Sunday, May 30, 2010

>EUROPEAN INFRASTRUCTURE: Rising Leverage Concerns Causes Equity/Debt Disconnect

Widespread equity sell-off contrasts with debt stability of specific companies — Credit concerns have returned to haunt the Infrastructure space with a vengeance over the past couple of weeks as increasing worries over a second round of the credit crunch have resurfaced against a backdrop of spreading sovereign risk fears. In this context, and with slowing growth expectations for the European economies (particularly in the periphery) S&P cut Brisa's rating by one notch to BBB-, from BBB (although raising its outlook to stable from negative). This followed a similar downgrade for Abertis (4/10) to BBB+. Rising risk aversion, however, has affected the whole sector recently with stocks falling globally by 10- 20% over the last month. Nevertheless, while the stock market has punished in a seemingly indiscriminate fashion, fixed income markets have been more selective.

Greece looks to sell infrastructure assets; Athens airport a potential candidate — The Greek government is looking to raise c€3bn during 2011-13 via the privatisation of several assets including Athens International Airport. AIA is 55% owned with Hochtief holding a further 26.7% and the 13.3% balance in the hands of HTAC, an airport fund owned by CDPQ, Hastings and KfW, but managed by German contractor. Athens airport handled 16.2m pax in 2009 (-1.5%) and Ebitda jumped 46% to €316m due mainly to the recovery of the previous year's impairment charges. For 2010 the company expects a slight dip in pax to 15.8m.

To read the full report: EUROPEAN INFRASTRUCTURE


Industry Overview: The huge investments by the Government of India on development of infrastructure in the country has resulted a positive spill over effects on the economy by triggering growth in other sectors like manufacturing and service sector and helped in sustaining India's growth rate in compared to rest of the world. The investment in infrastructure in India has increased from 4.9 percent of the gross domestic product (GDP) in 2002-03 to 6 percent last fiscal. The Union Budget 2010-11 has allocated USD 37 billion for infrastructure up gradation in both rural and urban areas. This amounts to over 46% of the total plan allocation for infrastructure development in the country. As per the Budget Estimates, disbursements by the India Infrastructure Finance Company Ltd (IIFCL), established by the government to extend long-term financial assistance to infrastructure projects, are expected to touch Rs 9,000 crore by the end-March 2010 and Rs 20,000 crore by March 2011. India's Government is planning a US$ 354 billion investment in its infrastructure by 2012, with another US$ 150 billion expected to come from the private sector, according to the latest report by PricewaterhouseCoopers.
Projected spending under the Eleventh Five Year Plan (FY07-FY12) should see the electricity (US$ 167 billion), rail (US$ 65 billion), roads and highways (US$ 92 billion), ports (US$ 22 billion) and airports (US$ 8 billion) sectors receive a total of US$ 354 billion. India is expected to expand at 8 per cent in 2010, the fastest among major economies in the world, and 8.5
per cent the year after, matching China's growth rate, according to a World Bank. An estimated US$ 500 bn is required by 2012 to upgrade India’s infrastructure.

India has the world's second largest road network, aggregating over 3.34 million kilometers (km). Being well-aware of the necessity to attract FDI in the segment, the Government has allowed 100 per cent FDI under the automatic route for all road development projects, in addition to offering 100 per cent income tax exemption for a period of 10 years. According to the Planning Commission, the road freight industry will be growing at a compound annual growth rate (CAGR) of 9.9 per cent from 2007-08 to 2007- 12. A target of 1,231 billion tonne km (BTK) has been put on road freight volumes for 2011-12. According to industry sources, the road sector in the country would require an investment of US$ 80 billion in the next 3-4 years of which US$ 45 billion is anticipated from the private sector.

To read the full report: INDIAN INFRASTRUCTURE


The Growing Wall of Worry — Uncertainty about European fiscal positions, a surprising ban on short selling, stresses in the interbank market and Korean political tensions have helped drive global equities down 16% from April highs.

No Discrimination — All major regions are down a similar amount. Global equity market correlations are at their highest level in 30 years. Put / call ratios are back at extremes. Investors are not discriminating what they sell, they just sell.

Flight to Safety — German government bond yields are at their lowest level in 90 years. Global forward PE ratios are approaching single digits. Perhaps most dramatically, European dividend yields are back above government bond yields. This extreme valuation event last occurred back around global market lows in 2003 and 2008.

Opportunities for the Brave— We look for stocks around the world where this equity/bond yield crossover has occurred, dividends are forecast to grow and earnings momentum remains solid. They include ABB, BAE Systems, BASF, CEZ, China Mobile, Cielo, Honda, Insurance Australia Group, Johnson & Johnson, Mattel and Vodafone.

To read the full report: EQUITY STRATEGY

>DB CORP LIMITED: Better-than-expected numbers…

On a consolidated basis, DB Corp reported its Q4FY10 results. The results were above our expectations. The topline stood at Rs 257.2 crore (I-direct estimate of Rs 248.5 crore), growing 13.3% YoY on the back of higher ad revenues. EBITDA for the quarter grew 44.9% YoY to Rs 69.6 crore. Lower newsprint prices and cost rationalisation measures adopted by the company led to an improvement of 589 bps in the EBITDA margin, which stood at 27.0%. The company reported a PAT of Rs 36.7 crore as compared to Rs 23.5 crore in Q4FY10.

Highlights for the quarter
DB Corp reported YoY ad revenue growth of 10.8% at Rs 185.1 crore. The ad revenue was led primarily by higher volume growth and re-pricing of old clients. Circulation grew 4.2% YoY to Rs 52.7 crore. The EBITDA margin improved YoY on the back of lower raw material cost that was down 8.5% YoY, while QoQ it declined due to higher selling and administrative expenses. Revenue from the radio business grew from Rs 8.0 crore to Rs 10.3 crore in Q4FY10. The radio business broke even during Q4FY10.

Merger of radio business
The company has demerged the radio business from its subsidiary Synergy Media Entertainment Ltd (SMEL) and merged it into the parent company.

At the CMP of Rs 240, the stock is trading at 20.0x FY11E EPS of Rs 12 and 16.8x FY12E EPS of Rs 14.3. Given the good advertisement growth and break even in the radio business, we are confident about the company’s performance. We have valued the stock at 18x FY12 EPS to
arrive at a target price of Rs 258. This implies an upside of 7.4%. We are maintaining our rating on the stock as ADD.

To read the full report: DB CORP


RIL-ADAG overhaul non-compete agreement. RIL and ADA group companies have signed and approved an agreement canceling all existing non-compete arrangements entered into between them in Jan ’06 pursuant to the reorganization of the Reliance group. They have now entered into a new non-compete agreement with respect to only gas-based power generation for the period extending until Mar ’22.

New opportunities for RIL to deploy excess cash. With the change in the non-compete agreement, RIL now has the freedom to explore investment opportunities in the telecom, power, and financial services segments. While some of these businesses were expected to be out of the non-compete framework after five years of initial de-merger of businesses of the Reliance group, it seems that for businesses like telecommunication, the non-compete agreement was (earlier) until 2015.

Gas agreement under negotiations. RIL’s statement said that they expect to expeditiously negotiate and conclude the gas supply arrangement with RNRL in accordance with the orders of the Supreme Court. We believe that the role of the government still remains critical, as any gas allocation to RNRL or its affiliate can only be done by the government and not by RIL, as per the
existing gas utilization policy.

Valuation. At our target price of Rs1,150, RIL offers 15% upside to current market price.

To read the full report: RIL


Robust 29% yoy revenue growth aided by 30% growth in power division.

Continues to benefit from lower raw material cost, operating margin expands by 225bps yoy to 18.3%

Higher depreciation, due to commissioning of the enhanced capacity, partially offset operating profit growth – thus resulting into 42% PAT growth during the quarter

Order book continues to remain strong at Rs1.4trn, provides earnings visibility for the next 3 years

Maintain BUY, but reduce target marginally to Rs2,709/share to reflect higher competition in FY12.

To read the full report: BHEL