>DLF (HSBC)

Upgrade to Neutral (V): Change in strategy is positive

• Q4 FY09 results disappoint, but the decision to pull out of long gestation projects is positive, in our view

• Cut-back in development pipeline is encouraging, as it should avoid strain on cash flow and strengthen the balance sheet

• Reduce NAV discount to factor in improved strategy; raise target to INR233 (INR140), upgrade to Neutral (V) from UW (V)

Disappointing results. DLF reported a 93% y-o-y drop in net profit to INR1.6bn, sharper than our estimate of 78% drop and consensus estimate of an c83% decline. The main reasons for the decline were the repricing of some projects (PBT impact of INR302m) and lower DLF Assets Ltd (DAL) revenues (85% y-o-y drop).

Pulling out from long gestation projects should improve business focus. DLF has pulled out of large township projects like Dankuni and Bidadi, which should improve its business focus on more profitable projects. Earlier, we had estimated that c50% of this development could materialise. We expect the market to view this as an acceptance of the difficulties in developing mega townships.

Moving away from such ambitious development plans is positive. DLF has further curtailed its development pipeline in commercial and retail segments, with its projects under construction coming down from c47m sq ft in Q3 FY09 to c21m sq ft in Q4 FY09. This should help DLF prioritise, and avoid strain on cash flows. We have cut our earnings forecast by c26% each in FY10e and FY11e to factor in a slower rate of development and lower prices.

Upgrade to Neutral (V) from UW (V); raise target price to INR233 (from INR140). We view the change in DLF’s development strategy as a positive move, which should help to cut balance sheet stress and improve business focus. While receivables from DAL are still an issue, improved market liquidity means an increased probability of DAL being able to source funding and repay DLF. This, we believe, should ease price/NAV compression for DLF. We hence lower our NAV discount to 10% from 50% previously. We have also rolled forward our NAV to FY10e after factoring in revised land estimates.

To see full report: DLF

>Grasim Industries (KOTAK SECURITIES)

Best is already factored in the price...


Grasim Industries, a diversified player in cement, viscose staple fibre (VSF), chemicals and sponge iron, is set to become the largest cement player in India post commissioning of its new capacities. However, due to demand slowdown, we expect decline in realizations across its core
businesses - VSF and cement, which may result in muted revenue growth between FY08-FY10. Pricing outlook for next one year for VSF continues to remain negative due to adverse global conditions impacting textile exports while oversupply and lower-than-expected demand growth may impact cement realization negatively. Lower realizations are also expected to offset the benefit of reduced raw material prices, thereby keeping margins lower going forward. Along with this, higher depreciation and interest charges post commissioning of new capacities are likely to keep the earnings growth depressed.

We value the company on sum-of-the-parts methodology on FY10 estimates and arrive at a price target of Rs.1600. Our assumptions of better cement prices based on prevailing firm cement prices as well as healthy dispatch growth for FY10 also leaves no stock price upside at current valuations. Though company has got pan India presence and is increasing its capacity significantly, most of the positives related to firm cement prices, low power and fuel costs as well as volume growth are already factored in the current stock price. Hence we initiate coverage with a REDUCE recommendation. We would wait for declines in the stock price for upgrading our recommendation.

Key disinvestment rationale

■ Cement oversupply and moderation in demand to impact cement realizations negatively. Cement demand had registered a growth of nearly 9% between FY06-FY08 driven primarily by strong demand from construction, infrastructure and real estate projects. However, with the slowdown witnessed in the real estate sector and overall moderation witnessed in the GDP growth, cement demand is expected to grow at a CAGR of 7% between FY08-FY10. We expect capacity addition to the tune of 60-70MT between FY08-FY10 while demand is expected to remain subdued in the next two years. We thus opine that, pace of commissioning of new capacities is expected to exceed the demand growth and will likely result in fall in cement prices. We expect cement prices to decline in next one year post commissioning of new capacities from Q1FY10. We have assumed total dispatches of 39 mn tonne and average cement realizations of Rs.3345 per tonne in our estimates on a consolidated basis for the company.

■ VSF division is also witnessing demand slowdown and price declines.
Adverse economic factors such as US recession, declining demand from textile sector and declining exports have impacted the VSF division negatively in terms of volumes as well as prices. Grasim has also further reduced prices by Rs 7 per kg (7.2%) in January, 2009 and we expect prices to remain under pressure due to poor demand from the textile sector going forward. Margins are also expected to remain subdued since company has correspondingly passed on the benefits of cost reduction by reducing the VSF prices because of low demand.

To see full report: GRASIM INDUSTRIES

>Top Picks (SHAREKHAN)

The rally gained further momentum in April 2009, driven by better than expected economic data and easing risk aversion that resulted in sustained inflows into the emerging markets. Consequently, the Indian markets outperformed the global markets with the benchmark indices Sensex and Nifty surging by 14.8% and 12.8% respectively in the month. Our portfolio of top picks more or less performed in line with the benchmarks, registering a gain of 13.1% during the
period.

We are making three changes in our portfolio of top picks this month. In the FMCG space, we are replacing ITC with Godrej Consumer Products as we expect the mid-tier FMCG companies to significantly outperform the front-line peers in terms of financial performance in the coming quarters. We are removing Crompton Greaves as the stock has reached our price target and are adding Shiv-Vani Oil & Gas Explorations in view of its strong order book position and the firming up of oil prices. Lastly, we are removing Grasim Industries from our top picks basket, with its stock price closer to our price target, and are replacing it with 3i Infotech, as we feel that compared with the front-line technology companies the tier-2 technology companies would perform better due to the widened valuation gap.

To see full report: TOP PICKS

>Asia Strategy Quarterly (MACQUARIE RESEARCH)

Green shoots or red herrings?

The global cycle is getting less worse
Accompanied by a turn in the second derivative of global economic activity and tentative signs of stabilisation in important leading indicators, Asia ex Japan has risen 28% from its recent trough on 2 March and is now up 39% from the late October low.

Valuations are still well below long-run averages
At 1.5x P/BV, 11.0x trailing earnings, 6.8x P/CF, Asia ex Japan is still well below long-run average levels on three of the four standard valuation metrics. On a forward PER basis, Asia ex Japan is currently trading on 14.4x, around half a standard deviation above its long-run average level of 13.1x. However, the uncertainty surrounding the ‘E, makes this measure only marginally better than useless at the current point in the cycle.

The 12-month risk/reward trade-off is attractive
With valuations still well below long-run average levels and key indicators of the cycle – such as the OECD leading indicator and our earnings revisions indicator for Asia ex Japan – moving higher, the 12-month risk/reward trade-off for Asian equities is undeniably attractive. If history is a guide, the odds of losing money are a mere 12%, while the odds of a greater than 10% return are 70%.

Upgrading Korea and Taiwan, tech and banks
Accordingly, it is time to selectively add beta to our model portfolio. Tech and banks stand out at the current juncture. These two sectors have underperformed in the rally so far; in the past they have been big outperformers when the OECD leading indicator is rising; and with valuations now only a touch above all-time lows, they command an overweight position, in our view.

We have also upgraded Korea, Taiwan and Singapore. With earnings expectations extremely low, Chinese institutional investor money on its way, and trading on a P/BV of 1.4x, Taiwan looks particularly attractive. Valuations are not as attractive in Korea, and its net-debtor status concerns us. But you are taking on history by being underweight Korea when the OECD leading indicator is rising and that is something we try to avoid doing. At 1.2x P/BV, Singapore is deep value and it looks like 1Q09 was the weakest point for growth.

Underweight China and Hong Kong
China has had a monopoly on good news flow in recent months and as a result is by far the most over-owned and over-loved market in the region. Moreover, from a bottom-up perspective, we are now struggling to find value. In addition to being cyclically challenged, Hong Kong is now plain and simply too expensive.

To see full report: ASIA STRATEGY