>CROMPTON GREAVES (PRABHUDAS LILLADHER)

Investment in a promoter group company – a negative surprise

· Acquisition of stake in APIL: Crompton Greaves (CRG) board has given approval to buy a stake of 41% for Rs2.3bn at book value in Avantha Power and Infrastructure (APIL), a promoter group company. These funds are to be utilized for the Korba 1x600mw power plant for which a debt of Rs21bn has already been underwritten, 80% of land acquisition has been completed, water allocation has been done and coal linkage are in place. Another Rs1.6bn worth of equity will have to be raised either by private equity or through group companies, which will result in dilution of CRGs stake (but will not go lower than 26%). APIL is a power generation company having 165MW capacity (by June 2009), expandable to 1365mw (2 plants of 1x600mw each) in various stages. The other stake holders of APIL are BILT, BILT paper and Solaris (all are Avantha group companies).

· Buy-back offer: CRG board has approved a buy-back of shares for Rs2.2bn upto a price of Rs170 per share. Keeping in mind that the APIL stake will be paid in cash and the current cash balance is just about Rs3.0bn, CRG will have to utilize internal cash generation over the next 9-12 months if it wants to complete the buy-back. We believe that only a part of this buy-back will be completed and in the current situation, this offer is largely there to just act as a check on the declining stock price.

· Valuation: At the CMP of Rs106, the stock is trading at 6.9x FY09E and 5.9x FY10E earnings of Rs13.7 and Rs15.3, respectively. The diversification into power generation could yield lucrative cash flows post 2013. However, in the near term this diversification would have a negative impact as the future cash flow commitments to this segment are not known. Also, to maintain its stake in the venture, CRG will have to commit larger sums of money, going ahead. Our Reduce rating stays.

To see full report: CROMPTON GREAVES

>Chemicals Sector (EMKAY)

SUSTAINED RECOVERY AHEAD.......

Mar’09 was marked by price as well as volume stability. In order to have more clarity on the price movement of various chemicals, we have increased the number of products from 19 to 33. Out of the 33 products in our universe, 12 products reported an increase in prices, 7 products reported a decline and prices of 14 products remained stable in Mar’09, indicating a stable price scenario. Emkay chemical index (covering 33 products) almost remained flat since Jan’09. Dealers are in consensus of the view that near term prices should remain stable. However, some volatility in prices cannot be ruled out. Volumes have stabilised with no significant increase on MoM basis in Mar’09. We believe that stable price scenario should continue while more products should report increase in prices in Apr-June’09 quarter. Volumes should pick up further on stable price scenario.

· Price stability continues
We have increased the number of products under our coverage from 19 to 33. We saw price stability during Jan-Mar’09 period in most of the products after a sharp fall in Oct-Dec’08 period. Products reporting positive movement in prices have steadily been on the rise, with 7, 10 and 12 products reporting an increase in Jan, Feb and Mar’09 respectively. Products with a stable price scenario also increased to 9, 13 and 14, respectively (Jan-Mar’09). Products reporting decline in prices reduced to 17, 10 and 7 during the same period. Higher proportion of increasing prices and stable prices in our product universe clearly indicates the stability in prices.

· Restocking boosted volumes in Jan-Feb’09; expect stable scenario now
After a sharp decline in prices in Oct-Dec’08 quarter, led by lower demand and de-stocking, volumes picked up in Jan-Feb’09 period, mainly driven by restocking at dealer’s and consumer’s level. However, the scenario has stabilised now and dealers expect volume and price stability in the near future. However, some volatility in prices cannot be ruled out.

· Outlook – Sustained recovery ahead
As mentioned earlier, we believe that prices of most of the products have bottomed out and should start showing some increase in prices. Many of the products have already shown some improvement in prices. We have seen increasing stability in prices as well as volumes of most of the products during Jan-Mar’09 quarter. We expect Apr-Jun’09 quarter to see a recovery in prices and volumes.

To see full report: CHEMICALS SECTOR

>Fulford (India) Limited (PPFAS)

Steady Operating Performance
Fulford (India) Ltd. has been a steady performer in terms of top-line & bottom-line growth, over the past several years. The company has consistently achieved growth in the range of 10 - 13% CAGR over CY04-CY08 period. Going forward, we expect the company to maintain similar growth rates of 10.3% & 14.4% CAGR in top-line & bottom-line respectively, over CY08CY10E period.

Strong & Committed Parent
Fulford is a 54% subsidiary of Schering-Plogh Corporation, USA, a research-based company operating worldwide. The parent company is committed to the growth of its Indian subsidiary, which can be seen from:

- The new product launches almost every year

- Increasing its stake through prefential allotment of shares, followed by an open offer.

Expectation of an Open Offer
Fulford's parent company - Schering-Plough is getting merged with Merck & Co. Inc. USA. Fulford is a 54% listed Indian subsidiary of Schering-Plough, whereas Merck has a wholly owned unlisted subsidiary - MSD Pharmaceuticals Private Ltd. After the successful completion of the merger, there are chances of Merck coming up with an open offer for shares of the listed entity Fulford (India) Ltd. That would be a very positive trigger for the stock.

Valuations
We expect Fulford (India) Ltd. to achieve a growth of 10 - 13% CAGR over CY08-CY10E period, both in terms of its top-line & bottom line. Besides, the company is cash-rich & completely debt-free. We expect the company to have approximately Rs. 280 per share as Cash & cash equivalents on its Balance Sheet as of December 2008. At CMP of Rs. 365, the script trades at 6.1x CY09 & 5.5x CY10E earnings. We initiate coverage with a BUY on the stock.

To see full report: FULFORD

>Metal Sector (MOTILAL OSWAL)

We believe pressure on steel prices has eased due to better visibility on cost structure despite poor demand

· Japanese mills settled coking coal annual contracts for 2009 at US$129/ ton, which disappointed steel producers who were targeting much lower prices and are left to buy carry over quantities of 2008 contracts at old prices. Though iron ore prices are yet to settle and there is no sign of demand recovery, there is now better visibility over the cost structures for 2009, which may not allow further price correction. Steel producers would rather cut production than offer lower prices. Billet prices have recovered marginally last week. We believe pressure on steel prices has eased.

· Spot iron ore prices continue to remain under pressure due to rise of inventories on ports, poor pig iron production and rise of imports in China.

· We believe easing of pressure on steel prices and correction of input costs will revive margins and the strong volume growth of 67% (largest among Indian steel company) will drive earnings for JSW Steel. Stock is trading at 45% discount to FY09 book value. We upgrade JSW Steel to Buy.

· Hydro, U.C. Rusal have cut production of aluminium and alumina further.

· Base metal prices have rallied on continued state buying by China at a premium, less disappointing US economic data, fear of dollar weakening and speculative inventories building by traders. Sterlite, a diversified base metal producer, is the key beneficiary.

To see full report: METAL SECTOR