Saturday, March 21, 2009

>Cement Sector (ANAGRAM)

Volumised Growth: All India cement production and dispatch witnessed healthy growth of 8.6% and 8.7% YOY, respectively. North and East regions witnessed strong volume growth, however overall volume growth was dragged down due to sluggish growth in West and Central. All India capacity utilization was 92% in Feb 09 against 95% in Feb 08. The capacity utilization rate recorded in Central region was highest at 97% and South recorded the lowest utilization rate of 88%.

Policy Updates: Providing relief from the impact slowdown, Government announced reduction in excise duty and service tax by 2%. The general excise duty on bulk cement has been reduced from 10 percent to 8 percent, the rate of service tax cut from 12 percent to 10 percent. Proposed excise duty of 8% ad valorem or a specific duty of Rs 230 per tonne, whichever is higher, benefits of which would be passed on to end users resulting in price reduction of Rs 3.50 - 4.50 / per bag.

Prices: Rising demand from the country's semi-urban regions and the housing sector is likely to keep cement prices firm for the next few months. The demand for the building materials, which saw a sudden spurt in November-December, has not been affected by the continuing economic slowdown

Coal Price Dips: Average coal prices for Feb were at USD 72/tonne. Prices decreased 6% compared to Jan. The Baltic Dry Index was up by 80% in Feb compared to Jan.

Outlook: The government is likely to go ahead with the promised infrastructure projects, which have got financial closure, as elections will be held soon. This would certainly push the demand. The industry is doing better than general expectations. The demand scenario is expected to remain buoyant till April-May, thereby keeping the prices firm. UltraTech, Grasim, India Cement and Madras Cement are likely to add capacities to the tune of 13 million tonnes in the next three months.

To see full report: CEMENT SECTOR


We recently met with the Sun TV management, following are the key takeaways

  • Q4FY09 revenue growth estimated at 24% YoY
  • No impact of slowdown on advertisement revenues
  • DTH segment and increasing addressability to bolster revenue growth
  • Revenues from analogue cable segment to grow at 4-5% annually
Topline to reach Rs103.8bn in FY09 According to the management, Sun TV's Q4FY09 revenues are expected to grow at 24% YoY to Rs30.6bn. In line with this growth, the company's revenues for FY09 are estimated to touch Rs103.8bn, an upside of 19.3% over FY08. View on advertisement revenues
  • Sun TV claimed that it has not yet witnessed any slowdown in its advertisement revenues
  • The company indicated that its advertisement slots were booked two months in advance Sun TV believes that if the overall ad revenues for the industry drops, the company will also suffer from lower growth in ad revenues. Nevertheless, according to the management, the company's ad revenues would continue to grow, albeit at a slower pace, but not turn negative in the near term.
  • A key positive for the company is that more than 50% its ad revenues come from the FMCG sector that is expected to grow at 10-12% per annum over the next two years.
  • Sun TV faces high regional concentration risk as it derives more than 50% of its ad revenues from Tamil Nadu. This remains a key concern.

Radio business
Sun TV expects its radio business to breakeven in FY11; losses for FY10 are estimated to stand at Rs600mn.

Movie Segment
For FY10, Sun TV's movie budget is estimated to be in the Rs700-800mn range for 9-10 small and medium budget movies. In addition, the company is also planning a big budget movie (amounting to Rs700mn) during FY10.

To see full report: SUN TV

>Suzlon Energy Ltd. (ANAGRAM)

Suzlon Energy is the fifth largest wind energy player in the world, with 10.5% market shares around the globe. Already among the top five, Suzlon's Vision to be a technology leader to be among the top 3 wind energy companies in the world. To deliver and to end solution, Suzlon has developed expertise in R&D, manufaturing, marketing & sales, EPC project delivery and lifetime operations & maintenance services for Wind turbine. It has developed a range of wid turbine models ranging from 350KW to 2.1MW. It operates in more than 20 countries around the globe.

Investment positive

Positive Policy Development in USA

The house of democrats has passed a USD787 billion economic stimulus plan. A tenth of the USD787 billion will be alloted to enviromental endeavors. This package is supposed to stimulate the economy and create jobs. Following are some of the measures which will boost alternative source of energy:-

  • The bill makes a provision of $6 billion in loan gurantees for renewable energy projects.
  • The package has also crafted a news 30% tax credit for equipment and facilities that produce renewable energy generating materials.
  • Plan also includes US$6.3 billion for energy efficiency and conversation grants, and another fund of US2.5$ billion for energy efficiency and renewable energy research.

To see full report: SUZLON ENERGY

>Transformer Sector (EMKAY)

The growth engine of the transformer sector, fuelled by supply shortage and input cost inflation during FY03-FY08, is likely to splutter in FY10E. The strong buoyancy during the FY03-09E period triggered off a series of ambitious capacity expansion plans by exisiting players and entry of new players in the market. With an 80% addition in installed capacity in FY07-10E period, we expect the transformer industry to reel under overcapacity. We expect an oversupply of 14% of installed capacity or 45,012 MVA- highest in last 9 years, despite optimistic demand assumptions.

With an absence of momentum drivers and room for downward revision in earnings estimates, we give thumbs down to the transformer sector. Our transformer universe is expected to report disappointing performance with a 24% decline in net profit in FY10E. We expect ROE and ROACE to decline by 1800 bps and 1300 bps to 17% and 14% respectively during FY08-10E. Our transformer universe is available at a PER of 4.7 x FY10E and PBV of 0.7xFY10E, at a premium to a bouquet of companies with similar demand drives.

To see full report: TRANSFORMER SECTOR


CFS/ICD container volumes continue to feel the pressure
Growth in container volumes is a function of global trade. Therefore, in the absence of any uptick in the EXIM trade, Gateway Distriparks’ (GDL) container volumes are expected to be under pressure in H2FY09. Management expects volume decline in the fourth quarter to be steeper, to the tune of 20% Q-o-Q. For the full year, CFS volumes are expected to register a decline of ~7-10% Y-o-Y.

Increase in realisation due to higher ground rent likely to be reversed
In a declining volume scenario, realization for the company in the past few quarters has been increasing. The realization in Q3FY09 was at INR 8996/TEU, a growth of 22.7% Q-o-Q, on account of higher ground rent charged. This was due to unwillingness of importers to take container deliveries, which resulted in higher ground rent, translating into higher realisations for the company. We, however, continue to maintain that this kind of trend is unsustainable. Also, the company’s realisation is expected to come under pressure in the coming few quarters.

Capex plans to slow down due to uncertain environment
GDL is expected to go slow on its capex plan in the coming few quarters. 70% of the incremental capex is expected to be in the container train segment, while the remaining will be towards setting up of CFS/ICD. GDL currently owns 13 container rakes and is expected to take delivery of another rake in Q4FY09. Currently, the company is operating 10 rakes on the domestic sector and the remaining on the EXIM route. It is expected to set up three new ICDS at Kalamboli, Ludhiana and Faridabad by December 2009.

Focus on domestic container in railways to boost volumes

GDL continues to focus on domestic segment for container traffic growth in its container train business. The company expects that, with train operators increasing their services and providing last mile connectivity, there will be a shift in volumes from the traditional roadways to transportation of goods by railways which is ~30% cheaper vis-à-vis road transportation. The current market share for railways is ~35%, which is expected to be ~55% in the coming few years.

To see full report: GATEWAY DISTRIPARKS

>Fun with Flows (CITI)

Inflows to Asian funds resumed — With hopes that China could lead the global economy out of recession, foreign investors have put new money into China related equity funds. As per the latest EPFR data, net inflows to China and Greater China funds totaled US$271m last week, the biggest net inflow in two months. Excluding these, net redemptions from other Asian funds continued, albeit with reduced outflows (US$178m vs. US$687m in the prior week).

Flows to Taiwan funds turned positive for the first time in eight weeks — The fact that Taiwan continues to be the best performing market in Asia YTD has finally gained some traction from overseas investors and moderate inflows were reported last week. Korea, the other market we like, saw outflows decelerate for the first time in four weeks when the KOSPI outperformed. Indeed, foreign investors turned net buyers in the Korea market, while net purchases by local institutions quadrupled during the period.

Redemption pressure sustained amongst other regional fund groups — While inflows to Asian and GEM funds resumed last week (both with China exposures), other emerging market funds continued to face outflows. In addition, International equity fund redemptions remained at billions of dollars. Year-to-date, total net outflows from this category have risen to US$7.7b, up 93% year-on-year.

To see full report: FUN WITH FLOWS

>Economic Commentary (CLSA)

Although we have been conservative in our expectations for India since late 2007 the shine is now well and truly coming off the growth story. India is now perceived as one of the riskiest markets to be in. Disappointment has mounted. The latest being fiscal which led S&P to downgrade India sovereign debt from stable to negative last month. Tax revenues are crashing, expenditure exploding as the government in a bid to win the elections has given full bridle to its populist urges. We are forecasting that the public sector deficit, already 11% of GDP this fiscal year, will rise to 14% in FY09/10. 10-year bond yields have spiked and the rupee is weakening again. We are not forecasting an Argentine style debt crisis. The bulk of Indian government debt is domestically held and Indian banks are eager buyers of government securities. However not only is the government’s US$500bn infrastructure program on the back burner but the spread between private and public sector borrowing costs has widened, bad news for private investment spending. Meanwhile the cyclical growth slowdown is worsening. Credit growth is slowing. The manufacturing recession is deepening. Job losses are climbing. Non-oil imports are slowing and inflation is falling rapidly belying the underlying weakness of domestic spending. We are forecasting 4.6% GDP growth in FY09/10 and only expect the domestic economy to stabilise in early 2010. We expect the IRs/US$ to see 57 this year and for interest rates to fall by another 150bp from here.

Where do we start? The deluge of bad news out of India has been pretty continuous since the start of the year. If you are disappointed, so are we. In January it was Satyam indiscretions and then Wipro getting banned by World Bank from bidding for any contracts till 2011. But the big whammy was yet to come, the fiscal sledgehammer.

It came with the government announcing in its interim budget that the central government deficit for FY08/09 would come in at 6% of GDP instead of the initially projected 2.5%. FY09/10 budget deficit is projected at 5.5%. No sooner had the official revenue and expenditure targets been set, the government announced 2% each cuts in the excise duty, customs duty and service tax rates for FY08/09 and FY09/10 as a part of a populist fiscal stimulus package to help consumption.

To see full report: TRIPLE-A

>KEC International Ltd. (BONANZA)

Mumbai based KEC International was started in 1945 as Kamani Engg. Corp, it was taken over by RPG Group in 1982 and renamed KEC International. RPG Transmission & National Information Technologies were merged into KEC in FY08. Rs.11000 Crore (US$ 2.2 Billion) RPG group is diversified conglomerate with interests in Powe (Generation Transmission & Distribution), IT, Entertainment, Tyres, Retail, Plantation, Carbon Black etc. KEC is among the Leading Transmission line EPC companies. It has strong global footprint with client base spread over 40 countries, and is currently executing orders in 15 countries. It has strong presence in India, South Asia, Middle East, Africa & Central Asia. The company has Experience of supplying transmission line towers to developed markets like USA, Canada.

KEC has successfully executed projects in diverse terrains:
• Deserts: UAE, Algeria, Egypt, India, Saudi Arabia (40°C)
• Mountains: India, Lebanon, Malaysia, Mozambique
• Frosty Conditions: Kashmir, Afghanistan, Kazakhstan
• Rivers: Brahmaputra, Nile, Ganges, Rihand
Challenging locations: Afghanistan, Iraq etc

It is 9001 14001 OHSAS 18001 certified to give world class manufacturing quality. It has 3 manufacturing plants at Jabalpur, Jaipur and Nagpur for transmission & telecom towers. It has total Manufacturing Capacity of 140,000 MT.

To see full report: KEC INTERNATIONAL

>Jubilant Organosys Ltd (KR CHOKSEY)

Draxis – Jubilant’s subsidiary received an approval for generic Sestamibi
Draxis pharma, Canadian subsidiary of Jubilant Organosys, a leading player of custom research and manufacturing services (CRAMs), has received an approval from Health Canada for generic Sestamibi. The drug is a generic kit for Technetium (Tc 99m), Sestamibi injection, a diagnostic cardiac imaging agent used for the diagnosis and localization of myocardial infarction; and for the diagnosis and localization of ischemic heart disease and coronary disease. The recent approval of the drug is expected to strengthen the product portfolio of the company in radiopharmaceutical segment.

Manufacturing base:
Sestamibi is expected to be manufactured at Montreal, the sterile injectible facility of Draxis. and is expected to be commercialized once the patent for the innovative drug “Cardiolite” expires.
Sestamibi to hit the Canadian market by July The patent of the innovator drug is expected to expire by July 2009 thus the company is expecting launch the generic version of innovator drug, Sestamibi by the mid of second quarter.

Sestamibi to hit the Canadian market by July
The patent of the innovator drug is expected to expire by July 2009 thus the company is expecting launch the generic version of innovator drug, Sestamibi by the mid of second quarter.

First mover advantage for Jubilant
Jubilant being the first generic player to launch the drug in Canada would get the first mover advantage as there would be only two player in the market including the innovator company BMS for the same. The total market size of the drug in Canada is estimated to be around USD25 Mn whereas globally it is expected to be around USD 800 Mn.

To see full report: JUBILANT ORGANOSYS

>Telecom Sector (EMKAY)

Indian telecom industry, like many others, is in the process of implementing mobile number portability (MNP) which allows subscribers to switch operators while retaining the number. The DoT has recently selected Telcordia & Syniverse as 3rd party neutral operators for providing porting services in the two zones, and has plans to introduce MNP beginning from Metros in August-09, which we believe would be delayed beyond 2009. While MNP implementation is underway, the street has allayed fears of rise in competitive intensity, tariff war, market share loss by large telcos, etc. Therefore to understand the the likely implications in India, we have studied and analyzed the impact of MNP in few international markets like Canada, Japan, France, South Korea and Taiwan where MNP has been experienced. From our study it is evident that post MNP (1) the churn rate in most of the markets have clearly shown an increase, but only for short-term (6-12 months) (2) majority of countries have seen large operators losing subscriber market share to competition (3) operators have increased focus on subscriber acquisition and retention measures including, aggressive advertising, higher distribution commissions, improving quality of networks, tariff reduction, etc. which has led to fall in EBIDTA margins (4) Porting charges and porting time are critical as the two are inversely proportional to the use of MNP.

Few advantages may partially nullify the MNP impact in India…
Few characteristics of Indian wireless market act advantageous to existing operators and may partially nullify the MNP impact, such as (1) low penetration (~33%) might allow all players to grow (2) lowest tariffs (US$0.02) provide limited scope for pricing war (3) 92% of subscribers use pre-paid services where churn rate is already high at 45-54% (4) High competitive intensity with ~10 players in each circle where top 5 control 80% of the market, limiting scope of meaningful market share shifts.

Market share shifts wouldn’t really matter…
The launch of low entry-cost schemes by RCOM and Idea has resulted in extraordinary subscriber growth, but is mainly aimed at getting additional spectrum in our view. Such subscriber additions and market share gains would have little importance given very low revenue and profit contribution from such subscribers. In such a scenario, we believe that couple of percentage point shift in subscriber market share would not really concern.

To see full report: TELECOM SECTOR