Thursday, October 1, 2009


Financial closure data suggest strong capex activity. Financial closures, a leading indicator of capex, reflected surprising strength with yoy growth of 73% (Rs4.2 tn versus Rs2.4 tn) during FY2009. Power dominated (1/3rd of total) with closure of about 25 GW. Capital goods imports data, however, does not corroborate such strength and actual capex may have been postponed. Revival in economic activity combined with strong financial closures underline strong capex outlook for FY2010E and beyond.

Financial closures – a leading indicator reflect surprising strength in capex activity
We highlight that the amount of financial closures achieved by the private sector during FY2009
grew 73% (to Rs4.2 tn from Rs2.4 tn) during FY2008. This reflects surprising strength versus a
wide perception of weak credit markets during FY2009. We believe that financial closure activity reflects strength of corporate capex activity in the country and is a leading indicator of likely capital expenditure activity. Financial closure data is provided by Reserve Bank of India (RBI) on an annual basis and captures private corporate sector projects achieving financial closure from banks and financial institutions. This data does not include projects of public sector entities such as NTPC and does not include direct government financed projects.

Infrastructure segment dominates—particularly power, supported by telecom and metal
The power sector contributed to 1/3rd (Rs1,241 bn out of Rs4,223 bn) of all the financial closures. This is reflective of strong generation capacity addition announcements by the private sector in the recent past. Total financial closures would have amounted to about 25 GW of capacity. Telecom sector financial closures during FY2009 (Rs691 bn) were 15X of the financial closures in FY2008 (Rs46 bn), probably contributed by new networks launched by recent entrants as well as the substitution of overseas borrowings by domestic funding. Metals sector financial closures contributed about Rs85 bn during FY2009 versus Rs40 bn during FY2008, possibly explained by financing for ongoing capital expenditure.

Capital goods imports do not corroborate such strength—actual capex may have been postponed: Capital goods imports (an aligned data point) does not corroborate such strength in capex activity as imports declined by 8% (in US$ terms) during FY2009 versus FY2008. Most of the decline was however concentrated in Oct ’08-Mar ‘09 with a 29% decline in those six months versus 42% yoy growth during Apr-Sep ‘08. We believe that despite strong financial closure activity, actual capex may have been postponed in 2HFY09, based on economic conditions prevailing then. RBI data based on phasing schedule of projects as per financial closure suggest likely capex of Rs3.1 tn (22% yoy growth) versus R2.6 tn during FY2008. We believe that despite the potential postponements, strong financial closure activity and a recent revival in economic activity during FY2009 strong support capital expenditure outlook for FY2010E and beyond.

To see full report: INDUSTRIALS


Read the Signs – Bullish On F11 EPS: Reverting to OW

Investment conclusion: We believe that DRL’s near-term product pipeline of niche opportunities for the US is underappreciated by the markets and that F11 earnings could be significantly higher than Street estimates. In view of the high growth momentum ahead and inexpensive valuations, we are reverting to our OW rating. Our new PT of Rs1076 (17x F11e EPS), implies 24% upside potential from current levels.

What's new: Based on our due diligence of DRL’s product pipeline and market signals (Allegra D12 and Lotrel settlements, court filings), we conclude that generic Allegra D12/24 (US$500 mn brand sales) and Lotrel (US$600 mn - MSe) are credible and lucrative product opportunities for the company, not so well known to the Street. These are discussed in detail inside.

Where we differ: We have upgraded our F11e EPS to Rs63.3, 16% higher than the Street. This may well turn out to be conservative since we have included only one (Allegra D12) opportunity in our earnings model. Importantly, most of the near-term niche opportunities (Allegra D24, fondaparinux and omeprazole OTC) have a long window (two years or more). Thus, earnings are
likely to grow all the way till F13 on a high base of F11.

What’s next: Expiration of 30 months ANDA stay on DRL’s Allegra D24 and Lotrel filings, approval of fondaparinux, market share win for omeprazole OTC, launch of two biosimilar MAbs are the key catalysts over the next six months. We expect the German business to continue to erode and bottom out by December ’09.

To see full report: DR REDDY'S LABS


Revenue visibility adequate; retain Buy

Visit takeaways. We estimate that Allied’s revenue and earnings target for FY10 is achievable. Business from the new tie-ups is expected to flow in from FY11. Our new target of Rs650 is at a
target PE of 7.5x (a 63% discount to Infosys’ current multiple). Retain a Buy.

Adequate revenue visibility. Allied has adequate revenue visibility, backed by its order book. The Solutions order book is Rs1.3bn, to be executed over the next six months. Services order
book is Rs1.2bn for India operations and US$60m for EPGS, executable over the next 12 to 15 months.

New tie-ups. Allied has tied up with an OEM from the USA to provide remote management for desktops, notebooks and servers sold by the OEM. The revenue stream from this business would start flowing from FY11.

Working capital. Debtor days of the standalone business, at 177, are high. Debtor days for EGS are a manageable three months. Allied is confident enough to bring them down in FY10.

Valuation. We assign Allied Digital a target multiple of 7.5x its FY11e EPS of Rs86.5, which is a 63% discount to Infosys (20x) and a 46% discount to HCL Tech (14x). This is also in line with other mid-cap IT companies. Based on the target PE of 7.5x FY11e EPS of Rs86.5, we arrive at a target price of Rs650.



  • Acil to enjoy benefits from revival in real estate sector.
  • Robust order backlog provides strong earnings visbility.
  • Diversified client base and venturing into new verticals.
  • Best play in the contractor space, Initiate with buy.

To see full report: AHLUWALIA CONTRACTS


Postcard from Chennai

We met the Chairman and Managing Director, Mr. M S Sundararajan and General Manager – Treasury, Mr. S K Bandyopadhyay of Indian Bank to get an update on any significant events in the bank. We retain our estimates and reiterate Buy on the stock. We believe greater clarity on asset quality could propel the stock beyond our target price of Rs173.

Clarity on asset quality: The management clarified that of the Rs45bn restructured assets (on borrowerwise classification) at the end Q1FY10, Rs39bn represented rescheduled (the interest servicing was regular) principal repayments. Merely Rs6bn represented core restructuring, where the bank has made principal sacrifices.

Credit growth expected to increase in H2FY10: Credit growth is likely to remain tepid in H1FY10 with the management indicating advances of ~Rs530bn by end H1FY10, implying 8% growth YTD. The bank expects significant incremental credit expansion in H2FY10 (almost ~Rs80bn, 19.6% YoY growth), which has led it to adopt a relatively liquid balance sheet and
deploy funds at the shorter end of the yield curve.

Pressure on margins likely: The management expects to face some margin pressure owing to delayed credit expansion. It hinted at likely 10bp margin contraction from Q1FY10 levels of 3.5% by the year end.

Treasury update: The management indicated that roughly 60% of the bank’s treasury is classified as heldto- maturity (HTM), which accounts for around 22% of net demand and time liabilities (NDTL). The maximum permitted by RBI is 25%. The available-for-sale (AFS)
book is estimated to have a duration of 2.5 years.

Maintain estimates; reiterate Buy: The stock has lately re-rated to 1.23x FY10E P/BV. We believe greater clarity on asset quality could propel the stock beyond our target price of Rs173.

To see full report: INDIAN BANK


Downgrade to Hold: Robust Fundamentals in the Price

Business fundamentals remain robust — Tata Power has plans to increase its capacity to 13GW (from 2.8GW) over the next 4-5 years. Good past execution record and significant progress on expansion projects gives us confidence. Business fundamentals remain robust with 92% YoY and 64% YoY Recurring PAT growth in FY09 and 1QFY10 respectively.

Recent positives: Mumbai open access & Freeing of 500MW from Apr10 — MERC has allowed distribution open access in Mumbai and ~ 45K retail consumers have applied to move to Tata Power from R-Infra. From Apr10 the company will also stop supplying 500 MW to R-Infra and this capacity will be free (200MW of hydel capacity would continue to be regulated).

But all these positives are in the price — We believe it is a little too early to value the ~ 6.2GW of pipeline projects where the company is yet to crystallize plans. As a consequence, after maintaining a Buy/ Low (1L) risk rating on the company for the last ~ 2 years, we downgrade Tata Power to Hold/ Low (2L).

Hiking our target price to Rs1389 — This factors in: 1) 29%-59% increase in EPS; 2) US$335mn of GDRs; and 3) Higher constructive valuations for subsidiaries and associates.

Why Hold and not Sell? — Amongst Indian private sector IPPs Tata Power seems to have a better execution track record, demonstrated progress on expansion projects and ability to achieve stated targets. All things being equal, we would consider becoming buyers if the shares correct to sub Rs1200 levels.

To see full report: TATA POWER


We met Punj Lloyd to take an update on the company’s operations and understand the changes in the business environment. The management expects the environment to improve thus translating into a healthy order book growth. They expect the order book growth to be driven by investments in the infrastructure segment. Of the Rs304bn order book, infrastructure accounts for 56% while energy forms the balance. The management also hinted at a loss of £8-10mn in Simon Carves during FY10. With margins expected to improve we believe the company will witness robust earnings growth over FY09-11. We upgrade our target price to Rs283/share, re-iterate Market Performer.

Rs99bn order inflow provides strong earnings visibility
With clients having restarted awarding orders, Punj Lloyd’s order inflow shot up to Rs99bn during Q1 FY10. Of these, Rs78bn worth of orders are from Libya for residential, commercial and utilities projects. This is the highest order inflow for the company over the past nine quarters. With this infrastructure’s share in the order book increased to 56%. Since infrastructure orders are longer gestation, the management expects energy to continue to dominate revenues.

Infrastructure segment will enable order inflow growth
Majority of the company’s orders are from the international market. Hence any recovery in the global economy should result in growing order book. The management expects infrastructure and oil and gas segments to drive order book growth. In India, growth will be driven by the huge opportunity in the power sector. Large orders bagged recently in the Middle East indicate a revival in the order inflow from the international market.

Business environment improves but positives priced in
With the huge jump in the order inflow and an improving global environment, we believe the company is set to ride the up-cycle. With no more legacy orders remaining and Punj Lloyd shifting projects from Simon Carves to the parent entity, we expect its margins to expand. Its robust order book of Rs304bn covers it for the next couple of years and provides us strong earnings visibility.

To see full report: PUNJ LLOYD


US and other developed economies are well on the way to a recovery by end-CY09 – as reflected in the various positive data points. IT spends are bound to recover, albeit with a 2-4 quarter lag, and we see Infosys Technologies (Infosys) as also tier1 IT services vendors well placed to increase their wallet share in CY10 and CY11. We expect sustainable ~20% growth in Infosys’s revenues starting FY12. Focus on client mining and established expertise in high growth services would help Infosys gain market share. We have raised our FY10/ 11E EPS by 8-15% to build in the operational/ STPI benefits. Reiterate Infosys as Outperformer and our top pick in the Indian IT space with an 18-24 months price target of Rs3,200. We believe premium valuations of 22-24x are sustainable in an upgrade cycle, especially when earnings growth is accelerating. A near-term weakness, if any, should be used to buy into the stock.

Improving business outlook: IT spend, a late cyclical, is expected to improve in CY10/ CY11 led by the global economic recovery. While IT budgets for CY10 will likely remain flat yoy, the actual IT spends may exceed budgets with the recovery gathering pace. We believe Infosys (as also other tier 1 firms) is well placed to benefit from the upturn. Infosys – by displacing competition in vendor consolidation processes at several of its key accounts – has gained a higher wallet share, that too in a tough business environment.

Expect strong traction ahead, upgrades likely: We expect ~11% revenue growth for Infosys in FY11 and ~20% in FY12 on the back of economic recovery-led acceleration in IT spends. We discount the management’s conservatism as the philosophy of reinvesting excess margins into the business indicates that it is confident of a business recovery ahead. We have raised our FY10/11E EPS by 8-15% and expect 22% EPS growth in FY12 as we expect the recovery to gather pace over the next few years.

Premium valuations sustainable: We believe valuations will sustain at current levels (21x FY11E earnings) as the stock has already entered a 2-3 years long earnings upgrade cycle. Between May ’03-’05, the previous upgrade cycle post the US recession, Infosys saw an EPS upgrade of 40-70% for FY05-06 and the stock returned 200%+. Reiterate Outperformer with an 18-24 months price target of Rs3,200 (23x FY12E earnings). We see a short-term weakness, if any, as an opportunity to buy into the stock.

To see full report: INFOSYS TECHNOLOGIES