Sunday, May 17, 2009


"Uncertainity out"

Post Election Leads/Result - Elect Your Sectors

The country has seen another reversal on the election results front which were forecasted by lot of sephologist who were basically indicating a terribly terribly hung parliament. The results are clearly indicating a mandate for UPA to run the government for next five years and that too without any clutches. This means UPA can accelerate the reform process with a human face with its team comprising of Mr. Manmohan Singh (Hon.. Prime Minister), Mr. Chidambaram (though currently trailling) (Hon.. Home Minister) and Mr. Montek Singh Ahluwalia (Chairman,.Planning Commission), who were the first to promote LPG (Liberalization, Privatization and Globalization). We expect the following sectors to be in limelight and attract faster liberalization steps which were opposed by LEFT, who have incidentally been left out in the race.

INFRASTRUCTURE: The government spending coupled with further stimulus to the economy shall attract more funds to infrastructure development programme.

POWER: The backbone of any economic growth cannot be completed without any government laying emphasis on the power sector. Further industrialization shall need more power and more UMPPs (Ultra Mega Power Plants). The concentration initially would be on Power ancillaries and equipment manufacturers.

INSURANCE: The almost clear majority and no hitches left for LEFT now. The reform in sector shall be put on faster accelerator.

RETAIL: Initially the government will probably go slow in further reforms in the sector,
keeping the social obligation in mind.

DIVESTMENT: The off balance sheet expenses and with almost majority in parliament, the
divestment of most profitable PSU's may take place at appropriate time and price. This
could attract investor latching on to PSU listed stocks.

BANKING: The banking / finance sector reforms would also be now taken up on priority basis. One could see consolidation in this sector particularly within the PSU banks themselves. However, there might be some legacy issues such as resistance from unions, branch overlap and different technological platforms which might make the merger of some PSU banks difficult. In case of private banks we believe RBI will be selective and allow acquisition of weak Indian banks only to begin with. We also expect voting rights of investors holding more than 10% in a banking company to be made proportional to their shareholding.

AGRICULTURE: In the last couple of years of UPA's last tenure, the focus was repeatedly harped on the agriculture reforms. One could expect some tinkering in the subsidies both directly and indirectly associated with the sector. We would like to highlight the fertilizer sector in particular.

EDUCATION: We think by the past experience that educating the Indian population or increasing the literacy rates in India shall become beneficial for any political party as the average age of an Indian citizen is between 25 -35 years. Thus the focus of UPA would also be on Education sector.

Though every thing looks rosy now but we certainly feel the economy has to go through serious consolidation phase both domestically and adjust to the international events that have taken place and their repercussions to Indian economy which is very much visible on export front, which have seen a drop of 33% in last couple of months. We would thus caution investors not to get carried away but be selective and have a systematic investment approach to create wealth.

To see full report: ELECTION RESULTS


What economic stimulus policies could still be used?

Despite the highly stimulatory economic policies adopted, the prospects for growth and unemployment are not good. It is true that one must wait for the effects of these policies to appear, but it can be feared that they will not be very effective.

Governments and central banks are therefore considering whether other stimulatory policies could be used (e.g. asset purchases by central banks, support for distressed sectors).

What room for manoeuvre remains, what policies have not yet been used?

We believe that further increases in fiscal deficits are likely to be counterproductive, and that even unconventional monetary policies are ineffective, except those that reduce the cost of long-term funding. Indeed, one of the few possible methods for stimulating the economy that has not been used is to bring down the interest rates on long-term funding and the risk premia that increase these interest rates, in particular by lowering the cost of long-term funding for banks and restoring liquidity in the corporate bond and CDS markets.

The major OECD countries have all adopted extremely stimulatory economic policies: very large fiscal deficits (Charts 1A and B, and it is likely that, based on the growth rates that can be expected, the fiscal deficits for 2010 will be higher than those expected at present), very low central bank intervention rates (Chart 2A), and very rapid monetary creation.

To see full report: FLASH ECONOMICS



M&M’s UV sales have improved in recent months boosted by election buying and a good response to the ‘Xylo’. While the former factor will not sustain, the latter will continue to boost sales. Tractor demand however remains lacklustre due to financing issues. M&M is trying hard to cut capex and is aiming at limiting total capex over FY10-12 at Rs80 bn. Outlook for subsidiaries like Tech Mahindra and Mahindra Forgings remains weak. We upgrade EPS estimates 6-12% factoring in higher UV volumes and the PTL merger. Post recent run-up, we see valuations as rich. Maintain U-PF.

UVs – volume outlook has improved

The recently launched ‘Xylo’ has received a good response and currently has a waiting list of ~8 weeks. M&M expects to exceed its initial target of 25,000 annual ‘Xylo’ sales and is in the process of increasing production. ‘Scorpio’ volumes have improved post the 5-10% price-cut in March but profitability would have got impacted. Pre-election buying has been a factor boosting UV sales since Feb but is not likely to sustain since the elections have come to an end this week. Overall,
our view on UV growth has improved and we now factor in 15% growth in FY10.

Tractors - no signs of recovery; PTL doing better

Tractor demand remains weak. Lack of financing is one reason for the same. Also, 15-18% of tractors are used in pure non-agricultural work like haulage and this demand has been impacted with the slowdown in infrastructural spend. M&M expects “low single digit” growth in tractors in FY10. We factor in 0%. M&M is also working on developing a new low cost tractor in the sub-25HP range. No timeline has been indicated for this product yet but is not likely before end FY11. Tractor
sales in erstwhile PTL are doing better; we factor in 7.5% growth there.

Subsidiaries – rising pressures

M&M’s European forging subsidiaries have turned loss-making and will impact consolidated profits in coming quarters. CLSA’s technology sector team has a negative view on Tech Mahindra. Mahindra Holidays is seeing de-growth in membership addition. We believe that M&M’s foray into 2Ws and CVs in FY10 is not going to be easy and could drag down consolidated performance in FY10.

Maintain U-PF

As we stand today, we are positive on M&M’s UV business (~17% of consolidated PAT); negative on tractor business and Tech Mahindra (~67% of consolidated PAT) and neutral on the balance ~16%. A strong market has boosted value of M&M’s listed subsidiaries and has resulted in holding company discount going down to ~25% versus historical average of 44%. We see M&M’s stock vulnerable to market correction and view risk-reward as unfavourable. Maintain U-PF with Rs440 TP.

To see full report: MAHINDRA & MAHINDRA


Target price achieved: We had initiated Buy on TCI (Well integrated, dated 11 Dec 2008), with a target price of Rs51, providing an upside of 34.2%. The stock touched a high of Rs53 on 12 May 2009 and closed at Rs51.

Rating changed to Hold: Our target price of Rs51 was based on a P/E of 7x FY11E EPS and 4.6x EV/EBIDTA. We believe that the stock is fully valued and there is very little upside from current levels. Accordingly, we have changed our rating to Hold.

Warehousing capacity addition may be delayed: We believe TCI’s target of creating a total 10mn sq. feet of warehousing space by FY10 end may be delayed. The slowdown in the industrial and manufacturing sectors has dampened demand for value-added services in
supply chain solution (SCS) services.

Slowdown in industrial activity hits demand: Slowdown in industrial activity and lower EXIM volumes have resulted in lower demand for domestic logistics services and reduced movement of goods. IIP growth for March 2009 contracted 2.3% YoY while for FY09 it grew a modest 2.4% (vs. 8.5% in FY08). Exports declined 33.3% during March 2009 and imports declined 34.0%.

Maintain estimates, consolidated results awaited: We are maintaining our earnings estimates (consolidated) at Rs5.5 for FY10 and Rs7.3 for FY11. However, the company’s financials in the interim may be impacted by the current slowdown. We expect greater clarity from the management post the Q4FY09 and FY09 consolidated results (22 May 2009), after which we will review our projections.

To see full report: TRANSPORT CORP OF INDIA


Initial View on Q1: Earnings Slightly Better, Cash Flow a Bit Worse

Q1 2009 Results — GM reported adjusted Q1 EPS of $(9.66) excluding $0.12 in charges, above low expectations for a consensus loss of $(11.05). Revenue of $22.4 billion fell short of our $25.6 billion estimate. The company no longer reports segment results on an EBT basis but now provides EBIT by segment. Total adjusted EBT came in at $(6.0) billion, slightly ahead of our $(6.6) billion estimate. GMNA reported EBIT of $(2.8) billion, a $2.5 billion decline from last
year. This was ahead of our expectation for a $3.9 billion decline in segment pre-tax profit as $2.3 billion in structural savings and pricing helped reduce pressure from $5.0 billion in profit decline related to volume, mix, commodities, and exchange. GME posted EBIT of $(1.2) billion, a year over year profit decline of $1.5 billion, which was only slightly ahead of our expectation. GMLAAM generated EBIT of $42 million, down $458 million from last year, which was also slightly ahead our estimate. GMAP posted EBIT of $21 million, a decline of $331 million. This decline was also slightly ahead of our estimate. Corporate and other now includes interest expense.

Cash Balances In-Line — Operating-related cash burn was $11.0 billion, including restructuring, slightly worse than our $10.6 billion estimate. Balance sheet cash balances ended Q1 at a low $11.6 billion, below our $13.0 billion estimate. Cash balances now include the Financing and Insurance segment. GM also reported $0.9 billion in debt extinguishment for a March 4 amendment to its $1.5 billion U.S. term loan due in 2013. We look for more details on this on the call.

Reiterate Sell — We maintain a Sell/Speculative Risk rating on the shares of GM. The company’s weak results and updated restructuring plan confirm challenging fundamentals and no resolution on stakeholder negotiations. Even if GM successfully obtains incremental government funding and equity for debt exchanges from the UAW and bondholders, shareholder dilution should be meaningful while leverage will likely remain high, with pro forma debt-to-
EBITDA at a high 3.5x.

Investment strategy
We rate GM shares Sell/Speculative Risk on deteriorating credit conditions and unappealing valuations. The company’s February 17, 2009 restructuring plan confirmed worsening fundamentals, greater liquidity needs and no resolution on stakeholder negotiations. The new plan shows that even if the company successfully obtains incremental government funding and equity for debt exchanges from the UAW and bondholders, gross leverage would remain high at above 3 times with free cash flow prospects remaining bleak until 2012. With declining share values, existing shareholders will likely share a smaller piece of a GM’s shrinking residual equity if the company restructures successfully, as result of lower conversion prices for the debt exchanges
resulting in the UAW and bondholders obtaining an even larger majority of GM's total shares. In the near term, we await progress with bondholder and the UAW debt exchanges, and the White House and U.S. Treasury Department’s response to GM’s latest appeal for an additional $9.1 billion in government support (including $2 billion in March 2009) to maintain cash balances at around $10 billion. By March 31, GM must submit to the government a certification of the plan. The President’s Designee will then determine whether these steps are sufficient to ensure long-term viability. (The designee would have authority to extend the certification date by up to 30 days.) If the designee ultimately fails to certify GM’s plan, the company then would likely file for bankruptcy protection.

To see full report: GENERAL MOTORS CORP


Warmed Up: Yet to Catch Fever 104

We remain positive on HT Media even as the stock has risen 51% since our upgrade on 29 March 2009. While continued strength in readership for Hindustan Times, Hindustan, and Mint provides support to our estimates, a surge in radio ratings is a positive surprise. Concerns on private treaties (advertising for equity deals) expressed recently in media (largely in the context of BCCL), are a potential short-term negative.

All of a sudden, Fever 104 rocks!: In Radio Audience Measurement (RAM) ratings for Week 17, Fever 104 has emerged as the #1 channel of Mumbai, and #2 channel in Delhi and Bangalore (see appendix for details). Healthy ratings of Fever 104 could raise earnings, and also offer opportunities to promote its own products and provide a wider variety of solutions to media buyers.

Fever 104 broke even in 4Q09: Fever 104 reportedly broke even in 4QFY09, even before the radio stations saw a ramp up in ratings. S. Keerthivasan, CEO, HT Music and Entertainment Ltd has said “...We are poised to become the most profitable radio operation in the country in times to come.”* Our estimates incorporate a minor loss for HT Media radio operations in FY10 (~Rs 250mn loss

for FY09).

IRS 2009 R1 results—HT Delhi continues to lead on AIR: IRS 09 R1 results indicate that the newspapers of the company continue to perform, although growth has slowed. Mint and Hindustan have shown continued growth, while Hindustan Times continues to be #1 in Delhi and NCR on Average Issue Readership (AIR). HT Mumbai readership grew ~4% over the previous survey.

Mint readership trends positive, to grow in visibility: HT Media’s business newspaper, Mint, has entered into a content partnership agreement with TV-18— positive as it provides targeted support to the Mint brand, especially in light of the reports that Mint is set to launch two new editions in Kolkatta and Chennai*.

Media Reports on BCCL’s private treaties’ losses likely to weaken sentiment: Recent media reports have questioned private treaties, and some have indicated that Bennett Coleman and Company Limited may have incurred losses in excess of 40% on private treaties entered into by the company (see appendix). This is likely to be a sentimental negative for HT Media stock, with

results around the corner.

We see a strong possibility of both earnings improvement and continued multiple expansion in the stock as concerns on radio operations weaken. We reiterate our BUY rating on HT Media with a price target of Rs 88.

To see full report: HT MEDIA


QE Mar-09 Earnings Season Thus Far

Quick Comment – Aggregate Earnings Growth Falls:
Through today, 55 companies in our coverage universe have reported results. Aggregate earnings fell 3.2% YoY against our analysts' expectation of a 7% fall YoY. In terms of surprise breadth, for 53%, or 29, companies’ net profits exceeded expectations by 5% or more, while 16 companies reported results that trailed
our analyst expectations by 5% or less. So far, three companies from our coverage have reported losses. Eighteen companies in the BSE Sensex have reported thus far, with aggregate earnings down 11% YoY, compared with our MS analysts’ expectations of a 7% fall. Excluding the energy sector, the Sensex earnings are down 14%, below MS expectations. At the sector level, industrials and consumer staples are the key positive surprises. Consumer Staples is the bestperforming sector in terms of profit growth, followed by Technology, while Materials is the worst-performing sector. Excluding the Financials sector, aggregate net profit for this sample is down 3.2%.

EBITDA Margins Slip: EBITDA margins for the sample are down 50bp YoY, while excluding Energy they are down 2.8ppt. Six sectors have reported a compression in EBITDA margins, with Materials leading the list. Notably, revenue growth for the 55 companies that have reported is 3% while for the 18 Sensex companies it is down 8%.

Broader market earnings; Worse than the narrow market: So far, 1,571 companies have reported. While revenue is up 1.6% YoY, net profit is down 11% YoY. Excluding the banks, aggregate profits are down 21%. EBITDA margins are down 75bp YoY, to 25%. Of these 1,571 companies, 34%, or 527 companies, have reported losses for the quarter ended March 2009.

To see full report: INDIA STRATEGY


G E Shipping's (GES) stand-alone results for Q4FY09 were below expectations due to an impairment loss of Rs700mn. Net sales declined by 24% to Rs5.6bn on back of lower revenue
days. OPM contracted 550bps YoY to 47.3% while expanding by 400bps sequentially. Adj. net profits dipped 67% to Rs1.1bn.

Reduced tonnage and rates depress revenues
Revenue days for the quarter declined by 18% on account of reduced tonnage. This coupled with depressed dayrates led to fall in revenues which was buffered to some extent by a stronger dollar.

Lower TCY & higher maintenance costs impact OPM
TCY declined across all asset classes while dry docking expenses increased 56%. Also, direct operating costs remained constant. This led to operating profits falling by 32% to Rs2.7bn & OPM contracting by 550bps to 47.3%.

Lower other income & impairment loss impact net profits
Other income contracted by 23% and GES took a Rs700mn impairment loss on one of its bulk carrier resulting in net profits declining by 67% to Rs1.1bn.

Fleet Details & Capex:
GES currently owns & operates 39 ships comprising 31 tankers (12 crude tankers, 18 product tankers, 1 LPG carrier) and 8 bulk carriers with an avg age of 10.3 yrs aggregating 2.9mnDWT. It also operates 5 in-chartered vessels. The offshore division GIL owns 5 PSVs & 5 AHTSVs and operates 3 in-chartered assets. 2 bulk carriers and 1 product tankers should leave the fleet by Q1FY10 as they have already been sold off. Further capex entails delivery of 26 assets with an outlay of Rs1.3bn over the next 3 years.

Based on SOTP valuations incorporating the decline in tanker asset prices, we believe the stock is fairly valued and has achieved our target price. Accordingly we downgrade our recommendation to ‘HOLD’ with a revised target price of Rs270.

FY09 Performance
On a consolidated basis, revenues increased by 22% to Rs3.8bn mainly on account of a weak rupee, higher TCY and increased spot market exposure. Crude tankers TCY rose 37% while dry bulk TCY rose 4%. Rupee depreciation impacted the revenues by ~10%. Operating profits grew by only 14% as higher spot exposure led to margin deterioration. Better earnings in H1FY09 and increased offshore earnings help offset the sharp decline in TCY in the second half. Subsequently, OPM contracted by 280bps to 41%. GES accounted for a Rs700mn impairment loss on one of its bulk carriers which impacted the adj. net profits that grew by 9% to Rs14.2bn as against our estimates of Rs14.9bn. In FY09, GES took delivery of 2 product tankers, 2 AHTSVs, 2 PSVs & 1 Jack-Up Rig (In-chartered from Mercator Lines). During the same period, 3 product tankers, 5 bulk carriers and 1 gas carrier were sold off. Going forward, it has already inducted 1 product tanker and 1 AHTSV in Q1FY10. Further capex entails deliveries of 9 ships mainly in FY11& FY12 and 17 offshore assets by FY11 (10 in FY10 & 7 in FY11). The total outlay for aforesaid would be ~USD1.3bn (Shipping ~USD550mn & Offshore ~730mn).

To see full report: GE SHIPPING


Upgrade to Buy: 4QFY09 Signals a Turnaround

4QFY09 bucks the trend — Consolidated PAT rose 7% Y/Y, driven by a strong 25% Y/Y revenue growth. This was in contrast to our expectations of a c20% profit decline, as we expected continued pressure on revenues and margins.

Headwinds appear to be abating — During the analyst meeting, management indicated that: a) demand in the key decorative paints business continues to remain firm (except in cities like Mumbai and Bangalore), b) growth in the international business remains steady (although macro concerns persist), and c) cost pressures are abating. We also note that the trend of sharp INR
depreciation vs. the US$ should reverse going forward, which should positively impact EBITDA margins.

Consequently, we upgrade to Buy from Sell... — We increase our target price to Rs1090 from Rs801 based on 20x Sept10e EPS. We raise our target multiple to 20x from 18x, in line with the average multiple of the past 5 years. Our comfort in setting a higher multiple stems from the fact that we expect earnings growth trajectory to improve; we forecast ~19% CAGR over FY09-11e. Over the past year, ASPN has underperformed the FMCG index by 10%; more recently YTD,
it has underperformed the broad market and peers by 22% and 4% respectively. ASPN is now our preferred pick in the Indian mid cap consumer space.

...and raise our estimates — We increase EPS estimates by 9-11% over FY10- 11e, factoring: a) lower input costs which would drive margin growth, and b) visibility of a recovery in domestic demand. Key risks to earnings stem from delay in domestic volume recovery, impacted by adverse macro environment and continued deceleration in key international markets.

To see full report: ASIAN PAINTS



Blue Star Ltd (BSL) is an end-to-end solutions provider in the field of airconditioning and commercial refrigeration as a manufacturer, contractor and after-sales service provider. The company primarily operates in three segments – Central & Packaged Airconditioning systems, Cooling Products and Professional Electronics & Applied Industrial systems. The company currently has five modern state of the art manufacturing facilities in Thane, Bharuch, Dadra and Kala Amb (Himachal Pradesh) and at Wada in Thane district of Maharashtra.

Investment Rationale

Fall in price overly discounts slowdown related fears – Fundamentals remain strong
BSL has fallen more than 65% from its high of Rs. 548 created on 4th January, 2008 and is currently trading at about Rs. 181. The fall in price discounts factors such as the economic slowdown, liquidity crunch and diminishing earnings visibility. However, we feel that at the current levels the price overly discounts these fears. BSL is a market leader in the central airconditioning business, has a strong order book and a lean balance sheet with a debt to equity ratio of about 0.1x. Superior growth, strong profitability, prudent financial management and a liberal dividend payout policy have resulted into high return ratios for BSL. RoE and RoCE has increased from 28.3% and 20.6% in FY06 to 56.4% and 58.7% in FY08. BSL could be one of the main beneficiaries of revival in economic activity expected a couple of quarters down the line.

Strong growth in the order book
As of 31st December, 2008, BSL has an outstanding order book of Rs. 1,626 cr, with an execution period of 9–12 months. This exudes confidence that BSL will sustain its momentum of high growth and profitability in the coming years. Moreover, BSL has limited its presence in the highly competitive, low-margin, consumer durables segment of the room airconditioner market. Instead, it has focused on the high-margin, institutional segment i.e. central airconditioning,

Growing market catered by three players with significant entry barriers
The market for airconditioning products and commercial refrigeration equipment grew 27% and 22% respectively during FY06-08. Based on plans announced by several players, the cumulative non-residential airconditioning opportunity over the next 5 years is estimated to be around Rs. 38,000 cr. Given the current market conditions one could expect a slowdown in segments like IT and Retail, however, sectors like infrastructure (Delhi Metro) and power continue to show decent growth potential. Currently, the non-residential HVAC (heating, ventilating and air conditioning) market is catered to by Blue Star, Voltas and ETA. Project engineering capabilities at various locations across the country and licensing / approval process is a barrier to new players eyeing this market. Internationally, players who are strong in the residential airconditioning market (consumer durables segment) like Samsung, LG, Hitachi etc are not focusing on the HVAC (non residential) project business, which is largely catered to by local players.

Acquisition of Naseer Electricals to increase the addressable market
BSL’s recent acquisition of Naseer Electricals will help BSL expand its business scope in the airconditioning business to MEP (mechanical, electrical and plumbing) projects, which will nearly double the company’s targeted market going forward. Moreover, today many customers seek Electrical Contracting services from the same contractor executing HVAC. Currently, Naseer has presence only in southern India, which BSL intends to scale up to other regions.

Recent fall in commodity prices could help improve margins in the medium term
During H1FY09, BSL’s operating margins were under pressure due to the increase in raw material prices like copper and steel. However, over the past few months, metal prices have corrected substantially. For example, from an average price of about $6,900 in the month of September, 2008, copper is currently trading at about $4,700 registering a drop in excess of 30%. This could help BSL reaching the margins it earned a couple of quarters

To see full report: BLUE STAR