AUGUST 21, 2015 Economy News Reserve Bank of India Governor indicated that policy measures may be warranted to counter any long-term plan by the Chinese to push the yuan down to gain an edge on exports. (BL) The Securities and Exchange Board of India (Sebi), has proposed to ease norms for infrastructure investment trusts (InvITs) as a way to encourage firms to unlock capital. A domestic InvIT can raise long-term funds from unit holders, helping developers unlock value in their operational or completed projects or repay debt associated with those projects. (BS) Seeking to reassure foreign investors that it will not take any steps that "undermines the growth momentum", the government has said that participatory notes (P-Notes) will not be banned overnight and stakeholders will be consulted before a decision is taken. (ET) Corporate News Government has fixed Rs 382 per share as the floor price for 5 per cent stake sale in Dredging Corporation of India (DCI). The government will sell up to 14 lakh shares of face value of Rs 10 each, representing 5 per cent of the total paid up equity share capital of the company, through offer for sale on 21st August (today). (BS) The government may sell 10 per cent stake in Coal India this fiscal itself through a public offer, which could fetch around Rs 220 Bn to the exchequer. The Department of Disinvestment (DoD) is in the process of appointing merchant bankers for managing the sale. The government will appoint up to five merchant bankers to manage the sale, and the last date for applications is September 2. (ET) Jyoti Structures Ltd has said that its lenders have decided to opt for strategic debt restructuring (SDR). The lenders' consortium of 21 banks is led by State Bank of India (SBI). As of 31 March, the company had a total stand-alone debt of Rs.22 Bn. (Livemint) Larsen & Tourbo (L&T) has scrapped a plan to develop a new port in Kacchigadh, near Dwarka in Gujarat, owing to environmental reasons, according to two state government officials close to the development. Gujarat Maritime Board has approved L&T's request to scrap the project and has forwarded it to the state government for its final consent. (Livemint) Aurobindo Pharma Ltd has said it has got approval from the US Food and Drug Administration (FDA) to launch two generic drugs in the US. The drugs include omeprazole delayed-release capsules to treat gastrooesophageal reflux disease and the anti-osteoporosis ibandronate sodium injection. (BL) Tata Steel is planning to raise Rs 15 Bn through issuance of commercial paper (CP). The CP programmes have been carved out of the working capital bank lines of the company. (ET) Maruti Suzuki has increased prices for the first time in 22 months in the range of Rs 3,000 to Rs 9,000 across models, except the newly launched S Cross. The price revision was effective from 11th August 2015 and communicated to the dealers on the same day. The price revision is on account of changes in dealer margin and a minor calibration in prices. (BS) Infosys has launched three new services which would work as a catalyst in positioning it as a next-generation services company. The three initiatives together would be known as 'Aikido'. (BS) Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange Equity % Chg 20 Aug 15 1 Day 1 Mth 3 Mths Indian Indices SENSEX Index 27,608 (1.2) (2.0) (0.7) NIFTY Index 8,373 (1.4) (1.8) (0.6) BANKEX Index 20,957 (2.3) (2.4) (1.5) SPBSITIP Index 11,585 (2.3) 3.6 5.5 BSETCG INDEX 17,697 (1.8) (4.2) 7.1 BSEOIL INDEX 9,239 (1.8) (7.2) (2.1) CNXMcap Index 13,832 (1.7) 2.2 6.0 SPBSSIP Index 11,681 (2.0) 0.9 4.3 World Indices Dow Jones 16,991 (2.1) (5.2) (7.1) Nasdaq 4,877 (2.8) (6.3) (4.2) FTSE 6,368 (0.6) (5.9) (9.2) NIKKEI 20,034 (0.9) (5.9) (2.9) HANGSENG 22,757 (1.8) (12.8) (19.1) Value traded (Rs cr) 20 Aug 15 % Chg - Day Cash BSE 3,292 1.2 Cash NSE 20,523 18.1 Derivatives 341,484 43.9 Net inflows (Rs cr) 19 Aug 15 % Chg MTD YTD FII (290) (1,595) (759) 42,860 Mutual Fund 325 57 1,208 36,420 FII open interest (Rs cr) 19 Aug 15 % Chg FII Index Futures 13,464 (5.6) FII Index Options 79,115 0.5 FII Stock Futures 52,574 (1.3) FII Stock Options 4,178 (0.9) Advances / Declines (BSE) 20 Aug 15 A B T Total % total Advances 43 516 179 738 26 Declines 255 1,509 246 2,010 71 Unchanged 1 66 28 95 3 Commodity % Chg 20 Aug 15 1 Day 1 Mth 3 Mths Crude (US$/BBL) 40.7 (1.5) (19.2) (33.0) Gold (US$/OZ) 1,152.6 2.1 5.3 (3.1) Silver (US$/OZ) 15.5 1.5 5.0 (8.8) Debt / forex market 20 Aug 15 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % 7.7 7.7 7.8 7.9 Re/US$ 65.5 65.3 63.7 63.8 Sensex 30,500 29,500 28,500 27,500 26,500 25,500 24,500 Aug-14 Nov-14 Feb-15 May-15 Aug-15
SECTOR UPDATE Teena Virmani teena.virmani@kotak.com +91 22 6621 6302 We continue to maintain our positive bias and BUY rating for IRB infrastructure, NCC Ltd, Simplex Infra and KNR Constructions CONSTRUCTION SECTOR REVIEW POST Q1FY16 Construction sector performance during Q1FY16 was led by healthy order inflows, improvement in execution as well as better margins. Borrowings continued to remain high sequentially but average interest cost has witnessed a reduction of 25-50 bps for companies. Companies are either looking for securitizing existing operational assets or planning to raise funds through QIP issue in order to be well equipped to bid for upcoming road projects. Government is also reworking on the model of road project awards via EPC and annuity mode to enthuse the players shying away from BOT projects. As witnessed since Q4FY15, traffic volumes across various toll projects continued to witness healthy growth volumes, thereby indicating revival in the economic activity. Thus marginal hike in toll rates due to negative WPI was more than compensated by higher traffic volumes across stretches. Going ahead, companies are expected to raise funds through stake sale which will help in reducing leverage while rate cuts from banks are likely to reduce the interest expense in medium to long term. Companies are also planning to further reduce the borrowings by containing working capital requirements on claim settlements and customer advances would start moving up on scaling up of order inflows. Thus, we opine that companies having strong balance sheet should be able to tap upcoming buying opportunities in the order inflows. We continue to maintain our positive bias and BUY rating for - IRB infrastructure (CMP: Rs 248; TP: Rs 296), NCC Ltd (CMP: Rs 78; TP: Rs 101), Simplex Infra (CMP: Rs 331; TP: Rs 470) and KNR Constructions (CMP: Rs 550; TP: Rs 641) as we believe that these companies are ideally positioned to benefit from revival in road BOT and EPC projects. Key highlights about the sector Healthy order inflow Order inflow from road segment has remained quite strong during first four months of the fiscal led by increased activity from NHAI as well as state road projects. IRB, ILFS Transportation Network, KNR Construction, HCC emerged as key beneficiaries while NCC, JKIL and Simplex Infrastructure are expecting their order inflow to ramp up in coming quarters. Companies are also L1 in large projects from NHAI, Mumbai metro as well as state highway projects which are likely to get awarded in next few quarters. Order inflow during Apr-July, 2015 (Rs bn) JKIL Simplex NCC HCC KNR Construction Ashoka buildcon Sadbhav Engineering ILFS Transportation Networks IRB 0 11 22 33 44 55 Source: Companies, Industry Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
Going ahead, companies are expecting order inflow to improve from building, industrial (mainly overseas), urban infra, roads and bridges as well as power segment based on the current bid pipeline. This is likely to provide healthy revenue visibility going forward. Upcoming pipeline of projects Government is carrying out a lot of initiatives to ease the ordering activity from road sector. It has made Right of Way (ROW) available to concessionaires free from all encumbrances. In order to attract private investment, NHAI / GOI to provide capital grant up to 40% of project cost to enhance viability on a case to case basis along with 100% tax exemption for 5 years and 30% relief for next 5 years, which may be availed of in 20 years. It has also eased the process of claim settlement through Arbitration and Conciliation Act 1996 based on UNICITRAL provisions. NHDP has planned to award nearly 20,000km of length with a total investment of $45 bn over next three years. The project pipeline is spread across various phases covering nearly 14,658 km excluding 5000km of terminated projects which would also be coming for rebidding. Details of NHDP projects to be awardedlength (km) 10000 9397 7500 5000 2500 270 2482 2658 0 Phase 2 - Balance work of GQ and NSEW corridor Phase 3-4 laning Phase 4-2 laning with paved shoulders Phase 5-6 laning Source: NHAI Since NHDP Phase 5 and Phase 3 projects are largely over, most of the remaining NHDP-Phase 5 projects are likely to come from UP, AP, Orissa and Karnataka while Phase 4 projects are likely to be diversified from states like Rajasthan, Maharashtra, Karnataka, UP, AP, Orissa and Tamil Nadu. Geographical spread of orders with states having >1000km of projectslength (Km) Tamil Nadu Andhra Pradesh Orissa UP Karnataka Maharashtra Rajasthan Phase 5 Phase 4 Phase 3 0 300 600 900 1200 Source: NHAI Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
Strong operating margins Operating margins remained strong during the quarter for most of the companies. NCC witnessed improvement due to better margin projects in order book while for IRB and ITNL, margins witnessed improvement led by higher proportion of toll revenues in total income. JP associates witnessed sharp decline in margins due to fall in cement margins while Simplex Infrastructure maintained margins on yearly basis. Competition is increasing in road projects while for other segments, companies are still able to bag projects at higher margins due to lower competitive intensity. Fund raising through stake sale/equity issuance/asset monetization likely to be seen in next 6-9 months Companies are planning to monetize assets or raise funds through QIP/rights issue to be able to bid for upcoming projects. NCC is likely to receive proceeds from power project stake sale in coming quarters while it is also looking to sell its road BOT projects. ITNL is planning to raise funds through rights issue and later it plans to monetize its annuity assets through securitization. IRB Infrastructure has also taken a board approval for setting up an Infrastructure Investment trust wherein it intends to transfer 12-13 operational projects to unlock value and raise funds for future growth and equity commitments. The funds raised through stake sale/equity issuance/asset monetization are likely to be utilized for strengthening the balance sheet in terms of debt reduction as well as for meeting equity requirements for existing and ongoing projects. We expect companies with strong balance sheet to benefit from upcoming projects. Maintain positive outlook for the sector despite near term challenges In the near term, increased ordering activity from NHAI, MoRTH as well as claim settlements are likely to be positive for the companies. However we believe that clarity on land acquisition bill, monsoons as well as delay in interest rate cuts may impact the performance of companies in terms of execution as well as continued pressure on bottom line during Q2FY16. Over medium to long term, sector is likely to benefit from improvement in macro-economic environment leading to higher order inflows especially from private segment. Reduction in borrowings and improvement in payment cycle is also likely to be positive for the sector over medium to long term. Thus, we would prefer players having good balance sheet strength, ability to tap upcoming opportunities in the order inflows as well as attractive valuations. Following companies should be accumulated on declines - Road BOT projects - Likely beneficiary IRB Infrastructure and IL&FS Transportation networks Road EPC projects - Likely beneficiary NCC, Simplex Infrastructure, KNR Constructions Deleveraging via stake sale/securitisation/setting up of investment trust - Likely beneficiary NCC, ITNL, IRB Infrastructure Order inflow revival across sectors - Likely beneficiary NCC, Simplex Infrastructure Recommendation We continue to maintain our positive bias and BUY rating for - IRB infrastructure (CMP: Rs 248; TP: Rs 296), NCC Ltd (CMP: Rs 78; TP: Rs 101), Simplex Infra (CMP: Rs 331; TP: Rs 470) and KNR Constructions (CMP: Rs 550; TP: Rs 641) as we believe that these companies are ideally positioned to benefit from revival in road BOT and EPC projects. 9 Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
Bulk deals Trade details of bulk deals Date Scrip name Name of client Buy/ Quantity Avg. Sell of shares price (Rs) 20-Aug AUTOLITIND Rasmani Capital Markets Pvt. Ltd S 150,000 70.0 20-Aug AUTOLITIND Nisha Suresh Maheshwari B 150,000 70.0 20-Aug CAPMANFI Golden Medows Export Pvt. Ltd S 49,649 10.1 20-Aug CAPMANFI Gopal Pravinchandra Jagani B 51,000 10.1 20-Aug FRASER Dhiren Anantrai Modi S 31,000 29.5 20-Aug IVEE Subhash Shankarlal Shah S 1,000 21.0 20-Aug IVEE Shashi Rungta B 1,269 21.0 20-Aug JAGPRO Tejas Rasiklal Madhwani S 2,472,081 0.4 20-Aug JAGPRO Tejas Rasiklal Madhwani B 4,252,823 0.4 20-Aug KAUSAMBI Arjun Prabhuji Nagora S 400,000 8.0 20-Aug LOOKS Vishwamurte Trad Invest Pe Ltd B 69,200 49.0 20-Aug MRSS Anurag Vithlani B 30,000 43.5 20-Aug PINCON Gaurav Bhandari B 74,000 231.1 20-Aug SALZER Quebec Information Service I Ltd B 69,200 286.9 20-Aug SIDDHA Jai Kishan Daga S 50,004 0.7 20-Aug SIDDHA Renu Maheshwari B 50,004 0.7 20-Aug SKP Baris Real Estates Pvt. Ltd B 35,000 14.3 20-Aug SRGHFL Lalit Kumar S 90,000 47.5 20-Aug SYNCOMF Malvi And Co B 6,800,000 4.2 20-Aug UNIMOVR Anil Kumar Goel S 50,000 3.0 20-Aug YOGYA Elevate Trading Pvt. Ltd S 40,000 14.0 20-Aug YOGYA Anuj Garg B 40,000 14.0 Source: BSE Gainers & Losers Nifty Gainers & Losers Price (Rs) chg (%) Index points Volume (mn) Gainers Lupin Ltd 1,891 5.3 NA 3.3 ITC Ltd 329 3.9 NA 12.0 BPCL 902 1.7 NA 2.8 Losers Yes Bank 720 (7.0) NA 6.9 Cairn India 142 (6.3) NA 3.8 PNB 159 (5.4) NA 4.3 Source: Bloomberg Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
RATING SCALE Definitions of ratings BUY We expect the stock to deliver more than 12% returns over the next 9 months ACCUMULATE We expect the stock to deliver 5% - 12% returns over the next 9 months REDUCE We expect the stock to deliver 0% - 5% returns over the next 9 months SELL We expect the stock to deliver negative returns over the next 9 months NR Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. RS Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA Not Available or Not Applicable. The information is not available for display or is not applicable NM Not Meaningful. The information is not meaningful and is therefore excluded. NOTE Our target prices are with a 9-month perspective. Returns stated in the rating scale are our internal benchmark. Fundamental Research Team Dipen Shah IT dipen.shah@kotak.com +91 22 6621 6301 Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6621 6305 Teena Virmani Construction, Cement teena.virmani@kotak.com +91 22 6621 6302 Saday Sinha Banking, NBFC, Economy saday.sinha@kotak.com +91 22 6621 6312 Arun Agarwal Auto & Auto Ancillary arun.agarwal@kotak.com +91 22 6621 6143 Ruchir Khare Capital Goods, Engineering ruchir.khare@kotak.com +91 22 6621 6448 Ritwik Rai FMCG, Media ritwik.rai@kotak.com +91 22 6621 6310 Sumit Pokharna Oil and Gas sumit.pokharna@kotak.com +91 22 6621 6313 Amit Agarwal Logistics, Transportation agarwal.amit@kotak.com +91 22 6621 6222 Meeta Shetty, CFA Pharmaceuticals meeta.shetty@kotak.com +91 22 6621 6309 Jatin Damania Metals & Mining jatin.damania@kotak.com +91 22 6621 6137 Pankaj Kumar Midcap pankajr.kumar@kotak.com +91 22 6621 6321 Jayesh Kumar Economy kumar.jayesh@kotak.com +91 22 6652 9172 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6621 6311 Technical Research Team Shrikant Chouhan shrikant.chouhan@kotak.com +91 22 6621 6360 Amol Athawale amol.athawale@kotak.com +91 20 6620 3350 Derivatives Research Team Sahaj Agrawal sahaj.agrawal@kotak.com +91 79 6607 2231 Rahul Sharma sharma.rahul@kotak.com +91 22 6621 6198 Malay Gandhi malay.gandhi@kotak.com +91 22 6621 6350 Prashanth Lalu prashanth.lalu@kotak.com +91 22 6621 6110 Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6
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