Monday, August 31, 2009


Buy Large Cap "Quality” (stocks to own through the cycle)

• As we look through to year-end 2010, we think the backdrop for equities will be one where sentiment swings from periods of extreme optimism (selling the market) to extreme pessimism (buying the market). We think the best way to position in this environment is to be overweight themes that look through the volatility of the cycle, but to also be prepared to take on and shed
additional risk as market condition dictate.

• There is clarity on the start of growth recovery but not on its strength. For this reason we want some exposure to the cycle, but look for areas/industries which will still stand to benefit even if growth disappoints. In this regard, our investment themes out to year-end 2010 are a mix of those which help determine “core” portfolio holdings (stocks to be held through the cycle) and those which are more growth leveraged.

• If a key feature of the 2008/09 equity market sell-down was the indiscriminate de-rating of high and low quality stocks alike, then a key feature of the rally has been the significant re-rating of the low quality names. Many measures (forward earnings yield, PEG) now show the valuation dispersion below normalized levels.

• In our view, the intensity of financial and credit market disruptions continues to impact growth visibility, and a tight valuation distribution implies that you can now buy higher quality, stable growth names with low earnings risk, strong franchise values, dividend sanctity, and a strong balance sheet at similar valuation levels to lower quality, more cyclical stocks. We think the high quality names have the potential to be strong outperformers - not for the near term but over a number of years.

• To date, the risk rally has nearly corrected the entire underperformance of low quality/cyclical stocks through 2008 and early 2009 (page 5). However, the rally has been driven almost entirely by multiple expansion – clearly most evident at the low quality end of the market (page 5). Historically, the multiple expansion phase of the cycle has lasted around a year and has seen the average P/E expand by approximately 50%. From the low of 666 on the S&P to the current level ~1000, we have now seen this occur.

• While there still remains a reasonable dispersion across “Value” factors (all value is not equal), a number of valuation metrics (forward earnings yield, price for growth) are now supportive of high over low quality stocks.

• With Valuation, Sentiment and Fundamentals still reasonable, the equity market may climb higher. We would look to see a deterioration in breadth and for technical factors to become more overbought before we would become more concerned. However, we think the low valuation dispersion between high and low quality stocks means the best value is found in the former.

To see full report: GLOBAL STRATEGY



• Largest integrated fluorochemicals complex in India with hydrofluoric acid capacity of more than 20,000 tpa – provides ability to speedily address new requirements of customers.

• Co has got a healthy mix of domestic and export sales. While refrigerant business is domestically doing well, export business margins are fluctuating. The products are sold under the brand name “Mafron”

• Bulk chemical business is subject to some competitive pressure. However, specialty fluoride is growing at high pace (3 yr CAGR: 18%) and the co is a leading global player in BF3.

• Key clients – Top five global crop protection companies like BASF and Bayer Cropscience; domestic clients includes Ranbaxy, Matrix, Aurobindo, Hetero, Orchid, Lupin

• Phasing out CFC as per Montreal Protocol, will be more than compensated by HCFC business, which finds its application into air-conditioners and refrigerators. HCFC business window is open till 2040.

• Consulted Mckinsey & Co to identify areas of cost reductions and profit improvement.

• Income from sales of Certified Emission Reductions (CERs) will further improve the financial profile of the company. (Refer to next slide)

• Healthy B/S and will become debt free in the current year; strong return ratios as well.

• High dividend yield of 5%

• Substantial recovery of dues from the group company, Mafatlal Industries, is expected as per the Chariman’s speech at the AGM

• Valuable property at Mafatlal Centre, Nariman Point will be free of lease by 2012.

To see full report: NAVIN FLUORINE


India’s most ‘hated’ & most ‘loved’ stocks

We have run a couple of screens (Tables 1&2) for our clients who are looking for contrarian bets. The BSE-100 list of companies has been screened for consensus recommendations. The most hated stocks are those covered by minimum 10 brokers, of who at least 60% have a SELL recommendation. At least 60% of the ratings for the most loved stocks are BUYs.

From I-Sec Research’s perspective, the one stock that stands out is Ranbaxy – 32 brokers cover it, 75% of them think it is a SELL, and the stock has underperformed the Sensex by over 40% in the past 12 months. Our pharma analyst, Rajesh Vora, recently upgraded the stock to BUY (refer our note ‘Ripe for a turnaround’ dated August 10, ’09) based on the argument that the worst developments on the US FDA front are behind us and two of the company’s blockbuster products may hit the market in the next eight months.

To see full report: MARKET STRATEGY


Fear fizzles out, but optimism only skin-deep
August FMS a feast for contrarian, tactical bears. Headline data reveals strongest market sentiment in two years. Big turnaround from apocalyptic bearishness of March. But underlying data shows lack of conviction. Four out of five investors predict a “below trend” recovery and neither regional nor sector positions are extreme. The optimism is skin-deep.

Only 8% of investors expect weaker economic growth
Consensus (75%) expects some sort of global recovery. Few expect a “double-dip”. This means “weaker-than-expected” data in coming months would be negative forequities. Next set of Chinese & US data now crucial for September direction. China growth expectations dipped again (to 49%) in the August FMS.

Cash balances plunge to 3.5%, lowest since July’07
Strong inflows now required to fund further equity and credit rallies or investors likely to raise cash. Highest equity allocation (34% from 7%) since Oct’07; bond allocation (-28% from -12%) lowest since April’07.

Optimism built with narrow regional leadership
EM equities (52%) by far the big OW. Asset allocators UW every other equity region, although the Eurozone UW was narrowed considerably (from -23% to -13%). Note, GEM investors sharply cut exposure to Chinese equities to neutral.

Optimism built with narrow sector leadership
Tech (28%) the most favored sector everywhere. Big monthly jump (-11% to 11%) in exposure to industrials. Defensives (telco, staples, pharma) cut back to neutral, while utilities (-15%) most detested global sector. The underweight in bank stocks narrowed (to -10%), but investors remain UW the credit plays.

Contrarian long & short trades
Contrarian longs: Japan, US, Asia utilities, US & UK banks, UK & Eurozone real estate, Asia telco, EM materials. Contrarian shorts: US, Eurozone, Japan, Asia tech, EM consumer discretionary, Asia and Japan banks, Russia.

Our view: there will be dips…buy them
Short-term pullbacks often coincide with a bullish FMS. That’s happening. But August optimism feels grudging and only skin-deep to us. We remain cyclical equity bulls and buyers of dips. August FMS resembles June 2003 FMS, when big reduction in cash balances (4.9% to 3.9%) and increase in equity allocation (3% to 22%) caused a nascent cyclical bull market to pause for breath. The bull market resumed a few months later.

To see full report: FUND MANAGER SURVEY


Bharti gains revenue market share

Bharti increases revenue market share by 80 bps; strong gains in “C” category circles

Vodafone (India) posted the highest gains( 90 bps) , state owned BSNL saw the largest decline ( 120bps)

Tamil Nadu, Bihar, UP East, and Madhya Pradesh circles post sequential revenue growth despite reduction in termination charges

As per TRAI’s financial data for the quarter ended June 2009, Bharti’s revenue market share increased by c80 bp to c34% q-o-q, while Idea’s revenue market share (including Spice) improved by c30bp sequentially. The key highlight of Bharti’s performance was its gain in revenue market share in ‘C’ circle, highlighting its focus on rural areas. Reliance Communications (RCOM) saw a marginal decline (10bps) in revenue market share (c12%) despite a marginal increase (c10 bps) in subscriber market share (c19%) this quarter. BSNL lost revenue market share across the country, with major declines taking place in B and C circle. Vodafone emerged as the biggest gainer as its revenue market share jumped by c90 bps on a sequential basis.

In Q1 FY 2010, 18 circles saw a negative q-o-q revenue growth, resulting in a c2% decline in pan-India revenues. We attribute the lower growth to the decline in termination charges, implemented from the start of this quarter. However, despite that, service areas like Tamil Nadu, Bihar, UP East, and Madhya Pradesh posted positive revenue growth.

With the Indian wireless space passing through one of its most peculiar phases, we believe investors are better placed to focus on revenue market share and revenue generating subscribers. We define revenue earning customers as subscribers that are active and contribute to revenues at the end of the service provider. At present, the Indian regulator does not prescribe any standard for reporting subscribers, allowing each operator to form its own definition for subscriber churn and reporting subscriber numbers. We believe rising competitive intensity and the lack of subscriber reporting norms are leading to double counting of subscribers and hence investors must focus on revenue generating customers and revenue market share.

To see full report: TELECOM REVENUE


Differentiated business model: A major boon
TIL’s uniqueness lies in its ability to provide total infrastructure solutions rather than supplying only products. In its material handling equipment (MHE) division, TIL designs and manufactures port cranes, forklifts and reach stackers, which find application in heavy construction activities in projects or for movement of materials. In its agency businesses (Caterpillar), the company sells earthmoving products to mining and construction industries. Moreover, it has huge potential of supplying spare parts and offering after sales service to the installed customer base.

GoI’s increased port spending to drive TIL’s future growth
Infrastructure development is a priority for the Government of India (GoI) for sustained GDP growth. GoI is doubling the port capacity at an investment of INR 600 bn over the next five years. From our interaction with industry sources, we have learnt that ~12% of this spending is likely on equipment like cranes, forklifts, and material handling systems, translating into an opportunity of INR 72 bn over next five years. We believe TIL’s MHE division will be a key beneficiary of this spend. Even if we assume a 10% market share for TIL, it could translate into revenues of INR 7 bn over the next five years (4x its MHE revenues) in FY09.

Recovery likely in H2FY10; new products give FY11 visibility
As on June 30, 2009, TIL has an unexecuted order book of INR 2.61 bn, including order from principal sales of INR 1.1 bn. We expect H2FY10 to be better on account of a low base of last year and expected improvement in the order book. Also, from Q4FY10, new product launches from the new plant will kick in, targeting the port, bulk material handling and roads segments. Moreover, the
company is exploring the option of supplying components to its technical collaborators FY11 onwards from the new plant, which could provide upside to our estimates, as we have not factored in the related revenues in our assumptions. Further, new product launches could aid margin expansion; we estimate EBITDA margin to expand from 8.8% to 10.4% by FY11.

Outlook and valuations: Going steady; initiating coverage with ‘BUY’
At CMP of INR 248, TIL is trading at 5.7x its FY10E consolidated EPS of INR 43.9 and 4.5x its FY11E EPS of INR 55.6. Given: (1) the huge opportunity; (2) expected accretion to order book; (3) decent valuations; and (4) potential rerating from likely restructuring (with transfer of agency business to a whollyowned subsidiary), we initiate coverage on TIL with ‘BUY’ recommendation.

To see full report: TIL


We recently met with the management of Jai Hind Projects Limted (JPL). JPL is a Engineering, Procurement & Construction (EPC) company focused on the Infrastructure sector including hydrocarbons (oil & gas) and water. JPL has specialised in layout of cross-country, plant and onshore pipelines. JPL has laid over 10,000 km of pipelines with 4,000 km of Hydro Carbon pipelines.

Key Highlights
• Gas Transport Infrastructure is the key going forward – The Oil & Gas discoveries from RIL, GSPC, ONGC, CAIRN, etc. would require massive transportation Infrastructure within the country (both across the states and cities and within the city/towns). The physical network for expanding the City Gas Distribution & PNG is high on the government’s agenda. The proposed gas pipeline network to be built by GAIL, GSPL and other domestic players is valued at Rs 200bn over the next two years.

• Competition – JPL competes primarily with Punj Lloyd on many projects. The management is of the opinion that it is trying to position itself in the Rs.1bn~Rs5bn space where the economics to operate are superior for them compared to the larger players like Punj Lloyd owing to size.
However, the Infrastructure requirement in the country is massive so as to accommodate a large number of players.

• Superior EBIDTA margins – The margins has improved from 14% to 19% over the last couple of quarters which is on the higher side when benchmarked to the EPC business. The management has sighted two reasons for this – 1. The contribution of the non EPC (services) business to the overall mix has led to higher margins and 2. There was a substantial gap between the award and execution of one of the large orders, during which the commodities collapsed.

• Debt/Equity – The D/E at 1.8x is on the higher side given the nature of the business (EPC). The management however has taken a conscious decision to build captive Assets over the last two years which has made the balance sheet Asset heavy leading to lower Asset turnover.
Moving into FY10 & FY11, with better utilisation of these Assets, productivity would improve leading to improvement in Return on Asset and ROE.

• SAP Implementation & Other Administrative Changes - Strong ERP systems is the key for any growing company. The management is gearing up the company and creating more bandwidth so as to service the intake of large ticket orders efficiently. JPL has also added an office space of
69000Sq.Ft at Ahmedabad. This would not only centralize its functions across the city, but also give the company strength to negotiate the cost of working capital.

• The management is looking to raise funds provided it gets the right price for its equity. This would enable the company to participate and own Asset in water infrastructure space and other projects vide BOT & BOOT mode.

To see full report: JPL


Business impact of regulations in the Indian Asset Management Industry: Playing in the new market place

The asset management industry in India experienced significant turmoil in the financial year 2008-09, with assets under management (AuM) declining by approximately 17 percent compared to year-on-year growth of approximately 50 percent between FY03 and FY08. The capital markets decline and consequent preference for debt and liquid funds resulted in a significant shift in the product mix, with the proportion of debt and liquid funds increasing significantly in FY092. Understandably, industry profitability, measured as basis points of average AuM, dropped from approximately 22 bps to approximately 14 bps, putting significant pressure on asset management companies (AMCs).

In recent years, industry regulator the Securities and Exchange Board of India (SEBI) has focused more on investor protection, introducing a number of regulations to empower retail investors in mutual funds. SEBI began by disallowing initial issue expenses and mandating that mutual fund schemes recover sales and distribution expenses through entry load only. Further, investors applying to mutual funds directly were exempted from entry load. These steps aimed at creating more transparency in fees paid by investors and helping make informed investment decisions. Subsequently, in a recent move, SEBI banned the entry load as defined by AMCs and deducted from the invested amount, and instead allowed customers the right to negotiate and decide commissions directly with distributors. The objective is to bring about more transparency in commissions and encourage long-term investment. The regulation mandates that all scheme application forms carry a disclosure to the effect that investors will pay upfront commissions directly to distributors based on the investor’s assessment of various factors including service rendered. In addition, the regulation mandates that distributors disclose all commissions (whether trail commission or otherwise) of all competing mutual fund schemes.



Table of Contents

  • General Provisions
  • Corporate Tax
  • International Tax
  • Tax Incentives
  • Capital Gains
  • Transfer Pricing Provisions
  • Mergers & Acquisitions
  • Personnel Taxation
  • Wealth Tax
  • Compliance and Procedural Provisions
  • Taxes Deduction at source
  • Trusts / Related Provisions
  • Other Residuary Provisions
  • Annexure
To see full report: DIRECT TAX CODE


India: Monsoon risks, but domestic demand theme intact

SENSEX target 20,100 – Overweight

Market overview
India has been one of the top performers since the March low with the index rising 90% in USD terms. Much of the outperformance occurred in May, when a positive surprise on the elections result and a strong and stable mandate resulted in a country re-rating. After an inflow of nearly USD1b in one day (20 May), India has seen continuous strong inflows with nearly USD7.5b inflows since March lows. A lot of these flows have, however, been channeled into and
Primary/Secondary issuances (QIP’s) with almost USD4.5b raised in the domestic market and USD2b through ADR’s and GDR’s. There is another USD8-10b expected to be in the pipeline.

India’s fiscal deficit remains a concern with a 6.8% deficit at the centre (11.2% inclusive of states and off balance sheet items) on the back of increased government expenditure. However, a strong emphasis on infrastructure and strengthening of domestic demand through providing a consumption kicker has been the primary focus. While the government borrowing programme is expected to be large, this is not as bad as it seems as Indian corporates have been generating strong internal accruals and have reduced their capex plans. This, coupled with the QIP wave, has reduced concerns of crowding out of private investments as Indian corporates are well funded.

India, with their high levels of consumption of about 66% (Private: 56% of GDP, Public: 10% of GDP) is less affected by the fall in global demand and is a strong domestic demand story. The rural markets, which have been relatively untapped but have been given a lot of emphasis in the current budget, are another long-term growth driver for the economy. Consequently, we have seen sectors levered to the rural economy, like autos showing excellent quarterly numbers. Industrial production has also revived with a 16-month high of 7.8% y-y growth. These numbers have been on the back of increased demand and will result in a strong revival of private capex.

To see full report: ALPHA STRATEGY

Sunday, August 30, 2009


What Tightening Could Mean for Equities?

• Liquidity is still favorable: As we pointed out recently (see Market Uptrend Intact, August 13), liquidity remains accommodative of the Indian equities. The 91-day yield is a good indicator of liquidity in the system and in our view its current low level augurs well for the market’s near-term outlook. Perversely enough, the prospects of a drought favor liquidity as both the government and the central bank may hesitate to initiate tightening steps in the face of an impending drought.

• How Has the Market Historically Responded to RBI Moves? Over the past 13 years, there have been two tightening cycles. The first one followed the tech bubble starting in July 2000 and ended into January 2001. The second one began during the bull market of 2003-08 in October
2004, and culminated in July 2006, after which the RBI held rates steady until September 2008, when the global financial crisis hit India’s shores. The direct impact of policy rates on the market is always hard to isolate, as is the case with say the monsoons or any other market
driver, but here are some key observations:

• Over the past few years, the RBI has seemingly lagged the US Fed in terms of rate action. Based on our economist forecasts for 2010, it appears that the RBI may lead the Fed in the coming tightening cycle. Our India economist Chetan Ahya expects a rate hike from the RBI in late 1Q10, whereas our US economist Dick Berner expects the Fed to move in June 2010.

• The short-end treasury yields (91-day) have moved in sync with effective policy rates, especially over the past decade. Not surprisingly, they correlate inversely with equity returns, although there is no discernable lead or lag.

• Purely from a policy rate environment, the previous two policy rate hike cycles were preceded by flat returns (relative to emerging markets) from Indian equities. In the 2000 cycle, Indian equities underperformed emerging markets by 3% whereas Indian equities outperformed EM by 5% in the six months preceding the next tightening cycle in 2004.

• Given that RBI is expected to lead the US Fed in this cycle, the market’s response is harder to forecast. Our view is that India will likely outperform, but unrelated to the prospective monetary policy and largely due to superior growth and our expectation of persistent reforms/infrastructure spending.

• To the extent that excess money will decline in the coming months as growth accelerates, the pace of equity gains could also slow. This may coincide with higher credit growth and, hence, lower commercial bank liquidity leading to a similar conclusion. However, for the time being, liquidity remains supportive of equity markets.

• There is little historical evidence of distinctive sector performance patterns related to policy rate moves. During the previous two rate hike cycles, energy and industrials did better than other sectors. However, sector performances ahead of a rate hike appear random.

To see full report: INDIA STRATEGY


Turning Sweet for Investors

The global sugar industry is entering an era of lower production regime, which is reflected in the sugar prices. Besides, strong GDP growth in developing economies particularly India and China has led to an increase in the global sugar consumption. During the last decade, world sugar production has grown by a CAGR of 1.71% while the global consumption has increased by 2.25%. We believe the current miss match in production and consumption scenario in the global sugar will push up the sugar prices, helping the sugar producers particularly in India. We initiate coverage on the sector with a near‐term positive outlook backed by lower production, increase in per capital consumption, and improved balance sheet quality of the sugar companies.

Domestic production in sugar season ’09 is expected to be at 14.7mn tons: Sugar production in the current season is expected to be around 14.7mn tons, which will result in a deficit to the tune of 8.3mn tons for the season. For the coming season, the production is expected to remain low due to the current fallout in the monsoon and the lower cane acreage. This will continue to push up the sugar prices.

International prices are at very high levels: International raw sugar prices are at around $22/lb, which is very high compared to Indian prices. This makes the import of raw sugar nonviable. To reach a viability position, Indian prices have to catch up with the international prices, which means a better realisation for the sugar companies.

Companies are out of the capex cycle: Most of the sugar companies have done heavy capex in the last sugar season and consequently, have raised a huge amount of debt. In the present up‐trend cycle, the companies are not planning for huge capex and will use the cash flows to reduce their debt. This will improve the balance sheet of the companies.

To see full report: SUGAR SECTOR


Conclusion: We are upgrading ZEEL from EW to OW as we believe ZEEL’s earnings improvement shall beat street expectations in the medium to long term. Our revised price target, based on a DCF model, of Rs246 implies potential upside of 20% from current levels. At
our price target, the stock would trade at a P/E of 19.4x on our F2011E EPS with estimated EPS CAGR of 23% over F2009-11. This compares well with target Sensex P/E and EPS CAGR for the corresponding period of 15.3x and 14.9%, respectively, based on our India strategist’s top-down expectations.

What drives our upgrade: Our view now is that: 1) high inventory utilization of ad slots is sustainable; 2) ad rates will start increasing in 3-6 months, 3) ZEEL’s flexibility in cost management will be beneficial; and 4) high-quality revenue streams will grow in prominence for ZEEL.

Earnings drivers from here – Cost management over next two quarters, ad revenue in F2010E, digital subscriber revenue in F2011: By scaling down its films operation and cutting non-content-related expenses, ZEEL is likely to keep its costs under a tight control in the next six months. On ad revenue, however, we are forecasting an 8% YoY decline in F2010 (implying a 9% increase in F2H10) and 18% improvement in F2011, which may surprise the Street positively. In our view, F2011 will be marked by higher proportion (coming closer to a critical mass) of digital subscriber revenues, thus aiding margins.

To see full report: ZEEL


The rout experienced by all the world’s equity markets during 2008 will be etched in the memories of share traders and investors for many, many years. Tales will be told, long after the bear market has ended, of fortunes lost and made during this implosion of share prices – stories that will be the repeated at dinner parties and in online chat rooms for years to come.

Many of the stories will be of woe and despair as distraught long-term investors struggled to comprehend and deal with the losses they suffered in their supposedly secure long-term investments. These ‘buy and-hold’ investors have had their portfolios decimated by the events of the Global Financial Crisis and the severity and extent of the current bear market. Many have
watched, frozen in fear and horror, unable to take decisive action as their portfolios halved
in value (in some cases even more) and their retirement plans, via their superannuation
funds, were almost destroyed.

Those who placed their faith in, or abdicated their financial responsibilities to, fund managers, financial advisers, or other so-called experts are even worse off, because fees and commissions are still being drained from their accounts – even though the investments have suffered
massive losses.

The buy-and-hold strategy employed by many equity investors and ‘traders’, which appeared to be working quite nicely during the extended bull market up to the latter stages of 2007, has proved disastrous as the market has collapsed. Many people have been left holding stocks that have become virtually worthless – for example, Royal Bank of Scotland (figure 1) and Citigroup (figure 2). Others, with holdings in the likes of ABC Learning (figure 3) and Centro Properties, have seen their investments completely wiped out.

What is value?
Even blue-chip companies, like the major banks and others in the Top 20, have seen their share prices savaged by the extended bear market. Whilst there may be an argument that these prices are cheap, represent great value, or represent ‘great buying at these levels’, three questions need to be asked. First, how do you know they are cheap? Second, what’s to stop them becoming even cheaper? Finally, who says they are cheap?

If the answer to that last question is the same person or organisation that advised you to buy them in the first place, and then either told you to hang on and wait for the prices to turn around, or, worse still, encouraged you to participate in that age-old furphy of averaging down and buying more as prices continued to fall (to reduce your average cost), then it might be about time to consider a new approach to your engagement with the share market. A cursory glance at just about any share price chart at the moment will show you just how ridiculous this strategy is. See the charts for Royal Bank of Scotland, Citigroup, and ABC Learning – stocks that were being advocated as cheap by certain experts and advisers, all the way down.

It remains to be seen whether those who are averaging down will live long enough to experience any gain from reducing their average price, given the massive price corrections experienced by nearly all stocks.

Waiting for the bounce… and still waiting
Mary had been steadily accumulating shares in Macquarie Bank (MQG) (figure 4) from early 2000. She had built a sizeable holding that was worth a considerable sum of money at the values reached in mid 2007, when the race was on to see if Macquarie could make it to $100.00 per share. Mary watched with alarm when the price dropped suddenly from just over $98.00 per share in May 2007 to around $66.00 in mid August. Her husband and financial adviser convinced her to hang onto the shares. He thought it was only a short-term correction and that Macquarie would turn around and continue its upward move through and then well beyond $100.00.

Turbo charging the crash
Many losses have been exacerbated through the effects of over-geared and over-leveraged accounts. Many uneducated and unprepared market participants were using margin loans and highly leveraged instruments to ‘gear up’ their exposure to the share market. Spurred on by stories of the never-ending bull market, the commodity super cycle, and the China effect, these people were throwing money into the market on a whim in order to be part of the action, and make their fortune share trading ‘in as little as one hour a day’. Unfortunately, they had no real idea of what they were doing. Nor did they have an understanding of the concepts of risk management and money management. Over exposure, lack of a trading plan, and disdain for money-management concepts wreaked havoc when the market crashed. Cash margin calls, the forced sale of shares, and in some cases other assets, to meet margin calls added more fuel to an already raging inferno.

Know when to hold ‘em… know when to fold ‘em
A major problem with a buy-and-hold strategy is knowing which ones to throw away (and when), and which ones to keep. In hindsight it’s all crystal clear. ‘If only I’d sold ABC and held XYZ,’ is a common lament. Whilst holding some stocks for the really, really long term may well prove beneficial for those with exceptionally long time spans, perhaps generations, for most share market participants it is not a successful strategy because it simply doesn’t work.

Actively managing your share portfolio – cutting losing trades, knowing where and when to exit profitable trades, understanding money-management and position-sizing techniques – is the only way to ensure success in any market. Share prices may recover over the long term but how long will it take? How long will it be, for example, before we see RIO back to $160.00 a share?

Hedging your bets
Portfolio hedging has allowed those who know how to use it to offset losses incurred in their long-term portfolios with profits made from their hedging activities. By short selling index CFDs and equity index futures, and by using put options and warrants, these investors have been able to weather the storm to a much greater degree. This is a much more fluid approach than simply sitting on the sidelines waiting for things to get better. It takes time, effort, a detailed trading plan, and a knowledge and understanding of the various instruments available to use for hedging for its effective and profitable use. The effort required is more than rewarded, however, if losses of profit and capital can be minimised.



Dominant presence in J&K region…..
JKB has the most dominant franchise among all banks (350 branches) in J&K region. We believe
that JKB is best placed to benefit from any uptick in economic activity through massive infrastructure push by the central and state government. JKB has 75% market share in lending
and 65% in deposits in J&K region. We believe that investment of INR 350 billion in the J&K region will provide adequate stimuli for accelerated credit growth to JKB.

Strong business growth….

We expect JKB to post strong growth with 20% CAGR in advances (v/s10% in FY09) and 17% in deposits through FY09-FY11E. However, advances in the J&K state will grow at the rate of ~30% YoY over the next two years. Since, ~50% of the bank's advances are outside J&K, overall growth in advances will remain at 20% due to muted growth (~10%) outside J&K.

Asset quality to remain stable

JKB has brought down its net NPA level from 1.4% in FY09 to 0.8% in Q1FY10 by increased NPA provisions. The Bank's provision ratio increased from 50% in FY09 to 69% in Q1FY10. Going forward, we expect provision coverage to remain at ~55% and NPAs to be at manageable level with GNPA at 2.8% and NNPA at 1.3% by FY11E.

NIMs to improve

We expect Bank's NIMs (calculated) to increase by 20-25 bps to 3.2% through FY10 -FY11E due to strong credit growth leading to higher CD ratio. The CD ratio is expected to increase from 63% in FY09 to 65% and 66% in FY10E and FY11E respectively. Moreover, bulk of the loan growth would be in the J&K region where loan yields are relatively higher leading to better NIMs.

Return Ratios…to inch up

Due to higher credit growth as compared to previous year, we expect return ratios to improve.
RoE is expected to increase to ~18% in FY11E from 16.5% in FY09 led by 19.5% CAGR growth
in profits. With a CAR of 14.9% (Basel II) the bank is sufficiently capitalised to expand its loan
book at a higher rate.

Compelling valuations…

JKB is among the cheapest bank available at 0.8x FY11E ABV despite superior operational
performance. The Bank continues to trade at 30-35% discount to large PSB's and ~20% discount
to mid size PSB's. In our view, the valuation gap (J&K versus other mid size PSU banks) is
unjustified and will narrow in the near future. We initiate coverage on JKB with a target price of
638 (INR 550 for Bank and INR 88 Metlife stake) and Buy recommendation.


Political crisis or strikes/protests would impact business operations of the bank. Deterioration in asset quality would result in higher provisions and decline in earnings.

To see full report: JAMMU & KASHMIR BANK


Strong demand n-t, but mismatch imminent; Ambuja on CL-Sell

Industry context
Three triggers for this industry update: 1) Stronger-than-expected demand over the last few months and improving economic fundamentals - we raise our cement demand CAGR estimate for FY09E-FY12E by 140bp to 8.3%. (2) Higherthan- expected capacity additions in FY10E ytd - we raise our supply growth CAGR estimate for FY09E-FY12E by 90bp to 9.2%. 3) We accordingly revise our earnings estimates for our coverage group by -30% to +75% for FY10E FY12E, and our EV/RC-based 12-m TPs by 22%-81% (moving to mid-cycle multiples from
trough previously on greater visibility and reduced risk for demand).

Source of opportunity
We believe that strong near-term demand and producer discipline can potentially delay, but not prevent the emerging demand–supply mismatches, in an industry that enjoys relatively low barriers to entry, and in which a number of players have committed significant capital for new capacity. Hence, we maintain our cautious stance on the Indian cement sector. To contextualize, the industry added 14mn MT of capacity in the first 4 months of this fiscal year alone, which is about 6% of end-FY09E capacity, and compares with 21mn MT added in the entire FY09. We expect the industry to add 31mn MT of capacity in FY10.

Best sell idea
We retain Sell on Ambuja Cements (ABUJ.BO) and add it to our Conviction List. We believe its industry-leading margins have been competed away, and consequently its 25% valuation premium to Indian peers is likely to be affected, in our view. Our new 12-m EV/RC-based TP of Rs80 (from Rs59), implies 19% potential downside. We also retain Sell on ACC (ACC.BO) with revised 12-m EV/RC-based TP of Rs662 (from Rs507), implying 17% potential downside.

Best buy idea
We raise Ultratech Cement (ULTC.BO) to Buy from Neutral with revised 12-m EV/RC-based target TP of Rs894 (from Rs494), implying 19% potential upside. On the back of Ultratech’s strong volume growth and cost-reduction initiatives, we expect 12% earnings CAGR over FY09E-FY12E, the highest in our India cement coverage.

Key risks include higher-than-expected urban demand, lower-than-expected capacity additions and the impact of the monsoon on the rural economy.

To see full report: CEMENT SECTOR


We had initiated coverage on Vinati Organics Ltd (VOL) in August 2007 (at a price of Rs. 76.5 – Cum Bonus) with a price target of Rs.
112 (CB). Thereafter, the stock made a high of Rs. 183.0 (CB) on November 20, 2007, thereby surpassing our target price. Ex-bonus, the stock is currently trading at the Rs. 169.4 level. We present an update on the company following a discussion with the management.

Company Background
Vinati Organics Ltd (VOL) has been operating in the chemical manufacturing industry since 1992 and has successfully implemented technology available to only few in the world. VOL primarily produces IBB (Iso Butyl Benzene) and ATBS (2-Acrylamido 2 Methylpropanesulfonic Acid). Its manufacturing facilities are located at Mahad and Lote Parshuram, Maharashtra. VOL currently has
over 300 employees. VOL also has export house status for its ATBS manufacturing facility.

Iso Butyl Benzene (IBB)

IBB is the prime raw material for the manufacture of Ibuprofen, a vital bulk drug. Ibuprofen is an anti-inflammatory and analgesic drug. It also has an application in the perfumery industry in small quantities. India is a net exporter of both IBB and Ibuprofen. Besides exporting IBB, VOL supplies IBB to domestic companies such as Shasun Drugs who in turn uses it to manufacture Ibuprofen and then exports the drug.

VOL has the largest IBB manufacturing capacity in the world with a current capacity of 14,000 MT at Mahad, Maharashtra. VOL
acquired the technology to produce IBB from Institut Francais du Petrole (IFP), France. The worldwide demand for IBB is about 20,000 MT and the market is growing between 3-5% p.a. The current realizations of IBB vary between Rs. 80 – Rs. 90 a kg at the current crude oil price levels. One of VOL’s main customers for IBB is BASF with whom it has signed a 5-year contract (upto 2011). BASF’s offtake each quarter is in the 1,000 MT range.

2-Acrylamido 2 Methylpropanesulfonic Acid (ATBS)
VOL started the commercial production of ATBS in October 2002. VOL manufactures ATBS of Acrylic Fiber grade and exports more than 90% of its ATBS production. VOL also manufactures the sodium salt of ATBS and n-tertiary Butylacrylamide (TBA). The uses of ATBS and its variants include acrylic fiber, water treatment chemicals, emulsions for paints and paper coatings, adhesives, hydro gels and super absorbents, textile auxiliaries, detergents and chemicals, oilfield and mining chemicals and construction chemicals / super plasticizers. At the end of FY08, VOL had a capacity of 3,000 MT for ATBS production at Lote Parshuram, Ratnagiri, Maharashtra.
During FY09, the company carried out a debottlenecking activity and expanded the capacity to 5,000 MT. In addition, the company set up another 5,000 MT plant for the production of ATBS, which was commissioned in May 2009. Thus, the total capacity of ATBS stands at 10,000 MTPA.

The manufacturing of the ATBS monomer is very limited worldwide and restricted to 3-4 players due to the difficulty in development of manufacturing technology. VOL sourced the technology from National Chemical Laboratories, Pune and further enhanced the technology. Other than VOL, the current manufacturers include Lubrizol (~14,000 MTPA capacity), Toagosei Co Ltd (Japan) (~8,000 MTPA capacity most of which is used for captive consumption) and China (~2,000 MTPA). The worldwide demand for ATBS is about 30,000 MTPA and is growing at about 8% p.a. Moreover, it is expected that the demand of ATBS could double over the next 2-3 years due to its application in enhanced recovery oil polymers. The use of this polymer is viable when the price of crude is above $40 a barrel. ATBS is currently sold at about Rs. 140 – Rs. 150 per kg.

Investment Rationale
VOL continues to look like an attractive investment opportunity due to the following reasons:

· Oligopolistic market structure – VOL is the market leader in IBB and 2nd largest producer in case of ATBS

· Revenue Visibility - Assured offtake of IBB due to long-term contracts aid revenue visibility. VOL has entered into similar contracts for
the offtake of ATBS (5,000 – 6,000 MTPA). The tenure of the contracts ranges from 1-5 years. VOL has annual contracts with companies like BASF, Rohm & Haas, Akzo Noble, SNF and Nalco Chemicals.

· Operating margins in the 15% range for IBB and 20% range for ATBS. Long-term contracts contain clauses for the pass on of raw
material costs and to a certain extent foreign exchange fluctuation, which helps protect margins

· High entry barriers due to economies of scale, cost efficiency, technology and high quality standards.

· The demand for ATBS and IBB is to a certain extent recession proof. VOL’s performance in FY09 underscores this fact. While most
companies faced slowdown in topline growth and margin pressure, VOL put up a good show in FY09. VOL reported sales of Rs. 190.5 cr up 30.2% y-o-y, operating margins of 17.4% (flat y-o-y) and PAT of Rs. 25.1 cr (up 65.4% y-o-y). The jump in bottomline is due to a fall in the effective tax rate from 34% in FY08 to 21% in FY09. VOL has converted its plant in Lote Parshuram (ATBS production facility) into an EOU (Export Oriented Unit) from a DTA (Domestic Tariff Area), effective July 28, 2008 and hence paid a lower tax rate. This benefit is available until March 2011.

To see full report: VOL


Equity review
After taking a breather in June, Indian equities resumed their upward movement in July. Both the Sensex as well as the broader BSE200 index advanced 8.1% through July. The CNX midcap index gained more by 9.6%. While the market briefly corrected following the presentation of the union budget, it bounced back strongly. During the month, IT services, consumers and material sectors outperformed the market while telecom, energy and industrials underperformed.

The finance minister made some changes in the taxation policies (e.g. increase in minimum alternate tax rate by 500 basis points) but the focus was clearly on continuing measures to stimulate the economy. However, the equity market took a negative view of higher estimates of fiscal deficit at 6.8% of GDP. Moreover, lack of much anticipated concrete announcement towards disinvestment, relaxing of foreign investment limits in various sectors, etc. might have added to the disappointment. However, the market quickly realized that many policy measures might be announced outside the budget. As the risk appetite improved, FII inflows into India increased after a dip in June.

Debt review
The fixed income markets were looking forward to two important events in the month of July '09- the Union Budget and the RBI's quarterly policy for 2009-10. Both the events did little to cheer the fixed income markets, particularly the government bond market.

The main focus of the Budget 2009-10 was to get growth back on track through high government spending and consequent higher fiscal deficit. The fiscal deficit for 2009-10 is expected to be at 6.8% of GDP vs. 5.5% of GDP estimated in the interim budget in 2009-10.

The Reserve Bank of India (RBI) announced the quarterly review of its annual policy for 2009-10. The policy signals a shift towards a neutral stance.

The RBI kept policy rates and the cash reserve ratio (CRR) unchanged. It also marginally improved its growth outlook. It now expects the GDP growth for 2009-10 at “6% with upside risk” compared to “around 6.0%” announced in April. The improved growth would mainly be driven by huge government
spending announced in the Union Budget.

The RBI raised its WPI inflation forecast for end-March 2010 to around 5.0% YoY from around 4.0% in April. The increase in the WPI target is keeping in view the global trend in commodity prices and the domestic demand-supply balance. In order to anchor inflationary expectations, the RBI stated that the monetary policy will continue to “condition and contain” the perception of inflation in the range of 4.0–4.5%, in line with the medium-term objective of inflation of 3.0%.

In our opinion, even though the RBI was a bit hawkish in its policy stance, it would not get into rate hiking mode anytime soon. In the current environment of heightened economic uncertainties, the RBI would prefer to wait for consistent signs of improvement in the investment activities particularly in private investments. The pace of improvement in the global economy would also have a strong influence on the RBI's rate decisions.

To see full report: FUND FACTS


Good with India growth story for now
Event Media reports have indicated that RCOM is in talks to buy Kuwaiti telecom operator Zain's African operations. We believe the news is speculative and the likelihood of this deal going through at this stage is fairly low. Maintain OP.


Potential sale of Zain’s African operations is possible. We note that Zain is in the midst of a restructuring exercise and that the potential sale of its African operations is one of the options the company is considering. Zain had publicly announced its intention to possibly sell its African assets last month, after talks with the French media and telecoms conglomerate Vivendi about a potential majority stake sale were called off. There is an extraordinary general meeting of Zain shareholders on 31 August, which might provide additional information about in what direction the deal is moving.

Uplift from pan-India GSM launch likely to play out in next six months. We believe the first signs of a resurgence in wireless growth, led by GSM, were clearly visible in 1Q FY3/10. RCOM posted its best sequential growth (6.5% QoQ) in wireless revenues in seven quarters. It reported 1Q FY3/10 wireless revenue growth of 16.4% YoY vs 19% for Bharti. Such similar wireless revenue growth between Bharti and RCOM has taken place after 12 straight quarters (it last occurred in June 2006).

Wireless broadband data access riding on EVDO (3G CDMA) is a new revenue stream that has just been tapped, with strong upside expected in two years, which should provide material upside to our current EPS forecasts.

Assign Rs37/sh value from recently signed towers sharing deal. Reliance Infratel, a 95%-owned subsidiary of RCOM, has signed a ten-year tower rental agreement with one of the greenfield telcos, Etisalat DB Telecom. Under the agreement, Reliance Infratel would provide Etisalat DB and its subsidiaries with complete tower and transmission infrastructure for its network rollout in 15 telecom circles. We view this as a significant positive for the stock and assign Rs37/share value, over and above our TP, for this deal.

Earnings and target price revision
No changes.

Price catalyst

12-month price target: Rs275.00 based on a DCF methodology.
Catalyst: Positive effect of new GSM launch on operating metrics.

Action and recommendation

Reaffirm OP. We continue to like RCOM as a beta play, primarily based on improving traction in the new GSM business (no more price discounting and a focus on revenues rather than low-yielding subs), the new revenue stream emerging from 3G EVDO-led wireless broadband, the new mega towers deal with Etisalat DB and attractive valuations. RCOM has corrected 9% in the past month, and we think investors should use this opportunity to accumulate the stock.



Rationale for Investment

L&T Finance Limited (LTF) is wholly owned subsidiary of L&T Capital Holdings Limited, which is in turn a 99.99% subsidiary company of Larsen & Toubro Limited (L&T). LTF was incorporated as a Non Banking Finance Company (NBFC) in November 1994. LTF offers a spectrum of financial products and services for trade, industry and agriculture and has evolved into a multi product finance company with a diversified corporate and retail portfolio. LTF plans to enter the debt capital market on 18 August 2009 with a public issue of Non Convertible Debentures (NCDs) aggregating up to Rs. 500 cr with an option to retain over-subscription of upto Rs. 500 cr for issuance of additional NCDs.

In the current market scenario, there are limited direct debt options for the retail investor in the fixed income market. LTF offers one more opportunity to the investor. It offers a better interest rate than other alternatives with no significantly higher risk. Further, given its established track record, decent financial history, high credit rating, strong parental backing, attractive returns compared to other fixed income options, medium liquidity and safety (NCDs are 100% secured by assets of the company), we feel that risk averse investors willing to hold for between 5-10 years can participate in this issue (low to medium risk, long term investment).

In report table is given, which compares the NCD issue with other debt options available in the market.

Investors in Tata Capital NCD issue (Feb 2009) have so far earned a return of 10.3-12.3% absolute (25-30% annualized) in 5 months (in terms of appreciation in the price of the NCD on the NSE). These NCDs (all four series put together) witnesses daily volumes of Rs.45-55 lakhs. Of course, the two cuts by the RBI amounting totally to 75 bps in the repo and reverse repo rates after the issue closed has helped matters for holders of Tata Capital NCDs.

NCD issues have been well received by the Indian markets. Consider the Rs. 500 cr NCD issue by Shriram Transport Finance. The company was planning to raise Rs. 500 cr through retail NCDs with an option to retain oversubscription up to Rs. 500 cr. The issue became a runaway hit with the company mopping up Rs. 4,500 cr on the first day itself from QIB and NII category. Similarly, the LTF issue could also get a decent response (especially from Mutual Funds).

Investors should evaluate the NCDs in the light of the fact that they allow locking into a yield between 9.85% - 10.5% for a 5-10 year period, even as returns on most other fixed-income options have declined sharply in the recent past. The yield offered is less than the Shriram Transport Finance Issue (10.75% - 11.5% for a 3-5 year period) as well as the Tata Capital NCD issue (11.57%-12% for a 3-5 year period) (All three issues carry a rating of Care AA+). In addition, the duration is longer than both these issues, there is no put option available and hence investors in LTF NCDs may have to put up with duration risk premium and lower liquidity. However it needs to be appreciated that interest rates in the system have fallen since the Tata Capital NCD issue closed and some investors may perceive L&T Finance as a better company to invest in than Shriram Transport Finance.

The issue from LTF is of a longer duration, has no put option available and has no incentive for senior citizens, NRIs are not allowed to apply and the interest rate on application money is 7% vs 8% offered by Tata Capital and STFC. The issue is attractive for investors who are concerned about the brand / management credibility of the issuer company and one who feels that interest rates in India are not going to rise significantly for longer maturity corporate papers and hence is a good idea to lock into these rates at this point. (Other investors could look at options with lower maturities of 5 years).

We feel that in an economy that is growing fast, where Consumer price inflation continues to remain high and when the Govt borrowing program is aggressive; interest rates may not fall below a level.

If convinced about the merits of the issue, the investor needs to apply at the earliest as allotment is to be made on first come first serve basis.

To see full report: LTF



Sobha Developers’ (Sobha) has seen significant pick-up in residential volumes, which have increased >50% from ~0.3mn sqft/quarter run rate over the past five quarters. Also, prices in Bangalore have firmed up, with risk being higher on the upside than downside. Based on this, we expect Sobha to witness sales of 3mn sqft in FY10E, and reaching ~7mnsqft by FY12E. Post capital infusion of Rs5.3bn via QIP (at Rs209/share) and Rs5bn through land liquidation (Rs2.25bn already raised via private equity), we expect gross D/E to reduce from the peak of 1.8x to 0.6x by end-FY10E. Sobha has 9.3mn sqft under development and is expected to launch another 3-4mn sqft in FY10. Given cashflow visibility from operations and asset sales, we remain confident about the company’s long-term potential. We raise our target price to Rs314/share from Rs288/share; given Sobha’s discounted valuations, we maintain BUY. The stock is trading at 1.2xFY11E P/BV
of Rs202/share.

Revenues on the rise. Sobha is witnessing sales run-rate of Rs500mn/month visà- vis Rs50-100mn/month at lowest levels as well as half of the peak run-rate of Rs1bn/month. Volumes have picked up across projects to over 0.5mn sqft at present from ~0.3mn sqft/quarter over the past five quarters. Sobha is developing 9.3mn sqft across 31 projects (7mn sqft in Bangalore) and has aggressive plans to launch 3-4mn sqft projects in FY10E across Bangalore, Mysore, National Capital Region (NCR), Pune and Trissur.

Land liquidation value accretive. Sobha has sold ~5mn sqft to private equity players in Bangalore for Rs2.25bn, of which Rs1bn has been received. Further, Sobha is looking to sell land in Bangalore, Pune and other cities to raise additional capital of Rs2.5bn. These asset sales will further de-stress the balance sheet, resulting in faster execution and new residential launches for the company.

We raise target price to Rs314/share from Rs288/share based on 20% discount to one-year forward NAV of Rs393/share to account for volume uptrend and better price realisation in real estate projects. The stock trades at FY11E P/BV of 1.2x vis-à-vis 2x for the sector. Sobha’s land bank’s value at cost is Rs132/share, with FY11 BV of Rs202/share. The stock has outperformed the broader markets and we expect the trend to continue, given the re-rating led by deleveraging and volume build-up in residential sales. Maintain BUY.

To see full report: SOBHA DEVELOPERS


Believe in the best

A renewed surge in spending after a 12m lull is rapidly improving Infosys’ order book, including new ramp ups from financial services customers and stability in other industry segments. This implies that both Infosys’ guidance and the current market consensus may prove lower than reality. Meanwhile, peer stocks have narrowed the valuation gap vs. Infosys, driving the sector towards a valuation equilibrium wherefrom Infosys shall be the first stock to break out, in our view. A 7.5-9.0% EPS upgrade for FY11-12 backs our optimism that after the multiple re-rating thus far YTD, an earnings upgrade cycle lies ahead. We are upgrading the stock from Outperform to Buy.

Financial services spending is returning; retail is stabilizing
Infosys’ 33% exposure to financials has been its bane in the downturn. We see clear signs of significant new business from financial services clients, including Bank of America, Barclays, Goldman Sachs, and RBS, to name a few (customer names via our channel checks, not confirmed by Infosys). Meanwhile, the beleaguered retail segment is stabilizing, even as incremental damage moderates from the ramp down at BT, now at US$50m quarterly revenue (down from its peak run rate of US$117m). Moreover, delayed vendor consolidations such as British Petroleum and LexisNexis have come to a favourable closure for Infosys.

Infosys’ guidance and consensus are both likely to be beaten
Infosys had guided for +1%QQ US$-revenue growth in the Sep quarter, while consensus expectations are closer to 2-3%QQ. We believe both numbers will be proven low, compared to the ramp-up beginning among Infosys’ customer base. A higher revenue throughput also implies that the extant margin guidance of down 150bpsYY for FY10 is irrelevant- we expect upside surprises on margins too.

What is the longer term growth trajectory?
We believe that the long term revenue growth trajectory of Indian Tech is in the low teens at best. The year past saw the sector plunge below the trend line, and FY11 could see a higher than trend growth as demand revives. Valuations are more likely to follow these swings, imparting cyclical characteristics to Indian tech stocks, including Infosys. The current phase, where earnings risks have receded and upsides seem more likely, implies upward bias on valuations as well.

Peer valuations have caught up sharply
Infosys has been a relatively modest performer in the last six months compared to other Indian IT stocks, after having held up better through 2008. With a sector wide valuation reset done, we see a fresh beginning to the sector’s investment case, this time anchored on earnings upsides, where we find Infosys holding out the greatest potential. The upgrade to BUY (from Outperform) makes Infosys our top sector pick with an 18% upside to our revised target price of Rs2,450.

To see full report: INFOSYS


IN: Excess Liquidity


• While liquidity in the interbank market continues to put downward pressure on o/n interbank rates, Overnight Index Swap rates have risen sharply on rate hike fears

• We think adjustments in the OIS market have run their course and see opportunities to receive fixed in short and intermediate maturities

• There is adequate compensation for the risk of rising o/n rates for anyone who agrees that credit tightening measures by the RBI are not imminent

• Still, the RBI has to be vigilant on loan growth and inflation so rate hikes are possible in 2010 but this risk is already reflected in the market. We think o/n rates will not rise as fast and/or as much as feared

• We recommend investors position for overnight rates to average much less in the coming quarters than what is implied by the OIS curve by receiving fixed short-term and medium-term OIS

To see full report: INTEREST RATE STRATEGY

Saturday, August 29, 2009


Early signs of weak monsoon impact

FMCG sales grow 12.7% in July, much below trend
July sales growth of 12.7% is lower than the last six month trend of high-teens growth. Most companies showed a MoM decline. We believe this could be early indication of a weak monsoon impacting top-line growth for FMCG and we will watch out for the sales growth trend in coming months. Tata Tea, Godrej and P&G continue to do well. Nestle, Colgate, Marico and Dabur showed average performance. HUL, Nirma and Britannia disappointed with mid-to-low-single-digit growth in July.

HUL - Sales gr slows down further to 7% vs. 13% over last yr
Initiatives taken by HUL to improve sales growth are yet to show positive results, as sales declined for fourth straight month. Volume growth remains negative for Soaps, Laundry, Toothpaste, Tea and Coffee. Fastest-growing categories in terms of value growth were Laundry, Skin Care and Shampoos, while Tea and Ketchups had single-digit growth. Sales declined in July for Soaps, Coffee and Toothpaste.

HUL – Market share trend was a mixed bag
July was a mixed bag, with Laundry, Shampoos, Tea and Ketchups showing gains, while Soaps, Toothpaste, Skin Care and Coffee continued to lose market share. Over last one year, HUL has lost market share across all key categories – Soaps (570bps), Detergents (210bps), Shampoos (10bps), Toothpaste (220bps), Skin Care (420bps), Tea (260bps), Coffee (770bps) and Ketchups (160bps). We believe volume gr and market share recovery will be slow and expensive for HUL.

Nestle – sales growth weakens sharply
Sales growth decline continued for Nestle and growth in July was 12%. This is significantly lower than AC Nielsen reported YTD sales growth. Market shares showed mixed trends with gains in Coffee and Chocolates, while Noodles and Ketchups lost share. The trend over the last 12 months has been negative, with gains in Coffee, but declines in Chocolates, Noodles and Ketchups.

Colgate – sales gr holds up, with mixed market share trends
July sales grew 10%. Colgate was one of the two companies to show MoM improvement in sales gr. Market share trends were mixed with Toothpaste gaining 30bps but Toothbrush lost 40bps and Toothpowder lost 90bps in July. Toothpaste is running at all-time-high market share and further improvement looks difficult.

Dabur – sales gr stable, with positive market share trends
July sales grew 10%, marginally lower that growth reported by AC Nielsen for last one year. Market shares improved for Shampoos and Toothpaste, but there were declines in Toothpowder and Chyawanprash. Over the last one year, Dabur has gained market share in Toothpaste (90bps) and Shampoos (90bps), but lost shares in Chyawanprash (470bps) and Toothpowder (130bps).

To see full report: FMCG SECTOR


AGM Highlights – Proxy On Global Generics – Stay OW

What's new: We attended Cipla AGM, a once-a-year management interaction platform. Bottom line, Cipla’s capex (Rs20 bln in F07-09), quality drug filings (7000 in 180 countries), and marketing tie-ups offer good midterm growth visibility and a sustained high ROE.

Management appeared optimistic about growth prospects and agreed that it can potentially double sales again in the next 4-5 years. For FY10, it targets a top-line range of Rs55-57 bln (implying 10-14% growth) and believes it can better its F09 earnings (adjusted for Rs2.3 bln forex losses). Management is concerned about drought conditions in India. Company appears
excited about HFA inhaler opportunities.

Where we differ: To us, the guidance appeared conservative, as it has been for the last 3 years. Cipla’s single location largest capex to date, Indore SEZ (Rs6 bln invested, another 2 bln to go), is the leading indicator of growth ahead with asset turnover of 2-3x (commercial production begins in F1Q11). In particular, we like depth in Cipla’s portfolio which includes HFA inhalers, steroids
hormones, concology, NDDS combination drugs

HFA Inhalers–Approvals Possible in 2010: Though frustrated with the long regulatory process spanning 3-4 years, management thinks the company is likely in the last lap and approvals are possible in 2010. In particular, the company was excited about salbutamol combination and formetrol combination products, and mentioned that these could be ‘game changers’, subject to the (extent of) competition.

We remain comfortable with the OW rating. In our opinion, impending fund raising (5% dilution,
management was comfortable with current valuations to dilute) is an overhang and opportunity to buy.

To see full report: CIPLA


Seasonality, weak demand hit pricing

We interacted with cement dealers and marketing personnel of cement firms, across regions and brands, to understand the demand-supply scenario, pricing trends and short-term outlook.

Prices decline by Rs3-20/bag: The monsoons, sluggish demand and new capacities have caused cement prices to fall by Rs4-5/bag on average and Rs10-20 in select markets. Prices fell in the south by Rs5-15/bag, in central India by Rs10-15/bag, the north by Rs2-3/bag and in Maharashtra by Rs5-20/bag (with a higher decline in Pune).

Seasonality, slow progress in infrastructure projects hit demand: Cement demand, which has been driven by individual housing and pre-election spends on infrastructure, slowed - due to monsoon and sluggish demand from infrastructure. But there are early signs of demand recovery from organized real estate in some markets.

Price moderation and cost inflation could affect near-term financials: While the demand and pricing outlook for the next two to three quarters is cautious, demand-supply dynamics are expected to improve from 4QCY10. The shortterm outlook is negative due to the impact of the monsoon on rural demand and muted urban housing demand, new capacities and cost inflation.

Valuations and view: We will review our estimates to factor-in changes in recent trends. Our current estimates factor in flat QoQ realizations in 2QFY10 and Rs5/bag QoQ decline in 3QFY10. For FY11 our estimates factor-in Rs10/bag decline over the FY10 average. Cement stock valuations are attractive. We prefer companies with strong cost-saving possibilities that are ahead of the curve in adding capacity. Among large-cap stocks, Grasim and UltraTech are our top picks and we prefer Shree Cement, Birla Corp and India Cement among mid-caps.

To see full report: CEMENT SECTOR


Upgrade to Buy: Concerns Abating, Outlook Improving

Upgrade to Buy — Despite the stock’s 27-29% outperformance in the last 2-3 months, we upgrade Aban to Buy (1M) from Sell (3S) with a Rs1,550 TP (was Rs520), driven by a better outlook and yesterday’s positive announcements.

Three key concerns abating — Our Sell rating was premised on 3 key concerns — (i) idle assets, (ii) high leverage, and (iii) E&P capex cuts — which did play out and have materially abated since then. The announcement yesterday of LT contracts for 4 idle rigs at healthy day rates provides us the necessary evidence to substantiate our earlier claim of improving times (see our note titled '1Q Ahead of Estimates – Signs of Improving Times' dated 31 Jul’09) and drives our TP, rating and risk rating upgrade. Debt restructuring (through moratorium on principal) also appears likely, largely precluding bankruptcy. The jack-up market appears to be showing signs of turning around, with crude at US$60+.

Duration and pricing of new contracts +ve — Aban yesterday announced deployment of 3 Deep Driller rigs in Middle East at day rates of cUS$165K for 3 years and 1 Deep Driller rig in Latam for US$120K/day for ~2 yrs. The day rates, esp. on the Middle East contract, are a +ve surprise. While political risks may have discouraged competition permitting Aban to command higher rates, Aban's presence in the region (through Aban VIII and Aban VI) reduces risk.

New TP of Rs1,550 — Key changes to our DCF assumptions: (i) improvement in industry outlook driving higher medium-term cash flows and slight improvement in mid-cycle earnings, (ii) terminal growth rate of 2% (vs. 0%), (iii) roll forward to Mar-10E, and (iv) earnings changes: -50% in FY10E, +19% in FY11E. Given the high debt, our equity value nearly trebles though our EV is up a more modest 46%. Our new TP imputes a 5.3x P/E and 6.7x EV/Ebitda.

To see full report: ABAN OFFSHORE


Hold: Good Q4 but Another Decline in IT Services Headcount

~8% sequential revenue growth led by infra services — HCL Tech reported strong Q4FY09 results – revenues increased ~7.6% sequentially with infrastructure services leading the way with 25.5% growth sequentially. Margin improvement of ~80bps qoq and lower than expected forex losses resulted in net profits increasing ~50% qoq to Rs. 3.1b.

Margins improved ~82 bps qoq — EBITDA margins improved ~80bps sequentially. IT Services margins improved by ~180bps sequentially due to better realizations and utilization rates. BPO and Infrastructure services margins declined sequentially.

Decent growth across segments — HCL Tech reported decent growth across segments – software services revenue growth was 4.5%, which was meaningfully better than peers. Infrastructure services did very well with ~25% sequential growth while BPO did well with ~4% growth qoq.

IT Services headcount declines again — IT Services headcount declined yet again – delivery headcount declined by ~500 employees compared to a decline of ~300 reduction in the previous quarter. Management comments on growth outlook for software services remain a key to focus on.

More details post the earnings call — The strong set of results will likely result in EPS upgrades across the street. The key issues to focus in the earnings call are (a) Demand outlook for IT services given the headcount reduction and (b) Sustainability of margins. The earnings call is at 1730 hrs India time.

To see full report: HCL TECHNOLOGIES