>ABB LIMITED (JAYPEE CAPITAL)

We initiate coverage on ABB with a ‘SELL’ recommendation and a target price of INR 588 per share implying a downside of 15% from current levels. We expect ABB to generate strong revenues from power business due to robust spending planned in power generation resulting in robust demand for power equipments. However, the slowdown in industrial capex due to high cost of borrowings and limited access to capital will drag the project business putting greater strain on the financials of ABB.

Power business going from strength to strength
With demand for power expected to grow at 8 to 10% annually, power supply will face greater strain. In order to meet the shortfall, heavy investments are planned in increasing the installed capacity of power generation. Higher plan outlay for power T&D has also been made in 11th plan as the need for more efficient T&D network is severely felt. More emphasis will be given to reduce the T&D loss (India – 27%, world average – 15%) by strengthening the grid and replacing the old T&D equipments with the new ones. Majority of these investments will be undertaken by state utilities and central government entities, providing further cushion in the present economic
environment.

Corporate capex yet to take off, project business to drag
Although the power segment is poised to grow at a fast rate, the industrial segment will see the continuation of slowdown in the current year. The key differentiator is the availability of funding. We do not expect any revival in industrial capex as the access to capital is still constrained. The capital that is raised at the currently prevailing high cost will be utilised only to secure funding for the ongoing projects. We believe the impact of increasing cost of capital on IRR will keep away private sector from investing in new projects as they become unviable.

Slowdown in order inflow, worsening credit cycle
CY08 saw significant slowdown in order inflow on account of economic slowdown which resulted in deferment / cancelation of industry capex. This lead to a drastic fall in order intake in four consecutive quarters beginning from INR 27bn in Q1CY08 to INR 13bn in Q4 CY08. We expect a subdued order intake in CY09 as well. ABB is also experiencing a severe expansion in the working capital cycle which has resulted in a heavy fall in cash levels from INR 6.4 bn in CY07 to INR 3.5 bn in CY08 and increased borrowings for short term working capital loans at high interest rates affecting the business profitability.

Ground realities do not reflect market buoyancy, valuations expensive, SELL with a price target of INR 588
In the previous down cycle that lasted between 1997 and 2000, the capital goods industry recorded negative earnings growth on account of slowdown in both power and industry capex. However, this time around, due to government’s increased thrust on infrastructure development, there is a strong visibility in the power T&D segment. This will ensure positive business environment for ABB’s power segment verticals. However, we believe the recovery in the industrial capex is unlikely for next two quarters which will keep the industry segment sub‐dued. This change in business mix has put pressure on the financials of ABB as a result of falling earnings, slowing order book, and expanding working capital cycle. We project a moderate growth of 8% in revenues and 3% in profits for ABB in CY09. We assign a P/E multiple of 18 times CY10E EPS of INR 32.7 to arrive at a target price of INR 588 per share implying a downside of 15% from current levels.

To see full report: ABB LTD.

>Gold steady; look for equities cue this week

Singapore - Spot gold at USD919.85/oz, down 95 cents since NY close; rally overnight from yesterday's low at USD907.45 was prompted by jump in equities on Wall Street, says Adrian Koh, analyst at Phillip Futures in Singapore. Equities, gold currently positively correlated as both tending to move inversely to USD. "I think if we get some good second quarter earnings (in U.S.) this week, gold could test higher but overall we think the (short-term) trend is still lower," says Koh. Adds, taking 45-day view, test of USD900 still likely with physical demand still weak. Beyond that, USD900-USD1,000 range likely to resume later in year with bias then towards higher prices.

Gold steady; sustained rally unlikely
Gold was steady in Asia Tuesday after rallying in late New York trade Monday.

The rally, which tracked strong U.S. equities, was the first strong upside move since the start of the month but participants aren't convinced that it represents a trend reversal.

"I think if we see some good second-quarter earnings (in the U.S.) this week, gold could test higher, but overall we think the (short-term) trend is still lower," said Adrian Koh, an analyst at Phillip Futures in Singapore.

Mitsui Global Precious Metals said in a note that it was also looking for a test of USD900.

"Right now there are no major push factors significantly capable of extending gold to the upside. The physical market is largely disengaged, waiting for the fall towards $880," the note said.

Mitsui said long exposure on futures exchanges was still excessive at 22.7 million ounces at the end of last week, well above the 2009 average of 20.7 million ounces.

"Therefore, we are concerned that a raft of liquidation action is around the corner as investors look to offload stale long positions," it said.

At 0650 GMT, spot gold was at $919.55 a troy ounce, down $1.25 since the New York close. On Tocom, June 2010 gold was at Y2,770/gram, up Y63.

Spot silver was at $12.83/oz, unchanged from overnight, but traders will be watching silver closely for signs of a relative trend reversal versus gold. Silver is down 22% from its early June highs compared to gold's retreat of 8%.

The Gold/silver ratio is now at 71.7 and a close lower than yesterday's 71.9 would be confirmation ratio is likely to move lower, said ScotiaMocatta in a note.

Platinum was also higher at $1,115.50/oz, up $2.50 and could be bolstered by expectations the U.S. auto sector may show signs of recovery in the third quarter.

Barclays Capital said in a note that the sector could see a "substantial turnaround in output growth," helped by the 'cash for clunkers' vehicle scrapping programme.

India gold futures little changed; INR weighs
India August gold contract on MCX little changed at INR14,599/10 grams tracking slight weakness in overseas gold markets, strong INR. "(Overseas) gold has been pressured by worries over the global economy and broad-based weakness in commodities that was fueled partly by U.S. regulatory pressure to limit speculation in the energy and metals markets," says Debjyoti Chatterjee of Admisi Commodities; he expects MCX August contract to consolidate at current levels and move in INR14,460-INR14,650 range today.

Source: COMMODITIESCONTROL

>STATE BANK OF INDIA (GOLDMAN SACHS)

Three reasons to own SBI; reiterate Conviction Buy

What's changed
We see three reasons to own SBI: 1) at a macro level, we believe SBI would be a key beneficiary of the economy returning back to potential growth level—33% CAGR in earnings for SBI during 2009E-2011E; 2) at a bank-specific level, we see SBI as a long-term player with a sustainable
advantage due to its strengthening competitive position—solid and stable deposit franchise, higher and rising productivity compared with its peer group of state-owned banks with prospects of further improvement through potential mergers with its subsidiary banks in the long term; and 3) likely relative valuation change reflecting the potential cyclical upside to earnings and its strengthening competitive position in the long term. We reiterate Buy, on Conviction list, and our 12-m TP of Rs2,280.

Implications
Trading at 2010E P/PPOP, P/E and P/B of 3.2X, 6.4X, and 1.1X, respectively, versus the regional average of 8.2X, 14.6X and 1.9X, we believe SBI’s valuation presents a compelling investment argument both in relative and absolute terms, within India and in the region. In our view, the market seems to be concerned about a tougher outlook for growth for SBI in 2009 and its lower loan loss reserves. While the tougher growth outlook is factored into our expectations, we believe the risk to capital from low loan reserves is insignificant given SBI’s net NPA/equity ratio of 15% in 2008.

Valuation
We derive our 12-m TP of Rs2,280 for SBI using SOTP methodology. At current multiples, SBI is trading ahead of its historical median of 0.9X P/B. However, given its ROE of 18% for 2010E, we believe it should trade well above its historical median and current multiples.

Key risks
Key risks include: 1) increase in interest rates and 2) deterioration in SBI’s asset quality outlook.

To see full report: SBI

>MUNDRA PORT & SEZ (MACQUARIE RESEARCH)

Concerns not in sync with reality

Event
■ MSEZ has declined significantly by 17% over the past week amid, we believe, unjustified concerns over its earnings post the increase in the Minimum Alternate Tax (MAT) in the union budget, and also over its volumes amid economic concerns. We believe the sell-off is overdone and presents an attractive opportunity to enter the stock.

Impact
■ Not impacted by an increase in MAT: Contrary to perception, Mundra Port enjoys a tax holiday under section 80IAB, which deals with tax benefits for SEZs and not 80IA, which is for infrastructure developers. Under 80IAB, there is no MAT requirement.

■ Volume growth could come in healthier than expected: Volume growth at Mundra Port could surprise on the upside in the near term and come closer to 20–25% over the next 1–2 quarters versus our estimate of back-ended growth in FY10, driven by coal (both 3rd party and Adani power plant), fertilisers and Maruti (MSIL IN, Rs1,102, UP, TP: Rs680, downside: 38%) car exports (13,336 units in June 2009 vs 4,836 in June 2008).

■ Upside to our volume estimates: We are building in 21% volume growth in FY10 and only 13% in FY11. Given the strong traffic growth that could come in 1Q FY10 along with the long-term contracts kicking in earlier than expected, we believe significant upside remains to our estimates.

⇒ Adani power plant ramp-up ahead of schedule: We are currently building in the commissioning of the entire Adani power plant capacity by FY14 (1,500MW by FY12 and the entire 4,620MW by FY14). However, activity on the ground is ahead of our estimates with the first unit of 330MW already commissioned and commissioning of three more units of 330MW is in the advanced stages. The rest of the 5X660MW units could be commissioned by FY12. If the entire capacity of 4,620MW comes up by FY12, the coal requirement of 17.5mn tons could come in by FY12 itself versus our estimate of FY14.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs617.00 based on a Sum of Parts methodology.
■ Catalyst: Traffic growth in 1Q and 2Q FY10 and any large deals on SEZ land.

Action and recommendation
■ Maintain Outperform with a target price of Rs617: We continue to maintain that MSEZ remains an attractive play for long-term investors, given extensive expansion in capacity, possibly at the port site, and monetisation of SEZ assets over a long period. 1Q FY10 results could surprise on the upside driven by robust volume growth, which could act as a short-term trigger, in our view.

To see full report: MUNDRA PORT