>BHARAT FORGE (ICICI DIRECT)

Poor show...

Bharat Forge (BFL) surprised us by reporting a substantial 44.8% degrowth in standalone net sales to Rs 351.6 crore. It was badly hit by a 41.2% fall in domestic sales and 52% fall in export revenues. Margins further slumped by 70 bps from Q4FY09 to 20.9% (24.5%in Q1FY08). This
was mainly on account of a 400 bps rise in the staff costs to sales ratio. Higher finance costs further arrested the bottomline. It plunged by 96.3% to Rs 96 lakh as against profit of Rs 26.6 crore (Rs 61.1 crore in Q4FY09). On a consolidated basis, net sales slipped 53.6% to Rs 1,311.3 crore while at the net level, the company went into the red with a loss of Rs 46.1 crore as against profit of Rs 40.9 crore in the corresponding period. As the company’s standalone profit has been eaten by its subsidiaries and the trend continued in Q1FY10, we are revising our sales estimates and profit estimates downward for FY10E on a consolidated basis. However, improving sales from a changing product mix would support higher sales and profit for FY11E. Revised consolidated EPS for FY10E would be at Rs 4.4 (down 18.4%) while for FY11E it would be at Rs 9 (up 17.2%).

Valuations
Poor exports and a lingering domestic market provide a bleak outlook for the current year. However, we expect the same to improve next year. Furthermore, multi-year order intake of $25 million from General Motors (reviving out of bankruptcy) and proposed venture with Alstom for power equipment with revenue guidance of Rs 1,600 per annum post FY12 provides a silver lining to the dark cloud. The proposed revenue inflow and expected recovery in domestic and export demand in FY11 emphasises comparatively higher multiples for the company. Accordingly, we value the stock at 20x its consolidated FY11E EPS of Rs 9, to arrive at our target price of Rs 180. Since the stock has run up in the last few days, at the CMP of Rs 241 we reiterate our UNDERPERFORMER rating.

To see full report: BHARAT FORGE

>CUMMINS INDIA LIMITED (MERRILL LYNCH)

Reviving up for demand revival; new Buy

■ Initiate with Buy; PO of Rs423 implies 44% upside
Cummins India (CIL), a subsidiary of Cummins Inc, is a play on (1) rising demand for diesel genset (26% of FY09 sales) driven by growing need for uninterrupted power, (2) rising demand for engines (14% of FY10E sales) for industrial m/c led by infra sector, and (3) rising demand for CNG (compressed natural gas) engines driven by rise in natural gas supply, which is relatively cheap.

We expect CIL to re-rate to 15x P/E FY11E from 10.4x now, driven by increased visibility of 38% EPS growth in FY11E following a 13% drop in FY10E. Sustained QoQ sales recovery as seen in the Jun-09 quarter will be a key re-rating trigger. Our FY11E EPS is 41% higher than consensus led by cyclical recovery in exports.

■ Stronger domestic sales in Jun09 Q driving bullishness
We expect domestic sales of engines (40% of FY09 sales) and spare parts, including miscellaneous service (22% of FY09 sales), to be key earnings drivers going forward. We expect domestic sales to grow 17% in FY10E and 22% in FY11E on faster GDP growth. Recovery in domestic engine sales is evident from 44% QoQ growth in the Jun-09 quarter, after the sharp decline in Sep08-Mar09.

■ Exports decline hurts FY10E, but cyclical recovery ahead
CIL could report YoY EPS decline until Dec 2009, despite a QoQ recovery. This could be due to the over 60% plunge in exports (38% of FY09 sales). However, we expect exports to recover in FY11E given that (1) channel inventory reached trough level in Jun09 Q, (2) CIL exports typically recover after one year of decline and (3) We at BAS-ML expect Global GDP to rise 3.7% in 2010 vs -1% in 2009.

■ Key downside risk is adverse macroeconomic condition
There is a strong correlation between industrial growth and CIL’s P/E. It trades in a P/E band of 13-22x during the phase of 8-12% IIP growth. Thus, weak macro economy is a key risk to our PO based on P/E of 15x FY11E earnings.

To see full report: CUMMINS INDIA

>FLASH ECONOMICS (ECONOMIC RESEARCH)

Shift of global capital flows (towards Asia) and public debts in OECD countries: Towards an inevitable crisis?

Asia’s attractiveness for capital will pick up very significantly after the crisis: vigorous growth - whereas growth has decelerated in OECD countries; development of domestic demand, infrastructure construction programmes; growth in the size of financial markets and banks; improvement in the perception of emerging risk and deterioration in the perception of risk related to OECD countries.

This means that Asia will become more and more attractive for private capital, and that Asian savings will increasingly be encouraged to remain invested locally. At the same time, public debt in OECD countries will rise considerably. We can therefore see the risk of an imbalance between the sharply increased supply of public debt and fading demand for OECD
countries’ public debt, to the benefit of financing of investments in Asia.

To see full report: FLASH ECONOMICS

>GLOBAL ECONOMIC MONITOR )ECONOMIC RESEARCH)

LIFT-OFF?

■ Strength of rebound to surprise…
Second quarter data continue to suggest that the pace of contraction in activity has slowed markedly since the precipitous pace of decline in the first quarter. This sets the stage for a return to positive growth rates in Q2. US economic evidence for example continues to surprise on the upside, with demand for housing and autos in particular rising above expectations. Consensus expectations for the US in H2 are shifting higher towards to 2-2.5% range. We see potential for even stronger growth as the inventory cycle alone could add 1.5% in GDP in H2. It’s a similar story in the euro area, where the success of car incentives is coming on top of the cyclical rebound in inventories. We continue to think that the strength of the recovery in manufacturing H2 will come as a surprise to the markets and will strength expectations that central banks will be heading for the exit early next year.

■ …but rate hike speculation premature
In contrast both the ECB and the Bank of England struck a more cautious tone last week largely on concerns about what happens after the inventory-led bounce in manufacturing. These are concerns that to a certain extend we share. So far the consumer has been supported by falling inflation leading to a resilient consumer outturn in H1. However these trends are about to turn around which will put pressure on consumer spending power in H2. Without a self sustaining recovery in consumption, activity risks falling back next year. As such, expectations of early interest rate rises by the Fed and the ECB look set to be dashed next year even if the market is increasingly moving in that direction in the short term.

To see full report: GLOBAL ECONOMIC MONITOR