Friday, May 29, 2009


India Cements is the third largest cement group in India with a capacity of 10.1mmt spread across seven manufacturing plants in the states of Andhra Pradesh and Tamil Nadu. Its cements are sold in south India under the Sanskar, Coromandel and Rassi brands, whcih have strong brand equity in that market.

The Company has revived its Shipping business with the purchase of two ships(Dry bulk carriers) with a total capapcity of 79843 DWT which will be primarily utilized for captive movement of coal and other rae materials also to partake in the upswing in the shipping industry.


The overall outlook for the back of robust demand from housing construction, phase-2 of NHDP and other infrastructure development projects. Domestic demand for the cement has been increasing at a fast pace in India.

The cement sector is expected to witness growth in line with economic grwoth because of strong co-relation with GDP.

The industry had installed capacity of 212mn tonnes in last financial year, while consumption was 176mn tonnes. Cement companies have added nearly 7mn tonnes capacity in April, taking the total installed level to 219mn tonnes. According to the Cement Manufactrurers' Association, the UltraTech/Grasim combine led the way with 4.5mn tonnes, followed by Damia Cements with 2mn tonnes of cement capacity is scheduled to come on stream by the end of FY10.

To see full report: CEMENT SECTOR



■ Firm arrangements with HPCL, BPCL & IOC for product off-take of 7 million tonnes and infrastructure support from these companies provide a strong foothold in the domestic market.

■ Retail outlet reactivation started from Q#FY09. Retail sales for the quarter January to March 2009 stood at 264,421 KL, a 253% jump over the Q3 sales of 74998 KL.

Outlook and Valuation

Going ahead, the performance of the stock will be greatly leveraged to progress on refinery expansion, refining margins & news flow on E&P business. Based on the assumption of crude oil prices at the levels of USD 50/ barrel for FY10E and USD 55/ barrel in FY11E from the current level, the stock is trading at a forward P/E of 19.36xFY10E and an EPS of Rs.9.2xFY10E.Based on the above mentioned assumptions the target price is Rs.167 (18 P/E + E&P).

To see full report: ESSAR OIL



■ Generation at 57BU, higher by 6% yoy while average realizations were higher by only 0.7% yoy

■ Gas plants registered PAF of 84% due to lack of availability of gas and forced outages.

■ Revenues higher by 14% yoy to Rs 114bn against Rs 100bn in the corresponding period last year, due to higher fuel cost.

■ Adjusted PAT de-grows 32% yoy to Rs17bn against Rs25bn last year

■ Commissioned 1GW during the year and plan to commission 3.3GW during Fy10

■ Most expensive utility, trades at 2.8x FY10E book, re-iterate SELL with an increased target price of Rs181/share, representing 15% downside.

To see full report: NTPC


EM Equity Flows: Inflows of $2.5bn

• Dedicated EM equity funds had aggregate inflows of $2.5bn for the week ended 05/20/09, compared to inflows of $3.6bn in the prior period. The pace of flows into dedicated EM funds suggests a swift move towards optimism after a period of very negative sentiment during 2H08 – 1Q09. We have now had 10 consecutive weeks of net inflows out of the last 10 weeks. We are therefore above the 8-of-10 weeks net inflow mark that has been associated with pullbacks
in the past. The two most recent episodes when flow momentum reached these levels were June-08 and October-07, providing good sell signals

• The EM benchmark is 66% above its 27th October low ad on a relative basis only 3% away from establishing a new high vs MSCI World. The resumed outperformance of EM to DM is supportive of such flows and validates our belief in the resilience of the secular bull market in EM equities. Although there remains upside to our MSCI EM year-end price target of 810, we continue to think that the risk-reward near term no longer warrants a fully invested position.
In our 22nd March report we advised clients to take some profits and reduced our equities overweight recommendation from maximum 10% position to 6%, raising some cash

• Technically we are 2.0 SDs overbought (vs. 3 month average) versus -3.0 SDs oversold last October. Prices have risen very rapidly and valuations are also not as attractive vs. just a few months ago. MSCI EM trailing P/B is currently 1.9x, up from 1.1x at the October market trough. MSCI EM is currently valued at 12.6x 2010E P/E

• This week we updated our country quants model recommendations. We are running lower risk positions in our country quant model as valuations converged significantly in the last month. Overweights are China, Taiwan, India, Malaysia and Israel. Underweights are Mexico, Indonesia, Thailand, Argentina and Philippines

• There is only 8% upside to our 810 MSCI EM price target through December 2009

To see full report: EM EQUITY FLOWS


No “Sell in May”

The bulls are back
Investors are now positioned for global economic recovery according to the May FMS. The unrelenting gloom of a mere three months ago has been replaced by fairly typical early-cyclical sentiment, with the only hint of potential irrational-exuberance in Emerging Markets. Real economic data now needs to satisfy consensus expectations but the May FMS does not say “Sell in May”.

Surging optimism on macro outlook and corporate profits
Optimism on global economic growth surged with a net 57% of panellists expecting a stronger economy- the highest reading since early-2004. And for the first time since March 2005, investors expect corporate profits to improve in the next 12 months, with over a quarter of respondents forecasting EPS growth to exceed 10%.

All regions seeing optimism (even Europe. . .)
Global growth optimism remains founded on China with two-thirds of investors expecting strength. However, even the final recessionary holdout has turned pro-growth with a net 35% of fund managers expecting Europe’s economy to improve, compared to a negative 26% last month.

Rising risk appetite but asset allocators hedge bets
The BAS-ML Risk & Liquidity composite jumped to the highest level since Nov 2007, with investors cutting cash balances to 4.3% (from 4.9% last month and a recent peak of 5.5%). However, asset allocators are still hedging their bets: they remain U/W equities (-6%) and have only marginally lowered cash O/W (+21% from +24%). A brief 9-month sojourn into bonds ended with allocators cutting to a net 3% U/W. They stay U/W Europe & Japan, but a record net 40% of investors see GEM as the region to O/W for the next 12 mths.

Defensives hacked back
Investors’ top 3 global sectors are now technology, energy and materials as May saw a rout in defensive sectors: pharma fell to -2% from +21%, staples -1% from +9%, and utilities -19% from -15% (now the most U/W global sector). The stubborn bank U/W was further reduced to its lowest level since June 2007.

What happens next?
Markets in H1 were all about extreme positioning & policy. With positioning now more balanced, markets in H2 will be driven by the economy & earnings. The FMS says the market grinds higher via asset allocation moves and pressure from the ongoing U/W in global banks. The grind lower risks revolve around weaker Chinese/EM data. Contrarian trades to mull over are long Europe/Japan, short EM/China; long pharma/utilities, short technology/materials.

To see full report: FUND MANAGER SURVEY


Reasons for Upgrade

• Grasim’s Cement division led the show in Q4 FY09 by delivering an impressive performance, while the company’s VSF division showed some signs of a recovery, with its volumes and margin increasing sequentially

• Going forward, we expect an increase in Grasim’s cement volumes on account of the commencement of its new units and higher demand from the infrastructure space.

• We also expect the VSF division’s realisation to improve and margins to recover, due to a reduction in pulp costs, product mix shift, and various cost reduction measures to be implemented by the company

• Moreover, the sale of its loss making Sponge Iron Division will help the company focus on its core business

The Story...

Grasim Industries Ltd.’s (GRASIM.IN) (GRAS.BO) Cement division led the show in Q4 FY09 by delivering an impressive performance, while the company’s VSF division showed some signs of a turnaround, with its volumes and margin increasing sequentially. Net sales for Q4 FY09 came in at Rs.29.3 bn, up 6% Y-o-Y, while the EBIDTA margin remained flat Y-o-Y at 24.7%, due to higher volumes and increase in productivity of the Cement division. Volumes and realisation of the Cement division were up 13% Y-o-Y and 6% Y-o-Y respectively, while volumes and margin of the VSF division increased by 22% sequentially and 16% sequentially. However, the company’s Proforma Net Profit for the quarter declined 13%, on account of an increase of 33% Y-o-Y and 42% Y-o-Y in depreciation and interest charges respectively, due to the commissioning of several new projects, the benefits of which will be fully reflected in the current year. Despite the impact of the economic slowdown, Grasim recorded a growth of 33% in its cash profit for the quarter, on account of a decline of 66% in the tax rate.

Going forward, we expect an increase in Grasim’s cement volumes on account of the commencement of its new production units and higher demand from the infrastructure space. We also expect the VSF division’s realisation to improve and margins to recover, due to a reduction in pulp costs, product mix shift, and various cost reduction measures to be implemented by the company. Moreover, the sale of its loss making Sponge Iron Division will help the company focus on its core business. We now upgrade Grasim from ‘Moderate Underperform’ to ‘Market Perform’.

Financial Highlights

Revenue growth
Grasim’s net revenues increased by 6% Y-o-Y to Rs.29.3 bn, due to an impressive growth of 21% in revenues of the Cement division. In Q4 FY09, 70% of the company’s revenues came from the Cement division, 25% from the VSF & Chemical division, 5% from the Sponge Iron division, and less than1% from the Textile division.

Going forward, we expect an increase in Grasim’s cement volumes on account of higher demand
from the infrastructure space, as well as rural regions. Moreover, the VSF division is expected to
witness an improvement in its realization in the coming months.

Cost Analysis
■ Raw material expenses & purchased goods increased by 6.9% Y-o-Y to Rs.8.2 bn, while, as a
percentage of sales, it was up merely 21 bps Y-o-Y to 28.1% in Q4 FY09. Going forward, the softening in raw material prices will have a positive impact on the company’s operating costs.

■ Power & fuel expenses rose 10.6% Y-o-Y to Rs.4.8 bn and, as a percentage of sales, was up
68 bps Y-o-Y. The benefits of the decline in imported coal prices were reflected in the company’s performance in Q4 FY09. Imported coal prices are expected to decline further in FY10E.

■ Freight & handling costs were up 15.7% Y-o-Y to Rs.3.4 bn in Q4 FY09 and, as a percentage

of sales, increased by 96 basis points Y-o-Y. However, the commencement of Grasim’s new
cement capacities across various regions will lead to a decline in the company’s Freight &
Handling costs.

■ Personnel expenses declined 10% Y-o-Y to Rs.1.4 bn in Q4 FY09, thereby easing the

pressure on the company’s operating margin.

Margin Analysis
■ The EBIDTA margin remained flat Y-o-Y, but improved by 478 basis points sequentially in Q4 FY09 to 24.7%, on account of a decline of 367 basis points and 128 basis points in Power & Fuel and Personnel expenses, as a percentage of sales, respectively.

■ The EBIT margin improved dipped 89 bps Y-o-Y to 20.4%, due to a sharp increase in depreciation charges, as the company commissioned new projects in the year.

■ The Net Profit Margin (NPM) declined 184 bps Y-o-Y to 13.1% in Q4 FY09, due to a rise of
42% Y-o-Y in interest cost, as a result of higher debt level.

To see full report: GRASIM INDUSTRIES


Singapore Access Forum

We hosted nine Indian mid-cap companies at the CLSA Corporate Access Forum, Singapore over May 20-23, 2009. In general, the companies said that they are seeing signs of an improvement in demand environment and with the liquidity scenario having improved, most corporates are pushing ahead with ongoing projects and reviving expansion plans. Companies believe that in the
near-term, the economic environment will remain challenging and will continue to focus on various cost saving initiatives that have been undertaken. Our top picks in the midcap space are Educomp, Godrej Consumer, Exide and Shree Cement.

Corporates witnessing sequential improvement
Most companies that presented in our forum were of the view that there are visible signs of revival in the domestic demand.

The outcome of election and a likely stability in government/economy has raised hopes of a much better FY10 than what it was before the elections.

The companies were appreciative of government efforts during last year towards keeping the economy on a growth path despite a global slowdown through various initiatives viz. farm waiver scheme, support prices, pre-election spending, pay revisions etc.

While the companies are looking forward to similar initiatives by government in the coming months, deteriorating fiscal balance did come out as a concern in our interactions with these corporates.

Mixed view on near-term outlook; different growth strategies
The companies are generally cautious on near term outlook and have stressed upon the various self-help cost saving initiatives that have been undertaken. Godrej Consumer, JSW Steel expect international businesses to remain under pressure and expect a better performance from the domestic operations. Interestingly, Mindtree is already seeing some traction in financial services in Europe and manufacturing and Hi-tech in US.

Tulip Telecom and Financial Technologies viewed regulatory action as a key risks while Godrej Consumer viewed rising commodity prices (crude, palm etc from the bottom) a potential threat in 2HFY10.

JSW Steel, which benefits from rising commodity prices, stated that the company is already witnessing an uptick in pricing and believes that the worst is over in commodity (steel) cycle.

Expansions to continue as per schedule; easing liquidity helping
The government action has improved the liquidity situation and the availability of funds to the corporate sector.

JSW Steel is going ahead with the existing expansion plans while Unitech, Educomp are working on new projects - thanks to the improvement in availability of funds.

Companies upbeat on long term India potential (Godrej Consumer, Aditya Birla Nuvo, JSW Steel) are working on to scale up distribution channel in India.

Ranbaxy and Financial Technologies are planning to expand footprints in newer geographies outside India.

Top midcap picks: GCPL, Educomp, Exide, Shree Cement
The positive election outcome has helped boost investor sentiment, but the sharp rally in the market has made investors hesitant to aggressively add their exposure to Indian equities, particularly the high beta names that have run the hardest.

An early revival in confidence will augur well for a 2H FY10 recovery, but this appears priced in to a large extent; the Sensex is near our 12m target of 14,000. Clearer signals on fiscal consolidation and revival in private investment will be prerequisites for the next leg-up for the market.

In this backdrop, we would recommend a high quality filter for investment into midcap stocks; we are also biased towards domestic plays with high earnings visibility. Our picks from forum are Godrej Consumer, Educomp and also prefer Exide and Shree Cement in the mid cap space.

To see full report: MARKET STRATEGY



Housing Development & Infrastructure’s (HDIL) Q4FY09 results were dismal, with revenues and PAT dipping 63% YoY and 91% YoY to Rs3.6bn and Rs619mn respectively. PAT was in line with our estimates, but EBITDA margin dropped sharply to 27%, the lowest in the past eight quarters. During March-April ’09, HDIL launched 2mnsqft of residential projects (75% booked). The company is mulling 3-4mnsqft residential launches in Mumbai in the next three months. The Mumbai slum rehabilitation scheme (SRS) is progressing well. The Board has approved raising up to US$600mn and allocating warrants to the promoters. We believe cashflow infusion would reduce the strain on balance sheet, bringing down the gross D/E from 0.9x to <0.5x> airport SRS and provide capital for new launches. We upgrade HDIL to BUY from Hold with Rs355/share target price (on 20% discount to one-year forward NAV of Rs443/share). HDIL is trading at FY10E & FY11E P/E of 15x & 12x respectively with FY10E P/BV of 1.7x.

Revenue & margin contraction. HDIL’s Q4FY09 revenues dipped 63% YoY (up 14% QoQ) to Rs3.6bn – Rs1.3bn was booked from sale of 1mnsqft TDRs and Rs1bn from FSI sale in Malad slum rehabilitation project; income from booking of Grande and land sales contributed the rest. EBITDA margin dropped to 27% versus 45% in FY09 due to lower TDR price and higher operating expenses on a reducing topline.

Strong demand in recent project launches. HDIL launched 2mnsqft of residential projects during March-April ’09 at ~30-20% discount to the market price, generating >75% bookings. The company is mulling launches of 3-4mnsqft residential projects in Mumbai in the next three months. Volumes have picked up in the TDR market, with HDIL selling 1mnsqft in Q4FY09 versus 0.3mnsqft in Q3FY09. As per the management, TDR prices have picked to Rs1,400-1,500/sqft (35% rise from the bottom). However, we have factored in Rs1,250/sqft TDR price for FY10E.

Capital infusion to help ease debt burden. HDIL is planning to raise capital through equity dilution and warrants. As per the management, the capital raised will primarily help reduce debt; future growth would be funded only via internal accruals. This will be positive for HDIL and reduction of gross D/E from 0.9x to <0.5x> balance sheet strain and bring down the rising interest burden. It will also reduce funding concerns in Mumbai airport SRS, a key long-term value driver. HDIL intends to focus on projects which have immediate cash inflow visibility; long-duration projects such as special economic zones are on hold till conditions improve.

To see full report: HDIL


High-dividend-yield stocks offer a safe haven to investors where safety is of greater priority compared to high returns. So, even if the market remains volatile, going ahead, an investor can still get a decent return on investment, thanks to good dividend yielding stocks. The dividends are paid no matter what direction the stocks move and can provide a higher yield on investment in a weak market.

To see full report: DIVIDEND YIELD STOCKS


Event update: Management change; Daiichi takes charge

Ranbaxy has announced that Mr. Malvinder Singh has stepped down from the positions of Chairman, CEO and Managing Director from immediate effect. While Mr. Tsotomu Une (Daiichi-Sankyo nominee) will take over as the Chairman of the board, Mr. Atul Sobti (erstwhile COO) will be the new CEO and M&D. This marks a new phase in Ranbaxy’s relationship with Daiichi Sankyo (Daiichi) and is indicative that Daiichi has now decided to take more direct control of the business. On the analyst call, the new Ranbaxy management team indicated that this change will accelerate the integration of the Ranbaxy into the Daiichi fold and accelerate the realizations of synergy benefits. While the company did not share specific details of the likely benefits, they hinted at potential cost savings from outsourcing of Daiichi’s manufacturing and R&D operations as well as penetrating the Japanese generics market as some of focus areas. Company also indicated that the management change may help in influencing the FDA’s decision making process with respect to the warning letters. On a negative note, there seems to be some uncertainty over the fate of Ranbaxy’s potential FTF status on the pending applications as the FDA will individually review each ANDA application. At this point of time, there is limited clarity on the timelines for the resolution of warning letters as also the Ranbaxy’s FTF status for different molecules. Given that Ranbaxy FTF status across multiple products is probably the most critical element of its growth strategy over the next few years, this uncertainty is a concern. In our view, the likely synergy benefits of Daiichi – Ranbaxy combination are likely to be realized only over the medium term and offer limited upsides in the near term. Even a quick resolution of the USFDA ban is unlikely to have any material impact on the CY09-10 earnings as Ranbaxy will find it extremely difficult to regain lost market share in a highly competitive US generics market. We reiterate our Underperformer call given the uncertainty on the business outlook across geographies including US and Ranbaxy’s extremely rich valuations (20x CY10E EV/EBITDA excluding Rs60/share of FTF value).


■ Malvinder Singh steps down from the company

Malvinder Singh, Ranbaxy’s erstwhile Chairman, CEO & MD has stepped down. As per the initial agreement, Malvinder was supposed to the CEO and MD of Ranbaxy for five years so this exit even before the expiry of the first full year is a bit surprising. In our view while the agreement to have Malvinder Singh continuing to lead Ranbaxy for 5 years despite selling out his stake was quite intriguing per se, his sudden exit is also surprising. While the management has denied it, we believe it is a reflection / consequence of the myriad challenges that Ranbaxy has been battling over the last few quarters.

■ Daiichi takes more direct control of the company; Atul Sobti to be the new CEO and MD
In a clear indication of its intent to take more direct control of operations, Daiichi Sankyo has appointed Mr. Tsotomu Une – a member of Daiichi’s board – as the head of the Ranbaxy’s board. At the same time, Ranbaxy’s erstwhile COO, Mr. Atul Sobti has taken over as the new CEO and MD of the company.

While there has been a steady attrition in Ranbaxy’s ranks over the last few months, the new management has not ruled out further personnel changes. Nevertheless, Daiichi and Ranbaxy remain very confident in the ability of the current management team to deliver despite the odds.

■ Ranbaxy expects accelerated realization of synergies in the new set-up
Additionally, the management has clearly stated that it would retain Ranbaxy as an independently listed company with a combined operational strategy of being an innovator as well as generics major. This may be a dampener for investors who have looking for a potential open offer from Daiichi as it seeks to “average” its cost of acquisition.

Penetrating the Japanese generics market will be key focus area for the integrated entity. With strong prospects of “genericization” in the Japanese market, Daiichi will aggressively look at launch of generics products by Ranbaxy in Japan. Ranbaxy can benefit from Daiichi’s strong image and presence in the Japanese market. The potential opportunity for generics in Japan remains large as demonstrated by the robust performance by Lupin’s Kyowa acquisition. Ranbaxy is hopeful of building up of “several hundred million dollar generics business” in Japan and this does remain one of the biggest potential upsides from this deal.

To see full report: RANBAXY LABS