Friday, May 22, 2009


Sensex: We said, "After two bear candles, holding 13800-34 will be required for positive expectations for Sensex. Breaking it could be bearish." Initially holding 13834, Index attempted positive moves, but weakened later to end 2.3% lower. Cap. Goods Index lost 5.4%. Small-Cap Index finished 2.5% higher with evened A/D.

The action formed the third consecutive bear candle. Having lost over 1200 points within 3 days, Index will test 38.2% and 50% correction levels to latest part of the rally at 13695 and 13314, respectively. Today will make it clear if it finds buyers at 38.2%. Support, however, confirms if it can move above previous day's high.

To see full report: CALLS 220509


Key points
Market Outlook — Open flat
Positives — New government to take oath today
Negative —MFs selling

Market outlook

The Indian market is likely to open flat today. It ended sharply lower on Thursday, as traders booked profits in frontline stocks and bought undervalued small-cap stocks. Weak cues from the overseas market also kept the large-cap indices under check. Today the markets are expected to open flat with a mixed trading session. More clarity would emerge over the weekend, as investors are likely to take cues from new cabinet formation

The Sensex has supports at 13480, 13200 and resistances at 13840, 14040. The Nifty has supports at 4190, 4150 and resistances at 4290, 4340

India's wholesale price index rose 0.61% in the 12 months to May 9 compared to an annual rise of 0.48% in the previous week and 8.57% in the corresponding week a year ago

Asian shares pared back early losses in the morning session on Friday, to trade mixed, with fiscal and economic concerns dragging sentiments down. Stocks tied to a recovery in growth, including technology and automotive shares, weighed on markets

US stocks fell on Wednesday, led by financials in a late-stage sell-off, after the Federal Reserve gave a more pessimistic view on the economy, tempering hopes for a quick recovery. The Dow Jones industrial average fell 52.57 points, or 0.62%, at 8,422.28. The Standard & Poor's 500 Index lost 4.64 points, or 0.51%, at 903.49. The Nasdaq Composite Index was off 6.70 points, or 0.39%, at 1,727.84

Stocks in news: Tata Power, Patel Engineering, Dr Reddy’s Lab.

To see full report: OPENING BELL 220509


No Need to Chase Stocks, But Buy the Dips

Strategic view is to buy the dips rather than sell the rallies: We think that the October 2008 low may have been the low of the bear market that started in January 2008. Whether a new bull market has begun will partly depend on government’s policy response and partly on global outcomes.

Significant medium-term development: We agree with the market’s reaction that the political development is a significant inflexion point for India’s medium term. Over the past 15 months, the electorate has been displaying growing maturity, we believe, in choosing its representatives for the country’s law-making bodies.

However, there is no need for panic buying: The market’s bizarre 17% rise yesterday in response to the election results is reminiscent of the 17% intra-day fall in May 2004 in response to the election results then. Just as in May 2004, it did not make sense to panic sell, it
makes no sense to panic buy now.

The government’s job is cut out: The government has the challenge to revive growth in a difficult global environment and deal with a large fiscal deficit. We expect the government to stimulate growth and grow out of the fiscal situation. This augurs well for equity markets, though not so well for bond markets.

Investor skepticism: Valuations are rich, and paper supply will likely rise in the short run. The market’s performance for the rest of the year depends largely on government action, we believe. We can see why investors are expressing discomfort with this situation. After all, in the past, most governments have failed to deliver. However, in the context of the quality of this government’s mandate, it seems that the market’s optimism may not be misplaced. At the same time, we remain cognizant of the risk of disappointment.

To see full report: INDIA STRATEGY


Railways: on the right track
We attended the IndiaRail 2009 conference in New Delhi on 12 May 2009. The key speakers at the conference were policy makers and industry representatives. The agenda of the conference was to discuss opportunities in the sector.

Opportunities galore …
Opportunities in the sector are close to INR2.7t over the next five to eight years, of which the INR800b-900b will be awarded in the next two years. The Dedicated Freight Corridor (DFC) is the largest opportunity worth INR680b. Other areas of opportunities include station modernization, port connectivity, gauge conversion, rolling stock and logistic parks. The Railway budget for 2009-10 has earmarked INR379b (compared to INR367.73b for 2008-09 revised estimates). Major beneficiary in our coverage from these investments is Larsen and Toubro, which we believe will benefit from its latest venture into the railways segment. The company also has investments in Kalindee Rail Nirman (Engineers) Limited (owns 14% of the company) that specializes in track and signaling systems.

… but challenges remain
We believe land acquisition is the most significant challenge, which could delay project implementation. Other key challenges highlighted by the industry representatives were related to inability of Indian players to execute projects on a turnkey basis due to obsolete technologies.
Shortage of trained engineers and suppliers is another impediment. However, these impediments may not materially affect the overall investment rationale.

Key takeaways
Increased focus on investments through Public Private Partnerships
Thrust on Dedicated Freight Corridor (DFC)
Major beneficiaries – rolling stock manufacturers, players offering track and signalling technologies, logistic & construction companies
Financing for the DFC from Ministry of Railways’ internal generation, budgetary support, multilateral and bilateral agencies, private investments and market borrowings.

To see full report: INDIA INFRASTRUCTURE


Stable Govt. to drive re-rating

Good governance in AP & Delhi voted; Buy Infra Builders
A stable Govt. in UPA alliance & voting back of Andhra (AP) & Delhi Govt. is great news for pick-up in Infra spends. Budget deficit will encourage divestment of PSUs such as NTPC, NHPC, Power Grid and more PPP projects, that should necessitate progressive policies in sectors such as power & roads. These coupled with Infra deficits creates a macro framework for robust sustainable growth & that has potential to drive E&C cos re-rating as they move into a higher orbit, in our view. We raise PO to factor-in re-rating across BAS-ML universe with top picks – E&C - BHEL (Rs2000 v/s 1700) & IVRC (255 v/s 215); Reliance Infra, JPA (developers).

Vote for incumbent Govt. in AP/Delhi = vote for governance
We attribute the voting back of incumbent Congress Govt. (see table 2) in the state of Andhra Pradesh (AP) led by land mark US$10bn Irrigation spends and Delhi – fixed water, power and transportation (metro rail + roads) problems. While this will not only encourage in-coming Govt. to accelerate Infra spends, but it will also act as role model other Govt. Loss of election by Mr. Balu, ex-transport
minister despite win by his party in TN, may be a vote v/s ineffective governance.

Buy builders - stocks to re-rate before EPS become visible
Likely improving visibility of Infra capex, potential falling-in place of Industrial capex on return of business confidence coupled with the global liquidity makes for a potent combination to re-rate the sector till the order inflows / earnings becomes visible in the next few quarters. We think that once the earnings catch-up, rich multiples will start to look reasonable.

Top Picks: BHEL, R. Infra, IVRC, L&T & JPA

1. BHEL: We raise PO to Rs2000 (1700) as it will be the main beneficiary for the liquidity driven sector re-rating given its visibility of 23% CAGR in earnings, potential for PE expansion to 17.5x (15x) FY11E at 20% premium to Sensex and thrust on power capex incl. the ‘bulk’ ordering by its customers’ – NTPC/DVC.

2. Reliance Infra with surplus equity (~US$1.5bn) may benefit from likely auction of three more UMPP by Govt. in FY10E leading to higher E&C value and value of R. Power investment. Stock is inexpensive at 1.1x consolidated FY09A P/BV.

3. IVRC: We see IVRC to benefit from return of pro-Irrigation capex (70% of its backlog) Govt. in AP. Potential pick-up in roads / real estate capex is +ve.

4. L&T: PO Rs1235 (1110) on benefit from thermal & Nuke power capex, potential pick-up in roads & industrial capex from improving business confidence.

5. JPA: Markets does associate JPA being close to BSP and hence, it runs the risk of not participating fully in the ensuing rally. However, we think that eventually a 40% discount to NAV and strengthening new project pipeline will drive stock.

Minister is key catalyst to watch
We think that personalities do matter in polity. We look for change in Industry, and transport ministry, while hope better performing Aviation & Power minister (Jairam Ramesh) to return. Return of aviation minister should secure ADF funding deals.



Fair value conundrum

Promoter stake sale could sustain DLF’s premium valuation
A revival in overall confidence that could lead to higher-than-estimated volumes and ultimately a price recovery, recent steps by promoters to restore investor confidence and technical factors may ensure that DLF trades at a premium to its fair value based on cash flow and ROE trends. We increase our price to NAV to 1.2x, raise near-term launches/EPS/NAV, and upgrade our rating from Sell to Neutral. We remove our short-term Sell rating.

What do alternate valuation models suggest?
We looked at the residual income model and three-stage DCF to derive possible valuation scenarios and derived valuations between Rs260-300. At Rs300, the stock would trade at 2.2x FY10E book vs. the five-year average ROE of 11.5%. We think it not worthwhile to look at ROE over 2007-09 (average of 90%) to derive cycle ROE, as it was based on sales to DAL and “nil” cost land (both unsustainable).

Raise earnings estimates on better visibility and balance sheet
We increase our launch volume estimates for FY10/11 from 5.8msf/18.8msf to 20.6/27.9msf and introduce FY12 of 28.9msf. We expect pricing to improve from FY11 onwards at c10% pa. We estimate net debt-to-equity to improve from 76% in FY09 to 30% by FY11, on cash inflow from DAL and sales of non-core assets. We increase FY10E/11E EPS from Rs11.1/10.1 to Rs13.7/14.1 and introduce FY12E EPS of Rs16.0.

Valuation: raise 12-month price target from Rs160 to Rs270
Our price target is based on 1.2x NAV. Our main NAV assumptions are: 1) a property price increase of 10% pa from FY11-15E; 2) a WACC of 12.1%; and 3) value of projects for five years of launches + 1.2x land cost.

To see full report: DLF LIMITED


Results as per expectation

Standalone Q4FY09 results: Chambal Fertilisers and Chemicals’ (Chambal’s)
Q4FY09 net sales grew by 43.4% YoY to Rs8,708m (our expectation was Rs7,773m), on the back of higher trading sales and other income. Chambal’s adjusted PAT grew by 107.9% to Rs593m (Our expectation was Rs618m).

Q4FY09 highlights: Net sales of urea business grew by mere 8.8% to Rs4,853m since Chambal had shut down Gadepan-1 plant for 36 days during the quarter due to hook-up activities for de-bottlenecking of plant. Trading sales have grown by 831% to Rs1,535m (Our expectation was Rs1,175m). Company has added three ships in H1FY09, which resulted in a YoY growth of 61.7% in the shipping business revenue to Rs1,211m in Q4FY09. EBIT margins of all the segments were as per our expectation, except trading business. During the quarter, the company has changed the accounting treatment for interest to trading creditors by charging into operating cost instead of finance cost as earlier. Hence, Chambal has charged full year interest in Q4FY09 that resulted in lower finance cost and loss in trading business during the quarter.

Balance sheet position: Chambal holds a fertiliser bond of Rs3,671.5m as on March 31, 2009. The company has booked MTM losses of Rs281m in Q4FY09. Chambal has consolidated gross debt of about Rs20,000m and cash of Rs7,000m as on the balance sheet date.

Valuation: Chambal’s 90% of the urea business is on cost plus 12% post tax ROE (i.e. fixed earning) basis and shipping business is on time contract till FY10. Hence, we believe that a downward pressure on earnings would be less. We expect PAT to grow at two year’s CAGR (FY09-11E) of 9.5%. While on the basis of historical rolling band chart of last ten years, Chambal has traded in the range of 4x-16x. We maintain our ‘Accumulate’ rating on the stock, on the basis of 9x at FY10E earnings.



April 2009 cargo decline by 1.2% YoY, FY09 cargo up 2.1% YoY, coal cargo registers highest increase of 39.8% YoY in April 2009

Cargo volumes down 1.2% YoY in April 2009 vs. 1.2% YoY increase in March 2009: In April 2009, cargo traffic at major ports in India declined by 1.2% YoY to 45.4m tons (vs 46m tons YoY). This compares with an increase of 1.2% in March 2009 and decline of 1.8% during 2HFY09. For FY09, cargo traffic grew just 2.1% YoY to 530.4m tons, 8% below targets of Indian Ports Association.

Coal and Fertilizer traffic increase by 39.8% and 12.4% YoY respectively in April 2009, Iron ore cargo decline 12.3% YoY: During April 2009, coal and fertilizer traffic increased by 39.8% and 12.4% YoY respectively; while Iron ore cargo reported decline of 12.3% YoY to 8.6m tons (vs.9.8m tons YoY). The strong growth in coal volumes was mainly due to increased coal imports by power utilities, which had led to increased PLF of 82.5% for the month of April 2009 (up 260bp YoY). During FY09, fertilizer volumes grew by 9.9% YoY to 18.3m ton (vs 16.6m ton), coal cargo grew by 9.6% YoY, while container cargo volumes were flat at up 0.9% YoY.

Container Cargo de-grew by 9.3% YoY in April 2009: During April 2009, the all India container cargo traffic declined by 9.3% YoY to 7.6m tons (vs. 8.4m tons YoY). This is on back of 4.8% YoY de-growth in total cargo traffic at JNPT terminal, where container traffic forms 87% of the total traffic. However, on the other hand, the total cargo traffic at the Kolkata and Tuticorin port increased by 13.7% and 11.2% YoY, of which the container cargo forms 57% and 33% of the total cargo respectively.

Five ports register cargo traffic growth in April 2009; Paradip, New Mangalore volumes up 29.2% and 23.4% YoY driven by coal imports: During April 2009, Paradip and New Mangalore ports registered highest growth 29.2% and 23.4% YoY respectively driven by liquid cargo (22% and 61% of the total cargo respectively). The surprise has been the cargo volume growth of 16.8% YoY at Mormugao port, which has largely been driven by Iron ore cargo (82% of the total cargo), which is up 11% YoY at 4.5m tons (vs 4.1m tons YoY). This is compared with the overall decline of 12.3% YoY in the Iron ore cargo in April 2009.

To see full report: INDIAN PORTS


Return of the "Feel good factor"

Electoral verdict: a big positive surprise; Raising Sensex target to 14,500
The surprise electoral verdict where the incumbent UPA was returned to power with a far more decisive mandate (relative to 2004) has come as a huge surprise – surpassing the most optimistic forecast. The political platform thus delivered to the Congress party now raises huge expectations on the roadmap and velocity of economic reform – disinvestment, increasing foreign direct investments, pension and insurance sector reforms etc – which had come to a virtual standstill under the UPA’s previous administration. We believe the verdict is one of those rare instances which justify a re-rating of the Indian equity market. Consequently we are raising our Sensex target to 14,500.

Buy beta with added focus on large cap domestic cyclicals
We see the return of a ‘feel good factor’ in India after a long gap. The return of the feel good factor coupled with our earlier assessment of an economic rebound in 2HFY2010 leads us to recommend investors to seek an aggressive portfolio with growth focused, high beta, domestic plays. Our top picks – DLF, Unitech, Larsen and Toubro, BHEL, HDFC Bank and Mahindra and Mahindra. Investors may also want to look at companies in search of balance sheet restructuring (Tata Steel,
Hindalco), which should be able to raise funds relatively more easily and sharply reduce balance sheet related risks.

Move away from the classical defensives.
We recommend investors to lighten up on the classical defensives and go underweight pharmaceuticals, telecom and consumer staples: Underweight Bharti, Sun Pharma, Dr Reddy’s and Hindustan Lever.

Runaway expectations from union budget, increasing equity issuance are key risks for market
The union budget (expected in July), is likely to be the next key milestone for the markets. We confess that this is going to be one of those budgets where expectations will run very high as the market will look to the government to deliver on the lost years of its earlier administration. Political realities (state election calendar, etc) may not allow government to be too nimble on reforms in its first budget, despite positive intent. We also remain cautious on a spate of new issues supply (private placements, equity raising) which could soak up liquidity from the secondary markets.

To see full report: INDIA EQUITY STRATEGY


India: Voter stimulus to markets

The Congress-led UPA alliance unexpectedly won a big victory in the Parliamentary elections, ensuring that they will form the next government, which will not include the Left or other large regional parties.

We think the decisive result is a big positive for markets as it will lead to a stable government, removes months of uncertainty, and will allow the Congress the space to pursue reforms. We think pension, insurance, banking reforms and disinvestment may be back on the agenda.

The election’s positive impact on business confidence is the final tenor in the chorus of evidence arguing for a pickup in activity and investment demand in 2HFY10. Recent evidence from the PMI and demand indicators, a large easing of financial conditions, historical peak-to-trough declines, and a huge pent-up demand for infrastructure and affordable housing sing to the same tune.

These election results may help India “decouple” further from the global economy by giving a fillip to domestic demand, and there are now upside risks to our GDP growth forecast of 5.8% for FY10.

We think the equity market will react positively to the result, with sectors that will benefit including cyclical sectors as the investment cycle turns, and those that play on rural demand—a continuing priority for the UPA. We think that the positive impact on capital inflows will help buoy the INR and we reiterate our 3, 6 and 12-month USD/INR targets of 49.2, 47.3, and 46.0.

To see full report: ASIA ECONOMICS FLASH