>AUTOMOBILE SECTOR: Tractor demand - more stable than Cars / M & HCVs trucks

There have been rising concerns on the sustainability of tractor demand owing to certain adverse developments and the strong performance of the tractor segment over the last few years (17% CAGR during FY08-11 and 20% YTDFY 12)


Recent adverse developments like (1) declining Agri term of trade (ATOT)(2) lack of buying support by FCI, resulting in produce being sold below MSPs and (3) slowdownin agri credit/rising NPAs (of PSU banks) have raised concerns over cash flows of the farmers


Some of these concerns are overdone, while others are still nascent. If these concerns materialize, then there can be pressure on tractor demand in the short term. However, this would be a temporary blip as structurally, demand continues to be on an upswing and it is nowhere near its peak. Our confidence stems from a number of indicators highlighted below

• Indian tractor industry is more than stable Card/M&HCVs. Since 1973, the tractor industry has registered a CAGR of 8.6%.

• While India's tractor penetration at 19 per 1000 hectares appers reasonable, we believe it is misleading. Penetration per 1000 agricultural people is a better indicator. At 5 per 1000, India's tractor penetration is among the lowest. 

• Across the globe, there has been a sharp reduction in population relying on agriculture as a source of income.

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RISH TRADER

A DECLINING RUPEE HURTS SOME INDIAN COMPANIES MORE THAN OTHERS (MOODY'S)

State-Run Indian Oil Corporation (IOC) at Most Risk If Gov’t Subsidies Fall Short

Adverse impact of weaker currency varies for issuers. The severity of the weakening Indian rupee (INR) on Indian corporate issuers ranges from high but potentially recoverable for Indian Oil Corporation (IOC, Baa3 stable) to low for regulated utilities and export-oriented companies, which benefit, respectively, from an automatic pass-through of higher costs and from exports that have now become more competitively priced. For others, such as the Tata Group companies, offshore operations may accentuate or mitigate the impact of a depreciated local currency.

India’s dependence on energy imports raises credit risk for oil marketers. Depreciating local currencies can help export-oriented emerging markets. However, India’s persistently high inflation and dependence on energy imports of oil, gas, and increasingly coal, provide limited leeway for its regulated, import-dependent sectors to cope with higher import bills caused by a weakened currency. A failure by the Indian government to fully compensate such rising costs at state-owned IOC would put the oil-marketing company’s finances at risk.

Ratio of net imports/EBITDA is more damaging than share of forex debt to total. At 8x, IOC stands out as having by far the highest ratio of net imports to EBITDA of all rated issuers, which makes the company vulnerable to a declining local currency by magnifying its impact on profitability. Exposure to debt denominated in foreign exchange (forex) does not have a similar, magnifying effect on debt or interest costs.

Most forex bond debt for Indian corporate issuers does not come due until 2014 or later. Eleven major issuers have little near-term exposure to maturing forex bonds. However, some issuers, including IOC, will need to refinance their short term foreign currency bank debt in the next 12 months, which may get challenging if Europe’s credit crunch reaches Asia and causes spreads to widen or curtails lending.

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>SIYARAM SILK MILLS LIMITED: Result Update: Q2 FY 12

Siyaram Silk Mills Ltd. (Siyaram’s) is one of the most renowned vertically integrated textile companies in the country.

During the quarter ended, the robust growth of Net Profit is increased by 16.93% to Rs.169.80

million.

The company offers yarns, fabric, home textiles and apparels in the Indian and global markets.

Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 31% over 2010 to 2013E respectively.

The company has wide range of latest machinery in its eco-friendly plants at Tarapur, Daman and Mumbai.

The Siyaram’s brand retails in over 40000 outlets all over the country.

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>BHEL LIMITED: a healthy order book of At the end of Q2 FY12, of INR 1,61000 crores

■ In a sweet spot due to structural deficit

Power sector plays a crucial role in the economic progress of the country given the importance of electricity in the economic activity. Currently, at the end of August 2011, the power generation capacity stood at 176,990.40 MW including the renewable energy sources such as wind, solar etc. However the country faces a peak power shortage of 13 percent as rising demand from industry, homes and shopping malls outstrips capacity growth. The energy-hungry nation needs to add over 75,000 megawatts in the five years to March 2017 to support its target of 9 percent GDP growth

■ Mammoth orders in book

Though the order inflow is muted during the year under review, BHEL has an outstanding order book of Rs. 1, 61,000 Crore as on September 2011, which comes at 3.30 times FY12E revenue, gives a clear revenue visibility for the next three years, coupled with strong execution capabilities. The company is also looking to get into agreements with many State Governments and other organizations which clearly signify the company‟s prospect for the next 3-4 years.

■ Minimal debt and cash rich company

Bhel is a low leveraged company having only 1% debt in the total financing coupled with a huge cash reserve of Rs.9000 crore, with which the company could withstand the effects of higher interest rate prevailing in the economy and finance the projects with much ease

■ Outlook and Valuations: Attractive; Initiate Coverage with ‘BUY’

Our DCF model with 15.3% discount rate values the company at Rs.400 per share giving an upside of 53.8% from the current level of Rs.260. We initiate coverage with a „BUY‟ recommendation for a target price of Rs.400. Those with a moderate to aggressive risk appetite can consider investing in BHEL at current level.

■ Risks

At the macro level, the current global economic scenario presents the most highly risk factor as any fall of the global economy into a double-dip recession can lead to a slower growth in our economy. Apart from that, the other concerns include the possibility for unusual further surge in the prices of commodities such as copper and steel, competition from the overseas players, persistence of the higher interest rate and higher coal prices causing delaying of projects etc. We expect all these concerns to ease in the medium term, which would otherwise impact the prospects of the company.

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