Tuesday, June 9, 2009


What will the world look like after the crisis?

We believe that the crisis may have changed the functioning of the global economy structurally in several ways, but some points remain uncertain:

− the role and regulation of finance: are we heading towards a financial sector devoting itself mainly to medium-term financing of growth?

− the use of savings: will it become more efficient? (financing of useful investment in the United States, financing of emerging countries);

− location of activities and growth: Can Asia replace the United States as the global growth engine?

− where will new jobs be created in advanced OECD countries? Probably not in "old industry" that will be offshored even more or depends on credit. Is green growth ("green business") really an interesting approach, and is its size sufficient?

− will consumers behave differently? Will they abandon the model of high, credit-driven consumption?

To see full report: FLASH ECONOMICS


Back to the bad old days?
The return of protectionism

The WTO and the World Bank report a rapid increase in protectionist measures since the beginning of the economic crisis.
The World Bank has registered 89 new restrictions on trade since October 2008, 23 since the London G20 summit in early April alone, and the WTO an even greater number still. Protectionist measures have increased particularly since the spillover of the crisis to the real economy. Protectionism is more topical than ever.

There is still a lobby for protectionist measures. In times of slumping national and international demand, countries and companies will continue to favour beggar-thy-neighbour measures which will (unjustifiably) make their products more competitive than those of foreign rivals or else shield them from competition from the outset.

Tariff hikes account for “only” about one-third of the measures recorded world-wide – protectionism has many faces: non-tariff barriers to trade and the abuse of anti-dumping measures, subsidisation of national industries or, very lately, calls to favour domestic products and companies in national economic stimulus packages, and restrictions on international capital flows or immigration.

The competition and trade-distorting effects of subsidies pose the biggest risk. In times of strong intra-industry trade the focus of protectionism is shifting away from discriminating against foreign competitors by imposing tariffs towards actively providing preferential treatment to domestic firms via financial aid. The global automobile industry is a case in point. Retaliatory measures are the response.

These factors threaten to unleash a spiral of protectionism that perhaps may not choke off the global recovery, but it will partly delay its progress. As regards monetary and fiscal policy, the authorities have learnt the right lessons from the Great Depression. What this means here is that policymakers must not sacrifice medium-term growth opportunities for near-term protection interests. Shoring up open markets and free trade is the next major challenge in a globally coordinated drive to cope with the crisis.

To see full report: CURRENT ISSUES


No signs of revival

TAMO’s Q4FY09 (implied results) performance is better than our expectations mainly due to adoption of new guideline for AS-11. TAMO’s margins remained under pressure for FY09, but net profit was better than our expectations. The company has already tied up for funds for JLR, but its leverage remains a concern in the short to medium term. We expect interest cost to go up in the near future. We continue to remain negative on CV industry as there are no signs of revival yet and assign SELL rating to the stock.

■ FY09 top line declines by 11% y-o-y
TAMO’s FY09 net sales reported a decline of 11% y-o-y to Rs.256.6bn on account of lower volumes. Sales volume for year were down by 16% y-o-y due to fall across all the three segments viz. passenger car, CV and exports. PC, CV and export sales of the company reported a fall of 5% y-o-y, 15% y-o-y and 39% y-oy respectively. However the company has improved its market share in the CV industry from 62.2% to 63.8%. Net sales realizations of the company during FY09 reported an improvement of 6% y-o-y to Rs.488,516 per vehicle. TAMO’s implied results for Q4FY09 suggests its top line went down by 21% y-o-y to Rs.68.9bn mainly due to drop in sales volume by 23% y-o-y.

■ AS-11 supports net profit
For FY09 TAMO’s EBITDA declined by 41% y-o-y to Rs.17bn and EBITDA margins came down by 334bps y-o-y to 6.6%. Higher raw material prices, lower volumes and higher employee cost impacted margins for the year. TAMO during the year has divested few of its investments (TACO, Tata Tele, Tata Steel etc) which supported its other income for the year. Other income for FY09 went up by 92% y-o-y to Rs.9.25bn. Net profit for the year came down by 51% y-o-y to Rs.10bn. TAMO has also taken advantage of change in AS-11 guidelines and due to which its PBT went up by Rs.5.19bn for the year. TAMO’s implied results for Q4FY09 suggests its EBITDA margins declined by 125bps y-o-y to 7.8% better than Q3FY09 margins of 1.6%. Net profit for Q4FY09 went up by 236% y-o-y to Rs.7219mn mainly due to change in AS-11 benefit.

To see full report: TATA MOTORS



Initiating with Buy and Rs185 PO based on 16xFY11E
We initiate on Voltas, the second largest air-conditioning & engg co in India (70% of sales) and Middle East (30% of sales), with a Buy. We expect it to be a key gainer of (1) thrust on infra in India; & (2) rise in oil price that could drive up capex in Middle East. Voltas FY10E PE has doubled to 16x since 15 May09 led by (1) new govt (2) 20% oil price rise & (3) new orders. We expect the 16xPE to be sustained due to expected 30%+ ROE and 25%+ EPS growth, hence have based
our PO at 16xFY11E.

Market size attractive; lead indicators showing uptrend
We expect market size for MEP (air-conditioning, electrification, plumbing etc), engg equipment and room AC in India to double in next five years, driven by India’s thrust on infra and 7%+GDP growth. We expect Middle East MEP market, which is US$5bn+ in size to grow 10% pa driven by US$60/bbl+ oil price. Uptrend is evident from new order wins, rising order execution and declining inventory.

FY09-12E EPS CAGR at 26%; 31% higher than consensus
We expect profit to grow 22% in FY10E and 38% in FY11E. Order backlog of 1.9x
FY09 sales for MEP key for FY10E. Expect stronger growth in FY11 to be driven by (1) 56% rise in new orders; and (2) 80bp increase in EBITDA margin driven by change in sales mix to favor more profitable mining and construction equipmenT sales. MEP, room AC and engg equipment contributed 60%, 21% and 19% of Voltas FY09 operating profit, respectively.

New initiatives + acquisitions could yield further upside
Recent initiatives could yield further upside. These are (1) expansion of presence in MEP work in industrial units like power plants following acquisition of 51% stake in Rs2bn Rohini Electrical last year and (2) entry into water treatment biz where it recently won order worth Rs500mn in India. It has surplus for acquisitions.

To see full report: VOLTAS


Forex loss re-classification leads to better than expected results, maintain Neutral

GMRI reported FY2009 PAT of Rs2.8B (up 33%) vs. our estimate of Rs1.7 B. Results were better than expected due to 1) exchange loss of Rs1.8B for FY09 now directly added to the cost of assets, vs. earlier policy of charging through P/L and 2) sharp improvement in revenue and EBIT from construction activities, as GMRI has begun to recognize profits on its construction JV with Limak, for building the Sabiha airport. Profits of airport and power segment trailed estimates: power EBITDA was lower than estimated mainly due to lower-than-expected utilization of Vemagiri plant.

The key constituents of our Mar-10 SOP-based PT of Rs150 are a) airports – Rs56, b) real estate – Rs28, c) power, incl Intergen – Rs51 and d) roads, net cash and coal mines: Rs15. While a stable government and return of funding appetite provide a stronger basis to view infra names
favorably, superior execution track record of the GMR group provides reason to view its development pipeline with less skepticism. In case of GMRI, a conducive policy and funding environment could add Rs17.7 to our SOP from 2.4GW power projects in the works. Improved real estate sentiment and concrete development plans could add a further Rs63, as our current valuation is conservative.

The stock appreciation of GMRI seems to have already captured some of these positive tailwinds. GMRI trades at 19.4x FY11 EV/EBITDA, which already builds in 43% EBITDA CAGR through FY11. Thus, we maintain Neutral. Sharp improvement in real estate sentiment, coupled with faster-than-expected progress on the project development pipeline, constitute the key upside risks to our PT. As our growth estimates factor in further user charge increases at Delhi airport, regulatory disapproval is the key downside risk to our FY11 earnings and our PT as well.

To see full report: GMR INFRASTRUCTURE


The domestic stock market created history in May 2009 driven by the decisive victory of Congress Party-led United Progressive Alliance, some positive news flow globally and strong foreign inflows into emerging markets. Consequently, the Indian stock market outperformed the global markets with the Sensex and the Nifty, the benchmark indices, surging by 27.2% and 26.7% respectively in May. Our portfolio of top picks substantially outperformed the benchmark indices registering a mammoth gain of 43.7% during the month, driven by hefty gains in the mid-cap stocks, such as 3i Infotech (gained 64.1%), Shiv-Vani Oil & Gas Exploration (gained 84.3%) and Unity Infraprojects (gained 116.3%; the stock was added during the course of the month).

We are making one addition, that of Bajaj Holdings & Investments, to our list of top picks, as we believe that at the current market price the stock is at a significant discount to its intrinsic value and this makes it attractive.

  • 3i Infotech
  • Bajaj Holdings
  • Bharti Airtel
  • Bharat Heavy Electricals
  • Godrej Consumer
  • ICICI Bank
  • Larsen & Toubro
  • Lupin
  • Reliance Industries
  • Shiv-Vani Oil & Gas
  • Unity Infra Projects
To see full report: TOP PICKS


Hawkins Cookers has reported fantastic performance for Q4 FY 2009. Net Sales rose by 25.2% to Rs. 75.42 crore (Rs. 60.24 crore). OPM% jumped up to 14.5% (10.4%) mainly because of sharp reduction in other expenses to 28.9% (32.4%) of sales. Further aided by substantially higher other income (incl. operating) of Rs. 67 lakh (Rs. 25 lakh), PBT zoomed to Rs. 10.66 crore (Rs. 5.62 crore). Slightly lower tax rate of 34.5% (36.2%) led to doubling of PAT to Rs. 6.98 crore (Rs. 3.59 crore).

For FY 2009, Net Sales increased by 18.3% to Rs. 241.48 crore. OPM% improved commendably to 12.1% (9.7%). 69.2% higher other income of Rs. 1.89 crore and extra ordinary income of Rs. 2.26 crore (nil) being surplus on disposal of immovable property and lower tax rate of 33.7% (36.8%) lifted PAT up by 78.6% to Rs. 20.12 crore (Rs. 11.26 crore)

Company’s main products are pressure cookers and kitchenware products. It operates in branded segment and is among the largest manufacturers of kitchenware in India. Its 'Futura' brand of non-stick kitchenware has higher margins and is growing at 20-25% per annum. Even in its bread-and butter pressure cooker segment, sales volume is growing at 10-13 % on y-o-y basis.

Continuing vitality of HCL’s brands - Hawkins, Futura and Miss Mary - and economic growth and growth of aspirations in India offer company best opportunity. Also, fast developing modern retail segment in India offers new opportunities for increasing turnover. Thus, future outlook for business is excellent and company is wellpositioned to take advantage of growth in demand & to increase its sales & profits handsomely.

While growing demand would be driving topline growth, softening of raw material (main being aluminium – accounting for 2/3rd of production cost) would improve profitability going ahead. Thus company is set for excellent growth.

At CMP of Rs. 210/-, the share (Rs. 10/- paid up) is trading at 6 times FY 2009 EPS of Rs. 35.21 and 4.77 times FY 2010 expected EPS of Rs. 44/-. Company has declared dividend of Rs. 20/- per share. At CMP dividend yield works out to be 9.5%. In view of decent future prospects, we recommend to “BUY” the share at CMP.


Near term pain, long-term looks good...
PVR reported its Q4FY09 standalone results, which were below our expectations. The topline at Rs 58.0 crore was up 6.8% YoY while it declined by 21.5% QoQ. The EBITDA margin at 10.5% declined 248 bps and 526 bps YoY and QoQ, respectively, on the back of higher rental cost and
film distributors share. The company reported a net loss of Rs 1.11 crore vs. Rs 2.8 crore of PAT during Q4FY08.

Highlight of the quarter
PVR opened a 24-lane bowling alley centre at Ambience Mall, Gurgaon under its newly formed JV PVR Blu-O. During its 18 days of operation, the subsidiary grossed an income of Rs 0.7 crore and PAT of Rs - 0.4 crore.


The whole of Q110E has been written off. This would result in negative growth in topline for FY10E. However, we expect the bottomline to grow on account of operational improvement in the subsidiaries and absence of one time launch cost incurred in them in FY09. At the CMP of Rs 129.3, PVR is trading at 27.0x its FY10E EPS of Rs 4.8 and 10.6x its FY11E EPS of Rs 12.2. On an EV/EBITDA basis, it is trading at 7.1x and 4.7x its FY10E and FY11E EBITDA, respectively. We value the company at 7x FY10E EBITDA to arrive at a target price of Rs 127.3, implying a 1.5% downside. We are upgrading the stock from UNDERPERFORMER to HOLD.

Result Analysis

Lack of good quality content
The entire multiplex industry witnessed lower occupancy levels due to lack of good quality content and the examination season. Generally, Q4 remains subdued due to the examination season. However, during Q4FY09 the exhibition business took a further hit due to the inferior quality content that was released. Big-ticket movies like Delhi 6, Chandni Chowk to China and Billu underperformed at the box office. Top five films in Q409 had a net collection of Rs 94.0 crore at the box office as compared to Rs 145.6 crore in Q408.

Consolidated result analysis
On a consolidated basis, the company reported topline of Rs 355.39 crore and EBITDA of Rs 50 crore. The EBITDA margin stood at 14.2% as against 16.8% on a standalone basis. During the year, PVR formed three new subsidiaries PVR Pictures, Sunrise Infotainment Ltd and CR Retail. The company entered into a 51:49 JV with Thailand-based Major Cineplex group Plc for PVR Blu-O. These collectively contributed ~Rs 117.66 crore to the topline. However, on the EBITDA front, the consolidated contribution from these subsidiaries was negative.

To see full report: PVR LIMITED


'Interest'ing times

Yes Bank will be a key beneficiary of declining interest rates, and thereby a collapse in wholesale borrowing costs, given the bias of its funding mix. Lower deposit costs are expected to drive a structural improvement in CASA – one of the key focus areas. The bank has surprised positively on the strength of its asset book, reflected in the 200bp+ of capital release on migration to Basel-II. We expect 26% earnings CAGR for the bank over FY09-11 driven by margin expansion, stable asset quality and robust fee income growth. Owing to a potential expansion in NIMs and comfort around asset quality, we are upgrading our earnings estimates by 3.9% for FY10 and 5% for FY11. At 1.8x FY10E and 1.5x FY11E adjusted book, valuations are attractive when viewed in conjunction with the stock’s historical trading multiples. Maintain Outperformer with a revised 12- month price target of Rs200.

Key beneficiary of collapse in bulk deposit rates: Wholesale borrowing costs, which had soared in Oct 2008 due to tight liquidity, have been rapidly falling over the past few months – CP rates now near to all time lows touched in 2003. Being largely bulk funded (only ~9% of deposits in CASA), Yes Bank will be a key beneficiary of the same. Around 60% of the bank’s liabilities are likely to get re-priced over the next 12 months, translating into lower deposit costs and an expected ~15bp expansion in NIM in FY10.

Well-capitalized for growth: Tier I ratio of 9.5% (as of March 2009) provides Yes Bank headroom to grow at ~30% for the next 18-24 months. Migration to BASEL-II has led to capital release of 210bp and enhanced the capital cushion. Further, as more corporate accounts get rated, another 50-100bp of capital release is likely over the next six months. That also underlines superior quality of the bank’s loan book.

Attractive valuations; reiterate Outperformer: Yes Bank is expected to report a strong 26% CAGR in earnings over the next two years. We expect RoE expansion (21% in FY10E against 14% in FY07) to lead to re-rating of the stock in the near term. At 1.8x FY10E and 1.5x FY11E adjusted book, current valuations offer an attractive entry point as the stock trades on the lower end of its historical price to book band. Reiterate Outperformer with a revised 12-month price target of Rs200 (3x FY10E and 2.4x FY11E adjusted book).

To see full report: YES BANK


New Government: Expectation = Action?

Broad blueprint spelt out — The new government has laid out its broad 5-year governance agenda – in the form of the president’s opening address to the parliament. This agenda covers socio, economic and political issues, and is wider and a little more detailed than the Congress Party’s pre-election manifesto. We do not believe there are any big surprises, or any key specifics, on economic policies; though the primary forum for that is the Budget, slated for the 1st week of July.

More socio-economic, than pure economic — The agenda of governance, expectedly, is most heavily biased toward socio-economic policies and objectives. These account for 7/10 top priorities of the government, and 90%+ of its 100-day plan – in sync with its pre-poll manifesto, and reflective of the mandate it has got. While expectations of a meaningful economic and policy change (and execution) are fair and will run alongside its socio-economic focus – we believe the ‘givens’ are in the area of rural infrastructure, health, education, agriculture and small business support, rather than headline economic reforms.

There is enough economics — The president has spelt out key economics issues and policies for the government – these cover: a) medium-term strategy for prudent fiscal management; b) counter-cyclical investment in the Infrastructure sector – PPP model, and policy changes; c) encouragement of foreign flows; d) recapitalization of government banks, and creating a pension regulator; e) rural infrastructure; f) land acquisition and rehabilitation laws; g) introduction of a
general service tax; h) 13,000MW of power capacity creation annually; and i) energy security, including oil exploration, coal policy and nuclear developments. If executed, and well, could well provide the economic action the market is expecting.

Right noises – wait for the budget — The new government has got off to a fairly positive start – ministerial allocations, right noises on economic policy and reform, and fairly positive GDP and market data to boost. While we do expect policy making to be an ongoing exercise – the budget, slated for early July, will be an early test of how much expectation actually translates into action.