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Table of Contents
Strategy 4QFY2012 Sectoral Outlook Automobile Banking Capital Goods Cement FMCG Infrastructure Information Technology Metals Oil & Gas Pharmaceutical Power Real Estate Telecom Watch Stock Watch 11 14 19 21 23 25 28 31 34 37 40 42 44 47
Note: Stock prices as on March 30, 2012 Refer to important Disclosures at the end of the report
2-9
Strategy
Macro fundamentals improving... both on the global and domestic fronts
Global crisis threats, which have plagued world markets since 2007 (first the subprime crisis and then European sovereign debt crisis), have finally begun to recede, as evidenced by the improving global economic environment. With improving sentiment and substantial liquidity support in the U.S. and European economies, we expect emerging markets such as India to once again develop into bright prospects for capital inflows. Indian markets have already witnessed net inflows of ~`45,000cr in the first three months of CY2012 compared to net outflow of ~`4,000cr in CY2011. Further, domestically, with repo rate cuts on the anvil (likely to begin in the next few months), macro fundamentals are expected to improve going into FY2013. During 4QFY2012E, earnings growth of our coverage universe (ex. SBI on account of one-off provisioning in 4QFY2011) is expected to remain moderate at around 4.3% yoy, as successive quarters of margin compression and high interest continue to weigh down on profitability. Similarly, we expect Sensex 4QFY2012E earnings to remain sudued and grow at meager 5.8% yoy (ex. SBI). Sensex earnings growth for FY2012E is expected to be modest at 9% yoy. However, cooling inflation and interest rates are expected to underpin healthier growth over FY2012-14E. We expect Sensex companies to deliver EPS growth of 13.4% yoy in FY2013E and 14.3% yoy in FY2014E, translating into a reasonable 13.9% CAGR over FY2012-14E. Earnings growth is expected to be broad-based with significant contributions from rate-sensitive financials and auto stocks, followed by metal, IT and oil and gas stocks. We assign a conservative multiple of 14.5x to FY2014E earnings, resulting into a 12-month Sensex target of 20,700, which implies an upside of ~19% from current levels. economic data and as reflected in the strong performance of U.S. equity markets (at their four-year high). The initial jobless claims (as of March 23, 2012) have declined sharply to 359K from 390K registered on January 6, 2012, and from the all-time high of 659K registered three years back (March 27, 2009). In fact, the current initial jobless claims reading is the lowest since April 2008 and is lower by ~13% than the average levels of 400K over the last 10 years. Consumer confidence levels in the U.S. (71.6 in February 2012 and 70.2 in March 2012) are at their highest levels since March 2008 (barring the 72 reading recorded in February 2011), indicating the renewed optimism about the future state of economic affairs among consumers. The monthly nonfarm payroll data, which denotes the number of jobs added or lost in the economy (excluding government and farming-related jobs) over the preceding month, has been in the positive territory for the past consecutive 17 months (addition of 2,812K jobs). Since July 2011, nonfarm payroll data has registered higher levels compared to the forecasts for every month; this, along with consistently lower-than-estimated jobless claims, reflects the positive effect of the stimulation created by the Fed's accommodative monetary policy. The Fed is expected to remain committed to ongoing liquidity creation measures (as indicated by a recent speech by Fed's chairperson, Ben Bernanke) to further fuel consumer demand and business investment.
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Strategy
The recent rounds of LTRO by the ECB, motivated by the success of QEs in the U.S., infused funds worth ~EUR1trn into the capital-starved European banks. Euro reforms coupled with liquidity creation are expected to encourage economic growth in European countries. The recent success of Greek debt swap (up to 70% hair cut), successful introduction of austerity measures and decline in bond yields from their peaks suggest that the worst of Eurozone crisis is behind us. 3) The slowdown in China on account of slowing consumption and weakening export growth is expected to reduce competition for foreign capital inflows. 4) As global crisis threats recede further, global investors would once again look to diversify their portfolios and look at emerging markets like India for enhanced returns.
45.0
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46.0
Aug-11 Mar-11 Nov-11 Dec-11 Feb-11 Jun-11 May-11 Feb-12 Jul-11 Sep-11 Oct-11 Apr-11 Jan-12
Source: Bloomberg, Angel Research Refer to important Disclosures at the end of the report
Strategy
Inflation environment should aid monetary easing commencement
In February 2012, inflation levels moderated substantially to 6.95% (down ~250bp) compared to the preceding three months and are in-line with the RBI's year-end inflation projections. Food inflation for February 2012 climbed back to 6.1% yoy from negative 0.5% yoy for January 2012; however, the sharp yoy jump can be attributed to the low base effect (decline of 5.8% mom in food inflation in February 2011). Also, for February 2012, annualized mom food inflation levels stood at 5.6%, lower than the six-month annualized figure of 7.1%. Manufacturing inflation in February eased further to 5.7% yoy (lowest levels in over a year) from 6.5% yoy levels in January 2012. Annualized mom growth in the manufacturing index stood at 4.2% and even the six-month annualized figure was at low 4.6% levels. More importantly, core inflation, which the RBI tracks closely for its monetary policy decisions, eased further to 5.5% levels.
WPI
Primary Articles
The marked decline in manufacturing inflation levels over the past three months (~240bp) has been visible post the dip in primary inflation, as a large part of pass-through of primary inflation is, in our view, already done with. Going ahead, sustained lower food inflation levels are likely to lead to lower wage inflation, which in turn are likely to translate into further easing of manufacturing inflation levels. Hence, in our view, the overall inflation environment should aid monetary easing commencement; and we expect the RBI to begin with more decisive signaling through repo rate cuts in the next few months. The consequent reduction in interest rates should end the spell of margin compression, which has afflicted corporate earnings in the past several quarters. We are factoring in ~100bp reduction in interest rates over FY2013 (inflation levels expected to be lower by 150bp) and expect the reduction in interest servicing costs to have a pronounced positive effect on FY2013 earnings, especially for capital-intensive sectors, which have been battered by elevated interest burden for quite a while now.
Refer to important Disclosures at the end of the report
Real Estate
Auto
IT
Pharma
Metals
Engg.
Finance
Power
FMCG
In FY2013E, when Sensex EPS is expected to grow by 13.4%, the BFSI sector again would be the largest contributor to its growth with 38.2% of the overall increase. Other sectors, which are also expected to contribute reasonably well, are auto and IT. Ex. BFSI stocks' contribution, Sensex EPS growth would have
Telecom
Total
Strategy
been much lower at 6.4%. The BFSI sector's growth is expected to be primarily on account of strong performances by all companies, owing to stable margins and improving asset quality, implying lower provisioning and, therefore, higher profits. Auto and IT companies are expected to contribute 13.6% and 13.4%, respectively, to total Sensex EPS growth in FY2013E. The auto sector's contribution to overall growth is expected to be on account of strong show by Maruti Suzuki, which had been grappled with production troubles in FY2012E. Growth in the profits of IT companies is expected due to decent business growth as CY2012 IT budget is expected to be flat to marginally positive. Even among them, Wipro is expected to fare much better, as it is expected to reap benefits of restructuring exercise done in FY2012, depicting the low base effect. Metals and FMCG companies are also expected to contribute to Sensex EPS growth by 9.5% and 7.7%, respectively. Notably, none of the sectors is expected to contribute negatively to Sensex EPS growth in FY2013E.
Auto
Metals
Power
Real Estate
FMCG
IT
Finance
Pharma
Engg.
Auto
IT
Finance
Pharma
Engg.
Metals
Power
Real Estate
FMCG
In FY2014E, we expect Sensex EPS to grow by 14.3%, with BFSI stocks continuing to dominate Sensex EPS growth, contributing 34.9%. Other sectors that are expected to contribute significantly to EPS growth are metal and oil and gas. Metal companies are expected to contribute a higher 14.4% of the increase in EPS on the back of strong performance by Tata Steel and JSPL. Both these companies would start getting additional profits in FY2014E from their new capacities coming on stream around that time. Oil and gas companies are expected to contribute 12.8% to Sensex EPS growth due to 11% earnings growth expected in index heavyweight, Reliance Industries. Again, none of the sectors is expected to report a decline in earnings.
Telecom
Total
Telecom
Total
Strategy
Exhibit 11: Sensex EPS estimates
(`)
1,500 1,300 1,100 900 700 500 300 FY2011 FY2012E FY2013E FY2014E 1,014
growth 9.0%
owth % gr 13.4
14.3 % gr owth
1,105
Sensex companies are expected to report healthy top-line growth of 15.5% yoy during the quarter. Operating margins are expected to contract by 285bp on a yoy basis to 18.3% (ex. Financials). However, on a sequential basis, margin compression, which has affected profitability in the last few quarters, is expected to moderate, with a minimal expected dip of 25bp. Net profit margin is expected to come in at 11.8% (ex. SBI), up by 100bp on a qoq basis. Overall, we expect Sensex 4QFY2012E earnings to grow by 13.6% yoy, aided mainly by SBI (one-off provisioning item in 4QFY2011), despite being dragged by an earnings decline of 14.8% yoy expected in oil and gas stocks on account of margin contraction of 652bp yoy. Ex. SBI, Sensex earnings growth is expected to be much lower at 5.8% yoy. Ex. SBI and oil and gas stocks, Sensex earnings growth is expected to be 10.9% yoy. Sensex net profit growth of 13.6% in 4QFY2012E is primarily aided by strong bottom-line numbers expected from BFSI, IT and auto companies. Ex. BFSI, auto and IT companies' contribution, Sensex' yoy net profit growth is expected to be in the negative territory. Sensex' top-line growth is likely to be dominated by auto and oil and gas stocks, accounting for combined top-line growth of ~57%. Sensex IT companies are expected to report strong 27.0% yoy sales growth on account of modest volume growth emanating from decent budget flush from clients and yoy INR depreciation. Profitability of companies such as Infosys, TCS and Wipro is expected to rebound by healthy 27.1%, 24.0% and 10.6% yoy, respectively, aided mainly by yoy INR depreciation. Sensex pharmaceutical companies are expected to buck the trend of margin compression, with a strong 896bp yoy OPM expansion on the back of 11.4% yoy top-line growth, partly aided by the yoy depreciation of the INR vs. USD. Bottom-line growth is expected to be strong at 60.9% yoy. We expect Sensex BFSI companies ex. SBI (as SBI had one-off item in 4QFY2011 pertaining to provisioning expenses) to post healthy 19.6% yoy bottom-line growth on the back of stable to improving margins and healthy performance of private banks. While oil and gas stocks are expected to contribute a sizeable 23% to the top-line growth of the Sensex, operating margins are expected to decline rather steeply by 652bp. ONGC is expected to face higher subsidy burden in 4QY2012E, which
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15 year Avg
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Earnings Yield
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Strategy
is expected to result in a 5.6% and 5.0% decline in the top line and bottom line, respectively. Although GAIL is expected to report 20.3% yoy top-line growth on account of higher gas prices, its bottom-line growth is expected to come in at 1.9% on account of 260bp margin compression. For RIL, we expect healthy 16.5% yoy top-line growth on the back of rise in prices of petrochemical products. However, due to margin compression, the bottom line is expected to decline by 22.3% yoy. Sensex' auto companies are also expected to contribute significant 34% to Sensex' top-line growth. Strong revenue growth is mainly on account of healthy volume growth, price increases and favorable currency impact primarily on the JLR front. Operating margins are expected to remain stable on account of easing raw-material prices. Overall, for Sensex auto companies, we expect revenue growth of 31% yoy and net profit growth of 27.1% yoy. We expect Sensex FMCG companies to post decent 15.7% yoy growth in sales, aided by modest volume growth coupled with price hikes taken by companies. Margins are expected to improve by ~255bp yoy. Bottom-line growth for Sensex FMCG companies is expected to be healthy at 23.3% yoy. From the capital goods pack, BHEL is expected to witness 14.0% yoy top-line growth. PAT margin is estimated to fall by 60bp yoy, resulting in decent bottom-line growth of 9.2% yoy. Sensex metal companies are expected to witness overall muted sales growth of 1.9% yoy due to modest top-line performance of steel companies on account of flat yoy realization and the expected decline in the top-line of nonferrous metal companies owing to lower LME prices. Margins are expected to decline by 470bp yoy due to higher input costs. Overall, we expect flat profit growth for Sensex metal companies. For Coal India, we expect a sharp 5.9% yoy decline in net profit mainly on account of higher staff costs provisions. The telecom sector is expected to witness strong sales growth of 20.4% yoy mainly on account of strong growth in Africa business and decent Indian subscriber growth. Operating profit of the sector is expected to grow by modest 10.9% yoy, impacted by increased operational charges. Net profit, however, is expected to decline by 22.2% yoy on account of higher amortization expenses due to 3G services rollout as well as impact of INR depreciation on interest costs of foreign borrowings.
Strategy
Earnings growth of our coverage to moderate in 4QFY12E
Earnings growth trajectory of our coverage universe is expected to moderate in 4QFY2012 as well, as higher input costs and interest rates continue to affect margins and the overall profitability of corporates. For our coverage universe as a whole (ex. SBI due to one-off provisioning expenses in 4QFY2011), we expect yoy top-line growth to remain reasonable at close to 15% levels. However, the compression in OPM and higher interest costs are likely to restrict operating profit and net profit growth to just ~4.3% yoy each. For our financials coverage universe, private banks are expected to continue to outperform public sector banks and drive earnings growth in the sector. Overall, we expect large private banks to post 18.5% yoy growth in net interest income, while PSU banks are expected to register 19.4% yoy growth (9.8% yoy ex. SBI). While large private banks are expected to report healthy 20.7% yoy growth on the net profit front, PSU banks are likely to post relatively lower 13.4% yoy growth (ex. SBI) due to higher provisioning expenses. For 4QFY2012E, we expect our FMCG coverage universe to register healthy ~16.8% yoy top-line growth, backed by modest volume growth and price hikes. OPMs are expected to expand by 152bp on the back of superior product mix and cut in A&P costs, which would result in healthy 26.4% yoy growth in operating profit and 25.7% yoy growth in net profit. IT companies are expected to report healthy top-line growth of 25.9% yoy on account of INR depreciation vs. the USD and modest volume growth, considering moderate demand for IT solutions. Operating margins are expected to remain flat due to increased employee cost on a yoy basis, as pent-up demand in 1HFY2012 forced companies to hike salaries. Overall, IT companies under our coverage are expected to report earnings growth of ~22% yoy. For our automobile coverage universe, we expect strong revenue growth of 31.4% yoy, driven by volume growth and pricing action. A large portion of this jump is expected to be on account of Tata Motors, which continues to record strong performance on the JLR front. Operating margins are likely to remain flat, led by stable commodity prices. Overall, we expect earnings of our our automobile coverage universe to grow by 20.7% yoy. Pharma companies under our coverage universe are expected to register steep ~77.3% yoy earnings growth (ex. Ranbaxy 29.2% yoy), mainly on account of strong top-line growth of 32.1% yoy coupled with significant improvement in margins by around 876bp. In the metals pack, we expect the top line of steel companies under our coverage to report modest performance on account of flat realizations on a yoy basis. Further, due to relatively higher raw-material costs, margins of steel companies are likely to contract by 295-708bp yoy. For nonferrous metal companies, we expect margin compression (165-1,558bp yoy) on account of declining LME prices and higher coal cost. Moreover, sectors like capital goods, construction and cement are likely to continue facing the brunt of higher interest costs in 4QFY2012E as well. For our capital goods universe, we expect moderate 3.2% yoy bottom-line growth; while for infra and cement companies, we expect a 2.7% and 1.2% yoy decline in net profit, respectively. However, with interest rates projected to have a downward trajectory over FY2012-14E, we expect these sectors to report improved performance going ahead.
Source: Company, Angel Research; Note: Only for coverage stocks for which quarterly results are estimated Refer to important Disclosures at the end of the report
Strategy
Exhibit 16: Earnings estimates for Sensex companies
(` Net Sales (` cr) Company Bajaj Auto Bharti Airtel BHEL Cipla Coal India DLF Gail India HDFC HDFC Bank Hero Honda Hindalco HUL ICICI Bank Infosys ITC 4QFY2012E 4,721 18,973 20,954 1,690 17,672 2,382 10,697 1,867 4,727 5,984 6,680 5,737 4,875 9,100 6,684 4QFY2011 4,052 15,756 18,380 1,615 15,089 2,683 8,894 1,655 4,095 5,351 6,761 4,899 4,150 7,250 5,836 3,848 15,384 6,682 9,864 15,519 15,396 72,674 12,874 10,000 1,463 35,715 4,986 33,823 10,158 8,302 363,155 % chg 16.5 20.4 14.0 4.6 17.1 (11.2) 20.3 12.8 15.4 11.8 (1.2) 17.1 17.5 25.5 14.5 14.7 23.1 20.4 20.1 6.1 (5.6) 16.5 23.9 9.1 19.0 40.5 (56.3) (1.1) 32.3 21.9 15.5 16.0
#
Adj.Net Profit (` Adj.Net Profit (` cr) 4QFY2012E 815 1,090 3,054 282 3,958 446 798 1,267 1,451 658 516 640 1,719 2,310 1,539 994 1,862 611 503 2,711 2,652 4,177 3,549 1,311 775 3,645 570 2,743 2,952 1,522 51,119 4QFY2011 676 1,401 2,798 214 4,207 345 783 1,142 1,115 502 708 486 1,452 1,818 1,281 1,002 1,686 607 660 2,782 2,791 5,376 21 1,951 443 2,460 627 1,896 2,381 1,375 44,984 % chg 20.7 (22.2) 9.2 31.8 (5.9) 29.4 1.9 11.0 30.2 31.1 (27.1) 31.7 18.3 27.1 20.1 (0.7) 10.4 0.7 (23.8) (2.5) (5.0) (22.3) NA (32.8) 75.0 48.2 (9.1) 44.7 24.0 10.6 13.6 16.8
Weightage (%) 1.7 3.1 1.5 1.1 1.5 0.6 1.3 6.8 6.7 1.4 1.2 3.0 7.0 9.6 8.5 1.6 4.9 2.2 1.3 1.8 3.9 9.2 4.1 1.2 1.6 3.3 1.2 2.2 4.7 1.9 100.0
% Contribution to Sensex growth# 1.9 (2.9) 2.4 1.2 (0.7) 0.7 0.2 3.4 7.2 2.1 (3.6) 2.1 7.2 11.3 4.9 (0.1) 4.3 0.1 (2.1) (0.4) (0.9) (17.8) 42.7 (7.8) 3.6 20.7 (1.1) 16.0 4.6 1.0 100.0
Jindal Steel & Power 4,414 L&T M&M Maruti Suzuki NTPC ONGC RIL SBI Sterlite Sun Pharma Tata Motors Tata Power Tata Steel TCS Wipro Total Sensex
#
18,945 8,046 11,843 16,468 14,530 84,669 15,948 10,912 1,741 50,188 2,177 33,437 13,438 10,125 419,622
10
Automobile
For 4QFY2012, we expect our auto universe to witness robust revenue growth of ~30% yoy (~13% qoq), led by healthy volume growth of ~10% yoy (~3% qoq) coupled with price increases and favorable currency movement (primarily on the JLR front). We expect EBITDA margin of our universe to marginally expand by 40bp yoy (flat qoq) to ~13%, led by stable raw-material prices and better product mix. As a result, adjusted net profit (excluding forex loss) is likely to register strong ~25% yoy (~10% qoq) growth. Amongst automobile companies, Tata Motors (TTMT) is expected to report a robust set of results, benefitting from sustained volume momentum at Jaguar Land Rover (JLR) in recent months. However, Maruti Suzuki (MSIL) and Ashok Leyland (AL) are expected to report poor performance mainly on account of margin pressures. The domestic automotive industry witnessed healthy volume growth YTD in FY2012, registering 12.5% yoy growth despite dual concerns of economic slowdown and high interest rates. Volume growth, however, remained mixed and has been driven by strong 26.9% yoy growth in the light commercial vehicle (LCV) segment and healthy 14.8% and 12.8% yoy growth in the two-wheeler (2W) and utility vehicle (UV) segments, respectively. The passenger car (PC) segment, on the other hand, remained the most affected and reported flat growth during the period. During 4QFY2012, while TTMT and MSIL reported better-than-expected volume performance, TVS Motor (TVSL) and Mahindra and Mahindra (MM, mainly on the tractors front) reported lower-than-expected volume growth. Going ahead, in FY2013, we expect interest rates to ease, leading to revival in demand in the passenger vehicle (PV) and commercial vehicle (CV) segments; however, volume growth in the 2W and tractor segments is likely to be muted, led by high base effect and slowdown in rural demand. In the long run though, volume outlook across all the segments is expected to be positive, aided by rising income levels, easy availability of finance, new product launches and improved outlook for exports.
Absolute
11
Automobile
average realization and overall profitability. This coupled with higher interest outgo (higher working capital requirement) is likely to impact the bottom line, which is expected to decline by ~15% yoy during the quarter.
FY2012
FY2011 % chg
4.7 1,132,743 1,271,015 (10.9) 2.8 1,006,092 1,132,749 (11.2) 23.4 9.1 20.4 61.4 (16.9) 15.6 126,651 714,492 451,227 29,518 220,310 13,437 138,266 590,719 358,023 19,042 201,786 11,868 (8.4) 21.0 26.0 55.0 9.2 13.2
FY2012
900,919 222,105 360,150 582,255 55,974 262,690 318,664 63,273 101,473
FY2011 % chg
803,316 211,636 285,347 496,983 43,070 263,263 306,333 58,042 94,106 12.2 4.9 26.2 17.2 30.0 (0.2) 4.0 9.0 7.8
Source: Company; Angel Research; Note: Volumes for March 2012 are estimated
Source: Company; Angel Research; Note: Volumes for March 2012 are estimated
FY2012
FY2011 % chg
14.4 13.7 19.7 32.7 15.4 7.4 1.0 13.7 11.1 2.0 22.3
Exports (incl. above) 364,723 HMCL TVSL Motorcycles Scooters Mopeds Three-wheelers Exports (incl. above) 1,573,737 526,075 194,127 118,162 205,319 8,467 57,070
32.2 1,597,133 1,203,718 8.2 6,236,915 5,402,443 (1.4) 2,198,153 2,046,737 (11.3) (4.5) 14.6 (29.8) (19.1) 845,174 530,367 781,888 40,724 287,210 836,821 466,264 703,723 39,929 234,850
Source: Company; Angel Research; Note: Volumes for March 2012 are estimated Refer to important Disclosures at the end of the report
12
Automobile
Auto ancillaries to track the auto sector
While OE demand continues to remain sluggish on account of macro concerns such as rising interest rates and slowdown in industrial activity, replacement sales have also seen moderate offtake due to weakness in overall economic activity, thereby negatively affecting ancillary manufacturers. We, however, expect the demand environment to improve in the OE as well as replacement segment in FY2013, aided by the likely easing of interest rates. During 4QFY2012, we expect auto ancillary companies to report moderate net profit growth on account of modest domestic auto sales and operating margin pressures. We expect a sequential expansion in the operating margins of Bosch and FAG Bearings, mainly due to stronger INR compared to 3QFY2012, as imports form a substantial portion of rawmaterial costs for both the companies. Motherson Sumi is expected to witness yet another challenging quarter, as its operating margin is likely to remain under pressure owing to ramping up of new plants in Brazil and Hungary and due to consolidation of low-margin Peguform operations. However, the standalone performance will benefit from normal production at its major client, MSIL. We expect EXID to continue to report improved performance sequentially, as revenue growth will be driven by increased 4W battery volumes and uptick in inverter batteries. We expect qoq expansion in the company's operating margin on the back of softening lead prices (down ~20% yoy) and better product mix. As a result, PAT is expected to jump by ~25% sequentially. Led by healthy PV and CV sales, APTY is likely to register a strong ~19% yoy increase in its top line. EBITDA margin is estimated to improve by 50bp qoq to 10.4%, as natural rubber prices have declined by ~6% qoq. We expect Bharat Forge to report strong top-line growth of ~22% yoy, driven by healthy growth in the CV sector and aided further by its diversified business model (one-third of revenue from non-auto business); operating margin of the company is expected to improve with easing commodity prices, leading to ~17% yoy growth in net profit.
Outlook
We believe long-term structural growth drivers of the Indian automobile industry such as GDP growth (leading to increasing affluence of rural and urban consumers), favorable demographics, low penetration levels, entry of global players and easy availability of finance are intact, which should support a 13-14% CAGR in auto volumes over FY2012-14E. As such, we prefer stocks that have strong fundamentals, high exposure to rural and exports markets and command superior pricing power. Against the backdrop of likely easing of interest rates, we expect demand revival in the 4W segment. Hence, we remain AL, TTMT. positive on AL, MM and TTMT.
(` cr)
rge Target Reco.
Source: Company, Angel Research; Note: Price as on March 30, 2012, * Consolidated numbers; ^ OPM adjusted for royalty payments
(` cr)
Reco.
Source: Company, Angel Research; Note: Price as on March 30, 2012, * Consolidated numbers; # December year ending; & Full year EPS is consolidated
13
Banking
Banking stocks after underperforming the Sensex for three consecutive quarters (1QFY2012-3QFY2012) were able to outperform the Sensex handsomely by 15.8% (absolute returns of 28.4%) in 4QFY2012 on account of lower valuations and improving economic outlook. The rally in banking stocks was led by mid cap PSU banks, within which Dena Bank gave the highest sequential returns of 84.3%, followed by UCO Bank and Syndicate Bank, which gave returns of 73.8% and 62.4%, respectively. Inflation levels moderated significantly in 4QFY2012 (~250bp), leading to increased anticipation of rate cuts, which fueled the rally in banking stocks. Throughout 4QFY2012, the RBI continued with open market operations (OMOs) and, along with cumulative 125bp cut in cash reserve ratio (CRR), infused liquidity worth ~`2lakh cr in the financial system, which allowed banks to manage the tight liquidity situation (owing to slowing deposit growth and dollar sales by the RBI). Considering the significant moderation in inflation levels over 4QFY2012, we expect the RBI to commence with repo rate cuts in the next few months, which, in our view, should help banking stocks in maintaining their positive performance in FY2013 as well.
647,544
648,667
FY2011#
FY2012*
Source: RBI, Angel Research; Note: #Between March 26, 2010 and March11, 2011, * Between March 25, 2011 and March 09, 2012
Slowing deposit growth coupled with the RBI's intervention in the forex market to support the depreciating rupee has led to liquidity pressures exacerbating since the starting of CY2012 (avg. borrowings of ~`1.4lakh cr compared to ~`88,000cr in 3QFY2012). While the RBI has infused ~`2lakh cr in the system through CRR cuts and OMOs, liquidity pressure has remained intact (`1.25lakh cr as of March 30, 2012) and is expected to ease only post the commencement of FY2013.
14
Banking
Exhibit 4: 3QFY2012 and 4QFY2012 Lending and deposit rates
Avg. Avg. Base rates (%) Bank 3QFY12 4QFY12 BP change 3QFY12 17.75 15.00 20.00 15.00 15.00 17.75 15.00 15.00 15.00 15.00 15.00 18.50 18.75 15.25 15.00 15.50 15.00 14.25 14.75 19.00 15.00 15.00 14.85 15.00 15.75 15.00 15.50 FEDBK 10.52 10.74 22 J&KBK 10.31 10.50 19 YESBK 10.43 10.50 7 ALLBK 10.75 10.75 ANDHBK 10.75 10.75 AXSB 10.00 10.00 BOB 10.75 10.75 BOI 10.75 10.75 CANBK 10.75 10.75 CENTBK 10.75 10.75 CRPBK 10.65 10.65 HDFCBK 10.00 10.00 ICICIBK 10.00 10.00 IDBI 10.75 10.75 INDBK 10.75 10.75 IOB 10.75 10.75 OBC 10.75 10.75 PNB 10.75 10.75 SBI 10.00 10.00 SIB 10.50 10.50 SYNBK 10.75 10.75 UCOBK 10.75 10.75 UTDBK 10.60 10.60 VIJAYA 10.65 10.65 DENABK 10.70 10.70 BOM 10.70 10.67 (3) UNBK 10.75 10.65 (10) Source: Company, Angel Research; Note: *1-3 Yr Maturity bucket BPLR rates (%) 4QFY12 17.75 15.00 20.00 15.00 15.00 17.75 15.00 15.00 15.00 15.00 15.00 18.50 18.75 15.25 15.00 15.50 15.00 14.25 14.75 19.00 15.00 15.00 14.85 15.00 15.75 15.00 15.50 BP change 3QFY12 9.50 9.50 9.60 9.50 9.40 9.25 9.35 9.25 9.25 9.40 9.65 9.25 9.25 9.50 9.50 9.50 9.75 9.40 9.25 9.75 9.35 9.50 9.25 9.35 9.60 9.35 9.25 FD rates* (%) 4QFY12 9.75 9.50 9.60 9.50 9.40 9.25 9.35 9.25 9.25 9.30 9.65 9.25 9.25 9.50 9.50 9.50 9.75 9.30 9.25 9.75 9.35 9.50 9.25 9.35 9.60 9.35 9.25 BP change 25 (10) (10) -
4QFY2011 due to pension expenses.While large private banks are expected to report healthy 20.7% yoy growth on the net profit front, PSU banks are likely to post relatively lower 13.4% yoy growth (excl. SBI) due to higher provisioning expenses.
15
Banking
Exhibit 5: Gross NPA trends (%) Private vs. PSU
3.60 3.30 3.00 2.70 2.40 2.10 1.80 1.50
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12
1.70 1.50 1.30 1.39 1.15 1.22 1.26 1.21 1.05 1.27 0.90 0.78 0.62
3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11
1.69
3.19
3.12
3.20
2.96
1.10
2.45
2.53
2.56
2.64
2.58
2.59
2.61
0.90
2.41
0.62
1QFY12
0.59
2QFY12
0.60
3QFY12
Pvt Banks
PSU Banks
Pvt Banks
PSU Banks
1.36
2.43 2.36
2.43
1.20
1.08
1.04
Almost all banks resorted to higher restructuring during 3QFY2012 with loans to SEBs and GTL being the primary contributors. Within PSU banks, BOM (up 55.0% qoq) and Central bank (up 50.5% qoq) witnessed highest sequential rises in their restructured books. Banks with exposure to GTL also had to take NPV hits in their P&L (ranging from 10%-20% of the total loan advances) during 3QFY2012, denting their bottom-line. Approvals of cases worth `20,000cr during 3QFY2012 (~`45,000cr during 9MFY2012) and pending approvals of `24,000cr under the CDR mechanism along with bank-specific exposures, in our view, are expected to further fatten the alreadyheavy restructured books over the next few quarters. Also, with sectors such as infra, real estate, metals and aviation continuing to face macro headwinds, asset-quality concerns, in our view, are expected to linger.
16
Banking
Bond yields remain volatile during the quarter
The 10-year G-sec bond yields maintained their downward trajectory and touched an eight-month low in the first fortnight of January 2012 (8.19% as on January 9, 2012), as liquidity infusion through RBI's OMOs, moderating inflation and expectations of rate cuts eased bond market sentiments. Bond yields, however, rose upwards in the first fortnight of March 2012 on account of uptick in global crude oil prices and expectations of the government exceeding its annual fiscal deficit target for FY2012, before rising further post Union Budget 2012-13, as the government's higher-than-expected market borrowings plan dampened bond market sentiments. The 10-year G-sec yields ended the quarter at 8.54% (8.57% as of December 30, 2011) and hence we do not expect material MTM losses/gains for the banking sector. However, considering the intra-quarter volatility witnessed, several banks could report trading gains on their investment book in 4QFY2012 results.
9.54 9.85
9.58 9.65
9.52 9.57
9.42 9.47
8.43 8.41
8.44 8.64
8.53 8.61
30-Dec-11
6-Jan-12
13-Jan-12
20-Jan-12
27-Jan-12
3-Feb-12
10-Feb-12
17-Feb-12
24-Feb-12
2-Mar-12
9-Mar-12
16-Mar-12
23-Mar-12
8.57 8.59
30-Mar-12
17
Banking
Exhibit 14: PSU banks price band (P/ABV)*
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 1.00 0.50 1.50
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-01
Apr-02
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Source:C-line, Angel Research, Note:* For PSU banks , excl. SBI and IDBI
Coming to PSU banks, valuations for the entire pack revived sharply during the quarter. This led to a few specific cases (Andhra Bank, UCO Bank, Central Bank and Vijaya Bank), wherein we believe valuations exceeded fundamentals. Hence, we recommend Neutral or Reduce on these stocks, while being
positive on banks such as Dena Bank, United Bank, Bank of Maharashtra and Syndicate Bank, which we believe have a superior earnings quality outlook compared to peers. Within large-cap PSU banks, we continue to prefer SBI and BOB due to their structurally strong fundamentals vis--vis peers.
(` ( ` cr)
Reco.
1.6 1,550
Buy
- Neutral 567 Accum. Buy Buy - Neutral 477 205 Accum. - Neutral 943 Buy 392 Accum. 62 Accum. 532 Accum. 92 508 114 Reduce Buy Buy
1.5 1,135
- Neutral - Neutral 104 Accum. - Neutral 296 Buy Buy Buy Buy Buy Buy Reduce
980.0 1,129.9 883.2 1,034.1 149.3 90.1 260.9 117.6 71.9 158.3 133.8 170.4 101.4 304.3 134.2 78.0 178.6 159.4
0.9 1,138 1.3 2,593 0.7 0.8 0.8 0.5 0.7 3.8 1.7 128 274 87 55
- Neutral
Vaibhav Agrawal/ l/V Varm arma Analyst - Vaibhav Agrawal/ Varun Varma
Refer to important Disclosures at the end of the report
18
Apr-12
Capital Goods
We expect companies in our capital goods (CG) universe to post average top-line growth of 10.9%. However, on the bottom-line front, the picture is mixed, with most companies in our coverage universe posting a decline mainly on account of margin pressure and, in some cases, due to higher interest cost. we expect an uptick of 200bp sequentially. Led by low revenue and margin contraction, the company's PAT is expected to drop PA 150.3cr. We by 40.2% yoy to `150.3cr. We recommend Buy on the stock with a target price of `164.
Capital Goods
is likely to remain subdued in the near-to-medium term. Acceleration in awarding road projects and improved ordering in the T&D space are few silver linings in the otherwise dampened investment climate. Overall, a substantial pick-up in the implementation of big-ticket economic reforms, growth impulse and anticipated easing of monetary policy will remain key drivers for CG stocks, in our view. We believe challenges outlined in the power sector (such as inadequate coal supplies land acquisition issues) would remain as near-term drags for companies in our CG universe.
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
(18.8)
(6.2) (14.1)
(9.7)
(7.1)
(10.7)
(0.6)
(4.6)
(5.8)
(9.0)
4Q12
Source: Company; Angel Research; Note: Price as on March 30, 2012; * December year ending
20
Cement
Cement demand improves
Cement demand, after growing at a healthy pace (10.4% yoy) in 3QFY2012, continued its momentum and grew by 10.5% yoy in January-February 2012. Despite this healthy show, cement demand growth for FY2012 is expected to be at around 6% (as 1HFY2012 demand growth has been modest at 3.1% yoy) and, hence, will not lead to any material improvement in utilization levels. Such healthy demand growth over the past few months is estimated to have been primarily on account of electionrelated demand push across few poll-bound states and strong demand growth in Western India. However, we would like to monitor the situation over some more time before arriving at any conclusion about the sustenance of high demand growth. announcements. Prices are currently quoting at `292-305/bag and are expected to inch further due to continuous power cuts in T.N. and A.P and the expected increase in power tariffs in T.N. . Northern region: Prices in the northern region, which corrected on an average by `15-20/bag during mid-December 2011 due to lesser-than-anticipated demand on account of severe winters, further witnessed a `5-15/bag decrease in January. In February, prices improved in few places by `10-15/bag; however, in H.P due to the state government's intervention, ., prices corrected by `15-20/bag. Prices are currently quoting at `230-270/bag and are expected to increase further by `10-15/bag by March-end. Western region: In the western region, prices are currently in the broad range of `270-310/bag, up on an average by `25/bag from `245-285/bag seen at the end of 3QFY2012. The sharp increase in prices has been on the back of strong growth in demand, particularly in Gujarat. Eastern region: Prices in the eastern region, which stood in the broad range of `300-330/bag at the end of 3QFY2012, moved upwards during January by `5-15/bag on account of the uptick in demand post the festive season. Prices inched further upwards during February by `15-25/bag due to supply-side constraints and healthy demand and are currently quoting at `320-370/bag. Central region: Prices in the central region, which had fallen by `10-15/bag to `240-265/bag in mid-December due to moderate demand, increased by `15-25/bag during the first two months of the quarter and are currently quoting at `255-290/bag as demand in the region has slightly improved.
yoy growth-RHS
Higher yoy railway freight charges and domestic coal prices to put pressure on margins
Cement companies are expected to face some cost pressure in this quarter on account of higher yoy power and fuel cost (due to higher domestic coal prices) and increased yoy freight and forwarding cost (due to the increase in railway freight charges). During January 2012, Coal India had notified prices for its coal in different grades based on the GCV mechanism from the earlier prevalent UHV mechanism, which led to a significant increase in coal cost for the cement industry. However, the company later revised the prices to neutralize the impact caused by switching to the new mechanism. Earlier, in March 2011, the company hiked the price of coal supplied by it to non-core sectors by ~30%, which had resulted in spiking power and fuel costs of many cement companies. As far as imported coal prices are concerned, they have declined marginally (in INR terms) on a yoy basis. During 4QFY2012, average prices of New Castle Mckloksey 6,700kc coal decreased by 11.3% yoy (flat qoq), however due to a 10.3% yoy depreciation in INR v/s USD coal price in INR terms declined by lower 2.2% yoy (1.8% qoq).
Price situation
All-India average cement prices, after declining towards the end of the previous quarter, remained firm on an average in January and increased by `10-15/bag in February. However, in March, prices have already increased/are expected to increase on an average by `10-25/bag as an after effect of the recent rail and Union Budget proposals amidst seasonal buoyancy in demand. Southern region: Prices at the start of the quarter were at `275-285/bag and have edged marginally since then due to project-related demand pick-up. Post the budget, prices increased by `7-10/bag to pass on the effect of budget
Refer to important Disclosures at the end of the report
21
Cement
Indian Railways has also increased base freight rates for cement by around 22% (average increase up to 1,000kms) w.e.f. March 6, 2012. Earlier it had imposed a busy season surcharge and development charge at the rate of 10% and 5% for October 2011-June 2012, much higher from 7% and 0% for October 2010-June 2011. Cumulative effect of these measures is expected to be witnessed in 4QFY2012 (higher base freight rates for ~30% of the period and higher busy season surcharge for the entire period). However on qoq basis effect of only increased base freight rates is expected to be evidenced. Exhibit 4: Sensex vs. cement stocks (4QFY2012)
Cement majors Sensex ACC Ambuja India Cements JK Lakshmi Cement Madras Cements Shree Cements Ultratech Source: BSE, Angel Research
7000
Abs. Return (%) 12.6 19.4 8.0 68.8 74.7 48.8 47.5 29.9
Relative to Sensex (%) 6.7 (4.6) 56.2 62.1 36.2 34.9 17.2
US $/tonne - LHS
`/tonne - RHS
(` cr)
Reco. Neutral Neutral Neutral Buy Neutral Neutral Neutral
India Cements 111 Madras Cem. 153 Shree Cem. 3,197 UltraTech 1,507
Source: Company, Angel Research; Note: Price as on March 30, 2012; ^December year ending
22
FMCG
Strong performance on the cards
For 4QFY2012, we expect our FMCG universe to report revenue growth of 16.8% yoy, aided by consistent price hikes taken by companies throughout the past year. We also expect companies to post reasonably strong yoy growth on the volume front, owing to low base, better distribution reach and new product launches. Bottom-line growth of our FMCG universe is expected to be much higher at 20.1%, as price hikes undertaken have been higher than the increase in input costs.
6.6
Britannia
ITC
HUL
Dabur
GCPL
Nestle
Asian Paints
Colgate
GSKCH
Marico
TGBL
23
FMCG
Performance on the bourses
BSE FMCG Index outperformed the Sensex by 2.3% and posted an absolute return of 14.9% during the quarter. TGBL posted the highest return of 33.5%, while Asian Paints and Britannia gained 23.5% and 25.8%, respectively. However, industry heavyweights, HUL and ITC underperformed the Sensex. While ITC gained 5.5%, HUL declined by 6.5% during the quarter.
12.6 14.9 7.8 10.5 5.5 2.2 16.3 3.5 11.9 25.8 23.5
5.0 10.0 15.0 20.0 25.0 30.0 35.0
33.5
We remain underweight on the sector. Amongs heavyweights, we prefer ITC. In mid caps, TGBL is our top pick.
Mcap
15x
18x
21x
24x
27x
(` cr) `
Reco. Neutral Accum. Neutral Accum. Accum. Neutral Neutral Accum. Neutral Neutral Buy
Source: Company, Angel Research; Note: Price as on March 30, 2012; * December year ending; ^Consolidated
24
Infrastructure
For 4QFY2012, we expect the average revenue growth for our coverage universe at 9.9% on the back of slowdown in execution and high base in 4QFY2011 for few companies. Although the fourth quarter is seasonally the strongest quarter for construction companies, we are factoring lower growth due to macro headwinds faced by the sector. front, we expect ABL to post OPM of 20.3%. We expect the company to post a 10.0% yoy decline in its earnings to `34.4cr for the quarter.
Source: Company, Angel Research; Note: For our analysis, we have selected 12 companies, as detailed in Exhibit 5
During 4QFY2012, there has been no respite from the several headwinds (such as high interest and commodity cost and slowdown in order inflow) faced by the sector. Thus, subdued revenue performance along with pressure on EBITDAM and high interest cost will result in muted performance on the earnings level. Against this backdrop, we expect a decline in earnings for most of the companies under our coverage universe, with L&T and IRB Infra (IRB) the only exception.
Source: Company, Angel Research; Note: For our analysis, we have selected 12 companies, as detailed in Exhibit 5
4QFY2012 expectations
ABL (CMP/TP: `200/`302) (Rating: Buy)
For Ashoka Buildcon (ABL), 4QFY2012 numbers are not comparable with 4QFY2011 due to change in accounting policy, which was incorporated by the company in 4QFY2011. On the revenue front, ABL is expected to post a decline of 18.0% yoy on the consolidated revenue front to `494.6cr. On the margin
25
Infrastructure
EBITDAM of 24.8%. Further, on the back of high interest cost, which is expected to come at `200cr, we expect ITNL's earnings to decline by 30.1% yoy to `111.3cr. revenue and EBITDAM and burgeoning interest cost (yoy jump of 23.1%), led by elongated working capital cycle.
26
Infrastructure
slowdown in order inflow from other segments. Although the overall ordering activity scenario has not improved by a great deal, funding and viability concerns are making players more cautious while bidding for new projects. acknowledged by one and all. Hence, we believe the long-term growth story for the sector remains intact. In this report, we introduce our FY2014 numbers, which factor in 8-30% earnings growth by most companies in our coverage during the year. Our estimates are primarily based on the following assumptions: 1) revival in order inflow, driven by government and private outlay; 2) respite in interest rates owing to lower inflation; and 3) relaxation on the working capital front. We remain positive on companies having 1) Comfortable leverage position (L&T and SEL); 2) Strong order book position (L&T, IRB and SEL); 3) Superior return ratios (L&T, IRB and SEL); and 4) Lower dependence on capital markets for raising equity for funding projects (L&T and SEL).
Exhibit 4: L&T, SEL and IRB enjoy higher returns on equity as compared to their peers (FY2014E)
18 16 14 12
IRB SEL
L&T
(RoAE)
10 8 6 4 2 0 0.0
JAL IVRCL
3.0
6.0
9.0
12.0 (P/E)
15.0
18.0
21.0
24.0
27.0
Hence, we maintain L&T and SEL as our top picks in the E&C space and recommend IRB in the development space.
(` cr) `
Reco. Buy Neutral Neutral Buy Buy Buy Buy Buy Buy Buy Buy Buy
Source: Company, Angel Research; Note: Price as on March 30, 2012, Target prices are based on SOTP methodology; ^Consolidated numbers
27
Information Technology
CY2012 IT budgets to remain largely flat due to uncertainty in developed countries
Worldwide economic trends: In June 2011, the IMF forecasted that global GDP is set to grow at 4.5% for CY2012. However, rising sovereign debt due to QE measures and bailouts led to gross debt to GDP of developed economies such as U.S., U.K. and Eurozone surge to an alarmingly uncomfortable zone. Further, as the effect of QE measures is gradually fading, economic data points for developed economies are also moving back into the alarming zone. As a result, in September 2011, the IMF marginally downgraded its global GDP growth forecast to 4.0% for CY2012 and gave 4.5% growth forecast for CY2013. This forecast has been slashed again by the IMF in January 2012 to 3.3% and 3.9% for CY2012 and CY2013, respectively, and IMF warned that CY2012 global GDP could drop to as low as 1.3% if Europe's problems persist. Interestingly, GDP growth forecast for almost every major part of the world was lowered for both CY2012 and CY2013, with U.S. being the only key exception. U.S. GDP growth for CY2012 was left unchanged at 1.8%, but the outlook for CY2013 was cut by 0.3 percentage points to 2.2%. For February 2012, data points for the U.S. economy have become mixed, for instance, 1) non manufacturing index grew to 57.3 from 56.0 in January 2012; 2) unemployment rate stood flat mom at 8.3%; 3) industrial production stood at 0.0% as against 0.4% in January 2012; 4) manufacturing index came in at 52.4 as against 54.6 in January 2012 (but a reading above 50 indicates an expanding factory sector); and 5) retail sales grew by 1.1% as against 0.6% in January 2012. We believe stability in the U.S. economy would help Indian IT services players cover up the risk of slower demand in the European region. Technological indicators: The recent financial results of Oracle, the global enterprise giant for the quarter ending February 2012, gave some signs of relief, after its disappointing performance in the last quarter, as new software-license sales, a predictor of revenue growth, grew by 7% to US$2.37bn. The management of Oracle indicated that business fundamentals remain strong, with the company not seeing anything negative in the markets. However, guidance of 1-11% yoy growth in license sales in the next quarter builds in some conservatism in closing rates, after Oracle missed its own guidance in the quarter ending November 2011, as some closures were delayed unexpectedly. Further, recent results by Accenture, in which it upgraded its full-year guidance to 10-12% from 7-10% and its bullish outlook on outsourcing services, are positive signs for the IT sector. However, recently Gartner has lowered its global technology spending growth forecast because of the sluggish economy and Euro crisis. Gartner now expects worldwide spending on technology to grow by 3.7% to US$3.8tn in CY2012, down from its earlier forecast of 4.6% growth. In 2011, global tech spending grew by 6.9% to US$3.7tn compared to 2010. Our take: Given the current economic uncertainties, we see moderation in IT budgets for CY2012 and expect volume growth of tier-I Indian IT companies to scale down to sub-15% from 18% plus in FY2012. However, we do not foresee any price erosion as of now because the current pricing is still at a discount to peak levels and risks are lower as compared to what they were in CY2008, when Lehman bankruptcy was filed. In addition, since the last couple of quarters, the INR has depreciated ~11% against USD, giving a boost to INR revenue, operating margins and overall profitability of all IT companies. However, most of the gains due to the depreciated INR have already flown in 3QFY2012. Hence, on account of all these events, IT index rose by 5.7% in 4QFY2012.
Utilization to inch up
In 4QFY2012, we expect the utilization level (including trainees) of almost all the IT companies to inch up as freshers hired in 9MFY2012 are expected to start being billed. In addition, in 4Q, by and large, freshers are not hired by IT companies and companies resort to just-in-time hiring as per the demand landscape. Utilization level (including trainees) of Infosys, TCS and HCL Tech is expected to rise by 70bp, 30bp and 90bp qoq to 70.6%, 74.4% and 74.5%, respectively. In case of Wipro, we expect utilization level (including trainees) to increase by 110bp qoq to 76.4%, on the back of absorption of a higher number of freshers. In case of tier-II Indian IT companies, utilization levels of most companies are expected to move up primarily because these companies were chasing to achieve the flattening of their employee pyramids by hiring freshers since the past three quarters. Most of the campus hires joined the companies in 2QFY2012 and 3QFY2012; a majority of them would have completed their training period and are expected to turn billable in 4QFY2012. Hence, we expect utilization levels of Hexaware, MindTree, Mahindra Satyam and Tech Mahindra to move up by 90bp, 100bp, 110bp and 100bp qoq to 70.6%, 66.5%, 76.1% and 74.0%, respectively. However, in case of KPIT Cummins, we expect utilization level to rise by 220-300bp qoq on account of Systime's acquisition.
28
Information Technology
Cyclically a muted quarter but with modest volume growth
Traditionally, 4Q is a soft quarter for IT companies as budgets get closed from January to March and decisions are taken between February and March on the kind of discretionary, operational and capital spending; the spend happens heavily in the next couple of quarters. For 4QFY2012, we expect volume growth to remain at 0.4-3.5% qoq for tier-I IT companies, with TCS leading the pack and Infosys at the fag end of the range. For tier-II companies, we expect growth to be modest at 0.5-4.2% qoq, as utilization is expected to inch up on a qoq basis, as the hired freshers will start being billed. KPIT Cummins is expected to lead the entire IT pack with 31% qoq volume growth because of Systime's acquisition. Other than this, Hexaware is expected to be the leading tier-II IT company, whereas Tech Mahindra is expected to be at the bottom. For 4QFY2012, on the back of modest volume growth, stable pricing and unfavorable cross-currency movement, we expect USD revenue of tier-I IT companies to grow moderately by 0.3-3.5% qoq. For tier-II IT companies, USD revenue growth is expected to be 0.4-4.0% qoq, with Hexaware leading the pack. KPIT Cummins is expected to lead the entire IT pack with 30.5% qoq USD revenue growth because of Systime's acquisition.
5.1
(%)
2QFY12
HCL Tech
3QFY12
Wipro*
4QFY12E
(%)
6 4 2 0 (2) (4)
1.8
1.5 0.8
(2.1)
Infosys
TCS
HCL Tech
Wipro*
For tier-II IT companies, INR revenue growth is expected to be at (2.9)-2.0% qoq, with Hexaware leading the pack.
(%)
4 3 2 1 0
2QFY12
HCL Tech
3QFY12
Wipro*
4QFY12E
Source: Company, Angel Research; Note: *For the IT services segment Refer to important Disclosures at the end of the report
Information Technology
Tech Mahindra, Hexaware and Mahindra Satyam is expected to decline by 22bp, 140bp and 22bp qoq to 16.0%, 21.6% and 16.0%, respectively. In case of KPIT Cummins, despite whopping revenue growth, EBITDA margin is not expected to increase because incremental growth is expected to come from Systime's acquisition, who has a single-digit EBITDA margin. MindTree is expected to record 44bp qoq expansion in margin to 17.7%, as the average USD/INR realization of MindTree was much lower than other mid-tier IT companies, which makes it less prone to the damage caused by INR appreciation in this quarter. Exhibit 5: EBITDA margin profile Tier-I
33.3 32.1 29.1 30.2 30.4 28.1 29.1 24.0 25.2 25.1 18.5 16.3 15 25.0 23.2 20 20.7 17.1 23.9 18.5 18.8 31.0 30.8 33.7 31.0 33.1
Amongst mid-tier IT companies, profitability of most IT companies is expected to slide down due to INR appreciation against USD, which will wipe off gains that the companies got in the last quarter. Profitability of Tech Mahindra, Mahindra Satyam, Hexaware, MindTree and Persistent is expected to decline by 6.2%, 25.7%, 12.5%, 8.7% and 23.9% qoq, respectively.
30
(%)
25
Infosys
TCS
HCL Tech
Wipro*
(` cr) `
Reco. Buy Buy Buy Neutral
463 Accumulate
352 Accumulate
Source: Company, Angel Research; Note: Price as on March 30, 2012; *June ending, so 3QFY2012 estimates; ^October ending, so 2QFY2012 estimates; #December ending, so 1QCY2012 estimates; Change is on a qoq basis
Metals
In our view, profitability of steel companies is expected to improve during 4QFY2012 compared to 3QFY2012 on the back of decreasing prices of key inputs coupled with stable domestic prices. During 4QFY2012, steel demand improved sequentially, with steelmakers increasing prices by `1,000-2,000/tonne. Globally, steel prices have risen during the quarter, including increases in the CIS and China by 10% and 4%, respectively. For 1QFY2013, coking coal prices have settled at lower levels of US$206/tonne (down 12.3% qoq). Iron ore contract prices for 1QFY2013 are expected to remain flat due to stable iron ore prices during 4QFY2012. Steel consumption in India grew by only 1.8% yoy in 1HFY2012 on account of subdued demand. Nevertheless, steel demand improved in 3QFY2012 and grew by 7.7% yoy. Looking ahead, although we expect steel consumption to pick up, there are some concerns owing to slowdown in the capex cycle, high interest rates and slowdown in construction and auto demand. Base metal prices improved modestly in 4QFY2012 on account of lack of any major disappointments from the Eurozone. Going forward, we do not expect base metal prices to spike meaningfully due to slowdown in global growth. BSE Metal Index posted positive return of 21.3% in 4QFY2012. Steel stocks gained during 4QFY2012 mainly on account of improved demand in the domestic market, increased steel prices, a decline in prices of key inputs and lack of adverse news from the troubled Eurozone. JSW Steel gained 42.2% in 4QFY2012 on the hope of lifting of mining ban in Karnataka, fall in iron ore prices and improvement in utilization levels at its Karnataka plant. SAIL and Tata Steel stocks gained 15.6% and 40.7%, respectively. On the non-ferrous side, stock prices of Sterlite, Hindalco, Nalco and Hindustan Zinc increased by 23.8%, 11.7%, 7.0% and 10.6%, respectively, on account of rise in spot prices of base metals during the quarter. Stock prices of Coal India and MOIL increased by 14.4% and 10.2%, respectively, during the quarter. NMDC underperformed during the quarter, as it lowered iron ore prices and reduced its volume guidance. Stocks of mid-cap steel companies also recorded significant gains during 4QFY2012.
Key events
Coal India shifts to new pricing mechanism
Coal India shifted to the new pricing mechanism from January 2012. The company now prices its non-coking coal based on internationally accepted Gross Calorific Value (GCV). Prior to January 2012, non-coking coal was priced on the basis of various grades, ranging from A to F The new pricing system is . based on the recommendations of the Integrated Energy Policy Committee and the Expert Committee on Road Map for the coal sector's reforms. Initially, although the change in pricing mechanism increased the tariff for Coal India, it rolled back the hike subsequently due to opposition from its customers. Coal India will review the pricing during April 2012. Meanwhile, the change in pricing mechanism is expected to be revenue-neutral for Coal India.
Source: Bloomberg, Angel Research Refer to important Disclosures at the end of the report
Metals
to MRRT, a company will have to pay MRRT @30% of its annual mining profit if its annual profit reaches AUD75mn or is higher than AUD75mn. As this tax is on the profit of coal miners, we do not expect the tax to have a significant impact on sea-borne iron ore and coal prices. yoy to 54.2mn tonnes and 29.2mn tonnes, respectively, during the same period. During the quarter, average spot iron ore prices for 63.5% Fe grade (CFR, China) remained flat qoq at US$147/tonne (although down 20.2% yoy). Hence, iron ore contract prices for 1QFY2013 are likely to remain flat on a qoq basis. However, domestic prices of iron ore fines declined during 4QFY2012. Media reports suggest that Teck Resources has settled a coking coal contract with South Korean steelmaker Posco at US$206/tonne FOB Australia (down 12.3% qoq) for the April-June 2012 quarter, in-line with our expectation. The decline in coking coal prices coupled with stable steel prices domestically are expected to improve steel companies' margins in the coming quarters.
Ferrous sector
During 4QFY2012, steel demand improved on a qoq basis. In addition, steelmakers hiked prices by `1,000-2,000/tonne during the quarter. Globally, steel prices have increased, representing increases in the CIS and China by 10% and 4%, respectively, during the quarter. World average HRC prices rose by 5.6% qoq to US$704/tonne, while average Chinese domestic prices increased by 4.0% qoq to RMB4,375/tonne. Average HRC prices in India grew by 3.6% qoq to ~`36,500/tonne.
(US $/tonne)
120
(`/tonne)
Sep-11
Nov-11
Jan-12
Nov-10
Nov-09
Mar-11
Mar-10
May-10
May-11
Mar-12
Sep-10
Sep-09
Jan-11
Jan-10
Jul-10
Jul-11
(US$/tonne)
(mn tonnes)
8 6 4 2 0
700
600
Feb-11
May-11
Jul-11
Sep-11
Mar-11
Aug-11
Nov-11
Dec-11
May-11
Jun-11
Aug-11
Nov-11
Dec-11
Feb-12
Jul-11
Sep-11
Apr-11
Oct-11
Jan-12
Mar-12
Outlook
Margins to expand hereon
Steel prices in India are expected to remain flat in the near term. With the decline in international iron ore prices, domestic iron ore prices have also come off slightly, thus benefitting
32
Feb-12
Jan-11
Apr-11
Jun-11
Oct-11
Jan-12
500
(mn tonnes)
Metals
non-integrated steelmakers. Also, coking coal prices have declined steadily over the past three quarters. These factors are expected to result in margin improvement for steelmakers during FY2013. According to World Steel, global crude steel production for January 2012 and February 2012 stood at 122mn tonnes and 119mn tonnes compared to 128mn tonnes and 118mn tonnes during January 2011 and February 2011, respectively. Global capacity utilization levels during January 2012 and February 2012 stood at 77% and 80%, respectively. 4QFY2012 expectations: For 4QFY2012, on a yoy basis, we expect steel companies under our coverage to report modest top-line performance on account of flat realization. Further, due to relatively higher raw-material costs, margins of steel companies are likely to contract by 295-708bp yoy. For Sesa Goa, net sales are expected to decline by 17.0% yoy on account of no production from Karnataka mines and a decline in iron ore prices. Further, higher iron ore royalty and increased export tax are expected to result in net profit declining by 15.0% yoy. For Coal India, we expect a 5.9% yoy decrease in net profit on account of increased provisions for staff costs. For NMDC, we expect its top line and bottom line to decrease by 33.1% and 27.2% yoy, respectively, on account of a decline in its sales volumes and realization. Nevertheless, we remain positive on we NMDC at current price levels. Non-ferrous sector: After a steep decline during 3QFY2012, base metal prices rose during 4QFY2012 on account of lack of adverse news from the troubled Eurozone. On a sequential basis, average copper, aluminium and zinc prices increased by 10.6%, 4.9% and 6.4%, respectively, after a steep decline in 3QFY2012. On a yoy basis, average copper, aluminium and zinc prices decreased by 13.5%, 11.5% and 15.3%, respectively.
On a qoq basis, zinc and aluminium inventory increased by 10.0% and 9.2%, respectively, while copper inventory declined by 24.7%.
110
90
70
50 Apr-11
Jun-11
Aug-11 Copper
Oct-11 Aluminium
Dec-11 Zinc
Feb-12
Outlook: Although base metal prices are likely to remain under pressure in the near term due to growth concerns, high cost of production should lend support to prices. While the copper market is struggling with supply constraints, the downside for aluminium prices is capped due to high energy cost. Zinc and lead prices are unlikely to see any major upside as the market remains in surplus. For 4QFY2012, we expect non-ferrous companies to register a dip in their top line on a yoy basis, owing to the decline in LME prices. Further, we expect a margin decline of 165-1,558bp yoy on account of lower LME prices and higher coal cost. We remain positive on Sterlite Industries and Hindustan Zinc.
cr ( ` cr )
Reco. Neutral Accum. Accum. Neutral Neutral Reduce Buy Accum. Accum. Buy Accum.
Source: Company, Angel Research; Note: Price as on March 30, 2012; EPS calculation based on fully diluted equity; Denotes consolidated numbers
33
(`/kg)
60 40 20 0 May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
PTA
MEG
CHIPS
POY
Oil supply across the world continued to improve in 4QFY2012 mainly on account of higher production from non-OPEC countries.
90 90 89 89 88 88 87 87 Apr-11 Jun-11 Aug-11 Oct-11 Total oil supply - Monthly Dec-11 Feb-12
90 80 70 60 50
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
40 Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
34
Key developments
RIL's KG-D6 output hits all-time low
Reliance Industries' (RIL) largest gas fields in the KG-D6 gas block have hit an all-time low production of 28mmscmd as the firm shut six wells due to water and sand ingress. Dhirubhai 1 and 3 gas fields in the eastern offshore KG-DWN-98/3 output plummeted to 28mmscmd during the week ending March 4, 2012. Including the gas production of 6.5mmscmd from MA fields, total production from KG-D6 block averaged 35mmscmd (significantly below the field development plan of 70mmscmd approved during 2006) during the same week. We continue to await further clarity on the sustainable levels of production from KG-D6 block.
4.5
(US $/mmbtu)
2.5
1.5 Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
Union Budget 2012-13 was negative for the oil and gas sector. The budget pegged the government's share of petroleum subsidy at only `43,737cr for FY2013, which would be insufficient if Brent crude stays at current levels (above US$115/bbl) or diesel and LPG cylinder prices are not revised upwards. The government's share of subsidy for FY2012 is expected to be `68,533cr, which is in-line with our expectation of `65,000cr, although it is significantly above the government's initial target of `23,696cr. The budget proposed to increase cess for oil producers from `2,500/tonne to `4,500/tonne, which is negative for Cairn India and ONGC. In light of this event, we had cut Cairn India's and ONGC's FY2013 EPS estimate by 10.7% and 10.3%, respectively.
(mn bbls)
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
(mn bbls)
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
35
2.0 0.0 (2.0) (4.0) RIL Cairn BSE O&G Index ONGC GAIL
(` cr) `
Reco. Accum. Neutral Buy Buy
Source: Company, Angel Research; Note: Price as on March 30, 2012; ^Standalone numbers for the quarter and consolidated numbers for the full year
36
Pharmaceutical
During 4QFY2012, the BSE Healthcare (HC) Index kept its outperformance, rising 13.0% vis-a-vis BSE Sensex, which rose by 12.6%. This depicts the robust earnings growth outlook and positive stance for the sector. During 4QFY2012, in our our coverage universe, mid caps posted higher gains compared to large caps. the R&D front to tap opportunities in the domestic and global markets. To encourage the same, the weighted deduction on R&D expenditure to 200% (in-house research) was extended for a further period of five years.
Announcements
To extend weighted deduction of 200% for R&D expenditure in an in-house facility for a further period of five years beyond March 31, 2012 Allocation for NRHM proposed to be increased from `18,115cr in FY2011-12 to `20,822cr in FY2012-13 Proposal to continue to allow repatriation of dividends from foreign subsidiaries of Indian companies at a lower tax rate of 15% up to March 2013 Introduced MAT on partnership firm
(%)
4QFY2011
1QFY2012
2QFY2012
3QFY2012
4QFY2012
Impact
Overall, the budgetary announcements have been positive for all Indian pharmaceutical companies. However, the introduction of MAT on partnership firm would negatively impact Cadila and Sun Pharma. However, since we are already working with higher tax provision for FY2013, we are not changing our FY2013 estimates for both the companies. Thus, overall the budget has been positive for the sector. Litigation clouds Sun Pharma: Wyeth, a Pfizer Group company, has recently estimated damages of US$960mn (around `4,700cr) against Indian pharma firm, Sun Pharma, for infringing on the patents of its anti-ulcer drug, Protonix. Wyeth believes that it should be compensated for the US$960mn losses it had to bear due to the at-risk launch by Sun Pharma. The damages claimed against Sun Pharma and Teva by Pfizer, which acquired Wyeth in 2011, allegedly represent Wyeth's and Nycomed's combined lost profits due to Teva's and Sun Pharma's at-risk launches, including interest and other expenses incurred as a result of generic launches, according to Pfizer. Nycomed had licensed the drug to Wyeth for sale in the U.S. However, Sun Pharma believes the damage claims are unjustified. The company believes that it has sound reasons to disagree with the overstated claims of Wyeth. According to management, the patent is invalid and unenforceable and will pursue all available legal remedies including appeals. Sun Pharma has around US$1bn cash on books. Thus, while an adverse verdict would have a negative impact on the stock, given the healthy balance sheet, we believe the company has healthy cash position to tide over the adverse verdict, without impacting the balance sheet. We maintain our Neutral recommendation on Sun Pharma.
Amongst large caps, Lupin, Ranbaxy and Sun Pharma outperformed the HC Index by posting gains of 18.4%, 15.7%, and 14.7%, respectively. Lupin performed well after languishing for many quarters, as its valuations became more attactive compared to peers. However, Cipla (down 4.7%), Cadila (gain of 7.9%) and Dr. Reddys (gain of 11.5%) were the large-cap underperformers during the quarter. Among mid caps, the major gainer was Orchid Chemicals, which posted gain of 45.7% during 4QFY2012. The stock had been languishing at lower levels for a while on the back of poor quarterly numbers. However, valuations of the stock became attractive and, thus, the stock bounced back sharply. Other mid cap gainers included Alembic Pharma and Aurobindo Pharma, which rose by 36.5% and 30.9%, respectively. IPCA Labs was also among the gainers, rising 22.0% during the quarter. Amongst the MNC pack, there was a divergent trend. While Glaxo rose by 18.3% during the quarter, Aventis Pharma dropped by 4.8%. Among CRAMS and small caps, Dishman Pharma and Indoco Remedies posted meager gains of 7.4% and 4.0%, respectively, during 4QFY2012.
Key developments
A positive budget for the pharma sector
Union Budget 2012-13, as expected, is positive for the pharmaceutical sector. As expected, R&D sops would continue to be positive for the sector as a whole. The government has again increased budgetary allocation for healthcare spending, which would be an overall positive for the sector. Indian pharma companies have been investing on
Refer to important Disclosures at the end of the report
37
Pharmaceutical
Lupin settles the diabetics case
Pharma major, Lupin Ltd. and its subsidiary, Lupin Pharmaceuticals, Inc., entered into a settlement agreement with Santarus, Inc. and Depomed, Inc. to resolve the pending patent litigation involving GLUMETZA (extended release metformin tablets) 1,000mg and 500mg. The settlement agreement grants Lupin the right to begin selling a generic version of GLUMETZA on February 1, 2016, or earlier under certain circumstances. GLUMETZA extended release metformin tablets, 1,000 mg and 500 mg, had annual U.S. sales of approximately US$71mn for the 12 months ending December 2011. The settlement agreement is subject to review by the U.S. Department of Justice and the Federal Trade Commission, as well as entry by the U.S. District Court for the Northern District of California of an order dismissing the litigation. Lupin had earlier received the tentative approval for generic GLUMETZA (Metformin Hydrochloride Extended Release Tablets) 1,000 mg and 500 mg from the U.S. Food and Drugs Administration (FDA) in January 2012. Lupin believes it is the first applicant to file an ANDA for GLUMETZA 1,000 mg and 500 mg strengths and as such is entitled to 180 days of marketing exclusivity. The development is positive for the company and at current valuations, the stock trades at 17.9x FY2013E and 16.1x We FY2014E earnings. We maintain our Buy recommendation on the stock with a target price of `656.
133.3
19.0
14.1
DRL
5 3
7 3 2 2
Source: Angel Research Refer to important Disclosures at the end of the report
Pharmaceutical
see good traction in its Indian and Russian formulation businesses as well. The company is expected to post EBITDA of 32.0%, up 770bp yoy. On the net profit front, the company is expected to post net profit of `526cr, registering 57.3% yoy growth. Cipla is expected to post muted net sales growth of 4.6% to `1,690cr, mainly driven by the domestic formulation business, while export performance is expected to remain muted. On the operating front, OPM (excluding technical know-how fees) is expected to come in at 21.5%, registering an expansion of 610bp yoy. This would aid the company's net profit to increase by 31.8% yoy to `282cr. Lupin, on the other hand, is expected to register top-line growth of 22.6%. The company's OPM is expected to expand by 190bp yoy during the period. However, net profit growth is expected to be lower at around 13.7% yoy on account of higher tax outgo. Cadila is expected to post a good set of numbers, with 20.7% yoy growth in net sales to `1,411cr on the back of robust growth on the domestic formulation and exports front. On the OPM front, we expect the company's OPM to expand by 270bp yoy to 18.4% on the back of favorable product mix. However, net profit is expected to increase by 7.8% yoy to `193cr, mainly on the back of increased tax outgo. Aurobindo Pharma is expected to post a decline of 4.0% yoy in its net sales. Consequently, the company's margin is likely to dip to 13.9%, which will lead to a dip of 63% yoy in its net profit to `47cr. Indoco Remedies is expected to report top-line growth of 28.7% yoy to `155cr. The company's OPM is expected to expand by 120bp yoy to 14.1%, driven by growth in domestic formulation sales. As a result, net profit is expected to increase by 31.6% yoy to `16.0cr on the back of improvement in OPM.
(` cr) `
OPM (%) chg bp 480 (110) (270) 270 610 170 770 (70) 120 170 190 160 2,180 1,080 14.0 14.6 13.9 18.4 21.5 17.8 32.0 34.3 14.1 20.7 19.7 24.5 38.8 41.1 Net Profit Profit 4QFY12E 26.5 51.5 47.0 193.0 282 28.5 526 200 16.0 64.9 258.3 36.2 1,470 775.0 157.3 1.8 (63.0) 7.8 31.8 24.0 57.3 7.4 31.6 (5.3) 13.7 (43.1) 385.6 75.0 EPS (`) (` % chg 157.3 1.8 (63.0) 7.8 31.8 24.0 57.3 7.4 31.6 (5.3) 13.7 (43.1) 384.8 75.0 FY12E 7.3 85.5 11.8 33.5 14.1 6.8 98.6 74.9 42.5 26.6 22.4 16.8 15.1 24.5 1.4 22.4 1.6 9.4 3.5 3.5 31.3 23.6 13.1 5.2 5.8 5.1 34.8 7.5 EPS (`) (` FY13E 8.2 89.7 13.8 43.3 17.0 10.1 92.1 87.9 55.5 32.7 29.7 28.3 41.1 26.7 FY14E 9.5 110.3 14.7 50.8 19.0 13.0 89.9 96.7 66.5 40.6 32.8 38.1 36.9 28.8 FY12E 6.6 25.8 10.1 22.7 21.6 6.7 17.8 30.6 9.5 12.6 23.7 11.0 31.1 23.3 P/E (x) FY13E 5.9 24.6 8.6 17.6 17.9 4.5 19.1 26.1 7.3 10.2 17.9 6.5 11.4 21.3 FY14E 5.1 20.0 8.1 15.0 16.0 3.5 19.6 23.7 6.1 8.3 16.1 4.9 12.7 19.8 Target arg (`) 95 175 1,016 380 92 665 443 656 270 634 Buy Neutral Buy Buy Buy Buy Neutral Neutral Buy Buy Buy Buy Neutral Accum. Reco. % chg 4QFY12E
CMP (`) 48 2209 119 760 305 46 1759 2291 406 335 530 469 570
Net Sales 4QFY12E 344 312 1,082 1,411 1,690 383 2,301 697 155 673 1,853 528 5,000 1,741 16.5 12.9 (4.0) 20.7 4.6 11.3 14.1 15.8 28.7 42.0 22.6 0.0 133.3 19.0
% chg 4QFY12E
Aurobindo
Source: Company, Angel Research; Note: Price as on March 30, 2012; Our numbers do not include MTM on foreign debt. # 1QCY2012
39
Power
All-India power generation highlights
During January-February 2012, overall power generation in India rose by 5.4% yoy to 145.3BU (137.9BU); while for 11MFY2012, it rose by 8.6% yoy to 798.9BU (735.3BU). Higher power generation was aided by 18,666MW of yoy higher installed capacity operational by the end of February 2012. During 11MFY2012, the country's thermal power generation rose by 6.8% yoy to 642.3BU. The plant load factor (PLF) of thermal plants for 11MFY2012 stood at 72.8%, down 152bp yoy. During 11MFY2012, hydro power generation increased substantially by 16.3% yoy to 122BU, while nuclear power generation grew sharply by 26.2% yoy to 29.4BU. Generation of companies under coverage: During 11MFY2012, NTPC's power generation stood at 201.1BU, registering an increase of 0.8% yoy. GIPCL's generation (excluding 145MW Baroda Plant) rose by 2.7% yoy to 3.5BU; while for CESC, it rose by 1.1% yoy to 8.2BU. against the targeted 17,616MW. Capacity addition has been generally below the target due to execution issues relating to acquisition of land and obtaining environment and other statutory clearances. In all, we expect capacity addition of 52,000MW during the plan period, which will be short of the targeted 62,374MW of capacity addition. Despite this shortfall in capacity addition, the quantum of the actual addition will be well ahead of 27,283MW added in the Tenth Plan. Exhibit 2: Generation capacity addition: Targeted vs. achieved
(MW) 25,000 20,000 15,000 10,000 5,000 0
11MFY12 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
A as a % of T (RHS)
Power-deficit situation
The country continues to face power deficit due to the delay in commissioning of new capacities, fuel shortage and deficiencies in the T&D system. India's overall and peak power-deficit levels during 11MFY2012 stood at 8.3% and 11.2%, respectively, as against 8.6% and 10.4% reported in 11MFY2011.
11.2
11.7
12.3
13.8
12.0
12.7 9.8
11.2
7.1
7.3
8.4
9.6
9.9
11.0
10.1
8.5
8.3
Overall
Peak
40
Power
Key developments
During the quarter, the Prime Minister's Office (PMO), after considering the fuel shortage faced by power producers, ordered Coal India Limited (CIL) to sign FSAs with power plants that had entered into long-term PPAs with power distribution companies and had been commissioned/would get commissioned on or before March 31, 2015. As per the PMO's directive, for power plants that were commissioned up to December 31, 2011, FSAs will have to be signed before March 31, 2012. FSAs have to be signed for the full quantity of coal mentioned in the Letters of Assurance (LoAs) for a period of 20 years, with trigger level of 80% for levy of disincentive and 90% for levy of incentive. In case of any shortfall in fulfilling its commitment under the FSAs from its own production, CIL was ordered to arrange for the supply of coal through imports or through arrangement with state/central PSUs who have been allotted coal blocks.
2.3 33.8
16.4 12.6 0.0 5.0 10.0 15.0 20.0 (%) 25.0 30.0 35.0 40.0
Sensex
289bp yoy to 27.5% due to better plant availability and expected grossing up of RoE under corporate tax rate for FY2012. Net profit is expected to decline marginally by 2.5% yoy to `2,711cr. CESC is expected to register 28.1% yoy growth in its standalone top line to `1,081cr, aided by improved realization. During the quarter, CESC got the approval from WBERC for increasing the tariff for Kolkata region on an average by 13%. Post this order, the company would charge its customers at a higher rate with retrospective effect. The companys OPM for the quarter is expected to expand by 385bp yoy to 33.0%. Net profit is expeted to increase by 62.9% yoy to `182cr. We expect GIPCL to register flat top-line performance during the quarter. The companys OPM is expected to decline by 1,201bp yoy to 27.4% on a high base on account of lower plant availability and lesser generation-linked incentives. The first unit of SLPP I plant (125MW) was not operational during 4QFY2012 due to damaged rotor. The bottom line is expected to decline by 71.9% yoy to `23cr due to poor operational performance and higher base due to the tax write-back in 4QFY2011. Outlook: With the power sector currently facing many headwinds such as fuel shortage, falling merchant tariffs and poor SEB financial position, we believe players with cost-plus return models and assured fuel supply are better placed than others. And, hence, we maintain our Buy view on NTPC, GIPCL and CESC.
(` cr) `
Reco. Buy Buy Buy
41
Real Estate
For 4QFY2012, we expect residential volumes to report negative to flat growth on a sequential basis on account of weak demand due to high interest rates and elevated property prices. Revenue of real estate companies is expected to be largely driven by sale of plotted land and execution of existing projects, though execution delays remain a cause of concern. Companies such as DLF are expected to continue to see sustainability in office-leasing volumes on a sequential basis. Accordingly, we believe commercial rentals have bottomed out, and we do not foresee any material uptick until inventory levels come down. In our universe of stocks, we expect DLF's revenue to be largely driven by the sale of plotted properties in Gurgaon. For ARIL, we expect revenue to be driven by the residential segment and rental income. HDIL is expected to report flat growth qoq in Transfer of Development Rights (TDR) volumes and prices, given the low inventory of TDRs left on account of earlier stoppage of the MIAL project, which has restarted but the company does not foresee any material uptick in the generation and sale of TDR.
73.9
78.8
40.3
40.7 29.4
PAT
(0.0)
ARIL
DLF
HDIL
42
Real Estate
22.9% in CY2012 and gradually reduce in CY2013. Industry participants have indicated that the surge in leasing enquiries has come on the back of renewed interest shown by the IT industry. Vacancy in the retail segment is expected to remain above 20% over CY2012-13 on the back high supply and low absorption rate.
47.5
(` cr) `
Reco.
43
Telecom
During 4QFY2012, in a major blow to various telecom players, the Supreme Court, in its judgment for the 2G case, cancelled 122 licenses given to telecom firms since January 2008. The cancelled licenses include nine of Idea Cellular, three of Tata Teleservices, nine of Swan Telecom, 21 of Loop Telecom, 21 of Videocon and 22 of Uninor. Telecom firms can operate the licenses for four months at market rate payment. However, of the companies under our coverage, for Bharti Airtel (Bharti) and Reliance Communication (RCom) none of the licenses were cancelled, as all licenses were issued to them before 2008. Due to this, share price of Bharti rose in the middle of the quarter. Also, Bharti and Vodafone appear to be marginal beneficiaries due to their potential for rationalization in competition and further pricing stability. Operators such as Idea and Tata Teleservices may also benefit from this, but they will have to incur additional charges (from re-bidding at market prices) if they intend to maintain their pan-India presence. We believe this move will increase consolidation in the highly competitive telecom industry, and the total number of players operating in the industry can come down to 9-10 from 14 currently. In Union Budget 2012-13, the government penciled in `40,000cr non-recurring revenue from telecom companies on the back of 1) 2G spectrum auction; 2) one-time receipts from spectrum held in excess of 6.2MHz; and 3) auction of BWA spectrum. All these will necessitate telecom companies to shell out cash from their kitty, which are already in a dire need of cash post 3G and BWA spectrum auctions and are witnessing added cash outgo burden due to ~11% INR depreciation against USD in the past six months, as there is huge forex debt in their books, which leads to higher interest outgo in domestic currency terms. All these events created pressure on the share prices of all telecom companies during 4QFY2012. wise, Idea leads the tally with a share of 93.2%, followed by Bharti with 91.2%, Vodafone with 86.6% and RCom with 65.1%, whereas DB Etisalat is at the bottom with 25.6%. Vodafone has shown considerable improvement in its peak VLR data from 81.0 in August 2011 to 86.6 in January 2012 by focusing on the quality of its subscribers.
(%)
70 60 52.2 50 Bharti Vodafone Oct-11 Idea Nov-11 Rcom Dec-11 BSNL Jan-12 Aircel 53.2
64.6
65.1 55.9
55.3
49.9
20.0
20.0
Chg. (3 months)
Chg. (1 year)
44
Telecom
Exhibit 4: RMS vs. SMS of incumbents (as of 3QFY2012)
35 30.5 30 25 19.8 20
(%)
21.4 16.6 14.3 12.0 8.5 6.9 4.6 10.4 6.9 17.0
Thus, a trend was spotted with net subscriber additions being led by incumbent telecom players and Uninor. Idea's and Uninor's subscriber market share grew to 12.2% and 4.5% in February 2012 from 12.0% and 4.1% in December 2011, respectively.
15 10 5 0 Bharti Vodafone
Idea RMS
Rcom SMS
BSNL
Aircel
419
418
401
397
300 241 251 200 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12E 233 227 224 223
Bharti (ex-Africa)
Idea
RCom
(% of mobility revenue)
14.5
14.3
14.5
Bharti (ex-Africa)
Idea
ARPM to move up
Average revenue per minute (ARPM), which has been falling since 4QFY2009, has been witnessing a slight uptick since
45
Telecom
2QFY2012, after telecom players undertook 20% tariff hike. In 4QFY2012, we expect ARPM of Bharti (excluding Africa), Idea and RCom to grow on a qoq basis to `0.46/min, `0.43/min and `0.45/min, respectively, on account of tailwind effect of tariff hikes undertaken, as these tariff hikes were applicable only after the existing vouchers of subscribers expired. top three listed operators, we expect Bharti and Idea to post revenue growth of 2.7% and 3.2% qoq, respectively. RCom is expected to post revenue growth of merely 2.2% qoq. On the EBITDA margin front, we expect margins of Bharti, Idea as well as RCom to decline by 43bp, 67bp and 65bp to 31.8%, 26.1% and 28.0%, respectively. We believe industry dynamics point toward a possible consolidation in the long run and expect few operators, including Bharti, Vodafone, RCom, Idea, BSNL, Aircel and Uninor, to be the survivors out of the current 14 operators. Bharti continues to be our preferred pick amongst telcos due to its low-cost integrated model (owned tower infrastructure), potential opportunity to scale up in Africa, established leadership in revenue and subscriber market share, and relatively better KPIs. However, overall we remain Neutral on the sector.
(`/min)
Key concerns
Uncertain regulatory environment: The telecom sector is currently surrounded by a number of policy uncertainties related to spectrum and license fee payments. The Telecom Regulatory Authority of India (TRAI) has deemed that any spectrum held beyond 6.2MHz in a circle market is 'excess spectrum' and has levied a one-time fee on the excess spectrum held by any operator based on a market-based value of spectrum for each circle. As per TRAI's recommendations, the liability for Bharti due to the above-said issue arises to ~`2,750cr, i.e., per share impact of `8.3, while for Idea the impact boils down to ~`1,085cr, i.e., per share impact of `3.3. In addition, telecom licenses in India were issued with validity of 20 years, so licenses will start coming for renewals from 2014, which will again pose a huge financial liability for telecom companies. In FY2015 and FY2016, license renewals for Bharti and Idea are due in eight and nine circles, respectively. These renewals, as per TRAI's recommendations, will require Bharti and Idea to shell out `5,500cr and `5,300cr, respectively, for the contracted spectrum (upto 6.2MHz). Adverse forex movement: Players in the telecom sector (especially Bharti) continue to be haunted by INR depreciation against USD due to huge forex debt in their books. Bharti has foreign currency denominated loans worth ~US$11.5bn in its books. Given the yoy INR depreciation against USD, the company will suffer from higher interest outgo, which will negatively affect its profitability.
Bharti (ex-Africa)
Idea
RCom
183
187
(`/month)
168 150
161
160
155
160
160
100
111
107
103
102
101
100
Bharti (ex-Africa)
Idea
(` cr) `
Reco. Neutral Neutral Neutral
Source: Company, Angel Research; Note: Price as on March 30, 2012; Change is on a qoq basis
46
Stock Watch
47
Accumulate Buy Buy Buy Buy Neutral Accumulate Buy Accumulate Buy Neutral Neutral Accumulate Buy Buy Accumulate Buy Buy Buy Buy
Accumulate 186 Neutral 119 Buy 1,146 Buy 794 Accumulate 361 Accumulate 55 Accumulate 474 Reduce 100 Buy 425 Buy 90 Neutral 426 Neutral 674 Accumulate 520 Buy 887 Neutral 105 Neutral 240
48
49
50
Neutral Neutral Buy Accumulate Accumulate Neutral Neutral Buy Reduce Buy Accumulate Accumulate Buy Accumulate Accumulate Neutral Buy Buy Buy Buy Neutral Buy Buy Neutral Buy Neutral Buy Buy Buy Buy Neutral Accumulate Buy Buy Buy
51
Buy Neutral Buy Neutral Neutral Neutral Buy Neutral Buy Buy Buy Neutral Buy Buy Neutral Buy
Source: Company, Angel Research, Note: ^Sept. year end; *December year end; #Consolidated; Price as on March 30, 2012
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Ratings (Returns) :
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Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Sharan Lillaney V Srinivasan Yaresh Kothari Nitin Arora Ankita Somani Varun Varma Saurabh Taparia Shareen Batatawala Twinkle Gosar Tejashwini Kumari Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Simran Kaur Dilip Patel Research Editor Production simran.kaur@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Sr. Analyst (Metals & Mining) Analyst (Mid-cap) Analyst (Cement, Power, FMCG) Analyst (Automobile) Analyst (Infra, Cap Goods) Analyst (IT, Telecom) Analyst (Banking) Analyst (Cement, Power, Media) Research Associate Research Associate Research Associate sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com nitin.arora@angelbroking.com ankita.somani@angelbroking.com varun.varma@angelbroking.com Sourabh.taparia@angelbroking.com shareen.batatawala@angelbroking.com gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com
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