Thursday, July 2, 2009



Wild swing was witnessed in the June series where at one point of time nifty was up by 8% during the first half of the series, only to retreat almost 12% from the high in the later half of the series and finally settled with a marginal loss of 2.2%. This muted dose came on the back of highest ever gain of 25% witnessed in the May series.

We have seen overall rollover of 74% as against 77% last month and last three months' average rollover of 76%. This Roll-over of 74% is at four year low - the lowest since May'05 when rollover of 72% was seen. We are starting the July series with a slightly lower OI of 109Cr shares as against 111Cr shares with which we had started June series. Even if we consider only stock futures, OI at the beginning of July series is slightly lower at 97.5 Cr as against 98.5 Cr indicating subdued confidence among the market players' in terms of rolling over of positions ahead of the budget which is going to be announced early next month.



OUTLOOK FOR THE JULY SERIES- BE BEARISH ONLY BELOW 4200 LEVEL ON CLOSING BASIS : In a nutshell, considering aggressive put writing at 4200 level and subdued rollover in stock futures which in-turn indicates that there is a higher possibility of positions being built in the first few days of the series before we see any major correction. Therefore our advise would be to remain bullish till 4200 level gets broken on the downside, the level at which we have seen aggressive put writing. One more notable thing is the lowest rollover in Nifty futures coupled with higher Nifty future premium, which shows lack of confidence among bears to build short positions ahead of the budget. This lower short rollover can be a negative factor during the time of correction, as market will not get enough support from short covering unlike past few months.Any close below 4200 level would result into unwinding of long positions, which might drag nifty to even 3950-4050 level. On the higher side we advise booking profit in long positions around 4500-4550 levels, the level which consists of second highest OI among the Nifty July calls.

To see full report: ROLLOVER ANALYSIS



We asked our country teams which of mid- to larger-cap stocks under coverage could double in the next 3 years if business conditions normalise’. Our list of 15 is weighted towards companies benefiting from domestic or Asian-led recovery i.e. banks, regional airlines, steel, property and some manufacturers. Although with average market cap of US$11.6bn, these are not all Tier I names. Greater upside however comes precisely through emerging from clouds they may currently be under.

Recovery to lead to EBITDA almost doubling for Air China coming 3 years.
Baidu’s DCF value on 13% discount rate estimated to rise to US$590 by 2012.
Current over-supply will ease over next two years leading to earnings recovery for Nine Dragons.
StanChart to get to 1.8x PB implied by 10% market cap to assets.
Hang Lung Prop disciplined whilst ambitious, only half way completing its HK$40bn China investment plan.

North Asia
Upside for Japanese auto manufacturers will doubling estimated for Nissan.
Fujifilm has strong upside from restructuring and potential improvement in ROE which should the stock above book over the medium-term.
Doosan Heavy on 8x EBITDA should double - leading nuclear plant contractor


2.75x PB for FY3/13 would take ICICI Bank to Rs1,550 through consolidating loan book, improving liability-mix and life insurance breaking even.
SAIL’s production capacity increasing 70% and will see improved product mix.
Strong volume growth aided by Indian recovery could lead to doubling in price for JSW Steel on undemanding 5x EV/EBITDA.


SIA moving to 1.7x PB in upcycle would double as book value increases.
KasikornBank has above average ROE with upside as provisions decline and enjoying operational gearing from heavy investment in new platform.
15x PER for 2012 will lead to doubling in stock price for United Tractors.
Olam been growing at 27% Cagr; recent capital points to more acquisitions.

To see full report: REGIONAL VALUATIONS


We present hereunder a table of companies that have announced dividends till May 2009 for FY09, for which dividend yield is 4%+ based on dividends for FY09 and those who have maintained or increased their dividend percentage over FY08.



We initiated coverage of ICICI Bank and set a target price of Rs 750.00 for Medium to long term.

The Bank has a network of 1,451 branches and about 4,721 ATMs in India and presence in 18 countries.

The Bank’s capital adequacy at March 31, 2009 as per Reserve Bank of India’s revised guidelines on Basel II norms was 15.5% and Tier-1 capital adequacy was 11.8%, well above RBI’s requirement of total capital adequacy of 9.0% and Tier-1 capital adequacy of 6.0%.

ICICI Bank intends to save up to USD 270 million in the current fiscal year by reducing sales force and other costs.

ICICI Bank aims to expand its fundgeneration profile and revenue streams to capitalize on the forthcoming opportunities.

Net Income & NII of the bank are expected to grow at a CAGR of 5% over FY08 to FY11E.

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To see full report: ICICI BANK


4Q08 interest coverage analysis of non-financials: early evidence of improving outlook

Early signs of outlook improving for banks' asset quality outlook
Our constructive view on banks was predicated on three key factors (i.e., improving growth outlook, rising ROE), including a benign outlook for banks’ asset quality due to resilient macro
economic prospects and the likelihood of further pick-up in economic activity. Our analysis of 1735 non-financial companies suggests that corporate sector performance has indeed seen a significant rebound in 4Q08; EBITDA margin and interest coverage ratio have recovered back to the levels prevailing in 1Q08 despite growth conditions being weaker than the corresponding period.

Further improvement to outlook likely with pick-up in economic activity.
Given our expectations of further pick-up in economic activity, we believe credit quality outlook for banks will likely improve further from here. There are some hurdles to our above view; debt/EBITDA ratio of some companies are very high which may require restructuring their financial position through capital raises or selldown of assets.

Regulatory forbearance, improving growth outlook to keep NPL/credit costs in check
Regulatory forbearance on NPL recognition and improving growth outlook for the economy are
likely to keep NPL/credit costs trends for banks under check. We do not anticipate significant
increase in credit costs from 2008 levels. We expect NPL ratio to increase modestly from 2.5%
in 2008 to 3% by 2010E.

Reiterate Conviction Buy on SBI; Buy on Axis, PNB and IOB
We believe state owned banks are key beneficiaries from an improving growth outlook for the economy; benefit of widening jaw between revenue and cost growth during 2010E and 2011E
would likely drive earnings growth stronger during this period. We expect ROE to cyclically
rise for the sector from 13% in 2009E to 17% in 2011E. We reiterate our Conviction Buy on SBI
and Buy ratings on Axis, PNB and IOB .

Key risks include rise in long bond yields as well as policy interest rates and potential set-back to our asset quality outlook.

To see full report: BANKING SECTOR


Investment Summary

DSML is holding sugar inventory of 2.3 lakh tonnes (97.0% of sugar production in 1HFY09)
costing INR 18.9 per kg as of March 2009. We believe the company is expected to benefit
materially due to low cost inventory and recent surge in sugar prices. We expect the
company to make gross margin (sugar price - cane cost) of INR 5.5 per kg and INR 8.0 per
kg of sugar sold in FY09E and FY10E respectively. We also expect EBITDA margins for the
company to improve by 170 bps and 210 bps YoY in FY09E and FY10E respectively.

Our understanding of sugar situation (global and domestic scenario) concludes that average
sugar realisation for the company will increase to INR 21.6 per kg and INR 26.0 per kg in FY09E and FY10E respectively. We believe better sugar realisations together with high
inventory will provide strong traction to the topline. We expect Net sales to grow at healthy
41.0 % in FY09E and 13.7 % in FY10E.

We expect shortage in sugar cane production to persist through SY10 even after accounting
for 25.0 % increase in acreage, resulting in import of raw sugar to cover the shortfall. DSML has refining capacity of 1700 TPD and has contracted to import 1 lakh tonnes of raw sugar. We believe that the company will able to refine only 25000 tonnes of raw sugar in 2HFY09 and rest will be refined in FY10. As per our calculation, the company will add INR 53.8 million in FY09E and INR 217.9 million in FY10E to EBITDA through processing raw sugar.

DSML has increased its exportable power capacity by 33.0% YoY to 80 MW at the end of FY08. We expect gross power sales to increase by 3.2% and 4.7% to INR 535.8 million and INR 560.8 million in FY09E and FY10E respectively. The company plans to start power generation from coal in FY10 and is in negotiation with government for open power sale.

We believe that concerns on highly leveraged balance sheet will subside by FY10 as debt will come to a more manageable level. The company doesn't have any additional capex plan in FY10 and will generate substantial free cash flow for repayment of debt. We expect debt-equity ratio to decline from 2.0x in FY08 to 1.8x in FY09E and 1.3x in FY10E.


At CMP, DSML is trading at 3.7x FY10E earnings and 3.4x FY10E EV/EBITDA. Historically,
sugar companies have mostly traded in one year forward EV/EBITDA band of 4.0-7.0x. Our
target EV/EBITDA multiple of 4.5x values DSML at INR 110. We rate the stock as BUY with
potential upside of 58.0%. Our reasoning for using low valuation multiple to arrive at price
target is due to our belief that sugar cycle will reverse post FY10.

To see full report: DHAMPUR SUGAR


Raise target price but downgrade on valuations.
We have rolled over our target price to FY2011E and revised our target price to Rs540 (Rs490 earlier). Also, we have downgraded our rating on the stock to REDUCE from ADD. Stronger Rupee assumptions have led us to lower our estimates for FY2010 and FY2011 to Rs33.2 and Rs41.8, respectively, from Rs41 and Rs50.5 earlier. We have raised our average copper price assumptions to US$5,000/ton from US$3,600/ton.

Downgrade to REDUCE on valuations
We have rolled over our target price to FY2011E from an average of FY2010 and FY2011 earlier. Following the rollover, we raise our target price from Rs490 to Rs540 which is 6% lower than the CMP. We therefore downgrade the stock from ADD to REDUCE.

Lower earnings by 19% for FY2010 and 17% for FY2011
We have lowered our earnings estimates lower by 19% for FY2010 and by 17% for FY2011 following changes in our Re/US$ assumptions. We have lowered our FY2010 and FY2011 Re/US$ assumptions from Rs50.75 and Rs50.5 to Rs48 and Rs47.75 for FY2010 and FY2011, respectively. Since most of Sterlite’s commodity prices are denominated in US$, earnings are highly sensitive to exchange rates.

Raise average copper price assumptions—no impact on earnings
We have raised our copper price forecast for FY2010 and FY2011 from US$3,600/ton to
US$5,000/ton. However, since the largest part of Sterlite’s copper business comprises of smelting, the impact of copper price revision is only on the topline. We maintain our aluminium price forecasts for FY2010 and FY2011 at US$1,700/ton and US$1,900/ton respectively. Also, our zinc price forecast for FY2010 and FY2011 at US$1,400/ton and US$1,500/ton, respectively, remains unchanged.

Raise power business valuations
We value Sterlite Energy’s 2,400 MW power plant currently under construction at Rs66/share (2X P/B). Sterlite Energy is implementing the project in Orissa and will supply 25% power (600 MW) to the state grid and likely earn regulated returns. Vedanta Aluminium will consume another 1,200 MW and the sale of balance 600 MW still to be tied up. We assume Sterlite Energy will be able to realize regulated returns from the power sale to Vedanta Aluminium, while the likely sale of 600 MW in the merchant market will yield attractive returns.

The project is expected to start commissioning in phases between December 2009 and September 2010. However, we note Sterlite Energy still needs to arrange the complete fuel required for the project. Sterlite Energy has been allocated a coal linkage for 600 MW by Coal India and allocation for the balance is awaited. Production from the allocated coal clock (Rampia and Dip Side of Rampia) will take another 2-3 years to commence. Sterlite Energy’s share of coal from the block is sufficient to fuel 1,000 MW of capacity.

To see full report: STERLITE INDUSTRIES



Glenmark’s Q4FY09 results were disastrous owing to one-time write-off of Rs1.6bn, including charge-back of Rs1.17bn for generic Trileptal. Excluding these, recurring consolidated PAT collapsed 97% YoY to a paltry Rs74mn, massively below I-Sec and Street estimates. With the management deciding to clean up its opaque and profit-boosting accounting policies (post Satyam fiasco), Q4FY09 results veered from the past trend – EBITDA margin (excluding R&D income) crashed 18pps to 13.6%. Hence, we cut FY10E & FY11E EPS 20% and 27% respectively. With investors’ risk appetite rising in the past three months, Glenmark has been re-rated along with broader indices and is likely to benefit from improving business performance from Q1FY10, a potential R&D deal and 1-2 key ANDA launches in FY10. We believe in Glenmark’s robust business model and world-class R&D pipeline. Glenmark remains our top large-cap BUYs in the sector.

Disastrous Q4FY09. After a disappointing Q3FY09, Glenmark shocked the Street with disastrous Q4FY09 results – reported loss of Rs1.2bn on the back of Rs1.6bn one-time write-offs. Recurring consolidate PAT was at Rs74mn versus Rs812mn in Q3FY09, which shows the degree of variance. However, the management expects strong performance recovery in Q1FY10 with improving demand from key markets, absence of one-offs and aggressive cost savings.

Despite short-term challenges, we expect Glenmark to succeed. Despite all the concerns, we continue to believe that Glenmark’s business model is among the best in the sector in India. Even after pruning FY09 forecast, Glenmark’s base business revenues and PAT have grown 6x and 8x respectively in the past five years. On the R&D side, it has bagged three world-class deals and earned cumulative ~US$110mn revenues (highest by an Indian pharma company). We expect Glenmark to succeed given its world-class R&D pipeline.

Worst may be behind; maintain BUY. We expect investor confidence to be largely restored in the next one year driven by improving visibility of key ANDA launches, recovering base business performance and at least one R&D licensing deal. We remain confident of Glenmark’s robust business model and success in the medium term. Maintain BUY. The stock trades at 13x FY11E P/E of generics business earnings. Our revised 18-month fair value of Rs312 implies 34% potential upside.



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To see full report: TRADE BYTES


Stock run-up discounts in the strong growth potential

IVRCL reported a robust revenue growth of 33.0% yoy in FY09, closely in line with our estimates. However, EBITDA margin declined 121 bps yoy due to the losses incurred by the Company on the initial projects in the power T&D space. We believe that the stock run-up post elections factors in the significant growth opportunities that the Company can capitalise on. Hence, we recommend a Hold rating on the stock with a revised target price of Rs. 325.

Robust order book; water and irrigation segment remains the key driver: IVRCL continues to be one of the strongest companies in the construction & infrastructure space. The Company’s order book currently stands at Rs. 145 bn, which provides revenue visibility for 2.5–3 years. The water & irrigation segment accounts for ~65% of the order book, planned spending for which has doubled in the 11th Five Year plan period. Currently, around one-third of IVRCL’s orders in the segment come from Andhra Pradesh (AP); thus, with the Congress back in power in AP, the Company stands to gain from the state government’s continuing thrust on irrigation projects through its ‘Jalayagnam’ programme under which it plans to spend ~Rs. 180 bn p.a. for the next 4–5 years.

EBITDA margin likely to improve from the present levels: EBITDA margin declined by 121 bps yoy to 8.7% in FY09 primarily due to the execution of the low-margined power T&D projects in which IVRCL is seeking to gain prequalifications. However, as the proportion of such projects is likely to decline in FY10, the margin is expected to improve to 9.7%, close to the FY08 levels.

Fairly valued stock: We have revised our target price upwards to factor in the
improving fundamentals and the better-than-expected management guidance. Post the general election results in May 2009, IVRCL’s stock has surged 87% compared with a 17% increase in Sensex. We believe that the upside potential remains limited from the present levels. Hence, we recommend a Hold rating.



4QFY09 Result above estimates

Godawari Power and Ispat Ltd. (GPIL) reported 4QFY09 results, which were above our
estimates. Net sales stood at Rs1,718mn (yoy down 34.8%, qoq down 18.9%), EBITDA stood at Rs173mn (yoy down 69.5%, qoq loss of Rs36mn) and Adj PAT stood at Rs79mn (yoy down 76.7%, qoq loss of Rs174mn). During the quarter, GPIL continued to sell surplus power in the merchant market as there was no billets production. In 4QFY09, the average realization of power was Rs6.50/unit. GPIL’s backward integration plan is progressing as per schedule. The 0.6mtpa pelletization plant is expected to be operational by Sep ‘09. The company has commenced Ari Dongri iron ore mine, having reserves of 7mt. GPIL is currently operating mine at a production level of 1,000t per day. GPIL has also received final approval for Borai Tibu iron ore mine and the company expects mine to be operational by 3QFY10. As on 31st Mar ’09, GPIL has net debt of Rs3.2bn at an average cost of 10.5%. At the CMP of Rs117, the stock is trading at 3.5x FY10E EPS of Rs33.6 and at 2.5x FY11E EPS of Rs46.3. On EV/EBITDA basis, the stock is trading at 3.5x FY10E EV/EBITDA and at 2.6x FY11E EV/EBITDA; while on P/B basis the stock is trading at 0.6x FY10E book value and at 0.5x FY11E book value. We maintain BUY on the stock with target price of Rs166 (0.7x FY11E book value).

Other highlights of the concall are as under:-
GPIL has commenced Ari Dongri iron ore mine, having reserves of 7mt. The company is currently operating at a production level of 1,000t per day and has target to produce around 0.3mt of iron ore in FY10. GPIL expects to be 50% captive for iron ore in FY10. This is expected to generate savings of around Rs3,500/t of iron ore as the cost of extraction is around Rs1,000/t and the current landed cost of iron ore for GPIL is around Rs4,500/t.

GPIL has also received final approval for Borai Tibu iron ore mine, having reserves of around 7-8mt. The company expects the mine to be operational by 3QFY10. The estimated capex for the mine development is around Rs150mn. The expected annual capacity for both the mines is around 0.6mtpa each.

During the quarter, the company continued to sell surplus power in the merchant market as the production of billets and ferro alloys has been temporarily discontinued due to low demand and better margins from power sales. The management has guided that production will be maintained at a very low level in for next few quarters. In 4QFY09, the average realization of power was Rs6.5/unit.

As per the management there will not be any production cut for HB wires and the company will purchase the billets required, from the market which is currently available at Rs21,000/t.

GPIL’s backward integration plans are progressing as per schedule. We expect 0.6mtpa pelletization plant to be operational by Sep ’09.

As on 31st Mar ’09, GPIL has total debt of Rs3,550mn and cash balance of Rs350mn, implying net debt of Rs3,200mn at an average cost of 10.5%.

In first FY09, GPIL has incurred capex of Rs1,700mn and expects to incur Rs850- 1,000mn in FY11.

To see full report: GODAWARI POWER