>SUZLON ENERGY (MORGAN STANLEY)

Another Stock Placement

Quick Comment: Due to a strained B/S (being repaired) and large stock pledges (promoters), the market has been concerned about stock overhang. While we were not expecting it, the promoters have announced a stock placement. Positives such as strong RE Power results and guidance, successful renegotiation of the bulk of its CBs, potential for better domestic credit conditions, and likely higher domestic infrastructure investment are being partially negated by
weak Hansen results and potential stock overhang from second promoters’ sale of $120mn (after selling $45mn two weeks ago). While the future risk of dilution from a primary stock offer or overhang from secondary sale cannot be ruled out, we believe that the restructuring of the remaining debt, potential stake sale in Hansen, and new order wins are likely to serve as positive catalysts.

What's new: Suzlon’s negotiations with Martifer to delay the last payment of €175mn (Rs11.4bn) for acquisition of RE Power have been unsuccessful. To raise cash, promoters are in the process of selling 4%+ of Suzlon stock to raise ~Rs5.5bn. Proceeds will be loaned to Suzlon (via Inter Corporate Deposits). Furthermore, Suzlon has secured a new credit line to draw down an additional Rs6bn. Proceeds from these two borrowings will be used to pay Martifer.

What we like: First, a solution to Martifer payment via this route compared with issuance of new shares at Suzlon avoids dilution to existing shareholders. Second, uncertainty regarding payment to Martifer is eliminated.

What we do not like: First, we are concerned about the frequency of the promoter sell-downs. Unless promoters assure the market that there are not going to be further disposals, it is likely to create a significant overhang. Second, a disposal of a partial stake in Hansen to reduce acquisition debt may have been a better strategic alternative. Potentially freeing up debt capacity, it may have allowed it to raise bank debt for full payment. Third, we are concerned about the timing of stake sales during a period when the market is awaiting its FY09 results and the results of its debt restructuring.

To see full report: SUZLON ENERGY

>FUNDS FLOW AFTER MARCH (CITI)

■ Three major changes in country preferences — First, China has gone from one of the most overweight markets in February to 25bp underweight. Second, the underweight in Taiwan has narrowed by 100bps to the smallest in thirteen months. Third, Indonesia has moved from Neutral to Top-2 most overweight markets at Asian funds. Historically once the consensus moves a country from neutral to Top-2 it outperforms the region by 1000bps in the next six months.

■ Asian funds no longer hold a defensive portfolio — Asian funds’ overweight in Consumers has fallen from 516bps in October 2008 to the current 195bps. Telecom has now become a consensus underweight (previously the biggest overweight when markets tumbled). Asian funds are now moderately underweight Technology compared with a 430bp underweight at the 2007 market peak.

■ GEM funds the potential source of additional liquidity — With the resumption of strong inflows to Asian funds since the first week of March, yet cash weights remain at 2.9%, they are fully invested in our view. GEM funds, by contrast, see cash levels at 3.7%. With GEM funds still largely underweight Asia, and taking in more new money than Asian funds (65% more this week), by the time they unwind their position it could provide further liquidity to the region.

■ Inflows to Asian funds decrease for the second week to 2-month low — In particular, China fund inflows drop to US$19m vs. US$484m/week in the previous month.

To see full report: FUN WITH FLOWS

>COMMODITY HEAP (CITI)

Iron Ore – Closing the Circle

■ Chinese Iron Ore Imports Surge — Iron ore imports are up 25% YTD. Yet steel production is up a more modest 3%. The explanation is falling domestic production and inventory accumulation.

■ Supply Demand Reconciliation Only Partial — The supply demand balance for the first five months highlights two concerns. Firstly annualized crude steel production (510Mt) is well above our forecast for the year of 485Mt. Secondly, reported domestic iron ore production (677 Mt) and required supply of iron units (after imports and stock changes) implies a further fall in ore grade to 20% from 23% in 2008. However, it would be reasonable to believe that grade is increasing, given the 100 Mt production cut. We conclude that unreported inventory continues to build, perhaps by 30Mt.

■ Contract Price Settlements; China Will Probably Follow — We think it most likely that China’s steel mills will follow the contract benchmark settlements agreed between Rio Tinto, the JSM and Posco, although perhaps only following further drawn out negotiations.

■ China’s Options — As we see it China’s steel mills (led by Baosteel, with CISA as a strong voice) have four options: 1) settle in line with the JSM; 2) no settlement – as much as half China’s imports are priced on spot anyway; 3) negotiate a lower price – this would put Rio Tinto in an untenable position; 4) agree but on a short-term basis, with the provision to renegotiate quarterly. We would attach the highest probability to option 1.

To see full report: COMMODITY HEAP

>INDIA WIRELESS (CITI)

It's All About the Risk Premium

■ Stable government doesn’t alter fundamentals much — While competition will keep coming and is the key driver of subdued elasticity assumption in FY10E (3% MOU growth for 21% rev/min decline), a sharper-than-expected recovery in economic activity could improve that. No changes likely to 3G/MNP policy but M&A norms could be relaxed. Since it's early to factor the positives in numbers, the target revisions are solely a result of 50-100bps reduction in country risk premium.

■ Bharti – MTN offsets some of the India re-rating; still a Buy — Raising our target price to Rs930 based on WACC of 11.3% (from 12%). The lower WACC is due to a reduced risk premium though we add back 50bps for the perceived higher risk post-MTN. Dilution of India-centric play, and not the 4-5% EPS dilution, is a bigger issue for India-bound flows. However, MTN related overhang offers long-term entry points given Bharti’s execution track record and cheaper valuations (15x) relative to market (17x).

■ RCOM – Sell, Risk in vogue again, but fundamentals lagging — We reduce RCOM’s discount on Bharti’s target EV/E to 15% and value it at Rs270 based on EV/E of 7.8x FY10E. However, we eliminate any value from towerco (Rs26 earlier) to reflect the low visibility of tenancy. The jury is still out on GSM’s ability to drive faster growth; sustenance of traffic share post the free mins is key challenge.

■ Idea – M&A/cleaner play? but don’t compromise on valuations — Inclusion in MSCI, cleaner play (post Bharti’s MTN agenda) and M&A talk could benefit Idea. However, smaller scale and relative vulnerability (should competition worsen) means too much compromise on valuation is risky. Axiata open offer (if at all) would be factored in at Rs90-100. Downgrade to Sell with TP of Rs80 on EV/E of 7.8x and towerco at Rs21 .

To see full report: INDIA WIRELESS