>PSU DISINVESTMENT – 2010 (ARM RESEARCH)

On account of global recessionary trends, India witnessed slowdown in its economy which resulted in all time high 16 – year high fiscal deficit of 6.8% which by any standard is unsustainable. The government in order to overcome economic slowdown and ensure that the economic growth process is not derailed growth during it introduced three stimulus packages which resulted in fiscal deficit of 6.8% of GDP.

Economy has started improving on account of government’s stimulus package. We expect, stimulus package would be withdrawn in a phased manner in tune with the gradual improvement of Indian economy.

It is encouraging to note that the government made its intentions clear to roll back the fiscal deficit to 5.5% from 6.8% of GDP in FY 11 and further down to 4% in FY 12. However government needs revenues to overcome these fiscal slippages and increasing the rates of indirect and direct taxes prematurely would defeat the very purpose of stimulus package. Government was left with the onerous task of maintaining a delicate balance between maintaining the growth momentum and ensuring rigorous fiscal discipline to bridge the fiscal deficit at acceptable levels within the shortest possible time span. Under the circumstances divestment of PSU’s was the only panacea to the abovementioned dilemma.

PSU Disinvestment inevitable…

The Cabinet Committee on Economic Affairs decided that the government will lower its stake in all listed public sector enterprises (PSEs) to atleast 90%. Government has already initiated this process by divesting 5% stake in companies like NHPC, Oil India which fetched ~Rs.42,600 mn. There are ~13 companies in which government stake is in excess of 90%. Disinvestment in these companies could fetch ~Rs. 280,000 mn which are shown in report

Further, disinvestment by the government would lead to significant re – rating of PSU companies. Local indices and MSCI India are on free float basis, where PSUs score poorly- e.g. PSU weightage in Nifty by Market Capitalisation is ~29%while actual weightage is only 14.7% due to low free float. As a result global fund managers may have to increase their weightage in PSUs. In general, India may have a poor perception of PSU companies but these stock’s have outperformed the Sensex over the last 1,3 and 10 years.

2010 can expect huge issuances from Government of India. As India is transiting from US$1 trn economy to US$ 2 trn, it has a digestable appetite to absorb these massive investments mainly due to its 38 % savings rate.

Companies in the PSU basket have huge cashable, monetizable assets like for eg. a land bank. Government is increasingly consenting to monetize these land banks.

PSU’s a wealth generating story in the past…
PSUs disinvestment has created value for investors in the long run. If we recall the 1st time that PSUs got listed in 1993 – 94, it was amazing to see the bargains that one got in companies like CMC, BHEL etc.

To read the full report: PSU DISINVESTMENT

>IRB INFRASTRUCTURE LIMITED (HSBC)

■ Right time, right place. Market leader IRB offers a focused play on India’s road sector at a time when highway construction is a top government priority. The company, which builds and operates toll roads, has the largest portfolio of build-operate-transfer (BOT) toll assets (1,154km across 16 projects). We estimate that IRB will record a FY09-12 earnings CAGR of c47%, driven by four contracts that the company has won in the last six months, new projects we expect IRB to be awarded over the next year, and revenue from two new toll roads.

■ Strong sector growth prospects. Given the government’s renewed focus on the building of highways, we estimate India’s road sector will generate cINR3trn (USD65bn) worth of business over the next 7-10 years. In the near term (FY09-13), this should amount to INR1.8trn (USD40bn), and we estimate IRB will capture a c6.5% share (USD2.6bn) of this highly fragmented market during this period. IRB will need to raise fresh capital to fund this growth. Its historical capital utilization record has been positive; we estimate the value of existing projects at 1.9x invested equity. Our current estimates do not factor in any dilution.

■ Attractive valuation. Our sum-of-the-parts value consists of INR138 for existing projects (DCF based), INR113 for its construction business (18x FY11e EPS), INR10 for other businesses and INR37 for future growth. IRB’s 62% earnings CAGR during FY09-11e and FY11e ROE of 20% are superior to its Chinese peers (earnings CAGR 13%, CY10e ROE 13%). Superior fundamentals justify IRB’s higher PB of 3.3x and PE of 17.8x against its Chinese peers (2.0x PB, PE 14.5x). If we factor in IRB’s impending INR12bn fund-raising, it would trade at an implied FY11e PB of 2.5x. Key risks: A sharp drop in traffic growth and an increase in interest rates.

To read the full report: IRB INFRASTRUCTURE

>AUTOMOBILE SECTOR (BRICS)

BRICS auto universe registered 69% yoy growth and 4% mom decline in vehicle sales in December 2009- commercial vehicles (up 146% yoy, 21% mom), two wheelers (up 69% yoy, down 4% mom) and passenger cars (up 58% yoy but down 6% mom). Key highlights: (1) CV sales of Tata Motors and Ashok Leyland improved 143% yoy and 165% yoy respectively, (2) Maruti’s exports rose 21% mom, (3) TVS’ motorcycle sales grew 24% yoy (first positive growth in FY10), and (4) M&M’s automotive sales grew 125 % yoy mainly on low base effect along with better performance of Scorpio and UVs.

BRICS auto universe registered 69% yoy growth and 4% mom decline in vehicle sales in December 2009. Two wheelers saw 69% yoy growth led by Bajaj Auto. While commercial vehicles grew 146% yoy led by Tata Motors (143% yoy growth), passenger car companies grew 58% yoy (6% mom decline).

Two Wheelers: The industry continued to report impressive performance and reported 69% yoy growth despite the end of festive season in October (usually November-December is lean period as most purchases are made during festive season). Bajaj Auto’s total sales was down 9% mom mainly due to lower sales in motorcycles (Pulsar sales volume at 44,518 units was lower than average 50,000 units and Discover 89,769 units v/s average 92,000 units). TVS Motor reported 24% yoy growth in motorcycle, 44% in scooters and 41% in mopeds. Industry leader Hero Honda maintained momentum and reported 74% yoy growth. We expect growth traction in two-wheelers to continue for rest of FY10.

Passenger Cars: Sales volume for Maruti Suzuki was up 51% yoy and down 3% mom, while for M&M it was up 120% yoy and 12% mom. Domestic volume for Maruti was up 37% yoy at 71,000 units, while exports were up 223% yoy and 21% mom at 13,804 units. The company said it would achieve export target of 140,000 units in FY10 (YTD 105,535 units). Tata Motors posted growth of 48% yoy in volumes but down 30% mom at 15,239 units.

Commercial Vehicles: Commercial vehicle sales volume reported 146% yoy and 14% mom growth. Ashok Leyland (165% yoy growth) outpaced Tata Motors (143% yoy growth). We expect CV sales growth to remain robust in Q4FY10, led by improving industrial production.

M&M and Bajaj Auto preferred bets
We expect auto sales to continue to grow over FY09-11 driven by rising income, easy access to financing, and higher industrial production. We prefer exposure in M&M and Bajaj Auto in the auto space as they are likely to be biggest beneficiaries of growth in India's consumption. M&M is our preferred bet - we value M&M's core business at Rs910/share and subsidiaries and other investments at Rs443/share (after applying 20% holding company discount) and expect RoCE of 20% in FY10 and 19% in FY11. We have a BUY on Bajaj Auto - expect 22% CAGR in sales volume (likely to regain some domestic market share lost in FY08 and FY09), 12% revenue CAGR and 64% earnings CAGR over FY09-11, and RoCE at 35% in FY11 v/s 31% in FY09. The stock trades at 17x FY10E and 15x FY11E, which is attractive. We expect Bajaj Auto to trade at premium to Hero Honda (15x FY11E) as it is expected to deliver higher earnings growth.

To read the full report: AUTOMOBILE SECTOR

>MANGALAM CEMENT LIMITED (ANAGRAM)

To read the full report: MANGALAM CEMENT