Monday, May 10, 2010

>No reason to get too enthusiastic about the US economy

Many investors are becoming very optimistic about the US economy, particularly in view of the consumption figures from early 2010, and are rebalancing their portfolios as a result. We believe that this "enthusiasm" for the US economy is very excessive:
− the pick-up in consumption is due to:
• faster adjustment of employment in the United States than in Europe;
• real dissaving (spending of monetary savings);
− it is also true that, thanks to the geographical structure, US exports are recovering more than those of the euro zone;
− however, fundamentally, the situation with regard to the correction of fiscal deficits, credit, wage incomes, investment and real estate is not better in the United States than in the euro zone; there is not that much asymmetry between the two regions in a medium-term perspective;
− this must be adjusted for the fact that potential growth is higher in the United States.

To read the full report: US ECONOMY


Standing Committee allocates coal linkages for Eleventh Plan projects, mandatory condition of financial closure within three months of LOA: The Standing Committee on Coal Linkages (SLC) made further allocations for coal linkages in its meeting held in January 2010 (as follow up to the earlier meeting in November 2008). In the January round also, linkages were considered only for projects to be commissioned in the Eleventh Plan (FY08-12) and to identify 'non-serious players/defaulters' to better allocate linkages to firm projects, based on the review submitted by Central Electricity Authority / Ministry of Power.

Also, the current linkages are subject to key milestones being achieved by the project developer, including financial closure within three months from the date of Letter of Assurance (LOA), failing which the LOA shall stand withdrawn. In terms of the timeframe, notice inviting Commitment Guarantee (CG) will be issued within 30 days of the SLC meeting, followed by one month time for submission of the CG and LOA would be issued within three weeks thereafter.

Coal India to face shortage of 110m tons in FY11 assuming all LOAs fructify into FSAs: Coal India (CIL), in its briefing to SLC, has informed that based on the LOAs issued till January 2010, there could be "net negative balance" of 110m tons in FY11. The shortfall is likely to go up further to 235m tons in FY12, 305m tons in FY13 and then decline to 186m tons by FY17. This is based on the presumption that all LOAs issued by CIL / coal companies fructify into Fuel Supply Agreements (FSAs), which are signed over a period of 24-30 months based on project milestones. CIL has requested for faster environment/ forest clearance and expedition in land acquisition to enable it to ramp up production capacity. The shortfall is partly expected to be met through increased imports by Coal India.

Sterlite, Adani, Lanco amongst the key gainers: SLC has allocated "Tapering" as well as "Long Term" linkages to projects (or units) which are feasible for commissioning in the Eleventh Plan period. Key players that have been allocated coal linkages include Sterlite Energy (1.8GW), Adani Power (1.5GW), Lanco Infratech (1.3GW), Jindal Power (1.2GW), and Patel Engineering (1GW). Cumulatively, Adani Power will now have ~60% of its fuel supply for initial 6.6GW of planned capacity from domestic sources (v/s 39% earlier); increased linkages lower the fuel risks.

Coal import likely to remain high in near future: Non-coking coal imports to India have steadily increased from 8.7m tons in FY04 to 35m tons in FY10, an increase of 4x. We believe that the coal supply issues are likely to impact the Indian Power sector in the near term, given (1) failure on the part of CIL to ramp up production, (2) non expeditious clearance for development of new coal blocks, (3) land acquisition issues for captive coal blocks, etc.

To read the full report: COAL LINKAGE


Jaiprakash Associates Limited or “JAL”, the flagship company of the Jaypee Group, is a diversified conglomerate working in the Infrastructure and Industrial segment in India. The Company is engaged in the business of Heavy Civil Engineering and Construction while also has interests in Cement, Real Estate and Hospitality. It is engaged in the business of Integrated Engineering Construction and in manufacturing and marketing of Cement. Other than this, it owns five star hotels at New Delhi, Mussoorie and Agra and a Golf Course along with associated recreational and residential facilities at Greater Noida as part of its Real estate business. The
company has 13 Subsidiaries which have presence in Power Generation & Transmission, Expressways and Hotels among others.

Engineering and Construction
JAL is the Industry leader in Construction of river valley and Hydro- Power projects on turnkey basis for more than 4 decades. The company is currently executing various projects in Hydropower / Irrigation / Other infrastructure fields and has had the distinction of executing simultaneously 13 hydropower projects spread over 6 states and in the neighboring country Bhutan for total generating capacity of 10,290 MW of power. Other than Power, the company
undertakes projects involving, Rock excavation (both surface and underground), Concrete manufacture and placement (including chilling), Real Estate Development, Steel Structures, Fabrication and erection of penstock liners, Expressway Construction, Hydromechanical equipment procurement and erection etc. The company has been assigned "CR 1" grade by ICRA Ltd indicating Very Strong Contract Execution Capacity with best prospects of timely completion of projects without cost overruns, etc. for hydropower EPC contracts of value greater than Rs 2500 Crores.

Cement and Cement Products
JAL along with its subsidiaries is the 3rd largest cement producer in the country. The groups current cement facilities are located in Central and Western part of the country which have one of the highest cement production growth rates. The group produces special blend of Portland Pozzolana Cement under the brand name 'Jaypee Cement' (PPC). Its Cement Division currently operates modern, computerized process control cement plants with an aggregate capacity by the end of this fiscal, standing at around 20 MTPA combined with round 252 MW Captive power plants.

Real Estate
JAL has vested interest in the development of Real estate but with a different kind of fervor. The premier way of expression is its real estate development property in Greater Noida. Jaypee Greens, Greater Noida with its inception in the real estate industry in the year 2002 brought about a revolution in the concept of golf centric real estate development in India.

Under this division, JAL owns and operates four 5 Star Deluxe hotels and is a significant player in northern part of the country. This leading chain of Deluxe hotels in India offers luxurious accommodation, exquisite dining facilities, interesting leisure options and a pleasant environment to provide a comfortable stay for its esteemed guests.

To read the full report: JAL


2QFY10 performance below estimates: During 2QFY10, Siemens reported revenues of Rs22b (down 7% YoY) lower than our estimates of Rs25b (up 5%YoY). EBITDA margins at 12.9% (vs 14.6%YoY) were down 65bp versus our estimates of 13.5%. Net profit at Rs1.8b (down 19% YoY) is below our estimates of Rs2.2b (down 2.4%YoY).

Reported revenue / profit growth rates impacted by higher base effect, given cost updations in 2QFY09: The cost updations were a factor of the revision in commodity prices as the Qatar projects (Rs62b) had been awarded ~3/4 years back and thus a decline in commodity prices had led to improved profitability. Revision in project cost downwards also led to increased percentage completion, which resulted in higher revenues being booked in 2QFY09. Adjusted, 2QFY10 revenues are up 14% YoY and profit up 17% YoY.

Takeaways from analyst meet: (1) Margins favourably impacted by reduction in commodity prices on large Qatar projects (Rs62b received in FY06/FY07), (2) Market showing momentum in terms of pick up in short cycle products, large projects to witness delayed recovery, (3) Capex plans of Rs16b till FY12, India to be an outsourcing hub; size of the investment is meaningful given that gross block as at Sep-09 stood at Rs11.3b and (4) Siemens India to be a
major centre for value priced products, target revenues of Rs65b by FY20.

Valuation and view, muted earnings growth in FY11: Our EPS estimates for FY11E stands at Rs27 (+12% YoY) and for FY12E at Rs34 (+27% YoY). Muted earnings growth in FY11 is a function of: Expected Revenue growth of 14% YoY as incremental orders entail long gestation period and margin contraction of 160bp YoY given FY10 margins are favourably impacted by lower commodity prices on Qatar projects. Maintain Neutral with price target of Rs765 (24x average of FY11E and FY12E).

To read the full report: SIEMENS


Lower margin pulls down PAT; order book slows down
Voltamp Transformers’ (VAMP) Q4FY10 result was ahead of our expectation on the profitability front. Though the EBITDA margin declined Y-o-Y, the dip was lower than our expectation. Numbers were, however, in line with our estimate on the revenue front. The company reported muted revenue growth of 9.4% Y-o-Y to INR 1,821 mn, primarily due to lower realisations. Q-o-Q, the company reported strong 26.1% revenue growth due to execution of certain high-margin orders.

EBITDA margins dipped 144bps Y-o-Y to 20.3% during the quarter, leading to slower growth in EBITDA at 2.1% Y-o-Y to INR 369 mn. The dip in the EBITDA margin was primarily due to sharp increase of 16.8% Y-o-Y in the raw material (RM) cost (increased 487bps Y-o-Y to 76% of sales). The sharp rise in RM cost was to an extent negated by 64.6% Y-o-Y decrease in other expenses (down 319bps Y-o-Y to 1.5% of sales). The substantial increase in RM cost indicates
margin pressure due to increased commodity prices. Due to commissioning of its new capacity, VAMP’s depreciation increased 56.1% Y-o-Y to INR 20 mn besides reduced other income (down 47.7% Y-o-Y) pulled PAT down to INR 265 mn, a 12.4% Y-o-Y decline during the quarter. The company’s current order backlog stands at INR 4.1 bn (0.7x FY11E revenues), a 8.9% decline Y-o-Y.

Volumes spurt; realisation dips
Realisations during the quarter, at INR 523K/MVA, were down 23.2% Y-o-Y. VAMP has recorded drop in realisation during each of the quarters during FY10. Volumes, however, at 3,485 MVA, were up 42.3% Y-o-Y, highest during the past 12 quarters. On a full year basis, volume recorded a muted growth of 4.9% Y-o- Y to 10,009 MVA amid concerns of overcapacity in its transformer range.

Outlook and valuations: Capacity utilisation a concern; maintain ‘HOLD’ We expect capacity utilisation to remain under pressure on the back of increased capacity. Also, with increase in commodity prices, we expect the margin to be under pressure going forward. On our current estimates of INR 85.2 and INR 93.1, the stock is trading at P/E of 10.0x and 9.1x for FY11E and FY12E, respectively. We maintain ‘HOLD’ recommendation on the stock and rate it ‘Sector Performer’ on relative return basis.

To read the full report: VOLTAMP TRANSFORMERS


Going Strong
PAT growth of 19.4% for 4QFY10 to Rs 2.4bn, 60% for FY10 to Rs 10.5 bn
Building in 26% loan book growth during FY11E; SMEs and retail to lead
Margins at 3.44% for Q4 and 3.2% for FY10; likely to dip by 10-15bps
Gross NPA at 0.6% and net NPA at 0.17%
Maintain BUY with a marginally revised TP of Rs150

Andhra Bank reported a good set of numbers on the operational front for 4QFY10 with NII at Rs6.56bn, far ahead of our expectations and net profit at Rs2.4bn, a little ahead of our expectations. Although the gross and net NPAs moved up marginally during the quarter in absolute terms (in line with our expectations), the ratios have remained stable while provisioning coverage continues to be healthy (above 80%). Valuation and recommendation: We maintain our BUY recommendation on the stock with a marginally revised TP of Rs150. Our FY11E estimates have undergone a marginal upward revision as a result of which our FY11E ABVPS estimate has inched up to Rs110 (up 4% from our earlier estimate of Rs105). At its CMP of Rs133, the stock quotes at 1.3x our FY11E ABVPS of Rs110.

Combined with a ~5% dividend yield, we continue to back Andhra Bank as one of the safest and consistent-performing investments within the mid-cap banking universe.

To read the full report: ANDHRA BANK