Tuesday, July 13, 2010

>Asia: votes of confidence (DBS)

After a brief pause in June, Asia’s central banks are tightening again

In the past two weeks, Taiwan, India, Malaysia and Korea have all hiked interest rates

This is bread-and-butter economics. GDP in Asia is far above precrisis levels; inflation is nearly back to average. Interest rates must return to normal too, and they are

The rate hikes are a loud vote of confidence from Asia’s central banks that growth will continue, despite weakness in Europe (and more generally, the G3).

The world has not decoupled. The G3 matters, but Asia matters more.

To read the full report: VOTES OF CONFIDENCE


Greaves Cotton is one of the largest makers of light diesel engines in the world. Over the years, the company's focus on R&D has resulted in an efficient product which is gaining acceptance with OEMs. GCL has been made the sole supplier of engines to Tata Motors' 4W LCV "Penguin", which is in the launch phase. The company's prime client, Piaggio (PVPL), has been a focused player in light transportation and has seen its 3W volumes grow 29% in 9M FY10. We believe higher demand from rural sector and increasing preference of light vehicles for intra-city transportation should drive growth in the 3-4W (sub 1 ton) auto segment. The company's infrastructure equipment division is expected to turnaround in FY11. We feel GCL is an ideal stock to play the development of light cargo transportation in the country. Valuations at 12x is not demanding. BUY

Key Investment Rationale
Three wheelers - Growth driven by need for low cost transportation. Passenger segment 3W continues to generate bulk of the volumes for GCL's automotive engines division. Given that three wheelers are the cheapest mode of transportation for passengers as well as goods, we see steady demand for this product from the urban as well as the rural areas. In the urban landscape, the emergence of "Hub and Spoke" model is resulting in LCVs being used for intra-city transportation.

Addition of new OEMs and variants to give impetus to growth. Diversifying from Piaggio, GCL has been making inroads into other OEMs including Tata Motors and M&M. It has been made the sole supplier of engines for Tata Motors' new 4W LCV model in the 0.5 ton segment named "Penguin". In addition to this, Piaggio is also sourcing engines from GCL for its 4W "Ape Truk Plus" which has been selectively launched in September 2009. The 4W segment has been gaining market share over 3W in the cargo segment. We believe these two models can generate significant volumes in the coming years. Simultaneously, we see the overall LCV cargo market expanding due to the availability of superior models.

Infrastructure equipment segment to turnaround in FY11. The infrastructure equipment segment bore the brunt of credit crisis in 2008 and posted a sharp decline of 59% in revenues in FY09. Segment margins turned negative due to lower volumes and higher material costs. However, due to the expansion in infrastructure sector and renewed thrust on road building
(targeting a quantum rise in road building to 20km/per day), we see demand responding positively. Profitability has been improving sequentially and we expect this division to turnaround in FY11 and contribute meaningfully to the profits in FY12 onwards.

Significant margin expansion in FY10 on soft material prices. GCL reported 500 bps expansion in EBITDA margins in 9M FY10 on the back of higher volumes coupled with softer material prices. Margin expansion was despite the Infrastructure equipment business continuing to report losses. Going ahead, we expect to see some benefits of softer material prices in FY10 to partially reverse as material prices have inched up in recent months. However, the impact on overall margins would be partially cushioned by improving profitability in Infrastructure equipment segment. Thus we have built in minor reduction in EBITDA margins in FY11.

To read the full report: GREAVES COTTON


Demand in Q1FY’11
Despite moderate demand, cement sector has managed to record 8.5% y/y growth in Apr‐May’2010 to 36mt. Cement Industry has seen slowdown in demand due to lower off take in government’s infrastructure projects and lackluster demand from housing projects on account of heat wave across India.

Pricing scenario
Realizations in the first half of the quarter were ruling high by Rs.5‐15/bag across India on account of transportation woes. However, from second half of the quarter, cement prices started to correct due to slowdown in demand and stabilization of newly commissioned capacities. Southern region has again seen highest fall in cement prices by Rs.25‐35/bag. Prices in other regions have also come down by Rs.7‐15/bag.

We are expecting cement prices to come down further in coming quarter due to onset of monsoon and supply glut.

Capacity utilization at 82%...
Capacity utilization of the sector remained at 82% in Apr‐May’10. Capacity utilization remained high in Central region at 102%. Southern region has seen lowest capacity utilization of 73% due to oversupply and lower volume growth.

Our Cement Universe….
Our cement universe comprises of ACC, India Cements and UltraTech Cement, is expected to record volume growth of (2%)‐8%. Top‐line of the companies are likely to register de‐growth of 1‐7% y/y mainly on account of lower realizations and muted volume growth. EBIDTA margin is likely to come down in the range of 8‐17% y/y due to lower realizations and increasing input costs.

To read the full report: CEMENT SECTOR

>IDFC: Building appetite (AMBIT)

Operational triggers remain

Raises $575mn through QIP at Rs168.25/shr
Dilution at ~12% of pre-diluted equity
Capital raising signals intent to capitalize on huge growth opportunities
Equity raising likely to trigger rating upgrades from independent agencies
IFC status. concomittant with higher ratings, to help bring down marginal cost of funds by 15-20bps
Maintain BUY at current levels; TP revised to Rs210 on FY12E estimates

To read the full report: IDFC


Balanced risk-reward: We are initiating coverage on Jaypee Infratech (JIL) with an Equal-weight rating and SOTP-based PT of Rs85 per share (20% discount to Mar-11 NAV). We believe that the value in JIL’s assets – 530 msf of real estate along the Yamuna Expressway, which it is developing and will operate on a BOT basis – may take 12-24 months to be unlocked. Near-term
earnings are dependant on just one micro market, Noida, which has strong potential but may slow in ensuing quarters.

Key debate: Although the market has mixed views on whether Noida market volumes are sustainable, we believe that the trailing three-quarter new sales data in Noida is quite high – compared with its history and comparable markets (Gurgaon/Bangalore) – and is therefore unlikely to be sustained. Moreover, unsold inventory is rising fast.

Fairly valued: The stock is trading at a 15% discount to Mar-11e NAV of Rs106 per share, which we think leaves little upside without significant real estate volumes from (non-Noida) multiple sites, and clear visibility on a new airport in Noida – as in our bull case. On P/E, it is trading at 12.8x and 13.2x F11e and F12e EPS, implying a discount to the sector. Though the stock appears inexpensive on a P/E basis, we highlight that F11 earnings include a high contribution from plot sales and high dependence on Noida.

What’s priced in: expressway completion in C11 and steady-state monetization of the Noida land parcel.

Key risks include dependence on JAL for project implementation; and potential conflict of interest with JAL (competing projects; control of JIL’s board of directors), a tight balance sheet in the near term, and dependence on Noida for near-term earnings. Other risks are dependence on the political and economic outlook for UP, and JIL’s concentrated land bank.

To read the full report: JAYPEE INFRATECH

>AMARA RAJA BATTERIES: Retail and replacement charge; initiate at Buy

Branding, the key. Amara Raja Batteries is India’s second-largest battery manufacturer in the organised sector. It has made its mark through branding, a strong retail network and entry into the twowheeler segment. While it has a lower market share with OEMs, valuations are attractive. We initiate coverage on Amara Raja with a Buy rating and a target price of Rs178.

Retail network expansion. Amara Raja has steadily expanded its aftermarket retail network and now has over 169 franchisees and 18,000 active retailers. The expanding retail network would help it further penetrate the replacement market.

VLRA batteries for two-wheelers. Amara Raja’s charge into the two-wheeler segment with VLRA battery technology (normally used only in luxury cars) is likely to help it penetrate the segment.

Industrials, a growth area. Notwithstanding the current industrial slowdown in some segments such as telecom tower batteries, we expect the segment to continue to grow at a good clip. Fundamental factors would continue to drive growth in the industrials segment.

Valuation. We value Amara Raja Batteries at 8.5x FY11e EPS (a 50% discount to the target multiple for market leader Exide Industries). At the current market price, the stock would trades at
7.1x FY10e and 6.2x FY11e earnings.

To read the full report: AMARA RAJA BATTERIES