Tuesday, June 8, 2010

>Global Emerging Markets Beyond the Turbulence (CITI)

Long-Term Bullish — In our first Global Emerging Markets (GEMs) strategy report, we set our long-term bullish case for the asset class. Our forecast is for around 15% returns in 2010, with a continuing pattern of volatility within a rising trend (the average ‘bull market correction’ in this cycle being -17%).

The Bull Case: — i) global economy in the early stages of a new upswing – we forecast GDP growth of 6.9% for GEMs in 2010, an even bigger gap than usual over developed countries (+2.4%); and ii) strong corporate earnings growth - EPS growth of 38% is forecast in GEMs for 2010; iii) valuations back to earth - sluggish markets, combined with strong EPS growth, are cutting valuations; an 11.5x forward P/E is back to its recent average.

Year 2 slows — the recent average GEMs gain in Year 2 of a bull market is 9%.

Headwinds and Risks — There will be Headwinds, notably: i) rising interest rates across the EM world and in the US over the rest of 2010; ii) a higher long-term cost of capital;, and Risks, notably: i) the EU fiscal crisis; and ii) the Chinese property market.

Overweight Asia — Overweight in Asia (the growth area of GEMs), a Neutral in Latin America (where earnings momentum is strong) and an Underweight in EMEA (which is the valuation play of the asset class).

Top Country Picks — Our Overweight calls are Taiwan, Korea, Russia, Brazil, Turkey; we are Neutral in China, India, Thailand, Chile and Mexico.

Top Sector Picks — Our Overweight calls are IT, Materials, Utilities and Consumer Discretionary. We are Neutral in Financials, Industrials, Health Care and Energy.

To read the full report: GEM

>MPHASIS: Overweight(V): 2QFY10 preview – low downside risk

Pricing remains the unknown, but downside risk is low: The key question for the
investors currently is whether the pricing discounts seen in 1Q were one-off and limited to the
Infra (ITO) division. We do not rule out further pricing discounts (in both the Applications
and ITO divisions). However, we believe management has defined benchmarks for
profitability and may not be willing to win business that breaches its profitability criteria. We
have factored in 31%-30% threshold gross margins for the Applications and ITO divisions in
our forecasts (which implies further pricing discounts in FY10).

However, expect volume growth to remain robust: We expect robust volume growth in FY10/11 (+34%/+22% y-o-y), as its parent (Hewlett Packard, HPQ.N, USD46.58, not rated) continues to increase offshoring in its existing business. We see HP facing increasing pressure to retain its market share in the global IT services market due to growing offshore demand and mid-term restructuring of mega-deals.

2QFY10: We expect 4.5% q-o-q USD top-line growth and an EBITDA margin decline of c100bps sequentially (primarily driven by our assumption of a pricing discount in the Application division and INR appreciation). We expect EPS of INR11.8.

Valuations undemanding: The stock is currently trading at 13x our FY10e EPS. We expect strong volume growth in FY10 and FY11 and EPS growth of c8% in FY11 (despite a material increase in the tax rate). We value the stock at a PE of 14.5x on our FY11e EPS, which is a 35% discount to Infosys (INFY.BO, INR2,581, OW). We remain OW(V) on MphasiS with a target price of INR770.

To read the full report: MPHASIS

>United Phosphorus acquires the global non-mixture Mancozeb business from DuPont

UPL has acquired the global non-mixture Mancozeb fungicide business and related assets from DuPont including existing inventory and formulation facility in Colombia as well as rights to registered brands, trademarks, registrations and all supporting regulatory data for these products including the popular Manzate brand fungicides. Post its Cerexagri acquisition, UPL had already become one of the top 3 players in Mancozeb market globally. With this new acquisition, UPL will further strengthen its position in the now 2 player dominated global Mancozeb market (UPL and Dow) post DuPont’s exit.

Key details of the transaction include
• The acquired business has sales of ~$70mn and UPL has paid 1.4x-1.6x sales in cash as consideration including working capital
• Given DuPont’s brand equity in the space, the product has significantly high gross margins which will translate into very attractive EBITDA level contribution after considering UPL’s frugal SG&A cost structure. Management is targeting 4-year payback period on this acquisition which could be accelerated if the business conditions are favorable.
• Most of the sales of this business are to Latin American geographies with North America accounting for the balance. The acquisition of this global brand significantly strengthens UPL’s overall strategic positioning in the extremely critical Latin American (as well as Central American) markets. This will significantly enhance UPL’s clout with the distributors in the region and have a positive rub-off impact on the balance portfolio too. This acquisition will also aid UPL’s entry into the Brazilian market
• The Colombian manufacturing facility is extremely efficiently run and will be an asset to UPL as it will enable UPL to significantly cut down its logistics cost involved in supplying to the Latin
American geographies from its Indian facilities

Our View
This is the first acquisition undertaken by UPL post its Nov 2006 acquisition of Cerexagri as it eschewed inorganic growth and opted to entirely focus on organic growth given the spike in global agrochemical asset prices. With the asset prices becoming reasonable in the wake of severe challenges faced by global agrochemical industry in 2009 and UPL’s balance sheet in a very healthy shape (0.3x net gearing and Rs32bn net worth as of FY10 end), the stage is set for UPL to dramatically step up the inorganic growth momentum. We believe Mancozeb acquisition makes immense strategic sense and the economics also look compelling given management’s 4 year payback target. Adjusting for $20mn per annum of brand acquisition revenues already built in our estimates, we are upgrading our FY11 and FY12 EPS estimates by 1% and 3.4% respectively to incorporate this transaction. We expect UPL to close some more transactions during the year which will lead to further earning upgrades. Reiterate Outperform with a
target price of Rs277.

To read the full report: UPL


Auto Sales touched record highs in FY2010 on the back of positive consumer sentiment and partially due to advanced buying at the dealers' end in anticipation of a price hike due to the change in Emission norms (effective from April 1, 2010). The impressive performance by the Indian Auto companies continued with Maruti Suzuki and Hero Honda recording the highest-ever monthly sales in May 2010. Strong growth across segments continues with demand surpassing supply in a few segments with vendors' capacity being stretched. This is despite the fact that, most auto majors hiked prices passing on the cost impact to the consumers owing to high commodity prices, change in Emission norms and Excise Duty hike. Pickup in economic activities has kept demand strong, albeit more normalised across segments, considering demand may have peaked in the past few months prior to the expected price hikes post the Excise Duty hike and spurt in Raw Material prices.

Tata Motors (TML) reported a robust 41.3% yoy growth in total volumes, with the medium and heavy commercial vehicles (M&HCV) Segment leading the growth at 57.6% yoy, followed by the LCV Segment, which grew 32.9% yoy. Exports also boosted the company's performance as it reported a 120.5% yoy growth partially on a low base. Passenger cars also showed healthy growth of 45.3% yoy with new launches such as Manza clocking good volumes for the company.

Maruti Suzuki (Maruti) recorded a strong 27.9% yoy growth in volumes at 102,175 vehicles (79,872) in May 2010. This included 12,134 units of exports, up 33.5% yoy. In May 2010, the company sold 90,041 units in the domestic market, up 27.2% yoy - the highest-ever domestic sales in a month. The company registered the highest-ever domestic sales in the A2, A3 and C Segments, up 16.6%, 60.5% and 70% yoy, respectively. Management is positive about it's new launch Eeco, which gave a boost to its C Segment.

Mahindra & Mahindra (M&M) reported a healthy 50.6% yoy growth in total sales to 45,744 units (30,366) in May 2010 aided by the 68.9% yoy growth in Auto volumes and 27.8% yoy growth in Tractor sales. The Utility Vehicle Segment recorded strong 50% yoy growth in May 2010 to 18,940 units (12,620). Three-wheelers, including the newly launched GIO and Maximmo, posted robust 146% yoy growth in volumes to 6,641 units (2,703) in May 2010. The company performed exceptionally on the Exports front, growing at around 129.3% yoy on an overall basis. In April, the company had suffered a major component shortage in engine parts, dies and castings. This negatively impacted dispatches, which normaliesd to a certain extent in May.

Two- and Three-Wheelers: Hero Honda (HH) reported a healthy growth on a high base in the two-wheeler pack, with a 13.9% yoy increase in volumes in May 2010 to 4,35,933 units (3,82,678). Bajaj Auto (BAL) led the pack with a striking 61.6% growth on a low base and its key brands, Pulsar and Discover, performing well during the month. TVS Motor (TVS) clocked 31.6% yoy growth following the strong growth registered by all the Segments. The recently launched TVS Jive (launched in Tamil Nadu) and the TVS Wego supported high volumes in Motorbike
and Scooter Segments respectively.

To read the full report: AUTOMOBILE SECTOR