Profile IVRCL Infrastructure & Projects operates in high-growth potential sectors like water & environment, transport, buildings and power.

On Firm Grounds By Research Desk | Mar 31, 2009 The company started operations in 1990 and established itself as a premier engineering procurement, construction and commissioning (EPCC) and lump sum turn key (LSTK) service provider. It now ranks amongst the fastest growing, profitable companies in the country in the infrastructure space with sales growth of 44 per cent CAGR (2004-07). With an eye on expanding into emerging infrastructure sectors like railway infrastructure, metro rail projects and oil and gas sectors, it has acquired Alkor Petroo Limited so that it can take part in exploration activities in Egypt and Yemen. Moreover it has partnered with major corporations to bid for the upcoming projects world over. Promoter The company is promoted by E. Sudhir Reddy. Currently he is the Chairman and Managing Director of the company with 3.93 per cent holding of the company. Rest 5.80 per cent of the promoter holdings are held by various relatives and holding firms of Mr. Sudhir Reddy. The major share holders of the company are FIIs and Mutual Funds, the combined shareholdings by them is over 65 per cent. Investment Rationale Revenue Momentum to Sustain For Q3FY09, IVRCL's revenue was at Rs 11.8 billion, up by 22 per cent YoY. However, PAT went down by 27 per cent to Rs 465 million, led by higher interest charge of Rs 419 million, up by 137 per cent. The company's EBITDA margins of 9..1 per cent were lower by 230 bps due to higher material, labour and staff costs. However, revenue growth is expected to continue with the current order backlog at 3x its FY09E revenue. Debt Levels to be Maintained IVRCL has advanced a loan of Rs 2.8 billion to its real estate arm, IVR Prime. The company's total loans and advances to its subsidiaries stands at Rs 4 billion YTD. In FY09E, IVRCL expects to get Rs 0.8 billion back from IVR Prime, of which Rs 0.3 billion have already been received. However, the company expects to borrow an additional Rs 1 to 1.5 billion, depending on their requirement for project execution. But debt costs are expected to subside in FY10E on the back of internal cash accruals from its core construction business. Further-more, with toll revenue flowing in from its BoT project from 2QFY10E, no significant rise in its debt is expected. Strong Order Book IVRCL's order book of Rs 143 billion is at 4x its FY08 revenues and has an average execution cycle of 24 to 30 months. Furthermore, 95 per cent of the company's order book is protected by price escalation clauses. A major part of the order book (65 per cent) is from the water segment. The balance, 20 per cent comes from buildings and the rest from transportation and power. IVRCL's focus is to secure government contracts. So far this year, the company has managed to secure contracts worth Rs 50 billion and expects to further secure additional contracts worth Rs 17 billion. Positive Macro Outlook As per the planning commission, for the 11th five-year plan, spending on water supply and sanitation infrastructure development is pegged at Rs 1991 billion, up by 207 per cent. IVRCL is perfectly positioned with immense domain expertise to gain from this. Risk & Concerns Policy Dependence Number of projects of the company depends on the government. Any unfavourable change in policy environment is going to adversely affect the company. This high dependence on a single client increases the operating risk of the company. Working Capital IVRCL's working capital needs are expected to remain high over the next few years in order to support its top-line growth. As a result, we believe that the operating cash flow would remain negative. Con-sequently the company would need to borrow to fund its working capital requirement. Hence there is a good chance that the current debt-equity ratio is going to deteriorate in coming times. Valuation At CMP of Rs 110, IVRCL's stock trades 6x of the FY10E EPS. The company has been valued to arrive at a target price of Rs 132. Even though the economic growth is slowing down, but due to the water-related infrastructure focus of the company, the order book of the company is going to remain robust in the coming times. After the hammering it got in 2008 the stock looks well poised for an upside. Financials FY06 FY07 FY08 9 Mths* Net sales (Rs Cr) 1,491 2,293 3,646 3,255 PAT (Rs Cr) 93 141 210 147 Operating profit (Rs Cr) 93 160 240 280 Interest payments (Rs Cr) 30 48 91 92 Borrowings (Rs Cr) 679 556 1068 - Ret on networth (%) 25 16 15 - Ret on cap employed (%) 26 23 28 - * FY09

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Edelweiss on PSL Limited-BUY

We met with the management of PSL. Following are the key takeaways: Management's view on industry 1. Domestic gas pipeline demand remains buoyant – medium term driver − There have been no delays witnessed so far in order flows/tenders. Further, pipeline projects typically form the last leg of any project, making its delay less likely. − Three large tenders (two already out) by Mar-09 are likely to create incremental requirement for 700,000-800, 000 MT of pipes. − RIL could explore options with domestic pipe manufacturers. This is likely to expand opportunities for players like PSL. − PSL' regional capacity is a key competitive advantage, as tenders are for delivered pipes at a select location. Transport costs are typically 20-25% of the cost of the pipe. For example, for the southern projects (Kakinada to Bangalore, Bangalore to Cochin & Chennai to Vizag), PSL is likely to incur 1/3 the freight cost than other players. 2. US pipeline demand – PSL has location advantage − PSL's US mill (located in southern region) can benefit from its location advantage. − PSL's US mill for firm orders for 12-15 months of production (till Mar-10). Customer has also procured the steel, ensuring the sanctity of order book. 3. Competition from Chinese players - Despite plunge in freight costs, logistics management (as customers insist on delivery to location) is likely to be a deterrent. Capacity expansion 1. PSL has a domestic pipeline capacity of 1.1 MMT. Their large capacity in HSAW is favorable, as they can be eligible for bidding 100% capacity in many tenders. Additionally, their domestic capacity is spread regionally (near pipeline construction points), imparting freight advantage. 2. The company is setting up an incremental 150,000 MT capacity in US. The HSAW plant in the US has been completed and is awaiting API approval (likely by Feb-09). 3. Sharjah capacity expansion plans have been put on hold, until the company gets firm orders. Existing capacity is 75,000 MT. Order book details 1. PSL's total order book aggregates INR 6,000 crores, out of which INR 4,000 crore is for Indian operations (executable by Mar-10). Approximately, INR 2,000 crores order book is from GAIL. 2. EBITDA for order book ranges from INR 125-200/MT. Conversion costs range between INR 110-180/MT. Upcoming tenders – status 1. Three major tenders are expected to create incremental requirement for 700,000- 800,000 MT of pipes through Mar-09..

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L&T - Reduce - Target INR 536

Sharp drop in PPP projects in 2008; no awards expected until after elections; reinforces our slowdown thesis.

L&T considering ~50% of identified opportunity; complex regulations a hurdle; new govt’s policy to dictate spending.

INR536 TP (standalone INR460 [8.5x FY10E EBITDA], subsidiaries INR76). Maintain REDUCE.

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T H E  B N P  P A R I B A S  A N G L E

Inflation Report : Inflation hovers around 30-year low; rises W-o-W though

Wholesale price index (WPI)-based inflation for the week-ended March 14 came in at 0.27% Y-o-Y, above expectations (Edelweiss: 0.04% and consensus: 0.12%). This is lowest Y-o-Y growth if we consider the current inflation series which takes 1993-94 as its base year. However, going back in history, it is the lowest number since January 1979. The overall trend for prices continues to move downwards due to weakening demand and poor business outlook.

W-o-W, primary articles’ inflation rose owing to higher food prices, particularly of few cereals, pulses, fruits, and vegetables. Manufactured group inflation also rose by 0.2% W-o-W due to higher prices of manufactured food products, iron, and steel.

Fuel group inflation remained unchanged. But, in the coming week, we expect a slight upward movement in it owing to rise in prices of non-administered components along with increase in prices of aviation turbine fuel.

Negative inflation within sight

Sluggish real activities and rapid correction in commodity prices, both in international and domestic markets, have dampened inflationary pressures. In the coming weeks we are likely to enter a phase of negative inflation. Apart from subdued demand and lower prices, a markedly favorable base effect is likely to drive prices further down Y-o-Y.

CPI yet to decline

With food articles having the maximum weightage in consumer price indices (CPI), CPI-based inflation is yet to decline significantly. Consumer Price Index for agricultural labourer (CPI-AL) and rural labourers (CPI-RL) remains at 10.79% in February. CPI-IW was at 10.45% Y-o-Y in January 2009. Weights of the fuel group and metals (two major contributors to softening of WPI inflation) are relatively less across all CPI variants.

SSKI:Sector update: Natural Gas - Shortage...what shortage!

India's affliction of 'gas shortage' is set to be alleviated. The KG gas find is slated to transform the domestic demand-supply scenario of natural gas over the next decade. While KG gas would obviously be a big positive for producer Reliance Industries (RIL), it will also materially affect the fortunes of potential consumers of this gas such as power and fertilizer units, gas transmission entities and city gas distribution (CGD) players. Also, the output from the field will help improve the current account deficit as naphtha gets replaced by gas and fertilizer imports reduce (we expect US$1.4bn of saving in India's annual import bill). The only deterrent we see affecting the timely monetization of this gas is the legal dispute between RIL and NTPC/ RNRL. While hampering negotiations with potential customers, it could also affect the pricing (and hence economics) of this project.

With KG, it'll raining gas...: The full complement of 80 mmscmd of gas to flow from KG D6 field will almost wipe out the supply gap (90-100 mmscmd) in the near term. However, the supply could affect expansion plans of LNG players as some capacities lie idle in the near term with lower demand for expensive R-LNG.

...a blessing to many: With potential accretion of Rs457/ share in NAV, RIL stands to benefit materially from KG gas. Besides GAIL (transmission player), NTPC, GVK, GMR and Lanco (consumers of this gas) would also benefit owing to higher output and PLFs. The power sector can achieve 30,000m units (4,000MW) of incremental production and fertilizer units 6m tpa of additional output from this gas. Power producers can save another Rs70bn by substituting costlier alternatives with gas. However, a speedy resolution of the legal tangle between RIL and NTPC/ RNRL is awaited regarding the availability and pricing of this gas.

The government gains the most: With accumulated cash flow accretion going up to US$17bn (profit petroleum + taxes) and additional cost savings/ import substitution of up to US$15bn over the next decade, the gas find helps alleviate the current account deficit materially. At Rs71bn (US$1.4bn) of savings annually, we expect the current account deficit to reduce by ~1.5% of GDP.

Key beneficiaries of KG D6 gas
Beneficiary	Extent of benefit	Comments
RIL	Accretion of Rs457/sh in NAV	80 mmscmd = ~30% of total domestic gas production in FY12E
NTPC	Additional 6,000 units of power	Cost of production lower by Rs3bn-Rs14bn*
Other IPPs	Additional 9000 units of power	Cost of production lower by Rs5bn-Rs21bn*
Fertilizer sector	Additional 6m tonnes of production	Cost of production lower by Rs0.65bn-Rs1.8bn*
GAIL	Additional transmission volumes of 30 mmscmd	Incremental revenues and EBIT of Rs15bn and Rs8bn respectively from this gas over FY10-12E
CGDs	Additional volumes of ~2.5 mmscmd	Pick up in rollouts in new cities
Government	Additional cash flow of ~US$17bn over the life of KG D6	Savings of US$1.4bn annually, from additional production of fertilizer, power and import substitution
Source: IDFC-SSKI Research; Company reports     *compared to RLNG & naphtha respectively

[Investors Please Listen] View from Research Desk on March 23, 2009

Update on Cement sector

Our analyst spoke to cement dealers pan India. We understand that cement dealers in some parts of Maharashtra have initiated another round of price hike to the tune of Rs 5-10 per bag. Our analysis shows that demand for cement across India is stable to picking up while the pricing power is in favor of companies. Central & eastern region are showing robust growth. Central region is actually feeling the supply bottleneck while the demand growth in the region is between 11-12%. We believe ACC, Ambuja & Ultratech will be beneficiaries of strong demand in west & eastern regions while JP & Birla Corp will be befitted by robust growth in demand in central & eastern regions.

Telecom sector update

Newspaper report suggest that DOT may defer reduction in license fee by 2% which was supposed to be effective from April 01, 09. However, when this was announced it was accompanied by a similar increase in spectrum charge, thus nullifying the benefit arising out of lower fee. We are awaiting clarity on whether the deferment in fee reduction will be accompanied by deferment on increase in spectrum charge. If that too happens than this news will be insignificant. However if that does not happen then the govt's decision will be negative for Telecom operators. Bharti & RCOM will both be negatively impacted to the tome of 8% on bottom-line.

Tata Motors launches Nano

Today Nano will be launched. There is a huge euphoria built around this. Though this will be sentiment positive but to expect any major impact on Tata Motors fortunes will be naïve. Our analysis shows that contribution from Nano will not be very significant in the near term. Also the concerns on how company will respond to huge bookings which may be many times its capacity to produce thus year. How will the company treat advance deposits received from customers for bookings etc? Thus we will stay away from stock.

Global Cues: The Dow fell by 122 points on Friday amidst concerns on bonus payouts to AIG. However Treasury secretary is likely to announce details of his plans on toxic assets for banks & how to use $1 trillion rescue plan announced a few days back.

Asian mkts are all trading in positive territory as mkts are expected some positive news tonight from the Treasury Secretary's plans for banks.

Our Markets: On Friday we witnessed flat movement in the mkts with index heavy weights ONGC, Lever & HDFC providing it support. Metals counters were also strong.

For today we expect the mkts to start on a positive bias. However due to lack of any major domestic cues our mkts will be looking towards global cues for taking the direction. We expect mkts to remain lackluster & range bound.  

 

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STOCK UPDATE

Grasim Industries
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,458
Current market price: Rs1,462
Issue with L&T likely to be resolved
As per media reports, Grasim Industries (Grasim), a flagship company of Aditya Birla group, and Larsen & Toubro (L&T) are close to settling their seven-year-old legal dispute over Grasim’s 0.66% stake in L&T and L&T’s 11.5% stake in UltraTech Cement, a Birla group firm. The issue has been lingering on for long with L&T claiming that Grasim must transfer its 0.66% stake to L&T Employee’s trust fund at a predetermined rate, while Grasim contending to make the sale at the current prevailing price.
At the current market price of Rs1,462, Grasim’s stock trades at a price/earnings (PE) of 8.6x and 8.8x FY2009 and FY2010 earnings estimate respectively and an enterprise value (EV)/earning before interest, tax, depreciation and amortisation (EBITDA) of 5.4x and EV/tonne of just $72 on FY2009 capacity. On account of high valuations and a sharp run in the stock price in the recent times, with the current market price being higher than our price target, we advice our investors to partially book profits on the stock while we maintain our Hold recommendation.

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VIEWPOINT

Apollo Tyres

Buy-back plan indicates possible curtailment in capex plans
The board of Apollo Tyres has approved the proposal to buy back equity shares of the company at a price not exceeding Rs25 per share. The shares will be bought back from the open market and a maximum amount of Rs122 crore (10% of its paid-up capital and free reserves) has been earmarked for the purpose.

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MUTUAL FUND: INDUSTRY UPDATE

Equity funds outperform markets

The total AUMs of the equity MFs stood at Rs115,648 crore in February 2009, down by 3.9% from the January 2009 AUM. On adjusting for the net inflows, the decline stood at 3.7%. This was better than the market fall of approximately 5.7%.

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Click here to read report: Investor's Eye

[Investors Please Listen] STOCK UPDATE

Navneet Publications (India) Cluster: Emerging Star Recommendation: Buy Price target: Rs59 Current market price: Rs44 Stationery business: The growth engine Key points With the growth in publication business moderating, Navneet Publications India (Navneet) has been banking on stationery business to drive its top line growth. As a result, the revenues from the stationery business are expected to grow by 57% in FY2009 to Rs214 crore. This is also reflected in the revenue contribution from the stationery business that has increased from ~34% in FY2007 to ~44% now. To expand its non-paper stationery portfolio further, Navneet plans to launch office stationery products under a new brand in four to five months in the domestic market. We believe, considering the small size of its existing non-paper stationery business (Rs18 crore), the new launch would help Navneet to post a robust growth of ~60% in the non-paper stationery business in FY2010. For Q4FY2009, we expect Navneet's top line to grow by a robust 33.8% year on year (yoy) driven by a strong performance of its stationery business. The stationery business is expected to achieve a robust growth of 57.8% yoy primarily led by export sales. We expect the operating margin to improve by 46 basis points primarily on account of a 347-basis-point decline in other expenses as percentage to sales, though higher raw material cost will arrest a higher expansion in the operating margin.  Driven by a robust top line growth, we expect the operating profit to grow by 40.6% to Rs7.7 crore during the quarter. However, a higher incidence of tax and a lower other income will result into a 21.6% year-on-year (y-o-y) increase in the adjusted net profit (pre-foreign exchange [forex] loss) to Rs2.5 crore in Q4FY2009. In the near term, Navneet's revenue growth will be driven by stationery business, as publication business growth will be subdued till further syllabi changes are announced. Further, the increase in the scale of stationery business will also help the company in improving the margins, as economies of scale come to the fore. A distant growth driver that the company is building on is the e-learning venture, which still continues to be in market development stage (student modules not launched). We believe, with these growth drivers, Navneet continues to be at attractive valuations of 7.1x its FY2009 expected earnings and 6.1x its FY2010 expected earnings. The dividend yield of 5.5% also aids our view on the stock. We maintain our Buy recommendation on the stock with a price target of Rs59. MUTUAL FUNDS: WHAT'S IN—WHAT'S OUT  Fund Analysis: March 2009 An analysis has been undertaken on equity and mid-cap funds' portfolios, indicating the favourite picks of fund managers for the month of February 2009. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 24 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc. Click here to read report: Investor's Eye

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[Investors Please Listen] Auto sector - Motorcycles ; Sector Update ; Changing product mix: More hype than reality

Auto sector - Motorcycles

 

Changing product mix: More hype than reality

 

Bajaj Auto           REDUCE                 Hero Honda    ACCUMULATE

Price                             Target Price                     Price                                      Target Price

Rs.563                                     Rs.485                     Rs.988                                           Rs.1,055

 

The domestic motorcycle industry has witnessed an increase in the share of 125cc+ motorcycles from 10% in FY02 to 29% in FY09YTD. This has resulted in investor confidence in Bajaj Auto, considering the fact that the125cc+ segment contributes around 75% of its domestic motorcycle portfolio. Also, concerns are being raised over Hero Honda's market share sustainability as the 125cc+ segment accounts for only 7% of its domestic motorcycle portfolio.

We do not deny that the share of the125cc+ segment is likely to increase going forward. However, we dispute the view that the demand for sub 125cc segment is likely to come under pressure. The structural shift from sub 125cc to 125cc+ motorcycles (as was observed during FY99-FY04 from scooters to motorcycles) is not likely to happen any time soon.

We attribute the rising share of 125cc+ segment to the shift in focus of players from 100cc to 125cc motorcycles rather than lower demand for sub 125cc motorcycles. Therefore, we view the rising share of 125cc+ motorcycles as a classification phenomenon rather than as the emergence of a new trend. Also, rather than just focusing on the CC based classification, it is also pertinent to look at price based classification of the industry.

We summarize our key observations below

n        Higher share of 125cc+ motorcycles – a classification issue rather than a demand issue

n        Infact, Ex-Bajaj Auto, the share of 125cc+ segment has gone up by only 500 bps to 18% during FY02-FY09YTD period

n        Inability to break the stronghold of 'Splendor' and 'Passion' despite lower pricing and significant increase in raw material cost are the key reasons for exit of players from the sub 125cc segment

n        Rising share of 125cc+ motorcycles is largely due to a shift in strategy by Bajaj Auto

n        Rather than just focusing on the CC based classification, it is pertinent to look at price based classification of the industry

n        'Splendor' and 'Passion' continue rule the executive segment

n        Bajaj Auto is the leader in the entry and premium segment

n        However, Bajaj Auto is losing market share in executive and premium segment which constitutes the 125cc+ segment for the company

n        We do not expect Bajaj to regain market share aggressively in the next 12 months

n        Bajaj Auto's history of product failures casts doubts on runaway success of new launches

 

Valuations and View

At CMP of Rs 563, Bajaj Auto trades at a PER of 9.3x FY10E earnings. Considering the fact that export is a more profitable franchise for Bajaj Auto (unlike other OEMs), the risk to negative surprises on earnings due to pressure on export volumes is considerably high. We would like to assign a lower multiple to export business (6xPER) and higher multiple to domestic business (10xPER). Considering the pressure on the volumes front- both in domestic as well as export markets, we believe that at the current price, the stock is fully valued. We maintain our REDUCE rating on the stock with a target price of Rs 485.

At CMP of Rs 988, Hero Honda trades at a PER of 12.2x FY10E earnings. We have upgraded our target price to Rs 1055, post the revision in our earnings estimates. While we maintain our positive view on the company, owing to the recent run up in the stock price, we have downgraded our rating from BUY to ACCUMULATE.

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STOCK UPDATE

Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Hold
Price target: Rs112
Current market price: Rs79
Price target revised to Rs112

We spoke to the management of Jaiprakash Associates Ltd (JAL) recently and the key takeaways from the same are as follows.

• With regard to the amalgamation scheme proposed in February 2008, the court has directed JAL to convene the meeting of the shareholders on March 27, 2009 to approve the proposed scheme and the proposed provisions relating to the creation of a trust that is likely to hold the cross holding of JAL shares.

• As per the company’s data, the amalgamation scheme, if approved, is likely to result in an additional issue of 21.8 crore equity shares. Out of the 21.8 crore equity share dilution, the new trust will hold 92% of the new shares. Hence, there will be an equity dilution of 18.4% of shares if the holding under the trust is not extinguished and an equity dilution of 1.4% of shares if the holding under the trust is extinguished. However, we believe the shares under the trust would be utilised as a funding avenue to finance its real estate and infrastructure projects. In such as case, we expect an earnings dilution of 10-12% in FY2010.

• JAL has also announced that it has repurchased and extinguished the zero coupon convertible bonds (ZCCBs) aggregating to a face value of US$32 million, which were purchased at 45-50% discount to the face value. As per our working, if the repurchase was funded through external commercial borrowing (ECB), it would lead to saving of US$21-22 million for the company over the period of ZCCBs and would create value for the shareholders.

• Since, these ZCCBs constitute only 8% of the total ZCCBs aggregating to US$400 million and close to 2% of the total debt, this move is not likely to have any major positive impact on the financials of the company. However, we highlight that the company’s move is in the right direction in terms of creating value for the shareholders and we could see further foreign currency convertible bond (FCCB) buyback by the company (if the Reserve Bank of India [RBI] permits), going forward.

• We have revised our estimates to factor in the delay in the commissioning of the cement capacity and the delay in the execution of real estate projects. We have also removed the dilution on account of FCCB III (see FCCB table below), which are deep out of the money. Consequently, we have revised our earning estimates to Rs5.9 per share in FY2009 earnings estimates and Rs6.7 per share in FY2010 earnings estimate.

• At the current market price, the stock is trading at 13.3x FY2009 earnings estimate and 11.8x FY2010 earnings estimate. We continue to value the company using the sum of the parts (SOTP) valuation methodology and value the stock at Rs112. Though, there is likely to be significant value proposition from the real estate and power businesses in the long run, we highlight that the equity dilution from the proposed amalgamation and the proposed rights issue of Rs1,800 crore (which could further dilute to 22.8 crore equity at the current market price) are likely to remain an overhang on the stock in the near term. Hence, we maintain our Hold recommendation on the stock.

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MUTUAL GAINS

Sharekhan's top equity fund picks

We have identified the best equity-oriented schemes available in the market today based on the following 3 parameters: the past performance as indicated by the one and two year returns, the Sharpe ratio and Fama (net selectivity).

The past performance is measured by the one and two year returns generated by the scheme. Sharpe indicates risk-adjusted returns, giving the returns earned in excess of the risk-free rate for each unit of the risk taken. The Sharpe ratio is also indicative of the consistency of the returns as it takes into account the volatility in the returns as measured by the standard deviation.

FAMA measures the returns generated through selectivity, ie the returns generated because of the fund manager's ability to pick the right stocks. A higher value of net selectivity is always preferred as it reflects the stock picking ability of the fund manager.

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Click here to read report: Investor's Eye

[Investors Please Listen] India growth to recover faster than world-bank chief - BBC

Indias economic growth is expected to pick up faster than the rest of the world once a global revival begins, though it is difficult to predict when, the countrys central bank governor was quoted as saying.
In an interview with BBC World broadcast on Sunday, but taken before he left for a meeting of G20 in London, Reserve Bank of India Governor Duvvuri Subbarao said Asias third biggest economy could be an engine for global growth.
India can be a growth engine. Not that India can recover ahead of the world. But when recovery starts, Indias recovery is going to be sharp and rapid, Subbarao said.
In January, the International Monetary Fund cut its forecast for global growth in 2009 to a slight 0.5 percent -- the weakest since World War II -- from a November estimate of 2.2 percent.
Even though Indias exports account for 14 percent of its GDP, much lower than some of its Asian peers, Subbarao said the global crisis has hit the Indian economy through the financial and manufacturing sectors, and said it was difficult to predict the timing of the recovery.
The Indian economy has slowed sharply as exports were hit and consumer sentiment was dented. It is expected to expand at a six-year low of 7.1 percent from an average rate of around 9 percent in the last three years.
Subbarao said Indias financial sector remains sound, safe and well capitalized and this was because of prudent policy actions taken by the government and the central bank.
Since the global crisis hit Indias shores in September authorities have rolled out two stimulus packages, duty and rate cuts with the latest rate cut just last week to shore up growth.
G20 finance ministers on Saturday promised the IMF money to help troubled countries and said they would use their full fiscal and monetary firepower to combat the worst economic crisis since the 1930s. .
Subbarao said India has gained from globalization and would not turn away from it.
Globalization is a double edged sword. It comes with benefits and costs so I dont think pulling out of the global system is an option for any country.

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Posted By Ways2earn

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Thanks & Regards

Aditya Kachru
Investment Consultant & Associate Finance Broker
ARN-40736 | NCFM-187929


9818269396  | 9810269396 | 01204105997 | aditya.kachru@gmail.com | www.investorspleaselisten.blogspot.com


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Panacea Biotec Event Update ; mOPV1 vaccine under WHO scanner ; HOLD ; Target : Rs52

Panacea Biotec
 
mOPV1 vaccine under WHO scanner

 

HOLD
 
CMP: Rs53                  Target Price: Rs52

 

The DCGI (Drug Controller General of India) has suspended Panacea Biotec's sale of mOPV1s (Monovalent Oral Polio Vaccine) after it failed to meet the potency requirements set by WHO. In order to have more clarity on the issue and its impact on the OPV business, we spoke to the management. As per our discussions with the management and industry sources, this move will defer further supply of mOPV1 to UNICEF or the Indian government till it clears the potency test of WHO and NRA (National Regulatory Authority). We believe that in a worst case scenario, if Panacea fails to clear the potency test, it may have to take back and destroy the entire batch. We estimate this to negatively impact our FY10E EPS estimate by Rs 1.5.  However, we do not expect this to adversely impact its overall business with UNICEF or the Indian government. Owing to this development, we are downgrading our FY10E earnings estimates by Rs1.5 to Rs7.5. Downward revision in earnings has led to downward revision in target price and our rating on the stock. We have downgraded our rating from Buy to Hold with a revised target price of Rs52. At CMP of Rs53, the stock is trading at 7.0xFY09E and 7.1x FY10E.  Any adverse action taken by DCGI or WHO can be a key risk to our call.  
 

[Investors Please Listen] View from Research Desk on March 18, 2009

 

Unitech has signed deal with Telenor albeit on reduced valuations.

Telenor's stake in the venture is now at 67%. We believe this extra stake could have been negotiated because of higher debt in the telecom venture. However as regards for Unitech there is no change in terms of cash flows. Unitech mgmt expects to receive first tranche of payment of Rs 400 cr by next week. We think this news item will not have any major impact on stock price.

 

Drug regulators have banned polio vaccine from Panacea

Drug regulator has banned monovalent Oral Polio Vaccine (mOPV) for one of the batch of Panacea after the vaccine did not meet the required standards of potency in test done by WHO appointed independent bodies.

Our Take: Though it is difficult to ascertain the exact financial impact on the company, but sentimentally it's a big blow on the company. We have yet to get more clarity from the management. Our understanding is that in case if WHO reject the above batch and defer the new supply till the time the quality issues are being sorted out, Panacea Biotec will have minimum impact of 4mn doses of mOPV1 (assuming 10 immunization schedule and each schedule will have 4mn doses requirement) and US$10mn impact in the topline because of deferment of order. Considering 20% net margins on OPV, the EPS impact in FY09E could be Rs1.5. Our EPS estimate for FY09E and FY10E is Rs7.4 and Rs10.2 respectively. We will re-visit our numbers once we get clarity from the management. Till the time we are putting our rating under Hold.

 

Dishman cuts salaries by 13%

Dishman has announced that it will cut salaries of its staff by around 13% besides following lesser working days. We believe this is a fallout of the fact that company does not expect full up-liftment of stock by one of its key customers namely Solvay in current quarter because of de-stocking of inventory happening at Solvay's US operations. Consequently Dishman has decided to cut down production by following lesser working days. Salary cuts will also be a part of cost saving. However, we have built in the fall in revenues from Solvay in this quarter in our estimates for earnings. The company has already done an EPS of Rs 14.5 in 9months of this fiscal. We have assumed only Rs 3 EPS in Q4FY09. We maintain Buy recommendation on the stock with a target price of Rs 200

www.emkayshare.com  

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MNP – Watch Margins, Not Market Share

Telecom Sector

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Indian telecom industry, like many others, is in the process of implementing mobile number portability (MNP) which allows subscribers to switch operators while retaining the number. The DoT has recently selected Telcordia & Syniverse as 3^rd party neutral operators for providing porting services in the two zones, and has plans to introduce MNP beginning from Metros in August-09, which we believe would be delayed beyond 2009.

While MNP implementation is underway, the street has allayed fears of rise in competitive intensity, tariff war, market share loss by large telcos, etc. Therefore to understand the the likely implications in India, we have studied and analyzed the impact of MNP in few international markets like Canada, Japan, France, South Korea and Taiwan where MNP has been experienced. From our study it is evident that post MNP (1) the churn rate in most of the markets have clearly shown an increase, but only for short-term (6-12 months) (2) majority of countries have seen large operators losing subscriber market share to competition (3) operators have increased focus on subscriber acquisition and retention measures including, aggressive advertising, higher distribution commissions, improving quality of networks, tariff reduction, etc. which has led to fall in EBIDTA margins (4) Porting charges and porting time are critical as the two are inversely proportional to the use of MNP.

Few advantages may partially nullify the MNP impact in India…

Few characteristics of Indian wireless market act advantageous to existing operators and may partially nullify the MNP impact, such as (1) low penetration (~33%) might allow all players to grow (2) lowest tariffs (US$0.02) provide limited scope for pricing war (3) 92% of subscribers use pre-paid services where churn rate is already high at 45-54% (4) High competitive intensity with ~10 players in each circle where top 5 control 80% of the market, limiting scope of meaningful market share shifts.

Market share shifts wouldn’t really matter…

The launch of low entry-cost schemes by RCOM and Idea has resulted in extraordinary subscriber growth, but is mainly aimed at getting additional spectrum in our view. Such subscriber additions and market share gains would have little importance given very low revenue and profit contribution from such subscribers. In such a scenario, we believe that couple of percentage point shift in subscriber market share would not really concern.

Operators focus to increase towards post paid and retention

We believe that in post MNP business environment operators would focus on (1) loyal and number sensitive post-paid subscribers, who form ~8% of industry subscriber base but ~35% of industry revenues (2) Subscriber retention than acquisition as it is more rewarding in terms of revenues and also cost (subscriber acquisition cost).

…But watch out for margins

Similar to the trend witnessed globally, we believe that there could be around 100bps contraction in EBIDTA margins of all major mobile operators post MNP due to one or more of the following reasons (1) aggressive advertisement spend (2) higher distribution commissions (3) more bundled offerings to attract/ retain subscribers resulting in lower RPMs and hence margin drop (4) Improving network quality and service experience resulting in both higher capex and higher network opex.

Porting Time & Porting Charges are critical to success of MNP

Porting charge & porting time are inversely proportional to the usage of porting services in a country. For instance, high porting charge of say Rs1000 or high porting time of about 10-15 days could discourage subscribers from using MNP, affordable and faster service could encourage more use/ misuse of MNP. While the porting time globally has only reduced over time, we believe that porting charges would be critical to the success of MNP in India as well.

STOCK UPDATE

www.sharekhan.com

Crompton Greaves
Cluster: Apple Green
Recommendation: Buy
Price target: Rs210
Current market price: Rs129
Buy-back in the offing
The board of Crompton Greaves Ltd (CGL) has decided to buy back the company’s shares and will be meeting on March 24, 2009 to finalise the buy-back exercise. At the current market price, the CGL stock is discounting its FY2010E earnings by 7.4x. In our view, the valuation of the stock is compelling, as it clearly does not capture the growth prospects of the company, and this could have prompted the management to buy back the company’s shares. Furthermore, CGL’s strong balance sheet (a low debt-equity ratio at the consolidated level and net cash position at the stand-alone level) provides the company enough headroom to carry out the process smoothly.

Bharti Airtel
Cluster: Apple Green
Recommendation: Buy
Price target: Rs789
Current market price: Rs572
ATC-Xcel deal may help evaluate Bharti’s tower business

• As per media reports, American Tower Corporation (ATC) is all set to acquire India-based independent tower company, Xcel Telecom. The deal, if it materialises, can give us certain indications of the ruling valuation of the domestic tower company and be used as a yardstick to value Bharti Airtel’s tower business. 

• ATC is reportedly planning to acquire Xcel Telecom for a total of USD136 million (Rs700 crore). Xcel Telecom, established in 2006, provides telecommunications infrastructure services in India. The company is aiming to set up a portfolio of 25,000 towers in the next three years through organic and inorganic routes. For the proposed portfolio of towers, Xcel Telecom intends to make capital investment of over USD2.5 billion over the next couple of years. 

• As per the media reports, Xcel Telecom has a tower base of 1,350 towers as on November 30, 2008. Based on this, the value per tower works out to Rs0.52 crore (USD0.10 million per tower). The deal is at a 15% discount to the value of Rs0.61 crore per tower paid by Quippo Telecom to acquire a 49% stake in Wireless Tata Teleservices (WTT) for a total of Rs2,400 crore.

• If we use the Rs0.52 crore per tower valuation of Xcel Telecom to value the 61,355 towers of Bharti Infratel as on December 2008, the value for Bharti Airtel works out to Rs31,814 crore and that for Bharti Airtel’s 92% stake in its tower subsidiary works out to Rs154.2 per share. This is much ahead of the value of Rs112 per share taken by us in our price target for the stock based on the discounted cash flow method.

• At the current market price, the stock trades at 10.9x its FY2010 estimated earnings and 6.2x enterprise value/earnings before interest, tax, depreciation and amortisation. We maintain our Buy recommendation on the stock with a price target of Rs789 per share.

HCL Technologies
Cluster: Apple Green
Recommendation: Hold
Price target: Rs144
Current market price: Rs102
Reader’s Digest’s deal part of Q3 deal win

Key points

• HCL Technologies (HCL Tech) has announced that it has signed an information technology (IT) outsourcing engagement worth over US$350 million with Reader’s Digest Association spread over seven years. Our interaction with the management leads us to believe that this deal is a part of US$1 billion worth of deals the company had won in Q3FY2009.

• Though HCL Tech won record deals of US$1 billion in Q3FY2009, we highlight that the company is likely to incur an upfront transaction cost of US$25 million for clients. Hence, we see risk to the company’s earnings, as the upfront transition cost on some of the new deals may not be supported by increased volume from the clients in the current difficult environment.

• Further, the rupee has depreciated significantly, close to 5.2%, in the last one month and is expected to remain weak in coming days. In our view, the depreciation in the rupee is likely to again expand HCL Tech’s unrecognised foreign exchange (forex) losses. In Q3FY2009, the company’s unrecognised forex losses expanded to US$207 million from US$156 million due to the depreciation in the rupee.

• At the current market price, the stock is trading at 5.5x FY2009 earnings estimate and 5.8x FY2010 earnings estimate. Historically, HCL Tech has traded on an average of 20-25% discount to Infosys. However, the stock has de-rated in the last six to nine months and the discount has widened to 53% due to HCL Tech’s aggressive hedging policy causing huge pile of forex losses on its balance sheet and due to acquisition of Axon in the current difficult environment. Given the huge pileup of unrecognised forex losses and the risk to the company’s earnings due to upfront transition cost and the dilution of margin from Axon’s acquisition, we do not see any re-rating in HCL Tech’s price/earning (PE) multiple in the near term. Hence, we maintain our Hold recommendation on the stock with a price target of Rs144.

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Click here to read report: Investor's Eye

Our regular features on investments and equity picks for our investors.

Investment Insights

FROM SHAREKHAN'S DESK

Markets reel under deepening global recession

Despite some positive macro indicators at home (rising cement dispatches, increasing automobile sales, persistently growing telecom subscriptions, declining inflation, more rate cuts by the central bank etc) market sentiments have deteriorated significantly in the past few weeks. The deepening global recession and India specific issues (a marked deterioration in the government’s fiscal health and uncertain outcome of general elections), have dragged down the markets. 

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MARKET OUTLOOK

Another round of collateral damage

• The markets across the world have slipped to new multi-year lows on account of the deepening economic recession globally. In the USA, the economic realities have overshadowed the short-lived euphoria that was created by the rhetoric of the Obama administration. Apart from the USA, the economic news flow from the other developed part of the world, such as Europe and Japan, has also worsened significantly in the past few weeks.

• The Indian equity markets have also witnessed a sell-off in line with the meltdown in the global markets. Apart from the global concerns, there are India-specific issues that have spooked the markets. First, the higher than anticipated consolidated fiscal deficit of 11.4% for the current fiscal 2008-09 and its fall-out on the economy (eg a possible review of the country’s sovereign rating). Second, the outcome of the forthcoming general elections remains uncertain with the growing possibility of a coalition government heavily dependent on the regional and smaller parties. Third, the recent incidents in neighbouring countries like Pakistan, Sri Lanka and Bangladesh have added a new dimension of regional instability as a potential risk for the foreign investors.

• Given the growing concerns (global and domestic) and the absence of any positive triggers till the new government comes in place by June this year, the risk of a break-down from the trading range of the past four months has increased substantially. However, the silver lining is that such an eventuality could be a once in a lifetime opportunity for building a long-term portfolio. Moreover, the markets would continue to provide strong trading rallies despite the downward bias.

• Notwithstanding the near-term concerns, we continue to believe that the situation would improve substantially by the last quarter of CY2009. There is a growing consensus that the worst could be over for the global economy by the end of CY2009. Moreover, India would be among the first few countries to revive. Especially since its rural economy (accounts for 45% of consumer spending) has shown resilience and the wage hikes to government employees would also act as a growth stimulus. By the end of 2009, corporate performance should show a distinct improvement on the back of the lag effect of the central bank’s loose monetary policy, lower energy cost and favourable base effect. In terms of valuation, the Sensex is trading at around 10x FY2010 earnings considering a flattish growth in FY2009 and a marginal decline in its earnings in FY2010.

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SHAREKHAN TOP PICKS

• Sharekhan top picks
  

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STOCK UPDATE

• Aban Offshore: Downgraded to Hold
• Aditya Birla Nuvo: Price target revised to Rs943
• Bharat Bijlee: Book profit
• Bharat Electronics: Strong order book, new contracts to drive growth
• Elder Pharmaceuticals: Book out
• Esab India: Price target revised to Rs310
• Genus Power Infrastructures: Price target revised to Rs160
• Grasim Industries: Price target revised to Rs1,458
• Hindustan Unilever: Price cuts to tackle declining volume growth
• Lupin: Global Fund disbursements slow down
• Madras Cements: Results below expectations
• Mahindra & Mahindra: Price target revised to Rs358
• Maruti Suzuki India: Put on Hold
• Orchid Chemicals & Pharmaceuticals: Price target revised to Rs117
• Punjab National Bank: Price target revised to Rs512
• Ranbaxy Laboratories: Book out
• Reliance Industries: Commercial gas production from KG D-6 delayed
• SEAMEC: Better deployment boosts results
• Selan Exploration Technology: Price target revised to Rs224
• Shiv-Vani Oil & Gas Exploration Services: Price target revised to Rs370
• Sintex Industries: Price target revised to Rs284
• State Bank of India: A tightrope walk
• Sun Pharmaceutical Industries: Price target revised to Rs1,295
• Television Eighteen India: Book out
• UltraTech Cement: Put on Hold
• WS Industries India: Price target revised to Rs54; maintained Hold

Occupancies, room rates dip significantly in January 2009

STOCK UPDATE

Indian Hotels Company
Cluster: Apple Green
Recommendation: Buy
Price target: Rs82
Current market price: Rs35
Occupancies, room rates dip significantly in January 2009

Key points

• A significant slowdown in business and leisure travel has led the occupancies of the hotel industry to fall from 75% to 58% year on year (yoy) and the average room rate (ARR) decline by 17% yoy in January 2009.
  w Foreign tourist arrival has also weakened after 9/11 terror attacks on Mumbai in late November 2008. However, the rate of decline has eased in February 2009 (a month-on-month increase as compared to January 2009).

• Hotel chains, airlines and travel agents along with the department of tourism of India have initiated a joint promotional campaign—Visit India 2009—to encourage tourism in India. The campaign entails offering enticing schemes to prospective customers during the period April-December 2009. Though such initiatives are welcome, the coming lean season is expected to remain tough due to a higher base effect and continued bleak macro environment.

• As for the hotel industry, we believe the occupancies and ARRs of Indian Hotels Company will also remain under pressure in Q4FY2009 and FY2010, however the addition of new room inventory should help drive growth in FY2010.

• While the business faces several challenges in the medium term, we believe the current valuations of 7.2x and 5.8x consolidated earnings per share (EPS) for FY2009E and FY2010E are at historic low levels and provides a good entry point for long-term investment in the stock. We maintain our Buy recommendation on the stock with our price target of Rs82.

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SECTOR UPDATE

Automobiles

Some respite in February
After four consecutive months of speed breakers, in February 2009 automobile companies experienced some respite as some effects of the various economic stimulus packages combined with the rebuilt inventory improved the volumes during the month. Further, interest rate cuts on automobile loans and the pay hikes based on the Sixth Pay Commission’s recommendations also boosted demand to some extent. Some of the automakers have lined up new and aggressive launches in the coming months, in an attempt to fight the slackening demand. In February 2009, the car segment outpaced the two-wheeler segment by recording a 21.8% growth in the domestic market. The two-wheeler sales grew by 16.2% in the domestic market. The overall automobile sales volume rose by 10% with the domestic sales rising by 12.7% and exports declining by 7%.

Cement

February dispatches up by 9.1%

• Cement dispatches for February 2009 grew by 9.1% year on year (yoy) to 16.1 million metric tonne (MMT). The cumulative dispatches for the period April 2008-February 2009 grew by 8.3% to 162.9MMT. The growth for the month under review is mainly on the back of strong demand from governmental infrastructure projects and personal housing construction in rural and semi-urban areas. 

• The utilisation ratio for the month under review stood at 92.4% as against 100.8% a year ago. The drop in the utilisation is backed by a 19% year-on-year (y-o-y) addition in the capacity. On a month-on-month (m-o-m) basis, the utilisation ratio has come down by 101 basis points.

• Among regions, North India emerged as the leading cement-consuming region with the consumption growing by a whopping 18.4%. Eastern region also registered an impressive growth of 13%, whereas the consumption in southern region improved by 8.2% yoy. However, western and central regions registered poor performance for the month. 

• Among the companies under our coverage, Orient Paper and Industries Ltd (OPIL) emerged as a pioneer with a robust volume growth of 21% yoy to 0.2MMT during the month. Shree Cement also registered an impressive volume growth of 14% yoy. Dispatches of top three players—ACC, Grasim Industries and Ambuja Cement—was a mixed bag with the volume growing by 2.8%, 11.9% and 13% yoy respectively.

• Cement prices have moved up twice across the country in February 2009 and the average price hike is Rs8 to Rs9 per bag of 50 kg. Prices in the southern region remained unchanged on a m-o-m basis, as cement is already selling at a premium to that of other regions. Eastern region witnessed the highest price hike. 

• Though macro head wind, in terms of a slowdown in the urban real estate sector and the overall slowdown in the economy, remains the revival in the volumes from the last four consecutive months have created positive sentiment for the sector. Moreover, the recent price hike (Rs8 to Rs9 per bag) announced by the companies, coupled with moderation at cost front, in terms of softened crude, coal and packaging prices, may give positive surprises on the margin front in the coming two quarters. However, the anticipated slowdown in government projects after election, slowdown in the urban real estate sector and the upcoming capacity (54MMT by the end of FY2010) is likely to put pressure on the realisations by the end of FY2010. In such a situation, we prefer Shree Cement and UltraTech Cement due to relatively early commissioning of their capacities and investment in captive power plants.

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