Tuesday, June 30, 2009


GSM subscribers cross 300mn mark

GSM operators recorded net additions of 8.3mn subscribers in May (excluding Reliance Communications), as against 8.96mn in April – a MoM dip of 7.4%. The decline in May follows a 20.3% MoM drop in April. Lower additions in both months were primarily due to BSNL whose new subscriber tally has fallen from 2.9mn in March to 0.45mn in May. Seasonally as well, the first half of the financial year is a slow period. In the last four years, ~42% of new subscribers
were added in the first half of the fiscal. We expect a repeat of this trend in FY10 with several new network launches in the second half.

Bharti’s net additions flat at 2.8mn: Bharti Airtel’s net additions at 2.8mn were consistent with the previous month while remaining at the same level for close to a year now. In a highly competitive market, we see Bharti’s ability to maintain a run-rate of 2.8mn additions as an encouraging sign and indicative of the company’s strength and leadership position.

Vodafone’s tally down 8.4% MoM: As in April, Vodafone witnessed a drop in additions for May. This comes after a consistent rise in subscriber additions till March following the extension of network coverage across India (seven new circle launches between August and December). May net additions at 2.54mn were down by 8.4% MoM.

Idea’s net adds up 13.3%: Idea Cellular’s net additions at 1.3mn subscribers in May (including Spice) were above its 1.15mn tally for April.

BSNL witnesses 55.9% plunge: BSNL’s subscriber additions at 0.45mn were 56% lower than the company’s April figure of 1.03mn and far short of the March figure of 2.9mn. However, as we have noted in the past, this is a common phenomenon in the BSNL subscriber trajectory owing to the year-end push in March to meet growth targets. We also believe BSNL is facing increasing pressure on rural subscriber retention and thus witnessing a higher churn due to the increasing penetration of market leaders in rural areas.

Aircel net adds flat at 1.1mn: Aircel’s net additions were flat MoM at 1.1mn with 30% of the new subscribers coming from its leadership market in Tamil Nadu. Aircel recently raised US$ 500mn in ECBs in March ’09.

Maintain Neutral sector outlook: In Q4FY09 all the major telecom players fared well with the exception of Bharti, whose revenue growth was below our expectations, and Rcom which witnessed a downturn in its wireless business. Further, operators have managed tariffs well by not responding to the reduction in mobile termination charges. However, increased competition over coming months would raise pressure on tariffs. We thus maintain our Neutral outlook on the sector.

To see full report: TELECOM SECTOR


Takeaways from India Investor Conference, June 24-26

Takeaways from Mumbai — Tech Mahindra presented at our India Investor Conference on June 25. Below are key takeaways from management.

BT Business — On BT business, the uncertainty continues. Tech Mahindra's focus is on maintaining market share. Project Andes should start in Q1FY10.

Non-BT business — Management is more optimistic here as it is seeing some good signs. Clients are awarding new projects – these are small as of now, but even small projects were not happening previously.

Future outlook — (1) Plans to span the different horizontals (Applications, Security, Network Services, VAS, IMS and BPO) of the telecom vertical. (2) Focus is on account mining. Apart from BT, the focus on other accounts is to maintain or grow market share.

Initiatives at Satyam — The priorities for management are: (1) Customer retention – Management is meeting everyone to assure them of the long term viability of the business. (2) Cost rationalization – Initiatives like virtual pool creation, rationalizing costs on infrastructure, etc. A lot of customers have responded well.

Open offer issue — Management does not plan to hike the open offer price. If there is zero response then the TechM stake will go up to ~43%. The proposed QIP is to primarily pay off debt on the books (~Rs22b).

To see full report: TECH MAHINDRA


Driven by volume growth

‘Retail Counter’ is a quarterly update, in which we analyse domestic sales trend of FMCG companies based on ACNielsen’s retail audit data. ACNielsen’s FMCG retail-sales audit figures for April-May ’09 indicate 16.2% YoY growth, lower than 19% YoY growth in FY09. We believe this is due to sales growth being driven by volume growth on account of lower inflation, which led to fall in prices of many products. The sector witnessed robust volume growth as only three of the top-10 categories saw lower growth over April-May ’09 vis-à-vis FY09. However, only six of the top-10 FMCG companies grew >10% YoY. Hindustan Unilever’s (HUL) sales growth at 9.6% indicates reversal of the strong, double-digit topline growth in the past six quarters. Notably, this lower value growth is mainly due to volume dip in categories such as toilet soaps, washing powder and detergent cakes. Market share fall continued in key categories such as toilet soaps, shampoos, detergent cakes, toothpaste and skin creams. Nestlé India sustained its spectacular performance, with 20% sales growth.

FMCG sales growth slackens with fall in inflation. FMCG retail sales grew 16.2% YoY over April-May ’09, lower than the 19% YoY growth achieved in FY09. We believe this is on account of sales growth being driven by volume growth on account of lower inflation, which led to fall in prices of many products. The sector saw robust volume growth as only three of the top-ten categories witnessed lower growth over April-May ’09 vis-à-vis FY09. Robust volume growth in large categories indicates marked resilience in consumer spending on FMCG.

Six of ten FMCG companies see over 10% sales growth. Only six of the top-ten FMCG companies grew over 10% YoY in April-May ’09. Britannia Industries, Dabur, Colgate-Palmolive and HUL registered less than 10% growth. However, with ACNielsen shifting to a new, larger data panel, we perceive some anomalies in the data and believe the lower growth number may not be unreservedly accurate. Nestlé India maintained the sales growth momentum, rising 20%. On the back of sharp price increases, sales in Tata Tea grew a strong 28.3%.

HUL – Even new ACNielsen data panel indicates sharp volume & market-share dip in key categories. Sales growth at 9.6% indicates reversal of the consistent,, strong double-digit topline growth in the past six quarters. Notably, this lower value growth is mainly due to volume decline in key categories – Fall of 10.5% in Toilet Soaps, 5.7% in Washing Powder & 19.4% in Detergent Cakes. HUL lost significant market share in Toilets Soaps, Toothpaste, Skin Care, Detergent Cakes and Shampoos.

To see full report: RETAIL SECTOR


Advancement continues to be weaker

The advancement of the Southwest monsoon continued on weaker trend during the week ended June 24, 2009 as weighted average rainfall during the week stood at 54% below normal same as that in the preceding week. The number of divisions with deficient/scanty rainfall continued to stand at 28 for the week ended June 24, 2009. The key takeaways of our analysis upto June 24, 2009 are as under:

The weighted average rainfall across the country continued to remain way below 10-year average as it stood at 54% below normal for week ended June 24, 2009. n Number of divisions receiving deficient/scanty rainfall stood at 28 during the week.

In the rain dependent areas the weighted average rainfall stood at 60.6% below normal.

The total rainfall till date is now just about 6.5% of the normal (see table IV) rainfall for the full season compared with 19% for the corresponding period last year.

The precipitation graph for next one week is indicating slight advancement to northern areas like Uttar Pradesh, Bihar, Jharkhand, and towards north eastern states. Advancement is also likely in Madhya Pradesh, Marathwada and Vidarbha. States like Rajasthan, Gujarat, Punjab and Haryana may continue to face dry spells.

To see full report: SOUTHWEST MONSOON


Long-term play

Unique business model
Mahindra Holidays and Resorts India (MHRL) is one of the leading leisure hospitality providers in India, offering family holidays with a range of services designed to meet the diverse holiday needs of a family. In addition to providing Vacation Ownership (VO) memberships, it also manages the operations at its resorts, which helps it control the quality of its offering thereby enhancing customer experience.

Apart from its flagship service offering of VO, as part of its growth strategy it diversified its portfolio by introducing new vacation ownership offerings, Zest and Club Mahindra Fundays, Mahindra Homestays and travel and holiday related services through clubmahindra.travel.

As of May 31, 2009, MHRL had 96,067 Club Mahindra Holiday vacation ownership members.

Likely increase in income levels to augur well for MHRL
Over the next two decades, the Indian market is likely to undergo a major transformation. Income levels will almost triple and India is poised to become the fifth largest consumer market by 2025. As Indian incomes rise, the shape of the country’s income pyramid will also change dramatically. Over 291 mn people will move from desperate poverty to a more sustainable life, and India’s middle class will swell by over ten times from its current size of 50 mn to 583 mn people.

Revenues extremely sensitive to incremental member additions
The fact that 60% of upfront onetime membership fess is booked upfront (currently accounting for 75% of revenues), topline for MHRL is extremely sensitive to incremental membership additions. Hence, unless the incremental number of new member addition is higher than the previous year, the topline for the company may not grow.

Strong parentage
MHRL is a part of the Mahindra Group of companies that is amongst the top 10 industrial houses in India. Forbes has ranked the Mahindra Group in its Top 200 list of the World’s Most Reputable Companies and in the Top 10 list of Most Reputable Indian companies. The Mahindra Group’s activities have spread over various areas such as automotive, farm equipments, engineering, forging, steel, infrastructure development, leisure hospitality, information technology, systems and technology, consultancy and software services, general retailing, and trade and financial services.

Outlook and valuations
Although the IPO is stiffly priced, we recommend ‘SUBSCRIBE’ from a long-term perspective at the lower end of the price band, betting on the strong parentage, management track record, early-mover advantage and the company’s dominant position in the vacation ownership business suggesting growth potential over the long term. At the upper band of INR 325, MHRL is valued at 34.2x its FY09 earnings and at the lower price band of INR 275, it is valued at 29x its FY09 earnings (on a fully diluted basis).




We raise our FY10E & FY11E earnings estimates for HDFC Bank 5.3% and 8.2% respectively to factor in better operating environment than envisaged earlier, high capital owing to HDFC’s warrant conversion and NIM traction due to improving CASA. We believe asset quality stress will persist; however, it is likely to be lower than expected going forward. Despite earnings traction and likely warrant conversion, upside from the current levels is limited in our view. We value HDFC Bank at 18x FY11E EPS (implied P/BV of 2.74x), which implies Rs1,453/share fair
value. The stock trades at FY11E P/E & P/BV of 18.1x & 2.8x respectively. HOLD.

Earnings growth to be led by higher credit growth, steady NIMs. We estimate 27.5% credit CAGR through FY11E to drive margins and hence earnings growth. Low systemic term deposits rates and improving branch productivity in the erstwhile Centurion Bank of Punjab (eCBoP) are likely to lead to CASA improving to ~46% by FY11E from 44% in FY09, helping sustain margins ~4%. We expect 28.3% NII CAGR through FY11E. HDFC Bank is likely to continue purchasing mortgage portfolios originated by it for HDFC in our view as the repurchased portfolio is AAArated and most of the loans repurchased fulfil priority sector lending requirements.

Fee income likely to be buoyant; costs to remain high. Fee income is likely to see strong traction, with pick-up in core fee income and third-party sales likely to drive 27.8% other income (ex-treasury) CAGR through FY11E. Given the retail oriented business model, we expect cost-to-income to stabilise at ~50% by FY11E.

Asset quality deterioration likely to be manageable. Despite threats to asset quality having declined significantly, we believe there is some stress from the eCBoP book. As per the management, the two-wheeler book from eCBoP is likely to run-off completely in the short term. We expect manageable deterioration in asset quality and envisage GNPAs to peak at ~2.65% in FY10E. We maintain our loan loss provision assumptions at 180bps through FY11E.

Valuations offer little upside despite strong fundamentals. Improved fundamentals – economic outlook and reduced NPA threat – are likely to drive higher credit growth and earnings traction. Based on these, we upgrade FY10E & FY11E earnings 5.3% and 8.2% respectively. Capital infusion by conversion of warrants is likely to strengthen tier 1 capital further. We value HDFC Bank at 18x FY11E EPS (implied P/BV of 2.74x), implying Rs1,453/share target price. The stock is currently trading at FY11E P/E and P/BV of 18.1x and 2.8x respectively. HOLD.

To see full report: HDFC BANK


Richly valued

Downgrade rating to Sell from Accumulate: We have revised our rating to Sell from Accumulate with a target price of Rs31.4/share. Even after capturing the company’s improving business fundamentals, we believe that stock is richly valued at FY10E EV/sub of Rs6,900. We value the stock at FY10E EV/sub of Rs5,600.

Q4 revenue below estimates: Q4 revenue at Rs2.0bn (up 7.5% QoQ and 52.4% YoY) was below our estimate of Rs2.4bn. The lower-than-expected revenue was due to the 14% YoY ARPU decline to Rs136/month, while we anticipated an increase in ARPU.

EBITDA break-even a positive surprise: EBITDA margin improved from negative 20.2% in Q3FY09 to positive 2.0% during Q4FY09. This sharp improvement came on the back of 23% QoQ reduction in content cost since company has moved from a variable content cost model
to a fixed content cost model during the quarter.

Estimates revised upwards due to change in content cost model: We have raised our EBITDA estimates to Rs1.0bn from an expected loss of Rs0.9bn for FY10E. In addition, we raised EBITDA margin estimates for FY11E from 6.5% to 23.7%. This change is primarily due to shift in its content cost model from variable cost per sub to fixed cost model.

To see full report: DISH TV


Finance Minister is expected to present the union budget on 6th July 2009.

Expected Key Highlights of the Union Budget :
1) Listing, Divesting of Government holdings in public sector undertakings (PSUs).
2) Investment- friendly regulatory and legal framework for public private partnership.
3) Recapitalise banks to boost their financial position.
4) Post offices will be leveraged to deliver more services.
5) Focus on small enterprises, textiles, export etc.
6) At least 13,000 MW additions every year envisaged.
7) Rural health institutions are expected to be recognised.
8) Autonomy in education through an independent regulatory authority.
9) SEZs: Land Acquisition and Resettlement and rehabilitation (R&R) bills to be reintroduced.
10) Infrastructure spending to be centerpiece of growth.
11) There will be an additional spending of Rs. 500 bn in social sector in rural and urban area.
12) Reform will be introduced in insurance, Special economic zone (SEZ), disinvesment, power and education sector.
13) The tax stimulus will have to come through a reduction in excise duties.
14) Tax Reform - Implementation of the goods and service tax (GST) will be pushed forward.
14) Reforms in Coal sector - PSU dilution.
15) Policy changes to reorient subsidies.
16) Reforms to empower panchayats.

The budget is expected to focus on the following sectors:

  • Infrastructure sector
  • Agriculture sector
  • Commercial vehicles sector
  • Textile industry

Following are the sectors where government is expected to take reformist path:

Disinvestments in PSUs
  • Publicly listed PSUs saw a revival of interest after the 2009 election as disinvestments may unlock hidden wealth in those PSUs. The UPA Government is expected to sell its stake in central PSUs. Divestment is expected to improve the fiscal deficit.
  • IPOs from government owned companies could also help revive the IPO market and boost the stock market. PSUs, where the government stake is much higher than 51%, may be the first where stake sales will be pushed through.
Banking sector
  • Reduce the long-term deposit's tenure from 5 years to 3 years, in order to bring the investments at par with ELSS. Loans against these fixed deposits should also be allowed.
  • Interest income of overseas lenders on external commercial borrowings should be made tax-free. The banks get loans at higher rates of interest, as foreign lenders gross up the tax liability to the interest rate.
  • Inter bank transactions of purchase and sale of foreign currency should be made tax-free.
  • Banks should be allowed to claim full deduction on the interest earned on long term lending to the infrastructure sector.
  • Banks are expected to be guided to lend at lower rates.
  • Process of consolidation of banks will be hastened.

Infrastructure Industry
  • The government is expected to give highest priority for infrastructure spending. The Government of India has planned infrastructure spending of US $550 billion during 11th five-year plan. Project like Bharat Nirman scheme aimed at strengthening the country's rural infrastructure including water supply, power, housing and roads, and proposed a `specific financing window' for Rs 1,740 bn programme, to provide a boost to the infrastructure sector.
  • ·Road projects are expected to launch on annuity-based BOT schemes rather than tollbased BOT schemes to a certain extent.
  • ·Part guarantee of debt for major infrastructure projects is expected.
To see full report: BUDGET EXPECTATION


When long-term interest rates dominate the yield curve

Since end-2008, volatility in long-term (10-year) interest rates has exceeded volatility in short-term (2-year) interest rates. It is therefore long-term interest rates that primarily determine the slope of the yield curve. There are several possible explanations for this phenomenon: 1- money market rates are "politically" frozen at their lowest possible level. Only the long end of the curve is free; 2- there is a liquidity trap phenomenon; 3- public finances are deteriorating drastically; 4- inflationary risks are on the rise. Question: is this situation set to last? Answer: in all likelihood, despite some governments’ determination to implement exit strategies.

To see full report: SPECIAL REPORT

>Emerging markets: global crisis, local political risks (ECONOMIC REEARCH)

  • The rise of political risk
  • Latin America—revolutionaries, structuralists, and inequalities
  • Eastern Europe: governance shortcomings
  • NMS: Will the Great Recession Spoil the Double Anniversary?
  • Rising political risk in North Africa and the Middle East
  • Asia: rising tensions on the horizon
  • Sub-Saharan Africa’s demography time-bomb
To see full report: EMERGING MARKETS

>Crude falls in Asia; rally may be over

Singapore - Crude prices slipped in Asia Monday, weighed on by lower Asian equity markets, as speculators began losing interest in supporting oil due to a lack of clear fundamentals.

"Given crude oil's parabolic rise from mid-April through mid-June, we think it quite telling that the rash of recent headlines has yet to spur the market toward the magical USD75 level that all of those Wall Street types like to tout," said analysts at the Schork Report in a note to subscribers.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in August changed hands at USD68.81 a barrel at 0654 GMT, 35 cents lower in the Globex electronic session.

August Brent crude on London's ICE Futures exchange was down 32 cents at USD68.60 a barrel.

Rising crude prices recently have been correlated with higher equity markets and a weaker U.S. dollar, which makes commodities such as oil more attractive to investors. But crude fell in Asian trading hours even though the dollar was broadly lower against its major counterparts.

"The demand side is what's concerning investors," said Christoffer Moltke-Leth, head of sales trading at Saxo Capital Markets in Singapore. "It looks like crude has come a little bit ahead of itself."

Investors typically invest in commodities such as oil as a hedge against inflation, which has provided support to oil prices, he said, adding that the lack of a strong mention of inflation from the U.S. Federal Open Market Committee last week may have tempered those concerns.

Protests in Iran, supply disruptions in Nigeria and a weaker dollar "haven't even mustered a yawn from the bulls," Schork Report analysts said. "Markets that fail to endure upon receipt of news that would reasonably be expected to sustain that trend are often a sign, a good sign, that that trend has run its course."

Meanwhile, Moltke-Leth said he expects oil to trade between $60 and $70 a barrel for most of the year.

"OPEC seems pretty prepared to protect this level," he said. "It's not unthinkable that we'll see supply cuts from OPEC if crude should slip below $60," he added.

Nymex reformulated gasoline blendstock for August, the more actively traded contract, fell 69 points to 186.50 cents a gallon, while the more actively traded August heating oil contract was at 176.99 cents, 111 points lower.

ICE gasoil for July changed hands at $555.25 a metric ton, down $2.25 from Friday's settlement.


Monday, June 29, 2009

>Countdown to Railway Budget 2009-10 (WAY 2 WEALTH)

Countdown to Railway Budget : Stocks to Watch & Acquire

Beneficiaries of Railway Budget

There are handful of stocks to watch out for, which derive a large part of their business from the railways. These companies are gearing up to grab opportunities thrown up by the Indian Railways’ Plan entailing an outlay of Rs 2,30,000 crore during the 11th Five-Year Plan. These stocks are likely to be beneficiaries of the Railway Budget.

BEML : To meet the growing demand of wagons and new-gen suburban rail (EMU) coaches, the railways have already farmed out orders to various coach manufacturers, prominent among them is BEML. Thus the company will likely to benefit from the additional demand for wagons and rail coaches.

Titagarh Wagons : Indian Railways has decided to step up its share of procurements from private sector players for new-gen suburban rail (EMU) coaches. As part of the move which comes under its public-private partnership initiative, the Railway Board is shortly expected to invite fresh tenders for supplying 21 rakes from a clutch of companies, among which Titagarh Wagons is one. Moreover, as per railway officials, in the immediate future, the share of private players is only likely to go up, thus benefiting the company from the additional demand for wagons and rail coaches. Titagarh Wagons, which supplied the first coaches within six months of getting the final order and design, claims to be the first private sector player to supply EMU
coaches to Indian Railways. The company has set up a new facility at its existing factory at Hind Motor to meet the Railways order.

Stone India : Stone India is engaged in manufacturing equipment for railways like alternators, air brakes and brake regulators. The company would get business from replacement of old wagons.

Kalindee Rail Nirman : Kalindee Rail specialises in railway tracks, signaling and telecommunications. It has order book of over Rs 450 crore, including about Rs 150 crore from the Delhi Metro Rail Corporation. The huge investment earmarked by railways for freight corridor project will benefit this company. Kalindee Rail
is expected to get orders worth Rs 500 crores from the Indian Railways in next few years.

Texmaco : It is widely expected that in the railway budget, government will add more capital assets and revise the Liberalised Wagon Investment Scheme, which could generate more demand for wagons. This will boost the prospects of wagon manufacturers like Texmaco. The company has decided to raise upto Rs 200 crore of fresh resources from the market to finance future growth plans, including the setting up of a greenfield metro coach manufacturing facility. The company turned out to be the largest winner of rolling stock orders from the Indian Railways in 2008-09. It bagged orders for 3,455 wagons courtesy belated release of orders. The current order book of Texmaco stands at around Rs 1,300 crore.

To see full report: RAILWAY BUDGET


Long-Term Rally or Dead Cat Bounce?

# Activity has surprised on the upside. The three main reasons for this are likely to have a
front-loaded impact on growth.

# Thus we expect the growth momentum to stutter. GDP will rise in 2010 in the US but not
by much, while eurozone GDP will again contract according to our forecasts.

# The market is premature in worrying about inflation. Inflation will eventually come, but only
because deflation fears will first lead to more unconventional policies. Deflation will be the big
theme once green shoots fail to flower.

# Markets may price in more chance of tightening before they price in less. But this will
prove to be a false presumption since deflation will encourage central banks to ease further
next year.

# We expect bond yields to decline in H2.

To see full report: GLOBAL OUTLOOK


Joining the dots: Pick-up to take time

Stability, not recovery; Recovery to take time, in our view
We remain bearish on Indian IT stocks. We believe ‘stability’ is not recovery & that incrementally the Rupee poses downside risk to ests. Based on channel checks, including discussions with the senior partner/CEOs of two leading global IT outsourcing consultants, TPI & Alsbridge, we believe decisions are still not being taken & any recovery could be slow. We see no pricing power. We maintain our Underperform ratings on TCS, Infosys, Wipro & HCL Tech at 14-17x FY11 PE 0-4% 2yr EPSg. Of these, we have a relative preference for TCS on valuation & lower Re sensitivity. Greatest risk of disappointment from Wipro/HCL Tech. Niche
buys: MphasiS (8xFY11) on offshoring by EDS & WNS (7x FY11) on BPO.

CY09:“Summer pause now” & ramp ups likely next year

Good news: Market is not worsening & Requests for Information (RFIs) have picked up, but of course, pick up in discussions is from a much lower base than last year & budgets are unlikely to change this year. Bad news: Decisions still not being taken, given client business confidence is yet fragile. Secondly, the impact of the sluggish summer months, starting now, could be more pronounced this year. Finally, given start up costs of a new deal can be high, savings from
offshoring may be difficult to achieve this year, & hence the bulk of the deals could ramp next year.

CY10: Flattish budgets? Optimisation, buzz word

In line with our view that global macro recovery will likely be slow, consultants & customers confirm that “optimization” is the theme in IT spending. Hence, the pace of recovery in IT spending is debatable in 2010. Our best estimate is that budgets remain flattish next year & recovery in IT services could be late cycle.

Pricing risk: Too early to call victory

Pricing steadiness post the 5-15% pressure seen earlier in the year likely reflects improved sentiment, but could re-surface, in our view, when deals close. Near term pricing pressure stems from currently low levels of utilization. In BPO, competition from locations like Philippines could cap prices. Offshore vendors could fare better, but competition stiff Growth trends for offshore vendors are flat to positive, in our view, given the value offered & likely greater ‘passion’ of Indian vendors vs incumbents. That said, we have heard of a couple of global vendors being very competitive on pricing. Accenture has ~40,000 people in India now & IBM close to 55,000 in exports. Also alternate "near shore" locations including Mexico, domestic US,
Costa Rica etc. could nibble at demand, at the margin.

To see full report: IT SECTOR


India: 2009 Union Budget—spotlight on infrastructure

The closely watched Union budget to be presented on July 6 will be important in gauging the new government’s policy stance. We think it will have a big focus on infrastructure.

We expect the budget to also emphasize low-cost housing, rural spending, and support for the exportable sectors.

Given the spending pressures, we expect the central government’s fiscal deficit to remain high at 6.5% of GDP and the consolidated deficit at 10.1% of GDP in FY10 despite a fall in oil and fertilizer subsidies. The deficit, we think, will likely be financed comfortably due to disinvestment and the auctioning of 3G license proceeds.

Consequently, we think that long bonds which have sold off recently in part due to concerns about funding the fiscal deficit, may rally.

We continue to expect the INR to strengthen over a 12-month horizon, and think that concerns over financing the fiscal deficit are overdone. Our 12- month target for USD/INR is 44.7.

Our sector analysts have outlined their expectations on the budget, and the impact on their respective sectors. We expect the budget to be positive for IT, capital goods, logistics, and financials.

To see full report: UNION BUDGET


Investment Rationale

Federal Bank has one of the highest capital adequacy ratio's (CAR 20.2%, Tier I CAR 17.5%) which can be deployed to ramp up business as the economic scenario improves. The management has guided a loan growth of ~20% in the current scenario, but may increase it to ~25% if the macro-environment improves. We expect loans and deposits to grow at a CAGR of 22% and 19% respectively over FY09-FY11.

Fed bank's NIM (4.1% in FY09*) is highest amongst peers whereas cost to income ratio (31%) is lowest the sector. We believe that the bank will maintain NIM in the range of ~3.9% and cost to income ratios at 32% over FY09-11E.

Suppressed RoEs (due to 1:1 rights issue in FY08) and increase in slippages have led to underperformance of stock. However, we expect bank's RoE to improve to 14.1% in FY11 (12% in FY09) led by 20% CAGR growth in profits. We also expect bank to maintain provision coverage of 80% for the next two years (88% in FY09) which will shield earnings against rise in NPAs.

Fee income of the bank is expected to grow at ~20% CAGR over FY10-11E due to strong growth in remittances, forex, processing fees etc. We believe that lower recoveries from written off accounts coupled with decline in treasury income will lead to muted growth in non interest income.

Fed Bank is in talks with Catholic Syrian Bank (based at Kerala) for merger which has 362
branches and a business size of INR 100bn. As the merger goes through, Federal Bank's
branch tally will increase to ~1000 and will be among the top three private banks (after
ICICI & HDFC Bank) in terms of branch network.

Valuations and Outlook
We expect Fed bank's advances to grow at CAGR of ~22% over FY09-F11E whereas profits to
grow at 20% CAGR over the same period. This would translate into ROE's of 14.1% in FY11E
(currently 12%). Despite sharp run up the stock is trading a 0.9x and 0.8x FY10 & FY11 adj
book values. We initiate coverage on the Federal bank with a target price of INR 300 (1x
FY11 ABV) and Buy recommendation.

To see full report: FEDERAL BANK


Better fundamentals expected to drive next phase of the oil rally

Liquidation risk remains in the near-term as we wait for
better fundamentals, but we continue to expect
fundamentals to begin to improve in 3Q2009.

Recent price strength has been led by the long-end
Crude oil prices have continued to rise in recent weeks, seemingly continuing the pattern of recent gains. However, it is important to emphasize that the underlying price driver of these gains has shifted over the last three weeks. The price gains from late April through late May were largely led by strengthening timespreads as easing credit conditions reduced the high funding costs that had generated exceptionally large negative carry in the oil forward curves earlier this year. In contrast, recent oil price gains have been driven by a rise in long-dated prices, rather than by strengthening timespreads, which we believe has been driven by an improving forward fundamental outlook, in line with better global leading economic indicators.

We continue to expect fundamentals to improve in 3Q2009
In the near-term, we believe that the sizable long position that has built up in the market on expectations of improving fundamentals could create some liquidation risk as we wait for better fundamentals to take over. However, we continue to expect such an improvement in fundamentals to begin to take hold in the next several months, pushing the market into
deficit and generating renewed strengthening in timespreads.

To see full report: ENERGY OUTLOOK


Takeaways from Our India Investor Conference, June 24-26

Takeaways from Mumbai — Fortis Healthcare attended our India Investor Conference on June 25. Here are some key takeaways from management:

Long-term vision — Fortis expects to have a network with c6000 beds by 2012 (at an expected cost of cRs7m/bed for new beds). It is also trying to create an asset-light structure by entering more O&M contracts, which will help expand reach and grow top line without increasing its asset base.

Updates on key projects — A) Shalimar Bagh: Expected to come online within three months. It will be operational from the next quarter. Phase I will have 258 beds. B) Gurgaon: Expected to be operational within the next 12 months with 350 beds. C) Escorts: Revenues close to earlier peak levels (before Dr. Naresh Trehan's exit) with lower ALOS, leading to higher margins (c20% towards the end of FY09). FY10 will be a good year for Escorts Delhi.

New O&M deal announced — Fortis has entered into an O&M contract with S L Raheja hospital in Mumbai. This is the second Mumbai hospital in Fortis' network and diversifies its geographical spread. The hospital has 280 operational beds and Fortis will get a share of the EBIDTA and if it can expand EBITDA margins beyond a certain threshold, it would share in the upside.

Other takeaways — 1) Rights issue to open in mid-July (expects to close by August). SEBI approval has been received; 2) Expects established hospitals to reach c23-25% EBITDA margins (Mohali, Noida, Amritsar already at these levels); 3) Dr. Balakrishnan, one of Chennai's eminent doctors, has joined at Malar; strong revenue growth likely in FY09; 4) Board meeting on 30th to announce FY09 results.

To see full report: FORTIS HEALTHCARE


We initiate coverage on Thermax with an ‘ACCUMULATE’ recommendation and a target price of INR 450 per share implying an upside of 12.5% from current levels. Diminishing capital flows, falling investment growth due to liquidity crunch, will dampen the economic growth from 9% in
FY08 to 6.3% in FY09. While domestic financing conditions have improved, external financing
conditions are expected to remain tight. Private investment demand is, therefore, expected to
remain subdued. Pick up in the economy in the latter half of this fiscal, will improve the
performance of Thermax ltd. with muted growth expected this fiscal.

Muted Order backlog
The Consolidated order book for Thermax Group stands at Rs. 3078 crs up 17% yoy, with a book-to- bill ratio of 0.9x. The fall in order inflow of 5800 mlns by 20% yoy was on account of order cancellations and reduction in scope and value of some of the company's large orders secured during FY09. The Rs 800 cr Essar order has been reduced to 2 boilers from the previous 4 boilers and is now worth Rs 380 cr. Brahmani’s Rs 400 cr order is now worth Rs 297 cr. However, the management expects order inflows of approx Rs1,200 cr in H1FY10 and an improvement thereafter. Further, the company’s entry into subcritical boilers (800 MW) has enabled it to win large orders.

Dismal revival in IIP Index, positive signs for the Infrastructure sector
As the global slowdown has taken a toll on India’s industrial production, IIP for 2008-09 grew by
only 2.4% as against 8.5% in the 2007-08. A revival of industrial production is round the corner, with excess liquidity in the system, easing of financial conditions and declines in some key interest rate spreads suggest that industrial activity will pick up in the second half of 2009-10. The six -core infrastructure sectors has also registered a growth of 4.3% in April, the most since July 2008, compared to a growth of 2.3% in April 2008, backed by significant contribution from coal, electricity and cement sectors.

Worldwide Declining GDP growth rate
The World Bank has estimated GDP growth in the developing world to slow to a projected 2.1
percent in 2009 from 5.8 percent in 2008. The World Bank’s forecast predicts growth momentum to turn weakly positive in 2010 World GDP as growth is expected to increase to a modest 2.3 percent in 2010, as financial-sector consolidation, lost wealth and knock-on effects from the financial crisis continue to dampen the economic activity. India’s RBI has lowered the GDP growth forecast to 5.7 percent for this fiscal from the earlier projection of 6 percent because of a sharp downward revision in the anticipated expansion of industrial output.

With Recovery round the corner & entry in subcritical space, Accumulate with a price
target of INR 432
An industry leader in the industrial boilers segment in the captive power segment, Thermax’s entry into a new arena into the subcritical space (800 MW), and a revival seen in the economy from H2 FY10, Thermax is confident of achieving higher inflow of order growth. For the fiscal ended FY10, the management expects revenues and margins to be maintained with a better picture from FY11. At the current price of Rs 395, the stock is quoting at 15x FY2010E EPS and 13x FY2011E EPS, which we believe is not inexpensive. We initiate with an Accumulate Rating on the stock, with a target price of Rs. 450 based on a PE of 15x consolidated FY11E EPS of Rs. 30 per share.

To see full report: THERMAX LTD.


Budget preview: Easy does it

  • Populist budget likely as India builds a welfare state of sorts
  • Structural budget deficit set to rise…
  • …which may worry RBI, rating agencies and bond market

Having already introduced two stimulus packages, seen the budget deficit exceed 6% of GDP, watched the Reserve Bank of India slash interest rates and witnessed some encouraging signs of recovery one might have thought the government would be content to present a neutral budget on 6 July. This seems unlikely, however. We expect the budget to contain several expansionary measures, with little or nothing in the way of action to address the worrisome structural deficit. If we are right, then the RBI, rating agencies and bond market players may be less than enthusiastic in their reaction.

While markets have taken the view that Congress was the big winner from the general election, a better interpretation of the result is that it was the left of the Congress party that was the real winner. This may seem a subtle difference but it is one with very important implications. In particular, it probably means that the top priority of the government is to continue building a welfare state of sorts, with meaningful pro-market reform and structural budget adjustment taking more of a backseat than many are assuming.

In line with this, we expect help for the poor to take centre-stage in the budget. The government has already suggested that it will guarantee the provision of basic foodstuffs at low prices to all poor families as well as funding the construction of millions of new homes in rural areas. It may also extend the popular National Rural Employment Guarantee Act to include the urban poor, while promising additional infrastructure, preferably via public-private partnerships. The corporate sector could enjoy higher depreciation and/or investment allowances for spending on machinery and equipment.

Despite the prospect of all this additional spending, we wouldn’t be surprised if Mr Mukherjee forecasts a fall in the central government’s budget deficit in 2009/10. The Finance Minister will attempt to square the circle by arguing that the various programmes will be “financed from stronger economic growth” (expect some bullish growth projections), with the sale of government stakes in some state-controlled companies also helping out. The trouble with this approach is that many of the spending measures are likely to be permanent in nature while the divestments are one-off. In other words, the structural budget deficit is in danger of rising when it should be falling. No doubt the government will commit to a medium-term programme of deficit reduction, but given the eventual failure of the first Fiscal Responsibility and Budget Management Act one might be forgiven for doubting the credibility of FRBM (2).

To see full report: BUDGET PREVIEW


■ Assam Company Ltd. (ACL) has business interest in tea and upstream oil business. It is a producer of high quality, premium tea. In 1994 ACL diversified into the oil & gas industry. Currently, it has participating interests in 5 assets in the Assam-Arakan basin in North East India. Its E&P portfolio consists of one discovered field, one exploration block and three service contracts with ONGC.

ACL operates through 17 tea estates and gardens with planted area of about 8644 hectares on a grant area of 14664 hectares. The average yield per hectare stands at 1983 kgs.

The Company was awarded Amguri block (discovered oil field) and AA-ON/7 (exploration block) by the Government in 1996 under Pre-NELP round Amguri covers an area of approximately 52 75 square Pre round. 52.75 kms with estimated proven resources of 60 MMbbls of oil and 229 bcf of gas, whereas AA-ON/7 covers an area of approximately 1,089 square kms with estimated resources of 80 MMbbls of oil and 617 bcf of gas. ACL owns 40% participating interest in the Amguri and 35% in the exploratory block AA-ON/07.

Recently, the Company expanded its Exploration and Production asset portfolio by adding one more Block - AA-ONN-2005/1, the only Block in Assam Arakan basin offered under NELP-VII.

Oil and Gas production from two wells, Amguri 10B commenced in at the rate of 1,370
barrels of oil equivalent (boe) per day and increased to 1,660 boe per day in Q2CY08. The production will further enhance, once the adequate facilities are created and further wells are drilled. Currently, the Company is producing 1,700 barrels of oil (boe) per day, and the average production is expected to increase further during the next 2 years. Evidently, the Company is expected to deliver very decent earnings growth from oil and gas segment.

The stock currently trades at 11x its earnings and 1.0x BV.

To see full report: ASSAM COMPANY

Sunday, June 28, 2009

>Gold market enters seasonally soft summer period

Gold prices could retreat during the summer as a still sluggish economy keeps inflation down and seasonal reductions occur in fabrication and investment demand.

Still, some analysts said any summer weakness may be more limited than normal, since financial-sector problems persist and destocking may have already occurred in the jewelry industry.

August gold on the Comex division of the New York Mercantile Exchange fell from a three-month high of $992.10 an ounce on June 3 to a low of $926.50 this week before stabilizing, largely on currency-related factors.

"We expect prices to head lower, possibly to $860 or $840," said Carlos Sanchez, associate director of research with CPM Group. "Weakness would be due to fabrication demand being reduced. Usually, gold-gift-giving holidays occur at the beginning of the year and latter part of the year, not only in developed countries but developing countries like India and Pakistan."

He also said investor activity tends to wane in the summer as many players focus more on vacations than markets.

Sanchez said some of the economic data lately have not been as bleak as in past months. Further improvement could take away some of the impetus to buy gold over the summer, he said.

James Moore, analyst with TheBullionDesk.com, expects gold to be "vulnerable" over the summer, perhaps trading sideways to lower. He cited the large net long position of speculators as one reason, which means potential for liquidation. As of June 9, the noncommercials were net long by 201,359 lots for Comex futures and options combined.

Moore said longer term, the potential for inflation should be supportive, but gold could be at risk of a test back below $900.

"Certainly, we're finding good support around the $930 level for now, he said. "But given the fact we haven't seen a step-up in buying interest, maybe we have to go back to the $880 area and maybe even back to the $850 before we can pick up fresh buying."

Bart Melek, commodity strategist with BMO Capital Markets, said subdued jewelry demand and a run-up in longer-term Treasury yields could hold gold back in the next couple of months. There also may be less demand for gold as a hedge since central bankers have indicated the dollar is likely to remain the world's reserve currency. This week's round of U.S. data showed tame inflation.

"A combination of these factors makes gold range-bound for the next quarter or two," Melek said, but added, "There is some risk to the downside."

Seasonal Weakness May Be Limited

Others acknowledge gold's tendency for summer seasonal weakness, but nevertheless look for the market to draw support anyway.

Gold fell with other commodities from mid-July last summer, but soon recovered due to troubles at institutions such as Lehman Brothers, Fannie Mae (FNM) and Freddie Mac (FRE).

"Things don't seem to be quite as dire as they were last summer, in terms of major financial and government institutions on the verge of collapse," said Peter Grant, senior metals analyst with USAGOLD - Centennial Precious Metals. Still, he said, systemic risks have not gone away.

Grant said there is the normal cyclical reduction in jewelry demand, but also a parallel of continued safe-haven interest in gold.

"They are kind of offsetting to some degree, which makes range-trading probably the greater likelihood," Grant said. "But the overall trend is up, and any major surprise with respect to systemic risks could have a very bullish impact on gold."

Jeffrey Nichols, managing director of American Precious Metals Advisors and publisher of NicholsOnGold.com, suspects any seasonal influence will be less than most summers. Large jewelry manufacturers have already reduced inventories of raw materials, he said. Like other industries, they didn't want to finance the cost during an economic slowdown.

"There shouldn't be any additional destocking over the summer months," Nichols said.

Otherwise, he said, movements in the dollar could be the dominant theme over the summer, as the metal tends to move inversely to the greenback.

"It's still vulnerable technically speaking, but I think it's likely to hold up at $900 or over," Nichols said. "And after we have a period of retrenchment - which we may have already seen - gold should start rebuilding itself."



Indian Equities - Valuations re-visited

Valuations re-visited. We evaluate market valuations considering different growth assumptions and valuation methodologies. Earnings based valuations, derived from current growth estimates (a CAGR of 14% over FY09-11E) suggest a trading range of 12,500-16,500 for the BSE Sensex for the current fiscal year. Valuation models that do not depend excessively on near term earnings – P/B-RoE and long term DDM – also suggest a reasonable upside.

Special focus: Valuations vs macro variables. An analysis of the relationship between 12 month forward PE multiples and key macro economic variables, suggests a meaningful relationship with IIP and the exchange rate. The relationship with interest rates and inflation is
however not significant.

Near term consolidation. We have been arguing for near term consolidation following the sharp rally, post the election results. A substantial equity issuance pipeline and the weak progress of the monsoon are near term pressure points. But we remain constructive on a 12-18 month view, given the policy freedom available to the new Government and await initiatives herein in the Budget scheduled for July 6.

Portfolio stance. We remain positive on local growth, with a bias towards the investment cycle. We are downgrading Consumer Discretionary from overweight to neutral following substantial outperformance over the last three quarters and concerns over the weak progress of the monsoon. We are also adding weight to IT services, given signs of an improvement in tech spending. We are adding Satyam to our model portfolio.

To see full report: STRATOSCOPE


The current global equity rally has resulted in stock price increase across the board, which include stocks with/without robust fundamentals. Therefore the current rally provides an excellent opportunity to investors to sell/book profits in companies whose business models is not backed by robust fundamentals or those companies whose stock prices have run ahead of their fundamentals. Therefore, we recommend investors to invest the proceeds from the above sales to be invested via our “Conservative Model Portfolio” which includes a better mix of companies with allocation to various sectors.

List of stocks where one can remain invested:

  • Shree Renuka Sugars
  • Reliance Petroleum
  • Reliance Natural Resources
  • Satyam Computers
  • IFCI
  • Power Grid
  • NTPC
  • Larsen & Toubro
  • Reliance Power
  • ITC
  • Petronet LNG
  • Suzlon Energy
  • Infosys
  • Ashok Leyland
  • GMR Infra
  • Nagarjuna Fertilisers
  • Jaiprakash Associates
  • Gujarat NRE Coke
To see full report: STOCK SWITCH


India's new Finance Minister will present a full-fledged budget after a gap of 16 months and under a different set of circumstances. In February 2008, India was entering a phase of lower growth trajectory. On the other hand, current data is suggesting that, the economy is likely past the worst and improving. However, we expect the agenda of the budget to be identical, subject to a few differences. We note that, the previous FM had a far more fractious and demanding set of coalition partners to contend with.

We opine that, the focus of the FM will continue to be on sustaining and improving the rate of GDP growth and that too, equitable (inclusive) growth. Investments in infrastructure, social initiatives and agriculture are expected to continue. While fiscal prudence will be attempted, we expect little change to the Center's fiscal deficit of more than 6% of the GDP. Alternate sources of raising finances like dis-investment, relaxation of FDI norms, auctioning of telecom licenses, etc may be used to fund additional investments.

While issues like FDI relaxations / allowance and implementation of GST may be addressed, other critical issues like labour reforms, pension reforms, etc may need broader political consensus. We expect material developments on the same, if any, to be outside the budget. Tax burden on individuals may be reduced to spur consumption. From the market perspective, any major reduction in the STT burden will positively surprise us. Tax benefits for 'impacted' sectors and employment-generating sectors will be provided, in our view.

Though India was impacted by the global economic slowdown, the GDP growth of 6.7% (CSO advance estimates) in FY09, was the second fastest, globally. We expect the focus of the budget to be on sustaining and improving this rate of growth. To that extent, investments, mainly in infrastructure, are expected to continue. Segments like roads, highways, airports, ports, power, etc are expected to receive continued attention and funding. However, only speedier implementation will make these plans more effective.

We expect inclusiveness to be another corner-stone of the budget. Increased allocations to schemes like SSA, NREGS, mid-day meal scheme, etc will be announced, we believe. With falling growth in agriculture and some uncertainty on the monsoon (till now), we expect further initiatives in agriculture, which also promotes balanced growth and helps in containing inflation.

To see full report: PRE-BUDGET ANALYSIS


First, rabbit holes; now, wings of wax

After the rally, what next?
In February 2009, real estate stocks appeared to be tumbling down a rabbit hole, with no signs of a bottom. As we expected (see report How deep does this rabbit hole go, dated 18 March 2009), stocks rallied due to improving liquidity. Although we still believe that this is a good time to accumulate Indian property stocks for the long term, their 200–300% average rise during the past three months has likely led the market to expect a sharp pullback. Should this occur, we would view it as an entry point. Meanwhile, we think it is advisable to take profits from stocks with wings (and feathers) of wax that are flying too close to the sun.

Rally has been backed by fundamentals
Availability of capital in 1Q CY09 was completely frozen, even while the situation in most of Asia was slowly improving. At that time, it looked like there would be some relief for developers as lenders took on more risk. This has now occurred. There have been instances of banks willing to refinance obligations and some asset sales. Importantly, nearly US$2bn of equity was raised by the developers in the past couple of months. This has definitely eased the liquidity pressure on developers. Developers have also cut prices by 20–30%. This has led to a recovery in residential sales volumes in many parts of India. Although the physical markets remain under stress (especially on the commercial and retail fronts), inventory clearance has indeed started.

The NAV upgrade cycle is still in its infancy
These trends led to some NAV upgrades in the past quarter, including by us (even though we were clearly above the Street back in March). We believe this momentum has just started. Analysing past cycles in India is very tough because most developers have been listed for less than three years. However, past cycles in more-developed markets (such as Hong Kong) show that NAVs can move up by 2–3x from the trough to peak cycle. In India, some drivers of upgrades are obvious. WACC of 16–17% and cap rates of 13–14% at bottom-cycle rents and
volumes were clearly pessimistic. NAV downgrades in 2008 were driven by the capital crunch and demand destruction. There have been some NAV revisions stemming from the improved capital scenario. The upgrade cycle on higher volumes and rising prices (after the recent GDP upgrades) has not yet started.

Approach should change from ‘selling into strength’ to ‘buying on dips’. A near-term pullback would not be a major concern, in our view. Stock markets have often had a 20–40% correction 3–6 months after coming off a bottom.

Stock picking: Keep an eye on the fundamentals
Investors should focus on stocks with relatively better-quality balance sheets and a clear and robust monetisation strategy. Based on our scenario analysis and qualitative framework, we believe Indiabulls and Unitech are best placed, with DLF next. We would also advise caution, however. The recent rally has clearly reduced the valuation proposition of Indian property stocks. We have maintained our Overweight position on India in the regional portfolio, but with a reduced weight (from 2% to 1%). We recommend that investors take profits in Provogue,
Akruti, Ansal and Mahindra.

To see full report: INDIA PROPERTY


  • Overweight mid-caps relative to large caps
  • Mid-cap stocks are trading at 10.7x 12- month forward PE, a 28% discount to large-caps
  • Improving liquidity and growth prospects make them a compelling proposition.
Is mid-cap appeal back?

Following the recent 75% rally from the trough in early March, valuations are stretched; for instance, the Sensex trades at 16.2x 12-month forward PE. For investment ideas, we need to look beyond the frontline stocks — one segment of the market which is interesting is mid-caps, i.e., stocks with a market cap between USD500m and USD1bn. This segment started outperforming its large-cap peers recently and we would be overweight on a 6-12 month view.

The case for investing in mid-caps lies in cheaper valuations, trading at 10.7x 12-month forward PE, which is at a 28% discount to large-caps, while the valuation discount of midcap stocks tends to persist for a longer period of time. On average, in terms of PE, the discount is 17%. Consensus forecasts that mid-cap stocks will grow earnings at a CAGR of 16.2% compared to an 11.5% CAGR for large-cap stocks over March 2009-March 2011e. We believe this makes for a
compelling case for investment in mid-cap stocks.

Our study also highlights that this segment of the market has outperformed large-cap peers historically, and the outperformance is significant on a risk-adjusted basis with a Sharpe ratio of 0.2 vs. the large-caps’ at 0.14. For specific ideas, we provide a screen of stocks from our coverage.

The risks of investing in this segment relate to higher liquidity risk for mid-caps and higher leverage.

With this edition we are launching our new biweekly equity strategy product, India Insights.

To see full report: INDIA INSIGHTS


Geared to excel

Gujarat State Petronet (GSPL) enjoys a well entrenched network of gas transportation pipelines across Gujarat and is all set to benefit from additional supplies from the KG-Basin and increased LNG capacities in India. We estimate GSPL to report impressive net income CAGR of 17% in FY08-FY11E led by 29% gas transmission volume CAGR. Corporate Social Responsibility (CSR) contribution of 30% to the Gujarat Government is the key overhang on the stock. We value GSPL at Rs56/share based on FCFE-DCF methodology assuming 30%
CSR contribution and 13% RoCE over the life of GSPL’s pipelines owing to higher spot contracts, efficient operations etc (versus 12% allowed return by Petroleum & Natural Gas Regulatory Board, PNGRB). If the Gujarat Government were to abolish 30% CSR, GSPL’s fair value would rise to Rs78/share. We initiate coverage on GSPL with BUY rating.

Rising gas supplies imply higher growth visibility. Increasing domestic supplies led by Reliance Industries’ (RIL) KG-D6 field and new LNG terminals would lead to ~2.5x rise in gas supply in the next 3-4 years, thereby improving growth visibility. Gas volume CAGR of 29% would lead to 17% net income CAGR over FY08-11E.

Gas Pipeline Policy – Exceeds expectations. PNGRB has allowed 12% post-tax RoCE on inter-state pipelines. We expect GSPL to generate better returns through higher spot volumes, lower depreciation, leveraging balance sheet and lower effective volume assumption in the first four years of operations.

RIL-Reliance Natural Resources stand-off will not affect GSPL. The market is concerned on diversion of gas supply to Reliance Natural Resources (RNRL), which decreases transmission volumes via GSPL pipelines. But lower gas volumes would lead to higher tariffs as returns are regulated. As spot volumes are excluded while calculating regulated returns, higher spot volumes would be beneficial.

Understated book value; valuations attractive. Due to GSPL’s aggressive depreciation policy, its book value (BV) is understated. GSPL’s FY09 BV/share, at 3.17% depreciation, would have been Rs28.9 versus Rs21.7, which will likely be reported by GSPL. We value GSPL at Rs56, implying adjusted FY09E P/BV of 2x.

To see full report: GUJARAT STATE PETRONET


Upgrading zinc and lead price estimates
Zinc prices dring the month rose to a high of US$1,700/ton, levels last seen trading in Sept'08. Zinc prices have been moving higher since it formed a base around the US$1,000-1,100/ton levels at the start of the year. The stronger than expected resilience shown by the Chinese economy, implementation of huge productions cuts and buying by the Chinese Strategic Reserve Bureau (SRB) led to a surge in imports.

Volumes to witness 21.4% CAGR over FY09-11E
Hindustan Zinc Ltd. (HZL) is set to become the world's largest integrated zinc-lead producer by FY11E. We expet volumes to witness 23.1% CAGR over the period FY09-11. While the volume growth in FY10E would be achieved by the recent de-bottlenecking process, in FY11E it would come from the expansion of production capacity to 1 mtpa (by mid-2010). On our revised metal price assumption, we upgrade HZL's topline by 17.2% in FY10E and 17.1% in FY11E.

Upgrade to BUy with a target price of Rs776
HZL falls in the lower quartile of the global cost drive. Even in an environment of high input costs like coal in FY09, the company managed to keep its costs at FY08 levels. With HZL's ability to contain input costs and a scenario of rising price realisations, we expect OPM to expand 309bps over the next two years. We upgrade our previous earnings by 16.2% to Rs26.8bn in FY10E and by 8.7% to Rs 34.2bn. We expect net cash per share to rise from Rs236 at the end of FY09 to Rs290 by FY11. We upgrade our target price to Rs776/share and change our rating to BUY from Market Performer. Net of cash, the stock is currently trading at 4.2x P/E on our estimated FY11E EPS of Rs80.9.

To see full report: HINDUSTAN ZINC


Leads malted food beverage segment with 70% market share
GSKCH dominates the ~Rs20bn MFB market with its brands - Horlicks, Boost, Maltova and Viva. GSKCH continues to leverage on the strong brand equity of Horlicks and Boost by introducing value added variants of these brands. These variants will be priced at 15-20% premium over existing products. G

New launches from parent's portfolio to diversify revenue base
GlaxoSmithKline plc. U.K. the parent company of GSKCH has a strong and well established product product portfolio of various brands such as Ribena, Sensodyne, Aquafresh, Lucozade, Breathe Right etc. GSKCH plans to launch few products from its parent's portfolio over the next 2-3 years. These products are expected to have a strong demand potential in the Indian market and we believe it will help the company in further strengthening its position in the Indian market.

Huge cash balance indicative of liberal payout policy
With zero debt on its books and operating cash flows of about Rs2bn per annum, GSKCH is a cash rich company. At the end of CY08, it had ~Rs4.7bn (Rs112/share) cash on its books. The company is expected to incur a capex of Rs1.3bn p.a. (maintenance and capacity expansion). We believe that the surplus cash would be utilized to acquire businesses/brands or to reward shareholders in the form of higher dividend payout or a buyback. The company is actively scouting for acquisitions in segments such as nutrition, medicinal and OTC products.

To see full report: GLAXOSMITHKLINE


Company Profile:
Great Offshore Ltd (GOL) is the largest offshore oilfield service provider to upstream oil and gas companies to carry out offshore E&P activities.The Company currently operates in four major business areas viz offshore drilling services, offshore logistics support services, engineering services and port & terminal support Services. GOL owns state of the art vessels which includes two drilling rigs, twenty seven OSVs, one construction barge and eleven harbour tugs. It generates nearly 80% of its revenues from ONGC.

Investment Rationale:

Ventured in port management and single point mooring operations: GOL has forayed in to port management and single point mooring operations by acquiring 100% equity stake in two Hydrabad based companies KEI-RSOS Maritime Ltd. (KEI) and Rajamahendri Shipping & Oilfield Services Ltd (RSOS) with purchase consideration of Rs 1.6 bn. This EPC accretive acquisition is in line with Great Offshore's strategy of maintaining its leadership in the port & terminal and offshore logistics servises.

Strengthening its fleet by adding new vessels: GOL has ordered two new vessels - a jack up shallow water drilling rig and a MSV with an aggregate cost of USD 168 mn and USD 68 mn respectively. The total number of vessel will become 43 with these two additions by FY11.
Currently the company owns 41 offshore support vessels inclusive of two drilling rigs.

Increasing oil Import bills - Creating Strong demand for offshore vessels: The demand for rigs is expected to rise globally in response to increasing crude prices. India is the net importer of the crude oil. Its import bill has rose to USD 76.61 bn in FY09 from USD 48.39 bn in FY07 due to increase in petroleum demand and rising crude prices. This has led the government to intorduce various policies (NELP for instance) to give boost to E&P activities which are expected to create strong demand for offshore service vessels in the near future.

Outlook & Recommendation:
At the current market price of Rs 360, the stock is trading at a P/BV of 1.16x and 0.95x of FY10E and FY11E book value of Rs 310 and Rs 378 respectively.

We recommend BUY rating on the stock with a target price of Rs 454/- (26% upside) in 12 months implying a P/BV multiple of 1.2x of FY11E book value.

Industry Overview
The offshore shipping industry is highly dependent on oil exploration and production (E&P) activities. The global E&P activities continue to be buoyant on account of robust crude prices, strong demand from India and China and tight OPEC supplies. Oil accounts for around 33% of India’s total energy consumption. India faces a large supply deficit, as the domestic oil production is unlikely to keep pace with demand. This makes India a net importer of oil.

To see full report: GREAT OFFSHORE