Thursday, October 6, 2011

IRB Infrastructure Developers -Road award momentum intact Internal accruals can sustain growth

Action: Strong operating cash generation could fund new projects
IRB has corrected 25% (vs Sensex return of -19%) YTD. We believe
concerns on rising competition in the road sector resulting in value
destructive bids and an adverse macro environment resulted in the
underperformance. We believe equity IRR in the road sector have come
down, but should stabilise at 15-17%, hence we believe that the
aggressive bids of the recent past need not be extrapolated to all future
projects. IRB is relatively better placed in the current environment, in our
view, as 1) almost 40% of the company’s net debt is secured at fixed
interest rates and b) the current projects can be executed through internal
accruals, hence there is little risk of dilution, in our view.
Valuation: Risk-reward attractive
IRB is currently trading at a P/BV of 2.2x vs. an average P/B of 3.2x over
the past three years. We believe that the current stock price is attributing
little value to potential project accretion in the future. Assuming that the
construction business is valued based only on the current order book (i.e.,
not attributing any future project accretion), the stock provides only ~8%
potential downside from current levels, as per our estimates. We believe
the risk-reward remains attractive as our TP provides potential upside of
25% from current levels.
Key catalysts
 Increased visibility of revenues from newly commissioned projects,
Tumkur Chitradurg in Q2FY12 and Kolhapur in 2HFY12.
 Reduction in bidding aggression in road projects.

One of the largest BOT players with a credible track record
IRB is one of the largest road developers in India , with18 road BOT projects of which 11
are operational. Its road portfolio consists of ~6700 lane Kms of which ~3400 Km are
operational. IRB was one of the earliest entrants in the BOT segment and owns some of
the very high density stretches in Western India. According to the company, it owns
concessions on ~11% of the Golden Quadrilateral, which has among the highest traffic
density in the country.
Since IRB was an early entrant in the BOT space, its initial projects were won when
competitive intensity was low. This has helped the company post high equity IRR on
these projects. We believe that IRB has been mostly prudent in project selection and
bidding. We list below the difference in IRB’s bid and the second lowest bidder in some
of its key projects. In our view, only the recent Ahmedabad-Vadodara bid is aggressive.

In the Ahmedabad-Vadodara project which IRB won in April 2011, the premium quoted
by IRB was 62% higher than the second highest bid. IRB offered to pay NHAI a premium
of INR3.1bn in the first year. This amount will increase by 5% y-y implying a total outgo
of INR147.8bn over the entire concession period. The next closest bidder (L2) had
offered to pay a premium of INR1.9bn in the first year, implying a total outgo of
INR91.2bn. We understand that other bidders had quoted INR1.0-1.5bn as premium,
implying that IRB's bid was100-200% higher than most other bidders. Management did
acknowledge rising competition and hence the aggressive bidding. Despite the
difference in bids, management expects to deliver 16-17% equity IRR which at this stage
appears optimistic, in our view. According to our estimates, the equity IRR for the project
is 9.3%, below the cost of equity of 13.5%. We therefore attribute a negative value of
INR 21/sh to this project in our valuation. In our view, the stock is already pricing in
negative value from the project, considering the price correction immediately after the
project win was announced.
Balance sheet strength
Net debt/equity ratio for IRB stands at 1.41 as of FY11, which is much lower than some
asset owners like GMR (2.47), Lanco Infra (2.21) and Adani Power (3.09). The company
expects to add US$1-2bn worth of projects every year. The projects can be absorbed
and funded only through internal accruals and additional debt, according to
management. Additional equity need not be raised for these projects as per company.
According to our estimates, we do not see the need for IRB to raise equity for the next
two years. In FY14, three of IRB’s projects which are currently under construction would
be commissioned, in our view. Beyond FY14, IRB could sell stake in these projects or
securitise future cash flows to raise capital to fund newer projects instead of raising
equity at the parent level, in our view.

Risk-reward attractive
We value the BOT projects at cost of equity of 13.5%. We value the construction arm at
7x FY13F earnings. Our end-FY12 value for IRB comes to INR 205/sh. Roll forward by
six months (methodology unchanged) gives us our price target of INR 212/sh. We
believe the risk-reward is attractive as our target price provides potential upside of 25%
from current levels.

IRB is currently trading at a P/BV of 2.2x vs. an average P/B of 3.2x over the past three
years. The stock has corrected 25% (vs Sensex return of -19%) YTD. We believe
concerns on rising competition in the road sector resulting in value destructive bids, and
the adverse macro environment resulted in the underperformance. We believe equity
IRR in the road sector has come down but should stabilise at 15-17%, hence we believe
that aggressive bids of the recent past need not be extrapolated to all future projects.
IRB is relatively better placed in the current environment, in our view, as 1) almost 40%
of the company’s net debt is at fixed interest rates and 2) the current projects can be
executed through internal accrual and hence there is little risk of dilution in our view.

We believe that the current stock price is attributing little value to potential project
accretion in the future. Assuming that the construction business is valued based only on
the current order book (i.e., not attributing any future project accretion), we estimate the
stock would provide just ~8% potential downside from current levels. We believe the riskreward
remains attractive as our target price provides potential upside of 25% from
current levels.
Key risks
The key risks to our target price and rating are: 1) lower-than-expected traffic in BOT
projects, 2) delay in construction of under-construction projects, 3) lower value attributed
to construction arm on lower-than-expected project wins and 4) increase in interest rates
and risk premium.
We present below the sensitivity of our target price to traffic growth as well as cost of

Diamond Power Infrastructure: 2011 Top Picks: Anagram

Diamond Power Infrastructure

Diamond power infra is the only EPC player with major captive
facilities (80% of the project cost) which gives the company an
advantage (higher margins & lesser volatility, lower cost of carry)
over other EPC player who outsources 60 to 70% of the project
work. With adequate liquidity in place, and experience in T&D
over years DPIL will be able to monetise on $100 bn spend in
T&D sector. Moreover company has not only targeted to increase
top-line but has made constant efforts to improve and sustain
margins through backward integration (Conductors, EPC and

While long-term looks promising, in medium term PGCIL pending
order finalisation, strong execution and earning surprise could
act as catalyst. We initiate coverage on the stock with "BUY"
rating with target price of Rs 297 ,a potential upside of 43%.

Only EPC player with Integrated Model
Diamond power infra is the only EPC player with major captive facilities
(80% of the project cost) which gives the company an advantage over
other EPC player who outsources 60 to 70% of the project work. We
believe this will not only accelerate the margins but help company to bid
competitively and reduce carrying cost of inventory. Company
commenced EPC business in 2006 and now has healthy order book of Rs
806 cr (2.4x FY10 sales) and L1 bids of another Rs 600 cr. DPIL along
with Skoda has bid for 8 projects. Order wins in 440 kv class would be
an upside to our estimate due to higher margins.

Cash conservation for growth - Equity Infusion & relaxed debt
terms have eased liquidity situation
Due to equity infusion (Rs 132 cr @ Rs 204/share) and easing liquidity
situation Crisil has upgraded rating on DPIL by two notches from BBB+
to A- with a positive outlook, which has resulted in lower interest rate
(by 275 bps) on a Rs 130 cr term loan from ICICI and the debt repayment
has been deferred till 2014. Even the short term working capital, which
was around 13%, is now expected to be at 11%. This will help company
to conserve its cash for its growth for the next three years.

Higher voltage + In-house manufacturing = Higher Margins
The company was present in low voltage products like LT cables and
distribution transformers. Expansion into new product and niche segment
like EHV cables (132 kv to 550 kv), HT cables, Power transformers will
enable company to increase margins. As company starts bidding for
T&D projects we believe benefits from in-house manufacturing will kickin
significantly, which will lead to margins expansion by 100 bps in FY13.

Expansion will accelerate topline while de-risking the product
Capacity expansion and foray into transmission project will enable
company to achieve robust growth over coming years. While demand in
high voltage segment remains good, revenue visibility in near term also
remains across the segment. We expect stronger execution on EPC side
in H2 FY11 as compared to H1 FY11.

We expect Sales and EPS to grow by 42% CAGR over 2010-13 led by
capacity expansion, entry into new segments, margin expansion and
lower interest cost. At the current market price of Rs 197 the stock
trades at 6.5/4.6x its FY11E/FY12E EPS of Rs 30/42 and 5.1/3.7x its
FY11E/FY12E EBITDA. At our target price of Rs 297 the stock would
trade at P/E of 7 and EV/EBITDA of 5.

Ramky Infrastructure - Top pick in mid-cap construction::Nomura research,

Ramky Infrastructure- Top pick in mid-cap construction
Higher growth, stronger cash flow and balance sheet differentiate it from peers

Action: Top pick in mid-cap construction space, financial
performance expected to be better than peers; maintain BUY
We believe Ramky is one of the best mid-cap construction players in
India, with revenue growth (20-25% vs peers’ 5-12%) and ROE (18-19%
vs 4-8%) exceeding our forecasts for peers for FY12-13F. Ramky has a
robust and well-diversified order book (backlog ratio at 4x as of end-
FY11), providing strong visibility for near- to medium-term revenue.
Focus on execution and management of receivables; low capital
intensity of developer business ensures better balance sheet
Ramky’s focus on execution and management of receivables has helped
control working capital, in our view. Its built, operate and transfer (BOT)
portfolio is a good balance of projects of low capital involvement with early
cycle cash flows and those with higher capital investment. The equity
component is only ~9% of BOT project cost, and equity invested to date is
only 24% of net worth (29-42% for peers). We believe future equity
investment can be met through internal accruals. Parent net debt/equity of
0.65x, (vs ~1.0x for peers), presents little equity dilution risk in the medium
term, in our view.
Catalysts: Strong, sustained financial performance as reflected in
quarterly results; management delivering on guidance
Valuation: Attractive considering lower risk than peers
Our PT of INR450 provides upside of 112% from current levels. The stock
is trading at an adjusted FY13F EV/EBITDA (adj for subs) of 3.54x vs our
estimate 5.16x average for mid-cap peers, which we believe is attractive
considering Ramky’s lower risk profile.

The stock is trading at an adjusted FY13F EV/EBITDA (adj for subs) of 3.54x vs 5.16x
average for mid-cap peers under our coverage.
We believe the stock will re-rate; strong, sustained financial performance to be
We believe the stock could re-rate on strong, sustained financial performance as
reflected thus far in the quarterly results. As reported, numbers continue to exhibit better
growth and ROE than those of its peers, and thus we believe the stock should trade at a
higher multiple. The stock has been listed only for ~10 months, and as management
delivers strong financial performance quarter after quarter, we think the stock will
eventually trade closer to our target multiple of 10x.
Risks to our view and price target
CBI investigation on certain investments made by the Ramky Group: The Central Bureau
of Investigation (CBI), at the direction of the Andhra Pradesh High Court, is investigating
certain investments made by some companies in firms owned by Y S Jaganmohan
Reddy, Member of Parliament and son of ex-Chief Minister of Andhra Pradesh, Y S
Rajasekhar Reddy. The Ramky group is one such investor being probed. (Source:
Deccan Herald, 18th July 2011, ‘CBI to issue notices to investors in Jagan’s firms’)
Higher-than-expected slowdown in order inflows could adversely impact earnings: We
build in order inflows of INR50bn in FY12F in line with the inflows in FY11. If order
inflows are lower, it could adversely impact revenues and earnings in FY13F, in our view.
Our analysis indicates a revenue growth range of 15-30% for FY13F for order inflows
ranging from INR30-65bn in FY12.
Execution delays would impact revenue growth: Execution delays due to issues such as
land acquisition, environmental clearances and inadequate client preparedness could
depress revenue growth.
Further rise in interest cost could depress earnings: We have built in an increase of
100bps in average interest costs in FY12F vs FY11. Any increase beyond this could
adversely impact earnings and valuation. We estimate that a 50bp increase in interest
rates would reduce adjusted profit by ~1%.
Deterioration in working capital: A delay in payments from clients could result in
deterioration of working capital, leading to higher debt and interest costs, resulting in
lower profits.
Increase in risk premium could lead to lower valuations: Any increase in the risk premium
for the company on account of macro or company-specific concerns could lead to lower
Overhang of sale of locked shares: Around 11% of Ramky’s outstanding shares have a
lock-in period of one year from the IPO. The lock-in expires in Oct 2011. There is a
possibility that investors would sell the shares after the lock-in period ends, which could
put some pressure on stock price. On the positive side, though, this would increase the
trading liquidity on the stock.

Larsen & Toubro Target: Rs2,100 - JPMorgan

L&T has underperformed the market by 15% last month and is down
to its  52-week  low. At  16x FY12E earnings (vs low  of  10.7x  - Feb-09
and high of 26x - Sep-09), we explore the bull and bear case scenarios.
Given our view that overseas orders could be a joker in the pack, we
think  market  concern  on  headline  order  flows  could  be  exaggerated.
However,  the  bear-case  is  that  multiples  might  converge  towards  its
regional peers, following the change in geographical mix of orders.
 Investors  are  most  concerned with L&T’s  order  flows  this  year. In
the  past  9  out  of  10  years,  L&T’s  relative  performance  has  shown
positive response to order flow growth. Mgt has been guiding to 15-20%
growth in orderflows for FY12 (i.e.Rs917-Rs957B). Recently, L&T lost
large  power  plant  equipment  orders  to  stiff  competition  from  Doosan
and BGR. L&T could have budgeted at least Rs50B wins from here, in
our  view. Besides this  prominent  order loss, there  have  been  anecdotal
instances  of  L&T  losing  orders  in  domestic  hydrocarbons,  metals  and
nuclear power construction over the past 6 months.
 Over  the  past  6  months,  amidst  rampant  fears  of  domestic  capex
disappointment,  a  renewed  thrust  for  export  order  wins  is
discernible. In Jun-q, overseas inflows rose sharply to 16% of total. The
Sep-q  marks  a  quantum  shift  in  the  proportion:  L&T  has  reported
Rs82bn of order inflows of which as much as Rs51B was from overseas.
 What is the stock pricing in? That is the 20Bn$ question. The Mkt cap to
order  flow  ratio  is  0.86x based  on  Rs917B  of  FY12E,  vs  the  last  2  year
average of 1.2x and previous trough of 0.54x (Feb-09). From  this, it appears
an 18-20% decline is already being priced in by the market. However, from
our  conversations  with  investors,  it  seems  a  decline  of  10%  is  widely
expected. Currently, we think the markets are getting more bearish on order
flows than needed,  given the M-E upside which might be bigger than most
believe. The devil’s advocate, of course, would say that the stock should be
de-rated on the back of this, and that remains a risk to our call.

Reliance Industries, SBI, Tata Steel, Infosys : Report

\Reliance Industries (Rs 808.3)

Following an intra-week low at Rs 748 on Monday, the stock bounced back and finished the week with almost 5 per cent in gains. The stock has an immediate resistance at Rs 835 and next at Rs 850. An inability to surpass the first resistance will be a cue for initiating fresh short positions with stiff stop-loss. Downward targets are Rs 786 and Rs 770.
As long as the stock trades below Rs 850, its near-term outlook remains gloomy. Fresh long positions are recommended only if the stock moves emphatically beyond Rs 850. It can then rally to Rs 880 or Rs 900 in the months ahead. However, the medium-term trend continues to be down for the stock. A strong close above Rs 900 is required to reverse this trend and take it higher. Medium-term key supports are at Rs 750 and Rs 713.
State Bank of India (Rs 1,911.1)
The volatility in the stock continued last week as well and it retreated 2 per cent. However, it persists to test its long-term significant support at around Rs 1,900 with negative bias. Traders with a short-term perspective can hold their short positions with stop-loss at Rs 1,955 levels. Downward targets are Rs 1,850 and Rs 1,800. Near-term resistance is at Rs 2,010 and subsequently at Rs 2,080.
The stock has to conclusively climb over Rs 2,080 to signal that its short-term trend is turning positive. The next key resistance is at Rs 2,150. The medium-term trend is down for the stock since its April peak of Rs 2,959 levels. A strong weekly close above Rs 2,500 is needed to indicate that its medium-term trend has turned positive. On the other hand, in the medium-term, a decisive drop below Rs 1,800 can drag the stock lower to Rs 1,726 or Rs 1,708.
Tata Steel (Rs 415.2)
In line with our expectations, the stock declined last week and plunged 4 per cent. The short-term trend is down and the forecast is also down. The stock is trading well below its 21- and 50-day moving averages. Daily as well as weekly indicators are featuring in the bearish zone. Traders can consider holding their short positions with stop-loss at Rs 432. Targets are at Rs 410, Rs 400 and Rs 390. A failure to decline below Rs 400 will be sign for taking profits off the table. Resistances for the week are at Rs 440, Rs 460 and Rs 475.
The stock appears to have resumed its medium-term downtrend that has been in place ever since its April peak of Rs 641. A decisive breach of Rs 400 can pull the stock down to Rs 369 in the medium-term.
Infosys (Rs 2,533.8)
Last week, the stock penetrated its key resistance at Rs 2,400 which it had been testing from September 15. It has zoomed 8 per cent with good weekly volumes. The short-term trend is turning positive. As long as the stock trades above Rs 2,445, its near-term stance stays positive and the stock can rally to Rs 2,620 and Rs 2,690 in the forthcoming weeks. However, fall below Rs 2,445 will pull the stock down to Rs 2,400 and Rs 2,350. Next important support is at Rs 2,200.
Medium-term trend, though, is still down for the stock. Only a strong move above Rs 2,700 will change the trend.

Power Sector in India: Research report

�� We met with several of our industry contacts over the past few days.
�� Government officials in Delhi: interestingly it appears from our channel
checks in Delhi that the target capacity additions in 12th plan and 13th plan
could be close to 76GW and 93GW, respectively, a material downward
adjustment from the 100GW envisaged in the 12th plan around 6-12 months
ago. Coal supply still a major issue with officials noting that the power sector
will likely receive ~320mt in FY12 vs. CIL’s promise of 347mt. Distribution
investment appears to be suffering with 11th plan capex in generation likely to
come in ~60% of target, transmission ~85%, but distribution close to only
~25% of target. Two schools of thought, 1) a whole lot of distribution
capex will happen soon, or 2) a lack of distribution capex could constrain
incremental generation volumes. With little change in key fiscal positions of
key SEBs, we subscribe to the latter. Lower demand and domestic shortages
still support Jindal Steel and Power, while merchant prices in the medium
term could be supported by cost-push from coal shortages - preferred
exposure would be Adani Power, but we’d wait at least until after 2Q12
when earnings in the sector may be materially squeezed.
�� Power sector lawyers in Mumbai: today we met with lawyers (top 5 in India)
actively involved in the power sector. In their view, there will be scope for Tata
Power to pass-through the negative impact of the Indonesia coal policy,
although they expect this to take time. In their view, this will be driven by the
Ministry. At around Rs.100/share, TPWR appears good value, fully factoring
in the downside from Mundra. Any ability to pass-through the Indonesian
policy change would add ~Rs.6/share (+5% valuation) and increase FY14
earnings by ~15%. Additionally, the Supreme Court hearing for the
TPWR/RPWR case over whether Reliance Power can use the excess coal
for the Sasan project is expected in February 2012. In their view, if ruling is
not in RPWR’s favour, the Sasan project, and perhaps Tilaiya, may not go
ahead. We're happy to remain Underweight RPWR until an outcome of the
court case in known.
�� Coal producer in Indonesia: we spoke to one of the largest thermal coal
producers in Indonesia to get a sense on the pricing for low quality coal for
Indian IPP’s. Currently they are seeing discounts of ~20% FOB for
4200kcal/kg (low quality coal). After shipping/handling, this translates to
around a 15% discount on a delivered basis. However, they also noted that
there is increasing appetite from buyers (mainly China) for lower quality coal,
especially for new power plant coming online from mid-2012. Therefore the
risk is that this discount reduces. We assume a 15% discount in our
forecasts. JSW Energy is the biggest buyer of spot imported coal, where we
see further downside.

Research report on Zee News

�� We re-assess our estimates for Zee News following meetings with
management and media ad sales consultants. We have scaled back our ad
growth forecast but increased our near-term margin forecast. Maintain OP
rating with 36% potential upside from current levels.
�� Tough operating environment. Indian TV broadcasters have a gloomy ad
outlook as a sports heavy calendar coupled with an economic slowdown has
hurt ad growth prospects for other genres. We learnt from management that it
would be difficult for ad sales for the news genre to grow by double digits. We
are building in conservatism in our revenue forecasts and now estimate 7%
ad growth in FY12 (vs 15% earlier).
�� ZEEN – strong positioning in news genre. The flagship channel Zee News
has consistently maintained its No. 4 position over the last year. Management
sees no difficulty in this steady performance and believes that its power ratio
(ie, ad rev share/viewership share) is better than its peers.
�� Subscription revenue growth on track. The company gets 30% of its
subscription income from DTH platform. Flagship channel Zee News is one of
the two pay news channels in its category. This should help the company to
deliver 8% YoY growth in both FY12 and FY13.
�� Near-term margin performance has room to surprise. ZEEN reported 1Q
FY12 margin of 12% as revenues slumped. We learnt from management that
this was due largely to seasonality in the 1Q numbers. The same was not
evident in the 1Q FY10 and 1Q FY11 numbers due to the ad boost from the
elections. The company is confident of improved margin trajectory for the rest
of the year (Macq FY12 margins: 15%). We see upside risks to our margin
forecasts if the performance of new channel launches is better than expected.
Earnings and target price revision
�� We update our model for the 2011 annual report. We have reduced our YoY
ad growth estimate to 5% / 10% from 15% /12% earlier for FY12 and FY13
resp. Our revised EPS is Rs0.76/Rs0.96 due to changes mentioned above.
Our new target price is Rs17 (vs Rs18 earlier).
Price catalyst
�� 12-month price target: Rs17.00 based on a DCF methodology.
�� Catalyst: Revival in advertising revenue growth
Action and recommendation
�� Retain OP, +ve FCF, attractive valuations and robust business model.
We like ZEEN for its strong track record amongst news broadcasters. The
company is FCF positive and we believe would not need fresh equity to fuel
its growth plans. The stock is trading at 13x FY13E PER, undervaluing our
estimated 25% earnings growth.

Outlook on Indian real estate sector

�� We attended day-1 of the ‘Real estate Investment Forum’ held in Mumbai
yesterday. In this note (first of a series), we focus on the four sources of cash
flows for developers. The points below are based on views expressed by
participants in various panel discussions and one-on-one conversations.
�� Debt – expensive and scarce: There is no doubt that rate hikes are hurting.
“Developers get debt funding on a ‘Last In - First Out’ basis”. Many
developers mentioned that the bigger problem is in fact availability. This is
forcing many developers to borrow from NBFCs and HNIs at an unusually
high 20–36%. One banker confirmed that the slowdown in residential sales
has led to delays in scheduled payments. He said that “many developers are
making payments late… but so far before the extended 90-day deadline”. This
is a big concern.
�� Equity markets (listed and unlisted) seem frozen. There is no appetite for
fresh equity in the stock market. No surprise here! We had seen a pick-up in
small- and mid-sized private equity transactions in January–June 2011. This
has slowed down considerably as well. Two private equity fund managers
mentioned that the fluid scenario of regulations and their interpretation has led
to an elevated risk profile. This is most notable in the state of Maharashtra
(and city of Mumbai). They mentioned that the consistent news flow on the
anti-corruption protests and “policy inaction” had led to foreign investors
starting to re-consider their intention of deploying money in India. Typically, a
private equity investor would be very active in the prevailing stress. But the
environment is making it tough for them to pull the trigger.
�� Residential sales and collection slowing: With the exception of Bangalore
and some tier-2 cities, the run rate of primary sales volumes across India has
fallen in the last 3–4 quarters. Mumbai has seen the biggest impact, followed
by the NCR. Importantly, pending collections from pre-sales have started to
slow. Our conversations with some industry consultants and brokers
confirmed this. We believe this is because speculators (and some end-users)
who bought units during 2009–2010 are delaying payments. This is due to
tight liquidity and lack of confidence on developers meeting delivery
deadlines. This phenomenon is most prevalent in the NCR and Mumbai.
�� Rentals stable due to commercial demand: Rental income has been the
only source of income, which has been resilient. Developers with occupied
yielding assets and good tenants are in a good position. Fresh leasing has
also been strong. While there are no signs of a slowdown so far, there are
some concerns that demand for IT space may slow due to global factors.
�� Avoid high leverage and weak free cash flows: These are two of the most
important parameters when we pick stocks by elimination (refer to Selection
via elimination, 13 May 2011). Prestige, Sobha, Phoenix and HDIL are wellplaced.
DLF is a story of de-leveraging – with asset sales as triggers in the
next six months. We would avoid Indiabulls Real Estate, Unitech and Omaxe

Hindalco Industries : Research report

�� Hindalco – positive vibes, should bring confidence: We visited two of
Hindalco’s sites, Renukoot and Mahan, and have come back confident on the
execution of expansion projects in Mahan. Management came out quite
strongly defending their project schedules, bauxite availability and ability to
fine tune operations to maintain margins even under an inflationary
environment. We think this should give investors confidence in projects which
we believe have been a key drag for the stock. Recommend buying on dips.
�� Renukoot – well settled operations, cash cow: These operations have a
capacity of 410ktpa and management is confident of increasing production by
10ktpa every year through de-bottlenecking. They are also doing simulation
studies targeted at unlocking the full potential of these facilities which they
peg at a 16% increase from current levels. We also visited the Krishnashilla
mines of NCL which supplies coal to Renukoot, and noted the quality of coal
is much better at 4500kCal. Hindalco is putting up a pipe belt conveyor to
transport coal and should benefit from FY13 onwards.
�� Mahan – best in class: The Mahan project is 359ktpa of aluminium smelter
with a 900MW captive power plant. This facility will start in phases from Q4
FY12. The power plants are in the advanced stages with hydro testing in the
first unit. Management seemed very confident of achieving the targets and is
looking to commission 40 pots by Dec 2011. They have 165ktpa of surplus
alumina which will help initially till the Utkal alumina comes in.
�� Bauxite – enough in pipeline: Management exuded confidence that they
have 15 yrs of captive mine life on expanded capacity and will take it to 30yrs
with leases in the pipeline. They also buy 30% under long term agreements
from 3rd party mines to conserve bauxite; pricing is on a cost plus basis.
�� Coal – worrisome but confident of resolution: The Renukoot operations
have just been allocated a new mine under linkage from Coal India. However,
coal for the Mahan smelter is still in limbo and management are hopeful of
getting tapering linkage till the Mahan coal block issue is resolved.
Earnings and target price revision
�� No change.
Price catalyst
�� 12-month price target: Rs259.00 based on a PER methodology.
�� Catalyst: 2Q FY12 earnings and execution of projects
Action and recommendation
�� Defensive call: Overall, Hindalco looks best placed vs peers with stable
earnings from Novelis, world class and low cost Indian operations and can rerate
once market confidence in its upcoming facility increases. Trading at 6.5x
PER compared to global average of 15x on FY12E doesn't look demanding.

Power Finance Corporation

 PFC is likely to book a large MTM forex loss in 2Q12 due to unhedged foreign
currency liabilities and sharp adverse movement in the INR exchange rate.
However over the longer term the unhedged exposure may actually turn out to
be positive for the P&L of the company.
 2Q12E MTM hit large. PFC has Rs50bn of foreign currency liabilities, out of
which 86% is unhedged. We think the hit in 2Q12 due to adverse movement
in the Yen and USD compared to the Indian rupee (INR) could be as much as
Rs5bn or ~50% of estimated pretax profits for the quarter.
 Larger hit due to Yen movement. Nearly 60% of the loss is likely to come
from Yen appreciation to INR of 15% in the quarter. Yen denominated
borrowings make up 48% of PFC’s total forex borrowings. USD denominated
borrowings make up another 49% of borrowings, with the USD having
appreciated 9.5% in 2Q12. Remaining borrowings are in Euro.
 MTM hits non-cash- significant repayment only in 2014/15. Bullet
repayments for three loans amounting to ~USD800m are due only in FY14/15.
These are basically loans that have been drawn by PFC in 2009 and 2010
and are of a 5-year duration.
 PFC may profit from unhedged liabilities in the long term. However, the
company’s decision to keep liabilities is likely to be profitable in the long term.
We expect the INR to appreciate another 4% from Sep 2011 to March FY12
and another 7% beyond that to March FY14. Over the life of a loan which is
due in FY14, the INR would have appreciated ~8% versus the USD. We
expect the INR to appreciate against the Yen as well from current levels.
 Current management policy is of keeping open positions of up to 30% of
networth. The company’s current policy is to keep forex liabilities up to 30%
of networth as unhedged. So far it does not see any need for revisiting the
policy as the repayments are far in the future and it expects the rupee to
appreciate from hereon.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs190.00 based on a Gordon Growth methodology.
 Catalyst: Improvement in regulatory environment
Action and recommendation
 We maintain our Outperform on the stock.

Research report on Automobile sector

Automobile sales witnessed strong growth in September 2011, with dealers
stocking up inventories ahead of the festive season. Demand for two-wheelers
and tractors remained robust during the month, helping Hero MotoCorp (HMCL),
Bajaj Auto (BAL), TVS Motor (TVS) and Mahindra and Mahindra (M&M) report
their highest-ever monthly volumes. The light commercial vehicle (LCV) segment
also sustained its impressive growth performance. Passenger car (PC) volumes,
however, grew at a slightly lower pace as growth was restricted due to the strike at
Maruti’s Manesar facility. Growth in the PC segment continues to be driven by
new model launches and higher discounts. Going ahead, we expect the
two-wheeler segment to sustain its volume momentum; however, demand in the
passenger vehicle (PV) segment is likely to taper off post the festive season.
Tata Motors (TML) registered a better-than-expected 21.8% yoy (22.9% mom)
increase in its total volumes, primarily driven by strong 29.9% yoy (10.1% mom)
growth in the CV segment and positive surprise in the PV segment. CV sales
continued to be benefited by robust LCV demand, leading to impressive 48.3%
yoy (9.7% mom) growth in the LCV segment. The PV segment registered its best
performance YTD in FY2012, posting 9% yoy (58.1% mom) growth, driven by
64.3% yoy growth in Indica volumes and 56.1% yoy (56.2% mom) growth in UV
volumes. Nano and Indigo sales continued their poor run during the month.
Maruti Suzuki (Maruti) reported a 20.8% yoy (6.4% mom) decline in its sales
volume on account of a sharp 47.5% yoy (53% mom) dip in exports volume and a
17.2% yoy decline in domestic volumes due to disruption in production at the
Manesar facility. Labour issues at the Manesar plant are supposed to have led to
a production loss of 20,000–25,000 units during the month. Sequentially,
however, domestic volumes witnessed a slight uptick, led by improvement in sales
in the compact and super compact segments.
M&M maintained its strong growth momentum, reporting better-than-expected
30.7% yoy (28.2% mom) jump in total sales to 68,810 units. The performance
was driven by robust 25.5% (17.1% mom) and 41.1% yoy (54.2% mom) growth in
the automotive and tractor segments, respectively. The automotive segment’s
growth was led by 45% yoy (6.8% mom) growth in four-wheeler pick-up volumes
and 21.6% (14.2% mom) and 128.9% yoy (55.7% mom) growth in three-wheeler
and exports sales, respectively, while the tractor segment’s performance was
driven by impressive domestic growth of 44.2% yoy (56.1% mom).
Two-wheelers and three-wheelers: BAL reported a better-than-expected 18.4%
yoy (9.1% mom) increase in total volumes, led by record performance across all
product segments. HMCL continued its strong run and reported its highest-ever
monthly sales, registering growth of 26.7% yoy (9.1% mom). TVS reported a
strong 16.7% yoy (12.6% mom) jump in total volumes on account of sustained
growth in the scooters segment.

Future Trends in Iron ore prices

 We have been very active in the market over the past two weeks in an
attempt to get a read on end demand in China. We also travelled to a
number of second and third tier cities last week.
 We have officially launched our Survey Tools product which focuses on
Steel, Iron ore and Cement related industries. This information is unique,
given the depth of our surveys and we think it provides a good leading
indicator to end demand in China and hence investment decisions.
 Key focus right now: Iron ore is the key focus at the moment given the
stocks have corrected majorly but the iron ore prices themselves remain
resilient. Our meetings in Qingdao provided us with some comfort that prices
will stay above US$160/t but for us, steel inventories are the focus.
 Next thing to focus on: Beware of the restock rally! At some point we
expect to see restocks in the chain given the large destocking that has take
place and continues to take place. We will look into this further but Copper,
Nickel and to a lesser extent the bulks will be impacted.
 Key stock picks – Atlas Iron, Fortescue, Rio Tinto, CNBM, CR Cement,
Sinoma, Shenhua, Straits Asia, Mitsubishi and Mitsui.
 Kicking tires in China reveals the known – things are slowing. The key
thing now is to assess the extent of the slowdown and the potential duration of
this slowdown. Our initial assessment based on travels, meetings and survey
tools indicates that this slowdown may not be as pronounced as some
investors fear. Either way, the correction in stocks is well and truly overdone
in our view even if earnings are 50% wrong from current levels.
 We pushed the Cement sector this week given the significant correction
in stock prices. Valuations look attractive and while we expect that there will
be some macro headwinds over the next few months, on a 6-12 months view
there is real upside. Pelen Ji’s piece on the sector puts some meat on the
bones when it comes to valuations – CR Cement and CNBM are clear
winners on a bear case earnings analysis.
 Iron ore – it’s make or break time. Stocks are reflecting a collapse in the
iron ore price and traders are getting nervous. Many meetings in Qingdao
reveal that while prices might slip to around US$160/t, demand from traders,
mills and others is still very strong. Demand has dropped to some extent but
mills and traders are still worried about supply. Concerns over Indian supply
also continue to linger and we think the real focus should be on the steel
market, as we feel inventories in China are starting to build and this could be
an issue going forward.
 Markets continue to be challenging and although there has been somewhat of
a relief rally taking place, we continue to focus on fundamentals and the
direction of China.

Tuesday, October 4, 2011

Top performing mutual funs in low risk low return category

CompanySchemeClassPlanTypeReturns (%)
UTI Asset Management Co. Ltd.UTI Gold Exchange Traded FundSpecial FundGrowthOpen Ended33.76
Reliance Capital Asset Management Ltd.Reliance Gold Exchange Traded FundSpecial FundDividendOpen Ended33.56
SBI Funds Management Pvt. Ltd.SBI Gold Exchange Traded SchemeSpecial FundGrowthOpen Ended33.42
Quantum Asset Management Co. Pvt. Ltd.Quantum Gold Exchange Traded FundSpecial FundGrowthOpen Ended33.41
Religare Asset Management Company Ltd.Religare Gold Exchange Traded FundSpecial FundGrowthOpen Ended33.40
HDFC Asset Management Company Ltd.HDFC Gold Exchange Traded FundSpecial FundGrowthOpen Ended33.05
Kotak Mahindra Asset Management Company Ltd.Kotak Gold ETFSpecial FundGrowthOpen Ended33.04
Goldman Sachs Asset Management (India) Pvt. Ltd.Goldman Sachs Gold Exchange Traded SchemeSpecial FundGrowthOpen Ended32.85
ICICI Prudential Asset Management Co. Ltd.ICICI Prudential Gold Exchange Traded FundSpecial FundGrowthOpen Ended32.62
Sundaram Asset Management Company Ltd.Sundaram Fixed Income Interval Fund - QS - Plan C - IPDebt - IncomeGrowthOpen Ended15.15
Canara Robeco Asset Management Company Ltd.Canara Robeco InDiGo FundDebt - IncomeGrowthOpen Ended14.63
Sahara Asset Management Co. Pvt Ltd.Sahara Short Term Bond FundDebt - IncomeGrowthOpen Ended13.32
Tata Asset Management Ltd.Tata Fixed Income Portfolio Fund - Scheme C3Debt - IncomeGrowthOpen Ended12.19
Peerless Funds Management Co. Ltd.Peerless Short Term FundDebt - IncomeGrowthOpen Ended12.16
Sundaram Asset Management Company Ltd.Sundaram Select Debt - Short Term Asset PlanDebt - Short TermGrowthOpen Ended11.79
Sundaram Asset Management Company Ltd.Sundaram Select Debt - Short Term Asset PlanDebt - Short TermDividend-AnnualOpen Ended11.65
Sundaram Asset Management Company Ltd.Sundaram Select Debt - Short Term Asset PlanDebt - Short TermDividend-Half YearlyOpen Ended11.30
Sundaram Asset Management Company Ltd.Sundaram Select Debt - Short Term Asset PlanDebt - Short TermDividend-QuarterlyOpen Ended11.07
Canara Robeco Asset Management Company Ltd.Canara Robeco InDiGo FundDebt - IncomeDividend-QuarterlyOpen Ended10.84
BNP Paribas Asset Management India Pvt. Ltd.BNP Paribas Fixed Term Fund - Series 16 ADebt - FMPGrowthClosed Ended10.83
BNP Paribas Asset Management India Pvt. Ltd.BNP Paribas Fixed Term Fund - Series 16 ADebt - FMPDividendClosed Ended10.83
Peerless Funds Management Co. Ltd.Peerless Short Term FundDebt - IncomeDividend-QuarterlyOpen Ended10.68
Escorts Asset Management Ltd.Escorts Liquid PlanLiquid FundGrowthOpen Ended9.98
UTI Asset Management Co. Ltd.UTI Short Term Income Fund - Institutional PlanLiquid FundGrowthOpen Ended9.54
Escorts Asset Management Ltd.Escorts Income PlanDebt - IncomeGrowthOpen Ended9.37