Weekend Highlights –25 October, 2014

Indias Diesel Deregulation Positive For Oil Companies-Fitch Ratings
The Indian governments 18 October decision to deregulate diesel prices will have a positive effect on the national oil marketing companies that are the principal retailers of petroleum products, says Fitch Ratings. The decision is also likely to lead to more private firms entering the diesel market in the medium term, resulting in greater competition.The decision to deregulate diesel prices is well-timed in light of the recent decline in international energy prices. The expected direct impact of both the diesel reform and natural gas price hike on Fitchs headline fiscal forecasts is limited; but the fiscal balances will be more robust to future oil shocks, since both diesel and petrol prices are now determined by the market. Furthermore, implementation of these politically sensitive reforms demonstrates that the government continues to roll out structural reforms gradually, and suggests that more far-reaching structural reforms may be in the pipeline.

The national oil marketing companies – Indian Oil, Bharat Petroleum and Hindustan Petroleum – will be the principal direct beneficiaries of deregulation, and the decision is positive for these companies standalone credit profiles. Under the previous rules, these retailers had to sell diesel (accounting for 40% of fuel sold) below market prices, and were partially compensated for the losses through the federal budget. Furthermore, the price control and subsidy system affected the working-capital positions of these companies, as there was a timing mismatch between the recognition of losses on sales and compensation from government – leading to higher debt.

The other beneficiaries are likely to be upstream oil companies such as Oil and Natural Gas Ltd and Oil India Ltd, which also bore a large part of the subsidy burden. These companies offered a USD56 per barrel discount to the national oil marketing companies – especially challenging when considering the fall in crude prices to around USD85. Fitch expects that the discount is likely to come down.

Fitch anticipates that deregulation will result in heightened competition for the existing dominant national retailers, and could hurt their profitability over the medium to long term. By allowing diesel to be marketed profitably, the sector will once again be attractive for private companies that had left when price restrictions were put in place. A large portion of the output of private refiners is exported, due in part to the restrictions placed on domestic sales. Private firms such as Reliance Industries and Essar Oil are likely to restart idled diesel retail operations, and should ultimately become more significant players. Their impact on the sector would not be seen immediately, though, as they would have to play catch-up to restart and establish retail infrastructure.

Ind-Ra: Diesel Price Decontrol May Create More Policy Space for RBI
India Ratings & Research (Ind-Ra) says the union governments decision to deregulate diesel prices will significantly improve the countrys finances as the oil subsidy will come down by INR150bn. Also, the cut in diesel prices by INR3.56/litre will go a long way in fighting inflation, which is trending downwards. This will create more space for the Reserve Bank of India to ease its policy stance and cut policy rate sooner than hitherto believed.Ind-Ra on 1 September 2014 expressed its view in favour of decontrolling diesel prices at the earliest. The staggered diesel price hike initiated since January 2013 and the recent decline in the prices of crude in the global market have converted the under recovery of public sector oil marketing companies into an over recovery. The over recovery on diesel for such companies reached INR3.56/litre for the second fortnight of October. The crude price of the Indian basket as on 15 October 2014 fell to USD83.85/bbl and the currency was at INR61.1/USD. When diesel prices were increased by around INR5/litre on 14 September 2012, the Indian crude oil basket was priced at USD113.64/bbl and the currency was at INR55.47/USD, leading to an under recovery of INR13.86/litre.

Although the rupee depreciated to around 61.5/USD by the middle of October 2014 from around 59/USD in May/June 2014, the sharp fall in the global crude prices has overall lowered the import price of Indian basket considerably. As the crude prices in the global market are likely to remain low in the near term due to the US discovery of shale oil as also the struggling economies of Europe and Asia, deregulating diesel prices is both the right and opportune step.

However, India will have to be watchful of global developments. Crude prices and therefore petroleum product prices are currently low because of low demand and appreciation of the US dollar in relation to its trading partners (measured by US Dollar index). In a scenario where even if global oil and petroleum products demand and supply remain same, depreciation of the US dollar may flare up both crude and product prices. Although the fuel price deregulation was scheduled to begin from April 2002, it took more than 12 years to deregulate petrol and diesel prices. The present order is however silent on government intervention in the eventuality of global prices flaring up again.

Currency movement (INR/USD) also has a significant impact on petroleum product prices and subsidy. Ind-Ra expects the rupee to strengthen marginally and this will have a favourable impact both on petroleum product prices and subsidy.

India Can Emulate Global Best Practices for the Development of the Corporate Bond Market: CII
To further the expansion of the economy, CII feels India must continue to work on removing infrastructure bottlenecks and further strengthen the financing of infrastructure development. CII projects investment requirement in infrastructure development to the tune of Rs 64.3 lakh crore during the period 2014/15 – 2018/19 and private sector will have to play a crucial role in achieving the desired goal.Corporate Bond Market (CBM), as a stable and reliable source of finance, provides a pivotal mechanism for sustaining business investment, infrastructure development, and economic growth. CII in its report n++Corporate Bond Market: Benchmarking Global Best Practices into Indian perspectiven++ has analysed the role Corporate Bond Market has played in infrastructure development for many economies globally and brings out key recommendations for the policymakers to implement in the Indian context.

n++Indian economy is at crossroads where development of Corporate Bond Market is required for meeting the funding requirements of the industry and the economy. Thus, it becomes imperative to study the successful global models for benchmarking best practices and devising an implementable roadmap for the Indian economyn++ said, Mr Chandrajit Banerjee, Director General, CII.

For an emerging economy like India, Corporate Bond Market can play a pivotal role for financing infrastructure development as evidenced from the successful models of various countries. It is, therefore, possible for India to learn from the experiences of other countries in developing its CBM.

Speaking on the report, Mr Banerjee added, n++CII has studied the global best practices and models for development of CBM with special emphasis on benchmarking global best practices for the Indian market and deriving policy solutions to guide the future reform agendan++.

The CII report analysed the models of both emerging and developed countries like Brazil, Chile, South Korea, China, Singapore, Japan and the United Kingdom, and noted that a variety of regulatory and market actions stimulated market growth in these economies. On careful examination, CII recommends, India needs to focus on few key measures (but not limited to) like broad based development of Government securities market, supportive taxation structure, uniform stamp duty, enhance institutional participation by re-visiting investment norms, institute a robust credit enhancement framework and most importantly strengthen bond holder protection mechanism.

Alembic Pharmaceuticals – 2QFY2015 Result Review

Results marginally below expectations

Stock up 3.4%

Alembic Pharma (CMP: `387/ TP:/ Upside :)

For the quarter, the company posted sales and profit, below expectations. The sales and net profit came in at `539cr V/s `568cr expected and `84cr V/s   `88cr expected respectively, thus posting a yoy growth of 11.7% yoy and 31.7% respectively. The growth in the sales was lead by the domestic formulation business, which posted a yoy growth of 18.0%. Other segment, which did well, was API, which posted a yoy growth of 20.0%. The international generic posted a growth of 9% yoy, while Indian generics de-grew by 12% yoy. The international branded segment posted flat sales. On the operating front, the gross margins came in at 64.8% V/s 60.8% in 2QFY2014; consequently taking the operating margins to 21.2% V/s 19.6% in 2QFY2014. This along with the lower interest expenditure, which dipped by 31.9% yoy, aided the PAT to come in at `84.1cr V/s `63.8cr in 2QFY2014, a growth of 31.7%. We maintain our neutral rating on the stock.

Indoco Remedies – 2QFY2015 Result Review

Results below expectations, on sales and net profit front, margins robust

Stock marginally up

Indoco Remedies (CMP: `287/ TP:/ Upside :)

For the quarter, the company posted results much below expectations on the net sales and profit front. The sales came in at `226cr V/s `257cr expected, posting a yoy growth of 16.1%. The sales growth was mainly driven by the exports, which rose by 21.1% yoy, while domestic sales rose only by 13.3% yoy. The domestic formulations grew by 13.9% yoy, while formulation exports grew by 21.2% yoy. On the operating front, the gross margin came in at 64.8% V/s 61.2% in 2QFY2014; consequently taking the operating margins to 20.6% V/s 13.2% in 2QFY2014. This along with the lower interest expenditure, which dipped by 49.0% yoy, aided the PBT, to register a yoy of 148.3%. However, a 148.3% yoy rise in the tax expense during the quarter, lead the net profit to come in at`20cr V/s `30cr expected, a yoy growth of 23.7%. We maintain our neutral rating on the stock.

UPL – 2QFY2015 Result Review

Results, robust on top line

Stock dips marginally

United Phosphorus (CMP: `331/ TP:424/ Upside :28%)

United Phosphorus Limited (UPL), posted a good set of numbers. For the quarter, the company posted sales of `2618cr V/s `2,269cr in 2QFY2014, registering a yoy growth of 15.4%. On the operating front, the company posted OPM’s of 16.7% V/s 16.0% in 2QFY2014, mainly driven by the GPM’s of 50.5% V/s 48.7% in 2QFY2014. The expansion in the OPM was lower than expansion in the GPM, on back of the 24.4% rise in other expenditure. This along with the lower other income during the period, which dipped by 32.2% yoy, lead the Adj. net profit to come in at `178cr V/s `171cr in 2QFY2014, a yoy growth of 4.3%. The reported net profit during the quarter was `166cr V/s `155, a yoy growth of 7.1%.We maintain our buy with a target price of `424.

Weekend Highlights –18 October, 2014

Indian Railways Freight Loading up by 4.20 per cent during April-September 2014
Indian Railways carried 532.44 million tonnes of revenue earning freight traffic during 1st April- 30th September 2014. The freight carried shows an increase of 21.44 million tonnes over the freight traffic of 511.00 million tonnes actually carried during the corresponding period last year, registering an increase of 4.20 per cent.During the month of September 2014, the revenue earning freight traffic carried by Indian Railways was 86.71 million tonnes. There is an increase of 1.85 million tonnes over the actual freight traffic of 84.86 million tonnes carried by the Indian Railways during the same period last year, showing an increase of 2.18 per cent.

Government IT Spending in India Forecast to Reach US$ 7.2 Billion in 2015: Gartner
Government IT spending in India will total US$ 7.2 billion in 2015, a 5% increase over 2014, according to Gartner Inc. Government IT spending is on pace to total US$ 6.6 billion in 2014.This forecast includes spending by the government sector (government is composed of state and regional government and central government agencies.) on internal IT (including personnel), hardware, software, external IT services and telecommunications.

Anurag Gupta, research director at Gartner says, IT services, which includes consulting, implementation, IT outsourcing and business process outsourcing, will be the largest overall IT government spending category through 2018. IT services are expected to grow 10.9% in 2014 to reach US$ 1.8 billion in 2015, up from US$ 1.6 billion in 2014 – with the business process outsourcing segment growing 22% during 2014.

Internal services will achieve a growth rate of 9.9% in 2014. Internal services refer to salaries and benefits paid to the information services staff of an organization. The information services staff includes all company employees that plan, develop, implement and maintain information systems. The software MARKET will achieve the highest growth rate within spending categories.

Government spending on software will total US$ 788 million in 2014, and it will grow to US$ 910 million in 2015. Software spending will be led by growth in vertical specific software (software applications that are unique to a vertical industry. These are stand-alone applications that are not modules or extensions of horizontal applications).

Anurag Gupta, research director at Gartner said, India has a new government in power with the underlying promise of Less Government & More Governance. The delivery of a citizen-centric and transparent government is only possible through the extensive use of technology and by leveraging digital government. We expect a focus on expanding broadband penetration, accelerating digitization of core government processes, leveraging mobility to engage the citizens, cloud initiatives and public private partnership. India has ambitious plans to build several smart cities, and this will create new opportunities.

ADB, 13 Banks Sign $288 Million B-Loan for Wastewater Reuse in PRC
The Asian Development Bank (ADB) has signed a ground-breaking agreement in partnership with 13 banks to support Beijing Enterprises Water Group Company (BEWG) to promote high standard wastewater treatment and reuse in the Peoples Republic of China (PRC).The $288 million B-loan agreement, signed today, is the largest such loan arranged by ADB. The B-loan is part of ADBs financing package to the project, which includes an ADB-financed loan of $120 million signed last November, and up-scaled to $408million. Through the B-loan structure, ADB acts as the lender of record for commercial banksn++allowing them to SHARE ADBs preferred creditor status.

n++A prime objective of the B-loan is to perpetuate our development mission with partner banks to promote reuse of treated wastewater as a strategic option for sustainable water management. We are pleased to work with 13 leading banks to address the PRCs water challenge,n++ said Hisaka Kimura, ADB Head of Private Sector Infrastructure Finance, East Asia Unit.

The PRCs increasing demand for water highlights water scarcity. Per capita freshwater resources are low and annual per capita water endowments have been declining alarmingly. Pollution exacerbates water scarcity, especially in upstream areas where it can degrade sanitation in local communities which depend on local sources for water supply.

Under the project, BEWG will upgrade and operate wastewater treatment plants across the country to meet grade 1A standard, the most stringent wastewater treatment standard in the PRC. The treated wastewater can then be reused for both industry and urban environment needs, including machine cooling, boiler operation, and cleaning at construction sites.

The 13 banks are Australia and New Zealand Banking Group, the Bank of Tokyo-Mitsubishi UFJ, BPI Capital Corporation, Industrial and Commercial Bank of China (Asia), Rabobank International, OCBC Wing Hang Bank, Kookmin Bank, Aozora Asia Pacific Finance Limited, State Bank of India, Chang Hwa Commercial Bank, KEB Asia Finance, Shinhan Asia, Taiwan Cooperative Bank, and ADB as the lender of record.

TCS- 2QFY2015 Result Review

Results below expected on net profit levels

Stock down ~7.0%

TCS (CMP: `2,700/ TP:/ Upside:)

TCS announced its 2QFY2015 results. While the dollar revenue was much higher than expected on sales front, the net profit came in lower than expected, on back of lower than expected EBDITA margins. On the sales front, the company posted a 6.4% sequential growth in USD revenues to US$3,929mn V/s US $3,859mn expected, with volume growth of 6.1% qoq. On constant currency (CC) terms the company posted a 7.4% qoq growth, of which organic growth during the period was 4.6% qoq on constant currency. In rupee terms, revenues came in at `23,816cr V/s `23,495cr, up 7.7% qoq.

The growth in the INR sales was equally driven by the key geographies, USA (5.3% qoq), Europe (3.8% qoq) and India and Asia Pacific, which grew by 9.0% qoq and 43.2% qoq respectively. In terms of verticals, the BFSI (4.3% qoq), Telecom (1.7% qoq), Retail & Distribution (5.9% qoq) and Manufacturing ( 26.7% qoq).

EBITDA margin came in at 28.5%, lower than expected 30.2% and a dip of ~29bps qoq. Consequently, PAT came in at `5,288cr V/s `5,414cr expected, an up-tick of 4.6% qoq. On the operational front, the company had the highest utilizations, which stood at 86.2% (ex-trainee), while including the trainee it was 81.3%. As per outlook, the company expects to post a growth higher than the NASSCOM growth target of 13-15%.

In terms of development, the TCS announced its merger with CMC wherein in the shareholders of CMC will receive 79 equity shares of Rs.1 each of TCS for every 100 equity shares of Rs.10 each of CMC held by them. The appointed date for the proposed scheme is 1 April 2015. We maintain our neutral rating on the stock.

HCL Tech -1QFY2015 Result Review

Results better than expected on EBIT and net profit front

Stock down ~6.0%

HCL Tech (CMP: `1,656/ TP: `1,968/ Upside:18.8%)

HCL Tech during the quarter posted revenue marginally below, expectations, while EBIT and net profit came in higher than expected. The sales came in at US $1,433mn V/s US$1,469mn expected, a qoq growth of 1.9%.In Constant Currency (CC) terms, the sales grew by 3.2% qoq. In rupee terms, revenues came in at `8735cr V/s `8,945cr expected, up 3.7% qoq.

In terms of geography, the USA posted a 5.7% qoq on CC basis, Europe grew by 2.7% qoq on CC basis, while ROW de-grew by 6.4% qoq basis. In terms of verticals Financials Services grew by 3.0% qoq on CC, Manufacturing ( grew by 5.3% qoq on CC basis) , while Life Sciences & Healthcare along with the Public services de-grew by 1.7% and 5.6% qoq on CC basis respectively. The vertical which posted, highest growth was Retail & CPG which grew by 15.8% qoq on CC basis.

On the operating front, the EBIT margins came in at 23.9% a decline of ~32bps qoq V/s expected 22.0%. The utilization levels dipped to 82.7% ( including trainees) V/s 84.5% in 4QFY2014.Consequently, PAT came in at `1,873cr V/s `1,591cr expected, a growth of 2.1% qoq. In terms of order flow, the HCL has signed 15 Transformational engagements with more than US$ 1bn of Total Contract Value in this quarter, led by Global Infrastructure Services, Engineering and R&D Services, Application Services and the Digitalization suite across Software Product and Platform Engineering. Manufacturing and Consumer Services led the wins in verticals and US in geographies. We maintain our buy rating on the stock with price target of `1,968.

Ranbaxy- Settles litigation with State of Texas

Ranbaxy- Settles litigation with State of Texas : Ranbaxy has settled the litigation concerning its participation in the Texas Medicaid Program. Under the settlement agreement, Ranbaxy will make payments to the State of Texas totaling US $39.8mn in a series of tranches through August 2015. The claims at issue related exclusively to the manner in which the Ranbaxy has historically reported pricing data to Texas Medicaid for certain of its drugs. As has been widely reported, the State of Texas has brought nearly identical claims against virtually every other major pharmaceutical manufacturer in the United States. Ranbaxy believes that it fully complied with all relevant laws; however the Company settled the matter to avoid any further distraction and uncertainty of continued litigation with the State of Texas. The said liability will not a major impact on the company’s financials and hence maintain our neutral on the rating on the stock.

Infosys- 2QFY2015 Result Review

Results above expectations on operating front

Stock up by ~5.8%

Infosys (CMP: `3,646/ TP: `4,700/Upside: 28.9%)

Infosys announced its 2QFY2015 results today. The company posted a 3.1% sequential growth in USD revenues to US$ 2,201mn V/s US$2,193mn expected. In rupee terms, revenues came in at `13,342cr V/s `13,279cr expected, up 4.5% qoq.  On constant currency (CC) terms, the company posted a strong 3.9% qoq growth V/s 1.5% qoq in 1QFY2015. The key geography that grew well was Europe which grew by 6.5% qoq on CC terms, while USA grew by 3.2% qoq on CC terms. Other regions like India and ROW posted a 4.0% qoq CC decline and growth of 4.2% qoq CC respectively. In terms of domain, the FSI ( Financial Services Industry ) grew by 2.0%qoq on CC terms, Manufacturing grew by 4.5% qoq in CC. The domain that posted the highest growth during the period was ECS (Electricity, Communications and Services ), which posted a CC qoq growth of 8.8%. On the operating front, the EBIT margins came in at 26.1% V/s 24.6% expected ( 25.1% in 1QFY2015) on account of improved productivity. Consequently, PAT came in at `3,096cr V/s `2,948.9cr expected, a rise of 7.3% qoq.

The utilization levels improved to 75.2% V/s 74.8% in 1QFY2015, while excluding the trainees, the utilization levels, improved to 82.3% V/s 80.1% in 1QFY2015.Going forward, the company has maintained its future USD revenue growth guidance for FY2015 at 7-9% and EBIT margins to be sustained at these levels in a narrow band. On valuation front, the stock is cheap at current valuations of 15.5xFY2016E earnings, at a 30% discount to its peer like TCS, which we believe can narrow down once the growth pick-ups. Thus , we maintain our buy rating on the stock with a target price of `4,700.

Weekend Highlights –11 October, 2014

Moodys: Asian Liquidity Stress Index declines to 21.3% in September
Moodys Investors Service says that its Asian Liquidity Stress Index declined to 21.3% in September from 22.3% in August, the lowest level since December 2013.The decline, the fourth in as many months, came as the net number of rated high-yield companies with Moodys weakest speculative-grade liquidity score (SGL-4) decreased to 26 from 27 and the number of rated high-yield companies increased by one to 122.

The index — which increases when speculative-grade liquidity appears to decrease — remains well below the record high of 37.0% reached during the fourth quarter of 2008 amid the global financial crisis, says Annalisa Di Chiara, a Moodys Vice President and Senior Analyst.

It is a bit above the indexs long-term rolling average of 20.2% but still slightly below the trailing 12-month average of 21.9%, adds Di Chiara.

The liquidity sub-index for Chinese speculative-grade companies declined slightly to 20.0% in September from 20.3% in August.

And the number of high-yield Chinese companies increased to 65 from 64. Meanwhile, the number with an SGL-4 score remained unchanged at 13.

Chinas high-yield property sub-index rose, to 15.4% from 12.8% while the Chinese high-yield industrial sub-index declined to 26.9% from 32.0%.

The Indonesian sub-index remained unchanged at 12.0% as the number of Indonesian companies with an SGL-4 score remained at three and the total number of high-yield Indonesian companies remained at 25.

Moodys downgraded the CFRs of three companies in September and upgraded six. The downgrade/upgrade ratio of 0.5 in September does not necessarily reflect a positive shift in overall credit quality and environment, but rather company specific events that have improved their credit quality and liquidity. Indeed, downgrades exceeded upgrades for the fifth consecutive quarter.

Railways revenue rises 12.02% in April-September 2014
The total approximate revenue of Indian Railways on originating basis showed an increase of 12.02% to Rs 73403.67 crore in April-September 2014 compared with Rs 65525.85 crore in the same period last year.The total approximate revenue from goods moved up 10.44% to Rs 48771.58 crore in April-September 2014 compared with Rs 44162.15 crore in the same period last year.

The total approximate revenue from passengers jumped 16.46% to Rs 21079.09 crore in April-September 2014 compared with Rs 18099.80 crore in the same period last year.

The approximate revenue earnings from other coaching amounted to Rs 1979.91 crore in April-September 2014 compared with Rs 1850.17 crore in the same period last year, registering an increase of 7.01%.

The total approximate numbers of passengers booked were 4253.32 million in April-September 2014 compared with 4255.81 million in the same period last year, showing a decline of 0.06%.

Revenue growth to decelerate in Q2FY15: CRISIL
CRISIL Research expects India Inc. to report a revenue growth of 9-10% year-on-year (y-o-y) in the September 2014 quarter (Q2FY2015), lower than 13% growth reported in the June 2014 quarter, due to slower growth in export-oriented sectors and the continued weak performance of investment-linked sectors. This forecast is based on an analysis of 600 companies (excluding financial services and oil companies), representing 71% of the overall market capitalization of India Inc.Export-oriented sectors have been performing extremely well in the past 5 quarters, reporting strong y-o-y growth due to a slight rebound in demand in key markets and currency tailwinds. However, in Q2FY2015, the rupee appreciated by 3% against the USD on a y-o-y basis; so no gains will be reported on the currency front.

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