Motilal Oswal: HDFC Bank: Downgrade to Neutral

EPS growth of 30% CAGR; Trades at 4x P/B FY12
Positives already in the price

HDFC Bank is set to deliver EPS CAGR of 30% over FY10-12 v/s 25% over FY05-10.
Our recent interactions with the management highlighted productivity gains, strong
growth in rural and semi urban areas and decline in credit cost to aid superior RoA of
1.5%+ and improved RoE to 19%+ by FY12. In CY10 YTD, the stock has seen strong
outperformance with 44% returns against Sensex returns of 14%. While we remain
positive on bank's business, we believe valuations at PBV of 4x FY12E and PE of 22x
are rich and offer no returns to our target price of Rs2,400. Downgrade to Neutral.
Management interaction reiterates our view of strong growth: Recently we met
the management of HDFC Bank for an update on business growth, margins, asset
quality and profitability. Key takeaways: (1) confident of achieving loan growth of
25%+ led by auto loans, home loans and corporate loans, (2) margins to remain
superior at 4-4.2%, (3) fee income growth to be 16-18% despite pressure on thirdparty
distribution income, (4) cost-to-income ratio will fall by 100-200bp over two
years, and (5) credit cost will fall sharply as (i) delinquencies have declined QoQ
across products, and (ii) the proportion of secured products is increasing.
Operating performance to remain superior: HDFC Bank is best placed in the
current environment with (1) CASA ratio of 50% (will help to stabilize margins even if
deposit costs rise), (2) strong loan growth outlook of 25-30%, (3) improving operating
efficiency, and (4) lower credit cost led by best asset quality.

BoA ML: Turning cautious; cut Infy to Neutral

Turning cautious on stretched valuation / rising macro risks
Post a stock rally of 20 to 55% in the last 1 year, we are taking a more cautious
stance on Indian IT stocks given valuations are at upper end of EV/E to Ebitda
growth band and with risk of macro slowdown in the US, the earnings upgrade
cycle is behind, for now. Historically, Indian IT vendors’ revenue growth has been
correlated with S&P 500 revenue growth, which is forecast to slow in CY11/FY12.
Protectionism could also slow offshoring. That said, current order flow is still
strong, driven by structural & regulatory changes in industries like banking, media
& healthcare, coupled with need for cost optimization. Thereby, we only trim FY12
earnings estimates (Table 1) for the top three vendors, for now.
Infy - lower to Neutral; TCS - limited upside
Lower Infy to Neutral with PO unchanged (6% upside), on stretched valuation,
relatively greater exposure to discretionary IT spend and likely re-investments in
the business, given above industry average margins. Tweak up TCS PO by 5% to
Rs1,050 (12% upside) as we remove our valuation discount to Infy. Also TCS
reaping early investments in BPO & emerging geo’s and could surprise on revs
and margins. Retain Buy. Key risk: slowdown in banking vertical, 35-45% of revs.
Wipro - A non-consensus pick
We prefer Wipro (PO of Rs520, ~20% upside potential) and forecast higher
earnings growth of 21% vs Infy and TCS at 15-17% over FY11-13, given its
dominance in IT infra mgmt services and increasing share in BPO – drivers of the
next wave of offshoring. So, we expect the expanded P/E discount of ~23% to
Infosys to narrow. Our FY12E EPS is 7% higher than consensus. Key risks:
employee attrition, slowdown in manufacturing/hi-tech clients (~25% of revs).
HCLT - A likely re-rating story
We believe HCLT has the potential to be re-rated. We raise earnings by 7% and
PO by 13% to Rs500 (~20%), led by increased confidence in HCLT’s revenue
outlook, given dominance in infrastructure services, improved competitive position
in enterprise applications, and BPO turnaround in sight. HCLT’s earnings outlook
was also helped by improving debt position and falling forex hedging-related losses.
Key risk: Higher-than-guided 250bp investment in margins on wages/BPO in FY11.
September quarter likely strong but discounted
We forecast yet another strong quarter with 6-8% QoQ growth in USD revenue for
the top-four vendors with likely moderating attrition. Expect Infosys to have the
strongest quarter on both revenue growth and margin expansion, since the wage hit
is behind it. Believe commentary will be positive but guarded on FY12, given low
visibility into CY11 budgeting cycle. Do not expect any meaningful guidance raise.
HCLT will likely have the weakest quarter given wage hikes and BPO investments

Macquarie Research: Punjab National Bank: Downgrade to Neutral

Punjab National Bank
Downgrade to Neutral
Event
􀂃 Downgrade to Neutral on valuations: We downgrade PNB to Neutral from
Outperform and maintain our TP at Rs1,300. PNB is now trading at its all-time
high valuations, and the risk-reward is unfavourable at this price, in our view.
Impact
􀂃 Higher restructured assets book worries us: PNB has one of the largest
restructured assets book among its peers at 6% (vs an average of 4-5%). So
far, PNB has had just 8% slippage from restructured assets. We have built in
roughly 15% slippage from restructured assets. Our sensitivity analysis
reveals that 25% slippage from restructured assets results in a 20% impact on
profits, with ROEs declining by 380bps to 16.7%.
􀂃 Cushion of NIMs is the greatest positive: PNB’s high margin structure and
its ability to maintain those high levels even during the toughest times last
year is quite commendable, in our view. The bank has maintained its margins
at 3.9%. The high margin structure is mainly due to its strong liabilities
franchise, which gives it a cost of funds advantage. The high NIMs give PNB
enough cushion to absorb credit losses compared to its peers, in our view.
􀂃 Return ratios consistently above those of peers: PNB’s ROA of 1.4% has
consistently been 200-300bps higher than those of its peers. The high ROA
mainly stems from its high margin structure, and we expect PNB to report an
ROE of around 20%, despite higher credit charges.
􀂃 Management stability is another encouraging factor: PNB’s CMD, Mr.
Kamath, has had a tenure of five years, and we believe management stability
in PSU banks is now likely to be a crucial differentiating factor in the banks’
achieving a consistent performance. The new CMD has managed to maintain
PNB’s margins at high levels of 3.9%, and his focus on growing profitably
without compromising on margins and asset quality is encouraging.
Earnings and target price revision
􀂃 No changes.
Price catalyst
􀂃 12-month price target: Rs1,300.00 based on a Gordon Growth Model
methodology.
􀂃 Catalyst: Slippages from restructured assets over the next two quarters and
margin compression in 2Q/3Q FY11.
Action and recommendation
􀂃 PNB is our top pick in the PSU banks space: PNB continues to be our
preferred play for investors willing to take an exposure to PSU banks. We
recommend that investors add PNB on corrections.

Macquire research: Bank of Baroda: Downgrade to Neutral

Bank of Baroda
Downgrade to Neutral
Event
􀂃 Downgrade to Neutral on valuations: We downgrade BOB to Neutral from
Outperform and maintain our TP at Rs850. BOB is now trading at its all-time
high valuations and the risk-reward is unfavourable at this price, in our view.
Impact
􀂃 Near-term headwinds on margins and loan growth: With deposit rates
hiked sharply and base rates untouched, coupled with the slowdown in loan
growth to 20% over the course of the year from 30% in 1QFY11, we expect
NIMs to be under pressure in the near term.
􀂃 The bank has not provided for pensions: Some of its larger peers have
already prudentially provided, or at least estimated, pension liabilities (second
option), whereas BOB has yet to come out with an actuarial estimate.
Consequently, operating expenses have more or less remained flat across
several quarters to date, which is unsustainable, in our view. We have
conservatively factored in a higher cost-income ratio of 46% for FY11E, up
200bps YoY. The overall impact due to pensions could be as high as 10% of
BOB’s net worth, if we merely try to extrapolate the numbers given by its
peers.
􀂃 International business profitability under pressure: BOB’s overseas
business, which contributes 24% of overall business and traditionally has
much higher return ratios than its domestic banking business (mainly due to
lower operating expenses and higher fee-based income), is under pressure.
ROA and ROE of this business are sub-1% and 17%, respectively, which are
lower than the steady-state ROE of 20%+ from this business. Weak global
markets are indeed taking a toll on its margins, fee income and asset quality.
􀂃 BOB remains one of the best-run PSU banks: Under the leadership of
Chairman and Managing Director, Mr. Mallya, BOB indeed has seen a
commendable turnaround in overall profitability, with return ratios improving.
The current CMD is slated to be in office till Nov-12. Management stability is
an encouraging factor.
Earnings and target price revision
􀂃 No impact.
Price catalyst
􀂃 12-month price target: Rs850.00 based on a Gordon Growth methodology.
􀂃 Catalyst: Loan growth slowdown in 2QFY11, margin compression in 3QFY11
Action and recommendation
􀂃 BOB continues to be one of our favourites amongst PSU banks. We would
recommend investors to add BOB on corrections.

Kotak Sec: Downgrade Reliance- target Rs 1015

FY2012 is a lot closer than FY2015. We would advise investors to focus on downside
risks from current weak refining and chemical cycles, which far outweigh potential
upsides from higher gas prices in FY2015E. Implementation of IFRS in FY2012E and
DTC in FY2013E may also spring negative surprises. We maintain our REDUCE rating
and SOTP-based 12-month target price of `1,015.


Refining margins remain dismal—US$1/bbl lower refining margin impacts RIL’s EPS by `6
Singapore complex refining margins have plunged into negative territory and were at –US$1/bbl in
the recent week (see Exhibit 1). We expect refining margins to remain subdued over the next
12-18 months given a comfortable global demand-supply balance. We see significant downside
risks to earnings from weaker-than-expected refining margins. We model FY2011E and FY2012E
refining margins at US$8.5/bbl and US$9.5/bbl versus 1QFY11’s US$7.3/bbl. A US$1/bbl lower
refining margin impacts RIL’s FY2011E EPS by `6 and FY2012E EPS by `6.3.
Chemical margins have plunged—US$50/ton lower chemical margin impacts RIL’s EPS by `3.5
We highlight that polymer margins have corrected by 9-30% versus the high margins seen in
February 2010 led by (1) restart of troubled plants in Japan and Saudi Arabia and (2) start of new
chemical plants in India, Singapore and Thailand. We expect large new capacity additions to
continue through CY2010-11E (see Exhibit 2), which will likely result in subdued margins. We see
significant risk to our assumption of reasonably strong chemical margins for RIL (see Exhibit 3);
US$50/ton lower chemical margin impacts RIL’s FY2011E EPS by `3.6 and FY2012E EPS by `3.5.
Minimal upside from a potential gas price hike; we already assume a price increase anyway
A section of the street has speculated about a potential increase in the price of KG D-6 gas.
We note that any revision in gas prices will be applicable from FY2015E when the current pricing
formula is due for a review. We already model US$5.25/mn BTU gas price for RIL (all blocks)
starting FY2015E. We see a modest upside of `10 to our fair valuation even if prices are increased
to US$5.5/mn BTU. We would also highlight related issues such as (1) burgeoning losses of state
electricity boards and (2) increase in fertilizer subsidy, which rules out an out-of-turn price increase
in the short term, in our view.
Several other potential negatives looming large
We do not rule out further downside risk to RIL’s earnings and valuations emanating from (1)
implementation of IFRS from April 1, 2011, (2) implementation of the new Direct Tax Code (DTC)
from April 1, 2012, (3) lower-than-expected production of oil and gas and (4) non-availability of
tax exemption on gas production

ICICI Securities: Sterlite DOWNGRADE: target Rs 194

We downgrade Sterlite Industries (SIL) to HOLD. We also revise down our target
price to Rs194 from Rs201, an upside of 12% from the current levels, primarily led
by reduction in VAL’s contribution. We believe that SIL is now a call option on
zinc prices, as zinc contributes ~60% and holds 0.63x sensitivity to our target
price respectively. Though we maintain a favourable view on zinc prices as key
western mines reach end of their lives and on increasing galvanized steel
penetration in China, we downgrade SIL on limited upside potential given our
FY12E zinc price assumption of US$2200/te.
􀁦 Zinc continues to be the crown jewel. As regard to mining capacity growth over
CY10-11, except the 0.2-mtpa Peñasquito mines in Mexico, most capacities are
small and the combined additions will be largely offset by exhaustion of the 0.25-
mtpa Brunswick and contraction at Antamina mines. With favourable movement of
cancelled warrants both on the SHFE and the LME and lack of any major mining
project taking off, we continue to prefer zinc to aluminium. SIL with 60% valuation
exposure to zinc remains a partly undervalued call option on zinc prices.
􀁦 Niyamgiri a dead issue, Orissa government not in a hurry to allocate new
mines. After the MoEF rejected stage 2 forest clearance to Niyamgiri mining project
and the National Environment Appellate Authority suspending the environmental
clearance, VAL will have to look out for new mines. We have assumed a long-term
aluminium production cost of US$1600/te, as the company has, off late, been
sourcing bauxite via sea route from Gujarat. Also, we have reduced our estimates of
the scale of the project to 1.4mnte alumina refinery and 0.5mtpa aluminium smelter.
􀁦 Reduced estimates for Sterlite Energy. Although Sterlite Energy commissioned its
first unit of the 2,400MW independent power project on August ’10, the facility has
been beset with problems right from the start. Further, our power analyst suggests
synchronization issues for these units. This has led us to reduce production
estimates both for FY11E and FY12E. This is however partly offset by increase in
value on account of increased merchant sales with power freeing up from VAL,
resulting in minor loss in value for SIL from SEL.
􀁦 Valuations and concerns. Our SOTP for SIL yields a fair value of Rs194/share. If
we are to go by the last concall, SIL’s total contribution to VAL including equity
should be below Rs50bn. We have reduced the scope of VAL’s expansion, and
hence the equity component of the project has increased making it further punitive
for equity holders like SIL. Hence money (returning 9% currently) should be freed as
soon as possible specially when the mantle of Anglo’s acquisition can befall on SIL
in the absence of Hindustan Zinc’s board approval.

Macquarie Research: Jaiprakash Associates: Downgrade: Concerns on core businesses persist

Jaiprakash Associates
Concerns on core businesses persist
Event
􀂃 We revisit our investment thesis on JPA post its FY10 annual report. Leverage
has increased significantly as the company continues to invest in cement
capacity despite large oversupply. Visibility on construction business has
reduced as key projects are close to completion while new projects have been
stuck.
􀂃 We are reducing our target price to Rs105 and downgrade the stock to
Underperform. Revival in pricing power in cement and fund raising in power
would be key to make us revise our opinion on the stock.
Impact
􀂃 Margin compression in cement business to continue: We expect that key
cement markets of North and West India will remain oversupplied right into
FY13. The cement margins for JPA have corrected from Rs1,257/ton in
1QFY10 to Rs734/ton in 1QFY11. We expect it to fall further to Rs620/ton and
Rs553/ton in FY11 and FY12 respectively.
􀂃 Construction business to see significant slowdown going ahead: Two
key projects, Yamuna Expressway and Kharcham Wangtoo are close to
completion over next 18 months. The Sports City project and real estate
should add close to Rs20 of annual revenues but would not be able to
compensate for construction due to completion of larger projects. JPA would
need to start work on large hydropower project to grow E&C revenues.
􀂃 Balance sheet issue cropping up, incremental cost of debt is 11-12%:
Net debt for the parent entity has increased by Rs34.2bn mainly due to new
loans for cement plants and working capital for construction business. It’s
worth noting that the incremental cost of borrowing is 11.25-12.5%, which
would lead to a sharp increase in interest.
􀂃 Increased stake in JP Sports Private Limited to 90.6%: JPA increased its
stake in JP Sports Private Limited by 28.9% in FY10 for consideration of
Rs5bn. We are assigning little value to Sports City, as its business model for
F1 track and associated real estate is not clear.
Earnings and target price revision
􀂃 We are reducing our target price to Rs105 from Rs152 to factor in higher debt
in standalone entity, lower value for construction business.
Price catalyst
􀂃 12-month price target: Rs105.00 based on a Sum of Parts methodology.
􀂃 Catalyst: further fall in cement realisations and lack of new order inflows
Action and recommendation
􀂃 Earnings to be under pressure over next 18 months: Declining margins in
cement coupled with higher interest and depreciation cost will put standalone
earnings under pressure.
􀂃 Downgrade to Underperform from Outperform with price target of
Rs105: The reduction in price target is to factor in higher debt and reduced
revenues from construction business.