>GUJARAT STATE FERTILIZERS & CHEMICALS (ICICI SECURITIES)

Fairly valued

GSFC saw 245% rise in Q4FY09 PAT to ~Rs984mn vis-à-vis ~Rs286mn in Q4FY08, higher than I-Sec estimates. This was owing to: i) benefit of ~Rs548mn in fertiliser division, pertaining to prior period and ii) Rs580mn excise reversal on GSFC winning an old litigation. Adjusting for these one-time items, overall results were inline with our estimates. Caprolactum division saw loss for a consecutive quarter, of ~Rs209mn, mainly owing to weak demand, given global slowdown in auto industry. DAP business significantly gained from the change in fertiliser policy in FY09, which allows import parity pricing. GSFC saw ~109% rise in FY09 PAT to ~Rs5bn, which is unlikely to sustain. We downgrade our earning estimates owing to: i) considerable fall in international DAP prices that would impact revenues ii) loss in caprolactum business iii) inventory- & high raw material costrelated pain impacting DAP business in H1FY10. Our SOTP evaluates GSFC at Rs163/share (Rs168/share earlier) based on: i) core business valued at Rs132/share, assuming FY10E P/E of 7x on adjusted EPS & ii) investments at Rs31/share. The stock has already outperformed and risen 128% since January’09 that we believe fairly valued; downgrade to hold.

■ GSFC may require contributing 30% PBT for social development fund from FY10. Although GSFC has not yet contributed the required 30% PBT towards Gujarat government’s social development fund in FY09; this may happen FY10 onward

■ Pain in DAP business expected in H1FY10. We expect FY10 revenues to decline, in line with fall in international DAP prices. Inventory write-down and temporary price mismatch may lead to pain in H1FY10 in DAP business.

■ Caprolactum business may not revive in short term. Uncertainty in the global auto industry has made an impact on caprolactum business demand; however, cheaper input prices have helped the company limit losses.

■ Stock outperforms – 128% returns since January ’09; downgrade to HOLD. We downgrade our FY10E EPS ~18% owing to issues in the DAP and caprolactum businesses. We value core business at FY10E P/E of 7x on adjusted EPS and investments at Rs31/share based on market value. The stock has outperformed since January ’09 and, we believe, is fairly valued at current market price. Downgrade to HOLD. Key upside risk to our call is GSFC not requiring 30&% PBT contribution to the social development fund.

To see full report: GSFC

>GRINDWELL NORTON LIMITED (HDFC SECURITIES)

We had initiated coverage on GNL on May 29, 2008 at a price of Rs.125.05 and recommended to accumulate on dips to Rs.106-110 band for a target of Rs.154. The stock subsequently made a high of Rs.133 on June 13, 2008. The stock later underperformed in line with the other small/midcaps and touched a low of Rs.70 on March 06, 2009. It later recovered and made a high of Rs.126 on June 03, 2009. Currently, the stock is quoting at Rs.101.80.

Company Profile:
Grindwell Norton Ltd. (GNL) came into being when a technical collaboration in 1967 between Grindwell and the then world leader in abrasives – Norton Company, USA, grew into a financial collaboration in 1971. GNL is a 51.3% subsidiary of Saint Gobain (SG) of France and India’s leading manufacturer of Abrasives (bonded, coated and super abrasives), Silicon Carbide and High Performance Refractories.

Q1CY09 Result Update
GNL recorded a 2.9% degrowth in revenues on a Y-o-Y basis in Q1CY09 and 2.3% fall Q-o-Q at Rs.114.3 cr. This was mainly on account of sharp fall in volumes and value of each of GNL’s products. Bonded abrasives witnessed fall of 15-20% in volumes, coated abrasives saw a fall of 5% whereas thin wheels volumes improved by 5% in Q1CY09. Performance Plastics and refractories also witnessed a volume degrowth of 10% and 15% respectively. However, the others division, which accounts for revenue from the Project Engineering has done well during the quarter.

The total expenditure fell by 3.3% Y-o-Y and by 3.8% Q-o-Q. Raw materials and staff cost have risen 250 bps and 150 bps respectively as a percentage of sales in Q1CY09. Staff cost increased on account of 6% hike in salary and higher wages post settlement been paid at one of GNL’s plant. Power and fuel cost has dipped by 170 bps Y-o-Y and 220 bps Q-o-Q as a percentage of sales. With the full-fledged commencement of operations at the Bhutan Plant in July 2009, the power and fuel cost could further see a dip on consolidated basis, which could ease the pressure on the margins. Other expenditure has dipped to 18.6% as a percentage of sales. Although the sales have dipped, control in costs have led to margin expansion by
40 bps Y-o-Y and 140 bps Q-o-Q to 14.3%.

Despite the benefit of excise and income tax for 5 years at the HP plant, GNL continues to pay 31% tax rate as the plant hasn’t been fully utilised. GNL has managed to keep its PAT margins at the same level of 10.4% in Q1CY09. During the quarter, GNL earned an EPS of Rs.2.1, down by 5.7% Y-o-Y and down by 4% Q-o-Q.

To see full report: GRINDWELL NORTON LIMITED

>FLASH ECONOMICS (ECONOMIC RESEARCH)

The centre of gravity of the global economy and for large corporations is being transferred to Asia at an increasing pace

We believe that the centre of gravity of the global economy and for large corporations will move - at a more rapid pace after the crisis - towards Asia, which includes China, India and other Asian emerging countries (but not

Japan directly):

- the growth gap between Asia and large OECD countries (United States, Europe, Japan), will widen further, which is likely to give rise to a new wave of offshoring to Asia and rapidly increase the weight of Asia in the global economy and in global trade;

- the vigorous growth in Asia will gradually drive up commodity prices, which will generate a new weakening in growth in large OECD countries;

- the necessary savings, be it to finance fiscal deficits or the needs of companies and banks in large OECD countries, will increasingly come from Asia, and this will gradually increase the weight of Asia in financial markets and in terms of company ownership.

To see full report: FLASH ECONOMICS

>MARKET STRATEGY (CLSA)

Dividend is king?

We analysed 82 companies with market cap of over US$1bn on trend in dividends in FY09 and see if there is any correlation with stocks performance. Interestingly in a year when profits grew by only 6% (for this universe), 42 companies declared higher dividend/ share than in
FY08 and only 23 companies declared lower dividend. Of the companies that declared a higher dividend, 79% have outperformed the Sensex in the last one year. In the same period, 57% of companies that have declared lower dividends have underperformed the Sensex.

Over the last one month, 33% of the 43 companies have underperformed the Sensex, but only 17% of the 24 companies underperformed the Sensex. The above indicates that in uncertain times companies expected to pay higher dividends will likely outperform and as risk appetite returns, as in the last one month, a higher proportion of companies that have paid lower dividends, but may have more exciting “stories” and potentially higher risks, tend to outperform. The average outperformance for companies that increased dividends was 29% over the last one year and 14% in the last one month. In uncertain times, dividend it seems is indeed the king.

We looked at companies with market cap of US$1bn

■ Of the 82 companies with market cap of over US$1bn, 42 companies have declared higher dividend/ share in FY09 vs FY08, 23 companies declared lower dividend.

■ Financials, particularly PSU banks, have declared higher dividends in FY09. Consumer, utilities and healthcare companies are other sectors where many companies have declared higher dividends. Materials, industrial and 4-wheeler companies have declared lower dividends.

■ It is interesting to note that in a year of uncertainty and slowdown, over 59 of the 82 companies have declared higher or unchanged dividend, a likely pointer to the fact that the outlook within India is not very gloomy.

Stock performance vs dividends

■ 79% of companies that declared higher dividend have outperformed the Sensex in the last one year and the average outperformance was 29%. The nine stocks that underperformed had an average underperformance of 12%.

■ On the other hand, 57% of the companies that declared lower dividends underperformed the Sensex over the last one year and the average underperformance was 15%.

■ The trends over the last one month are equally interesting. Of the companies that have declared higher dividends, 33% underperformed the Sensex, but only by 6%, whereas the 67% that outperformed, had an average outperformance of 14%.

■ Of the stocks that have declared lower dividends, only 17% underperformed the Sensex in the last one month by 6% on an average. The 83% stocks that outperformed had an average outperformance off 13%, not very different from the basket of stocks that declared higher dividends.

■ We believe that in uncertain times, stocks that are likely to maintain or increase their dividends are likely to do better over a longer time period. In the short term, even as risk appetite returns, the average performance of companies that declare higher dividends is comparable to the presumably riskier universe of stocks that have declared lower dividends.

To see full report: MARKET STRATEGY