Saturday, May 23, 2009



Table of contents
  • India Economy
  • Auto & Auto Components
  • Banking & Financial Services
  • Consumer Markets & Retail
  • Hospitality
  • IT/ITes
  • Media
  • Oil & Gas
  • Pharma
  • Power
  • Real Estate & SEZs
  • Telecom
  • Transport & Logistics

To see full report: SECTORAL SNIPPETS


• Smart class will continue to dominate private school segment
The company maintained that smart class would continue to be an industry leading product. Also, Educomp is changing its model for Smart Class. It plans to sell content and hardware together and receive money outright. The model would reduce the cash burden on the company and lighten its working capital needs. It plans to increase its sales staff by 40 people in FY10. We believe that Educomp will continue to get the early mover advantage in this space and will be able to ward off competition, thereby retaining its leadership positions. We have factored in 2825 schools for FY10 and 3750 schools for FY11.

• Gujarat ICT contract comes with better margin
The company recently won an ICT order from Gujarat government for 1,780 schools and the margin for this contract is comparatively better than the previous ones. In the ICT space, due to few PAN India participants, many state players have entered considering this a sound business opportunity. This has resulted in unwarranted competition. The local players offer huge discounts and have no proven management skills. The company said that this concern no longer exists and expected the ICT segment to be more profitable going forward. We have factored in 17,250 schools for FY10 and 22,500 schools for FY11.

• Dry management contracts to drive K12 business
The focus of K12 business of Educomp is shifting towards dry management contracts as this model does not involve any capex and Educomp gets a fair share of revenues (about 20%). The management attributed this change to the fact that many private schools were not managed properly and this model did not involve capex. The company currently operates 20 schools and has visibility of another 23 schools in FY10. We estimate it would take up 45 schools in FY10 and 60 in FY11.

• FCCB conversion is not a concern
Educomp had outstanding FCCBs of US$80m (raised in July ’07) convertible at Rs2,950. The bonds are due for redemption in July ’12. Currently, the bonds are trading at 5% discount. Considering the expected growth of the company, we believe the conversion price is not a concern and expect the entire FCCBs to get converted into equity.

• Outlook and Valuation
We expect Educomp to record a revenue and net profit CAGR of 46.4% and 45.3% between FY09 to FY11. At the CMP, the stock is trading at a P/E of 24.7x and 18.7x our estimated EPS of Rs106.8 and Rs140.9 for FY10 and FY11. With a stable government geared to growth at the centre we expect sectors including Education will get a boost benefiting companies like Educomp. We continue to rate Educomp a ‘Marketperformer’ with a revised target price of 2,670. Though, we earlier valued Educomp at 22x of FY10 estimated EPS, we now value Educomp at 25x of its FY10E EPS of Rs106.8 as we believe the PE ratios of high growth companies in the education sector will expand faster due to the strong government at the centre.

To see full report: EDUCOMP


For the past fifteen months, we all have seen the market sentiment turning from irrationally exuberant mode, during late 2007, to extremely pessimistic mode, during October 2008 and March 2009.

In March 2009 when NIFTY was trading at 2600 levels, we did a study on long term valuations trend in Indian stock markets and recommended that markets will see strong recovery (Refer to our report "NIFTY to see strong recovery" on Bloomberg. Since then NIFTY has recovered strongly, and is likely to cross 4100 level today.

We have again done a study on the same lines and are sending you a list of stocks which are likely to outperform the markets during next three months. In the present situation, we like stocks in sectors like Banking, Capital goods, Infra and education.

During initial phase of a bull market , the stock prices are mainly driven by the expansion in valuation parameters P/E, P/B and contraction in Yield and our list includes all those stocks which have seen huge contraction in P/E, P/B and expansion in Yield during last Fifteen months.

This report contains information on:

  • Fifty Stocks which have seen huge contraction in P/E during last Fifteen months
  • Fifty Stocks which have seen huge contraction in P/B during last Fifteen months
  • Fifty Stocks which have seen huge expansion in Yield during last Fifteen months



Telecom – Can VAS salvage falling ARPUs for Indian telecos?

Indian telecos are facing a peculiar situation whereby subscribers are growing at an exponential pace, but incremental subscribers (primarily prepaid) are contributing significantly lower ARPUs. This has raised concerns on future revenue growth and profitability of operators, particularly given increasing competitive intensity and falling tariffs. Value-added services (VAS) are increasingly being considered critical to boost ARPUs as voice services get progressively commoditized. In this context, operators are counting on the introduction of 3G services to enhance data usage, while also enabling to ease the spectrum crunch by shifting voice traffic from congested 2G networks at a lower cost structure.

Our study of the experience in various telecom markets globally, however, indicates that VAS have largely failed to stem ARPU decline, though the share of ARPU has increased substantially. We have studied the trend in ARPUs of top operators in various telecom markets (the US, Japan and Europe). While data ARPU continues to be on an uptrend, blended ARPUs have been declining or at best remained stable owing to a sharply falling voice ARPU component that continues to dominate the customer spend. In our sample universe, over the last 12 quarters, voice ARPUs have declined at ~0.7-4.3% CQGR, while data ARPUs have improved at ~0.6-2.2% CQGR, with aberrations like the US (where data component has grown at ~10% CQGR) and some European countries (where data component has declined Q-o-Q). In our sample universe, only AT&T and Verizon have shown an improvement in ARPUs owing to increasing data ARPUs.

In India, data services still comprise a small proportion of ARPUs at sub-10% levels, and this proportion for the top Indian telecos has barely improved over the last several quarters. At present, given the low telecom spend by incremental customers, absolute data ARPU is also on the decline. We acknowledge that 3G services are yet not available in India, and could drive data usage among subscribers in future. In other telecom markets, despite higher income levels, overall customer spend on telecom has largely remained steady over time, with VAS at best providing stability to ARPUs. For Indian telecos, keeping in view the market conditions, customer profile (large base of prepaid customers) and demographic profile, a deviation from the trend seems unlikely. India, being a price-sensitive market, one can also not rule out the possible commoditisation of VAS services as operators resort to lower price points to drive volumes.

To see full report: TELECOM SECTOR


Expensive on muted prospects

Raise forecasts, but retain rating
Q4 results were ahead of expectations, thanks to control over key expense items. Still, operational EBITDA, declined 70% to Rs908mn (BAS-MLe Rs648mn), and high interest outgo restricted recurring net profit to Rs269mn (Rs476mn). As a result, FY09 EBITDA declined 40% to Rs4.69bn (BAS-MLe Rs3.90bn), and net profit Rs2.02bn (Rs1.50bn). We raise forecasts to reflect this surprise. However, re-iterate Underperform on weak prospects, and expensive valuations.

Margin surprise

Q4 margins at 7.5% (down 450bps yoy) was driven by strict control over staff (down 26%), and overheads (down 32%, after adjusting for forex gains included under this item). As a result, the company ended the year with margins at 7.8% (down 240bps). We believe margins will hold up as commodity prices remain soft.

We raise forecasts to reflect the surprise

We raise margin expectations by 180bps to 8.1% for FY10 and 110bps to 8.5% in FY11, and thereby EBITDA forecasts by 33% and 17% in FY10 & FY11 resp. We retain truck volume assumptions of 5% decline in FY10, and 10% growth in FY11.

Business outlook muted

Our CV outlook is muted, on slowing economy and infrastructure related investments. We however are positive on buses (~39% of volumes), as well as light vehicles (Nissan JV operational only in CY11). By FY11, we expect new entrants in CVs. We therefore expect company to lose share in CVs.

Reiterate Underperform with higher PO

Our revised PO of Rs13.4 (earlier Rs11.2), is based on 5x FY10E EV/EBITDA, in line with mid-cycle valuations.

To see full report: ASHOK LEYLAND


India Votes for Stability
Singh is still the King

Indians have done it. The result of the 2009 election, which came as a positive surprise to the market, is a clear mandate for stability, growth and progress for the Indian economy. The mandate for the congress led UPA coalition is better than what most psephologists would have expected. The new UPA is now more cohesive and substantially stronger than the earlier one. Having won in nearly 200 seats, about 55 seats more than the previous Parliament, the Congress itself has moved into a position of strength within UPA and need no Left parties for support.

We expect a re‐rating of the Indian equities on the basis of improvement in the fundamentals of the economy. We, in our report “Investment Ideas for 2009” dated 19th Jan’09, clearly cited a positive outlook for the Indian economy and expected a revival post election. We expect the new government to give priority to revive the economy from the global slowdown by way of more public investment.

The prime focus of the government will be to reduce the fiscal deficit to the FRBM limit without compromising on the need of more government investment in the social and infrastructure sector. India needs more FDI in key infrastructure sectors for growth and we expect the present UPA government to relax FDI cap in aviation and other non strategic sectors.

We have hit the bull’s eye with our Investment Ideas for 2009 report. All the 13 stocks we have recommended achieved the target (though the target was full year target for FY09). On an average the stocks have moved 34% within a span of 4 months. Our model portfolio (based on investment on our recommended stocks) has outperformed the BSE 200 index by 5 percentage pts. We still remain positive over the performance of our recommended stocks and believe them to outperform the broader market.

  • NTPC
  • L&T
  • SUN TV
  • BRFL

Sensex target revised:
On the back of the changed socio‐economic condition, we revised our Sensex target for FY10 to 16905. We expect that the world revive from the current slowdown and demand to pick up. We expect a 15% increase in the Sensex EPS and implies a PE of 20x. We are confident of the EPS revision unless there some unforeseen event hampers this growth.

Sectors likely to get more emphasis

‐ Reform in Indian banking sector. More merger or amalgamation among PSU banks likely in line of BASEL II norms and opening up of the Indian Banking sector.

Infrastructure‐ Increase public investment in infrastructure in order to churn up the economy. India needs US$ 500 bn of investment in the infrastructure sector in the next 5 years to maintain the 8% GDP growth rate. We expect government to step‐up spending on key infrastructure e.g. roads, bridges and port development.

Telecom‐ 3G and Wimax licensing and better spectrum allocation along with broad band connectivity to villages will be on the top of the new UPA governments agenda. Allocation of frequency for telecom service providers and new rules for subscribers to switch operators using the same telephone numbers are among the policy initiatives for the sector expected to be on top of the agenda for the new government. The new government is also expected to take the real first step towards listing the state‐run Bharat Sanchar Nigam Ltd (BSNL) on stock exchanges. The industry also expects some rationalization of the revenue‐sharing regime from the present 25‐ 30% of the revenues with the government.

Power‐ Thrust on UMPPs and rural electrification program. We expect the total production to grow to 180,000 MW by 2012 with more thrust on Nuclear and alternative source of power generation.

Textile‐ Tax benefit and other subsidy to revive the sector

Agro industries‐ Buzz around of a second Green Revolution.

To see full report: INDIA POLITICS


We interacted with the management of LIC housing Finance. Key takeaways of the meetings are as under:

Demand for Housing Loan is picking up.
Post interest rate cuts and correction in property prices (especially in big cities), the demand for
housing loans is picking up. Last two months (March and April) the disbursements grew by
42% and 34% respectively for the company which indicates strong trend. Further correction in
property prices coupled with easing of interest rates will boost the demand. We expect
disbursements to grow at a CAGR of 22% for the company over FY09-11E.

Expanding geographical presence
LIC has ramped up its distribution network with increase in the number of branches and agent force. The company has opened 20 branches in the current fiscal which has increased the total branch count to 150 (targets 160 branches by FY10). Despite branch additions the employee numbers have remained almost same due to effective utilization of manpower.

Decline in interest rates to cushion margins
Management expects to maintain margins at the current levels (i-e 2.95%) despite offering loans at the competitive rates. With decline in overall interest rates, the incremental cost of funds will decline and the company expects to maintain spread of ~2% on incremental loans. The special rate of 8.75% offered by the company would not have any significant impact on margins as the offer is for limited period and would constitute small part (~10%) of the overall loan book.

Customer mix dominated by PSU/govt employees
LICHFL's customers mainly consist of salaried employees and self employed people. Among the salaried customers about 50% are government/PSU employees resulting in lower risk on loans. The company will continue to expand its customer base (PSU & govt.) which will benefit from the implementation of sixth pay commission.

Asset quality set to improve
Asset quality has shown marked improvement as gross NPAs and Net NPA have declined to 1.07% and 0.21% respectively at the end of FY09. Management targets to reduce net NPA to zero by the end of current fiscal.

Valuations attractive despite run up
We expect company's loan book to grow at CAGR% of 22% over FY09-FY11E led by drop in the interest rates and correction in property prices. Net interest margins are expected to remain stable at 3% despite lending rate cuts. Current valuations of 1.1x FY11 BV is attractive considering higher RoE's (26% & 27% for FY10, FY11), better asset quality and huge growth potential in the housing finance segment. We have a target price of INR 512 for the stock which is 1.3xFY11 BV. We recommend Buy on the stock.



Apr 09 dispatch grow @13.1%, prices increase 2.91%

Key Highlights
The cement industry delivered yet another month of stellar performance with dispatches growing by 13.1% yoy to 16.65mnt. Cement dispatches have registered an average growth of 11% since Nov 08 mainly on account of strong demand from rural housing and higher demand on account of pre election spend.

Cumulatively dispatch growth of cement majors (ACC, Ambuja, Grasim & Ultratech) at 13.87%yoy was inline with industry growth. AV Birla Group companies Grasim and Ultratech witnessed high dispatch growth with Grasim registering dispatch growth of 20.83% yoy while the same for Ultratech stood at 22.40%. Ambuja dispatch growth for April stood at 10.74% yoy while ACC was the laggard in the pack registering growth of 4.05% yoy.

On a regional basis Northern region witnessed the highest dispatch growth of 19.6% while South, West and Central registered 12.8%, 11.2% and 10.5% respectively. Dispatch growth was lower in East at 8.8%.

Cement prices continued their upward trend during the month of April 09 registering a yoy growth of 2.91% to Rs245. Even on a m-o-m basis, cement prices were up by Re1. We believe that the price rise is the result of strong dispatch growth observed over the past 6 months aided by robust demand outlook at least till the onset of monsoon.

On a regional basis, the Central region continued to register the highest growth in prices with April 09 growth pegged at 13.32% yoy while on a m-o-m basis, prices increased by Rs2 to Rs249/bag. South and North witnessed price increase of 3.85% and 2.49% to Rs262 and Rs246/bag respectively while prices fell in Eastern and Western regions by 2.25% and 2.07% respectively.

During the month of Apr 09, International coal prices witnessed a yoy decline of 42.55% to USD62.4. International coal prices are now down 65% from peak levels witnessed in July 08. However on a m-o-m basis, international coal prices had risen by 6.76%. As on 15th May 09, international coal prices were ruling at USD 58.8/ton.

With the onset of monsoon, we expect cement dispatches and prices to witness some softening. Based on our cement demand growth assumption of 6.9% for FY10E, we expect cement dispatches to fall by around 10% qoq this monsoon (July September 22009) and cement prices to fall by 4.3% -5.3% i.e. Rs10-13/bag to Rs232-234 (for details refer our Sector update ‘Monsoon trends’ dated 11th May 2009). We further assume the prices to continue to decline to Rs220 by Mar 10. However even in this case the cement price for the year would average Rs230/bag for FY2010. In our earnings estimates for cement companies we have factored in FY2010 average cement prices of Rs230/bag. Consequently we see little risk of downside to our earnings estimates for cement companies. We maintain positive view on the sector and our top picks are ACC, Ambuja, Ultratech, India Cement and Shree Cement.

To see full report: CEMENT SECTOR


GCPL's 4QFY09 results above estimates: Net sales grew 26% YoY to Rs3.4b (v/s our estimate of Rs3.1b). Gross margin declined 850bp YoY to 49.1% (up 760bp QoQ). However, lower ad-spend (510bp) pushed EBITDA margin up to 19.3% (14.1% in 3QFY09) v/s our estimate of 18.3%. Adjusted PAT grew 45% YoY to Rs594m (v/s our estimate of Rs473m) on higher interest income and lower tax rate (290bp).

34% volume growth in toilet soaps: Toilet soap volumes grew ~34% YoY (17% in 3QFY09), while realizations increased 12%; Godrej No 1 has been key growth driver. We believe competitive intensity could increase in the category, as the market leader HUL tries to regain market share.

Hair color sales reflect revival post multiple initiatives in 3QFY09: Hair care sales increased 20% (volume growth ~13%), as benefits of the trade push and price increases got reflected. In 3QFY09, the company had increased prices by 11%, of which 6-7% was passed on to the trade as additional margins. The management aims at increasing market share in Hair Color through new launches (in premium segment) and increasing its distribution reach.

Keyline and Rapidol sales de-grow; Kinky reports Rs23m loss during 4QFY09: Keyline (15% of consolidated sales) reported sales de-growth of 8% YoY to Rs435m and adjusted PAT growth of 6% YoY to Rs35m. Rapidol reported sales of Rs109m (down 3% YoY) and adjusted PAT of Rs17m. Kinky operations continued to disappoint, with net sales of Rs107m (v/s Rs407m in 9MFY09) and loss of Rs230m.

Revising EPS estimates by 14%; maintain Buy: The company plans to expand its distribution and exploit synergies with other FMCG companies of Godrej Group which will enable it to accelerate growth in coming years. The management is confident of margin expansion in 1HFY10 (low cost forward cover for palm oil) although international operations are likely to remain under pressure. We are revising our EPS estimates by 14% for FY10 and 11% for FY11 to factor in stronger volume growth. The stock trades at 17.5x FY10E EPS and 15.1xFY11E EPS. Buy.



Our view
Since mid-March, we have had a 50% solvency/50% reflation model portfolio. We stay focused on HK/China banks, property, plantations and coal for the summer. The summer sweet spot we believe lies in overlooked ‘Bad’ stocks – adequate solvency and inexpensive. We highlight our best ideas in this report.

Anchor themes
The default risk reduction rally (brought to you by governments) is over. A muted sequential recovery rally is now to come, in our view. Unlevered Asia will receive Western liquidity. Differentiation will be prominent.

We highlight leveraged plays which have run up – we would take profit. We think it is time to take profit in the ‘Ugly’ stocks as phase 1 of the rally is over (QE I). QE II is ahead. The only bear case is when CBs tighten. This is premature, in our view.

Good, Bad and Ugly
May 2009

Themes: Good, Bad and Ugly since 9 March
Asia ex-JP: Least expensive region globally; should it trade at a premium?
Australia: Run-up in expensive market. Now priciest market in Asia. SELL.
China: ‘Ugly’ has same value as ‘Bad’. So, SELL the ‘Ugly’. BUY the ‘Bad’.
Hong Kong: Least difference between the three groups: SELL the ‘Ugly’.
India: Poor value in ‘Good’ stocks. Good value in the ‘Bad’. BUY the ‘Bad’.
Indonesia: Tremendous run. Isolated pockets of value. TAKE PROFIT.
Korea: Little differentiation between ‘Ugly’ and ‘Bad’. BUY ‘Bad’. SELL ‘Ugly’.
Malaysia: Plantations are still inexpensive. Small caps are good value.
Singapore: Rational market. Difference smartly exploited. Resources inexpensive.
Taiwan: Only market with no difference between Bad & Ugly. BUY ‘Bad’.
Thailand: Great run. Market still inexpensive. BUY the oils.

Also inside
Doing a sector-wise analysis of the ‘Good, Bad and Ugly’, we find value by searching out the most attractive sectors throughout Asia. We see Telecoms as the most interesting sector in Asia for value (page 5).

We compile a list of ‘Ugly’ stocks that have run the fastest and are now expensive. These would be our candidates for taking profit (page 5).

Global signals for equities: Bullish, Neutral or Bearish?

To see full report: MULTI STRATEGY