Sunday, April 19, 2009

>Hindustan Unilever (EMKAY)


HUL implemented price cut of 4%-20% on select brands and product categories. The price cuts are implemented either directly (20% price cut on Wheel Active Blue) or indirectly through weight changes (4.2% weight increase in Lifebuoy and 6.7% - 8.3% weight increase in Wheel Green). Considering above mentioned price cuts on select brands, total blended price reductions is approximately 1.2%. This translates into net cost saving of Rs5,301 mn compared to Rs7,637 mn earlier and additional EBITDA margin of 2.9% versus 4.1% earlier. Recent price reductions ratify our call that consumer staple companies will retain some savings to improve margin profile and intensify advertisement activities and utilize the balance for price reductions to benefit consumers. The recent price reduction on select brands is in-line with expectation. Despite adjusting the above price actions, HUL can implement incremental price reductions of 3.1% without impacting FY10E earnings estimates and intensify advertisement activities. Our earnings forecasts for CY09E remain unchanged at Rs11.7/Share. We maintain our BUY rating with target price of Rs305.

HUL implemented price cuts of 4%-20% on select brands and product categories
HUL, w.e.f April 2009 implemented price cut of 4%-20% on select brands and product categories. The price cuts are implemented either directly (Wheel Active Blue – Cake) or indirectly through weight changes (Lifebuoy, Wheel Green – Powder). The pricing action undertaken are – (1) 20% price cut in Wheel Active Blue – Detergent Cake (200 gm) from Rs10 to Rs8 (2) 4.2% price cut in Lifebuoy by increasing the weight from 115 gm earlier to 120 gm and keeping the retail price unchanged at Rs15 and (3) price cuts in range of 6.7%-8.3% in two SKU of Wheel Green – Detergent Powder by increasing the weight from 275 gm to 300 gm and 560 gm to 600 gm.

Safety cushion still exists, despite the above price reductions
Drawing reference to our earlier report ‘Material Gains’, HUL is riding on net savings of Rs7,637 mn or additional margins of 4.3%. The report highlighted the magnitude of savings and re-iterated our call on partial retention of savings and partial pass through to the consumers. Considering above mentioned price cuts on select brands, total blended price reductions is approximately 1.2%. This translates into net cost saving of Rs5,301 mn compared to Rs7,637 mn earlier and additional EBITDA margin of 2.9% versus 4.1% earlier. Despite adjusting the above price actions, HUL has enough safety cushions to introduce further pricing actions (upto 3.1% blended price reduction), make aggressive spends on advertisement and enough arsenal to combat price competition.

To see full report : HUL

>Crude down on firmer dollar; fundamentals weak

Singapore - Crude oil futures drifted lower Friday in Asia as the dollar strengthened, presenting a disincentive to stay long on contracts, while traders also opted to take profit as weak fundamentals continued to cast doubts over the market's outlook. While oil prices have held steady near the psychologically important $50-a-barrel mark in recent trading, with sentiment finding support from firming equity markets, analysts warned that downside risks persisted. "Overall, we continue to have difficulty building a bullish case," said Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates. "But, at the same time, we are recognizing the recent resiliency of the complex amidst seemingly bearish headlines, particularly in the form of mounting and burdensome crude supplies." On the New York Mercantile Exchange, light, sweet crude for delivery in May traded at $49.64 a barrel at 0635 GMT, down 34 cents or 0.7% in the Globex electronic session. June Brent crude on London's ICE Futures exchange lost 5 cents to $53.01 a barrel. The dollar earlier traded firmer against the euro and the yen, rising to Y99.52 from Y99.33 late in New York; the single currency traded at $1.3128, from $1.3175. Oil prices came under renewed pressure Wednesday following U.S. government oil data that showed the country's crude inventories rose a fifth straight week to 366.7 million barrels - the highest since September 1990. Stockpiles have climbed almost 17% on year despite efforts by the Organization of Petroleum Exporting Countries to aggressively cut output, suggesting demand has failed to keep pace.

Given the recent positive performance of equities - Asian shares traded higher ahead of the weekend - as well as some bright spots in the global economic growth picture, energy and precious metals markets may be "running out of favor" with investors, according to Barclays Capital. "The flow of investments into oil (exchange-traded products) has reversed sharply," analysts led by Gayle Berry said in an overnight report. "With the financial market environment now less positive for gold and oil inventory levels rising sharply, further investment outflows from these sectors look likely." At 0635 GMT, oil product futures also traded lower. Nymex heating oil for May fell 82 points to 141.36 cents a gallon, while May reformulated gasoline blendstock traded at 147.25 cents, down 18 points. ICE gasoil for May changed hands at $454.25 a metric ton, slipping $2.75 from Thursday's settlement.


>JSW Steel (KARVY)

Surpassing Tata Steel as the largest private sector steel player in India

JSW Steel has come back on track to deliver a healthy crude steel production performance in Q4FY2009 after the complete disappointment on production and sales volume front during Q3FY2009. Volumes have been showing an uptrend but we believe there could be negative surprise of lower steel price realization as compared to consensus estimates. On account of price performance and overhang of lower price realizations, we downgrade our rating from BUY to Market performer.

Production update for Q4FY2009 and outlook for FY2010E: After commissioning of new blast furnace capacity of 2.8 mn tonnes in February 2009, JSW Steel has now become India's largest private sector steel company with total steel making capacity of 7.8 mn tonnes. Earlier it was Tata Steel with steel making capacity of 6.8 mn tonnes. The 2.8 mn tonne expansion project has been commissioned in a record 31 months.

Indian and global steel price might correct further due to lower raw material prices: We expect iron ore contracts and coking coal contracts to be negotiated at ~ 50%-60% lower than the contract rates of FY2009. Iron ore contracts might be finalized at US$50 per tonne and coking coal at US$120 per tonne for FY2010E. This is likely to put further pressure on steel prices going forward.

Despite being largely non-integrated, JSW Steel is a low cost producer: JSW Steel's cost of production is lower than that of Tata Steel (India), which is remarkable considering that its level of integration is much lower than that of Tata Steel (India). While Tata Steel (India) is 100% integrated for iron ore supplies and 70% for coking coal supplies, JSW Steel is integrated for only 25% of iron ore. However, JSW's employee and other costs per tonne are
significantly lower than those of Tata Steel.

Domestic producers gain as imports reduce: Though there was a sharp jump in imports in November 2008 due to the wide differential between Indian domestic prices and the import price from CIS countries, Indian companies could counter the flow of imports by cutting HRC prices by US$100/t in December 2008. Going forward, we believe that the preference for domestic producers over imports could continue due to the benefits like less order to delivery time, no requirement of letter of credit, lack of any exchange rate risks, etc.

Valuation: For FY09E, we expect adjusted profit to decline by 36.5% to Rs 11,787 mn. Our EPS estimate for FY2009 comes to Rs 59. Our FY2010E EPS is Rs 82 based on sales volume of 6.2 mn tonnes in FY2010E. We maintain our target price of Rs 334 at which the stock would quote at P /E of 4.1x and EV / EBIDTA of 4.6x based on FY2010E. Due to the recent surge in the stock price, we change our rating from BUY to Marketperformer.

To see full report: JSW Steel

>Investor’s Eye (SHAREKHAN)

  • Stock Update >> Larsen & Toubro

  • Stock Update >> ITC

To see full report: INVESTOR”S EYE

>Torrent Pharmaceuticals (KARVY)

We recently met up with the management of Torrent Pharmaceuticals (Torrent Pharma) and despite concerns in Germany due to Aok tender and on account of changes in liquidity and de-stocking in the Russian markets, we maintain our marginal growth estimates in these regions. The business growth in Brazil, Europe and Rest of the world (RoW) is on a strong wicket.The company's major margin contributor, the domestic formulations business is back on track with 12% growth in Q3FY09. Chronic therapies such as Cardio Vascular System (CVS), Central Nervous System (CNS) and gastrointestinal accounts for nearly 60% of domestic revenues (>70% of branded formulation segment). We maintain our revenue and margin estimates and slightly downgrade our earnings estimates on account of higher interest cost in FY09 & FY10E and higher capex in FY10E. Despite reduction in EPS estimates by 4.46% in FY 10, we maintain our BUY rating on the stock.

Domestic Formulations business (44% of revenues) is back on track: Completion of inventory correction and realignment of domestic operations has aided the company's growth to double digit in last quarter. With nearly 60-65% of branded formulation revenues coming from chronic areas such as CVS, CNS and Gastro, the company's domestic operations should be growing in excess of market growth rate. We believe the company's domestic formulations space should grow by 7% in FY09 to Rs.6.28bn and by 13% in FY10E to Rs.7.11bn.

Growth prospects of Brazil, Europe & ROW gaining strength: With completion of expansion of field force in all the regions of the country, the Brazil business has stabilized. With 36% growth clocked in the last quarter adjusted for currency depreciation and 12-13 product introductions over the next couple of years, this business appears to be gaining strength. The company's business of dossier selling and contract manufacturing in Europe is gaining mass with estimated revenues of Rs.952.7mn in FY09 and Rs.1143mn in FY10E. Focus on branded promotional business, aided by strong product pipeline and contract manufacturing opportunities in ROW will enable the company to improve its profitability in this high growth market.

Heumann, Russia and CIS (RCIS) markets downside capped: Despite de-growth in German market in Euro terms, the company has grown in this market for 9mFY09 (~15% to Rs.1.93bn). Due to impending new Aok tender, we believe the company may lose certain revenues in sales from Heumann (Germany) but still remain marginally profitable. On RCIS on account of currency depreciation and de-stocking, the company may face payment delays for H2FY09 and FY10E in RCIS markets. However, we believe, the company's focus on Over-the-Counter (OTC) and other prescription based products will enable it to have reasonable revenues and keep debtors in check.

View & Valuation: We maintain our net revenues to grow at a CAGR of 16.3% from Rs.13.5bn in FY08 to Rs.18.3bn in FY10E. The revenue growth will be primarily driven by realignment of domestic branded formulations business
and strong growth from key markets like Brazil and Europe. We maintain our EBITDA margin estimates at 16.9% in FY09 and 17.7% in FY10E. We marginally downgrade our EPS estimates by 2.1% to Rs.22.5 for FY09 and by 4.46% to Rs.25.8 for FY10E mainly due to higher interest charges in FY09 and in FY10E and higher depreciation in FY10. We downgrade our price target by 5% to Rs.200 based on PE of 7.75x FY 10E EPS of Rs.25.8. We reiterate our
BUY rating.

To see full report: TORRENT PHARMA


We believe net revenues for the quarter will move up by 11.4 % to Rs 4660 mn. Part of the growth can be attributed to lower excise duty for this quarter. The revenue growth will mainly be driven by priority products which will be growing by double digits. Operating margins are expected to be flat at 36.2 %.while profits for the quarter are expected to be higher by 8% to Rs 1322 mn.

The company launched three products in CY 2008 which include Tykerb, Rotavirus and Olmesartan. In CY 09, the company plans to launch Mycamine, Eltrombopag (anti platlet), Synflorix a Strepto Pneumonia vaccine and Rezonic. The company has multiple engines of growth like Branded generics, Vaccines, Rural marketing and In-licensing. We believe these new initiatives should fructify from CY 2011 and company should clock higher growth in revenues. We marginally upgraded our CY 09E EPS by 0.6 % to Rs 61.9and introduce our CY 10E estimates at Rs 69.4. At the current price of Rs 1085 excluding cash of Rs 207, the stock is quoting at 14.2x CY 09E. We value the base business at 15x CY 10E and add Rs 240 cash per share. We value GSK Pharma at Rs 1280 and upgrade the stock to Outperformer.

To see full report: GLAXO SMITHKLINE


Company Background
Steel Authority of India Limited (SAIL) is the leading steel‐making company in India. The company is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets.

Investment Rationale

· Expansion Of Capacity‐ The company has plans to almost double its production capacity to 26 million tonnes of steel per annum from the present capacity of 15 million tonne per annum by 2010‐11 with the capex of Rs.54, 000.

· Expansion of Subsidiaries‐ The work relating to expansion and modernization of IISCO and Salem Steel Plant is progressing and contracts are being finalized.

· Steel Processing Units‐ The company in the process of setting up 11 Steel Processing Units (SPU) in 7 states where it does not have any production facility. The SPU will cost Rs 85 crore and will have an installed capacity of 1 lakh tonnes per annum. The SPUs will use products like hot rolled coils, billets and TMT bars produced by SAIL's main integrated steel plants to manufacture a wide variety of steel items
that can be utilised by the common man.

· Target for FY 10‐ The company has set the target to produce around 12 million tonnes of saleable steel and sales turnover of over Rs. 40,000 crore during financial year 2009‐10. We have however considered a lower turnover for the FY 10.

· Investment In Mining‐ The company has made the investment of Rs. 4000 Cr for mining projects in Orissa. This is part of the capex of Rs.54, 000.

· Joint Venture For Acquiring Coal Properties‐ International Coal Ventures (ICVL), the special purpose vehicle (SPV) is formed by five large public sector NTPC, SAIL, RINL, NMDC and CIL for acquiring coal mines abroad. This may improve the availability of coal for the company.

To see full report: SAIL


Visibility and growth priced-in: HOLD

Limited positive news & likely delays in 12th plan orders
Bharat Heavy Electricals (BHEL) management has guided to an order intake of INR500b. We estimate a less-optimistic intake of INR425b due to likely delays in the 12th plan orders, tighter financial markets impacting ordering by IPPs and drop in export orders.

No structural erosion of market share
We disagree with the Street’s view that BHEL’s order intake has peaked. Though we are modeling a 28.8% decline in FY10 orders due to delays in 12th plan orders and base effect, we expect orders to revive in FY11. We expect BHEL’s 12th-plan share to be approximately 45-50% (compared to its 55% share for the 11th-plan projects) due to: 1) Its strength in the sub-critical segment (up to 500MW); 2) strong relationships with government utilities; 3) focused execution of its strategy to indigenize super critical technology (>660MW).

No change to our FY10 sales and margin estimates
BHEL management reiterated its FY10 guidance of 20-25% y-y growth, hinting that the lower end of the guidance is conservative. We maintain our FY10 sales growth estimate of 26.7% y-y supported by: 1) easing of raw material supply constraints; 2) benefits from line balancing and additional bays at Trichy; 3) industrial slowdown freeing up capacity at ancillaries in Trichy (please refer “Visit Notes from Boiler Capital of India,” 12 March 09); and 4) a higher percentage of BTG orders among the backlog.

Downgrading to HOLD on limited upside
BHEL has outperformed the BSE Capital Goods Index over the last one year by 26.9%. We downgrade BHEL to HOLD as the stock has limited upside from current levels. BHEL stock is also trading close to our DCFbased valuation of INR1,600/share. BHEL is trading at a P/E of 16.9x our FY10 EPS estimate of INR90.33 compared to its Indian capital goods peers at 15.6x. The valuation gap between BHEL and its peers has dropped (our target P/E multiple was set at a 20% premium to peers) due to the recent liquidity driven rally. We reiterate REDUCE on ABB and Crompton Greaves which are trading at 18.4x and 9.9x on FY10 EPS respectively.

To see full report: BHEL

>Micro Technologies (SUNIDHI)

Company Description:
MTIL is a leading global developer, manufacturer and marketer of IT based security solutions for its clients across the globe. Products range includes the much-needed security devices, life support systems and web-based software. MTIL promoted in 1992 is a pioneer in developing messaging-based security systems based on embedded technology. MTIL is an ISO 9001 certified located in Mumbai and Pune. MTIL has formed two subsidiaries, viz. Micro Secure Solutions (MSSL), which focuses on Premises (commercial & residential premises) Security Business and Micro Retail for creating retail chain of Micro Shoppe.

The company's current portfolio consists of seven major product lines, including fleet/vehicle monitoring, lost mobile tracking, sales force tracking and home security systems. It sells its products through over 200 domestic franchisee-based retail outlets. It earns 35% of its revenue from exports to South Africa, West Asia and Kenya. The company has recently launched a micro Wi-Fi security system to cater to the increasing demand for security guard against attacks on Wi-Fi networks.

MTIL has designed new and innovative software for laptops known as Micro LNTS (Lost Notebook Tracking System). Micro Lost Notebook Tracking System is embedded on notebook hard drives, allowing systems to be tracked as soon as they are connected to the Internet. MTIL will offer Micro LMTS (Lost Mobile Tracking System) to secure the mobile handsets of 2 million MTNL Subscribers.

It has spent Rs 37 crore for products & services enhancement. Another Rs 19 crore is being incurred for the development of new products.

MTIL has recently signed an agreement with I-Tech Innovative Technology Solutions for distribution of the company's products in Yemen, Egypt and selected Middle East countries for one-lakh pieces amounting to Rs 100 crore.

For meeting the fund for various capital expenditure plans in Middle East and US, MTIL had made its FCCB issue of 15 million US$ (Rs 60 crore).

Micro Tech has allotted 24,00,000 warrants on February 05, 2008 to promoter group and certain other investors on preferential basis at Rs 256.88 per warrant convertible in to one equity share of the company.

To see full report: MICRO TECHNOLOGIES


' Not Enough ‘Iron ’

Sesa Goa (SGL), a subsidiary of Vedanta Resources Plc., is India's largest private player in iron ore exports with combined Iron ore reserves of 180mn tonnes. Amidst the ongoing downturn, we estimate the company's Earnings to decline at a compounded rate of 8.4% during FY2008-10E, owing to the weak pricing outlook for the next two years. Even so, we believe that SGL is the most insulated player in the current downturn considering its low cost operation, zero debt and strong cash balance of Rs3,219cr (Rs41/share). At Rs105 the stock is trading at a P/E of 4.3x and 6.4x FY2009E and FY2010E EPS and EV/EBIDTA of 2.1x and 2.2x FY2009E and FY2010E EBIDTA, respectively. With the recent run up of around 40% in the stock, we believe the stock is fairly valued. Hence, we Initiate Coverage on the stock with a Neutral recommendation, with a Fair Value of Rs112.

* Volume Growth achievable: We estimate the company to post 21% CAGR in iron ore volumes over FY2008-10E as against the management's optimistic guidance of over 25% growth in iron ore volumes over the next 2-3 years. It may be noted here that the company posted 12.5% CAGR in iron ore volumes in the last five years.

* Most insulated amidst downturn: We believe that SGL is insulated from the current downturn considering its huge cash and cash equivalents of Rs3,219cr in FY2009E (fetches Rs41/share) and it's zero debt on the book. We also believe that considering SGL's low cost of operation compared to its domestic peers, company is well placed to eat into the market share of small high cost Indian iron ore exporters, amidst falling prices.

* Contract Iron ore prices to be settled 30-40% lower: Worldwide iron ore contract negotiations for FY2010 are currently progressing. Negotiations signal weak iron ore prices at 30-40% lower levels owing to the slowdown in steel demand globally and especially in China. The Spot iron ore prices in China have also collapsed by more than 65% to US $64 from the peak of US $186 during July 2008. We also estimate the Australian FOB Iron ore fines contract price to be 30% lower yoy at US $64/tonne in FY2010. Overall, we believe that the weak pricing outlook in the next two years will pressurise SGL's Earnings and expect it to de-grow at a compounded rate of 8.4% during FY2008-10E.

To see full report: SESA GOA