>Automobile Sector (UBS)

2 wheeler dealer survey....

■ Bajaj Auto – model worries, still high dependence on financing
Our dealer survey key findings support our negative view on Bajaj: 1) Close to 50% of Bajaj sales are still on financing. Tighter lending standards have been one of the key reasons for sharp drop in Bajaj Auto sales in Tier 2 cities. 2) Bajaj’s new launches like the Xced 125 and Platina 125 have not been able to deliver on customer expectations and core mktg. proposition. 3) Only 30% of Bajaj dealers surveyed expect volume increase vs more than 80% for HH.

■ Hero Honda - dealers confident of 100cc growth
Our survey indicates customers buying on cash prefer HH for higher reliability and lower maintenance expense. Only about 30% of HH sales are from financing. HH dealers don’t see an evident shift in customer preference towards 125cc bikes. HH dealers attributed the market share increase in the ‘under 125cc’ segment to new launches by the company and expect continuing growth in this segment due to fuel efficiency remaining the key buying criteria for the 2-wheeler buyer.

■ Scooter growth outlook remains strong, HMSI doing well
Dealers felt confident of scooter segment growth going forward driven by demand from women and elderly people. This is positive for HMSI which continues to dominate the scooters market. HMSI’s new bike launches like CBF Stunner continues to gain sales traction. Around 40% of HMSI sales are on financed basis.

■ We reiterate our view on the two wheeler market
We maintain our rating and estimates for Bajaj Auto (Sell) and Hero Honda (Neutral).

To see full report: AUTOMOBILE SECTOR

>Ambuja Cement Limited (HDFC Securities)

• Benefits of capacity addition insignificant: ACEM has planned to increase its installed capacity by ~5.5 mt in different stages during CY09 and CY10. Though we expect the entire capacity to get commissioned by H1CY10, we don’t think this will result in a sales volume growth due to a demand-supply mismatch.

• Capacity Utilization rates set to decline: We expect the capacity utilization rate of ACEM to decline to the levels of 81% in CY09 and 77% in CY10 against ~95% in CY08 as we believe the company will perform in line with the industry. We expect the sales volume of the company to grow at a CAGR of 1.4% for the period CY08 to CY10E.

• Cost pressure expected to ease: ACEM is dependent on Imported coal for ~30% of its requirements. The cost of imported coal has corrected by ~50% over the last 5-6 months, which will protect the operating margins of the company in CY09.

• Operating benefits expected to come down in CY10E: ACEM enjoys one of the best operating margins in the Industry. However, we expect this benefit to ease in CY10 with the downturn in the cement cycle. We believe the realization of the company will decline by 3.3% in CY09 and by a further 5% in CY10. We expect the margins of the company to remain stable in CY09, but drop by 506 bps to 23.8% in CY10E.

• Earnings to decline: With operating benefits and realization set to decline over next two years, we believe the earnings of the company will decline at a CAGR of 17.4% for the period CY08 to CY10E.

• Merger with ACC can provide synergy benefits: We feel the merger of Ambuja with ACC can provide synergy benefits going forward, in terms of rationalization of the distribution system and reduction in duplication of work. However, the management has not indicated anything on this.

To see full report: AMBUJA CEMENT

>India Financial Services (MORGAN STANLEY)

Dependence of Mortgage Growth on Property Prices = Sharper Slowdown Ahead

Quick Comment: In this note, we try and present a simple argument on why mortgage growth for the industry will be extremely weak in F2010 and possibly F2011. Even if we don’t consider slowing economy and rising unemployment, the fall in property prices itself will cause a sharp deceleration in the market. In India, there is no property price index, so it is not possible to get an idea of exact price decline. However, anecdotally it appears that prices have come off by about 20% in the last few months and will likely decline further. New loans (disbursements) are obviously a function of mortgage volumes and prices. With prices declining, volumes have to move up sharply – just to keep the new loans constant. That is unlikely to happen, implying that new loans will contract in F2010 for industry. There will be players, like HDFC, that are likely to gain market share, but overall industry will see a decline. While we are focusing on mortgages in this note, the slowdown is likely to be intense for all other loans, as all asset prices have come off sharply. In fact, in our view, there is a very high probability that loan growth will be in the single digits for Indian banking system in F2010.

Most of the growth in mortgages in the past 5 years was driven by the rise in property prices, in our view. We are handicapped by lack of price data. But we do an approximate analysis, using some data from HDFC. It gives average value of mortgage outstanding; in F2003 this was Rs.370000, which increased to Rs. 1.4 mn in F2008, a CAGR of 30%. This is for the entire loan portfolio – implying that the increase in value of new mortgages would have been even greater.

To see full report: INDIA FINANCIAL SERVICES

>Equity Insight (HSBC)

Pro-cyclical shift reiterated

■ Near-term hurdles: this week’s data flow and Q1 results
■ But financial and economic crises slowly turning a corner
■ Sticking to more pro-cyclical stance and rally to year-end

After one of the sharpest rallies in recent times, some near-term retracement is hardly surprising. This week’s ISM, PMIs and non-farm payroll data and pending Q1 results will doubtless provide opportunities for profit-taking. The Vix has still to break below 40: what we have called the “volatility bubble” has yet to burst.

Looking further ahead, however, we do think that both the financial and economic crises are (very) slowly turning a corner. The Fed’s latest initiative seems to be pulling mortgage rates down – to 50-year lows in some cases – and refinancing applications up (see chart). Meanwhile, some indicators of US consumer and housing demand seem to be stabilising, and the pace of destocking is likely to fade.

Our US economist expects GDP growth could turn positive in the second quarter (Break in the weather?, 27 March 2009). He still doubts that there will be much follow-through, but we think that equities have not been pricing in even a flat economy so soon.

On 19 March 2009 (Q2 preview: adding to cyclical weights), we shifted our sectoral views a little further in a pro-cyclical direction and away from some defensives (pharmaceuticals and utilities). We also set out the case (again) for some further rally to year-end. Whether it is a “bear market rally” or not seems less important than whether it happens – and we still think it can.

To see full report: EQUITY INSIGHT