>SHIPPING SECTOR UPDATE AUGUST 2009 (GEPL)

Baltic Dry Index (BDI) decreased by 28% on month-on-month (m-o-m) basis as in August 2009

■ The Baltic Dry Index, a measure of shipping costs for commodities, continued with negative momentum on signs of slowing Chinese raw-material demand, BDI fell 28% m-o-m. Port bottlenecks for ships have eased through reduced congestion in China, with about 7% of the fleet now held up outside ports, down from a peak of about 14% in early July, this coupled with fleet expansion were the major reason for significant decline in BDI. There remains much concern of course over commodity demand in the second half of the year, particularly from China. According to the Chinese State Council, China's economic growth may start to slow in the second quarter of next year. The Council is also studying curbs on overcapacity in industries including steel and cement.

The BPI decreased over 32% month on month, at 2,157 points, while the BCI and BSI decreased by 27% and 16% to 3,946 and 1,740 respectively. The major reason for this decrease is attributable to the market, which was suffering from too much tonnage and a lack of iron ore cargos out of India.

■ Expected production cuts from OPEC (Organization of Petroleum Exporting Countries) OPEC is expected to reduce shipments by 1.1% in the month to Sept. 19, according to consultant Oil Movements, amid speculation the group is expected to pledge adherence to record supply cuts announced last year. The Organization of Petroleum Exporting Countries is expected to export 22.34 million barrels a day by sea in the four week period, down from an average of 22.58 million barrels a day in the month to Aug. 22, 2009.

OUTLOOK

■ Dry Bulk
The main reason for decline in BDI in the month of July 2009 is slowdown of buying by China for a while as inventory is expected to gone up from previous levels. Though the (second hand) asset price momentum is high, which can be an indicator to increase in trade activities, we feel that higher tonnage in the sea may act as a catalyst for southward movement of day rates in near future. Looking at the current circumstances, we remain NEGATIVE on dry bulk segment.

■ Tankers
There is marginal activities for large sized vessels like VLCCs, however, the performance of other type of vessels (Suezmax and Aframax) was below expectations, which was result of lower activities and higher tonnage supply. The concerns of higher supplies are quite evident from this month as asset prices of second-hand tankers declined by more than 10% across the board, which implies that due to incremental addition in the tonnage, the business of second hand (older) vessels may be severely impacted. Because of over supply concerns, we are NEGATIVE (for short term) for the tanker markets.

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>$1,000: Can gold hold? (CITI)

■ Gold testing $1,000/oz — Gold is again testing $1,000/oz. At previous attempts in the past 18 months gold has failed to hold as buying has dried up and scrap flows have increased. If gold holds above $1,000 the yellow metal could find a new support level as investors and consumers become accustomed to higher prices.

■ Expect gold to remain range bound — Safe haven demand is moderating and while we believe gold will remain well supported, driven by US$ weakness, demand from China and inflation expectations, we expect gold to remain range bound between $900-1000/oz. US$ weakness and rising inflation represent the upside risks.

■ Preference for silver and PGMs — We expect silver and platinum to continue to outperform gold as economic conditions improve given their superior leverage to the industrial cycle. With the potential restocking in the global auto market and the curtailment of supply, there is potential for the platinum price to break out of the recent range and approach $1400/oz by year end.

■ Earnings and target price adjustments — We have refreshed our forecasts to reflect our revised gold / silver prices and have increased earnings and target prices for the majority of companies (see table below). Our global commodities team recently raised 2010E gold/silver/platinum prices by 4/13/4% to $966/16/1,350/oz.

■ Selecting relative value — Following strong recent performance and limited valuation upside we take a more neutral stance on the gold / silver stocks. We maintain our BUY on Fresnillo and downgrade POG from BUY to HOLD. We maintain our HOLD ratings on RRS and HOCM. We maintain our bullish stance on platinum and keep our BUY recommendations on both LMI and AQP. We maintain our HOLD on GEMD.

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>LARSEN & TOUBRO (INDIABULLS)

Promising future; but fairly valued

Larsen & Toubro (L&T) reported mixed results for Q1’10 with an 11% yoy growth in sales but a 20% yoy decrease in order inflows (excluding the RMC business). We believe the Company will be a key beneficiary of the Government of India’s (GOI) infrastructure spending; however, considering the recent run-up in the share price, we believe the stock is fairly valued and continue to maintain the Hold rating.

Large fiscal spending holds promise: To provide impetus to the current sluggish economic growth, the government is looking at boosting spending on infrastructure, removing policy bottlenecks, and simplifying the procedures for project approvals. L&T has vast experience in a wide range of infrastructure projects and a proven track record of executing such projects efficiently. Thus, the Company is likely to be one of the biggest beneficiaries of the government's increased spending on infrastructure. Accordingly, we have upwardly revised L&T's order book growth for FY10 to 25% as against our earlier estimate of a 20% growth in the previous quarter.

Operating margin expected to remain stable: L&T’s operating margin improved by 68 bps yoy in Q1’10 to 10%, mainly due to a 94 bps yoy increase in the margin of the Engineering and Construction (E&C) segment as a result of a) a larger proportion of orders that crossed the margin recognition threshold and b) a reduction in the cost of materials. We expect the Company's operating margin to largely remain stable in the remaining quarters of FY10 due to the relatively lower commodity prices (compared with H1’09) and the management’s discretion in picking up projects with higher margins.

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>BRITANNIA INDUSTRIES (MOTILAL OSWAL)

We analyzed the FY09 annual report of Britannia Industries. Following are the key takeaways:

■ Britannia cautious about growth; devises multi-pronged strategy: Biscuits category sales growth declined in 2HFY09 to 11.7% from 14.4% in 1HFY09. Britannia's management believes growth in the biscuits category will be more sedate in FY10 than FY09. Competition in the biscuits category is intensifying because of the resurgence of local players and the entry of new international players. Britannia has devised a multi-pronged strategy, including focus on two broad portfolios-delight & lifestyle and health & nutrition-which encompass key power brands, commercializing the growing trend of 'out-of-home' consumption, offering more value at affordable price points and introducing channel initiatives in distribution.

■ Britannia biscuits grow 7.9% by volume in FY09; volume growth to tend lower in FY10: Britannia's biscuit volume (tonnage) grew 7.9% in FY09 from 2.8% in FY08, rising 510bp. We believe reduced pack sizes impacted volume growth by 8-10%. Our estimates factor-in a 6.8% and 7.5% increase in biscuit volumes in FY10 and FY11 respectively. We believe a 10% increase in biscuit prices by regional players can increase growth of larger players.

■ Sugar prices on a boil; margins to contract 40bp in FY10; 100bp rebound likely in FY11: We estimate a 13% rise in raw-material costs in FY10 with sugar accounting for 75% of the cost increase (sugar prices are up 40% YoY). We expect an 80bp decline in gross margins and a 40bp decline in EBITDA margins. Margins are expected to rebound by 100bp in FY11 due to cost-control measures and as input prices turn benign.

■ Valuations attractive; maintain Buy: We believe an increase in payout ratio from 23.5% to 47% is a positive. The issue of bonus debentures will increase the interest burden and affect EPS till FY13. We are downgrading FY10 EPS estimates to Rs92.3 from Rs107.7 and for FY11 to Rs114.1 from Rs120.3. The stock trades at 18.2x FY10E and 14.7x FY11E excluding the value of bonus debentures. Maintain Buy.

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>TATA MOTORS (ICICI DIRECT)

On high speed…

Tata Motor’s share price surged ~13% touching Rs 574 creating a new high in the last one year. We have valued the company on a sum of the parts (SOTP) basis to arrive at our target price of Rs 560. Since the stock has crossed our target price, we advise booking profits on the counter and reentering at low levels around Rs 464 per share.

Valuations
We maintain our earning estimates for the company and price target of Rs 560 (refer our report dated August 24 2009). With the recent run up in prices, the target price has been achieved. Hence, at the CMP of Rs 574, we advise BOOK PROFIT. At the CMP, the stock is trading at 11.1x and 9.7x its standalone FY10E and FY11E EPS, respectively.

To see full report: TATA MOTORS