Thursday, February 25, 2010

>Resumption of second generation reforms? (DEUTSCHE BANK)

Budget session agenda signals strong policy intent
The Indian parliament’s agenda for the current budget session (apart from discussing the union budget) seems to signal a strong intent to move ahead on the long outstanding reform agenda. The agenda includes 16 pending bills for consideration and passing (of these 10 to be taken up only in case standing committee reports are presented in time), and introduction of 63 new bills.

Pension, Insurance, Mining and Land Acquisition Bills on parliament agenda
Bills listed for consideration and passing include the Mines and Minerals Amendment Bill (for amendments in coal mining, permitting auction of coal blocks and paving way for Coal India’s listing), and Insurance Bill (key objective is to raise FDI cap from 26% to 49%). Bills listed for introduction include Banking Regulation Amendment Bill (to lift 10% limit on voting rights in private sector banks) and State Bank of India Amendment Bill (reducing minimum govt stake in SBI from 55% to 51%), Pension Fund Regulatory and Development Authority Bill (for deepening and improving regulation of pension sector), Land Acquisition Amendment Bill and Rehabilitation and Re-settlement Bill (to facilitate easier land acquisition).

Strong on intent, will government deliver?
Since taking power last year, this is the first time; the UPA administration has decisively put many of these long-awaited bills on the business agenda. We believe that politically, the timing is also propitious with the next state election more than six months away, positive coalition dynamics and a government that has firmly signaled the compulsion to return back to the pending reform agenda. Even on the economic front, the near restoration of GDP growth to the 8-9% trajectory has created a compelling platform to resume long pending reform. While we do not see all the proposed bills being taken up/passed, on account of the need for long and arduous debate, even if some of the bills are taken up, the government will send out a very strong message of its intent on moving decisively on the pending reform agenda. This should be very positive for market sentiment.

Banking on return to 8-9% GDP growth trajectory
We view the government as growth biased and one of the key premise of our
positive outlook on India is the restoration of Indian GDP growth to an 8-9% trajectory over next 12 to 15 months. We maintain our year end target of 22,000. Our top Buys are: Asian Paints, BHEL, HDFC Bank, ICICI Bank, Infosys, Maruti, M&M, SAIL, Sterlite, and TCS.

Risks to our positive investment thesis
The return of non-food inflation could bring back the overhang of an ‘inflation wary’ government, a sharp rise in global oil prices raises the risk of an aggressive policy response and a fat pipeline of fresh issuances. A strengthening dollar and weakerthan- expected global growth are key exogenous risks.

To read the full report: EQUITY STRATEGY

>Rail Budget 2010-11: Focus on PPP… (ICICI DIRECT)

Earning guidelines
Freight rates have been increased in January 2010 to the tune of 5-8% while the freight loading target is up 8 MT to 890 MT. This is getting reflected in higher freight earning estimates for FY10E by Rs 191 crore. Freight earning revenue estimates for FY11E were kept in line with volume growth expectations as freight rates were maintained at current levels. Hence, the growth indicated was much below the historic trend

However, passenger earnings and coach earnings have been trimmed down for revised FY10E but kept high for FY11E

Focus on wagon procurement
To set up five wagon manufacturing plants through PPP mode
To set up wagon repair shop at Badnera
Establishments of coach factories at Rae Bareilly, Kanchrapara and Palakkad are in progress
To set up a rail axel factory

For rail infrastructure and rail operating players
A solution in the form of setting up a special task force to clear the pending investments within 100 days is a fine step towards growth
Preliminary engineering cum traffic survey on four other freight corridors to be taken up in FY11E
To construct dedicated passenger corridors
Premium tatkal services for parcel and freight movements is under consideration
To examine the need for special wagons for iron ore, fly ash, automobiles, etc
To set up 10 auto ancillary hubs
To set up six bottling plants for clean drinking water at cheaper rates
To build multi level parking complexes through PPP mode
Modernisation of Chittaranjan Locomotive Works to augment the present capacity of 200 locomotives to 275 locomotives
Work on loco factories at Madhepura and Marhora is also in progress
Private operators investing in rail infrastructure can run special freight trains to carry automobiles, vegetable oil, molasses, chemicals, petrochemicals and bulk traffic like fly ash and cement

For public in general

To construct more under-passes, limited height subways besides road over-bridges (ROB) and road under-bridges (RUBS)
To add 10 more Duronto trains to be introduced
Routes of 21 trains to be extended
To add 101 new suburban trains for Mumbai
To set up 381 diagnostic centres throughout India alongside hospitals
Within the next seven months, 117 trains to be flagged off
Withdrawal of railway examination fees for minorities, women and OBCs
To introduce modern trolleys at railway stations
To launch double-decker trains on a pilot basis
To start five sports academies at Delhi, Chennai, Secunderabad, Kolkata and Mumbai
Service charge on sleeper class cut to Rs 10
Service charge on AC Class cut from Rs 40 to Rs 20
Larger section of the population to get connectivity over the next five years

For employees

Housing for all railway employees in the next 10 years
To set up 50 crèches for children of railways women employees.

To read the full report: RAILWAY BUDGET REVIEW

>Asia tilts scales in global steel market (ELARA CAPITAL)

Global demand set to rebound from CY09 lows
Steel production worldwide is showing a steady revival after suffering a major setback in Q3CY08 due to the financial turmoil. Going ahead, we expect China and India to lead the demand growth for steel in CY10 and CY11. The World Steel Association (WSA) estimates the steel demand growth to be 12.4% in CY10, primarily driven by China with the developed world likely to register a muted expansion in demand.

Demand – supply balance seen in China and India
With the rising demand in the developing world, we expect the Chinese as well as the Indian mills to continue to operate at a healthy utilization levels of 85 – 90%. With no new large greenfield capacity visible in the near term, coupled with the fact that the Chinese regulations are compelling small and inefficient blast furnaces to shut down, we expect the Chinese and Indian steel markets to remain in balance. Although the developed world is expected to operate at 65 - 70% utilization levels, the high cost structure in those parts of the world makes the movement of steel into the developing world unviable at the current prices.

Steel prices to nudge upwards by 10-15%
We expect steel prices in the Chinese region to settle at least 10 – 15% higher, driven by the cost push factor as well as the market dynamics which indicate that steel markets in the region would remain in balance with little threat of overcapacity. We believe that steel prices in CY10 would settle at a higher level riding the following: (a) an increased cost of output thanks to higher contract price settlements for iron ore and coking coal (b) no oversupply scenario in the developing world and (c) a sustained higher cost of production in the developed world which nullifies the import threats from these regions (despite a lower capacity utilization level).

Indian steel companies are likely to see benefits of firm steel prices and a no-surplus market in FY11 and FY12 despite the big capacity additions. We like the ‘volume story’ and expect large players with big expansions to benefit from the favorable steel pricing scenario. JSW Steel with its healthy volume increment remains our top pick as we believe that such a spurt in volumes would offset its lesser level of integration as compared to peers. We recommend a Sell / Switch on SAIL to JSW as we are circumspect of its ambitious expansion programme, the timeline and continuous upward revisions in its capex plan. We are neutral on Tata Steel and see an overhang of Corus on the consolidated performance.

To read the full report: INDIA STEEL

>BHARTI AIRTEL: African safari gamble worth it (ICICI SECURITIES)

We upgrade Bharti Airtel (BAL) to BUY from Hold as its entry into Africa via Zain’s African assets (ZAF) is positive from a long-term horizon and reduces the risk of intense competition in India. BAL has bid for ZAF (excluding Sudan & Morocco) at US$10.7bn. The acquisition will give BAL control over ZAF and we believe while valuations are at a premium based on FY10E EV/E of 9.6x, the strategy will pay rich dividends in the long term. ZAF’s assets have been impacted in terms of growth and profitability by the currency devaluation and poor economic conditions. ZAF’s revenues declined 12% through 9MFY09 (annualised), but grew 5% based on constant currency. The ZAF acquisition is likely to lead to only 6% EPS dilution in FY12E (the second year of acquisition) and be EPS-accretive from FY13. We see the current fall in BAL’s stock price (11% post announcement) as a chance to accumulate since the performance will likely improve post more clarity on the deal structure and business fundamentals. Upgrade to BUY.

ZAF acquisition EPS-accretive by FY13. The ZAF acquisition is EPS-dilutive in FY11 and FY12, but we expect it to be EPS-accretive from FY13. We expect dilution in FY12 to be 6% assuming 100% debt funding. The acquisition through leveraging BAL’s balance sheet will improve the capital structure with low interest cost. In our view, this is a one time opportunity for BAL to enter the African markets and the premium valuations are justified for control.

“Cash combined with courage in a crisis, is priceless.” – Warren Buffett

African assets – Hidden jewel. We see the current profitability and market situation in Africa as misleading – post the credit crisis in ’08, African currencies significantly devalued 3-39%, with African nations highly dependent on natural resources (crude) and remittances. With current mobile penetration at 36% in ZAF’s markets of presence, Africa presents an opportunity similar to that in India in ’08 and will likely witness the maximum interest by global telcos in this decade.

We upgrade BAL to BUY at Rs345 target price as the current price correction is a knee jerk reaction in our view and entry into Africa via ZAF is a long-term strategy, thereby reducing the risk of hyper competition in the Indian markets. BAL’s increased debt owing to the ZAF acquisition leads to better capital structure, given that BAL’s balance sheet is being currently underleveraged in spite of its ability to raise low-cost debt. We attribute Rs273 value to BAL’s mobility business and Rs72 to towers with a total value of Rs345, implying an upside of 24%.

To read the full report: BHARTI AIRTEL