Tuesday, October 6, 2009


Fertiliser companies demand for lowering KG basin gas price….

After lots of hue and cry from RNRL (Reliance Natural Resources Ltd) and NTPC LTD over KG basin gas pricing, fertiliser companies too have joined the party and raised the issue of higher marketing margin and transportation cost being charged by Reliance Industries Ltd (RIL) on gas from its D6 block in KG (Krishna Godawari) basin. RIL is charging US$ 0.14 per mmBtu as marketing margin and US$1.58 per mmBtu as transportation cost on the US$4.2 per mmBtu base price fixed by the government. This takes the landed cost of gas in the range of US$ 6.25-7 per mmBtu (depending on the location) for the companies. The delivered gas price to Tata Chemicals' Babrala plant is US$ 6.99 per mmBtu. The Fertiliser Association of India (FAI) has already sought lower price through a petition filed in the Supreme Court against the high freight fixed by RIL and the marketing margin. The FAI has raised the issue that if NTPC gets gas from RIL at US$ 2.4 per mmBtu, then fertiliser companies should also get it at that price. According to industry sources, the manufacturing cost of Indian fertiliser companies is higher than the Gulf countries and the gas price of US$ 6.25-7 per mmBtu is affecting the bottomline and competitiveness of Indian fertiliser companies visà- vis their international peers.

Views: Undoubtedly, the availability of KG basin gas is benefiting Tata Chemicals in terms of better capacity utilisation and savings on raw material costs in comparison to other feedstock like LNG (Liquefied Natural Gas) and Naphtha. However, as per industry sources, KG (Krishna Godawari) basin delivered gas price to Tata Chemicals' Babrala plant (which is at US$ 6.99 per mmBtu) is still high and landed cost can be reduced by lowering the transportation cost and marketing margin. We believe that any reduction in KG basin gas price for Tata Chemicals
will be a positive for the company.

Valuation: The stock is currently trading at a P/E of 14.5x FY10E EPS of Rs 19.3 and 9.7 x FY11E EPS of Rs 28.8. We maintain our Underperformer rating on the stock with price target of Rs 230 on 8x FY11E estimated earnings.

To see full report: TATA CHEMICALS


To Hell and Back

The worst is over – Liquidity and demand concerns have abated and property stocks are back in the spotlight.

Home buyers are back – After several months of subdued demand, home buyers are back.

Affordability has improved – Lower property prices, small apartment sizes and lower mortgage rates have made homes more affordable.

Better buyer confidence – Improved job security and income visibility is encouraging customers to buy homes.

Liquidity crunch has eased – Developers are in better shape after debt restructuring, infusion of funds through QIPs and non-strategic assets sales.

Change in strategy – Focus is on affordable homes and pre-sale of projects. Commercial and retail segments are yet to see meaningful recovery.

Catalysts and challenges – Continued improvement in home demand, increase in property prices and revival of the office segment are catalysts going forward while scale up in construction activity and project execution will be a key challenge.

Initiate with BUY – We initiate coverage on the sector with a BUY rating on four stocks DLF (Target Price INR520), Unitech (Target Price INR136), HDIL (Target Price INR411) and Indiabulls Real Estate (Target Price INR355).

To see full report: REAL ESTATE


Green shoots to full bloom

MindTree enjoys strong management bandwidth versus other mid-caps and provides an attractive alternative to Fortune-500/1000 clients besides large vendors. However, the company can witness continued growth volatility given higher project-based revenues. With signs of recovery in global economy, we expect growth beyond FY10 to be healthy for MindTree given expected pick-up in discretionary spend for the industry and resulting margin uptick for MindTree as most of the margin pressure is bottoming out. Despite the stock’s run up recently, we initiate coverage with BUY and Rs725 target price. Our target FY11E P/E is at ~30% discount to Infosys’ target P/E, which we believe is fair considering MindTree’s quality management, better corporate governance and EBITDA & EPS CAGR of 20% and 12% respectively through FY10E-12E.

Client mining – Steps in the right direction. Earlier, MindTree underperformed peers on client mining despite a marquee client list. But recently it has addressed these by: i) recruiting lateral account managers from large global IT companies (account manager strength rose to ~10-12 from 2-3 YoY), ii) exiting ~50 client accounts given scale-up issues due to limited scope and iii) multi-service offerings to clients. These investments are likely to yield better results on revenues & margins, when global IT spending is showing signs of recovery even on discretionary/project-based spend, which forms a material part of revenues.

Margin-related pressure bottoming out. With likely recovery in IT spending in H2FY10/FY11, we expect MindTree’s EBITDA margin to improve hereon considering: i) utilisation (including trainees) touched a bottom of 61.1% in Q1FY10 from 70% in Q2FY09, ii) billing rate, post Aztecsoft’s consolidation, reduced 5-8% from Q3FY09 levels (Q3FY09, the first quarter to reflect full consolidation of Aztec), iii) Q1FY10 SG&A at 19.5% (similar to pre-IPO levels) versus 16-18% in FY08-09. Besides, we believe, incremental investment in S&M is likely to be lower.

Well positioned to outperform with quality management & marquee clients. Given MindTree’s quality management and marquee client list – Volvo, Unilever, LSI Logic, Symantec, United Technologies, Microsoft etc – which acts as a big differentiator versus other mid-cap peers, the company is likely to outperform after FY10. We expect 19% & 20% revenue & EBITDA CAGR in FY10E-12E post 1% & 30% decline in FY10E dollar revenues and rupee EBITDA respectively.

To see full report: MINDTREE


We have compiled interesting charts across key sectors, which we believe have compelling stocks & key takeaways.

Some significant takeaways are:
IT Services look well poised as western economies recover and Indian IT Services are strongly correlated with these economies. We favour Tata Consultancy Services the most among larger companies as its revenue mix is ideal (it has the highest exposure to BFSI, which is recovering well, and the lowest to Manufacturing, which is still struggling). We also prefer HCL Technologies’ (HCLT) emerging verticals, which will fuel the company’s growth in the next 10 years; HCLT will benefit from this through Axon.

We reiterate BUY on Ranbaxy, which remains a contrarian call. We are currently valuing Ranbaxy’s first-to-file (FTF) ANDAs at 3x (present value of EPS), compared to 4-9x given by market to top tier pharma companies during product announcements. Prospective FTF launches over the next six months can trigger consensus rating upgrades and the FTF multiple.

We believe aluminium prices are well poised as they are still hovering around the cost curve. Significant destocking has been seen in the US and Europe, and this can absorb any demand shock from China. Global steel capacity utilisation is at a 25-year low; significant discipline will be required from producers to ensure that the positive price trends continue, which will be difficult.

Increasing market share of new operators coupled with new aggressive tariff plans reinforce a cautious stance on the telecom sector. Idea’s incremental market share has been hit significantly, making it a SELL for us. Bharti is our preferred pick in the sector as it continues to gain revenue share in the face of increasing competition.

Our composite real estate sector index is now trading close to NAV versus 60%+ discount 9-10 months ago, indicating that the sector is fairly valued. Using the discount to NAV as a basis, Sobha and HDIL are relatively more attractive, while DLF and Unitech are not.

Jagran has witnessed significant earnings revision and the steep fall in newsprint prices in the past 12 months has been a reason. While newsprint prices are inching up now, we believe positive consensus earnings revisions will continue (our FY10E estimates are 15% higher than consensus). Sun’s valuation premium to Zee has contracted over the past three years; we expect
its market leadership to drive that premium up again.

We are cautious on refiners due to our expectations of muted GRMs. Oil PSUs are hostage to policy changes; we are concerned on OMCs as we believe they will bear higher-than-expected subsidy sharing.

To see full report: SECTORAL CHARTSCAPE

>QE Sep-09 Earnings Preview: A Mixed Bag (MORGAN STANLEY)

Quick Comment: MS analysts expect aggregate earnings for the 94 companies in MS coverage universe to rise 39% for the QE Sep-09, compared to a 7% increase in Jun-09. Excluding the volatile energy sector, earnings are expected to decline 3% (this would be a fourth consecutive quarter of declining earnings). Based on our analysts’ estimates, the BSE Sensex earnings
are likely to decline 3% YoY compared to a 1% fall in the QE Jun-09.

What's new: The aggregate of our analysts’ estimates reveals that revenues for the MS coverage stocks could fall 10% YoY – revenues could therefore be down for a third consecutive quarter. Ex-energy, our analysts expect revenues to grow 6% YoY (compared to 8% growth in the previous quarter). The sample’s aggregate EBITDA margins are likely to rise by 624bps YoY.
Ex-energy EBITDA margins are forecast to fall 34bps (a likely fall for the fifth consecutive quarter). Six out of the 10 sectors are likely to see margin expansion with energy leading the set and materials seeing the sharpest contraction in margins. The strongest earnings growth is likely in energy (as the public sector oil companies are likely making profits vs. losses a year ago) followed by consumer discretionary (mainly autos) and healthcare whereas materials and telecoms appear distinctly weak. If we exclude the energy, financials and materials sectors, earnings are forecast to be up 8% YoY for our sample. Our analysts expect 13 companies to report 50% or more fall in earnings while 12 of them are expected to deliver 50% or more earnings growth.

Implications: We expect earnings to surprise on the upside ahead of our analyst expectations (as has been the case for the past two quarters) with the broader market outpacing the narrow market in terms of growth. The broad market earnings were up 7% versus a 1% fall in Sensex earnings in the previous quarter (QE Jun-09).

To see full report: INDIA STRATEGY



Stock Update >> Larsen & Toubro
Stock Update >> Shiv-Vani Oil & Gas Exploration Services
Sector Update >> Cement (Grasim Industries & UltraTech Cement)
Sector Update >> Pharmaceuticals
Sector Update >> Automobiles
Sharekhan Special >> Q2FY2010 IT earnings preview

To see full report: INVESTOR'S EYE 05/10/09


East side story. We expect Oil India Limited to likely create significant value from its current large oil and gas reserves and solid exploration abilities. We initiate coverage with a BUY rating and 12-month target price of Rs 1,350 based on 10X FY2011E EPS. Our positive view stems from OIL's production profile, attractive valuations and strong financials.

  • Attracitive valuations- Buy rating with 12-month target price of Rs 1,350
  • Upside potential - favorable subsidy-sharing, natural gas price increase and new discoveries
  • Strong cash flow generation, net income driven by volume growth, higher crude price
  • Key risks-unfavorable subsidy-sharing scheme, lower than expected crude price, regulations
To see full report: OIL


  • Prime Location in Mumbai
  • New Construction to add lease rentals revenue
  • Old structure continue to generate decent cash flows
  • Company to become Debt free within four years starting from FY10
  • Valuation- "Beyond the Vagaries of Real estate cycle.
To see full report: NIRLON LIMITED


Sep09 Results Preview: In-line results may not be good enough

Quick Comment: We believe inline results may not be good enough to sustain the current stock valuations. Given the rising market expectations and the continued uncertainty on the ground (as indicated by Accenture’s results and new bookings) India IT companies may find the market expectations a bit stretched in our view.

We expect reasonable 2Q10 but muted guidance for 3Q10: For the quarter, we expect reported revenues to be in the 3%-3.5% qoq range for the large vendors including the impact of higher number of working days and cross-currency benefits for the quarter. However, revenue guidance for Q3 could be in the flat to 1% qoq growth range in our view.

Margin outlook is key: The margin outlook for top 3 companies is likely to converge this quarter onwards. So far, TCS and Wipro have indicated flat margins whereas Infosys has guided for -150bps margin decline. We believe the yearend result could be somewhere mid-way for the large companies.

Infosys guidance: Though Infosys could have a 2-2.5% benefit due to higher working days and cross-currency in Q2, Q3 has lower working days. We believe Q3 guidance and FY10e EPS revisions would be key focus areas for the results. We believe Infosys could revise its FY11e EPS guidance to ~Rs100-101.

In our view, stocks are already pricing in FY11e EPS expectations but any EPS cuts for Infosys could tamper rising expectations post Q2. With USD depreciating against key currencies, we would now recommend investors to position their portfolios for an appreciating rupee as well. Wipro would likely be a key beneficiary of an appreciating rupee environment in our view.

To see full report: INDIAN IT SERVICES



Air Products Announces Price Increase for Liquid and Bulk Industrial Gas Products: USA

Dow to close units at Texas plants: USA

Monsanto Doubles Job Cuts: USA

Detergent manufacturers imposing safeguard duty on soda ash import: India
Fertilizer ministry seeks additional gas for revival of seven fertilizer units: India
AMAI asks for immediate action to check surge in caustic soda import: India
No plan to set up chemical industries in Public sector: DCPC: India

India may explore exporting chemicals to Kyrgyz Republic at competitive prices: DCPC: India

Alstom and Dow Dedicate New Pilot Plant to Capture CO2: USA
New Dow Impact Modifier for Rigid Vinyl Material Greatly Boosts Impact: USA

California Products acquires Progress Paint brands: USA
RIL gets HC`s nod for merger with RPL: India

H. B. Fuller settles lawsuit for US$18.8 million: USA
GACL seeks environmental clearance for its caustic soda de-bottlenecking project: India
No plan to eliminate import of chemicals: DCPC: India
Gujarat PCPIR to be supervised by a GIDC subsidiary: India
BASF sells its polystyrene business in Brazil: India
Ajanta Pharma proposes to produce 32 drugs in new unit: India
CRISIL assigns 'BB-' rating to Wanksons Chemicals' bank facilities: India
ICRA assigns LA rating to the bank line of Huntsman Advanced Materials: India
Punj Lloyd bags Rs5.50bn contract from MRPL: India