Tuesday, June 2, 2009



After a strong gap-up opening today the markets have given up all the gains and filled the bullish gap. The Nifty has taken out a strong resistance of 4510 on the upside, which is a positive sign for the market.

The Nifty had formed an inverted head & shoulder pattern, which has already achieved its aggressive target of 4420. On the daily charts, the Nifty has the 20DMA and the 40DMA
at 3997 and 3748 respectively, which are crucial support levels. The momentum indicator is trading in the positive zone and has given a positive crossover.

The market breadth is positive with 974 advances and 275 declines. On the daily charts, support at 4300 and strong resistance at 4600 are indicated.

On the hourly charts, the momentum indicator has given a positive crossover and is trading in the positive zone.

Of the 30 stocks of the Sensex, Bharti (down 3.5%) and ICICI Bank (down 2%) are the top losers. ICICI Bank is looking negative and is likely to test Rs650 on the downside with strong resistance at Rs750. Of the sectors, the banking sector is looking negative and is expected to move downwards.

To see full report: HIGH NOON


OMCs to depend on bonds despite reform; govt likely benefits most

Enthusiasm on potential pricing reforms has lifted OMC stocks
The stocks of Indian oil marketing companies (OMCs) have moved up sharply in the last few weeks on media reports (e.g., Reuters) suggesting that the government could free up auto fuel pricing up to oil price of US$75/bbl, (without reforms in cooking fuels). Though the petroleum minister is yet to take office, the government has remained noncommittal on this issue; as such, we remain unconvinced about the reforms actually happening, but take a look at how the OMCs would be impacted by potential reforms.

Partial reforms may not help OMCs; gov't likely main beneficiary
We believe that deregulation of only auto fuels may not boost the earnings of OMCs, since oil bonds and upstream payments would still remain critical for them due to large losses from cooking fuel sales. We find it hard to believe that the government would issue a large quantum of oil bonds to increase OMC profits and add to the fiscal deficit in the process. Collection from any windfall tax on oil producers would also likely be less than cooking fuel losses. Hence, we believe that partial reform would improve cash flows of OMCs but may not impact earnings.

The government could be the biggest beneficiary from this, in our view, as it would likely look to reduce issuance of oil bonds and also potentially increase upstream subsidy burden. We also believe that private refiners (RIL, Essar) could be included in the subsidy scheme going forward, rather than the government initiating pricing reforms to encourage private participation in domestic petroleum retailing.

With stock prices moving on expectations of reforms and oil price rising, significant scope for disappointment going forward
With hardly any impact on earnings on OMCs likely from partial reforms and the recent run-up in these stocks, we believe there is scope of disappointment in these stocks in the near term. Moreover, rising oil prices could make partial reform itself unlikely. We believe this sentiment-driven rally in OMC stocks is unlikely to get fundamental support.

Neutral on OMCs on lack of policy direction; move out on rallies
We remain Neutral on IOC, HPCL and BPCL with P/B-based 12-m TPs of Rs415, Rs260, Rs325, respectively, as we wait for some policy direction from the gov’t. We believe investors should reduce positions on any news flow-driven rally in the run-up to the Union budget in early July.

To see full report: OIL SECTOR


Another Stock Placement

Quick Comment: Due to a strained B/S (being repaired) and large stock pledges (promoters), the market has been concerned about stock overhang. While we were not expecting it, the promoters have announced a stock placement. Positives such as strong RE Power results and guidance, successful renegotiation of the bulk of its CBs, potential for better domestic credit conditions, and likely higher domestic infrastructure investment are being partially negated by
weak Hansen results and potential stock overhang from second promoters’ sale of $120mn (after selling $45mn two weeks ago). While the future risk of dilution from a primary stock offer or overhang from secondary sale cannot be ruled out, we believe that the restructuring of the remaining debt, potential stake sale in Hansen, and new order wins are likely to serve as positive catalysts.

What's new: Suzlon’s negotiations with Martifer to delay the last payment of €175mn (Rs11.4bn) for acquisition of RE Power have been unsuccessful. To raise cash, promoters are in the process of selling 4%+ of Suzlon stock to raise ~Rs5.5bn. Proceeds will be loaned to Suzlon (via Inter Corporate Deposits). Furthermore, Suzlon has secured a new credit line to draw down an additional Rs6bn. Proceeds from these two borrowings will be used to pay Martifer.

What we like: First, a solution to Martifer payment via this route compared with issuance of new shares at Suzlon avoids dilution to existing shareholders. Second, uncertainty regarding payment to Martifer is eliminated.

What we do not like: First, we are concerned about the frequency of the promoter sell-downs. Unless promoters assure the market that there are not going to be further disposals, it is likely to create a significant overhang. Second, a disposal of a partial stake in Hansen to reduce acquisition debt may have been a better strategic alternative. Potentially freeing up debt capacity, it may have allowed it to raise bank debt for full payment. Third, we are concerned about the timing of stake sales during a period when the market is awaiting its FY09 results and the results of its debt restructuring.

To see full report: SUZLON ENERGY


Three major changes in country preferences — First, China has gone from one of the most overweight markets in February to 25bp underweight. Second, the underweight in Taiwan has narrowed by 100bps to the smallest in thirteen months. Third, Indonesia has moved from Neutral to Top-2 most overweight markets at Asian funds. Historically once the consensus moves a country from neutral to Top-2 it outperforms the region by 1000bps in the next six months.

Asian funds no longer hold a defensive portfolio — Asian funds’ overweight in Consumers has fallen from 516bps in October 2008 to the current 195bps. Telecom has now become a consensus underweight (previously the biggest overweight when markets tumbled). Asian funds are now moderately underweight Technology compared with a 430bp underweight at the 2007 market peak.

GEM funds the potential source of additional liquidity — With the resumption of strong inflows to Asian funds since the first week of March, yet cash weights remain at 2.9%, they are fully invested in our view. GEM funds, by contrast, see cash levels at 3.7%. With GEM funds still largely underweight Asia, and taking in more new money than Asian funds (65% more this week), by the time they unwind their position it could provide further liquidity to the region.

Inflows to Asian funds decrease for the second week to 2-month low — In particular, China fund inflows drop to US$19m vs. US$484m/week in the previous month.

To see full report: FUN WITH FLOWS


Iron Ore – Closing the Circle

Chinese Iron Ore Imports Surge — Iron ore imports are up 25% YTD. Yet steel production is up a more modest 3%. The explanation is falling domestic production and inventory accumulation.

Supply Demand Reconciliation Only Partial — The supply demand balance for the first five months highlights two concerns. Firstly annualized crude steel production (510Mt) is well above our forecast for the year of 485Mt. Secondly, reported domestic iron ore production (677 Mt) and required supply of iron units (after imports and stock changes) implies a further fall in ore grade to 20% from 23% in 2008. However, it would be reasonable to believe that grade is increasing, given the 100 Mt production cut. We conclude that unreported inventory continues to build, perhaps by 30Mt.

Contract Price Settlements; China Will Probably Follow — We think it most likely that China’s steel mills will follow the contract benchmark settlements agreed between Rio Tinto, the JSM and Posco, although perhaps only following further drawn out negotiations.

China’s Options — As we see it China’s steel mills (led by Baosteel, with CISA as a strong voice) have four options: 1) settle in line with the JSM; 2) no settlement – as much as half China’s imports are priced on spot anyway; 3) negotiate a lower price – this would put Rio Tinto in an untenable position; 4) agree but on a short-term basis, with the provision to renegotiate quarterly. We would attach the highest probability to option 1.

To see full report: COMMODITY HEAP


It's All About the Risk Premium

Stable government doesn’t alter fundamentals much — While competition will keep coming and is the key driver of subdued elasticity assumption in FY10E (3% MOU growth for 21% rev/min decline), a sharper-than-expected recovery in economic activity could improve that. No changes likely to 3G/MNP policy but M&A norms could be relaxed. Since it's early to factor the positives in numbers, the target revisions are solely a result of 50-100bps reduction in country risk premium.

Bharti – MTN offsets some of the India re-rating; still a Buy — Raising our target price to Rs930 based on WACC of 11.3% (from 12%). The lower WACC is due to a reduced risk premium though we add back 50bps for the perceived higher risk post-MTN. Dilution of India-centric play, and not the 4-5% EPS dilution, is a bigger issue for India-bound flows. However, MTN related overhang offers long-term entry points given Bharti’s execution track record and cheaper valuations (15x) relative to market (17x).

RCOM – Sell, Risk in vogue again, but fundamentals lagging — We reduce RCOM’s discount on Bharti’s target EV/E to 15% and value it at Rs270 based on EV/E of 7.8x FY10E. However, we eliminate any value from towerco (Rs26 earlier) to reflect the low visibility of tenancy. The jury is still out on GSM’s ability to drive faster growth; sustenance of traffic share post the free mins is key challenge.

Idea – M&A/cleaner play? but don’t compromise on valuations — Inclusion in MSCI, cleaner play (post Bharti’s MTN agenda) and M&A talk could benefit Idea. However, smaller scale and relative vulnerability (should competition worsen) means too much compromise on valuation is risky. Axiata open offer (if at all) would be factored in at Rs90-100. Downgrade to Sell with TP of Rs80 on EV/E of 7.8x and towerco at Rs21 .

To see full report: INDIA WIRELESS



• Mahindra & Mahindra (M&M) Q4FY09 results have been better than our estimates primarily on account of the inclusion of Punjab Tractors performance which has been amalgamated with the company from Q4FY09. Hence, the results are not comparable on a yoy basis.

• Net sales grew by 15.5%yoy to Rs36.4bn (we saw Rs33.8bn). While automotive revenues grew by 6%yoy to Rs21.9bn, the farm equipment segment (FES) revenues (including Punjab Tractors and hence strictly not comparable yoy) grew by 48%yoy to Rs14.5bn. The company was able to grow its UV volumes by 5%yoy during the quarter despite a challenging macro-environment primarily due to the strong demand for the newly launched Xylo as well as a sustained demand for the Bolero during the quarter.

• EBIDTA Margins at 11.1% were marginally higher yoy (10.9% in Q4FY08) and substantially higher qoq (8.8% in Q3FY09). Operating margins have been adjusted for the octroi benefit of Rs179.5mn received and the forex gain of Rs1.4bn (pre-tax) during the quarter. On a segmental basis, auto segment margins during the quarter were at 8% (against 10% in Q4FY08 and significantly better than the loss of Rs104mn in Q3FY09) while the FES segment margins were at 11% (against 14.5% in Q4FY08 and 10.7% in Q3FY09).

• Profit on sale of shares from Swaraj Mazda of Rs383.6mn included in other income has been treated below the line
as an exceptional one time gain. Adjusted for these extra-ordinary items, PAT for the quarter was at Rs2.8bn.

• M&M’s FY09 consolidated operating income grew by 12%yoy to Rs268bn on the back of 14.4%yoy growth for the
standalone company as well as strong performance by its key subsidiaries including Tech Mahindra (19%yoy growth in revenues) and Mahindra Finance (13%yoy growth in revenues). Margins for the full year were at 13.7% while PAT for the year declined 19%yoy to Rs14.7bn. The full year profits for the group were severely impacted by the downturn in the automotive and auto-component sector across the world.

Introducing FY11 estimates: We have assumed 10% UV volume growth driven by new model launches and a recovery in tractor volumes (9%yoy growth) for M&M in FY11E. On a consolidated basis, we expect M&M to post 8% CAGR in earnings over FY09-11E, translating to an EPS of Rs60.3 in FY11E.

To see full report: MAHINDRA & MAHINDRA


Tax write-back improved the PAT

Q4FY09 Result: Tata Chemicals’ (TCL’s) consolidated net sales have indicated a growth of 29.7% YoY to Rs18.9bn (our expectation was Rs21.2bn) on the back of 29.0% and 30.3% growth in inorganic chemicals and fertilizers segment, respectively. Sales from inorganic chemicals grew due to contribution by General Chemical Industries Products (GCIP, Rs3.2bn). Fertiliser sales increased mainly on account of an increased contribution from urea, which has been partially set-off by the shut down of a phosphatic fertiliser plant for part of the quarter due to fertiliser price volatility. Urea production has shot up to 3.1lac tonnes (up 8% YoY) on account of additional production due to de-bottlenecking of the urea plant.

TCL’s adjusted consolidated PAT grew by 63.4% YoY to Rs1.9bn (against expectation of Rs1.3bn) mainly due to tax refund of Rs465m taken in GCIP and further tax credits taken in other operations. EBIT de-grew by 47.5% to Rs0.7bn due to losses in the fertiliser business due to the shut down of phosphatic fertiliser business and its fallen prices.

Outlook: TCL witnessed demand destruction in the soda ash business in H2FY09. Management expects that the soda ash market could recover from the beginning of 2HFY10. Domestic soda ash prices and demand is stable now due to introduction of anti-dumping duty and stable demand from detergent market. Global slowdown in the flat glass demand affected the demand in US and Europe. We have considered a 15% decline in the soda ash price and 12%
volume decline in our FY10E estimates. Urea business is expected to perform well. TCL is planning to shut down their operation of Netherland plant (Soda ash capacity of 3lac tonnes)

Valuation: Soda ash business outlook is weakening and also phosphatic fertiliser has not performed well due its fallen prices. Hence, we maintain our ‘Reduce’ rating on the stock.

To see full report: TATA CHEMICALS



• Q4FY09 standalone net sales were down 12.4%yoy at Rs11bn, sharply below our expectations of Rs14.6bn. The shortfall in revenues has been mainly on the back of reversal of Rs1.2bn of revenues recognized by the company’s JV with Naftogaz (total order worth Rs12.3bn) and cancellation of a construction order worth Rs3bn by the Karnataka Government (impact of ~Rs1bn). Further, the company’s revenues were also impacted by slower than expected execution of some projects in the electrical division and in the projects awarded by the Satyam Group.

• NCC-Naftogaz JV received an order of Rs12.3bn from Naftogaz Ukraine as a subcontractor pending the approval of the client for the subcontract. The client of the order didn’t approve the subcontractor JV of NCC- Naftogaz as a subcontractor and hence the order was cancelled. As a result of the order cancellation, NCC has reversed revenues of Rs1.2bn in 4Q FY09 along with the corresponding cost have also been reversed. NCC was entitled to a fixed profit based on percentage of revenues amounting to approximately Rs80-90mn, which NCC has retained in the

• Q4FY09 standalone EBIDTA declined by 23.4%yoy to Rs838m impacted mainly by the revenue shortfall (as explained above) as well as losses in the company’s own fixed price road BOT projects.

• Consequently EBIDTA Margin stood at 7.6%, down 110bps yoy, 120bps qoq against our expectation of 9.2%

• Q4FY09 standalone PAT stood Rs382m, down 27.4%yoy (we saw Rs612m)

• FY09 consolidated revenue was up 31.6%yoy at Rs47.9bn. EBIDTA was up 26.7%yoy at Rs5bn, implying an EBIDTA margin of 10.5% (against 10.9% in FY08). Consolidated PAT for FY09 was up 8.3%yoy at Rs1.8bn.

To see full report: NCC


Entertainment Network (India) Limited (ENIL) operates FM radio broadcasting stations through the brand Radio Mirchi in 32 Indian cities and is headquartered in Mumbai. ENIL has a wholly owned subsidiary, Times Innovative Media Limited (TIM), through which it operates its out‐of‐home media brand Times OOH and experiential marketing brand 360 Degree Experience. Its promoter, Bennett, Coleman & Co. Limited (BCCL), is the flagship company of The Times Group, which has a heritage of over 150 years and is one of India's leading media groups.

Quarterly Results ‐‐‐‐ Revenues below our Expectations
ENIL declared its Q4FY09 results which were below our expectations on the revenue front. Revenues were down mainly due to a fall in the advertising revenues because of slowdown in the economy. The company reported revenues of Rs. 99.6 cr in Q4FY09 as against Rs. 123.3 cr in Q4FY08 i.e. 19.3% fall YoY basis and Rs. 110.1 crs in Q3FY09, a fall of 9.6% on QoQ basis.

The company provided for doubtful debts worth Rs. 8.75 crs thus increasing the administrative expenses. The company also exited few of its properties thus resulting into a loss of Rs. 10.6 crs. ENIL reported an operating loss of Rs. 10.8 crs in Q4FY09 as against a profit of Rs. 21.2 crs in Q4FY08 and a profit of Rs. 0.3 crs in Q3FY09.

ENIL reported a net loss for Q4FY09 to the tune of Rs. 23.4 crs after minority interest against profit of Rs. 3.6 crs in Q4FY08 and a loss of Rs. 10.7 crs in Q3FY09. FY09 Results ‐‐‐‐ Revenues below our Expectations

ENIL declared its FY09 results which were below our expectations on the revenue front. Revenues were down mainly due to a fall in the event management revenues by 5.2%. The company reported revenues of Rs. 426.7 crs as against Rs. 413.5 cr in FY08 thus registering a rise of 3.2%.

The company also exited few of the properties thus resulting into a loss of Rs. 26.6 crs in FY09. ENIL reported an operating loss of Rs. 28.6 crs in FY09 as against a profit of Rs. 17.4 crs in FY08.

ENIL reported a net loss of Rs. 60.5 crs against a loss of Rs. 17.1 crs in FY08.

Performance Analysis

During the quarter, the impact of the economic downturn on ‘Out Of Home Media’ sector was quite severe. The advt spends in the OOH segment basically comes from Real estate and financial services segments, with both these sectors the worst hit in the recent meltdown the advt revenues from these segments went down drastically and the company also had to face cancellation of some of the deals. TIML has divested 5 loss making media properties in this year. There have been new additions in the airports and traditional sectors to the tune of 108 and 199 respectively. The company is working on a major cost cutting spree reducing its costs to the tune of Rs. 2.5‐3 crs on a monthly basis.

The FM Radio segment however accounted for a net profit of Rs. 29.1 crs. The company remains the leader with approximately 40‐41% of the market share even though the private radio industry declined by around 22‐24% in Q4FY09.

The general view for the media sector as a whole is that the general economic slowdown has hurt advertisement revenues. Client advertising spends have been under pressure but we believe the
spends will improve going forward in Q1FY09 and Q2FY09.

Future Plans

The company has planned horizontal expansion in the radio business by way of getting additional licences in new cities under Phase III. The phase III plans are on its way and the auctions are expected very shortly. They are also planning to establish footprints in top 25 cities in India for the OOH segment growth.

To see full report: ENIL