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Indian stock market and companies daily report (October 15, 2012, Monday)

Contributed by Angel Broking

The Indian markets are expected to open flat tracking mixed opening in the Asian markets as the markets held in tight ranges, with concerns about Europe keeping investors sidelined amid some mixed signals on the state of the Chinese economy.

The US markets ended mostly lower over the course of the trading day on Friday. Selling pressure has remained subdued, however, contributing to choppy trading on Wall Street. The report from Thomson Reuters and the University of Michigan showed that the preliminary reading on their consumer sentiment index for October came in at 83.1 compared to the final September reading of 78.3. Economists had expected the index to come in unchanged compared to the previous month.

Meanwhile the Indian markets fell notably on Friday, dragged down by IT stocks after InfosysRs. quarterly results which once again failed to impress the investors. The broader market recouped earlier losses after official data showed that IndiaRs.s industrial output grew by a higher-than-expected 2.7% in August from a year earlier on the back of a positive base effect. CPI inflation also eased marginally in September to 9.73% from 1 0.03% percent in the preceding month.

Markets Today

The trend deciding level for the day is 18,719 / 5,687 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,800 - 18,925 / 5,714 - 5,752 levels. However, if NIFTY trades below 18,719 / 5,687 levels for the first half-an-hour of trade then it may correct up to 18,594 - 18,513 / 5,621 - 5,649 levels.

August IIP growth surprises positively at 2.7%

As per the Quick Estimates on the Index of Industrial Production (IIP), industrial growth during August 2012 surprised positively with 2.7% yoy growth as compared to 0.2% decline in growth in July 2012 and 3.4% yoy growth in the corresponding period of the previous year. On a 3MMA basis, however, growth remained at a low level of 0.2% during the month.

On a yoy basis, Mining reported growth of 2.0% on a low base after witnessing de-growth of 1.6% in the previous month and 5.5% decline in growth during August 2011. Manufacturing sector with the highest weightage of 75.5%, too, marked an improvement with 2.7% growth as compared to a contraction in the two preceding months thereby augmenting overall growth in industrial production for August 2012. Electricity sector disappointed with growth decelerating for the second consecutive month. It reported modest growth of 1.9% during the month vis-a-vis growth of 9.5% in August 2011.

Due to the general slowdown in the economy, Capital goods continued to remain under stress witnessing de-growth of 1.7% following decline in growth by 4.5% in July 2012 and a steep 28.1% de-growth in June 2012. On a positive side however, the index for capital goods has witnessed some traction since April 2012.

The consumer goods sector reported an improvement in overall growth by 5.0% during August 2012 as compared to nearly flat performance in the previous month. Consumer durables reported growth of 4.0% while Consumer nondurables reported 5.8% growth aided by a low base.

In spite of the somewhat-positive industrial production numbers, overall the growth continues to remain bleak. On a fiscal year-to-date basis, the index has reported tepid growth of 0.4% as compared to growth of 5.6% during April - August 2011.

We believe that the recent reform measures taken by the government to boost business and investor sentiment are positive for growth outlook in the economy in the medium-term but a revival in the investment cycle in the near term is unlikely on account of high interest rate environment and deterioration in capex activity.

CPI inflation for September 2012 moderates to 9.73%

Consumer Price Index (CPI) inflation for the month of September 2012 moderated to a six-month low at 9.73%, on a yoy basis, as compared to 10.03% in August 2012. Inflation in rural areas stands at 9.79% during September 2012 as against 9.9% in the month of August 2012. Inflation in urban areas moderated to 9.72% in the September 201 2 as compared to 10.19% in August 2012.

Inflation in the Rs.Food and BeveragesRs. category stayed elevated above the 10% mark at 11.62% for the Combined Index as compared to 11.67% for rural consumers and 11.52% for urban consumers. The Combined Index for Fuel and Light witnessed a deceleration to 7.29% in September as compared 7.55% in August. However, fuel inflation is likely to rise going ahead reflecting the passthrough impact of hike in fuel prices. Inflation in Rs.HousingRs. as well as Rs.Clothing, Bedding and FootwearRs. recorded an increase of 10.85% and 10.32% respectively for the month of September 2012. Inflation in the Miscellaneous Category comprising transport and communication, education, recreation etc stood at 6.83% in September 2012 as compared to 6.8% in August 2012.

JLR offers 7.5% salary hike for over 21,000 employees

According to the media reports, Jaguar and Land Rover (JLR) has offered to hike salaries of over 21,000 employees by 7.5% effective next month, subject to ratification by the union members through a ballot that is likely to take place soon. While the first hike of 4.5% will be effective from November 1, the second increase of 3% will be from November 1, 2013. The deal also involves making 2,400 agency workers permanent employees from next month. We see this as a positive development for JLR as the salary hikes offered by the company are amongst the best in the UK and should be comfortably accepted by the union. This would secure the operations of the company in the near future which would enable JLR to continuously ramp-up in order to meet the surging demand for its products. At the current market price of Rs.271, the stock is trading at 6.1x and 3.3x FY2014E earnings and EV/EBITDA, respectively. We maintain our Buy rating on the stock with an SOTP based target price of ?316.

Vedanta Aluminum shuts refinery on bauxite shortage

Sterlite Industries associate Vedanta Aluminium (VAL) (29.5% stake) has temporarily shot down its Alumina refinery at Langigarh in Odisha due to lack of bauxite to produce alumina. The company has not been allowed to mine bauxite form its mines and also the other private miners in Odisha have been shut down which has led the company to take this decision. This was however in line with our expectations because the company had stated earlier that it was likely to shut down the refinery. Post the merger of Sesa Goa and Sterlite, VAL would be 95% owned by Sesa Sterlite- the merged entity. We maintain Neutral on both Sesa Goa and Sterlite.

Result Review

HDFC Bank (CMP: Rs.630 / TP: - / Upside: -)

For 2QFY2013, HDFC Bank reported a healthy 30.1% yoy growth in its net profit to Rs.1,560cr, in-line with our as well as the streetRs.s estimates. Strong balance sheet growth and stable margins and asset quality were the key highlights of the result. We recommend a Neutral rating on the stock.

HDFC BankRs.s net advances growth was strong at 22.9% yoy, while deposit buildup was also healthy, growing by 18.8% yoy. Growth in current account (adjusted for one-offs) and saving account deposits was healthy at 16.4% and 14.7% yoy, respectively. The current account saving account (CASA) ratio of the bank stood at 45.9% as of 2QFY2013.

The share of retail to overall loan book increased from 52.4% in 1QFY2013 to 53.2% for 2QFY2013, on back of lower wholesale lending (6.9% qoq compared to 10.1% qoq in retail loans). In spite of lower corporate lending, the bankRs.s margins declined by10bp qoq, primarily due to reduction in its base rate by 20bp to 9.8% (on June 30, 2012).

The bank maintained its strong asset quality track record during 2QFY2013 as well. Gross and net non performing assets (NPA) ratios remained stable at 0.9% and 0.2%, respectively. NPA provision coverage ratio remained at elevated levels at 81.9%, even without considering the floating provisions. Including floating provisions (70bp) and general provisions (40bp), the provisioning coverage stands strong at ~200% of the gross NPA book. Restructured advances for the bank remained stable at 0.3% of gross advances. The bank however made only Rs.75cr of floating provisions in 2QFY2013 compared to Rs.240cr of floating provisions during 2QFY2012.

HDFC Bank is currently trading at one-year forward 3.6x FY2014 ABV, higher than its median of 3.4x (over FY2005-12). We believe the current valuations largely factor in the positives leaving limited upside in the stock, and hence we recommend a Neutral rating on the stock.

Infosys (CMP: Rs.2,396 / TP: Rs.2,573 / Upside: 7%)

Infosys reported its 2QFY2013 results which were decent on the revenue front but disappointed on the operating front. The dollar revenues grew by 2.6% qoq to US$1,797mn, almost in line with the expectations. A key positive thing was that the companyRs.s volumes grew at a modest pace by 3.8% qoq led by a 3.6% offshore volume growth and 4.4% onsite volume growth. In INR terms, revenue came in at Rs.9,858cr, up 2.5% qoq. The company signed six large deals during the quarter.

The companyRs.s EBITDA and EBIT margins declined by 151 bp and 1 66bp qoq to 29.1% and 26.3% respectively in 2QFY2013. Operating margins of the company were impacted adversely because of higher subcontracting costs, warranty costs and one-time payout for promotion-based compensation increases. The company has announced wage hikes for its employee base - ie 6% for offshore employees and 2-3% for onsite employees. This will further pull down the operating margin of the company in addition to the negative impact of the INR appreciation trend being witnessed. On a full year basis, the company expects margins to go down by 200bp for FY2013 from the earlier expectation of 50-100bp, due to wage hike announced by the company.

Infosys has kept its FY2013 yearly guidance unchanged and expects revenue growth of at least 5% yoy to US$7.343bn; however in constant currency terms, the guidance has been scaled down from 6% earlier to 5.7% now, which clearly indicates challenging visibility in the business volumes and managementRs.s future expectation. This doesnRs.t include the Lodestone acquisition, which we believe would add ~ 100bps of growth in FY2013. Also, US$ EPS guidance has been revised down slightly to at least US$2.97 from US$3.03, adjusting it for the currency exchange rate. Taking wage hike as well as INR appreciation into account, the company scaled down FY2013 INR EPS guidance to at least Rs.160.6 from at least Rs.166.5 (at assumed currency rate for INR/USD of Rs.55.0). Post 1HFY2013 performance, the company requires a minimum 3.5% qoq growth rate in the next two quarters to achieve their FY2013 USD revenue growth guidance, which in the current scenario looks a bit stretched.

In addition, Infosys, which has seen a slew of management changes in the last couple of years, said that its CFO V. Balakrishnan would give up his position from October 31, 2012 and will be replaced by VP-finance Rajiv Bansal. Balakrishnan will, however, continue to be on the companyRs.s board and will now look after BPO operations, Finacle and India operations. This is a cause of concern as it does not give out a good picture of the company which is not doing well since the past three quarters.

At the current market price of Rs.2,396, the stock is trading at 15.0x FY2013E and 14.0x FY2014E EPS. We value the company at 15x FY2014E EPS of Rs.172and maintain our Accumulate rating on the stock with a target price of T2,573.

Result Preview

Reliance Industries (CMP: Rs.819, TP: -, Upside : -)

Reliance Industries Ltd. (RIL) is scheduled to announce its 2QFY2013 results today. We expect the companyRs.s top line to increase 19.6% yoy to Rs.93,934cr due to higher petrochemical prices during the quarter. However, we expect the companyRs.s operating margin to decline 474bp yoy to 7.8% mainly on account of decrease in production from KG D6 basin. The companyRs.s bottom-line is expected to decrease by 12.1% yoy to Rs.5,013cr. We maintain our Neutral view on the stock.

Axis Bank (CMP: Rs.1,120 / TP: Rs.1,326 / Upside: 18.4%)

Axis Bank is slated to announce its 2QFY2013 results. We expect the bank to report NII growth of 15.2% yoy to Rs.2,313cr. Non-interest income is expected to increase by healthy 11.6% yoy to Rs.1,378cr. Pre-provision profit of the bank is expected to register growth of 15.7% yoy. However, provisioning burden is expected to decline by 4.9% yoy, leading to net profit growth of 22.5% yoy to Rs.1,128cr.

The stock is currently trading at attractive valuations of 1.5x FY2014E ABV - more than 50% discount to HDFC Bank, despite similar earnings quality, profitability and growth expectations over FY2013-14. Hence, we maintain our Buy recommendation on the stock with a target price of 71,326.

Economic and Political News

- BSNL, MTNL tell government to shell out Rs.11,000cr to pay spectrum fee

- Gems and jewellery exports dip 14% to US$3.72bn in September

- Government needs to see competition while designing subsidies: CCI

- GSM operators lose 1.9mn subscribers in September

Corporate News

- Infosys doubles investments in debt funds to Rs.5,000cr

- Maruti gets 6000 pre-launch bookings for new Alto 800

- RIL cuts capital investment in KG-D6 by over US$3bn