>ASIA MACRO & STRATEGY OUTLOOK (CITI)

When it Rains, it Pours

■ The sharp rally in Asian assets is accompanied by both a rapid expansion of domestic liquidity and optimism about Asia prospects “relative” to the rest of the world. While relative growth optimism about the region is valid — strong fiscal, bank and household balance sheets are supportive — lingering risks need to be factored in. A sub-par recovery path in G2 on top of still significant inventory overhang would stall re-stocking momentum, and China’s investment-driven growth engine could worsen excess capacity.

■ Recent data confirm that economies are bottoming in the region. The growth rate bottomed in 4Q08, but even for countries still experiencing sharp contraction in 1Q09, like HK, SG and TW, we expect growth to turn sharply positive on a SAAR basis by 2Q09.

■ We remain fundamentally bullish on Asia FX over the medium to longer term. While we could see a near-term pull-back after a sustained run, we expect the longer-term appreciation story to remain intact on external flows, further anchored by CNY’s growing undervaluation as the dollar weakens. Our most aggressive FX appreciation expectations vs. spot in 12 months are in KRW, IDR and MYR.

■ Forces of “inflation” are currently winning over “deflation” – While we don’t foresee any monetary tightening in the near-term, we remain biased to pay rates (MY, TW) or steepeners (SG, TH) with the exception of IDR bonds, where we like being long on improving IDR sentiment, carry and BI accommodation.

■ Sovereign credit spreads are now close to or even tighter than pre-Lehman levels, so we see little value in going outright short protection on Asia CDS. We see more relative value opportunities with the Indonesia-Philippines CDS spread gap narrowing to 80-100bps and going long cash to play the negative basis.

To see full report: ASIA MACRO & STRATEGY OUTLOOK

>SESA GOA (ICICI SECURITIES)

Positives priced in...

Though we are confident on Sesa Goa’s ability to push incremental 1-2mnte sales annually in Chinese spot markets on: i) increasing market share at the cost of domestic private miners, ii) leveraging well established dealer and end-user contacts in Chinese markets and iii) given the increased Chinese dependence on imported ore after ~50% closure of domestic capacities, earnings surprise will be hard to come by as: i) margins get diluted since incremental ore is mined from high-cost Karnataka mines and ii) prices remain range-bound in the absence of demand recovery (with Chinese steel makers asking for a 45-50% contract price cut). The stock has run up ~100% in the past three months and trades at historically high FY10E P/E of 7.5x. We downgrade Sesa Goa to HOLD from Buy with revised target price of Rs152/share.

■ While volumes are secured… We do not expect significant downside risk to our FY10E and FY11E volume estimates of 17mnte and 18mnte respectively based on Sesa’s increased market share at the cost of small-scale domestic miners (which form 55-60% of India’s export share). Also, at the current iron ore price, 50% of Chinese iron ore capacities are loss making (operational costs at US$67-70/te). While increased spot exposure due to dealer inventory build-up might be
temporary, the management’s focus to increase contract sales (at ~20% with 3- 4mtpa in long-term contracts) via aggressive marketing push will at least help maintain Sesa’s current market share in Chinese exports.

■ …we expect no positive earnings surprise. We do not expect significant earnings surprise on: i) volumes as incremental volumes will flow in from low margin Karnataka mines (suffering from high transportation costs), lowering the earnings sensitivity to volumes and ii) prices as we expect spot market prices to remain mostly range-bound within ~US$60-66/te with little short-term upside, which translates into a blended realisation of US$44/te for Sesa. However, rupee appreciation (~7% post elections) is a key downside risk.

■ Downgrade to HOLD. The stock has run up ~100% in the past three months and is currently trading at historically high valuations – at FY10E P/E (cash adjusted) and EV/E of 7.5x and 4.7x respectively. Also, rupee appreciation is a key risk to revenues. While we are not lowering our volume estimates, we do not believe there is significant upside risk to our earnings. We maintain our benchmark valuations of 50% discount to global peers and value Sesa at FY10E EV/E of 4.2x. We downgrade Sesa to HOLD with target price of Rs152/share from Rs141/share.

To see full report: SESA GOA

>GLOBAL BANKS RANKING

Global Banks
1999-2009

"Changing of the Guard"

■ Global view since 1999 - 2009
■ Top 20 financial institutions by market capitalisation, $bn, 1999-2009


Source: Financial Times of London

To see report: GLOBAL BANKS RANKING

>INDIA MEDIA MONITOR (HEERNET VENTURES)

News stories
■ ZenithOptimedia forecasts advertising revenues for Indian media
■ Pudhari newspaper launches in Mumbai
■ Balaji announces annual financial result for the year 2008-2009
■ Aegis Group launched OOH media company Hyperspace.
■ Diamond Comics expands into children’s television
■ Zee Entertainment acquires a 40% stake in Zee Studio from Resource Software Ltd
■ Facebook launches Indian language interface
■ Ybrant acquires Latin American online advertising network, Dream Ad.

Data
■ Share price data
■ Radio audience analysis
■ Leading newspapers in English and Hindi language

To see full report: INDIA MEDIA MONITOR

>ORACLE FINANCIAL SERVICES SOFTWARE (SBICAP SECURITIES)

Oracle Financial Services Software (Oracle FSS) declared Q4FY09 numbers significantly surpassing our estimates backed primarily by strong license fee bookings. Profitability also showed a marked increase partly due to the depreciation of the Rupee v/s major currencies. In view of the run up in price we downgrade the stock to Outperformer.

■ Product business posts strong growth
The company’s product business segment registered revenues of Rs. 7949 mn for Q4FY09, growing by 6% QoQ and 25% YoY. Noteably, a larger part of the growth was contributed by higher license fees bookings (Rs.1490mn) which grew 59% QoQ, a rare feat in the current uncertainties. However continued INR depreciation v/s major currencies has also been a contributing factor to this growth due to the company’s no-hedge policy.

■ Higher margin maintenance income increasing
Oracle FSS earned maintenance fees of Rs. 3627 mn for FY09 a growth of 48% YoY. Share of maintenance revenues has increased to 20% from 18% in FY08. We expect this to further go up to 22%.

■ Jump in margins
Operating margins for FY09 increased by 7% to 26.5% backed by cost curtailment measures and benefits from INR depreciation. This was in spite of a Rs. 291mn impairment loss taken by the company in Q4FY09. Net margins also improved by 770bps YoY. The company also recorded a higher interest income of Rs. 771mn on higher free cash flows resulting in higher net margins of 26.8% compared to 17.5% reported last year.


To see full report: ORACLE FINANCIAL SERVICES SOFTWARE

>POWER SECTOR (ICICI DIRECT)

Regulators move in the right direction…

The Central Electricity Regulatory Commission (CERC) came out with the draft “Tariff Norms for Renewable Energy Projects” in May 2009. The tariff policy will regulate renewable energy projects, which are central sector generating stations or generating stations with composite scheme for sale of electricity to more than one state. The different renewable energy projects for which tariff is determined in the manner suggested under these tariff norms includes wind, small hydropower plants, biomass, bagasse, solar PV and municipal solid waste. The steps taken by the regulator were pointing in the right direction with regard to being clear on the tariffs for renewable energy projects. Several parties to the policy will submit their comments and suggestion on the policy. Developers, to whom the tariff norms are applicable, will find comfort in the fact that the preferential tariff is to be determined for a period of 13 years. The tariff will be determined on a competitive basis after the debt service obligations are covered.

Suzlon Energy, PTC India and Tata Power would be the immediate beneficiaries of the tariff norms. We believe the move is in the right direction. This will lead to increased investment in the renewable energy space.

Policy norms proposed under the New Tariff Norms
We have tried to focus on the impact of the norms on the wind energy sector in the event update.

■ Tariff design
Under the earlier norms, SERCs were prescribing a varying approach for tariff design. In the recommendation given by the CERC, under the new tariff norms, they have suggested a levelised tariff mechanism. Such a tariff mechanism will be applicable over the preferential tariff period of 13 years. Since the levellised tariff takes into account the extra cash flow requirement by the project for servicing the debt in the initial phases of the project it will help the developers to manage cash flows properly. At the same time it will not lead to a significant burden on utility.

■ Debt equity ratio
The debt equity ratio has to be considered as 70:30. If the equity actually deployed is more than 30% of the capital cost, equity in excess of 30% shall be considered as normative loan. If the deployed equity is less than 30% then actual equity will be considered for determination of tariff.

■ Capital cost
The capital cost for wind energy projects shall be Rs 5.15 crores per MW for FY09-10. It will be linked to an indexation formula for computing the capital cost for projects coming after FY10.

■ Tariff structure
The tariff on renewable energy consists of the following fixed components. It includes
1. Return on equity
2. Interest on loan capital
3. Depreciation
4. Interest on working capital
5. Operation and maintenance expense

• Return on equity: It is proposed that the preferential return at the rate of 16% will be allowed in case of renewable energy projects. The developer shall be entitled to avail the 80IA benefit under the Income Tax Act, which will result in the MAT rate being applicable for the initial 10 years. This will translate into a pretax return on equity of ~17% for the initial 10 years. Beyond 10 years, the normal corporate tax rate of 33.66%will be applicable. This will translate into a pre-tax rate of return on equity of ~23%.

• Interest on loan capital: A normative loan tenure of 12 years has been specified for claiming interest rate on a normative basis in tariff determination. The benchmark interest rate is prescribed as 100 basis points above the SBI PLR prevalent as on April 1 of the relevant period.

• Depreciation: After considering the normative repayment tenure of loan over the initial 12 years, the commission has prescribed the rate of depreciation. The estimated useful life of the asset is distributed into two parts. The first part will be 12 year over which the loan capital can be serviced by the developer by way of depreciation. Hence, it has been proposed as 6% for the initial 12 years.

• Interest on working capital: Interest on working capital will be calculated at the average SBI short-term PLR prevalent for the period (April 2008 – March 2009). For the calculation of working capital the commission has prescribed the following line items.

• Operation and maintenance expense of one month
• Receivable equivalent to 1.5 months of energy charges
• Maintenance spare @ 15% of operation and maintenance

• Operation and maintenance expense
The regulator has prescribed the operation and maintenance expense for FY2009-10 at Rs 6.5 lakh per MW for the first year. CERC has also prescribed an escalation factor of 5.72% per annum from FY11 onwards.


To see full report: POWER SECTOR

>METAL SECTOR (CENTRUM)

Meltdown over, time to solidify

■ Sector upgraded to Overweight: Our upgrade is premised on stabilizing metal prices after a sharp rally and improving business confidence. Aluminium prices have risen 16% from their Dec 2008 lows while copper and zinc have surged 59% and 43%, respectively. However, steel prices remain mostly unchanged at US$425/tonne. Prices of base metals have increased 30- 50% in Nov 2008 and are stabilizing at the current level. Besides, we believe that weakening dollar would further give support to the commodity prices going forward.

■ Return of business confidence the main trigger: We believe this price stabilization is the result of arrest in demand decline and decline in inventory as a result of production cuts, destocking and the return of buyers on increased business confidence.

■ Earnings unchanged, but valuations upgraded: We have not revised the earnings estimates but upgraded ratings of metal stocks within our coverage on improved business confidence over last two months, based on China’s rising Purchase Managers Index (PMI). A stable government in India and increased business confidence would lead to higher investment and consumption, which would ultimately lead to a re rating of the sector.

■ Valuing stocks on underlying commodity prices: We have valued stocks on the basis of underlying commodity prices, which we expect to remain stable going forward. We have considered the ratio of stock and underlying commodity prices to arrive at our target
price under an optimistic scenario.

■ Top Buy - Tata Steel; Top Sell – Nalco: We have upgraded Hindalco to Accumulate (Reduce) and JSW Steel to Accumulate (Reduce) as steel and base metals prices have stabilized and we do not expect further declines from current levels. We prefer Tata Steel and JSW Steel to SAIL, given the higher sensitivity of their earnings to steel prices. We retain Sell on Nalco with a
price target of Rs240.

To see full report: METAL SECTOR

>GUJARAT NRE COKE LIMITED (RELIANCE MONEY)

Price Target Achieved:
Gujarat NRE coke has appreciated by about 54% since our last recommendation dated Apr. 15, 2009 (quarterly pre-view) wherein we had recommended a Buy with a price target of Rs 41 looking at the expected mismatch in the domestic coke market. Gujarat NRE being the largest private sector player in the Low Ash Metallurgical Coke (LAMC) would be the direct beneficiary of all the positive developments in the coke and Steel industry.

Well poised to weather the storm ………
Equipped with upcoming green field capacity, Gujarat NRE coke is braving the slowdown in the Steel Industry- the principal consumer of coke. Gujarat NRE coke is adding up 0.25 mmT of capacity which is ready in times of falling Global Steel production and prices but relatively stable production and prices in India. Gujarat NRE Coke is the largest independent coke manufacturer that owns coking coal mines in Australia. With backward integration, Gujarat NRE is assured of the raw material it requires for making of Low Ash Metallurgical Coke (LAM Coke), thus controlling its costs.

Enhanced backward integration to favour the company:
Currently, Gujarat NRE Ltd. is sourcing about 30% of its raw material from its own Australian mines and rest from the spot market. With enhanced production from the Australian mines, the Guj. NRE Ltd. expects to meet its 100% requirement by FY2011. This will help the Indian operations to be secured on raw material front in scenario of volatile coking coal market though at the annual bench mark contract rates.

Gujarat NRE to benefit from demand- supply mismatch:
A wide gap of approx. 26 mmT of coke is existent in the Indian coke market, which will be benefiting Gujarat NRE coke. Coke being an essential input for Steel making through blast furnace route, the suspension of production cuts will keep the demand intact in the Indian market. With increased capacity of 0.25 mmT coming in June.’09, Gujarat NRE will enjoy the economies of scale vis-à-vis its competitors. It has also embarked on the expansion of its capacity by another 1 mmT expected to be commissioned by FY2011.

Valuation
At CMP of Rs 42, the stock quotes at an EV/EBIDTA of 2.5x for FY2011E earnings. The coke prices are expected to be stable with upward bias. LAM Coke being a critical input the Steel making process through blast furnace route and the supply being restricted due to limited availability of coking coal, the down side for the coke prices is limited. Secondly, the fortunes of coke- making industry are hinged upon that of Steel making industry- the latter lifting 90% of the production. With stability seen resuming in Steel making industry, the coke prices are expected to be robust, though it may not reach the highs scaled in CY2008. At CMP of around $395 per tonne we are of the belief that the coke is rightly priced. Hence, we advise our clients to book profits in the
stock and re-enter at lower levels although we have positive outlook on the sector and the company as a whole.

To see full report: GUJARAT NRE COKE

>CIPLA LIMITED (INDIABULLS)

Domestic revenue to remain robust; but exports may be under threat In Q4’09, Cipla posted a 21.8% yoy growth in sales to Rs. 13.7 bn, delivering in-line domestic growth and lower than - expected growth in exports. The Company’s EBITDA margin improved to 25.5%, up 748 bps yoy, gaining from lower material costs and favourable exchange rate. The net profit increased by 40.9% yoy to Rs. 2.5 bn and the net profit margin expanded by 251 bps yoy to 18.5%. We value Cipla based on DCF valuation, which gives a fair value of Rs. 246. Although, in our view, domestic revenues are likely to remain robust, exports may come under threat due to FDA deviations. Thus, we downgrade the stock to Hold.

Robust growth in domestic revenue: We project stable expansion of Cipla’s domestic revenues, which forms 45% of the Company’s gross sales, supported by strong domestic demand for generic drugs as customers are attracted towards cheaper alternatives for expensive innovator drugs. A robust demand offtake coupled with Cipla’s market leadership position lend support to our
upward revision of estimates for growth of domestic sales by 0.5% to 15% in FY10 and 14% in FY11.

However, exports at risk from FDA deviations and Cipla Medpro takeover: We expect Cipla’s exports to come under threat if the Company fails to rectify or comply with the nine deviations pointed by USFDA in its manufacturing processes at the Bangalore plant. Thus, non-compliance would put 27% of Cipla’s total sales at risk - Cipla draws 10% of its total sales from US and 17% from sales of anti-AIDS drugs in Africa under the President's Emergency Plan for AIDS Relief (PEPFAR) which requires USFDA approval. Furthermore, Cipla’s 20-year supply arrangement with Cipla MedPro in South Africa, which contributes 7% of total exports, may be impacted due to built-in marketing and sourcing conflicts if the latter is acquired by Adcock.

To see full report: CIPLA LIMITED

>BANKING & TEXTILE SECTOR (EDELWEISS)

This note highlights key observations from our discussions with industry participants (including banks, textile companies etc.) in Coimbatore (Tirupur, Karur and Erode) - targeted at assessing banks’ asset quality and demand outlook. Business of this export-dependent region has slowed down significantly on account of poor global demand and stiff competition. Availability of low-cost Textile Up-gradation Funds (TUF) and foreign currency derivatives (which led to further reduction in
effective cost of funds) have led to huge capacity expansion in the region, which is currently more than double of the demand. We understand that, roughly 60% of loans in the region are under restructuring. Official unemployment data is not available; however considering the capacity utilisation of less than 50% and practice of contract labour in the region, unemployment is expected to have gone up - impacting retail asset quality further. However, this is possibly the worst sample in India and, hence, we cannot generalize the phenomenon for the country. We are getting positive feelers from domestic consumption-based textile companies in other regions. Around ~25%
default rate has been observed in small business loans (below USD 100 K) funded by banks and NBFCs.

Key observations (Textiles sector)
■ In general, export demand is still weak; both pricing and order book is hurting.
■ April-May has been better than Q4FY09 (no orders) for some companies due to demand from Europe.
■ Domestic demand is still good and some companies are setting up local sales counters (domestic business, however, accounts for a small proportion of companies’ business).
■ Apart from general slowdown, international competition is hurting margins badly – for example, Bangladesh gets 10% extra realization for the same quality; Turkey gets higher realization due to better turnaround time and proximity to markets.
■ Companies want more duty drawbacks from the government to compete with Bangladesh; they are also demanding better infrastructure and labour laws to compete with Turkey.

Others
Engineering companies of Coimbatore are relatively better placed and are still seeing order flows. However, even these companies are supplying machinery to textile units under severe pressure; revenue declined 60-70% Y-o-Y (eg. Laxmi Machine Works).

Key observations (Banks/NBFCs)

Loan enquiries going down; more restructuring likely
■ Banks have been liberal in restructuring (more to happen in April-June 2009 than reported); there seems to be no other alternative with banks.
■ Banks, in general, have tightened credit and have reduced exposure wherever possible.
■ NBFCs were very active in small loans segment; they have, however, stopped business now due to high delinquencies.
■ Nearly 20-25% of small business loans (ticket size of INR 1.5-5.0 mn) are delinquent due to business slump.
■ Small business loan enquiries have come down significantly; housing loan enquiries have also declined.

Forex derivative issues are settling down
As 90% of receivables were foreign currency denominated, many companies (irrespective of size) entered into derivatives to lower their cost of funds further (mostly USD/CHF swaps). Banks have taken different approaches to solve the problem; some of them have converted MTM receivables into term loans and some have restructured derivative contracts through embedded contracts, while others are fighting legal battle and have reported NPLs. Most of these cases are closed, either through out-of–the-court/one-time settlements or by term loans.

Retail credit quality: To experience more stress
Retail credit quality is adversely impacted, as bulk of the small ticket loans were taken for business. Nearly ~25% default rate has been observed in small business loans (below USD 100K) funded by banks and NBFCs. Also, the number of shifts has clearly reduced; companies are not even working for two shifts now.

Official unemployment data is not available; however considering capacity utilisation of less than 50% and practice of contract labour in the region, unemployment is expected to have gone up - impacting retail asset quality further.

Though housing prices have not corrected in line with the deterioration in income levels of this region, housing demand has come to a standstill, which portends lower property prices, going forward.

To see full report: BANKING & TEXTILE SECTOR

>GOLD PRICE TO HOLD EVEN IF US APPROVES IMF GOLD SALE

London - The U.S. Congress could approve International Monetary Fund gold sales as early as next week, but that decision shouldn't cause a drop in gold prices, analysts said Friday.

"This issue appears now fully priced into the gold market and any announcement confirming sales should not move the market - apart from perhaps a knee-jerk reaction," said John Reade, an analyst at UBS.

Gold hit a three month high Friday due to U.S. dollar weakness across a number of currencies such as the euro and pound. Traders and analysts said the metal is heading towards $1,000 a troy ounce with speculative buying reentering the market and the dollar weakening.

At 1116 GMT spot gold was trading at $974.90/oz, up 1.7% from Thursday's close.

The approval to sell gold, along with an increase in U.S. funding to the IMF, is scheduled for a debate beginning Monday as part of the 2009 Supplemental.

An initial version of the Supplemental, which includes a wider number of issues such as defense spending, was passed by both the House of Representatives and the Senate earlier this month.

The version passed by the House didn't include the IMF provision but the Senate did approve the limited sale as long as it is done in a way that won't disrupt the market.

Discussions over a final draft between representatives from each house are due to begin next week with a vote possible by next Friday.

At the G20 summit in London in April, nation participants agreed the IMF could sell 403.3 metric tons of gold as part of efforts to leverage up to $6 billion in concessional loans for low-income countries over the next few years.

In order for the sale to proceed, 85% of IMF shareholders need to approve the proposal. Since the U.S. has 17% of the votes, it has a de facto veto over the proposal, which requires Congressional approval, but IMF Managing Director Dominique Strauss-Kahn told Dow Jones Newswires this week he expects Congress will soon approve the sale.

"We do not believe the sales, should they occur, will harm gold prices," said HSBC analyst James Steel.

Other member states must also approve the sales plan, which may take many months, HSBC's Steel said, adding the sales are likely to be included in a new Central Bank Gold Agreement, or CBGA. The current CBGA agreement expires in September and analysts expect a new one to be announced soon.

Under the CBGA, 17 European central banks agreed to limit gold sales to 500 tons a year. The pact is adhered to on an informal basis by the U.S., the Bank of International Settlements and the IMF.

Source: COMMODITIESCONTROL

>INDIA GOLD IMPORTS SEEN DN 50% IN MAY; HIGH PRICES

Mumbai - India's gold imports in May will fall by nearly 50% on year to around 15 metric tons, as high prices limit local demand, a top industry official said.

The rally in equity markets have also hit investment demand in gold, said Suresh Hundia, president of the Bombay Bullion Association.

Rising stock prices since early March have spooked investment interest in gold in the world's largest market for the yellow metal, he said in an interview.

Gold imports between January and March were only about 10 tons, but shot up in April to 29 tons because of a dip in prices and strong demand during the Akshaya Trithya festival, which Hindu's consider an auspicious time to buy gold.

But "import demand in May has not improved," Hundia said. Part of the reason was the recent strength in gold prices.

"Demand will pick up only if prices fall to around INR14,000/10 grams," Hundia said, adding that level is likely to be reached by May-end.

Currently, gold is trading around INR14,600/10 grams in the local market.

Stronger Rupee To Lower Local Prices

A stronger rupee, which has risen by over 5% against the dollar since April 1, is likely to bring down the local price of gold, Hundia said.

So far, the impact of a stronger local currency has been marginal as gold has risen in the global market in recent weeks.

"Spot gold prices have risen to $960/oz from about $860/oz, so a correction is likely," he said.

"I expect prices to drop to $912/oz to $932/oz by the end of this month. Once that happens, Indian prices will automatically fall to INR14,000/10 grams and local demand will start picking up," Hundia said.

He said he expects the rupee to strengthen further to about 46.00 to a dollar, in the coming weeks. At 0815 GMT, the rupee was trading around 47.65 to a dollar.

India imports more than 90% of the 700 tons to 800 tons of gold sold in the country annually.

Hundia said gold imports in 2009 are likely to be in line with last year's imports of 396 tons.

The chance of an increase in demand looks remote as investment buying in gold has disappeared with few willing to bet on the yellow metal at prices above INR12,000/10 grams.

However, banks in India, which had imported gold in April just ahead of the Akshaya Trithya festival, have been able to sell most of their stocks, Hundia said.

Scrap gold sales are also thin at the moment and volumes are likely to pickup only when prices rise to INR15,000/10 grams, Hundia said.

Source: COMMODITIESCONTROL

>JYOTI STRUCTURES LIMITED (ELARA CAPITAL)

Key Takeaways

■ In line with our expectations Net Sales for FY09 stood at Rs 1,717.1 crores (Elara estimate Rs 1717.3 crores) against Rs 1,370.4 crores in FY08 (up 25%).

■ The order book for the company as at end of FY09 stands at Rs 3,606 croes (2.1x FY09 sales) with new order intakes of Rs570 crores (2.1x FY09 sales) with new order intakes of Rs570 crores in Q4FY09 from PGCIL (Rs 247 crores) and Maharashtra State Electricity Distribution (Rs 323croes). Of the current order book 65% are for tranmission lines, Substations 15% and Rural Electrification 20%. The order book addition was subdued in the H2FY09 but we expect it to improve with order visibility of up to Rs 3,000 crores for the sector in next two months. JSL would also bid for orders worth Rs 1,300 - 1,500 crores internationally for Gulf Jyoti and JSL Africa.

To see full report: JYOTI STRUCTURES LIMITED

>INDIA EQUITY STRATEGY (CITI)

Owning India Inc.: Foreign Ownership – Ebb...Before the Swell?

■ Market EBB: Foreign ownership at a 6-year low of 15.03% — Foreign ownership in the Indian market has hit a 6-year low of 15.03% as at March 2009 (latest data), valuing foreign ownership at c.$86bn, but falling 56bps in the quarter ($1.3bn outflow). This is a long way from the September 2007 peak of 21% ownership, a value high of $260bn, and an annual inflow peak of $17bn (CY2007).

■ Market SWELL: There has been a foreign flood — We estimate inflows from April-to date of $4.1bn have raised foreign ownership levels to c.15.6% of India’s Top500 companies, and that this portfolio value is now c.$130bn. This is amongst the most concentrated foreign inflows (Sept-Oct 2007 ($9.1bn) was the biggest, but there were outflows thereafter). This flood of funds is almost all foreign with domestic MFs negative in current quarter. Domestic Insurance (over a third of foreign money now) should be positive and stable (but no reliable intra-quarter data).

■ Underweight India/Equities: Domestic getting more defensive than foreigners — Institutional investors started the April quarter relatively defensively: a) FII’s underweight MSCI 46bps, b) Domestics with estimated 14-15% cash weightage, and c) Overall portfolio bias more defensive than at January 2009. Within portfolios, Foreigners are positioning less defensively than domestics in Jan-Mar 2009 quarter.

■ Sector Positioning — Financials and Industrials are key Overweights with foreigners and domestics. Energy (Reliance effect) and IT are consensus Underweights. Domestics are significantly Overweight Consumer Staples and foreigners are Overweight Telecom (Bharti effect). Relatively few changes in sector positioning in Jan-Mar 2009, although significant outperformance in beta sectors/stocks in Apr- May 2009 suggests the current quarter should see significant portfolio o re-casts.

To see full report: INDIA EQUITY STRATEGY

>REAL ESTATE (ICICI SECURITIES)

GUARDED OPTIMISM

Based on our interaction with MD & CEO of ICICI Home Finance Company, Mr Rahul Mallick, we believe the residential segment will script a recovery in ’10. However, office and retail segments are fraught with oversupply, and might only improve after two years. Developers have been able to wade through short-term liquidity concerns. Prices have corrected 5-20%, dipping to December ’07 levels and could consolidate hereon although with a marginal drop. Delinquencies in corporate and retail lending are low and home loan rates can drop 75-50bps further. Overall, industry dynamics have improved, but advice guarded optimism.

■ Residential transaction volumes better. As per our interaction, there is significant demand uptick in new mid-income housing projects. Developers are restructuring new projects to better align with ground realities. In case of revival, residential segment would be the first to improve. Latent demand at the right price point is strong, with most of the demand from end users. Developers who have cut prices to match the market reported best sales in the past three months.

■ Existing inventory to cause pain since demand is sluggish given that repricing is difficult in residential projects with more units sold, due to cancellation risk. Developers will have to face agony in the next 2-4 quarters to absorb existing inventory, wherein net cash inflow is lower; this could lead to construction delay in existing inventory.

■ Developers’ ability to hold inventory is improving as per Mr Mallick – Small- and mid-sized players have liquidity; only large-sized players have overextended themselves on credit. Developers who had bought property more than 24 months ago have benefitted, but those who had bought land in the past two years are in trouble. Most developers have reduced prices only in Q4FY09 to revive sales momentum and are mulling asset liquidation and other measures to raise capital.

■ Do not expect significant defaults by developers. Developers are under stress, but only short-term liquidity is a concern with long-term cashflow manageable. Developer financing is unaffected, with restructuring limited. Many are raising capital via assets sales, tapping vulture investors, private equity investors, high net worth individuals (HNIs) and through secondary markets.

■ Pan-India price correction within 5-20%. Q4FY09 was the first quarter when prices declined 5-20% across India and ~40% from the peak in some places. Prices have reached December ’07 levels and could consolidate hereon although with a marginal drop. Mr Mallick expects prices to come down to ’07 levels in most cities and even reduce to ’05 levels in some cases.

■ Home finance companies (HFCs) are tightening lending standards on income coverage and cashflow adequacy. Expect home financing to grow +10% in FY10E. At present, loan-to-value (LTV) is within 70-80% and it might inch up if prices correct. Home loan rates might reduce 75-50bps further. Refinancing has picked pace. Defaults on home loans have been lower then expected.

■ Commercial segment to remain insipid. As per Mr Mallick, due to oversupply, the commercial segment may remain in the downturn for the next 2-3 years. Bangalore and Hyderabad would feel the maximum pain. Mr Mallick stated that vacancy rates are now at +10% from 5% and could touch a high of 20%.

To see full report: REAL ESTATE

>PAREKH ALUMINEX LIMITED (ANAND RATHI)

Investment Rationale
Company is world class manufacturer of Aluminum foil products, which are used in hygienic food products packaging. Its facilities are fully automatic and meet health / safety standards of European nations. Company is expanding capacity by three times to cater to rising demand from domestic and global markets. The expansion of Rs 240 Crs is underway and for which funding was raised earlier in 2007-08; wherein company raised about Rs 125 Crs by equity dilution [in the range of Rs 225 to 260 around Jan’08], by placing equity under QIP route. Even equity warrants were issued @ 115, which are being converted now. So whereas most of the equity dilution already happened, the fruits of this mega expansion [which will triple the capacity] will be visible from 2010-11. The company, which is having very healthy B/Sheet, attractive earnings/earnings growth; will be able to grow even faster in coming years.

Company is likely to become one of the biggest Aluminum foil producer in the world, and will be able to achieve turnover close to 1000 crs, once this expansion is completed; is available to you at Mkt Cap of Just around Rs 100 Crs. If we value such companies very conservatively at 0.5 times of sales, then I think this stock should be 4-5 times from current levels in next 3 years. Even at ‘09 expected sales of over Rs 400 Crs, the business value of company should double at least, if not more, from current levels.

Risks
Any delay in expansion or quality issues, may change the equation.

Recommendation
Company is likely to report [for March.’09] EPS of Rs 25-28 on diluted equity, which can go up further to Rs 30 in current year. But real growth due to mega expansion will come there after. That’s why we have covered this in Multi-bagger category for long term investors. But in one year also we expect it to give 100% returns.

To see full report: PAREKH ALUMINEX

>RELIANCE INFRASTRUCTURE LIMITED (MORGAN STANLEY)

Additional Capital Infusion Proposed

Quick Comment: The company announced plans to raise Rs43 bn through a fresh equity infusion. The offering is priced at Rs1,000/share (effective price of Rs1,183/share) and subject to shareholders approval.

Background: In January ‘08, the company allotted 43 mn warrants to promoters, which were to be converted at Rs1,822/share by July 19, 2009. The company consequently collected Rs7,835 mn as margin money through this issuance. At a board meeting held over the weekend, the company cancelled the 43 mn equity warrants that were issued then. Subsequently, the board proposed an equity infusion of 42.9 mn shares.

Implications

• The effective cost of purchase comes to Rs1,183/share (Rs1,000/share + 7,835 mn that the company had paid as margin in early 2008); this is 5.5% above the current market price.
  

• If the entire issuance is subscribed to by the promoter group, the promoter holding would increase from 37.6% at end-March 2009 to 47.5% post the issuance.
  

• At end-March 2009, consolidated book value was Rs169 bn, which would increase to Rs212 bn (Rs787/share). This implies a P/B of 1.4x at current levels.
  

Investment thesis: The equity issuance plans should be viewed positively, in our view, as it will allow the company to bid for additional infrastructure and power projects. In addition, it will further bolster its balance sheet. We maintain our Overweight rating on the stock.

To see full report: RELIANCE INFRASTRUCTURE LIMITED

>INDIA MEDIA MONITOR (HEERNET VENTURES)

Selected news

• GroupM reduces 2009 adspend forecasts
• Latest Hindi Channel Audience Data (week 17)
• Commercial exploitation of foreign DVDs is illegal
• Raj Express launched 2 tabloid newspapers
• Reliance Big TV plans to sell 49% stake
• BSNL launches IPTV services in Chennai
• Walt Disney forms new distribution partnership
• Number portability service to be launched by September 2009

Data

• Share price data
• Deal sheet for 3 months
• Internet subscriber market
• Radio audience analysis

To see full report: INDIA MEDIA MONITOR

>SUGAR SECTOR (HSBC)

Price rise likely despite the sugar futures trading ban

• Ban on sugar futures trading unlikely to impact gradual rise in sugar price

• Levy price revision and power tariff increase for companies based in Uttar Pradesh are potential positive triggers

• Reiterate OW(V) ratings on Shree Renuka (TP increased from INR125 to INR150) and Balrampur Chini (TP increased from INR90 to INR105), and UW (V) on Bajaj Hindusthan (TP unchanged at INR65)

■ Ban on sugar futures trading until December 2009: The Forward Markets Commission has suspended futures trading in sugar until December 2009 as a precautionary measure, considering the demand-supply scenario and inflationary concerns. We believe the government has put forward this measure to avoid speculative spikes in sugar prices, but in our view the price is likely to rise gradually despite the ban as 1) there is a demand supply mismatch: 2) raw/white sugar imports are unviable at the current sugar price level, 3) sugar inventory levels are likely to remain tight at the end of the sugar crushing season (October-September).

■ Potential triggers: The government may revise the statutory minimum price (SMP) for sugar
cane from INR82/quintal to INR107/quintal (Business Standard, 21 May 2009). The levy price, or the price at which sugar is sold to the government, which is 10% of production, is based on SMP prices. Such an upward revision in cane SMP should increase levy prices by INR2-3/kg from the current INR13.8/kg. We estimate this could lead to an increase of 3-38% in earnings for the sugar stocks under our coverage in FY10. Also, managements of companies based in the state of Uttar Pradesh (UP), Balrampur Chini and Bajaj Hindusthan, have said that they expect tariffs for their power co-generation division to rise from INR3/unit to INR4/unit. If this happens, it could be another potential positive trigger for these stocks, and we estimate that such a revision would increase earnings for these companies by 13-22% in FY10

■ Maintain Overweight (V) on Shree Renuka (TP INR150) and Balrampur Chini (TP INR105): We value sugar stocks using PB- and EV/EBITDA-based valuation methodologies. We have increased target PB multiples for Renuka from 3x to 4x on expectation of higher refining margin and Balrampur from 1.5x to 2x based on above mentioned potential triggers.


To see full report: SUGAR SECTOR

>JAIPRAKASH ASSOCIATES LIMITED (MORGAN STANLEY)

Updating Price Target; Remains Top Reward Play

■ Investment conclusion: Over the next two to three years, we expect Jaiprakash to emerge as a top-5 player in India in each of its main businesses: cement, construction, power, and real estate. We believe the company has sustainable advantages in each of its businesses, and it remains the top pick in our coverage.

■ What's new: We update our price target to account for the uptick in valuations of the company’s peers in the cement and construction businesses. Our price target moves up 33% to Rs221, implying an upside potential of 27%. As one of the biggest beneficiaries of the improvement in the macro scenario, the run-up in Jaiprakash stock over the last few days, on the back of the positive surprise in the central elections, is more than justified, in our opinion. We raise our F2010e and F2011e EPS by 11% and 10% respectively, to account for the upside surprise in F2009 earnings, as well as an uptick in pricing assumptions for the cement sector.

■ Where we differ: We believe the market continues to lay a disproportionate emphasis on potential problems in funding. The courts have approved the intra-group mergers announced in March 2009, paving the way for the treasury stock (14.5% of equity) to become available in the next four weeks, giving the company significant flexibility to raise funds. In addition, while we
conservatively price the stock at or below peer valuations despite having a superior model in every business segment, we believe the market is allocating a large discount to peer multiples, which is unjustified, in our view.

To see full report: JAIPRAKASH ASSOCIATES LIMITED

>BRIGADE ENTERPRISES (CENTRUM)

Liquidity intact, maintain Buy

■ Lacklustre results: Q4 revenues plunged 68% YoY to Rs426mn and PAT declined 27% to Rs156mn owing to higher operating expenses. Although the company reported loss before tax of Rs89mn, exceptional items representing prior period items and excess tax provision resulted in adjusted PAT of Rs156mn.

■ Core business still under strain: Low off-take in new apartment sales of its Gateway and Metropolis projects targeted at premium segment and weak leasing activity of commercial and retail space in Bangalore continues to be a cause for concern.

■ PAT estimates revised: We have retained our revenue and EBITDA estimates, but lowered our PAT estimates by 4.5% for FY10 and 5.5% for FY11 owing to higher tax rate and lower
other income.

■ Affordable housing and hotels hold long-term potential: Brigade intends to launch affordable housing projects in Bangalore and Mysore with flats priced up to Rs2mn and plans to launch ~8-10mn sq ft of projects in FY10. Further, its hotel at Gateway is also expected to become operational in CY10.

■ Maintain Buy with target price of Rs107: Our FY10E NAV has increased to Rs119 from Rs96 earlier due to balance sheet and project level adjustments. We have included NAV from ongoing projects with remaining land bank taken at book value. We are providing 10% discount to NAV compared to 50% earlier to reflect easing sector liquidity concerns but remain cautious on the commercial and retail space. We maintain our Buy rating with target price of Rs107.

To see full report: BRIGADE ENTERPRISES

>BHEL (ALCHEMY)

Valuations leave little scope for out-performance

Audited results marginally better than provisional results
The order inflow of Rs156bn in 4QFY09 (+3% yoy) drove up the order book to Rs1,197bn (+40% yoy). While net sales rose 46% yoy in 4QFY09 to Rs105.4bn, EBITDA margin declined by 284bps yoy in 4QFY09. For FY09, net sales increased by 35% yoy to Rs262.3bn and EBITDA margin declined by 289bps yoy. This was due to wage provisioning of Rs17.3bn for the year (Rs 8.9bn in 4QFY09 alone) and higher raw material costs. Raw material cost as percentage of value of production increased by 940bps in 4QFY09 and 562bps in FY09. However, audited results were marginally better than the provisional results declared in April 2009.

Changing composition of power equipment demand profile
BHEL is expecting Rs500bn of orders in FY10E (Rs597bn in FY09). This will include bulk ordering from NTPC-DVC and other 12th plan orders. However, BHEL has a lower share of private sector orders in the current backlog. BHEL has only 12% share for plants expected to be commissioned in the 11th plan period. The private sector orders form 28% of 11th plan orders. Increasing the share of private sector orders and not losing orders to Chinese players (either due to lack of capacity resulting in extended delivery timelines or price differences), would be key going forward for BHEL. The orders from private sector are expected to have higher share in 12th plan orders.

In any case, competition will be tougher as BHEL will have to face not only Chinese but also domestic players who are currently setting up capacities. As such realizations and margins are expected to moderate in the longer term.

Valuations leave little scope for out-performance
We do not foresee significant re-rating from current levels as BHEL is already trading at 50% premium to Sensex. BHEL is currently trading at a P/E of 24.8x FY10E and 19.9x FY11E. We expect an EPS CAGR of 28% over FY09-FY11E and RoAE in the range of 29-30%.

We assign 15% discount to the average multiple during FY03-09 to factor in the possibility of
execution delays and higher competition. This is due to the changing composition of power equipment demand in India. Accordingly, our target price of Rs1700 per share is arrived at by taking the average of 16x FY11E PER and 10x FY11E EV/EBITDA – implying 18% potential downside. Maintain Reduce.

To see full report: BHEL

>CEMENT SECTOR (ANAGRAM)

COMPANY DESCRIPTION
India Cements is the third largest cement group in India with a capacity of 10.1mmt spread across seven manufacturing plants in the states of Andhra Pradesh and Tamil Nadu. Its cements are sold in south India under the Sanskar, Coromandel and Rassi brands, whcih have strong brand equity in that market.

The Company has revived its Shipping business with the purchase of two ships(Dry bulk carriers) with a total capapcity of 79843 DWT which will be primarily utilized for captive movement of coal and other rae materials also to partake in the upswing in the shipping industry.


INDUSTRY SCENARIO

DEMAND-SUPPLY SCENARIO
The overall outlook for the back of robust demand from housing construction, phase-2 of NHDP and other infrastructure development projects. Domestic demand for the cement has been increasing at a fast pace in India.

The cement sector is expected to witness growth in line with economic grwoth because of strong co-relation with GDP.

The industry had installed capacity of 212mn tonnes in last financial year, while consumption was 176mn tonnes. Cement companies have added nearly 7mn tonnes capacity in April, taking the total installed level to 219mn tonnes. According to the Cement Manufactrurers' Association, the UltraTech/Grasim combine led the way with 4.5mn tonnes, followed by Damia Cements with 2mn tonnes of cement capacity is scheduled to come on stream by the end of FY10.

To see full report: CEMENT SECTOR

>ESSAR OIL LIMITED (ANAGRAM)

MAJOR DEVELOPMENTS

■ Firm arrangements with HPCL, BPCL & IOC for product off-take of 7 million tonnes and infrastructure support from these companies provide a strong foothold in the domestic market.

■ Retail outlet reactivation started from Q#FY09. Retail sales for the quarter January to March 2009 stood at 264,421 KL, a 253% jump over the Q3 sales of 74998 KL.

Outlook and Valuation

Going ahead, the performance of the stock will be greatly leveraged to progress on refinery expansion, refining margins & news flow on E&P business. Based on the assumption of crude oil prices at the levels of USD 50/ barrel for FY10E and USD 55/ barrel in FY11E from the current level, the stock is trading at a forward P/E of 19.36xFY10E and an EPS of Rs.9.2xFY10E.Based on the above mentioned assumptions the target price is Rs.167 (18 P/E + E&P).

To see full report: ESSAR OIL

>NTPC (INDIA INFOLINE)

HIGHLIGHTS

■ Generation at 57BU, higher by 6% yoy while average realizations were higher by only 0.7% yoy

■ Gas plants registered PAF of 84% due to lack of availability of gas and forced outages.

■ Revenues higher by 14% yoy to Rs 114bn against Rs 100bn in the corresponding period last year, due to higher fuel cost.

■ Adjusted PAT de-grows 32% yoy to Rs17bn against Rs25bn last year

■ Commissioned 1GW during the year and plan to commission 3.3GW during Fy10

■ Most expensive utility, trades at 2.8x FY10E book, re-iterate SELL with an increased target price of Rs181/share, representing 15% downside.

To see full report: NTPC

>EM Equity Flows (MORGAN STANLEY)

EM Equity Flows: Inflows of $2.5bn

• Dedicated EM equity funds had aggregate inflows of $2.5bn for the week ended 05/20/09, compared to inflows of $3.6bn in the prior period. The pace of flows into dedicated EM funds suggests a swift move towards optimism after a period of very negative sentiment during 2H08 – 1Q09. We have now had 10 consecutive weeks of net inflows out of the last 10 weeks. We are therefore above the 8-of-10 weeks net inflow mark that has been associated with pullbacks
in the past. The two most recent episodes when flow momentum reached these levels were June-08 and October-07, providing good sell signals

• The EM benchmark is 66% above its 27th October low ad on a relative basis only 3% away from establishing a new high vs MSCI World. The resumed outperformance of EM to DM is supportive of such flows and validates our belief in the resilience of the secular bull market in EM equities. Although there remains upside to our MSCI EM year-end price target of 810, we continue to think that the risk-reward near term no longer warrants a fully invested position.
In our 22nd March report we advised clients to take some profits and reduced our equities overweight recommendation from maximum 10% position to 6%, raising some cash

• Technically we are 2.0 SDs overbought (vs. 3 month average) versus -3.0 SDs oversold last October. Prices have risen very rapidly and valuations are also not as attractive vs. just a few months ago. MSCI EM trailing P/B is currently 1.9x, up from 1.1x at the October market trough. MSCI EM is currently valued at 12.6x 2010E P/E

• This week we updated our country quants model recommendations. We are running lower risk positions in our country quant model as valuations converged significantly in the last month. Overweights are China, Taiwan, India, Malaysia and Israel. Underweights are Mexico, Indonesia, Thailand, Argentina and Philippines

• There is only 8% upside to our 810 MSCI EM price target through December 2009

To see full report: EM EQUITY FLOWS

>FUND MANAGER SURVEY GLOBAL (MERRILL LYNCH)

No “Sell in May”

■ The bulls are back
Investors are now positioned for global economic recovery according to the May FMS. The unrelenting gloom of a mere three months ago has been replaced by fairly typical early-cyclical sentiment, with the only hint of potential irrational-exuberance in Emerging Markets. Real economic data now needs to satisfy consensus expectations but the May FMS does not say “Sell in May”.

■ Surging optimism on macro outlook and corporate profits
Optimism on global economic growth surged with a net 57% of panellists expecting a stronger economy- the highest reading since early-2004. And for the first time since March 2005, investors expect corporate profits to improve in the next 12 months, with over a quarter of respondents forecasting EPS growth to exceed 10%.

■ All regions seeing optimism (even Europe. . .)
Global growth optimism remains founded on China with two-thirds of investors expecting strength. However, even the final recessionary holdout has turned pro-growth with a net 35% of fund managers expecting Europe’s economy to improve, compared to a negative 26% last month.

■ Rising risk appetite but asset allocators hedge bets
The BAS-ML Risk & Liquidity composite jumped to the highest level since Nov 2007, with investors cutting cash balances to 4.3% (from 4.9% last month and a recent peak of 5.5%). However, asset allocators are still hedging their bets: they remain U/W equities (-6%) and have only marginally lowered cash O/W (+21% from +24%). A brief 9-month sojourn into bonds ended with allocators cutting to a net 3% U/W. They stay U/W Europe & Japan, but a record net 40% of investors see GEM as the region to O/W for the next 12 mths.

■ Defensives hacked back
Investors’ top 3 global sectors are now technology, energy and materials as May saw a rout in defensive sectors: pharma fell to -2% from +21%, staples -1% from +9%, and utilities -19% from -15% (now the most U/W global sector). The stubborn bank U/W was further reduced to its lowest level since June 2007.

■ What happens next?
Markets in H1 were all about extreme positioning & policy. With positioning now more balanced, markets in H2 will be driven by the economy & earnings. The FMS says the market grinds higher via asset allocation moves and pressure from the ongoing U/W in global banks. The grind lower risks revolve around weaker Chinese/EM data. Contrarian trades to mull over are long Europe/Japan, short EM/China; long pharma/utilities, short technology/materials.

To see full report: FUND MANAGER SURVEY

>GRASIM INDUSTRIES LIMITED (FIRST GLOBAL)

Reasons for Upgrade

• Grasim’s Cement division led the show in Q4 FY09 by delivering an impressive performance, while the company’s VSF division showed some signs of a recovery, with its volumes and margin increasing sequentially

• Going forward, we expect an increase in Grasim’s cement volumes on account of the commencement of its new units and higher demand from the infrastructure space.

• We also expect the VSF division’s realisation to improve and margins to recover, due to a reduction in pulp costs, product mix shift, and various cost reduction measures to be implemented by the company

• Moreover, the sale of its loss making Sponge Iron Division will help the company focus on its core business

The Story...

Grasim Industries Ltd.’s (GRASIM.IN) (GRAS.BO) Cement division led the show in Q4 FY09 by delivering an impressive performance, while the company’s VSF division showed some signs of a turnaround, with its volumes and margin increasing sequentially. Net sales for Q4 FY09 came in at Rs.29.3 bn, up 6% Y-o-Y, while the EBIDTA margin remained flat Y-o-Y at 24.7%, due to higher volumes and increase in productivity of the Cement division. Volumes and realisation of the Cement division were up 13% Y-o-Y and 6% Y-o-Y respectively, while volumes and margin of the VSF division increased by 22% sequentially and 16% sequentially. However, the company’s Proforma Net Profit for the quarter declined 13%, on account of an increase of 33% Y-o-Y and 42% Y-o-Y in depreciation and interest charges respectively, due to the commissioning of several new projects, the benefits of which will be fully reflected in the current year. Despite the impact of the economic slowdown, Grasim recorded a growth of 33% in its cash profit for the quarter, on account of a decline of 66% in the tax rate.

Going forward, we expect an increase in Grasim’s cement volumes on account of the commencement of its new production units and higher demand from the infrastructure space. We also expect the VSF division’s realisation to improve and margins to recover, due to a reduction in pulp costs, product mix shift, and various cost reduction measures to be implemented by the company. Moreover, the sale of its loss making Sponge Iron Division will help the company focus on its core business. We now upgrade Grasim from ‘Moderate Underperform’ to ‘Market Perform’.

Financial Highlights

Revenue growth
Grasim’s net revenues increased by 6% Y-o-Y to Rs.29.3 bn, due to an impressive growth of 21% in revenues of the Cement division. In Q4 FY09, 70% of the company’s revenues came from the Cement division, 25% from the VSF & Chemical division, 5% from the Sponge Iron division, and less than1% from the Textile division.

Going forward, we expect an increase in Grasim’s cement volumes on account of higher demand
from the infrastructure space, as well as rural regions. Moreover, the VSF division is expected to
witness an improvement in its realization in the coming months.

Cost Analysis
■ Raw material expenses & purchased goods increased by 6.9% Y-o-Y to Rs.8.2 bn, while, as a
percentage of sales, it was up merely 21 bps Y-o-Y to 28.1% in Q4 FY09. Going forward, the softening in raw material prices will have a positive impact on the company’s operating costs.

■ Power & fuel expenses rose 10.6% Y-o-Y to Rs.4.8 bn and, as a percentage of sales, was up
68 bps Y-o-Y. The benefits of the decline in imported coal prices were reflected in the company’s performance in Q4 FY09. Imported coal prices are expected to decline further in FY10E.

■ Freight & handling costs were up 15.7% Y-o-Y to Rs.3.4 bn in Q4 FY09 and, as a percentage
of sales, increased by 96 basis points Y-o-Y. However, the commencement of Grasim’s new
cement capacities across various regions will lead to a decline in the company’s Freight &
Handling costs.

■ Personnel expenses declined 10% Y-o-Y to Rs.1.4 bn in Q4 FY09, thereby easing the
pressure on the company’s operating margin.

Margin Analysis
■ The EBIDTA margin remained flat Y-o-Y, but improved by 478 basis points sequentially in Q4 FY09 to 24.7%, on account of a decline of 367 basis points and 128 basis points in Power & Fuel and Personnel expenses, as a percentage of sales, respectively.

■ The EBIT margin improved dipped 89 bps Y-o-Y to 20.4%, due to a sharp increase in depreciation charges, as the company commissioned new projects in the year.

■ The Net Profit Margin (NPM) declined 184 bps Y-o-Y to 13.1% in Q4 FY09, due to a rise of 42% Y-o-Y in interest cost, as a result of higher debt level.

To see full report: GRASIM INDUSTRIES

>MARKET STRATEGY (CLSA)

Singapore Access Forum

We hosted nine Indian mid-cap companies at the CLSA Corporate Access Forum, Singapore over May 20-23, 2009. In general, the companies said that they are seeing signs of an improvement in demand environment and with the liquidity scenario having improved, most corporates are pushing ahead with ongoing projects and reviving expansion plans. Companies believe that in the
near-term, the economic environment will remain challenging and will continue to focus on various cost saving initiatives that have been undertaken. Our top picks in the midcap space are Educomp, Godrej Consumer, Exide and Shree Cement.

Corporates witnessing sequential improvement
Most companies that presented in our forum were of the view that there are visible signs of revival in the domestic demand.

The outcome of election and a likely stability in government/economy has raised hopes of a much better FY10 than what it was before the elections.

The companies were appreciative of government efforts during last year towards keeping the economy on a growth path despite a global slowdown through various initiatives viz. farm waiver scheme, support prices, pre-election spending, pay revisions etc.

While the companies are looking forward to similar initiatives by government in the coming months, deteriorating fiscal balance did come out as a concern in our interactions with these corporates.

Mixed view on near-term outlook; different growth strategies
The companies are generally cautious on near term outlook and have stressed upon the various self-help cost saving initiatives that have been undertaken. Godrej Consumer, JSW Steel expect international businesses to remain under pressure and expect a better performance from the domestic operations. Interestingly, Mindtree is already seeing some traction in financial services in Europe and manufacturing and Hi-tech in US.

Tulip Telecom and Financial Technologies viewed regulatory action as a key risks while Godrej Consumer viewed rising commodity prices (crude, palm etc from the bottom) a potential threat in 2HFY10.

JSW Steel, which benefits from rising commodity prices, stated that the company is already witnessing an uptick in pricing and believes that the worst is over in commodity (steel) cycle.

Expansions to continue as per schedule; easing liquidity helping
The government action has improved the liquidity situation and the availability of funds to the corporate sector.

JSW Steel is going ahead with the existing expansion plans while Unitech, Educomp are working on new projects - thanks to the improvement in availability of funds.

Companies upbeat on long term India potential (Godrej Consumer, Aditya Birla Nuvo, JSW Steel) are working on to scale up distribution channel in India.

Ranbaxy and Financial Technologies are planning to expand footprints in newer geographies outside India.

Top midcap picks: GCPL, Educomp, Exide, Shree Cement
■ The positive election outcome has helped boost investor sentiment, but the sharp rally in the market has made investors hesitant to aggressively add their exposure to Indian equities, particularly the high beta names that have run the hardest.

■ An early revival in confidence will augur well for a 2H FY10 recovery, but this appears priced in to a large extent; the Sensex is near our 12m target of 14,000. Clearer signals on fiscal consolidation and revival in private investment will be prerequisites for the next leg-up for the market.

■ In this backdrop, we would recommend a high quality filter for investment into midcap stocks; we are also biased towards domestic plays with high earnings visibility. Our picks from forum are Godrej Consumer, Educomp and also prefer Exide and Shree Cement in the mid cap space.

To see full report: MARKET STRATEGY

>HOUSING DEVELOPMENT & iNFRASTRUCTURE LIMITED (ICICI SECURITIES)

CONCERNS PACIFIED

Housing Development & Infrastructure’s (HDIL) Q4FY09 results were dismal, with revenues and PAT dipping 63% YoY and 91% YoY to Rs3.6bn and Rs619mn respectively. PAT was in line with our estimates, but EBITDA margin dropped sharply to 27%, the lowest in the past eight quarters. During March-April ’09, HDIL launched 2mnsqft of residential projects (75% booked). The company is mulling 3-4mnsqft residential launches in Mumbai in the next three months. The Mumbai slum rehabilitation scheme (SRS) is progressing well. The Board has approved raising up to US$600mn and allocating warrants to the promoters. We believe cashflow infusion would reduce the strain on balance sheet, bringing down the gross D/E from 0.9x to <0.5x> airport SRS and provide capital for new launches. We upgrade HDIL to BUY from Hold with Rs355/share target price (on 20% discount to one-year forward NAV of Rs443/share). HDIL is trading at FY10E & FY11E P/E of 15x & 12x respectively with FY10E P/BV of 1.7x.

■ Revenue & margin contraction. HDIL’s Q4FY09 revenues dipped 63% YoY (up 14% QoQ) to Rs3.6bn – Rs1.3bn was booked from sale of 1mnsqft TDRs and Rs1bn from FSI sale in Malad slum rehabilitation project; income from booking of Grande and land sales contributed the rest. EBITDA margin dropped to 27% versus 45% in FY09 due to lower TDR price and higher operating expenses on a reducing topline.

■ Strong demand in recent project launches. HDIL launched 2mnsqft of residential projects during March-April ’09 at ~30-20% discount to the market price, generating >75% bookings. The company is mulling launches of 3-4mnsqft residential projects in Mumbai in the next three months. Volumes have picked up in the TDR market, with HDIL selling 1mnsqft in Q4FY09 versus 0.3mnsqft in Q3FY09. As per the management, TDR prices have picked to Rs1,400-1,500/sqft (35% rise from the bottom). However, we have factored in Rs1,250/sqft TDR price for FY10E.

■ Capital infusion to help ease debt burden. HDIL is planning to raise capital through equity dilution and warrants. As per the management, the capital raised will primarily help reduce debt; future growth would be funded only via internal accruals. This will be positive for HDIL and reduction of gross D/E from 0.9x to <0.5x> balance sheet strain and bring down the rising interest burden. It will also reduce funding concerns in Mumbai airport SRS, a key long-term value driver. HDIL intends to focus on projects which have immediate cash inflow visibility; long-duration projects such as special economic zones are on hold till conditions improve.

To see full report: HDIL

>DIVIDEND YIELD STOCKS (ICICI DIRECT)

High-dividend-yield stocks offer a safe haven to investors where safety is of greater priority compared to high returns. So, even if the market remains volatile, going ahead, an investor can still get a decent return on investment, thanks to good dividend yielding stocks. The dividends are paid no matter what direction the stocks move and can provide a higher yield on investment in a weak market.

To see full report: DIVIDEND YIELD STOCKS

>RANABAXY LABS (IDFC SSKI)

Event update: Management change; Daiichi takes charge

Ranbaxy has announced that Mr. Malvinder Singh has stepped down from the positions of Chairman, CEO and Managing Director from immediate effect. While Mr. Tsotomu Une (Daiichi-Sankyo nominee) will take over as the Chairman of the board, Mr. Atul Sobti (erstwhile COO) will be the new CEO and M&D. This marks a new phase in Ranbaxy’s relationship with Daiichi Sankyo (Daiichi) and is indicative that Daiichi has now decided to take more direct control of the business. On the analyst call, the new Ranbaxy management team indicated that this change will accelerate the integration of the Ranbaxy into the Daiichi fold and accelerate the realizations of synergy benefits. While the company did not share specific details of the likely benefits, they hinted at potential cost savings from outsourcing of Daiichi’s manufacturing and R&D operations as well as penetrating the Japanese generics market as some of focus areas. Company also indicated that the management change may help in influencing the FDA’s decision making process with respect to the warning letters. On a negative note, there seems to be some uncertainty over the fate of Ranbaxy’s potential FTF status on the pending applications as the FDA will individually review each ANDA application. At this point of time, there is limited clarity on the timelines for the resolution of warning letters as also the Ranbaxy’s FTF status for different molecules. Given that Ranbaxy FTF status across multiple products is probably the most critical element of its growth strategy over the next few years, this uncertainty is a concern. In our view, the likely synergy benefits of Daiichi – Ranbaxy combination are likely to be realized only over the medium term and offer limited upsides in the near term. Even a quick resolution of the USFDA ban is unlikely to have any material impact on the CY09-10 earnings as Ranbaxy will find it extremely difficult to regain lost market share in a highly competitive US generics market. We reiterate our Underperformer call given the uncertainty on the business outlook across geographies including US and Ranbaxy’s extremely rich valuations (20x CY10E EV/EBITDA excluding Rs60/share of FTF value).

EVENT: MANAGEMENT RESHUFFLE AT RANBAXY

■ Malvinder Singh steps down from the company
Malvinder Singh, Ranbaxy’s erstwhile Chairman, CEO & MD has stepped down. As per the initial agreement, Malvinder was supposed to the CEO and MD of Ranbaxy for five years so this exit even before the expiry of the first full year is a bit surprising. In our view while the agreement to have Malvinder Singh continuing to lead Ranbaxy for 5 years despite selling out his stake was quite intriguing per se, his sudden exit is also surprising. While the management has denied it, we believe it is a reflection / consequence of the myriad challenges that Ranbaxy has been battling over the last few quarters.

■ Daiichi takes more direct control of the company; Atul Sobti to be the new CEO and MD
In a clear indication of its intent to take more direct control of operations, Daiichi Sankyo has appointed Mr. Tsotomu Une – a member of Daiichi’s board – as the head of the Ranbaxy’s board. At the same time, Ranbaxy’s erstwhile COO, Mr. Atul Sobti has taken over as the new CEO and MD of the company.

While there has been a steady attrition in Ranbaxy’s ranks over the last few months, the new management has not ruled out further personnel changes. Nevertheless, Daiichi and Ranbaxy remain very confident in the ability of the current management team to deliver despite the odds.

■ Ranbaxy expects accelerated realization of synergies in the new set-up
Additionally, the management has clearly stated that it would retain Ranbaxy as an independently listed company with a combined operational strategy of being an innovator as well as generics major. This may be a dampener for investors who have looking for a potential open offer from Daiichi as it seeks to “average” its cost of acquisition.

Penetrating the Japanese generics market will be key focus area for the integrated entity. With strong prospects of “genericization” in the Japanese market, Daiichi will aggressively look at launch of generics products by Ranbaxy in Japan. Ranbaxy can benefit from Daiichi’s strong image and presence in the Japanese market. The potential opportunity for generics in Japan remains large as demonstrated by the robust performance by Lupin’s Kyowa acquisition. Ranbaxy is hopeful of building up of “several hundred million dollar generics business” in Japan and this does remain one of the biggest potential upsides from this deal.

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