Thursday, June 25, 2009


Page Industries Ltd. (PIL) Q4FY09 results were in line with our expectations. Better realization and higher volumes resulted into a growth of 25.4% in net sales (YoY). Lower material cost helped in improvement of operating margins by 180bps. However, higher depreciation and employee cost (due to increased capacities) negated this to a certain extent. With increased capacities, strong brand image and pan India presence, we feel the company is well poised to capture the growth in volumes and value. We reiterate our BUY recommendation on the stock with a revised price target of Rs.612 (12x FY11E) in the next 12~18 months.

Q4FY09 result analysis:

PIL sold 8.35mn pcs in Q4FY09 (39mn pcs in FY09) vs 6.8mn pcs in Q4FY08 (31mn pcs in FY08). The average realization in Q4FY09 has improved to Rs.67.5 per pc (Rs.65.3 per pc in FY09) from Rs.66.2 per pc. (Rs.62.1 per pc in FY08).

The operating margins improved by 180bps to 17.2% mainly on account of lower raw material prices which declined by 220bps (as a % of sales).

PAT grew by 27.7% to Rs.55.6mn vs Rs43.5mn in the last corresponding quarter. PAT margins were under pressure mainly due to higher depreciation. We expect margins to improve as no more incremental capex is required.

The current capacities of the company stand at 74mn pcs p.a. up from 54 pcs p.a. These capacities would be enough to take care of demand for at least next two years.

The working capital turn over ratio (on an annual basis) improved from 4.5 in FY08 to 5.3 in FY09.

PIL had paid a dividend of Rs.17 per share for the year FY09 and had also declared interim dividend of Rs.9 per share for FY10.

Total no. of EBOs (Exclusive brand outlets) currently stands at 46 stores which PIL plans to augment to 100 stores in the next two years.



Just a drizzle

The delay in the onset of the monsoon and rising El Nino risks has revived memories of the market selloff during the drought of 2002. Water reservoir levels are already low and a poor monsoon season could hurt farm incomes and impose additional fiscal burden. Whether this scenario plays out will, however, depend on the progress in July. Autos, consumers and cement stocks are vulnerable, but a fall in consumer stocks would provide attractive entry opportunities in our view.

2009 season starts on a bad note
Overall rainfall for the season until Jun 17 has been 45% below normal, with 28/36 metrological divisions receiving rainfall below the long-term average.
Water levels in reservoirs are at 10% of capacity (vs norm of 14% for Jun).
According to Australia’s Bureau of Meteorology, the signs of a developing El NiƱo, which usually lead to drought in Asia, have strengthened during the past fortnight.

India’s gearing to monsoon now lower, but rural boom can be hit
The share of the monsoon-dependent kharif crop has declined. Since 1987, agri output fell in only 5/8 years when monsoon rainfall was +5% below average.
The area under irrigation (now 43%) has been rising steadily, albeit gradually.
With agriculture now accounting for only 18% of GDP (versus 33% even in the early 1990s), the Indian economy is far more resilient to a poor monsoon season.
However, a poor crop will deflate the current buoyancy in farm incomes. At a time of +10% fiscal deficit, there is little room for further fiscal support.

Domestic plays –autos, cement, consumers are vulnerable
Linkage of monsoon with market performance is weak. However, in 2002, the Sensex fell 10% in the six weeks to end-July as the drought was established.
Autos (BSE Auto Index -16%), cement stocks ACC, Ambuja, India Cement (down 14-30%) were hit. Among consumers, HUL fell 13%, but Nestle, ITC outperformed.
Cement initially saw a rise in despatches, but supply concerns started to dominate.
Earnings for consumers, autos held up well, while cement was hit by rise in supply.
While stocks in all three sectors are vulnerable to correction, we would see a lower price points in consumers as attractive entry opportunities.
Soft commodities could be beneficiaries with prices moving up due to lower supply.
Tea output is already forecast to be 5% lower.

Jury not out – wait until July
The month of June accounts for just 20% of sowing activity for foodgrains.
35% of the season’s rainfall, 50% of sowing takes place in July. Watch for updates on El-Nino, trends in spatial distribution of rainfall (more critical than total rainfall).

To see full report: MARKET STRATEGY


Are the consequences for the yield curve very different according to whether excess liquidity leads to inflation or a rise in asset prices?

Global liquidity is extremely abundant. Until 2008 this was due to the rise in official reserves, since 2008 it has been due to very expansionary domestic monetary policies, and in the recent period is has been accounted for by both these causes.

We would like to look at the effects of the very abundant global liquidity on yield curves:

− if they brought back inflation (which will not be the case, but this is what many financial market participants believe), there would straight away be a rise in long term interest rates and yield-curve steepening;

− but if inflation cannot return, due to the situation of massive under-employment, and if there are asset price bubbles because of excess liquidity (emerging country equities, credit), it is not certain that yield curves will steepen less, because of the correlation between bond yields and returns on other available assets;

− the case of commodity prices is obviously somewhere in between.

This shows that, even though excess monetary creation no longer leads to inflation in prices of goods and services in contemporary economies, it can nevertheless lead to a rise in long-term interest rates.

1 - Excess liquidity, but disappearance of goods and services inflation, excluding commodities
Global liquidity is extraordinarily abundant.

− until early 2008 mainly owing to the accumulation of official reserves in Japan and in emerging and oil exporting countries;

− since the start of the crisis, due to the extremely expansionary monetary policies implemented in OECD countries;

− since the spring of 2009, there has again been accumulation of official reserves in emerging
countries, due to capital flows returning to these countries, which is causing a renewed appreciation in their exchange rates.

To see full report: SPECIAL REPORT


Back to secular growth path; upgrade SBI to Buy, add to Conv. list

Turning constructive on improved growth outlook
We believe the Indian economy and the financial sector are returning back to a potential growth path, post a period of adjustment to the intense dislocation in the global economic environment. We now turn constructive on Indian financials due to better fundamentals: 1) we forecast aggregate net income growth for the sector to rebound strongly from a subdued level of 1% in 2009E to 32% in 2010E and 23% in 2011E due to acceleration in loan growth, rising NIM and stable credit costs; 2) we forecast ROE to rise from 13% in 2009E to 17% in 2011E reflecting a pro-cyclical environment. We raise our 2009E-2011E EPS by up to 73% and our 12-m TP for stocks under our coverage by 26%-115%.

We see GARP ideas despite rally in stock prices
We turn constructive from our earlier cautious stance which was based on concerns about potential increase in NPL and credit costs. We note that the run-up in share prices since the lows seen in March 2009 partially reflects the improved outlook for the operating environment. However, we highlight potential GARP ideas based on sustained earnings growth, underperformance relative to benchmark index and inexpensive valuations despite the run-up.

Upgrade SBI to Buy, add to Conviction list; PNB to Buy from Sell
We upgrade SBI (SBI.BO) to Buy and add it to our Conviction list and reiterate Buy on Axis (AXBK.BO). Further, we upgrade PNB (PNBK.BO) and IOB (IOBK.BO) to Buy from Sell and Neutral, respectively; we also upgrade BOB (BOB.BO) to Neutral from Sell.

Add IDFC to Conviction Sell list; downgrade IBFSL to Sell
We downgrade HDFC (HDFC.BO)and ICICIB (ICBK.BO) to Neutral from Buy as we believe current valuations factor in potential upside from their respective operating fundamentals. We downgrade IBFSL (IBUL.BO) to Sell due to a strong price rally and concerns arising from a weak 4Q2008 performance. We maintain Sell on IDFC (IDFC.BO), and add it to our Conviction list, and on KMB (KTKM.BO); we maintain Neutral on HDFCB (HDBK.BO).

Key risks
Setback to growth expectations for the economy, rise in interest rates (policy rate as well as long bond yields), and deterioration in credit quality of loans for banks.

To see full report: FINANCIAL SERVICES


High Performance - Delivered!!!

Ahluwalia Contracts India Ltd. (ACIL) is a premium player in contracting and caters to industrial, real estate and infrastructure segment. A healthy order book of Rs.41.5 Bn provides revenue visibility of 3.6 years. Increased contribution from Government Contracts (32% of order book) enhances certainty in the order book. ACIL has been awarded the time critical Commonwealth Projects which exhibits its quality and timely execution skills. With proven execution skills, strong promoter pedigree and sound financials with positive free cash flows, webelieve that ACIL is attractively place d. We initiate coverage with a BUY recommendation and a 12 months price target of Rs.108 which discounts its FY11E EPS of Rs.15.5 by 7x.

Investment Rationale

Huge opportunity in infrastructure segment: ACIL is actively bidding for Urban Infrastructure Projects (especially projects under the JNNURM scheme) and is currently associated with projects like Metro Rail in Mumbai, Delhi and Bangalore, Airport development in Ranchi etc. Under the JNNURM scheme, projects worth Rs.692 Bn are to be allocated over the next 3 years thereby providing ACIL a substantial opportunity landscape in the Urban Infrastructure space.

Healthy order book position to enhance revenue visibility: ACIL has a current order book of Rs.41.5 bn (3.6x FY 09 E sales) catering to residential, commercial retail, hospitality and healthcare segment. The company is currently executing time critical commonwealth projects worth Rs. 8.9 Bn (20% of order book) thereby exhibiting its credibility of timely execution. Going forward, ACIL will increase focus on infrastructure and Government projects which would perk
up the order book quality. ACIL, currently, has an order pipeline worth Rs.10 bn.

Out of woods.....poised for high growth: The Company has recently received its long pending payment from Emaar MGF for commonwealth games village project which has addressed the short term concerns, thereby infusing sufficient liquidity in the project and ramping up execution.We expect ACIL to clock a revenue and net profit CAGR of 30.3%and 23.6% respectively between FY 09E and 11E.The company has been generating positive free cash flows in the past 2 years. We expect it to continue generating positive free cash flow in the next two years.

Valuations: At CMP, the stock trades at 7.9x its FY10E earning and 5.4x its FY11E earning. We initiate the coverage with a BUY recommendation and a 12 months price target of Rs.108 which discounts its FY11E EPS of Rs.15.5 by 7x.