>CONSTRUCTION SECTOR (AMBIT CAPITAL)

STUPENDOUS OPPORTUNITY

• Government infraspend to grow 20%
• .... likely supporting prder book growth of 15% CAGR to FY11E
• Strong order book reflects buoyant earnings visibility
• Balance sheet health manageable, ROCE to expand
• We are Overweight; we initiate Coverage with Buy on IIL, NCL

To see full report: CONSTRUCTION SECTOR

>1QFY2010 AUTO EARNING REVIEW (SHAREKHAN)

Higher volumes and lower raw material cost drives growth

Key points
■ The Q1FY2010 results of the automobile sector were impressive, especially on the margin front. Overall, the automobile companies had a double push to the bottom line performance. The top line was driven by better volume growth and the margins got a fillip from softer
commodity prices. For the quarter, the net sales of the automobile companies in Sharekhan’s universe improved by 23.5% and their margins expanded by a healthy 380 basis points to 14.1%.

■ The revenues for the quarter indicated a strong performance across the two-wheeler and four-wheeler segments. Easing liquidity constraints combined with the positive effect of the recent government measures to boost the economy clearly had a positive impact on the volumes. The excise duty cut effected by the government in its various stimulus packages combined with the slew of new launches by the automakers positively affected the sales of four-wheelers and twowheelers.

■ On the margin front, the benefits of declining commodity prices and the cost efficiencies undertaken by the companies played an extensive role in expanding margins during the quarter. The adjusted profit after tax (PAT) of the companies in Sharekhan’s universe grew by 59.3% year on year (yoy).

To see full report: AUTO EARNING REVIEW

>MARKET EARNINGS REVIEW (ICICI SECURITIES)

Margin revival but no earnings upgrade yet

Aggregate EBITDA and net income for the I-Sec universe in April-May-June ’09 (AMJ) quarter surprised positively. However, this was largely driven by significant cost control and higher other income/forex gains, with revenues being slightly lower than expectations. Thus, the sustainability of these positive surprises is not assured. Earnings upgrade can be a key positive trigger for the markets, but we continue to doubt that it will ensue in the short term – our Sensex earnings estimates remain broadly unchanged. We continue to reiterate our defensive stance on the market in the short term, given rich valuations (FY10E & FY11E P/E of 18x & 15x), uncertainty in the global macro-economic environment and potential risk still on the monsoon front.

■ Cost control, raw material benefits and other income led to positive surprise. EBITDA margin for the I-Sec universe expanded 150bps YoY (I-Sec: 160bps compression) and net income rose marginally (I-Sec: 10% decline). This was largely driven by cost control, raw material benefits and high-than-expected other income. Aggregate revenues declined 7% YoY (as against our estimates of a 3% decline).

■ Auto, IT, real estate surprise positively; banks & telecom negatively. Volume growth and raw material cost benefits aided the first YoY net income growth for auto in four quarters. IT surprised positively on volumes and margins. Real estate revenues were significantly higher than expected, but they tend to be lumpy. Banks’ margins were under pressure and asset quality was mixed. Telecom stocks faced pressure on ARPUs and MoUs. Based on AMJ ’09 results and our bottom-up view on stocks, we maintain BUY on Axis Bank, Bajaj Auto, Bharti Airtel, Glenmark, GSK Consumer, Gujarat State Petronet, HDFC, Lanco, Marico, Tata Steel, Tata Consultancy Services (TCS) and Texmaco and reiterate SELL on Bharat Petroleum Corporation (BPCL), Chambal Fertilizer, Colgate, Divi’s, DLF, Entertainment
Network India, Idea and Unitech.

■ Earnings upgrade insignificant. AMJ ’09 results have not triggered any significant revision in our Sensex EPS estimates – FY10E & FY11E estimates (unadjusted for free float) are Rs893 and Rs1,075 respectively, not even 1% higher than our estimates a month ago.

To see full report: MARKET EARNINGS REVIEW

>FUND FLOW TRACKER (MACQUARIE RESEARCH)

A flood of liquidity

Event
■ Liquidity flows remain strong across Asia and global emerging markets. The latest fund flow numbers, for the week ending 29 July, show inflows as large as at any time this year, with Asia ex Japan and global emerging markets seeing a weekly net inflow of US$1,565m and US$906 respectively.

■ Greater China funds (China, HK + Taiwan), continued to see sizeable weekly inflows for the third week in a row. Sentiment towards China clearly remains very positive, with investors looking to diversify their exposure.

■ India has also seen huge inflows recently. The election outcome in May is clearly being seen as a very positive outcome by foreign investors, as they continue to buy the market despite now unambiguously rich valuations. Indonesia also saw large inflows in the week ending 29 July, recording its largest net inflow since the data collection began in 2000. The strength of the domestic economy and the favourable political environment are two factors no doubt supporting foreign investors’ positive view of the market. Taiwan and the Philippines were the only countries to see net outflows over the week.

Outlook
■ In the near term, there is clearly the risk that more money continues to flow into Asian equity markets despite the now elevated valuations. As we highlighted in our previous note, foreign investors are not the only source of liquidity; domestic investors are also playing an important role:

⇒ Depositors are switching from time deposits into demand deposits. With the opportunity cost of liquidity low, a greater proportion of funds are moving to liquid assets (ie, demand deposits). Unsurprisingly, M1 growth has been outpacing M2 growth in most of the markets across Asia.

⇒ The low returns on alternative investments could divert more money into the equity market. With the gap between the earnings yield on equities and the deposit rate high (in favour of equities), there is the obvious potential for domestic investors to continue to re-allocate into equities.

■ With liquidity, and not fundamentals, driving markets, we advise investors to progressively reduce beta as equity prices move further away from fair value. In terms of sectors, we prefer domestic names such as banks, telecommunication and consumer plays. As for countries, we are overweight Singapore and Taiwan from a valuation perspective and also China and Indonesia for growth.

To see full report: FUND FLOW TRACKER