Thursday, October 15, 2009


Buy sugar stocks as sugar price could rise further 20%
We believe the recent stock underperformance on downward sloping of futures curve (SB1 Cmdty) is just technical and could reverse on resumption of import by India led by (1) increased shortage owing to drought; & (2) increase in demand following completion of govt mandated inventory cut by bulk users since Aug09.

We upgrade EPS and POs for stocks under our coverage driven by higher sugar price (avg Rs32/kg in FY10E ending Sep 2010). We retain Renuka as top pick owing to its refinery & inorganic expansion plans. We upgrade Bajaj Hindusthan, the biggest beneficiary of sugar price rise, from Underperform to Buy as (1) equity infusion; & (2) increase in capacity utilization driven by foray into raw sugar refining has addressed key concerns. Maintain Buy on Balrampur & Triveni.

Poor weather and import shortfall pressuring supply
We expect sugar price to rise 20% more by Mar2010 and remain strong till March 2011 driven by (1) likely production shortfall of 30% in FY10E in India owing to adverse weather; (2) limited scope for rise in cane cultivation area in FY11E owing to a likely rise in demand for food grain following a drought in the current year, and (3) shortage of sugar globally driven by below par production in Brazil.

Valuation attractive given lower capex and debt risk
Sugar stocks are trading at a FY10E EV/EBITDA of 4-5x on concerns of a supply surge, as the sugar price has been rising since August 2007 and is up 130%, but we do not foresee a huge supply surplus in the near future. We expect valuations to be re-rated as sugar companies are unlikely to see a sharp fall in earnings from the cyclical peak given that companies have (1) stronger balance sheets, (2) diversified revenue mix and (3) no new capex that could hurt cash flow. We base POs on EV/EBITDA of 6x implying a 15% return on replacement value.

Prefer Renuka and Bajaj Hindusthan on higher sensitivity
Earnings sensitivity and execution capability are key stock performance drivers. We estimate that, in FY10E, at 5.4%, Bajaj Hindusthan has the highest sensitivity to a 1% rise in the sugar price, followed by Renuka at 4%, while Balrampur and Triveni are both at 3%. Balrampur and Renuka are best in terms of execution.

Key risks are higher raw sugar processing costs, cane price
Sugar production costs could surprise on the upside on a combination of (1) higher-than-estimated raw sugar conversion losses owing to a lack of past experience and (2) higher-than-expected cane costs owing to shortages. Bajaj Hindusthan is most exposed to higher raw sugar conversion losses. Renuka is most exposed to cane shortages owing to recent flooding in its cane area.

To see full report: SUGAR SECTOR


All set for takeoff…

GVK Power & Infra (GVK PIL), India’s leading private sector diversified infrastructure play, has a presence in power, aviation, transportation, mining, oil & gas and SEZ. After initial hiccups in the power segment due to non-availability of gas, GVK PIL has now commissioned three gasbased power plants with an overall capacity of 901 MW in Andhra Pradesh. The new plants are operating at almost full capacity. In aviation also, Mumbai Airport (MIAL) went through a turbulent patch of passenger traffic de-growth of 9% in FY09. Passenger traffic is now showing signs of pick up. We expect growth to return from Q2FY10 onwards. Also, road traffic at Jaipur Expressway (JKEL) continues to see robust growth, which will support operating profitability of the road segment. JKEL has witnessed growth of 8.2% YoY in traffic in Q1FY10. We are initiating coverage on the stock with an OUTPERFORMER rating.

Mumbai Airport along with real estate – A valuable asset GVK is the developer and operator of the busiest airport in India and handles ~23 million passengers, commanding ~21.5% market share of the overall Indian aviation in passenger traffic. After the lean patch of passenger de-growth in FY09 passenger traffic is showing signs of revival. GVK is in the process of finalising the master plan for development and monetisation of 276 acres of land. The master plan is expected to be public by December 2009.

Four fold growth in capacity, merchant play to offer upside
GVK has commissioned the operations at JP-II and Gautami power plants scaling the overall generating capacity to 901 MW. Revenues of the power segment are expected to witness a near five fold jump to Rs 1,750 crore in FY10E. GVK is expected to get the requisite approval for
sale of 138 MW of power through merchant route by December 2009.

At the current market price of Rs 44, the stock is trading at P/BV of 2.2x in FY10E and 2.0x in FY11E. We have adopted an SOTP based methodology by valuing each segment distinctly. Improving visibility of growth for their projects and allaying balance sheet concerns will help them scout for growth opportunities further. We are initiating coverage on the stock with an OUTPERFORMER rating.

To see the full report: GVK POWER & INFRA


F2Q10 Earnings Preview – A Sedate Quarter Ahead

Quick Comment: F2Q10 results for Indian banks will kick off on October 12 with Axis Bank. In this note, we discuss our earning estimates for these banks. We believe that earnings growth for Indian banks will be fairly sedate in 2Q – on a QoQ basis – likely driven by the following:

  • Limited volume growth – Loan growth remained weak during the quarter. There was some pickup towards the end of the quarter (in line with our view that growth will pick up from F3Q10 onwards.
  • NIM’s are likely to remain weak, especially for SOE banks – We have built in some NIM expansion for HDFC Bank and Axis and flat for ICICI Bank. The SOE banks are likely to show flat to 5-10bps lower NIM’s – QoQ. The benefits of deposit repricing will be felt from F3Q10 onwards, in our view.
Hence NII growth will likely be sedate. We are building in stable fees progression (in line with growth seen in F1Q and broadly stable cost income ratios).
  • Capital gains likely to be lower – During the quarter, long bonds went up a bit which is likely to cause limited bond gains. This should affect all banks – private banks too had 30-60% of PBT from capital gains in 1Q. We have reduced this to 10-20% across banks (except at ICICI where it still is about 40% of earnings for the quarter).
  • Improving asset quality outlook reduces credit cost estimates – We have reduced our credit cost estimates compared to 1Q. Some of the banks were using the large capital gains to provide aggressively. With capital gains lower, provisioning can come off. We have kept credit charges broadly stable for ICICI for this quarter – likely to start coming off towards the end of F2010. We do expect some more increase in restructured loans during the quarter.

Wholesale funded institutions are likely to report strong earnings – they benefitted from lower short rates and better asset growth, in our view, compared to banks.



Hydro Ain’t Electrifying

Hydropower – a risky business
We Initiate coverage on NHPC Ltd with a REDUCE rating and TP of INR29.00. NHPC is a regulated government-owned hydropower generation utility with 13 existing plants and a capacity of 5.1GW (12% of India’s hydropower generation capacity). Hydro power projects have long gestation periods taking several years to plan and build. With potential opposition from environmentalists and people displaced by the project, they also face significant execution risks. Seven of NHPC’s 11 projects under implementation have been delayed by a year or more owing to natural calamities, opposition from environmentalists and locals.

Low returns for high risks
NHPC assumes a higher risk in building hydropower plants but the Central Electric Regulatory Commission’s (CERC) tariff regulations do not compensate it for the extra risk. Unlike the National Power Thermal Corp (NTPC), NHPC has lower levers to boost its ROE above 15.5%.
New regulated tariffs for the period FY10-14 are negative for NHPC as its profits could be hit if it can’t generate the stipulated amount of electricity owing to water shortages. We estimate every 10% shortfall in generation will lead to an 11.3% reduction in our FY10 EPS estimates.

High CWIP and low leverage depress ROEs
The long gestation period and high execution risks mean investor returns in NHPC are low. ROE in FY09 was only 9.1% due to low leverage and a low asset-turnover ratio. Presently 32% of its equity is stuck in capital work in progress, which earns no returns – due to the long gestation of
projects and execution delays, 8% in 8.5% tax-free bonds and 6% of equity is deployed in cash. We expect the same in FY12, when only 49% of the equity will earn returns.

Unattractive valuations: Initiate with TP of INR29.00/share
Our TP of INR29.00 is based on 1.4x our FY11 BV/share estimate, a discount to NTPC’s FY11 P/BV of 2.5x. We believe the valuation discount is warranted for the significantly lower ROE of 8.3% vs NTPC’s ROE of 14.6%. We expect upside if more NHPC projects are allowed to sell Carbon Emission Rights under the Clean Development Mechanism.

To see full report: NHPC LTD


Company Brief
Indraprastha Gas Ltd., incorporated as a JV between GAIL, BPCL and the Delhi government, is the sole supplier of CNG to transport sector, PNG to domestic & commercial sectors & R‐LNG to industrial sector, in the National Capital Region (NCR) of Delhi.

The company has a very sound business model due to its utility nature i.e fuel for the vehicles and piped natural gas for domestic and industrial consumers and hence is relatively immune from any economic downturn.

IGL is consolidating its presence in the NCR of Delhi by investing Rs 1,600 crore to expand its retail outlets and PNG network in and around the metropolis in the next three years.

IGL is looking for opportunities in the surrounding regions and has geared itself for competitive bidding being for setting up of City Gas Distribution Projects in various cities.

IGL has tied up for its future gas requirements by signing Gas Sale Agreements with GAIL & BPCL and the supply pact with RIL from KG D6 block, and hence will not have gas sourcing
issues over the medium term.

In view of forthcoming Commonwealth Games in 2010, a large number of high capacity buses and Radio Taxis running on CNG are expected to be added to the public transport fleet in the Capital, which would immensely benefit IGL.

IGL is a debt free company with surplus cash and investments of about Rs 250 crore and all the expansions have been undertaken with internal accruals.

At the current price of Rs 161, the stock trades at a P/E multiple of 11.1x FY10E earnings and 9.6x FY11E earnings. We recommend a “BUY” on the stock with a price target of Rs 205, assuming a P/E multiple of 12x FY11E earnings, an upside of 27% from the current levels, over a period of 12 months.

To see full report: INDRAPRASTHA GAS LTD


SUPPORT @ 5050

The Nifty opened in green with positive global cues but has given up all its gains. It is finding resistance at 5150; however, it has got good support at 5050 level. The Nifty has given a breakout from a triangular pattern, so the upper end of the triangle also remains a crucial support in the short run. The momentum has started to reverse on the upside which will also support the Nifty to move higher.

On the hourly charts, the KST momentum indicator has a given a positive crossover and is trading above the zero line. The Nifty is trading above the 20-HMA and 40-HMA, ie 5039 and 5022 respectively, which are supports in the short run. The market breadth is positive with 764
advances and 456 declines.

Of the 30 stocks of the Sensex ITC (down 3.11%) and HUL (down 2.30 %) are the top losers while NTPC (up 2.50%) and BHEL (up 1.43%) are the top gainers.

To see full report: HIGH NOON


High-growth urban infra play; Reiterate buy

49% earnings CAGR over FY09-12. Given steady order inflows and a proven execution record, we raise FY10 and FY11 earnings estimates by 25% and 21%, respectively. We estimate a 49%
CAGR in J Kumar’s earnings over FY09-12.

Healthy order book. J Kumar’s Rs14.5bn order book (3.7x FY09 and 3.1x TTM revenues) is a healthy mix of varied projects – transport engineering, skywalks, irrigation, civil construction and piling. It has an average execution period of two years.

Superior operating margins. J Kumar’s operating margin (15%) is better than the sector average (10%) given its strengths: geographical concentration, owned machinery and manpower and a strategy of not bidding for sub-contract work. For FY10-12, we estimate it would maintain margins at current levels.

Macro growth opportunities… scale up in execution is key. Increase in outlay on infrastructure development would increase order flows to construction companies. J Kumar, with a threedecade long track record in Maharashtra, is in a good position to capitalise on the potential for infrastructure investment.

Valuation. We value J Kumar at 7.5x FY11e earnings, a 50% discount to the average of large cap construction companies and a 25% discount to mid cap companies. At the current price of
Rs172, the stock trades at 5.0x FY11e earnings.

To see full report: J KUMAR INFRAPROJECTS


We are initiating coverage on DFPCL, which has traditionally been perceived as a fertilizer company. However, DFPCL, which was incorporated in 1979 as an ammonia manufacturer and is today a multiproduct company with 2 major business segments, viz. Industrial Chemicals & Fertilizers. DFPCL is a dominant player in the industrial chemical segment which drives almost 70% of its revenues. With further Ammonium Nitrate capacity additions, DFPCL will undergo a re-rating from being a fertilizer company to an integrated industrial chemical manufacturer.

Investment Rationale:
• Of DFPCL’s total natural gas requirement of 0.8 mmscmd for the enhanced capacities, about 0.728 mmscmd (90%) has already been contracted at a landed cost of $ 6.1 per mmbtu. For the balance 10% the company plans to buy gas in the spot market, which will meet DFPCL’s entire gas requirement and help the company streamline its manufacturing activity and keep the volatile raw material cost under control. DFPCL has also set up a new 15,000 MT Ammonia storage tank at JNPT to ensure a steady supply of Ammonia.

• Recently, DFPCL augmented capacities at most of its plants, anticipating higher demand for -
Ammonia (90,000 TPA to 125,400 TPA), Ammonium Nitrate (90,000 TPA to 132,000 TPA) and DNA (297,000 TPA to 445,500 TPA). DFPCL will further increase its Ammonium Nitrate capacity by 300,000 TPA by Q3-FY11, at an investment of Rs. 6550 mn. with a view of fulfilling the rising demand from the infrastructure and mining sectors, which will drive future growth.

• Strong technology tie-ups with international players have enabled DFPCL in controlling production costs, leading to steady increase in margins.

• On the retailing front, the company has successfully leased out about 55% of the entire 550,000 sq. ft. of area at rentals of Rs. 35 per sq. ft. per month and plans to increase the rental to about Rs. 40 per sq. ft. per month by the end of this fiscal, targeting a revenue of Rs. 120 to 140 mn. in the current fiscal.

Based on DCF valuation with a terminal growth rate of 1%, risk free rate at 8% and WACC of 14.6% we arrive at a fair value of Rs. 156 per share resulting into 64% upside form the CMP of Rs. 90.85 per share. Hence, we recommend a BUY on DFPCL.

To see full report: DFPCL