 radio stations with a spend of ~Rs400-
500mn.
Den Networks
􀁺 The company has started Ad campaigns on TV and Print to make viewers aware of the
digitisation mandate and market its digital STBs.
􀁺 The company has started offering its STBs at Rs799.
􀁺 To enable smooth implementation of migrating their analog subscribers to digital in
phase I, the company has placed an order for 2mn STBs with Skyworth and Huawei for
which it needs a capex of ~Rs3bn.
􀁺 The company will venture into offering broadband services post the digital roll-out.

Cable Distribution – Immense growth potential 􀁺 PINC

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Cable Distribution – Immense growth potential
􀁺 Since 2003 the government has become serious about the implementation of digitisation
of cable network. Government is even ready to put off the signals in the Metros post
sunset date in metros.
􀁺 DAS roll out is inevitable but it may possibly be delayed by 2 to 3 months.
􀁺 Landed cost of an STB is Rs1400, MSOS has started giving the STB at a subsidised
rate of Rs750-Rs800 per box, lower than what DTH players are offering.
􀁺 For Phase I and Phase II cities, the fibre optic laid is capable enough of carrying the
digital feed, Phase III and IV towns may require some new cables to be laid.
􀁺 DTH Vs Digital Cable – in the long run Digital is expected to outperform as it can carry
more channels, can offer broadband services and is more cost competitive relatively to
DTH .
􀁺 For the FTA channels, the industry is pitching for a charge of Rs50 for 30 FTA channels,
and the minimum basic package should not exceed Rs150 excl. of taxes.
Challenges in Implementation
􀂄 Huge Capex - Approximately 10-12mn boxes will be required for Phase-I digitisation,
resulting in a capex of ~Rs11bn to be made by MSOs.
􀂄 Availability of STBs to capture the opportunity may be a problem as order for STBs
need to be placed minimum 3 months in advance.
􀂄 Execution Risk at the end of MSOs : Business model will change from B2B to
B2C.
􀂄 No clarity on revenue sharing between the stakeholders of the value chain.
Radio - Bleak performance
Radio advertising growth was sluggish in 2011 as it grew mere 2%. Radio has been and
will always be a dependant form of media. An advertiser looks at radio from an angle of
what more it can offer than just advertising.
Outlook for 2012
Advertising on radio is expected to grow at 5% in 2012. The belief is that radio will always
be a dependant media. Also, phase-III may not pump in as much revenues as the industry
desires because the ad rate in the smaller towns would be very low and even niche channels
will not be able to demand a high rate per se considering that the ad rate in major metros
and mass music channels playing bollywood music is also in the range of Rs1,500-Rs2,000
per 10 seconds.
Outdoor Media - Blank period
Outdoor advertising de-grew 10% in 2011. Mumbai contributes 30-40% of oudoor advertising
in India. 2011 was not a good year for outdoor advertising in Mumbai with most of the
hoardings going empty. Non FMCG spending had dropped considerably.
Outlook for 2012
Outdoor Advertising will grow at a modest 5%. The focus is shifting to small towns where
it’s doing well and the most of the growth will be contributed from those regions. Also,
digital and premium outdoor advertising is on the rise like high bids being sold for airport
sites especially in Mumbai. Non- FMCGs are spending very less, even if they spend, they
would look for efficiencies which are better defined on Print and Television compared to
Outdoor.

Broadcasting: Not a great year but an exception for few Ad Revenue 􀁺 PINC

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Broadcasting: Not a great year but an exception for few
Ad Revenue
􀁺 TV continued to capture the dominant position in the total Ad revenue pie increasing
its ad contribution from 44.5% in 2010 to 44.8% in 2011.
􀁺 TV ad revenues grew just 9% as a result of saturating demand mainly led by cut in
FMCG ad spends. FMCG advertising contribution declined from 54.5% in 2010 to
52.8% in 2011.
􀁺 The year 2011 saw a fall in demand for advertising. There was no growth in the TV ad
space sold during the last six months despite festive season which usually contributes
to an uptrend in ad spends. In retrospect, the first half of the year turned out to be
better than the performance in the second half.
􀁺 Star and Sony witnessed a double digit advertising growth, but most other channels
including Sun TV and Zee TV recorded lower single digit growth.
􀁺 Regional market is expected to grow at a faster pace than national market owing to
greater consumption and penetration in the regional area.
􀁺 Sports properties: The sentiment for the IPL 5 is at an all-time low, with very few
sponsors tied up till now.

MEDIA & ENTERTAINMENT -CONFERENCE NOTE :Pinc

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We hosted PINC Media & Entertainment Conference on 28th Feb, 2012. Players from across the platforms of media
participated in the event. Sony Entertainment, Industry Experts, Media planners and unlisted players helped us
understand better about the Industry scenario and the competitive landscape of the respective segment. The
conference clearly elucidated short term apprehensions and integral long term growth story.
Given below are the key highlights of the conference.
Broadcasting: Not a great year but an exception for few
The year started on a positive note, however slowdown in the economy and high inflationary environment resulted in ad
budgets being hampered and hence only necessary advertising was done especially for second rung channels and regional
players like Sun TV. However, lead channels like Sony Entertainment and Star Plus performed well. TV advertisement
registered growth of 9% in 2011. In 2012 Television is expected to maintain a marginal growth rate of 10%.
Print: Regional outperformed English
The Print advertising segment grew at 8% in 2011. The growth rate was down mainly in English press advertising (regional
print revenue in double digits, however English Print grew at low single digit rate) which led to slow growth in the entire print
segment. Advertisers, specifically from BFSI and telecom spent cautiously on print in the second half of the year. No big
IPOs and no big launches impacted the advertising revenues. The entire focus was on regional consolidation with existing
players launching new editions into existing and new markets. Print media advertising is expected to reflect a growth of 6%
in 2012.
Radio: Bleak performance
Radio advertisements grew marginally by 2% in 2011 owing to lack of innovation in the medium. The only happening factor
was Phase III policy announcement by the government. Radio advertisement growth rate in 2012 is expected to be better at
5% mainly because of Phase III.
Outdoor: Blank period
Outdoor advertising revenue fell 10% in 2011 with its share in the total ad pie falling from 6.1% in 2010 to 5.1%. Spends on
outdoor have decreased in the major metros but some respite is seen on the back of rising spends in Tier II and Tier III cities.
2012 is expected to see some revival with a modest growth of 5%.
Cinema: Blockbuster year
The segment performed exceptionally well on account of blockbuster releases like – Ready, Bodyguard, Dabaang, Don 2,
RaOne, Rockstar etc. The Ad revenue grew 18% in 2011 pocketing Rs1.4bn revenues. Cinema advertising is expected to
increase its contribution in 2012 to 0.6% of the total ad pie from the current 0.4%.
Our View:
We reiterate that regional players will be better placed during the current economic slowdown. Despite slowdown in national
advertising, local spending (Automobile, FMCG, Clothing) will provide support to the regional players. Rising newsprint cost
for print players and surging content cost for broadcasting players remain a concern. With mandatory digitisation we expect
MSOs and broadcasters to gain immensely on account of increase in the declared subscriber base and higher subscription
revenue.

GSK Pharma::Largely in-line with estimates :PINC,

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Largely in-line with estimates
GSK Pharma’s Q4CY11 results were largely in-line with our
estimates. The net sales grew by 15.4% YoY to Rs5.6bn on back
of revival in the anti-infective and mass markets. The company
also witnessed strong traction in speciality and vaccine segment.
The gross margins contracted by 372bps YoY due to escalation in
the raw material costs. However, EBITDA margins were in-line
with our estimates at 31.5%, as the lower SG&A costs offset the
impact of contracted gross margins. Consequently, the net profit
came in at Rs1.4bn, growth of 20.5% YoY.
We maintain our ‘SELL’ recommendation on back of rich
valuations and the overhang of the proposed NPPP-2011. We
value the company at 22x one year forward earnings with a
Target Price of Rs1,880.
Revival in key segments boost growth
GSK Pharma reported net sales of Rs5.6bn up 15.4%YoY, in- line with our
estimates, backed by the revival in the anti-infective and mass market
segments. Further, the company also launched Synflorix-vaccine against
invasive pneumococcal disease during the quarter. The core
pharmaceutical segment clocked growth of 18.2% YoY.
EBITDA margins expand on lower SG&A
The gross margins contracted during the quarter due to escalation in the
raw material costs. However, the impact was offset by the lower SG&A
expense, translating to EBITDA margins of 31.5%, in-line with our
estimates. Subsequently, the reported recurring net profit came in at
Rs1.4bn, growth of 20.5% YoY.
NPPP-2011 remains an overhang
The proposed NPPP-2011 policy, which entails to bring more than 60%
of the domestic drugs under price control on back of market based
pricing, still remains unclear and would negatively impact GSK Pharma.
We expect key brands such as Augmentin and Calpol to be impacted by
the policy.
VALUATIONS AND RECOMMENDATION
The stock is trading at an expensive valuation of 25.3x CY12E and 22.3x
CY13E earnings. We maintain our ‘SELL’ recommendation on the stock
on back of rich valuations and the overhang of the proposed NPPP-2011.
We value the company at 22x one year forward earnings with a Target
Price of Rs1,880.

Marico: Robust Volume Growth Across Segments ::PINC

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Robust Volume Growth Across Segments
Marico reported better than expected net sales growth of 29% led by
20% volume growth during the quarter. Parachute coconut oil
clocked 40% sales growth which includes 13% volume growth. The
benefit of price during Q3FY11 was only partially available during that
quarter and hence the realisation growth in Q3FY12 is higher than our
anticipation. Higher A&P spending impacted the profitability and
resulted into 68bps YoY and 45bps QoQ decline in EBITDA margin.
PAT grew by 21% to Rs842mn (PINCe Rs801mn).
We slightly increase Parachute hair oil volume growth assumption for
FY13 and FY14 owing to strong consumer response for newly
introduced 45ml and 175ml packs. We raise FY13 and FY14 estimates
by 4% and 5% respectively. We retain our 24x P/E on 12-month
forward earnings and increase TP to Rs150 (earlier Rs144) while
maintain our ‘REDUCE’ rating on the stock.
Encouraging Volume Growth
Marico registered 13%, 20% and 15% volume growth for Parachute oil,
Value added hair oil and Saffola oil respectively. Parachute oil in the
last three quarters registered encouraging 10%, 10% and 13% volume
growth and beat the competition through introduction of new packs.
Marico gained 150bps YoY market share on coconut oil to 54%. Value
added hair oil and Saffola maintained high volume growth.
International Business (IBD) Maintain Strong Growth
IBD (25% of sales) posted 39% growth that includes 16% organic and
24% inorganic growth. Bangladesh (~45% of IBD) posted 11% growth
while rest of the organic business clocked ~20% growth. We expect
higher marketing efforts to continue to maintain this high growth.
EBITDA margin under pressure
Higher A&P (164bps YoY and 300bps QoQ) spend was due to the new
product launches and higher marketing efforts for the overseas
market. We expect such marketing efforts would be required going
forward to. We anticipate EBITDA margin improvement to the tune of
~100bps during FY13-14E due to softening of input prices.
VALUATIONS AND RECOMMENDATION
On account of limited product portfolio, higher exposure to commodity
prices and moderate scope for further price hike on key brands, we
maintain Marico's P/E discount over FMCG sector. We retain our 24x
multiple on 12-month forward earnings and raise TP to Rs150 (earlier
Rs144). We maintain our ‘REDUCE’ rating on the stock.

TRF: Reduce- TP Rs372:: PINC

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order inflows to improve visibility
TRF reported consolidated sales growth of 48% to Rs4.3bn (PINCe Rs3.4bn)
led by better execution in project division (sales up by 132%). Margins at
operating level were at 4.4% (after adjusting forex loss). Cost overrun in
certain projects, higher material cost, unrealised foreign exchange loss and
high tax rate impacted bottom line adversely. TRF reported loss of Rs8.5mn.
Adjusted PAT was Rs27mn (PINCe Rs112mn). The company, in this quarter
managed to bag orders worth Rs2bn. It expects orders worth Rs6.5bn in
Q4FY12 in projects and product division. The automotive subsidiaries reported
subdued growth of 4% on account of slowdown in the overseas market.
Healthy order inflows expected in Q4FY12
Project division revenue increased by 132% to Rs2.5bn in Q3FY12 on account of
better execution. However, cost overrun in certain projects impacted the segmental
margins which declined sharply by 790bps to 1.7%. Order inflow in Q3FY12 was
Rs1.9bn. TRF expects orders worth Rs5.7bn mainly from NTPC and Tata Steel in
Q4FY12. We believe this is extremely positive for TRF as lack of orders in last five
consecutive quarters, reduced revenue visibility.
Subdued performance from product division
The product division report de-growth of 5% in sales to Rs694mn on account of
slowdown in demand. Change in product mix and high material cost impacted the
margins which declined sharply by 390bps to 12.2%. We believe margins to remain
under pressure in the near term.
Automotive subsidiaries witnessed an impressive sales growth of 46%. Slowdown
in demand of trailers in Middle East and Europe impacted the sales of DLT. In
9MFY12, automotive subsidiaries witnessed a revenue growth of 47% to Rs4.1bn.
Adjusting to forex loss, segmental margins improved by 70bps in Q3FY12 and
40bps in 9MFY12. With expected improvement in margins and healthy revenue
growth driven by expanded capacities coming on stream, we believe the automotive
segment would be the key growth driver for the company going forward.
VALUATIONS AND RECOMMENDATION
The current order book of the company stands at Rs12.2bn. We have increased
our sales estimates for FY12 by 8.4% and 9.2% in FY13 to factor in expected order
inflows in Q4FY12 and performance of project division in the current quarter. We
reduced our profit estimates by 35% for FY12 to factor in lower margins and increased
it by 7.8% for FY13E. We expect TRF to witness sales CAGR of 27% (FY11-14E).
The key triggers remain acceleration in order inflows and margin improvement in
automotive business. Considering the steep rise witnessed in the stock price in
last one month we believe there is limited upside. We maintain our target multiple
at 8x and downgrade the stock to ‘REDUCE’ from ‘BUY’ and revise our target price
to Rs372 (earlier Rs350).

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Sell Bhushan Steel; target of Rs 297: PINC Research

PINC Research is bearish on Bhushan Steel and has recommended sell rating on the stock with a target of Rs 297 in its January 30, 2012 research report.
"Bhushan Steel's Q3FY12 revenue at Rs24.1bn grew 24% YoY on higher volumes (up 10% YoY) and improved blended realisations (up 13% YoY) on rupee depreciation. Operating profit surged by 35% YoY to Rs7.2bn further aided by higher consumption of captive HRC. OPM expanded by 241bps YoY to 30.1%. Net profit at Rs2.8bn declined 1.3% YoY on higher depreciation & interest cost on Odisha phase-II, despite lower effective tax rate."
"Sales volume at ~513kt grew 10% YoY on expanded capacities as HRC sales grew 75% YoY to 165kt. Further, blended realisation at Rs46,679/t grew 13% YoY on rupee depreciation, even though share of value added products declined to 67% vs 75% in Q3FY11. EBITDA/t grew 23% YoY to Rs14,118. As of Q3FY12, Bhushan Steel has ~Rs200bn of net debt (incl. Rs19.8bn of preference share as debt) with net D/E of 4.34x. Bhushan's board approved raising of Rs7.0bn via rights issue, the premium for which would be decided later on. The fund rasing was much required for the highly leveraged balance sheet of Bhushan Steel. We view this development positively."  Bhushan Steel is in the midst of high growth, with contribution from Odisha phase- II providing volume growth in FY12E-FY13E. Further, Odisha phase-III (2.5mntpa HRC) and downstream expansions (2.8mntpa value-added products) are on track for completion in FY13E-FY14E that shall provide growth FY14E onwards."
"Consequently, we estimate Bhushan's FY11-FY14E EBITDA to grow at a CAGR of 28% drive by volume CAGR of 28%. However, we estimate EPS CAGR of 4% to be subdued by rise in interest and depreciation cost. Further, very high financial leverage (FY12E net D/E of 4.1x) and lack of captive resources amidst tight iron ore supply in Odisha are cause for concerns. Although company's fund raising plans via rights issue partly allays our concern, we find the stock expensive at 5.3x FY13E EV/EBITDA. We have revised our FY12 and FY13 estimates to factor in the change in macro assumptions and introduce FY14 estimates (ref pg 3). We maintain 'SELL' rating on the stock with a TP of Rs 297 (5x FY13E EV/EBITDA)," says PINC Research report.

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Accumulate NTPC; tgt of Rs 182: PINC Research

PINC Research is bullish on NTPC and has recommended accumulate rating on the stock with a target of Rs 182 in its January 30, 2012 research report.
"NTPC's Q3 FY12 performance was impacted by continued backing down by SEBs and poor fuel supply. Coal and gas station PAF contracted by 835 and 110bps to 85.3% and 94.5% respectively - thus impacting its incentive income. This coupled with preponed maintenance shutdown at a few stations and under-recoveries due to lower than normative PAF for some stations, translated into lower than expected adjusted PAT of Rs21.7bn - lower 7.7% yoy."
"During Q3FY12 NTPC generated at sold 56.4BU and 52.6BU respectively. It lost 6.48BU due to grid restrictions (2.7BU) and low fuel supply (3.8BU), higher by 8.3% yoy. Due to this, NTPC's coal PLF declined to 83.6% from 87.2% in the corresponding period last year. The management indicated that debtor days during 9M FY12 worsened to 77 days against 53 days in FY11. The management highlighted that none of the states had defaulted in their payments except for one week extension (beyond 60 day payment window) given to BSES-Rajdhani and BSES-Yamuna."
"NTPC maintains its commissioning target of 4,980MW during FY12. In 9M FY12, it commercialised 1.6GW. Despite this, the management remains confident of meeting its target. NTPC plans to declare Farakka, Sipat and Jhajjar as commercialised during Q4 FY12. As Coal India implements the new pricing mechanism, NTPC's cost of generation and hence tariff is expected to increase. As a result, we believe it runs the risk of increased backing down by beneficiary states. We continue to build in capacity addition of 2.8GW and 4.2GW during FY12 and FY13 respectively. Although we maintain ACCUMULATE rating on the stock, we believe NTPC's earnings quality is likely to deteriorate due to concerns on fuel supply and hence low availability," says PINC Research report