>Monthly Economy Review (SHAREKHAN)

Economy: All eyes on RBI monetary policy review

■ The Reserve Bank of India (RBI) will announce its annual policy review on April 21, 2009. The policy review is staged against the backdrop of near-zero inflation (in terms of the Wholesale Price Index [WPI]) but near double-digit increase in the Consumer Price Index (CPI) and slowing economic growth. Besides, the credit growth has witnessed a sharp deceleration while the banking system is awash with liquidity. In view of this, we expect the RBI to announce a token cut of 25 basis points each in the repo and reverse repo rates in keeping with its stress on a low interest rate regime. The central bank is expected to keep the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) unchanged. However, we feel the business growth target for the banking system and the outlook for the economy to be given by the RBI for the current fiscal will remain a key monitorbale.

■ India’s trade deficit stood at USD4.91 billion in February 2009 compared with USD6.07 billion in the previous month. The trade deficit for February 2009 declined (for the second consecutive month in FY2009) by 26.9% year on year (yoy) and by 19.2% on a month-on-month (m-om) basis. With this, the year-till-date (YTD) trade deficit has widened to USD104.98 billion from USD74.89 billion in the comparable period of FY2008.

■ In February 2009, industrial production growth once again entered the negative zone as it declined by 1.2% yoy. The fall in the industrial output was led by a y-o-y decline of 1.4% and 1.6% in the output of the manufacturing and mining segments respectively. On a
YTD basis, the IIP growth for the period April 2008- February 2009 stood at 2.8% and was significantly weaker compared with the 8.8% growth achieved during the comparable period of the previous year. Importantly, the Index for Industrial Production (IIP) figure for January 2009 has been revised upwards to indicate an increase of 0.4% yoy against a drop of 0.5% (provisional) earlier. While there has been some improvement in automobile sales, cement dispatches and steel production during March 2009 (indicating better industrial activity), the high base effect is likely to play a spoilsport.

■ Inflation continued its southward journey and stood at 0.18% for the week ended April 04, 2009 after touching a record high of 12.91% in August 2008. However, on a week-on-week (w-o-w) basis, the inflation rate inchedup by 0.4% on the back of higher food and fuel prices.
The inflation rate is at near zero levels and we believe it is likely to enter the negative territory in the coming few weeks as the high base effect comes into play. Furthermore, the Indian Meteorological Department (IMD) expects the monsoon rainfall to be near normal to normal this year (96% of the long-period average). We believe a near normal to normal monsoon would help in bringing down the food inflation, which is currently at elevated
levels.

To see full report: ECONOMY REVIEW

>Ballarpur Industries (EMKAY)

Results below estimates

BILT reported poor Q3FY09 results. Revenues remained flat at 6.9 bn while EBITDA margins dropped by 650 bps to 19.8% as a result APAT fell by 76% to Rs 179mn. Results were affected mainly on account of – 1) Poor show at Sabah, Malaysia plant due to sale of high cost inventory and maintenance shut down which have resulted in EBITDA loss of ~Rs 240 mn 2) Lower demand for rayon grade pulp (RGP), Kamalapuram plant resulting in plant shut down, leading to EBIT loss of ~Rs 110 mn. We expect that the current quarter poor performance was mainly driven by extra ordinary circumstances. However global prices still remain weak hence putting pressure on margins at Sabah plant and Kamalapuram plant is likely to resume operation from May’09 and company is expected to start consuming pulp for its captive purpose. Its capex plan at Bhigwan is completed and expansion plan at Ballarpur is on schedule (completing June’09) which will increase its capacity by ~45%. We expect full benefit of this expansion to flow from Q1FY10 and Kamalapuram and Sabah plant should also stabilise by that time. To factor poor ongoing problem at Sabah and its Kamalapuram plant, we are reducing our FY09 revenue estimates by 10.6% to Rs 28 bn and APAT by 37.3% to Rs 1.8 bn. However our FY10 estimates remain unchanged. We maintain our BUY recommendation on the stock with a price target of Rs 24.

Poor show at Sabah plant and pulp plant affected results
Disappointing Q3FY09 results is mainly attributed to poor results from Sabah plant and rayon grade pulp at Kamalapuram plant. Company’s Sabah operation reported losses of approx Rs 413 mn due to sale of high cost inventory during the quarter and also due to maintenance shutdown for a month which affected its production. Sabah plant had an inventory of ~17,000 mt in Q2FY09 which was sold during current quarter at lower prices. Unit Kamalapuram, which produces rayon grade pulp, continued to remain shut due to sluggish pulp demand. Pulp division also contributed a loss of Rs 107 mn for the quarter.

Stand alone results remain stable
BILT standalone performance remained stable. BILT on stand alone reported net sales of Rs 2.5 bn with EBITDA margins of 24.2% and APAT of Rs 321 mn. Paper demand and realisations in domestic market remained stable.

Revising FY09 estimates keeping FY10 unchanged, maintain BUY
We have reduced our FY09 revenue, PAT and EPS by 10.6%, 21.7% and 37.3% to Rs 28.5
bn, 1.8 bn and Rs 2.8, respectively. We keep our FY10 estimates unchanged. We believe
that FY10 growth will be driven by 45% growth in paper capacity. We expect that pulp
operation at Kamalapuram will resume from Q1FY10 and company will start consuming pulp for its captive consumption. We maintain our BUY recommendation on the stock with a price target of Rs 24.

To see full report: BALLARPUR INDUSTRIES

>3I INFOTECH (ICICI Direct)

Decent show…
3i Infotech announced flat q-o-q top line at Rs 607 crore, which was in line with our expectation. EBITDA margin improved 157 bps sequentially driven by improvement in gross margins in the products and services segment. The company has also been able to maintain gross margin in the transaction services segment. Buy-back of FCCB and one time advisory and legal fee payment led to profits increasing to Rs 90.5 crore (profit removing these exceptional items increased 3.3% to Rs 67 crore).

Highlight of the quarter
The flat q-o-q performance by the company was primarily a result of the poor performance of the services segment which saw de-growth of 11% qo-q. Transaction services segment was comparatively the best performing segment with sequential growth of 6.2%. Product revenue bounced back this quarter with 3.1% q-o-q growth in Q4FY09 (compared to q-o-q degrowth
of 4.5% in Q3FY09. the company has bought back FCCB worth Rs 152 crore during the quarter. For the full year FY09 the company grew 89.6% on the top line. More than 50% of this growth was contributed by the acquisitions made by the company during the year.

Valuations
3i-infotech has an outstanding order book of Rs 1445 crore which is 56% of FY09 revenue. The order book growth has slowed down in the recent past. The management has also refrained from giving guidance for FY10 due to the uncertain demand environment. We recommend a Hold rating on the stock with a revised price target of Rs 49.

To see full report: 3I INFOTECH

>Jaiprakash Associates Limited (MORGAN STANLEY)

Adjusting Price Target for Higher Liquidity Environment

Investment conclusion:
Over the next two to three years, we expect Jaiprakash to emerge as a top-5 player in India in each of its main businesses – cement, construction, power, and real estate. We believe that
with worries on execution and funding receding a bit (given the strong results and the easing debt funding environment), the stock can trade above our base case. We add 30% of the differential between our base and bull case to our base case to set our PT of Rs166, which
implies potential upside of 27% from current level.

Strong Results Ease Execution Issues:
Jaiprakash declared a strong set of numbers in F4Q09, with its construction and real estate businesses driving revenues and profits up 55% YoY and 52% YoY, respectively. With the company also commissioning 2.5 mn tons of cement capacity in F4Q09, and taking their
presales on Yamuna Expressway up to 5.23 mn sq ft (0.73 mn sq ft in F4Q09), we believe that execution worries have reduced.

Debt Funding Availability Easing from Crunch in
F3Q09: Our interaction with banks also reveals that debt funding in no longer as difficult to secure as in F3Q09. We continue to expect the company to use presales of real estate, sale of treasury stock, and discounting of power asset cash flows to fund the equity requirements
of their planned power generation assets.

What’s next:
We believe that declaration of financial closure on the company’s generation projects (especially Bina and Nigrie) will be a driver of stock price. Also, we believe the execution of the projects it has in hand (especially the internal ones) will reassure the market, driving the multiple and the stock price up.

To see full report: JAIPRAKASH ASSOCIATES