>VARDHMAN TEXTILES LIMITED (TECHNO RESEARCH)

KEY INVESTMENT HIGHLIGHTS: Vardhman Textiles is totally integrated play on textiles with 669000 spindles increasing by 50000 further and 92mn mtrs gray and 51mn mtrs processed fabric capacity increasing by 2mn mtrs further. Presence in entire textile value chain benefits the firm to capture growing domestic and international market. We expect volume improvement with increasing realization to improve bottomline at a CAGR of 21% over next two years.

■ Evolution through consolidation: Vardhman Textiles to be major beneficiary of strong consolidation witnessed in the spinning industry. Wherein, total spinning capacity has increased at a CAGR of 1% over a decade Vardhman was able to increase its capacity at 3.5% CAGR. Capacity expansion of 50000 spindles and 2 mn meters fabric will improve volume
further.

■ Healthy demand to absorb high yarn prices: Improving textile demand outlook, rising raw material cost and reduced yarn inventory levels (3%) in the international market will maintain at current high level. However, healthy demand will be able to absorb high prices. Domestic textile demand growth is expected at 7%. Vardhman to improve its margins in such scenario as yarn contributes 55% of its total sales.

■ Export demand adding spice: We expect Vardhman’s internationalbusiness to increase, which currently contributes around 25%. With China’s cotton production expected to reduce by 9% for 2009-10, we expect increased yarn imports from China and even from neighboring countries like Bangladesh. India is well positioned to cash on this as India’s cotton production is expected to increase 5% in 2009-10.

■ Forward integration to benefit: With forward integration into gray and processed fabric with total capacity of 91mn mtrs and 40mn mtrs respectively increasing by 2mn mtrs Vardhman dominates its presence in entire textile value chain. We expect this business to contribute around 32% to total revenue.

■ Improving profitability and reducing leverage: Improving volume and reducing interest saddle with reducing debt is expected to improve profitability of the company. We expect topline and bottomline to grow at 15% and 21% respectively over FY09-FY11E. The firm holds consolidated debt of Rs2200 cr with Rs450cr cash and Rs250 cr capex plan ahead. Strong free cash flow expected at Rs500cr next year would be able tofulfill capex requirement and bring down debt level at Rs2000cr by FY11E.

CONCERNS:

• Higher than expected increase in raw material prices could dampen the margins of the company.

• Lower than expected demand could dampen growth volume growth of the company.

VALUATION: Vardhman is consistent dividend paying company with positive ROE. With improving profitability’ ROE of the firm is expected to improve further to 15% by FY11E. All the positives are offered at very discount, which makes re-rating of the stock evident. Currently stock is trading at 4.9xFY11E earnings and 4.3xFY11E EBIDTA. We recommend
“BUY” with price target of Rs310.

To read the full report: VARDHMAN TEXTILES

>HOUSE PRICING WAR - VYING FOR A SHARE IN THE PIE (INDIA INFOLINE)

■ Mortgage: GDP ratio at 7% provides room for further growth
The ratio of mortgage to GDP in India has remained low at 7%, as against 12% for China, 41% for Hong-Kong and more than 80% for developed countries, thus providing potential for further growth in the housing sector during the coming years.

■ Revival in real estate volumes supported by low interest rate
The correction in the real estate prices in the initial period of the year and low interest rate schemes announced by the banks/HFCs have resulted in significant surge in real estate volumes over the past few months.

Home loan rates - a number play game

■ Sluggish credit demand; banks increase their exposure to housing sector
Due to sluggish credit demand (up 10.1% yoy for the fortnight ended November 20th, 2009), banks have been diverting their funds towards housing loans.

■ HFCs continue to do business as usual
HFCs foresee the increasing share of banks exposure towards home loan segment as a temporary phenomenon. In our view, banks are likely to face asset-liability mismatch as these loans have a long hestation period.

■ Differential interest rate may not remain for long
While the discounted/special scheme rates are offered to new home loans, existing customers continue to pay higher rate of interest. The Indian Banks Association has planned to introduce a uniform rate for all borrowers.

See also major events/Rate cuts announced by banks/HFCs in report

To read the full report: HOUSING PRICES

>HOTEL LEELAVENTURE LIMITED (INDIA INFOLINE)

An improvement in H2 FY10 occupancies across room portfolio coupled with steady average room rates (ARRs) has been key to Hotel Leela's recovery from amongst the worst downturn in the hospitality industry. Even so, Numbai and Bangalore luxury markets (~65% of FY11E room revenues) have not shown the kind of business ramp up seen in Delhi or Hyderabad.

We now expect FY11 occupancies to be in the range of 66-74% (an increase of 200 - 400bps from previous estimate)while room tariffs may be flat yoy. Revise Fy11 revenue and EPS estimates by 11% and 16% respectively. Raise TP to Rs35 but retain SELL.

■ H2 occupancies better than expected

■ Volume growth in FY11 partly offsets weak ARRs

■ Co in recovery mode remains expensive: SELL

To read the full report: HOTEL LEELAVENTURE

>The India story: Opportune times (EDELWEISS)

■ Interest rates to stay “lower for longer” in advanced economies
The global economy is up from the trough. However, we believe growth is still nascent and stimulus-dependent, especially in the developed world. Globally, particularly in developed nations, stimulus unwinding is likely to be slow as policymakers would rather prefer to err on the side of caution than putting growth recovery at risk. While most of the extraordinary stimulus measures are to be gradually rolled back during the first half of CY10, we believe, the Fed will keep interest rates at current levels for most of the year. Appreciation in the EUR is anyway acting as a “pseudo tightening” for the Euro zone and will delay rate hike by the European Central Bank (ECB). On the other hand, Japan is still in the process of injecting fresh stimulus, acknowledging likelihood of poor economic performance for a prolonged period.

■ USD to remain weak; flows to remain strong into emerging markets
We expect the USD to remain weak during CY10, primarily driven by: (1) surging federal deficit and large treasury issuances; (2) sharp expansion of the Fed balance sheet; (3) improved risk appetite globally, reducing significance of the USD as ‘safe haven’; and (4) several emerging markets (EMs) shifting their reserves from USD to gold. Low interest rates in the US, without the fear of any quick appreciation of the domestic currency, will lead to continued flow of USD to EMs. Even in case of a slowdown in USD flows, EMs will still enjoy inflows of other low yielding developed country currencies. JPY remains a prime candidate for being used in such “carry trade” as a result of the near-certainty of its continued weakness and extremely low interest rates in Japan.

■ India stands to benefit more than peers
India has been relatively less battered in the global crisis and most indicators suggest a strong growth recovery ahead. The country remains largely immune to the risk of any rollback in stimulus as the same was miniscule at less than 1% of GDP (against ~15% of China), targeted at the lower strata of the economy—in line with GoI’s long-term strategy of “inclusive growth”. In our view, the current phase of high inflation will be a concern for just around six months and, thus, will not put undue pressure on the interest rate scenario. With the economy poised to re-enter a healthy growth zone, the pro-cyclicality of India’s fiscal dynamics will reduce deficits considerably over FY11-12. With stability and strength in income generation, efficient use of capital, favourable demographics, India is in the early phase of a virtuous cycle of high savings, capital formation, and high growth.

■ Focus on consumption and infrastructure creation in India
India’s current valuation premium over EMs has been in line with the recent past. Given the strong visibility of growth and political stability, there should not be any de-rating in the premium over the near term. We expect earnings estimates for FY11 to grow further. Even if there is no further uptick in valuation multiples, Indian markets will keep moving up along with earnings upgrade. While we are bullish on Indian equities in general, we believe key to outperformance will be with bottom-up sector and stock selection. We prefer to play the India growth story via infrastructure creation and end-consumption. We are overweight on BFSI, industrials, real estate, and consumer discretionary.

To read the full report: INDIA STRATEGY