Wednesday, March 31, 2010

>The Sustainability of China’s Recovery from the Global Recession

China’s policy response to the global financial and economic crisis was early, large, and well-designed. Although Chinese financial institutions had little exposure to the toxic financial assets that brought down many large Western investment banks and other financial firms, China’s leadership recognized that its dependence on exports meant that it was acutely vulnerable to a global recession. Thus they did not subscribe to the view sometimes described as “decoupling,” the idea that Asian countries could passively weather the financial storm that originated in the United States and other advanced industrial economies. They understood that absent a vigorous policy response China inevitably would suffer from the backwash of a sharp economic slowdown in its largest export markets—the United States and Europe.

While it is now widely understood that China was the first globally significant economy to begin to recover from the crisis, critics nonetheless increasingly charge that the stimulus program has substantial flaws and that China’s early economic recovery cannot be sustained. One prominent critic has gone so far as to suggest that the stimulus has created a debt-fueled bubble that will collapse, causing China’s growth to plunge to only 2 percent.1 But the analysis below suggests these criticisms are exaggerated.

China and the Crisis
In the fall of 2007, just before the global crisis, the Chinese authorities tightened monetary policy and took steps to curtail an incipient property bubble. But when the global crisis intensified in the fall of 2008 the authorities reversed economic course by launching a policy of monetary easing in order to offset the additional drag on China’s growth caused by the sharp slowdown in global trade. First, they cancelled the lending quotas that had previously restricted the ability of
banks to fully meet the demand for loans from their customers. Second, to ensure that a sufficient supply of funds would be available to meet this demand, the government repeatedly
reduced the share of deposits that banks had to place with the central bank. Banks were not necessarily forced to expand their lending in 2009, as has often been asserted. It was in their economic self-interest to do so since the interest rate that they could charge on loans was several times what they earned either on funds they were required to place with the central bank or on funds lent in the interbank market.3 Thus, the government’s first step in monetary easing was to increase the supply of loanable funds.

Shortcomings of the Stimulus?
China’s growth in 2009 was impressive compared with the absolute downturns in economic output in the United States, Europe, Japan, and many other developed economies and was the fastest growth of any emerging market. But 2009 was the second consecutive year of slowing Chinese growth and 8.7 percent was the slowest pace of expansion recorded since 2001. Moreover, critics, both in China and abroad, argue that growth recovery in 2009 was unsustainable since it relied on a burst of investment financed largely by an unprecedented increase in bank lending.11 According to the critics, the massive stimulus program would have several adverse consequences.

First, in the short run it created bubbles in the property and equity markets as funds lent for investment leaked into these markets. Second, in the medium term the massive investment program financed with the expanded supply of credit would inevitably lead to excess industrial capacity and thus, with a slight lag, would put downward pressure on prices and firm profits.12 That, in turn, would impair the ability of firms to amortize their bank debt and thus likely lead to a large increase in nonperforming loans. Potentially this would require the state to recapitalize the banks once again, with adverse consequences for the government’s fiscal position.

Third, the critics argue that the stimulus undermines China’s strong fiscal position. China’s budget deficit barely topped 2 percent in 2009, a small fraction of the deficits recorded in the United States and some other advanced industrial countries. This meant China’s outstanding government debt remained stable at only 20 percent of GDP, again a small fraction of most high-income economies. But, the critics charge, this obscures a massive increase in hidden government debt.

Finally, the critics charge that the stimulus program exacerbated China’s structural imbalances and set back the effort to transition to growth that would rely more on the expansion of private consumption expenditure rather than the growth of investment and exports.

Excessive Lending and a Property Bubble?
The charge of excessive lending growth, for example, fails to take into account that the authorities initiated steps to slow lending growth as early as mid-2009. Increased window guidance and other initiatives slowed lending dramatically in the second half of the year. Although lending spiked upward in January 2010, the China Banking Regulatory Commission (CBRC) announced that month that it would take tougher measures to moderate the pace of lending over the balance of 2010. It reinstated mandatory lending quotas on individual banks and imposed tougher regulations to prevent banks from disbursing most of their lending quota in the first quarter or two of the year.14 It also raised the required reserve ratio by 50 basis points in both January and February, cutting banks’ excess reserves and further signaling the transition away from the “moderately loose monetary policy” of 2009 to the “moderately loose monetary policy implemented flexibly” policy of 2010.

Second, the CBRC has taken other steps to curtail the expansion of bank credit. In October 2009, in what he described as a “historic decision,” Chairman Liu Mingkang ruled that banks would no longer be able to count subordinateddebt and hybrid capital as part of their tier-two capital.

Contrary to repeated criticisms,
this stimulus had a substantial
consumption component and focused
on investment in infrastructure
rather than expanding capacity in
traditional industries such as steel.

Creation of Excess Capacity?
What about the assertion that the investment boom in 2009 created excess capacity that will lead to downward pressure on prices and thus on firm profits, perhaps leading to defaults on the loans that financed the capacity expansion? This argument too seems not well founded. In a high-growth, high investment economy, such as China’s, some product sectors inevitably have at least temporary excess capacity. The issue, however, is whether this excess capacity is so widespread and enduring that it could contribute to deflation, putting downward pressure on the profits of a large number of firms across many sectors. Such a situation would not only impair the ability of individual firms to repay their loans but also potentially lead to large-scale losses in the banking system.

To read the full report: CHINA'S RECOVERY


With strong demand and capacity utilisation of over 90%, Exide has increased its capex plans and expects to grow sales volume at a cagr of 17-18%. While after market demand in autos is strong, telecom replacement demand is likely to kick in from 2HFY11. Exposure to lead prices has steadily declined as 40% of requirement is now being sourced from in-house recycling smelters. Given the strong volume growth we are upgrading our forecasts by 19-23% over FY10-12. With lead prices moving up and strong demand in the OE segment limiting supplies to the after market, we believe that Exide’s margins in the next few quarters will decline to 20-22% as against the 24% achieved in the first nine-months of FY10. While we continue to like Exide’s long term potential and steady growth story, valuations are no longer compelling.

■ Demand growth remains strong
Exide believes that going forward replacement market in autos and telcos will drive demand and is targeting a 17-18% cagr volume growth. Exide also believes that unorganized players share will drop to 25% in 5-6 years from 42% presently as vehicle qualities improve and customers gravitate more towards well known reliable brands. With its facilities operating at 90%+ capacity utilization, Exide intends to spend Rs1.75-Rs2.0bn on capex per annum over FY10-12. Any greenfield venture will likely result in additional capex. On submarine batteries, the company has orders till March-11.

■ Customer reach being increased; in-house lead sourcing
Exide has a reach into 38,500 retailers through 12,500 dealers and 202 area offices in different cities and towns. By Mar-12, Exide expects to have a presence in over 400 cities. While improving customer reach, the network is also helping Exide to source more used batteries for its recycling smelter, which help the company to meet 41% of its total lead requirements. Recycling smelters will meet 70% of Exide’s lead requirements by March-12 at an investment of Rs1bn.

■ Investments, capital raising and valuations
Exide has 50% stake in ING Life Insurance and expects to invest about Rs1.25-1.5bn per annum in the venture. While ING Life is a marginal player at the national level, according to Exide, ING Life is among the top 4/ 5 players in south and western regions. Exide estimates that renewal premium/ new premium should be 2.5x for the business to break even and they are at 1.5x now. Operating expenses to premium and AUM have come down significantly in the last 3 years (66% to 40% and 28% to 18%), giving a sense that things are moving in the right direction. To meet its capex and investment requirements, Exide recently raised Rs5bn through QIP; however, Exide’s cash accruals are sufficient to meet its funds requirement. The stock is trading at 17.7xFY11 and we believe that while the long term story is very strong, valuations are no longer compelling.

To read the full report: EXIDE INDUSTRIES


Recycling waste into wealth
We spoke to the CFO Mr Gopal Agarwal of Ganesh Polytex Ltd (GPL) for an outlook on the Business and Strategy of the company. Following are the key takeaways from the meet.

Investment Highlights
Commissioning of new RPSF facility
GPL is set to become the largest player in RPSF in the country with the commissioning of its 18,000 TPA plant by the end of this month at its Rudrapur facility at an estimated cost of INR 250 mn. This will take the total RPSF capacity of GPL to 57,600 TPA beyond the current market leader Reliance Industries’ capacity of 42,000 TPA. The commissioning of this facility is expected to improve the operating margins by around 250 basis points making.

Expansion plan to drive growth
The company’s ambitious growth targets include enhancing the recycling capacity to over 100,000 TPA in stages over the next 3-4 years, building up of yarn spinning capacity to integrate its operations forward, foraying into manufacturing of downstream products and entering into horizontal integration through producing more value added products like Partially Oriented Yarn (POY), packaging sheets, etc. from pet bottle waste.

These growth plans would help the topline and bottomline to grow at a healthy CAGR of 35-40% over the next few years.

Valuation & Outlook
At the CMP of INR 42, the stock trades at 4.8x its FY11e EPS of INR 8.8 (on weighted average capital). The company’s FY10e sales are 5x the current market capitalisation and the price to cash EPS is 3.1x. The stock looks attractive considering the expansion in capacity and the growth of the user industry. We applied a multiple of 4x on FY12e EPS to arrive at our target price of INR 64. We feel investors can buy the stock at current levels for a good upside within a year.

To read the full report: GANESH POLYTEX LIMITED


Adani Power is setting up 6,600MW power capacity which will make it one of the largest private sector players by FY13. It has 70% power tied up in Case 1 bids and the balance 30% will be sold on merchant basis. Additional merchant sales before the start of long term PPAs are contingent to timely commissioning of the projects. The fuel supply for its projects is a mix of Indonesian coal (sourced from AEL at US$36/t cif) and coal linkages from Coal India. The Budget proposal of imposing a duty on power imported from SEZs (has 70% capacity in Mundra SEZ) to DTA is a risk. Initiate with a U-PF and TP of Rs111/sh.

■ Strong capacity addition over next three years
Adani Power has 6,600MW capacity under development which is targeted to be full commissioned by FY13. This will make Adani one of the largest private sector players in power generation. 70% of this capacity is located in Mundra SEZ (Gujarat) while the balance 30% is in Tiroda, Maharashtra. The company has plans to add more capacity in Gujarat at Dahej (1,980MW) and in Rajasthan at Kawai (1,320MW) and expand its Tiroda project to 3,300MW.

■ High exposure to merchant power in initial years
~30% of its capacity is untied in any long term PPA which the company intends to sell on a merchant basis. Apart from that, the company has window to sell more power on a short term basis where its projects gets commissioned before the start of the PPA date. Thus the timely commissioning of its capacities is absolutely necessary to take advantage of this window when the merchant tariffs are also likely to be relatively higher.

■ Fuel supply to be a mix of Indonesian and linkage coal
The fuel supply for its projects is a mix of Indonesian coal (sourced from Adani Enterprises at US$36/t cif Mundra) and coal linkage from Coal India. The coal block allocation (Lohara) for part of its requirements for Tiroda project has been cancelled by the MoEF and the company has recently got a linkage (tapering) in lieu of that. We have assumed a coal linkage for the full requirements of Tiroda project in our numbers.

■ Project execution/merchant tariff – key to stock performance
Our DCF based target price for Adani Power is Rs111/sh. We believe the capacity ramp up/ risks associated with the coal supplies (mainly the pricing) from Indonesia/ merchant tariffs are going to be the key for the stock performance. We have given the company benefit of doubt regarding the budget proposal of imposing a duty on power imported from SEZs to DTA (domestic tariff area) however we have assumed a MAT rate for taxation for the company (similar to other mega power projects) even though the company’s assessment is that it will have zero tax liability for the initial 10 years under the SEZ Act. Initiate with an Underperform.

To read the full report: ADANI POWER


After witnessing low spot prices over the past four months, rates have bounced back in March'10. Spot rates touched a high of Rs 7.9/unit in March, indicating strong demand. Average rates for March '10, Rs 5.8/unit, were 67% higher over Q3 FY10. With the country entering the summer season and an improvement in the economic environment, we believe demand for power will remain high. The demand-supply gap is expected to remain high as the country witnesses slow capacity addition during the eleventh plan. Hence, we believe spot rates will continue to remain firm.

Lower capacity addition will keep deficit high
Spot prices regaining firmness
Expect average merchant rates to hover around Rs 5.5-6/unit.

To read the full report: UTILITIES SECTOR

Tuesday, March 30, 2010

>China Collapse: Are the Bears Out to Lunch?

China has weathered the global financial crisis extremely well. Exports rose 45.7% in February
from a year ago and GDP growth near 10% through 2010 is likely (Charts 1 & 2). In contrast to most developed nations, the Chinese financial system has shown few signs of strain during the downturn. Non‐performing loans (NPLs) are at record low levels and capital ratios at publicly listed banks have been beefed up with rights offerings of around 250 billion yuan over the last few months. Despite these signs of strength, there is a rising chorus of sceptics who argue that the recovery is hollow and that the miraculous growth rates China has achieved over the last 15 years will soon be over.

Of course, these arguments have been made many times during China’s transformation. At its
most basic level, the bear argument is derived from the fact that China has had what is probably the biggest, longest economic boom in history. The logic applied is that the bigger the boom, the bigger the bust. Here are the key arguments supporting the bear case:

Imbalances between China and its debtors have grown relentlessly, which will eventually crack the undervalued rmb and force a limit to U.S. indebtedness.

Excessive dependence on exports combined with a failure to adequately develop domestic consumption leaves China vulnerable to external shocks.

Overinvestment has led to significant overcapacity; corporate profits are threatened and the banking sector is vulnerable to a sharp increase in non‐performing loans, particularly after the credit boom and government stimulus in 2009.

Excess liquidity and volatile capital inflows are leading to frothy asset markets particularly in stocks and real estate.

Inflation is on the rise and the risk of monetary tightening is growing.

Finally, shady accounting and political interference undermines confidence in official statistics and is probably hiding some nasty surprises.

The bear story has a lot of adherents and it is based on assumptions that all the above points
have some validity. A reckoning may well come to pass at some future point but it won’t be soon. Over the time horizon of most investors, it has a low enough probability of occurrence that people should not pay much attention to it. Here’s why.

China’s U.S. $2.2 trillion build‐up of reserves and the flipside—American overindulgence and
excessive debt accumulation—are both clearly unsustainable, yet there are few signs of strain between China and its debtors besides political noise. Despite the financial crisis and the dramatic slowdown in trade between the U.S. and China, the currency peg is intact and the dollar continues to defy its sceptics. China’s stimulus has been successful in bridging the export slowdown with little damage to public.

To read the full report: CHINA COLLAPSE

>SYSTEMATIC INVESTMENT PLAN: A disciplined investment approach

A systematic investment plan (SIP) is a disciplined way of investing your funds. It works on the principle of regular investing. SIPs allow you to invest a prefixed amount for a prefixed interval in a mutual fund scheme of your choice. On the defined date, the amount indicated by you will be
automatically debited from your bank account and invested in the scheme selected by you. Hence, after you have set an SIP you are not required to track the investment dates

Benefit of SIP
• Avoid timing the market: By investing a small amount regularly into the schemes you can avoid the common error of investing larger sums in bull markets (when the markets are at a high) and smaller sums in bear markets (when the markets are at a low)

• Rupee cost averaging: An SIP allows you to invest a pre-specified amount in a scheme at periodic intervals (e.g. one month, three months, etc). Therefore, whenever the market moves down and the net asset value (NAV) of the scheme is lower, you end up buying more units of the scheme. If the market moves up, the NAV of the scheme rises and you will get less units of the
scheme. Hence, the average cost of purchase works out lesser

• Not just savings but investing too: Usually we tend to save some amount but fail to invest the same. An SIP not only imparts savings it invests your capital and frees you from answering the
question of where to invest each time you save

Why SIP in equity funds?
Investments into equities over a longer period have always delivered higher returns. By doing an SIP in an equity fund, you have an opportunity to increase the growth rate of the accumulated capital. A 10-year SIP in an equity fund after accounting for the fluctuations in the market can earn capital appreciation far better than any other investment option available
for retail investors.

To read the full report: SIP

>Contract Research and Manufacturing Services (CRAMS) companies

The Indian Contract Research and Manufacturing Services (CRAMS) companies are on the threshold of a significant opportunity given the expected increase in pace of outsourcing
from India.

Inventory de-stocking coming to an end: We expect the adverse impact of global inventory de-stocking (undertaken by customers) to correct gradually from FY11 onwards as the underlying demand for pharmaceutical products has remained intact despite the global slowdown. Most of the Indian CRAMS players have recently indicated that there will be increased trend towards outsourcing in FY11.

Macro environment favourable for increased outsourcing: We expect a significant traction in the global outsourcing business given the low R&D productivity and intense pressure on the global innovators to generate growth. A large portion of this outsourcing business is likely to be sourced from Asia (mainly India and China).

Entry barriers are high: Given the significant entry barriers in this business, we expect existing players to get a disproportionate share of the business.

India is on the threshold of a big opportunity: India's market share in the global contract manufacturing business is likely to more than double to 7% in 2007-2012 while supply revenues will grow from US$800m to US$3b, giving rise to a significant opportunity for well-established CRAMS players.

Demonstrated skills for CRAMS: We believe that some of the Indian companies have demonstrated strong chemistry and regulatory skills coupled with IPR compliance and low manufacturing costs — the prerequisites for building a successful CRAMS business.

Recommendations: We reiterate our Buy rating on Divi's Labs (17% upside), Piramal Healthcare (19% upside). Consolidation of customer base and delayed paybacks from acquired companies, which were funded through leverage, are the key risks to our positive stance.

To read the full report: CRAMS


OW(V): Diversification through MSK Projects acquisition

■ Welspun’s offer of cINR8bn to acquire MSK Projects implies FY11e EV/EBITDA of 6.2x, which we find reasonable; deal will be EPS accretive, we believe

■ Possible synergies – diversification into infrastructure sector for Welspun while Welspun’s balance sheet will provide support for MSK to bid for large-size projects

■ Maintain OW (V) with target price of INR335; new order flow will be likely trigger

MSK Projects acquisition at a reasonable valuation. Welspun Gujarat, India’s leading pipe manufacturing company has announced the acquisition of MSK Projects (MSKP IN, not rated) – a construction company – for a consideration of INR8bn (75% stake). This implies FY11e EV/EBITDA of 6.2x, an 18% discount to peers, which we believe is reasonable given the lower RoE generated by MSK (14% for FY11e) compared with peers (17%). Note that the acquisition is subject to all necessary approvals.

Deal is EPS accretive. We believe that the deal could be funded through the internal accruals of Welspun Gujarat. Thus, MSK could increase FY11e Welspun’s EPS by 7%.

Possible synergies. We believe synergies from this acquisition may include (1) diversification into the infrastructure sector, enhancing Welspun’s ability to provide its customers with end-to-end solutions to plate-pipe-pipeline laying; and (2) MSK Projects through Welpsun’s balance sheet support likely to bid for large infrastructure projects specifically into the road sector. MSK’s current order book of INR5bn constitutes 40% road projects.

New pipe orders of INR10bn likely to be announced. Bloomberg reports that Welpsun is likely to receive pipe orders of INR10bn. This will increase order book by 14% to INR82bn (revenue visibility of five to six quarters).

Maintain Overweight (V) with target price of INR335. We are positive on the stock, as the company has a strong order book – the largest among peers – and a sound customer base with committed capex plans; and given the rise in crude prices, which has improved the new order book outlook. Based our target PE of 13.5x and September 2011e earnings, we arrive at target price of INR335.

To read the full report: WELSPUN GUJARAT

Monday, March 29, 2010

>THE ASIA INVESTIGATOR: Cash...Flows and Flows

Asia ex-Japan: From Negative to Positive Free Cash Flow — Asia post 1998 is very different from the preceding period. Over-investment has given way to more sensible investment ratios, and FCF has turned positive from negative. Cash flow has been used to either repay debt (from a peak of 82% to the current 27%) or raise payout ratios – a double benefit for investors.

Australia: Cash at a Price — The Australian equity environment is overweight cash in at least 3 senses: 1) Corporates are undergeared vs. regulatory requirements and in-house targets; 2) Pension funds are still somewhat overweight cash; and 3) Dividend yields are high relative to cash rates and global comps. We see each of these as constituting a persistent tailwind for Australian equities.

Hong Kong: Repaying the Faith — With the recovery in the real economy, free cash flow generation in Hong Kong has bounced back. Page 22

India: FCF: The Big Turn? — India’s FY10 FCF yield is estimated at only 0.7%. Nearly 45% of the largest companies generate negative FCF, and 4 of 10 sectors are FCF-negative. This at first glance may not look good, but one can’t have it both ways. You can’t ask for growth and investment boom and at the same time expect the rapidly growing corporate sector to generate meaningful FCF. Page 27

■ Indonesia: Generating Cash for Growth — Indonesia’s market attractiveness is based on its better growth prospects, which have to be supported by ability and willingness to spend for growth. Page 35

■ Korea: Cash flow generators — In terms of CF yield analysis, memory, auto, telco, and overseas-exposed construction stocks stand out. Page 40

Malaysia: Tanjong Generates, Genting Retains — Malaysia's FCF yield screen features Tanjong, KLCC Property, Star Publications, Axiata and Genting Malaysia at the top quintile. Page 42

Singapore: Top Cash Flow Generators: Telcos, Media, Offshore Marine — Net cash over assets for STI companies improved to -5% in 09 from -18% in 01 on steady earnings, conservative capital management and higher equity issuance. Page 44

Taiwan: Cash Pile-up — We forecast FCF yield to surge from 4.2% in 10E to 7.7% in 11E. This surge is premised on our assumption that capex will peak in 10E and revenues will grow 14% in 11E. Page 48

Thailand: Strong Growth Momentum Supports Rising Earnings & FCF

To read the full report: ASIA INVESTIGATOR


In a global outperformance phase…

The Indian graphite sector is currently going through a phase of global outperformance in a technology intensive industry on the back of cost competitiveness and sound operations of domestic graphite producers. Graphite demand has started improving globally. An improvement in steel production and robust product prices have led to a fine performance by Indian graphite players in 9MFY10 leaving global peers far behind. Capacity expansion is underway and low cost operations are ensuring better margins as compared to global peers. Hence, we expect Indian graphite companies to continue their outperformance over international players and increase their share in the global graphite market from ~13% in 2009 to ~18% in 2012E. We are initiating coverage on the graphite sector with a STRONG BUY rating on HEG Ltd and an ADD rating on Graphite India Ltd (GIL).

■ Bounce back in steel production to propel graphite electrode demand
Steel demand suffered a sharp drop from Q4CY08 and through much of 2009. This was on account of the global financial crisis that led to a severe drop in EAF steel production and the resultant graphite electrode demand. With the recovery in steel production growth firmly in place, we expect graphite demand to increase by ~17% YoY in 2010 on the back of steel
production scaling back to pre-crisis levels.

■ Ongoing capacity expansion ensures economies of scale
Indian graphite manufacturers enjoy competitive operating advantages with low manpower costs, captive power feeds and strategic location benefits. Brownfield capacity expansion (ranging from 13% to 21%) at existing locations being carried out by both Indian graphite producers
would lead to further cost savings with economies of scale.

■ Low cost structure ensures highest capacity utilisation, margins globally
Indian graphite producers have operated at higher capacity utilisation rates (45-75%) as compared to global peers (35-55%) even during recessionary periods (CY09) due to their low cost structure. Production cuts in response to a drop in demand have been more pronounced for high cost producers in the developed world. Domestic players have weathered the storm better. With the low cost structure being further improved upon, domestic players are expected to enjoy better margins (higher by 500-1000 bps) as compared to global peers, going forward.

Outlook and recommendation
Indian graphite players have remained at the forefront of the recovery in graphite electrode demand globally. Apart from operating at higher capacity utilisation levels and achieving better profit margins as compared to global peers in the last few quarters, they have also announced capacity expansion plans recently. Despite possessing strong business models, the current valuations of domestic players are at a steep discount to global peers and leave room for upside. We are initiating coverage on the graphite sector with a positive view. HEG Ltd is our top pick in the space on account of its single location advantage, higher margins and value accretive investment in Bhilwara Energy Ltd.

To read the full report: GRAPHITE SECTOR


Preface: In 2007, we launched our landmark India NTD (Next Trillion Dollar) report. This report brought out a simple, yet profound, fact: it took India 60 years since independence to generate the first trillion dollar of GDP. Its next trillion dollar (NTD) would take only 5- 6 years, based on 12-15% nominal GDP growth.

This NTD era spells exponential growth for several businesses which, in turn, throws up several investment themes and opportunities. Since our first NTD report, we have captured such ideas in an "NTD Thematic" series. We already see the NTD opportunity playing out in Gas and in Consumer non-durables.

We now release a TRILOGY of reports - Cement, Construction and Engineering - all of which are offer a play on the India NTD theme.

We have lined up many more NTD Thematics in 2010. Stay tuned!

Indian Construction: Work-in-Progress

We believe India's Infrastructure is a 'work-in-progress', and offers significant opportunities for construction. We are bullish on the medium-term prospects of the Indian construction sector driven by: (i) improving order intake, (ii) stable margins, and (iii) value unlocking opportunities. Adjusted for BOT/Real Estate projects, sector P/E stands at an attractive 13x FY11E earnings. Our top picks are NCC and Simplex. We upgrade HCC to Buy and downgrade IVRCL to Neutral.

Improving order intake visibility to revive deteriorated book-to-bill ratio: The TTM book-to-bill (BTB) for our construction coverage universe has declined from 3.9x in FY05 to 2.6x currently. This moderation has impacted near-term revenue visibility and has been caused mainly by delays in order intake due to weak government finances and a challenging credit environment. We believe the macro environment is showing initial signs of improvement; orders from sectors such as roads, power and urban infrastructure are picking up. As L1 projects get converted into orders, we expect end-FY10 BTB of 3.2x against 2.6x currently. NCC and Simplex have diversified vertical, client and geographic mix and are better positioned.

Healthier BTB could boost FY12 execution: Our estimates suggest revenue growth of 19.8% in FY11 and 21.8% in FY12 compared with 9.2% in FY10. While growth rates are improving, they are still lower than the 37% CAGR over FY05-09. Revival in order intake and a healthier BTB could boost execution in FY12 and narrow the growth gap.

EBITDA margins to be stable: During FY10, most construction companies reported improved EBITDA margins despite poor execution, leading to low fixed cost absorption. Margin expansion is being driven by lower commodity prices, project mix change and other company-specific factors. During FY11 and FY12, we expect margins to be largely stable. Bunching up of order intake in the interim period could lead to higher mobilization expenses, resulting in possible near-term margin disappointment.

BOT/Real estate projects provide unlocking opportunities: Investments and advances in BOT/Real Estate (RE) projects for our construction universe have increased from Rs6.6b in FY06 to Rs28.2b in FY09, and are expected to be Rs37.3b in FY10. Of the Rs37.3b investments and advances, BOT projects account for Rs18.6b, RE for Rs15b and others for Rs3.3b.

To read the full report: CONSTRUCTION SECTOR

>Glenmark Pharmaceuticals Limited (NIRMAL BANG)

Snapshot: Glenmark Pharmaceuticals Limited (GPL) is a Mumbai based research-driven, fully integrated pharmaceutical company. It has a global presence with focus on branded generics across emerging markets including India. It has twelve manufacturing facilities in four countries and has five R&D centers.

Investment Rationale
Strong growth in international markets: The Company has strong presence in both regulated as well semi-regulated markets with around 70% of revenues coming from exports.

■ Increasing footprint in domestic markets: The Company follows the strategy of targeting niche areas as a growth strategy to penetrate in domestic markets which enables the company in maintaining margins. It is a leader in dermatology segment in domestic region and continues to be focused in the segment.

Strong research capabilities: It has a strong pipeline of 6 New Chemical Entities (NCEs) and 2 New Biologics Entities (NBEs) in various stages of preclinical and clinical trials and has earned revenues of US$115mn till now from R&D activities, highest ever earned by any Indian company.

Listing of Generics business: GPL has re-organized its generics business into a separate subsidiary called Glenmark Generics Limited (GGL), which contributes around 44% of group’s revenues. It has filed RHP and awaiting SEBI’s approval for its IPO.

■ Increasing profitability via restructuring Balance sheet: Company has taken various steps like reducing debtor’s day and debt on the books to improve the liquidity.

Valuation Recommendation
We believe the revenues of the company will grow at a CAGR of 17.2% over a period of two years from 2010 to 2012E whereas net profit will grow at a higher CAGR of 30.7% during the same period, on account of balance sheet restructuring exercises, cost containment program and management of working capital cycle. We expect the company to earn an EPS of Rs. 17.4 in FY11E and Rs.21.1 in FY12E. At the CMP of Rs. 252 per share, GPL is currently trading at a PE of 14.5x FY11E and 11.9x FY12E EPS estimates, which looks quite attractive when compared to its peers. At Rs. 252 per share the stock is trading at a discount of 24% from our intrinsic price of Rs. 314 per share which is 18x FY11E earnings. With growth triggers like first-to-file opportunities, listing of its subsidiary (not factored in our financials), out-licensing deal for its NCE (not factored in our projections) the stock looks undervalued. We recommend a BUY rating on the stock with a price target of Rs 314 with a long term view.

To read the full report: GLENMARK PHARMACEUTICALS


Cloud-computing – a long-term opportunity: Excitement around the industry growth prospects from cloud computing is building. Our analysis suggests cloud computing is a robust growth opportunity, but over the long term. Among the various cloudmodels, growth will be driven by Business Process as a Service (BPaaS), whereas other cloud models such as Infra-as-a-service and Software-as-a-service (IaaS/SaaS) remain inconsequential for Indian IT companies. While the top-4 IT services companies are investing in these new engagement models, Infosys seemingly is leading the race, closely followed by TCS. (Cloud computing, simply described, offers IT resources to customers without upfront capital commitments).

Near-term growth to remain robust, but led by offshoring: Our confidence in the +20% sector growth expectations (next 2-3 years) continue to increase, underpinned by a secular up-tick in offshoring, in under-penetrated markets and services such as remote management services (RMS). There are several reasons why adoption of RMS will accelerate in the coming years, such as 1) significant fall in hardware costs, 2) declining bandwidth costs, with higher capacity and reliability; 3) introduction of robust remote monitoring tools and, 4) new engagement models that offer better IP and data security

Competitive risks manageable: We continue to expect India to dominate as the most attractive offshoring destination and global competition to remain manageable for the foreseeable future. Loss of vendor agnostic charm, questionable success of M&A in IT services and materially higher blended costs/pricing, would keep competitive pressure from the new “integrated players” at bay. Remain bullish on long-term sector fundamentals. Current valuations (c20x on FY11e) are close to the historic averages and the upside is driven primarily by earnings upgrades. Infosys remains our top pick, followed by HCLT. We do not change any estimates/recommendations in this report.

To read the full report: IT SERVICES

Sunday, March 28, 2010


Smart Class –on track to achieve guidance
Post meeting with senior management team at Educomp & EduSmart (third party vendor) we retain our Buy rating on the stock. We believe the initial response to Smart Class advertisement has been extremely strong with school signs up exceeding 600 (vs. ~450 in 3Q) during the quarter and pipeline increasing to ~2000 (vs. 1500 in 3Q). While signs up remain robust, it expects nearly 500 schools to be implemented during 4Q, in line with its guidance. For FY11 management reiterated its guidance of adding 2500 schools. Strong pipeline provides upside risk to our assumptions for school sign up in FY11e. Forecast strong earnings CAGR of 42% over FY10-12E.

EduSmart- well placed to meet higher school signups
Our interaction with EduSmart management, reveal that the team is well placed to meet strong demand for Smart Class implementation. Educomp’s guidance of implementing Smart Class in 2500 (FY11) schools implies installing hardware in ~50 schools per week. As EduSmart outsource nearly 50% of low end installation work to local vendors and given its ability to manage hardware installation at multiple schools concurrently, we believe the current team of 70 technicians can manage installations in nearly 80 schools per week. See minimal risk to
implementation in FY11e.

Plans to enhance team strength at EduSmart
Besides 70 technicians the team includes eight zonal managers and ten regional managers and caters to hardware implementation in over 128 cities. Management highlighted that it intends to ramp up operations and would more than double its team strength over next one year. Educomp is also implementing ERP systems which will further strengthen hardware procurement, optimize inventory levels and improve service levels.

To read the full report: EDUCOMP SOLUTIONS

>The Tinplate Company of India Ltd. (BAJAJ CAPITAL)

The Tinplate Company of India is based in Jamshedpur in the state of Jharkhand. The Company is essentially a producer of a single product i.e. tinplate. The tinplate consumption in India is presently ~ 400,000 tonnes per annum and imports account for more than 50% of the market share in India.

Tinplate is a coating of tin on either side of a steel sheet that is mainly used as a packaging material in the form of cans. The coating of tin is done as it is malleable, non-corrosive, non-toxic and it gives the can their slick texture. These cans can be used for storing processed food, beverages, beer, paint, lubricants etc.

Although main consumers have been the developed nations of Europe, USA & Japan consuming more than 70% of world tinplate, of late increasing production / consumption is noticeable in developing economies. With Asia becoming the driver for growth, new capacities are coming up in emerging economies like China, India and Thailand. Major producers of Europe, USA & Australia have initiated shift of manufacturing facilities to cost advantageous regions.

■ India’s fast growing economy to boost tinplate sales
It is an established phenomenon world -wide that packaging industry growth is dependent on the rate of economic growth of a region / country. The growth at relatively higher rates in emerging economies of BRIC and Asia as compared to developed economies like USA, Europe & Japan will ensure that these markets including India will be the prime driver of growth.
Consumption of tinplate in India at approx 0.30-0.40 kg /capita is much lower compared to 8 to 12kg/capita in many developed nations. Even a similar developing economy like China, consumes 1kg / capita. With expectation of economic growth, it is estimated that the packaging industry in India is also poised for growth and hence the tinplate demand will also grow.

The company is the market leader in Industry

The company is the largest tinplate producer in South East and South West Asia. Without saying, it is the largest player in India with a 35% to 40% share of the total domestic consumption.50% of the demand in the country is met through imports while the balance 10-15% is in the unorganized sector. The company is aiming for full backward integration with the second cold rolling mill (CRM) under implementation to ensure self sufficiency of raw material for the tinning line.

Growth of organized retail in India
The growth of the organized retail sector in India would be a big boost for the growth of the tinplate Industry as this sector encourages consumers to buy more canned products.

■Most Eco Friendly packaging medium

The world is today grappling with environment concerns and packaging waste is a cause of concern. Tinplate is the most eco friendly packaging medium. This would give it an edge over other substitutes.

Excellent pedigree and related advantages
In 1982, Tata Steel bought the shareholding of Burmah Oil, the then major shareholder and took over the management of The Tinplate Company of India. The company has recently started collaborating with Corus, one of the world leaders in tinplate business and a subsidiary of Tata Steel. The company will be in a position to leverage the excellent R&D and engineering capabilities at Corus.

To read the full report: TINPLATE COMPANY


Room for more
■ Secular uptrend likely in tourist arrivals

With the economic revival on the anvil, we expect a mature uptrend of in-bound tourist arrivals to resume with CAGR of 7.7% for the next ten years. Interestingly, tourist arrivals had nosedived in 2001-02 before recovering and clocking a CAGR of 16.3% in 2003-08. It subsequently hit a trough in November 2008 as a result of the worsening global slowdown only to capitulate with the 26/11 terror attack. Now with a reversal in these trends, we anticipate the growth momentum to sustain.

■ Demand supply sweet-spot to repeat during 2012-15
We see the mismatch in demand-supply to reemerge in line with an economic revival and a delayed supply pipeline. Increase in repeat journeys and an extension in length of stay by guests would be the real multiplier of demand. Occupancy levels are set to rebound to 68%-72% while average room rates (ARRs) are set to spike to INR8700- 11200 in FY11E, driven by a reinforced economy. Growth in demand is seen across business as well as leisure destinations.

■ Spotting the winner
We find players with a significant supply addition and a diverse geographical spread during 2009-12 to be the biggest beneficiaries of the impending upturn. We also find the branded mid-market players to gain from the growing domestic tourism. IHCL emerges a clear winner with the spread increasing by 38% during 2010-12 across the country along with ‘Ginger’ to cater to value conscious guests. With a significant portion of their topline coming from overseas operations, IHCL is expected to benefit from a revival in the US and UK economies. Hotel Leela is also expected to reap benefits of new property launches, and its distributed geographical spread.

■ Valuation
We believe EV/room is a better measure to value hotel stocks as it captures the effects of a changing capital structure along with operating efficiencies on a per room basis. The EV/room valuation should be considered attractive with a significant upside when a player is available, cheaper than the average replacement cost of INR12-15mn per room, invested in the premium category and around INR6-8mn in the Four-Star category. Indian Hotels, our preferred bet, trades at an FY12E EV/room of INR9.6mn, EIH at INR18.3mn and Hotel Leela at an FY12E EV/room of INR25.7mn.

To read the full report: HOSPITALITY

Saturday, March 27, 2010


In the aftermath of the credit crunch, the outlook for most developed economies appears pretty
bleak. Households need to de leverage. Western governments will have to tighten their purse strings. Faced with such grim prospects at home, many investors are turning their attention toward China. It’s easy to see why they are excited. China combines size – 1.3 billion inhabitants – with tremendous growth prospects. Current income per capita is roughly one-tenth of U.S. levels. The People’s Republic also has a great track record. Over the past thirty years, China’s Gross Domestic Product has increased sixteen-fold.

So what’s the catch? The trouble is that China today exhibits many of the characteristics of great speculative manias. The aim of this paper is to describe the common features of some of the great historical bubbles and outline China’s current vulnerability.

Section One: Identifying Speculative Manias and Financial Crises
Can we confidently identify a speculative mania before the bubble bursts? Is it possible to spot an incipient financial crisis before it explodes in our faces? Based on the performance over the last decade of most leading economists, central bankers, and Wall Street pundits, the answer to these questions is surely a resounding NO!

In fact, bubbles can be identified ex ante, as the economists like to say. There also exists an interesting, if rather neglected, body of research on leading indicators of financial distress. A few years ago, many of these indicators were pointing to rising economic vulnerability in the United States and other parts of the globe. Today, those red fl ags are fl ying around Wall Street’s current darling, The People’s Republic of China.

To read the full report: RED FLAGS

>Jaiprakash Power Ventures Ltd (ICICI DIRECT)

On a firm footing…
Jaiprakash Power Ventures Ltd (JPVL), a part of the $7 billion Jaypee group, is the result of amalgamation between the erstwhile Jaiprakash Hydro Power (JHPL) and Jaiprakash Power Ventures (JPVL). The combined entity has a successful track record of operating 700 MW of hydro projects - Baspa-II (300 MW) commissioned in 2003 and Vishnu Prayag (400 MW) commissioned in 2006. In FY09, the erstwhile JHPL generated 1,291.9 million units (MU) while JPVL generated 2,033.3 MU vis-à-vis 1,280.8 MU and 1,871.0 MU in FY08, respectively. The conglomerate entity is aiming to achieve ~13,500 MW of installed capacity by FY19E with a diversified fuel mix. JPVL is expected to command an optimal 60:40 thermal-hydro mix. The upcoming hydro project at Karcham Wangtoo (1,000 MW) is well on track to achieve the commissioning six months ahead of schedule in May 2011. The parent company (JAL) has demonstrated significant execution strength clubbed with better operational performance at existing projects. Thus, we are initiating coverage on the stock with an ADD rating.

Total ~16 fold growth in installed capacity over the next six years
JPVL has an installed capacity of 700 MW as at the end of December 2009. The company has an ambitious growth plan and is targeting ~11,050 MW by the end of FY16E. Total ~1,500 MW is expected by FY12E. JPVL is diversifying into other fuel mix with the first thermal plant Bina – I expected in the second half of FY12.

Superior asset quality getting reflected in operational numbers
JPVL is generating at an implied plant load factor (PLF) of ~100% in the peak flow season. This is far in excess of the overall PLF generated by hydro-based capacities in India. For FY09, the overall Indian hydro generation is operating at an implied PLF of ~34.1% and JPVL is commanding a much superior implied PLF of ~54.6%.

At the CMP of Rs 67, the stock offers ~6.2% upside potential. JPVL has 700 MW of plants operational, which comprises Rs 17 per share and ~24% in overall value. Expansion plans form the remaining portion of overall value. The demonstrated capability of parent company (JAL) renders significant comfort to upcoming expansion plans. Thus, we initiate coverage on the stock with ADD rating and target price of Rs 71.

To read the full report: JAIPRAKASH POWER


Sesa Goa is targeting to increase iron ore output to 50 mtpa by FY14 from ~20 mtpa in FY10, which will make it one of the world’s largest iron ore producers. This will require addition of at least 300 mn tons of reserves from existing mines and/or acquisition of new mines. Our NPV analysis suggests that one needs to be a believer in Sesa adding these reserves at a very low acquisition cost and also in iron ore prices staying at $100/t till FY15 to justify 10%+ returns in stock price. Strong iron ore prices and rising production will ensure a strong 81% profit growth in FY11 but post recent run-up, we view risk-reward as unfavourable. We initiate coverage on Sesa Goa with an Underperform rating and a target price of Rs385.

Reserve accretion is crucial for volume growth
We believe that Sesa needs to augment its iron ore reserves by at least 300 mn tons by FY14 when its output hits 50 mtpa, assuming a minimum 10-year mine life. Sesa is undertaking extensive exploration efforts at existing mines to boost reserves. Sesa is also targeting to acquire reserves via acquisitions of smaller mines, which looks likely given its balance sheet strength and the high degree of fragmentation in India’s iron ore sector. Sesa is also hopeful of getting ~90 mn tons of reserves from the Jharkhand mine in 4 years, where it holds a prospecting lease and has applied for a mining lease.

NPV analysis suggests unfavourable risk-reward
An NPV on Sesa’s existing reserves using CLSA’s iron ore forecasts yields a value of just Rs287/sh. However, we believe that this is conservative as 1) There is a high probability that Sesa will augment its reserves in an NPV-accretive manner; and 2) We see upside potential to CLSA’s near and long-term iron ore price forecasts. If we take a leap of faith and assume that 1) Sesa adds 105 mn tons of reserves from existing mines, acquires another 105 mn tons at a very low acquisition cost of just US$3/ton and the Jharkhand mine comes through in 4 years; and 2) Iron ore prices stay at $100/t (FOB India) till FY15 and use a 30% higher long-term price of US$70/t (real terms) FY16 onwards, we arrive at an NPV of Rs506/sh – just 14% upside.

Initiate coverage with U-PF rating
We see potential delays in Sesa getting the Jharkhand mine and also see a risk of Sesa having to acquire new mines at a much higher acquisition cost. This, combined with the relatively small upside even in our blue-sky scenario, makes us view risk-reward as unfavourable. Put another way, we believe that the current stock price implies a 25+ year mine life or $105/t iron ore price from FY12 till perpetuity – both very unlikely. Stock moves with spot iron ore prices and could outperform for short periods if spot prices rise further. However, we struggle to justify a positive stance on a 12m view. We initiate coverage on Sesa with an U-PF rating. Our TP of Rs385 implies 8.3x FY12 P/E, 4.1x FY12 EV/EBITDA and is at a 34% premium to NPV on existing reserves.

To read the full report: SESA GOA

>RBI releases First Financial Stability Report : Says Limited Risk to Financial Stability, but Monitoring Required on an Ongoing Basis

As announced in the Annual Policy Statement of April, 2009 the Reserve Bank of India established a Financial Stability Unit in August, 2009. The Second Quarter Review of Monetary Policy in October, 2009 made specific mention of a periodic Financial Stability Report (FSR) for India to enhance transparency and augment confidence in the financial system. The Financial Stability Report (FSR) published today is the first of these reports and is an attempt at institutionalising the implicit focus and making financial stability an integral driver of the policy framework.

In general, the Financial Stability Reports will focus on reviewing the nature, magnitude and implications of risks that have bearing on the macroeconomic environment, financial institutions, markets and infrastructure. It will also assess the resilience of the financial sector through stress tests. It is hoped that FSRs will emerge as one of the key instruments for directing pre-emptive policy responses to incipient risks in the financial system.

The FSR will be a key supplement to the evolving institutional arrangements in the coming months. The specific composition and the role of the proposed Financial Stability and Development Council (FSDC) is yet to crystallise. But the role of the Reserve Bank in any future arrangement, as regards financial stability, will continue to be critical. This inaugural report details the prevailing financial system in India and also gives some background on past financial stability initiatives.

Global Outlook
The forceful and coordinated global policy response to the crisis has facilitated the relative stabilisation of global markets and easing of credit risk concerns after the financial turmoil, especially in the second half of 2009. Uncertainties about growth prospects and financial stability, however, persist. The unevenness of the global recovery adds to this uncertainty. Further, concerns about sovereign credit risk have also intensified in the light of the fiscal woes of Greece and some other Euro zone nations.

While global imbalances declined somewhat due to contraction of demand in advanced economies during the financial crisis, the structural problem associated with the imbalances remains. There are some incipient signs of the recurrence of these imbalances with the economic recovery, which is reminiscent of the pre-crisis days and could emerge as a cause for concern. Though the exposure of the Indian financial system to the international markets remains relatively low, the contagion impact from the global macroeconomic shocks on the Indian financial sector cannot be ruled out.

Outlook for India
There are evident signs of recovery in the growth increasingly taking hold. Hence, the process of monetary policy exit has already begun. Early steps to exit from the fiscal stimulus measures have also been initiated with the Union Budget for 2010-11 committing a return to the process of fiscal consolidation. The process of fiscal consolidation should facilitate better monetary management. In recognition of the Government’s intent to bring down deficit and debt levels, along with the positive outlook on domestic economic growth, S&P has recently upgraded its outlook on India from “Negative” to “Stable”.

Going forward, however, there are several factors which may have a bearing on financial stability considerations, including inflationary pressures and expectations, management of government borrowing program, and capital flows.

To read the full report: FSR


Eyeing power: Thermax is moving up the value chain with in-house capability of up to 300MW, and JV with B&W for super-critical and 300+ MW. We initiate coverage with ADD and target of Rs 725 (comprising Rs 650 for core business and Rs 75 for JV with B&W) based in (1) long-term upside from breadth of capabilities, (2) growth on the back of large backlog, (3) revival in industrial capex, and (4) cash flow and execution record. Slower- than - expected execution and valuation pose risks.

■ Profile: Leading player in energy and environment, moving up power equipment value chain

Capability expansion, execution pick-up and investment recovery to boost growth.

■ Financials: Strong growth expectation on back of strong backlog and capability scale-up

Recommend ADD with an SOTP-based target price of Rs 725/share.

To read the full report: THERMAX

Friday, March 26, 2010

>Emerging countries: a multispeed recovery

Drawn into the same depressive spiral as the developed economies in fall-winter 2008-09, the
emerging economies(1) recovered more quickly and robustly. As of Q2 2009, real GDP growth rates had returned to about 10% qoq annualised. The ones of advanced economies did not return in positive territory until Q3 2009, with real GDP growth rates of less than 2%.

Within the emerging economies, Asian countries have already completed the catch-up phase. With the exception of Argentina and Venezuela, Latin American countries are about to follow in the second half of 2010. Eastern Europe will probably continue to lag behind, hampered by sluggish growth in Western Europe coupled with financial instability within the Euro Zone since the beginning of the year.

Looking beyond these divergent paths, it is worth asking whether the emerging regions, including Asia, have the capacity to fuel world growth over the long term if the recovery were to falter in the main advanced economies.

In this overview, we will first examine the cyclical situation and prospects of the emerging countries (Part I), before reviewing the main risk factors for our central scenario for these countries (Part II). In a future issue of Conjuncture, we will look at the preliminary lessons that
can be drawn from the impact of the crisis on country risk.

Cyclical situation and prospects for the emerging countries

Still driven by Asia, the recovery is consolidating

Since spring 2009, trends in the emerging countries have begun to decouple again from those
in the developed countries. The emerging countries returned to growth rates of over 10% qoq annualised as of Q2 2009, while the developed countries did not begin to recover until Q3, with growth rates of less than 2% (see Table 1).

Based on partial data, industrial growth slowed in Q4 2009, as was to be expected after the strong rebound in Q2 and Q3, although the growth differential was maintained between the emerging and developed countries. At year-end 2009, industrial production in the advanced countries was still 14% below spring 2008 levels, whereas even excluding China, production had declined only 3% in the emerging countries (see Chart 1). In early 2010, Asia is the only region that is no longer formally in a catch-up phase (see Chart 2). Catch-up phases are likely to last through mid 2010 in Latin America, and at best through the end of 2010 or early 2011 in Eastern Europe.

To read the full report: MULTISPEED RECOVERY

>CEMENT SECTOR: Feb volumes grow 4.9% YoY, utilisation at 80% (ICICI DIRECT)

In February 2010, all-India cement dispatches (including ACC and Ambuja) reported a growth of 4.9% YoY at 16.8 million tonnes (MT). The dispatches have grown by 10.4% YoY in YTDFY10. The northern and western regions have posted YoY growth of 12.3% and 11.6%, respectively, (adjusted for ACC and Ambuja). The central region reported 4.8% YoY growth while the southern and eastern region reported negative growth of 1.1% YoY and 0.5% YoY, respectively.

On an MoM basis, all-India dispatches growth has declined by 7.6%. The eastern and northern region reported 12.2% and 9.1% decline in dispatches, respectively. The western and southern region reported decline of 7.9% and 6.4%, respectively, while the central region reported a 6.9% decline in dispatches.

The all-India capacity utilisation declined to 80% in February ‘10 from 87% in January ‘10 and 90% in February ‘09. Northern and eastern regions saw highest fall in utilisation in February ‘10 to 89.5% and 78.7% from the January ‘10 utilisation rates of 98.5% and 90.5%, respectively. Central region’s utilisation rate has fallen to 107.6% in February ‘10 from 115.6% in January ‘10. Southern and western region’s utilisation rates stood at 66.5% and 87%, respectively.

JP Associates reported impressive dispatch growth of 57% on account of capacity expansion. Southern region players, Dalmia Cement, India Cement and Madras Cement have shown dispatch growth of 28.1%, 23.3% and 27.6%, respectively. Ambuja and UltraTech’s dispatches were up 2.5% and 8%, respectively, while ACC reported negative YoY growth of 2.3%.


With ~42 MT of capacity addition across India during April-February FY10, all-India average cement prices have declined by ~3% during the same period. Moreover, capacity of ~42 MTPA is expected by the end of FY12 across all regions. We believe it will pull down capacity utilisation
rates and put further pressure on pricing. We expect the all-India utilisation rate to drop to ~83% in FY11E from the FY10E rate of 90%. We prefer northern and central region players on account of better pricing outlook compared to other regions. These regions have been enjoying firm pricing on the back of continuous strong consumption growth, driven by infrastructure spending by the government and demand from rural and semi-urban housing.

To read the full report: CEMENT SECTOR

>SATYAM COMPUTERS: Up on its feet and running (BNP PARIBAS)

■ Retain BUY. Increased confidence in thesis after recent checks.

■ Deal wins still largely of small sizes, but momentum improving.

■ Attrition in check, hiring picking up, margins likely back on track.

■ DCF-TP of INR130.00. Risky, but compelling turnaround story.

Higher confidence after checks
Our latest round of checks on Satyam gives us increased confidence in our FY10 USD1.1b standalone revenue estimate and our thesis that the company should approach industry average growth and profitability by FY11. Since our last update, we believe that the business has improved, especially from February, partly due to an industry-wide revival. Apart from the recent wins such as the USD48m, deal from KMD and business from South Africa, Brazil and the Middle East, we believe Satyam continues to win short tenure projects, mostly from existing customers. In fact, the deal advisory firm, TPI lists Satyam among only a handful of Indian players that have won 10 or more contracts each greater than USD25m in 2009. The lack of audited financials remains an impediment to winning more large projects, which should change after June, in our view, when the company releases its FY09-10 results.

Operations now at a likely more “normal” level
1) We believe pricing continues to be at industry average levels because of the smaller sized projects that Satyam is working on, where it may have faced limited competition. 2) We believe attrition levels have subsided after the salary hikes in January and after news of another
round planned in April. 3) At its current headcount of a likely 22-23k (25- 26k incl. subsidiaries), Satyam appears well staffed and is possibly operates at a healthy utilization of over 70%. We believe therefore that it is well placed to improve its margins by our expected 9.3ppts in FY11. 4) We also believe Satyam has started hiring aggressively for about 2,000 positions in response to an increased pipeline, in our view. Our revised numbers are largely unchanged, but reflect higher utilization rates offset by higher wages (to retain talent), higher SG&A and a stronger USD/INR.

Risky, but investment case difficult to ignore
We acknowledge the risks that Satyam presents given the lack of audited financials and the near-term overhang of L&T likely selling its stake. However, we believe Satyam still makes for a compelling turnaround story and that the audited results could reflect a better picture than investors fear. We believe an eventual merger with Tech Mahindra would be synergistic and could re-rate both the stocks ahead of the event. We also estimate Satyam has about USD700m or 28% of its market cap in cash that it can use strategically. Finally, large cap IT stocks have rallied 14-19% from their YTD lows, while Satyam is up only 3%, hence presents a case for a catch-up. Retain BUY.

To read the full report: SATYAM COMPUTERS

>TELECOM SECTOR: More stability now, but risks remain (NOMURA)

■ Little noise on competition, but worst may not be over yet
From our recent meetings with operators, regulators and investors in India last week, we believe the operating environment and sentiment are relatively more upbeat. There have been no recent launches and no one player is leading on price. A new issue is that the Department of Telecommunications is requiring approval on all equipment purchases, forcing some new players to delay circle launches.

Rising optimism on 3G auctions
3G auctions are scheduled for early April, and the consensus seems to be “it will happen this time”. Prices are uncertain, but we expect most carriers will bid – even the new operators may bid selectively. There is expectation it could lead to another round of price wars or carriers moving to “bucket-plan” models given the excess capacity generated. We expect limited incremental data growth in the near term.

Amendments to M&A norms likely
We understand from discussions with TRAI that some amendment to the M&A norm could be announced this month. Various criteria are being reviewed –– a 40% limit to market share and a 15Mhz cap on spectrum per circle could remain. Amendments will likely be perceived positively, but any near-term consolidation is unlikely. Our talks with various carriers suggest there are now more buyers than sellers. New operators like Uninor are bullish on their growth prospects. Besides,
we believe their valuations are debatable given the lack of unique subscribers.

IDEA a relative play
We begin coverage on IDEA today with a BUY and it is our preferred pick (see our report, A timely IDEA, for more details). It appears to be executing consistently, its financials are improving, and there is an element of M&A surprise. For Bharti, Zain is still a bit unknown and the deal seems likely to go ahead, which, in our view, will squeeze earnings in the near term. We think RCOM’s execution remains questionable. 3G auction prices can be expected to stretch balance sheets for all carriers.

To read the full report: TELECOM SECTOR

>CAIRN INDIA: Revising estimates upwards (BRICS)

■ Rajasthan block resource potential revised upwards to 6.5 boe from 3.7 boe.
■ Plateau production of 2,40,000 bopd possible in FY13 (as against approved 1,75,000 bopd) with low incremental capex.
■ we revise our base case NAV estimate to Rs246/share (earlier Rs 227/share) at US$60/bbl and Rs 47/US$
■ Cairn remains our top pick in upstream oil segment, Upgrade to Outperform.

To read the full report: CAIRN INDIA

Thursday, March 25, 2010

>Recovery still looks strong (DANSKE MARKETS)

• The recovery in Asia looks increasingly sustainable. Across Asia unemployment is declining, property prices are increasing and manufacturing investments are rebounding sharply on the back of surging exports and industrial activity.

• In addition, growth in Asia has become more broad based with growth momentum currently strongest outside China and Japan. Our 2010 GDP forecast for India, Indonesia, South Korea and Taiwan has been raised, China is largely unchanged, while our forecast for Japan has been revised slightly lower.

• In Asia excluding Japan, GDP growth has overall been stronger than expected and the pace of the recovery is unlikely to ease in Q1 10. However, with the output gap closing fast, GDP growth is expected to gradually slow from Q2 10. In Japan, the recovery so far has been reasonably strong, but growth will slow substantially in Q1 10. However, a double-dip recession is unlikely in Japan.

• Inflationary pressure has started to emerge across Asia and, with the exception of Japan, inflation has increased more than expected. In Q2 and Q3 10, we expect most Asian central banks to start raising their leading interest rates and we expect China to resume its gradual appreciation of CNY in Q2. On the other hand, we cannot rule out further monetary easing in Japan.

To read the full report: RESEARCH ASIA


Crude price upgrade. Macquarie’s oil economist, Jan Stuart, has upgraded the WTI crude oil forecast by 13-18% for 20010E–13E and long-term forecast from US$75/bbl to US$85/bbl.

Upstream companies’ gain. We sharply upgrade our target price for Cairn India by ~15% as it is India’s only crude oil pure-play. We also upgrade ONGC, OIL & RIL by 2-4%. We re-affirm our switch recommendation from ONGC and Cairn India to RIL and OIL.

Stronger fundamentals. Fundamental data have turned and finally show tightening oil supply and demand balances. Inventories are still high. But it now appears that they did fall late last year and that inventories should normalize quite quickly over the course of this year. The driving force toward leaner balances is demand growth in emerging economies. That will become
especially obvious once OECD oil consumption stops falling next quarter.

We also raise our Long Run oil price. We use $85/b WTI as a proxy for long-term cost of incremental supply, after taking a fresh, in-depth look at cost-structures and margins of Canadian oil sands projects.

GRM estimates remain unchanged: Our refining margins estimates remain unaffected by the increase in crude assumptions, since GRMs follow their own demand-supply dynamics, which we believe is improving.

Cairn India to gain the most as it is an oil pure play: We upgrade our target price by ~15%. Our near-term earnings upgrade is slightly less steep though (+13% FY11E & + 10% FY12E) given a slow production ramp-up.

ONGC, OIL positive impact partially offset by subsidy: Although, there is no clear subsidy-sharing mechanism as yet, the government does tend to increase ONGC & OIL’s subsidy burden as oil prices rise. This takes away a bulk of the upside. Hence we believe gains to these companies would be diluted, and hence upgrade ONGC and OIL’s target prices only mildly by 2.5% and 2.0%, respectively.

RIL is not significantly leveraged to crude with only 4% of its turnover coming from crude oil. Nevertheless it is not burdened by subsidies and it is an operationally leveraged business. We upgrade RIL’s target price by 4%.

GAIL and Reliance Industries remain our top sector pick. We believe both are poised to witness a volume and margin expansion. RIL’s upstream KGD6 gas ramp-up is poised to nearly double GAIL’s gas transmission volumes. While GAIL’s petrochemical margins are poised to improve, we believe RIL’s recently doubled refining capacity is well-timed to capitalise on a rebound in gross refining margins.

To read the full report: OIL & GAS


What's changed
The consortium of Reliance Infrastructure (RELI) and Hyundai Constructions, per the Times of India, agreed to 1) buy the existing Bandra-Worli Sea Link for about Rs16.4bn and 2) and extend the sea link by 3.4km to connect to Haji Ali at the cost of Rs19.6bn. The concession agreement is expected to be signed in another two months and RELI will be eligible to collect a toll for the existing link after completion of financial closure of the project.

Sea link acquired; completion of Worli – Haji Ali stretch key; Buy

Our analysis of the project suggests that RELI’s investment in the existing sea link will likely have an equity IRR of about 10%, based on the existing toll structure of Rs50 for one way, 37,500 PCUs daily (as per MSRDC Oct 2, 2009) and debt equity structure of 70:30, compared with our estimate of 15% equity IRR for RELI’s Mumbai and Delhi metro projects. We believe improvement in equity IRR for this project hinges primarily on traffic growth (we estimate that 60,000 PCUs would be required for an equity IRR of 15%) on the back of the completion of the Worli-Haji Ali stretch (expected to take about 48 months for completion), which may provide more tangible benefits to commuters in terms of time saved on using the combined stretch of Bandra-Worli-Haji Ali sea link.

Though we assume the contribution from this project is not material to our SOTP value, we believe news flow on execution of road and metro projects and EPC order book will be key re-rating triggers for the stock. We reiterate our Buy rating on RELI with a 12-m SOTP-based target price of Rs1,370 which implies upside of 34%.

Key risks
1) Delays in commissioning of infrastructure projects under construction;
2) lower-than-expected EPC margins; 3) favorable decision of the court case between RIL-RNR.

To read the full report: RELIANCE INFRASTRUCTURE