Tuesday, March 10, 2009

>Indian Real Estate (CITI)

* Resi demand and IT growth seem strongly correlated — We believe the housing boom in the past few years can largely be attributed to strong growth in the IT/ITES sector. Data on strong housing loan growth of 32% CAGR during FY03- FY07, at a time when the Top 3 Indian IT majors’ (a good representative of the sector) employee base grew at 44% CAGR, followed by moderating growth rates in FY08 (Figure 1), suggests the same.

* Slowdown/cuts in IT hiring to adversely impact resi demand — With most global/domestic IT companies going slow on hiring plans, we see this adversely impacting housing demand. Slowing home loan growth (an indicator of housing demand) of 10% YoY on the back of slowing employee growth (14%) for the Top 3 Indian IT companies in 3QFY09 are early signs of this trend, in our view. A deteriorating outlook for Indian IT and our IT analysts’ headcount forecast for the Top 3 IT majors revised down by 2%-17% since Jun 2008, also raise
demand risks.

* Job losses in other sectors will affect demand too — According to a national survey by the labour bureau ~0.5m jobs were lost during Oct-Dec 2008, with the gems & jewellery, transport and auto sectors most affected (Figure 5).

* Pay cuts/lower salary hikes also to weigh on housing demand — In addition to job losses, we see increasing risks of pay cuts and low visibility on pay hikes weighing on near-term demand for homes. According to a survey by Hewitt Associates, projected salary hikes for 2009 in India have dipped to 8.2% vs. an increase of 13.3% in 2008. Sectors with the lowest projected salary hike include employee-intensive sectors such as Retail, IT, Banking & Financial
services and Media/Communications.

To see full report: INDIAN REAL ESTATE



# We have revised our FY 09-10 GDP growth forecast to 4% from 5.2%. We see the risks as tilted to the downside.

# We expect the economy to witness deflation from April to October 2009 at least.

# In our view, further loosening of monetary policy is likely to come from significant real effective exchange rate depreciation and policy rate cuts.

# For Q3 09, our repo rate forecast is revised to 3% from 4%, and our reverse repo rate forecast is revised to 1.5-2.0% from 2.0-2.5%.

# We expect further rate cuts in the next few weeks as January IP remains weak, global macro data weaken further and financial markets remain soft.

# Our three-month USD/INR forecast is 56.

To see full report: USD/INR

>Indian Hotels (CITI)

* Average Jan’09 occupancies down to 58%, ARRs fell 14% — While this was better than Dec’08 (immediately post the terror attacks), data is disappointing. Jan is traditionally considered peak business season for hotels and average occupancy falling to 58% (vs. 79% in Jan’08) with ARRs down 14% YoY in 10 key cities across India does raise downside risks to earnings. Bangalore and Pune reported the least occupancy for the month at 49% and 43% respectively, with Mumbai at 54%.

* Occupancy likely to remain subdued — With business and tourist traffic down following the global economic downturn and risks of likely supply kicking in (though with delays), we expect occupancies to remain muted over the next 1-2 years. We forecast occupancies to decline to 63-66% in FY09-11E vs. 72% in FY08.

* Intensifying competition to impact ARRs — Declining ARR in Jan’09 could be early signs of intensifying competition. With more international hotels looking to enter India and existing players having ongoing expansion plans across most markets, we see pressure building on ARRs and forecast a 1% CAGR decline in ARRs for FY09-11E, with ARRs down 6% in FY10E.

* Reiterate cautious outlook — Hotel stocks have fallen 33-55% in the last six months and look attractive on valuations. However, with no near-term catalysts, and expectations of lower occupancy and ARR levels and increasing risks to earnings, we maintain our cautious outlook on the sector. Indian Hotels is our best relative play, on attractive valuations of 0.7x P/BV; maintain Hold (2H).

To see full report: INDIAN HOTELS

>PTC India Ltd. (WALLFORT)

Steady flow of revenue
-> The company has signed various long term power sale agreements and MOU with various companies.

-> Apart from this, the company's financial aim is picking strategic stake in Captive and regulated power generation plants.

Long-term solutions to make business stable:
-> PTC has already diversified its business by entering into long-term contracts with power generators. The power purchase agreements (PPAs) and power sale agreements (PSAs) range from 10 to 35 years and provide for tie-up of long term capacity.

-> PTC has already signed PPAs and MoUs for purchasing 11940 MW of power and 33000 MW power from various power projects as part of the long-term solutions, as a part of PTC's portfolio this would provide stable and long-term business, mitigating the risk of volatility in volume of business inherent in short term-trading.

The company plans to make a shift towards a greater share of Long Term Trade (LTT) in its revenue pattern

To see full report: PTC INDIA LTD

>Grasim Industries (MERRILL LYNCH)

Co expects 4Q FY09 & 1Q FY10 to be strong for cement
Grasim said continuously falling imported coal prices coupled with stable cement prices will boost cement profits through 4Q FY09E & 1Q FY10E. This short-term visibility coupled with expected free cash generation from FY10 onwards may be driving investor interest in the stock; FII ownership in Grasim is now ~22% vs ~20% in Sep ‘08. Our underperform rating on Grasim reflects f’cast YoY earnings weakness in FY10E and downside risk to cement prices over next 12-months.

Pressure on cement prices likely from 3Q FY10E
Grasim expects pressure of oversupply to hurt cement prices from 3Q FY10E onwards. The Co estimates ~30mn tpa of new capacity additions across the industry by Mar ‘09 but believes the ramp up of new capacities could take 2-3 quarters. Citing its own experience with both the Shambhupura & Tadpatri expansions, Grasim said that the clinkerisation units were ready in Mar ’08 but associated grinding capacity will be ready only in next 1-3 months.

North India witnessing demand surge
Grasim said that demand growth in certain pockets of north India has surged led by 1) activity relating to Commonwealth Games (the games village is targeted to be complete by Dec ’09); 2) lower cement imports from Pakistan owing to reimposition of counter-vailing duty (CVD) on imports. At a pan-India level, however, economic visibility remains low; the Co cautiously f’casts demand growth at 5-6%.

To see full report: GRASIM

>Fortis (ICICI Direct)

Going strong : Fortis Healthcare declared its consolidated results for Q3FY09 with robust growth of over 400% in its operating profits. This robust growth in operating profit was mainly lead by a rise in its total bed capacity, improvement in average revenue per occupied bed (ARPOB) and better cost control management. Due to better operating performance, the company reported positive net profit for the quarter, despite a decline of 64% YoY in its other income.

Highlight of the quarter : Net sales rose 32.5% YoY to Rs 161.1 crore on account of a rise in number of facilities and improvement in average revenue per occupied bed (ARPOB) across its various hospitals. On an individual performance basis, Escorts (Delhi) recorded highest revenue of Rs 146.4 crore as against Rs 129.8 crore last year on a nine monthly basis, whereas on percentage terms Escorts (Jaipur) recorded highest growth of 187.5% with total revenues of Rs 27.6 crore over a period of nine months. The company also adopted various cost control measures. As a result its operating profits for the quarter recorded over 400% YoY growth. Its net profit for the quarter stood at Rs 5.1 crore compared to a loss of Rs 6.8 crore last year. The EBITDA margin for the current quarter was 15.4% as against last year’s EBITDA margin of 3.9%.

Valuations: At the current market price of Rs 65.5, the stock is trading at a level of 20.6x and 15.1x its FY09E and FY10E EV/EBITDA, respectively. With consistent strong growth at operating levels, we maintain our target price of Rs 92 and rate the stock as OUTPERFORMER. The target price was arrived at by using the DCF methodology.

To see full report: FORTIS

>Dr. Reddy’s Laboratories (IDFC SSKI)

DRL continues to be comfortable on Russia; CIS markets seeing pressure: With a sharp depreciation in the Russian currency ruble and other CIS currencies, the street has been concerned on DRL’s exposure to these markets. To put it in context, Russia and CIS are DRL’s most profitable geographies and accounted for 11% of DRL’s sales for 9MFY09 (excluding one-off Imitrex sales). We estimate that these geographies contribute much higher ~16% (for FY09E) share to the overall gross profit, which underlines their importance. DRL has taken a Rs300m hit due to the MTM impact on its outstanding receivables from the region.

Betapharm – AOK tender implementation likely; expect another impairment charge in Q4FY09: DRL believes that AOK tender is most likely to get implemented in the current round even though there may be a delay of 2-3 months. (AOK is the largest insurer in Germany with ~65% of population under coverage. AOK’s tender has been scuttled twice before due to legal hurdles.) AOK has already won favorable verdicts in a few litigations initiated by some players against the tender process. Given this backdrop as well as its feedback from the AOK officials, DRL expects that AOK will win the remaining cases too and will be able to enforce the tenders. The implementation is likely from May-June 2009.

To see full report: DR. REDDY LABORATORIES

>Cipla Ltd. (BNP PARIBAS)

• Initiate with a BUY rating and TP of INR250 on the back of steady growth and a risk averse business model.
• Conclusion of its capital expenditure programme will mean capital efficiency returns to high levels.
• We value the stock at 19x FY10 EPS; target price implies 33% upside.

A breath of fresh air

Performance enhancing drugs
We initiate coverage of pharmaceutical company Cipla Pharmaceutical with a BUY rating and target price of INR250, implying 33% upside from current levels.Cipla has a unique business model that insulates it from fluctuations in end-user demand and from regulatory and R&D

investment risk. This is due to an effective partnership strategy and dominance in the domestic formulation market. We believe its recent outperformance vs. the broader market and its valuation premium will continue, on the back of strong earnings growth.

A clean bill of health
Cipla, unlike other large Indian pharma companies that have adopted aggressive growth strategies, has stuck to its core business of supplying pharmaceutical products to its customers (pharmaceutical companies) across the globe. This focus has resulted in more modest growth than some of its peers, but has ensured predictable cash flow and steady, long-term growth. Cipla’s geographically diverse and low-cost business model is well placed to leverage the growth of generics globally, which is relatively insulated from the broader economic environment.

To see full report: CIPLA

>Dividend Yield Stocks (ANAGRAM)

In current market situation dividend paying stocks offers attractive yield to investors. We have taken the following factors into consideration for dividend yield stocks.
  • Dividend yield should be greater than 8%.
  • Low Debt Equity Ratio.
  • Available at reasonable valuation.
  • Provides good dividend cover.
  • Stability in profit growth for 9 months ending December and visibility of earning growth for next year.
By investing in following stocks, investors should receive good dividends while we wait for the current market route to get over, and once the tide turns this stocks has the capability to offer significant price appreciation to its holders.
  • Coromandel Fertilizers
  • Tata Elxsi
  • NIIT Ltd.
To see full report: Research Note