>SMART IDEAS (LKP SHARES)

Focus Issue of the Month

Focus Issue of the Month - Union Budget - 2009-10 - Analysis & Impact

Company Reports

Areva T&D India Ltd
While we are positive on its capacity expansion in high-rating power equipments and robust order intake, its high debt and higher contribution from low margin project business will lead to subdued growth in profits for the next two years. At 33xCY'09E earnings, Areva is fairly valued and we remain Neutral on the stock.

IDBI Bank Limited
IDBI Bank has transformed itself from a DFI into a full-service commercial bank. With Resource Mix shifting towards low cost deposits, we will witness NIMs expansion and improvement in CASA. We initiate coverage on IDBI Bank with a Buy recommendation with a target price of Rs.155, a return of 40% for a time frame of 12-18 months.

Impact Analysis of open offer for Great Offshore Ltd
We are likely to see a price war in the form of counter offers for the stake in Great Offshore Ltd. Bharati Shipyard Ltd has re - revised its bid for GOFS to Rs.405/ share as per SEBI rules. ABG Shipyard is also mulling over its options for the counter offer it has put across. Our estimates suggest that this acquisition will be more beneficial to BSL in all respects, financially, strategically as well as good synergies.

To see full report: SMART IDEAS

>FINANCIAL TECHNOLOGIES (IDFC SSKI)

HIGHLIGHTS OF FY09 RESULTS AND OUR INTERACTION WITH THE MANAGEMENT

• Ahead of estimates, Financial Technologies has a reported a strong revenue growth of 143% at Rs3.3bn. Higher contribution from exchange solutions has increased EBITDA margins from 32.6% in FY08 to 49.3% in FY09. This resulted in 106% growth in operational net profit at Rs1.7bn.

• Consolidates revenues grew by 19% at Rs3.2bn and reported net profits stood of Rs2.5bn. This includes Rs3.7bn of other income with Rs1.9bn resulting from capital gains.

• Revenues from ecosystem ventures (includes NBHC, Atom, Tickerplant) grew by 80% at Rs1.2bn and EBIT for the segment came at Rs92m (as against Rs19m of EBIT loss in FY08).

• MCX (associate of FTIL – 31.2% stake owned), India’s largest commodity exchange garnered a 47% increase in turnover in FY09 at US$918bn. Share of profits from associates, which include MCX (31.2% stake) and IEX (41.2%), stood at Rs527m. This implies MCX garnered profits to the tune of ~Rs1.6bn for the year.

• Of the ten exchange ventures floated by FTIL (five domestic and five international), six are currently operational while four of the international ventures are scheduled to start in the next two years. Of these, SMX and GBOT are expected to go live in 2009, while Bourse Africa and BFX are targeted to go live in 2010.

• During the quarter, standalone revenues grew by 176% at Rs1.1bn. EBITDA margins improved significantly from 37% in Q4FY08 to 53% in Q4FY09 resulting in a 216% growth in operational net profits at Rs785m.

• As on 31st March 2009, cash on books stood at Rs11.6bn and Rs4.6bn worth of ZCCB outstanding.

• Aggregate investments in group companies stood at Rs4.3bn and share of losses from the same stood at Rs1.2bn.

To see full report: FINANCIAL TECHNOLOGIES

>RELIANCE POWER (RELIANCE EQUITIES)

Power-packed play

■ Ambitious plan to add 32+ GW capacity by FY18
Reliance Power (RPWR) has a power portfolio of over 32 GW capacity at various stages of implementation. The project portfolio is well diversified across fuels, off-take and geography, which helps in minimising counterparty risks, and RPWR benefits from higher realisation in power-deficit areas.

■ DCF-equity to value projects + CERs upside
We have used the DCF-equity of individual projects to value the company, using a cost of equity (Ke) of 15%, which gives us a value of Rs 171/share (FY11E). This includes Rs 146/share for projects that have not achieved financial closure. If we assume a Ke of 12.5%, our fair value goes up to Rs 229/share. It is pertinent to note that a major part of power sales done through competitive bid/merchant power makes the valuation highly sensitive to assumptions of CoD, tariff, fuel cost, loan repayment schedule, interest rates, exchange rates, etc. RPWR could also benefit from sale of CERs (carbon credits) by using fuel-efficient and environment-friendly technologies, and we value CERs at Rs 10/share.

■ Margin of safety (MoS) led by conservative gas price assumptions
We have assumed availability of natural gas from RIL’s KG D6 gas basin at a price of US$4.2/mmbtu. However, if we assume availability of natural gas at US$2.34/mmbtu for the Dadri power project, the project value increases by ~Rs 38/share. This provides MoS to our valuation as the potential downside risk of other projects is protected by the upside risk in Dadri project.

■ No additional equity required till FY13E
We estimate a equity funding gap of ~Rs 21bn in FY13 and ~Rs 15bn in FY14. RPWR can use debt at the corporate level to fund the equity gap and can repay the debt in FY15E from the cash flow generated from projects.

■ Key risks: Delays in CoD and fuel availability/pricing issues
(1) Any delays in CoD will lead to escalation in project costs, concurrently leading to lower equity IRRs. (2) Business model of ~92% of planned capacity is non-regulated, exposing RPWR to significant pricing and off-take risks.

To see full report: RELIANCE POWER

>TATA STEEL (MACQUARIE RESEARCH)

Raising money?

Event
■ GDR issue could be in offing: Media reports suggest that Tata Steel might be looking to do a GDR offering. The amount indicated is a wide range of US$500m to US$1.5bn. We estimate that Tata Steel needs some equity funding, and with the business environment improving, the likelihood of better valuation is high, in our view.

Impact
■ Was a part of Corus acquisition funding plan: Tata Steel, post the acquisition of Corus in its funding plan, had mentioned about US$500m of GDR issue. However, given the buoyancy in the steel market, this was left out at that time and now seems to have been revisited.

■ Requirement – well funded but a bit stretched: Based on our estimates, Tata Steel should have free cashflow of US$1.5bn in FY10. This compares well with the estimated capex of US$1bn. However, with net debt to equity at 1.8x, the balance sheet is a bit stretched, hurting the company’s ability to undertake even profitable expansions.

■ Pricing and impact– expect upward of Rs500/sh: Tata Steel has done allequity infusion since 2006 at Rs450-500/sh, and we estimate that diluting below this level is only possible by a rights issue. We believe that, if Tata Steel raises US$500m at Rs500/sh, EPS would go up marginally in FY10, although there would be 2.7% dilution in FY11. If the raised amount is US$1.5bn, the EPS dilution would be 7.3% in FY11, by our estimate.

■ Business fundamentals improving: According to trade reports, the European steel mills have so far been successful in pushing though €30 (US$42/t) price increases for hot-rolled coil from July 1. Thyssen Krupp (TKA GR, €17.04, NR) reported that it has pushed through price increases on annual and quarterly contracts for steel. Tata Steel has announced the starting of the sixth Blast Furnace at its Netherland unit.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs584.00 based on a PER methodology.
■ Catalyst: Improving steel demand and pricing scenario in Europe.

Action and recommendation
■ Maintain Outperform: We think Tata Steel reached the bottom of its earnings cycle, and we expect a sharp recovery from 2Q FY10. We believe that the company is not only the best stock to play the rebound but also that it has enough catalysts in the medium term to merit a long-term investment. Reduced concern on its debt could lead to re-rating of the stock, in our view.

To see full report: TATA STEEL