Monday, August 31, 2009


Buy Large Cap "Quality” (stocks to own through the cycle)

• As we look through to year-end 2010, we think the backdrop for equities will be one where sentiment swings from periods of extreme optimism (selling the market) to extreme pessimism (buying the market). We think the best way to position in this environment is to be overweight themes that look through the volatility of the cycle, but to also be prepared to take on and shed
additional risk as market condition dictate.

• There is clarity on the start of growth recovery but not on its strength. For this reason we want some exposure to the cycle, but look for areas/industries which will still stand to benefit even if growth disappoints. In this regard, our investment themes out to year-end 2010 are a mix of those which help determine “core” portfolio holdings (stocks to be held through the cycle) and those which are more growth leveraged.

• If a key feature of the 2008/09 equity market sell-down was the indiscriminate de-rating of high and low quality stocks alike, then a key feature of the rally has been the significant re-rating of the low quality names. Many measures (forward earnings yield, PEG) now show the valuation dispersion below normalized levels.

• In our view, the intensity of financial and credit market disruptions continues to impact growth visibility, and a tight valuation distribution implies that you can now buy higher quality, stable growth names with low earnings risk, strong franchise values, dividend sanctity, and a strong balance sheet at similar valuation levels to lower quality, more cyclical stocks. We think the high quality names have the potential to be strong outperformers - not for the near term but over a number of years.

• To date, the risk rally has nearly corrected the entire underperformance of low quality/cyclical stocks through 2008 and early 2009 (page 5). However, the rally has been driven almost entirely by multiple expansion – clearly most evident at the low quality end of the market (page 5). Historically, the multiple expansion phase of the cycle has lasted around a year and has seen the average P/E expand by approximately 50%. From the low of 666 on the S&P to the current level ~1000, we have now seen this occur.

• While there still remains a reasonable dispersion across “Value” factors (all value is not equal), a number of valuation metrics (forward earnings yield, price for growth) are now supportive of high over low quality stocks.

• With Valuation, Sentiment and Fundamentals still reasonable, the equity market may climb higher. We would look to see a deterioration in breadth and for technical factors to become more overbought before we would become more concerned. However, we think the low valuation dispersion between high and low quality stocks means the best value is found in the former.

To see full report: GLOBAL STRATEGY



• Largest integrated fluorochemicals complex in India with hydrofluoric acid capacity of more than 20,000 tpa – provides ability to speedily address new requirements of customers.

• Co has got a healthy mix of domestic and export sales. While refrigerant business is domestically doing well, export business margins are fluctuating. The products are sold under the brand name “Mafron”

• Bulk chemical business is subject to some competitive pressure. However, specialty fluoride is growing at high pace (3 yr CAGR: 18%) and the co is a leading global player in BF3.

• Key clients – Top five global crop protection companies like BASF and Bayer Cropscience; domestic clients includes Ranbaxy, Matrix, Aurobindo, Hetero, Orchid, Lupin

• Phasing out CFC as per Montreal Protocol, will be more than compensated by HCFC business, which finds its application into air-conditioners and refrigerators. HCFC business window is open till 2040.

• Consulted Mckinsey & Co to identify areas of cost reductions and profit improvement.

• Income from sales of Certified Emission Reductions (CERs) will further improve the financial profile of the company. (Refer to next slide)

• Healthy B/S and will become debt free in the current year; strong return ratios as well.

• High dividend yield of 5%

• Substantial recovery of dues from the group company, Mafatlal Industries, is expected as per the Chariman’s speech at the AGM

• Valuable property at Mafatlal Centre, Nariman Point will be free of lease by 2012.

To see full report: NAVIN FLUORINE


India’s most ‘hated’ & most ‘loved’ stocks

We have run a couple of screens (Tables 1&2) for our clients who are looking for contrarian bets. The BSE-100 list of companies has been screened for consensus recommendations. The most hated stocks are those covered by minimum 10 brokers, of who at least 60% have a SELL recommendation. At least 60% of the ratings for the most loved stocks are BUYs.

From I-Sec Research’s perspective, the one stock that stands out is Ranbaxy – 32 brokers cover it, 75% of them think it is a SELL, and the stock has underperformed the Sensex by over 40% in the past 12 months. Our pharma analyst, Rajesh Vora, recently upgraded the stock to BUY (refer our note ‘Ripe for a turnaround’ dated August 10, ’09) based on the argument that the worst developments on the US FDA front are behind us and two of the company’s blockbuster products may hit the market in the next eight months.

To see full report: MARKET STRATEGY


Fear fizzles out, but optimism only skin-deep
August FMS a feast for contrarian, tactical bears. Headline data reveals strongest market sentiment in two years. Big turnaround from apocalyptic bearishness of March. But underlying data shows lack of conviction. Four out of five investors predict a “below trend” recovery and neither regional nor sector positions are extreme. The optimism is skin-deep.

Only 8% of investors expect weaker economic growth
Consensus (75%) expects some sort of global recovery. Few expect a “double-dip”. This means “weaker-than-expected” data in coming months would be negative forequities. Next set of Chinese & US data now crucial for September direction. China growth expectations dipped again (to 49%) in the August FMS.

Cash balances plunge to 3.5%, lowest since July’07
Strong inflows now required to fund further equity and credit rallies or investors likely to raise cash. Highest equity allocation (34% from 7%) since Oct’07; bond allocation (-28% from -12%) lowest since April’07.

Optimism built with narrow regional leadership
EM equities (52%) by far the big OW. Asset allocators UW every other equity region, although the Eurozone UW was narrowed considerably (from -23% to -13%). Note, GEM investors sharply cut exposure to Chinese equities to neutral.

Optimism built with narrow sector leadership
Tech (28%) the most favored sector everywhere. Big monthly jump (-11% to 11%) in exposure to industrials. Defensives (telco, staples, pharma) cut back to neutral, while utilities (-15%) most detested global sector. The underweight in bank stocks narrowed (to -10%), but investors remain UW the credit plays.

Contrarian long & short trades
Contrarian longs: Japan, US, Asia utilities, US & UK banks, UK & Eurozone real estate, Asia telco, EM materials. Contrarian shorts: US, Eurozone, Japan, Asia tech, EM consumer discretionary, Asia and Japan banks, Russia.

Our view: there will be dips…buy them
Short-term pullbacks often coincide with a bullish FMS. That’s happening. But August optimism feels grudging and only skin-deep to us. We remain cyclical equity bulls and buyers of dips. August FMS resembles June 2003 FMS, when big reduction in cash balances (4.9% to 3.9%) and increase in equity allocation (3% to 22%) caused a nascent cyclical bull market to pause for breath. The bull market resumed a few months later.

To see full report: FUND MANAGER SURVEY


Bharti gains revenue market share

Bharti increases revenue market share by 80 bps; strong gains in “C” category circles

Vodafone (India) posted the highest gains( 90 bps) , state owned BSNL saw the largest decline ( 120bps)

Tamil Nadu, Bihar, UP East, and Madhya Pradesh circles post sequential revenue growth despite reduction in termination charges

As per TRAI’s financial data for the quarter ended June 2009, Bharti’s revenue market share increased by c80 bp to c34% q-o-q, while Idea’s revenue market share (including Spice) improved by c30bp sequentially. The key highlight of Bharti’s performance was its gain in revenue market share in ‘C’ circle, highlighting its focus on rural areas. Reliance Communications (RCOM) saw a marginal decline (10bps) in revenue market share (c12%) despite a marginal increase (c10 bps) in subscriber market share (c19%) this quarter. BSNL lost revenue market share across the country, with major declines taking place in B and C circle. Vodafone emerged as the biggest gainer as its revenue market share jumped by c90 bps on a sequential basis.

In Q1 FY 2010, 18 circles saw a negative q-o-q revenue growth, resulting in a c2% decline in pan-India revenues. We attribute the lower growth to the decline in termination charges, implemented from the start of this quarter. However, despite that, service areas like Tamil Nadu, Bihar, UP East, and Madhya Pradesh posted positive revenue growth.

With the Indian wireless space passing through one of its most peculiar phases, we believe investors are better placed to focus on revenue market share and revenue generating subscribers. We define revenue earning customers as subscribers that are active and contribute to revenues at the end of the service provider. At present, the Indian regulator does not prescribe any standard for reporting subscribers, allowing each operator to form its own definition for subscriber churn and reporting subscriber numbers. We believe rising competitive intensity and the lack of subscriber reporting norms are leading to double counting of subscribers and hence investors must focus on revenue generating customers and revenue market share.

To see full report: TELECOM REVENUE


Differentiated business model: A major boon
TIL’s uniqueness lies in its ability to provide total infrastructure solutions rather than supplying only products. In its material handling equipment (MHE) division, TIL designs and manufactures port cranes, forklifts and reach stackers, which find application in heavy construction activities in projects or for movement of materials. In its agency businesses (Caterpillar), the company sells earthmoving products to mining and construction industries. Moreover, it has huge potential of supplying spare parts and offering after sales service to the installed customer base.

GoI’s increased port spending to drive TIL’s future growth
Infrastructure development is a priority for the Government of India (GoI) for sustained GDP growth. GoI is doubling the port capacity at an investment of INR 600 bn over the next five years. From our interaction with industry sources, we have learnt that ~12% of this spending is likely on equipment like cranes, forklifts, and material handling systems, translating into an opportunity of INR 72 bn over next five years. We believe TIL’s MHE division will be a key beneficiary of this spend. Even if we assume a 10% market share for TIL, it could translate into revenues of INR 7 bn over the next five years (4x its MHE revenues) in FY09.

Recovery likely in H2FY10; new products give FY11 visibility
As on June 30, 2009, TIL has an unexecuted order book of INR 2.61 bn, including order from principal sales of INR 1.1 bn. We expect H2FY10 to be better on account of a low base of last year and expected improvement in the order book. Also, from Q4FY10, new product launches from the new plant will kick in, targeting the port, bulk material handling and roads segments. Moreover, the
company is exploring the option of supplying components to its technical collaborators FY11 onwards from the new plant, which could provide upside to our estimates, as we have not factored in the related revenues in our assumptions. Further, new product launches could aid margin expansion; we estimate EBITDA margin to expand from 8.8% to 10.4% by FY11.

Outlook and valuations: Going steady; initiating coverage with ‘BUY’
At CMP of INR 248, TIL is trading at 5.7x its FY10E consolidated EPS of INR 43.9 and 4.5x its FY11E EPS of INR 55.6. Given: (1) the huge opportunity; (2) expected accretion to order book; (3) decent valuations; and (4) potential rerating from likely restructuring (with transfer of agency business to a whollyowned subsidiary), we initiate coverage on TIL with ‘BUY’ recommendation.

To see full report: TIL


We recently met with the management of Jai Hind Projects Limted (JPL). JPL is a Engineering, Procurement & Construction (EPC) company focused on the Infrastructure sector including hydrocarbons (oil & gas) and water. JPL has specialised in layout of cross-country, plant and onshore pipelines. JPL has laid over 10,000 km of pipelines with 4,000 km of Hydro Carbon pipelines.

Key Highlights
• Gas Transport Infrastructure is the key going forward – The Oil & Gas discoveries from RIL, GSPC, ONGC, CAIRN, etc. would require massive transportation Infrastructure within the country (both across the states and cities and within the city/towns). The physical network for expanding the City Gas Distribution & PNG is high on the government’s agenda. The proposed gas pipeline network to be built by GAIL, GSPL and other domestic players is valued at Rs 200bn over the next two years.

• Competition – JPL competes primarily with Punj Lloyd on many projects. The management is of the opinion that it is trying to position itself in the Rs.1bn~Rs5bn space where the economics to operate are superior for them compared to the larger players like Punj Lloyd owing to size.
However, the Infrastructure requirement in the country is massive so as to accommodate a large number of players.

• Superior EBIDTA margins – The margins has improved from 14% to 19% over the last couple of quarters which is on the higher side when benchmarked to the EPC business. The management has sighted two reasons for this – 1. The contribution of the non EPC (services) business to the overall mix has led to higher margins and 2. There was a substantial gap between the award and execution of one of the large orders, during which the commodities collapsed.

• Debt/Equity – The D/E at 1.8x is on the higher side given the nature of the business (EPC). The management however has taken a conscious decision to build captive Assets over the last two years which has made the balance sheet Asset heavy leading to lower Asset turnover.
Moving into FY10 & FY11, with better utilisation of these Assets, productivity would improve leading to improvement in Return on Asset and ROE.

• SAP Implementation & Other Administrative Changes - Strong ERP systems is the key for any growing company. The management is gearing up the company and creating more bandwidth so as to service the intake of large ticket orders efficiently. JPL has also added an office space of
69000Sq.Ft at Ahmedabad. This would not only centralize its functions across the city, but also give the company strength to negotiate the cost of working capital.

• The management is looking to raise funds provided it gets the right price for its equity. This would enable the company to participate and own Asset in water infrastructure space and other projects vide BOT & BOOT mode.

To see full report: JPL


Business impact of regulations in the Indian Asset Management Industry: Playing in the new market place

The asset management industry in India experienced significant turmoil in the financial year 2008-09, with assets under management (AuM) declining by approximately 17 percent compared to year-on-year growth of approximately 50 percent between FY03 and FY08. The capital markets decline and consequent preference for debt and liquid funds resulted in a significant shift in the product mix, with the proportion of debt and liquid funds increasing significantly in FY092. Understandably, industry profitability, measured as basis points of average AuM, dropped from approximately 22 bps to approximately 14 bps, putting significant pressure on asset management companies (AMCs).

In recent years, industry regulator the Securities and Exchange Board of India (SEBI) has focused more on investor protection, introducing a number of regulations to empower retail investors in mutual funds. SEBI began by disallowing initial issue expenses and mandating that mutual fund schemes recover sales and distribution expenses through entry load only. Further, investors applying to mutual funds directly were exempted from entry load. These steps aimed at creating more transparency in fees paid by investors and helping make informed investment decisions. Subsequently, in a recent move, SEBI banned the entry load as defined by AMCs and deducted from the invested amount, and instead allowed customers the right to negotiate and decide commissions directly with distributors. The objective is to bring about more transparency in commissions and encourage long-term investment. The regulation mandates that all scheme application forms carry a disclosure to the effect that investors will pay upfront commissions directly to distributors based on the investor’s assessment of various factors including service rendered. In addition, the regulation mandates that distributors disclose all commissions (whether trail commission or otherwise) of all competing mutual fund schemes.



Table of Contents

  • General Provisions
  • Corporate Tax
  • International Tax
  • Tax Incentives
  • Capital Gains
  • Transfer Pricing Provisions
  • Mergers & Acquisitions
  • Personnel Taxation
  • Wealth Tax
  • Compliance and Procedural Provisions
  • Taxes Deduction at source
  • Trusts / Related Provisions
  • Other Residuary Provisions
  • Annexure
To see full report: DIRECT TAX CODE


India: Monsoon risks, but domestic demand theme intact

SENSEX target 20,100 – Overweight

Market overview
India has been one of the top performers since the March low with the index rising 90% in USD terms. Much of the outperformance occurred in May, when a positive surprise on the elections result and a strong and stable mandate resulted in a country re-rating. After an inflow of nearly USD1b in one day (20 May), India has seen continuous strong inflows with nearly USD7.5b inflows since March lows. A lot of these flows have, however, been channeled into and
Primary/Secondary issuances (QIP’s) with almost USD4.5b raised in the domestic market and USD2b through ADR’s and GDR’s. There is another USD8-10b expected to be in the pipeline.

India’s fiscal deficit remains a concern with a 6.8% deficit at the centre (11.2% inclusive of states and off balance sheet items) on the back of increased government expenditure. However, a strong emphasis on infrastructure and strengthening of domestic demand through providing a consumption kicker has been the primary focus. While the government borrowing programme is expected to be large, this is not as bad as it seems as Indian corporates have been generating strong internal accruals and have reduced their capex plans. This, coupled with the QIP wave, has reduced concerns of crowding out of private investments as Indian corporates are well funded.

India, with their high levels of consumption of about 66% (Private: 56% of GDP, Public: 10% of GDP) is less affected by the fall in global demand and is a strong domestic demand story. The rural markets, which have been relatively untapped but have been given a lot of emphasis in the current budget, are another long-term growth driver for the economy. Consequently, we have seen sectors levered to the rural economy, like autos showing excellent quarterly numbers. Industrial production has also revived with a 16-month high of 7.8% y-y growth. These numbers have been on the back of increased demand and will result in a strong revival of private capex.

To see full report: ALPHA STRATEGY