Tuesday, August 18, 2009


Who moved my pie? Tracking institutional flows and asset allocation

Strong FII buying pushes up Indian equities in Q1FY10

FIIs were strong buyers of Indian equities in Q1FY10, pushing markets up ~50%
  • FIIs hold the largest chunk in India’s free-float market or one-half of what all domestic institutions together hold FII’s market hold. FII s activity (net flows) is an important determinant of India’s market movement. Q1FY10 saw substantial buying of ~USD 6 bn across sectors (highest in BFSI and real estate) after five consecutive quarters of net outflows. Maintain strong O/W on BFSI

Domestic institutional investors’ market activity subdued during the quarter
  • Insurance: Insurance funds were marginal sellers of ~USD 0.3 bn. They sold stakes in most sectors, specifically in consumer discretionary and utilities. They were marginal buyers of BFSI and telecom
  • MFs: MFs were marginal buyers during the quarter with ~USD 0.7 bn of net inflows into equities. They primarily bought utilities and energy, and sold BFSI
Spate of QIP issuances resulted in lower promoter holding in certain stocks
  • With strong liquidity in the system, many companies looking to deleverage or for business investments were able to raise capital through equity issuances to Qualified Institutional Buyers (QIBs). This resulted in dilution of promoter holding in such stocks.
To see full report: FII PUMPS MONEY IN INDIA


EBITDA hit on lower revenue

Revenue Halves: Salora International (SIL) reported a sharp 47.4% YoY decline (down 20.7% QoQ) in revenues to Rs1.06bn. This drop was on account of 50.7% YoY slide in its Infocom business and 15.5% YoY decline in the consumer electronics division.

Steep fall in EBITDA margin: With revenues nearly halved YoY, SIL’s EBITDA margin turned negative with a steep 761bp YoY and 64bp QoQ fall to -3.4%. The company reported an EBITDA loss of Rs36mn vs our estimate of Rs20mn profit for the quarter, primarily due to the poor performance in its Infocom business.

Estimates revised; Downgrade to Hold: We have cut revenues by 7.0% for FY10E and by 13% for FY11E. This explains the 28.1% fall in EBITDA and 49.7% in PAT for FY10E. For FY11E, margin is expected to recover on the back of 12.0% recovery in Infocom revenue. At CMP the stock trades at 10.1x FY11E EPS of Rs3.9. We think the stock is fairly valued and do not see much upside from current levels; thus the downgrade to Hold from Buy.

To see full report: SALORA INTERNATIONAL


Downgrade to Sell: Lacking Valuation Upside

Downgrade to Sell — This is purely a valuation call, with the stock now trading at 20x CY10E EPS. While we rate GSK as a good play on the stronger IPR regime in India, we expect any upside to be gradual over a number of years. In the interim, with an EPS CAGR of 15% (CY08-11E) and no near-term catalysts, we see a lack of upside over the next 6-12 months. We prefer Piramal Healthcare (1M) as a play on the Indian market.

Fully valued — Post a good run (up 9%/15% over 1/2 months, outperforming the BSE Sensex by 2%/8%), GSK appears fully valued at 23x CY09E and 20x CY10E EPS. While the P/E could expand as IPR benefits flow through to financials, we expect this to take a few years. Thus, while the stock could remain defensive with limited downside, we expect a lack of upside in the near-term.

Play on stronger IPR...— We expect GSK to be a key beneficiary of product patent introduction in India. Besides focusing on higher margin priority products, it has started launching patented and in-licensed products, and also intends to focus on branded generics. We expect these steps to drive sales growth to the industry level over the next two years and above industry rates beyond.

...but still a long haul — GSK expects only seven patented/vaccine launches (including Tykerb) over CY08-10. With none of these likely to clock sales in excess of Rs400m by the third year, we expect a lag before any material step up in growth rate and profitability. Risks exist in the form of patent challenges, compulsory licensing, and possible government intervention in pricing.

Lowering estimates and target price — We lower CY10E/11E EPS estimates by 6%/2% on higher staff and marketing costs, and expect 15% EPS CAGR over CY08-11E. Our new target price of Rs1,360 is based on 20x Sept-2010E earnings.



Media Reports of Balco Stake Purchase – A Positive Step If True

Quick Comment – Impact on our views: We remain Overweight on Sterlite due to its strong volume growth prospects, higher chances on balance stake purchases in HZL and Balco, and likelihood of higher valuations as we come close to the commissioning of its power plant.

What's new: According to the Economic Times, the Government is seeking Rs20bn from Sterlite to exit the balance of the 49% stake it owns in Balco, although this has not been confirmed.

Stake Purchase is value accretive in our view: As per our estimates, the 49% stake in Balco is worth Rs63bn. If this news is accurate, it can add about Rs61/share (about 9% of current stock price) to Sterlite's stock price just due to the gap in valuations of the 49% stake. Value of the option to monetize the mines and infrastructure further after buying out the stake could be bigger, though difficult to quantify now.

We also note here that as per the initial agreement, Sterlite was to pay Rs10.9bn for this stake. But when Sterlite tried to exercise the call option to buy the remaining stake, differences cropped up over the valuation of the company. Nevertheless, we feel the stake purchase of Balco, even at Rs20bn, would be a positive development for Sterlite.

To see full report: STERLITE INDUSTRIES


Hanging by a thread

Underperform, with a target price of Rs79
We transfer coverage of Suzlon to Inderjeetsingh Bhatia, with an Underperform rating and a target price of Rs79. The Street has been primarily focused on balance sheet issues. We believe the bigger concern should be the core business fundamentals, which are expected to remain weak despite the building economic recovery. The company is projected to deliver 18% earnings CAGR over FY09–12, primarily driven by subsidiaries (Hansen and REpower).

  • Valuations are rich at 10–30% premium to market: Suzlon is trading at 9.2x FY11 EV/EBITDA as against 7.1–8.1x for other global WTMs. These valuations are even more demanding, given Suzlon’s recent serious quality issues, the impact for which is still not known or built into numbers.
  • Target price of Rs77 based on SOTP: Our target price is based on 9x FY11E Suzlon Wind EV/EBITDA, which is a 20% premium to global average and 10% holding company discount to Hansen and Repower, which are listed subsidiaries. Although the long-term average EV/EBITDA multiple has been around 12x, we do not expect the stocks to re-rate again to those levels due to much more moderate growth projections over next few years.
Balance sheet overhang on the way to being addressed
Suzlon has seen a sharp correction on concerns regarding its ability to meet its debt obligations. However, we believe that the company will be able to pull out of these issues through dilutions, renegotiations on covenants and very likely the sale of its stake in Hansen, which could yield almost US$900m at current price.
  • There are near-term concerns on the test of covenants in September, when annualised consolidated EBITDA needs to be 4x net debt. If volume remains weak, Suzlon would be required to undertake further debt restructuring.

Business fundamentals to remain weak over medium term
Wind turbine manufacturers (WTM) are facing severe demand/supply mismatch, as huge capacity has been added in the past 12 months. Even with the most bullish industry estimates, which suggest a CAGR of 14% for the industry over the next three years, the overcapacity situation is likely to persist over the next three to four years, leading to pricing pressure. Please refer to our global wind energy team’s report, A shift in power, dated 1 May 2009, for detailed analysis on global demand supply dynamics.
  • A quarter of the global market is effectively closed to Suzlon: The Chinese market (almost 25% of annual installation) is practically open only to local manufacturers. Suzlon would thus be unable to participate in a huge growth opportunity beyond the 10% of its capacity based in China. Even in India, medium-term demand may suffer, as the tax arbitrage window is closing.
  • Near-term assumptions are below guidance: The company has guided for 2400–2600MW of revenues in Suzlon’s Wind business for FY10 (213MW in 1Q FY10). We believe that despite early signs of recovery in 2H FY10, the company will miss its guidance by 10%, leading to EBITDA margins of 10% in FY10 vs guidance of 12–14%.
To see full report: SUZLON ENERGY



Quick Comment – Impact on our views: We met Rakesh Biyani, Director Future Group, who heads the retail business. Our investment thesis regarding improving business outlook and availability of capital to fund growth plans continues to hold good. Management has consciously shifted focus to growth quality rather than just growth. We reiterate our Overweight rating and believe that any volatility in the stock price should be viewed as an entry opportunity. Here are the key takeaways from the meeting:

Aggressive growth and margin targets: PRIL has set an aggressive 16-17% same store growth (SSG) target for F2010. This compares with F2009 SSG of 7.0%. The company plans to achieve this target by adopting active merchandise management. First, the company is
likely to ensure that its fastest-selling products don’t go out of stock. It has increased its order per SKU range from 900-1,400 to 600-6,000 to ensure reduced stockouts for fast-selling products. Second, it has put in place a system to continuously monitor underperforming
categories/segments/SKUs so that they can be immediately replaced. Third, it has improved product quality and pricing across its merchandise (particularly private label) to ensure market share gains. Fourth, it has now set store-wise, product-wise and SKU-wise, daily/weekly sales targets so that the monitoring and feedback system improves significantly.

Focus on efficiency to improve margins: The management is targeting 200-250 bps improvement in gross profit margin, a 30% reduction in logistic costs, and a reduction in non-store inventory during F2010. Gross margin improvement is likely to be driven by
improvement in sell-through ratio (% of products sold through the primary store), from 79% in F2009 to 89% in F2010. The company achieved 79% in F2009, which was an improvement from 64% in F2008. Significant improvement in private label contribution, particularly in the apparel segment, may also help the overall mix improvement.

To see full report: PANTALOON RETAIL


Bracing for the future…

OnMobile Global reported its Q1FY10 results that were below our expectations. The topline for the quarter stood at Rs 107.2 crore against our expectation of Rs 119.9 crore. It grew 37.8% YoY while declining 7.0% QoQ. The EBITDA stood at Rs 24.4 crore at 22.8% of net revenues. The EBITDA margin declined by 408 bps QoQ and 1070 bps YoY due to increase in content fee and other sales and services expenses, which grew 9.4% and 60.1%, respectively. The PAT margin stood at 8.1% as against 19.9% in the last quarter. The company posted a PAT of Rs 8.7 crore against our expectation of Rs 23.9 crore.

Highlight of the quarter

First Vodafone Operator went live with RBT in Europe under the global Vodafone agreement that OnMobile had signed in Q4FY09. The company also launched voice portal and RBT services with a new GSM operator in India. Revenues during the quarter declined by 7.0% QoQ due to a seasonal trend in the company’s earning pattern. The de-growth was also a result of an internal restructuring in one of the operators that impacted the topline. Two large handset manufacturers have selected Onmobile’s Phone Backup solution for Android phones. The company has also partnered with Nokia to launch Life Tools, the first initiative to package agriculture, education and entertainment services on the handset for the large rural market.


At the CMP of Rs 547, OnMobile is trading at 35.1x its FY10E EPS of Rs 15.6 and 22.6x its FY11E EPS of Rs 24.2. We have used the DCF approach to value the stock at Rs 606. Our target price discounts the FY10E and FY11E EPS by 38.9x and 25.0x, respectively. We are upgrading the stock from HOLD to PERFORMER.

To see full report: ONMOBILE GLOBAL


This stock was first recommended in (VOL 1 N 23) at the then price of Rs 26 and was projected to be priced at Rs 40 in a year’s time. The stock has not only achieved the targeted price but is also trading above it for some time now. The Auto Component Industry in the recent past prior to the rent turmoil was one of the fastest growing sectors in the world economy with a global turnover of US $185 billion. Over the past years, the industry has been increasingly striving to attain cost competitiveness globally. The growing demand for automobiles coupled with the outsourcing trend has spurred the growth of the auto component industry worldwide with Asian countries like Japan, China, South Korea and India emerging as the major automobile manufacturers in recent years. Low cost sourcing has given India an edge to nurture the fast-growing auto component industry, over its global competitors. Indian auto component industry is estimated to touch a turnover of US $40 billion by 2014. In a nutshell,
growing economy, strong domestic & global demand, adoption of and adapting to innovative technology will lead the Indian auto component industry to make a mark globally. Munjal Showa Ltd (MSL) promoted by Munjals of Hero Honda and Showa Corporation (Japan) is a leading manufacturer of shock absorbers, struts and window balancers from its two plants located at Gurgaon.

The financial year 2008 / 09 has proved to be a challenging one for the automobile industry and in turn for the auto component manufacturers in particular, because of a relentless rise in oil price, the erratic movement of thedollar, an all round increase in raw material prices particularly of steel and in addition, also because of the infrastructure growth in the country not keeping pace with the needs of the economy. Another contribution factor was the high interest rates that made purchase outlays higher than before thus impacting the growth of this industry particularly in the second half. Testing times they surely are for this industry but one gets a feeling that we may have seen the worst. Despite this MSLs performance during the year saw a healthy growth of 13% in value terms and 12% in volume terms. The company expects the growth in volumes terms to be around 10% in the current FY 10 to be supported by the new models to be launched by its customers both in the 2 wheeler and 4 wheeler segments. MSL is also taking active steps to reduce its dependenc on few customers.

MSL continues to dominate the OEM (Original Equipment Manufacturer) business in the organized sector as its range of products has expanded significantly as a result of the introduction of new models by its customers. The company has during the current year commissioned its third plant at Uttrakhand having a capacity to produce 5 Mn shock absorbers annually thus catering to the needs of Hero Honda. During the year the company developed products for new generation vehicles such as Stunner, New Activa and City-08 produced by Honda Motorcycles, Scooters India and Honda Siel Cars respectively. In addition to this Hero Honda also launched nine models across all segments like macho HUNK, CBZ X-treme, New Passion Pro, New look products in the already successful brands like Glamour and Splendor. MSL is a single source supplier for the complete range of products manufactured by Hero Honda, Honda Siel Cars, Honda Motorcycles and all the export vehicles of Maruti Suzuki.

Any major rise in input costs shall affect future performance. Dependency on the growth of the automobile industry.Concentration on few customers is negative

At the current market price of Rs. 53 MSL’s projected FY 09 EPS of Rs. 7.4 is discounted 7 x. Long term investors can add this to their portfolio.

To see full report: MUNJAL SHOWA


Greaves Cotton Limited (GCL) reported results which were marginally below our expectations. Engines segment reported strong operating performance primarily driven by decline in the raw material cost. Though infrastructure segment reported PBIT loss, we believe improvement in the road and real estate segment (two key target sectors for the company) will drive growth over the next few quarters. During the quarter the company reported revenue of Rs.2.6bn, decline of 18.6%. Net profit declined by 35% to Rs.141mn.

During the quarter the company also started supplying twin cylinder engines to Piaggio for its newly launched commercial vehicle. We believe the twin cylinder engine and single cylinder engine supplies to Tata Motors that is expected to start from December 2009 would be volume growth driver for the company. With improvement in infrastructure activity, especially road construction and real estate we expect infrastructure segment to bounce back sharply. We expect the company to report revenue of Rs.12.7bn and net profit of Rs.629.8mn in FY10. The
stock trades at 10.5x FY09. We are maintaining our Buy rating on the stock with revised target price of Rs.160 (12.5x FY10 earnings).

Infrastructure segment to bounce back from hereon
Infrastructure reported disappointing numbers during the quarter. Revenue of the segment was at Rs.255mn and PBIT loss of Rs.33.7mn. However, with improvement in the spending in the road making and real estate (two primary target segment) we expect the segment to break-even in the next quarter. The company is also witnessing increase in enquiries from its customers as also improvement in the order book.

Engines business – twin cylinder supply starts to Piaggio
During Q4FY09, Engines division reported a decline of 1.8% in revenue to Rs.2.2bn. However, PBIT increased by 20.7% to Rs.327mn. PBIT margins during the quarter were at 14.4%, highest in the last eight quarters. Reduction in the raw material cost and cost savings initiative are the main reasons for improvement in the margins. The company has also started supply of twin cylinder engine to Piaggio during the quarter.

Tie-up with OEMs will be the future growth drivers
The management of GCL is evaluating options of supplying the twin cylinder engine to
various other OEMs apart from Piaggio. The company has already undertaken a capex
of Rs.600mn by setting up a plant at Aurangabad. We believe tie-up with new OEMs for
supply of SCV engines will be the growth driver for the company in the medium term.
Further, the company is expected to start supply of single cylinder engines to Tata
Motors from December 2009. Supply to Tata Motors would be a huge booster to the
engine volumes.

Worst may be over, Maintain BUY with target price of Rs.160
We believe the worst may be over for both the engines and the infrastructure segment. While the engines segment will be driven by automotive engines as Piaggio and M&M increase its market share in 3 wheeler segment and supply of twin cylinder engine to Piaggio, infrastructure division shall witness demand for its equipment as construction activity picks up. We expect the company to report revenue of Rs.12.7bn and net profit of Rs.629.8mn in FY10. The stock trades at 10.5x FY09. We are maintaining our Buy rating on the stock with revised target price of Rs.160 (12.5x FY10 earnings).

To see full report: GREAVES COTTON


The quarterly survey of global gold hedging and financial gold movements.

Global gold hedging resumed its trend decline in Q2 09, falling by 1.2 Moz (37t) to 14.7 Moz (458t) on a delta-adjusted basis. The decline when measured in committed ounces was a slightly larger 1.3 Moz (41t), taking that measure to 15.3 Moz (476t).

On a year-on-year basis, however, dehedging continues to slow, with the delta-adjusted global total down by 4.0 Moz compared with Q2 08, its lowest annual decline since we began collecting quarterly data in Q2 02.

AngloGold Ashanti was responsible for the largest reduction, removing 0.65 Moz from its book. It also cut another 0.74 Moz in July after our data cut-off point. Thirty-one other companies saw their positions decline, none however made a reduction greater than 0.1 Moz.

Only one company increased its commitments, and then by just 22,500 oz.

The global hedgebook is likely to continue falling in H2 09 due to AngloGold Ashanti's already announced reduction and stated plans for the rest of the year. Therefore we have slightly increased our full year forecast of dehedging to between 2-4 Moz.

The mark-to-market valuation of the global book (the cost to mining companies of closing out their hedge books at end Q2 09) improved to a negative $6.6bn compared with end-Q1 09’s revised negative $6.7bn, despite the gold price rising to $934.50/oz from $916.50/oz at the end of Q1 09. See p.7

Gold ETF outflows in July
The world’s 16 physically-backed gold ETFs saw inflows in Q2 09 of just 47.3t, much lower than Q1 09’s remarkable 458.3t. July was worse yet as - thanks mainly to the SPDR – there was an outflow of 41.0t. See p.10

Central bank sales weak; CBGA renewed with IMF key seller
Central banks globally are less keen on selling their gold. Net sales in the first six months of 2009 were just 60t, with 93t of net sales from advanced economies and institutions, and 33t of net purchases from emerging economies, mainly Russia. In this quarterly report our 'Focus' section takes a look at recently proposed IMF gold sales and the recent renewal of the
Central Bank Gold Agreement

To see full report: GOLD