Tuesday, October 13, 2009


"The second coming"
Prepare for wave two

October 2008 was the worst period for the financial markets globally. The financial meltdown that followed shattered not only large financial institutions but even countries. However one year down the line it seems that the financial Armageddon never occurred, as business become normal, people all the more optimistic and the overall social mood upbeat. But behind this facade there still remains the dungeon of doom where things are not all that hunky dory. Skeptics believe this rally, which has been driven by flush of easy money chasing returns, will ultimately dry up and suck the people of their wealth for some time to come. As per the Elliott wave theory, the Sensex rallied for wave 1 from March 2009 lows i.e. from 8047.17 to 15600.30 and started wave 2 in an expended flat pattern, where it has completed wave A and B, and wave C is about to start. So, the market is likely to correct for the target of 13200. On the weekly chart, the Sensex suggests weakness in the momentum indicator, KST, which has given a negative crossover and shows negative divergence too. The Sensex on the way up from 13219 has been taking support around 20 daily moving average (DMA) and 40 DMA, which will act as crucial supports. However, once we get a decisive break below these moving averages, the next leg in southward direction will gain strength and the bears would take over the control.

Bollinger band key reversal
The key resistance for the Sensex from here will be the upper Bollinger band, which is also the high of the current week. Hence, 17200- mark is an important level to watch out for because, if the market fails to sustain above 17200, the downside momentum will gain strength and the index will start traveling towards the lower end of the Bollinger band i.e. 13200.

To see full report: BRAVE HEART STRATEGY

>Indiabulls Power IPO- A Risky Investment ? (NOBLE)

Although IBP looks cheap on the face of it, we can’t spot near term valuation upside.
Following the disappointing post-IPO performances of two richly valued Power stocks - Adani Power and NHPC – it is refreshing to see Indiabulls Power (IBP) price its IPO at a discount of 25-30% to other private sector developers of similar profiles (based on Mcap/Total MW). That being said, this discount makes sense since:

(a) IBP has no operational capacity as yet; (b) first commissioning is likely only in FY12; and (c) there is a likelihood of further equity raising over the next two years. Uncertainty on the PPA for the

Amaravati phase 1 power plant (pricing is still not known) & the Nashik power plant (PPA is still not signed) and doubts about the commerciality of the Bhaiyathan plant (65% of offtake has been signed at Rs 0.81 per Kwh vs the prevailing long term PPA of Rs 2.6-2.9 per unit) pose further concerns. As a result, although IBP looks cheap on the face of it, in light of these issues, even at the lower end of the price band, we can’t spot near term valuation upside.


a) Why did IBP give the entire order to Chinese vendors given the short history associated with Chinese equipment in India?

b) Was the selection of vendors based on a global tender? If yes, who were the other vendors participating in the tender process?

c) Our primary data suggests that the average life of the Chinese equipment ranges from 7-10 years? Given the fact that IBP has signed PPAs up to 25 years, is there a provision made by IBP in case the equipment undergoes a replacement cycle?

To see full report: INDIABULLS POWER IPO



Rupee appreciation to impact short-term performance of IT majors

The Indian Rupee has recently witnessed strong appreciation against the US Dollar. From nearly Rs 49 to a Dollar in September 2009, the currency has strengthened to Rs46.66, implying appreciation of nearly 5% in barely over a month's time and an over 10% rise from its lows of over Rs 52 to a Dollar in March 2009. We believe this is likely to negatively impact the near-term financial performance of these companies, even as 2QFY10 is likely to witness a decent performance on a strengthening of deal flows, with the global economic recovery coming to the fore and favourable results also in key vendor consolidation exercises like British Petroleum (BP) and Telstra. IT stocks have surged on the bourses, comfortably out-performing the Sensex over the past three months on expectations that the economic recovery and stronger deal flows will lead to earnings upgrades. It may be noted that the BSE IT Index had surged by as much as 39% in the September quarter, comfortably out-performing the Sensex, which gained 18%.

Apart from the movement in the Rupee-Dollar equation, it should also be noted that of late, cross-currency movements have been favourable for IT companies, with the US Dollar depreciating against the Euro, British Pound and Australian Dollar, leading to the value of these billings in US Dollar terms rising to that extent. Going forward, it is likely that this tailwind, which has been favourable over the past two quarters, could dissipate, thus leading to a 'double-whammy' of sorts, with no further favourable cross-currency swings, as also Rupee appreciation.

Consequently, with the steep stock price run-up, which has led to these stocks getting overheated and the recent Rupee strength, a correction has been witnessed, with Infosys, TCS and Wipro all witnessing falls after the recent strength. We believe that while the recent rise in the Rupee is likely to put pressure on near-term earnings, particularly 3QFY10 financial performance, we believe any correction in these stocks should be used as an opportunity to accumulate them. We expect 2QFY10 to be a strong quarter for Indian IT companies and expect an upgrade in guidance from Infosys on Friday, October 9, 2009. This is likely to be an indication of further economic recovery and the next few quarters could witness a return to growth, which we believe is the most critical factor for these companies to sustain their premium valuations.

We expect these companies to be able to manage Rupee appreciation to the extent that it is gradual, and not sudden and volatile and expect a recovery in core business to more-than-compensate for this headwind. We are positive on the Indian IT sector and believe a correction in these stocks is a good opportunity to add them to the portfolio.

Revenues for the quarter are expected to be lower by 15.3 % to Rs 2.8 bn in 2Q FY 10. The current de-stocking is expected to see revenue uptake expected in October -November 2009. However, we expect turnaround to happen from 3Q FY 10 onwards. OPM is expected to be at 36.9% compared to 48.2% in the corresponding period last quarter on account of lower revenues and current overheads. Profits for the year are expected to be at Rs. 849 mn down by 43.5% YoY in 2Q FY 10. We expect marginal forex gains of Rs 2.1 mn during Q2 FY 10. The reported net profit is expected to be of Rs 851 mn in Q2 FY 10.

The company is getting more qualification approvals for its Nutraceutical plant which is a positive sign for the company. Currently the stock is quoting at 18.6x FY 2010E and 16.4x FY 2011E. With better revenue traction expected in H2 FY10, we remain upbeat on the company and rate the stock as Outperformer with a price target of Rs 630 based on 19x FY 2011E.

To see full report: EQUITY RESEARCH


Robust core; new forays could trigger large upsides

Improved outlook for infra capex, steadier execution and margin expansion due to input cost savings should drive strong PAT growth in the core construction business. An order coverage ratio of 3.45x provides sufficient revenue visibility. The listed infra subsidiary has the requisite experience to benefit from the likely upsurge in infra award activity, especially in the highways sector. While turning around the Italian acquisitions remains a challenge, they offer significant growth opportunity through the foray into the power equipment business in India. At current prices, the stock is trading at 35% discount to peers. Steadier execution and signs of traction in the power business are likely to drive a re-rating in the stock. BUY.

Better execution and margin improvement to drive growth in core construction business: In FY09, the core construction business was beset by a number of external problems: i) suspension of projects under execution; ii) disruption of construction sites due to heavy floods in Bihar and; iii) margin pressure due to low profitability in fixed-price captive projects. Execution rates should improve in absence of external impediments. A strong order book at Rs130bn (3.45x trailing 12 months’ revenues) and L1 pipeline of Rs20bn provide sufficient growth visibility. Profitability in the captive projects would also improve, thanks to sharp declines in input prices from FY09 levels driving a 22% PAT CAGR over FY09-12.

GIPL well-placed to benefit from up-tick in infra BOT projects: Gammon’s infra subsidiary, GIPL, currently has four operational projects—three road and one port terminal project. Along with the ten other projects across road, ports and power sectors, GIPL’s portfolio is well-diversified across sectors. With 100km of highways under operation and another 132km under development, along with two large BOT bridge projects, GIPL has the requisite capability to execute large, complex road projects. This should enable it to capitalise on the likely upsurge in NHAI award activity in the next 2-3 quarters.

Acquisitions provide opportunity to exploit the power opportunity; not factored in our valuations: Through the three Italian acquisitions in FY09, Gammon has got access to technology to foray in high-growth power equipment business in India. The company is also expanding the pressure parts manufacturing facility in India to improve cost competitiveness for both domestic and international projects. While turnaround of these companies remains a key challenge, we believe that the company is taking steps in the right direction. Our valuations do not factor any upsides from turnaround of overseas operations or project wins in India. However, successful foray in power business has potential to add upsides to our SOTP.

To see full report: GAMMON INDIA



Favourite stock picks in the portfolios of equity and mid-cap funds
An analysis has been undertaken on equity and mid-cap funds’ portfolios, indicating the favourite picks of fund managers for the month of September 2009. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 24 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc.

To see full report: FUND ANALYSIS


Monsoon blues or party over?

Cement demand seasonal dip: Cement companies reported lower despatches for September. ACC and Ambuja reported marginally negative growth, while Grasim and Ultratech still registered 16% growth. Overall we expect 7% growth for the industry and believe that delayed monsoon and early festivals contributed to lower YoY growth.

Strong demand to continue: Until August, cement demand had been exceptionally strong, growing at 12.8% against our estimate of 9%. While there are some concerns on demand due to a deficient monsoon and its impact on rural demand, we see support coming from a rebound in urban housing and a further boost to infrastructure projects, particularly road projects.

Cement prices – slipping but not collapsing: Cement prices on average for all of India are down to Rs244/bag, which is still 7% higher than the average seen last year, ie, in FY08. In fact, due to price increases seen in July and early August, the 2Q FY10 prices are still more or less equal to 1Q FY10 prices. Andhra Pradesh is the only state to see a bit of a collapse in prices, which are down 15% to Rs190/bag. The key reason is a lack of demand here, as the start of irrigation projects has been delayed due to the vacuum created post the death of the chief minister of the state.

Clinker stocks low even with high capacity utilisation: The industry had been operating at an 87% capacity utilisation YTD until August, which is higher than last year’s 85%. The clinker stocks have remained low – 16.1 days of consumption lower than last year and well below the 20-day average seen during surplus years.

Cement capacity increase – full impact by 2Q CY10: In the last six months an increase of 20mnt, or around 10% of capacity, has occurred. Overall, we expect another 30–35mnt to be added in the next 12 months, with bulk of this coming in the first half of CY10.


Valuations remain attractive at below a 10x PER: Cement companies are trading below the historical averages seen over last 15 years on all valuation parameters (PER, EV/EBITDA and EV/T). All the companies are trading at or below replacement costs.

Top pick remains Grasim and Ambuja: Although we expect the possibility of a surplus in FY11, we believe that the cement price fall will be limited due to stronger-than-expected demand. We recommend taking exposure to industry leaders that are expanding volume faster than the industry and that are taking measures (like captive power plants and split-grinding units) to reduce costs.

To see full report: CEMENT SECTOR

>The Global Economy, From Recession to Recovery (GOLDMAN SACHS)

Global growth has continued to improve and it now appears that the deep recession that began in the US in late 2007 and then spread to many other countries has finally ended. Key measures of financial stress have improved and risky assets have staged impressive rallies since mid-March. Looking forward, the global economy is seeing increasing differentiation between the G3— where the growth outlook remains fragile—and robust growth in most emerging markets (EMs).

Indeed, the big story for EMs during the crisis appears to be that there was no big story: by and large, their strong fundamentals allowed them to weather the shock better than most had expected. We forecast that EMs will grow by 2.8% in 2009 and by 7.3% in 2010. In contrast,
among advanced economies, we expect GDP to decline by 3.2% and increase by 1.9% in 2010. For the world as a whole, we are projecting GDP to decline by 0.9% this year and then rebound to 4.1% next year, up from our estimates of -1.2% and 3.5% published in the previous
issue of the Global Economics Analyst.

In the US, we expect growth to accelerate to 3%qoq annualised in 2009H2 on the back of fiscal stimulus, a pick-up in housing construction and inventory restocking. However, growth is likely to decelerate to 1.5% by the second half of next year as fiscal stimulus fades, investment spending continues to decline and consumption growth remains weak in the face of high unemployment. Given this anaemic recovery, we expect the Fed to keep the Funds rate near zero at least until 2011.

In Euroland, our latest forecast sees GDP declining by 3.8% in 2009, an improvement over our earlier forecast of -4.4%. Growth is likely to have turned positive in Q3 and should average 1.2% in 2010. We think the ECB will start ‘tightening by stealth’ over the next few quarters by draining liquidity from the overnight market, and then begin to raise policy rates in the second half of 2010. We expect the UK economy to contract by 4.1% in 2009. However, financial conditions have eased much more in the UK than in continental Europe, which should help propel growth to 1.9% in 2010.

Although GDP growth in Japan turned positive in Q2 thanks to a strong contribution from net exports, domestic demand remains quite weak. We expect GDP to decline 5.7% in 2009 and grow 1.4% in 2010 and Japan’s balance of payments to continue to deteriorate. In the light of this difficult economic outlook, the BoJ is likely to keep the policy rate at 0.1% for the foreseeable

To see full report: GLOBAL ECONOMY


Pradesh Bhraman – Revisiting rural India

As the 2009 south-west monsoon comes to an end, we try and assess its impact on crop output, farm income and the fallout on consumer demand. Over the past one month, we visited three major crop producing states - Uttar Pradesh, Andhra Pradesh and Madhya Pradesh - to gauge the ground reality. Our visit involved insightful interactions with farmers (small and large, rain dependent and otherwise), auto/tractor dealers, fertilizer dealers and FMCG distributors (of every FMCG company in our coverage and several other unlisted players). Following are the key takeaways:

Huge variations in monsoon impact; irrigation facilities the key determinant
We observed huge variations in standing crop not only among various districts but also within the same village due to differences in irrigation facilities. The fields which are close to river valleys/have good irrigation facilities have seen very little impact. We note that places where sowing/replanting has failed would see sharp declines in output.

Nominal agri GDP unlikely to get impacted
We estimate 2% increase in nominal agri GDP even with 6-7% decline in real agri GDP in FY10. Late showers in August have significantly improved the prospects of the Rabi crop. Also, GoI has increased allocation to NREGS (National Rural Employment Generation Scheme) by Rs100b, which would provide much needed relief to landless laborers/marginal farmers. We expect medium and large farmers (>4 hectares of land) to be better off due to higher crop prices.

Small/marginal farmers to lead consumption curtailment/downtrading
Marginal and small farmers, who are likely to witness income erosion, would cut consumption/downtrade in categories like soaps and detergents. They would postpone big ticket spends like marriages and durables. Sales of paints, bikes and new mobile connections have suffered in some areas within the regions that we visited. However, we expect higher spends on durables, automobiles and housing by medium to large farmers, who would gain from higher crop prices.

Near-term pressures; strong rebound likely in FY11
Drought years in the past have seen good rainfall in the following year, as El Nino is followed by La Nina, which boosts rainfall and crop output. History of droughts in the past 30 years suggests that overall GDP growth in the year following the drought year is 170-590bp higher. A normal monsoon in FY11 would result in bountiful crops and increase in demand.

To see full report: MONSOON 2009


Stepping up the pace of growth

Rise in CD ratio and dip in cost of funds to boost NIMs H2FY10 onwards Karnataka Bank’s (KBL) NIMs are set to expand on the back of increase in the credit-deposit (CD) ratio and decline in cost of funds. We expect NIMs, which bottomed in H1FY10, to increase from below 1% to over 2% by FY10E as: (i) strong disbursement growth will propel the CD ratio from 55% currently to 70% by FY11E; and (ii) re-pricing of high cost deposits will drive down cost of funds from Q2FY10 by ~50bps by FY11E.

High credit growth trajectory of 25% plus likely over FY09-11E KBL had adopted a conservative stance on advances through FY09, growing them at 11% Y-o-Y and steadily reducing lending to sensitive sectors. Management, however, intends to move to a strong credit growth trajectory of ~25% CAGR over FY09-11E via the following roadmap: (1) lend in consortium that enables faster and quicker disbursements; (2) follow the hub-and-spoke model which enables faster turnaround time and better pricing; and (3) increase advances to the agriculture segment and fulfill priority sector commitments. The bank already has a strong sanction pipeline which will enable it to achieve targets for the year.

Strong operating efficiency and comfortable provisioning coverage The bank has enjoyed high operating efficiency reflected in low opex/assets (at 1.7%) compared to the industry and it is likely to further decline by 15-20bps to 1.5% by FY11E on back of strong balance sheet growth and modest expansion in branches and staff costs. Asset quality has witnessed improvement since FY04, with slippages seeing a secular down trend declining to 1.5% by FY09. KBL’s provision coverage stands comfortable at >70%, one of the best in the industry.

Outlook and valuations: Attractively priced; re-initiate with “BUY” We believe KBL is an attractively priced bank compared to its peers at 0.9x FY11E book and 6.9x FY11E earnings, delivering sustainable RoEs of around 16-18%. Given its extensive reach in South India and the non-promoter holding structure, we believe KBL offers an attractive franchisee for potential new entrants in the banking system. All these make a strong case for the stock to re-rate to peer
group valuation. Hence, we re-initiate coverage on the stock with a “BUY” recommendation and rate it ’Sector Outperformer’ on relative return basis.

To see full report: KARNATAKA BANK


  • Pulse Track >> IIP sustaining growth momentum
  • Stock Update >> Housing Development Finance Corporation
  • Stock Update >> Axis Bank
  • Stock Update >> Sintex Industries
  • Mutual Fund >> What’s In—What’s Out
To see full report: INVESTOR'S EYE