Monday, July 12, 2010


Manipulation of data and lack of enforcement of EU Rules were also the contributing factors

To read the report: EUROZONE CRISIS

>INDIA STRATEGY: Road to reforms

Government acts with a strong resolve; delivers path-breaking reform: The Government of India (GoI) displayed strong political resolve by taking firm steps towards partial deregulation of petroleum product prices (based on Kirit Parikh Committee recommendations). While deregulation of petrol prices was on expected lines, a step towards deregulation of diesel prices, which until recently was considered completely outside the realm of deregulation, and price hikes in LPG and kerosene, definitely surprised the market. Furthermore, what is notable is that the aggressive move came at an unlikely time when inflation is running into double-digits and the government is gearing for assembly elections in key states of West Bengal and Tamil Nadu in 2011. Therefore, it is one of those rare moments in the process of India’s economic reform where economic logic took precedence over short-term political considerations; such moments tend to deliver path-breaking reforms. This reform is no less, if one could see beyond the immediate adverse impact on headline inflation.

Move will unleash energy efficiency gains in the economy…
First and foremost, the deregulation of petroleum product prices will lead to efficiency gains in energy consumption (i.e., reduced energy intake per unit of economic output). Market determined prices will induce rational behavior among economic participants. While households will curtail consumption during high and rising energy prices, businesses will be motivated to invest in efficiency enhancing technologies or even in alternate sources of energy. Private sector participation in the oil sector will increase and so will competition. Furthermore, efficiency gains
will directly lead to reduction in the country’s overall energy needs. A recent Mckinsey study estimated that by raising energy productivity, developing countries could reduce their energy demand growth from 3.4% to 1.4% per year over the next 10-12 years. Such efficiency gains are crucial, given India’s heavy dependence on imports to meet energy needs. If such gains materialise, India will be able to reduce its current account deficit meaningfully and to that extent its
reliance on foreign capital to fund the deficit will also ease.

… and, support government’s fiscal position
Benefits of deregulation do not stop with efficiency gains. Deregulation, if fully extended to diesel prices; combined with implementation of the direct tax code (DTC) and Goods and Services Tax (GST) could meaningfully alter the country’s fiscal landscape in the coming years. This is particularly important because fiscal deficit has been the long-standing chink in the otherwise robust Indian macro story. Indeed, one of the key messages from the global financial crisis is that
sovereign risk (even in western economies) can come under question. Persistent fiscal deficits not only weaken government’s ability to deliver timely fiscal stimulus during recession, but also lead to build up of debt over time, hurt the economy’s potential growth rate, increase chances of credit rating downgrade, and undermine global investors’ confidence—something that is currently playing
out fully in peripheral Europe. In that sense, the Indian government is sending out confidence-building signals to the global investor community and is adhering to what Rahm Emmanuel, President Obama’s advisor, famously said, “don’t waste a crisis”.

To read the full report: INDIA STRATEGY

>SOBHA DEVELOPERS: FY11 sales of 3msf look achievable to us. Near term focus on debt reduction.

FY11 sales guidance of 3msf (+50% Y/Y, FY10-2msf) seems achievable in our view given (a) company’s current bookings run rate of ~0.7-0.8msf per quarter, (b) 3.4msf of unsold inventory in its ongoing projects and (c) robust launch plans of 7msf in FY11. Our average realization assumption of Rs 3,700 psf for FY11 is in line with company guidance of Rs 3,750-3,800 psf. Overall this should drive a 40% CAGR earnings growth over FY10-12E on our estimates.

Reducing leverage remains the key focus-Target Net D/E remains at 0.5x vs 0.8x currently. The company's overall plan is to reduce net debt by Rs4B aided by Rs2B of asset sales and the rest via operational cash flows. However, Sobha has debt maturity of Rs5B in FY11 thereby implying a cash flow gap of Rs1B. Management indicated that the company has debt facilities in place to re-finance this. Overall for FY11, we model net debt reduction of Rs3.3B which includes Rs1.5B from asset sales.

7 msf of new launches over the next 12-18 months: In FY10, Sobha achieved sales of 2msf largely from its ongoing projects with only one project being launched during the year. The pace of new launches is expected to pick up as unsold inventory is declining. Sobha targets around 7msf over the next 12-18 months. Preliminary work has already begun for its launches in South Bangalore (Marigold) and Pune (Carnation II).

Delivery track record is good: In FY10 Sobha delivered 5.6msf of space in FY10 and is gearing for 6.5msf of deliveries in FY11. The company currently has 7.8msf of real estate projects under-construction, of which 4.4msf has already been sold. Historically Sobha has consistently delivered 6-7msf of projects (including contracting business) and this gives comfort to us on our sales assumptions.

Maintain OW, Mar-11 PT of Rs420/share. A slowdown in hiring trends in the IT sector is the key risk to our OW hypothesis.

To read the full report: SOBHA DEVELOPERS

>DB CORP LIMITED: Foray in new territories

DB Corp is one of the leading print media companies in India, publishing in three languages (Hindi, Gujarati and English), in 11 states in India. We expect the company’s circulation revenues to grow on the back of its phased entry into new territories of Bihar, Jharkhand and Jammu. DBCL’s recent ad-rate hike of 14% will also boost its advertisement revenues. We believe that the increasing purchasing power of Tier II and Tier III cities present significant opportunities for advertisers marketers and media players. This is favourable for DBCL as it has a strong presence in these markets. We expect the revenue to grow at a CAGR of 14% over FY10-FY12E and profits at a CAGR of 15% over the same period. We are initiating coverage on DBCL with a ‘BUY’ rating.

Entry in new territories to boost circulation revenues: DBCL is entering new territories of Bihar, Jharkhand and Jammu. Although these editions will take 2-3 years to break-even, the sale of these editions would boost the company’s circulation revenues.

Growth in regional advertisement: The increasing number of middle and higher income households has made Tier II and Tier III cities attractive markets, thereby resulting in growth in regional advertisement. DBCL is likely to garner a major chunk in regional advertisement pie as most of its editions enjoy leadership positions in these cities.

Hike in ad-rates to further boost ad-revenues: With improvement in the economic scenario, there is an overall improvement in the advertisement volumes. Considering this, DBCL has recently taken a 14% hike in its advertisement rate which would further boost DBCL’s ad revenues.

At the CMP of Rs 233, DBCL is trading at 20x and 17x its FY11E and FY12E earnings, and 11x and 9x its expected EV/EBIDTA value. We value DBCL at 13x its FY11E EV/EBIDTA to arrive with a 12-month target price of Rs 289, implying a potential upside of 24% from present levels. We initiate coverage with a ‘BUY’ rating.

To read the full report: DB CORP

>ITC: Positive Earnings Cues (AMBIT CAPITAL)

ITC has been a significant outperformer over last three months (absolute 17% and relative 18%). Our review of its balance sheet and earnings expectation suggest that there continues to be an upward bias to earnings growth (18% for FY10-12E) despite some weakness seen in 1QFY11 for cigarette business. We believe the stock can still deliver positive relative outperformance and we
retain our BUY rating on the stock with a March 2011 target price of Rs320.

Cigarette business still on solid footing – We believe the recent weakness seen in cigarette volumes is somewhat short term in nature and we expect the company should be able to deliver low positive volume growth in FY11. Over last 12 months it has strengthened its brand portfolio significantly with brands such as Flake Excel and Duke Filter, entered less than 60mm category and augmented its production capacity by more than 20% with the set up of a more than 20 billion capacity stick plant at Ranjangaon near Pune.

FMCG business to maintain positive trend – The significant improvement seen in profitability for FY10 (nearly 640bps improvement in EBIT margin) should continue as outlook for both packaged foods and personal product business remains positive. Over last 12 months in case of personal products the company has added significant capacity at its Haridwar plant and also
commissioned new facilities at Manpura, Himachal Pradesh. The nearly threefold increase in capacity implies that the company will be targeting low double-digit volume shares in personal product categories such as Soaps, Shampoo and Skin Cream over next three years. We believe existing players such as Hindustan Unilever, P&G, Dabur and Godrej Consumer will have to
respond suitably to this increased competitive ante from the company.

Significant improvement in return ratios – On account of significantly improved working capital management (down nearly 5 days to 34 days in FY10), return on capital for FY10 is nearly 300bps higher v/s our previous expectation of 39%. Considering there is significant headroom for capacity utilization to improve we expect this upward trend in ROCE to continue and touch nearly 56% by FY12.

Outlook and Valuation – We expect the company to report 17% growth in topline and 22% in EBIT led by 30% growth in topline and 55% growth in EBIT for non-cigarette business in 1QFY11. Considering positive outlook for its non-cigarette business, improved subsidiary business performance (Surya Nepal and ITC Infotech) and improvement in return ratios, we expect valuations will continue to see improvement. Our target price implies forward P/E multiple of 21x and EV/EBIDTA multiple of 13x and is also consistent with our sum-of-the-parts approach.

To read the full report: ITC