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Table of Contents
Strategy 3QFY2013 Sectoral Outlook Automobile Banking Capital Goods Cement FMCG Infrastructure Information Technology Media Metals Oil & Gas Pharmaceutical Power Telecom Watch Stock Watch 11 14 19 21 23 25 28 31 32 35 38 41 43 46 2-9
Note: Stock prices as on September 28, 2012 Refer to important Disclosures at the end of the report
Strategy
3QFY2013 earnings to show early signs of recovery
Earnings to recover
For 3QFY2013, we expect Sensex companies to report an earnings growth of 11.0% yoy as compared to 5.8% yoy in 2QFY2013. Our overall coverage companies (152 companies) are expected to report earnings growth of 10.0% yoy as compared to 8.8% yoy in 2QFY2013. On a sequential basis, the earnings performance for Sensex as well as our coverage companies is likely to improve by 3.9% qoq and 3.7% qoq respectively. The growth in earnings is likely to be driven by oil and gas, BFSI and metals sector stocks.
Strategy
Exhibit 2: 3QFY2013 Sensex performance estimates
Net Sales Sector Auto (5) Finance (4) Capital Goods (1) FMCG (2) Infrastructure (1) IT (3) Metals (4) Mining (1) Oil & Gas (3) Pharma (3) Power (2) Telecom (1) Sensex (30) Source: Company, Angel Research (%, yoy) 14.2 10.4 5.3 13.9 12.8 13.4 12.8 5.5 5.9 7.3 12.8 10.5 10.3 (%, qoq) 16.3 4.2 6.8 3.2 19.7 2.0 10.2 11.1 (0.2) (7.5) 4.1 0.7 6.0 Net Profit Profit (%, yoy) (2.0) 16.6 (0.5) 4.9 21.6 5.9 59.5 (5.8) 21.6 (8.5) 18.0 (10.0) 11.0 (%, qoq) 28.3 3.7 11.8 (2.0) 17.0 (5.2) 68.3 24.1 (9.5) (18.0) (8.9) 26.2 3.9 Operating Margins (bps, yoy) (140.8) (181.6) (43.3) (231.7) 160.5 (267.7) 78.3 (568.8) (185.4) (431.0) 534.9 (75.6) (110.3) (bps, qoq) 55.1 81.7 102.6 (141.9) 54.2 (48.4) 22.0 727.9 (31.9) (374.5) (117.8) 18.2 (6.0)
Sectoral Analysis
Automobile - Tata Motors to weigh on earnings performance
We expect our coverage automobile universe excluding Tata Motors to report a strong 16.4% yoy earnings growth. Tata Motor's performance is expected to weigh on the sector due to weak standalone performance and high base effect at JaguarLand Rover (JLR). We expect Maruti Suzuki and Mahindra and Mahindra to be the core growth drivers of our coverage universe in 3QFY2013. Maruti Suzuki is expected to register an strong
Refer to important Disclosures at the end of the report
bottom-line growth on account of the low base of last year and sharp revival in volumes post the Manesar strike while Mahindra and Mahindra is likely to witness a strong bottom-line growth driven by growth in volumes and improvement in realization.
Strategy
Dragged by relatively higher asset quality pressures, PSU banks are likely to report a muted earnings performance. Large PSU banks are expected to report a marginal earnings growth of 1.5% yoy, while bottom-line performance of mid-sized PSU banks is expected to be moderate at 4.6% yoy.
Strategy
Exhibit 4: Sensex companies' performance estimates
Net Sales (` cr) (` Sector Bajaj Auto Bharti Airtel BHEL Cipla Coal India Dr. Reddy HDFC HDFC Bank Hero Moto Corp Hindalco HUL ICICI Bank Infosys ITC Jindal Steel Gail India L&T M&M Maruti Suzuki NTPC ONGC RIL SBI Sterlite Sun Pharma Tata Motors Tata Power Tata Steel TCS Wipro Total Sensex# Source: Company, Angel Research; Note: # based on free-float adjusted basis Weight Weight (%) 1.7 2.7 1.2 1.3 1.4 1.4 7.9 8.1 1.1 1.0 3.5 7.7 7.2 10.0 1.0 1.1 5.6 2.7 1.3 1.6 3.5 8.6 3.6 1.0 1.8 3.2 1.1 1.6 4.7 1.5 100.0 3QFY2013E 5,255 20,415 11,110 2,024 16,190 2,700 1,780 5,496 6,141 7,199 6,591 5,575 9,961 7,131 3,742 11,986 15,790 10,915 10,938 16,712 19,294 89,981 14,819 11,288 2,383 48,794 8,085 38,228 15,926 10,974 437,421 3QFY2012 4,840 18,477 10,548 1,711 15,349 2,769 1,460 4,536 5,984 6,590 5,853 4,604 9,298 6,195 3,652 11,260 13,999 8,278 7,527 15,332 18,124 85,135 14,462 10,246 2,145 45,199 6,660 33,103 13,204 9,997 396,537 % chg 8.6 10.5 5.3 18.3 5.5 (2.5) 21.9 21.2 2.6 9.2 12.6 21.1 7.1 15.1 2.5 6.4 12.8 31.8 45.3 9.0 6.5 5.7 2.5 10.2 11.1 8.0 21.4 15.5 20.6 9.8 10.3 11.0 3QFY2013E 810 910 1,425 404 3,808 339 1,162 1,860 602 404 790 2,024 2,157 1,798 490 1,147 1,020 876 474 2,592 4,843 5,108 3,587 1,524 584 2,865 422 683 3,367 1,585 49,659 Net Profit (` cr) Profit (` 3QFY2012 854 1,011 1,432 270 4,043 513 981 1,430 613 451 766 1,728 2,372 1,701 751 1,091 839 662 206 2,130 3,599 4,440 3,263 1,345 668 3,406 425 (603) 2,887 1,456 44,730 % chg (5.1) (10.0) (0.5) 49.7 (5.8) (33.9) 18.5 30.1 (1.8) (10.4) 3.1 17.1 (9.1) 5.7 (34.8) 5.1 21.6 32.3 130.5 21.7 34.6 15.0 9.9 13.3 (12.6) (15.9) (0.5) 213.3 16.7 8.8 11.0 11.7
Strategy
Paving Reforms - Paving the way for an improvement in economic outlook:
Since September 2012, the government has taken a number of positive policy steps in the areas of structural reforms, fiscal consolidation and investment revival. The slew of reform measures announced has led to a renewal in investor sentiments and business confidence.
FDI in civil aviation (up to 49%), broadcasting (up to 74%) and power exchanges (up to 49%) FDI in insurance (up to 49%) and pension sector (up to 49%)
No
Attract long term capital inflows. Boost investment. Improve supply chain efficiency and thereby positively impact inflation Achieve financial turnaround of power distribution companies Greater autonomy to regulator and likely to result in allowing new products like options Speed up acquisition and enable determination of economic feasibility of project in early stages. Expected to drive up land cost and thus escalate project cost. Improve corporate governance through greater accountability and transparency To incentivize setting up and expansion of plants . Lower dependence on urea imports Likely to expedite clearances from various ministries thus reviving investment and growth but implementation remains key. Likely to reduce leakages in the distribution system, bring down administrative costs on subsidies and circumvent misappropriation of welfare benefits but identifying beneficiaries and financial inclusion are key for implementation To meet the budgeted disinvestment target of `30,000cr and narrow the fiscal deficit
Yes
Approved by CCEA. State governments to finalize the restructuring plans. Approved by Union Cabinet and deferred for consideration until the next parliamentary session Approved by Union Cabinet and deferred for consideration until the next parliamentary session Cleared by Lok Sabha, pending clearance in Rajya Sabha Approved by CCEA Approved by CCEA
No
(Regulation)
Yes
Land acquisition and rehabilitation and resettlement bill - Stipulates 80% landowners consent for private projects, 70% for PPPs and no consent for public projects. Companies Bill 2011 Urea policy Cabinet Committee on Investment (inter-ministerial body for projects above `1,000cr) Direct Cash Transfer - Transfer of subsidy directly to beneficiaries' bank account to be linked with their unique identity number (Aadhar card)
Yes
Yes No No
To be rolled out for scholarships, pensions, NREGA wages etc in 20 districts from January 2013, cover total 43 districts by March 2013, 18 states from April 2013 and the remaining states by April 2014 Divested stake in Hindustan Copper and NMDC. CCEA has approved stake sale in NALCO, SAIL, NTPC, RINL, BHEL, Oil India, MMTC and HAL and RCF Cleared by parliament. RBI to finalize guidelines for issue of bank licenses Decision on scheme taken by the commerce ministry
No
No
Expected to pave the way for issuance of the new bank licenses for private players Likely to boost export growth, support the trade balance and INR but impact is likely to be limited by weak external demand
Cleared
Extend 2% interest subvention on loans for labor-intensive export industries and engineering sector until March 2014
No
Strategy
So far, the government has decisively moved in the right direction as evident from some of the politically difficult but economically beneficial policy measures. We believe that further positive actions by the government such as implementing GST and DTC, alleviating constraints in mining and power sector to remove supply-side bottlenecks, clearing hurdles for land acquisition and expediting investments are likely to augur positively for market sentiment. In the medium term, we believe that these measures are likely to pave the way for a better economic outlook thereby having a positive impact on the earnings growth trajectory for corporates. Recovery in services sector growth during the quarter to 7.2% yoy as compared to 6.9% in the previous quarter supported the overall headline growth print as industry and agriculture reported modest growth performance. Industrial growth decelerated to 2.8% yoy as compared to 3.6% in the previous quarter and 3.7% in 2QFY2012 as manufacturing activity continued to remain muted. Agricultural growth reported a subdued growth of 1.2% yoy owing to a decline in kharif production due to late revival of monsoon and this impact is likely to play out further in the next quarter. We believe that growth for FY2013 has likely bottomed out in the second quarter. Overall, there is an improvement in the outlook for global growth going ahead, as policymakers take positive steps to support the recovery and reduce tail-risk scenarios. In addition, with key domestic policy measures being taken to stimulate growth in the economy we expect 5.7% yoy real GDP growth for FY2013. Also, positive catalysts to the outlook for FY2014 improving are likely to lead to a pick-up in growth and we expect the economy to move closer to 6.3% yoy growth.
Real GDP
11.2 8.5 5.7 3.5 9.0 7.5 8.5 9.2 7.6 8.2 8.0 6.7 6.1 5.3 5.5 5.3
1QFY11
2QFY11
3QFY11
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
(20.0)
Core Inflation
WPI Inflation
7.2
300 290
4.5
280 270 260 Apr-12
2QFY13
Strategy
Window for monetary policy easing opens in 4QFY2013
Headline WPI inflation moderated for the second consecutive month and came in at 7.2% yoy for the month of November 2012 as compared to 7.5% yoy during October 2012 and a higher 9.5% yoy in November 2011. Deceleration in the headline print can be attributed to softening commodity prices and the lagged impact of rupee appreciation resulting in moderation in inflation of manufactured products. Core (manufactured non-food) inflation for the month of November edged to a two-year low of 4.5% yoy, well within the Reserve Bank of India (RBI)'s comfort level. We believe that easing of the core component is likely to give some respite as far as interest rates are concerned. However, Consumer Price Index inflation has accelerated to almost double-digits at 9.9% yoy in November 2012. In its recent December policy review the RBI has treaded cautiously as prices continue to remain elevated despite easing pressures. On a positive note, the RBI's policy stance has increasingly shifted towards supporting growth rather than focusing purely on inflation management. The RBI has also reiterated its guidance on policy easing in the fourth quarter of the fiscal year. We believe that going ahead; softening commodity prices along with a high base lend a positive bias on bringing down headline inflation, thus opening the window for reduction in monetary policy rate. We expect the RBI to ease the repo rate by 50bp in 4QFY2013. previous year. Merchandise imports too declined but by a lower 4.8% during the quarter as against an increase of 38.1% in Q2 of 2011-12. The sharper decline in exports as compared to imports has led to widening of the trade deficit to USD48.3bn during 2QFY2013 from USD44.5bn during the corresponding quarter of the previous year. In the April - September period, the CAD increased to USD38.7bn as compared to USD36.3bn in the corresponding period of the previous year. The CAD as a percentage of GDP also marked an increase during the first half of the fiscal year to 4.6% from 4.0% in the corresponding period of the previous year. As far as narrowing the fiscal deficit is concerned, various proactive measures taken by the government to rein the deficit include hike in diesel prices, capping supply of subsidized LPG cylinders to households, kick-starting the disinvestment program and auctioning of telecom spectrum. We believe that despite these steps, the government is likely to fall short of meeting its revised fiscal deficit target of 5.3% of GDP owing to slowing revenues due to slowdown of growth in the economy and a burgeoning subsidy burden. The fiscal deficit has already reached 80.4% of the budgeted estimate (BE) in the April - November 2012 period. Political will to continue the process of fiscal consolidation remains key as the threat of sovereign ratings downgrade still lingers. Also going ahead, a fiscal deficit in FY2014 at 4.8% of GDP as indicated by the Finance Minister seems optimistic since the risks of a populist budget prevail as we come closer to elections in 9 states in 2013 and the 2014 general election. On a positive note though, key triggers to watch out for in respect of fiscal consolidation in the medium-term include a) direct cash transfers, b) increase in diesel prices, c) impact of shale on global oil and gas prices and d) revenue buoyancy on account of anticipated improvement in GDP and corporate earnings growth.
Strategy
Outlook and Valuation
We expect the Sensex EPS to report a 7.9% growth to `1,213 in FY2013E. In FY2014E, we expect a more robust 14.2% growth to `1,385. We arrive at our 12 month Sensex target of 22,100, with a target multiple of 16x FY2014E earnings based on the five-year average one-year forward P/E ratio. The target implies an upside of 13.8% from the present levels. Going forward, we believe that there are possibilities for further upsides arising out of improvement in the outlook for earnings growth and rollover to FY2015 earnings.
1,385
1,213
20.0
15.0
5.0 Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
10
Automobile
Muted festival demand
The domestic automotive industry failed to recover during 3QFY2013 as demand across the segments (excl. utility vehicles and light commercial vehicles) faded out post the festival season. The total industry volumes saw a modest growth of 4.8% YTD in FY2013, due to continued weakness in the medium and heavy commercial vehicle (MHCV, down 16.3% yoy), tractor and passenger car (PC, flat yoy) segments. Nonetheless, the utility vehicle (UV) and light commercial vehicle (LCV) segments sustained their growth momentum, reporting a strong growth of 37% and 17% respectively in YTD FY2013. Going ahead, we expect the demand to remain under pressure in 4QFY2013; however, an expected easing of interest rates going ahead is likely to revive demand in FY2014. however, other heavyweights like Hero MotoCorp (HMCL) and MM underperformed the auto index. TTMT, BJAUT and MSIL were the major gainers during the quarter, with absolute gains of ~17%, ~16% and ~10% respectively. Bharat Forge declined ~17% on account of sluggish CV volumes and Exide Industries was down ~6% on posting weak results for 2QFY2013.
Absolute
Automobile
We expect AL's top-line to register a de-growth of ~14% yoy (~25% qoq) largely due to higher discounts and increasing contribution of the lower priced Dost (~36% of total volumes vs 29% in 2QFY2013). We estimate EBITDA margins to decline by 180bp qoq on account of adverse product-mix and higher discounts which are likely to drag down the bottom-line by ~39% yoy (down ~70% qoq). sequentially on account of favorable product-mix and currency movement and operating leverage benefits. Hence, the bottom-line is expected to surge ~131% yoy, although on a lower base.
Exports (incl. above) 376,222 HMCL TVSL Two-wheelers Three-wheelers Exports (incl. above) 1,573,135 518,146 504,894 13,252 58,894
(1.2) 1,182,152 1,232,410 (1.0) 4,546,230 4,663,168 (2.2) 1,523,305 1,670,391 (3.0) 1,488,761 1,637,993 42.6 (14.5) 34,544 179,667 32,398
Automotive - domestic140,378
9,850 (13.5)
Source: Company; Angel Research Refer to important Disclosures at the end of the report
231,182 (22.3)
12
Automobile
Auto ancillaries
We expect auto ancillary companies to report a mixed performance for 3QFY2013. With an up-tick in OEM demand led by festival buying and gradual recovery in replacement demand, primarily in batteries and tyres, the top-line of our coverage universe (ex. Bharat Forge) is expected to post a healthy growth. However, likely margin pressures due to an unfavorable currency and a slightly adverse product-mix (higher share of OEMs) will negatively impact the bottom-line. We expect Apollo Tyres (APTY) and Exide Industries (EXID) to outperform in 3QFY2013 driven by healthy demand and falling raw-material prices. We expect APTY to register a healthy growth of ~10% yoy in consolidated revenues driven by ~11% and ~12% yoy growth in domestic and South Africa revenues respectively. European operations are expected to register a modest growth led by an uncertain macro-economic environment. We expect the consolidated margins to improve 140bp yoy to 11.5% primarily on account of a sharp decline in rubber prices (down ~15% yoy). On the back of the improved operating performance, the adjusted net profit is expected to grow strongly by ~30% yoy. For Bharat Forge (BHFC), we expect the standalone volumes to decline sharply by ~17% yoy led by sharp deceleration in MHCV sales and slowdown in Europe. However, strong realization growth, due to increasing share of machining component and favorable forex movement, is expected to restrict the decline in net sales to ~7% yoy. We expect the bottom-line to decline by ~14% yoy as we expect operating margins to contract by ~210bp yoy on account of reduced operating leverage. Exhibit 5: Quarterly estimates Automobile
Company AL BJAUT HMCL^ MSIL MM TTMT* TVSL CMP (`) 27 2,131 1,898 1,489 930 312 42 Net Sales 3QFY13E 2,423 5,255 6,141 10,938 10,915 48,794 1,793 (14.4) 8.6 2.6 45.3 31.8 8.0 3.6 OPM (%) chg bp 109 (108) (50) 232 (10) (225) (1) 8.3 18.7 11.7 7.5 12.1 12.8 6.5 Profit Net Profit 3QFY13E 41 810 602 474 876 2,865 59 (38.8) (5.1) (1.8) 130.7 32.3 (15.9) 4.2 (` EPS (`) % chg (38.8) (5.1) (1.8) 130.7 31.9 (15.9) 4.2 0.2 28.0 30.1 16.4 14.8 9.0 1.2 (` EPS (`) FY12 2.1 106.5 108.3 50.6 46.7 36.1 5.2 FY13E 2.1 110.4 118.2 67.3 54.4 35.5 4.6 FY14E 2.8 126.5 130.0 94.6 62.1 42.7 5.8 FY12 12.8 20.0 17.5 29.5 19.9 8.7 8.0 P/E (x) FY13E 12.8 19.3 16.1 22.1 17.1 8.8 9.2 FY14E 9.6 16.8 14.6 15.7 15.0 7.4 7.2 % chg 3QFY13E % chg 3QFY13E (`) (` 31 2,014 998 337 46 Buy Neutral Accum. Neutral Accum. Accum. Accum.
We expect Bosch (BOS) to post an ~8% yoy growth for the quarter due to weak MHCV volumes, the major driver of the company's revenues. We expect EBITDA margins to decline sharply by ~220bp yoy led by raw-material cost pressures (due to INR depreciation) and lower operating leverage. Hence, the net profit is expected to decline by ~29% yoy during the quarter. EXID is likely to witness a strong revenue growth of ~28% yoy led by healthy demand from the automotive OEMs as well as replacement markets and continued traction in the inverter battery sales. We expect EBITDA margins to improve by ~110bp qoq due to price hikes taken in 2QFY2013 (~5% across the replacement segment). Hence net profit is expected to jump ~31% yoy. We expect Motherson Sumi Systems to continue to post improvement in its operating performance driven by improving utilization levels at the domestic level and on the Samvardhana Motherson Reflectec front. Led by consolidation of Peguform operations, the top-line and bottom-line are expected to post an ~61% and ~127% yoy growth, respectively.
Outlook
We believe the long-term structural growth drivers of the domestic automotive industry such as GDP growth (leading to increasing affluence of rural and urban consumers), favorable demographics, low penetration levels, entry of global players and easy availability of finance are intact, which should support a 10-12% CAGR in auto volumes over FY2012-14E. As such, we prefer stocks that have strong fundamentals, high exposure to rural and export markets and commanding superior pricing power. We remain positive on Ashok Leyland, Hero MotoCorp, We Leyland, Tata Mahindra and Mahindra and Tata Motors. (` cr) `
Target Target Reco.
Source: Company, Angel Research; Note: Price as on December 31, 2012; * Consolidated numbers; ^ OPM adjusted for royalty payment
(` cr) `
Reco. Accum. Accum. Neutral Accum. Accum. Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2012, * Consolidated numbers; # December ending; & Full year EPS is consolidated
13
Banking
Banking stocks outperform broader markets on liquidity and rate cut hopes
Banking stocks under our coverage outperformed the broader market during 3QFY2013, with more than half of them generating sequential returns higher than 10%. The rally was largely driven by liquidity and rate cut hopes fueled by moderation in inflation levels. Though the economic growth environment remains challenging and in spite of inflation having moderated in the last two consecutive months, the RBI restrained from any policy rate cuts during the quarter. However, the central bank's stance now indicates increasing concern to address growth rather than pure concentration on inflation management, as it had been doing till now. At the shorter end of the interest rate curve, a slight moderation in three-month CD and CP rates rates should lead to easier and cheaper access to short term funding. Even at the longer end of the yield curve, despite the recent increase in term deposit rates by a few banks, many others have sequentially lower term deposit rates, which would ease costs of deposits to some extent. Though Private banks are expected to report a healthy earnings performance with a 21.7% yoy growth, the overall bottom-line performance is expected to be moderate at 8.1%, largely dragged by subdued performance of PSU banks (2.5% yoy). Dissecting private banks performance, the larger ones (22.5% yoy) are expected to comfortably outperform smaller ones (16.1% yoy). Within PSU banks, mid PSUs and large-PSUs are expected to report a muted performance with growth of 4.6% and 1.5% yoy, respectively.
Feb-09
May-09
Feb-10
Nov-09
Nov-08
Aug-10
Feb-11
Nov-10
Aug-09
May-10
Aug-11
Feb-12
May-12
May-11
14
Nov-12
Nov-11
Aug-12
Banking
The deposit rate cuts have made the real interest rates for depositors even more negative (considering persisting CPI inflation levels at around 10%), which is likely to result in moderate deposit growth going ahead as well. Diesel and LPG price revisions, hikes in electricity tariffs, agricultural bottlenecks and increase in MSPs of agriculture products, are yet to fully reflect in generalized inflation and therefore pose significant upside risks to overall inflation expectation and resultant outlook for savings and deposit mobilization. Bank and Bank of India, have recently increased their peak term deposits rates (1-3 year tenure) by 25-35bp, respectively. Unlike in the last quarter, where a 25bp CRR cut in the September policy review prompted banks like SBI, State Bank of Bikaner and Jaipur and State Bank of Mysore to reduce base rates by 25bp, there was no base rate reduction in 3QFY2013 induced after 25bp CRR cut, as banks await the RBI to reduce policy rates. HDFC bank has become the first bank to reduce its base rate by 10bp with effect from December 31, 2012 ahead of RBI's monetary policy review due on January 29, 2013, which in our view, is to manage its ALM. Short-term borrowing rates have eased further in 3QFY2013, though at a decelerating pace compared to last quarter, as reflected in the slight correction in the three-month CD and CP rates. Easier and cheaper access to short-term funding, in our view, should support margins to some extent. Amongst our coverage universe, only SBI and OBC had reduced their base rates by 25bp and 10bp, respectively in the previous quarter and accordingly on an average basis their base rates were lower by 22bp and 5bp qoq, respectively. On the deposits front, Vijaya Bank, Central Bank, J&K Bank and South Indian Bank have reduced their retail term deposit rates (1-3 year tenure) by 50-65bp, highest within our coverage universe.
Margins to find respite in reduced term deposit rates, even as CASA accretion remains modest
In 3QFY2013, 15 out of 27 banks under our coverage reduced their retail term deposit rates (1-3 year tenure) by 25-65bp. Amongst the banks which resorted to lowering term deposit rates during the quarter, 9 had also reduced rates by 25-45bp during the previous quarter, thereby implying a total reduction of 50-110bp for these banks in the span of past six months. Reduction in deposit rates, in our view, was driven by lower incremental credit growth emanating from weak macro fundamentals. Deposit growth has moderated on account of reduced rates (term deposits) and slow economic growth (CASA accretion), thereby leading to tight liquidity conditions. In response to it and to manage their ALM, Dena Bank, Federal
15
Banking
Exhibit 5: Gross NPA trends (%) Private vs. PSU
3.76 3.60 3.30 3.00 2.70 2.40 2.10 1.80 1.50
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13
2.80
3.02
2.98
2.34
2.42
2.35
2.17
2.01
2.05
2.06
0.92
0.79
0.69
3QFY11
0.56
4QFY11
0.56
1QFY12
0.54
2QFY12
0.54
3QFY12
0.46
4QFY12
0.49
1QFY13
0.54
2QFY13
1QFY11
Pvt Banks
PSU Banks
2QFY11
Pvt Banks
PSU Banks
1.74
1.04
Slippages for the banking sector have increased significantly every quarter over the past few quarters and can be expected to remain in spotlight even during 3QFY2013, as mid-corporate and SME segments continue to remain vulnerable to becoming NPAs considering slowing growth environment and expectations of relatively slower and delayed downward movement in interest rates, in our view. Suzlon could be a chunky common addition to the restructuring book of many banks such as SBI, IDBI Bank, BOB, IOB and few others, this time around, as its case has been referred to CDR earlier during the quarter. If it is not approved under CDR, it is most likely to be an addition to the slippage book of these banks. On the discom restructuring front, OBC and Andhra Bank have stated that their exposure to Punjab SEB and Tamil Nadu SEB, respectively is most likely to be restructured in this quarter (which is included in amounts mentioned above). However, the developments on CCEA approved discom bailout package are still not noticeable, and hence the magnitude of SEB restructuring this time around is likely to be limited to bank/facility specific. CDR referrals have also risen significantly over the last five quarters, closely tracking the weakening economic growth environment, and hence fresh approvals of `19,000cr through the CDR route in 2QFY2013 and the pending approvals of ~`31,000cr under the CDR mechanism are likely to lead to further fattening of restructuring books for the banking industry. Private banks have not been sparred of asset quality pressures,
16
Banking
though they have faced relatively much lower pressures than their PSU peers and have managed to keep most of their asset quality largely intact until now in a challenging economic environment. Even going ahead, private banks can be expected to outperform their nationalized counterparts on the asset quality front.
8.0
9.24 8.98
9.26 9.06
9.26
9.25 9.06
7.99 8.02
8.01
8.18 8.03
9.10
7.93
8.15
7.5 7.0
AAA 1 Yr
AAA 3 Yr
AAA 5 Yr
AAA 10 Yr
Gsec 1Yr
Gsec 3Yr
28-Sep-12
31-Dec-12
inflation management and reduced CRR slightly by 25bp, which led the yields to soar to 8.22%. During November, yields remained largely range-bound and reacted to an unexpected and slight easing in headline WPI inflation for October, as rate cut hopes in December policy review started gaining ground. In December, yields edged lower in the first half of the month on higher rate cut expectations after headline WPI inflation moderated for the second straight month. In its policy meeting, the RBI maintained status quo on rates, but the stance has increasingly shifted towards supporting growth rather than focusing purely on inflation management, which led the yield to trend even more downwards. Overall, the 10-year bonds ended the quarter slightly lower sequentially at 8.05% (8.15% as of September 30, 2012) and hence the treasury gains/losses for the banking sector are expected to be moderate during 3QFY2013.
8.05
Banking
While PSU bank valuations around three-four months back offered bottom-fishing opportunities, after the recent surge in several of these stocks, further upsides in our view would have to be driven by catalysts such as lower re-pricing of high-cost deposits (relative benefit for low CASA banks) and higher recoveries (relative benefit for banks that have experienced maximum asset quality pain, and importantly, also provided for it already). Screening for these criteria, as well as Tier 1 capital adequacy and trailing adjusted valuations, in our view, PSU banks that would stand to gain most from an eventual cyclical turn-around include Bank of India among the largecaps as well as Indian Bank, Corporation Bank and United Bank amongst the mid-caps. Of these Bank of India/United Bank is going through/expected to go through management change, hence we would have a relook at them post results.
Source:C-line, Angel Research, Note:* For PSU banks , excl. SBI and IDBI
(` ( ` cr)
Reco.
Buy
1.8 1,320 1.1 2.4 1.0 0.9 0.8 0.9 0.7 0.7 0.7 0.9 32 541
933 Accum.
257.3 1,200.1 1,319.4 1,548.6 27.2 46.8 21.6 37.8 27.3 133.5 217.3 109.0 128.8 112.2 155.1 246.3 121.4 157.7 127.8 175.9 285.6 139.1 176.9 149.2
1.5 2,600 Accum. 0.7 1.0 0.6 4.7 2.0 141 Accum. - Neutral 90 Accum. - Neutral 328 Accum.
18
Capital Goods
We expect companies in our capital goods (CG) universe to post a moderate cumulative top-line growth of 7.4%. However, on the bottom-line front, the picture is mixed, with many companies in our coverage universe posting a flat yoy growth or decline mainly on account of margin pressure and, in some cases, due to higher interest cost. 29.5% yoy to `18cr aided by a lower base. We maintain our Accumulate recommendation on the stock with a target price of `51.
19
Capital Goods
Exhibit 1: 3QFY2013 - Sensex vs CG stocks
(%) 15.0 10.0 5.0 (1.5) (5.0) (5.7) (10.0) (15.0) (11.7) ABB BHEL CG Thermax BGR KEC Jyoti BSE CG Index SENSEX (9.3) (7.6) (6.2) (5.3) 10.0 3.2
tandem, the BTG market will further witness a dry spell as most of the planned orders have already been awarded and new orders are in the preliminary stages of discussions, which are likely to witness delay in finalizations due to ongoing headwinds (such as fuel crisis, constraints in land acquisition and poor health of SEBs). T&D space in a better shape; although concerns loom: While T&D capex is on an uptick, given the strong traction in ordering from PGCIL, land acquisition and forest clearances (RoW) entail execution risks, which have led to slower-than-expected growth in T&D infrastructure historically. Overall, the outlook remains challenging: A handful of positives, especially in the T&D space, do very little to warrant a change in our pessimistic view. Against the backdrop of economic slowdown, we believe the overall picture remains gloomy for market leaders (read BHEL, BGR and ABB, among others). We believe it will take a while for the sector to witness dramatic improvements, while the government is initiating its efforts to resolve the key issues in the power sector. Given this, we expect the slowdown to continue for the next couple of quarters. Therefore, companies catering to the power sector will witness a high degree of discomfort unless core concerns soothe. Valuations: We prefer companies with strong growth visibility and diversified revenue streams. We follow a stock- specific stockapproach, with Crompton Greaves, KEC and Jyoti Structures being our preferred picks. In the BTG space, we continue to maintain our negative stance, owing to concerns of heightened competition and slowing of order inflows.
ABB decline in order intake yoy across BTG space BHEL Thermax CG 23 10 KEC Jyoti 10 20 30 40
(40)
(30)
(20)
(10)
( ` cr)
Reco. Sell Neutral Neutral Buy Accum. Buy Neutral
Source: Company; Angel Research; Note: Price as on December 31, 2012; * December year ending
20
Cement
Cement demand muted post monsoon
Cement demand in the country failed to pick up at desired pace during 3QFY2013 post monsoon. The slow pick-up can be attributed majorly to the overall slowdown in the economy. The RBI has restrained from reducing interest rates (repo and reverse repo) despite the ~5% GDP growth reported for 1HFY2013 as the inflationary situation has failed to abate. The prevailing high interest rates in the economy are a major dampener for the real estate activity in the country which is affecting cement demand. However, on a positive note, the RBI has signaled the possibility of monetary policy easing in 4QFY2013, which should aid healthy pick-up in cement demand during FY2014. Besides the overall economic slowdown, the construction activity during the quarter was also affected due to the occurrence of the festive season which resulted in labor going on leave. Unavailability of sand due to ban on sand mining too affected construction activity in certain regions. Construction activity is expected to pick-up in mid-January post Makara Sankaranthi. calendar year accounting pushing up the supply to meet the yearly target. Cement makers increased the prices by `5-10/ bag in Gujarat and Kerala in the fourth week of December.
Source: Industry, Angel Research; Note refers to prices in the trade segment
Repo rate
CRR
4.25
100
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Jun-06
Dec-11
Jun-07
USD/tonne (LHS)
INR (RHS)
Key developments
know-how ACC and Ambuja to pay technology and know-how fees to Holcim: During 3QFY2013, the Board of Directors of ACC and Ambuja Cements have approved payment of an amount equivalent to 1% of the companies' net sales to the promoter group Holcim towards technology and know-how fees w.e.f January 1, 2013. An approval of the shareholders in the AGM is required, for the decision to take effect. Both the companies already pay a certain amount towards technical and training fees to Holcim (ACC 0.6% of CY2011 net sales; Ambuja 0.8% of CY2011 net sales) and the new payment is expected to be inclusive of those payments. Hence the payment is not expected to have a major impact on the companies earnigs. Ambuja Cements announces capacity addition: During the quarter Ambuja Cements announced capacity expansion of its
21
Dec-12
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Cement
Sankrail grinding unit in West Bengal to 2.4 mn tonne at an investment of `325cr. Cement is expected to post the highest top-line growth of 21.0%. Amongst the large caps, Ambuja Cements is expected to post the highest top-line growth of 18.2%.
3QFY2013 expectations
Top-line to grow by 13.2% yoy
We expect our cement universe to report a 13.2% yoy improvement in the top-line, driven more by higher realization. Amongst the companies under our coverage, JK Lakshmi
17.4
11.2
1.0 0.5
10.0 5.0 0.0 ACC Ambuja Ultratech India Cements Madras Cements JK Lakshmi Shree Cement 3.4
0.0
EV/Sales(x) -LHS
Source: Company, Angel Research; Note: Price as on December 31, 2012; ^December year ending; *June year ending
Analyst - V Srinivasan
Refer to important Disclosures at the end of the report
22
FMCG
Poor macro -economic indicators keep consumer sentiments low
Consumer sentiments continue to remain weak due to low GDP growth and high inflation persisting in the country. Weak consumer sentiments were reflected in the modest volume growth posted by FMCG companies in 2QFY2013. However, the outlook for the Indian economy has improved over the past few months post the reform measures announced by the Union Government which augurs well for the consumer sector.
FMCG
Exhibit 2: FMCG stocks performance on bourses (3QFY2013)
United Spirits TGBL Nestle Marico ITC HUL GSK Consumer GCPL Dabur India Colgate Palmolive Britannia Asian Paints (10) 0 5.5 (3.6) 27.8 8.1 0.5 29.9 4.9 12.3 10 20 (%) 30 40 50 60
(%)
6.5
3QFY2013 expectations
We expect 3QFY2013 to be a reasonably strong quarter for our FMCG universe with top-line and bottom-line growth coming in at 15.8% and 11.0% respectively. On the top-line front, our FMCG universe is expected to grow by 15.0% yoy. The occurrence of the festive season in the quarter is expected to boost performance of companies such as Asian Paints and United Spirits. Both the companies are expected to post a top-line growth of 20.3% and 17.7% respectively. Similarly, the integration of Darling group companies in phase II geographies in the consolidated accounts is expected to boost the revenue of GCPL which is expected to post a healthy top-line growth of 22.9%. Sensex companies ITC and HUL are expected to post top-line growths of 15.1% and 12.6% respectively. Despite the weak consumer sentiments, companies have adopted selective price increases during the quarter to protect margins. During the quarter, ITC had increased the prices of Goldflake cigarettes by ~6-7%.
On the operating front, most of the companies are expected to post a decrease in OPMs due to increase in raw material and fuel costs. However, Marico is expected to post a 344bp yoy expansion in OPM due to lower copra prices. Thus we expect the FMCG universe to post an operating profit growth of 9.6% yoy.
Reco. Neutral Buy Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2012; * December year ending; ^Consolidated; #Quaterly numbers pertains to standalone financials
Analyst - V Srinivasan
Refer to important Disclosures at the end of the report
24
Infrastructure
For 3QFY2012, we expect our coverage universe to report a subdued top-line growth of 12.8% yoy on the back of slowdown in execution. The slowdown in execution pace has been due to: 1) a challenging macro environment; 2) policy paralysis; 3) stretched working capital; and 4) delays in payments from clients. EBITDAM is expected to come in at 23.0% (19.6%), registering a growth of 341bp yoy. On the back of healthy execution we expect earnings to come at `54cr for 3QFY2013.
Source: Company, Angel Research; Note: For our analysis, we have selected 10 companies, as detailed in Exhibit 6
During 3QFY2013, there has been no respite from the several headwinds (such as high interest and inflationary cost pressures and slowdown in order inflows) faced by the sector. Thus, dull revenue performance along with pressure on EBITDAM and high interest cost will result in muted performance on the earnings front. Against this backdrop, we expect a muted performance on the earnings front for most of the companies under our coverage universe. Excluding the performance of L&T, earnings for our coverage companies are likely to decelerate to 1.6% yoy.
5.8 2.0
Source: Company, Angel Research; Note: For our analysis, we have selected 10 companies, as detailed in Exhibit 6
3QFY2013 expectations
ABL (CMP/TP: `204/`286) (Rating: Buy)
Ashoka Buildcon (ABL) is expected to post a robust growth of 47.8% yoy on the consolidated revenue front to `522cr on the back of under-construction captive road BOT projects, which will drive its E&C revenue. The E&C segment will continue to dominate the company's revenue by contributing `405cr (77.7%), while the BOT segment's share is expected to be `117cr.
Refer to important Disclosures at the end of the report
Infrastructure
JAL (CMP/TP: `97/-) (Rating: Neutral)
We expect Jaiprakash Associates (JAL) to post modest top-line growth of 13.3% yoy to `3,288cr for the quarter. We expect C&EPC revenue to growth 12.4% yoy to `1,390cr. On the cement front, we expect JAL to post revenue of `1,663cr - volume of 4.0mt with realization of `4,158/tonne for the quarter. We expect the company to post blended EBITDA margin of 25.9%, registering a decline of 136bp for the quarter. The bottom line 144cr, is expected to be at `144cr, registering a yoy decline of 29.7% quarter. for the quarter. EBITDA margin to expand by 39bp yoy to 8.7%. The 28cr, bottom-line is expected to be at `28cr, registering a growth of yoy. better-than-than-expected 32.8% yoy. This is mainly on account of a better-than-expected performance at the operating level.
2QFY13
2QFY12
1QFY13
26
Infrastructure
Exhibit 4: Order inflow yoy growth trend during 2QFY2013 (%)
(46) Simplex In.
(70)
NCC
30
L&T
294
Sadbhav
IVRCL
(` cr) `
Reco. Buy Neutral Buy Accum. Neutral Neutral Accum. Neutral Buy Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2012, Target prices are based on SOTP methodology; ^Consolidated numbers; *FY2013 figures are for 9 months
27
Information Technology
Mixed economic data indicates flat CY2013 IT budgets
The Indian IT services industry is likely to touch ~US$98bn in FY2013 according to Nasscom, close to 6x of where it was in FY2004, a CAGR of 13% over the past five years. Gartner's current US dollar growth forecast for the overall global IT spending in 2012 has been revised up slightly from 2.5% last quarter to 3.0% now but in constant US dollar terms, the forecast growth for overall IT spending in 2012 is unchanged at 5.2%. While the challenges facing global economic growth persist - the eurozone crisis, weaker US recovery and a slowdown in China - the outlook has at least stabilized. Also, according to IDC, a market research firm, the global IT spending is expected to grow by 6% in 2012 in constant currency, slightly down on last year's pace of 7% growth. Economic indicators: The US' real GDP grew by 2.0% in 3QCY2012, up from 1.3% in 2QCY2012. US corporate profits for 3QCY2012 increased by 17.9% on a yoy basis, compared to 14.5% in 2QCY2012. For November 2012, data points for the US economy have become mixed. For instance, 1) non-manufacturing index inched up to 54.7 from 54.2 in October 2012; 2) unemployment rate stood at 7.7% as against 7.9% in October 2012; 3) industrial production came in at 1.1% mom as against a decline of 0.7% in October 2012; 4) manufacturing index declined to 49.5 as against 51.7 in October 2012; 5) retail sales grew by 0.3% as against -0.3% in October 2012; and 6) factory orders grew by 0.8% mom as against 4.5% in October 2012. These mixed economic data points from the US coupled with an unsteady economic situation in Europe have created an uncertain macro-environment over the past few quarters and companies are facing some challenges in the near term due to financial turmoil and global uncertainties. Tech numbers: The recent quarterly numbers from Oracle and Accenture gave mixed signals for the Indian IT sector going into CY2013. While Oracle's new license sales and cloud revenue registered a robust growth, Accenture's consulting bookings were soft yoy, implying pressure on discretionary spending. Oracle posted a strong license revenue growth of 18% yoy coupled with a decent guidance of 4-14% in new license sales, which indicated positive signals for revival in the discretionary spending in CY2013. However, Accenture's consulting revenues declined by 3% qoq and outsourcing revenue grew at a moderate pace of 13% yoy compared with an 18% yoy growth in the previous quarter. While the company maintained its FY2013 business outlook of 5-8% revenue growth in local currency terms, softness in discretionary spending is likely to continue in the near term. Also, Cognizant in its 8K filing indicated at a growth of 16% in CY2013 (based on incentive programs) against a guidance of 20% in 2012, which raised
Refer to important Disclosures at the end of the report
eyebrows for the sector's demand health in 2013. Overall, we believe that the IT budgets are expected to remain flattish in CY2013. Our take: Given the current uncertain environment, we expect volume growth of tier-I Indian IT companies to scale down to sub-12% in FY2013. The BFSI industry, from which IT companies derive maximum revenue, is expected to be a laggard in terms of growth. A weak performance from these accounts due to weaker-than-anticipated acceleration implies industry-wide slowdown in IT spending. The IT spend now is driven by trends such as increased offshoring of work from Europe and vendor consolidation. Market share gains in the renewal deal pipeline will be a key differentiator of volume growth across players in our view. Management commentary within the sector provide a mixed outlook for 2013 IT budgets as of now. Early comments from managements indicate that IT budgets will remain flattish in CY2013.
5.3 3.8
5.0 4.5
3.2 1.8
0.2 0
(2) 3QFY12
Infosys
TCS
HCL Tech
Wipro*
28
Information Technology
Mahindra leading the pack aided by revenues flowing from acquisition of Hutchison Global Services and Comviva. For 3QFY2013, in INR terms, revenue growth is expected to be in the range of 1.0-2.2% qoq for tier-I IT companies, marginally lower than USD revenue growth, due to appreciation of INR against the USD on a qoq basis, with average USD/INR rate at 54.1 for 3QFY2013 as against 55.1 in 2QFY2013.
2.5
2.0
1.2
2.2
1QFY13
2QFY13
3QFY13E
Infosys
TCS
HCL Tech
Wipro*
4.6 3.4 2.4 2.2 2.0 2.4 2.5 2.0 3.0 3.0 3.2 2.6 1.7 2.4 3.2 2.2 2.6
2 1 0 (1) (2)
For tier-II IT companies, INR revenue growth is expected to be at (2.4)-7.6% qoq, with Tech Mahindra leading the pack.
TCS
HCL Tech
Wipro*
For tier-II IT companies, USD revenue growth is expected to be (1.3)-8.4% qoq, with Tech Mahindra leading the pack aided by inorganic growth from the two acquisitions done recently while Hexaware is expected to be at the bottom with its management indicating a client specific issue.
We expect the EBITDA margin of Infosys to decline by 97bp qoq to 28.1%, because of moderate wage hike of 6% to the offshore employee base and 2-3% to the onsite employee base. The EBITDA margin of HCL Tech is also expected to decline by 179bp qoq to 20.4%, due to wage hikes given during the quarter. TCS and Wipro (IT services) are expected to post a moderate decline of 28bp qoq and 46bp qoq in their EBITDA margin to 28.2% and 23.3%, respectively, on account of lower working days in the quarter. Exhibit 6: EBITDA margin profile Tier-I
35 31.0 33.7 32.6 30.6 29.1 31.0 29.1
(%)
8.4
30 29.5
29.1 24.0
1.6
20
22.0
20.4
3QFY13E (1.3)
1QFY13
2QFY13
3QFY13E
Infosys
TCS
HCL Tech
Wipro*
Tech Mahindra
Mahindra Satyam
Mphasis
MindTree
Persistent
Hexaware
For tier-II IT companies under our coverage (excluding KPIT Cummins and Persistent Systems), we expect EBITDA margin to decline on a qoq basis due to INR appreciation during the quarter. The EBITDA margin of Hexaware is expected to decline by ~520bp qoq to 16.4% due to a client specific issue (involving one of its clients) cited by the management. The EBITDA margin of Tech Mahindra is expected to decline by 136bp qoq to 19.3% as the two acquisitions done by the company have lower margin profile as compared to the company's current average operating margin.
29
Information Technology
Earnings growth to be a mixed bag
On the back of INR appreciation and moderate volume growth, profitability of tier-I companies such as TCS and Wipro is expected to decline by 4.1% and 2.0% qoq, respectively. Infosys and HCL Tech will have higher impact on their profitability due to additional negative impact of wage hikes; profitability is expected to go down by 9.0% and 9.5% qoq, respectively. Amongst mid-tier IT companies, earnings growth is expected to be a mixed bag. Tech Mahindra is expected to post a 5.7% qoq growth in its net profit aided by couple of acquisitions. Hexaware is expected to report an enormous hit of 28.5% qoq on its net profit due to a sudden project closure at one of its top clients. Persistent Systems and MindTree are expected to see a qoq increase in their net profits on account of forex gains. In case of KPIT Cummins, the profitability is expected to go up by 41% qoq to `57cr on the back of higher other income qoq and lower tax rate coupled with decent volume growth. outperform peers and show better revenue growth and greater margin control. We expect that growth in FY2013 will be largely led by market share shifts with competitive intensity increasing. Temporary suspension of work happening at key BFSI accounts which are the highest contributor to Indian IT revenues and reduced discretionary spending are concern areas going ahead. Management commentary within the sector has provided a mixed outlook for 2013 IT budgets as of now. Early comments from the management indicate that IT budgets will remain flattish in CY2013. We do not expect the flow business to see material acceleration in FY2014, with it likely to be held back by the impending fiscal cliff in the US, which would impact client decision making and cause softness in discretionary spending from large revenue contributors such as BFSI and telecom clients. After a year of growing faster than the tier-I IT companies, India's mid-sized IT companies might have a tougher and slower year ahead as companies wait for economic revival in their largest market - the US. Factors such as demand pressures, limited pricing power, high client concentration and limited bench sizes could restrict profits of mid-tier firms in the coming quarters. We remain cautiously optimistic on the IT sector, as post a mixed 1HFY2013, managements have given a mixed commentary for IT budgets in CY2013, which are at best expected to remain flattish. We expect TCS and HCL Tech to lead growth in the tier-I IT pack in FY2013. TCS is currently trading at 18.1x FY2013E EPS and 16.4x FY2014E EPS, owing to better revenue visibility than its peers and operational exuberance we recommend Buy rating on the stock with a target price of `1,448. We have a Buy rating on HCL Tech with a target price of `725. Further, we recommend an Accumulate rating on Wipro with a target price of `421. Among mid-caps, we like Tech Mahindra due to the inorganic growth it would witness post the two acquisitions done recently; we recommend Buy on it with a target price of `1,087.
(` cr) `
Reco. Buy Accum. Accum. Buy Buy Accum. Neutral Buy Accum. Accum. Buy Accum.
Source: Company, Angel Research; Note: Price as on December 31, 2012; *June ending so 2QFY2013 estimates; ^October ending so 1QFY2013 estimates; #December ending so 4QCY2012 estimates; Change is on a qoq basis
Media
Healthy top-line growth
For 3QFY2013, we expect our Media universe to post a cumulative top-line growth of 10% yoy. The revenue growth of print media companies for the quarter would primarily be aided by uptick in advertisement revenues due to festive season. Sun TV Network (Sun TV)'s agreement with Arasu Cable as well as uptick in advertisement revenues from FMCG companies is expected to bolster the former's top-line performance. PVR is also expected to post a healthy revenue growth on the back of robust seat additions and many successful releases during the quarter. Exhibit 1: Newsprint prices up in INR terms
800 750 700
USD/tonne
650 600 550 500 450 400 Dec-05 Dec-06 Dec-07 Dec-08 USD/tonne Dec-09 Dec-10 Dec-11
INR/tonne
During 3QFY2013, the average newsprint prices have remained flat at $620. In INR terms, the newsprint prices have posted a slight decline of 1.9% qoq to ~ `33,656 due to 1.9% qoq appreciation of INR v/s USD. However, newsprint prices are up by 6.6% yoy in INR terms, on account of yoy depreciation in INR v/s USD.
Outlook and valuation: Print media stocks had underperformed the Sensex in the last few quarters due to margin pressure. However they have posted impressive gains in 3QFY2013, outperforming the Sensex on expectations of uptick in advertising revenues (on account of the festive season) and on increased optimism of economic recovery. However, we believe, the print media stocks are still trading at cheaper valuations, considering the structural positives of print business (high brand loyalty and significant entry barriers). Hence, we maintain Buy on DBCorp and Jagran Prakashan and Accumulate on HTMedia.
(` cr) `
Reco. Buy Buy Accum. Neutral Neutral
31
Metals
In our view, steel companies' profitability is expected to improve yoy during 3QFY2013 on the back of decreasing prices of key inputs, mainly coking coal. During 3QFY2013, global steel prices rose on the back of improvement in economic data in China. Steel prices in the US and China increased during the month of November and December after a steep fall the month of October. Steel prices in India also rose during December after witnessing a fall during October and November. For 4QFY2013, coking coal contract prices have settled to US$165/tonne, compared to US$170/tonne for 3QFY2013. Iron ore contract prices for 4QFY2013 are expected to increase as spot iron ore prices have increased sharply during 3QFY2013. Looking ahead, although we expect steel consumption to pick up, concerns on account of slowdown in the capex cycle, high interest rates and slowdown in construction demand remain. After a steep decline in base metal prices during 2QFY2013, prices rebounded during the November - December period. Going forward, we do not expect base metal prices to spike meaningfully due to subdued outlook of the Eurozone. The BSE Metal Index posted a positive return of 5.2% in 3QFY2013. Prices of steel stocks under coverage increased during 3QFY2013 on the back of positive news of demand recovery in China, higher domestic HRC prices and opening of the category A mines in Karnataka. Stock prices of SAIL, Tata Steel and JSW Steel increased by 6.1%, 6.9% and 7.3% respectively. On the non-ferrous side, Hindalco Industries (Hindalco)'s stock price increased by 8.1% after the MoEF granted stage 1 clearance to its Mahan coal block and Sterlite Industries (Sterlite)' stock prices also rose by 17.2%. On the other hand NMDC recorded a substantial fall in its stock performance of 14.9% after it reported a weaker off-take in volumes due to infrastructural issues and also due to the overhang of the divestment of 10% stake by the Government of India. However the divestment was a success due to lower price set by the government.
Key events
Government of India divests 10% stake in NMDC
During 3QFY2013 the Government of India divested 10% stake in NMDC comprising 36.1mn shares. The shares were divested through the Offer for Sale (OFS) route with a floor price of `147. The issue was subscribed 1.7x times, which in our view, was due to attractive valuation (3.6x FY2014 EV/EBITDA).
Ferrous sector
During 3QFY2013, global steel prices rose, led by rise in spot iron ore prices. Steel prices in the US and China increased during the month of November and December after a steep fall the month of October. Steel prices in India also rose during December after witnessing a fall during October and November.
USA HRC/tonne
32
Metals
Exhibit 3: Domestic HRC prices rose in december
39,000 37,000 35,000
(`/tonne)
subsequently suspension of environment clearances of all the 93 mining leases by the MoEF .
33,000 31,000
(mn tonnes)
4 3 2 1 0
Feb-12
Aug-12
Sep-12
Jul-12
Oct-12
Nov-11
Dec-11
Mar-12
May-12
(000 tonnes)
Feb-11
Mar-11
May-11
Aug-11
Dec-11
Feb-12
Mar-12
May-12
Sep-11
Jan-11
Apr-11
Jul-11
Aug-12
Nov-11
Sep-12
Jun-11
Apr-12
Jan-12
Jun-12
Jul-12
100
(mn tonnes)
Net production
Real consumption
80 150 60 100 40 50 0 Dec-09 20 0 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Indian Iron ore prices (LHS) Iron ore inventory (RHS)
Outlook
Margins to expand on a yoy basis
Current international iron ore prices are in the range of US$130-140/tonne (slightly above marginal cost of production for several Chinese iron ore miners). Hence, we do not expect any further meaningful downside from the current price levels. Contracted coking coal prices have declined gradually over the past one year. A decline in coking coal prices is expected to benefit Indian steelmakers, although INR depreciation would partially offset the decline in the price of coking coal. According to World Steel, global crude steel production for October increased by 1.3% to 126mn tonne, whereas for November it increased by 5.1% yoy to 122mn tonne. Global capacity utilization levels during October and November stood at 76.5% and 76.1%, respectively.
33
Nov-12
Oct-11
Oct-12
120
(000 tonnes)
Nov-12
Oct-11
Jan-12
Apr-12
Jun-12
Metals
3QFY2013 expectations: For 3QFY2013, on a yoy basis, we expect net sales to increase, aided by higher realization. Thus, we expect the top-line of steel companies under our coverage to grow by 2-16% yoy. Also, due to lower raw-material costs, margins of steel companies are likely to improve on a yoy basis. For SAIL, we expect net sales to grow by 10.7% yoy; however, its EBITDA is expected to decline by 14.4% yoy due to higher staff costs and other expenditure. For Coal India, we expect the top-line to grow by 5.5% yoy due to higher volumes; however, its PAT is expected to decline by 5.8% yoy mainly due to higher staff costs and lower e-auction realizations. NMDC's PAT is expected to decline by 5.0% yoy due to lower sales volumes. Tata We remain positive on NMDC and Tata Steel. zinc inventories rose by 10.6%, and 48.7%, respectively while copper inventory declined by 39.6%.
Copper
Aluminium
Zinc
Non-ferrous sector
During the quarter, base metal prices declined in October 2012. Nevertheless, the prices rebounded in the November-December period. Domestic aluminium companies continued to suffer on account of low aluminium prices coupled with higher coal costs. On a sequential basis, average copper, aluminium and zinc prices increased by 2.8%, 5.1% and 3.2%, respectively after declining over the past one year. However, on a yoy basis, average copper, and zinc prices increased by 5.2% and 2.0%, respectively, where as aluminium prices declined 4.6%
Outlook
Non-ferrous companies are expected to face a double whammy of declining product prices coupled with higher input costs during FY2013. Base metal prices have declined steeply over the past one year and hence realizations for companies are expected to decline during FY2013 (partially offset by INR depreciation against the USD). Further, although several aluminium companies (globally) have announced production cuts, we are yet to see any meaningful decline in production. Thus, lower realizations coupled with higher prices of key inputs such as imported coal, caustic soda, CP pitch and petroleum coke are expected to hit margins of non-ferrous companies during FY2013 in our view. We expect non-ferrous companies to report a lower top-line on a yoy basis, owing to a decline in LME prices. Further, we expect Aluminium companies margins to remain under pressure while there could be some improvements for other non-ferrous players. We have a Neutral stance on the non-ferrous sector. sector.
On a qoq basis, inventory levels at the LME warehouse for copper, aluminium and zinc increased by 4.3%, 5.1% and 18.1%, respectively. However, on a yoy basis, Aluminium and
cr ( ` cr )
Reco. Neutral Neutral Neutral Neutral Reduce Buy Neutral Neutral Accum.
145 Accumulate
Source: Company, Angel Research; Note: Price as on December 31, 2012; EPS calculation based on fully diluted equity; Denotes consolidated numbers
34
70 60 50 40 30 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12
PTA
MEG
CHIPS
POY
Oil supply across the world continued to improve in 3QFY2013 on account of higher production from both, OPEC and nonOPEC countries.
112 108 104 100 96 92 88 84 80 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12
(mnbpd)
91 91 90 90
115 110 105 100 95 90 85 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12
35
Key developments
ONGC sells 26% stake in KG basin
(US $/mmbtu)
4.5
3.5
2.5
1.5
Feb-12 May-12 Dec-11 Aug-12 Jan-12 Sep-12 Jul-12 Oct-12 Mar-12 Nov-12 Dec-12 Apr-12 Jun-12
During 3QFY2013, Japan's largest oil company Inpex Corp. acquired a 26% stake in ONGC's KG DWN- 2004/6 block located in deepwaters of KG Basin in the Bay of Bengal. ONGC continued to remain an operator in the block with 34% stake. The block covers an area of 10,907 sq km and has a depth of approximately 3,000 meters.
(US$/mmbtu)
14 11 8 5
Aug-06
Aug-07
Aug-08
Aug-09
Aug-10
Aug-11
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
LNG price
May-12
Aug-12
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
(000 bbls)
Aug-12
Sep-12
Oct-12
Nov-12
Mar-12
May-12
Dec-12
Feb-12
Jun-12
Jan-12
Apr-12
Jul-12
36
3QFY2013 expectations
For 3QFY2013, we expect mixed profitability performance for our coverage companies. For RIL, we expect the top-line to increase by 5.7% yoy on account of higher prices of petrochemicals. However, its operating profit is expected to decrease by 0.8% yoy mainly due to decline in production from the KG D6 block. Nevertheless, its PAT is expected to increase by 15.0% yoy mainly due to increase in other income. For ONGC, we expect net sales to increase by 6.5% yoy while its operating profit is expected to decrease by 10.1% yoy due to higher employees cost. GAIL is expected to report a top-line growth of 6.4% yoy on account of increase in volume. Its net profit is expected to increase by only 5.1% yoy due to higher top-line growth.
(2.0) (3.0) (4.0) (5.0) (6.0) (7.0) RIL BSE O&G Index Cairn ONGC GAIL
Cairn India's net sales are expected to increase by 47.8% yoy mainly on account of increase in volumes; its operating income is also expected to increase by 40.2% yoy. Its bottom-line is expected to increase by 52.3% mainly due to increase in operating income.
(` cr) `
Reco. Buy Neutral Buy Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2012; ^Standalone numbers for the quarter and consolidated numbers for the full year
37
Pharmaceutical
Pharma sector continues its outperformance
During 3QFY2013, the BSE healthcare (HC) index continued its outperformance. The HC index rose by 7.6% as against a 3.2% rise in the Sensex. Manufacturers would be free to fix any price for their products equal to or below the CP The CPs would be fixed on dosage . basis, such as per tablet / capsule / standard injection volume as listed in NLEM-2011. The methodology of fixing a ceiling price for NLEM medicines, is of adopting the Simple Average Price of all the brands having market share (on the basis of Moving Annual Turnover) more than and equal to 1% of the total market turnover of that medicine. Pricing of the Drug: The CP will be fixed on the basis of readily monitorable Market Based Data (MBD) available with the pharmaceuticals market data specializing company - IMS Health (IMS). As the IMS data gives stockist level prices, in order to arrive at the CP (which will be the maximum retail price) the IMS price will be further increased by 16%. The CP for a drug listed in the NLEM would be the simple average of prices as calculated on the basis of IMS data six months prior to the date of announcement of the new National Pharmaceutical Pricing Policy ie the "Appointed Date" for bringing the new policy into effect. The prices of these NLEM-2011 medicines will be allowed an annual increase as per the Wholesale Price Index as notified by the Department of Industrial Policy & Promotion. Non-price Control Drugs: Under the existing price control regime, the prices of Non-Scheduled drugs are monitored, and in case the prices of such drugs increase by more than 10% in a year, subject to certain criteria, government fixes the prices of such medicines from time to time. In the proposed policy, all essential drugs are under price control. It would follow that non-essential drugs should not be under a controlled regime and their prices should be fixed by market forces. However, in order to keep a check on overall drug prices, it is proposed that prices of such drugs be monitored on a regular basis, and where such price increase is of above 10% per annum, the government would be empowered to have the price of these drugs reduced to below this limit, for the next 12 months. Imported Drugs: The CP determined for drugs falling under the span of control as in 4(iv) above shall also be applicable to such drugs that are imported. There will be no separate determination of CP for imported drugs falling under the span of control. Overlap drugs between DPCO 1995 and NLEM-2011: The prices of medicines which are a part of DPCO 1995 but not in NLEM-2011 would be frozen for one year and thereafter a maximum increase of 10% per annum, as in case of other non-NLEM medicines, will be allowed.
38
2QFY2013
3QFY2013
The upward rally in the pharma sector during the quarter was driven by mid-caps as well as large caps. The highest gainers were Aurobindo Pharmaceuticals and Dishman Pharmaceuticals which rose by 31.4% and 17.7% respectively. Among the large caps, Dr. Reddy's , Cipla and Glaxosmithkline Pharmaceuticals rose by 11.1%, 8.9% and 8.4% respectively, whereas other large caps Sun Pharma and Cadila Healthcare on the other hand rose by 6.2% and 6.0% respectively. Lupin, another large cap, rose only by 2.4% during the period. Amongst the losers, Ranbaxy Laboratories lost around 6.8% during the quarter. Among the mid caps and small caps, Aurobindo Pharma and Ipca Laboratories were up by 31.4% and 11.0% respectively. Aurobindo Pharma rose after the company announced that it expects USFDA issues regarding its facilities to resolve in future. Amongst the MNC pack, while Glaxo Smithkline Pharmaceuticals gave healthy returns, Sanofi India was down by 1.6%.
Key developments
NATIONAL PHARMACEUTICALS PRICING POLICY, 2012 (NPPP-2012)
After years of deliberation on the contentious issue of price control of essential and life saving medicines, the Government of India has finally approved and released the new drug pricing policy 2012. Principles of the New Drug Pricing Policy: According to the new Pricing Policy: policy, the government will bring prices of 348 essential drugs (all formulations) mentioned in the National List of Essential Medicines (NLEM) under control against the current practice of controlling prices of 74 bulk drugs and their formulations. The formulations will be priced only by fixing a Ceiling Price (CP).
Refer to important Disclosures at the end of the report
Pharmaceutical
Patented Drugs: Pricing of patented drugs would be taken based on the recommendations of a separate Committee. Exemptions: Indigenously developed and manufactured new drugs with patent (either process or product patent) and formulation involving a new delivery system developed through indigenous R&D would be eligible for exemption from price control for a period of 5 years. Conclusion: The proposed policy has recommended that the retail price of the essential 348 drugs will be fixed at weighted average price of brands that have more than 1% market share. We believe that the policy in its current form is positive, as it is based on average price mechanism and thus follows competition. Given the price competition, the policy is unlikely to have any major negative implication for the sector. However amongst the domestic and MNC players, the latter would be impacted the most, as they mostly price their products much higher than the competition and then derive their 100% of the sales from domestic markets. Domestic companies not having a huge exposure to the domestic market, would be insulated to a large extent, as pricing is not the key driver for their growth. Their products are therefore competitively priced. Thus, we maintain our recommendations on the sector and our top picks Lupin, are Lupin, Aurobindo Pharma and Dishman Pharmaceuticals & Chemicals. Sun Pharmaceutical Industries: Buys URL's Generic Business: Sun Pharmaceuticals' US subsidiary Caraco Pharmaceutical Laboratories agreed to buy the generic business of URL Pharma Inc., a company that Takeda Pharmaceuticals USA Inc. acquired in April. The valuation of the transaction was not disclosed. URL Pharma's leading product is Colcrys, a colchicine brand, and its variants, used to treat and prevent gout flares. The net sales figure for Colcrys in calendar year 2011 was more than $430 million. These products have, however, not been included in the Sun Pharma deal. Upon completion of the purchase, the generic assets of URL Pharma will be owned and managed by Caraco. The deal is subject to regulatory approvals. URL Pharma's 2011 calendar year revenue was nearly $600 million, according to an earlier release. Sun Pharma's deal includes URL Pharma's generic business excluding Colcrys, the gout treatment business, which was at least $430 million in calendar year 2011. The deal is unlikely to put pressure on Sun Pharma's balance sheet as it is non-Colcrys and hence its size should be low. On the P&L front, the net profit should be augmented by 2.3%, as per rough estimate. Thus we maintain our Neutral stance on the stock.
17.2 11.1
(32.5) Ranbaxy
OPM
DRL
39
Pharmaceutical
strong traction in its Indian and Russian formulation businesses as well. The company is expected to post an OPM of 20.7%, down from 31.4%. On the net profit front, the company is expected to post a net profit of `339cr, a de-growth of 33.9% over the last corresponding period. Cipla is expected to post a net sales growth of 18.3% to `2,024cr, driven mainly by the domestic performance. On the operating front, the OPM (excluding technical know-how fees) is expected to come in at 24.9%, up by 470bp from the last corresponding period. This will aid the net profit to increase by 49.7% yoy to `404cr. Ranbaxy is expected to post a decline of 32.5% with sales at `2,525cr during 4QCY2012. Its OPM is expected to be at 9.3% vs 21.6% in 4QCY2011. However, the net profit is likely to come in at `274cr, vs `428cr during the last corresponding period. Cadila is expected to post yet another strong quarter with a 15.3% growth in net sales to `1,559cr on the back of robust growth on the exports front. On the OPM front, we expect the company's OPM to expand by 80bp yoy to 17.9% on the back of a favourable product mix. Net profit is expected to increase by 21.7% yoy to `182cr. Aurobindo Pharma is expected to post a net sales growth of 10.1% yoy. The margins are likely to expand by 17.0% vs 13.5%, which will lead to a net profit of `152cr vs a net loss of `28.5cr. Indoco Remedies is expected to report a top-line growth of 30.8% to `185cr. The OPM is expected to expand by 350bp yoy to 16.4%, driven by growth in domestic formulation sales. As a result, net profit is expected to increase by 124.0% yoy to `18.5cr on back of improvement of OPM.
(` cr) `
Reco. Buy Accum. Neutral Neutral Buy Neutral Neutral Buy Neutral Accum. Neutral Neutral Neutral
9.3 (1,229.3)
Source: Company, Angel Research; Note: Price as on December 31, 2012; Our numbers do not include MTM on foreign debt. # 4QCY2012
40
Power
All-India power generation highlights
During April-November 2012, the overall power generation in India rose by 4.6% yoy to 607BU; aided by a 13.7% yoy increase in installed capacity to 210,937MW. During this period, thermal power generation grew by 9.0% yoy to 495BU while hydro power generation declined by14.5% yoy to 86.0BU. The decline in hydro power generation is due to decline of water in reservoirs feeding hydroelectric stations. Nuclear power generation posted a growth of 3.7% yoy to 22.0BU. Exhibit 1: Operational Performance (PLF)
(MW) 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 NTPC GIPCL All India PLF
per tonne. In rupee terms, the coal prices were down by 22.5% yoy and 5.2% qoq to `4,492 per tonne. The continuous fall in imported coal prices in the last few quarters augurs well for power companies as the shortage of domestic coal has forced them to import more coal. Exhibit 2: Global coal prices
250 continuous decline in coal prices 200 150 100 50 0 9000 8000 7000 6000 5000 4000 3000 2000 1000 0
Dec-09
Dec-05
Dec-10
Dec-06
Dec-11
Jun-09
Dec-07
Dec-08
USD/tonne (LHS)
INR (RHS)
Capacity addition
During 8MFY2013, 9,839 MW of capacity was added compared to targeted capacity of 9862 MW. The bulk of the capacity addition (~5565MW) was done by private companies. During the last few years, private power companies have made robust capacity additions. The Planning Commission has set a power capacity addition target of 88,425MW for the current Five-Year Plan period ending March, 2017 to bridge the widening demand-supply gap for electricity. However, we believe the target is over-ambitious in the wake of multiple headwinds facing the power sector such as domestic fuel availability issues, land acquisition delays etc.
8MFY2013
8MFY2012
The all India plant load factor (PLF) of thermal power plants during April-November 2012 stood at 69.2% vs 71.6% in corresponding period last year due to fuel availability constraints. NTPC's PLF declined from 88.2% in 8MFY2012 to 84.6% in 8MFY2013. However, its PLF was much better than all India PLF of 69.2% during the same period. GIPCL reported a better operational performance with its PLF improving to 88.0% in 8MFY2013 compared to 70.7% in 8MFY2012
Dec-12
20.0 0.0
Jun-10
Jun-06
Jun-11
Jun-07
Jun-08
Jun-12
41
Power
Power-deficit situation
The country continues to face power deficit due to the domestic fuel shortage, land acquisition delays and deficiencies in the T&D system. India's overall and peak power-deficit levels during 8MFY2013 stood at 8.6% and 9.0% respectively, as against 7.4% and 10.6% reported in 8MFY2012.
Company
NTPC is expected to sign the new FSA within a month after resolving most of the issues with CIL. Due to differences over penalty, imported coal mechanism, domestic coal quality, among others, NTPC had refused to sign the new FSA. However most of these issues have been ironed out. CIL has revised its penalty and promised to supply higher quality coal to NTPC. The new FSA are likely to be signed as soon as NTPC and CIL work out a mechanism that will allow CIL to supply coal under the combination of old and new FSA. During the quarter, NTPC commissioned unit 3 of 500MW of Indira Gandhi STPP at Jhajjar of Aravali Power Company, a joint venture of NTPC, Haryana Power Generation Corporation and Indraprastha Power Generation Co. With this the total capacity of NTPC group stands at 39,674MW.
16.6 11.2 11.7 12.3 13.8 12.0 12.7 9.8 9.6 9.9 11.0 10.1 8.5 10.6 9 8.5 8.6
7.1
7.3
8.4
Overall
Peak
Key developments
Sector
The Union Cabinet has cleared a proposal to set up a Cabinet Committee on Investment (CCI) which will accord single window approval to investments, particularly above `1,000cr. The committee will be chaired by the Prime Minister and is expected to set timelines for regulatory and administrative clearances from various individual ministries. The setting up CCI is a positive development as it is expected to fast track large projects which are facing delays due to requirement of multiple clearances from different government agencies.
Outlook: The power sector is currently facing many headwinds such as fuel shortage, delay in land acquisition and environmental clearances among others which is reflected in the underperformance of BSE power index to Sensex. The government has shown its intent on reforms with restructuring plans for SEBs and setting up of Cabinet Committee on Investment to fast track projects. If the government continues with measures such as Captive Coal Allocation Policy and Land Acquisition Policy, it will be positive for the sector in the medium to long term. We maintain our Accumulate view on GIPCL and remain Neutral on NTPC.
(` cr) `
Reco. Accum. Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2012; * Consolidated; #Quaterly numbers pertains to standalone financials
42
Telecom
During February 2012, in a major blow to various telecom players, the Supreme Court, in its judgment for the 2G case, cancelled 122 licenses given to telecom firms since January 2008. After this move, as expected, some telecom players (DB Etisalat and S Tel) stated their intentions to shut down operations in India. For companies under our coverage - Bharti Airtel (Bharti) and Reliance Communications (RCom), none of the licenses were canceled, as all of their licenses were issued before 2008. Post this, the Telecom Regulatory Authority of India (TRAI) came out with its recommendation on spectrum auction during April 2012 and recommended a reserve price of ~`18,000cr for 5MHz pan India 1800MHz band. However, broader discussions in the market pointed that the reserve price set by TRAI is high. Thus the cabinet finally decided for a reserve price of `14,000cr for 5MHZ pan India 1800MHz band (22% lower than the TRAI's recommendation) but that too yielded a lackadaisical auction. The recently conducted 2G auction ended in just two days and fetched the government just `9,400cr. Not only that, the CDMA auctions could not happen at all as none of the companies participated in it. Delhi, Mumbai, Karnataka and Rajasthan circles, which accounted for 51% of reserve price, did not receive any bid. Keeping this in notice, the Cabinet approved a 30% cut in the reserve price of mobile phone airwaves in the aforesaid four circles which turned out to be positive for the incumbent players whose license renewals are scheduled to come up from 2014. The cabinet also approved a ministerial panel's proposal to set the auction's reserve price of more efficient 900MHz band airwaves at twice that of the basic phone airwaves in the 1800MHz band. The government aims to conduct the next auction during the current fiscal year ending in March. All these events have led to consolidation in the overcrowded telecom industry, and the total number of players operating in the industry has come down from 15 to 7-8. Decisions regarding one-time excess spectrum fee and modalities of spectrum refarming are yet to be made, which in our view, will continue to be an overhang on the sector. The recent set of developments again advocate the challenging regulatory outlook for industry players.
5.4 55 45 35 25 50.2
Aug-12
80
76.0
76.9
(%)
70 61.1 60 53.4 50 Bharti Vodafone Idea Rcom BSNL Aircel 53.9 58.6
Chg. (3 months)
Chg. (1 year)
Jul-12
Aug-12
Sep-12
Oct-12
Source: Bloomberg, Angel Research Refer to important Disclosures at the end of the report
43
Telecom
Exhibit 4: Active subscribers (October 2012)
Active subscribers (mn) Bharti Vodafone Idea RCom BSNL Aircel MTNL 171.0 139.2 110.3 104.1 51.9 40.8 2.0 Active subscribers' market share (%) 24.17 19.68 15.60 14.71 7.34 5.77 0.29 Active subscribers' Reported subscribers' market share (%) market share - July 2012 (%) 24.28 19.64 15.52 14.63 7.19 5.42 0.29 20.52 16.85 12.73 14.89 10.60 7.35 0.56
to 85.3mn. The company has already announced its plans to shut down operations in Jammu & Kashmir, North-East and Assam circles. Tata Teleservices was followed by Uninor and RCom whose subscriber base declined by 1.1mn and 0.5mn, taking their wireless customer base to 41.0mn and 134mn respectively. TRAI indicated that during October, the share of urban wireless subscribers has decreased from 63.06% to 62.68% whereas share of rural wireless subscribers has increased from 36.94% to 37.32%. The overall wireless teledensity in the country has reached 74.21% at the end of October 2012. DB Etisalat, S Tel and Loop (except Mumbai) have already decided to shut shop in India while Uninor has scaled down its operations to nine circles. We believe this decline has been led by a general slowdown in incremental gross additions and aggressive churn policy by a few operators in response to stringent norms for allocation of new number series.
31.6
Videocon
14.9 10.5 7.3
15 10 5 0 Bharti Vodafone
DB Etisalat
Idea RMS
Rcom SMS
BSNL
Aircel
MOUs to improve
In 2QFY2013, Bharti (excluding Africa) as well as Idea posted a decline in minutes of usage (MOU) due to seasonal slowdown seen in 2Q as well as increased proportion of rural subscribers. For 3QFY2013, we expect the overall MOU profile for Bharti (excluding Africa), Idea and RCom to increase by 3.0%, 1.5% and 1.5% qoq to 429min, 364min and 240min, respectively. This is because 3Q is a seasonally good quarter in terms of MOU for telecom players due to the festive season falling in the quarter and on account of the low base effect of 2Q (which tends to be a weak quarter).
44
Telecom
Exhibit 7: Trend in MOU per month per subscriber
450 400 350
(min)
423
419
431
433
417
429
183
187
189
185 177
184
364
369
379
160 155
160
156 148
151
300 250 200 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13E 236 240
227
224
227
228
100 102 80 2QFY12 3QFY12 4QFY12 101 100 98 1QFY13 101 2QFY13 103 3QFY13E
Bharti (ex-Africa)
Idea
RCom
Bharti (ex-Africa)
Idea
RCom
0.44
(`/min)
0.45 0.43
0.43
Bharti (ex-Africa)
Idea
RCom
ARPU to improve
For 3QFY2013, we expect the combination of increase in MOU and stable ARPM to push up the APRU of Bharti (excluding Africa), Idea as well as RCom by 3.5%, 1.7% and 1.9% qoq to `184/month, `151/month and `103/month, respectively.
(` cr) `
Reco. Accum. Neutral Neutral
Source: Company, Angel Research; Note: Price as on December 31, 2012; Change is on a qoq basis
45
Stock Watch
46
Agri / Agri Chemical Rallis Neutral United Phosphorus Buy Auto & Auto Ancillary Amara Raja Batteries Accumulate Apollo Tyres Accumulate Ashok Leyland Buy Automotive Axle Neutral Bajaj Auto Neutral Bharat Forge Accumulate Bosch India Neutral CEAT Buy Exide Industries Accumulate FAG Bearings Accumulate Hero Motocorp Accumulate JK Tyre Buy Mahindra and Mahindra Accumulate Maruti Neutral Motherson Sumi Neutral Subros Buy Tata Motors Accumulate TVS Motor Accumulate Financials Allahabad Bank Accumulate Andhra Bank Neutral Axis Bank Buy Bank of Baroda Neutral Bank of India Neutral Bank of Maharashtra Accumulate Canara Bank Neutral Central Bank Neutral Corporation Bank Buy Dena Bank Accumulate Federal Bank Neutral HDFC Neutral HDFC Bank Neutral ICICI Bank Buy IDBI Bank Accumulate Indian Bank Buy IOB Accumulate
47
Accumulate 1,297 Accumulate Accumulate Accumulate Buy Accumulate Neutral Neutral Accumulate Accumulate Buy
Accumulate 2,384
48
Accumulate 1,606
Accumulate 2,319
49
Neutral Neutral Accumulate Accumulate Neutral Neutral Neutral Buy Reduce Buy Neutral Neutral Neutral Accumulate Buy Buy Buy Buy Neutral Buy Neutral Neutral Neutral Buy Neutral
Buy 72 Accumulate 189 Neutral 901 Neutral 414 Neutral 1,829 Buy 116 Neutral 2,166 Buy 64 Neutral 519 Accumulate 613 Neutral 503 Neutral 2,291 Neutral 736
50
Accumulate 1,485 Neutral 209 Neutral 406 Buy 439 Neutral 1,084 Accumulate 57 Accumulate 467 Neutral 365 Neutral 319 Neutral 150 Neutral 2,761 Neutral 740 Buy 239 Neutral 162 Neutral 1,472 Neutral 12,807 Neutral 3,433 Buy 804 Buy 65 Buy 301 Neutral 44 Buy 71 Buy 309 Buy 544 Buy 265 Neutral 1,899 Neutral 333 Neutral 13
Source: Company, Angel Research, Note: *December year end; #September year end; &October year end; ^June year end; Price as on December 31, 2012
51
Disclaimer
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.
Ratings (Returns) :
52
Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Viral Shah Sharan Lillaney V Srinivasan Yaresh Kothari Ankita Somani Sourabh Taparia Bhupali Gursale Vinay Rachh Amit Patil Shareen Batatawala Twinkle Gosar Tejashwini Kumari Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Tejas Vahalia Dilip Patel Research Editor Production tejas.vahalia@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Sr. Analyst (Metals & Mining) Sr. Analyst (Infrastructure) Analyst (Mid-cap) Analyst (Cement, FMCG) Analyst (Automobile) Analyst (IT, Telecom) Analyst (Banking) Economist Research Associate Research Associate Research Associate Research Associate Research Associate sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com viralk.shah@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com ankita.somani@angelbroking.com sourabh.taparia@angelbroking.com bhupali.gursale@angelbroking.com vinay.rachh@angelbroking.com amit.patil@angelbroking.com shareen.batatawala@angelbroking.com gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com
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