>GMR INFRASTRUCTURE: Focus back on domestic assets

GMR's focus is fully back on its high-growth domestic assets following the commissioning of its largest asset, the Delhi airport (DIAL), the start of its gasbased power plant in Kakinanda and the progress on exiting Intergen. However, DIAL's ramp-up has been delayed. We lower our EPS forecasts but reiterate Buy.

■ 1QFY11 results impress on EBITDA, but disappoint on PAT
GMR Infra recorded consolidated normalised PAT post minority of Rs24m (-89% yoy, -95%
qoq) on net sales of Rs12.3bn (+5% yoy, +9% qoq). Even though EBITDA was 11% ahead of our estimate, growing 17% yoy and 20% qoq to Rs3.78bn, PAT disappointed due to FX translation impact, a sharp decline in other income and higher taxes. In terms of divisional performance, all except roads and others recorded qoq dips in EBIT, while, on a yoy basis, airports and roads recorded a sharp increase.

■ Delay in DIAL ramp-up impacts financials
We halve our FY11 EPS forecast, as we build in the more than three-month delay in DIAL becoming fully operational, the change in our revenue-recognition method from assured returns to actual sales, and higher interest and depreciation costs for GMR’s Turkey airport. Our FY12F EPS cut is limited to 25%, as the Vemagiri power-plant expansion is ahead of schedule and operations are likely to start six months early, in October 2011. These EPS cuts have little impact on our DCF value for individual projects, as airport returns are assured by the government for the time value of money. We value the 50% stake in Intergen at the restructured equity investment of Rs15.8bn (Rs8.5bn earlier), which raises our SOTP-based target to Rs79 (from Rs78.40). Upside could come from pending financial closure of projects that we haven’t valued, like Male International Airport and 2,800MW in power projects.

■ Intergen overhang is behind us, focus on domestic project execution. Buy
We expect sales traction to improve sharply in the coming months, with the commissioning of
GMR Infra’s largest asset, DIAL Terminal 3, and GMR Energy’s gas-based Kakinada power
plant. For the medium term, GMR’s plan to sell its 50% stake in Intergen and deploy it in the
domestic power business should help drive ROE higher. We expect a sharp ROE uptrend in
FY13, which puts GMR at only 1.18x FY13F PB with low equity-dilution risk following the
improvement in its net debt/equity to 1.43x in June 2010. We reiterate Buy on 27% upside.

To read the full report: GMR INFRASTRUCTURE

>BHARAT HEAVY ELECTRICALS LIMITED: Margin surprise led to 1Q11 numbers well above expectations

■ Strong order flows should continue in FY11F; order book remains robust
The outlook for FY11 remains strong, as orders for the 12th five-year plan start to pick up.
NTPC is planning a further tender for 9x800MW supercritical capacity in addition to its bulk
tender for 11x660MW. The company is progressing well on order conversion of its joint
ventures with states. We expect private sector orders to be strong as well for BHEL in FY11.
All these factors give us confidence in the company’s ability to meet its FY11 inflow guidance
of Rs600bn. The current order book stands at Rs1.48trn, which is 4.4x FY10A sales and
provides strong medium-term visibility.

■ Margin surprise led to 1Q11 earnings well above expectations
BHEL reported 1Q11 earnings well above our expectations on the back of higher-than anticipated margins. Overall, revenue and PAT grew 16.4% and 41.9% yoy respectively to Rs66bn and Rs6.7bn. Margins expanded 418bp yoy to 14.6%, primarily on the back of a 480bp improvement in RM/net sales. Although the company reported a top line marginally below our expectations, we expect execution to catch up in the coming quarters and believe that the lower-than-anticipated top line might be due to a slight delay in revenue booking. On the margin front, we believe there is limited room for improvement over FY10, given rising material prices, and expect margin expansion to be lower for the rest of the year.

■ Introducing FY13 numbers, maintaining our Buy recommendation
We retain our estimates for FY11 and FY12. We also introduce our FY13 numbers and roll forward our DCF, which raises our target price to Rs2,793, a change of 8% compared with our previous target price of Rs2,590. We continue to like BHEL and remain confident in its ability to maintain its leadership and profitability, even in the increasingly more competitive scenario in the industry. In this regard, we watch keenly the upcoming NTPC tender for bulk supercritical equipment. Buy rating maintained.

To read the full report: BHEL

>GMR INFRASTRUCTURE: Largest asset gets commissioned

Our visit to GMR's new terminal at Delhi airport highlighted its project execution capability in building the world's sixth largest terminal in 37 months. With this Rs80bn commissioning, we expect GMR's airport sales to jump sharply. Supported by sufficient cash for ongoing projects, we reiterate Buy.

■ World’s sixth largest airport terminal commissioned in a record 37 months
Our visit to GMR’s new Terminal 3 (T3) at Delhi airport, which opens to traffic in the coming week, impressed us on the company’s large project execution capability (Rs80bn of Delhi airport’s Rs124bn project cost). Covering 80 acres and consuming 0.57m tonnes of cement and 0.14m tonnes of steel, the terminal was completed in around 60% of the time of similarsized terminals elsewhere. Delhi terminal capacity now exceeds demand (34m passengers vs 26m) for the first time, and management is aiming to make best use of the 5.5m sq ft inside the airport to raise non-aeronautical revenue from the 43% of gross sales in FY09.

■ Strong traffic growth in existing projects and new opportunity in the Maldives
We believe FY11 has started well for GMR’s airport division, with management disclosing yoy passenger traffic growth in April-May 2010 ahead of our expectations: 20-22% at Delhi and 16-24% at Hyderabad vs RBS estimates of 15% for each. We view GMR’s successful US$380m bid to construct a new terminal and expand the runway at Malé (Maldives) as an attractive opportunity as GMR will hold 77% in this profitable airport in a popular tourist destination and it won the bid with a 7% premium over the next closest bid. We await traffic details and financial closure information before incorporating this project’s valuation.

■ Reiterate Buy rating, with 33% upside potential as large asset commissioned
With the commissioning of this large Delhi airport asset and traffic growth ytd ahead of our forecasts, we forecast that GMR will grow its airport division gross sales 85% yoy to Rs38.2bn in FY11, with Delhi contributing 63% vs 50% in FY10F. With the T3 project demonstrating GMR’s physical execution skills, supported by its successful US$510m equity raising, we believe the company is set to build a world-scale infrastructure in airports and power generation and thus create shareholder value. We reiterate our Buy rating, with an SOTP-based target price of Rs78.40, as we expect ROE to improve from its low in FY10.

To read the full report: GMR INFRASTRUCTURE

>TATA POWER (RBS)

Tata Power's deal with Olympus Capital implies a US$2bn value for Tata's mine stake, which is lower than our attributed value of US$3.1bn. This leads us to lower our estimate for the mine stake to Rs305/share and roll back our SOTPbased target price to Rs1346. Consequently, we downgrade to Hold from Buy.

■ New deal with private equity player values Bumi stake at US$2bn
Tata Power has entered into a deal with private equity player Olympus Capital to sell 15% of its stake in the special purpose vehicles (SPVs) that own 30% of KPC and Arutmin. The 15% stake is valued at US$300m, implying a total equity value of US$2bn for Tata Power’s stake in the coal mines. The company has issued differential rights shares to Olympus Capital that are subject to capital protection arrangement. The capital protection arrangement is expected to be serviced either by funds from coal SPVs or by Tata Power.

■ Funds to be used for debt repayment and mine acquisitions
Tata Power’s management stated that it planned to use the proceeds to reduce debt related to coal mine acquisitions (US$694m outstanding as of March 2010) or to acquire additional coal mines overseas in order to ensure long-term fuel supply for its upcoming power projects. Currently, it has a take-or-pay arrangement of 10.1+20% MT with Indonesian coal mines and captive coal blocks at Mandakini (2.5MTPA) and Tubed (2.3MTPA) in India.

■ Power projects are on schedule
Tata Power plans to add 1,138MW of capacity in FY11, including the first unit of the Maithon project (1,050MW), for which a fuel-supply deal is already in place. Mundra UMPP is 52% complete, while management says the IEL Jojobera project is likely to happen in 2QFY11.

■ We revise our value estimates for the mines and downgrade to Hold
We had valued the company’s coal mines stake at US$3.1bn (US$2.5bn including a 20% holding discount, or Rs485/share). We now lower our estimate in the light of the deal, and value the company’s coal stake at US$2bn, which implies US$4.2 EV/ton for mine reserves (US$6.5/ton previously). We lower our SOTP-based target price to Rs1,346 (fromRs1,519) and downgrade to Hold (from Buy). The stock currently trades at 2.9x our FY11F book value.

To read the full report: TATA POWER

>GMR INFRASTRUCTURE: 4QFY10 results (RBS)

Funding in place for projects
GMR's March quarter was affected by weaker sales momentum and a steep hike in interest expense owing to new project commissions. With a combined equity issuance of US$510m for GMR and GMR Energy, we believe GMR is well placed to deliver projects as scheduled. We reiterate our Buy rating.

■ 4QFY10 results – airports gaining traction
GMR’s 4QFY10 results were affected by a steep increase in interest costs (37% qoq and 93% yoy) owing to a 14% qoq increase in debt. Net sales were lower than we expected at Rs11.3bn but were up 5% qoq, and EBITDA dropped 9% qoq to Rs3.14bn. The company attributed the sequential sales momentum to a full quarter of operations at the new Sabiha Gökçen International Airport (SGIA) in Turkey and an increase in non-aero revenue at Delhi airport, DIAL. Normalised EPS for 4Q was Rs0.19 and, except for the Power division, all of GMR’s divisions recorded impressive FY10 sales and EBITDA growth to yield EPS of Rs0.34.

■ Power and road building progress as planned
In 4QFY10, GMR began construction work at Vemagiri Power Plant in India and paid an advance towards equipment for Chattisgarh power plant and EMCO Energy projects, both in India. The company recently completed financial closure of Hyderabad-Vijayawada project in its Roads division. In Airports, it plans to run the Hyderabad airport duty-free business as a fully owned subsidiary, as Nuance Group AG has withdrawn from the venture. DIAL integrated terminal (T3) is undergoing trial runs to ensure it can open for traffic in July, and a steep jump in traffic at SGIA (96% yoy) has prompted a feasibility study for a second runway.

■ Equity funds in place to deliver projects on time
The April 2010 qualified institutional placement of US$310m, coupled with US$200m in private equity funding for subsidiary GMR Energy, augurs well for GMR’s projects, considering that it has nearly Rs41bn in liquid investments and cash in its consolidated entity. GMR has several large infrastructure projects in the high-entry-barrier infrastructure BOT (build-operate-transfer) space that are scheduled to get under way over 1HFY11. Since early May, the stock has marginally underperformed the Sensex, which we believe indicates a buying opportunity. With a debt service coverage ratio of 1.36x for FY10, we reiterate Buy with a target price of Rs78.40.

To read the full report: GMR INFRASTRUCTURE

>GMR INFRASTRUCTURE: Infrastructure giant

With a broad portfolio of infrastructure projects supported by a track record of good execution, GMR looks ready to deliver flagship projects in airports and power. We value GMR on an NAV basis, leading to our TP of Rs78.4. Recent long term fund raising has strengthened the balance sheet; we initiate with a Buy.

GMR enjoys first-mover advantage in the high entry barrier infra developer space
In the high entry barrier infrastructure developer space, GMR has a first-mover advantage as it aggressively builds a portfolio in transport (airports and roads), energy (thermal and hydro power, mines) and urban infrastructure (real estate and special economic zones (SEZ)). GMR's majority-management and financial control of projects have given it a strong execution track record in Indian infrastructure, in which overruns on time and costs are usual.

Largest airport developer in India should benefit from 15% CAGR in traffic
We forecast GMR's airport division, with controlling stakes in Delhi and Hyderabad airports,
commanding nearly 27% of India's air traffic, will grow at 15% CAGR in FY10-13F. Building on its first-mover advantage in the sector, we believe GMR has created a strong brand by giving international-quality service to Indian consumers. Supported by an open sky policy and project funding, we believe GMR offers a safe play on air traffic growth. GMR derives nearly 27% of its SOTP value from airports, which we see as more stable than cyclical airlines or the hotel industry. The adjoining premium land parcels supporting airport capex contribute 17% of our SOTP value.

Ambitious power portfolio to start delivery in FY13F; will reduce project-specific risk
GMR's judicious mix of fuel, customer profile, geography and fuel supply security in its energy business should lead to a sharp ramp-up in performance beginning in FY13F. Meanwhile, with a recent equity fundraising of US$510m, management appears on course to nearly triple sales, with an 85% CAGR in EPS FY10-13F. We value GMR on a SOTP basis at Rs78.4, in which we value projects on NPV of free cash flow to equity (FCFE), the highgrowth EPC division at an FY12F PE of 12x, and InterGen and Homeland at book value. GMR's monopoly in premium assets, good mix of regulated and market return projects, and ROE supported by government policy merit a premium valuation, in our view. We initiate with a Buy.

To read the full report: GMR INFRASTRUCTURE

>Global Steel 2010 (RBS)

We attended the Global Steel conference hosted by Gujarat NRE and The Economic Times last week at Goa. Various industry reps and analysts spoke about steel demand in India, the raw material pricing environment and the way forward for steelmakers. We sum up conference highlights here.

■ Near consensus on domestic expansion story
Speakers at Global Steel 2010 cited the 2020 steel-capacity projections of various agencies that ranged from 110mt to 293mt. However, there was near consensus on the strong growth expected over the next two to three years, as a result of expected strong demand backed by the current low per capita steel consumption and access to cheap raw materials. Potential negatives were land-acquisition delays, infrastructure bottlenecks and a lack of adequate coking coal resources domestically. Despite the strong resilience of domestic steel markets, versus world markets that are in the doldrums, speakers believed domestic steel players had recently missed a big opportunity to improve backward integration levels, due to their overleveraged balance sheets. For example, Sesa Goa was sold to a non-steelmaker and

■ Dempo was sold to Sesa Goa.
More analysts bullish on coking coal; times to get tough for non-integrated producers Most speakers and analysts appeared more bullish about coking coal than iron ore in the long term. They expected iron ore prices to peak next year and coking coal prices to remain high for a sustained period due to the poor prospects of existing finds delivering the desired coal on time. On the other hand, they expected scrap prices to continue to be volatile. We also see a need to increase exploration and discovery of new coking coal assets.

■ Our view: positive near term; repetition of 2008 likely if steel demand recovery slips
We expect steel prices to spike over the next two to three months, aided by strong seasonal factors that should almost entirely flow through to the bottom line. However, we expect the real challenges to begin after July-August, as steelmakers exhaust their low-priced iron ore and coking coal supplies. Current spot prices of iron ore and coking coal are more than 80% higher than contract prices, indicating significant price increases for FY11 raw material contracts. Based on historical movements, the market expects steel stocks to follow the direction of profitability and outperform up to June-July. However, after that period, it expects stocks to underperform depending on the strength of the economic recovery.

To read the full report: GLOBAL STEEL

>UNITECH (RBS)

Unitech, one of the largest pan-India residential developers, continues with its aggressive growth plans raising execution concerns, in our view. While it has largely addressed the leverage issues, we expect margin pressure on lower monetising opportunities in near term. We initiate with a Rs72 target price. Sell.

Execution remains a challenge

■ Pan-India residential real-estate developer focused on affordable housing
Unitech is one of the largest pan-India residential developers. When the market was buoyant, the company shifted its focus to the higher-margin, non-residential segment and monetised some of its IT parks/SEZs. However, the change in demand caused by the economic downturn prompted Unitech to return its focus to its forte of developing residential projects.

■ Aggressive growth strategy raises execution and marketing concerns, in our view
In FY10, Unitech plans to launch 30m sq ft (launched 24m sq ft in 9MFY10), despite already having 17m sq ft of past projects under construction. We believe its potential pipeline of about 47m sq ft is aggressive, given its average annual execution run-rate of 7m-9m sq f even in buoyant markets. While Unitech is now focusing on executing its past projects, we are concerned that its recent aggressive launches might result in execution delays for upcoming projects. Furthermore, while Unitech's project launches in metros have been successful, the poor response in non-metro areas raises concerns about marketing, as about 44% of the company's land bank is in tier-II cities.

■ Expect margin pressure due to lack of significant near-term monetisable opportunities
While Unitech has successfully reduced its net gearing from about 160% in March 2009 to 59% now, its net debt is still high (US$1.3bn) as only about 58% of its US$900m QIP was used to repay debt. This could lead to continual high interest outgo (about 47% of our FY11 EBITDA estimate). We expect margin pressure due to Unitech's changing product mix and lack of near-term higher margin monetisable assets (unlike about 40% of revenue in FY07-09). With demand for IT Parks/ SEZs yet to show significant revival and such projects owned by Unitech and UCP being in initial stages of development and leasing, we do not expect monetisation in the near term. Also, Mumbai slum-rehabilitation projects should add significant value only in the medium to long term.

■ We initiate coverage with a target price of Rs72 and a Sell rating
We value Unitech on a SOTP-based target price of Rs72, comprising: 1) Rs62 end-FY11F DCFbased NAV for real estate (at a 15% discount to GAV); and 2) Rs10 for Unitech's stake in telecom unit, Uninor (at a 20% discount to Teleno's acquisition price). With our target implying 19% potential downside from the current price, we initiate coverage of Unitech with a Sell rating.

>INFOSYS TECHNOLOGIES (RBS)

■ Increasing traction from new engagement models underpins long-term targets
Infosys showcased its thrust on new engagement models, where output/pricing are not directly co-related to manpower. The company aims to earn a third of its revenues from these models in five to seven years (vs 5-7% currently, ex-Finacle). It has closed about a 100 such deals in FY10 ytd of TCV of US$165m. Discussions are on for 150 more projects worth US$528m. Growth from these models is significantly higher- bookings and revenues are up 75% and 50%, respectively, vs a 4% yoy decline in overall revenues in 1HFY10. Apart from customers' demand for outcome-based pricing, a key driver is to side-step rate card negotiations, typical of time and material based contracts.

■ New operating model to drive productivity, while client-partner role focuses on mining
Infosys has increased the minimum number of years an employee needs to put in technical roles to eight (typically six earlier). While this is in line with clients' insistence on experienced technical staff, it also increases the average billability of an employee by about two years. A larger span of control of 1:3:9 (from 1:2.4.5 earlier) also helps spread overhead costs wider. Infosys plans to increase its sales headcount by 30% in FY10, particularly to deepen large client relationships through dedicated client-partner roles.

■ Near-term outlook unchanged; valuations price in growth expectations, in our view
Management reiterated its near-term demand outlook given in October 2009. It does not expect the usual budget flush to play out in December 2009, as clients are still strictly monitoring spending levels. While most 2010 budgets are likely to be finalised in time, recent interactions with clients indicate budgets will likely be flattish yoy. Infosys expects discretionary expenses to be curtailed. We maintain about 20% growth for FY11F is already built into current valuations and that this would be difficult to surpass.

To read the full report: INFOSYS TECHNOLOGIES

>CAPITAL GOODS SECTOR (RBS)

While the outlook has improved in recent times, we feel stocks are trading at the upper end of their valuation bands and are unlikely to rerate further. Hence, we are Neutral on the sector. Stock picking is a judicious balance of long-term outlook and low risk in meeting near-term numbers. Thus, Buy BHEL and CGL.

Sector trading at the upper end of its valuation band; initiate coverage at Neutral
The capital goods and engineering space has seen a fundamental shift over the past six months, with a new government promising more on infrastructure, improved liquidity conditions and softer commodity prices. However, this structural shift is already reflected in share prices, in our view, and the sector is trading at the upper end of its valuation band, capping near-term upside potential. Stocks appear to be pricing in medium-term valuations, on a two- to three-year horizon. Hence, we initiate coverage at Neutral on a 12-month view.

Stocks unlikely to touch past valuation peaks, in our opinion
The bull argument for the sector, from a valuation standpoint, is that stocks are still trading well below historical highs seen in 2007, at which time valuations were explained by PEGs. While stocks may yet see some liquidity-driven PE expansion, we believe they are unlikely to repeat 2007 PEs when viewed from the PEG angle. If one compares the growth exhibited by these companies over FY05-08 with that in FY09-12F, one finds that sales, EBIDTA and PAT growth is much slower now. Similarly, the operating leverage story that played out in the earlier period will now be much more muted. Finally, the delta we saw in RoE and RoCE earlier is unlikely to be repeated because capital goods companies are themselves in capex mode. Slowing order books and stretching working capital cycles also means free cash flow generation is much lower than in the past. What is different this time around is the global cost of capital. At an all-time low, this variable is driving up the valuations of many sound companies. Could this be the dark horse in the valuation game?

Relative stock picking is the order of the day; Buy BHEL, Crompton Greaves
In the current scenario, we believe stock picking has become relative instead of absolute. Of the core bellwether stocks, BHEL and Larsen & Toubro, we prefer BHEL on a 12-month perspective. This is based on our view that downside risk is greater than upside, thus we advocate stocks with lower beta. While Larsen has multiple drivers to fire when the going is good, it is precisely this that increases its beta. Among the T&D stocks, we pick Crompton Greaves, because we believe the traditional valuation gap between Crompton and its MNC peers should shrink within the next year. The other key reason for choosing BHEL and Crompton is that we believe they are the least likely to disappoint in terms of FY11 numbers.

To read the full report: CAPITAL GOODS SECTOR

>BANKS: Light at the end of the tunnel

FY10F: margins under pressure, equity capital raising partly lowers risk of NPLs After muted loan growth in 1HFY10, we expect loan growth to pick up in 2HFY10 and maintain our 16% yoy growth estimate. Further, we expect NIMs to be higher in 2HFY10 vs 1HFY10, as 18% of deposits are to come up for repricing in 2H. For FY10, on balance we expect NIMs to fall 20-30bp yoy. Our concerns about asset quality have receded partly due to equity raising by companies. In our 24 June 2009 note (At the crossroads), our estimate was that gross NPLs would rise by Rs857bn up to March 2011, implying a 3.6% GNPL ratio (2.4% as of March 2009) and, accordingly, we had factored in higher NPL provision for banks in general. However, the improving macroeconomic environment and the equity capital raising of about Rs410bn ytd and about Rs695bn in the pipeline have reduced our concerns on asset quality. In short, core earnings will likely remain under pressure in FY10, but lower NPL provision will likely ease some of the pressure on RoAs.

FY11-12F: improvement in core earnings, led by margin expansion and fees A long-term analysis of SBI’s margins suggests that NIMs come under pressure when interest costs rise, implying that the ability to pass on the total increase in cost of funds for banks in general is limited. However, as liabilities get repriced lower over the maturity cycle in FY10 (overall cost of liabilities is down 200-300bp yoy), NIMs will likely expand in FY11- 12. Also, healthy growth in core fee income (1HFY10) despite the muted loan growth has been a pleasant surprise. We expect a combination of these factors to drive improvement in core earnings in FY11-12F.

RBI's 70% coverage norm is a mere book entry; upgrade PSBs to Buy Fears of withdrawal of the accommodative monetary stance by RBI and the advice to maintain a 70% provision coverage ratio for NPLs have led to some correction in bank stocks. We believe this is a counter-cyclical measure and is structurally positive for the system in the long term. In our view, the higher provisioning may impact reported net profit, but will help strengthen the balance sheet over the medium to long term. Note an increase in coverage ratio is a mere book entry and is different from an actual loan loss charge. We thereby consider this an opportune time to Buy. In general, we raise our FY10-12 net profit estimates, driven largely by the rolling back of NPL charges. We roll forward our valuation to FY11F and upgrade public sector banks (PSBs) to Buy. On a relative basis, we now prefer PSBs over private banks. Top picks: SBI, PNB and BOB. IDBI Bank remains a contrarian Buy.

Loan growth set to accelerate After muted loan growth in 1HFY10, we expect loan growth to pick up in 2HFY10 and maintain our 16% yoy growth estimate. Most bank managements have been guiding for 18-20% yoy loan growth in FY10, on the back of a robust sanctions pipeline. We believe infrastructure loans, higher demand for working capital and retail loans will be the key drivers of loan growth. Further, the government’s borrowing programme for FY10 is 70% completed and, therefore, we believe the incremental loan-deposit ratio in 2HFY10 will be better than in 1HFY10.

To read the full report: BANKS

>India Steel (RBS)

India Steel Sector

A tentative Recovery.....

Our visits to the Indian steel producers suggest that they are expecting a recovery in sales volumes, though prices remain weak. The government could raise import barriers further, protecting the industry from import competition. Demand-boosting measures, however, may take longer to execute.

* Production recovering and prices stabilising

The Indian steelmakers have raised production volumes from the low levels of Nov-Dec and they expect sales volumes to improve qoq in the Jan quarter. However, sales volumes could still be down yoy. The volume recovery has so far not led to a price recovery, though prices have stabilised in February after a continuous decline over Sept 2008-Jan 2009. A strong price recovery looks very unlikely, as visibility remains low.

* Government actions may aid industry, but timing in question
The government has announced several measures to protect the domestic steel industry, and we see the possibility of more, such as a further rise in import tariffs. Currently, however, we highlight the risk of delays, in decision-making and execution, due to the upcoming elections (probably in May/Jun 2009).

* Costs should decline, leading to EBITDA improvements
The possibility of lower input costs is well known, particularly for imported coking-coal contracts, as new prices (which we forecast will be 60% lower) are to become effective from July. Efforts to renegotiate prices for remaining contract volumes for Jan-Jun 2009 are ongoing, and any success would be positive. This should boost margins for domestic steelmakers, which have remained profitable during the price downturn.

To see full report: India steel

>Tata steel(RBS)

Tata Steel posted a strong 1HFY09 performance, with operating profits up 73% yoy.
However, we expect the rapid price deterioration in the past few months to lead to a
severe earnings decline from 2HFY09. Maintain Sell with new target price Rs115

To read full report Tata steel(RBS)