Monday, September 20, 2010

>INFRASTRUCTURE: Road development in India

Implementation of reco. by B.K. Chaturvedi driving the new awards
Adoption of the B.K. Chaturvedi report recommendations has cleared the long pending
issue related to MCA & RFP, RFQ. Consequently, the road sector has seen a significant
pick up in the awarding activity- 4,940 km of new projects being awarded over the last 9
months compared to just 1,877 km in FY08-09. This yields a monthly run rate of close to
550 kms of new project awards. The run rate has further increased to 700 kms With
2871 kms of new project awards, in the first 4 months of FY11 itself.

NHAI expects to award 18,000 kms over FY11-12
NHAI’s FY11 target stands at 11599 kms of new awards. Add to it the 8250 km as spill
over from FY10 targets, the cumulative target stands at 19856 kms of new awards.
Though such a steep target is unlikely to be achieved over FY11, we would like to that
the 8250 kms spil over from FY10 targets already have the requisite clearances and are
ready for awards. NHAI expects to award ~9000 kms each in FY11E & FY12E, taking
the overall tally to 18,000kms on new road awards over FY11-12. However, based on
the monthly run rate of ~550km/per month over the last 9 months and ~700 km for YTD
FY11, we expect NHAI to award 7000-7500 kms in FY11E.

Developers maintain positive stance on the sector despite some lingering issues Developers are optimistic on the outlook and opportunities in road sector, despite the sector being plagued by key issues like:

Difference in project cost estimated by NHAI and developers: leading to lower VGF/
termination payments as these are calculated based on NHAI’s own estimates of TPC.
Land acquisition: Inability of the Govt in timely completion of land acquisition resulting
in significant time and cost overruns.

Removal of utilities: Removal of utilities, inordinate delays in obtaining forest
clearances and approval for Railway over bridge (ROBs) impacts execution. Lack of succession planning: The current NHAI chairman was supposed to retire in Aug’10 and the ministry is yet to appoint his successor. This lack of succession planning is affecting the pace of project awards (last 3 months has seen few projects awards).

Developers opine funding cost still high. Lenders differ- Rates to harden Even though liquidity constraints have significantly eased over the last year, developers opine that the rates at 9.5%-12.5% (depending on project feasibility) are still high. However, lenders to road projects are of the view that the road sector was actually getting subsidized with lower rate of interest on account of lenders intentionally reducing their weightage on the power sector. With RBI adopting tighter monetary policy, lenders have started signaling that cheaper interest rate scenario is set to change, with interest rates expected to move up between 100 to 150 bps by the end of the fiscal.

Increasing competitive intensity leading to lower IRRs
Developer friendly initiatives adopted by the Govt over the last 12 months have resulted in significant pick up in investor interest. This has lead to increasing competitive intensity, evident from the fact that a lot of projects in FY11 are bagged by developers by paying premium to NHAI, as opposed to them receiving VGF in FY10. Consequently, developers/lenders have seen comparatively lower project IRR’s. The trend suggests a gradual move towards higher premium being paid by bidders.

Our view
We believe NHAI will award 7000-7500 kms of new road projects in FY11 as significant projects from work plan for 2009-10 already have requisite clearance & approvals,. We believe positive macro economic scenario, and political commitment will lead to significant growth opportunities for PPP investment in road sector. This, coupled with Govt’s willingness to resolve issues hampering private investment will lead to steep growth trajectory in the Indian road sector.

To read the full report: INFRASTRUCTURE


■ Four of the top 10 dailies witness declines: According to the IRS 2Q2010 survey, the top 10 order in print media remains largely unchanged. However, Dainik Jagran, Dainik Bhaskar, Amar Ujala and Mathrubhumi have registered a 0–2% ror decline in their readership. Dainik Jagran
and Dainik Bhaskar, although securing the top positions amongst Hindi dailies, witnessed ror declines of 2.4% and 0.2%, respectively.

TOI remains the undisputed leader, DNA is the surprise package: Out of the 20 English dailies, 14 dailies showed growth in AIR figures, with Times of India (TOI) retaining its leadership position reporting an AIR of 7.1mn in 2Q2010. Hindustan Times (HT) reported an AIR of 3.5mn, posting a marginal dip from the 1Q2010 survey, but retained its second position, followed by The Hindu with an AIR of 2.2mn. DNA put up an impressive show, registering 16.6% growth in its AIR.

Hindi dailies show mixed trend, Dainik Jagran remains the leader: Among Hindi publications, Dainik Jagran retained its No. 1 position with AIR of 15.9mn, while competitors Dainik Bhaskar and Hindustan reported AIR of 13.3mn and 10.1mn, respectively. Incidentally, Hindustan is the only newspaper to have witnessed growth amongst the top three Hindi dailies, with readership growth of 2.3% ror.

To read the full report: PRINT MEDIA

>RALLIS INDIA: Strong volume driven growth

We met Rallis India's (Rallis’) management recently and key takeaways of the meeting are:

Strong volume growth in domestic market: Domestic market is growing well, aided by a strong volume growth (YoY) of more than 15% along with a good Kharif season owing to a well-distributed rainfall. Domestic agrochemical prices, though lower on YoY basis (~3% YoY), are stable on QoQ basis. We believe that on the back of a strong product portfolio and distribution network, Rallis is expected to show higher growth than an overall domestic market.

Adverse exchange rate and lower prices affect exports adversely: Rupee has appreciated ~4% v/s USD, while agrochemical prices are still lower by ~10% on YoY basis during the Q2FY11. Both are affecting the exports of agrochemical industry adversely at present. We believe that companies which have a higher exposure in the export market could take a hit in the revenue growth. EBITDA margin is also expected to be under pressure. Further, we believe that Rallis is expected to show higher growth (during Q2FY11) on the back of a low base effect.

Strategic investment has started bearing fruits: Rallis has a ~16% stake in Advinus Therapeutics (Advinus), with a total investment of ~Rs27cr. Advinus is a research-based pharmaceutical company founded by a leading global pharmaceuticals executives and promoted by the Tata Group. Company offers development services to pharma, agro and biotech industries and is in loss at the current net profit level. Advinus discovered a novel molecule for the treatment of diabetes. Earlier, lots of other companies tried to discover this molecule, but failed. Advinus is now looking for a JV with global pharma companies to market the product. We believe that this type of single product could turn Advinus profitable and create a huge value for strategic investor like Rallis.

To read the full report: RALLIS INDIA

>SOUTHWEST MONSOON: In positive territory

The overall rainfall is deficient no more. Having covered ~87% of its full season, the monsoon is entering its last month-long phase. The rainfall for the week ended September 08, 2010 was, ~26% above its long period average (LPA). The cumulative rainfall for the week ended September 08, 2010 stood at 1.2% below its LPA. The number of divisions experiencing excess/normal rainfall increased to 31 from 30 last week. The number of regions experiencing scanty rainfall dropped to 5 from 6 of last week.

Weekly rainfall covers most of the country
For the week ended September 08, 2010, rainfall was in plenty and covered most of the country. Well irrigated areas have seen rainfall at ~29% above their LPA, while Bihar, Jharkhand, West Bengal and parts of the north-east saw scanty/deficient rains. The southern regions; Kerala and Tamil Nadu saw scanty rainfall. Cumulative rainfall improves in rain-dependent and well irrigated areas Overall rainfall for the season from June 1, 2010 till September 08, 2010, has
completely covered the deficit and is currently at ~1% above its LPA. Rainfall deficit in
well irrigated areas dropped to 16.5% below their LPA and rain-dependent to ~4%
above their LPA. As West Bengal and east Uttar Pradesh still receive low rainfall,
rainfall in east Madhya Pradesh has bettered and is now normal from a deficient status
of last week.

Reservoir levels at 68% of their FRL’s
The reservoir levels are now at 68% of their full reservoir level (FRL) and at 111% of
their LPA. Increased weekly rainfall has helped the reservoir levels to pick up
Forecast rainfall for east, central and north India Areas lying on the eastern side: Orissa, Chattisgarh and West Bengal are likely to receive good showers. West Madhya Pradesh might experience normal rainfall while parts of north India; Bihar and Uttar Pradesh would receive relatively light showers over next week.

Kharif crop acreage at 990 lakh hectares, up 7%
Acreage under Kharif crops increased to 990 lakh hectares (lh) from 923 lh. last year; an increase of ~7%. Sown area under pulses increased ~22% as compared to the same period last year whereas area under rice increased by ~7%. The increase in coarse cereals has moderated to ~3%, whereas area under sugarcane has remained relatively stagnant since July.

To read the full report: SOUTHWEST MONSOON

>LAKSHMI MACHINE WORKS: Machining growth

Lakshmi Machine Works (LMW) has dominated the Indian textile machinery sector for decades, providing its clients with world class products at the lowest prices available. The company has a healthy order book of Rs3,300cr (2.9x FY2010 sales), providing good revenue visibility. During FY2010-12E, we expect the company to register top-line CAGR of 48.3% and bottom-line CAGR of 51.8%. At the current price of Rs2,476, the stock is quoting at 19.4x and 13.3x FY2011E and FY2012E EPS respectively, which we believe is attractive. The company has announced plans to buy-back its shares at a maximum price of Rs2,045/share.

We recommend an Accumulate on the stock, with a Target Price of Rs2,819. Ability to defend market share: LMW is one of the largest players in the world and one of only three players globally that manufacture the entire range of spinning machinery. In India, it has high market share of around 70% in yarn spinning and preparatory machines. It has been able to sustain this market share on the back of strong after-sales service coupled with providing world’s best technology to customers at the cheapest rates. LMW has service centres at all the textile hubs
across the country, which gives it a strong advantage over its European peers, who at the most have service centres in only 3-4 cities. LMW also enjoys an edge over competition as it caters to a huge 1,300 domestic textile players out of the total universe of around 1,600. The company has been innovating on technology for the past 15 years. In terms of prices, LMW’s products are at least 10% cheaper than its European peers who have manufacturing base in India.

Strong order book to translate into robust sales growth: LMW has a strong order book of Rs3,300cr. The upturn in the spinning industry has lent a boost to the company’s order inflow. The yarn prices have increased at 15.0% CAGR over the last two years and most listed yarn manufacturers surveyed by us are operating at utilisation rates of around 95%. This indicates that there is low probability of order deferments and the company’s robust order book is expected to result in strong growth.

To read the full report: LAKSHMI MACHINE WORKS