>MARUTI SUZUKI- Domestic Growth Trajectory Improves (CITI)

Buy: Aug09 – Domestic Growth Trajectory Improves

■ What's New? — MSIL reported solid domestic sales growth over the month (+29% y/y, substantially above expectations) driven by the A2 segment (+c39% Y/Y) and the A3 segment, which continued its solid growth streak – up 44% y/y, though MoM sales reported a decline.

■ Domestic Volumes Guidance Revised Upwards for FY10 — to 10%, from earlier guidance of 5%. Management notes that both footfalls to showrooms and customer inquiries remain healthy. We factor 10% for FY10 but believe there are upside risks to these estimates.

■ Model Mix Continues to Improve — The model/revenue mix is increasingly tilted toward fresher/younger products. Management noted that while models < 5 years are now just < 40% of volumes, from a revenue perspective these account for 60-67% of revenues, underscoring that the realisation mix continues to improve.

■ Exports strong, but growth rate not sustainable — The growth this month is accentuated by a low base. Management also noted that export volumes are being stimulated by the fiscal incentives in Europe – the probability of volume growth decelerating from this monthly trend rate is somewhat low.

■ Mixed Impact of Festive Seasons — Growth in the domestic market is also slightly accentuated because in Aug08, the period of 'Shraddh' had occurred – a period when buyers typically eschew purchases. This year, Shraadh will occur in the month of Sept, but mgmt doesn’t expect it to impact volume growth as it will be offset by the "Navraatra" festival, an auspicious period when buying revives. Maintain Buy (1L).

To see full report: MARUTI SUZUKI

>RATNAMANI METALS - AN EXCELLENT PROXY (ENAM)

An excellent proxy for India’s strengthening capex cycle

Ratnamani is India’s largest manufacturer of stainless steel pipes and tubes and is a preferred supplier of various EPC contractors (like L&T, BHEL), fabricators and engineering consultants
worldwide. It also has a SAW pipe division which caters to the requirements of the oil and gas transmission industry.

Investment argument
■ India’s market leader in the stainless steel tubes and pipes industry characterised by high value add and superior ROCE’s Ratnamani is India’s largest and a globally recognised company
in the high margin stainless steel tubing business which is a niche segment with few players across the globe.

■ Revenues linked to a diverse range of industries with different capex cycles. Contrary to the perception of being a small SAW pipe manufacturer catering to just the oil and gas sector, Ratnamani is actually a supplier of critical components to oil and gas refineries, petrochemicals and power generation sectors which have huge capex projects lined up for execution.

■ Carbon pipe segment to add to the growth with a renewed vigour. Having received all the API approvals for its SAW pipe manufacturing facilities and capability to produce pipes of varied dia’s, Ratnamani now plans to aggressively bid for big ticket pipe tenders floated by GAIL and other players.

■ Despite Ratnamani’s subdued revenue visibility in the near term (order book of Rs 350 cr) we believe that the large order book’s of EPC contractors (executing the power and hydrocarbon
related projects) gives us the necessary confidence that the order inflow will increase with the execution cycle.

Risk factors
■ Slowdown in the capex in user industries and margin pressure on account of increased competition.

Valuation
Ratnamani is a niche player with superior ROCE’s, high free cash flows (consistently +ve cash flow from operations) and a high scalability potential. With capex on thermal power projects about to take off in a big way and refinery capex activity gradually picking up (huge projects lined up), Ratnamani is expected to benefit from the derived demand for its products. We believe that once the execution of these large projects gathers momentum, Ratnamani will see a massive order inflow and earnings growth. At current valuations, the company offers an extremely favourable risk-reward proposition and we recommend BUY on Ratnamani with a price target of Rs 148

To see full report: RATNAMANI METALS

>RANBAXY LABORATORIES - TAMIFLU (GOLDMAN SACHS)

Gov’t Tamiflu orders much ado about nothing; reiterate Conv Sell

News
The Indian government, which had a stockpile of 10mn Tamiflu capsules, has exhausted 75% of its stockpile and is looking to raise its stockpile by further 20mn capsules, according to media reports (Economic Times, Aug 11). Of these, Hetero Pharma is reported to be supplying half of the order (10mn units), while the remainder is being sourced from various suppliers. One of the suppliers cited is Ranbaxy, which according to a Sep 2 Bloomberg report has secured an order to
supply 900,000 units to the government.

Analysis
Per an Aug 22 report in the Economic Times, the government’s price for these orders is Rs270 -Rs275 per 10 capsules, or Rs27 per Tamiflu capsule. We note that this equates to Rs24.3mn in terms of incremental revenue upside for Ranbaxy based on the reported order for 900,000 units. This translates to US$0.5mn (0.03% of our 2009 sales est) for Ranbaxy, which we view as inconsequential. However, in the unlikely event the government permits retail sales of a generic version of Tamiflu, we believe this may provide significant upside potential to Ranbaxy. Ranbaxy’s superior distribution network and marketing strength in India could lead to greater market share and higher sales volumes, command a higher retail selling price, and generate improved margins. To date, there has been no concerted effort to allow retail sales of a generic version of Tamiflu, on concerns that the drug could either be hoarded or used indiscriminately, which could lead to the H1N1 virus developing resistance to the drug.

Implications
Ranbaxy has outperformed the broader market by 20% (up 23.4% vs. BSE Sensex’s +3.5%) since Aug 10, when the government’s order for 20mn units was announced. We believe Ranbaxy’s share price movement has been driven in part by news flow surrounding the company’s ability to supply Tamiflu to the government. Even if Ranbaxy secures these orders, the incremental upside won’t justify the recent price movement, in our view. We reiterate Sell (on Conviction Sell list) on Ranbaxy and maintain our Director’s Cut-based 12-m TP at Rs196.

Key upside risk: Resolution of the USFDA issue.

To see full report: RANBAXY LABORATORIES

>OIL AND NATURAL GAS CORPORATION LTD (INDIABULLS)

Mixed results, lower sales compensated by lower subsidy burden

Oil and Natural Gas Corporation Ltd.'s (ONGC's) net sales were down 25.8% yoy to Rs.148.8 bn in Q1’10, on account of a drop in production volumes, lower price realisations (USD 58 per barrel vs. USD 69 per barrel in Q1’09), and the discontinuation of the trading of MRPL products since April 2009. However, the EBITDA margin stood at 64.3%, improving by 567 bps yoy due to lower subsidy burden, which was down 95.6% yoy to Rs. 4.3 bn. Also, employee costs were down 13% yoy to Rs. 2.5 bn. Net profit, however, declined 26.5% to Rs. 48.5 bn, mainly due to an increase in DD&A expenses related to the cost of two dry wells written-off in the KG offshore basin.

Proposed subsidy-sharing formula provides relief – The Secretary of Petroleum recently announced that under-recoveries on the sale of domestic LPG and kerosene will be borne by the Government. This has brought enough reasons to cheer for upstream companies such as ONGC.
At current exchange rates and crude oil prices hovering at around USD 70 per barrel, Oil Marketing Companies (OMCs) are expected to incur around Rs. 300 bn of under-recoveries on the sale of LPG and kerosene.

Delay in production, cause for concern – Three platforms that were to come up in fiscal FY09 were delayed and the delay continued into the first quarter as well, leading to a decline in the expected production. Though production from one of the projects, C-Series, is likely to start soon, the other two platforms may be delayed further.

To see full report: ONGC