Sunday, March 22, 2009


Downtrading evident in detergents, toilet soaps and tea: Cost cutting is not limited to MNCs in cities. Rural consumers are doing their bit in an environment of contracting wallet sizes. They are exercising restraint not only with relatively big-ticket purchases such as consumer durables, house repair/improvement, and apparel, but also with daily purchases like food and FMCG. Our interactions with consumers and the trade indicate that in the last couple of months, there has been sharp downtrading in detergents, soaps and tea. Consumers have shifted not only to discount brands of large players but also to unorganized and regional brands.

Gains from higher crop prices, farm loan waiver not percolating to needy farmers: We dug further into the reasons for the underlying consumption sentiment. Villagers had a story to tell. Farm output has been impacted in a few crops (cotton, sugarcane, pulses and vegetables) on account of untimely monsoons and poor seeds; consequently, the benefits of price increases have not accrued to the large section of the farming community. Moreover, small and marginal farmers have not benefited from farm loan waiver, as they mostly borrow from local money lenders. However, we caution that the Marathwada region may not be representative, as farm output has declined due to untimely rains.

Non-farm rural economy has started feeling the pinch: We were told that nearly 30% of the rural workforce is employed in non-farm areas and they bring about 50% of income to each household. Slowdown in sectors like construction/infrastructure, BPO, services (transportation/trade) has started impacting the non-farm rural economy. This is reflected in the sharp decline in the number of daily commuters from villages to nearby towns for employment.

Unorganized/regional players gain market share: Our interactions with wholesalers, retailers and hawkers (in haats/melas) indicated that unorganized/regional players have gained market share due to (1) downtrading by consumers, and (2) increased push by retailers on account of higher trade margins and longer credit period.

Outlook and view: Losing market share to unorganized players does not augur well for FMCG majors. We believe this could well be the scenario in the rest of the country, reflected by the fact that the overall FMCG industry has grown at a faster rate than our FMCG universe in 4QCY08.

To see full report: FMCG SECTOR


Battling the slowdown: DLF’s net sales for Q3’09 plunged 62.0% yoy due to a slump in property demand and a correction in property prices. This coupled with increased interest cost burden impacted the net profit, which fell 68.7% yoy. Sales volume unlikely to pick up substantially in the near-term: We believe that the current slowdown in the real estate sector is yet to bottom out and the pricing pressure should further intensify in Q4’09. We expect the property demand to remain weak at least over the next 2-3 quarters as expectations of a further fall in prices, worsening economic environment, and low loan-to-value ratios, are keeping the potential buyers away from entering the property market. Despite a 15%–20% decline in realty prices across segments in the last few months (discounts offered are higher in certain new launches) and a cut in interest rates, the sales volume has failed to pick-up, indicating a wait-and-watch approach being followed by the potential buyers.

Slowdown to have an extended effect on profitability: We believe that the expected decline in property prices/rental rates will drag DLF’s margin considerably downwards even after considering a reduction in construction costs. Moreover, the shift in the Company’s strategy towards low-margined middle income segment should negatively affect margins over the longer term. DLF is also delaying certain projects and changing current debt profile of short-term loans to long-term, which would increase the carrying cost of capital and thus impact net margins negatively.

Valuation: Our revised NAV–based fair value estimate of Rs. 146 reflects a downside of 16% from the current market price. We have reduced our fair value estimate to reflect a higher than-expected decline in property demand and prices in this quarter. Thus, we downgrade our rating from Hold to Sell.

To see full report: DLF LIMITED

>India Hotels (MORGAN STANLEY)

Investment conclusion: We turn Cautious on the India Hotel industry, as deteriorating tourism trends worsened by the impact of the 26/11 terror attacks in Mumbai have damaged tourist inflow and RevPAR trends. In addition, we believe corporate travel budgets have started to decline as corporate profitability is hit, which has in turn curtailed business travel. Balance sheets for most companies are under stress due to the acquisition of properties/land parcels at peak rates, which has resulted in rising debt servicing obligations and possible impairment of book value. As a result, we are now Underweight all the three stocks under our coverage.

F2010 could be worse for earnings: For 9MF2009, all major listed Indian hotel companies showed decelerating performance, with the December quarter being the worst – revenues declined by 15% YoY and EBITDA witnessed an 11 ppt YoY decline. We believe F2010 will be worse for earnings as weakening demand for rooms due to the global slowdown and the Mumbai terror attacks will force down both average room revenue and occupancy rates, which will pressure operating margins. Rising interest costs due to high leverage will also affect earnings. As a result, we have cut our F2010 earnings estimates for all coverage stocks by 60-70%.

Thoughts on coverage stocks: The global economic slowdown and the 26/11 terror attacks will have a significant impact on the earnings of all our coverage companies. Over and above that, some specific issues will affect each of the companies as follows: a) IHCL – earnings will likely be hurt due to weakness in international properties and rising interest costs; b) EIH – earnings will likely be impacted due to deferral of the Trident Bandra-Kurla property; and c) Leela – deferral of new properties and rising interest costs will likely affect earnings.

To see full report: INDIA HOTELS

>Axis Bank (UBS)

Stock trading at attractive valuations
AXIS bank stock has corrected 35%, and has underperformed the Sensex by 26% in the last 3 months. We find value in the stock at current valuations (upside of 65% to our target price), despite long-term concerns and are upgrading to Buy from Neutral. We remain wary of: 1) the exit of its dynamic CEO in July 2009; and 2) the equity overhang as SUTI, a key shareholder plans to offload its stake.

Aggressive growth in advances may lead to asset deterioration
Total advances grew 55% and retail by 30% in the face of a slowing economy. While net NPL ratio of 0.4% is not a concern for now, we expect the growth in SME advances (57%), unsecured personal loan (41%) and credit cards (30%) may lead to pressure on asset quality in coming quarters. Our valuations assume a 200% increase in NPLs and a provision coverage ratio of 80%.

Earnings growth could remain strong because of expansion
We expect 18% growth in earnings and an average ROE of 17-18% in FY09-11 against a 3 year earnings growth of 31%. Risks to our earnings could come from change in strategy from new management, impacting continuity and thus operations. In the short term higher NPL provisions could put pose risk to earnings.

Valuation: Buy rating and Rs 540 target price
AXIS Bank is trading at a PE of 7.3x and 1.2x PBR FY09E EPS and BVPS. We base our price target of Rs 540 on a residual income model, assuming cost of equity of 12.5%, long-term sustainable ROE of 16% and terminal growth of 5%. We estimate a BVPS of Rs.280 and ABVPS of Rs.255 for FY09.

To see full report: AXIS BANK

>Apollo Hospitals (CITI)

Best play on Indian Healthcare — We remain positive on the long-term prospects of Indian healthcare with Apollo as our preferred play given its scale, national footprint, and presence in multiple disease/delivery segments. Most of its hospitals are profitable, and it appears well funded to execute its expansion plan. Valuations look attractive at 8xFY10E EV/EBIDTA. Maintain Buy (1M).

Hospitals continue to stand out — Apollo continues to benefit from its large set of mature hospitals. Revenues in 9mFY09 were up 23% YoY & PBIT margins were up 124bps to 18%. Margin expansion was driven by improved ALOS (5.08 days in 9m09 v/s 5.2 days in 9m08) and higher occupancy at new hospitals (avg occupancy of 80% in 9m09). Rev/bed day rose 10% YoY to Rs9,500. It has also outlined an aggressive expansion plan (3000 beds over next two years) which would maintain its position as India's leading corporate hospital.

Pharmacies continue to drag — Apollo's pharmacy business, while growing at a rapid pace (773 pharmacies as of Dec '08), continues to be a drag on margins given that each store takes 12-18m to break even. We expect profitability to improve with the number of new pharmacies being set up slowing from FY10 and a ramp-up in profitability of existing pharmacies.

Balance sheet strength to execute expansion plans — Apollo’s B/S remains strong, with cash position of Rs3.8bn & undrawn lines of credit of Rs440m and a net D/E of 0.2x. It intends to fund its expansion plan through a combination of internal accruals and fresh debt. Apollo plans to add c3,000 beds (an investment of Rs14bn) over the next 18-24m including c800 beds in eight secondary hospitals as a part its REACH initiative.

To see full report: APOLLO HOSPITALS

>Larsen & Toubro (HSBC)

We remain cautious in our outlook on FY10 order accretion, given slowing new orders from the metals and mining, oil and gas, and real estate sectors. Management has guided that c5-8% of the INR688bn order backlog will be delayed. We expect domestic oil and gas capex to be led by Oil and Natural Gas Corporation Ltd (ONGC). ONGC projects capex of INR1,300bn in the 11th Five-Year Plan vs its 10th Plan capex of INR740bn, up 75% (with a FY10 capex budget of cINR208bn). Also, the Gas Authority of India Ltd (GAIL) is committed to cINR145bn in capex by 2011 and cINR141bn post-FY11.

Shift in mix to infrastructure and power sector orders. We expect the power equipment manufacturing business and railways and shipbuilding ventures to start contributing to revenue in FY11, driving growth for the company in the long term. In the first nine months of 2009, infrastructure and power contributed c65% of new orders (vs 38% in FY08).

Satyam acquisition news remains a hangover. We maintain that, given our cautious outlook on L&T’s core business, the potential Satyam acquisition entails risk related to the commitment of management’s time and other liabilities. Also, the acquisition may not be EPS accretive in the initial years, given uncertainties related to client traction and cost structure.

Change in estimates. We have reduced our revenue estimates c4% to incorporate expected delays in project execution. We expect L&T to trade in a MACC range of 10.5-14.5% and a CROIC range of 8.5-9.5%. Based on this, we value L&T’s core business at INR544 per share (10.6x FY10e EPS). We value L&T’s subsidiaries at INR116 (previously INR131) per share. Hence, we reduce our target price to INR660 (from INR765).

To see full report: LARSEN&TOUBRO

>Investor's Eye (SHAREKHAN)


  • Crompton Greaves
  • Bharti Airtel
  • HCL Technologies

To see full report: INVESTOR'S EYE

>Titan Industries Ltd. (MERRILL LYNCH)

Management: Mixed impact so far, caution near-term
We met with Bhaskar Bhat, MD, Titan Ind. recently. Here are the key takeaways:

Impact of high gold prices: Plain gold jewelry volumes have come down. Margins are now partly linked to gold price and hence profitability is less impacted than sales. Mgmt believes current high gold prices are not sustainable (contrary to BAS-MLe) as Indian demand (key gold consumer) has dried up. Longer term, if volume growth remains low on high gold prices, they could look at launching lower karat jewelry to improve affordability.

Impact of economic slowdown: Tier-II/III towns have still not seen the impact and have outpaced big cities in growth rates in recent months. Also, youth remains largely immune and hence a focus segment for the company.

Strategies in current challenging environment: 1) More cautious approach to store expansion – cash, profitability and sales priorities in that order, 2) More frequent new collections, 3) A number of new formats being piloted - Helios (up-market watch retailing) and Zoya (designer diamond jewellry) to tap the elite and exclusive Fastrack accessory stores for youth.

4Q likely a difficult quarter for watches. January has been dismal for watch sales growth but February has seen an improvement; outlook for March remains extremely cautious.

4Q likely to see a profit drop, Maintain Underperform
We expect 6% drop in profits in 4Q to Rs568mn driven by single digit volume growth and margin decline on a large base. The stock is trading at 13.5x FY10 P/E implying a 50% premium over the market. We believe the premium is likely to reduce as earnings growth starts to come off. Also, we see downside risk to our and consensus earnings as impact of slowdown gets reflected on performance.

To see full report: TITAN


Key debates: 1) Revenue outlook: While consensus still expects revenue growth for the sector in FY2010, we believe the outlook is turning tougher than anticipated, and we now forecast an organic revenue decline of 5-20% yoy across the board. 2) Cost analysis: We use Infosys as a benchmark to estimate the buffer due to lower costs.

Where we differ: Investors have so far focused on risk to pricing, but a reset of volumes could surprise on the downside, we believe. We have seen cases of banks’ resetting overall portfolio spending on offshore vendors, leading to significant cuts in offshore spending. Resetting business volumes with existing clients is the biggest concern for IT vendors, in our view, due to lower budgets and rationalization of portfolios. Although companies have been able to maintain pricing for contracts so far, we believe rates could come under severe pressure if overall volumes were to contract. Vendor consolidation could benefit select companies.

Cutting estimates further: We are reducing our earnings estimates for large caps and now forecast 4-5% US$ revenue decline for Infosys and TCS and 13-21% lower revenue for the small/mid-cap vendors in our coverage universe. Rupee denominated EPS are at a slight advantage due to ~10% depreciation so far. While much of the bad news appears to be priced in, we think there could be more downside even from current levels as 2009 unfolds.

To see full report: IT SECTOR


On a weekly basis too, the WPI has decreased by 0.44%.

This weekly decrease coupled with high base impact of last year has resulted into a below 1.0% figure for WPI as mentioned in our earlier report.

The weekly decrease in WPI is attributed to the fall in the price indices of Primary Articles Group (decreased by 105 bps) led by fall in price indices of Food Articles (vegetables, fruits, food grains etc) and Non-food Articles (fibers, oil seeds).

The Fuel Group price index too declined by 77 bps led by fall in price index of Electricity (by 264 bps). In mineral oils group, the prices of HSD oil, naphtha and furnace went up whereas the decline was seen in prices of ATF, bitumen and light diesel oil.

Though overall price index of Manufactured Products group remained unchanged on a weekly basis, the high base resulted in “y-o-y” fall. On a weekly basis, the Textile (Jute hemp & mesta) and Machinery & Tools (Electrical mach) price indices increased marginally; which was offset by decrease in price indices of Paper Products (Paper & pulp) and Chemical Group (Basic heavy inorganic chem).

To see full report: INFLATION METER