>GAMMON INDIA (IIFL)

Robust core; new forays could trigger large upsides

Improved outlook for infra capex, steadier execution and margin expansion due to input cost savings should drive strong PAT growth in the core construction business. An order coverage ratio of 3.45x provides sufficient revenue visibility. The listed infra subsidiary has the requisite experience to benefit from the likely upsurge in infra award activity, especially in the highways sector. While turning around the Italian acquisitions remains a challenge, they offer significant growth opportunity through the foray into the power equipment business in India. At current prices, the stock is trading at 35% discount to peers. Steadier execution and signs of traction in the power business are likely to drive a re-rating in the stock. BUY.

Better execution and margin improvement to drive growth in core construction business: In FY09, the core construction business was beset by a number of external problems: i) suspension of projects under execution; ii) disruption of construction sites due to heavy floods in Bihar and; iii) margin pressure due to low profitability in fixed-price captive projects. Execution rates should improve in absence of external impediments. A strong order book at Rs130bn (3.45x trailing 12 months’ revenues) and L1 pipeline of Rs20bn provide sufficient growth visibility. Profitability in the captive projects would also improve, thanks to sharp declines in input prices from FY09 levels driving a 22% PAT CAGR over FY09-12.

GIPL well-placed to benefit from up-tick in infra BOT projects: Gammon’s infra subsidiary, GIPL, currently has four operational projects—three road and one port terminal project. Along with the ten other projects across road, ports and power sectors, GIPL’s portfolio is well-diversified across sectors. With 100km of highways under operation and another 132km under development, along with two large BOT bridge projects, GIPL has the requisite capability to execute large, complex road projects. This should enable it to capitalise on the likely upsurge in NHAI award activity in the next 2-3 quarters.

Acquisitions provide opportunity to exploit the power opportunity; not factored in our valuations: Through the three Italian acquisitions in FY09, Gammon has got access to technology to foray in high-growth power equipment business in India. The company is also expanding the pressure parts manufacturing facility in India to improve cost competitiveness for both domestic and international projects. While turnaround of these companies remains a key challenge, we believe that the company is taking steps in the right direction. Our valuations do not factor any upsides from turnaround of overseas operations or project wins in India. However, successful foray in power business has potential to add upsides to our SOTP.

To see full report: GAMMON INDIA

>FUND ANALYSIS : OCTOBER 2009 (SHAREKHAN)

WHAT'S IN - WHAT'S OUT

Favourite stock picks in the portfolios of equity and mid-cap funds
An analysis has been undertaken on equity and mid-cap funds’ portfolios, indicating the favourite picks of fund managers for the month of September 2009. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 24 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc.

To see full report: FUND ANALYSIS

>INDIA CEMENT SECTOR (MACQUARIE RESEARCH )

Monsoon blues or party over?

Event
■ Cement demand seasonal dip: Cement companies reported lower despatches for September. ACC and Ambuja reported marginally negative growth, while Grasim and Ultratech still registered 16% growth. Overall we expect 7% growth for the industry and believe that delayed monsoon and early festivals contributed to lower YoY growth.

Impact
■ Strong demand to continue: Until August, cement demand had been exceptionally strong, growing at 12.8% against our estimate of 9%. While there are some concerns on demand due to a deficient monsoon and its impact on rural demand, we see support coming from a rebound in urban housing and a further boost to infrastructure projects, particularly road projects.

■ Cement prices – slipping but not collapsing: Cement prices on average for all of India are down to Rs244/bag, which is still 7% higher than the average seen last year, ie, in FY08. In fact, due to price increases seen in July and early August, the 2Q FY10 prices are still more or less equal to 1Q FY10 prices. Andhra Pradesh is the only state to see a bit of a collapse in prices, which are down 15% to Rs190/bag. The key reason is a lack of demand here, as the start of irrigation projects has been delayed due to the vacuum created post the death of the chief minister of the state.

■ Clinker stocks low even with high capacity utilisation: The industry had been operating at an 87% capacity utilisation YTD until August, which is higher than last year’s 85%. The clinker stocks have remained low – 16.1 days of consumption lower than last year and well below the 20-day average seen during surplus years.

■ Cement capacity increase – full impact by 2Q CY10: In the last six months an increase of 20mnt, or around 10% of capacity, has occurred. Overall, we expect another 30–35mnt to be added in the next 12 months, with bulk of this coming in the first half of CY10.

Outlook
■ Valuations remain attractive at below a 10x PER: Cement companies are trading below the historical averages seen over last 15 years on all valuation parameters (PER, EV/EBITDA and EV/T). All the companies are trading at or below replacement costs.

■ Top pick remains Grasim and Ambuja: Although we expect the possibility of a surplus in FY11, we believe that the cement price fall will be limited due to stronger-than-expected demand. We recommend taking exposure to industry leaders that are expanding volume faster than the industry and that are taking measures (like captive power plants and split-grinding units) to reduce costs.

To see full report: CEMENT SECTOR

>The Global Economy, From Recession to Recovery (GOLDMAN SACHS)

Global growth has continued to improve and it now appears that the deep recession that began in the US in late 2007 and then spread to many other countries has finally ended. Key measures of financial stress have improved and risky assets have staged impressive rallies since mid-March. Looking forward, the global economy is seeing increasing differentiation between the G3— where the growth outlook remains fragile—and robust growth in most emerging markets (EMs).

Indeed, the big story for EMs during the crisis appears to be that there was no big story: by and large, their strong fundamentals allowed them to weather the shock better than most had expected. We forecast that EMs will grow by 2.8% in 2009 and by 7.3% in 2010. In contrast,
among advanced economies, we expect GDP to decline by 3.2% and increase by 1.9% in 2010. For the world as a whole, we are projecting GDP to decline by 0.9% this year and then rebound to 4.1% next year, up from our estimates of -1.2% and 3.5% published in the previous
issue of the Global Economics Analyst.

In the US, we expect growth to accelerate to 3%qoq annualised in 2009H2 on the back of fiscal stimulus, a pick-up in housing construction and inventory restocking. However, growth is likely to decelerate to 1.5% by the second half of next year as fiscal stimulus fades, investment spending continues to decline and consumption growth remains weak in the face of high unemployment. Given this anaemic recovery, we expect the Fed to keep the Funds rate near zero at least until 2011.

In Euroland, our latest forecast sees GDP declining by 3.8% in 2009, an improvement over our earlier forecast of -4.4%. Growth is likely to have turned positive in Q3 and should average 1.2% in 2010. We think the ECB will start ‘tightening by stealth’ over the next few quarters by draining liquidity from the overnight market, and then begin to raise policy rates in the second half of 2010. We expect the UK economy to contract by 4.1% in 2009. However, financial conditions have eased much more in the UK than in continental Europe, which should help propel growth to 1.9% in 2010.

Although GDP growth in Japan turned positive in Q2 thanks to a strong contribution from net exports, domestic demand remains quite weak. We expect GDP to decline 5.7% in 2009 and grow 1.4% in 2010 and Japan’s balance of payments to continue to deteriorate. In the light of this difficult economic outlook, the BoJ is likely to keep the policy rate at 0.1% for the foreseeable
future.

To see full report: GLOBAL ECONOMY