VIKAS PARSHURAM SAMWATSARE

1. Reduce Crompton Greaves (CRG) For Target .94 

Crompton Greaves (CRG) has acquired ZIV group at an Enterprise Value of EUR150 mn (~Rs 10 bn). ZIV is engaged in design. Engineering, manufacturing and support of Intelligent Electrical Device (IEDs) and automation systems for Utilities and Industries.

*  We interacted with various industry players to understand that market dynamics of smart grid. US market has been the largest market for Smart
grid followed by Europe. Indian market is currently in a nascent stage sized at Rs 8-9 bn per annum.

*  With the acquisition Crompton marks its tenth overseas acquisition in the span of last six years. Management expects that the acquisition
would add substantially to company's offering in providing comprehensive energy saving solutions with latest technology.

*  We believe that the ZIV acquisition is likely to be value accretive in FY13 and offer long term strategic advantage to Crompton. Acquisition value
at EUR 150 mn looks reasonable.

* We highlight that currently overseas subsidies has been experiencing headwinds of economic slowdown in certain geographies mainly in Europe;
integration of existing subsidiaries and realignment of their core business processes along with that of ZIV now continues to remain a challenge.

* We therefore tweak our estimates and do not make substantial revisions in FY13 earnings. Maintain 'Reduce' rating on the company's stock with
a one year DCF based revised target price of Rs 94 (Rs 90 earlier).

Valuation & Recommendation

* At the current price of Rs 119, company's stock is trading at 14.5x P/E and 7.3 x EV/EBITDA on FY13E earnings.

*  We maintain our 'Reduce' rating on the company's stock with a one year DCF based revised target price of Rs 94 (Rs 90 earlier).

2.  Two-wheeler, CV Sales Dismal; Car Sales Mixed

Two-wheeler, CV Sales Dismal; Car Sales Mixed

Two-wheeler sales in July 2012 were disappointing, with major two-wheeler companies reporting a fall in sales. Car sales were mixed, with a few companies posting better-than-expected numbers and others coming out with dismal numbers. In two-wheelers, key players like Hero MotoCorp, Bajaj Auto and TVS Motor Company reported decline in sales. Hero MotoCorp’s sales declined 1.4 %  YoY, while TVS Motor and Bajaj Auto registered 15.1% and 5.4% YoY drop in sales, respectively. In the car segment, Maruti Suzuki India (MSIL) registered a 9.2% YoY growth in sales, despite the ongoing lockout, largely due to a low base and available inventory of ~10 days. Tata Motors and Mahindra & Mahindra (M&M) reported better-than-expected sales numbers, with both the companies posting overall growth of over 15% YoY, driven by higher sales of cars and utility vehicles (UVs). Sales of Ford India, Honda Siel Motors, and GM India continued their sluggish trend, reporting a decline of 16.9% 7.2% and 23.4%, respectively, YoY. In the medium and heavy commercial vehicle (MHCV) segment, sales momentum weakened further with Tata Motors, Ashok Leyland and Eicher Motors witnessing double-digit fall in sales by 21.2%, 10.9% and 13.2%, respectively, YoY. Given the weak macro-economic environment, automobile sales are likely to stay under pressure in the near term.

Key highlights:

*  MSIL reported a 9.2% YoY growth in sales on account of low base due to a strike at its Manesar plant in June 2011. On MoM basis, sales declined 14.9% due to the  current lockout at this plant. Meanwhile, the impact of the ongoing lockout was partly visible in July 2012 sales as the company had an inventory of ~10 days.

*  Hyundai Motors India reported a modest 6.4% YoY growth in sales, driven by 7.6% YoY rise in domestic market. Exports were up by 5.1% YoY.

*  Tata Motors posted a 15.3% YoY growth in sales led by higher sales of passenger cars, LCVs and UVs which grew 48.0%, 15.0% and 59.4%, respectively, YoY.

* Sales of Ford India, Honda Siel, and GM India continued their sluggish trend, with these companies witnessing a YoY fall in sales by 16.9%, 7.2% and 23.4%, respectively.

*  Toyota-Kirloskar Motors posted single-digit rise in sales (7.2% YoY) with the highbase effect catching up. Nissan India’s sales grew 118.5% YoY following a low base.

* M&M’s automotive segment sales were up18.7% YoY, driven by growth in sales of UVs and higher exports, while tractor sales, after reporting a positive growth in June 2012, entered the negative zone with a drop of 1.0% YoY.

* In two-wheelers, market leader Hero MotoCorp’s sales fell below 500,000 units after a period of 11 months, down 1.4% YoY.

* TVS Motor posted a steep decline in sales by 15.1% YoY. Both domestic and export sales were down 12.2% and 32.8%, respectively, YoY.

* Bajaj Auto reported a 5.4% YoY decline in sales because of lower exports, which were down 12.8% YoY. Three-wheeler sales were down 22.6% YoY, but up 31.8% MoM.

* Honda Motors & Scooters India (HMSI) reported a 56.9% YoY growth in sales driven by higher motorcycle sales, up 80.3% at 152,382 units.

*  Ashok Leyland’s and Eicher Motors’ MHCV sales were down 10.9% and 13.2%,  respectively, YoY.

3. Buy Redington India Ltd For Target 88 

Results were below expectations. Q1 quarter is a slow quarter for the company, however YoY revenues disappointed.

Revenues grew 3.3% YoY to Rs.5371.5 crore on the back of India business growing 3% YoY and the overseas revenues growing 3.5% YoY.

EBIDTA margins remained flat YoY at 2.66%.

PAT de grew by 6.6% YoY on the back of higher tax rate during the quarter.

India Operations – High Valued Products aided the growth

India business grew 4.4% QoQ and 3% YoY mainly on the back of high valued products. However, the government spending was subdued due to lack of decision making. Similarly, even the corporate sector spending was restrained due to dismal outlook of the economy. Blackberry sales have remained stable during the quarter.

The company in the Q4FY12 quarter had indicated a growth of 14%-15% for FY13E on the back of lower government and corporate demand.

Overseas Operations – Hit by gloomy Global Outlook

Overseas revenues were affected by the overall slag in the global economy.  Arena continues to remain under structural re-structuring phase and
cancellation of contract with Nokia also contributed to slowness. However, Samsung is expected to make up for the Nokia loss of contract in the Q3 and the Q4 quarter of FY13E.

Guidance

Company has given a guidance of 14-15% growth both for India as well as the Overseas business.

Valuation & Recommendation

The company is facing pressure from the overall weakness in the economy coupled by pressure at its Turkey subsidiary and dis-continuation of contract with Nokia. Slowing down of revenues from the past two quarters remains a concern and reflects in the stock price which has corrected almost 20% in the past 3 months. We believe this is a temporary phenomenon and would lay its impact in FY13. However, with Samsung revenues catching up in the coming quarters and resolution of hitch at the Arena subsidiary, we believe the company would again go back to its regular growth trajectory.

We reduce our target price from the earlier Rs.96 to Rs.88 assigning a lower P/E multiple of 10x (earlier 11x) for FY13E expected earnings due to lower revenue visibility in the near future. At CMP, the stock is trading at 8.6x and 7.3x its FY13E and FY14E expected earnings and looks attractive for long term investment and recommend BUY.

4.  Accumulate India Overseas Bank (IOB) For Target .84

Q1FY13: Disappointment continues; near term outlook remains challenging with ~12% of stressed assets along with thin margin as well as need for recapitalization (tier-I capital at 7.92%). 

* NII came at Rs.13.28 bn, a modest growth of 11.8% YoY, due to 26bps (YoY) decline in NIM (2.59% in Q1FY13) despite strong growth in loan
book (24.5% YoY). Net profit grew 13.5% YoY (Rs.2.33 bn), slightly lower than our estimates, on back of higher credit costs (NPA provisions shot
up QoQ from Rs.2.77 bn during Q4FY12 to Rs.4.07 bn during Q1FY12).

*  Business growth has continued to moderate since Q4FY12; loan book grew 24.5% YoY partly aided by overseas book (49.2% YoY; share at
12.5% of total loan book). Deposits grew 22.3% YoY but at the cost of shrinking CASA mix (declined 250bps to 25.1%).

*  NIM has been on the declining path (2.59% in Q1FY13; lowest in last six years) due to deterioration in the liability franchise along with shift towards lower yielding asset mix (corporate loan growth is faster than other segments). IOB needs recapitalization as its tier-I capital stands at
7.92%. This does not bode well in the prevailing macro environment.

* Improving the asset quality remains the biggest challenge for IOB, in our view. Their ~12% of loan book is facing stress (restructured book + gross
NPA), one of the highest in the industry. Gross slippage has remained at the elevated levels (Rs.8.65 bn, 2.4% on annualized basis), while up gradation and cash recovery was relatively subdued vis-à-vis previous quarter.

*  We believe, the near term outlook remains challenging for the stock with ~12% of stressed assets along with thin NIM as well as need for recapitalization (tier-I capital at 7.92%). IOB is likely to report subdued return ratios (RoE: 10-11%, RoA: 0.5%) during FY13E/14E and hence, we retain ACCUMULATE rating on the stock with lower TP of Rs.84 (Rs.96 earlier) based on 0.75x its FY13E ABV. We advise our clients to remain cautious on the stock and look for better entry opportunity in the future.

Valuation and recommendation

Although IOB is currently trading close to its lower end of its historical valuation band (0.7x FY13E ABV; 5.6x FY13E earnings), we believe, the near term outlook remains challenging for the stock on back of high share (~12% of loan book) of stressed assets (restructured book + gross NPA) along with thin NIM as well as need for recapitalization (tier-I capital at 7.92%).

5.  Hold Cipla For Target Rs.379

Many Positive Surprises; 2QFY13 To Be Stronger As Well

Cipla’s 1QFY13 performance was significantly better than our/consensus expectations as a better product mix (lower anti-retroviral or ARV sales, higher domestic sales), Escitalopram (CNS drug) supply to Teva (~56% market share) and currency benefits (only US$220mn of hedges) led to much-higher-than expected improvement in margins. We believe most of these positives will play out in 2QFY13 as well – as 1QFY13 is the third consecutive quarter of over 15% growth in domestic business - showing the benefits of recent additions to sales force/therapies have started flowing in, while Escitalopram supply (for one more quarter) and rupee depreciation continue to aid exports. We have increased our FY13E/FY14E EPS estimates by 20%/5%, respectively, factoring in much higher improvement in margins (300bps higher than our earlier estimates) and revised our target price to Rs379 (from Rs347 earlier), valuing the stock at 19xFY14E revised EPS of Rs20. We retain our Hold rating on the stock.

Strong domestic growth; export growth restricted by lower ARV sales:

Domestic revenue surprised positively with 30% YoY,29% QoQ growth - highest in more than 20 quarters and the third consecutive quarter of above industry growth (14-15%) - benefitting from recent sales force/therapy additions and partly from a low base. Export formulations growth, however, was restricted to 23% YoY, as the upside from Escitalopram supply to Teva (market share of ~56%) and a favourable rupee were negated by lower ARV sales (contributing less than 15% to exports). API exports were flat YoY, while Indore SEZ’s contribution was similar to 4QFY12 level  (~Rs1.9bn). Cipla’s management has revised FY13 revenue guidance from 10% earlier to 12-15%. 

Margins beat estimates, PAT follows suit:

EBITDA margin of 27.6% was 432bps/406bps higher than our/consensus estimates, respectively, leading to our earnings estimates getting missed. Most of the improvement was witnessed in gross margin (up 460bps YoY, 400bps QoQ), benefiting from a better product mix (lower
ARV sales, higher local sales) and favourable rupee. Strong operating performance and forex gains of Rs230mn drove PAT (up 58% YoY, 37% QoQ) above estimates.

We upgrade FY13E/FY14E EPS estimates by 20%/5%, respectively:

Taking into account strong 1QFY12 performance, we increase our FY13E margin assumption by 300bps (from our earlier estimate) and factor in higher domestic revenue growth, thereby leading to upward revision of 20%/5% in our FY13E/FY14E EPS, respectively. We have also upgraded our target multiple from 18x to 19x (to factor in improved outlook) and revised our target price to Rs379 (from Rs347 earlier), valuing the stock at
19xFY14E EPS of Rs20. We retain our Hold rating on the stock.

6. Buy Phoenix Mills Ltd For Target .237

Revenues of the company were better than our estimates led by improvement in rentals and also on account of reclassification of electricity expenses recovered from licensees. Operating margins remained strong. Net profit growth was slightly better than our estimates. Pune, Kurla and Bangalore market cities are slowly witnessing increased trading densities while Chennai market city is expected to commence operations by
Q2FY13. We maintain BUY on the stock.

Valuation and recommendation

* At current price of Rs 183, stock is trading at 20.2x P/E and 12.1x EV/EBITDA.

*  We value the company on sum of the parts valuation and arrive at a target price of Rs 237 on FY13 estimates.

* We remain positive on the company due to its robust business model, excellent operating cash flows from HSP and expertise to capitalize on the upcoming opportunities in the retail sector in various cities.

*  We thus recommend BUY on the stock.

*  Key risks for the stock would be further delays in launch of Shangri-La and lower than expected ramp up in occupancies in key market cities.

7. Buy Petronet LNG For Target 186 

Cost Saving, Higher Marketing Margin Boost Earnings

Petronet LNG reported a net profit of Rs2,708mn for 1QFY13 (up 10.5 % QoQ, 5.5% YoY) higher by 13%/18% compared to Bloomberg/our estimates, respectively. Its higher earnings were aided by cost saving of Rs200mn on time charter rates and higher marketing margin in a buoyant spot market, despite volume declining on plant shutdown by fertiliser companies. Adjusted for one-time cost saving, net profit was up 5% QoQ We believe Petronet LNG would remain an important clog wheel to play imported gas theme in times of a gas-deficit market in India. We retain our Buy rating on the stock with a revised target price of Rs186 based on DCF methodology.

Higher netback margin supplant volume drop:

The company’s netback margin in 1QFY13 inched up to Rs42.01/mmBtu from Rs36.75/mmBtu in 4QFY12. It earned higher netback margin on: (1) Cost saving to the tune of Rs200mn on time charter rates, as one of the three ships hired was on dry docking, and (2) Higher marketing margin. Both factors led realisation to improve 6.27% QoQ, while gas cost was up 6.23%. Blended gas cost in 1QFY13 touched US$10.22/mmBtu compared to US$9.62/mmBtu. The company’s gas price (FoB) for Rasgas touched US$9.0/mmBtu.

Soaring marketing margin boosts earnings:

Our analysis indicates the company enjoyed a marketing margin of Rs37.78/mmBtu(US$0.69/mmBtu) in 1QFY13 compared to Rs7.44/mmBtu(US$0.15/mmBtu) in the previous quarter. It sold ~21tBtu of spot gas compared to ~26.5tBtu in 4QFY12. Spot gas sold during the quarter was mainly shortterm in nature having an assured supply of one-two years and the company will maintain the current run rate in short-term spot gas for next three quarters. We have assumed Rs40/Rs30/mmBtu marketing margin for FY13E/14E, respectively.

Volume lacklustre on plant shutdown by users:

Gas delivered in 1QFY13 declined 6% QoQ & 4% YoY to 127tBtu. Out of 127tBtu, 96tBtu was delivered on long-term basis, 21tBtu on spot basis and the balance 11tBtu under regasification service. The management attributed the fall in volume to shutdown of five fertiliser plants in April 2012, but volume from these units recovered from May 2012. We have assumed volume of 576tBtu/645tBtu (11.3mmtpa/12.66mmtpa) for FY13/FY14E, respectively, of which assumed volume for Kochi terminal stands at 25.5tBtu/76.48tBtu for FY13E/FY14E.

Outlook & valuation:

Petronet LNG stock presently languishes on account of: (1) Likely lower utilisation of newly built Kochi terminal in FY13-14 depressing earnings due to higher interest costs and depreciation, (2) Inability to sign long-term contracts for gas offtake, (3) Major boost to incremental volume starting only from 2HFY14, and (4) Lack of a clear regulatory environment for new RLNG terminals. With the stock trading at 10x FY13E EPS, we see it as an attractive opportunity to participate in a structural five-year growth story with a volume/EPS CAGR of 13%/18%, with least regulatory risk. We retain our Buy rating on the stock with a target price of Rs186.

8. 

 Accumulate Jaiprakash Associates Ltd Ltd For Target .83

Revenues of the company in Q1FY13 came lower than our estimates due to lower than expected revenues from the cement and real estate division. Company has demerged the south and west cement plants and transferred it to Jaypee Cement Corporation Ltd so correspondingly it has
restated financials of Q1FY12.

*  Operating margins in Q1FY13 stood strong at 26% and primarily led by strong margins in construction and real estate division.

*  Net profit for the quarter was slightly ahead of our estimates led by strong operating margins and lower than expected interest outgo.

*  At current price of Rs 76, stock is trading at 23.4x P/E and 11.6x EV/   EBITDA on FY13 estimates respectively. We maintain our FY13 estimates and price target of Rs 83. We had upgraded the stock to BUY in our last recommendation at Rs 61. Owing to limited upside from the current levels, we now downgrade the stock to ACCUMULATE and would look for dips in the stock to buy with a long term view.

Valuation and recommendation

*  At current price of Rs 76, stock is trading at 23.4x P/E and 11.6x EV/EBITDA on FY12 and FY13 estimates respectively.

*  We maintain our FY13 estimates and price target of Rs 83. We had upgraded the stock to BUY in our last recommendation at Rs 61. Owing to limited upside from the current levels, we now downgrade the stock to ACCUMULATE and would look for dips in the stock to buy with a long term view.