>PRC Metals and Mining Chart Park (CITI)

Is This Sector Hot or Not?

■ Mixed signals – The fall in steel prices through August highlights the power of speculative demand and over-stocking versus the timing of real demand. A combination of seasonality, fear and de-stocking has left prices below the February lows, and headed for the Oct ’08 lows. Despite this, copper and gold look robust, likely a function of financial rather than industrial buying.

■ China Materials is looking like an inverse play on the US and EU economies – With no export growth, China policy will remain focused on domestic growth with high materials intensity. Moreover a weak US will see a weaker US$, which is positive for materials prices from traditional demand sources, along with sustained dedollarisation decisions from investors and governments.

■ 3Q results and 4Q demand will hold most sway in the next 2-3months – With 3Q09 results, more so than 2Q09, we will be able to gauge the recovery in profitability versus the announced price increases. Moreover, we will have visibility on the strength of 4Q09 demand, which is expected to be strong. Worryingly, this may already be in the price.

■ Order of least preference for China: Steel, Bulks, Base Metals, Cement and Gold – Stock specific drivers aside, Steels are looking the most vulnerable near-term, as are the bulk plays in the region, especially coking coal, which has had a good run but which will struggle if steel prices continue to dive. However, we would use this as a buying opportunity for coking coal.

To see full report: METALS & MINING

>DHANALAKSHMI BANK (ENAM SECURITIES)

Rejigged board + Refurbished strategy >> Recipe for a bright future

■ Dhanalakshmi Bank (Dhanbank), a Kerala based old private sector bank, promises to be an excellent play with regards to the well defined execution of strategy. This is attributable to a spectacular business (Rs 8165 cr as on March 2009) growth of 43% in the first year of operation
after the entry of fresh talent, new technology, revamp exercise (both strategically & change in composition mix) & differentiated business model for each product & service.

Unfurling the first phase of the growth story!
■ Change is the new mantra -The management has fully leveraged on the current capacity and revamped the bank’s operations through hiring of fresh talent to nearly double from the current 1402 to 2700 employees in FY10. The bank plans to reshuffle loan mix exposure, investment book &
deposit base to yield healthier margins. Capital raising plans is an ongoing process for the bank with Rs 400 cr (Tier II) to be raised over FY10 and FY11 and possible equity issuance in FY11. Care & ICRA have upgraded the credit rating for Dhanbank’s Tier II bonds.

■ Differentiation in business model to achieve excellence - The endeavour to take the bank’s business to new highs demarcates their business model from other private sector banks in terms credit cards, branding exercise through ATM, insurance & MF distribution & AMC.

■ Entering a new gamut of growth trajectory – Dhanbank aims to achieve a pan India status with presence in 600 (currently 180) cities 1000 plus branches in 5 years. The bank endeavours to achieve a 40% plus credit growth (twice the industry growth) through inorganic growth once they
have achieved a firm hold through organic growth.

Risk factors
■ Capital raising exercise could increase the cost component for the bank in Tier II capital & there could be a possible equity dilution in case the bank plans an issuance in FY11. Execution delays could be a dampener to the bank’s aggressive plans of achieving exponential growth.

Valuation
Dhanbank has delivered a strong balance sheet growth (advances of 52% & deposit of 38%) and doubled in terms of profitability in FY09 on account of a low base effect. Going forward, we expect ascending core margin compared to the downtrend expected amongst its peer group. This has been supported by an above industry growth in other income (55% of other income forms a
part of insurance). Going forward, the bank is likely to triple in terms of size with a three year horizon. Considering its strong growth & expansion plans, change in composition of the bank & book accretion driven by profitability plough-back, we initiate a BUY on Dhanalakshmi Bank (which
has traded from FY07 at a historical P/Adj BV range of 1.8 x and deserves premium valuations) with a target price of Rs 198 (2.5x FY11 E adjusted book value & 11.6x FY11E earnings).

To see full report: DHANALAKSHMI BANK

>MOTO GAZE (ICICI DIRECT)

Ahead of festive mania…

Ahead of festive sales, August reported stupendous growth in volume with leaders Maruti Suzuki and Hero Honda registering their highest ever sales in the month. This confirms that the segment in on a high growth trajectory despite poor monsoons. Ashok Leyland was the only company that was unable to catch up in the race and has de-grown by 7.2 YoY while all else registered growth in the range of 10% to 42%. Due to poor monsoons, we were expecting a poor sales performance from Hero Honda, Mahindra and Mahindra (M&M) and Maruti, which garner higher sales from rural markets. However, their sales performance has actually surprised us. Along with new launches, the increase in financial lending and softening of interests led the rally.

For the first five months, the four wheeler major players (Maruti Suzuki, Tata Motors and M&M) reported 16.6% sales growth while exports were robust growing at 58.7%. The growth was mainly led by Maruti Suzuki. The two and three wheelers segment reported 12.7% growth while exports were down 23.5%.

We expect the automobile segment to grow at 16%. The two-wheeler segment would grow at ~17% while the passenger vehicles segment is likely to register 10-12% growth. We were expecting the commercial vehicle segment to remain subdued with 4-5% volume fall. However, 10% YoY growth and 4.9% MoM growth reported by CV leader Tata Motors is likely to reverse the trend for the segment and report flat to 2%-3% growth.

Two–three wheeler industry
With reviving volume sales, Bajaj Auto finally joined the race with 6% volume growth while Hero Honda continued riding high and registered 35.9% growth in total sales for August 2009. TVS Motors also ended with double digit 11% growth. Yamaha Motor’s sales jumped 63% to 19,508 bikes in August 2009 from 11,974 bikes in August last year while the other Japanese two-wheeler maker Suzuki Motorcycle India’s sales increased 18% to 13,030 units in August.

We expect the two-wheeler segment to grow at 17% in FY10. Hero Honda Motors, which is expected to grow at 24% per annum, was the major contributor to segment growth. We expect 7-8% growth from three-wheeler sales for the year.

To see full report: MOTO GAZE

>GLOBAL CHARTBOOK :SEPTEMBER 2009 (WELLS FARGO LIMITED)

Executive Summary: Is the Deepest Recession in Decades Ending?

The heady days of 2004-2007, when global GDP growth averaged about five percent per annum, seem like a distant memory now. Growth in most countries slowed in the first half of 2008 due in part to monetary tightening, the unprecedented rise in energy prices and dislocations in credit markets. Global economic activity then went into absolute freefall in the fourth quarter of 2008 as credit markets froze up in the wake of Lehman Brothers failure, and the sharp downturn in major economies extended into the first part of this year. Industrial production in the OECD countries (i.e., the thirty most developed economies in the world) plunged 17 percent in the first quarter of 2009, by far the sharpest year-over-year rate of contraction in decades.

It could have been worse. Most major countries averted a catastrophe last year by taking steps to prevent a wholesale collapse of their financial systems via recapitalization, loan guarantees, and increased deposit insurance. In addition, governments responded to the crisis with stimulative economic policies. Major central banks slashed policy rates to unprecedented levels, and governments in most major countries opened the fiscal taps.

There are signs that the medicine is having its desired effects and that growth is returning to most economies. The global recovery is being led by Asia where growth turned positive again earlier this year. The financial systems of most Asian economies were not nearly as levered as their western counterparts, so banks in the region were able to ramp up lending again. In addition, most Asian governments responded to the crisis with expansionary fiscal policy. The year-over-year GDP growth rate in China rose from six percent in the first quarter to eight percent in the second quarter. However, the expansion is not confined to only China. Many other countries in the region, including the large economies of Japan, Korea and Taiwan, are posting positive growth rates again.

There is solid evidence to suggest that Canada, the United States and most economies in Western Europe have stabilized. Production was slashed much faster than final demand in most western economies, leading to sharp declines in inventories. It appears that massive inventory liquidation has come to an end, and manufacturers are beginning to ramp up production to bring output back in line with final sales. In that regard, stimulus measures enacted late last year and earlier this year are helping to boost activity. Most western economies should post positive growth rates over the next few quarters. That said, the modest global upturn that appears to be underway remains fragile, and a self-sustaining recovery has not yet been firmly established.

The Dollar Should Appreciate Modestly versus Major Currencies
The dollar strengthened significantly last autumn as risk aversion spiked. U.S. Treasury securities are considered to be the safest assets in the world, and massive buying of U.S. government bonds by foreign investors contributed to the dollar’s strength. The greenback has given up most of its gains over the past few months as investors have turned less risk averse. With stock markets rising in most countries and corporate bonds rallying, the safety of low-yielding U.S. Treasury securities is not as compelling as it was only a few months ago when worst-case scenarios did not seem farfetched.

Looking ahead, the currency strategy team of Wells Fargo projects that the dollar will trend modestly higher against most major currencies. Investors expect that most major central banks, including the Federal Reserve, the European Central Bank and the Bank of England, will be on hold until well into next year. Therefore, expected changes in short-term interest rates will not have as much an influence on exchange rates as in the past. As the U.S. recovery gathers steam, foreign investment flows into long-term securities (e.g., corporate bonds and equities) and direct investment inflows should resume, helping to lift the greenback. In addition, the decline in the U.S. current account deficit should exert less headwind on the greenback than it did earlier this decade when the dollar was trending lower.

To see full report: GLOBAL CHARTBOOK

>NTPC (INDIA INFOLINE)

• Clear focus on fuel security
• 18GW under construction but addition to remain back-ended.
• Core RoE marginally above 20%
• Amongst the most expensive utilities, re-iterate MP.

To see full report: NTPC