>ICICI Bank (CITI)

Strategic Direction – Finally?

■ Strategic direction – signs of a more prudent, and return-oriented one — ICBK does appear to be following in deeds (and words) a more prudent, returnoriented and ‘market palatable’ strategic direction. This is showing through in better margins, lower/negative growth, signs of asset quality and balance-sheet mix management, and apparently greater respect for capital (while not closing out the growth option). There are gaps – off-shore strategy remains debatable, asset risks/funding gaps could widen and the new strategy could be environment induced (reverts, when economy turns); but combined with a meaningful management revamp, we are more positively biased than skeptical.

■ Asset deterioration continues, but is not worsening — ICBK continues to see almost 2.5%pa deterioration; poor and lags industry, but retail appears to be stabilizing (in-line with industry trends). There is 1.5% of new restructured loans (not a big surprise); we do see further deterioration (management cautious on outlook), but would not expect ICBK to lag industry here-on.

■ P&L disappoints, but there are positives — 4Q09 profits are down 35%, and 12% below our estimates; primarily on weak fee incomes (-30% yoy, flat qoq), and possibly suggesting some recent franchise damage. But margins have bounced 20bps qoq, and management has put out a robust medium-term outlook (well grounded too); ICBK’s core profitability problem being addressed?

■ Maintain Buy, High Risk — If ICBK were to continue down its espoused strategic path (with some tweaks and changes), and gets support from the economy; it could well retrieve more of its lost profitability and valuations.


To see full report: ICICI BANK

>Oracle Financial Services Software Ltd. (BONANZA)

Company Background
Oracle Financial Services Software Ltd (OFSS) is a world leader in providing products and services industry. The company has a host of products that offer a gambit of solutions and services for the BFSI segment

Investment Rationale
Growth in Turbulent economic condition: ‐ OFSS would witness growth of nearly 60% in FY09 over the topline of FY08. The company, which is a leader in financial services software, has been able to maintain a robust growth despite a slowdown in the industry that is its chief client. The increase in revenue vindicates company’s software solution prowess for financial institutions.

Strong product pipeline: ‐ Company has a strong product pipeline that commands premium in the BFSI industry. OFSS’s Flexcube suite of product is a market leader and its products have more than 320 clients world over. Its other products such as Reveleues and Mantas are also well received in the industry. Going forward, we expect the company’s new products such as daybreak etc would rake in more revenues for the company.

Growth from key area of software products robust: ‐ The Company has witnessed a robust growth in its product business, which includes product licensing. The products business, which is a high margin business and adds significantly to the bottom line, has witnessed good growth. The company has witnessed 33.3%.

To see full report: OFSS

>India Steel (Deutsche Bank)

Global steel production down 24% YoY

Global crude steel production declines for the seventh consecutive month...
The cavalry of global steel production cuts continued for seventh consecutive month with a 24% YoY decline in global crude steel production in Mar'09 taking cumulative decline for 1QCY09 to 23% YoY. EU and North America continue to stand out as regions with the most aggressive supply response with YoY production decline of 45% and 52% respectively in Mar'09. China is the only major region that has defied global trends with only a marginal decline of 0.3% YoY in crude steel production in Mar'09.

…But global steel pricing remains weak
Though the global production response has been very aggressive, we are yet to see any sustainable recovery in global steel prices. Our global steel pricing table (Page 3) shows a WoW decline across all major world geographies. Our global team recently cut the HRC price forecasts for U.S. and Europe by an average of 14% in 2009 and 7% in 2010 to reflect market surpluses and reduced costs.

Demand scenario in Europe remains weak; more production cuts required
While Europe has been quite aggressive in reducing steel production – down 44% in 1QCY09, our global steel team believes that it lags US in the inventory destocking cycle and more production cuts are likely required to restore the demand supply equilibrium. Arcelor Mittal has already guided for the continuation of its steel production cuts in Europe into the second quarter in response to the exceptionally weak economic conditions.

Marginal capacity in China remains the key focus area
China continues to stand out as the only major region in the world that has not participated in the global steel production response. The importance of China in the present scenario can not be over emphasized given that its contribution to global crude steel production has increased to 49% in 1Q’CY09 from 38% in CY08. The flexible excess capacity in China remains nimble in responding to the fluctuating cash margins. Though our Chinese steel analyst estimates that the cash margins are negative now, he also expects the cycle to repeat itself over the
course of 2009.

Reiterate SAIL as top pick
We continue to prefer SAIL (SAIL.BO, INR108, BUY) as our top pick in the Indian steel sector. The high exposure to domestic demand and low risk government funded projects provides visibility over SAIL’s ability to push volume sales. Also, strong balance sheet and net cash position removes any refinancing risk. We value SAIL on a FY10 EV/EBITDA of 2.7x leading to a TP of INR108/share. Tata Steel (TISC.BO, INR263, HOLD) remains a Hold with its high exposure to the weak. European steel market through Corus and highly levered balance sheet. We have a TP of INR192/share for Tata Steel based on SOTP valuation. A protracted downcycle in steel remains the biggest downside risk factor. (See page 4 for details on valuation and risks).

To see full report: INDIA STEEL

>FMCG Snippet (CLSA)

Price cut to help maintain volumes & prevent consumers from down trading to cheaper brands…

Margins in Soap & detergent segment to remain intact…


The Story....
The recent announcement of a price cut by FMCG giant, Hindustan Unilever Ltd. (HUVR.IN) (HLL.BO), in order to provide a boost to its volumes, was very much in line with our expectations…

Quote
“With the inflation in input costs beginning to recede and prices of key FMCG inputs, such as
palm oil, LAB and packaging material climbing down significantly in the past two months, we believe that HUL will pass on the benefits of the softening in commodity prices to consumers, which will result in a surge in the company’s volumes, going forward.”

Unquote
(From First Global’s, “Hindustan Unilever Ltd. ((HUVR.IN) (HLL.BO): Passing on of benefits of softening of commodity prices to drive volumes; reiterating Moderate Outperform”, dated February 4, 2009).

Since the benefit of lower commodity prices and consequent price cut was predicted and modeled in, our estimates for HUL remain unchanged. The ongoing recession, which has already led to a reduction in discretionary spending, is now making consumers increasingly price-value conscious even in the case of their daily necessities. HUL has chosen to reduce prices in the lower and mid segment over the premium segment, as the former is comparatively more price sensitive. Moreover, the intense competition from local players in
the soap & detergent arena is keeping HUL on its toes on the price front. In several cases, HUL has opted to increase the package weight/volume, thus bringing down per gram costs, instead of directly reducing prices. It has increased the weight of its Wheel Green detergent powder packet by 50 gm, while the weight of its 115 gm Lifebuoy toilet soap has been increased to 120 gm, resulting in a benefit of 8.3%% and 4.2% for consumers respectively. HUL’s bold move appears to have kicked off a price war, with P&G also taking a price cut of 19.35%, to Rs.50, on its 750 gm pack of Tide detergent. We believe that the price cut will help HUL maintain its volumes, which had declined sharply in Q4 FY09, and also prevent consumers from down-trading to cheaper brands, though the company’s margins in the Soap & detergent segment will not get affected materially.

Cutting prices to lure consumers…
At the beginning of Q1 FY10, which is the peak period for soap & detergent sales, HUL has raised the weight of its Stock Keeping Units (SKUs) instead of changing the price point, as raising prices again after cutting prices could negatively impact sales. Also, companies like to stick to ‘round-number’ pricing like Rs.10/-, Rs.25/- etc. Hence, HUL has increased the weight of Wheel Green detergent powder by 50 gm, but has kept its prices unchanged, while the weight of Lifebuoy toilet soap has been increased from 115 gm to 120 gm without changing its existing price of Rs.15 per piece. Thus, HUL has passed on a relief of 8.3% and 4% on Wheel and Lifebuoy respectively to consumers. The strategy behind the price cut is to enable the company ride out the recession and at least maintain its volumes by retaining
consumers through attractive prices.

To see full report: FMCG SNIPPET