>INDUSTRIALS (KOTAK SECURITIES)

Financial closure data suggest strong capex activity. Financial closures, a leading indicator of capex, reflected surprising strength with yoy growth of 73% (Rs4.2 tn versus Rs2.4 tn) during FY2009. Power dominated (1/3rd of total) with closure of about 25 GW. Capital goods imports data, however, does not corroborate such strength and actual capex may have been postponed. Revival in economic activity combined with strong financial closures underline strong capex outlook for FY2010E and beyond.

Financial closures – a leading indicator reflect surprising strength in capex activity
We highlight that the amount of financial closures achieved by the private sector during FY2009
grew 73% (to Rs4.2 tn from Rs2.4 tn) during FY2008. This reflects surprising strength versus a
wide perception of weak credit markets during FY2009. We believe that financial closure activity reflects strength of corporate capex activity in the country and is a leading indicator of likely capital expenditure activity. Financial closure data is provided by Reserve Bank of India (RBI) on an annual basis and captures private corporate sector projects achieving financial closure from banks and financial institutions. This data does not include projects of public sector entities such as NTPC and does not include direct government financed projects.

Infrastructure segment dominates—particularly power, supported by telecom and metal
The power sector contributed to 1/3rd (Rs1,241 bn out of Rs4,223 bn) of all the financial closures. This is reflective of strong generation capacity addition announcements by the private sector in the recent past. Total financial closures would have amounted to about 25 GW of capacity. Telecom sector financial closures during FY2009 (Rs691 bn) were 15X of the financial closures in FY2008 (Rs46 bn), probably contributed by new networks launched by recent entrants as well as the substitution of overseas borrowings by domestic funding. Metals sector financial closures contributed about Rs85 bn during FY2009 versus Rs40 bn during FY2008, possibly explained by financing for ongoing capital expenditure.

Capital goods imports do not corroborate such strength—actual capex may have been postponed: Capital goods imports (an aligned data point) does not corroborate such strength in capex activity as imports declined by 8% (in US$ terms) during FY2009 versus FY2008. Most of the decline was however concentrated in Oct ’08-Mar ‘09 with a 29% decline in those six months versus 42% yoy growth during Apr-Sep ‘08. We believe that despite strong financial closure activity, actual capex may have been postponed in 2HFY09, based on economic conditions prevailing then. RBI data based on phasing schedule of projects as per financial closure suggest likely capex of Rs3.1 tn (22% yoy growth) versus R2.6 tn during FY2008. We believe that despite the potential postponements, strong financial closure activity and a recent revival in economic activity during FY2009 strong support capital expenditure outlook for FY2010E and beyond.

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>DR. REDDY'S LABS (MORGAN STANLEY)

Read the Signs – Bullish On F11 EPS: Reverting to OW

Investment conclusion: We believe that DRL’s near-term product pipeline of niche opportunities for the US is underappreciated by the markets and that F11 earnings could be significantly higher than Street estimates. In view of the high growth momentum ahead and inexpensive valuations, we are reverting to our OW rating. Our new PT of Rs1076 (17x F11e EPS), implies 24% upside potential from current levels.

What's new: Based on our due diligence of DRL’s product pipeline and market signals (Allegra D12 and Lotrel settlements, court filings), we conclude that generic Allegra D12/24 (US$500 mn brand sales) and Lotrel (US$600 mn - MSe) are credible and lucrative product opportunities for the company, not so well known to the Street. These are discussed in detail inside.

Where we differ: We have upgraded our F11e EPS to Rs63.3, 16% higher than the Street. This may well turn out to be conservative since we have included only one (Allegra D12) opportunity in our earnings model. Importantly, most of the near-term niche opportunities (Allegra D24, fondaparinux and omeprazole OTC) have a long window (two years or more). Thus, earnings are
likely to grow all the way till F13 on a high base of F11.

What’s next: Expiration of 30 months ANDA stay on DRL’s Allegra D24 and Lotrel filings, approval of fondaparinux, market share win for omeprazole OTC, launch of two biosimilar MAbs are the key catalysts over the next six months. We expect the German business to continue to erode and bottom out by December ’09.

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>ALLIED DIGITAL SERVICES (ANAND RATHI)

Revenue visibility adequate; retain Buy

■ Visit takeaways. We estimate that Allied’s revenue and earnings target for FY10 is achievable. Business from the new tie-ups is expected to flow in from FY11. Our new target of Rs650 is at a
target PE of 7.5x (a 63% discount to Infosys’ current multiple). Retain a Buy.

■ Adequate revenue visibility. Allied has adequate revenue visibility, backed by its order book. The Solutions order book is Rs1.3bn, to be executed over the next six months. Services order
book is Rs1.2bn for India operations and US$60m for EPGS, executable over the next 12 to 15 months.

■ New tie-ups. Allied has tied up with an OEM from the USA to provide remote management for desktops, notebooks and servers sold by the OEM. The revenue stream from this business would start flowing from FY11.

■ Working capital. Debtor days of the standalone business, at 177, are high. Debtor days for EGS are a manageable three months. Allied is confident enough to bring them down in FY10.

■ Valuation. We assign Allied Digital a target multiple of 7.5x its FY11e EPS of Rs86.5, which is a 63% discount to Infosys (20x) and a 46% discount to HCL Tech (14x). This is also in line with other mid-cap IT companies. Based on the target PE of 7.5x FY11e EPS of Rs86.5, we arrive at a target price of Rs650.

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>AHLUWALIA CONTRACTS INDIA (INDIA INFOLINE)

• Acil to enjoy benefits from revival in real estate sector.
• Robust order backlog provides strong earnings visbility.
• Diversified client base and venturing into new verticals.
• Best play in the contractor space, Initiate with buy.

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