Wednesday, May 5, 2010


• The impact of the financial crisis and its ensuing global recession on public finances has raised red flags regarding sovereign debt sustainability in advanced economies in the eurozone.

• Projections based on fair assumptions suggest these countries are on an unsustainable trajectory unless they embark on serious fiscal consolidation programs, achieve significantly higher economic growth rates, or reduce their projected unfunded age-related spending

• The events taking place in the last few days highlight the need for immediate and decisive action from European authorities to contain the risks of contagion

• Assuming financial markets are able to surpass the near-term challenges, the widespread need for fiscal consolidation still paints a eurozone medium term outlook with slower economic growth, a weaker euro and a looser monetary policy from the European Central Bank.

Policymakers across the eurozone are receiving a rude awakening to the pitfalls of having allowed government debt levels to escalate unchecked. Greece was thrust into the spotlight when market participants became aware that it would have difficulty rolling over US$10.6 billion in maturing debt on May 19th. But Greece is only one among eight European countries – France, Germany, the United Kingdom and the disparagingly nicknamed PIIGS (Portugal, Ireland, Italy, Greece, and Spain) – that are under market scrutiny for unsustainable debt levels. In fact, Spain and Portugal have recently experienced debt downgrades by a major rating agency, and the stakes are rising that others may follow. Debt downgrades start a vicious cycle which pushes up the cost of borrowing, and this, in turn, makes it even harder for governments to meet near-term debt payment obligations. At this stage, a debt default by Greece or any one of the other at-risk European countries is becoming increasingly likely. All of these ‘at-risk’ countries are set to confront ballooning debt-to-GDP ratios unless there is a radical change to their fiscal approach.

And, if you think the joint eurozone-IMF financial package for Greece that is currently afoot will be the saving grace, think again. There is no guarantee that this will be sufficient to reassure investors regarding the outlook for the other debt-beleaguered euro members. With yield spreads rising rapidly in a matter of days and with sizeable upcoming roll over needs of the other PIIGS (US$ 588 billion from May-December 2010), Greece’s atonement today could be Portugal’s, Ireland’s, Italy’s or Spain’s tears tomorrow.

To read the full report: SPECIAL REPORT


Key Investment Rationale
We believe Farmax’s new product pipeline, increased contribution from branded products, strong distribution reach and growth from urban and semi-urban domestic markets would be key growth drivers going forward. We expect 122% and 296% compounded growth in revenue and net profit, respectively over next three years. EBIDTA margin is likely to improve to 22.5% in FY12 versus 10.3% in FY09 led by improved product flow, high revenue growth and higher assets utilization. We
recommend BUY.

Strong Pipeline of new businesses: FIL has been very careful in selecting its new focus areas and has, over the years, created a very strong pipeline of new products. The Company intends to roll-out these new products in a steady fashion over the next few years. Given the high demand and added production capacity of the new products, FIL is expected to enjoy high prices and better margins in the long term.

Improving Operating Margins: FIL has now shifted its focus on businesses in which it has a clear competitive advantage in the form of product technology and/or easier access to raw materials. The company intends to launch high margin branded products which are on the anvil. EBIDTA margin is likely to improve to 22.5% in FY12 versus 10.3% in FY09 led by improved product flow, high revenue growth, cost efficiencies and higher assets utilization.

Huge capacity expansion in place: FIL has constantly expanded its production capacity, which is planned to continue in the coming years. FIL’s current production capacity has the potential to address a market of Rs. 3.5 billion in value.

Strong Distribution Reach: FIL has superior distribution reach which can propel a company to a leadership position. It marketing network provides the company with a strong head start and makes the products available to larger sections of a target population. Further, its distribution reach is backed by innovation to keep a brand relevant over time.

Valuations: FIL is all set to move into an orbit of high growth, which is sustainable for atleast another 4-5 years. The margins are expected improve consistently led by strong sales growth, introduction of new and higher margin innovative products and higher assets utilization. We believe the company will continue to enjoy high earning multiple given its high growth potential. We are, therefore, setting the 12 month target price at Rs 215 / share based on DCF valuation method. At our target price, the stock will be valued at 17.8x of its FY12 EPS.

To read the full report: FARMEX INDIA


4QFY10 PAT ahead of expectation on other income — Adani Power’s 4QFY10 PAT at Rs983mn, up 36% QoQ, was ahead of CIRA expectations of Rs732mn on Rs319mn of other income which we had expected the company to capitalize in line with what was done in 3QFY10.

ASPs lower than expected — ASPs in 4QFY10 at Rs3.27/kWh were down 15% QoQ. If one assumes merchant sales at Rs6/kWh and GUVNL sales at Rs2.81/kWh then one can back calculate and find out that almost 76.5% of the FY10 sales has been to GUVL and 23.5% of the FY10 sales has been merchant.

Sell: Other Income Leads To Profit Beat

Lower fuel costs and higher O&M costs — 4QFY10 fuel costs at Rs1.05/kWh per unit generated were down 27% YoY which is a very big positive but this to some extent has been negated by higher O&M costs of Rs0.23/kWh per unit sold. As a consequence, the EBITDA per unit sold is Rs1.91/kWh which is below CIRA expectations of Rs2.14/kWh

Update on tax rates and SEZ duty — Effective tax rate is down to 11% in 4QFY10, from 22% in 3QFY10, on account of commissioning of unit 2 of 330MW. Our discussion with the company suggests it has not provided for the 16% SEZ duty in FY10 as the regulations are not clear yet.

2 more units set to be commissioned — Adani Power has commissioned 2 units of 330MW each in Mundra so far. The company was set to commission unit 3 in April 2010, followed by unit 4 in June 2010.

To read the full report: ADANI POWER


Capitalizing on domain experience and niche presence: Given its rich domain experience of over 25 years, large presence, strong customer relationships, and quick turnaround time, we believe that DHFL is sweetly poised to capture the opportunity presented by the growing demand for housing in rural and semi-urban regions. Being a niche player in the housing finance business, with a focus on middle and low income customers in tier-II and tier-III cities, it enjoys higher yields and margins than peers. Its average incremental ticket size was Rs840,000 as on December 2009 compared with ~Rs1.4m for LIC Housing Finance.

Efficient utilization of capital; strong growth to continue: DHFL has been one of the fastest growing housing finance companies in the last six years. Its loan book and disbursements registered a CAGR of 39% and 37%, respectively (well above peers) over FY04-09. In 1QFY10, DHFL raised Rs3b through equity dilution, taking its tier-I ratio to 20%. Post
capital raising, growth rates have remained very strong and significantly higher than industry. In 9MFY10, loans and disbursements grew 55% and 78% YoY, respectively. On a lower base and higher ticket size, we expect loan growth of 40% CAGR and disbursement growth of 37% CAGR over FY10-12.

Superior margins, high asset quality: Though its cost of funds is higher and it has low exposure to the non-retail segment, DHFL's niche presence enables it to earn superior margins. Also, despite exposure to high-risk low-income customers, DHFL's asset quality is relatively high. Its gross NPA ratio was <1.6%>
asset quality.

Fee income initiatives gaining traction: DHFL is focusing on growing fee income through insurance distribution, project marketing and by providing technical services to developers. In 9MFY10, DHFL's third-party distribution income was Rs175m as compared to just Rs30m in FY09. Fee income (including processing fees) was Rs450m in 9MFY10 as compared to Rs170m in FY09. We factor in fee income of Rs1b in FY11.

Offers strong growth-value combination; Buy: DHFL offers a strong combination of growth and value, with superior asset quality. We expect earnings CAGR of ~37% over FY10-12. RoA should improve from 1.6% in FY09 to 1.9%+ by FY12 and RoE from 21% in FY09 to ~25% by FY12. Adjusting for the value of key investments after 20% discount (Rs14/ share), the stock trades at 1.3x FY12E BV and 5.9x FY12E EPS. We maintain Buy, with a revised SOTP-based target
price of Rs288 (1.8x FY12E BV + Rs14/share for key investments).

To read the full report: DEWAN HOUSING FINANCE


Growth momentum continues…
Exceeding our earning estimates, Subros reported 15.8% YoY growth and 7.4% QoQ growth in net sales to Rs 249.7 crore. The sales growth was supported by 14.2% volume growth and 0.9% realisation growth YoY. On the EBITDA margin front, the company saw a slide of 80 bps QoQ to 10.6%on the back of increased other expenses and personnel cost. However, on a YoY basis, the margin improved by 338 bps on account of lower raw material cost. The PAT was reported at Rs 9.03 crore, lower than our estimate of Rs 11.2 crore, registering a meagre improvement of 3.2% QoQ while YoY it jumped from Rs 0.78 crore. However, the low base effect cannot be ignored.

Going forward, strong volume growth from its key clients Maruti Suzuki and Tata Motors and restructuring of Logan by Mahindra and Mahindra would continue to support demand growth for Subros. In addition to this, many launches announced by MNC players having their production set up here in India would likely expand Subros’ client portfolio. This would not only garner higher volumes but also diversify its client concentration. We maintain our earnings estimates for FY11 and FY12.

At the CMP of Rs 47, the stock discounts its FY11E and FY12E EPS by 8.2x and 6.9x while on an EV/EBITDA basis, it is trading at 3.3x and 2.8x its FY11E and FY12E basis. We are maintaining our earning estimates for the company considering the strong volume growth from its key clients
and reiterating our STRONG BUY rating on the stock.

To read the full report: SUBROS