Friday, November 6, 2009

>Correction = Buying opportunity (UBS)

Deploying Cash; Turn +ve on Auto, Pharma & Telecom; Turn –ve on IT
We believe that the recent Indian equity market correction presents an excellent buying opportunity. We increase our exposure to autos and telecom & introduce an overweight on pharma. We reduce exposure to IT services (refer to our report ‘Offshoring 3.0 -realities of a changed world’ dated 30Oct09). While we cut banks to neutral, we continue to maintain off-benchmark positive view on PSU banks.

Add Ambuja, DRL, Hindalco, M&M; Remove ACC, JSW Steel, Unitech
Within autos we increase exposure to Maruti and M&M to our portfolio. We add M&M as we believe concerns regarding impact of a weaker monsoon on company sales are overdone. We add Hindalco as we expect the domestic business to gain on higher aluminium price expectations. We add Reddy's to the portfolio as we believe consensus upgrades are likely given greater visibility on US drug launches. We replace ACC with Ambuja as Ambuja is least exposed to South (maximum pricing pressure) & Central India. We remove JSW Steel as rising raw material prices could impact margin outlook. We add Tata Steel with a neutral weight. We remove Unitech as we do not expect near term catalysts in the stock.

Maintain positive stance on Indian stocks in the medium to long term
As we highlighted in our report “India-the next Asian tiger”, we are bullish on India in the long term given: 1) UBS real GDP growth expectation of 8-9% for next 10-20 years; 2) Attractive demographics with rapidly falling dependency ratio; 3) Low penetration of products & services 4) Stable government. Our key overweight stocks: Bharti Airtel, Maruti, M&M, Bank of Baroda, PNB, Hindalco, Reddy's, IndiaBulls Real Estate, Tata Power, TCS, Ambuja, Union Bank.

To read the full report: INDIA STRATEGY



· The recent recovery in industrial growth and in the real estate sector augurs well for Indian steel makers and the resultant rise in demand is already evident. India and China are two markets where steel units are operating at quite high levels of capacity utilization; 86% for China and 80% for India, compared with the world average of 64%.

· The four major steel companies came with their Q2FY10 results in October 2009. Tata Steel Ltd., India’s biggest producer, reported a nearly 50.0% slide in profit and state-run Steel Authority of India Ltd. posted a 17.0% decline in net income last quarter. Net profit of Jindal Steel &Power Ltd. And JSW Steel Ltd. improved by 7.5% and 42.2%, respectively

· Most companies benefited by selling more of their products as demand picked up because of the stimulus package and lower raw material prices but it did not translate into higher revenues and profits due to poor prices

· Indian steel prices fell almost 35.0% from a year earlier, trimming earnings at local steelmakers.

· Steel exports during the period declined by 40% to 0.93 million tonne as the global economy continues falters

· The steel companies have reduced the price of flat steel products on account of global weakening of prices and appreciation of the rupee, as well as a dip in Chinese domestic prices

· The margins have also contracted mainly on account of lower realizations and higher raw material prices

· We believe that the Steel Stocks have gone way above their fundamentals and most of the demand recovery and other such factors are already factored into their prices. Thus entering them at the current levels would be taking on significantly higher risk and so one should wait for at least 2 more quarters to see whether or not fundamentals improve and then enter

To read the full report: STEEL SECTOR


Revenues in line; volume growth hit by largely one-time events
United Spirit’s Q2 revenues were in line with our estimates at INR 10.8 bn (our estimates of INR 10.9 bn), a growth of 19.7% Y-o-Y. Volume growth for the quarter stands at 10% (17% in Q1) and 14% in H1FY10. Given the fact that Q2 is the weakest quarter in terms of off take and trade opposition in Maharashtra in current quarter (which is now resolved), led to subdued volume growth. However price abuse by syndicate private traders in UP and parts of Punjab is a cause of
concern and we will track it closely.

Gross margins improved 50 bps Y-o-Y and 323 bps Q-o-Q
Spirit costs in Q2FY10 were up Y-o-Y however ENA costs were static through the quarter. A 323 bps Q-o-Q improvement in gross margins is commendable, this was achieved by capitalizing on the increased availability of molasses during FY09-10 crushing season, long term contracting, switching between alternative feed stock like grain and molasses, and reduction in excise duties.

EBITDA margins dip by 300bps Y-o-Y; hit by one offs
EBITDA margins took a 300 bps knock even after a 50 bps expansion Y-o-Y in gross margins. This was on account of two one off items: a) 204 bps increase in employee costs due to a one time provision of INR 127.6 mn towards special incentives (likely due to higher competition) b) 229 bps increase in A&P spend due to national roll out of W&M Special and Romanov Red Prestige Vodka. Interest expense increased whopping 90% Y-o-Y to INR 751 mn and thus denting the net profit at INR 696 mn (down 26% Y-o-Y), below our estimates of INR 885 mn.

Outlook and valuations: Positive; maintain ‘BUY’
Post QIP in which company raised USD 350 mn at INR 913.7 per share, USD 285 mn will be used to reduce debt and thus interest costs will come down going forward. USL is a secular play on improving consumer sentiments, backed by favorable demographics. The stock is likely to be re-rated as debt levels have started to dip to more manageable levels and re-pricing of contracts of Whyte & Mackay can potentially surprise earnings estimates.

At CMP of INR 999, the stock is trading at P/E of 27.4x and 19.4x and EV/EBITDA
of 11.2x and 9.1x, based on its FY10E and FY11E earnings, respectively. We maintain our ‘BUY’ recommendation on the stock and advice near term weakness as a buying opportunity. On relative return basis, the stock is rated ‘Sector outperformer’.

To read the full report: UNITED SPIRITS


Highest-ever EBITDA margins; EPS division the only drag
Voltas’ (VOLT) Q2FY10 earnings, at INR 807 mn (up 37% Y-o-Y), were ahead of our estimates as the company reported its highest-ever EBITDA margin. EBITDA margins improved 245bps Y-o-Y to 11.1% on improvement in operating metrics across segments. Even as the electro-mechanical project (EMPS, order book driven) business reported steady revenue growth (up 16% Y-o-Y to INR 6.8 bn) concerns continue on engineering products & services (EPS, short-cycle industrial demand/economic activity driven). EPS revenues were down 28% Y-o-Y to INR 1.1 bn.

Order intake remains weak; likely to improve in H2
INR 4 bn accretion in Q2FY10 was way below our estimate and continued to remain weak for fifth quarter in a row. Even as intake numbers disappointed, on the positive side, enquiry levels picked up considerably in both domestic and international markets. In our view, with improvement in oil prices and faster ordering of domestic projects (with elections out of the way), accretion is likely to pick up in H2FY10. However, on extremely weak accretion in H1FY10, we are cutting our order intake assumption for full year to INR 25 bn against INR 36 bn earlier. Management indicated that it is hopeful on closure of a few large orders in international markets by Q4FY10.

Revising up earnings on better margins; likely to sustain going forward
We have revised up our earnings estimates by 18% for both FY10 and FY11 on better than-expected operating metrics in Q1FY10. We believe EBITDA margins will sustain at 8% levels in the medium term as UCL margins stabilise at 7.5%, while EPS margins, which have taken a knock in the past few quarters, will settle around 17-18% as the business outlook and working capital improves.

Outlook and valuations: Recovery in sight; maintain ‘BUY’
Even as accretion disappointed in H1FY10, enquiry pick up in domestic and international markets is a positive in our view, indicating an early sign of revival. Given the 18-month coverage on international business and improving domestic economic landscape, we see no risk to our earnings estimates in FY10, while intake pick up (H2) will improve FY11 visibility. Current valuations of 14.0x FY11E and 12.1x FY12E, with focus on new areas of growth (water management, specialty healthcare centers, HVAC opportunity in oil & gas and power), light balance sheet, and initial signs of business recovery (likely to play out in next 12- 18 months) lead us to maintain ‘BUY’ recommendation and relative ‘Sector Outperformer’ rating.

To read the full report: VOLTAS

>Mundra Port & SEZ Ltd. (MERRILL LYNCH)

PAT +22% On SEZ; 70% Hike in Adani Power Mundra Capex +ve; Buy
MPSEZ 2QFY10 recurring PAT grew +22%YoY despite slow growth in port income +5%YoY on rebound in high margin SEZ income +41% & 30% lower tax on SEZ benefit on port income. Adani Power has scaled-up its Mundra Project by 70% to 7.9GW, which will drive long-term assured volume for MPSEZ’s new coal terminal. Maintain Buy on rebound in its port traffic in FY10E and SEZ monetization in FY11E, which should drive its EPS at a CAGR of 35% over FY09-12E. A scaleable and deep draft port on the western coast, a low-cost 18k acres of contiguous land bank – India’s largest port-linked SEZ – and un-leveraged balance sheet (net D/E 0.4x), which supports new project wins, are key arguments for our Buy rating.

Cargo +9%YoY led by crude +43% & liquid +55% growth
Mundra Port was one of the few Asian ports to report 2QFY10 cargo volume growth of +9%YoY to 10.1mmT led by liquid cargo +55% and crude cargo +43%, Coal cargo +19% despite Minerals & other cargo -57% and Fertilizer cargo -35%. Rec. PAT at Rs1.7bn was +22%YoY led by 11% growth in Revenue, 193bps YoY improvement in EBITDA margin and 30% lower tax incidence on notification of port as an SEZ. Reported PAT was +56%YoY on account of Rs22mn non-recurring exchange gain (v/s Rs292mn exchange loss in 2QFY09). To factor in +6% recurring PAT, a better than expected 2Q and improving global trade supporting robust earnings environment, we upgrade our earnings estimates ~2% over FY10-12.

SEZ pick-up; larger deal ahead in FY11E
SEZ revenues were up 41%YoY after a long time signaling monetization pick-up. Pickup in private industrial capex should material improve the prospects of land monetization at MPSEZ given the core competitive advantages. This should also unlock potential value in its non-processing zone of 18K acre land-bank.

Superior assets drive RoCE is > WACC; Maintain Buy
We have valued MPSEZ at Rs670, based on SOTP of project DCFs. We don’t yet value MPSEZ’s SEZ scale-up plan to 32k acres (18k now). New infra concession wins and potential SEZ land bank scale up to 32k acres are future catalysts. Risks: Global recession impacting traffic at ports and slow private capex at SEZs.

To read the full report: MUNDRA PORT

>Standard Portfolio – Conservative (Issue No: 20091105)

>Standard Portfolio – Aggressive (Issue No: 20091105)