Get documents about "Result Preview -3QFY2011 - 3-12-2011
Document Sample
Preview
3QFY2011 Results Preview | January 3, 2011
Table of Contents
Strategy 2
Portfolio
Angel Research Model Portfolio 17
Automobile 19
Banking 22
Capital Goods 26
Cement 29
FMCG 32
Infrastructure 35
Logistics 38
Metals 41
Oil & Gas 44
Pharmaceutical 47
Power 50
Real Estate 53
Retail 56
Software 59
Telecom 62
Note: Stock Prices as on December 31, 2010.
Refer to important Disclosures at the end of the report 1
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Port of Choice India to attract substantial FII inflows…
The onward march of the Indian stock markets was halted in With QE2 related inflows on the anvil, CY2011 holds the
3QFY2011 by a flurry of scams that made headlines during potential to see even higher foreign inflows into the Indian equity
the period and as a result, markets remained flat compared to markets, especially considering that earnings growth is also
the previous quarter. The Sensex did make an all-time high expected to improve - while the Sensex EPS CAGR is estimated
during the quarter, extending the positive momentum of the at 18.4% over FY2010-11, FY2012E EPS growth is expected at
previous quarter. But, it eventually corrected owing to negative 22.4%. This thesis is further validated by the broader perspective
news flow, ending a mere 2% higher qoq, after a strong on India as well. In our view, even though each of the emerging
performance in 2QFY2011. markets is having its own set of cyclical headwinds and tailwinds,
for a long-term investor what matters is that eventually few
Positive or negative news flow notwithstanding, the FIIs continued
broader realities tend to overwhelm the myriad economic noises
to pump in money through 3QFY2011 as well, rounding off
(fiscal concerns, bureaucratic hurdles, etc.) to determine the
the calendar year with strong capital inflow into the markets.
overall direction of the economy and in tow, the markets. The
Overall FII inflow in equities in 3QFY2011 stood at nearly
evolving overwhelming reality is that India's demographic
US $10bn, taking total investments in FY2011 this far to
dividend is approaching a key inflection point over the next few
US $25bn. As an indication of India's attractiveness as an
years, not just in absolute terms but even relative to China,
investment destination, total FII inflow during 9MFY2011 has
which is set to make India a veritable port of choice for investors
already exceeded the entire inflow during FY2010. On the other
across the world. No wonder, that seen on a yoy basis the Indian
hand, the DIIs continued to be sellers, with net selling of `9,700cr
markets gained 17.4%, much ahead of China.
(US $2bn) in 3QFY2011, making them net sellers of `29,700cr
in 9MFY2011. …Indian markets underperformed sequentially though
Exhibit 1: Rise in Sensex (qoq) The global equity markets continued their strong run through
60 3QFY2011 as well, with markets in the developed economies
50
40
giving significant returns to investors. Market sentiments were
30 soothed to some extent by the bailout extended to Ireland and
20
the QE2 program. Developed markets, on an average, recorded
(%)
10
0
(10)
QoQ gains of ~8%, led by Japan, which increased by more
(20) than 9%. Amongst the emerging markets, Russia outperformed
(30)
the others, gaining ~17%. The other emerging markets rose
1QFY2007
2QFY2007
3QFY2007
4QFY2007
1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
1QFY2011
2QFY2011
3QFY2011
by a much lower 4%. Amidst this scenario, in comparison, India
was one of the underperformers. Taking a cue from this, in this
Source: BSE, Angel Research
note we try and look at some of the near-term execution issues
Exhibit 2: Net fund inflows which need to be kept in mind in the context of the growth rate
60 that the markets are factoring in, even though India's long-
term growth story remains intact.
50
40
30
(` '000 cr)
20 Exhibit 3: Performance of key global markets
10
50
0
(10) 40
(20) 30
(30) 20
(%)
1QFY010
2QFY010
3QFY010
4QFY010
1QFY011
2QFY011
3QFY011
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
10
0
(10)
FII DII
(20)
Source: Bloomberg, Angel Research
India
Brazil
Russia
Korea
US Nasdaq
Japan
Malaysia
China
US Dow
Indonesia
HongKong
Taiwan
Singapore
UK FTSE
yoy qoq
Source: Bloomberg, Angel Research
Refer to important Disclosures at the end of the report 2
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Portfolio strategy: Key monitorables in major In this context, post the correction, the Sensex is now looking
sectors more reasonably valued, available at 16.3x 1-year forward
EPS, close to its average P/E since April 2004. Our 17x target
The Indian markets have come off their recent highs, as a host multiple translates into a Sensex target of 21,844 by March
of information flow is suggesting near-term execution hurdles 2011; however, once the markets start looking at FY2013E
to India's double-digit growth ambitions. This is not to say that numbers within the next few months, there would be a
the growth outlook for our demographically most-advantaged corresponding upside in the Sensex targets as well.
economy is anything but buoyant over the long-term. But, it is In fact, from January 2011 onwards with QE2 inflows on the
more a question of what is the right valuation to pay for the anvil, there are widespread expectations that India will attract
expected growth. We believe that for the 8-8.5% real GDP substantial FII investments, which could set an upward direction
growth that India still looks set to achieve, talking in terms of for the markets during the year. But, as mentioned at the outset,
benchmark Sensex valuations, a target P/E multiple of 17x on some of the sectors are witnessing execution hurdles that have
FY2012E EPS seems fair. in the past year resulted in earnings disappointment and
consequent stock under-performance. Going into 2011 as well,
Exhibit 4: Sensex EPS estimates we believe that the markets will continue to closely monitor
1,300
ow
th
1,285
near-term execution, especially in sectors or companies with
Gr
1,200 .4
% less-than-exemplary corporate governance or inherently
22
1,100 th
low-entry barriers. Hence, notwithstanding India's robust GDP
row 1,050
EPS (`)
8.4
%G growth outlook, sectoral strategies and stock-picking will remain
1,000 1
wth 887
vital to overall healthy portfolio returns.
900 Gro
3%
22.
800
Exhibit 7: BSE Sectoral returns (yoy and qoq)
725
80.0
700
60.0
FY2009 FY2010 FY2011E FY2012E
40.0
Source: Angel Research
(%)
20.0
0.0
Exhibit 5: One-year forward Sensex P/E
(20.0)
30.0
(40.0)
HC
AUTO
CD
FMCG
CG
OIL&GAS
METAL
IT
TECk
REALTY
BANKEX
SENSEX
POWER
25.0
20.0
(x)
15.0 yoy qoq
10.0 Source: BSE, Angel Research
5.0
The Building Blocks - Infrastructure,
0.0
Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 commodities, banking and capital goods
Sensex 1-yr fwd P/E Average P/E
Ironically, some of the sectors that constitute the building blocks
Source: BSE, Angel Research; Note: Prices till 31.12.2010
of the economy are facing headwinds. In our view, policy-related
Exhibit 6: Bond yield v/s earnings yield issues like land acquisition/environmental clearance delays,
12.0 sector-specific issues like oversupply or company-specific
10.0 headwinds are limiting the investment options in infrastructure,
8.0 power, steel and cement. A large part of the oil & gas space in
any case has limited investibility. Together, these sectors comprise
(%)
6.0
4.0
~31% of the BSE-100, and the only weightage we have given
2.0
in our model portfolio is 10% to RIL, which we believe is trading
0.0
at too low a discount to the Sensex, as well as 3% to
Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 infrastructure. In case of infrastructure, we believe valuations
Bond Yield Earnings Yield have become reasonably attractive after a year of
Source: Bloomberg, Angel Research; Note: Prices till 31.12.2010
underperformance, and expect execution to pick-up going forward.
Refer to important Disclosures at the end of the report 3
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
On the other hand, we believe the banking and capital goods a strong bidding pipeline, we expect the momentum to continue.
companies that are also set to benefit from the GDP up-cycle, In any case, the second half of a fiscal is seasonally a strong
offer more investible ideas at this juncture. This is not only period for the infrastructure companies, with pick-up witnessed
because of the expected cyclical improvement that they are in execution. Hence, we believe that the sector would once again
expected to witness, but also backed by the structural tailwinds be on growth trajectory in the coming quarters, owing to: 1)
and inherently stronger business models enjoyed by the leading robust order book, and 2) long-term growth story being intact.
companies from these sectors. Accordingly, compared to a
Exhibit 9: Top-line growth and order book position
BSE-100 weightage of 34%, in our model portfolio we have
50.0 47.2 3.9
given these two sectors 43% weightage. 45.0
47.1
3.7
40.0 45.4
38.5 43.0 40.6
Infrastructure: Monitoring execution 35.0
30.0
34.2 3.5
3.3
(%)
25.0
(x)
19.2 3.1
Earnings of the infrastructure companies in the preceding quarter 20.0
15.0 18.1 12.5
18.3
2.9
(2QFY2011) were disappointing, especially in case of the mid- 10.0
5.0
9.3
5.7 7.4
9.6
2.7
size contractors. The slippage in profit was due to the lower- - 2.5
1QFY11
2QFY11
3QFY11
1QFY09
2QFY09
3QFY09
4QFY09
1QFY08
2QFY08
3QFY08
4QFY08
1QFY10
2QFY10
3QFY10
4QFY10
than-expected EBITDA margins and higher interest costs.
Looking at the execution track record in the recent quarters as Average OB/Sales (RHS) Average Top-line growth (yoy, LHS)
well, infrastructure companies have disappointed. This is partly Source: Company, Angel Research
explained by the lopsided order inflow in 2HFY2010 (which
will enter execution phase only in 2HFY2011) and to policy- Increasing working capital in 1HFY2011 another lead indicator
related issues. pick-up
of pick-up in execution: Analysis of the 1HFY2011 balance
sheets indicates that the sector experienced some rise in working
Nonetheless, in our view, the 2QFY2011 top-line numbers
capital and pick-up in capex (a similar trend though to a lesser
depicted some signs of revival on the execution front with the
extent was visible in 1HFY2010 as well). Working capital
companies posting decent top-line growth. Overall, top-line
requirement increased for the sector mainly on account of higher
growth came broadly in line with our estimates, though it was
loans and advances and debtors. We believe the key reasons
still lower than street expectations. The market's disappointment
for the same include: 1) stocking up in anticipation of pick-up
on the top-line and bottom-line was reflected in the stock
in 2HFY2011, and 2) lending to subsidiaries to ensure flow of
performance - infrastructure companies in our coverage universe
in-house C&EPC revenue. Further, going ahead, we expect
have been battered in recent times (barring L&T) and
companies to see some relief on the working capital front given
underperformed the markets.
the significant share of captive orders in the overall order book.
Exhibit 8: Infra stocks qoq returns (%)
long-term
Robust medium to long-term growth prospects: Infrastructure
(3.2) L&T
investments are projected to touch US $135bn p.a. during
(13.1) Simplex In.
(19.4) Sadbhav FY2011 and FY2012, registering 145% growth over the last
(10.1) NCC three year's annual spend of US $55bn. The Eleventh Five-Year
(16.8) MPL
(12.3) JAL
Plan missed projections by ~20% in the initial three years, and
(19.7) IVRCL Infra we believe that even if this performance is maintained, it would
(13.4) IRB Infra
(17.1) HCC
lead to huge opportunities for the infrastructure players. We
2.2 BSE Sensex believe the power, road and water segments will witness
(25.0) (20.0) (15.0) (10.0) (5.0) - 5.0 maximum traction.
Source: BSE, Angel Research
Overall, earnings momentum is expected to pick up in
Execution to pick up: One of the most, if not the only, positive 2HFY2011 on the back of strong order book and after the recent
outcomes from 1HFY2011 results has been traction in order underperformance by the stocks post the quarterly numbers,
inflow, leading to soaring order backlog levels. Most contractors the sector is attractively valued at 6-8x FY2012E earnings
saw good order inflow despite unexciting activity on the NHAI (excluding L&T). We prefer IVRCL Infra, NCC and ITNL; our
front, particularly during 2QFY2011. Further, with positive preference indicates our relative comfort on the execution, order
comments by managements of various companies coupled with book position, funding and valuations within the sector. We
Refer to important Disclosures at the end of the report 4
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
have valued the construction companies on SOTP basis, taking fuel security only from FY2016F onwards, given the minimum
conservative P/E multiples for the core construction business in 4-5 years that will be required to develop the mines as well as
the range of 10-14x (excluding L&T), valuing the listed the 1,500km+ rail lines to transport the same, posing its own
subsidiaries at 30% discount to CMP and unlisted subsidiaries set of execution risks.
at 1-1.5x book value. From the preferred stocks, we have
We believe that import of coal is not expected to solve the
included NCC in our model portfolio with 3% weightage.
problem of domestic coal shortage. While procuring imported
coal by itself is a challenging task, the problem is compounded
Power: Fuel security, not merchant power is the key
by the country's inability to handle imported coal.
India's domestic coal production is expected to post a CAGR of
8.6% over FY2010-15, as against a demand CAGR of 10.6% Key measures under implementation
during the period, resulting in huge deficit. We estimate India's Auction of coal blocks: The government has already cleared
thermal coal imports to grow from 25mmt in FY2010 to 107mmt the system of auctioning the coal blocks thereby replacing
in FY2015, increasing at a CAGR of 33.2% during the period. the current system of allocating coal blocks. This, we believe,
Currently, coal-based plants are facing fuel shortage due to: will bring in more private participation.
inadequate supply on the domestic front due to delays in New mining tax could be a drag: The government is
procurement of coal linkages proposing a mining tax of 26% to fund the compensation to
issues in obtaining environment clearances and other the local population affected by mining. While the proposed
regulatory approvals for developing captive coal blocks tax may undergo several changes before its potential
hurdles in expansion of the mines, and implementation, if implemented, it could raise the coal prices
logistical and infrastructural issues further.
MoEF's proposal to ban mining in forest land could affect
Exhibit 10: India coal imports
coal reserves: Identification of restricted areas will be based
120 107
on field studies of the forest cover and coal reserves. The
100
81 Ministry of Environment and Forests (MoEF) is currently in
(mn tonnes)
80
59 discussion with the Ministry of Coal (MoC) to consider the
60
41 possibility of diverting certain designated forest land for
40
25 28 mining activities. If the two ministries are not able to agree
20
with the proposed issue, it could further affect the output.
0
FY10 FY11E FY12E FY13E FY14E FY15E
Allowing private sector to sell coal from the allotted coal
blocks: If implemented, this would bring more private
Source: Ministry of Coal, Angel Research participation and companies with higher coal assets currently
As of now, 215 coal blocks have been allocated for captive would also stand to benefit.
mining, of which only 26 blocks are currently operational. Also, Domestic and international political risks: Many of the private
150 coal blocks have been classified in the no-go zone identified players have their projects dependent on the coal from
by the environment ministry. Moreover, ~90% of the coal blocks Indonesia. For instance, the contracted price of US $36 for the
allocated for power generation are situated in Naxalite-affected coal supplied by Adani Enterprises (AEL) to Adani Power is
areas, which is also hampering the mining activities. substantially lower than the prevailing market price of
With availability of coal key to profitability, many Indian Indonesian coal.
companies have acquired coal mines abroad to meet their fuel We doubt whether AEL can supply coal at such low rates, given
requirements. Tata Power acquired 30% stake in the Bumi coal that the Indonesian government is planning to tighten the laws
mines, which will provide it 11mtpa of coal for the Mundra regarding export of coal from the country. As per the new mining
project. JSW Energy will have access to ~20mtpa of captive laws, although the Indonesian government might not force the
coal in South Africa and Botswana through its acquisition of producers to sell coal at market prices, it may seek to determine
SACMH and CIC Energy (CIC). However, JSWE's move to acquire royalties and income tax payable based on the prices
CIC to gain access to 2.6bn tonnes of coal resources will provide benchmarked to the Indonesian Coal Index (ICI).
Refer to important Disclosures at the end of the report 5
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Increasing Naxalite insurgency in prime coal belts - A key Exhibit 11: Industry capacity utilisation and prices
FY11E utilisation down by 1,150bp ,
concern: The eastern states of Orissa, Jharkhand and 350
leading to a 8.3% fall in prices
120.0
300 100.0
Chattisgarh, which possess majority of the country's coal 250 prices
GR in 80.0
9%CA 05-10
reserves, have been rife with Naxalite activity. In fact, the Naxalite 200 over
FY
60.0
150
violence has been on a rise over the last few months, which is a 100
40.0
cause for concern. More such instances would hamper coal 50 20.0
mining activities and aggravate the domestic shortage.
0 0.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
Regulatory developments to track: We expect potential Effective Capacity (mtpa) -LHS Price (`/bag) - LHS
regulatory changes which are likely to incentivise higher private Utilisation (%) - RHS
sector participation. We expect some meaningful measures to Source: CMA, Angel Research
be introduced for faster execution, higher participation from
The cement players registered a collapse in EBITDA/tonne in
the private sector by allowing coal mine auctions and open
2QFY2011, touching its lowest level in the past seven years.
market sales from the captive coal mines. Also, expediting the
Margins are also expected to remain under pressure despite
regulatory clearances and reforms in the environment and forest
the marginal improvement in utilisation and prices (expected
clearances are the key monitorables to track over the next 3-6 months.
to witness a `10/bag increase in the next quarter) due to
Outlook on power sector: In our view, certain key factors such spiraling prices of coal and other raw materials like limestone,
as quantum of near-term capacity addition providing revenue fly ash, etc. In the near term, we expect players with a
visibility (and ability to profit from the high merchant rates), pan-India presence to post relatively better operating
execution capability, level of fuel security and degree of long- performance, though the smaller players, especially in the south
term off-take arrangements would separate our top picks from may continue to witness substantial pressure.
the rest of the players. NTPC, CESC and GIPCL are our top
Going ahead, we do not expect major capacity additions once
picks in the sector. However, in our model portfolio, we have nil
the current round of expansion in the sector gets completed.
weightage on the power sector owing to unexciting valuations,
This would improve the demand-supply dynamics post FY2013,
potential long-term supply overhang and uncertainties regarding
as we expect demand to regain its momentum. However, on
fuel linkages.
the valuation front, large cap cement players ACC, Ambuja
Cement: Oversupply situation to worsen, may be too and UltraTech are currently trading at expensive valuations of
soon for value-buying US $110-130/tonne owing to which we remain Neutral on them.
We have a Buy on India Cements, Madras Cements and
The cement sector has over the past three quarters suffered
JK Lakshmi Cement due to attractive valuations - EV/tonne in
due to subdued demand growth on the one hand and substantial
the range of US $37-80/tonne. However, in view of the poor
capacity additions on the other, which has in turn resulted in
numbers that these companies are likely to post in the
low utilisation levels and fall in prices. During the 8MFY2011
near term, we have not included any of them in our
period, all-India cement dispatches grew by a modest ~5%
model portfolio.
yoy as against ~10.5% CAGR recorded over FY2005-10.
However, effective cement capacity has increased by 55mtpa Banking: Margin worries replace NPA concerns, CASA
over the past 20 months (28mtpa during 8MFY2011) resulting holds key
in excess supply and pressure on prices. Utilisation levels, a
Back in August 2010 itself, we had sounded the warning bells
major indicator of the industry's performance, declined
that the deposit rates appeared set to rise in the coming quarters,
substantially and touched a low of 77% in 2QFY2011. As a
possibly faster than consensus, which would signal peaking of
result, cement prices, on an average, declined by `30/bag.
margins of the mid-sized banks and contribute to their
Moreover, an additional 11mtpa of effective capacity is expected
underperformance on the bourses. Since then, the gap between
to be commissioned in the remaining 4 months of FY2011 alone.
deposit and credit growth has further widened. Credit growth
has jumped to 23.7% yoy, which we have been pointing out is
best estimated by top-down demand analysis rather than
sector-by-sector estimation.
Refer to important Disclosures at the end of the report 6
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Credit growth robust: Despite concerns off-late regarding the Exhibit 12: Spike in short-term CP and CD rates
sluggishness in credit demand from the broader segments 10.0
ex-telecom, over the past one year though infrastructure 9.0
accounted for 29% of the incremental demand, most of the
(%)
8.0
other segments have also recorded 15%+ growth during the
period. Excluding the retail loans and loans to the real estate 7.0
sector, growth in other segments ex-infra (comprising 64% of
6.0
total non-food credit) was as high as 21.4%. Moreover, even in
case of retail loans, except for credit cards, ytd growth has been
3M CP 3M CD
strong in all other segments, including mortgages, car loans Source: Bloomberg, Angel Research
and education loans. The real estate segment has seen a 10.4%
ytd increase, after seeing de-growth over August 2009 - NPA concerns receding: Some of the PSU banks faced pressures
NPA
February 2010. Hence, credit growth has been fairly on the asset-quality front primarily due to switchover to
broad-based contrary to majority opinion. Banks have CBS-based NPA recognition. Going forward, these kinds of
incrementally lent more than `4,00,000cr ytd in FY2011, which pressures are likely for few other PSU banks as well. However,
is more than double the amount lent during the same period overall asset-quality pressures have evidently moderated. Total
last year. asset-weighted (FY2010) net NPAs for the sector have fallen
from the peak of 1.15% in 3QFY2010 to 1.09% in 2QFY2011.
Extremely tight liquidity:On the other hand, deposit growth has
liquidity:
Only 11 out of the 39 listed banks registered an increase in net
continuously lagged credit growth during April-December 2010.
NPA ratio in 2QFY2011 v/s 23 banks witnessing an increase in
YTD credit growth has been healthy at ~12.3%, while deposits
3QFY2010. The private banks, especially have witnessed a
have grown at ~6.0%, resulting in an incremental
substantial decline in net NPAs and provisioning expenses over
credit-to-deposit ratio of 147.8%. The mismatch between credit
the mentioned period.
and deposit growth exacerbated the system liquidity situation
with the liquidity adjustment facility (LAF) borrowings averaging NIM performance to be key monitorable going forward:
more than `91,000cr during the quarter. The liquidity situation Accordingly, going forward we believe that NIM progression
further worsened with advance tax outflows in December taking rather than asset quality will be the key monitorable for the
the LAF borrowings over `1,70,000cr. Consequently, the banking sector, having a major impact on divergence in stock
short-term commercial paper (CP) and certificate of deposit (CD) returns across the banking space. NIMs are likely to see
rates spiked by 190bp to 9.4% and 170bp to 8.9% respectively, moderate impact in 3QFY2010. The NIM compression is likely
during the quarter. to be especially front-ended in case of banks with higher reliance
on certificate of deposits (3-6 month tenure) as well as wholesale
The persistent tight liquidity situation and slower deposits growth
deposits (6-12 month tenure). Moreover, going forward, in case
prompted many banks to raise their fixed deposit interest rates
of banks with sub-30% CASA ratios, we expect NIM compression
aggressively by 50-150bp. Going forward, credit demand is
to be as much as 40-60bp over the next 4-6 quarters.
expected to sustain at least above the 19% level and central
Correspondingly, larger banks with high CASA ratios and robust
and state government borrowings are also expected to kick in.
branch expansion such as SBI, ICICI Bank, HDFC Bank and
Hence, to mobilise sufficient deposits to meet an estimated
Axis Bank are better placed to sustain or improve their NIMs
shortfall of about `50,000cr (post the `48,000cr RBI OMO) in
going forward. Monitoring CASA market share trends will
FY2011E and a further `1 lakh crore estimated shortfall in
remain one of the most important monitorables impacting
FY2012E, we believe banks will have to continue increasing
earnings growth.
the deposit rates over the coming quarters. Note that, while this
will also put upward pressure on lending rates, we believe rates
will remain below 2008 peak levels for the next six quarters,
and accordingly credit demand is unlikely to be hampered by
the same.
Refer to important Disclosures at the end of the report 7
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Hence, even post the sharp correction in most mid-sized banks, Segments worst affected by the import deluge have been
we prefer to invest in the mid-cap banks which have stronger construction equipment, machine tools, turbines and
CASA franchises such as J&K Bank and Dena Bank. Taking into transformers. The domestic power equipment manufacturers
account valuations, our top picks among the private large-cap
Exhibit 14: Import of capital goods
banks include ICICI Bank and Axis Bank; SBI and Union Bank
80,000
71,833
of India from the PSU large-cap banking universe; and Dena 70,111
Bank, IOB, J&K Bank and Federal Bank among the mid-cap 64,000
banks.
(USD mn)
47,069
48,000
37,666
Exhibit 13: High CASA, low investment book - Key to 32,000 25,135
ALM in rising rate scenario 13,498
18,279
16,000 9,882
70.0 7.0
60.0 6.0
0
50.0 5.0
40.0 4.0
Source: RBI, Angel Research
30.0 3.0
20.0 2.0
such as BHEL and L&T have been losing bulk of the orders to
10.0 1.0
- - their Chinese counterparts. Notable orders placed during the
current quarter include the Lanco Infratech order for supply of
SBI
BOI
OBC
AXSB
PNB
IOB
SIB
HDFCBK
ICICIBK
J&KBK
DENABK
UNBK
INDBK
FEDBK
UCOBK
CRPBK
YESBK
16 sets of 660MW power equipment to Harbin Power for
CASA (%) Inv/Dep (%) Duration (Years, RHS)
~`6,800cr, Abhijeet Projects for supply of 10 sets of 660MW
Source: Company, Angel Research
supercritical units to Dongfang Electric for ~USD 2.5bn
Capital Goods: Power segment experiencing China (~`11,500cr) and the Reliance Power order to Shanghai Electric
threat; niche leaders are a better bet for the supply of coal-fired power generators worth USD 8.3bn
(~`38,000cr). The above orders were placed when the domestic
Due to the relatively high intangible component in their business
power equipment industry was in the midst of expanding
models, we would normally place a high degree of preference
capacities to meet the growing demand. Besides, the power
for capital goods companies during an up- cycle.
transmission and distribution (T&D) segment has also seen
Macro-indicators, such as IIP and real GDP growth also point
serious competition from the Chinese and Korean majors.
to an imminent up-turn in the demand for capital goods. The
IIP numbers for October 2010 came in at a decent 10.8% as Key developments worth monitoring for the power segment will
compared to 6.9% and 4.4% for the previous two months, be any possible import duties being imposed by the government
respectively. Along with the strong 8.9% GDP growth reported on the Chinese equipment in the coming budget as well as
for the first half of the current fiscal, this should translate into a possible implications of a medium-term appreciation in the
pick-up in the investment cycle as robust corporate profit and Yuan. We believe there are merits to the thesis of such an
favourable financing conditions fuel investments. The current appreciation, which would be underpinned by China's evolving
quarter has also seen a narrowing of premium valuations in demographics of an aging population that no longer
the capital goods sector vis-à-vis the Sensex. necessitates the creation of a huge quantum of jobs like it needed
to create in the past couple of decades. But, given the
However, a big chunk of the Indian capital goods sector in the
near-term uncertainties, combined with the fact that valuations
listed space - mainly relating to power generation and T&D as
are not leaving much margin of safety even post the correction,
well as machine tools and equipment manufacturers catering
at this juncture, we have not accorded any weightage in our
to industrial demand - continues to be negatively impacted by
model portfolio to the conventional capital goods plays, relating
the increasing quantum of imports, especially from China.
to the power segment, such as BHEL.
Evidently, the persistent under-valuation of the Yuan and the
favourable duty structure under which the Chinese companies At the same time, in our view, some of the leaders in the niche
operate, have enabled them to flood the Indian markets with segments continue to offer attractive investment opportunities.
cheaper equipment. Specifically, we like Blue Star, one of the leaders in the
air-conditioning segment with a major portion of its revenue
Refer to important Disclosures at the end of the report 8
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
derived from the domestic segment, as well as Lakshmi Machine Exhibit 16: Order inflow, sales have started firming up
4,000
Works, the dominant leader in the textile machinery space.
3,500
Blue Star: Blue Star is one of the more attractive bets in the 3,000
2,500
capital goods space, set to post strong 25.7% CAGR in top-line
(` cr)
2,000
over FY2010-12E. Its largest segment, Electro Mechanical 1,500
Projects and Packaged Air-Conditioning Systems (EMPPACS), is 1,000
500
showing signs of revival. The key monitorable for Blue Star over
0
the next few quarters is its order inflow, with a thrust on when FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11*
business from the traditionally strong IT and Office Space Sales Order Inflow
segments starts improving. Another important monitorable is Source: Company, Angel Research; *Note: FY11 order inflow is for 1H only
the copper prices, especially as the company's margins have
been impacted by high input costs and copper is one of the Crude oil: Can it play spoilsport? We think that's
most important raw materials (we have factored margins to be unlikely
lower in FY2011 and FY2012 compared to FY2010 levels on
Crude price hit a 27-month high, rising past the US $90/bbl
account of this). That said, the stock has corrected significantly
in the recent past, providing sufficient margin of safety in our mark during the second fortnight of December 2010, boosted
by an unexpected surge in global demand (due to the cold
view from raw material price pressures.
weather in the northern hemisphere and higher-than-expected
Exhibit 15: Copper prices and Blue Star margins Chinese oil imports). This surge in demand has fueled the biggest
9000 12.0
three-week drop (by 19mnbbl since November 26, 2010) in
8000
7000
10.0
US crude stockpiles in more than a decade. Overall, the OECD
6000 8.0
oil stocks fell by 8.4mnbbl as indicated by the November 2010
($/tonne)
5000
(%)
6.0
4000 preliminary data.
3000 4.0
2000
2.0 Exhibit 17: Crude on the rise
1000
160
0 0.0
140
120
LME Copper Price (LHS) OPM (RHS)
100
(US$/bbl)
Source: Bloomberg, Company, Angel Research ; Note: Copper prices for 80
FY2011 are average for 9MFY2011
60
Lakshmi Machine Works: Lakshmi Machine Works (LMW) is
Works: 40
20
currently at the beginning of a strong up-cycle, indicated by
0
significantly higher order inflow over the past two quarters and
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
firm demand across the textile industry. The company currently
Source: Bloomberg, Angel Research
has a strong order book with a delivery period of 10-12 months.
We expect this strong order book to translate into higher sales Stockpiles fell despite the global oil supply increasing by
over the coming quarters, including 3QFY2011, with standalone 0.4mnbpd mom to 88.1mnbpd (highest-ever level) in
top-line expected to grow to `2,368cr by FY2012E. The November, largely due to increased non-OPEC production
company's ability to achieve this top-line would depend on the (53.4mnbpd, up 0.3mnbpd versus October levels), notably from
order inflow and quarterly execution run-rate over the next six Canada, Kazakhstan and Brazil. With demand exceeding
quarters, which remain the key monitorables. In the past, the production, as indicated in the falling crude stockpiles, crude
company recorded highest quarterly sales of `604cr in prices ruled firm during the quarter at US $80-90/bbl as against
4QFY2008. LMW will have to achieve a comparable average US $71-82/bbl in 2QFY2011. On an average, crude prices
quarterly top-line in FY2012 to perform as per our estimates. rose by 12% during the quarter backed by gains in crude price
On the valuation front, owing to the recent correction the stock seen in the second half of the quarter. With this rise, crude oil
is available at attractive valuations of 12.8x FY2012E EPS. LMW has soared by a substantial ~39% since hitting a CY2010 low
is one of our top picks in the capital goods space. of US $66/bbl in May.
Refer to important Disclosures at the end of the report 9
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Despite this recent sharp run up in crude price, we expect crude strong spending on services like package implementation and
price to average around US $80/bbl in FY2011 and around engineering. This has led to return of the large, multi-year
US $80-85/bbl in FY2012 on expectations of lower demand transformational deals, with total contract value (TCV) of US
growth next fiscal vis-à-vis the current one due to the sedate $100-800mn thereby strengthening the deal pipeline for the IT
nature of the global economic recovery. Moreover, going ahead, companies. In 3QFY2011, on the back of strong volume growth,
non-OPEC supply is expected to average 52.8mnbpd in stable pricing and favourable cross-currency movement, we
CY2010 and 53.4mnbpd in CY2011, representing a growth expect dollar revenues to surge 6.0-8.7% qoq for tier-I IT
of 1.1mnbpd and 0.6mnbpd, respectively. The OPEC supply companies. Moreover, we expect Infosys to revise its revenue
for CY2011 is estimated at 29.5mnbpd and OPEC natural gas growth guidance upwards for FY2011 from the previous
24-25% to 27-28% yoy.
liquid output is expected to average 5.3mnbpd in CY2010 and
5.8mnbpd in CY2011 on higher demand projections. Exhibit 18: Revenue growth trend (USD)
At estimated levels of crude price of about US $80-85/bbl in 14
10
FY2012 and based on IMF's projection of global GDP touching 6
(% qoq)
US $65.5tn in CY2011, the weightage of crude consumption 2
in global GDP would remain comfortably below 5%, and not (2)
(6)
act as a deterrent to growth, in our view. We believe that only
(10)
above US $105-110/bbl, the crude prices may start becoming
1QFY11
2QFY11
2QFY09
3QFY09
4QFY09
3QFY11E
3QFY08
4QFY08
3QFY08
1QFY10
2QFY10
3QFY10
4QFY10
a cause for concern.
Exports: Structural and cyclical tailwinds Infosys TCS HCL Tech Wipro
Source: Company, Angel Research
In the export sectors, the growth in the past year has generally
been strong and outlook for the coming quarters is also On the back of upbeat outlook, companies like Infosys and
TCS have raised their hiring guidance for FY2011 from 30,000
encouraging. Within exports, we believe that the software sector
to 40,000 and 36,000 to 50,000, respectively. This envisages
remains an attractive bet, underpinned by strong hiring pipeline
and 20%+ revenue growth expectations (in dollar terms) in the the strong deal pipeline foreseen by companies. Going forward,
we expect volume growth momentum to sustain at 5-6% CQGR
next two years. However, valuations leave only limited upsides
for the tier-I companies. The IT players are now looking at
in the front-line IT companies, and it is in the next-rung that we
find several companies trading at unjustifiably high discounts planned hiring to address the strengthening demand pipeline.
We expect the hiring trend to remain upbeat, with Infosys and
to the front-liners owing to which we have an overweight stance
TCS expected to have hired ~7,268 and ~13,837 employees
on them. While at the current juncture the pharma sector is
looking fundamentally strong, valuations are fair. Hence, we in 3QFY2011, respectively.
have included only Cipla in our model portfolio and have an In 2QFY2011, attrition levels had shot up to pre-recessionary
underweight stance on pharma vis-à-vis the BSE-100. levels of FY2008, as companies were flocking for people
IT: Growth back with a bang everywhere to map the sudden surge in demand. However,
going forward, we expect these rates to normalise as strong
The Indian IT sector is riding the wave of global recovery. Most campus hiring carried out by these companies will create a
tier-I IT companies are outperforming revenue growth stable bench, map any surge in demand and abate poaching
expectations by a fair margin, led by strong volume growth. of laterals. Accordingly, we do not expect attrition to be a
The companies witnessed volume growth reaching 6.6-11.2% spoilsport anymore, though it will remain a key monitorable
levels qoq in 2QFY2011, which were last seen during the especially for the mid-sized IT companies that have been bearing
pre-slowdown phase. This surge in volumes in 1HFY2011 can the brunt of lateral hiring by the larger companies.
be attributed to the return of spending on discretionary IT services
In 4QCY2010 till date, the rupee has appreciated by 3.5%
by clients.
against the USD over 3QCY2010, on the back of FII inflows
Growth is not just restricted to the anchor BFSI segment, but witnessed over the past one-and-a-half month. We believe this
has been broad-based, with retail as well as the once troubled is a temporary phase as India's high current account deficit
verticals like manufacturing reverting to growth trajectory, with (expected to touch 3.5-4% of GDP in FY2011) is not expected
Refer to important Disclosures at the end of the report 10
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
to support a strong rupee in the medium term and the RBI's Mphasis: For 1QFY2011, Mphasis is expected to record a strong
intervention is likely. Thus, we have taken a moderate USD/INR volume growth of 5% qoq on the back of robust demand seen
assumption of 45.5 and 44.5 for FY2011 and FY2012 in both the application and ITO businesses, having open billable
respectively, and do not expect the rupee to play spoilsport to positions of 1,600-plus and 800-plus to be filled in, respectively.
our positive outlook for the IT sector. TCS, Infosys and HCL Tech The company has been outperforming on the revenue front in
are our preferred picks in the large-cap space, of which we the mid-tier space, recording 6% CQGR in revenues vis-à-vis
have allocated equal-weight to TCS in our model portfolio. 7% CQGR recorded by tier-I companies like TCS and Infosys.
Among the mid caps, we prefer Mphasis and Tech Mahindra The company survived the semi-annual pricing renegotiation
due to the steep discounts at which they are currently trading rounds with HP very well. Around 28% of the company's business
vis-à-vis the tier-I IT companies, despite having growth which includes the migration and internal work of HP has already
comparable to them. been moved to the fixed rate card with rates lower than most of
the other offshore players, leaving little downside going forward.
Tech Mahindra: In 3QFY2011, Tech Mahindra is expected to
Also, the pricing for its go-to-market business (44% of revenues)
record a strong growth of 6% qoq in its non-BT accounts, while
continues to be market driven. Hence, we do not foresee any
revenue from BT is expected to be flat despite BT decreasing
pricing cuts going forward. The company is currently trading at
the outsourcing spends globally, as it has committed volumes
a steep discount of over 52% to Infosys (vis-à-vis its historical
to Tech Mahindra. Also, the cross-currency movement has
discount of 25-30%) despite profitability better than likes of HCL
proved favourable for the company, with GBP and Euro
Tech and Wipro coupled with growth also comparable to them.
appreciating by 1.9% and 5.4% qoq respectively, and expected
Hence, we recommend a Buy on the stock, with a Target Price
to aid dollar revenues further by 1.5%. Management foresees
of `862, based on 15x FY2012E EPS.
strong growth in telecom service providers (TSP) accounts in the
emerging markets for new roll outs and in the US to gain Exhibit 20: Mphasis trading at unjustified discount
competitive advantage by enriching the end-users' experience. (C
Sales (CAGR %)
%) EBIDTA Margin (%)
EBIDTA P/E (x)
We expect the company to post 12% CAGR in dollar revenues FY2010-12E FY2012E FY2012E
over FY2010-12. The stock underperformed in the past due to Infosys 22.8 31.7 24.2
uncertainty related to Mahindra Satyam's financial health, which TCS 22.2 28.5 24.1
is now behind us. At current levels, the stock is trading at 7.6x Wipro 15.7 21.6 20.2
FY2012E EPS of `55.1 (excluding Satyam) i.e. at a discount of HCL Tech 24.6 17.9 14.5
more than 68% to the benchmark Infosys, which is unjustified Mphasis 18.3 23.0 11.7
in our view. Hence, we recommend a Buy on the stock, with a Source: Company, Angel Research
SOTP-based Target Price of `866, valuing the standalone
Consumption: Strong business dynamics, few
business at 12x FY2012E EPS and adding the stake of Satyam
stocks to play it
with a holding discount of 20% to the current market cap.
Looking at the domestic consumption sectors, FMCG valuations
Exhibit 19: Growth in non-BT accounts
are not available within an attractive range to take a materially
160 18
15.9 150 overweight stance. On the other hand, real estate remains a
137 140 138
140
14
high beta sector, with its own set of transparency issues. That
118
said, several real estate stocks are trading at well below book
($ mn)
10
8.3
(%)
120 8.2
6 values that reflect the large land banks at historical cost. This,
100
1.9 2 in our view, provides substantial margin of safety, though
(1.1) company-specific parameters such as execution and leverage
80 (2)
2QFY10 3QFY10 4QFY10 1QFY11 2QFY11
and macro parameters like interest rates and property prices
Non BT ($ mn) qoq growth (%)
will remain critical monitorables. In auto and auto ancillaries,
Source: Company, Angel Research we continue to believe that there is strong visibility of 15%+
volume growth for many years to come, which justifies an
overweight stance on the sector, especially considering that front-
line stocks such as Maruti are trading at a discount to the Sensex,
even though both growth and RoE are expected to be better
than the Sensex.
Refer to important Disclosures at the end of the report 11
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Real Estate: Low debt, dirt-cheap valuations provide Exhibit 21: Top-10 cities residential absorption trend
selective value-buying opportunities 70,000 150
60,000
50,000 100
We are positive on the long-term outlook of the real estate sector
(Units)
40,000
(%)
50
on the back of growing disposable income, shortage of 2.5cr 30,000
20,000
houses in India and reasonable affordability. Given the current 10,000
0
scenario, we expect stability in the residential prices with the 0 (50)
3QCY09+
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
4QCY09
1QCY10
2QCY10
exception of certain micro markets, where prices have
overheated. We also expect an uptick in the commercial segment
over the next twelve months. Absorption (LHS) yoy growth (RHS)
Source: Company, Angel Research
The risk-reward ratio is turning favourable for the sector, with
recovery widening towards tier-II and tier-III cities in the Exhibit 22: Commercial rentals stabilising
residential segment. The recent moves by the RBI to curb 150
140
speculation by tightening capital and provisioning norms as
(Monthly Rental Index)
130
well as stipulating maximum 80% loan-to-value will lead to 120
110
higher interest rates and could further hit affordability in the 100
90
`1cr and above segment. Having said that, we believe higher 80
70
absorption, not price appreciation, will drive residential growth 60
over the next six quarters. New launches have been rewarding
1QCY07
2QCY07
3QCY07
4QCY07
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
2QCY10
3QCY10
for the developers who have launched projects at 10-15%
discount to the ongoing market rates. For instance, HDIL has Gurgaon Bangalore Mumbai
been able to pre-sell 75% of its residential projects (7mn sq.ft.) Source: Cushman & Wakefield, Angel Research
launched since FY2009, thereby providing `5,000cr of revenue
visibility over FY2010-12E. High inventory is still hampering Midcaps: The quest for Alpha
commercial recovery; however, there has been uptick in
Midcaps across the board have witnessed selling pressure as a
absorption levels. We expect rentals to remain firm at current
plethora of scams have hit sentiment. Nonetheless, this has
levels, with uptick apparent over the next twelve months.
thrown up investment opportunities in quality businesses with
For 3QFY2011, volumes are expected to be flat to moderate good corporate governance standards. Accordingly, for the rest
on a sequential basis on account of festive demand. Revenue of our portfolio, we prefer to take a stock-specific approach
of the real estate companies will largely be driven by execution and identify Alpha stocks - either high RoE businesses or deep
of existing projects and new launches. Among our universe of value stocks. This list presently includes companies like Jagran
stocks, we prefer companies with strong near-term cash flow Prakashan, United Phosphorus, Taj GVK, Surya Roshni, Greenply
visibility, low leverage and strong project pipeline. Our top picks and CRISIL, among others. Below, we set out the near-term
are HDIL and ARIL, which are trading at 53% and 49% discount trends, developments and key monitorables that are likely to
to their NAVs respectively, and are both having negligible to affect the performance of these companies, even as the
low levels of debt. Even in terms of book value, both these one-to-two-year outlook for each of them is quite promising.
stocks are trading at well below their book values, providing
Greenply: Greenply Industries (GIL) has posted lacklustre
substantial margin of safety. However, execution remains a key
performance over the last two quarters on account of the delay
monitorable, apart from the macro risks to demand from rising
in commencement of production at its new MDF unit, which
interest rates and property prices.
was slated to commence production in 1QFY2011.
Consequently, GIL saw an increase in depreciation and interest
costs without commensurate revenue contribution, resulting in
erosion of margins.
With the new laminate capacity running at almost full capacity
on the back of strong demand, we expect GIL to post robust
top-line for 3QFY2011 and 4QFY2011. The existing laminate
and plywood capacity is also operating at 115%+ capacity
Refer to important Disclosures at the end of the report 12
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
utilisation. However, the MDF unit, which commenced production depend on the key monitorables of capacity utilisation and
in mid-3QFY2011, is expected to contribute to top-line from market share. We expect capacity utilisation across its major
4QFY2011 onwards. Thus, profit would remain subdued in products to be in the range of 85-90% in FY2012. Margins are
3QFY2011 and improve qoq in 4QFY2011. Further, the also expected to expand, based on higher contribution from
company proposes to increase its plywood capacity by 3.75mn the lighting division. Owing to attractive valuations of 5.3x
sq ft in 4QFY2011, which would augment 1QFY2012 revenues. FY2012E EPS, we maintain a Buy on Surya Roshni.
We like GIL because of its leadership position, largest distribution United Phosphorus: After a year of drought, good monsoons
network across India, strong demand for its existing products. in 2QFY2011 brought back the much needed cheer across the
Moreover, the new MDF segment is expected to contribute different sectors of the economy. This euphoria was however,
`350cr at full capacity. Given that 80% of India's MDF demand short-lived as rainfall continued across the country during
is met through imports, going ahead a substantial portion of October and November as well causing crop destruction in
the same is expected to be replaced by GIL. Currently, the stock many of the key agri states. Hence, 3QFY2011 is expected to
is trading at attractive valuations of 5.8x FY2012E EPS v/s its be muted for the agrichemical companies, compared to the
historical median of 10x one-year forward earnings, providing growth witnessed in 2QFY2011 and 3QFY2010. As for the
a strong margin of safety. The key monitorable remains how international markets (US and EU), winter has set in and the
soon the company scales up its MDF operation. time and inventories of the agrichemical players at the retail
level have fallen to near pre-crisis levels. However, hereon, end
Exhibit 23: Segment-wise sales outlook of the winter season would be the key determinant for the
2,000 60 international segment's performance in 4QFY2011.
50
1,500
40 Against the backdrop, we expect United Phosphorus (UPL) to
(` cr)
scale down its FY2011 guidance, and have accordingly pruned
(%)
848
1,000 30
703
655 207 20 our earnings estimates. On the bourses too on account of these
500 544 72
276
391
479 514 10 developments, the stock has corrected by a more than justified
182 217 267 312
- - 25% from its recent highs. But, the fact remains that UPL is
FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
amongst the top-five generic agrichemical manufacturers in
Decorative Laminates MDF Board
Plywood & Allied Products Total Revenue Growth (RHS) the world. The company has a sound acquisition strategy, backed
Source: Company, Angel Research by a robust balance sheet along with a cash pile of `2,000cr,
which makes it one of the fastest growing global agrichemical
Surya Roshni: Surya Roshni is well positioned for growth over
companies amongst its peers. Given the recent correction in
the next few years, after expanding capacities across its entire
the stock price and attractive valuations of 11.4x FY2012E EPS
range of products. Going ahead, we expect the benefits from
(post downward adjustment to our earnings estimate), UPL
these expanded capacities to start kicking in, as the company
remains our preferred pick in the agrichemical space.
ramps up the capacity utilisation rate. We also expect the
company to increase its market share in the lighting space, Taj GVK: TajGVK appears set to make the most of the rebound
GVK:
especially CFLs, to 14.0% in FY2012, and post a CAGR of 23.8% that the hotel industry is currently witnessing on the back of an
in top-line over FY2010-12E. Over the coming quarters, increase in foreign tourist arrivals and the economy getting back
including 3QFY2011, the company's performance would on track. With demand growth (13% CAGR over FY2010-13E)
outstripping supply (10.8% CAGR over FY2010-13E), we expect
Exhibit 24: Promoters' shareholding to increase to 60% business destinations like Hyderabad and Chennai where
Promoters' TAJGVK has a presence, to significantly benefit. Overall, we
shareholding (%) expect TajGVK to post 20.7% CAGR in sales during the
Warrant Conversion Amount Before After
mentioned period on the back of an increase in average
allocation date (` (`
price (`/share) invested (` cr) conv.
conv. conv.
conv.
occupancy rates (OR) and average room rates (ARR). We expect
Dec. 14, 2009 59 37.8 24.1 39.1
the company's 3QFY2011 performance to be strong, as the
Jul. 12, 2010 83 94.9 39.1 55.0 third quarter is the "on" season for hotels in India. Besides, tourist
Oct. 22, 2010 111 60.8 55.0 60.0 inflows during the quarter have been strong. Major upside or
Source: Company, Angel Research downside to our target valuations are dependent on the trend
in occupancy rates and average room rates v/s our estimates.
Refer to important Disclosures at the end of the report 13
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Exhibit 25: ARR, OR expected to strengthen Prakashan:
Jagran Prakashan: The recent IRS 2010 (Q3) re-iterates the
8,500 80.0
leadership position of Jagran Prakashan (JPL) amongst the print
8,000
75.0
dailies, indicating a strong presence in the Hindi market. This
7,500
70.0 in our opinion will help JPL to garner high advertisement
(` cr)
revenue. It is expected that the vernacular print space will record
(%)
65.0
7,000
60.0 14% CAGR in advertisement revenues over FY2010-13 driven
6,500
55.0 by higher ad-spends in tier II/III towns on account of increased
6,000 50.0 per capita income. We expect JPL to register 16% CAGR over
FY07 FY08 FY09 FY10 FY11E FY12E the same period.
ARR (LHS) Average OR (RHS)
Source: Company, Angel Research For 3QFY2011, we expect JPL to derive strong advertising
revenue owing to the festive season, up-tick in the economy
CRISIL: CRISIL has witnessed strong growth in the three quarters
CRISIL: and rising colour ad-inventory. Lower losses in nascent
of CY2010, with the highest yoy growth reported in 3QCY2010 businesses and higher operating leverage will benefit JPL's gross
on the back of strong credit off-take and improvement in the margins. However, we expect this benefit to gross margins to
global economic conditions. Operating margins however, took be offset by rising prices of newsprint. While we have not factored
a hit in the first two quarters owing to forex losses and high the Mid-Day deal in JPL's numbers, we expect the deal to be
expenses arising from relocation of operations. Margins reverted
earnings accretive by ~2% in FY2011. Moreover, with
to normal in 3QCY2010 setting the pace for ensuing quarters.
Blackstone's recent investment of `225cr and a wider portfolio
CRISIL is expected to leverage its expertise in ramping up (including Mid-Day's publications), we believe that Jagran is
business of the recently acquired Pipal Research Corp., (in well poised to benefit from steady growth in the print media
September 2010). This is expected to lend a boost to the sector. We believe that the recent underperformance of the stock
company's 4QCY2010 revenues as synergies come to play. Also, and attractive valuations of ~14x FY2013E EPS, provides a
we expect margins to remain stable from 4QCY2010 onwards. good entry point for investors.
Thus, overall the strong growth in credit demand, large untapped
bank loan rating market, the Pipal acquisition and strong infra Finolex Cables: Finolex Cables is poised for strong growth in
spend combined are expected to boost the company's overall the years to come, as it continues to witness strong demand in
performance. the low-tension cables segment, backed by an entry into the
high-tension cables segment. We expect the company to clock
We like CRISIL, as it is market leader in all its segments, is set to
23.2% CAGR in revenues over FY2010-12. In the medium term,
reap the benefits from an improving economy and register
despite the top-line growth momentum expected to sustain,
strong growth going ahead. On the bourses, the stock is currently
concerns remain on the high copper prices and forex losses
trading at attractive valuations of 17.3x CY2012 earnings, which
front. The company has been unable to pass on the high copper
is close to the lower-end of its historical range of 16.4-29.9x
prices, which are ruling at their all-time peak levels at the LME,
one-year forward earnings. Apart from macro-factors such as
sustained credit demand and infra spend, the key monitorables thus taking a hit on margins. We expect 3QFY2011 also to
will be the scaling up of Pipal operations and the continued witness subdued albeit sequentially higher margins, as the
ramp-up in bank loan ratings as the company increasingly looks copper prices continued to scale new heights through the quarter.
to tap into the mid and small-corporates. Forex losses are also expected to continue till FY2013, though
diminishing every year. For 3QFY2011, we expect the company
Exhibit 26: Segment-wise sales outlook to book around `10cr of forex losses. Currently, the stock is
1,000 45
900 40
trading at attractive valuations of 5.9x FY2012E EPS, providing
800 35 a strong factor of safety, even as the copper prices and forex
700 427
30
losses remain key monitorables.
(` cr)
600 352 25
(%)
500 286 75 20
400 226 238
62
300 168 51 15
100 60
200 425 10
107 353
239 292 5
100 189
130
- 0
CY07 CY08 CY09 CY10E CY11E CY12E
Rating Advisory Research Total Revenue Growth (RHS)
Source: Company, Angel Research
Refer to important Disclosures at the end of the report 14
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Exhibit 27: Derivative losses expected to taper off The capital goods sector is expected to report a strong 27%
120 growth in top-line. However, net profit growth is expected to
100 be subdued due to margin compression by 131bp. The BFSI,
80 FMCG and IT sectors are expected to report growth rates
(` cr)
similar to the Sensex. Top-line growth of BFSI sector is
60
expected to come in at 18%, while a 15bp increase in OPM
40
would result in 22% yoy increase in bottom-line. The FMCG
20 companies are set to post 16% yoy growth in top-line, driven
0 primarily by robust volumes. On the bottom-line front,
FY06 FY07 FY08 FY09 FY10 FY11E FY12E
growth is expected to be 14%. The IT sector is expected to
Source: Company, Angel Research
post 25% yoy growth during the quarter, primarily driven by
3QFY2011 Sensex earnings outlook higher volumes and favourable cross-currency movements.
However, high wage inflation would exert pressure on
For 3QFY2011, we expect the Sensex companies to report a margins, which are expected to decline by 140bp. Overall,
robust 19% yoy performance on the sales front. On the the IT companies are expected report earnings growth of
bottom-line front, the performance is expected to be even better, 17% for the quarter under review.
with a yoy growth of 26%. However, operating margins are
expected to remain more or less flat for the quarter and increase During 3QFY2011, the telecom and power sectors are
by a mere 8bp. Overall, we expect OPM to come in at 21.7%, expected to be the main underperformers, despite strong
while NPM is expected to increase to 11.7% vis-à-vis 11.1% for top-line growth. Telecom is expected to report a strong 35%
the corresponding period of the previous year. yoy increase in sales, partially because of the inclusion of
Zain's numbers in Bharti's accounts. However, owing to a
The oil and gas, auto and metals sectors are set to post 413bp decline in OPM resulting from the price wars that
robust numbers for 3QFY2011. The oil and gas sector is have intensified, bottom-line is expected to reduce sharply
expected to be the major contributor to the growth in Sensex by 44%. The decline in margins is expected to hit the power
sales and profit, with a 20% and 47% growth in sales and sector too. Net profit is expected to remain flat despite a
profit respectively, mainly on the back of the 80bp expansion 24% increase in top-line, as margins are expected to correct
in margins and 79% increase in profit of ONGC. Ex-oil and by 347bp owing to low merchant power rates and high fuel
gas, growth in Sensex sales and earnings is expected to be cost.
13.8% and 17.2%, respectively. The auto companies are
expected to report 69% yoy increase in net profit in In the pharmaceutical sector, Cipla is expected to report a
3QFY2011, led mainly by Tata Motors, which is expected to 9% decline in net profit, as margins decline by 70bp.
report a 146bp increase in OPM and 195% rise in net profit. Similarly, DLF, the only real estate sector representative on
Overall, the auto sector is expected to report 18% growth in the Sensex, is expected to be impacted by a higher debt
sales for the quarter. Metals are expected to report 52% burden and report flat profit growth despite a strong 25%
jump in net profit, despite the mere11% yoy increase in growth in top-line. JP Associates in the construction sector is
top-line, mainly on account of margin expansion. We expect expected to report a substantial 218% spike in profit for
overall OPM of the sector to come in at 14.8% 3QFY2011.
for 3QFY2011.
Refer to important Disclosures at the end of the report 15
Preview
3QFY2011 Results Preview | January 3, 2011
Strategy
Exhibit 28: Quarterly earnings trend for Sensex companies
(`
Net Sales (` cr) Profit (`
Net Profit (` cr) Weightage % Contribution
Company 3QFY2011E 3QFY2010 % chg 3QFY2011E 3QFY2010 % chg (%) to Sensex growth
RIL 68,347 56,856 20.2 5,535 4,008 38.1 11.7 20.1
Tata Steel 27,800 26,069 6.6 1,392 610 128.4 2.6 13.1
Sterlite 7,143 6,677 7.0 1,147 1,005 14.1 1.9 1.7
Tata Motors 28,720 25,980 10.5 1,920 650 195.3 2.7 19.8
ONGC 18,488 15,506 19.2 5,475 3,054 79.3 3.4 11.6
ICICIBK 3,920 3,731 5.1 1,353 1,101 22.9 8.1 6.0
BHEL 9,398 7,229 30.0 1,135 1,073 5.8 2.4 0.5
ITC 5,388 4,532 18.9 1,341 1,144 17.2 5.8 3.3
JP Associates 3,616 2,964 22.0 328 103 218.1 0.8 3.0
HDFCBK 3,708 3,077 20.5 1,091 819 33.3 5.3 5.2
Maruti Suzuki 9,518 7,334 29.8 601 688 (12.6) 1.3 (0.9)
TCS 9,680 7,650 26.5 2,197 1,797 22.2 4.2 2.9
Hindalco 17,749 15,136 17.3 606 455 33.1 2.0 2.5
DLF 2,536 2,026 25.2 475 468 1.4 0.8 0.0
M&M 5,972 4,479 33.3 611 424 44.1 2.1 3.4
Bajaj Auto 3,951 3,166 24.8 596 475 25.4 1.4 1.5
Hero Honda 4,927 3,814 29.2 548 536 2.2 1.2 0.1
Wipro 7,972 6,977 14.3 1,348 1,203 12.0 1.8 0.9
Cipla 1,552 1,344 15.4 261 289 (9.5) 1.2 (0.4)
Reliance Infra 3,450 2,287 50.9 299 277 7.8 0.8 0.3
L&T 10,202 8,071 26.4 720 696 3.4 6.6 1.7
Infosys 7,292 5,741 27.0 1,815 1,559 16.4 10.3 5.2
Bharti Airtel 15,787 10,305 53.2 1,535 2,195 (30.1) 2.9 (5.5)
HUL 5,023 4,504 11.5 699 649 7.7 2.1 0.6
HDFC 1,195 1,053 13.5 796 671 18.5 5.9 2.7
Jindal Steel 3,458 2,675 29.3 1,116 874 27.6 1.8 2.6
SBI 12,412 9,682 28.2 2,911 2,479 17.4 4.9 4.7
NTPC 13,277 11,708 13.4 2,132 2,365 (9.8) 2.0 (1.1)
Tata Power 1,723 1,556 10.8 216 148 46.3 1.4 1.1
RCOM 5,301 5,284 0.3 311 1,130 (72.5) 0.6 (6.9)
Total 319,505 267,412 19.5 40,509 32,944 23.0 100.0 100.0
Sensex # 18.7 25.6
Source: Angel Research; Note: Sensex sales and earnings growth based on free-float weightages
#
Refer to important Disclosures at the end of the report 16
Preview
3QFY2011 Results Preview | January 3, 2011
Angel Research Model Portfolio
BSE-100 Angel
Sector Company CMP (`) Target Price (`) Weightage (%) Weightage (%) Stance
Consumption 15.2 14.0
FMCG 7.5 3.0 Underweight
ITC 175 177 4.1 3.0 Underweight
Auto & Ancillaries 6.6 8.0 Overweight
Maruti Suzuki 1,421 1,654 0.9 3.0 Overweight
Ceat 134 200 0.0 3.0 Overweight
Fag Bearing 879 1,035 0.0 2.0 Overweight
Real Estate 1.1 3.0 Overweight
HDIL 194 302 0.0 3.0 Overweight
Domestic Industry 64.3 56.0
BFSI 25.5 31.0 Overweight
SBI 2,811 3,500 3.5 5.0 Overweight
Axis Bank 1,350 1,678 1.6 6.0 Overweight
ICICI Bank 1,145 1,332 5.7 10.0 Overweight
HDFC Bank 2,347 2,501 3.8 4.0 Equalweight
CRISIL 6,040 7,584 0.0 3.0 Overweight
J&K Bank 776 1,063 0.0 3.0 Overweight
Oil & Gas 13.6 10.0 Underweight
Reliance Industries 1,058 1,260 8.3 10.0 Overweight
Metals 8.6 0.0 Underweight
Capital Goods 7.8 12.0 Overweight
Bluestar 437 565 0.0 4.0 Overweight
L&T 1,979 2,024 4.7 5.0 Equalweight
LMW 2,462 2,977 0.0 3.0 Overweight
Power 3.9 0.0 Underweight
Infrastructure 2.6 3.0 Overweight
Nagarjuna Construction 141 196 0.0 3.0 Overweight
Cement 2.2 0.0 Underweight
Exports 16.6 16.0
Software 12.1 13.0 Overweight
TCS 1,165 1,208 3.0 3.0 Equalweight
Tech Mahindra 702 866 0.0 4.0 Overweight
Mphasis 673 862 0.0 6.0 Overweight
Pharma 4.4 3.0 Underweight
Cipla 370 388 0.8 3.0 Overweight
Others 4.0 14.0
Hotels 0.2 3.0 Overweight
Taj GVK 133 228 0.0 3.0 Overweight
Media 0.4 3.0 Overweight
Jagran Prakashan 132 185 0.0 3.0 Overweight
Telecom 2.8 0.0 Underweight
Others 0.5 8.0 Overweight
United Phosporus 173 198 0.3 2.0 Overweight
Finolex Cables 54 82 0.0 2.0 Overweight
Greenply 192 266 0.0 2.0 Overweight
Surya Roshni 105 143 0.0 2.0 Overweight
Refer to important Disclosures at the end of the report 17
Preview
3QFY2011 Results Preview | January 3, 2011
3QFY2011 Sectoral Outlook
Refer to important Disclosures at the end of the report 18
Preview
3QFY2011 Results Preview | January 3, 2011
Automobile
For 3QFY2011, we expect our auto universe to post a strong the fiscal deficit has led to a substantial increase in petrol prices
net sales growth of ~27% yoy, aided by robust ~26% yoy volume since June 2010. Petrol and diesel prices were hiked by
growth (due to increased production by most players to meet `8.59/litre and `5.36/litre in CY2010. This should have a direct
high festive demand) across product segments. Revenue growth impact on ownership cost and freight operators' profitability,
is expected to be led by Maruti (strong domestic volume offtake and could moderately impact auto volume growth in the medium
due to the festival season), Mahindra & Mahindra (M&M, robust term. For 3QFY2011, commodity prices in general have
tractor sales due to the festive season and post-harvesting witnessed an upward trend, with prices of key raw materials,
period), Hero Honda (HH, healthy volume growth) and Bajaj steel and aluminum, increasing by 6-15% yoy. Rubber and lead
Auto (BAL, increased capacity and low base effect). We expect prices also rose by ~65% and ~4% yoy during the quarter.
Ashok Leyland (ALL) to emerge as a laggard in terms of revenue Further, around 10-12% yoy increase in average international
growth as commercial vehicle (CV) sales moderated during the crude oil prices during 3QFY2011 has had an impact on
quarter due to pre-buying ahead of emission norm changes transportation costs for all the companies in our auto universe.
from October 2010 and production constraints of Auto index outperforms the Sensex
BS III vehicles. For most companies, the focus continues to be
The auto index posted gains of 7.4% during 3QFY2011 versus
on volume growth. Going ahead, near-term volume growth
2.2% gains for the Sensex, outperforming it by 5.2%. The upturn
would be tapered off due to the high base effect of 2HFY2010
in volume witnessed in 1HFY2011 continued during 3QFY2011,
and an increase in financing cost; while in the long run, we
albeit at a slightly lower pace, on the back of positive consumer
expect sales momentum to continue, aided by healthy consumer
sentiment and healthy festival demand. Further, advanced
sentiment, rising income levels, easy availability of finance and
buying in anticipation of the expected price increases from
success of new product launches.
January 2011 due to higher input costs also boosted volume
Rising raw-material costs pose margin pressure growth to a certain extent during the quarter. The auto sector
The auto industry is expected to face margin pressure as input has turned out to be a star performer since FY2010, while,
costs spiraled during the quarter. Prices of major raw materials going forward, concerns over rising input cost, higher cost of
such as steel, aluminum, plastic and rubber witnessed average finance and rising inflation could act as headwinds for the
increases of ~6.5%, ~15%, ~16.5% and ~65.2% yoy, industry's volume growth. Heavyweights, Tata Motors and M&M
respectively, during 3QFY2011. However, cost-reduction outperformed the auto index by 11.6% and 4.7%, respectively,
initiatives, improved operating leverage and price increases will during 3QFY2011. However, other heavyweights such as Maruti,
dilute the impact of input cost inflation to some extent. We expect HH, Bajaj Auto and Apollo Tyres underperformed in 3QFY2011.
the operating margin of our auto universe to contract Exhibit 1: Auto index v/s the Sensex
substantially by ~300bp yoy, reflecting higher input costs; while 250
net profit margin is expected to decline by ~150bp yoy. Players
200
are expected to register a yoy decline in net profit for 3QFY2011
on a yoy increase in input cost. On a sequential basis, net profit 150
is estimated to decline by ~10% qoq, owing to a sequential 100
increase in input cost. 50
Interest rate, fuel price and commodity price trend 0
Apr-07 Aug-07 Dec-07 May-08 Sep-08 Feb-09 Jun-09 Nov-09 Mar-10 Jul-10 Dec-10
Financing plays an important role and industry trend suggests
BSE Auto BSE_SENSEX
that there is a negative correlation between auto finance rates
Source: Company; Angel Research
and auto volume growth. Auto finance rates declined by
200-250bp in FY2010, which supported robust growth during CV growth to moderate on a high base effect
the period. A swift revival in underlying vehicle sales volume, a
CV sales, which have a strong correlation with domestic GDP
benign finance environment and an increase in finance
and industrial production, were caught in a cyclical downturn
penetration and loan-to-value (LTV) ratio are the key factors
over FY2008-09. CV volumes witnessed good recovery in
responsible for the industry's growth. However, the beginning
FY2010 and registered 38.6% yoy growth YTD in FY2011.
of monetary tightening by the RBI has pushed interest rates up,
However, CV sales moderated during 3QFY2011, given that
thereby increasing the cost of ownership for consumers. Further,
the pre-buying ahead of the changes in emission norms had
the government's policy of deregulating petrol prices to control
resulted in strong sales growth in 1HFY2011. With positive
Refer to important Disclosures at the end of the report 19
Preview
3QFY2011 Results Preview | January 3, 2011
Automobile
traction in the GDP which is estimated to register a CAGR of
, Exhibit 3: Maruti, M&M - Quarterly volumes
~8.5% over FY2010-12E, we expect CV demand to remain Segment 3QFY11 3QFY10 % chg 9MFY11
9MFY11 9MFY10 % chg
buoyant. Moreover, healthy freight rates, ease in finance Maruti Suzuki 330,687 258,026 28.2 927,665 730,943 26.9
availability and government thrust on infrastructure investment Total Passenger cars 298,636 218,230 36.8 815,652 622,573 31.0
are expected to boost the growth momentum further. However, MUV Gypsy, Vitara 891 680 31.0 4,698 2,835 65.7
this growth momentum is expected to witness a slowdown on Domestic 299,527 218,910 36.8 820,350 625,408 31.2
account of the high base effect and as such we estimate the CV Exports 31,160 39,116 (20.3) 107,315 105,535 1.7
sector to register a CAGR of ~14% over the next two years.
M&M 153,833 116,063 32.5 423,710 336,209 26.0
Tata Motors recorded a healthy growth of 23.2% yoy in CV
Domestic Auto 90,205 68,679 31.3 255,965 201,201 27.2
volumes, aided by 17.2% yoy and 27.7% yoy growth in M&HCV
Exports 5,020 3,581 40.2 13,480 7,338 83.7
and LCV, respectively.
Domestic Tractor 55,488 40,917 35.6 145,493 121,528 19.7
Expotrs 3,120 2,886 8.1 8,772 6,142 42.8
Exhibit 2: TML, ALL - Quarterly volumes
Source: Company; Angel Research
Segment 3QFY11 3QFY10 % chg 9MFY11
9MFY11 9MFY10 % chg
9MFY10
Tata Motors 186,820 159,139 17.4 566,936 432,629 31.0 Two-wheeler segment's momentum continues
M&HCV 50,883 43,408 17.2 149,616 110,416 35.5
The two-wheeler segment registered robust 29.2% yoy growth
LCV 74,617 58,425 27.7 201,786 163,648 23.3
YTD in FY2011, aided by 26.4% growth in the dominant
Total CV 125,500 101,833 23.2 351,402 274,064 28.2
motorcycle segment and 49.2% yoy growth in the scooter
Utility Vehicles 9,478 6,545 44.8 29,019 22,518 28.9
segment. Hero Honda reported robust 28.5% yoy growth in
Cars 51,842 50,761 2.1 186,515 136,047 37.1
the domestic market in 3QFY2011, indicating strength of its
Total PV 61,320 57,306 7.0 215,534 158,565 35.9
market reach and better performance by the rural market. At
Exports (Inc Above ) 15,962 10,300 55.0 42,660 23,522 81.4
the same time, backed by a series of new launches and low
ALL CV sales 18,437 16,129 14.3 64,427 38,119 69.0
Source: Company; Angel Research; Note: ALL -Dec. nos. are estimated
base, BAL reported a 17.8% yoy increase in motorcycle volumes
in 3QFY2011. We believe though the substantial ownership
Passenger vehicles (PV) - Maruti ahead of competition base of two-wheelers results in reduced headroom for higher
growth and increases dependence on replacement demand to
PV volumes witnessed strong 25.6% yoy growth YTD in FY2011,
sustain volumes, rural markets will register better growth on
aided by buoyant domestic demand. Domestic demand was
demand arising from the relevant rural population. This is
supported by sustained positive consumer sentiment, easy
expected to help two-wheeler companies maintain their growth
availability of finance and new model launches. Exports,
momentum and register a ~13% CAGR in volumes over the
however, declined by 1.6% yoy YTD in FY2011 as PV majors
next couple of years.
concentrated on meeting the strong demand in the domestic
market. Moreover, robust volume growth, low penetration and Exhibit 4: BAL, HH, TVS - Quarterly volumes
a low-cost manufacturing base have been attracting global auto Segment 3QFY11 3QFY10 % chg 9MFY11
9MFY11 9MFY10 % chg
majors to India, who have started launching products for the Bajaj Auto 946,850 809,218 17.0 2,875,734 2,043,703 40.7
Indian market. During CY2010, General Motors, Volkswagen, Motorcycles 838,487 711,991 17.8 2,550,350 1,794,455 42.1
Nissan and Ford launched Beat, Polo, Micra and Figo, Scooters - 1,060 - 27 4,593 (99.4)
respectively, in the dominant A2 segment, thereby escalating Total 2 Wheelers 838,487 713,051 17.6 2,550,377 1,799,048 41.8
competition for the market leader Maruti. However, Maruti Three Wheelers 108,363 96,167 12.7 325,357 244,655 33.0
Exports (Inc above ) 296,644 273,902 8.3 927,875 676,627 37.1
recorded a robust 28% and 27% yoy increase in volumes during
Hero Honda 1,428,030 1,111,372 28.5 3,948,013 3,413,594 15.7
3QFY2011 and 9MFY2011, respectively, supported by strong
TVS Motors 524,171 374,799 39.9 1,512,959 1,117,737 35.4
volume traction in the A2 and C segments. Going ahead, we
Motorcycles 208,632 151,105 38.1 617,996 458,726 34.7
expect volume momentum in the PV segment to continue but at
Scooters 122,696 74,982 63.6 342,538 228,471 49.9
a slightly modest pace. We estimate the PV segment to register
Mopeds 182,735 145,487 25.6 524,562 421,947 24.3
a CAGR of ~15% over FY2010-12E. Three Wheelers 10,108 3,225 213.4 27,863 8,593 224.3
Exports (Inc above ) 51,394 43,696 17.6 163,898 110,132 48.8
Source:Company, Angel Research
Refer to important Disclosures at the end of the report 20
Preview
3QFY2011 Results Preview | January 3, 2011
Automobile
Auto ancillaries to track the auto sector Outlook
The auto ancillaries sector, which depends on OEMs for growth, Going ahead, driven by strong economic recovery, we expect
was stuck in the midst of sluggish growth in the domestic market the auto sector, which includes PVs, CVs and two-wheelers, to
and a recession-hit global export market in FY2009. However, register good growth in the domestic market and decent growth
revival of domestic auto volumes in FY2010 supported recovery in the export market over FY2010-12E. We estimate overall
of the players during the period. Growth of the Indian auto auto volumes to register a CAGR of ~13% over FY2010-12E,
component industry is directly linked to growth of the auto sector aided by improved business environment for the sector.
and has more than 65% of its domestic sales to OEMs. Thus, Over the longer term, comparatively low penetration levels, a
recovery of auto sales volume in FY2010 would help the OEM healthy economic environment and favourable demographics
segment to register a ~13% CAGR over FY2010-12E. Further, supported by higher per capita income levels are likely to help
an overall increase in vehicle population (recorded a 10% CAGR auto companies in sustaining their top-line growth. Core
over FY2000-10E) is expected to support consistent growth in business performance of auto companies improved in FY2010
replacement demand of auto parts and register a ~8% CAGR and visibility restored, with substantial 25% yoy and 29% yoy
over FY2010-12E. Broadly, the sector is expected to deliver good growth witnessed in volumes in FY2010 and YTD FY2011,
yoy earnings performance in 3QFY2011 on improved volumes respectively. Thus, while this quarter's performance is likely to
and better operating leverage. be robust on a yoy basis, we expect auto companies to report a
Among battery manufacturers, we expect Exide to post ~27% sequential spurt in revenue on better volumes. Most stocks have
yoy growth aided by increased capacity of two-wheeler and been positive in the last one year due to better visibility for the
four-wheeler batteries by ~35% and ~13%, respectively, during sector. We remain positive on the long-term prospects of the
the quarter. Tyre manufacturers are likely to post a sharp decline Indian auto sector. We prefer stocks with attractive valuation
in profitability due to a significant increase in raw-material prices, and where strong fundamentals could deliver positive
especially natural rubber. Natural rubber prices increased by earnings surprises.
~65% yoy in 3QFY2011. We expect Apollo Tyres to report a Among auto heavyweights, we prefer Maruti Suzuki and M&M.
~550bp yoy contraction in operating margins for the quarter. Among ancillary stocks, we maintain our positive stance on
Tyres, Fag
Apollo Tyres, Ceat and Fag Bearings, which are available at
reasonable valuations.
Exhibit 5: Quarterly estimates - Automobile (` cr)
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target Reco.
rge
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Ashok Leyland 64 2,105 16.0 10.3 (111) 94.9 (9.3) 0.71 (9.3) 2.9 4.0 5.2 22.2 16.1 12.3 73 Accumulate
Bajaj Auto@ 1,542 3,951 24.8 19.9 (202) 596.0 25.4 20.6 25.4 58.8 87.7 99.5 26.2 17.6 15.5 - Neutral
Hero Honda 1,986 4,927 29.2 12.8 (442) 547.5 2.2 27.4 2.2 104.2 100.8 110.6 19.1 19.7 18.0 - Neutral
Maruti 1,421 9,518 29.8 10.4 (472) 601.3 (12.6) 20.8 (12.6) 83.7 82.9 103.4 17.0 17.1 13.7 1,654 Buy
M&M@ 778 5,972 33.3 14.8 (13) 611.4 44.1 10.6 39.7 34.9 41.5 47.2 22.3 18.7 16.5 827 Accumulate
Tata Motors@* 1,306 28,720 10.5 12.8 142 1,920.0 195.3 33.6 181.5 18.1 130.9 160.7 72.1 10.0 8.1 1,458 Accumulate
TVS Motors 71 1,545 44.0 7.0 65 50.8 115.9 1.1 115.9 2.3 4.5 5.9 30.1 15.8 12.0 76 Accumulate
Source: Company, Angel Research; Note: Price as on December 31, 2010, @Adjusted for extraordinary items; * Consolidated numbers
Exhibit 6: Quarterly estimates - Auto Ancillary (` cr)
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
rge Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Auto Axle^ 431 175 28.4 12.0 11 9.9 53.9 6.6 53.9 29.2 32.6 35.0 14.8 13.2 12.3 525 Buy
Bharat Forge*@ 379 714 44.0 23.9 40 68.1 79.4 3.1 79.4 (2.8) 12.3 20.2 - 30.9 18.8 404 Accumulate
Bosch India# 6,319 1,724 30.8 18.7 158 210.0 32.7 66.3 31.7 167.7 273.3 314.8 37.7 23.1 20.1 6,766 Accumulate
Exide Industries 167 1,160 27.2 21.0 (292) 150.6 15.4 1.8 8.6 6.3 7.4 9.0 26.4 22.5 18.5 - Neutral
FAG Bearing# 879 277 27.9 18.9 772 32.7 98.7 19.7 98.7 39.4 70.9 76.7 22.3 12.4 11.5 1,035 Buy
Motherson Sumi* 182 1,975 10.8 10.5 (44) 86.8 15.9 2.2 6.4 6.2 8.7 11.6 29.2 20.8 15.6 195 Accumulate
Apollo Tyres& 67 1,259 (4.9) 10.0 (549) 34.0 (66.7) 0.7 (66.7) 13.0 6.0 8.7 5.1 11.1 7.7 70 Accumulate
Source: Company, Angel Research; Note: Price as on December 31, 2010, * Consolidated numbers; #
December year ending; ^ September year ending; @
Adjusted for FCCB
interest after tax, & FY2010-12E EPS on consolidated basis
Vaishali Jajoo/Yaresh Kothari
Analyst - Vaishali Jajoo/Yaresh Kothari
Refer to important Disclosures at the end of the report 21
Preview
3QFY2011 Results Preview | January 3, 2011
Banking
Stock performance has continuously lagged credit growth from April-December
2010. YTD credit growth has been healthy at ~12.3%, while
During the first two months of 3QFY2011, banking stocks
deposits have grown at ~6.0%, resulting in an incremental
performed in line with the broader markets on the back of good
credit-to-deposit ratio of 147.8%. Consequently, the overall
2QFY2011 results and continuance of healthy credit demand.
credit deposit ratio, which had bottomed out during 2QFY2010
However, in December 2010, banking stocks underperformed
at 68.8%, improved substantially to 75.8% in 3QFY2011.
the broader indices due to negative newsflows (related to the
bribes-for-loan scam, telecom-related and MFI exposures of a From September 24, 2010 to December 17, 2010, the gap
few banks) as well as margin worries (expected NIM pressures between credit and deposit growth widened further, with credit
due to aggressive deposit rate hikes). Consequently, by the end showing strong traction (6.4% qoq), while deposits growth not
of the quarter, the BSE Bankex was down 4.6% sequentially, picking up meaningfully (growing at just 2.0% qoq), resulting
underperforming the Sensex by 6.8%. Most banking stocks under in an incremental credit-to-deposit ratio of 235.2%.
our coverage universe declined in line with the correction in Exhibit 2: Incremental CD ratio for the quarter at 235%
other banking stocks. Within our coverage universe, IOB gave 250,000 250
the highest returns of 10.8% sequentially, followed by Dena 200,000
200
Bank and ICICI Bank with gains of 9.6% and 3.1%, respectively. 150,000
100,000
150
Exhibit 1: 3QFY2011 stock performance 50,000
-
(%) Returns (qoq) Returns (yoy) 100
8-Oct-10
5-Nov-10
3-Dec-10
17-Dec-10
Total
22-Oct-10
29-Oct-10
19-Nov-10
(50,000)
IOB 10.8 32.4 (100,000) 50
DENABK 9.6 40.0 (150,000)
(200,000) 0
ICICIBK 3.1 30.7 Inc. Credit (` cr) Inc. Deposit (` cr) Inc CD ratio (%, RHS)
UCOBK 2.7 108.1 Source: RBI, Angel Research
Sensex 2.2 17.4
Extremely tight liquidity position
FEDBK 1.5 68.7
SIB 0.8 62.0 The mismatch between credit and deposit growth exacerbated
J&KBK (3.7) 34.2 the system liquidity situation with the Liquidity Adjustment Facility
(LAF) borrowings averaging more than `91,000cr during the
Bankex (4.6) 33.4
quarter. The liquidity situation worsened further with advance
HDFCBK (5.4) 38.0
tax outflows in December, taking the average LAF borrowings
PNB (5.4) 34.7 for the last fortnight over `1,32,000cr. On December 22, 2010,
CRPBK (8.4) 50.3 LAF borrowings hit a new record of `1,70,500cr.
UNBK (10.5) 31.6
Consequently, the short-term commercial paper (CP) and
YESBK (11.0) 17.1
certificate of deposit (CD) rates spiked up sharply by 195bp to
INDBK (11.7) 41.9
9.5% and 187bp to 9.0%, respectively, during the quarter.
AXSB (11.9) 36.5
OBC (12.0) 61.9 Exhibit 3: Tight liquidity leading to sharp jump in short-term rates
BOI (13.0) 16.8 (` bn) (%)
800 10.0
SBI (13.1) 23.9 400
9.0
Source: Bloomberg, Angel Research 0
(400)
8.0
(800)
Deposit growth yet to pick up meaningfully (1,200) 7.0
(1,600)
As per the latest fortnightly data for credit and deposit, credit (2,000) 6.0
growth jumped to 23.7% yoy compared to growth of 19.0%
Dec-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
yoy as of September 24, 2010. Banks have incrementally lent
Repo ( ve) / Reverse Repo (+ve) 3M CP (RHS) 3M CD (RHS)
close to `4,00,000cr YTD in FY2011, which is more than double Source: RBI, Angel Research
the amount lent during the same period last year. Deposit growth
Refer to important Disclosures at the end of the report 22
Preview
3QFY2011 Results Preview | January 3, 2011
Banking
Exhibit 4: Peak wholesale deposit rates Exhibit 6: Base rates
Bank 3QFY11 (%) 2QFY11 (%) chg.
bp chg. (qoq) Bank 3QFY11 (%) 2QFY11 (%) chg.
bp chg. (qoq)
UNBK 8.60 7.00 160 BOI 9.00 8.00 100
CANBK 8.55 7.00 155 INDBK 9.00 8.00 100
INDBK 8.50 7.00 150 OBC 9.00 8.00 100
OBC 8.75 7.25 150 PNB 9.00 8.00 100
PNB 8.50 7.00 150 IOB 9.00 8.25 75
BOM 8.30 7.00 130 DENABK 8.95 8.25 70
BOB 7.75 6.50 125 AXSB 8.00 7.50 50
CRPBK 8.25 7.75 50
KNTBK 8.50 7.25 125
UCOBK 8.50 8.00 50
IDBI 8.75 7.75 100
UNBK 8.50 8.00 50
Source: Company, Angel Research; Note: As per data available on bank
websites SIB 8.50 8.10 40
FEDBK 8.00 7.75 25
The persistent tight liquidity situation and slower deposits growth
HDFCBK 7.50 7.25 25
prompted many banks to raise their fixed deposit interest rates ICICIBK 7.75 7.50 25
aggressively across maturities. Most banks hiked deposit rates J&KBK 8.50 8.25 25
by 50-150bp during the quarter. In spite of the aggressive rate SBI 7.60 7.50 10
hikes, deposits growth as of now has not picked up meaningfully. YESBK 7.00 7.00 0
Source: Company, Angel Research
Exhibit 5: Peak retail FD rates in 1-3 years maturity bracket
Bank 3QFY11 (%) 2QFY11 (%) chg.
bp chg. (qoq) Going forward, credit demand is expected to sustain at least
UNBK 8.60 7.00 160 above the 19% level and central and state government
INDBK 8.50 7.00 150 borrowings are also expected to kick in. Hence, to mobilise
PNB 8.50 7.00 150 sufficient deposits to meet the expected increase in credit, we
SIB 9.00 7.50 150 believe banks will have to continue increasing the deposit rates,
J&KBK 8.50 7.25 125 which will continue the upward pressure on lending rates.
DENABK 8.25 7.00 125
OBC 8.75 7.50 125 Large banks better placed to sustain NIMs
SBI 8.50 7.25 125
NIMs are likely to be moderately affected in 3QFY2011.
UCOBK 8.25 7.00 125
Moreover, going forward over the next 4-6 quarters, we expect
YESBK 8.50 7.50 100
AXSB 8.25 7.35 90
rising retail and wholesale fixed deposit rates to lead to
CRPBK 8.40 7.50 90 substantial 40-60bps NIM compression of low-CASA mid-size
IOB 8.60 7.75 85 banks. Correspondingly, larger banks with high CASA ratios
BOI 8.25 7.50 75 and robust branch expansion such as SBI, ICICI Bank, HDFC
HDFCBK 8.25 7.50 75 Bank and Axis Bank are better placed to sustain or improve
ICICIBK 8.25 7.50 75 their NIMs going forward.
Source: Company, Angel Research
Higher G-sec yields might result in moderate MTM losses
As a consequence of the FD rate hike and persistently tight
During the quarter, yields also went up across the yield curve,
liquidity situation, lending rates were also raised by many banks.
especially more so at the shorter end. The benchmark 10-year
Further, banks like SBI and ICICI Bank have hiked their base
G-sec yield went up marginally by 8bp to 7.9%, while the
rates with effect from January 3, 2011, by 40bp to 8.0% and
one-year G-sec yield increased by 75bp and the three-year
by 50bp to 8.25%, respectively.
G-sec yield went up by 21bp. Hence, we expect most of the
banks under our coverage to have moderate MTM losses
in 3QFY2011.
Refer to important Disclosures at the end of the report 23
Preview
3QFY2011 Results Preview | January 3, 2011
Exhibit 7: Sharper rise at the short-end of the yield curve NPA concerns receding
(%)
8.5 Some of the PSU banks faced pressures on the asset-quality
7.5 front primarily due to switchover to CBS-based NPA recognition.
6.5 Within our coverage universe, Indian Bank and Union Bank of
5.5
India shifted to the CBS-based NPA recognition system during
1HFY2011, while Corporation Bank and PNB are expected to
4.5
complete major part of it in the 3QFY2011. Going forward,
12-month
10-year
3-year
5-year
7-year
T-bill
Gsec
Gsec
Gsec
Gsec
such asset-quality pressures are likely for a few other PSU banks
31 -Dec-10 30 -Sep-10 30 -Jun-10
as well. However, overall asset-quality pressures have evidently
Source: Bloomberg, Angel Research moderated. Total asset-weighted (FY2010) net NPAs for the
Exhibit 8: Investment book - Composition and duration sector have fallen from the peak of 1.15% in 3QFY2010 to
100.0 8.0 1.09% in 2QFY2011.
75.0 6.0
Only 11 out of the 39 listed banks had registered an increase
50.0 4.0
in net NPA ratio in 2QFY2011, compared to 23 banks witnessing
25.0 2.0
an increase in 3QFY2010. Especially private banks have
- - witnessed a substantial decline in net NPAs as well as
SBI
SIB
UNBK
PNB
OBC
CRPBK
IOB
UCOBK
BOI
J&KBK
DENABK
FEDBK
AXSB
provisioning expenses over the same period.
AFS % HTM %
Exhibit 10: Asset-weighted net NPA ratio stabilizing
AFS Duration (Yrs , RHS) Overall duration (Yrs , RHS)
1.20
Source: Company, Angel Research
1.15
Capital infusion to aid credit growth 1.10
1.05
The government in December 2010 approved capital infusion 1.00
of `6,000cr in public sector banks to ensure tier-I CRAR of all 0.95
public sector banks in excess of 7% and to raise the government’s 0.90
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
holding in all public sector banks to 58%. The exact amount,
mode of capitalisation and other terms and conditions would
Assets -weighted Net NPA Ratio (%)
be decided in consultation with the banks at the time of infusion.
Source: Company, Angel Research
At present, we have factored in the proposed infusion only for
Union Bank of India and Dena Bank, as other banks have Pension liabilities unlikely to impact profitability in a
indicated that they have neither been intimated by the major way
government nor does their own assessment indicate a need for
PSU banks had given the option to their employees to opt for
large capital infusion at present. In case of Uco Bank, although
the pension scheme instead of the existing Provident Fund
it was earlier planning an FPO, it has now received the capital
scheme. As of now, most banks are working out the liabilities
it needed from the GoI itself, though in the form of preference
as per the actuarial assumptions; however, initial estimates
shares. Accordingly, we have factored the same in our estimates.
indicate the liability to be ~`8lakhs-10lakhs per employee.
Exhibit 9: Capital infusion plans Some of the banks had proactively started making provisions
Bank (`
Exp. Infusion (` cr) Tier-I CAR (%)
Tier-I GoI holding (%) against the same in 1HFY2011 itself. Some of the banks have
BOB 3,500 8.2 53.8 directly provided the estimated liability amount, while others
OBC 1,900 9.4 51.1 have given the number of employees who have opted for the
ANDBK 1,210 7.3 51.6 pension option-in which case we have assumed a liability of
UNBK 1,150 7.9 55.4 `10lakhs per employee. We expect that pension liabilities will
ALBK 670 8.4 55.2 be allowed to be amortised over a five-year period.
DENABK 520 8.0 51.2
VIJAYA 350 9.6 53.9
PNB 190 8.0 57.8
CRPBK 185 8.3 57.2
Source: Company, Angel Research
Refer to important Disclosures at the end of the report 24
Preview
3QFY2011 Results Preview | January 3, 2011
Exhibit 11: Expected pension liabilities moderate impact in 3QFY2010. The NIM compression is likely
(` cr) Opting Expected Liability Provisions Surplus/ to be especially front-ended in case of banks with higher reliance
Employees Liability p.a.* 1HFY11 (Deficit) on certificate of deposits (3-6 month tenure) as well as wholesale
PNB N/A 2,500 500 250 - deposits (6-12 month tenure). Moreover, in case of banks with
BOI 24,000 2,400 480 350 110 sub-30% CASA ratios, we expect NIM compression to be as
UNBK N/A 2,400 480 240 - much as 40-60bp over the next 4-6 quarters. Correspondingly,
IOB 14,724 1,030 206 252 149 larger banks with high CASA ratios and robust branch expansion
CRPBK 4,900 490 98 - (49) such as SBI, ICICI Bank, HDFC Bank and Axis Bank are better
DENABK 4,500 450 90 - (45) placed to sustain or improve their NIMs going forward.
SIB N/A 146 29 24 9 Monitoring CASA market share trends will remain one of the
FEDBK 2,600 145 29 16 2 most important monitorables impacting earnings growth.
Source: Company, Angel Research; Note: *Assuming amortisation over five years; Estimates not yet
available for INDBK, OBC and UCOBK; For SBI, liability is nil; while for JKBK, it is negligible. Hence, even post the sharp correction in most mid-sized banks,
Outlook we prefer to invest in the mid-cap banks which have stronger
CASA franchises such. Taking into account valuations, our top
Back in August 2010 itself, we had cautioned that deposit rates large-
picks among the private large-cap banks include ICICI Bank
were set to rise in the coming quarters, possibly faster than the
large-
and Axis Bank; SBI and Union Bank from the PSU large-cap
consensus, which would signal margins of mid-size banks to
IOB, Federal
banking universe; and Dena Bank, IOB, J&K Bank and Federal
peak and contribute to their underperformance on the bourses.
mid-cap
Bank among the mid-cap banks.
Since then, the gap between deposit and credit growth has
widened further, prompting many banks to raise their fixed Exhibit 12: Deposits composition and investments/deposits
deposit interest rates aggressively by 50-150bp during the 60.0 75.0
quarter. To mobilise sufficient deposits to meet an estimated 60.0
45.0
shortfall of about `50,000cr (post the `48,000cr RBI OMO) in 45.0
FY2011E and a further `1lakh crore estimated shortfall in 30.0
30.0
FY2012E as well, we believe banks will have to continue 15.0
15.0
increasing their deposit rates over the coming quarters.
- -
Accordingly, going forward, we believe NIM progression rather
SBI
BOI
OBC
AXSB
PNB
IOB
SIB
HDFCBK
ICICIBK
J&KBK
DENABK
UNBK
INDBK
FEDBK
UCOBK
CRPBK
than asset quality will be the key monitorable parameter for the
banking sector, having the major impact on divergence in stock CASA (%) Bulk Dep. (%) Inv/Dep (%, RHS)
returns across the banking space. NIMs are likely to see Source: Company, Angel Research; Note: Bulk deposits data as per availability
Exhibit 13: Quarterly estimates ( ` cr)
Company CMP Operating Income Profit
Net Profit (`
EPS (`) BVPS (`
Adj BVPS (`) P/E (x) P/ABV (x)
P/ABV Target Reco.
(`) 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E (`)
AXSB 1,350 2,736 17.1 837 27.5 62.1 80.4 100.8 393.8 455.1 524.3 21.7 16.8 13.4 3.4 3.0 2.6 1,678 Buy
FEDBK 398 581 16.7 145 31.8 27.2 33.8 45.3 273.9 300.7 336.7 14.6 11.8 8.8 1.5 1.3 1.2 505 Buy
HDFCBK 2,347 3,708 20.5 1,091 33.3 64.4 86.1 115.6 470.2 536.5 625.3 36.4 27.2 20.3 5.0 4.4 3.8 2,501 Accum.
ICICIBK 1,145 3,920 5.1 1,353 22.9 36.1 44.7 60.8 449.8 470.4 506.4 31.7 25.6 18.8 2.5 2.4 2.3 1,332 Buy
SIB* 24 242 12.8 76 22.4 2.1 2.5 2.8 12.9 15.0 17.0 11.7 9.6 8.6 1.9 1.6 1.4 - Neutral
YESBK 313 477 40.7 176 39.8 14.1 20.0 21.9 91.0 109.4 129.8 22.2 15.7 14.3 3.4 2.9 2.4 353 Accum.
BOI 450 2,432 17.7 669 65.0 33.1 51.7 61.3 215.6 275.3 321.7 13.6 8.7 7.3 2.1 1.6 1.4 483 Accum.
CRPBK 635 962 13.0 324 6.2 81.6 93.7 96.6 398.3 474.6 541.9 7.8 6.8 6.6 1.6 1.3 1.2 705 Accum.
DENABK 117 599 43.9 165 22.6 17.8 22.0 20.9 73.8 99.3 115.1 6.5 5.3 5.6 1.6 1.2 1.0 138 Buy
INDBK 247 1,278 9.6 436 (1.3) 35.1 37.6 41.9 154.3 183.5 216.0 7.0 6.6 5.9 1.6 1.3 1.1 281 Accum.
IOB 146 1,237 17.5 183 79.6 13.0 15.1 19.4 96.5 123.4 138.2 11.3 9.7 7.6 1.5 1.2 1.1 166 Accum.
J&KBK 776 442 13.5 121 (13.5) 105.7 120.1 138.2 620.8 712.3 817.8 7.3 6.5 5.6 1.2 1.1 0.9 1,063 Buy
OBC 406 1,298 16.9 410 41.6 45.3 63.3 70.1 278.0 342.0 397.6 9.0 6.4 5.8 1.5 1.2 1.0 437 Accum.
PNB 1,222 3,775 23.4 1,100 8.8 123.9 138.2 154.1 509.1 623.8 745.2 9.9 8.8 7.9 2.4 2.0 1.6 1,341 Accum.
SBI 2,811 12,412 28.2 2,911 17.4 144.4 171.7 240.9 944.5 1,124.3 1,320.8 19.5 16.4 11.7 3.0 2.5 2.1 3,500 Buy
UCOBK 116 1,227 42.4 142 (42.3) 18.4 11.6 21.7 63.9 80.6 97.4 6.3 10.0 5.3 1.8 1.4 1.2 - Neutral
UNBK 348 1,922 25.7 594 11.1 41.1 42.9 48.0 168.5 202.4 246.1 8.5 8.1 7.2 2.1 1.7 1.4 394 Accum.
Source: Company, Angel Research; Note: Price as on December 31, 2010; *EPS and book value for FY2010 adjusted for split
l/Shrinivas Bhutda
Vaibhav Agrawal/ ohiya/
Lohiya/V arma
Varm
Analyst - Vaibhav Agrawal/ Shrinivas Bhutda / Vasant Lohiya/ Varun Varma
Refer to important Disclosures at the end of the report 25
Preview
3QFY2011 Results Preview | January 3, 2011
Capital Goods
Lagging
Capital Goods Index - Lagging behind Macro indicators showing strength
The current quarter saw narrowing of premium valuations in The IIP numbers for October 2010 came in at a decent 10.8%
the capital goods (CG) sector vis-à-vis the Sensex. While majority as compared to 6.9% and 4.4% for the previous two months,
of the sector specific indices reported positive growth, the CG respectively. The manufacturing sector, which contributes ~80%
index ended 3QFY2011 down 3.6% and underperformed the ,
to the IIP reported double-digit growth of 11.3%, almost double
Sensex by 5.8%. Valuation consistently drifted during the first than the 4.6% clocked during the previous month. The rebound
two months of the quarter under review before marginally in IIP was mainly driven by the consumer durables and CG
recovering during December 2010. The quarter also witnessed production, which reported growth of 31% and 22% yoy,
high volatility in the reported numbers for the Index of Industrial respectively. Along with the strong 8.9% GDP growth reported
Production (IIP) and CG production. Despite underperforming for the first half of the current fiscal, we expect the investment
the broad-based Sensex for a major portion of the quarter, cycle to pick up in the near term as robust corporate profit and
valuations of front-line stocks in the CG index continue to trade favourable financing conditions fuel investments.
at a premium to the Sensex.
Exhibit 3: GDP growth to bounce back
Exhibit 1: Sensex v/s CG stocks (3QFY2011) 12.0
Abs. Returns Relative to Sensex
10.0
(%) (%)
BSE Sensex 2.19 0.00 8.0
BSE Cap Goods (3.63) (5.82)
(%)
6.0
ABB (13.03) (15.22)
4.0
Areva T&D 11.82 9.63
BHEL (6.40) (8.59) 2.0
BGR Energy Sys. (4.35) (6.55) 0.0
Crompton Greaves (0.74) (2.93) FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E
Jyoti Structures (2.24) (4.43) Source: CMIE, Angel Research
KEC Intl. 5.01 2.82
..but benefits not percolating down to CG industry
Thermax 8.52 6.33
Source: C-line, Angel Research
The Indian CG sector continues to be negatively impacted by
Exhibit 2: CG index: Relative returns to the Sensex the increasing quantum of imports, especially from China. We
60.0
48.6 believe that the administered currency regime, cheaper finance
50.0
40.0
and the favourable duty structure under which the Chinese
30.0 23.5 companies operate have enabled them to flood the Indian
17.2
markets with cheaper equipment. Segments worst affected by
(%)
20.0
9.4
10.0
the import deluge have been the construction equipment,
1.3 3.5
0.6
0.0
(10.0)
(6.2)
(0.6)
(4.6) (5.8)
machine tools, turbines and transformers. The domestic power
(7.1)
(9.7)
(20.0) (14.1)
(10.7)
equipment manufacturers such as BHEL and L&T have been
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
losing bulk of the orders to their Chinese counterparts. Notable
Source: C-line, Angel Research orders placed during the current quarter include the Lanco
On a stock specific basis, Areva T&D was the top performer Infratech order for supply of 16 sets of 660MW power equipment
gaining ~11.8% in absolute terms and outperformed the Sensex to Harbin Power for ~`6,800cr, Abhijeet Projects for supply of
by ~9.6%. Despite the price erosion of 10-15% in the T&D 10 sets of 660MW supercritical units to Dongfang Electric for
segment, Areva managed to register 40% yoy revenue growth ~USD 2.5bn (~`11,500cr) and the Reliance Power order to
and 425bp expansion in EBDITA margins to 12.7% during the Shanghai Electric for the supply of coal-fired power generators
September 2010 quarter. Being the market leader in the high worth USD 8.3bn (~`38,000cr). The above orders were placed
voltage transmission, the company is expected to gain from the when the domestic power equipment industry was in the midst
expected release of T&D orders post the successful FPO of of expanding capacities to meet the growing demand. Besides,
PGCIL. In contrast, ABB was the major loser during the quarter. the power transmission and distribution (T&D) segment has also
The scrip lost ~-13% in absolute terms and underperformed
seen serious competition from the Chinese and Korean majors.
the Sensex by ~15.2%. Declining revenue and margin
contraction on account of the exit cost of RE Projects continued
to weigh on the stock.
Refer to important Disclosures at the end of the report 26
Preview
3QFY2011 Results Preview | January 3, 2011
Capital Goods
Exhibit 4: IIP growth Key Developments
(%)
18 ABB
15 Major order inflow for ABB during the quarter included the USD
12
40mn contract from PMC Project (I) Private Limited to supply
9
765 kilovolt (kV) and 400kV substations for the Maharashtra
6
Eastern Grid Power Transmission Company. ABB also won an
3
order worth USD 32mn from PGCIL to construct two transmission
0
substations, to be located in the cities of Gwalior and Indore in
Jan-08
Apr-08
Jan-09
Apr-09
Jan-10
Apr-10
Oct-07
Jul-08
Oct-08
Jul-09
Oct-09
Jul-10
Oct-10
Madhya Pradesh. In the metals space, ABB was awarded orders
Source: Bloomberg, Angel Research worth USD 23mn to provide integrated automation systems and
related services to modernise the plate mill at the Rourkela Steel
Exhibit 5: CG component growth
plant in India.
(%)
70
Crompton Greaves (CGL)
57
CGL announced that it has developed high range 1,200KV
44
31
capacitive voltage transformer (CVT), becoming the first
18
company in the world to develop such a high range power
5 product. The company recently delivered its first 1,200KV
(8) product to the ultra high voltage (UHV) station of PGCIL at
Bina, Madhya Pradesh.
Jan-08
Apr-08
Jan-09
Apr-09
Jan-10
Apr-10
Oct-07
Jul-08
Oct-08
Jul-09
Oct-09
Jul-10
Oct-10
Source: Bloomberg, Angel Research
BHEL
BHEL and GE India Industrial Private Limited (GEIIPL), a wholly-
Exhibit 6: Basic goods components growth
owned subsidiary of GE, USA joined hands to co-operate on
(%)
16 water treatment equipment. Orders worth `3,700cr were
13 received from the Karnataka Power Corporation (KPCL) for
10 setting up a 700MW coal-fired thermal unit with supercritical
7 parameters.
4
BGR Energy
1
(2) During 3QFY2011, the BGR stock displayed extreme volatility
on the back of the ongoing CBI investigations into the LIC
Jan-08
Apr-08
Jul-08
Jan-09
Apr-09
Jul-09
Jan-10
Apr-10
Jul-10
Oct-07
Oct-08
Oct-09
Oct-10
Housing scam, which had named BGR Energy as one of the
Source: Bloomberg, Angel Research implicated companies. At the analyst conference call hosted by
Exhibit 7: Intermediate goods component growth the company thereafter, management clarified its position and
(%)
strongly refuted the allegations. The company was also awarded
30 a BoP contract worth `2,168cr for the 2 x 660MW supercritical
23 thermal power project of Thermal Powertech Corporation.
16
9
KEC International
2 KEC bagged orders totaling to `1,018cr across the transmission,
(5) railways and cables segments. In transmission, the company
(12) bagged three orders for construction of 765kV transmission
Jul-08
Jul-09
Jul-10
Oct-10
Oct-07
Jan-08
Apr-08
Oct-08
Jan-09
Apr-09
Oct-09
Jan-10
Apr-10
lines totaling `540cr. These orders were received from the
Rajasthan Rajya Vidyut Prasaran Nigam (`313cr), PGCIL (`130)
Source: Bloomberg, Angel Research
and Eskom, South Africa (`97). In addition to above, KEC's
wholly-owned subsidiary, SAE Towers, secured `246cr supply
orders in the Americas.
Refer to important Disclosures at the end of the report 27
Preview
3QFY2011 Results Preview | January 3, 2011
Capital Goods
Jyoti Structures Outlook
Jyoti Structures announced plans to set up base in the US for The revival in the IIP numbers during the past few quarters signals
making lattice steel towers. The company is likely to invest ~USD strong recovery of the Indian economy in general and that of
12mn (~`55cr), which would be fully funded through internal
the capital goods industry in particular. Almost all the companies
accruals.
in our CG universe are highly dependent on the generation,
Thermax and T&D segments of the power sector.
Thermax acquired Danstoker A/S, a leading European boiler The generation segment has attracted increasing domestic
manufacturer and its German subsidiary, Omnical Kessel at a
competition in addition to the Chinese imports. In transmission,
valuation of Euro 29.5mn. Danstoker has strong presence in
companies like ABB and Areva T&D have consistently lost ground
biomass-based boilers and waste heat recovery systems for a
to lower priced imports from China and Korea. However, with
wide range of industries. The acquisition will enable Thermax
the government mandating domestic manufacturing to be a
to leverage the ongoing renewable energy movement of Europe
aimed at generating 20% of its overall energy generation from pre-requisite to bid for NTPC and PGCIL tenders, we expect the
renewables. flow of imports to temporarily slow down thereby benefitting
the domestic companies. Foreign companies can still enter into
3QFY2011 expectations
joint ventures (JV's) with the local manufacturers and supply
We expect the companies in our universe to post cumulative equipment manufactured at the Indian facilities. However, similar
top-line growth of 41% on a yoy basis on the back of improving restrictions do not apply to the private sector projects, which
order executions and favourable base effect. Companies like can place direct orders with the foreign companies. Post the
BGR Energy and Thermax are expected to report strong recent spate of equipment orders placed with the Chinese
top-line growth of 90% and 50% yoy, respectively. Jyoti Structures
companies, we expect other private sector power projects to
and KEC are expected to maintain a steady top-line growth of
follow suit.
20% and 25% yoy, respectively. In the T&D segment, we expect
ABB to report strong growth of 17%, while Areva and Crompton KEC and Jyoti Structures are expected to benefit from the capex
Greaves are expected to show a growth of 1.5% and 7.5%, plans of PGCIL and other state utilities. With increasing number
respectively. of power projects likely to be commissioned over the next couple
On the operating front, we expect our universe companies to of years, we expect the work orders for setting up transmission
report flat margins at ~14.8%. ABB is likely to report a pick-up facilities to be released over the next 6-8 months, especially by
in margins from the current quarter and post strong OPM of PGCIL as the recent FPO proceeds are likely to be utilised for
10.7%, while Areva is expected to report OPM of 12.7%. We setting up transmission assets.
expect BHEL to report 360bp dip in OPM to 18%, while BGR is
expected to maintain its OPM at 11%. On the valuation front, we believe that most of the CG
companies in our universe are presently trading at premium
The expected top-line growth of 41% yoy coupled with flattish
valuations offering meagre upside from current levels. In such
margins would result in 41% yoy growth in net profit. BGR Energy
a scenario, we prefer a stock-specific approach. Crompton
and ABB are expected to report strong profitability growth a
low base, while companies like KEC and Jyoti Structures are Lakshmi
Greaves, KEC, Jyoti Structures, Blue Star and Lakshmi Machine
likely to maintain steady growth. Works figure among our preferred picks.
Exhibit 8: Quarterly estimates ( ` cr)
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
ABB* 801 2,207 17.1 10.7 186 179 63.6 8.5 63.6 16.7 11.1 28.7 47.9 72.2 27.9 - Neutral
Areva* 325 1,177 1.5 12.7 66 75 10.7 3.2 16.4 8.0 7.3 10.5 40.6 44.5 30.9 260 Sell
BHEL 2,325 9,398 30.0 18.0 (360) 1,135 5.8 23.2 5.8 88.1 109.5 129.9 26.4 21.2 17.9 - Neutral
BGR 726 1,207 90.0 11.0 (25) 78 85.4 10.8 85.3 28.0 38.7 48.1 26.0 18.7 15.1 - Neutral
Crompton Grv. 310 2,415 7.5 13.5 (74) 207 3.5 3.2 3.5 13.4 13.7 16.2 23.2 22.6 19.2 375 Buy
Kec Intl' 105 1,186 25.0 10.0 (25) 59 26.9 2.3 21.8 6.7 8.4 10.0 15.7 12.5 10.5 130 Buy
Jyoti Stryctures 133 615 20.0 11.5 (10) 31 31.3 3.7 31.2 11.2 13.7 17.3 11.9 9.7 7.7 215 Buy
Thermax 865 1,015 50.0 12.0 5 82 45.9 6.9 45.9 21.8 29.7 37.4 39.8 29.1 23.1 - Neutral
Source: Company; Angel Research; Note: Price as on December 31, 2010; * December year ending
Perinchery/Hemang
Analyst - John Perinchery/Hemang Thaker
Refer to important Disclosures at the end of the report 28
Preview
3QFY2011 Results Preview | January 3, 2011
Cement
Dispatches up 7.5% yoy Price situation
In 3QFY2011, all-India dispatches grew 7.5% yoy compared Cement manufacturers hiked prices by `15-20 per bag across
to the 3.7% yoy growth recorded in 2QFY2011. Dispatches the country towards mid-October post the two rounds of price
increased by a robust 18.5% yoy in October 2010 due to the hikes carried out in the southern region in September. The price
cessation of monsoons and on account of inventory build-up in hike was carried out against the norm of keeping prices
anticipation of price hikes by the dealers. However, the unchanged during Dusshera and Diwali. However, the price
momentum could not be sustained in November due to labour hikes carried out in October 2010 did not last long as poor
shortage on account of the festive and harvest seasons, decline demand and surplus capacity exerted pressure on the prices.
in demand from the infrastructure sector and unavailability of Hence, since mid-November prices have started to trend
sand in the southern region due to heavy rainfalls. Going ahead, downwards. Further, increase in the costs of other construction
we do not expect a major growth in dispatches over the next inputs such as steel, sand and gravel has slowed down the
few months due to the high base effect in the northern region construction activity. Efforts by the cement manufacturers to bring
and continuing political instability in the southern region. in pricing discipline have not been very successful, as it did not
However, the central and western regions are expected to get much support from players like ACC and Ambuja with
perform slightly better due to increase in government spending year-end obligations. The prices were also brought down due
on infrastructure. to the government intervention in Tamil Nadu.
Exhibit 1: Dispatch growth (8MFY2011) Southern region: In the south, the price decline was highest in
20.0
18.0 Tamil Nadu, which has been facing weak demand due to
15.0 unavailability of sand on account of rains. The prices in Chennai
have fallen from around `260/bag in the beginning of
10.0
(yoy %)
7.5 November to `230/bag currently. Further, during the quarter,
6.5
5.0
3.8
4.8 the cement manufacturers in Tamil Nadu reduced the prices
2.5 2.8
0.0 after the state government asked for a price cut. The prices fell
in Karnataka due to low demand and increased dispatches
April
(2.5)
July
November
October
June
May
August
September
(5.0)
from Andhra Pradesh due to the price differential between the
two states. In Bangalore, the price per bag is currently ruling at
Source: Industry, Angel Research
`255/bag, down from `275/bag in November. In Andhra
Performance of top players Pradesh, the prices have not corrected much, but continue to
be the lowest in the region, with average prices at around
During October and November 2010, Jaiprakash Associates
`220/bag in Hyderabad.
continued to remain the top-performer with respect to dispatch
growth, posting a 38.9% yoy jump in sales volumes to 2.4mn Northern region: The prices have declined in the northern region
tonnes (1.8mn tonnes) on the back of substantial capacity due to low demand. In Delhi, the prices have fallen from
addition. ACC reported a 9.3% yoy growth in dispatches to `230/bag towards mid-November to `200/bag currently. The
3.7mn tonnes. Ambuja Cements' dispatches grew by a modest prices in other areas like Amritsar and Ludhiana have also fallen
5.1% yoy to 3.2mn tonnes. and stand at ~`250/bag currently. Efforts to bolster the prices
in the region during the first week of December through
Exhibit 2: Dispatches of leading players curtailment of dispatches did not succeed as the Holcim group
Company Oct- Nov
Oct- Oct- Nov
Oct- Growth companies did not participate due to year-end obligations.
2010 2009 (yoy, %)
(yoy,
Western region: The cement prices have corrected in most
ACC 3.7 3.4 9.3
parts of Maharashtra. In Mumbai, the prices have declined by
Ambuja Cements 3.2 3.0 5.1 ~`10/bag to `230/bag currently. In Gujarat however, the prices
JP Associates 2.4 1.8 38.9 have sustained at mid-November levels despite weak demand
UltraTech Cement 2.7 2.9 (9.2) owing to supply constraints faced by some companies.
Shree Cement 1.5 1.4 8.5 Eastern region: The region experienced weak demand and
Dalmia Cement 0.7 0.6 11.8 higher inventory levels in some areas, resulting in price correction
Source: Company, Industry since November. The prices have declined by `10-25/bag. In
Refer to important Disclosures at the end of the report 29
Preview
3QFY2011 Results Preview | January 3, 2011
Cement
Kolkata, the prices have declined from `240/bag to `230/bag Exhibit 4: Global thermal coal prices
currently. Similarly, in Bhubaneshwar, the prices have corrected 250
Prices beginning to firm up
by `20 to `215/bag. 200
Central region: Weak demand coupled with increased supply
(US$/tonne)
150
in some cities has led to price correction of ~`20-25/bag in
100
the region. In Lucknow, the prices are down from `230/bag to
`210/bag. The prices in Bhopal have declined to `185/bag. 50
All-India capacity to increase by 28mt in FY2011 0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
In FY2010, all-India cement capacity stood at 267mtpa. In Source: Bloomberg, Angel Research
FY2011, the country's cement capacity is expected to increase
by 28mt and touch 295mt by the end of the fiscal. YTD FY2011, Key developments
capacity has been augmented by ~12mtpa. Going ahead, ACC: During the quarter, the Holcim group, the promoters of
CC:
ACC's 3mtpa plant in Chanda is expected to get operational ACC, acquired an additional 2.01% stake in the company. Post
by 4QFY2011. JP Associates is also expected to increase capacity this deal, Holcim's stake in ACC now stands increased at 48.1%.
by ~3.0mtpa spread across two locations during 4QFY2011. This deal once again raised expectations of a merger of ACC
amd Ambuja Cements (Holcim holds 45.58% stake in Ambuja).
Exhibit 3: All-India capacity addition
FY2012E 313 18 Ambuja Cements: Dispatches from the company's Suli and Rauri
FY2011E 295 28 plants in Himachal Pradesh were affected by the transport strike.
FY2010 267 48
The strike which began in the first week of October lasted till
(mtpa)
FY2009 219 21
FY2008 198 31 November 22. To off-set this fall in supply, the company utilised
FY2007 167 9
built-up inventory and increased output from the other plants.
FY2006 158 4
FY2005 154 8 India Cements: Subsidiary, Indo-Zinc, commenced operations
FY2004 146 7
at its 1.5mtpa green-field plant in Rajasthan during 3QFY2011.
0 100 200 300 400
This plant has begun supplies to the central and western regions.
Year -end Capacity Additions during the year
Source: CMA, Angel Research Cement stocks - Performance on the bourses
During 3QFY2011, the cement stocks under our coverage except
Capacity utilisation
Ambuja underperformed the Sensex, with Jk Lakshmi Cement
The all-India capacity utilisation picked up slighlty during (JK Lakshmi) being the biggest loser with negative returns of
3QFY2011 and increased to 78.5% from 77% in 2QFY2011 15.2%.
on the back of better demand. Overall, utilisation levels are
Exhibit 5: Sensex v/s Cement stocks (3QFY2011)
expected to record moderate improvement to 79.5% in FY2011. Abs. Returns Relative to Sensex
(%) (%)
Coal prices surge
Sensex 2.2
The global spot coal prices were substantially higher on a yoy ACC 8.6 6.4
basis during the quarter. Average prices of the New Castle Ambuja 1.7 (0.5)
Mckloksey 6,700kc coal stood at around US $104/tonne in India Cements (7.4) (9.6)
3QFY2011 as against US $77/tonne in 3QFY2010. The coal JK Lakshmi (15.2) (17.4)
prices stood higher by 10.6% even on a qoq basis. The rise in Madras Cements (7.4) (9.6)
the coal prices is expected to result in higher power costs for UltraTech 1.4 (0.8)
the cement manufacturers during the quarter. Source: BSE, Angel Research
Cement to report flat performance in top-line
Dispatches of the companies in our universe are expected to
rise marginally by 3.3% yoy during the quarter under review.
We expect the pure cement players are to report flat performance
Refer to important Disclosures at the end of the report 30
Preview
3QFY2011 Results Preview | January 3, 2011
Cement
on the top-line front primarily due to the decline in realisations. to the substantial reduction in realisations and increase in the
Operating profit is expected to decline by 33.9% cost of inputs such as coal and limestone. JK Lakshmi is set to
record the higest decline in OPM by 1,070bp during the quarter.
Exhibit 6: Realisation per tonne
4,000
Exhibit 8: OPM to decline
3,720
3,574 Company (%) 3QFY11E 3QFY10 chg bp 2QFY11 chg bp
3,600
(yoy) (qoq)
(`)
3,200 ACC* 17.7 24.9 (713) 14.0 373
Ambuja* 21.1 25.1 (407) 19.1 196
2,800
India Cements 7.6 14.7 (707) 3.6 399
2,400 JK Lakshmi 14.5 25.2 (1,070) 10.4 410
3QFY10 3QFY11E
3QFY10 3QFY11E Madras Cements 20.7 18.2 248 17.7 297
Source: Industry, Angel Research UltraTech 16.0 24.0 (802) 13.5 251
Source: Company, Angel Research; Note: *Year ending December
Amongst the pure cement players, we expect Ambuja Cements
to post top-line growth of 3.4%. However, the other major Valuation
pure cement players are expected to post de-growth in Going ahead, we expect demand to pick-up in 4QFY2011,
top-line. Madras Cements, predominantly a south-based player, leading to marginal price increase. However, the industry would
is expected to report highest top-line decline of 13.3%. remain bogged down due to over-capacity. We maintain our
ACC,
Neutral view on large cap cement players like ACC, Ambuja
Exhibit 7: Top-line performance (3QFY2011E, yoy)
10 UltraTech. We
and UltraTech. We remain positive on India Cements, Madras
3.4
Lakshmi
Cements and JK Lakshmi due to attractive valuations (on EV/
0
tonne basis) and maintain a Buy on these stocks.
(3.3) (4.1)
(%)
(10) (7.3)
(8.7) Exhibit 9: EV/tonne
(13.3) Company FY11E installed EV/tonne (US $)
(20)
capacity (mtpa) FY10 FY11E FY12E
(30) ACC^ 30.4 140.2 128.8 127.3
ACC Ambuja Cem India Cements JK Lakshmi Madras Ultratech Ambuja^ 23.5 201.4 164.9 162.2
cements Cements
India Cements 14.0 70.5 77.6 72.0
Source: Angel Research
JK Lakshmi 5.4 33.4 32.9 36.8
Operating margins to fall Madras Cements 11.0 99.5 82.9 76.6
Ultra Tech 23.1 141.7 140.5 128.3
Operating margins are expected to decline substantially during Source: Company, Angel Research
the quarter. The decline in margins can primarily be attributed
Exhibit 10: Quarterly estimates (` cr)
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target Reco.
arg
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
ACC^ 1,076 1,919 (3.3) 17.7 (713) 186 (33.6) 9.9 (33.6) 85.5 60.4 51.0 12.6 17.8 21.1 - Neutral
Ambuja^ 143 1,849 3.4 21.1 (407) 228 (5.3) 1.5 (5.3) 8.0 8.0 6.5 17.9 17.8 21.9 - Neutral
Grasim* 2,341 4,987 3.0 17.4 (1,229) 412 (42.4) 44.9 (42.4) 337.6 203.3 235.8 6.9 11.5 9.9 - Neutral
India Cem. 108 812 (7.3) 7.6 (707) (8) - (0.3) - 11.5 2.8 4.0 9.3 39.0 27.1 139 Buy
JK Lakshmi 55 322 (8.7) 14.5 (1,070) 16 (65.2) 1.3 (65.2) 19.7 6.7 8.7 2.8 8.3 6.3 92 Buy
Kesoram Ind. 249 1,334 10.6 6.5 (467) (27) - (5.8) - 51.9 5.7 18.6 4.8 43.6 13.4 389 Buy
Madras Cem. 107 529 (13.3) 20.7 248 19 17.3 0.8 17.3 14.9 7.6 8.5 7.2 14.1 12.6 141 Buy
UltraTech Cem.# 1,082 3,486 108.8 16.0 (802) 206 5.3 16.6 5.3 87.8 33.4 45.5 12.3 32.4 23.8 - Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2010; ^December year ending; *Consolidated numbers; #Estimates for merged entity
Analyst - Rupesh Sankhe / V Srinivasan
Refer to important Disclosures at the end of the report 31
Preview
3QFY2011 Results Preview | January 3, 2011
FMCG
For 3QFY2011, we expect our FMCG universe to post steady Input costs still a major concern
top-line growth of 20% yoy aided by robust volumes and
selective price hikes. While a buoyant economy, increased Among the agri-commodities, while the sugar and tobacco
demand owing to the festive season and sustained ad-spends prices are benign, milk has also finally started showing signs of
are expected to drive volumes, the impact of selective price cooling. The tobacco prices have fallen (16% yoy and 6% qoq
hikes taken by the companies in 2QFY2011 will also be felt decline) due to: 1) poor quality of tobacco leaves on account of
during the quarter under review. Godrej Consumer (GCPL) is erratic rainfalls, 2) higher-than-expected tobacco output in
expected to post the highest top-line growth this quarter albeit Karnataka resulting in higher arrivals at the auctions thereby
on a low base aided by the revenue traction from its recent dragging the prices, and 3) global decline in prices resulting in
acquisitions. GSK Consumer (GSKCHL), Asian Paints, Dabur lack of fresh export orders. The wheat and barley prices are
and Marico are also expected to post strong top-line growth however, ruling high on account of supply constraints.
for the quarter.
Exhibit 3: Key input prices in 3QFY2011
Exhibit 1: Revenue growth in 3QFY2011E (yoy %) CMP (`) yoy (%) qoq (%)
100.0
90.0
87.9 Wheat (`/quintal) 1,309 11 5
80.0 Barley (`/quintal) 1,235 24 8
70.0
60.0 Sugar (`/ quintal) 3,060 (6) 13
50.0
Tea (`/kg) 190 21 6
40.0
30.0 24.1 23.1 25.6
21.7 Coffee (`/100kg) 3,850 28 8
18.9 17.7
20.0 15.2
11.5
Cocoa (US$/ton) 2,958 (26) 8
10.0
- Milk Liquid (`/ltr) 25 75 -
ITC
HUL
Dabur
Asian
GCPL
Nestle
Paints
Marico
GSKCHL
Colgate
Palm Oil (MYR/ton) 3,562 (4) 29
Copra (`/quintal) 5,500 32 22
Source: Company, Angel Research; Note: Nestle and GSKCHL figures are for
4QCY2010E Safflower (`/quintal) 2,375 18 8
Soyabean Oil (`/10kg) 568 35 19
Erratic monsoons spell doom for crops Groundnut Oil (`/MT) 76,500 (1) (15)
Erratic monsoons (23% above normal till third week of December Coconut Oil (`/quintal) 6,844 57 19
2010) have proved to be bad for crops in India as the raw Rice Bran Oil (`/MT) 5,200 4 (28)
material prices have been spiraling. Currently, while the wheat Tobacco (`/kg) 86 (16) (6)
and rice prices are ruling firm, the potato and onion prices Caustic Soda (`/kg) 1,100 11 23
have spiked and are in double digits. We believe that the same Soda Ash (`/kg) 985 18 11
will negatively impact input costs of the agri-dependent Source: Bloomberg, CMIE, Angel Research
companies like ITC, Marico, Nestle and GSK Consumer as the
increase in raw material prices will exert pressure on the margins All the vegetable oils and copra prices have increased
of these companies. Cooling demand due to the rise in food ~20-30% qoq mirroring the global prices with groundnut and
inflation, which has increased in close succession over the last rice bran oil being the only exceptions. Prices of crude-linked
three weeks (current food inflation stands at 12.1%) could also raw materials such as caustic soda and soda ash have also
impact HUL, Colgate and GCPL performance for the quarter. risen with crude touching ~US $90/barrel.
Growing inorganically to fill in portfolio gaps
Exhibit 2: Monsoon trend in Oct-Dec 2010
60
17%
23% 40% FMCG majors have been focusing on expanding their global
9%
footprint through acquisitions in niche segments to fill the gaps
(No of Subdivisions)
20%
40
-15% 0% in their product portfolio. In line with this, Dabur acquired
-29%
20 -37%
-20% Namaste Laboratories LLC, a USA based ethnic hair colour
-40% manufacturer. This acquisition marks Dabur's entry into the fast-
0 -60% growing US $1.5bn ethnic hair care product market in the US,
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Europe and Africa.
Excess Rainfall (LHS) Normal Rainfall (LHS) In the domestic market, amidst much speculation Reckitt
Defecient/ Scanty (LHS) Deviation from Normal rainfall (RHS)
Benckiser completed the acquisition of Paras Pharma. This deal
Source: IMD, Angel Research
Refer to important Disclosures at the end of the report 32
Preview
3QFY2011 Results Preview | January 3, 2011
FMCG
is touted to be the most expensive one being executed at Quarter all about garnering volumes
`3,260cr or ~8x sales. Among the other deals, GCPL acquired
In a bid to cash in on the festive season, the FMCG players
Naturesse Consumer Care Products and Essence Consumer
wooed customers with attractive discounts, contests and
Care Products from Muskan Projects (has the Genteel and innovative packaging. Going ahead, we expect most of the
Swastik Shikakai soap brands) for an undisclosed amount. In FMCG companies to continue re-investing their margin gains
another event, the Oetker Group, Germany acquired Fun Foods in an attempt to enhance their ad-spend to support volume
Pvt. Ltd. growth.
New launches gather pace Currently, while Asian Paints is running a contest, Surprise your
Spouse, Nestle is wooing consumers with Santa Dreamz contest.
FMCG companies maintained the momentum of launching new
Colgate is promoting its Max Fresh gel toothpaste by giving
products and re-launching existing products with new
free toothbrush and an 80gm tube with the purchase of every
formulations. The food and beverages category witnessed most
150gm tube. PepsiCo and Coca Cola were in a race of sorts to
number of new product launches/re-launches during the quarter.
garner higher number of customers through innovative
Heinz led the pack with maximum number of launches, followed
advertisements, special festive packs (PepsiCo) and special Warli
closely by Dabur India.
bottles (Coca Cola).
In beverages, HUL re-launched Brooke Bond Red Label tea, The rural theme continues to be a focus area for most of the
while Dabur re-branded its Real Juice portfolio. Coca Cola FMCG companies, who have been undertaking various rural
launched Nestea, a global brand of Beverage Partners activation programs to garner higher volumes. Thus, HUL
Worldwide (BPW), a joint venture between Coca Cola and launched its multi-brand rural activation program, Khushiyon
Nestle. In the food segment, Heinz expanded its portfolio with ki Doli in the three states of Uttar Pradesh, Andhra Pradesh and
the launch of Heinz Home Style Chutneys, Heinz Chef Style Maharashtra to educate consumers about personal hygiene.
Sauces, Heinz Kitchen Klassics ready-to-eat meals and instant Dabur launched a rural campaign for its brand Dabur Lal Tail
mixes, and Heinz Golden Circle Juices. Britannia entered the in Chattisgarh and Madhya Pradesh.
diabetes management space with its first-ever diabetic friendly Heavyweights ITC and HUL drag FMCG index
snack under its NutriChoice brand. ITC relaunched Sunfeast
During the quarter, the BSE FMCG Index posted 5%
Dark Fantasy, the premium dark chocolate biscuits. CG Foods
underperformance vis-à-vis the Sensex, in line with our
rolled out two new flavours of Wai Wai Quick - Wai Wai Quick
expectations. ITC, which witnessed a sharp rally in 2QFY2011,
Chicken Pizza and Wai Wai Quick Masala Curry with three
came off its highs during the quarter. HUL continued to
seasonings. Bambino launched Instant Pasta, the first-of-its-
underperform, even though the competitive pressures have been
kind of product and manufactured using one-of-its kind
easing and pricing power slowly returning. Concerns persisted
technology in Asia. During the quarter, Dabur launched different
about HUL not being able to salvage lost market share (faced
product ranges targeting men and women along with two new aggressive price war with P&G in 2QFY2011) and a higher
fruit flavours of its flagship healthcare brand, Dabur input cost environment, which has impacted its profitability.
Chyawanprash, viz. Dabur Chyawanprash Orange and Dabur During the quarter, Asian Paints was the biggest outperformer
Chyawanprash Mango. The company also launched a health following high demand for paints on account of the festive
supplement, Nutrigo. Through subsidiary, Dabur Nepal, the season.
company launched its first hair oil for men, viz. PROstyle
Exhibit 4: Relative outperformance to Sensex (3QFY2011)
Dandruff Control Hair Oil.
Sensex (0.4)
Johnson & Johnson launched the nicotine gum. A new variant BSE FMCG (4.9)
GCPL
of Alpenliebe and Alpenliebe Eclairs was introduced by Perfetti Marico (7.4) (3.2)
VanMelle. Emami launched two new products under the Boroplus ITC (6.3)
Asian Paints 10.9
brand, namely Boroplus Healthy & Fair Winter Cream and GSKCHL 7.0
Boroplus Intensive Skin Therapy Cream. Godfrey Philips launched Nestle 9.3
Dabur (6.9)
variants in its seven-year old brand, Marlboro, in the king-size Colgate (2.2)
or 84-mm segment. HUL (5.3)
(8.0)
(3.0)
2.0
7.0
12.0
Source: BSE, Angel Research
Refer to important Disclosures at the end of the report 33
Preview
3QFY2011 Results Preview | January 3, 2011
FMCG
Midcaps to outshine heavyweights volume growth, they are currently trading at rich valuations. In
terms of their one-year forward P/Es, most of the FMCG
With most festivals falling in 3QFY2011, we expect our FMCG
companies are trading in line with their five-year averages. While
universe to report robust top-line growth of 20% yoy and
the long-term consumption story for the FMCG industry remains
earnings growth of 19% yoy. Most of the companies are expected
intact, any further re-rating hereon seems less likely owing to
to register margin expansion largely aided by robust top-line
concerns over high input costs.
growth. Sector leader, HUL, is expected to report robust 11.5%
yoy growth in top-line driven by both value and volume growth. Remain equal-weight on sector
The company is expected to post 7.7% yoy growth in earnings
We continue to emphasise on selective stock picking and prefer
(recurring) despite margin contraction. We expect ITC to deliver
companies with a leadership position in their product categories,
18.9% yoy growth in revenues during the quarter and 17.2%
a diverse product portfolio and with stronger pricing power, as
yoy growth in earnings, aided by margin expansion. Overall,
we believe they are better placed to combat the vagaries of
the company's margins would largely receive a fillip aided by
high input costs.
the cigarette division on account of the absorption of earlier
rate hikes and benign tobacco price environment. mid-caps,
In mid-caps, we maintain an Accumulate on GCPL (due to
significant margin expansion and GSL consolidation would
Valuations rich, recommend stock-specific approach
address portfolio concerns), and Marico (a play on the valuation
Post the recent rally in most FMCG stocks on the back of steady We
gap). We upgrade Dabur to a Buy post integrating its recent
earnings growth, significant margin expansion and sustained acquisitions.
Exhibit 5: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Asian Paints ^ 2,875 2,011 24.1 18.6 (104) 236.2 18.9 24.6 18.9 80.5 92.8 113.5 35.7 31.0 25.3 - Neutral
Colgate 868 565 15.2 21.4 80 107.4 (7.7) 7.9 (7.7) 31.1 32.8 37.3 27.9 26.5 23.3 820 Reduce
Dabur India ^ 100 1,140 23.1 19.6 40 171.2 24.3 2.0 24.3 2.9 3.5 4.7 34.8 29.0 21.5 121 Buy
GCPL ^ 385 972 87.9 20.3 65 147.7 73.5 4.6 65.2 10.5 14.9 18.7 36.7 25.9 20.6 410 Accumulate
GSK Consumer * 2,313 525 25.6 12.5 371 56.7 68.5 13.5 68.3 72.0 87.3 103.6 32.1 26.5 22.3 - Neutral
HUL 312 5,023 11.5 15.7 (30) 698.8 7.7 3.2 7.6 9.6 10.6 12.0 32.4 29.6 26.1 276 Reduce
ITC 175 5,388 18.9 37.7 104 1,341.2 17.2 3.5 16.5 5.3 6.4 7.4 32.8 27.3 23.7 - Neutral
Marico ^ 120 815 21.7 13.9 (90) 78.9 26.8 1.3 26.8 3.9 4.9 5.7 30.6 24.7 21.3 136 Accumulate
Nestle * 3,795 1,591 17.7 17.8 309 187.3 65.9 19.4 65.9 84.4 103.5 125.0 45.0 36.7 30.4 3,501 Reduce
Source: Company, Angel Research; Note: Price as on December 31, 2010; * December year ending; ^ Consolidated
.V.S
Kapur/Sreekanth .V
Analyst: Chitrangda Kapur/Sreekanth P .S
Refer to important Disclosures at the end of the report 34
Preview
3QFY2011 Results Preview | January 3, 2011
Infrastructure
We expect the infrastructure sector to post decent numbers - irrigation and road projects. Management has guided for a
especially on the top-line front - for 3QFY2011 as the minimum 18% yoy growth in revenues for FY2011, implying a
construction activity picks up in the second half of the year. growth of ~40% in 2HFY2011, which exceeds our expectation
of reasonable growth of ~24%. We project marginal decline in
Exhibit 1: Revenue trend (3QFY2011E)
12,000 90.0
EBITDA margins at 9.2% and net profit de-growth of ~7.6%
78.9
10,000
80.0 for the quarter to `42.3cr mainly on account of higher interest
70.0
8,000 46.8 60.0 costs.
50.0
6,000
40.0
4,000
22.0 22.3 26.0
17.4
26.4
30.0
Nagarjuna Construction (NCC)
10.1 17.8
20.0
2,000
10.0 We project the company to post decent revenue growth of 22.3%
- -
yoy for 3QFY2011 to `1,452cr. Management has guided for
L&T
MPL
Sadbhav
IRB Infra
NCC
Simplex In.
IVRCL Infra
HCC
JAL
revenue growth of ~20% for FY2011 (standalone), which implies
growth of >25% in 2HFY2011. We expect the company to
Top -line (` cr, LHS) yoy chg (%, RHS)
deliver as per management guidance given its diversified order
Source: Company, Angel Research
book and consistent performance over the past quarters. We
On the earnings front the picture would be mixed as the sector project stable EBITDA margins of 9.6% and net profit growth of
is still plagued by high interest cost owing to rising interest rates 9.3% for the quarter to `52.3cr assuming a tax rate of 37.5%.
and increasing working capital requirement leading to increase
Hindustan Construction Company (HCC)
in overall debt levels. We expect IVRCL Infra and Madhucon
Projects in our coverage universe to lag on the bottom-line We project modest ~10.1% yoy growth in revenues for
growth front for the quarter compared to its peers on account 3QFY2011 to `994.1cr impacted by the AP crisis and high
of higher interest cost. exposure to longer gestation period orders. We project stable
Exhibit 2: Earnings trend (3QFY2011E) EBITDA margins at 12.6% and net profit growth of 19.2% to
800 218.1 250.0 `17.6cr for the quarter primarily due to the low base effect.
200.0
600 IRB Infra
150.0
400
56.0 51.0
100.0 We estimate consolidated revenue growth of ~78.9% yoy for
46.9
200
19.2
(7.6)
9.3 3.4
50.0
3QFY2011 on the back of the increase in construction and
-
(16.3) EPC (C&EPC) revenues of `572cr for the quarter. However,
0 (50.0)
EBITDA margins are expected to decline given higher
Sadbhav
IRB Infra
IVRCL Infra
L&T
JAL
MPL
NCC
Simplex In.
HCC
contribution to top-line from the low-margin C&EPC segment
Earning (` cr, LHS) yoy chg (%, RHS)
compared to the BOT revenues. Hence, EBITDA margins are
Source: Company, Angel Research expected at 37.8%. We project net profit before tax and after
tax at `167.9cr and `134.4cr respectively, for 3QFY2011. PAT
3QFY2011 expectations is expected to increase 46.9% yoy assuming a tax rate of 20%
Larsen and Toubro (L&T) for the quarter.
We expect L&T to record revenues of `10,202cr, a substantial Simplex Infra
jump of 26.4% yoy. For FY2011, management has guided for We project a decent 17.4% yoy growth in revenues for
20% yoy growth in revenues, which implies growth of ~27% in 3QFY2011 to `1,250cr. We expect EBITDA margins to improve
2HFY2011. On the EBITDA front, we expect margins to be flat by 106bp to 10.0%, which is in line with management guidance.
at 11.3% as against 11.8% in 3QFY2010. We project net profit Net profit is expected to post a staggering ~51% jump to `34.8cr
at `720cr, a modest increase of 3.4% yoy primarily due to higher for the quarter primarily due to the low base effect.
interest cost.
IVRCL Infra (IVRCL)
We project IVRCL Infra to clock revenue growth of ~17.8% yoy
for 3QFY2011 to `1,391cr as against management guidance
of `1,500-1,600cr, primarily on the back of the slow-moving
Refer to important Disclosures at the end of the report 35
Preview
3QFY2011 Results Preview | January 3, 2011
Infrastructure
Key Developments ,
projects on BOT toll basis with more VGF so that the projects
Road sector plagued by constant changes are viable.
Over the last few months, there has been a lull in the award Lavasa under environment scanner
activity from NHAI primarily due to policy and capacity issues, We have been maintaining that HCC is no longer a construction
some of which are as below: play, as most of its value accretion is from its real estate
During the quarter, in its attempts to avoid a transport strike, subsidiary - Lavasa - for which the company is seeking exorbitant
the government lowered the toll (base) rates slab for three-axle valuations and beyond our estimates. Further, as per our house
commercial vehicles to `2.40/km from `3.45/km earlier. This view, there are better plays in real estate, viz., HDIL and Anant
move is not expected to impact the road developers as the new Raj, which are at very compelling valuations and at low/nil net
rate will be applicable to all future PPP projects and not affect debt levels. Moreover, HCC/Lavasa is shrouded in controversy
the already awarded projects. Thus, the new rates will not impact - the CBI has sought details about money matters, it is facing
the currently operational PPP projects. To that extent, it would environment clearance issues coupled with some other alleged
not impact our estimates and valuations for IRB and ITNL. irregularities. Consequently, we expect a delay in the listing of
However, in the long run, we believe it could hit NHAI's financials Lavasa, which would be a negative for the stock performance
(which are already under pressure) in turn impacting the going ahead.
awarding activity. We estimate that this road transport ministry's Thus, though our SOTP target price of `59 for HCC implies an
agreement with the truckers could lead to a potential loss of upside of ~20% from current levels, we recommend investors
~`350cr annually for NHAI. Besides, we believe that it is a bad to consider other stocks in the sector including IVRCL, NCC
precedent set by the government, as in the future in case of a and ITNL, which are also trading at attractive valuations.
similar situation arising pertaining to rates, it is quite possible
that the government may once again be caught on the back Sensex v/s infrastructure stocks
foot, which is fundamentally negative for the sector. Moreover,
The infrastructure sector stocks have taken a beating in recent
new projects likely to be awarded under the new proposed toll
times (barring L&T) and underperformed the markets on account
rate may find fewer bidders or the bidders may demand higher
of dismal 2QFY2011 performance on the earnings front.
viability gap funding (VGF) to make the projects viable.
Exhibit 3: Relative underperformance to Sensex (3QFY11)
Lack of a succession plan at the NHAI has impacted the
(3.2) L&T
award of projects. Appointment of a successor to the outgoing
(13.1) Simplex In.
chairman, Brijeshwar Singh, is still pending. In the interim, the (19.4) Sadbhav
ministry has asked Brijeshwar Singh, who retired on August 31, (10.1) NCC
(16.8) MPL
2010, to continue for another one month after serving the three (12.3) JAL
month extension till such time a new chairman is appointed. (19.7) IVRCL Infra
(13.4) IRB Infra
The finance ministry has put a cap on the yearly annuity (17.1) HCC
outgo at the total cess collected by NHAI. NHAI is expected to 2.2 BSE Sensex
receive `8,500cr as its share of road cess for the current fiscal (25.0) (20.0) (15.0) (10.0) (5.0) - 5.0
and its annuity payments are also expected to be in the same Source: Angel Research
range. However, the highway authority may find it difficult to
award further projects on annuity basis owing to the new cap Earnings for 2QFY2011 were disappointing, mainly for the
According to its roadmap, NHAI has to award projects worth mid-size contractors. The slippage in the profit was due to the
`40,000cr on annuity basis in the current and next fiscal. lower-than-expected EBITDA margins and higher interest costs,
However, the cess amount is expected to increase by mere 5.1% though top-line growth was broadly in line.
a year. Under NHAI's work plan, 20% of the projects would be
awarded on BOT annuity, 65% on BOT toll and the rest on
engineering-procurement-contract basis. With this, NHAI's
annuity outgo is expected to increase to around `13,000cr. Thus
annuity cap may force NHAI to award majority of the new
Refer to important Disclosures at the end of the report 36
Preview
3QFY2011 Results Preview | January 3, 2011
Infrastructure
Exhibit 4: 2QFY2011 Earnings growth Favourable risk-reward ratio
140.0 120.1
120.0
100.0
The sector, after outperforming in the initial run-up from abysmal
80.0
60.0
levels, has underperformed over the last one year. As against a
39.9
40.0
12.0 17.4% return generated by the Sensex over the last one year,
20.0 4.7
- most construction stocks have generated negative returns
(20.0)
(40.0) (16.3)
(4.4)
(excluding L&T), leading to underperformance ranging from
(60.0) (43.7)
(51.3) 18-50%.
L&T
IRB Infra
NCC
HCC
JAL
Simplex Inf.
Madhucon
IVRCL Infra
Exhibit 5: Coverage universe underperforming since last 12 months
30.0
Source: Company, Angel Research 17.8
20.0 17.4
The lull in execution, which we believe is temporary in nature, 10.0
(0.3)
was also partially responsible for the underperformance of the -
sector. Nonetheless, post the lacklustre performance the infra
IRB Infra
MPL
Sadbhav
JAL
NCC
Simplex In.
IVRCL Infra
L&T
HCC
BSE Sensex
(10.0)
stocks are trading at attractive valuations, and we believe that (20.0) (7.8) (15.1)
several stocks have limited downside from current levels.
(30.0)
(26.5)
Therefore, we remain overweight on infra and recommend (33.0)
(27.9) (28.4) (25.9)
(40.0)
investors to seize the opportunity to increase exposure to the
Source: Company; Angel Research
sector.
Currently, the stocks are trading at attractive valuations -
Outlook
available at 6-8x FY2012E earnings, excluding L&T. Also, we
Robust medium to long-term growth prospects expect the earnings momentum to pick up in 2HFY2011 on the
back of strong order book. From our universe, we prefer IVRCL
The Eleventh Five-Year Plan missed its projections by ~20% in
Infra, NCC and ITNL due to the relative comfort on the execution
the initial three years, and we believe that even if this
front, healthy order book position and attractive valuations. We
performance is maintained, it would lead to huge opportunities
have valued the construction companies on SOTP basis, wherein
for the infrastructure players. Going ahead, infrastructure
for the core construction business we have assigned earnings
investment is projected to touch US $135bn p.a. in FY2011
multiple of 10-14x (excluding L&T) based on certain quantitative
and FY2012, which represents 145% growth over the last three
and qualitative factors. The listed (unlisted) subsidiaries of the
year's annual spend of US $55bn. Moreover, we expect the
construction companies have been valued at 30% discount to
power, road and water segments to witness maximum traction.
their CMP (1-1.5x book value).
Exhibit 6: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) *Adj. P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY10 % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
HCC 49 994 10.1 12.6 (38.7) 17.6 19.2 0.3 18.4 1.3 1.6 1.8 8.6 7.2 6.3 59 Buy
IRB Infra^ 226 775 78.9 37.8 (1464.8) 134.4 46.9 4.0 47.0 11.6 15.2 15.9 7.4 5.6 5.4 265 Buy
IVRCL Infra 129 1,391 17.8 9.2 (37.0) 42.3 (7.6) 3.2 (7.6) 7.8 7.7 9.5 10.3 10.5 8.5 181 Buy
JP Associate 106 3,616 22.0 26.6 (326.8) 327.7 218.1 1.5 218.1 4.7 5.3 8.2 22.8 19.9 12.9 160 Buy
MPL 123 411 46.8 8.8 (355.6) 9.1 (16.3) 1.2 (16.1) 6.2 7.3 9.2 6.8 5.7 4.6 173 Buy
NCC 141 1,452 22.3 9.6 (29.8) 52.3 9.3 2.0 10.2 7.8 8.5 10.0 10.9 10.0 8.5 196 Buy
Sadbhav Engg 120 397.0 26.0 11.2 206.6 22.0 56.0 1.8 56.0 3.9 6.3 8.3 8.0 4.9 3.8 170 Buy
Simplex Infra 411 1,250 17.4 10.0 106.4 34.8 51.0 7.0 50.9 25.6 30.3 37.2 16.0 13.6 11.0 521 Buy
L&T 1,979 10,202 26.4 11.3 (56.3) 720.0 3.4 11.8 3.4 47.3 54.7 70.1 31.7 27.4 21.4 - Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2010, Target prices are based on SOTP methodology; ^Consolidated numbers; *(1) For HCC value of Lavasa
and Road BOT totals to `37.4/share; (2) For IRB, investments in BOT and real estate totals to `140/share; (3) For IVRCL, value of IVRCL Assets and BOT projects totals to
`48/share; (4) For JAL, no investments have been adjusted; (5) For Madhucon Projects, Road BOT and other investments total to `81.1/share; (6) For Nagarjuna, value of land
bank, BOT projects and investments total to `55.8/share;(7) For Sadbhav, its investments in BOT projects totals to `88.4/share; (8)For Simplex Infra, there are no major
investments in subsidiary; and (9) For L&T, investments in subsidiaries amounts to `482/share.
Kanani
Analyst: Shailesh Kanani / Nitin Arora
Refer to important Disclosures at the end of the report 37
Preview
3QFY2011 Results Preview | January 3, 2011
Logistics
For 3QFY2011, we expect Concor and Gateway Distripark have stabilised at higher levels albeit on the low base of FY2010.
(GDL) to report strong revenue growth of 11.6% and 10.7% Going ahead, we expect the ports to sustain the monthly
yoy respectively, on the back of healthy volume growth in the run-rate and surpass the 7.0mn TEU mark set for FY2011.
Exim segment following inventory build-up ahead of the festive Company-wise, Concor is expected to post a 13.0% yoy increase
season both domestically as well as abroad. We expect Allcargo in Exim volumes, while GDL is expected to report 9.6% yoy
Global Logistics (AGL) to post robust revenue growth of 25.7% growth in CFS volumes for 3QFY11.
yoy on a low base and consistently improving ECU Line numbers.
Operating margins are expected to remain stable for our Exports picking up
coverage universe. While Concor and GDL are expected to
In October 2010, India's exports stood at `79,763cr (+15.3%
report moderate PAT growth of 6.9% and 4.8% yoy respectively,
yoy), whereas imports were valued at `122,970cr (+1.5% yoy).
we expect AGL's PAT to spike 61.5% yoy on a low base and
Cumulative value of exports for the April-October 2010 period
moderate appreciation (2.6%) of rupee vis-à-vis the euro
stood at `556,162cr (+20.3% yoy), while the cumulative value
during the quarter. Overall, we expect a 16.0% and 24.4% yoy
of imports stood at `876,997cr (+17.9% yoy) for the period.
increase in revenue and PAT respectively, for our coverage
Thus, the trade deficit increased 14.2% yoy to `320,835cr during
universe.
the mentioned period. The revival in Exim trade has been visible
Exhibit 1: Revenue and PAT estimates for 3QFY2011E in the overall port throughput as well as container volumes.
70
61.5
60 Exhibit 3: Steadily growing EXIM trade
50 140,000
120,000
40
(%)
100,000
30 25.7
(` cr)
80,000
20
11.6 10.7 60,000
6.9
10 4.8 40,000
0 20,000
Revenue PAT 0
Jan-05
Apr-05
Jul-05
Oct-05
Jan-09
Apr-09
Jul-09
Oct-09
Jan-06
Apr-06
Jul-06
Oct-06
Jan-08
Apr-08
Jul-08
Oct-08
Jan-07
Apr-07
Jul-07
Oct-07
Jan-10
Apr-10
Jul-10
Oct-10
Concor Gateway Distriparks Allcargo Logistics
Source: Angel Research; Note: Allcargo-December year ending
Imports Exports
Container volumes stabilising at higher levels Source: RBI, Angel Research
The container traffic data released for FY2011 YTD (April-Nov Key developments
2010) by the Indian Port Association (IPA) has registered robust
Railways hiked Exim haulage charges
growth of 12.2% yoy on a low base and demand generated by
the festive season. The JNPT port, which handles around 60% The recent revision by Indian Railways (IR) on transportation of
of the country's container volumes, has registered 7.8% yoy nine commodities, which was put on hold, has now been revised
growth in volumes. The Chennai port, which handles around upwards with effect from Jan 2011. Consequently, Concor as
17% of the country's container volumes, has recorded strong well as the private operators will be revising their rail freight
increase of 28.0% yoy in volumes for the mentioned period. tariffs with effect from mid-Jan 2011. We believe this could
The container data for FY2011 so far indicates that the volumes result in substantial traffic moving to the road segment if the
operators choose to pass on majority of the hike. However,
Exhibit 2: Container traffic - Sustaining post recovery
680 35
given the intense competition, the operators may not be in a
660
654
649
640 636
643
30 position to pass on the hike substantially, which could impact
630 25
profitability of the rail container operators going forward.
640 624
20
620 607 604 608 608
('000 TEUs)
15
600
AGL continues inorganic expansion
(%)
10
580 569
562 5
553 553 554 555
560
-
540 (5) During 4QCY2010, AGL's wholly-owned subsidiary acquired
520 (10)
500 (15) a controlling stake for US $22mn in two Hong Kong based
companies engaged in non-vessel owning common Carrier
Jul-09
Sep-09
Feb-10
May-10
Jul-10
Sep-10
Aug-09
Oct-09
Nov-09
Dec-09
Jan-10
Mar-10
Apr-10
Jun-10
Aug-10
Oct-10
Nov-10
Container Volumes (LHS) YoY change (RHS)
(NVOCC) business in China and other parts of the eastern
Source: IPA, Angel Research region. While AGL already has eight offices in China, the
Refer to important Disclosures at the end of the report 38
Preview
3QFY2011 Results Preview | January 3, 2011
Logistics
acquisition adds one in Shanghai (75% stake with an option to following increased private participation in handling container
raise it further to 100% at same price) and another in Ningbo terminals and customer preference in transporting cargo in
(100% stake). The acquisition has been made at reasonable containerised form as it reduces handling costs.
valuations of 6.2x CY2009 EBITDA. Further, the acquisition is
While the slowdown in global trade in FY2009 impacted
expected to add US $35mn in revenues and US $3.6mn at the
containerisation more than the overall cargo traffic, the trend
EBITDA level on a yearly basis. AGL has also acquired two vessels
reversed in 2HFY2010 and container traffic is expected to
of approximately 6,500 dead weight tones (DWT) each to
outperform overall cargo going ahead.
augment its project cargo movement business. This would help
it in saving the ship chartering and hiring charges and increase Exhibit 4: Container traffic to outperform cargo traffic in FY2011E
control across the project cargo supply chain. 30
3rd container terminal at JNPT came
25 into existence boosting volumes
GDL outlines expansion roadmap
20
GDL's 60% subsidiary, Gateway Distriparks (Kerala) (GDKL),
(%)
15
won a tender floated by the Cochin Port Trust for a 2.58 hectare 10
plot in Vallarpadam on a 30-year lease. It is a prime site opposite 5
Slowdown in global trade has impacted
container volumes more than overall cargo
the US $442mn International Container Transhipment Terminal 0
(ICTT), which is India's first trans-shipment hub designed to FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010
EXIM growth YoY Container growth YoY
reduce dependence on ports like Colombo, Dubai, Singapore
and Salalah. GDKL already owns an eight-hectare freehold Source: IPA, Angel Research
property at Kalamasserry, which together with this leasehold
Bullish on the container industry on low penetration
land, will enable it to create adequate capacities to handle
and customer preference
containers in sync with the capacities and throughput of the
ICTT. GDKL's total investment in Vallarpadam and Kalamasserry Non-bulk cargo, which constitutes ~35% of the total cargo at
exceeds `50cr. However, we expect GDKL to witness stable major ports, has the potential to be transported in containerised
volumes only after 1HFY2012 once the necessary infrastructure form. Earlier, only basic goods were suitable for shipment in
is established. containers, but now most items can be shipped in a container.
It is estimated that 75-80% of the total non-bulk cargo can be
Competition, higher haulage charges to impact
containerised. Currently, the level of containerisation in India is
Concor's Exim growth
at ~51%, compared to 80% globally, which indicates the scope
Concor's OPM has been declining over the years, though since of growth on account of improved infrastructure. The share of
the last two-three years it has stabilised at around 25-27% levels. containerised traffic increased by around 700bp during
Margins declined mainly on account of lower ground rent FY2007-09 despite the slowdown in trade in FY2009; however,
revenue, inability to completely pass on the hike in haulage it tapered down in FY2010. We expect the share of
charges due to intense competition and rebates to clients, all of containerisation to sustain at current levels in the near term as
which pulled down the company's Exim performance. We believe it helps to reduce handling costs. Over the next five years
that volumes would remain subdued in Concor's Exim segment however, it is expected to increase to 62-65%.
in FY2011 due to the slowdown in the northern routes owing to
Exhibit 5: Improving levels of containerisation
heavy monsoons and lower exports, leading to higher empties. 600 56
In addition, the increase in haulage charges by the IR would 54 54 54
500
further dent Concor's Exim growth. 52 52 52
400
50
('000 TEUs)
Container traffic outperforming overall cargo traffic
(%)
300 48
47
47 47
46
200 46
Container traffic has increased from 3.4mn TEUs in FY2003 to 45
44
6.9mn TEUs in FY2010, registering 11% CAGR during the 100
42
period. Meanwhile, cargo at major ports posted 9% CAGR 0 40
FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY11TD
during the mentioned period. The share of container traffic in EXIM traffic at major ports-LHS Non-bulk cargo-LHS Container share in non bulk cargo-RHS
the current decade increased from 11.5% to 18.0% in FY2010, Source: IPA, Angel Research
Refer to important Disclosures at the end of the report 39
Preview
3QFY2011 Results Preview | January 3, 2011
Logistics
Sensex v/s logistics stocks Outlook
During 3QFY2011, the Sensex posted moderate gain of 2.2%. We believe that sustained growth in the Indian economy with
However, during the quarter, Concor and AGL underperformed GDP growth expected at 8.5% over the next few years, as well
the Sensex by 551bp and 1,180bp, respectively. The overhang as emergence of India as a global outsourcing hub will facilitate
of the IR freight hike from January 2011 is expected to impact the country's container trade. In the current decade, container
rail container operator margins and investors have begun to traffic registered 12% CAGR compared to the 9% CAGR posted
discount the same. For GDL, we expect the increase in the pace by the total traffic at the major ports. We expect this trend to
of capex post cash infusion by Blackstone and PAT break-even continue and container traffic to register 11% CAGR over the
in the rail business to be the key triggers for its stock next five years driven by the addition of new container terminals
performance. AGL's performance shall be largely driven by the and increased containerisation.
uptick in volumes and realisations at its European subsidiary
We prefer companies that provide a decent blend of growth
ECU Line, which contributes ~70% to its revenue. AGL currently
opportunities and are quoting at attractive valuations. We
trades at attractive valuations of 6.8x FY2012E earnings and
maintain a Reduce on Concor as the company is losing its
1.1x FY2012E book value. However, Concor's ability to sustain
pricing power in the high-margin Exim segment and is trading
operating margins along with market share in rail freight will
We AGL
at expensive valuations. We maintain a Buy on AGL owing to
determine its stock performance.
reasonable valuations and improved performance by ECU Line
Exhibit 6: Underperforming the Sensex in 3QFY2011 We
over the last few quarters. We recommend an Accumulate on
Sensex GDL Concor AGL CAGR
GDL and expect the company to register 14.1% CAGR in EPS
4.0
2.2 over FY2010-12 on account of being present at strategic
2.0 1.0
break-
locations, its ongoing expansion plans and break-even in the
0.0
(2.0)
rail business at the PAT level.
PA
(%)
(4.0)
(3.3)
(6.0)
(8.0)
(10.0)
(9.6)
(12.0)
Source: Bloomberg, Angel Research
Exhibit 7: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Allcargo* 147 683.5 25.7 11.1 159 45.8 61.5 3.5 61.5 13.4 17.0 21.7 11.0 8.6 6.8 217.0 Buy
Concor 1,257 987.2 11.6 27.5 (133) 214.4 6.9 16.5 6.9 59.8 66.0 72.3 21.0 19.0 17.4 1,194 Reduce
Gateway Dist. 113 142.4 10.7 26.5 (198) 21.0 4.8 2.0 4.8 7.3 7.5 9.5 15.4 15.1 11.8 123 Accumulate
Source: Company, Angel Research; Note: Price as on December 31, 2010; *data for CY2010-12E
Param
Analyst: Param Desai / Mihir Salot
Refer to important Disclosures at the end of the report 40
Preview
3QFY2011 Results Preview | January 3, 2011
Metals
During 3QFY2011, steel prices remained muted on a qoq basis, higher by 24.2% yoy to US $615/tonne. Average domestic HRC
as appreciating INR led to price cuts in November, reversing prices increased by 1.0% qoq to `35,000/tonne and 6.6% yoy.
October gains; but later in December, companies hiked steel
prices by `500/tonne. Base metal prices also witnessed huge Exhibit 2: World HRC prices witness a slight uptick qoq
1,200
volatility during the quarter; however, prices increased by
1,000
11-19% qoq due to Chinese production cuts and US Treasury
(US $/tonne)
800
commitment to buy US $600bn treasury securities.
600
During 3QFY2011, the BSE metals index outperformed the 400
Sensex by 2.1% and gained 4.3% in absolute terms. A series of 200
industry and corporate events took place during the quarter, 0
which dictated the direction of few stocks. In the ferrous space, 1QFY08 3QFY08 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 3QFY11
Tata Steel topped the charts, outperforming the Sensex by 2.2%, World HRC prices China export HRC prices (FOB)
on account of Rio bidding for Riversdale, in which Tata Steel Source: Bloomberg, Angel Research
holds a 24% stake. SAIL underperformed the Sensex by 13.2%
Exhibit 3: Domestic HRC prices
on reports that its FPO price would be at lower levels. Sesa 45,000
Goa underperformed the Sensex by 1.9%, while NMDC 40,000
outperformed by 4.3%. On the non-ferrous front, Hindustan 35,000
30,000
Zinc, Hindalco and Sterlite outperformed the Sensex by 24.1%,
(`/tonne)
25,000
22.8% and 9.6%, respectively, on account of higher LME prices. 20,000
15,000
Exhibit 1: Sensex v/s metal stocks (3QFY2011) 10,000
Metal Majors Abs. Relative to 5,000
0
Returns (%) Sensex (%)
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Sensex 2.2
Source: CRISIL Research, Angel Research
BSE Metals 4.3 2.1
Domestic steel demand remains strong: As per the steel ministry,
SAIL (11.0) (13.2)
Indian steel consumption for FY2011 is expected to grow at
Tata Steel 4.4 2.2
10%. In the eight months of FY2011, steel consumption rose by
JSW Steel (12.1) (14.3) 7.2% to 43.5mn tonnes, while steel production grew by 5.0%.
Hindalco 24.9 22.8 For 3QFY2011, we expect steel companies to register higher
Nalco (2.0) (4.2) sales volume growth of 4-14% yoy.
Sterlite Ind 11.7 9.6 Major events
Hindustan Zinc 26.3 24.1
Coal India (CIL) and MOIL debut: While CIL's issue, which
NMDC 6.5 4.3
mopped up `15,200cr in October, was the biggest IPO in the
Sesa Goa 0.2 (1.9) history of the Indian capital market, MOIL was subscribed 55x,
Source: Bloomberg, Angel Research the highest total subscription multiple witnessed this year. On
Ferrous sector the listing day, CIL and MOIL closed higher at 40% and 24%,
respectively.
Steel companies hiked steel prices by `1000/tonne in October,
which was reversed in November to counter cheaper imports JSW Ispat Steel: JSW Steel will buy a 41.3% controlling stake in
as the INR appreciated against the USD. However, in December, Ispat through fresh equity issuance of 108.6cr for `2,157cr
companies increased prices by `500/tonne on the back of (acquisition price: `19.85/share). We believe the acquisition is
improvement in demand and rising raw-material prices. positive for JSW Steel in the long term, as it will become India's
largest steel company with a total capacity of 14.3mn tonnes.
In 3QFY2011, average world HRC prices marginally increased
With operational synergies expected to accrue in FY2012, Ispat
by 1.2% qoq to US $675/tonne (up 20.3% yoy). Average
is likely to post positive EBITDA/tonne of US $50. Moreover, as
Chinese export prices showed a flattish trend qoq and were
and when Ispat's capex projects (coke over, pellet and power
Refer to important Disclosures at the end of the report 41
Preview
3QFY2011 Results Preview | January 3, 2011
Metals
plant) are completed, EBITDA/tonne is likely to increase to First
Sterlite acquires Skorpion Zinc Mine - First phase of the Anglo
US $100-125. Zinc acquisition: During the quarter, Sterlite completed the
acquisition of Skorpion Zinc Mine (Namibia) from Anglo for
Rio bidding for Riversdale: Rio Tinto made a bid of AUD3.5bn
US $707mn. The Namibian asset is part of the acquisition of
(AUD15/share) to take over Riversdale Mining, in which Tata
Anglo American's zinc assets announced in May 2010 for a
Steel has a 24.2% stake, and later revised it to AUD3.9bn
consideration of US $1,338mn. As per Sterlite, the acquisition
(AUD16/share). International Coal Ventures Ltd., comprising
has been undertaken by its wholly owned subsidiary Sterlite
SAIL, CIL, NTPC, RINL and NMDC, is also reportedly in the
Infra, as against intended under Hindustan Zinc because the
race for Riversdale and has appointed Citigroup to conduct a
Indian government's approval was not received within the
due diligence on Riversdale. While a counter bid from Tata Steel
contractual completion timeline for Skorpion. The acquisitions
seems unlikely, given its high leverage, we believe Tata Steel
of the other two mines (Lisheen mine and Black Mountain mines)
will continue to hold on to its existing stake and may not sell out
are expected to be completed by 1QFY2012.
as its investment in Riversdale is of strategic importance and
will help in increasing the raw-material integration level at Tata GoM approves new mining policy: The Group of Ministers
Steel Europe. (GoM) has approved the draft mining bill, which provides for
sharing 26% of mining profits with locals. The approved draft
Karnataka High Court upholds ban on iron ore, iron ore exports
will now be placed before the cabinet. As clarifications are
decrease: On November 19, 2010, the Karnataka High Court
required on the implementation of the bill, we feel mining stocks
upheld the government's decision to halt iron ore exports. Iron
will remain under pressure in the near term.
ore exporters have contested the ban and the matter is now
being heard by the Supreme Court. Next hearing by the Supreme raw-material
4QFY2011 raw-material prices fixed higher: The settlement of
Court is expected in the third week of January 2011. benchmark coking coal contracts for the January-March 2011
quarter was higher by 7.7% at US $225/tonne (US $209/tonne
According to the FIMI, Indian iron ore exports for November for October-December 2010). In case of iron ore negotiations,
were down 30.6% yoy to 8.1mn tonnes. Total iron ore exports media reports suggest a hike of 7-10% over 3QFY2011. During
for April-November were down 16% yoy to 54.6mn tonnes. the quarter, average spot iron ore prices for 63% Fe grade (CFR,
China) were up 63.4% yoy and 14.0% qoq to US $163/tonne.
Exhibit 4: Iron ore exports to China down yoy
16
Exhibit 5: Iron ore prices and inventory in China
14
210 90
12
180 75
10
(mn tonnes)
150
60
(US $/tonne)
8
(mn tonnes)
120
6 45
90
4 30
60
2 15
30
0 0 0
May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Source: Bloomberg, Angel Research Iron ore inventory (RHS) Indian Iron ore 63% Fe, CFR China (LHS)
Sesa Goa closes third-party operations in Orissa: Sesa Goa Source: Bloomberg, Angel Research
has closed its mining operations in Thakurani mines in Barbil, Outlook
Orissa, from December 1, 2010, as it was unable to renew the
Iron ore prices to remain firm on supply disturbances: We expect
mining contract on viable commercial terms on a long-term
iron ore prices to remain firm because of the continuing ban
basis. Sesa Goa started operating the Thakurani mines from
on exports by Karnataka. Further, Chinese iron ore imports
1999 under a 10-year contract that expired in June 2009. Since
increased by 25.5% mom to 57.4mn tonnes in November, thus
then, the company has been carrying out its operations on short-
providing support to prices.
term renewals. In FY2010, iron ore sales volume from Orissa
mine stood at 1.9mn tonnes. In our view, Sesa Goa's volume According to World Steel, global capacity utilisation levels have
growth is at risk, given the closure at Orissa and ban in marginally increased to ~75% in 3QF20Y11E as compared to
Karnataka. 73-74% in 2QFY2011. With increasing raw-material prices and
low inventory levels, companies are expected to raise prices by
Refer to important Disclosures at the end of the report 42
Preview
3QFY2011 Results Preview | January 3, 2011
Metals
`1,000-1,500/tonne in January. We expect steel prices to remain Exhibit 6: Average base metal prices (US $/tonne)
firm in the coming months. 3QFY11 3QFY10 yoy % 2QFY11 qoq %
Copper 8,631 6,650 29.8 7,260 18.9
3QFY2011 expectations: For 3QFY2011, we expect steel
Aluminium 2,341 2,002 16.9 2,090 12.0
volumes to increase, aided by higher realisations. Thus, the top
Alumina 353 306 15.5 317 11.2
line of the steel companies under our coverage is expected to
Zinc 2,314 2,212 4.6 2,015 14.9
grow by 7-26% yoy. However, due to relatively higher
Lead 2,387 2,285 4.5 2,039 17.0
raw-material costs, margins of steel companies are likely to Source: Bloomberg, Angel Research
contract by 440-940bp yoy-except for Tata Steel, which is
expected to report a 166bp margin expansion. For Sesa Goa, Exhibit 7: Base metal inventory levels (Indexed to 100)
the top line is expected to marginally dip on account of lower 250
Tata
iron ore sales volume. We remain positive on Tata Steel and 200
JSW Steel. 150
Non-ferrous sector 100
The quarter witnessed great volatility with 1) temporary tightness 50
in the Chinese domestic market due to energy conservation- 0
related production cuts; and 2) metal prices touching record Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10
high in early November, after the Federal Reserve announced Copper Aluminium Zinc Lead
Source: Bloomberg, Angel Research
that it would buy US $600bn of treasury securities. However,
base metals fell the most in mid-November, as China raised Outlook
the reserve requirement for the fifth time (the sixth hike came in
In our view, the key positives for base metal prices are ongoing
December). However, the loan package of 85bn agreed
economic recovery, tighter market balances and emergence of
between Ireland and the EU supported prices thereafter.
restocking activity. Further, the launch of the physically backed
During the quarter, average LME prices of copper, aluminium, base metals exchange traded funds could be another trigger.
alumina, zinc and lead increased by 11-19% qoq and 4-30% However, developments in China need to be closely watched
yoy. During the quarter, copper touched new highs of as frequent tightening of the monetary policy to contain inflation
US $9,405/tonne. Aluminium touched 2010-high of can be somewhat discouraging.
US $2,453/tonne, while zinc and lead were also close to their
We expect non-ferrous companies to register positive top-line
2010 highs.
growth of 7-21% yoy, owing to a surge in LME prices. While
On a yoy basis, inventory levels of copper and aluminium, at Nalco is expected to report margin expansion of 434bp yoy,
the LME warehouse, were down 24.8% and 7.6%, respectively, Hindustan Zinc's margin is expected to contract by 693bp yoy
but were higher by 43.7% and 42.2% for zinc and lead, on account of higher operating cost. We maintain our
respectively. Accumulate rating on Sterlite.
Exhibit 8: Quarterly estimates cr
( ` cr )
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Hindalco 246 17,749 17.3 10.3 (128) 606 33.1 3.2 33.1 20.5 20.1 20.7 12.0 12.2 11.9 - Neutral
Hind. Zinc 1,362 2,374 7.1 55.6 (693) 1,126 (2.0) 26.7 (2.0) 95.6 97.2 123.6 14.2 14.0 11.0 - Neutral
JSW Steel 1,172 6,042 26.0 18.0 (446) 391 8.2 19.4 8.2 63.8 55.6 97.2 18.4 21.1 12.1 1,310 Accumulate
Nalco 391 1,673 20.7 25.7 434 278 79.4 4.3 79.4 12.9 18.9 21.1 30.3 20.7 18.5 316 Sell
SAIL 182 10,825 11.6 17.3 (931) 1,200 (28.4) 2.9 (28.4) 16.4 13.8 17.1 11.2 13.2 10.7 198 Accumulate
Sesa Goa 329 1,855 (1.8) 58.7 387 921 11.3 10.7 11.3 29.5 46.1 40.9 11.1 7.1 8.0 - Neutral
Sterlite Ind. 187 7,143 7.0 24.9 (60) 1,147 14.1 3.4 14.1 11.9 13.4 19.1 15.7 13.9 9.8 196 Accumulate
Tata Steel 681 27,800 6.6 13.0 166 1,392 128.4 15.1 120.2 (25.0) 73.1 80.7 (27.3) 9.3 8.4 768 Accumulate
Source: Company, Angel Research; Note: Price as on December 31, 2010; EPS calculation based on fully diluted equity
Paresh Jain/Pooja
Analyst : Paresh Jain/Pooja Jain
Refer to important Disclosures at the end of the report 43
Preview
3QFY2011 Results Preview | January 3, 2011
Oil & Gas
Prices mix, margins firm Exhibit 1: WTI crude and Indian crude oil basket prices
150
In 3QFY2011, crude oil price stood firm (hitting 27-month high) 125
at US $80-90/bbl. While natural gas price, which weakened 100
US$/ bbl
during the later part of 2QFY2011, continued its weak trend in 75
the first half of 3QFY2011 before showing some recovery in 50
25
the second half of 3QFY2011. However, petchem margins
0
improved. Refining margins were also higher sequentially due
Sep-07
May-08
Jul-08
Sep-08
May-09
Jul-09
Sep-09
May-10
Jul-10
Sep-10
May-07
Jul-07
Nov-07
Nov-08
Nov-09
Mar-10
Nov-10
Jan-07
Mar-07
Jan-08
Mar-08
Jan-09
Mar-09
Jan-10
to improvement in heating oil and naphtha cracks.
WTI Crude Avg. WTI price
Crude hits a 27-month high, passes the US $90/bbl mark Indian Crude oil basket Avg. Indian Crude oil basket
Source: Bloomberg, Angel Research
Crude price hit a 27-month high, rising past the US $90/bbl
mark, during the second fortnight of December 2010, boosted On the supply side, as per the IEA's December outlook, OECD
by an unexpected surge in global demand that fueled the biggest stocks rose by modest 0.7mnbbl in October 2010 to
drop in US crude stockpiles in more than a decade. Stockpiles 2,745mnbbl. Thus, October OECD forward demand cover rose
in the US, the world's biggest oil consumer, fell by 19mnbbls marginally to 60.1 days. However, as per November preliminary
since November 26, 2010, roughly equivalent to one day of data, OECD oil stocks fell by 8.4mnbbls. Global oil supply rose
US fuel consumption, being the biggest three-week drop since by 0.4mnbpd mom to 88.1mnbpd (its highest-ever level) in
1998. The higher-than-expected fall in inventories was due to November, largely due to increased non-OPEC production to
the cold weather in the northern hemisphere. Consequently, 53.4mnbpd, up 0.3mnbpd mom, notably from Canada,
crude oil soared substantially (~39%), since hitting a CY2010 Kazakhstan and Brazil. Global oil output in November increased
low of US $66/bbl in May, driven by a faster-than-expected by 1.6mnbpd yoy, of which half came from higher non-OPEC
recovery in global fuel demand and continued optimism for US supply, one-third came from OPEC NGLs and one-sixth came
economic recovery. Further, Chinese government's reports from OPEC crude. Non-OPEC supply is expected to average
claiming that China (world's second-largest oil-consuming 52.8mnbpd in CY2010 and 53.4mnbpd in CY2011,
country) nearly doubled its net oil-product imports in November representing growth of 1.1mnbpd and 0.6mnbpd, respectively.
led to higher crude oil price. With positive developments taking OPEC crude oil supplies also stood higher by 45kbpd in
place, crude price stood firm in 3QFY2011 (US $80-90/bbl) November to 29.2mnbpd. Effective spare capacity of OPEC,
against US $71-82/bbl in 2QFY2011. On an average, crude thus, fell marginally mom to 5.6mnbpd. The demand for OPEC
price rose by 12% qoq in 3QFY2011. Crude price has now crude and stock change for CY2011 has been raised by
moved above US $70-80/bbl, the preferred level for OPEC. 100kbpd to 29.5mnbpd on higher demand projections.
However, OPEC, at its December 11, 2010, meeting at Quito On the demand side, IEA has increased its global oil demand
(Ecuador), left production quotas unchanged after reviewing estimates by 130kbpd to 87.4mnbpd in CY2010 and by
the oil market's outlook, including overall demand and supply 260kbpd to 88.8mnbpd in CY2011 on stronger data from
projections for CY2011. OPEC has not formally changed its OECD North America and non-OECD Asia. In CY2010, yoy
output policy since agreeing on the record cut in December 2008. growth of 2.5mnbpd was mainly led by buoyant gasoil demand,
notably in 3QCY2010; however, demand growth in CY2011
The Indian crude oil basket averaged US $85.3/bbl in
should slow to 1.3mnbpd, as temporarily supportive factors fade.
3QFY2011 v/s US $74.9/bbl in 2QFY2011. Despite this recent
sharp run up, we expect crude price to average ~US $80/bbl Average gas price takes a hit, dips 11.6% qoq
in FY2011 and ~US $80-85/bbl in FY2012, as expectation of
Natural gas price, which stood weak at US $3.75-4/mmbtu in
lower demand growth in FY2012 v/s FY2011 along with
the latter part of 2QFY2011 after declining from the peak of
challenging risks to the fragile global economic recovery,
US $4.9/mmbtu in August 2010, continued its weakness and
including the adverse effect of possible currency conflicts and
touched a low of US $3.18/mmbtu in October 2010. Post that,
fears of a second banking crisis in Europe, would negatively
natural gas price tried to recover and got a fillip only towards
affect oil demand.
the beginning of December on increasing demand for gas due
to lower-than-expected temperatures, thus leading to natural
gas price hitting 3QFY2011 high of US $4.5/mmbtu towards
mid-December. However, in the subsequent weeks, despite low
Refer to important Disclosures at the end of the report 44
Preview
3QFY2011 Results Preview | January 3, 2011
Oil & Gas
temperatures, the price corrected by 10-12% due to sufficient Refining Global Indicator Margin also witnessed a marginal
gas supply. Currently, natural gas price is at US $4-4.2/mmbtu. improvement in 3QFY2011. We expect margins for complex
With this, average natural gas price in 3QFY2011 stood at refineries to improve due to the increase in heavy-light spreads
US $3.78/mmbtu, a fall of 11.6% qoq, due to subdued price in during 3QFY2011. Benchmark Singapore margins are likely
the second half of 3QFY2011. Thus, natural gas price, which to average at US $5.5-6.0/bbl v/s US $4.25/bbl in 2QFY2011.
was on a recovery path through 1QFY2011 and in the first half
Key developments
of 2QFY2011, gave up much of the gains due to subdued
demand and sufficient availability of LNG, with increasing shale Rising under recoveries put ONGC and IOC FPO in limbo
gas production in the US.
Rising crude price has again tested the government in many
Exhibit 2: Natural gas - Henry Hub prices ways. The biggest casualty is the government staring at the
14.0 possibility of missing the disinvestment target of `40,000cr in
12.0
FY2011 with FPO of two major oil companies (ONGC and
(US$/mmbtul)
10.0
8.0
IOC) in limbo. The problem is government's unwillingness to
6.0 share the mounting under recoveries beyond one-third of the
4.0 total under recovery and delay in the implementation of Kirit
2.0
0.0
Parikh committee's recommendation of freeing up diesel,
cooking gas and kerosene prices. This has led to the expectation
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-08
Mar-08
May -08
Jul-08
Sep-08
Nov-08
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
of total under recovery touching a whopping ~`70,000cr for
Henry Hub Price Average Henry Hub NG Price FY2011. Even on petrol, the price of which has been hiked six
Source: Bloomberg, Angel Research times post its deregulation on June 26, 2010, is bearing the
brunt of the under recovery as the recent December 16, 2010,
Spot LNG price during 3QFY2011 was marginally high qoq,
price hike of ~`2.96/litre was still less than the required. The
with delivered price of LNG procured by Indian firms (Petronet,
EGoM meeting, scheduled on December 30, 2010, to take a
LNG and GAIL) being in the range of US $9.0-9.5/mmbtu.
call on hiking diesel price is also postponed and, thus, only
Despite higher demand, the market is expected to remain amply
time will tell how much courage the government shows in hiking
supplied in CY2011 as new production in Russia, Yemen,
fuel prices to stem under recovery for FY2011.
Indonesia and Qatar comes on stream. Thus, we expect spot
LNG prices to be subdued going ahead. GSPC - OMCs win `18,000cr gas pipeline bids
Petchem and refining margins improved GSPC, along with its consortium partners (OMCs - IOC, HPCL
and BPCL), in a field so far dominated by GAIL and RIL, is set to
Polyethylene and polypropylene prices increased higher than
get authorisation for three major gas pipeline projects worth
naphtha, thus increasing polymer cracks sequentially. Asian
`18,000cr. In the venture, GSPC and IOC owns 52% and 26%
polymer plants operated at relatively higher rates in 3QFY2011
stake, while HPCL and BPCL holds 11% each. The consortium
on account of higher demand. Polyester prices added
is said to be ahead of the other bidders (GAIL-Engineers India
significantly to average global petchem margins due to tighter
and Adani-Welspun) in all the three projects put up for bidding.
cotton market. Demand supply imbalance resulted in a spurt in
However, the PNGRB has not yet declared the official winner
cotton prices, benefiting relatively cheaper polyester producers.
since an interim order of the Supreme Court has prevented it
The cotton market is expected to remain tight in the coming
from passing final decisions. PNGRB has requested the Supreme
quarters, leading to sustainably high polyester demand.
Court to modify its order, since the government has notified
During 3QFY2011, global refining margins on an average Section 16 of the PNGRB Act. The three trunk pipelines being
increased due to higher heating oil demand because of the won by the consortium are Mallavaram-Bhilwara,
cold weather coupled with strong Chinese demand for diesel Mehsana-Bhatinda and Bhatinda-Jammu-Srinagar wherein
due to its government's mandate to meet emission reductions GSPL , its subsidiary would be the ultimate beneficiary of
and energy-efficiency targets, lending a considerable support contructing these pipelines. We have not factored these bids for
to regional middle distillate markets. Naphtha cracks in Asia valuing GSPL, waiting for further operational and financial
continued to improve in November due to strong petrochemical visibility.
demand in line with stronger economic activity. BP's generic
Refer to important Disclosures at the end of the report 45
Preview
3QFY2011 Results Preview | January 3, 2011
Oil & Gas
Oil & gas index underperforms the Sensex last two years due to material increase in crude oil price
(US $85/bbl v/s US $79/bbl in 2QFY2011). However, the
On the bourses, the oil & gas index underperformed the Sensex
positive effect of the spurt in crude oil price to some extent has
by 0.7% in 3QFY2011 despite significant outperformance by
been offset by stronger INR/USD qoq, resulting in mere 2%
index heavyweight RIL (59.9% weightage). After a substantial
growth in the bottom line.
fall of 9.3% in 2QFY2011, RIL registered robust gains of 7.3%
during 3QFY2011 due to the improving refining margin RIL is likely to post higher GRM qoq at US $9.3/bbl v/s
scenario with cracks widening on the back of the cold weather. US $7.9/bbl. The spurt in GRMs could be attributed to higher
However, the substantial increase of 12% in average crude price, middle distillates crack and wider heavy-light crude oil spread.
resulting in mounting under recoveries and reducing chances Petchem margins are expected to improve due to better polymer
of any further deregulation reforms, has proved to be a major cracks over naphtha and higher polyester prices on account of
spoilsport for OMCs and upstream PSU companies. HPCL, BPCL higher cotton prices globally. Higher petchem and refining
and IOC registered whopping loss of 23.1%, 12.3% and 18%, margins are expected to offset the dip in natural gas production
respectively; whereas, ONGC and Oil India lost 7.7% and 7.2%, (55mmscmd v/s 60mmscmd) qoq from KG-D6.
respectively. Cairn also lost 1% despite robust gains in crude Cairn,
Cairn being highly leveraged to crude oil, is likely to benefit
price, as it awaits clearance for the Vedanta-Cairn Energy deal. from the spurt in crude oil price, although stronger INR/USD
However, gains were seen in gas companies, with GAIL and will offset gains to a certain extent. Production from MBA fields
Petronet LNG posting robust gains of 7.4% and 18%, is likely to remain stagnant qoq due to approvals awaited from
respectively, on higher petchem margins and spot LNG imports,
JV partners and management committee for additional production.
respectively. Non-index gas companies, including IGL and GSPL,
also registered gains of 12.2 and 6.8%, respectively. GAIL is expected to report flat transmission volumes qoq. Higher
transmission tariff and petchem margins are offset by higher
Exhibit 3: Relative performance to the Sensex subsidy burden, leaving bottom-line flatter qoq.
60.0
50.0 Petronet is likely to post volume growth qoq with the company
40.0
importing spot LNG cargoes due to lower production from KG-
30.0
20.0
D6. For 3QFY2011, we expect volumes to stand at 106.6TBTUs.
(%)
10.0 GSPL’s
GSPL’s bottom-line is likely to decline by 19% yoy, as we expect
0.0
(10.0)
tariff adjustment, which is happening over the last few quarters,
Q3'FY09 Q4'FY09 Q1'FY10 Q2'FY10 Q3'FY10 Q4'FY10 Q1'FY11 Q2'FY11 Q3'FY11
(20.0) to adversely impact profitability. We expect volumes to increase
(30.0) marginally by 2.5% yoy to 36mmscmd during 3QFY2011.
(40.0)
BSE Sensex BSE Oil & Gas
IGL's volumes are likely to grow by 29% yoy due to the recent
Source: Bloomberg, Angel Research
commonwealth games and remain flat qoq. Margins are likely to
3QFY2011 expectations be flat qoq and fall yoy due to increased sourcing of costlier gas.
ONGC is likely to report net realisation of US $65/bbl v/s Gujarat Gas' volumes will be supported by restart of the PMT
US $58/bbl in 3QFY2010 and US $63/bbl in 2QFY2011. field and LNG imports . We expect the company to report volume
Despite the expected rise in subsidy burden by 45% to `43.2bn, of 3.52mmscmd for the quarter, up 18.2% yoy and 2.8% qoq.
ONGC is expected to report the highest net realisation in the 3QFY2011E,
Overall, for 3QFY2011E, our universe of stocks is likely to
witness mixed performance.
Exhibit 4: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Cairn India 332 3,019 509.3 69.0 (109) 1,706 486.3 9.0 486.3 5.5 23.2 46.1 60.0 14.4 7.2 - Neutral
GAIL 511 8,276 33.7 19.4 (112) 930 8.1 7.3 8.1 24.8 29.5 33.3 20.6 17.3 15.4 - Neutral
GSPL 118 257 (4.4) 92.4 (181) 93 (19.0) 1.7 (19.0) 7.4 7.2 9.4 16.0 16.3 12.5 128 Accumulate
Gujarat Gas * 398 488 26.4 18.9 (100) 54 19.0 4.2 19.0 18.0 19.9 23.2 22.2 20.0 17.2 418 Accumulate
IGL 343 461 61.0 27.8 (891) 71 20.8 5.1 20.8 15.4 17.2 21.1 22.3 19.9 16.2 - Neutral
Petronet LNG 125 3,376 50.4 8.5 (84) 137 64.3 1.8 64.3 5.4 6.8 8.5 23.2 18.2 14.8 - Neutral
ONGC ^ 1,293 18,488 19.2 61.0 80 5,475 79.3 25.6 79.3 90.7 114.4 123.1 14.3 11.3 10.5 1,391 Accumulate
RIL ^ 1,058 68,347 20.2 15.0 120 5,535 38.1 16.9 38.1 48.6 69.5 87.2 21.8 15.2 12.1 1,260 Buy
Source: Company, Angel Research; Note: Price as on December 31, 2010; * Calender year, ^ standalone numbers for quarter and consolidated numbers for full year
Vora
Analyst: Vinay Nair / Amit Vora
Refer to important Disclosures at the end of the report 46
Preview
3QFY2011 Results Preview | January 3, 2011
Pharmaceutical
Pharma sector back in the limelight last two years; hence, this has further reinforced management's
ability to monetise its FTF opportunities, despite issues with its
During 3QFY2011, the BSE healthcare (HC) index outperformed
manufacturing facilities. Overall, we value the one-off FTF
the BSE Sensex after underperforming during 2QFY2011-the
opportunities of the company at `129/share.
first quarter of underperformance in 2010. The HC index surged
by handsome 10.3% as against a flat closing of the Sensex. Lupin settles patent litigation with Warner Chilcott: During the
Warner
With markets nearing 21,000, increased risk-aversion led to quarter, Lupin, Warner Chilcott plc and its subsidiary Warner
the sector's outperformance. Chilcott Company, LLC entered into a settlement agreement to
resolve the pending patent litigations involving Warner Chilcott's
Exhibit 1: BSE HC index v/s Sensex
oral contraceptive (OC) products, Loestrin 24 Fe and
50 BSE HC Sensex
Femcon Fe. The products, which grossed sales of ~US $250mn
40
and ~US $50mn in 2009, will go off patent in July 2014 and
30
April 2019, respectively.
(%)
20
Under the terms of the settlement agreement, Lupin has agreed
10
that, except in the event of an at-risk launch of a generic
0
Loestrin 24 Fe product by a third party, neither Lupin nor its
-10
affiliates will market or sell a generic Loestrin 24 Fe product
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
1QFY2011
2QFY2011
3QFY2011
prior to July 22, 2014. In addition, Lupin has been granted a
non-exclusive license by Warner Chilcott, covering Femcon Fe.
Source: C-line, Angel Research The license will permit Lupin to commence the product's
marketing either as an authorised generic product, which would
Barring the run-up in few mid-cap stocks, the rally in the HC
be supplied by Warner Chilcott, or as the generic equivalent of
sector was broadly restricted to large caps, which gained around
Femcon Fe in the US beginning on the earlier of (1) the 180-
10-20% during the period. Sun Pharma was the key gainer
day exclusivity period, after which Teva Pharmaceutical Industries
amongst large caps, reporting gains of 19.4%, after posting a
will enter the market with a generic equivalent to Femcon Fe;
stellar performance in 2QFY2011 and favourable appeals court
or (2) by January 1, 2013.
ruling, which has once again paved the way for Sun Pharma to
launch the generic Eloxatin. Other large-cap gainers during Under the agreement, Lupin has also been granted rights to
the quarter were DRL and Cipla, which gained almost 14.2% purchase and sell an authorised generic version of the Asacol
and 12.6%, respectively. Ranbaxy, on the other hand, remained 400mg product (a US $115mn product in 2009) in the US,
flat during the period. which would be supplied by Warner Chilcott, only if a generic
version of the Asacol 400 mg product is launched by a third
Amongst mid and small caps, Lupin and Aurobindo Pharma
party in the US.
were the key gainers, gaining 21.1% and 24.8%, respectively.
Lupin and Aurobindo Pharma witnessed a surge on the back of Going forward, from FY2013, OC, which addresses a market
strong/better-than-expected numbers posted in 2QFY2011. opportunity of around US $3bn-4bn in the US, would be one
Amongst small caps, Indoco Remedies gained almost 17.7%. of the key growth drivers of the company. Lupin, which has
filed around 23 OC products in the US, expects to launch around
Key developments 17-18 products over the next two years, with the first product
Ranbaxy launches Aricept in the US: Ranbaxy has launched
US: expected to be launched by 3QFY2012.
generic Aricept in the US, with 180-day exclusivity. Aricept, a Takeda settles Actos patent litigations: Takeda and its wholly
branded product of Eisai Pharmaceuticals, grossed sales of owned subsidiary, Takeda Pharmaceuticals North America, Inc.,
around US $2bn in the US.Besides Ranbaxy, Greenstone will entered into settlements with all the defendants in patent litigation
launch the Authorised Generic of the product. During the brought against the companies in response to their ANDAs for
exclusivity period, Ranbaxy could garner sales and profit of generic Actos (pioglitazone HCl), Actoplus met (pioglitazone
around US $240mn and US $168mn, respectively, contributing HCl and metformin HCl) and duetact (pioglitazone HCl and
around `16.8 to the company's EPS. This is the fourth First-To- glimepiride). Actos, which is a Type-2-diabetes drug, reported
File (FTF) product monetised by the company, despite ongoing sales of around US $3bn.
USFDA issues (Imitrex, Valtrex, Flomax and Aricept) over the
Refer to important Disclosures at the end of the report 47
Preview
3QFY2011 Results Preview | January 3, 2011
Pharmaceutical
According to the settlement, FTF players Mylan, Watson and to post 48.2% yoy sales growth, mainly on the back of integration
Ranbaxy, which are expected to get 180-day exclusivity, have of Taro. Other players, which are expected to post robust
been licensed to enter the US market with generic Actos on performance, include Lupin and Cadila, which will report 36.6%
August 17, 2012, subject to regulatory approval, or earlier under and 33.6% growth in net profit, respectively. Amongst small
certain circumstances. We estimate Ranbaxy to gross net sales caps, Indoco Remedies is expected to post 27.2% yoy and 60.0%
and profit of US $128mn and US $64mn, respectively, during yoy growth in sales and net profit, respectively. Amongst the
the exclusivity period. MNC pack, Aventis is likely to post 40.4% growth in net profit,
on the back of a 668bp yoy improvement in OPM, compared
Piramal Healthcare goes in for a share buyback: The
to the last corresponding period, which was marred by the
shareholders of Piramal Healthcare approved the buyback of
decline in the domestic formulation business.
~4.18cr shares or 20% of the company's share capital. The
buyback would be on a proportionate basis through the tender Exhibit 3: Sales growth and OPM for 3QFY2011
60.0
offer at a price of `600/share, aggregating to `2,508cr. The 48.2
50.0
buyback would open on January 17, 2011, and end on
40.0
February 7, 2011. With promoters tendering equal number of 29.9
shares, the acceptance ratio for the shareholders would work (%)
30.0
19.4 20.4
17.4
out to 20%. Further, with cash constituting a larger portion of 20.0 15.9 15.4 15.3
10.8
the balance sheet, clarity on the utilisation of the same would 10.0
0.9
be the key value driver for the stock. 0.0
Sun Pharma Lupin Cipla Ranbaxy DRL
ANDA approvals in 3QFY2011 Sales growth OPM
Source: Angel Research; Note: 4QCY2010 for Ranbaxy
During the quarter, Alembic and Lupin received four approvals
each, while Cadila received three approvals. Further, DRL
Among large caps, Sun Pharma and Lupin to outperform
launched Zafirlukast, the bioequivalent generic version of Among the large caps in our coverage universe, for 3QFY2011,
Accolate, in the US. The product launch was subsequent to the Sun Pharma is likely to post 48.1% yoy growth on the sales
summary judgment of non-infringement against AstraZeneca front, mainly on the back of integration of Taro, which will drive
by the US District Court of New Jersey. The product addresses a export formulation sales during the period. On the domestic
market opportunity of US $50mn in the US. front, Indian formulation sales would continue to grow at a
healthy pace at 20%. However, despite strong top-line growth,
Exhibit 2: ANDA approvals for select companies on account of the integration, operating profit is likely to grow
Company Generic products Approvals only by 22.8%, with margins likely to be around 29.9%, a dip
Alembic Venlafaxine HCL, Losartan Potassium, of around 619bp yoy, resulting in net profit registering yoy
Pramipexole Dihydrochloride, Theophylline 4 growth of 32.0% during the period.
Aurobindo Losartan Potassium, Losartan Potassium HCL, 2
Cadila Indomethacin, Losartan Potassium,
Lupin, on the other hand, is expected to register growth of 15.9%,
mainly led by formulation sales in the exports markets (US and
Losartan Potassium HCL 3
Europe) and the Indian domestic market. On the operating front,
Cipla Zidovudine 1
margins are likely to remain stable at 19.4% during the period;
DRL Zafirlukast, Lansoprazole 2
however, lower tax and interest outgo during the period would
Lupin Losartan Potassium, Losartan Potassium HCL,
lead to 36.6% growth in net profit in 3QFY2011.
Cefixime, Desloratadine 4
Ranbaxy Donepezil HCL 1 DRL is expected to post top-line growth of 10.8% to `1,917cr,
Sun Pharma Diltiazem HCL, Desloratadine 2 driven by the US market. The region is expected to post growth
Source: US FDA, Angel Research of around 35%. Similarly, the company is expected to see strong
traction in its Indian and Russian formulation businesses.
3QFY2011 result expectations
However, the PSAI segment is expected to post a lacklustre
The Indian pharmaceutical sector is expected to post robust performance during the quarter. The company is expected to
growth on the sales front for 3QFY2011. We expect our post OPM of 15.3%, up 90bp yoy. On the net profit front, the
coverage universe to register 14.7% yoy top-line growth, albeit company is expected to post net profit of `259.5cr, vis-à-vis a
the 3.7% yoy appreciation in INR against USD on an average loss during the last corresponding period, which was impacted
during the quarter. Amongst large caps, Sun Pharma is expected by the write-down on goodwill and intangibles.
Refer to important Disclosures at the end of the report 48
Preview
3QFY2011 Results Preview | January 3, 2011
Pharmaceutical
Cipla is expected to post net sales growth of 15.4% to `1,552cr, company is expected to log in growth of 17.2% and 23.8% yoy,
driven by exports. On the operating front, OPM (excluding respectively. OPM is expected to compress by 140bp yoy to
technical know-how fees) is expected to fall by 86bp yoy to 21.1% on the back of rise in other expenditure. Overall, net
20.4% on the back of higher employee expenses. Further, net profit is expected to rise by 8.8% yoy to `63.4cr on the back of
profit is expected to register a decline of 9.5% yoy to `261cr, as pressure on operating margins.
top-line growth will be offset by the fall in OPM.
Aurobindo Pharma is expected to post an 11% yoy rise in sales,
Ranbaxy is expected to post a flat top line of `2,245cr. Growth aided by formulation exports. Margins are likely to remain stable,
looks muted despite the launch of Aricept in the US, on the despite improvement in gross margins, on the back of higher
back of high base during the last corresponding period on employee expenditure. Overall, net profit is expected to rise by
account of sales of Valtrex. For Aricept, we expect the company 40% yoy on the back of lower tax-outgo during the period.
to post sales of around US $240mn during the exclusivity period.
Indoco Remedies is expected to report top-line growth of 27.2%
However, the impact of the same would be more visible in
to `121.7cr, driven by the domestic and export segments. The
1QCY2011. On the operating front, Ranbaxy is expected to
company's OPM is expected to expand by 101bp yoy to 13.9%,
report OPM of 17.4%.Overall, the company is expected to post
driven by growth in domestic formulation sales. As a result, net
net profit of `312.6cr during the period.
profit is expected to increase by 60.0% yoy to `12.4cr.
Among mid caps, Cadila expected to continue its
Outlook and valuation
outperformance
During the past three years, the BSE HC index has been among
Cadila is expected to post strong 18.4% growth in net sales to
the best performing indices, posting returns of 52.4% and
`1,143cr on the back of robust growth on the export and
outperforming the market by 51.3% during this period. At the
domestic formulation fronts, where the company is expected to
current juncture, most of the stocks in our universe are currently
grow at 18.2% and 19.4% yoy, respectively. On the OPM front,
trading at fair valuations and, hence, we continue to recommend
we expect the company's OPM to expand by 82bp yoy to 19.9%
a bottom-up approach.
on the back of favourable product mix. Net profit is expected to
increase by 33.6% yoy to `173cr, driven by top-line growth In the generic segment, we prefer Cipla, Lupin, Cadila
Lupin,
and OPM expansion. Healthcare, Aurobindo Pharma and Indoco Remedies.
We estimate Ipca Laboratories' top line to grow by 20.6% to The CRAMS segment is witnessing near-term hiccups because
`474.9cr for 3QFY2011. The company is expected to post strong of inventory rationalisation and multiple mega global pharma
growth both on the export and domestic fronts, where the mergers in CY2009; these concerns are mostly factored in
valuations. In this segment, we recommend Dishman Pharma.
Exhibit 4: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Alembic 68 321 7.0 11.7 138 16.1 19.9 1.2 19.9 3.0 5.6 6.5 22.8 12.1 10.4 74 Accumulate
Aurobindo 1,318 935 11.0 19.3 (53) 145.0 40.4 24.9 30.2 101.1 84.9 109.2 13.0 15.5 12.1 - Neutral
Aventis #
1,950 263 10.8 13.6 668 36.5 40.5 15.9 40.5 68.4 70.6 92.1 28.5 27.6 21.2 - Neutral
Cadila 774 1,143 18.4 19.9 82 173.3 33.6 12.7 33.6 24.7 30.6 39.6 31.3 25.3 19.5 - Neutral
Cipla 370 1,552 15.4 20.4 (86) 261.1 (9.5) 3.3 (9.5) 13.5 13.0 17.6 27.5 28.5 21.0 - Neutral
Dishman 157 291 30.9 23.1 1 36.7 11.0 4.6 11.0 14.5 13.9 17.5 10.8 11.3 8.9 230 Buy
Dr. Reddys 1,663 1,917 10.8 15.3 90 259.5 - 15.4 - 20.9 59.1 78.1 79.7 28.1 21.3 - Neutral
Glaxo # 2,357 511 15.0 30.0 (118) 119.7 15.3 14.1 15.3 60.0 68.4 73.9 39.3 34.5 31.9 - Neutral
Indoco 493 122 27.2 13.9 101 12.4 60.0 10.1 60.0 34.3 39.5 54.1 14.4 12.5 9.1 541 Accumulate
Ipca Labs 345 475 20.6 21.1 (140) 63.4 8.8 5.1 8.8 16.4 19.5 23.7 21.0 17.7 14.6 - Neutral
Lupin 480 1,454 15.9 19.4 (17) 219.2 36.6 4.9 36.6 15.3 18.6 23.3 31.3 25.8 20.6 - Netural
Orchid Chem* 304 315 2.0 19.0 305 35.5 - 5.0 - - 12.7 16.6 - 23.9 18.3 - Neutral
Ranbaxy Lab# 599 2,266 0.9 17.4 (470) 312.6 22.4 7.4 22.4 7.1 45.1 28.1 84.9 13.3 21.3 - Neutral
Sun Pharma 485 1,513 48.2 29.9 (619) 447.4 32.0 21.6 32.0 13.0 15.7 21.2 37.3 30.9 22.9 - Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2010; Our numbers include MTM on foreign debt. #4QCY2010,* Quarterly numbers are standalone financials
Kour
Analyst: Sarabjit Kour Nangra
Refer to important Disclosures at the end of the report 49
Preview
3QFY2011 Results Preview | January 3, 2011
Power
For 3QFY2011, we expect power-generating companies in our generation rose by 3.4% yoy to 426.8BU. The plant load factor
universe to report top-line growth of 15.3% yoy, driven by (PLF) of thermal plants for 8MFY2010 stood at 75.7%, which
capacity additions and higher tariffs. However, operating profits was 65bp lower than the target of 76.4%. Hydro power
are expected to decline by 12.3% on account of higher fuel generation increased by 5.8% yoy to 83.3BU, while the amount
costs. Net profit is expected to fall by 6.5% yoy. of nuclear power generated grew substantially by 29.4% yoy to
15.4BU.
Capacity addition: Status check
Generation Exhibit 2: Power generation (BU)
Nov-10 Nov-09 chg (%) 8MFY11 8MFY10 chg (%)
Inordinate delays in the completion of projects have led to the
Thermal 52.5 50.9 3.1 426.8 412.7 3.4
CEA revising its XIth Plan capacity estimates to 62,488MW, much
Hydro 7.4 6.8 8.8 83.3 78.7 5.8
below the target of 78,000MW set at the beginning of the plan
period. Capacity addition has generally been delayed due to Nuclear 2.2 1.4 57.1 15.4 11.9 29.4
execution issues relating to acquiring land and obtaining Total 62.1 59.1 5.1 525.5 503.3 4.4
environment and other statutory clearances. Capacity addition Source: CEA, Angel Research
till November 2010 from the beginning of the XIth Plan period
stood at 29,361MW, which is just 54% of the capacity targeted Power-deficit situation
to be achieved during the period. The country continued to face power deficit due to the delay in
Exhibit 1: Generation capacity addition performance the commissioning of new capacities, fuel shortage in existing
(MW) (%) plants and deficiencies in the T&D system. India's overall and
20,000 100
peak power-deficit levels during 8MFY2011 stood at 8.9% and
15,000 80 10.2%, respectively, slightly lower than 9.7% and 12.6% reported
in 8MFY2010.
10,000 60
5,000 40 Exhibit 3: India - Power deficit scenario
(%)
0 20 20.0
16.6
FY2003 FY2005 FY2007 FY2009 8MFY2011
16.0 13.8
12.3 12.6
Target (T) Achievement (A) A as a % of T 12.2 11.2 11.7 12.0
12.0 10.2
Source: CEA, Angel Research 9.9
8.0 11.0
9.6 9.9 8.9
8.8 8.4
Transmission lines 7.1 7.3
4.0
0.0
During April-November 2010, 5,579 circuit kilometers (ckm)
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
8MFY2011
were added to the 400kV HVDC transmission lines, as against
Overall Peak
the targeted 5,563ckm. Total addition to other transmission line
Source: CEA, Angel Research
categories stood at 3,979ckm, as against the targeted
2,997ckm. Power deficit highest in the western region
Transmission sub-stations The western region's overall power deficit of 13.4% during
8MFY2011 was the highest amongst all the regions.
During April-November 2010, total addition to the 400kV
Maharashtra had an overall power deficit of 17.4%; peak deficit
substation stood at 8,245MW, which was higher than the
in Maharashtra stood at 22.1%. The eastern region had the
targeted 7,645MW. Addition to the 220kV sub-station category
lowest power deficit of 4.6%, with peak deficit of 5%.
stood at 7,330MW, as against the targeted 6,220MW.
Operational highlights
During 8MFY2011, power generation in India rose by 4.4%
yoy to 525.5BU (503.3BU). The country's thermal power
Refer to important Disclosures at the end of the report 50
Preview
3QFY2011 Results Preview | January 3, 2011
Power
Exhibit 4: Region-wise power deficit Global coal prices on the rise
Region (%) Overall Peak
Spot global coal prices were substantially higher on a yoy basis
Northern (8.5) (8.9)
during the quarter. Average prices of the New Castle Mckloksey
Western (13.4) (17.2)
6,700kc coal stood at around US $104/tonne in 3QFY2011,
Southern (5.8) (9.8)
as against US $77/tonne recorded in 3QFY2010. On a qoq
Eastern (4.6) (5.0)
basis as well, coal prices were higher by 10.6%.
North Eastern (10.1) (18.5)
All India (8.9) (10.2) Exhibit 6: Global coal prices
Source: CEA (US$)
250
Coal scenario
Prices beginning to firm up
200
Coal
150
India's coal-based power-generation capacity, which currently
100
stands at 89,778MW, accounts for ~53% of overall capacity.
The dominance of coal as a power-generation fuel in India is 50
set to continue with a major portion of the upcoming capacity 0
being based on coal. The power sector is the leading consumer Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: Bloomberg, Angel Research
of coal in the country, accounting for 75% of India's overall
demand of 534mn tonnes in FY2010. As per our estimates,
Primary market activity
India's power sector would require an additional coal supply of
~188mn metric tonnes (MMT) over the next five years. The quarter witnessed two major public offerings from the energy
Coal-based power plants have been facing fuel shortage due space from Coal India (CIL) and Power Grid Corporation
to various reasons such as delay in procuring coal linkages; (PGCIL).
issues in obtaining environment clearances and other regulatory
approvals for developing coal blocks; hurdles in expansion of CIL: IPO
coal blocks; and logistical and infrastructural issues. CIL, the world's largest coal producer raised funds through its
initial public offer (IPO) during the quarter. The `15,000cr issue
Exhibit 5: Coal consumption for power generation
400 366
was subscribed by 15.28 times. We had a Subscribe rating on
355
350 330 the issue based on 1) the huge reserves and production base of
302
300 263
278 280 the company; 2) the highly encouraging domestic coal demand
(mn tonnes)
253
240
250 scenario, which is expected to significantly outpace the supply;
200 and 3) the expected improvement in blended realisations of
150
CIL due to a) hikes in notified prices of raw coal, b) increased
100
proportion of beneficated coal in overall sales going ahead
50
and c) higher e-auction sales volume.
0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
PGCIL: FPO
Source: CEA
PGCIL, India's principal electric power transmission company,
As of November 30, 2010, 27 critical thermal power stations raised money through an FPO offer during the quarter. The
out of the 82 monitored by the CEA have critical coal stocks for `7,600cr issue received a good response from investors and
less than seven days. was subscribed by 14.88 times. We had a Subscribe rating on
the issue based on the expectation of a substantial increase in
the regulated capital of the company post the rev up in the
commissioning of generation projects.
Refer to important Disclosures at the end of the report 51
Preview
3QFY2011 Results Preview | January 3, 2011
Power
Key corporate developments Exhibit 7: Performance on the bourses
NTPC Sensex 2.2%
BSE Power
During the quarter, the Ministry of Power gave NTPC the go -7.6%
ahead to sell 15% of power outside the long-term PPA with CESC -4.9%
respect to the 500MW Unit 7 of Korba Super Thermal Power GIPCL -9.0%
Project and 500MW unit 6 of Farakka Super Thermal Power NTPC -7.5%
Project. The company will sell the balance to state power utilities
PTC 10.4%
under the long-term PPA. Thus, 150MW of power would be
available for sale on a short-term basis. We believe the -10.0% -5.0% 0.0% 5.0% 10.0% 15.0%
company's profitability would receive a substantial boost if the Source: BSE, Angel Research
government allows sale under the short-term route from its other
3QFY2011 expectations
existing and upcoming plants as well.
JSW Energy We expect NTPC to witness a 13.4% yoy increase in its top line
to `13,277cr during the quarter, aided by volume growth due
JSW Energy has agreed to acquire 100% equity stake in CIC to commencement of new capacities; and higher tariffs.
Energy, which has 2.6bn tonnes of coal reserves in Botswana However, the company's operating profit is expected to decline
for a consideration of ~CAD422mn (~US $414.4mn). The offer by 17.3% yoy to `3,217cr. We estimate NTPC's net profit to dip
price is attractive as it implies an EV of US $0.22/tonne of by 9.8% yoy to `2,132cr on high depreciation costs.
mineable reserves. The offer is yet to get regulatory approval
and must be accepted by 66% of shareholders for the deal to We expect CESC to register 46.6% yoy growth in its standalone
pass through. The deal is expected to close before February top line to `1,168cr, aided by higher volumes due to the
28, 2011. The acquisition of CIC Energy with 2.6bn tonnes of commissioning of the 250MW Budge-Budge plant. The
coal reserves would provide JSW Energy 16-20mtpa of coal company's OPM is expected to expand by 503bp yoy to 28.6%.
from FY2016. We expect CESC to record 64% yoy growth in net profit to `167cr.
Reliance Power We expect GIPCL to register a 8.0% yoy increase in revenue for
3QFY2011, primarily on account of higher volumes. The higher
Reliance Power has tied up with some Chinese banks for volumes are expected due to the commissioning of Unit 3 and
financing US $1.1bn (~`5,000cr) to import power equipment 4 in Surat. OPM is expected to expand by 603bp to 31.2%,
for Sasan UMPP in Madhya Pradesh. Banks that have promised while the bottom line is set to increase by 15% yoy to `33.1cr in
financing include Bank of China, China Development Bank and 3QFY2011.
The Export-Import Bank of China.
Industry outlook
Adani Power
We expect capacity addition to gather pace going ahead, with
During the quarter, Adani Power completed the synchronisation
the XIth Plan period ending in FY2012. However, the
of the 330MW fourth unit in Mundra, Kutch. Post the
power-deficit scenario is likely to persist, as supply is not likely
commissioning of this plant, the company has a total capacity
to keep up with demand. Thus, players with the ability to execute
of 1,320MW. The company would be adding another 660MW
projects on time would be benefited by high merchant tariffs
in the remaining portion of FY2011, while another 1,980MW
expected to prevail over the next two years. We maintain Buy
of capacity would be added in FY2012E.
GIPCL, PTC
on NTPC, GIPCL, PTC and CESC.
Exhibit 8: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
CESC 366 1,168 46.6 28.6 503 168 63.4 13.3 63.4 34.5 43.2 47.1 10.6 8.5 7.8 474 Buy
GIPCL 104 257 8.0 31.2 603 33 15.0 2.2 15.0 7.1 8.7 12.9 14.8 12.0 8.1 135 Buy
NTPC 201 13,277 13.4 24.2 (900) 2,132 (9.8) 2.6 (9.8) 10.7 10.2 11.4 18.7 19.6 17.5 230 Buy
PTC 127 2,509 47.8 1.5 86 40 150.0 1.3 164.1 3.2 4.9 6.6 39.9 25.9 19.4 137 Accumulate
Source: Company, Angel Research; Note: Price as on December 31, 2010
V.
Analyst - Rupesh Sankhe / V. Srinivasan
Refer to important Disclosures at the end of the report 52
Preview
3QFY2011 Results Preview | January 3, 2011
Real Estate
For 3QFY2011, we expect residential volumes to report flat to Exhibit 2: Forthcoming residential projects
moderate growth on a sequential basis on account of festive Project Location Saleable Area
demand. Revenue of real estate companies will be largely driven (mn sq. ft.)
by execution of existing projects and new launches. Companies Popular Car Bazaar Andheri 0.8
such as DLF and Unitech (through UCP) will continue to see Ekta Nagar Kandivali 1.5
sustainability in office leasing volumes on a sequential basis. Palghar Township Palghar 11.8
Banks have tightened lending norms in line with the RBI’s Whispering Towers Phase-II Mulund 0.8
mandate that loan to value (LTV) should not exceed 80%, which Meadows Phase-II Goregaon 3.6
may marginally impact housing demand in the short term. Daulat Nagar Santacruz 0.8
Premier Residency Phase-II Kurla 0.8
In our universe of stocks, we expect DLF's revenue to be driven
Ghatkopar Ghatkopar 0.5
by the execution of its existing projects. We expect HDIL to post
Kochi Kochi 6.3
flat growth sequentially in transfer of development rights (TDR)
Total 26.9
volumes and prices. This is on account of the anticipation of Source: Company, Angel Research
Maharashtra state government overruling the Bombay High
Increasing land acquisition by ARIL
Court's decision and hiking FSI from 1x to 1.33x. However,
HDIL's new launch of Paradise City project Palghar (W) has During 1HFY2011, ARIL acquired 153 acres of land for a total
taken off well and phase-I has been completely sold. For ARIL, consideration of `564cr. These land parcels were primarily
we expect revenue to be driven by the residential segment and bought in Gurgaon (125 acres), Sonepat (10 acres) and
rental income. Neemrana (18 acres). Out of the 125 acres in Gurgaon, 110
acres of land is agricultural land, where the company intends
Exhibit 1: Revenue, PAT estimates (3QFY2011)
to develop group housing and township. On the remaining 43
(%) ARIL DLF HDIL
60.0
acres, it intends to launch a mid-income residential project over
48.5
50.0 the next six months. This is in line with the company's strategy
40.0
25.2 26.5 to acquire land at a cheaper cost.
30.0
20.0 Delay in Unitech's Golibar project
10.0 1.4 2.8
0.0 Unitech's upcoming Golibar SRA project, which was being jointly
(10.0) developed with Shivalik Ventures at Santacruz (Mumbai), has
(20.0)
(30.0) been delayed on account of fresh litigation following protest
(27.0)
(40.0) Revenue PAT from slum dwellers. Unitech has so far invested `600cr for its
Source: Angel Research 50% stake in the JV. Phase-I of the project is expected to generate
~11mn sq. ft. of saleable area. Further, overhang of Comptroller
HDIL's new launches continue to be rewarding
and Auditor General of India’s (CAG) report on Uninor has led
HDIL opened the booking for phase-II of its mega township to correction in the stock price by 24.9% over the last three
project, Paradise City, on December 24, 2010. The project is in months. Unless we get more clarity on both the above issues,
close proximity to Palghar railway station and offers over 20,000 we expect the stock price to remain range bound.
homes at affordable prices coupled with modern amenities.
Improvement in leasing; new launches hold key for
The first phase involving sectors 1, 2 and 3 of 4,332 flats and
DLF stock performance
399 shops was launched on December 10, 2010, with
residential units being completely sold out within two weeks of DLF's non-residential segment constitutes 55% of our GNAV. In
the launch. Phase-II involves shops from phase-I and sectors 4, FY2010, the company leased only 0.93mn sq. ft. of commercial
5 and 6 with 6,407 flats (340-930sq. ft.) and 320 shops (5,155- and retail space. However, it witnessed improvement in leasing
7,950sq. ft.) for sale. The company has been able to pre-sell in 1HFY2011 by leasing out 2.7mn sq. ft. DLF expects the leasing
75% of its residential projects (7mn sq. ft.) launched since activity to continue its uptick in FY2011. Further, in CY2012, it
FY2009, thereby providing `5,000cr of revenue visibility over expects to list DAL as a business trust/REIT, which could be value
FY2010-12E. In FY2011/12, HDIL plans to launch new projects accretive for DLF's shareholders at the lower cap rate. However,
of 27mn sq. ft., largely in Mumbai. much will depend on the sustainable recovery in the commercial
leasing segment. Post the merger of DLF and DAL/Caraf, the
Refer to important Disclosures at the end of the report 53
Preview
3QFY2011 Results Preview | January 3, 2011
Real Estate
company has 20mn sq. ft. of rent-yielding assets, which will Commercial demand likely to pick up over the next 12
generate `1,500-1,600cr of rental income in FY2011. However, months
new launches have been delayed because of delays in getting
new approvals. Therefore, in 1HFY2011, the company was able After witnessing a sharp decline in the past few quarters, capital
to launch only 1mn sq. ft., much below peers. In light of this, values have started to strengthen and have registered marginal
we believe management's guidance of achieving >12mn sq. appreciation across most micro markets. Industry participants
ft. of development volumes in FY2011 will prove to be a have indicated that the surge in leasing enquiries is because of
challenging task. a renewed interest from corporates. This has already been
,
reflected for companies like DLF which leased out 2.7mn sq. ft.
RBI tightened liquidity to curb speculative demand
in 1HFY2011-higher than the entire area leased out in FY2010.
In order to curb excess liquidity and speculative demand in the
real estate sector, the RBI introduced the following measures In the IT/ITES sector, we expect net employee addition of 15%
viz. 1) capped the LTV ratio to 80% (previously 85%), 2) increased over FY2010-12E. Accordingly, we believe demand in office
risk weights on residential housing loan of above `75lakh and space will start picking up from 2HFY2011E. Cushman and
3) raised standard asset provisioning for teaser loans from 0.4% Wakefield estimates pan India cumulative demand for office
to 2.0%. We believe these measures would marginally affect space during CY2009-13E to be 196mn sq. ft.
demand and may lead to postponement of buying in the short
Exhibit 4: Pan India commercial demand
term. Further, we believe debt refinancing requirement in 60
1HFY2012 will come under pressure, which can lead to cooling
50
off in prices in cities like Central Mumbai and Gurgaon, where
40
prices have overheated since the last six months.
(mn sq. ft.)
30
Residential recovery has slowed, but not stopped
20
Prices in Mumbai and Delhi are 15-30% above their peak levels
10
in 2008, whereas prices in most other markets are still 10-15%
0
lower than their last peak levels. This has resulted in the tapering 2009E 2010E 2011E 2012E 2013E
of volumes in cities like Mumbai, where prices have increased Source: Cushman & Wakefield, Angel Research
substantially. Volumes slowed down in 2QFY2011 on account
of seasonal weakness. Launch activity also remained subdued Retail segment - Still some pain left
during this period. However, for 3QFY2011, while new launches
Vacant space in shopping centres increased during 2008-09.
have been robust, we expect volumes to be benign on the back
This was primarily on account of higher real estate costs and
of tightening measures by the RBI. Response to new launches
lower consumption, because of which many retailers started
and absorption trends over the next quarter should provide us
shifting from their rapid expansion mode to a consolidation
greater clarity on sustainability of volumes witnessed in FY2010,
mode. Consequently, absorption of retail space fell to 4mn sq.
especially in Mumbai/NCR.
ft. in CY2009. Retail supply is projected to be around 16.4mn
Exhibit 3: Absorption trend of top-10 Indian cities sq. ft. in CY2010, with an expected absorption of only around
Absorption (LHS) yoy growth (RHS) 8.9mn sq. ft. Therefore, vacant spaces are likely to increase in
70,000 150
60,000
the short term, given the considerable rationalisation in the
50,000 100 supply pipeline. We believe demand is yet to pick up, especially
in tier-II and tier-III cities, which is not the case with metros
(Units)
40,000
(%)
50
30,000
20,000
where catchment areas are high. We expect prices to remain
0
10,000 under pressure, as the segment has fragmented supply
0 (50)
dynamics. Initial recovery volumes are likely to be cornered by
1QCY08
2QCY08
3QCY08
4QCY08
1QCY09
2QCY09
3QCY09
4QCY09
1QCY10
2QCY10
experienced players, such as Phoenix Mills, and not necessarily
large ones.
Source: Jones Lang LaSalle, Angel Research
Refer to important Disclosures at the end of the report 54
Preview
3QFY2011 Results Preview | January 3, 2011
Real Estate
Exhibit 5: Pan India retail demand Outlook and valuation
14
12 The risk reward ratio is turning favourable for the sector, with
10 recovery widening towards tier-II and tier-III cities in the
residential segment. Lending from the banking sector is slowing
(mn sq.ft.)
8
6
down and the new RBI circular shall further hit affordability in
4
the `10mn and above segment. Having said that, we believe
2
absorption, not price appreciation, will drive residential growth
over the next six quarters. New launches have been rewarding
0
2009E 2010E 2011E 2012E 2013E for developers who have launched projects at 10-15% discount
Source: Bloomberg, Angel Research to ongoing market rates. Further, high inventory is still hampering
commercial recovery; however, there has been an uptick in
Sensex v/s realty stocks absorption levels. We believe rentals to remain firm at current
During 3QFY2011, the BSE realty index strongly levels with an uptick apparent over the next 12 months. We
underperformed the Sensex by 2,555bp on the back of the believe stock performances are related to macro factors
housing loan scam, which stoked fears of 1) corporate interspersed with company-specific issues, such as the DLF-DAL
governance, 2) restricted credit-flow to the sector and 3) the merger translating into higher debt and 2G-related scam for
expected increase in cost of funding for future projects. Moreover, Unitech. We are positive on the long-term outlook of the realty
the RBI's measures to tighten liquidity and curb speculative sector, with growing disposable income, shortage of 25mn
demand by increasing LTV and risk weight on teaser loans have houses in India and reasonable affordability. Given the current
further dampened stock performances. We believe the recent scenario, we expect stability in residential prices, with an
correction gives good entry opportunity on account of exception of certain micro markets such as Mumbai and
1) companies trading at significant discount to our one-year Gurgaon, where prices have overheated, and expect an uptick
forward NAV, 2) stability in volumes and 3) comfortable balance in the commercial segment over the next 12 months.
sheet position, unlike that in 2008. We believe HDIL, Oberoi In our universe of stocks, we prefer companies with visibility on
Realty and ARIL are best placed in the sector. cash flow, low leverage and a strong project pipeline with
ARIL,
attractive valuations. Our top picks are HDIL and ARIL, which
Exhibit 6: Realty stocks underperform the Sensex
are trading at 52% and 49% discount to their NAVs, respectively.
NAVs, respectively.
5.0 2.2
We maintain a Neutral rating on DLF with concerns of a weak
0.0
operating cash flow, increasing gearing levels and the stock
flow,
(5.0)
one-year NAV
trading at 12% discount to our one-year forward NAV.
(10.0)
(%)
(15.0)
(20.0)
(25.0) (22.8) (23.8)
(25.0)
(30.0)
BSE Sensex DLF ARIL HDIL
Source: Bloomberg, Angel Research
Exhibit 7: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E )
(`)
DLF 292 2,536 25.2 45.5 387 474.6 1.4 2.8 1.4 10.1 10.9 16.9 28.8 26.7 17.3 - Neutral
Anant Raj Ind 107 123 48.5 51.0 (4,143) 49.0 (27.0) 1.7 (27.0) 7.6 6.2 13.4 14.2 17.3 8.0 178 Buy
HDIL 194 420 2.8 58.0 1,183 205.9 26.5 5.0. 26.5 12.9 20.6 29.2 15.1 9.4 6.6 302 Buy
Source: Company, Angel Research; Note: Price as on December 31 , 2010
Param
Analyst - Param Desai / Mihir Salot
Refer to important Disclosures at the end of the report 55
Preview
3QFY2011 Results Preview | January 3, 2011
Retail
As against the mild recovery seen in the global economy, the As per the recent CB Richard Ellis report, developers have
Indian economy has shown good growth on account of strong chalked out aggressive plans to build 90 new malls and take
government spend, low dependence on exports and rising the grand total to 280 by the end of 2012. India is likely to add
consumerism in India. The Indian economy has steadily 5 million square feet (mn sq ft) in 2010 and another 15mn sq
recovered to pre-2007 levels and economists across the board ft is likely to be added by 2012. Of the total addition, Bangalore
expect GDP growth of around 9% levels for the next decade. forms the largest share with 70%.
The Private Final Consumption Expenditure (PFCE) is expected
Although the retailers have gone aggressive in space booking,
to reach about $1trn (`5,000,000cr) by CY2020. Key growth
it has been done with a very cautious approach post the learning
drivers for the same include investments in infrastructure by the
phase for the retailers during the recessionary times of 2008
government and private sector, which would propel earning
and 2009. Developers are also a more knowledable clan now
power of the Indian consumer. Rising income levels are likely to
and have started appreciating the retailers' matrix (footfalls,
boost consumption in the country and in turn lend a boost to
tenant mix and conversion rates) while commencing projects
the modern retail trade. Thus, investments are likely to boost
and approaching tenants. Many developers have changed the
consumption and vice-versa is also likely to be true.
rental model from fixed to revenue share, which is more
The retail consumption trends remained upbeat in both the rural acceptable to the retailers. We believe that the change in strategy
and urban households in 3QFY2011. The quarter saw the Diwali signals evolution in the business model that allows more flexibility
festival being celebrated towards early November compared to the retailers in developing their business. This is because
to mid-October. Pertinently, majority of India's retail sales take rental is a key cost component in the retail business, which had
place during the festival season and Diwali being one of the witnessed stunning increase during the pre-recession era. As a
biggest festivals, it bring a lot of cheer for the retailers. This result, during the recession, rentals plunged 30-40% across
Diwali particularly, the mood was quite upbeat compared to cities, which is now stabilising
2008 and 2009, when most global economies including India
Value retailing maintains positive momentum
were reeling amidst the throes of the economic downturn. This
time round, the retailers were pleasantly surprised to see growth The value retailing segment is expected to have witnessed robust
exceeding their expectations in certain areas. Consumers were growth during 3QFY2011, despite the high food prices. Value
upbeat in their spending, not only in apparel and fashion items, retail formats such as Big Bazaar, Food Bazaar, More and D'Mart
but consumer durables and home improvement products as tried to cushion the impact of inflation on demand by stepping
well. These categories were incidentally the most affected last up bargains and discount offers across product categories that
year, as there was a decline of business in the home retail have been hit hard by the spiraling prices. Pantaloon Retail
category. Thus, with the economic revival gathering steam, we (PRIL) reported 12.5% growth in value retailing in 1QFY2011,
expect the retailers to experience better times going ahead. and we expect the segment to register higher double-digit growth
in 2QFY2011. Overall, major players in the value retailing
In this context, we believe that the organised retail sector is
segment, including PRIL, Reliance Retail, Spencer's and More
currently at inflexion point, and is ready to take the next leap of
stand to benefit from this ongoing trend.
growth at a steady and stable pace. We maintain that the
segment has tremendous growth potential, and accordingly we Lifestyle retailing on a roll
expect it to capture 10% share of the overall retail sector over
Stable economic conditions and a pick-up in consumer
the next 4-5 years.
confidence resulted in consumers opening up their wallets for
Expansion but with a cautious approach purchasing lifestyle goods during the quarter. PRIL reported
21.7% growth in lifestyle retailing in 1QFY2011, which is
Overall, optimism was also visible in the space booking done
expected to register higher double-digit growth in 2QFY2011.
by the retailers during the quarter. Markets witnessed strong
space booking not only from the domestic retailers, but Proposal to ease FDI rules in retail - Positive for sector
international too albeit with a cautious approach. We believe
The concept note on allowing 51% FDI in multi-brand retail
that the mood on the street is buoyant on account of the
continues to be at the discussion stage. The department of
sustained strong industrial production (IIP) figure and resulting
industrial policy and promotion (DIPP), under the commerce
increase in consumer spend.
Refer to important Disclosures at the end of the report 56
Preview
3QFY2011 Results Preview | January 3, 2011
Retail
ministry, is seeking comments on putting an FDI cap on multi- Exhibit 1: Retail outperforms Sensex marginally
140
brand retail, which is currently banned. The paper, however,
remains silent on the quantum of FDI cap, even after the draft 120
paper had proposed 51% FDI in multi-brand retail. 100
We concur with the industry experts that enabling FDI would be 80
good for the sector, as it will result in increased employment 60
and higher level of consumerism, on account of a substantial
16-Dec-10
23-Dec-10
30-Dec-10
30-Sep-10
7-Oct-10
14-Oct-10
21-Oct-10
28-Oct-10
4-Nov-10
11-Nov-10
18-Nov-10
25-Nov-10
2-Dec-10
9-Dec-10
range of competitively priced products. The government also
stands to benefit from this, as the exchequer would receive PRIL Shoppers Titan Sensex
increased collections, since the large organised trade players Source: C-line, Angel Research
are tax-compliant, contribute robust tax revenue and are unable
3QFY2011 expectations
to avail exemption limits. On the supply-chain front, we believe
wastage in farm-to-fork will reduce with the transfer of An upbeat festive season during the quarter leading to increased
technology used by the global players. footfalls and consequently higher sales per sq ft, coupled with
ongoing cost-rationalisation measures are likely to benefit the
According to a recent research by Crisil, the entry of FDI in retail players. We expect value retailing to further strengthen,
multi-brand retail has the potential to bring down prices of while lifestyle retailing is likely to maintain its growth trajectory.
perishable goods such as fruits and vegetables over the long We expect our coverage universe to report top-line growth of
term. The report states that an efficient supply chain will enable 52% yoy. We estimate Shoppers Stop to lead our universe with
the large retailers to source fruits and vegetables directly from 70% yoy growth in top-line for the quarter.
the co-operatives and in turn lower the annual wastage
Exhibit 2: Sales estimates
amounting to around `630bn. Wastage in the supply chain
3,500
and commission to trade intermediaries inflate the final price 3,000
paid by the Indian consumers. They shell out almost 2-2.5x the 2,500
price a farmer gets as compared to 1-1.5x in developed markets, 2,000
(` cr)
where penetration of organised retail is much higher. As per 1,500
the research, the overall investment required to set-up the supply- 1,000
chain infrastructure for fruits and vegetables would be close to 500
-
Rs650bn over the medium term. This is estimated after taking 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
into consideration the number of cold storage facilities and PRIL Shoppers Titan
refrigerated trucks that would be required for handling Source: Angel Research
perishable goods. About 30% of the country's total production
On the margins front, we expect PRIL and SSL to register a yoy
of fruits and vegetables is wasted every year because of
decline of 60bp and 310bp in OPM, respectively. However, the
inadequate cold storage and transport facilities.
higher growth in top-line is expected to cushion the impact of
Retail stocks marginally outperform Sensex the increase in fixed cost. We expect NPM to increase by a
marginal 35bp yoy.
Most stocks in the retail sector marginally outperformed the
Sensex during October -December 2010. While Shoppers Stop Exhibit 3: EBITDA margin estimates
(SSL) outperformed the Sensex by 12%, Titan beat the Sensex 20
by 8%. However, retail major, PRIL, underperformed the Sensex 16
by around 26% during the mentioned period. 12
(%)
8
4
-
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
PRIL Shoppers Titan
Source: Angel Research
Refer to important Disclosures at the end of the report 57
Preview
3QFY2011 Results Preview | January 3, 2011
Retail
Outlook and Valuation initiatives would also enable it to enhance its focus on the
different segments and provide it a good opportunity for value
With the economic recovery gathering steam, coupled with the
unlocking. At `367, the stock is trading at 19.8x FY2012E
revived consumer sentiment amidst the Diwali festival during
earnings and 2.1x FY2012E P/BV. Our sum-of-the-parts target
the quarter under review, footfalls registered an upward trend,
for PRIL is `469, wherein we have valued its stake in FCH, HSRIL
resulting in an increment in same store sales (SSS) and the sales
and Future Bazaar at `31, `12 and `18, respectively. PRIL
per square feet (SPSF) of the retailers. We expect the trend to
continues to be our top pick in the retail sector and recommend
continue and strengthen going ahead, thereby keeping the
a Buy on the stock.
long-term growth prospects intact for the organised retail
segment in India. We expect organised retail to post a CAGR of Titan has a stable and niche business model. In the jewellery
31% over the next five years. segment, Titan had witnessed a dip in volumes earlier, as
demand fell due to the higher gold prices. However, the falling
The value retailing segment is likely to lead the growth over the
rate of decline in volumes indicates that the consumers may be
next few years, as more and more consumers are expected to
adjusting to the high prices and do not expect gold prices to
go for value-for-money-goods. However, we expect the lifestyle
correct significantly. The company's watch segment is performing
retailing segment growth to pick-up on the back of stable
well, while the other segments are also expected to turn in a
economic conditions. Players like PRIL, who are straddled across
good performance, as there has been a revival in the demand
the price and product points, are expected to benefit both in
for lifestyle category goods. At `3,601, the stock is trading at
the short and long term. Overall, retail continues to be one of
35.8x FY2012E earnings and 12.2x FY2012E P/BV. Owing to
the fastest growing sectors in India and we remain positive on
rich valuations, we remain Neutral on Titan.
its growth prospects.
We expect SSL’s performance to improve in the ensuing quarters
PRIL continues to be our preferred pick
on the back of pick-up in consumer demand for lifestyle retailing.
On account of being present across price points and categories, At `748, the stock is trading at 36.3x FY2012E earnings and
we believe that PRIL is better-placed than its peers. Apart from 5.8x FY2012E P/BV. In view of the recent run-up in the price,
the cost-rationalisation measures, the company's restructuring SSL.
we remain Neutral on SSL.
Exhibit 4: PAT estimates Exhibit 5: PAT margin estimates
160 10
140
120 8
100
(` cr)
6
(%)
80
60 4
40
2
20
- 0
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11
PRIL Shoppers Titan PRIL Shoppers Titan
Source: Angel Research Source: Angel Research
Exhibit 6: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Profit
Net Profit (`)
EPS ( ) (`)
EPS ( ) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E )
(`)
Pantaloon* 367 2,869 50.0 287 (60) 72 42.2 3.5 42.2 11.2 15.1 19.8 32.8 24.3 18.5 469 Buy
Shoppers Stop 748 745 70.0 52 (310) 16 14.6 4.5 14.1 10.3 18.0 20.6 72.7 41.6 36.3 - Neutral
Titan 3,601 2,001 50.0 200 190 145 92.0 32.6 92.0 56.5 83.4 100.7 63.7 43.2 35.8 - Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2010, * June year ending, For PRIL estimates are for 2QFY2011
Analyst - Sageraj Bariya
Refer to important Disclosures at the end of the report 58
Preview
3QFY2011 Results Preview | January 3, 2011
Software
Broad-based growth continues to cheer the IT pack Exhibit 3: Retail - Revenue growth trend
20
The aggregate US macro data for November 2010 points 15
towards a sustained recovery going ahead. The positive cues 10
for November 2010 include 1) capacity utilisation firming up
(% qoq)
5
to 75.2% v/s 74.9% in October 2010; 2) industrial production 0
holding at 5.4% v/s 5.5% in October 2010; 3) retail sales
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
(5)
continuing to grow at 7.7% yoy in November 2010; 4) personal (10)
income growth sustaining the momentum of 3.8% yoy; and 5) (15)
durable goods order growth expanding to 10.4% yoy (20)
Infosys TCS Wipro HCL Tech
v/s 9.3% yoy in October 2010. Also, in December 2010, the Source: Company, Angel Research
US PMI expanded to 57.0 from 56.6 in November 2010. In
fact, even Europe's macro data strengthened with PMI shooting The recent increase in IT spending in the BFSI segment (the
to 58.0 in November 2010 from 55.4 in October 2010. The major contributor with 45-50% to exports) is driven by business
change in the perception about recovery being sustainable from needs related to 1) regulatory compliance and risk,
the earlier perception of it being just a fad (in 2QFY2011) and 2) rationalisation and consolidation and 3) post-merger
the continued spending on IT by global corporates led to the integration. The next wave of strategic investment by BFSI clients
outperformance of IT stocks over the BSE Sensex, although clients is expected in areas of 1) mobility 2) social commerce and
3) risk and compliance. For the retail segment, IT spend
are going in for short-term spending commitment rather than
continues to grow in order to tap the digital consumer's behavior,
long-term commitment. For CY2011, managements of tier-I IT
social media and multi-channel commerce.
companies expect client budgets to remain flat to positive, with
a higher element of offshoring. Exhibit 4: Manufacturing - Revenue growth trend
Exhibit 1: IT index v/s Sensex 15
7,200 22,000 10
6,800
21,000
5
(% qoq)
6,400
20,000
6,000 0
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
19,000
5,600 (5)
5,200 18,000
(10)
1-Oct-10
16-Oct-10
31-Oct-10
15-Nov-10
30-Nov-10
15-Dec-10
30-Dec-10
(15)
Infosys TCS Wipro HCL Tech
BSE IT Sensex (RHS) Source: Company, Angel Research
Source: Bloomberg, Angel Research
The hi-tech and manufacturing segments are also back to their
For 3QFY2011, we expect growth to continue to be
secular growth phase, but spending in telecom continues to be
broad-based with the BFSI and retail segments leading the
a laggard though telecom service providers (TSPs) in the
growth path and the manufacturing segment following their
emerging markets are investing in expansion and roll outs.
footsteps; however, the telecom segment will continue to be
Geographically, US is ahead, riding on the wave of technological
laggard.
investments to drive growth apart from harvesting cost
Exhibit 2: BFSI - Revenue growth trend efficiencies, whereas European clients, especially in continental
15 Europe, are opening up to outsourcing-offshoring to drive cost
10 efficiencies. This is leading to the rise of transformational deals
with a higher component of discretionary services such as
(% qoq)
5
enterprise application services (EAS) and engineering, research
0
and development (ERD) from the manufacturing, utilities and
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
(5) retail segments.
(10)
Infosys TCS Wipro HCL Tech
Source: Company, Angel Research
Refer to important Disclosures at the end of the report 59
Preview
3QFY2011 Results Preview | January 3, 2011
Software
Exhibit 5: EAS - Revenue growth trend Hiring spree to continue
20
IT players got into the hiring mode from 3QFY2010, with high
15
lateral hiring in 2HFY2010 to tap the sudden pent-up demand.
10
With an improving demand landscape, Infosys and TCS have
(% qoq)
5 increased their hiring targets for FY2011 by over 10% and 20%,
0 respectively, over the past two quarters. Companies are now
looking at planned hiring to address the strengthening demand
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
(5)
pipeline. We expect the hiring trend to remain upbeat, with
(10)
Infosys TCS Wipro HCL Tech
Infosys expected to have hired ~7,268 employees and TCS
Source: Company, Angel Research hiring ~13,837 employees in 3QFY2011.
In case of EAS, incremental growth is emerging out of Exhibit 7: Trend in net addition
Net addition FY08 FY09 FY10 1QFY11 2QFY11
implementation work rather than sale of new licenses. In fact,
Infosys 18,946 13,663 8,946 1,026 7,646
the need for standardisation of enterprise platforms, i.e.
TCS 21,988 32,354 16,668 3,271 10,717
conversion of multi-version implementation into single-version
Wipro 18,529 2,243 10,261 4,854 2,975
or limited-version as well as global-level rollout of the same is
HCL Tech 9,653 4,224 4,103 6,428 5,661
pacing up. Even ERD services are witnessing a spurt in demand,
Total employees
with product companies getting aggressive and trying to launch
Infosys 91,187 1,04,850 1,13,796 1,14,822 1,22,468
a series of new products by shortening the go-to-market cycle.
TCS 1,11,407 1,43,761 1,60,429 1,63,700 1,74,417
Thus, the surge in discretionary spending witnessed in
Wipro 95,567 97,810 1,08,071 1,12,925 1,15,900
2QFY2011 continues its traction as more and more clients look
HCL Tech 49,802 54,026 58,129 64,557 70,218
at change-the-business initiatives via IT spending as a growth
Source: Company, Angel Research
driver and cost optimiser.
Utilisation to be a mixed bag
Cross-currency movement continues to favour revenue
Utilisation levels for TCS and Infosys peaked in 2QFY2011,
The cross-currency movement, which had proved to be the bane reporting historic high of 77.7% and 74.3% (including trainees),
over 4QFY2010-1QFY2011 impacting USD revenue by respectively. For HCL Tech and Wipro, due to strong fresher
0.8-1.5% (qoq), has turned into a boon since 2QFY2011. The hiring, utilisation level did not expand but remained lower than
USD depreciated by 1.9%, 5.1% and 9.1% against the GBP , that in 1QFY2011. In 3QFY2011, we expect utilisations for
Euro and AUD to 1.58, 1.36 and 0.99, respectively, in TCS to come off, but expect them to remain firm for Infosys and
3QFY2011. This will aid USD revenue for Infosys, TCS, Wipro HCL Tech as trainees hired in 1HFY2011 will start getting billed.
and HCL Tech by 1.3%, 0.7%, 1.1% and 1.7%, respectively. For Wipro, we expect better utilisations in 3QFY2011.
Although, gains from weaker USD against global currencies
will be wiped off due to the INR appreciating steeply against Exhibit 8: Trend in utilisation rates
the USD by 3.5% qoq in 3QFY2011. 85
80
Exhibit 6: Cross-currency impact on USD revenue
(%)
75
2.0 70
1.5
65
1.0
1QFY08
2QFY08
3QFY08
4QFY08
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
0.5
(%)
0.0
Infosys TCS HCL Tech Wipro
(0.5) 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11E
Source: Company, Angel Research
(1.0)
(1.5) Attrition to cool off
(2.0)
Infosys TCS HCL Tech Wipro Attrition levels had shot up in 2QFY2011 to the pre-recessionary
Source: Company, Angel Research levels of FY2008, as companies were flocking for people
everywhere to map the sudden surge in demand. However,
Refer to important Disclosures at the end of the report 60
Preview
3QFY2011 Results Preview | January 3, 2011
Software
going forward, we expect these rates to normalise as strong productivity gains. Wipro is expected to record a 110bp qoq
campus hiring carried out simultaneously by these companies expansion in EBIT margins for the IT services segment on the
will create a stable bench, which will help them to map any back of better utilisations qoq; however, at a consolidated level,
surge in demand and thus, abate poaching of laterals. Thus, Wipro is expected to record only 81bp qoq expansion due to
we do not expect attrition to be a spoilsport anymore, causing good growth in the IT products segment, which is a thin-margin
any lapse in the billable position of companies. business. HCL Tech is expected to record a 30bp qoq expansion
in its EBIT margins on the back of strong cross-currency benefit
Cyclically a weak quarter but with strong volume growth
and productivity gains. Thus, for 3QFY2011, tier-I IT companies
Traditionally, 3Q is a weak quarter for IT companies as the are expected to report a mixed bag performance on the EBIT
number of working days is less, compared to the other quarters, margin front.
due to the holiday season at the client site. However, for
Exhibit 10: Change in EBIT margins (qoq)
3QFY2011, on the back of continued IT spend by clients, we
300
expect volume growth to remain strong at 5.6-7.1% qoq for
tier-I companies, even on the base of high volume growth of 200
6.6-11.2% qoq witnessed in 2QFY2011. BP (qoq) 100
Exhibit 9: Trend in volume growth (qoq) -
12 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11E
(100)
10
8 (200)
6
(300)
(% qoq)
4 Infosys TCS Wipro* HCL Tech
2
Source: Company, Angel Research; *Note: For IT services segment
0
1QFY07
3QFY07
1QFY08
3QFY08
1QFY09
3QFY09
1QFY10
3QFY10
1QFY11
3QFY11E
(2)
(4)
Outlook and valuation
(6)
Over the last three quarters, there is an uptick in discretionary
(8)
Infosys TCS HCL Tech Wipro spending as clients are looking forward to gain competitive
Source: Company, Angel Research advantage by remaining ahead of the curve. This trend, though
led by the BFSI and retail segments and largely driven by the
Surge in revenue to continue
US market, is expected to be more broad-based with broader
In 3QFY2011, on the back of strong volume growth, stable economies tracking recovery in the true sense, thereby instilling
pricing and favourable cross-currency movement, we expect confidence in the IT sector. Thus, we expect 3QFY2011 to be
USD revenue to surge by 6.0-8.7% qoq for tier-I IT companies. yet again a strong quarter with 6.0-8.7% qoq growth in USD
This growth will be lower in INR terms at 3.1-5.1% qoq due to revenue for tier-I IT companies, aided by buoyant demand
INR being stronger in 3QFY2011, at 44.85 v/s 46.48 (in driving volumes, favourable cross-currency movement and
2QFY2011). stable pricing environment. Moreover, we expect Infosys to revise
Margins to be a mixed bag its revenue growth guidance upwards from 24-25% yoy to
27-28% yoy for FY2011. We remain positive on the IT sector
We expect Infosys to record a dip of 78bp qoq in its EBIT margins
CS,
TCS Tech
with TCS, Infosys and HCL Tech as our preferred picks.
due to the impact of mid-year promotion in October 2010 and
3.4% appreciation in INR against USD. In case of TCS, the drop
in utilisations and INR appreciation are expected to take away
Exhibit 11: Quarterly estimates cr
( ` cr )
Company CMP Net Sales OPM (%) Profit
Net Profit (`
EPS (`) (`
EPS (`) P/E (x) Target
arg Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Infosys 3,445 7,292 5.0 29.4 (78) 1,815 4.5 31.8 4.5 109.5 121.1 142.5 31.5 28.4 24.2 - Neutral
TCS 1,165 9,680 4.2 27.5 (48) 2,197 4.3 11.2 4.3 35.1 43.1 48.3 33.2 27.0 24.1 - Neutral
Wipro 490 7,972 3.1 19.0 81 1,348 4.9 5.5 4.9 18.9 21.9 24.3 26.0 22.4 20.2 515 Accumulate
HCL Tech* 456 3,898 5.1 13.2 30 360 16.7 5.2 16.7 17.6 24.0 31.5 25.8 18.9 14.4 513 Accumulate
Source: Company, Angel Research; Note: Price as on December 31, 2010; * June ending so 2QFY2011 estimates, % chg is qoq
Analyst - Srishti Anand/Ankita Somani
Refer to important Disclosures at the end of the report 61
Preview
3QFY2011 Results Preview | January 3, 2011
Telecom
During 3QFY2011, almost all telecom stocks slumped, with 3G launch by private players: Not at an irrational price
Bharti Airtel (Airtel), Reliance Communication (RCOM) and Idea
RCOM gave respite to the industry by launching 3G services at
dropping off by 2.5%, 13.7% and 6.2%, respectively. These
a premium to Tata Docomo, for usage lower than 1 GB, thus
stocks were set on fire by the report issued by the CAG. As per
ruling out the possibility of any irrational pricing by other
the report:
incumbents going forward.
(1) 85/122 new licenses issued in 2008 did not fulfill the
eligibility criteria New players continue to gain subscriber market share
(2) The Department of Telecom (DoT) favoured RCOM by Over September-November 2010, the Indian subscriber base
accepting its license entry fee for dual-technology spectrum grew at an average rate of 2.9% mom. Amongst the incumbents,
before others Airtel, RCOM, Vodafone, Aircel and Idea grew at an average
rate of 2.1-3.1% mom, whereas BSNL outperformed its peers
(3) The licensing/spectrum allocation policy resulted in a loss
by growing at an average rate of 3.7% mom. New entrants,
of revenue of ~`1,76,000cr to the exchequer as the entry fee
including Uninor, Etisalat, Videocon and S Tel, grew at average
for spectrum licenses in 2008 was pegged at 2001 prices
rates of 19.9%, 55.8%, 4.5% and 12.5% mom, respectively.
Following this, the DoT has issued show cause notices to new
operators such as Etisalat, Videocon, Uninor, Loop, S Tel and Exhibit 2: Total subscriber base
Allianz Infratech (merged with Etisalat), because, as per the Company (mn) Jun-10 July -10 Aug-10
Aug-10 Sep-10
Sep-10 Oct-10 Nov-10
Oct-10
DOT, these operators had suppressed information to bag Airtel 136.6 139.2 141.3 143.3 146.3 149.4
licenses and have failed to roll out services as mandated. RCOM 110.8 113.3 115.3 117.3 119.4 122.4
Recently, Etisalat and Sistema Shyam have paid penalty of `9.9cr Vodafone Essar 108.8 111.2 113.5 115.3 117.8 120.9
and `11cr, respectively, to the DoT for failing to launch mobile TTSL 72.5 74.8 76.9 79.0 80.7 82.5
phone services on time. IDEA 68.9 70.7 72.7 74.2 76.0 78.8
BSNL 66.9 68.1 70.4 72.7 75.2 78.2
Amongst the listed players, RCOM was set on fire as CAG also
Aircel Cellular 41.7 43.3 44.9 46.5 47.5 48.7
found a violation of rules in the equity structure of Swan Telecom
Uninor 6.0 6.9 9.1 11.3 13.7 16.2
as Reliance Telecom (GSM subsidiary of RCOM) had more than
Shyam Telelink 5.1 5.5 6.0 6.5 7.0 7.6
the maximum 10% stake in the company. The quarter also
MTNL 4.9 4.9 5.0 5.0 5.1 5.1
witnessed some key developments, including 1) rollout of mobile
BPL Mobile 2.9 2.9 3.0 3.0 3.0 3.0
number portability (MNP) in Haryana, which allows a subscriber
S Tel 1.1 1.1 1.2 1.3 1.5 1.7
to shift from one service provider to another without changing
the mobile number and 2) launch of 3G services by operators HFCL 0.7 0.9 0.9 1.0 1.0 1.4
such as Tata Teleservices and RCOM. Videocon 3.0 3.9 4.9 1.3 1.3 1.4
DB Etisalat 0.0 0.0 0.0 0.1 0.1 0.1
Exhibit 1: Stock return analysis of leading Indian TSPs Total 629.8 646.9 665.1 677.8 695.5 717.3
20 Source: COAI, AUSPI, Angel Research
15 18.6
10 Thus, a trend was spotted with most of the incumbents (Airtel,
5 8.5
RCOM, Aircel and Vodafone) losing out their market share to
(%)
0 (2.5)
(5) (6.2) new entrants. Whereas, BSNL and Idea bucked the trend of
(10) (13.7) losing out their market share to new entrants and gained market
(16.0)
(15) share by 0.2% and 0.1%, respectively, over the same period.
(20)
Airtel RCOM Idea
Over September-November 2010, subscriber market share of
Chg. (3 months) Chg. (1 year)
new entrants such as Uninor increased by 0.6%, whereas market
Source: Bloomberg, Angel Research share of Videocon and S Tel remained stable at 0.2%.
non-event:
MNP as a non-event: Haryana witnessed the launch of MNP
during the quarter, which proved to be a non-event as the
anticipated escalation in the churn of post-paid customers fell
through. Pan India rollout of MNP is due in January 2011.
Refer to important Disclosures at the end of the report 62
Preview
3QFY2011 Results Preview | January 3, 2011
Telecom
Exhibit 3: Operator-wise subscriber market share growing by 2.1-3.4% mom, whereas B circle growing by 3.1%
Company (%) Jun-10 July -10 Aug -10 Sep-10
Sep-10 Oct-10 Nov-10
Oct-10 despite having the highest subscriber base.
Airtel 21.7 21.5 21.2 21.1 21.0 20.8
In November 2010, Metro lost its share to A and B circles in a
RCOM 17.6 17.5 17.3 17.3 17.2 17.1
big way, which stood tall with market share of 34.1% and 42.6%
Vodafone Essar 17.3 17.2 17.1 17.0 16.9 16.8
in subscriber net addition, respectively. On an absolute basis,
TTSL 11.5 11.6 11.6 11.7 11.6 11.5
in November 2010, all circles except Metro grew rapidly, with
IDEA 10.9 10.9 10.9 10.9 10.9 11.0
B circle leading at 9.3mn net addition (28.9% mom), followed
BSNL 10.6 10.5 10.6 10.7 10.8 10.9
by A and C circles at 7.4mn (28% mom) and 3.2mn (15.7%
Aircel Cellular 6.6 6.7 6.8 6.9 6.8 6.8
mom), respectively. Net additions in Metro circle trended
Uninor 1.0 1.1 1.4 1.7 2.0 2.3
downwards by 3.2% mom at 1.9mn.
Shyam Telelink 0.8 0.9 0.9 1.0 1.0 1.1
MTNL 0.8 0.8 0.8 0.7 0.7 0.7 Exhibit 5: Market share in subscriber net addition
BPL Mobile 0.5 0.5 0.4 0.4 0.4 0.4 Circle (%) Aug-10
Jun-10 July -10 Aug-10 Sep-10
Sep-10 Oct-10 Nov-10
Oct-10
S Tel 0.2 0.2 0.2 0.2 0.2 0.2 Metro 15.3 14.1 11.5 9.5 11.3 8.9
HFCL 0.1 0.1 0.1 0.2 0.1 0.2 A 30.4 38.0 32.9 24.2 32.7 34.1
Videocon 0.5 0.6 0.7 0.2 0.2 0.2 B 38.9 40.3 41.8 46.2 40.6 42.6
DB Etisalat 0.0 0.0 0.0 0.0 0.0 0.0 C 15.4 7.6 13.9 20.0 15.4 14.5
Source: COAI, AUSPI, Angel Research Source: COAI, AUSPI, Angel Research
Exhibit 4: Trend in subscriber net additions MOU to marginally firm up
Aug-10
Company (mn) Jun -10 July -10 Aug-10 Sep-10
Sep-10 Oct-10 Nov-10
Oct-10
Airtel 3.0 2.6 2.0 2.0 3.0 3.1 From 2QFY2010-1QFY2011, Airtel and Idea witnessed a
Vodafone Essar 2.7 2.4 2.3 1.8 2.5 3.1 secular growth trend in their minutes of usage (MOU); however,
BSNL 1.1 1.2 2.3 2.3 2.5 3.0 they witnessed a decline in the seasonally weak 2QFY2011.
RCOM 2.9 2.5 2.0 2.0 2.0 3.0 RCOM, on the other hand, has been consistently experiencing
IDEA 2.2 1.9 2.0 1.5 1.8 2.8 a decline in its MOU. For 3QFY2011, we expect MOU for Airtel
Uninor 1.0 0.9 2.2 2.2 2.5 2.4 and Idea to grow marginally by 0.5% and 0.2% qoq,
TTSL 2.7 2.3 2.1 2.1 1.7 1.8 respectively; whereas for RCOM, we expect MOU to continue
Aircel Cellular 1.6 1.6 1.6 1.6 1.0 1.2 to decline at 1% qoq.
Shyam Telelink 0.4 0.5 0.5 0.5 0.4 0.6
Exhibit 6: Trend in MOU per month per subscriber
HFCL 0.3 0.2 0.1 0.1 - 0.4
550 505
S Tel 0.1 0.1 0.1 0.1 0.2 0.2 485 478 468
480
454 456
450 446
minutes per user
Videocon 0.6 0.9 1.0 (3.6) 0.1 0.1 450 416 415
402 399 398
389 394
DB Etisalat 0.0 0.0 0.0 0.0 0.0 0.1 410
375
395
350
MTNL 0.0 0.0 0.0 0.0 0.0 0.0 372 365 295 276
340 273
330
BPL Mobile 0.0 0.0 0.0 0.0 0.0 0.0 318
250
Total 18.7 17.1 18.3 12.7 17.7 21.9
4QFY10
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
1QFY11
2QFY11
3QFY11E
Source: COAI, AUSPI, Angel Research
The net addition run rate of incumbents faced a churn during Airtel (ex -Africa) Idea RCOM
August-September 2010 due to tightened security norms as well Source: Company, Angel Research
as rollout of 2G services by new operators, including Uninor,
VAS share to grow
Etisalat and Videocon. In October-November 2010, incumbents
again supported strong net additions, with Airtel and Vodafone We expect VAS share to have grown in 3QFY2011, on account
leading the pack by adding 3.1mn subscribers each in of the festival season leading to higher exchange of text and
November 2010. other value-added services. This should help the downside in
Circle-wise net additions average revenue per minute (ARPM) to be limited due to lower
voice ARPM resulting in from higher growth in B and C circles.
In the first two months of 3QFY2011, all the circles witnessed
impressive growth in subscribers with Metro, A and C circles
Refer to important Disclosures at the end of the report 63
Preview
3QFY2011 Results Preview | January 3, 2011
Telecom
ARPM to remain flattish EPMs to remain stable
ARPM registered a free fall at a ~5% CQGR over the past nine For 3QFY2011, we expect EBITDA per minute (EPM) to remain
quarters on the back of entry of new players and the price war. flat for all the three telcos as stable ARPM, marginal uptick in
However, the price war logged by these new entrants has turned MOU and strong subscriber growth will set off cost escalation
into a curse for their own sustainability. The confidence of no due to higher access charges.
further possibility of a price war resurfacing was instilled by the
rational pricing move for 3G services by RCOM vis-à-vis Tata Exhibit 9: EPM trend
0.24
Docomo, i.e. no case of undercutting. Therefore, we expect 0.25 0.23
0.22
0.23
0.22 0.20
ARPM to remain flat qoq for 3QFY2011. 0.20
0.20
0.17
0.17
0.20 0.16 0.16
0.16
`/min
Exhibit 7: Trend in ARPM per subscriber 0.15
0.15
0.16
0.16
0.14
0.14
0.13 0.13 0.13 0.13
0.70 0.13 0.13
0.10
0.11 0.10 0.10
0.60 0.05
`/min
3QFY09
4 QFY09
1 QFY10
2 QFY10
3 QFY10
4 QFY10
1 QFY11
2 QFY11
3 QFY11E
0.50
Airtel (ex -Africa) Idea RCOM
0.40 Source: Company, Angel Research
3QFY11E
4QFY09
1QFY10
2QFY10
4QFY10
1QFY11
2QFY11
3QFY09
3QFY10
Outlook and valuation
Airtel (ex -Africa) Idea RCOM
For 3QFY2011, we expect revenue growth to be driven by strong
Source: Company, Angel Research growth in subscriber base, flat ARPM and a marginal uptick in
ARPUs to inch up MOU. Amongst the top three operators, we expect Idea to
register revenue growth of 5.0% qoq and RCOM to grow at
For 3QFY2011, we expect the combination of flat ARPM and 5.5% qoq. Airtel (including Zain) is expected to post growth of
marginal improvement in MOU to push average revenue per 3.8% qoq. On the EBITDA margin front, we expect Airtel to
user (ARPU) marginally up by 0.4% and 0.3% qoq for Airtel record an expansion of 56bp qoq on the back of lower personnel
and Idea, respectively. However, for RCOM, ARPU is expected cost and decreasing network-operating expense (NOE) with
to fall by 2.0% qoq due to slippage in MOU. higher subscribers per cell site. Idea and RCOM are also
expected to post EBITDA margin expansion of 7bp and 30bp
Exhibit 8: Trend in ARPU per month
400
qoq, respectively, for 3QFY2011. The sector continues to be
324 haunted by issues related to the 2G scam. We believe industry
305
300
278 dynamics point toward a possible consolidation in the long run
` /month
266 252
254
232
230
220 215
202 202
and expect only select few operators, including Airtel, Vodafone,
251 209
200 224
210
200 165 166
RCOM, BSNL, Aircel, Idea and Uninor, to be the survivors out
185 182
161 149
139 121 119 of the current 14 operators. Airtel continues to be our preferred
130
100
pick amongst telcos due to its low-cost integrated model (owned
3QFY11E
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
tower infrastructure), potential opportunity to scale up in Africa,
Airtel (ex -Africa) Idea RCOM
established leadership in revenue and subscriber market share,
Source: Company, Angel Research and relatively better KPIs.
Exhibit 10: Quarterly estimates (` cr)
`
Company CMP Net Sales OPM (%) Net Profit
Profit EPS (`)
(` EPS (`)
(` P/E (x) Target
rge Reco.
(`) 3QFY11E % chg 3QFY11E chg bp 3QFY11E % chg 3QFY11E % chg FY10 FY11E FY12E FY10 FY11E FY12E (`)
Airtel 357 15,787 3.8 34.2 56.0 1,535 (7.6) 4.0 (7.6) 32.0 17.4 23.8 11.1 20.5 15.0 - Neutral
RCOM 145 5,301 5.5 31.4 30.0 311 (30.3) 1.5 (30.3) 22.8 6.7 9.1 6.4 21.6 16.0 - Neutral
Idea 69 3,844 5.0 24.1 7.0 178 (1.1) 0.5 (1.1) 2.9 2.2 2.0 23.9 32.0 34.6 65 Reduce
Source: Company, Angel Research; Note: Price as on December 31, 2010, % chg is qoq
Analyst - Srishti Anand/Ankita Somani
Refer to important Disclosures at the end of the report 64
Preview
3QFY2011 Results Preview | January 3, 2011
Disclaimer
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment.
Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment
decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are
those of the analyst, and the company may or may not subscribe to all the views expressed within.
Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading
volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.
The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources
believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for
general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or
damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not
independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or
warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to
update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that
prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed
or passed on, directly or indirectly.
Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other
advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.
Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in
connection with the use of this information.
Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the
latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have
investment positions in the stocks recommended in this report.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to -15%) Sell (< -15%)
Refer to important Disclosures at the end of the report 65
Preview
3QFY2011 Results Preview | January 3, 2011
Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.
Tel : (022) 3952 4568 / 4040 3800
Research Team
Fundamental:
Sarabjit Kour Nangra VP-Research, Pharmaceutical sarabjit@angelbroking.com
Vaibhav Agrawal VP-Research, Banking vaibhav.agrawal@angelbroking.com
Vaishali Jajoo Automobile vaishali.jajoo@angelbroking.com
Shailesh Kanani Infrastructure, Real Estate shailesh.kanani@angelbroking.com
Rupesh Sankhe Cement, Power rupeshd.sankhe@angelbroking.com
Param Desai Real Estate, Logistics, Shipping paramv.desai@aangelbroking.com
Sageraj Bariya Fertiliser, Mid-cap sageraj.bariya@angelbroking.com
Paresh Jain Metals & Mining pareshn.jain@angelbroking.com
John Perinchery Capital Goods john.perinchery@angelbroking.com
Srishti Anand IT, Telecom srishti.anand@angelbroking.com
Vinay Nair Oil & Gas vinay.nair@angelbroking.com
Jai Sharda Mid-cap jai.sharda@angelbroking.com
Sharan Lillaney Mid-cap sharanb.lillaney@angelbroking.com
Naitik Mody Mid-cap naitiky.mody@angelbroking.com
Chitrangda Kapur FMCG, Media chitrangdar.kapur@angelbroking.com
Amit Vora Research Associate (Oil & Gas) amit.vora@angelbroking.com
V Srinivasan Research Associate (Cement, Power) v.srinivasan@angelbroking.com
Mihir Salot Research Associate (Logistics, Shipping) mihirr.salot@angelbroking.com
Pooja Jain Research Associate (Metals & Mining) pooja.j@angelbroking.com
Yaresh Kothari Research Associate (Automobile) yareshb.kothari@angelbroking.com
Shrinivas Bhutda Research Associate (Banking) shrinivas.bhutda@angelbroking.com
Sreekanth P.V.S Research Associate (FMCG, Media) sreekanth.s@angelbroking.com
Hemang Thaker Research Associate (Capital Goods) hemang.thaker@angelbroking.com
Nitin Arora Research Associate (Infra, Real Estate) nitin.arora@angelbroking.com
Ankita Somani Research Associate (IT, Telecom) ankita.somani@angelbroking.com
Varun Varma Research Associate (Banking) varun.varma@angelbroking.com
Vasant Lohiya Research Associate (Banking) vasant.lohiya@angelbroking.com
Technicals:
Shardul Kulkarni Sr. Technical Analyst shardul.kulkarni@angelbroking.com
Mileen Vasudeo Technical Analyst vasudeo.kamalakant@angelbroking.com
Derivatives:
Siddarth Bhamre Head - Derivatives siddarth.bhamre@angelbroking.com
Jaya Agarwal Derivative Analyst jaya.agarwal@angelbroking.com
Institutional Sales Team:
Mayuresh Joshi VP - Institutional Sales mayuresh.joshi@angelbroking.com
Abhimanyu Sofat AVP - Institutional Sales abhimanyu.sofat@angelbroking.com
Pranav Modi Sr. Manager pranavs.modi@angelbroking.com
Ganesh Iyer Sr. Manager ganeshb.Iyer@angelbroking.com
Jay Harsora Manager jayr.harsora@angelbroking.com
Meenakshi Chavan Dealer meenakshis.chavan@angelbroking.com
Gaurang Tisani Dealer gaurangp.tisani@angelbroking.com
Production Team:
Bharathi Shetty Research Editor bharathi.shetty@angelbroking.com
Simran Kaur Research Editor simran.kaur@angelbroking.com
Bharat Patil Production bharat.patil@angelbroking.com
Dilip Patel Production dilipm.patel@angelbroking.com
Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946
Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302
Refer to important Disclosures at the end of the report 66
