>RELIANCE INFRASTRUCTURE LIMITED (HSBC)

■ Improved outlook. The outlook for Reliance Infrastructure (R-Infra) has improved on several fronts over the past nine months: 1) orderbook and new order prospects for its EPC business; 2) EPC margins from lower commodity prices; 3) increased profit contribution from Mumbai and Delhi power businesses; 4) R-Infra’s 45% stake in RPower has appreciated 30%; 5) redemption of a majority of deposits with other corporates has eliminated an overhang. At current valuation (9.1x FY11e EV/EBITDA), the risk/reward trade-off is now more attractive.

■ Growth driven by EPC and power business. R-Infra’s EPC division has a strong order backlog of cINR196bn and we expect robust order inflow from R-Power and other nonpower sources. We also expect lower commodity prices to drive a 90bp EBITDA margin improvement (earlier 40bp) in FY10. The profit contribution from distribution and transmission should grow on the back of additional capex in Mumbai and increasing its stake in the Delhi distribution business to 49% from 26%.

■ R-Power value. R-Infra’s 45% stake in R-Power is valued at INR695 per share, or 65% of the company’s market cap. This comes to INR556 when we factor in our 20% discount to the current market value, up from INR336 in our previous target price. The increase is due to improved visibility on a number of R-Power’s projects.

■ ICD redemption. R-Infra redeemed INR37bn of inter-corporate deposits (ICDs) in FY09 – the equivalent of c15% of the company’s market cap. This is positive given the valuation overhang they represented.

■ Upgrade to N(V). We raise our FY10 profit estimate by 13.5% on increased contribution from EPC (c4% increase), improved profitability of Delhi power distribution (c2%) and power business (2%) and higher interest income (5%). Our EPS estimates are 14% higher than consensus for FY10 and in line for FY11. We increase our valuation for the core business (power and EPC) to INR372 (from INR290) and raise the value of R-Power to INR556 (from INR336). We raise our target price to INR1,146 for 11% potential return.

To read the full report: RELIANCE INFRASTRUCTURE

>AMARA RAJA BATTERIES LIMITED (ICICI DIRECT)

Charged up …
Amara Raja Batteries (ARBL) catering to industrial and automotive batteries segment is India’s second largest battery manufacturer in the regulated market. The focus on branding and strong retail network and entry into the two-wheeler segment helped company to gain leading market position. The technological capabilities are strengthened by through technical collaboration with Johnson Control USA, who also holds 26% stake in the company.

■ Presence in industrial segment cushioned slowdown in automobile ARBL garner around 55% of the revenue from industrial batteries catering telecom, power and railways and the segment played a major role during the slowdown in the automobile segment. Though telecom sector is currently witnessing slowdown but we expect the segment to continue to grow at good rate in coming years. The industrial growth would drive the revenues from the segment going forward

■ Revival in automobile, the immediate growth driver Auto demand has revived after the slump witnessed during FY09 and this would emerge as immense opportunity in the replacement
market. The company has strong presence in the replacement market driving 66% of the revenue from the segment. The focus on branding, strong network of 169 franchises and 18,000 active retailers and entry into 2 wheeler segment with VLRA battery technology would further help ARBL in penetrating the segment.

■ Higher EBITDA margins despite rising lead prices Lead prices have doubled in last one year, which is likely to pressurise EBITDA margins. However the pricing power in replacement market would protect EBITDA margins from drastic fall. Past two quarters, the company has reported EBITDA margins of 24% plus as against 10% - 18% range in FY08 and FY09.

Valuation
At CMP of Rs 161, ARBL discounts FY10E and FY11E EPS by 8.3x and 7.9x respectively. The revival of auto volumes , and industrial growth provides us strong earning visibility. We recommend the stock with 10% upside from current levels as our Pick of the Week.

To read the full report: ARBL

>UPPER GANGES SUGAR & INDUSTRIES LIMITED (FAIRWEALTH)

COMPANY PROFILE: Established in 1932, Upper Ganges and Sugar Industries Limited (UGSIL) is a KK Birla group company. KK Birla group apart from sugar is a leading player in key industries like fertilizer, chemicals, heavy engineering, textiles, shipping, media, etc. UGSIL has its manufacturing units in UP, Bihar and Assam.

THE COMPANY OPERATES THROUGH FOLLOWING DIVISIONS:

SUGAR
This division consists of manufacturing and selling of sugar, molasses and bagasse.
Presently company has three sugar manufacturing unit with aggregate crushing capacity of 18000 TCD:-

■ Seohara Sugar Mills, Seohara, Dist. Bijnor (U.P.) with a crushing capacity of about 10,000 tonnes of sugarcane per day.

■ Bharat Sugar Mills, Sidhwalia, Dist. Gopalganj (Bihar) with a crushing capacity of about 5,000
tonnes of sugarcane per day.

■ Hasanpur Sugar Mills, Hasanpur, Dist. Samastipur (Bihar) with a crushing capacity of about 3,000 tonnes of sugarcane per day.

To read the full report: UPPER GANGES SUGAR

>Steel metallics prices on uptick. (MOTILAL OSWAL)

■ Steel prices across the world have largely remained unchanged. However, the steel mills in USA, Japan and China are trying to raise prices for deliveries in Jan 2010 to cover higher input costs.

■ Scrap, sponge iron and coking coal prices have been on uptrend, while iron ore prices have not weakened much.

■ Indian mills have kept the prices of flat products unchanged in last two weeks. The pressure has eased now because of rising costs of imports. Import prices of HRC re-rollable grade has increased from USD530/ton to USD560/ton.

■ According to our interaction with industry, the prices of long products have started moving up in last week, due to higher prices of sponge iron, pig iron and coke.

■ Sponge iron prices have increased by Rs1000/ton to Rs14000/ton. Many mills, who had accumulated inventories of pig iron in past 2 months, are now reporting that inventories have started depleting last fortnight. Steel scrap prices have moved up from recent lows of USD290/ ton to USD340/ton thereby fueling the demand for substitutes like sponge iron.

■ The margins of Tata sponge and Godawari are likely to expand because of lesser dependence on spot iron ore market. Godawari's iron ore integration has increased from 25% in 1HFY10 to 75% now.

To read the full report: METALS