>STEEL SECTOR (GEPL)

Crude steel production in all major steel producing countries/continents declined 3% in the month of Apr -09 compared to Mar-09. However, the production was down by ~24% on YoY basis. Asia (mainly China and India) which produced highest steel in the month of Mar-09 since Oct-08 was 3% down in the months of Apr-09. Steel production in all major countries/continents declined by up to 8% on month-on-month (MoM) basis led by EU (-8.1%), China (-3.7%), India (-3.3%), CIS countries (-3.3%).

During Jan-Apr 09 period, the world crude steel production was down 22.7% YoY led by US (-53%), EU (-44%), CIS (-33%) and Japan (-43%). India reported only 1.6% fall in production whereas China produced flat during the same period.

Steel prices in all major markets were on uptrend in last one month except the US. Steel prices in China and India went up by ~16% and ~2% in last one month. On the contrary, steel price in US continued its downtrend and fell ~6%. Indian steel association urged the government to impose a safeguard duty of 25% on imported HR coil and other flat products due to higher imports. The government did not take any such measure due to lack of evidence.

Total steel inventory at Shanghai, China which was falling continuously, started moving up from the beginning of May-09. The rise in inventory level was mainly due to lower consumption of steel due to increase in steel prices in China.

China steel export was also down in the month of Apr-09 compared to Mar-09. According to China Iron and Steel Association (CISA), China steel export may fall by 80% in CY09 to 12 mt (Vs 60 mt in CY08) due to massive fall in steel demand from export markets due to global recession.

To see full report: STEEL SECTOR

>SOBHA DEVELOPERS (CENTRUM)

Liquidity easing but valuations stretched

■ Lacklustre results: Q4 revenues plunged 68% YoY to Rs1,545mn and PAT declined 90% to Rs72mn owing to a halt in new transactions and higher tax rate.

■ Volumes thin due to unaffordability of premium flats: Most of the company's ongoing projects consist of apartments with more than 1,500 sq ft saleable area, targeted at the premium segment. This has resulted in stagnant sales off take due to apartments being priced over Rs5mn.

■ Estimates lowered: We cut our revenue estimates by 22.1% for FY10 and 20.7% for FY11 due to slower-than-anticipated volume off take in core real estate business. However, PAT estimates have been raised by 17%, assuming that there would be no further correction in prices in FY11 and reduced interest burden.

■ Possible QIP issue a trigger for the stock: Sobha continues to have a high D/E of 1.7x with ~25% of its Rs18.75bn debt maturing in FY10. However, with liquidity concerns easing in the sector, Sobha may raise upto Rs7.5bn in FY10 through QIP issue.

■ Spin-off of non-core businesses may provide upside: Sobha’s plans to spin-off its non-core manufacturing and interiors businesses may provide further upside to the stock.

■ Upgraded to Hold: We have raised our target price to Rs150 from Rs56 due to upgrade in SOTP NAV from Rs140 to Rs200. We have provided 25% discount to NAV vs 60% earlier owing to liquidity concerns easing for the sector. However, Sobha’s minimal presence in affordable housing and questionable accounting practices makes us cautious on the stock and we recommend a Hold on the stock.

To see full report: SOBHA DEVELOPERS

>HDFC (KR CHOKSEY)

Impressive Performance – HDFCs operating numbers and net profit numbers in Q4FY09 were impressive. Net Interest Income handily beat expectations coming in at Rs 870.9 crores during Q4FY09 on back of higher interest income from disbursements and better spreads. Unlike other private sector financial institutions, HDFC increased its disbursements in tough economic times. Loan approvals grew disbursement growth was reported at 16% yo- y and 3% q-o-q. Inspite of having no access to low cost deposits, HDFC interest expense growth in Q4FY09 was muted at 1% q-o-q. Non Interest Income growth was impressive at 125.7% q-o-q largely on account of dividends and fees from HDFC AMC.

Incremental Margins Improvement – Net Interest Margins improved incrementally to 2.21% for FY09 from 2.19% for 9MFY09 on back of lower funding costs. CP rates, a proxy for wholesale funding costs in India, have been trending down on account of comfortable liquidity environment and decreasing risk aversion. HDFC has been incrementally shifting its borrowings to the wholesale markets from deposits to benefit from the declining rates. HDFC strategy continues to be to hold onto margins as it has not followed SBI’s aggressive pricing strategy in home loans.

Asset Quality – Management focus on prudent underwriting standards during the upswing has helped withstand the pressures on asset quality. Gross NPLs amounted to Rs. 701.55 crores (0.81% of portfolio) as at March 31, 2009 down 3 bps from 0.84% as at March 31, 2008. Provisions for contingencies stood at Rs. 621.53 crores (0.72% of portfolio) as at March 31, 2009. Coverage ratio was high at ~89%, providing a buffer to future earnings.

Our View – At current price of Rs 2093 the stock is trading at ~3.86x FY10E P/BV. We maintain a buy on HDFC with a target price of Rs 2,475, giving an upside potential of 18% from the current levels, on account of:: 1) housing demand will improve in H209 due to better affordability, leading to a 18 – 20% y-o-y pickup in disbursements (high loan approvals and disbursements in Q4FY09 demonstrates HDFCs ability to withstand stiff competitions from public sector banks); 2) Net Interest Margins will improve as borrowing rates, especially in the wholesale markets, will remain low on account of benign liquidity conditions; 3) income from real estate fund management fees and asset management (HDFC MF) will remain an earnings driver in FY10; 4) strong asset quality will reduce earnings pressure; 5) RoE growth (~18% in FY09) on account of redeploying cash to support balance sheet growth will drive multiple expansion; 6) potential value unlocking in life insurance subsidiary.

To see full report: HDFC

>DEEPAK FERTILISERS & PETROCHEMICAL CORP. LTD. (PINC RESEARCH)

Deepak Fertilisers & Petrochemicals Corporation Ltd. (DFPCL) posted a 1.2%YoY de-growth in sales to Rs3.3bn in Q4FY09 against our estimate of Rs3.2bn. OPM expanded by 152bps to 20.4% driven by fall in operating expenses. With higher other income (+155%) and lower effective tax rate, net profit grew by 26.5% to Rs396mn against our estimate of Rs258mn.

■ OPM expands on lower trading volume
Declined in traded goods by ~25% YoY to Rs0.9bn and decrease in cost of other expenses to net sales by 167bps led OPM to increase by 152bps to 20.4%.

■ Ishanya getting firm
Ishanya mall is making its mark in the interiors and exteriors in western Maharashtra. It registered over 1.3mn footfalls with conversion rate of ~35%.

■ Availability of gas to boost performance
DFPCL has begun purchase of consignments of LNG through GAIL pipeline (Dahej-Uran). Once regular gas supply starts from KG basin, company will be able to increase its capacity utilisation and eventualy profitability will improve.

■ Projects / New initiatives
DFPCL augmented its technical Ammonium Nitrate capacity to 132k MT from 90k MT p.a. in FY09. It further plans to raise its capacity of Ammonium Nitrate by 300k MT p.a.at Taloja plant with a capex of Rs6bn, which is expected by Oct’10. Commissioning of Bentonite Sulfur plant (25k MT p.a.) at Taloja and Ammonia tank (15k MT) at JNPT is over and now company should be able to limit its exposure to highly volatile ammonia prices. Nitric acid facility with 450 MT p.d. should be commissioned by H1FY10 which will make DFPCL among the largest producer of Nitric acid in Asia.

VALUATIONS AND RECOMMENDATION
At the CMP of Rs86, DFPCL is trading at a P/E of 6.2x and EV/ EBITDA of 3.5x FY10E. Favourable fertiliser policy & expected increase in availability of gas post RIL KG basin development, augurs well for DFPCL. We maintain our ‘BUY’ recommendation with a target price of Rs98, which implies a P/E of 7x FY10 earnings that is less than 5years historical median P/E of 7.4x.


To see full report: DEEPAK FERTILISERS & PETROCHEMICAL CORP. LTD.