Financials Focus The land of smiles 􀂃 ::Macquarie Research

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Financials Focus
The land of smiles
􀂃 Many travel brochures describe Thailand as the land of smiles. And Thai
banks’ price performance likely brought a smile to investors’ faces over the
past couple of years. This year, though, has been a different story. The price
performance of the Thai banks has been the proverbial two sides of a coin,
with direction seemingly dictated by the top down call. However, beyond the
macro, there were two sector issues I wanted to delve into during my recent
round of bank visits in Bangkok: margins and corporate lending.
Margins: Under pressure
􀂃 Post my meetings with the various Thai banks, I would say that the street
estimates on margins have been too high. Earlier this year, several banks
were reportedly taking a more aggressive stance on deposits, with the step-up
program on deposits a prominent feature of this campaign. The first quarter
results bear out part of the impact from higher funding costs.
Corporate loans: Flash
􀂃 Corporate-related lending may continue to lead growth for another quarter.
We’ve been a bit surprised to find corporate lending driving loan growth. The
question for us had been whether this is simply a flash in the pan or whether
there’s sustainability behind this trend.
􀂃 I’m, however, in agreement with our man-on-the-ground, Passakorn
Linmaneechote, that corporate loans will slow down in the latter part of the
year. Corporates are cashed-up and the outlook for rising interest rates will
likely see companies pay down their loans quicker.
Thai macro: Wants to break free
􀂃 The macro background on Thailand is looking good and this may be the
biggest draw to the Thai banks. There could be upside surprise to GDP and,
with it, loan growth could break out as well.
􀂃 The key concern as far as macro is concerned seems to be inflation. More
specifically, the lifting of the oil subsidy that could create a jump in inflation. If
inflation persists, inflation expectations could change.
Play the game
􀂃 Rising rates, funding cost pressure (to go with the competition on loan yields),
and resilience of corporate lending for the time being: in such an environment,
I’d prefer banks that have good liquidity, a high share of lower costing CASA,
or banks that are able to garner a higher proportion of longer-term deposits
within their fixed deposit mix. Banks with good non interest income would
also be preferred.
􀂃 Taking the points I just mentioned into consideration, SCB (SCB TB,
Bt115.00, OP, TP Bt130.00) could continue to outperform in the near term. I
sense momentum is with this bank. However, further down, I can see why
KBank (KBANK TB, Bt127.00, OP, TP Bt150.00) is our top pick, as it seems
well positioned in the operating environment that we just described.

To Quant or Not to Quant: That is the Question .:Macquarie Research

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To Quant or Not to Quant:
That is the Question
Highlights from North American Quant
Conference
Event
 We held our North American Quant Conference, To Quant or Not to Quant: That
is the Question, in Boston on May 17th. We had consultants from Rogerscasey
and Russell Investments, buy-side managers from State Street Global Advisors,
PanAgora Asset Management and AXA Rosenberg, as well as a sell-side
perspective from Macquarie‟s George Platt, who shared their opinions on the
challenges that quants currently face and the future of quant strategies.
 The following pages contain the key highlights from each of our speakers and
our panel discussion. Each speaker and their presentation titles are listed below:
George Platt - Co-Head of Global Quantitative Research, Macquarie
Capital: The case for the Affirmative – Perspectives from the Sell-side
Arman Gevorgyan - Director, Investment Research, Rogerscasey: A
Long Road Ahead for Quantitative Strategies
Mark Thurston - Head of Global Equity Research, Russell Investments:
Will quants provide diversification and alpha opportunities?
Mark Hooker - Head of Advanced Research Center, State Street Global
Advisors: The case for the Affirmative – Perspectives from the Buy-side
Additionally we had a panel discussion that included the above speakers as
well as Eric Sorensen - President, PanAgora Asset Management and
Jeremy Baskin - Global CEO, AXA Rosenberg.
 For additional information about our conference and presentations please
contact a member of the Macquarie Quant team.

Asian Paints- Domestic volumes healthy; cost pressures continue: Prabhudas Lilladher,

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􀂄 Paints volume grow 15‐16%; cost pressures impact profitability: Asian Paints’
(APNT’s) Q4FY11 consolidated sales; EBITDA and PAT came in at Rs19.7bn (up
5% YoY), Rs2.9bn (up 8.5%) and Rs1.86bn (down 3% YoY) against our
expectations of Rs20.08bn, Rs3.3bn and Rs2.2bn, respectively. Reported
numbers are not comparable as base quarter includes six months performance
of international division. Like to like consolidated sales and PBT grew 24% and
2%, respectively. We estimate 15‐16% volume growth in decorative paints for
the quarter. For the full year, volume growth came in at 17% which is impressive
given the series of price hikes taken by APNT in FY11, amounting to 12.4%
(weighted average ~7.5% for FY11). Given the steep inflation in key RM costs,
APNT plans to hike prices again in May and June by 4.3% and 2.4%, respectively.
Performance of international division continued to remain weak owing to poor
demand in Caribbean and political disruptions in Middle East. (19% and 23%
revenue and EBIT decline, respectively)
􀂄 Gross margins decline ~300bps YoY; RM price inflation 14% for FY11: Pressure
from rising input costs was reflected in ~300bps decline in gross margins despite
series of price hikes in the previous 6 months. Material Price index for Q4 moved
to 121.8 from 115 in Q3 (indicating ~22% increase in RM prices vs FY10 average)
with FY10 base as 100. Management expects the input cost pressure to
continue in the near term as incremental supply addition in Tio2 remains subpar.
Operating margins decline was restricted to 180bps owing to savings of
140bps in employee costs.
􀂄 Maintain ‘BUY’: We have revised our estimates downward by 3‐5% for FY12e
and FY13e, to account for higher than estimated increase in raw material prices.
Volume growth has remained strong so far despite higher than average price
hikes. We roll forward our model to Mar‐13e and continue to maintain our
‘BUY’ rating on the stock, with one‐year price target of Rs3,000.

ASHOKA BUILDCON: Migrating to clarity::PINC

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Migrating to clarity
Ashoka Buildcon Ltd (ABL) Q4FY11 results, key highlights was
change in BOT depreciation policy from SLM to traffic
proportion and shift from AS21 to IFRS for booking of revenue
and profit from internal EPC work. Hence on a YoY basis the
results are not comparable, without accounting changes the
PAT for FY11 would have been Rs710mn i.e. 12% down YoY
basis, while the adjusted PAT is Rs1008mn, but excluding the
one time loss of Rs580mn for BOT projects (Rs450mn overlay
exp and Rs130mn revenue loss), the adjusted PAT would have
been Rs1300mn. Based on the new order book we marginally
increase standalone earnings, while BOT valuation is brought
down as revenue estimates for 4 BOT projects have been
marginally lowered. We maintain our BUY recommendation
with a lower target price of Rs364 (Rs390 earlier).
Change in accounting policy…
Depreciation on BOT assets will be henceforth booked on traffic
proportion against SLM earlier. The total impact is Rs537.4mn
increase in reserves on a retrospective basis of which Rs162.6mn is
the impact for FY11. Similarly now internal EPC revenues would be
recognised as income as per IFRS, accordingly Rs2859.9mn of
revenue and Rs168.8mn of profits has been booked in FY11. On a
like to like basis if such changes are excluded the PAT for FY11
would have been ~Rs710mn i.e. 12% lower than FY10.
One time expense impact profitability…
ABL has incurred Rs450mn towards overlaying for 2 BOT projects,
and during the process lost Rs130mn of revenue. Hence with the
above mentioned accounting changes the adjusted PAT for FY11
would have been ~Rs1300mn. The management has mentioned that
this overlaying is one-time in nature. No major maintenance exp is
likely for the next two years.
VALUATION AND RECOMMENDATION
Equity invested till date by ABL is ~Rs4.5bn, which would increase to
Rs7bn & Rs10bn by FY12E and FY13E, we value BOT (DCF) at
equity multiple of 1.6x times and 1.1x times on FY12E and FY13E i.e.
Rs11bn. Over FY10-13E, we expect revenue for standalone business
to grow at 22.3% CAGR and PAT to grow at 12.4% CAGR. We value
this business at 9x FY12E adjusted earnings of Rs17.3 (EPC).

State Bank of India: Big clean-up act: 􀁠 Kotak Sec

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State Bank of India (SBIN)
Banks/Financial Institutions
Big clean-up act. SBI reported sharply lower earnings for the quarter, but addressed
most of its pending issues. Full impact of pension was taken through reserves/P&L, a
majority of gratuity is provided for and slippages have been aggressively reported in
SME/agri, on account of the move to system recognition. Higher slippages and
somewhat lower margins in 4Q were key disappointments. The new management
guides for better margins (has aggressively raised lending rates recently) and lower
slippages. The earnings profile will remain strong in FY2012E and FY2013E. Valuations
at 1.2X FY2013E book and 7X (adjusted) EPS are comforting but expect subdued price
performance in the near term. Maintain BUY with TP of `3,100 (`3,400 earlier).

Equity Strategy -- Trip notes from America:: Credit Suisse

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Global Equity Strategy ----------------------------------------------------------------------------------------
Trip notes from America


● Little visibility: An appropriate title of our trip notes might have
been ‘waiting for something to happen’. Clients had very little
visibility on the three key issues: the end game in Europe, the
degree of overheating in China, the withdrawal of QE 2.
● Asset allocation: There was a strong consensus call for a pullback
in the equity market on this uncertainty. Yet, nearly everyone
wanted to buy on dips suggesting a limited pull-back. Clients were
also confused about how much of a growth slowdown is occurring.
● Consensus longs: Oil (OFS within that), tobacco and software
stood out. Thematic consensus longs were the GEM/NJA
consumer, rising food prices and water. Consensus shorts: Food
producers/food retailing, energy utilities in Europe, UK REITs,
companies competing against China (the list varies) and the USD.
● Few questions on banks, insurers and Japan: We almost had
no questions on banks (investors seem to accept that long-term
RoTE will revert to their pre-1990 trend), insurers and Japan (this
is very unusual and usually a good sign).
Clients had little visibility on three key issues
An appropriate title of our trip notes might have been ‘waiting for
something to happen’. Clients had very little visibility on the three key
issues: the end game in Europe, the degree of overheating in China,
the withdrawal of QE 2.
Asset allocation
There was a strong consensus call for a pull-back in the equity market,
given uncertainty about the issues mentioned above. Yet, nearly
everyone wanted to buy on dips (suggesting the pull-back will
probably be limited). There were big concerns on margins, which are
at record high in the US, owing to accelerating GEM wage growth,
high commodity prices and strong capex growth.
Macro issues
Clients were confused about how much of a growth slowdown is
actually occurring. Most macro funds felt this is part of the normal
business cycle, while bottom-up funds were concerned that the
peaking in US lead indicators at a time when US GDP is just 1.7%
shows that growth will continue to be anaemic. Inflation was a
dominant issue: nearly everyone believed that inflation is on the rise –
and investors were, consequently, on the look-out for inflation hedges.
There was huge uncertainty over the degree of overheating in
emerging markets, and particularly in China. The lack of quality data
and uncertainty over China’s degree of overheating, we believe, will
make the market particularly vulnerable to changes in the news-flow
from China. Investors thought the end game in China was clear (a
property bust and IRRs falling below interest rates, owing to
overinvestment), while the timing of this end game was very unclear.
Half of US clients expected the euro to break up at some point. On the
whole, investors seem quite relaxed about the end of QE 2.
Consensus longs
Oil (OFS within that), tobacco and software stood out. Thematic
consensus longs were the GEM/NJA consumer, rising food prices and
water. Style consensus longs were high dividend yield (yield being a
hedge against both uncertainty and inflation) and big cap. Regionally,
the consensus was clearly to be long the US.
Consensus shorts
Food producers/food retailing, energy utilities in Europe, UK REITs,
companies competing against China (though the list varies) and the
dollar.
There were very mixed views on mining, telecoms (value vs value trap)
and drugs as well as emerging markets as an asset class (top-down
funds were short of India, bottom-up were long).
Virtually no questions
We almost had no questions on banks (investors seem to accept that
long-term RoTE will revert to their pre-1990 trend), insurers and Japan
(this is very unusual and usually a good sign).

Credit Suisse,::Gammon 4Q11 disappoints on loss-making legacy orders

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Gammon India----------------------------------------------------------------- Maintain OUTPERFORM
4Q11 disappoints on loss-making legacy orders


● Gammon’s reported PAT needs to be adjusted for: 1) Rs1.8 bn
received from its real estate subsidiary, Metropolitan Infrahousing,
2) Rs1.7 bn of loss provisioning on revaluation of old fixed-price
orders (Kosi & Gorakhpur) and claims writeoff (DMRC order) and
3) Rs250 mn of gains from sale of its stake in Sadbhav Engg.
● 4Q11 recurring PAT of Rs273 mn fell 56% YoY (4% below CS
estimate), mainly impacted by its old loss-making fixed-price orders.
● Although Gammon claims it has improved its working capital cycle
sequentially, our calculation suggests its working capital cycle (net
of cash) increased from 132 days in FY10 to 147 days in FY11.
● Gammon plans to focus on cash flow improvement during FY12
rather than focussing on growth. It therefore guided for just 7-11%
top-line growth in FY12. However, it expects margins to improve to
9% as loss-making orders are expected to be completed by
December 2011.
● Gammon did not provide any details on its Italian and real estate
businesses. We cut our FY12-13E EPS by 1-5% on rising interest
rates and reduce target price to Rs164 (from Rs182), based on
the value of its construction business, which is at 10x FY12E EPS
(vs 12x previously).
4Q11 disappoints as legacy orders impact margins
Gammon’s legacy fixed-priced orders that constituted 25% of its order
book have fallen to about 10% now. However, led by delays (including
external factors such as floods, insurgency, etc.) and rising commodity
costs, these orders are now loss-making. Loss at these projects
continue to impact Gammon’s performance. 4Q11 operating margins
were just 6.3% vs our expectation of 8% and 119 bp lower YoY.
Gammon expects to complete these loss-making orders by December
2011. Its reported PAT needs to be adjusted for several one-time items
such as: 1) Rs1.8 bn interest income received on debentures of Rs0.8
bn of its real estate subsidiary taken over from ICICI Bank 4-5 years
back, 2) Rs1.7 bn loss provisioning on revaluation of its legacy road
projects, Kosi & Gorakhpur and claims writeoff for its DMRC order and
3) Rs250 mn of gains from the sale of its stake in Sadbhav Engg.
Working capital cycle though has improved on a sequential basis as
guided by the company, we note that it (net of cash) deteriorated
during FY11 to 147 days versus 132 days during FY10. Gammon
plans to focus on improving working capital cycle during FY12.
Figure 1: Gammon India – 4Q FY11 standalone results summary
(Rs mn) 4QFY10 4QFY11 % YoY 4QFY11E % difference
Order book 113,595 150,000 32.0% 155,000 -3.2%
Net Sales 16,678 17,379 4.2% 14,500 19.9%
Total operating expenses (15,426) (16,282) 5.5% (13,340) 22.1%
EBITDA 1,252 1,097 -12.4% 1,160 -5.4%
EBITDA margin (%) 7.5% 6.3% (119) 8.0% (169)
Depreciation (189) (249) 31.7% (261) -4.8%
EBIT 1,063 848 -20.2% 899 -5.6%
Net interest expenses (230) (405) 76.4% (520) -22.1%
Tax (212) (170) -19.9% (95) 79.2%
Tax Rate (%) 25.5% 38.3% 1,286 25.0% N.A.
Recurring PAT 621 273 -56.0% 284 -3.9%
Exceptionals (73) 331 Nmf - N.A.
Reported PAT 548 604 10.3% 284 112.7%
Source: Company data, Credit Suisse estimates
Muted FY12 sales guidance; expects margin improvement
Gammon guided for muted sales growth during FY12 of 7-11%, led by
its almost flat order book over the past four quarters and focus on
improving cash flow generation and margins during FY12 rather than
focussing on growth. Gammon expects the legacy loss-making orders
to be completed by December 2011. Besides, on a conservative basis
it has already provided for potential loss from these orders until
December 2011. This should allow it to improve margins going
forward. Gammon plans to reach 9% operating margin during FY12.
Order inflows could provide positive surprise, led by order
wins at subsidiaries
However, order inflows could surprise on potential large road project
wins on BOT basis by its subsidiary, GIPL, and potential of it winning
the NTPC bulk tender, if it wins its litigation to participate in NTPC’s
bulk tender. Besides, our sales growth estimate for FY12 already
factors in lower growth, as guided by the company.
No clarity provided on its Italian and real estate businesses
During the post-results conference call, Gammon provided no details
on the performance of its Italian business as well as on the media
articles that suggests Gammon is looking to divest its stake in the
Italian business. Besides, we await clarity on details of the land bank
and development plans for Gammon India’s real estate business.
Cut FY12-13E EPS by 1-4%; maintain OUTPERFORM
We cut our FY12-13 earnings estimates by 1-5% to factor in rising
interest costs. We also cut our price target to Rs164 from Rs182 as we
now value its construction business at 10x FY12E EPS versus at 12x
earlier led by expectation of lower growth and fall in peer valuation.
However, adjusted for valuation of its infrastructure business, the stock
now trades at 4-5x core construction earnings, which we believe is
inexpensive and thus maintain our OUTPERFORM rating for the stock.