Saturday, April 11, 2009

>Economy Release Calendar (EDELWEISS)

Given below is a calendar indicating significant economic events/releases due in April 2009:

* For the Indian economy, the highlight of the month will be the RBI annual policy meeting. Industrial production data for February will also be of interest after witnessing two consecutive months of decline.

* Policy actions across major economies will be of significance against the backdrop of a spate of rate cuts by central banks in recent times. Growth and inflation data across economies will continue to remain of interest with major economies slipping into recession and deflation.


>Tata Communications Ltd. (INDIA INFOLINE)

Pricing pressure to dampen wholesale voice growth
Wholesale voice (ILD & NLD) business is likely to face continued challenges as realizations declines and operators fight for voice volumes. Tata communications experienced nearly 20% yoy fall in gross revenvue/min in FY08 and we expect as annual 5-7% drop over yje next two years.

Leverage, uncertainty in land disposal remain key concerns
The company has incurred ~US$500mn capex in the current financial year and plans to spend a similar amount in FY10. Since operations may not be FCF positive, debt would fund as estimated capex of ~US$1.5bn over FY09-11. Thsi could push debt burden to 1.1x in FY10. Separately, the company owns 773 acres of valuable land in major cities, which we value at Rs 113/share. However, the uncertain timing of any potential transaction is a concern, especially since crash from land sale could be used to repay debt.

Data business revenue CAGR seen above 20%
Enterprise & Carrier data is expected to witness a health 20% + CAGR in revenues over FY09-11 on the back of capacity addition in cable network. We have factored in a higher revenue growth as compared to that for Bharti and Rcom's enterprise business is given the larger scale of asset ownership and expansion is managed data centre services.

To see full report: TATA COMMUNICATIONS

Seamless Cylinders – ‘The CNG Drive’ (INDIA INFOLINE)

Environmental benefits: a key driver for CNG demand growth
Robust economic growth, at a global cycle, over the last few years, has lead to a strong growth in primary energy consumption. With lack of availability of technology to tap renewable resources, consumption of fossil fuels has gathered significant momentum. Contribution of coal and crude oil to global primary energy basket stands at 64%.

Emerging economies: demand growth centres
Majority of the growth in natural gas vehicles (NGVs) has been driven by emerging economies. Most of these economies have subsidized petrol and diesel pricing, which has led to sustenance of CNG's cost advantage in the current fall in crude oil prices. With energy security being at the top of mind for many of these economies, shifting to CNG would be a key strategy.

Everest Kanto Cylinders: A global growth story
With EKC setting up footprints in Dubail, China and Kandle SEZ (India), it is well poised to serve economies witnessing robust growth for CNG cylinders. Its total capacity is slated to increase from the current 1mn cylinders to 1.5mn cylinders in FY10. We believe current valuations do not factor EKC's future growth prospects adequately, Recomment BUY.

To see full report: SEAMLESS CYLINDERS



Manufacturing activity continues its plunge. By the end of February, US industrial production was down 12% from its peak, Eurozone production by 12% and Japanese production by a significant 38%.

The March US manufacturing ISM index of 36.3 suggests that the rapid fall in manufacturing output is continuing. Historically, manufaturing stablises when the ISM survey reaches the high 40s. The ISM new orders index is picking up, as consumer demand has modesty improved in Q1` following two atrocious quarters, but the level of the new orders index is only 41.2, held back by the severe slump in machinery orders.

US consumer real disposable income is up 2.5% yoy as falls in energy prices, unemployment insurance and rising social security payments have substantially ameliorated the impact of the sharp rise in unemployment. Small-ticket purchases are up 1% yoy.

Big-ticket purchases, more important for Western manufacturing are bouncing from their lows, by february up 2.8% from the lows in December. The pick-up are ebbing, but a substantial rebound in confidence and in postponed demand, are unlikely until corporate restructuring finishes and the pace of job cuts lessen, most probably in Q3. In Europe too, car sales are posting strong rebounds, helped by government subsides on new car purchases.

To improve US credit availability, for when demand recovers, the New York is lending through the TALF facility to purchasers of new AAA asset backed securities (ABS), at 1% above LIBOR for three years, non-recourse to the borrower, and only secured by eligible ABS.

To see full report: ECONOMIC CYCLES

>First Solutions Ltd. (JP Morgan)

Large shareholder Metavante acquired by FINS - ALERT

Fidelity National Information Services (FIS) today announced acquisition of Metavante Technologies (MT) – MT holds 20% stake in Firstsource (FSOL). The acquisition will create the world's largest provider of integrated payment and financial processing services. FSOL had entered into a strategic partnership with Metavante where Metavante would market FSOL’s offshore BPO services as part of their overall service offerings and FSOL would be Metavante’s exclusive offshore and preferred onshore BPO service partner.

Implications: We believe that FSOL failed to see any significant traction in the partnership with Metavante, especially due to the severe downturn in the US Banking space. While the acquisition creates a much bigger entity giving FSOL access to a large pool of a relatively underpenetrated segment of US-based mid-size banks, we are unaware of FIS’ commitment to the deal signed by Metavante. We believe there is a chance that offshoring BPO work is not the priority for FIS near term given weak financial markets. Further, any decision to sell stake in FSOL could be a technical negative for FSOL stock – we will speak to the company over next few days to get more color on the same.

FCCB buyback: Firstsource has bought back FCCB of face value worth US$49.7mn at discount of ~50%. FSOL has raised ECB of ~$25mn (interest cost below 10%) to fund the buyback. While the FCCB buyback should be a sentiment positive for the stock, the quantum is too small (US$257 million of outstanding FCCB before the buyback) to have any material impact on our FY10/11 EPS estimates, especially because FSOL has taken debt to fund this buyback.

Investment view: We continue to believe that FSOL will see a difficult end-market environment both in financial services and healthcare for FY10, and we remain fundamentally cautious.

To see full report: FIRST SOLUTIONS

>Kirloskar Oil Engines Ltd (RELIANCE MONEY)

Demerger of engines and auto component business from the Company
Kirloskar Oil Engines Ltd (KOEL) has announced the demerger of Engine and Auto Component business of the Company into Kirloskar Engines India Ltd (KEIL). After the demerger KOEL would continue to hold investments in its books while KEIL would represent core engines and auto component business. KOEL after Q3FY09 results informed that it’s Board of Directors had constituted a Committee of Independent Directors to examine merits of reorganizing the various businesses and investments of the company, including by way of restructuring and /or demerger of the Company. The effective date of demerger has been decided as 1st April 2009.

Existing shareholders to get 3 shares of KEIL for 4 shares in KOEL
KOEL has fixed demerger ratio at 3:4 which means existing shareholders of KOEL to get 3 shares of KEIL for every 4 shares held in KOEL. The company has not disclosed the method of valuation for demerger. But we believe it to be mainly based on book value and potential value of unlisted investments. We believe the valuation has given due consideration to potential of unlisted companies (Toyota Kirloskar, Toyota Kirloskar Auto Parts, T G Kirloskar Automotive etc) which is reflected in demerger ratio.

KEIL ‘s equity capital after the demerger would be ~146mn equity shares of Rs.2 each (~Rs.291mn). KOEL as on 31st March 2008 held book value investments of ~Rs.4.76bn which includes strategic investments and investments in mutual funds. The current market value of these investments is ~Rs.1.9bn and including the book value investments of non-quoted investments and mutual fund investments, the investment on the books are at Rs.4.93bn.

KOEL’s valuation has not been reflecting the value of investments it holds in the balance sheet and because of which we believe the company has taken the decision to demerge core business into separate company, KEIL.

To see full report: KIRLOSKAR

>Suzlon Energy (UJLK Securities)

Suzlon Energy Limited is a vertically integrated wind turbine manufacturer with manufacturing capability along the full value chain from components to complete wind turbine systems. The company currently has a combined manufacturing base of 4,200 MW of annual capacity. It is the world’s fifth leading wind turbine manufacturer in 2008. The company is the leading manufacturer in the Indian market maintaining over 50% market share.

Investment Rationale:
Suzlon saw new orders flows from China and Australia of 100 MW each which improves the revenue visibility of the company. There is scope for margin improvement and improved profitability as most of extraordinary items have been considered in FY08‐09. The company has high level of working capital and inventory which it is trying to work down to generate cash for its acquisition. Its subsidiaries Hansen and RePower will add value to the company as they have good profitability and strong order book position especially Hansen which has higher revenue visibility. Suzlon is not a stock which is driven by domestic consumption as majority of its revenues come from international market. Going ahead only 30% of its revenues will come from India and 70% from its international market. The major concerns for the company are deteriorating macros, rising debt and high working capital and funding its Repower acquisition. In the last 2 years, almost Indian market is flat as execution is governing the size of the Indian market. But lately a lot of initiatives by the government have changed in the last 2 to 3 months, particularly in Tamil Nadu and Gujarat governments have both have changed the lot of regulatory improvements are there. The new order inflows will act as the growth drivers for the company.

The stock is trading at Rs 45. At the current market price the stock is trading at a P/BV of 0.7x its FY10E. Its FY10E EPS is seen at Rs 6.9 and it trades at a PE of 6.2x. We recommend an accumulate rating on the stock with a price target of Rs 56. At this price the stock will discount FY10E earnings of Rs 6.9 by 8x. The stock has priced in all the negatives and is available at cheap valuations. The stock is trading at a discount as compared to its peers on account , rising debt and high working capital, but these negatives are priced in the current market price.

To see full report: SUZLON

>Telecom Sector (ICICI SECURITIES)

Rural, the reigning flavour

* Rural offers vast growth opportunity
* Tower – Shaky foundation with low sharing and likely overbuild
* New entrants – Short-term disruption, long-term consolidation
* BUY on Bharti Airtel; HOLD on Reliance Communications & Idea Cellular

The Indian Telecom sector is at a critical point as net adds approach peak and competition intensifies. We expect a tussle between incumbents & new entrants, GSM & CDMA services and for 3G licences. Amidst all this, rural India offers telcos a new leg of growth as they extend coverage to hinterlands. We expect that by FY15E, rural net adds will contribute ~45% to total net adds. Though tower sharing is in the spotlight, we expect modest value creation from tower companies as incumbents will likely use captive tower companies, leading to overbuild and low sharing ratio for the industry. We are bearish on new entrants and expect consolidation in due course.

We initiate coverage on Telecom with a Neutral stance as net adds slow down and competition rises, though growth opportunities abound in rural India. We recommend cherry picking among telcos as individual company dynamics outweigh sector dynamics. We initiate coverage on Bharti Airtel (BAL) with BUY and on Reliance Communications (RCom) and Idea Cellular (Idea) with HOLD.

* Mobile subscriber growth – Running out of steam. Mobile subscriber additions in India are likely to slowdown FY10 onwards as urban penetration has become high and mobile operators try to maintain momentum by expanding into rural areas. We estimate the Indian mobile penetration to rise to 64% by FY15E. Growth, going forward, is likely to depend on the pace at which telcos extend coverage to low density rural areas.

* Rural India – Small part of a large number is still large. Rural India offers unbridled growth potential, accounting for 70% population, 56% income and 64% expenditure. We expect 33% teledensity in rural India by FY15E, driven by coverage and rising affordability. However, difficulty in expanding network coverage to rural areas will pose a challenge to achieving high rural penetration.

* Tower sharing – Shaky foundation. We expect the tower sharing ratio in India to be a modest 2.3x by FY15E as tower companies will essentially cater to in-house demand. The tower sector is progressing towards an overbuild, though the ongoing credit crunch might reduce the likelihood.

* Valuations – BUY BAL; HOLD RCom & Idea. We recommend a selective approach for investing in telecom. BAL offers unhindered growth as the company shifts focus to rural India. We believe RCom’s dual network approach has long-term revenue potential though on high costs. Idea offers limited returns as it is bearing the costs of expansion into new circles.

To see full report: TELECOM SECTOR


Petronet LNG Ltd. (PLL) accounts for 23% of natural gas supply of India and boasts of a Sovereign parentage of GAIL, IOCL, ONGC and BPCL. Considered as an Indian pioneer in import distribution, it regasifies ~6.5 mn mtpa of imported LNG from its facility in Dahej, Gujarat and is a major supplier to GAIL’s HVJ gas pipeline.

Unique business model
PLL’s business model of back to back gas sale purchase agreements insulates the company from sourcing, offtake and exchange rate risks. With the virtue of a short working capital cycle, the company does not require any working capital funding for its growth.

Earnings growth visibility
PLL has growth visibility through its long term sale-purchase agreements and matching offtake agreements with GAIL, IOCL and BPCL, thereby ensuring supply and a ready customer base, which should enable it to register an earnings growth at a CAGR of 14% over next 3 years. As energy consumption is not expected to ebb in the foreseeable time, PLL offers high safety of earnings in these challenging times.

Capacity expansion
It would double its Dahej capacity in Apr’09 to 10 mn mtpa and another 5 mn mtpa terminal, which is under construction in Kochi, should be on stream by H2FY12.

* Invocation of force majeure clause by the LNG supplier might result in lower volumes sold by PLL.

* Even though the capacity expansion at Dahej has been completed, PLL has not yet fully tied up with long term supply contracts for the new capacity. An unforeseen spot purchase might impact the profitability.

The capacity expansions at Dahej should enable PLL volume growth by 13% in FY10 to 7.4 mn mt and 24% in FY11 to 9.2 mn mt garnering scale in earnings. Hence we initiate coverage on the stock with a ‘BUY’ recommendation and a price target of Rs66 on a 24 month investment perspective.

To see full report: PETRONET LNG

>Automobile Sector (PINC RESEARCH)

On a recovery course……

Indian automobile sector reported an improved performance during the month of Mar’09. On a sequential basis, there has been a marked up-tick in the primary dispatches by the major auto players. Passenger cars and 2-wheelers were two segments which have done well. While domestic 2-wheelers sales improved, exports were weak with decline in volumes. Domestic passenger cars sales were boosted by the discounts and offers on the products. Exports were healthy with Maruti and Hyundai growing their penetration in the European market. Medium and Heavy Commercial Vehicles (MHCV) segment continues to be in a declining phase though there is sharp improvement sequentially.

* 2-wheelers: Overall industry performance has been good though Bajaj Auto continues to post a decline in its monthly sales. Honda Motorcycles & Scooters India (HMSI) and Yamaha have shown a strong growth in the motorcycle segment.

* Passenger Vehicles: Passenger cars and Utility vehicles reported strong performance. Utility vehicles has got a big boost due to National Elections. Hyundai reported a decline in domestic sales which is largely a factor of big base. Maruti Suzuki reported their best ever monthly sales.

* Commercial Vehicles: MHCV is on a gradual recovery phase for the last two months. However, we believe that this segment will be adversely impacted by elections and monsoons thereafter. So, we do not expect the segment to stabilise before Sep’09. Light Commercial Vehicles (LCV) segment has done well and we believe that this segment is in a secular growth phase due to large requirement for last mile connectivity.

To see full report: AUTOMOBILE SECTOR