>BOSCH LIMITED (IDFC SSKI)

HIGHLIGHTS OF Q1CY09 RESULTS

■ Bosch Q1CY09 results have been below our estimates primarily on account of higher than estimated raw material costs on account of adverse currency movement and shift in product mix towards the low margin non-auto business.

■ Net sales during the quarter declined 17%yoy to Rs10.1bn (we saw Rs10.9bn). Revenues were impacted primarily on account of the slowdown in the auto OEM space (both domestic and exports) and also on account of the lockout at the Jaipur facility which extended over the first 3 weeks of Jan09. While automotive business revenues declined 21%yoy to Rs8.5bn, the non-auto revenues increased 13%yoy to Rs1.4bn. As a result, the product mix for Bosch has changed adversely in favor of the relatively low margin non-auto business which now contributes to about 14% of its topline from about 10% earlier.

■ Raw material costs shot up sharply during the quarter to 56.2% of net sales as against 51.6%in Q1CY08 and 47.4% of net sales in Q4CY08 primarily on account of depreciation of INR against the USD which increased its import costs as also the change in product mix.

■ On account of a lower topline growth and a sharp increase in raw material costs, margins crashed 960bp yoy and 660bp qoq to 10.2%. Resultant, PAT for the quarter declined 70%yoy to 493mn (we saw Rs1.1bn).

Other Key highlights:

• Given an uncertain outlook for both the automobile and the tractor industry, the company has reduced its capex for CY09 to about Rs2.5bn

• During the quarter the company has bought back and extinguished about 365,627 equity shares after which the equity capital stands reduced to Rs317mn. Post the buyback, the promoter holding has gone upto about 70.6% from about 69.8% earlier.

To see full report: BOSCH LIMITED

>ASHOK LEYLAND (IDFC SSKI)

HIGHLIGHTS OF Q4FY09 RESULTS

■ Ashok Leyland’s Q4FY09 results have been ahead of our estimates primarily on account of better than expected operating performance.

■ The company has posted a steep decline of 53%yoy in net sales to Rs12.2bn (we saw Rs13.3bn) on account of 61%yoy fall in CV volumes. The contribution of non-cyclicals to revenues has increased from 33% to nearly 50% in FY09 due to robust sales of power gensets and spare parts as well as on account of the sharp decline in goods M&HCV volumes during the period.

■ Adjusting for the Rs180mn unrealised forex gain included in other expenses, margins for the quarter at 7.9% (we saw 7.2%) were down 400 bp yoy, but better 100bp qoq.

■ Interest burden for the quarter increased to Rs440m against Rs394mn in Q3FY09 and Rs91mn in Q4FY08 on account of higher working capital and drawdown of the USD200mn ECB loan. Being eligible under MAT the company reported a reversal of taxes of Rs224mn during the quarter.

■ Adjusted PAT for the quarter declined 77%yoy to Rs443mn (we saw Rs338mn).

■ Other key highlights:

• Total inventory in the system for ALL is 7,500 units. The company is targeting to reduce this to 3,000-3,500 units within the next few months which would reduce its working capital requirements by about Rs5bn-7bn and thereby reduce interest costs.

• Given the marked slowdown in the domestic CV industry, the company has consciously pruned its capex over the next three years to Rs20bn from the earlier planned Rs30bn.

• Ashok Leyland has so far received orders to manufacture about 2,800 buses of the total 5,330 bus order released under the JNNURM scheme.

To see full report: ASHOK LEYLAND

>FLASH ECONOMICS (ECONOMIC RESEARCH)

What can be done to reduce liquidity preference?

The present situation is of a deflationary type because there is a very strong liquidity preference (by banks, investors and households). This is preventing a pickup in credit and in purchases of risky assets. What can be done to lessen the liquidity preference once interest rates have been lowered to zero?

− try to create inflation expectations (quantitative monetary policy, currency depreciation) to cause investors and banks to switch from cash to assets that provide a hedge against inflation (real estate, productive capital, etc.);

− increase the return on risky assets (through fiscal policy, for example), because the return on risk-free assets cannot be reduced further (despite some far-fetched proposals to introduce negative interest rates).

Policies discouraging the holding of liquid assets are more effective than policies of creating additional liquidity, although they are similar in certain respects (inflation expectations).

It must also be recognised that if banks are faced with a fall in credit demand, it is only on the investor side that action can be taken.

If, moreover, there are fears of excessive monetary creation and expected inflation, the most advisable policy is therefore to increase the returns on risky assets via incentive policies.

To see full report: FLASH ECONOMICS

>STEEL SECTOR (FIRST GLOBAL)

Is the imposition of safeguard duty on imported HRC required to protect
Indian steel majors?

The Story…

At a time when the US and European governments are trying hard to close their doors on foreign steel by imposing anti-dumping duties on steel products imported from India, there has been a sharp surge in steel imports into the country. According to data by the Directorate General of Commercial Intelligence & Statistics, India’s average monthly steel imports rose from 80,000 tonnes in September 2008 to 250,000 tonnes in February 2009, following an increase in purchase by galvanised steel players, engineering and construction companies. Presently, countries, such as China and Ukraine, continue to ‘dump’ steel into India.

In order to protect the interests of Indian steel majors, the Director General of Safeguards had recommended imposing a safeguard duty of 25% on HRC imported at a price of less than $600/tonne, which was, however, turned down by the government. Considering that all Indian steel majors operated at full capacity in the January- March 2009 quarter and recorded a significant growth in volumes for the period, the demand for steel in India appears quite strong. Moreover, steel currently trades at a premium in India in comparison to world steel prices. The question that now arises is whether there is actually a need for the imposition of safeguard duty on imported steel for Indian steel companies, particularly at a time when the infrastructure, construction and auto sector (all steel users) badly require cheaper steel for an early revival. Read on for the answer...

The case presented by Domestic Steel Players

M/s Ispat Industries Ltd. and Essar Steel Ltd. have filed an application for the imposition of
safeguard duty on imports of Hot Rolled Coils/Sheets/Strips. The application is supported by SAIL and JSW Steel Ltd. The applicant, along with the supporting companies, accounted for 79.50% of India’s total production in April 2008-February 2009.

As much as 7,00,000 tonnes of HR coils are estimated to land on Indian shores between May 2009 and July 2009 from Ukraine and Turkey. The imports have been contracted at a price of $400- 415/tonne at Indian shores, while Indian prices stand at $500-540/tonne. These low cost imports could put pressure on Indian steel prices, thereby impacting the profitability of steel majors.

The other side of The Coin

Since the last four months, all major primary steel producers in India have been operating at 100% capacity utilization and recorded a growth in sales volumes for the period. These companies managed to sell their total output in spite of comparatively higher imports (as against last year), as it is not possible for all players with a requirement for HR coils to import the same into the country and only a few big producers having huge requirements are capable of importing the product. Moreover, there also still exists a strong domestic demand for steel and according to latest projections by the World Steel Association, India might be the only country in the world to record a growth (2%) in steel demand in CY09. India has overtaken Russia and the US to become the world’s third largest steel producer, amidst the present scenario of slowing demand and drastic production cuts in both the countries.

Presently, in India, steel prices have stabilised (with an upward bias), which coupled with the significant decline in coking coal and iron ore prices, has provided relief to the major steel producers. We have made some rough calculations in order to arrive at the production cost of crude steel under the new raw material contract prices.

To see full report: STEEL SECTOR