>CAPITAL GOODS - POWER'FUL' AGENDA (TATA SECURITIES)

Power generation space would continue to offer significant opportunities to equipment manufacturers for the next few years as the country grapples to manage the huge peaking shortages that is currently faced. We believe the ever-increasing electricity consumption also requires a quantum jump in power generation capacities. Apart from the huge market opportunity, the consistent order flows along with the superior return ratios enjoyed by the equipment companies, make the power generation space one of the most attractive segments in the capital goods industry, in our view. The Central Electricity Authority’s (CEA) planned capacity addition target for the XIIth Five Year Plan translates to a market opportunity of Rs4-4.5tn (about US$100bn), which we expect can materialise over the next three to four years.

Key investment highlights
■ To contain the peaking shortages and to meet the incremental demand, CEA has targeted a capacity addition of 1,00,000 MW in the XIIth Five Year Plan, a growth of 27%. We believe the plan targets would continue to increase going forward. The shelf of the projects planned for the XIIth Five Year Plan stands strong at 1,38,000 MW.

■ Private sector utilities are expected to account for around 50% of the capacity additions in the XIIth Five Year Plan. With private sector utilities’ better execution capabilities, a better visibility exists for equipment companies, as more projects would take off.

■ Power plants based on supercritical technology are expected to dominate the capacity addition plans in the XIIth and the XIIIth Five Year Plan. Hence, in our view, companies with technological tie-ups and faster indigenisation in manufacturing over the next two to three years would have an edge.

■ Going by the past trend, equipments order for projects related to a five year plan are placed one to two years ahead of the beginning of the plan period. Of the shelf of 1,38,000 MW for the XIIth Five Year Plan, orders for around 43,000 MW have been placed, while orders for the balance equipments are expected to be placed in the near to medium term.

■ We expect this to translate into robust growth for the power generation equipment companies and drive a strong growth in their order book, revenues and profits. We are positive on the industry and initiate coverage with an Overweight rating on the sector and a Buy recommendation for BHEL, BGR Energy and Thermax.

To read the full report: CAPITAL GOODS

>IRON ORE - 'TURNING GOLD' (INDIA INFOLINE)

■ Chinese iron ore spot prices above US$150/ton
■ Contract prices cross US$100/ton
■ Upgrade target price on higher iron ore realizations; however valuations remain a concern.

To read the full report: IRON ORE

>The recovery continues while uncertainties still linger...

■ The economic climate seems to be stabilising. In developed countries a partial recovery is currently underway. This is a recovery because indicators show that growth has resumed and probably on a lasting basis. But its partial characteristics can be seen in several areas: bank lending has not yet recovered and consumer spending and construction investment are
lacklustre. In emerging countries the prospects are more flattering. GDP growth is forecast to run at around 6% this year and next. For most of these countries inflation is under control, policymakers seek to tighten monetary settings in line with price trends and government budgets are in relatively good shape—all in all, a reassuring and attractive picture.

■ Our favourable outlook will not prevent the business community from remaining a little cautious. The feeling of lack a of clarity will not disappear easily. There are three main reasons. The crisis has taught us that the market did not always know better than everyone else. This means that a sharp rise in asset prices would not necessarily lead to a greater preference for spending at the expense of saving. However, it is feared that the contrary (falling asset prices) would lead to a net loss of confidence and a downward revision of purchasing intentions

■ Uncertainty over the political/regulatory landscape is dampening ’animal spirits’ that often animate business investment decisions. For example, the financial services sector still does not know what lies ahead in terms of regulatory reform and that will affect its profitability. Other sectors are also confronted by the same kind of uncertainty. For example, in the US firms face uncertainty over how much they will pay for their employees’ health care costs given recent health care reform measures.

■ The post-crisis period will demand a great deal from economic policy. In developed countries, the aim is to simultaneously normalise the very accommodative monetary policy stance that the crisis forced upon us and to nurture economic growth that will initially be on the weak side. In emerging countries the aim is to stop markets spinning out of control and to consolidate the culture of stability that has gradually grown up over the past decade. Much is at stake, and knotty questions will be raised, as to the timetable (when to swing into action?), the preferred tools and the degree to which they should be applied. The markets will be attentive to the credibility and expected effectiveness of the measures undertaken.

To read the full report: MACRO PROSPECTS

>RELIANCE INDUSTRIES:better days ahead (NOMURA)

■ Dawn replacing darkness — better days ahead
In our note, Increased darkness before dawn? on 27 November, 2009, we highlighted that RIL’s offer to acquire LyondellBasell (LB) added to near-term uncertainties. Refining margins were also among the lowest then. Reliance is now nearly out of the LB race. Refining margins have sharply improved from lows in 4Q09. The Supreme Court verdict on the long pending gas litigation is expected soon. The period of darkness is abating, in our view.

■ Focus to shift on earnings growth in FY11F
Despite the large base, we expect RIL’s earnings to grow 44% in FY11F (consensus is marginally lower at 39%). Growth will be driven by refining (the new refinery will see its first full year of operations and margins have recovered sharply) and exploration and production (KGD6 gas volumes will reach initial peaks in 2H FY11F).

■ Large E&P upsides remain
With the group focused on KG-D6 (both development and litigation), there has been relatively less exploration effort in other blocks and little news flow on RIL’s plans for its large inventory of discoveries. Exploration is scaling up and after the Supreme Court ruling the company could surprise with more concrete plans for other KG-D6 discoveries and other discovered blocks, in our view.

■ Upgrade to BUY with price target of INR1,275
We have rolled forward valuations to end-FY12F. Valuations for core refining, petrochemical and currently producing E&P assets (PMT, KG-D6) are largely unchanged. We are more optimistic than ever on E&P upside and assign a significantly higher value of INR421 (earlier INR167) for other discovered blocks and exploration upsides.

To read the full report: RIL