>RELIANCE INFRASTRUCTURE LIMITED (MORGAN STANLEY)

Beneficiary of Improving Macro Outlook; Maintain OW

Investment conclusion: We maintain our Overweight rating on Reliance Infrastructure and raise our price target to Rs1,458 as we believe the improvement in the macro outlook and the positive outcome in the Indian general elections bode well for the power and infrastructure sectors in terms of emerging opportunities and easier availability of credit. In addition, improving visibility on execution and increased clarity on balance sheet strength should be positive triggers for the stock.
We believe the stock will trade between our base-case (Rs1,117/share) and bull-case (Rs1,671/share) values and will be a key risk-reward play in the current environment. Our price target tops up our base-case fair value with the investment in preference shares and 50% of the upside available between the bull case and base case for the other components in our sum-of-parts valuation as we believe the probability of our bull case unfolding has increased.

Recent developments: Key developments in the past few weeks include i) Proposed issuance of preferential warrants to be converted into 42.9mn equity shares to the promoters (ADA Group) at Rs1,000/share; ii) Achievement of financial closure by the 600 MW Rosa II power plant and WRSS transmission project; and iii) Possible scheme of arrangement to enable value unlocking in the future.

Where we could be wrong: Any significant slippages on execution or continued ambiguity concerning liquid assets would likely be negative for the stock. In addition, given its high beta, any weakness in the macro environment could put pressure on the stock.

To see full report: RELIANCE INFRASTRUCTURE

>TRADE WINDS (KARVY)

08 June 2009 to 14 June 2009

Sectoral merry-go-round…

Global stock markets rallied sharply during the week on optimism over the slowdown in the pace of the economic recession as well as the scope for economic recovery in the global economy. The data points in the US, such as jobless claims, productivity, pending home sales, construction spending, and vehicle sales have triggered a rally in global equity markets.

In the domestic markets, both the Sensex and Nifty gained 3.1% and 3.29%, respectively, during the week. Positive global markets and pre-budget expectations in the domestic markets have helped the Sensex to close on a positive note for the 13th straight week. Continued buying interest from FIIs and selling by domestic institutions induced heavy intra-day volatility in the markets. However, due to the dominant FII infl ows, the indices managed to close in the green.

The week witnessed sectoral rotation with the few sectors that enjoy high weightage in the Nifty underperforming, while majority of sectors constituting a lesser proportion outperforming the index. Auto, cement, construction, capital goods, FMCG, metals, software, telecom and power sectors outperformed the broader market, whereas BFSI and energy sectors underperformed the index. The sectoral rotation was due to profit booking in sectors where there was a sharp run-up in the penultimate week, while buying interest came into other sectors due to pre-budget expectations. The trend is likely to continue during the week.

The Nifty is expected to trade in a broad range of 4450-4650 levels during the week. However, a breakout or breakdown is likely to trigger a 150-200-point movement in the Nifty on either side. The F&O traders can utilize the opportunity by designing covered call, bull-call spread, collars, short straddle and short strangle strategies.

To see full report: TRADE WINDS

>TATA POWER (JP MORGAN)

CONSOLIDATED RESULTS IMPACTED BY GOODWILL WRITE-OFF - ALERT

• Tata Power reported consol. PAT of Rs12.6B, lower than our estimate of Rs16.8B – the variance arose from: (1) goodwill impairment charge of Rs2.8B that the company decided to take on its overseas coal mining subs, and (2) prior period tax liabilities of coal mining subs – Rs1.91B. Management stated in its conference call that this additional tax liability pertains to the period before TPWR took a stake in the coal mines: thus, Bumi would reimburse the amount as agreed (Rs2.15B totally incl other adjustments).

• Electrical business EBIT at Rs13.9B (up 16%) was in-line with estimate, and the growth largely came from 100% consolidation of Delhi distribution (treated as JV in FY08). Even though NDPL PAT declined 40% as a result of a one-time depreciation reimbursement of Rs2.25B in FY08, NDPL managed to earn Rs790M incentives by surpassing its loss reduction targets.

• Coal segment EBIT registered a sharp 272% increase, due to strong contracted coal prices, coupled with the 12-month consolidation vis–a-vis 9- months in FY08. The reported EBIT of Rs14.6B corresponds to our estimated EBIT of Rs17.5B (based on Bumi IJ’s reported nos) less goodwill impairment charge. The write-off came as a surprise to us, because we believe the coal mines are worth more than what the company has paid for, reflected in its book value.

To see full report: TATA POWER

>SAIL (ICICI DIRECT)

Sailing through…
Steel Authority of India Ltd (SAIL) surprised us with its Q4FY09 numbers, which were ahead of our and consensus estimates. Though there was YoY de-growth, the company was able to report better-than-expected results. This was despite a fall in realisation on improved product mix, lower employee costs and significant rise in saleable steel volume over the previous quarter supported by an improvement in domestic demand. SAIL reported net profit of at Rs 1486.68 crore and Rs 6174.81 for Q4 and full FY09 (against our expectations of Rs 856.4 crore and Rs 5544.5 crore), respectively. The Q4 net profit figure was down 37% YoY. However, it rose 76% QoQ.

Highlight of the quarter
The topline for Q4FY09 was Rs 12057.8 crore, down 10% YoY but up 35% QoQ. The EBITDA margin grew by 480 bps QoQ but fell by 1010 bps YoY to 17.5%, as higher raw material cost mainly on account of coking coal continued to weigh coupled with lower realisation during H2FY09. For the full year FY09 the EBITDA margin, however, stood at 20.4% due to stronger performance during H1FY09. Special steel production rose 11% YoY to 3.7 million tonnes (MT).

Valuation
At the CMP of Rs 173, the stock is discounting its FY10E earning of Rs 13.3 by 13.1x and FY10E EV/ EBITDA by 5.7x. Based on the good growth prospect of the company in future coupled with higher operational efficiency we assign the stock a multiple of 6.5x on its FY10E EV/EBITDA. This translates to a price of Rs 180/ share, an upside of 4%. We continue to maintain our HOLD rating on the stock.

Strong volume growth offsets fall in realisation
The average realisation per tonne fell again for the second consecutive quarter in Q4FY09 following the global trend. Indian steel prices, however, did not see a significant fall compared global markets. This is because India is better positioned compared to most of its global peers in terms of expected economic recovery. Thus, steel makers that have their major focus on the domestic markets are set to reap the benefit. SAIL, being a PSU, has already shown that. The company, though it saw some drop in realisation, could sell significantly higher quantity (3.6
MT) in Q4FY09 compared to the previous quarter (a QoQ growth of 33%). On a YoY basis, however, saleable steel production declined by 4% to 12.5 MT. Total sales also fell by 8% YoY to 11.32 MT for the full FY09. However, considering the tough situation in FY09 especially from mid-August to December 2008, even this performance seems quite good.

To see full report: SAIL