Wednesday, January 20, 2010

>This "recovery" has none of the characteristics of a recovery (NATIXIS)

What are the normal characteristics (not necessarily all present at the same time in all recoveries) of an economic recovery?

upturn in corporate investment with a reappearing need to increase production capacity;
upturn in real estate investment, due to the fall in interest rates, disappearance of the stock of unsold housing;
decline in the household savings rate due to the pick-up in household credit and the return of positive wealth effects;
upturn in wage incomes after the end of the adjustment in employment.

None of these characteristics is appearing at present, which, in our view, shows that the upturn in activity, driven by fiscal deficits, is not a real recovery.

To read the full report: CHARACTERISTICS OF A RECOVERY

>Stay bullish, raising Sensex target to 22000 (DEUTSCHE BANK)

2010 annual Sensex target of 22,000
We are setting our one year forward target for the BSE Sensex at 22,000, implying an upside of 25% from current levels. Our target implies a PE of 21x on our current FY11 earnings estimates. We believe that the market is underestimating the growth potential since a more convincing, revenue driven, EPS upgrade momentum has just begun.

Banking on return to 8-9% GDP growth trajectory
Our 2010 India outlook is premised around two broad themes – a shifting paradigm in the composition of global economic growth and the restoration of Indian GDP growth to a 8- 9% trajectory over next twelve to fifteen months. The key theme for the Indian equity market in 2010 will be the domestic economy and the pace at which economic growth is restored back to the 8-9% growth trajectory. While consensus is still cautious on the restoration of above trend growth, we remain confident that the economy is on course to moving back towards the 8- 9% growth trajectory.

Robust consumption to result in return of investment cycle
We believe that the next leg of market re-rating will occur when the investment cycle makes a decisive comeback. We are convinced that strengthening domestic consumption and accelerating momentum in employment generation – across swathes of rural and urban India – is raising business confidence. We expect these factors will lead to an accelerated return of the investment cycle, which should drive the next round of GDP upgrades, upward revision to earnings forecasts and rising conviction in the restoration of the 8-9% GDP growth trajectory.

Our investment ideas
DB Investment themes – domestic consumption and consumption derivatives (autos, metals, paints, private sector banks), infrastructure (we prefer power generation equipment suppliers over T&D equipment suppliers) and software ( we are more confident of front ended returns in 1H). Our Top Buys - : Asian Paints, BHEL, HDFC Bank, ICICI Bank, Infosys, Maruti, M&M, SAIL, Sterlite, TCS. Our top mid-cap picks are: Auro Pharma, Bajaj Hindusthan, GVK, Onmobile, and Thermax.

Tug of war between inflation and growth, but low risk of sudden policy reversal
We think 2010 will also see the market being swayed by a tug of war between inflation expectations and growth. We sense that the current UPA administration remains biased towards growth, reducing the risk of any knee-jerk policy error. The return of non food inflation could bring back the overhang of an ‘inflation wary government’, which may impact valuations of materials companies. A sharp rise in global oil prices raises risk of aggressive policy response. Global macro factors – strengthening dollar, weaker than expected global growth - are key risks.

To read the full report: INDIA EQUITY STRATEGY


Raised PO on high earnings visibility; Reiterate Buy
Raise PO to Rs 1,325 (earlier Rs1,110), to reflect (1) earnings increased by 7% in FY11E, mainly US sales, and (2) higher base business multiple of 18x FY11E EPS (up 9%), in line with sector (presently 15% discount) on stronger business visibility, and anticipated news flows of GSK alliance and bio-similar opportunity.

High visibility boosts confidence; Raise PO

Increased confidence on US$3bn sales guidance
Raise earnings based on higher US sales (~28% of FY12E), on revised pace of new launches (15/yr). Despite stronger rupee, we expect ~22% EBITDA margins to sustain on lower SG&A expense and better product mix. Post-revision, we estimate 17% sales CAGR, while management guidance of $3bn sales by FY13 implies 26% sales CAGR (FY10-13E). Our increased confidence of execution ability stems from DRL surpassing guidance in past 2 years.

Triggers from niche opportunities
Sales forecasts include (1) generic Fondaparinux (Arixtra, $200mn) in Q1 FY11, but could exceed due to minimal competition over next 2 years, (2) at-risk launch of generic Allegra D24 by end-FY10, where DRL is FTF, and (3) Omeprazole Mg (Prilosec), launched in the OTC market last quarter, but likely ramp up in Q4. Pipeline of 62 ANDAs (16 FTFs) is expected to contribute to $3bn guidance.

Key opportunities not factored in estimates
This includes (1) GSK shipments (formulations to RoW markets), which will likely commence in next 2 years, but we expect clarity on this opportunity later this month, and (2) Biosimilar investments achieving results, with 2 products already in India, RoW entry by FY12, regulatory pathway clarity (US mkt) to be next trigger.

Q3 result weakness, particularly attractive
We estimate 20% YoY and 29% QoQ decline in profit on absence of exclusive opportunity (as was in previous qtrs), and slower growth in US (an aberration due to FDA audit).We also expect write-down on Betapharm to impact reported profits.

To read the full report: DR. REDDY

>CEMENT SECTOR: Dispatch growth improves to 11.5%; prices rise slightly (ANAND RATHI)

Dec ’09 volume growth at 11.5%. In Dec ’09, all-India cement production and dispatch rose 11.4% and 11.5% yoy, respectively. The Central and East grew 18.4% and 12.9% yoy, respectively, while the West was the worst, rising only 6.1% yoy. Dispatches in the South grew 12.3% yoy in Dec ’09, after rising an average 6% during Apr- Nov’09.

The South leads in capacity additions. Capacity during the month increased by ~1m tons, and now stands at 234m tons. The industry has added 26m tons in the last nine months, 54% (13.9m tons) in the South. The all-India capacity utilization stood at 91% (92% yoy and 81% mom). At 81%, the South recorded the lowest utilization; at 111%, the Central the highest.

Top five post strong volume growth. Combined volumes of the top five for Dec ’09 rose 8.1% yoy, boosted mainly by the strong India Cements’ 34.9% yoy growth. Outperformers in volume growth were JPA, Dalmia, India Cements, Madras Cements and Shree Cements.

Prices inch up slightly. Prices in Jan have risen Rs4-8 in the North, Central, East and West; and been stable in the South. Demand during Dec-Jan has not picked up as usually seen in Jan, chiefly due to a slowdown in government projects and real estate activity. Dealers expect price hikes to hold, and demand to pick up by end-Jan.

To read the full report: CEMENT SECTOR


  • BGR Energy Systems Ltd.
  • Gayatri Projects Ltd.
  • Great Eastern Shipping Co. Ltd.
  • HEG Ltd.
  • Mahindra Holidays & Resorts India Ltd.
  • Opto Circuits India Ltd.
  • Prakash Industries Ltd.
  • Sterlite Technologies Ltd.
  • Shiv-Vani Oil & Gas Exploration Services Ltd.
  • Triveni Engineering & Industries Ltd.
To read the full report: MID CAPS


IndusInd reported a PAT of Rs880m – up 95% yoy – in Q3FY10 ahead of our estimate of Rs768m. The outperformance was led by a strong momentum in NII, in turn a function of expansion in margins and strong business volumes.

• Strong NII growth; margins continue to expand: NII was up by 104% yoy and 14% qoq to ~Rs2.4bn, driven by a steep 100bp yoy and 8bp qoq expansion in NIMs to 2.94%. Improvement in NIMs was driven by ~60bp qoq reduction in funding costs owing to stable wholesale borrowing rates and uptick in CASA. (exhibit 1 and 2)

• Healthy core-fee income; treasury profits remain muted: Core-fee income grew by 41%yoy to Rs1.1bn. However, total other income declined by 13% yoy primarily due to lower treasury profits and recoveries during the bank during the quarter. Treasury profits declined by 76% yoy (at Rs106m) while recoveries stood at Rs30m (against Rs178m in Q3FY09). The bank continues to see strong traction in income from third party distribution (insurance as well as MF products). Transaction banking and processing fee also continued to display strength on the back of management focus to gain meaningful contribution from these heads. (exhibit 3)

• Credit growth remains strong; CD-ratio remains stable: IndusInd’s loan book grew by ~33% yoy and 9% qoq to ~Rs191bn. Corporate banking continued to lead overall growth (at 66% yoy). Growth in retail book also exhibited revival at 3% qoq. At the same time, deposits grew by a healthy ~20% yoy to Rs247bn, leading to ~700bp yoy (stable qoq) improvement in the CD ratio to 77%.

• CASA continues to inch up: CASA ratio improved by 400bp yoy and 130bp qoq to 22.5%. Over the quarter, savings deposits displayed healthy traction. (exhibit 2)

• Gross NPAs decline qoq….: IndusInd’s asset quality remains high with gross NPAs declining by ~50bp yoy to 1.34%. More importantly, Gross NPAs declined even on an absolute basis to Rs2.5bn (against Rs2.6bn in Q2FY10). Net NPAs stood at 0.67% (against 1.3% in Q3FY09). The bank did not undertake any additional restructuring in the quarter, with total restructured ad vances being insignificant at 0.3% of the book. (exhibit 5)

To read the full report: INDUSIND BANK