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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
Time to buy selectively
„ Indian markets likely to decline immediate short term
We expect the Indian markets to decline in the next few trading sessions as: 1)
India is a high Beta market and therefore risk aversion will lead to a knee jerk sell
reaction 2) India has seen portfolio inflows to the tune of US$29.4b in CY2010 &
US$2.1b ytd CY2011. This makes India vulnerable to outflows in the short term.
„ The positives for India – Lower crude prices, End of tightening
We believe that Indian stocks are likely to be attractive to foreign investors in the
medium to long term as: (1) Crude is expected to weaken which benefits India (2)
Decline in global commodity prices will result in peaking of policy rates. (3) Come
November/December 2011, investors will start focusing on FY13 earnings which
are likely to grow at a mid-teen rate. India is likely to have more attractive growth
prospects vs. developed markets and other emerging markets, in our view. Our
global equity strategist Jeffrey Palma believes that emerging markets should
outperform in most scenarios given stronger growth prospects, healthier balance
sheets and lower valuations. Our Asia strategist Niall MacLeod believes that weak
economic data should lessen inflation pressures short-term, and reduce tightening
risks in China and India. Niall remains overweight India and China (monetary
headwinds easing and valuations/estimates reflecting a growth slowdown,
especially in India).
„ Buy on decline stocks
Out of the 145 stocks we cover, we believe that the following six stocks offer the
best risk-reward and would see any weakness as an opportunity to reiterate our
Buy ratings on the stocks: Axis Bank, Bharti Airtel, BHEL, Dr. Reddys, M&M,
and Manappuram. Our top sell ideas are Adani Power, Crompton Greaves, HCL
Tech, NMDC, and Tata Motors.
High conviction buy ideas
Axis Bank (Buy, PT Rs1,600.00)
Q We believe margins have bottomed out for Axis bank in 1QFY12 and we
expect margins to expand from here on with further softening in wholesale
rates.
Q Asset quality has been faring well despite pressures as Axis has seasoned
SME and commercial real estate loan book
Q We expect loan growth of 23% CAGR over FY12-13 and earnings to grow at
22% CAGR.
Q We believe the stock offers attractive risk-reward at current valuations of
2.0x FY13E book and 10x earnings.
Bharti Airtel (Buy, PT Rs500.00)
Q We believe India mobile sector is going through a paradigm shift with
leading players increasing tariffs. We believe that improving pricing
environment and regulatory outlook will lead to a re-rating of the sector.
Q Given its dominant position, we expect Bharti to be one of the key
beneficiaries of the improving business environment in the Indian mobile
sector
Q In addition we believe India is at an inflexion point of mobile data growth
post 3G launch and expect the company to benefit from uptake of data usage.
Q The stock has outperformed Nifty by 31% year to date. We expect the
outperformance to continue in the coming months. The stock is trading at
FY12E EV/EBITDA of 8.8x.
BHEL (Buy, PT Rs2,750.00)
Q The three fundamental reasons why we think BHEL offers great value in
turbulent times are
— it has revenue coverage of more than 3 years from its order book,
— it's a net cash company (more than $2bn net cash),
— it is a company with very good corporate governance standards and high
quality management.
Q We think that the increased competition in the sector is old news. There are
now signs that the market is stabilizing in terms of customers' preferences.
The trend we see is that the state utilities and smaller private companies
prefer BHEL and large private companies are working with Chinese
equipment. So, we have not seen further deterioration for BHEL on this
parameter over last six to twelve months.
Q We believe FPO (government selling 5% stake in the company) overhang is
in the price now. The stock has already corrected post this announcement and
despite the belief that the government may offer a discount to market price
and some investors may be waiting for this event, we think there may not be
too much downside. The next catalyst for the stock could also be a
possibility of government announcing an import duty on foreign equipments.
Q On valuation, the stock is trading at historical lows on multiples (11.8x FY12
EPS) and we strongly believe that it offers value.
Dr Reddy’s (Buy, PT Rs 1,850.00)
Q Stock trades at 10% discount to rest of the sector at 15.7x FY13 earnings
with an EPS CAGR of 22% over FY11-FY13 period. We believe earnings
visibility remains high with potential approval for generic Lipitor, Geodon
(FTF) and ramp up of Arixtra (fondaparinux) generic in FY13.
Q We expect base business earnings to improve in H2FY12 with ramp up of
newly acquired Bristol penicillin facility in US and ramp up of Fondaparinux
and Allegra D-24 OTC.
Q Management expects to launch 10 more products in the US in FY12 incl.
Zyprexa exclusivity. The company has a pipeline of 75 ANDAs pending
approval including generic Lipitor. US filings include 37 para IVs and 10
FTFs.
Mahindra & Mahindra (Buy, PT Rs 840.00)
Q We believe Mahindra & Mahindra (M&M) is a strong play on the rural
growth story due to its
— leading tractor franchise; and
— high utility vehicle (UV) sales, which also have significant exposure to
rural areas.
We expect demand and pricing power to remain robust in the tractor segment.
We expect M&M to continue to gain market share in LCV market as
Maxximo continues to gain momentum.
Q We believe the negative impact of higher excise duty on diesel cars is priced
in. Our estimates already assume only 10%YoY growth in SUVs in FY12.
We believe the same is still achievable.
We believe the trend will favour diesel vehicles vs petrol and hence M&M
will continue to benefit over the medium term. We believe UV demand could
surprise on the upside with the forthcoming launch of the below 4m Xylo,
which should open up a new segment for the company.
Q We believe the co. remains well capitalized with FY11 Debt/Equity at ~0.2
on a standalone basis. Recent Ssangyong acquisition is expected to be
EBITDA positive in FY12. We do not expect any need for further capital
infusion at Ssangyong.
Q We believe the stock is attractive at current valuations trading at 11.5x FY12
PE.
Mannapuram (Buy, PT Rs77.50)
Q We believe the company’s business growth is positively geared to rising gold
prices. As per our estimates 1% rise in gold prices could potentially add 0.6-
0.7% to overall AUM growth
Q We think that the company is unaffected by macro slowdown. In our view,
growth rates are contingent on RBI regulatory changes. We expect loan
growth of 45% for MGFL in FY12.
Q Mannapuram is a big beneficiary of pause in tightening as it is funded at the
short end of the yield curve.
Q The valuations are attractive at 2x FY12 book and 10x FY12 earnings. We
expect RoE of 22% over FY12-13 with EPS CAGR of 48%.
High conviction sell ideas
Adani Power (Sell, PT Rs80.00)
Q Adani Power has corrected 20% in last six trading sessions primarily on;
— Lokayukta of Karnataka (one of the states in South India) has named a
few companies (including Adani Enterprises Limited) in its report on
illegal mining in the state. Adani Enterprises is the parent company of
Adani Power
— Adani Power has reported below expectations numbers in 1Q results
which were reported last week.
Q Adani Power has reported sharp decline in plant utilisation in 1Q, the
average Plant Load Factor (PLF) was only 74% vs. 80% in 1Q FY11. We
have cut our steady state PLF forecast by 500bps from 90% to 85% over
medium and long-term. We believe the assumption is reasonable after the
industry wide decline in utilisation levels.
Q We like the company for its strong execution but we believe that the current
stock price still doesn’t fully factor in the risks for projects such as, a)
decline in merchant tariffs, b) no fuel escalation in its long-term PPAs.
Q On valuation, the stock is trading at 2.7x FY12 Book Value per share and we
think it's not cheap compared to the peer group. We strongly believe that the
stock may have some further downside.
Crompton Greaves (Sell, PT Rs160.00)
Q We believe Crompton’s power systems business is struggling in both the
overseas and domestic markets. There is also no clarity in the near term on
the revival of its consumer products business. Since these two businesses
contribute around 85% of its revenue, investor sentiment on the stock could
remain negative.
Q We understand that Indian T&D manufacturers are facing strong competition
from overseas manufacturers, which led to lower profitability. Post
Crompton Greaves’ (Crompton) results, a few more domestic power
transmission and distribution (T&D) equipment manufacturers have declared
their results; Q1 FY12 data indicates huge competitive pressure in the space.
Q We also expect this trend to continue in the near term. The overseas business
in Europe and Middle East have low visibility and domestic consumer
products business has seen sharp fall in revenue growth, this situation may
not improve in near-term in our view.
Q On valuation, the stock is trading at 15x FY12 EPS and we think it's not
cheap as we strongly believe that our numbers may not have upside (we are
already at the top end of guidance).
HCL Technologies (Sell, PT Rs430.00)
Q We do not expect the company’s margin differential with Infosys/TCS to
widen without a significant large revenue growth outperformance. HCL
Technologies operating margin in FY11 stood at 17.2% compared with its
peers in the range of 22-29%. In addition, we expect that there is likelihood
of potential sluggishness in demand by early 2012, which could cause
downgrades to FY13 outlook.
Q The company’s margins continue to suffer due to higher dependence on more
experienced employees and aggressive currency hedges leading to lower
margin resilience compared with the top Indian vendors. We expect more
expenditure on client-facing activities, which is likely to show up as higher
SG&A expenditure.
Q The company has guided for better margin focus over the next few quarters;
the H2 FY11 EBITDA margin being up 130bp from H1. However, the FY11
EBITDA margin was down 330bps YoY. Over the next two-three years we
expect the margins to remain low and we do not foresee any other catalyst
for stock price upside. We remain cautious given our concern about a
potential trade-off between margins and revenue growth.
NMDC (Sell, PT Rs210.00)
Q We remain negative on NMDC as it remains one of the most expensive iron
ore stocks globally.
Q In addition to the regulatory concerns in mining in India (NMDC was also
named in the Lokayukta report for under-invoicing iron ore sales though
NMDC has clarified that it was not involved in it), we believe the recent
macro concerns globally could weigh on the stock as it sells iron ore on
export parity price in India.
Tata Motors (Sell, PT Rs920.00)
Q Tata Motors (TAMO) derives ~70% of EBITDA from its JLR operations.
Given deteriorating global growth outlook, we remain cautious on JLR
performance in the near to medium term. There has been steady decline in
EU retail sales (down 15% yoy in June Qtr).
Also, incentives in the US have risen sharply for the Jaguar brand,
underscoring a deteriorating demand environment. With rising incentives,
JLR’s operating margins will decline; we expect 10.2%/9.1% margins for
FY12/13 from
Q We also maintain our negative view on the domestic MHCV cycle. Change
in product mix in favor of lower margin LCVs and sharp decline in Indica
and Indigo sales will cause domestic business margins to remain under
pressure.
We expect standalone margins at 9%/8.5% for FY12/13. Our EPS estimates
(consolidated) are 4%/16% below consensus for FY12/13.
Q Due to limited free cash flow generation given high capex at JLR, we believe
debt is unlikely to decline meaningfully and interest cost is likely to remain
high. We believe any marked deterioration in demand environment could
result in further leveraging of the balance sheet. The company had net
Automotive Debt of ~ US$3bn as of Mar'11.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
India Market Strategy
Time to buy selectively
„ Indian markets likely to decline immediate short term
We expect the Indian markets to decline in the next few trading sessions as: 1)
India is a high Beta market and therefore risk aversion will lead to a knee jerk sell
reaction 2) India has seen portfolio inflows to the tune of US$29.4b in CY2010 &
US$2.1b ytd CY2011. This makes India vulnerable to outflows in the short term.
„ The positives for India – Lower crude prices, End of tightening
We believe that Indian stocks are likely to be attractive to foreign investors in the
medium to long term as: (1) Crude is expected to weaken which benefits India (2)
Decline in global commodity prices will result in peaking of policy rates. (3) Come
November/December 2011, investors will start focusing on FY13 earnings which
are likely to grow at a mid-teen rate. India is likely to have more attractive growth
prospects vs. developed markets and other emerging markets, in our view. Our
global equity strategist Jeffrey Palma believes that emerging markets should
outperform in most scenarios given stronger growth prospects, healthier balance
sheets and lower valuations. Our Asia strategist Niall MacLeod believes that weak
economic data should lessen inflation pressures short-term, and reduce tightening
risks in China and India. Niall remains overweight India and China (monetary
headwinds easing and valuations/estimates reflecting a growth slowdown,
especially in India).
„ Buy on decline stocks
Out of the 145 stocks we cover, we believe that the following six stocks offer the
best risk-reward and would see any weakness as an opportunity to reiterate our
Buy ratings on the stocks: Axis Bank, Bharti Airtel, BHEL, Dr. Reddys, M&M,
and Manappuram. Our top sell ideas are Adani Power, Crompton Greaves, HCL
Tech, NMDC, and Tata Motors.
High conviction buy ideas
Axis Bank (Buy, PT Rs1,600.00)
Q We believe margins have bottomed out for Axis bank in 1QFY12 and we
expect margins to expand from here on with further softening in wholesale
rates.
Q Asset quality has been faring well despite pressures as Axis has seasoned
SME and commercial real estate loan book
Q We expect loan growth of 23% CAGR over FY12-13 and earnings to grow at
22% CAGR.
Q We believe the stock offers attractive risk-reward at current valuations of
2.0x FY13E book and 10x earnings.
Bharti Airtel (Buy, PT Rs500.00)
Q We believe India mobile sector is going through a paradigm shift with
leading players increasing tariffs. We believe that improving pricing
environment and regulatory outlook will lead to a re-rating of the sector.
Q Given its dominant position, we expect Bharti to be one of the key
beneficiaries of the improving business environment in the Indian mobile
sector
Q In addition we believe India is at an inflexion point of mobile data growth
post 3G launch and expect the company to benefit from uptake of data usage.
Q The stock has outperformed Nifty by 31% year to date. We expect the
outperformance to continue in the coming months. The stock is trading at
FY12E EV/EBITDA of 8.8x.
BHEL (Buy, PT Rs2,750.00)
Q The three fundamental reasons why we think BHEL offers great value in
turbulent times are
— it has revenue coverage of more than 3 years from its order book,
— it's a net cash company (more than $2bn net cash),
— it is a company with very good corporate governance standards and high
quality management.
Q We think that the increased competition in the sector is old news. There are
now signs that the market is stabilizing in terms of customers' preferences.
The trend we see is that the state utilities and smaller private companies
prefer BHEL and large private companies are working with Chinese
equipment. So, we have not seen further deterioration for BHEL on this
parameter over last six to twelve months.
Q We believe FPO (government selling 5% stake in the company) overhang is
in the price now. The stock has already corrected post this announcement and
despite the belief that the government may offer a discount to market price
and some investors may be waiting for this event, we think there may not be
too much downside. The next catalyst for the stock could also be a
possibility of government announcing an import duty on foreign equipments.
Q On valuation, the stock is trading at historical lows on multiples (11.8x FY12
EPS) and we strongly believe that it offers value.
Dr Reddy’s (Buy, PT Rs 1,850.00)
Q Stock trades at 10% discount to rest of the sector at 15.7x FY13 earnings
with an EPS CAGR of 22% over FY11-FY13 period. We believe earnings
visibility remains high with potential approval for generic Lipitor, Geodon
(FTF) and ramp up of Arixtra (fondaparinux) generic in FY13.
Q We expect base business earnings to improve in H2FY12 with ramp up of
newly acquired Bristol penicillin facility in US and ramp up of Fondaparinux
and Allegra D-24 OTC.
Q Management expects to launch 10 more products in the US in FY12 incl.
Zyprexa exclusivity. The company has a pipeline of 75 ANDAs pending
approval including generic Lipitor. US filings include 37 para IVs and 10
FTFs.
Mahindra & Mahindra (Buy, PT Rs 840.00)
Q We believe Mahindra & Mahindra (M&M) is a strong play on the rural
growth story due to its
— leading tractor franchise; and
— high utility vehicle (UV) sales, which also have significant exposure to
rural areas.
We expect demand and pricing power to remain robust in the tractor segment.
We expect M&M to continue to gain market share in LCV market as
Maxximo continues to gain momentum.
Q We believe the negative impact of higher excise duty on diesel cars is priced
in. Our estimates already assume only 10%YoY growth in SUVs in FY12.
We believe the same is still achievable.
We believe the trend will favour diesel vehicles vs petrol and hence M&M
will continue to benefit over the medium term. We believe UV demand could
surprise on the upside with the forthcoming launch of the below 4m Xylo,
which should open up a new segment for the company.
Q We believe the co. remains well capitalized with FY11 Debt/Equity at ~0.2
on a standalone basis. Recent Ssangyong acquisition is expected to be
EBITDA positive in FY12. We do not expect any need for further capital
infusion at Ssangyong.
Q We believe the stock is attractive at current valuations trading at 11.5x FY12
PE.
Mannapuram (Buy, PT Rs77.50)
Q We believe the company’s business growth is positively geared to rising gold
prices. As per our estimates 1% rise in gold prices could potentially add 0.6-
0.7% to overall AUM growth
Q We think that the company is unaffected by macro slowdown. In our view,
growth rates are contingent on RBI regulatory changes. We expect loan
growth of 45% for MGFL in FY12.
Q Mannapuram is a big beneficiary of pause in tightening as it is funded at the
short end of the yield curve.
Q The valuations are attractive at 2x FY12 book and 10x FY12 earnings. We
expect RoE of 22% over FY12-13 with EPS CAGR of 48%.
High conviction sell ideas
Adani Power (Sell, PT Rs80.00)
Q Adani Power has corrected 20% in last six trading sessions primarily on;
— Lokayukta of Karnataka (one of the states in South India) has named a
few companies (including Adani Enterprises Limited) in its report on
illegal mining in the state. Adani Enterprises is the parent company of
Adani Power
— Adani Power has reported below expectations numbers in 1Q results
which were reported last week.
Q Adani Power has reported sharp decline in plant utilisation in 1Q, the
average Plant Load Factor (PLF) was only 74% vs. 80% in 1Q FY11. We
have cut our steady state PLF forecast by 500bps from 90% to 85% over
medium and long-term. We believe the assumption is reasonable after the
industry wide decline in utilisation levels.
Q We like the company for its strong execution but we believe that the current
stock price still doesn’t fully factor in the risks for projects such as, a)
decline in merchant tariffs, b) no fuel escalation in its long-term PPAs.
Q On valuation, the stock is trading at 2.7x FY12 Book Value per share and we
think it's not cheap compared to the peer group. We strongly believe that the
stock may have some further downside.
Crompton Greaves (Sell, PT Rs160.00)
Q We believe Crompton’s power systems business is struggling in both the
overseas and domestic markets. There is also no clarity in the near term on
the revival of its consumer products business. Since these two businesses
contribute around 85% of its revenue, investor sentiment on the stock could
remain negative.
Q We understand that Indian T&D manufacturers are facing strong competition
from overseas manufacturers, which led to lower profitability. Post
Crompton Greaves’ (Crompton) results, a few more domestic power
transmission and distribution (T&D) equipment manufacturers have declared
their results; Q1 FY12 data indicates huge competitive pressure in the space.
Q We also expect this trend to continue in the near term. The overseas business
in Europe and Middle East have low visibility and domestic consumer
products business has seen sharp fall in revenue growth, this situation may
not improve in near-term in our view.
Q On valuation, the stock is trading at 15x FY12 EPS and we think it's not
cheap as we strongly believe that our numbers may not have upside (we are
already at the top end of guidance).
HCL Technologies (Sell, PT Rs430.00)
Q We do not expect the company’s margin differential with Infosys/TCS to
widen without a significant large revenue growth outperformance. HCL
Technologies operating margin in FY11 stood at 17.2% compared with its
peers in the range of 22-29%. In addition, we expect that there is likelihood
of potential sluggishness in demand by early 2012, which could cause
downgrades to FY13 outlook.
Q The company’s margins continue to suffer due to higher dependence on more
experienced employees and aggressive currency hedges leading to lower
margin resilience compared with the top Indian vendors. We expect more
expenditure on client-facing activities, which is likely to show up as higher
SG&A expenditure.
Q The company has guided for better margin focus over the next few quarters;
the H2 FY11 EBITDA margin being up 130bp from H1. However, the FY11
EBITDA margin was down 330bps YoY. Over the next two-three years we
expect the margins to remain low and we do not foresee any other catalyst
for stock price upside. We remain cautious given our concern about a
potential trade-off between margins and revenue growth.
NMDC (Sell, PT Rs210.00)
Q We remain negative on NMDC as it remains one of the most expensive iron
ore stocks globally.
Q In addition to the regulatory concerns in mining in India (NMDC was also
named in the Lokayukta report for under-invoicing iron ore sales though
NMDC has clarified that it was not involved in it), we believe the recent
macro concerns globally could weigh on the stock as it sells iron ore on
export parity price in India.
Tata Motors (Sell, PT Rs920.00)
Q Tata Motors (TAMO) derives ~70% of EBITDA from its JLR operations.
Given deteriorating global growth outlook, we remain cautious on JLR
performance in the near to medium term. There has been steady decline in
EU retail sales (down 15% yoy in June Qtr).
Also, incentives in the US have risen sharply for the Jaguar brand,
underscoring a deteriorating demand environment. With rising incentives,
JLR’s operating margins will decline; we expect 10.2%/9.1% margins for
FY12/13 from
Q We also maintain our negative view on the domestic MHCV cycle. Change
in product mix in favor of lower margin LCVs and sharp decline in Indica
and Indigo sales will cause domestic business margins to remain under
pressure.
We expect standalone margins at 9%/8.5% for FY12/13. Our EPS estimates
(consolidated) are 4%/16% below consensus for FY12/13.
Q Due to limited free cash flow generation given high capex at JLR, we believe
debt is unlikely to decline meaningfully and interest cost is likely to remain
high. We believe any marked deterioration in demand environment could
result in further leveraging of the balance sheet. The company had net
Automotive Debt of ~ US$3bn as of Mar'11.
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