Friday, April 3, 2009

>Automobile Sector (UBS)

2 wheeler dealer survey....

Bajaj Auto – model worries, still high dependence on financing
Our dealer survey key findings support our negative view on Bajaj: 1) Close to 50% of Bajaj sales are still on financing. Tighter lending standards have been one of the key reasons for sharp drop in Bajaj Auto sales in Tier 2 cities. 2) Bajaj’s new launches like the Xced 125 and Platina 125 have not been able to deliver on customer expectations and core mktg. proposition. 3) Only 30% of Bajaj dealers surveyed expect volume increase vs more than 80% for HH.

Hero Honda - dealers confident of 100cc growth
Our survey indicates customers buying on cash prefer HH for higher reliability and lower maintenance expense. Only about 30% of HH sales are from financing. HH dealers don’t see an evident shift in customer preference towards 125cc bikes. HH dealers attributed the market share increase in the ‘under 125cc’ segment to new launches by the company and expect continuing growth in this segment due to fuel efficiency remaining the key buying criteria for the 2-wheeler buyer.

Scooter growth outlook remains strong, HMSI doing well
Dealers felt confident of scooter segment growth going forward driven by demand from women and elderly people. This is positive for HMSI which continues to dominate the scooters market. HMSI’s new bike launches like CBF Stunner continues to gain sales traction. Around 40% of HMSI sales are on financed basis.

We reiterate our view on the two wheeler market
We maintain our rating and estimates for Bajaj Auto (Sell) and Hero Honda (Neutral).

To see full report: AUTOMOBILE SECTOR

>Ambuja Cement Limited (HDFC Securities)

Benefits of capacity addition insignificant: ACEM has planned to increase its installed capacity by ~5.5 mt in different stages during CY09 and CY10. Though we expect the entire capacity to get commissioned by H1CY10, we don’t think this will result in a sales volume growth due to a demand-supply mismatch.

Capacity Utilization rates set to decline: We expect the capacity utilization rate of ACEM to decline to the levels of 81% in CY09 and 77% in CY10 against ~95% in CY08 as we believe the company will perform in line with the industry. We expect the sales volume of the company to grow at a CAGR of 1.4% for the period CY08 to CY10E.

Cost pressure expected to ease: ACEM is dependent on Imported coal for ~30% of its requirements. The cost of imported coal has corrected by ~50% over the last 5-6 months, which will protect the operating margins of the company in CY09.

Operating benefits expected to come down in CY10E: ACEM enjoys one of the best operating margins in the Industry. However, we expect this benefit to ease in CY10 with the downturn in the cement cycle. We believe the realization of the company will decline by 3.3% in CY09 and by a further 5% in CY10. We expect the margins of the company to remain stable in CY09, but drop by 506 bps to 23.8% in CY10E.

Earnings to decline: With operating benefits and realization set to decline over next two years, we believe the earnings of the company will decline at a CAGR of 17.4% for the period CY08 to CY10E.

Merger with ACC can provide synergy benefits: We feel the merger of Ambuja with ACC can provide synergy benefits going forward, in terms of rationalization of the distribution system and reduction in duplication of work. However, the management has not indicated anything on this.

To see full report: AMBUJA CEMENT

>India Financial Services (MORGAN STANLEY)

Dependence of Mortgage Growth on Property Prices = Sharper Slowdown Ahead

Quick Comment: In this note, we try and present a simple argument on why mortgage growth for the industry will be extremely weak in F2010 and possibly F2011. Even if we don’t consider slowing economy and rising unemployment, the fall in property prices itself will cause a sharp deceleration in the market. In India, there is no property price index, so it is not possible to get an idea of exact price decline. However, anecdotally it appears that prices have come off by about 20% in the last few months and will likely decline further. New loans (disbursements) are obviously a function of mortgage volumes and prices. With prices declining, volumes have to move up sharply – just to keep the new loans constant. That is unlikely to happen, implying that new loans will contract in F2010 for industry. There will be players, like HDFC, that are likely to gain market share, but overall industry will see a decline. While we are focusing on mortgages in this note, the slowdown is likely to be intense for all other loans, as all asset prices have come off sharply. In fact, in our view, there is a very high probability that loan growth will be in the single digits for Indian banking system in F2010.

Most of the growth in mortgages in the past 5 years was driven by the rise in property prices, in our view. We are handicapped by lack of price data. But we do an approximate analysis, using some data from HDFC. It gives average value of mortgage outstanding; in F2003 this was Rs.370000, which increased to Rs. 1.4 mn in F2008, a CAGR of 30%. This is for the entire loan portfolio – implying that the increase in value of new mortgages would have been even greater.


>Equity Insight (HSBC)

Pro-cyclical shift reiterated

■ Near-term hurdles: this week’s data flow and Q1 results
■ But financial and economic crises slowly turning a corner
■ Sticking to more pro-cyclical stance and rally to year-end

After one of the sharpest rallies in recent times, some near-term retracement is hardly surprising. This week’s ISM, PMIs and non-farm payroll data and pending Q1 results will doubtless provide opportunities for profit-taking. The Vix has still to break below 40: what we have called the “volatility bubble” has yet to burst.

Looking further ahead, however, we do think that both the financial and economic crises are (very) slowly turning a corner. The Fed’s latest initiative seems to be pulling mortgage rates down – to 50-year lows in some cases – and refinancing applications up (see chart). Meanwhile, some indicators of US consumer and housing demand seem to be stabilising, and the pace of destocking is likely to fade.

Our US economist expects GDP growth could turn positive in the second quarter (Break in the weather?, 27 March 2009). He still doubts that there will be much follow-through, but we think that equities have not been pricing in even a flat economy so soon.

On 19 March 2009 (Q2 preview: adding to cyclical weights), we shifted our sectoral views a little further in a pro-cyclical direction and away from some defensives (pharmaceuticals and utilities). We also set out the case (again) for some further rally to year-end. Whether it is a “bear market rally” or not seems less important than whether it happens – and we still think it can.

To see full report: EQUITY INSIGHT


  • Stock Update >> Bharat Heavy Electricals
  • Sector Update >> Banking
  • Sector Update >> Pharmaceuticals


Key points
■ Bharat Heavy Electricals Ltd (BHEL) will announce its provisional results on April 02, 2009. We expect the company to report a turnover growth of 31.6% year on year (yoy) and profits to grow at 8.3% yoy.

■ For the full year, the company would be making a provision of Rs1,313 crore for increment in wages, as recommended by the Sixth Pay Commission. For Q4FY2009, the provision would be to the tune of Rs475 crore. We expect the total order inflows for FY2009 to rise by 39%, while the backlog should settle at a 19% growth on a year-on-year (y-o-y) basis.

■ The street would keenly watch as the management issues its formal comment on the company’s performance in FY2010E. We expect the company to guide for a 20- 25% growth in its revenues. The operating margin is expected to improve on the back of lower raw material cost and operating leverage. The order flows would also continue to remain strong. In fact, in a recent conference call, the management has guided for an order inflow to the tune of Rs50,000 crore in FY2010E.

■ In Q4FY2009, the order inflows continued to be firm, as the company acknowledged orders to the tune of Rs13,076 crore. The company recently bagged an order for 700MWe steam generators from the Nuclear Power Corporation of India Ltd (NPCIL), valued at Rs345 crore.

■ BHEL’s strong revenue visibility (with an order book of 4.8x FY2008 revenues) coupled with its strong balance sheet makes it our preferred pick in the sector. At the current market price, the stock trades at 16.9x FY2010E earnings. BHEL’s premium valuation to the Sensex owes much to former’s resilient business model. We maintain Buy call on the stock with a price target of Rs1,546.

To see full report: BHEL


Oil – unlikely to stay much above US$55

■ Crude oil prices trebled from about US$50/bbl in early 2007 to over US$150/bbl during mid 2008, further nose-diving to US$30/bbl.

■ Hedge funds interest pushed up oil prices, though now expecting a decline in their activity

■ Extraneous factors like geopolitical tensions across oil-producing countries, aid by governments to propel their economies etc. will swing the crude prices sharply

■ Expect oil prices to broadly hover between US$45-55/bbl over next year

■ In contrast to the crude prices, natural gas prices moved up, albeit slowly

■ A sudden drop in the economic activity has put pressure on the natural gas prices

■ Natural gas prices to remain quite subdued in the near term due to an expected surge in LNG

■ Long-term crude futures remain in a contango, with sharp recovery in crude prices towards end of 2010

■ Long-term natural gas futures depict a sharper price recovery and much earlier by end of 2009

To see full report: OIL & GAS INDUSTRY

>Asia Growth (ADB)

ADB sees Asia's growth down in 2009, recovery next year

MANILA (Reuters) - Growth in Asia's developing economies will slow this year to the lowest rate since the 1997/98 financial crisis, but the world's fastest expanding region may rebound next year, the Asian Development Bank said.

The forecast for 2010 was however contingent on a mild recovery in the global economy, and this was far from certain, the Manila-based ADB said in its annual Asian Development Outlook released on Tuesday.

"There are tremendous downside risks to this global outlook," ADB President Haruhiko Kuroda said in the report.

"The effectiveness of the global responses to the crisis remains uncertain. Loud calls for protectionist policies are becoming worrisome. As job losses in the major industrialised countries continue, the protectionist voices may only get louder."

The ADB said Asia's developing economies, which include China, India, the economies of Southeast Asia, South Korea and Central Asia, should register average GDP growth of 3.4 percent this year, down from 6.3 percent in 2008.

It is the lowest ADB forecast for developing Asia since growth averaged only 0.2 percent in 1998.

The multilateral development bank said average growth in Asia could recover to 6.0 percent in 2010 if big industrialised nations pull out of recession.

The forecasts by and large confirm a Reuters poll of economists earlier this month that growth in Asia will fall sharply this year and could recover next year.

"The concern for the region, and especially for the region's poor, is that it is not yet clear that the United States, European Union and Japan will recover as soon as next year," said the ADB's acting Chief Economist Jong-Wha Lee.

As late as December, the ADB had forecast that average growth in Asia would reach 5.8 percent in 2009. But it said: "The global downturn is having a pronounced impact on the region's exports and subdued domestic demand will further crimp growth."


China, the world's fastest growing economy, will register growth of 7.0 percent this year, down from 9.0 percent in 2008, the ADB said. India should grow 5.0 percent in 2009 and 6.5 percent in 2010, it said.

The economies of Hong Kong, South Korea, Taiwan and Singapore will all contract this year because of their dependence on trade to support growth, it said.

The main effect of the slower growth will be a setback in poverty alleviation. In 2009 alone, the ADB said, the number of poor will be 62.3 million higher at 728.2 million because of the slowdown.

If growth had continued as in 2007 and 2008, the number of poor in developing Asia would have been 665.9 million, based on a daily allowance of $1.25.

This crisis has highlighted the need for developing nations in Asia to rebalance growth and avoid overreliance on export-driven expansion, the ADB added.

"The pronounced impact of the current global downturn on developing Asia's growth underlines the risk of excessive dependence on external demand," it said.

"A wide range of government policies, ranging from boosting domestic consumption to promoting more competitive markets, will be required to facilitate the transition of the region to a more balanced growth path."

>Aban Offshore Limited (HEM SECURITIES)

Company Snapshot
Aban Offshore Ltd., formerly Aban Loyd Chiles Offshore Limited, is an off-shore oil and gas drilling company. The Company has two business segments: Offshore Oil Drilling and Production services, and Wind Power generation. The company has reported earnings results for the full year ended March 2008. For the year, the net sales for the company jumped to Rs 6579.21 mil-lion for the FY09 as against the net sales of Rs 4974.75 million for the FY08 with the growth rate of 32.35%. The net profit for the company stood at Rs 1648.65 million for the FY09 versus the net profit of Rs 915.41 million for the FY08 with the growth rate of 80.10% as compared to 9.22% for FY08.

The company posted excellent financial figures for the quarter ended Decem-ber 2008. The net sales for the company gone up by 54.88% to Rs 2618.68 million for the Q3FY09 as against the net sales of Rs 1690.74 million for the Q3FY08. The company posted the EBITDA of Rs 1557.77 million for the Q3FY09 as against the EBITDA of Rs 897.42 million for the Q3FY08 with the growth rate of 73.58%. The operating profit margin for the company stood at 59.49% for the Q3FY09 as against the operating profit margin of 53.08% for the Q3FY08, clearly showing the strength of the company. The net profit for the company rose to Rs 558.72 million for the Q3FY09 in comparison to net profit of Rs 477.67 million for the Q3FY08 with the growth rate of 16.97%. The net profit margin stood at 21.34% for Q3FY09 in comparison to 28.25% for Q3FY08. The EPS for the company stood at Rs 14.79 for the quarter ended in December 08 versus the EPS of Rs 12.64 for the quarter ended December 07. The EPS on TTM (Trailing twelve months) stood at Rs 66.23 for the company.

Business Details
Aban Offshore Ltd, formerly known as Aban Loyd Chiles Offshore Limited was incorporated in 1986. The Company together with its sub-sidiaries, provides oil field services for offshore exploration and pro-duction of hydrocarbons in India and internationally. It owns and oper-ates offshore drilling rigs, as well as provides drilling services to vari-ous oil and gas operators. The company also engages in the generation of wind energy and provides wind energy services. The Company pos-sesses twenty offshore assets including fifteen jack-up offshore drilling rigs, two drill ships, one floating production platform and a jack-up rig and drill ship each on bareboat charter. It enjoys the privilege of part-nering with several global players in the oil and natural gas industry by offering them reliable, state-of-the-art drilling services. Its notable cus-tomers include ONGC, Hardy Exploration & Production (India) Inc., Oriental Oil Co. (Dubai), Shell Burnei, Shell Malaysia, Hind Oil Explo-ration Co. Ltd, Cairn Energy, Petronas Carigali etc. It is India`s largest offshore drilling entity in the private sector. Its innovative and cost ef-fective solutions make the company one of the most efficient interna-tional drilling contractors. Aban Singapore Pte. Ltd. (ASPL) was formed as a wholly owned subsidiary of Aban Offshore Ltd. to offer drilling services to large global oil and gas operators. The company has obtained ISO 9001:2000 for its drilling operations.

Industry Outlook
The oil and gas industry has been instrumental in fuelling the rapid growth of the Indian economy. It contributes about 45 % of the total energy consumption of the country, which is the fifth largest energy consumer in the world. The oil exploration & production (E&P) space has been consolidating with strong momentum. With the announce-ment of NELP in the second half of 2009-10, the companies are expect-ing to get more oil & gas exploration blocks for auction by 2010. Off-shore vessels such as jack up rigs, anchor handling tugs, accommoda-tion barges and supply vessels which play a key role in the hunt for oil & gas have seen huge demand spurt due to increased global activity. According to DGH (Director General of Hydrocarbons) the shortage will rise further as India drills more wells estimated at 498 by 2012. The demand for rigs is going up strongly due to rise in oil prices on widen-ing demand - supply gap which is spurring the pursuit of additional re-serves. There is a huge worldwide shortage for exploration equipment. At present, the day rate for deep water rigs has gone up from $1,00,000 to over $7,00,000 in the last couple of years. The sector is attracting huge investments in order to meet the rising demand from oil & gas firms and is expected to show outstanding performance in medium to long term with Aban Offshore being a valuable pick in the industry.

To see full report: ABAN OFFSHORE

>Rallis India (IDFC SSKI)

We recently met Rallis India’s (Rallis) management to get its perspective on the global and domestic agrochemical industry and the company’s growth outlook. Rallis continues to be fairly upbeat on the outlook for global crop protection industry in general and India in particular. Given the consistently increasing MSPs (minimum support prices) across crops, an improving irrigation scenario as well as flat prices of key inputs like fertilizers, Indian farmers are intensifying the usage of crop protection products. Rallis expects the Indian crop protection industry to grow at 12-15% (in volume terms) – at least for the next 4-5 years and the company is well placed to grow faster than the market. In our view, with its strong India-franchise along with steadily growing exports and CRAMS business, Rallis is an interesting crop protection play. Rallis has been aggressively filing registrations in non-US/ EU geographies, which will enable it to register healthy export growth in the coming years. Rallis is also positive on growth prospects of its CRAMS business as the company seeks to leverage its relationships with multiple global players. Rallis is working on optimizing its cost structure, which can lead to accelerated profit growth in the coming years. Over the last 3-4 years, Rallis has achieved significant operational
efficiency improvements under the new management and the company sees significant room for eking out more gains. Rallis trades at ~4x FY09E EV/ EBITDA and healthy outlook for operating profit growth.

Global agrochemicals – demand outlook intact
Rallis management remains positive on the outlook for the global crop protection industry. The management has affirmed that while 2008 has been an exceptional year in terms of both value and volume growth (and unlikely to be repeated), the outlook for 2009 continues to be positive.
Prices of agricultural commodities, though significantly off from the peak levels, are still high vis-à-vis prices observed 2- 3 years ago. Also, the pressure on output prices has coincided with reduction in key cost heads like power and fertilizers for crop growers. As a consequence, farmers’ profitability remains healthy and there is continued incentive for them to cultivate (especially in developed economies). This indicates sustained volume growth momentum for the agrochemicals industry though some value erosion cannot be ruled out due to the high base effect.

Regulated markets – not easy for Indian players to enter

- > US market – a tough nut to crack: Rallis management believes that US is a tough market for new generic players. Given the highly consolidated distributor networks in regulated markets, it is difficult for newer generic companies to make a mark in the US market. As for launching new products in the geography, the initial registration process takes around two years for a product with costs estimated upwards of US$0.5m. The costs are significantly higher for relatively newer molecules. Growing regulatory scrutiny in the crop protection segment is also pushing up registration costs for new players. Identification of relevant products to penetrate the US market is a key strategic imperative for all new entrants in the geography.

- > EU – common processes make the task relatively easier
: With most of the process requirements (in terms of new registrations) being common across countries in the EU, it becomes relatively easier for generic companies to expand in this market. Also, forging strong distributor partnerships in the EU is the way followed by most generic companies to achieve scale in the key geographies and products.

Domestic crop protection sector – upbeat outlook

With consistently rising MSPs in India over the past few years, the outlook for domestic agriculture remains upbeat. The Indian farmer particularly has been benefitting on two counts – increase in prices of agricultural commodities and lower fertilizer costs (due to regulated price mechanism). Consequently, the Indian farmer currently finds himself in a sweet spot (subject to a normal monsoon).

Pesticide usage in India well below global standards

In India, the use of agrochemicals has traditionally been a tertiary need for farmers. Use of seeds and fertilizers are the two primary priorities in India and Rallis estimates that cost of agrochemicals as a percentage of a farmer’s total costs is miniscule (2-3%) in India as against the internationally observed range of 6-8%. However, a distinct behavioral change has been observed over the last few years and Indian farmers are increasingly looking at the use of prophylactic doses for crops which will lead to higher usage of herbicides and fungicides.

To see full report: RALLIS INDIA

>India Telecoms (HSBC)

All spectrum is not created equal....
  • Lower spectrum (900 Mhz) is better than higher spectrum (1800 Mhz) – larger cover area-fewer base stations
  • Bharti’s greater access to 900 MHz drives longer-term margin benefits of c12-20% and allows for higher market share in rural India
  • We are cautious on the sector given the competitive environment, with Bharti as our only OW(V)
Spectrum is the critical issue for the long-term success-failure of Indian telecom operators. Spectrum constraints are a structural impediment to industry growth, but there are significant differences in both the quantity and quality of spectrum by operator. This report analyzes how differences in the quality of spectrum will impact subscriber growth, profitability, and industry structure.

We argue 900 MHz GSM spectrum is the most attractive mobile wireless spectrum in India given the combination of larger coverage area and lower base station requirement. Our analysis indicates that 900 MHz operators have 12-20% higher EBITDA margins than 1,800 MHz operators. The structural spectrum advantages also result in lower capex and better balance sheets.

Bharti is the best positioned wireless operator in India vis-a- vis this spectrum advantage, with 900 MHz spectrum in 13 service areas vs. RCOM with 8. This spectrum advantage will be
particularly important in rural India, given low population densities and incomes. Roughly 70% India’s population is rural and rural subs growth is the primary, near to medium term growth driver of Indian telco earnings.

We are cautious on the Indian telcos sector given the damage caused by RCOM’s aggressive GSM roll-out and high level of regulatory uncertainty. We believe spectrum, coverage and balance sheet constraints will drive industry consolidation on a 2-4 year view. Bharti retains significant structural advantages, but the price war and rupee depreciation will impact Q4 earnings. We retain our Neutral (V) rating on RCOM, given our scepticism on its GSM strategy, tower roll-out and capex guidance. We also retain our Neutral (V) on Idea Cellular, MTNL and Underweight (V) on Tata Tele Maharashtra.

To see full report: INDIA TELECOMS