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Indian stock market and companies daily report (August 04, 2012, Tuesday)

Contributed by Angel Broking

Indian markets are expected to open flat with a positive bias, following a marginally positive opening in the SGX Nifty. Most of the Asian markets are currently trading in red.

The US markets remained closed on Monday. The European markets ended the day higher on Monday despite news that ChinaRs.s manufacturing activity fell to its lowest level in three years. Germany's manufacturing activity too fell below estimates for the month of August. The final Markit/BME Purchasing Managers Index came in at 44.7 in August, down from the flash reading of 45.1, but rose from 43 in July.

Meanwhile, the Indian benchmark indices which opened in the green on Monday fell shortly due to the growing concerns about the domestic economy. The markets remained weak for most part of the day, before ending the day lower by ~0.3%. The markets would be keenly awaiting some announcements on the reforms front after the implementation of GAAR has been postponed by three years.

Markets Today

The trend deciding level for the day is 17,415 / 5,264 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,480 - 17,575 / 5,285- 5,317 levels. However, if NIFTY trades below 17,415 / 5,264 levels for the first half-an-hour of trade then it may correct up to 17,319 - 17,254 / 5,233 - 5,212 levels.

Supreme Court permits mining operations for category A mines in Karnataka

The Supreme Court has allowed 18 mines (category A) to resume iron ore mining in Karnataka after a suspension of over a year on environmental concerns. This is in line with our expectations given that the Central Empowered Committee had earlier recommended category A mines to resume operations. The A category mines are the ones that are either free of any illegality or had committed marginal illegalities in their mining operations. However, the mines need to get fresh environmental and pollution clearances from the Ministry of Environment and Forest before they resume operations which could delay the commencement of operations in our view. Further, there is no clarity on the quantum of annual production capacity of these mines as of now (although some media reports suggest that the new mines could produce ~7mn tonne p.a.). NMDC has been producing iron ore at a run rate of 8-10mn tonne in Karnataka over the past one year. Given the Karnataka steel industryRs.s requirement of 30mn tonne, we believe the commencement of production from these 18 mines is slightly positive for the steel industry in Karnataka, especially JSW Steel - which operates a 10mn tonne plant in Karnataka with annual iron ore requirement of 18mn tonne. For JSW Steel, the eventual start-up of production from these mines will be positive as this will result in higher availability of iron ore at slightly lower prices. However, currently it is challenging to quantify the impact on JSW SteelRs.s financials given the uncertainty on the timelines and production quantity. As far as Sesa Goa is concerned, there is no clarity whether any of its Tumkur mines are a part of these 18 mines which have been cleared to resume operations. Until further update, we maintain our Neutral rating on JSW Steel and recommend Accumulate on Sesa Goa with a target price of Rs.192.

Cement dispatches - August 2012

For August 2012 Ambuja cements posted a 2.4% yoy decline in its dispatches to 1.45mn tonnes (1.49 mn tonnes). The south west monsoon monsoons picked up in the month of August after remaining weak in June and July, resulting in lower cement demand. We remain neutral on Ambuja Cements.

Monthly volumes: August 2012

Ashok Leyland (ALL)

Ashok Leyland (AL) reported in-line sales for August 2012 riding on the strong growth of its small commercial vehicle, Dost. Total volumes ex-Dost registered a 8.6% yoy (5.5% mom) decline to 6,597 units on account of sluggish demand led by slowdown in economic activity. However, DostRs.s sales continued to be strong at 2,835 units. As a result, total volumes grew by a strong 30.4% yoy (down by 3.6% mom) to 9,432 units. ALL continues to witness strong growth traction YTD in FY201 3 mainly led by the success of the Dost and a gradual pick-up in demand in South India. While medium and heavy commercial vehicle (MHCV) sales going ahead will remain under pressure due to slowdown in industrial activity, we expect the sales momentum in Dost to continue with it gets introduced across India (currently available in seven states). At Rs.21, the company is trading at an attractive valuation of 7.5x FY2014E earnings. We maintain our Buy rating on the stock with a target price of ?30.

Bajaj Auto (BJAUT)

BJAUT reported in-line sales for August 2012 with total volumes registering a decline of 9.9% yoy (flat mom), due to weak demand in the domestic motorcycle segment. Three-wheeler sales on the other hand recovered (volumes up 14.9% mom) as demand in Sri Lanka and Egypt picked up considerably during the month. The company dispatched around 7,500 units in Sri Lanka during the month as against 3,000 units in July 2012. The total motorcycle sales however, declined by 10% yoy (1.5% mom), led by subdued demand in the domestic markets. The motorcycle volumes continues to benefit from the new launches -Pulsar NS (7,200 units) and Discover 125ST (25,000 units). Exports posted a 4.8% yoy decline (up 4.8% mom) during the month to 131,562 units mainly due to under performance in the key export markets of Sri Lanka and Egypt. Going ahead, as domestic demand continues to remain sluggish, we believe that revival in exports will be necessary for the company to maintain its volume momentum. At Rs.1,664, BJAUT is trading at 13.7x FY2014E earnings. We maintain our Neutral rating on the stock.

Infosys top executive Shaji Farooq quits, possibly to join Wipro

As per media reports, in yet another senior-level exit at software major Infosys, Shaji Farooq, senior vice-president and head of financial services, Americas at Infosys has quit and is headed to join Wipro. Shaji Farooq has been in Infosys for the last ten years and has over 20 years of industry experience. He is unit head for financial services, Americas and responsible for all client facing activities, delivery/execution and operations. FarooqRs.s exit is the latest in a series of senior-level exits at Infosys in the last one year. Other top executives who quit in the last year include board member Mohandas Pai, sales head Subhash Dhar and Infosys BPO COO Ritesh Idnani. Infosys is currently witnessing near-term challenges in terms of growth after the restructuring exercise it went through in the last year. We maintain Accumulate rating on the stock with a target price of Rs.2,530.

L&T bags orders worth Rs.1,063cr

Larsen & Toubro (L&T) Construction has bagged orders worth Rs.1,063cr across business segments in the month of August 201 2. A major order worth Rs.377cr has been bagged from Delhi Metro Rail Corporation for the construction of elevated viaduct and stations. This project is a part of Phase-III of Delhi MRTS. Another order valued at Rs.212cr has been secured from Rail Vikas Nigam for doubling the lines of the Rewari - Manheru section on the Bikaner division of North Western Railway. The company has also secured orders aggregating Rs.474cr which include design and construction of an IT campus in the southern part of India and construction of residential towers in Mumbai. This also includes additional orders from various ongoing building projects.

At the current market price of Rs.1,353, the stock is trading at PE of 13.5x FY201 4E earnings, after adjusting for investments, which is below the historical trading multiple for L&T. We have used the sum-of-the-parts (SOTP) methodology to value the company to capture all its business initiatives and investments/stakes in the different businesses. Ascribing separate values to its parent business on a P/E basis and investments in subsidiaries on P/E, P/BV and mcap basis, our target price works out to Rs.1,553. We recommend Accumulate on the stock.

Tech Mahindra to announce strategic move today, might buy HutchRs.s India BPO business

Tech Mahindra is expected to announce a strategic move today. As per media reports, Tech Mahindra could seal a deal to acquire BPO services firm Hutchison Global Services for ~US$100mn. As part of the deal, it is also expected that Hutch has also made a revenue commitment of US$1bn over the next 5-7 years to Tech Mahindra. HutchRs.s India BPO business caters to three geographies UK, Australia and Ireland. This deal is expected to give a revenue boost to Tech Mahindra and give it a much larger BPO footprint. Hutchison Global Services has ~12,000 employees operating out of five facilities in India. This move is positive for Tech Mahindra as it would give inorganic boost to revenues when the company is not able to grow in tandem with other IT services players organically. We continue to remain positive on the stock and maintain Accumulate rating on the stock with a target price of ?850.

UB group considering stake sale in Whyte and Mckay

As per media reports, UB group, which is the promoter of United Spirits (USL) with a 28% stake is considering to offload up to 48% stake in its flagship brand Whyte & Mackay (W&M). USL bought Whyte and Mckay in 2007 for a consideration of US$1.2bn. UB group has been looking at selling its stake in USL to raise funds for repaying the debts of its other group company Kingfisher Airlines. The proposal to off-load stake in W&M is intended to enable the sale of 27% stake in USL for a consideration of ~Rs.3,000cr to UK based Diageo, without attracting UK anticompetition laws as USL and Diageo put together have a considerable market share in the scotch and vodka segments. However, off-loading of stake in W&M might make the deal financially unattractive for Diageo. We continue to remain neutral on USL.

Economic and Political News

- July exports down 14.8% at USD$22.4bn

- Govt will ensure stable tax regime: Chidambaram

- Finance Mininster wants loss-making banks, insurers out of CCI ambit

- Govt taking steps to bridge demand, supply gap in power: Moily

Corporate News

- Wockhardt gets USFDA nod for anti-depressant tablets

- Reliance Power starts production at controversial Sasan mines

- Strides Arcolab gets USFDA nod for cancer drug

- Suzlon arm REpower bags 131.2 MW contract

- Uflex aims to double revenue to USD$2bn in 3 years