Saturday, October 3, 2009


Investment thesis

Best banking franchise
HDFC bank continues to remain the best banking franchise among Indian financials with an unparalleled liability franchise and sound risk management systems resulting in strong earnings growth trajectory. The bank has significantly underperformed the broader indices due to concerns on growth and asset quality, especially related to problem portfolio of CBOP. However, with NPL accretion for the bank likely to peak in the next two quarters, we believe that bank is well poised to leverage the revival in credit growth in 2H FY10, given smooth integration of CBOP into its fold. We assume coverage with a Buy rating and target price of INR1,850 per share.

Concerns on CBOP problem portfolio slowly abating
NPL accretion for the bank is likely to peak in the next two quarters, as the run down of the two-wheeler portfolio of CBOP is almost complete and CBOP's personal loan portfolio is likely to mature in the next 18 to 24 months. Approximately 40% of the incremental GNPL accretion in the past one year has been contributed by CBOP. Adjusting for the acquisition of CBOP, increased GNPL ratio in standalone HDFC Bank has been negligible at ~10bps

Earnings to remain resilient despite dilution
We expect earnings trajectory growth for the bank to remain strong at 24.3% CAGR over FY09-11E, driven by strong asset growth and stable NIMs. While ROE for the bank is likely to remain muted for the next two years due to the excessive dilution, we expect it to improve in FY12E as the bank utilizes the excess capital. The stock currently trades at 2.6 FY11E P/B, which is well below its 10-year average P/BV of 3.5x P/B, we assume coverage with a Buy rating and target price of INR1, 850 per share (3.5x FY11E BV), implying 15% upside potential.

To see full report: HDFC BANK


Concerns on balance sheet issues put to rest: Deccan Chronicle Holdings (DCHL) has been focusing on addressing balance sheet related issues that had gained prominence in FY07-08. Most of the operational issues with regard to high debtors, low dividend payout, securitization of debtors, and high debt levels have been addressed. Working capital to sales ratio has declined from 73.6% in FY07 to 20% in FY09. Net debt stands at Rs663m as at March 2009 v/s Rs2.7b as at March 2007. Dividend payout has increased from 16.9% in FY07 to 40% in FY09.

Has consolidated position in the South, maintains leadership in Andhra Pradesh: After the launch of Deccan Chronicle in Bangalore, DCHL has presence in all the key markets of South India. It maintains its leadership position in Andhra Pradesh and is a strong number-2 player in Chennai after Hindu. Deccan Chronicle's overall circulation is 1.3m copies/day and the management is targeting 1.5m copies/day. DCHL has also launched a financial daily, Financial Chronicle in Mumbai, Hyderabad, Bangalore and Chennai.

Advertising revenues to grow at 10% CAGR over FY09-10: DCHL's advertising revenues grew just 2.8% in FY09. Reduction in ad spends by key segments like autos, real estate and financial services impacted DCHL's advertising revenues. However, there are signs of recovery; DCHL's advertising revenues grew 11.9% YoY in 1QFY10. We estimate 10% CAGR in DCHL's advertising revenues over FY09-11.

Newsprint prices are below FY09 levels; expect savings of Rs800m in FY10: Increase in newsprint requirement due to the launch of the Bangalore and higher newsprint prices had led to a 90% increase (Rs1.9b) in DCHL's raw material cost in FY09. Newsprint prices have declined 35-40% from the peak. We estimate newsprint cost for FY10 at Rs30,720/ton down by 24.5% YoY. We believe DCHL would be able to achieve savings of Rs800m in newsprint cost in FY10.

Strong balance sheet, change in distribution policy could re-rate stock: We believe that change in debtor policy and increase in payout ratio is positive. We estimate revenue CAGR of 10% over FY09-11 and PAT CAGR of 50%. The stock trades at 11.9x FY10E EPS of Rs10.3 and 9.7x FY11E EPS of Rs12.6. Possible stake sale in Deccan Chargers or divestment of Odyssey Retail could help unlock value. We maintain Buy.

To see full report: DECCAN CHRONICLE


Company Brief
JK Lakshmi Cement Ltd. (JKLC) is one of the established north based Cement Company, with a state of‐the‐art plant at Rajasthan and Gujarat, and having a capacity of 4.75 million tonne The
company╩╣s product mix includes blended cement, ready‐mix concrete and plaster of paris, which are distributed through its large network of over 2,000 dealers across North and West India.

JK Lakshmi Cement has increased its cement capacity by 30% in March 09, which should enable it to enhance its sales volume by 12% in FY10 and by 4% in FY11.

JKLC is further increasing its cement capacity by 67% to 7.45 mtps by Oct 2012, which will enable it to have access to central and eastern markets thus giving it a wider footprint.

The company has tied up with the VS Lignite for the purchase of 21 MW power every year at a price of Rs 3.3/unit, that is less than Rs 4.2/unit, at which it sources from grid, thus translating into substantial savings for the company.

JKLC is increasing its power capacity by 30MW. With the power purchase agreement kicking in and captive power plants coming on stream, JKLC will have surplus power capacity, which it intends to sell on merchant basis.

JKLC has been betting high on ready‐mix concrete (RMC) business and, with the softening of interest rates, the management believes that this segment is likely to recover.

At the current price of Rs 144, the stock trades at a P/E multiple of 3.1 x FY10E earnings and 3.6 x FY11E earnings. We recommend a “BUY” on the stock with a price target of Rs 199, assuming a P/E multiple of 5 x FY11E earnings, an upside of 38% from the current levels, over a period of 12 months.

To see full report: JK LAKSHMI CEMENT


Irrational stock exuberance, in our view

Reiterate U/P view on IT; valuation-led 25% downside expected for Infy
Software stocks have rallied sharply and consensus is now positive. We reiterate our Underperform view and believe the market will be disappointed in the near term,on margins and in the longer term on revenue growth trajectory. Unlike consensus, we expect margins to decline in FY11, not only due to Rupee appreciation but due to likely rise in wages, ahead of pricing recovery and a pick up in discretionary S&M costs. Structurally, we expect slower revenue growth going ahead on slower expansion of addressable market and greater competitive intensity. We have U/perform ratings on the top four Indian IT stocks, and we see the highest valuation-led downside for Infosys of ~25%. Our FY11e Infosys EPS is 8% below consensus.

Why do we expect FY11 margins to disappoint consensus expectations?
We differ from consensus and believe FY11 margins will decline not only because we expect 5% Re/USD appreciation next year but because a) we expect wages will recover earlier than pricing and utilization in vendors like Wipro, HCL Tech and Patni is at a peak and b) discretionary S&M costs will pick up as vendors invest in developing new markets. Non-traditional markets like BPO/infrastructure services are likely to form 80% of incremental addressable market, as per

Structurally, believe revenue growth will be slower ahead
We also believe market will be disappointed with the revenue growth trajectory. Infy revenues (as proxy for sector) are highly correlated with S&P500 revenues, which have seen a much steeper fall and are forecast to recover more slowly as well, compared to 2003. Further, we expect slower revenue growth going ahead as we forecast that growth in addressable market is likely to halve over the next decade to 10% CAGR, compared to 2000-08 and market share gains are likely to
be more gradual as competitive pressure grows.

Estimates & PO revised but valuations stretched
Faster than expected macro recovery and better vendor cost control lead us to raise estimates by 3-12% over FY10/11/12 for the large caps (Table 1). We also re-rate the stocks on increased revenue visibility & productivity improvements, raising POs by 20-60%. However, in our view valuations are stretched. Infy is trading at its highest PE in the last two years, at 22x 1yr fwd PE vs 3yr avg of 19x, while in fact we expect stocks to de-rate structurally, given a slower growth trajectory. Further, it is at an EV/E to 2-yr fwd EBITDA growth of 2x today vs 0.75x and 1.2x in Jan08, including FY09 actual and taking analyst estimates at the time



Strong order inflows strengthen near-to-medium term outlook
Alstom Project India Limited (APIL) reported a strong set of numbers for Q1’10. APIL’s net sales increased 36.7% yoy to Rs. 5 bn. EBITDA increased 129.1% yoy to Rs. 573 mn, largely because of the decline in raw material costs. In the near-to-medium term, we expect the Company to have robust order inflows on the back of the Government of India's (GoI's) expansion of power generation capacity, and GoI’s increasing focus on non-conventional sources of energy and refurbishment of public transport, including the metro rail services, which augers well for the Company’s Power and Transport segments.

Order inflows to increase: At the end of FY09, the Company’s order book stood at Rs. 26.1 bn. In FY10, so far the Company has received large orders worth Rs. 6.4 bn from BHEL and Lanco Infra. In the near-to-medium term we expect the order book for the Power segment to get a boost on the back of the GoI's expansion of power generation capacity and the Company’s strategic ties with major players in the sector such as BHEL and NTPC. We expect the Company to benefit from the GoI's huge investments in the Power sector, and accordingly, we have upwardly revised our estimates for the Company’s order book to Rs. 29.8 bn for the FY10.

Transport segment’s order book to improve: In FY10, the Company received a major order from the Bangalore Metro Rail Corporation to supply signaling systems worth Rs. 1.9 bn, which represents 8.3% of the FY09 total revenue. Currently, the transport segment contributes ~2% of revenues; however, we expect its contribution to increase in the near-to-medium term on the back of a major overhaul in public transport and the commencement of metro rail services in various cities such as Bangalore, Hyderabad, and Chennai. Also, the Company plans to increase the business volume of the segment by supplying various global units with products from its Coimbatore manufacturing unit. Accordingly, we expect the order book of the segment to grow in the near-to-medium term.

To see full report: ALSTOM PROJECTS


Revenue visibility improving

We upgrade SAIL to Buy (from Hold) on improved revenue visibility over the mid-term. The management estimates 10% volume growth in FY10 and plans to restart two idle blast furnaces (1.6mt total capacity) to meet the renewed demand from infrastructure, automobile and white goods sectors. The company’s plan to hike prices of long products too would boost revenues.

Upgrade to Buy: We upgrade SAIL to Buy (from Hold) on improved revenue visibility over the mid-term. At CMP, the stock trades at 12x FY10E and 10.2x FY11E earnings and 6x FY10E and 4.8x FY11E EV/EBIDTA. We value the stock at 6.0x FY11E EV/EBIDTA, which gives us
a target price of Rs205 (Rs176 earlier).

Domestic steel consumption to rise in tandem with GDP growth: Highlighting the strong correlation between steel consumption and GDP growth, the management estimates domestic steel consumption to register 7% growth in FY10 and 10% in FY11. Consumption during August 2009 increased 4% to 4.4mt, though production dipped 1% to 4.73mt.

Company to increase production: SAIL plans to restart two idle blast furnaces (total capacity of 1.6mt) to meet the incremental demand from construction, automobile and consumer durable sectors.

Gearing up to hike prices of long products: The company intends to increase prices of long products from Q3FY10 onwards. Improving domestic demand coupled with likely increase in prices would be positive triggers for the stock.

Estimates revised: We have cut our earnings estimates for FY10 by 0.7% to Rs14.2 to factor in higher employee costs. However, for FY11 we raise estimate by 2.3% to Rs16.7.

Capex delayed by two more years: SAIL’s Rs500bn capex to double capacity to 26mt would be further delayed by two years to 2014, primarily due to global economic stress and softer demand. The company expects to add about 7mt of new capacity during phase 1 of the capex (between June-July 2010 and 2012).

To see full report: SAIL



· The economy is still growing at a positive rate, albeit slower. There is no recession in India – only a slowdown and that too a temporary one.

· As per the FICCI-KPMG report in 2008, the size of the industry was approximately Rs. 8.4 billion inclusive of AIR revenues.

· The report also states that Indian media and entertainment industry stood at Rs.584.4 billion in 2008 and it will grow upto Rs.1051.1 Billion till 2013 at a CAGR of 12.5% from 2009 - 13

· The report further analyze the Indian Advertisement Industry which stood at Rs.221.7 billion in 2008, it will grow upto Rs.396.8 Billion till 2013 at a CAGR of 13.5% from 2009 - 13

· The Advertisement to GDP ratio in the country still continues to be very low at around 0.57%. This is much lower than economies like the US where it is upwards of 1.2% and developing economies such as Hong Kong and Thailand which recorded 1.47% and 1.1% respectively. The global average is also higher

at 0.9%.

· The Indian Advertising Industry is still expected to grow, albeit at a slower pace. Group M predicts that India’s ad spending in 2009 will grom by 4.7% · New initiatives are likely to be announced in the Phase III policy: broadcasters may be allowed to operate multiple stations in a city, offer news and current affairs through Prasar Bharati

· There are some significant limitations to the RAM methodology.

· As per the New Frequency Module (FM) broadcasting policy, effective April 1, 2005 license fees are charged to revenue at the rate of 4% of gross revenue for the period or 10% of Reserve One time Entry Fee for the concerned city, whichever is higher.



The rally in metal prices which has been underway since the start of the year witnessed a minor halt last month. Most of the base metals ended in the red on a mom basis, as concerns over demand from China and the excess supply weighed on metal prices. The growth in supply has outpaced the pick-up in demand over the last two months, leading to a rise in inventory levels. The supply overhang, which has persisted since the October mayhem made its impact, as most metal producers have restarted or have announced plans to restart their manufacturing capacities. Though demand scenario has improved globally, the pace at which metal prices have gained has been higher than our expectations. The favourable commodity prices have led to an oversupply situation in the last two months. Inventory levels of most of the commodities have surged over the last two months. We feel that the upside for metal prices would be capped on account of the present supply overhang.

Dollar index slides to 2009 lows
The US dollar has tumbled in the last 30 days as the appeal of the currency as a safe haven has diminished. Data points released by most of the major nations have continued to show a rebound in their economies.

Base metals under pressure
Base metals were under pressure for most part of the month led by concerns over excess supply and a decline in demand from China. Most of the base metals ended lower on a month basis, with copper declining the most with a fall of 8%.

Global steel prices increase due to firm demand
Steel prices in China have declined ~12 over the past fortnight. Inventory levels in China have surged to three-month highs as export remain weak and production levels soar, recording an all time high 50.7mn tons in July.

To see full report: COMMODITY UPDATE