Friday, January 20, 2012


In June 2010, the Ministry of Finance, Government of India, had issued guidelines pertaining to minimum public shareholding for all listed corporates. The guidelines were later revised in August 2010. As per the guidelines, all private sector listed corporates must have at least 25% public holding while listed PSUs should maintain a minimum public holding of at least 10%. The corporates were given time of three years to abide by the guidelines. The deadline for companies to achieve the stated level of public holding is June 2013.

The corporates, particularly fundamentally strong multinational companies (MNC) may not have the inclination to increase their public holding and may resort to delisting to have better flexibility in taking business decisions. The case for delisting becomes stronger in the current weak trend prevailing in the equity markets, which has led to a substantial fall in stock prices providing an opportunity for such corporates to buy out the remaining stake with the public at lower valuations. The chances of a delisting offer succeeding also appears higher due to a moderation in return expected by the public shareholders and the enhanced willingness to exit the stock even at a marginal premium to current stock prices.

We have analysed and identified MNC companies, which would be probable delisting candidates. We have filtered the companies based on the criteria of a minimum promoter holding of 75% and return on capital employed (RoCE) higher than 10%. We have further looked into the availability of funds to buy back the public holding.


>INDIA OIL & GAS: 2012- A Tough Year; Our Top Pick is Cairn India

We downgrade our Industry View to Cautious due to 1) negative outlook for Refining and Petrochemical margins, and 2) higher subsidy burden due to a weaker rupee. Our top pick is Cairn India for its production growth and free cash flow. Avoid OMCs, Reliance and Essar due to their refining exposure.

Cairn India – the only star: Despite our sideways view on crude oil, Cairn should benefit from three key factors:
1) increase in production due to swifter approvals;
2) improved realization due to weakening of rupee, and
3) increasing free cash flow and attractive valuation.

Counter-consensus call – going UW on Reliance Industries on our negative outlook for Asian complex margins: We cut our earnings forecasts by 9-19% for F2012-14 and are now 11-20% below the Street. The stock price looks cheap close to its three-year low. Increasing contribution from non-core earnings, and diversification in non-core businesses could lead to a stock de-rating/conglomerate discount, despite a sound
balance sheet.

Downgrading Oil Marketing Companies (OMCs) (HPCL, BPCL) to Underweight: The 16% depreciation in the rupee against the dollar in the last six months has led us to increase our subsidy burden to US$26bn (Rs1.3trn). With five state elections in February, we think the earliest a moderate price hike could come is April. The path to petroleum decontrol, in our view, seems to be delayed due to upcoming elections, a high crude oil price environment, and a weaker rupee. Every Rs1/US$ depreciation increases the subsidy bill by US$550mn (Rs25.5bn). We downgrade GAIL to EW due to uncertainty on subsidy share as well as a lack of short-term gas supplies.

To read the full report: INDIA OIL & GAS



► Cement Sales Growth Eases, But Prices Firm
► Surplus Capacity, Output Under Check
► Clinging On To High Prices
► Cost Pressures Remain
► Consumption To Rise At Slow Pace Despite Healthy Demand
► Cement Companies Hold Prices, But Excess Capacity A Worry

Demand in the current financial year slowed in April-December as major demand drivers grew at a moderate pace.Key demand drivers in the cement sector include:
■ Housing sector: It accounts for a large portion of domestic demand. Rise in urbanisation, an increasing number of house-holds and higher employment are primarily driving demand for housing. However, uncertainty about future incomes, rising interest rates and firm real estate prices have restrained conver-sion of latent demand into actual purchases. This has led to weakness in fresh investments in housing.

 Infrastructure development: Emphasis of the government on development of dedicated freight corridors, upgrading and building of greenfield airport projects and ports were expected to drive consumption. But this has not happened because of slow pace of execution of infrastructure projects.

 Industrial projects: Slowdown in the economy, policy uncertainty, high interest rates and weak global economic outlook have resulted in companies holding back their capital expenditure plans.

 Commercial construction: Construction of retail outlets, office space, hotels, malls, hospitals and schools grows as the economy develops. Demand for consumer-centric sec-tors — such as, automobiles, consumer durables and fast-moving consumer goods — have been impacted due to high inflation, high interest rates and uncertainty in in-comes. This has led to fall in demand for retail space and malls. Rising costs are also affecting the hotel industry, thereby resulting in hotel expansion slowing down.

To read the full report: CEMENT SECTOR

>VST INDUSTRIES LIMITED: second largest player in Indian Cigarette industry by sales

■ Second Largest Player : VST Industries is the second largest player in Indian Cigarette industry by sales. ITC has a market share of ~78% while VST Ind. and Godfrey Phillips account for ~8% each. Balance is made up by imports, unorganised sector &; smaller players. VST has positioned itself as the lowest cost filter cigarette provider with market presence in south, south central, UP, north-east states.

■ Shift from non-filtered to filtered stands complete: GoI increased excise on non - filter segment, which forced non - filter players to shift to filter segment.VST shifted its product portfolio in favour of filter cigarettes (95% of total volume) and grew volumes and price at CAGR of 8% and 12% respectively since 2009 vs flat volumes for ITC. Steep increase in excise duties on cigarette over the years has impacted volume growth but net realization of large players have continued to move up, which compensated for flat volumes over the last 5 years for the industry as a whole.

■ Increased traction in premium products will be margin accretive: The industry growth is faster in premium segment vs mass & mid segment. VST's premium brands witnessed volume growth of 30%+ in FY11 and now account for 33% of its volume resulting in higher realization besides giving phillip to volumes.

■ Exports present a promising opportunity: VST exports leaf tobacco from India and accounts for 26% of its sales. During 2005-10 peiod, tobacco export from India has shown CAGR of 30%.VST's export has also trebled in last 4 years to `150 Cr. It presents a promising opportunity and will be a good earnings driver.

■ Valuations and View: VST is quoting at a P/E of 13.7x /12.5x on FY12E/FY13E EPS. Its return ratios are ~50% with unleveraged Balance Sheet and ~5% dividend yield. There are upside risks to our conservative volume growth estimates of 2% in FY13E, which we have estimated due to expectation of excise duty hikes in budget. In the case of moderate or no hike volume growth may surprise positively. Recommend ACCUMULATE on VST Industries with a 1 Year target price of `1600 (16xFY13E EPS, discount of 30% to ITC's valuations)

To read the full report: VST INDUSTRIES LIMITED

>ALSTOM PROJECTS INDIA & ALSTOM (France): Collaboration with BHEL; Hydro - Global sourcing hub; Global engineering giant with focus on power and transport segments; Transferring boiler business to JV with Shanghai Electric

Global slowdown necessitating consolidation; Alstom SA to form JV with SEC for boiler business: The Alstom Group is undergoing significant transformation globally. Alstom SA acquired the transmission business of Areva T&D recently and has entered into an agreement with Shanghai Electric Company (SEC) to create a 50:50 JV, which will own all boiler manufacturing assets of the two companies worldwide. The company sees China and India as two key markets over the next few years. The company is very optimistic on its JVs in India - with Bharat Forge for supercritical turbine generator and with NTPC for boiler servicing.

Collaboration with BHEL to remain unaffected by JV with SEC: BHEL has a longterm technology agreement with Alstom. The formation of Alstom-SEC JV has raised concerns on the future of this collaboration, given that SEC is an active player in India. The Alstom management reiterated that these concerns are unfounded. BHEL has exclusive rights on Alstom supercritical technology in India and will continue to enjoy that status.

Indian BTG manufacturing industry lost out to Chinese manufacturers due to unpreparedness: The Indian power equipment manufacturers were not prepared when demand surge occurred in 2005-08, leaving the field open to the Chinese manufacturers. The scenario has changed over time and India has built sufficient capacity to meet domestic demand. In India, however, projects are awarded on the basis of initial cost and not on life-cycle cost, which is detrimental to the growth of sector and puts companies like BHEL and Alstom at a disadvantage.

ABBAP's 1HFY12 margins fail to impress due to disappointing performance of boiler business: During 1HFY12, ABBAP's revenue increased 31% YoY. However PAT declined 49% YoY, mainly due to disappointing performance of the boiler business. The order book currently stands at INR58b, implying BTB of 3.2x FY11 revenue. We believe that while the opportunity in hydro and transportation sectors is large, near-term demand is subdued and it will not be able to compensate for loss of boiler business in the next few years. Recovery in the
hydropower and gas segments will be critical for stock outperformance. ABBAP trades at 25% premium to BHEL on FY11 P/E and lacks near-term catalysts.

Power market facing hurdles
■ In India, demand for power and power equipments is driven by regulatory changes and hence not predictable. Demand surged in 2005-8, following the Electricity Act 2003, which attracted a large number of first-time power developers to the sector. The Indian power equipment manufacturers were not prepared for this demand surge, leaving the field open to Chinese manufacturers.

 Mr Sharma believes that, in India there is still little focus on efficiency. Projects are awarded on the basis of initial cost and not on life-cycle costs. A large number of thermal power projects based on imported equipment may see operational cost rising over next 5-7 years, thereby significantly impacting their returns.

 Established power equipment manufacturers, including Alstom, do not believe in following predatory prices quoted by a few suppliers. Given the risks involved with quoting low, including losses and liquidation damages, most manufacturers will not be prepared to quote below their set price bands.

 The installed capacity has little meaning. Indian manufacturers can produce not more than 20GW per annum as of now (Indian power equipment manufacturing capacity is expected to be 36GW by FY14-15).

Alstom (France) - Transferring boiler business to JV with Shanghai Electric
■ Alstom and Shanghai Electric Company have announced their intent to create Alstom-Shanghai Electric Boilers Company (ASEBC), a 50:50 JV combining activities of both the companies in the boiler market for power plants. However, the EPC and service businesses of respective companies will not be transferred to the JV. ASEBC would be world leader, with combined annual sales of about EUR2.5b.

 By combining the complementary assets of the two companies, the joint company will benefit from both (1) Shanghai Electric's cost competitiveness as well as its very strong positioning in China, the largest market in the world for coal-fired power plant boilers, and (2) Alstom's relationships with utilities worldwide as well as its leadership in clean coal power plants and its technologies.

 In India, the Durgapur facility of Alstom Projects India will be transferred to the JV. Durgapur facility currently is engaged in new and spare parts manufacturing. Currently Boiler business roughly contributes 30% of the sales.

 BHEL has a long-term technology agreement with Alstom. The agreement was signed in 2005 and is valid for 15 years. The formation of ASEBC has raised concerns on the future of this collaboration, given that Shanghai Electric is an active player in India. It has also raised a question whether Alstom, through the JV, will enter the Indian power boiler market, thereby competing with BHEL directly.

 Alstom management re-iterated that these concerns are unfounded. BHEL has exclusive right on Alstom supercritical technology in India. The new JV will not have access to Indian market for selling supercritical boilers, and ASEBC will not directly compete.

 The management stated that negotiations are still going on between Alstom and SEC and actual scheme of merger has yet to evolve.

Alstom (France) - Global engineering giant with focus on power and transport segments
 Alstom globally operates in two segments, namely, a) Power and b) Transport. Headquartered in France, the company is present in over 70 countries with EUR21b of revenues (including Areva's T&D business acquired in FY11). According to the company, Alstom has supplied ~25% of the global installed power generation capacity and has rolled out 1 in 4 metro rail and 1 in 3 tramway systems globally.

 The company is an integrated power equipment manufacturer in thermal, gas, hydro and renewable energy sectors. The company also has strong product portfolio for emission control in power generation, petrochemical and industrial sectors. It also serves demand for upgrades and modernization of existing power plants. Similarly, transport segment provides equipment and systems for rail transportation activities, including passenger trains, locomotives, signaling equipments, rail components and services.

 The recently acquired T&D business from Areva T&D in FY11 has been added to a new segment called the 'Alstom Grid' to its erstwhile operational segment of Power and Transport. Alstom Grid has an order backlog of EUR5b, annual revenues of EUR3.6b, and OPM of 5-6%.

 The segment employs more than 20,000 people in over 90 manufacturing sites. Alstom Grid is among top three companies in electricity transmission along with ABB and Siemens. In FY11, geographical sales split was: Europe (30%), Africa- Middle East (20%), Asia-Pacific (31%) and Americas (9%).

Aggressively tapping Indian markets through JVs
 In India, Alstom Group intends to focus on gaining traction in power equipment space through joint ventures with leading Indian companies. India is emerging as a key destination for Alstom. Globally the company is significantly ramping up its focus towards emerging countries

 Alstom France has formed two joint ventures with Bharat Forge. The flagship JV is setting up a plant in Gujarat to manufacture supercritical steam turbine. Another JV will have facility for turbine components. The plant, being set up at the cost of INR20b, will have capacity of 5,000MW per annum.

■ Alstom France has also entered into technical collaboration with BHEL for supercritical boilers. The agreement is valid till 2020.

 Alstom has also formed a 50:50 JV with NTPC for servicing and retrofitting aging steam generators.

Alstom Projects India: Hydro, gas and transportation sectors to drive growth post merger of boiler manufacturing assets of Alstom-SEC
 Alstom Projects India (APIL) is the listed Indian subsidiary of Alstom France with FY11 revenues of INR18b. In India, it has presence across the power and transportation segments (mainly, railways), with four manufacturing sites employing 4,000 people. Power is the dominant business accounting for 95% of FY11 sales while transport accounts for remaining 5%.

 However, there is strong growth expected in railways orders in next 4-5 months, particularly for Dedicated Freight Corridor, which will increase share of transport sector in revenues in FY12-13.

 APIL has benefited from parent's partnership with BHEL. It has spent over ~INR2b over the last 2-3 years to ramp up and upgrade its supercritical capabilities in Durgapur and Shahabad. The company is key supplier of components (pressure parts for supercritical boilers) to BHEL, which is executing 11GW of supercritical power projects and is expected to get 6.5GW from NTPC bulk tenders. In turn, Alstom could execute a good portion of the work outsourced by BHEL (roughly INR2-4b / 800MW set). Post transfer of Durgapur facility to Alstom-SEC JV, the orders will get executed by JV. However, over a period of time, BHEL will indigenize technology, thereby lowering the quantum of boiler components outsourced from

Hydro - Global sourcing hub for Alstom Group
 APIL has established is one of the largest hydro-power equipment manufacturing hubs of the group at Vadodara facility, along with its locations in France, China, Brazil, Switzerland, Spain and Canada. The factory has a capacity of 4,000MW and meets demand from India and other regional emerging markets. Alstom has 38% market share in Hydro power ordering in the XIIth plan.

 CEA has identified ~25,000MW of feasible hydro-power projects for the 12th Plan. Hydro-power occupies 25% share of the power generation mix and currently the installed base stands at 37,000MW. Of this, APIL (through Alstom) has contributed towards installation of ~6,000MW. The company stands to benefit from the opportunity, though the sector is mired in environmental and rehabilitation issues.

 The company is executing NHPC's 2000MW (8 x 250MW) hydro power project, largest in India. The project has been significantly delayed and is now expected to be completed by December 2012. Alstom has completed over 70% of work.

To read the full report: ALSTOM PROJECTS