>R SYSTEMS INTERNATIONAL (SUNIDHI)

Company Description:
Incorporated in 1993, R Systems International is a New Delhi-based software product development company. It helps companies bring products and services to market quickly by using its different products and services comprising the pSuite framework, which is an execution framework for PLM (product lifecycle management) services.

Other than the two 100% subsidiaries, R Systems Inc California and R Systems in Singapore, it has acquired two companies, Indus and ECnet, to cater to the banking, finance and manufacturing and logistics verticals. Indus Lending Solutions Business products cater to the retail lending industry and the ECnet suite of products offer supply chain collaboration solutions. RSIL tapped the market in April 2006 at a price of Rs 250 per share aggregating Rs 70.6 crore.

Highlights:
Other services include building and supporting software products in diverse areas like Internet security, Internet music delivery, Internet IP TV, banking applications, supply chain management, ERP solutions, and knowledge management. These software products & services find application across industry verticals such as banking & finance, government, health care, high technology and software vendors.

A significant percentage of R Systems revenues are generated from exports. The development and service centres in Noida, Pune and Chennai are registered with the Software Technology Park of India in their respective areas as 100% Export Oriented Undertakings.

R Systems rapidly growing customer list includes a variety of Fortune 1000, government and mid-sized organizations across a wide range of industries including Banking and Finance and High Technology and Independent Software Vendors, Government, HealthCare, Manufacturing and Logistic. RSIL maintains 8 development and service centres and using its global delivery model it serves customers in the US, Europe, South America, the Far East, the Middle East and Africa.

RSIL had approved the buy back of its shares in September 08 at a maximum price of Rs. 150 per equity share and accordingly bought back nearly 6.4 lakh shares reducing its equity to Rs 12.87 crore in Q1CY09. It continues to buyback another 6.66 lakh shares, which would further reduce its equity to Rs 12.2 crore. During CY08 RSIL has set up branch offices in Netherlands and Japan.


To see full report: R SYSTEMS

>ENGINEERING SECTOR (MOTILAL OSWAL)

Free cash flow contraction ahead
During past 5 years, the strong earnings growth has provided strength to the capital goods sector balance sheet. Scenario is set to change with earnings moderation and increased working capital requirement. We expect the earnings quality to undergo deterioration during FY09-FY11, given lower free cash flows of Rs32b during FY09-FY11 vs Rs100b during FY06-FY08. This will be driven by increased working capital requirements to 16.9% of revenues in FY11 as compared to 3.1% in FY08. Thus, the capital goods sector, which had moved from net debt of Rs37b in FY02 to net cash of Rs68b in FY08, is expected to lose net cash status by FY11/FY12; but still maintain a comfortable DER of almost -0.03x in FY11E. Given the weak earnings outlook and lower free cash flow generation, we expect capital goods sector to be a market performer. We have no Buy recommendations in the sector.

Free cash flows set to decline to Rs32b during FY09-FY11, v/s Rs100b during FY06-08#: The listed capital goods sector over the past 7 years has gradually reduced investments in fixed assets and working capital has been tightened. The current downturn should reverse this shift towards an asset light model, as working capital deteriorates and investments in capex increases. We expect free cash flows (post capex and working capital) to decline from Rs100b during FY06-FY8 to Rs32b during FY09-FY11. This could mean lower valuation multiples as compared to FY06-FY08 for the sector.

Working capital deterioration imminent during FY09-FY11: During FY01-08, NWC (Net Working Capital, percentage revenue) has improved from 36.4% in FY01 to 3.1% in FY08, mainly on account of (1) reduction in inventory from 107 days in FY01 to 68 days in FY08 and (2) increased client advances from 60 days in FY01 to 96 days in FY08. Going forward, we expect net working capital to increase from 3.1% in FY08 to 16.9% in FY11 driven by (1) lower customer advances (as % of revenues) triggered by stagnation in order intake, (2) shift towards government projects (v/s private projects) as well as towards projects as against products and (3) weakening of vendor finances.

To see full report: ENGINEERING SECTOR

>Global Market Watch (AIG INVESTMENTS)

OVERVIEW

■ The nature of a business-cycle inflection point is that it is defined by elements that both bulls and bears favor – for very different reasons.

■ At the current inflection point, bears will likely point to the continued problems occurring in the U.S. and European banking sectors. Earnings at financial institutions appear to have rebounded during the first quarter of 2009. However, the U.S. government’s stress testing has revealed continued capital shortages at a number of large U.S. banks and the International Monetary Fund’s (IMF’s) most recent Financial Stability Report puts the global total losses from the financial markets crisis at a staggering $4 trillion. Add to that the new threat of a swine flu pandemic, and it is not hard to see why some investors remain extremely cautious.

■ However, we prefer to take the “glass-half-full-view.” We agree with those commentators highlighting the most recent improvements in the economic backdrop, not just here in the US and in Europe, but especially in Asia.

■ The financial markets also seem to have been on our side over the past few weeks. Global equity markets significantly outperformed government bonds in April. Additionally, Emerging Markets posted higher returns than the more developed regions for the fifth straight month, emphasizing the gradual decline in risk aversion. Within Developed Markets, Europe marginally outperformed the U.S. The worst performer, and the region where we have our largest underweight position, was Japan.

■ Among the three main regions in Emerging Markets, although we see the greatest potential for an economic rebound to be in Asia, surprisingly, Latin America and EMEA both outperformed

ASIA
■ What about signs of an inflection point in Japan? The collapse in activity in what is still the world’s second largest economy has been stunning and revealed a much greater export dependency than many economists expected. Quarterly GDP declined by a stunning 12.1% during the last quarter of 2008, and the IMF is looking for an overall 7.2% contraction this year.

■ There are, however, a few faint signs of hope that a pickup in regional trade is stirring an improvement in Japan’s industrial sector. In fact, Reuters’ monthly version of the widely watched Tankan business survey has stabilized in the past few months, March Industrial Production posted a small increase, and the decline in export volumes appears to have stopped.

■ A few weeks ago, the government announced its fourth fiscal stimulus package in six months,
but it will be the resumption of global trade that is most likely to provide the spark for a recovery in Japan.

■ In addition to the U.S., the other region that is showing the most convincing signs of improvement is Asia ex-Japan, where the aggressive policy response by the Chinese government is starting to arrest the decline in economic activity in the broader region. For example, bank-loan generation in China is hitting record highs, and the economy posted a stronger 5.8% increase in the first quarter. Korea’s economy eked out a small increase during the first quarter, and Taiwan’s exports to China have rebounded.

■ In contrast to SARS or the avian flu outbreak a few years ago, the epicenter of the current “swine flu” pandemic lies in the Western Hemisphere. However, Asia’s dependence on international trade could turn into a weakness again, if countries in North America or Europe decide to restrict air travel or close shipping ports. In the long run, Asia’s importance in the global economy will continue to grow, not just due to demographics, but also due to their healthier economies, improved fiscal balances and the lack of overleveraged private sectors.

INVESTMENT OUTLOOK
■ Our cautious approach to increasing risk in our equity and fixed income portfolios is starting to pay off. We had a small equity overweight in our balanced strategies as we started to tilt our portfolios towards the “Global Reflation” theme, and an eventual economic rebound. In addition, the gradual rotation away from the larger, more liquid developed markets towards areas with greater growth potential is proving to be the right strategy, as well.

■ We still do not have an outright overweight position in either Emerging Market equities or bonds, but we increased our exposure to both asset classes last month. The reflation theme suggests that, within both Developed and Emerging Markets, economies with more aggressive crisis response should continue to outperform; hence our overweight in the U.S. and Asia ex-Japan.

■ Finally, attractive valuation and signs of stabilization in financial market conditions continue to support our small overweight in High Yield credit in our fixed income strategies. Over the short-term, investor risk appetites may be curbed by the “swine flu” scare. However, we believe the improving economic backdrop and the continued aggressive policy response will support our current modestly constructive posture in both our equity and fixed income strategies

To see full report: Global Market Watch

>TVS Motor Company Ltd. (EMKAY)

Worst is behind, upgrade rating to HOLD

We came back positive from our meeting with the management of TVS Motor on (1) profitability of domestic business due to easing metal prices (2) strong management confidence (3) rational growth targets. However, a lot depends on the success of the new launches (upgrade of Flame, a new motorcycle in price range of 40000 to 45000 and a new ungeared scooter).

Having said that, we continue to have concerns with respect to Indonesian venture. We are concerned with the cash burn as well as limited availability of information with respect to the Indonesian venture. The management indicated of a loss of Rs 500 mn (Rs 1.5 per share) in FY09 as well as FY10. Also, TVS has taken a debt of USD 30 mn in the Indonesian venture (30% of FY10 standalone debt).

We believe that worst is over for TVS in the domestic business on volumes as well as profitability front. Infact, we believe that in FY10, the company would report the maximum EBIDTA growth, largely due to low base. We have upgraded our FY10 earnings estimates by 12% to Rs 2.9 per share and introduce our FY11 estimates. We upgrade our target price to Rs 35. At Rs 35, the stock would trade at a PER of 12.2x and 9.1x, EV/EBIDTA of 7x and 5.7x and P/B of 1.0x and 0.9x our FY10 and FY11 estimates respectively. We upgrade our rating on the stock from SELL to HOLD.

Extracts of the management meeting are as follows

New launches
■ In motorcycles, TVS will introduce a new model in he price range of 40,000 to Rs 45,000 in 2HFY10. In June/July 2009, the company will introduce upgrade of Flame, rectifying the errors with the existing Flame.

■ In scooters, TVS will be launching a new ungeared scooter in 100cc+ category, which is around 70% of the scooters market. This will also provide a cushion against the potential market share loss in the sub 100cc segment, with the entry of Honda Motors and Scooters India (HMSI). TVS aims to increase its run rate by 5000 p.m (increase of 27% over FY09 average run rate of 18,400), scooters post the launch of 100cc+ scooter. We have factored in an increase of 2000 units p.m
from 2HFY10.

■ For Mopeds, the company is looking for a modest growth of 5% to 6%. The primary focus area will be accessing the non southern market. The company will be focusing on creating awareness for its mopeds. We do not expect any significant contribution from the new markets in FY10.

Profit margins
■ Gross profit margins (Sales – RM) for mopeds, scooters and motorcycles are comparable. However, there are higher Selling and distribution cost in case of motorcycles and scooters due to low volumes and intense competition. With rising volumes in motorcycles, the per vehicle cost will come down and hence aid EBIDTA margin expansion.

Indonesia operation
■ Till date TVS has invested around USD 80 mn. Of this around USD 40-45 mn is towards physical assets, USD 15 to 20 mn is towards product development and balance towards brand building activity.

■ The funding for the Indonesian venture has been through equity contribution of USD 50 m from TVS (which itself was funded through an ECB) and USD 30 mn through a debt from IFC.

■ Also, the company will need around USD 10 m per annum in the near term for brand building activity.

■ Indonesian venture has made a loss of around Rs 500mn in FY09 and expect similar amount of loss in FY10.

■ It aims to breakeven in FY11 with a target sales of 100,000 units.

■ It has around 100 dealers as on now and the number is expected to increase to 150. The dealers have a very low operating cost model and break even with as low as 35 units per month.

Debt on books
■ Long term debt in standalone books is around 5.3 bn. Out of these around 80 m is through ECB and balance is sales tax deferral loan.

■ Around USD 40 m ECB is repayable in F10 as well as FY11. Capex

■ Capex for FY10 and FY11 will be around Rs 400 mn

Three – wheelers
■ Total investment of Rs 1.5 bn

■ Dealer ship network of around 60 dealers

■ Company aims to breakeven at 15,000 units p.a.

■ We have been very conservative in our volumes assumptions for three wheelers and expect company to sell around 5000 numbers in FY11.

Valuation and View
We believe that worst is over for TVS in the domestic business on volumes as well as profitability front. Infact, we believe that in FY10, the company would report the maximum EBIDTA growth, largely due to low base. We have upgraded our FY10 earnings estimates by 12% to Rs 2.9 per share and introduce our FY11 estimates. Having said that we continue to have concerns with respect to Indonesian venture. We are concerned with both the cash burn as well lack of regular information flow. However, we do not expects the stock price to react negatively to the loss reported by the Indonesian business given the start up nature of the business. We upgrade our target price to Rs 35. At Rs 35, the stock would trade at a PER of 12.2x and 9.1x, EV/EBIDTA of 7x and 5.7x and P/B of 1.0x and 0.9x our FY10 and FY11 estimates respectively. We upgrade our rating on the stock from SELL to HOLD.

To see full report: TVS MOTOR