Saturday, March 28, 2009

>Auto Sector Two Wheeler (WAY2WEALTH)


■ Industry Composition
■ Sales Analysis for FY06-FY09
■ Index Performance/Stock

Performance v/s Sensex

■ Conclusion: Two-wheeler

Industry: A Cyclical Reversal?

■ Company Update
■ Hero Honda Motors (HHML)
■ Bajaj Auto (BAL)
■ TVS Motors (TVS)

To see full report: AUTO SECTOR


Established in 1996 as Peerless Shpping and Oilfields, South East Asia Marine Engineering & Construction Limited caters to the offshore oilfield industry and provides Diving Support Vessel (DSV) based diving services. Mauritius based Coflexip Stena offshore oilfield industry and provides Diving Support Vessel (DSV) based diving services. Mauritius based Coflexip Stena offshore had acquired 58.24% stake in the erstwhile. Peerless Shipping in 1999, which in-turn was acquired by Technship S. A. of France in April 2000. Pursuant to this Technship made an open offer to the shareholders of SEAMEC in December 2002 taking its shareholding from 58.24% to 78.25%.

Being a leading provider of DSV based diving services, SEAMEC has unrivalled experience in the ongaoing subsea inspection, repair maintenance and light construction required for the support of offshore oil production.

Currently the company owns three multi functional diving support vessels is capable of working throughout the year in severe sea and weather conditions. Multi-support vessels are normally used for supporting oil fuel services, diving, remote vehicle operations, fire fighting, rescue and helicopter services. Most of the time dedicated dive support vessels are used for diving and sometimes for ROV service (Remote Operated Vehicles), which are under water remotely controlled vehicles.

The company has also acquired a cale lay vessel in june 2006 named Seamec Princess. After modification, the vessel was put on charter from 1st March 2008.

To see full report: SEAMEC

>India Steel Sector (UBS)

Infrastructure spend and the Indian steel industry

Infrastructure spend to be an important driver for steel consumption
UBS estimates infrastructure spending as per the eleventh five-year plan will be US$275bn, compared to the plan’s target of US$500bn. Infrastructure accounts for around 59% of the total domestic steel consumption and we expect steel consumption for infrastructure in 2007-2012 to potentially increase to around 48mt compared to an estimated 33mt used between 2002-2007, during the tenth fiveyear plan period.

Top companies and their positions
Tata Steel has the highest proportion of longs in its basket with around 45% of sales; SAIL comes in second with 22% of volumes being flat. Tata also has a 1- 1.25mt sales volume of auto-grade flat steel, which improves its product profile and eventually EBITDA/tn in the domestic business, in our view. JSW has around 8% proportion of sales volumes in long products, and intends to ramp up its HSM over 2009-11.

Valuation: recently upgraded Tata Steel to Buy, and JSW to Neutral
We prefer Tata Steel and SAIL and rate them a Buy. We rate JSW Steel Neutral. We used the DCF methodology to arrive at our price targets for Tata Steel (Rs275), SAIL (Rs125), and JSW (Rs225).

To see full report: INDIA STEEL SECTOR

>Reliance Industries (ANAND RATHI)

Niko data points sustain E&P promise; Reiterate Buy

D6 capex to rise to US$10bn. Niko now expects capex on the current D6 project to be a higher-than-budgeted US$10bn over the life of the project. It expects gas production to start by 1 Apr ’09. We do not expect the higher capex to materially affect the valuation due to the cost recovery mechanism.

Production to ramp up to 120m cmd. Niko re-affirmed plans to raise D6’s peak production to 120m cmd by developing nine satellite discoveries at an additional capex of US$6bn. The development plan for these discoveries awaits approval.

D4 a wild card; exploration drilling in D6 re-started. Niko stated that the D4 field (RIL owns 85%), could be much larger than D6, based on initial studies. Niko also confirmed that after a 16-month lull, exploration drilling has re-commenced at D4.

Earnings. We restate estimates, incorporating the proposed merger, recent rupee depreciation, and higher margins.

Valuation. We raise the fair value of RIL to Rs1,625 (Rs1,300 earlier), incorporating RPL’s valuation minus the holding company discount, higher margins, and adjusting for the recent rupee depreciation. We value refining and petrochemicals businesses at EV/EBITDA of 5.5x FY10 estimates, new refinery at DCF and its E&P businesses using DCF/multiple-based approach.

To see full report: RELIANCE INDUSTRIES

>Cement Sector (INVESTSMART)

February: Strong despatches and firm price scenario continues…

During February 2009, cement despatches and consumption showed YoY growth of 9.2% and 8.2% respectively, primarily led by eastern, central and northern regions of the country. On MoM basis, cement despatches and consumption were marginally down at 0.3% and 0.2% respectively.

Strong growth along with increased construction activity resulted in cement prices rising by Rs 4-5 per bag across all regions with central region witnessing an increase of over Rs 15 per bag during February. Going forward, we expect cement prices to remain firm across regions in near term as government backed infra projects combined with inception of construction season will keep the demand strong.

Though cement industry showed improved performance during last three months, sustainability of such performance over medium term is a big question mark especially in a scenario when the key end user industries like real estate and infrastructure are facing difficult times. We believe,
in near term there might be some demand push by the existing government projects but the profitability of the industry will come under pressure in short to medium term once fresh capacities comes on stream.

To see full report: CEMENT SECTOR

>Banking Sector (ANGEL BROKING)

Navigating the downturn

Since September 2008, the impact of the global crisis on India's GDP growth prospects has intensified through two channels - by dampening our exports and by reducing availability of finance. This slowdown in GDP growth poses material headwinds for the banking sector in the form of slowing credit demand and increasing asset quality pressures.

We believe that Monetary softening, strong Domestic Savings and falling Interest rates will help revive domestic demand from late FY2010E and subscribe to the view that stimulus packages and bank bailouts will stabilise developed economies over a similar timeframe. But uncertainty regarding the timing of the revival poses material risks for the Banking sector.

That said, after more than a year of falling stock prices, valuations for several banks are much below median levels. In our view, the sector is well placed to navigate the ongoing downturn and valuations provide substantial margin of safety against potential worst case scenarios of asset quality deterioration.

In order to draw conclusions regarding the course of revival of domestic demand and correspondingly, banking sector earnings, we have provided projections and analysis of financial savings, combined fiscal deficit as well as sources and deployment of funds by the banking sector. Underpinning our positive long-term outlook on the sector, is our view that long-term growth drivers for the sector continue to hold true (revisited in a recent report).

Concerns over asset quality and slowing credit growth will remain an overhang over both Private and PSU bank stocks so long as the macro-economic outlook remains bleak. Therefore, in our view, keeping in mind attractive valuations, a longer-term investment perspective needs to be adopted, in order to take advantage of the eventual upturn in GDP growth - and several factors are falling into place to make this imminent over the next 12-18 months.

From this perspective, we prefer private banks, in light of their stronger core competitiveness. Moreover, PSU banks carry the risk of government interference affecting their financial performance. Importantly, private banks are presently available at compellingly cheap valuations, based on historic trends as well as justified fundamental valuation multiples.

Our top picks are HDFC Bank and Axis Bank.

To see full report: BANKING SECTOR

>Tata Motors' Nano Update (RELIANCE MONEY)

Launch of Tata Motors' Nano

Tata Motors has formally launched Nano across India. It had showcased the first Nano in January 2008, during Auto Expo 2008. The base version is priced at Rs.1,12,735 (ex-mumbai) and higher version is priced at Rs.170,335 (ex- Pantnagar). The company has decided booking amount of Rs.95,000 for Nano and has also promised to give price protection for first 100,000 cars. We estimate FY10E would see revenue addition of ~Rs.6bn (~2.2% of FY10E revenue) and insignificant incremental EPS for FY10E.

Nano – Big Wonder is here
Tata Motors has launched much awaited Nano across the country. Earlier the company has promised to launch the car in Mid-2008, but after facing many hurdles it first showcased it in Auto Expo in January 2008, finally Tata Motors has launched the car. It’s a 623cc, 33 HP, the engine meets BS3 and is capable to being scaled up to Euro 4. It is approximately 8% smaller compared to Maruti 800, but 21% larger in terms of passenger space. Nano is expected to give mileage of 23kmpl. The car has satisfied front crash test and satisfies European recycle norms.

Expect strong response for Nano bookings
Tata Motors has already said that Nano bookings will be open from 9th April 2009 and would remain open till 25th April 2009. Looking at the initial response at Auto Expo 2008 and response from various categories, we expect strong response for Nano bookings. The company would start distributing Nano from 9th July 2009. Tata Motors has also revealed that the car will be up for grabs under the financing mode which starts at an attractive booking amount of Rs.3,000/- per vehicle. While, for others who do not wish to opt the financing mode will have to make a heavy down payment of Rs.0.95L-Rs.1.4L (~75% of total amount). We believe that the other mode, wherein down payment is very heavy will not be that attractive for the customers, while for the financing mode the rate of Interest is likely to be a key factor towards the booking, which is still not disclosed.

To see full report: NANO

>Advanta India Limited (LKP SHARES)

…best bet to play the agricultural productivity theme


• We believe that Advanta India Ltd - AIL is the most aggressive and geographically diversified hybrid seed play available to investors to play the agricultural productivity improvement theme in key markets across the globe.

• Fox Paine LLC a private equity firm based in the US sold Advanta in bits and pieces and the United Phosphorus Group acquired the Asia Pacific and Latin America business in March 2006 and Advanta India Ltd - AIL came out with its IPO in March 2007 by raising Rs2.2bn by issuing shares of Rs10 each at a price of Rs640 per share. AIL part of the UPL group is the holding company for the global business of Advanta spanning five major geographies - Australia, USA, Thailand, Argentina and India. AIL has a leadership position in Sorghum Sunflower and Corn and is a leading agronomic global seed company competing with Syngenta, Limagrain, Monsanto,
Pioneer (Dupont group) and Pro Agro (Bayer group) in most of the markets.

• Australia is a $35mn business and Sorghum is the focus crop accounting for close to 40% of the business. The other key crops are corn, canola, sunflower, oats and pearl millet among others. Acquisition of Longreach Plant Breeders, a wheat research company in Australia has reinforced its presence in the wheat market in Australia. Exports of AIL are channeled out of Australia and the key countries where hybrids of sunflower and canola are sold include Pakistan, Bangladesh, Sudan, Iran and Indonesia. However the profitability is not high as the operating costs in Australia is high.

• US business was reinforced in sweet sorghum with the acquisition of Garrison and Townsend-GT, which essentially is a private label business with no branding. AIL acquired the $10.5mn business at one time revenues and the acquired companies have proprietary traits and a good germplasm in grain and forage sorghum and we expect this crop to fill the gap arising due to corn in the bio-fuel market. AIL remains the third largest player in Sorghum after Monsanto and Pioneer. It is among the few players in the world to have a quality sweet sorghum germplasm and while GT is the vehicle in the US, AIL has tied up with the TATAS in India. Sweet sorghum although a relatively small component in its portfolio would be a fast growing segment as the cost of production is low and can develop into a preferred crop in the bio-fuel market. AIL also acquired the sunflower seed business of Limagrain in the US last year which consolidated its position in the sunflower seed market. The US business is expected to grow at the rate of 15% annually.

• Thailand is a $15mn business where Corn is the key crop and it has a 60% market share in corn. Thailand is also a good market for vegetable seeds. AIL is a strong player in the Thai corn market in baby corn and sweet corn and is now building a strong presence in the field corn market.

• India is a $30mn business and the focus crops include paddy, vegetables, corn and sunflower and we expect the business to grow at 20% annually led by vegetables, paddy and mustard. With the acquisition of Golden Seeds and Unicorn Seeds AIL now has a 10% market share in the Rs6bn vegetables seeds market in India. As India is the second largest producer of vegetables in the world, AIL is looking to tap the opportunities in vegetable seeds like cabbage, cauliflower, chillies and okra. Hybrid rice is a huge opportunity with 42 million hectares of acreage under rice of which only 2 million is under hybrid and Bayer, Pioneer and Advanta are the key players in this segment.

To see full report: ADVANTA

>Koutons Retail India (BATLIVALA & KARANI)

Discounted for!

Koutons Retail India Limited (KRIL) is a pioneering discount retailer of readymade fashion apparel for mew, women and chlidren. The company, with its own manufacturing operations, currently operates ~ 1,450 retail outlets across India, mainly through a franchisee network and intends to increase the total number of stores to ~ 1,950 by FY11. Although its cost efficient business model of supplying only to its own exclusive brand outlets (EBOs) and a high dependency on franchising makes it favourably placed among other peers in terms of operating profitability, the slower growth in store expansion and turnover due to economic slowdown and increasing debt will impact its profitability going forward.

KRIL's wide array of apparels, new product launches and heavy discounting of its products will enable it to record a top line CAGR of 15.3% for FY08-11E.

However, due to weak macroeconomic conditions, higher level of discounts and increase in debt, the margins and profitability will adveresely affected, resulting in a bottom line CAGR of (1.3%) over FY08-11E.

At the current levels, valuations of 18.8% our FY10E estimates are at premium to other leading players such as Pantaloon and Titan. In view of the concerns and stretched valuations of the company, we are initiating coverage with an Underperformer rating and target price of Rs 308, which offers a downside of 20% from the current price.

To see full report: KOUTONS

>Unitech Limited (INDIABULLS)

Diminishing sales volume

Unitech reported a weak financial performance in Q3’09 due to the intensifying slowdown in the real estate sector. The results were adversely impacted by a sharp deterioration in demand, decline in real estate prices and high finance costs. In light of the worsening prospects of the realty sector we downgrade our rating to Hold.

Property sales getting postponed: Despite a decrease in interest rates by the RBI and consequently by the commercial banks, and a cut in property prices by around 20% in new launches, the sales volume in the residential segment has so far failed to pick up. This is due to the potential buyers adopting a wait-and-watch approach in anticipation of a further decline in real estate prices. Further, a weak economic environment is pushing the expansion plans of IT/ITeS and retail companies thus impacting the commercial and retail space demand. We expect the weak demand scenario to continue at least for the next 2-3 quarters with a slow improvement thereafter.

Liquidity position improves marginally: Unitech has been able to repay Rs. 4,000 mn out of the Rs. 25,000 mn of debt due to be paid by March 2009. It has also restructured loans worth around Rs. 15,000 mn through banks and is changing its debt profile from short term to long term. It is further trying to raise funds to repay the balance.

Valuation: We have revised our NAV estimate downward to reflect the worsening prospects of the sector. We have cut our revenue and earnings estimates to factor in lower sales volume and high vacancy rates and a higher-than-expected decline in property prices in Q3’09. Our NAV based fair value estimate of Rs. 32 reflects a limited upside potential to the current share price. Hence, we downgrade our rating to Hold.

To see full report: UNITECH

>Indian Overseas Bank (SUNIDHI)


IOB had the unique distinction of commencing business in 10th February 1937 (on the inaugural day itself) in three branches simultaneously - at Karaikudi and Chennai in India and Rangoon in
Burma (presently Myanmar) followed by a branch in Penang. At the dawn of Independence, IOB had 38 branches in India and 7 branches abroad. In 2006, it acquired Bharat Overseas Bank.
In September 2000, the bank had come out with an offer of 11.12 crore equity shares of Rs 10 each at par, aggregating to Rs 111.20 crore. It came out with its second initial public offer of 10 crore equity shares of Rs 10 each for cash at premium of Rs 14 per share aggregating Rs 240 crore through the fixed price route in October 2003.


IOB has a dominant presence in south India, which accounts for 45% of its branch network. Currently, the bank has 1, 894 branches across the country. It has international presence in eight countries.

Total business as on December 31, 2008 rose from Rs 1, 33, 413 crore as at end December 2007 to Rs 1, 62, 575 crore — a growth of 22%.

Total deposits grew by 15% to Rs 90, 866 crore from Rs 78, 791 crore. Advances spurted 31% in Q3FY09 to Rs 71, 709 crore from Rs 54, 6222 crore (YoY). As at December 31, 2008 IOB’s CASA (current accounts saving accounts) is marginally down to 29.23% from 30.93% (YoY).

IOB, with a capital adequacy ratio of 13.34%, has comfortable capital to support the envisaged growth. Gross & Net NPA stood at 2.49% and 1.30% as on December 31, 2008.

IOB entered into non life insurance business with equity participation of 19% in a joint venture Universal Sompo General Insurance Co. The bank along with bank of Baroda (BOB) and Andhra Bank (AB) has planned to open overseas bank in Malaysia. It will be a special purpose vehicle in which IOB and AB could hold equity of 30% each and BOB could hold 35% of equity stake.

The overseas bank would be operational by end of financial year 2009 subject to necessary regulations. The new joint venture is expected to commence operations by the end of 2009.

To see full report: INDIAN OVERSEAS BANK