>Crude weaker as sell off resumes

London - Crude oil futures traded lower in London Thursday as traders returned their focus to immediate weak demand for energy and burgeoning stockpiles of crude and oil products in both the U.S and Europe.

Some market participants hold a very skeptical short-term outlook for products and therefore crude and refining margins. Refinery runs are still too high for the product market to balance and need to come down, said DnB NOR analyst Torbjorn Kjus. "Even if refiners are reluctant to cut runs, as there has been much new capacity added this year, we believe economic run-cuts will force their way into the market."

At 1114 GMT, the front-month August Brent contract on London's ICE futures exchange was down 87 cents at $62.22 a barrel.

The front-month August contract on the New York Mercantile Exchange was trading 56 cents lower at $60.81 a barrel.

The ICE's gasoil contract for August delivery was up $3.25 at $506 a metric ton, while Nymex gasoline for August delivery was down 172 points at 169.09 cents a gallon.

An overall bearish weekly U.S inventories report, which showed days cover for all light products remains really high, weighed on crude prices Thursday. The climbdown from recent 20-year crude stock highs saw a larger than expected crude stock draw in the data but was counterbalanced by higher imports figures.

In the coming week, crude oil futures are expected to quickly resume the downward trend established in early July, although the ICE Brent front-month contract rolls over from August to September Thursday, which could add some volatility to prices.

Peter Beutel, analyst at Cameron Hanover, expects to see prices return to test their recent lows after a short-lived rally this week. But Beutel pointed out that equities are "back in the picture" and a strong performance from stocks this week could bring the index funds back into "every hard asset available."

Looking ahead over a longer period, analysts at Goldman Sachs are confident improving fundamentals will lead to rising commodity prices and returns over 12 months. "Although we share the market's concerns over recent oil demand deterioration, we believe much of this weakness can be attributed to the continuation of massive destocking in U.S. manufacturing that is weighing on U.S. demand today but is expected to slow and eventually reverse as manufacturers deplete inventories," the analysts said.

VTB Capital analyst Andrey Kryuchenkov remains bullish on the market toward the end of the year, anticipating that more weakness for the dollar, improving macroeconomic data and the approaching hurricane season will all be supportive for crude prices.

Source: COMMODITIESCONTROL

>Weak monsoon rains to choke India's rural gold demand

Mumbai - After high prices and a doubling of import duty choked India's gold imports in the first half of 2009, demand in the world's largest consumer is likely to be further hit by poor rural demand in the second half due to weak monsoons.

Rural consumers, who account for 60%-70% of total gold consumption in the country, rely heavily on June-to-September monsoon rains for the production of summer crops such as rice, oilseeds, cotton, and sugar cane.

Typically, rural gold sales fall whenever there is fear of insufficient rains because that can lead to a squeeze on farm incomes.

According to India's Meteorological Department, monsoon rains are expected to be 93% of the long term average this year. Erratic rains in the past few weeks have already fueled concerns of widespread crop losses and lower output.

Morgan Stanley said in a recent report that there is an increasing risk of India's agriculture growth slowing to 1.5%-2%, from a 3% growth forecast made before the monsoon season.

"As it is, gold imports have fallen this year. Adding to the current weak demand, lower farm realizations will definitely (keep) farmers away from the bullion market," said Harish Galipelli, head of research of Karvy Comtrade.

Upcoming Hindu festivals in the second half of the year, usually the peak time for gold sales, may fail to generate increased buying interest this year amid fears of a drop in rural incomes.

"The Impact of the weak monsoons will be felt strongly on rural demand, unless gold prices fall to INR13,500 levels as Indians are very price sensitive," said Praveen Singh, an analyst with Sharekhan Commodities.

If prices continue to hover around current levels of INR14,500/10 grams, it could be a bad year for gold demand, he said.

In the first half of 2009, India's gold imports plunged to just 61.8 tons, from 139 tons during the first half of last year, according to preliminary data from the Bombay Bullion Association.

"The rest of the year is unlikely to see any surge in demand, despite the peak festival season if prices hover at these levels," said Girish Choksi, a bullion merchant based in Ahmedabad.

"Average sales will continue to be around 30%-40% of last year's sales," he added.

He said weak sales will result in India's gold imports falling below 500 tons this year, compared with an average 700-800 tons in previous years.

Recycled Gold To Dominate Local Sales
"There is increasing amount of recycled gold coming into the market and that is quoting around INR100/10 grams lower than imported gold," said Pravin Mehta, president of the Madras Jewellers and Diamond Merchants Association.

He said with the doubling of import duty on gold bars, the difference in prices will widen, leading to higher preference for recycled gold.

"Right now we are getting 10% more recycled gold than demand in the market," Mehta said.

However, it may still be too early to estimate the extent of demand weakness, said Bhargava Vaidhya, director of Vaidhya & Associates and a leading industry expert.

In addition to agriculture production, overall economic growth in the next few months will be a key indicator of demand, he said.

"Monsoon's failure will affect demand, but it will be limited as the government has a lot of relief measures in place to take care of the rural economy," Vaidhya said.

Source: COMMODITIESCONTROL

>RELIANCE INDUSTRIES LIMITED (MORGAN STANLEY)

Stepping on the Gas

Investment conclusion: We reiterate our Overweight stance on Reliance Industries (RIL) and update our price target to Rs2,371 per share, marking to market our sum-of-the-parts multiples for each division. We expect RIL’s profits to grow at an impressive CAGR of 37% F2009/11, on the back of RIL’s E&P business. Reliance started commercial production from the KG D6 field on April 2, 2009, and is currently producing 30 mmscmd of gas. It has signed up with customers for 40 mmscmd of gas at US$ 4.2/mmbtu. The company should touch 80 mmscmd of gas in the next six months.

RIL’s 80 mmscmd of gas implies an annual US$8 billion saving for the country, or replacement of close to 26mn tons of crude oil; that is as much as ONGC produces domestically. We estimate 20 mmscmd of gas would go to the fertilizer industry and most of the rest to the power industry. This would imply about 13 million tons, or almost 50% of the country’s fertilizer production,
and 12,500 MW of power, or 8-9% of power produced in the country, would run on RIL’s gas.

There is a lot of uncertainty around the RIL-RNRL litigation and we highlight four different possible scenarios. Our base case is based on

US$ 4.2/mmbtu for all the D6 gas to customers other than NTPC and RNRL, who would get the gas at a lower price when their power plants are ready to consume the gas. We believe the green field ventures by both RNRL and NTPC are at least 3 years away, and until then RIL should be able to earn US$ 4.2/mmbtu on its entire gas production.

We estimate RIL to be FCF positive in F2010 with cash earnings increasing from US$4.5bn in F2009 to US$7.4bn in F2010 and US$9.4bn in F2011, and capex hovering around US$3.5-4.5bn per annum. We believe the E&P business should enable the company to grow 17% sequentially in each of the next four quarters despite lower GRMs and petrochemical netbacks.

To see full report: RIL

>TEXMACO (ICICI SECURITIES)

Favoured by firm foundations

Texmaco, the largest wagon manufacturer in India, is in a sweet spot to capitalise on diverse & large-scale opportunities in the Indian railways sector emerging from necessities and logistics advantage. Demand for wagons continues to grow as Indian Railways (IR) and private players strive to meet the burgeoning rail-freight traffic. On the back of its leadership, long-standing experience, low-cost infrastructure and capabilities (skill & capacity), Texmaco is set to benefit from the expanding railways landscape. We value the company at Rs146/share and initiate coverage with BUY recommendation. Further, positive developments on JVs with global partners, the foundry division and real estate would provide upside to our valuations.

■ Railway freight traffic – In fast lane. Rail freight offers logistics advantage and is critical to economic growth. Freight traffic has seen 8.4% CAGR over the past five years; burgeoning demand of bulk commodities, particularly coal & containerisation, would accelerate growth. Demand for wagons is set to grow as IR, Container Corporation of India (CONCOR), and private players increase procurements. Texmaco is the leader in the high-growth, high-margin specialised wagons category.

■ Advantage Texmaco. Texmaco is the largest wagons supplier for IR (~25% market share) and the private sector (~50% market share). It has superior design & manufacturing capabilities, thereby switching rollout to the high-growth, commodity specific & special-design wagons. Texmaco’s infrastructure is low-cost and has the advantage of parallel processing and a hi-tech foundry. Management has ~50 years of experience, renowned for ethical standards & industrial harmony over 5 decades.

■ Potential upside from Foundry, JVs & real estate. Texmaco’s foundry division is technologically advanced, gaining traction in the export market – Foundry’s EBITDA saw 39% CAGR over FY06-09. Texmaco plans JVs with global peers to manufacture electrical multiple units (EMUs), metro coaches, special wagons, locomotives & their underframes, and bogies. Its 178-acre land bank at Delhi and Kolkata could provide minimum upside of Rs2.9bn or Rs26/share.

■ Valuations. Our SOTP-based valuations for Texmaco stand at Rs16.1bn or Rs146/share, including Rs15.4bn or Rs139/share for core business and Rs750mn or Rs7/share for leased property in Gurgaon (NCR). Based on FY10E & FY11E EPS of Rs8 & Rs9.4, the stock trades at P/E of 11.5x & 9.7x respectively. Texmaco is a value play on growing demand of rail freight and Mass Rapid Transport System (MRTS) across Indian cities.

To see full report: TEXMACO

>TATA MOTORS (MERRILL LYNCH)

Expect domestic recovery, JLR to follow

■ Maintain Buy, potential upside 30%
Following a Rs 25bn consolidated loss last fiscal, we forecast a strong reversal over next 2 years driven by both domestic business and JLR. We believe that surprises will come from lower costs, especially in JLR, and also the extent of domestic recovery (consensus estimates sharply lower). Our PO of Rs 365 (earlier Rs 420) factors higher debt position, which lowers imputed equity value.

■ We expect strong operational growth
We expect consolidated EBITDA to increase to Rs 79.7bn by FY11E (up from Rs 20.1bn last year), driven by (1) demand revival in CV business (trucks/buses/light vehicles), thanks to higher industrial production and government stimuli, (2) sharp cut in JLR losses on significant cost-saving initiatives, and new product launches, and (3) rebound in key subsidiaries, in line with domestic recovery.

■ Forecast rising cash flows, JLR to be self sustaining
Despite expected increase in operating cash flows, we expect both Tata Motors and JLR to resort to independent fund raising in FY10E, to finance capex and other operating requirements. However, in FY11E, we expect Tata Motors to generate surplus cash, facilitating debt repayment, and JLR to be self sustaining.

■ Revised PO factors additional debt
Our revised sum of parts PO is based on (1) standalone business at 8x EV/EBITDA FY11E, slight premium to previous mid-cycle sector multiple, and (2) JLR at 0.25x EV/Sales FY11E, 30% discount to long term European auto sector average, assuming debt of €2.1bn (incl SPV) and (3) subsidiaries, in line with domestic peers in constituent businesses, with holding company discount of 20%.

To see full report: TATA MOTORS

>STERLITE INDUSTRIES (DEUTSCHE BANK)

Non ferrous 'power' house; initiate with Buy

■ Initiate with Buy rating and target price of Rs660/share
We initiate coverage on Sterlite Industries with a Buy rating and a 12-month target price of INR660/share implying a potential upside of 21% from current levels. Our Buy rating is premised on three key factors – (1) a 39% CAGR in earnings over FY10-FY12 driven by an aggressive organic growth pipeline in high-return zinc and power businesses, (2) potential to unlock further value by buying out government’s minority stakes in Balco and Hindustan Zinc, and (3) valuation discount of 30% versus global peers, creating an attractive arbitrage opportunity.

■ Aggressive expansion in zinc and power to derisk company
We expect aggressive expansion in zinc and power will allow Sterlite to progressively reduce its revenue and earnings focus on its legacy copper business where it is only a converter and see higher contribution from zinc where it generates EBITDA margins of almost 48% even at bottom-of-the-cycle zinc prices. Exposure to India: Slated to become among fastest growing metals market Sterlite is putting in place the strategic architecture to achieve global scale efficiencies in its aluminum, zinc and power businesses. We expect India to emerge as the world’s fastest growing aluminum market and among the fastest growing zinc markets in the decade of 2010, allowing it to optimally participate in India’s move to its fastest-growing phase of materials intensive growth.

■ Price target, valuation and key risks
Our SOTP-derived TP of Rs660/share, translates into a PE valuation of 9.4x FY2011 earnings. We value the zinc business at 8.3x FY11 EBITDA, copper business at 5x FY11 EBITDA—40% discount to target valuation of its zinc business, Balco at 7x FY11 EBITDA—in line with the current valuation of Nalco and we use a combination of P/B and NPV methodology for SEL. Key risks include sustained weakness in non-ferrous metal prices and appreciation of rupee (see page 13 onwards for valuation and risks details).

To see full report: STERLITE INDUSTRIES

>SIGNPOST (BARCLAYS CAPITAL)

ESSAY – STEADY AS SHE GOES

SO FAR, SO GOOD!
THIS YEAR IS TURNING OUT TO BE ONE IN WHICH THE GLOBAL ECONOMY (FIGURE 1) AND THE FINANCIAL MARKETS ARE MUCH BETTER BEHAVED THAN THEY WERE IN THE SECOND HALF OF LAST YEAR.

IN THE FOLLOWING PAGES, WE PROVIDE OUR NEW PROJECTIONS (SUMMARISED ON PAGE 5). READERS FAMILIAR WITH SIGNPOST WILL NOTICE THESE ARE ACTUALLY VERY SIMILAR TO THE FORECASTS WE PUBLISHED THREE MONTHS AGO, WHEN WE THOUGHT THAT A “THAW” HAD BEGUN. BUT WHAT HAS CHANGED IS OUR CONVICTION LEVEL REGARDING OUR FORECASTS: WE NOW HAVE RATHER MORE CONFIDENCE THAT REALITY WILL TURN OUT TO BE CLOSE TO OUR PROJECTIONS.

THAT IS NOT THE SAME THING AS SAYING THAT WE CANNOT REVERT TO THE SITUATION WE WERE IN LAST YEAR, WHEN THE APPROACHES THAT USUALLY DO A GOOD JOB AT PREDICTING ECONOMIC ACTIVITY BROKE DOWN, AND PSYCHOLOGICAL FORCES (OR “ANIMAL SPIRITS”) DOMINATED BEHAVIOUR. BUT, THAT RISK APPEARS TO BE FADING, IN MUCH THE SAME WAY THAT THE MEMORY OF A NIGHTMARE DOES SO WITH TIME.

POLICY EFFORTS PAY OFF
IN RECENT MONTHS, IT HAS BEEN CLEAR THAT COUNTRIES WHICH HAVE EXPERIENCED THE BIGGEST POLICY SHIFTS HAVE ENJOYED THE FASTEST AND LARGEST TURNAROUND IN THEIR FORTUNES. ¢ONSEQUENTLY, EMERGING MARKETS (ESPECIALLY IN ASIA) ARE GENERALLY MORE ADVANCED IN THE ECONOMIC CYCLE THAN THE “ADVANCED” ECONOMIES. ONE ILLUSTRATION OF THIS IS PROVIDED BY THE PURCHASING MANAGERS INDICES OR “PMIS” (FIGURE 2). THESE ARE MEASURES OF BUSINESS CONFIDENCE, BASED ON FIRMS’ REPORTS OF THEIR ORDER BOOKS, UNSOLD INVENTORIES, RECENT AND PLANNED PRODUCTION AND EMPLOYMENT AND OTHER FACTORS. FIHEN THE PMIS ARE ABOVE 50, THEN THERE ARE MORE FIRMS
EXPANDING THEIR BUSINESSES THAN CONTRACTING THEM. IF WE COMPARE THE PMIS IN BRAZIL, INDIA AND ¢HINA (BI¢) WITH THOSE IN THE US, EUROPE AND JAPAN, WE SEE THAT THE “BI¢S” HAVE ALL BOUNCED BACK INTO GROWTH-MODE AGAIN; BY CONTRAST, THE “ADVANCED” ECONOMIES ARE STILL FINDING THEIR FEET.

AMONG THE ADVANCED ECONOMIES, WE THOUGHT THAT THE US WOULD SUFFER LEAST, AND LEAD THE WAY IN RECOVERY, AGAIN BECAUSE OF THE SHEER SCALE OF THE US POLICY RESPONSE. AGAIN, THIS LOOKS TO BE THE RIGHT CONCLUSION.

To see full report: SIGNPOST

>The Perils of Asymmetrical Rebalancing (MORGAN STANLEY)

The worst of the crisis now appears to be over. At least, that’s the collective sigh of relief now evident in financial markets and amongst the broad consensus of politicians and policymakers. However, while the rate of decline in the global economy is, indeed, moderating—not all that surprising after the unprecedented plunge in late 2008 and early 2009—the quality of healing looks dubious. Unfortunately, the world is not coming to grips with the dangerous imbalances that lie at the core of this crisis.

The United States is leading the global adjustment process—with real consumer demand plunging and personal saving on the rise.

China, by contrast, is focusing its stimulus on its two most over-extended sectors—fixed investment and exports—while doing the minimum to provide support for internal private consumption.

For the world as a whole, a pullback in excess demand is being countered by efforts to boost global supply—an ominous asymmetry to rebalancing.

To see full report: ASYMMETRICAL REBALANCING

>NEYVELI LIGNITE (ICICI DIRECT)

Changing fortunes...

Neyveli Lignite (NLC), a Mini Ratna government enterprise, is an integrated thermal power generator with a fuel base of lignite. It operates a 2,490 MW generation capacity split into three plants (viz TPS-I, TPS-II and TPS-I Exp) and has a captive mining capacity of 24 MTPA. Capacity addition (expected at 4,440 MW), new CERC norms and a possible tariff renegotiation with Tamil Nadu Electricity Board for its TPS-I (600 MW) will be key drivers for earnings. Consequently, with a slew of positives in the offing, we are initiating coverage with an OUTPERFORMER rating.

■ Expanded generation capacity to provide revenue upside in Q1FY10
We expect the overall generation to deliver ~25% growth YoY in Q1FY10E. Operations have normalised after roadblocks observed in Q1FY09 due to the strikes witnessed at the plants. We expect the company to achieve a production of 4,938 million units (MU) as compared to 3,937 MU in the corresponding quarter last year.

■ New CERC tariff policy should offer significant upsides
New CERC regulations (2009-14) should boost the PAT by Rs 229 crore and the EPS by Rs 1.4 per share. We expect a major improvement in earnings from incremental RoE of 1.5%, retention
of tax benefits, relaxed station heat rate and ease in operational and maintenance expenses (relaxed by~60%) under normative clauses.

■ Renegotiations of tariff for TPS-I (600 MW) to boost bottomline
NLC is renegotiating the PPA with Tamil Nadu Electricity Board (TNEB) for its 600 MW TPS-I plant that is nearing the end of its operating life. We expect the new realisation per unit to be around Rs 3 per unit against the current Rs 1.8 per unit. Tariff renegotiation should contribute to an incremental PAT of Rs 270 crore annually. This will raise the EPS by Rs 1.6 per annum for the next three years.

■ Valuations
At the CMP of Rs 118, the stock is trading at an EV/EBITDA of 9.1x FY10E and 7.2x FY11E EBITDA, respectively. We expect the new CERC policy and renegotiation of PPA with TNEB to enhance the financial performance. Thus, we are initiating coverage on NLC with an OUTPERFORMER rating and a price target of Rs 155.

To see full report: NEYVELI LIGNITE

>MEDIA SECTOR (ICICI SECURITIES)

Capital raising activity picks up

Network18, Dish TV & IBN18 raise capital; Jagran Prakashan promoters buy in
Buoyancy in capital markets led to a flurry of fundraising activity, with Network18, IBN18 and Dish TV raising capital. Network18 raised Rs3.25bn via preferential allotment and QIP;IBN18 raised capital through sale of treasury stocks; and Dish TV promoters encashed some equity to fund the second tranche of the rights issue. All three witnessed significant erosion in stock price, of up to 20-30%, post the fundraising exercise. Jagran Prakashan (Jagran), however, witnessed promoters buying additional ~4.5% stake and has been outperforming the broader markets since June ’09.

Hindi GECs – Lively competition in tier I; NDTV Imagine & Sony consolidating in tier II
Competition in tier I of Hindi GECs heightened, with all three channels – Colors, STAR Plus & Zee TV – at the #1 spot in different weeks over weeks 23-27 of CY09. Colors retained an edge, while Zee TV continued to consolidate and STAR Plus continued to slip. During prime time, Zee TV was #1 during weeks 26-27 and that too with no blockbuster movies, events of grand finale shows . In tier II of Hindi GECs, NDTV Imagine and Sony Entertainment TV (Sony) have consolidated positions and garnered 20% of prime-time market share between themselves, up from 13-15% three months ago post introduction of a fresh slate of programming. NDTV Imagine has maintained >100 GRPs for six consecutive weeks.

Valuations – Prefer print companies and Sun TV Network (Sun)
We recently upgraded HT Media (HTML) to BUY from Hold and Jagran remains our top pick in the sector. We expect the crumbling newsprint prices (down 50% from recent peak) to contribute to high profitability of print companies. We also prefer TV18 and Network18 as their stocks offer attractive entry points at current market prices owing to heightened concerns about competition and poor Q4FY09 results. We prefer Sun over Zee Entertainment Enterprises (ZEEL) and recommend investing in ZEEL only on dips.

Key factors to watch
i) Impact of cost-control exercise (initiated in FY09) on Q1FY10 results ii) Fundraising by IBN18 iii) Newsprint price movement post the steep US$100 decline in past five weeks iv) Performance of NDTV Imagine and Sony, which have introduced a new set of programming.

To see full report: MEDIA SECTOR

>INDUSIND BANK LIMITED (BNP PARIBAS)

1QFY10 EARNINGS UPDATE

Results confirm our positive transformation thesis
IndusInd Bank posted strong 1QFY10 earnings, beating our PAT estimates by 81%. The improvement was broad based – net interest income, fee income and credit costs all coming in better than our estimates. Key highlights are:

1) Net interest income 5% higher than budgeted on marginally higher loan growth (4% q-q) and in-line NIM of 2.6%.

2) Non-interest income 64% higher than expected on higher treasury gains, forex income and robust fee income growth.

3) P&L provisioning costs 13% lower than expected on lower than anticipated NPLs. Net NPL ratio down to 1% from 1.1% in the previous quarter (our estimate was 1.2%).

4) Annualized return on asset (RoA) for the quarter much higher at 1.3% compared to our estimate of 0.7% and 0.8% for the previous quarter.

Detailed comparison in Exhibit 1 in report.

Valuation: Recommend BUY with TP of INR90
While we are yet to revise our estimates and TP after 1QFY10 results, we believe IndusInd Bank is firmly on the transformation path. We reiterate our BUY rating on the stock. As highlighted in our initiation report (The comeback kid – published June 10, 2009), given management’s intent and strategic focus, IndusInd is well poised to break into the big league within the private sector bank space in the next few years.

Our TP of INR90 is derived from a three-stage residual income model. At our TP, IIB is valued at 1.77x the FY11E ABV and 12.6x FY11E EPS. We expect IndusInd to achieve an adjusted ROE of 15.5% by FY11 and 16.8% by FY12 on an expanding capital base. IndusInd Bank is looking
to raise approximately USD100m in equity in 2QFY10.

Our current estimates are factoring in the dilution at an average price of INR55 per share. Lower than expected equity dilution due to the strong price record in the recent past will provide upside to our EPS estimates.

To see full report: INDUSIND BANK

>ABB LIMITED (JAYPEE CAPITAL)

We initiate coverage on ABB with a ‘SELL’ recommendation and a target price of INR 588 per share implying a downside of 15% from current levels. We expect ABB to generate strong revenues from power business due to robust spending planned in power generation resulting in robust demand for power equipments. However, the slowdown in industrial capex due to high cost of borrowings and limited access to capital will drag the project business putting greater strain on the financials of ABB.

Power business going from strength to strength
With demand for power expected to grow at 8 to 10% annually, power supply will face greater strain. In order to meet the shortfall, heavy investments are planned in increasing the installed capacity of power generation. Higher plan outlay for power T&D has also been made in 11th plan as the need for more efficient T&D network is severely felt. More emphasis will be given to reduce the T&D loss (India – 27%, world average – 15%) by strengthening the grid and replacing the old T&D equipments with the new ones. Majority of these investments will be undertaken by state utilities and central government entities, providing further cushion in the present economic
environment.

Corporate capex yet to take off, project business to drag
Although the power segment is poised to grow at a fast rate, the industrial segment will see the continuation of slowdown in the current year. The key differentiator is the availability of funding. We do not expect any revival in industrial capex as the access to capital is still constrained. The capital that is raised at the currently prevailing high cost will be utilised only to secure funding for the ongoing projects. We believe the impact of increasing cost of capital on IRR will keep away private sector from investing in new projects as they become unviable.

Slowdown in order inflow, worsening credit cycle
CY08 saw significant slowdown in order inflow on account of economic slowdown which resulted in deferment / cancelation of industry capex. This lead to a drastic fall in order intake in four consecutive quarters beginning from INR 27bn in Q1CY08 to INR 13bn in Q4 CY08. We expect a subdued order intake in CY09 as well. ABB is also experiencing a severe expansion in the working capital cycle which has resulted in a heavy fall in cash levels from INR 6.4 bn in CY07 to INR 3.5 bn in CY08 and increased borrowings for short term working capital loans at high interest rates affecting the business profitability.

Ground realities do not reflect market buoyancy, valuations expensive, SELL with a price target of INR 588
In the previous down cycle that lasted between 1997 and 2000, the capital goods industry recorded negative earnings growth on account of slowdown in both power and industry capex. However, this time around, due to government’s increased thrust on infrastructure development, there is a strong visibility in the power T&D segment. This will ensure positive business environment for ABB’s power segment verticals. However, we believe the recovery in the industrial capex is unlikely for next two quarters which will keep the industry segment sub‐dued. This change in business mix has put pressure on the financials of ABB as a result of falling earnings, slowing order book, and expanding working capital cycle. We project a moderate growth of 8% in revenues and 3% in profits for ABB in CY09. We assign a P/E multiple of 18 times CY10E EPS of INR 32.7 to arrive at a target price of INR 588 per share implying a downside of 15% from current levels.

To see full report: ABB LTD.