Friday, February 12, 2010

>India Strategy: Dec-09 Results Review (MOTILAL OSWAL)

A)Aggregate performance in line with estimates
109 companies in our Universe have reportedresults for the Dec-2009 quarter. Sales are up 25% (vs estof22%), EBIDTAup 34% (vs est31%) and PAT up 26% (vs est 26%).

47 companies in our Universe reported PAT higher than estimate while41 have reported below. On the EBIDTA front,42 companies reported above estimate while31 were below.

B) Sector performance: Telecom above estimates; Oil & Gas, Pharma, Utilities below estimates
Autos, Telecom, Metals and Real Estate performed better than estimates.

Sectors where PAT growth is disappointing includeOil & Gas (16% growth vs est 100%, led by ONGC & RMs), Pharma (entirely led by Dr Reddy’s), and Utilities (2% growth vs est of 8%).

C) Sensex performance: ONGC drags down aggregates
The aggregate performance of Sensex has beenin line (29 Sensex companieshave reportedDec-09 quarter results).

Sensex PAT aggregate is in line, with growth of18% vs estimateof 22%. EBIDTA growth is 29% vs estimated27%. Sensex performance has been dragged down by ONGC’sunexpectedly high write-off for dry wells. Excluding ONGC, Sensex PAT growth is 17% vs estimated 15%.

10 companies reported PAT above estimates while10 reported below estimates.

D) Best and worst performing companies
Several large-cap companies reported significantly better than our estimates:Maruti(222% PAT growth vs est of 171%),Jaiprakash(49% PAT growth vs est of19%),Grasim(81% PAT growth vs est 69%), TCS(33% PAT growth vs est 21%) and Bharti Airtel(2% PAT growth vs 12% decline). Few others with strong performance are BoB, Idea, Asian Paints, Crompton, Shree Cements and Zee.

Large-caps that reported below estimates wereONGC, HUL, L&T, SBI, Dr Reddy’sand Tata Power. Other disappointments were from HCC, IVRCL, Tech Mahindra, UltraTech and Sintex.

Key sectoral highlights
AUTOS: Two-wheelers segment profits were in line with estimates. Outperformanceof Maruti and Tata Motors was dragged down by M&M, leading to sector aggregatePAT in line. Maruti’smargins expanded 240bps QoQ while M&M’s margins fell 190bps.

BANKS: Banking sector PAT performance was in line. Of the large banks,Canara Bank and Bank of Baroda outperformed significantly, whereas Bank of India and State Bank underperformed. Sequentially, core operating profits improved across banks as the contribution from NII increased and trading profits declined.Private banks continued to improve on their cost income ratios.

CEMENT: Surprise volume growth of 9.4% YoY was offset by Rs15/bag QoQ price decline. Overall sector PAT performance was in line. Indian Cements and Ultratechunderperformed estimates whereas Shree Cement and Grasim outperformed.

ENGINEERING: Sector turnover growth at 5% was one of the lowest ever, and significantly below estimate of 19%. However, EBITDA and PAT were in line driven by superior margins led by lower commodity prices. Siemens hugely outperformed estimates followedby Crompton; L&T and Thermaxunderperformed.

FMCG: Volume growth remained robust in 3QFY10; however, impact of carry-over pricing waned. Estimates were in line at all levels, Sales, EBITDA and PAT. Asian Paints, Colgate and Daburoutperformed estimates, while GSK Consumer, Britannia and HUL were the major underperformers.

To read the full report: INDIA STRATEGY


Bulks are Back — Actually, they never went away. We have long held a bullish view of the fundamental outlook for bulk commodities.

For Bulks Persisting Chinese Imports — Factors which have boosted Chinese imports of bulk commodities – strong demand and constrained domestic supply - are likely to persist for at least the next two years.

For Base Metals — In China, apparent consumption has run ahead of underlying and we believe there are significant excess un-reported inventory in copper and nickel, although less so in other commodities. OECD demand will be the key to 2010. We expect improving demand and a restocking multiplier, but it will be concentrated in the second half. Investment flows accelerated further in early 2010, but are now slowing on USD concerns.

Two Risks are Torturing Markets — Firstly, sustained USD strength, if not backed by positive economic data, could trigger significant outflows of short term investments. Secondly China’s monetary tightening has raised worries about slower demand and rapid destocking, but here we believe the risk is less.

Copper's Still Shining — Constrained mine supply has been a persisting source of price support and continues to be so. On the demand side the picture is mixed. China’s apparent consumption is expected to slow to 8% in 2010 from 40% in 2009. But OECD demand will kick in but not until the second half. Thus we expect price to weaken in 1H, rebounding to US$3.50 in 2H.

But Coking Is Preferred — We retain our bullish outlook for coking coal and our forecasts of US$200/t for JFY10 (Coal: Back in Black, 22 September 2009). We retain our concerns on the changing prices structure of the market. However these concerns are more than offset by our views of continued robust Chinese imports, improving demand from traditional customers and supply constraints.

Thermal Smoking Hot — Chinese imports could continue to surprise on the upside over 2010 as domestic supply struggles to keep pace with demand. But China’s buying is not the only force pushing prices higher. Korean and Indian utilities are also acutely short, even though Europe is soft. We upgrade our JFY10 forecasts to US$105/t and see prices remaining nearUS$100 over the next three years.

Iron the Ore with More — Price activity in the iron ore spot market has been explosive. The outlook for domestic iron ore production in China is one of the key uncertainties in the iron ore market. We believe consolidation could also prove expensive and disruptive to iron ore supplies. We upgrade JFY10 forecasts to
+40% for fines and +50% for lumps.

To read the full report: COMMODITY OUTLOOK


Prefer steel over metals
We reiterate our preference for steel over base metals. Our incrementally bullish view on India Steel hinges upon : 1) strong demand momentum as we enter into steel-intensive phase of economic growth, 2) constrained supply response till 2011 and 3) tight market conditions in Asia, coupled with the rise in cash costs, leading to higher steel prices in Asia and consequently India. While there are concerns on rising raw material prices and potential impact on steel margins, we believe that against the backdrop of robust demand, Indian steelmakers are in an advantageous position, given access to low-cost captive iron ore and high leverage to rising prices. On the other hand, we believe base metal prices have run ahead of fundamentals, and we expect a pullback in the medium term.

Strike while the iron is hot; Steel over Metals; Buy JSW, Tata

Add JSW to Conviction Buy, U/G Tata Steel to Buy
We add JSW Steel (JSTL.BO) to the Conviction Buy List with a 12-m P/Bbased TP of Rs1,346 (from Rs1,199) as we continue to believe that it is in the best position to capitalize on a recovery in steel demand and pricing vs. its peers - we expect 40% EBITDA CAGR over FY09-FY12E, highest amongst peers. We upgrade Tata Steel from Neutral to Buy with a 12-m P/B-based TP of Rs702 (from Rs496) on sustained strong profitability at its India business and a constructive outlook for the European steel sector which drives our expectations of earnings recovery at Corus.

Add Nalco to Conviction Sell, Buy on Sterlite, off CL
We remove Sterlite (STRL.BO) from our Conviction Buy List, as we see better relative upside in JSW Steel. We reiterate a Buy on Sterlite with a 12-m SOTP-based TP of Rs962 (fromRs951), as we believe that the current valuation does not reflect the earnings upside from the power business. Its diversified exposure, low cost position, volume growth and balance sheet strength make it our top pick in base metals. We reiterate Sell on NALCO (NALU.BO) and add to the Conviction list with a 12-m PB based target price of Rs305. We believe that NALCO’s valuations at FY11E PB of 3.2x don’t justify its deteriorating fundamentals – limited volume growth,
muted aluminum outlook and frequent coal supply disruptions.

To read the full report: STEEL SECTOR


Q3 PAT was 5% below estimates; EBITDA margin halved on higher costs. Unitech’s reported PAT of INR1.8bn (+30% y-o-y) was 5% lower than our estimate, despite net sales of INR7.7bn (+58% y-o-y) 17% higher than estimates. While strong sales growth reflects improving execution, EBITDA margin halved from 50% in Q3 FY09 to 24% in Q3 FY10 as Unitech adjusted for construction cost growth on old undelivered space of 17m sq ft.

Business momentum maintained, though well reflected in share price. During 9M FY10 sold 10.7m sq ft of residential space (2.8m sq ft in Q3 FY10), and 2.4m sq ft of commercial space (0.3m sq ft in Q3 FY10). Volume growth was in line to meet our FY10 estimate of 13.5m sq ft residential and 2.8m sq ft commercial space. However we believe the market is factoring in the good volume growth and current valuation leaves limited room for upside.

Execution and higher than estimated volumes to act as catalysts. Unitech improved its execution pace (57% y-o-y sales growth) during Q3 FY10. However it will need to sustain the momentum, to allow delivery of 17m sq ft of old presold inventory by FY11. We believe sustained execution momentum and higher than estimated volume growth would act as key drivers for a valuation upgrade and vice-versa.

Lower TP to INR83 (INR 85) as we cut NAV by 3%. We lower earnings by 14% in FY10 to INR6.8bn, 18% in FY11 to INR8.9bn and 7% in FY12 to INR14.3bn to factor in escalation in project costs on old undelivered projects. However the impact on our NAV is limited to 3%. In line we cut our target price to INR83. We retain our valuation at a 10% discount to our FY11 NAV, along with INR8 for Unitech Wireless and INR6 for terminal

To read the full report: UNITECH

>Vaccines Market; Apollo (Capex Plans), Fortis (Fund Raising); Sun Pharma (Effexor XR Launch Closer) (CITI)

Bill Gates, vaccines and a $1.5bn Carrot — Bill Gates has said that his foundation would spend $10bn on vaccine delivery and R&D over the next 10 years. Gates devoted a chunk of his annual letter, published earlier this week, to vaccines “We expect that manufacturers will commit to building factories much earlier than they
would otherwise in order to compete for this money,” Gates wrote in his letter this week. (WSJ Health Blog)

Apollo Hospitals to invest Rs18bn in 2 yrs — Apollo Hospitals today said it will invest around Rs18bn in the next two years for increasing the number of hospitals under its operation to 70 with a capacity of 13,500 beds. At present, the company has 46 hospitals under its operation with a capacity of around 8,000 beds. It also announced opening its 47th facility in Bhubaneswar. (Business Standard)

Fortis to raise Rs4.5bn as part of additional capex — As part of an additional outlay of Rs6bn to fund its capital expenditure programmes, Fortis Healthcare plans to raise Rs4.5bn through a combination of term loans from banks as well as internal accruals. Yogesh Sareen, CFO, said 60% of this would be raised through internal accrual and the remainder by term loans from banks. (Business Standard)

Sun gets a boost as FDA rejects rival Osmotica’s plea — Sun Pharma's plan to launch a copy of Wyeth’s anti-depressant Effexor XR got a big boost after the US drug regulator rejected rival Osmotica’s appeal. The FDA rejected Osmotica’s appeal a few days ago, though the FDA’s website is yet to notify the development, Sun Pharma CMD Dilip Shanghvi said. Though Osmotica’s second petition is still pending, Mr Shanghvi said it was not a significant challenge. (Economic Times)

Other stories (Pg 2) — Cipla, Wockhardt, GSK, Sanofi-Aventis, Philippines plans further drug price cuts.

To read the full report: INDIAN PHARMA