Sunday, March 15, 2009

>India cable & satellite TV (Macquarie Research)

● Colors considered joint No.1 in Hindi GECs; one ad break a big help: Viacom 18’s (unlisted) Hindi GEC Colors has garnered 304 GRPs for the latest week, just one short of the 305 for genre leader, Star Plus. We highlight the fact that the surge in GRPs was driven by Colors’ strategy for all programmes, except for its most popular family soap, Balika Vadhu, to run with only one commercial break per half-hour show. In addition, the channel has adopted the strategy of telecasting blockbuster Hindi movies over the weekend. As a result, the channel has had a remarkable and sustained increase in weekly GRPs over the last 12 weeks.

● Colors’ addition to One Alliance to strengthen its reach: From 1 April, Colors will be distributed as part of the One Alliance bouquet (Viacom 18’s MTV, Nickelodeon and Vh1 are already part of it, as are the Sony channels). This is a positive driver for Colors, as it means wider distribution and reach.

● Competitive intensity in Hindi GECs increasing: In a bid to protect its No.1 position in the genre, Star Plus has run no advertisements between 8am and 9pm over the past few Saturdays and lined up back-to-back Hindi movies, following Colors’ successful strategy. This trend of Star Plus and Colors of cutting commercial air time to increase stickiness and thereby channelling GRPs is likely to hurt shares in TV ad revenue, as it reduces ad inventory.

● Zee TV’s ad revenue share to feel pressure: We expect Colors’ strong position in the genre to work a continuing shift in advertising revenue away from No.3 player Zee TV towards joint No.1 player Colors. We note that ad revenue growth for Zee Entertainment slumped to 1.7% YoY in 3Q FY3/09. Zee Entertainment’s management asserted in the 3Q earnings call that the slump in ad revenue was entirely due to the economic slowdown. Given the tough macroeconomic outlook and with Colors now considered joint No.1, we do not see upside risk to our FY3/10E ad revenue growth forecast of 5% YoY.

● General Election to benefit news channels: The upcoming elections to the Indian Parliament, slated for 16 April to 13 May 2009, will be a big driver of ad revenues on news channels and on Zee News in the June 2009 quarter.

● Weekly GRP trends for Regional channels have not shown any change. We believe regional channels are better placed vs Hindi GECs to ride the slowdown. Zee News Limited (ZEEN IN) continues to have a solid leadership in its key regional GEC markets of Maharashtra and Bengal, with a solid lead over the competition (see Figures 6 and 7 on Page 3).

To see full report: INDIA CABLE

>Mphasis Limited (EMKAY)

Our recent interactions with Mphasis management continue to reinforce our strong belief in the company being the best demand story in the sector with a softening currency environment adding more fuel to our argument (Mphasis has higher sensitivity to a depreciating currency as offshore proportion at ~72% of revenues is the highest in the sector). Our +ive view on the company continues to get vindicated with quarterly results beating expectations by a wide gap for more than 3 quarters now. (please refer to the section: Mphasis: Best performing IT services stock across all time frames)

Though more clarity on HP’s offshoring plans would clearly help we believe that investor concerns around any unfavorable treatment to Mphasis (given that HP already has a 100% subsidiary in India) remains a wild card. Investors cite Digisoft as a precedent, however we note that even in case of Digisoft , delisting happened at significant premium to June’03 price levels. (please refer relevant section below). We are comfortable upping our FY09E and FY10E earnings further by ~15% post our interactions with the company and now expect Mphasis to report earnings of Rs 34.6 and Rs 32.2 for FY09/FY10 (as compared with Rs 29.9 and Rs 28 earlier). Maintain BUY with a price target of Rs 240. (For our comments on Q1FY09 results, please refer to our result update ‘Mphasis: Rock on performance speaks for itself’ dated
March 2’09).

To see full report: MPHASIS LIMITED

>Power Finance Corporation (RELIGARE SECURITIES)

● Strong traction in loan sanctions: In light of India’s rising energy deficit and inadequate T&D infrastructure, we expect large investments in the power sector during the 11th and 12th Five Year Plans. With more than 20 years of experience in lending to the power sector, Power Finance Corporation (PFC) is wellpositioned to leverage the growing financing opportunities. The company has witnessed strong traction in loan sanctions over the last few years and currently has outstanding sanctions of Rs 1.1tn. A large proportion of these will be disbursed over FY10-FY12 which provides strong growth visibility. We expect PFC to clock a 19% CAGR in loan disbursals over FY08-FY10 and consequently a 22% CAGR in its loan book to Rs 772bn by FY10.

● Margins to remain largely intact: In a rising interest rate scenario, PFC has benefited from re-pricing benefits on its loan assets (80% of which have a reset clause of three, five or ten years) and the fixed nature of its liabilities (90% fixed). With the recent decline in interest rate, PFC’s incremental spreads now stand at 3–4% which will help in maintaining spreads of ~2.3–2.4% for FY10. However, interest margins may come under pressure from FY11 onwards when loans disbursed in FY08 and FY09 will be due for re-pricing. Access to tax-free bonds, if allowed by the government, will help PFC to maintain its interest spreads. We are not factoring in this possibility at present.

● Robust asset quality: PFC’s asset quality has remained robust with net NPAs hovering at near-zero levels. Loans to state and central sector utilities comprise ~88% of the total loan book. Moreover, loan to utilities have an escrow mechanism in place which provides further comfort on the asset quality front. Significant T&D losses and lower realisations have weakened the financial
position of state utilities; however, losses have remained under control in the past few years and the subsidy burden as a percentage of state government revenues has declined significantly.

● Favourable tax ruling to act as catalyst: PFC is eligible for tax exemption up to 20% of the profit derived from the financing business. However, it is providing for tax on this deduction by creating a deferred tax liability due to objections from the auditors in FY05. This issue is under consideration with the ICAI; if the outcome proves favourable for PFC, the company’s tax rates for future years will be lower and its net worth will increase by ~Rs 13bn–14bn.

To see full report: PFC

>Indraprastha Gas (KARVY)

Since our last update on Indraprastha Gas (IGL) dated 4th February 2009, the stock has corrected by almost 9% to Rs 101. We believe that there has not been any adverse news for IGL and the fall in stock price is largely in line with that in the broad market. In our opinion, IGL's business model is relatively immune from any economic downturn and it is likely to benefit from compressed natural gas (CNG) sales growth during Commonwealth Games to be held in New Delhi and national capital territory (NCT) in 2010.

Petroleum and Natural Gas Regulatory Board (PNGRB) has approved IGL as the authorized entity in NCT, giving it three years marketing exclusivity and 25 years network exclusivity for city gas distribution (CGD) network within NCT.

IGL's Q3FY2009 results were depressed due to the provision of Rs 175 mn made for a disputed demand from the gas supplier, which might have adversely affected the stock price performance. However, the future growth prospects for IGL appear bright driven by increased conversion of private four-wheelers to CNG, acceleration in the conversion of light commercial vehicles (LCVs) to CNG and a sustained growth in piped natural gas (PNG) customers.

At current levels of Rs 101, the stock quotes at a P/E of 6.7x FY2010E EPS of Rs 15.1 and 2.8x EV/EBIDTA of FY2010E. We continue to value the stock based on one year forward EV/EBIDTA multiple of 5x with target price of Rs 155. We believe that the 5x multiple captures the concerns over the sustainability of margins.

To see full report: INDRAPRASTHA GAS

>Indian Financial Sector (GLOBAL MARKET RESEARCH)

Fundamental, Industry, Thematic, Thought-leading
Deutsche Bank Company Research's Investment Policy Committee has deemed this work FITT for investors seeking differentiated ideas. While credit quality risks in Indian banks are undoubtedly on the rise, we remain below-consensus on the extent of the likely NPL increase. Our analyses suggest that stock prices now offer compelling selective investment opportunity across the India financial sector. This includes paired or hedged ideas as the credit quality impact is likely to be materially different across the sector.

Fundamental: Strong headwinds, but corporate preparedness generally high We estimate our coverage universe will report a ~50% increase in NPLs in year to Mar’10E over Mar’09E. This is significantly lower than consensus that expects closer to a doubling in NPLs. Sharp credit controls and portfolio seasoning should result in NPLs peaking sooner and less severely than most think. We also derive comfort from sizeable unrealized gains, lesser global dependence of the economy, comparatively modest GDP deceleration and subsequent lower risk of job losses.

Industry: Favourable regulatory regime, but transparency risk increases Institutional frameworks such as the foreclosure law work not just as postdelinquency tools, but also as a deterrent to willful defaults. Prudential exposure guidelines and transition to Basel II function as effective self-control mechanisms. We are concerned, however, that aggressive bank restructuring – an otherwise necessary and positive trend – could make bank balance sheets more opaque and evoke investor skepticism over reported NPLs.

Thematic: Sensitivity analysis reveals primacy of private banks Detailed scenario analyses of rising NPL conditions reveal that private sector banks hold a clear advantage over PSU banks and underscore the importance of adequate capitalization levels. Valuation analysis suggests that the market has already priced in 50% higher than our increased NPL estimates, with many banks now trading at valuations closer to periods when NPLs were 3-4x higher.

Thought leading: Rising default risks but retail seasoning data positive Our detailed analysis of corporate India’s conventional default risk indicator ratios, Altman Z scores across sectors and Merton’s methodology indicate rising default probabilities in general with expectedly greater degree of stress in export-oriented sectors. We conclude that the ‘tail risk’ is still increasing, but our seasoning analysis also reveals lesser-known, positive aspects of retail loans.



Prices of crude-linked inputs appear to have de-coupled from crude prices
Prices of major crude-linked inputs for FMCG players (palm oil, LAB, and packaging material) appear to have decoupled from crude prices in the last couple of months. Though crude prices have continued their slide, prices of these inputs have moved up by 20-40% from the panic bottoms. Palm oil prices have increased from MYR1,415/ton to current levels of MYR1,900/ton, a 35% upside. Similarly, HDPE prices have risen 22% from the bottom, while LAB prices have been flat in February and March (despite ~10% fall in crude prices). Our interactions with industry players suggest that some of these commodities are unlikely to test the recent bottoms.

Agri-based commodities remain a mixed bag
Agri-based inputs remain a mixed bag, as the prices of copra, safflower, coffee and barley are on a decline, while the prices of sugar, liquid milk and wheat continue to hold firm. We believe that the prices of sugar, wheat and milk would continue to rule firm. Sugar production has been low and minimum support price (MSP) of wheat has been increased by 8%. Copra and safflower prices are likely to be weak due to start of flush season. Barley malt prices have declined globally, but processed malt prices are expected to decline once new capacities go on-stream in the next few months. Agri-commodity inflation is likely to be significantly lower than the levels seen in the last couple of years.

Rupee depreciation to limit gains from lower cost of imported inputs
The rupee has depreciated ~33% from Rs39-40/US$ in January 2008 to the current ~Rs52/US$. This has neutralized the gains from decline in input prices to a certain extent. Users of commodities like palm oil, skimmed milk powder, solvents, LAB, HDPE, barley, coffee and cocoa will have limited gains from decline in input prices, as rupee depreciation will neutralize the impact, significantly. Rupee depreciation will limit gains from palm oil price reduction for HUL and GCPL. Nestle and Britannia will be adversely impacted due to rising sugar and wheat prices. Marico will gain from lower prices of copra and safflower oil.

To see full report: FMCG SECTOR

>Equity & Commodities (MORGAN STANLEY)

What to Look for in the Equity and Commodities Environment in 2009......


We continue to expect a fight back from EM equities in 2009 and a resumption in the secular trend to outperform DM equities.

Our base case for MSCI EM EPS in 2009 is -25%, but +20% in 2010. On this basis, MSCI EM is currently valued at 7.7x 2010E P/E and 1.1x P/Book.

Our key trade idea for the year is Asia to outperform EMEA and LatAm within EM.

Asia has stronger sovereign and corporate balance sheets, more flexibility in applying countercyclical monetary and fiscal policy, and is leveraged positively to lower commodity prices. Its earnings cycle tends to trough before EMEA and LatAm.

In 2H 2008 we rotated out of late-cycle Materials, Industrials and Energy and increased exposure to early-cycle IT, defensive Telcos, and Financials and real estate in Asia.

Our largest country overweight is now China, which scores #1 on our 15-factor quant model. Other overweights are Taiwan, Malaysia, Brazil, Egypt and Israel. Underweights are India, Indonesia, Mexico, Argentina, Hungary, Thailand and Philippines.

We also recommend building exposure to physical gold and gold equities.

To see full report: EQUITY & COMMODITY

>Karvy Bazaar Baatein (KRAVY)

The dance of democracy…
For a change, a string of good news overwhelmed the markets last week, taking participants completely by surprise after what was increasingly appearing to be a bottomless pit in the penultimate week. The indications by fi nancial services majors like Citicorp, JPMorgan and Bank of America that they had operated profi tably in the fi rst two months of 2009 came as a shot in the arm for global fi nancial markets. In a scenario of complete doom and gloom, the news came in like a breath of fresh air, raising hopes of greater visibility of a turnaround and an early end to the global recessionary fears. Moreover, with IIP (index of industrial production) numbers, though negative, coming in better than market expectations, the market witnessed a major rally in the weekend session. Accordingly, the BSE Sensex gained 5.17% while the NSE Nifty rose 3.78% on a week-on-week basis. However, although the Citicorp news was certainly welcome, it is rather too early to be optimistic. With the US under the grip of the worst-ever financial crisis since the Great Depression of the 1930s, the legendary spending habits of the ordinary American may well be a thing of the past, at least for the foreseeable future. Given that we are in the midst of the MOTHER of all recessions, this view was more than suitably endorsed by the recent US Q4 preliminary GDP growth, which came in at -6.2%, with consumer spending recording multi-decade lows. Clearly, there is a marked change in spending habits, as US households increasingly tighten their purse strings. Given that India is a growing economy, however, we have the ability to generate growth within our frontiers. However, it is not going to be smooth sailing for our economy as we go to the polls in April-May. What’s more, with no clear majority in sight, we can brace ourselves for another round of fractured coalitions and confl icts that may prove to be a drag for the economy. This week, we expect the Nifty to hover between 2600 and 2850 levels and a breach below the 2500 mark should see the index slide to 2200 levels.

To see full report: BAZAAR BAATEIN

>Investment Strategy (MERRILL LYNCH)

● Inflation to Deflation: 12 months ago China’s CPI was 8.7% and the PPI 6.6%. Both measures are deflating: China’s CPI is down 1.6% y/y and the PPI down 4.5% y/y in Feb. Consensus forecasts a 10% decline in Asia’s EPS in 2009. Despite tentative signs of macro stability in recent weeks, the weak global backdrop and regional deflation still suggests the consensus is too optimistic.

● Deflation benefits Asia consumer stocks: But margin expansion for some sectors is likely due to lower raw materials costs. Asia consumer stocks faced a huge squeeze when commodity prices surged in 2006-08 (one-on-three saw two consecutive years of margin compression despite strong top-line). This should reverse in 2009 as lower commodity prices shifts EPS momentum from energy to consumer sectors (Chart 1).

To see full report: INVESTMENT STRATEGY

>Indian Automobile Sector (HSBC)

Recent growth not sustainable. The car industry’s recent growth was aided by central government employees, who received arrear pays and pay hikes due to the Sixth Pay Commission recommendations. Their contribution to total sales doubled to ~16% in February 2009 for the industry. Management said sales were positively affected by a low base, inventory push and bunching up of demand, driven by heavy discounts and excise duty reduction. Retail sales have started to slow down. We expect sales growth to dry up from Q2 2009 onwards. Rural India is a small contributor. In India, the car is still largely an urban product. Small centres contribute no more than ~15% to total car sales in the industry. Although small centres are growing healthily, the company believes that it may not be sufficient to counter the slowdown in urban centres.

Credit may not be a growth driver. Private banks continue to be cautious about lending to this sector whereas the State Bank of India is still lending, although mostly to its own customers. Of late, the credit situation has improved marginally, with sales on credit at ~60% for the industry, although this is nowhere close to the 90% level of last year. In the near term, management expects credit may not be as strong a growth driver for the industry overall as it was during 2004-2008.

Macro environment remains adverse. The outlook for the Information Technology Enabled Services sector, export-related sectors, financial services and the manufacturing sector has deteriorated as is evident from slowing GDP growth. The fear of lay-offs persists, which is the one of the biggest negatives for car demand.

Bleak outlook for FY10. Car sales have a high correlation with industrial and services GDP growth. Given the economic slowdown, the outlook for car sales is poor. We believe the talk of recovery is premature. We remain pessimistic about the outlook for the Indian auto sector.

To see full report: AUTOMOBILE SECTOR

>EMCO (KR Choksey)

Rs 550 crore order from PGCIL
Emco Ltd has received five orders worth Rs 550 crore from the state-run Power Grid Corporation of India Ltd for a 765 kilo volt overhead transmission line. The orders also involve supply of galvanised steel towers.

"Transforming" into a complete T&D EPC player
The Baroda-based Urja Engineers, a transmission-tower manufacturing company, has been merged with EMCO. Previously, it had supplied towers to EMCO for the latter's projects business. Post-expansion the merged entity would have transmission-tower manufacturing capability of 45,000 MT. Urja is qualified to bid for all State Government and PGCIL contracts. The focus is to become an end-to-end solutions provider for the EPC business.

Emco plans hybrid model for selling power
The company plans for 540 MW merchant power plant at Warora in Chandrapur district (near Nagpur, Maharashtra). The financial closure for the first phase of 270 MW (135MW X 2 units) of the project has been achieved. The plant is expected to be operational by March 2010.

Q3FY09 Results
In Q3FY09, company’s witnessed drop of 14.6% & 45.7%(YoY) in net sales & PAT to Rs 207.9 crore & Rs 8.2 crore. The topline declined mainly due to intentional delay in deliveries to industrial clients and issues in sourcing of key components.

To see full report: EMCO

>CITI (The Wall Street Journal)

Can Citigroup continue to lift the stock market?

Stocks soared Tuesday after Citi Chief Executive Vikram Pandit said the bank was profitable in the first two months of this year.

Citi is arguably the nation's
sickest large bank, so any sign it can produce real earnings in this economic climate bolsters confidence. What's more, if Citi is on the road to profitability, there is a greater chance the government's bank-sector revival plan -- involving stress tests and possible equity injections -- will get financial firms through the downturn.

So it is worth parsing Mr. Pandit's comments. "We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007," he said in a memo to employees Monday.

To see full report: CITI