Wednesday, October 12, 2011

>SWARAJ ENGINES: Capacity expansion to drive growth

We are impressed with Swaraj Engines' conservative management style, negative working capital high margin (17%) and RoE (32%) and high asset turnover (10x). While Swaraj Engines was unable to fulfill demand of Swaraj Tractors in FY11 due to capacity constratints, given 33,000 units expansion of capacity (up 79%) over FY12-13, we expect 22%, revenue and 14% profit CAGR over FY11-13E

  • Major capacity expansion to meet rising demand
  • Strong possibility of Swaraj Engines being used for Mahindra tractors
  • Construction equipment business
  • Good FY12 monsoons positive for tractor industry

>Equity Strategy: On longer, higher, cleaner growth (JEFFERIES)

Key Takeaway
To us, the Indian economy is off the celebrated 8%+ growth path. And now this should be the number one economic concern. The causes are not all in the global environment. We present a basket of signs to point that something is amiss. More importantly, we discuss what we deem as the true drivers of longterm growth and what policy action is needed as a solution. Until efforts are
being made to address growth, or we see signs of global stability, we maintain our defensive bias on equities.

Needed first and foremost – an admission that growth is off: We study the past relationships of 12 high frequency domestic economic indicators with GDP. All of them suggest that current domestic growth is likely lower than the headline published GDP growth with more slowdown ahead.

All other economic indicators imply that it doesn't feel like 7.7% GDP growth

>India Property Initiating Coverage: Cheap. Really? (Jefferies)

Key Takeaway
Property sector investment at inflection point is all about getting the timing right and fraught with risks. We are not trying to make a call on the cycle turning from here but presenting a case for remaining selective while investing in the sector given the far-reaching structural changes. We initiate coverage on eight companies with Oberoi Realty as our top Buy and DLF as our top

A free meal, no more
2011 has provided enough empirical evidence of a structural shift over the past five years. The shift to construction linked payment and buyers becoming selective has made development more capital intensive. Cheap land acquisition, a major value creator earlier, is no longer as lucrative with land owners demanding share in conversion gains. Increasing construction costs and manpower shortages are hindering growth prospects. Regulatory interference is rising and both equity and debt has become scarce and expensive. As a consequence the business is no longer as profitable as it used to be.

There will be new industry leaders that will emerge in this new era and the critical success factors will now shift to a) clean and converted land banks, b) strong balance sheets, c)
execution strengths, d) transparency, and e) lower litigation risks.

Challenging times ahead
After two years of strong volume growth across most cities, we are at the cusp of a cyclical volume slowdown. Recent trends indicate that residential volumes are beginning to slow down with a 14% YoY drop in All-India June-11 volumes on rising mortgage rates and alltime high property prices. With developers’ reluctance to cut prices, we believe that volume recovery will get pushed into 2H FY13. We expect a significant slowdown in Mumbai and Gurgaon volumes while Bangalore, Chennai and Pune expected to perform relatively better in FY12.

No gain in being bold
Realty sector has underperformed without any de-rating with consensus continuing to remain bullish on growth prospects and FII ownership at all-time highs. MSCI real estate index is up only 6% since Mar'09 and has underperformed both the autos and staples which are up 234% and 62% respectively. Despite that real estate sector has not seen any valuation de-rating vis-à-vis these sectors. Additionally, timing was critical for stock returns in the real estate sector. If one was a few months too early or late in catching the bottom for real estate stocks, most of the 2009 out-performance would have been lost.

Initiate coverage on the sector
Being selective remains the key to investing in the sector and we like management with positive cashflows, stronger balance sheets and low risks. We initiate on Oberoi, Sobha and Prestige with Buy ratings, Godrej properties and Unitech with Hold ratings and DLF, IBREL and HDIL with Underperform ratings.

To read the full report: India Property