>MAHINDRA & MAHINDRA (UBS)

Asian Corporate e Governance Pick

■ How is governance?
In today's Q-Series®: Corporate Governance in Asia, we rate Mahindra & Mahindra (Mahindra) as Improving in India. The company provides a high degree of disclosure on related party transactions and maintains a clear separation between subsidiaries. Separately, senior management have made disclosures to the board that there are no material, financial and/or commercial transactions between them and the company, which could create potential conflict of interest. CRISIL has assigned Governance and Value Creation (GVC) Level-1 to Mahindra for its
ability to create value for all its stakeholders.

■ Is anything changing?
In our view, management has made recent efforts to improve its governance. For instance, it now provides quarterly disclosure of non-operating items and their overall impact on P&L. Mahindra’s ranking in the JD Power Customer Satisfaction Index (CSI) has improved to fourth from seventh, demonstrating its commitment to delivering value to customers. Mahindra has made efforts to relocate workers from its existing facilities to the upcoming Chakan plant. This highlights management’s ability to work for the benefit of both shareholders by reducing costs, and workers by providing an alternative employment opportunity.

■ Investment view
We think growth of Mahindra’s UVs and LCVs will remain strong, driven by successful new launches and higher exposure to rural and semi-urban areas. We expect UV and LCV sales to grow 20% and 15% YoY, respectively, in FY10.

■ Valuation: Buy rating and a price target of Rs860.00
We value M&M on a sum-of-the-parts basis. Based on our target multiple, we value the core business at Rs565/share and the subsidiaries at Rs294/share.

To see full report: MAHINDRA & MAHINDRA

>BAJAJ AUTO LIMITED (HDFC SECURITIES)

Impressive margin performance in Q1 FY10, sustainability is a concern

Results: Sales growth remains muted, export realizations boost margins
Although BAL’s volumes in Q4 FY09 reduced by 12% yoy, average net realizations improved by 15% yoy on the back of improved product mix and export realizations. The growth in realizations offset the decline in volumes as net revenues grew 1.6%, slightly above our expectations. Total income (net sales + other income) rose 1.5% to Rs 23,385 mn. BAL’s EBITDA jumped by 71% yoy in Q1 FY10; while EBITDA margins expanded 800 bps yoy and 430 bps qoq to 19.5%.
Softening of steel prices and a change in product mix led to an improvement in raw material costs as a percentage of total income (66.2% v/s 75.7% in Q1 FY09 and 68.8% in Q4 FY09). Adjusted net profits were also above our expectations due to higher than expected benefits at the operating level. Adjusted net profits increased by 55% yoy although in this quarter the company continued to pay for the VRS scheme amounting to Rs 458 mn. Net profits are adjusted for a derivative gain of Rs 218 mn.

EBITDA margins not sustainable
With the effect of steel prices reducing, BAL has witnessed a huge surge in the margins. With Aluminium price reduction showing its impact from Q1 FY10, margins expanded by a significant 430 bps in the quarter on qoq basis. Additionally, export realizations also got a boost due to DEPB benefits and the company’s strategy of taking a forward cover with a bottom-side protection of Rs 47/$ against Rs 41/$ earlier. As a result of this alteration, net realizations increased by a
straight 15%. Also, the ramping up of production at Pantnagar plant would add to the excise benefits. However, the company mentioned that the EBITDA margins would not be remaining at the current level of 19.5% in the remaining part of the year. This will be because the company is in the process of launching new models, which would demand increase in marketing expenses and sacrificing of margins on them to gain volumes. We have estimated the full year margins to
reduce down to 18% from current level of 19.5%. The management expects raw material costs to remain stable throughout the year and also expects EBITDA to remain at the Rs 4,500 mn level every quarter.

New launches to provide better positioning
To reposition itself, BAL is launching the 100 cc bike Discover M on 17July, priced at > Rs42,000 per unit and expected to give a mileage of 80 kmpl. The company also launched two variants of Pulsar 150 and 180 in May and the new Pulsar 220 in June. The domestic Pulsar sales have increased to 42,000 v/s 28,000 per month in FY 2009. The company has started to produce a low cost bike, Boxer in China for Nigerian market. It is currently producing 1,000 bikes per month. In
the coming months, this could be ramped up to 10,000 per month due to increasing demand in the African markets. BAL also declared its plans to launch a new bike with KTM in India next year and has also increased its stake in KTM. It will also launch two new three wheelers in August and December, one each in the passenger and goods segments. The company is planning to ramp up production at Pantnagar to derive added excise benefit. In May, it produced 45,000 bikes from there, while in September it intends to increase it to 60,000, thus taking the yearly production to ~ 0.65 mn.

Exports drop on reducing demand Exports contribute ~33% of BAL’s volumes. The first quarter has witnesses a 10.3% drop on a yoy basis due to weaker export sales in April. We believe this to be negative for the company as the company is banking too much on exports. The company expects a revival in exports in the coming quarters.

To see full report: BAJAJ AUTO LIMITED

>CESC - FY09 ANNUAL REPORT ANALYSIS (INDIA INFOLINE)

• STRONG OPERATIONAL PERFORMANCE
• HIGHER REALIZATIONS TRANSLATE INTO 9% YOY REVENUE GROWTH
• SPENCER'S CONTINUES TO DRAW BLOOD
• TRADES FAIRLY, RE-ITERATE MARKET PERFORMER
• HIGHER SYSTEM DEMAND TRANSLATES INTO STRONG OPERATIONAL PERFORMANCE

To see full report: CESC

>INDIA HARD HAT (JP MORGAN)

Supply additions continue to creep up, while South remains weak

• Y/Y demand growth looks good, but South India weakness is a concern: India’s June-09 cement dispatches grew 13% Y/Y (+1.3% M/M). We believe a benign base, combined with continued strong demand in North and East India, was the key reason for the strong Y/Y dispatch growth. While we expect the base to stay supportive until Nov-09, we believe the continued slowdown in South India is a concern. The May-09 cement consumption increased only 1% Y/Y in South India, with two of the top three markets (Karnataka and Andhra) declining. Usually, South India does not get affected by the monsoon rains in the July-Sept period. Although 1Q has seen capacity additions of 15MT, we highlight that it does not yet include the large green-field units of Grasim.

• Mixed cement price trends: While the J.P. Morgan National Cement Price Index increased 0.7% M/M, pricing trends were mixed across India. Some pockets of Eastern and Northern India continued to see cement price increases of Rs3-8/bag in June/early July; however, most of the South India and pockets of Western India saw price declines. Southern India was the first
off the blocks in terms of capacity addition, and we believe continued ramp up of capacity, combined with weak demand, is likely to see more supplies to Western markets, thus affecting the prices. Although cement prices did not fall over the past three monsoons, we expect price declines this year.

• The time frame to achieve capacity ramp up: Over the past three years, the Indian cement industry has added capacity mainly through debottlenecking and small brown-field expansions. However, an analysis of some of the green-field units over the past two years suggests that from clinker commissioning to the ramp up of 70% capacity utilization can take as much as 8-9 months, as the power plant, grinding units and bagging units come in place.

• Quarterly results—we expect a record quarter: We expect cement companies to post record earnings and margins in the Jun-09 quarter (please see Figure 6 for details) as the full benefit of higher prices flows through.

To see full report: INDIA HARD HAT