>Areva T&D (Anand Rathi)

● Raising estimates and target price. We marginally increase our sales and earnings estimates for CY09 and CY10 on the back of higher-than-expected execution and improvement in operating margins going forward. Our new target price of Rs159 is based on
13x CY09e earnings. Maintain Sell.

● CY08 results, margins under pressure. Operating margin slipped 200bps to 16.5% in CY08 mainly due to raw material prices which climbed 140bps. Change in product mix and the outsourcing of components resulted in higher material costs. PAT margin declined 220bps to 8.5% due to higher interest expense and restructuring cost. High leverage (debt/equity ~0.6 CY08) and lower ‘other income’ would keep PAT margins under pressure.

● Order backlog 1.5x CY08 sales. The company received orders worth Rs40.1bn in CY08, up 37% over CY07. The order backlog rose 35% to Rs40.9bn at end-Dec ’08 (from Rs30.4bn a year ago). Quarterly the order backlog has declined 4% from Rs42bn at end Sep’09.

● Change in estimates. We raise CY09 and CY10 sales estimates by 2.5% and 0.8%, respectively, and PAT estimates by 2.5% and 2.7%.

● Valuation. We arrive at a target price of Rs158 (earlier Rs155) for Areva T&D based on 13x CY09e EPS of Rs12.2.

To see full report: AREVA T&D

>Indian Hospitals (CITI)

● Steady progress — Both Apollo and Fortis reported strong results for the first three quarters of FY09, with positive trends on occupancy and pricing. Although Apollo’s pharmacy operations remained a drag on overall profitability, the hospitals division continued to excel. Fortis, on the other hand, was buoyed by an impressive turnaround at Escorts, removing a key overhang for the stock.

● Expansion plans — Despite tighter availability of capital, Apollo and Fortis maintain aggressive expansion plans. While Fortis intends to add c.4,000 beds by 2012 (organic and inorganic), Apollo plans to add c.3,000 beds over the same period. We see these as additions as exceptions, rather than the rule, for the sector, as smaller players adopt a more cautious stance. Inability to grow, due to scarcity of capital, may also trigger consolidation, which should favour larger players.

● Low leverage offers comfort — The sector is largely under leveraged (net D/E of 0.33x in FY10E), especially given it is still in an investment phase. Both Apollo and Fortis appear comfortable on the funding side, at least with respect to the next 1-2 years, in our view. Beyond that, however, efficient execution and ability to generate cash from the existing set of hospitals will be critical.

● Risks to growth — While we remain positive on the long term prospects for the sector, the current macro environment, especially falling income levels, could pose some risk to demand and impair the ability to take price hikes. At the same time, capital constraints could hinder expansion plans at the aggregate level, although Apollo and Fortis appear comfortable on this front.

To see full report: INDIAN HOSPITALS

>Weak $, investments to push gold higher; crude buoyant

Mumbai, - Commodity markets have yet again lived up to their reputation for volatility with macroeconomic developments, rather than demand-supply fundamentals, providing a boost in the last few days.

After languishing at relatively low levels, commodity prices, led by crude, have begun to move up. The Fed’s surprise decision to announce quantitative easing - buyback of government debts - has had a profound impact on the dollar which has dramatically weakened, while the equity market has begun to move up.

The inflationary impact of the Fed’s stance is also on top of market’s mind. As a hedge against inflation, hard assets are likely to interest investors.

While it may be premature to announce there is a recovery in risk appetite, the indicators from equity and commodity markets suggest the possibility; but one may have to wait for some time for confirmation. Is the turn of sentiment for real and will it boost demand for commodity exposure?

To be sure, the current move up is clearly dictated not by market fundamentals of demand-supply, but by a host of non-fundamental factors including government policies, expectations of improving liquidity and currency movements. Obviously, different commodities are likely to behave differently in their price performance. Caution is advised.

GOLD
Last week saw big bounce back in the yellow metal after the Fed announced it would begin buying longer-term US Treasuries. The USD weakened considerably vis-À-vis the euro and was the weakest since early January. The announcement had implications for improved liquidity and inflation. No wonder, investor interest in the precious metal picked up.

Fresh inflows into exchange-traded products emerged. Total inflows for the year are up 389 tonnes, exceeding net inflows for the whole of last year by 67 tonnes. Holdings across the 15 major physical products have now breached the 1,600-tonne level.

On Friday, the metal witnessed a modest pullback. In London, the PM Fix was $954.00 an ounce, marginally down from the previous day’s $956.50/oz.

On the other hand, silver gained on Friday moving up to $13.65/oz (AM Fix), from $13.13/oz the previous day.

In the medium-term, conditions for a rally in gold beyond $1,000/oz are developing. Weakening of the dollar and inflationary expectations are sure to force investors to favour gold as a hedge. However, it is a matter of deep concern that physical demand in major markets (such as India and Turkey withprice-conscious buyers) is suffering because of high prices.

For instance, India’s gold import last month was zero. So, it looks like the market is driven by non-fundamental factors such as currency. A further pick up inequity markets will lure investors away from gold. In the event, the downside risk to gold prices cannot be wished away. According to technical analysts, there is a near-term upside bias.

Momentum remains supportive; and with the dollar under pressure, one could look for a break of 965 resistance to test the year highs at 1,005. However, within the precious metals sector, gold looks set to be a laggard as both platinum and palladium are outperforming, analysts asserted adding of the two, platinum looks to have the most potential as the gold/platinum ratio is on the verge of completing an impressive top.

In the medium term, a gold breakout above 931/44 targets a run beyond the high at 1,033 to 1,200.

BASE METALS

The complex was generally up strongly over the past week, with aluminium surprisingly out-performing others. The metal posted a growth of 8.3 per cent week-on-week, while copper rose 7.7 per cent and lead moved 7.4 per cent higher.

On Thursday, 3-month copper prices rallied to over $4,000 a tonne, but drifted lower on profit taking.

Most other metals followed suit. The dollar depreciation, recent rally in copper and announcement of Chinese province Guangxi (a major aluminium producer) plans to buy 50,000 tonnes of primary aluminium were all supportive.

On the other hand, there are concerns relating to demand. Euro zone industrial production has been contracting at a rapid rate from the beginning of this year. Overall, support from the physical market does not show any sign of improvement. .It appears the rally has taken base metal prices to levels that look unsustainable given the lack of improvement in the fundamentals.

Some metals are over-valued and a pullback is a distinct possibility. At the same time, given that some base metals have been heavily shorted, short-covering rallies are not ruled out.

In copper, it may be worthwhile to wait for a pullback to a low $3,000 before going long; and in aluminium, selling into (short-covering) rallies is advisable. Lead may be ready for a pullback as the rally is overdone, while nickel may trade range-bound because of weak stainless steel market.

According to technical experts, while allowing for corrective weakness, as overbought momentum unwinds, the upside focus remains. With the speculative community still in the process of unwinding short positions, the upside potential should not be underestimated. Initial targets are seen at 4,366/4,547. Short term support can be found at 3,725/3,671, with a move below needed to warn of a greater correction.

CRUDE

The wave of bullish sentiment that swept the commodity market last week following various measures announced by the Fed helped support prices even as oil was no exception. With WTI trading above $50 a barrel for the first time this year and value of OPEC crude basket having moved above $45 from early January, there is a shift in the sentiment.

Experts assert that straight forward negativity towards the oil market has now given way to somewhat of a nuanced judgment of supply/demand fundamentals. Even dire warnings of negative global GDP growth have not really deterred the market.

Clearly, far from declining, demand is stabilising. Although global demand stays weak, it is not getting worse. Experts forecast year-on-year fall of two million barrels a day in the first half of 2009.

Crude oil inventory overhang is eroding and in recent weeks, stocks are beginning to show signs of tightening.

With non-OPEC output growth slipping and OPEC members respecting the output quotas, supply cutbacks are greater than demand side weakness. A weak dollar is supportive.

For the second quarter (April-June 2009), an average price of $50 a barrel looks eminently possible. Crude could move 10 per cent on either side that is between a low of $45 and a high of $55 in the coming months. For Q3, the average may rise further to around $60 a barrel.

Source: COMMODITY CONTROL

>HDFC Bank (BNP PARIBAS)

We discussed a few key issues with HDFC management and we are also revising our estimates. We are reducing TP to INR1,600 from INR2,250. We expect HDFC to continue to enjoy a premium over its banking sector peers with its sticky customer base, better asset quality, a sector leading opex ratio and stable spreads. Reiterate BUY.

Loan growth – The company guided towards loan growth in the range of 18-20% for FY10. We are factoring for a loan growth of 16% for FY10 and we believe this growth will be more back end loaded in FY10.

Competition from state owned banks – Some state owned banks have announced a limited period mortgage loans at an interest rate of 8% for the first one year. While there has been wide spread speculation around the possible loss of market share for HDFC due to these competitive offers, we believe these concerns are misplaced for the following reasons –

1) We do not see a meaningful increase in property purchases as yet, an interest rate of 8% notwithstanding.

2) Given this is a limited period offer and the slow processing times of state owned banks, we do not anticipate a significant volume pick up through these offers.

Funding strategy – Management intends to use a flexible funding strategy depending on the prevailing liquidity situation. When liquidity is tight and term borrowing becomes expensive, HDFC has mobilized incrementally greater amounts of retail deposits as seen during October
2008 and vice versa. In easier liquidity conditions, the company enjoys a 50bps advantage for term borrowing vis-à-vis retail deposits. The current blended loan yield is 11% while the blended funding cost is approximately 8.6%.

Valuation - We are revising our TP for HDFC to INR1,600 from INR2,250– core mortgage TP revised to INR1,200 from INR1,700 and embedded value of subsidiaries revised to INR400 from INR550 after factoring in our recent TP reduction for HDFC Bank. At our revised TP, core HDFC trades at 2.3x our FY10E BV.

To see full report: HDFC BANK