Thursday, June 4, 2009


The spin game is on as the world tries to talk itself out of the worst recession since the end of
World War II. The good news is that there is a slowing in the rate of deterioration in the global economy. The tougher news is that this is hardly surprising. In the aftermath of unprecedented annualized plunges in real global GDP on the order of 6–7% in the fourth quarter of 2008 and the first quarter of 2009, the pace of deterioration almost had to moderate.

Export-led Asia lacks support from internal private consumption and remains more dependent on external demand than ever before.

Unless Asia finds a new source of demand to replace the overextended American consumer, it will face surprisingly stiff headwinds for years to come.

China is vulnerable to a relapse in 2009, as a fading investment stimulus is not countered by a US-led snapback in external demand.

To see full report: RISKS OF AN ASIAN RELAPSE



Indian IT large-caps have been re-rated on expected stabilisation/recovery in the global economy. Signs of improvement in consumer confidence have been seen globally, leading to higher sectoral valuations ahead of fundamental upgrade. With mixed signals on global recovery, we believe the revival will unlikely be equally positive for all large-cap Indian IT vendors on fundamentals, at least in
short-to-medium term (versus pick up across total IT sector post slowdown in ’01) given depth of macro challenges, increased base, varied business concentration risks among vendors and resultant client-specific issues. This is reflected in the diverse stance by most India-based IT services vendors as regards volume pick-up & pricing decline. Hence, advice cautious optimism on IT.

Mixed signals on recovery in global economy. While consumer sentiment, a lead indicator, has improved in the US and Europe, key concerns are increasing unemployment, declining credit to consumers and higher debt, leading to increased savings rate among US consumers. The pace of some negative economic indicators has slowed down, indicating that the worst may be behind. Overall, sentiments and business confidence is unlikely to worsen.

Major pick up in IT services volumes is unlikely before H2FY10/FY11 with IT services growth lagging corporate profitability growth by ~2 quarters, in our view.

Likely stabilisation of global economy to cap valuation downside in medium-tolong term. We believe that newsflow on global economy may not be significantly negative and, therefore, large-cap IT sector will be a direct beneficiary and recent P/E re-rating versus our earlier forward target P/E of 11-13x for Infosys, Tata Consultancy Services (TCS) and Wipro is likely to sustain over the medium-to-long term. But we are surprised by the pace of P/E re-rating and believe that there is less room for further upside in the short term. We raise our target price on revised forward FY11E target P/E of 12-16x.

Sectoral strategy. Recommend staying selective based on: i) higher earnings visibility of vendors versus peers and ii) increased diversification in services/vertical portfolio to gain higher wallet share given the cautious recovery in IT spend. Hence, reiterate Infosys (upgrade to BUY from Hold) and Wipro as our sectoral picks over TCS as we believe that concerns about client-specific issues and relatively lowmargin levers still persist for TCS. Though we maintain HOLD on HCL Technologies on short-term execution challenges, we rate it as a dark horse in the sector. We also
upgrade Patni to BUY on lower valuation downside and earnings risk.

Key risks are: i) significant rupee appreciation after likely stable political scenario in India ii) increasing protectionism in the US and Europe and iii) delay in client decision making beyond H1CY09.

To see full report: TECHNOLOGY


• Exports (in dollar terms) continued the double-digit decline in April: Exports (in dollar terms) declined 33.2%YoY in April, largely at the same pace as the decline of 33.3%YoY registered in March. In our view, the high-base effect of last year (46.8%YoY in April 2008) also accentuated the slowdown trend in export numbers in YoY terms. In rupee terms, exports contracted 16.4%YoY, compared with -15.3%YoY in March. In other Asian countries, exports (in dollar terms) declined 24.3%YoY in April, compared with -22.7% in the previous month.

• Imports (in dollar terms) contracted further: Imports (in dollar terms) declined by 36.6% YoY in April, compared with -34% in March. In rupee terms, imports declined 20.6%YoY, compared with -16.2% in March. Oil imports (in dollar terms) declined further to -58.5%, compared with -58.1% in March, in line with the fall in crude oil prices. Non-oil imports (in dollar terms) also weakened further to -24.6% in April, compared with -18.9% in the previous month, on slowing domestic demand.

• Monthly trade deficit widened to US$5 billion (5.2% of GDP, annualized) in April: This compares with a US$4 billion
deficit in the previous month. The YoY monthly trade deficit declined by 42.8% in April, compared with average growth of 41.4% in the previous 12 months. On a trailing 12-month basis, the trade deficit narrowed to 9.1% of GDP in April, compared with 9.4% in the previous month.

• Exports to improve on the margin: While we maintain our view that exports will remain weak over the next two to three months, due to the global slowdown, we expect the YoY decline to turn narrower from here (i.e., exports should still decline, but by a smaller extent). The second-order derivative for the US ISM New Orders Index (three-month moving average), which leads export growth by about four months (Exhibit on Slide 4), has improved for the fourth consecutive month (40.5 in April 2009 vs. 35.8 in March 2009, and 29.8 in February 2009). We believe imports will remain weak, due to slowing domestic demand and a lower oil import bill, helping the trade deficit to narrow further.

To see full report: EXPORTS



NIIT Ltd has reported consolidated numbers for FY09 - revenue growth of 14% at Rs11.5bn (ahead of estimates at Rs11.1bn), EBITDA growth of 15% at Rs1.18bn (our estimates of Rs1.15bn) and PAT (before share of associate) at Rs389mn (our estimates at Rs374mn). PAT post share of associate came in at Rs698m.

The company reported other income for the year at ~Rs200mn (including a forex gain of ~Rs96mn, hedging losses to the tune of ~52mn and a one time exceptional gain of Rs158mn which includes sale of land during the year).

The company reported a capex of ~Rs1.6bn in the current year. In tandem with the capex, the debt levels shot up to Rs3.5bn (cash at Rs749mn taking net debt to Rs2.7bn). Going ahead the company plans to incur a capex of ~Rs1.3bn in the current year.

Reported numbers include a net interest outgo of ~Rs247mn for the year (post interest income of Rs53.2mn and an interest expense of Rs300mn).

For the quarter – NIIT reported a revenue growth of 10% at Rs3bn, EBITDA growth of 19% at Rs364mn and PAT decline of 46% at Rs96mn.

To see full report: NIIT LIMITED


IVRCL Infrastructures & Projects Ltd’s (IVRCL) Q4FY09 results were ahead of our expectations. Its revenues grew 23.1% YoY to ~Rs16.3bn backed by robust execution across water supply & environmental segment. OPM for the period dipped by 178bps YoY to 8.7% owing to higher masonry & labour expenses at 24.5% of net sales. Fuelled by other income of Rs87mn, net profits rose marginally by 9% YoY to Rs799mn.

Fresh order inflows at Rs9.3bn: IVRCL bagged new orders worth Rs9.3bn in Q4FY09, taking the total order inflows in FY09 to Rs76.4bn. Further, the company has already bagged jobs amounting to ~Rs6.6bn in Q1FY10 till date & stands L1 for additional projects worth Rs8-10bn.

Strong Order book at ~Rs135bn: IVRCL maintains a healthy order backlog of 2.1x FY10E revenues. While water supply & environmental projects dominate a major chunk (68%) of this backlog, buildings & industrial structures (20%) form the second largest segment. Almost 98% of IVRCL’s order backlog emanates from Government sector.

Revise our FY10 estimates: IVRCL has registered an impressive 33.4% YoY growth in its revenues for FY09; though the same has been accompanied by a fall in its OPM (down ~124bps YoY). Going forward, with commencement of work on projects bagged in FY09 we expect the company to maintain its growth momentum. The margins too are expected to improve by 40-50bps on account of reduction in prices of key raw materials. Hence, we revise upwards our FY10 EPS estimate to Rs16.2 from the earlier Rs15.5.


At the CMP of Rs329, IVRCL trades at a P/E of 20.3x & EV/EBIDTA of 10.8x its FY10E earnings. We are of the opinion that presently the stock is fairly valued in line with our SOTP valuation of Rs340/ share (Refer page3). Hence, we maintain our ‘HOLD’ recommendation on the stock.

To see full report: IVRCL


Forex losses over shadows performance

Higher sales due to better realizations– Welspun Gujarat reported Q4FY09 consolidated revenue of Rs 1,831 crores, an upside of 50% y-o-y and 26% q-o-q on account of better realizations. However if we see the product wise performance, sales of LSAW pipes which command higher prices, has gone down by 67% over last year in volume terms.

Operating performance –For Q4 FY09 company has reported an EBITDA of Rs 161 crores, down 16%
y-o-y mainly on account of foreign exchange provision of Rs 131.4 crores made during the quarter. As more than 90% of sales of the company is generated from export markets and also majority of raw material procured from foreign countries, higher volatility in forex rate could have serious implications on performance of the company.

For Q4 FY09 blended pre exceptional item EBITDA per tonne stood at Rs 10526 for pipes and Rs

6000 for plates compared with Rs 9969 for pipes in Q4 FY08.

Net profit for Q4 FY09 stood at Rs 51.8 cores, an upside of 15% q-o-q but a decline of 49% y-o-y due
to higher depreciation and interest cost added to above mentioned reasons. Depreciation mainly increased on account of additional capacity of HSAW, Plate mill and US HSAW facility added this year.

Order book: Order book of the company stood at Rs 7740 crores, which includes orders worth Rs

640 crores of plates. In volume terms total pipe orders are 780,000 tonnes consisting of 240,000 of
LSAW, 505,000 of HSAW and 35,000 of ERW pipes. Share of domestic orders has gone up to 20%, which include GAIL order worth Rs 500 crores

Our View – With crude oil price rising to $ 67 levels, we expect that demand for SAW pipes will
also see an upside as pipeline investments are highly correlated to crude oil prices. With the commissioning of Plate mill, the raw material cost of the company will go down. US mill will also
help company save cost on logistics front.

The order book of the company at Rs 7740 crores provides a good visibility for FY10 revenues. At

current CMP of Rs 180 stock is trading at forward FY10 P/E and FY11 P/E of 4.8 respectively. We value the company at FY10 EVEBITDA of 6 which gives us a valuation of Rs 239 per share. We
recommend a buy rating on the stock.

To see full report: WELSPUN GUJARAT


Better prospects ahead!!

Topline below our expectation: Panacea Biotec posted its Q4 FY09 and FY09 numbers with
topline growing at the rate of 7.6% y-o-y to Rs 243.0crore whereas 34.2% q-o-q on consolidated basis. The standalone numbers reflect a 16% growth in net turnover to Rs227.6 crore against Rs195.5 crore during the same quarter a year earlier. The growth in the topline is mainly contributed by good growth from both of its segments. The formulation segment registered revenue of Rs 51.5 crore whereas vaccine segment clocked revenue of Rs 175.7 crore. The oncology segment of the company has reported a growth of nearly 55%.

Healthy performance at the Operating level: The company clocked an operating profit of Rs 99.5 crore compared to Rs 47.8 crore during the same quarter last year, thus registering a spurt of 108%. The increase in operating profit is mainly driven by decline in staff as well as other expenses. The margins of the company had shown an improvement of 1764 bps y-o-y to 38.8%, whereas it had improved around 3167 bps on a q-o-q basis. On the operating level the company is witnessing a decline in COGS this reflecting an increased operating efficiency.

Bottom Line – below our expectation: The bottom line of the company witnessed losses due
to currency fluctuation which resultant in the company to report a negative bottom-line. The net profit of the company before adjusting for the losses showed a robust growth of 410% to Rs 105.2 crore against Rs20.64 crore, whereas after adjusting for losses it turned negative Rs 38.14. The net margins of the company before adjustment for losses recorded a significant improvement y-o-y..

Our View: We believe the sales of the company were mainly driven by good performance from its vaccine as well as pharma segments. The company reported forex losses of Rs 55 crore whereas created a provision for MTM loss of Rs170.2 crore during FY09. The company also witnessed an Increase in depreciation as well as interest expenses which had adversely impacted the profitability of the company.

Going forward, we believe that Panacea would post good growth numbers in the coming years as we see a good revenue visibility from its vaccine as well as formulation segment. The company would start its supply of combination vaccine to WHO from July 09 and the agreement stands for 3 years till 2012. The formulation segment is also expected to record good number backed by manufacturing agreement with MNC giants like GSK and Bayer. We expect the margins of the company would remain at the level of 25% and 17% at the operating and net level. Looking at the good growth opportunity coupled with robust revenue visibility we maintain our positive view on the company.

To see full report: PANACEA


V-shaped recovery?
  • Consensus earnings revisions ratios for all main regions are showing a V-shaped profile, as are some economic indicators
  • Improvement has been so dramatic that earnings upgrades are now almost matching downgrades for the world index
  • Normalising rates: combination of stabilising profitability and favourable valuations should allow equities to live with the normalisation of long-term interest rates, in our view
Very few commentators appear to be giving serious consideration to the likelihood of a ‘V’-shaped global economic recovery (which may make you wonder where the balance of risk lies from here). The most popular representative letters still appear to be ‘W’, ‘U’ and ‘L’. But, if the profile of analysts’ earnings revisions is any guide, the possibility of a decent rebound in economic growth and corporate earnings should not be ruled out.

The normalisation of interest rates has been beginning to feature in our discussions with investors, spurred by the sell-off in government bonds. As we write, the sheer steepness of the yield curve seems to have capped the surge in long-term yields, for a while at least. And recent levels of yields are not yet hitting equity valuations materially: the implied risk premium remains well above trend. But, at some stage, equity markets will have to tackle this question more definitively.

In our view, a combination of stabilising profitability – which may be a little closer perhaps than we’d thought – and favourable (cyclically adjusted) valuations, together with a conscious decision by asset allocators eventually to dump bonds and money-market mutual funds for stocks, should allow equities to live with the normalisation of long and even short-term interest rates when this finally happens for real.

To see full report: EQUITY INSIGHT

>Bharti + MTN - FAQs (CITI)

  • Current and proposed shareholding structure?
  • What are the key shareholder and regulatory approvals that would be needed?
  • Will Bharti be issuing new shares to be traded as GDRs in JSE?
  • Why is Bharti doing this deal? What are the synergies?
  • Does the 74% foreign ownership limit in India impact Bharti in any way?
  • Will/Can MTN be given the 25% stake at the Bharti parent level?
  • Why has the Bharti stock price been weak since the deal was announced? Who has been selling?
  • What should MTN shareholders be thinking about into the scheme of arrangement?
  • What should Bharti shareholders be thinking about?

To see full report: BHARTI AIRTEL


Downgrade to Sell: Fully Valued + Fire Behind Idea Smoke?

Fully valued now – We see the stock as fully valued on a sum-of-parts after its ~60% rise off March 2009 lows. Operational outlook is underwhelming as is the patchy execution track record. Valuations are expensive (14x PE, 6.0x EV/EBITDA) and dividend yield is paltry at best. We downgrade to Sell/High Risk (from Hold/High Risk) with a new target price of RM2.25 (from RM2.07).

More Idea? – The Business Standard in India reported (28 May 09) that Axiata intends to launch a voluntary offer for 20% of Idea at Rs130-135/share. Axiata has dismissed the report as speculation and cites a shareholders' agreement limiting Axiata's stake to 20% (at 14.99% now, 19% post Spice+Idea merger). Should a deal materialize as reported, though, we believe the market would focus on funding concerns (we est. US$1.8bn for the stake) and valuation
premiums (66% above CIRA TP of Rs80) as overshadowing long-term positives.

Overseas assets need work – We still believe that Axiata's stable of overseas assets hold long-term attractions, particularly given exposure to growth markets. Still, short-term challenges can't be ignored, with Dialog struggling with poor profitability and XL facing a funding crunch likely necessitating a rights issue. Celcom stays the main earnings and cash driver for now.

Cutting 2009 estimates – Following 1Q09 results, we cut 2009 earnings by 5.4%, reflecting weak Dialog and XL earnings but offset by stronger than expected Celcom performance. Our new TP of RM2.25 reflects higher Celcom contribution to NAV and CIRA's new TP for Idea of Rs80/ share.

To see full report: AXIATA GROUP