Saturday, March 7, 2009

>Weekly F&O Indicators (ANAGRAM)

To see report: F&O Indicators 060309

>Infosys Technologies (CITI)


Buy: Worsening Outlook, But How Much Is Priced In?

* Management comments more bearish – not unexpected though — Our recent meetings with Infosys CEO, CFO and head of telecom vertical suggest a worsening outlook – not surprising given the macro. Confidence on margins remains high (as ever), but visibility on revenues is possibly lowest ever.

* Key comments on the outlook — (1) Budgets have less relevance — customers in cash conservation mode (2) Some existing projects coming to an end may not be replenished as deal velocity is low (3) Customers asking for price cuts (5-15%) – ~5% yoy price decline looks likely, in our view (4) Earliest possible recovery will be in mid CY10 (5) Telecom vertical outlook is challenging – best case seems to be flattish revenues next year.

* Management to continue to give guidance; flattish is best case, in our view — Management indicated that they will continue to guide based on the visibility they have at that point of time. However, given the challenging outlook, we would not be surprised if management guides to some decline yoy in revenues – flat revenue guidance seems to be the best case at this point of time.

* What is priced in? — Despite the worsening outlook, the stock has held up well, outperforming the Sensex by ~25% over last year. We believe “buy side” expectations have got reset to flat to some decline in revenues. Unless that worsens significantly, the stock remains a good defensive in the Indian market.

* Buy for better cost management/leverage to INR — Outlook for the sector is challenging; Infosys is relatively better on cost management and is best leveraged to INR. FCF yield of ~9% should also provide support.

To see full report: INFOSYS

>Tata Steel (CITI)


Sell: By No Means In The Clear

* 3Q FY09 PAT falls across regions — Cons adj PAT was Rs10bn, 23% lower yoy but better than estimates on higher than expected EBITDA and cost savings - major part of the savings being on account of hedging gains. EBITDA margins fell 350bps to 8.7% and EBITDA fell 29% to Rs29bn. Revenues rose 4% to Rs332bn despite a 24% fall in volumes (6m tonnes) due to higher realizations.

* Tata Steel India PAT fell 43% yoy — Adj. PAT at the Indian operations came in at Rs5.9bn. EBITDA margin fell to 31% vs 42% last year on lower steel volumes (-14% yoy), lower ferro alloy margins and higher raw material costs (+80% yoy per tonne). Steel PBIT margin was 31% vs 42% last year. Ferro alloys divisional PBIT fell 39% yoy to Rs1.4bn and PBIT margin was 21% vs 26% in 3Q FY08.

* Asian operations — NatSteel reported a US$16m EBITDA loss (margin -5%), while Thailand reported an EBITDA loss of US$76m, (margin -60%). Volumes fell 43% and 25% yoy respectively at NatSteel and Thailand. Weak demand, inventory write-downs and political turmoil in Thailand impacted operations.

* Corus strong 4QFY09 but outlook bleak — 3Q EBITDA was 96% ahead of our expectations, likely to be a lag effect in the quarter with negative risks to earnings. Demand continues to be 35-50% down. GBP600m cost savings hinge on hedging gains and plant closures, only the latter is recurring benefit.

* Bearish stance still justified – Demand visibility remains low with prices continuing to fall in export markets and there is potential for further disappointment.

To see full report: TISCO

>Tata Chemicals (KARVY)

Outperformer - Target Price: 140

KG basin gas to provide stability
Tata Chemicals is expected to sign an agreement to buy natural gas from Reliance Industries for its 1.15 million tonne urea plant in Uttar Pradesh. The Gas Sales and Purchase Agreement (GSPA) is expected to be signed on 6 March 2009 to get Reliance's eastern offshore (Krishna-Godavari) KG-D6 gas. The company is expected to pay US$4.20 per million British thermal unit price plus transportation and taxes which will be an additional of US$1.8 per million British thermal unit. The company has already increased the capacity of its plant from 0.86million tonnes to 1.15 million tonnes through the de-bottlenecking process. According to media reports, the company would increase capacity of urea further at Babrala plant in Uttar Pradesh if it gets assured gas supply for long-term.

The Babrala plant of the company will get 0.88 million cubic meters per day (mmscmd) of gas from KG-D6. After 0.88 mmscmd gas from Reliance, 2.24 mmscmd gas requirement of Babrala plant of Tata Chemicals would be fully met. The Babrala plant currently receives 1.46 mmscmd gas from the state gas utility GAIL India and the Indian Oil Corp (IOC). It produces both urea and ammonia. The Babrala plant of Tata Chemicals is the first in the country to run on dual fuels - naphtha and gas. The Gas Sales and Purchase Agreement (GSPA) with Reliance for supplying natural Gas will hedge the company from volatility of naphtha price and will help the plant to run at higher capacity utilisation.

We believe that supply of KG basin gas will improve the fertiliser production which we have factored in our model. We have assumed that increased capacity will run at 90% capacity utilisation in FY10. Overall, the capacity utilisation of urea plant is expected to be at 129% in FY10. We expect that the positive development would nullify the expected downtrend in soda ash business due to its declining prices (Rs 11,479 per tonne for Tata Chemical standalone which is 12.5% down in FY10 over FY09 and Rs 10,750 per tonne for Brunner Mond which is 12.3% down in FY10 over FY09) and volumes (decline by 5.6% and 3.2% for Tata Chemical standalone and Brunner Mond respectively for FY10 over FY09).

To see full report: Tata Chemicals

>Oil & Gas Petrochemicals (ICICI Securities)


Bids announced – Surprises abound.....

* Cairn’s participation a positive surprise as it offers some visibility for the company’s plans. Notably, Cairn would be generating huge positive cashflows once production commences in Q3CY09 in the resource-rich Rajasthan block. CGD is likely to result in utilisation of cashflows from the company’s E&P business. Cairn has bid for Kota and Sonepat in a 50:50 JV with Bharat Petroleum Corporation (BPCL). Interestingly, there may be a possibility of utilising gas from the
Raageshwari field for distribution to Kota and neighbouring areas; this, in turn, could provide gas reserves from the company’s Rajasthan block for its CGD business in Rajasthan. We are awaiting further details about total capex commitment for the business. Though positive, overall upside from the nascent CGD venture would be minimal. However, we maintain Cairn as our top pick in the sector on the back of cheaper valuations and our bullish outlook on long-term crude prices.

* RIL surprises – Bids for only one location. We had expected RIL to be aggressive as regards CGD ventures and bid for maximum number of locations. However, of the six locations opened for bidding, RIL has only bid for Kakinada. Based on the small size of RIL’s CGD venture, we do not anticipate any meaningful impact on the company. Albeit, RIL’s bidding for only one location provides better visibility to small players such as GGCL and Indraprastha Gas (IGL).

* GAIL and IGL to compete outside NCR. GAIL, via its wholly-owned subsidiary GAIL Gas, has bid for Meerut and Sonepat, whereas IGL, in which GAIL has 22.5% stake, has also bid for the same locations. The managements of GAIL and IGL have confirmed that GAIL would not compete with IGL in National Capital Region (NCR). However, both managements have reiterated that they are separate entities and would compete outside NCR on a level playing field.

* Indian Oil Corporation-Adani JV bids for four cities. IOC and the Adani Group have jointly bid for four cities. GSPC Gas has ventured out of Gujarat and bid for Dewas, Madhya Pradesh.

* Ball in PNGRB’s court. Post initial bids, PNGRB would require certifying eachvcompany/JV’s eligibility for the bid and thence evaluate the bids before final allocations. Though the CGD business is in the nascent stage at present, we expect it to grow considerably and replace the more expensive MS/HSD/LPG in due course, thereby also resulting in increased exports of petro-products.

To see full report: Oil Sector