Monday, July 6, 2009



The Union Budget for FY2009-10 announced by Finance Minister Pranab Mukherjee has turned out to be more of a common mans budget with the core focus being the continuation of efforts to achieve a 9% GDP growth in future while aiming at all round inclusive growth as well as social spending. More specifically this Budget like the earlier ones, has continued to focus on the basic pillars of all round development which include a strong push being given to the Agriculture sector with the overall outlay being increased to Rs 325,000 crs from Rs 2,87,0000 crs last year, followed by a continuedfocus on the social sector by encouraging public spending on programs for increased capital outlays on Rural Employment, Drinking Water and Mid day meal Schemes, providing primary education via higher budget allocations and increased thrust on the Bharat Nirman programme during FY2009-10.

The market which was keen awaiting wide ranging announcements ranging from a expected cut in the STT, a cut in Capital gains taxes, and also some big bang announcements on PSU divestments was disappointed that nothing of these actually materialized in the budget. In fact on the negative side MAT rate has been increased to 15% from 10% with some minor benefits like FBT being taken off and individual tax payers also given the benefits of surcharge of 10% being taken away in this budget. Nevertheless corporate tax rates have remained unchanged which is a sliver lining considering the tight financial resource crunch with the government.

NIFTY scaled a HIGH of 4693.20 on 12th JUNE 2009. Since then till the presentation of the Uniion Budget markets exhibited a CAUTIOUS approach, without any significant directional move. Markets went into today's Budget with High hopes on Disinvestment programme, aggressive Reforms and Market friendly announcements. But 'build-up' of positions was clearly absent in pre-budget action. The expectations of markets were not met in today's 'socially oriented' budget. Absence of big ticket announcements sent a wave of 'disappointment' among players. The result was a sharp knee-jerk reaction from marketmen. FIIs were seen off-loading aggressively, showing concerns on rising 'fiscal deficit'.

Technically speaking 'Support' around 4150 levels of NIFTY is crucial and the 'Risk' in markets will go up substantially if NIFTY slips below the mentioned levels (on closing basis) during the week. Next significant support for NIFTY exists far lower around levels of 3800. We however believe that despite the market disappointment over the budget, the probability of emergence of 'value Buying' at lower levels from domestic Institutions is very High.

Net Net we believe the Union Budget for 2009-10 has been on expected lines notwithstanding the fact that several big bang announcements related to FDI, Pension Reforms, Education Reforms, Insurance and PSU divestment were eagerly awaited but failed to prominently come up in this budget.

As mentioned earlier the primary focus of the government has been to accelerate growth in Infrastructure, ensure all inclusive growth by increasing social spending on several employment generation schemes and ensuring that export oriented sectors are given a helping hand by way of some fiscal concessions until the global economy picks up. While the markets seem to have given a thumbs down to this budget we believe that the Union Budget is not the only the conclusive document which is a means to the end and many more pro market policy announcements from the government on specific business areas is expected to materialize over the next 12-18 months. We hence believe that long term investors should utilize this market opportunity optimally by selectively investing in blue chips for a medium to long term horizon.



  • Direct Tax
  • Indirect Tax


  • Excise duty
  • Service tax

  • Automobiles
  • FMCG
  • Infrastructure
  • Education
  • Information Technology
  • Media & Entertainment
  • Metals
  • Pharmaceuticals
To see full report: BUDGET ANALYSIS


Key Features of Budget 2009-2010

  • to lead economy to high GDP growth rate of 9 per cent per annum at the earliest
  • to deepen and broaden the agenda for inclusive development
  • to improve delivery mechanisms of the government.
Growth rate of Gross Domestic Product dipped from an average of over 9 per cent in the previous three fiscal years to 6.7 per cent during 2008-09.

Whole sale price index rose to nearly 13 per cent in August, 2008 and had an equally sharp fall to zero per cent in March, 2009.

The structure of India’s economy changed over the last ten years with contribution of the services sector to GDP at well over 50 per cent and share of merchandise trade doubling to 38.9 per cent of GDP in 2008-09.

Recognising economic recovery and growth as co-operative effort of the Central and State Governments, meeting with Finance Ministers of States held as part of preparation of the Budget. This is intended to become an annual feature.


Short-term Measures
To counter the negative fallout of the global slowdown on the Indian economy, Government responded by providing three focused fiscal stimulus packages in the form of tax relief and increased expenditure on public projects along with RBI taking a number of monetary easing and liquidity enhancing measures.

Fiscal accommodation led to an increase in fiscal deficit from 2.7 per cent in 2007-08 to 6.2 per cent of GDP in 2008-09.

The fiscal stimulus at 3.5 per cent of GDP at current market prices for 2008-09 amounts to Rs.1,86,000 crore.

Measures taken by the Government were effective in arresting the fall in GDP growth rate in 2008-09. 6.7 per cent growth rate recorded in 2008-09.

Infrastructure Development
IIFCL to evolve a Takeout financing scheme in consultation with banks to facilitate incremental lending to infrastructure sector.

IIFCL to refinance 60 per cent of commercial bank loans for PPP projects in critical sectors over the next fifteen to eighteen months. IIFCL and Banks are now in a position to support projects involving total investment of Rs.1,00,000 crore.

Highway and Railways
Allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) increased by 23 per cent over B.E. 2008-09 in B.E. 2009-10 and allocation for Railways increased from Rs.10,800 crore in Interim B.E. 2009-10 to Rs.15,800 crore in B.E. 2009-10.

Urban Infrastructure
Allocation under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) stepped up by 87 per cent to Rs.12,887 crore in B.E. 2009-10 over B.E. 2008-09. Allocation for housing and provision of basic amenities to urban poor enhanced to Rs.3,973 crore in B.E. 2009-10. This includes provision for Rajiv Awas Yojana (RAY), a new scheme announced.

To see full report: BUDGET HIGHLIGHTS


Diversified financial services play: Reliance Capital is focused on businesses across the spectrum of financial services, including life insurance, asset management, retail broking and distribution. We expect its strong parentage and large capital base to help it achieve a substantial market share over time. However, we believe that the current market price is somewhat ahead of its fundamentals and we therefore initiate coverage with a REDUCE rating.

Life insurance and asset management businesses add most value to our SOTP
Focus on wide reach, superior pricing strategy across businesses
Financials: Core profitability yet to be demonstrated
Key risks: Execution, competition

To see full report: RELIANCE CAPITAL


Volumes slump; no GSEDS contribution

Transmission volumes remain lower: The benefit of lower naphtha prices continued in Q4FY09, due to which Gujarat State Petronet’s (GSPL’s) gas transmission volumes were impacted; volumes dropped by a whopping 28.5% YoY and 3.1% QoQ to 12.7mmscmd (Q4FY09– 17.7mmscmd). However, due to a tariff hike in January 2009 and payments from certain take or pay contracts, the revenues jumped by 13.7% YoY to Rs1.3bn (Rs1.2bn).

Higher staff costs, O&M expenses depress EBITDA margins: GSPL provided for arrears on salary revision with a consequent jump in staff costs by 39.9% YoY and 97.3% QoQ to Rs47m (Rs34m). O&M expenses climbed on account of higher compression costs during the quarter. Gas
transportation charges arose due to utilisation of another distribution player’s network (Sabarmati Gas). These charges are expected to remain for next few quarters. EBITDA margins, thus, declined by 320bps YoY to 85.5% (88.7%). However, operating profit increased by 9.6% YoY to Rs1.13bn (Rs1.03bn)

PAT declines by 14.3% YoY: Depreciation and interest costs remained more or less flattish during Q4FY09. Effective tax rate during Q4FY08 was low at 19.1%, while it was at 34.9% in Q4FY09. Due to this, PAT declined by 14.3% YoY to Rs348m (Rs406m).

Valuations: By March FY10, GSPL’s transmission volumes are anticipated to scale-up to 40mmscmd from the current 30-31mmscmd. The volume growth is, thus, expected to remain buoyant over the next couple of years. However, the overhang on contribution towards GSEDS still
remains. GSEDS contribution will be earnings dilutive for the shareholders. Hence, we maintain our ‘Reduce’ rating on the stock.

To see full report: GSPL


FDA strictures nettle goliath

Sun Pharmaceutical Industries’ (SPIL) US subsidiary Caraco Pharma’s (Caraco) continued non-compliance with US FDA standards has aggravated, with the recent seizure of drugs, which was unexpected. Despite strong support from SPIL that boasts of best-in-class management, Caraco has failed to adhere to US FDA’s cGMP standards for over a year. While financial impact may be limited (Caraco contributed 8% of SPIL’s consolidated PAT in FY09), the FDA issue is a substantial risk to SPIL’s repute. SPIL management has retracted its 13-15% YoY FY10 revenue growth guidance, which it will revisit. Hence, we cut our EPS 11% for FY11E but raise it 9% for FY10E, with SPIL continuing to sell generic Protonix at risk. We trim fair value to Rs1,216/share and, for the first time, downgrade the stock to HOLD from Buy. The stock trades at FY10E EPS of 16x, excluding upside from para IV products.

Seizure of Caraco’s drugs by US FDA. Despite ‘improving compliance with the US FDA’ having been Caraco’s priority for the past five years as well as full parent support with excellent management, violation of manufacturing standards for over a year is alarming. The recent seizure of Caraco’s drugs (including ingredients) at its three Michigan-based facilities surprised us. SPIL believes that Caraco is likely to enter into a consent decree with the FDA to ensure complete compliance with cGMP requirements. Resolution of the issue is likely take at least 9-12 months.

Generic EffexorXR and base business – Key positives. SPIL expects US FDA approval for generic tablet version of EffexorXR capsules in FY10, which could potentially generate additional EPS of Rs11-14 if launched in December ’09. SPIL’s track record of sales and PAT growth of 2x and 3x respectively on a rolling four-year basis is exemplary. Notwithstanding current US FDA issue with Caraco as well as the Taro Pharma acquisition, we have confidence about SPIL’s robust business model and expect healthy performance in the medium-to-long term.

Downgrade to HOLD for first time. Given uncertainty on course of action (which could potentially worsen before getting fully resolved), timeline for the resolution, inadequate data for calculating precise negative impact on earnings, we downgrade the stock to HOLD from Buy. This coupled with a subdued H1FY10E and absence of major positive stock catalysts (except approval for generic EffexorXR), we expect the stock to underperform peers and Sensex over the next 2-3 quarters.

To see full report: SUN PHARMACEUTICALS


Debtors write-offs of Rs180m impacted 4QFY09 result: During 4QFY09, Simplex reported lower net profit of Rs299m (-28%YoY vs estimate of Rs330m) due to debtors write-offs of Rs180m. However, during FY09 the adjusted net profit at Rs1.32b was in-line with estimates of Rs1.36b due to lower tax rate of 28.3% as against estimated 33%. During FY09, company wrote off Rs250m of debtors from government sector (vs Rs108m in FY08) since they were long due, of which Rs180m was provided during 4QFY09. Also, the company has recovered Rs60-70m in FY09 from delayed receivables, which had been written off in the past years. We have considered the write-offs as normal business expenses, and thus have not adjusted the same as extra-ordinaries. Also, while the write-offs of overdue receivables provide tax benefits, they do not impact the ability of the company to recover the money from customers. It adjusted for debtors write-offs; the numbers are in-line with estimates.

Order intake during 4QFY09 at Rs11.5b (-8%YoY); expect improvement from 2QFY10/3QFY10: Order book for Simplex stands at Rs101b (+9.5%YoY, -1.7%QoQ), book to bill of 2.1xTTM revenues. Order intake during 4QFY09 stands at Rs11.5b (-8%YoY, -21%QoQ). Order intake for FY09 stand at Rs56.6b (-15.5%YoY). Management indicted that both domestic and international markets are already witnessing some revival. Thus Simplex expects order intake (with desired profitability) to show improvement from 2QFY10/3QFY10.

Outstanding debt reduces on working capital improvement: During 4QFY09, outstanding debt declined from Rs13.2b as at Dec 2008 to Rs12.2b, and has further reduced to Rs11.8b as on May 2009. The reduction in debt has been driven by improving working capital, with net working capital cycle at 81days in FY09 vs 98days in FY08. This working capital improvement has been driven by better inventory and debtors management.

Valuation and view: We have maintained our earnings estimates at Rs36.2 (+35.3%YoY) and Rs44 (+21.5%YoY). Maintain Buy with a price target of Rs437 (based on 12xFY10 earnings).



The Future in a Dynamic Environment
Outlook for 2015


1. Executive Summary
2. The Indian Mutual Fund Industry - Current State
3. Challenges and Issues
4. Voice of the Customer
5. Future Outlook in a Dynamic Environment
6. Action Plan for Achieving Transformational Growth
7. Summary

To see full report: MUTUAL FUND INDUSTRY


Company Snapshot
Gas Authority of India Ltd. is India’s flagship Natural Gas company. India's principal gas transmission and marketing company, was set up by the Government of India in August 1984 to create gas sector infrastructure for sustained development of the natural gas sector in the country. GAIL today has diversified into Petrochemicals, Telecom and Liquid Hydrocarbons besides gas infrastructure. The company has also extended its presence in Power, Liquified Natural Gas (LNG) re-gasification, City Gas Distribution (CGD) and Exploration & Production (E&P) through equity and joint ventures participations.

Quarterly Financial Highlights
GAIL posted decent results for the quarter ended March 2009. There was an increase in the net sales by 26.11% from the corresponding quarter last year standing at Rs.62339.50 million up from Rs.49430.70 million. The operating profits for the company have fallen from Rs.11677.40 million to Rs.10871.30 million from Q4FY08 showing a dip of 6.90% from the same quarter last year. The company’s net profit has surged from Rs.2533.60 million in Q3FY09 to Rs.6300.20 million in Q4FY09 and dropped from Rs.7223.80 million in Q4FY08 depicting a fall of 12.79%. This fall can be attributed to lower price realization and exploration & production costs. Both the margins have shown a decline. The Operating Profit Margin fell from 23.62% to 17.44% this fiscal and the Net Profit Margin stood at 10.11% as compared to last financial year’s 14.61%. EPS for the quarter ended March 2009 stood at Rs.4.97. as compared to Rs.8.54 last fiscal. The EPS is calculated based on the equity standing in the corresponding quarter.

Segmental Outlook
The Oil and Gas industry has been playing a major role in the rapid growth of the Indian economy. The natural gas sector along with petroleum including their transportation, refining and marketing constitute more than 15% of the GDP. The production of Natural Gas has only increased year on year. The New Exploration Licensing Policy (NELP) designed to address the increasing gap in the demand and supply gap of Gas in India has attracted both domestic and foreign players. Demand for Gas in India is dominated by the power and fertilizer sectors that accounts for 66% of consumption. The demand for oil and gas is likely to increase from 176.40 million tonnes in 2007-2008. The gas sector is set for a major upturn due to the increase in availability of gas as a result of large scale gas finds in India. The share of natural gas in the overall fuel mix is expected to increase to 20% by 2025. Apart from RIL and GSPL’s network in Gujarat, Gail has a monopoly in long distance gas transmission. Reliance industries is planning to invest between US$5.45 billion to US$6.54 billion in the coming three years to lay a 10,000 km pipeline. ONGC also plans to invest US$696 million to increase its facilities at their Assam and Western Offshore oilfields to boost the output.

To see full report: GAIL


India Cements’ 4QFY09 results were lower than our estimates, with EBITDA margins of 25.4%. Higher RM cost and higher other cost impacted performance. The management gave positive outlook for the industry for FY10, and expects marginal improvement in FY10 realizations over FY09.

Net sales grew just by 5.3% to Rs8.9b, being impacted by 5.5% YoY decline in volumes to 2.32MT. However, realizations were higher by 2.9% QoQ (~10.7% YoY) to Rs3,733/ton, benefiting from part retention of excise duty cut. Volume growth was impacted by on-going brownfield expansions and power cuts in TN & AP. Income from IPL of Rs165m for 4Q and Rs685m for FY09.

EBITDA de-grew by 14% to Rs2.25b, resulting in EBITDA margins contraction of 570bp YoY (~150bp QoQ improvement) to 25.4%. Margins were impacted by higher RM cost and higher other expenditure. Higher depreciation, higher interest and lower other income further restricted recurring PAT to Rs1b (~26% YoY decline).

Setting up CPPs, plans to acquire to coal mines: India Cement is planning to set-up 100MW CPP in Tamil Nadu and Andhra Pradesh with capex of Rs5b. However, its investment in CPP would depend on the structure of ownershipof these assets. Further, it is pursuing coal mining rights in Indonesia to meet its coal requirements.

We are downgrading our EPS estimates for FY10 by 4.3% to Rs20.3, but maintain FY11 EPS at Rs14.7. Downgrade in FY10 estimates is to factor in for higher RM and other expenditure as well as EBITDA losses in shipping business. The stock is valued at 6.5x FY10 EPS (fully diluted, ex-treasury stock), 3.6x FY10E EBITDA and US$59/ton (at 14MT capacity). Maintain Buy.

To see full report: CEMENT SECTOR


AIA Engineering (AIAE) FY09 results were in line with our estimates. On a consolidated basis, AIAE reported revenues of Rs 10.3 bn (up 45% YoY), EBITDS of Rs 2.6 bn (up 39% YoY) and adj. PAT of Rs 1.7bn (up 28% YoY). Due to uncertain export-market outlook (esp mining); the mgmt yhas not given specific revenue guidance but is cofident of maining margins.

FY09 result highlights and concall | takeaways

Sales volume were up 11% YoY to 95,348 MT, largel due to strong H1FY09 (~22% growth).
Margins: Bcaked by favourable sales mix and weaker INR, realizations increased ~32% YoY to Rs 108/kg.
MTM: AIAE partially hedges its forward sales (30-40%). In FY09, it booked gross MTM loss of Rs 320 mn (Rs 200 mn net MTM).
Balance sheet: Reduction in debtor (66 days) and inventory days (45 days) was noteworthy. Net cash increased to ~Rs 2.7 bn.

To see full report: AIA ENGINEERING