Wednesday, March 11, 2009

>Oil&Gas and Petrochemicals (ICICI Securities)

* Upstream players, ONGC & Cairn to benefit from weak rupee. If FY10E rupee- US dollar rate were to average at the current level of ~Rs51, FY10E earnings of Cairn and ONGC would be 23-28% higher than our base-case estimates of Rs5.8/share and Rs72.7/share respectively with exchange at Rs44/US$1. For ONGC, most of the incremental revenues, due to weak rupee, will be passed on to the company as incremental subsidy sharing to ONGC will be very low.

* RIL approaching its worst-case valuation. At present, RIL offers 23% upside to our fair value of Rs1,440/share. We strongly advice investing in the stock on corrections below Rs1,100/share as most negatives would be priced in. Any newsflow on the E&P front from D-4 and D-9 blocks would be positive for the stock. We are negative on OMCs and advice booking profits. Although we believe that liquidity for OMCs will improve through FY10 due to improvement in their marketing profitability and disbursement of pending oil bonds, valuations already factor in the likely improvement in fundamentals. Possible lowering of HSD prices and reintroduction of customs duty on crude would further risk OMCs’ profits.

* We prefer upstream sector. We maintain Cairn as our top pick in the sector – The stock currently trades at long-term implied crude price of US$54/bl. We believe crude price will rebound in the long term on the back of higher exploration and development costs of ~US$35-40/bl for marginal offshore fields; this will support higher crude price in the long term and sustain additional crude supplies from marginal upstream producers. We maintain ONGC as our top pick among oil PSUs as the stock offers 26% upside from the current level. At Rs600-650/share, the stock offers a good entry point for long-term investors.

* GAIL – Any correction offers good entry point. Post the recent correction, the stock offers 16% upside to our fair value of Rs234/share. We recommend entering the stock post further correction to Rs190/share.

To see full report: OIL&GAS SECTOR

>KSB Pumps Ltd. (KR Choksey)

Strong growth in sales: In Q4CY08, the company’s sales have increased by 33% on a y -o-y basis to Rs174.7 crore from Rs131.8 crore. In CY08, the company’s sales have increased by 28% on a y - o-y basis to Rs596.9 crore from Rs crore. The increase in the sales of the pump segment by 47% y-o-y and 31% q-o-q has lead to a robust growth in sales of the company. Inspite of slowdown in its user industries, KSB Pumps has shown a robust growth in its top-line and we expect the company to out-perform in long-run

Margins declined quarterly: The operating profit in Q4CY08 grew by 3% y-o-y and declined by 8% q-o-q to Rs27.7 crore accounting for a fall in the operating profit margin by 469 bps y-o-y. Steep fall in margin was due to the rise in staff cost as well as other expenses. The staff cost as proportions to sales rose sharply by 346 bps y-o-y and other expenses was higher by 271 bps. Rise in cost of staff and other expenses were likely on account the commissioning of new additional plant at Sinnar near Nashik. EBITDA for the year has increased by 50% to Rs108.4 crore compared to Rs72.4 crore, whereas the margins have increased by 260 bps to 18.0%.

Valuations: The growth of the pump industry would be driven by the heavy investments being made in the user industries, such as power and petrochemicals. However delay in the expansion plans of user industries and volatility in raw material prices going forward can affect the company’s earnings. At the CMP of Rs206.1, the stock is trading at 5.5x CY08 EPS of Rs37.2 and 4.7x CY09E EPS of Rs43.4. We recommend a BUY with a target price of Rs242, implying an upside potential of 17%. At the target price, the stock would be valued at 5.5x CY09E EPS of Rs 43.4.

To see full report: KSB Pumps

>Cement Sector (EDELWEISS)

While price correction in FY10 is a near certainty, the frequent question of “how much” yet remains unanswered. Current assumptions by both analysts and companies about the extent of correction are, at best, only guesstimates. While the actual extent by which prices will fall will be known only post facto, in this piece, we attempt to explore “What is likely to be the ceiling of price correction in the sector? While companies slipped into the red in the earlier downcycle, did price corrections result in EBITDA losses? What is different this time around?” Inferences from the past lead us to conclude that sector realisations move in tandem with changes in utilisation rates. Now, with average utilisation expected to correct to 85% in FY10E from 95% currently, we expect FY10 to set the stage for price corrections in the cement sector. Apart from supply side influx, we believe soft demand will further dampen sector fundamentals. We have used base case demand growth of 8% in FY10-11E for our computations. With GDP expected to grow by only ~6% in FY10 and ~60% of cement demand arising from housing (which is not witnessing revival as yet), actual cement demand growth could be lower at ~5-6% in FY10-11E (implying utilisation rate of 82% in FY10E and 75% in FY11E).

In FY03, at 8.7% domestic demand growth and 86.8% utilisation level, sector realisations corrected 13%. Hence, this time around, with a lower demand growth, lower utilisation level, and sharp run up that cement prices have witnessed (during FY06-09E, realisation increase of 74% vis-à-vis 39% cost increase), price fall is likely to be higher. One can argue that players can come together and voluntarily reduce supply and thereby protect prices. However, maintaining market share is an important consideration which makes curtailing volumes through voluntary measures difficult. Also, the reasoning that “the industry is more consolidated now than during the previous downturn which will help avert price cuts” holds little ground in our view as consolidation levels are not too different (capacity share of top 8 groups is likely to be ~62% in FY10E compared to ~60% in FY03).

To see full report: CEMENT SECTOR

>Auto Sector 2 wheeler (RELIANCE MONEY)

Bajaj Auto has reached an agreement with KTM regarding to hike Bajaj Auto's stake in the latter and the deal would be completed over the next two months.

Harley-Davidsonis now looking at expanding its operations worldwide and also wants to bring its bikes to India.

Honda Motorcycle & Scooter India Ltd. has launched the Honda CBR1000RR Fireblade and CB1000R sports bikes in the Indian market. These bikes will be imported into India as CBUs and given the stiff import duties levied on such machines, prices are stratospheric - Rs.1.25mn for the Fireblade and Rs.0.95mn for the CB1000R.

Yamaha India is now looking at expanding its dealer network and may even use its India facility as an exports hub for shipping bike and engines for its global operations. Yamaha plans to invest up to Rs.2.4bn in its Indian operations by 2011 and will develop at least two or more brand-new bikes which would be engineered specifically for this market. The company is also looking at increasing the number of its dealerships in India to around 600, by end-2010.

To see full report: AUTO SECTOR

>GSPL (KR Choksey)

Investment Rationale: Contribution to Gujarat Socio-Economic Development Society (GSEDS) will be up to 30% of PBT and every year board have to pass the resolution. No contribution to make, if the projects are not identified by GSEDS and Income Tax department not giving tax exemption certificate. Management is in opinion that PNGRB will not approve social contribution as expenses when setting the tariff. For the FY09 GSPL yet to provide social contribution; however we have taken conservative approach and provided 30% of PBT in our estimates. Recent increase in tariff largely due to current lower post tax RoCE of ~11.5% vs regulated post tax RoCE of 12%.

Other developments: It has filed an EoI with PNGRB to lay pipeline between Mallavaram, AP and Bhilwara, Rajasthan of 30mmscmd capacity largely to cater gas flowing from GSPC in FY2012. Management has not ruled out further equity investment in GSPC Gas Company Ltd and Sabarmati Gas Limited which are developing CGD network in Gujarat. Capex for FY09 be ~Rs 400 crore and FY10 be Rs 250 crore. Capitalization of Bharuch-Jamnagar pipeline after KG D6 gas flow.

Financial performance: GSPL reported net sales of Rs 110.6 crore, up 6.2% y-o-y & -1.0% q-o-q in line with our expectations. However volume was below our expectation and declined to 13.1mmscmd, de-growth of 25.8% y-o-y and 15.8% q-o-q due to the competitive naptha prices in the quarter. Operating profit of Rs 101.6 crore, up by 4.6% y-o-y, higher staff & O&M expenses reduced the profit margin by 128 bps. PAT was down 9.7% y-o-y and 2.6% q-oq due to lower operating profit and other income.

Valuation: We have reduced our volume expectation to 26.5mmscmd & 36mmscmd due to delay in KG Gas D6 volume to RIL Jamnagar refinery, 30% of PBT towards social contribution, and changing competitive pricing in naptha prices. We have reduced our FY09, FY10 & FY11 earnings from the Rs1.7, Rs2.7 & Rs3.4 to Rs1.4, Rs2.2 & Rs 3.9. However, at the same time the current valuations are not factoring the meaningful volume increase beyond 2HFY11 and any upside from its expansion beyond Gujarat. At the CMP of Rs 33, GSPL is trading at 6.2x its TTM CEPS and 7.3x its FY09E CEPS of Rs 4.5. We maintain a BUY on the stock with target price of Rs 40, giving an upside potential of 20%.

To see full report: GSPL


Estimates changed to factor in concessions to existing raw material contracts :
SAIL’s coking coal contracts typically run from July-June and adjusting for the unlifted quantities, we earlier expected the benefit of lower coking coal prices to accrue only from Q3FY10. However, we believe SAIL has received significant concessions on its existing coking coal contracts that offer flexibility to defer the purchase of unlifted quantity of coking coal over the next few quarters. These concessions, in our view, are now being offered across all Indian steel companies – particularly by one of SAIL’s key supplier. This would translate into an immediate drop in raw material costs, though the difference would be spread over the next few quarters. Hence, we re-evaluate our numbers and account for (a) significantly lower raw material costs in Q4FY09; (b) spillover of unlifted contracted coal volumes leading to higher than- expected costs in FY10; and (c) lower average realisations for FY10.

SAIL’s earnings sensitive to new coking coal prices:
We estimate new iron ore and coking coal contracts to be signed at 33% and 50% lower respectively. This would translate into a substantial US$160/tonne saving in coking coal cost for SAIL. Press reports suggest an even higher drop in coking coal cost to US$100-110/tonne. A further 10% drop in imported coking coal price would prop SAIL’s earnings by 15%.

Though SAIL has 100% backward linkages for iron ore, its operating margins are vulnerable to international coking coal prices and freight rates. SAIL imports 69% of its total coking coal requirement (~10m tonnes – 8.5m tonnes from Australia and 1.5m tonnes from USA), and procures the remaining through coal linkages (via CIL) and captive mines. High dependence on imported coking coal renders SAIL’s earnings highly sensitive to coking coal prices.

To see full report: SAIL

>Piramal Healthcare (ENAM Securities)

CRAMS: STHICCUPS, BUY LT GROWTH INTACT : We met PIHC's CRAMS head to get an update on the business. The meeting reinforced our view that the trend of "Outsourcing to India" is gaining momentum, though growth rates would be muted for the next of couple of quarters (inventory rationalization by innovators). PIHC expects better business mix (higher contribution from early phase development products) and opertional effeciencies will be the key growth drivers for profilability in the next 12-18 months.

Key Highlights - Macro Trends

-> Reduction in lead time in closing contracts, as Big Pharma under severe pressure due to deciling R&D productivity and loss of patented revenues.

-> Big Pharma to focus on optimising R&D spend, as R&D budgets are being cut - increase likelihood of outsourcing.

-> Biotech innovators are under severe pressure (orimarily dependent on VC funding), however, biotech developers have started looking at working directly with Indian companies.

To see full report: PIRAMAL

>Marico Ltd. (ENAM Securities)

-> Flush season (Feb-May) promises to ease RM cost pressures: Marico's flagship brands, Paranchute & Saffola {~53% sales & ~70% of profits) underwent acute gross margin contraction in 9mFY09 due to a sharp rise in RM prices (as demand for edible oil oils increased). Despite siginificant pricing power, Marico tried to maintain a balance between margins & affordability. However copra price is softening due to the current flush season & demand slowdown (consumer switching to palm oil).

-> Volume growth remains firm, despite sequential slowdown: Volume growth in saffola (~15% of group sales) will revert back to 8-10% in next 2-3 quarters led by price corrections. Coconut & hair oil segments are expected to maintain growth rate of ~8% & ~13% respectively, led by ground activations & conversion from loose packs. However, domestic revenue growth will slow to 12% in FY10E, due to lower price led growth.

-> International business (20% of sales) unlikely to be impacted: Receding inflation fears (easpecially in Bangladesh & Egypt), distribution initiatives and entry into neighbouring international markets will maintain growth. Supply chain initiatives to yield ~100 bps expansion in margin for international business.

-> Kaya and new launches (ZEST) unlikely to impact earnings: Kaya to post PBT loss of ~Rs 40 mn, but expects to achieve cash breakeven in FY09E.

At CMP (Rs 57) the stock is trading at 18.3x FY09E and 14.9x FY10E earnings. Our 1 year TP of Rs 69 is based on 12 month rolling fwd EPS of Rs 3.8 & target P/E of 18x. Maintain sector Outperformer rating.

To see full report: MARICO