>Cement Sector (MOTILAL OSWAL)

Prices recover; short-term outlook positive; upgrading FY10 estimates

We interacted with various cement dealers and marketing personnel of cement companies across regions and across brands, to understand the evolving demand-supply scenario, pricing trends and short term outlook.

Prices recover by Rs5-20/bag: Cement prices have increased across all key markets by Rs5-20/bag, except in a few pockets such as Gujarat and south India (excluding Andhra Pradesh). While price increases in central India (Rs15-20/bag), east (Rs7-10/bag), north (Rs10-15/bag) and Andhra Pradesh (Rs8-10/bag) markets are driven by strong demand, price increase in the west is despite muted demand.

Demand boosted by individual housing, pre-election infrastructure spend: Cement demand over the last 3 months is driven by individual housing and pre-election spend on infrastructure by both the state and Central governments. However, demand from organized real estate, ITES and organized retail has fallen.

Short-term demand outlook positive, but medium-term outlook remains uncertain: All the dealers/marketers we interacted with are confident that the momentum in demand will continue at least until June 2009, driven by ongoing infrastructure projects, individual housing and completion of ongoing real-estate projects. But demand outlook beyond June 2009 is uncertain; this would depend on a revival in organized real estate and initiatives by the new government.

Upgrading earnings, led by improvement in realizations: For companies under our coverage, we are upgradinig our earinings estimates by 12-26%, driven by improvement in cement prices across key markets as well as cost savings in energy, freight and other expenditure. We are also rebasing our cement price assumptions to Rs10/bag decline in FY10 from current levels (v/s Rs10/bag decline over FY09E average).

Valuations attractive: Asset valuations for all the companies are below the replacement cost of US$100/ton. Cement stocks have outperformed the benchmark, driven by positive news flow in form of higher demand growth, stronger pricing and positive government actions. However, post 1QFY10, impending excess supply situation would put pressure on volumes and profitability. Among large cap stocks, Grasim remains our top pick, and we prefer Birla Corp and Shree Cement among mid-caps.

To see full report: CEMENT SECTOR

>Asia Insights (HSBC)

Bounce - or bottom?

■ History shows that bear markets end when monetary policy is eased aggressively and the banking system is sorted

■ The former has now happened; the latter may soon

■ There seems more upside than downside risk for stocks

“A week is a long time in politics”, former British Prime Minister Harold Wilson famously said. It can be a long time in stock markets too. It was only Monday last week that the S&P500 hit a new cycle low, 57% off its October 2007 peak. In the seven trading days since, it has risen 17%. Asia ex Japan didn’t quite make a new low last week (though Japan, India and Singapore did) but it has bounced 12% in the past seven days too.

Of course, strong rallies are a typical characteristic of bear markets. We have already had four of 10% or more in Asia during the current episode (Chart 1). But could this bounce be something bigger and continue for some time? Remember that during the 1997-98 Asian Financial Crisis, there was one rally of 50% (Chart 2). Or, even, could last week prove to be the bottom for the market?

History can provide some lessons. As Mark Twain said: “History doesn’t repeat itself, but it does rhyme.” Similar episodes in the past – the 1930s in the US, Sweden’s 1992 banking crisis, Japan in the 1990s – give some pointers. Most clearly, when recession is caused by a financial crisis, stocks tend to bottom when the last troubled bank is rescued – even if the economy remains weak for some time after. Second, when stocks do bottom, the rebound can be huge: the Dow rose 371% in the five years after it bottomed in 1932.

With further positive surprises possible (US Treasury Secretary Geithner can hardly disappoint the markets any more with his bank bail-out plan) and quantitative easing beginning, there seems more risk on the upside than on the downside for markets now.

To see full report: ASIA INSIGHTS

>Kalpataru Power Transmission (HSBC)

Reiterate OW (V); strongest order book and least geared

■ The company has the strongest order book of INR68bn, or 2x of FY09e sales, compared to peers

■ FY10e net debt-to-equity of 0.4x is least among peers like Jyoti structures, at 0.6x, and KEC International, at 1x

■ Reiterate our Overweight (V) rating and INR360 target price; new order flow is potential trigger, lower margin is key risk

● Strongest order book: Kalpataru Power in the last month announced orders of INR11.6bn, including orders from PGCIL and a pipeline laying order from Hindusthan Mittal Energy Limited (HMEL). Thus, its consolidated order book has increased to cINR68bn, or 2x FY09e sales (this excludes part of Q4FY09e revenue). Its stand-alone order book is INR51bn, or 2.4x of FY09e stand-alone sales, is the strongest among the transmission tower companies like Jyoti Structures, at 1.9x of FY09e sales, and KEC International, at 1.5x.

● Lowest balance sheet gearing: In a business that is working capital-intensive, Kalpataru Power has the least balance-sheet gearing, of FY10e net debt/equity of 0.4x, compared to peers such as Jyoti structures, at 0.6x, and KEC International, at 1x. Based on FY10e PB, Kalpataru Power stock is trading at the cheapest multiple of 0.7x; among peers, Jyoti Structures is trading at 0.8x and KEC International at 0.9x.

● Risks to earnings: The key downside risks that we see: 1) lower-that-estimated revenue and margin for transmission line business. 2) lower execution by JMC projects and the impact of the slowdown in the real estate sector; we estimate that even if revenue from JMC project is flat in FY10e, the impact on consolidated EPS of Kalpataru will be only c3%. 3) higher interest cost, as a 100bps rise in effective interest rates would lead to c3% fall in stand-alone profits.

● We reiterate our Overweight (V) rating and INR360 target price: We value Kalpataru using PE and PB multiple-based methods. Based on a target PE of 5x and December 2009e EPS, we arrive at a fair value for the stock of INR340. Our target PB multiple is 1x, and based on December 2009 BVPS, we arrive at a fair value of INR380. Our target price of INR360 is the midpoint of our PE and PB multiple-based valuations.

To see full report: KALPATARU POWER TRANSMISSION

>Crude drifts dn; doubts over fundamentals linger

Singapore - Crude oil futures drifted lower Tuesday in Asia as traders mulled their next move after an overnight equity-led rally, amid lingering doubts if the market can sustain its upside without fresh support from supply-demand factors.

While Asian share markets held steady in the wake of the U.S. Treasury's plan to take troubled assets off the balance sheets of banks - a move aimed at shoring up the financial sector and possibly lead to a broad-based economic recovery - there may be little else to support oil prices in the near term, with global inventories staying bloated due to soft demand, traders said.

"I am not at all bullish," said Ryoma Furumi, a broker at Newedge Japan.

"It seems the dead cat is bouncing too high - we've heard that some monies are coming back into the market. (But only) the U.S. dollar and stocks are driving the market upward."

On the New York Mercantile Exchange, light, sweet crude for delivery in May traded at $53.61 a barrel at 0650 GMT, down 19 cents in the Globex electronic session.

Prices were largely range-bound, with the front-month contract locked in a narrow 42-cent band.

Nymex heating oil futures for April slipped 87 points to 146.20 cents a gallon, while April reformulated gasoline blendstock traded at 148.19 cents, 62 points lower.

Nymex crude Monday rallied 3.3% to a fresh 2009 high as orders poured in, mirroring a surge on Wall Street, where the Dow Jones Industrial Average chalked up nearly 500 points.

The dollar also continued to lose ground, boosting demand for dollar-denominated commodities such as oil, a development that some analysts said may be hard for the market's bears to ignore.

"We have emphasized that underlying fundamentals in the energy complex have not shown any improvement and probably won't for several months. But, any additional weakening in the dollar amidst longer-term inflationary concerns will spur significant speculative buying interest especially if accompanied by further gains in the stock market," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

"Within such an environment, it is best to simply go with the flow in the process of pushing sizable supply surpluses and a continued weak demand environment to the backburner, at least temporarily."

Looking ahead, weekly U.S. government oil data due Wednesday may offer some directional cues.

The country's commercially held crude inventories are expected to have risen 1.4 million barrels in the week to March 20, with refinery run rates probably unchanged, according to the average prediction from 10 analysts polled by Dow Jones Newswires.

Gasoline stockpiles were likely to have slipped just 100,000 barrels and distillate stocks flat on-week, the survey showed.

Before the federal Energy Information Administration's report, the American Petroleum Institute industry group will release its own set of data at 4:30 p.m. EDT Tuesday, or 2030 GMT.

At 0650 GMT, oil prices on London's ICE Futures exchange also fell, with May Brent crude losing 32 cents to $53.15 a barrel.

Gasoil for April changed hands at $466 a metric ton, down $1.50 from Monday's settlement.

To see full report: COMMODITY CONTROL