Fears of the spreading emerging market crisis impacted India

WEEK IN A NUTSHELL

WIN-dow to the week that was

Week in a Nutshell (WIN)

Week

ended

7 Feb 2014

Key WIN-dicators

Arvind Ltd: Initiating Coverage

Fears of the spreading emerging market crisis impacted India in the first

half of this week and FII net inflows turned negative for CY14 YTD.

However a recovery in sentiment after some positive data from the US

and reassuring commentary from the ECB and BoE helped global markets.

Expectations of positive election outcome and seasonal inflows lead to

DIIs buying and a flattish close for the benchmark indices (-0.4% WoW)

Telecom Auctions:

The auctions that started this week have clearly

surprised everyone. While bidding has been aggressive in the 1800 MHZ v/s

expectations, it’s the bidding in 900 MHZ band that is of more immediate

concern. Taking into account the current prices for 1800MHz and 900MHz

for the three metros, there could be significant upside to the spectrum

renewal liability for

Bharti INR43 to 63/sh and for Idea INR42 to 69/sh and

the bidding is still on!

While the results season is panning out on expected lines;

the highlight of

this week’s results includes PNB, BOB & Divis.

Both PNB and BOB surprised

positively on NIM’s and asset quality and their guidance for better

performance on asset quality comes as a welcome relief. Divis reported an

all-round strong performance.

Auto Expo 2014: Highlights

This was the biggest expo ever in India, with

~69 new launches (47 in

2012), of which 26 were global launches

(incl concepts).

Maruti’s Celerio

launch and pricing for automatic at INR429k was the talking point. New

launches in the small sedan segment that created excitement were

Hyundai’s Xcent

and

Fords Figo Concept.

While MM had no new products,

very few MPVs (Honda and Datsun) give some breathing space for MM's

product lifecycle.

TTMT:

We were positively surprised by quality of new

launches of small sedan Zest and small car Bolt. While

HMCL

made

statement of intent with 9 new products (5 scooters, incl 2 indigenously

developed engines) and 3 concepts (diesel, hydrogen and 650cc sports

bike).

BJAUT:

Launched 375cc Pulsar, which looked stunning and also

showcased the U-Car concept.

Some of the highlights of this edition:

3QFY14 Result Notes:

Lupin, Ambuja, PNB, Hero, BoB

Arvind Mills:

Initiating Coverage

Bajaj Auto Concept: U Car Concept

Maruti Suzuki: Celerio: India First Auto

Gear Shift Car

Nifty (-0.4%) WoW

WWW – WIN Weekend Wisdom

There’s a big difference between seeing an opportunity and seizing an

opportunity

Feb 7

2014

WIN – Week In a Nutshell

WEEK IN A NUTSHELL

[W]INside this week’s edition

WIN-TERESTING DATA POINTS ...................................................................................................................................................4

WIN-NING CHARTS & CHATS ......................................................................................................................................................5

INNING

HARTS

- R

EVENUE AND

ROFITS

ARNED IN

1 M

INUTE

...............................................................................................................5

WIN-CONOMICS.........................................................................................................................................................................6

INDIA ECONOMICS: G

REEN GROCERS STILL REMAIN FRIENDS BUT

. R

AJAN HAS MOVED ON

.......................................................................6

INDIA ECONOMICS: S

HARP REVISION IN

FY11-FY13 GDP

GROWTH

;

SAVING RATE BELOW

EHMAN LOWS

INVESTMENTS HELD UP BY PUBLIC

SECTOR

.............................................................................................................................................................................................6

SECTOR UPDATES .......................................................................................................................................................................7

AUTO DASHBOARD: J

ANUARY

2014

UPDATE

......................................................................................................................................7

CEMENT: A

TTEMPTS TO BOOST PRICE CONTINUE

; INR10-20/

BAG

HIKE EXCEPT SOUTH

;

DISCIPLINE IMPROVED IN NORTH

WEST

...................7

ENERGY: CNG/PNG

SEGMENTS TO GET

100% (

80%

NOW

)

DOMESTIC GAS ALLOCATION

;

EXPECT

CNG

PRICES TO LOWER ON NET BASIS DESPITE

SCHEDULED DOUBLING OF GAS PRICE IN

PRIL

1, 2014;

RESPITE FOR

IGL

AS VOLUME GROWTH COULD PICKUP

.....................................................8

INDIA POLITICS: T

HIRD FRONT EMERGES AGAIN TO IMPROVE POST POLL VISIBILITY

;

PAST FAILINGS AND DECLINING STRENGTH EVOKES SKEPTICISM

....8

REAL ESTATE: D

ATA AIDS POSITIVE SURPRISE IN

4QCY13

PRESALES GROWTH

;

LOW BASE EFFECT

SELECT ATTRACTIVE LAUNCH KEY REASONS

;

PRICE

FLATTENING

.......................................................................................................................................................................................8

TELECOM: S

PECTRUM AUCTION

4 – 900

BAND PRICE UP

11%

ELHI

;

CONTINUED ACTION IN

1800

BAND

; MTM

SPECTRUM LIABILITY UP

45-

65%

FOR

HARTI

DEA

........................................................................................................................................................................9

WIN CORPORATE CORNER .......................................................................................................................................................10

ACC 4QCY13: EBITDA

BEAT OF

ON LOWER COST PUSH IN ENERGY AND

RM;

TAX REVERSAL BOOSTS

PAT;

RAISE

EPS

4-5%. M

AINTAIN

.....................................................................................................................................................................................................10

AMBUJA CEMENT 4QCY13: EBITDA

BEATS EST ON LOWER ENERGY AND EMPLOYEE COST

;

RAISING

CY14/15 EPS

~4%;

KEEPING

NDER

REVIEW

...........................................................................................................................................................................................10

RVIND

: I

NITIATING COVERAGE

; 46%

UPSIDE

...................................................................................................................................10

ASHOK LEYLAND: A

BOVE EST AT

7,847

UNITS

(

EST

7,500

UNITS

); MHCV

S DECLINE

20%; LCV

DECLINES SHARPLY BY

37% Y

Y......................11

BAJAJ AUTO: M

ARGINALLY AHEAD OF EST

;

VOLUME DECLINES

8.5% Y

318,171

UNITS

; 3W

S CONTINUE TO REMAIN WEAK

.......................11

BANK OF BARODA (BOB) 3QFY14: A

BOVE EST

; NIM

IMPROVES

NET STRESS ADDITION DECLINES

;

HEALTHY CAPITALIZATION

. B

..........11

BHEL 3QFY14: A

BOVE EST

;

SLOW MOVING ORDERS AT

20%+;

POSSIBLE PROJECT WINS AT

~INR150

B IN

4Q;

DEBTORS DOWN

4% Q

Q.............12

ANARA

ANK

3QFY14: W

EAK CORE PERF

.; S

TRESS ADDITION REMAINS HIGH

;

STRONG LOAN GROWTH A CONCERN

; T

RADES AT

0.4

FY15BV ......12

COGNIZANT 4QCY13: R

EVENUE MARGINALLY BELOW CONSENSUS

; CY14

ORGANIC GROWTH GUIDANCE OF AT LEAST

16.1%

IMPLIES LIMITED

LIKELIHOOD OF GROWTH ACCELERATION

................................................................................................................................................12

CUMMINS INDIA 3QFY14: O

PERATING PERF ABOVE ESTIMATES

;

IMPROVED COST EFFICIENCIES SUPPORT MARGINS

;

MAINTAIN

..................13

DIVI'S LABS 3QFY14: A

NOTHER STRONG QUARTER

; A

LL ROUND GROWTH

; R

OBUST GUIDANCE FOR

FY15E; U

PGRADE ESTIMATE BY

5-6% ..........13

EICHER MOTORS: I

LINE

; CV

SALES DROPS

31% Y

MOMENTUM IN

OYAL

NFIELD CONTINUES WITH

~77%

GROWTH

..............................14

RASIM

NDUSTRIES

3QFY14: B

ELOW EST ON COST PUSH

DESPITE STRONG VOLUMES AND HIGHER REALIZATIONS

; M

AINTAIN

.......................14

GSPL 3QFY14: S

IGNIFICANTLY BELOW ESTIMATES LED BY LOWER VOLUME AND TARIFF

;

HEADWINDS FOR INCREMENTAL GAS CONTINUE

; N

EUTRAL

..14

GODREJ CONSUMER (GCPL) 3QFY14: B

ELOW ESTIMATES

; H

OME

NSECTICIDES GROWTH IN SINGLE AT MULTI QUARTER LOW

; N

EUTRAL

..........15

HERO MOTOCORP: A

BOVE EST AT

561,253

UNITS

(

EST OF

530,000

UNITS

);

MGMT GUIDES MULTIPLE NEW LAUNCHES IN PHASED MANNER

......15

HMSI: S

TRONG SCOOTER GROWTH CONTINUES TO DRIVE OVERALL SALES

....................................................................................................15

IDFC 3QFY14: PAT

ABOVE EST

.; G

ROWTH MODERATE FURTHER

; NPL

S SPIKE UP

; L

OWER

ROVISIONS DRIVE

PAT

BEAT

....................................15

ING VYSYA BANK 3QFY14: NIM

IMPACTED BY ONE

OFFS

; R

ESTRUCTURING RISES

; NPL

STABLE

; T

RADES AT

1.4

FY15BV .............................16

JAIPRAKASH POWER 3QFY14: B

ELOW ESTIMATE

;

LOWER CONTRIBUTION FROM

INA

ARCHAM

ANGTOO

;

CUT EARNINGS

/TP;

LEVERAGING

IS KEY

..............................................................................................................................................................................................16

JAYPEE INFRATECH 3QFY14: R

EVENUE BEATS EST

; EBITDA

PLUNGES ON LOWER MARGIN

;

OPERATIONS WEAK

ALBEIT UP

Q .....................16

LUPIN 3QFY14: A

BOVE EST

; I

NDIA

, J

APAN RECOVER

MOMENTUM IN

GENERICS CONTINUES

;

EXPECT STRONG QUARTERS AHEAD

;

UPGRADE

EPS

1-3% .........................................................................................................................................................................................17

MARUTI SUZUKI: I

LINE AT

102,416 (

EST

104,500

UNITS

DECLINE OF

10.3%

DRIVEN BY

48%

DROP IN EXPORTS

, C

ELERIO DISPATCHES STARTED

(

EST

K UNITS

) .................................................................................................................................................................................17

MARUTI SUZUKI: M

GMT MEET

- MSIL’

S CORE EARNINGS

/FCF

UNAFFECTED

; PAT/

RETURN RATIOS TO IMPROVE

; S

URPLUS FUNDS TO USE TO

STRENGTHEN MARKETING

/R&D ..........................................................................................................................................................18

M&M: I

LINE AT

62,794 (

EST

61,499

UNITS

); A

UTOS DECLINE

14% Y

TRACTOR GREW

15% Y

Y ..........................................................18

NMDC: J

ANUARY DELIVERIES UP

9% M

M; K

ARNATAKA

E-

AUCTION BID VOLUMES UP

57% M

LUMPS PRICES UP

2%,

FINES PRICES DOWN

12%

YET

HIGHEST

. M

AINTAIN

.........................................................................................................................................................19

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

BEROI

EALTY

3QFY14: O

PERATIONAL WEAKNESS CONTINUES

BUT POSSIBLY NEARING INFLECTION

WITH

ORLI

, M

ULUND

, JVLR

LAUNCH ON

MONTH RADAR

. M

AINTAIN

...........................................................................................................................................................19

PETRONET LNG 3QFY14: B

ELOW EST

LED BY LOWER

AHEJ THROUGHPUT

; K

OCHI RAMP

UP SLOW

;

TO SAVE

INR6

B ON

AHEJ EXPANSION

;

ALUATIONS REASONABLE

..................................................................................................................................................................19

PNB 3QFY14: I

NLINE

; A

SSET QUALITY IMPROVEMENT A POSITIVE SURPRISE

; S

TRONG

NIM

S DUE TO DE

BULKING

;

GROWTH TO IMPROVE

; B

.......20

POWER FINANCE 3QFY14: A

BOVE EST

; H

EALTHY LOAN GROWTH

; S

TABLE ASSET QUALITY

; I

NTERIM DIV OF

INR8.8/

; R

AISE EST

~7%.......20

POWEGRID 3QFY14: B

ELOW ESTIMATE LED BY LOWER CORE BUSINESS CONTRIBUTION

, STOA;

CAPEX MOMENTUM REMAINS STRONG BUT

CAPITALIZATION GROWTH IS THE KEY

.....................................................................................................................................................20

PRESTIGE ESTATES PROJECTS 3QFY14: EBITDA

BEATS EST

;

OPERATIONS MARGINALLY MODERATED

BUT ON TRACK TO MEET

BEAT

GUIDANCE

;

EFFECTIVE DEBT UP

INR1

Q ..........................................................................................................................................21

RANBAXY 4QFY14: O

PERATIONAL PERF

ABOVE EST

;

GUIDES FOR LOWER IMPACT FROM

AONSA BAN BUT HIGHER REMEDIATION COSTS AHEAD

;

RAISE CORE

EPS

2-4% ...................................................................................................................................................................21

OBHA

EVELOPERS

3QFY14: A

BOVE EST

;

PRESALES

COLLECTIONS WEAKENED

Q; FY14

GUIDANCE LOWERED

BUT HINTS

4QFY14

OPERATIONS

TO RETURN TO NORMALCY

. M

AINTAIN

............................................................................................................................................22

TATA MOTORS: B

ELOW EST AT

40,481

UNITS

(

EST

44,400

UNITS

);

PRESSURES ACROSS PORTFOLIO

; LCV

SALES DECLINE

45% Y

Y ...................22

TATA POWER: A

GREEMENT TO SALE STAKE IN

RUTMIN MINE COULD BE POSITIVE FOR LEVERAGE

CASHFLOWS

EARNINGS

VALUATION IMPACT

MINIMAL

; A

WAIT CLARITY

...................................................................................................................................................................23

TVS MOTOR: A

BOVE EST

; S

TRONG

55% Y

GROWTH IN EXPORTS

;

SCOOTERS GREW

19% Y

Y; M

OPEDS RECOVERS WITH

29% M

GROWTH

NION

ANK

3QFY14: L

OWER CAPITALIZATION REMAINS A CONCERN

; S

TRESS ADDITION REMAINS HIGH

; T

RADES AT

0.4

FY15BV .....................23

WHIRLPOOL INDIA 3QFY14: F

IRST SIGNS OF RECOVERY

ALBEIT ON FAVORABLE BASE

...............................................................................24

WIN COLLAGE ..........................................................................................................................................................................25

DITYA

URI ON

NDIA CAN BE THE OUTLIER AS GROWTH IN DEVELOPED ECONOMIES ASCEND AND OF

BRICS

DESCEND

................................25

NIFTY VALUATIONS AT A GLANCE ............................................................................................................................................27

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

WIN-teresting data points

Global Indices

Sensex

Nikkei

Hang Seng

Dow Jones

FTSE 100

Sectoral Indices

Bank Nifty

CNX IT

BSE Oil

Bond yields-

India

1 Year

10 Year

10238

9957

8453

Last

Friday

8.52

8.78

10263

9648

8328

0.25

-3.10

-1

13.91

15.01

10.55

Last week

20514

14915

22035

15699

6510

Current

week

20377

14462

21637

15629

6570

WoW change (%)

-0.67

-3.03

-1.81

-0.45

0.91

P/E Valuations

16.26

25.39

11.61

13.22

15.24

Inflows

FII (Rs B)

DII (Rs B)

Commodities

Oil(US$/Bbl)

Precious Metals

Gold ($/OZ)

Silver ($/OZ)

Metals

Copper(US$/MT)

Zinc(US$/MT)

Aluminum(US$/MT)

This week WoW change (%)

8.46

8.74

-1

Spread Vs US 10

yrs

Steel HRC(Rs/T)

8.34

6.03

Currency

Rs Vs Dollar

Euro Vs Dollar

62.66

1.35

62.29

1.36

-0.59

0.59

7096

1964

1663

7178

2012.5

1671.5

1.2%

2.5%

0.5%

1245

1263

1.47

3.78

MTD

-10

Last

week

107.2

YTD

(Calendar)

-12

This week WoW change (%)

106.9

-0.28

Top Gainers

Company Name

Monsanto India

Godfrey Phillips

Kaveri Seeds

Aban Offshore

Voltas

Balkrishna Industries

BSE 500 – Key Movers

Top Losers

% Change Company Name

23%

21%

19%

16%

12%

10%

BHEL

Oberoi Realty

Opto Circuits

Sintex

Eclerx

Shriram Transport

% Change

-10%

-8%

-6%

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

WIN-ning charts & chats

Winning Charts - Revenue and Profits Earned in 1 Minute

Amazon is a retailing juggernaut, but its revenues are still a fraction of those of Walmart, whose tills ring up about

$900,000 a minute. The bricks-and-mortar colossus turns in a modest profit margin, whereas Amazon is still being

run on a basis of growth now, profits later. Comparing the revenues and net profits of companies commonly

regarded as peers shows their relative commercial power.

Google is often chided for its dominance, though Apple is far larger (and their profit margins are similar). Coca-

Cola’s sales are less than PepsiCo’s but its margins are almost twice those of its arch-rival. In energy and aerospace,

the sales of American and European giants are roughly similar yet the Americans earn more. And Goldman Sachs

has long been the media’s whipping boy, but JPMorgan Chase is bigger in net revenue and net profit—though not

profit margins.

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

Win-conomics

INDIA ECONOMICS: Green grocers still remain friends but Dr. Rajan has moved on

RBI has decisively won the bet in proving Nov-13 inflation data as a ‘noise’. Sharp drop in vegetables prices led

the significant moderation in both CPI and WPI in Dec-13.

Collating the price trend on major vegetables for the month of Jan-14 so far, we find that vegetable prices

continue to drop MoM taking them lower than their levels a year back in many cases.

This would likely to result in WPI falling to 5.7% levels during Jan-14 and CPI to 9.1% in Jan-14.

Further moderation of food prices is expected with Rabi sowing exceeding previous year by 5.3% with

particularly increased acreage for cereals. Lower hike in MSP also to aid in moderation in inflation.

In normal course, this should have triggered a rate cut expectations in the coming months.

However, as evidenced in the latest round of rate hike in Jan-14, RBI is amidst inflation targeting already

incorporating all its critical components in its policy decisions, including, i) far greater emphasis on inflation

control than growth, ii) adoption of CPI as a nominal anchor, iii) setting a lower tolerance limit through the glide

path by which inflation would come down to 8% by Jan-15, and to 6% by Jan-16, iv) insistence on positive real

policy rate.

While we hold that CPI inflation would come down to 8% sooner than RBI expects, it has guided for a stable

policy course, indicating high interest rates for a longer period. External considerations too might have

influenced a hardened policy stance from RBI. Thus, while inflation is falling down rapidly, RBI has hardened its

stance in the interim.

INDIA ECONOMICS: Sharp revision in FY11-FY13 GDP growth; saving rate below Lehman lows,

investments held up by public sector

Significant revision has been effected in GDP growth estimate of FY11 to FY13. However, the direction of change

lacks consistency.

While FY11 growth has been downgraded to 8.9% in sharp contrast to their previous upgrade in earlier revision,

FY12 GDP growth has been upgraded to 6.7%, again in sharp contrast to the downgrade seen in previous

estimate. FY13 GDP growth has been revised downwards to 4.5% from 5% earlier

Saving rate continued to fall and at 30.1% was lower than the Lehman low of 32%. A sharp decline in household

physical saving coupled with decline in private corporate saving accounted for this while public sector saving

were held up on PSUs’ profit.

The investment ratio declined further to 34.8%, although it was somewhat higher than the Lehman low of

34.3%. The decline was mainly attributed to decline n household and private corporate investment while the

public sector stepped up its investment in construction activities.

While we expect the saving rate to improve somewhat during FY14, investment ratio is likely to go down further

as import of valuables have corrected sharply, before recovering again in FY15.

The sharp correction in FY13 GDP growth would lend a marginal upside bias to our FY14 GDP growth estimate of

4.5%. CSO would release the advance estimate of FY14 GDP on February 7, 2014.

Significant revision in GDP growth estimates (YoY%)

Saving ratio lower than crisis year while investments higher(% of GDP)

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

Sector Updates

AUTO DASHBOARD: January 2014 update

•

Growth continues in two-wheelers and tractors, other segments sees sharp decline

Underlying demand remains weak; however two-wheelers and tractors posted healthy growth

Considering the slowdown in economic activity and consequent weakness in consumer and business

sentiments, demand continues to remain weak across auto segments. MHCVs and cars have been the worst

impacted.

However, tractor volumes continue to remain strong on favorable monsoon and high farm income. Two-

wheeler sales have also picked-up driven by rural demand and strong growth in scooters.

Easing of macro headwinds to be key catalyst for demand recovery

With expected increase in rural incomes due to favorable monsoon, coupled with election spending led

improvement in macro-economic environment, we expect better 4Q for the auto sector. Over the long term,

easing macro headwinds in terms of lower interest rates and higher economic growth would be the key driver

for volume growth, profitability and in turn re-rating.

Demand environment and changing competitive landscape in the auto sector would be the key determinants of

stock performance. Prefer Hero MotoCorp and Tata Motors in large caps and TVS Motor and Eicher Motors in

mid-caps.

•

CEMENT: Attempts to boost price continue; INR10-20/bag MoM hike except south; discipline improved

in north, west

•

We concluded our periodic interactions with cement dealers across regions to get ground reality on recent

pricing trend and demand.

Key takeaways:

• Efforts to increase price continues

• Attempts to provide upward thrust to cement prices by manufacturers continued in the month of January-14,

despite volume growth showing no encouraging sign yet. Overall, the prices were taken up by INR10-20/bag

(over December-end level) across most regions except south – which witnessed a INR10-15/bag of decline (AP

saw a decline of INR20/bag).

• Increase was most in select states like Rajasthan, Gujarat and Chhattisgarh. In some instances, actual selling are

happening lower than the billing prices (as highlighted by dealers of Pune, Chandigarh, Indore etc).

• Another round of price increase is expected over next 1 week. Dealers are viewing this multiple price increases

by the companies as an effort to protect downside in an environment of muted demand – which has been a

phenomenon in recent months.

Region-wise weighted average January-14 price (INR/bag) trends

Region

MoM

YoY

National average

+INR 5/bag (+2%)

–INR 9/bag (-3%)

North

+INR 9/bag (+4%)

–INR 17/bag (-7%)

West

+INR 13/bag (+5%)

–INR 4/bag (-1%)

East

+INR 11/bag (+4%)

–INR 6/bag (-2%)

South

- INR 10/bag (-4%)

–INR 17/bag (-10%)

Central

+INR 9/bag (+4%)

–INR 17/bag (+7%)

•

We are assuming INR10-12/bag QoQ increase in cement pricing in 4QFY14 for our MOSL universe. Uptick in

demand would be the most crucial factor to sustain price hike (prevent any repeated roll back) and critical for

operating and stock performance. In large-caps, we prefer ACC and Shree Cement; whereas in mid-caps we

prefer Birla Corp, Dalmia, and JK Lakshmi.

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

ENERGY: CNG/PNG segments to get 100% (v/s 80% now) domestic gas allocation; expect CNG prices to

lower on net basis despite scheduled doubling of gas price in April 1, 2014; respite for IGL as volume

growth could pickup

Ministry of Petroleum and Natural Gas has announced that CNG and PNG network’s natural gas requirement

will be met 100% (v/s 80% now) through domestic gas (could be a blend on APM and PMT).

This will eliminate high cost LNG purchase for CNG/PNG and is expected to result in price cut of INR15/kg (30%

reduction) in CNG and INR5/scm in PNG in Delhi.

Gas will be made available through pro-rata cut in non-priority industries, which include Petrochemicals,

Refineries and Steel and any further requirement, will be met through additional cuts.

100% allocation of domestic gas to CNG/PNG will reduce selling price to the consumer and is likely to result in

the higher volume growth as CNG becomes more attractive v/s alternate fuels. Increased PNG customer base

will also help in lowering LPG subsidy. Gas volume cut is likely to impact Gail India and RIL who currently

consume APM and PMT gas for petrochemical production.

However, benefit of increase in domestic gas allocation to 100% will be partly negated by the scheduled

domestic gas price hike from April 1, 2014 as per Rangarajan Committee formula.

Nevertheless, on a net-net basis the CNG price will be lower than the current level (INR50/kg in Delhi) across

the country (except Mumbai where it already gets 100% APM).

From company-level perspective, we expect volume growth to increase for IGL. IGL’s (IGL IN, Mkt Cap USD0.6b,

CMP INR269, TP INR306, 14% upside, Neutral) volume growth has averaged lower at 6% in the last 4 quarters

with ~4% in CNG (75% of total volumes) and 12% in PNG v/s FY08-12 average of ~20%.

We would watchout for the final mix of the domestic gas allocation (APM and PMT) and implementation of the

gas price hike in April 1, 2014 before reviewing our volume growth estimates for IGL. We currently model

volume growth of 5%/7%/7% for FY14/15/16 in our estimates.

INDIA POLITICS: Third front emerges again to improve post poll visibility; past failings and declining

strength evokes skepticism

•

Leaders of 11 non-Congress and non-BJP parties announced the formation of a block (termed as Third Front by

media) to pitch for pro-people, anti-communal and federal agenda.

The Front initiated by the Left parties made a joint appearance in the Parliament indicating an understanding to

work together on key issues.

However, only the Left parties (CPI and CPI-M) have gone for a pre-poll seat sharing arrangement with the

AIADMK in Tamil Nadu. Indeed, regional isolation of these parties makes pre-poll arrangement meaningful with

only the Left.

While most of these parties have non-overlapping electoral presence, they shied away from a pre-poll alliance.

This implies that the move is a first time attempt to improve visibility for the quick formation of a post-poll

alliance to provide a non-congress-non-BJP axis.

However, the seat and vote share of these parties had taken a major knock in the 2009 Lok Sabha elections

(Refer Exhibit 1 below).

As expected, while the leaders of the Third Front have tried to put up a united face, they came under severe

criticism from the BJP while Congress was more guarded in its observations (Refer Exhibit 4 below).

One silver lining has been that the Governments by Third Fronts too have carried out the legacy of reform.

Illustratively, the United Front Government between 1996-98 initiated various path breaking reforms including

Central Electricity Regulatory Commission, phased de-regulation of petroleum prices, Disinvestment

Commission and Banking Sector Reforms.

•

REAL ESTATE: Data aids positive surprise in 4QCY13 presales growth; low base effect, select attractive

launch key reasons; price flattening

•

We analyzed the quarterly real estate data points from various property consultants (Liases Foras, JLL, DTZ)

available in public domain. Presenting our takeaways and views:

There were very weak new launches in festive season of 4QCY13 unlike past years. To end the year, Bangalore

was the lone market to have higher launch in CY13 than CY12.

Feb 7

2014

WIN – Week In a Nutshell

WEEK IN A NUTSHELL

•

As per Liases Foras data, Pan India presales were strong in 4QCY13 (+14% YoY/+22% QoQ in volume and +46%

YoY/+32% QoQ in value). CY13 presales volume down by 5-10%, value up 8% YoY.

Regional presales value in 4QCY13/CY13 is as follows: MMR (+70%/+16%), NCR (+27%/+1%), Bangalore

(+77%/+8%), Pune (+0%/-11%) and Chennai (+80%/+48%). Hence, it is evident that growth was led by MMR

(due to extremely low base), Bangalore and Chennai.

Unsold inventory level improved marginally QoQ across markets, albeit MMR, NCR still at concerning level.

Bangalore, Chennai, Pune and Thane are better placed.

Flattening (QoQ) price trends suggest peaking out of property prices in most markets. Channel checks suggest

10-15% off-the-book discount in many markets (Island City Mumbai, Dwarka expressway and new Gurgaon

projects at NCR etc).

Commercial annual demand de-grew by 3.5% YoY in CY13 after a flattish 4QCY13. New supply moderated

(almost halved in MMR), and thus improving vacancy level.

•

TELECOM: Spectrum auction Day 4 – 900 band price up 11% in Delhi; continued action in 1800 band;

MTM spectrum liability up 45-65% for Bharti/Idea

•

Seven rounds were completed in the 1,800MHz and 900MHz spectrum auction on Day 4, taking total rounds to

twenty-eight. Aggregate value of spectrum ‘bid for’ (303 MHz across 2 bands and 22 circles) at the provisional

winning price post twenty-eight rounds was INR389b as compared to Day 3 value of INR439b (for 308 MHz bid

on Day 3).

In the 1,800MHz band, aggregate demand on Day 4 was 281MHz vs 275MHz on Day 3. Pricing increased in

double-digits vs Day 3 in Assam (34%), Maharashtra (16%), and UP west (11%). Excess demand was positive in

Assam, J&K, MP, UP east and UP west.

In the 900MHz band, aggregate demand on Day 4 reduced to 22MHz vs 33MHz on Day 3 with excess demand at

negative levels for all the three metros. While the price as well as excess demand remained unchanged for

Kolkata and Mumbai implying no incremental bidding, price for Delhi increased by 11% but excess demand

declined from 5 on Day 3 to -6 on Day 4.

Increased pricing for 900MHz band spectrum has a significant bearing on the renewal liability of Bharti and Idea

as the bulk of renewal liability pertains to 900MHz spectrum.

With the premium for 900MHz increasing from 1.6-1.7x at reserve price to 2.6-2.8x at current bid prices, there

is a possibility that renewal for 900MHz spectrum in circles other than the three metros might also happen

closer to ~3x premium vs the 1,800 band.

Taking into account the Day 4’ 1800MHz prices for pan-India, Day 4 900MHz prices for the three metros, and

multiplier of 3x for 900MHz spectrum in the circles other than the three metros, there could be significant

upside to the spectrum renewal liability for Bharti/Idea as compared to the earlier estimates benchmarked to

reserve price.

On a mark-to-market basis, the licence renewal and excess spectrum liability for Bharti upto CY16 increases

from INR173b (INR43/sh) to INR250b (INR63/sh).

On a mark-to-market basis, the licence renewal and excess spectrum liability for Idea upto CY16 increases from

INR139b (NR42/sh) to INR230b (INR69/sh).

The actual spectrum liability can change depending on 1) Bids towards data spectrum, and 2) Quantity of

900MHz renewed by the operator.

•

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

WIN Corporate Corner

ACC 4QCY13: EBITDA beat of 5% on lower cost push in energy and RM; tax reversal boosts PAT; raise

EPS by 4-5%. Maintain Buy

ACC’s 4QCY13 cement business net sales (ex RMC) grew by 1.8%YoY (+7.4% QoQ) to INR25.2b (in line with est of

INR25.3b), while overall sales were marginally below est at INR26.9b, down 13% YoY (v/s est of INR27.7b), due

to weaker RMC business. RMC revenue grew by 7% QoQ to INR1.7b (below est of INR2.4b).

Cement volumes de-grew 1.5% YoY (+6% QoQ) to 5.85mt (v/s est of 5.97mt), while grey cement realization was

up 1.7% QoQ (3.4% YoY) to ~INR4,307/ton (in line with est of INR4,244/ton).

EBITDA was marginally above est at ~INR2.6b (v/s est of INR2.5b), which translates into margin of 9.8% (v/s est

of 9% and +0.8pp QoQ). EBITDA/ton stood at INR449 v/s est of ~INR417 (up INR42/ton QoQ and down

INR85/ton YoY), driven by lower energy and raw material cost (down INR92/ton QoQ), albeit partially offset by

higher freight cost and other expense.

Further, tax reversal of INR759m resulted into a negative tax of INR360m, which boosted reported PAT at

INR2.78b (est of INR1.6b).

ACC declared final dividend of INR19/share, taking total dividend for CY13 to INR30/share (same as CY12) –

implying 62% Payout on adj. PAT and dividend yield of ~3%.

We are revising our EPS for CY14/CY15 upward by 4%/5% to INR66.8/88.1 respectively. This translates into

target price of INR1,240 (at ~USD100/ton or implied EV/EBITDA 7x CY15E EV/EBITDA) including synergy

benefits.

We are yet to formally incorporate benefits of synergies. However, based on our initial estimates, stock trades

at 10.5x CY15E EPS, and at an EV of 5.6x CY15E EBITDA and USD71/ton. Maintain Buy with a target price of

INR1,240 (at ~USD100/ton or ~7x CY15E EV/EBITDA).

AMBUJA CEMENT 4QCY13: EBITDA beats est on lower energy and employee cost; raising CY14/15 EPS

by ~4%; keeping Under review

•

Ambuja Cements’ (ACEM)’s 4QCY13 net sales de-grew by -5.3% YoY (+9%QoQ) to INR21.9b (in line with est of

INR22.1b). This was driven by in line volume 5.29mt (v/s est 5.36mt), down 1.8% YoY (+8% QoQ), and

realizations of INR4,142/ton (v/s est of INR4,131/ton), up 0.9% QoQ.

EBITDA de-grew 33% YoY (+13% QoQ) to ~INR2.9b (v/s est ~IN2.5b), translating into EBITDA margin of 13.2%

(+0.5pp QoQ). EBITDA/ton stood at ~INR546 (v/s est ~INR462), up INR24/ton QoQ (-INR249/ton YoY). Better

profitability was attributable to lower energy cost (which benefitted by further increase in pet coke usage in

kiln) and savings in employee cost.

Reported PAT stood at INR3.2b (v/s est of INR1.6b), boosted by tax credit of INR1b. Adj. PAT de-grew 2.8% YoY

to INR2.2b. It declared final dividend of INR2.4/share, taking total dividend for CY13 to INR3.6/share (same as

CY12).

We are upgrading EPS for CY14/CY15 by 4.2%/4% to INR8.4/10.6 respectively, to factor in for (a) lower energy

cost (4% YoY inflation v/s earlier estimates of 5% in CY14/15), (b) lower employee cost, while (c) maintained

CY14/15 volume growth assumption at 5%/8%, and realizations growth of INR12.5/bag YoY each in CY14/15.

While we are yet to factor in resultant synergies in our estimates, based on our preliminary estimates, the stock

trades at an EV of 6.8x CY15E EBITDA and USD91/ton (on fully diluted equity and on pro-rata consolidation,

including synergies). Recent fall in stock price results in potential upside. However, we seek more clarity on

near-term triggers in the context of current challenging environment. We place the rating Under Review from

earlier rating of Neutral

•

Arvind Ltd: Initiating coverage; 46% upside

•

Brands and retail segment margins to see structural improvement from 5.4% in FY13 to 12% by FY16E, driven by

consolidation of portfolio, more power brands, turnaround of loss-making new brands and improved margins in

Megamart.

Restructuring in garments segment led to turnaround and improvement in margins from -8% in FY10 to 11% in

FY13. Plans to expand capacity from 10m pieces to 25m by FY15 to drive profitable growth.

Wovens to be the largest segment for Arvind Ltd (ARVND) in FY16 and overtake denims in sales and profitability.

Feb 7

2014

•

WIN – Week In a Nutshell

WEEK IN A NUTSHELL

•

Focus on higher value-added products in denim (70% of denim revenue) will ensure better realizations and

margins in an over-supplied market scenario.

We value ARVND at 6x FY16E EV/EBITDA, in line with five-year historical average multiple of 6.4x one-year

forward EV/EBITDA. Initiate coverage with a 'Buy'.

ASHOK LEYLAND: Above est at 7,847 units (est 7,500 units); MHCVs decline 20%; LCV declines sharply by

37% YoY

Ashok Leyland reported decline of 26% YoY (+25% MoM) in Jan-14 sales volumes to 7,847 units (est 7,500

units).

Reflecting the continued weakness in economic environment and consequent pressure on freight traffic, MHCVs

declined by 20% YoY, +42% MoM) to 5,530 units (est 4,200 units). We have built-in 30% decline in MHCV

volumes for FY14, implying a residual de-growth of 46% and residual run-rate of 4,492 units.

LCV (Dost & Stile) have declined by 37% YoY to 2,317 units (est 3,300 units).

The stock trades at 33.3x FY16E EPS and 8.4x EV/EBITDA and 0.9x P/BV. Maintain Neutral.

BAJAJ AUTO: Marginally ahead of est; volume declines 8.5% YoY at 318,171 units; 3Ws continue to

remain weak

Bajaj Auto Jan-14 total sales were marginally ahead of expectations with 8.5% decline at 318,171 units (est

312,000 units).

Our estimate of 8.4% decline in FY14, implies residual de-growth of 0.5% or residual run-rate of 315,093 units.

Motorcycle volumes stood at 281,390 units, declining by 6.6% YoY (+8% MoM) vs our expectation of 275,000.

Drop in volumes could be attributed to continued shift towards scooters, higher competitive pressures in the

motorcycle segment coupled with weak consumer sentiments within the domestic segment.

Weakness in 3W volumes continues with 20.5% YoY decline (-1% MoM) at 36,781 units led by sharp slowdown

in domestic 3Ws. Our de-growth estimate of 7% implies residual de-growth of 4.5% or monthly run-rate of

~35,948 units.

Exports have grown by 7% YoY to 137,644 units (-9% MoM) against our expectation of 140,000 units.

The stock trades at 16.9x/14.2x/12x FY14E/FY15E/FY16E EPS of INR112.9/133.7/158.5 respectively. Maintain

Buy.

BANK OF BARODA (BOB) 3QFY14: Above est; NIM improves QoQ; net stress addition declines; healthy

capitalization. Buy

BOB’s 3QFY14 PAT was 7% above estimate at INR10.5b (+4% YoY). NII/PPP was in-line with estimate at INR30.6b

(8% YoY) and INR21.8b (down 3% YoY). However, PBT was 18% above estimate led by: a) MTM write-back of

INR1.2b (v/s expectation of INR300m of MTM loss) and b) strong asset quality performance. Higher tax rate

(26% v/s expectation of 19%) on account of creation of DTL of INR2.7b on special reserve contained PAT growth.

Net slippages declined QoQ to INR10.6b (net slippage ratio of 1.4%), lowest in last five quarters (average of

INR16.4b). Write-offs were negligible in 3QFY14, hence GNPA increased 10%. PCR (cal) improved QoQ to 44.5%

(up 250bp) and NNPA % was stable at 1.9%.

In 3QFY14, bank restructured fresh loans of INR12.1b (v/s INR16.4b in 2QFY14). However, led by

repayment/adjustments, OSRL was flat QoQ at INR212b (6% of loans).

Other highlights: (1) Domestic and global NIM improved by 10bp / 5bp QoQ to 3% / 2.4%, (2) BoB directly

debited networth by INR8.2b (2.3% of networth, INR19/share), (3) Bank raised USD1.9b of FCNR (B) deposits.

Guidance for 4QFY14: a) Loan growth above industry growth rates, b) Domestic NIMs of 3%, c) ROA to reach

~1% and (d) Slippages and fresh restructuring to come down in coming quarters.

Improving trend on asset quality, strong CET1 of ~9.5%, relatively better return ratios and lower stress loans v/s

peers increases our confidence on fundamentals of BoB. NIMs and asset quality could surprise positively if

growth engine resumes. Nevertheless, we model credit cost of 0.9%/1% over FY14/16.

We model 10bp improvement in NIM in FY15 and to be stable thereafter.

RoA’s and RoE is expected to be 0.7/0.6% over FY15/16. We expect bank to report EPS of INR105/INR106 and

INR113 in FY14/15/16 and BV is expected to be INR768/INR850 and INR936. The stock currently trades at

0.7/0.6x FY14/15/16E BV.

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

BHEL 3QFY14: Above est; slow moving orders at 20%+; possible project wins at ~INR150b in 4Q; debtors

down 4% QoQ

•

BHEL’s 3QFY14 performance was above estimates with revenues at INR84.6b (down 16% YoY, in-line) and

EBIDTA margins at 11.7% (down 462bp YoY, vs est of 10.6%). PAT at INR6.9b (down 41% YoY) was higher than

estimates of INR5.2b (down 56%) and is supported by INR800m of forex gains on receivables (included in other

income).

Revenues were impacted given slow moving orders from private sector (at ~20%+ of the order book), and also

delayed execution due to lack of regulatory clearances, local issues, delays in payment / LCs, etc. Importantly,

margins have bounced back to a more normative level of 11.7% in 3QFY14 (vs 1HFY14 levels of 6.5%), given

limited incremental provisions in 3Q pertaining to bad and doubtful debts / liquidated damages, etc. Margins

have been impacted given poor fixed cost absorption with staff costs at 17.7% (up 360bp) and SGA expenses at

14.4% (up 58bp), while RM costs as % of revenues stood at 56.5% (up 40bp).

Order backlog at the end of 3QFY14 declined to INR1t, down 12% YoY & 2% QoQ. Power sector order book was

at INR834b, stable QoQ while Industry sector witnessed 11% YoY decline to INR101b. Gross order inflow was

INR72b (power sector INR63b, Industry INR13b). Management stated that BHEL is favourably positioned in

~4.5GW of projects to be awarded by March 14, which includes 1.98GW NTPC North Karanpura, 1.6GW NTPC

Darlipalli (Boilers), 6X196MW Pranhita Lift Irrigation, 1.32GW e-BOP of NTPC Raghunathpur, etc. In addition, the

company is submitting bids for another 7GW of projects (including Ennore 1.6GW, Udangudi 1.32GW, Tanda TG

1.32GW, etc). We model order inflow of INR147b for BHEL in 4QFY14, entailing INR263b in FY14.

Working capital situation continues to be stretched and debtors at the end of 3QFY14 stood at INR394b (down

4% QoQ). Management stated that collections are an important focus, with 9mFY14 collections at 109% of the

net billings and at 95% of revenues. We believe that improved trend in terms of debtors collections will be an

important monitorable and a key stock price trigger. Debtors outstanding for more than 12 months continues to

be ~50% of the outstanding amount.

We maintain Buy with a Price Target of INR210/sh (14x FY16E). We expect BHEL to report EPS of INR14.4/sh

(down 46%) in FY14, INR9.6/sh (down 32.9%) in FY15 and INR15.0/sh (up 56%) in FY16. At CMP of INR160, BHEL

trades at PER of 12.1x / 18.0x / 11.6x its FY14E / FY15E / FY16E.

•

Canara Bank 3QFY14: Weak core perf.; Stress addition remains high; strong loan growth a concern;

Trades at 0.4x FY15BV

•

Canara Bank’s 3QFY14 PAT of INR4.1b (down 42% YoY) was 20% above estimate. However, core performance

was weak with (1) NIMs remaining at a low of 2.2% (~5bp drop QoQ), (2) fee income growth of 12% YoY (7%

below expectation) despite strong loan growth of 32% YoY and (3) higher stress addition.

Lower opex (6% below expectation) and MTM provisions of INR1.6b v/s expectation of INR3.6b led to PAT beat.

Unamortized MTM is of INR2.6b.

Stress levels continue to be high with net slippages of INR10.4b (net slippage ratio of 1.9% v/s INR6.3b in

2QFY14) and fresh restructuring of INR34.5b (1.2% of loans). OSRL stood at INR184.5b (6.4% of loans). Pipeline

of restructuring is of INR33b of which INR16.2b pertains to SEBs.

CBK directly debited INR11.9b (5% of net worth; INR26 per share) for creation of DTL on special reserves which

pertained to earlier years (in-line with recent RBI notification).

Other highlights: (a) Of the overall FITL requirement of INR5.3b bank charged INR1.3b to P&L with rest to be

amortized over next three quarters, (b) bank recognized revaluation reserve of INR35.7b during the quarter.

•

COGNIZANT 4QCY13: Revenue marginally below consensus; CY14 organic growth guidance of at least

16.1% implies limited likelihood of growth acceleration

•

Revenue marginally below consensus: CTSH’s 4QCY13 revenues grew 2.2% QoQ to USD2,355m, ahead of its

implied guidance of USD2,352m. The consensus estimate of revenues was USD2,359m, +2.3% QoQ (TCS grew

3% QoQ) and our estimate was USD2,362m, +2.5% QoQ growth. EBITDA margin during the quarter was 21%,

+20bp QoQ. GAAP EPS for the quarter was USD1.06, v/s guidance of USD1.04 and consensus of USD1.05.

16% organic revenue growth in CY14: CTSH gave CY14 revenue growth guidance of ‘at least’ 16.5%, and

excluding the impact of Equinox acquisition, organic growth guidance is 16.1%. Revenue guidance for 1QCY14 is

USD2,420m (2.7% QoQ) – implies 2Q-4QCY14 CQGR of 4.2%.

Feb 7

2014

•

WIN – Week In a Nutshell

WEEK IN A NUTSHELL

•

Reading the guidance from Indian peers’ perspective: CTSH’s guidance implies unlikely acceleration in the

company’s CY14 growth, contrary to our revenue acceleration expectation for its Indian peers. We currently

model 17.7% USD revenue growth for TCS in FY15 (v/s 16.5% in FY14E), and CTSH’s outlook suggests little

upside to that number. Also, we expect USD revenue growth of 13.7% at INFO, and guidance of ~11% in the

background of that expectation and CTSH’s guidance may not be perceived very negatively.

North America budgets modestly up, discretionary spending to continue: North American IT budgets are up

modestly compared to last year, which is better than flattish budgets in the past couple of years. In 2013,

discretionary spending picked up in the middle of the year (which drove guidance upgrade), and CTSH expects

that to continue.

•

CUMMINS INDIA 3QFY14: Operating perf above estimates; improved cost efficiencies support margins;

maintain Buy

KKC’s 3QFY14 operating performance was above estimates: Revenues at INR10.2b (down 6% YoY) vs estimates

of INR9.8b (down 10.2%), while EBITDA at INR2.0b (down 5% YoY) is 17.5% above estimates.

EBIDTA margins stood at 19.3% (down 16bp) and are significantly above estimates of 17.2%. PAT stood at

INR1.5b (down 19% YoY) and is above est of INR1.4b.

The key highlight has been the sharp decline in RM costs to 60% of revenues in 3QFY14 (down 270bp YoY). On

QoQ basis, RM costs are stable at 60% which is encouraging, and is despite pig iron prices increasing by 7.4%

from lows in 1QFY14.

The expansion in gross margins since last 2 quarters is largely attributable to currency benefits on exports (KKC

is an important beneficiary of the currency movement, as it retains 50% of the gains beyond 3% and last reset

was in Dec 2012). This has also offset the impact of poor operating leverage - staff costs stood at 8.5% of

revenues (up 82bp YoY) and other expenses at 12.1% (up 170bp YoY).

Cummins Inc had altered the currency reset on annual basis, vs the previous practice of reset every third year;

and thus the currency will be reset in 4QFY14, impacting margins in 4QFY14. Also, currently pig iron prices are

up 7.4% from lows in 1QFY14 and should impact RM costs 4QFY14 onwards.

Hence, we model EBIDTA margins of 17.1% in 4QFY14 (vs 19.3% in 3QFY14). CPCB II norms implementation

have been postponed to June 2014 now, and thus the pre-buying is likely to commence from ~March 2014.

We currently model EPS of INR21.9/sh in FY14 (down 8% YoY), INR24.9/sh in FY15 (up 13% YoY) and INR29.5/sh

in FY16 (up 18.8% YoY). At CMP of INR402/sh, KKC quotes at PER of 18.4x FY14 / 16.2x FY15E.

Maintain Buy; key triggers are: i) incremental success in LHP segment (both domestic and exports), which

contributed ~INR4b to revenues in FY13 and internal targets are ~INR15-20b over the next 3-5 years, ii) possible

demand recovery in US and Europe (which would drive HHP exports), and iii) pick-up in the reconditioning and

refurbishment business with implementation of CPCB-II (facilities have been recently established in Phaltan).

We expect contribution of LHP products and Recon to increase from 8% of revenues in FY13 to 23% in FY16, and

thus these segments are important growth levers.

DIVI'S LABS 3QFY14: Another strong quarter; All round growth; Robust guidance for FY15E; Upgrade

estimate by 5-6%

Divi’s Labs 3QFY14 results were above estimates. Revenues grew 29% YoY to INR6.9b (v/s est. INR6.3b), while

EBITDA grew 58% YoY to INR2.8b (v/s est. INR2.4b). PAT grew 52% YoY to INR2.2b (v/s est. INR1.8b). There was

a forex loss of INR53m (included in other expenses).

Revenue growth was led by healthy performance in both CRAMS and API. Capacity utilization at DSN SEZ has

increased and the unit booked INR1.3b of sales in 3QFY14 (INR3.5b in 9MFY14).

EBITDA margin expanded 760bp YoY to 41.6% v/s our est. 38%. Surprise was mainly driven by 320bp YoY

improvement in other expenses. The management attributed this to benefits of operating leverage given the

increased capacity utilization at DSN SEZ. Power cost too has reduced for the quarter.

Based on 3QFY14 results, we have raised our FY14E/FY15E/FY16E EPS estimates by 5%/6%/2% to reflect higher

margins on account of operating leverage benefit and lower tax rate. We estimate revenue/PAT CAGR of

21%/24% over FY13-16E with EBITDA margins between 39%-41%.

The stock trades at 18.7x FY15E and 15.1x FY16E earnings. Buy with a revised TP of INR1,570 (18x FY16E EPS).

Divi’s Labs continues to be one of our top picks in Indian pharma.

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

EICHER MOTORS: In-line; CV sales drops 31% YoY; momentum in Royal Enfield continues with ~77%

growth

Eicher Motors reported 30% decline in CV sales at 2,608 units (est 2,598 units).

The LMD and HCV segment each declined by 33% YoY to 1,685 and 471 units respectively.

Buses volumes declined by 15% YoY to 452 units.

Volvo truck sales grew by 58% YoY (on low base) to 30 units.

Eicher recently launched the new range of CVs (with Volvo inputs) from 5-49 tonne.

Strong momentum in Royal Enfield though continues with 77% YoY growth to 20,232 units (v/s est 20,312

units). The company has guided volumes of 250,000 units for CY14.

The stock trades at 23.7x/17.1x CY14E/CY15E EPS of INR196/271 respectively. Maintain Buy.

Grasim Industries 3QFY14: Below est on cost push, despite strong volumes and higher realizations;

Maintain Buy

S/A net sales grew 20% YoY to ~INR14.6b. EBITDA margins at 13.4% (v/s est 17.1%) and EBITDA at ~INR1.95b

(v/s est ~INR2.25b). Lower other income and higher tax restricts PAT to ~INR1.24b (v/s est ~INR2.5b), a de-

growth of 37% YoY (-69% QoQ).

VSF volumes grew 23.5% YoY (4% QoQ) to 97,049 tons (v/s est ~90,366 tons). VSF realizations were flat

QoQ/YoY to ~INR121.6/kg (v/s ~INR119.6), benefiting from weaker INR despite weakness in global VSF prices.

However, severe cost push (~4% YoY/7% QoQ) on account of higher pulp prices due to higher wood cost and

weaker INR, impacted PBIDT margins by 480bp YoY (-630bp QoQ) to 13.5% (v/s est 19.8%) lowest margins in

last 5 years.

Key takeaway from the call: a) The management has indicated that VSF prices globally under pressure due to

surplus dissolving grade pulp capacity, b) China has been key driver of VSF demand due to artificially high cotton

prices, c) increase in wood cost and annual maintenance shutdown impacted captive pulp subsidiaries, d) S/A

tax rate to be 9-10 in FY14 and e) expects 50mt (v/s 55mt in 2QFY14 v/s 60mt in 1QFY14) of new cement

capacities over next 3 years.

On consolidated basis, net debt was at ~INR37.5b (v/s ~INR28b in Mar-13). Its consolidated capex guidance for

FY14 is lowered at ~INR33.4b (v/s INR54b in 2QFY14), whereas total capex guidance remains same at ~INR180b.

Our FY14/15 consol EPS is downgraded by 4%/3% to ~INR249/INR299. The stock trades at 8.4x FY15 Consol EPS

and 1x P/B and implied cement valuation of ~USD73/ton. Maintain Buy with target price of INR3,352 (SOTP

based, valuing economic interest in cement business at USD125/ton & 20% hold-co discount and VSF at 4x

EV/EBITDA).

GSPL 3QFY14: Significantly below estimates led by lower volume and tariff; headwinds for incremental

gas continue; Neutral

•

Gujarat State Petronet’s 3QFY14 reported revenues at INR2.4b (est of INR2.8b; -6% YoY, -12% QoQ) and EBITDA

at INR2.0b (est of INR2.5b; -12% YoY, -18% QoQ) were below estimates led by lower than expected volumes at

20.2mmscmd (est of 21.3mmscmd and tariff at INR1,291/mscm (est of INR1,350/mscm). Reported PAT stood at

INR873m (-27% YoY, -23% QoQ) v/s es of INR1.2b.

Transmission volumes continue to decline: GSPL reported transmission volumes lower than estimates at

20.2mmscmd (-26% YoY and -4% QoQ) due to continued decline in KG-D6 volumes and lower LNG imports by

PLNG during 3QFY14 (led by high LNG prices, which makes it unviable for many sectors).

Tariff decline in the 3rd consecutive quarter: Implied transmission tariff at INR1,291/mscm (+24% YoY and -5%

QoQ) has declined for the 3rd consecutive quarter, indicating likely revision in take-or-pay contracts with the

consumers.

Key events to watch: 1) Construction of 3 new trunk pipelines in set timelines; 2) Volume ramp-up and 3)

Monetization of its stake in GSPC Gas and Sabarmati Gas.

Valuation and View: We are cutting our FY14E/FY15E EPS estimates by 9%/2% to factor in actual 3QFY14 results

and lower transmission tariff. The stock trades at 6.6x FY15E EPS of INR8.7. Maintain Neutral despite attractive

valuations due to continued headwinds for incremental gas volumes, which is the key earnings driver for the

stock.

Feb 7

2014

•

WIN – Week In a Nutshell

WEEK IN A NUTSHELL

GODREJ CONSUMER (GCPL) 3QFY14: Below estimates; Home Insecticides growth in single at multi

quarter low; Neutral

GCPL results are below estimates with Consol sales growth of 16.9% to INR19.8b (est. INR20.7b), EBITDA growth

of 9.5% to INR3.1b (est INR3.6b) and Adj PAT growth of 13.6% at INR1.96b (est. INR2.3b).

Household Insecticides growth of 8% YoY is lowest in many quarters. Management attributes it to weaker

monsoon trends in South and East.

However, GCPL’s growth is ahead of category growth. Soaps have grown at 6% both in volume and value terms

as against category de-growth in volume and value, as per management. GCPL has taken price hikes to pass on

input price inflation. Hair Colors reported robust 37% value growth, much ahead of category growth, driven by

Expert Rich Hair Creme. Various initiatives pertaining to marketing/trade activations are aiding the growth.

Consol EBITDA margins declined 110bp to 15.5% (est. 17.3%). Ad spends went up 70bp to 11.5% while other

expenses declined 100bps YoY.

International business: 13% constant currency organic sales growth, 22% reported sales growth. Operating

margins down 250bps to 12.4% led by Indonesian entity (Foods business distribution at breakeven EBITDA, 58%

wage hike and 33% fuel cost increase). 80bps and 170bps margin gain in LATAM and Europe, resp while 260bps

and 280bps margin decline in Indonesia and Africa, resp.

Ex of Indonesian Foods business and reversal of INR90mn tax credit in Darling, 9MFY14 International PAT

growth stood at 33%.

GCPL’s results bring to fore the inherent volatility associated with its international business with

disproportionate impact coming from Indonesian entity.

Slowdown in Home Insecticides category after many consecutive quarters of 20% plus revenue growth can be a

blip due to seasonal nature of the category. However, if it continues, it can take the sheen off the domestic

growth momentum. We expect an earnings cut of ~5-7% for FY14 and FY15. Neutral.

HERO MOTOCORP: Above est at 561,253 units (est of 530,000 units); mgmt guides multiple new

launches in phased manner

Hero MotoCorp reported sales at 561,253 units (above est of 530,000 units), registering a marginal growth of

1% YoY (+7% MoM).

Our industry interaction indicates that retail sales have picked-up in Jan-14 v/s Dec-13. We estimate Jan-14

retails at 525k units v/s 380k units in Dec-13.

Volume base for Feb & Mar is lower at average 484k units (considering weakness in 4Q last year in northern

region due to delayed farm cash flows).

We expect Hero to use low base opportunity to correct high channel inventory which stands at 6-7 weeks (in-

line with industry) and still being able to report growth.

HMSI: Strong scooter growth continues to drive overall sales

•

Honda Motorcycle & Scooters India (HMSI) reported volume growth of 50% YoY (+16% MoM) to 344,750 units.

Strong growth was driven largely by scooters which grew by 63%, while motorcycle grew 38% YoY.

HMSI plans to launch a new scooter with 125cc (called as Activa Vision) in coming months.

IDFC 3QFY14: PAT above est.; Growth moderate further; NPLs spike up; Lower Provisions drive PAT beat

•

IDFC’s 3QFY14 PAT grew 11% YoY and 3% QoQ to INR5b (16% above est.). While operating profit was 5% below

est. significantly lower provisions (INR365m v/s est. of INR1.3b) and lower tax rate (26.4% v/s est. of 31%) led to

above estimated PAT. Continued moderation in growth (flat YoY and down 3% QoQ), spike up in telecom loan

pipeline (INR110b vs INR85b a qtr ago and INR15b in 4QFY13), increase in GNPA (+30bp QoQ to 62bp), addition

of INR40b in India Infra fund II and drop in spreads (10bp QoQ, TTM) to 2.3% were the key highlights.

On a YoY basis, transportation (+7% YoY, down 7% QoQ) and others segment (+2% QoQ and +15% YoY) were

the growth drivers whereas, telecom (down 13% YOY and 2% QoQ) and energy (flat QoQ and YoY) were the

drags. Loan pipeline increased to INR225b vs. INR192b a quarter ago led by telecom, short term in nature.

Sanctions/disbursements for the quarter stood at INR54b (+25% YoY)/ INR20b (down 22% YoY & 18% QoQ).

Share of energy segment in overall exposure declined to 33% vs 39% in 3QFY13.

Feb 7

2014

•

WIN – Week In a Nutshell

WEEK IN A NUTSHELL

•

Other highlights a) Trailing 12months Cost to income ratio stable QoQ at 15% d) Average interest duration of

loans has come down to 1.3yrs vs 1.4yrs a quarter back c) AUM was up 36% YoY (6% QoQ) to INR516b led by MF

AUM growth of 38% YoY d) CAR remains healthy at 24.8% with Tier I at 22.5% and e) Outstanding provision for

loans remain healthy at 2.03% vs 1.95% a quarter ago.

ING VYSYA BANK 3QFY14: NIM impacted by one-offs; Restructuring rises; NPL stable; Trades at 1.4x

FY15BV

•

ING VYSYA Bank’s 3QFY14 PAT grew 3% YoY to ~INR1.7b (6% below estimate). NII was 8% below estimate at

INR4.2b (+3% YoY) led by lower than expected NIM (down 10bp QoQ due to reversal of interest on RL of

INR257m, Adjusted up 10bp QoQ) and moderation in customer asset growth (10% YoY). While PPP was 9%

below expectation at INR2.7b (+4% YoY), lower provisions of INR230m (v/s INR400m) helped PAT.

GNPA in absolute terms was flat QoQ and on a lower base NNPA increased 17% QoQ. GNPA and NNPA in %

terms was stable QoQ at 1.7% and 0.2%. PCR declined 1.7% QoQ and stood at 87% - one of the best in the

industry. During the quarter bank restructured loan of INR2b (0.6% of loan) under CDR. OSRL stood at INR5.6b

(1.6% of loans).

SA deposit growth was flat QoQ (+ 13% YoY) and as a % of overall deposits stood at 15.7% as compared to

15.3% a quarter ago. CA grew 8% QoQ and 13% YoY. While reported CASA ratio improved QoQ to 34.7% v/s

32.5% in 2QFY14, core CASA ratio dropped QoQ at 31.6%.

Other highlights: (1) During the quarter bank added just 2 branches (24 branches in last two years). (2) Bank

provided INR41m on account of creation of DTL on special reserve for FY14 and also debited its reserves by

INR254m for DTL creation on special reserve for previous years and (3) fee income (ex-forex) continues to

disappoint with a YoY growth of just 7% and (4) Loans grew 4% QoQ and 8% YoY. In 2QFY14 there was a

repayment of INR21.5b from one large telecom account adjusted for which loan growth would have been 15%

YoY.

The stock trades at 1.4x/1.3x/1.2x BV of FY14/15/16. Maintain Buy with the target price of INR655 (1.6x FY15

BV).

•

JAIPRAKASH POWER 3QFY14: Below estimate; lower contribution from Bina/Karcham Wangtoo; cut

earnings/TP; de-leveraging is key

JPVL standalone PAT loss stood at INR1.5b, higher than our estimate of INR875m. Lower generation at Bina

power project (509MU, vs est of 821MUs), lower merchant realization for Karcham Wangtoo hydro power

project at INR3.02-3.04/unit, vs INR3.54/unit YoY (vs est of INR3.50/unit) and transmission costs (INR448m, vs

est of INR360m) impacted profitability. K. Wangtoo project is being converted into regulated power project

(704MW) and petition has been filed with CERC to adjudicate project cost. This would help reduce volatility in

earnings, losses in lean season.

Operational performance for power projects was however strong with 19%/21% YoY jump in hydro generation

for Baspa/K. Wangtoo project and 46% PLF for Bina power project (vs average of 33% in 1HFY14). Plant

availability at Bina was robust, enabling recovery of fixed charge, while generation was impacted due to

backdown by MPDISCOMs.

Project update: a) Vishnuprayag project debris are cleared and hydraulics needs repair/replacement, expected

to resume operations by Mar-14; b) Nigrie project 1st unit synchronization by Mar-14; c) Excavation/ initial

production has begun at Amelia mine (linked to Nigrie project) and evacuation infrastructure (merry-go-round)

is in place; d) Clearances are in place for Dongri Tal mine and land acquisition is underway, CoD by 1QFY15 and

e) Capex of INR76b incurred on Bara project (INR20b equity spent of the total of INR30b) of the total capex of

~INR120b.

JAYPEE INFRATECH 3QFY14: Revenue beats est; EBITDA plunges on lower margin; operations weak,

albeit up QoQ

•

Jaypee Infratech (JPIN)’s 3QFY14 performance was below our estimates. While revenues were ahead of

estimates, sharp decline in margin kept EBITDA at INR3.6b (v/s est of INR4b). Revenue grew 6% YoY to INR9.9b

(v/s est of INR9b), while PAT stood at INR1b (v/s est of INR1.4b) due to lower profitability.

Feb 7

2014

WIN – Week In a Nutshell

WEEK IN A NUTSHELL

•

Average annual PCUs at Yamuna Expressway stood at 12.9K annum (v/s 11.8K - 6 months back), with total toll

revenue in 3QFY14/9MFY14 at INR379m/INR971m (+25%QoQ). This implied annualized run-rate of INR1.5b v/s

INR0.9b in FY13 (+67%). Management expects 53% growth in toll revenue over FY14-16, with FY14/15/16 run-

rate at INR1.5b/INR2b/INR3.5b.

Presales remains weak, albeit improved QoQ to 0.64msf (INR2.4b) v/s 0.5msf (INR1.8b) in 2QFY14, and est of

1msf (INR 3.5b). Presales velocity weakens further in Mirzapur (Parcel 3), which was offset by better volume in

Noida parcel (accounted for 78% of sales value in 3QFY14). Based on run-rate and near-term challenging

outlook, we cut FY14/15 presales 5-15% to INR11b/18b/20b.

Weak presales over past 3 quarters have also impacted collection run-rate, which is down to INR5.1b in 3QFY14

(v/s INR5.7b in 2QFY14 and average FY13 run-rate of INR9b). Overall, 9MFY14 operations remain much weaker

than 9MFY12 with presales at INR8.3b (v/s INR27b), collections of INR17.7b (v/s 27.2b).

Near-term operational performance, which is largely dependent on the success of monetization in Parcel-3 and

Agra is expected to remain weak especially if the real demand growth surrounding the Yamuna Expressway gets

delayed, and given that prevailing run-rate has been subdued.

The stock trades at 4.5x FY16E EPS and 0.4x FY15E BV (7-8% RoE in FY14-16).

•

LUPIN 3QFY14: Above est; India, Japan recover, momentum in US generics continues; expect strong

quarters ahead; upgrade EPS by 1-3%

Lupin’s 3QFY14 results were above estimates. Sales grew 21% YoY to INR29.8b (beat of 8%), reported EBITDA

grew 29% YoY to INR7.3b (beat of 13%) and PAT grew 41% YoY to INR4.8b (beat of 5%)

Revenue beat was mainly due to a 35% growth in constant currency for US generic business (v/s est. 18%), 14%

growth in India (v/s est. 5%), and 26% growth in APIs (v/s est. 5%). Japan reported 2% growth (v/s est. decline of

2%), while RoW + South Africa grew 23% (est. 32%).

EBITDA margin expanded 150bps YoY to 24.6% (est. 23.5%), led by improvement in other expenses.

Management attributed this benefit from operating leverage.

Results include one-off upside from generic Tricor and Trizivir. Ex these one-offs, core sales grew 20% YoY (est.

12% YoY), core EBITDA grew 28% (est. 12%) and adj. PAT grew 43% (est. 35%).

Based on 3QFY14 performance we have increased our FY14E/15E/16E by 3%/1%/2%. We see sustained

momentum in the US generics business and see India growth bouncing back to historical levels. We expect

margin expansion to come from limited competition opportunities in US and turnaround in Japan.

We estimate core EPS of INR33.3/INR42.4/INR49.3 for FY14E/15E/16E, i.e. 29% EPS CAGR for FY13-16E. The

stock trades at 21.8x FY15E and 18.7x FY16E EPS. Buy with a revised target price of INR1,090 (22x FY16 core

earnings + DCF estimate INR6/share from gTrizivir launch).

MARUTI SUZUKI: In-line at 102,416 (est 104,500 units), decline of 10.3% driven by 48% drop in exports,

Celerio dispatches started (est 5k units)

•

Maruti Suzuki (MSIL) reported 10% decline in January 2014 sales at 102,416 (v/s est 104,500 units). This was led

by 6.3% YoY (+11.5% MoM) drop in domestic sales, while exports have declined by 47.7% YoY (+36% MoM) to

5,847 units (v/s est 7,500 units).

Domestic sales were led by 7.5% YoY (24% MoM) growth in Dzire/Sx4 volumes to 19,423 units (est 18,000),

while MPVs (Omni, Eeco) sales grew 11.6% YoY (+12% MoM) to 9,345 units (est 9,000).

Management had indicated that demand environment remain challenging particularly in urban markets.

However, rural markets (30% of sales) continue to grow at strong rate (YTD growth 18% YoY).

Discounts in 3Q have reached all-time high levels of INR19,400/unit with pressure on discounts expected to

continue until sentiments recover.

Our industry interaction indicate that dispatches of Celerio (Automatic Manual Transmission) model have

started in Jan-14 (around 5k units). Launch is expected on Feb 6th.

We expect FY14 volumes to drop by 2% YoY, implying a residual run-rate of 107,139 units (residual de-growth of

6.7% YoY).

MSIL trades at 13.8x/11x our FY15E/16E Consol. EPS of INR118.2/148.5 respectively. Maintain Buy.

•

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

MARUTI SUZUKI: Mgmt meet - MSIL’s core earnings/FCF unaffected; PAT/return ratios to improve;

Surplus funds to use to strengthen marketing/R&D

•

We attended Maruti Suzuki’s (MSIL) Analyst Meet to discuss on MSIL’s decision to expand Gujarat facilities

through Suzuki’s 100% subsidiary (Suzuki Gujarat). Management reiterated that MSIL’s core earnings/FCF will

remain unaffected, while PAT and return ratios to improve led by capex savings on 1

phase of expansion (and

consequent treasury income). Key highlights are:

MSIL is the cornerstone in Suzuki’s global strategy (contributing 50% of profits), thus Suzuki’s priority is to make

MSIL stronger and healthier.

Given the scale of expansion, MSIL’s management bandwidth would have been stretched given the current size

of MSIL’s operation (~20k employees). Thus, Suzuki would focus on manufacturing, while MSIL can channelize

their energy on strengthening its R&D, marketing, sales etc.

To protect the interest of minority shareholders of MSIL, the Suzuki Gujarat subsidiary would not make any

surplus/profit/FCF or declare dividend. The company would make only such surplus (post tax) which is

necessary for the expansion of the facility to benefit MSIL.

The tenure of the contract manufacturing agreement would be of 15 years. The agreement is extendable on

mutual consent of both parties on similar terms/principles. The Gujarat (owned by MSIL) land lease agreement

would be co-terminus with the contract manufacturing agreement. The rentals would be determined by an

independent body.

Suzuki Gujarat plant will sell cars only to MSIL and as per requirements of MSIL. MSIL will in turn sell these

vehicles through its network and earn distribution & selling margins/profits on the same. The agreement would

be between MSIL & Suzuki, Japan.

Profitability on these vehicles would be similar had the investment were made by MSIL itself. In addition to that,

they would earn treasury income (8% yield) on money thus saved on capex (INR30b). With similar profits and no

capex, MSIL’s cash flows and return ratios would improve.

Soft loan from Suzuki to MSIL would have entailed currency risk (hedging cost of 7-8%) and loan repayment

obligation to MSIL, hence equity investment by Suzuki in the separate subsidiary considered suitable.

Cash surplus available with MSIL could be used more in R&D, building marketing network etc.

•

M&M: In-line at 62,794 (est 61,499 units); Autos decline 14% YoY; tractor grew 15% YoY

•

M&M Jan-14 sales at 62,974 (est 61,499 units) declined by 6% YoY (+11% MoM) driven by 14% decline in Auto

volumes, while tractors continued with their healthy growth performance (15% YoY) to 20,109 units (est

20,094)

Weakness in passenger vehicles (UVs & Verito) continues with decline of 25% YoY to 19,792 units.

Pick-up segment have grown by 4% YoY reflecting shifting preference towards larger pick-ups (where M&M is

market leader) due to financing constraint towards smaller CVs.

Management indicated that while immediate turnaround for auto industry is not expected without certain

policy corrections and support, the worst seems to be over.

Commenting on the monthly performance, Pravin Shah, Chief Executive, Automotive Division, Mahindra &

Mahindra Ltd. said, “The first month of 2014 did not witness any improvement in the overall industry

performance and the situation remains subdued. The recent Repo Rate hike will in coming months escalate the

rate of interest on car loans impacting consumer sentiment. We hope the upcoming Auto Expo which will

showcase new products and technology, will provide a trigger in giving a much needed boost to the auto

industry and overall sentiment.”

Tractor sales continue to grow at a healthy rate. Sales increased by 15% YoY (18% MoM) to 20,109 units (v/s exp

of 20,094 units). We expect to raise our tractor sales estimate for 4QFY14.

Commenting on the monthly performance, Rajesh Jejurikar, Chief Executive, Tractor and Farm Mechanization,

Mahindra & Mahindra Ltd. said, “We have achieved a cumulative domestic growth till January 2014 of 23%. This

is primarily due to a bumperKharif crop and the anticipation of a good Rabi crop. We expect the good run to

continue for the rest of the quarter.”

The stock trades at 10.5x/8.8x FY15E/16E Con. EPS of INR84.7/INR101.2 respectively. Maintain

Buy.

•

WIN – Week In a Nutshell

Feb 7

2014

WEEK IN A NUTSHELL

NMDC: January deliveries up 9% MoM; Karnataka E-auction bid volumes up 57% MoM; lumps prices up

2%, fines prices down 12% yet 2

highest. Maintain Buy

NMDC has already dispatched 2.86m tons (+9% MoM) of iron ore in the month of January and is well on track of

delivering 8.5m tons during 4QFY14 and 29.6m tons during FY14. We will not be surprised if NMDC delivers

above expectation volumes because the Essar Steel pipe from Chhattisgarh complex to Vizag has re-started

w.e.f. 24th Jan, 2014. Logistics bottlenecks had constrained NMDC from ramping up volumes despite it having

much larger mining permits and capacities.

Karnataka E-auction quantity has jumped 57% MoM to 1.3m tons. During Jan-2014, bid premiums over floor

prices have cooled off for NMDC, but the private mines have jacked up floor prices. NMDC benefitted with

higher volumes at the cost of private mines.

Karnataka E-Auction data suggests that the average realization for NMDC has fallen by 16% MoM to INR2993/T

in January 2014 due to dual effect of larger share of iron ore fines and lower average grade. A closer analysis of

data reveals that the share of iron ore fines in the mix has increased 9pp to 60% due to liquidation of low grade

iron ore dumps. On normalizing the grade to 60%, the average realization is actually down just 5% MoM.

Individually, the normalized price of lumps is up 2% MoM, while normalized price of fines is down 12% MoM yet

2nd highest in last 13 months.

Valuations are attractive at FY15 EV/EBITDA of 4.4x, EV/T of USD4.1, P/BV of 1.8x (RoE 21.4%), dividend yield of

7.1%. NMDC is our top pick in ferrous space. Re-iterate BUY.

Oberoi Realty 3QFY14: Operational weakness continues, but possibly nearing inflection, with Worli,

Mulund, JVLR launch on 6-month radar. Maintain Buy

•

Revenue declined 40% YoY (and 10% QoQ) to INR1.7b (our est: INR1.9b). EBITDA declined 47% YoY (grew 4%

QoQ) to INR898m (our est: INR1.1b). EBITDA margin at 53% (+7pp QoQ, -7pp YoY) failed to improve due to

negative operating leverage. PAT was INR681m (our est: INR867m).

No new launch and slowdown in broader market continue to impact presales, which declined further to

0.028msf (INR0.6b) from 0.039msf (INR0.8b) in 2QFY14 and INR2b-2.5b/quarter in FY11-13. Hotel operations

performed better due to seasonality. Oberoi Mall and Commerz were stable QoQ.

We calculate that in 3QFY14, company had inflow of INR0.9b (collections, rentals and other income), which was

spent as follows (a) construction of INR1.3b-1.4b (Worli: ~INR0.95b, Exquisite: ~INR0.25b, Esquire: INR0.12b),

(b) fungible FSI payment of INR1.26b for Garden City (Goregaon) Phase III, and (c) capex (Commerz II), tax and

overheads.

The recent favorable Supreme Court verdict clears the forest overhang on the Mulund project and paves the

way for launch. Thus, there is improved visibility on presales momentum. OBER has also received approvals for

conversion of the JVLR project (Prisma) from commercial to residential.

We are cutting our FY14 EPS estimate by 28% and are upgrading our FY15 EPS estimate by 10%, as Esquires

revenue recognition is deferred to FY15. While some headwinds (Commerz II, slowdown in Goregaon) remain,

launch visibility has improved. The stock trades at 8.1x FY16E EPS and 1.1x FY16E BV. Maintain Buy with a target

price of INR240.

•

PETRONET LNG 3QFY14: Below est. led by lower Dahej throughput; Kochi ramp-up slow; to save INR6b

on Dahej expansion; Valuations reasonable

•

Petronet LNG’s reported 3QFY14 EBITDA at INR3.5b (est INR3.8b) and PAT at INR1.4b (est INR1.5b; -57% YoY,-

25% QoQ) were below estimate primarily due to lower than estimated volumes at dahej at 120tbtu (v/s est of

130tbtu; -15% YoY, -2% QoQ). Marketing margin at Dahej was also lower than estimates at USD0.2/mmbtu as

compared to USD0.35/mmbtu in 2QFY14.

Dahej capacity utilization at 95% in 3QFY14: Re-gas volumes at 120.2tbtu (2.39mmt) was below estimates

primarily due to higher cost of LNG in spot market. Continued high spot LNG prices coupled with INR

depreciation has been impacting the price sensitive short term spot demand. 3QFY14 throughput mix showed

lower spot volumes with: (a) 92tbtu (-5% YoY; -7% QoQ) for long term; (b) 18tbtu (+26% YoY; +48% QoQ) for

third-party and (c) 11tbtu (-65% YoY; -15% QoQ) for pure short-term. Kochi terminal throughput stood at

3.4tbtu (5% utilization) during 3QFY14.

Feb 7

2014

•

WIN – Week In a Nutshell

WEEK IN A NUTSHELL

New projects/expansions broadly on track, Second Jetty by Mar/Apr 2014; announces 20% savings in Dahex

expansion project:

• PLNG has awarded the last EPC contract for Dahej expansion and expects the project to be completed on track

by November 2016. It has also announced a saving of INR6b on capex, current capex guidance at INR24b v/s

INR30b earlier. It will receive a advance of INR12b (INR2b per mmt) from offtakers towards advance for building

the capacity, to be adjusted over 15 years against revenues post commissioning.

• Dahej 2nd jetty at Dahej to complete by Mar/Apr-14,

• Gangavaram environmental clearance is expected during 4QFY14. Plans on FSRU are still not firmed up

(depends on firm volumes), however plans for land terminal are largely on track.

Valuation and View

• We are rolling over our SOTP to Mar-16 and the same now stands at INR156/share offering a 42% upside from

the current levels. The stock trades at 10.5x FY15E EPS of INR10.5. Buy.

•

PNB 3QFY14: Inline; Asset quality improvement a positive surprise; Strong NIMs due to de-bulking;

growth to improve; Buy

•

PNB’s 3QFY14 PAT declined 42% YoY to INR7.6b (in-line). Positive surprises were a) NIM improvement of 10bp

QoQ to 3.6%, b) fee growth of 15% YoY (vs flat in 1H) c) fall in net slippages (60bp of loans vs 270bp in 1H) and

stable GNPA (% down 20bp QoQ) and d) improvement in PCR by 340bp QoQ.

Additions to restructured loans (RL) were at INR21.5b (INR27.7b in 2QFY14). However, there were

reduction/adjustment of INR75b on account of (a) INR21b of SEB bond receipt, (b) INR28b+ removed from

restructured pool as was categorized only due to DCCO extension (c) normal reduction of INR7b and (d)

INR18.5b of NPA (cumulative). OSRL stood at INR313b (9.6% of loans).

Other highlights: a) SA grew 3% QoQ (+14% YoY). CASA ratio was stable QoQ at 38.3% and proportion of bulk

deposits declined to 8% v/s 9.4% in 2QFY14 and 24% 3QFY14 b) OSRL ex SEB and AI it stood at 7.6% of loans.

PNB carries provision to the tune of 70bp of loans on OSRL.

•

POWER FINANCE 3QFY14: Above est; Healthy loan growth; Stable asset quality; Interim div of

INR8.8/sh; Raise est. by ~7%

Power Finance Corporation’s (POWF) 3QFY14 PAT grew 37% YoY and 20% QoQ to INR15.3b (19% above

estimate of INR12.9b). While the net operating income was in line with est. significantly lower forex losses

(INR290m v/s expectation of INR 1.25b) and lower provisions (INR510m v/s est. of INR 1.2b) led to above

estimate PAT. Key Highlights

Asset quality remained stable QoQ with %GNPAs/NNPA stood at 0.65%/0.52%. No new account got added to

NPL during the quarter. POWF made a provisioning of INR0.54b towards standard assets during the quarter;

Provisioning coverage ratio remained stable at QoQ at 20.4%.

Loan growth (+3% QoQ and 20% YoY) was largely inline with estimate. Loan to private sector grew (+46% YoY &

8% QoQ) to INR 263b; Share of private sector borrowers in the overall loan mix increased further to 14.8% (from

14.2% a quarter ago and 12.1% a year ago).

Disbursements growth for 3Q/9M was -3%/flat YoY whereas, sanctions grew 35%/-13% YoY. Almost 35% of the

incremental loans during the quarter came from transitional finance to SEB. Share of short term loans in overall

loans has increased to 12.8% vs 7% a quarter ago and 3.7% a year ago.

Reported margins stood at 4.93% (up 32bp YoY, down 10bp QoQ); sequential decline in yields was led by 10bp

QoQ moderation in yields to 12.37% coupled with 5bp QoQ increase in cost of funds.

While balance sheet and earnings growth, return ratios remain healthy and even valuations are very attractive,

Reforms in the power sector remain a key catalyst for the stock performance.

The company has declared an interim dividend of INR8.8/sh.

POWEGRID 3QFY14: Below estimate led by lower core business contribution, STOA; capex momentum

remains strong but capitalization growth is the key

•

Powergrid reported revenues of INR37b, up 10% YoY but lower than our estimate of INR39b. While revenue

from telecom (INR677m, vs est of INR725m) and consultancy (at INR1.5b, vs est of INR1.4b) division was largely

in-line with estimate, the transmission revenue was lower. EBIDTA for the quarter stood at INR31b, vs est of

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INR34b. At PBT level, the reported numbers stood at INR14.4b, vs est of INR17.2b. This was again due to lower

contribution from core business, while EBIT from consultancy (INR505m, vs est of INR587m) and telecom

(INR196m, vs est of INR264m) were marginally lower than estimate.

PAT for the quarter stood at INR10.4b, down 6% YoY and up 1% QoQ (INR10.3b in 2QFY14). Lower absolute PAT

QoQ was also due to loss in Short term open access (STOA) charges for PGCIL (INR1b in quarter) owing to

change in regulation. PBT for transmission division stood at INR21b, up 1% YoY on reported basis and down 12%

QoQ. However, 2QFY14 transmission PBT had prior period revenues of INR2.1b and thus adjusted PBT de-

growth on QoQ basis would be 3%.

Notes to account highlight one-time income (approval of prior period arrears by regulator) of INR1.6b in

3QFY13, which boosted PAT for last year. However, we note that there was no mention of any such onetime

gain in notes to accounts of results last year. Thus, muted transmission PBT growth is perplexing given

capitalization of ~INR130b since 4QFY12 to 2QFY14. We await clarity on the same.

Management indicated that gross fixed assets as at Dec-13 stood at INR902b. Comparing the number with

INR806b of gross fixed assets as at March 2013, leads to capitalization of INR95.5b in 9MFY14 (up merely 2%

YoY). However, it is important to note that PGCIL adds foreign exchange rate variation (FERV) to gross fixed

assets (on loan re-pricing) and thus, we seek clarity if INR902b of gross fixed assets includes any FERV

adjustment. As at March 2013, FERV account stood at INR17b. If so, the capitalization would be lower to that

extent (if FERV of similar quantum is included in INR902b). Capex for 9MFY14 stands at INR165b (+31% YoY).

However, this is driven by commissioning of large project of INR12b on 1st January 2014.

PGCIL is hosting an analyst meet tomorrow at 3.45PM IST at Hotel Trident to discuss 3QFY14 performance. We

will review our estimate post the same.

•

PRESTIGE ESTATES PROJECTS 3QFY14: EBITDA beats est; operations marginally moderated QoQ, but on

track to meet/beat guidance; effective debt up INR1b QoQ

Prestige Estates (Prestige) has reported earnings better than our estimates led by improvement in EBITDA

margin. EBITDA of INR1.3b (-7% YoY) beats our est of INR1.2b, driven by +5.6pp QoQ uptick in margin to 30.6%

(v/s est of 26%).

Revenue stood at INR4.3b (down 12% YoY), while PAT stood at INR806m (-12.5% YoY), impacted by higher

interest cost.

Core operations (released earlier) were largely in line with our estimates, albeit moderated QoQ. 3QFY14

presales (Prestige’s share) stood at 1.55msf (INR9.4b), -12% QoQ, +25% YoY growth. 9MFY14 presales reached

~80% of FY14 annual target.

Customer collections witnessed a marginal sequential moderation at INR5.9b (-4% QoQ, +17% YoY). 9MFY14

collections stood at INR18.2b (v/s est of INR24b in FY14; FY14 guidance of INR23b).

New leasing in 3QFY14 was 0.86msf (Prestige’s share of 0.22msf), while 9MFY14 leasing stood at 2.1msf (PEPL

share of 0.86msf). Rental income grew 3.9% QoQ (+9.4% YoY) to INR615m.

Consolidated net debt stood at INR22.9b (+INR1b QoQ), while effective debt, as PEPL’s stake increased INR0.9b

QoQ, was at INR21.7b (0.72x) on the back of negative FCFE.

Negative FCFE was attributable to: (a) cash inflow of INR6.8b (collections of INR5.9b and rent of INR0.6b, and

other income of INR0.3b) which was utilized towards (b) constructions spending (INR5.5b), overheads (INR0.5b),

land advances and payment towards acquisition of higher stakes in Eden Investment land (INR0.8b), interest

(INR0.6b), and tax (INR0.35b).

Prestige trades at 9.8x FY16E EPS, 1.3x FY16 BV (RoE of 14%), and 9.9x FY15 EV/cash EBITDA. We maintain Buy

with target price of INR186 (32% upside).

RANBAXY 4QFY14: Operational perf. above est; guides for lower impact from Taonsa ban but higher

remediation costs ahead; raise core EPS by 2-4%

•

Ranbaxy's 4QFY14 result was above estimates. Core revenue grew 16% YoY to INR28.9b (in line) while core

EBITDA grew more than 6x YoY to INR2.6b (v/s est INR2.3b) over an abnormally low base. Core EBITDA margin

was 9% (v/s est 8.1%). Adj. PAT stood at INR1.2b (v/s est INR1.1b) compared to loss of INR45m last year.

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•

Revenue growth was driven by US base business, which in turn was led by Absorica sales. Romania also grew

faster than expected, while performance from other key emerging markets like Russia, LatAm and Africa was

below estimates. Domestic business growth was in-line led by OTC segment.

Core EBITDA margin expanded 730bp YoY on a low base and was 90bp above est due to lower other expenses.

Management attributed this to cost rationalization measures across geographies and indicated that EBITDA

margin adjusted for consent decree related costs stood at ~12%.

The company reported a net loss of INR1.6b (v/s est INR1.4b profit) due to INR2.6b write-off resulting from FDA

ban on Taonsa plant.

Key concall takeaways: RBXY did not revise the guidance for FY14E and will share the same for FY15E in next

quarter. Management continues to maintain that all FTF exclusivities will be retained. Only 10-12% of US sales

are dependent on APIs from Taonsa (v/s our earlier est 20%).

Management has not shared any timeline for the resolution of US FDA issues and indicated that progress is as

per plan. However, with the inclusion of Taonsa unit in the consent decree, the remediation costs are expected

to continue beyond earlier expectation of moderation from FY16E.

•

Sobha Developers 3QFY14: Above est; presales, collections weakened QoQ; FY14 guidance lowered, but

hints 4QFY14 operations to return to normalcy. Maintain Buy

SOBHAs 3QFY14 P&L was better than expected, though margins remained below desired levels due to cost

escalations and higher overheads. Revenue grew 27% YoY (stable QoQ) to INR5.4b (our estimate: INR5b), while

PAT grew 11% YoY to INR583m. EBITDA grew 8% YoY to INR1.5b (our estimate: INR1.4b), translating into EBITDA

margin of 27.4% (against our estimate of 28% and 26.5% in 2QFY14).

Presales (as reported earlier) were weak at INR5b (-21% QoQ, -5% YoY). Presales volume stood at 0.74msf (-18%

YoY, -26% QoQ). 9MFY14 presales were INR17.4b (against FY14 estimate of INR23.6b). Collections from real

estate projects were weaker QoQ (albeit up 15% YoY) at INR4.4b, and have been showing a declining trend over

three quarters.

Nonetheless, 3QFY14 operating cash flow (OCF) improved to INR1.4b (INR1.2b in 2QFY14 and INR1b in 3QFY13),

due to strong cash flows from contract business. FCFE was negative INR0.5b on the back of expenses towards

land payments (various outstanding ones) of INR1.1b. Net debt was up by INR0.5b to INR13.6b (0.59x).

The management has qualitatively reduced its FY14 guidance on presales from INR26b (earlier) to a moderate

growth over FY13 presales (INR22.2b). It has guided launch of 3 projects in 4QFY14 and hinted that the weak

performance of 3QFY14 was an aberration and normalcy could return in 4QFY14.

Correction in stock price factors in most concerns, and offers opportunity to accumulate. Fundamentals are still

better than peers. We cut our FY14-16 cash EBITDA estimate by 4-8%, NAV by 4% and target price by 10% to

factor in lower presales assumption and weaker market dynamics. The stock trades at 7x FY16E EPS, 1x FY16E

BV (12-14% RoE), and at 40% discount to NAV. Maintain Buy with a target price of INR370.

TATA MOTORS: Below est at 40,481 units (est 44,400 units); pressures across portfolio; LCV sales decline

45% YoY

•

Tata Motors reported below estimate sales at 40,481 units (v/s est 44,400 units). The disappointment was seen

across portfolio, particularly in LCVs which declined by 45% YoY.

HCV sales declined 5% YoY (+8% MoM) on low base to 8,916 units (est 8,000 units). We have built-in decline of

22% in FY14, implying a residual de-growth of 18% (residual run-rate of 10,341 units).

LCV sales declined by 45% YoY (1% MoM) to 20,267 (est 25,500 units). Our industry interaction indicates that

credit availability has been difficult due to rise in defaults. We are factoring in for volume decline of ~24% for

FY14, implying residual de-growth of 19% YoY (residual run-rate of 33,611 units)

Car sales stood at 8,663 units (est 8,000 units), a decline of 25% YoY (+30% MoM). UV sales were at 2,635 units

(est 2,900 units), a decline of 36% YoY (-6% MoM). We have built-in de-growth of 37% for the PV segment for

FY14.

The stock trades at 7.2x/5.8x FY15E/16E consol. EPS of INR48.7/60.5 respectively. Maintain

Buy.

•

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2014

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TATA POWER: Agreement to sale stake in Arutmin mine could be positive for leverage, cashflows,

earnings, valuation impact minimal; Await clarity

•

Deal: Tata Power has decided to sell its 30% stake in Arutmin mines to Bakri group at a consideration of

USD500m. Post sale, the offtake agreement with KPC mines for 10.5m tons and investment in KPC mines would

remain. Rationale for divestment is to improve cash flows and reduce consolidated debt (3.3x consolidated net

DER as at Sep-13). However, the press release also highlight that operations at Arutmin mines are also impacted

due to lower price.

Valuation perspective: Transaction’s valuations is evaluated on 3 key parameters, viz. a) Equity based, b)

Reserve based and c) Profitability based. We note that proportionate EV for Arutmin mine considering equity

investment of USD100m held by TPWR’s 100% subsidiary Bhira investment (vs USD300m total investment made

towards acquiring 30% stake in KPC/Arutmin mines in FY08) works out to USD418m, vs USD500m consideration.

On reserves front, TPWR’s share of Arutmin’s 2.2b tons reserve works out to 679m tons and thus, EV/ton works

out to USD0.73/ton. We calculate Arutmin mine EBIDTA at USD210m in CY12 and thus, TPWR’s share at USD63,

entailing EV/EBIDTA of ~8x.

Impact: In FY15E, TPWR has to repay FCCB (due in Nov-14, price of INR143/sh) of USD300m and debt at mining

companies level of USD340m (recourse on Tata Power). Divestment of stake will improve cash flow and help de-

leverage. Clarity on tax impact, receipt of net proceeds, net contribution from Arutmin mines and usage of cash

flow would enable determine the benefit of the deal. Assuming savings on interest from USD500m debt

repayment, and no contribution from Arutmin, we estimate that earnings could see an upside of 3-4%. DER can

come down to 3x. Valuations impact unlikely to be meaningful given similar cash flow impact.

We expect TPWR to report consolidated PAT at INR8.8b in FY14E (down 4% YoY) and INR8.4b in FY15E (down

4.5% YoY). Stock trades at FY15E PER of 21x and P/B of 1.4x (RoE of 8.1%). Stock performance in the near term

would be driven by decision on Mundra UMPP tariff hike, while upside possibilities from there on would be

limited, given lack of growth option, lower return ratios, etc. Neutral.

•

TVS MOTOR: Above est; Strong 55% YoY growth in exports; scooters grew 19% YoY; Mopeds recovers

with 29% MoM growth

•

TVS Motor sales were above estimate at 186,313 units (+6% YoY, 17% MoM) v/s est of 179,700.

Scooter portfolio grew by 19% YoY driven by recently launched Jupiter scooter. With launch of Jupiter scooter in

South (4Q) and production ramp-up, management expects scooter run-rate to touch 50,000 units by Mar-14.

TVS is scaling up production capacity to 75,000 units to meet FY15 demand.

Mopeds have recovered strongly with 29% growth MoM (1% YoY v/s YTD decline of 9.3%) driven by Pongal

festival in Southern region.

TVS would showcase two new products (one scooter and another motorcycle) in the upcoming Auto Expo 2014.

The stock trades at 9.8x/7.8x standalone FY15E/16E EPS of INR7.9/10 respectively. Maintain

Buy.

•

Union Bank 3QFY14: Lower capitalization remains a concern; Stress addition remains high; Trades at

0.4x FY15BV

Union Bank’s 3QFY14 PAT of INR3.5b was 13% above estimate. While NII and PPP were 3% and 7% lower than

estimates, lower provisions (INR6.1b v/s estimate of INR9.2b) led to better than expected PAT. Tax rate came in

higher at 46% vs expectation of 28% led by creation of INR484m on account of DTL.

Net slippages declined QoQ to INR8.9b (remains elevated with net slippage ratio of 1.9%) vs INR12.4b. GNPA (in

absolute terms) increased 9% QoQ. PCR was flat QoQ at 60% and NNPA stood at 2.4% (v/s 2.3% in 2QFY14).

UNBK restructured loan of INR10b (0.5% of loans) of which INR6.4b is to two discoms. OSRL stood at INR110.3b

(4.9% of loans) of which INR34.5b is towards SEB (Ex-SEB OSRL stood at 3.3% of loans).

Other highlights: (1) Loan grew 3% QoQ and 20% YoY, however lower CET I of less than 7% remains a concern

and constraint for future growth, (2) NIM declined 4bp QoQ to 2.5%, (3) fee income for 9MFY14 grew 13% YoY

(14% in 3QFY14) as compared to flat fee income growth in FY13.

Guidance: a) 15-16% loan growth b) restructuring pipeline of INR18b c) plans to sell down loan of INR3b to ARCs

in 4Q.

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WHIRLPOOL INDIA 3QFY14: First signs of recovery, albeit on favorable base

Whirlpool India (WHIRL) reported revenue of INR6.73b, up 8.7% YoY helped by lower base. Volumes were flat;

revenue growth was driven by pricing and mix improvement in favor of newer models.

Management highlighted that festive season demand was slightly better during the quarter; however, overall

volume growth still remains weak.

WHIRL has been introducing newer products in the Refrigerator and Washing Machine segments since July 2013

and will roll out its complete range of new products by 1QFY15. New products have a pricing premium of 5-7%

over existing products.

EBITDA margin was 5.5% as compared to 3.6% in 3QFY13 (200bp expansion), largely led by lower other

expenses (down 230bp). Ad spends have not been cut and are running at similar levels as 3QFY13.

PAT was INR213m v/s INR101m in 3QFY13, a growth of 111% YoY.

WHIRL is restructuring its distribution set-up and rationalizing distributor margins (distributor margins are

currently lower than players like Samsung, LG). Management suggested that restructuring would be complete

by October 2014.

WHIRL’s revenue has remained flat for the last three years (FY11-14) due to weakness in the Consumer

Durables industry. However, operating leverage has been impacted resulting in PAT de-growth by 23% from

INR1.66b to INR1.27b over FY11-13.

Net cash as of FY13-end stands at INR1.5b with return ratios of 33% RoCE and 23% RoE. The stock trades at

18.9x FY13 reported earnings. Not Rated.

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WIN Collage

Aditya Puri on How India can be the outlier as growth in developed economies ascend and of BRICS

descend

As the stars of developed economies ascend and of BRICS descend, here’s how India can buck the trend

The world economy is changing rapidly. The stars of yesteryear, the BRICS, are down and the stars of the world’s

leading economies are ascending. A simple comparison of GDP growth forecasts for the US, BRICS and India will

underscore this point. In 2006-07 India came within a whisker of double-digit growth and the US was growing at 3%.

In 2014, US is expected to grow at 3% while India would not dare to predict a rate anywhere over 5-5.5%. In short

the growth differential has compressed by a hefty 4 percentage points. The recovery in the developed world might

be led by the US, but others such as Europe and Japan are showing signs of life. So money in the foreseeable future

is likely to move to developed economies. The dollar will strengthen, dollar interest rates will rise and, as a mirror

image, emerging economy stocks and currency will fall and commodity prices should stabilise or rise. Mercifully, the

developed world needs emerging markets to grow, which in turn requires capital, and so some money must come

back. But which emerging markets will manage to attract more capital depends on how quickly they get their

economic act together The pundits are making all sorts of forecasts. Some of them still work on the assumption that

convergence of the rich and the poor world is almost axiomatically inevitable. However, convergence based on

differential growth rates sustaining for the long run can work only if poorer countries work hard to remove supply

shortages, improve human capital and physical capital and not mistake episodes of easy money and asset bubbles

as a sign of affluence.

China’s Slowdown

India has an enormous advantage in the new economic ballgame. The majority of its problems are self-created and

it is in a position to address them. This creates a fantastic opportunity for India to be a positive outlier. But before

getting to a strategy for achieving outlier status, we need to look at things through a larger Asian prism. China is

slowing down sharply and could possibly clock a growth rate of below 7% this year. Rising wages are whittling its

competitive edge and undermining its position as a manufacturing powerhouse. This means that international

investors are likely to look at alternatives like India to relocate manufacturing bases. Thus the potential for

attracting substantially more foreign direct investment is large. How do we achieve this? A lot of the reforms that

are needed to enhance India’s status as an investment destination are low-hanging fruit. Take GST, which is ready

to roll out, if only all the states agree to this and political parties agree on a minor constitutional amendment to

allow states to tax services. The implementation of a new tax dispensation is unambiguously good for growth and

revenue buoyancy. The only thing holding it back is political will and consensus. Despite the much discussed drop in

investment spending, India managed a respectable investment rate (gross fixed capital formation) of 30% of GDP in

2012-13. The rate is unlikely to be much lower this year. What has gone completely awry though is the incremental

capital output ratio (the amount of capital needed to produce a unit of GDP) that has increased from an average of

around 4 in the last decade to over 6 in 2012-13. This drop in the productivity of capital is largely the result of delays

in critical sectors like power and roads. This can be resolved if there is less arbitrariness in decision-making at the

central and state levels

Make Youth Work-Ready

Then there are bigger and more daunting challenges. We cannot just accept a young population as a blessing. To

reap the so-called demographic dividend, we need a healthy, educated and employable population. Expenditure on

health and education has to increase: we need to reach threshold levels that at least our peer economies are

associated with. Public spending on healthcare in India in 2012 was just 3.9% compared with 5.2% in China and

8.9% in Brazil. It can be ramped up if the government cuts back on unnecessary expenditure like non-merit

subsidies. But simply throwing money at a problem does not solve it if the money is not spent efficiently. Progress in

education cannot be measured by the literacy rate or the number of graduates. The target is to make them work-

ready or employable. Studies have shown that of a graduate pool of about 16 million, only 25% are employable. The

focus has to be on skill creation. Industry and government need to work together to ensure this. The remedy is a

combination of increased spending in these critical sectors, enhanced efficiency of spending and greater

collaboration between private and public sectors to find viable solutions. For the government, where does the

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money come from in a situation where fiscal consolidation is imperative? The answer is simple: take the subsidy bull

by the horns. Subsidies account for 18% of total expenditure and 49.5% of the total fiscal deficit. The irony is that

instead of addressing this problem, we are compounding it. Take the new food subsidy bill. Even if it subsumes

some of the existing programmes, it would still be a drag on the exchequer. The decision to raise the cap on

subsidised LPG cylinders and de-link it from Aadhaar would also bloat the subsidy bill. This is misdirected

expenditure and we cannot afford it when there are other more justifiable claims on the government. Underpinning

all this is the central issue of accountability that makes government responsible for the outcomes of its actions.

Take the case of the Fiscal Responsibility and Budgetary Management Act (FRBM). While for states there are

penalties for failing to comply with it, the exact penalty for the Centre busting the FRBM limits remains fuzzy. We

need to devise stringent penalties for the Centre, like penal interest rates on government borrowings, when it

breaches borrowing limit. A brief comment on two of the enduring problems of the economy is perhaps in order

here. Agricultural growth might have picked up but it remains highly volatile. Growth is dependent on the area

under cultivation that in turn depends on the monsoon. A technological breakthrough along the lines of the green

revolution is imperative. Higher yielding seeds have to be supported by the delivery of credit, power, water and the

right mix of agriculture.

Glitter Like Gold

Again, despite the fact that the tightest bottlenecks are in non-cereal products, our agricultural policy is resolutely

focused on cereal. The cereal-based food security programme will only buttress that further. We need more

investments in the pipeline for non-cereal items. Another problem is that of gold holdings that erode both investible

financial savings and put a drag on the current account deficit. First, we must accept that there is a sociological

dimension to the Indians’ obsession with the yellow metal and there will always be a core demand for gold.

However, offering instruments that mimic the returns on gold but are not fully backed by gold imports is one way of

bringing the current account pressure under control.

The Only Risk

Finally, we must not confuse the noise of an incredibly diverse democracy in transition with the vibrancy of India.

The recent developments in the political and economic scenario are welcome. We are moving towards

representative democracy, which is transparent and accountable, fiscal prudence and inclusive growth. The recent

elections have served as a wake-up call to old thinking, both economic and political. We are witnessing mind-

boggling change, with all sections of the population seeking to be holier-than-thou in championing performance,

transparency and accountability. We can expect before May a spate of competitive legislation covering Lokpal to

land acquisition, natural resources to FDI. The more noise the electorate makes, the more action that will follow.

Now comes the new election — and a new dawn. The only risk is a fractured mandate that will lead to policy

paralysis and pandering to selfish interest. Barring this, our problems are on the way to resolution.

WHAT NOW FOR INDIA?

In times of extreme risk aversion, the EMs that are considered the weakest and most vulnerable face extreme

pressure. Given the improvement in the current account position, sentiment towards the INR and Indian assets has

improved in the last 3 months. So the INR — one of the main under-performing currencies in its peer group in 2013

— has emerged as the better performing one against its peers in 2014. India needs to move from Block 4 to 5.

WIN – Week In a Nutshell

Feb 7

2014