8th April, 2011

The markets opened on a flat note and slipped lower trading in the negative throughout the morning session. The markets gradually recovered by afternoon session and traded in the positive zone for short while but slipped lower in the late session ending the day on a flat lower. Among the Sectoral indices Realty was the major gainers while IT and Oil & Gas were saw some selling. Among the Sensex stocks Reliance HDFC (2.31%) and Hindalco (1.79%) were the gainers while NTPC (2.61%), ONGC (2.10%) and TCS (2.00%) were amongst the losers. The Sensex lost 21 points or 0.11% to close at 19,591 while Nifty lost 6 points or 0.10% to close at 5,886.

Total traded turnover stood at Rs 90,247 cr. In equities FIIs were net buyers (Rs 221 cr) while DIIs were net sellers (Rs 212 cr). On the derivatives side, FIIs were net sellers in Index Futures (Rs 269 cr) Stock Futures (Rs 359 cr) and Stock Options (Rs 19 cr) while they were net buyers in Index Options (Rs 341 cr).

The US markets ended marginally lower on concerns of higher crude prices and fresh earthquake in Japan. The Dow Jones lost 17 points or 0.14% to close at 12,410 while NASDAQ lost 4 points or 0.13% to close at 2,796.

The Asian markets are trading higher. Nikkei is trading higher by 0.91% while Hang Seng is currently trading higher by 0.44%.

The markets ended on a flat note with sustained buying seen in mid caps and small caps. The markets may open on a flat to positive note amidst mixed global cues. Maintain 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 5910‐5940‐5970 levels. However, if NIFTY spot trades below 5900 levels then we may see some profit booking to initiate in market, it may correct up to 5865‐5835‐5800.

NTPC: Q4FY11 Results Update

Tax Benefit supports FY11

NTPC’s provisional results were below expectations. Further, FY12 capacity addition guidance is likely to be missed as evident from: (a) FY11 capex being significantly lower than guidance and (b) implied capacity addition from FY12 generation volume guidance being lower than actual guidance. NTPC reported Net sales of Rs 53,721cr (up 16% YoY) and PAT of Rs 8,826 cr (up 1% YoY) in FY11. Reported PAT includes ~Rs 1,000 cr worth one-time tax gain from grossing up of RoE for tariff calculation on full tax vs. MAT.

Key highlights:

·     Capacity addition target missed in FY11: NTPC commissioned 2,490 MW & commercial ops for 1,600 MW vs. guidance of 4,150MW.

·     PLF impacted due to coal supply and demand: PLF declined by ~300bps to ~88% due to inadequate supply of domestic coal and infrastructure bottlenecks for transporting imported coal. Thus volume growth was barely 1% at 220.5 bn units vs. installed capacity addition growth of 8%.

·     Capacity addition target for FY12 may be missed: The management is guiding for 4,320 MW of capacity addition for FY12 vs. ~5,500 MW earlier. However, we believe this target may not be achieved as inferred from: A) NTPC missing its FY11 capex guidance of Rs 22,400 cr by a wide margin (actual capex was at Rs 12,800 cr) – indicating delays; B) FY12 generation target of 235 bn units vs. 220.5 in FY11 implying an incremental capacity of ~2,000 MW.

·     Challenges in coal sourcing mounting: NTPC incrementally requires ~16 MMT of coal in FY12, of which ~13 MMT is from domestic sources. We believe this would be a challenge, since Coal India has guided for incremental production of ~16 MMT in FY12E.

Earnings growth to be muted in FY12; Maintain HOLD

Earnings growth in FY12 is likely to be muted due to absence of one-time tax benefit. Lower coal availability could put further pressure on earnings through incentives (~22% of FY11). Target Price of Rs 182/sh takes into account LT sustainable core RoE of 23% (NO hick-ups in PLF due to coal availability & NO changes in tariff policy due in 2013) & LT growth of 5%.

Auto Sector Update

Volume's accelerated in March, Strong ending to FY11

Auto volumes across-the-board continued their show of strength in Mar’11 (typically a strong month), despite some pre-buying in Feb’11 in anticipation of duty hikes. Discounts offered by various OEMs also aided sales. FY11 has been a record year for the entire automobile sector with a consecutive robust volume growth of ~25%.

• 2Ws: Hero Honda recorded highest ever vols of 0.51 mn units in Mar’11 (up 9% MoM & 24% YoY). However, BAL’s sales were muted at 274,389 units, down 4% MoM (up 12% YoY) due to export vehicles still in transit. TVS’ 2W volumes witnessed a healthy 8% MoM growth to 186,781 units (up 27% YoY).

• CVs: TAMO and ALL saw highest ever CV vols of 49,753 (up 21% MoM & 15% YoY) and 12,168 (up 24% MoM & 21% YoY) units resp. 

• Cars: Maruti saw record sales of 121,952 units, up 9% MoM (up 28% YoY); while Tata Motors’ passenger car volumes fell by 16% MoM to 23,130 units (down 3% YoY), led by 31% MoM decline in Indica sales. Nano clocked 8,707 units (vs. 8,262 units in Feb’11).

Maruti Suzuki (MSIL): Target - 1603

• MSIL clocked its highest ever volumes of 121,952 units in Mar’11 (up 9% MoM, 28% YoY). Domestic sales were higher by 9% MoM at 110,424 units (up 39% YoY), with a strong showing across all segments. Exports too improved by 14% MoM to 11,528 units (down 26% YoY).

• Maruti has raised prices by upto Rs 9,000 (upto ~2.4%) across models in Apr’11, to absorb the material cost pressures.

• The management expects the industry and Maruti volumes to grow by ~12-15% in FY12E (vs. 25% in FY11)

Mahindra and Mahindra (M&M): Target - 745

• M&M’s UV volumes (incl Gio + Maxximo) grew by 15% MoM to 27,822 units (up 15% YoY). 3W sales were steady at 5,769 units (up 32% YoY; 1% MoM). Logan volumes continued to be healthy at 1,018 units in Mar’11 (vs. avg. of 1,136 p.m. in Jan & Feb). The company recorded its highest ever auto segment volumes in Mar’11.

• Tractor volumes rose by 4% MoM to 19,848 units, up 4% MoM (23% YoY).

• M&M is currently running at ~85% utilization levels for tractors and expects strong volume growth of ~12-15% for FY12E. The company has announced a greenfield expansion plan for tractors (capacity addition of 0.1 mn units), which is expected to commence operations by Feb’12.

Tata Motors (TAMO): Target - 1501

• Tata Motors witnessed highest ever domestic CV volumes of 49,753 units in Mar’11, higher by 21% MoM (15% YoY).Domestic M&HCVs rose 32% MoM to 23,338 units (up 12% YoY), while LCVs at 26,415 units were up 12% MoM and 18% YoY.

• However, passenger car volumes fell by 16% MoM to 23,130 units (down 3% YoY) – led by 31% MoM decline in Indica sales. Nano clocked 8,707 units (vs. 8,262 units in Feb’11).

• TAMO is planning to double its Nano production to ~18,000–20,000 p.m. units in FY12E, in light of the revival in Nano sales over the last four months.

• The company has raised prices by Rs 7,000-36,000 in Apr’11 across passenger vehicle products.

Ashok Leyland (ALL): Target - 63

• ALL witnessed overall volume growth of 24% MoM and 21% YoY at 12,168 units, which is its highest ever.

• Goods segment volumes rose 22% MoM to 9,296 units (up 25% YoY); while passenger segment saw a 28% MoM jump in sales at 2,728 units (7% YoY).

• The company expects overall volume growth of ~15% in FY12E (vs. 47% in FY11 at 94,108 units), also to be aided by market share gains.

• ALL is planning a round of price increase in Apr’11.

Two-Wheeler Industry

Bajaj Auto (BAL): Target - 1570

BAL’s motorcycle volumes were down 4% MoM at 274,389 units (up 12% YoY). Three-wheeler sales stood at 33,349 units (down 17% MoM, up 14% YoY). The volume decline is on account of ~32,000 units of exports in transit, which will be recorded in Apr’11 sales. As a result, exports too were lower at 69,884 units (vs. avg. of 0.1 mn p.m. in the last 3 months). Bajaj has launched the 125 cc variant of the Discover brand at a competitive price of Rs 45,500 on March 31st, 2011. The co. has raised prices by ~1-1.5% across models in Apr’11.

Hero Honda (HH): Target - 1642

HH has reported strong volumes of 515,852 units in Mar’11 (up 9% MoM and 24% YoY); this is its highest ever monthly run-rate. The company’s market share (among top 3 players) increased to 59% this month (vs. 57% in Feb’11 and Mar’10).

TVS Motors (TVS): Target - 63

TVS’ motorcycle vols improved by 11% MoM to 79,642 units (up 24% MoM), while scooter sales remained healthy at 42,655 units, up 6% MoM (50% YoY). Mopeds clocked 64,484 units (up 5% MoM, 19% YoY). Exports have surprised positively, with a 24% MoM growth to 26,979 units (up 34% YoY). TVS has met its full yr volume guidance of 2 mn units in FY11, and expects growth of ~15% in FY12E. The co. is planning to hike prices in Apr’11.