>CONSTRUCTION SECTOR (GOLDMAN SACHS)

What's changed: Over the last few weeks, the government has announced and proposed for discussion a number of policy initiatives that are aimed at making road projects more attractive for contractors (Ex 1). Our analysis of these proposals suggests that the biggest impact of these initiatives would be in increasing the pace of land acquisition for new projects, and for clearing ownership and exit clauses for the developers, both of which have been major constraints to the execution of road projects in India. In tandem with these policy actions, there has also been an increase in the pace of execution of the National Highway projects, with the avg. per day Km addition even over the traditionally slower monsoon period June–Aug 2009 increasing to 8Kms from the 5Km per day seen over 2008.

Implications: IRB and IVRCL are our preferred picks for exposure to the Road Infrastructure segment. On the back of the above policy actions, we expect a significant increase in both the number of projects put up for bidding (NHAI targeting $20bn in the next 12 months) and also an increase in participation by both Indian and foreign contractors.

Policy reforms in place, strong orders likely next 3m; Buy IRB, IVRCL

Despite the increase in competition, we expect IRB to maintain its market share (about 8%) – driven by its strong execution track record and strong cash flow generation from existing assets. On Oct 14 2009, NHAI announced the award of the Jaipur-Deoli road project (146.3km, $300 mn) to the company, strengthening our view of continued awards for IRB.

We estimate that IRB’s free cash flow generation over the next two years positions it to add about $1bn of new projects (70:30 debt: equity) without any equity dilution. We expect an EPS CAGR of 64% over FY09-11E and value the stock at Rs289, implying 16% upside from the current level.

Valuation: IRB and IVRCL currently trade at FY11E PE of 17.4X and 13.5X vs historical median 12–mo fwd PE of 13.8X (since listing in Feb 08) and 14.8X (5-yr) respectively. We consider these multiples reasonable, given our outlook of strong growth and expanding returns over the next 12-18 months.

Risks: 1) Lower traffic growth; 2) Volatile interest rates and raw material costs.

To see the full report: CONSTRUCTION SECTOR

>SET TO SOAR: INDUSIND BANK (IDFC SSKI)

At IndusInd Bank (IndusInd), an era of renewed vigour has been ushered in, engineered by a new management. The past six quarters symbolize a marked improvement in IndusInd’s operating metrics, as evident in a 140bp expansion in NIM to 2.9% in Q2FY10, 5.5% increase in CASA ratio to 21.2% and steep drop in C/I ratio – all converging into an impressive RoA expansion of 80bp to 1.1%. With focus on fortifying the liability profile and adding fee based revenue streams, we expect the bank to exhibit a 66% CAGR in earnings over FY09-11. Led by RoA expansion to ~1.15% by FY11E, we see a strong case for re-rating of the stock on market cap to assets metric, where it lags peers by 40-50%. We expect the stock to outperform the 20% CAGR in assets estimated over FY09-11. Current valuations of 2.4x FY11E adjusted book offer an attractive entry point. Initiating coverage with Outperformer.

A turnaround…: The management’s enhanced strategic clarity and execution capabilities are reflected in consistent uptick in the bank’s operating metrics for the last six quarters. Shrugging off past tribulations, IndusInd now has streamlined systems and processes to grow ahead of the industry average. Network expansion, improvement in CASA & retail deposit share, traction in fee income and stable provisioning requirements are expected to converge into margin expansion (~115bp over FY09-11E) and strong earnings growth in the near term.

…and subsequently a high growth trajectory…: A stronger liability franchise and expanding footprint would drive rapid growth in the bank’s loan book. Well entrenched in the CV financing industry, IndusInd would also benefit from receding competition. The bank is equipped to gain market share, and derive operating leverage from better productivity of the existing network.

…make a case for stock’s re-rating: Growth momentum would gather pace and correction in asset-liability pricing is expected to ease the pressure on margins. Driven by a 66% CAGR in earnings over FY09-11E, we expect IndusInd’s RoA to increase from 0.58% in FY09 to ~1.15% by FY11. Current valuations of 2.7x FY10E and 2.4x FY11E adjusted book appear attractive in view of the strong earnings growth and improving return ratios. With substantial RoA expansion in the offing, we expect the stock to be rerated on the market cap to assets parameter, where it lags peers by 40-50%.

To see the full report: INDUSIND BANK

>RALLIS INDIA LIMITED (SMC)

2Q FY 2010 results: Rallis India Ltd. (Rallis) 2Q FY 10 net sales were in line with our estimates, while profitability was above our estimates. The company reported robust growth in net sales despite deficient monsoons and decline in product prices. The company's net sales growth was driven by strong domestic volumes growth on account of realignment of product mix. However, decline in realizations coupled with poor demand internationally muted the margin growth.

Outlook and valuations: Despite a tough environment during 2Q FY 10, Rallis reported better-than-expected results on account of proactive management and focus on cost reduction. Looking ahead, the early October rains have been heavy in many areas in the country which has resulted in increase in reservoir levels in India. This is expected to benefit Rallis as it will result in higher sales of pesticides during rabi season. Hence, we have revised our FY 2010 net sales and profitability estimates upwards. Over the long-to-medium term, we expect Rallis' revenue growth to be driven by its International business and domestic volume growth. Margins are expected to improve given that Rallis continues to optimize its cost structure coupled with declining input costs. Rallis also has significant excess land bank. As a part of ongoing restructuring programme, the company may sell some of its non-core assets which may pose an upside risk upside to our target price estimate.

At the current market price of Rs. 975, the stock is currently trading at 10.2x FY 11E EPS of Rs. 95.18. We maintain our positive outlook on the stock and maintain a BUY. Using the discounted cash flow-based model, we derive a target price of Rs. 1,195.

Financial highlights:
■ Net sales grew 13.2% y-o-y in 2Q FY 10 on the back of strong domestic volumes growth. The company recorded increase in net sales despite deficient & erratic monsoon, low pest incidence and poor international demand. Timely and proactive realignment of product portfolio drove its domestic volume growth. Pre-monsoon (March-May 2009) rains were deficient by 29%, and hence kharif acreage was lower by 6-7%. Export business was a drag during 2Q FY 10 as realizations declined on the back of high inventory levels internationally.

■ EBITDA margins declined 174 bps y-o-y mainly due to decline in realizations in domestic as well as international markets.

■ PAT (excluding extra-ordinary items) declined 2.0% y-o-y.

Key updates:
■ The company redeemed preference share capital of Rs. 880 mn during 2Q FY 10. Rallis aims to raise approximately Rs. 900 mn via share sale to upto 98 mn on a preferential basis to Tata Chemicals Limited.

■ The company has launched a fungicide ERGON, which not only protects the crop but also enhances the yield. The company will have three years of exclusivity for ERGON as it has registered it earlier than others in India. The company expects significant contribution from ERGON over the medium term.

■ The company expects Dahej plant to be operational from June 2010. The company continues to target Rs. 5,000 mn of net sales from this plant over the next three years.

■ The company has appointed a professional who is working on a long-term business development plans for Rallis.

Valuation: At the current market price of Rs. 975, the stock is currently trading at 10.3x FY 11E EPS of Rs. 95.18. Using the DCF valuation method, our revised target price is Rs. 1,195 per share for the Rallis common stock.

To see the full report: RALLIS INDIA

>INDUSTRIAL ANALYSIS ON PERFORMANCE OF STOCK EXCHANGE

CONTENTS

1. INTRODUCTION
2. HISTORY OF STOCK EXCHANGE
3. STOCK MARKET ANALYSIS
4. PERFORMANCE OF STOCK EXCHANGE
5. COMPARISON AMONG VARIOUS INDUSTRIES
6. COMPARISON OF GDP AND INFLATION TOWARDS INDUSTRY
7. GOVERNMENT CONTROL OVER INDUSTRIES
8. COMPENSATION PACKAGE IN INDUSTRIES
9. TRAINING AND DEVELOPMENT IN THE INDUSTRY

To see the full report: STOCK EXCHANGE