Wednesday, September 30, 2009


Investor Feedback: A Wall of Worries to Climb

• Our recent trip to Europe indicates that investors are a bit tentative about India. They worry, among other things, about the rate at which the market has risen since election day, the high correlation with global markets, as well as local issues such as the 10-year bond yield, the rains, the Central Bank’s likely exit policy, the government’s reform agenda or lack thereof, and valuations.

• We think most of these concerns are already in play and in the price. Some of them are events we are unlikely to witness (for example, the rains affecting industrial growth or the 10-year bond yield rising further). Our prognosis is that Indian equities could stay volatile in the near term, since the next six months’ projected growth is already in the price. Indian equities continue to be vulnerable to a sell-off in global equities or a sudden spike up in crude oil prices. However, at the same time, we believe that investors should use such volatility to buy Indian shares, since the growth outlook for the next 12-18 months remains firm and is still not priced into equities. Our favored sectors are Consumer Discretionary, Energy, Financials, and Industrials. The next few pages detail the concerns that were raised on our trip and our responses.

Concern # 1: Is the 10-year Bond Yield Going to Rise Further?
We believe the 10-year bond yields have peaked and the government has taken action by moving to lower tenure bonds to take the pressure off the 10-year bonds. The only technical issue that remains is the exhaustion of HTM limit with banks. There is a major hump in the government borrowing calendar in September. Once that is over, we think the 10-year is likely to stabilize from October (unless there is a very strong recovery in credit growth and/or oil goes to USD95-100/bbl). The incremental credit-deposit ratio is at its 2003 low. Credit growth is at 14.1% as of August 28, and this has created abundant liquidity in the system. Sterilized liquidity (excess liquidity) stock, including reverse repo less repo balances, MSS bonds, and the government's balances with the Reserve Bank of India (RBI), rose to US$35.4 billion as of July 17, from US$20.6 billion at end-March. Thus, we believe that liquidity will not be a problem to fund the deficit.

Concern # 2: Will RBI’s Exit Strategy Derail Growth or the Markets?
Investors worry that rising inflation and excess liquidity will lead to Central Bank tightening. We maintain our view that the RBI will initiate its first policy rate hike in early 2010, as we believe
it will likely wait for a sustained economic recovery and is unlikely to change its path due to food inflation pressure along with the drought. However, if the robust trend of 7%-plus industrial growth is maintained, the RBI could move on CRR in 2009. The market’s response historically to the first rate hike has been mixed. To us, the ensuing flattening of the yield curve would actually be positive for the markets (as it would confirm growth), especially for Financials.

Concern # 3: Will Poor Rains Reduce Growth?
We maintain our view that poor agricultural output due to below-normal rainfall will have limited impact on industry and services growth, for four reasons: 1) The share of farm income in total rural income is now below 50%; 2) the acceleration of the government's rural spending is acting as an offsetting factor (government spending in the form of social welfare schemes will be about USD20 billion compared with USD7 billion in F2007); 3) an increase in minimum support prices for farm produce purchased by the government from farmers is partially offsetting income loss due to lower output volume, and 4) the government's effort on mitigation measures. While we expect non-agriculture GDP growth to decline by 0.5ppt because of poor agricultural growth, we see an offsetting surprise in the current trend for industrial production and the services sector.

Concern # 4: Will the Government Deliver?
We expect the government to deliver steady reforms. The key agenda includes tax reform (both direct and indirect), increased infrastructure investments (watch the data on road contracts in the coming months as indicator for execution), and fiscal consolidation (the 13th Finance Commission report is likely to be published later this year). If the new direct tax code is an indication, the next few reform steps from the government could become important equity market drivers.

Concern # 5: Isn’t the Market Pricing In All the Good News?
For long-term investors, the equity risk premium implied by the market (represented by the BSE Sensex) using our residual income model is currently around 6%. We think this is a fair level of risk premium for investors looking to make a long-term commitment to Indian equities. The short-term call is less clear, with the outlook mired by the excessive volatility the market is going through as it grapples with the pace of growth recovery versus the prospects of Central Bank tightening both at home and abroad. Other factors such as equity supply, monsoons, and crude oil will also influence share prices. Indeed, the market is pricing in almost all the growth recovery that we are forecasting in the coming six months. However, markets are yet to price in the earnings and industrial growth for F2011, which bear upside, according to our view. To that extent, investors with a 12-18 month view are likely to realize positive returns from equities.

To see full report: INDIA STRATEGY & ECONOMICS


Techno-Fundamental Stock Pick

IDBI was incorporated as a Development Financial Institution in 1964 and was a wholly-owned subsidiary of the Reserve Bank of India (RBI). In 1976, the RBI surrendered its 100% stake to the government. In 2005, IDBI transformed itself into a full-service commercial bank after merging its commercial banking arm, IDBI Bank, into itself. More recently, the amalgamation of United Western Bank (UWB) with IDBI Bank gave the latter the much needed branch network to enhance its retail presence.

IDBI is one the leading public sector banks of India. At the end of June 2009, IDBI has 566 branches and 972 ATMs and intends to set up more branches over the next year, thus taking its total number of branches to 750 by March 2010. IDBI Bank has four wholly owned
subsidiaries: IDBI Capital Market Services (ICMS), IDBI Home Finance, IDBI Gilts and IDBI Intech. In FY09, IDBI reported a total consolidated income of Rs. 13,346.9 cr, up 34% y-o-y; operating expenses increased 40% y-o-y to Rs. 12,041 cr and PAT for the year
stood at Rs. 766.5 cr, up 2.7% y-o-y. This is lower than the Rs. 859 cr PAT recorded on a standalone basis.

IDBI Capital Market Services Limited offers a full suite of financial products and services to institutional, corporate and retail clients. Its businesses include Stock Broking, Distribution of Financial Products, Merchant Banking, Corporate Advisory Services, Debt Arranging
& Underwriting, Portfolio Management of Pension / PF Funds & Research Services. Next, IDBI Homefinance commenced its business with the acquisition of Tata Homefinance Limited in September 2003. The company, since its inception, initiated series of measures to
expand its retail reach, strengthen its brand image, improve its asset quality and excel its business growth.

IDBI Intech Limited (IDBI Intech) was incorporated in March 2000, as a wholly-owned subsidiary of IDBI Bank to undertake the IT related activities of the Bank. The major business activities of the Company are Information Technology Services, Information Security
Practice, Knowledge Management Services, National Contact Center and Outbound Sales Team (OBST). Moreover, IDBI Gilts Limited (IDBI Gilts) was set up as a wholly owned subsidiary of your Bank to undertake Primary Dealer [PD] Business with paid up capital of Rs.100 crore. IDBI Gilts commenced its operations as Primary Dealer w.e.f. July 24, 2007. The company presently focuses on Bond trading, underwriting in auctions of primary issuance of government dated securities and treasury bills.

IDBI Fortis Life Insurance Company Limited (48% holding) is a joint venture of IDBI Bank Limited, Federal Bank Limited and Fortis Insurance International. The company commenced operations in March 2008 and the current year is the first full year of operations. IDBI Fortis entered the market with several innovative products consisting of WealthsuranceTM - an insured wealth plan, BondsuranceTM - an insurance plan with guaranteed returns, HomesuranceTM - an insurance plan for home loans and RetiresuranceTM - a retirement plan. The performance of all the above mentioned entities has been summarized below.

To see full report: IDBI BANK

>What’s Wrong with the Dollar? (WELLS FARGO)

Executive Summary
The dollar has followed a downward trend over the past six months, weakening against the currencies of other major economies and developing countries alike. Some observers claim that the dollar’s depreciation reflects unease among foreigners about the U.S. fiscal outlook. However, there is very little evidence to support this hypothesis. Purchases of long-term U.S. Treasury securities by private foreign investors and foreign central banks have remained strong during the recent period of dollar weakness.

Rather, the depreciation of the greenback reflects, at least in part, an unwinding of the forces that propelled it higher last autumn. As the global financial system stood on the cusp of collapse, foreign purchases of short-term Treasury bills, considered by many to be the safest asset in the world, surged. In addition, foreign banks had to scramble for dollar liquidity as U.S. banks pared back their credit lines. Now that the global financial system has stabilized, net foreign purchases of low-yielding Treasury bills have weakened considerably as investors have gone in search of higher returns. In addition, American banks have started to reopen some credit lines to their foreign counterparts.

What could cause the dollar to turn around? Another increase in risk aversion likely would cause the greenback to strengthen, but even the most fervent dollar bull probably would blanch at the thought of another financial market meltdown. The dollar’s best, and less psychologically stressful, hope probably lies in a truly self-sustaining U.S. economic recovery. A run of better-than-expected U.S. economic data would lift rates of return in the United States that would attract long-term capital inflows.

Greenback Resumes Its Slide
After rising to a three-year high earlier this year, the trade-weighted value of the dollar has slid over the past few months (Figure 1). Not only has the greenback weakened against most major currencies—it has dropped to a 12-month low vis-à-vis the euro—but the dollar has also depreciated versus the currencies of many developing economies. Predictably, the financial press has been filled with renewed prognostications of the greenback’s ultimate demise. A theory that has gained currency among some observers recently is that the weakness of the dollar since the beginning of the year reflects concerns among foreign central banks and foreign investors about the gaping federal deficit and/or fears of runaway inflation. Does this theory have any merit? If not, why is the dollar weakening again?

To make sense of the dollar’s depreciation over the past few months we examine the U.S. balance of payments data, which measure transactions of U.S. residents with the rest of the world. We begin with the current account, which records transactions of goods and services.1 After narrowing sharply late last year and early this year, the U.S. trade deficit has been essentiallystable since March (Figure 2). Therefore, it is hard to make a convincing case that the dollar’s depreciation over the past few months is linked solely to a renewed deterioration in the U.S. trade position with the rest of the world.

To see full report: DOLLAR


Company Background

Incorporated in 1987, IVRCL is a Hyderabad based construction company, present in most of the verticles of infrastructure space like Water & Irrigation, Transportation, Power T&D and Buildings and Industrial structures. The company is betting big on irrigation and water opportunity in India and has maintained its un-disputed leading position in the segment. Acquisition of Hindustan Dorr Oliver has improved its presence in water and environmental engineering space. Going forward, the management has given indication of tapping upcoming opportunity in power transmission.

Infrastructure Industry –Opportunities Unlimited
There is a little doubt that the infrastructure industry in India is to play a vital role in nation's progress towards achieving the status of a 'developed nation'. The government has realized that the infrastructure related inadequacies will put a significant constraint in realizing the nation's growth potential. Consequently, the planned investment in the 11th five year plan is 136% higher over the anticipated investment in the 10th five year plan. Irrigation, roads and highways and power have witnessed 129%, 117% and 127% growth in the 11th five year plan and account for almost 60% of the total outlay. With the new government in place, there are strong expectations that going forward these infrastructure initiatives will get a further emphasis in terms of execution and incremental investments.

Healthy Order Book Provides Revenue Visibility
The current order book of the company stands at Rs 13900 Cr with a further Rs 1000 Cr of projects having L1 status. Irrigation projects account for 69% of the total followed by 22% contribution from Buildings and Industrial Structures unit. Going forward we expect the order book to witness robust growth mainly from the order wins in Irrigation, power and road sector.

We believe that IVRCL will continue tapping huge opportunities in irrigation and water related projects. While over the past couple of years the company has strengthened its position in Buildings and Industrial Structures segment, going forward, power transmission and roads related projects will increasingly contribute to the growth.The core construction business of the company is valued at Rs 363 per share by assigning forward multiples to FY11E EPS. The two listed subsidiaries IVR Prime and HDO are valued at CMP and contribute Rs 42.8 and Rs 19.8 per share respectively. The 4 BOT projects are valued at Rs 28.7 per share. We had given OUTPERFORMER rating on the stock in our Q1FY10 Earnings Review report (14th Aug 2009, Price Rs 318). Investors who had already invested in IVRCL Infra can continue holding it while others can look at the stock on declines.

We remain bullish on IVRCL and retain OUTPERFORMER rating with the SOTP based 12 months price target of Rs 465.

To see full report: IVRCL


We present hereunder a table of companies that have announced dividends till FY09, for which dividend yield is 4.5%+ based on dividends for FY09 and those who have maintained or increased their dividend percentage over FY08.

To see full report: DIVIDEND YIELD STOCKS


Sensex above 17K

Markets on Sep 30, 2009: Strong up-move

Nifty continued to move upwards giving close above 5050, which is a good sign for the market going ahead. Today, it gave a breakout from sideways consolidation pattern and is trading in an upward parallel channel; the upperend of the channel is at 5150. It is holding the lower end
of the channel at 4900, which acted as a crucial support twice earlier. It also managed to surpass the swing high of weekly negative close quite comfortably, which added more strength to its up-move.

On daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA at 4858 and 4709 respectively, which are crucial supports going forward. Momentum indicator (KST) has given negative crossover and is above the zero line. Market breadth was positive with 740
advances and 534 declines on NSE and 1,615 advances and 1,252 declines on BSE.

On hourly chart, Nifty is trading below its 20 hourly moving average (HMA) and 40HMA at 5008 and 4995 respectively, which are now resistances in the short run. Momentum indicator (KST) has given positive crossover but trading below the zero line.

Nifty and Sensex closed in green, gaining 77 and 274 points respectively. Of the 30 Sensex stocks, State Bank of India (up 5.01%) and ICICI Bank (up 4.63%) were the top gainers, whereas ONGC (down 1.25%) and ITC (down 1.07%) were the top losers.

To see full report: EAGLE EYE 01/10/09


Key takeaways from the roadshow

BGR Energy roadshow. On 16-17 Sep ’09 we organized a BGR Energy roadshow. During the roadshow management addressed various issues regarding BGR’s competitive strength, growth
sustainability and the dynamics of the power equipment sector.

Competitive advantage in bidding. BGR has enjoyed a 4-5% margin over competitors in bidding due to its in-house design capabilities. It has also negotiated for higher advances and lower retention money (20% and 10% of contract value, respectively), easing working capital and cash-flow concerns.

Capacity addition. Except for L&T-Hazira, which would soon commence production, other ventures (JSW, Thermax, Bharat Forge) are still in initial stages. BGR is planning to invest Rs4bn (Rs1.2bn in equity) for a boiler and Rs30-40bn for a turbinegenerator manufacturing plant. The boiler license agreement is pending GoI approval and the boiler-manufacturing plant would take 18-24 months to roll out after approval.

Management guidance. Management maintained a 50% yoy growth guidance for FY10/FY11 and an 11.5-12% operating margin. The current Rs125bn order backlog comprises EPC and
BoP projects in a 60:40 ratio. The company might look at a 10% equity dilution in FY12/13 for expansion plans.

To see full report: BGR ENERGY



The Indian Transformer Industry – presently valued at around Rs 60 Billion, has been in the forefront, not only in terms of cost-effectiveness and technology, but also in terms of quality and design. It has grown to become a leading manufacturer of all types of transformers – distribution, power and other special types used for welding, traction, furnace and other applications. Owing to its ability of keeping pace with new developments, India exports almost 10-15% of its overall transformer production. About 60-70% of the production is absorbed by SEBs (State Electricity Boards) and the balance is bought by private sector companies. ECE Industries Ltd is a North based company engaged in manufacture of power transformers. The company is also engaged in manufacturing of switch gears and Elevators under technical collaboration with companies like Toshiba and Mitsubishi. It also has a Projects Division which is engaged in undertaking turnkey projects.

Looming power shortages have forced the government to focus very intently on power generation. Thus about 58,000 MW (megawatt) of fresh capacity (revised from 78,000 MW original target) is targeted by 2012.. Additionally, around 16,000 MW is expected to be added by ultra mega power projects. As a thumb rule, for every 1 MW of capacity added, 7 MVA (megavolt ampere) of transformers are required across the entire power system. Further the government through APD & RP (Accelerated Power Development & Reforms Program) scheme aims to make the power generation profitable to them through reduction of losses through transmission & distribution by up-gradation of the existing network. With the estimated life of a transformer at about 20-25 years, demand is also expected to come from the replacement market which could be in the region of 20000-30000 MVA p.a. ECE is engaged in manufacture of transformers upto 220KV class and upto 100MVA capacity. The company has taken steps to create facilities to manufacture higher range of transformers.

According to industry sources, the demand-supply scenario for transformers is expected to remain favorable for the next few years and this demand is expected to come more from SEBs as one expects a slowdown from private sector in the immediate future. ECE stands to benefit in this as its focus has always been towards SEBs which accounts for major of its production. ECE was also engaged in manufacture of Industrial meters however due to continuous bleeding and the activity becoming unprofitable it has suspended this activity and stopped production from the second half of FY ‘09.There has been a decline in revenues from the contracts business during the year as ECE intentionally did not take the new contracts for railway electrification, as they had pending orders. The company is reported to have taken a decision to discontinue this line of business after completion of pending orders. The switch gear business of the company is expected to have good growth in the near future primarily because of the major growth seen in the power sector.

The Elevator business of the company saw a good growth in the year under review with turnover registering a growth of 88% from Rs 76 Mn (Fy‘08) to Rs 144 Mn in the current year and this higher turnover enabled it to reduce the losses that this division was incurring earlier. The company has plans to spruce up and strengthen its marketing infrastructure seeing the increasing customer base and market for elevators. This division is expected to further improve its performance and thus contribute both to the turnover and profits of the company.

To see full report: ECE INDUSTRIES



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To see full report: TOP 40 SERIES