>JSW Steel (CITI)

Sell: 4Q Loss; Margins Collapse

■ 4Q disappoints — JSTL reported standalone PAT of Rs492m. Adjusting for the FCCB buyback & forex gains, net loss for 4Q was Rs258m vs profit of Rs4.4bn in 4QFY08. EBITDA margin came in at 11% vs 27% in 4QFY08 and 15% in 3QFY09, impacted by 13% yoy decline in realizations and higher costs. Sales volumes rose 5% yoy to 1.06m tonnes. FY09 adj PAT fell 44% yoy to Rs9.3bn.

■ High opening inventory — 4Q EBITDA/t fell to $67 vs $188 last year and $122 in 3QFY09. Even though JSTL had contracted coking coal at $175/t for most of its 4Q off-take (vs $305/t for FY09), the quarter was impacted by significant high-cost opening inventory. ~8% of coking coal contracted at $305/t in FY09 is yet to be lifted and JSTL is in negotiations to spread it over the next 2-3 yrs.

■ US platemill to be shut — The US plate/pipe mills are operating at 10-15% utilization and reported a 4Q loss of $61m and a $37m loss for FY09.

■ Stretched balance sheet — Standalone debt is Rs101bn and cons. debt is Rs146bn (standalone D/E 1.2x; cons D/E 1.8x). While JSTL has breached its standalone debt covenant of 3.25x Debt/EBITDA (3.3x as on 31 March 09), most of its lenders have approved the relaxation of these covenants.

■ Volume estimates — JSTL has enhanced capacity to 7.8mtpa (+63%) and expects FY10 volumes to rise 78% - which appears to be an onerous target. We expect 51% growth.

■ Sell — While steel stocks have appreciated substantially, the risk of supply restarts and downside to prices persists. Hence, we prefer less leveraged plays.

To see full report: JSW STEEL

>BANKING SECTOR REVIEW (ANAGRAM)

Banks reported a robust yearly growth in Q4FY09, though sequentially situation worsened,

Slowdown in the lending activities from the last two quarters coupled with lower interest rate scenario translated in to a negative growth in Net Interest Income in most of the banks quarterly basis. Moreover, hit of asset quality could be very clearly seen in gross NPA figures. We are Bearish on Banking Sector due to the following major concerns.

• Adverse effect of downturn in core business in Net Interest Income
• Hit on asset quality following the economic downturn
• Inadequate cover for NPAs
• Stress on demand Deposit
• Banks still in a diverse track of business

PRESSURE ON NET INTEREST INCOME
The cautious strategy adopted by most of the banks discouraged lending activites, putting pressure on the interest income and the margins. Lower interest income, while on the other side continued flow of deposits kept the interest expenses on a high end. As a result of which most of the banks registered degrowth in net interest income on sequential basis, consequently drop in the margins.

WORRY ON ASSET QUALITY
Banks had hard hit on their asset quality following the ongoing financial slowdown and that is the reason of choosing the safe avenues for the fund deployment by the banks instead of providing credit to the productive sectors. To deal with it, RBI came out with the circular of restructuring without changing its investment grade.

INADEQUATELY PROVIDED FOR NPAs
Provision coverage ratio provides the cushion for the corrosion in the asset quality. Presently where all banks prefer capital conversation and risk management over growth, those who have adequately provided for the NPAs are on a safer side. In FY 2008-09 instead of providing more amount for the same, some of the banks lowered their provisions and thus showed positive sum of growth in Net Profit.

To see full report: BANKING SECTOR REVIEW

>AUTOMOBILE SECTOR (INDIA INFOLINE)

Maruti: Growth across categories except M800
Maruti reported a 8.9% yoy rise in domestic volumes, driven by growth across all categories except for Maruti 800 which registered a fall 0f 47.4% yoy. A3 category lead the growth with 68.8% yoy jump in volumes drven by strong response to Swift DZire. Our channel checks have indicated at 1.5-2 months waiting period for petrol variants of the model. A2 category, which account for about 73% of volumes, reported 8.6% yoy growth owing to continued success of Swift model and pick up in volumes of A-Star Exports jumped 146% backed by robust volumes for A-Star in the European market.

Mahindra & Mahindra: UV volumes remain strong
M&M registered 14.8% yoy growth in total automative volumes during April 2009. The growth was lead by 36% jump UV volumes owing to sales of 3,509 units of its new model XYLO. 3-wheeler volumes fell 11.1% yoy. Volumes of Mahindra Logan continue to fall precpitously and were at 550 units in April'09 as against 1,713 units in April'08. LCV and export volumes declined by 16.5% yoy and 39.3% yoy respectively.

Tata Motors: Domestic volumes rise yoy after 7 months
Tata Motors reported 4.5% yoy rise in its total domestic volumes. On a yoy basis, volumes plunged across all categories except for passenger cars and LCV. While passenger car volumes increased 10.8% yoy, LCV volumes jumped 51.7% yoy. Its M&HCV volumes nosedived by 28.4% yoy, whereas exports and UVs plummeted 45.3% and 39.5% yoy respectively.

Two-Wheelers : Hero Honda continues to rule
Amongst the two wheelers, Hero Honda continued with its dominance with a 29.5% yoy increase in volumes in comparison to 2.9% yoy growth for TVS Motors and 23.8% yoy fall for Bajaj Auto. On a mom basis, Hero Honda reported a 4.9% yoy growth in volumes.

To see full report: AUTOMOBILE SECTOR

>GAIL (CITI)

Buy: Risk/Reward Still Favorable; Increasing TP to Rs288

■ Maintain Buy; risk/reward favorable — GAIL has outperformed the Sensex by 17% in the last year, though the market rally in the last month has seen it underperform by 18%, offering an improved risk/reward for investors seeking exposure to the rapidly developing gas sector in India. We maintain our Buy rating while upgrading our risk rating a notch to Low from Medium as KG gas commencement increases visibility for transmission volumes while simultaneously, cyclical businesses become less critical for its growth.

■ Raising TP to Rs288 — Our new TP of Rs288 (Rs240 earlier) is derived from our Mar-10 DCF value and includes Rs74 value of investments. Our TP also imputes a multiple of 5.5x EV/EBITDA for the existing business and 2.0x P/B for new pipeline investments. The change in TP is driven by: (i) higher transmission vols – we are increasing KG vols in FY10E from 17 to 25 mmscmd (10 through HBJ/DVPL + 15 through others) and in FY11E from 32 to 40 mmscmd (20 + 20), (ii) change in capex assumptions – total Rs300bn capex (Rs240bn on pipelines) over FY10-13E vs. Rs267bn earlier, (iii) 2:1 D/E for new capex (1:1 earlier), and (iv) higher value of investments (Rs74 vs. Rs59).

■ Possible upside from lower tariff reduction, city gas — Our TP continues to factor in Rs5bn (~30%) of downside to tariffs. GAIL mgmt has expressed confidence on the issue of regulatory risk to pipeline tariffs, stating that it envisaged almost no reduction in HBJ/DVPL tariffs. Our TP could increase to Rs310 if the reduction in tariffs is lower at 20% and to Rs330 with only a 10%
reduction. GAIL has also identified city gas as a key thrust area, which could add value over the medium term, though we currently ascribe no value to it.

To see full report: GAIL