Friday, January 15, 2010

>At what point in time will Asia lose interest in the dollar? (NATIXIS)

Asian countries (China, Japan, South Korea, Asian emerging countries) are currently forced to shore up the dollar's exchange rate and to prevent an excessively sharp appreciation of their currencies, mainly for two reasons:

− the dollar's role as a currency of global trade, particularly in Asia;

− the weight of the United States in Asian countries’ exports and output, once we take into account the segmentation of the production process between Asian countries, which increases intra-Asian trade, but in a way that is related to Asian final exports to the rest of the world.

Asia will not lose interest in the dollar until Asian demand accounts for a major part of Asian output. We will try to estimate the time needed for this to occur.

Once Asia’s economic independence has become sufficient enough, the financial links with the United States will be broken: Asian central banks will stop shoring up the dollar, the United States will have to rebalance its foreign trade with Asia, and Asian savings will be lent (invested) in Asia instead of being lent to the United States, which will accelerate Asia’s financial development. Of course, this will also require a financial modernisation of many Asian countries. The amount of global trade denominated in dollars will probably also shrink.

To read the full report: DOLLAR


Asbestos Cement Fibre Sheet (CFS) is an oligopoly market with the top four players collectively controlling ~60% of the market. The industry has witnessed a volume CAGR of 12% in the last 10 years. CFS being predominantly a rural product has its fortunes closely linked with the rural economy. Branding and distribution reach are key parameters in the business. However, ability to pass on raw material inflation by increasing realizations is limited on account of the affordability constraint of rural India for the product. The players are exposed to forex risk as imports account for ~50% of total raw material cost. To leverage on existing brand and distribution reach coupled with an increased focus to diversify and de-risk the revenue stream, players have started focusing on allied products used in “Green Buildings” as well as non allied industrial products. The key players generally generate positive cash flows.

The industry underwent a phase of turbulence due to a demand supply disequilibrium which has been addressed and is now expected to maintain the top line growth of ~20% coupled with stabilization in the margins for next couple of years. CFS industry is cyclical in nature with June quarter is the best quarter for the industry historically. We believe, the industry should be re-rated on PER on account of improved visibility, diversification of revenue
stream, expansion in margins and cash flows positive status of the players.

Our preferred bet is Hyderabad Industries (BUY- 135% Upside) followed by Visaka Industries (BUY –55% Upside) and Everest Industries (BUY - 43% Upside).

Hyderabad Industries
Hyderabad Industries Ltd (HIL) is the market leader (Capacity - 764500 Tons) with a share of ~18% in the Roofing industry (Asbestos Cement Fibre Sheet-CFS) with an experience of over six decades. Large capacity, Brand superiority of “Charminar” and Strong distribution network places HIL in the pole position by garnering largest market share with price leadership and provides volume strength. It helps to capitalize on the strong thrust of Government on Rural Housing. Increased focus on allied building products and Thermal Insulation business are expected to further boost sales growth and margins. We expect the company to clock revenue CAGR of ~16% between FY09 and FY11E with stable margins and return ratios. At CMP, the stock trades 4.7x its FY10E earning of Rs.97.7 and 4.2x its FY11E earnings of Rs.109. We recommend a BUY on the stock with the price target of Rs.1091 at which it discounts its FY11E earnings by 10x.

Everest Industries
Everest Industries has been the pioneer and the 2nd largest player (Capacity - 710000 Tons) in the Asbestos Cement Fibre Sheet (CFS) Industry with a presence of over seven decades with a market share of ~13%. The company is one of the leading brands and has transformed into a complete “Building Solutions” Company with its roofing to flooring range of solutions. The new unit at Roorkee has boosted EIL’s presence in the lucrative Northern region. Everest has also forayed into the Steel Building business to cater to the industrial segment. We expect the company to clock a revenue CAGR of 24% between FY09 and FY11E with stable margins and return ratios. At CMP, the stock trades 9x its FY10E earning of Rs.18 and 6.3x its FY11E earnings of Rs.25.7. We recommend a BUY on the stock with the price target of Rs.231 at which it discounts its FY11E earnings by 9x.

Visaka Industries
Visaka Industries (VIL) is the 3rd largest player (Capacity - 544000 Tons) in the Asbestos Cement Fibre (CFS) industry with a 15% market share. It has a prominent presence in the Southern markets and has a well established brand. Visaka plans to increase its CFS capacity over the next couple of years and has also forayed into the value added cement products segment thereby moving up the value chain. VIL is also one of the leading yarn producers with a presence in the overseas markets as well. This segment contributes ~20% to the top line and enjoys EBIT margin of ~9%. We expect VIL to clock a revenue growth of 11% between FY09 and FY11E with EBIDTA margin estimated to stabilize at 15% and PAT margin at 8%. At CMP, the stock trades 4.2x its FY10E earning of Rs.31.3 and 3.9x its FY11E earnings of Rs.34. We recommend a BUY with a target price of Rs.204 which discounts its FY11E EPS by 6x.

To read the full report: ROOFING INDUSTRY


Lower Risk & Lower Value — We believe the impact of Astra’s settlement with Teva (for Nexium) on Ranbaxy should be viewed from the risk & valuation perspectives. While it could entail a modest impact (cRs11/sh) on fair value, it also significantly lowers the risk of Ranbaxy’s exclusivity being triggered earlier. This protects the more valuable leg (4.5 yr supply contract) of Ranbaxy’s deal with Astra. We believe the lower risk more than makes up for the lower value. Maintain Buy.

Teva settles patent litigation with Astra — Teva & AstraZeneca have settled all patent disputes for generic versions of Astra's Nexium. Astra has granted Teva with a license to launch generic version of Nexium delayed release capsules, subject to regulatory approval, on or before May 27, ‘14.

Buy: Teva’s Nexium Sett. – Lower Risk Offsets Valuation Impact

How does it affect Ranbaxy? — Ranbaxy’s settlement with Astra allows it to launch
generic Nexium on or before May 27, ‘14, with 180 days exclusivity. The settlement with Teva essentially means that there will be two players (Ranbaxy & Teva) in the market during the exclusivity period. We had assigned Rs22/sh in our valuation towards the 6m exclusivity. This would have to be shared with Teva.

Risk overhang lifted — While the exclusivity upside could be lower, we believe this also lowers one key risk w.r.t. the Nexium settlement. Ranbaxy’s deal with Astra includes a supply contract (upto May ’14, valued at Rs35/sh) and a launch with 180 days exclusivity (in May ’14, valued at Rs22/sh). If Teva had won its litigation with Astra, it would have triggered Ranbaxy’s exclusivity earlier – thus impairing the supply part of the deal. It also ensures that Ranbaxy has time on its side to get approval for Nexium (relevant, given its issues with the FDA).

Potential impact on valuation is modest — Our target price includes Rs22/sh towards exclusivity sales of Nexium. If one assumes that this is shared with Teva, it could entail an impact of Rs11/sh (assuming Teva takes away half of the upside) or c2% on our fair value for the stock.

To read the full report: RANBAXY

>Gremach Infrastructure Equipments & Projects Ltd (FIRST CALL)

As the industry leader, the company provides a voice for the construction equipment industry.

• Gremach provides innovative solutions to the growing challenges of the construction equipment industry and strives to be the best.

• The company is planning to dilute its 10% stake in Osho Gremach Mining.

• Got approval to set up a SEZ near Kolhapur.

• The Company has planned to enter into commodity trading (Coal, Iron ore, Urea etc.) business in a big way.

• Company has signed the MOU for 40 on-shore rigs with China's biggest oil & gas rig manufacturer “BOMBO”.

To read the full report: GREMACH


Re-rating imminent: GAIL is on its way to becoming a true utilities company - gas transmission will account for over 65% by FY14 from 53% in FY09 of its EBIT. Its transmission business has all the characteristics of a utilities company: (1) Large asset base with annuitylike returns, (2) Secular demand growth with strong long-term earnings visibility, and (3) Direct customer interface with CGD business. We believe that GAIL should trade at par with other utilities companies.

Geared to capture huge gas transmission opportunity: India is witnessing a big thrust in gas production from domestic finds in the Krishna-Godavari basin. We expect gas availability in India to grow at 23% CAGR to 312mmscmd by FY14, buoyed by trebling of domestic production to 254mmscmd and doubling of RLNG imports to 58mmscmd. To capture the huge transmission opportunity presented by this gas surge, GAIL is investing to double its capacity by FY12/13. We expect its transmission volumes to grow at 20% CAGR through FY14 to 208mmscmd.

HVJ-DVPL tariffs to stay intact, 10% upside likely: As against consensus expectations of tariff decline for its HVJ-DVPL network (which accounts for >65% of its total volumes), our calculations indicate that tariffs should stay intact or even increase by 10%.We expect GAIL's profits (EBIT) from the transmission business to increase 2.8x by FY14.

CGD and E&P to add substantial value, petchem capacity to double by FY12: GAIL is expanding its CGD presence from the current 9 cities to 45-50 cities in the next 4-5 years, with a gas volume potential of 25mmscmd. We believe CGD would lead to long-term value creation for GAIL and just 25mmscmd volumes would add Rs27/ share. Further value accretion would come from its E&P blocks entering production phase and doubling of petchem capacity by FY12.

Increasing FY11E EPS, upgrading target price; Buy: We remain positive on GAIL primarily due to: (1) long-term revenue visibility, (2) value creation through the CGD business, (3) potential upside from its E&P business, and (4) likely favorable policy decision on subsidy. We value GAIL on SOTP basis at Rs485 (core business at 14x FY12E EPS), investment value of Rs54/share and E&P value of Rs23/share). We believe there is further upside potential of at least Rs27/share from its CGD foray. Adjusted for investments, the stock trades at 11.7x FY12E EPS of Rs29.1. We maintain Buy.

To read the full report: GAIL

>Birla Shloka Edutech Ltd (HDFC SECURITIES)

Highlights of the issue:
Birla Shloka Edutech Ltd. is one of the education companies in India, which is engaged in sales and services of varied products to education institutions. It is also engaged in providing IT infrastructure and imparting IT and IT enabled education in schools of various boards. It sets up computer labs, Digital classroom solutions and Audio Visual solutions in schools along with its software product “XL@School” which is a curriculum based interactive multimedia software for mathematics and science subjects.

It has entered into a joint venture agreement with Vision India Software Exports Pvt Ltd., on 30th April 2009, to bid and execute various tender projects (“the Projects”) of Central Government of India and various State Governments in the field of Computer Education, Education through computers, and facilitate the supply of various hardware and equipments and provide hardware solutions, teacher training and various allied services of similar nature on BOO/BOOT basis.

It has following Strategic Business Units:
• IT / Multimedia based education and ICT Solution in private schools.
• ICT Solution in government schools through Public Private Partnership.
• Sales of Educational and Software products.

Objects of Issue:
The objects of the Issue are:
• Capital expenditure for Turnkey Projects executed by the company under the BOOT model
• Capital expenditure on upgradation of infrastructure and content development for XL@School
• Funding the proposed M&A activities
• To meet the Working Capital requirements
• Meeting the Public Issue Expenses

To read the full report: BSEL