>FMCG Sector (MOTILAL OSWAL)

Downtrading evident in detergents, toilet soaps and tea: Cost cutting is not limited to MNCs in cities. Rural consumers are doing their bit in an environment of contracting wallet sizes. They are exercising restraint not only with relatively big-ticket purchases such as consumer durables, house repair/improvement, and apparel, but also with daily purchases like food and FMCG. Our interactions with consumers and the trade indicate that in the last couple of months, there has been sharp downtrading in detergents, soaps and tea. Consumers have shifted not only to discount brands of large players but also to unorganized and regional brands.

Gains from higher crop prices, farm loan waiver not percolating to needy farmers: We dug further into the reasons for the underlying consumption sentiment. Villagers had a story to tell. Farm output has been impacted in a few crops (cotton, sugarcane, pulses and vegetables) on account of untimely monsoons and poor seeds; consequently, the benefits of price increases have not accrued to the large section of the farming community. Moreover, small and marginal farmers have not benefited from farm loan waiver, as they mostly borrow from local money lenders. However, we caution that the Marathwada region may not be representative, as farm output has declined due to untimely rains.

Non-farm rural economy has started feeling the pinch: We were told that nearly 30% of the rural workforce is employed in non-farm areas and they bring about 50% of income to each household. Slowdown in sectors like construction/infrastructure, BPO, services (transportation/trade) has started impacting the non-farm rural economy. This is reflected in the sharp decline in the number of daily commuters from villages to nearby towns for employment.

Unorganized/regional players gain market share: Our interactions with wholesalers, retailers and hawkers (in haats/melas) indicated that unorganized/regional players have gained market share due to (1) downtrading by consumers, and (2) increased push by retailers on account of higher trade margins and longer credit period.

Outlook and view: Losing market share to unorganized players does not augur well for FMCG majors. We believe this could well be the scenario in the rest of the country, reflected by the fact that the overall FMCG industry has grown at a faster rate than our FMCG universe in 4QCY08.

To see full report: FMCG SECTOR

>DLF Limited (INDIABULLS)

Battling the slowdown: DLF’s net sales for Q3’09 plunged 62.0% yoy due to a slump in property demand and a correction in property prices. This coupled with increased interest cost burden impacted the net profit, which fell 68.7% yoy. Sales volume unlikely to pick up substantially in the near-term: We believe that the current slowdown in the real estate sector is yet to bottom out and the pricing pressure should further intensify in Q4’09. We expect the property demand to remain weak at least over the next 2-3 quarters as expectations of a further fall in prices, worsening economic environment, and low loan-to-value ratios, are keeping the potential buyers away from entering the property market. Despite a 15%–20% decline in realty prices across segments in the last few months (discounts offered are higher in certain new launches) and a cut in interest rates, the sales volume has failed to pick-up, indicating a wait-and-watch approach being followed by the potential buyers.

Slowdown to have an extended effect on profitability: We believe that the expected decline in property prices/rental rates will drag DLF’s margin considerably downwards even after considering a reduction in construction costs. Moreover, the shift in the Company’s strategy towards low-margined middle income segment should negatively affect margins over the longer term. DLF is also delaying certain projects and changing current debt profile of short-term loans to long-term, which would increase the carrying cost of capital and thus impact net margins negatively.

Valuation: Our revised NAV–based fair value estimate of Rs. 146 reflects a downside of 16% from the current market price. We have reduced our fair value estimate to reflect a higher than-expected decline in property demand and prices in this quarter. Thus, we downgrade our rating from Hold to Sell.

To see full report: DLF LIMITED

>India Hotels (MORGAN STANLEY)

●Investment conclusion: We turn Cautious on the India Hotel industry, as deteriorating tourism trends worsened by the impact of the 26/11 terror attacks in Mumbai have damaged tourist inflow and RevPAR trends. In addition, we believe corporate travel budgets have started to decline as corporate profitability is hit, which has in turn curtailed business travel. Balance sheets for most companies are under stress due to the acquisition of properties/land parcels at peak rates, which has resulted in rising debt servicing obligations and possible impairment of book value. As a result, we are now Underweight all the three stocks under our coverage.

●F2010 could be worse for earnings: For 9MF2009, all major listed Indian hotel companies showed decelerating performance, with the December quarter being the worst – revenues declined by 15% YoY and EBITDA witnessed an 11 ppt YoY decline. We believe F2010 will be worse for earnings as weakening demand for rooms due to the global slowdown and the Mumbai terror attacks will force down both average room revenue and occupancy rates, which will pressure operating margins. Rising interest costs due to high leverage will also affect earnings. As a result, we have cut our F2010 earnings estimates for all coverage stocks by 60-70%.

●Thoughts on coverage stocks: The global economic slowdown and the 26/11 terror attacks will have a significant impact on the earnings of all our coverage companies. Over and above that, some specific issues will affect each of the companies as follows: a) IHCL – earnings will likely be hurt due to weakness in international properties and rising interest costs; b) EIH – earnings will likely be impacted due to deferral of the Trident Bandra-Kurla property; and c) Leela – deferral of new properties and rising interest costs will likely affect earnings.

To see full report: INDIA HOTELS

>Axis Bank (UBS)

Stock trading at attractive valuations
AXIS bank stock has corrected 35%, and has underperformed the Sensex by 26% in the last 3 months. We find value in the stock at current valuations (upside of 65% to our target price), despite long-term concerns and are upgrading to Buy from Neutral. We remain wary of: 1) the exit of its dynamic CEO in July 2009; and 2) the equity overhang as SUTI, a key shareholder plans to offload its stake.

Aggressive growth in advances may lead to asset deterioration
Total advances grew 55% and retail by 30% in the face of a slowing economy. While net NPL ratio of 0.4% is not a concern for now, we expect the growth in SME advances (57%), unsecured personal loan (41%) and credit cards (30%) may lead to pressure on asset quality in coming quarters. Our valuations assume a 200% increase in NPLs and a provision coverage ratio of 80%.

Earnings growth could remain strong because of expansion
We expect 18% growth in earnings and an average ROE of 17-18% in FY09-11 against a 3 year earnings growth of 31%. Risks to our earnings could come from change in strategy from new management, impacting continuity and thus operations. In the short term higher NPL provisions could put pose risk to earnings.

Valuation: Buy rating and Rs 540 target price
AXIS Bank is trading at a PE of 7.3x and 1.2x PBR FY09E EPS and BVPS. We base our price target of Rs 540 on a residual income model, assuming cost of equity of 12.5%, long-term sustainable ROE of 16% and terminal growth of 5%. We estimate a BVPS of Rs.280 and ABVPS of Rs.255 for FY09.

To see full report: AXIS BANK