18 stocks for 2018 -Indian equities top ideas & bets : JM Financial

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Prestige Estates -BUY Target: `205 (Dec’13) JM Financial

Balanced portfolio with comfort of South
Prestige Estate is one of the largest developers in Bangalore real estate
market with strong cashflow profile (from completed and existing ongoing
projects), healthy fresh sales momentum (average `7bn/qtr of fresh sales in
last 5 quarters), large outstanding order book pending revenue recognition
(`48bn) and growing rental income. We like Bangalore real estate market
from the volume offtake and pricing perspective. The southern market
presence and a balanced portfolio of investment and development
properties are the key reasons for us to like Prestige Estates. Initiate with
BUY and NAV based target price of `205 (Dec’13).

Natco Pharma: Risk-reward remains favourable 􀂄 JM Financial

Risk-reward remains favourable
􀂄 Strong operating performance in FY12: Natco posted 15% sales growth for
FY12 at `5.2bn. During FY11, the company had divested one retail pharmacy
store in US (sales of $10mn). Excl the US retail sales, underlying sales were
stronger at 27%. EBITDA at `763mn was up 25% YoY while margins at 14.7%
were higher 120bps YoY. The margin increase was driven by better product
mix (lower US retail). Adjusted net profit at `596mn was up 2.8% YoY
primarily due to higher taxes (at 26.1%). Domestic oncology sales at `1.5bn
grew by 22% YoY driven by both volume and price increase.

Ranbaxy Labs: Risk-reward turns less favourable :JM Financial,

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Risk-reward turns less favourable
Base margins appear to have improved: Ranbaxy reported 1QCY12 net
profits of `12.5bn (310% YoY). This included US Lipitor sales of $306mn
(JMFe). Adjusting for Lipitor net profits of `5.6bn and post-tax MTM forex
gains of `940mn (`750mn as part of the other income + `190mn as part of
the interest expense), adjusted net profit was `2.4bn (300% YoY; JMFe:
`1.0bn). Base sales at $430mn (9% YoY) were 9% below JMFe. Adjusted EBITDA
(excl Lipitor) at `3.4bn appear higher than JMFe (`2.4bn) primarily on account
of lower raw material costs. Base RM margins have improved almost by
180bps on a sequential basis. Management mentioned that this improvement
will sustain. The improvement was due to various factors such as product mix,
level of imports and currency. Staff costs were in-line with JMFe. The payment
to Teva as part of the Lipitor launch may have remained at levels similar to
4QCY11 (c.50%). Given the presence of significant FTF revenues (along with
the profit share with Teva) and currency volatility, it may be difficult to identify
the drivers for the improvement in base margins. R&D expense was $22mn for
the quarter.
Update on consent decree in 3QCY11: Domestic sales at $99mn grew by
13% in INR terms. The growth in consumer division ($15mn) was strong at
20%. Slower growth in domestic market is due to higher exposure to antiinfectives.
Base US sales at $95mn are likely to be driven by Caduet and
Nexium supply. In the Atorva market, Ranbaxy has a 47% share with 60-70%
price erosion. Sales of Atorva from Mohali are not reflected in 1Q12 numbers.
Ranbaxy will provide an assessment of additional costs to implement the
consent decree in 3QCY12. The company has finalized the consultants who
are expected to visit the facility in 2QCY12, post which the FDA inspection is
expected. Ranbaxy reiterated that large scale infrastructure additions may not
be required as part of the consent decree process given the investments done
by the company over the last couple of years. The company did not provide
any capex guidance but expects investments to be higher than CY11. It plans
to set up a facility in Nigeria during the current year.
Maintain BUY; increase Dec’12 TP to `540: We increase CY12/13E EPS by
32%/13% primarily due to higher margins. We increase our Dec’12 TP to `540
from `485. Our TP is based on 18x CY13 EPS (`26) and P-IV value of `70. The
US PDUFA date for Isotretinoin is scheduled for 29th May’12 which is a near
term trigger. Our estimates already factor sales from this product in CY13.

Technicals: Sundram Fasteners, Gammon Infrastructure, Bajaj Hindusthan, S.E. Investments, Symphony, JM Financial, Dewan Housing, :Business Line

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I am holding shares of Dewan Housing Finance bought at Rs 275 and JM Financial bought at Rs 35. Should I continue to hold or sell at current price?

Pragdas Mathuradas

Dewan Housing Finance Corporation (Rs 218.5): Dewan Housing still appears to be on strong foundation. It has key long-term support at Rs 155 and the stock bounced off the low at Rs 176 last December. Investors with long-term perspective can continue to hold the stock as long as it trades above this level.

If it manages to hold above Rs 176 in the upcoming months, investors can look forward to a rally to the previous peak at Rs 347 or even higher over the long term.

The near-term prospects for the stock are, however, under a cloud. Medium-term resistance for the stock is at Rs 280. Since the stock is reversing lower from this level, it can decline to Rs 175 or Rs 155 in the upcoming months. If your investment horizon is short-term, then exit the stock on a close below Rs 210.

JM Financial (Rs 13.5): This stock is in a vicious downtrend and it is advisable to switch over to some other stock. JM Financial recorded its long-term trough around Rs 19 in March 2009.

This trough was breached last September, and the stock is currently trading below this level. Since the stock is currently close to its multi-year low, it is hard to predict where the downward spiral can halt.

Immediate support for the stock is at Rs 11.6. If this level is breached, it may fall to Rs 5.1. Medium-term resistances will be at Rs 32, Rs 45 and Rs 65.

Please advise on the outlook for Symphony and S.E. Investments. Are these stocks worth holding?

Rakesh Duggal

Symphony (Rs 250.8): This stock moved out of wilderness, below Rs 20, in 2010 to move to the peak of Rs 334 in April 2011. Since then, the stock is moving sideways in a broad band between Rs 200 and Rs 300.

Long-term outlook is positive for the stock and investors can hold with stop at Rs 190. If the stock holds above this level, it will open the possibility of break out to Rs 400 over the next two years.

That said, breach of the support at Rs 190 will drag the stock down to Rs 168 or Rs 130. Therefore, investors should divest their holding on fall below Rs 190.

The medium-term trend in the stock is, however, sideways.

It could continue to oscillate in the band between Rs 200 and Rs 300. Investors with a shorter investment horizon should, therefore, exit the stock close to Rs 300 and look for buying opportunities near the floor of the current range.

S.E. Investments (Rs 319.9): This is an extremely volatile stock recommended only for the brave-heart. It is currently close to its long-term resistance between Rs 350 and Rs 400. S.E. Investments has reversed sharply from this band twice in the last two years.

Since the reversals can be very sharp giving little opportunity to investors to exit, it would be best to take some money off the table, if you have some in front of you.

Hold the rest with stop at Rs 285.

What is the long-term view on Bajaj Hindusthan?

R.N.B. Rao

Bajaj Hindusthan (Rs 29.2): Bajaj Hindusthan is hardly in a sweet spot, wallowing close to eight-year low. Needless to add that the long-term view on the stock is currently down.

Decline below the December 2011 low at Rs 24 will take the stock below the Rs 10 mark.

The stock needs to do a lot of work before it moves to a position of relative stability. The first requirement would be a strong close above Rs 60.

Investors with lower risk-taking ability should exit the stock at current juncture and consider re-investing on a strong close above Rs 60. Subsequent medium-term targets would be Rs 93 and Rs 136.

Long-term outlook for the stock will turn positive only on weekly close above Rs 200. Inability to move beyond this level will keep the stock in the Rs 25-200 band for a few more years.

I am holding shares of Gammon India purchased at Rs 123. Please advise on the prospects of this stock.

P.M. Rao

Gammon India (Rs 44.4): Gammon India has given up all the gains recorded in the 2009 rally and is currently trading near its 2009 trough. The trend across time frames — long, medium and short — are currently down for this stock.

Investors can hold the stock with stop at Rs 40. But given the fact that many stocks are currently trading well below their 2009 lows, the stock can head lower to Rs 33 or Rs 19 in the upcoming months.

Resistances in the upcoming months will be at Rs 130, Rs 180 and Rs 271. The long-term trend will, however, turn positive only if the stock manages a close above Rs 270.

Please advise on the future outlook of Sundram Fasteners.

Sajahan

Sundram Fasteners (Rs 53): Sundram Fasteners faces strong long-term resistance in the zone between Rs 65 and Rs 75.

The rally from 2009 lows halted in this zone and the stock is currently consolidating in the band between Rs 45 and Rs 65. Key long-term supports for the stock are at Rs 44 and Rs 36.

If the stock manages to hold above Rs 44, it will denote the propensity to break out higher to Rs 85 or Rs 94 in the next couple of years.

IT Services:: 3QFY12 Preview: Benefit of INR depreciation ::JM Financials

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3QFY12 Preview: Benefit of INR depreciation
Constant currency revenue growth of 2.9-4.6%: We expect top-4 Indian IT
companies to report constant currency revenue growth of 2.9-4.6% QoQ. US$
revenue growth will be adversely impacted by 50-190bps due to cross
currency movement. However, USD/INR depreciation of 11.4% QoQ would
benefit reported revenues (INR), margins, and drive 20%+ QoQ EBIT growth.
We believe the stocks are factoring in FY13 US$ revenue growth of 10-15%
and don’t see any downside to these expectations. While macro environment
remains challenging, Indian IT companies are likely to benefit from the
outsourcing trend. Remain positive on the sector with a bias towards tier-
1 companies. Infosys/TCS remain our top picks in the sector; amongst
mid-caps we like eClerx/MindTree.
TCS and HCLT to lead revenue growth: TCS should report strongest
constant currency QoQ growth at 4.6%, followed by HCLT (4.4%), Infosys
(3.7%) and Wipro (2.9%). However, cross currency will adversely impact growth
by c.190bps for TCS/Wipro and c.160bps for HCLT. Infosys should report
highest growth in US$ terms at 3.2% QoQ. Amongst mid-caps, eClerx (+4%)
and MindTree (+3%) should report decent US$ revenue growth. Rupee
depreciation of 11.4% will drive EBIT margin expansion of 200-300bps QoQ
for most companies. Infosys may indicate bias towards lower end of FY12 US$
revenue guidance (17.1-19.1%), however raise EPS guidance to `148.
Investors to focus on CY12 demand outlook: We expect management
commentary on CY12 IT budgets to indicate a) no major delays in finalisation
of budgets, and b) largely flat IT budgets with minor downward bias. We
expect a moderation in the demand commentary and select instances of
project delays/cancellations from companies. Amongst verticals, we expect
manufacturing and retail outlook to be relatively better while financial
services and technology/telecom outlook may be muted.
Infosys/TCS top picks: We remain positive on Infosys/TCS and expect 15-
20% upside over 9-12 months. Stocks are factoring in 10-15% US$ revenue
growth for FY13 and currency reset will drive earnings upgrade. We believe
the risk/reward is most favourable for Infosys. Risk to our thesis is a freeze in
the global economy and/or legislative move against offshoring.

Rural Electrification Corp. :Correction provides attractive entry opportunity :JM Financial,

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Correction provides attractive entry opportunity
􀂄 Loan book to register 20% CAGR for FY11-14E: RECL has delivered robust
loan book CAGR of 25% over FY05-11. Given outstanding sanction of `1.5trn
(1.8x FY11 loan book) and investment pick-up in FY12 (being the last fiscal of
the 11th five year plan), we expect 18%/17%/17% disbursement growth in
FY12/FY13/FY14E, leading to loan book CAGR of c.20% for FY11-14E.
􀂄 Margins to moderate by 17bps over FY11-14E: We expect 30bps and 17bps
decline in spreads and margins for RECL over FY11-14E driven by a) increase in
borrowing cost by c.90bps over FY11-13E, b) unfavourable ALM profile
wherein RECL has negative mismatch of `7bn in FY12E and `23bn in FY13E.
Thus we expect RECL’s spreads to decline by 35bps to 2.6% by FY12E and
improve marginally to 2.7% in FY13E. For FY14, we factor c.8bps improvement
in spread over FY13E level. Margins are expected to compress by 17bps,
implying 19% CAGR in NII over FY11-14E.
􀂄 Credit losses on SEB exposure unlikely; however, we conservatively factor
credit costs of c.12bps: Given higher exposure to discoms which are incurring
significant losses currently, there has been perception of significant asset
quality pressure on RECL. However, we believe actual credit losses would not
be significant given a) escrow account mechanism and state level guarantees
on these exposure, b) recent tariff hikes which should ease the burden for
SEBs, c) In FY01-03, RECL had restructured SEB loans but without taking any
significant loss on NPV basis. However, given risks on private sector exposure,
we conservatively factor credit costs of 10bps each for FY12/FY13E and 12bps
for FY14E. Further, RECL maintains reserve for bad debts (c.0.8% of loan book)
which should act as buffer in case of any restructuring/NPLs.
􀂄 Earnings CAGR of c.16% over FY11-14E with ROE of c.21%: We forecast net
profit to witness c.16% CAGR over FY11E–14E driven by 19% CAGR in NII on the
back of robust 20% loan book CAGR. However, we have modeled elevated
credit costs (12bps in FY14E vs nil in FY11) and margin decline of 17bps over
FY11-14E .RECL is expected to report healthy return ratios with ROA and ROE
of c.2.9% and c.21% respectively over FY12-14E..
􀂄 Correction provides attractive entry point, initiate coverage with BUY and
`220 TP: RECL has witnessed significant de-rating from peak multiple of 2.9x
1yr fwd book to 1.1x currently. We believe current valuations are attractive at
1.1x FY13E book with dividend yield of c.5% (based on FY12E dividend). We
value the stock at 1.1x FY14P/B (at 1.15x Mar’14 ABV; adjusted for reserves
for bad and doubtful debt), implying Mar’13 target price of `220, upside of
c.23%, including dividend

Power Finance Corp :Negatives priced in 􀂄 :JM Financial,

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Negatives priced in
􀂄 Loan book to register 21% CAGR for FY11-14E: POWF delivered robust loan
book CAGR of 23% for FY05-11. Given outstanding sanction of `1.7trn (1.6x
FY11 loan book) and investment pick-up in FY12 (being the last fiscal of the
11th five year plan), we expect 18%/17%/17% disbursement growth in
FY12/FY13/FY14, leading to loan book CAGR of c.21% for FY11-14E.
􀂄 Equity issuance to lead to stable margins in FY12E: We expect 14bps decline
in spreads for POWF in FY12E and stable spreads over FY11-14E given a)
increase in borrowing cost by 65bps over FY11-14E, b) company has a
marginally negative re–pricing schedule of `30bn i.e. excess of loan liabilities
(`230bn up for re-pricing) over loan assets (`200bn). Thus we expect POWF’s
spreads to decline by 14bps to 2.1% in FY12E and improve to 2.27% over FY12-
FY14E (on lower borrowing costs). We expect margins to remain stable over
FY11-14E, leading to 23% CAGR in NII over FY11-14E.
􀂄 Higher exposure to generation is comforting factor, conservatively model
14bps of credit costs; reserves for bad debts (1% of loans) should act as
buffer: POWF has c.84% of the loans towards generation companies which are
much better financially positioned than distribution and transmission
companies which form c.13% of POWF’s book. However, given risks gencos face
from poor financial health of state-owned discoms, we conservatively factor
14bps of credit costs for FY13E and 14E. Further, POWF maintains reserve for
bad debts (c.1% of O/S loan book) which should act as a buffer in case of any
restructuring/NPLs.
􀂄 Solid 20% net profit CAGR over FY11-14E with ROE of c.18%: We expect
earnings CAGR of 20% over FY11-14E driven by 23% CAGR in NII on the back of
robust loan book CAGR of 21%; however, we have modeled elevated credit
costs (14bps in FY14E vs 4bps in FY11). Return ratios should remain healthy
with ROA of 2.6% and ROE of 18% in FY14E.
􀂄 Current valuations at 0.95x 1yr fwd book (down from a peak of 2.9x);
initiate coverage with BUY and TP of `205: POWF has witnessed significant
de-rating from peak multiple of 2.9x 1yr fwd book to 0.95x currently. We
believe current valuations are attractive at 0.9x FY13E book with dividend yield
of c.5% (based on FY13E dividend). We value the stock at 1x FY14P/B (at 1.05x
Mar’14 ABV; adjusted for reserves for bad and doubtful debt), implying Mar’13
target price of `205, upside of c.30%, including dividend

Power Financiers: Light at the end of the tunnel 􀂄 POWF and RECL are best placed ::JM Financial,

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Light at the end of the tunnel
􀂄 POWF and RECL are best placed to leverage on the massive investment
opportunity: Over the next five years, c.$236bn is estimated to be invested in
the power sector as India scales-up infrastructure in generation, transmission
and distribution. REC and POWF are best positioned to leverage on the
massive investment opportunity given a) IFC status which gives exposure
limits advantage, easier access to ECBs. IFCs have a competitive edge over
banks given better asset-liability profile. Further, most banks are approaching
their sectoral limits for infrastructure sector which should reduce competitive
intensity for specialised power financiers like POWF and RECL.
􀂄 SEB default unlikely – losses may have peaked, tariff hike trend
encouraging: SEBs have been under financial distress due to non-revision of
tariffs, non-payment of subsidies and high merchant power rates. However,
recent measures offer hope that their finances will improve going ahead led
by a) 5-40% tariff hike across states over the last 18 months (Exhibit 2).
Further, 3 of the 4 states (TN, UP, MP, Rajasthan) that account for c.70% of
cash losses have already raised/proposed to raise tariff while UP will raise
tariff post election early next year. b) APTEL facilitating suo-motu tariff
increase by the regulator. c) Increasing pressure from lenders to improve
finances by raising tariffs/improving efficiency. d) Declining power purchase
costs which would provide much needed relief to SEBs. These measures are a
step in the right direction and we believe financial position of SEBs will
improve going forward, implying that default from SEBs for POWF and RECL is
unlikely.
􀂄 Fuel availability - A key risk: Coal and gas availability, in our view, is a
significant threat which could restrict power supplies and impact financial
viability of projects. Coal supply has been severely hampered due to a) Coal
India unable to achieve sufficient production growth, b) delayed
environmental clearances, c) infrastructure bottlenecks, d) blending limitation
in existing plants, e) pricing issues on imported coal from Indonesia and
Australia. However, recent steps by government to scrap go and no-go policy
and granting environment clearances to some delayed projects should reduce
this concern over the medium term (3 years); though fuel availability remains
a key near-term risk which could lead to restructuring of projects (especially
IPPs in the capacity range of 50Mw-100mW) and result in some NPV loss for
power financiers.
􀂄 Initiate coverage on POWF and RECL – BUY with TP of `205 and `220
respectively - recent SEB/government measures and decline in wholesale rates
should act as key catalysts: POWF and RECL have de-rated significantly over
the past 12 months due to concerns over financial health of SEBs (POWF
currently trades at 0.95x 1yr fwd book, down from a peak of 2.9x; while RECL
at 1.1x 1yr fwd book, down from a peak of 2.9x. Going ahead, we believe
recent SEB/government measures and decline in wholesale borrowing rates
from 1QFY13 (which will impact spreads positively) should act as key
catalysts for stock outperformance. We initiate coverage on POWF with Mar’13
TP of `205 – current valuations are attractive at 0.9x FY13E book with
dividend yield of c.5% (based on FY13E dividend). We value the stock at 1x
FY14P/B (at 1.05x Mar’14 ABV - adjusted for bad and doubtful debt reserves)
Initiate coverage on RECL with Mar’13 TP of `220 - current valuations are
attractive at 1x FY13E book with dividend yield of c.5% (based on FY13E
dividend). We value the stock at 1.1x FY14P/B (at 1.15x Mar’14 ABV -
adjusted for bad and doubtful debt reserves).

DLF:: Slackening business environment  JM Financial,

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Slackening business environment
 DLF’s 1QFY12 earning report was disappointing on several counts: a)
Fresh leasing volume declined 39% to 0.97mn sq ft this quarter vs 1.6mn
quarterly run rate in FY11; ‘uncertainty on economic growth’, as per
management. Some cancellations (0.24mn) were witnessed this quarter as
well. b) Even fresh residential sales (2.2mn - c.60% were plots) were 12%
lower vs FY11 run rate. c) Debt remained at the elevated level of `239bn
(gross); net debt has gone up slightly QoQ. d) Receivables (including
unbilled receivables) remained high at `90bn+ vs. c.`100-110bn of yearly
revenue based on current run rate. Continuing efforts at non-core assets
monetisation (`1.7bn realised this quarter – see trend inside) is
commendable, which coupled with the recent strategy change (more of
plotted sales rather than vertical-development to upfront cash-flows and
mitigate execution risk) are what hopes are hinged on, as far as debt
reduction goes. This remains critical as interest outgo took away c.70% of
the operating cash-flow generated this quarter (90%+ on rolling 12M basis)
and interest charge now comprises 20% of revenue (vs 15%/18% in
FY10/FY11) – highest since listing.
 Financials remained subdued; upmove in rental stream a positive: DLF
reported 1QFY12 revenue, EBITDA and adjusted net profit of `24.5bn,
`11.1bn and `3.6bn respectively. Revenue/EBITDA grew 21%/13% YoY but
higher interest charge (+28%), lower other income (-57%) led an 11% YoY fall
in adjusted net profit despite lower tax rate (down 380bps). Sequentially,
revenue was 9% lower and EBITDA (adjusted for cost reset in 4QFY11) was
marginally down by 3%. EBITDA margin declined 290bps YoY to 45.4% this
quarter vs 48.3% in 1QFY11 (4Q: 42.5% on adjusted basis) but decline in PBT
margin was even sharper (-775bps) due to the higher interest charge. 26%
QoQ growth in rental income (`3.7bn in 1Q) was a positive; total area under
lease stood at c.24.5mn sq ft as at Jun’11 – 3% higher sequentially, up 20% on
YoY comparison. Average office rentals, however, remained in the sub-`50/sq
ft per month range over the past several quarters.
 Maintain TP; pessimistic-bias remains: We have broadly maintained our
earning and valuation estimates barring some slight tweaks; TP stays at `205
based on 1x Mar’12 NAV. Cash-flow disappointment, heightened debt levels,
slackening-business momentum remain areas of concern to us.

Dhanlaxmi Bank | Margins expand but return ratios remain subdued :: JP Financials

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Margins expand but return ratios remain subdued
„ 4QFY11 net profit at  `112mn: Dhanlaxmi Bank (DHLBK) almost doubled its
4Q11 net profit to  `112mn (c.16% ahead of  `96mn JMFe) on a sequential
improvement in margins and higher non–interest income growth. Margin
expanded 30bps YoY and 40bps QoQ to 3.0%. Loan growth remained strong
at 81% YoY while asset quality improved with 13% YoY decline (18% QoQ) in
absolute gross NPLs. Cost ratios remained at elevated levels while return
ratios were subdued with 4Q11 (annualised) ROA of 0.33%.
„ Retail segment drives healthy 81% YoY loan growth:  DHLBK reported
strong  81%  YoY  loan  growth  (17%  QoQ;  c.4x  of  system  growth)  at  `90.7bn,
driven mainly by retail segment. The bank is focusing on retail segment since
the last one year due to which the proportion of retail loans went up to 41% in
4Q11 vs 16% in 4Q10. Proportion of corporate banking group declined to 39%
(64% in 4Q10) while SME/TAG remained stable at 15%. Retail loan growth (up
4.6x YoY and 26% QoQ) was driven by gold loans (constitutes c.34% of retail
loan book), mortgages/LAP (c.21%) and vehicle financing (c.30%). LDR
remained stable at 72% vs 71% in 4Q10 and 74% in 3Q11. CASA mix was
stable at 23% vs 22% in 4Q10 and 20% in 3Q11. The bank expects SME and
retail segment to drive c.75% loan growth in FY12E.
„ Sequential margin expansion of 40bps (30bps YoY) drives 106% YoY NII
growth: NII grew 106% YoY (23% QoQ) driven by loan growth and margin
expansion. Reported margin expanded 40bps sequentially (30bps YoY) to
3.0% in 4Q11 driven by  a) increased proportion of retail loans,  b)  270bps
sequential increase in CASA,  c) asset re-pricing. Management aims to
maintain margins in FY12E.
„ Opex up 68% YoY (21% QoQ): Costs increased 69% YoY and 21% QoQ in
4Q11 led by 70% YoY (42% QoQ) jump in other opex. Employee expenses
grew 68% YoY (8% QoQ) while employee count declined by 90 sequentially to
4,260. During the year, the bank provided  `51.1mn for additional pension
and gratuity liability and `15.3mn for AS15. It did not add any branch during
the quarter - branch count stands at 275.
„ Asset quality improves sequentially: Asset quality improved as gross NPLs
in absolute terms declined by 13% YoY and 18% sequentially. Delinquencies
during FY11 declined to 81bps vs 165bps in FY10. 4Q11 gross NPLs declined
to 0.74% (4Q10:1.54% and 3Q11:1.05%) and net NPLs to 0.30% (4Q10: 0.84%
and 3Q11: 0.52%). Coverage ratio improved to 59% vs 46% in 4Q10 and 51%
in 3Q11. RBI has extended deadline for increasing the  PCR to 70% till 30
Sept’11.
„ 4Q11 CAR at 11.8%; to raise  `5.0bn equity capital: DHLBK had CAR of
11.8%, with tier I of 9.4% as of 4Q11. It intends to raise `5.0bn equity capital
over next 3-4 months to support its growth objectives.
„ Return ratios remain subdued: Return ratios remained subdued with 4Q11
ROA of 0.33%. For FY11, ROA was at 0.23% with ROE of 4.1%. The stock
trades at 1.3x FY11 book.
„ Estimates and TP under review: Our earning estimates and TP for DHLBK are
under review.

The Banking Laws (Amendment) Bill, 2011 : JM Financials

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The Banking Laws (Amendment) Bill, 2011
On 22 March 2011, the government tabled the Banking Laws (Amendment) Bill,
2011 in Lok Sabha. The bill proposes a number of amendments to the existing
regulation of banking sector. The overarching theme is to allow banks more
flexibility in strengthening their capital base and empower the watchdog role of
Reserve Bank of India (RBI).
􀂄 SOE banks to have additional tools and flexibility for raising capital: The
three key proposals that are directly relevant to SOE banks are: 1) Limit on
individual shareholder’s voting right will be increased from 1% to 10%. 2) SOE
banks can now raise capital by issuing preference shares following the
guidelines of RBI. This will be applicable to other banks as well and help them
improve their ROEs. 3) Banks can now use rights issue and bonus share issue,
in addition to public issue, for raising capital.
􀂄 Proposal to remove 10% restriction on voting rights: The current
provisions of The Banking Regulation Act provide that voting rights of
shareholders, holding more than 10% of a private bank’s equity, be restricted
to 10%. This provision is proposed to be removed. Hence, voting rights of
investors holding more than 10% in a banking company would be made
proportional to their shareholding.
􀂄 Proposal to impose restriction on holding 5% or more in a banking
company without prior approval of RBI: Even though under the ‘Guidelines
on Ownership and Governance in Private Sector Banks’, RBI permission is
required at present for acquisition of 5% or more stake in a banking company,
the proposed amendments to The Banking Regulation Act would formalise
RBI’s policy in this regard.
􀂄 Empowering RBI’s role as regulator: Taking cognizance of global financial
crisis of recent years, proposals seek to give far-reaching powers to RBI.
Three such key proposed powers are: 1) RBI can ask banks to provide
financial and other information of associates companies. 2) In an event of
distress at a bank, the RBI can, if it deems fit, supersede the entire board and
directors and appoint an administrator and a committee to safeguard the
interest of stakeholders. 3) RBI will continue to be a prime body regulating
M&A in banking sector. The banking sector will, thus, be outside the purview
of Competition Commission of India.
􀂄 In our opinion, the new proposals open up the possibility of foreign players
to acquire large shareholding as well as management control in Indian banks
as their voting interest would be in proportion to their shareholding. Hence,
the proposals, if passed, will remove the disincentive for foreign banks to
acquire Indian banks. If RBI permits acquisition of significant stake, it will give
additional boost to foreign interest. However, we believe RBI would be
selective and allow acquisition of weak Indian banks only to begin with.
The proposals will place RBI in a better position to act decisively in an event
of financial crisis (broader or company specific). These steps will strengthen
the faith in robustness of banking sector regulation in India.
Key amendments of The Banking Laws (Amendment) Bill, 2011 are listed in
Exhibit 1.


Exhibit 1. Key proposals of the Banking Laws (Amendment) Bill, 2011
EXISTING GUIDELINES PROPOSED AMENDMENTS
A - Additional tools for nationalised banks to raise capital
The Banking Companies ( Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies ( Acquisition and Transfer of Undertakings) Act, 1980:
1. The paid-up capital of the banks may from time to time be increased by
public issue
1. The paid-up capital of the banks from time to time be increased by public
issue or by rights issue or by issue of bonus shares
2. No shareholder of the bank, other than the Central Government, shall be
entitled to exercise voting rights in respect of any shares held by him in excess
of 1% of the total voting rights of all the shareholders.
2. No shareholder of the bank, other than the Central Government, shall be
entitled to exercise voting rights in respect of any shares held by him in
excess of 10% of the total voting rights of all the shareholders
B - Regulations pertaining to banking companies
The Banking Regulation Act, 1949
Issue of preference shares (Section 12, sub-section (1))
The section specifies a condition for all banking companies that the capital of
the company consists of ordinary shares only or of ordinary shares or equity
shares and such preferential shares as may have been issued prior to the
1st day of July, 1944.
The amendment proposes to modify this condition. The capital of all banking
company may now consists of — (a) equity shares only, or (b) equity shares
and preference shares: Provided that the issue of preference share shall be in
accordance with the guidelines framed by the RBI.
Voting rights (Section 12, sub-section (2))
No person holding shares in a banking company can exercise voting rights in
excess of 10% of the total voting rights. Existing section to be removed
Acquiring stake in banking companies
No existing section Insertion of new ‘section 12B’ to regulate control of banking companies
The persons, looking to acquire a stake of 5% or more in a banking company,
will have to obtain prior approval from the RBI.
The RBI may specify the minimum percentage of shares to be acquired in a
banking company if it considers that the purpose for acquisition warrants such
minimum shareholding.
The RBI may, if it deems fit, impose a ceiling of 5% on the voting rights of an
individual person or group:
C - Regulations to empower the RBI
The Banking Regulation Act, 1949
Scrutiny of associates
No existing section Insertion of new ‘section 29A’
Given that banking companies now provide diverse services through associate
companies, the RBI seeks to be aware of financial impact of associates on core
banking company. The proposed section allows the RBI to call a banking
company for information and returns from its associate companies.
Suppression of board and directors of a banking company
The RBI, currently, has power to remove any director or other officers of a
banking company
Insertion of new ‘PART IIAB’
If the RBI feels that the entire Board of directors of a banking company is
functioning in a manner detrimental to the interest of the depositors or the
banking company itself, the RBI may supersede the entire Board of directors.
The Reserve Bank may supersede the Board of Directors of such banking
company for a period not exceeding six months. If the period of supersession
of the Board of Directors is extended, the total period shall not exceed twelve
months.
The Reserve Bank may appoint an administrator (not being an officer of the
Central Government or a State Government). A committee of three or more
persons may be constituted to assist the Administrator
On and before the expiration of two months before the expiry of the period of
supersession of the Board of Directors, the Administrator of the banking
company shall call the general meeting of the company to elect new directors
and reconstitute its Board of Directors.
Exemption of mergers of banking companies from Competition Commission of India (CCI)
The existing provisions of the Competition Act, 2002, the CCI has power to
regulate combination
Insertion of new ‘Section 2A’
Notwithstanding anything to the contrary contained in section 2, nothing
contained in the Competition Act, 2002 shall apply to any banking company,
the State Bank of India, any subsidiary bank, any corresponding new bank or
any regional rural bank or co-operative bank or multi-state co-operative bank
in respect of the matters relating to amalgamation, merger, reconstruction,
transfer, reconstitution or acquisition.
The RBI will continue to be prime regulatory body for such matters in banking
sector.
Source: The government of India, JM Financial.

JM Financial, :: Bajaj Finance: Ready to cruise in its new Avatar

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Ready to cruise in its new Avatar
􀂄 Restructuring has set the base for sustainable growth: Post induction of
new management team led by Mr. Rajeev Jain, Bajaj Finance (BAF) underwent
significant restructuring during FY08-10 which included a) shift in focus
towards the affluent and HNI segment in the consumer business, b)
transformation from primarily being a captive business model (Bajaj Auto’s
finance arm) focused on 2-wheeler and consumer durable business to a
diversified NBFC with full suite of lending products, c) Significant improvement
in origination and underwriting processes by investing in technology, using
information from CIBIL and creating a dedicated risk analytics unit which has
enhanced its risk management capabilities. Going ahead, we believe BAF is
well-positioned to deliver sustainable and profitable growth which is scalable
with lower risk, as it intends to focus on secured business lines.
􀂄 Secured business lines to drive loan book CAGR of 32% over FY11-13E: We
expect secured loan products (loan against property, construction equipment
finance and infrastructure finance) to drive loan book CAGR of 32% over FY11-
13E, while unsecured business lines would be in consolidation phase after
witnessing strong growth during FY09-11. Consequently, we expect secured
assets to account for c.55-60% of the book by FY13E vs c.30% in FY10.
􀂄 Healthy NII CAGR of 26% despite margin pressure due to change in loanmix
and higher borrowing costs: We factor-in significant margin decline of
c.440bps over FY10-13E due to a) lower asset yields on account of higher
proportion of secured business going ahead, b) increase in cost of borrowings.
We still expect a healthy 26% CAGR in NII over FY11-13E.
􀂄 Credit costs to decline by 135bps over FY11-13E; coverage ratio now at
healthy 71% level: We expect credit costs for BAF to decline by 135bps over
FY11-13E given a) change in loan mix towards secured assets; b) BAF has
improved its coverage ratio from 28% in FY08 to a healthy 71% currently. We
forecast gross and net NPLs of 4% and 1% respectively in FY13E.
􀂄 Earnings CAGR of 27% with healthy ROE of c.22%: We expect earnings CAGR
of c.27% over FY11-13E on strong loan growth, lower credit costs and
improving cost ratios. We expect BAF to report healthy return ratios with ROA
of 3.1% and ROE of 22% by FY13.
􀂄 Solid business available at compelling valuation; initiate with BUY and TP
of `990: BAF is currently trading at a compelling valuation of 5.7x/1.2x based
on FY13E earnings and book value respectively. We value BAF at 9x Mar’13 EPS
(implied P/B of 1.8x), implying Mar’12 target price of `990, upside of c.57%.
Key risks: Spike in interest rates and higher than expected delinquencies.

Jain Irrigation -Subsidy support for micro irrigation raised further; JM Financial,

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Jain Irrigation -Subsidy support for micro irrigation raised further
􀂄 FY12 subsidy raised further; new schemes under RKVY likely positive: The
Finance Minister’s Union Budget provides for an increase in the central
government’s subsidy support for the National Mission on Micro Irrigation
(NMMI) to `11.3bn for FY11-12 (vs an original allocation of `10.0bn for FY10-11
that is now revised downward to `9.7bn). We note that central government also
subsidises micro irrigation (MI) via various other schemes, budgetary
allocations for which are also raised (Exhibit 1). In particular, a number of new
schemes have been created under the Rashtriya Krishi Vikas Yojana (RKVY) that
could meaningfully expand the addressable opportunity (Exhibit 2) and provide
for additional subsidy support for MI. The downward revision in FY10-11 NMMI
subsidy estimate to `9.7bn could be driven by slower than expected farmer
demand due to prolonged and excessive rainfall in late-CY10.

JM Financial- Riding on a buoyant market: Target Rs 45: Crisil

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JM Financial Ltd
Riding on a buoyant market
JM Financial Ltd is one of the leading players in the financial services sector
with business interests in investment banking, equity broking, wealth
management, lending, asset management and alternative asset management.
These diversified offerings have helped JM Financial establish itself as a one
stop financial shop and develop strong relations with clients. Accordingly, we
maintain the fundamental grade of ‘4/5’, indicating that JM Financial’s
fundamentals are ‘superior’ relative to other listed securities in India.

JM Financial: Sun Pharma: Favourable developments in Eloxatin case

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Favourable developments in Eloxatin case
�� Sun pharma wins appeals decision in Eloxatin case: On 22-Dec-10, the
appeals court vacated the consent judgment and order given by the district
court. Also the injunction under the consent agreement entered by the district
court no longer holds. The case now goes back to the district court to provide
an opportunity to conduct discovery and allow Sun/Sanofi's to present
evidence as to the proper resolution of the ambiguous language in the license
agreement that is incorporated in the parties’ original proposed consent

IPO Details -MOIL (Manganese Ore India Limited):: JM Financial

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IPO Details
The Offer MOIL Limited


Sector Mining & Mineral Products

Transaction: Book Building
Issue: Size 33,600,000 equity shares of Rs 10 each
20% of the post offer paid-up capital

IPO Dates Nov 26th 2010 – Nov 30th 2010 (for QIB)
Nov 26th 2010 – Dec 1st 2010 (for Retail / HNI)

Price Band: Rs 340 to Rs 375
5% discount to retail investors as well as to employee quota

Exchanges BSE; NSE

Book Running Lead Managers: Edelweiss Capital Limited; IDBI Capital Market Services Limited; J.P. Morgan India Private Limited

Registrar Karvy Computershare Private Limited

DLF:Residential target modified -JM Financial Research

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Residential target modified; leasing witnessing some
pick-up
Revenue slightly ahead of expectation, bottomline impacted by a squeeze in
margin: DLF’s reported 2QFY11 revenue, EBITDA and adjusted net profit of
`23.7bn, `9.3bn and `4.1bn respectively vs 1QFY11’s `20.3bn, `9.8bn and
`4.1bn. Revenue grew 35% YoY and 17% QoQ but EBITDA margin compression
(39% this quarter vs 1Q’s 48%, 52% in 2QFY10) led to a mere 2% YoY EBITDA
growth, down 5% QoQ (10% below our estimate). As per the press release,
margin decline is ‘a temporary drop, owing to variation in the product mix’
and the same is expected to be in the 45-50% range on an annual basis. 2Q
tax rate was much lower at 15% in 2Q vs 29-30% in the comparative periods
(clarification awaited), which helped maintain a sequentially flattish net profit
(PBT down 14% QoQ, 24% YoY).

Bharti Airtel: 2QFY11: Africa revenues ring in but margins slip

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2QFY11: Africa revenues ring in but margins slip
􀂄 A flat quarter for India & SA: Ex-Africa revenues of `131bn and EBITDA of
`42bn came in flat QoQ and inline with JMFe. Amongst segments enterprise
+2.3% and passive infrastructure +3.7% grew revenues ahead of expectations,
while Telemedia reported strong margins 46% (+211bps) as focus on
broadband in key identified markets yielded results. EBITDA margin at 23.2%
was down 42bps QoQ on the back of increased network expenses (diesel
prices) and employee costs (annual increments). Wireless Traffic at 196b mins
was flat (avg subscribers +6%, mou -6%) and ARPM at 0.44p was down a mere
1.7% (reaffirming our view on stable domestic tariffs).

Balaji Telefilms – 2QFY11 results below expectation:: JM Financials

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First Cut – 2QFY11 results below expectation
􀂄 Revenue better than expected, EBITDA margin in deep red: At `382mn
(down 6.2% YoY), 2QFY11 standalone revenues came in better than JMFe of
`362mn; but EBITDA margin at -13.5% was significantly below JMFe of -5%.
Initial launch expenses for new shows under commissioned model impacted
overall EBITDA margin. 2QFY11 net profit came in at -`64mn vs -`23mn JMFe,
primarily due to dismal performance at operating profit front. 2QFY11
standalone EPS stood at -`1.0 vs `0.2 in 2QFY10 and `0.4 in 1QFY11.