Friday, April 30, 2010

>The Economy vs The Stock Market

The global financial market rally is now in its 13th month. As we have pointed out repeatedly, it has occurred against an unsettling, uncertain and unbalanced macroeconomic backdrop. There is an array of structural problems that could derail the recovery once momentum from fiscal and monetary stimulus ends. However, slower than expected growth isn’t necessarily a big negative for investment returns. Sustainability, liquidity flows, interest rates and long‐term profit expectations are crucial variables. In this letter we offer a brief review of what we believe will be the weak link in the U.S. recovery and explain how investors should position themselves for it.

Forecasts for the durability of this bull market are wildly divergent, and with good reason. Most signs of recovery are clouded by the influence of government stimulus and reflation efforts. Moreover, year on year comparisons are misleading. Almost anything would look better than the abyss we were in a year ago. However, a common mistake many of the more bearish analysts are guilty of, is the assumption that investment returns are predicated on their near‐term assumptions of the GDP growth rate.

In terms of the negatives, runaway public‐sector deficits and debt growth are the greatest threats, which we will discuss in detail in a coming letter. However, there is likely at least a year or two before this weighs heavily on markets. The reason is that a massive fiscal drag is likely to hit the U.S. and other economies in 2011, in good part from tax increases. While extremely negative from a supply side perspective, it should help cool the angst coming from debt projections at least temporarily. However, the political process is always a wild card when unemployment is high, and it remains to be seen whether the structural deficit will actually shrink on a sustainable basis.

In the U.S., the more immediate threat to the recovery is consumer deleveraging. Housing prices and unemployment have stabilized, but a quick rebound is not in the cards. Years of credit‐fuelled consumption, which was taken to its ultimate stage of excess during the housing bubble, will be a slow and painful process to unwind. There are no shortcuts, and given that domestic consumption is responsible for 70% of economic activity in the U.S., sluggish growth seems inevitable.

Personal consumption expenditures are growing, although only at a 2% rate from last year. Retail sales are up substantially, but must be adjusted for government incentives which have been successful in causing a bulge in current spending, likely at the expense of future consumption. Worryingly, consumer confidence remains low, which is a reflection of weak income growth, high structural unemployment and excessive household debt levels. This is a grim picture particularly if income growth remains anaemic. It is important to keep in mind that the wealthiest 20% of Americans are responsible for 65% of consumption, and that their buying power is more closely correlated with stock market performance than with income.

Recent stock market gains have given this source of consumption a boost, while the lower middle class has had to be more frugal. However, asset‐driven spending is a two‐way street. A sharp break in the stock market and further weakness in housing prices could cause household spending to dry up again. Below, we present some charts that highlight the unbalanced and artificial nature of the recovery.

The case for a weak recovery.....

To read the full report: ECONOMY & STOCK MARKET


Siemens reported 2Q10 earnings of Rs1.8bn, which were largely in line with our estimate of Rs1.9bn. Margins significantly surprised on the upside, which was offset by lower-than-expected revenues. We have increased our target price to Rs542 from Rs440, as we have rolled over to the average of FY11/12E; however, we still maintain an Underperform rating, as we believe the stock has already built in a sharp turnaround in growth.

Margins surprise, however unsustainable at these levels: EBITDA margin stood at 12.9% in 2Q10, and if we adjust for the forex loss of Rs700m, margin stood at 16%. However, this high margin is mainly due to high-yield historical projects, which are likely to be over soon. We expect the margin to stabilise at 11.5% in FY11 and FY12.

Pricing pressure in projects business, product margins holding on:
Management said that there are pricing pressures in the projects business due to intense competition. However, product margins are stable at the moment.

Clear signs in industrial capex pick-up, order inflow growth back in +ve trajectory: Order inflow in 2Q10 stood at Rs22.4bn (+20% YoY), and the order book stood at Rs134.5bn (+40% YoY). Management said that though there was a good repeat demand in the industry automation and drives business, industry solution remains soft currently.

HVDC/800kV PGCIL order could aid growth: If Siemens were to win the Rs60bn HVDC/800kV order from Power grid (PGCIL IN, Rs110, Not rated), it could lead to significant revenue inflows for the company. Siemens is competing with ABB for this order, which is likely to be given out in CY10.

Earnings and target price revision
We have increased our 9/12 FY10E and 9/12 FY11E EPS forecasts by 13% and 12%, respectively, to factor in higher EBITDA margins. We also are rolling over our valuation to the average of FY11E and FY12E 20x EPS from the average of FY10E and FY11E EPS earlier.

Price catalyst
12-month price target: Rs542.00 based on a PER methodology.
Catalyst: Margins settling around 11–11.5%.

Action and recommendation
Earning growth does not justify historical multiples: The stock is trading at 27x Sep’11 and 26x Sep’12 earnings. Even after building in an upturn in order inflow, earnings growth should remain at a 15% CAGR over the FY10– 12 period, as the company faces competition from new entrants and takes longer gestation-period contracts. Earnings growth should not go back to 30% levels to justify historical multiples of 30x. We maintain an Underperform rating on the stock.

To read the full report: SIEMENS INDIA

>GLOBAL INVESTMENT TRENDS MONITOR : Fourth Quarter of 2009 and First Quarter of 2010 (UNCTAD)

• Foreign direct investment (FDI) flows remained relatively stable during the fourth quarter of 2009, though at a level much lower than that of 2007 and 2008. UNCTAD’s FDI Global Quarterly Index was practically unchanged at 117 over the previous quarter, and half the level in the first quarter of 2008

• During the last quarter of 2009 only a handful of economies – including China, Hong Kong (China) and Ireland – received more FDI inflows than those in the quarterly average of 2007.

• Among the three components of FDI flows, equity flows – the most closely linked to real investment operations abroad – compared to reinvested earnings and other capital (intra-company loans) remained at a very low level. Transnational corporations (TNCs) thus apparently remained cautious regarding their international investment expenditures during the
last quarter of 2009, as also illustrated by the low value of cross-border mergers and acquisitions (M&As) and number of greenfield projects.

• Prospects for the first quarter of 2010 are better as indicated by improvements of the global business environment and a growing optimism of TNC executives regarding their own company’s prospects and a pick-up in the value of cross-border M&As.

• In general, growth of FDI inflows trails economic growth. The current trend of gross domestic product (GDP) turned positive in mid-2009. Government policies regarding the current crisis have double-edged effects. While the majority of these policies may promote and facilitate FDI, some policies such as increased screening requirements and new limitations of foreign equity may work against renewed flows.

• With the slight drop in the number of greenfield projects in the first quarter of 2010, it is premature to say that FDI is now on a strong rebound. TNCs still remain very cautious in their international investment programmes.


>YES BANK : Another Strong Quarter; Maintain OW

Yes Bank reported a PAT of Rs1.4 bn (+11% QoQ, +75% YoY): This compares with our expectation of Rs1.35 bn. On a per share basis (given equity issuance), earnings were up 57% YoY and 1% QoQ.

NII growth driven by volumes: NII was up 16% QoQ, driven by loan growth, which was up 19% QoQ. Margins expanded by 10 bps QoQ to 3.2% as the bank benefited from the free funds effect of the equity issuance. Adjusted for this, NII grew at about 10% QoQ and
margins were flat to slightly down sequentially.

Non-interest income (ex-capital gains) grew 26% QoQ and 72% YoY: YoY strength was broad-based with all segments growing well. In this quarter, the key driver was financial markets, which saw a sharp uptick, owing to some chunky deal-related revenues.

Weak liability franchise means margins will compress in F2011, but will still deliver 18% ROE: We expect Yes Bank’s margins to come off from current levels in the coming year as rising short rates (given low CASA/assets), impact of free funds effect fading, and CRR hikes filter through. Despite this, we expect the bank to deliver 18% ROE in F2011.

Well positioned for growth cycle in terms of capital and asset quality: With a Tier I ratio of 12.9% and an impaired loans ratio of 0.5%, we think Yes Bank is well positioned entering the new credit growth cycle, especially given its small size. We agree that margin progression will be challenging near term, but believe that this has already been factored into expectations.
Yes Bank trades at 15.7x F2011 earnings and 2.6x BV – we believe that the risk-reward is still favourable and hence maintain our Overweight rating.

To read the full report: YES BANK


Polaris Software (Polaris) is an end-to-end global financial technology company with a
comprehensive suite of products and services for the BFSI sector.

Improved outlook for the IT sector
The outlook for global IT spend has improved since the latter part of 2009, after a brief phase of
weak demand outlook. Consequently, the outlook for Indian IT vendors has also improved which
has prompted them to set a high recruitment target for FY11. The BFSI (banking, financial
services and insurance) sector is globally the largest spender on IT. Demand improvement in
the US – largest target market – bodes well for financial technology vendors like Polaris.

Polaris has evolved as an end-to-end global financial technology company
Through the acquisition of Orbitech, a Citibank subsidiary, in 2002 Polaris got access to 56
software modules for the banking industry. Polaris has transformed these modules into serviceoriented- architecture (SOA). Aided by acquisitions in the insurance and India-focused banking products space, Polaris has evolved as an end-to-end global financial technology company.

IT products business at an inflection point
Over the past few years, Polaris has been in the process of transforming banking products into
SOA, broadening its products portfolio and building customer references. It is now at an
inflection point in its products business wherein it can capitalise from its investments made in
software development. In FY10 Polaris won 54 deals in products business as against 21 deals
each in FY08 and FY09. We forecast a CAGR of 25% in US dollar terms (21% in rupee terms)
over FY10-13 for the IT products segment and expect its revenue contribution to increase to
25% in FY13 from 20% in FY10.

Increasing contribution from IT products to drive margin expansion
We forecast total revenues to grow to Rs 19.3 bn in FY13 from Rs 13.5 bn in FY10 at a CAGR
of 12.4% (16.2% in US dollar terms). We expect Polaris’ EBITDA margin to increase to 19.3% in
FY13 from 16.5% in FY10 on account of: (a) increasing revenue contribution from IT products;
(b) IT products’ margins expansion to 29% from 23% currently on account of increasing
operating leverage; and (c) broadening of the employee pyramid.

Net profit to grow at a CAGR of 22.2% over FY10-13
After considering the impact of higher tax rates and forex gains from hedges ($170mn hedges at
Rs 48), we forecast net profit to increase from Rs 1.5 bn in FY10 to Rs 2.8 bn in FY13. We also
expect the RoE to increase to 20.2% in FY13 from 18.6% in FY10. The company has a strong
cash balance which we expect will touch Rs 10 bn in FY13, which could be used for acquisitions
aimed at client acquisition and access to intellectual property rights.

We assign 4/5 on fundamentals and 5/5 on valuations
Polaris’ fundamental grade of 4/5 indicates that its fundamentals are superior relative to other
listed securities in India. The grading factors in experienced management, a strong IT products
portfolio, balance sheet strength and improved outlook for the IT sector. The grading has been
tempered by dependence on the BFSI sector and high client concentration. The valuation grade
of 5/5 indicates that the current market price has strong upside to our fundamental value per
share of Rs 247.

Key stock statistics

  • Fundamental value : (Rs) 247
  • Current market price : (Rs, as on April 21) 186
  • Shares outstanding (mn, face value : Rs 5) 99
  • Market cap (Rs mn) : 18,407
  • Enterprise value (Rs mn) : 13,319
  • 52-week range (Rs)(H/L) : 204/60
  • PE on EPS estimate (FY11E)(x) : 7.7
  • Beta : 1.16
  • Free float (%) : 41.1%
  • Average daily volumes (last 12 months) : 1,998,306

To read the full report: POLARIS

>Bombay Rayon Fashions (PRABHUDAS LILLADHER)

Increasing utilization levels on massive capacity expansion: Bombay Rayon Fashions (BRFL) has enhanced the overall fabric and garment (FY09) processing capacity by 1.9x and 1.2x, respectively (~5x of its FY07 capacity in both segments) during FY10. We believe that the increasing asset turnover ratio from 0.9x in FY10 to 1.6x in FY12 will drive the growth, going forward. BRFL has currently completed its expansion plan. Hence, we believe that there is no risk of raising equity or debt further in the future. We have visited BRFL‟s Tarapur fabric processing plant (constitute ~80% of company‟s total fabric capacity) recently and came back convinced that it has the potential to propel BRFL into new growth trajectory.

Expect robust PAT CAGR of ~50% over FY09-12E: BRFL has a strong client list, including DKNY, Guess, Gap, Wal-mart. This, coupled with strong business positioning, convince us to factor in robust sales and PAT growth CAGR of ~36% and ~50%, respectively during FY09-12E. We believe that BRFL‟s operating cash flow would turn positive from FY10 and it would help to reduce the debt/equity ratio from 1.5x in FY09 to 0.6x in FY12E.

India’s largest integrated Garment & Fabric player: BRFL has embarked on an aggressive growth path from post quota opportunities and in-house design capabilities via its integrated manufacturing facilities. It would add value and sustain competitiveness, with considerable advantage over peers such as fast-track delivery model of 30-60 days vis-a-vis industry average of 60-90 days. It enhances BRFL‟s ability to quote premium for its products. We believe that rupee appreciation has had a limited impact on BRFL on account of better pricing power, premium to its peers and presence in the fashion garment business.

Attractive valuation, initiate with ‘BUY’: We believe that BRFL is well positioned as against its domestic peers, given its in-house designing capabilities, better margin and strong earnings growth along with visibility. BRFL is trading either at par or at discount to peers. Hence, we strongly believe that it should trade at a premium than peers, considering that it‟s well-positioned. Further, stock is trading at near-to-lower end of its historical forward P/E, EV/E and P/B band. We recommend ‘BUY’ the stock on the basis of 11x of FY11E earnings.

To read the full report: BRFL

Thursday, April 29, 2010

>WHERE TO INVEST NOW: Cyclical start, defensive finish

1. Economy: The US economy remains in a fragile state

– GS Economics forecasts sluggish recovery in 2010 & no Fed rate hike until 2012.
– Benefit of inventory re-stocking and fiscal stimulus ends in the middle of 2010.
– Final demand to recover gradually; unemployment to remain high into 2011.
– Excess capacity will affect inflation, interest rates, margins, and capex.

2. Earnings: Focus on 2010 pre-provision EPS of $81

– Our S&P 500 operating EPS estimates are $76 for 2010 and $90 for 2011.
– On a pre-provision and pre-write-down basis our estimates are $81 and $91, reflecting 13% annual growth.
– S&P 500 operating EPS will reach 99% of prior peak in 2011.
– Near peak EPS forecast in 2011 does not imply a new S&P 500 price level peak.

3. Valuation: We anticipate a rally to 1300 and a fade to 1250 by year-end

– P/E typically remains flat or falls slightly in the year following the market trough.
– Equity returns are primarily a function of EPS growth.
– S&P 500 currently 73% above March 2009 low and trades at 14.5x our 2010 EPS.
– Low interest rates in 1H will serve as a tailwind to push P/E toward 15x or 1300.
– Multiple expansion expected to be higher for cyclicals than defensives.

4. Money flows: A bullish back-drop for stock investors in 2010

– We estimate $600 billion of potential flows into the US equity market.
– Individuals: $350 billion of potential money flow into equities.
– Institutions: $150 billion from hedge funds and foreign investors.
– Corporations: $100 billion net flows from capital spending and equity issuance.

To read the full report: INVESTMENT

>The new world: Emerging markets after the crisis

Emerging markets have fared quite well in the crisis
• Particularly against the background of large financial market losses in Sep/08-Mar/09

EM economic growth lower than in the “boom“ years but still very robust
• Roughly 4 pp per year higher than in industrial countries in the next 3-5 years

Some short-term risks to watch
• Risks of bubbles building in some markets; inflation on the rise in some countries
• Policy risks as governments try to manage “excessive“ capital inflows

Medium-term trend: EM position improves but specific risks remain
• Large build-up of public debt in DM has brought issue of sovereign risk to the fore
• Relative risk position of EMs has significantly improved
• Importance of EMs as consumer markets and regarding commodities will rise further
• EM political and policy risks remain important: country-specific knowledge essential

To read the full report: NEW WORLD

>Shree Renuka Sugars Ltd. (MERRILL LYNCH)

PAT of Rs2.24bn up 7x y-o-y, but 10% lesser on FX loss
Renuka Sugars reported PAT of Rs2.24bn in Mar 2010 quarter, up 7x y-o-y and down 14% q-o-q. Profit growth was driven by (1) sugar price increase of 78% y-oy to Rs33.6/kg; (2) volume increase of 96% y-o-y to 239mn kg; and (3) inventory gain on low cost materials contracted in anticipation of sugar price rise. The company’s profit, however, came in 11% lower than our estimate as the company had translation loss in its international subsidiaries owing to rupee appreciation.

1mt sugar inventory at Rs25/kg is cheaper and profitable
At the end of Mar 2010 Renuka had total sugar stock of 1mt including 0.6mt white and 0.4mt raw. Average cost of the inventory is Rs25/kg compared to current sugar price of about Rs27/kg can yield Rs2bn EBIT in H2FY10, while most of its peers will have losses owing to higher cost of inventory.

Balance sheet is in good shape and can add Equipav
Renuka’s net debt to equity increased to 0.8x at the end of Mar 2010 compared to 0.5x at the end of Sep 2009. Increase in net debt to Rs15bn is primarily due to consolidation VDI of Brazil. Net debt to equity is likely to go up to 1.7x following consolidation of Equipav. However, we are not concerned about this debt level as there is three year moratorium on debt payment by its Brazil subsidiaries.

Buy Renuka on diversified business and ethanol price hike
We maintain Buy as Renuka could limit its ROE decline yet again in this downcycle to 17% driven by (1) 3x jump in distillery volume owing to jump in molasses supply in addition to 29% increase in ethanol price as decided by govt recently; (2) around 60% increase refining volume led by commissioning of 1mt Mundra refinery in Dec10; and (3) 2x jump in power sales driven by higher
utilization. Our PO of Rs80 is at 1.8xFY11e P/B owing to 17% trough ROE.

To read the full report: SHREE RENUKA SUGAR

>OIL & NATURAL GAS: Strong domestic reserve replacement; production decline continues (GOLDMAN SACHS)

What's changed
ONGC announced its annual operational metrics for FY10, which indicate strong 1P reserve replacement (1.33x) in domestic fields but declining oil production. Notably, oil production has declined in ONGC’s overseas subsidiary, OVL (ONGC Videsh) as well. Natural gas production grew marginally by about 1% yoy, keeping the overall production volume flat yoy. The numbers were below our volume forecasts for ONGC.

Overall, ONGC’s production profile remains challenged by natural decline in its key blocks in India and overseas. The oil production decline would have been steeper had it not been for ONGC’s share in Cairn India’s oil production from Rajasthan. While ONGC continues its redevelopment efforts in Mumbai High offshore fields in order to arrest the decline, we note that share in Rajasthan oil production likely represents the most significant new avenue of volume growth for ONGC in the medium term.

We maintain our Neutral rating on ONGC with a new 12-m TP of Rs1,010 (earlier Rs1,110), based on EV/GCI vs. CROCI/WACC framework, implying downside of 1%. Our valuation now assumes ONGC’s net oil realization at US$55/bbl in FY10E and US$50/bbl in FY11E vs. US$ 58/bbl and US$53/bbl previously. We have cut FY10E-12E consolidated earnings by 3%-13%,
reflecting our new production forecasts and oil realization estimates.

However, given continued uncertainty in the subsidy-sharing mechanism for loss-making state-owned oil marketing companies, we believe ONGC will likely end up paying a higher subsidy and hence see further potential downside risk to our earnings estimates.

Key risks
1) Higher subsidy burden, 2) lower production volume from legacy fields, and 3) fuel price reforms leading to higher net realization for ONGC.

To read the full report: OIL & NATURAL GAS


Jaypee Infratech Limited (JIL) is engaged in the development of the Yamuna expressway, and related real estate projects. It is a part of Jaypee group, incorporated on April, 2007 as a special purpose company for the development, operation and maintaince of the Yamuna Expressway in the state of Uttar Pradesh, connection Noida and Agra.

Objects of the Issue: Out of the issue proceeds, around Rs 1500 crores are to be used to partially finance the Yamuna expressway, and the remaining general corporate purposes.

Investment Highlights
JIL enjoys strong parentage of Jaypee Group which is a leading integrated infrastructure conglomerate in India.

The Yamuna expressway is a 165-kms access controlled six lane concrete pavement expressway along the Yamuna River, with the potential to be converted into an eight lane expressway. The travel time on this access controlled expressway is likely to take roughly 120-
130 minutes for 165 kms of distance.

The company holds the concession for developing, operating and maintaining the Yamuna Expressway from Noida to Agra for a period of 36 years.

They plan to use cement concrete for the pavements to cut their maintenance costs in future.

The company has a right to develop five parcels of land each of 1235 acres, totalling 6175 acres. The total area which could be developed is roughly 530 mn sq.ft. JIL has taken land parcels on lease agreements for 90 years therebby saving the upfront land costs.

Of the aforesaid saleable area, approx. 21.21 mn sq. ft. of residential area and 3.13 mn sq.ft. of commercial area has been launched for sale, which were approximately 88% sold on a square foot basis which amounts to Rs 4213 crores (residential) as of March 2010.

The entire expressway of 165 kms travels through a single state Uttar Pradesh, so no state toll needs to be paid by travellers, where as if they use the NH, they have to cross two states, hence pay toll. It would also reduce the traffic and the time taken to travel.

The company is eligible for income tax benefits under section 80 I(A) and the same is available for a continuous period of 10 consecutive years in a block of 15 years. The company has decided to claim this benefit beginning with Assessment year 2009-2010 (FY08-09).

The required construction deadline is April 2013, JIL plans to complete the construction by 2011, two years in advance due to contractors’ use of modern construction equipment which significantly reduces construction timeframes without sacrificing the quality of construction.

Key Challenges: The Company will face the tough task of selling the huge land bank of 530 mn sq.ft. at a place where there is already an oversupply.

Advise: The financials till now do not capture the future revenue potential from tolls once the expressway is complete and income from its real estate business (5 integrated townships covering 6175 acres i.e. ~530 mn sq.ft.). Thus valuing the Company based on past performance will not be prudent. The Noida-Agra project is the first of its kind where there will be such a
large real estate development included in the same. Investors with a long-term horizon can consider Subscribing to this issue to benefit from the huge opportunity that the project is likely to present.

To read the full report: JIL

>Satluj Jal Vidyut Nigam Ltd.(SJVN) (INDIA INFOLINE)

Satluj Jal Vidyut Nigam Ltd.(SJVN) a mid-sized hydroelectric power generator has 1,500 MW of operational assets. Over the past three years, it has maintained high efficiency which has allowed it to earn incentives. Against the normative 85% PAF, it operated its plants at 92.4%, 96.7% and 96.1% in FY07, FY08 & FY09 respectively. In order to grow, it plans to expand its installed capacity to 5.5GW over the next decade. Since there is slow progress on majority of the projects (except 412MW Rampur project), we believe most of them will come up only after FY14.

To read the full report: SJVN

Wednesday, April 28, 2010

>Checking the Pulse of the Economy

Conclusions and Investment Implications

• The Federal Reserve has already begun to exit markets without disrupting the economic progress.

• Housing appears to be stabilizing earlier and at higher levels than we expected

• Fiscal stimulus is a strong positive in 2010, but becomes a negative thereafter

• Significant uncertainties remain, but the near-term outlook is positive

• All of these factors, however, are set against a backdrop of deleveraging that has just begun

To read the full report: PULSE OF THE ECONOMY


To read the report: INDIA'S URBAN AWAKENING

>Weakness Begets Weakness: from Banks to Sovereigns to Banks

The Greek debt situation has been an interesting case study for students of the sovereign bond
markets. If there’s a lesson to be learned from Greece’s experience thus far it’s that sovereign bailouts are far more complicated than bank bailouts. They require more sophisticated negotiations and proposals and involve an extra layer of diplomacy that makes them especially difficult to accomplish. As we write this, the European Union has recently announced new lending terms to support the Greek government, with great efforts made to assure the markets that these new terms do not constitute a ‘bailout’. The problem with the Greek situation is that an actual bailout would involve an almost impossible coordination among all the major powers within the EU. It would require the unanimous pre-approval of all the EU heads of state. It would involve the European Commission, the European Central Bank and the International Monetary Fund (IMF) all visiting Greece to perform financial assessments.1 And finally, it would involve at least seven EU countries affirming support through parliamentary votes - all of this before a single euro is spent. A true bailout involves an almost impossible number of hurdles that essentially guarantee nothing will happen until all other avenues of rescue are exhausted. However, judging by the recent increase in yields on 10-year Greek bonds, Greece may soon need more than a loan package proposal to solve its fiscal problems.

One aspect of the Greek situation that has been obscured by all the recent political wrangling is the crisis’ impact on the Greek banks. Although the banks were supposed to be rock solid after all the government-injected capital they received (not to mention zero-percent interest rates and generous lending terms from the European Central Bank), data shows that Greek bank deposits have fallen 8.4 billion euros, or 3.6 percent, in two months since December 2009.2 With no restraints on capital flows within the European Union, Greek savers are free to transfer their assets elsewhere. Given that bank deposit guarantees in Greece are the responsibility of the national government rather than the European Central Bank, we suspect Greek citizens are pulling money out of their banks because they question their government’s ability to honour its domestic deposit guarantees. We envision Greek depositors asking themselves how a government that can’t raise enough money to stay solvent can then turn around and guarantee their bank deposits? It’s a fair question to ask.

To read the full report: WEAKNESS BEGETS


We recently met with the management of Consolidated Construction (CCCL) to enhance our understanding about the company. Key highlights of our interaction are summarised below:

Current order book at ~ INR 38 bn, L1 in ~ INR 5 bn worth projects CCCL’s current order book is at ~ INR 38 bn. The company is also L1 in projects worth ~ INR 5 bn. Infra orders form ~36% of the current order book with ~50- 55% coming from the commercial segment; residential and industrial projects contribute the balance.

Order intake picking up; negligible developer exposure
Management stated that the company’s order inflow is picking up. Its order intake during 9mFY10 stood at INR 18 bn; the company has bagged orders worth ~ INR 4 bn in the current month itself. Its exposure to real estate developers is negligible and currently stands at ~1-2% of order book.

􀂄 Looking to expand footprint in various infra segments
CCCL is planning to increase its presence in the infra space to diversify its business model and enhance its business offerings. The company is planning to bid for a couple of state BOT-annuity road projects. It is also eyeing the BoP space in the power segment, where it has provided only civil construction services till now.

Looking at PE investment at subsidiary level
CCCL’s wholly owned subsidiary, CCCL Infra is the vehicle for its asset ownership ventures. The company is developing a 294 acre food processing SEZ. It is also L1 in an INR 2.5 bn multi-level underground car parking project in Delhi. The company is eying PE funding for CCCL Infra.

■ Outlook and valuations: Promising; ‘NOT RATED’
The management believes that with improvement in economic outlook, CCCL is poised for better growth prospects ahead. At CMP of INR 92, the stock is currently trading at P/E of 14.7x and 12.0x FY11E and FY12E (consolidated earnings, consensus estimates), respectively. The stock is currently not under our coverage.

To read the full report: CONSOLIDATED CONSTRUCTION


Dr Reddy’s initiates Class III recall of 9 batches of risperidone
Dr Reddy’s fell 3% today following news that co. has initiated a Class III recall (a situation in which use of or exposure to a violative product is not likely to cause adverse health consequences) for 9 batches of Risperidone tablets. The reason for the recall is out of specification results at the 18 month time point. Out of the 9 batches being recalled 7 of them were to expire in April 2010.

Limited negative fallout seen from this recall
Co. indicated that the drug accounts for less than 0.1% of U.S. revenues and therefore has negligible financial impact. These batches were manufactured before the previous recalls in early Oct’09, following which the co. took strong corrective action at its facility. The plant was re-inspected by the FDA in Nov’09 and received only one minor observation. We therefore do not expect any further negative fallout from this recall.

Maintain bullish stance
We continue to see significant near term drivers for the stock with ramp up of Prilosec OTC and launch of Allegra D-12 and D-24 in Q1FY11. Fondaparinux generic approval remains another trigger, although not a part of our estimates. We also expect the API business to benefit from the strong wave of patent expiries over 2011-2012 in US.

Valuation: Maintain Buy, PT Rs 1,500
We continue to derive our price target using DCF-based methodology, explicitly forecasting long-term valuation drivers using UBS’s VCAM tool (WACC of 11%).

To read the full report: DR. REDDY

Tuesday, April 27, 2010

>Greece,Spain,Italy Portugal Banks facing heat (DANSKE MARKETS)

• The decoupling between banks and corporates continues on the back of escalating market fears regarding Greece.

Market comment
In the last few days the Greek situation has spiralled out of control, with Greek treasury spreads reaching new highs relative to Bunds. The latest widening came after it was revealed that there was yet another negative revision of the 2009 deficit number (to 13.6%, with Eurostat warning that it may be even higher). It is hard to guess on the outcome of the ongoing problems, but in the short term Greece should have access to financing through the combined EU/IMF loan package that was agreed upon last week.

The spill-over to Spain, Italy and Portugal was significant and Portuguese banks in particular felt the heat, with senior bank spreads widening by some 50-100bp in the long end. As ever when the focus turns to sovereign debt problems, non-financials have outperformed financials in the credit market. The difference between the two indices is now at its widest level ever.

Currently, iTraxx Europe trades at 86bp while Crossover is at 420bp. Cash spreads have held up reasonably well compared to CDS, although the Tier 1 market has given up a little after performing strongly for a long time. In our view, any substantial widening in both non-financials and subordinated financials, in names not directly exposed to Southern Europe, is a buying opportunity. Naturally, the primary market has been quiet during the week due to the weakness in the market.

To read the full report: CREDIT UPDATE

>What’s next for global banks (McKinsey)

In 2008, as the credit crisis broke, banks underwent near-death experiences on a massive scale. Last year, many enjoyed a recovery that was nearly as abrupt. In the intense uncertainty that ensued, bankers around the world have rightly shifted their focus away from growth and toward survival as they confront ambiguity about markets, risk, regulation, and demand.

Amid such extreme mood swings, long-term structural changes now under way will fundamentally affect banking in the years to come. To understand these changes, we undertook research that combined a historical view of the industry with an analysis of 25 global banks to see how various portfolios of banking businesses and geographic distributions would fare under different macro and regulatory scenarios. Among our findings:

• Under a scenario of lower global economic growth and tough regulatory restrictions, all but emerging-market banking giants will probably destroy value over the next four years.
Funding costs will remain high, further hurting profitability.

• Without any management moves, banks of every type will need more capital—as much as $600 billion over the next five years for the 25 banks we modeled. That suggests a real danger of a capital crunch, further forced asset sales, and the need for additional government help.

• The range of performance by banks using similar business models will widen. Big European banking groups, for example, will see returns on equity (ROE) ranging from 9 to 18 percent.

To arrive at a perspective on these fundamental changes, we turned to scenarios that the McKinsey Global Institute (MGI) developed to help model uncertainty about economic recovery and growth. We adapted these scenarios to include the particular forces that most influence banking returns: inflation and the shape of the yield curve, as well as uncertainties about state intervention, including new capital requirements, consumer protection measures, new rules on risk management, pay caps, and the extension of regulation to the “shadow” banking system.

Two views emerged. The midpoint case foresees prolonged recession followed by subtrend growth, returning within two years to pre-crisis rates. Markets in nearly all asset classes would recover as regulators sought to stabilize the financial system, improve riskmanagement practices, and increase transparency. Moderate regulation of systemically important banks would include pay caps, new rules on exotic products, and tighter capital requirements.

The extreme case envisions a moderate recession followed by structurally slower global growth. Markets would remain severely dysfunctional, and regulators would see banks as utilities, not independent agents, and accordingly attempt to limit their returns and to suppress volatility. Strict regulation would be applied not only to systemically important banks but to smaller entities as well. In this scenario, banks would face much tighter capital requirements.

When we proposed these two scenarios to about two dozen banking leaders and chief strategy officers, the result surprised us. While the current economic evidence seems to indicate that the midpoint case is more probable, our panel concluded that the extreme one was just as likely.

With both scenarios thus in play, we conducted a “momentum” analysis of 25 global banks, together representing about 40 to 45 percent of global industry assets and all major Western and emerging markets, including Brazil, China, Eastern Europe, India, and Russia. We aggregated these institutions into five archetypes: three kinds of universal banks (European, Japanese, and North American), emerging-market giants, and global investment banks. Then we extrapolated current performance into the future, producing a “run rate” forecast—that is, an estimate of how various portfolios of banking businesses and geographic distributions might fare in either scenario if the banks don’t respond to the forces we see shaping the industry in the next few years (see the interactive exhibit on This estimate establishes the baseline.

Our findings suggest that they will be subject to five substantive forces that will
considerably change their fortunes. One key finding is that the capital shortage triggered
by the crisis and recently addressed through several rounds of massive capital raising
will endure and get worse. Our scenarios model both the demand for capital (the amount
needed to finance projected asset growth and meet regulatory requirements) and the
supply (earnings, less the amount likely to be paid out as dividends). In every case, demand
exceeds supply. Capital needs will range from small (investment banks, which have already
raised significant amounts and are holding substantial buffers, anticipating regulatory
change) to vast (emerging-market giants, which will need to finance their growth). Inbetween
are the universal banks, which will have modestly challenging capital needs in the
midpoint scenario and a very challenging problem in the extreme one.

A second factor weighing on returns will be the high and rising cost of long-term funding. Several factors are at work here, beginning with a shift in demand. As part of balance sheet restructuring, many banks are cutting back on short-term, unsecured funding (such as commercial paper) and seeking instead to issue longer-dated debt. Demand will also rise as the longer-dated funding currently on banks’ books expires and is renewed. On the supply side, government asset-purchase programs—quantitative easing—are already being retired. Finally, the market will see greater competition for funds, not least from governments that must finance their deficits. All this implies that prices for long-term funding will inexorably rise, shaving as much as several percentage points off ROE, depending on the scenario.

Given these drags on performance, returns will be weak by the standards of the past decade. Worse, they will be highly uncertain—our third finding. In the midpoint case, industry revenues would grow by 5 percent annually through 2014; in the extreme case, the industry would eke out much less attractive annual growth of 1 percent. Under either scenario, the emerging-markets giants come out on top. The story for the other groups of banks is mixed. In the midpoint case, the European and US universals and the investment banks would generate middling ROEs well below their pre-crisis levels. The Japanese universals’ returns would suffer from a poor macroeconomic environment. In the extreme scenario, all but the emerging-market giants will find it extraordinarily difficult to return even their cost of equity. In other words, these banks will face a challenging period reminiscent of the early 1980s.

Our estimates may be cautious. We did not include, for example, the effects of a liability levy such as the one the Obama administration recently proposed. Instead we modeled this proposal separately and found that if such a tax were adopted globally and imposed on the banks in our model, the effect would be to reduce their ROEs by 0.7 to 1.2 percentage points.

A fourth finding confirms the economic evidence of the past several months: the crisis affected emerging markets, especially Asia, less severely than Western ones. Parts of Asia were the last areas to enter into recession and the first to emerge from it—indeed, China’s economy never stopped growing. Asian banks had less trouble with toxic assets and excess leverage than their counterparts elsewhere did. The crisis served to demonstrate that the balance of power shifts abruptly and powerfully rather than gradually; many Asian banks have vaulted to the top of league tables in one go.

Our research confirms that for the next several years, Asia’s economic might will continue to grow, as will the influence and power of its banks. Indeed, in these markets, banking is likely to grow much faster even than the broader economy, because so much of the population is “unbanked.”1 In both scenarios, all the emerging markets will grow substantially faster than the more mature markets of Europe and North America. Our last finding stands apart from the rest—and offers a ray of light to many banks. The archetypes constitute a form of destiny: emerging-market giants, riding the back of faster GDP growth, will outperform developed-market universals. In many ways, banking is a leveraged bet on the underlying economy. Yet despite that destiny, banks can do a lot about their performance. The model suggests that within archetypes, differences in performance will be even greater in the future than they are today. The crisis has considerably ratcheted up economic volatility, putting an end to the period some have dubbed “The Great Moderation.” This volatility will amplify the existing differences in performance. Even banks that have been dealt a challenging hand can do much to outperform their peers and reward stakeholders.

To mitigate these longer-term structural changes, banks can and should take many strategic steps. The necessary moves include reconfiguring and empowering regulatory strategy, placing big bets on the fastest-growing areas, and rethinking liquidity to treat it like other scarce resources the corporate center manages. Such steps, as well as innovations yet unseen, will be important variables in determining the shape of global banking over the long term.


After seven consecutive quarters of contraction in its loan book, ICICI Bank is now looking to grow its domestic loan book by 20% in FY11. The bank has already made credible progress towards increasing CASA and stabilising asset quality. We expect the bank’s loans to grow at sub-industry rate in FY11, with no material NIM expansion. Provision charges are likely to remain high to meet RBI’s required 70% NPL coverage by 2QFY11. We expect the RoE to remain in single digits until FY12, and view the stock as expensive on PE and PEG basis. We retain REDUCE.

New retail strategy needs time: In contrast to its earlier strategy of discouraging branch-banking and aggressively acquiring new customers through direct-marketing agents (DMAs) and call centres, the bank is now focussing on cross-selling to existing customers. We believe this change in stance will take some time to trickle down to customers. Unlike in the past, the bank is unlikely to be a price leader, as it has more competition from government banks and has fewer products to offer, having reduced its focus on credit-card and unsecured personal loans.

Material NIM expansion unlikely: While the CASA ratio has risen by 12pps to 40% over the past year, NIMs have expanded by only 20bps over the same period. The growing proportion of overseas loans, coupled with the bank’s exit from high-yielding retail loans, has effectively capped NIM expansion. We expect these factors to continue to play out over FY11 as the proportion of overseas loans remains high and the bank concentrates on secured retail lending.

NPLs have peaked, but credit charges may not decline: Gross NPLs have declined by 10% and gross retail NPLs by 16%, since peaking in 4QFY09. However, the NPL coverage ratio of 51% (62%, considering technical write-offs, which are yet to be approved by RBI) remain well below the minimum 70% stipulated by RBI. As such, we expect provision charges to remain high.

To read the full report: ICICI BANK

>INDIAN REAL ESTATE: Residential volume slows; still see value in our Buy stocks

■ Residential data for Jan-Feb 2010 indicates a slowdown vs. 4Q09
Our analysis of recent residential data indicates a slowdown in volume in 1Q10. In Gurgaon, monthly sales fell to about 1,600 units/month in Jan-Feb 2010 from about 2,400 units/month in 4Q09. In the Mumbai region, the average was about 4,100 units/month in Jan-Feb 2010 vs. about 5,700 units/month in 4Q09. We expect sales data from the listed developers with results in April/May.

■ Maintain Buy on Unitech, DLF, Anant Raj and Indiabulls RE
The BSE Realty index is down 9% ytd and has lagged the Sensex (up 2%), which we believe reflects concerns on macro policy tightening, moderation in volumes, and a pipeline of upcoming IPOs. However, we continue to expect steady residential sales for leading listed developers such as DLF and Unitech that have not increased prices across the board as steeply as seen in some Mumbai projects. Our recent Delhi-NCR trip indicated that construction activity is picking up. We also expect office absorption to improve through 2010. We think unsold inventory levels, affordability, developer balance sheets, and discounts to RNAV are more favorable in 2010 than they were in 2008/2009. We therefore maintain our Buy ratings on Unitech (UNTE.BO), DLF (DLF.BO), Anant Raj (ANRA.BO) and Indiabulls RE (INRL.BO); our Neutral on HDIL (HDIL.BO) and Sobha (SOBH.BO); and our Sell rating on Parsvnath (PARV.BO).

■ Some stocks have already priced in falling property rates
While we expect further policy tightening through 2010, our sensitivity analysis
indicates potential value in our Buy-rated stocks at current stock prices. For example, we believe Unitech, Anant Raj, IBREL, and DLF stock prices currently imply well over a 5% yoy decline in residential prices in FY11E, which we believe is unlikely unless economic growth slows down. In fact, our economist is looking for GDP growth of over 8% in FY11.

■ We revise our estimates and 12-m target prices
We revise our FY10E-FY12E EPS by -18% to +11% for our India property coverage in order to reflect key factors that include the phasing out of percentage of completion revenue/profit recognition and changes to other line items such as finance and overhead costs. We revise our 12-month target prices by -20% to +12% for these stocks: Indiabulls RE to Rs214 from Rs269; DLF to Rs425 from Rs463; Parsvnath to Rs112 from Rs118; HDIL to Rs364 from Rs379; Sobha to
Rs280 from Rs250. Our target prices for Unitech and Anant Raj remain unchanged.

To read the full report: REAL ESTATE

>STERLITE TECHNOLOGIES: Strong telecom margin drives PAT (EDELWEISS)

■ Revenue up 15% to INR 6.6 bn
Sterlite Technologies’ (SOTL) Q4FY10 revenues recorded growth of 14.7% Y-o-Y, to INR 6.6 bn, primarily driven by 19.9% Y-o-Y growth in the power transmission business to INR 4.8 bn. The telecom business, however, recorded a mere 2.9% Y-o- Y growth to INR 1.8 bn due to lower execution during the quarter. Telecom’s contribution to the overall revenue fell to 27.5% during the quarter against 30.6% in Q4FY09. On the volume front, SOTL recorded 38.4% Y-o-Y growth in optical fibres volume to 2.2 mn km, while that for power conductors increased 11.5% Y-o- Y to 36,794 MT.

Telecom margin zooms to 31%
During the quarter, reduced raw material (down 598bps to 64.1% of sales) and employee (down 15bps to 2.2% of sales) costs were negated to some extent by increase in other expenses (up 277bps to 17.1% of sales). This led to 336bps improvement in EBITDA margin to 16.6%. This, in turn, led to a robust 43.8% EBITDA growth Y-o-Y to INR 1,101 mn. Further, reduced interest cost (down 31.7% Y-o-Y) and significant improvement in other income helped post strong PAT growth of 57.4% Y-o-Y, to INR 722 mn, during the quarter. In view of improved business outlook and guidance by management, we revise our EPS estimates upwards for FY11E and FY12E by 4.4% and 9.7%, respectively.

Strong visibility; order book up 75% Y-o-Y; expansion on schedule
SOTL’s order backlog recorded a strong growth of 75.2% Y-o-Y, to INR 24.0 bn (0.8x FY11E revenues), with INR 18 bn (increase of 58% Y-o-Y) backlog in power conductors and the balance INR 6 bn (increase of 161% Y-o-Y) in the telecom business. Management has indicated that expansion projects for both optic fibres (expansion to 20 mn km) and power conductors (expansion to 200,000 MT) are on schedule and likely to be completed by end FY12 and FY11, respectively.

Outlook and valuations: Positive; maintain ‘BUY’
We are positive on SOTL, given that both businesses (power and telecom) have favourable demand drivers with significant spending expected in power T&D in India and fibre demand (driven by growing number of mobile subscribers, 3G auction along with pick up in the global fibre market). At our target price of INR 103, the implied target P/E for FY11E and FY12E is 14.5x and 11.8x, respectively. We maintain our ‘BUY’ recommendation on the stock.

To read the full report: STERLITE TECHNOLOGIES


Wipro 4QFY10 results in line, margins surprise positively, elevated attrition a risk; Neutral
Wipro's 4QFY10 results were in line with our estimates. The key highlights were:

1] US dollar revenues were up 3.5% (v/s our estimate of 4% QoQ), 1QFY11 guidance was 2-4.2% QoQ (v/s our expectation of 3-4%). Overall EBIT margins and IT EBIT margins were ahead of expectations on improved acquired company profitability and reduction in non-staff costs. Overall EBIT margins improved by 20bp to 191%, IT EBIT margins increased 60bp to 24.2%.

2] Wipro does not envisage wage inflation in FY11, despite attrition increasing from 13.4% to 17.1% QoQ. Our assumptions build in 7% offshore wage hikes in FY11. This brings wage inflation in line with TCS and Infosys (13% and 14% offshore respectively), given the 8-9% offshore hike in 4QFY10 (effective for two months). We expect IT EBIT margins to fall by 70bp to 22.7% (v/s Wipro's expectation of flattish margins, given our mid-year wage inflation expectation).

3] The company declared a 2:3 bonus and dividend of Rs6/share, reinstating dividend to pre -FY09 levels (after which dividend was cut to Rs4/share).

Our FY11 EPS (Rs34.7) are downgraded by 3% and FY12 EPS are constant (Rs40), incorporating [1] mid-year wage inflation expectations of 7% offshore [2] INR/US$ assumption change from 46 to 44.5. We expect Wipro to post US$ revenue CAGR of 19% over FY10-12 and an EPS CAGR of 13% in the period. The stock trades at a P/E of 20x FY11E and 17.3x FY12E. We maintain Neutral with a target price of Rs760, based on 19x FY12E earnings. Infosys and HCL Tech remain our preferred picks among top tier IT companies.

Wipro 4QFY10 revenue up 3.5% QoQ, guides for 2-4.2% growth in 1QFY11 Wipro's 4QFY10 revenue at US$1166m grew 3.5% QoQ (v/s our estimate of US$1172m and guidance of US$1,162m-1,183m). Constant currency revenue grew by 4.7% QoQ. IT services EBIT margin was up 60bp QoQ at 24.2% (v/s our estimate of 22.6%). Consolidated EBIT margin was at 19.1% (v/s 18.9% in 3QFY10 and our estimate of 18.4%). SGA as a percentage of sales increased from 12.2% to 12.6% (v/s our estimate of 12%). Higher other income at Rs 1.7b (vs our estimate of Rs1.3b), led to a higher effective tax rate of 20.2% (v/s our estimate of 16.1%). PAT was Rs12.1b, up 1% QoQ (v/s our estimate of Rs12.4b). FY10 EPS was Rs31.2 (up 18% YoY)

Wipro guided 1QFY11 growth of 2-4.2% QoQ (v/s Infosys guidance of 2.6%-3.4% QoQ). The company expects to add 11,000-12,000 freshers in FY11 in its IT business. Wipro expects broad-based growth and early signs of recovery in discretionary demand.

To read the full report: WIPRO

Monday, April 26, 2010

>Pan-European Pharmaceuticals (MERRILL LYNCH)

Competitive analysis of major therapeutic classes
We provide a monthly competitive market share and growth analysis of the major therapeutic drug classes of interest to investors for the US market. We use monthly prescription data for retail and mail order pharmacies sourced from IMS.

New product approvals and patent expiries
We highlight key upcoming product approvals, patent expires and other events that could impact class dynamics.

Market shares, growth rates and sales forecasts
We highlight category market shares, total prescription growth rates and, where applicable, BofA Merrill Lynch sales forecasts.

U S drug market 4.1% in March (actual), 1.8% (adjusted)
On an actual basis, the US prescription drug market was up 4.1% in March, versus down 0.5% in February and 2.7% 12 month MAT growth. On an adjusted basis (which takes into account the number of days in a given month for a yearon- year comparison), March volumes were up 1.8% versus February volumes down 0.5%.

Key Highlights this month
Key highlights this month include the following:
1) Cozaar / Hyzaar- FDA approved the first generic equivalents of Merck’s ARBs Cozaar (Losartan Potassium) and Hyzaar (Losartan Potassium/HCTZ combo) 6 April 2010. Whilst Teva has 180-day exclusivity for its generic Cozaar and Hyzaar, Sandoz launched authorised generics of both in the US on 8 April 2010.

2) Bydureon (Byetta LAR) – Amylin’s partner (Lilly) submitted an MAA to the European Medicines Agency for Bydureon on 18 April 2010. Following the FDA CRL for Bydureon in March, Amylin expects to make its response imminently.

3) Duodart - GSK's fixed dose combination of Avodart/Flomax was granted European approval 31 March 2010. The Flomax patent expires on 27th April 2010.


>JAIPRAKASH ASSOCIATES: Proxy for infrastructure play… (ICICI DIRECT)

Jaiprakash Associates (JAL) is a leading infrastructure conglomerate in India. The company has set aggressive expansion plans across its business. With aggressive capacity addition plans in the cement division, we expect JAL’s market share across India to increase from 4.1% in FY09 to 7.6% in FY12E. In the power division, JAL is set to add 10,350 MW taking its total capacity to 11,050 MW by FY16E. In the construction division, the strong order book of Rs 10,608 crore
(excluding Ganga Expressway) and in-house EPC opportunities from power projects provides strong revenue visibility over the next couple of years. Additionally, monetisation of the real estate development from the development for Yamuna Expressway bodes well for JAL. Hence,
we are initiating coverage on JAL with BUY rating and a price target of Rs 180 based on the SOTP valuation methodology.

Cement division – market share to almost double by FY12E
JAL is a leading cement player with a strong presence (~30% market share) in the central region. We expect its cement capacity to almost double to 26.8 MTPA during FY09-12E. Consequently, we expect the volume of JAL’s cement division to grow at a CAGR of 35.2% to 18.9 MTPA in FY12 against industry average of 10.4% during the same period leading to expansion in market share to 7.6% in FY12 from 4.1% in FY09.

Power division capacity to grow exponentially
JAL through its subsidiary JPVL (merged entity) has installed capacity of 700 MW as at the end of December 2009. The company has an ambitious growth plan and is targeting capacity of 13,470 MW. Out of these, ~1,500 MW is expected by FY12E and 10,350 MW is expected by FY16E.

■ Construction division – huge opportunities from in-house project
JAL has a strong order book of Rs 10,608 crore, 2.0x FY10E construction division revenues. Furthermore, we expect significant in-house order inflow opportunities from the power division (~Rs 12,000 crore). Hence, we expect revenues of the construction division to grow at a CAGR of 34.7% during FY09-FY12E.

Yamuna Expressway – Monetising on land bank
JAL is monetising very well on the Noida land parcel, which was received along with 165 km development of the Yamuna Expressway road project. Till date, the company has sold 19.9 million sq ft at an average realisation of Rs 3,480 psf and collected Rs 1,991 crore from its customers.

At the CMP, the stock is trading at 23.3x FY12 earning estimates and 3.3x FY12 P/BV. We value the stock at Rs 180 per share based on the SOTP methodology. We are initiating coverage on JAL with BUY recommendation.

To read the full report: JP ASSOCIATES

>ESCORTS: Strong trends continue (EDELWEISS)

Strong quarter: Profits well ahead of estimates
Escorts’ Q2FY10 PAT, at INR 444 mn (up 1093% Y-o-Y; 90% Q-o-Q), was well ahead of our estimates (INR 244 mn). The strong performance reflects improved profitability and volume growth in the core tractor segment.

■ EBITDA margins up 120bps Q-o-Q
The top-line growth of 37% Y-o-Y was led by 51% Y-o-Y volume growth in tractors. Raw material costs declined 87bps Q-o-Q, largely on price hikes taken at the beginning of the quarter. Staff and other costs showed a downturn (down 210bps Y-o-Y; 33bps Q-o-Q) as benefits of operating leverage kicked in. Net interest income was positive (INR 9 mn vis-à-vis interest outgo of INR 45 mn in Q1FY10) on account of interest refunds from banks (~INR50mn).

Repurchases debentures in construction subsidiary
In April 2010, Escorts redeemed the convertible debentures held by DAMF Equipment Holdings (DARBY) in Escorts Construction Equipment (ECEL: a wholly owned subsidiary of the company) for INR 1.3 bn. Had these debentures converted, equity of the subsidiary would have diluted by ~25%. This indirectly values ECEL at ~INR 5bn.

■ Balance sheet strength shines
The company’s balance sheet remains strong with greater profitability leading to an increase in cash balances. The net debt currently stands at INR 246mn, implying a negligible D/E of 0.02x. The working capital position remains comfortable. These factors were reflected in the recent credit upgrade from ICRA.

Outlook and valuations: Going strong; maintain ‘BUY’
We believe the company has successfully resolved balance sheet related issues, and is now firmly focused on its core businesses. While the tractor business is on track, we are also enthused by the company’s focus on segments in the infrastructure space. With the strong performance, we revise our estimates for EPS for FY10 and FY11 by 9.7% and 15.7%, respectively. Despite the recent run-up (up 30% in the past three months), the stock is trading at P/E of 11.8x FY10E and 9.7x FY11E, respectively, considerably lower than its peers. Also, upsides from the construction business could be substantial. We maintain ‘BUY’ on the stock.

To read the full report: ESCORTS


Marginally below estimates led by lower GRM, higher depreciation: RIL's 4QFY10 reported EBITDA was Rs91.4b, marginally lower than our estimate of Rs94.6b (up 68% YoY and up 16% QoQ), led by lower GRM and lower E&P profitability. PAT was Rs47.1b (v/s our estimate of Rs48.6b), up 22% YoY and 18% QoQ.

Lower than expected GRM; petchem strong: Reported GRM was lower than our estimate at US$7.5/bbl (v/s our estimate of US$8/bbl), against US$9.9/bbl a year earlier and US$5.9/bbl in 3QFY10. Petchem EBIT margin was 14.4% against 17.7% in 4QFY09 and 13.9% in 3QFY10. Petchem made the highest ever quarterly EBIT of Rs22.2b, led by strong volume and margin growth.

E&P profitability hit by higher depletion; ramp-up contingent to GAIL de-bottlenecking: E&P EBIT margin continued to decline led by higher depletion and was 39.4% against 64.3% in 4QFY09 and 41.8% in 3QFY10. KGD6 gas volumes averaged 60mmscmd in 4QFY10 (v/s 48 in 3QFY10, 32 in 2QFY10 and 19 in 1QFY10) and a further increase is contingent on GAIL's HVJ-DVPL debottlenecking. MA oil production ramped up significantly and is producing 30kbpd (no clarity on a further ramp-up).

Clarity on timelines for other E&P blocks yet to emerge: The management did not provide specific guidance in terms of the exploration/appraisal/development plan for its other key blocks. We believe clarity on the development plans for NEC-25, satellite fields would be key to clarity on medium-term E&P earnings growth.

Valuation and view: We model GRM of US$7.6/8.5/bbl in FY11/FY12. The key things to watch in the near term would be (1) resolution of its court cases with RNRL and NTPC; (2) ramp-up of KG-D6 gas, and (3) deployment of its increasing cash on the balance sheet. Adjusted for treasury shares, RIL trades at 12.4x FY12E adjusted EPS of Rs87.9. Our SOTP-based target price for RIL is Rs1,133/share (including upside potential of Rs205/share). Buy.

To read the full report: RIL


Incumbency may confer a strategic advantage in the 3G auctions because of the infrastructure, customers and cash flows of the large companies. All the winners in 3G may find reasons to observe price discipline and tone down the tariff war. Another force that may end the tariff war would be exhaustion of spectrum with new operators after Mar11. Number portability may act differently in India because the forces triggered by it in other parts of the world have existed here
for some time; portability may actually be good for incumbents. Underperformance of telecom stocks for five quarters suggests that 3G and the tariff war are priced in. However, a rebound may not be round the corner due to the risks to FY11f earnings. We initiate coverage on BHARTI (Hold), IDEA (Add) and RCOM (Hold).

■ Incumbents hold the edge in 3G auctions
The strategic advantage of large incumbents arises from their infrastructure, customer relationships and cash flows. Winners could quickly lift quality of service in 2G. Later, they could tap the high‐ARPU segments to identify customers for 3G offerings. A potential positive spin‐off from the 3G auctions is the return of pricing discipline. Incumbents with a superior quality would not need to resort to aggressive pricing. A new provider who wins a 3G license may only obtain funding with covenants that prescribe superior returns on capital.

■ Tariff war could end after Mar11
Aside from the influence of 3G a potential inflection point may emerge after Mar11 when new operators begin to exhaust their spectrum. Exhaustion of spectrum with large incumbents since 2007 had slowed the decline in tariffs. However, the tariff war resumed in 2009 because new entrants used the pricing tool to grab incremental market share. We believe the situation in FY11
would be similar to that in 2008 with a high probability of bottoming out of tariffs.

■ MNP may add little to the high ambient competition in India
Global precedents indicate that onset of portability leads to high churn rates, loss of market share by incumbents and a cut in ARPU. Much of these effects have been present in India for 5 quarters. Portability may be favorable to incumbents in India due to extensive network coverage, distribution reach, customer service and brand.

■ Near‐term downside risk to earnings may delay a re‐rating
Across the globe, winners in 3G auctions had seen consequent erosion in market value. In India this phase may be over. Underperformance of telecom stocks to the Nifty after Dec08 correlates with concerns over 3G and the tariff war. Yet, stocks may not rebound soon as net profits for FY11f face potential downside arising from the persistence of low tariffs and the possible rise in financing costs. FY12 may have more positives such as the likely return of price discipline and payback in some projects where investments were made till FY10. We initiate coverage on BHARTI (Hold), IDEA (Add) and RCOM (Hold).

To read the full report: TELECOM SECTOR

Sunday, April 25, 2010

>GLOBAL MARKETS: Risky assets retain their appeal

Despite a temporary blip, economic data has again begun to surprise consistently to the upside, and risky asset returns are trumping uncertainty for investors in 2010.

The current point in the cycle is a swwet spot, with output gaps that can accomodate above trend growth, yet inflation that keeps central banks on the sidelines.

Whereas global central bank rates fell roughly in unison as the financial crisi struck, there is an obvious divergence on the way back up, with the emerging markets and commodity players moving before the major advanced economies.

The publication also includes quarterly interest rate and exchange rate forecasts for the U.S., Canada, Australia, and New Zealand and also offers additional exchange rate forecasts for the Japenese yen, the euro, the U.K. pound and the Swiss franc.

To read the full report: GLOBAL MARKETS

>Analysis of Equity Moves by Mutual Funds in March 2010 (HDFC SECURITIES)

This note analyses the equity moves in March 2010 by Mutual Funds having month-end equity corpuses of more than Rs. 2,000 cr (except Fidelity Mutual Fund whose portfolio for February 2010 was not available). The source of data for this analysis is NAV INDIA, who in turn takes into account the monthly-declared portfolios of the respective schemes wherever available (excluding offshore funds, FMPs and new fund offers). NAV INDIA at times revises data for past periods depending on the need thereof.

AMFI disseminates the data about mutual funds on a monthly basis based on the monthly average AUMs declared by the Mutual Funds while NAV India calculates the data based on month end AUMs. Hence the analysis and findings based on these two may not match.

Summary: Total AUM fell 15.5% in March 2010 over February 2010 to Rs. 6,41,866 cr. This fall is mainly on account of massive outflows (in terms of percentage) in the bond funds, liquid funds, index funds and FOF segments. Only 8 of the 36 fund houses that have disclosed their assets under management (AUM) figures for March 2010 have seen a rise in assets compared with the previous month. Even though the benchmark indices saw a growth of over 6% during March 2010, the AUMs fell as banks and corporates withdrew mainly from fixed income funds to pay off their advance tax payments. Banks also withdrew funds from mutual funds to shore up their year-end credit growth numbers. This happens during every fiscal year-end. Another reason for the decline has been the large dividend payouts by the mutual funds during the month. The Bond Funds saw a fall of 26% and Liquid Funds and Index funds, fell by -14% and 12% respectively. FOF fell by 13% in March 2010 after a 10% rise in February 2010. According to figures released by the Reserve Bank of India in its weekly statistical supplement, banks' investments in mutual funds stood at Rs 55,503 crs in the last fortnight of March 2010 as against Rs 1,09,453 crs as on February 26, 2010 as against Rs 1,47,279 crs on December 18, 2009.

The Equity Diversified funds showed a marginal rise of 1% in their corpus for the month of March 2010 mainly due to the increase seen in the benchmark indices during the month. Gilt Funds rose the maximum by 7% followed by Tax Planning Funds, which rose by 5% during March 2010 (to benefit out of the tax reliefs by investing before the fiscal year end). As per SEBI data, mutual funds were net sellers of Rs 3, 809 crs worth equity shares during the month of March 2010 in the secondary markets.

To read the full report: STOCK ANALYSER

>AXIS BANK: Low cost of funds propels bottomline (ICICI DIRECT)

Axis Bank declared its Q4FY10 earnings, which were above our expectations. The PAT grew 32% YoY to Rs 765 crore (we estimated Rs 716 crore). A drop in the cost of funds, primarily driven by repricing of bulk deposits, growth in demand deposits and QIP proceeds, helped the
bank to inch up its NIM to 4.1% (3.4% in Q4FY09).

Strong business growth leads to NIM improvement YoY, QoQ
The bank witnessed 23% YoY and 24% YoY growth in advances and deposits to Rs 1,04,343 crore and Rs 1,41,300 crore, respectively. This resulted in 23% YoY growth in total business of the bank. The key highlight for Q4FY10 was sequential 39 bps improvement in cost of funds, which helped the NIM to be at 4.1% levels. On the other hand, CASA was stable at 46%. We expect NIM to stabilise around 3.5% by FY12E.

Non-interest income
The non-interest income of the bank grew moderately by 10% YoY in Q4FY10 to Rs 934 crore. This was lower than our estimate of Rs 1,010 crore. Going forward, we expect 37% CAGR in non-interest income over FY09-12E to Rs 5,403 crore.

Asset quality showing early signs of stress
GNPA inched up QoQ by Rs 144 crore whereas NNPA improved by Rs 11 crore to Rs 419 crore. The GNPA slipped from 0.9% in FY09 to 1.1% in FY10, while NNPA stayed stable at 0.36%. The silver lining for asset quality remains the fact that provision coverage has improved sequentially from 69% in Q3FY10 to over 72% in Q4FY10. We have built in higher provisioning for the bank till FY12E to absorb any shock on asset quality.

We expect the bank to generate a business CAGR of 22% over FY09- FY12E with NIM hovering around 3.5% levels. We expect the bank to deliver healthy return ratios with improvement in credit offtake. We expect RoA of 1.7% and RoE of 19% for FY12E. We are rolling over our target price on FY12E estimated ABV of Rs 544 and valuing the bank at Rs 1302 (2.4x ABV).

To read the full report: AXIS BANK