Tuesday, March 31, 2009

>Daily Market & Technical Outlook (ICICI Direct)

Key points
Market outlook — Open flat to positive on mixed global cues
Positive — Rupee expected to gain
Negative – FIIs, MFs selling

Market outlook
Indian markets are likely to open flat to positive, taking cues from Asian markets. The SGX Nifty was trading 15 points up in the morning. Other Asian markets were also positive in the morning despite the US markets falling around 3% on an average. The Japanese government announced that it was prepared to unveil a new stimulus package, which bucked up the confidence in Asian markets. The rupee is expected to gain from Asian stocks gaining

■ The Sensex has supports at 9510 and 9330 and resistances at 9710 and 9820. The Nifty has supports at 2960 and 2920 and resistances at 3120 and 3160

■ Asian stocks rose as Japan prepared to unveil a new stimulus package and confidence among South Korean manufacturers rose. The Nikkei gained 72.8 points, or 0.9%, to trade at 8,308.8. The Hang Seng advanced 169.1 points, or 1.3%, to trade at 13,625.5

■ US stocks tumbled on Monday as two major US automakers took a step closer to potential bankruptcy and a spate of European bank rescues heightened concerns over the financial system's health, putting the brakes on a recent run-up. The Dow Jones lost 254.16 points, or 3.27%, to 7,522.02. The S&P 500 tumbled 28.41 points, or 3.48%, to 787.53. The Nasdaq fell 43.40 points, or 2.81%, to 1,501.80

■ Stocks in news: DLF, NMDC, Tata Power, Grasim, Kamat Hotels, Cadila Healthcare

To see full report: OPENING BELL 310309

>Daily Calls (ICICI Direct)

Sensex: We said, "Doji can be a potential turning point for the short term, if we see a strong trading below its low at 9913," Index opened gap-down below 9913, and lost nearly 5% for the day. Bankex lost more, down 8.5%. Metals and Realty also lost more than 7%. A/D ratio turned negative, at 1:2.

The action created a bearish Evening Doji Star pattern, confirming Friday's Doji as a short-term turning point as argued. It also broke both Blue and Green channels. Gap-down area at 9902-13 is now a new technical resistance. Though pull-back to Green channel is possible, break of low at 9520 would continue weakness.

To see full report: CALLS 310309

>Daily Derivatives (ICICI Direct)

Derivative Comments

• Nifty April futures shed 2.02 million shares in OI accompanied by a narrowing of discount to 10 pointsindicating closure of long positions in the Nifty. A similar trend was also seen in FII Index futures wherein there was a net sale of Rs 995 crore along with a drop in OI by 3.77%

• The options data suggests maximum addition of OI in the 3200 Call option, which added 14261 contracts with rise in IV from 33.35 to 34.48. The highest volume was registered by the 3100 Call followed by 3000 Put. The OI addition in 3000, 3100 and 3300 Calls was 8411, 4713 and 8488 contracts. All these Call options saw an upward shift in IV. On the other hand, unwinding of contracts was seen in Puts ranging from 3000 to 3200 wherein some short covering was seen in 3100 and 3200 while profit booking by Put buyers was seen in 3000 Put. Maximum addition in Put option was seen in 2600 adding 10673 followed by 2700 adding 7352 contracts. The drops in IVs with rise in volumes indicate Put writing in these Put options. Moreover, an addition of 4865 contracts in the 2900 Put was accompanied by a fall in IV from 39.34 to 38.97. This along with good volumes further suggests that this level could act as a decent support for the Nifty on a closing basis for a couple of sessions.

To see full report: DERIVATIVES 310309


Value, with lots of negatives cooked in; Initiate at Buy

■ Buy. We initiate coverage on the ICICI Bank with a Buy and a target of Rs430. We expect on-going fundamental improvements and adequate NPA coverage to lead to stable RoEs over FY09-11. We believe the subsidiaries have value, and are not reflected in the stock price.

■ Fundamental improvements underway. The bank has been slowing asset growth and placing greater emphasis on protecting margins, improving productivity and maintaining credit quality. These measures would improvement fundamentals.

■ Subsidiaries have value, not reflected. Key subsidiaries of the bank (in life insurance, general insurance, asset management and the securities business) are leaders in their businesses. In our view, the current price does not reflect the value of the subsidiaries, which we estimate at Rs105.

■ Adequate NPA coverage. At 51%, ICICI’s NPA coverage is not the best, but should hold it in good stead when asset quality is under duress. The coverage ratio is expected to be +50% over FY09-FY11, with net NPAs at ~3.2% in FY10.

■ Valuation. Our fair value of Rs325 (standalone bank) is based on the two-stage DDM (CoE: 15%; beta: 1.3; Rf: 6.5%). We value its subsidiaries at Rs105 a share. At our target price of Rs430, ICICI would trade at 1.1x FY10e ABV. Its target multiple is at a 40% discount to HDFC Bank’s and a 5% premium to the sector.

To see full report: ICICI BANK

>Tata Chemicals Ltd. (MERRILL LYNCH)

Company meeting reinforces confidence

Meeting with management reinforces confidence, Buy
Post our channel checks and meeting with Tata Chemicals management we believe price correction in the stock is overdone given i) stabilizing prices in soda ash, ii) strong expected free cash flow led by urea and iii) improving scenario in DAP. The stock trades at 0.6xFY10E P/BV, 5xFY10E PE and at ~22% of the replacement value. We reiterate Buy on the stock given attractive valuations.

To tie up for gas; De-bottlenecked capacity on stream
Post de-bottlenecking, urea capacity is up 30% and is already functional. The company is in talks with Reliance Industries for gas supply and is likely to get ~US$6/mmbtu delivered cost. Moreover, we expect DAP and IMACID operations to become profitable in Q1 FY10 given strong correction in rock phosphate prices globally.

Soda ash prices are stabilizing
As per the company soda ash prices are stabilizing and demand in North America is stable despite slowdown as flat glass demand gets replaced by container glass. The company has also not scaled back price hikes it got in CY08 in UK and Netherlands. Media reports suggest a likely 31% safeguard duty on cheap soda ash imports from China, which we believe will be a positive for Tata Chemicals.

Attractive valuations; strong free cash flow generation
Based on the replacement value of INR570 per share, the stock is trading at a discount of 78%. It is at 0.6xFY10E P/BV and 5xFY10E PE. With EBITDA/interest ratio at 6xFY10E and strong free cash flow expected ahead, debt servicing concerns are overdone in our view. We reiterate our Buy rating on the stock with a price objective of INR180.

To see full report: TATA CHEMICALS

>Larsen & Toubro (BNP PARIBAS)

Delays likely in infra projects.....

Takeaways from meeting with K Venkatesh, CEO L&T Infrastructure Development Projects Ltd (IDPL) on March 26.

Company estimates opportunity of INR750b in near-term
These opportunities exist across highways (NHAI + state), ports, railways, water, power transmission and hydropower. L&T is considering approximately 50% of this total opportunity; the company is cautious about bidding for Public Private Partnership (PPP) projects due to complex regulations. Government regulations and policies are primarily responsible for delays. Some projects have become commercially unviable due to change in policy/regulation. As a result, achieving financial closure for these projects is challenging.

Highways offer near-term opportunities, but are risky
National Highway Authority of India (NHAI) has reduced concession periods for several projects resulting in lower IRRs, so project finance is difficult to obtain. NHAI has also capped the upside from increase in traffic estimates. State government projects are preferable as there is a single-point regulatory clearance; however, annuities and projects with Viability Gap Funding (VGF) face cash flow mismatch risk. L&T is wary of servicing debt obligations with cash flows from the state governments.

Select opportunities in railways, ports, and transmission
The New Delhi Railway Station redevelopment project (INR90b), Mumbai Metro Line 2 (INR76.5b) and Bangalore high speed rail link (INR45b) are under consideration vs total opportunity of INR331b in railways. In ports, the container terminal contract at Ennore port
(INR13b) and coal import terminal project at Mormugoa port (INR6b) are the only projects that are attractive, with a total opportunity of INR86b. Power transmission offers an INR109b opportunity and the company is considering INR67b of these.

We maintain our REDUCE rating on L&T due to lower order intake and elongation of the execution cycle of existing orders. We maintain our INR536 TP based on our SOTP valuation (INR460 from standalone based on 8.5x FY10E EBITDA + INR76 from subsidiaries).

To see full report: LARSEN & TOUBRO


With no sign of a real recovery in the property market in 2009, DLF’s debt will remain high due to weak project-development cashflow. With stock down 85% from its January-2008 peak, the question is: when to buy? Factoring in lingering risks but also recognising the sizeable value of the firm’s assets, we see Rs104 as an attractive entry point, which implies 41% downside. However, on a 12-month view, we project 26% downsideas the PB multiple adjusts to reflect low ROE.

Safe entry point still 41% away
A Rs104 valuation only gives credit to DLF’s landbank and cashflow from projects under execution; it fully discounts the weak outlook for new-project launches. Using history as a guide, a sustainable upturn in property stocks appears to be another one-to-two years away. In the interim, we expect DLF to derate as the market recognises its severe ROE deterioration. We base our 12-month target price of Rs130 on a blend of NAV and PB multiples.

Residential not as lucrative
DLF’s strategy of leading price cuts in the residential segment has helped revive volumes, but we believe the initial positive response will peter out as buyers look for further price cuts. The double-whammy of narrower margins and elongated working-capital cycles will translate into an 82% fall in housing profits in 2008-10.

Steep fall in non-residential earnings
Representing about 75% of FY08 earnings, non-residential sales will fall 43% in FY09CL and a further 94% in FY10CL, given the severe slowdown in office and retail space. DLF has already stopped the sale of office assets to group company DLF Asset (DAL) given weak demand for leased space in special economic zones (SEZs). Rental income will provide support but, here too,
renegotiation risks exist. Consensus has built in a 32% earnings recovery from 3QFY09 forecasts which we believe is too optimistic.

Extended-balance-sheet stress
DLF’s balance sheet has geared up substantially due to large land payments and capital-intensive developments. Debt has risen 16x since June 2007 to Rs148bn. While the company has no major debt repayments until end-FY11 thanks to its recent refinancing, the squeeze on profit means that operating cashflow largely will be spent meeting annual interest payments of Rs18bn. Potential financial restructuring of DAL will further aggravate the cashflow issue as one of its investors needs to exit.

To see full report: DLF

>India Steel Sector (UBS)

Compelling valuations and fundamentals

Regression analysis used to estimate fair value of companies
We believe Tata Steel and SAIL are undervalued based on valuation multiplier through our regression analysis. According to our regression analysis, there is a linear relationship between: 1) EV/t and EBITDA/t; and 2) EV/IC and ROIC. Based on our analysis, we conclude that Tata Steel and SAIL are undervalued.

Indian stocks offer value
We lower our India capacity estimates to 70mt (73mt earlier) for FY10E and expect utilisation to remain at around 80% in our base estimates for steel demand to FY12E. We expect Indian consumption to be 52.5mt (up 2.9%) in FY10E. We believe Indian steel companies have been beaten down to 0.3-1x P/BV levels and valuations should correct up given our stable steel price outlook and lower material costs. Stocks have priced in worst-case earnings and consensus estimates should increase, in our view.

Steel sector—close to inflexion point
UBS Basic materials strategist, Peter Hickson, expects cyclical opportunity, which could see a potential re-stocking in the space. With steel prices down 12-15% over the past one month in India, we believe there is limited downside from here given further production cutbacks in surplus markets, a moderate pick-up in demand driven by the cyclicality, and infrastructure-led demand growth in India.

Valuation: Buy on Tata Steel, SAIL; upgrade JSW to Neutral
We upgrade Tata Steel to a Buy, maintain our Buy rating on SAIL, and upgrade JSW to a Neutral rating. We use DCF to derive our price targets for Tata (Rs275), SAIL (Rs125) and JSW (Rs225), but given weak sentiment we cross-check on EV/tn and EV/IC regression analysis.

To see full report: INDIA STEEL SECTOR

>India Mobile Sector (UBS)

India adds 13.7m subs in February 2009

Detailed analysis of India mobile subscriber data
In this note, we present a detailed outlook on the Indian mobile subscriber base from an operator-wise and a service area-wise perspective. We have also the analysed Bharti, RCOM and Idea subscriber base, and subscriber market share.

Subscriber growth momentum continues in February 2009
India added 13.7m mobile subs in February vs 15.4m in January. Bharti leads the subscriber market with a share of 25%, followed by RCOM at 19% and Vodafone at 18%. RCOM continued to gain a significant incremental market share of 25% in February (compared with 32% in January), driven by its attractive GSM prepaid plan offering. Bharti, Vodafone and Idea captured incremental market share of 20%, 19% and 11%, respectively, last month.

Reiterate 12-month Buy, Short-term Sell on Bharti; Buy on Idea, RCOM
India is an ultra-competitive mobile market, and we have already factored in an increase in competitive intensity following RCOM's GSM launch (ie, our estimates take into account lower revenue per minute realizations leading to lower margins and returns). We maintain a 12-month Buy rating on Bharti, RCOM and Idea. We introduced Short-term Sell ratings on Bharti, Idea and RCOM on 15 January 2009 as we expected: (1) negative newsflow on pricing moves post RCOM GSM launch; and (2) consensus earnings downgrades. The consensus FY10 net profit estimate has declined 20% for Idea and 24% for RCOM since 15 January. Therefore we dropped our Short-term Sell ratings on these two effective 13 March 2009. Since the FY10 net profit consensus earnings estimate for Bharti has declined by only 4%, we expect more downgrades and hence maintain our Short-term Sell rating.

To see full report: INDIA MOBILE SECTOR

>India Market Strategy (UBS)

Maintain bullish stance on Indian an market.....

Launch of UBS India model portfolio; 12-month Sensex target of 13,500
In this report, we launch the UBS India model portfolio. Our base-case scenario is for the Indian economy and corporate earnings to bottom by H2 FY10 and for a full recovery to occur in FY11. We are positive on the Indian stock market on a 12- month view and set a March 2010 Sensex target of 13,500.

Overweight: Autos; Banks; and Metals
Auto demand is likely to improve based on the low interest rate environment. We believe banks will benefit from an economic recovery, as the focus moves away from NPLs into growth. Globally, UBS believes Basic Materials are poised for a turnaround; hence our positive stance on Metals.

Underweight: Consumer Staples; IT Services; and Oil & Gas
We are Underweight the Consumer sector, as we believe sector outperformance will not continue. We also believe IT Services face strong headwinds and an imminent recovery looks unlikely. We are Underweight the Oil & Gas sector, as ONGC is unlikely to outperform in a recovery and could be affected by government intervention.

Top Buys: ICICI Bank; BHEL; Maruti; Reliance Infra; ITC; Tata; ABNL
ICICI Bank is a UBS Key Call; valuations are compelling as it trades at 0.5x adjusted P/BV (standalone). Bharat Heavy Electricals (BHEL) has a strong order book and hence earnings visibility. We believe Maruti is a good way to play the cyclical recovery in passenger car demand. Tata Steel, ITC, Reliance Infra, Infosys and Aditya Birla Nuvo (ABNL) are our other key Overweights.

To see full report: INDIA MARKET STRATEGY

Monday, March 30, 2009

>Weekly Calls (ICICI Direct)

To see report: CALLS 300309

>Weekly Derivatives (ICICI Direct)

■ The Nifty Spot has surged by 10.72% to close at 3108 from the previous week’s close of 2807

■ The total futures OI in the market stands at Rs 28682 crores whereas all options OI stands at Rs 27755 crores

Technical Outlook
• The Nifty closed 10.74% positive posting one of the biggest weekly gains. Nifty gained in all the five trading session in last week trade

• The Nifty has formed strong bull candle after breaking out above 2800 levels

• On the upside the Nifty is now testing 3150-3170 area where profit booking is expected

• On the downside good support appears around 2,950-2900 levels

• We expect the Nifty to trade in the range of 3200 – 2900 levels for the coming week

• The resistance remains at 3150 and 3200, whereas supports exist around 3000, 2920 levels

Derivative Outlook:
• The PCR-OI has moved from 1.59 to 1.51 mark after making a high of 1.96 on the expiry day. The sharp fall in PCR-OI on Friday is because of unwinding of huge put positions of March series. In the current series, addition of put OI is more than compared to call OI. In The April series, maximum addition of OI was registered in 2900 put which added 76108 contracts followed by 72499 contracts addition in 3000 put. The 2700 and 2800 puts added 44807 and 49802 contracts respectively. On the flip side, the maximum concentration of OI was seen in call options ranging from 3000 to 3200 wherein the 3200 call added 39148 contracts followed by 33597 contracts in 3100 call and 25485 contracts in 3000 call. With rise in IVs of these call options; we conclude that decent call buying was observed in these calls in last week. The rise in put IVs also suggest significant put buying, however this could be ‘Put Hedge ‘ strategy adopted my many market participants in order to hedge their long future positions. The maximum put OI base in April stands at 2700 with 4.82 million shares whereas the largest call OI base is currently at 3000 with 2.71 million shares in OI. We feel that the 2700 level may stand as a strong support for Nifty in this series. Moreover, OTM call options have not witnessed any major call writing in last week and hence we advise participants not to go for higher OTM call writing at current levels

• The Nifty futures combined OI stands at 38.09 million shares wherein April OI stands at 37.24 million shares. Over the week, we have seen addition of 24.81 million shares in April futures OI accompanied with a 10.74% surge in Nifty price. In the expiry week, we observed significant long positions adding in April series. The rollover in the Nifty was at 69.61% wherein majority of them were long rollovers whereas Market-wide rollover stood at 77.04%. This also concludes that rollover in stocks is comparatively higher to Nifty. The April futures OI is near to the 4 crore mark, which is considered as a psychological level from where we could see some unwinding in OI. Once the Nifty crosses the 40 millions shares in OI in near month, participants are advised to book profit in their long positions. However, from the current levels we may see further upside in Nifty, possibly 3200 in near term

To see full report: DERIVATIVES 300309

>Opening bell 30-3-09(ICICI Direct)

Key points
􀂃 Market outlook — Open negative and trade negative
􀂃 Positive — MF, FII buying, crude cooling off
􀂃 Negative – Rupee weakening again, Asian markets
Market outlook
􀂃 Indian markets are likely to open negative taking its cues from the
global markets. SGX Nifty was down by 65 points. We have witnessed
a brisk rally from the recent lows and we expect profit booking to
continue. The players would like to go light on positions ahead of the
important G 20 summit and hence we may witness pressure on the
market for the coming sessions as well. Our markets will closely watch
at the developments in US markets and the outcome of G 20 summit.
We advice not to take aggressive positions for the week unless we see
decisive break on either side of the band. Trading interest will be
witnessed in Reliance for the coming session or two because of the
gas production which is anticipated to start in a day or two.

To read full report Opening bell


From 30 March'09 to 5 April'09

Cautious optimism in play…

The markets across the globe cheered last week as the Obama administration announced a detailed bank rescue plan to buy US$1 trillion worth of toxic assets from the country’s ailing fi nancial institutions. Moreover, a stream of better-than-expected economic indicators emanated from the US, raising hopes of an early global economic recovery. Accordingly, stock markets rallied spectacularly last week, with the BSE Sensex and the Nifty rising by about 12% and 11% respectively. In fact, this uptrend began much earlier on March 9, and since then, the Dow Jones, the BSE Sensex and the Nifty have risen more than 20%, underlining the cautious optimism that has seeped into the markets. The optimism is clearly shared by the FIIs, which have been net buyers worth Rs2,400 crore in the Indian markets during the same period. With the US bank rescue plan in place and recent indications that major banks had operated profitably in the first two months of 2009, global investors may believe the worst is over for US banks, even as economists fiercely debate over the effectiveness of the plan.

So what does the plan entail? Well, its objective is to rid banks’ balance sheets off toxic assets and illiquid loans, thereby enabling them to start lending once again. The Treasury, in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, announced the “Public–Private Investment Program” as part of its efforts to cleanse balance sheets across the financial system and ensure credit availability to households and businesses.

The Federal Government would use US$75-100 billion from the Troubled Asset Relief Program (TARP) and capital from private investors to generate US$500 billion in purchasing power to buy out troubled assets. The investment programme would have the potential to expand to as much as $1 trillion over a period of time, according to the US Treasury. The participation of long-term investors, such as individuals, pension plans, and insurance companies would be particularly encouraged. The “Public–Private Investment Programme” would be designed around three basic principles—maximizing the impact of each taxpayer dollar, shared risk and profits with private-sector participants, and private-sector price discovery.

Meanwhile, back home, the annual inflation was reported at 0.27% for the week-ended March 14. While, technically, we are close to deflation levels, there is little to indicate that we would undergo the pains of a typical deflationary scenario.

To see full report: KARVY BAZAAR BAATEIN


30 March 2009 to 05 April 2009

Five potential positives for our markets…

The worst financial crisis in the global economy is likely to present a wonderful opportunity for those who have the conviction and courage to participate in the markets using calculated risks. The unprecedented efforts by governments across the globe and the coordinated action by major central banks in the form of stimulus packages, tax cuts, reduction in interest rates, and infusing liquidity into the system were aimed at getting the global economy back on track. The actions are likely to pave the way for a recovery in the global economy as well as a rally in global stock markets.

The following are some of the key positive factors that could contribute to the rally in stock markets.

Increased government spending: The governments in major economies like the US, European Union, Japan, China and India have increased spending on infrastructure, which is likely to trigger demand in auto, cement, construction, and capital goods sectors. The measures announced by policymakers to revive the housing market are likely to bear fruit in the next few months and is likely to boost the positive sentiment in the markets.

Reduction in tax rates: The Indian government has taken several measures in the form of reduction in excise duty and service tax as a measure to stimulate demand in the country. The US fiscal package signed by Obama includes tax cuts for the middle-income group in an effort to boost the economy by leaving more money in the taxpayers’ hands.

Lower inflation and interest rates: The global economic slowdown has brought down inflation to all-time low levels. The fall in demand for crude oil, metals and other commodities has led to lower inflation across the globe. Inflation in India has come down to 0.27%, triggering concerns over the emergence of a deflation, although there is little to indicate that India will undergo the pains of a typical deflationary scenario.

Increased consumer confidence and spending: Consumer confidence will be boosted once the results of these stimulus packages reach the end-user. Also, credit availability at much lower interest rates to corporates will ensure timely ongoing expansion plans. The political stability in the US has brought clarity in regard to its policies. In India, too, clarity will emerge on various policies and economic issues once the new government is formed. A clear policy environment will improve and facilitate consumer confidence.

Growth in EPS and FII inflows: The above factors will enable companies to maintain profit margins and increase sales. This will lead to rise in net profit and EPS. The Sensex EPS growth will attract FIIs (foreign institutional investors), besides investments by DIIs (domestic institutional investors), such as mutual funds and insurance companies, which channelize the domestic savings into stock markets.

To see full report: TRADE WINDS

>South Indian Bank (BONANZA)

Company Background
Thrissur (Kerala) based South Indian Bank (SIB) is one of the earliest banks in South India, came into being during the Swadeshi movement in 1928. It is mainly a strong regional player in South India. The Bank has grown gradually steadly. Presently, it has a branch network of 537 branches (including 17 extension counters), all with CBS technology.

• The bank has shown decent performance. Its profits have grown very well, from Rs.8.7 Crore in FY 2005 to Rs.153.39 Crore in FY 2008, a growth of 260% compounded. It has also shown very good improvement in Assets quality. Its Net NPA stand at 0.4% presently, down from 3.81% in FY 2005.

• SIB has been paying dividend regularly. At current price the dividend yield works out to be 6.5%, if dividend payout of Rs.3/Share is maintained.

• Bank gave 1 for 4 Bonus in Q3 FY 09.

• Bank has maintained its PLR at 16%. This should improve the net interest income for the bank.

• The bank has high capital adequacy ratio of 14.62%.

• SIB has good market share of large South India based NRIs and their families in India. It serves the niche market due to its decades old relations in specific regions. About 24% of bank’s business is from NRI market.

• SIB is a very good M&A target, due to no dominant promoter group and strong presence in South Indian market.

To see full report: SOUTH INDIAN BANK

>Macroeconomic Research (FIRST GLOBAL)

Food for Thought: Will the rate cuts help?

Benefits of earlier rate cuts yet to percolate down the system & help arrest economic slowdown…

Is the headroom from low inflation for further rate cuts merely theoretical…

The Story…

The Reserve Bank of India (RBI) has been on a rate-cutting spree, along with most other Central banks of the world. Lately, it has lowered its policy rates, the Repo rate (the rate at which RBI lends short-term funds to banks) and the Reverse Repo rate (the rate at which overnight funds are parked with it), under the Liquidity Adjustment Facility (LAF), each from 5.5% and 4% to their new levels of 5% and 3.5% respectively. Before the rate-cutting cycle started, the Repo and Reverse Repo rates were at 9% and 6% respectively. The RBI has maintained its status quo on the Cash Reserve Ratio (CRR), the amount of cash balances parked by banks with it as a percentage of the net demand and time liabilities, at 5% since the last cut by 50 bps.

The easing of RBI’s monetary policy began from October 2008 onwards and so far, it has slashed the Repo rate by 400 bps, the reverse Repo by 250 bps, and the CRR by 400 bps. The RBI’s key aim behind the cuts is to signal banks to lower their lending and deposit rates and shed their risk aversive approach by passing on the benefits of the easing of its monetary policy to the productive sectors in order to stimulate demand and increase confidence in the economy. The lowering of the reverse Repo rate lowers the incentive for banks to park their surplus funds with the RBI on its LAF window, as a result of which, banks are expected to cut their lending rates. Though banks have reluctantly reduced their PLR rates, with the benefits of these cuts have not really percolated down the system and arrested the economic slowdown, as evident from the continuous negative data coming in. In April’08-January’09, the IIP growth stood at 3%, which is almost one-third the growth of 8.7% recorded during the same period in same period in the previous year, due to the slowdown across all the key sectors. Exports have recorded a decline for four consecutive months from October 2008 to January 2009. Theoretically at least, the low wholesale price inflation provides the RBI with sufficient headroom to extend rate cuts in the absence of any fiscal measures during the code of conduct period.

■ The Inflation provided monetary policy cushion may be illusory : The WPI inflation is expected to touch 0% to a negative 1.3% by the end of March 2009 and shall remain negative till October- November 2009, mainly due to the double-digit base effect. While part of the reason for the discrepancy between the WPI and CPI is the lag effect, the differences in the basket weights are also to blame. Food inflation, for instance, remains fairly high even in the WPI basket. This means that an easy monetary policy may not be a costless proposition.

■ Bond yield movements: The RBI’s borrowings have already surpassed the targeted levels by 80% to Rs.2.61 trillion for FY09 vis-à-vis Rs 1.45 trillion in FY08. As a result, the long-term (20-year and 30-year) and medium-term (5-year and 10-year) G-secs have lost their attractiveness, based on the expectation of a deluge of G-secs entering the market in the coming months. Rate cuts and falling inflation alone cannot ensure a softening in the soaring medium and longterm G-sec yields and it is only consolation in the form of the RBI’s decision to purchase Gsecs under OMO that could provide the much-needed relief.

■ Key sectors that may benefit:

  • Auto: The policy rate cuts will signal banks to provide cheaper finance to these segments in order to help stimulate consumption and help the ailing Auto sector. Hence, banks could further lower their lending rates for these segments.
  • Banking: Instead of sitting on idle cash, banks can choose to lower their lending rates in the coming months and also reduce their deposit rates, primarily to improve margins. The trade-off here will depend on how the government bond rates move.
  • Real Estate: Since the interest rates have already been reduced significantly, the possibility of a further cut in lending rates appears unlikely, unless banks lower their deposit rates from the current 8.5-9% level.

■ Conclusion: We maintain our view that another cut in the policy rates by the RBI is imminent, though the exact timing of these cuts cannot be predicted, as inflationary pressures will vanish in the next two months and provide more room for such rate cuts.


>Hero Honda Motors (KARVY)

Way ahead of the competition....

ero Honda Motors Limited (HHML) is the undisputed market leader in the domestic two wheeler industry with 48.6% share (59.4% market share in domestic motorcycle segment). We believe HHML would benefit from Bajaj Auto Ltd’s (BAL) change in strategy to focus on 125cc+ segment as the sub 125cc segment still accounts for majority of domestic sales volume. HHML has a strong presence in the rural and semi urban market which is expected to perform in the current economic slowdown. On back of margin improvement and tax benefits from the new plant the company is expected to continue its strong earnings growth for the next two years. We are optimistic about HHML's future prospect and therefore we initiate coverage on the stock
with an Outperformer rating.

HHML to continue its dominance in the domestic motorcycle segment: HHML has a strong presence in the sub 125cc segment and is expected to further strengthen its position in this segment on back of BAL's shift in focus from the 100cc segment to the 125cc+ segment. HHML would take advantage of the benefits ushered to the rural economy through its strong rural distribution network and thereby survive the current difficult economic scenario. Furthermore, the company's higher dependence on cash sales (relative to its peers) would facilitate strong performance vis-à-vis its peers in the current high credit risk situation. Improvement in EBITDA margins: HHML's margin is expected to improve on account of cooling off of raw material prices and excise duty benefit. Major raw material like steel and aluminium which accounts for ~75% of the total raw material cost have been on a declining trend since the past few months. Due to lowering of excise duty by the government and excise duty exemption at Haridwar plant the effective excise duty is expected to come down significantly. We expect the company to report EBITDA margin of 13.8% and 14.0% for FY10E and FY11E respectively.

Haridwar plant to help boost bottom line: During FY09, HHML started production at its 0.5mn unit capacity plant at Haridwar (Uttaranchal). Haridwar plant offers various fiscal benefits which include 100% excise duty exemption for 10 years and 100% income tax exemption for the first 5 years and 30% for the next 5 years. Due to lower effective excise duty and lower effective tax rate, net profit is expected to grow at CAGR of 19% over FY08- FY11E as against 10.4% expected CAGR growth in revenues during the same period.

Valuations: HHML is the market leader in the Indian two wheeler space having presence in all the significant sub segments and categories. Better EBITDA margin and lower tax rate would help the net profit to grow strongly at a CAGR of 19% over FY08-FY11E. HHML is a debt free company having cash reserves of Rs27bn and the same is expected to double by FY11E. HHML enjoys strong return ratios with FY08 RoCE and RoE of 49.2% and 35.5% respectively. HHML is trading at 15.6x and 13.3x its FY10E and FY11E estimated earnings respectively. We initiate coverage on the stock with an Outperformer rating and value the stock at Rs1,250 (15.3x its FY11E EPS of Rs81.7). In our view, HHML’s high return ratios, strong balance sheet, double digit earnings growth, negative working capital cycle, positive net cash flow and huge cash reserves justifies the premium valuations assigned to the stock.

To see full report: HERO HONDA

>Bharti Airtel (MERRILL LYNCH)

Cutting margins; growth still strong

Earnings & PO cut by 4-10%; still offers strong growth - Buy
We have cut Bharti’s FY10E & onwards earnings by 4% & lowered our DCF-led PO to Rs715/sh (-10% vs earlier). Despite the PO and earnings cut, we believe Bharti remains one of the strongest growth stories in AsiaPac & offers ~20% YoY EPS growth potential at a PE of ~11x FY10E. This compares with local market PE valuation at ~11x FY10E for no YoY grwth expected & avg. AsiaPac-wireless PE of ~10x CY09E for ~3% YoY earnings fall. We expect Bharti to sustain ~15-20% LT earnings growth despite new competition.

Margin hit: USO deferral, lower termination, pot’l SMS cut
We have cut wireless FY10E-11E EBITDA margin by ~70bps vs earlier, to 30.1%. This reflects 1) reported deferral of USO concession by the government (assumed to be ~100bps for Bharti), 2) lower termination charges (10p cut) announced earlier (~40bps margin hit) and, 3) potential cut in roaming SMS tariffs (~30bps margin hit). These factors coupled with competitive pressures will likely offset the margin cushion (~100bps) from stable spectrum charges.

Government defers USO concession
As per media reports, today, the government has decided to defer the USO concession that was scheduled to apply from April 2009 onwards. Earlier, in Oct ’08, the government had announced 200bps concession in USO levy (part of licence fee) on achieving >95% coverage of a service area. We had assumed that Bharti would qualify for the concession in ~50-60% of its coverage area.

Revised estimates safe unless usage collapses
We think our FY10E earnings forecasts are safe as they imply virtually no usage elasticity (flat MoU/sub YoY) despite f’cast 12% decline in tariffs (rpm). Our industry feedback so far, post RCom’s GSM launch, suggests that tariffs are not seeing major pressure (-1-2% QoQ) & usage (MoU/sub) maybe down ~2-3% QoQ

To see full report: BHARTI AIRTEL

>Alpha Bet Strategy (KOTAK SECURITIES)

Switching it on. We initiate four new trades-(1)long RIL, short GAIL on positive catalysts for one versus none for the other, (2)long REC, short PEC on lowering of valuation differential, (3) long Ultratech cements, short ACC on market share gains, cost leverage and valuations and (4)long IBREL, short DLF on contrasting business developments.

■ Trade 1: Long RIL, Short GAIL-Relative potential triggers in the near team
We recommend a long Reliance Industries(RIL), short GAIL pair trade given relative catalysts for the stocks which will determine the performance on the near term. We see potential triggers for RIL on account of (1)availability of income tax exemption for gas production, (2)availability of gas for internal consumption and (3)disclosure of reserves. We do not see any positive triggers for GAIL in the near term, which will result in muted stock performance.

■ Trade 2: Long Ultratech, short ACC-Growth for a song
We recommend a long Ultratech Cements, short ACC pair trading offering 10% returns on the following-(1) unjustified valuation premium of ACC trading at US$87/ton on FY2010E production relative to US$77/ton for Ultratech; (2)declining market share of ACC versus gains for Ultratech and (3)cost leverage available from switch over to coal-based captive power plants will reflect in better March 2009 quarter performance versus ACC.

■ Trade 3: Long REC, short PFC-Valuation differential to narrow
We recommend a pair trade of long Rural Electrification Corporation(REC) and Short Power Finance Corporation(PFC) based on the 20% valuation gap between the two despite the two superior ROE profile of REC. REC trades at 1X FY2010E PBR versus 1.2X PBR for PFC.

■ Trade 4: Long IBREL, short DLF-Contrasting business developments
We recommend a pair trade of long India Bulls Real Estate(IBREL) and short DLF on account of (1) IBREL trading a higher discount(52%) to the NAV versus DLF(42%); our comfort on NAV of IBREL is higher, (2) leasing concerns of INREL's Mumbai commercial properties will reduce in the near term while business concerns for DLF will persist for atleast three quarters and (3) we expect weak March 2009 quarter performance from DLF.

To see full report: ALPHA BET STRATEGY

>KEC International Ltd. (RELIANCE MONEY)

Encouraging domestic order inflow during Q4FY09
During the 4th quarter of FY09, KEC International Ltd (KEC) has seen addition of seven significant orders largely from domestic markets. The management earlier in post Q3FY09 results conference call had indicated the company intended to increase focus in domestic market. In Q4FY09 KEC received domestic orders to the tune of ~Rs.12.5bn as against Rs.11bn in Q3FY09 (out of which Rs.8.8bn were export order). We remain impressed with the order inflow and remain confident about earnings for FY09E and FY10E. But the major risk we foresee is possibility of lower order inflow during Loksabha election period.

Easing of input material cost and interest rates
The key input raw materials like steel, copper, aluminum etc have corrected significantly from the highs during 1st Quarter of FY09. Steel Billets prices have fallen by 24.5% from the high of Rs.40025/Tonne during April’08 to Rs.30200/ Tonne in Feb’09. Similarly RBI has cut repo and reverse repo rates for three times during last 6 months which has resulted in reduction in interest rates by most of the banks. We expect the company will able to improve its profitability with these positive developments.

Order inflow uncertainty foreseen during 1st Half of FY10E
As 15th general elections are near the corner, the first half of FY10E is expected to be muted in terms of new order inflow both from state and central utilities due to funding arrangement and other regulatory issues.

Well equipped to compete in current scenario
Domestic market is likely to witness high competition and due to which the margins are likely to come under pressure, which is expected to intensify further as bigger players like BHEL are also expected to enter the market. We believe KEC is better equipped with its planned tower capacity of 200,000 MT and established execution skills for this competitive scenario.

Business Outlook and Valuation
KEC currently has a healthy estimated outstanding order book position of ~Rs.54.5 bn. We continue to remain cautious in terms of new order inflow from international market as well as domestic market during the 1st half of FY10E. At current market price of Rs.144, the stock is currently trading at P/E of 4.2x and EV/EBITDA of 3.9x of its FY10E earnings. We maintain our HOLD recommendation on the stock with target price of Rs.147.

To see full report: KEC INTERNATIONAL

Sunday, March 29, 2009

>Nifty changing to free float method (KR CHOKSEY)

Proposed changes in Nifty composition

The National Stock Exchange (NSE) has announced that it will switch to a free float market capitalization methodology for calculating the value of the S&P CNX Nifty against the full market capitalization weighted methodology used at present. The new formula will come into effect
from June 26, 2009.

Our Key Findings

• Weightage of a stock in the Nifty will be proportional to the public shareholding (non-promoter holding – free float market capitalization method)

• Till now, the weightage was proportional to the market capitalization of the company. So, a company with low public shareholding, but high market capitalizations used to have a higher weightage. This is set to change.

To see full report: NIFTY

>INDIA ECONOMICS (Morgan Stanley)

Road Infrastructure Development – Taking Stock of Progress

Infrastructure spending – critical in the current economic environment: In the current domestic growth environment, while the private business capex is likely to suffer, we believe that the government’s effort to push infrastructure spending will be critical. Within the infrastructure segments, we believe the roads spending is the most important considering its strong multiplier

Tardy progress in development of roadways over the last few months: Of the total 33,097km planned, only 10,858km had been completed as of February 2009. About 50% of roads tenders have yet to be awarded. According to the monthly data released by NHAI, not a single project was awarded between August 2008 and January 2009 even though there was some pick up in the month of February 2009.

Three key reasons for this poor performance: (a) funding constraints for the private sector on account of deteriorating global and domestic credit markets as well equity markets; (b) change in regulations related to public-private partnership contracts, which has added some uncertainty for the private bidders; (c) typical execution hurdles including land acquisition, removal of
existing structures, and getting the environmental and forest clearances.

Bottom line: We believe that the progress on road development is likely to be tardy until the end of 2009. The new cabinet, which should be in place by June 2009, will need to spearhead this spending and, if need be, take the financial risk on its own balance sheet for such investments as the private sector could remain shy.

To see full report: INDIA ECONOMICS

>Gem Trading Note (MERRILL LYNCH)

Inflection Points & Trades

Three big inflection points for markets in past 9-12 months
  • July 3rd ECB hikes rates (possibly one of great policy blunders of recent years); commodity prices peaked the very same day (Baltic Freight, Euro, inflation expectations peak same time); EM equities start to underperform as global growth expectations fall.
  • Sept 15th bankruptcy of LEH; initiates de-leveraging and vicious collapse in EM equities/currencies as growth expectations/risk appetite sinks and US dollar surges.
  • November 10th announcement of big Chinese fiscal stimulus; CRB troughs vs. S&P500 and EM starts outperforming again as global growth expectations find a floor. Chart 1 tells the tale...

Play a recovery in risk appetite
Last week's Merrill Lynch Fund Manager Survey showed a distinct gap between (recovering) growth expectations and (rock-bottom) risk appetite. But risk appetite turned up in the past week due to a) US/UK/Swiss/Japanese Quantitative Ease (QE) and b) US financial policy (PPIP) to reduce toxic assets. QE has caused a bounce in risk appetite. A genuine inflection point for risk (following bounce in growth expectations) would see:

1. Asset allocation by pension funds out of bonds into equities

2. Outperformance from banks, Europe & EMEA

3. Euro-yen taking out 200mda @ 138

4. 30-year US Treasury yields moving above 4%

5. Rise in US breakeven inflation rates which have strong correlation with many risk assets (e.g. Brazilian real – Chart 2)

MSCI EM index target is 650-700 or EEM at $28. Long Russia, China, Brazil our favored ways to play the story in EM

FMS highlighted improvement in risk appetite most positive for EMEA, Korea, Poland, banks, industrials, materials in EM

The trade ends when/if growth rollover later in spring (watch BDIY, China Ashares, China PMI, G7 demand, trade, housing and so on)

To see full report: GEM TRADING

>India Equity Strategy (CITI)

Spring is in the Air, but Hot Summer is Ahead

Spring is in the air – India’s strong 25%+ bounce from lows, +ve YTD performance, and recent peer market outperformance has been backed by: a) Near-trough valuations, b) Signs of growth revival and resilience in consumption demand, c) Rising monetary flexibility and rate reductions, d) Liquidity and stabilization of domestic credit market, e) Little inventory build up, and f) Currency support, with possibilities of a current account surplus ahead. All this still holds.

But hot election and economic summer is ahead – India’s 2009 spring will change to election season; if it weathers this unscathed, then we see a hot economic summer ahead. The global risk pullback, election buildup and fiscal stimuli would have more lingering impact: a) 10%+ fiscal deficit, b) Peak system leverage, c) Steepening yield curve, d) Weakened investment and corporate confidence cycle, and e) Earnings de-growth. We believe these will not change as quickly or predictably as seasons and are a medium-term cap on economic and market rebounds.

India – economy and markets – more crawl than spike? – India’s bear markets have historically lasted 30 months on average, been longer than regional markets (21-23 months), and longer than India’s bull markets (bar the last). Is this bounce the beginning of a bull run? We think not, given India’s equity market lows are shallower, longer, and more in sync with its economic cycle. The market is more likely to crawl rather than spike out of its current trading band.

Limited upsides from here, but let's not be too defensive – We expect the market to maintain a 9000-10500 (11x-12.5x) trading range and expect interest rate and rupee gains. We would overweight Banks, Telecom, and Pharma and underweight IT, Capital Goods and Cement.

To see full report: INDIA EQUITY STRATEGY

>Fun With Flows (CITI)

The Lack of Capitulation Suggests That Bear Market Is Not Over....

■ This is a bear market rebound — According to EPFR Global, foreign investors have regained risk appetite and plowed in US$502m of new money into Asian equity funds over the past two weeks as equity prices rebounded. In January 1998, when MXASJ had fallen by half from the July 1997 peak, flows also turned positive amid a bear market rally. Sadly, those who got in suffered from a 30% loss when markets made their final low on the 1st of September.

■ Await signs of capitulation to mark the end of the current bear market — In the last four months of 1998, when Asian markets advanced 50% from the low, hardly any investor believed that equity prices had bottomed and redemptions from Asian funds persisted in three out of four months. In our view, the divergence between fund flows and market performance is an indication of the beginning of a bull run. And this is not the case at the moment.

■ Inflows still concentrated in China funds — Of the total net inflows to Asian funds last week, 50% were taken in by A50 ETF and 43% by other China funds. Greater China regional funds (geo focus on China, Hong Kong and Taiwan equities) also reported strong inflows for the second week, but that was offset by continuous outflows from Asia ex Japan regional funds, Korea and Singapore country funds.

■ Redemptions from Global equity funds ongoing — The good news is that outflows dropped to just US$210m last week, down 90% compared with the average in previous three weeks. GEM fund outflows resumed nevertheless.

To see full report: FUN WITH FLOWS


India Industry Information

  • Indian Economy
  • Auto and Auto Components
  • Banking and Financial Services
  • Consumer Markets and Retail
  • Hospitality
  • IT / ITeS
  • Media
  • Oil and Gas
  • Pharma
  • Power
  • Real Estate and SEZs
  • Telecom
  • Transport and Logistics

To see full report: SECTORAL SNIPPETS

>Powering India (McKinsey)

India is amongst the world’s largest electricity-consuming and generating economies. Its annual electricity consumption accounts for about 4 per cent of the world’s total electricity consumption, and is set to grow at 8-10 per cent per year, propelled by the country’s accelerating economic growth.

To address this growing demand and create a viable power sector, successive governments have undertaken progressive initiatives such as the Electricity Act 2003, National Tariff Policy 2006, the Ultra Mega Power Projects, the Integrated Energy Policy, the National Electricity Fund and many more. Yet, India’s power sector remains plagued by a plethora of financial and physical risks and bottlenecks.

To understand the challenges that confront India’s power sector, McKinsey & Company’s Electric Power and Natural Gas Practice conducted a 6-month long research effort in collaboration with industry leaders and policymakers. The objective of the effort was to assess what additional measures are required at this time to ensure the sector is able to keep pace with the demands of the economy. This report, “Powering India: The Road to 2017” is a result of that effort. It provides a perspective on the demand outlook in 2017, the factors constraining the sector’s development, and proposes a comprehensive 10-point roadmap to unlock the sector’s potential. Finally, it discusses the opportunities, risks and winning approaches that will surface
as the sector develops.

India will need a fivefold to tenfold increase in its rate of capacity addition if it is to meet demand. The magnitude of the challenge at hand makes it clear that piecemeal measures will not be enough. The country needs a radically new approach that enables financial viability, accelerates the pace of capacity addition, improves operational efficiencies and augments fuel supplies. Needless to say, the power sector’s governance structure and monitoring mechanisms need to be strengthened to ensure successful execution of such a programme.

Several rewarding investment opportunities will unfold across the value chain as India’s power sector develops. Our analyses suggest that a US$600 billion investment opportunity will arise over the next 10 years, if key bottlenecks are removed. Besides the traditional opportunities such as large-scale coal-fired plants, several non-traditional opportunities will emerge, such as peaking plants, renewables and demand-side management.

Finally, competing and winning in India will require players to tailor their business models to address existing bottlenecks, market inefficiencies and development risk. Players will need to develop and execute approaches that are quite distinct from conventional global models. In return, the payoff from entering early, when the sector is still underdeveloped, will be substantially higher than when it has matured. This has been proven by companies in other sectors, such as telecommunications and infrastructure development.

India’s power sector is at a watershed in its development, and its progress is imperative to sustaining economic growth. The time is right for all stakeholders — policy makers, regulators, public and private providers, resource holders, equipment providers, financiers and consumers — to act in concert to power the country’s future.

To see full report: POWERING INDIA

>Greed & Fear (CLSA)


The best thing to say about Tiny Tim’s latest ruse for the banking system is that it will probably
take two months or so to see if it has a chance of working. This from a market perspective is
encouraging since it has the potential to keep equity investors hopeful. The second best thing is
that the teleprompter driven Obama administration made sure that on this occasion live televisions cameras were banned from the Treasury Secretary’s press conference.

That said, there are two ways of looking at this bank plan, now known as the Public-Private Investment Program (PPIP). The first is whether it is good public policy. The second is whether it has a chance of removing these toxic assets, or rather (puke) “legacy assets” from weaker hands to stronger hands.

On the issue of public policy, GREED & fear agrees completely with the criticism of the policy made by Paul Krugman in an op-ed in the New York Times published on Monday (“Financial Policy Despair”, 23 March 2009). This is a re-visit of TARP but a more complicated version where the government is providing an indirect way to subsidise for a select group of institutional investors the purchase of bad assets.

Quite why the Obama administration continues with this bizarre sneaky approach is beyond GREED & fear and certainly beyond an increasingly disillusioned Krugman, a once fervent Obama supporter. For all it is doing is seeking to protect the current vested interests on Wall Street which is hardly politically popular or radical. Indeed at a time when the political process is up in arms about bailouts and bonuses, the new administration is proposing to offer more sweet deals for Wall Street types via seemingly federally guaranteed non recourse funding. For this reason, if the scheme fails, Obama’s credibility will be badly damaged politically. In this respect Tiny Tim and his boss are taking a massive political gamble akin to putting everything on black on the roulette wheel. It would clearly be far better from every point of view to take temporary control of the insolvent banks and put the bad assets in a separate entity for their orderly distribution. This is why, contrary to some press reports, this current scheme is not the same as the Resolution Trust Corporation (RTC) which was set up in 1989 to deal with the consequences of the savings and loan crisis. For the RTC was selling assets which belonged to institutions which had already gone bust.

To see full report: GREED & FEAR

>Chemicals Sector (EMKAY)

Sustained recovery ahead.....

Mar’09 was marked by price as well as volume stability. In order to have more clarity on the price movement of various chemicals, we have increased the number of products from 19 to 33. Out of the 33 products in our universe, 12 products reported an increase in prices, 7 products reported a decline and prices of 14 products remained stable in Mar’09, indicating a stable price scenario. Emkay chemical index (covering 33 products) almost remained flat since Jan’09. Dealers are in consensus of the view that near term prices should remain stable. However, some volatility in prices cannot be ruled out. Volumes have stabilised with no significant increase on MoM basis in Mar’09. We believe that stable price scenario should continue while more products should report increase in prices in Apr-June’09 quarter. Volumes should pick up further on stable price scenario.

Price stability continues
We have increased the number of products under our coverage from 19 to 33. We saw price stability during Jan-Mar’09 period in most of the products after a sharp fall in Oct-Dec’08 period. Products reporting positive movement in prices have steadily been on the rise, with 7,10 and 12 products reporting an increase in Jan, Feb and Mar’09 respectively. Products with a stable price scenario also increased to 9, 13 and 14, respectively (Jan-Mar’09). Products reporting decline in prices reduced to 17, 10 and 7 during the same period. Higher proportion of increasing prices and stable prices in our product universe clearly indicates the stability in prices.

Restocking boosted volumes in Jan-Feb’09; expect stable scenario now
After a sharp decline in prices in Oct-Dec’08 quarter, led by lower demand and de-stocking, volumes picked up in Jan-Feb’09 period, mainly driven by restocking at dealer’s and consumer’s level. However, the scenario has stabilised now and dealers expect volume and price stability in the near future. However, some volatility in prices cannot be ruled out.

Outlook – Sustained recovery ahead
As mentioned earlier, we believe that prices of most of the products have bottomed out and should start showing some increase in prices. Many of the products have already shown some improvement in prices. We have seen increasing stability in prices as well as volumes of most of the products during Jan-Mar’09 quarter. We expect Apr-Jun’09 quarter to see a recovery in prices and volumes.

To see full report: CHEMICALS SECTOR

>Voltas Ltd. (KR CHOKSEY)

We met the management of Voltas Ltd to understand the company’s strategy in the midst of the global economic slowdown. Key takeaways of the meeting are as follows:

Huge orders from the international market to provide strong revenue visibility
The total order backlog of the company stands at Rs 5,334 crore at the end of Q3FY09. In domestic business the order book stands at Rs 1,085 crore, a growth of 35% y-o-y and in international projects the order book stands at Rs 4,200 crore, a growth of 58% y-o-y. The domestic projects have timeline of 9-12 months and international projects have timeline of 24-30 months thereby providing good revenue visibility. The company has not witnessed any cancellation of orders as most of the projects are government or semi-government funded.

Diversified business model
Voltas has primarily three business lines where Electro Mechanical Projects & Service (EMPS) is the biggest business segment contributing 54% to the topline in FY08. In this segment Voltas serves both international as well as domestic clients. Going forward we expect the international projects to contribute ~60% to the segment revenue (45% in FY08). The company is now a fully integrated player from a mere HVAC (Heating, Ventilation and Air-conditioning) to MEP player in domestic market on acquiring Rohini Electrical (Mumbai based turnkey electrical and instrumentation projects contractor). Thus being well diversified would ensure revenue growth inspite of economic slowdown.

Competitive Advantage over others
Civil work constitutes 65% of the total construction cost of an In-built environment and 30-35% is MEP works. Voltas is a contractor of choice in MEP (Mechanical which includes HVAC, Electrical & Public health which includes plumbing) in the international market. Thus being a well established player and having strong track record of projects, Voltas has an edge over other players in domestic and international markets.

To see full report: VOLTAS

Saturday, March 28, 2009

>Auto Sector Two Wheeler (WAY2WEALTH)


■ Industry Composition
■ Sales Analysis for FY06-FY09
■ Index Performance/Stock

Performance v/s Sensex

■ Conclusion: Two-wheeler

Industry: A Cyclical Reversal?

■ Company Update
■ Hero Honda Motors (HHML)
■ Bajaj Auto (BAL)
■ TVS Motors (TVS)

To see full report: AUTO SECTOR


Established in 1996 as Peerless Shpping and Oilfields, South East Asia Marine Engineering & Construction Limited caters to the offshore oilfield industry and provides Diving Support Vessel (DSV) based diving services. Mauritius based Coflexip Stena offshore oilfield industry and provides Diving Support Vessel (DSV) based diving services. Mauritius based Coflexip Stena offshore had acquired 58.24% stake in the erstwhile. Peerless Shipping in 1999, which in-turn was acquired by Technship S. A. of France in April 2000. Pursuant to this Technship made an open offer to the shareholders of SEAMEC in December 2002 taking its shareholding from 58.24% to 78.25%.

Being a leading provider of DSV based diving services, SEAMEC has unrivalled experience in the ongaoing subsea inspection, repair maintenance and light construction required for the support of offshore oil production.

Currently the company owns three multi functional diving support vessels is capable of working throughout the year in severe sea and weather conditions. Multi-support vessels are normally used for supporting oil fuel services, diving, remote vehicle operations, fire fighting, rescue and helicopter services. Most of the time dedicated dive support vessels are used for diving and sometimes for ROV service (Remote Operated Vehicles), which are under water remotely controlled vehicles.

The company has also acquired a cale lay vessel in june 2006 named Seamec Princess. After modification, the vessel was put on charter from 1st March 2008.

To see full report: SEAMEC

>India Steel Sector (UBS)

Infrastructure spend and the Indian steel industry

Infrastructure spend to be an important driver for steel consumption
UBS estimates infrastructure spending as per the eleventh five-year plan will be US$275bn, compared to the plan’s target of US$500bn. Infrastructure accounts for around 59% of the total domestic steel consumption and we expect steel consumption for infrastructure in 2007-2012 to potentially increase to around 48mt compared to an estimated 33mt used between 2002-2007, during the tenth fiveyear plan period.

Top companies and their positions
Tata Steel has the highest proportion of longs in its basket with around 45% of sales; SAIL comes in second with 22% of volumes being flat. Tata also has a 1- 1.25mt sales volume of auto-grade flat steel, which improves its product profile and eventually EBITDA/tn in the domestic business, in our view. JSW has around 8% proportion of sales volumes in long products, and intends to ramp up its HSM over 2009-11.

Valuation: recently upgraded Tata Steel to Buy, and JSW to Neutral
We prefer Tata Steel and SAIL and rate them a Buy. We rate JSW Steel Neutral. We used the DCF methodology to arrive at our price targets for Tata Steel (Rs275), SAIL (Rs125), and JSW (Rs225).

To see full report: INDIA STEEL SECTOR

>Reliance Industries (ANAND RATHI)

Niko data points sustain E&P promise; Reiterate Buy

D6 capex to rise to US$10bn. Niko now expects capex on the current D6 project to be a higher-than-budgeted US$10bn over the life of the project. It expects gas production to start by 1 Apr ’09. We do not expect the higher capex to materially affect the valuation due to the cost recovery mechanism.

Production to ramp up to 120m cmd. Niko re-affirmed plans to raise D6’s peak production to 120m cmd by developing nine satellite discoveries at an additional capex of US$6bn. The development plan for these discoveries awaits approval.

D4 a wild card; exploration drilling in D6 re-started. Niko stated that the D4 field (RIL owns 85%), could be much larger than D6, based on initial studies. Niko also confirmed that after a 16-month lull, exploration drilling has re-commenced at D4.

Earnings. We restate estimates, incorporating the proposed merger, recent rupee depreciation, and higher margins.

Valuation. We raise the fair value of RIL to Rs1,625 (Rs1,300 earlier), incorporating RPL’s valuation minus the holding company discount, higher margins, and adjusting for the recent rupee depreciation. We value refining and petrochemicals businesses at EV/EBITDA of 5.5x FY10 estimates, new refinery at DCF and its E&P businesses using DCF/multiple-based approach.

To see full report: RELIANCE INDUSTRIES

>Cement Sector (INVESTSMART)

February: Strong despatches and firm price scenario continues…

During February 2009, cement despatches and consumption showed YoY growth of 9.2% and 8.2% respectively, primarily led by eastern, central and northern regions of the country. On MoM basis, cement despatches and consumption were marginally down at 0.3% and 0.2% respectively.

Strong growth along with increased construction activity resulted in cement prices rising by Rs 4-5 per bag across all regions with central region witnessing an increase of over Rs 15 per bag during February. Going forward, we expect cement prices to remain firm across regions in near term as government backed infra projects combined with inception of construction season will keep the demand strong.

Though cement industry showed improved performance during last three months, sustainability of such performance over medium term is a big question mark especially in a scenario when the key end user industries like real estate and infrastructure are facing difficult times. We believe,
in near term there might be some demand push by the existing government projects but the profitability of the industry will come under pressure in short to medium term once fresh capacities comes on stream.

To see full report: CEMENT SECTOR

>Banking Sector (ANGEL BROKING)

Navigating the downturn

Since September 2008, the impact of the global crisis on India's GDP growth prospects has intensified through two channels - by dampening our exports and by reducing availability of finance. This slowdown in GDP growth poses material headwinds for the banking sector in the form of slowing credit demand and increasing asset quality pressures.

We believe that Monetary softening, strong Domestic Savings and falling Interest rates will help revive domestic demand from late FY2010E and subscribe to the view that stimulus packages and bank bailouts will stabilise developed economies over a similar timeframe. But uncertainty regarding the timing of the revival poses material risks for the Banking sector.

That said, after more than a year of falling stock prices, valuations for several banks are much below median levels. In our view, the sector is well placed to navigate the ongoing downturn and valuations provide substantial margin of safety against potential worst case scenarios of asset quality deterioration.

In order to draw conclusions regarding the course of revival of domestic demand and correspondingly, banking sector earnings, we have provided projections and analysis of financial savings, combined fiscal deficit as well as sources and deployment of funds by the banking sector. Underpinning our positive long-term outlook on the sector, is our view that long-term growth drivers for the sector continue to hold true (revisited in a recent report).

Concerns over asset quality and slowing credit growth will remain an overhang over both Private and PSU bank stocks so long as the macro-economic outlook remains bleak. Therefore, in our view, keeping in mind attractive valuations, a longer-term investment perspective needs to be adopted, in order to take advantage of the eventual upturn in GDP growth - and several factors are falling into place to make this imminent over the next 12-18 months.

From this perspective, we prefer private banks, in light of their stronger core competitiveness. Moreover, PSU banks carry the risk of government interference affecting their financial performance. Importantly, private banks are presently available at compellingly cheap valuations, based on historic trends as well as justified fundamental valuation multiples.

Our top picks are HDFC Bank and Axis Bank.

To see full report: BANKING SECTOR