>ADANI ENTERPRISES (IDFC SSKI)

HUNGARY FOR MORE!

Adani Enterprises (AEL) is redefining its business model and scale of operations. Moving away from low capex, lumpy and low-margin trading to capex heavy and high margin annuity businesses, AEL is emerging as an infrastructure conglomerate Rs421bn of revenues by FY12E). AEL plans to invest Rs300bn+ across sectors with 90% in power generation and coal mining by FY12. Commencement of power generation (total capacity of 6,600MW) and coal mining (75m tonnes at peak) imparts visibility of scale to what were ‘just potential opportunities’. While near-term risks pertain to execution and financial leverage, we derive comfort from AEL’s track record 8x revenue scale-up since FY02) and entrepreneurial vision. With current projects valued at Rs1,105-1,279 per share, and further upside likely as planned projects gain visibility as also from scale-up beyond the existing plans, we maintain Outperformer.

In quest of scale: AEL is transitioning from a Star Trading House (power, coal, agri, precious metals, scrap, etc) to an infrastructure conglomerate (power generation, coal mining, city gas distribution, oil & gas exploration, agri logistics, etc). A marked shift is underway from asset light businesses to asset creation, lumpy trading to annuity model and 5-6% margins to a 40%+ margin profile.

Power and coal businesses at the core: AEL is executing 6,600MW of power plants with 330MW capacity going on stream immediately and 1,320MW by FY10. In coal mining business, Indonesian mines with annual extract of 10m tonnes are operational and Indian mines (65m tonnes by FY16) would commission in FY11. Power generation and coal mining would account for 25% of revenues and 80% of EBITDA by FY12.

Execution the key; we see a winner: As AEL enters uncharted territories and creates scale
Rs421bn by FY12), execution will hold the key. However, timely commissioning of Mundra Port and power plants, position as India’s third largest power and largest coal trader, and promoters’ entrepreneurial acumen infuse confidence. Power would be the largest value creator with pre-money valuation of Rs204bn (Rs242bn post money). We value AEL’s existing projects at Rs1,105-1,279 per share (Rs688-862 for power and Rs221 for coal mining). Further upside could accrue as AEL capitalizes on the massive government thrust on infrastructure.

To see full report: ADANI ENTERPRISES

>DISINVESTMENT (JM FINANCIAL)

Opportunity to reduce deficit

As widely covered in the press, Government is expected to announce list of candidates for disinvestment program shortly for reducing the fiscal deficit. In this note, we attempt to look at business profiles (including financial snapshots) of likely companies in the expected disinvestment initiative. Disinvestment can be in the form of (a) offer for sale in unlisted companies (through IPO or direct stake sale to strategic investor) and (b) divestment
in listed companies.

In the interim budget for 2009-10 (announced in Feb-09), Government indicated that fiscal deficit for FY10E is likely to be ~Rs3.32 trn (~5.5% of estimated GDP) on account of continuation of major government schemes such as National Rural Employment Guarantee scheme (NREGS), Jawaharlal Nehru National Urban Renewal Mission (JNURM) and
implementation of Sixth Pay Commission. With declining direct/indirect taxes and continued expenditures, disinvestment program would assume more importance to reduce the deficit.

Except 2004, no major disinvestment in past: As shown in Exhibit 1 in report, we find that most significant amount of Rs155bn was raised in FY04, when fiscal deficit was 4.5% of GDP. Disinvestment program in FY04 (which included offer for sale of petroleum companies) was undertaken by the then ruling BJP government.

Plenty of options available at the moment: We enclose profile of likely companies for the ensuing disinvestment program. As seen in Exhibit 2 in report, the total net sales /net profit of all listed government companies are Rs 13.7/1.1 trillions respectively while unlisted government companies have net sales/profits of Rs4.0/0.3 trillions respectively.

To see full report: DISINVESTMENT

>MARKET STRATEGY (CLSA)

What are insiders doing?
Insider sales hit a nine-month high in May as markets recovered and June will also be a month of high insider selling. Interestingly insider buying which had tapered off after Sept-08 revived partly in Jan-09 and Mar-09. The complete lack of insider selling over Sept-08 and April-09 is likely reflective of the poor demand/ liquidity for equities as the credit crunch hit the markets very badly. To quote from our Regional Watchdog report: “Stocks that have outperformed but seen large insider sales could face more downside potential if markets correct.” Bharti, DLF, L&T, ITC, Kotak Bank, Shriram Transport, HDFC and HDFC Bank are among the companies
that have seen relatively large insider selling in Apr-09 to Jun-09.

Record insider selling in the region…
■ Our Regional Watchdog report covers trades by directors/ significant shareholders and buybacks above US$0.1m for companies with market cap of US$1bn or more.
■ Insider selling in the region accelerated in May as market rally continued, hitting record US$2.2bn (a 4x increase from April) – the highest since Sept-08.
■ The spike in sales betrays a likely lack of confidence in the current rally.

…Similar trend in India
■ The Indian data shows that insider buying was strong during Sept-08 and then again in Jan-09 and Mar-09.
■ Insider selling which was virtually absent during Sept-08 to Apr-09, has significantly picked up in May-09 and Jun-09.
■ Even removing the big deals in May – the selling by promoters of DLF and Suzlon the insider selling in May and Jun will be the highest in the last ten-months.

Interesting buying and selling by insiders
■ We looked at the buying and selling by insiders in the top 25 companies by market cap (excluding PSUs) and a few other companies where notable insider transactions were seen.
■ Stocks that have seen a notable increase in insider selling in recent weeks/ months are Bharti, DLF, L&T, ITC, Kotak Bank, Shriram Transport, HDFC and HDFC Bank.
■ ICICI Bank, which had witnessed large selling by insiders in the Jan-08 to Jul-08 period, has seen some buying in early May after a long period of lull. Jindal Steel Power has seen buying in Nov ’08 and in Apr ’09.
■ It is not just insider selling that increased. Corporate India’s equity raising plans suggest that equity supply in FY10 can exceed that in any year other than FY08.

See inside for charts and tables and for details refer to Krishnan’s strategy note

To see full report: MARKET STRATEGY

>TATA STEEL (ICICI SECURITIES)

SILVER LINING

We upgrade Tata Steel to BUY from Hold, with revised target price of Rs501/share. Though near-term earnings uncertainty persists in Corus, we expect proactive cost-cutting measures (via overhead reduction & reorganisation of unprofitable UK centres) to reap dividends, once capacity utilisation picks up. Notwithstanding the weak margin outlook, domestic operations would continue churning Rs50-55bn annual cashflows. Comfortable liquidity position (~US$2bn), resetting of debt covenants to be retested over FY12-13 and no near-term repayment obligation in Corus will help Tata Steel manage cashflows better.

Tata Steel’s Q4FY09 results were lower than Street expectations on account of: i) sharp drop in domestic realisations and ii) steep decline in prices as well as volumes in its European operations. Consolidated topline declined 22% YoY and 21% QoQ to Rs264bn. Consolidated Q4FY09 EBITDA stood at (Rs154mn) due to ~Rs7.3bn inventory write-down at Corus. Tata Steel’s India operations saw lowerthan- expected results, with EBITDA down 40% YoY (I-Sec: down 31%) to Rs14.5bn; EBITDA margin sharply dipped to 22%. Adjusting for ~Rs5.8bn
extraordinary gains, Corus registered EBITDA loss of Rs13.5bn (I-Sec: Rs35bn loss). We are trimming our FY10E & FY11E consolidated profit estimates 84% & 1% respectively. This is on the back of reduction in FY10E & FY11E Corus’ sales and realisations estimates 49% & 40% and 26% & 19% respectively.

■ Corus to reap benefits from cost-cutting measures in next upcycle. i) Sharp pricing decline due to higher spot exposure, ii) absence of raw-material contracts prolonging the cost pressure and iii) current 50-53% capacity utilisation led to recurring EBITDA loss of US$76/te in Q4FY09. However, cost optimisation programmes will spurt earnings, once capacity utilisation increases. Also, resetting of covenants and absence of prepayments coupled with hedging & carbon-credit gains on reduced production will help better management of Corus cashflows.

■ Domestic pricing pressure; long-term fundamentals intact. Q4FY09 domestic realisations dipped 20% QoQ despite 68% QoQ increase in volumes. This resulted in muted 22% EBITDA margin, which will remain the flavour of FY10E. However, despite the weak margin outlook, domestic operations will continue generating annual cashflows of Rs50-55bn, adequate for funding the 3mnte brownfield at Jamshedpur.

■ Valuations. The stock trades at reasonable FY11E P/E & EV/EBITDA of 5.4x & 5.4x respectively. Upgrade Tata Steel to BUY with revised target price of Rs501/share (target FY11E EV/EBITDA of ~5.9x, which is at 10% discount to global peers).

To see full report: TATA STEEL