Monday, October 5, 2009


On a slippery wicket

Markets on Oct 05, 2009: Waning momentum
The domestic stock market opened in red on negative global cues and continued to face resistance on upside. It also failed to cross the high of the Doji candlestick pattern formed on Thursday. Nifty has been trading in an upward parallel channel with 4900 being a crucial support at the lower end of the channel and resistance at 5150 on the upper side of the channel. However, the weakening momentum is signaling that from here onwards the downtrend should ensue. So, 4900 on lower side should be watched for, as close below it will accentuate the selling pressure. Hence, we revise our short-term target to 4660 with reversal above 5150.

On the daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA at 4900 and 4773 respectively, which are crucial supports going forward. The momentum indicator (KST) has given negative crossover and is below the zero line. The market breadth was negative with 247 advances and 1,040 declines on the NSE and 824 advances and 2,033 declines on the BSE.

On the hourly chart, Nifty is trading below its 20 hourly moving average (HMA) and 40HMA at 5049 and 5013 respectively, which are now resistances in the short term. The momentum indicator (KST) has given negative crossover and trading below the zero line.

Nifty and Sensex closed in red losing 80 and 268 points respectively. Of the 30 Stocks of the Sensex Bharti Airtel (down 8.05%) and Reliance Communications (down 5.60%), Grasim Industries (down 7.10%) and Hindalco Industries (down 6.75%) were the top losers while ITC (up 2.58%) and Cipla (up 1.40%) were the top gainers.

To see full report: EAGLE EYE 06/10/09


The fittest has survived, now it can thrive

BRFL has continued to see strong margins and a full export order book, as buyers reward its superior design and execution skills. With increasing confidence in its margin sustainability, we upgrade our forecasts and valuation on BRFL and reiterate our Positive stance

We turned Positive on BRFL in April after the company’s fund raising gave us increased confidence on the firm’s ability to weather the downturn. Subsequent results have reinforced this with continuing strength in margins, a full order book and better than expected cash conversion in FY09. We met management earlier this week and came away impressed by the company’s prospects.

Amidst the turmoil in the global textiles sector, BRFL has continued along a relatively steady course, going ahead with its capacity expansion (2x in garments, 4x in fabrics) and continuing to deliver steady margins.

• Design capabilties: BRFL’s design skills are widely known and underpin its expansion into garments. This is reflected in the company creating ~5 new designs per day and working closely with leading retailers like Zara in assisting their design efforts. These skills, coupled with the company’s ability to deliver high design content products (underpinned by its integrated operations), give the company access to a slightly premium segment with lower pricing
pressures (due to less commoditisation – visible in high margins). This also gives greater bargaining power in the domestic market, where more sophisticated designs often attract a premium.

• Distribution advantage: The BRFL promoters are well liked and respected in the wholesale textile market in India, giving them access to a robust domestic channel for surplus fabric (current dealings through ~20 distributors). The relationships also pave the way for BRFL’s plans to begin supplying to domestic brands as well, currently being piloted with Mufti.

• Strengths underpin share gain: BRFL has continued to grow (exports almost doubled in FY09) amidst a shrinking global textiles market (~3%+ decline in CY2008). This growth has been underpinned by tight execution (visible in low turnaround time of 60-90 days and low rejection rates of ~1%) and the ability to offer design support. This has allowed BRFL to continue to thrive at the cost of higher cost manufacturers in Europe (CIS countries, Turkey and Italy).

BRFL has highlighted its intention to do a fresh round of equity raising later in FY10 (we expect ~Rs.2bn, 10.5% dilution at the current share price). This round of dilution is intended to finance a part of the working capital requirements (over Rs.5.5bn in FY10) for the increased capacity with a view to keeping debt at a reasonable level (target debt/equity of 1.5x).

We have downgraded our forecasts for Guru but upgraded our earnings for the core textiles business (21% EBITDA upgrade for FY10 and FY11) as we now expect the company to be able to sustain ~23%+ EBITDA margins in the core textiles business. Our FCFE based valuation for BRFL is Rs.299, 41% upside and 65% higher than our previous valuation. The valuation upgrade has been driven by earnings upgrades (42% in FY10) as well as better cash conversion on the back of improvements demonstrated in FY09 (FY10 net working capital to sales ratio reduced by 480bps). On a relative basis, BRFL trades at a 19% discount on EV/EBITDA and a 63% discount on P/E (59% assuming equity issues of Rs.2bn). Even if we factor in 10% dilution, BRFL seems relatively cheap despite its very visible strategic superiority to domestic peers.

To see the full report: BRFL


Finolex Cables Ltd (FCL), the flagship company of the Finolex Group, was established in 1958 in Pune. Today, it is India's largest and leading manufacturer of electrical and telecommunication cables with a turnover of more than Rs.1,200 cr. The company started its operation with the manufacture of PVC insulated electrical cables for the automobile industry. Since then, the company has constantly endeavored to augment its product range to include, PVC insulated electrical wires and Flame Retardant Low Smoke electrical wires, PVC insulated single core and multicore industrial flexible cables, Rodent Repellent Multicore Flexible Cables, PVC Insulated Winding Wires and 3 Core Flat Cables, XLPE 3 Core Flat Cables High Voltage Power Cables (Upto 33 kV), Auto & Battery Cables, Co-axial and CATV cables, LAN Cables, Switchboard Cables, Fibre Optic Cables and others.

The main segments of the company are: Electrical Cables and Communication Cables. The company has recently added High Voltage Power Cables to its range of Electrical Cables. Every cable is manufactured using bright annealed electrolytic grade copper – 99.97% pure manufactured in house and is insulated with virgin grade PVC (manufactured by group company Finolex Industries Limited) that is formulated in-house. In FY09, FCL derived about 56% of its revenue from electrical cables (59% in FY08), 19% from communication cables (19% in FY08), 19% from copper rods (18% in FY08) and 6% from others (4% in FY08).

Plants: FCL has set up four modern state of the art plants. These manufacturing plants are located in Pimpri (Pune),Urse (Pune),Goa & Roorkee (Uttarakhand). All these manufacturing plants are well equipped with the latest state-of-the art modern machinery for producing quality product. FCL currently has electrical cables capacity of 1701 CKM (59% utilization in FY09), 48,000 km of optical fibre cables capacity (80% utilization in FY09) and other communication (telephone jelly filled) cables capacity of 10,612 CKM (8.4% capacity utilization in FY09).

To see full report: FINOLEX CABLES


Focus shifts to profitability

Pantaloon Retail India’s (PRIL) revenue for FY09 (June year ending) rose 25.6% YoY to Rs63.4bn and EBITDA surged 45.2% to Rs6.7bn, inline with our estimates. However, higher depreciation resulted in lower 11.6% PAT growth at Rs1.4bn vs our estimate of Rs1.5bn. EBIDTA margin expanded 142bp to 10.5%, mainly on account of cost reduction.

Average sales per sq ft down: Same-stores-sales growth was tepid at 7% and this coupled with lower contribution from new stores resulted in 7% reduction in average sales per sq ft to Rs7,220 (vs Rs7,763 in FY08). The company expects to add 3mn sq ft over the next three years.

Cost rationalisation helps boost margin: The 142bp expansion in margin to 10.5% surprised as it was achieved despite the 40bp fall in gross margin. The management attributed this margin expansion to rationalisation across heads.

EBIDTA margins to improve: We believe steps to increase full price merchandise and core merchandise would help improve sales per sq ft. Further, rationalisation of warehousing and logistic costs is also expected to boost EBITDA margins going forward.

Focus shifts to profitability: The management has shifted its strategy from store roll-out to profit growth. We remain positive on the company and maintain our fair value of Rs389 on SOTP. We value retail business on DCF at Rs345, FCH at Rs39 and HSRIL at Rs6.

To see the full report: PANTALOON RETAIL


Right Fomula(tion)...!!!

Lupin has successfully transformed itself from a Tier-II API manufacturer to a fully integrated global generic player. It has managed to deliver superior track record growth (86% CAGR in export formulations; 23% CAGR in domestic formulations over FY06-09) with a balanced business portfolio. Its growth strategy entwines an interesting mix of strategic acquisitions that compliments its existent business-mix. There exists a positive surprise in case of any favourable outcome from the re-inspection due in the next 3-4 months. We initiate coverage with an “Accumulate” rating on the stock with a target price of Rs.1291 (PER of 15xFY11E).

Investment Rationale
Among the largest vertically integrated generic players.
Lupin has transformed itself from an API manufacturer to a fully integrated generic company.Formulations constitute a dominant share - 81% of the product mix with API’s mainly captively consumed. Its emphasis on complex generics and branded formulations in niche therapeutic areas fetches relatively higher margins.

Balanced Business Portfolio.
It has not only consolidated its position in the domestic market (35% sales) but established its credentials in the export formulations market The company has gradually reduced dependency on Anti-TB’s and cephalosporins and increased its focus on high growth lifestyle category - CVS, CNS etc.

Export Formulations – Growth Engine
The company derives 51% of sales (FY09) from export formulations. Its exceptional track record in US generics (9th largest by prescription) is primarily attributed to selective product launches (limited competition) and increasing contribution from branded formulations. We anticipate the success model to be replicated in key European markets while it consolidates its position in Japan – 2nd largest market. We estimate export formulations to grow by 28% CAGR over

FY09-11E and contribute 58% of sales.
Domestic Formulation business: An Established Cash Cow... Lupin owns 2.7% market share and ranks 5th in the domestic pharma market with leadership in Anti-TB (48% share) and Anti-Asthma (12% share) segments. Gradual migration towards fast growing chronic based portfolio and incisive marketing strategies has resulted in consistent outperformance vis-à-vis the domestic industry with 23% CAGR over FY07-09. We estimate the division to record 20% CAGR over FY09-11E to Rs.16.4bn.

Grey clouds over Mandideep FDA compliance - suppress valuations
The warning letter issued however doesn’t impact sales of existing products; although no new products including pending applications (1 pending approval) will be approved until a favorable resolution.We believe outcome from the reinspection due in the next 3-4 months remains crucial to future US sales and will until then remain an overhang on overall valuations.

At CMP, the stock trades at 15.8x FY10E and 12.4x FY11E earnings. We believe current valuations do not fully reflect scalability in Lupin’s business model (23% EPS growth over FY09-11E and strong return ratios). We value the stock at 15x FY11E earnings (~10% discount to average multiple of large cap peers) with a target price of 1291/- and recommend “Accumulate” on the stock.

To see full report: LUPIN LIMITED


………………. Sailing in Bad Times

Company Background:

VSL is an integrated hydrocarbon shipping company, commenced operations in 1973 and currently is the operator of largest LPG fleet under Indian flag. The company is a global player in energy transportation and offshore exploration and production (E&P) support services.

Investment Rationale:
· VSL currently owned LPG carrier fleet of 11 vessels, which is the largest in India in terms of both fleet size and cargo carrying capacity of 319,682 dead weight tons (dwt). The company has a major 86.0 percent of the total LPG tonnage (on dwt basis) under Indian Flag

· The company has delivered value to its shareholders in the form of paying dividends. The company has impressive track records of paying continuous dividends since past 24 years, and at current market price dividend yield’s stands over 8.0 percent

· For the financial year FY09, major portion of revenue has clocked from repeat customers, contributing 80.94 percent to total revenue earned by the company, showing faith of the clients
towards the VSL business model

· VSL has increased its asset base and business operations in the offshore segment to capitalize the rapidly developing oil and gas exploration and production industry. VSL revenue contribution from offshore segment has increased significantly from 3.55 percent in FY07 to 20.0 percent in FY09

Key Risks:
· It is predominantly in LPG carriers business which accounts 57.72 percent of overall revenues in FY09. Hence any amendments in government policy, new regulatory compliance would affect the company adversely

· VSL debt-to-equity ratio is very high as compared to its peer players, while the interest coverage ratio has also fallen over years to mere 1.86 times in FY09, which remains a cause of

To see full report: VARUN SHIPPING LIMITED

>Phoenix Mills Limited (CRISIL)

Under penetrated organised retail provides bright industry prospects
Under-penetration of the organised retail market, rising disposable income and favorable demographics buoy India’s retail sector. However, these prospects are partly subdued by the fragmented industry and low entry barriers.

Phoenix pioneered an innovative concept of the Market City
Phoenix Mills Limited (Phoenix) pioneered the Market City concept in India. It refers to a multi-use premise for retail, commercial, entertainment as well as hospitality needs. The economic strength of the concept is derived from the inherit nature of business offerings, extensive range of services enabling larger footfalls and higher longevity at the premise.

HSP provides revenue stability; expansion will augment steadiness
High Street Phoenix (HSP) contributes nearly 99% of the lease revenues. Out of 0.5 million square feet (msft) leased area; anchor tenants occupy nearly 40% and contribute almost a quarter of revenues. HSP’s revenues are expected to be Rs 2.0 Bn by FY12, translating into a 32% 3-year CAGR, with 0.9 msft of leased area.

Aggressive plans to launch Market Cities will double revenues
Phoenix plans to launch Market Cities in four major cities in India. With around 7.7 msft of retail and commercial area currently under development and expected to be operational through FY12 and beyond, we expect Phoenix’s revenues to be Rs 3.5 Bn in FY12, translating into a 3-year CAGR of 33%.

Phoenix’s financial performance is highly sensitive to occupancy rates
Phoenix’s financial performance is highly sensitive to its occupancy rates at its upcoming Market City projects. We have assumed occupancies in range of 60-75% during the initial few years of the Market Cities becoming operational. However, any change in this underlying assumption will materially impact the overall financial performance as well as valuation of the company.

Expansion looks highly aggressive especially looking at the past record
Although the management of the company has done well so far at a single location, viz, HSP, we feel that the ongoing expansion of more than 9 msft (as against the existing 0.9 msft until June 2009) at various market cities pose challenges of scale, complexity and demand risks which are significantly greater than what has been hitherto managed.

We assign Phoenix ‘2/5’ on fundamental and ‘3/5’ on valuation
We assign a fundamental grade of ‘2/5’, indicating that its fundamentals are ‘Moderate’ relative to other listed securities. While good industry prospects and expected revenue from upcoming market cities positively influence our grading, limited execution track record of management and aggressive expansion plans weigh down our overall grading. A valuation grade of ‘3/5’ indicates that the current market price is ‘Aligned’ to our fundamental value per share (Fundamental Value of Rs 160 per share).

To see full report: PHOENIX MILLS LIMITED


Business fundamentals gaining strength

We met the management to BFL to examine the state of domestic and overseas business, seek clarity on JVs, recently announced fund raising, FCCB redemption and various other issues. While the initial feed remains cautious, we discovered that the challenging business environment has made BFL more determined on their future projects - be it auto ro non aunto. Add to this, one area that in our view hold stupendous potential and hence a major trigger for BFL's growth outlook are the JV's with Alstom, Areva and NTPC - meant for aggressively capitalizing the opportunity the capital goods forging space offers (mainly Power).

  • Domestic busniess stablizing, overseas markets still mixed
  • Non-auto capacity ramp up in FY11, to enjoy 3-4% better margin.
  • Operating margins set to revive strongly
  • JV's meant for capitalizing opportunities in Cap. Goods space

To see full report: BHARAT FORGE


Key takeaways from analyst meet

Focus on large-deal wins. Management’s states that the outlook for EAS and RIM services is positive, supporting our view that these horizontals would contribute to HCL’s growth. Key
takeaways: sharper focus on infrastructure, and the company's strategy and ability to win large outsourcing deals.

New verticals, technologies. For new practices, HCL Tech is aggressively taking steps such as expanding sales and marketing teams, and building delivery centres for future technologies, clearly indicating that it is gearing up for the next level of competition.

Financial services – handling mature businesses. HCL Tech provides a total IT outsourcing solution, with greater emphasis on cross-selling. It is increasing its domain expertise to provide greater customer satisfaction. This should result in greater customer loyalty, advocacy, satisfaction and value.

Telecoms, Media and Entertainment – handling immature businesses. HCL Tech is providing focused vertical-based solutions by breaking up these verticals into micro-verticals. It is also investing in new domain-led services and focusing on moving up the value chain to more deeply penetrate the verticals.

Valuation. We re-rate HCL Tech from 15x FY11e earnings to 17x on its sharper focus on clients, technologies and profitability. Hence, we raise our target price to Rs425 (17x FY11e earnings of Rs25). We maintain our Buy rating.

To see full report: HCL TECHNOLOGIES




  1. Moog likely to acquire GE Aviation subsidiary, US
  2. Engineering boss eyes major projects, Australia
  3. Alstom to pick stake in Bhel-Nuclear Power JV, India
  4. BHEL, BEL to float joint venture for solar panels facility, India
  5. Alstom led consortium bags Rs5.63bn contract from BMRCL, India
  6. Bhel, GE to build turbine workshop, India
  7. BHEL bags Rs13bn order for Vallur project, India
  8. Sadbhav Engineering bags order for Rs2.25bn from CIL's subsidiary, India
  9. BHEL to supply 150 electric locomotives to railways, India
  10. Thermax bags Rs10bn power plant order, India
  11. BEML to establish R&D hub in Bangalore, India
  12. Punj Lloyd bags Rs5.50bn contract from MRPL, India

  1. L&T pays Rs2.1bn advance tax, India
  1. Aban Offshore to raise US$1 billion via GDR, share sale to QIB, India
  2. Punj Lloyd raises Rs6bn via debenture issue, India

  1. SAIL buys Bharat Refractories, India
Engineering exports plunged by 31% in August, India

To see full report: ENGINEERING SECTOR

>India floods hit output in key rice growing state

New Delhi - Flooding may reduce output in India's key rice growing state of Andhra Pradesh by up to a third from the last crop year ended Sept. 30, likely slashing supplies to federal grain reserves this year, the state agriculture minister and industry officials said Monday.

India expects summer-sown crop output to drop following the lowest monsoon rainfall levels since 1972, as large tracts of land were left uncultivated.

A late revival of the monsoon rains is expected to improve crop yields, but flooding in two states could cut total crop output more than earlier estimated.

Andhra Pradesh Agriculture Minister Neelakanthapuram Raghuveera Reddy told Dow Jones Newswires the state's summer-sown rice and other crops were hit by drought in June and July and by floods in the past few days.

"I doubt whether we will be able to export any rice (to other states) this year (2009-10)," Reddy said.

The rice crop in Andhra Pradesh is sown from July to mid-August and harvested in December, later than in most parts of the country. The state ranks among the top two contributors of rice to federal grain reserves.

"But we will still sell a small quantity to the (national) Food Corporation this year," Reddy said.

About 12 million tons of paddy, or unhusked rice, was harvested in Andhra Pradesh last year, of which about 70% was of the summer-sown variety.

The state consumes about 8.5 million tons of rice every year, an industry official said.

"We were facing a drought early in the season, and now we have floods...The only (consolation) is that Rabi (winter-sown rice output) is likely to be better because of the rains," said Vithal Reddy, former secretary of the Andhra Pradesh Rice Millers' Association

Prices may not rise sharply despite the floods, however, as government stock levels are comfortable, he said.

Vithal Reddy said that the summer crop in Andhra Pradesh's Telangana region may fall by about 50% from last season because of the recent flooding.

"There will be a shortfall of at least 25% (in the state's summer rice crop) compared to last year," he said.

Rice stocks of the Indian federal government were at a record high last year of more than 30 million tons. The rice harvest in fiscal 2009-10, which started Apr. 1, is expected to fall to 91 million-92 million tons from 99.15 million tons a year earlier.

India's annual rice consumption is about 85 million to 86 million tons.

"The rains may help in the second crop, which is suitable only for parboiled rice," G Nagendra, secretary of All India Federation of Rice Millers said, adding that there are surplus stocks of parboiled rice.

Parboiled rice has been soaked and steamed while still in the husk, retaining more vitamins than white rice and a more durable grain able to withstand industrial food preparation.