Saturday, May 2, 2009

>Economy at glance (ECONOMIC RESEARCH)


The recently elapsed financial year witnessed major developments on the global economic
front. While the turn of the global economic cycle was confirmed at the beginning of FY 09, the impact of the slowdown, which dragged major economies of America and Europe into recession, was reflected by various indicators. The Indian economy's growth forecast of 7.1% for FY 09 represents the lowest growth rate for the last 6 years. A heightened sense of fear generated by a rising fiscal deficit and withdrawal of dollars by foreign investors took its toll on the currency. The Rupee weakened during the fiscal year, and depreciated 28% from Rs.40/USD in Apr'08 to Rs.51/USD in Mar'09. The Index of Industrial Production (IIP) decelerated 0.5% year-on-year in Jan'09 compared to 6.2% growth during the previous year. Exports for FY 09 grew at 3.6%, the slowest pace in 7 years, and markedly lower than the 29.08% growth witnessed last year. Exports for FY 09 stood at USD 169 Bn., short of the commerce ministry's revised target of USD 175 Bn., and significantly lower than the initial target of USD 200 Bn. Imports are growing, but at a slower pace, which is due not only to falling petroleum and other commodity prices, but also to waning demand in the domestic economy. Although this is a bad sign for producers, the silver lining is that the deteriorating trade deficit is
being kept in check.

The decline of inflation, which fell from 12.91% in Aug'08 to 0.26% in Mar'09, has raised fears of deflation. This prospect is worrisome because it discourages producers from continuing with their capacity utilisation and calls into question the feasibility of new projects, which facing the threat of declining revenues could be stalled. Lower capacity utilisation may result in unemployment and could further dampen the labour market, a scenario that could cause yet more damage to flagging demand and drag the economy into a slump. However, it is important to note that this deflation would not result from a real fall in demand, but on account of lower petroleum prices this year as compared to the previous year. This phenomenon is evident in the numbers for the last week of Mar'09, when although WPI inflation was at a marginal 0.26%, the index for primary articles, for example food grains, which has a weight of 22% in the WPI index, increased by 3.46%. Similarly, the index for manufactured products, which constitutes a weight of about 64% of the WPI, increased by 1.42%. However, the index for fuel & power, comprising 14% of the WPI index, declined by 6.11%, thereby forcing down the WPI. The fuel and power index decline can be attributed to the fact that crude oil, which was trading at USD 100 per barrel in Mar'08, is currently trading at USD 50 per barrel, which represents a price level last seen in 2005.

To see full report: ECONOMY AT GLANCE

>Housing Finance in India (ANTIQUE)

Plenty of ‘room’!

■ Huge untapped, under-penetrated housing market offers significant growth opportunities to providers of housing finance.

■ Default rates of Indian mortgages have been at very low levels. This is due to the fact that most mortgage loan borrowers are ‘first time’ borrowers who borrow money for their basic dwelling units. Low default rates attracted competition from banks. Banks also have the advantage of low-cost deposits.

■ Housing Development Finance Corporation (HDFC) and LIC Housing Finance (LIC HF) are the two largest Housing Finance Companies (HFCs) operating in India. Together, they have a market share close to 40%.

■ We are positive on the housing finance sector, as it carries a high growth potential due to the huge demand-supply gap.

■ We recommend a strong BUY on LIC Housing Finance Ltd, as the improved fundamentals of the company do not get reflected in the valuation of the share price! Buy with a target price of INR450!

To see full report: HOUSING FINANCE

>Alok Industries (FAIRWEALTH)

Alok Industries is a leading vertically integrated textlie palyer of the country with Sales of more than 3000 crore and strong bottom line. We initiate a buy call on the company on basis of its attractive valuation, huge growth in topline over next three years and increased bottom line from higher foreign currency earnings, increased sale of Value added products and Vertical/ backward Integration. We estimate Alok Industries Net Profit to grow at 30% compounded over next 3 yers.Profit margins for FY09 are likey to taper to 6.1% for FY09 and move back to 9-10% by FY11E.

Company is currently trading at 4.5x is FY08 Earnings; At estiated profits of 290 crores and 412 crores for FY10E and FY11E stock is currently valued at 2.9 and 2.1 times its EPS of 4.8 and 6.8 respectively.

Alok Industries has its Cost of Capital lowest in industry at around 10% as company after tax cost of Debt is around 6%.Out of total Debt of 6500 crores 4000 crores has been raised as part of TUF scheme.

Earnings Estimate:

We expect company to post decent set of numbers for Q4 on account of higher Foreign Exchange Earnings. Alok Industries' March quarter sales are expected to go up 20% to Rs 870 crore on yoy basis. The company's net profit is seen flat at Rs. 53 crore on yoy basis.

Company Description
Alok Industries is the largest vertically integrated textile companies in India. Company has commenced massive expnasion plans since 2006 which is expected to be completed by Q1 FY10. As part of the expansion policy Company aims to achieve the following:

1. Integrated Operations and Economies of Scale

2. Become a ‘Nominated Supplier’ to Global Customers
3. Expansion of retail of products manufactured by the company


1. Apparel Fabrics
2. Home Textiles
Store 21 in UK with more than 200 stores and H&A in India with more than 53 stores and target of over 100 by end of this year.
3. Cotton Yarn

Outlook and Valuation
Company has total debt of about 6500 crores out of which 4500 crore long term debt has been raised as part of TUF’s at subsidised rates rest 2000 crores is raised as working capital loans.

In view of company’s high net D/E ratio of 3:1 Company has decided to issue rights issue at
83:40 raising around 450 crores. Post right issue company’s total Net worth would reach
around 2300 crores with cash balance of around 1800 crores.

Company’s Long Term Debt: Equity ratio post right issue will be around 1.8 to 2 which

would be much more stable. Another thing in favour of the company is low cost of debt. Long term Debt has been raised as part of the textile promotion scheme, TUF which will provides 5% subsidy on interest cost of debt.

Increased Capacity to sales. Company has almost completed its Phase-IV expansion. Most

of the expansion is likely to be completed with in next 3 months. 90% of the overall capacities is expected to be utilized by 2011 from current levels of around 75%

We expect top line growth of compounded 30-35% over next 3 years, with bulk growth

coming from exports and retail sales. By 2010 exports would contribute about 50 percent of
company’s Net Sales up from current 40%.

Bottomline will get boosted through backward integration steps; company expects to meet

50% of its yarn demand in house and increased margin from dollar depreciation.

We value company at 4.5 x its 2009 expected EPS of 3.1. For FY10E and FY11E we
expect company to post PAT of 320 crores and 410 crores respectively giving it a valuation
of 2.6x and 2x its FY10E and FY 11E EPS of 5.4 amd 6.9 respectively.

To see full report: ALOK INDUSTRIES

>Sterlite Industries (IDFC SSKI)


■ Sterlite Q4FY09 net profit adjusted for impairment write-back, change in accounting policies for depreciation and
forex losses at Rs5.2bn was broadly in-line with estimates (Rs5.1bn). Operating performance in Copper business was marginally ahead of estimates even as Balco’s profitability surprised on the lower side.

■ Production cut in Balco-I resulted in spot sale of surplus power (130MW annualized). On the back of drop in alumina prices, focus on operational efficiencies and shut-down of in-efficient capacities Balco’s cost of production dropped 16%qoq to an average of US$1,385/tonne for the quarter—production cost in March’09 dropped further to US$1,177/tonne. Interestingly, management did not rule away possibility of moth balling a part of Balco-I facility in case of lower base metal prices specifically considering that sale of power from captive plant yielding better returns.

■ Copper business reported operating profit of Rs2.9bn marginally ahead of our estimates on the back of lower than
expected drop in by-product credits. Hindustan Zinc numbers (reported earlier) were largely inline with our estimates.

■ Adjusting for change in accounting policy, asset write-down and capitalization of new assets depreciation for the
quarter was surprisingly higher. Similarly, adjusted for write-back of earlier year provisions, the tax rate for the quarter was at 20.3%--significantly higher on qoq basis as the profit contribution from Hindustan Zinc increased considerably.

■ Sterlite’s share of loss from Vedanta Aluminium (VAL) was apparently significantly higher at Rs1bn—however, the company clarified that a large part of this was on account of mark-to-market forex losses in the company. Adjusting for this, the share of loss from VAL was inline with estimates.

■ Arbitration process for Balco stake acquisition on; conclusion unlikely soon: After the Indian government
disputed Balco’s balance stake sale; Sterlite had earlier sought legal relief and had requested the court to appoint an independent arbitrator to resolve the issue. Management indicated arbitration proceeds on Balco call option are currently in progress; with Hindustan Zinc likely to follow. We believe the arbitration process in unlikely to be settled soon.

ASARCO Acquisition: The US bankruptcy court recently approved Sterlite’s bid to acquire operating assets of ASARCO at a NPV of ~US$1.3bn (US$1.1bn of upfront payment and US$600m of staggered payment over nine years). Sterlite is now also entitled to receive break up fee and reimbursement of expenses, in event of competing bid. Management however, clarified that the old agreement (with a bid value of US$2.1bn) would be released only once
the deal is completed with new terms. Further, in case of a competing bid, Sterlite would not be under an obligation to match the higher bid—though it retains a right of first refusal, according to the management.

Expansion plans: We remain convinced that expansion plans across all business lines (metals & power) are
progressing on or ahead of schedule. Exhibit 2 below highlights key progress achieved so far and expected timeline for the projects.

To see full report: STERLITE INDUSTRIES

>Reliance Industries (MACQUARIE RESEARCH)

All cylinders have just been fired up

■ RIL not only beat 4Q FY3/09 PAT forecasts by 9%, but is poised to double earnings within three years as it is has just fired up two new sizeable operations. Maintain Outperform with a TP of Rs2,035.

Hedged operations. A 17% rise in petchem profits, a 6% rise in upstream profits and a sharp 25% INR/US$ YoY depreciation offset a 36% YoY fall in GRM to US$9.9/bbl, demonstrating the benefits of being highly integrated.

New SEZ refinery kicks off. RIL commissioned one of its two CDUs achieving 100% utilisation straightaway. It earned a small profit of Rs840m within the first quarter of start-up. Full start-up is scheduled for 1Q FY3/10, including the start-up of FCCU converting bottom-of-the-barrel distillates into high-value propylene and PP, triggering a profit surge. New refinery operating cost is lower than the existing refinery’s US$1.75/bbl (industry at US$5/bbl). Euro V diesel production has also just started, kicking off its first high-margin product.

Innovative tax planning. RIL guided that its tax shall remains near MAT of 9-10% for at least the next two years. First, RIL commissioned its new SEZ refinery prior to March 2009 year-end to avail itself of tax-free status for another six years (seven including FY3/09) for even the portion of products sold domestically (only refineries started by March 2009 have this option available). This is in addition to tax-free exports. Second, we believe RIL’s KGD6 capex of US$12.7bn (US$7.2bn spent already and US$5.5bn proposed for nine satellite developments), not only allows a 7-year tax holiday on KGD6 profits, but additional tax depreciation on these assets can also be used to lower tax on other businesses.

Stage set for FY3/10E take-off… RIL’s low-tax massive refinery triggering growth is the smaller part of the kicker in FY3/10E. RIL’s KGD6 gas has already reached 9.5mmscmd of production. Management is confident it will achieve peak production of 550,000boe, which will double India’s gas production add to 0.4% of global oil equivalent of production.

…with even more. Yet, this is the tip of the iceberg. RIL expects regulatory approval within three months for plans to raise KGD6 production by 50% and NEC-25 development. Also as RIL moves its three deepwater rigs after shortly completing KGD6 development , it plans to drill 17 exploratory wells in FY3/10 compared with only two in FY3/09. Another deepwater rig is expected to arrive in July 2009, with two more to follow in 2H CY10. Three prolific basins of KG, Cauvery and Mahanadi are key exploratory targets. Moreover, RIL plans to increase 3D seismic studies twenty-fold during FY3/10E. During our recent Oil Yatra (Tour) Forensics, the upstream regulator (DGH) demonstrated India’s potential to surpass the Gulf of Mexico or even Brazil’s upstream capabilities.

Earnings revision
■ No change.

Price catalyst
■ 12-month price target: Rs2,035.00 based on a Sum of Parts methodology.
■ Catalyst: New oil and gas finds and enhanced clarity on organised retail.

Action and recommendation
Reiterate Outperform. RIL is our top pick in the India oil & gas sector.

To see full report: RIL

>Shree Renuka Sugars Ltd. (MERRILL LYNCH)

Stocked for strong Apr-Sep09

Muted H1FY09 PAT on stock built up for a strong H2; Buy
Renuka sugar has reported only 7% PAT growth in H1FY09 (Oct08-Mar09) including 4% y-o-y growth in Q2FY09. In contrast to muted PAT, EBITDA grew 38% y-o-y in H1FY09 driven by (1) better margin and (2) higher sales volume. Increase in interest burden by 130% owing to 0.5mn tonne rise in sugar inventory is the key reason for flat earnings in H1FY09. We expect Renuka earnings to rise .6x in H2FY09 driven by (1) 70% rise in sugar sales (2) 140% jump in alcohol
sales (3) 96% jump in electricity sales and (4) higher prices for sugar and ethanol. Maintain Buy on strong earnings growth in H2FY09E and FY10E. Our PO of Rs120 is based on 6xFY10E EBITDA, stock is now at 5.06x FY10EBITDA.

Favourable outlook intact for 48% PAT growth in FY10E
We expect raw sugar imports to gather pace well into FY10E and we expect Renuka to sustain strong profitability and achieve higher volume given that it has dedicated raw sugar refinery having the lowest cost of production. India’s demand for imports is likely to rise to a total of 7.5mn tonnes including FY09 and FY10E due to a sharp drop in cane production. India so far has contracted to import only 1.5mn tonnes out of which 50% is by Renuka.

Key risk is govt intervention against price rise
Sugar prices in India fell 8% last week following a series of govt initiatives including close monitoring of stocks at the mills. Govt action follows over a 20% rise in sugar prices prior to last week. Further govt action could hurt the earnings outlook. Renuka’s earnings in FY10E could drop 2.6% for every 1% drop in sugar prices. However, our earnings estimate for FY10E is just 5% higher than current sugar prices and 8% below the recent peak in sugar prices.

To see full report: RENUKA SUGAR

>Triveni Engineering (CENTRUM)

Sugar business boosts earnings

Results in-line with expectations: The upturn in sugar
prices helped boost sugar revenues 47.5% YoY. However, the 9.1% de-growth in engineering revenues restricted overall sales growth to 21.0%. Margins expanded 68bp and PAT was Rs 378mn vs. our estimate of Rs401mn.

Target price revised: We have revised our target price
valuing the company on FY10E. Appling a P/E multiple of 7.1x (a 15.0% discount to our earlier FY09E multiple), our target price works out to be Rs 69 ( previous Rs 67)

Robust sugar performance: Higher sugar prices (up 35.8% YoY) and higher volumes coupled with better prices of ancillary products helped sugar revenue to grow by 47.5%. Inventory gains on sugar led to a turnaround PBIT margin from 0.6% to 15.7% YoY.

Engineering revenue recovering: Revenue from engineering business fell 9.1% YoY. However, the 40% QoQ growth strengthens our confidence in recovery in the sector. The company’s order-book stood at Rs7.7bn, flat on QoQ basis.

Maintain Buy: We maintain our Buy rating on the stock.
At CMP, the stock trades 7.1x FY09E and 5.5x FY10E. We have revised our target price to Rs69 (from Rs67 earlier), representing a 29.1% upside potential.

To see full report: TRIVENI ENGINEERING

>Market Strategy (CLSA)

Top Slice

With the Sensex strong 35% rally from the 9th March low, 15 of 98 stocks in our coverage are within 10% of their 52 week high; 8 are trading 1 standard deviations above five year average P/E multiple. Among stocks in this set, Maruti, GAIL, IOC, BPCL and Glaxo look set to give up gains. While we see market performance being capped by the risk of weak governance in the backdrop of the challenging macro situation, we still see positive risk-reward in Bharti, Cipla, ITC, ICICI Bank and Sterlite.

Best and worst performers
■ 26 stocks in our universe have gained >50% since 9 Mar. As expected in a liquidity driven rally, asset plays, deep cyclicals and highly geared companies dominate.
■ Print media stocks, Educomp and Wipro have been the exceptions.
■ On a YTD basis, however, domestic cyclicals, especially autos and cement, have been the stars – driven by the pick-up in volumes in recent months.
■ Zee (+17% since 9 Mar, -23% YTD) and Nalco (3.5%, 6.6% YTD) are the non defensives
among the laggards, but Nalco has also seen big earnings downgrades.

Already discounting a move into a bull market?
■ 15 stocks are within 10% of their 52 week high. Non-defensives in this list are Hero Honda, Maruti, Union Bank and oil R&Ms IOC and BPCL.
■ While easing in volume growth, margin pressures will weigh on the Maruti stock, IOC, BPCL – facing a rise in crude price, weak refining margins – are near target.
■ Among non-cyclicals, GAIL, Bajaj Auto and Glaxosmithkline are trading at >1 sd above 5yr average P/E. GAIL has downside to our target price, with little prospect of earnings upgrade; Glaxosmithkline 19x P/E looks rich given weak growth.

Where are we seeing earnings upgrades?
■ Only 15% of covered stocks have seen FY10 EPS upgraded by 5% or more. While banks dominate this list, other constituents from the auto, cement sectors and Godrej Consumer have seen big stock appreciation as well.
■ Biocon’s 20% upgrade reflects adjustment in booking of FX losses; we retain U-PF.
■ For the Sensex, FY10 EPS has been cut 15% since the beginning of the year. We see upgrades to overall EPS being limited by risks to profits of commodity plays.

Caution ahead of elections
■ The most likely scenario for the new government at the centre, post the May-09 elections, remains one that will be weaker than the current one.
■ We retain our year-end target of 11,000 for the Sensex. We see little visibility on the earnings upgrade cycle and expect macro risks to cap valuation multiples.

To see full report: MARKET STRATEGY

>Mind Tree (RELIGARE)

Forex loss disappoints, guidance upbeat

Revenues in line, margins disappoint
MindTree’s dollar revenues have slipped 9.1% QoQ during Q4FY09, owing to sequential dips in volumes and pricing (consolidated) by 7% and 2% respectively. Individually, dollar revenues for MindTree and Aztec decreased by 9.1% and 9% QoQ respectively. The EBITDA margin for the quarter, at 25.7%, shed 484bps QoQ as against our expectation of a 235bps fall. The steep margin decline is attributed to a 6.5% QoQ rise in cost of revenues in MindTree, despite the fall in topline.

Forex losses continue to erode profits
Net profit at Rs 211mn came in significantly below our estimate of Rs 437 due to above-expected forex losses. The company provided for forex losses of US$ 4.2mn during the quarter as the rupee depreciated further by 4.4% on an end-to-end basis.

Upbeat FY10 guidance
The management expects a marginal decline in revenues during Q1FY10, after which it sees a recovery in demand based on discussions with existing customers and its new deal pipeline. Accordingly, it has guided for FY10 revenues of US$ 290mn–300mn, a growth of 6.5–10% YoY. EPS for FY10 is guided to be in the range of Rs 49.3–50.9, much ahead of our expectation of Rs 37.9 and the consensus estimate of Rs 39.7. The guidance is based on an exchange rate assumption of Rs 51.4/US$.

Estimates revised upwards
We are increasing our FY10 revenue and earnings estimates for MindTree by 9.3% and 17% respectively, considering the strong management guidance. Our FY10 EPS estimate of Rs 44.4, however, continues to fall short of the lower end of the guidance. Though we believe the company could achieve its dollar revenue guidance, matching up to the earnings target would prove difficult considering the margin headwinds expected in FY10.

Revising target to Rs 244, maintain Sell
Consequent to the upward revision in estimates, we are increasing our target price from Rs 184 to Rs 244. We have valued MindTree at 5.5x on FY10E consolidated earnings of Rs 44.4. At the current price of Rs 307, the stock is trading at 6.9x and 6.4x on FY10E and FY11E earnings, which we believe are rich valuations. We maintain a Sell on the stock.

To see full report: MIND TREE

>Festival demand inauspicious for India gold sales

Mumbai - Indian jewelers' hopes that the Hindu holy day Akshaya Trithya would give a fillip to declining gold sales look to have been dashed, as many customers stayed away or scaled down purchases.

India is the world's biggest gold buyer, but imports have fallen to negligible levels in recent months as the rupee has weakened, making dollar-denominated gold more expensive to local buyers.

Akshaya Trithya, which fell on Monday this year, is considered an auspicious day to make long-term purchases or start new ventures - Akshaya means "the never diminishing" in Sanskrit - and has traditionally boosted gold demand in India. Gold sales usually pick up the week before the festival.

At around 14,800 rupees per 10 grams, retail gold prices were about 25% higher this year compared to prices at last year's festival, levels unattractive to India's famously price-sensitive gold buyers.

That increase is due to a weaker rupee - gold is denominated in dollars internationally - which at last year's festival was around 40 to the dollar against about 50 to the dollar this year.

"This year, we expect sales to be around 60% to 70% of the quantity we sold last year," said Pravin Mehta, vice president of the Madras Jewellers and Diamond Merchants Association. Mehta said almost a third of this year's purchases were sealed at lower prices as customers bought early.

Last year wasn't good for festival gold sales, either. At a retail price of about INR11,800/10 grams, sales were down 11% on the year at 49 metric tons, according to World Gold Council data.

In 2008, consumers in India bought 660 tons of gold, from total global demand of 2,907 tons, the WGC says, although Indian demand was down 14% on 2007 as prices on international markets rose.

Continued high prices have deterred buyers since the start of the yearand India's imports in the past two months have been negligible - less than 2 tons in the first quarter, against 62 tons in the first quarter of 2008, according to the Bombay Bullion Association. April has been a better month, however, with 10 tons imported so far.

Jewelers and dealers had pinned their hopes on Akshaya Trithya, South India's biggest gold buying festival, spurring a revival in local demand. Their focus will now switch to the various holidays and festivals of the second-half of the year, of which Diwali in November will be key to North India's gold industry.

Daman Prakash, director of MNC Bullion, a dealer in Chennai, said his firm's sales will decline by 40% to 50% at this year's Akshaya Trithya.

"Although the number of people visiting jewelry shops is encouraging, volumes of gold sold is not great," he said. "People were buying earrings where earlier they would have gone in for chains or necklaces."

Princeson Jose, chairman and managing director of Prince Jewellers in the state of Kerala, said he expects the value of items sold to rise 10%, although volumes would be much lower.

"Quantity is not happening as most buyers are going in for lightweight jewelry due to the high prices," he said, adding that people are waiting for prices to decline to INR13,000 to INR14,000 before resuming purchases.