Wednesday, April 22, 2009

>Telecom Sector (CENTRUM)

Mobile subs adds buoyant

􀂁 BSNL performance drives higher net adds: Ex-RCom GSM, the industry added 10.8mn subs in Mar 2009 vs. 9.2mn in Feb. The performance is primarily driven by higher net adds of BSNL (2.5mn vs. 1.5mn last month), Vodafone (2.8mn) and four new circle launches by Aircel.

􀂁 Subs net adds to remain robust: More launches in Apr (Idea in Orissa, MTS in TN, Aircel in Mumbai) will provide further impetus to subs net adds, in our view. However, we remain cautious of increasing non-active subs base in the disclosed numbers.

􀂁 Bharti increases subs net adds to 2.8mn: Bharti added 2.8mn subs during Mar, taking its subs base to 93.9mn. B and C circles continued to contribute majority (56%) of Bharti’s net adds during the month.

􀂁 Idea (incl. Spice) maintains net adds run rate at 1.5mn: Idea continues to garner robust incremental market share in new circles of Mumbai (20%) and Bihar (27%). These circles contributed 316,000 subs during Mar- 09 vs. 165,000 last month. However, it added meager 85,000 subs in Spice’s Punjab and Karnataka circles in Mar 2009 vs. 96,000 in Feb.

􀂁 Bharti is top pick; reiterate BUY on Idea: Bharti’s valuation premium over peers has narrowed significantly after its recent price performance. At 7.2x FY10E EV/EBITDA, we believe Bharti is relatively better priced compared to RCom, which trades at 6.5x FY10E EV/EBITDA. We recommend a strong Buy for Idea as it continues to strengthen its leadership position.

To see full report: TELECOM SECTOR


Unitech is leaving no stone unturned to survive the ‘crisis of confidence’. Having stretched its balance sheet in unremitting good times, Unitech is sorting out the ‘nasty shock’ brick by brick. With no takers for premium projects currently, Unitech has slashed prices and unit sizes across projects to suit customer budgets. Also, debt restructuring and asset monetization have helped Unitech repay/ restructure the debt due by March 2009. We estimate Rs21.5bn to be raised via sale of non-core assets over FY10-11E, to be used to deleverage. We expect 19% and 14% CAGR in revenues and earnings respectively over FY09-11E through cumulative sale of 35msf (~8% of total land bank). We expect the stock to be re-rated as the market prices in Unitech’s survival and begins valuing its ‘land bank’. However, a prolonged economic downturn and rising interest rates could hit incremental sale of flats, and thereby warrant further restructuring.

Demand does exist but at affordable prices: The uncertain economic environment and elevated prices have turned buyers away from real estate. However, we believe that structural demand, based on favorable demographics, low penetration and rising prosperity, is intact. Going forward, while falling real estate prices and benign interest rates will trigger a revival in demand, we believe buyers are currently takers only for ‘affordable’ properties.

Caught in the “perfect storm”…: Unitech has availed of short-tenure borrowings (debt of Rs84bn) to create a massive 9,845-acre land bank and fund development activity as also the telecom foray. However, a sudden demand slump and capital constraints have turned the land bank illiquid – thereby creating a huge asset-liability mismatch. To preserve cash, Unitech has stalled land accretion and is monetizing non-core businesses (including 67% stake sale in Unitech Wireless to Telenor). While debt restructuring/ asset monetization has helped Unitech manage debt obligations due by FY09, we expect the company to monetize ~35msf of saleable land bank over FY10-11E at prices that the market can take.

…rebuilding – brick by brick: Deleveraging is at the core of Unitech’s medium-term strategy as cash flows from property development and non-core asset monetization are used to repay debt. The stock currently trades at near-bankruptcy valuations, which offer comfort. While resumption of construction activity in full swing is some time away, we see the market valuing Unitech’s land bank as it gets monetized.

To see full report: UNITECH

>Flash Economics (ECONOMIC RESEARCH)


The economic policies being implemented during the crisis are "extraordinary":

* huge fiscal deficits;
* extremely rapid monetary creation (central bank money);

The question being asked by governments and central banks, for both kinds of policies, is how to end them (exit strategies), in order to prevent their perverse effects in the medium term. As long as private economic agents deleverage, it is normal for governments to run up more debt. The fiscal deficits must be reduced when private spending picks up again, and the question in this respect is whether the fiscal deficits are reversible or irreversible.

As far as monetary policies are concerned, central banks must be able to destroy the excess liquidity created when the economies pick up again. This may come up against two problems: central banks’ refusal to take the risk of causing a relapse in the economies after a severe recession; and the fact that asset price bubbles appear before economies pick up, and central banks do not dare to burst these bubbles.

To see full report: EXIT STRATEGIES

>Maruti Suzuki (IDFC SSKI)

Maruti Suzuki (MSIL) has outdone street expectations as volumes have rebounded (up 17%yoy) in Q4FY09 on a high base. While rural initiatives and focus on tapping PSU employees (higher incomes owing to the recently doled out fiscal incentives) have helped, hefty discounts on older models (like WagonR) and strong demand for the Swift family have primarily driven the growth. However, inventory has reverted to 3-4 weeks as of end- March09 (also confirmed by MSIL in a recent conference call). Hence, we believe the ~70,000 units run rate clocked in Q4 in the domestic market is not sustainable. Further, Swift – a key volume driver – is likely to face stiff competition from the new Honda Jazz (likely to be launched in June09) and diesel variants of i-10 and i-20 from Hyundai in FY10. Further, export volumes have picked up only on account of A-Star – currently being sold by Suzuki in Europe as the new Alto. But given recessionary trends in Europe, A-Star exports may decelerate. On the operational front, operating costs have gone up significantly due to higher power and fuel costs due to Manesar plant ramp-up, increasing royalty on new model launches and rising sales promotion expenses to push volumes. The incremental costs, we believe, would nearly wipe out the gains arising from lower raw material prices in FY10 (we have assumed a 100bp margin expansion to 11%). To build in the volume ramp-up in Q4FY09, we upgrade our FY09 and FY10 estimates upwards by 15% for FY09 and by 2% for FY10. However, the stock has outperformed the Sensex by 45% in Q4FY09 and at 15.5x FY10E earnings and 9.7x EV/ EBIDTA, we believe, valuations appear expensive. Our best case estimate for MSIL (15% volume growth and 150bp margin expansion in FY10) would yield an EPS of Rs62.1 with a target price of Rs869 – based on 14x FY10E earnings, 3% upside from here. Given the lack of volume visibility in FY10, we value MSIL at 12x FY10E earnings with a price target of Rs655. Maintain Underperformer.

Strong recovery posted in domestic market in Q4FY09…
MSIL has posted a strong recovery in Q4FY09 with 13%yoy volume growth in the domestic market after a 15%yoy decline in Q3FY09. Higher rural penetration (rural sales have gone up to 8.5% of the total in FY09 from ~3.5% a year ago) and focus on PSU employees (sales to this segment increased to 11% from 5%) have helped MSIL post higher volumes in the quarter. Also, aggressive discounting on older models (like the hefty ~Rs45,000 discount offered on WagonR in March 2009), incremental volume addition from the latest launch A-Star as well as strong demand for the Swift family have been the key volume contributors in Q4FY09

…unlikely to be sustainable going forward
While volumes have recovered from the December lows, we do not expect the current momentum (hit rate of ~70,000 units monthly for Q4) to sustain going forward. A ground level analysis reveals that although MSIL had managed to bring down dealer level inventory from almost 28 days in November 2008) to ~15 days by January 2009, it has again gone up to 3-4 weeks as of end-March 2009.

Higher A-Star exports may drive volumes, not margins
Exports have received a significant boost primarily on account of exports of A-Star. Adjusting for the 19,000 units of AStar in the three months since its launch, export volumes have actually declined by 4%yoy in FY09. Currently, A-Star is being exported to European markets and is sold as the new Alto from Suzuki. Given the prevalent recessionary trends in Europe, A-Star export momentum may not be sustainable. Further, given that the parent Suzuki has suffered a loss of ~¥12.6bn in Q3FY09, Suzuki is likely to seek price cuts from MSIL. Further, MSIL had earlier also entered into a contract manufacturing agreement to supply A-Star to Nissan for the Japanese market, for which negotiations are on. Given the nature of the deal (contract manufacturing) with Nissan, we do not expect it to be margin-accretive for MSIL.

To see full report: MARUTI SUZUKI

>Reliance Infrastructure Ltd. (KR Choksey)

Investment Rationale

Reliance Infrastructure Ltd is not only India’s largest private sector enterprise in power utility but also the largest private sector player in many other infrastructure sectors of India. In the power sector the company is involved in generation, transmission, distribution and trading of electricity and constructing power plants as EPC partners. In the infrastructure space the company is focused on roads, Urban infrastructure which includes MRTS, Sealink and Airports, Specialty Real Estate which includes business districts, trade towers, convention centre and SEZ which includes IT & ITES SEZ and non IT SEZ as well as free trade zones. Reliance Infrastructure distributes more than 28 billion units of electricity to cover 25 million consumers across different parts of the country including Mumbai and Delhi in an area that spans over 1, 24,300 sq. kms. It also generates 941 MW of electricity, from our power stations located in Maharastra, Andhra Pradesh, Kerala, Karnataka and Goa.

Reliance Power Ltd
Reliance power is a subsidiary of the company which is been listed mainly with the intention of generation of power. The company through its various subsidiaries is developing various generation projects with an aggregate capacity of ~ 28,000 MW on completion of which the company will be the largest private generating company.

Key Developments
Huge Order book
At the end of the 3rd quarter, the company enjoys a healthy order book of Rs 21,510 crore (3.4x of FY08 sales) and has a substantial cash & liquid balance of Rs 9,898 crore (cash per share of ~Rs 434)

Financial Performance
Net sales of the company has again surprised the street and surged by 80.5% (YoY) to Rs 2,717.6 crore on back of exceptional performance from both its division viz Electrical Energy and EPC & Contracts, increased by 62.4% and
144.7% (YoY) to Rs 2031.2 crore and Rs 686.4 crore respectively

EBIDTA of the company augmented by 7.9% (YoY) to Rs 455.6 crore, majorly impacted by purchase of electricity cost and Material & Sub contract charges, increased by 90.3% and 152.1% (YoY) to Rs 1233.9 crore and Rs 587.7 crore respectively.

PAT of the company gone down by 16.7% (YoY) to Rs 251.2 crore on back of high base effect as Rs 89.5 crore tax was reversed in the previous corresponding quarter. At the end of the Q3FY09, the company enjoys substantial cash & cash equivalent balance of ~Rs 9,898 crore (Rs 434/share) and intact order book of ~Rs 21, 510 crore (3.4x of FY08 sales)

At CMP of Rs 710.2, stock is trading 14.8x TTM EPS of Rs 47.8 and 15.6x on FY09E EPS of Rs 45.5. On back of diversified business model, strong execution capabilities of the management, huge infrastructure development in India, intact order book position, rich cash reserves, the company seems well situated in the current turbulent times. However, we recommend our investors to book profits with a medium term target price of Rs 707.


>Multiplex Sector (ANGEL BROKING)

'Exhibiting Gloomy Pictures'

Over the last one month, Multiplex stocks have witnessed sharp rally in the range of 35-50% despite looming concerns including lower occupancies and possible delays in handover of properties. Moreover, owing to the upcoming IPL season and the tiff between Multiplex operators and Producers, the Movie pipeline over 1QFY2010 is expected to remain weak. We believe that the slowdown in consumer spends and weak movie pipeline are likely to lead to stagnation in Footfalls and Average Ticket Prices (ATPs). Overall, we see no near-term catalysts for the Sector and given the recent rup up in the stock prices, we recommend a Neutral rating on the Multiplex Sector.

* Poor Content, not Slowdown - the key culprit: Amidst the ongoing economic slowdown, it has been observed that the frequency of theatre visits by moviegoers, especially to multiplexes, has been affected. Occupancies in most multiplexes have declined to as low as 25-30% levels in FY2009. We, however, believe that slowdown is only a certain factor impacting footfalls, with content being the key culprit keeping audiences away from the multiplexes. For instance, while Ghajini, released in the midst of slowdown, managed to gross Rs100cr+ domestically, a weak movie pipeline particularly in CY2008 (highest number of average and flop movies over the last three years) was mainly responsible for lower occupancies during FY2009.

* Real Estate slowdown, Funding issues impact Multiplex expansion plans: In a scenario where Multiplex operators are facing funds crunch on one hand and slowdown in the Real Estate Sector on the other, we believe expansion plans of the Multiplexes in terms of property roll outs are likely to suffer, in turn impacting their growth prospects. As a result, while the Multiplex companies had chalked out optimistic expansion plans at the beginning of FY2009, most have fallen short of meeting their target rollouts. We believe this scenario will only worsen in FY2010. Hence, we have pruned our FY2010 estimates to factor in lower
capacity addition.

* Near-term negatives to remain an overhang: We believe the Multiplex industry is facing several headwinds in the near term, which are likely to create an overhang on the Multiplex stocks on the bourses - 1) Delayed Movie releases owing to Exhibitor-Producer tiff, 2) Weak movie pipeline in 1QFY2010 owing to upcoming IPL season and 3) Stagnation in Footfalls and ATPs due to slowdown in consumer spends. Moreover, our interaction with managements indicated that occupancies during 4QFY2009 worsened (almost at 20% levels) on both qoq and yoy basis. Hence, we expect Multiplexes to report poor 4QFY2009E results, which would prove to be a dampener for the Multiplex stocks in the near term.

We have revised our estimates for the Multiplex companies under our coverage to discount execution delays in capacity addition and lower occupancies in the near term. While we remain Neutral on Fame, Inox and Cinemax, we downgrade PVR from Buy (Target Achieved) to Neutral.

To see full report: MULTIPLEX SECTOR

>Money Advisor (RELIANCE MONEY)


Mutual Fund Update
The report reviews the performance of all open ended equity schemes and debt schemes covered by Reliance Money. The performance has been reviewed as on March 2009.

Performance Overview
The markets witnessed a sharp correction in the beginning of the month of March, 09, however by the end of the month investors started investing money since the valuations were looking attractive and the markets have recovered by almost 10%. Mutual funds who were holding tightly to cash positions have now slowly started deploying the money however many fund houses are still cautious with their investment approach. The overall performance of the schemes has gone up in the last month. Among large cap funds, Templeton India Growth Fund and Principal Large Cap Fund emerged as toppers on a monthly basis with 10.73% and 8.03% absolute returns as against the category average of 5.5%. While on a yearly basis, IDFC Imperial Equity Fund and DSP BlackRock Top 100 Equity Fund have topped the charts outperformed their benchmark indices as well as exceeded category average.

The Midcap and Smallcap category have continued to under perform as a whole as compared to other equity categories. However with the recovery in the markets the funds within this category performed well on a one month basis. Within this segment SBI Magnum Midcap Fund and Franklin India Prima Plus were gainers and reported 7.9% and 6% absolute returns respectively. While on an annualized basis, Franklin prima plus and Reliance Growth were among the leaders while Fortis Future Leaders Fund and SBI Magnum Sector Umbrella - Emerging Business Fund were among the laggards.

Being the tax saving month, ELSS witnessed a net inflow of Rs.547 crore in the month of March 2009 which was higher as compared to industry expectation given the market conditions. However the inflows were subdues as compared to the figures of previous fiscal. Among ELSS funds, ICICI Prudential Tax Plan and Reliance Equity Linked Saving Fund - Series I were among the toppers.

Gold ETF is another category which has come in the limelight with the recent upsurge in gold prices. Gold ETFs have outperformed every other asset class rising 22.8% for the year ending March 30, gold funds that invest in gold mining
companies and mutual funds (MFs), which have an exposure in such companies, too, have joined the Bull Run.

To see full report: MONEY ADVISOR

>Cement Sector (EMKAY)

Q4FY09 - Strong dispatch numbers, better realizations and lower costs

* We expect Q4FY09 to be a strong quarter for the cement sector mainly driven by a 9.4% dispatch growth, better realizations and easing of cost pressures.

* Following strong growth in dispatches cement prices have defied consensus expectations and have risen by Rs15 bag and are currently ruling at Rs246/bag as compared to Rs231/bag in early January 2009. However it is to be noted that since most of the hikes were effected form mid February 2009 the average price increase in Q4FY09 over Q3FY09 has been just Rs3 per bag i.e. Rs238/bag in Q4FY09 as compared to Rs235 in Q3FY08. On a yoy basis, Q4FY09 cement prices are up Rs6/bag or 2.6%.

* We expect the cement companies under our coverage to report a 10.6% yoy topline growth. Pure cement sales are expected to be up 15.5% driven by volume growth of 7% and net realisation improvement of by 8.5% (benefits of excise duty cuts not passed on).

* At operational level, we expect cement companies in Emkay universe to witness a decline of 293bps yoy in EBITDA margins to 26.3%. However on a qoq basis, the same is expected to improve by 264bps on account of better realisations and easing cost pressures during the quarter.

* Overall we expect the cement companies to report a marginal 0.2% decline in their EBIDTA as compared to a huge 19.3% decline witnessed in Q3FY2009. Infact pure cement EBDITA is expected to improve 8.1% yoy. EBITDA/ton is expected to touch Rs1064 as compared to Rs907 in Q3FY2009, i.e. a huge 17% improvement QoQ.

* Rising interest cost and higher depreciation charge on account of continuous capex will lead to net profit of Emkay cement universe falling by 6% yoy. However the same is significantly lower than 21.1% decline witnessed in Q3FY2009.

* We have been positive on the sector on account of sharp moderation in cost pressures, better than expected dispatches and higher cement prices. Maintain positive view on the sector and believe that impending consensus earnings upgrade and severe under ownership of the sector will continue to fuel outperformance. ACC, Ambuja Cement, Ultratech Cement and India cement are our top pick in the sector.

To see full report: CEMENT SECTOR

>Results Preview (KARVY)

Bank of India (Rs258) - Results Preview
BUY - Target Price: Rs455

Andhra Bank (Rs54) - Results Preview
BUY - Target Price: Rs74

Lupin (Rs696) - Results Preview
BUY - Target Price: Rs900

To see full report: RESULTS PREVIEW