Morning Insight 26 Jul 2012Ashok Leyland has said it was planning to reduce its capex for the current financial year by around 25% to Rs 4.5bn, as the company planned to conserve cash

JULY 26, 2012

Economy News A majority of the stocks that the NSE has decided to remove from the

futures and options (F&O) segment took a beating on Wednesday due tounwinding of positions by traders. Out of the 51 excluded stocks, 44 endedwith losses. These stocks which will be expelled from the F&O list from theOctober series, dropped as traders offloaded their holdings. BS)

In an order which would impact lakhs of people owning cars, the Gujarathigh court on Wednesday directed the state government to pass laws tomake it compulsory for all four-wheelers registered in Gujarat to convertto natural gas within one year. The order applies to both public andprivate vehicles running on petrol and diesel. (ET)

The government is ready to ban futures trade in volatile commodities,impose limits on stocks that traders keep and release grain, pulses andedible oils through ration shops to contain rising food prices, Food MinisterKV Thomas has said. (ET)

Corporate News The spat between Unitech Ltd and Norway's Telenor has escalated with

the former blocking a proposed Rs12bn rights issue by Uninor. Unitech Ltdhas written to the FIPB that its nominees on Uninor's board had not giventheir consent for the rights issue. It also alleged that the rights issue wasan indirect attempt by the Nordic company to bring in a new partner intothe venture.(BL)

Power Grid Corporation has a Rs420bn plan for setting up an exclusivecountrywide green corridor for renewable energy transmission. Thiswould be done over a period of five years. The investment was fortransmission of 40 GW of renewable energy capacity by 2030. (BL)

Pharma company Strides Arcolab has received investments of $12.5mnfrom French Development Financing Institution, Proparco. The investmentis in the form of equity participation for 20% stake in the company'sAfrican front-end arm. (BL)

The mediation process between software services exporter Infosys andJack Palmer, the whistle-blower employee who sued the company forallegedly circumventing visa rules in the US has failed. The case will nowgo to trial on August 20. (ET)

Ashok Leyland has said it was planning to reduce its capex for thecurrent financial year by around 25% to Rs 4.5bn, as the company plannedto conserve cash on the back of a demand slowdown. (BS)

OMDC has got environment clearance from MOEF on July 24 for its Kolha-Roida iron ore and manganese mines in Odisha. The company plans toresume production of 3mpta of iron ore and 0.24mpta of manganese oreat the Kolha-Roida mines complex, spread over 254.952 hectares. (BL)

Sudarshan Chemicals Ltd has won a patent case against Germanpigment manufacturer Clariant Produkte which was claiming thatSudarshan pigment has infringed its patent. It was also held that Clarianthad issued unlawful threats to potential customers of Sudarshan.European Court of Justice based in Luxembourg will now assess damagesto be paid by Clariant to Sudarshan as a result of its wrongful threats. (BS)

Equity% Chg

25 Jul 12 1 Day 1 Mth 3 Mths

Indian IndicesSENSEX Index 16,846 (0.4) (0.4) (1.7)NIFTY Index 5,110 (0.4) (0.2) (1.5)BANKEX Index 11,784 (0.3) 2.5 1.0BSET Index 5,237 0.3 (6.9) (4.8)BSETCG INDEX 9,552 (0.9) (1.3) 1.4BSEOIL INDEX 7,969 (0.6) (0.1) 0.9CNXMcap Index 7,211 (0.7) 0.7 (2.4)BSESMCAP INDEX 6,556 (0.8) 2.1 (2.5)

World IndicesDow Jones 12,676 0.5 1.1 (4.0)Nasdaq 2,854 (0.3) 0.0 (6.4)FTSE 5,498 (0.0) 0.9 (4.4)NIKKEI 8,366 (1.4) (3.3) (12.4)HANGSENG 18,877 (0.1) (0.4) (9.1)

Value traded (Rs cr)25 Jul 12 % Chg - Day

Cash BSE 1,770 (0.4)Cash NSE 9,011 4.5Derivatives 181,966 20.2

Net inflows (Rs cr)24 Jul 12 % Chg MTD YTD

FII (211) (165.7) 9,378 51,458Mutual Fund 33 (112.3) (2,225) (8,284)

FII open interest (Rs cr)24 Jul 12 % Chg

FII Index Futures 16,414 (0.8)FII Index Options 47,203 0.9FII Stock Futures 27,905 (0.9)FII Stock Options 1,882 (2.3)

Advances / Declines (BSE)25 Jul 12 A B T Total % total

Advances 67 729 274 1,070 37Declines 135 1,284 285 1,704 59Unchanged 0 86 27 113 4

Commodity % Chg

25 Jul 12 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 88.8 (0.2) 11.9 (15.1)Gold (US$/OZ) 1,605.3 1.9 2.1 (3.2)Silver (US$/OZ) 27.3 1.9 1.1 (12.4)

Debt / forex market25 Jul 12 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % 8.3 8.2 8.3 N/ARe/US$ 56.2 56.1 57.0 52.5

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,

BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

15,000

16,600

18,200

19,800

Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

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

MORNING INSIGHT July 26, 2012

KPIT CUMMINS

PRICE: RS.128 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.143 FY13E P/E: 11X

We recommend buying the stock at declines. KPIT's 1QFY13 results were in line with expectations at the EBIDTA lev-

els. While revenues shot past expectations, margins were slightly lowerthan what we had estimated. Organic revenues grew by 5% QoQ in USDterms. This was higher than most industry peers. EBIDTA margins werelower QoQ as salary increments and visa costs set off the impact of ru-pee depreciation. The 3.25% volume growth comes on the back of highgrowth rates in the past six quarters.

Management commentary suggests decent visibility on revenues goingahead. Leading industry players have indicated continuing traction inautomotive, manufacturing and hi-tech verticals, the mainstay of KPIT.We opine that, the company is strategically well positioned with focusverticals doing well. It has also made well - directed acquisitions whichshould help it penetrate clients and geographies. These acquisitionsshould scale up going ahead.

Strong additions to the pipeline and additions to client acquisition re-sources should lead to consistent revenue growth ahead. KPIT is now in-creasingly focusing on non-linear revenues and has filed about 40 pat-ents. 5% of overall revenues (mostly from auto electronics) currently ac-crue from non-linear initiatives. KPIT plans to have 25% of revenues fromthese initiatives in 3 years' time. We believe this is an important lever toprotect and sustain margins.

KPIT has maintained the target of 200 vehicle conversions by the calendarend. As part of this program it will be converting vehicles of up to 4 dif-ferent fleets and these trials would run for a period of up to 6 months.We have not yet accounted for these revenues in our projections.

We have increased our FY13E estimates on the back of the 1Q numbersand the changed assumption on the exchange rate. We expect FY13Eearnings at Rs.11.2 per share (Rs.9.4 earlier). Our PT stands at Rs.143(Rs.116 earlier) based on FY13E earnings. There could be upsides basedon Revolo financials. We have maintained our valuation target and at ourTP, the stock will be valued at about 12.5x FY13E earnings. This is a suit-able discount to larger peers. We remain positive on the long term pros-pects of KPIT. Maintain ACCUMULATE due to adequate valuations and inthe backdrop of a volatile macro scene.

Slower-than-expected recovery in demand from major user economiesand a sharper-than-expected appreciation in rupee remain the key risksfor earnings. Revolo earnings can provide significant upsides, if success-ful.

Revenues up 5% QoQ in USD terms; volumes up by 3.25% Revenues grew by about 5% in USD terms, largely led by volumes which, grew

by about 3.25%. Revenues include those of Systime (WEF 4QFY12). KPIT nowholds about 57% in Systime.

KPIT has hived off the hardware business of Semi-conductor Solutions Group(SSG). The 1Q numbers exclude these. The 5% growth in USD terms is afterexcluding these revenues from 4Q as well.

The 3.2% volume growth came on the back of a 9% growth in 4QFY12, 4%growth in 3Q, 5% in 2Q and 4% in 1Q.

Average realizations were marginally higher because of a change in businessmix. Like-to-like improvement was marginal, we understand. Realisations haveimproved in 4 out of the last 5 quarters, which is encouraging.

Summary table

(Rs mn) FY11 FY12 FY13E

Sales 10,230 15,000 21,682Growth (%) 39.8 46.6 44.5EBITDA 1,522 2,181 3,346EBITDA margin (%) 14.9 14.5 15.4PBT 1,103 1,786 2,798Net profit 947 1,453 2,029EPS (Rs) 5.4 4.1 11.4Growth (%) (1.3) 50.6 39.4CEPS (Rs) 7.8 5.3 14.2BV (Rs/share) 34.5 40.0 50.9Dividend / share (Rs) 0.4 0.4 0.4ROE (%) 19.1 22.1 25.0ROCE (%) 18.2 23.5 30.2Net cash (debt) 991 284 1,728NW Capital (Days) 90.1 106.6 86.7P/E (x) 23.6 31.3 11.2P/BV (x) 3.7 6.4 2.5EV/Sales (x) 2.1 1.5 1.0EV/EBITDA (x) 14.3 10.3 6.3

Source: Company, Kotak Securities - PrivateClient Research

RESULT UPDATE

Dipen [email protected]+91 22 6621 6301



1QFY13 results

(Rs mn) 1QFY13* 4QFY12* % chg 1QFY12 % chg

Turnover 5382.7 4800.1 12.1 3161.2 70.3

Expenditure 4576.2 4039.8 2764.1

EBDITA 806.5 760.3 6.1 397.1 103.1

Depreciation 113.5 101.7 94.4

EBIT 693.0 658.6 5.2 302.8 128.9

Interest 29.8 39.0 10.4

Other Income 30.3 -112.9 22.5

PBT 693.6 506.7 36.9 314.9 120.3

Tax 184.8 149.8 70.9

PAT 508.8 356.9 42.6 243.9 108.6

Minority Int 12.3 22.0 3.0

XO Item 26.7 100.5 0.0

Adjusted PAT 469.8 234.5 100.3 240.9 95.0

EPS (Rs) 2.6 1.3 1.4

Margins

OPM (%) 15.0 15.8 12.6

GPM (%) 12.9 13.7 9.6

NPM (%) 9.5 7.4 7.7

Source : Company * - includes Systime financials on a line-by-line basis, excludes SSG hardware

revenues

Focus verticals seeing continued spends According to the management, the focus verticals are seeing continued spends

though cost rationalization is also a theme for most customers.

Larger industry peers have also indicated continued order traction from verticalslike automotive and hi-tech. KPIT derives a substantial part of revenues fromthese industries.

The automotive industry is investing in developing technologies that addressemerging trends such as alternate mobility concepts of hybrid or electric vehiclesand the software requirements for in-car 'value added services'.

Automakers are spending good amount of their R&D budgets on improving fuelefficiency of their vehicles through focus on areas of powertrain technology, bat-tery management systems and light weight body materials

Manufacturing companies are looking at agility in operations, seamless integra-tion of business processes, efficient design and development of new products,coupled with reduction in time-to-market.

IT spending is up around 4% in manufacturing companies compared with 2.2%across all industries during the period from January to April, 2012, according tothe management.

This segment is also seeing high demand for engineering services, a view echoedby companies like Geometric.

Utilities sector is undergoing modernization, driven by state and federal man-dates for smart meters, smart grids and other technological requirements thatcombines traditional IT with advanced applications to develop operational andconsumer related technology solutions.

Environmental concerns are also driving investments in newer infrastructure andsustainable energy sources.



New accounts and Cummins KPIT is benefiting from the continuing demand in its focus verticals. The com-

pany has been able to win several new orders from existing and new accounts.

The large deals which the company had won in earlier quarters have startedramping up and led to the above-expected growth during the quarter.

According to the management, the order pipeline is strong. The deal flow isstronger in medium sized deals though the pipeline consists a few large dealsalso.

Revenues from Cummins grew by 18.5% sequentially during the quarter (about3.2% growth in 4QFY12).

Cummins has been driving in operational efficiencies through internal cost con-trol measures but is also continuing with the ongoing projects

KPIT is looking at more options to penetrate it further. On the IT business it islikely to roll out global programs to meet its global business needs and on theengineering side it is expected to continue investing in products to stay ahead ofthe competition.

The environment is positive and the company is not experiencing any constraintsin this account.

KPIT has enough clarity on the work it wants to do within Cummins and expectsto get more orders from this client.

Services The revenue growth in 1QFY13 came largely due to revenues from IES and A&E

segments, which reported about 16% QoQ growth each..

The A&E practice is benefiting from increasing spends on infotainment,Powertrain and AUTOSAR.

In IES, the inter-practice cross-selling has started gaining momentum as KPIT haswon deals along with CPG and SYSTIME teams. Efforts are on to extend this tothe JDE customers also.

Systime has reported an 11.7% QoQ growth.

SAP practice is witnessing traction, especially in the mid-market Utility industry,according to the management. Utilities are focusing on smart grid adoption.

The company increased the number of SAP certified solutions to 6 in US and 5 inIndia. It has started seeing traction for these non-linear offerings.

KPIT has added a consulting layer above its services portfolio, which has allowedit to enter the customers relatively early. The company continues to make invest-ments in the Business transformation Unit.

Non-linear revenues is the focus The company has been focusing on non-linear initiatives.

As part of its efforts in this direction, the company had entered into an engage-ment with a Japanese Tier I for AUTOSAR license sale for their new vehicle pro-gram.

During the quarter, KPIT launched its latest LINUX based platform for RapidPrototyping and emulation of AUTOSAR based applications, developed jointlywith a German OEM.

The company has filed around 40 patents already.

Currently, about 5% of overall revenues (mostly from auto electronics) currentlyaccrue from non-linear initiatives. KPIT plans to have 25% of revenues fromthese initiatives in 3 years' time. We believe this is an important lever to protectand sustain margins.



SYSTIME Systime reported an 11.7% QoQ growth in revenues during the quarter. The fo-

cus of the combined operation is now on medium size deals ($3 - $5 mn).

We note that, with the SYSTIME acquisition, KPIT has a strong Oracle and JDEdwards practice.

Systime has achieved double-digit EBITDA margins for 1Q, even after accountingfor compensation increases.

KPIT is also looking at increasing the productivity of the sales and delivery teams.SYSTIME's margins are target to reach KPIT's levels in FY13.

KPIT now has 57% stake in Systime and hence, financials have been consoli-dated on a line-by-line basis.

We see the acquisition of a 50% stake in SYSTIME (to buy remaining stake overa 3-year period) as a good strategic fit for KPIT.

REVOLO - commercial production may start in FY14 KPIT is holding a major trial of Revolo. 200 vehicles have been converted into

plug-in hybrid models by installing Revolo kits. These trials will run for 6 months.

The company is looking to have some support from the regulatory side. We un-derstand that, the launch will happen only after it gets the regulatory support.

We expect the commercial production to start sometime in the next fiscal.

We have not assumed any revenues from this JV in our estimates.

Employee strength up marginally The total employee strength of KPIT stood at 7873 (7719) as at the quarter end.

Capacity utilization was almost stable at the 4QFY12 levels.

EBITDA Margins - lower EBIDTA margins fell from the 4Q levels despite the sharp rupee depreciation,

which added about 230bps to the margins remained. Scale benefits also helped.

However, salary increments (300bps) and higher visa costs (35bps) erased thesebenefits.

We believe that, the company has a few levers which will allow it to improvemargins going ahead.

The potential improvement in Systime's margins is an important lever.

It is also looking at a higher off-shore proportion to sustain and improve margins.Currently, about 47% of revenues come from off-shore services. KPIT is alsolooking at non-linear revenues (about 40 patents filed) to improve profitability.

Going forward, if billing rates improve, they may provide further cushion to mar-gins. The management has also indicated that it will rationalize low-margin, non-focus projects with a view to improve profitability.

Earnings estimates tweaked We have increased our FY13 earnings estimates post 1Q numbers and on

changed exchange rate assumption.

For FY13, we expect revenues to grow by 45%, largely on the back of rupeedepreciation and higher volumes. Part of this is due to Systime's consolidation.SYSTIME revenues will be for the full 12 months as against 3 months in FY12.

Rupee is expected to average 53 / USD in FY13, which may impact marginspositively. Margins are expected to improve YoY due to the rupee depreciationand efficiency gains, but higher salaries and the relatively low margins of Systime(consolidation for full year) may take away some of the gains.

PAT is expected to grow by 39% to Rs.2.03bn, an EPS of Rs.11.4



Valuations and recommendation The stock has moved up sharply in the past few sessions and is currently quoting

at 11x FY13E earnings.

We have accorded KPIT valuations higher than comparable peers, based on thehigher revenue growth and potential upsides to margins. The valuations are at asuitable discount to larger peers, though.

Our PT is at Rs.143. At our target price, KPIT's FY13E earnings will be discounted12.6x.

Maintain ACCUMULATE, while remaining positive on the long term prospects ofthe company.

Risks and concernsSlower-than-expected recovery in demand from major user economies and asharper-than-expected appreciation in rupee remain the key risks for earnings.Revolo earnings can provide significant upsides, if successful.

We maintain ACCUMULATErating on KPIT Cummins with a

revised price target of Rs.143



HCL TECHNOLOGIES LTD (HCLT)PRICE: RS.514 RECOMMENDATION: BUYTARGET PRICE: RS.570 FY13E P/E: 12X

HCLT's results were above our estimates. The 4.6% (2.9% in 3Q) volumegrowth in IT Services (3.5% in SW services and 9.2% in IMS) was better thanexpectations. HCLT has achieved consistency in revenues, especially inSoftware Services, over the past few quarters. The growth was acrossgeographies and verticals (except Telecom). Average realizations were stableon a CC basis. EBIDTA margins rose by 260bps, largely due to rupeedepreciation.

Management has indicated continuing headwinds for the industry in theform of an uncertain macro which is affecting decision-making. Thestructural change in the US BFSI sector is leading to vendor churn andsqueeze on margins for incumbents, according to the management. HCLT'sfocus on the churn market has yielded results in the past two quarters. Ityielded another 8 multi-million transformational deals in 4Q. The companyintends to focus on execution over the next 1-2 quarters. The companyadded 1885 employees after seeing a reduction in the previous quarter.

We have increased our earnings estimates for FY13 post 4QFY12 numbersand due to the depreciation in INR. Rupee is expected to average 52.5/ USDin FY13. EPS is expected to be Rs.42.8 in FY13 post ESOP-related charges. Weaccord valuations at a slight discount to those of Infosys, due to therelatively lower margins. Consequently, we arrive at a PT of Rs.570 (Rs.516).The company has consistently grown revenues and sustained margins overthe past few quarters. We upgrade the stock to BUY based on valuations. Asharp appreciation in the rupee against various currencies and a delay inrecovery in major user economies remain the key concerns.

4QFY12 results

(Rs mn) 4QFY12 3QFY12 QoQ (%) 4QFY11 YoY (%)

Turnover 59,191 52,156 13.5 43,036 37.5

Expenditure 46,182 42,565 35,088

Operating Profit 13,009 9,591 35.6 7,948 63.7

Depreciation 1,524 1,413 1,289

Gross Profit 11,485 8,178 6,659 72.5

Interest 0 0 0

Other Income (423) (136) 150

PBT 11,062 8,042 37.6 6,809 62.5

Tax 2,525 2,016 1,700

PAT 8,537 6,026 41.7 5,109 67.1

Share of income 0 0 0

ESOP charge 128 208 197

Minority interest (4) 1 -

Adj. PAT 8,413 5,817 44.6 4,912 71.3

Shares (mns) 706 706 706

EPS (Rs) * 11.9 8.2 7.0

OPM (%) 22.0 18.4 18.5

GPM (%) 19.4 15.7 15.5

NPM (%) 14.4 11.6 11.9

Source : Company

Summary table


Sales 160,381 210,312 244,591Growth (%) 27.6 31.1 16.3EBITDA 27,491 40,251 48,322EBITDA margin (%) 17.1 19.1 19.8PBT 21,952 33,441 41,896Net profit 16,197 24,555 30,250EPS (Rs) 22.9 34.8 42.8Growth (%) 30.7 51.6 23.2CEPS (Rs) 30.0 42.8 52.2BV (Rs/share) 119.5 152.0 190.7Dividend / share (Rs) 4.0 6.0 4.0ROE (%) 13.6 16.4 16.1ROCE (%) 14.2 18.6 19.3Net cash (debt) 2,769 6,228 23,087NW Capital (Days) 57.0 74.5 70.6P/E (x) 22.4 14.8 12.0P/BV (x) 4.3 3.4 2.7EV/Sales (x) 2.2 1.7 1.4EV/EBITDA (x) 13.1 8.9 7.0


RESULT UPDATE




CC growth of 4.6% - largely volume led Revenues grew by 3% in USD terms and by 4.6% in CC terms.

While the software services revenues grew by 3.5%, IMS reported a strong 9.2%rise on a CC basis. BPO had a 2% de-growth during the period.

The 4.9% growth was led by volumes as average realisations remained almostflat, we understand.

The CC growth was better than our estimates and also beat the growth reportedby most peers.

The overall client profile has improved for HCLT. HCLT earned more than$100mn (annualized) revenues from 5 clients in 4Q as compared to 4 in 3Q and1 in 1Q.

All the Top 10 clients of the company are in the Fortune 500 / Global 500 list.

HCLT has also been penetrating deeper into its clients by offering diverse ser-vices.

The Top 5 clients grew by 6.6% in CC terms and the Top 10 clients by 5.5%.

All geographies grew in CC terms, with Europe growing the fastest by 7.1% fol-lowed by APAC with a 6.9% CC growth.

Europe revenues have grown consistently at a CQGR of more than 4.5% for thepast 4 quarters, which is surprising, in the backdrop of a slowdown in that geog-raphy.

We understand that, the cost pressures are pushing European companies tooutsource and off-shore more, in turn helping Indian vendors.

The management has indicated that, companies in the Financials Services spacein Europe have initiated the vendor consolidation process and are opening up toappointing new vendors.

US reported a 2.7% growth in CC terms. HCLT management has indicated thestructural shift in US BFSI sector as the main reason for the relatively lowergrowth.

Within verticals, growth came from all verticals except for the Telecom vertical,which reported a 2.8% de-growth in CC terms. Healthcare and Energy / Utilitieswitnessed strong growth of 23% and 13%, respectively in CC terms.

The US BFSI segment is witnessing increased pressure because of the changingcomposition of profitability of the institutions. Companies in this sector have beenreporting dismal performance on the revenue front.

Due to this, there is a churn in the vendors to these companies and also pressureon realisations. Clients are looking at reducing spends on run-the-business initia-tives, while increasingly looking at new business models to increase revenues(support change-the-business spends).

HCLT has participated increasingly in the CTB market and has won several deals.

Within services, Software Services and Infrastructure services contributed togrowth, while BPO revenues de-grew by 2% QoQ.

The growth in Enterprise services is encouraging as it reflects the scale up andtraction in the Change-the-business market.

HCLT has been aggressively pursuing this business line and has won deals in thepast few quarters.

Custom applications reported a growth of 2.3% after de-growing marginally in3Q. We will watch this space closely in the future.



Macro scene - headwinds persist In line with other companies, HCLT management has indicated that, the

headwinds against the sector persist in the form of uncertain global economicscene, which is creating uncertainties in client spends.

The new spending was down by about 20% in 1HCY12 as compared to theyear-ago period. The BFSI segment is witnessing more softness because of thestructural change in the financial health of companies there.

Moreover, with the supply scene getting more competitive, the managementassigns low probability to billing rate increases. Average realisations were flat in4Q.

However, it has indicated that, the churn ratio in project re-bidding is unusuallyhigh and this provides an opportunity to HCLT to win larger projects.

The restructuring or churn spend in up by 40% YoY during 1HCY12. The compa-nies are looking at squeezing more benefits in the RTB budgets which is alsoleading to vendor churn.

The benefits from the RTM savings are now being directed to CTB. This is with aview to develop different business models and increasing revenues or revenuestreams.

To that extent, CTB is witnessing higher business and HCLT has been focusing onthe same.

HCLT plans to bring in more efficiency in the RTB side of clients business andhelp clients divert the same to CTB, we understand.

Significant order wins HCLT's focus on RTB and CTB has resulted in significant wins for the company.

It had won a record $1.5bn worth of deals in 3Q and $2.5bn in last six months(excluding renewals) and the company won 8 multi-million transformationaldeals in 4Q.

We believe that, the company will now focus more on execution of these deals,which should support revenue growth, going ahead.

Margins higher than estimates Margins were about 260bps higher on a QoQ basis. The rupee depreciation

helped margins apart from utilization benefits.

Margins were also helped by optimization in SG&A costs in the IT services busi-ness.

We understand that, margins may moderate from the 4Q levels the utilizationlevels come down in the future and salary increments kick in. We also expectthe rupee to appreciate from 4Q levels.

Low margins were a cause of concern for us. The sustenance of margins in anarrow band over the past few quarters and the sharp improvement in 4Q dolead to some comfort on this front.



Future prospects We have suitably modified our earnings estimates for FY13E.

Revenues are expected to rise by 16% in FY13E, largely on the back of volumesand rupee.

Margins are expected to rise as compared to FY12. While the expected rupeeappreciation, salary increments and initially lower utilization levels may impactmargins, higher off-shore content, better profitability in BPO business, mixchange and cost optimization should help sustain profitability.

We have assumed the rupee at Rs.52.5 / USD in FY13.

We expect the company to report an EPS of Rs.42.8 (Rs.37.8.) in FY13E. This isafter assuming a further equity dilution due to ESOPs.

Valuations We value HCLT at a marginal discount to Infosys' valuations due to the relatively

lower profitability. This leads us to a PT of Rs.570 based on FY13 earnings esti-mates.

The company has consistently grown revenues and sustained margins over thepast few quarters. We upgrade the stock to BUY based on valuations.

Concerns A delayed recovery in major user economies may impact our projections.

A sharp acceleration in the rupee from our assumed levels may impact our earn-ings estimates for the company.

We recommend BUY on HCLTechnologies with a price target

of Rs.570



NIIT LTD (NIIT)PRICE: RS.40 RECOMMENDATION: REDUCETARGET PRICE: RS.42 FY13E P/E: 8.5X

NIIT's 1QFY13 results were disappointing. Revenues grew by just 4% YoY(after removing the Element K revenues from 1QFY12). The sluggishness inthe Indian IT exports has likely rubbed off on NIIT with global enrollmentsfalling by 8%. CLS volumes grew by about 2% QoQ due to the uncertainglobal environment. SLS revenues were up 17% YoY. Lower revenues andinvestments towards cloud campus and 1-NIIT impacted profitability in ILS(yoy). Over the past few quarters, margins for NIIT have been impacted byinvestments in new delivery models (ILS), in transitioning new projects (CLS)and in restructuring (SLS), we understand.

NIIT's performance has been below par for several quarters earlier. The fallin margins has been more disappointing. The 9% YoY fall in ILS revenues in1Q reflects the negative sentiment and the consequent strain on thebusiness. The CLS business is also expected to remain under pressure. Wedowngrade our estimates for FY13. After incorporating 1QFY13 earnings,our FY13 EPS estimate stands at Rs.4.7 (Rs.6.8 earlier). We downgrade thestock to REDUCE. The erratic performance of the past constrains us fromgiving a better valuation to the stock. The price target stands revised toRs.42. A slower-than-expected global recovery and a sharper-than-expectedrupee appreciation may impact growth rates.

1QFY13 results

(Rs.mn) 4QFY12 1QFY13 QoQ (%) 1QFY12 YoY (%)

Income 3052 2275 -25.5 3212 -29.2

Expenditure 2695 2161 2905

EBIDTA 357 114 -68.1 307 -62.9

Depreciation 197 203 227

EBIT 160 -89 -155.6 80 -211.2

Interest 0 0 81

Other Income -67 -276 17

PBT 93 -365 -492.5 16 -2380.8

Tax -49 -341 -13

PAT 142 -24 29

Share of profit 120 138 102

Adjusted PAT 262 114 -56.5 131 -13.0

Shares (mns) 167.0 167.0 167.0

EPS (Rs) 1.6 0.7 0.8

EBIDTA (%) 11.7 5.0 9.6

EBIT (%) 5.2 -3.9 2.5

Net Profit (%) 4.7 -1.1 0.9

Source : Company

ILS ILS revenues fell by about 9% on a YoY basis. The sudden and sharp fall in rev-

enues came as a surprise and reflects the amount of negative sentiments in theminds of the prospective students.

We opine that, the slowdown in the IT services exports industry impacted theYoY growth. The hiring demand from the IT services company has come off andthis impacted sentiments, we understand.

Summary table


Sales 12,481 12,603 10,946Growth (%) 4.1 1.0 -13.1EBITDA 1,594 1,475 1,073EBITDA margin (%) 12.8 11.7 9.8PBT 558 2,030 (51)Net profit 922 1,102 787EPS (Rs) 5.6 6.6 4.7Growth (%) 30.9 18.2 (28.6)CEPS (Rs) 10.8 11.8 10.2BV (Rs/share) 34.3 38.3 40.9Dividend / share (Rs) 1.6 2.0 2.0ROE (%) 17.2 18.3 11.9ROCE (%) 9.6 25.1 (0.7)Net cash (debt) (2,649) (80) 771NW Capital (Days) 42.9 43.7 57.0P/E (x) 7.2 6.1 8.5P/BV (x) 1.2 1.0 1.0EV/Sales (x) 0.7 0.5 0.5EV/EBITDA (x) 5.9 4.6 5.5


RESULT UPDATE




The global enrollments also fell by about 8% on a YoY basis. The fall was re-stricted by the enrolments in the non-India non-IT segment, which was a growthof 17% YoY. The career enrolments in Finance and Management training grewby 28% YoY.

India based IT enrolments, in fact, saw a steeper fall of 13%.

The overall enrolments were at 129000 for the quarter.

Growth in ILS revenues

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13

Revenues (Rs mns) 1178.00 1802.00 1327.00 1522.00 1074.00

YoY growth (%) 15.67 11.86 10.77 13.72 -8.83

Source : Company

NIIT is now focusing on the One NIIT model and sees Cloud Campus as the nextgrowth area for this business. The company has invested significantly in buildingthe Cloud infrastructure which also impacted margins during the quarter. TheCloud Campus program has been rolled out in more than 380 centres and 80colleges and it already has more than 16000 enrollments already for digitalGNIIT.

NIIT 1-world has been rolled out in about 60 centres. The target is to cover 100centers under 1-NIIT.

CLS Revenues grew by 10% on a QoQ basis, largely on the back of the depreciated

rupee.

Volume growth was about 2%.

Managed Training Services grew by about 10% QoQ in USD terms and was thebright spot.

After transferring the Element K business, the company has been left with about1/3rd of the overall revenues in CLS. Of this, more than 60% is contributed byManaged Training Services (MTS), which is once again growing at a very fastpace.

The company had an order intake of $12.9mn during the quarter.

Revenue break up

Rs mn 1QFY13 4QFY12 1QFY12

Individual 1074.00 1522.00 1178.00

Schools 470.00 865.00 403.00

Corporate 730.00 664.00 1630.00

Source : Company

SLS SLS reported a 17% YoY growth for the quarter.

The number of Government schools has reduced by 400 to 13115 after thecompletion of the Assam BOT project.

However, 267 non-Government schools were added during the quarter, which isencouraging.

For the previous fiscal, the company had added 687 private schools.

Non-Government schools now form about 42% of the total SLS revenues.

The company witnessed continuing momentum in IP based orders. N Guru, thecompany's offering in the private schools business is gaining increasing accep-tance, as is reflected in the additional schools bookings.



Margins were down YoY Headline margins for the quarter were sharply lower YoY. NIIT's margins have

disappointed us for the past several quarters.

EBIDTA margins (%)

1QFY13 4QFY12 1QFY12

Individual 2.32 16.87 9.59

Schools 9.15 4.30 12.16

Corporate 9.73 9.65 8.90

Source : Company

Margins in ILS fell YoY due to lower revenues, additional investment made inCloud Campus and in the 1-NIIT program. The company is setting up the infra-structure for providing Cloud Campus facilities across its centres, which will allowit to implement the 1-NIIT program across centres. These investments are ex-pected to keep margins subdued in the near term.

Relatively lower enrollments also impacted margins.

Margins were also impacted by investments in the skills building initiative, whichthe company has started with the joint venture - NIIT Yuva Jyoti Ltd - with Na-tional Skills Development Council (NSDC). NSDC will hold 10% equity in NYJL,which aims to train 7 million students in 1,500 centres across 1,000 cities over 10years.

The skills building business had a negative EBIDTA of Rs.25mn.

Margins in SLS were also lower on a YoY basis.

CLS margins improved on a YoY basis due to the rupee benefit but were flat ona QoQ basis.

Future prospects We expect the individual learning business (including new businesses) to report a

de-growth in revenues on an annual basis due to passive sentiments and lowerenrolments.

CLS business is expected to grow ata steady pace on a sequential basis due tohigher revenues in the MTS business.

SLS is expected to report a 14% growth on the back of the scale up in privateschools business.

We have assumed margins to fall (YoY basis) in all businesses except in SLS.

Lower revenues, investments in new businesses and new modes of deliveryshould result in moderation in profitability levels, we expect.

After accounting for its 25.7% share in NIIT Technologies' profits, we expect thenet profit to be at Rs.787mn in FY13E.

Valuations We downgrade the stock to REDUCE.

The sharp fall in enrolments and continued losses in new initiatives should impactoverall growth and profitability in FY13. The CLS business may also remain im-pacted because of the subdued demand scenario.

We will accord higher valuations to the stock after we see signs of improvementin margins and better growth rates.

Concerns A slower-than-expected recovery in the global economy could impact revenue

growth of NIIT.

Steep rupee appreciation v/s major global currencies may impact the financialsof NIIT.

We recommend REDUCE onNIIT with a revised price target

of Rs.42



CONTAINER CORPORATION OF INDIA (CONCOR)PRICE: RS.940 RECOMMENDATION: SELLTARGET PRICE: RS.910 FY13E P/E: 13.5X

Concor continues to report small growth in profitability - No sur-prisesConcor reported its Q1FY13 net profit at Rs 2,452 million (+4% YoY) ~slightly ahead of our expectation. This was on account of slightly improvedrealizations in the Exim segment of Rs 16,117 per TEU (versus Rs 15,098 perTEU YoY). This hike in realisation was offset to some extent by falling leaddistance with some originating volumes shifting from JNPT to Pipavav andMundra for the company. The realization have also increased in thedomestic segment, as it has passed a significant portion (not entirely) of therail haulage hike by Indian Railways (IR) to the customers and also due tolower empty running. Other operating expenses have increased considerablyfor the company as the company has provided Rs 80 mn for discount andrebates offered to customers in the quarter. Consequently the operatingmargins of the company came in at 25.8 % falling by 160 bps YoY.Revenues were reported at Rs 10.4 bn growing 8% YoY primarily aided bygrowth in volumes in the Exim segment (+4% YoY) and improved averagerealisation (+8%YoY). Falling lead distance, higher haulage (marginpressure), competition, increased empty running and infrastructurebottlenecks of IR are jeopardizing the growth prospects of Concor. Weestimate the company to spend around Rs 10 bn in FY13 to add new ICDsand rakes. Post that we expect the company to deliver 4% volume growth(both Domestic and Exim) for FY13E, operating margins to sustain at ~25%and ROE of ~15%. The stock at CMP of Rs 940 trades at 13.5 times FY13Eearnings which we believe is fully valued for the estimated 4% growthprofitability in FY13E. We continue to value the company at 13 times FY13EEPS of Rs 70 per share. P/E of 13x is at 25% discount to one year forward P/E of 17x for the company during high growth phase of FY06 to FY10. Wecontinue to rate the stock a SELL with a target price of Rs 910. Risk to ourcall includes:1) Rationalization of haulage charges by the IR or 2) Pick-up incontainerized trade both in Exim and domestic segment.

Quarterly Snapshot (Consolidated)

(Rs mn) Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13

Revenues 9,490 9,945 10,462 10,711 10,369

Staff cost 229 230 247 293 275

Rail freight expenses 5,390 5,630 5,985 6,161 5,919

Others 1,275 1,458 1,456 2,018 1,503

Operating expenditure 6,894 7,318 7,688 8,472 7,697

EBIDTA 2,596 2,627 2,774 2,239 2,672

EBIDTA (%) 27.4 26.4 26.5 20.9 25.8

Other Income 589 753 698 1,126 823

Interest 0 0 0 0 0

Depreciation 402 373 413 397 407

Taxation 441 785 646 698 636

PAT 2,342 2,222 2,413 2,270 2,452

Prior period adjustment 0 468 0 0 0

Adjusted PAT 2,342 1,754 2,413 2,270 2,452

Source: Company

Summary table


Sales 38,266 40,608 43,572Growth (%) 3.3 6.1 7.3EBITDA 10,216 10,236 10,937EBITDA margin (%) 26.7 25.2 25.1PBT 10,512 11,349 11,448Net profit 8,299 8,779 9,044EPS (Rs) 63.9 67.5 69.6Growth (%) 5.9 5.8 3.0CEPS (Rs) 76.1 85.3 86.7BV (Rs/share) 397.4 447.0 489.2Dividend / share (Rs) 15.0 17.0 25.0ROE (%) 16.1 15.1 14.2ROCE (%) 16.28 15.63 14.40Net cash (debt) 22,491 27,655 25,213NW Capital (Days) (0.4) (3.9) (10.7)EV/EBITDA (x) 9.7 9.2 8.8P/E (x) 14.7 13.9 13.5P/Cash Earnings 12.3 11.0 10.8P/BV (x) 2.4 2.1 1.9


RESULT UPDATE

Amit [email protected]

+91 22 6621 6222



Highlights of the quarter Revenues in the Exim segment were reported at Rs 8,583 mn (+12% YoY and

+2% QoQ). Revenues in the domestic segment were reported at Rs 1,786 mn(flat YoY and -21% QoQ). Overall revenue was reported at Rs 10.4 bn (+8% YoYand -3% QoQ) versus our expectation of Rs 10.9 bn.

Operating margins for the quarter has slipped by 160 bps to 25.8 % primarilydue to higher rail freight expense and higher other expense. Management indi-cated that other expenses include provision of Rs 80 mn for discount and rebatesoffered to customers in the quarter.

With interest rates moving up by more than 200 bps in the last one year andConcor having a cash reserve of Rs 28 bn , the other income component of thecompany has gone up to Rs 823 mn ( from Rs 589 mn YoY)

Company would continue to be a MAT paying entity going ahead

Consequently the company has reported PAT of Rs 2,452 mn (+4% YoY).

Volumes and Realisation

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13

Exim volumes (TEUs) 510,672 543,324 555,399 535,575 532,539

Domestic volumes (TEUs) 110,725 112,521 120,108 124,907 96,346

Total volumes (TEUs) 621,397 655,845 675,507 660,482 628,885

Exim revenues (Rs Mn) 7,710 7,999 8,513 8,433 8,583

Domestic revenues (Rs mn) 1,780 1,946 1,949 2,278 1,786

Total revenues (Rs mn) 9,490 9,945 10,462 10,711 10,369

Realisation Exim/ TEU 15,098 14,722 15,328 15,746 16,117

Realisation Domestic/ TEU 16,076 17,295 16,227 18,238 18,537

Avg Realisation/TEU 15,272 15,164 15,488 16,217 16,488

Source: Company

Total volumes have grown to 628,885 (+1 YoY and -5% QoQ). Volume in the Eximsegment has grown to 532,539 TEUs (+4% YoY and flat QoQ) while volumes havedeclined in the domestic segment by ~13% YoY (-23% QoQ).

Realizations were up in the quarter as the company has been taking marginal tariffhike on various routes to cover increasing operating cost. This hike in realisation wasoffset to some extent by falling lead distance with some originating volumes shiftingfrom JNPT to Pipavav and Mundra for the company and also because of competi-tion. Realization in the Exim segment has increased in Q1FY13 to Rs 16,117 per TEU(versus 15,098/TEU YoY). The realization have also increased in the domestic seg-ment, as the company was able to pass on a significant portion (not entirely) of therail haulage hike on certain commodities. However this hike is hurting the domesticvolumes as the company has lost business of these commodities to either IR or road-ways. We expect domestic volumes to grow in FY13E by 4% to ~4.87 lakh TEUs.

Empty running and lead distanceThe company spent a total of Rs 1.8 bn in FY12. The empty running has gone up forthe company as the export import imbalance of containerized cargo for India in-creases with import growing at a faster pace to exports. There have been imbal-ances also at the ports with JNPT largely handling export cargo and Mundra andPipavav handling import cargo. With these imbalances the company had to run in-creased number of empty rakes which has increased the empty running cost. Webelieve the problem of increased empty running is structural in nature and wouldcontinue to hurt the company for a long time The lead distance in the Exim seg-ment (loaded) was 1050 km in Q1FY13 versus 1080 km in Q1FY12 (it was 1109 kmin Q4FY12).



Cash balance and other incomeConcor today has a cash balance of over Rs 28 billion on its balance sheet whichwould yield the company around 9 to 10% per annum (versus 7.5% yield YoY).Consequently the other income for the quarter was higher at Rs 823 million (from Rs589 mn YoY).

Competition continuous to intensify - Private container rail busi-ness growing graduallyPrivate operators are getting tie-ups (as Concor do) with shipping lines to drive theirExim volumes. Most private players have also accelerated their ICD expansion androlling stock addition programme to get a share in the Exim business. For instance,GDL which currently operates 21 rakes would be adding further 6 rakes in the nexttwo years. Also their Faridabad ICD has become partly operational in Q3FY12.WhileConcor is going slow with their capacity expansion programme.

We estimate that Concor which has already lost 26% Exim business to private op-erators would lose further market share to private operators like In logistics Solutions,Boxtrans Logistics, Gateway Distriparks and Arshiya International.

Operational performance and cash flow generation continuous tobe healthyEven though operational performance of Concor is not at historical high (ROE hasfallen from 25% in FY07 to around ~16% in FY12), still it has one of the highestoperating margins of 25% (Vs. 17% of GDL). Also we estimate strong operationalcash flows of ~ Rs 24 bn in FY12E and FY13E and healthy free cash flow of ~Rs 8.7bn in FY12 and FY13E. The key reason for fall in ROE for the company is the fall inasset turnover - the asset turnover for Concor has fallen from 0.97 in FY08 to 0.70 inFY12. Similarly asset turnover has impacted the ROCE of the company. This is prima-rily due to competition where the asset + additional capex are not translating intorevenue and profitability as it did historically for Concor.

Comforting factor is the Healthy balance sheet - zero debt, sub-stantial cash balance and no funding issuesWe estimate Concor to spending around Rs 10 bn in FY13E towards capex. The cashbalance of ~Rs 28 bn and operating cash flow of about ~Rs 11.3 bn in FY13E verycomfortably supports such a capex. The company doesn't have to take high costdebt in these uncertain times.

Management guides for 9% top-line and bottom-line growth inFY13EConcor management has guided for a revenue growth of 9% in FY13E with sus-tained margins. This is in line with our estimate of a 7.3% growth in revenues. Ourestimates imply an overall volume growth of 4% in FY13E primarily led by Eximvolume growth estimate of ~ 4% with domestic volumes growing by ~4% YoY.

Container Volumes for Concor (000)

FY08 FY09 FY10 FY11 FY12 FY13E

Exim TEUs 1,977 1,855 1,882 2,018 2,145 2,225

YoY % 15.2 -6.2 1.5 7.2 6.3 3.7

Domestic TEUs 470 453 539 544 468 487

YoY % 20.8 -3.6 18.9 0.9 -13.9 4.1

Total 2,448 2,308 2,421 2,561 2,613 2,712

YoY % 16.3 -5.7 4.9 5.8 2.0 3.8

Source: Company, Kotak Securities - Private Client Research



Outlook and Valuation - Reiterate SELL with a TP of Rs 910We expect the company to deliver 4% volume growth (both Domestic and Exim) forFY13E, operating margins to sustain at ~25% and ROE of ~15%. The stock at CMPof Rs 940 trades at 13.5 times FY13E earnings which we believe is fully valued forthe estimated 4% growth in profitability in FY13E. We continue to value the com-pany at 13 times FY13E EPS of Rs 70 per share. P/E of 13x is at 25% discount to oneyear forward P/E of 17x for the company during high growth phase of FY06 to FY10.We rate the stock SELL with a target price of Rs 910. Risk to our call includes:1) Ra-tionalization of haulage charges by the IR or 2) Pick-up in containerized trade both inExim and domestic segment.

We recommend SELL onCONCOR with a price target of

Rs.910



LIC HOUSING FINANCE LTD

PRICE: RS.241 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.275 FY13E P/E: 10.9X; P/ABV: 2.0X

Q1FY13: Margin compression disappoints; likely to improve withthe re-pricing of "fix-o-float" portfolio NII came slightly below our expectations (Rs.3.51 bn vs. estimate of

Rs.3.71 bn) on back of sharp margin compression (26bps QoQ). Net in-come also came lower at Rs.2.28 bn (decline of 11.2%; against estimateof Rs.2.54 bn) on back of lower core performance and higher provisionsduring Q1FY13.

NIM declined 26bps QoQ during Q1FY13 (seasonality - Q1 is generallyweaker than Q4) on back of decline in the share of developer loans.Spread declined to 1.1% in Q1FY13 from 1.47% in Q4FY12 on back of36bps rise in cost of funds, while yield on assets remained stable. Webelieve NIM has bottomed out and is likely to move northward duringnext couple of quarters with re-pricing of ~Rs.120 bn "fix-o-float" portfo-lio during next 4 quarters.

Disbursements to developers segment improved as compared to previous4-5 quarters. However, repayment from the project loans segment contin-ued to outpace this growth which led to decline in its share to 4.6% atthe end of Q1FY13. Overall loan book grew at 24.1% YoY on back ofstrong growth in retail segments, even though builder book continuedto drag (decline of 24.4% YoY).

Gross NPA and net NPAs rose, which is more of a seasonal phenomenonwhere Q1 will see a hike in NPA vis-à-vis Q4 of previous year. Provisioncoverage ratio is down to ~47% at the end of Q1FY13 as compared to58.3% at the end of Q1FY12, which increases the risk on earnings withany future deterioration in the asset quality. However, management hasindicated that they do not perceive any big risk to its asset quality, innear term.

At the CMP, stock is trading at 2.0x its FY13E ABV and 10.9x its FY13Eearnings. We have tweaked earnings estimate for FY13E and now expectearnings to grow at 25.1% on low base during FY12.

We do take cognizance of improvement in its NIM during FY13 on backof falling interest rate environment as well as re-pricing of its fix-o-floatportfolio (~Rs.120 bn). However, with limited upside from current levels,we maintain ACCUMULATE rating on the stock with revised TP of Rs.275(earlier Rs.280) based on 2.25x its FY13 ABV.

Sharp margin compression (26bps QoQ) impacted the NII; NIM islikely to improve with re-pricing of ~Rs.120 bn "fix-o-float" port-folio during next 4 quarters.NII came slightly below our expectations (Rs.3.51 bn vs. estimate of Rs.3.71 bn) onback of sharp margin compression (26bps QoQ). Net income also came lower atRs.2.28 bn (decline of 11.2%; against estimate of Rs.2.54 bn) on back of lower coreperformance and higher provisions (30.3% YoY) during Q1FY13.

NIM declined 26bps QoQ during Q1FY13 (seasonality - Q1 is generally weaker thanQ4) on back of decline in the share of high yielding builder loans (now stands at4.6% of total loan book) and rise in funding costs (being largely wholesale bor-rower). Spread declined to 1.1% in Q1FY13 from 1.47% in Q4FY12 on back of36bps rise in cost of funds, while yield on assets remained stable.

It is also important to note that cost of funds (9.22%) for Q4FY12 was more of anaberration which was down over the previous few quarters as LIC Hsg has raisedborrowings during March 12 (back ended) which increased the denominator whileinterest outgo was limited leading to lower calculated number.

Summary table


Interest Income 44,697 59,827 71,485Interest expenses 30,977 45,911 54,079NII 13,719 13,916 17,406Growth (%) 55% 1% 25%Non-Int Income 3,991 2,325 1,894Total Income 17,710 16,241 19,300Gross profit 15,550 13,870 16,871Net profit 9,745 9,142 11,152Growth (%) 47% -6% 22%Gross NPA (%) 0.5 0.4 0.5Net NPA (%) 0.1 0.1 0.3NIMs (%) 3.1 2.5 2.6RoA (%) 2.2 1.6 1.7RoE (%) 26.0 18.9 18.7DPS (Rs) 3.5 3.6 4.0EPS (Rs) 20.5 18.1 22.1BV (Rs) 86.7 110.5 126.3Adj. BV (Rs) 86.4 108.8 122.3P/E (x) 11.7 13.3 10.9P/ABV (x) 2.8 2.2 2.0


RESULT UPDATE

Saday [email protected]+91 22 6621 6312



We believe NIM has bottomed out and is likely to move northward during nextcouple of quarters on back of two factors - 1) In the falling interest rate environ-ment, wholesale funded business is likely to benefit from lower interest rate. 2)Around Rs.120 bn worth of "fix-o-float" portfolio (earlier given at ~8.9%) is comingfor re-pricing during next 4 quarters.

Management has guided that ~Rs.8 bn has been re-priced during Q1FY13, whilerest of the "fix-o-float" portfolio is likely to be re-priced at the run-rate of ~Rs.25 bn/quarter. The average yield on this portfolio would be higher by around 250bps, thusimproving the overall yield on assets.

Result highlights

(Rs bn) Q1FY13 Q4FY12 Q1FY12 YoY (%) QoQ (%)

Interest income 17.18 16.28 13.58 26.5 5.5

Interest expenses 13.67 12.57 9.97 37.1 8.8

Net Interest Income 3.50 3.71 3.61 (2.9) (5.5)

Non-Interest Income 0.49 0.61 0.60 (17.7) (19.0)

Net Operating Income 4.00 4.32 4.21 (5.0) (7.4)

Operating Expense 0.52 0.85 0.42 23.3 (39.0)

Operating profit 3.48 3.46 3.79 (8.2) 0.4

Provi. for loan loss 0.44 (0.02) 0.33

Profit before tax 3.04 3.49 3.45 (11.9) (12.8)

Provisions for taxes 0.77 0.95 0.89

PAT 2.28 2.54 2.57 (11.2) (10.2)

EPS (Rs) 4.51 5.28 5.40

Cost/Income ratio (%) 13.0 19.8 10.0

Effective Tax rate (%) 25.2 27.3 25.7

Sanctions 53.1 - 36.9 44.0 NM

Disbursements 47.9 66.2 35.5 35.1 (27.6)

Mortgaged Loan 656.4 630.8 528.8 24.1 4.1

GNPA (%) 0.71 0.42 0.84

NNPA (%) 0.38 0.14 0.35

Source: Company

Disbursements to developers segment improved during Q1FY13as compared to previous 4-5 quarters; overall loan book grew athealthy pace (24.1% YoY)Disbursements to developers segment (Rs.3.21 bn) improved during Q1FY13 as com-pared to previous 4-5 quarters. However, repayment from project loans segmentcontinued to outpace this growth which led to decline in its share to 4.6% at theend of Q1FY13 as against 11.3% during Q2FY11 (peak). During the same period, re-tail segment continued to witness robust growth in disbursement (28.9% YoY).

Outstanding loan book grew at healthy pace of 24.1% YoY on back of stronggrowth in retail segments (~29% disbursements without any unusual rise in repay-ments), even though builder book continued to drag (decline of 24.4% YoY). Man-agement has guided that they are targeting to enhance the share of developersloans to 6-8% in next 2 years from the current level of 4.6% (Q1FY13).

Rise in gross NPA is more of a seasonal phenomenon; likely toimprove by the end of FY13Gross NPA rose to 0.71% at the end of Q1FY13 as against 0.42% at the end ofQ4FY12, while it improved from 0.84% at the end of Q1FY12. However, net NPArose to 0.38% at the end of Q1FY13 as against 0.14% at the end of Q4FY12 and0.35% at the end of Q1FY12. This is more of a seasonal phenomenon where Q1 willsee a hike in NPA vis-à-vis Q4 of previous year.



Provision coverage ratio is down to ~47% at the end of Q1FY13 as compared to58.3% at the end of Q1FY12, which increases the risk on earnings with any futuredeterioration of asset quality. However, management has indicated that they do notperceive any big risk to its asset quality, in near term.

Trend in Asset Quality

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13

Gross NPA 3.7 3.2 3.1 2.4 4.4 3.6 3.7 2.7 4.7

% chg (YoY) -17% -22% -36% -8% 21% 12% 18% 10% 5%

% chg (QoQ) 40% -13% -2% -23% 84% -19% 3% -28% 76%

Gross NPA Ratio % 0.92 0.74 0.67 0.47 0.84 0.64 0.63 0.42 0.71

Net NPA 1.4 0.9 0.8 0.2 1.9 0.7 1.8 0.9 2.5

% chg (YoY) -26% -54% -68% -68% 32% -27% 114% 467% 35%

% chg (QoQ) 202% -36% -7% -82% 1134% -64% 173% -53% 193%

Net NPA Ratio% 0.35 0.21 0.18 0.08 0.35 0.12 0.30 0.14 0.38

Source: Company

Valuation and recommendationAt the CMP, stock is trading at 2.0x its FY13E ABV and 10.9x its FY13E earnings.We have tweaked earnings estimate for FY13E and now expect earnings to grow at25.1%. This robust earnings growth during FY13 is likely to come on low base dur-ing FY12. We expect EPS and ABV to come at Rs.22.1 and Rs.122.3, respectively,during FY13E.

We do take cognizance of improvement in its NIM during FY13 on back of fallinginterest rate environment as well as re-pricing of its fix-o-float portfolio (~Rs.120 bn).However, with limited upside from current levels, we maintain ACCUMULATE ratingon the stock with revised TP of Rs.275 (earlier Rs.280) based on 2.25x its FY13 ABV.

We maintainACCUMULATE rating on LIC

Housing Finance with a revisedprice target of Rs.275



ASHOK LEYLAND (ALL)PRICE: RS.22.5 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.23 FY13E P/E: 9.8X

ALL reported weak 1QFY13 result though largely on expected lines. Rev-enues during the quarter grew by 20% YoY but weak performance at theoperating level and high interest cost led to 22% YoY drop in net profits.

EBITDA margin for the quarter came in at 8% as against 9.7% in 1QFY12and our expectation of 8.3%.

Company has lowered its FY13 M&HCV volume guidance from 15% to~7%. Given weak monsoon, demand outlook continues to remain weakin the near term.

As per the management, freight rates have softened and are almostdown by 10%. Company expects the industry growth to remain negativeto flat in FY13.

Company has resorted to production cut at its plants in order to alignproduction with demand and also as a step to lower inventory levelsthat have risen in the recent period.

With lowering of management guidance and softening of freight rates,we are lowering our FY13 estimates. We now expect FY13 volume in theM&HCV segment to grow at a flat rate for ALL. We are also marginallylowering our EBITDA margin estimate. Accordingly our revised net profitestimates stands at Rs6,094 (earlier Rs8,156mn).

We accordingly cut the price target on the stock to Rs23 (earlier Rs31) anddowngrade the stock to ACCUMULATE (from BUY earlier). Given weakmacro indicators, volumes in the near term will remain under pressure.Cut in interest rate and pick-up in economic activity could likely changesentiments over the medium to long term.

Quarterly performance

(Rs mn) 1QFY13 1QFY12 YoY% 4QFY12 QoQ%

Total Revenues 30,073 25,127 19.7 43,110 (30.2)

Total expenditure 27,666 22,681 22.0 38,411 (28.0)

RM consumed 21,887 18,116 20.8 32,091 (31.8)

Employee cost 2,679 2,497 7.3 2,468 8.5

Other expenses 3,101 2,068 50.0 3,851 (19.5)

EBITDA 2,407 2,446 (1.6) 4,699 (48.8)

EBITDA margin (%) 8.0 9.7 - 10.9 -

Depreciation 893 847 5.4 956 (6.6)

Interest cost 834 567 47.1 724 15

Other Income 129 74 72.9 109 18.3

Extraordinary income/ (loss) - - 16 -

PBT 809 1,107 (26.9) 3,144 (74.3)

PBT margins (%) 2.7 4.4 - 7.3 -

Tax 140 245 (42.8) 557 (74.9)

Tax rate (%) 17.3 22.1 - 17.7 -

Reported PAT 669 863 (22.4) 2,587 (74.1)

PAT margins (%) 2.2 3.4 - 6.0 -

Reported EPS (Rs) 0.3 0.3 (22.4) 1.0 (74.1)

Source: Company

Summary table


Sales 111,177 128,420 141,958Growth (%) 53.5 15.5 10.5EBITDA 12,176 12,561 13,169EBITDA margin (%) 11.0 9.8 9.3PBT 8,018 6,900 7,343Net profit 6,313 5,660 6,094EPS (Rs) 2.4 2.1 2.3Growth (%) 49.0 (10.3) 7.7CEPS (Rs) 3.4 3.5 3.7BV (Rs/share) 14.9 15.8 17.2Dividend / share (Rs) 1.0 1.0 0.8ROE (%) 16.6 13.8 13.9ROCE (%) 14.7 13.1 12.2Net cash (debt) (23,887) (23,626) (37,329)NW Capital (Days) 16.7 16.1 17.1P/E (x) 9.5 10.6 9.8P/BV (x) 1.5 1.4 1.3EV/Sales (x) 0.8 0.7 0.7EV/EBITDA (x) 6.9 6.6 7.4


RESULT UPDATE

Arun [email protected]

+91 22 6621 6143



Result Highlights ALL reported revenues of Rs30,073mn, a growth of 19.7% over 1QFY12 rev-

enues of Rs25,127mn. Revenues were in line with our expectation ofRs29,438mn.

Company's M&HCV volumes during the period grew by 5% largely driven byimprovement in the key South India market. Further revenues during the quarterwere also aided by sales of Dost (LCV) which numbered 7,248 units in 1QFY13.

Management said that the ASP in the M&HCV segment increased primarily onaccount of change in product mix.

Discounts during the quarter were higher by Rs10,000-15,000 per vehicle due toweak demand nullifying the pricing action taken by the company in May2012.Company expects the trend in discounts to persist in the near term.

In the power solution business, the company sold 4,312 units in 1QFY13 asagainst 3,465 units sold in 1QFY12. Revenues from the same increased fromRs798mn in 1QFY13 to Rs644mn in 1QFY12.In the defence segment, revenuesstood at Rs890mn. Spare part revenues increased by 18% YoY from Rs1,870mnto Rs2,180mn.

Raw material cost to sales increased from 72.1% in 1QFY12 to 72.8% in1QFY13. However it dropped QoQ probably due to change in product mix. Com-pany is witnessing some cost pressure in steel largely due to weak INR.

Employee cost increased by 7.3% YoY to Rs2,679mn. Other expenses witnesseda steep jump YoY from Rs2,068mn in 1QFY12 to Rs3,101mn for the quarter un-der review. Reasons for the same includes - 1.Higher advertisement costRs160mn (related to brand ambassador) 2.Change in accounting policy related tolease and warranty 3.Dost related expenses - Rs130mn (not present in 1QFY12)4.Increase in net under recovery in AMC 5.Increase in power cost - Rs40mn6.Forex loss of Rs70mn in 1QFY13 as against Rs20mn in 1QFY12.

Company reported EBITDA of 8% as against 9.7% in 1QFY12 and our expecta-tion of 8.3%.

Interest cost increased substantially from Rs567mn in 1QFY12 to Rs834mn in1QFY13. Rise in long term loans for capex and investments along with steep risein working capital loans led the rise in interest cost. Company though has be-come a bit cautious on its future capex plans and is pruning down production tolower inventory levels and cutting down working capital.

Net profit for the quarter stood at Rs669mn, drop of 22.4% YoY but in line withour estimate of Rs686mn.

Conference Call Highlight Company indicated towards softening of freight rates. The company said that

freight rates have dropped by 10% over the past few weeks.

Company expects the industry growth to be negative to flat. Management hasalso pruned down its own FY13 M&HCV volume growth guidance from 15% to7%.

Company is banking on new product launches and increase in dealers point togenerate growth.

On the exports, the company said that the demand outlook in the SAARC coun-tries is not very bright. Share of SAARC countries have come down to less than60% from 75% earlier. However Africa and Middle-East continue to do well.

Company is cutting down production across plants to align the same with de-mand. Further the company is also taking these steps to lower the inventory lev-els which stand at an uncomfortable level (over 10,000 units).



At the Pantnagar plant, the production is been brought down in July 2012 in linewith overall cut in production. Company expects to manufacture 28,000-30,000units out of its Pantnagar plant in FY13. Company is expecting to increase theconcession levels at the Pantnagar facility from current levels of Rs50,000 pervehicle to Rs70,000 per vehicle in the near term through increase in localizationlevels.

In 1QFY13, the company incurred Rs1,600mn in capex. Gross debt as of endJune 2012 stood at Rs47.5bn. Company plans to bring this down by lowering theworking capital requirements.

Due to current slowdown, the company has indicated towards lowering of FY13capex from Rs6bn to Rs4.5bn. Further, investments in JV's are also likely to becut down from Rs5bn to Rs3-3.5bn.

Over the course of FY13, the company will be launching new products/modelslike - 10x2 rigid axle vehicle, 16T haulage & tipper vehicle (with Neptune en-gine) and Jan Bus.

Cut in FY13 estimates Management has lowered its FY13 M&HCV volume growth guidance from 15%

earlier to 7% now. Further the company also indicated towards softening infreight rates. Weak monsoon too is expected to negative for the sector.

Accordingly, we have lowered our FY13 M&HCV volume growth estimates from13% earlier to flat growth. Due to cut in our volume estimates, our revised netprofit estimates stands at Rs6,094mn (earlier Rs8,156mn).

Change in estimates FY13

(Rs mn) Old New % change

Revenues 171,257 141,958 (17.1)

EBITDA margin (%) 9.4 9.3 -

PAT 8,156 6,094 (25.3)

Source: Kotak Securities - Private Client Research

We also cut our price target to Rs23 (earlier Rs31) and downgrade the stock asACCUMULATE (from BUY earlier).

Given weak macro indicators, volumes in the near term will remain under pres-sure. Cut in interest rate and pick-up in economic activity could likely changesentiments over the medium to long term.

Management is looking at various steps such as cut in production, cost controland pruning down FY13 capex and investment plans. We believe the same tohave some positive impact on profitability, going ahead.

We recommend ACCUMULATEon Ashok Leyland with a

revised price target of Rs.23



Trade details of bulk deals

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

(Rs)

25-Jul 7seas Tech Meenu Jainbhanshali S 47,405 36.1

25-Jul Acclaim Ind Santosh Ranga B 35,000 34.0

25-Jul Acclaim Ind Abhishek Mehta S 194,767 34.0

25-Jul Acclaim Ind Krushnakumar G Brahmbhatt B 25,000 32.8

25-Jul Acclaim Ind Ceeplast Trading Co Pvt Ltd B 25,000 34.0

25-Jul Bampsl Sec Sangeeta Bandil B 3,000,000 0.8

25-Jul Bampsl Sec Kiran Gupta S 1,812,826 0.8

25-Jul Boston Bio Patel Sanjaybhai Narandas S 265,400 5.0

25-Jul Boston Bio Payalben Purvin Patel B 50,000 5.0

25-Jul Exelon Infra M V Lakhani S 100,000 8.0

25-Jul Exelon Infra Avani Kaushik Kanakia B 100,403 8.0

25-Jul Finalysis Cred Vallabhbhai Kakadiya S 108,350 68.0

25-Jul Finalysis Cred Sagar Kadam B 42,015 68.0

25-Jul Finalysis Cred Dharmendra Harilal Bhojak B 44,000 68.0

25-Jul Koffee Break Manish Laltichandara Shah S 918,055 0.4

25-Jul Koffee Break L D Shah S 1,350,100 0.4

25-Jul NHC Foods Mustafa Hussaini Sayed B 50,000 20.0

25-Jul NHC Foods Apoorva Shah S 50,000 20.0

25-Jul Oasis Sec Rangnath Somani S 10,000 98.5

25-Jul Oasis Sec Oak Tansiton Management Pvt Ltd. B 19,000 98.5

25-Jul Pasupati Fin Sarvaiya Dakshaben Hiteshbhai S 39,548 9.9

25-Jul Pasupati Fin B M Traders S 35,000 9.9

25-Jul Pasupati Fin Hitendrakumar Amrutlal Parmar S 45,000 10.1

25-Jul Rammaica India Paresh Dhirajlal Shah B 30,000 15.0

25-Jul Rammaica India Tien Trading Pvt Ltd S 37,500 14.9

25-Jul Reliance Chem-$ Harish Kumar Singhania B 25,900 111.9

25-Jul Reliance Chem-$ Mukesh Chouradia S 22,598 112.0

25-Jul Reliance Chem-$ Rajesh Agrawal S 25,000 112.0

25-Jul Reliance Chem-$ Milestone Shares & Stock Broking B 25,000 112.0

25-Jul Shalibhadra Fin Shah Anilbhai Naginlal B 37,800 56.0

25-Jul SP Capital Gajmukh Suppliers Pvt Ltd B 31,153 119.2

25-Jul SVC Res Akshat Ashok Gupta S 350,000 5.5

25-Jul Triochem Prod Kishore Radhesham Chokhani S 2,000 13.6

25-Jul Triochem Prod N L Rungta Huf B 2,000 13.6

25-Jul Triochem Prod Badri Prasad Choudhury S 2,500 13.6

25-Jul Triochem Prod Rapid Stocks Pvt.Ltd. B 2,500 13.6

25-Jul Vaishnavi Sai Nithisha Parvathaneni S 111,505 5.6

25-Jul VKS Projects Sagar Rajeshbhai Jhaveri S 118,617 55.0

25-Jul VKS Projects Decent Fin Ser (P) Ltd B 151,000 55.0

Source: BSE

Bulk deals



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

Gainers

ITC Ltd 255 1.8 7.7 5.3

HCL Tech 514 6.8 2.6 7.4

Ambuja Cements 174 3.7 1.5 6.2

Losers

Hindustan Unilever 464 (2.5) (3.9) 3.6

Bharti Airtel 301 (2.5) (3.0) 3.1

Reliance Ind 719 (0.7) (2.8) 2.0

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

Documents

Morning Insight 26 Jul 2012Ashok Leyland has said it was planning to reduce its capex for the current financial year by around 25% to Rs 4.5bn, as the company planned to conserve cash