>FORTIS HEALTHCARE (CITI)

Takeaways from Our India Investor Conference, June 24-26

Takeaways from Mumbai — Fortis Healthcare attended our India Investor Conference on June 25. Here are some key takeaways from management:

■ Long-term vision — Fortis expects to have a network with c6000 beds by 2012 (at an expected cost of cRs7m/bed for new beds). It is also trying to create an asset-light structure by entering more O&M contracts, which will help expand reach and grow top line without increasing its asset base.

■ Updates on key projects — A) Shalimar Bagh: Expected to come online within three months. It will be operational from the next quarter. Phase I will have 258 beds. B) Gurgaon: Expected to be operational within the next 12 months with 350 beds. C) Escorts: Revenues close to earlier peak levels (before Dr. Naresh Trehan's exit) with lower ALOS, leading to higher margins (c20% towards the end of FY09). FY10 will be a good year for Escorts Delhi.

■ New O&M deal announced — Fortis has entered into an O&M contract with S L Raheja hospital in Mumbai. This is the second Mumbai hospital in Fortis' network and diversifies its geographical spread. The hospital has 280 operational beds and Fortis will get a share of the EBIDTA and if it can expand EBITDA margins beyond a certain threshold, it would share in the upside.

■ Other takeaways — 1) Rights issue to open in mid-July (expects to close by August). SEBI approval has been received; 2) Expects established hospitals to reach c23-25% EBITDA margins (Mohali, Noida, Amritsar already at these levels); 3) Dr. Balakrishnan, one of Chennai's eminent doctors, has joined at Malar; strong revenue growth likely in FY09; 4) Board meeting on 30th to announce FY09 results.

To see full report: FORTIS HEALTHCARE

>THERMAX LIMITED (JAYPEE CAPITAL)

We initiate coverage on Thermax with an ‘ACCUMULATE’ recommendation and a target price of INR 450 per share implying an upside of 12.5% from current levels. Diminishing capital flows, falling investment growth due to liquidity crunch, will dampen the economic growth from 9% in
FY08 to 6.3% in FY09. While domestic financing conditions have improved, external financing
conditions are expected to remain tight. Private investment demand is, therefore, expected to
remain subdued. Pick up in the economy in the latter half of this fiscal, will improve the
performance of Thermax ltd. with muted growth expected this fiscal.

Muted Order backlog
The Consolidated order book for Thermax Group stands at Rs. 3078 crs up 17% yoy, with a book-to- bill ratio of 0.9x. The fall in order inflow of 5800 mlns by 20% yoy was on account of order cancellations and reduction in scope and value of some of the company's large orders secured during FY09. The Rs 800 cr Essar order has been reduced to 2 boilers from the previous 4 boilers and is now worth Rs 380 cr. Brahmani’s Rs 400 cr order is now worth Rs 297 cr. However, the management expects order inflows of approx Rs1,200 cr in H1FY10 and an improvement thereafter. Further, the company’s entry into subcritical boilers (800 MW) has enabled it to win large orders.

Dismal revival in IIP Index, positive signs for the Infrastructure sector
As the global slowdown has taken a toll on India’s industrial production, IIP for 2008-09 grew by
only 2.4% as against 8.5% in the 2007-08. A revival of industrial production is round the corner, with excess liquidity in the system, easing of financial conditions and declines in some key interest rate spreads suggest that industrial activity will pick up in the second half of 2009-10. The six -core infrastructure sectors has also registered a growth of 4.3% in April, the most since July 2008, compared to a growth of 2.3% in April 2008, backed by significant contribution from coal, electricity and cement sectors.

Worldwide Declining GDP growth rate
The World Bank has estimated GDP growth in the developing world to slow to a projected 2.1
percent in 2009 from 5.8 percent in 2008. The World Bank’s forecast predicts growth momentum to turn weakly positive in 2010 World GDP as growth is expected to increase to a modest 2.3 percent in 2010, as financial-sector consolidation, lost wealth and knock-on effects from the financial crisis continue to dampen the economic activity. India’s RBI has lowered the GDP growth forecast to 5.7 percent for this fiscal from the earlier projection of 6 percent because of a sharp downward revision in the anticipated expansion of industrial output.

With Recovery round the corner & entry in subcritical space, Accumulate with a price target of INR 432
An industry leader in the industrial boilers segment in the captive power segment, Thermax’s entry into a new arena into the subcritical space (800 MW), and a revival seen in the economy from H2 FY10, Thermax is confident of achieving higher inflow of order growth. For the fiscal ended FY10, the management expects revenues and margins to be maintained with a better picture from FY11. At the current price of Rs 395, the stock is quoting at 15x FY2010E EPS and 13x FY2011E EPS, which we believe is not inexpensive. We initiate with an Accumulate Rating on the stock, with a target price of Rs. 450 based on a PE of 15x consolidated FY11E EPS of Rs. 30 per share.

To see full report: THERMAX LTD.

>BUDGET PREVIEW (HSBC)

Budget preview: Easy does it

• Populist budget likely as India builds a welfare state of sorts
• Structural budget deficit set to rise…
• …which may worry RBI, rating agencies and bond market

Having already introduced two stimulus packages, seen the budget deficit exceed 6% of GDP, watched the Reserve Bank of India slash interest rates and witnessed some encouraging signs of recovery one might have thought the government would be content to present a neutral budget on 6 July. This seems unlikely, however. We expect the budget to contain several expansionary measures, with little or nothing in the way of action to address the worrisome structural deficit. If we are right, then the RBI, rating agencies and bond market players may be less than enthusiastic in their reaction.

While markets have taken the view that Congress was the big winner from the general election, a better interpretation of the result is that it was the left of the Congress party that was the real winner. This may seem a subtle difference but it is one with very important implications. In particular, it probably means that the top priority of the government is to continue building a welfare state of sorts, with meaningful pro-market reform and structural budget adjustment taking more of a backseat than many are assuming.

In line with this, we expect help for the poor to take centre-stage in the budget. The government has already suggested that it will guarantee the provision of basic foodstuffs at low prices to all poor families as well as funding the construction of millions of new homes in rural areas. It may also extend the popular National Rural Employment Guarantee Act to include the urban poor, while promising additional infrastructure, preferably via public-private partnerships. The corporate sector could enjoy higher depreciation and/or investment allowances for spending on machinery and equipment.

Despite the prospect of all this additional spending, we wouldn’t be surprised if Mr Mukherjee forecasts a fall in the central government’s budget deficit in 2009/10. The Finance Minister will attempt to square the circle by arguing that the various programmes will be “financed from stronger economic growth” (expect some bullish growth projections), with the sale of government stakes in some state-controlled companies also helping out. The trouble with this approach is that many of the spending measures are likely to be permanent in nature while the divestments are one-off. In other words, the structural budget deficit is in danger of rising when it should be falling. No doubt the government will commit to a medium-term programme of deficit reduction, but given the eventual failure of the first Fiscal Responsibility and Budget Management Act one might be forgiven for doubting the credibility of FRBM (2).

To see full report: BUDGET PREVIEW

>ASSAM COMPANY LIMITED (SUSHIL FINANCE)

■ Assam Company Ltd. (ACL) has business interest in tea and upstream oil business. It is a producer of high quality, premium tea. In 1994 ACL diversified into the oil & gas industry. Currently, it has participating interests in 5 assets in the Assam-Arakan basin in North East India. Its E&P portfolio consists of one discovered field, one exploration block and three service contracts with ONGC.

■ ACL operates through 17 tea estates and gardens with planted area of about 8644 hectares on a grant area of 14664 hectares. The average yield per hectare stands at 1983 kgs.

■ The Company was awarded Amguri block (discovered oil field) and AA-ON/7 (exploration block) by the Government in 1996 under Pre-NELP round Amguri covers an area of approximately 52 75 square Pre round. 52.75 kms with estimated proven resources of 60 MMbbls of oil and 229 bcf of gas, whereas AA-ON/7 covers an area of approximately 1,089 square kms with estimated resources of 80 MMbbls of oil and 617 bcf of gas. ACL owns 40% participating interest in the Amguri and 35% in the exploratory block AA-ON/07.

■ Recently, the Company expanded its Exploration and Production asset portfolio by adding one more Block - AA-ONN-2005/1, the only Block in Assam Arakan basin offered under NELP-VII.

■ Oil and Gas production from two wells, Amguri 10B commenced in at the rate of 1,370
barrels of oil equivalent (boe) per day and increased to 1,660 boe per day in Q2CY08. The production will further enhance, once the adequate facilities are created and further wells are drilled. Currently, the Company is producing 1,700 barrels of oil (boe) per day, and the average production is expected to increase further during the next 2 years. Evidently, the Company is expected to deliver very decent earnings growth from oil and gas segment.

■ The stock currently trades at 11x its earnings and 1.0x BV.

To see full report: ASSAM COMPANY