>UNITECH LIMITED (MORGAN STANLEY)

Stock Is at the Crossroads of Demand; Moving to EW

■ Investment conclusion: We are upgrading our rating on Unitech to Equal-weight in view of initial repair of the balance sheet (182% net gearing in F09 could drop to 84% in F10) and improving macro (India F10 GDP growth upgraded to 5.8%, better foreign capital flows, and prospects of pro-market policy actions). Worst may be behind us, but not yet out of the woods, we believe.

■ Several challenges remain: 1) Portfolio of ongoing projects (27 msf) appears weak (since 80% is completed and recognized). 2) Therefore, reliance on new launches and sales to generate earnings/cash is high. 3) Even after significant fund raising (Rs24 bln odd), B/S will remain stretched (84% F10E net gearing and low interest coverage of 2.5x incl interest cost capitalised).

■ Where we differ: Valuations appear rich (16% discount to F10 NAV, 18x F10 EPSe, 1.9x F10 P/B) and seem to be already discounting revival in business cycle. Nearer term, we see downside risk to the stock price. Our new PT is Rs60 (at 30% discount to F10 NAVe of Rs85), and we would take profits on stock price appreciation.

■ Something for the bulls: Early monetization (regulations/Telenor permitting) of balance stake
(32.75%) in telecom business could further fix the b/s. We see deep value in Mumbai projects, though given the task of slum rehab, we expect slow delivery of land parcels (1-2 msf launches in F10, 50% share).

■ Something for the bears: There may be more equity dilution (preferential warrants to promoters, another QIP), economic recovery might be elusive, and low (YTD 2.5 msf) sales contracted (versus 18 msf at Rs3000 ASP to meet our F10 EPSe).

To see full report: UNITECH LIMITED

>EMERGING MARKETS MACRO AND STRATEGY OUTLOOK (CITI)

Out of the frying pan? Fiscal vulnerability takes centre stage

■ At the risk of great oversimplification, we think emerging economies have passed through two phases of the global crisis, and are now entering a third.

■ The first phase could be labelled the Financial Vulnerability Phase. At the centre of this was the loan-to-deposit ratio. Countries with a high loan-to-deposit ratio were vulnerable to the immediate consequences of the collapse in foreign banks’ desire for counterparty or credit risk; and their need to bring resources back to their own balance sheet.

■ An External Vulnerability Phase may have succeeded this, in which the central concern was with countries who, regardless of the health of their banking systems, became vulnerable because of the large size of their external financing needs. The External Vulnerability Phase coincided in some cases with the Financial Vulnerability Phase.

■ The External Vulnerability Phase seems to be at an end, thanks to i) sharp improvements in trade balances in many countries; ii) the IMF’s commitment to inject larger amounts of liquidity into emerging economies on easier terms; and iii) the re-emergence of risk appetite, particularly among bond and equity investors.

■ The import compression that has helped to improve the trade balance in many countries has a flipside in very weak growth. That in turn helps to give rise to the third phase of the crisis, a Fiscal Vulnerability Phase, as budgets come under pressure. Thanks to budget discipline in many countries during the past few years, we believe the Fiscal Vulnerability Phase poses fewer risks than what has passed before. The countries most at risk here are likely to be ones with unrealistic budget assumptions and high debt/GDP ratios.

To see full report: EMERGING MARKETS MACRO AND STRATEGY OUTLOOK

>JET AIRWAYS (IDFC SSKI)

HIGHLIGHTS

‘We have already cut domestic capacity by ~20% yoy....exceptional efforts will be required for profitability going ahead’– Wolfgang Prock - Schauer CEO, Jet Airways

• Jet Airways (Consolidated) has reported numbers for FY09 – Revenues were at Rs130.7bn (ahead of estimates at Rs126bn), EBITDA loss at 8.6bn (against expectations of Rs8.9bn) and net loss of Rs21.2bn without exceptional items (Jet has reported a consolidated net loss of Rs9.6bn including exceptional items for the year).

• For the quarter - Jet Airways (standalone) has reported an 11% decline in revenues at Rs24.6bn, a positive EBITDAR at Rs5.1bn, EBITDA at Rs3bn (primarily due to the support from international operations and lower ATF prices in the quarter) and a net loss before exceptional items at Rs1.6bn.

• For the quarter - Jetlite has reported revenues at Rs3.1bn, a positive EBITDAR at Rs165mn, and continued to post an EBITDA loss at Rs717m and a net loss of Rs1.3bn.

• Capitalization concerns high - Jet reported consolidated debt at Rs166bn taking the debt:equity ratio to ~5X. Repayment in the current year is at ~Rs10bn. Additional outstandings for the current year include a Rs 1.4bn payment to SICCI (annual installment for the acquisition of Jetlite erstwhile Sahara).

• No capacity additions in the current year – The management is in talks with Boeing over cancelling/finding another buyer for the Boeing 777 (Capex at ~$145m) that was due for delivery in August09 (Jet had earlier deferred all future deliveries except the Boeing 777). The current operational fleet (86 aircrafts under Jet and 23 aircrafts under Jetlite) is expected to be maintained as of now. (The management plans to renew the leases that come for expiry in the current year).

• Options to fund - Sale and lease back – Inorder to meet its obligations, Jet has the option of a sale and lease back of its existing assets (39 owned planes – 21 narrow bodied aircraft and 18 wide bodied aircraft). While Jet has booked a sale and lease back of an A330 in the current quarter at a $9m profit over its book value (leading to a cash inflow of ~$85m), a premium to book value could be difficult in the current environment. Till date Jet has raised ~$2.5bn inorder to fund the acquisition of its fleet; a sale (at book value) of these assets by the end of the current year can
potentially generate cash (net of repayment of loans) to the tune of ~Rs15-18bn.

To see full report: JET AIRWAYS

>JSW STEEL (RELIANCE MONEY)

Price target achieved
JSW Steel has appreciated by more than 18%, since our last recommendation dated May 11, 2009. We had given a buy call with a price target of Rs 485 on the spectacular guidance given by the management for FY2010E and FY2011E. The management had guided for 70% rise in the production for FY2010E owing to the successful operations expected from the green field facility recently commissioned.

Indian Steel industry is exhibiting resilience:
Indian Steel industry is not showing the panicky conditions exhibited by the global steel majors. The steel prices throughout the country are stable and above the international prices which in turns are exhibiting some strength. The Indian domestic Steel prices have been steadfast. The Steel demand is expected to remain robust despite the recessionary noises through out the globe. According to World Steel Association India's apparent steel demand is forecasted to reach 53.5 mmT in CY09, a 1.7% rise over that of CY08 and is expected to reach 58 mmT in 2010, an increase of 8% YoY.

Steel prices are expected to be stable and rising:
The demand for Indian Steel Industry is expected to steady. Although, the capacity expansion projects of domestic steel majors are on track, the green field plans made by foreign Steel behemoths like POSCO and Arcellor Mittal have been deferred. The mismatch between expected demand and supply is expected to keep the prices steady and rising.

Valuation:
At CMP of Rs 511, the stock quotes at an EV/EBIDTA of 1.7x FY2011E earnings. Currently, we feel that the pricing of the stock is stretched. We advise the clients to book profits at this price and re-enter at lower levels although we are positive on the future prospects of the company.

To see full report: JSW STEEL