>VOLTAS (ANAND RATHI)

■ Business environment improves; concerns continue. Voltas is seeing a gradual improvement in businesses especially in the UCP segment and the domestic EMPS segment as well as some parts of the EPS segment. But the international EMPS business is still a concern due to lack of order inflows from international markets in the last few quarters. We thus maintain our Sell rating.

■ EMPS segment the key. As growth in UCP and EPS segments (except textiles), along with domestic EMPS, is picking up, only the international EMPS segment is a concern: slack order inflows even with crude at over US$70/barrel. Voltas’ order backlog has declined for five consecutive quarters now. The current order backlog is Rs43.6bn, down 22% yoy. It includes a Rs7bn order, currently suspended.

Still awaiting international orders; maintain Sell

■ Margin outlook stable. We expect the EBITDA margin to expand 146bps in FY10, to 8%, and thereafter to be stable on account of higher margins in the UCP and EPS segments.

■ Change in estimates. We raise our earnings estimate on account of the better margin profile of the EPS and UCP segments, consolidation of Rohini Industrial and assumption of better order
inflows due to higher crude oil prices.

■ Valuation. Our new target price of Rs169 (Rs129 earlier) is at 15x one-year-forward estimated earnings (Dec ’11).

To read the full report: VOLTAS

>INFOSYS TECHNOLOGIES (RBS)

■ Increasing traction from new engagement models underpins long-term targets
Infosys showcased its thrust on new engagement models, where output/pricing are not directly co-related to manpower. The company aims to earn a third of its revenues from these models in five to seven years (vs 5-7% currently, ex-Finacle). It has closed about a 100 such deals in FY10 ytd of TCV of US$165m. Discussions are on for 150 more projects worth US$528m. Growth from these models is significantly higher- bookings and revenues are up 75% and 50%, respectively, vs a 4% yoy decline in overall revenues in 1HFY10. Apart from customers' demand for outcome-based pricing, a key driver is to side-step rate card negotiations, typical of time and material based contracts.

■ New operating model to drive productivity, while client-partner role focuses on mining
Infosys has increased the minimum number of years an employee needs to put in technical roles to eight (typically six earlier). While this is in line with clients' insistence on experienced technical staff, it also increases the average billability of an employee by about two years. A larger span of control of 1:3:9 (from 1:2.4.5 earlier) also helps spread overhead costs wider. Infosys plans to increase its sales headcount by 30% in FY10, particularly to deepen large client relationships through dedicated client-partner roles.

■ Near-term outlook unchanged; valuations price in growth expectations, in our view
Management reiterated its near-term demand outlook given in October 2009. It does not expect the usual budget flush to play out in December 2009, as clients are still strictly monitoring spending levels. While most 2010 budgets are likely to be finalised in time, recent interactions with clients indicate budgets will likely be flattish yoy. Infosys expects discretionary expenses to be curtailed. We maintain about 20% growth for FY11F is already built into current valuations and that this would be difficult to surpass.

To read the full report: INFOSYS TECHNOLOGIES

>SKYSCRAPERS & ECONOMIC CRISIS: IS THERE A LINK?

Dubai World, with $59 billion of liabilities, is seeking to delay debt payments, sending contracts to protect the emirate against default surging by the most since they began trading in January. The state controlled company will ask all creditors for a standstill agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due on Dec. 14 from its property unit Nakheel PJSC, the builder of palm tree-shaped islands. Extending the maturity of Nakheel debt is feeding the market’s uncertainty on which debt Dubai will honour in full. They look desperate and the market is concerned that in the long term Dubai's indebtedness is rising not falling. Dubai accumulated $80 billion of debt by expanding in banking, real estate and transportation before credit markets seized up last year

Bond Program- Dubai, the second biggest of seven sheikhdoms that make up the United Arab Emirates and home to the world’s tallest tower and the biggest man-made islands, suffered the world’s steepest property slump in the global credit crisis as home prices fell 50 percent from their 2008 peak. The central bank, headquartered in Abu Dhabi, bought all of the 4 percent, five -securities that Dubai sold on Feb. 23. Dubai’s ruler said, Nov. 9 the emirate’s bond program to raise a further $10 billion. Abu Dhabi, the U.A.E.’s capital, is owner of the world’s biggest sovereign wealth fund and holds almost all of its oil.

Repayment Schedule- Sheikh Mohammed last week removed the chairman of Dubai holding LLC and Dubai World, two large statestate-owned business groups, as well as the head of U.A.E.’s biggest developer Emaar Properties PJSC from the board of the Investment Corp. of Dubai the emirate’s main holding company. He also ejected the governor of the Dubai International financial Centre, Omar Bin Sulaiman, who had led efforts to transform Dubai into the Middle East finance hub.

To read the full report: ECONOMETER

>Convergence with IFRS (CLSA)

There are significant differences in the accounting treatments proposed under Indian GAAP and IFRS. If the experience of the UK companies is anything to go by, convergence with IFRS can have a meaningful influence on the reported financial performance of certain sectors/companies. Our analysis suggests that banking, real estate, and infrastructure sectors in India are most sensitive to the changes in the accounting framework. Given that all listed companies will report their FY12 results under the IFRS provisions, we expect investors increasingly start considering its potential impact as we move closer to 2011.

Banking
■ Banks will have to distribute income and expenses related to acquisition of assets and liabilities over the expected term of assets/ liabilities.
■ Banks will be permitted to recognise MTM gains on assets (classified as AFS and HFT). MTM gains/ losses on AFS will be routed through reserves (presently through P&L) making quarterly earnings less volatile.
■ Recognition of impairment to assets and related provisioning will be based on management estimate of expected losses (after factoring likely recoveries). Banks will also be permitted to recognise income on impaired assets on accrual basis.
■ Indian Banks Association (IBA) has asked RBI to push transition to IFRS by a year due to inconsistencies in regulations, IT bottlenecks and lack of trained staff.

Real estate
■ IFRS can lead to delayed revenue recognition on sale of under-construction apartments as they are likely to qualify as sale of goods, in which case revenue is recognised only on completion of construction.
■ In a scenario of rising prices, valuing investment property at fair value (under IFRS) will increase profits of real estate developers.

Infrastructure
■ IFRS requires that in the case of service concession arrangements, a part of the overall profits should be recognised in the construction phase; and the infrastructure asset should be treated as a financial/intangible asset (rather than a fixed tangible asset).
■ Embedded derivatives in various contracts need to be recorded at their fair values.

Other sectors
■ Power: Under IFRS, some long term PPAs might be treated as leases; decommissioning obligations need to be recorded at their present values; embedded derivatives in long term fuel purchase contracts are to be recognised at their fair values; and components approach needs to be followed for fixed assets.

■ Extractive: According to IFRS, costs incurred on unsuccessful wells/mines cannot be capitalised; impairment needs to be tested at least annually on the basis of certain specified indicators; and abandonment costs are to be recorded as a liability at their present values.

■ Technology: Under IFRS, share-based payments need to be recorded on the basis of fair value method (intrinsic method is not permitted); and a higher proportion of product development expenses need to be expensed.

■ Telecom: Certain Indefeasible Rights to Use (IRUs) might be treated as leases; decommissioning costs need to be recorded at present values; multiple elements contract are to be split for revenue recognition; and components approach is to be followed for fixed assets.

■ Consumer/ Autos: Under IFRS, all retailer discounts and rebates are required to be subtracted from revenues; a higher proportion of R&D expenses needs to be expensed; certain contract manufacturing contracts might be required to be treated as leases; and component approach needs to be used for fixed assets.

■ Pharmaceuticals: Assets and liabilities of an acquired entity can be consolidated only at their fair values; and components approach needs to be followed for accounting for fixed assets.

To read the full report: MARKET STRATEGY