Fw: Investor's Eye: Update - HDFC; Special - Q1FY2012 Power preview, Q1FY2012 Capital Goods preview, Q1FY2012 Construction preview

 

 

Investor's Eye [July 08, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Housing Development Finance Corporation    Cluster: Evergreen Recommendation: Hold Price target: Under review Current market price: Rs712 Q1FY2012 results: First-cut analysis Result highlights Housing Development Finance Corporation (HDFC) reported a net profit growth of 21.6% to Rs844.5 crore which was marginally below our expectations due to a lower than expected net interest income (NII) growth for the company. The asset quality of the company was also stable with gross non performing assets (NPA) at 0.83% as against 0.77% in Q4FY2011. NII growth weak: The NII of the company grew by 17.1% year on year (YoY) to Rs1,094.8 crore. The calculated net interest margin (NIM) declined by 8 basis points to 3.38% as against 3.46% in Q1FY2011. The reported spreads were largely stable at 2.3% as against 2.33% in Q4FY2011 and 2.34% in Q1FY2011.  Advances growth strong: The advances of the company grew by 22.2% YoY and 6% quarter on quarter (QoQ) to Rs124,167 crore during the quarter. Loans sold during the preceding 12 months amounted to Rs3,123 crore. The growth in the loan book inclusive of these loans is of 25%. Asset quality remains stable: The gross NPAs of the company based on 90 days overdue increased marginally from 0.77% to 0.83% QoQ. The gross NPAs of the company based on 180 days overdue also increased sequentially by 9 basis points to 0.55% as against 0.46% in the previous quarter. In terms of the prudential norms as stipulated by the National Housing Bank, the corporation is required to carry a provision of Rs839.66 crore, which includes the provisioning of Rs450.76 crore on standard assets in respect of housing loans granted under the Dual Rate Home Loan Scheme.  Capital adequacy ratio at 14.1%: The capital adequacy ratio of the company stood at 14.1% as against the statutory requirement of 12%. The tier I capital of the company stood at 12.2% as against the statutory requirement of 6%.  Outlook: HDFC has continued with its strong performance on all fronts. A robust advances growth and stable interest spreads along with a stable asset quality reflect the strong operating performance of the company. The company is also adequately capitalised for future expansion plans. The stock is currently trading at 5.3x FY2012E book value (BV)and 4.6x FY2013E BV. We shall come out with a detailed note shortly.  SHAREKHAN SPECIAL Q1FY2012 Construction earnings preview  Key points Moderate execution due to onset of monsoon: In Q1FY2012, the construction companies are likely to register a slowdown in execution of the ongoing projects on account of onset of monsoon in the month of June 2011, which is a normal phenomenon. Hence we expect the revenue of the engineering, procurement and construction (EPC) companies during Q1FY2012 to likely decline on a sequential basis. On a year-on-year (Y-o-Y) basis the cumulative revenue of the Sharekhan construction universe (ex-Punj Lloyd) is estimated to grow by 13.4%. Among them , we estimate Ramky Infra to deliver the highest revenue growth of 31.7% YoY on account of robust order inflow witnessed in FY2011 along with the lower revenue base in Q1FY2011. Whereas C&C Constructions is expected to post a muted revenue growth of 1.1% YoY. In case of asset developers, we expect a 47.8% Y-o-Y growth for IL&FS Transportation Networks (ITNL) on the back of toll hike in three of its operational projects during the quarter and commencement of construction activity in few new projects. We further expect a 33.8% revenue growth in IRB Infrastructure Developers (IRB Infra) on the back of its robust EPC revenues led by start of construction work in its Tumkur-Chitradurg project and toll hike in its Mumbai-Pune project.  Surge in interest burden to dent earnings: A poor execution during the last one year resulted in a surge in the working capital requirement across the construction industry. This, in turn, resulted in higher borrowings which along with the rising interest rate will lead to a surge in the interest burden of the companies for the quarter. Thus, despite a flat operating profit margin (OPM) Y-o-Y, a higher interest cost will dent the earnings of the construction companies. The cumulative average bottom line of the EPC companies (ex-Punj) is expected to decline by 11.8% YoY (as compared to an average growth of 13.8% at the operating level). In case of Pratibha Industries, we expect a 33.8% YoY profit after tax (PAT) growth which would be largely driven by saving in the interest cost as the company has made a part repayment of its outstanding debt. On the developer front, we expect a marginal earnings growth of 1.7% and 0.6% in IRB Infra and ITNL respectively, mainly dented by lower OPM and higher interest burden. OPM will decline for asset developers on the back of higher contribution from the EPC business which has lower margins compared to build-operate-transport (BOT) segment.  Order inflow muted in Q1FY2012: The order inflow which had gained momentum in Q4FY2011 lost its pace during Q1FY2012. The order inflow in the quarter ended June was muted at around Rs39,500 crore which represents a fall of 32% YoY and 40% quarter on quarter (QoQ). The key factor that affected the order inflow during the quarter was the state elections in April and May 2011. Further, scams and political rifts and high inflation also restricted the order inflow during the quarter. Among the various infrastructure verticals, the water & irrigation segment has been a major disappointment over the last four to five quarters since new orders from the most active state in this space, Andhra Pradesh, have completely dried up. Even the orders in the building segment have slowed down recently given the dip in the real estate demand and poor financial health of the realty companies. Further, industrial capital expenditure (capex) continues to be low in a rising interest rate scenario.  Outlook: Though the National Highways Authority of India (NHAI) failed to meet its monthly target during the first quarter of FY2012, we expect traction going ahead. We however don't expect the NHAI to meet its aggressive target fully. Further, we expect some revival in government spending in H2FY2012. Further, we expect the execution of projects to improve in H2FY2012 which might reduce the working capital pressure going ahead. This, in turn, will moderate the interest burden a little since the interest rates will continue to be high in FY2012. Given the steep correction in the sector and its underperformance, the valuations of the major companies in this space have turned very attractive. Many stocks are trading below 1x their price/book value (P/BV) and we believe all the negatives have been factored in. Thus, one can take a selective approach at this point of time and start accumulating infrastructure stocks with a long-term perspective. We like IL&FS Transportation Networks (India) and IRB Infra among the larger players given their strong financials and track record in the road BOT space. We like Pratibha Industries and Unity Infraprojects among the smaller players.   Q1FY2012 Capital Goods & Engineering earnings preview  Key points We expect most of the capital goods companies under our coverage to report a robust revenue growth for Q1FY2012 led by sound execution of their order book and a favourable base effect. Conventionally, the first quarter of a fiscal accounts for 16-22% of the yearly sales and hence is the lowest revenue contributing quarter for the capital goods companies. As a result, the operating profit margins (OPMs) are also the lowest in this quarter.  Further, on account of the lagging effect of two to three months in passing on the hike in the prices of inputs like copper to customers (in Q4FY2011), the margins would be subdued for Q1FY2012. However, the effect of the cooling off of prices of metals like copper in the last three months should provide some respite to the margins from Q2FY2012 onwards. The order inflow announcements in the capital goods space picked up momentum in Q1FY2012 driven by the big-ticket orders bagged by Larsen and Toubro (L&T) in the engineering and construction (E&C) and transmission and distribution (T&D) segments. However, we feel that the order inflow needs to improve in the coming quarters if the growth has to be robust from FY2013 onwards.  Margin sustenance (actually margin pressure) along with the order inflow would be the key monitorables in the Q1FY2012 report card. In terms of anticipated Q1 results, we expect Bharat Heavy Electricals Ltd (BHEL) to be the top performer in the large-cap space and PTC India and V-Guard Industries to lead the show in the mid-cap space.    Q1FY2012 Power earnings preview   Key points According to our estimates, India generated 217.6 billion units (BU) of power during Q1FY2012. This reflects a very healthy growth of 8.6% year on year (YoY) backed by an 8% incremental capacity over the last year. At the end of Q1FY2012, the total generation capacity of the country is likely to have stood at around 175,000MW. Sequentially, India's power output is expected to have grown by 2% in Q1FY2012.  As the monsoon had set in by the end of Q1FY2012, the growth in power requirement is estimated to have moderated to 2% sequentially during the quarter and to 3% on a year-on-year (Y-o-Y) basis. In the meanwhile, the availability of power is estimated to have grown by 9% YoY and 5% quarter on quarter (QoQ) in the same period. Hence, the power deficit for the quarter is expected to fall to 7% from 12% in Q1FY2011 and 8% in Q4FY2011.  The power deficit is likely to come down both sequentially and annually. The effect of the same should get reflected in the merchant power prices. However, the prices were broadly in the range of Rs2.5-4.0 per unit during Q1FY2012.  View: We expect healthy volume growth in power generation in the industry during Q1FY2012 and believe that merchant power price realization should also be around Rs3.5-4/unit for companies during this quarter. Price hike taken by Coal India selectively would start reflecting from Q1FY2012 numbers in raw material of power generation companies. Though, most of them would pass on the same in their tariff revision, in short run it would pinch margin to some extent. We like CESC among generation companies as the company is available at a low valuation despite having an integrated business (refer our stock idea report dated June 29, 2011).    Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions

 

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Fw: Investor's Eye: Update - Reliance Industries; Cement

 

Investor's Eye [July 04, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Reliance Industries   Cluster: Evergreen Recommendation: Buy Price target: Under review Current market price: Rs868 More negative news flow on upstream business Key points Cut in KG D6 2P reserves: Niko Resources (Niko), a Canada-based oil and natural gas exploration & production company having a 10% stake in the Krishna-Godavari (KG) D-6 assets of Reliance Industries Ltd (RIL), has recently in its annual information form of 2011 significantly reduced (by 20%) its proven and probable (2P) oil and gas reserve estimate in India. The same reserves have also been evaluated by an independent expert, Ryder Scott Company, LP. Niko has made this on account of technical revision. The technical revision of gas reserves (2P) 241,334MMcf, ~20% of reserves (Please refer table on next page). In the report, Niko has not bifurcated the reserves of all its assets in India. Nevertheless, we believe a major part of the revision would have been on account of the KG D-6 block as the other assets (in Surat and Hazira) of Niko are relatively smaller. It is mentioned that the FY2011 estimate of Niko's 2P reserves in India has been reduced due to technical reasons, eg the production constraint faced by RIL in KG D-6 during FY2011.  Would lead to lower upstream valuations: The cut in KG D-6 reserves estimate would result in a reduction in the value assigned to the upstream business of RIL in the price target for its stock. We have assigned a value of Rs221.7 per share to the KG D-6 gas which could decline by Rs50-60 per share in line with the reduction in the 2P reserves estimate. Moreover, we see a potential downside risk to the gas output of 60mmscmd assumed for FY2012. However, we would wait for more clarity and further details before making the necessary revisions in our earnings estimates and price target for RIL.  Valuation: Currently the RIL stock is trading at 12x FY2012E earnings and 11x FY2013E earnings. RIL is available at 6.5x enterprise value (EV)/EBITDA on FY2012 estimates and 5.5x EV/EBITDA on FY2013 estimates. Though we have maintained our Buy recommendation on the stock, we have put the price target under review considering the recent news flow related to the cut in the KG D-6 2P reserves estimate.  SECTOR UPDATE  Cement Monsoon effect-sluggish offtake  The volume-wise performance of the top three domestic cement players, namely ACC, Ambuja Cements and UltraTech Cement (UltraTech), for June 2011 was mixed on a year-on-year (Y-o-Y) basis. ACC registered a better performance with a 7.3% growth in its dispatches. However, Ambuja Cements continued to disappoint with a 1% decline in its volume year on year (YoY). Overall, the cement offtake was sluggish on account of a slowdown in the execution of infrastructure and housing projects due to the onset of the monsoon and shortage of labour. Further, on a sequential basis all the major players reported a drop in their dispatches. In terms of demand, dealers have confirmed that the cement offtake in most parts of the country was affected primarily due to the monsoon and shortage of labour. In terms of regions, the southern region, Rajashtan and Kolkata witnessed sluggish cement offtake during the month. However, the demand environment was relatively better in the western market of the country as Gujarat saw some signs of a pick-up in the volume, particularly from the government infrastructure projects.  Cement prices during the month decreased in most parts of the country by Rs12-15 per 50kg bag in June 2011. The price corrected during the month largely on account of a slowdown in the cement offtake and increased inter-regional movement by the cement companies. The largest price correction was witnessed in Kolkata. Further, dealers are of the view that cement prices may decline further in the coming 15-20 days due to a weak demand in the monsoon season.  We feel the cement sector could underperform the market in the next six months since the cement manufacturers may fail to adhere supply discipline. However, we believe any correction in the sector will provide investment opportunities in the mid-sized space. We prefer Grasim Industries in the large space, and Orient Paper and Industries (Orient Paper) in the mid-sized space.   Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions

 

Fw: Sector Report: Gold Loans - 'Lending with comfort'

 

Gold Loans: 'Lending with comfort'

 

 

India - a huge gold loan market

India is one of the largest markets for gold accounting for ~10% (18,000-20,000 tons) of the global gold stock. Rural India is estimated to hold around 65% of this. Shaped by sentimental and structural factors, country's demand for gold has been buoyant defying the phenomenal rally in price. It is estimated that ~10% of country's gold stock has been pledged, of which, ~75% is in the unorganized market (money lenders, pawn brokers, etc) and balance ~25% in organized market (specialized NBFCs, other NBFCs, commercial/cooperative banks, etc). 

 

Organized market growing at robust pace

As per IMaCS Industry Report (2010 update), the organized gold loan market in India stood at Rs350-400bn at end-FY10 having witnessed a robust 40% CAGR over FY02-10.  We estimate the market to have crossed Rs550bn by end-FY11 as specialized NBFCs Muthoot Finance and Manappuram combine have grown their book by Rs130bn+ during the year. Share of the organized pie has been increasing rapidly due to significantly lower rate of interest charged, higher LTV offered and perceived safety of the ornaments. With penetration still negligible at 1-1.5%, the organized market would continue to witness strong growth.    

 

Specialized NBFCs better placed than banks

Amongst organized players, specialized gold loan NBFCs have witnessed exceptional growth driven by management aggression/strength, robust branch expansion, belligerent marketing spend and ability to raise capital timely. Given the customers preference for them over banks due to critical factors like low levels of documentation, quick disbursal of loans, higher LTV offered, flexibility in loan terms, etc, specialized NBFCs command premium yields and enjoy superior profitability. Therefore, they represent a much better medium to ride the gold loan growth story.

 

Initiate coverage on Muthoot and Manappuram with BUY rating

We initiate coverage on Muthoot Finance and Manappuram with a BUY rating. Both the companies have witnessed 100%+ CAGR in their gross gold loan book over FY09-11. Notwithstanding the substantial business investments made, they have improved their profitability profile. Their dream run is expected to normalize though on account of higher base, intensifying competition in the key Southern region, recent adverse regulation with respect to assignments and steep increase in funding cost. Nevertheless, their earnings CAGR is estimated to be strong in the range of 35-50% thereby making current valuations (1.6-1.7x FY13 P/BV) attractive. Key risk factors would be unfavorable regulatory changes and material correction in gold prices.

 

Muthoot Finance – BUY

CMP Rs154, Target Rs202, Upside 31%

 

±  Largest gold financing company in the country with 20%+ market share

±  AUM growth to moderate but remain strong on higher base

±  NIM to decline on steep increase in funding cost; yield to be relatively resilient

±  Earnings CAGR to remain brisk at 39% over FY11-13E

±  RoA to marginally come-off; RoE to normalize

 

Manappuram Finance & Leasing – BUY

CMP Rs57, Target Rs73, Upside 28%

 

±  Fastest growing gold loan company; 8x AUM growth over FY09-11

±  New branches to drive 45% AUM CAGR over FY11-13E

±  NIM to contract sharply due to decline in yield and increase in funding cost

±  Earnings CAGR to remain robust at 47% over FY11-13E

±  RoA to trend down while RoE to improve

 

 

 

Please click on the link to view the attachment.

 

 

 

Warm Regards,

 

Amar Ambani

 

  

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Fw: Investor's Eye: Update - Zydus Wellness, Automobiles; Special - Q1FY12 IT earnings preview

 

Investor's Eye [July 01, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK UPDATE Zydus Wellness   Cluster: Emerging Star Recommendation: Hold Price target: Rs669 Current market price: Rs642 Price target revised to Rs669 Key points FY2011-strong operational performance: It was yet another year of a strong performance by Zydus Wellness Ltd (ZWL) with the revenue growing by 26% year on year (YoY) and the profit after tax (PAT) rising by 27% YoY in FY2011. The growth was achieved on back of a strong performance by all its brands, which maintained their strong position in their respective niche categories in the domestic market. The operating profit margin (OPM) was maintained at 25% during the year.  Negative working capital: Leveraging the strength of its brands and its relationship with its channel partners through the group's pharmaceutical business, ZWL runs its business on advance collection terms from distributors and customers. The cash conversion cycle stood at negative 44 days in FY2011 (reduced from negative 80 days in FY11). This implies minimal working capital blockage and zero bad debt risk. No debt on books: The company has excellent cash generation ability and has a cash pile of around Rs87 crore, which is around 47% of its balance sheet size. Given the strong cash pile, the company will not need to raise any funds as debt or equity for its organic growth. Also, it provides an opportunity to the company to go for inorganic expansion in the domestic market (an acquisition of a brand in a niche category). Return ratios remain strong: The company's return ratios though declined from the levels of FY2010 but the same remained strong in FY2011. The return on equity (RoE) stood at 49.0% while the return on capital employed (RoCE) stood at 74% during the year. Improvement in dividend pay-out: The dividend pay-out ratio of the company improved from 27% in FY2009 to 31% in FY2011. The strong generation ability firms up our view that the company has the potential to pay a hefty dividend on a recurring basis. Focus on new launches: The company has maintained its thrust to enhance the product portfolio by developing new products in niche categories/new variants under the existing brands to maintain the strong growth momentum. The company has new products in the pipeline, which will be launched in the coming quarters. The new launches will be supported by brand building and promotional activities. Hence, we expect advertisement spend of the company to increase in the next two years.  Revision in estimates: With vegetable oil likely to show a downtrend (in line with the other edible oils) in the coming quarters, we expect the pressure on the company's gross margin to ease out in FY2013. Hence we have upgraded our earnings estimates for FY2013 by 4%. Outlook and valuation: With a portfolio of strong brands and thrust on enhancing the product portfolio, we expect the company to achieve the turnover of Rs500 crore well in advance of its target of FY2014. However, we expect the OPM to slide a bit due to a higher raw material cost and an increase in advertisement spend towards the new launches. The tax benefit from new facility in Sikkim would aid in strong bottom line compounded annual growth rate (CAGR) growth of 32% over FY2011-12 (strong compared to that of the other fast moving consumer goods [FMCG] companies). Hence, we have upgraded our price target to Rs669 (based on 25x its FY2013E earnings per share [EPS] of Rs26.7). However, with a limited upside of around 5% from the current level, we maintain our Hold recommendation on the stock. At the current market price the stock trades at 32.8x its FY2012E EPS of Rs19.6 and 24.0x its FY2013E EPS of Rs26.7. SECTOR UPDATE  Automobiles June'11 volumes: Industry resilient even as macro headwinds whirlwind  The commercial vehicle segment has thrown the biggest surprise in June 2011. The medium - heavy commercial vehicles (MHCVs) segment in particular dealt with quite a few irritants such as rate hikes, fuel price increase, driver shortage and Reserve Bank of India (RBI)'s restriction on lending to non banking financial company (NBFC)s for further priority sector lending at concessional rates. Tata Motors' MHCV segment grew by 6.2% year on year (YoY) and 3.2% month on month (MoM) in June 2011. The light commercial vehicles (LCVs) segment reported a strong growth as freight requirement for last mile connectivity remained robust. Mahindra & Mahindra (M&M) was the star gainer as their pick-ups raced at full speed. The rural centric demand theme also remained strong and surprised positively. M&M grew its tractor volumes by 37% YoY and 20% MoM. Similarly TVS Motors grew its rural centric moped by 20% YoY in June 2011. Hero Honda yet again crossed the 5 lakh units mark in the month (June 2011) and reported a 20% volume growth due to its strong rural focus.  The growth slowdown remained more selective. Maruti Suzuki (Maruti) saw a deep adverse impact due to a strike at its Manesar plant and bi-annual maintenance shutdown. Similarly Tata Motors saw its ageing product portfolio struggling to revive. It reported sluggish sales of the Nano, Indigo and utility vehicles (UVs) although there was some respite for Indica which might have benefited due to the Maruti strike. SHAREKHAN SPECIAL  Q1FY2012 IT earnings preview Key points Top line numbers likely to remain strong: We expect average sequential revenue growth of the top four information technology (IT) companies to be around 5.2% for the June quarter as against 3.9% in Q4FY2011, with an average volume growth of around 4.1% and cross currency tailwinds of 85 basis points. For the June quarter, Tata Consultancy Services (TCS) is expected to lead the pack with a 7% sequential revenue growth followed by HCL Technologies with a 5.8% quarter on quarter (QoQ) growth. Whereas, on account of organizational restructuring Infosys and Wipro are likely to report a relatively soft set of numbers. Infosys is expected to grow by 4.4% in topline while Wipro's IT services is likely to post a 3.4% QoQ growth. Under our mid-cap coverage, Polaris Software Lab (Polaris) and NIIT Technologies (NIIT Tech) are likely to report an around 5% sequential revenue growth in dollar terms for the June ending quarter.  Margins to weaken tracking wage hikes: The earnings before interest, tax, depreciation and amortisation (EBITDA) margins for the June quarter are likely to remain weak primarily on account of the wage hike cycle effective during the quarter for majority of the companies except HCL Technologies and Wipro (wage cycle is June 2011). Infosys and TCS are likely to post a more than 200 basis points sequential fall in their EBITDA margins whereas among the mid-caps NIIT Tech's margins are likely to decline by around 270 basis points QoQ and Polaris' margins could likely decline by 90 basis points QoQ. Wipro's IT services margins are likely to fall by 80 basis points QoQ while HCL Technologies' margins are likely to improve by 70 basis points QoQ.  Management commentary on sustainability of demand and visa issue: Weak datapoints emerging from US and Euro-zone coupled with looming debt crisis in the US have sparked renewed debate and apprehension on the sustainability of demand for the IT sector beyond CY2011. Further, issues pertaining to visas and potential aggravation of protectionist policy in the US have raised an alarm for an outsourcing backlash in the coming years. Although most of the companies' managements have indicated at a strong demand undercurrent for FY2012, they and industry bodies have also voiced concerns on the visa issue. Given the backdrop, we believe that in the upcoming earnings season there will be larger focus on specific management commentary on these issues, which will provide clarity and roadmap for the future.  Valuation: The recent quarterly performance of Accenture and Oracle suggest strong demand momentum and uptick in discretionary spending. Coupled with it the recent upward revision of worldwide IT spending to 7.1% by Gartner from 5.6% earlier has provided further support to the demand thesis. We continue to remain positive on the Indian IT sector for the next 12 months; however, in the short term negative newsflows and quarterly performance disappointments would impact stock performances. On an absolute risk reward ratio our top IT picks remain HCL Technologies and Polaris.   Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions

 

Fw: Investor's Eye: Idea - CESC; Sector - Insurance, Retail

 

Investor's Eye [June 29, 2011]  Sharekhan www.sharekhan.com

Summary of Content STOCK IDEA CESC   Cluster: Ugly Duckling Recommendation: Buy Price target: Rs413 Current market price: Rs282 Integrated business at a discount Key points Integrated business model with strong cash generation from distribution business: CESC's presence in both generation and distribution business is an advantage given the emergence of erratic purchase of power by the state electricity boards (SEBs) due to their deteriorating financial health. The power distribution business in Kolkata is growing at a healthy rate and generates substantial free cash to fund CESC's expansion plans. CESC is doubling its generation capacity by FY2015 through addition of 600MW in Chandrapur and 600MW in Haldia. Further, 1,920MW of capacities are at an early development stage. Moreover, led by the deteriorating financials of the SEBs, the potential privatisation of the distribution business could open up opportunity for CESC.  Secured fuel supplies an added advantage: Besides coal linkage from Coal India, CESC has a secured supply of coal from two coal assets held by the promoters through ICML. Around 50% of the coal would be sourced from these mines and 30-40% of the requirement would come from the Coal India linkage; the balance 10% would be imported. CESC has a higher level of fuel security compared to most of its domestic peers which is a strong positive.  Retail turns profitable at store level; current price ignores the turnaround possibility: The retail business of CESC is currently burning significant cash at the operation level; however, we believe it is close to the end of the tunnel. The silver lining is that there are initial indications of a recovery as the business reported profits at the store level in all four quarters of FY2011. Further, backed by the current strategy of the management, we believe it could break even at the corporate level in the next three years against the management's ambitious time line of five to six quarters. Moreover, the cash generation from the monetisation of its spare land through the development of a 400,000-square-feet shopping mall in a prime area of Kolkata would partially negate the losses in the retail business.  Significant discount to peers, Buy: CESC is one of the cheapest utility stocks available in the Indian market. It trades at a discount to its book value and at a 60-70% discount to the average multiple of the comparable companies. One of the key reasons for the discounted valuations is the concerns related to the losses in the retail business that depress the return ratios at the consolidated level. However, we believe that the improving financial health of the retail business and the growing scale of the power generation and distribution business would positively affect the return ratios in future. We value per share of CESC at Rs536 (Kolkata utility business at Rs472 + the upcoming power generation assets at Rs48 + the property at Rs17 share). Further, we deduct Rs123 per share for the retail business to account for the latter's accumulated losses of Rs1,231 crore (over FY2008-11) and the estimated cumulative losses of around Rs316 crore to be incurred during FY2012-14 (before it turns profitable in FY2015) to arrive at a fair value of Rs413 for CESC. Hence, we recommend a Buy on CESC with a price target of Rs413. SECTOR UPDATE  Insurance   Hit by revised rules, product launch delays The annual premium equivalent (APE) for the life insurance industry declined in May 2011 by 15.6% year on year (YoY) but increased by 32.5% month on month (MoM) due to increased premium collection mainly in the single premium segment.   Retail Retail channel check exercise reveals volume downtrend In line with our expectation, all the retailers we spoke to confirmed on the fact that volume slowdown in the apparel category was evident in Q1FY2012. We believe that the abrupt price increase of 15-18% across all apparel brands coupled with inflation pressure restricted demand. We continue to be of the opinion that just within a couple of months, the consumer psyche would adjust towards the higher price points, resulting in a rebound in volume offtake. Looking at the mid- to long-term trend, optimism and increasing aspiration levels across consumption categories, we believe that all consumption plays are at an inflexion point, with the long term demand drivers intact. Thus, we maintain our long term bullish stance on the sector. From the point of view of large-cap stocks and in terms of valuations, we like Pantaloon. However, in the mid-cap retail space we continue to have a Buy rating on Provogue (a proxy to the retail real estate play) and KKCL (a player with a scalable business model and management) with a pedigree and a robust balance sheet. Click here to read report: Investor's Eye

Regards, The Sharekhan Research Team myaccount@sharekhan.com   www.sharekhan.com to manage your newsletter subscriptions

 

Fw: Merge the pay-in /pay-out date

 

Dear Customer, The Exchange has decided to merge the pay-in /pay-out date for settlement numbers 2011124 & 2011125 [NSE] and 1112064 & 1112065 [BSE] as there would be no pay-in/ pay-out activities on July 01, 2011 on account of Annual Closing of RBI. Settlement No. From To Pay In Sale against Receivables Availability 2011123 29-Jun-2011 29-Jun-2011 04-July-2011 Yes 2011124 30-Jun-2011 30-Jun-2011 05-July-2011 No 2011125 01-Jul-2011 01-Jul-2011 05-July-2011 Yes Deliveries taken in settlement number 2011124, will not be available for selling in settlement number 2011125 as the Pay-in for both the settlements are on Jul 05, 2011. Settlement No. From To Pay In Sale against Receivables Availability 1112063 29-Jun-2011 29-Jun-2011 04-July-2011 Yes 1112064 30-Jun-2011 30-Jun-2011 05-July-2011 No 1112065 01-Jul-2011 01-Jul-2011 05-July-2011 Yes Deliveries taken in settlement number 1112064, will not be available for selling in settlement number 1112065 as the Pay-in for both the settlements are on Jul 05, 2011. Kindly feel free to call us on 1800 22 7500/ 022 - 6115 1111 / (Local STD Code) 3970 7500 in case of clarifications. Warm Regards Team Sharekhan

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