>TATA STEEL LIMITED (ANTIQUE)

C(h)orus getting stronger

Corus turnaround in 2HFY10
Utilization rates at Corus has picked up from 53% in 1QFY10 to >65% in 2Q driven by restocking demand. Improving economic conditions and seasonal factors will enable Corus to achieve ~80% utilization rates in 4QFY10. Increased fixed cost recovery due to improving utilization and beneficial impact of sliding raw material cost is expected to boost gross contribution by ~USD150/t from 3QFY10 onwards. Realisations in Europe have increased by USD60-70/t in the past few weeks and would positively impact EBIDTA in 3QFY10 onwards.

Its Teesside Cast Products (TCP) facility, though operating at low is breaking even at current slab prices. However, the viability of this facility is still questionable in current environment.

Expansion at domestic operations on track
Tata Steel India (TSI) 2.9mt expansion plan is on track to be commissioned in 2010, and would aid earnings expansion in coming years. Its EBITDA/t of USD258/t for 1QFY10, is expected to improve by USD20-25/t over the next two quarters, as benefits of low cost coking coal flow in. Performance will also be positively impacted from the ferro alloys division due to the sharp uptick in realisations.

Valuation
Strong cost savings initiatives and bouyant steel outlook in Europe should trigger gradual earnings improvement at Corus and should impact earnings positively from 3Q onwards. Efforts are on to generate USD75-100/t of EBITDA at Corus even in a depressed price regime. This, along with strong domestic earnings aided by increase in scale and upsurge in ferro alloys realisations make for a strong case for earnings expansion over the next two years. We thus have revised our target price to INR551 (from earlier INR501), and recommend a BUY.

To see full report: TATA STEEL LIMITED

>INDIA STRATEGY (MORGAN STANLEY)

Hedge the Risk: Buy Energy

■ To say crude oil prices are important to India’s macro is an understatement. After all, oil prices affect inflation, private consumption, growth, external balances, liquidity, and the fiscal deficit. Our estimates indicate that every US$5/bbl increase in oil prices above US$57/bbl increases the fuel oil subsidy in India by US$3 billion (0.25% of GDP) if domestic fuel prices are unchanged. However, the impact on equity prices depends on the state of capital flows. If flows are strong, Indian equities can overcome rising oil prices (i.e., they correlate positively with crude oil prices as we have seen in recent months). However, if flows weaken, rising oil prices can derail the markets (correlation becomes negative like in 2Q2008). A sudden spike up in oil prices is what investors need to worry about, in our view, especially if it comes with a slowdown in capital flows.

■ That said, the longer-term situation with crude oil is getting better for India. Indeed, we forecast that India’s net crude oil import bill will remain at US$100-130 billion. That is, we see oil imports declining as a percentage of GDP from 4.2% in F2009 to 3.9% in F2013, despite a rise in demand. This is due to the shift to gas, rising domestic production as well as rising exports from refineries. Rising gas output has other positive macro implications – increased infrastructure investments, lower fiscal deficit, and higher productivity due to lower energy costs.

■ The most critical factors influencing the energy sector’s price performance seem to be industrial growth and the short bond yield. Given our positive view on industrial growth going into 2010, the sector’s absolute performance is likely to continue for the coming months. Likewise, rising rates will favor the sector’s performance.

■ Valuations and earnings look to be in good shape for the sector as well. Valuations are around historical averages whereas earnings revisions have been leading the market for the past three months.

■ Technical factors also favor the sector. Most important, the sector’s six-month trailing relative performance is at a level from where it usually rallies versus the market.

■ Our global commodities team recently highlighted improving near-term fundamentals in the oil market. Jonathan Garner has turned significantly bullish on the energy sector in both his EM and APXJ model portfolios. Our European strategy team has made Energy the biggest overweight. The Indian Energy sector correlates strongly with EM Energy, and hence these positive views are important. We recommend investors overweight Energy to hedge against the ill effects of a sudden spike in crude oil prices on Indian equities.

■ Our top pick in the energy sector is Reliance Industries (RELI.BO, Rs2,101). The stock has underperformed the market and we believe that a lot of bad news is in the price. At 11.6x F2011 earnings, we find the stock attractively valued. We are also adding Cairn India (CAIL.BO, Rs262) to our Focus List. Cairn India is a direct play on crude oil prices, which our global commodities team believes are likely to rise. Cairn has underperformed the market year to date. We are funding this change by removing ONGC (ONGC.BO, Rs1,161) which has been a stellar performer.

To see full report: INDIA STRATEGY

>INDIA SUGAR (MORGAN STANLEY)

Re-engaging on Better Cycle Visibility – BRCM is Top Pick

India will likely require another ~5mn tons of raw sugar imports in F10: Poor monsoons in the key sugarcane growing area in India will likely limit the F2010 sugar production to ~16 mn tons. This coupled with an opening inventory of around 6 mn tons and consumption of around 22 mn tons means that India will need to import ~5 mn tons in F10 (for refining in F11) in addition to the ~5 mn tons imported in F09. A combination of better cycle visibility, higher cane availability in F11, the continuing raw sugar refining opportunity and absence of government intervention to control sugar pricing drives our industry view upgrade. Given the recent underperformance of North Indian millers, Balrampur Chini (OW) is our top sector pick.

Why the government is unlikely to intervene: Our channel checks suggest that the government will look at controlling the sugar price for only ~6 mn tons of retail consumption. Prices for the remaining ~16 mn tons of wholesale consumption will likely be market determined. The government proposal to increase the levy quota from 10% to 20% is a step to protect the interest of retail consumers of sugar, we believe. This move while positive for sugar millers (it cuts out uncertainty of incremental government intervention) will impact near term sugar consumption adversely, in our view.

Where we differ: 1) The government will likely differentiate between retail and wholesale sugar consumers, thereby reducing risk of ad hoc policy changes to control prices. 2) Domestic sugar realizations will likely continue to trend higher in-line with international parity prices. Sugar prices will likely peak in F11. 3) Sugar refining should continue to drive overall earnings in F11, albeit at lower margins. 4) India is unlikely to be a structural importer of sugar; high cane procurement prices will likely incentivize planting, driving capacity utilization and higher operating leverage in F11.

To see full report: INDIA SUGAR

>RELIANCE COMMUNICATIONS (NOMURA)

MONETISING SCALE

■ Upside from new tower deals
We have increased forecast revenue / EBITDA over the next three years by 5-8% to account for recent tower deals, and higher incremental external tenancies of ~0.5x (to give total external
tenancies of ~1.0x). RCOM is well positioned to be able to offer end-to-end services (backhaul / network management), and is perhaps being more aggressive and offering greater discounts /
incentives on these deals. We assume EBITDA margins of 52-55%, with monthly revenue / tenant / tower of ~INR30k, as there are still uncertainties on the survivability of some new-comers. We derive an EV of US$7bn for the towers (INR77/share).

■ More clarity on normalised numbers
We have adjusted FY09 numbers for one-time non-operating gains / losses, provisions, write-offs etc, after the release of the annual report. We estimate underlying NPAT of INR38bn, vs the INR59bn reported, representing a 11% y-y fall. This also adjusts for one-time investment
income from the sale of a 5% stake in the tower business in FY08.

■ Competitive intensity remains unchanged
Our recent discussions with the company suggest: a) the operating environment remains competitive; b) RCOM is holding its position, with monthly net adds of 2-2.3mn; and c) the revenue outlook is for mid-single digit growth in the upcoming quarter, we believe. Aggressive promotions by new carriers have kept a lid on net add growth for incumbents. With Telenor and Etisalat now making headway with their service launches, pricing has yet to hit bottom. The company’s early repayment of debt is also encouraging; along with continued improvement in wireless business and progress on listing the tower business, this could be another catalyst for the stock.

To see full report: RELIANCE COMMUNICATIONS