Monday, June 29, 2009

>Countdown to Railway Budget 2009-10 (WAY 2 WEALTH)

Countdown to Railway Budget : Stocks to Watch & Acquire

Beneficiaries of Railway Budget

There are handful of stocks to watch out for, which derive a large part of their business from the railways. These companies are gearing up to grab opportunities thrown up by the Indian Railways’ Plan entailing an outlay of Rs 2,30,000 crore during the 11th Five-Year Plan. These stocks are likely to be beneficiaries of the Railway Budget.

BEML : To meet the growing demand of wagons and new-gen suburban rail (EMU) coaches, the railways have already farmed out orders to various coach manufacturers, prominent among them is BEML. Thus the company will likely to benefit from the additional demand for wagons and rail coaches.

Titagarh Wagons : Indian Railways has decided to step up its share of procurements from private sector players for new-gen suburban rail (EMU) coaches. As part of the move which comes under its public-private partnership initiative, the Railway Board is shortly expected to invite fresh tenders for supplying 21 rakes from a clutch of companies, among which Titagarh Wagons is one. Moreover, as per railway officials, in the immediate future, the share of private players is only likely to go up, thus benefiting the company from the additional demand for wagons and rail coaches. Titagarh Wagons, which supplied the first coaches within six months of getting the final order and design, claims to be the first private sector player to supply EMU
coaches to Indian Railways. The company has set up a new facility at its existing factory at Hind Motor to meet the Railways order.

Stone India : Stone India is engaged in manufacturing equipment for railways like alternators, air brakes and brake regulators. The company would get business from replacement of old wagons.

Kalindee Rail Nirman : Kalindee Rail specialises in railway tracks, signaling and telecommunications. It has order book of over Rs 450 crore, including about Rs 150 crore from the Delhi Metro Rail Corporation. The huge investment earmarked by railways for freight corridor project will benefit this company. Kalindee Rail
is expected to get orders worth Rs 500 crores from the Indian Railways in next few years.

Texmaco : It is widely expected that in the railway budget, government will add more capital assets and revise the Liberalised Wagon Investment Scheme, which could generate more demand for wagons. This will boost the prospects of wagon manufacturers like Texmaco. The company has decided to raise upto Rs 200 crore of fresh resources from the market to finance future growth plans, including the setting up of a greenfield metro coach manufacturing facility. The company turned out to be the largest winner of rolling stock orders from the Indian Railways in 2008-09. It bagged orders for 3,455 wagons courtesy belated release of orders. The current order book of Texmaco stands at around Rs 1,300 crore.

To see full report: RAILWAY BUDGET


Long-Term Rally or Dead Cat Bounce?

# Activity has surprised on the upside. The three main reasons for this are likely to have a
front-loaded impact on growth.

# Thus we expect the growth momentum to stutter. GDP will rise in 2010 in the US but not
by much, while eurozone GDP will again contract according to our forecasts.

# The market is premature in worrying about inflation. Inflation will eventually come, but only
because deflation fears will first lead to more unconventional policies. Deflation will be the big
theme once green shoots fail to flower.

# Markets may price in more chance of tightening before they price in less. But this will
prove to be a false presumption since deflation will encourage central banks to ease further
next year.

# We expect bond yields to decline in H2.

To see full report: GLOBAL OUTLOOK


Joining the dots: Pick-up to take time

Stability, not recovery; Recovery to take time, in our view
We remain bearish on Indian IT stocks. We believe ‘stability’ is not recovery & that incrementally the Rupee poses downside risk to ests. Based on channel checks, including discussions with the senior partner/CEOs of two leading global IT outsourcing consultants, TPI & Alsbridge, we believe decisions are still not being taken & any recovery could be slow. We see no pricing power. We maintain our Underperform ratings on TCS, Infosys, Wipro & HCL Tech at 14-17x FY11 PE 0-4% 2yr EPSg. Of these, we have a relative preference for TCS on valuation & lower Re sensitivity. Greatest risk of disappointment from Wipro/HCL Tech. Niche
buys: MphasiS (8xFY11) on offshoring by EDS & WNS (7x FY11) on BPO.

CY09:“Summer pause now” & ramp ups likely next year

Good news: Market is not worsening & Requests for Information (RFIs) have picked up, but of course, pick up in discussions is from a much lower base than last year & budgets are unlikely to change this year. Bad news: Decisions still not being taken, given client business confidence is yet fragile. Secondly, the impact of the sluggish summer months, starting now, could be more pronounced this year. Finally, given start up costs of a new deal can be high, savings from
offshoring may be difficult to achieve this year, & hence the bulk of the deals could ramp next year.

CY10: Flattish budgets? Optimisation, buzz word

In line with our view that global macro recovery will likely be slow, consultants & customers confirm that “optimization” is the theme in IT spending. Hence, the pace of recovery in IT spending is debatable in 2010. Our best estimate is that budgets remain flattish next year & recovery in IT services could be late cycle.

Pricing risk: Too early to call victory

Pricing steadiness post the 5-15% pressure seen earlier in the year likely reflects improved sentiment, but could re-surface, in our view, when deals close. Near term pricing pressure stems from currently low levels of utilization. In BPO, competition from locations like Philippines could cap prices. Offshore vendors could fare better, but competition stiff Growth trends for offshore vendors are flat to positive, in our view, given the value offered & likely greater ‘passion’ of Indian vendors vs incumbents. That said, we have heard of a couple of global vendors being very competitive on pricing. Accenture has ~40,000 people in India now & IBM close to 55,000 in exports. Also alternate "near shore" locations including Mexico, domestic US,
Costa Rica etc. could nibble at demand, at the margin.

To see full report: IT SECTOR


India: 2009 Union Budget—spotlight on infrastructure

The closely watched Union budget to be presented on July 6 will be important in gauging the new government’s policy stance. We think it will have a big focus on infrastructure.

We expect the budget to also emphasize low-cost housing, rural spending, and support for the exportable sectors.

Given the spending pressures, we expect the central government’s fiscal deficit to remain high at 6.5% of GDP and the consolidated deficit at 10.1% of GDP in FY10 despite a fall in oil and fertilizer subsidies. The deficit, we think, will likely be financed comfortably due to disinvestment and the auctioning of 3G license proceeds.

Consequently, we think that long bonds which have sold off recently in part due to concerns about funding the fiscal deficit, may rally.

We continue to expect the INR to strengthen over a 12-month horizon, and think that concerns over financing the fiscal deficit are overdone. Our 12- month target for USD/INR is 44.7.

Our sector analysts have outlined their expectations on the budget, and the impact on their respective sectors. We expect the budget to be positive for IT, capital goods, logistics, and financials.

To see full report: UNION BUDGET


Investment Rationale

Federal Bank has one of the highest capital adequacy ratio's (CAR 20.2%, Tier I CAR 17.5%) which can be deployed to ramp up business as the economic scenario improves. The management has guided a loan growth of ~20% in the current scenario, but may increase it to ~25% if the macro-environment improves. We expect loans and deposits to grow at a CAGR of 22% and 19% respectively over FY09-FY11.

Fed bank's NIM (4.1% in FY09*) is highest amongst peers whereas cost to income ratio (31%) is lowest the sector. We believe that the bank will maintain NIM in the range of ~3.9% and cost to income ratios at 32% over FY09-11E.

Suppressed RoEs (due to 1:1 rights issue in FY08) and increase in slippages have led to underperformance of stock. However, we expect bank's RoE to improve to 14.1% in FY11 (12% in FY09) led by 20% CAGR growth in profits. We also expect bank to maintain provision coverage of 80% for the next two years (88% in FY09) which will shield earnings against rise in NPAs.

Fee income of the bank is expected to grow at ~20% CAGR over FY10-11E due to strong growth in remittances, forex, processing fees etc. We believe that lower recoveries from written off accounts coupled with decline in treasury income will lead to muted growth in non interest income.

Fed Bank is in talks with Catholic Syrian Bank (based at Kerala) for merger which has 362
branches and a business size of INR 100bn. As the merger goes through, Federal Bank's
branch tally will increase to ~1000 and will be among the top three private banks (after
ICICI & HDFC Bank) in terms of branch network.

Valuations and Outlook
We expect Fed bank's advances to grow at CAGR of ~22% over FY09-F11E whereas profits to
grow at 20% CAGR over the same period. This would translate into ROE's of 14.1% in FY11E
(currently 12%). Despite sharp run up the stock is trading a 0.9x and 0.8x FY10 & FY11 adj
book values. We initiate coverage on the Federal bank with a target price of INR 300 (1x
FY11 ABV) and Buy recommendation.

To see full report: FEDERAL BANK


Better fundamentals expected to drive next phase of the oil rally

Liquidation risk remains in the near-term as we wait for
better fundamentals, but we continue to expect
fundamentals to begin to improve in 3Q2009.

Recent price strength has been led by the long-end
Crude oil prices have continued to rise in recent weeks, seemingly continuing the pattern of recent gains. However, it is important to emphasize that the underlying price driver of these gains has shifted over the last three weeks. The price gains from late April through late May were largely led by strengthening timespreads as easing credit conditions reduced the high funding costs that had generated exceptionally large negative carry in the oil forward curves earlier this year. In contrast, recent oil price gains have been driven by a rise in long-dated prices, rather than by strengthening timespreads, which we believe has been driven by an improving forward fundamental outlook, in line with better global leading economic indicators.

We continue to expect fundamentals to improve in 3Q2009
In the near-term, we believe that the sizable long position that has built up in the market on expectations of improving fundamentals could create some liquidation risk as we wait for better fundamentals to take over. However, we continue to expect such an improvement in fundamentals to begin to take hold in the next several months, pushing the market into
deficit and generating renewed strengthening in timespreads.

To see full report: ENERGY OUTLOOK


Takeaways from Our India Investor Conference, June 24-26

Takeaways from Mumbai — Fortis Healthcare attended our India Investor Conference on June 25. Here are some key takeaways from management:

Long-term vision — Fortis expects to have a network with c6000 beds by 2012 (at an expected cost of cRs7m/bed for new beds). It is also trying to create an asset-light structure by entering more O&M contracts, which will help expand reach and grow top line without increasing its asset base.

Updates on key projects — A) Shalimar Bagh: Expected to come online within three months. It will be operational from the next quarter. Phase I will have 258 beds. B) Gurgaon: Expected to be operational within the next 12 months with 350 beds. C) Escorts: Revenues close to earlier peak levels (before Dr. Naresh Trehan's exit) with lower ALOS, leading to higher margins (c20% towards the end of FY09). FY10 will be a good year for Escorts Delhi.

New O&M deal announced — Fortis has entered into an O&M contract with S L Raheja hospital in Mumbai. This is the second Mumbai hospital in Fortis' network and diversifies its geographical spread. The hospital has 280 operational beds and Fortis will get a share of the EBIDTA and if it can expand EBITDA margins beyond a certain threshold, it would share in the upside.

Other takeaways — 1) Rights issue to open in mid-July (expects to close by August). SEBI approval has been received; 2) Expects established hospitals to reach c23-25% EBITDA margins (Mohali, Noida, Amritsar already at these levels); 3) Dr. Balakrishnan, one of Chennai's eminent doctors, has joined at Malar; strong revenue growth likely in FY09; 4) Board meeting on 30th to announce FY09 results.

To see full report: FORTIS HEALTHCARE


We initiate coverage on Thermax with an ‘ACCUMULATE’ recommendation and a target price of INR 450 per share implying an upside of 12.5% from current levels. Diminishing capital flows, falling investment growth due to liquidity crunch, will dampen the economic growth from 9% in
FY08 to 6.3% in FY09. While domestic financing conditions have improved, external financing
conditions are expected to remain tight. Private investment demand is, therefore, expected to
remain subdued. Pick up in the economy in the latter half of this fiscal, will improve the
performance of Thermax ltd. with muted growth expected this fiscal.

Muted Order backlog
The Consolidated order book for Thermax Group stands at Rs. 3078 crs up 17% yoy, with a book-to- bill ratio of 0.9x. The fall in order inflow of 5800 mlns by 20% yoy was on account of order cancellations and reduction in scope and value of some of the company's large orders secured during FY09. The Rs 800 cr Essar order has been reduced to 2 boilers from the previous 4 boilers and is now worth Rs 380 cr. Brahmani’s Rs 400 cr order is now worth Rs 297 cr. However, the management expects order inflows of approx Rs1,200 cr in H1FY10 and an improvement thereafter. Further, the company’s entry into subcritical boilers (800 MW) has enabled it to win large orders.

Dismal revival in IIP Index, positive signs for the Infrastructure sector
As the global slowdown has taken a toll on India’s industrial production, IIP for 2008-09 grew by
only 2.4% as against 8.5% in the 2007-08. A revival of industrial production is round the corner, with excess liquidity in the system, easing of financial conditions and declines in some key interest rate spreads suggest that industrial activity will pick up in the second half of 2009-10. The six -core infrastructure sectors has also registered a growth of 4.3% in April, the most since July 2008, compared to a growth of 2.3% in April 2008, backed by significant contribution from coal, electricity and cement sectors.

Worldwide Declining GDP growth rate
The World Bank has estimated GDP growth in the developing world to slow to a projected 2.1
percent in 2009 from 5.8 percent in 2008. The World Bank’s forecast predicts growth momentum to turn weakly positive in 2010 World GDP as growth is expected to increase to a modest 2.3 percent in 2010, as financial-sector consolidation, lost wealth and knock-on effects from the financial crisis continue to dampen the economic activity. India’s RBI has lowered the GDP growth forecast to 5.7 percent for this fiscal from the earlier projection of 6 percent because of a sharp downward revision in the anticipated expansion of industrial output.

With Recovery round the corner & entry in subcritical space, Accumulate with a price
target of INR 432
An industry leader in the industrial boilers segment in the captive power segment, Thermax’s entry into a new arena into the subcritical space (800 MW), and a revival seen in the economy from H2 FY10, Thermax is confident of achieving higher inflow of order growth. For the fiscal ended FY10, the management expects revenues and margins to be maintained with a better picture from FY11. At the current price of Rs 395, the stock is quoting at 15x FY2010E EPS and 13x FY2011E EPS, which we believe is not inexpensive. We initiate with an Accumulate Rating on the stock, with a target price of Rs. 450 based on a PE of 15x consolidated FY11E EPS of Rs. 30 per share.

To see full report: THERMAX LTD.


Budget preview: Easy does it

  • Populist budget likely as India builds a welfare state of sorts
  • Structural budget deficit set to rise…
  • …which may worry RBI, rating agencies and bond market

Having already introduced two stimulus packages, seen the budget deficit exceed 6% of GDP, watched the Reserve Bank of India slash interest rates and witnessed some encouraging signs of recovery one might have thought the government would be content to present a neutral budget on 6 July. This seems unlikely, however. We expect the budget to contain several expansionary measures, with little or nothing in the way of action to address the worrisome structural deficit. If we are right, then the RBI, rating agencies and bond market players may be less than enthusiastic in their reaction.

While markets have taken the view that Congress was the big winner from the general election, a better interpretation of the result is that it was the left of the Congress party that was the real winner. This may seem a subtle difference but it is one with very important implications. In particular, it probably means that the top priority of the government is to continue building a welfare state of sorts, with meaningful pro-market reform and structural budget adjustment taking more of a backseat than many are assuming.

In line with this, we expect help for the poor to take centre-stage in the budget. The government has already suggested that it will guarantee the provision of basic foodstuffs at low prices to all poor families as well as funding the construction of millions of new homes in rural areas. It may also extend the popular National Rural Employment Guarantee Act to include the urban poor, while promising additional infrastructure, preferably via public-private partnerships. The corporate sector could enjoy higher depreciation and/or investment allowances for spending on machinery and equipment.

Despite the prospect of all this additional spending, we wouldn’t be surprised if Mr Mukherjee forecasts a fall in the central government’s budget deficit in 2009/10. The Finance Minister will attempt to square the circle by arguing that the various programmes will be “financed from stronger economic growth” (expect some bullish growth projections), with the sale of government stakes in some state-controlled companies also helping out. The trouble with this approach is that many of the spending measures are likely to be permanent in nature while the divestments are one-off. In other words, the structural budget deficit is in danger of rising when it should be falling. No doubt the government will commit to a medium-term programme of deficit reduction, but given the eventual failure of the first Fiscal Responsibility and Budget Management Act one might be forgiven for doubting the credibility of FRBM (2).

To see full report: BUDGET PREVIEW


■ Assam Company Ltd. (ACL) has business interest in tea and upstream oil business. It is a producer of high quality, premium tea. In 1994 ACL diversified into the oil & gas industry. Currently, it has participating interests in 5 assets in the Assam-Arakan basin in North East India. Its E&P portfolio consists of one discovered field, one exploration block and three service contracts with ONGC.

ACL operates through 17 tea estates and gardens with planted area of about 8644 hectares on a grant area of 14664 hectares. The average yield per hectare stands at 1983 kgs.

The Company was awarded Amguri block (discovered oil field) and AA-ON/7 (exploration block) by the Government in 1996 under Pre-NELP round Amguri covers an area of approximately 52 75 square Pre round. 52.75 kms with estimated proven resources of 60 MMbbls of oil and 229 bcf of gas, whereas AA-ON/7 covers an area of approximately 1,089 square kms with estimated resources of 80 MMbbls of oil and 617 bcf of gas. ACL owns 40% participating interest in the Amguri and 35% in the exploratory block AA-ON/07.

Recently, the Company expanded its Exploration and Production asset portfolio by adding one more Block - AA-ONN-2005/1, the only Block in Assam Arakan basin offered under NELP-VII.

Oil and Gas production from two wells, Amguri 10B commenced in at the rate of 1,370
barrels of oil equivalent (boe) per day and increased to 1,660 boe per day in Q2CY08. The production will further enhance, once the adequate facilities are created and further wells are drilled. Currently, the Company is producing 1,700 barrels of oil (boe) per day, and the average production is expected to increase further during the next 2 years. Evidently, the Company is expected to deliver very decent earnings growth from oil and gas segment.

The stock currently trades at 11x its earnings and 1.0x BV.

To see full report: ASSAM COMPANY