To read the full report: NTPC

To read the full report: DRL

Q2FY11 result analysis
• JM’s revenues increased 33.3% y-o-y to Rs 2.3 bn supported by strong performance in investment banking and securities funding businesses. However, PAT dipped by 2.3% y-o-y to Rs 564 mn mainly due to losses of Rs 33.5 mn in AMC and poor performance in the broking business.

• The investment banking and securities businesses reported revenue growth of 27.3% y-o-y to Rs 1.3 bn in Q2FY11. The investment banking division completed five deals worth Rs 30.6 bn in Q2FY11. However, the performance of the broking business was impacted by low brokerage yields and higher cost related to the institutional desk. As a result, segmental profit increased at a low rate of 3.7% y-o-y to Rs 94 mn in Q2FY11.

• Revenues from the securities funding business increased 70% y-o-y to Rs 721 mn in Q2FY11. However segmental earnings declined 7.3% y-o-y to Rs 198 mn due to a higher mix of borrowed funds and increased funding cost.

• AMC performance was impacted by regulatory changes and redemption pressure. Average AUM declined 26% y-o-y to Rs 65.3 bn in 2QFY11. The segment reported losses of Rs 33.5 mn. We believe the loss is largely due to one-time valuation losses arising from the shift to the mark to market valuation regime for the bond portfolio, which the company may have absorbed rather than passing on to the investors, inline with most of the players in the mutual fund industry.

• The alternative investment segment had AUM of Rs 17.2 bn and reported profit of Rs 110 mn in Q2FY11, 26.3% lower than that in Q2FY10.

Valuations: Upside from current levels
We continue to value JM using the sum-of-the-parts method and maintain the fair value at Rs 45 per share. The stock price has rallied by 15% since our previous update report dated August 19, 2010. Hence, we are revising our valuation grade to 4/5.

To read the full report: JM FINANCIAL LIMITED

• As the index of industrial production (IIP) has been readjusted in view of revamped Wholesale Price Index (WPI) for IIP items, the IIP growth for July and August 2010 now stands 15.0 and 6.9 per cent.

• Manufacturing output growth decelerated to 4.5 per cent in September 2010.

• Among the three major segments of IIP, only manufacturing index posted a positive growth (1.4 per cent) on m-o-m basis.

• Weak m-o-m performance of both mining and electricity in September 2010 led to their growth slowing down to 5.2 and 1.7 per cent respectively

• Capital goods output, continues to be volatile and the same shrank by 4.2 per cent in September 2010. As per the recompiled series, this is the first month in which capital goods have witnessed contraction this fiscal.

• Consumer durable goods, hitherto a consistently good performer also posted a lower growth of 10.9 per cent in September 2010 as against 27.1 per cent in the previous month.

To read the full report: ECONOMY FIRST CUT

Analysts are turning bullish for the first time in a year. Riding into the quarterly earnings season, we gauge consensus sentiment across sectors, and find that earnings revisions are no longer headed south. We aren’t seeing substantial upgrades just yet, but the trend of downward revisions is moderating. Economic growth is on track with a solid monsoon, robust consumption demand (and perhaps, a booming market), leading analysts to take a second look at earnings. RCML’s Q2 PAT (ex-oil) estimate is 29% for the Sensex, and 21% for our broader 135-stock coverage universe.

■ Consensus signals a moderation in earnings downgrades: Earnings revisions across the market have turned slightly positive in the last two months. The MSCI India Earnings Revision Index*, a key measure of sentiment, which has been on a downward trend (i.e., more downgrades than upgrades) since September ’09, has now shown signs of a reversal before the quarterly earnings season commences. Sentiments have been even more positive for the 600+ stock IBES India universe, the set of all stocks under sell-side coverage. In the backdrop of prolonged global weakness and the possibility of a double dip, analyst optimism is borne out of a good monsoon season, strong consumption demand, and a resilient Indian market post-crisis.

■ FY11 earnings growth at ~20%, but not on upgrades: Meanwhile, profit growth for Sensex companies remains largely unchanged since the ‘Tata (Motors/Steel)’ spike in June, at 20% for FY11 and 18% for FY12 (Fig 2). Gross FY11 profits have remained flat (-0.6%) during this period. In other words, analysts haven’t factored in any rise in full-year profits post Q1FY11. Not yet anyway.

■ Autos remain the sector of choice, Telecom the least-liked: Sector-wise, Autos (Fig 3) have seen the highest earnings growth since last year, riding on the strong volume growth post-recovery. Telecom earnings in contrast have been pared down by a third in this period. While the overhang of competitive intensity, 3GBWA, and MNP (where in contrast to the costs, data-revenue estimates are still hazy) explains the negative quarterly estimates, the latest round of downgrades is largely due to consolidated (including Africa) figures for Bharti. High upgrades also imply an increased risk of disappointment, with Autos, Metals, Health, and Capital Goods seeing the highest upgrades in the last three months and remain as sectors to watch this earnings season.

■ Earnings upgrades and market performance… may not go together: Ratings may not always translate into performance, as we know. While Autos, Cement and Metals outperformed the market in line with upward earnings revisions, Banks, Telecom and Real Estate have seen outperformance despite flat or downward earnings revisions.

■ Sectors to watch out for this earnings season: Sectors such as Real Estate and Telecom are the ones to watch out for this earnings season as outperformance ahead of earnings could well turn into sharp underperformance in case of any negative earnings surprises.

To read the full report: FY 11/12 Earnings

■ Copper, VAL, and BALCO expansions effectively on hold
The 100 ktpa lead capacity expansion has been delayed by a quarter and is now expected to be completed in Q3FY11. The 400 ktpa brown field copper expansion has been put on hold considering the high court order to shut the existing smelter due to environmental/pollution issues and pending approval from the State Pollution Control Board. The Supreme Court has currently issued a stay on the above order and hearing on the matter is scheduled on October 18. With the Ministry of Environment and Forests withholding clearance for Vedanta Aluminium’s (VAL) bauxite mine and objecting to the alumina expansion, the company has effectively put on hold the entire expansion—alumina expansion at VAL to 5 mt from the current 1 mt, smelter expansions of 1.25 mtpa at Jharsuguda and 325 kt at Korba—at VAL and BALCO.

■ Increased power available for merchant sales
The company had planned to source power from Sterlite Energy’s (SEL) 2,400 MW plant for its upcoming 1.25 mtpa aluminium smelter at Jharsuguda. With that project being deferred, the power available now will be sold on merchant basis. Similarly, the entire output from the 1,200 MW captive power plant at BALCO (for 325 ktpa smelter III) will also be available for merchant sales.

■ Outlook and valuations: Project execution concerns; maintain ‘BUY’
We are revising down Sterlite’s FY11E and FY12E PAT 8% and 4%, respectively, after factoring in lower volume growth in Hindustan Zinc (HZL) and project delays in copper, VAL, SEL and BALCO. Cash costs at VAL are running higher than expected at ~USD 1,900/t even after considering purchased bauxite. While the various projects and environment related issues will be an overhang on the stock, we believe this has been factored in the stock price. From a longer-term perspective we see value in the business. We retain our ‘BUY/Sector Performer’ recommendation/rating, but lower our fair valuation to INR 203 (earlier INR 214) considering the revision in estimates.

To read the full report: STERLITE INDUSTRIES

Though, it appears that ECGC may not fulfill the banks’ claim for the account, and banks are pushing the matter for corporate debt restructuring (CDR). The CDR package could provide short term relief to the borrower and to ECGC. The borrower has been aggressively trying to raise short-term funds for fulfilling liabilities on account of employees’ costs and overheads. Given the status of the borrower, CDR package might not revive the borrower and banks could have to write off the entire exposure.

Central Bureau of Investigation (CBI) would be investigating the foreign currency irregularities and the central bank would investigate huge amount of banks’ non-fund exposure to single account.

To read the full report: PNB

■ Existing Capacity of 601 MW to be ramped up to 914 MW by FY11 and 4644 MW by
FY15 leading to 75% Revenue CAGR and 51% EPS CAGR from FY10 to FY15: KSKEVL has commissioned 601 MW across multiple locations in India including the first two units of 135 MW at the 540 (4*135) MW Warora plant. The further expansion of 313 MW includes 2 remaining units of the Warora Plant and a 43 MW expansion of Arasmeta Phase II. KSKEVL has also achieved substantial progress on the 3600 MW KSK Mahanadi Project at Chhatisgarh in terms of placement of BTG orders, commencement of construction works at the site and recent financial closure for the entire debt requirement. It has incurred a Project Cost of ` 33 bn and has already infused equity of ` 21 bn. It has also received equity commitment of ` 2500 mn by IFCI and expects to commission the first unit of 600 MW in Q1FY12 vis-à-vis our conservative assumption of Q2FY12.

■ Predictability of business model and innovative capital structuring enabling higher financial leverage: KSKEVL has focused on fuel security in the form of long term fuel supply agreements and has tied up most of its off-take on a long term basis which provide higher predictability to its business model. It has also set up power plants on captive basis where in it receives partial equity contributions from its equity partners. These factors have enabled KSKEVL to finance its projects at higher leverage than its peers.

■ Overcoming the Lehman Hangover with High Investor Interest due to Improved Visibility of Projects, Scalability of Business and Attractive Valuations: KSKEVL has entered into a lock up agreement with Lehman Brothers Subsidiaries (LB Entities) to not sell 12.2% of the shareholding till Oct 30, 2011 and has a right of first refusal over sale of 6.5% of the shareholding. This reduces the uncertainty on the sale LB entities and we expect that several long term investors will be interested in KSKEVL due to improved visibility of its projects, scalability of business model and its attractive valuations. This is evident in the recent commitments of ` 3.5 bn by IFCI and L&T Infra.

■ Attractive Valuations and High Sensitivity to Project Cost Overruns: KSKEVL is attractively priced on FY10 and FY11 Price/Book to Forward RoE. The advanced stages of its projects provide assurance regarding the implementation of the projected capacity of 4644 MW within the estimated project costs.

To read the full report: KSKEVL

■ Business growth scaling up; margin expansion. We expect ING Vysya Bank to witness improved business growth and higher market share FY11 onwards. Rising CASA share is likely to aid margin expansion to 3.1% in FY13e from 2.7% in FY10.

■ Rising productivity. Core Cost-to-income (excluding trading and extraordinary gains) sharply declined to 60 % in FY10, falling 690bps over FY09. Cost-to-assets at 2.5% in FY10, though higher than peers, shows significant scope for further improvement in productivity.

■ Adequate capitalisation. With strong backing of its international parent and current CRAR of 14.5% (tier 1 capital of 9.9%), the Bank is adequately capitalised to support future growth and
protect itself from additional loan defaults.

■ Valuation and risks. At our target price of `445, the stock would trade at 1.9x FY12e and 1.7x FY13e ABV. Our target price is based on the two-stage dividend-discount model (CoE: 13.2%;
beta: 0.87; Rf: 7.5%). Risks include slower-than-expected credit growth and higher slippages on account of NPAs.

To read the full report: ING VYSYA BANK

Large caps are not cheap: Indian markets have risen 14% this year, 9% of it in this month alone, and with Sensex at 19x 12m forward earnings, valuations are not cheap for most of the large caps. While we continue to be bullish on India’s long-term fundamentals, we do accept that near-term upside is limited in large caps. As such, we find most investors are looking for mid-caps that still offer significant share price upside either due to higher earnings trajectory or possibility of multiple re-rating or a combination of both. This is our effort to provide names of some of the midcaps with such upside potential.

Historical performance supports mid-caps: In the Indian markets’ near one-way trajectory since 2003, small and mid-caps have outperformed large-caps by a fair margin in 4/6 years. This year too, the BSE Midcap and Small-cap indices have outperformed the Sensex by 15 and 22% YTD. While past performance is no guarantee for future returns, we believe there’s sufficient growth potential in each of our picks to become a large/mega-cap tomorrow. In this context we also expect hitherto low foreign participation (13% in midcaps, 7% in small-caps vs.  25% in Sensex) to become more broad-based going forward.

Show me the money: Most investors believe that the higher risk of buying midcaps needs to be justified by higher returns. Hence while screening the midcap space for value and growth potential; we have shortlisted picks that we believe will generate 35-50% returns by Dec’11.

To read the full report: POTENTIAL STOCKS

■ Exposed to the spot market for 46% of total coal requirement
JSWEL has entered into long term coal supply contract with PT Sungai Belati and its South African company (South African Coal Mining Holding Ltd), which will together supply ~4mtpa. We believe this will meet only ~54% of its total coal requirement of ~7mtpa in FY13, thus keeping it exposed to the spot market (on a steady state basis) for ~3.2mtpa. This dependence would be higher in FY12E at ~4.8mn tons, as the company operates a part of its Rajasthan unit on imported coal.

■ Expect 13% downside; Initiate with SELL recommendation
Although, JSWEL is one of the fastest-growing power companies, we believe its high exposure to spot market only increases earningssensitivity. Robust 66% earnings CAGR over FY10-12E, due to higher operational capacity, should allow the stock to trade at a premium in the near future. We expect the premium to contract as: 1) capacity addition slows; 2) short-term rates soften; and 3) fuel prices increase. Decline in profitability and higher interest outgo will contract its RoE going forward. Hence, further upside for the stock seems limited, in our view. We value the company on FCFE to arrive at our target price of Rs117, implying potential downside of 13%. We initiate coverage with a SELL recommendation.

To read the full report: JSW ENERGY LIMITED

Clariant Chemicals (India) (CCIL), a 63.4% subsidiary of Clariant AG, Switzerland, is a leading specialty chemicals companies. India is witnessing one of the best growth rates ever seen in consumption in various sectors including automobiles, paints, personal care, food and beverages or textiles. With demand growing at a fast clip, CCIL is ideally placed to capitalise on this favourable trend as it caters to most of the consumption categories.

Most of CCIL’s portfolio consists of specialty of products enjoying strong brand and tremendous customer loyalty due to superior quality and technology. As the consumption boom gathers steam, demand for value-added and well-finished products will expand at a faster rate than the category growth. Hence, the company’s products will enjoy faster growth.

The textile business of CCIL enhances the properties of apparel and other textiles in applications as diverse as high fashion, home textiles, and special technical textiles. The company is also a leading manufacturer and supplier of pigments and its preparations for manufacturing paints, plastics, printing inks, cosmetics, detergents or special applications like latex, and viscose. Its high performance pigments meet the exacting demands of the automotive, coil and coating industries.

To read the full report: CCIL

■ Resurgence of competitive intensity likely
In the past 10 months, headline tariffs have been stable, but revenue per minute (RPM) has declined 22%. With implementation of MNP and launch of 3G services, we anticipate re-emergence of tariff wars. In our view, Idea, Aircel and Tata Docomo will utilise the MNP opportunity to target Bharti’s and Vodafone’s high usage customers. As per media reports, the government is planning to allow entry of MVNOs, which will make the market more competitive. Thus, Bharti’s dominance, with 32% revenue market share will be severely challenged.

■ Margins to remain under pressure
MNP implementation and launch of 3G services will lead to escalation in costs. We believe, the entry of MVNOs will lead to further pressure on business for incumbents. While on one hand tariffs will be under pressure, on the other, we expect network operating costs and customer acquisition/retention costs to escalate. This, combined with expensing of interest cost and amortisation of 3G licence fee will lead to lower profitability. In our estimate, Bharti will have to generate incremental ARPU of INR 622 per month from 3G services in Mumbai to breakeven and INR 800 to defend current margins.

■ No meaningful consolidation expected
Street is expecting consolidation in the sector. We believe, a shake-out is imminent in the new operator segment. Post-consolidation we expect the current top 7 operators, who control 98% of industry revenues to continue. Thus, consolidation will not be meaningful.

■ Tower and handset businesses offer attractive alternate options
The tower industry is fairly consolidated with five players mostly fulfilling infrastructure requirements of telecom operators. We expect the tower industry to generate revenue of INR 191 bn and EBITDA of INR 112 bn in FY12E. The handset industry, riding on significant growth in subscribers, is expected to sell 295 mn handsets and report revenues of INR 286 bn in FY12E.

■ Valuations and view: Await a better entry point
Bharti and Idea stock price has risen 40% in the past three months due to investor optimism on stable tariff environment and as the stocks have under performed the broad indices over the past two years. We don’t believe tariff wars have ended. Bharti is trading at similar valuations as it did when its stock price peaked in February 2008 despite higher competitive intensity in business and inferior financials. We downgrade Bharti to ‘HOLD’ and RCOM to ‘REDUCE’. Maintain ‘HOLD’ on Idea and ‘BUY’ on Tulip Telecom.

To read the full report: TELECOM SECTOR

With the recent correction, the risk-reward ratio for select construction companies has turned favourable, in our view. Revival in execution and pick-up in industrial/international orders will be the key triggers for construction companies in the near to medium term. Simplex Infrastructure (SINF) and Nagarjuna Construction (NJCC) are our top-picks in the sector with 20%+ potential upside from current levels.

Investment Highlights
■ Ordering opportunity for construction players pegged at US$109 bn between FY10-12E
We peg the ordering opportunity for construction companies at US$109 bn over the next two years led by acceleration in awarding of national highway projects and increasing opportunities in the power sector. Road/power/irrigation/railway sector are expected to contribute 40%/24%/14%/13% of the total orders.

■ Infrastructure investment robust despite slippages
Despite slippages in meeting target, infrastructure investment (ex-storage, oil & gas and telecom) has seen a 17% CAGR in the past five years. In FY10, infrastructure spending increased to US$69 bn or 5.8% of GDP (5.0% in FY04). As per revised projections, US$349 bn (ex-storage, oil & gas and telecom) is expected to be invested in the 11th Plan (US$170 bn in the 10th Plan), with private sector contribution expected at 25% (22% in the 10th Plan).

■ Strong order inflows in H2FY10 to accelerate revenue growth in H2FY11/FY12
Economic slowdown and general elections led to muted order inflows in H2FY09 and H1FY10. Order inflows, however, have picked-up since H2FY10 (up 74% YoY). Due to the back-ended nature of revenues, we expect our coverage universe (SINF, NJCC, IVRCL and HCC) to report a 16% YoY growth in revenues for FY11 (8% YoY growth in Q1FY11) and 23% YoY growth for FY12.

■ Risk-reward ratio favourable; SINF and NJCC our top-picks
After outperforming the broader markets during the pre-crisis period, construction stocks have been a consistent underperformer since May 2008. Against a 2% return generated by Sensex between May 2008 and August 2010, our coverage universe has delivered a negative 25% return.

With earnings momentum expected to pick-up in the coming quarters, select construction stocks are trading at attractive valuations (available at 9-12x our FY12 EPS). Within the construction space, we prefer SINF and NJCC due to their (1) diversified order book (2) better working capital position (3) conservative approach to BOT projects and (4) attractive valuations. We have valued construction companies based on SOTP methodology. For the core construction business, we have assigned earnings multiple in the range of 10-15x, based on certain quantitative and qualitative factors. The listed (unlisted) subsidiaries of construction companies are valued at 30% discount to CMP (1x book value). We initiate coverage on SINF, NJCC and IVRCL with a BUY rating and maintain our HOLD rating on HCC.

To read the full report: INDIA CONSTRUCTION SECTOR

1) Ashok Leyland
2) KEC International
3) Glenmark Pharmaceuticals
4) Educomp Solutions
5) Petronet LNG
6) Sintex Industries
7) Sobha Developers
Mahindra & Mahindra Financial Services Ltd
9) Shree Cement
10) Voltas

India’s medium-term economic growth story continues to remain healthy on account of a revival in demand - the current year looks particularly good given the better monsoon and its impact on rural demand.

Till September 29 this year, FIIs have invested about Rs 85,340 crore in the Indian markets, which is among the largest inflows in recent years and a lot of foreign money has flowed into the largecap stocks. Therefore, midcaps have underperformed in the recent past. The BSE Midcap index has delivered only 6.14% returns in the last one month vis-a-vis the Sensex’s 10.8% returns.

To read the full report: MIDCAP STOCKS

■ With regards the farmers’ protests against the Yamuna Expressway project in Uttar Pradesh for a justifiable compensation for land to be surrendered by them, the government has decided to go back to the drawing board to create an expressway authority and decide the funding pattern for the projects. Due to the farmers’ protests, the work of the company suffered for about 20 days at a particular stretch on the expressway. We believe the issue is negative for the company as it may lead to a delay in the execution time of the project or could lead to an increase in the cost of the project. On the real estate front, the company could sell about 5.1 million square feet (sq ft; as on August 31). At the moment the company is constructing almost 20 million sq ft and hopes to start deliveries next year from June 2011.

■ Further, the company is also looking to make a foray in the business of manufacturing and marketing of fertilisers, either on its own or through a special purpose vehicle (SPV). As per media reports, JP Associates is looking to acquire a controlling stake of nearly 74% in the fertiliser division of Duncans Industries. The fertiliser division of Duncans Industries is proposed to be hived off into a separate entity. Duncans Industries’ fertiliser unit is located at Panki in Uttar Pradesh and is non-operational at present. We believe the company’s likely foray into the fertiliser business is also an overhang on the stock as it is not related to its present business model.

■ The re-rating triggers for the stock will be an improving outlook for the real estate companies, better than expected execution of its expressway and power projects, and a better than expected performance of its cement division, which contributes around 40% of its overall revenue.

To read the full report: JAIPRAKASH ASSOCIATES