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HDFC Bank (Rs1,160) - Results Preview
Underperformer - Target Price: Rs903
Axis Bank (Rs462) - Results Preview
BUY - Target Price: Rs630
Sun Pharma (Rs1,148) - Results Preview
Marketperformer - Target Price: Rs1,245
Indoco Remedies (Rs140) - Results Preview
Outperformer - Target Price: Rs170
Container Corporation of India (Rs740) - Results Preview
Underperformer - Target Price: Rs706
To see full report: RESULTS PREVIEW
Moving up the value chain; risks continue; maintain Sell
* Maintain Sell. BGR Energy plans to transform itself into a fullyintegrated
player (manufacturing as well as EPC). While margin expansion is possible over the next couple of years due to softening material costs, we believe execution challenges remain. We maintain our Sell rating, with a marginal increase in target price to Rs112 (from Rs103 earlier).
* Operating margin expansion of 150bps.
We build in a 150-bps increase in margins over FY10-11 to factor in the benefit of lower raw material costs. However, higher interest cost and lower ‘other income’ would continue to have its impact at the PAT level.
* Boiler tie-up in place, turbine to follow.
BGR has announced a tie-up with Foster Wheeler where the latter would license boiler technology. It is also talking to Hitachi for a possible arrangement for turbines.
* EPC projects in design stage.
Projects are in the design and engineering stage (10% completion), with credit lines tied up. Foreign exchange risk would be borne by state electricity boards.
* Earnings revision. We retain our sales estimate but raise PAT estimates for FY10 (by 9%) and for FY11 (by 10%).
* Valuation. Our revised target price of Rs112 implies 5x FY10e earnings (~50% discount to sector multiple).
To see full report: BGR ENERGY SYSTEMS
Election 2009 – confusion galore
• India’s General Elections begin on 16 April and end on 13 May. There are no clear national issues or expectations.
• UPA government without their former Left Front allies or the NDA Government appears to be the best-case scenario for the market, but these outcomes have low probability.
• Prior to elections, we advocate caution with defensive portfolio stance. Sun Pharma, Bharti, M&M are top choices.
Elections in five phases start tomorrow
India’s General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June.
A highly fragmented political landscape
The two major parties – Congress and BJP hold 52% of the total Parliamentary seats, and opinion polls seem to indicate that their total seat share could decline. Both major alliances – Congress’ UPA and BJP’s NDA, have suffered defections by their alliance partners. Therefore – not only do we have a Third Front today, but a ‘Fourth Front’ as well – consisting of parties who were members of the UPA or NDA in the last Parliament but are now reluctant to join any alliance.
No clear issues, no clear expectations
Election 2009 is characterized by a lack of strong national issues, and confusion among political experts and pollsters regarding the potential outcome. Consequently, state-level issues, and outcomes in some of the “swing” states have become important. Most opinion polls suggest UPA will get 190-200 seats, NDA 180-190 seats and about 150 seats will go to a mixed group of other parties (i.e. the Third and the Fourth fronts).
Expect market correction during election
After a 35% rally since 9 March, the Indian market is trading at 13.2xFY10E, and appears ripe for a correction. The market declined during three out of the past four elections, and we don’t expect any
divergence from that trend.
Go defensive during elections
During elections, the most consistent outperformers are pharmaceuticals, telecoms and autos. We highlight Bharti, Sun Pharmaceuticals and M&M as our top picks during this phase of shortterm uncertainty.
Post election sector choice to depend upon outcome A UPA Government not supported by Left parties or an NDA Government appears to be the best possible outcome from the market’s point of view. However, the probability of such an outcome appears low (less than 50% in our opinion), despite some recent improvement (according to media) in NDA’s chances. A “market-friendly” government should lead us to overweight banks, engineering and capital goods.
General Election 2009 – a massive exercise
Every five years, or sometimes even before the completion of the term (as was the case in the second half of the 1990s), India holds the General Elections. The largest democracy in the world (with nearly 715m voters, 543 Parliamentary seats) votes out the incumbent government or keeps it in office – though in the past 20 years, the former has been a more frequent outcome. In the six elections since 1989, only once – in 1999 – the incumbent ruling party (the BJP) – stayed in power after the elections. The sheer size of the General Election exercise (e.g. total number of eligible Indian voters is thrice that of the US which has 208m voters) makes it imperative that the elections are held in phases. General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all the 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June.
To see full report: INDIA STRATEGY
High leverage to sugar prices
* We believe Shree Renuka Sugars (SHRS) will be one of the prime beneficiaries of rising sugar prices aided by strong volume growth. The company will emerge as India’s largest sugar producer in FY09E by producing 900,000MT of sugar (includes both cane based sugar and refined sugar).
* On the other hand, Bajaj Hindustan (Bajaj) and Balrampur Chini (Balrampur) are expected to report 45%-50% decline in sugar production in FY09E due to lack of sugarcane availability and absence of refining facility.
* Though Bajaj and Balrampur had the advantage of a low cost inventory (+300,000MT each) at the beginning of the season, inventory gains have been largely realized in 1QFY09. Incrementally, SHRS will enjoy much higher leverage to sugar prices compared with peers due to sharp increase in refinery output in 2HFY09E, lower conversion costs and increase in refining margin due to rising domestic sugar prices.
Favorable demand-supply scenario
* We expect two consecutive years (SS09E and SS10E) of sugar deficit in India – led by a sharp drop in sugar production in the current season (SS09E) to 14.5mn MT and relatively lower increase in sugar production in SS10E (at ~19-20mn MT compared to consumption of 23mn MT per year).
* Hence, we expect India’s inventory of 8mn MT to get replenished by the end of current season (SS09E).
* The world sugar production is also expected to decline to 153.5mn MT in SS09E against the consumption of 165mn MT – resulting in a deficit of 11.5mn MT (Source: Kingsman Report). The drop in sugar output is led by India, Thailand, Pakistan and China.
* Consequently, we expect sugar prices to remain firm with an upward bias – at least till the end of current crushing season (September 2009). In fact, domestic sugar price have moved up by Rs1.5-2/kg in the past one week to Rs22.5-23/kg – led by an anticipated shortfall in production.
* In the event of the government allowing duty free white sugar imports, we foresee potential imports once domestic sugar prices reach above Rs24/kg. However, international prices may also firm up in such a scenario.
To see full report: RENUKA SUGAR
INVESTMENT ARGUMENT
• SKF India is the 53.5% subsidiary of the Swedish bearing giant and is the largest bearing producer in India. It derives 90% of its revenues from bearings comprising of ball and hub bearings, deep groove ball bearings, cylindrical roller bearings and tapered roller bearings. The balance 10% of revenues comes from its four new technology platforms like seals, lubrication systems, mechatronics and services. The strategy has been to bundle all service platforms together so as to provide the customers an integrated solution, which can positively impact
their cost of operations.
• Domestic business accounts for 90% of its revenues and both the automotive and industrial segment have an equal share of this pie with most of the large players being customers of SKF India. SKF India being the industry leader controls a 30% share in the Rs50bn bearing market in India.
• SKF India with a capacity of producing 119m bearings at its facilities in Pune and Bangalore was prior to CY'06 following the indenting commission business model and shifted to the direct customer delivery model since then which enabled the company to account for revenues accrued from trading activities which was substantial at ~ 40%.
• The Rs16bn SKF India has been a victim of the slowdown in both the automotive and the industrial segment during Q4-CY'08 with net profit during Q4CY'08 dropping sharply to Rs163mn as automotive companies resorted to plant shutdown and lesser working days since November 2008 to reduce inventory piling and align their production with market demand which contracted due to reduction in freight availability on account of moderation in economic growth. The situation has not turned any better for the company even in Q1-CY'09 and we expect SKF India to face the pressure on the bottom line as net profit during the same period last year was Rs378mn on net revenues of Rs4bn.
• The automotive sector continues to be impacted by tight credit terms, high cost of finance, pricing pressures and weak consumer demand from fleet operators while the industrial segment is witnessing a slowdown across industries and CY'09 is expected to be a challenging year for SKF India even as softening input costs like steel would start benefiting the company from Q1-CY'09.
• SKF India is now going ahead with its new 48m ball bearing unit at Haridwar in Uttarkhand which would add close to 50% more capacity from CY'10 onwards at a cost of Rs1.5bn and would initially service the two-wheeler companies whose demand is expected to show a marginal rise on account of the incremental demand from the rural and semi-urban markets. The game plan for SKF India is in sync with that of its key customers like Hero Honda and its plans from its Haridwar unit.
• The investment phase for the company this fiscal along with the challenging environment is expected to put pressure on the ROI, as the benefits would start accruing only from next fiscal onwards. SKF India with a strong balance sheet trades at 7xCY'09E and 5.7xCY'10E and we believe that a 15% correction in the stock price from current levels would be a good opportunity for gaining an entry into the stock with an 18-month price target of Rs190. Over a longer time frame a revival in its key user industries could propel the stock to Rs240 over a two-year time frame.
To see full report: SKF INDIA
The USD is the reserve currency. Deal with it.
Market focus
The latest FX reserve data for 2008Q4 has just been released. The data is timely given that it captures the changes in FX reserve composition by central banks during a period of intense financial market volatility and when some central banks were intervening to support their domestic currencies. Also, given the discussion of USD’s reserve status around the recent G20 meeting, the IMF’s data highlights how the USD is still by far the pre-eminent reserve currency. This will be the case for some time to come. We have argued that the USD’s value will decline but we have never argued that it will suddenly be replaced as a reserve currency. The USD’s liquidity premium through its reserve currency status is not a valuation tool but helps to explain USD strength in a time of crisis.
The idea to switch to the SDR as the main global reserve currency may hold some merit as a concept but implementing it would take a long time and overall it is an extremely low probability event. That said, we outline what would happen from a flow perspective if it suddenly happened today. Undoubtedly this implausible development would be USD negative.
Gold investment is robust but consumer demand crumbles
Gold prices are likely to remain volatile as investors assess the impact of the authorities’ efforts to combat the global recession but ultimately we believe a lack of inflation will reduce the safe haven demand for gold.
Technical analysis
USD-CHF: Downward pressure is building again on support at 1.1160/70 and a break lower would be expected to release further selling energy towards 1.0900 and potentially 1.0620. To the upside, if support at 1.1160/70 manages to hold firm, then the focus will switch to the short term resistance at 1.1550, since a break above here should trigger a strong rebound towards 1.1750
IMM analysis
According to the latest CoT report dated 31 March net long USD positions were decreased for the second consecutive week. Investors increased their net short positions in JPY for the third consecutive week, in addition to increases in short positioning in GBP, CHF and CAD. EUR positioning was switched from short to slightly long while a small increase was seen in AUD long positioning this week.
To see full report: CURRENCY STRATEGY
Quick Comment: Emerges as Highest Bidder for Satyam
Impact on our views: We believe Tech Mahindra’s (TM) successful bid for Satyam gives it more elbow room to maneuver through the tough economic environment. Given its dependence on BT, TM’s move toward diversification is a sign of relief, in our view, and could be seen as a positive step for TM in the long run. However, the near-term impact remains uncertain due to a lack of visibility on Satyam’s financials, litigationrelated liabilities, earnings dilution for TM, and declining organic business for Satyam and TM. We would wait for management execution before turning more constructive on TM stock.
What's new: TM’s aggressive bid of Rs58 per share for Satyam has emerged as the high for a 31% stake in Satyam. TM’s bid is in line with its stated intention of aspiring to be one of top 5 offshore IT vendors. Satyam’s Financials are still unknown, but media reports indicate that its revenue run-rate could be ~US$1.6bn (to decline further to US$1.3bn per management) with operating profit of ~US$48mn (margin of 2.3-3.1%) and collections of ~US$130-150 per month. TM’s next move could be to take its stake up to 51% by making an open offer for a 20% stake at a price of at least Rs58 per share. TM had a cash balance of US$140mn at end-March 2009e, and the 51% Satyam stake should cost at least ~US$580mn, in our view.
What we like: 1) The Satyam stake would help Tech Mahindra expand its severely constrained vertical and service offerings, in our view. 2) The deal appears earnings dilutive, although margin improvement at Satyam could limit EPS dilution for TM.
What we don’t like: 1) Rising debt profile for TM and uncertainty with the existing clients of Satyam are the key risks for TM, in our view. 2) There could be litigationrelated liabilities for Satyam/TM. 3) Although the deal improves TM’s long-term prospects, turning around Satyam in the current environment with declining revenues could take longer than expected, in our view.
To see full report: TECH MAHINDRA
Infrastructure in India
A vast land of construction opportunity
Reasons to invest in India:
One of the world’s fastest growing economies – and growth expected to continue at 7-7.5% despite the global downturn
Few restrictions on foreign direct investment (FDI) for infrastructure projects
Tax holidays for developers of most types of infrastructure projects, some of which are of limited duration
Opening up of the infrastructure sector through PPPs
Projected spending from FY07-FY12 in selected infrastructure segments:
Electricity: US$167 billion
Railways: US$65 billion
Road and highways: US$92 billion
Ports: US$22 billion
Airports: US$8 billion
To see full report: ENGINEERING & CONSTRUCTION
Too cheap to avoid
EMCO is the third largest transformer manufacturing company in India. It is a leading player in the 132KV, 220KV and 400KV rating transformer market segments with an annual capacity of 20,000 MVA. It also manufactures meters and has a presence in EPC turnkey power T&D projects. Transformer segment contributes about ~65% to the revenues, while rest has been contributed from the transline towers, project business, electronic energy meter and other businesses.
Investment Rationale
Rs 550 crore order from PGCIL
Emco Ltd has received five orders worth Rs 550 crore from the state-run Power Grid Corporation of India Ltd for a 765 kilo volt overhead transmission line. The orders also involve supply of galvanised steel towers.
"Transforming" into a complete T&D EPC player
The Baroda-based Urja Engineers, a transmission-tower manufacturing company, has been merged with EMCO. Previously, it had supplied towers to EMCO for the latter's projects business. Post-expansion the merged entity would have transmission-tower manufacturing capability of 45,000 MT. Urja is qualified to bid for all State Government and PGCIL contracts. This provides EMCO with an edge in terms of providing 400kv transmission lines along with its 400kV transformer manufacturing capability. The focus is to become an end-to-end solutions provider for the EPC business.
Emco plans hybrid model for selling power
The company plans for 540 MW merchant power plant at Warora in Chandrapur district (near Nagpur, Maharashtra). The financial closure for the first phase of 270 MW (135MW X 2 units) of the project is about to be completed. The plant is expected to be operational by March 2010.
Q3FY09 Results
In Q3FY09, company’s witnessed drop of 14.6% & 45.7%(YoY) in net sales & PAT to Rs 207.9 crore & Rs 8.2 crore.
Valuations
In last one year, we have witnessed re-rating of transformers industry on anticipation of surplus capacity & slowdown in economy. Earlier the industry, which used to trade in range of ~12x to 14x is currently trading in range of 3x to 4x (in other words stocks are available at ~70% discount).
We believe on back of EMCO’s diversified business model, high concentration of Government orders, foray in to power generation & coal mining, and the stock looks attractive at current levels. Further, with the kind of order it received from PGCIL, it seems strong demand still exist in the transformer industry. At CMP of Rs 47.7, the stock is trading at 4.8x on TTM earning of Rs 9.96 and 5.3x FY10E earning of Rs 8.9. We maintain our BUY rating on the stock with target price of Rs 55.
Key Developments
JV with Edison Group
EMCO has formed a JV with Edison Group through its wholly owned subsidiary, Emco Overseas Pte Ltd., Singapore by way of 51% participation in the equity of Emco Edison Transformer (Pty) Ltd incorporated in South Africa. This company will manufacture and market Transformers to cater to South Africa and neighboring countries.
The company plans 2,000 MVA transformer capacity at its new facility in South Africa. Initially, the company would be focusing on 20MVA/33KV class transformers and planning to source higher rating (220KV and 400KV) transformers from its Indian facilities. This would facilitate the company to meet its aim of enhancing export business from ~16% to ~30% in coming time. EMCO expects to begin the commercial production of transformers by Q1FY10E. It has planned a capex of ~USD 10 mn (~Rs 45 crore) for its South African venture.
Stake in Coal Mine
EMCO bought 37.35% stake in Singapore-based Rabaan Pte Ltd for ~$18 million (~Rs 76 crore) through its overseas subsidiary Emco Overseas Pte Ltd. The move is to get into coal trading as the demand for coal is quite high. The Singapore based company has a long-term exclusive coal offtake contract with Bina Insan Sukses Mandiri, an Indonesian mining company, which has estimated coal reserves of ~105m tons, 95% of which is extractable. The Indonesian coal mine is in the Kalimantan region with ~5500 kcal/kg calorific value.
Competition can be managed
EMCO management strongly believes that despite rising competition in the business, the company will retain its competitive edge due to prequalification norms for SEB orders and proven quality vis-à-vis newer entrants.
Strong order book position
At end of Q3FY09, Emco order book stands at ~Rs 1300 crore (increased 5.5% YoY). The transformer orders constitute ~56% of the order book (10% export orders), projects contributed ~42%, while the balance 2% being meter orders. Further, order inflow during Q3FY09 fell by 56% (YoY) to Rs 208 crore mainly due to higher base affect.
To see full report: EMCO Ltd.
1Q performance appears to be negative but beats S&P 500
Large Specs buy equities, gold and 10Y-Ts; sell oil, the Yen
Note: Commitment of Traders data reflects positions as of last’s Tues close
Equities: Large specs continued to add to their net long position in the S&P 500 futures last week. Readings are back near a crowded long. However, our factor analysis models suggest market exposure may be peaking and part of the increase may be due to hedging as in December (see below and pg 3 for details). They also continued to cover their net short positions in the NDX and the R2000. HFs are still a source of liquidity for the markets but less so with a potential buying power of ~$6b, consisting of ~$2b R2000 and ~$4b NDX.
Metals: Large specs modestly added to their long position in gold last week; readings are crowded. They reduced their silver and platinum longs, while holding steady their short positions in copper.
Energy: HFs sold crude oil last week and continued to add to their deep short position in natural gas. Additionally, they continued to buy heating oil and sold gasoline.
Forex: Large specs covered their shorts in the Euro last week and held steady the USD. Additionally, they continued to sell the Yen.
Interest Rates: HFs continued to buy the 2-Yr Ts to move further into a crowded long, while modestly covering their shorts in the 10-Yr Ts and 30-Yr T-Bonds.
M/N and L/S hedge funds further reduce equities exposure
Our models indicate M/N and L/S funds’ market exposure continuing to decline last week, adding to their underweighting of equities. Our estimates suggest market exposure for M/N and L/S funds peaking in late March, after rising significantly from mid-Dec through much of Q1 (more details on pg 3). Other L/S tilts: Growth, large caps and high quality. Inflationary expectations have also increased sharply (pp 5-6).
Macros buy back shorts in SPX,10 Yr-Ts & commodities; sell US$
Our models point to Macro funds covering their shorts in the S&P 500 last week, while selling the NDX. Additionally, they continued to reduce their longs in the US$ index and cover more of their shorts in the 10-Yr Ts and commodities. We also estimate Macro HFs modestly covering their short positions in the Emerging markets last week, while increasing their shorts in the EAFE markets; readings are volatile.
To see full report: HEDGE FUND MONITOR
