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Indian stock market and companies daily report (October 31, 2012, Wednesday)

Contributed by Angel Broking

The Indian markets are expected to open flattish with a positive bias following flat opening in the SGX Nifty and positive opening in the other major Asian indices. Asian stocks rose, trimming a monthly loss, after South Korean industrial output increased and home prices gained in the U.S.

With Hurricane Sandy swirling towards the east coast of the U.S., the major stock markets in US remained closed on Tuesday as well. NYSE Euronext (NYX), said it intends to re-open the U.S. markets Wednesday morning if conditions permit. The European markets gained ground Tuesday after better than expected earnings reports from companies such as Allianz, Deutsche Bank and BP. However, trading volume remained thin in the wake of Hurricane SandyRs.s devastation in the United States

Indian shares fell sharply on Tuesday after the RBI left interest rates on hold but cut the cash reserve ratio for banks by 25 basis points, walking a tightrope on managing faltering growth and high inflation. Rate-sensitive banking and realty stocks bore the brunt of the selling

Markets Today

The trend deciding level for the day is 18,514 / 5,626 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,635 - 18,839 / 5,662 - 5,726 levels. However, if NIFTY trades below 18,514 / 5,626 levels for the first half-an-hour of trade then it may correct up to 18,310 - 18,189 / 5,562 - 5,526 levels.

RBI delivers on expected lines, reduces CRR by 25bp

The Reserve Bank of India (RBI) in its Second Quarter Monetary Policy Review for FY2013 reduced the Cash Reserve Ratio (CRR) by 25bp, from 4.50% to 4.25%, in line with market expectations. It maintained the key policy rate - the repo rate unchanged at 8.0%. Consequently, the reverse repo rate remains at 7.0% and the marginal standing facility (MSF) rate and bank rate remain unchanged at 9.0%. The statutory liquidity ratio (SLR) stands at 23.0% of banksRs. net demand and time liabilities (NDTL).

The RBI anticipates tightening of liquidity conditions owing to higher festival demand and therefore the reduction in CRR is expected to provide some comfort on the liquidity front. Trimming the CRR by 25bp is expected to inject around Rs.17,500cr of primary liquidity in the banking system effective November 3, 201 2.

By maintaining the repo rate the RBI has reiterated its stance on inflation management. WPI inflation for the month of September 2012 surged to 7.8% mainly owing to the impact of hike in fuel prices initiated by the government earlier in that month. We believe that the hike in diesel prices and revision in electricity tariff will adversely impact inflation through its pass-through effect on generalized inflation.

At the same time, the key change in the tone and stance of this policy is that the RBI has increased the priority of supporting growth in its decision-making criteria for the coming quarters rather than focusing purely on inflation. In fact, the RBI governor has mentioned the possibility of a more accommodative policy stance in 4QFY2013.

Through its policy stance, the RBI has reiterated that managing inflation and inflationary expectations remain amongst its top priority. The policy statement also raises concerns over growth and indicates that a material improvement in the current account and fiscal deficit situation will increase headroom for the central bank to ease its policy stance.

We maintain our view that in the growth-inflation dynamics, the scale is still tilted in favor of inflation control rather than growth, at least until the next policy review. Post December 201 2, we expect the RBI to ease rates by 25bp - 50bp.

RBI raises the provisioning requirement for standard restructured advances to 2.75% from 2% earlier

RBI has raised the provisioning requirement for standard restructured advances to 2.75% from 2% earlier. Considering the current experience of most banks of about 25-30% of restructured loans slipping into NPAs and about 50% loss given default, increase in provisioning requirement was imminent and 75bp increase can be seen as a primary step by RBI in the direction of ensuring higher provisioning for standard restructured advances. Earlier its working group had recommended increasing provisioning on standard restructured advances from 2% to 5% in a phased manner over a period of two years. Further, RBI can be expected to clarify regarding upgrading of restructured advances to enable banks to write-back provisions once the account performs satisfactorily over a stipulated period.

Higher provisioning on standard restructured advances would impact mid-PSU banks the most, with an average PBT impact for FY2013E of 4.1%. Within the mid PSUs, Central Bank and IOB would be worst affected, as their FY2013E PBT would be lower by 8.8% and 7.7%, respectively owing to their higher outstanding restructuring book. We await clarity from management on their restructured book, as the book is not strictly comparable bank-wise, owing to difference in reporting of restructured advance (account-wise/borrower-wise, sanctioned basis/disbursed basis, total restructured advances /standard restructured advances). Meanwhile, least affected amongst PSU banks would be SBI and BOB, while there would be negligible impact on new private banks and moderate impact in case of old private banks.

manufacturers/ATMA acted together and limited and controlled the production and price of tyres in the domestic markets. We see this as a positive development for the tyre industry as the outcome of the CCI inquiry was an overhang on the stock prices. The favorable outcome provides major relief to tyre manufacturers in our view.

S Kumars US subsidiary, HMX, filed voluntary petition for bankruptcy

SKNL ventured overseas through the acquisition of Hart Schaffner Marx (HMX) in the US in May 2009 for a transaction value of ~ $11 9mn. HMX has reported sales of Rs.1,091cr and a net loss of Rs.0.5cr for CY2011 and till June 2012, the company has registered sales of Rs.288cr with a loss of Rs.1 0cr. At the time of acquisition, HMX had received a US$95mn credit line in August 2009 which was reduced to about two-thirds by July this year.

The company providing the DIP (debtor-in-possession), Salus Capital, has agreed to fund upto US$75mn only if SKNL infuses $15 million. However, looking at the sluggish market in U.S and uncertain future of HMX business coupled with liquidity crunch, SKNL is not willing to infuse any additional capital in HMX and have decided the option of voluntary petition under Chapter 11. Details on the same will be available after November 8, 2012. Though the company is trading at low valuation, we have a Neutral recommendation on the stock, given the lack of clarity.

HMX is the largest menRs.s formal wear clothing company in the U.S. and a leading American producer of luxury apparel. The company is the largest manufacturer and marketer of menRs.s suits and coats in the U.S. The companyRs.s brands include HMX, Hickey Freeman, Misook, Coppley, Austin Reed, Claiborne and Pierre Cardin, among others.

Result Review

Maruti Suzuki (CMP: Rs.1,395/ TP: -/ Upside: -)

Maruti Suzuki (MSIL) reported marginally lower-than-expected results for 2QFY2013 led by lower-than-expected growth in top-line and operating margin pressures on account of higher raw-material and employee expenses. However the results were largely in-line with the street estimates.

For 2QFY2013, net sales grew by a healthy 8.2% yoy (down 22.9% qoq) to Rs.8,305cr which was 4.1% lower than our estimates, driven by 18.9% yoy increase in net average realization. Net average realization improved on account of price increases and relatively better product-mix (due to Swift, Dzire and Ertiga in volume-mix). Volumes during the quarter witnessed a decline of 8.7% yoy (22.1% qoq) led by labor strike at the Manesar plant and reduced demand for petrol cars. On the operating front, margins declined 11 7bp sequentially to 6.1% primarily due to increase in raw-material and employee expenses and lower operating leverage benefits. The raw-material cost as a percentage of sales jumped 1 75bp qoq due to higher discounts and lagged impact of indirect imports. Further, employee expense as a percentage of sales also increased 60bp qoq due to wage settlements and one-time expense related to the Manesar plant. On the positive side, other expenditure as a percentage of sales declined 120bp qoq due to favorable foreign exchange movement which led to lower royalty outgo (down 80bp qoq to 5.4%). As a result, operating profit declined 35.3% yoy to Rs.509cr. On a yoy basis though, operating profit grew by 15.4% largely due to 40bp improvement in operating margins. However, net profit declined 5.4% yoy (46.3% qoq) to Rs.227cr as depreciation and interest expense increased 248% and 30% yoy respectively. At the CMP of Rs.1,395, the stock is trading at 15x FY2014E earnings. Currently we have a Neutral rating on the stock.

DRL (CMP-Rs.1723, Target- Rs.1859, Upside-8%,)

Dr Reddys Labs: Dr Reddys Labs (DRL) posted results in line with expectations. On the top-line the DRL posted a growth of 27% to end the period at Rs.2,880cr, in line with the expectations of Rs.2,800cr majorly driven by the US market, which grew by 47% yoy. The companyRs.s other key regions Indian and Russian formulation businesses have grown by 12% yoy and 14% yoy respectively. In terms of the pharmaceuticals services and active ingredients (PSAI) segment, it grew by 33% yoy during the quarter. The companyRs.s the OPM came in at 22.5%, V/s 21.2% during the last corresponding quarter. On the net profit front, the company posted an adjusted net profit of Rs.493.7cr, i.e a growth of 76.8% over the corresponding period of the previous year. We recommend accumulate on the stock with a target price of Rs.1859.

Mahindra Satyam (CMP: Rs.108 / TP: Under review)

Mahindra Satyam reported broadly in-line set of results for 2QFY2013, with robust operational performance. Revenue came in at US$354mn, up 3.5% qoq (better than many of its peers), mainly led by 2.8% qoq volume growth. In INR terms, revenue came in at Rs.1,938cr, up 3.1% qoq. The companyRs.s operational performance was ahead of our expectations, with EBITDA margin remaining almost flat qoq at 21.5% despite having negative impact of wage hikes given during the quarter (6% to offshore employees and 1.5% to onsite employees). This was due to reduction in sub contracting, visa and travel costs. PAT came in at Rs.278cr, impacted by forex loss of Rs.86cr as against gain of Rs.66cr in 1QFY2013. The companyRs.s growth was led by manufacturing and BFSI vertical. The company continued to deliver operational exuberance with healthy volume growth. We remain positive on the stock and the target price is currently under review.

IDBI Bank- (CMP: Rs.92/ TP: Rs.108/ Upside: 17.4%)

IDBI Bank posted net profit decline of 6.3% yoy to Rs.484cr due to 54.3% yoy increase in provisioning expenses, which was directionally in-line with our estimates. The performance on the operating front was healthy, with operating income and operating profit growing by 20.7% and 17.2% yoy. On the asset quality front, on an absolute basis, Gross NPA increased by 6.4% qoq, while Net NPA declined by 2.4% qoq. Gross and Net NPA ratios were higher by 21bps and 3bps during the quarter to 3.45% and 2.04%, respectively.

At CMP, the stock trades at 0.6x FY2014 ABV. We value the stock at 0.7x FY2014 ABV and recommend a Buy rating on the stock with a target price of Rs.108.

Thermax (CMP: Rs.568/TP: -/Upside: - %)

For 2QFY201 3, Thermax reported a decline of 8.5% yoy in its top-line to Rs.1,192cr, as weak order inflows continue to keep the companyRs.s revenue under strict check. The companyRs.s order backlog stood at Rs.4,412cr, a 13% decline yoy. The companyRs.s EBITDA margin remained flat at 9.4%. Falling revenue and flat margin resulted in a y-o-y fall of 10.3% in the companyRs.s PAT to Rs.91cr. We maintain our Neutral rating on the stock.

IRB Infra (CMP: Rs.120 / TP: Rs.164 / Upside: 37%)

For 2QFY2013, IRB Infrastructure (IRB) reported a decent set of numbers. The companyRs.s revenue came slightly below our expectation but owing to better-than-expected performance at the EBITDAM level, earnings were higher than estimates. IRBRs.s top line grew by 14.9% yoy to Rs.845cr (below our estimate of Rs.900cr) mainly due to healthy execution pace for under-construction projects. The E&C segmentRs.s revenue grew by 17.8% yoy to Rs.622cr and the BOT segment witnessed 7.7% yoy growth to Rs.257cr. On the EBITDAM front, IRBRs.s margin came in at 45% (+140bp yoy basis), higher than our estimate of 43.3%. Stable input prices led to EBITDAM of 27.3% (excluding other income) for E&C segment. Interest cost grew by 5.0% yoy to Rs.148cr. IRB net profit increase by 10.0% yoy to Rs.121cr, above our estimate of Rs.106cr on account of better-than-expected performance at EBITDAM level.

IRB is looking at both organic and inorganic options for growth with a threshold of 18% equity IRR and intends to allot 20% of consolidated cash flow post debt repayment towards acquisitions. IRB has a healthy order book of Rs.7,466cr (2.9x FY201 3E E&C revenue, excluding O&M orders), which lends revenue visibility. Although a slowdown in order awarding by NHAI in road sector has been witnessed in 1HFY2013, IRB expects ordering activity to improve going ahead. As far as road EPC contracts are concerned IRB will decide whether to bid after the draft agreement is out. We maintain our Buy rating on the stock with a target price of Rs.164.

KEC International (CMP: Rs.69/TP: Rs.78/ Upside:13%)

For 2QFY2013, KEC International (KEC) reported a strong growth of 32% yoy to Rs.1,668cr, beating our expectations on the back of strong execution of its robust order book. However on the EBITDA front, the companyRs.s margin declined by 210bp yoy to 5.1% due to aggressive pricing in power, railway and cable business. Consequently, PAT declined of 22%yoy to Rs.17cr. We recommend an Accumulate rating on the stock with a target price of Rs.78.

PVR (CMP: Rs.227/TP: -/Upside: - %)

For 2QFY2013, PVR reported robust 37% yoy growth in top-line to Rs.189cr, on back of good performance in movie exhibition business. The companyRs.s EBITDA margin declined by 126bp yoy to 18.9% primarily on account of 152bp yoy increase in film distribution share. Consequently, Net profit grew by 13% yoy to Rs.16cr. We maintain our Neutral rating on the stock.

JK Tyre & Industries (CMP: Rs.127/ TP: Rs.135/ Upside: 6%)

JK Tyre & IndustriesRs. (JKI) reported sluggish results for 2QFY2013 as operating margins witnessed a decline of 70bp despite 220bp reduction in raw-material expenses. For 2QFY2013, adjusted net profit came in at Rs.25cr as against a loss of Rs.11cr in 2QFY2012 driven by sharp improvement in operating margins (594bp margin expansion) on a yoy basis led by 710bp decline in raw-material expenses. Top-line registered a modest growth of 6.1% yoy (down 7.1% qoq) growth to Rs.1,322cr as the demand for tyres in the replacement segment remained sluggish. Also demand from the OEMRs.s remained muted as MHCV segment witnessed a decline of 12.9% yoy in 1HFY2013. Operating margins registered a significant improvement as it expanded by 594bp yoy to 8.1% driven mainly on account of improvement in raw-material costs (710bp yoy) as natural rubber prices witnessed a decline of ~15% yoy during the quarter. On a sequential basis though, margins declined 70bp as benefits of lower raw-material expenses were mitigated by higher employee and other expenses.

Going ahead we believe that the company will report improvement in its performance on stable raw-material prices and likely pick-up in demand in the replacement segment. At the CMP of Rs.127, the stock is trading at 3.3x FY2014E earnings. Currently we have an Accumulate rating on the stock with a target price of Rs.135. We shall revise our estimates and release a detailed result update soon.

Jyoti Structures (CMP: Rs.46/TP: Under review)

Jyoti Structures announced its 2QFY2013 results. The company reported 6% yoy decline in its top-line to Rs.593cr. The companyRs.s operating margin contracted by 11 0bp to 9.7% primarily on account of 120bp yoy increase in other expenses. Consequently, the companyRs.s PAT declined by 46% yoy to Rs.12cr. We recommend Accumulate on the stock with the target price under review.

Result Preview

Tata Global (CMP:Rs.151/TP:/Upside:-)

Tata Global is expected to announce its 2QFY2013 results today. We expect the topline to grow by 11.8% yoy to Rs.1,802cr. OPM is expected to expand by 396bp yoy to 10.6%. Bottomline is expected to grow by 28.7% yoy to Rs.108cr. We maintain our neutral recommendation on the stock.

Bharat Forge (CMP: Rs.272/ TP: Rs.351/ Upside: 29%)

Bharat Forge is slated to announce its 2QFY2013 results today. On a standalone basis, we expect Bharat Forge (BHFC) to report flat revenue growth of 1.9% yoy to Rs.927cr, driven by ~10% yoy growth in net average realization. The company is expected to benefit from higher share of machining component. We expect the BHFCs volumes to decline by ~7% yoy following a 12.9% yoy decline in MHCV volumes. Nonetheless, the operating margin is expected to improve by 117bp yoy to 24.8% led by stable commodity prices and a superior product-mix. However, we expect the bottom-line to decline by 3.1% yoy to Rs.103cr primarily due to an increase in interest expense. At Rs.272, the stock is trading at 10.9x its FY2014E earnings. Currently, we have a Buy rating on the stock with a target price of Rs.351.

J&K Bank- (CMP: Rs.1,145 / TP: -/ Upside: -)

J&K Bank is slated to announce its 2QFY2013 results today. We expect the bank to report a robust Net Interest Income (NII) growth of 24.6% yoy to Rs.541cr. Noninterest income is expected to grow at a healthy pace of 19.6% yoy to Rs.85cr. Operating expenses of the bank are expected to be higher by 19.3% yoy to Rs.230cr. Net Profit is expected to grow by 17.0% yoy to Rs.234cr, despite 126.9% yoy increase in provisioning expenses (on a low base), due to strong growth of 26.7% on the operating profit front. The stock has surged recently and it trades at a valuation of 1.0x FY2014E ABV. We maintain our Neutral recommendation on the stock.

TVS Motor (CMP: Rs.40/ TP: Rs.49/ Upside: 22%)

TVS Motor is scheduled to announce its 2QFY2013 results today. We expect the company to report —13.7% yoy (5.5% qoq) decline in its top-line to Rs.1,719cr largely due to 19.6% yoy (6.4% qoq) decline in volumes during the quarter. The poor volume performance was on account of extremely weak motorcycle (down 28.4% yoy) and scooter sales (down 24.4% yoy) amidst rising competition and moderating demand environment. We expect the EBITDA margin to contract 104bp yoy (flat qoq) to 5.9% led by inferior product-mix and lower operating leverage benefits. As a result, bottom line is expected to decline 42.8% yoy (14.4% qoq) to Rs.44cr. At the CMP of Rs.40, the stock is trading at 7.4x FY2014E earnings. Currently, we have a Buy rating on the stock with a target price of Rs.49.

Economic and Political News

- Govt to launch pilots for direct food subsidy transfer

- Exclusive teams to verify digitisation progress in 4 metros

- LPG consumers can now fill KYC form till Nov 15

Corporate News

- BS Limited bags orders worth Rs.117cr

- Punj Lloyd bags Rs.664cr residential projects

- Country Club opens fitness centre in Jaipur