29th April, 2011

The markets opened on a positive note but immediately slipped into the red and traded in a tight range for most of the morning session. The markets slipped further in the afternoon session but recovered some of the losses and ended on a weak note amidst volatility. All the Sectoral indices ended in the red with Realty, Metals & IT losing the most while Healthcare ended with minor losses. Among the Sensex stocks ONGC (1.99%) & ICICI Bank (0.92%) were amongst the gainers while RCom (5.13%), Cipla (2.77%) and DLF (2.71%) were among the losers. The Sensex lost 157 points or 0.81% to close at 19,292 while Nifty lost 48 points or 0.83% to close at 5,785.

Total traded turnover stood at Rs 2,42,192 cr. In equities FIIs were net sellers of (Rs 833 cr) while DIIs were net buyers (Rs 533 cr). On the derivatives side, FIIs were net buyers in Index Futures (Rs 191 cr), Index Options (Rs 493 cr) while they were net sellers in Stock Futures (Rs 59 cr) and Stock Options (Rs 15 cr).

The US markets ended positive despite mixed economic news and diverse earnings reported by companies. The Dow Jones gained 72 points or 0.57% to close at 12,763 while NASDAQ gained 3 points or 0.09% to close at 2,873.

The Asian markets are trading mixed. Nikkei is trading higher by 1.63% while Hang Seng is trading lower by 0.28%. Once again the markets closed on a weak note after remaining volatile in the late session. The markets may open on a soft note amidst mixed cues from Asian peers. Adopt a stock specific strategy.

The trend deciding level for the day is 5805, If NIFTY trades above this level then we may witness a further rally up to 5835‐5880‐5905 levels. However, if NIFTY spot trades below 5805 levels then we may see some profit booking to initiate in market, it may correct up to 5755‐5725‐5700.

HCL Technologies : BUY

Back-to-Back Strong Quarters Led by Volumes

HCL Tech reported another quarter of EBITDA improvement (despite one-offs from the Tsunami in Japan) led by robust volume growth, higher utilization rates and a strong market share gain / execution in BFSI. Lower DSO days (down by 4 days QoQ) & curtailment of peak BPO losses are added positives. HCL Tech declared consol. rev of Rs 41.4 bn (~6% QoQ & ~35% YoY), EBITDA of Rs 7.2 bn (~13% QoQ & ~18% YoY), & PAT of Rs 4.7 bn (~17% QoQ & ~36% YoY) in Q3FY11.

Key highlights

• Sales: Software svcs grew 6% QoQ. Revenues from IMS grew 9% QoQ and that from BPO rose 1% QoQ.  Blended volume growth was 4.8% with currency contributing ~1% to drive  5.8% QoQ growth in USD terms. Pricing was stable for the quarter.
• EBITDA: Led by SG&A efficiency & reduced losses in BPO segment.
• PAT: Operating profit offset the impact of higher tax outgo. Market share gains/efficient client mining drove operating performance: This quarter saw a blend of client additions and client mining with: (1) closure of 11 large transformational deals; & (2) healthy upgrades esp. across key client buckets of USD 5 / 10 / 20 / 30 mn. HCL Tech showcased strength across key verticals (BFSI, Mfg, E&U* & Public Sector with aggregate rev share of ~61%) and service offerings (Enterprise Apps, IMS & Custom Apps with aggregate rev share at ~77%).
• While rev momentum is strong, we believe following operating levers would offset headwinds from lateral hiring, currency fluctuations and salary hikes: (1) lower BPO losses – mgmt guided for a reduction in peak qtrly BPO losses from USD 7 mn earlier to USD 6 mn; (2) utilization rates at ~76% in Q3FY11 (ample headroom given peak levels of ~79%); and (3) offshore revenue transition.

Valuations

We have revised our FY12E EPS est. upwards by ~6% & now assign a higher PE of 18x (vs. 17x earlier) and rate the stock as a BUY. CAGR btw FY11-FY13E at topline / EBITDA /PAT levels remains strong at 23% / 25% / 27% resp. We have revised our Target Price upwards to Rs 594 (14% upside from CMP).

Tata Consultancy Services : BUY

Raising the Bar

TCS’ FY11 performance (Rev up ~24% YoY & PAT up ~26% YoY, despite INR appn) exemplifies its strategy of “growth with a margin focus”.  FY12E  to  mark  another  year  of  growth  with  23  units  being carved out that have strong leadership team, profitability focus and rev potential of USD 1 bn each over next few years (TCS’ FY11 topline: USD 8.2 bn). We are mainly enthused by its strong deal pipeline, mgmt confidence on growth, power focus on non-linear initiatives & execution capabilities to manage ~80-84% utz rates.

Q4FY11 marked a perfect finish with broad based growth (vols. in int’l. biz up 3.3% QoQ) despite Q4 seasonality and margin headwinds from higher onsite revs, lower utz rates and ~19,300 employee addns.

Key highlights: Q4FY11

• Sales:  Led by blended volumes (+2.9% QoQ), pricing (+0.8% QoQ in const currency), currency benefit (1.3% QoQ) & onsite shift (0.1% QoQ)
• EBITDA:  Despite decline in utz – currency benefit (58 bps), improved realizations & SG&A efficiency helped to maintain EBITDA % QoQ
• PAT: Higher other income helped offset higher tax Continued improvement in revenue visibility; margin confidence high: Our confidence in rev visibility is further strengthened by: 1) Robust 18% QoQ growth in Enterprise Solns (Q4 rev share at ~11%) – a key indicator of discretionary spend; 2) Strong deal pipeline (closed 7 large transformation deals in Q4 and currently pursuing 20 deals), & 3) Gross hiring target of 60K for FY12E (campus offers at ~37K).
• Positive commentary on pricing & utz (target to maintain utz ex-trainees in the range 80-84% range) is added positive from a margin standpoint. Addl. margin levers include: 1) volumes from verticals / geos like Telecom / Continental Europe that are showing signs of improvement; 2) better offshore rev %; 3) margin increase in GDCs/ EMs (5% rev share); & 4) better trajectory from non-linear offerings (e.g. its SMB platform, iON had 225+ clients in its first quarter of launch).

Valuations

Our FY12E EPS est. remains largely at ~Rs 53; with FY13E EPS est. at ~Rs 62. Our BUY rating with TP of Rs 1,330 at 25x FY12E EPS.

ING Vysya Bank : BUY

Impressive Performance With Strong Set of Nos

ING Vysya Bank’s (ING) PAT grew 91% YoY to Rs 91.3 cr, which was above our estimates. Improvement in NIMs (3.3% in Q4FY11, up 20 bps QoQ); strong growth in CASA balances (34.6% in Q4FY11, up 116 bps QoQ) along with improved asset quality (Gross NPA at 2.3%  in  Q4FY11,  down  36  bps  QoQ)  drove  this  robust  operating performance. Decline in provision expenses (down 96% YoY) provided traction to PAT growth.

Key highlights

• NIMs grew 20 bps to 3.3% in Q4FY11 led by yield on advances improving to 10.69% (up 56 bps QoQ) along with an improvement in CASA ratio. Cost of deposits rose to 6% (up 56 bps QoQ).
• Advances grew 28% YoY to Rs 23,600 cr buoyed by a 43% YoY rise in biz banking. CASA ratio improved to 34.6% (up 120 bps QoQ) with current a/c balance up 25% YoY & savings a/c balance up 23% YoY.
• High staff expenses (up 54% YoY) led to 13% QoQ increase in cost-to-income (C-I) ratio to 67%. ING has fully provided for: (a) the entire Gratuity liability (of Rs 20.74 cr), (b) Additional liability of pension for retired employees (of Rs 28.73 cr), and (c) 1/5th of Pension costs for existing employees (of Rs 18.6 cr). Only Pension cost on existing employees will be repeated going forward.
• Asset Quality improved as gross NPAs and Net NPAs declined by 5% QoQ and 33% QoQ to Rs 550 cr and Rs 90 cr respectively. Provision coverage improved further to 83%.

Maintain BUY, with TP of Rs 434 (24% upside)

ING is expected to witness substantial improvement in C-I ratio as some of the one-off items will not be repeated, which will help ING achieve over 1% RoA in FY12E (vs. 0.9% in FY11). Higher-thanmandated PCR will help in normalizing earnings in bad qtrs. With asset quality issues behind & with opening of new branches, ING’s focus will be on growth which will augur well for return ratios. We have revised our earnings upwards by 7% to factor in improved operational performance. At CMP of Rs 350, ING is trading at 11.5xFY12E EPS of Rs 30 & 1.38xFY12E ABV of Rs 253. BUY rating with an TP at Rs 434.

28th April, 2011

The markets opened on a positive note and witnessed volatility in the morning trade post which they continued to trade sideways till the afternoon session. The markets moved lower in the afternoon session and again witnessed volatility before ending on a weak note.  Among the Sectoral indices PSU & FMCG gained while Realty and Capital Goods were among the losers. In the Sensex kitty ONGC (2.57%), M&M (1.61%) & Maruti Suzuki (1.10%) were amongst the gainers while Wipro (2.86%), Jaiprakash Asso (2.26%) and BHEL(2.30%) were among the losers. The Sensex lost 97 points or 0.49% to close at 19,449 while Nifty lost 35 points or 0.59% to close at 5,834.

Total traded turnover stood at Rs 1,98,744 cr. In equities FIIs were net sellers of (Rs 711 cr) while DIIs were net buyers (Rs 299 cr). On the derivatives side, FIIs were net sellers in Index Futures (Rs 385 cr), Stock Futures (Rs 407cr), Stock Options (Rs 24 cr) while they were net buyers in Index Options (Rs 490 cr).

The US markets ended positive as stocks rallied after Fed renewed it commitment to stimulate growth with low rates and stated that increase in inflation is likely to be temporary. The Dow Jones gained 96 points or 0.76% to close at 12,691 while NASDAQ gained 22 points or 0.78% to close at 2,870.

The Asian markets are trading positive. Nikkei is trading higher by 1.28% while Hang Seng is trading higher by 0.57%.

The markets closed on a weak note after witnessing volatility. The market breadth was negative with declines outnumbering the advances. The markets may open on a positive note tracking global cues and may remain volatile due to F & O expiry today.

The trend deciding level for the day is 5850, If NIFTY trades above this level then we may witness a further rally up to 5875‐5900‐5930 levels. However, if NIFTY spot trades below 5850 levels then we may see some profit booking to initiate in market, it may correct up to 5805‐5775‐5745.

Container Corporation : HOLD

Muted Volume Growth Mars Profitability

Container Corporation’s (Concor) Q4 operating performance was below expectations, with a 617 bps QoQ decline in EXIM margin to 24.6%, due to: a) volumes remaining flat QoQ (despite port volumes being up 4%); b) volume discounts (typically a Q4 event); and c) only ~30% of the rail haulage hike (of 4%) has been passed. Domestic ops (22%  of  revs)  continued  to  be  negatively  impacted  by  the  ~50-200% hike in rail haulage charges on 9 commodities in Dec’10, with 4% volume decline and subdued margins of 8.4% in Q4 (vs. 11.4% in Q3FY11). The mgmt has lowered its FY12E guidance to 10% revenue and profit growth.

Key highlights

• EXIM volumes flat QoQ (µ 5.6% YoY) to 0.52 mn TEUs in Q4FY11:  Concor’s  EXIM  volumes  for  FY11  grew  by  7%,  lower than the port volume growth of 10% – on account of a decline in rail throughput from JN Port (due to de-stuffing activity at port itself). FY11 realizations were 3.5% lower, mainly on account of shift in traffic from JNPT to Mundra and Pipavav (JNPT handling has fallen to 64% in FY11 vs. 74% in FY10), which has resulted in ~6% decline in lead distances to 1,109 kms.  We have factored in vol growth of 10% and 8.5% for FY12E & FY13E resp.
• Dom. volumes fell by 4% QoQ and 9% YoY to 0.14 mn TEUs in Q4:  Domestic  vol  growth  in  FY11  has  been  1%  (which  would have been ~7.5% in absence of the Dec’10 rail haulage hike). With higher empty running due to non-availability of certain commodities, EBIT margin for the year has declined to 10.8% (vs. 14% in FY10). The mgmt is in talks with railway ministry for the review of the policy; however, in the near term, dom ops are likely to remain weak. We have factored in vol growth of 4% and 10% for FY12E & FY13E resp.
• Of  the  4%  rise  in  rail  haulage  charges  on  both  EXIM  and  domestic  leg  w.e.f.  Jan 1st, the co. has been able to pass on ~30% (vs. 50% guided earlier).  
• Capex: Concor intends to spend Rs 700 cr in FY12E of which ~Rs 420 cr is towards wagon addition (~20 rakes likely to be added vs. 240 currently), while the rest is towards terminal development and setting up of logistics parks. While one of the logistics parks at Ahmedabad has just commenced operations, the second one at Andhra Pradesh is likely to come on stream in the next 3-4 months. 
• Fresh and Healthy (FHEL, fully owned subsidiary) has achieved PAT breakeven in FY11 (vs. loss of Rs 9.1 cr in FY10). The co. is targeting revenues of  ~Rs 90 cr in FY12E, with increased profitability.

Stock fully priced in; Maintain HOLD

We are reducing our FY12E EPS by 5% to Rs 71 on account of the near-term concerns on domestic ops and structural decline in lead distances. We maintain a HOLD rating on the stock, with a revised TP of Rs 1,213 (vs. 1,265 earlier), based on 17x FY12E EPS.

Yes Bank : BUY

Sustained Growth; Stable Margins

Yes Bank’s PAT grew 45% YoY to Rs 203 cr, in-line with our expectations. Core income rose 43% YoY, driven by advances growth of 55% and stable margins. Core fee income witnessed 44% YoY growth led by traction in transaction banking and branch banking segments. Cost-to-income ratio at 34.8% (down 96 bps QoQ) improved as a result of strong income growth. Gross NPAs increased by 11% QoQ, however, in ratio terms it remained stable at 0.23%. Provision coverage cushion has been raised to ~89% (from 76% in Dec-10). Restructured loans declined 3 bps QoQ to 0.24%.

Key highlights

• Yes Bank has been able to maintain margins at the last quarter’s level backed by its ability to pass on the increase in cost of funds. Almost 95% of its overall loans are on floating rate basis.
• CASA deposits growth (up 18% QoQ and 69% YoY) was in-line with overall deposits growth (up 16% QoQ and 71% YoY) – CASA ratio now stands at 10.3%.
• Advances growth was largely driven by retail and corporate banking segments which grew 251% YoY and 46% YoY respectively. Share of retail segment has improved to 12% (from 10% in Dec-10).
• The Bank maintains CAR at 16.5% (declined 170 bps from 18.2% in Dec-10). Tier-I ratio stands at 9.7% in Mar-11.

Maintain BUY, with TP of Rs 375

Margins remained intact as a result of loan re-pricing catching up with deposit cost increase. Overall business growth remained healthy with 64% YoY increase. The erstwhile strong business growth rates are expected to moderate due to high base effect coming into play. We expect that Yes Bank’s targeted branch network expansion (325 branches by Mar-12 from 214 in Mar-11) will support balance sheet growth. We have revised our EPS estimates upwards by 8% for FY12E. At CMP of Rs 316, the stock is trading at 12x FY12E EPS of Rs 27 and 2.1x FY12E ABV of Rs 150. We maintain our BUY rating with TP of Rs 375 (2.5x FY12E ABV and 14x FY12E EPS) – upside of 19%

27th April, 2011

The markets opened on a soft note amidst mixed global cues and moved lower on profit booking, touching the lowest point by the afternoon session. The markets gradually recovered the lost ground but ended the day with minimal losses. Among the Sectoral indices Healthcare witnessed some buying while Oil & Gas and Consumer duarbles witnessed selling. In the Sensex kitty Bharti Airtel (1.65%) and Hindalco (1.55%) were amongst the gainers while HUL (1.99%) and Maruti Suzuki (1.91%) were among the losers. The Sensex lost 39 points or 0.20% to close at 19,545 while Nifty lost 6 points or 0.10% to close at 5,868.

Total traded turnover stood at Rs 2,34,961 cr. In equities FIIs were net sellers of (Rs 554 cr) while DIIs were net buyers (Rs 162 cr). On the derivatives side, FIIs were net sellers in Index Futures (Rs 264 cr), Stock Futures (Rs 543 cr)    while they were net buyers in Index Options (Rs 693 cr) ,Stock Options (Rs 25 cr).

The US markets ended positive as investors remained optimistic due to strong corporate earnings being declared by companies like Ford Motor, 3M Co and United Parcel Services Inc. The Dow Jones gained 115 points or 0.93% to close at 12,595 while NASDAQ gained 22 points or 0.77% to close at 2,848.

The Asian markets are trading positive. Nikkei is trading higher by 1.29% while Hang Seng is trading higher by 0.51%.

The markets witnessed profit taking moving lower but managed to recover the losses to end with minimal gains. The markets may open on a positive note tracking positive global cues. Adopt a stock specific approach.

The trend deciding level for the day is 5851, If NIFTY trades above this level then we may witness a  further rally up to 5885-5915-5940 levels. However, if NIFTY spot  trades  below  5851  levels  then we may  see some profit booking to initiate in market, it may correct up to 5830-5802-5770.

Stocks to focus for intraday long:  Moser Baer, Havells, Gail

Hindustan Zinc : BUY

Silver-Rich Quarter; Volume Growth In Zinc

Hindustan Zinc’s (HZL) 4QFY11 EBITDA at Rs 1,967 cr (+27% YoY) was significantly above consensus (Rs 1,610 cr) & our estimates (Rs 1,750 cr) due to better-than-expected contribution from silver.

Silver revenues doubled YoY to Rs 200 cr. In addition, lead concentrate revenue increased 4x YoY and 2.5x QoQ to Rs 260 cr due to higher levels of silver in the concentrate. Net profit was at Rs 1,770 cr (+43% YoY).

Key highlights

• Increase in reserve base: HZL added 22 mnt to its reserve base (primarily from the Rajpura Dariba belt which includes SK mine), thereby increasing its total reserves & resources to 313 mnt.  This contains 34.7 mnt of zinc/lead metal and 885 mn ounces of silver.
• The co. expects to commission the 100kt lead smelter in 1QFY12, post which the combined lead/zinc capacity will be 1,064kt.

Outlook

We expect zinc/lead volume growth of 19% in FY12. Ramp-up of silver-rich zinc/lead SK mine (currently operating at 85%) would enable HZL to achieve its target of exit capacity (of 500 tonnes) by end-FY12.  We estimate silver volumes of 350 tonnes and 450 tonnes in FY12E and FY13E respectively.

Key result highlights

• Silver: Silver revenues doubled YoY to Rs 220 cr due to higher silver prices. Average silver price during the quarter was USD 32/oz vs USD in 17/oz in 4QFY10. In addition, lead concentrate sales revenue increased 4x YoY and 2.5x QoQ to Rs 260 cr  due to higher levels of silver in the concentrate. (50% of concentrate sales during the quarter was from the silver-rich SK mine)
• Volume: 4QFY11 refined zinc output was up  29% YoY to 194 kt, post the commissioning of the 210 kt Rajpura Dariba smelter in March 2010 (which contributed 46kt during the quarter). Concentrate sales during the quarter was 48kt as compared to 25kt in 3QFY11 and 49kt in 4QFY10.
• Other income: Other income increased to Rs 3 bn during the quarter vs. Rs 200 cr in 3QFY11 and Rs 130 cr in 4QFY10. This was primarily due to better yields on investments. Avg. return on investment was at 8.2% during the quarter vs. 5.2% in 3QFY11 and 4.4% in 4QFY10.

Valuations

We raise our silver price estimates for FY12E and FY13E to USD30/oz each from USD 25 and USD 27 respectively, driven by the recent surge in silver prices (currently at USD 46/oz). We also reduce our tax rate for FY12E and FY13E to 18% and 20% respectively from the earlier 22%, as per mgmt guidance. Consequently, we increase our EPS estimates for FY12E and FY13E to Rs 16.8 (vs. Rs 15.5) & Rs 18.7 (vs. Rs 17.8) respectively.  We raise our TP to Rs 168 (vs. 162 earlier) – zinc business at Rs 135 (5.5x FY12 EV/EBITDA) and silver business at Rs 33 (9x FY12 EV/EBITDA). Maintain BUY on the stock.

Dish TV : BUY

DISH TV Benefitting From Digitization

The I&B Ministry has announced its intent to implement the Digital Addressable Cable System by December 2014. In order to understand its implications, we met with the mgmt of Hathway Cables (unrated).

The management is confident of a successful rollout this time around and believes that their co shall be a key beneficiary (82% of its 8.3 mn subscribers come under Phase 1 and Phase 2 of the mandatory CAS implementation). In our opinion, Dish TV too will gain significantly from this thrust on digitization, leading us to raise our TP on Dish TV.

Hathway mgmt meet: Key highlights

• Focus on digitization: Hathway is currently focusing on digitizing its existing ~8.3 mn subscriber base, rather than expanding its subscriber base through inorganic means. They expect  to  digitize  ~1  mn  subs  in  FY12E  with  digitizing  becoming mandatory.
• Funding in place to digitalize 6 mn subscribers: Required to pay only 30% of STB capex upfront with the rest due at the end of the third year. Hathway will be required to pay 7-8% interest on outstanding liabilities. The STB subsidy is currently at Rs 600 /subscriber.
• Consolidation likely post CAS implementation:  Cable industry likely to witness consolidation post mandatory digitization as many small MSO’s and LCO’s business would become unviable.
• Cable players are the likely beneficiaries of mandatory digitization: Hathway’s mgmt believes that the mandatory digitization is likely to benefit cable players more than DTH as they can provide similar services at a comparatively lower rate than DTH. However, carriage & placement fees could get negatively impacted for cable cos.

Outlook and Recommendation

Rapid build-up in digital subs base post mandatory digitization augurs well for Dish TV as it leads to a faster expansion of its subscriber base. While we maintain our earnings estimate for Dish TV, we revise our TP upwards to Rs 81 (previous Rs 69) based on a 12x EV/EBITDA multiple on FY13E (earlier disc. back to FY12E @ 16% WACC).  We maintain our  BUY rating  on  Dish  TV  with  an upside of 16% from CMP of Rs 70.

I&B Ministry’s recommendation on digitization

The Information and Broadcasting ministry (I&B) has come out with its views on implementation of digital addressable cable system in India, suggesting Dec 2014 as the sunset date for the analogue cable regime.

Maruti Suzuki India Ltd : BUY

Higher Realizations AID Margin Expansion

Maruti Suzuki India Ltd’s (MSIL) Q4 operating performance was inline with expectations with EBITDA margin at 10% (vs. 9.5% in Q3). Profitability has seen an up-tick sequentially on higher realizations (up 2.5% QoQ) and lower employee costs (lower by 35% QoQ due to one-time in Q3). MSIL reported revenues of Rs 9,906 cr (up 20% QoQ & 6% YoY), EBITDA (incl. operating other income) of ~Rs 1,000 cr (up 12% QoQ & dn 9% YoY), and adj. PAT of Rs 660 cr (up 1% QoQ & 17% YoY).

Other highlights

ü  MSIL’s Q4 overall realizations at Rs 2.8 lakhs (up 2.5% QoQ) have been aided by improvement of both domestic realizations (up 2.2% QoQ) and export realizations (up 4.4% QoQ), owing to a better sales mix.

ü  Maruti has taken ~1% price increase (upto Rs 9,000 across models) in April-11. Additionally, the co. also indicated that levels of discounts are lower currently than FY11 avg. of Rs 10,500/ unit.

ü  MSIL has re-started hedging (after Q1 stand of open Yen exposure) on the back of an improving Yen/ Dollar rate. The co. has hedged ~40% of its FY12E exposure. While the avg. rates are lower than FY11 levels of 87/dollar, the recent weakness in Yen is likely to benefit MSIL in the coming quarters.

ü  During the qtr, MSIL has changed its policy of amortization of tools (earlier expensed) resulting in higher depreciation charges (by Rs 50 cr) in Q4. On the other hand, MSIL has guided for a 26- 27% tax rate going forward (vs. our est of 30%) due to higher R&D set-off.

Profitability likely to improve. Maintain BUY rating

As per the mgmt guidance, we raise our deprecation est. by 12% but reduce our effective tax rate to 27% for FY12E (from 30% earlier), keeping our estimates intact. Our EBITDA margin for FY12E has been reduced marginally (~10 bps) on higher raw material costs. We believe that profitability for MSIL is near trough and will improve as the co. increases realizations. We maintain our BUY rating on the stock, with a revised TP of Rs 1,594 (8.5x FY12 EV/EBITDA).

Reliance Industries : Maintain BUY

E&P Blip Obscures Strong Cyclical Biz

RIL reported Q3FY11 EBITDA of Rs 9,545 cr and PAT of Rs 5,136 cr bang in-line with our estimates. The petchem biz reported best ever EBIT of Rs 2,429 cr aided by decade high margins in polyester chain, which we expect to sustain going forward. The R&M segment also reported strong results backed by a cyclical recovery in margins. However, there was a slight blip in the E&P biz, wherein lack of clarity over future outlook of business may delay monetization of E&P assets, in our view.

ü  Refining EBIT growth at 77% (YoY): RIL exhibited strong cyclical recovery in refining biz, reporting a GRM of USD 9.0/bbl (Sing. margins at USD 5.0/bbl) on the back of strong recovery in gasoline spread along with widening light-heavy differential. Mgmt has indicated that the improvement in product spreads, along with stricter environmental norms in Europe/Turkey, would also support complex refining margins.

ü  Petchem recorded decade high margins: Polyester margins remained strong on the back of: (a) spiraling domestic demand (15% growth in 9M-YoY); (b) lack of incremental global capacity addition; and (c) tightness in cotton market. Most of the polymer capacity additions are behind us, which would support polymer margins going forward.

ü  KG-D6 – lack of clarity an overhang: The mgmt has indicated that RIL is continuing discussions with govt. and DGH to understand the policy framework and its impact on RIL. In view of the sensitivities, mgmt has not provided any clarity on KG-D6 production, which could remain an overhang on valuations. Moreover, the company’s development/ exploratory plans in other blocks may get delayed, which would delay monetization of E&P assets further.

Maintain BUY with Target Price of Rs 1,145/ sh

Due to expected delay in exploratory plans in NEC-25, MN-D4 and lack of clarity on KG-D6, we have reduced RIL’s E&P business valuation by 10% leading to our fair value coming to Rs 1,145/share. Our TP still offers 18% upside to CMP. We retain our Buy rating on the stock and believe any weakness in the stock is an opportunity to BUY.

Analyst meet highlights

Refining: GRMs exhibit cyclical uptrend

RIL’s GRM improved to USD 9.0/ bbl (Q2FY11- USD 7.9/ bbl) due to a strong recovery in gasoline spreads (up 25% QoQ) along with widening light-heavy crude differential (highest in last 2 years). Gasoil spreads remained firm as cold weather in Europe supported demand. Naphtha spreads turned positive, after a weak Q2FY11, primarily on the back of healthy demand from Saudi Arabia. RIL’s mgmt is expecting product cracks to widen going forward on the back of (a) strong recovery in global demand; (b) reduction in product inventories; and (c) widening light-heavy differential amidst the increasing demand for lighter product along with weakening FO cracks. Utilization rate was marginally lower at 104% compared to 109% in Q2FY11, primarily due to planned shutdown in the CDU unit, albeit remained significantly high when compared to other global peers.

Petrochem: margins are at decade high, to sustain going forward

RIL’s mgmt has indicated that despite rising feedstock costs (oil/naphtha), the company has managed to achieve significant growth in petchem profitability as spiraling demand along with high operating rates supported petchem margins. Polyester margins remained strong on the back of: (a) spiraling domestic demand (15% growth in 9M- YoY); (b) lack of incremental global capacity addition; and (c) tightness in cotton market. The Chemical profitability further improved as shortage of Benzene, Butadiene and SBR/PBR increased pricing power. Lastly, since most of ethylene cracking facilities are behind us, recovery in polymer spreads over the next two years is expected, which would support petrochemical margins for RIL.

E&P – lack of clarity mars outlook

The mgmt has indicated that they have initiated a discussion with GoI and DGH over interpretation of E&P policy framework. The mgmt has not provided any further details citing that the discussion is sensitive in- nature. We believe that the on-going discussion would not only impede production outlook of existing KG-D6 basin, but also likely to delay monetization of RIL’s other E&P blocks.

Earnings revision

We have marginally revised our FY11/12/13E estimates downward by 1.0-2.0%. The revised estimates have largely remained flat vis-à-vis our previous estimates as the upward revision in R&M/petchem business have been partly offset by weakness in upstream business (lower KG-D6 production and higher risk factor to incorporate the lack of visibility over future outlook of the business).

Valuation and assumptions

Building in delay in E&P asset monetization and strong cyclical recovery in R&M/petchem

E&P business: RIL’s upstream business has recently faced headwinds amidst the slower than- expected ramp-up of its KG-D6 gas production and a minor setback in its exploratory portfolio (D9 dry well). The company’s mgmt has not furnished any clarity over the future outlook of its upstream business. We believe that the current uncertainty would not only impede production outlook of existing KG-D6 basin, but also likely to delay monetization of RIL’s other E&P assets. We have incorporated the uncertainty over E&P business by: (a) moderating our production estimates for KG-D6 block; and (b) applying a risk discount of 20% on valuation of other reserves (NEC-25, CBM, contingent and future reserve accretions). We have reduced our fair value estimates for RIL’s E&P business to Rs 394/share from our earlier estimates of Rs 440/share.

Refining and petrochemicals biz: We have marginally raised our refining margin assumptions from USD 8.2/9.3/10 to USD 8.4/10/10.5 per bbl for FY11/12/13E respectively, owing to a strong recovery in global demand. Additionally, we are building in a substantial cyclical recovery in petrochemical margins, even higher than our previous estimates, on the back of an indication from RIL mgmt that the current healthy petchem margins are likely to sustain in future. We value the extant R&M and petchem biz at Rs 631/share.

26th April, 2011

The markets opened on a soft note but soon moved up touching the highest point in the early session post which they continued to trade in a narrow range and ended the day marginally lower. Among the Sectoral indices Consumer Durables & IT gained while Realty and Oil & Gas were among the losers. In the Sensex kitty Sterlite (4.40%), SBI (2.06%) & Maruti Suzuki (1.53%) were amongst the gainers while RIL (2.97%), DLF (2.25%) and RCom (1.41%) were among the losers. The Sensex lost 18 points or 0.09% to close at 19,584 while Nifty lost 10 points or 0.17% to close at 5,875.

Total traded turnover stood at Rs 1,25,171 cr. In equities FIIs were net sellers of (Rs 378 cr) while DIIs were net buyers (Rs 237 cr). On the derivatives side, FIIs were net buyers in Index Futures (Rs 33 cr), while they were net sellers in Index Options (Rs 262 cr) and Stock Futures (Rs 308 cr) Stock Options (Rs 16 cr).

The US markets ended mixed amidst light volumes and concerns over increasing inflation. The Dow Jones lost 26 points or 0.21% to close at 12,480 while NASDAQ gained 5 points or 0.20% to close at 2,826.

The Asian markets are trading lower. Nikkei is trading lower by 0.98% while Hang Seng is trading lower by 0.71%.

The markets closed marginally lower after trading in the tight range throughout. The declines outnumbered the advances. The markets may open on a soft tracking mixed global cues. Maintain a stock specific approach.

The trend deciding level for the day is 5880,If NIFTY trades above this level then we may witness a further rally up to 5900‐5930‐5965 levels. However, if NIFTY spot trades below 5880 levels then we may see some profit booking to initiate in market, it may correct up to 5850‐5830‐5802.

25th April, 2011

After a gap up opening the markets traded sideways for most of the trading session touching intraday high in the morning session and moving bit lower in the afternoon session before ending the day on a positive note. Among the Sectoral indices Metals & Oil and Gas gained while Capital goods and Power were among the losers. In the Sensex kitty Maruti Suzuki (3.22%), ONGC (3.01%) & Hindalco (2.92%) were amongst the gainers while BHEL (4.38%), TCS (2.23%) and Bharti Airtel(1.01%) were among the losers. The Sensex gained 131 points or 0.67% to close at 19,602 while Nifty gained 33 points or 0.56% to close at 5,885.

Total traded turnover stood at Rs 1,63,807 cr. In equities both FIIs & were net buyers of (Rs 307 cr) While DIIs were net sellers (Rs 270 cr). On the derivatives side, FIIs were net buyers in Index Futures (Rs 204 cr), Index Options (Rs 586 cr) and Stock Futures (Rs 84 cr) while they were net sellers in Stock Options (Rs 26 cr).

The US markets ended positive on strong earnings reported by companies like Apple Inc but the gains were limited due to mediocre results from General Electric & McDonaldʹs coupled with concerns on increase in jobless claims. The Dow Jones gained 52 points or 0.42% to close at 12,506 while NASDAQ gained 18 points or 0.63% to close at 2,820.

The Asian markets are trading marginally higher. Nikkei is trading higher by 0.29% while Hang Seng is shut on account of holiday.

On Thursday, the markets ended on a positive note after trading sideways throughout the day. The advance decline ratio was almost 1:1. The markets may open on a soft and may remain volatile ahead of F&O expiry and declaration of corporate earnings this week. Adopt a stock specific approach.

The trend deciding level for the day is 5885,If NIFTY trades above this level then we may witness a further rally up to 5910‐5940‐5965 levels. However, if NIFTY spot trades below 5885 levels then we may see some profit booking to initiate in market, it may correct up to 5860‐5834‐5805.

Stocks to focus for intraday long: Titan, SBIN

IPO Update : IIL

Innoventive Industries Limited

Price band: Rs 117-120 per share

Issue opens: 26 April 2010

Issue closes: 29 April 2010

Bid Lot: 50 shares

Company and promoters

Incorporated on Aug 1991; Innoventive Industries Ltd. (IIL) is a multi-product engineering company engaged in the manufacturing and sale of precision steel tubes, tubular components, auto components, machined components and other steel products which find application in diverse industrial sectors such as transportation, oil & gas, power, farm equipments and general engineering. IIL is ISO 9001:2000 and ISO/TS 16949:2002 certification certified and has also successfully implemented TPM.

Mr. U.K. Dixit, is currently holding the post of Chief Operating Officer (COO). He is a Mechanical Engineering Graduate. Mr. Dixit has over 39 years of experience in the steel industry including projects, plant operation and installation. He possesses great experience in handling Greenfield projects.

Issue highlights

ü  Innoventive Industries Ltd. (IIL) is a multi-product engineering company engaged in the manufacturing and sale of precision steel tubes, tubular components, auto components, machined components and others. IIL is ISO 9001:2000 and ISO/TS 16949:2002 certification certified and has also successfully implemented TPM.

ü  23 pilger machines were installed over last 2 years that have now stabilized and higher utilization on these machines is expected. Moreover, 94 pilger machines are expected to be installed over next 2 years and their total benefits will be reaped in FY 2013. If IIL achieves this scale of utilization; it will significantly propel revenue growth coupled with margin expansion due to economies of scale.

ü  IIL is eligible for Industrial Promotion Subsidy (IPS) equivalent to 75% of the eligible investment in its plant. As at Nov 2010; an overall investment of Rs 262.5 cr has been made by IIL of which Rs 94.5 cr has been sanctioned as eligible investment and Rs 167.9 cr is in the process of validation.

ü  Marquee clientele list includes some prominent names like Bharat Heavy Electricals Ltd, Bajaj Auto Ltd, Thermax Ltd, Alstom Projects Ltd, John Deere India and Salem Steel North America LLC, amongst others.

ü  IIL has delivered stellar performance in the last 2 years. Total sales have grown at a CAGR of 14.3%, 76% in EBITDA and 107% in PAT during FY 2008-2010. IIL has also successfully augmented its customer base from 447 in FY 2006 to over 700 in FY 2010.

ü  ICRA has graded the IPO 3/5 which indicates average fundamentals.

Positives

ü  Capacity expansion, geographical diversification and broadening end user industries expected to provide stability and growth

ü  IIL will reap benefits of its investments; higher utilization rates will propel margins

ü  Procurement of essential raw materials from captive mines a big positive

ü  Technology enhancement aids in saving costs and improves cost competitiveness

ü  Benefits derived under the Package Scheme of Incentives 2007

Risk factors

ü  Steel and D.I. Pipe plants typically have long gestation period. The scheduled completion target for IIL’s Project is an estimate and is subject to delays as a result of, among other things, contractor performance shortfalls, unforeseen engineering problems, dispute with workers, unavailability of financing, and others; any of which could give rise to cost overruns or delay in implementation schedule. Failure to complete the project according to its specifications or schedule, if at all, may give rise to potential liabilities as a result, ROI may be lower than originally expected, which may have a material adverse impact on the business operations of Company.

ü  IIL procures steel coils, which constitute a majority of raw material, from suppliers on annual contract basis. Besides this contract for steel coils, company does not have any tie – ups / firm arrangements with vendors for the supply of raw material. Further, in the event vendors discontinue supply or fail to adhere to technical specifications, quality requirements and delivery schedules for any reason whatsoever, IIL may have temporary stoppages of production till alternate arrangements are made. Such temporary stoppages may affect business and profitability.

Magma Fincorp : BUY

Strong Profit Growth

Magma FinCorp (Magma) maintained its strong growth trajectory in 4QFY11 driven by robust growth in interest income (25% QoQ to Rs 253 cr) and lower write-offs (Rs 24.6 cr in 4QFY11 vs. Rs 40 cr in 4QFY10). PAT rose 69% YoY and 39% QoQ to Rs 43 cr which includes Rs 10.9 cr of provision for standard assets. On-book AUM grew 35% YoY to Rs 4,280 cr as on March 11 which now comprise 46% of total AUM (40% in March 10). Going forward, management expects similar growth trend (50% disbursement growth) with focus on high yielding products (HYP) which will keep their NIMs at above 5%.

Key highlights

ü  Disbursement grew 41% YoY and 53% QoQ to Rs 1,955 cr mainly driven by Cars & UV (80% YoY growth and 26% share) and HYP segment (111% YoY growth and 18% share).

ü  NIM (on incremental biz) maintained at 5% and mgmt has guided for 5.25% in FY12. However, mgmt does not expect its cost of funds to come down (9.1% in 4QFY11) from current levels.

ü  Magma maintains a capital adequacy ratio of 18.2% (Tier 1 ratio of 11.3%), which is above the regulatory requirement of 15%.

Valuation

Magma continues to impress with robust business growth, lower write- offs (0.24% of AUM), sustained NIMs (5%) and healthy PAT growth. Magma, in-line with its guidance, is consistently reducing its share of securitized portfolio (~54%) and is aiming to bring it down to ~30% by FY13E. Keeping this in mind, we expect that the company may need to raise capital in near term in order to grow its On-book AUM. At CMP of Rs 70, it is trading at 5.6x FY12E EPS of Rs 12.6 and 4.0x FY13E EPS of Rs 17.4. On P/ABV it is trading at 1.2x FY12E ABV of Rs 60 and 0.9x FY12E ABV of Rs 79. On the back of its consistent improving performance BUY with a target price of Rs 86 (1.4x FY12E ABV).

CMC Ltd : BUY

Interim Hiccups; An Opportunity to Buy

Transformation accomplished: FY11 marked first full year post CMC’s biz transformation, in which it delivered healthy topline growth (+24% YoY) with stable margins (FY11 OPM at ~19%; +40 bps YoY). A balanced rev mix (Svcs: ~89%, International revs: ~54%, contribution from TCS: ~47-48% in Q4F11) with ~30% segmental PBIT margins for high growth Systems Integration & ITES biz (FY11 aggregate share: ~68%) bestow a positive demand outlook for CMC in the coming years.

Long-term revenue visibility robust: Higher employee additions (+33% YoY to 7,396) & increased investments in facilities are direct indicators of a stronger revenue outlook in the coming years. Healthy demand outlook is also reflected in new client additions (20 in Q4 – 8 in US and 12 in India/ 80 in FY11). In domestic biz (Q4 rev share: ~46%), CMC is witnessing strong traction in its niche verticals/offerings — Infra, e-Governance, Insurance, Retail (Rollout svcs), Rural & Co-operative Banks, Mobile and Cloud Computing. In exports (+26% YoY in Q4), strong demand is witnessed in its key offerings – Embedded & Real-Time Systems, Digitization & Work-Flow mgmt – in developed (US/Europe) as well as in emerging economies (Bangladesh, Sri Lanka, Nepal and MEA).

Leverage on short-term corrections (due to higher FY12E tax rate and capex) to BUY: FY12E tax rate and 35% increase in SEZ capacity to impact short-term performance. CMC’s earnings growth would have been higher but for increase in the FY12E effective tax rate to 25% (vs. earlier indications of 20%) and higher capex of ~Rs 250 cr in FY12E. Commencement of Phase III facility with 3,500 capacity addition (+35%) to Phase I & II (10,000 capacity) to impact cash flows in FY12E. On the positive side, this increase in capacity is again an indicator of buoyant demand. While we reduce our FY12E EPS est. downwards by ~10% to ~Rs 132 to incorporate these changes, we remain more confident on FY13E EPS growth and build in ~28% YoY growth to Rs 169. Revenue/PBT CAGR btw FY11- FY13E at 24%/23% resp.

BUY the stock from a long-term perspective.