Fw: Investor's Eye: Pulse - (Monetary policy update); Update - Cement (Channel check indicates price cut), Information technology (Impressive performance continues)

 

 

Investor's Eye [December 16, 2011]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK Monetary policy update RBI in its mid quarter policy review has kept the key rates unchanged (repo rate at 8.5%, CRR at 6%) while made important indications in terms of reversing the rate hikes going ahead. Although, there was anxiety in terms of CRR easing within some corners of market, RBI played safe by waiting for stable trend in inflation and rupee. RBI also expressed the rising concerns on the GDP growth due to deterioration in domestic and global environment. Since, RBI has clearly articulated the peaking of rates hikes and need to support growth the easing of CRR could happen sometime in Q4FY12 followed by the repo rate cuts. SECTOR UPDATE Cement    Channel check indicates price cut We have recently done a channel check with the cement dealers. We present below the key points of the same: Cement prices declined in the north, east and central; unchanged in west and south: Our interaction with the cement dealers indicates that cement prices have corrected in the northern, central and eastern regions of India by around Rs10 per bag in the last couple of days. The correction in the price is largely on account of a lower than expected cement offtake due to slower execution of infrastructure projects. Prices have remained unchanged on a month-on-month (M-o-M) basis in the western and southern regions. Central region witnessed relatively higher pressure on price: The central region has witnessed a relatively higher pressure on the price (declined by Rs10-12 per bag of 50 kg) compared to the northern and eastern regions. As per our interaction with the dealers in Lucknow and Bhopal, the volume offtake is lackluster, hence prices have fallen down by Rs10-12 per bag. The move will affect the realisations of Jaiprakash Associates, Prism Cement, Birla Corporation, Century Textiles and Heidelberg Cement will be affected due to their higher exposure to the central region. Northern and eastern regions witnessed price correction of Rs5-7 per bag: The cement prices in the key states of the northern region have corrected by Rs5 per bag. The demand environment in the northern region has been affected due to a slower than expected execution of infrastructure projects. Companies having higher exposure to the northern region like Shree Cement, JK Lakshmi Cement, JK Cement and Mangalam Cement are expected to face an adverse impact on their realisations. On the other hand, the eastern region has continued to witness a sluggish demand environment. The cement price in Kolkata has declined by around Rs8 per bag to around Rs300-305 per bag. The key cement players in the region are Birla Corporation, OCL India and Lafarge India.  Western region relatively better with improved offtake in Gujarat as well as Maharashtra: In the western region the demand environment is relatively better (both in Gujarat and Maharashtra) on account of government infrastructure projects in Gujarat and lifting of ban on river sand in Maharashtra. As per cement dealers in Gujarat, the cement price could increase from the current level by Rs5-7 per bag in the near term, whereas in Mumbai and other major cities of Maharashtra, prices have remained unchanged on an M-o-M basis.  Southern region continues to benefit from the tight supply discipline: The southern region continues to face a lack of any material demand on account of the slowdown in the real estate market and the political hurdles. The present average cement price in Hyderabad is in the range of Rs260-285 per bag. We believe an improvement in the demand environment is unlikely in the near term and could take some more time. The key players operating in the region are India Cements, Madras Cement, Dalmia Cement and Chettinad Cement.  Outlook on pricing: Given the supply discipline, the cement manufacturers have managed to maintain cement prices at a healthy level in spite of lackluster demand. Going ahead, with the capacity addition in place and a likely break in the supply discipline by mid sized players, we believe cement prices could come under pressure. However, the average cement realisation for cement players in FY2012 will remain higher compared to the average cement realisation in FY2011. We maintain our neutral view on the sector. However, we believe any correction in the sector will provide an investment opportunity in select companies. We prefer Grasim Industries in the large size space and Orient Paper and Industries in the mid size space.   Information technology    Impressive performance continues Accenture has started the new fiscal with an impressive set of numbers for Q1FY2012. The performance was better than its guidance and was backed by a strong growth in the outsourcing revenues and growth across verticals and geographies. The revenues were up 17% year on year (YoY) and 5.8% quarter on quarter (QoQ) to $7,074 million. The order booking remained strong on a year-on-year (Y-o-Y) basis to $7.8 billion though the same was lower on a quarter-on-quarter (Q-o-Q) basis. Going forward, for Q2FY2012 the company has increased the guidance range to factor in the uncertain macro-economic environment and the delay in spending at the start of the new year. For FY2012 the company has maintained a revenue growth guidance of 7-10% to $27.3-28.1 billion. The company has cut its earnings guidance on account of cross-currency headwinds. The management remains watchful about the macro-economic environment and the company's clients are taking proactive action to respond to the current, more volatile market conditions. The demand for outsourcing remains strong and going forward, the management expects the outsourcing business to grow in double digits and the growth in the consulting business to moderate.  Valuation: Accenture's numbers for Q1FY2012 reinforced the belief that the demand environment for the IT industry is stable currently. However, going forward the management remains watchful of the macro-economic uncertainties. Nevertheless, Accenture's management remains optimistic more about the demand for outsourcing services than the discretionary spend (consulting) in the coming quarters. The optimism in the outsourcing demand augurs well for the Indian IT vendors. We maintain our cautiously optimistic stance on the Indian IT sector and our top pick in the sector remains Tata Consultancy Service.    Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.   Click here to read report: Investor's Eye

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Fw: Sharekhan's top debt fund picks

 

 

Mutual Gains [December 16, 2011]  Sharekhan www.sharekhan.com

Summary of Contents MUTUAL GAINS Sharekhan's top debt fund picks We have identified the best debt-oriented schemes available in the market today based on the following 5 parameters: Avg. rolling returns for one and two years, Sharpe ratio, Fama (net selectivity), Credit quality and Average Maturity. Eligibility criteria: scheme existence for more than 2 years and cut off of minimum 10% of category AAUM. After considering all the parameters we arrive at composite score by assigning specific weightages.   Click here to read report: Top debt fund picks       Regards, The Sharekhan Research Team myaccount@sharekhan.com

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Fw: Investor's Eye: Idea: GlaxoSmithKline Consumer Healthcare (A healthy pick; PT: Rs3,000); Pulse - (Inflation moderates to 9.11%)

 

 

Investor's Eye [December 14, 2011]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA GlaxoSmithKline Consumer Healthcare       Cluster: Evergreen Recommendation: Buy Price target: Rs3,000 Current market price: Rs2,544 A healthy pick Key points  Market leader in MFD segment: GlaxoSmithKline Consumer Healthcare (GSK) is a leader in the malted food drink (MFD) market with a market share of 71%. The MFD business accounts for around 94% of its overall domestic revenues. Over the years GSK has developed strong brands, such as Horlicks (a 55% market share) and Boost (a 13% market share), which are household names today. Judicious new launches and brand extensions to meet the consumer's needs and the expansion of its distribution reach have helped GSK to stay ahead of the competition and maintain its pricing power over the years. Double-digit volume growth in MFDs sustainable in the long run: The penetration of MFDs is low (22% overall) compared with some of the other consumer goods in India. With the rising per capita income and increased acceptance of health and wellness products, the demand for MFDs would increase in the years ahead. Hence, on the back of improved penetration (both rural and urban), increasing distribution reach, and sustained innovations and brand extensions GSK's volumes are expected to grow by 11-14% in the MFD segment in the long run. Entering into new categories: Leveraging the strong brand equity of Horlicks and ''supplementing the brand with consumer insights'', GSK has entered into newer categories, such as biscuits, noodles, energy bars, sports drinks, health supplements and oats, in recent years. While its biscuit segment grew at a CAGR of 30% over CY2007-10, the noodle segment gained a market share of 3% at an all-India level. The low penetration of some of the categories, such as noodles, oats, health supplements and energy drinks, provides strong visibility of future growth. Strong balance sheet: GSK is debt-free and has been consistently enhancing its cash balance over the years. Its cash balance currently stands at close to Rs1,000 crore and is expected to improve to around Rs1,170 crore in CY2012. The strong cash generation ability would take care of its future capex needs. GSK is known as a very good dividend payer. Over CY2005-09 its average dividend pay-out stood at 33% (CY2010 was an exception with a dividend of 70%).  Outlook and valuation: With a double-digit volume growth in the MFD segment and a strong growth in the newly launched products, we expect GSK's top line to grow at a CAGR of 19.2% over CY2010-13. The strong pricing power would help it to maintain the OPM at 16-17% over the same period. Hence, we expect GSK's bottom line to grow at a CAGR of 19.0% over CY2010-13. We initiate coverage on GSK with a Buy recommendation. Our price target for GSK is Rs3,000 based on 25x its CY2013E EPS of Rs120.3, which is a 25% discount to Nestle India's current multiple. The fair value as per the DCF method comes to Rs3,069. At the current market price the stock trades at 25.1x its CY2012E EPS of Rs101.3 and 21.2x its CY2013E EPS of Rs120.1. PULSE TRACK Inflation moderates to 9.11% The Wholesale Price Index (WPI)-based inflation for November 2011 came in at 9.11%, in line with the Street's expectations. However, the inflation for September 2011 has been revised upwards to 10% from the provisional figure of 9.72%.    Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Thematic Report (Ashok Leyland: LCVs boost volume growth); Update - GAIL India (Long-term supply agreement improves growth visibility)

 

 

Investor's Eye [December 13, 2011]  Sharekhan www.sharekhan.com

Summary of Contents THEMATIC REPORT Ashok Leyland: LCVs boost volume growth LCVs decoupling from IIP slowdown and... Against the dismal growth in the index of industrial production (IIP) of 3.5% between April-October 2011, the light  commercial vehicle (LCV) segment has grown by 28.7% year on year (YoY) in the same period. The strong divergence reflects the decoupling of LCVs from the slowing broader economy. The LCV cargo segment grew at a robust pace of 31% between April-October 2011 while the LCV passenger segment grew by 12% in the same period. In the last six years, LCVs have overgrown the IIP by an average of 2.1x. However, the year till date (YTD) FY2012 chart shows that the ratio averaged 8.2x, reflecting a strong outperformance over the IIP.  ...outgrew most automobile segments in YTDFY2012 Most automobile segments felt the impact of slowing economic growth, rising inflation and a deteriorating investment as well as consumption cycle. LCVs bucked the general trend of moderation and have emerged the strongest amongst most  automobile segments. Passenger cars were the worst hit while many other segments managed to grow in mid double digits. LCVs took the lead with over 30% growth between April-November 2011. Beta highest for ALL; Dost to provide essential diversification We believe the ALL - Nissan joint venture (JV) would see the maximum benefit as FY2012 is the first year of  diversification. The ALL - Nissan JV plans to sell around 12,000 units of the newly launched Dost in FY2012. Further in FY2013, the Dost platform would be expanded to passenger carriers also whereby volumes can grow multifold. The company is targeting 55,000 units in FY2013. We see the Nissan LCV JV to be significantly value accretive and provide ALL the new dimension of growth.  Ashok Leyland: Outlook and valuation Our volume estimates for ALL in FY2012 and FY2013 are pegged at 98,405 units and 1,11,000 units respectively. Our earning per share (EPS) estimates for FY2012 and FY2013 remain unchanged at Rs2.5 and Rs2.9 respectively. ALL is the cheapest stock among the auto OEMs. We value the company at Rs31 per share which discounts FY2013E EPS by 9x at the lower price earning (PE) band. In addition to the PE multiple on core business we assign a Rs5 book value per share for subsidiaries. We recommend a Buy on ALL.   STOCK UPDATE GAIL India       Cluster: Apple Green Recommendation: Buy Price target: Rs541 Current market price: Rs392 Long-term supply agreement improves growth visibility Event GAIL has signed a 20-year sales and purchase agreement (SPA) with Sabine Pass Liquefaction LLC, a unit of Cheniere Energy Partners, for the supply of 3.5 million tonne per year of LNG. The SPA has a term of 20 years starting from the date of first commercial delivery in CY2017 with an option to extend for another ten years. Impact The SPA will help GAIL to ensure long term gas supply for the growing demand. Though execution of this SPA will be in 2017, which is five years ahead, we believe considering domestic demand supply assurance is certainly a positive for the stock. View and valuation: Reiterate Buy The impact of this event is likely to be felt only in the long term, ie post CY2017. It certainly is a positive development for GAIL as it provides better visibility of LNG supply in the long term. Moreover, it should act as a positive as GAIL's new pipeline network is likely to face low utilisation in the initial years considering the current gas supply condition.  We retain our estimates and Buy rating on the stock with a target price of Rs541 (based on sum of the parts [SoTP] valuation).    "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Thematic Report; Pulse - (IIP growth nosedives by 5.1%); Update - Telecommunications

 

 

Investor's Eye [December 12, 2011]  Sharekhan www.sharekhan.com

Summary of Contents Thematic Report Switch from Infosys to TCS Key points In the uncertain demand environment for the Indian IT services companies, it is advisable to stick to the leader Tata Consultancy Services (TCS) which is our preferred stock among the frontline IT companies. TCS is likely to sustain its much superior track record in terms of revenue growth and margin stability in the coming quarters.  On the other hand, Infosys is facing transition issues (management change) and the management offers weak commentary on the demand outlook. Industry surveys also indicate that Infosys' top clients are likely to cut back on IT spending, spearheaded by British Telecom (BT), its single largest client. In comparison, the survey indicates a 23% increase in IT spend by TCS' clients. Moreover, according to media reports, Infosys' management has undertaken desperate measures like working on some Saturdays to boost revenues in Q3.  In terms of valuations, TCS trades at a slight premium to Infosys. The relatively sharper run up in Infosys (as compared to TCS) has narrowed down its discount to TCS which could be utilised as an opportunity to switch from Infosys to TCS due to the latter's superior growth outlook. Currently, we have a Buy rating on TCS and Hold rating on Infosys. Risk: The key risk to our call is the potential distortion in quarterly results due to cross currency fluctuations (especially Euro/USD and Pound/USD).  Switch from Infosys to TCS: As TCS and Infosys are both the flag bearers of the Indian IT sector, it would be imprudent to completely avoid one over the other. However given the current macro uncertainties it would be better to increase exposure to TCS by cutting some exposure in Infosys till the time the disparity in the latter's fundamentals gets adjusted in its stock valuation.  Why we prefer TCS TCS better placed for market share gains: TCS' diversified scale of operations and higher exposure to the high spending banking, financial services and insurance (BFSI; 43% as against Infosys' 35%) and infrastructure management services (IMS; 9.6% as against Infosys' 5.8%) verticals will help it to garner higher market share gains. In the last one year, TCS has gained the highest market share among the Indian IT incumbents. TCS has gained market share quarter over quarter with its market share standing at 37.4% for the September 2011 quarter, up from 35.9% a year back. During the same period, Infosys has seen its market share drop to 25.9% from 26.8% a year back. Valuation: At the current market price of Rs1,180 and Rs2,731 of TCS and Infosys respectively, they trade at 19.0x and 17.3x FY2013 earnings estimates. In the last six months TCS' average premium over Infosys was around 8.2%, which is likely to expand further in the coming quarters with Infosys likely to lag behind TCS in financial performance parameters. Infosys' stock is likely to remain weak in the run-up to third quarter results, with recent earnings warning and a potential miss and revision of FY2012E guidance. Further, we believe Infosys' earnings will remain vulnerable to downgrades in FY2013E as compared to TCS owing to TCS' relatively higher exposure to BFS and IMS verticals. On the overall sector perspective, we continue to remain cautiously optimistic and would keenly wait for the finalisation of IT budgets for CY2012. Our interaction with the company's management suggests at budget closure by end January 2012. We continue to maintain our earnings estimates and price targets for both the stocks. We maintain Hold on Infosys with a price target of Rs2,772 and Buy on TCS with a price target of Rs1,250. PULSE TRACK IIP growth nosedives by 5.1% In October 2011 the Index of Industrial Production (IIP) declined by 5.1%, slipping significantly below the market estimate. The October IIP numbers are the weakest in 31 months and were a result of a decline in manufacturing, mining and capital goods output. For the year till date (YTD) FY2012, the IIP growth stands at 3.5% as against 8.7% in YTD FY2011. However, the IIP growth number for September has been revised upwards marginally to 2% from 1.9%. SECTOR UPDATE Telecommunications       Regulatory news continue to unfold, new telecom policy to be unveiled by early 2012 The Telecom Commission (TC) has reached a consensus on the following matters for the new telecom policy 2011, ie National Telecom Policy, to be out by early 2012. One-time charge for spectrum above 6.2MHz Uniform licence fee of 8% Tower companies to be brought under the licencing regime Liberal M&A norms Negative regulatory news flow coupled with falling rupee to keep stocks under pressure: The commission will meet again on December 13-14, 2011 to fine-tune the policy decisions on which it has reached a consensus. The outcome of the meeting would be shared by the end of this year. We believe that till the time the new policy is unveiled with clarity, the negative regulatory reports in the media and the falling rupee are likely to keep the telecom stocks under pressure. Long-term trajectory looks positive; liberal M&A norms to protect the downside: With the return of the pricing power in the hands of the existing players, we believe the domestic environment has turned positive . Further, the negative regulatory developments and news flow (levy of one-time spectrum charges, higher uniform licence fee of 8% and bringing tower companies under the licence net) have been in public domain for long and been discounted by the market. Thus though we see risks to the profitability and cash flow in the short term, the long-term outlook continues to be positive. We also believe that the expected liberalisation of the M&A norms would act as a downside cushion for the sector. We maintain our Buy rating on Bharti Airtel with a price target of Rs468.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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Fw: Investor's Eye: Update - IL&FS Transportation Networks (Expected easing of competitive intensity is favourable); Viewpoint - HSIL (Challenging environment ahead)

 

 

Investor's Eye [December 09, 2011]  Sharekhan www.sharekhan.com

Summary of Contents   STOCK UPDATE IL&FS Transportation Networks       Cluster: Emerging Star Recommendation: Buy Price target: Rs330 Current market price: Rs167 Expected easing of competitive intensity is favourable Key points Preferred bidder for Chongqing Expressway group: The company has emerged as the preferred bidder for acquiring a 49% equity stake in Chongqing Yuhe Expressway Co (Chongqing Yuhe) in China. Chongqing Yuhe operates 58 kilometre of Yu He Expressway in Chongqing, located in southwest China, with the toll concession rights till 2032. The road project has been operational for the last nine years. The expressway is significant because it connects to a major industrial belt in the Chongqing region, thereby allowing the Chinese company to enjoy consistent traffic flow throughout the year and offering a decent growth prospect. Further, the Chongqing municipality has assured an annuity based payment on a certain part of the road the stretch beyond which will be tolled. However, the contours of the deal would be known by the end of this month after the signing of the agreement by both the parties. Expected moderation favourable; Maintain Buy: In view of ITNL's leadership in the road vertical, its strong relationship with state governments, its relatively diversified and derisked business portfolio, and strong parentage we remain positive on the company for two key reasons: 1) Given its strong parentage and scale of operations, the company stands to gain from the expected consolidation in the sector; 2) Order inflow is likely to improve on the back of expected moderation in competitive intensity as smaller players are unable to achieve financial closure. On the flip side, the FY2013/14 estimates are at risk if the company is unable to bag decent projects over the next 3-6 months. Currently, its order book stands at Rs8,900 crore, that is 3.5x its FY2011 construction revenues to be executed over the next two to three years. At the current market price the stock is trading at 6.8x and 6.2x its FY2012E and FY2013E earnings. Hence we maintain our Buy rating on the stock with a price target of Rs330.  VIEWPOINT HSIL       Challenging environment ahead Key points HSIL operates in two key business segments, namely sanitary ware and container glass division. Each business segment contributes 50% revenue. The company sells sanitary ware under the Hindware brand and manufactures glass under the AGI brand. While it is the number one player in the sanitary ware market with a 40% market share, it is the second largest player in the container glass space with a 17% market share (70% market share in southern India, the biggest market for container glass).  The organised segment is growing at over 12% per annum and we expect the growth to sustain driven by the increased demand for new houses and the burgeoning young earners with a rising disposable income. Being the largest domestic player in the sanitary ware business HSIL is likely to benefit the most from this incremental demand. However, the slowdown in the property market in recent times has affected the overall volume growth of this industry.  Key risk includes longer than expected slowdown in the real estate market will affect the demand for building products while sharp volatility in prices of soda ash can affect the margins in the container glass division. Moreover, in order to fund the huge capex of Rs650 crore it could see an increase in its debt-to-equity ratio, which presently stands at 0.6x. This will increase the interest burden on the earnings of the company. The return on equity (RoE), which stands at 15%, could fall to around 10% in the coming two years.  Outlook and valuation: The company has a strong financial track record in terms of earnings. It is also operationally efficient. With the new capacities coming on stream in the next two years the company is well placed to capture the incremental demand in both the sanitary ware and container glass markets. The company's management is confident of achieving a 25% growth in its revenue in the coming years. However, a longer than expected slowdown in the real estate market (which is the key consumer of its sanitary ware) and an increase in the price of soda ash could adversely affect the performance of the company. At the current market price the stock is trading at price-to-earnings ratio of 10.7x, discounting its FY2011 earnings per share. On a comparative basis, the stock's valuation is in line with that of its peers despite its lower return ratios.   "Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article."   Click here to read report: Investor's Eye

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