>ADOR WELDING LIMITED (VENTURA)

Ador Welding Limited, one of the leading players in the welding consumables & equipment space is all set to benefit from a pick up in the investment cycle in the core infrastructure space resulting in strong demand outlay for its welding products. AWL is expected to exhibit a revenue & PAT CAGR of 24% & 26% for the period FY10-12 respectively on the back of strong volume growth of 25% and capex in continuous welding equipment which is margin accretive. We value
AWL at 10x its FY12e earnings and initiate a BUY at CMP with a price target of Rs 298, representing a potential upside of 42% over a 15-18 months horizon.

■ Volume expansion: key growth driver
In FY10 AWL clocked a volume growth of ~42% from 18,655 TPA in FY09 to ~24,000 TPA in FY10. Considering a further uptick in the demand for electrodes, we expect a volume growth of 25% (on conservative basis) over the next two years. With the volume growth set to kick in, the revenues in the welding consumables segment are expected to exhibit a CAGR of 26% from Rs 196 crore in FY10 to Rs 310 crore in FY12.

■ Capex in continuous welding segment to fuel further growth
With the demand for continuous electrodes outpacing manual electrodes, AWL has initiated a Rs 15 crore capacity expansion programme which would add 10,000 TPA of capacity space in the form of adding special wires. The main purpose behind this expansion is to enable AWL to enter into high growth & niche areas of welding application which includes nuclear power, super critical
boilers & some special steel applications. This would not only help in widening its product profile but would enable the company to improvise on its margins backed by low competition in these niche segments.

■ Uptick in infrastructure spending spells good opportunity for welding players
We are currently witnessing a strong pick up in the capex cycle across its user segments viz Steel industry, petrochemicals, fertilizer, hydro electric and thermal power, nuclear power, ship building and heavy machinery, etc. This would present increasing opportunities for the Welding players. AWL which has a market share of ~23% is expected to be one of the biggest beneficiaries.

■ Clean balance sheet, Zero Debt Company with attractive return ratios
AWL has one of the cleanest Balance Sheets apart from being a debt free company. Further it has a track record of paying dividend since more than 12 years with the current dividend yield placed at 2.8%. The ROE & ROCE which stands at 18% & 26% respectively in is expected to further increase to 22% & 32% respectively in FY12e on the back of improved financial performance.

To read the full report: ADOR WELDING

>ASIAN PAINTS: Painting the town red

We initiate coverage on Asian Paints with ‘BUY’ rating and a target price of Rs2,600, an upside of 9%. Healthy earnings growth CAGR of 19% for FY10-12E, continued pickup in urban discretionary demand and leadership position in a growing market with relatively benign competitive intensity, underline our positive investment thesis on Asian Paints.

■ Continued robust demand to drive healthy 18% earnings CAGR: Asian Paints is an undisputed leader in the Indian paints market (55% market share of the organized segment), with more than 2x the share of its next competitor. Pick-up in urban discretionary demand and continued healthy volume growth in semiurban and rural markets will result in robust 18% earnings CAGR for FY10-12e, in our view.

■ Expect 80bps EBITDA contraction in FY11e: We model for 80bps contraction in FY11e EBITDA margin, given the high base (highest EBITDA margin of 18.4% in FY10) and sequential increase in input costs. We believe that Asian Paints has enough pricing power to pass on any adverse input cost hike (~4% price hike in May 2010).

■ Favourable macro catalysts: We believe that Asian Paints is a direct play on the growing economy and India consumption story. Apart from consumption and penetration-led opportunity, several favourable demographic catalysts viz. rising income levels, increasing urbanisation and nuclear families can act as structural growth drivers for decorative paints demand growth.

■ Valuation and Outlook: We value Asian Paints at a P/E of 23x (3 year average) to arrive at target price of Rs2,600, an upside of 9%. We expect the valuations to sustain, given our expectations of healthy earnings CAGR of 19% for FY10-12E, led by a pick-up in urban discretionary consumption. Asian Paints has the pricing power to pass on input cost inflation (price hike of 4.15% in May and 2.8% in July). We initiate with ‘BUY’. Upside risk includes better-than-expected margin performance (we model for 100bps decline in FY11e) and downside risk including moderation in rural demand on account of poor monsoon.

To read the full report: ASIAN PAINTS

>Thinking ‘outside the box’ on economic policy

• The markets are currently imposing on Europe a more brutal tightening of fiscal policy earlier than expected. But that does not mean that the two other constraints have disappeared: central banks should normalise the settings of their monetary policy as soon as conditions are met, while there is a ‘strong obligation’ to maintain a certain level of growth. How this can be done is not at all clear, and there are fears that the markets will find it difficult to extract themselves from this new ‘Bermuda Triangle’ – not forgetting that the triangle can easily shift from one place to another within the region formed by the advanced countries.

• Recent European experience shows that the management of fiscal policy appears to be a more complicated issue than previously thought: how is the decision made when to cut off stimulus and start coming back to fiscal discipline? Cutting it off too soon is taking the risk of the economy plunging into a new downturn; letting it run for too long could build more investor fears and create a hard landing scenario. Defining the main risk between Scylla and Charybdis is
never easy. Perhaps the choice should depend on the importance of both private domestic savings and the ability to attract foreign capital.

• The decision of the ECB to purchase government bonds on the secondary market has triggered a debate about the impact on its credibility. The latter would be reduced because of too close proximity to the behaviour of governments. From an academic standpoint, a distinction has to be made between an environment of high inflation or of very limited inflation. In the face of high inflation, often related to excessive monetisation of government debt, a central bank’s
independence is its cardinal virtue; if very limited inflation is associated with weak growth and fiscal austerity, greater co-operation between the central bank and the government is more easily understandable.

• The link between the sovereign debt crisis and banking crisis has been borne out historically. However, the aim of the rescue plan for member states from the European Union, with IMF support, no doubt changes the nature of that link. In fact, the plan is designed to head off for a period (almost two years in the case of Greece) the emergence of liquidity risk for the Greek Treasury, with the breathing space gained being devoted to reducing solvency risk via credible public account rebalancing plans. For a short time, therefore, the plan staves off the transfer of risk from the sovereign to the banking sector. It is, in fact, a sort of ‘mutualisation’ of risk between sovereigns: from the weaker to the healthier. In this respect, it is probably not entirely legitimate to link the two types of risk so strongly.

To read the full report: MACRO PROSPECTS

>INDIA TELECOMS: Deleveraging Is Key

• 3G and broadband auction stretches balance sheets short-term: We estimate average net debt to EBITDA for Bharti, RCOM and Idea at 3x in F2011, up from 1.5x currently. After that we expect all to be FCF-positive and lower their debt burden in two years to 1.8x.

• Unlocking value of towers could alleviate debt concerns: We estimate that the value of towers is equivalent to 31%, 54% of market cap for Bharti, Idea respectively and 59% of RCOM’s EV.

• Tariff wars are subsiding: No tariff cut in more than 2 quarters

• Overweight Bharti : Bharti has the strongest balance sheet among our coverage companies, its peak net debt/EBITDA of 2.8x should halve in two years.

• Overweight Idea: Idea’s future capex could be less than the industry average due to higher spectrum per sub; the worst quarter in terms of peak losses is behind us.

• Underweight RCOM: Lower ARPU estimates and forex losses lead to earnings cut of over 25% for F2011/12E. RCOM will likely remain costliest Indian telco even after demerger of towers to Global Tele Infra Ltd. (GTIL)

• Key Risks: 1) Entry of Reliance Industries in Broadband Wireless; 2) TRAI recommendations on excess spectrum charges, etc. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

To read the full report: INDIA TELECOM