We met the management of Axis Bank. Key takeaways:  PUG

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We met the management of Axis Bank. Key takeaways:
 Axis Bank currently enjoys market share of 3.5% in business and the management expects to gain further share due to higher than industry growth (about 1.5x of industry). However, share of corporate loans which is at ~53% may decline in the next few years. However at industry levels, fresh disbursements seem constrained since the last 6-9 months as Infrastructure lending has dried up, though demand for working capital loans is still high.
 The bank aims to maintain CASA ratio of 40% and above even though the demand deposits is likely to fall in line with industry trend due to increasing interest rate differential with term deposits. As the depositors are increasingly parking funds at higher yielding term deposits, growth in CASA balances is expected to be a challenge going forward. About 40% of liabilities of the bank are on a fixed rate basis whereas 85% of the loan book is based on floating rates. Bulk deposits comprise of 65% of term deposits; rest is retail term deposits with ticket size of less than INR50mn.
 MFI portfolio is around INR10bn out of which around 45-50% is towards Andhra based MFIs. Restructuring of INR2-4bn expected during current quarter. Securitized portfolio is very small i.e. about INR0.5bn. SME and retail mortgage space may surprise with some asset quality deterioration. Overall, balance sheets of large corporate are fairly resilient.
 Infrastructure sector comprises ~15% of total credit exposure, out of which around 40% is towards the power sector (5.8% overall). The bank does not lend to State Electricity Boards (SEBs) and most of the exposure is towards under-construction power projects.
 Merger with Enam is expected to take time as approvals are required from RBI, SEBI and finally the High Court. Enam has strong relationships with Mid-market clients in the equities business while Axis has wide network with SMEs in the loan/debt capital business. Hence, synergies are expected to accrue from this merger but only in the next 2-3 years.
Catalysts
 Above industry credit growth with maintenance of strong CASA franchise.
 Continued traction in fee income growth due to robust technological platform.
Risk
 Higher than expected slippage or lower NIMs may impact profitability negatively.
Valuations
The stock currently trades at 2.8x FY11 P/ABV and 15x FY11 EPS. Presently we do not have any rating on the stock.

SAIL:: Margin pressures to continue ; earnings will be under pressure::CLSA

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Margin pressures to continue
SAIL’s earnings will be under pressure in FY12 thanks to weakening domestic
demand and rising coking coal prices with no relief on the price front. The ISP
plant expansion by end-FY12 will boost volume growth in FY13 but the wage
settlement for workers in Jan 2012 will eat into part of the benefits. We cut
FY12-13 EPS by 20-23%. Stock has underperformed but still looks expensive
even on FY13 earnings. We see a high risk of SAIL’s expansions getting
delayed and believe that it is too early to assign value to FY14-15 earnings.
Continued delays in the FPO are also impacting the stock. U-PF stays.
FY12 set to be another weak year for SAIL
We believe that SAIL is unlikely to offer any meaningful volume growth in FY12
given weakening domestic demand in both long and flat steel. Domestic steel
prices rose by ~US$110-120/t over Jan-Mar – inline with regional prices – but
have come off by US$40-50/t since then. We anticipate more price cuts in 2Q
given weakening global prices. The impact of US$330/t coking coal will flow
through for half of 1Q since SAIL has inventories from 4Q at US$225/t but will
fully impact costs in 2Q. Platts has reported that Anglo has reached agreement
with several north Asia customers for its 3QCY11 HCC price at US$315/t FOB, a
similar price with its Europe settlement in May. We don’t see any relief for SAIL on
coking coal in 2QFY12 either. We expect SAIL’s EBITDA/t to decline YoY in FY12.
FY13 will be better than FY12 but not by much
The 2mtpa expansion in the ISP plant by end-FY12 will drive 15% volume growth
in FY12. The end of carry-over coking coal volumes (at US$300/t) will also
improve FY13 costs. However, SAIL will revise wages for non-executives in Jan
2012, which will impact FY13 costs and will eat into part of the benefits from the
volume growth. Nonetheless, we see SAIL delivering 14% EPS growth in FY13.
Too early to assign value on a post expansion basis given risk of delays
Given the spate of execution delays in metal sector projects by private sector
companies, we are sceptical of SAIL completing its expansions on time by Mar-13
and anticipate 6-12m delays. Given the risk of delays and continued macro
uncertainties in the near-term, we believe that it is too early to assign any value
to SAIL based on its eventual capacity. We are also not in favour of excluding the
debt component of CWIP from total debt while valuing such companies.
Cutting FY12-13 EPS by 20-23%; maintain U-PF
SAIL’s stock has underperformed substantially but at 7.0x FY13 EV/EBITDA,
valuations are still expensive. The FPO delays are also impacting stock
performance. Our new estimates are 22-24% below consensus. We maintain U-PF
with a target price of Rs110 at 6x FY13 EV/EBITDA.

We met the management of ICICI Bank. Key takeaways:  PUG

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We met the management of ICICI Bank. Key takeaways:
 ICICI Bank expects advance growth to be inline with system growth of 19-20% for FY12. While retail loans growth is expected to be muted at 15-16%, corporate loan growth is likely to compensate with over 20% growth. Foreign loan book should expand at similar levels (i.e. 19-20%).
 Expansion in CASA ratio seems difficult given the current interest rate scenario and wholesale deposits comprise 40% of total deposits part of which would get repriced at much higher rate. Hence the bank is witnessing pressure on cost of deposits due to rising rates, but the management is confident to maintaining NIMs around 2.6% levels.
 MFI portfolio has declined from ~INR25bn in Sep’10 to INR10bn currently. Out of this around INR2.5bn is securitized portfolio. Part of the term loan portfolio may undergoing restructuring (mostly towards Andhra based MFIs). Additional standard asset provision is not expected on restructured book as the bank already holds excess provisions in books.
 Life insurance premium growth is expected to remain under pressure till Sept’11. NBAP margins currently stand at 15-16% which the bank aims to maintain by cutting operating costs by ~30%. No additional capital infusion is expected this year as the company is already making accounting profits.
 Fee income is expected to be in-line with balance sheet growth although some slowdown is likely in equity related businesses. The bank is a big player in the NRI remittance market and has not witnessed any slowdown post the recent political turmoil in Middle East.
 The Bank of Rajasthan (BoR) merger has been completed. Corrective action is being taken to improve the productivity of urban and non-Rajasthan branches of BoR. The performance of the general insurance business has been in line with expectations, barring higher provisioning for third party motor pool in Q4FY11. Though tariffs have been revised by 68%, general insurance companies may still face pressures in this segment.
Catalysts
 Maintenance of strong CASA franchise along with robust growth in domestic and foreign loan book.
 Continued traction in fee income due to robust technological platform along with unlocking of value of subsidiaries.
Risk
 Higher than expected slippage or lower NIMs because of high proportion of wholesale deposits in funding mix.
Valuations
The stock currently trades at 2.3x FY11 consolidated P/ABV and 21x FY11 Consolidated EPS. Presently we do not have a rating on the stock.

Tech Mahindra - Analyst meet takeaways --Credit Suisse,

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● Tech Mahindra (TechM) and Mahindra Satyam (MSat) held their
first joint analyst meet on Friday.
● Management indicated that overall IT spend in the telecoms
vertical could rebound in 2H FY12. Further, it expects to benefit
from the trends of convergence and increased offshoring in
developed markets; and greenfield implementations and
introduction of revenue-boosting products in emerging markets. It
also stated that its capabilities were world-class and that its win
ratio was well over 50% in any significant telecoms deal.
● Management was confident of strong growth in non-BT revenues
and highlighted potential for improving margins by right-sizing the
employee pyramid.
● On MSat, management indicated that it was on track to achieve
industry-level operating margins and revenue growth in one-two
years. Given some pending legal/regulatory issues, it expects that
merger process could be completed earliest by May 2012.
First-ever joint analysts meet
Tech Mahindra (TechM) and Mahindra Satyam (MSat) held their first
joint analyst meet on Friday. Speakers included Mr Vineet Nayyar,
CEO of TechM and Chairman of MSat, Mr C P Gurnani, CEO of MSat
and the business heads of both companies.
Telecoms vertical to recover in 2H FY12
Management indicated that overall IT spend in the telecoms vertical
could rebound in 2H FY12. Further, it said that the addressable
market for offshore IT vendors such as TechM had increased
significantly after the financial crisis as operators in developed
markets were under pressure to cut costs. It also expected to benefit
from the trend of convergence of telecoms, media and internet. In
emerging markets, implementing greenfield projects and introduction
of new products to boost revenues would be the key drivers for growth.
It also stated that its telecoms capabilities were world-class and that
its win ratio was well over 50% in any significant deal in telecoms.
Separately, management said that telecoms operators were
increasingly looking upon their IT vendors as ‘partners’ and wanted to
share both risks and benefits of projects. Consequently, the
commercial model was evolving from time- and material-based pricing
to outcome-based pricing.
Non-BT business to drive revenue growth
Management stated that revenues from its largest client, BT, could
continue to stagnate but it was confident of growing revenues from
other clients. Management highlighted that its non-BT revenues had
grown at a 25% CAGR (in US$ terms) over FY08-11 despite the
recession.
Employee pyramid to be key driver for margin improvement
Management indicated that improving the employee pyramid by hiring
more freshers would be a key lever for improving margins at both
TechM and MSat. For instance, it stated that only 20% of MSat’s
employees were less than 30 years of age.
While, it expected to see improved realisations due to better servicemix, management did not expect significant like-for-like price
increases.
Mahindra Satyam turnaround on track
Management indicated that it was on track to achieve industry-level
operating margins and revenue growth in one-two years.
According to management, the average deal size was increasing and
it was seeing embargoes lifted from a number of clients; there was
significant potential for improvement on this front.
Management mentioned that Mahindra Satyam had never operated at
an EBITDA margin of over 3%; hence, it believes that achieving
EBITDA margin of 13% in 4Q FY11 was a significant achievement.
Merger earliest by May 2012
Management also stated that it could start the merger process only
after the settlement of some pending issues namely: (1) pending
litigation by Aberdeen and Satyam group companies and (2) tax
demand from the Indian government. It believes that it has a strong
position in each of these cases. However, it expects that even in the
most optimistic scenario, it was unlikely to complete the merger
process before May 2012.
It believes that synergies will mainly be on revenue front and that cost
synergies had been largely realised.

Prism Cement :: India’s Largest Integrated Building Materials Company ::BPE

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India’s Largest Integrated Building Materials Company
Company Description
Prism Cement Limited (PCL) is India’s largest integrated building materials company with a wide
range from cement, ready-mixed concrete, tiles, bath products to kitchens. The company recently
merged H & R Johnson (India) and RMC Readymix (India) with Prism Cement. The company also
has a 74% stake in Raheja QBE General Insurance Company Limited, a JV with QBE Group of
Australia.
Investment Rationale
⇒ Cement capacity expansion to lead robust volume growth
Prism Cement has completed its brownfield cement capacity expansion of 3.6 MTPA in December
2010 enhancing its total cement capacity to 5.6 MTPA due to which we expect the cement &
clinker sales volume to grow at ~29% CAGR (FY10-FY13E) to 6.2 MTPA. The company is also in
the process to set up a greenfield plant of 4.8 MTPA capacity in Andhra Pradesh in 2012 which
would benefit the company in the cement up-cycle.
⇒ Favourable Regional Exposure
The company has a strong presence in Central India and Eastern India with ~80% and ~15% exposure
respectively. Pace of demand in the markets of the company’s interest is expected to remain
robust going forward on the back of the government’s continued thrust on infrastructure and housing
in these regions and the company expects robust growth in demand from rural and tier-2 city
housing and infrastructure from these regions. The demand-supply situation of cement is the most
balanced in the Central region unlike other regions in India where there is a supply glut.
⇒ Strong Brand Equity in TBK Business
The company’s Tile Bath & Kitchen (TBK) division, H&R Johnson, is India’s premier tile company
since 1958 and has the largest distribution network and strongest brand equity in the country which
we believe will help the business to grow at ~ 15% CAGR (FY11-FY13E). The TBK division follows
a business model of 35% own manufacturing, 55% joint ventures and 10% outsourcing which we
believe will act as a catalyst for the business to achieve higher ROCE (~18%-20%) along with the
company’s core strength of strong distribution network and brand equity.
Valuation Summary
At CMP of Rs 44.5 the stock is trading at a P/E of 8.2x, P/BV of 1.5x and EV/EBITDA of 4.3x for
FY13E representing a significant discount to its peers. We believe PCL’s revenues will grow at a
CAGR of over 25% over FY10-FY13E on back of synergies achieved between the business divisions
which will create efficiencies and improve margins. We have arrived at a SOTP target price of
Rs 54.7 for PCL which represents a 23% upside from CMP. We hereby initiate coverage on Prism
Cement with a “Buy” recommendation and a target price of Rs 54.7.

Goldman Sachs, :: African Safari Part 3: Bharti vs. MTN: Growing with industry or competing?

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African Safari Part 3: Bharti vs. MTN: Growing with industry or competing?
Reiterate Buy on Bharti, MTN as industry growth remains strong
Following our recent meetings with Bharti & MTN and our recent visit to
Africa, we believe the concerns related to increase in competition post
Bharti’s entry are exaggerated, and believe both Bharti & MTN are well
positioned to show double digit revenue and EBITDA CAGR led by market
growth. We therefore reiterate our Buy on Bharti (on CL) and MTN.  In this
report, we (1) discuss Bharti Africa and MTN’s strength/weakness and
strategies; (2) highlight case studies that show the impact on
incumbent/new operator profits due to increased competition; (3) flag the
key takeaways after our discussions with Bharti & MTN; (4) provide on-theground feedback from Nigeria – the key African market for both telcos; and
(5) analyze the risk-reward potential in case of worsening competition.
Conclusion: BRTI’s improvement not coming at MTN’s expense
1) Given both Bharti and MTN have been rational in their offerings, we see
less risk of any price wars, particularly in Nigeria (contributes 38%/49% of
Bharti/MTN’s Africa EBITDA); 2) Adjusted for recent macro headwinds, we
expect Bharti/MTN to show 2010E-2013E revenue CAGR of 12%/11% and
EBITDA CAGR of 19%/14%, driven by rising market penetration/economies
of scale. We see upside risks to our 3G/m-commerce applications uptake
estimate given the push from operators; 3) We believe Bharti’s
revenue/EBITDA improvement will be driven by addressing operational
inefficiencies, improving its distribution/network issues and not at MTN’s
expense; 4) In our view, Bharti’s recent initiatives in Africa may also benefit
MTN in terms of cheaper procurement from its vendors, with the
outsourcing market developing in Africa, and tower sharing picking up.
MTN is preferred Africa play, but more surprise potential for Bharti
Between Bharti and MTN, MTN stacks up well as a preferred Africa pick
given its track record in the market, higher revenue contribution from Africa
and attractive valuations (FY12E P/E of 9.2X vs. 12.7X for Bharti). Going
forward, we believe Bharti could be considered as a stock to gain Africa
exposure as Africa’s contribution to its FY12E NAV increases from
Rs11/share (3% of TP) to Rs87 in FY14E (15% of implied value), led by Africa
EBITDA contributing 28% of total EBITDA in FY14E from FY11E’s 20%. Bharti
has a unique advantage vs. its African peers in leveraging benefits from a
combined India and Africa scale. Our Bharti Africa revenue/EBITDA could see
upside risks if the company achieves its FY13 revenue/ EBITDA target.

India Per Sq Ft Portable Cost Inflation a Big Challenge … Citi Research

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India Per Sq Ft Portable
Cost Inflation a Big Challenge … Or is it Shrinking Volumes?

Sector faces inflationary woes … — DLF surprised investors with Rs4.75b of one-time cost reset in 4Q, highlighting inflationary pressures. We believe this is not a recent phenomenon since both cement and steel prices have been trending upwards over the past 3-4 years, albeit with much volatility. In fact average pricing of cement has remained flat in FY10 and FY11.

… Not a cause for margin contraction — Steel/Cement costs (which constitute 25-40% of construction costs) are up ~16%/20% respectively since Aug-10. Most developers indicate that this rally hasn't led to any meaningful margin contraction, being offset by higher realizations across most cities. Recently reported margin erosions for few players have been led by causes like cost over-runs due to delays in old projects, changes in product mix and one-time cost adjustments.

Are material costs peaking? — Developers have mixed views – Oberoi & Prestige opine that input costs have peaked/close to peaking, while DLF/Godrej Properties feels that inflationary pressures may continue. CIRA believes that steel and cement prices could see some correction in the near term. However in the medium term, cement would tend to be flattish while steel would likely decline marginally YoY.

Margins versus volumes? — Prices have shot up in the past year and are being sustained at high levels by developers to protect their margins. This has resulted in lower affordability, impairing sale volumes and in turn cash flows.

Falling volumes is a bigger concern — Given a modest outlook for both steel/cement, we believe margins should be less of an issue going forward and transaction pick-up will be a key catalyst in sector recovery. Some price correction is imminent and should prove healthy as it would help drive volumes/cash flows in urrent tight liquidity environment. Our top picks are DLF/Prestige/Oberoi.