Tuesday, June 15, 2010


In the eye of the Storm:
Ignore Short-Term Indicators, Focus on the Long Haul

To read the book:COLLATERAL DAMAGE

>CEMENT: Prices in South decline, too soon too fast

Cement prices continued on their downward trajectory for yet another month, but this time at an accelerated pace, particularly in Andhra Pradesh (AP). Cement prices in this market are currently hovering around Rs 150-155/bag, down by Rs 50-60/bag from its peak two months back. Cement prices in Chennai too have declined by Rs 15-20/bag to ~Rs 230-240/bag. Dealers believe that prices in south India could fall further in the coming weeks as demand shows no signs of revival. While prices in central and northern regions, particularly in Delhi, have remained flat, that in the western region of Pune have declined by 15-20/bag. Interestingly, these price corrections have happened during the pre-monsoon period; with the monsoon setting in, a further drop cannot be ruled out. We continue to maintain Sell on ACC, Ultra Tech, and India Cements. Grasim (post steep correction) and Shree Cement remain out best bets in the sector.

South prices nosedive: Our dealer checks indicate that cement prices in the south have declined by Rs 15-20/bag across states. This revision has brought down prices in Chennai to Rs 230-240/bag and Bangalore to Rs 230/bag. The decline has been sharper in AP – cement prices in this market have tumbled by Rs 55-60/bag from its peak two months back and currently stand in the range of 150-155/bag. With monsoon setting in and the demand already lackluster, further price cuts in the south are inevitable.

Western region a mixed bag: The Pune market in the western region is essentially correlated with the AP market as dispatches enter Maharashtra from AP, once the gap between the prices widens. Prices in the Pune market have corrected by Rs 15- 20/bag in the last 15 days. Dealers opine that prices could well go below Rs 200/bag as monsoon sets in and AP market looks weak. For the Mumbai market, although prices have been steady at Rs 245-250/bag, a decline is expected in the next 15-20 days.

Northern region stays flat: Cement prices in New Delhi have remained steady at Rs 245-250/bag. Gurgaon, however, has seen a drop of Rs 5-10/bag to Rs 225- 230/bag and, is likely to see a further decline of Rs 5-10/ bag in the coming weeks. While prices in Jaipur have increased by Rs 5/bag in last 15 days, and are in the Rs 230-238/bag range currently, our dealer checks suggest that since demand is low, the price rise may not be absorbed by the market. Central region flat; eastern markets see a decline: Cement prices in Uttar Pradesh have remained flat at Rs 250/bag; however, demand continues to be weak in this market. In the eastern region, especially in Kolkata, prices have declined by Rs 5/bag and are currently at Rs 280-290/bag; in the bulk segment, prices are hovering at Rs 260-265/bag. Dealer suggests prices in this market
could decline by Rs 10-15/bag.

Caution advocated: Given the low single-digit demand growth, lurking monsoons, and increased supply pressure, we believe this is not an opportune time to enter pure cement players. We reinstate a Sell on ACC, Ultra Tech, and India Cements. Grasim (post significant correction in last one month) and Shree Cement remain our best bets in the cement sector.

To read the full report: CEMENT

>INDIAN WIRELESS SECTOR: BWA auctions ended with three major negative consequences

BWA auctions ended with three major negative consequences for the alreadybeleaguered
Indian telecom sector. First, the pan-India winning price of Rs128.47bn (US$2.74bn) per slot was well ahead of anyone’s expectations. Second, it led to a fractured verdict, with the largest incumbents coming out croppers with no circle wins, except for Bharti, which won in only four circles. Lastly, in a repeat of 2003, we are seeing the birth of four new players in the Indian telco space. While one could dismiss their entry citing competition only for wireless data, this clearly thwarts the future growth option for incumbents from wireless data during the next five years. Of the four new entrants, most notable is Reliance Industries, India’s largest company, which began the remarkable telecom foray in 2003 of what is now called RCOM.

We are clear that one needs a serious reassessment of Indian telecoms, and the hope of consolidation to reduce the number of players to a workable seven or eight is just that – hope. We reiterate our Underperform ratings on the entire listed operator space – Bharti, RCOM, Idea, TCOM and MTNL. In our view, all of it is ‘dead money’ for the next six to nine months. We believe that the only event worth investing in may be RCOM attaining a cash infusion on the 26% stake sale at a good premium.

RCOM, Vodafone, Idea and Tata are notable absentees from the list of BWA spectrum winners. Aircel Maxis continued to surprise in BWA (as in 3G) with wins in eight circles. BSNL and MTNL have been allotted BWA spectrum in 20 and two circles, respectively (the third pan-India BWA slot).

The biggest surprise winner is Infotel Broadband, which won all 22 circles (pan-India) for US$2.74bn. Other surprise winners were QUALCOMM (QCOM US, US$35.03, Outperform, TP: US$50.00, Phil Cusick) in four circles, Tikona (unlisted) in five circles and Augere (unlisted) in
one circle.

Within hours of the BWA result release, Reliance Industries disclosed that it has acquired a 95% stake in Infotel Broadband by infusing approximately US$1.02bn and that RIL would pay US$2.74bn to the government for Infotel’s BWA spectrum. This marks the reentry of RIL into telecoms, and the fresh capital infusion would help Infotel launch its services targeted at corporates/ enterprises by next year. Although no capex plan has been disclosed, we believe that the size of RIL’s balance sheet (US$46.3bn) and its annual operating cashflow of US$4.4bn would be able to fund expansion in the scope and scale of the telecom business over time and a potential entry into the whole gamut of services, chiefly voice.

Headwinds galore for the incumbents, in-market consolidation a pipe dream unless regulations change; valuations expensive as downgrades start coming through: MNP implementation could occur by September 2010, which could lead to a 7–8% correction in ARPU, entirely led by postpaid. We view the regulatory framework on M&A as the key hurdle for inmarket consolidation, even while supply of new capacity continues unabated.

To read the full report: WIRELESS SECTOR

>INDIAN BANKS: Uncertainties receding (HSBC)

Rating changes. Downgrading Bank of Baroda to Neutral (V) and State Bank of India to UW(V) on stock performance and relatively high provisioning pressures, respectively. Banks to gain from EPS acceleration and PE rerating. We expect 24% EPS CAGR for our coverage banks over
FY10-12e vs. 18% last year, causing PE multiples to expand quicker than PB as the street starts to focus on credit and earnings growth upside rather than asset quality risks.

Three uncertainties diminishing. Loan growth, direction of short rates and asset quality trends are all closer to moving up than down, as economic indicators (PMI, industrial growth, overnight liquidity) point to a pickup in the credit cycle and tightening liquidity.

Earnings sensitivity analysis on these three parameters points to Canara being most leveraged and Punjab National Bank most insulated. We like both names given relatively attractive valuations vs. peers even after factoring in significantly higher provisions for Canara.

Multiples increased. We increase target PE multiples by up to 25% for public sector (PSU) banks to 7.0-8.5x, more so for Union Bank and Canara Bank which historically have traded at discounts to peers in the downcycle.

Near term prefer private banks… Underperformance of private banks to PSU banks by ~10% and private banks trading at discounts to their average multiples point to better entry opportunities, particularly given brighter growth prospects in the early stages of the upcycle as well as fewer asset quality issues and more flexible pricing power. …but over 12 months prefer PSU banks, which hold out promise of a higher PE rerating and earnings growth into the upcycle once near-term hiccups are overcome.

To read the full report: INDIAN BANKS

>TATA TECHNOLOGIES LTD: looking to tap capital market through an IPO at an expected price of Rs.500/-share.

Tata Technologies Limited was incorporated in 1994 and is a part of Tata Group, India. It is an automotive focussed engineering and design (E&D) company, which provides services to leading
automotive and aerospace companies. The company is headquartered in Pune, India. It also has a centre for advanced engineering and design at the same location. Tata Technologies has operations in the US, the UK and the Asia Pacific through its subsidiary and associate companies. The company functions through its two operating companies, INCAT and iKnowledge Solutions (iKS). It has operations across 12 countries on three continents.

To read the full report: TATA TECHNOLOGIES