>Talking Point (Deutsche Bank)

Deficit spending: You'd better keep an eye on it, too

Deficit spending can be helpful to overcome the current economic crisis. However, the necessity to stimulate the economy does not justify public spending sprees. Economic stimulus programmes come with a caveat. Strongly increasing public deficits and public debt can weaken major forces of economic growth.

In Germany as well, higher government expenditure is the policy of choice to fend off the economic crisis. Two stimulus packages of EUR 80 bn have already been enacted by the federal government. The spending programmes, which equal roughly 3% of GDP, are contentious. While advocates expect a sustained boost to economic growth, critics fear that the packages will fail to heal the recession.

The programmes are designed to reinvigorate the weak demand for goods and services and prevent a free fall of the economy. The German government and other advocates do not only count on the direct effects of the rise in public spending. They also expect a boost to private-sector consumption and investment activity. Under the optimistic scenario, the measures will not only push up GDP by EUR 80 bn; the actual added value is expected to be higher as the measures will have a positive effect on the business climate. This will keep more employees on the payroll and thus stimulate consumption and investment, it is argued. But economic stimulus programmes come with a caveat. They push up national debt. This is part of the deal, so to speak. If the government now wants to spend more for economic stimulus programmes such as road infrastructure projects and the refurbishment of public buildings, and supports many citizens wishing to buy a new car by implementing the scrapping bonus, it must not, of course, finance these measures by simultaneous tax increases. The only instrument for the government to stimulate demand is debt financing.

To see full report: TALKING POINT

>Hotels Q4 FY09 (INDIA INFOLINE)

Weakness likely to persist in Q4 FY09.
Q4 FY08 had seen record quarterly revenues for the three hotel companies under our coverage. However, the slowdown in Revenue Per Available Room (RevPar) growth worked its way through 9M FY09 with Q3 FY09 bearing the burnt of recession and terror attacks in Mumbai. Dec'08 has proved a 'wipe-out' month for the indudtry as luxury market ARRs fell 15% yoy. The weakness in room rates and occupancies is likely to persist in Q4 FY09. We expect revenue declines ranging from 16-25% yoy, partly owing to the high-base effect of the last year.

Margin pressure may contiue unbated.
We expect margin pressure to continue unbated as revenues come under pressure yoy. Relatively fixed expenses such as fuel and staff are likely to impact operating margin. Indian hotels and EIH are expected to report more than 10 ppts drop in OPM.

Occupancies may improve qoq for Indian Hotels.
In the aftermath of terror attacks and holiday season, occupancies in business hotels dropped to ~50% in Dec'08, a sharp fall of over 24ppts yoy. However, we expect larger players such as Indian hotels to witness improvement in occupancy rate qoq from the Dec'08 trough. On the other hand, ARRs are likely to remain weak, due to ongoing economic weakness, especially in cities such as Bangalore where we estimate room rate decline of about 7-8% yoy and occupancies of about 63-68% in the quarter.

To see full report: HOTELS Q4 FY09

>Chambal Fertilisers and Chemicals (PRABHUDAS LILLADHER)

Expansion plan – On track

* De-bottlenecking of Gadepan-I urea plant completed: De-bottlenecking of the Gadepan-I urea plant has been completed and the commercial production has commenced from March 31, 2009. Post the de-bottlenecking, plant capacity has increased from 2850tpd (tonne per day) to 3100tpd. The de-bottlenecking of the Gadepan-II urea plant is on and expected to be completed during May 2009. It will increase the capacity from 2850tpd to 3000tpd. Total capex for the debottlenecking would be around Rs4,500m (Rs3,000m for Gadepan-I and Rs1,500m for Gadepan-II plant). Chambal Fertilisers and Chemicals (Chambal) is expected to get the KG basin gas from the current month. We believe that Chambal will add EBIT of Rs636m in FY10E on the back of de-bottlenecking of both the urea plants and use of the KG basin gas.

* Shipping business: Chambal has five Aframax ships in their portfolio (added three new ships during the year) at present. The company has a long-term time contract till the end of FY10 for all the ships, with an average freight of US$22,000 per day per ship. They will further add one more ship in Q4FY10. Chambal has taken a debt at an attractive rate of Libor plus 40bps to 90bps for the shipping business. All the ships are fully insured.

* Debt and bond position: At present, Chambal has total debt of Rs21,500m, which consists of a long-term debt of Rs18,000m and working-capital debt of Rs3,500m. The company has a fertiliser bond of Rs3,800m in their books. They could book a provision for MTM losses on such bonds. We have assumed 5%
discount i.e. Rs190m in our FY09E estimate.

* Valuation: Chambal’s 90% of the urea business is on cost plus 12% post tax ROE (i.e. fixed earning) basis and shipping business is on time contract till FY10E. Hence, we believe that a downward pressure on earnings would be less. We maintain an “Accumulate” rating on the stock.

To see full report: CHAMBAL FERTILISERS & CHEMICALS

>United Phosphorus (CITI)

Buy: Strong Biz, Concerns Overdone; Raise TP to Rs183/sh

* Concerns overdone — We believe that UPL’s valuations do not reflect its strong fundamentals due to overplayed concerns on industry growth and pricing prospects. Our discussion with UPL and channel checks along with recent
earnings and management speak from global peers suggest that while the outlook is more cautious than 6 months back, things are better than is being perceived. Maintain as one of our top picks with a 14% higher TP of Rs183/sh.

* Global cues — Besides good results, management speak from global peers indicate that farm economics and demand are sound across markets, with the exception of some LatAm countries. The outlook for the next fiscal is strong in most cases and concurs with our positive view on UPL’s business.

* B/S strength could throw up opportunities — UPL has a steady B/S, with net D/E of 0.6x, low refinancing risk (most debt redeemable in 2011) and rising cash flows. As asset valuations come off, we believe UPL is one of the few
players positioned to be an active participant in any industry consolidation.

* Adjusting earnings — We believe conversion of warrants issued to promoters in Oct'07 is now unlikely. Our FY10-11E PAT estimates are lower by 4% due to lower other income, but the lower share count leads to c6-7% higher EPS.

* Core thesis — UPL is among the fastest growing and most profitable generics crop protection firms in the world. Its presence in regulated markets and low cost manufacturing base in India give it a competitive edge, while growing
scale and cash flows provide the ability to seed growth. At 7xFY10E earnings, the stock appears very attractive in light of the 30% EPS CAGR (FY08-11E).

To see full report: UNITED PHOSPHORUS