Saturday, January 24, 2009


We continue to recommend caution regarding the
Indian Steel sector, more so after the recent
outperformance seen in the Sensex recently even as the
economic climate continues to slip. Our Cautious stance
is based on our belief that: 1) steel prices have more
downside from here in the next two quarters, bringing
many Indian companies close to losses; and 2) stocks
are not fully discounting trough-level earnings and
balance sheet pressure. We suspect that many
second-rung steel companies are already incurring
losses, which could be revealed in F4Q09. Results for
the next two quarters could act as catalysts for the
A 30-year low in economic growth and a sustainable
rebound in steel prices at US$500/t do not make a
good pair. Our economists are now calling for just 0.3%
growth in C2009. Accordingly, we forecast the first
demand compression in the global steel industry since
1998, and a 10-year low capacity utilization level. We
are cutting our Indian steel price forecasts by 5-7% for
F2010-11 even as near-term news flow has improved
somewhat. A quick impact from global stimulus
packages may be the surprise element on the upside,
but the effects will have to be reflected in broader
economies before they will be seen in steel. We assign a
low probability to this event.

To read full report

>IRB INFRA(Religare)

Leading private developer with a focus on road projects: IRB Infrastructure
has a portfolio of 14 BOT road projects, of which 11 are operational, 2 are
under construction and 1 is yet to achieve financial closure. The capitalised
cost of these projects is Rs 64.7bn, funded through equity of
Rs 13.3bn and the balance through debt. Despite the difficult market
conditions, the company has been able to achieve financial closure for its
Rs 27bn Surat-Dahisar project, albeit with a delay of three months.
Strong in-house construction order book of Rs 63bn: IRB’s order book of
Rs 63bn is bifurcated between EPC – Rs 35bn with an execution time frame
of three years – and O&M – Rs 28bn with an execution period of 10–12 years.
IRB’s construction arm reports margins of 20% vis-à-vis the industry average
of 10%. The strong margin outperformance can be attributed to lower
subcontracting expenses, a large fleet of equipment, ownership of aggregate
mines, and higher cost assumptions while pricing project bids. While we
expect construction margins to decline by 450bps over the next 2–3 years due
to increased competition, they would still be above the industry average.
Consolidated earnings to grow at 49% CAGR over FY08-FY11: We anticipate a
significant jump in revenues and earnings, at a CAGR of 59% and 49%
respectively over FY08-FY11, once the Bharuch-Surat and Surat-Dahisar road
projects start contributing to IRB’s toll income. Since financial closure on the
Surat-Dahisar contract has been achieved, revenues will kick in from February
’09 at the rate of Rs 10mn per day, post revenue-sharing with the National
Highway Authority of India (NHAI) (38% of toll revenue in the first year).
To read full report IRB INFRA