D:VelsDaily Morning Brief 1OctMorning Insight 25 Oct 2011smartinvestor.business-standard.com/BSCMS/PDF/morning... · 2011. 10. 25. · 3,260 MW Vindhyachal super thermal stations

OCTOBER 25, 2011

Economy News4 The 42-day strike by the Government staff in the Telangana region of

the State is set to end with the representatives of Telangana Joint ActionCommittee (TJAC) holding final talks with the Chief Minister, Mr N. KiranKumar Reddy, late in the evening. (BL)

4 The proposed National Manufacturing Policy that aims at developingmega industrial zones with the world-class infrastructure and flexibility inlabour and environment laws is likely to come up before the UnionCabinet tomorrow. Earlier last month, the ministries of environment andlabour were opposed to the proposals brought in by the Industry Ministry.According to the draft policy of the Industry Ministry, a special purposevehicle, to be headed by a CEO, will oversee the proposed NationalManufacturing Investment Zones (NMIZs). (BL)

4 To give a boost to the housing sector, the government may increasetomorrow the home loan cap for availing 1% interest subsidy to Rs 1.5mnfrom existing Rs 1mn.The government may also raise the ceiling on costof house to Rs 2.5mn from Rs 2mn to avail this benefit. (BS)

Corporate News4 Despite promise of increased coal supplies to the power sector, the fuel

stock situation at key thermal stations seems to have taken a turn forthe worse. The power situation can turn grim. The latest estimatessuggest that nine stations, including NTPC's 2,000 MW Singrauli and3,260 MW Vindhyachal super thermal stations and the Damodar ValleyCorporation's 2,340 MW Mejia in West Bengal, are left with a day's stockor less.(BL)

4 IT company InfrasoftTech has entered into a definitive agreement withKPIT Cummins Infosystems to acquire the latter's diversified financialservices (DFS) unit over the next few quarters.(BL)

4 State-run gas utility GAIL India plans to buy stakes in more shale gasassets in the United States, its chairman BC Tripathi said on Monday asthe company reported results. "We are looking for more assets there.We can't fix a timeline but we hope something will come out in sixmonth," Tripathi said. (BS)

4 Power Grid Corporation of India (PGCIL), the state-ownedtransmission company, plans to install about 65,000 circuit km (ckm) oftransmission lines during the 12th Five Year Plan (2012-2017), which ismore than twice the likely installation in the current Plan. (DNA)

4 Tide Water Oil (India) Ltd has acquired 100 per cent shares of VeedolInternational Ltd (VIL), registered in the UK and a wholly ownedsubsidiary of BP Plc (BL).

Equity% Chg

24 Oct 11 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 16,939 0.9 4.8 (10.2)

NIFTY Index 5,098 1.0 4.7 (10.2)BANKEX Index 11,050 (0.4) 2.7 (15.1)BSET Index 5,631 1.9 12.9 (5.1)

BSETCG INDEX 10,368 (1.8) (7.1) (25.3)BSEOIL INDEX 8,792 1.6 6.4 (4.9)CNXMcap Index 6,982 (0.4) (2.8) (15.0)

BSESMCAP INDEX 6,803 (0.3) (3.4) (20.0)

World IndicesDow Jones 11,914 0.9 10.6 (5.4)

Nasdaq 2,699 2.3 8.7 (5.0)FTSE 5,548 1.1 9.5 (6.4)NIKKEI 8,844 1.9 3.0 (12.2)

HANGSENG 18,772 4.1 6.8 (15.4)

Value traded (Rs cr)24 Oct 11 % Chg - Day

Cash BSE 1,942 (15.9)

Cash NSE 9,279 4.1Derivatives 150,469 0.6

Net inflows (Rs cr)21 Oct 11 % Chg MTD YTD

FII (178) (58.6) (974) (2,503)Mutual Fund (54) (70.9) 22 5,619

FII open interest (Rs cr)21 Oct 11 % Chg

FII Index Futures 15,190 0.3FII Index Options 54,125 0.1

FII Stock Futures 29,838 0.9FII Stock Options 1,075 (5.1)

Advances / Declines (BSE)24 Oct 11 A B S Total % total

Advances 109 943 223 1,275 44Declines 93 1,208 224 1,525 52

Unchanged 1 84 38 123 4

Commodity % Chg

24 Oct 11 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 91.3 (0.0) 14.3 (8.0)

Gold (US$/OZ) 1,649.9 0.8 0.1 2.5Silver (US$/OZ) 31.6 1.5 (0.0) (21.1)

Debt / forex market24 Oct 11 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % NA NA NA NARe/US$ 49.9 50.0 49.5 44.4

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

15,500

17,000

18,500

20,000

21,500

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT October 25, 2011

ZENSAR TECHNOLOGIES LTD

PRICE: RS.126 RECOMMENDATION: BUYTARGET PRICE: RS.195 FY13E P/E: 3.5X

q Zensar's results were lower than expectations. Volumes grew by 1%QoQ, which was disappointing.

q EBIDTA margins improved despite salary hikes, largely due to rupee de-preciation and cost realignment.

q Cisco revenues continue to remain impacted and uncertainty persists onthe exact timing of the revival on growth in the account. However, ac-cording to the management, Zensar is expected to get additional rev-enues as one of the large Indian vendors has been rationalized by Cisco.

q The management indicated a promising macro environment, with clientslooking at growth as well as efficiencies.

q Post the acquisition of Akibia, Zensar is in a position to cross sell servicesto the mutually exclusive set of clients and this is expected to helpgrowth rates. About 14 clients are getting joint services from Zensar andAkibia.

q Rationalization of low-margin business, focus on utilization and costoptimisation should improve margins, we opine.

q We have revised our FY12E EPS to Rs.33.4 (Rs.29.3), to factor in the rupeedepreciation. We introduce FY13E earnings and expect EPS to rise to 36.2at an exchange rate of Rs.46.5 / USD.

q The stock is available at 3.5x FY13E earnings. We maintain BUY purelydue to valuations, with a DCF-based price target of Rs.195 (Rs.211 ear-lier). However, we expect the stock to outperform the sector only afterthe company shows sustainable revenue growth and improvement inmargins.

q A delayed recovery in major user economies and a sharper-than-expectedappreciation in rupee v/s major currencies are pronounced risks for asmaller player like Zensar.

2QFY12 results

(Rs mn) 1QFY12 2QFY12 QoQ (%) 2QFY11 YoY (%)

Income 3987.8 4090.0 2.6 2633.3 55.3

Expenditure 3557.1 3566.6 2245.6

EBIDTA 430.7 523.3 21.5 387.7 35.0

Depreciation 81.2 81.4 68.2

EBIT 349.5 441.9 26.5 319.5 38.3

Interest 21.4 22.5 4.1

Other inc 57.1 191.1 15.1

PBT 385.2 610.5 58.5 330.5 84.7

Tax 114.5 210.0 55.3

PAT 270.7 400.5 48.0 275.2 45.5

Shares (mns) 43.3 43.3 43.3

EPS (Rs) 6.3 9.2 6.4

Margins (%)

Operating Profit 10.8 12.8 14.7

Gross Profit 8.8 10.8 12.1

Net Profit 6.8 9.8 10.5

Source : Company

Summary table

(Rs mn) FY11 FY12E FY13E

Sales 11,383 16,785 18,363Growth (%) 18.6 47.5 9.4EBITDA 1,530 2,151 2,388

EBITDA margin (%) 13.4 12.8 13.0PBT 1,502 2,009 2,042Net profit 1,318 1,451 1,572

EPS (Rs) 30.4 33.4 36.2Growth (%) 3.4 10.1 8.3CEPS (Rs) 37.2 41.1 44.7

BV (Rs/share) 103.0 131.1 162.2Dividend / share (Rs) 4.5 4.5 5.0ROE (%) 34.0 28.6 24.7

ROCE (%) 29.2 28.2 24.4Net cash (debt) (1,263) (517) 576NW Capital (Days) 8.9 10.1 10.3

P/E (x) 4.1 3.8 3.5P/BV (x) 1.2 1.0 0.8EV/Sales (x) 0.6 0.4 0.3

EV/EBITDA (x) 4.4 2.8 2.0

Source: Company, Kotak Securities - PrivateClient Research

RESULT UPDATE

Dipen [email protected]+91 22 6621 6301



Revenues grew by 2.6%, volumes up by 1%n Revenue growth during the quarter was low at 2.6%. The management indi-

cated that, 1Q contained some re-selling revenues at Akibia, which did not recurin 2Q.

n The volume growth was disappointing.

n Zensar's revenue growth profile has been erratic with a 6.6% growth in the pre-vious quarter, preceded by two quarters of sequential drop in organic volumes.

Cisco revenues continue to be under pressure; Zensar to benefitin vendor rationalization initiativen In terms of clients, Cisco revenues continued to moderate due to the internal

problems within the client.

n According to the management, Cisco's revenues have remained stable as itlikely scaled back spending in its routers business. This business is facing signifi-cant competition from companies like IBM, which were its SW partners (for rout-ers business) till recently. We understand that, Cisco's market share has reducedfrom the erstwhile 80% to about 60% currently.

n Revenues during the next quarter are expected to be impacted partly also be-cause of the shut-down of activity for a few days.

n According to the management, Cisco has rationalised its vendor base to cut costs(Zensar, TCS, Wipro and Accenture were the vendors).

n In this process, Cisco has discontinued work with one of the large Indian vendorsand Zensar is expected to benefit in terms of additional revenues.

n We note that, post Akibia's acquisition, Cisco's contribution to Zensar's revenueshas fallen from the higher levels of about 34% to less than 25%. This was oneof the factors limiting additional business from Cisco.

n The management is confident of strong growth from Cisco going ahead becauseof cost pressures on Cisco.

n However, we will watch the revenue growth from Cisco closely. We have alwaysvoiced our concern on the high dependence of the company on one client.

Existing clients; rationalization expectedn Revenues from the Top 10 clients have grown by 8% QoQ and the number of

clients giving revenues of between $1mn - $5mn have grown from 42 to 44QoQ.

n The management indicated that, the spending outlook from clients remains en-couraging.

n Zensar has been able to penetrate deeper into clients by providing diverse ser-vices as well as make strong additions to its clientele. The company added 23(18) new accounts during the quarter.

n The management has indicated that, it will likely rationalize some of the ac-counts which are yielding low margins. This is with a view to re-align the workforce to better yielding projects. Thus, revenue growth may be impacted in theshort term by this initiative.

Verticals - strategyn Manufacturing and BFSI are the two largest verticals for Zensar. In BFSI, the com-

pany has set itself a target of growing by at least 20-25% for next two years.

n Company enjoys strong relationship with its clients that include UBS, CreditSuisse, Investec, Nomura etc. On the other hand, Akibia has some marquee cus-tomers like Federal Reserve Bank, JP Morgan chase etc.



n Company plans to cross sell some of its own and Akibia products across globe byintegrating the sales force of the two. This is also expected to increase the clientmining - for instance Nomura is Zensar's client in Asia Pacific and Akibia's clientin USA.

n In manufacturing, Zensar's focus is on discrete manufacturing. It intends to de-velop cluster solutions, auto ancillary solutions and B2B solutions.

Akibia - Consolidates Zensar's presence in IMSn Zensar has completed the 180-day integration program with Akibia and is now

looking at the next stage of integration.

n We understand that, the acquisition will consolidate Zensar's presence in the rap-idly growing infrastructure management business. According to industry sources,Infrastructure Management Solutions (IMS) is a $370bn market, split into DataCentre services ($231bn), Remote Infrastructure Management ($108bn) andManaged Services ($31bn).

n While Akibia has presence in the data centre, network and security services so-lutions, Zensar has operations in the RIM business. In our opinion, these are twocomplimentary services whereby, Zensar will be able to offer its offshore RIM ser-vices to Akibia's clients.

n In turn, Akibia's on-site data centre and security services are expected to attractand provide more comfort to several US - based clients as the same will act asnear-shore centres for those clients.

n Adding the capabilities of Akibia will further enhance Zensar's customer base forDatacenter services while there is an equal opportunity to scale the Remote In-frastructure Management Services business using Akibia's large datacenter cus-tomer base.

n We understand that, both entities have a largely exclusive set of clients withminimum overlap. Akibia had 53 active clients and served large accounts likeGoldman Sachs, IBM and Fujitsu US.

Average realizations were almost unchangedn Average realizations for the company were almost stable over the previous quar-

ter.

n New contracts are coming in at higher-than-average rates. However, billing rateincreases are contingent on consistent demand in the future.

n The company has not seen any pressure on billing rates from existing clients tilldate. In fact, the management has indicated that, it has been able to get billingrate increases from about 60% - 70% of its clients. We find this surprising espe-cially in the backdrop of weak economic environment. We will watch out for theimpact of these increases over the next few quarters.

Net addition of 579 employeesn Zensar added 579 (40) employees during the quarter, which was encouraging.

The utilization levels fell marginally to 80%.

n The management has indicated that, it is taking a hard look at the utilizationlevels and also at the performance related issues of employees.

n The management has earlier indicated net additions of about 800 employees inFY12, abd we expect the company to reach this figure by FY12 end.

n Zensar is focusing more on improving utilization levels and we expect the sameto improve by about 300 - 400bps over 2Q levels.



EBIDTA margins upn EBDITA margins during the quarter rose by about 200bps on the back of rupee

depreciation and cost optimisation.

n The improvement came despite the salary increments, which had a negativeimpact on margins.

n Over the next two quarters, we see the margins improving by about 100bps over2QFY12 on the back of the expected rupee depreciation and also due to theinitiatives mentioned above.

Financial prospectsn We have made changes to our FY12E earnings. We assume the rupee to aver-

age Rs.48 per USD in 2QFY12.

n Revenues are expected to rise by 47% (Akibia consolidation WEF 4QFY11).

n Margins are expected to moderate YoY largely due to the lower margin profileof Akibia and salary increments.

n We have assumed the tax rate at about 27% for FY12. Consequently, EPS forFY12E is expected to be Rs.33.4 (Rs.29.3).

n We also introduce our Fy13E earnings. We have assumed the rupee at a morenormalized level of 46.5 per USD in FY13E.

n Revenues are expected to rise by about 9.5% on higher volume growth.

n Margins are expected to remain stable as the rupee appreciation and salary in-crements set-off the benefits coming from cost optimization and better utilizationrates.

n We have assume tax at lower levels of 24% because of the expected increase inrevenues from SEZs.

n Consequently, PAT is expected to rise by about 9% to Rs.1.57bn, leading to anEPS of Rs.36.

Valuationsn We have done our DCF analysis wherein we have also incorporated a WACC of

about 15% to compensate for the higher risks.

n Our price target is Rs.195 (Rs.211) for the stock, based on FY13E earnings.

n Sustained rise in margins and stable revenue growth profile may lead us to ac-cord higher valuations to the stock.

Concernsn A sharp acceleration from the current levels may impact our earnings estimates

for the company.

n A delayed recovery in major global economies could impact revenue growth ofZensar.

We recommend BUY onZensar Technologies with a

revised price target of Rs.195



GRASIM INDUSTRIES


Consolidated result highlightsq Revenues of the company were better than our estimates led by higher

realizations in all segments on YoY basis.

q Operating margins remained flattish on YoY basis due to higher costswhile declined on a sequential basis due to fall in cement and VSF priceswitnessed during Q2FY12.

q Net profit growth was impacted by lower operating margins and stoodat 29.3% YoY while declined by 44% on QoQ.

q We tweak our FY12 estimates and also introduce FY13 estimates. We rollforward our valuations on FY13 and continue to maintain BUY with arevised price target of Rs 2763 (Rs 2795 earlier on FY12 estimates).

Financial highlights

(Rs mn) Q2FY12 Q2FY11 YoY (%)

Net sales 56,492 44,390 27.3

Expenditure 47,464 37,179 27.7

Dec/(Inc) in stock 666 -231

Raw material consumed 13,139 9,526

As a % of sales 23.3 21.5

Purchase of finished goods 701 357


Staff cost 3,396 3,099


Power and fuel 12,408 9,813


Freight, handling and other expense 7,850 6,847


Other expenditure 9,304 7,767


Operating profit 9,028 7,211 25.2

Operating margin 16.0 16.2

Depreciation 2,837 2,727

EBIT 6,191 4,484 38.1

Interest 894 974

EBT(exc other income) 5,297 3,510 50.9

Other income 2,318 1,625

EBT 7,615 5,134 48.3

Tax 2,374 1,508

Tax% 31.2 29.4

PAT 5,241 3,627 44.5

- Minority share 1,021 468

+ Share of profit/(loss) of associate -40 75

Net profit 4,180 3,234 29.3

Equity capital 917.2 916.9

EPS (Rs) 45.6 35.3

Source: Company

Summary table


Sales 212,690 246,923 268,624

Growth (%) 7.0 16.0 9.0EBITDA 46,832 52,051 59,792EBITDA margin (%) 22.0 21.1 22.3

PBT 38,528 43,796 48,361Net profit 22,648 23,591 25,259EPS (Rs) 246.9 257.2 275.4

Growth (%) (16.0) 4.0 7.0CEPS (Rs) 371.0 384.5 416.7BV (Rs/share) 1,588.9 1,821.5 2,072.5

Dividend / Share (Rs) 20.0 20.0 20.0ROE (%) 16.7 15.1 14.1ROCE (%) 21.6 21.4 21.8

Net cash (debt) 14,349 23,779 15,787NW capital(days) 43 36 36EV/Sales (x) 0.9 0.8 0.7

EV/EBITDA (x) 4.3 3.7 3.4P/E (x) 9.5 9.2 8.6P/BV (x) 1.5 1.3 1.1


RESULT UPDATE

Teena [email protected]+91 22 6621 6302



Revenue growth led by improvement in realizations on yearlybasisn Revenues of the company for Q2FY12 reported a growth of 27.3% on YoY basis,

better than our estimates. This was led by improvement in VSF and cement real-izations on yearly basis.

n Segment wise performance of the company is shown below -

l Cement - Grey cement and clinker volumes on a consolidated basis forQ2FY12 stood at 10.04 MT as against 9.2 MT in Q2FY11, reporting a growthof 9.1%. Demand for white cement continues to stay strong and white ce-ment volumes witnessed an improvement of 8.2% YoY. Grey cement realiza-tions stayed strong on yearly basis but declined on a sequential basis due tofall in cement prices seen during July-Aug, 2011. Blended cement realizationsfor the company for Q2FY12 stood at Rs 3599 per tonne as against Rs 3859per tonne for Q1FY12 and Rs 2983 per tonne for Q2FY11.

Out of company's capex of nearly Rs 110 bn for cement division expansion aswell as modernization, company has already spent nearly Rs 11 bn duringH1FY12 while it intends to spend nearly Rs 47 bn in FY12 and Rs 63bn inFY13. However, we have factored in lower capex in our estimates taking intoaccount the capex done till H1FY12. Out of the total planned capex, com-pany intends to spend Rs 51.5 bn for setting up additional clinker units atChattisgarh and Karnataka and Rs 58.5 bn for setting up bulk packaging ter-minals across various states and upgrading and modernizing existing units

Though cement prices have started recovering post monsoons but demandcontinues to remain weak. We expect the demand to recover duringH2FY12, but oversupply situation may continue to prevail for next 2-2.5 yearswhich may keep the prices subdued.

l VSF - VSF division performance was impacted by fall seen in the VSF priceson a sequential basis. VSF prices declined due to decline in the cotton pricesbut staged marginal recovery by end of Sep, 2011. Average VSF realizationsare up 7% YoY but down 18% QoQ. However, fall in realizations on sequen-tial basis was offset by improvement in volumes due to full production at theNagda plant. Performance of pulp JV's during Q2FY12 was impacted byplanned maintenance shutdown at AV Nackawic as well as forex losses onDomsjo forex borrowings. Demand for VSF has now started picking up due toinventory depletion in the value chain. However, it is expected to be volatiledue to macro-economic conditions as well as euro zone uncertainties. Alongwith this, cotton production during this year will also be a key deciding factorabout pricing going ahead. We have thus incorporated flat pricing duringFY13 as compared to FY12.

l Chemicals - Chemicals' division volumes were up by 30% YoY due to fullcapacity utilization. Average realizations also improved by 24% YoY forQ2FY12 led by higher caustic prices. Grasim expansion plan to build 182,500tonnes caustic capacity at Vilayat for its captive use along with the VSF facili-ties is progressing on schedule.

Segmental revenue breakup


Fibre and Pulp 12,931 10,176 27.1

Cement 42,089 32,845 28.1

Chemicals 1,915 1,200 59.5

Textiles 1,403 1,179 19.0

Others 3 3 16.0

Source: Company



Realization details

Q2FY12 Q2FY11 YoY (%)

Cement division details

Ultratech Cement Sales volumes(MT) 10.04 9.2 9.1

Realisations(Rs/tonne) 3,599 2,983 20.7

White Cement sales volume(MT) 133,568 123,496 8.2

Realisations(Rs/tonne) 9,131 8,590 6.3

VSF division details

VSF volumes(MT) 78,959 67,488 17.0

VSF realisations(Rs/tonne) 124,689 116,465 7.1

Chemical division details

Sales volumes(MT) 67,321 51,590 30.5

Realisation(Rs/Tonne) 23,978 19,403 23.6

Source: Company

n We tweak our estimates slightly and also introduce FY13 estimates. We expectrevenues to grow at a CAGR of 12.3% between FY11-FY13.

Operating margins declined due to higher costsn Operating margins stood at 16% for Q2FY12, lower than our expectations. This

was due to decline seen in average VSF and cement realizations during the quar-ter as well as higher costs.

n Overall costs continue to remain high due to higher coal costs as well as rawmaterial cost such as pulp. Coal prices continue to stay high due to hike in do-mestic coal prices as well as higher imported coal prices. Along with this, due toTelangana issue, company had to purchase coal from open market which alsoincreased the costs. Freight costs also moved up due to hike in diesel prices.

n We expect operating margins to be 22% and 21.1% for FY12 and FY13 respec-tively.

Net profit growth impacted by fall in marginsn Net profit improved by 29% for Q2FY12. This was lower than our estimates due

to fall in operating margins.

n We now expect net profits to grow at a CAGR of 5.6% between FY11-FY13.

Valuation and recommendationn At current market price of Rs 2358, stock is trading at 8.6x P/E and 3.4x EV/

EBITDA for FY13 respectively.

n We roll forward our valuations on FY13 and continue to maintain BUY with arevised price target of Rs 2763 (Rs 2795 earlier on FY12 estimates).

Sum of the parts valuation based on FY13 estimates

Division EBITDA EV/EBITDA EV Rationale(Rs mn) (x) (Rs mn)

Valuation of VSF division 13,235 5 66,176 Based on relative valuations

Valuation of chemical division 1,418 5 7,089 Based on relative valuations

Net debt(standalone) (17,804)

Total 91,068

Valuation of 60.3% holding in merged entity 149,361 At 20% discount to current price of Rs 1130

Investments 12,996 At 20% discount to current market price of Rs 94

Total valuation 253,425

Value per share (Rs) 2,763

Source: Kotak Securities - Private Client Research

We recommend BUY onGrasim Industries with a price

target of Rs.2763



PRATIBHA INDUSTRIES LTD


q Revenues of the company reported a growth of 30.4% for Q2FY12, betterthan our estimates.

q Operating margins were in line with our estimates and stood at 13%.Company expects to maintain margins between 13-14% going forward.

q Net profit growth stood at 20%YoY and was also boosted by lower taxoutgo.

q We tweak our estimates for FY12 and also introduce FY13 estimates. Atcurrent price of Rs 43, stock is trading at 4.9x and 4.7x P/E and 3.3xand3.2x EV/EBITDA on FY12 and FY13 estimates respectively. We roll for-ward our valuation to FY13 and arrive at a revised price target of Rs 70on FY13 estimates (Rs 80 earlier) and continue to maintain BUY on thestock.

Consolidated results


Net Sales 3,361.6 2,578 30.4

Expenditure 2,924 2,208 32.5

Raw material 2,293 1,798

As a % of net sales 68.0 70.0

Employee cost 218 151


Other expenditure 413 258


EBITDA 438 370 18.2

EBITDA margin 13.0 14.0

Depreciation 54 42

EBIT 384 328 17.0

Interest 194 149

PBT(exc other income) 190 179 6.3

Other Income 24 18

PBT 214 197 8.7

Tax 51 61

Tax (%) 24% 31%

PAT 163 136 20.0

NPM (%) 4.9% 5.3%

No. of shares 99.43 83.43

EPS (Rs) 1.64 1.63

Source: Company

Summary table


Sales 12,681 15,426 18,048Growth (%) 26.0 22.0 20.0EBITDA 1,720 2,160 2,346

EBITDA margin (%) 13.6 14.0 0.1PBT 968 1,263 1,325Net profit 714 884 928

EPS (Rs) 7.1 8.7 9.2Growth (%) 4.0 24.0 0.0CEPS(Rs) 8.8 10.7 11.4

Book value(Rs/share) 48.5 56.5 65.0DPS (Rs) 0.6 0.6 0.6ROE (%) 18.7 16.7 15.1

ROCE (%) 19.7 20.5 19.5Net debt 3,107 5,500 5,600NW capital(days) 135 135 135

P/E (x) 6.1 4.9 4.7P/BV (x) 0.9 0.8 0.7EV/Sales (x) 0.5 0.5 0.4

EV/EBITDA (x) 3.9 3.3 3.2


RESULT UPDATE

Teena [email protected]+91 22 6621 6302



Revenue growth led by strong order bookn Revenues of the company were better than our estimates and reported a growth

of 30.4% for Q2FY12. This was led by a strong order book of approx. Rs 50 bndiversified across buildings, tunnelling, water and roads.

n Order inflow in FY12 till date stood at Rs 10.88 bn corresponding to company'sshare of projects. Company had placed bids worth Rs 35 bn during Q1FY12 in oiland gas and water segment but finalization of these bids has taken longer.Along with this, order inflow from Maharashtra is expected to remain weak dueto upcoming MCGM elections.

n We maintain our FY12 estimates and also introduce FY13 estimates based onrevenue visibility. We expect revenues to grow at a CAGR of 19.3% betweenFY11-13.

Operating margins stayed inline with our estimatesn Operating margins were in line with our estimates and stood at 13%. Company

has been able to maintain margins due to its diversified project mix and highermargin water supply related projects.

n Company expects to maintain margins between 13-14% going forward. We thuscontinue to maintain our operating margin estimates and expect margins to be14% during FY12

Net profit growth led by strong revenue growth as well as lowertax outgon Net profit growth stood at 20%YoY and was boosted by strong order book and

execution during the quarter.

n However, depreciation charges moved up due to higher capex done by the com-pany during H1FY12 for Delhi Jal Board project. Company expects capex ofnearly Rs 2 bn for FY12- Rs 600 mn for Delhi metro project, Rs 1bn for Delhi JalBoard and remaining for other projects.

n Interest charges also remained high due to sharp increase in borrowings in com-parison with last year to fund capex as well as working capital requirements.Interest outgo is expected to remain high in near to medium term due to higherinterest rates.

n Working capital requirements are also likely to remain high due to commence-ment of two large projects - Delhi metro and Delhi Jal board.

n We expect net profits to grow at a CAGR of 14% between FY11-FY13.

Valuation and recommendationn At current price of Rs 43, stock is trading at 4.9x and 4.7x P/E and 3.3x and3.2x

EV/EBITDA on FY12 and FY13 estimates respectively.

n We roll forward our valuation to FY13 and arrive at a revised price target of Rs70 on FY13 estimates (Rs 80 earlier). We value core business at 7x FY13 esti-mated earnings and add valuation of its BOT investments at book value.

n We continue to maintain BUY on the stock.

We maintain BUY onPratibha Industries with a

price target of Rs.70



HT MEDIA


q HT Media reported revenues Rs 4931mn, EBITDA Rs 713mn, and PAT Rs438mn in 2QFY12. Reported financials include impact of one-off items(forex losses, provisions for private treaties), on account of which EBITDAand PAT reported are lower than our estimates.

q Advertising revenues of the company continue to see benefits from ris-ing readership. The company saw 25% growth in its Hindi newspapers'advertising revenues. English newspapers' advertising revenues grew8%, with HT-Mumbai growing 15%, and Mint growing 30%. Overall ad-vertising revenues in English newspapers have been weak on account ofweakness in certain key categories, notably real estate.

q The company has indicated that near-term outlook remains clouded onaccount of macroeconomic uncertainty and volatility in newsprint prices;the company shall take measures to contain downsides (rationalizationof newsprint use, raising cover prices) depending on how the situationevolves.

q We continue to see HT Media as a long-term outperformer in the printmedia space, as we think the company investments in three key proper-ties (Mint, HT-Mumbai, and Hindustan-UP) have shown strong readershiptrends as well as revenue trends. Going forward, we believe that furtherconvergence in readership with the respective market leaders shall im-prove yields favorably, with disproportionate gains in advertising yields/profitability in these newspapers. HT Media is our top pick in print me-dia.

q We maintain BUY on HT Media, with a price target of Rs 200. Key risksrelate to macroeconomic uncertainty and worsening advertising environ-ment, and higher newsprint prices.

2QFY12 Results Summary-

(Rsmn) 2QFY12 2QFY11 % Chg

Operating Revenues 4,931 4,455 11

- Advertising revenues 3,705 3,294 12

- Circulation Revenues 507 418 21

Raw Material Expenses 1,861 1,649 13

Gross Margin 62.3 63.0 -0.7ppt

Employees Cost 849 734 16

Advertising and Sales Promotion 242 322 -25

Other Expenditure 1,266 959 32

Total Expenditure 4,218 3,664 15

EBITDA 713 791 -10

EBITDA Margin 14.5 17.8 -3.3ppt

Depreciation and Amortization 233 211 10

EBIT 480 580 -17

Other Income 204 61 234

Interest Expenses 75 55 36

PBT 609 586 4

Provision for Tax 140 165 -15

Effective Tax Rate 23.0 28.2 -5.2ppt

PAT 469 421 11

Minority Interest -31 -33 -6

PAT after Minority Interest 438 388 13

SHOS 235 234 0

EPS (Rs) 1.9 1.7 13

Source: Company

Summary table


Sales 17,861 20,291 22,447Growth (%) 26.4 13.6 10.6

EBITDA 3,358 3,818 4,593EBITDA margin (%) 18.8 18.8 20.5PBT 2,571 3,263 4,140

Net profit 1,809 2,187 2,729EPS (Rs) 7.7 9.3 11.7Growth (%) 28.0 20.9 24.8

CEPS (Rs) 11.3 13.0 15.4BV (Rs/share) 61.1 70.2 81.6Dividend / share (Rs) 0.4 0.4 0.4

ROE (%) 14.9 14.2 15.4ROCE (%) 13.1 13.0 14.3Net cash (debt) (1,971) 2,786 6,231

NW Capital (Days) 7 -30 -30P/E (x) 18.3 15.1 12.1P/BV (x) 2.3 2.0 1.7

EV/Sales (x) 2.0 1.5 1.6EV/EBITDA (x) 10.4 7.9 7.9


RESULT UPDATE

Ritwik [email protected]+91 22 6621 6310



HT Media reported revenues ahead of our estimates, on the back of stronger circu-lation revenues. Advertising revenues were up 12%, in line with our expectations.Circulation revenues have come in stronger as a result of improved realizations inHindi newspapers, as well as hikes taken by the company in the Delhi edition. Ad-vertising revenues have been buoyant in the Hindi segment of the business, whilethe English newspapers' advertising has been weak, primarily on account of weakadvertising revenues in the Delhi edition of HT (impact largely on account of realestate category). Mint and HT-Mumbai have continued to perform strongly, with30% and 15% y/y growth respectively. A large part of the growth in advertisingrevenues has been achieved on account of improving yields.

The company's newsprint expenses rose 13% y/y on account of higher newsprintprices. The company continues to take initiatives to reduce wastage, and introduceefficiencies in managing newsprint expenses. Other expenses of the company camein well higher than anticipated on account of forex losses (Rs 63mn), and provisionsfor loss in private treaties transactions (Rs 55mn). The company cut back aggres-sively on advertising and sales promotion expenses in the quarter. EBITDA came inat Rs 713mn, lower than our estimate of Rs 829mn - largely on account of one-offitems in other expenditure.

On account of higher Other Income (sale of investment in Metropolitan Media) aswell as lower effective tax rate (tax credit from previous quarters) in the quarter,disappointment in PAT has been less pronounced. The company has reported PATRs 438mn, compared with our estimate of Rs 473mn.

Outlook and Investment ThesisWhile disappointment has come in on account of weak performance from HT-Delhi,it is noteworthy that the company's advertising have continued to grow 12%, onaccount of the new initiatives that HT Media has taken over the past several years.HT Media has continued to show strong growth in Hindi, business newspaper, andHT-Mumbai. The slowdown in Delhi, affected by a slowdown in real estate advertis-ing activity, is not structural, and growth is likely to come back in the next quarter ortwo, in our understanding.

We continue to be impressed by the readership assets that HT Media holds, and therelatively low revenues they generate denotes to us an opportunity. As successiverounds of IRS have shown, HT Media's key properties continue to move towardscritical thresholds that portend profitability in three of its major investments(Hindustan - UP, Mint, and HT- Mumbai). Yields of the company's newspapers -although improving, continue to be weak relative to the leader , and could see sub-stantial increase as readership rises further. Newsprint prices have, according to in-dustry participants, likely peaked, and we are likely to see some relief in the comingquarters, which augurs well for profitability.

We maintain a positive view on HT Media with a BUY rating and a price target ofRs 200.

We recommend BUY on HTMedia with a price target

of Rs.200



JAGRAN PRAKASHAN


q JagranPrakashan has reported fairly decent set of financials for 2QFY12.The company reported in-line revenues (Rs 3054mn) and EBITDA (Rs791mn), while PAT was lower than our estimates on account of lowerother income (affected by forex losses of Rs 135mn).

q We continue to believe JagranPrakashan is likely to underperform peersDB Corp and HT Media in the long-run, on account of the company's de-pendence on the Uttar Pradesh market, where competitive pressures areexpected to rise significantly in the coming years, notably fromHindustan (HMVL). Even so, we think that near and medium term out-look for earnings is stable, in so far as competitive pressures are con-cerned. We view the company's renewed focus on raising its circulationfavorably.

q Near-term earnings are likely to be positively impacted by elections inUttar Pradesh (likely March-April 2012), stronger readership of thecompany's flagship brand, and weakening domestic newsprint prices (se-quential basis). Management has also indicated that advertising duringDiwali has been pretty robust.

q Valuations are cheap, in our opinion, at 12.2x PER FY13E (3.7% dividendyield FY12E). We upgrade JagranPrakashan to BUY (ACCUMULATE previ-ously), with a price target of Rs140 (unchanged).

q Risks to our investment view include worsening macroeconomic environ-ment, and raw material risks.

JagranPrakashan reported in-line 2QFY12 results. Advertising revenues rose 9.5%,while circulation revenues rose 11.7% in the quarter. Advertising environment hasbeen weak in the quarter, with softness more pronounced in categories such asmobile service providers, BFSI, and education sector. We note thatJagranPrakashan's advertising revenues have grown at a weaker pace than Hindipeers, which have reported 15-25% growth in advertising revenues. Circulation rev-enues have been higher across newspaper groups, as companies have raised coverprices/ raised circulation in the past year.

Quarterly performance

(Rs mn) 2QFY12 2QFY11 YoY (%)

Revenues 3,054 2,769 10.3

- Advertising Revenues 2,119 1,935 9.5

- Circulation Revenues 612 548 11.7

- Other 323 286 13.1

Expenses: 2,263 1,881 20.3

Raw Material Expenses 1,075 801 34.2

Personnel Expenses 376 354 6.2

Other Expenses 812 726 11.9

EBITDA 791 888 -10.9

Margin (%) 25.9 32.1

Depreciation 160 133 20.6

Interest Expenses 29 14 103.7

Other Income 40 85 -53.5

PBT 642 826 -22.3

Provision for Tax 184 271 -32.1

PAT 458 555 -17.5

Source: Company

Summary table


Sales 12,211 13,863 15,416Growth (%) 29.6 13.5 11.2


Net profit 2,103 2,296 2,764EPS (Rs) 6.6 7.3 8.7Growth (%) 13.8 9.2 20.4

CEPS (Rs) 8.7 9.5 11.0Book value (Rs/share) 22.2 24.1 27.3Dividend / share (Rs) 3.5 3.9 4.7

ROE (%) 32.0 31.4 34.0ROCE (%) 24.7 24.5 27.5Net cash (debt) (1,562) (982) (6)

NW Capital (Days) 51 43 46P/E (x) 16.1 14.7 12.2P/BV (x) 4.8 4.4 3.9

EV/Sales (x) 2.8 2.4 2.1EV/EBITDA (x) 9.5 8.8 7.1


RESULT UPDATE




Newsprint expenses rose 34% on expected lines. We note that Jagran has raised itscirculation 9% y/y, on account of new editions as well as rising circulation in UttarPradesh, which has had an impact on higher circulation revenues as well as highernewsprint costs. Newsprint prices for the company rose 18% in the quarter.

Other expenses have been in line with our expectations. EBITDA, Rs 791 mn, islargely in line with our expectations (Rs 786mn).

The company's other income has declined 53% y/y on account of forex losses (Rs135mn). PAT came in at Rs 458mn, in line with our expectations on account oflower other income.

Outlook and Investment ThesisLonger-term, we believe JagranPrakashan is likely to see lower growth than industryon account of its dependence on Uttar Pradesh and the rising competitive activity inthe state. However, we are encouraged by the company's intent to raise circulationin Uttar Pradesh, as also the impact of the same in readership. We believe that inthe medium -term Jagran shall continue to enjoy the benefits of its dominance inUttar Pradesh, and report healthy advertising revenues. Higher dependence of thecompany on circulation revenues, too, shall be sustainable so long as it maintainslead over competitors.

Competitive activity in Jharkhand/ Bihar has reduced, following DB Corp's decisionto defer the launch of its newspaper in FY12.

Near term, we believe Jagran is favorably exposed to the Uttar Pradesh assemblyelections, and may outperform peers in 2HFY12 on the back of the same. Manage-ment said that growth in the festival season has been fairly strong as well. The com-pany believes that domestic newsprint prices are likely to soften in the coming quar-ters by 5-7% (sequentially).

Given these, we believe JagranPrakashan is undervalued at CMP (12.0x PER FY13E,3.7% FY12E dividend yield). We upgrade JagranPrakashan to BUY (ACCUMULATEpreviously), with a price target of Rs 140 (Unchanged).

We recommend BUY on JagranPrakashan with a price target of

Rs.140



ITC LTD

PRICE: RS.207 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.220 FY13E P/E: 23X

q ITC reported a strong set of financials for 2QFY12. The company's rev-enues ( Rs 60.8Bn), EBITDA (Rs 22.2Bn), and PAT (Rs 15.1Bn) were wellahead of our estimates. Volume growth in cigarettes was likely in theregion of 7-8%, indicating that demand remains strong. The companyalso posted strong growth in Other FMCG segment, where revenuesgrew 27%, contributed by both volume and pricing growth(premiumization/ price hikes). Revenue/ profitability trends remainedstrong in most of the company's segments, leading to a positive sur-prise.

q Post 2QFY12, ITC remains well on track to meet our estimates for theyear. Fresh price hikes taken by the company on the Classic and WillsNavy Cut brand place the company in a position to pass on VAT increasesin states affected during the year, as also prepare the company (partially)for excise rate hikes that may be affected by the government.

q ITC continues to have, and has demonstrated since our initiation , stableearnings drivers, high pricing power, and lower (than peers) exposure tovolatile raw material prices. We believe these remain sought-after prop-erties, and will continue to drive strength in the valuation of ITC. How-ever, we believe that sharp increases in excise duties (near to mediumterm) may have an adverse impact on volumes/ realization of the ciga-rette business and maybe a sentimental negative for the stock. Weaken-ing economic growth and fiscal concerns do provide reason to believethat the government may raise excise duties sharply and unexpectedly.

q On account of lower price-value gap since initiation, as well as risingrisks of sharp hikes in excise duties in near/medium term, we cut our rat-ing on ITC Ltd. to ACCUMULATE; we would look for better entry pointsto buy more aggressively into the stock. We maintain a price target of Rs220.

n ITC reported a strong set of financials for 2QFY12. Sales came in at Rs60.8Bn, up18.2% y/y. Net sales from cigarette segment grew 16.4% y/y, on account ofhigher volumes (+7-8% growth) as well as improved realizations. The non-ciga-rette FMCG segment has grown 27% y/y, with mid-teen growth in volumesacross product categories. Paper and paperboard segment (+15% y/y) continuedto see benefits of improved realizations. The company reported soft growth inthe Hotels segment, due to general macroeconomic weakness arising out ofweakness in developing economies, as well as subdued demand from Indianbusiness on account of slowdown in the Indian economy. Sales in agri-businesses(+9%, y/y) continued to grow on a high base. Gross margins continued to de-cline y/y, we believe, on account of higher prices of FMCG (ex-cigarettes).Growth in employee expenses was managed at 1.5% y/y (timing issues relatingwith increments in 1HFY11 and 1HFY12), and other expenses grew 10.7%, re-sulting in strong EBITDA margins (+0.1 ppt, y/y).

Summary table


Sales 211,676 243,664 284,837

Growth (%) 16.6 15.1 16.9EBITDA 71,534 88,628 103,542EBITDA margin (%) 33.8 36.4 36.4

PBT 72,682 87,925 103,024Net profit 49,876 59,789 69,541EPS (Rs) 6.4 7.7 9.0

Growth (%) 21.2 19.9 16.3CEPS (Rs) 7.3 8.7 10.1Book value (Rs/share) 19.9 23.1 26.9

Dividend / share (Rs) 4.5 3.9 4.5ROE (%) 33.8 35.9 36.0ROCE (%) 25.4 29.2 30.0

Net cash (debt) 4,878 10,185 28,024NW Capital (Days) 75 73 72P/E (x) 32.1 26.8 23.0

P/BV (x) 10.4 9.0 7.7EV/Sales (x) 7.5 6.5 5.5EV/EBITDA (x) 22.3 18.0 15.2


RESULT UPDATE




n Segment-wise, profitability (PBIT/ Gross Sales) in the cigarette segment rose to31.5% in the quarter - we believe on account of higher realization due to betterproduct mix as well as price hikes affected by the company (Classic and Wills).Losses from other FMCG segment continued to decline - and reduced to Rs559mn in the quarter. 2Q is a somewhat weak quarter, and hotel occupancieshave been weak at ~60%. Even so, the company has reported 18.5% marginsin the segment. Margins in agri-business, affected by product mix (we note that2Q tends to bring in larger margins as tobacco forms a larger portion of the salesin agri-commodities in 2Q), remained strong at 16.6% (+0.4ppt, y/y). Paper andpaperboard segment continues to see benefits of ITC's strong backward integra-tion as well as favourable industry scenario - reporting PBIT margins of 27.5% inthe quarter.

Results Summary

(Rsmn) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

Net Sales 43453 45802 51316 48473 51472 55137 59600 58602 60852

- o/w Cigarettes 21997 23316 24530 24836 25501 27726 27673 28736 29681

- o/w Non-Cigarette FMCG 8633 8896 11227 10014 10556 11021 13125 11978 13407

- o/w Hotels 1740 2477 2562 2099 2089 2816 3003 2305 2111

- o/w Agri Business 10283 9052 9881 13498 13498 10667 10818 17071 14345

- o/w Paper and Paperboard 7904 8118 8030 7937 9192 8773 9170 9596 10054

Expenses

- Raw Material Expenses 17176 18223 21785 17911 18532 20478 24576 22992 23191

Gross Profit 26277 27579 29531 30562 32940 34659 35024 35610 37661

Gross Margins (%) 60.5 60.2 57.5 63.0 64.0 62.9 58.8 60.8 61.9

- Employee Expenses 2420 2228 2558 3419 2612 2773 2790 3942 2650

- Other Expenses 7956 8275 10793 10772 11579 11593 13106 11906 12821

EBITDA 15901 17076 16180 16371 18749 20293 19128 19761 22190

Margin (%) 36.6 37.3 31.5 33.8 36.4 36.8 32.1 33.7 36.5

Depreciation 1484 1549 1539 1597 1540 1681 1642 1665 1701

EBIT 14417 15528 14641 14774 17209 18612 17486 18096 20489

Other Income 684 1591 592 985 1245 1930 1022 1438 1808

Interest Expneses 181 109 185 58 54 230 140 165 142

PBT 14920 17010 15048 15701 18400 20313 18368 19370 22155

Provision for Tax 4821 5569 4766 4998 5833 6422 5553 6043 7012

PAT 10099 11442 10282 10703 12567 13891 12815 13327 15143

Source: Company

Segmental

Rsmn, FY Ends Mar Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

Segmental Profit 15,585 16,056 14,779 15,658 18,572 18,805 17,958 19,358 22,449

- o/w Cigarettes 12,517 13,098 12,512 13,050 14,582 15,330 14,706 15,767 17,289

- o/w Non-Cigarette FMCG -850.2 -860.3 -786.9 -892.5 -889 -736 -678.4 -762.8 -559

- o/w Hotels 316 763 782 385 399 886 996 513 434

- o/w Agri Business 1740.8 1040.8 583.1 1231 2023.6 1410.8 997.5 1571.4 2387.8

- o/w Paper and Paperboard 1862.2 2014.1 1688.2 1884.6 2456.4 1914.2 1937.2 2269.6 2897

Segment Profitability, % (PBIT/ Gross Sales)

Cigarettes 29.9 29.6 27.7 27.9 30.3 29.3 28.8 29.9 31.5

Non-Cigarette FMCG -9.8 -9.6 -7.0 -8.9 -8.4 -6.7 -5.2 -6.4 -4.2

Hotels 16.9 28.8 28.5 17.1 17.7 29.2 30.7 20.3 18.5

Agri-Business 16.9 11.5 5.9 9.1 16.2 13.2 9.2 9.2 16.6

Paper and Paperboard 22.7 23.8 20.2 22.7 25.6 20.9 20.1 22.4 27.5

Source: Company



Other income has risen on account of higher yields as well as level of investments.The company reported PAT Rs 15.1 Bn, ahead of our estimates ( Rs 14.5Bn).

Outlook and Investment ThesisCigarette business of the company continues to show strong trends in profit growth,growing at 18-20%. Volumes have picked up over the past two quarters along ex-pected lines. The company has taken price hikes (+10%) in two of its significantbrands in the past quarter - Classic and Wills Navy Cut; in addition to hikes taken inBristol, Berkley, and Gold Flake (RSFT) earlier, we believe the average hike in ciga-rette prices is likely in the region of 6%. We believe the realizations as well as vol-umes shall continue to be strong in 2HFY12, and it does not seem unlikely that thecompany may raise prices over a few other brands in 2HFY12. Price hikes affectedshall also offset the impact of higher VAT affected by a number of states (on aweighted average basis, VAT has increased over 300 bps y/y, post increases inFY12). Other FMCG businesses of the company continue to show trends towardsprofitability, even as the company continues to expand into new categories andlaunch new products. In hotels, we believe occupancies shall rise in the later part ofthe year, improving profitability. The company shall add 100,000 TPA capacity in itspaper and paperboards division in FY13, which shall drive volume growth in the seg-ment.

With earnings drivers in place, and high visibility of the same, we remain positive onITC Ltd. Key risks to our investment view arise from sharp rises in excise duties(FY13/ mid-way through FY12). We believe the company has prepared itself partiallyfrom higher excise duties by raising its prices. Even so, a rise of 10%+ in exciseduties could have a negative impact on volumes/ sentiment. Given weakeningeconomy, the pressure on the government as regards the fiscal deficit, and thesomewhat vulnerable status of the cigarette industry (higher income users, low num-ber of consumers), it is not unlikely that the government may choose to hike exciserates steeply in the near future.

While ITC has a demonstrated ability to pass on higher tax rates through higherprices, the same may impact volume adversely, if hikes are very sharp. Moreover,we fear, sharp hikes shall send a signal that cigarettes may face punishment fromthe government arbitrarily and continually. While this is far from facts (long-termaverages point to a 4-5% annual increase in ITC's excise duties/ stick), we believeadverse sentiment could weaken valuation, if such an event were to occur.

We continue to be positive on ITC Ltd, as we think: 1/ Cigarettes enjoy high loyaltyand high degree of inelasticity, which enables passage of tax burden to the con-sumer, 2/ ITC has a strong track record of margin expansion in cigarettes despitesharp rate hikes affected in the past, 3/ In the current circumstance, we continue tofind ITC well-placed in so far as visibility of earnings is concerned, on account oflower (than FMCG peers) exposure to volatility in raw materials and predictability inrevenues.

However, on account of lower price - value gap (+6.5% upside from CMP) as wellas rising risks from adverse government action, we downgrade ITC Ltd. to ACCU-MULATE (from BUY). We maintain FY12E price target of Rs 220.

We recommendACCUMULATE on ITC with a

price target of Rs.220



GREAVES COTTON LTD


q GCL's earnings are in line with expectations though there is minor slip-page on the revenue and profit front. Engine segment has done welldespite the moderation in 3W volumes in 2Q of Piaggio. However, themonsoons coupled with unavailability of engines with revised emissionnorms impacted offtake in the construction equipment segment. Thissegment has slipped back into red after posting a turnaround in the pre-vious quarter.

q A positive takeaway from the analyst meet was that the company is innegotiations with OEMs for taking price hikes on products. These are ex-pected to materialize in Q3 and Q4 and should aid improvement inEBITDA margins going forward.

q While the company had announced in Q4 FY11 about its informal inter-nal target of doubling revenues in three years timeframe, the same ap-pears challenging due to adverse economic environment.

q We maintain BUY with an unchanged DCF based target price to Rs 110.

Quarterly performance

(Rs mn) Q2FY12 Q1FY11 YoY (%) Q1FY12 QoQ (%)

Gross Revenues 4,815 4,137 16 4,413 9

Excise duty 424 356 19 395 7

Net Revenues 4,392 3,781 16 4,018 9

other op income 4 3 18 0 1233

Expenditure 3,765 3,185 18 3,449 9

RM costs 3,029 2,491 22 2,741 10

Purchase of traded goods 102 105 -3 73 39

Staff costs 302 263 15 287 5

Other costs 332 326 2 348 -5

Operating profit 631 599 5 570 11

Depreciation 75 68 10 73 3

Other income 19 17 11 18 6

Gross Profit 575 547 5 515 12

Interest 22 22 -3 12 79

PBT 553 525 5 503 10

Tax -167 -162 3 -153 9

Reported PAT 386 363 7 350 11

EPS (Rs) 1.6 1.5 1.4

Excise rate (%) 8.8 8.6 8.9

OPM (%) 14.4 15.8 14.2

RM costs to sales (%) 71.3 68.7 70.0

Other exp to sales (%) 7.6 8.6 8.7

Tax rate (%) (30.1) (30.9) (30.5)

Source: Company

Summary table


Sales 12,505 19,062 21,221Growth (%) -7.4 52.4 11.3EBITDA 1,984 2,834 3,189

EBITDA margin (%) 15.9 14.9 15.0PBT 1,843 2,565 2,921Net profit 1,185 1,744 1,986

EPS (Rs) 4.9 7.1 8.1Growth (%) -2.4 47.2 13.9CEPS 5.8 8.6 9.7

BV (Rs/share) 19.5 24.3 29.9DPS (Rs) 1.5 2.0 2.2ROE % 25 30 28

ROCE % 25 30 28Net cash (debt) 561 1,389 2,396NW Capital (Days) 66 47 53

EV/Sales (x) 1.6 1.0 0.9EV/EBITDA (x) 10.3 7.0 6.1P/E (x) 18.1 12.5 10.9

P/Cash Earnings 15.4 10.4 9.2P/BV (x) 4.6 3.7 3.0

Source: Company, Kotak Securities - PrivateClient Research; Note: FY11 was July-Marchfiscal.

RESULT UPDATE

Sanjeev [email protected]+91 22 6621 6305



n Strong revenue growth despite weak 3W volumes and decline in infrastructureequipment segment

n For the quarter, net revenue grew 16% yoy a tad lower than our expectations.The company is the sole supplier of light diesel engines to OEMs like Piaggio,M&M and Atul Auto. Piaggio is the prime client accounting for the bulk of auto-motive engines revenue.

n The company is thus a play on the 3W segment (passenger and cargo) which inturn is driven by rising urbanization and usage of light cargo vehicles for intra-citytransportation.

n The Indian 3W sales volumes during the Jul-Sep 2011 stood at 234730 units vs207892 units, a growth of 13% yoy. During the Q1FY12, the demand was strongbut it has started to moderate in recent months.

n Piaggio's 3W sales in Jul-Sep are down marginally. However, the impact hasbeen cushioned by strong volumes from M&M and Atul Auto during the sameperiod. As a result, the volumes for GCL's OEMs were up 10% yoy. We estimate3W's to account for roughly 70-80% of auto revenues and around 50-55% oftotal revenue for the company and hence is an important variable to monitor.

n However, reported revenue growth in the engines segment was much higher(compared to 3W volumes growth) at 22% yoy, which the management attrib-uted to higher share of non-auto revenue including industrial engines, exportsand diesel pumpsets.

n The 4W LCV segment has continued to defy the economic slowdown and hasbeen posting strong volumes. LCV volumes in Jul-Sep period have grown 39%yoy to 100544 units. Tata Motors continues to lead this segment with a marketshare of 59%.

n Tata Motors has an exclusive sourcing arrangement with GCL for single cylinderdiesel engine to be fitted for its Magic Iris/Ace Zip LCV models in the 0.6 tonrange. Supplies have started meaningfully since the month of September.

n The company indicated that initial feedback for this vehicle has been good andvolumes are going up progressively. The company is currently clocking volumesof 6000 per month and expects to deliver 30000-35000 units in the 2H FY12.

n The automotive division is ready with its Greenfield plant at Aurangabad with acapacity of 80000 units to make diesel engines for Tata Motors LCV (Ace zipand Magic Iris). This unit has been recently commissioned in October 2011. Weexpect strong marketing push for Magic Iris around the festive season of Diwali.

n In the infrastructure equipment segment, the company makes concrete mixersand pavers. This segment was affected by monsoons and change in emissionnorms which disrupted engine supplies. Consistent interest hikes have also re-sulted in softening of demand.

Segment Revenues

(Rs mn) Jul-Sep 2011 Jul-Sep 2010 YoY (%)

Engines 3,887 3,188 22

Infrastructure 339 428 -21

Others (Power tillers) 170 168 1

Total 4,396 3,784 16

Source: Company



n EBITDA margins largely maintained despite cost pressures and loss in infrastruc-ture equipment segment

n For the quarter, EBITDA margins improved 20 bps on a qoq basis to 14.4%.Despite the steep rise in material costs, margins have been preserved. A positivetakeaway from the analyst meet was that the company is in negotiations withOEMs for taking price hikes on products. These are expected to materialize inQ3 and Q4 and should aid improvement in EBITDA margins going forward.

n After reporting marginal profits in Q1 FY12, the Infrastructure segment slid intoloss again in the second quarter. Clearly, the 21% yoy decline in revenues of thissegment is responsible for the margins slipping back into red.

PBIT margins

(%) Q2FY12 Q1FY12 Q1FY11

Engines 16.6 17.6 18.7

Infrastructure -3.5 0.6 -0.1

Others (Power tillers) 25.6 18.8 28.2

Total 15.4 15.6 17.0

Source: Company

Other Highlightsn The company continues to be net debt-free with borrowings of Rs 313 mn and

cash worth Rs 289 mn.

n There has been an increase in working capital mainly due to higher inventoriesand loans and advances (mainly due to supplier advances).

n The company undertook capex of around Rs 420 mn in FY11 towards generalmodernization and Greenfield capacity at Aurangabad. The company expects tospend about the same in FY12. The company expects to exit the year with closeto 480000 engines pa capacity spread between Aurangabad (old and greenfield)and Ranipet (110000 pa).

n The company's medium term objective is to move up into higher capacity en-gines and tap greater share of OEM business.

n Although the company is not actively looking at acquisitions, but a reasonablypriced facility for manufacturing high precision engine components could be con-sidered. GCL makes single and twin cylinder engines currently. For graduatinginto three cylinder engines, the company may look at acquiring technology.

ValuationGCL is currently trading at 12.5x and 10.9x FY12 and FY13 earnings respectively. Inview of the strong set of numbers and adequate upside of 24% from current levels,we maintain BUY on the stock with an unchanged DCF based price target of Rs110.

Risks and ConcernsThe Annual Report highlights the demand sensitivity of the company's products tothe interest rates and liquidity. In addition to this, commodity prices could play aspoilsport.

We maintain BUY on GreavesCotton with a price target of

Rs.110



KALPATARU POWER TRANSMISSION LTD (KPTL)PRICE: RS.99 RECOMMENDATION: BUYTARGET PRICE: RS.140 FY13E P/E: 7.2X

q KPTL reported Q2FY12 nos lower than our estimates with revenues andPAT down by 7% YoY and 17% YoY.

q Stock has been underperforming the broader market through past twoquarters. Muted order book growth and company's fund raising in lastfiscal that has met with skepticism are the primary reasons for this.

q Sluggish momentum in investment in transmission towers by state utili-ties and order flows from PGCIL has been negatively affecting thegrowth of the company and also for the peer group.

q Company is favorably poised in terms of capacity and execution, to ben-efit from thrust in T&D spending in India.

q We reduce our earnings estimate for FY12 and long term margin assump-tion in DCF to factor in moderation in operating margins on account of1) increasing competition leading to pricing pressure in new orders 2)increase in input prices 3) continuing wage inflation.

q We maintain our BUY rating on the company's stock in view of adequateupside to our DCF based target price of Rs.150 (Rs 240 earlier).

Standalone Result


Net Sales 5,833 6,315 -7.6 5,845 (0.2)

Other Income 138 138 -0.5 144 (4.5)

Total Income 5,971 6,453 (7.5) 5,989 (0.3)

Raw Material 2,878 2,985 (3.6) 2,616 10.0

Staff costs 403 474 (14.9) 439 (8.2)

job charges 1,312 1,591 (17.6) 1,574 (16.7)

Other expenditure 534 533 0.1 548 (2.7)

Total Expenditure 5,126 5,583 (8.2) 5,177 (1.0)

PBIDT 708 732 (3.3) 668 6.0

Interest 242 186 29.8 220 10.0

PBDT 603 683 (11.8) 592 1.9

Depreciation 121 113 6.4 117 3.1

PBT 482 570 (15.4) 475 1.6

Tax 140 156 (10.5) 138 1.8

PAT 342 414 (17.2) 337 1.6

EPS (Rs) 2.2 2.7 (17.2) 2.2 1.6

PBDIT (%) 12.1 11.6 11.4

Raw material costs to sales (%) 49.3 47.3 44.8

Staff costs to sales (%) 6.9 7.5 7.5

job charges to sales (%) 22.5 25.2 26.9

Other expenditure to sales (%) 9.1 8.4 9.4

Tax rate (%) 29.0 27.4 29.0

Source: Company

Summary table


Sales 28,787 32,526 38,807Growth (%) 9.3 13.0 19.3


Net profit (Adj) 1,916 1,918 2,099EPS (Rs) 12.5 12.5 13.7Growth (%) 27.3 0.1 9.4

CEPS (Rs) 15.5 16.0 17.8BV (Rs/share) 73.6 84.6 96.7Dividend/share (Rs) 1.3 1.3 1.3

ROE (%) 17.8 15.4 14.8ROCE (%) 16.1 15.6 15.6Net cash (debt) (6,445) (4,408) (5,763)

NW Capital (Days) 122 123 124EV/Sales (x) 0.8 0.6 0.5EV/EBITDA (x) 6.4 5.5 5.3

P/E (x) 7.9 7.9 7.2P/Cash Earnings (x) 6.4 6.2 5.6P/BV (x) 1.3 1.2 1.0


RESULT UPDATE

Ruchir [email protected]+91 22 6621 6448



Result Highlightsn Revenue down by 7% YoY at Rs 5.8 bn in Q2FY12 mainly due to sluggish rev-

enue accretion in transmission line business. Transmission business that consti-tutes to about 80% of the revenue pie has de-grown by 10% YoY in the quarter.

n Company reported EBITDA margin at 12.1% vis-à-vis 11.7% in Q2FY11. Com-pany has started to show stabilizing employee expense. Lower EPC work in thequarter has accounted for YoY reduction in job charges.

n Increases in input prices have had negative impact on the international businessmargins. Overseas projects as largely of fixed price in nature.

n We reiterate that the company has been adopting selective bidding strategy andis likely to protect margins amidst competition originating from fringe and otherunorganized players.

n However, delays in order execution from client's side, increasing competition inthe industry and increase in interest rates have been negatively affectingcompany's profitability.

Segment reporting


Standalone Revenues

T& Dist business 4883 5472 (10.8) 5228 (6.6)

Real Estate Division 0.7 0.3 133.3 0.3 133.3

Energy 109 97 12.8 106 3.1

Infrastructure 897 745 20.3 512 75.2

Total 5889 6315 (6.7) 5846 0.7

PBIT (Rs mn)

T& Dist business 566 581 (2.5) 544 4.1

Real Estate Division 0.6 0.3 0.2 200.0

Energy -1.0 5 5 (119.2)

Infrastructure 31 63 (50.5) 14 118.9

Total 597 649 563 5.9

PBIT (%)

T& Dist business 11.6 10.6 10.4

Real Estate Division 85.7 - 66.7

Energy - 4.9 4.9

Infrastructure 3.5 8.5 2.8

Source: Company

n Company reported growth of 12.8% in energy segment. Infrastructure segmenthas reported growth of 20% in the quarter.

n Company has reported significant rise of 30% YoY in interest expense for thequarter at Rs 242 mn on account of increase in interest rates negatively affectingfunding of the working capital.

n Company has been deploying significant resources in its subsidiary JMC projectsinvolved in road construction projects. We believe that increasing competition inroad projects and increase in interest rates are likely to pose downside risk to ourestimates.



Order book at 1.5x FY13E sales offers meaningful visibility; in-creasing competition in the industry especially from fringe play-ers remains a concern for the industryn KPTL current standalone order book stands at over Rs 60 bn. The order book

break up comprises 90% of transmission, 5% of distribution and 5% of ordersfrom infrastructure space.

n We opine that the current order book at 1.5x FY13E sales provides visibility fornext two years. However we believe that delays in fresh order flows fromPowergrid is a matter of concern for the overall growth of industry.

n We opine that orders flows from PGCIL are critical at this point and KPTL with itscomprehensive domain expertise coupled with timely execution capability willenormously benefit by securing high-quality power transmission projects in future.

Earnings Outlook: increase in execution cycle, rising input prices,labour cost and interest rates likely to hamper growth in mediumterm; revise earnings estimate downwards for FY12n Management expects meaningful improvement in JMC's numbers over in FY12-

13 in view of the improved margins of its order backlog.

n The net raised sum of Rs 4.2 bn in last fiscal has been utilized in working capitalto the tune of Rs 1.04 bn and remaining is invested in debt funds. Company in-tends to utilize the remainder in ramping up its BOOT and JMC operations.

n We expect revenues to grow at 16% CAGR between FY11-13E.

n We reduce our earnings estimate for FY12 to factor in moderation in operatingmargins on account of 1) increasing competition leading to pricing pressure innew orders 2) increase in input prices 3) continuing wage inflation.

n In our estimates we build EBITDA margin of 11.4% and 10.2% in FY12E andFY13E respectively. We also opine that increasing interest rates trend is likely toincrease finance charges for the funding of working capital in the same period.

n We value the company on DCF based methodology and build long term EBITDAmargins of 10.5% (11.5% earlier).

n In view of the changes we have made to our DCF, we arrive at a one year pricetarget of Rs 140 on company's stock.

Change in earnings estimate FY12

Rs (mn) New Old Change (%)

Revenue 32,526 35,149 (7.5)

EBITDA 3,696 4,223 (12.5)

PAT 1,918 2,345 (18.2)

EPS (Rs) 12.4 15.2 (18.4)

Source: Kotak Securities - Private Client Research

Valuation & Recommendationn We believe that the company is favorably poised in terms of capacity and execu-

tion, to benefit from recent thrust in T&D spending in India.

n At CMP of Rs.99, the stock trades at 5.3x EV/EBITDA and 7.2x P/E based onFY13E earnings.

n We maintain our BUY rating on the stock given adequate upside to our DCFbased target price of Rs.140 (Rs 240 earlier).

We maintain BUY on KalpataruPower Transmission with a

revised price target of Rs.140



M&M FINANCIAL SERVICES

PRICE: RS.638 RECOMMENDATION: BUYTARGET PRICE: RS.810 FY13E P/E: 9.6X; P/ABV: 2.0X

Core performance came almost in line with our expectations; as-set quality remained stable. Retain BUY on the stock with revisedTP.q Reported NII came at Rs.3.9 bn (22.8% YoY) in Q2FY12 against our esti-

mate of Rs.3.81 bn on back of buoyant rural market behaviour. It waswell supported by strong loan growth during Q2FY12 (54.0% YoY; 13.8%QoQ). Net profit grew at slightly moderate pace (16.3% YoY; Rs.1.36 bn)during Q2FY12 on back of higher provisions (56.2% YoY).

q While gross spread declined from 11.5% in Q2FY11 to 10.2% in Q2FY12on back of change in asset mix, net spread declined by only 50 bps to4.9% during Q2FY12. Moreover, net spread improved sequentially from4.4% in Q1FY12.

q Strong momentum in business growth continued for MMFSL duringQ2FY12 - AUM grew 40.7% YoY (11.6% QoQ) mainly driven by more sur-plus funds in the hands of rural and semi-urban populace, where MMFSLhas a strong presence. Asset mix composition largely remained un-changed with slight up-tick in Auto/utility vehicle (M&M) and 'CV & Con-struction Equipment' segments.

q Asset quality remained stable on back of good monsoon during last 18-20 months along with better labour and asset absorption. In absoluteterms, gross NPA remained flat (decline of 1%), while net NPA rose 20%QoQ.

q We believe that rural market behaviour is still buoyant and driven moreby the cash flows and not by the movement in interest rate. With goodmonsoon during last 18-20 months along with better asset and labourabsorption leading to multiple cash flows in the hands of rural populace,MMFSL is better placed to deliver superior growth during FY12-13E.

q At CMP, stock is trading at 9.6x its FY13E earnings and 2.0x its FY13E ABVand hence we maintain BUY rating on the stock with TP of Rs.810 (Rs.840earlier) based on 2.5x its FY13 ABV.

Core performance came almost in line with our expectations; de-cline in net spread is marginal despite sharp decline in grossspread due to change in asset mix.n Reported NII came at Rs.3.9 bn (22.8% YoY) in Q2FY12 against our estimate of

Rs.3.81 bn on back of buoyant rural market behaviour. It was well supported bystrong loan growth during Q2FY12 (54.0% YoY; 13.8% QoQ). Net profit grew atslightly moderate pace (16.3% YoY; Rs.1.36 bn) during Q2FY12 on back ofhigher provisions (56.2% YoY).

n While gross spread declined from 11.5% in Q2FY11 to 10.2% in Q2FY12 onback of change in asset mix, net spread declined by only 50 bps to 4.9% duringQ2FY12. Moreover, net spread improved sequentially from 4.4% in Q1FY12.

RESULT UPDATE

Saday [email protected]+91 22 6621 6312



Q2FY12 Performance

(Rs mn) Q2FY12 Q1FY12 Q2FY11 YoY (%) QoQ (%)

Income from operations 6,491 5,477 4,696 38.2 18.5

Interest Expenses 2,589 2,160 1,518 70.6 19.9

Net Interest Income 3,902 3,317 3,178 22.8 17.6

Other income 159 163 93

Total income 4,061 3,480 3,271 24.1 16.7

Operating cost 1,521 1,406 1,194 27.4 8.2

Employee cost 510 519 369

Other operating expenses 1,011 886 825

Operating profit 2,539 2,074 2,077 22.3 22.4

Provision and write offs 523 561 335 56.2 -6.8

Profit before tax 2,016 1,513 1,742 15.7 33.3

Provision for taxes 661 491 577

Net profit 1,355 1,022 1,165 16.3 32.6

EPS 13.2 10.0 12.1

Cost to income (%) 37.5 40.4 36.5

Effective Tax rate (%) 32.8 32.4 33.1

Advances (Rs bn) 158,588 139,308 102,965 54.0 13.8

Gross NPA 4.0 4.6 5.8

Net NPA 1.0 1.0 1.1

Provision coverage (%) 75.3 79.7 82.5

Source: Company

Spread analysis

Q1FY11 H1FY11 9MFY11 FY11 Q1FY12 Q2FY12

Total Income/Average Assets 16.6 17.0 17.4 17.9 16.2 16.5

Interest/Average Assets 5.5 5.5 5.7 5.8 6.2 6.3

Gross spreads 11.1 11.5 11.7 12.1 10.0 10.2

Overheads/average assets 4.4 4.4 4.3 4.4 4.0 3.9

Write offs & provisions/Avg assets 2.3 1.7 1.8 1.4 1.6 1.4

Net spreads 4.4 5.4 5.6 6.3 4.4 4.9

Source: Company



Strong business growth continues; asset mix composition largelyremained unchanged with slight up-tick in Auto/utility vehicle(M&M) and 'CV & Construction Equipment' segments.n Strong momentum in business growth continued for MMFSL during Q2FY12 -

AUM grew 40.7% YoY (11.6% QoQ) mainly driven by more surplus funds in thehands of rural and semi-urban populace, where MMFSL has a strong presence.

n Disbursement during Q2FY12 was also strong at Rs.44.5 bn (32.4% YoY) as com-pared to Rs.33.6 bn witnessed during Q2FY11. Out of this, ~32% went to Cars,~27% to Auto/UVs, ~20% to tractors and ~11% to CVs. Management has indi-cated about some pressures prevailing on the personal car segment; however,Mahindra Finance is currently financing on the average of ~9000 Maruti cars/month, especially in rural & semi-urban market.

n Asset mix composition largely remained unchanged with slight sequential up-tickin Auto/utility vehicle (M&M) and 'CV & Construction Equipment' segments. Atthe end of Q2FY12, AUM composition remained largely stable with 32% expo-sure to auto/utility vehicles (M&M), 20% to tractors (M&M) and 31% to cars (in-cluding non-M&M vehicles). Good monsoon during last 18-20 months, higherallocation to government programs like NREGA etc and enhancement in theminimum support prices (MSP) of various crops resulted in the improved cashflows to rural India and hence helped the M&M Financial Services which has astrong presence (~80% branches) in rural areas.

Asset quality remained stable on back of good monsoon duringlast 18-20 months along with better labour and asset absorption;its QoQ deterioration has to do more with the seasonal factors.Asset quality remained stable on back of good monsoon during last 18-20 monthsalong with better labour and asset absorption. In absolute terms, gross NPA re-mained flat (decline of 1%), while net NPA rose 20% QoQ.

In percentage terms, gross NPA declined to 4.0% of total assets at the end ofQ2FY12 as compared to 5.8% at the end of Q2FY11 and 4.6% at the end ofQ1FY12. Similarly, net NPA as a percentage of total assets also declined to 1.0% atthe end of Q2FY12 as against 1.1% at the end of Q2FY11 (stable QoQ).

Trend in asset quality

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

Gross NPA (%) 6.9 5.8 5.6 4.0 4.6 4.4

Net NPA (%) 1.3 1.1 1.1 0.6 1.0 1.0

Coverage Ratio 82.4 82.5 81.6 86.4 79.7 75.3

Source: Company

We believe, stable asset quality has come on the back of improving cash flows inrural India with rising government allocation to rural employment generation/devel-opment programs as well as rise in MSP of various crops. We are of the view that -improved operating scenario, revival in agriculture growth and more govt's focus oninclusive growth to help arrest incremental slippages and will also aid better recover-ies. Going forward, we opine that MMFSL's asset quality will continue to improve.

Its provision coverage ratio stands at healthy 75.3% at the end of Q2FY12, providingcushion to earnings in the future from any asset quality deterioration.



Valuation and recommendationsWe believe that rural market behaviour is still buoyant and driven more by the cashflows and not by the movement in interest rate. With good monsoon during last 18-20 months along with better asset and labour absorption leading to multiple cashflows in the hands of rural populace, MMFSL is better placed to deliver superiorgrowth during FY12-13E.

We expect MMFSL to report healthy earnings 21.0% CAGR during FY11-13E andstrong return profile (RoA: 4.4%; RoE: 21.0% during FY13E).

At CMP, stock is trading at reasonable valuation (9.6x its FY13E earnings and 2.0xits FY13E ABV) and hence we maintain BUY rating on the stock with a revised TP ofRs.810 (Rs.840 earlier) based on 2.5x its FY13 ABV.

Summary Table

(Rs mn) FY10 FY11 FY12E FY12E

Interest Income 15,307.7 19,739.3 26,094.6 32510.5

Interest expenses 5,017.3 6,602.1 10,241.0 13126.7

NII 10,290.4 13,137.2 15,853.6 19383.8

Growth (%) 20 28 21 22

Other Income 380.3 386.5 541.1 595.2

Total Income 10,670.7 13,523.7 16,394.7 19979.1

Optg Profit 7,420.9 8,591.5 10,018.0 12230.0

PAT 3,427.0 4,631.1 5,533.5 6781.9

Growth (%) 60 35 19.5 22.6

Gross NPA (%) 6.7 5.0 4.2 3.6

Net NPA (%) 1.0 0.7 0.9 0.7

NIM on Assets (%) 10.6 10.4 9.8 9.5

RoA (%) 4.6 4.9 4.6 4.4

RoE (%) 21.4 21.9 20.4 21.3

Divi. Payout Ratio (%) 7.5 10.0 12.5 15.0

EPS (Rs) 35.7 45.2 54.0 66.2

BV (Rs) 180.1 244.4 285.2 335.1

Adj. BV (Rs) 171.5 237.2 273.7 322.4

P/E (x) 17.9 14.1 11.8 9.6

P/ABV (x) 3.7 2.7 2.3 2.0

Source: Company, Kotak Securities - Private Client Research

We recommend BUY on M&MFinancial Services with a price

target of Rs.810



UNION BANK OF INDIA

PRICE: RS.212 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.275 FY13E P/E: 4.3X; P/ABV: 1.0X

Q2FY12 Results: NII came ahead of expectations; however, netprofit disappointed on back of higher NPA provisions & mutednon-interest income. Slippage spiked with the implementationof final leg of system based NPA recognition system. Downgrad-ing the stock to ACCUMULATE from BUY earlier.q Net interest income (NII) came slightly ahead of expectations (Rs.16.6 bn

as against estimate of Rs.16.23 bn) during Q2FY12 on back of improve-ment in LDR (loan deposit ratio) from 71.1 % at the end of Q2FY11 to75.3% at the end of Q2FY12. NIM rose 11 bps QoQ mainly on back ofimprovement in CASA mix (57 bps QoQ) and higher LDR.

q Net profit came at Rs.3.53 bn (16.2% YoY; against our estimate of Rs.4.81bn) lower than expectations mainly on the back of high provisions(Rs.6.23 bn in Q2FY12) and muted non-interest income (declined by 1.7%YoY).

q Deterioration in asset quality is likely to impact the stock performance innear term, in our view. Gross NPA and net NPA spiked 45.8% YoY (37.2%QoQ) and 102.4% YoY (56.3% QoQ), respectively, during Q2FY12. Slip-page (4.76% annualized) also spiked with the implementation of finalleg of system based NPA recognition system. Now, cumulative restruc-tured book stands at Rs.66.01 bn (~4.5% of total advances).

q We have cut the earnings estimate to factor in higher credit costs duringFY12-13 (119 bps and 92 bps for FY12 & FY13, respectively) and now ex-pect earnings to grow 10.9% CAGR during FY11-13E. We expect RoA andRoE to come at ~0.9% and ~19% during FY13, showing sharp decline inits return profile.

q At the current market price of Rs.212, the stock is trading at 4.3x itsFY13E earnings and 1.0x its FY13E ABV. Near-term risk persists fromhigher delinquencies and lower coverage ratio and hence we are reduc-ing the TP to Rs.275 (Rs.400 earlier) based on 1.3x of its FY13E adjustedbook value.

Result Performance


Interest on advances 38586.2 27757.9 39.0

Interest on Investment 11409.3 9851.2 15.8

Interest on RBI/ banks' balances 858.3 561.2 52.9

Other interest 250.6 1352.1 -81.5

Total Interest earned 51104.4 39522.4 29.3

Interest expenses 34492.2 24164.0 42.7

Net interest income 16612.2 15358.4 8.2

Other income 5009.3 5096.4 -1.7

Net Revenue (NII + Other income) 21621.5 20454.8 5.7

Operating Expenses 9570.9 9148.5 4.6

Payments to / Provisions for employees 5913.5 5919.4 -0.1

Other operating expenses 3657.4 3229.1 13.3

Operating profit 12050.6 11306.3 6.6

Provisions & contingencies 6228.0 5988.9 4.0

Provision for taxes 2297.4 2283.5 0.6

Net profit 3525.2 3033.9 16.2

EPS (Rs.) 6.72 6.01 11.8

Source: Company

RESULT UPDATE

Saday [email protected]+91 22 6621 6312



NII came slightly ahead of expectations; however, net profit dis-appoints on back of higher NPA provisions & muted non-interestincome.Net interest income (NII) came slightly ahead of expectations (Rs.16.6 bn as againstestimate of Rs.16.23 bn) during Q2FY12 on back of improvement in LDR (loan de-posit ratio) from 71.1 % at the end of Q2FY11 to 75.3% at the end of Q2FY12. NIMrose 11 bps QoQ mainly on back of improvement in CASA mix (57 bps QoQ) andhigher LDR.

Net profit came at Rs.3.53 bn (16.2% YoY; against our estimate of Rs.4.81 bn)lower than expectations mainly on the back of high provisions (Rs.6.23 bn inQ2FY12) and muted non-interest income (declined by 1.7% YoY).

Non-interest income was flat due to muted core fee-income (3.8% YoY) and declinein the treasury profit (decline of 10.3% YoY). For last couple of quarters, we arewitnessing flattish core fee-based income, a departure from the ~15% averagegrowth witnessed during previous 5 years.

Non-interest income

(Rs bn) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 YoY (%) QoQ (%)

Core Fee Income 2.42 2.87 3.54 3.32 2.52 2.98 3.8 18.3

Profit on sale of Investments 1.55 1.79 1.08 1.71 1.73 1.61 -10.1 -6.9

Recovery from W/O accounts 0.38 0.44 0.31 0.98 0.59 0.42 -4.5 -28.8

Total non-interest income 4.35 5.10 4.94 6.01 4.84 5.01 -1.7 3.5

Source: Company

Moderate business growth; conscious strategy helped in LDR im-provement. Deposit mobilization would be the key to future loangrowth, as little scope is left for further improvement in LDR.Total business of the bank rose moderately (12.7% YoY) to Rs.3428.6 bn at the endof Q2FY12 on back of slower growth in deposits as well as loan book. Bank's depos-its grew by only 10% YoY at the end of Q2FY12 and is still lies below the levels wit-nessed at the end of FY11.

CASA share improved sequentially from 31.5% at the end of Q1FY12 to 32.1% atthe end of Q2FY12 mainly due to run down of term deposits; CASA mix rose by only7.9% YoY (flat QoQ) while term deposit declined 2.6% sequentially.

Gross advances grew 16.5% YoY (1.2% QoQ) to Rs.1472.8 bn at the end ofQ2FY12. Faster growth in loan book vis-à-vis deposit led to improvement in LDRfrom 71.1 % at the end of Q2FY11 to 75.3% at the end of Q2FY12.

Slippage spiked with the implementation of final leg of systembased NPA recognition system; total stressed asset at ~8% is onthe higher side vis-à-vis its peers.Deterioration in asset quality is likely to impact the stock performance in near term,in our view. Gross NPA and net NPA spiked 45.8% YoY (37.2% QoQ) and 102.4%YoY (56.3% QoQ), respectively, during Q2FY12. Slippage (4.76% annualized)spiked with the implementation of final leg of system based NPA recognition sys-tem.

In percentage terms, gross NPA and net NPA stand at 3.49% and 2.04% at the endof Q2FY12. Now, cumulative restructured book stands at Rs.66.01 bn (~4.5% oftotal advances). Hence total stressed book of the bank is ~8% of its loan book. Webelieve rise in slippage (Rs.18.21 bn; 4.76% annualized slippage ratio duringQ2FY12) and lower coverage levels (~60%) imply lower cushion to absorb any nega-tive shock on its asset quality in a tight macro environment.



Union bank had the legacy of higher coverage ratio (~93% during FY09) which hasbeen providing cushion to its earnins; however, it has come down to ~60% at theend of Q2FY12. We believe higher credit costs on back of spike in delinquencies islikely to remain an overhang on the stock. We are modeling higher credit costs dur-ing FY12-13 (119 bps and 92 bps for FY12 & FY13, respectively) as against 1.0%witnessed during FY11.

Valuation & recommendationAlthough management has guided that gross NPA is likely to come down to 2.65%by the end of FY12 (currently at 3.5%), we believe rise in slippage (Rs.18.21 bn;4.76% annualized slippage ratio during Q2FY12) and lower coverage levels (~60%)imply lower cushion to absorb likely deterioration in the asset quality.

We have cut the earnings estimate to factor in higher credit costs during FY12-13(119 bps and 92 bps for FY12 & FY13, respectively) and now expect earnings togrow 10.9% CAGR during FY11-13E. We expect RoA and RoE to come at ~0.9%and ~19% during FY13, showing sharp decline in its return profile.

Rolling 1-year forward P/ABV


Rolling 1-year forward P/E band


At the current market price of Rs.212, the stock is trading at 4.3x its FY13E earningsand 1.0x its FY13E ABV. Near-term risk persists from higher delinquencies and lowercoverage ratio and hence we are reducing the TP to Rs.275 (Rs.400 earlier) basedon 1.3x of its FY13E adjusted book value.

We recommend ACCUMULATEon Union Bank of India with arevised price target of Rs.275

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Key data

(Rs bn) FY10 FY11 FY12E FY13E

Interest income 133.03 164.53 202.13 230.32

Interest expense 91.10 102.36 133.49 151.49

Net interest income 41.92 62.16 68.63 78.83

Growth (%) 9.9 48.3 10.4 14.9

Other income 19.75 20.39 19.51 22.49

Gross profit 36.59 43.06 47.66 55.68

Net profit 20.75 20.81 18.66 25.61

Growth (%) 20.2 0.3 -10.3 37.3

Gross NPA (%) 2.2 2.4 3.0 2.9

Net NPA (%) 0.8 1.2 1.8 1.6

Net interest margin (%) 2.7 3.3 3.1 3.1

CAR (%) 12.5 13.0 12.3 12.0

RoE (%) 26.2 18.9 15.8 19.2

RoAA (%) 1.2 1.0 0.7 0.9

Dividend per share (Rs) 5.5 8.0 9.0 10.0

EPS (Rs) 41.1 39.7 35.6 48.8

Adjusted BVPS (Rs) 155.3 179.0 177.5 211.5

P/E (x) 5.2 5.3 6.0 4.3

P/ABV (x) 1.4 1.2 1.2 1.0




Trade details of bulk deals

Date Scrip name Name of client Buy/ Quantity Avg.Sell of shares price

(Rs)

24-Oct Aadi Inds Priti Manoj Ruparel B 95,000 16.7

24-Oct Aadi Inds Mayur Ramnikbhai Patel S 183,658 17.2

24-Oct Aroma Ent Rupesh Bhogilal Bhatia B 51,000 84.1

24-Oct Aroma Ent Chunilal Mishrimal Sanghvi S 51,000 84.1

24-Oct Ashutosh Paper Stellar Capital Services Pvt Ltd B 39,500 175.3

24-Oct Birla Pacific Med Kirti Ramji Kothari B 675,000 18.5

24-Oct Clarus Finance Chhaya Gupta B 105,000 49.5

24-Oct Coral India Chetan Doshi B 99,750 19.3

24-Oct Coral India Nitin C Dadia S 100,000 19.3

24-Oct Diamant Kiran Bhiku Bhanaes B 365,000 17.0

24-Oct Diamant Jinal Apurva Rawal S 218,000 16.8

24-Oct Flexituff Pasupati Tradelink Pvt Ltd S 186,005 168.1

24-Oct Gemstone Invest Jigar Praful Ghoghari S 706,798 10.0

24-Oct Gflfin Kirti Kantilal Mehta B 15,000 99.5

24-Oct Golden Tob Man Mohan Damani B 100,000 54.5

24-Oct Golden Tob Progressive Star Finance Pvt Ltd S 100,000 54.5

24-Oct Indian Info Navin Kumar Bhuwania (HUF) B 25,000 17.7

24-Oct Kailash Ficom Vantage Financial Services Pvt Ltd B 296,504 30.4

24-Oct Kailash Ficom Varun D Shah S 272,413 30.3

24-Oct Maharashtra Corp Ratanlal Ladda B 48,038 8.8

24-Oct Maharashtra Corp Chandrakanta Ladda S 18,575 8.8

24-Oct Maharashtra Corp Sheetal Laddha S 29,253 8.8

24-Oct Mahaveer Info Khambatta Securities Ltd B 31,000 18.1

24-Oct Midvalley Ent Tirthankar Shares And Ser Pvt Ltd S 266,646 91.3

24-Oct Monotype India Axis Realtors Pvt Ltd B 12,000 14.8

24-Oct Monotype India Pratibha Distributors Pvt Ltd S 75,000 14.7

24-Oct Monotype India Touchstone Finvest Services Pvt Ltd S 16,300 14.8

24-Oct Parichay Invest Nila Babubhai Shah B 8,500 33.0

24-Oct Parichay Invest Rukmani Devi B 6,150 30.4

24-Oct Parichay Invest Amrit L Gandhi (HUF) B 12,000 30.5

24-Oct Parichay Invest Dominent Fincap Services Pvt Ltd S 6,450 32.8

24-Oct Polytex India Kiran Bhiku Bhanaes B 93,000 125.5

24-Oct Readymade Steel Blue Peacock Securities Pvt Ltd B 81,533 58.6

24-Oct Regency Trust Chirag Dineshkumar Shah S 95,000 74.0

24-Oct Rubra Med Alluri Hema Venkata Vijayalakshmi S 30,400 2.3

24-Oct Rushil Decor Samirkumar Dipakbhai Shah B 75,000 163.5

24-Oct Rushil Decor Bmd Exports Pvt Ltd S 124,500 161.9

24-Oct SB&T Intl India Max Investment Fund Ltd B 430,000 16.0

24-Oct SB&T Intl Prime India Investment Fund Ltd S 430,000 16.0

24-Oct Taksheel Globalworth Securities Ltd B 182,358 32.7

24-Oct Vakrangee Soft Dream River Neral Developers Pvt Ltd B 150,000 352.0

24-Oct Vakrangee Soft Dinesh Birdilal Nandwana S 150,000 352.0

Source: BSE

Bulk deals



Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

Infosys Tech 2,767 1.6 7.1 0.8

Reliance Ind 847 1.3 6.0 2.1

ITC 207 1.5 5.2 9.3

Losers

Infosys Tech 2,767 1.6 7.1 0.8

Reliance Ind 847 1.3 6.0 2.1

ITC 207 1.5 5.2 9.3

Source: Bloomberg

Gainers & Losers

Forthcoming events Company/MarketDate Event

25-Oct Alstom Projects, BASF India, DRL, Engineers India, KEC Int, Kotak Mahindra Bank,MIRC Elect, NTPC, Oracle Finance, Sesa Goa earnings expected

28-Oct BEML, Bharat Elect, Indian Hotels, NHPC, Tata Elxsi, Tata Global earningsexpected

Source: Bloomberg



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Fundamental Research TeamDipen ShahIT, [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, Cement, Mid [email protected]+91 22 6621 6302

Saurabh AgrawalMetals, [email protected]+91 22 6621 6309

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, [email protected]+91 22 6621 6222

Jayesh [email protected]+91 22 6652 9172

K. [email protected]+91 22 6621 6311

Technical Research Team

Shrikant [email protected]+91 22 6621 6360

Amol [email protected]+91 20 6620 3350

Premshankar [email protected]+91 22 6621 6261

Derivatives Research TeamSahaj [email protected]+91 22 6621 6343

Rahul [email protected]+91 22 6621 6198

Malay [email protected]+91 22 6621 6350

Prashanth [email protected]+91 22 6621 6110

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