Monday, November 15, 2010

>NTPC: Regulatory changes, rising costs impact profitability

National Thermal Power Corporation (NTPC), the largest power generating company in India, is principally engaged in engineering, construction and generation of power. Besides, it also undertakes oil & gas exploration, coal mining and provides consultancy services in the area of power plant construction and power generation. It provides power at the cheapest average tariff in the country. Currently the company has a capacity of 32694MW. It is currently trading at a P/BV of 2.6.

To read the full report: NTPC

>DR. REDDY'S LABS: Developments during Q2FY11

Robust performance in India, Russia/CIS & RoW Generics markets has managed to offset lower Generics sales in other markets and overall PSAI sales: Net sales at Rs1870crs showed yoy growth of 1.8%. This performance was a direct result of the lower PSAI sales across all markets, which has been offset by robust growth in India, Russia/CIS & RoW markets. PSAI sales declined 14.1% yoy to Rs461.7crs, impacted by price erosions and lower order flow. Ex‐PSAI, net revenues at Rs1367crs grew 7.6% yoy where India, Russia/CIS & RoW markets exhibited continuous (yoy) growth of 25.3%, 17.0% & 25.3% respectively. US generics business depicted strong sequential growth of 13%, led by market share gains in base business and new products like generic Lotrel and Tacrolimus launched in Q1FY11. Betapharm sales have stabilized and grew 23% Q‐o‐Q; they, however, declined 27% Y‐o‐Y from one‐time seasonal vaccine sales in Q2FY10.

To read the full report: DRL

>JM FINANCIAL LIMITED: Buoyant capital markets drive business performance

JM Financial Ltd’s (JM’s) Q2FY11 revenues were in line with CRISIL Equities’
expectations driven by investment banking and securities funding businesses.
However, the securities broking business continued to be impacted due to
pressure on broking yields. Losses in the asset management business (AMC)
and poor performance of the broking business led to a slight decline in
profitability. Our outlook for the company’s second half remains stable on the
back of buoyant capital market activities. Consequently, we maintain our
earnings estimates for FY11 and FY12. We maintain our fundamental grade of
‘4/5’ for JM.

Q2FY11 result analysis
• JM’s revenues increased 33.3% y-o-y to Rs 2.3 bn supported by strong performance
in investment banking and securities funding businesses. However, PAT dipped by
2.3% y-o-y to Rs 564 mn mainly due to losses of Rs 33.5 mn in AMC and poor
performance in the broking business.
• The investment banking and securities businesses reported revenue growth of 27.3%
y-o-y to Rs 1.3 bn in Q2FY11. The investment banking division completed five deals
worth Rs 30.6 bn in Q2FY11. However, the performance of the broking business was
impacted by low brokerage yields and higher cost related to the institutional desk. As
a result, segmental profit increased at a low rate of 3.7% y-o-y to Rs 94 mn in
• Revenues from the securities funding business increased 70% y-o-y to Rs 721 mn in
Q2FY11. However segmental earnings declined 7.3% y-o-y to Rs 198 mn due to a
higher mix of borrowed funds and increased funding cost.
• AMC performance was impacted by regulatory changes and redemption pressure.
Average AUM declined 26% y-o-y to Rs 65.3 bn in 2QFY11. The segment reported
losses of Rs 33.5 mn. We believe the loss is largely due to one-time valuation losses
arising from the shift to the mark to market valuation regime for the bond portfolio,
which the company may have absorbed rather than passing on to the investors, inline
with most of the players in the mutual fund industry.
• The alternative investment segment had AUM of Rs 17.2 bn and reported profit of Rs
110 mn in Q2FY11, 26.3% lower than that in Q2FY10.

Valuations: Upside from current levels
We continue to value JM using the sum-of-the-parts method and maintain the
fair value at Rs 45 per share. The stock price has rallied by 15% since our
previous update report dated August 19, 2010. Hence, we are revising our
valuation grade to 4/5.

To read the full report: JM FINANCIAL LIMITED

>Economy First Cut: Industrial growth drops further to 4.4 per cent in September 2010

• Industrial output growth dropped to 4.4 per cent in September 2010 as compared to 8.2 per cent a year ago and 6.9 per cent a month ago.

• As the index of industrial production (IIP) has been readjusted in view of revamped Wholesale Price Index (WPI) for IIP items, the IIP growth for July and August 2010 now stands 15.0 and 6.9 per cent.

• Manufacturing output growth decelerated to 4.5 per cent in September 2010.

• Among the three major segments of IIP, only manufacturing index posted a positive growth (1.4 per cent) on m-o-m basis.

• Weak m-o-m performance of both mining and electricity in September 2010 led to their growth slowing down to 5.2 and 1.7 per cent respectively

• Capital goods output, continues to be volatile and the same shrank by 4.2 per cent in September 2010. As per the recompiled series, this is the first month in which capital goods have witnessed contraction this fiscal.

• Consumer durable goods, hitherto a consistently good performer also posted a lower growth of 10.9 per cent in September 2010 as against 27.1 per cent in the previous month.

To read the full report: ECONOMY FIRST CUT

Tuesday, October 12, 2010

>INDIA STRATEGY: FY11/12 Earnings: What do Analysts think?

Consensus downgrades moderating before Q2 season

Analysts are turning bullish for the first time in a year. Riding into the quarterly earnings season, we gauge consensus sentiment across sectors, and find that earnings revisions are no longer headed south. We aren’t seeing substantial upgrades just yet, but the trend of downward revisions is moderating. Economic growth is on track with a solid monsoon, robust consumption demand (and
perhaps, a booming market), leading analysts to take a second look at earnings. RCML’s Q2 PAT (ex-oil) estimate is 29% for the Sensex, and 21% for our broader 135-stock coverage universe.

■ Consensus signals a moderation in earnings downgrades: Earnings revisions
across the market have turned slightly positive in the last two months. The MSCI
India Earnings Revision Index*, a key measure of sentiment, which has been on a
downward trend (i.e., more downgrades than upgrades) since September ’09, has
now shown signs of a reversal before the quarterly earnings season commences.
Sentiments have been even more positive for the 600+ stock IBES India universe,
the set of all stocks under sell-side coverage. In the backdrop of prolonged global
weakness and the possibility of a double dip, analyst optimism is borne out of a
good monsoon season, strong consumption demand, and a resilient Indian
market post-crisis.

■ FY11 earnings growth at ~20%, but not on upgrades: Meanwhile, profit growth
for Sensex companies remains largely unchanged since the ‘Tata (Motors/Steel)’
spike in June, at 20% for FY11 and 18% for FY12 (Fig 2). Gross FY11 profits have
remained flat (-0.6%) during this period. In other words, analysts haven’t factored
in any rise in full-year profits post Q1FY11. Not yet anyway.

■ Autos remain the sector of choice, Telecom the least-liked: Sector-wise, Autos
(Fig 3) have seen the highest earnings growth since last year, riding on the strong
volume growth post-recovery. Telecom earnings in contrast have been pared
down by a third in this period. While the overhang of competitive intensity, 3GBWA,
and MNP (where in contrast to the costs, data-revenue estimates are still
hazy) explains the negative quarterly estimates, the latest round of downgrades is
largely due to consolidated (including Africa) figures for Bharti. High upgrades
also imply an increased risk of disappointment, with Autos, Metals, Health, and
Capital Goods seeing the highest upgrades in the last three months and remain as
sectors to watch this earnings season.

■ Earnings upgrades and market performance… may not go together: Ratings may
not always translate into performance, as we know. While Autos, Cement and
Metals outperformed the market in line with upward earnings revisions, Banks,
Telecom and Real Estate have seen outperformance despite flat or downward
earnings revisions.

■ Sectors to watch out for this earnings season: Sectors such as Real Estate and
Telecom are the ones to watch out for this earnings season as outperformance
ahead of earnings could well turn into sharp underperformance in case of any
negative earnings surprises.

To read the full report: FY 11/12 Earnings

>STERLITE INDUSTRIES: Project issues continue

Q2FY11 production numbers in line
Vedanta Group’s/Sterlite Industries’ (Sterlite) Q2FY11 declared production
numbers were largely in line with our estimates. Lead production, however, was
7% ahead of our expectations.

Copper, VAL, and BALCO expansions effectively on hold
The 100 ktpa lead capacity expansion has been delayed by a quarter and is now
expected to be completed in Q3FY11. The 400 ktpa brown field copper expansion
has been put on hold considering the high court order to shut the existing
smelter due to environmental/pollution issues and pending approval from the
State Pollution Control Board. The Supreme Court has currently issued a stay on
the above order and hearing on the matter is scheduled on October 18.
With the Ministry of Environment and Forests withholding clearance for Vedanta
Aluminium’s (VAL) bauxite mine and objecting to the alumina expansion, the
company has effectively put on hold the entire expansion—alumina expansion at
VAL to 5 mt from the current 1 mt, smelter expansions of 1.25 mtpa at
Jharsuguda and 325 kt at Korba—at VAL and BALCO.

Increased power available for merchant sales
The company had planned to source power from Sterlite Energy’s (SEL) 2,400
MW plant for its upcoming 1.25 mtpa aluminium smelter at Jharsuguda. With
that project being deferred, the power available now will be sold on merchant
basis. Similarly, the entire output from the 1,200 MW captive power plant at
BALCO (for 325 ktpa smelter III) will also be available for merchant sales.

Outlook and valuations: Project execution concerns; maintain ‘BUY’
We are revising down Sterlite’s FY11E and FY12E PAT 8% and 4%, respectively,
after factoring in lower volume growth in Hindustan Zinc (HZL) and project
delays in copper, VAL, SEL and BALCO. Cash costs at VAL are running higher
than expected at ~USD 1,900/t even after considering purchased bauxite. While
the various projects and environment related issues will be an overhang on the
stock, we believe this has been factored in the stock price. From a longer-term
perspective we see value in the business. We retain our ‘BUY/Sector
Performer’ recommendation/rating, but lower our fair valuation to INR 203
(earlier INR 214) considering the revision in estimates.

To read the full report: STERLITE INDUSTRIES


In a recent development, Punjab National Bank (PNB) and other seven banks'
exposure to Zoom developers (a Mumbai based project development company)
has come into light. The banks' total exposure to the account is close to Rs26
bn (non-fund based exposure), out of this PNB's (the lead banker) exposure is
close to Rs4.5 bn. In accordance with the media reporting, in Q1FY11, the bank
already recognized Rs3.0 bn as NPAs and made provisions. According to our
communication with other banks' managements some of the banks made
provisions in Q4FY10 itself. Around 76% of the banks' exposure is insured with
ECGC (Export Credit Guarantee Corporation).

Though, it appears that ECGC may not fulfill the banks' claim for the account,
and banks are pushing the matter for corporate debt restructuring (CDR). The
CDR package could provide short term relief to the borrower and to ECGC. The
borrower has been aggressively trying to raise short-term funds for fulfilling
liabilities on account of employees' costs and overheads. Given the status of
the borrower, CDR package might not revive the borrower and banks could have
to write off the entire exposure.

Central Bureau of Investigation (CBI) would be investigating the foreign currency
irregularities and the central bank would investigate huge amount of banks'
non-fund exposure to single account.

To read the full report: PNB

>KSK ENERGY VENTURES LIMITED: High Project Visibility coupled with Attractive Valuations (EQUIRUS)

We expect KSK Energy Ventures Limited (KSKEVL) to commission a total of 4644 MW by FY16 comprising operational capacity of 601 MW, capacity of 313 MW which is expected to be commissioned by FY11 and further capacity under construction of 3730 MW. KSKEVL has pioneered the group captive business model along with a focus on long term off take agreements and fuel security which lead to lower volatility in the tariffs and fuel costs. This provides higher visibility and scalability to its power generation capacity. We see 35% upside in KSKEVL by 30th Sep, 2011 and initiate coverage recommending LONG position and suggest an overweight within the power sector. Our FCFE based DCF Target Price (TP) of ` 242 is based on projections till FY17 and 20 years of growth.

Existing Capacity of 601 MW to be ramped up to 914 MW by FY11 and 4644 MW by
FY15 leading to 75% Revenue CAGR and 51% EPS CAGR from FY10 to FY15: KSKEVL has commissioned 601 MW across multiple locations in India including the first two units of
135 MW at the 540 (4*135) MW Warora plant. The further expansion of 313 MW includes 2
remaining units of the Warora Plant and a 43 MW expansion of Arasmeta Phase II. KSKEVL
has also achieved substantial progress on the 3600 MW KSK Mahanadi Project at
Chhatisgarh in terms of placement of BTG orders, commencement of construction works
at the site and recent financial closure for the entire debt requirement. It has incurred a
Project Cost of ` 33 bn and has already infused equity of ` 21 bn. It has also received
equity commitment of ` 2500 mn by IFCI and expects to commission the first unit of 600
MW in Q1FY12 vis-à-vis our conservative assumption of Q2FY12.

Predictability of business model and innovative capital structuring enabling higher
financial leverage: KSKEVL has focused on fuel security in the form of long term fuel
supply agreements and has tied up most of its off-take on a long term basis which provide
higher predictability to its business model. It has also set up power plants on captive
basis where in it receives partial equity contributions from its equity partners. These
factors have enabled KSKEVL to finance its projects at higher leverage than its peers.

Overcoming the Lehman Hangover with High Investor Interest due to Improved
Visibility of Projects, Scalability of Business and Attractive Valuations: KSKEVL has
entered into a lock up agreement with Lehman Brothers Subsidiaries (LB Entities) to not
sell 12.2% of the shareholding till Oct 30, 2011 and has a right of first refusal over sale of
6.5% of the shareholding. This reduces the uncertainty on the sale LB entities and we
expect that several long term investors will be interested in KSKEVL due to improved
visibility of its projects, scalability of business model and its attractive valuations. This is
evident in the recent commitments of ` 3.5 bn by IFCI and L&T Infra.

Attractive Valuations and High Sensitivity to Project Cost Overruns: KSKEVL is
attractively priced on FY10 and FY11 Price/Book to Forward RoE. The advanced stages of
its projects provide assurance regarding the implementation of the projected capacity of
4644 MW within the estimated project costs.

To read the full report: KSKEVL

>ING VYSYA BANK: Business and margin scaling up; initiate with Buy

We initiate coverage on ING Vysya Bank with Buy and price target of `445/share. We expect the Bank’s RoE and RoA to expand to 17.3% and 1% respectively by FY13e on the back of business scaling-up as well as improvement in margins and productivity.

Business growth scaling up; margin expansion. We expect ING Vysya Bank to witness improved business growth and higher market share FY11 onwards. Rising CASA share is likely to aid margin expansion to 3.1% in FY13e from 2.7% in FY10.

Rising productivity. Core Cost-to-income (excluding trading and extraordinary gains) sharply declined to 60 % in FY10, falling 690bps over FY09. Cost-to-assets at 2.5% in FY10, though higher than peers, shows significant scope for further improvement in productivity.

Adequate capitalisation. With strong backing of its international parent and current CRAR of 14.5% (tier 1 capital of 9.9%), the Bank is adequately capitalised to support future growth and
protect itself from additional loan defaults.

Valuation and risks. At our target price of `445, the stock would trade at 1.9x FY12e and 1.7x FY13e ABV. Our target price is based on the two-stage dividend-discount model (CoE: 13.2%;
beta: 0.87; Rf: 7.5%). Risks include slower-than-expected credit growth and higher slippages on account of NPAs.

To read the full report: ING VYSYA BANK

Sunday, October 3, 2010

>Stocks with 35-50%+ potential

Midcap monitor is a new product from the Religare Strategy team where we
would analyze and provide updates on midcap stocks. In our first edition, we
provide 10 midcap picks (market cap of US$500mn-US$2bn) that we believe
have 35-50% upside by Dec-11. To build a diversified portfolio, we have
chosen stocks across the entire spectrum of Indian growth story – consumption
(Ashok Leyland, Educomp, Glenmark Pharmaceuticals), investment (Voltas,
Sobha Developers, Shree Cement, KEC Intl), Energy (Petronet LNG), diversified
(Sintex), financials (M&M financial Services). We recommend investors to take
significant position in these stocks for alpha performance.

Large caps are not cheap: Indian markets have risen 14% this year, 9% of it in
this month alone, and with Sensex at 19x 12m forward earnings, valuations are
not cheap for most of the large caps. While we continue to be bullish on India’s
long-term fundamentals, we do accept that near-term upside is limited in large
caps. As such, we find most investors are looking for mid-caps that still offer
significant share price upside either due to higher earnings trajectory or
possibility of multiple re-rating or a combination of both. This is our effort to
provide names of some of the midcaps with such upside potential.

Historical performance supports mid-caps: In the Indian markets’ near one-way
trajectory since 2003, small and mid-caps have outperformed large-caps by a fair
margin in 4/6 years. This year too, the BSE Midcap and Small-cap indices have
outperformed the Sensex by 15 and 22% YTD. While past performance is no
guarantee for future returns, we believe there’s sufficient growth potential in each
of our picks to become a large/mega-cap tomorrow. In this context we also
expect hitherto low foreign participation (13% in midcaps, 7% in small-caps vs.
25% in Sensex) to become more broad-based going forward.

Show me the money: Most investors believe that the higher risk of buying
midcaps needs to be justified by higher returns. Hence while screening the
midcap space for value and growth potential; we have shortlisted picks that we
believe will generate 35-50% returns by Dec’11.

To read the full report: POTENTIAL STOCKS


Capacity to increase ~2x by FY12
JSW Energy (JSWEL) plans to more than double its capacity to 3.1GW by FY12 from 1.4GW currently. It plans to sell ~56% of its expanded capacity in the short-term market, which would increase its earnings sensitivity. If we consider the 270MW Raj West extension, the share of merchant capacity increases further to ~60%.

Exposed to the spot market for 46% of total coal requirement
JSWEL has entered into long term coal supply contract with PT Sungai Belati and its South African company (South African Coal Mining Holding Ltd), which will together supply ~4mtpa. We believe
this will meet only ~54% of its total coal requirement of ~7mtpa in FY13, thus keeping it exposed to the spot market (on a steady state basis) for ~3.2mtpa. This dependence would be higher in
FY12E at ~4.8mn tons, as the company operates a part of its Rajasthan unit on imported coal.

Expect 13% downside; Initiate with SELL recommendation
Although, JSWEL is one of the fastest-growing power companies,
we believe its high exposure to spot market only increases earnings sensitivity. Robust 66% earnings CAGR over FY10-12E, due to higher operational capacity, should allow the stock to trade at a premium in the near future. We expect the premium to contract as: 1) capacity addition slows; 2) short-term rates soften; and 3) fuel prices increase. Decline in profitability and higher interest outgo will contract its RoE going forward. Hence, further upside for the stock seems limited, in our view. We value the company on FCFE to arrive at our target price of Rs117, implying potential downside of 13%. We initiate coverage with a SELL recommendation.

To read the full report: JSW ENERGY LIMITED

>CLARIANT CHEMICALS: Capitalising on consumption boom

Supplier of specialty chemicals for value addition in host of consumption categories

Clariant Chemicals (India) (CCIL), a 63.4%
subsidiary of Clariant AG, Switzerland, is a
leading specialty chemicals companies. India is witnessing one of the best growth rates ever
seen in consumption in various sectors including automobiles, paints, personal care, food
and beverages or textiles. With demand growing at a fast clip, CCIL is ideally placed to
capitalise on this favourable trend as it caters to most of the consumption categories.

Most of CCIL’s portfolio consists of specialty of products enjoying strong brand
and tremendous customer loyalty due to superior quality and technology. As the
consumption boom gathers steam, demand for value-added and well-finished products
will expand at a faster rate than the category growth. Hence, the company’s products
will enjoy faster growth.

The textile business of CCIL enhances the properties of apparel and other textiles in
applications as diverse as high fashion, home textiles, and special technical textiles. The
company is also a leading manufacturer and supplier of pigments and its preparations for
manufacturing paints, plastics, printing inks, cosmetics, detergents or special applications
like latex, and viscose. Its high performance pigments meet the exacting demands of the
automotive, coil and coating industries.

To read the full report: CCIL

>TELECOMMUNICATION SECTOR: The next round gets tougher

We maintain our medium-term cautious view on the telecom sector and downgrade Bharti
Airtel (Bharti) to ‘HOLD’ and Reliance Communications (Rcom) to ’REDUCE’. We maintain
‘HOLD’ on Idea Cellular (Idea) and ‘BUY’ on Tulip Telecom (TTSL). We anticipate tariff wars
to re-emerge with the implementation of Mobile Number Portability (MNP) and launch of 3G services. We believe, Bharti’s dominance in revenue market share and margins will be challenged by Idea, Aircel, and Tata Docomo. The entry of MVNOs will further make the market competitive. Over the longer term, we believe, the sector will witness de-leveraging of balance sheets and sustenance of healthy cash flows. But, at current valuations the street is in for a disappointment.

Resurgence of competitive intensity likely
In the past 10 months, headline tariffs have been stable, but revenue per minute (RPM)
has declined 22%. With implementation of MNP and launch of 3G services, we anticipate
re-emergence of tariff wars. In our view, Idea, Aircel and Tata Docomo will utilise the
MNP opportunity to target Bharti’s and Vodafone’s high usage customers. As per media
reports, the government is planning to allow entry of MVNOs, which will make the
market more competitive. Thus, Bharti’s dominance, with 32% revenue market share will
be severely challenged.

Margins to remain under pressure
MNP implementation and launch of 3G services will lead to escalation in costs. We
believe, the entry of MVNOs will lead to further pressure on business for incumbents.
While on one hand tariffs will be under pressure, on the other, we expect network
operating costs and customer acquisition/retention costs to escalate. This, combined with
expensing of interest cost and amortisation of 3G licence fee will lead to lower
profitability. In our estimate, Bharti will have to generate incremental ARPU of INR 622
per month from 3G services in Mumbai to breakeven and INR 800 to defend current

No meaningful consolidation expected
Street is expecting consolidation in the sector. We believe, a shake-out is imminent in
the new operator segment. Post-consolidation we expect the current top 7 operators,
who control 98% of industry revenues to continue. Thus, consolidation will not be

Tower and handset businesses offer attractive alternate options
The tower industry is fairly consolidated with five players mostly fulfilling infrastructure
requirements of telecom operators. We expect the tower industry to generate revenue of
INR 191 bn and EBITDA of INR 112 bn in FY12E. The handset industry, riding on
significant growth in subscribers, is expected to sell 295 mn handsets and report
revenues of INR 286 bn in FY12E.

Valuations and view: Await a better entry point

Bharti and Idea stock price has risen 40% in the past three months due to investor
optimism on stable tariff environment and as the stocks have under performed the broad
indices over the past two years. We don’t believe tariff wars have ended. Bharti is
trading at similar valuations as it did when its stock price peaked in February 2008
despite higher competitive intensity in business and inferior financials. We downgrade
Bharti to ‘HOLD’ and RCOM to ‘REDUCE’. Maintain ‘HOLD’ on Idea and ‘BUY’ on Tulip

To read the full report: TELECOM SECTOR

Saturday, October 2, 2010

>INDIA CONSTRUCTION SECTOR: Concerns overdone; risk-reward ratio favourable

Strong order inflows, improved credit scenario and better execution capabilities are expected to accelerate revenue momentum for India construction sector in the coming quarters. We expect our coverage universe to report 16%/23% YoY growth in revenue for FY11/12 (8% in FY10).
With the recent correction, the risk-reward ratio for select construction companies has turned favourable, in our view. Revival in execution and pick-up in industrial/international orders will be the key triggers for construction companies in the near to medium term. Simplex Infrastructure (SINF) and Nagarjuna Construction (NJCC) are our top-picks in the sector with 20%+ potential upside from current levels.

Investment Highlights
Ordering opportunity for construction players pegged at US$109 bn between FY10-12E
We peg the ordering opportunity for construction companies at US$109 bn over the next two years led by acceleration in awarding of national highway projects and increasing opportunities in the power sector. Road/power/irrigation/railway sector are expected to contribute 40%/24%/14%/13% of the total orders.

Infrastructure investment robust despite slippages
Despite slippages in meeting target, infrastructure investment (ex-storage, oil & gas and telecom) has seen a 17% CAGR in the past five years. In FY10, infrastructure spending increased to US$69 bn or 5.8% of GDP (5.0% in FY04). As per revised projections, US$349 bn (ex-storage, oil & gas and telecom) is expected to be invested in the 11th Plan (US$170 bn in the 10th Plan), with private sector contribution expected at 25% (22% in the 10th Plan).

Strong order inflows in H2FY10 to accelerate revenue growth in H2FY11/FY12
Economic slowdown and general elections led to muted order inflows in H2FY09 and H1FY10. Order inflows, however, have picked-up since H2FY10 (up 74% YoY). Due to the back-ended nature of revenues, we expect our coverage universe (SINF, NJCC, IVRCL and HCC) to report a 16% YoY growth in revenues for FY11 (8% YoY growth in Q1FY11) and 23% YoY growth for FY12.

Risk-reward ratio favourable; SINF and NJCC our top-picks
After outperforming the broader markets during the pre-crisis period, construction stocks have been a consistent underperformer since May 2008. Against a 2% return generated by Sensex between May 2008 and August 2010, our coverage universe has delivered a negative 25% return.

With earnings momentum expected to pick-up in the coming quarters, select construction stocks are trading at attractive valuations (available at 9-12x our FY12 EPS). Within the construction space, we prefer SINF and NJCC due to their (1) diversified order book (2) better working capital position (3) conservative approach to BOT projects and (4) attractive valuations. We have valued construction companies based on SOTP methodology. For the core construction business, we have assigned earnings multiple in the range of 10-15x, based on certain quantitative and qualitative factors. The listed (unlisted) subsidiaries of construction companies are valued at 30% discount to CMP (1x book value). We initiate coverage on SINF, NJCC and IVRCL with a BUY rating and maintain our HOLD rating on HCC.

To read the full report: INDIA CONSTRUCTION SECTOR


We are suggesting 10 midcap stocks in this Midcap Monitor report which we believe have 35 -
50% upside by Dec.-2011. We have selected the following stocks from the entire gamut of
Midcap growth story -

1) Ashok Leyland

2) KEC International
3) Glenmark Pharmaceuticals
4) Educomp Solutions
5) Petronet LNG
6) Sintex Industries
7) Sobha Developers
8) Mahindra & Mahindra Financial Services Ltd
9) Shree Cement
10) Voltas

India’s medium-term economic growth story continues to remain healthy on account of a revival in demand - the current year looks particularly good given the better monsoon and its impact on rural demand.

Till September 29 this year, FIIs have invested about Rs 85,340 crore in the Indian markets, which is among the largest inflows in recent years and a lot of foreign money has flowed into the largecap stocks. Therefore, midcaps have underperformed in the recent past. The BSE Midcap index has delivered only 6.14% returns in the last one month vis-a-vis the Sensex’s 10.8% returns.

To read the full report: MIDCAP STOCKS

>JAIPRAKASH ASSOCIATES: Well placed to benefit from infrastructure creation

Jaiprakash Associates, has underperformed the broader market by around 39%
in the past one year on account of some overhangs in terms of a potential sale
of its treasury stock, a delay in the execution of its Yamuna Expressway project
due to farmers’ protests and its plan to enter into the non-related fertiliser

With regards the farmers’ protests against the Yamuna Expressway project in
Uttar Pradesh for a justifiable compensation for land to be surrendered by
them, the government has decided to go back to the drawing board to create
an expressway authority and decide the funding pattern for the projects. Due
to the farmers’ protests, the work of the company suffered for about 20 days
at a particular stretch on the expressway. We believe the issue is negative for
the company as it may lead to a delay in the execution time of the project or
could lead to an increase in the cost of the project. On the real estate front,
the company could sell about 5.1 million square feet (sq ft; as on August 31). At
the moment the company is constructing almost 20 million sq ft and hopes to
start deliveries next year from June 2011.

Further, the company is also looking to make a foray in the business of
manufacturing and marketing of fertilisers, either on its own or through a special
purpose vehicle (SPV). As per media reports, JP Associates is looking to acquire
a controlling stake of nearly 74% in the fertiliser division of Duncans Industries.
The fertiliser division of Duncans Industries is proposed to be hived off into a
separate entity. Duncans Industries’ fertiliser unit is located at Panki in Uttar
Pradesh and is non-operational at present. We believe the company’s likely
foray into the fertiliser business is also an overhang on the stock as it is not
related to its present business model.

The re-rating triggers for the stock will be an improving outlook for the real
estate companies, better than expected execution of its expressway and power
projects, and a better than expected performance of its cement division, which
contributes around 40% of its overall revenue.

To read the full report: JAIPRAKASH ASSOCIATES


COMPANY BRIEF: Hyderabad Industries Ltd. (HIL) is one of the leading manufacturers of
Fibre Cement Sheets in India with a market share of about 20.5%. Its key product range include Fibre Cement Roofing Sheets sold under the brand name CHARMINAR, AAC Blocks and Panels called AEROCON, and Calcium Silicate Insulation Product (thermal insulation) called HYSIL.

⇒ HIL has an extensive presence across the country and enjoys premium brand equity in the market based on superior quality, strength and durability.

⇒ The company has diversified into value added (environmental friendly green) products, which will de‐risk its business model and diversify its revenue stream. Given the diversification into value added products, we strongly believe that HIL is due to get re‐rated and command much higher multiple in times to come.

⇒ Demand of such green building products is increasing across the world on account of serious concerns about the environment and the impact on energy consumption.

⇒ HIL is increasing the cement sheet capacity by 180000 tpa to 1079500 tpa & thermal insulation by 3000 tpa to 11500 tpa in CY11. This will help the company to keep pace with the growing demand for its products and retain significant share in the market.

⇒ Relatively speaking, HIL has far superior earnings profile and return ratios in comparison to its peers. It has a stronger balance sheet with a Debt:Equity Ratio of 0.3, ROCE of ~44%. The company has the highest operating margins in comparison to its peers.

⇒ At the current price of ` 624, the stock trades at a P/E multiple of 4.1 x FY12E earnings and P/BV multiple 1.0 x FY12E earnings. We recommend a “BUY” on the stock with a price target of ` 754, assuming a P/E multiple of 5 x FY12E earnings, an upside of 21% from the current levels, over a period of 12 months.

To read the full report: HIL

>RANBAXY LABORATORIES: Multiple triggers ahead; Upgrade to Hold

■ Worst is behind; Multiple triggers ahead
■ These triggers present potential upsides of Rs120
■ Factored in only triggers like - hive-off of NCE R&D and monetization of Aricept FTF- which have already kicked in
■ Upgrade to ‘Hold’ and raise target price to Rs520. Have a positive bias on the stock but will factor in upsides only on occurrence of triggers

To read the full report: RANBAXY LABS

Friday, October 1, 2010


Satyam – FAQs and what to expect on 29th Sep?

Satyam will report its financials on 29th September, 21 months after the fraud was
discovered. The impending result report and the 27% stock move in the last 1
month have generated considerable investor interest. This note attempts to answer
a few key investor queries.

#1: Financials for what period will be reported?

#2: Why is FY10 reported revenue not representative of current business status at Satyam?

#3: Can Satyam report YY growth in revenues in FY11?

#4: What is happening on the supply-side at Satyam?

#5: What could be Satyam’s margin trajectory in FY11?

To read the full report: SATYAM


■ Dearth of absolute low valuation ideas

■ Infrastructure and domestic consumption dominate the list

To read the full report: INDIA STRATEGY


To read the full report: ECI STRATEGY

>CRISIL: Putting cash to good use - acquires Pipal Research

■ CRISIL to by Pipal Research, for a sum of USD12.75mn. The
acquisition is at 1.6-3.2x EV/ Sales (assuming 50-100%
stake), which is lower than 2.2x it gave for Irevna in 2005

■ Looking at CRISIL’s history of acquiring smaller companies

and then quick scale up it will be able to scale up Pipal’s
business significantly leveraging their existing capabilities

■ The acquisition of Pipal alongwith recent buy back program,
we expect CRISIL’s ROEs to improve, which till date were not
optimized due to high cash on book

■ At CMP of Rs6,169, the stock trades at 26.6x CY10E EPS of
Rs232 and 21.7x CY11E EPS of Rs284. We will review our
numbers and rating after having more details on Pipal

To read the full report: CRISIL

>INDIA: Financial Services

Banking Sector – In good shape
We recently hosted an Indian Financials road trip, where investors hadextensive interaction with 25 corporates. Our key takeaways:

(1) Credit growth will likely accelerate and will be more broad based in 2H as corporates start drawing down on approvals,

(2) Deposit growth which has been sluggish so far (not indicted to be a concern) will improve as banks have raised deposit rates,

(3) Banks remain optimistic on CASA targets despite a rising rate environment,

(4) Not all banks were confident of margin improvement given less pricing power, which they expect to return with credit growth,

(5) Banks expect NPLs to rise in FY2011 on account of agri debt, and end of moratorium period for restructured assets, both of which could lead to some more slippage, though remain manageable and improve in FY2012,

(6) HR issues seem to be the major concern for PSU banks as they see a large number of senior staff retiring as well as debate about compensation packages to retain and attract talent. Branch expansion and shorter branch breakeven seem to be key drivers of growth for private banks to increase profitability.

Insurance Sector – Jury will be out for some time
Insurance industry interactions were more tepid in tone with the jury still likely to be out for some time on how recent regulations would impact growth and margins. Companies are currently in the process of calibrating strategies – product mix, and focus on cost, productivity and persistency to minimize impact.

From our interactions it emerged that insurance companies expect volume growth to be lower in 2H given a higher base, lower commissions and retraining of agency force to sell new products. Most companies we interacted with indicated a potential shift in product focus to traditional
products from ULIP, though these traditional products along with distributors may potentially be the next target area for the regulator.

We expect margins to fall to 12-15% from 19-20% pre-regulatory changes even despite the potential significant cost cuts planned by companies.

Most companies seem comfortable on capital at least for FY2011. Potential equity issuances are now not on the horizon.

To read the full report: FINANCIAL SERVICES

Saturday, September 25, 2010

>STRATEGY: Which stocks to buy now?

Buy under-valued, under-performing stocks
Given the pace of the rally, we believe the market is vulnerable to a correction. We believe even if the market uptrend continues, the outperformers may see some rotation. We, therefore, screen for stocks that have under-performed the current rally and are cheap relative to their history as a means of identifying ideas for investors. Some of the large cap stocks that look attractive on this screen are Reliance, Zee, BHEL, Sterlite, Wipro and Maruti. These are not necessarily stocks on which our fundamental analysts have a Buy rating currently.

Stocks vulnerable to a correction
Similarly, stocks that have outperformed the market sharply and are expensive relative to history are most vulnerable in a correction. As expected these include many stocks in the financial space like SBI, ICICI, HDFC Bank and HDFC and other large cap names like Bajaj Auto, Ambuja Cements, Bharti and ONGC. Similar to the list above, these are not necessarily stocks we are negative on from a fundamental point of view but stocks that tactically could under-perform in a market correction.

Other stocks that have under-performed the market
For the purpose of identifying laggards, we have taken the base as the market lows in May, 2010. The market has bounced over 20% from these lows. Other stocks that have lagged in the rally include Lupin Labs which is one of our preferred stocks. On the other hand, we continue to like stocks like Tata Motors and United Spirits that have been sharp outperformers in the rally.

To read the full report: INDIA STRATEGY

>ORIENT GREEN POWER: IPO NOTE; Unexciting ‘Orient’ation

Orient Green Power (OGPL) is India’s leading renewable energy-based power generation company focused on developing, owning and operating a diversified portfolio of renewable energy power plants. OGPL, which currently has an installed capacity of 213.0MW, has another 836.5MW of prospective capacity expected to get operational by FY2013.

Huge potential for the development of renewable power: India’s renewable energy-based power capacities have increased their share of total power capacity from 2.0% in FY2003 to around 10.0% in 2010. Despite this, the renewable power sector still has huge potential, which remains untapped. The country’s wind power capacity stands at 10,890MW although the potential has been estimated at approximately 48,500MW. The government has announced a number of fiscal incentives and measures such as renewable power obligation and the renewable energy certificate mechanisms, which are expected to spur growth of this sector.

Leading player in the renewable energy segment and poised for rapid growth: OGPL plans to increase capacity by more than four-folds to 1,049MW by FY2013 and is well poised to capitalise on the untapped potential in the renewable energy space. OGPL currently has 405MW of wind power committed projects, and the infrastructure is in place for majority of the projects. Financial closure has also been achieved for most of the projects. It may be noted here that the execution risks and project commissioning time are lower for renewable energy projects due to the lower land requirement and lesser regulatory hassles. Hence, we believe that OGPL has good revenue visibility going ahead.

Lower PLFs to suppress IRRs: OGPL’s wind energy plants currently have a PLF of 20-21% (varies according to wind density), which is lower than the normative PLF of 25% set by the CERC. This would result in the company reporting lower IRRs than the achievable IRRs if CERC’s prescribed norms are achieved. Moreover, the company also does not have fuel supply contracts in place along with lower availability of fuel for the biomass plants, which would result in lower PLF than the normative standard set by CERC.

Outlook and Valuation
The renewable energy sector is set for healthy growth due to its vast unexplored potential and supportive government policies. Leader OGPL has also charted out aggressive expansion plans to capitalise on the emerging opportunities in this nascent but growing industry.

At the lower and upper price bands OGPL is available at implied P/BV of 1.7x – 1.9x on FY2012E financials, which we believe is fair considering higher RoE’s of its business and the risks associated with lower PLFs. The IPO is available at a premium to its private sector peer Indowind Energy (1.3x FY2012E P/BV), which has lesser operational assets at 44MW. For OGPL, the EV/MW works out to Rs6.3cr and Rs6cr on FY2012E capacity at both ends of the price band, which is at 10% and 7% premium to its replacement cost, which limits further upside
considering the return ratios. Hence, we recommend a Neutral view on the IPO.

To read the full report: ORIENT GREEN POWER

>CANTABIL RETAIL:IPO NOTE; Expansion led growth

About Cantabil Retail (CRIL): CRIL, an integrated discount apparel retailer, is in the business of designing, manufacturing, branding and retailing of apparels under the brands ‘Cantabil’ and ‘La Fanso’. The ‘Cantabil’ brand offers a complete range of formal wear, party wear, casuals & ultra casual clothing for men, women and kids in the middle-to-high income group. The ‘La Fanso’ brand caters to men’s segment in the lower-to-middle income group. Apparel range catering to a wide customer base, strong in-house design & research team and inhouse integrated capacity, are some of the strengths of CRIL.

Retail network of 411 outlets: Currently, CRIL has a network of 411 outlets (Cantabil - 270, La Fanso - 141), predominantly in North (230) and West (113), with total area under operation of 3.17 lakh sq.ft. Out of this, 268 stores are operated under Franchisee owned/leased and Franchisee operated (FOFO) model, while the rest under Company owned/leased and Franchisee managed (COFM). It intends to open 180 new outlets in the next two years; 80 in FY11e and 100 in FY12e.

Bahadurgarh manufacturing facility to reduce dependence on third parties: Presently, CRIL has three in-house manufacturing/finishing units and four warehouses located in Delhi. They also have third-party dedicated units manufacturing exclusively for CRIL and fabricating arrangements with 94 manufacturing units to which CRIL outsources cutting and stitching. CRIL is proposing to set up a large integrated manufacturing facility at Bahadurgarh to reduce its dependence on third-party fabricators and to meet growth needs.

Valuation and Recommendation: CRIL’s diversified product basket in the discount apparel segment, coupled with wide retail network, provides strong edge in the highly fragmented and competitive marketplace. Not only has Cantabil scaled up its business (Turnover up 9x and profits 12.5x in 4 years), it has also improved its operating margin by nearly 620bps in last four years and with the commencement of proposed facility at Bahadurgarh, it will provide further impetus to its margin profile. Given the proposed store expansion plans, we expect CRIL to witness strong growth in the medium term. At the higher band, valuations at ~15.4x FY10 EPS look reasonable in comparison with its peers. Higher inventory, working capital requirements and leverage (2.1x preissue) constitute key risks.

To read the full report: CANTABIL RETAIL

>Ashoka Buildcon Limited: IPO NOTE

Ashoka Buildcon Ltd (ABL) is a Nashik based EPC contractor having pan India presence. Company owns 23 projects on BOT (Built Operate Transfer) basis covering 1100 kms and 6 foot
over bridges which are operational. Other business vertical of ABL would include sale of ready mix concrete for road construction and civil works. ABL can also provide toll collection services to third party BOT projects. ABL is also capable of providing EPC solutions for power sub stations.

In last 4 years ABL's EPC revenues have increased by a CAGR of 48%, Toll revenues have surged by 47%. Revenues from ready mix concrete business grew by CAGR of 33% in last 4 years. EBITDA profits of ABL saw a rise of 48% while profits after taxes witnessed growth of 130% in previous 4 financial years.

Investment Rationale:
Proven track record of order execution and O&M services across road industry ABL has a proven track record of constructing 2390 kms of road projects across the country. ABL is also capable of providing operational & maintenance (O&M) services as well as toll collection services to the existing toll projects for its customers.

Strong base of operational BOT projects
ABL currently has 23 projects on BOT basis, off which 11 road projects spanning across 1100 kms are operational. ABL also has 6 foot over bridges as a part of its BOT projects located in
Mumbai. BOT projects are valued at Rs.6.9 bn in which ABL has 93% stake worth Rs.6.5 bn.

To read the full report: ASHOKA BUILDICON


ZF Steering Gears (India) Limited, a pioneer in manufacturing and supply of Steering Gears for commercial vehicle (CV) space in India, is expected to gain from the rising demand for the steering gears. Apart from the positive business outlook, ZF also has significant liquid investments in its balance sheet which at the current prices is valued of Rs 115 per share. This provides much needed cushion to the stock. Over the next two years ZF is expected to exhibit a CAGR of 29% & 40% in its revenues & profitability respectively. At CMP of Rs 450, the stock is available at 9.1x & 7.3x its estimated earnings of Rs 49.4 & Rs 61.3 respectively. We recommend a BUY at CMP for a price target of Rs 615 an upside of 37% for a time horizon of 12 to 15 months.

Favourable Industry Outlook The Indian CV industry, after facing a severe demand slowdown in the second half of 2008-09, has bounced back strongly, reporting a strong demand recovery across most segments. After posting a drop of 24% in the production of CV for the fiscal 2008-09, the CV industry achieved an impressive 36% growth in 2009-10. The trend has even continued in the first quarter of the current fiscal (Q1FY11) with growth coming in at a robust 36.4% growth. Although the medium to longer term outlook remains strong given the expectations of continued economic revival, the growth in volumes is likely to see some moderation & is expected to be at around 19-20% for FY11 & 7-8% for FY12.

Commands a significant market share ZF Steering commands a strong market share in the domestic CV space with nearly 45% market share. Its only competitor with similar market share is Rane TRW Steering Systems Limited. The balance 10% of the CV Steering Gears market is met by imports from China. Almost 65% of the Tata Motor’s requirement in the CV space is met by ZF whereas in case of Ashok Leyland, it meets nearly 35% of its requirements. Further 100% of the requirement for Eicher Motors & Man Force is met by ZF.

Investment Value per share provides cushion Besides its core business of manufacturing steering gears, ZF has significant portion of income coming from its investments in liquid funds. The cash value per share of these investments is valued at Rs 115 per share and provides significant cushion.

Better Capacity Utilization to enhance its operating margins
Currently ZF has installed capacity of 270,000 power steering gears & 180,000 mechanical steering gears. The capacity utilization in FY10 stood at 51% & 69% for power & mechanical steering gears respectively. With the volume growth expected at 24% & 15% for FY11 & FY12 respectively capacity utilization would improve leading to higher operating margins at 22.8% in FY12 from 20.4% witnessed in FY10, an increase of 240 bps.

To read the full report: ZF STEERING GEARS

>PRAKASH INDUSTRIES: Story remains unhampered

We hosted a conference call with Vipul Agarwal, Director of Finance, Prakash Industries (PKI). The management of PKI has categorically denied any indulgence in illegal activities as mentioned in the Times of India (9th September 2010 issue) with regard to selling coal in the open market from the Chotia mines. The management ascertained that the whole news article was published with malafide intent and entire allegations are baseless. The management also clarified that the Chotia
mine does not fall in the Hasdeo Arand “No Go” region hence, the company can continue mining coal from it as per the approved mining plan.

Mining from Chotia mine to continue undeterred

The management ascertained that mining from the Chotia mine will continue undeterred. It has also applied for two more coal blocks viz Madanpur and Fatehpur, which are under the approval stage. If the approval for these mines is delayed, PKI has the option to continue mining additional coal from Chotia subject to the approval of mining plan from the concerned ministry.

Future growth prospects remain intact
The expansion plans of the company in the sponge iron as well as merchant power are progressing on time. The company also has applied for two iron ore and coal mines each. The approval for these mines is at various stages and PKI expects to start the iron ore mining from Sirkaguttu mine (with reserves of ~10mn tonnes) by March 2011 as it has got the approval for the mining plan. It is waiting for the forest clearance. The said mine is under the jurisdiction of State government hence PKI expects to obtain clearances sooner than the Kawardah mine which is subject to the Central government’s approval. Besides, Sirkaguttu mine does not have forest cover as well and hence, can be operational within two months after getting the requisite approvals.

Continue to recommend BUY with a reduced target price of INR220 to account for iron ore mining delays.
We believe that the rationalization of steel operations and the foray into merchant power would fuel PKI’s profit margins in the coming years. The iron ore mining once it becomes operational will boost the profitability of the steel business. PKI management has guided for the start of Sirkaguttu iron ore mine from March 2011. To factor in delays in the iron ore mining, we have reduced our estimates for FY11 as well as FY12. Considering the growth prospects in the steel business, foray
into merchant power business and the cheap valuations the stock is trading at, we continue to maintain BUY recommendation on the stock. However, we reduce our target price to INR220 in line with reduction in our estimates.

To read the full report: PRAKASH INDUSTRIES

Wednesday, September 22, 2010

>CAREER POINT INFOSYSTEMS: IPO NOTE, Company Background, Business Model & Key Strengths (ADITYA BIRLA MONEY LIMITED)

Career Point Infosystems Ltd was incorporated as a public company on March 2000 by Pramod Maheswari, who has been in tutoring for competitive entrance exams since 1993 along with other promoters Mr. Om Prakash Maheswari and Mr. Nawal Kishore Maheswari. In FY02, the company started its operations via franchisee centres and from April 2006 onwards, it started to provide tutoring via company operated training centres as well.

CPIL is one of the leading tutorial service providers to high school and post high school students for various competitive entrance exams including All India Engineering Entrance Examination (AIEEE), Indian Institute of Technology – Joint Entrance Examination (IITJEE), All India Pre-Medical Test (AIPMT), Pre-Dental Test (PDT), etc., The company provides these services through four delivery platforms - company & franchisee operated centres, distance learning, synchro school programme and knowledge lab.

■ Under company operated centres, the course fees are based upon the selection of course, duration and geographical location of the centres. Basically, the company gets fees in lumpsum and/or on installments basis depending upon the course opted by the student. On an average, the company charges `31,000/ student/course.

■ In franchisee centres, the company enters into a 3-4 years agreement with franchisees and the company receives upfront fee and subsequently a certain percentage of the gross fees earned from the enrollment of students. Going forward, the franchisee centres are expected to come down as the company is likely to concentrate more on its own centres. As of 31st July, it has presence through 33 training centres, of which, 17 are company owned and the rest 16 are franchisees centres, spread across 13 states. Recently, CPIL forayed into formal education space through Education Consultancy and Management Services (ECAMS) segment. Through this entry, the company will serve K- 12 and higher education segment for private & government schools, colleges and universities. Under this ECAMS, the company will provide necessary management services which includes, laying strategic plans, HR management services, administrative services, advisory services and IT related services.

Key Strengths
Qualified and Experienced faculty team – Currently, the company has a team of 231 faculty members, in which, most of them are graduates from Indian Institute of Technology (IIT), National Institute of Technology (NIT) and other colleges in India. So the faculty members are well equipped with subject knowledge to guide and tutor students. Apart from this, the company has an ongoing in-house faculty training facility, where they undergo training on coaching skills & methodologies and subject matter up gradation in relevant courses

Brand power and geographical presence – CPIL enjoys the strong brand recognition as the established tutorial player in competitive exams space for engineering and medical stream. Presently, it has presence in 13 states (including franchisee centres) which provides access to major markets in northern and eastern India. Its Kota centre attracts students even from overseas countries like Singapore and Middle East, which reflects the brand image.

To read the full report: CAREER POINT INFOSYSTEMS

>MOTOGAZE: What seasonality? Demand grows unabated…

No signs of demand slowdown
The Indian automotive industry is witnessing a trend of volume growth, which has been defying all seasonality trends of the past. This is reflecting the structural change in consumer patterns driven by the strong economic performance adding strength to the income levels of the urban as well as rural customers. The volume growth of the industry till date has been around 26% with the passenger car segment growing ~34% and commercial vehicle (CV) segment growing at ~45% leading the way. The robust growth across the segment has led to demand surpassing supply in all major segments with suppliers facing acute capacity shortages. The surprising and heartening trend can be ascertained from the fact that despite the OEMs having raised prices in response to higher commodity prices and newer emission norms, demand growth has not been deterred.

Supply side shortages limit growth ceiling
Auto OEMs have seen a loss of probable sales due to supply related
slippages in castings, bearing, fuel injection pumps, etc. Ancillary
manufacturers have undertaken the process of capacity expansion, which
would come on stream by the second half of next fiscal. Pre-festive
purchases have been high in anticipation of a demand outburst in the
coming months, which would lead to further shortages of supply. The
OEMs have tried to increase dealer inventory to face these issues though
this has not been very fruitful due to continuous demand.

Raw material prices easing
Rubber prices have seen a decline from their earlier higher levels beyond
` 85/kg to ` 165/kg since the festive season of Onam in Kerala that saw
increased supply of natural rubber reducing the price arbitrage between
domestic prices and international prices (Bangkok prices). The tyre
industry would get some respite. This is due to the change in the existing
inverted duty structure in which the finished tyre attracts half the duty at
~10% in comparison to natural rubber, which is a raw material. This
would further help in maintaining price balances between domestic and
international markets. Aluminium prices, on the other hand, have seen a
hardening of ~6.5% since Q1FY11, thereby providing another possible
cause for concern in the coming quarters for OEMs.

Industry outlook
The consistent performance till now has raised expectations regarding
volume growth possibilities during the coming months of the festive
season, which is expected to be the strongest for the industry. The
industry is expected to grow at a CAGR of 13-15% in FY10-12E aided by
boisterous economic activity, favourable demographics and higher
income levels. The major concerns would be raw material prices, capacity
constraints and any untoward interest rate movement that could lead to a
reduction in profitability in spite of such volume growth. With the industry
lining up new capacities and anticipating future growth possibilities to
meet the stronger demand scenario of the domestic market, the outlook
continues to remain bright.

To read the full report: MOTOGAZE

>TELECOM SECTOR: Revival in GSM subscriber addition…

Subscriber growth continued unabated in the telecom industry. The industry added 13.5 million GSM subscribers in August 2010 –highest since April 2010. Though net adds declined in metros, it was more than compensated in all other circles. Highest traction was seen in C Circles, which added 2.0 million subscribers against just 0.9 million in July 2010. Metros recorded MoM growth of 2.3% while A and B circles grew by 3.1% each and C circles by 3.2%. BSNL and Uninor put up an impressive show. Uninor had highest ever net adds at 2.2 million subscribers while BSNL added 2.3 million subscribers. Subscriber addition for Bharti Airtel was down at 2.0 million subscribers – lowest in several quarters. Idea, Vodafone and Aircel maintained their monthly run rate in subscriber addition at 2.0 million, 2.3 million and 1.6 million, respectively.

Airtel – Decline in net adds
Bharti added 2.0 million subscribers as compared to the past seven month’s average of 2.9 million. Net adds for Bharti declined for the second straight month. Share in net adds also fell to 15.0% from 22.6% last month. Total subscriber base for Bharti Airtel stands at 141.3 million, with a market share of 30.4% among GSM players.

Uninor – Impressive show
Uninor posted its highest ever net adds at 2.2 million subscribers with strong addition coming from Tamil Nadu, Andhra Pradesh, UP (E), UP (W) and Bihar. Share in net adds for August stood at 16.4%.

BSNL – Reviving growth
BSNL added 2.3 million subscribers in August 2010. This is very impressive looking at its past four month average of 1.1 million subscribers. The company recorded robust net adds in Haryana,
Rajasthan and Orissa.

New launches
Amid the intense competition, the industry witnessed several new launches by various operators in this month. Videocon launched services in Himachal Pradesh, Andhra Pradesh, Karnataka, Maharashtra, Rajasthan, Bihar, Orissa and West Bengal. The subscriber base for Videocon stands at 3.7 million, up from 2.8 million in July. Aircel launched services in Gujarat, Punjab and Haryana with an impressive net addition of 96,248 subscribers in Punjab. Aircel added 1.6 million subscribers in line with its monthly run rate. Even Loop Mobile launched services in Haryana, Kolkata, Madhya Pradesh, Orissa, Punjab and Rajasthan, while STel ventured into the North East. The subscriber base for Loop Mobile stood at 3.0 million while STel increased to 1.5 million.

T0 read the full report: TELECOM SECTOR

>BANKING SECTOR: Basel III – been there; done that

■ Basel Committee on Banking Supervision (BCBS) announces Basel III capital requirements.

■ The new framework requires 50-200% higher tier I capital than that required under basel II

■ Indian banks would not require much capital for transition to Basel III norms as they comply with most of the norms even as of now
■ However, a faster credit growth would mean that Indian banks may be required to keep significantly higher tier I capital if the RBI wishes so

Basel III norms require 50-200% higher capital than Basel II
The Group of Governors and Heads of Supervision, the oversight body of BCBS announced Basel III capital norms on September 12, 2010. Under Basel III, the tier I capital requirement would go up by 50-200% over period of next nine years for banks globally. The full-fledged implementation of the norms will start from 2015 and will go on till 2019.

The tier I capital would be sum-total of common tier I capital, capital conservation buffer and counter cyclical buffer (optional).

To read the full report: BANKING SECTOR

Tuesday, September 21, 2010


■ Cement manufacturers in southern region intimate price hike of Rs30-35/bag effective Sept 7– Prices in other regions largely stable

■ Dealers confirm price hike - but skeptical about absorption capacity of market given sluggish offtake and ample supply – Dealers suggest net price could be Rs10-15/bag

■ Assuming best case effective price hike of Rs15/bag for south, H2FY11 entry prices could be higher than our est by Rs10/bag. Earnings of our coverage cos could get upgraded by 4-36%

■ Maintain current earnings estimates pending uncertainty of effective price hike. Maintain NEUTRAL view on sector – pricing discipline and its sustainability remain key factors

Cement manufacturers in southern intimate price hike of Rs30-35/bag
Cement stock surged 5-15% in yesterday’s trade following news flow of price hike in Southern region. In a knee jerk reaction, cement manufacturers in south have intimated dealers that cement prices will be raised in key markets of Hyderabad and Chennai by Rs30-35/bag effective – 7th September 2010. Cement prices in Hyderabad which were hovering at around Rs138-140/bag, will go up to Rs178-180/bag, an increase of Rs30/bag. Similarly cement prices in Chennai market which were at Rs175-180/bag will be raised to Rs215-220/bag. We would like to highlight that cement price in southern region had fallen close to Rs60/bag from the recent peaks in April 2010. For example cement prices in Hyderabad fell from Rs200-210/bag in April to Rs140-150/bag in August. This sharp decline resulted in smaller cement manufacturers making cash losses.

Dealers wary about markets absorption capacity of the markets
Cement dealers have been surprised by the extent of price hike (Rs35/bag is amongst highest ever single price increase) and also the timing of hike (Dealers were expecting a seasonal price hike by early October). Though the prices have been hiked by Rs35/bag, dealers say that on account of a nation wide strike today (7th Sept - nationwide strike called by trade unions to protest against price rise, violation of Labour laws etc ) the dispatches on new prices will start only in next couple of days. Dealers also opine that given the sluggish cement offtake and ample supply, the markets are unlikely to absorb such a sharp price hike. For example, recently cement prices in Mumbai market were hiked by Rs8-10/bag. However with poor cement offtake cement manufacturers had to roll back price by Rs4-5/bag, resulting in net price hike of Rs4-5/bag. Dealers suggest that over a period of next couple of week, the effective price hike could be in the range of Rs10-15/bag. We believe that it will be only by 2nd-3rd week of September that we will see the absorption capacity of the southern markets.

To read the full report: CEMENT SECTOR