>INDIA EQUITY STRATEGY (CITI)

1QFY10 Earnings Preview—Negative Again, Third Quarter Running

■ Sensex profits to dip -7% yoy, and -6% qoq; metals the primary strain — The pain should continue – we expect India’s Sensex companies (ex-oil) to fall 7% yoy – this would be the third straight quarter of negative growth (-5%, -4% in 3Q09 and 4Q09). It’s a similar story with a wider universe—CIRA universe (138 companies.) would also see profits dip by 4.5% (-10% in Mar'09). If we include oil companies, which we exclude because of inconsistent/varying accounting treatment, it would look even weaker: -14% growth for Sensex and -11% for CIRA universe. Metals are a primary contributor to profit pressure (ex metals, profit growth at -2% for Sensex and +3.8% for CIRA universe).

■ The primary problem is sales growth (demand?), margins only a partial offset — 12 months ago, Sensex companies were generating sales growth of 35%yoy – this has slipped consistently but will now likely touch a pace of 2.8% (CIRA universe a slightly healthier 8%) and flat to negative qoq. Margins provide some support; rising qoq (falling yoy), on the back of some commodity and cost-cutting support, but not enough. Ex-metals, sales growth at 4.2%, and margins up 81bps yoy.

■ Leaders and Laggards — Banks (34%+) and Cement (23%) lead the pack with strong profit expectations while the long tail comprises Real estate (-87%), Metals (-39%) and Auto’s (-8.7%). More sectors will see earnings fall (10) than rise (6), reflecting broad-based pressures rather than concentrated ones.

■ Is this the earnings bottom? — The relative robust Sensex suggests so. And our revised FY10 expectations, +1.7% growth, would also suggest a nadir with backended growth in the current year. Let's wait for the results – an acceleration in earnings de-growth over three quarters is usually fairly challenging to reverse.

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>ASIA: RECOVERY DASHBOARD (DBS)

• It’s payback time. The V-shaped recovery in industrial production and exports in Asia over the past few months will show up in double-digit GDP growth in most of Asia in 2Q09, starting this week with China and Singapore

• China will report sequential GDP growth of 16%-17% (QoQ, saar). Singapore should report growth of 15%-16%

• Korea and Taiwan will report 2Q growth of 10%-15%; Thailand should grow by 12%. Indonesia’s growth will return to about 4%.

• With this, Asia’s output will take a big step back toward pre-crisis levels

• China’s June trade data show another 10% (MoM, sa) rise in import demand between May and June. Asia-8 exports to China grew by 8%

• Asia’s exports to the US are no longer falling, China and the US are now pulling Asia in the same direction

To see full report: ASIA RECOVERY DASHBOARD

>AVENTIS PHARMA LIMITED (PPFAS)

■ Aventis Pharma Ltd. (APL) is the Indian subsidiary of the global pharmaceutical giant Sanofi-Aventis S.A. The parent ranks amongst the top 3 pharmaceutical companies of the world & holds about 50% in Aventis Pharma Ltd. Sanofi-Aventis lends strong support to Aventis Pharma, in terms of new product introductions in the Indian domestic markets from its product basket & easy access to its strong & rich product pipeline. The parent has also looked at increasing its stake in the Indian subsidiary.

■ APL has transformed itself into a company catering to the chronic & critical-care therapeutic segments. It has several products that are market leaders within their respective segments & have grown at double digits over the years. APL is also achieving better results on the exports front year after year. We believe these products to continue their growth momentum & help the company to achieve higher profitability going forward.

■ With consistently growing brands in its product basket & new product launches every year, the company generates huge cash flows. As of December 2008, APL has net cash balance of Rs. 4,973.7 Mn. on its Balance Sheet, translating to Rs. 216.0 per share. This free cash can be used by the company for suitable acquisitions within the Indian pharma space. Over the years, APL has maintained a constant dividend payout in the range of 20-25%.

Valuations
We expect the company to achieve 8 - 10% CAGR growth in its top-line & bottom-line over the next couple of years. Besides, cash rich & debt free status adds to the defensive nature of the stock. At CMP of Rs. 1,110.0, the scrip trades at 14.3x CY09E & 12.9x CY10E earnings. We initiate coverage on the stock with an ACCUMULATE rating.

To see full report: AVENTIS PHARMA LIMITED

>UTILITIES (ICICI SECURITIES)

GOOD SHOW

We expect the I-Sec Utilities universe to post ~17.6% YoY revenue growth and ~19.6% YoY PAT growth in Q1FY10E. Revenue growth will be led by: i) 2,000MW YoY capacity addition by NTPC at Sipat (1,000MW) and Kahalgaon (1,000MW), ii) ~24% rise in NTPC’s fuel costs owing to increase in the price of domestic coal and use of imported coal and iii) ~420MW capacity addition by Tata Power (~190MW merchant, ~230MW regulated). We believe PAT will grow at a slightly higher rate of ~19.6% owing to: i) implementation of new Central Electricity Regulatory Commission (CERC) guidelines, which will boost NTPC’s PAT 6% over and above 9% coming from capacity addition and ii) ~Rs876mn incremental merchant revenues, which will directly boost Tata Power’s bottomline. We expect CESC’s revenues to increase ~5% YoY to Rs8.2bn in Q1FY10E led by ~4%
demand growth in Kolkata licence area. However, CESC’s PAT may dip ~13% YoY as increasing capex for Budge-Budge expansion would lower other income.

■ NTPC’s PAT to grow ~15% on 2,000MW capacity addition & new CERC guidelines. We expect NTPC’s Q1FY10E PAT to be ~Rs19.9bn (~Rs17.2bn in Q1FY09), led by ~24% revenue growth to ~Rs118bn (~Rs95bn in Q1FY09). We believe 9% of the PAT growth will come from 2,000MW capacity addition (1,000MW at Sipat, 1,000MW at Kahalgaon) in FY09, while 6% from implementation of new CERC guidelines. We expect NTPC to generate ~55bn KWhr in Q1FY10E (~51bn KWhr in Q1FY09, ~57bn KWhr in Q4FY09) as the company will start regular maintenance shutdown of its plants on a cyclical basis from June ’09.

■ Merchant component to boost Tata Power’s Q1FY10E PAT 71% YoY to Rs2.6bn. Tata Power has added ~420MW in the past 12 months, of which ~190MW may supply merchant power. Given that merchant power rate is at ~Rs8/unit, we expect Tata Power’s bottomline to be boosted ~Rs876mn owing to ~321mn merchant units generated from Trombay (100MW) and Haldia (90MW) plants. We believe higher realisation from merchant will boost Tata Power’s Q1FY10E PAT ~71% YoY to Rs2.6bn even as revenues may decline ~6% YoY to Rs19.1bn on ~28% dip in fuel costs with phased closure of oil-based unit 4.

■ Capacity addition on track for NTPC and Reliance Power. NTPC synchronised 500MW Unit 7 at Kahalgaon in June ’09, while Reliance Power (RPower) has likely completed all formalities for the financial closure of 300MW Butibori project that is expected to come up in FY12.

■ Top picks: NTPC (Buy) & CESC (Buy)

To see full report: UTILITIES