Monday, December 21, 2009


Improved outlook. The outlook for Reliance Infrastructure (R-Infra) has improved on several fronts over the past nine months: 1) orderbook and new order prospects for its EPC business; 2) EPC margins from lower commodity prices; 3) increased profit contribution from Mumbai and Delhi power businesses; 4) R-Infra’s 45% stake in RPower has appreciated 30%; 5) redemption of a majority of deposits with other corporates has eliminated an overhang. At current valuation (9.1x FY11e EV/EBITDA), the risk/reward trade-off is now more attractive.

Growth driven by EPC and power business. R-Infra’s EPC division has a strong order backlog of cINR196bn and we expect robust order inflow from R-Power and other nonpower sources. We also expect lower commodity prices to drive a 90bp EBITDA margin improvement (earlier 40bp) in FY10. The profit contribution from distribution and transmission should grow on the back of additional capex in Mumbai and increasing its stake in the Delhi distribution business to 49% from 26%.

R-Power value. R-Infra’s 45% stake in R-Power is valued at INR695 per share, or 65% of the company’s market cap. This comes to INR556 when we factor in our 20% discount to the current market value, up from INR336 in our previous target price. The increase is due to improved visibility on a number of R-Power’s projects.

ICD redemption. R-Infra redeemed INR37bn of inter-corporate deposits (ICDs) in FY09 – the equivalent of c15% of the company’s market cap. This is positive given the valuation overhang they represented.

Upgrade to N(V). We raise our FY10 profit estimate by 13.5% on increased contribution from EPC (c4% increase), improved profitability of Delhi power distribution (c2%) and power business (2%) and higher interest income (5%). Our EPS estimates are 14% higher than consensus for FY10 and in line for FY11. We increase our valuation for the core business (power and EPC) to INR372 (from INR290) and raise the value of R-Power to INR556 (from INR336). We raise our target price to INR1,146 for 11% potential return.

To read the full report: RELIANCE INFRASTRUCTURE


Charged up …
Amara Raja Batteries (ARBL) catering to industrial and automotive batteries segment is India’s second largest battery manufacturer in the regulated market. The focus on branding and strong retail network and entry into the two-wheeler segment helped company to gain leading market position. The technological capabilities are strengthened by through technical collaboration with Johnson Control USA, who also holds 26% stake in the company.

Presence in industrial segment cushioned slowdown in automobile ARBL garner around 55% of the revenue from industrial batteries catering telecom, power and railways and the segment played a major role during the slowdown in the automobile segment. Though telecom sector is currently witnessing slowdown but we expect the segment to continue to grow at good rate in coming years. The industrial growth would drive the revenues from the segment going forward

Revival in automobile, the immediate growth driver Auto demand has revived after the slump witnessed during FY09 and this would emerge as immense opportunity in the replacement
market. The company has strong presence in the replacement market driving 66% of the revenue from the segment. The focus on branding, strong network of 169 franchises and 18,000 active retailers and entry into 2 wheeler segment with VLRA battery technology would further help ARBL in penetrating the segment.

Higher EBITDA margins despite rising lead prices Lead prices have doubled in last one year, which is likely to pressurise EBITDA margins. However the pricing power in replacement market would protect EBITDA margins from drastic fall. Past two quarters, the company has reported EBITDA margins of 24% plus as against 10% - 18% range in FY08 and FY09.

At CMP of Rs 161, ARBL discounts FY10E and FY11E EPS by 8.3x and 7.9x respectively. The revival of auto volumes , and industrial growth provides us strong earning visibility. We recommend the stock with 10% upside from current levels as our Pick of the Week.

To read the full report: ARBL


COMPANY PROFILE: Established in 1932, Upper Ganges and Sugar Industries Limited (UGSIL) is a KK Birla group company. KK Birla group apart from sugar is a leading player in key industries like fertilizer, chemicals, heavy engineering, textiles, shipping, media, etc. UGSIL has its manufacturing units in UP, Bihar and Assam.


This division consists of manufacturing and selling of sugar, molasses and bagasse.
Presently company has three sugar manufacturing unit with aggregate crushing capacity of 18000 TCD:-

Seohara Sugar Mills, Seohara, Dist. Bijnor (U.P.) with a crushing capacity of about 10,000 tonnes of sugarcane per day.

Bharat Sugar Mills, Sidhwalia, Dist. Gopalganj (Bihar) with a crushing capacity of about 5,000
tonnes of sugarcane per day.

Hasanpur Sugar Mills, Hasanpur, Dist. Samastipur (Bihar) with a crushing capacity of about 3,000 tonnes of sugarcane per day.

To read the full report: UPPER GANGES SUGAR

>Steel metallics prices on uptick. (MOTILAL OSWAL)

Steel prices across the world have largely remained unchanged. However, the steel mills in USA, Japan and China are trying to raise prices for deliveries in Jan 2010 to cover higher input costs.

Scrap, sponge iron and coking coal prices have been on uptrend, while iron ore prices have not weakened much.

Indian mills have kept the prices of flat products unchanged in last two weeks. The pressure has eased now because of rising costs of imports. Import prices of HRC re-rollable grade has increased from USD530/ton to USD560/ton.

According to our interaction with industry, the prices of long products have started moving up in last week, due to higher prices of sponge iron, pig iron and coke.

Sponge iron prices have increased by Rs1000/ton to Rs14000/ton. Many mills, who had accumulated inventories of pig iron in past 2 months, are now reporting that inventories have started depleting last fortnight. Steel scrap prices have moved up from recent lows of USD290/ ton to USD340/ton thereby fueling the demand for substitutes like sponge iron.

The margins of Tata sponge and Godawari are likely to expand because of lesser dependence on spot iron ore market. Godawari's iron ore integration has increased from 25% in 1HFY10 to 75% now.

To read the full report: METALS


Company Description:
Incorporated in 1993, Globus Spirits (GSL) is the leading player in the Alcohol industry in North India. It is engaged in the business of manufacture, marketing and sale of Industrial alcohol comprising Rectified Spirit and Extra-Neutral Alcohol, Country Liquor (CL), and Indian Made Foreign Liquor (IMFL). The company has two distilleries; Alwar in Rajasthan and Panipat in Haryana. In January 2009, the company expanded its IMFL range in the state of Rajasthan by launching two new products, namely Hannibal Legendary Rum and 20-20 Premium Whisky.

GSL owns two modern distilleries which are situated at:- Behror, District Alwar, Rajasthan: The production facility is built on an area spread over 18 acres of land. The unit has its own captive supply of water and power.

Samalkha, District Panipat, Haryana:-The production facility is built on an area spread over 16.6 acres of land. This unit too has its own captive supply of water and power. At present both the units are capable of manufacturing alcohol from both molasses and grain.

The total installed capacity of each of the units is 144 lakh Bulk Litres (BL) per annum. The distilleries have modern bottling facilities equipped with bottling machines, which caters to its own production of CL and IMFL brands. GSL has tieups and separate arrangements for bottling IMFL products for other brand owners.

Investment Rationale:

GSL’s units are strategically located near the raw material sources. The plant also has technological flexibility to use both grain and molasses as raw material, insulating from dependence on any specific raw material.

The Company has a brand portfolio of its own in the country liquor segment, such as Rana, Rajasthan No 1, Ghoomar, Samalkha No 1, Samalkha ki Saunfi; and in IMFL segment, such as White Lace Gin, White Lace Vodka, Samurai Gold Extra Rich Blend Whisky, Samurai Premium Whisky, 20-20 Premium Whisky, GR 8 Times Whisky and Hannibal Legendry Rum. It also caters to the Indian brands in the IMFL segment, such as Officer's Choice Prestige Whisky, Officer's Choice Classic Whisky, Officer's Choice No 1 Brandy and Officer's Choice XXX Rum.

GSL has launched its own IMFL brands in Haryana, Rajasthan, Chandigarh, Uttar Pradesh, Andhra Pradesh, Kerala and Karnataka. It proposes to launch the brands in two states and Union territory in north India and one state and Union territory in south India. The company has a well established position in domestic CL segment with significant market share (22%, 17% and 20% share in Rajasthan, Haryana and Delhi respectively) and has made its presence in IMFL segment by taking up contract bottling to cater to the renowned Indian players.

GSL is implementing projects comprising expansion cum modernisation of (capacity increase from 288 lakh BL to 498 lakh BL per annum), setting up of new CPP (captive power plant), revamping IMFL bottling section and brand launching for IMFL, at an aggregate project cost of Rs 89.3 crore with the project debt equity ratio being 0.16 : 1, which was met by IPO proceeds of Rs 75 crore in September 2009 and a term loan of Rs 12 crore from SBI. GSL’s new projects are expected to be completed by March 2010.

India is emerging as the largest global market for whisky with 60% share, registering sales of more than 60 million cases per annum. Other spirits (Brown – Brandy/Rum; White–Gin, Vodka, and Rum) constitute the rest 40% of IMFL market. White spirits, although currently placed at only 5% of the market are growing at a much faster pace of 40% p.a. as against 10% p.a. growth of the overall IMFL market.

The demand for alcoholic beverages has been growing at a steady pace of approximately 10% p.a. and is expected to continue to grow at this rate in the future. Supply is expected to match the demand over the medium term. The overall profitability of the industry would continue to be subject to the prices of molasses and the extent of competition besides the duties levied by State Governments. GSL is in the process of acquiring Canteen Stores Department (CSD) registered brand for Rs 3 crore as it intends supplying to the Defence Services. Thus, the brand will have the requisite presence in the CSD market as well. GSL plans to simultaneously make its presence felt in the civil market too.

At the CMP of Rs 93, the share is trading at a P/E of 7.6x on FY10E and 5.6x on FY11E. We recommend BUY with a target price of Rs 120.

To read the full report: GSL