Saturday, September 25, 2010

>STRATEGY: Which stocks to buy now?

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

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

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

To read the full report: INDIA STRATEGY

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

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

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

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

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

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

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

To read the full report: ORIENT GREEN POWER

>CANTABIL RETAIL:IPO NOTE; Expansion led growth

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

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

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

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

To read the full report: CANTABIL RETAIL

>Ashoka Buildcon Limited: IPO NOTE

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

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

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

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

To read the full report: ASHOKA BUILDICON


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

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

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

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

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

To read the full report: ZF STEERING GEARS

>PRAKASH INDUSTRIES: Story remains unhampered

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

Mining from Chotia mine to continue undeterred

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

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

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

To read the full report: PRAKASH INDUSTRIES

Wednesday, September 22, 2010

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

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

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

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

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

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

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

To read the full report: CAREER POINT INFOSYSTEMS

>MOTOGAZE: What seasonality? Demand grows unabated…

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

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

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

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

To read the full report: MOTOGAZE

>TELECOM SECTOR: Revival in GSM subscriber addition…

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

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

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

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

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

T0 read the full report: TELECOM SECTOR

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

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

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

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

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

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

To read the full report: BANKING SECTOR

Tuesday, September 21, 2010


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

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

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

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

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

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

To read the full report: CEMENT SECTOR

>Mid-Quarter Monetary Policy Review: Inflation continues to be RBI’s priority

RBI hikes repo (25bp) and reverse repo rates (50bp)
■ Hikes repo rate by 25bp to 6.0%
■ Hikes reverse repo rate by 50bp to 5.0%
■ Keeps cash reserve ratio unchanged at 6.0%

Inflation RBI’s priority in FY2011
The Reserve Bank of India in its maiden mid quarter monetary policy review
raised interest rates for the fifth time since mid March 2010 with an objective to
control inflationary expectations. It raised the repo rate (the rate at which it lends
to banks) and reverse repo (the rate at which it accepts surplus liquidity from
banks) by 25bp and 50bp to 6.0% and 5.0%, respectively. Effectively, this reduced
the Liquidity Adjustment Facility (LAF) corridor to 100bp after a reduction of 25bp
in July 2010 policy as well. The Central Bank has maintained status quo on Cash
Reserve Ratio (CRR) at 6.0%.

Monetary Policy - Key takeaways
■ Inflation remains the dominant concern for hiking the rates.

■ Expectation of rate hike not disrupting growth.

■ GDP and IIP growth rates indicate that the recovery is consolidating and the economy is rapidly converging to its trend rate of growth.

■ Monetary tightening that has been carried out since October 2009 has taken the monetary situation close to normal.

■ Central fiscal deficit to be contained at targeted 5.5% on account of higher than expected realizations from 3G and BWA auctions coupled with buoyant tax revenues.

The growth momentum in the Indian economy continued to be strong and was largely broad based, with IIP registering robust growth of 13.8% yoy in July 2010 coupled with healthy credit growth of 19.4% yoy in August 2010. On the other hand, continuing food inflation (14.6% yoy) has kept the overall WPI (8.5% yoy as per 2004-05 series) above RBI’s tolerable levels. Thus, with the headline inflation clearly above the RBI’s target of 6.5% as well as sustained healthy uptick in credit growth in the last few months, we expect gradual monetary tightening to continue.

To read the full report: MONETARY POLICY


Screen additions/movie pipeline to drive exhibition business: Management has
guided for a robust 2Q/3QFY2011 for the exhibition business, aided by strong
movie pipeline (both domestic and Hollywood), and substantial screen additions
(PVR has added 28 screens and ~7,500 seats over the last six months).
Management expects a pipeline of almost 14-15 3D English movies (most of
them being sequels) to be released over the next 18-24 months, and contributing
~27-28% to top-line.

Phoenix Mill offers considerable value unlocking, not factored in our numbers:
PVR is looking at sale and lease back of its property at Phoenix Mills. It is positive
of closing the deal by end of FY2011. The company expects the deal to rake in
~Rs80-100cr cash, which will help fund its future capex needs. It will also boost
the company’s RoCE though we have not factored in the same.

Multi-fold growth for PVR Pictures in FY2011E: PVR Pictures released Aisha, which
is estimated to have contributed net revenue of ~Rs20cr. Two more productions
are lined up in FY2011. The company has also bagged the pan-India distribution
rights for Action Replayy, which will be a Diwali release.

Blu-O a profit making venture from first year: Blu-O is expected to add a 26-lane
bowling alley by 4QFY2011, in Vasant Kunj, Delhi. The company is targeting a
total of 150 lanes by FY2012 and expects it to be ~Rs80-90cr business.

Outlook and Valuation: For FY2010-12E, we expect PVR to register 44% CAGR in
consolidated top-line, aided by 34% CAGR in exhibition revenues, 120% CAGR in
PVR Pictures and 80% CAGR in Blu-O. We estimate earnings to register strong
CAGR of 436% over the period on a low base and margin expansion (on a low
base, we expect OPM of 16-17% in FY2011-12E). At the CMP of Rs174, the stock
is trading at attractive valuations of 11.5x FY2012E EPS. We maintain a Buy on
the stock with a revised Target Price of Rs226 (Rs199) based on 15x FY2012E EPS
of Rs15.1. Upside risk to our estimates include significant value unlocking in case
the sale and lease agreement for the Phoenix Mill property goes through.

To read the full report: PVR

>YES BANK:Bank's business strategy for next five years

To read the full report: YES BANK

>ISPAT INDUSTRIES: Ispat’s share being 76mn tonnes.

We met management of Ispat Industries. Key takeaways of our meeting are as

Joint venture with Stemcor to set up a coke oven plant: Ispat has entered into a JV (Amba River Coke) with Stemcor for setting up a 1mn tonne coke oven plant at a cost of Rs1,124cr. Ispat holds 26% equity stake & the balance is held by Stemcor.

The project will be funded through debt-equity ratio of 2:1 and is yet to achieve the financial closure. Ispat’s equity contribution will be Rs100cr (Rs50cr will be through land and infrastructure support and balance Rs50cr through cash infusion). Once commissioned, the plant will cater to 100% coke requirement of the company.

110MW power plant to lead to cost savings: Ispat under its subsidiary, Ispat Energy, is setting up 110MW captive power plant (CPP) comprising of two units of 55MW each. The plant will primarily use gases from coke oven and blast furnace. Land for the project has been acquired and the civil work has also started. Total cost of the project is expected to be Rs491cr and the company expects savings of Rs1,300cr post commissioning of the power plant.

Captive raw material holds the key for future performance: Ispat has already
secured the prospecting license for developing iron ore mines in Maharashtra.
The management expects to start mining in FY2012 and targets iron ore
production of 2mn tonnes. The company in a JV with Essar Steel, Mukand,
Kalyani Steel and Ind Synergy has also been allotted Behrabad (North) coking
coal block in Madhya Pradesh. The mine has reserves of 170mn tonnes, with

Outlook and Valuation: At the CMP, the stock is trading at P/BV of 1.4x and
EV/EBITDA of 7.8x FY2010. We believe that future stock performance would be
dependent upon improvement in raw material integration and successful
commissioning of the power and coke oven plants.

To read the full report: ISPAT INDUSTRIES

Monday, September 20, 2010

>INFRASTRUCTURE: Road development in India

Implementation of reco. by B.K. Chaturvedi driving the new awards
Adoption of the B.K. Chaturvedi report recommendations has cleared the long pending
issue related to MCA & RFP, RFQ. Consequently, the road sector has seen a significant
pick up in the awarding activity- 4,940 km of new projects being awarded over the last 9
months compared to just 1,877 km in FY08-09. This yields a monthly run rate of close to
550 kms of new project awards. The run rate has further increased to 700 kms With
2871 kms of new project awards, in the first 4 months of FY11 itself.

NHAI expects to award 18,000 kms over FY11-12
NHAI’s FY11 target stands at 11599 kms of new awards. Add to it the 8250 km as spill
over from FY10 targets, the cumulative target stands at 19856 kms of new awards.
Though such a steep target is unlikely to be achieved over FY11, we would like to that
the 8250 kms spil over from FY10 targets already have the requisite clearances and are
ready for awards. NHAI expects to award ~9000 kms each in FY11E & FY12E, taking
the overall tally to 18,000kms on new road awards over FY11-12. However, based on
the monthly run rate of ~550km/per month over the last 9 months and ~700 km for YTD
FY11, we expect NHAI to award 7000-7500 kms in FY11E.

Developers maintain positive stance on the sector despite some lingering issues Developers are optimistic on the outlook and opportunities in road sector, despite the sector being plagued by key issues like:

Difference in project cost estimated by NHAI and developers: leading to lower VGF/
termination payments as these are calculated based on NHAI’s own estimates of TPC.
Land acquisition: Inability of the Govt in timely completion of land acquisition resulting
in significant time and cost overruns.

Removal of utilities: Removal of utilities, inordinate delays in obtaining forest
clearances and approval for Railway over bridge (ROBs) impacts execution. Lack of succession planning: The current NHAI chairman was supposed to retire in Aug’10 and the ministry is yet to appoint his successor. This lack of succession planning is affecting the pace of project awards (last 3 months has seen few projects awards).

Developers opine funding cost still high. Lenders differ- Rates to harden Even though liquidity constraints have significantly eased over the last year, developers opine that the rates at 9.5%-12.5% (depending on project feasibility) are still high. However, lenders to road projects are of the view that the road sector was actually getting subsidized with lower rate of interest on account of lenders intentionally reducing their weightage on the power sector. With RBI adopting tighter monetary policy, lenders have started signaling that cheaper interest rate scenario is set to change, with interest rates expected to move up between 100 to 150 bps by the end of the fiscal.

Increasing competitive intensity leading to lower IRRs
Developer friendly initiatives adopted by the Govt over the last 12 months have resulted in significant pick up in investor interest. This has lead to increasing competitive intensity, evident from the fact that a lot of projects in FY11 are bagged by developers by paying premium to NHAI, as opposed to them receiving VGF in FY10. Consequently, developers/lenders have seen comparatively lower project IRR’s. The trend suggests a gradual move towards higher premium being paid by bidders.

Our view
We believe NHAI will award 7000-7500 kms of new road projects in FY11 as significant projects from work plan for 2009-10 already have requisite clearance & approvals,. We believe positive macro economic scenario, and political commitment will lead to significant growth opportunities for PPP investment in road sector. This, coupled with Govt’s willingness to resolve issues hampering private investment will lead to steep growth trajectory in the Indian road sector.

To read the full report: INFRASTRUCTURE


■ Four of the top 10 dailies witness declines: According to the IRS 2Q2010 survey, the top 10 order in print media remains largely unchanged. However, Dainik Jagran, Dainik Bhaskar, Amar Ujala and Mathrubhumi have registered a 0–2% ror decline in their readership. Dainik Jagran
and Dainik Bhaskar, although securing the top positions amongst Hindi dailies, witnessed ror declines of 2.4% and 0.2%, respectively.

TOI remains the undisputed leader, DNA is the surprise package: Out of the 20 English dailies, 14 dailies showed growth in AIR figures, with Times of India (TOI) retaining its leadership position reporting an AIR of 7.1mn in 2Q2010. Hindustan Times (HT) reported an AIR of 3.5mn, posting a marginal dip from the 1Q2010 survey, but retained its second position, followed by The Hindu with an AIR of 2.2mn. DNA put up an impressive show, registering 16.6% growth in its AIR.

Hindi dailies show mixed trend, Dainik Jagran remains the leader: Among Hindi publications, Dainik Jagran retained its No. 1 position with AIR of 15.9mn, while competitors Dainik Bhaskar and Hindustan reported AIR of 13.3mn and 10.1mn, respectively. Incidentally, Hindustan is the only newspaper to have witnessed growth amongst the top three Hindi dailies, with readership growth of 2.3% ror.

To read the full report: PRINT MEDIA

>RALLIS INDIA: Strong volume driven growth

We met Rallis India's (Rallis’) management recently and key takeaways of the meeting are:

Strong volume growth in domestic market: Domestic market is growing well, aided by a strong volume growth (YoY) of more than 15% along with a good Kharif season owing to a well-distributed rainfall. Domestic agrochemical prices, though lower on YoY basis (~3% YoY), are stable on QoQ basis. We believe that on the back of a strong product portfolio and distribution network, Rallis is expected to show higher growth than an overall domestic market.

Adverse exchange rate and lower prices affect exports adversely: Rupee has appreciated ~4% v/s USD, while agrochemical prices are still lower by ~10% on YoY basis during the Q2FY11. Both are affecting the exports of agrochemical industry adversely at present. We believe that companies which have a higher exposure in the export market could take a hit in the revenue growth. EBITDA margin is also expected to be under pressure. Further, we believe that Rallis is expected to show higher growth (during Q2FY11) on the back of a low base effect.

Strategic investment has started bearing fruits: Rallis has a ~16% stake in Advinus Therapeutics (Advinus), with a total investment of ~Rs27cr. Advinus is a research-based pharmaceutical company founded by a leading global pharmaceuticals executives and promoted by the Tata Group. Company offers development services to pharma, agro and biotech industries and is in loss at the current net profit level. Advinus discovered a novel molecule for the treatment of diabetes. Earlier, lots of other companies tried to discover this molecule, but failed. Advinus is now looking for a JV with global pharma companies to market the product. We believe that this type of single product could turn Advinus profitable and create a huge value for strategic investor like Rallis.

To read the full report: RALLIS INDIA

>SOUTHWEST MONSOON: In positive territory

The overall rainfall is deficient no more. Having covered ~87% of its full season, the monsoon is entering its last month-long phase. The rainfall for the week ended September 08, 2010 was, ~26% above its long period average (LPA). The cumulative rainfall for the week ended September 08, 2010 stood at 1.2% below its LPA. The number of divisions experiencing excess/normal rainfall increased to 31 from 30 last week. The number of regions experiencing scanty rainfall dropped to 5 from 6 of last week.

Weekly rainfall covers most of the country
For the week ended September 08, 2010, rainfall was in plenty and covered most of the country. Well irrigated areas have seen rainfall at ~29% above their LPA, while Bihar, Jharkhand, West Bengal and parts of the north-east saw scanty/deficient rains. The southern regions; Kerala and Tamil Nadu saw scanty rainfall. Cumulative rainfall improves in rain-dependent and well irrigated areas Overall rainfall for the season from June 1, 2010 till September 08, 2010, has
completely covered the deficit and is currently at ~1% above its LPA. Rainfall deficit in
well irrigated areas dropped to 16.5% below their LPA and rain-dependent to ~4%
above their LPA. As West Bengal and east Uttar Pradesh still receive low rainfall,
rainfall in east Madhya Pradesh has bettered and is now normal from a deficient status
of last week.

Reservoir levels at 68% of their FRL’s
The reservoir levels are now at 68% of their full reservoir level (FRL) and at 111% of
their LPA. Increased weekly rainfall has helped the reservoir levels to pick up
Forecast rainfall for east, central and north India Areas lying on the eastern side: Orissa, Chattisgarh and West Bengal are likely to receive good showers. West Madhya Pradesh might experience normal rainfall while parts of north India; Bihar and Uttar Pradesh would receive relatively light showers over next week.

Kharif crop acreage at 990 lakh hectares, up 7%
Acreage under Kharif crops increased to 990 lakh hectares (lh) from 923 lh. last year; an increase of ~7%. Sown area under pulses increased ~22% as compared to the same period last year whereas area under rice increased by ~7%. The increase in coarse cereals has moderated to ~3%, whereas area under sugarcane has remained relatively stagnant since July.

To read the full report: SOUTHWEST MONSOON

>LAKSHMI MACHINE WORKS: Machining growth

Lakshmi Machine Works (LMW) has dominated the Indian textile machinery sector for decades, providing its clients with world class products at the lowest prices available. The company has a healthy order book of Rs3,300cr (2.9x FY2010 sales), providing good revenue visibility. During FY2010-12E, we expect the company to register top-line CAGR of 48.3% and bottom-line CAGR of 51.8%. At the current price of Rs2,476, the stock is quoting at 19.4x and 13.3x FY2011E and FY2012E EPS respectively, which we believe is attractive. The company has announced plans to buy-back its shares at a maximum price of Rs2,045/share.

We recommend an Accumulate on the stock, with a Target Price of Rs2,819. Ability to defend market share: LMW is one of the largest players in the world and one of only three players globally that manufacture the entire range of spinning machinery. In India, it has high market share of around 70% in yarn spinning and preparatory machines. It has been able to sustain this market share on the back of strong after-sales service coupled with providing world’s best technology to customers at the cheapest rates. LMW has service centres at all the textile hubs
across the country, which gives it a strong advantage over its European peers, who at the most have service centres in only 3-4 cities. LMW also enjoys an edge over competition as it caters to a huge 1,300 domestic textile players out of the total universe of around 1,600. The company has been innovating on technology for the past 15 years. In terms of prices, LMW’s products are at least 10% cheaper than its European peers who have manufacturing base in India.

Strong order book to translate into robust sales growth: LMW has a strong order book of Rs3,300cr. The upturn in the spinning industry has lent a boost to the company’s order inflow. The yarn prices have increased at 15.0% CAGR over the last two years and most listed yarn manufacturers surveyed by us are operating at utilisation rates of around 95%. This indicates that there is low probability of order deferments and the company’s robust order book is expected to result in strong growth.

To read the full report: LAKSHMI MACHINE WORKS

Sunday, September 19, 2010

>SPECIAL ECONOMIC ANALYSIS: India and China: New Tigers of Asia

India to Outpace China's Growth by 2013-1
Special Economic Analysis

In our second report comparing India and China in 2006 (India and China: New Tigers of Asia, Part II dated May 29, 2006), we made a call that India had the potential to catch up with China
in terms of GDP growth rates. That time has come, in our view.

We believe that, over the next two years, India should start matching China’s GDP growth of around 8.5-9.5%, barring another global financial crisis. More importantly, we think that,
by 2013-15, India will start outpacing China’s GDP growth notably. Morgan Stanley’s Chief Economist for China, Qing Wang, believes that China’s growth will move towards a more
sustainable rate of 8% by 2015, following the remarkable 10% average over the past 30 years. We believe India’s growth will accelerate to a sustainable 9-10% by 2013-15, after an
average of 7.3% over the past 10 years. In other words, over the next 10 years, we expect India’s growth to outpace China’s.

Indeed, we expect India’s per-capita income to reach China’s 2009 levels of US$3,750 over the next 10-11 years. We believe India will see further rise in investments to GDP, particularly
infrastructure, and China will see a gradual rise in consumption GDP.

15BIndia Is Transitioning to Higher Sustainable Growth Rates India’s GDP growth has moved from a range of 6% in the early 2000s to 8-8.5% currently. We believe this shift has been
premised on three key factors.

First, the improvement in demographics as measured by declining age-dependency (the ratio of the dependent population size to the working-age population size) has been the most important factor supporting this acceleration in growth. The ratio of the number of elderly people and children to the working-age (aged 15-64 years) population has declined from 68.6% in 1995 to 55.6% in 2010, according to United Nations (UN) estimates. In other words, the working-age
population has been growing faster than has the dependent population. This has helped support a structural rise in domestic savings.

Second, structural reforms have improved the utilization of the working-age population, a key resource. A positive demographic trend may be a necessary condition for strong growth, but it is not sufficient alone. Favorable demographics need to be converted into a virtuous cycle of acceleration in growth. A critical step in this process is the opening up of productive job opportunities through reforms. Over the years, India’s government has been initiating reforms to encourage private sector investment, which helps create the platform of employment for the working-age population. In this context, one of the long-standing challenges for India was acceleration in infrastructure spending. The government has finally been able to address this.

To read the full report: SPECIAL ECONOMIC ANALYSIS

>INDIA STRATEGY: Identifying emerging winners for 2015

Are leaders born or made? It is clear that in the context of a dynamic, rapidly evolving stockmarket like India, both can be true. Some have indeed been born out of favourable social and regulatory changes, but most have been made from anticipating major themes and evolving strategies to take them well ahead of their peers. This report selects an Indian XI for 2015 - a set of 11 stocks that will become market or sector leaders in the next five years. Some will leap from being small/mid caps today to large caps.

India is a true ‘emerging’ market and comparisons with developed economies like the USA, as well as some in Asia, underscore the contrasts in evolution. The benchmark BSE Sensex has seen two-thirds of its constituents change over the past decade. While much of this can be attributed to a fast-changing economy, modifications in corporate structure have also contributed. For
investors, the meaningful alpha-generation potential from anticipating who the new market leaders will be makes this very much relevant.

The rise of the metals and mining, and capital-goods industries are the best
reflection of large thematic shifts over the past decade. However, changes to
the leading stocks in the market or in specific sectors are also a function of
initial conditions, including the extent to which indices accurately reflect
economic activity, and prevailing biases towards sectors. Thus the impact of
the consumption boom has been relatively diffused and richly valued staples
have been among the worst performers. Within sectors, high or rising ROIC
appears a key factor for stocks to sustain or ascend to leadership positions.

While the first wave of the consumption/investment story may have played
out, specific dimensions of the investment themes - the J-curve impact and
the gains from lagged infrastructure spending - will remain significant stockprice
drivers. Regulatory arbitrage will be limited to niche opportunities. India
Inc’s newfound urge to redefine boundaries, through M&A or otherwise, will
also be a significant driver of market-leadership transformation, as will be the
final wave of public-sector-undertaking (PSU) listings.

We have selected our Indian XI for 2015 - a basket of stocks that are likely to
move towards market or sector prominence - by identifying those geared into
these themes and those well positioned strategically to run ahead of peers.
We have set the threshold Cagr for expected stock performance at 20%.

To read the full report: The new leaders

>Why SOE Banks Remain Top Picks Among Asian Banks

Despite their run-up, we think Indian SOE banks still offer significant upside potential: When we look at historical multiples, SOE bank stocks are trading at close to all-time highs. However, in our view, that may not necessarily be the right metric for this group. Historically, they were growing at a much slower pace than system and underlying profitability (ex bonds) was very thin. However, things have changed.

SOE banks have changed meaningfully over the last 4-5 years: The market share loss (in loans, deposits and fee income) has abated. Private banks are now growing at a few percentage points more than SOE banks, rather than the 2-3x we saw in the mid-2000s. Moreover, while bond-related revenues collapsed (from 40% of revenues in F2005 to 12% in F2010), underlying
profitability has picked up. Core business contributed only 0.4% to ROA in F2005 – it is now closer to 0.9%.

With market share loss stemmed and growth profile/underlying profitability improved – we think these stocks can trade at higher than historical multiples. We are raising our 12-month price targets very aggressively – they now imply 30-50% upside for our coverage stocks: This sounds high (especially following a 70% run-up in the last 12 months), but it implies that these stocks will still trade at 6.5-10x our estimates of forward earnings and 4-6x PPoP in 12 months. We had an OW on all SOE banks except OBC and Canara – which we are also upgrading to OW. We would buy a basket of SOE banks (in our coverage).

All Indian SOE banks combined (77% of the nation’s banking system) have market cap less than Bank Itau in Brazil (and obviously each of the big four Chinese banks). This seems unsustainable to us given the improved profitability and growth profile at SOE banks. These stocks will be volatile (bond moves, asset quality concerns), but on a structural basis, we believe that this
is the top segment within Asian banks.

To read the full report: INDIAN FINANCIAL SERVICES

>RELIANCE INDUSTRIES LIMITED: Time for a relook, we see 24% upside from current levels

RIL has underperformed the Sensex by 19% since April of this year, which the steepest
underperformance in the stock over the last six years. The under performance has been driven by i) KG D6 production stalling at ~60 mmscmd, ii) uncertainty around refining and petrochemical margins and iii) RIL’s foray into telecom and hotels. We believe however, that the bad news around the stock has been more than priced in and the stock should rally smartly from here, aided particularly by good news on the gas pricing front (overall domestic gas prices rising) and exploration business globally (more shale acquisitions).

Refining and Petrochemical pressures now fully reflected
The cyclical downturn in refining and petrochemical demand, coupled with the simultaneous record increase in capacity worldwide has led to one of the most severe slump in margins for a long time. However we believe that the last few months have shown signs of a substantial turnaround, with Singapore benchmarks rising and the improvement in Arab Heavy Light Spreads. The closures of unviable standalone refineries in Europe should further help the demand supply balance going forward (~1.5 mb/d of capacity shut in over the last few months)

To read the fulll report: RIL


Investment Theme Innovation driven by R&D is key driver for the growth of all the business segments of this company.The major contributor is and will remain the Pharma packaging solutions, which accounts for 85% of sales

Company offers comprehensive range of innovative packaging solutions, consisting of – blister films, aluminumfoils, cold formed blisters and wrap systems.

Apart form domestic demand, major growth will come from US markets, where shifting from bottles to Blister packaging will boost demand for its products.

Company is ready to tap this potential with required DMF filings and FDA approvals. Another important growth area will be – Global Clinical services business. Here company is offering various services in clinical trials phase to cut costs as well as time period, with its innovative products & services.

Company caters to 35‐40 global clients for 60‐70 drugs in various stages of clinical trails and these numbers are likely to grow significantly in coming years. This will be the fastest growing segment with highest margins.

Company has developed anti counterfeit solutionsin packaging using non clonable security technology (NST)which can revolutionize the packaging arena,by offering solutions across number of industries to ward of the menace of piracy.

Company’s recent US acquisition is earnings accretive and drive the top line and bottom line significantly.

We think stock is highly undervalued and deserves re‐rating. Market is not giving any valuation to this company for its strong R&D capabilities and unique patented technologies. Acquisition led inorganic growth is yet to be discounted. BUY with target of Rs 950/‐ in 12 months.

To read the full report: BILCARE LTD

>INFRA BEESInfrastructure Benchmark Exchange Traded Scheme

Investment Objective
The investment objective of the Scheme is to provide returns that, before expenses, closely
correspond to the total returns of the securities as represented by the CNX Infrastructure
Index by investing in the securities in the same proportion as in the Index.

However, the performance of Scheme may differ from that of the Underlying Index due to
tracking error. There can be no assurance or guarantee that the investment objective of the
Scheme will be achieved.

Investment Pattern
Upto 100% of net assets in Securities covered by the S&P CNX Nifty Index; Upto 10% of net assets in Money Market instruments, convertible bonds & other securities including cash at call but excluding subscription & redemption Cash Flow

An Open-ended, exchange listed, Index Scheme

Terms of Issue
On NSE, the units of Nifty BeES can be purchased/sold in minimum lot of 1unit and in multiples
thereof. Directly with the Fund - The minimum number of units of Nifty BeES that investors can
create/redeem in exchange of Portfolio Deposit and cash component is 10,000 units and in multiples thereof.

Load Structure:
Entry Load : Nil
Exit Load: Nil

To read the full report: INFRA BEES

>RELIANCE CAPITAL: Q1 FY 11 result performance

During the quarter ended June 2010 reliance Capital posted a consolidated total Income of Rs 12.6 billion which was down by 13.7% on Y –o- Y basis and down by 26% on Q –o- Q basis. The total income was down due to lower capital gains and reduction in topline of general insurance business. The company posted a net profit of Rs 770 million which is drastically down by 49% on Y –o- Y basis but is up by 19.4% on Q –o- Q basis. The profit was down due to fall in AUM and loss in insurance business.

Strong contender for banking licence
Reliance capital is interested in banking license for quite some time. The finance minister in the budget has announced to give new banking licence. Reliance capital is currently a key contender for the banking license, as it will be source of low cost funds which is key requirement for the growth of business.

Strengthening broking business
Reliance capital's subsidiary 'Reliance securities' is looking to increase its employees strength to 1,400 from 800 at present, the company is also targeting to reach 10,000 franchisees in next 2 years. The company having a customer base of 6,50,000 is planning to invest around Rs 30 to Rs 40 billion in coming 2 to 3 years to improve technology and risk management capabilities, and to introduce new retail equity products, the entire spending would come from internal accruals.

India’s Largest mutual Fund
Reliance mutual fund is currently the India’s largest Mutual fund with 15% market share. Reliance Capital Asset management currently manages Rs 1.4 trillion across MF, Pension funds, managed accounts and hedge funds.

We have done a SOTP based valuation for the company and valued the various business segment of the company on different parameters. We arrive at target price of Rs 868 for reliance capital. At current market price the stock is trading at 2.61x its FY 10 book value and at our target price it will trade at P/B multiple of 2.8x.

We recommend BUY with investment horizon of 6 to 12 months.

To read the full report: RELIANCE CAPITAL

Friday, September 3, 2010

>EXIDE INDUSTRIES LIMITED: Smelter stake hike adds value

Raising PO on smelter acquisition & rising competitiveness
We interacted with Exide recently and learnt that (1) stake in battery smelter Leadage
has been hiked to 100% from 51% for a nominal sum; and (2) capacity expansion
from Sep onward is likely to boost volume growth and improve product mix. We
maintain Buy with PO raised to Rs171 driven by (1) higher EPS; and (2) higher PE
owing to rise in competitiveness leading to higher margin than peers.

Higher in-house smelting to help gain from rising lead price
Exide has hugely benefited from recycling of old batteries in own smelters. This is
evident from the fact that Exide’s EBITDA margin expanded to 24.6% in FY10 and
remained at 22.8% in Q1FY11 compared to an average of 16.4% in FY07-09.
Whereas Amara Raja, key competitor of Exide has seen its margin sliding to
13.9% in Q1FY11. Benefit of smelter is likely to rise further with rise in lead price
and rise in extent of in-house smelting from 50% in FY11e to 70% by FY14e.

Hiking EPS on Leadage stake hike and strong demand
We have raised FY11e EPS by 3% and FY12/13e EPS by 5% owing to (1) hike in
stake in Leadage having PAT of Rs545mn in FY11e and Rs673mn in FY12e; and
(2) stronger sales growth in automotive replacement battery driven by easing of
capacity constraint from Q3FY11 as new capacity will kick in.

Re-rating on rising competitiveness & growth upside risk
Exide is trading at PE of 16.7x FY11e and 14.4x FY12e and could re-rate further
owing to (1) rise in Exide’s profit margin relative to peers driven by lower cost; and
(2) likely positive surprise to earnings from stronger retail battery sales driven by
capacity expansion and change in product mix in favor of premium car battery.
Our PO of Rs171 is the sum of (1) Rs159 for core earnings based on 15.5x
FY12e; and 2) insurance JV at Rs12 equivalent to 1.2x the investment amount.

To read the full report: EXIDE INDUSTRIES LIMITED

>VIBRANT GUJARAT: Glimpses of the Gujarat growth story

Several impeccable records

 Gujarat is probably the only Indian state in which the ground water level has increased
over the past 10 years, driven by state government efforts towards interlinking of rivers,
etc. The state’s agriculture economy has also reported robust GDP growth of 9% over
past several years and this is much higher than all-India average of 2%. This has led to
economic development including better quality of lives for masses, including in rural
areas, etc.

 Development and fiscal health can go hand in hand. Ten years ago, Gujarat had a fiscal
deficit of Rs67b but today it has a budget surplus of Rs5b. Also, over 10 years, Gujarat’s
state electricity boards have turned in a profit of Rs4b from a loss of Rs25b, despite no
tariff hikes in the past 10 years and post discounts of Rs9b towards promotion of new

 Gujarat has been the pioneer in terms of starting the model of professionalizing PSUs
as opposed to closure or privatization.

To read the full report: VIBRANT GUJARAT

>COAL SECTOR: Facing demand-supply mismatch

Indian coal industry is the world’s third largest in terms of production and fourth
largest in terms of reserves after the US, Russia and China and also the world's
third largest coal consuming nation after US and China. Around 70% of the total
production is used for electricity generation and the remaining by the steel,
cement and other heavy industries. Coal is also used as fuel for domestic
purposes. About 88% of the total coal production in the country is produced by
various subsidiaries of Coal India Ltd. which is the largest supplier of coal in the

Power sector fuels demand: India has emerged as one of the major buyers of
global coal, with imports doubling in the past four years. A significant portion of
the supply is used by the power utility sector followed by steel (coking coal). For
the current year the coal imports are expected at around 90 million tonnes as
new thermal capacities come up. According to working group on coal and
lignite, the projected domestic availability of coal is 680 million tonnes (mt)
against the projected demand of 731 mt in the terminal year of the Eleventh Plan
period, that is, 2011-12.

Demand-Supply Mismatch: India faces a steep demand supply mismatch with
the power sector growing at a faster rate of 10% while the coal production
clocking in a growth at 5-6%. Currently there is a 10% gap in the demand and
supply of the dry fuel which alone accounts for more than half of the country’s
annual overall demand for commercial energy at 329 million tonne oil
equivalent (Mtoe). As per government estimates coal shortage in India is likely to
touch 15% or 81 million tonnes by the end of the current Plan period that is
March 2012.

Govt initiative: The government has proposed to increase investments in
developing infrastructure at the coal fields. Investments towards regional
exploration, detailed drilling, environmental measure and development of
transportation infrastructure in coal fields will be raised to Rs 400 crore in 2010-
11, from Rs 260 crore in 2009-10. However, Coal India Ltd and Singareni
Collieries Company Ltd, from their internal resources, propose to invest Rs 3,800
crore and Rs 1,335 crore in 2010-11 against provision of Rs 3,100 crore and Rs
634 crore during 2009-10 respectively for increasing production.

Going ahead: The production from Coal India Ltd (CIL) and its subsidiaries is not
able to keep pace with the demand, with economic activity gaining momentum.
Inadequate railway unloading infrastructure is another reason for difficulty in
meeting production targets. The demand-supply gap is set to further widen in the
coming years. Total coal availability in the country by end 2017 would be close
to 647 mt with a projected import requirement of over 86 mt. A major constraint
in ramping up production is the failure of companies to develop captive coal
blocks allotted to them by the coal ministry. The shortage is likely to continue
unless almost all the coal blocks are in production mode.

Our view: The demand-supply mismatch in the coal sector is likely to continue
in the next few years. Power utilities are also importing coal to meet the shortfall
in domestic supply. To reduce the input cost, the companies are also doing
backward integration. In the long term Sarda Energy & Minerals Ltd. remains our
Top Pick on better performance.

To read the full report: COAL SECTOR

>Is it all over for the global wind markets?

Weak electricity demand resulting from energy efficiency measures
and recessionary forces have made national wind installation targets
easier to achieve. We have therefore cut our five year wind industry
global demand CAGR to 7.0% from 7.5% previously and our 10-year
CAGR to 5.5% from 6.7%. We remain cautious on the wind OEMs,
and see few near term catalysts for share price performance. Our
favourite part of the value chain remains the wind farm developers
as we feel that that the developers offer a more compelling
combination of earnings visibility and valuation and our preference
for this part of the value chain has now increased. Acciona and EDP
R, both rated OW(V), are our highest conviction investment ideas

What’s going on with the markets?

Why has the wind sector been so weak?

The wind sector has been weak since the start of the credit crisis in September 2008. Until this point it had held up pretty well, when most other sectors had already been selling off. However, in the two months following the collapse of Lehman Brothers, the sector more than halved in value; the wind farm developers lost 50-60% and the wind turbine manufacturers lost 60-70%. The focus at this time was lack of availability of project finance.

The sector then recovered some of its share price losses during the March 2009 bear market rally, but subsequently spent a year in the doldrums, with share prices moving sideways. The main reason for this was lack of order flow during 2009 due to US regulatory uncertainty and only a modest improvement in project finance markets throughout the course of 2009. Order flow has finally started to pick up in H1 2010, double the H12009 level, but importantly it remains around 70% below H12008, and the recovery is less strong than we had hoped for due to the Sovereign debt concerns in Southern Europe, increasing the possibility of tariff reductions (see our note dated 21 June 2010, entitled ‘Carbon default – real of imagined?’), and at the same time the Clean Energy regulatory rollercoaster in the US Senate started heading for derailment. From mid-April onwards, the sector sold off along with the wider Southern European markets, but whereas the Southern European markets have recovered some 20% since early June, the wind sector has not; some stocks have recovered slightly but most have not. This, we believe, is due to continued uncertainty over clean energy legislation in the US, which is now unlikely to pass the Senate before mid-term elections in November.

To read the full report: GLOBAL WIND MARKETS

>IT SERVICES: Earnings Expectations and Ownership – A Closer Look

 Earnings beat/upgrades to drive stock prices — Given current valuations, EPS
beat/upgrades remain the key catalyst for the sector, in our view. For example,
post 1Q results, TCS was the only stock that witnessed meaningful operational
upgrades – after which, TCS outperformed its peers. In that context, we take a
closer look at expectations as they can limit or result in surprises/upgrades.
 Expectations for Infosys are the highest; Wipro the lowest — Our analysis (Fig. 1)
highlights that consensus (IBES) expectations for Infosys are the highest – implied
EBITDA CQGR over next three quarters is ~10%. The same number for TCS and
HCLT is 4.1% and 4.5%. Wipro stands out – expectations are lowest at ~1.2%
CQGR over next three quarters (we are slightly ahead).

 What does history suggest? — Our analysis (Fig. 2) suggests that Infosys has on an
average delivered ~8% CQGR (2Q to 4Q) over the last 5 years. While that does not
rule out the possibility of positive surprise, it is a limiting factor. Also, 2Q is strong
but 3Q/4Q are seasonally weak quarters. Wipro, on the other hand, has delivered
an ~8% CQGR (2Q to 4Q) over the last 5 years – good likelihood of EPS upgrades,
we would argue.

 Is Indian IT under-owned? — Yes, it is – FIIs (300bps), DMFs (~600bps) and
Insurance (~700bps) are all underweight. However, the key question is: whether it
is a technical under-ownership? The surprising part is that over the last 5
quarters, the sector has outperformed but its relative weight (vs index) has gone
down. In MSCI India, Infosys is ~11% while in Nifty it is ~8.3% (and ~10% in
Sensex). With most funds unlikely to have such a big exposure to a single stock,
under-ownership may remain and may not be a big supporting factor.

 Remain Neutral on the sector; Buy HCLT/Wipro — Given recent macro concerns
and high expectations/valuations, it is difficult to see meaningful upside. In the
expectation context, Wipro looks a likely candidate for EPS surprises, has
underperformed (~7% vs. BSEIT YTD) and trades at ~15-20% discount to TCS
and Infosys. HCLT/Wipro are our top picks in Indian the IT services space.

To read the full report: IT SERVICES