Friday, July 31, 2009


Company Background
JK Lakshmi Cement (JKL), a north-based cement player with a total capacity of 4.75 million tonne (MT)and has a 36 MW captive power plant at Sirohi. The company has major presence in Rajasthan, Gujarat, Maharashtra and North India markets. North India, Rajasthan and Gujarat contribute around 30% each to the total sales while Maharashtra contributes the remaining 10% of the total sales. North Indian markets include J&K, Himachal Pradesh, Punjab, Haryana, Delhi and west UP.

Investment rationale

Capacity addition to drive Volumes:
JKL has increased its cement capacity by 30% from 3.65MT in FY2008 to 4.75MT in March 2009 by adding two grinding units of 0.55 MT each at Sirohi, Rajasthan and Kalol, Gujarat. The company is further planning to set up a green field plant 2.7 MT plant at Durg, Chhattisgarh at project cost for the expansion is Rs 1100 crore. The plant is expected to come on stream by mid- FY13. Thus capacity addition will drive the volumes of the company.

Cost Savings to help cushion Margins
JKL mainly uses petcoke as a fuel for its operations. It has contracted the fuel at lower prices until October 2009 at Rs 4000 per tonne. Domestic petcoke price in June were hovering around Rs 4800 per tonne.

The company is also expanding its captive power capacity to 48 MW by setting up a 12 MW waste heat recovery plant at Sirohi, Rajasthan. The variable cost per unit will be only Rs 0.3-0.4 per unit and will generate carbon credit income. Captive Power will meet 70% of the power requirement of the company.

For balance power requirement, Company has also entered into strategic tie ups with KSK group company, VS Lignite for the purchase of 21MW power every year at a cost of Rs3.2/unit for 20 year.(JKL as of now sources power at Rs4.6/unit from grid). This would translate into a savings of Rs1.4/unit from October 2009 onwards.

Power and fuel constitute about 34% of the cost of production. Contracting of power and fuel at low cost has increased the earning visibility.

Presence in high growth North India market
JKL has significant presences in North India. Cement consumption in Northern region grew at impressive 14.5% as compared to all India average of 11.6%. On account strong consumption growth prices in key markets of JKL has remained firm.

Going ahead, we expect the northern region to continue to grow above the all-India average due to incremental demand that will come from the Commonwealth Games and the hydropower projects coming up in the region. In addition, the upcoming US$90-billion Delhi-Mumbai Industrial Corridor project and the 1,483-km high-speed dedicated freight corridor project will also boost cement demand in North India.

Healthy Balance sheet
JKL has a cash and Investments of Rs 416 crore (Rs 68 per share) It has comfortable a net debt equity ratio of 0.35X. Company is presently. The company is evaluating option of deploying cash by setting up merchant based power plant.

Risks & concerns

Delay in Capacity Expansions
JK Lakshmi is on the verge of capacity expansions for cement and Captive Power. Any delay in capacity expansions plans will have a Negative Impact on the earnings of the company

Slowdown in Demand
Any slowdown in the demand from the end user industries like Housing, construction and Infrastructure will put more than expected pressure on the prices.

At the CMP of Rs 127 per share, the stock is trading at 4.5x its FY09 earnings and 0.99x its FY09 book value. On an EV/EBITDA basis, the stock is trading at 3.1x while on an EV/tonne basis, it is trading at $46.7 of its FY09 capacity. Since JKL is trading at less than half of its replacement cost and its large cap pears, despite having healthy return ratios (RoNW of 25.2% & RoCE of 19.5%) we expect 10% upside from the stock in 3-6 months.

Technical Outlook
The Stock is forming rising peaks and troughs on the weekly charts which define an up trend. The stock began fresh up move last week after five weeks of consolidation. Sustained trading above 127 would trigger further upsides for the stock. We place short term target of 140 and 143, with stop loss at 119.

Earlier, the Stock has corrected from its Dec’07 highs of 223 and made a good base around 35 levels. Then from mid March’09 it started its uptrend accompanied by rising volumes.

To see full report: JK LAKSHMI CEMENT


ITC Ltd. declared its first quarter result today. The results came in line with the street expectations. The sales were around 2.0% below Bloomberg consensus estimate, whereas the net profit was around 2.2% above, which was on account better performance of its cigarettes business.

The net sales for the quarter ended June 09 grew by 4.69% to Rs. 4,082.68 cr, backed by better performance of its cigarettes business

The cigarettes and paper business reported a 23.34% & 15.96% y-o-y growth to Rs. 2,145.60 cr and 702.62 cr respectively while other segments named Hotels and Agri- Business reported a decline of 27.68% & 48.72% y-o-y to Rs. 940.61 cr and Rs. 702.62 cr respectively

The EBIDTA for the quarter ended June 09 increased by 19.45% to Rs. 1,387.33 cr while the EBIDTA margin improved by 405 basis points (bps) to 33.57% as compared to 29.52% reported a year ago

Improve in the EBIDTA margin is mainly on account of decline the total expenditure cost. The consumption of raw material as a percentage of net sales declined by 156 bps to Rs. 1,339.34 cr as compared to Rs. 1,336.20 cr reported a year ago

Company’s interest expense increased by whopping 314.18% y-o-y to a level of Rs. 5.84 cr while the other income declined by 9.39% y-o-y to Rs. 87.57 cr

Company’s Net Profit for the quarter ended June 09 rose by significantly 17.4% to Rs. 878.7 cr as compared to Rs.748.67 cr reported a year ago while, the NPM improved by 223 bps y-o-y to 21.26% as against 19.03% reported a year ago

Company’s Diluted EPS grew by around 17.77%, to Rs. 2.32/ share

Looking forward, the company business might face some
problem due to below than average monsoon rains. The poor monsoon is likely to put pressure on the prices of certain commodities which would indeed also result in lower disposable income for farmers. As company has significant market share in Rural India, the sales and profitability might be impacted going forward

To see full report: ITC LIMITED


QE Jun-09 Earnings Season Thus Far

Quick Comment – Earnings Better than MS Analysts’ Expectations: So far, 38 companies in our coverage universe have reported results. Aggregate earnings are up 3% YoY (ex-energy up 22%) against our analysts' expectation of 4% fall (ex-energy up 14%). In terms of surprise breadth, 21 of these 38 companies have reported net profit that exceeded expectations by 5% or more, while 10 trailed our expectations by 5% or less (see page 2 for details by company. Fifteen companies in the BSE Sensex have reported flat earnings ahead of MS analysts’ expectations of 8% fall. Ex-energy, aggregate earnings for Sensex companies is up 23% against MS analysts’ expectations of 13% growth. At the sector level, consumer discretionary and materials are the key positive surprises. Healthcare is the best-performing sector in terms of profit growth, followed by financials while materials is the worst-performing sector thus far.

EBITDA Margins Rise: EBITDA margins for the sample are up 2.6ppt. Excluding the energy sector, EBITDA margins are up 2.3ppt. Five sectors have seen margin expansion with financials leading the list. Revenuegrowth for the sample is down 1% YoY (ex-energy, up
16%) whereas for the Sensex companies, it is down 5% (ex-energy, up 16%).

Broader Market Earnings Lead the Narrow Market: So far, 629 companies (accounting for almost 50% of India’s market capitalization) have reported. Revenue growth for the broad market is flat, while ex-energy revenue is up 11%. Aggregate earnings for the broad market are up 9% YoY (up 16% ex-energy). Of these 629 companies, 17% or 107 reported losses for the
quarter while 25% or 160 companies have reported earnings growth in excess of 50% for the quarter ended June 2009.

To see full report: INDIA STRATEGY


  • Pulse Track >> Monetary policy review
  • Stock Update >> Hindustan Unilever
  • Stock Update >> Grasim Industries
  • Stock Update >> Sanghvi Movers
  • Stock Update >> Orient Paper and Industries
  • Stock Update >> Punj Lloyd
  • Stock Update >> Bank of India
  • Stock Update >> Bank of Baroda
  • Stock Update >> Glenmark Pharmaceuticals
To see full report: INVESTOR'S EYE


Incentives to Boost Affordable Housing – Sentiment Positive, but Financial Gains Limited

Sops for affordable housing — The Finance Minister yesterday announced a few incentives to boost housing, in particular the affordable housing sector: 1) 1% interest subsidy for 1-yr on housing loans up to Rs1m for properties worth < Rs2m; 2) tax holiday u/s 80IB (10) for developers on projects approved by local authorities between 1st Apr’07 to 31st Mar’08, provided these are completed before 31st Mar’2012 – more an extension of the holiday provided early on for projects approved before Mar’07 and completed before Mar’10 for houses of 1000 sf built up area within 25km of municipal limits of big cities and 1500 sf in other cities.

What does this mean for the sector? — 1) Renewed focus towards low-cost housing; 2) increased supply of affordable homes as most developers re-configure their projects; and 3) Higher sales volumes; however near-term profitability will be under pressure – as low-cost housing is a low margin (18-23%) business compared to current avg. housing margins of 28-35%.

Sentiment positive, but financial gains limited— We view these initiatives as sentiment positive. However, the financial impact is likely to be limited as – 1) subsidy is nominal and benefit is available only for a year; 2) its difficult to quantify the gains from tax holiday for developers given lack of details on no. of projects eligible for these benefits – but given the slow down had largely set-in during this period of Apr’07-Mar’08, the no. of projects approved/launched were low during this period.

Likely beneficiaries — Prima facie, we believe interest subsidy would benefit smaller developers, with residential bias in tier-II and tier-III cities. However DLF, Unitech and few small developers, could benefit from a tax holiday on a few of their launches in FY08 (Figure 1) subject to necessary approval/completion conditions.

To see full report: INDIA PROPERTY


Sell: 1Q10 Results – Rating Downgrade Eclipses a Good Quarter

Profits up 26%, led by fees and margin expansion — IDFC's 1Q10 profits were in-line with estimates (up 26% yoy) driven by: a) 40bps NIM expansion to about 350bps, a historically high level, aided by low wholesale borrowing costs; and b) pickup in fee income levels. Fundamentally, a strong returns quarter (but with no growth) and overshadowed by the rating downgrade by Crisil.

Credit downgrades IDFC to AA+ (stable) from AAA — This was an overhang (Crisil-key rating agency, had forewarned), appears harsh and IDFC does have two other AAA ratings, but will probably hurt. It could hurt funding costs (spreads have widened 10-15bps), in cases access to some investors and possibly market standing. While the rating downgrade overhang is now possibly over (and in the price), it could pressure IDFC’s wholesale funded business model, particularly in a rising rate/tight liquidity environment (which is a risk).

The quarter itself was a strong one — 1Q10 was fundamentally a strong quarter (one of IDFC’s best) with higher margins, strong fee growth and stable asset quality. Earnings mix has also improved – greater annuity fees, reduced dependence on risk business and sub 5x leverage. The only offset – no meaningful growth, which management suggests should be addressed next quarter on (suggests industry level growth – we believe could lag).

Leverage to liquidity, capital markets is showing — IDFC's wholesale funding, asset management and capital market linked revenue stream shows through in this quarter's strong performance – we expect it to remain a key stock driver over the near term (as also the key risk). Maintain Sell (3M).

To see full report: IDFC


Incorporated in 1931, Federal Bank is an old private-sector bank with a dominant presence in the southern state of Kerala. It operates 617 branches and over 630 ATMs spread across 24 states. It has a customer base of over 5 mn, concentrated in Kerala and is a key player in servicing Kerala based middle-east NRI community. At present it is the fifth largest private sector bank in terms of assets (asset size of Rs 388.5 bn as on March 31, 09).


Highest CRAR to Enable Sustainable and Quality Asset Growth
Federal bank had the highest Capital to Risk Weighted Assets (CRAR) ratio in the industry at 20.14%, with tier I capital ratio at 17.5% as on March 31, 09. As a result of a high tier I capital ratio we do not see equity dilution in immediate future. Apart from this, in case of a faster than expected economic recovery the excess cash on the bank’s balance sheet can be
deployed to ramp up its business activities. As per our conservative estimates, the bank’s business is expected to grow at a CAGR of 22.6% over FY09-FY11 with advances and deposits estimated to grow at a CAGR of 22.2% and 22.9% respectively during the same period.

Asset Mix Tilted Towards High Yielding Retail and SME Advances
The advances mix of Federal Bank has traditionally been tilted towards high yielding retail and SME advances (constitute around 63% of its loan book) as a result of which it has had higher than industry average Net Interest Margins (NIM) of 3.4-4.3% over FY03-FY09. It had second
highest NIMs in the industry at 4.3% in FY 09.

Good Low Cost Deposit Base at 34% Another Key Driver of NIMs
The bank’s low cost deposit base including its CASA deposits and low
cost NRI term deposits stood at 33.5% as on March 31, 09. In our view the bank’s expanding distribution network (bank expected to add over 170 branches and 220 ATMs during FY09-FY11) and a growing retail liability and low cost NRI deposit base will help the bank maintain a lower cost of funds at 5.8-5.9% and Net Interest margin (NIM) at 3.75- 8% during FY09-FY11.

To see full report: FEDERAL BANK


Investment Argument

Company produces PET films and Engineering plastic, for which domestic demand is growing at more than 15% p.a. Company’s utilization levels are currently more than 100% for PET film and around 100% for engineering plastic. Thus to meet growing demand, company is planning to expand capacity of PET film from 30,000 Mts to 57,000 Mts by the
end of 2010 and also planning to raise Engineering plastic capacity from 3,600Mts to 11,000Mts. Expansion is mostly funded from internal accruals and debt. (No equity dilution is contemplated).

Company also has more than matching capacity of PET chips, which is and intermediate product. Last year performance was affected due to volatility and high prices of the raw material like PTA and MEG. But now the raw material prices have stabilized and better realizations are leading to healthy margins for the company. Better performance is expected to continue as the realizations are better and the input costs have come down. Most of the sales are to the domestic markets [75%] catering to FMCG segment where demand is strong at 20-22% [and least affected by any slowdown], rest is exported [25%].

Outlook for the current year and the coming year looks promising with company expected to achieve sales close to 450 crores and profit after tax close to 50 crores for 2010.

Current years earnings could be close to Rs 9 and thus discounting present stock price by around 2.4X and offers scope for appreciation looking to growth potential.

To see full report: ESTER INDUSTRIES


Investment Rationale

Company's current working is good [with excellent Q-1 results] and its likely to perform much better in coming years.

Company is a leading Ductile Iron pipes and cast iron pipe manufacturing company. It also offers turnkey solutions in water transport and sewage management. The demand for ductile pipes comes from Govt/ Govt sponsored projects for transportation of potable water and for cast iron pipes - from irrigation / sewage disposal projects. Demand for ductile pipes is growing very fast looking to growing focus of the Govt to provide potable water not only in India but also across Asia and other developing countries. Company is fully integrated
backward, with pig iron plant, sinter plant and captive power plant, as also iron ore & coal mining rights. This kind of integration leads to superior margins for company.

It is thus very cost efficient and large player earning attractive margins. Business is mostly dependent on municipal/Govt orders and is thus immune to economic/business cycle. Under - Accelerated Rural Water Supply Program and Pradhan Mantri Gramodaya Yojana - Rural Drinking Water; significant annual demand for projects and products [pipes] is generated on sustained basis. Through an SPV [wherein company holds 40% stake] it is also setting up a 2.2 million integrated steel plant, fully backed by required iron ore & coal mines. This will
come on stream by the end of 2010. Captive mining of Ore and coal will also be operational by the same time or slightly latter, so cost of production will be always under tight control.

RISK: The key concern is Forex derivatives and forex losses. With rupee improving sharply, most of these concerns could be taken care of.

RECOMMENDATION: Buy with price target of Rs 45 in around three months. Long term investors can look for still better returns.

To see full report: ELECTRO STEEL CASTINGS


The issue of exchange-rate policy for emerging countries is not resolved

The recent period has demonstrated that there is no “right choice" in the currently available "menu" of exchange-rate policies for emerging countries:

countries that chose flexible exchange rates were initially faced with an excessive appreciation in their exchange rates due to capital inflows, and then a fall in the exchange rate due to drastic capital outflows (and will perhaps now be faced with a return of excessive

countries that chose pegging (in one form or another - peg, currency board, etc.) of their exchange rates to a major currency were faced with inflation and excessive credit growth due to the unsuitable nature - for these countries - of the monetary policy conducted for the dollar or the euro; but also an enormous risk linked to the development of foreign-currency borrowing when exchange-rate stability called for high domestic interest rates, and not interest rates aligned on the low level of dollar and euro interest rates.

What are the solutions:
monetary unification? But this is difficult to imagine for countries with price and wage levels that differ significantly from those prevailing in the United States or the euro zone;

exchange-rate flexibility with restrictions on speculative capital flows seems to be the most robust system.

To see full report: FLASH ECONOMICS


Bank of India [BOI] operates in three business segments: Treasury Operations, Wholesale
Banking and Retail Banking. The bank has presence in 4 continents and 15 countries covering
financial centers, such as London, New York, Paris, Tokyo, Singapore and Hong Kong.

· Bank of India’s strong pricing power coupled with the benefit of recent CRR cuts has helped the bank to improve its NIMs. Yield on global advances has also improved by 40bps at 8.9%.

· Bank of India’s international loan book grew 23% in FY09 to 302bn [16% of loan book]. Operating revenue from international operations grew marginally by 1% to Rs 21bn on the back of slowdown of the global economy.

· The management is targeting a 22% loan growth and 20% deposit growth for FY10 while expecting the short term NIMs at 3% as there is pressure on spreads due to high cost of funds.

· The bank’s capital adequacy ratio currently is 13.01% where as NIM has been consistent
over the years at 2.4%. It has a very strong asset base of 2,255bn. The management expects global business mix of around 4000bn for FY 2009-10.

Bank of India was found in 1906 and had got nationalized in 1969. With a very minimal start, the bank today has extensive branch network spread across the country to cater the needs of the people and occupies a premier position among the nationalized banks in terms of asset size & business volume. The bank has premiered in opening branches abroad and has a notable presence in various countries. The Bank has 3,021 branches in India spread over all states/ union territories including 136 specialized branches. International business now contributes ~17.82% to overall business of the bank. The bank provides a host of commercial banking products including housing loans, loans to SMEs, personal loans etc.

To see full report: BOI


Rubber led margin expansion…

Balkrishna Industries reported meagre 1.9% to Rs 302.9 crore for Q1FY10 as against our expectation of Rs 330 crore. The growth remain muted due to cowed demand as volume fell by 4% but thanks to rupee depreciation, realization were at Rs 160,000 per tonne Vs Rs 140,750 per tonne in Q1FY09 restricting the fall in revenues. The softening of rubber prices brought substantial expansion in EBITDA margins; EBITDA margin was at 29.3% from 23.9% in Q1FY08. The quarter reported fall in interest outgo as well as foreign exchange gain of Rs 15. 9 crore (loss of Rs 30.6 crore), muted the adverse impact of rising depreciation, net profit surged 264% to Rs 52.3 crore.

Incorporating the improved realization as well as lower rubber prices, we are revising our financial estimates for FY10 and FY11. Accordingly net sales are revised from Rs 1,281.7 crore and Rs 1,276.8 crore to Rs 1.299.2 crore and Rs 1,497.2 crore for FY10E and FY11E respectively. Net profit also revised from Rs 71.4 crore and Rs 79.8 crore for the same period to Rs 194.7 crore and Rs 213.4 crore respectively.

Remarkable improvement in EBITDA margins as well as favourable rupee dollar/ Euro currency movement would help company improve its bottomline in coming year even though topline growth to remain subdued due to slowing global demand. According to revised earning estimates, we are revising our target price to Rs 402 (4x FY10E, cautiously lower PE multiple as currency movement has crucial role to play) and rating to PERFORMER. At CMP of Rs 344, the stock is trading at 3.4x and 3.1x its FY10E and FY11E EPS.




We have generally become more constructive on the global investment outlook. This week we address the increasingly bullish outlook from our economists and strategists. With this changing stance in mind, our US economist David Greenlaw talks about the potential for upside surprises in the third quarter and other economic news. Qing Wang, our China economist, touches upon continued upgrades to his numbers. And finally, Jonathan Garner, our Asia/GEMs equity strategist, discusses his more upbeat outlook for Emerging Markets, especially China.

— Greg Peters


Pickup in Motor-Vehicle Output Points to Potential Upside for 3Q GDP

Rethinking our haircut on motor-vehicle impact to 3Q GDP. When Dick Berner and I recently bumped up our GDP growth estimate for 3Q from 0.0% to 1.0% and cut our 4Q number by 0.5 percentage points, to +1.5%, we cited a new assumption for motor vehicle production as a source for much of the forecast change. For some time, we have been aware of automaker plans to build a lot of vehicles in 3Q. However, we were skeptical for various reasons. Thus, we applied a haircut to the impact implied by strict adherence to published assembly plans and assumed about a 2 percentage point add-on to 3Q GDP (still very large by historical standards).

We now think the impact could be even larger for three reasons: (1) Data we received last week indicated a June overbuild — the first in quite a while. This is consistent with a ramping up of output heading into 3Q. (2) Recent industry reports suggest that fleet sales may be poised to rise over the near term. And (3) data for the first few weeks of July suggest that production is running close to the original plan.

Outlook for 3Q to be revisited. At face value, the auto industry’s latest assembly schedules imply a 3Q add-on to GDP of nearly 6 percentage points — which would represent an all-time record by a very wide margin. So we believe there may be some meaningful upside risk to our +1.5% estimate for 3Q GDP. Could GDP be +3% or even +4% in the current quarter? Possibly, but because of the potential noise in the data, we're not changing our official forecast. We will revisit the issue in another week or two when more information is available.

Would a strong 3Q borrow from 4Q? The answer depends on the automotive sales picture in the next few months. We believe that inventory levels across the industry are close to normal at this point. And near-term production plans appear to be consistent with about an 11 million unit annualized sales pace. If sales are close to that rate, then motor vehicle output can probably be sustained at the 3Q pace for a while longer. Thus, we could see a neutral contribution for auto output in 4Q. However, if sales disappoint over the next few months, then production is likely to be scaled back later this year.

To see full report: STRATEGY FORUM


Sitting on a goldmine…

PTC, India’s largest power trading solutions company, is strategically poised to take advantage of the upcoming opportunities in the evolving power arena. Ruled by deficit the demand for power trading continues to grow and PTC which enjoys 46.5% market share has traded over 13,825
MU in FY09 (a growth of ~40%) maintaining a mix of 56% short term trades (STT) and 44% long term trades (LTT). PTC is set to benefit with significant value unlocking from its investment book. With stakes in several big ticket power ventures, PTC is likely to add further muscle to its existing position. We initiate coverage on the stock with an OUTPERFORMER rating.

Power-Full growth on the horizon for Power trading market
Power trading continues to grow in the backdrop of power deficit
scenario (which stands at 11.1% for FY09) and the expanding merchant capacities. Power trading has grown at a CAGR (FY02-FY09) of 52%and is expected to cloak a growth of 20% for the next 2 years. The development of energy exchanges, materialization of Long Term Power Purchase Agreements (LTPPA) should accentuate the growth prospects. PTC with the first mover advantage initiated ~11,200 MW of PPA which should aid it in reporting a CAGR (FY08-13E) volume growth of 37.7% from 9,889 MU in FY08 to 48,937 MU by FY13E.

Unlocking value in PTC Financial Services (PFS) through IPO
PFS holds eminent assets like IEX and stakes in 10 other power related
projects (under execution at different stages) in its portfolio. In our bull case evaluation, we expect that the stake of PFS will be worth close to Rs 45 per share for PTC. With PTC and other reputed investment banks being the promoters of PFS, we derive comfort in believing that there will be a significant value unlocking through the expected IPO.

At the current market price of Rs 82, the stock is trading at P/BV of 1.2x in FY09 and 1.2x in FY10E. With the visibility emerging on big ticket projects like Teesta HEP alongwith the probable unlocking of significant value, we believe that stock is undervalued and thus we initiate the coverage on the stock with an OUTPERFORMER rating.

To see full report: PTC INDIA


Ambuja Ltd. declared its second quarter result today. The result came below the street expectations The sales were around 2.0% below Bloomberg consensus estimate, whereas the net profit was around 12.5% below, which was mainly on account of higher input cost

The net sales for the quarter ended June 09 grew by 18.16% to Rs. 1,847.41 cr, backed by higher sales volumes and better price realization

The average realization per bag (50kg) increased by 8.31% y-o-y to Rs. 192.44 mainly on account of price hike taken in March and April 2009 while, the volume increased by 9.09% y-o-y to 4.8 million tones

Though driven by benefits of prices nand higher sales volume, EBIDTA for the quarter improved by only 9.95% (it is way below the growth reported by peer companies) y-o-y to Rs. 520.77 cr while its EBIDTA margins stood at 27.58% registering a decline of 250 basis points (bps)

The consumption of raw material as a percentage of net sales increased by 537 bps Rs. 306.67 cr while the power and fuel cost remain the same as reported a year ago

Company’s interest expense declined by 8.76% y-o-y to a level of Rs. 5.21 cr while the other income declined by 21.04% y-o-y to Rs. 28.11 cr

Company’s Net Profit for the quarter ended June 09 cannot be compared as during the same quarter a year ago the company reported an exceptional gain of Rs. 314.19 cr

The company declared an interim dividend of Rs. 1.2/share

Significant new capacity is expected to be added in the coming months, demand, led by housing, retail and infrastructure sectors is expected to remain firm. However, prices of major inputs for
the cement Industry, including coal, may rebound from recent lows because of an anticipated uptrend in the commodity business cycle. Thus, the profitability of the companies might be
impacted going forward.

To see full report: AMBUJA CEMENT

Wednesday, July 29, 2009


20-HSMA violated

Markets on July 29, 2009: Dragon eclipses bulls

After a poor start the Indian indices saw a massive selloff in morning, as Asian markets especially that of China witnessed heavy selling. However, in afternoon it recovered a part of morning losses. Finally the Sensex ended 158 points lower, while Nifty was 50 points down at closing bell. Mid-caps and small-caps also closed lower with the BSE MICAP BSE SMLCAP closing 0.9% and 1.4% down respectively. On the daily chart, after today’s selloff we have a negative crossover in stochastic oscillator, which is not a good sign for the market. Further if the sell in stochastic is accompanied by the negative crossover in KST, the probability of the slide to deepen further may increase. On the hourly chart, the rising wedge finally saw a downside break down with 20-hourly simple moving average (20-HSMA) getting violated. Now the next support can be expected around 20-day simply moving average packed near 4350. Bears with 837 declines and 417 advances dominated the market breadth.

The hourly KST sank below the zero line. Our short-term bias is down for the target of 4339 with the reversal pegged at 4600. However our mid-term bias is still up for the target of 5000 with reversal nailed at 4200.

Selling was seen in realty, consumer durables, metal and fast moving consumer goods sectors. From the 30 stocks of Sensex, Tata Consultancy Services (up 4%) and Tata Power (up 3%) led the pack of gainers, while DLF (down 7%), Tata Steel (down 6%) and Sterlite Industries (down
6%) led the pack of losers.

To see full report: EAGLE EYE 300709

>Spot gold extends fall on dollar strength

London - Spot gold extended losses in Europe Wednesday due to a stronger U.S. dollar against the euro, and traders said with volumes low and demand down the metal could fall further.

"For the time being we see limited near term upside to gold prices, with equity markets weakening leading to strengthening of the dollar which is a negative for gold," said investment bank Fairfax IS.

Gold fell sharply Tuesday after weaker than expected U.S. consumer confidence sparked selling across commodities. That selling could carry on and gold may test $925 a troy ounce, said a London-based trader.

"The speculative line of least resistance appears to be emerging back to the downside," the trader said.

At 0923 GMT spot gold is trading at $934.17/oz, down 0.3% from Tuesday's close.

The rest of the precious metals traded down too. Spot silver was at $13.54/oz, down 1.1%. Spot platinum was at $1,184.50/oz, down 0.7%. Spot palladium was at $254.50/oz, down 0.8%.

However, longer term the metal remains supported due to the shortage of major new mine projects and the potential for inflation from stimulus packages in U.S. dollar terms once Western economies begin to recover, Fairfax said.

The risk of a strike at South African gold operations is declining.

South Africa's largest gold producers signed a two-year wage agreement with unions. The deal replaces contracts that expired at the end of June and averts a threatened strike.


>Crude falls on CFTC, weak demand concerns

Singapore - Crude futures fell by more than $1 a barrel in Asia Wednesday as uncertainty over potential curbs on speculative trades and weak demand concerns resurfaced.

Losses in China's equity markets widened in late afternoon trading, as mix of bad news about profits and weak commodity prices sparked a broad sell-off in local bourses.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in September hovered near one-week low of $65.40 a barrel. It traded at $65.89 a barrel at 0247 GMT, down $1.33 in the Globex electronic session.

September Brent crude on London's ICE Futures exchange fell $1.07 to $68.81 a barrel.

The chairman of the Commodity Futures Trading Commission Tuesday said he believes the agency must "seriously consider" setting strict limits on traders who place bets on energy contracts.

The Wall Street Journal said that the CFTC would in August reverse the findings of last year's study, more closely linking speculators to the rise in prices.

"The uncertainty related to this announcement is really impacting on market activity at the moment," said Yingxi Yu, analyst at Barclays Capital. "Until we get more clarity from the hearing, the market is likely to find a lot of downside pressure."

Demand concerns resurfaced as U.S. consumer confidence for July was weaker than expected.

Comments from BP PLC (BP) Chief Executive Tony Hayward Tuesday also suggested that oil prices are up on speculation - not necessarily on fundamentals, Mike Sander from Sander Capital Advisors said in a note.

U.S. crude-oil inventory data due Wednesday from the Department of Energy may shed more light.

Crude-oil inventories are expected to fall by 400,000 barrels, according to the mean of seven forecasts in a Dow Jones Newswires survey of analysts.

Gasoline inventories are seen decreasing by 400,000 barrels while stocks of distillates, which include heating oil and diesel, are expected to rise by 500,000 barrels.

Barcap's Yu doesn't expect the data to have a large impact on crude prices.

If the stocks data are positive, showing a fall in crude, but a rise in products, the response may be muted, Yu said, but the reverse will add to the downside.

Fundamentals aside, some analysts called Tuesday's sell-off a technical correction after a nearly three-week rally.

"It may be in for one more push higher," said Jonathan Kornafel, director for Asia at Hudson Capital Energy in Singapore.

September Brent crude on London's ICE Futures exchange fell 44 cents to $69.44 a barrel.

At 0249 GMT, oil product futures were lower.

Nymex reformulated gasoline blendstock for August - the benchmark gasoline contract - fell 162 points to 174.85 cents a gallon, while August heating oil traded at 189 cents, 206 points lower.

ICE gasoil for August changed hands at $561.75 a metric ton, down $3 from Tuesday's settlement.



Upgrade to Buy on Strong Order Booking

Upgrade to Buy (1M) from Sell (3M) — After losses of Rs2.3bn/tepid backlog of Rs208bn up 6% YoY in FY09, Punj Lloyd started FY10 with ~ Rs94bn of orders in 3 months. Following a lull in Jan-Feb, bidding activity has picked up, and the company has identified US$30bn+ of projects for the next 2 years.

Underlying business is more robust — Punj Lloyd’s skill sets have not translated into superior profitability like that of L&T, and the answer lies in Simon Carves. Removing Simon Carves from Punj Lloyd suggests that the business is delivering 5.5-5.9% PAT margins (upper end of mid cap E&C). Punj Lloyd needs to restructure Simon Carves and integrate the same fast.

Earnings revised upwards — By 2-7% over FY10E-12E on higher inflows, sales and margins. Rs701mn of qualifications (~ 12% PBT) continue to be a worry.

Target price revised up to Rs263 — From Rs217 earlier to factor in: (1) our earnings revision, (2) hike in target P/E multiple to 17x (from 15x earlier) post robust order inflows in 1QFY10 & (3) value of shipyard at 50% discount to book value. Our target multiple is pegged at a small premium to mid cap E&C peers like IVRCL at 16x and Nagarjuna at 15x and set at ~ 23% discount to L&T.

Big international bias — ~ 80% of Punj Lloyd’s business comes from outside India. Big international exposure implies jobs are being picked up in a more competitive environment, and there could be worries on profitability. On the positive side, it also implies with time the scale and ability to counter competition can be transferred to India to take on the formidable L&T.

To see full report: PUNJ LLOYD


Sell: Disappointing 1Q Results

1Q well below estimates — PLNG’s 1Q PAT came in at Rs1.03bn, down 2.2% YoY and significantly below our expectations. Despite volumes increasing QoQ from 82 to 99 TBTUs as was expected, EBITDA did not grow correspondingly and in fact registered a sharp decline (46.8% QoQ, 5.2% YoY) due to losses made on spot cargoes.

Losses on spot cargoes drive down profitability — Petronet bought and regassified c5 spot cargoes during the quarter, which contributed to the QoQ increase in volumes. Though global LNG prices were down sharply in the quarter due to the economic slowdown, Petronet had probably contracted these at higher prices and was unsuccessful in passing the prices to consumers when prices fell. This was likely further exacerbated by the commencement of KG gas which resulted in consumers shifting away from spot gas. This is a trend that we expect will likely continue over the coming few quarters and is the main thesis our Sell recommendation is premised on.

Maintain Sell — Given total capacity of 17.5 MMTPA after expansion, PLNG would have to sign more long-term contracts or continue its reliance on spot cargoes to improve its utilization levels (we factor total long-term plus spot volumes of 14.1 MMTPA in the long-term in our DCF). Spot volumes could be under risk with commencement of KG gas and if LNG prices pick up from current levels. Besides, robust long-term LNG outlook increases uncertainty for the company. Power plans, though interesting, are still a few years away and would be contingent on competitive pricing of long-term LNG. At current prices, the stock appears fully valued. W maintain our Sell (3H) rating.

To see full report: PETRONET LNG


Challenging FY10E; Expensive Valuations; Downgrade to Sell

Raising target, but downgrading to Sell — We increase our target to Rs414 (from Rs211), based on a P/E of 16x Sept 10E (vs. 8x FY10E earlier) – a 27% discount to BHEL given lower visibility into revenues. Thermax, up ~134% YTD, is at a P/E of 19x FY10E, factoring in a broader economic revival. We believe FY10E could remain challenging and downgrade the stock from Buy to Sell.

1Q FY10 revenues down 25% yoy; PAT declines 27% yoy, worse than expected — The revenue decline was due to lower order intake in 3Q FY09. Margin improvement, driven by cost-cutting initiatives, was a positive surprise and commendable given the revenue decline. Thermax’s order book at Rs32bn is up 22% yoy and 11.4% qoq – positive as a slowdown in orders was an overhang on the stock.

Management expects decline in FY10E revenues, pickup in 2H FY10E — FY10 revenues are likely to decelerate due to lower order intake in FY09. Thermax expects FY10 order inflows to grow marginally on a recovering economy, especially in 2H FY10E. Food processing, agro-based industries, distilleries & cement sectors are picking up, while the metal sector remains subdued.

Cutting EPS for FY10E by 16% — We factor in lower revenues given order renegotiations /cancellations, and expect order inflows to pick up meaningfully only in 2H FY10E/1H FY11E, which would lower revenue booking in the current year given the short-cycle nature of orders of its product business.

Early beneficiary of recovery, but order inflows have to grow meaningfully While there has been some pickup in order inflows, we believe it has to pick up strongly for the stock to re-rate from current levels. Also, while 1Q FY10E order book is up YoY, at end-2Q FY10E it could be flat/negative given the high-base effect (adjusted for cancelled orders).

To see full report: THERMAX


1Q10 Results: Not A Margin(al) Impact

1Q10 profits up 94% YoY, but NIMs under significant pressure — Union's profits were 28% above estimates led by higher fee growth and trading gains. Growth remained strong and management is hopeful of maintaining stable asset quality. The key pressure point of the quarter was, however, a sharp 50bps drop in NIMs, which overshadows gains in the quarter.

Sharp margin pressure overshadows fee growth and support from bond gains — Union's NIMs declined 50bps QoQ to 230bps, sharply ahead of 10-15bps declines amongst peers. High growth in high-cost deposits and declining loan yields resulted in margin pressure. Management suggests repricing of deposits in 2Q/3Q and targets FY10 NIMs of 300bps (which looks ambitious, in our view). Fee growth of 47% YoY was strong and reverses the previous quarter's slower growth. A jump in bond portfolio gains further boosted profits in 1Q10.

Growth at a strong clip, with stable asset quality — Loan growth continued at 27% YoY, spread well amongst various segments with retail and agriculture growing faster. Management suggests credit demand is picking up and is hopeful of 25% growth in FY10 (also targets 500 new branches). Deposit growth at 34% is relatively high, mix has deteriorated to 30% CASA (34% in
4Q09) and Union has paid the price in NIMs. While management is keen to grow at a fair clip, the challenge is to improve NIMs.

Quality bank, but valuations leave little room for disappointment — Union still has amongst the best fee growth, cost ratios and asset quality relative to peers. However, 1.2x 10E P/BV valuation leaves little room for further disappointment.

To see full report: UNION BANK OF INDIA


Indian ABS Performance Report: July 2009

This report provides analysis on the performance of the 21 Indian ABS transactions currently under surveillance. The key performance trends for each individual asset type are highlighted and detailed performance data for each Fitch‐rated transaction are provided. The ongoing analysis of the performance of these transactions forms an essential part of Fitch’s rating process. Fitch Ratings’ surveillance team analyses both the structure and the receivables’ performance to evaluate the transaction in comparison to the agency’s initial expectations and to
determine future trends.

As anticipated in the Fitch Outlook report entitled “Indian Structured Finance report‐2008 Review and 2009 Outlook”, dated 4 February 2009, the performance of most asset classes has deteriorated. In particular, performance measures, such as current collection efficiency and overdue collection efficiency, have worsened. Fitch notes that the relative decline in overdue collection efficiency has been higher than the decline in current collection efficiency. However, given the level of amortisation and available credit enhancement cover ‐ in the range of 4x and 6x ‐ the ratings Outlook for the majority of the rated series is Stable.

Performance by Asset Class

Commercial Vehicle Loans
Fitch currently monitors the performance of 15 ABS transactions backed by commercial vehicle (CV) loans. The collection efficiency of CV loans has shown a declining trend since July 2008. The performance of heavy commercial vehicle (HCV) and medium heavy commercial Vehicle (MHCV) loans has been more susceptible to the recent downturn than other sub‐categories of CV, such as light commercial vehicles (LCV) and tractors.

Retail Auto
Fitch currently monitors the performance of three ABS transactions backed by auto loans (see pages 29 to 34). All three transactions had amortised significantly by Q308, to the extent that the deterioration in current collection efficiency of these transactions has been limited; in contrast, the overdue collection efficiency has deteriorated very significantly and is currently around 6.0%.

To see full report: STRUCTURED FINANCE


RCOM-Etisalat Deal – First Visibility Of Towerco Value

Tower deal is a positive — RCOM today announced Etisalat DB (Swan Telecom) as the first external tenant on its towerco (RTIL). We believe this is a material positive for RCOM given: 1) it helps increase credibility around RCOM’s towerco value which till now had only captive tenancy (GSM + CDMA), and 2) capex recovery at 13-14% is also higher than our base case for RTIL (12.5%) and the industry (~10%).

Etisalat’s base load goes to RTIL — As per the company, the deal involves Etisalat becoming tenant on 30k of RCOM’s towers across 15 circles over next 18-21 months. As a result, tenancy could be >2.0x by 2011 (1.6x being captive) vs. our long-term assumption of 2.3x. The deal, while not exclusive, gives first preference to RTIL for the proposed cell site locations.

Deal terms ensure good return potential — Management claims incremental revenue potential of Rs100bn over 10 years. On a base of 30k towers, assuming marginal opex increase, capex recovery is estimated at 13-14%. Though high capex recovery could partly be attributed to inclusion of backhaul in the deal (~10-15% of capex), it is still materially higher vis-à-vis our industry estimates (i.e. Indus/Bharti Infratel). At first glance, based on the sharing targets and capex recovery, we estimate towerco could add up to Rs30/share to RCOM’s value.

Trends to watch — 1) Ability to attract other tenants at 13-14% capex recovery given its adverse impact on a new entrant’s cost structure, and 2) ability to offer deeper coverage – 50k towers vs. 100k of Indus.

To see full report: RCOM


Sell: Strong 1Q, But Can This Sharing Formula Continue?

Strong 1Q driven by low subsidy — 1QFY10 PAT at Rs48.5bn was above expectations, primarily on account of the lower subsidy burden driving higher net realisations and also lower other expenses. Even though gas sales recovered to 5.1bcm from the slight dip seen in 4Q09, crude sales remain depressed at 5.45MMT vs. FY09 average sales of 5.72MMT. Dry well expense declined from Rs18.6bn in 4Q09 to Rs10.7bn in 1QFY10, but remains high on a yoy basis (Rs5.5bn) due to a structural increase in costs and higher exploration intensity.

Subsidy sharing only on auto fuels — ONGC’s subsidy burden of Rs4.29bn was in-line with the oil ministry’s assertion of upstream sharing for under-recoveries only on auto-fuels. This burden translates into a subsidy discount of US$2.3/bbl, resulting in healthy net realisations on own crude of US$60.6/bbl. While the government has followed up intent with action, it is difficult to extrapolate this for the full year.

Government policy continues to be a risk — Even though Petmin has stuck to upstream sharing losses only on auto-fuels in 1Q, the Budget did not make requisite allocations to confirm that. Given that net under-recovery of Rs200bn (gross loss on LPG/SKO of Rs300bn minus oil bonds of Rs100bn) will be too much for the OMCs to bear (esp. when GRMs are likely to stay depressed), we see the risk on ONGC sharing the LPG/SKO subsidy as well is very much intact.

Maintain Sell, lacks triggers — ONGC currently trades at 12x Sept-10E P/E, the top end of its historical 7-12x trading band. Any move by the government to fully deregulate auto fuels could take time as it has recently constituted an expert committee for pricing recos. We maintain our Sell (3M) rating.

To see full report: ONGC


To see full report: ONMOBILE GLOBAL LTD


“ Increased asset base lifts up revenue “

For Q1FY2010, Garware Offshore Services (GOSL) reported 106% y-o-y growth in revenues to Rs571 million as compared to Rs277 million in Q1FY2009. Increase in revenue was due to addition of 5 assets during the end of FY2009, which increased the revenue days.

The Operating Profit Margin (OPM) of the company declined by 400 basis points y-o-y to 56% in Q1FY2010. The major reason for decline in operating margin is decline in stock in trade. Operating profit by 91% y-o-y to Rs319 million in Q1FY2010.

Interest expenses for Q1FY2010 showed a massive jump of 120% y-o-y to
Rs89 million as compared to Rs40 million in Q1FY2009. This increase in debt is mainly attributable to addition of vessels. Depreciation increased by 95% y-o-y in Q1FY2010 to Rs77 million. After deducting tax of Rs1.2 million, PAT witnessed a growth of 74% y-o-y in Q1FY2010 to Rs154 million. Moreover, GOSL gained around Rs11 million in gain on sale of vessels and lost Rs155 million in foreign exchange in Q1FY2009, after giving effects to the extraordinary items there was net loss of Rs55 million in Q1FY2009.

Vessel deliveries are expected to be on time
In FY2010, the 2 vessels (a 60 Tons PSV and a 300 Tons Construction Barge) are expected to join the fleet by middle of the year (on BBC basis) are expected to join as per the schedule.

No dry dockings in Q1FY2010
In Q1FY2010, there was no dry docking activity carried out. In Q2FY2010, 1 PSV is expected to go on dry docking (M.V Kailash), where the amount is expected to be negligible.

In FY2010, Apart from 1 PSV (M.V Everest, which was about to its trip to North Sea) all other vessels were working and utilizations was close to 100%. M.V Everest has already reached to the North Sea and will start working in next couple of days. It will be working on spot.

The outlook for the offshore services sector remains positive as the prices of crude oil remains high above US$60, which is a positive indicator for Exploration and Production activities. Almost all the vessels of the company is employed for around 2 years provides revenue visibility for the company in such bad phase. At the CMP of Rs160, the stock is trading at around at a P/E of 7.0x its FY2010 estimated earnings, 5.5x its FY2011 earnings. We maintain our FY2010 revenue estimate of Rs2,390 million and PAT estimate of R541 million. Hence, we maintain our BUY rating on the stock with same target price of Rs227, which is an upside of around 42% from current levels.

To see full report: GOSL


Noble intent turns ignoble

Prima facie, the government’s new policy of replacing benefits from Section 80-IA of the Income-tax Act for gas-pipeline companies with Section 35AD is bound to backfire as it is both EPS- & NPV-detrimental. Although government intent was noble, it has turned ignoble for the industry; but, all is not lost. We expect the gas-transmission industry (Reliance Gas Transportation & Infrastructure-RGTIL, GAIL and Gujarat State Petronet-GSPL) to persuade the government to alter this policy, hence leading to gas-transmission companies spending aggressively on setting-up a wholly-entrenched network of pipelines in the country. Based on its current format, the policy would impact GAIL’s fair value Rs14/share. However, if the government allows losses on the pipeline business to offset profits from other businesses, it would improve GAIL’s fair value by Rs15/share. Another alternative for the government would be revamping the complete policy and making it positive for the industry.

Section 35AD detrimental to fair value of gas transmission firms. As per Section 35AD, effective tax rate on earnings from new gas pipeline investments would not change substantially as, even earlier under Section 80-IA, such companies were paying nil tax on new pipeline investments. Moreover, tax coverage due to depreciation post the first ten years is absent in the present policy. The new policy allows 100% depreciation in the first year of operations itself, which would lead to lower earnings in the long term. Our estimates suggest that companies would commence paying corporate tax rate (34%) from the ninth year of operations vis-à-vis eleventh year earlier. Moreover, companies would pay higher taxes from the ninth year of operations under Section 35AD vis-à-vis Section 80-IA, under which depreciation benefits would have continued.

Government intent positive, but policy impact negative. The new policy is set to be detrimental to the industry. However, we believe government intended to encourage investments in gas pipeline infrastructure and provide further incentives via introduction of Section 35AD. We believe that the policy turning negative is more a result of miscalculation by the government and expect sanity before the finance bill is passed. Also, we expect the government to modify policy terms and, at least, allow losses from the pipeline business to offset profits from other businesses. This move itself would lead to Section 35AD being NPV-positive for GAIL vis-à-vis benefits from Section 80-IA earlier.

GAIL – Most upsides priced-in. Post change in the subsidy-sharing formula (when we favoured GAIL as our top pick in the sector), the stock has run up 8.4% since July 2, ’09, significantly outperforming the Sensex 7.8%. The stock is currently trading at par with our fair value of Rs336/share. Even after including Rs15/share upside as per the new policy, the stock offers minimal 4.5% upside from current levels. We believe GAIL would not significantly outperform from here going forward.

ONGC, now our top pick in sector. Based on recent positive announcements (media reports suggesting that government would bear 100% cooking fuel underrecoveries in Q1FY10), we favour ONGC as our best bet in the large-cap O&G space. We value ONGC at Rs1,250/share, which offers 19.8% upside. Notably, the stock has corrected 10% post budget due to absence of provisioning by the government for cooking fuel under-recoveries in FY10. We expect the stock to
retrace this 10% decline over the short-term. In the long-term, impending Oil India (OIL) IPO would result in positive newsflow, which would boost ONGC’s stock price.

To see full report: OIL&GAS SECTOR


Orders drying out…

Maharashtra Seamless (MSL) performance for Q1FY10 was above our estimates on higher sales realisation and lower input costs. The seamless pipes reported higher profitability for the quarter whereas ERW pipes performance was affected on account of pressure on the realisations. The top line grew at 20.1% YoY whereas the bottom line grew at 8.2% YoY on flat EBITDA margins (slightly downwards) and lower other income. The slowdown in the capex in the oil & gas sector has led to the decline in order book position to Rs 401 crore.

Highlights for the quarter
MSL reported 20.1% YoY growth in sales to Rs 422.5 crore in Q1FY10 on higher realisations of the seamless pipes segment. MSL reported an EBITDA of Rs 99.3 crore in Q1FY10 against Rs 83 crore in Q1FY09. The EBITDA margins declined ~10bps YoY to 23.5% in Q1FY10. The
net profit of MSL grew 8.2% YoY to Rs 65.2 crore in Q1FY10 as against Rs 60.3 crore in Q1FY09.

The volatile crude oil prices have impacted the order-flow of tubular product companies like MSL. However, given the recovery in crude oil prices, order book of MSL would improve in quarters to come. The company trades at 3.2x FY11E EV/EBITDA. We rate the stock as a PERFORMER with a price target of Rs 296, 4x FY11E EV/EBITDA.

To see full report: MAHARASHTRA SEAMLESS


Fading lustre

JSW Steel’s (JSWS) Q1FY10 results were much below Street and I-Sec estimates (adjusting for extraordinary forex gain). Adjusted standalone net profits decreased 77% YoY to Rs1.04bn. The revenue increase was muted at 19% QoQ and 6% YoY, despite 61% YoY and 24.5% QoQ volume growth. This was mainly owing to 3% QoQ and 34% YoY drop in blended realisations. Margins improved sequentially to US$112/te from US$57/te on reduction in coking coal prices. Consolidated reported PAT declined 15% YoY. Adjusted for extraordinary income, consolidated reported loss was Rs198mn. Though the management has guided for strong 72% YoY volume upside in FY10, we believe significant volume risks exist owing to GP/GC exports and domestic market share gain in rebars and wire rods. We will shortly revisit our estimates. Maintain HOLD.

Margin outlook partially improves. Reduced coking coal prices to US$129/te from US$300/te have helped improve Q1FY10 EBITDA margin ~800bps QoQ to 18.6%. But margin was below Street estimates on high-cost coking coal & iron ore inventories. We expect margins to improve in Q2FY10 as the full impact of reduction in coking coal contract price comes in. Also, Rs2,000/te rise in HRC prices in Q2FY10 and reduced sales of semis (from 23.5% in Q1FY10) with the commissioning of the bloom caster in Vijaynagar will help boost margins. However, margin expansion will be partially offset by: i) increasing spot iron ore prices, currently at US$90/te, which will form ~40% of JSWS’ requirement in FY10E and ii) US$22/te impact coming from carry-over coking coal volumes.

Volumes, the key risk. JSWS continues with its niche positioning strategy of increasing incremental volumes from the recently completed 2.8mtpa expansion in Vijaynagar. While management has guided for 6.1mtpa sales in FY10, we estimate it to be 5.5-5.7mtpa. Monthly exports of value-added products at ~45,000tpa and monthly sales of domestic wire rods of ~55,000tpa are at risk. Also, sales from the US will be subdued. Pipe capacity in the US is currently running at 30% utilisation.

Upside priced in. JSWS continues to moderate its debt gearing, with consolidated and standalone D/E declining 6.7% QoQ and 5.6% QoQ to 1.67x and 1.17x respectively. The stock trades at FY10E P/E & EV/E of 5.6x & 5.3x respectively, leaving little scope for further re-rating. Maintain HOLD on the back of volume and margin uncertainty and increased leverage.

To see full report: JSW STEEL LTD


Sell: 1Q Follows The Trend; Weak MOU, Higher Margins, Churn Up

In-line EBITDA despite lower revenue growth — Idea’s 1QFY10 EBITDA at Rs7.7bn (+8% yoy, +4% qoq) came exactly in-line with expectations. The slight disappointment in top-line (net revenue growth of 5.3% qoq, in-line with Bharti) was offset by the 80bps EBITDA margin expansion. Margins expanded as a result of termination cut and relatively stable SG&A. However, PAT was
slightly ahead due to lower depreciation and finance charges (attributable to forex gains), although the tax rate at 5% came in higher than expected.

KPI trend was in line with Bharti — 5p rev/min decline was as expected, with termination cut contributing 3p. However, MOU dipped 1% qoq, likely due to the competition’s free min offer and slower usage ramp up of rural subs. Overall, ARPUs dipped 9% qoq, with half of that coming from the termination fee cut.

Churn continues to go up — Pre-paid churn continued to rise, reaching an alarmingly high level of 6.9% in 1Q (5.3% in 4Q). The increase was much higher than that witnessed for Bharti (3.2% going to 3.5%) and is possibly a reflection of new circles in Idea’s footprint. Incidentally, Spice’s churn was even higher at 9.1% in the quarter.

New launches had limited impact on EBITDA, will be a drag in 2Q — EBITDA losses in new circles (TN, Orissa launched in 1Q in addition to the existing new circles of Mumbai/Bihar) remained stable qoq. However, the full impact of new launches will only be felt in 2Q as: (i) the TN launch was in mid-1Q, and (ii) higher rollout increases the costs gradually over 3-6 months from the launch.

To see full report: IDEA CELLULAR