Sunday, October 18, 2009


Executive Summary

Demand-supply gap; growth opportunities abound
The education sector currently faces a huge quality and supply gap at all levels viz., higher education, vocational and k-12 segments. While demand for quality education surges on demographics (both income and age) as well as a change in the GDP structure, supply remains constrained on account of limited government budgets and lack of accountability in the public education system. These pressures will force regulatory changes that are likely to open up new vistas for the private sector.

Regulatory changes likely catalysts for growth
While the private sector plays an important role in the education space, it remains constrained by regulations. Recent policy statements from the new education minister give hope for a gradual acceptance of “for profit” education and a change in the government role to a facilitator (from a licensor). We believe these changes will lead to “cleaner” corporate structures and perhaps the presence of education chains. Further, the new policy statement opens new vistas through the Public Private Partnership (PPP) route. For instance, the model school scheme, which will allow private sector management of government schools, is a potential USD 4.7 bn opportunity.

Market size estimated at over USD 21 bn
We estimate the size of the Indian education space at USD 21 bn, which is slated to grow at a rate of 22% per annum. Growth is expected across segments, most prominently in k-12 and higher education, which we value at USD 9.4 bn and USD 7.1 bn, respectively. We believe, the growth rates could be higher incase regulatory changes are introduced. Further, private sector players will benefit disproportionately as the size of the pie available increases.

Educomp best placed but valuations a speed breaker
We initiate coverage on Educomp Soutions with a ‘HOLD’ recommendation. We like the company for its proven track record in project execution and strategic presence across the entire education chain. However, we believe the upsides in the near-term are limited on account of its high valuations (30x FY11E earnings). From a medium to long term perspective, the company is likely to offer strong growth opportunities, we recommend adding on dips.

Everonn Systems’ (Everonn) business focus is somewhat more narrowly defined with fewer entry barriers. We initiate coverage on the stock with a ‘BUY’ recommendation largely on attractive valuations (it trades at a 60% discount to Educomp). Longer term growth for Everonn though will be dependent on an expansion of its product offerings.

To see the full report: EDUCATION SECTOR

>Earnings and Sensex Target Raised (MORGAN STANLEY)

Earnings drivers looking in good shape: We are raising our top-down earnings estimates. Revenue growth seems to have bottomed out given our view that industrial growth is likely to recover sharply in the coming months. The strength of the recovery could bear upside depending on execution of policy reforms. The corporate sector seems to have cut costs and thus margins have
improved sharply. The macro environment (i.e., higher consumer price inflation vs. wholesale price inflation after adjusting for food prices) favors a robust rebound in margins in the coming four quarters. We think these three factors have set us up for strong earnings growth over the next 12 months.

Higher earnings forecast for BSE Sensex: We are revising our base-case BSE Sensex top-down earnings growth forecast from +10% and +20% in F2010 and F2011, respectively, to 15% and 23%. The consensus is expecting 5% and 20% growth for the BSE Sensex for F2010 and F2011, respectively. It is quite likely that broad market earnings growth will accelerate faster than the narrow market, as we saw in the previous cycle. We expect broad market earnings growth to average 20% and 25% in F2010 and F2011, respectively.

Sensex target raised: Following our earnings upgrade, we are also raising our BSE Sensex target. We have moved the target from Jun-10 to Dec-10 and increased the risk-free rate to 7.3% (reflecting the current long bond yield). The cumulative effect of these changes implies that our new BSE Sensex target is 19,400 for December 2010. Our bull-case scenario takes the Sensex well past its previous high whereas the bear case could lead it to test the post-election result close of May 18.

Market outlook: We reckon that Indian equities could to be in a sweet spot with low institutional ownership (coming off five-year lows), strong liquidity (policy makers are still reticent to take away stimulus), prospects of growth and earnings upgrade (indeed, we are at the start of earnings growth cycle), strong corporate balance sheets, and stable politics. Our Dec-2010 target for the Sensex suggests an upside of 13%, reflecting slower pace of gains after a stellar performance over the past six months. Our prognosis is that Indian equities could be volatile in the near term, since a lot of the next six months’ projected growth is already in the price. We believe that investors should use such volatility to buy Indian shares, since the growth outlook for the next 12-18 months remains firm and is still not priced into equities. Key factors that could determine market behavior include government policies, global markets, crude oil prices, long bond yields (reflecting fiscal position), the RBI’s exit policy (and hence liquidity), sentiment indicators (watch market breadth and momentum), equity supply, and valuations (relative valuations are moving above average levels).

To see the full report: INDIA STRATEGY


Stay Constructive for Medium-Term Rewards

We retain our In-line view on the India Steel industry; Tata and JSW OW: Despite the run-up JSW and Tata Steel have enjoyed in the past six months (outperforming the Sensex by 102% and 51%), we see further upside potential in both stocks from a medium-term perspective, thanks to strong volume growth and high steel price sensitivity. Tata should also benefit from ongoing restructuring at its European operations. SAIL has performed in line with the market for the period and may continue to do so as we believe its sluggish volume growth shall disappoint the Street.

Increases in our price assumptions for steel boost our F10 and F11 estimates despite hikes assumed in key raw materials: This is in line with our global mining team’s forecast changes (key inputs include iron ore and reductants). Accordingly, our EPS forecasts for F10 and F11 have risen by 12% to 28%. We also introduce F12 forecasts for SAIL, Tata and JSW, which imply YoY growth of 13%, 34% and 33%, respectively.

Key Debate #1: Can China’s steel surplus derail the nascent steel price recovery globally? Many are apprehensive about this possibility, but we are not so concerned. We cite China’s lack of incremental slack capacity and likely revival in global industrial output.

Key Debate #2: Are capacity restarts in the West occurring at a speed that could deflate the recovery in the steel balance? We don’t think so, in contrast to the Street’s view. Capacity restarts are taking place quickly, but we believe that after a brief hiccup, steel supply will adjust. We see demand growth by the end of CY09 maintaining medium-term steel price strength.

Key Debate #3: What are the trends in global steel demand? It remains quite feeble, according to the market – but we see clear signs of overall recovery.

Catalysts: Further tightening in Indian steel market, leading to price increases in 1HCY10; 4QF10 results.

To see the full report: INDIA STEEL

>Our Top Pick Among Our Large Asian Banks (MORGAN STANLEY)

SBI took a risk over the last few years, but it seems to be paying off: It grew its loan book aggressively at 28% p.a. over the last five years (up 3.5x). As such, the unseasoned loan book faced significant problems when the economy slowed. However, with IP growth picking
up and capital flows rising in India, the credit outlook has improved. We are still building in higher-than-normal provisions (112bp in F2010) in our model, but in our view the threat of substantially higher credit costs is greatly reduced. SBI is now in a position to reap revenue from its considerable asset base.

SBI’s efficiency up sharply: SBI’s profit per employee has increased about 100% in the last three years, as has balance sheet per employee. This has resulted in a noticeable improvement in cost ratios. Market share loss in fees has also abated. Over the last few quarters, SBI has been one of few banks we follow to grow fees faster than assets – and we expect this to continue. Improved costs and fees will drive core profitability.

Higher rates will be a catalyst for earnings pickup: Historical trends indicate that SOE banks should be sold when rates are rising. But these banks have reduced MTM risk to very low levels. Moreover, they are carrying substantial excess liquidity, which will benefit as rates rise. This, coupled with high CASA, implies that rising rates will drive NIMs up for SBI – which would more than compensate for any MTM loss.

Unloved stock; valuation appealing: Foreign
ownership remains close to multi-year lows at 14%. We are building in US$3bn of capital issue next year but still see 17% ROE for F2011E. The stock is at 9x F2011E earnings, 1.4x core book (ex insurance), and 5x core operating profit, one of the most attractive valuations among our Asia large cap financials, in our view.

To see the full report: SBI


THE STORY........

Over the last six years, the power transmission towers sector has been delivering pretty good returns and strong growth, driven primarily by inter-regional capacity additions, distribution reforms, rural electrification and a robust growth in power generation. The Government of India’s (GoI) Eleventh Plan has envisaged a capital expenditure of over Rs.6,665 bn for the country’s power sector in order to ensure “Power for All”. The GoI’s Common Minimum Program is focusing on achieving 100% village electrification by the year 2009 and 100% household electrification by 2012. It plans to add 78,700 MW of power generation capacity in the XIth Five Year Plan, which, coupled with, its decision to set up transmission lines with generation capacity for effective power evacuation, has opened ample business opportunities for transmission lines companies. The planning commission has allocated a budget of Rs.3,773 bn towards power generation, Rs.1,404 bn for power transmission and Rs.1,487 bn for sub-transmission and power distribution system, in order to tackle the power deficit situation
prevailing in the country. We believe that companies possessing financial strength and project
execution skills will enjoy an edge over their competitors and will be better positioned to capitalize on the opportunities arising in the power transmission sector.

KEC International (KEC.IN/KECI.BO), Kalpataru Power Transmission Ltd. (KPP.IN/KAPT.BO)
(KPTL) and Jyoti Structures Ltd. (JYS.IN/JYTS.BO) are our top picks in this space, as we view
them to be the biggest beneficiaries of the positive developments in the sector. For players such as KEC International, which derives almost 60% of its revenues from the international market, there exist significant opportunities abroad, particularly in the Middle East and Africa, where grid expansion and development has just commenced and the power transmission & distribution
(T&D) infrastructure is being ramped up. We believe that these players will be able to sustain their growth momentum for the next few years, though the slow down in the international market could impact their order inflow, which might act as a hindrance to growth. We are positive on the transmission towers sector and our investment thesis on the top picks in this space is balanced between our outlook on the overall sector, as well as the strengths and weaknesses of each of these players. We reinitiate coverage on KEC International, Kalpataru
Power and Jyoti Structures with a rating of Outperform.

The strong and sustainable growth in the T&D sector across the world is being driven by huge spending towards transmission lines, both on account of increasing generation capacity and maintenance of existing lines, as well as distribution networks, especially in the developing countries of Asia, Africa and the Middle East. In India, the ratio of investments in power generation to T&D stands at 1:0.5, as against the global level of 1:1, thus leaving huge room for growth in the domestic T&D sector. The Government of India’s (GoI) spending on T&D in the X Five Year Plan stood at Rs.500 bn, while the XI Five Year Plan (2007-12) envisages an investment of Rs.2,891 bn in T&D, which provides huge growth opportunity for players in the
power transmission sector.

As per the CEA, India’s annual power shortage stands at 11% and the country has a peak shortage at 12.4%. The country’s estimated power requirements at the end of the XI Five Year Plan is 1,038 bn units, with a peak demand of 151,000 MW. The power ministry is focusing on increasing the power generation capacity and evacuation of power from these power stations, which provides huge opportunities for transmission companies. Also, India’s telecom and railway sectors are growing at a very fast pace and the planning commission has allotted a capex of Rs.2,584 bn and Rs.2,618 bn for both the sectors respectively. The development of the telecom and railways sectors will provide a boost to the order book of transmission sector companies. Considering the investments in transmission and distribution sector, we expect the growth of order book for the transmission EPC players in tandem with industry growth in the coming years. Further orders from other developing countries will add to the growth of integrated transmission line EPC companies. In H2FY08 and HIFY09, higher raw material prices and rising interest rates were the key concerns for power transmission companies. We expect the margin pressure to ease, due to lower interest rates in FY10 in comparison to FY09 and a decline in commodity prices. The margins of companies with a higher proportion of fixed price contracts in their order books will witness an improvement.

To see the full report: POWER TRANSMISSION TOWERS