Sunday, December 20, 2009


Where we are versus consensus: The market views backlight module makers as assemblers with a backward integration threat from panel makers. Our view: 1) BLM is more than assembly to panel makers: Panel makers, including CMO, are now increasing outsourcing after taking production back in-house, as it is more economical to purchase externally than to produce internally after benchmarking, factoring in customer model changes. 2) External backlight makers have larger scale than internal panel makers do, increasing cost efficiency. BLM makers are clearly strong in optical usage, which has greater valueadded than pure assembly. 3) BLM is better than panels: While Taiwan panel makers have been losing market share to their Korean counterparts, Taiwan backlight makers have been gaining share on better competitiveness. LED transition has added value for existing backlight makers on higher average selling prices (ASP).

Backlight module makers are direct beneficiaries of LED proliferation. Coretronic is our top pick in TFT LCD supply chain.

Key share price catalysts: 1) Faster-than-expected LED proliferation for LCD TV and monitors in 2010, as happened with notebooks in 2009. 2) Better-than-expected pico projector shipments in 2010.

Near-term risks: 1) Taiwan panel customer shipments could decline sequentially in 4Q09 and 1Q10, partially as a result of the Taiwan power outage that affected Corning’s glass factory. Lower panel outputs could hurt backlight module shipments. 2) Christmas sell-through in the US and Europe may be hurt by high unemployment.

LED proliferation trend: LED backlight makers add more value in making light guide plates to improve light transmission. Light guide plates are being reused for LED edge lighting in LCD TV and monitors, rather than diffusers/plates (direct lighting), just as happened with notebooks. Backlight makers achieve higher margins on light guide plates than on backlight module assembly.

As LED backlight becomes mainstream for notebooks, LED TV should become more popular in 2010 thanks to thinner design and less power usage. The same goes for LEDbased monitors for the all-in-one PC with multi-touch functions as Windows 7 proliferates.

LED accounted for ~60% of notebook backlight in 2009, up from ~10% in 2008. We expect a similar trend for LCD TV and monitors starting in 2010, when we expect LED to be ~15-20% of LCD TV and ~10-15% of the LCD monitor backlight module mix, up from a minimal amount in 2009.

Coretronic purchases LED wafers and outsources to local LED back-end foundries for packaging. It believes its special design for light bars is key to its success. The company is also working with panel makers and branded customers on customized BLM designs. Coretronic thinks 52”+ LED TVs will still use direct-lit-type BLM for its Japanese customers, given that direct-lit provides a better image on local dimming.

LED BLM ASP is ~2x CCFL-based BLM prices; while LED backlight for LCD TV and notebooks is multiples of the price of LED backlight for notebooks. Adoption of LED in LCD TV/monitors should improve backlight module profitability.

We consider a cheaper way to gain exposure to LED is backlight modules, which, on our estimates, trade at discounts to the P/E or P/B of LED chip supply chain companies.

To read the full report: KEY SURPRISES

>Public Notice to Investors of Vanishing Indian Companies

The Capital Market Boom of 1993-94 and 1994-95 witnessed a large number of companies tapping the capital market through public issues. However, some companies which had raised funds by making public issues, later vanished with the investors’ money.

With a view to bringing such vanished companies into book, action was initiated against them by the Central Government in coordination with the State Governments. FIRs have been filed under the relevant provisions of Indian Penal Code in addition to prosecutions for violation of various provisions of the Companies Act, 1956 in a number of cases. Action against these companies is also being regularly monitored through a Coordination and Monitoring Committee comprising of the representatives of Ministry of Company Affairs and SEBI.

The investigation process can be expedited and made more effective, if aggrieved persons, to whom wrongful loss has been caused by these companies, come forward to assist the initiative against such companies. The details of the companies against whom FIRs have been filed are given through this public notice. Individual investors/NGOs/Associations of investors who are aggrieved by the actions of these companies may submit their specific complaints against the company concerned either to the concerned Registrar of Companies or to the Police Station where FIR has been filed in this behalf.

To see the full report: PUBLIC NOTICE

>Manappuram General Finance & Leasing (RELIGARE)

Manappuram General Finance & Leasing (MAGFIL) operates in the niche business of lending against gold collateral, primarily to low-income customers. Its client profile and niche expertise support higher interest rates, resulting in best-in-class margins of 13–15% and an ROE of 30–35%. MAGFIL’s ongoing expansion drive will help it tap into the large section of Indians not considered ‘bank-worthy’, but who own the gold assets necessary to secure small loans. We expect its AUM to triple to Rs 59bn by FY12 as its distribution network expands. With a model that is scalable and highly profitable, we initiate coverage on MAGFIL with a Buy.

Loans backed by gold tailor-made for India: Access to affordable credit services by India’s low-income segment remains limited, as small-ticket loans entail higher operating costs and a higher perceived risk. Lower income households are still heavily dependent on moneylenders who charge exorbitant rates. Substitution of these loans with gold-based lending by NBFCs holds tremendous potential due to the safety of gold as collateral and large accumulated gold stock among Indians households. MAGFIL is a key player in this segment with strong expertise and credibility in loan disbursal and jewellery valuation, particularly in South India.

Robust AUM growth to continue: The Manappuram group (MAGFIL and sister company MAFIT) has reported strong business growth during FY06-FY09, with gold loan assets under management logging a 125% CAGR due to aggressive branch expansion and easy availability of funds. The group has ramped up its distribution network from 291 branches in FY07 to 765 in H1FY10 and is
expected to double its presence in the next three years. We expect this expansion drive to aid a 67% CAGR in AUM to Rs 59bn over FY09-FY12.

Best-in-class NIMs of 13–15%: With clients who have little recourse to bank credit and short-term funding needs, MAGFIL earns a high yield on advances of 24–30%. At the same time, improved access to institutional funds supports easy availability of capital at a rate of 10–12%. As a result, MAGFIL reported NIMs of 13–15% over FY07-FY09, which we believe are sustainable given its high pricing power. With stable margins, we expect NII to log a 72% CAGR over FY09-FY12.

Merits premium valuation: We believe that MAGFIL represents an opportunity to invest in a highly profitable business model with strong growth potential. We expect the company to maintain an ROE of 33–35% over the next three years, with a PAT CAGR of 93% over FY09-FY12. With its superior return ratios and asset quality (delinquencies at only 0.2% of AUM in the gold segment), we believe the stock should trade at a premium to other NBFCs. We initiate coverage with a Buy rating and target price of Rs 682, based on 2.8x FY11E ABV.



Value play…
Royal Orchid Hotels, a mid-sized player with more than half of its total rooms based in Bangalore, is poised to benefit from the improving outlook for the IT/BFSI segment and long-term growth oriented focus. The company is almost doubling its room base from 989 in FY09 to 1,750 rooms by FY12E, representing a CAGR of 21%. Hence, we are initiating coverage on the stock with Strong Buy rating and a price target of Rs 105.

Strong expansion plans
Royal Orchid Hotels (ROHL) has plans to double its room base to 2,000 rooms over the next three to four years. During our forecast period of FY09-12E, we expect ROHL to add 761 rooms representing CAGR of 21%. This would entail a total capex of Rs 370 crore. We also expect average occupancy levels to increase from 53% (till September 2009) to 59% in FY11E and 62% for FY12E, respectively, led by an improving scenario for IT/BFSI. Taking both these factors into our revenue assumptions, we expect revenues to grow by 24.5% to Rs 145.8 crore for FY11E and further by 43.3% to Rs 208.9 crore for FY12E.

Low debt to equity provides enough room to expand: To finance the growth, the company seems to have enough space to leverage and raise further long-term loan. This is evident from the low debt to equity of the company as ROHL has one of the lowest debt/equity ratios of less than 0.6x among its peer companies.

IT revival, lower-than-expected room supply to support faster growth: Due to the global financial meltdown, there has been a sharp cutback of over 40% in expected room availability from 6,595 to 3,725 rooms in the premium segment by FY12E. Along with revival in the IT/BFSI segment this has significantly improved the outlook for established hotel players like Royal Orchid Hotels in Bengaluru.

At the CMP of Rs 76.3, the stock is available at 11.2x and 9.1x its FY11E and FY12E EV/EBITDA, respectively. Considering ROHL’s competitive efficiency, we value the stock in line with average valuations of its peer matrix (i.e. at13.5x its FY11E EV/EBITDA and 10.0x FY12E EV/EBITDA) and arrive at a target price of Rs 105 per share. We initiate coverage on the stock with STRONG BUY recommendation, potential 38% upside.

To read the full report: ROYAL ORCHID HOTELS


Scale change ahead. We estimate our construction coverage universe (excl. JPA) to report 32% earnings CAGR over FY09-12, driven by India’s huge infra spend, better credit availability and leaner balance sheets. The massive infra spend is likely to lead to a scale change in order inflows over the next 12-18 months.

Infra spend – Sustained impetus. India’s infra spend will rise from 6.5% of GDP in FY09 to 9.3% by FY12. Almost half the investments would be in power and roads – construction orders for over 100 GW (Rs1.1trn) and 36,000km (Rs2.6trn) over the next 24-30 months. Over the next 15 months, we expect orders worth Rs0.5trn and Rs1.6trn from power and roads, respectively.

Order, order, order! Time for a scale change

Strong earnings growth. We expect our coverage stocks (excl. JPA) to record earnings CAGR of 32% over FY09-12 on the back of stable operating margins and strong revenue growth. Despite a higher base (40% CAGR over FY06-09), we expect revenue to grow at 25% CAGR over FY09-12e.

Leaner balance sheets. Stronger balance sheets (led by availability of equity capital) are enabling construction companies to bid for larger orders and for more of them. Focus on core competency is reducing risk perception.

Top picks: JP Associates, Nagarjuna. We initiate coverage on JP Associates, NCC, Era Infra, IVRCL, HCC and Simplex with Buy ratings.

To read the full report: CONSTRUCTION SECTOR


Small price hikes in South/West; short-term phenomenon: After recent sharp declines in cement prices in the South and West (Rs40- Rs80 decline/10%-35%), some cement makers have announced small price hikes of Rs5-10. In our view, while demand momentum has started to pick up, the price hikes are largely driven by logistics bottlenecks, with government giving priority for allotment of railway wagons to essential commodities such as food grains. While we are not surprised by these price hikes, given the steep declines recently, we believe that higher prices will not be sustained in an environment witnessing excess supply.

Price decline widespread, prices soften in resilient North & East: While we have started to see a marginal correction in prices in the North and East—so far, prices have been relatively stable in these regions on the back of strong demand—we expect the price decline to be sharper as new capacity starts coming on stream; North: 11 mn tonnes to come on stream in next 12 months (23% of FY09 capacity); East: 10 mn tonnes (32% of FY09 capacity).

Price hikes unsustainable as excess capacity looms; stay cautious

Another 6mn MT of capacity added in Oct'09, remain cautious: The industry has added 26mn MT of fresh capacity in the first 7 months of FY2010, which compares with 21mn MT added in the entire FY09, and is about 12% of end-FY09E capacity. Based on the latest capex data from CMIE, another 40mn tonnes of capacity is planned to be commissioned in the next 12 months. While we expect demand momentum to stay strong going forward, we expect supply growth to outstrip demand—to contextualize, FY10E consumption at 200mn MT (12.5% yoy) vs. FY10E end capacity of 270mn MT implies 7-yr low capacity utilization of 75%.

Bank on volume growth; Buy Ultratech, Sell Ambuja, ACC: In a firm pricing environment, we continue to prefer companies which are best positioned to benefit from potentially strong 2HFY10 demand momentum—we reiterate Buy on Ultratech Cements (ULTC.BO) as we believe that its strong volume growth from newly commissioned capacity and improved operating efficiency should partially offset impact of declining prices. Our favorite Sell ideas are Ambuja Cements (ABUJ.BO, Conviction List) and ACC (ACC.BO) on the back of industry lagging volume growth and expensive relative valuations. Key risks include higher-thanexpected urban demand, delay in capacity additions.

To read the full report: INDIAN CEMENT SECTOR