Wednesday, September 2, 2009


Infotech more than just survived in FY09, a year of great challenges for Indian IT industry due to recession in key global markets and high exchange rate volatility across currencies. We believe that by delivering a strong operating performance and making crucial business investments, Infotech has further differentiated itself in the mid-cap IT space. Aided by huge generation of cash during the year, the much stronger and fungible balance sheet provides opportunity for further differentiation. Post our analysis of the company's FY09 annual report, we re-rate Infotech's valuations by 1x FY11E EPS. Key takeaways of our analysis are as follows

Strong operating performance with 1) reported consolidated revenue growth of 4% under US GAAP despite a significantly higher cross currency hit than peers 2) 200 bps OPM expansion on toght cost control and revenue shift towards EMI segment and offshore 3) net profit growth of 8% despite making substantial provisions for unrealized forex losses.

FY09 witnessed large customers reposing their faith in Infotech by renewing theri relationships. Infotech also added four new image-enhancing relationships.

Proforma net profit stood material 6.7% below reported profit. Outstanding ESOPs represents a potential 3.2% equity dilution




  • Issue opens: Monday, September 7, 2009
  • Issue closes: Thursday, September 10, 2009
  • Price Band: Rs. 950 - Rs. 1050
  • Bid Lot: 6 Equity Shares

Oil India Limited is the second largest national oil and gas company in India as measured by total proved plus probable oil and natural gas reserves and production (Source: DGH). The company is primarily engaged in the exploration, development, production and transportation of crude oil and natural gas onshore in India. The company also process produced natural gas to extract LPG. They are present internationally through the exploration of crude oil and natural gas in Egypt, Gabon, Iran, Libya, Nigeria, Timor Leste and Yemen. They primarily conduct activities with respect to domestic producing blocks and exploration activities in their nomination blocks independently. They also conduct exploration activity, both in India and overseas, through joint venture arrangements and PSCs with other oil companies.

The company was incorporated as a private limited company in 1959. As of March 31, 2009, all of their estimated independent proved plus probable oil reserves, as well as 93.66% of their estimated independent natural gas reserves is located onshore in the Upper Assam basin in the states of Assam and Arunachal Pradesh. Additionally, they have independent natural gas reserves in the Jaisalmer basin in the state of Rajasthan. In addition to their independent reserves, they also have a 40% participating interest in crude oil reserves in the Kharsang fields in the Assam-Arakan basin in the state of Arunachal Pradesh. They own and operate, as a common carrier for them, ONGC and BRPL, a 1,157 kilometer cross-country crude oil pipeline.

The pipeline has the capacity to transport over 44 million barrels of crude oil annually. They transported approximately 45 million barrels of crude oil in fiscal 2009 to four public sector refineries in the North East region of India located in Digboi, Numaligarh, Guwahati and Bongaigaon. They own ten crude oil pumping stations and 17 repeater stations, spread across the states of Assam, West Bengal and Bihar. They also own and operate a 660 kilometer petroleum product pipeline connecting NRL to Siliguri in West Bengal, which was commissioned in August 2008.

The Company has interests in downstream activities through a 26% equity stake in NRL, a 10% equity stake in BCPL and a 23% equity stake in DNP Limited. They also hold a 10% equity stake in a 741 kilometer pipeline construction project in Sudan that was completed in 2005. They have the ability to provide various exploration and production-related services to the oil and gas industry, both domestically and internationally, including pipeline construction, pipeline consultancy services, drilling and well work-over services, research and development services and logging services.

As a public sector undertaking, they have been accorded "Mini Ratna Category I" status since 1997 by the GoI for their operational efficiency and financial strength. In recognition of their performance and consistent achievement of targets negotiated under the memoranda of understanding that they enter into with the GoI on an annual basis, the GoI has rated their performance as "Excellent" for fiscal 2005 and 2006 and "Very Good" for fiscal 2007 and fiscal 2008. They were also ranked as the best public sector undertaking by the Department of Public Enterprises in its annual survey for fiscal 2006.

To see full report: OIL INDIA LIMITED


Next Phase: NIM and Profitability Expansion

Profitability over volumes – Chinese banks have underperformed lately due to concerns over slowing loan growth. We see this current negative sentiment as a buying opportunity. Despite slowing loan growth, we believe the earnings trend remains positive due to improving loan and deposit mix, and higher rates. We see expanding NIMs as a healthier earnings driver than surging loan volumes.

Improving loan mix – 2H09 loan mix should improve lending shifts from discounted bills to regular loans, for an estimated yield differential of 250-300bps. This process has already begun in July with Rmb198bn contraction in discounted bills.

Improving deposit mix – An active A-share market should support a shift in deposits from time to demand (~150bps yield differential), helping to lower funding costs.

Rising interest rates – Recent increases in repo/interbank rates and bond yields are positive for NIMs across the sector. Interest rates are likely to head higher as our economists now expect lending and deposit rate hikes to begin in 2Q10.

Smaller banks bigger beneficiaries – Given their higher proportion of discounted bills (up to 30-40% of 1H09 loan growth), historically greater deposit mix volatility, and greater gearing to symmetrical rate hikes, smaller banks are bigger beneficiaries. We now expect NIMs for the sector to recover 10-20bps hoh in 2H09E, followed by 5-20bps yoy expansion in FY10E (no rate increase assumed), with smaller banks leading the recovery.

Raise TPs, Upgrade CMB to Buy – CMB and CNCB are most geared to these themes and our top picks among smaller banks. Top picks among big banks: CCB, ICBC.

To see full report: CHINESE BANKS


Fund re-risking: Net long exposure rises to pre-Lehman levels

Net long exposure rises to 31%, highest since June 2008
Hedge funds have increased net long exposure to the highest levels since June 2008, amidst improving economic data, stabilizing capital markets, and rising equity prices. Hedge funds are no longer net short Financials.

We estimate 7% of hedge funds have shut down since June 2008
Based on public 13-F filing information, roughly 7% of hedge funds that filed their holdings in June 2008 did not file in June 2009. These 7% of funds represented 4% of total hedge fund long equity AUM in June 2008.

Invest in the re-risking theme: Buy our Hedge Fund VIP List
Using the 13-F filings to identify the “stocks that matter most” to hedge funds has proven profitable in the past. Hedge fund selling pressures have abated, and hedge funds are likely to put more cash into their top positions. Falling correlation suggests that single-stock investment ideas will gain favor over a macro-driven market.

To see full report: HEDGE FUND ACTIVITY



• We initiated Coverage of VIP Industries Ltd and set a target Price of Rs. 115.00 for Long Term gains.

• VIP Industries is a leading manufacturer of moulded furniture, markets hard and soft luggage products primarily in India.

• Company products are sold across 1,300 retail outlets in 27 countries.

• VIP Industries plans to open 50-60 showrooms, out of which about 15 showrooms would be in the eastern region.

• The top and bottom line of the company is expected to grow at a CAGR of 7% and 15% over 2008 to 2011E.

To see full report: VIP INDUSTRIES LTD


Poised to pick up speed…

Texmaco is the leader in the wagon segment with a 25% market share. It has sustained its leadership in the past and has an established performance track record. The company has an order backlog of ~5,500 wagons and we believe that Texmaco will continue to maintain its leadership. Moreover, increasing investments in hydel capacity augur well for the hydromechanical division. However, the hydel power generation industry typically suffers from significant delays in orders and execution.

Texmaco has formed a JV with United Group (Australia) for manufacturing metro and EMU coaches, which is expected to commence operations in the next 10-12 months. We initiate coverage on Texmaco with a BUY recommendation and a price target of INR124.

Recommendation rationale

Wagon orders adequate: The company has an order backlog of 5,500 wagons, which should be adequately sustain FY10 performance. IR releases tenders for wagons annually. A tender for 5,862 wagons was recently floated in July 2009 and the balance is expected during Q3FY10. Thus, bulk of the benefit from new orders being awarded will be reflected in FY11, in our view and gives us comfort over revenue visibility. However, over the past two years, there has been considerable
delay in award of orders and quantity tendered lower-than-planned. IR targeted procurement of 20,000 wagons annually in FY08 and FY09; against this, actual procurement was ~50%.

MRTS coaches will take time: The metro and EMU coaches will take another 10-12 months to commence operations. The Texmaco-United-Kawasaki JV will face competition from established global players such as Bombardier and domestic manufacturers such as BEML. Further, with orders that may flow to the JVs, Texmaco will capture 50% or lower share of profit.

Hydromechanical orders will take time: Hydel projects are subject to long gestation and execution periods. Even with a renewed target of tapping 50,000MW, many projects are suffering due to hurdles in relocating the affected population. Hence, even with an increase in order flows, execution will take 2-3 years. Equity issue to dilute equity: Texmaco has raised INR1.7 billion through a QIP at a price of INR104/share. This will lead to a 14.8% increase in equity to INR127.1 million. Further, IR has steadily lowered the free-issue components and the same will have to be procured by the company. This will imply increasing inventory levels and can impact ROCE & RONW.

Valuation and Recommendation

At CMP of INR109, the stock trades at a P/E of 15.1x FY10E EPS of INR7.2 and 12.3x FY11E EPS of INR8.9. The announcement of a 61% increase in procurement in the Railway Budget for FY10 points to increasing focus on easing infrastructure bottlenecks for the industry. We initiate coverage on Texmaco with a BUY recommendation and a price target of INR124 at a target P/E of 14x FY11E. We have not factored in any value from its Delhi land as it has been under litigation for
the last many years without result.

To see full report: TEXMACO LTD



In our April On the road report we had said that we came back incrementally more positive and it was not all ‘gloom and doom’. Last week we travelled through parts of Haryana, Uttar Pradesh and Rajasthan to gauge the mood of small town and rural India and we came back incrementally more negative than positive. Admittedly the feedback is still fairly mixed, but the signs of stress are unmistakable. Huge government spending, land buying in select pockets (like along the Taj Expressway) and some diversification in income streams are masking the distress for a cross section of people. Make no mistake – rural income and consumption will hit the speed breakers. Further the festive season in Kerala and Maharashtra is off to a poor start as per feedback received by us. And increased government spending will come at a price for the economy as a whole. Tighten your seat belts.

Challenging near term outlook…
The impact of poor monsoons is worse than expected as government plays down the bad news.

Rural and small town India will see slow down in consumption and consumer demand and initial signs of the same are visible.

Tighten your seat belts. The news is likely to get worse before it gets better.

…but some mitigating factors
Government spending through schemes like NREGS, higher minimum support prices (MSP), and investments in infrastructure helping.

Diversifications of farm incomes as families engage in other activities, primarily services and also crop diversification is helping. But likely limited to the better off farmers and not the small ones.

Land acquisitions for infrastructure projects bring in money into rural/ small town.

Sixth Pay Commission wage arrears likely to be paid out in September.

Late monsoons likely to mitigate concerns on Rabi crop as ground water level rises.

Some long term trends
Increasing income diversity thanks to the opening up of the economy and resultant opportunities. But part of this is still linked to agri-incomes and growth.

Rapid privatization of the education sector.

Good infrastructure – roads and telecom – giving new opportunities.

Corruption and leakages in government schemes remain a big concern.

To see full report: MARKET STRATEGY



Emami is one of the fastest-growing consumer-goods companies in India and one of the few to have successfully monetised ayurveda. The company has seen a rebound in sales growth in 1QFY10, led by a turnaround in its biggest brand, Navratna oil, while there has been impressive progress on cost savings at its subsidiary Zandu (reflected in the over 1,000bps YoY expansion in EBITDA margin in 1QFY10). Emami’s dominant presence in niche categories with low penetration and minimal MNC presence, innovation-led strategy and significant cost savings at Zandu, we estimate, will drive 18% and 30% CAGR in consolidated revenue and EPS respectively over the next three years. We value the stock at 19x FY11ii EPS, in-line with the mid-cap personal-care FMCG peer group. BUY with a TP of Rs465.

Rebound in sales growth as Navratna oil sales recover: Emami’s sales growth rebounded to 21% YoY in 1QFY10 after a sluggish 2HFY09. Sales of its largest brand, Navratna hair oil (25% of standalone sales), rose c16% YoY in 1QFY10 after a decline in FY09. The price correction in the key Re1 SKU and focus on variants are driving growth in the brand. The cooling hair-oils category continues to see strong growth, with 1QFY10 seeing 18% revenue growth. Emami’s other key brands, such as Fair & Handsome and Boro Plus, continue to register 20%+ sales growth.

Zandu margin expansion on track, sales pick-up in 2HFY10: Management has shown good progress in driving cost savings in Zandu, leading to 10ppts YoY EBITDA margin expansion in 1QFY10. Trade margin rationalisation, reduction in staff costs and other overheads, reduction in excise and tax rates have been aggressively pursued. Zandu is wellpositioned to drive over 900bps expansion in EBITDA margin in FY10. Zandu’s sales growth was muted at 3% in 1QFY10, as a fall in trade margin, discontinuation of distributor credit and depot mergers caused some disruption. We expect growth to bounce back in 2HFY10 as the sales system stabilises and Zandu launches the Rs2 SKU and a new ad campaign.

Margin expansion, interest reduction to drive EPS CAGR of 30%: We estimate Emami’s consolidated EBITDA margin will expand by 400bps over FY09-12, as margins at Zandu and Emami standalone both see an expansion. Interest costs will be much lower from 2QY10 due to repayment of debt. We estimate an EPS CAGR of 30% for Emami over FY09-12ii.

To see full report: EMAMI


Commodities in Crosshairs – a commodity shortage lies ahead

We expect a commodity supply shortage in 2010
We have long emphasized that the commodity problem is, at heart, a supply shortage due to decades of suboptimal investment, which has been exacerbated over the past year by the sharp drop in prices and tight credit conditions. As the commodity markets rebound with the broader global economy we expect a redux of 2008 when severe supply constraints forced the rationing of demand through sharply higher prices to keep the markets balanced.

Industrialization, Globalization, Westernization drive demand
The world’s population is increasing at its fastest pace in history. As the developed world increasingly begins to consume like Westerners the demands placed on the finite resources of the planet increases. This trend of human populations growing faster than the earth’s ability to produce not only impacts food production but that of commodity usage.

China matters for demand … Brazil for supply
The leverage a commodity has to China matters both in the context of their share of global consumption but more importantly their relative shortness of supply domestically. These criteria suggest agriculture and metals have the greatest leverage. Brazil has little in the way of natural resource protectionism and is long commodities in its resource base.

Prosecuting the theme through stock selection
We see opportunity to benefit from these trends across four global stock complexes: E&C/Machinery, which take advantage of capex trends, Global Energy, where we highlight key beneficiaries of oil capacity constraints, Agriculture, where companies are addressing the challenges of feeding the world, and Consumer, where we dig into consequences of expected commodity volatility.

Introducing the GSGLCIC3 basket
We have created a long basket to help investors track and trade implications of a commodity supply shortage in 2010. The basket contains potential beneficiaries based on our assumptions.

To see full report: COMMODITY


Poised For Growth

India is one of the oldest stock markets in the world with a strong presence of domestic and local
intermediation. Stock markets in India surged over a decade on back of a wide range of economic
reforms, liberalization of financial markets buoyed by greater freedom and flexibility. Some of the fundamental changes that fuelled rapid pace of market growth was the introduction of electronic trading (secondary markets), allowing foreign ownership (FII’s) of shares, permitting Indian companies to raise capital from abroad (ADRs/GDRs), expansion in the product range (equities, commodity, currency, derivatives and debt), book building process and transparency in IPO issuance, T+2 settlement cycle, dematerialization of shares and internet trading (e-broking). These changes resulted in dramatic growth of the stock markets in India as well as the equity broking firms. The broking industry is emerging as a rapidly growing segment in Indian finance, in terms of business growth, distribution & network and enterprise value.

The first signs of trouble appeared in the US and Western Europe in August 2007. Indian economy kept growing at a considerable pace till the middle of 2008. The Indian market continued to rise till January 2008 and appeared to be going through a relatively mild correction till the middle of 2008. It was in September 2008 that Lehman filed for bankruptcy and the whole world was shaken. The credit markets froze in the west and Indian corporate which were accessing western credit markets found their credit drying up and therefore, wanted to borrow in India. Our markets went through a period of unusual liquidity squeeze with its attendant impact on interest rates, foreign exchange rates, and mutual funds till liquidity was restored through aggressive steps (stimulus package) by the Central Bank and Government.

The market capitalization of BSE was up by 37.23% from Rs. 3,545,041.0 cr as on December 2007 to Rs. 4,865,044.91 cr as on May 2009. The market capitalization of NSE was up by 35.55% from Rs. 3,367,350.0 cr as on December 2007 to Rs. 4,564,572.18 cr as on May 2009. Business has been exceptionally good in primary and secondary markets, in the equities and derivatives segments across both the national level stock exchanges. India’s combined turnover in NSE and BSE in the equity segment which was around Rs. 2,901,471 cr in the year 2006-2007 has grown 1.33 times to Rs. 3,852,097 cr in the year 2008-2009, despite the market fallen by approximately ~50% in the same year. The derivate segment during the same period has gone up by 1.50 times to Rs. 11,010,482 cr.

To see full report: BROKING SECTOR

>RBI buying relaxes market fears (EDELWEISS)

Sovereign bonds trailed an impressive trajectory today, the yield curve till the 10- year maturity drifting lower by 18-20bps. The decline yields seemed much like a relief rally to participants who had been reluctant to initiate fresh positions on the NDS-OM; total volumes on closed at a month’s high of INR 160.85 bn.

The 10-year benchmark bond yield declined by a massive 31bps to touch the day’s low of 6.99% before closing at 7.13%. The 5-7 year segment yields declined 20- 22bps, trading for 47% of the total volumes. The secondary market buying by RBI (also evident by tomorrow’s INR 60 bn OMO auction) has induced investor optimism to awaken trading interest in government bonds.

The INR 60 bn T-bill auction concluded with firmer cut-offs for the 91-day and 364-day instruments; while the former was up 4bps, at 3.40%, the latter inched higher by 17bps to report a cut-off of 4.34%. The auction reported a bid-to-cover ratio of 3.47, inviting investor interest in the non-MTM money market papers.

The infrastructure output growth for July stood at a dismal 1.8% relative to the previous month’s 5.1%. Also, contraction was the steepest in petroleum refinery products (at 14.4%), which miserably dragged down the 6-core industries index (the index accounts for 26.68% of IIP).

Annual Inflation for week ended August 15 stood at -0.95% relative to market expectation of -1.41% and previous week’s release of -1.53%. Food Prices continued to harden (by 3.2% W-o-W) accompanied by a rise in prices of primary articles of 2.1% (W-o-W).

An amount of INR 15.65 bn was raised in the short term non-SLR market; IOC’s INR 6 bn 3-month CP issue that received bids for nearly three times the amount was issued at 4.60%, to Mutual Funds plush with funds in their liquid portfolios.

To see full report: BOND VECTOR