Tuesday, April 7, 2009

>Fulford (India) Limited (PPFAS)

Steady Operating Performance
Fulford (India) Ltd. has been a steady performer in terms of top-line & bottom-line growth, over the past several years. The company has consistently achieved growth in the range of 10 - 13% CAGR over CY04-CY08 period. Going forward, we expect the company to maintain similar growth rates of 10.3% & 14.4% CAGR in top-line & bottom-line respectively, over CY08CY10E period.

Strong & Committed Parent
Fulford is a 54% subsidiary of Schering-Plogh Corporation, USA, a research-based company operating worldwide. The parent company is committed to the growth of its Indian subsidiary, which can be seen from:

- The new product launches almost every year

- Increasing its stake through prefential allotment of shares, followed by an open offer.

Expectation of an Open Offer

Fulford's parent company - Schering-Plough is getting merged with Merck & Co. Inc. USA. Fulford is a 54% listed Indian subsidiary of Schering-Plough, whereas Merck has a wholly owned unlisted subsidiary - MSD Pharmaceuticals Private Ltd. After the successful completion of the merger, there are chances of Merck coming up with an open offer for shares of the listed entity Fulford (India) Ltd. That would be a very positive trigger for the stock.

We expect Fulford (India) Ltd. to achieve a growth of 10 - 13% CAGR over CY08-CY10E period, both in terms of its top-line & bottom line. Besides, the company is cash-rich & completely debt-free. We expect the company to have approximately Rs. 280 per share as Cash & cash equivalents on its Balance Sheet as of December 2008. At CMP of Rs. 365, the script trades at 6.1x CY09 & 5.5x CY10E earnings. We initiate coverage with a BUY on the stock.

To see full report: FULFORD

>Metal Sector (MOTILAL OSWAL)

We believe pressure on steel prices has eased due to better visibility on cost structure despite poor demand

· Japanese mills settled coking coal annual contracts for 2009 at US$129/ ton, which disappointed steel producers who were targeting much lower prices and are left to buy carry over quantities of 2008 contracts at old prices. Though iron ore prices are yet to settle and there is no sign of demand recovery, there is now better visibility over the cost structures for 2009, which may not allow further price correction. Steel producers would rather cut production than offer lower prices. Billet prices have recovered marginally last week. We believe pressure on steel prices has eased.

· Spot iron ore prices continue to remain under pressure due to rise of inventories on ports, poor pig iron production and rise of imports in China.

· We believe easing of pressure on steel prices and correction of input costs will revive margins and the strong volume growth of 67% (largest among Indian steel company) will drive earnings for JSW Steel. Stock is trading at 45% discount to FY09 book value. We upgrade JSW Steel to Buy.

· Hydro, U.C. Rusal have cut production of aluminium and alumina further.

· Base metal prices have rallied on continued state buying by China at a premium, less disappointing US economic data, fear of dollar weakening and speculative inventories building by traders. Sterlite, a diversified base metal producer, is the key beneficiary.

To see full report: METAL SECTOR

>India Property (CITI)

Per Sq Ft Portable

· Mall rentals decline 12/19% QoQ in 4Q2008 — C&W data suggests NCR and Hyd witnessed the sharpest decline in rentals at 19% and 13% resp while main street rentals fell most in Mumbai (24%), Chennai (21%) and Delhi (18%). 4Q vacancy in Mumbai and NCR was high at ~15%. We see more risks to rentals with most retailers re-negotiating and scaling down expansion plans (Fig 19).

· 2008 Mall supply below est; pronounced slowdown in 4Q — JLL data highlights actual aggregate mall supply in Mumbai, NCR, Bangalore and Chennai was 60% lower than est. supply at the beginning of the year (Fig 7). The supply slowdown was more pronounced in 4Q vs. 3Q for four key cities largely due to liquidity and absorption issues delaying mall completions.

· Derivative action in property stocks — Real estate stocks with Unitech in particular have seen a build up of fresh long positions. Unitech and DLF saw rollovers of 76% and 70% resp. vs. 69% for Nifty (Fig 20). On stocks, short positions in DLF have reduced with rollover costs down MoM, while in Unitech some long positions were left to expire, triggering a rally in cash market; long positions in HDIL and IBREL have largely been rolled over.

· Trikona Trinity Capital a casualty of property slowdown — Shareholders of the AIM-listed real estate fund invested in several projects in India have passed a resolution to dispose of all assets and return the capital. We see this as a sign of distress and more such events could further add to liquidity crunch.

· News — 1) DLF cuts Gurgaon prices; 2) Sicom acq 0.27% stake in Parsvnath through invocation of promoter pledged equity; 3) 53% of homes built in 6- key cities since 2007 unsold; and 4) Dec’08 FDI fell 62% MoM to US$44m.

To see full report: INDIA PROPERTY


We initiate coverage on Indian IT services sector with a Negative view. We believe that the macro-economic factors will continue to impede Indian IT Services industry. The industry is experiencing multiple headwinds along with the slowdown that will play out in terms of reduced growth rates, pricing pressures, project cancellations, delays or no orders and return of economic nationalism resulting in sluggish top-line growth. We initiate coverage on Infosys (Sell), TCS (Sell), Wipro (Hold), and HCL (Hold) rating.

· Global macro-economic headwinds: BFSI, Telecom and Retail the worst affected: The current macro-economic outlook appears bleak in the near term. GDP of the US and Europe, which contributes about 85% of revenue for top 4 Indian IT comapanies, is expected to de-grow. BFSI, Telecom and Retail that contributes 65% of revenue for top 4, are suffering because of declining consumer confidence, write-offs and bankruptcies. M&A has further decreased the size of the pie.

· Globalization of global delivery model: Large global peers like IBM, HP-EDS, and Accenture have managed to grow at a faster pace in India than the top 4 Indian IT companies. Global players have steadily improved their margins over the last 3 years. Tier-1 Indian IT companies are also facing pricing pressure due to competition from the Tier 2 Indian IT companies.

· Pyramid effect not geared for decelerated growth: We believe that with little visibility of volume growth and gloomy macro-economic condition, and in declining attrition scenario, the ability to maintain the pyramid base would be difficult. Any decline in hiring would increase the average age and accelerated hiring would put pressure on utilization ratio and margins.

· STPI benefit to end in FY10, slower volume growth could increase tax rate further in FY11: End of tax holiday will have dampening effect on bottom-line of Indian IT companies. According to us, slower volume growth than expected could increase effective tax rate higher than anticipated in FY11. We are factoring in the number of new business moving to SEZ, but as the volume of new business dries up the companies' effective tax rate could be higher than anticipated.

To see full report: IT SERVICES

>India Strategy (MERRILL LYNCH)

India elections: Musical chairs post elections

· Hung parliament likely…
Over next 6-8 weeks, we think concerns of a hung Parliament post-election will likely worry the market and, coupled with expected slowing earnings, we believe could lead to a 15% correction in the markets. On the elections, we believe
(a) there will likely be a hung Parliament i.e. none of the three combinations – Congress-led UPA, BJP-led NDA and the Third Front – will be able to come to power (b) post-election results new alliances are likely –regional parties like BSP and AIADMK will be important (c) the probability of a Third Front Government coming to power is still low but increasing in our view. Our best case scenario would be a Congress Government but with the Left being a key ally in it.

· …leading to new alliances in effort to form the Government
We think most of the present alliances are fluid and many parties would be willing to reconsider their alliances post-elections. We think 2 regional parties – Mayawati’s BSP and Jayalalita’s AIADMK would play a crucial role in deciding the Government. The role of the Left parties, though weakened, should also be important.

· Congress-led UPA Government still has a slight edge
Despite the break-down of seat sharing with Mulayam Singh’s SP in U.P and Laloo Yadav’s RJD in Bihar, we think both will continue to be part of the Congress-led UPA. We think the UPA still has a slight edge since they can get
Left support again. The BJP-led NDA on the other hand, we believe, could need the support of BSP, Jayalalita’s AIADMK, Naidu’s TDP as well as its old ally BJD.

· Third Front Government: Negative scenario for the market
We think it would be highly unlikely that a Third Front Government is formed without the support of Congress or BJP, because Congress plus BJP should gain nearly 50% of the total seats. However, if the Congress/BJP can’t form a stable Government, they may support a Third Front Government. While we think this is a lower probability event, the possibility has been increasing past few weeks.

· Markets edgy till Government formed
We think a positive scenario for the market is a BJP or Congress led Government without the Left parties but has a low probability event in our view. Historically, markets have been edgy ahead of elections. We think concerns of a hung Parliament could lead to a 15% correction in markets this time. We would be defensive (Buy Hero Honda, Bharti) in the run-up to elections. We think infrastructure would be a priority for all Governments – Jaiprakash could be a gainer in the post-election scenario. We believe a Congress or BJP government without the Left could lead to reforms in (a) privatization and oil reforms (gainers: HPCL/BPCL) (b) banking reforms (gainers: Government banks) (c) FDI in retail, aviation, insurance etc (gainers: Pantaloon).

To see full report: INDIA STRATEGY

>Eastern silk Industries (INAJ MENA)


EASTERN SILK INDUSTRIES, LTD. engages in the manufacture, sale, and export of silk yarn and fabrics primarily in India. It offers fabrics and madeups, home furnishings, fashion fabrics, handloom fabrics, double width fabrics, scarves, laces and belts, and embroidered fabrics. EASTERN SILK INDUSTRIES exports its products to the United States and Europe, as well as to Australia, the Middle East, and the Far East. The company was founded in 1946 and is based in Kolkata, India. The company was thereafter converted into a Private Limited Company in the name of Eastern Silk Manufacturing Company Private Limited on 12th June 1956. The company was again converted to a Public Limited company in the name of Eastern Silk Manufacturing Company Limited and fresh certificate of incorporation consequent to change of name was issued by the Asst. Registrar of Companies West Bengal on 26th July 1975. The name of the company was further changed to "Eastern Silk Industries Limited" and a fresh certificate of incorporation consequent on change of name issued by the Asst Registrar of Companies West Bengal was obtained on 12th August 1975.

The company manufactures silk fabrics with an annual processing capacity of 4.05 million mtr pa. Most of its production is exported to Japan, the US and the UK. A government-recognized export house, it also exports made-ups, leather goods and shrimps. The company has two subsidiaries – Eastern Enterprises and Mayur International Corporation. Eastern subsidiaries markets a part of the ESIL products in the US and Canada.

ESIL is involved in an integrated production facility of silk products starting from reeling of yarn from cocoons to finished silk. ESIL procures the cocoons from the southern part of India and Madhya Pradesh. The yarn is reeled on a contract basis by the various units in different villages in the cottage industry sector. The reeled yarn is sent either directly in to company's process house at Noida for dyeing or given to Eastern Enterprises Ltd. (EEL) a wholly owned subsidiary of ESIL. Around 50% to 60% of the yarn requirement is imported mainly from China or Brazil . After the weaving of the fabric, ESIL processes and finishes the fabric at its process house at Noida. The made-ups like scarves etc. are mainly manufactured in Naraina in New Delhi.

· Expansion Plans to drive volumes :The company is starting a new plant worth INR 800mn in Bangalore which should be operational from July 2009. This will surge the total production capacity of silk yarn and fabrics.

· Shift in Product Mix :The company is now focusing on machine made silk fabrics rather than handloom made silk fabrics. Machine made silk fabrics fetches higher margins and have better demand in developed countries.

· More Focus on Domestic markets to improve margins :ESIL plans to venture into domestic markets due to an increase in demand for silk in the furnishing sector in India. The margins in the domestic markets are higher as the finished products are sold to the retailers directly.

· We have initiated a coverage with a price target of INR 49.95 giving an appreciation potential of 581% in the next 2 years.


>Bank of Maharashtra (BONANZA)


BoM is a small PSU Bank, mainly concentrated in Western India. It has deeply penetrated underbanked areas of among the most industrialized states of the country like Maharashtra, Gujarat, Karnataka etc.

It is an excellent take over candidate as M&A begins in PSU Banks (already started within SBI group).

Bank has controlled its NPA very well. Its NPA levels are at 0.82%.

At CMP Rs.22, Bank is trading at about 47% of its Book Value of Rs.41,.

At CMP Rs.21, it offers dividend yield of 9.5%. Dividend in FY 08 was Rs 2/share. It has been paying dividend consistently.

Government shareholding is very high at 76%, which makes further fund raising easy. Also, BoM is attractive to potential acquirer in M&A, specially banks with Govt. holding near 51%.

PSU Banks have huge exposure to G-Sec. The prices of these Govt. securities have sharply risen in past few months and yields have fallen. With softer interest economy, Bonds yield can fall more. Thus dividend yield of the safe PSU Banks stocks are much higher than the Bond Yields (10-Year 6.05% G-Sec yield is about 7.1% presently)

The bank enjoys high CASA of about 38%.

To see full report: BANK OF MAHARASHTRA

>Suzlon Energy – MP (INDIA INFOLINE)

· Lower earnings visibility from shrinking order book
Suzlon's order book fell by 43% since the blade cracking issue surfaced in Q4 FY08. It has been unable to bag large orders from either USA or Europe since then. As they are largest markets, non receipt of orders displays lack of customer confidence in Suzlon's products and thus raises concern over future growth. The existing order book of ~2,000 MW does not even cover Suzlon for one year. However short duration orders from India will help restrict de-growth.

· Funding REpower purchase will strain cashflow
Weak market environment will force Suzlon to 1) offload additional stake in either Hansen or Suzlon, 2) raise fresh debt or 3) contract working capital cycle. The management is already working towards contracting its working capital cycle. Any delays will result in Suzlon having to resort to bridge loans. During Q3 FY09, higher inventory and debtor days inflated its working capital cycle. We expect the company ot offload a minority stake in either Suzlon or Hansen to fund its Rs 13.5 bn REpower acquisition.

· Intergrating to overcome supply chain issues
With the commisioning of its castings and firgings unit and the acquisition of Hansen Transmission, Suzlon has become an end to end solutions provider in the wind industry. Hansen helps in filling the supply chain gap of gearboxes - which presently is a key of bottleneck. Hansen is in the process of enhancing its capacity to 14.3GW from 7.3GW FY13. It will set up capacities in China and India. Such superior level of intehgration should enable Suzlon to bid competitively and maintain margins.

To see full report: SUZLON MP

>Punjab Nastional Bank (INDIA INFOLINE)

· Significant expansion in loan book over Q4 FY08- Q3 FY09
In the past four quarters, PNB's loan loan book has grown by 40% implying a CQGR of 8.7%. In 9m FY09, bank's advances have grown by 18.5% YTD impying an annualized growth of 25% yoy. This is in startk contrast to a material slowdown in the loan growth for the system. Key drivers behind PNB's brisk loan loan growth are 1) multiple lending constraints faced by large private sector banks 2) large corporate borrowers have been shifting to the large PSBs 3) extensive branch network and rural presence.

· NIM to dip in Q4 FY09; to remain at 3.5% in FY10E and FY11E
Over Q1-Q3 FY09, PNB's NIm has improved by 60 bps to 3.9%. The margin improvement was driven by more than commensurate increase in lending rate by the bank in response to an increase in cost of funds due to tight liquidity conditions between July-October 2008. Due to extensive branch network and strong brand, PNB was amongst, PNB was amongst the least affected banks during the liquidity crunch. However, PNB's NIM is expected to decline by 20-40 bps qoq in Q4 FY09 due to significant reduction in BPLR in the past four months. In FY10E and FY11E, we expect reported NIM to hover near 3.5%.

· Fragile asset quality; but deterioration to remain under check
Traditionally, PNB has witnessed higher GNPL% than most of the other PSBs due to its more aggressive lending strategy, which focuses on earning high NIMs. Though the asset quality could rapidly deteriorate in future due to worsening macro conditions, we believe that it would remain within bank's tolerance levels. We estimate Gross NPLs to incorease 2.5x and reach 4.2% of advances while net NPLs would jump 5x and represent 2% of advances by FY11

To see full report: PUNJAB NATIONAL BANK

>Automobile Sector four wheeler (ENAM SECURITIES)

Earn to ground: Automobiles

Volume for cars and 2w have shown a singnificant improvement from the troughs of Q3FY09 (cars up 45% and 2w up 37% in Feb v/s Dec'08). We analyze various factors affecting volumes, to check their sustainability.

Main reasons for for a strong rally in volumes in Q4:
· Cars: a) 6th Pay commision's 20% salary raise for 5.5 mn governemnt employees in Q3; b) Excise duty reduction of 4% in Dec'08, followed by aggressive discounts (3-5%) by all OEMs (ending March 31, 2009); c) Increased availability of finance (PSU banks) and lower lending rates (200 bps reduced); d0 Q4 seasonality: Depreciation benefits, marriage season etc; e) Pre-election season purchases.

· Two - Wheeler demand has mainly driven by high rural income on increased government spending government spending of Rs 800 bn or 3% of GDP (30% increase in MSP, NREGS, expansion, 6th pay comm and farm loan waiver etc.). While there has been a reduction in lending rates, availability of finance remains a key isssue

Structural changes in the long term, 2w better placed than cars....
· Increased participation of PSU banks will stabilize liquidity and increase geographical reach.

· Repossession norms to ease finance availability: Draft guidelines have been submitted by the MoF. These include changes in loan application procedure and a central monitoring cell for recovery agents. A decision on the same is expected on the same is expected in Q1FY10, subject to clearances from the Election Commission. 2w expected to benefit most as repossession norms ease.

· Nano Launch: expect the market size to expand as new customers come into the fold.

To see full report: AUTOMOBILE SECTOR