Friday, September 4, 2009


Cement majors continue to record strong growth in August 2009
Grasim Industries continues to benefit from frontloaded capacity expansion with 32% YoY (+7% MoM) volume growth in August 2009, while Ambuja Cements also recorded strong YoY growth of 15% (-1% MoM). ACC’s despatches grew 7% YoY (-7% MoM). Despatch data for the industry is yet to be released.

Industry despatch growth continues above 10% YTD (April-July)
The industry continued its growth momentum with 10% despatch growth for July 2009. YTD (April-July 2009) the industry has recorded growth of 12%. Prices remained firm in July in most regions except the western and southern regions, where a marginal fall in prices was recorded.

Prices likely to remain firm in FY10 though seasonal correction possible
We do not expect average cement prices in FY10 to fall on a YoY basis (though there could be seasonal pricing declines such as in the monsoon quarter) since we do not expect significant overcapacity as highlighted in our note Turn positive on the sector, dated 4 May 2009 (~15% in FY10-12E). A continued strong demand environment (we have conservatively estimated 5% growth in FY10) would hence only strengthen our view on the sector. We remain positive on the sector.

Statement of Risk
We believe the key risk to our outlook on the sector could come from an unexpected fall in cement prices, increase in input costs such as coal/freight, and any government intervention to lower cement prices.

To see full report: CEMENT SECTOR

>Trade deficit remains static (EDELWEISS)

Import growth slow; exports keep up momentum

  • India’s trade deficit for July settled at ~USD 6 bn, the same level as that in June; imports stayed put at June levels, while exports exhibited a pick-up.
  • M-o-M, imports growth was lower at ~3.4% (against ~17.1% in June), while exports grew ~6.3% (against ~16.5% in June).
Outlook hinges on global recovery, effectiveness of policy initiatives
  • Trade deficit has come down significantly in the recent months. However, with the rising trajectory of global energy prices, there can be some adverse impact on the import bill in the coming months.
  • Pick-up in exports has been a long drawn process, given the slow pace of recovery in case of most major economies and the discretionary nature of Indian exports. However, a simultaneous recovery, as observed in the domestic manufacturing sector and advanced economies, is raising hopes of a turnaround in trade.
While the Foreign Trade Policy creates a framework for a period of 5 years (2010- 2014), the currently announced initiatives would be applicable for the first two years (2010 and 2011). In terms of the targets, the government aims to achieve an annual target growth rate of 15% for exports (an annual target volume of USD 200 bn) for the first two years, and rates of 25% annually from 2012 to 2014.

To see full report: EXTERNAL SECTOR


Play on global engineering and construction demand
Punj Lloyd (Punj) is one of the largest engineering and construction companies in India in terms of revenues and order backlog. Since its inception, the company has constructed more than 9,000 km of pipelines (up to 48” diameter) and 4 mn cubic meters of storage tanks and terminal capacity. Acquisition of SEC and its subsidiary Simon-Carves in June 2006 provided Punj the armory to become a large global EPC player and consolidate its position in the oil & gas space, along with opening doors to the fast growing urban infrastructure space.

Leading player in mid stream and down stream oil & gas sector
Punj is a leading player in mid stream and down stream oil & gas sector in India and abroad. In the down stream oil & gas space, India’s refinery capacity is expected to increase from 155 MMTPA to 240 MMTPA by FY12E. Currently, around USD 40 bn projects in the refinery vertical have been announced. We believe, Punj will benefit with the sector’s growth prospects looking bright.

Civil infrastructure and oil & gas segments to boost order inflows
On the back of strong economic growth (till FY08), especially in South East Asia, Asia Pacific, and India, coupled with high crude oil prices (till July 08), Punj experienced exponential growth in order intake, in excess of INR 100 bn in each year (during FY07-FY09). We believe such rapid scale up in order inflows, implies high growth over the long term.

Outlook and valuations: Bright prospects; initiating coverage with ‘BUY’
We arrive at one-year fair price of INR 336/share for Punj, through the SOTP methodology (valuing the parent at INR 323/share and its holding in Pipavav Shipyard at INR 13/share). We have valued Punj using the DCF method, while its holding in Pipavav Shipyard is valued at FY09 P/B of 2.5x, in line with global peers in the ship building industry. Over its 3.5-year history since listing, it has traded at average one-year forward P/E of 44x. However, over the past one year, it has traded at 20x one-year forward. At current estimates, the stock is trading at P/E of 18.9x and 15.3x for FY10E and FY11E, respectively. We believe upsides exist from current levels and initiate coverage on the stock with ‘BUY’ recommendation. On a relative return basis, the stock is rated as ‘Sector'.

To see full report: PUNJ LLOYD


Leading the Indian education story, this is just the beginning

• We initiate coverage of Educomp Solutions Ltd with an Overweight rating and Jun-10 PT of Rs 5000: Educomp is the largest listed player in the huge, fast-growing and under-tapped Indian private education sector. With private initiatives in education just beginning to take off and its first-mover edge, we expect strong growth trajectory for Educomp (50%+) over the next few years. Hence, we are fundamentally positive on the company and would be buyers from a 12-18 month view.

Indian education sector is a huge but inefficient system: This is due to limited private sector presence and a cultural mindset of running schools in the non-profit paradigm. However, government’s willingness to allow private participation in education seems to be changing and we
believe that this would lead to large addressable market size of US$25B/$35B for private players by 2012/2015 just in key segments (K-12, Multimedia and ICT).

We expect growth to remain strong: Despite its small size (FY09 revenue of US$140MM), Educomp is one of the largest private players in the education space (showing lack of private participation). With its first-mover edge in multimedia (SmartClass) and K-12 segments,
Educomp has delivered 140%/100% revenue/EPS CAGR over FY07-09. We expect EPS growth to remain strong (50% EPS CAGR over FY10E- 12E) as Educomp continues to scale, helped by government policies.

Valuation and key risks: Educomp trades at FY10E P/E of 40x, which is not cheap on an absolute basis but reasonable given the growth prospects. Our price target assumes one-year forward P/E of 28x. Risks to our thesis and price target are: (1) managing growth and delivering on already high consensus expectations; (2) high capex requirements for all segments could lead to higher leverage on balance sheet (current net debt-to-equity is 0.4x) or equity dilution; (3) presence in too many small segments that stretches management bandwidth; and (4) disclosure levels to be improved.

To see full report: EDUCOMP SOLUTIONS


Outlook for cement, sugar improving

DCB will benefit from rising cement demand as the housing market recovers as well as new road construction in Southern India. We forecast cement sales to rise 50% on a 150% increase in total
capacity. We do not expect sharp decline in cement prices, if any, and that market demand matches supply. Sugar earnings should increase to 10% of total earnings (up from 4% last year) on 100% increase in selling prices.

Total FY10 revenue of Rs25bn, up 40%
Cement sales should rise 50% to 5m tonnes. We believe that cement demand may rise 8% due to greater gov’t spending on infrastructure and rural housing in the South. Cement prices could fall 4% at most in H2 but price declines should be offset by increasing economy.

FY10 gross margin should increase 3% to Rs1.7k/tonne
This year, the coal cost for DCB should decline 10% to Rs6k/tonne on lower prices for imported coal (currently down by 50% from their peak in FY09). With a new power plant, power cost should fall 7% this year. We expect FY10 cost of production to decline by 9% to Rs2k/tonne.

FY10F EPS of Rs47 up by 28%
Last year, earnigns fell 62% on a one-time loss of Rs1.6bn (FX loss, loss on asset sale). For FY10, the company does not plan to sell assets and has lowered FX risk through currency hedges against foreign debt. With higher sugar prices, we expect sugar earnings this year of Rs430m, up from Rs16m last year. For every Rs1 change in sugar prices, net profit changes by Rs140m.

Net D/E of 1.6x
DCB said that the repayment schedule for outstanding debt of Rs23bn will not negatively impact liquidity. Over the next 3 years, we forecast a free CF of Rs13bn, enabling the company to proceed with expansion.

Trading at low PER of 3x FY10F
The stock trades at a 50% discount to peers. Our TP of Rs230/sh is based on discounted CFs.

To see full report: DALMIA CEMENT


Ad revenues: Worst Over!!! We predicted it 3 months back….

H2CY09 – Ad forecasts - what to bet on?

  • We had forecast recovery in ad revenues 3 months back in our report ‘Media & Entertainment - four themes to play‘
  • As per the latest Pitch - Madison forecasts, Ad revenues in H2CY09 is going to be much better than H1CY09.
  • Ad industry is likely to grow in H2CY09 at a massive 65 per cent sequential growth over H1CY09.
  • Print to rebound the most with a 82% sequential growth and back to number one slot.
  • TV too to recover strongly by 58% sequential growth.
  • Radio and outdoor to underperform the Big two mainline media.
  • We would bet on larger streams like TV and Print.
  • Top picks – Zee Entertainment, Sun TV, Zee News, Jagran Prakashan



El Nino to dampen crop in Brazil
Parts of Brazil have had four times more than normal rain due to the El Nino effect, adversely affecting sugarcane crop. Due to this, Brazil’s sugar production is expected to fall short of the estimated 32 – 33 mt to 30.3 million tons in 2009-10.

Competitive buying pressures from countries apart from India to further accentuate the shortage
Besides India, the largest consumer, with contracted imports of 4 million tons of sugar, neighboring Pakistan and Bangladesh also plan to import the sweetener to cater to their domestic demand. “Pakistan must import as much as 1 million tons of sugar by December’, as per the spokesman for the Pakistan Sugar Mills Association. Indonesia, Southeast Asia’s largest sugar buyer, India, may also step up imports to stem the domestic prices.

International raw sugar prices are expected to reach 30 cents / pound
October raw-sugar contract, which is trading at 23.45 cents a pound on ICE Futures U.S., is expected to go up to 30 cents a pound in 2010’s first quarter on constructive fundamentals and support from speculators. Reports of hoarding, confiscation of stocks and rationing in various parts of the world are indicative that there is more upside in near future.

World outlook
Worldwide demand for sugar will exceed output by 9.35 million tons in the year ending Sept. 30, more than the 7.8 million tons projected in May, according to London-based International Sugar Organization.

To see full report: SUGAR SECTOR


Valuations to catch up with improving sector fundamentals……

We attribute an ‘ATTRACTIVE’ rating to the banking sector on the FY11 estimates as the Banking Sector is believed to be among the key benefactors to gain from the reviving economy. Earnings visibility of the sector has improved with superior outlook on credit, margins and asset quality of the banks. BSE BANKEX has registered 130% returns over the last 5 months, we however believe that the sector offers an upside as valuations are still 30‐40% lower from the peak valuations. An upward revision in earnings and expansion in valuations multiples is expected to underpin the stock prices further. In our view, the sector deserves better valuation multiples than assigned by the market currently.

Banks not to suffer large MTM hits in FY10 as most of them are hedged till 7.5‐8% yield
In our view, interest rates would remain in the range of 7‐7.3% levels in FY10.They are likely to inch upwards by 50‐100 bps from the fiscal year end FY10 in line with improvement in the business cycle, reversal of expansionary monetary policy, and rise in inflation. Banks, being hedged till 7.5‐8% yield, won’t suffer large MTM hits on their AFS book in the current fiscal, even if yields rises to the said rates. Going ahead, in our view, markets would assign better valuations multiples to the banks which are able to post sustainable earnings and are less volatile in nature.

Credit growth – momentum towards the year end
We expect the sectoral credit to grow at a healthy rate of 19‐20% in FY2010E assuming that GDP grows by 6%. We expect credit demand to rise in both the working and the term loans segment. CMIE data shows that the corporates have made investments into capacities of more than 5 trillion which translates into the credit growth of 18% from the industrial segment alone (whose share in the total credit is at 38%). We expect demand for the working capital loans to gain momentum with the upward movement in the commodity cycle and reversal in the economy.

Margins, which are at cyclical low levels currently are expected to improve
Q1FY10 margins across the sector have dropped which is a peculiar feature of the downward movement of interest rate cycle. In this cycle, margins get affected in the near term (3‐6 months) but they show signs of recovery as soon as liabilities start getting re‐priced. We are currently at the beginning of the phase where margins across the sector are expected to improve. An uptick in the credit demand will give the required pricing power to banks thereby capping the fall in their advances yields which would cushion the bank’s margins further.

Economic recovery to reduce NPA concerns
Over the last one year, with the economy entering the slower growth phase there have been looming concerns on astounding higher NPAs levels of banks. The concerns had triggered abrupt sector downgrades. In our view, economic growth would overturn to a recovery phase in the current fiscal which would narrow the NPA concerns to a large extent. Faster the economy recovery, shorter would be NPA cycle. The Q1FY10 performance of the assets which were restructured in Q4FY09 was encouraging as an insignificant amount of assets restructured under the special RBI dispensation slipped during Q1FY10

To see full report: BANKING SECTOR


From ugly duckling to top flight eagle

We upgrade our target price for RCOM to Rs360 from Rs275 (even with 50bp higher WACC of 13%), following solid 1Q results, a cut in capex guidance and forecasts despite higher subs and a new tower deal. We reiterate our Outperform rating with potential upside of 36.4% to our new target price.

We increased our target price. This is driven by reduced capital intensity, higher subscriber forecasts, the launch of EVDO data cards and introduction of third-party revenues in Reliance Infratel on the back of the tenancy deal with Etisalat DB Telecom. RCOM has cut its FY3/10 capex guidance by 33% to Rs100bn. In addition, FY3/09 capex of Rs190bn was 37% lower than the original guidance of Rs300bn given in January 2008. As such, we have cut our capex forecasts for FY3/10–12 by 21–39% as pop coverage maxes out.

Consensus estimate of 15% YoY drop in FY3/10 EPS is aggressive, in our view. Our EPS estimates for FY3/10 and FY3/11 are 32% and 41%, respectively, ahead of the Street. We expect upgrades to drive a re-rating and outperformance in RCOM (see Figure 3).

Mobility: Uplift from wireless broadband key reason for 4% increase in wireless revenues. Our FY3/10 wireless revenue forecast is flat with our earlier estimate, as an increased sub estimate has been offset by reduced ARPU to take into account the termination rate cut. Even so, our FY3/11 and FY3/12 revenue estimates have increased by 4% to capture upside from
wireless broadband. We expect FY3/10 wireless revenue growth of 19.8% and attribute approximately 6% YoY growth contribution from wireless broadband (Rs12.3bn revenue opportunity).

Broadband and Global business: Minor change in top line but reducing capex forecasts. We have significantly reduced our capex forecasts on the back of a sharp cut in capex guidance by management.

Towers: Rolling in contribution from Etisalat DB Telecom deal, potential upside from S Tel and Aircel deal yet to be factored into our estimates. The share of revenue from external tenancy on Reliance Infratel towers is insignificant in FY3/10 (roughly 1% of total revenues). However, Reliance Infratel has signed a deal with S Tel to provide passive infrastructure services, and media reports have hinted at a similar deal with Aircel (Not Listed). The
potential contributions from these deals are yet to be factored in our model.

Earnings and target price revision
We raise our FY3/10E, FY3/11E and FY3/12E EPS by 17%, 20% and 21%, respectively. We increase our target price to Rs360 from Rs275.

Price catalyst
12-month price target: Rs360.00 based on a DCF methodology.
Catalyst: Launch of postpaid GSM service in 14 new circles.

Action and recommendation
RCOM is a favoured beta play in the sector and, in our view, has the potential to deliver outsized returns, if new tenancy deals are incrementally signed by Reliance Infratel.



Indian Life Insurance industry, after reporting a decline for the last two months, staged a recovery in July'09. The industry's total Annual Premium Equivalent (APE) clocked a growth of 6.1% yoy on back of a strong 28.9% yoy growth by LIC. LIC continued to outperform the private players, since December'08 (posted growth of 37.9% points over and above the private players in July'09). Although private players reported a decline of 9% yoy, the fall was substantially lower than 24% yoy reported in the previous two months. IRDA is actively regulating ULIP norms, which dominate insurance sales for most players, to safeguard investors' interest. Recently, IRDA issued clarity on exclusion of mortality and morbidity charges for computiung the overall cap, which provided some relief to the players for controlling their ULIPs overheads. Further, the regulator is keen to increase ULIPs lock-in-period from three to five years, to ensure a higher return for investors.