Fw: Investor's Eye: Special - Q1FY2013 FMCG earnings preview, Q1FY2013 Construction earnings preview, Q1FY2013 Cement earnings preview

 

 

Investor's Eye [July 05, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN SPECIAL Q1FY2013 FMCG earnings preview   Steady performance to sustain Key points  Strong revenue growth momentum to sustain: In Q1FY2013, we expect the FMCG companies to maintain their double-digit revenue growth momentum. The growth would be driven by a mix of sales volume and price-led growth during the quarter. Our interaction with most of the FMCG companies indicates that the sector is yet to face the impact of the looming macro concerns and we expect a decent volume growth in most of the categories during the quarter. However the sales of discretionary items or premium categories might witness some slowdown in Q1FY2013.  Raw material prices remained a mixed bag: The prices of some of the key inputs such as palm oil and copra have corrected from their highs and are lower on a year-on-year (Y-o-Y) basis (copra prices are down 40% YoY and palm oil prices are down 4.5% YoY). Further, the prices of sunflower oil and kardi oil have stabilised in the recent months. On the other hand, the prices of commodities such as HDPE, LAB, caustic soda, soda ash and raw tea substantially moved up on a Y-o-Y basis during the quarter (refer to table below). Also, a significant depreciation in the rupee against various currencies would have resulted in higher import prices for some of the key inputs (such as palm oil) in Q1FY2013. Having said that, the calibrated price hikes of the products would help FMCG companies to mitigate the impact of higher input prices. Margins to improve for most: We believe softening in the prices of the key raw materials and the benefits of calibrated price hikes in product portfolio would come into play for most of the FMCG companies in Q1FY2013. Marico will be the largest beneficiary of the correction in copra prices with an above 600-basis-point improvement anticipated in the gross margins during the quarter. We expect Godrej Consumer Products Ltd (GCPL)'s operating margins to improve by 150 basis points YoY to 16.5% largely on account of an improved revenue mix and a low base of Q1FY2012.  Performance of Sharekhan's FMCG universe: We expect the top line of Sharekhan's FMCG universe to grow by ~17% YoY with most of the companies in the coverage universe posting a strong double-digit revenue growth (except for Zydus Wellness) in Q1FY2013. Since prices of most of the raw materials have corrected from their highs, we expect the margin profile of the FMCG companies under our coverage to be better in Q1FY2013 in comparison to Q1FY2012. However companies like Glaxo SmithKline Consumer Healthcare (GSK Consumer) and Tata Global Beverages Ltd (TGBL) are likely to witness a Y-o-Y decline in their operating margins, largely due to higher raw material prices. Mcleod Russel India Ltd (MRIL)'s is expected to post a robust performance. The revenues are expected to grow by 11.0% YoY to Rs120.4 crore and the profit after tax (PAT) is expected to grow by 56% YoY to Rs58.2 crore. The strong growth in MRIL's bottom line could be attributed to the anticipated significant improvement in the sales realisation during the quarter. Overall, we expect the operating profit and the adjusted PAT of Sharekhan's FMCG universe to grow by 20.1% YoY and 21.5% YoY respectively during the quarter. Outlook In FY2012 the growth in demand for FMCG products in rural India was much ahead of that in urban India. However, a below-normal rainfall at the start of the monsoon season this year has dampened the overall sentiments. We believe these are early days to form a view. The progress of the monsoon during the July-August period will have to be keenly monitored as it will be the key determinant of rural economic growth in India. A below-normal monsoon will have its repercussion on the Indian FMCG sector in the coming quarters. We might see moderation in demand for FMCG products from rural India, which currently contributes 40-50% of the revenues for most of the FMCG companies under our coverage. Also, a below-normal monsoon will add on to the food inflation, thereby affecting the consumer buying decision in urban India. Hence in the scenario of high food inflation and below-normal rainfall we might see a moderation in sales growth for FMCG companies in the coming quarters. However we foresee a larger impact on the growth of discretionary and premium items rather than daily consumption items.  Preferred picks: In an environment of uncertainties we prefer stocks with better earnings visibility and a strong balance sheet. Hence we like ITC in the large-cap space and GCPL and GSK Consumer in the mid-cap space.   Q1FY2013 Construction earnings preview  No respite yet Key points  A pick-up in execution to support revenue growth but weakness at PAT level to persist: The first quarter of FY2013 will continue to witness poor results as the engineering, procurement and construction (EPC) companies have had to prolong their battle against the mounting interest burden. We expect the aggregate revenue of the Sharekhan EPC universe (ex Punj Lloyd) to grow by a good 16% year on year (YoY) led by some pick-up in execution across projects. However, the earnings are estimated to decline by 22% on the back of a marginal decline in the margins and a sharp jump in the interest burden. Asset developers to also witness pressure on earnings: Asset developers, which have otherwise outperformed the EPC players, would feel the pinch too due to the rising interest burden. IL&FS Transportation Networks Ltd (ITNL) is expected to post a robust growth of 19% YoY in its revenue on account of consistent execution, consolidation of the Chongqing project and some signs of traction in the Elsamex division. But higher depreciation and a rising interest burden would dent the earnings, which would degrow by about 13% YoY. IRB Infrastructure Developers (IRB) too would post a nearly 7% decline YoY in its earnings in spite of a 17% growth in its top line led by strong order execution and the start of construction activity at its mega highway project, viz the Ahmedabad-Vadodara project.  Only small EPC companies might record positive earnings growth: In our universe, we expect smaller EPC players like Gayatri Projects (Gayatri), Pratibha Industries (Pratibha) and Unity Infra (Unity) to post a growth in their earnings led by the robust execution of their projects and sustained margins despite a high interest burden. This expectation is supported by their strong order book, which comprises smaller orders that normally do not get stuck for long for want of clearances or approvals.  Outlook: situation likely to improve from H2: The construction companies are already witnessing an improvement in execution of projects. Going ahead, the policy action prompted by the direct intervention by the Prime Minister's Office (PMO) is expected to improve the situation further. Moreover, we expect the margin and the interest burden to also ease out on the back of the expected monetary easing by the Reserve Bank of India. However, the divergence in the performances of the construction companies would remain wide and it would be better to remain selective. We prefer companies that have relatively better order inflows and execution track record in the existing tough conditions. Hence, we maintain our bullish bias on ITNL, Unity Infra and Pratibha. Our bullish stance on IRB Infra is more of a tactical call to take advantage of the event-led wide gap in the valuations of IRB Infra and ITNL.  Q1FY2013 Cement earnings preview  Realisation to support earnings growth Key points  Volume offtake improved in Q1FY2013: With an increased consumption from the rural market and a partial pick-up in the infrastructure activity, the cement offtake in the domestic market improved in Q1FY2013. The all-India cement volume in the April-May 2012 period grew by 11.9% year on year (YoY). However, the volume data of the large players for June 2012 is not encouraging (shows a decline month on month [MoM]) due to the arrival of the monsoon. Overall, we expect the volume growth to support the revenue growth of the cement players in Q1FY2012. Among Sharekhan's cement universe, Madras Cements, JP Associates and Shree Cement are likely to register an impressive volume growth on the back of the stabilisation of their new capacities. For FY2013 we expect the all-India cement demand to grow at around 8% as compared with a 6.3% growth in FY2012. Average realisation for Q1FY2013 to be higher YoY as well as QoQ: Cement prices in April 2012 increased by an average of Rs10-15 per bag due to an increased cement offtake in the northern, western and central regions. The western, eastern and southern (Tamil Nadu) regions witnessed relatively higher price hikes during Q1FY2013. On the other hand, cement prices in northern and central regions witnessed relatively lesser price hikes. The average cement realisation in Q1FY2013 is estimated to be higher by around Rs200-250 per tonne quarter on quarter (QoQ). The realisation of the companies under our coverage is expected to increase by 4% to 8% sequentially. Shree Cement, and Orient Paper and Industries (Orient Paper) are expected to post a relatively higher growth in their realisation. Further, on a year-on-year (Y-o-Y) basis as well, cement prices across the major cities were higher. Hence, cement companies are expected to register a double-digit growth in their revenues. Further, as per our channel check, the cement prices have gone up by Rs10 per bag after the Competition Commission of India (CCI) imposed a penalty on cement companies for cartelising. We believe cement prices will see a seasonal correction in the coming couple of months. However, for FY2013 the average realisation will be higher as compared with that in FY2012.  Cost pressure to offset benefit of price hikes; margins continue to be under pressure: With the support of growth in the volume as well as realisation, the revenue of the cement companies under our coverage is likely to increase by 9% to 35%. However, the positive impact of the increased realisation on the margins is expected to be offset by the cost pressure in terms of higher power & fuel and freight charges (due to an increase in the lead distance). The Sharekhan cement universe is expected to post a mixed bag of results on the margin front. Companies like Shree Cement, India Cements and Orient Paper are likely to report an expansion in their operating profit margin (OPM) whereas Madras Cements and UltraTech Cement (UltraTech) are expected to register a contraction of 300-475 basis points in their margin.  Average bottom line to increase by 17.7% YoY (ex Grasim): The cumulative revenue of the Sharekhan cement universe is expected to grow by 17.3% (ex Grasim Industries [Grasim]). However, on account of the continued cost pressure the cumulative OPM is expected to contract by 46 basis points. The average bottom line growth of Sharekhan cement universe works out to 17.7%. Shree Cement, Madras Cements and Orient Paper are expected to post a healthy earnings growth in the range of 24-90% YoY. On the other hand, UltraTech is likely to post earnings growth of 9.1% and India Cements is likely to post a decline of 4.8% in its earnings YoY. Outlook going ahead: Due to the increased consumption from the rural housing segment and a partial pick-up in the infrastructure activity, the cement demand has improved over the past couple of months. Going ahead in FY2013, we believe the domestic demand for cement will grow by around 8% as compared with the 6.3% growth in FY2012. Further, with the healthy realisation and a likely improvement in the utilisation ratio (marginal), we believe cement companies would register a double-digit growth in the revenues. However, the key risk remains the cost pressure in terms of the power & fuel cost and the freight charges. Further, any break in the supply discipline (due to the penalty imposed by the CCI) could affect the stability of cement prices at higher levels. Hence, we maintain our neutral view on the cement sector but are positive on selective picks. In the large-sized space we prefer Grasim and among the mid-sized companies we like Orient Paper. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Investor's Eye: Stock Update - Ashok Leyland; Special - Q1FY2013 Banking earnings preview, Q1FY2013 Capital Goods & Engineering earnings preview; Sector Update - Power

 

 

Investor's Eye [July 04, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Ashok Leyland Cluster: Ugly Duckling Recommendation: Hold Price target: Rs28 Current market price: Rs25 Slowdown fails to deter investments as VAT incentives lure Ashok Leyland conference call ALL highlights investment plan in Tamil Nadu Ashok Leyland Ltd (ALL) highlighted a Rs4,000 crore investment plan in Tamil Nadu. This comprises of investment towards medium and heavy commercial vehicles (MHCVs), which the company has been considering to undertake since 2008, and another investment under its joint venture (JV) with Nissan towards light commercial vehicles (LCVs).  Until March 2012, the company has undertaken Rs950 crore of capital expenditure (capex), primarily towards the MHCV business in Tamil Nadu. Some part of this Rs950 crore investment has also been directed towards the LCV segment where ALL manufactures engines for the ALL-Nissan JV. The ALL- Nissan JV has spent around Rs200 crore towards the LCV project. Further investments to the tune of Rs1,800 crore would be made in the greenfield LCV JV that would have a capacity of 1.9 lakh units in Tamil Nadu. The JV would raise Rs800 crore as debt and the rest would be made up by equity contribution by both the JV partners. ALL's equity contribution in the LCV JV is pegged at Rs500 crore. During FY2013, the company would spend around Rs300 crore while the balance would be spent in FY2014. The balance capex would be spent in remaining years with January 2017 as a deadline for the completion of the Rs4,000 crore investment. Company justifies attractive VAT incentives as investment rationale  For the LCV JV; the value added tax (VAT) incentive for every vehicle produced and sold in Tamil Nadu is pegged at Rs50,000. The benefit would be availed in the form of an interest free loan for 14 years as a grant. The company expects 25-30% of the LCV sales to come from Tamil Nadu. On an initial assumption of 15,000 units to be sold in Tamil Nadu, the interest free loan translates into a benefit of Rs75 crore per year for the JV. With a 1.9 lakh units / annum capacity coming on-stream and overall volumes improving over the next few years, the VAT benefits can increase considerably for the JV.  For MHCVs the company indicated of VAT benefits that could be availed on incremental volumes whereby the company needs to produce 68,000 vehicles within Tamil Nadu to claim the benefits. The company needs to sell at least 14,000 vehicles in Tamil Nadu and thereafter would receive VAT benefits on incremental volumes sold in Tamil Nadu to the tune of Rs1.5-1.9 lakh/per unit. The company sold 17,000 units in Tamil Nadu during FY2012. At this run-rate the VAT benefits amount to Rs45 crore per year. These VAT benefits would not attract any income tax charge as they would be termed as a 14-year interest free loan.  ALL leveraging to increase but debt equity to remain under control The company has passed an enabling resolution to raise funds by way of equity issuance and debt. In FY2013, the company would raise around Rs1,200 crore by way of debt. Any equity issuance would primarily go towards reducing debt. The debt: equity has been guided at 1:1 and incremental debt raising for FY2013 is guided at Rs500 crore. Recently, the company raised $80 million to retire an old external commercial borrowing (ECB) debt at a 150 basis points higher interest rate with weighted average cost below 6%.  Valuation The investment in Tamil Nadu, given the attractive VAT incentives augurs well for the company and is a positive from a long-term perspective. However, we are cautious on the management's commentary on poor volume growth in H1FY2013, rising discounts, as well as possible slippages in margin to the lower end of the FY2013 guidance.  We are presenting our expectations for Q1FY2013 earnings where we estimate earnings to remain flat Y-o-Y. We would revise our FY2013 estimates post the quarterly results if required as our volume and margin expectations are conservative than the street's. We continue with our Hold recommendation with short term caution on the stock.  SHAREKHAN SPECIAL Q1FY2013 Banking earnings preview Earnings growth healthy but asset quality woes persist  Key points  Earnings to grow 21.5% YoY (ex SBI): We expect banks in our coverage universe to report an earnings growth of 21.5% year on year (YoY; ex State Bank of India [SBI]) compared with the 30% year-on-year (Y-o-Y) growth in Q4FY2012 and the 13% increase in Q3FY2012. The provisioning will remain at elevated levels while treasury profits will provide some cushion. NII growth likely to be sluggish on contraction in NIMs: The net interest income (NII) of the banks under our coverage is expected to grow by 19% YoY (by 17% YoY for the public sector banks [PSBs]) compared with the 22.3% Y-o-Y growth in Q4FY2012 and the 17.1% Y-o-Y growth in Q3FY2012. The business growth remains subdued due to the slowdown in the economy. The net interest margin (NIM) could decline by 5-10 basis points sequentially and affect the NII growth.  Asset quality pressure to continue: The asset quality pressure will continue led by the slippages from the small and medium enterprise (SME) and mid corporate accounts. Further, the large-ticket restructurings (of state electricity boards [SEBs]) and increased corporate debt restructuring (CDR) cases would keep the provisioning at elevated levels.  Prefer exposure to private banks and select PSBs: We expect the private sector banks to report a relatively better performance (an NII growth of 24% YoY and a net profit growth of 28% YoY) with lesser asset quality strain. Among the private banks we prefer ICICI Bank (due to its improving return on equity [RoE] and asset quality) and Yes Bank (due to its steady performance) while Allahabad Bank (with its attractive valuation) is our favourite among the PSBs.   Q1FY2013 Capital Goods & Engineering earnings preview Revenue growth moderates further  Key points  Q1FY2013 would bring no respite to the capital goods companies as most of our coverage companies are expected to report a sluggish revenue growth in single digits led by low order booking in the previous quarters and an unfavourable base effect.  Operating margins are largely expected to be stable on a yearly basis as we feel that the adverse effect of competitive margin pressure and low operating leverage would be partially offset by cooling of metal prices in the last three to four months. Conventionally, Q1 forms 16-22% of the yearly sales, making it the lowest revenue contributing quarter for capital goods companies. On this account, operating margins are also the lowest in this quarter.  The order inflow announcements in the capital goods space marginally picked up (by 17% quarter on quarter [QoQ] and 12% year on year [YoY]) with companies bagging orders worth Rs35,977 crore in Q1FY2013. Larsen and Toubro (L&T) was the highest contributor (34% of the total orders announced). Some NTPC orders for the super-critical equipment that were expected to be awarded during the quarter, however, are yet to be announced. The book-to-bill ratio for most companies has now started falling, thereby aggravating concerns of growth in future. Also, the fierce competition from the overseas players, mainly the Chinese, has created additional pricing and margin pressure in the power equipment space.  Margin sustenance along with revenue offtake and order inflow would be the key monitorables in the Q1 report card. In terms of the anticipated Q1 results, L&T is expected to outperform in the large-cap space while V-Guard Industries (V-Guard) would lead the show in the mid-cap space.  Outlook  We expect the sluggish order inflow, margin pressure and subdued future guidance in the face of a slow demand environment and sluggish industry capex cycle to be the recurring tune in Q1FY2013 for most capital goods companies. Hence, the management commentary of these companies on the future growth would be closely watched and could lead to significant downgrades in earnings estimates.  The cabinet is to soon decide on imposition of import duty to curb overseas competition, but the same is likely to be dragged/ diluted because of the strong lobby of power developers like Reliance Power, Adani Power etc. On the positive side, the expected awarding of NTPC's super-critical orders, a cut in interest rates and a pick-up in industrial capex activities remain the key positive triggers for the sector. Our top picks in this space are L&T and V-Guard, and we recommend a Buy on these companies from a long-term perspective.  SECTOR UPDATE Power Time for selective buying in utilities Key points  Power utilities-a steep correction driven by structural issues In the past two years, the valuations of power utilities have corrected sharply on the back of some concerns including a lack of fuel security (unavailability of the required amount of coal at a reasonable price and a sharp deterioration in the health of the state electricity boards [SEBs]; the key customer of the power generation companies). The inability to secure fuel supply and the concerns related to the offtake of the power generated have clouded the growth visibility of the power generation companies in a scenario where most private players are in an expansion mode with highly leveraged balance sheets. Time for selective buying post sharp correction and improving policy actions The good news is that the things have finally started moving on the policy front in the form of the fuel supply agreements (FSAs) being signed by Coal India Ltd (CIL) for committed fuel supply and the tariffs being hiked by the SEBs among others. The corrective steps taken by the government are rather feeble, given the complexity of the issues, and a lot more needs to be done. However, the valuations of the power utilities have turned quite supportive now and there is an opportunity to selectively nibble on certain power generation companies. We have done a risk analysis of the power utilities and believe that some of the companies have relatively much lower risk and have also corrected substantially along with the other stocks in the sector. Companies like CESC, Gujarat Industries Power Company Ltd (GIPCL) and Torrent Power have a relatively higher proportion of operational assets with fuel security and a captive client base (ie a distribution set-up).  Weak monsoon pushes up spot rates; trading opportunity in JSPL Merchant power rates moved up during June 2012 (peaking at Rs7 per unit) and are likely to remain high for some time, given the weak monsoon outlook for this year. The monsoon is 31% in deficit now leading to a fall in the water level in the reservoirs and power shortage. In case the monsoon gets delayed further, the demand for power will rise and keep the spot prices high for a longer period. Unlike for the hydro power generators, a weak monsoon would be favourable for the thermal power plants as their fuel gets wet and coal mining gets affected during the monsoon rains. Therefore, the current situation offers a trading opportunity in companies like Jindal Steel Power Ltd (JSPL), which has captive coal supply and sells power on a merchant basis.     Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Sharekhan Top Picks

 

 

Top Picks [June 30, 2012]  Sharekhan www.sharekhan.com

Summary of Contents SHAREKHAN TOP PICKS Despite the disappointment from the Reserve Bank of India (RBI)'s inaction in the policy review meet and the downgrade of India's rating outlook by another leading global rating agency in June, the Sensex and the Nifty have registered handsome gains of 8.8% and 8.5% respectively since our last update on June 5, 2012. The Top Picks basket has performed in line with the benchmark indices and appreciated by 8.7% in the same period. However, the blended return stands at 8% after accounting for the cash created (by adding one stock less to the basket) in May this year. In this month, we are increasing the basket's exposure to engineering, construction and infrastructure sectors by adding Larsen & Toubro (L&T), IRB Infrastructure Developers (IRB) and Kalpataru Power Transmission Ltd (KPTL) in the Top Picks basket. IRB replaces IL&FS Transportation Networks to take advantage of the widened gap in the valuations of the two stocks. L&T, the bellwether engineering, procurement and construction player, comes in place of Sun Pharmaceuticals, which has appreciated by close to 28% in the last five months and sharply outperformed the benchmark indices since it was introduced in the Top Picks basket in February 2012. Lastly, we deploy the cash to bring in KPTL, which has a strong order backlog and a healthy balance sheet. Click here to read report: Sharekhan Top Picks Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.

Fw: Changes in Securities Transaction Tax w.e.f July 01, 2012

 

Dear Customer, Greetings of the day and thank you for your continued support and patronage of our trading services! We write to update you of the recent regulatory changes, wherein Securities Transaction Tax for Equity segments will be revised effective July 01, 2012. Accordingly, STT on the transactions executed on the Exchange (NSE/BSE) on or after July 01, 2012 shall be charged as indicated in below table. Securities Transaction Tax Security Effective rate till 30.06.2012 New rate from 01.07.2012 Equity Delivery based Trade : 0.125% on buy & sell both side. Intra-day Trades : 0.025% on sell side only. Delivery based Trade : 0.1% on buy & sell both side. Intra-day Trades : 0.025% on sell side only. F&O (Futures) 0.017% on sell side only. 0.017% on sell side only. F&O (Options) 0.017% on sell side only. (On Premium) 0.125% to be paid by purchaser if exercised (On underlying/settlement price) 0.017% on sell side only. (On Premium) 0.125% to be paid by purchaser if exercised (On underlying/settlement price) Feel free to call our customer service desk at 1800-22-7500 /39707500 or write us at myaccount@sharekhan.com in case of any queries. Alternatively you could also get in touch with your nearest Sharekhan shoppe. We look forward to a long and pleasant association. Warm regards, Team Sharekhan

Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai - 400 042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos. BSE Cash-INB011073351; F&O-INF011073351; NSE - INB/INF231073330; CD - INE231073330; MCX Stock Exchange: CD - INE261073330; United Stock Exchange: CD - INE271073350; DP: NSDL-IN-DP-NSDL-233-2003; CDSL-IN-DP-CDSL-271-2004; PMS INP000000662; Mutual Fund: ARN 20669. Commodity trading through Sharekhan Commodities Pvt. Ltd.: MCX-10080; (MCX/TCM/CORP/0425); NCDEX -00132; (NCDEX/TCM/CORP/0142); National Spot Exchange Ltd :12790; for any complaints email at igc@sharekhan.com ; Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and Do's & Don'ts by NCDEX, and the T & C on www.sharekhan.com before investing.

Fw: Investor's Eye: Max India (APE to grow at 15% in FY2013; margins likely to decline); Insurance (APE of life insurers grew 38.6% MoM in May 2012)

 

 

Investor's Eye [June 28, 2012] Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Max India Cluster: Emerging Star Recommendation: Buy Price target: Rs234 Current market price: Rs190 APE to grow at 15% in FY2013; margins likely to decline APE likely to grow by 15% in FY2013: The company plans to grow its annual premium equivalent (APE) by around 15% in FY2013 compared with the 13% growth in FY2012. In the first two months of FY2013 the APE growth was flattish while the peer companies recorded a higher growth due to their focus on selective products (those with the highest net asset value [NAV] and the other short-term products). Max New York Life Insurance (MNYL) continues to focus on the high-value traditional products targeting the affluent segment. This aids in maintaining a high persistency ratio and in posting healthy margins despite an adverse industry scenario.  NBAP margin may drop to ~14% after the regulations on non-par products: For FY2012 the company's new business achieved profit (NBAP) margin was about 15% after the adjustment of the new regulations for the unit-linked insurance policies (ULIPs). Going ahead, an Insurance Regulatory and Development Authority (IRDA) regulation is expected regarding the non-par policies (constituting 15% of MYNL's products) which could affect the margins by around 100-150 basis points. Earlier, the Finance Bill, 2012, had proposed life cover should be at least 10x the annual premium paid for availing tax benefits. This could also lead to a change in the product structure.  Distribution tie-up with Axis Bank remains intact: The company has renegotiated an existing equity arrangement with Axis Bank regarding the latter's 4% stake in MNYL. As per the deal, Max India will purchase the 4% equity stake held by Axis Bank in MNYL in tranches not exceeding 1% equity every year (before 2020). However, the distribution tie-up with Axis Bank, which contributes 40% of the sales, remains intact. Mitsui Sumito-the new joint venture partner in insurance: Recently Mitsui Sumito concluded the acquisition of a 26% stake in MNYL from New York Life International Holdings (16.63 %) and Max India (9.37%) at Rs2,731 crore, thereby valuing MNYL at 3.26x embedded value. Max India received around Rs800 crore in the transaction on a post-tax basis which could be deployed to expand the healthcare and health insurance businesses. Healthcare business to break even in FY2013, may turn profitable in FY2014: Max Healthcare had 1,800 beds in FY2012 and added 205 beds (at the Dehradun hospital) recently, thereby increasing the total capacity to approximately 2,000 beds. The operational beds in FY2013 would be around 1,600 and 2,000 in FY2014. For FY2012 the healthcare business reported a revenue growth of 20% YoY (Rs824 crore) and EBITDA of Rs12 crore (due to the fixed cost of expansion). The company expects to break even in FY2013 and report profit from this business FY2014 onwards. Valuations Max India's strategy to focus on traditional products, targeting the affluent segment, aids in maintaining a high persistency ratio and in posting healthy margins despite an adverse industry scenario. The company has invested in capacity addition in the healthcare business which could significantly add to the revenues in the coming quarters. Nevertheless, the other businesses (specialty films, health insurance etc) continue to grow at a healthy rate. The life insurance business is already delivering profits. This along with the treasury corpus of Rs397 crore will take care of the funding requirements of the health insurance and healthcare segments. We maintain our Buy recommendation on the stock with our sum-of-the-parts valuation method based price target of Rs234.   SECTOR UPDATE Insurance APE of life insurers grew 38.6% MoM in May 2012 During May 2012, the annual premium equivalent (APE) of the life insurance industry declined by 2.5% year on year (YoY) but increased 38.6% month on month (MoM). The month-on-month (M-o-M) growth in the APE was mainly contributed by the private players, which reported a growth of 66% in May this year. Life Insurance Corporation of India (LIC) showed an M-o-M growth of 28% (down 12.6% YoY). Companies like SBI Life Insurance Company (SBI Life), Bajaj Allianz Life Insurance (Bajaj Allianz) and HDFC Standard Life (HDFC Life) showed a strong growth on an M-o-M basis while Max New York Life Insurance (MNYL)'s APE growth remained flattish.  In terms of APE growth for May 2012, six out of 18 private players posted a decline YoY with Tata AIG Life Insurance (Tata AIG) showing the highest contraction of 35.8% followed by MNYL, which showed a contraction of 16.2% YoY. However, on a year-till-date (YTD) basis, the life insurance industry reported a decline of 4.4% in APE.  The market share of the private players increased to 33.7% in May 2012 while that of LIC decreased to 66.3% (71.8% in April). Among the private players, SBI Life's market share declined to 10.1% from 11.2% in May 2011 while that of ICICI Prudential declined to 16.3% from 17.2% in May 2011. The share of MNYL declined to 5.6% as against 8.4% in May 2011. Going ahead, the growth in APE is likely to remain sluggish as new guidelines for products may be announced and the insurers may have to refile the products with the Insurance Regulatory and Development Authority (IRDA) based on the new guidelines.  APE declines by 2.5% YoY (up 38.6% MoM) On a year-on-year (Y-o-Y) basis the APE growth declined by 2.5% in May 2012, mainly contributed by LIC, which showed a decline of 12.6% YoY in its APE. The private players, however, fared better as their APE increased by 26% YoY (up 65.6% MoM). The sharp sequential growth was mainly due to a sharp decline in April due to the seasonality after the end of a fiscal.   Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.