Copper mine supply still struggling  Macquarie Research,

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Copper mine supply still struggling
 While financial markets focus on the potential for copper demand to fall as
China’s economic growth slows and the eurozone debt crisis continues to cast
a shadow over the outlook for the global economy, it may be forgotten that
world’s copper miners are still struggling to supply the market.
Latest news
 “Down, down, deeper and down!” These words, once sung by the rock band
Status Quo, sum up well the recent mood and direction in base metals markets.
Prices took another tumble on Thursday, with copper crashing 6.6% to close at
$6,722/t, while zinc (down 5.4% on the day) and aluminium (down 4.5%)
broke down below critical technical support levels. Tin fared relatively well,
but still fell 3.3%. Precious metals prices also fell, with gold giving up 2.0%,
silver sliding by 3.7% and palladium plunging by 4.6% to close below $595/t.oz.
Meanwhile, spot iron ore prices continue to sink and are now well below
$150/t CIF China. Prices are under pressure across the board from worries
over slowing growth in China and the eurozone debt crisis.
 Financial markets may fear the worst for metals markets, but physical market
price signals remain more constructive. Shanghai copper premiums remain
high, with latest quotes at $115-135/t CIF, from $115-145/t a week ago, and
another 15,000t of LME copper stocks were cancelled in Singapore on
Wednesday. However, European aluminium premiums are coming under
some softening as some of the carry trades come under pressure.
 The US Federal Reserve Bank of Philadelphia’s general economic index
rose to 8.7 from minus 17.5 in September, the biggest one-month rebound in
31 years. The weak reading a month ago contributed significantly to the
market sell-off seen at that time.
 Brazil's local media has reported that the proposal for the country's
new mining code to be submitted to congress before the end of 2012
plans to double the royalty rates on iron ore fines to 4% but the royalty
rate for pellets will remain unchanged at 2% in an effort to encourage
more value-add mineral processing within the country. As of yet, there
is no timetable for the introduction of the new royalty system.
 Even within Europe's ailing steel industry, the differences between
different product markets are highly visible from recent company releases.
Finland's Rautaruukki, a flat steel producer with significant exposure to the
construction sector, operated at only 80% of its total capacity in Q3 2011,
producing just 392,000t, with net sales down 15% QoQ. Meanwhile,
strong energy markets led French seamless pipe manufacturer Vallourec,
a world leader in its sector, to operate at 95% of capacity, helped by the
fact that a large part of its sales are made outside of Europe.
 Coal prices in Qinhuangdao have risen recently and are now reportedly
trading at ~RMB860/t (basis 5,500 kcal/kg), compared with previous lows of
RMB825/t, but it is thought that this may already be reflected in prices in
Guangzhou. Chinese thermal coal demand has been good, with coal fired
power generation rising by 21% YoY in September, while hydro-power
generation fell by 25% on the same comparison. However, supplies of
seaborne thermal coal available for import into China have been very
strong, which may lead to some pressure on index prices in the short term
and paper markets are already seeing a pullback in API2 versus API4.

Macquarie Agri View La Niña’s impact on South American grain & oilseeds ::Macquarie Research,

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Macquarie Agri View
La Niña’s impact on South American
grain & oilseeds
Feature article
 We highlight in this report our current view of the building La Niña weather
phenomena and discuss the impacts this event could have on South
American corn and soybean production. Current expectations are of a mild to
moderate La Niña (-0.5 < SST anomaly < -1.0) during Q4 2011. In sum the
likely impact of this weather event will be for Brazilian soybean yields to once
again outperform trend and conversely Argentine corn yields will be likely to
underperform trend. The implication for the global soybean market fits in with
our current thesis that soybeans will remain the laggard of the grain and
oilseed complex continuing to trade at a historically tight ratio to corn prices.
The signs are more worrying for the corn market as the world is increasingly
reliant on EX-US corn supplies due to the restrictions in US production. The
projected drop in Argentine yields will see a shift lower in their export
potential; this implies corn supplies from the Ukraine and Brazil will be
increasingly important. Looking at the historical impacts of a mild to moderate
La Niña on the South American crops, we see the typical yield
outperformance for Brazilian soybeans could lead to a production of 77.3mt
and the typical yield underperformance for Argentine corn could lead
production down to 25mT. In summary this analysis shows that weather risk
still remains a pertinent issue for production in the 11/12 season and the
continued strengthening of the La Niña could further shake the world’s grain
and oilseed markets.

Hexaware Technologies- Firing on all cylinders, raise TP:Macquarie Research,

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Hexaware Technologies
Firing on all cylinders, raise TP
Event
 We raise our TP to Rs103 (vs Rs92 earlier) post solid 3Q CY11 results.
Offshore effort shifts, cost efficiencies on SG&A and currency depreciation
have helped the company to post margin surprise. We now have more
comfort on the sustainability of margins and raise our margin forecast by
150bp for CY12 and CY13, leading to an increased TP. Reiterate OP.
Impact
 Conference call takeaways. (1) The CEO indicated initial discussions with 8
of the top 10 clients of the company indicated that IT budgets are going to flat
to slightly up next year; (2) US$100m deal win announced earlier in the year
has reached steady state. We think this can aid future cost rationalisation; (3)
Hexaware is targeting 800-1000 fresher induction in CY12 (vs. 800 in CY11).
 Billing, Forex & Costs rationalization pumps margins. The key moving
parts for EBIT margin improvement of 350bps this quarter are: +170bps due
to FX, +75bp due to effort/offshore movement, +115bps from billing, -140bps
from wage hikes and fresh hiring, +130bps from SG&A rationalization.
 CY11 revenue growth guidance raised again, now at 32% YoY growth.
Our positive view on the name is premised on strong execution and healthy
deal wins. The performance this quarter and positive 4Q outlook reinforce our
investment view. Growth momentum is the most potent margin lever for the
company. This quarter’s performance, coupled with mgmt commentary on the
preliminary 2012 outlook, is comforting for the margin outlook.
 Forex hedges at good levels for CY12-13. The company has hedges worth
US$177m at a ~INR/USD exchange rate of ~Rs48. This is close to the
prevailing rate of ~Rs49. In case the currency appreciates, the company
should have a forex gain in the coming quarters.
Earnings and target price revision
 We retain our street-high revenue forecast for the company and are raising
our margin assumption. Cost rationalizations result in 11% rise in our
CY11E/12E EPS. ( For details see Fig 1-3) As a result, our PER-based target
price moves to Rs103 (vs Rs92 earlier). For details on changes to estimates,
see Fig 4.
Price catalyst
 12-month price target: Rs103.00 based on a PER methodology.
 Catalyst: Large deal wins
Action and recommendation
 Reiterate OP.

Cairn India Left searching for a positive trigger::Macquarie Research,

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Cairn India
Left searching for a positive trigger
Event
􀂃 Cairn India (CAIR) reported an adjusted Q2FY12 PAT of Rs15.9bn (flat YoY,
down 42% QoQ). Its reported profit of Rs7.6bn was due to the one-time hit of
royalties on account of Rajasthan production till Q1FY12 to the tune of
US$336mn, partially offset by forex gains of Rs5.3bn. Lower (recurring)
profitability was due to royalties and start of profit sharing with Government.
We maintain our TP of Rs260, and downgrade the stock from Neutral to
Underperform, as it has rallied by 11% in the last two weeks.
Impact
􀂃 Vedanta takeover a done deal, but positives yet to materialise: With Cairn
India shareholders (Cairn Plc and Vedanta group hold 80%+) accepting the
value-eroding preconditions of making Rajasthan block royalty and cess costrecoverable
through a simple majority ballot (pending an NOC for sale by the
ONGC board), uncertainty surrounding the firm has been replaced with a
certainty of lower profitability, and the expectation of expedited permissions
(by GoI/ONGC) to ramp up production. Media reports state that the new
ONGC chairman has affirmed support for increasing production (25 kbpd from
Mangala possible immediately, 40kbpd from Bhagyam by end CY11).
􀂃 20% tranche of profit share reduces EBITDA margin by 7% vs Q1FY12
Royalties being made cost-recoverable has hit profitability by 15% on a
recurring basis, according to the management. Also, the Barmer field has hit
the 20% tranche of profit share in Aug-11, curtailing profit margin further.
􀂃 Mangala oil realizations down 2% QoQ; 10% discount to Brent
maintained: Rajasthan gross realizations fell to US$102.8/bbl. Rajasthan
total opex maintained at US$2.5/bb), which is still significantly below the
company’s long-term steady-state estimate of US$5/bbl.
􀂃 Pipeline capacity may be a near-term constraint, despite permissions:
The delivery pipeline (Mangala-Salaya-Bhogat) needs to be augmented
beyond its existing capacity of 175 kbpd to allow for Mangala and Bhagyam
fields to produce at full throttle, and the same is expected to materialise not
before CY12-end, although there may be some capacity optimization.
Earnings and target price revision
􀂃 PAT estimates increased by 1-2% due to INR depreciation.
Price catalyst
􀂃 12-month price target: Rs260.00 based on a Sum of Parts methodology.
􀂃 Catalyst: GoI permissions for ramp-up; Clarity on pipeline augmentation
Action and recommendation
􀂃 CAIR is trading at an expensive US$48/bbl of EV/1P reserves (due to low 1P)
vs global mean of US$18/bbl. Approvals of ramp-up from Mangala/FDP
changes for commissioning of Bhagyam and Aishwarya could be soon, but
the stock is already reflecting the possible volume growth as well as a high
long-term Brent crude price of ~US$100/bbl, in our view. A drop in profitability
due to royalty and profit petroleum (sharing with the govt) could take the
sheen of the stock, especially if crude price declines, as is our house view.

Sterlite Industries- Steep increase in dividend from zinc sub key positive::JPMorgan

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 Steep increase in dividend payout from zinc sub (HZ IN, not rated)
key positive: While the zinc sub delivered results broadly in line with
estimates, with EBITDA at Rs14.6bn vs. JPMe of Rs13.9bn, we believe
the biggest positive to come out of the results was the steep increase in
dividend payout. The ~65% STLT-owned sub, Hindustan Zinc, declared
an interim dividend of Rs1.5/share on H1 EPS of Rs6.72/share, implying
a payout of ~22% on H1 PAT. This translates into an inflow of Rs4.1bn
for STLT in H1. Payout ratio including the dividend tax stood at 7% and
10% in FY10/11.
 The first tentative step toward addressing the key issue of
'fungability of cash from subs': One of the key investor pushbacks on
STLT has been the perceived lack of fungability of cash at its subs,
particularly the zinc sub, where net cash at the end of the Sept quarter
stood at Rs162bn (~$3.31bn). As we had highlighted in our recent Note
on STLT (Grade A zinc assets provide earnings support; market
discounting severe stress from ally/power investments) any move to
address the fungability of cash would be an important step.
Understandably, a large part of today's conference call of HZ was on
dividend payout policy going into the future. Management did not give
any numbers on expected payout ratios. Assuming that the 22% payout
ratio is maintained for both FY12-13 on our estimates would result in a
cash inflow for STLT of Rs8.7/9.7bn for the respective years. We have
argued that growth opportunities in zinc in India have peaked out, and
thus cash deployment inside India would be difficult. Given the steady
decline in FII holdings in STLT, we believe positive news flow such as
the above could likely lead to strong stock upmoves. The next big
timelines are in January, when the final hearing for bauxite would take
place at the Supreme Court.
 Results update: The modestly higher EBITDA was primarily due to
lower CoP (CoP without royalty was down 3% q/q). Reported PAT for
the quarter was Rs13.4bn vs. JPMe at Rs13.3bn. Other income was 5%
higher than our estimates but the tax rate was also higher (19.2% vs. 17%
in 1QFY12) due to advance taxes paid in the quarter

Indraprastha Gas 2QFY12 - Below expectations, supply visibility a concern ::JPMorgan

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IGL 2QFY12 earnings of Rs772m (+16.5%y/y) were below our and
consensus expectations, impacted by lower-than-expected margins. The
rupee depreciation late in 2QFY12 and higher LNG in the supply mix led
to the margin disappointment. While IGL continues to demonstrate pricing
power, we are cautious on the stock on account of supply constraints and
potential impact of higher prices on demand growth.
 2QFY12 volume growth steady. IGL volume growth of 23% was aided
by strong 14% growth in CNG volumes (on account of private car
conversions and strong growth in DTC demand as new buses get added)
and a 62% growth in PNG. PNG volume growth during the quarter was
impacted by customer shutdowns and management believes there is no
price impact on demand as of yet.
 Pricing power remains a key positive. Rupee depreciation late in
2QFY12 and higher LNG in supply mix led to the margin
disappointment. IGL has taken price hikes in early October (a Rs2/kg
hike in CNG), which should help protect margins during the current
quarter.
 Supply visibility is a concern. IGL is hopeful of tying in further term
LNG volumes from parent GAIL; but given current volume growth
trends, IGL would need to depend on spot LNG for near-term growth.
Tying up of LT supplies would remove a key overhang on the stock.
 We stay cautious. IGL stock has corrected c.9% over the last month. We
continue to stay cautious on the stock on low supply visibility and
potential demand impact of high spot LNG prices on Industrial
conversions. Our DCF-based PT is Rs410 – a 10% correction in the
stock would turn us more constructive on IGL stock. Key risk to our
view is higher-than-expected volume growth.

What's Working in Asian Telecoms / Internet? "...and I know someday I will find the key...": Telcos = Earnings revisions; "There are no internet stocks" :: JPMorgan,

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 “Seems like I’m caught up in your trap again, Seems like I'll be wearing
the same old chains, Good will conquer Evil, and the truth will set me
free…and I know some day I will find the key…(Trapped, by Jimmy Cliff,
as sung by Bruce Springsteen)”. The performance gap between our Earnings
Momentum Telco portfolio and our Value Telco portfolio continues to gap out,
with the Earnings Momentum portfolio outperforming the Value portfolio by a
huge 72% YTD (Earnings Momentum portfolio +48%, Value as defined by P/E
-24%, P/BV even worse at -32.5%). We recommend investors don’t buy cheap
telcos…the key to telco outperformance is earnings revisions, in our view.
 What’s the market paying for YTD? Telcos = Earnings Momentum. The
region as a whole has more balanced drivers, with Quality, Earnings
Momentum, and Price Momentum all driving significant positive returns. Size
and Price Momentum have been the most positive drivers within the Internet
space, while Earnings Momentum and ROE have driven significant negative
Internet stock returns. Best Telco markets on Earnings Momentum are
Thailand and Japan (best YTD and best shorter term momentum), vs. Korea
and Indonesia. Best Telco stocks with short term earnings momentum are
TNZ, Softbank, ADVANC; Worst are LGU+, RCOM.
 Short Term: MTD the Asian region has traded largely on yield, beta, and
quality (investors seeking out high quality names with some level of trough
value (dividend) that have been beaten down in the market sell off). Telcos as
usual, trade differently, with beta actually driving negative performance (higher
beta Telcos outperformed during the market turn, and are now serving as
funding sources), while the normally strong drivers of Earnings Momentum and
Analyst Revisions showed negative returns (again, due to strong outperformance
during the sell off). We’d use this as an entry / short opportunity for high beta
Telcos with good earnings revisions that have underperformed lately – Top Pick
is China Unicom, best to avoids include LGU+.
 There are no Internet Stocks: Cross sector correlation in the Chinese internet
space is once again at 90%+, from 40% at the beginning of the year (please see
Figure 28). The sector is trading as one giant mass, rather than as single stocks.
This should create very large opportunities eventually, but we believe the most
important call to make in the Chinese Internet space is when stocks actually
become single fundamental stocks again. We’d be long Gaming (NTES, OW)
and short Advertising (SINA, N) once we can make this call.
 Please contact us for tools: We have an interactive factor exposure model
available as well as detailed files showing stock exposure to the factors
(included in this report as Appendices).