Market News

Markets today opened flat on cautious remarks yesterday by federal reserve on continuing the low interest rate regime as the worries of European crisis still loom large and the USA not having still tread on the revival path. The new home sales data yesterday declined by as much as 37% which clearly indicated that tax credits provided had only a limited impact.

ITC recently launched a Vivel fairness cream in kerala. This segment in personal care is growing at 15% with HUL being the market leader. It is possible the ITC might intensify competition in the 1700 cr. industry. Also with the hotel business reviving and cigarette business showing resilience to price hikes/ tax hikes ITC might be able to keep its growth momentum on track. The stock may be researched further for investment.

Reliance Industries with announcements of increased refining capacities to 700 kbpd. Also the announcement of increasing the retail arm revenues to 10 billion USD from 1 billion USD has been positive. It has also said it would enter into coal, hydro and nuclear based power and power distribution. It shall also have a focus on solar power generation. The company also plans to increase its petrochemical capacities providing paraffin for the detergent market and also into elastomers.

Tata motors has been reporting high growth in the sales. The sales last month had jumped by 72% to 80000 YOY. The cumulative sales have also jumped to 160000 which is 52% higher than the last year same period. Jaguar and landrover have reported a growth of 72%. land Rover grew by 93% and Jaguar by 36%. land rover has been doing extremely well with it reporting a cumulative growth of 91%. Given higher margins for Land Rover and Jaguar vehicles tata motors seems to be on a recovery - growth path. One may research the stock further for investment purpose.

Recently HCL won 2 order , 1 from Merck (500 million USD) and other from SGX (110 m USD). These projects have a focus on Infrastructure management. Merck deal is across the value chain from providing IT solution, engineering, Infrastructure Management and knowledge process outsourcing. HCL has recently set up a multilingual process development office in Brazil to become stronger in the Infrastructure management space. It is expected the companies would strongly want to reduce their infrastructure management costs in the coming years and HCL being one of the biggest players in this domain stands to gain.

Edelweiss has announced a stock split of 1:5 and a bonus of 1:1. This stock might see a lot of activity today.

Kotak Mahindra Bank: ING would be selling 3% stake in the Bank. By this transaction ING would get Rs. 800 cr. which would be used the expand the operations in India. Also the 3% stake sale might push the Kotak prices down. This might be used as an opportunity to buy into the stock.

IDFC has bagged Infrastructure non banking company status. They would be able to lower the borrowing cost.The company will benefit because of huge infrastructure spending in the country. It is a well established infra financing company. The company has also diversified its risk by going in to MFs.

Read more at: http://beta.profit.ndtv.com/stock/recommendation?page=1&cp

GAIL : At its current price of Rs 472, the stock has gained almost 70 per cent over one year with PE of 18. There might be still a scope for upside, primarily due to the company's strong positioning, good performance and massive expansion plans in the burgeoning Indian gas market, where demand growth outpaces rapid growth in supplies. With rise in prices and better marketing margins also with expansion plans in other major segments such as petrochemicals lend confidence its prospects. Success in exploration efforts and removal of subsidy overhang, if they materialise, may further improve returns.

Opportunities, risks

Big wins in its exploration and production efforts could integrate the company across the energy value-chain and provide a significant upside trigger for the stock. This will also mitigate risks if expected gas volumes from other sources do not meet expectations. Lack of success, however, will result in an increase in write-off of exploration expenses and could prove to be a drag.

On the other hand, subsidy overhang continues to be a drag and a major risk factor for the company. GAIL's share (around Rs. 1,320 crore) of the subsidy burden in FY-10 on transport fuels accounted for more than 20 per cent of its operating profits for the year. The Kirit Parikh committee recommendations on fuel price deregulation include exempting GAIL altogether from the subsidy sharing mechanism. The government move of more than doubling APM gas prices in May sent positive signals on its intent on fuel price deregulation.

However, it remains to be seen whether the powers-that-be will implement the recommendations, especially in the current high inflation environment. Any positive move on this front could provide another positive trigger for the stock. A business-as-usual scenario could depress the stock's prospects, especially in a regime of high crude prices and inflating subsidy bills.

NTPC: It is a stock with limited downside risk. But there is no immediate trigger for an upside. The company has acquired mines in Australia and diversified into nuclear power gen. It is for long term investors.

Read more at: http://beta.profit.ndtv.com/stock/recommendation?page=1&cp

Reliance Communication: The industry is going through a bad patch because of huge outflow on account of the 3G and BWA auction. The average revenue per customer has been falling. The company is planning a stake sale that will de-leverage the balance sheet.

Read more at: http://beta.profit.ndtv.com/stock/recommendation?page=1&cp

Power Grid: The company’s results have been disappointing. But the stock might rise if the proposed expansion goes through which will take 2-3 years time. The company has a monopoly when it comes to power transmission in India. Hold with a target of 140.

Read more at: http://beta.profit.ndtv.com/stock/recommendation?page=1&cp

Idea: The company has shown good performance and a healthy growth trend despite the telecom industry being under a lot of pressure. It is quoting at an attractive multiple of 13. It can touch 91 levels.

Read more at: http://beta.profit.ndtv.com/stock/recommendation?page=3&cp

Market News today

The home sales data in the US was disappointing in spite of the tax credits to incentivize home purchases. The sales fell by 2.2% after an increase in the month of April. The consensus had been a 5% increase.

The steel stock might see action on back of the export rebate in long & flat product and even cold rolls being scrapped in China. This is speculated as Chinese imports reducing into India and hence the steel prices actually moving up as the imports from "CHINA" reduce. But his might affect the iron ore producers and exporters of India such as Sesa Goa and Gujarat NRE Coke.

Larsen and toubro might come under pressure after it was rejected out of the NTPC Rs. 25000 cr. deal for super critical boilers and turbines. But the dis qualification is a technical glitch which can be resolved after L&T can shift the JV from L&T power to itself. Thus it may be assumed as a buy on dips. However the re-tendering would involve even higher competition this time. One may watch the benefits BHEL might derive out of this re-tendering.

In an effort to cut the soaring debt in Britain, the budget announced austerity measures. They have proposed increased in fuel prices and fuel duty. Some announcement on Climate Change levy were also discussed.

Stocks in News

Jai Prakash Associates

The net sales increased by 36% and the operating margins increased to 40%. E&C contributed 46$ of the revenue whereas cement contributed 34% and power & real estate contributing 12%
with infra and other contributing the rest.

The cement was the highest contributor to the profitability (44%) followed by power and construction (23% & 21%). The exceptional profit was on account of sale of treasury shares held by the trust.

But JP associates has a huge debt on its books however this debt might be due to project specific debts. The standalone net debt is 140 bn whereas overall debt is 350 bn. It is expected that its cement production would command a premium in the market and its power generation activities would start providing cash flows which would be used to repay the debt.

Nifty is expected to be range bound today between 4250 and 4330. We expect the market might not give any clear trend before the expiry.

Reliance Industries has planned to invest 1.35 bn in shale gas acquisition in texas and would further invest 3 bn USD in the development of the same in the next 5 years.

R com has been now intiating dialogue with the french telecom company vivendi for a stake sale of 26%.

The PSU Oil marketing companies and Oil exploration companies might experience some activity due to the announcement of 25th june meeting scheduled for discussing freeing up the administered price mechanism.


The max put OI for june is ar 4800 and max put OI for July is 5000. The max call OI for June is 5300 and max call OI is 5400. The roll overs have not been huge.

IMG and RIL might form Indian Basketball league.

There is talk of Hindustan motors planning to sell its Chennai plant asset to Mitsubishi.

Godrej industries has been experiencing activity as godrej properties has been doing good and its own 70% of godrej properties.

Shell India has put 20 retail outlets for sale.


In the debt market there is still an acute shortage of liquidity which we see with huge CD issuance coming by bank in a single day which was 9000 crs. I believe the impact of 3G and BWA auctions would be sharp in the short term yield curve with yields falling back to the 4% levels. However it may be remembered no impact was seen on the longer end of the yield curve after the auctions and hence it would remain in the same range even after the liquidity surplus in a months time as govt spends the money getting it back into the system.

The govt might not borrow less this year but 3g and BWA auction have made sure govt. does not exceed its borrowing plan this year. There is only a probability of it reducing the borrowing in the second half. But this has already been factored discounted in the yield curve. Now with RBI increasing the interest rates and credit picking up ( thats what the IIP numbers show) we should only see the yield curve moving up in the coming days.

People have been arguing that RBI inaction might be continued given the looming euro crisis and Inflation expected to reduce with high base affect the last year. I would look the 10 year moving to 8% by the August and might move up to 8.10-8.15 by the end of september.

The 3g money is most likely to used for paying cash subsidies to OMC which were budgeted only Rs. 14000 cr. The extra subsidies is expected to be paid by the proceeds if the crude prices continue to rise this year.

·

Bond markets

The benchmark 10-year bond yield has come down 12 basis points from a 5-week high touched last week, after a higher-than-expected inflation data raised concerns of an off-cycle policy tightening. The Reserve Bank of India (RBI) bought back 8.07 billion rupees of bonds under its open market operations, compared with a target of 100 billion rupees via a multiple price auction, it said late Monday.Thus the buyback was a large disappointment.

The 1-year overnight indexed swap (OIS) rate rose to 5.43 per cent, from Monday's close of 5.39 per cent and from the 19-month peak of 5.62 per cent hit last Friday.

Given the positive IIP numbers and Inflation numbers it is widely speculated from some sections of the market that RBI might increase the rates. After the BWA auctions it is expected the operators would have borrowed close to 8.4 billion dollars (USD 29 billion in total for 3G included) from Banks. It is also speculated there might be a 2 stage rate hike.One before the policy review and one after the policy review.

The lastest WPI number was at 10.16 from a year earlier in May. The outlfow for the payment for 3G and BWA auction has been 1.36 trillion rupees.

Longer yields i.e. 10 year versus 1 year spread has been at 242 bps. We beleive these spreads should widen over the coming days. The recent devolvement which happened only indicated that RBI is not comfortable with the increase in yields. These yields have also been held lower as the Govt. wants to complete its borrowing at lower cost. Last week the banks has borrowed 1.4 lac crore from repo and only 1600 cr. was parked under reverse repo.

The recent inflation data was at 10.16% which clearly showed the inflation rising was not only due to food but manufacturing was also contributing in a big way to the inflationary scenario.

Given the huge inflows from 3G and BWA auctions it was expected government would borrowing less however the government has made an announcement on not reducing its borrowing for this fiscal year. Actually the money offtake from the banks should be around 70000 cr for payment for 3G and BWA auctions.

If the Euro Zone worries persist the bond markets might see a lot of foreign money flowing into the debt market thus decreasing the debt yields further down to 7.30% levels.

It is expected that RBI might increase 50 bps increase in both repo and reverse repo on or before the July policy review. Actually the yields have been extremely volatile given the various statement coming from across the corners of finance ministry and RBI.

Stocks in News

Sterlite Industries.

Revenues had increased by 15.4% due to increased volumes in Copper and Zinc business and LME prices. Though the raw material costs has increased with the copper concentrate being lower from its copper mines. The employee cost had increased due to wage settlement at HIND Zinc. There have been capacity expansion to the extent of 15%. The inventories have also improved.
Sterlite Industries is largely looking to consolidate and integrate its existing business. The stock may be researched further for Investment.

Tata Steel

Tata steel has recently got an approval to increase the capacity at its Jamshedpur plant by 45%. This stock has been beaten down during the recent correction in the market. The appreciation of Yuan has been playing into the increasing interest in commodity stocks. One may look to invest in this stock after further research.

Nifty ETF

Trading at near its 52 week high. One may become book profits at these levels as Nifty BeES might face resistance at 540 levels. There has been a continous rally in the last 10-12 trading sessions. It is advisable to have short positions in the index. I ex[ect the european markets to open gap down after the french bank BNP Paribas was downgraded by fitch. However i expect the market to start finding some support at 5300 levels.

Other News

The Supreme court has decided that there should be a payment of Rs 1 lakh / tower in delhi. If the same gets implemented pan India the impact could be heavy.

The rollover have been lower for this month vis a vis the last month roll overs.

Daily Bite 22nd June 2010

The events that would determine the movement of markets would be:

Fitch cut its rating of on French Bank BNP Paribas which was slashed from AA to AA minus on deteriorating asset quality.

Stock In news

Escorts :By selling off its non-core assets it has steadily been able to decrease leverage in its books and has seen a turnaround if sorts this year. One may look at this stock for investment purposes. It expects to do good in the firm equipment sector.

Bharti Airtel: The stock may do well in the coming days as the worst is almost over. The ARPUs are at their all time low. The ZAIN deal is expected to be EPS accretive. The Stock may be bought at current levels with a target of Rs. 300 in 6 months time.

Lanco Infratech is a stock which has moved up rapidly. But the positive news on the stock is on commisioning of 2500 MW of plants. The financial closure for a couple of projects may be acheived very soon. The stock may be researched further for Investment purposes.

BGR energy is also in the buzz given the company is in fray for 2 large EPS orders of Suratgrah and Chhabra. Also the bulk tendering would be eligible to re-bidding. The stock may researched further for Investment purposes.

C&C Constructions Limited (C&C), a Gurgaon based Infra development firm with presence in India and Afghanistan. It is into transportation engineering, Commercial Buildings, Water Sanitation and Sewerage, railways and transmission tower Sectors. It has had a tremendous growth in its order book. Execution of projects in difficult terrains translates into higher EBIDTA margins. It has ownership of high end equipment hence ability to execute on time. Foray into BOT ( Build Operate Transfer) projects. 70% of the contracts are Government contracts and other multilateral agencies which entails timely payment. The stock may researched further for Investment purposes.

Sobha Developers is one of the South India's real estate and construction company. It has contructed 36 m sq ft of real estate and contract projects. With presence in bengaluru which one of the most stable real estate markets and which has a huge employment potential it is best positioned to capitalize on bengaluru growth. Sobha is also the preferred contractor for Infosys.
It is expected to improve its leverage position from the cash flows from its ongoing projects.
The stock may researched further for Investment purposes.

Maytas Infra might sell 20% stake to Saudi Binladin Group's SBG Projects Ltd. Some activity may be seen in this stock.

Dr. Reddys might also be in action as it plans to sell off its domestic formulations business after demerging its businesses.

ICICI Bank may see some actions as Bank of Rajasthan employees go on strike for 3 days starting today.

Hindalco might see action as novelis plans to bid for Rio Tintos Alcan unit.

IDFC plans to sell 26% stake in its AMC business to a foreign player.

Day Update 21st June 2010

The Indian markets have opened positive today mainly on 2 events over the weekend.

1. Resolution of the ULIP dispute between SEBI and IRDA which went in favour of IRDA. Govt said it would categorize the hybrid product under regulatory aegis of IRDA. This move may attract greater interest in such schemes as this is a major source of inflows into equities.

SEBI had argued that since 99% of the ULIPs inflows go into investment and only 1% towards insurance it should fall under the regulatory radar of SEBI.

Insurance companies pay up to 40% of 1st premium as commission on a long term policy. However mutual funds can no more charge entry loads. This made SEBI issue a ban on ULIPs which were very similar to the mutual fund products. However ULIPs constituted 68% of the total premium (1.15 lac crore) collected the last year. So any adverse decision would have negatively affected the Inflows in the equity market and Govts. long drawn disinvestment plans with Insurance companies ( read LIC) providing a saving grace would have been crippled making the divestment process tepid. Compare this to the Equity mutual fund inflows the last year, which stood at 595 cr. ( highly minuscule in comparison to ULIPS). This is the reason why the verdict went in favor of IRDA.

2. The second news which reached the market was China announcing its scrapping the artificial peg of Yuan with Dollar. This has been received positively across the world. Indian markets have received it positively as it makes India's competitiveness improves in the world market vis-a-vis China. I believe this has been particularly done to appease US ahead of G20 meet as it had been pressurizing China to free it currency. I dont expect a major move as China still holds majority of its reserves in USD. Any appreciation would negatively impact its currencies. Also the local Industries may suffer largely as appreciation would compromise China's competitiveness in the World market and may lead to closure of Industries in China. But the announcement has however pacified the US and European nations by averting any proposal to call China as a "Currency Manipulator" and any legislative action against it by increasing the tariffs and trade barriers.

I expect the market seem to be following an uptrend however i would like to go cautious and book profits at levels. Stock specifically i would take exposure in Bharti, Tata Steel, Sterlite, Reliance and Power Grid. These stocks are currently trading at 266, 490, 180, 1065 and 102.90 respectively.

Maruti Udyog review

Maruti Udyog ( Nomura)

June 2010 review

1. Domestic Car market to increase at 16% CAGR over next 5 years.
2. Better distribution to help maruti offset competition
3. Maruti is fast gaining markest share in the higher end segments.
4. The buy target is Rs. 1591.
5. Penetration of only 12.5 cars per 1000 people strong volume growth is expected in cars
6. Korea and China reached this position in 1984 and 2004 and after that their volumes grew by 25% CAGR.
7. It market share might come down over the next 2 years with Nano scaling up into the market but it should be able to increase its market share in the utility vehicles space with launch of Eeco and RIII.
8. It is expected the domestic volumes for grow at 15% CAGR for the next 5 years.
9. With improved road infrastructure and increase in income levels in the rural india the car penetration should increase. Maruti would benefit the most as it has an extensive distribution network which is 5 times that of GM and ford.
10. Currently the stock is trading at 12 F EPS and it is expected to touch 15 F EPS.
11. It is anticipated the volumes would still grow at 11% in the coming five years.
12. The Average selling Price (ASP) and Average Realization has increased 4-5% on an average over the past five years.
13. The company may hence post 12-15% increase in net sales
14. Market share concerns are more pronounced because of the foraying of Tata nano but it doesn’t compete directly with Maruti Suzuki
15. Replication of Maruti Distribution and Service Network is difficult
16. New product launches should keep the companys sales ticking.
17. MSIL produced 1.2 mn units and want to expand the capacities to 1.3 mn units before FY 12.
18. Indian Auto Industry is cost competitive and maruti has a huge advantage in that domain
19. If GST gets implemented it would bring down the car prices by 4% and hence boosting the sales.
20. It will also launch KIzashi which will be a premium segment launch and a new variant in Alto.
21. It will also launch it Bi-fuel CNG engine in India. All this would help company growth.
22. Commodity prices if fall further would result in better margins for the company.
23. If the yen depreciates by 1% the margins would improve by 0.16%. This is because MSIL imports 20% parts from Japan of its net sales.
24. This risk lies in the exports to Europe and depreciation of Euro would impact the realization from the export business.
25. New launches from competitor would eat up the market share of the company.
26. Company now earns 5% through its subsidiaries.
27. The estimate is based on 9% GDP growth for India. If the growth slows down the volumes would get impacted adversely.
28. A sharp increase in Commodity prices would negatively impact the margins as it would be unable to pass the increases to the customer given the increased competition in the car market.
29. MSIL generates 12% sales from Europe. Any adverse conditions in Europe would impact the demand adversely for maruti and hence its margins.
30. Also with Euro weaking the margin pressure would further increase.
31. However we expect the company would have hedged its positions in EURO in the first quarter of this year.
32. Strengthening of Yen would impact margins negatively.
33. It has been assumed an earnings CAGR of 12% and terminal ROE at 15%.
34. Maruti has long traded in line with Sensex or at a slight premium.
35. MSIL currently operated on 100% capacity and therefore focusing on Higher end segments will help it generate higher returns.
36. Even if the market share of maruti reduces from 50% to 45% the drop would be majorly owing to Nano launch however nano doesn’t compete directly with marutis portfolio.
37. Hyundai has less than half number of dealer outlets.
38. MSIL has 2868 service stations across the country, ensuring availability of parts and service across the length and breadth of the country.
39. A typical dealership gets 75% revenue from servicing and new car sales. However new dealerships get a major chunk from the new car sales. If GM and ford which are trying to expand their dealerships are not able to achieve sufficient new car sales it would be difficult for the dealerships to become viable
40. 56% cars on Indian roads are Maruti which presents a huge servicing opportunity.
41. It has been growing rapidly in the A3 segment
42. Maruti has led JD power customer satisfaction survey for many years now.
43. Maruti Wagon R is competitively priced in comparison to Ford figo and GM Beat. It has low cost of servicing and residual value.
44. Maruti has increased its focus of R&D. The new wagon R with CNG variant may be launched soon and also a BI-fuel engine.
45. It has been successful in the UV segment with the launch of EECO. It has a waiting list of more than a month. With RIII launch in 2011 there is greater scope in this category
46. Maruti is planning a capex of 17bn to expand the manesar capacity by 250000 units.
47. Indian auto industry is highly cost competitive and product mix is skewed to the lower end. Thus other global players have been unsuccessful as it doesn’t fit the cost economics.
48. With 19% stake of VW in MSIL parent, it would synergies the capabilities of VW to foray into high ended cars.

Indian IT Industry June 2010 Review

Indian IT industry

June 2010 review (Jaypee)

1. IT companies consistently widening their services spectrum
2. They are rising up the value chain of IT services industry.
3. It offer services in:

a. IT consulting
b. Application development
c. Software product engineering
d. Enterprise System integration
e. Business Process Outsourcing
f. Testing Services
g. Re-engineering

4. BPO services are offered in

a. Finance
b. Customer Service
c. IT infra management
d. Analytics and Research
e. Risk Management
f. HR, Media and Legal Outsourcing

5. Since IT is still largely export driven, USD INR rate impacts the revenues.

Financials

1. Infosys is being valued at 22X at FY12 E, TCS at 21X and Wipro at 21X of FY12 E.
IT value chain

1. IT companies stated from Maintenance and support and then the transitions happened to ADM and now recently have tried foraying into IT consulting and re-engineering.
2. Consulting is a high margin business.
3. IT companies through bundling of their services get the IT and BPO projects together. With significant revenue now coming from BPO business, Indian IT companies are giving off a stiff competition to the pure play BPO Vendors like Genpact and WNS.

SWOT

Strength

1. Indian IT industry is a 50 bn USD industry.
2. Indian IT companies are now offering services at all points on the value chain. The big players offer integrated services hence they are able to get large projects.
3. Indian IT companies are strong in BFSI vertical and going forward the revenue from this vertical might increase as the spending in IT under this vertical increases.

Weakness

1. Consulting and research still contribute less to the total revenue however IT companies are trying to strengthen their consulting and research departments.

Opportunities

1. Hardly 100 of the top fortune 1000 companies do business in India. Hence there is a huge potential for outsourcing.
2. Indian IT market is only 5% of the global IT spend market. Opportunity to increase this pie.
3. With cost cutting coming into play the companies would most likely outsource for curtailing expenses.
4. Also the steady recovery in global scenario would improve the IT spends by companies.
5. Vendor consolidation would also help Indian IT companies to consolidate their positions.
6. The US healthcare bill is an opportunity for Indian IT companies.
7. Cloud computing is also a huge opportunity.
8. All big banks would be outsourcing in the near future.

Threats

1. Rising rupee would be the biggest threat
2. Off shoring to india advantage replicated by other countries would increase competition and put pressure on margins and billing rates.
3. US markets remain the biggest market for Indian IT industry. US govt. policies towards outsourcing if adverse would prohibit the growth.
4. Rising salary pressures put a downward pressure on the margins.

Other points

1. Forrester research expects the US IT industry to grow by 10% this year.
2. The consulting and system integration would grow at the fastest pace.
3. Nasscom predicts than Indian IT industry can grow at 25% CAGR for the next decade.
4. Nasscom predicts Indian IT industry can grow at 13-15% in FY11.
Application Development Maintenance (ADM) business was what drove the market the most till 2000. The Indian IT companies have stretched on the Upside of the value chain by getting into consulting and have stretched to the lower end of the value chain by providing the BPO services.
5. Cloud computing are finding place in the clients option list. It is internet based resource sharing, software sharing and information sharing service. Cloud is metaphor for internet. The data shared is accessed through a web browser.
6. The Rupee has been steadily rising given the huge FII inflows into the Indian market with our growth story intact. This may impact the IT export businesses adversely.
7. The domestic Indian IT market is growing and now stands at UDS 20 billion. This is going to grow more rapidly as the industries expand and economy grows steadily at 8%. IT services sector is expected to grow at 17% in the domestic Indian market.
8. Clients have been raising concerns with Indian IT vendors in relation to the Attrition rate which hampers the smooth completion of the project and Data security as the policies for it are not as stringent as they are prevalent in western countries. There have been past incidents of data thefts.
9. Testing services is high volume based and also cost sensitive , India has a huge opportunity in this domain. All major product engineering firm would require lost cost testing of their products in India. Eg. Google and Microsoft.
10. Offshore product development services also offer a huge scope for Indian IT industry. The product development market is expected to double by 2013. Engineering services are also expected to do well in the future. IT governance and Mobile Banking are other opportunities in this space.

There is an acquisition spree among Indian IT companies. The targets are BPO, mortgage, healthcare and insurance space.

New Opportunities

There is immense opportunity in the healthcare space. Cognizant has the largest healthcare and life-sciences practice practice which accounts for 26% of their total revenue.

UID budget has an IT budget of 600 cr. Taiwan which is the manufacturing hub might be another growth frontier opportunity for Indian IT companies.

Threat

The threat also comes from the fact that lot of international IT firms are setting up their offshore delivery centers in India. Global IT majors have low operating margins are better positioned to offer discounts to apply for the renewal of contracts expiring this year. The billing rate is expected to reduce due to competition in the outsourcing market.

One positive is large clients have started outsourcing large deals to multiple vendors. This is the area where Indian IT companies are steadily gaining market share.

The verticals

TCS is strong in the ADM, testing and BPO. The acquisition of Citibank BPO has helped TCS in this regard. Also BFSI as a Domain is highly profitable with TCS revenue higher than other Indian IT players.
Infosys is actively looking for acquisition in the healthcare space.
Usually in IT companies it is seen that do currency hedges typically two quarters in advance of their revenue.

Telecom Industry - June 2010 review

Telecom Industry

June 2010 Review ( KSL)

Industry Perspective

1. Falling ARPU, EBIDTA margins
2. Increasing Capex
3. Higher customer acquisition costs
4. Heightened competition
5. The drop in stock prices is far more than fall in EBIDTA
6. Consolidation might be the next trigger for the market as the market is reaching maturity.
7. Tariffs appear to have bottomed out. Price discipline would come about.
8. Regulatory environment seem certain
9. Minutes of usage to increase as the subscriber base stabilizes
10. Mobile phones are fast becoming a necessity
11. Aggressive bidding in 3G auctions.
12. Net debt/ EBDITA for Bharti, Idea and Rcom is likely to increase to 0.7, 3.6 and 3.6 respectively.
13. Indian telecom is one of the fastest growing markets with 20 mn subscribers getting added every month.
14. Total subscriber base currently stands at 584 mn.
15. Indian demographics with nearly half the population below the age of 25 years. More tech savvy.
16. As the size of working population increases the growth trajectory might improve over the long run.
17. Indians are steadily having a high propensity to spend.
18. 3G would support high data speeds and thus the telecom operator would benefit the value added services portfolio. Revenues from data services traditionally enjoy higher margins than voice.
19. Currently VAS portfolio adds 8-10% to the revenue.
20. 3G would improve average realizations and gross margins per handset.

Bharti Airtel

1. Bharti stock has corrected by about 40% in one year.
2. Underperformed the broader market by 60%.
3. Bharti is the market leader in domestic market and with acquisition of Zain and Warid is now world’s 5th largest telecom player.
4. Bharti enjoys 1/3rd revenue market share in the Indian market and 22% subscribers market share.
5. It also enjoys a national foot print. Covers 85% of the population
6. It has a favourable frequency allocation (900 Mhz) which is high competitive advantage in low density regions.
7. Their preference has been on the revenue market share and not the subscriber market share.
8. They ended FY 10 with net cash.
9. It has a trailing twelve month multiple of 11X.

Reliance Communication

1. There have been issues with irregularities in the accounts.
2. It also has a highly leveraged balance sheet.
3. Currently it derives 40% revenues from Global, Broadband and other businesses while these segments contribute 30% to the EBIDTA.
4. MNP is going to a huge positive for Reliance GSM operation.
5. MNP is likely to be introduced from 30th June onwards.
6. R com would initially gain subscriber market share on aggressive tariffs and ultimately would gain on revenue market share.
7. Its current debt is Rs. 285bn which it intends to decrease by selling off assets in its tower business. Reliance Infratel value unlocking.
8. It is currently trading at 6X TTM multiple.

India per capital Cement consumption

Though India is the second largest producer of cement in the world after china it is way below as far as the per capita consumption is concerned. The per capita consumption remains at 150 kg whereas for china it is 660 kg.

M&A activity in Cement Industry

Franch Company Vicat bought a majority stake in Bharti Cement. In may KKR bought 20% in Dalmia cements at a valuation of USD 100 per ton.
Ultratech bought UAE based cement company at USD 125 per ton.

Limestone surplus states

It has been observed since the 5 states of MP, Chattisgarh, Rajasthan, Andhra Pradesh and Gujarat are limestone surplus the cement companies set up the plants in these areas.

Effective Capacity Utilization- Cement Plants

Average production to installed capacity ratio has been on an average at 76.5% and has never crossed 93%. The new capacity additions have an effective capacity of 30% in the year of commissioning, 70% in the next year and around 95% in the 3rd year of operation.

Cement Growth to GDP

The cement Growth is related to GDP growth and the multiple attached is 1-1.15. However this multiple might increase to 1.4-1.5 with increased focus on infrastructure. But the correlation remains very low at about 0.2-0.4. So we cannot fully subscribe to the above estimate.

Ambuja Cement - June 2010 Review

Ambuja Cements

June 2010 Review (Anand Rathi)

Stock Info

1. There has been a resurgence of its cost leadership status, expansion in high growth regions and its deleveraged balance sheets.
2. Its cement capacity addition increased to 25 tons from 22 tons and it is expected to be 27 tons by this 3rd quarter. This would entail 10% CAGR growth over the next 2 years.
3. Over 60% of its sales originate from high growth North, Central and East regions and the rest from the west. They had come up with a capacity (bulk terminal) in kerala which has made it an All India player.
4. It commissioned a 4.6 ton clinker plant (HP and Chattisgarh) taking the capacity to 16.7 m tons. This would save Rs. 200/ ton reinforcing Ambuja’s cost leadership status.
5. With no further capex the FCF would remain positive till CY11.
6. The net cash is expected to be Rs. 33 bn by CY 11.
7. It average EV/EBIDTA has been 7.5X over the ten year period.
8. PE 14X and EV/ton of USD 160 is being considered for the target price of 148
9. The volume growth over last 2 years was 6% for Ambuja due to capacity constraints also there was cement capacity and clinker capacity mismatch which resulted in sourcing clinker at a higher cost.
10. Company added 2 grinding units of 1.5 m tons each in Himachal Pradesh and Uttar Pradesh taking its cement capacity to 25 m tons. It is also adding 1 ton in Maharashtra and Chattisgarh increasing it capacity to 27 m ton.
11. Since its gearing would improve in the coming years it would be able to fund its future investment plans without put pressure on its balance sheet.

ACC June 2010 Review

ACC

June 2010 Review (Anand Rathi)

Stock Info
1. ACC has undertaken cost rationalization. It has a pan India presence and a deleverage balance sheet.
2. ACCs ongoing expansion would raise the cement capacity to 30.5m tons from 24 m tons currently
3. ACCs Maharashtra plant would get commissioned soon thus undoing the imbalance it had in terms of lower exposure to western markets.
4. ACC has been able to cut the coal consumption per ton by 15% in the last 2 years and has kept fixed costs constant despite rise in the volumes. It is expected under the guidance from Holcim it would continue to have cost rationalization measures.
5. It has been able to achieve coal linkages of upto 65%.
6. It is expected to remain FCF positive as there are no fresh capex plans.
7. It is expected to have net cash at Rs. 27 bn ending by CY11.
8. It has a EV/ton at USD 135 and a PE of 14X at a projected price of 1125
9. It has an EV/EBIDTA average of 7.5X as its 10 year average.
10. The volume CAGR expansion was just 4% as there were no expansions in CY08 and delays in CY09.
11. Last December the company has added 2 split grinding units ( with combined capacity of 2.9 m tons) in Karnataka. The corresponding clinker unit ( new wadi) would be commissioned in July 2010. The company is adding a composite plant at Chanda at Maharashtra which would be commissioned by the 3rd quarter taking its capacity to 30.5 tons.
12. These expansion plans would increase the volumes at a 9% CAGR growth over 2 years.
13. After the commissioning of its plant, the following would be its regional mix:
a. Central 15%
b. North 20%
c. West 13%
d. South 32%
e. East 20%
14. It is a super brand of India. Enjoys noteworthy brand equity and commands premium in all markets.
15. It has the highest coal linkage in the industry of 65% of its requirement. Thus it is able to check prices even when the coal prices are rising.
16. Setting up a 90 MW plant which would raise its self sufficiency from 72% to 86%. Its net gearing is expected to improve over improved cash flows and net cash position by CY 11. It is best positioned to fulfill capex plans without much load on its balance sheet.


The risks to valuation
1. Increase capacity addition
2. Steep rise in Coal prices.
3. Lower demand off take for the next couple of years.

Cement Industry - June 2010 Review

Cement Industry ( Anand Rathi)


1. Discretionary spend is increasing, consumers asset backed leverage is rising and inclusive growth is making consumption demand more broad based.
2. Share of Infra in the overall spend is increasing.
3. Despite the global crisis the cement industry reported a growth of 8% and 11% in the last 2 years.
4. There is a huge requirement of more educational institutes, hospitals, dispensaries, hotels, restaurants and theaters. Rising retail demand also requires more shops. Strong consumer demand calls for more factories and office space.
5. More construction work for facilities like power plants irrigation water supply, roads, bridges port and airports.
6. Irrigation, Urban Infrastructure and power are the largest consumers of cement.
7. The residential space would constitute 26% of the domestic cement demand.
8. Shops and offices account for only 9% of the overall demand and same amount comes from education, healthcare and hospitality.
9. Excess capacity might impact North and south while all other zones would remain supply excess.
10. The stronger cement demand and slower pace of effective capacity addition and capacity optimization would improve the market perception about the sector.
11. Any coal price increase would be passed on by commensurate increase in cement prices.
12. With most cement companies running on captive power capacities rather than on state grids the risk of high power tariffs and erratic supply has gone down.
13. The open market sale of power would cross subsidize the power generation. This would also add to the revenue streams in coming years.
14. 5 cement companies contribute to 55% of the capacity. With greater M&A there would not be any downward impact on cement prices.
15. Also the leverage levels of cement companies have improved over the last 2 years.
16. Heightening interest from foreign players to enter Indian market might increase the valuation on stocks.
17. Typically acquisition is being priced between USD 170-220 per ton. Whereas the replacement cost is USD 100-110.
18. The cement companies have been trading at a discount of 25% to Nifty which would narrow down.
19. The implied EV/ Tons are at a premium of around 30% to the average multiples. This is back of lower leverage and lower working capital.

Risks

1. Weak volume growth
2. Weak demand and quick ramp of capacities.
3. Steep hike in coal prices.

HDFC June Review

Housing Development Finance Corporation (HDFC)

June 2010 review ( PeSB)

About

HDFC was incorporated in 1977 as the largest mortgage finance company. It provided housing finance in systematic and professional manner. Provides home loans and accepts deposits, property related services and a training facility.
It also provides consultancy to organization like the World Bank, USAID, Asian development bank and UNCHS, Commonwealth Development Corporation (CDC) and United Nations Development Program. (UNDP), banks in Indonesia and Ghana. Has an office in London, Dubai and Singapore.

Associate Companies/ Subsidiaries

1. HDFC Standard Life (73%)
2. HDFC Asset Management Company (60%)
3. HDFC Bank (24%)
4. HDFC ERGO General Insurance (74%)
5. HDFC Property Ventures (100%)
6. HDFC Venture Capital (81 %)

Stock Info

1. Acquires Credila – specialized loan market estimated to be over Rs. 30,000 crore by acquiring 41% stake in education-loan Provider Company for Rs. 10 cr from DSP Merrill Lynch India.
2. This acquisition is likely to increases its share in the education loan space.
3. HDFC plans to list its life insurance business HDFC standard life in 2011.
4. HDFC has 73% stake in its life insurance arm.
5. HDFC raised Rs. 4000 cr. through QIP by offering NCDs and detachable warrants.
6. It also raised $ 100 m (4500 cr.) under the short term foreign currency borrowings by housing finance companies for period of 3 years and raised Rs. 3900 crore through private placement of Non- convertible debentures.
7. HDFC issued warrants amounting Rs. 4300 cr. with issue of NCDs to QIIs on QIP. Of this Rs. 3600 cr. was used exercise HDFCs right to convert the preferential offer of Rs. 2.62 cr. warrants to an equivalent number of equity shares at a price of Rs. 1530.12.
8. HDFC has tied up with SKS microfinance to expand its micro finance reach. Loans offered would be in the range of Rs. 50000 to Rs. 150000 for tenure of three to five years.
9. HDFC has come out with a home loan rate of 8.25% per annum fixed till 2012.


Financial Analysis

1. PBT for FY 2009-10 was at Rs. 39 bn compared to Rs. 32 bn for the previous year. ( 22% increase)
2. Cost to income declined to 7.9% from 8.8%.
3. Net profit surged 24% to Rs. 28 bn from Rs. 22 bn.
4. Increase in loan disbursals and stable spreads increased the profitability of the company.
5. Cumulative loan approved and disbursement grew by 53% and 31% respectively.
6. Loans drawn from NAT banks and NHB were amounting to Rs. 276 bn.
7. The margins stood at 2.31% in comparison to 2.21% previous year.
8. CAR was at 14.6% as against the min requirement of 12%.
9. Tier 1 capital adequacy was at 12.8% against a min. of 6%
10. Loan book of HDFC recorded an increase of 15% to Rs. 979 bn from Rs. 851 bn.
11. Gross NPL have been at Rs. 7.82 bn which is 0.79% of the portfolio as against 0.81% in the previous year.
12. Provision for contingencies & NPL was at Rs. 6.55 bn as against Rs. 3.25 prescribed by NHB.
13. Hence the Net NPL stood at 0.13%.
14. HDFC has 271 outlets including 57 offices and 2400 locations to distribute home loans through HSPL, HDFC bank and others.
15. Companies core lending comes from the retail space which contributes 64% as compared to 36% in the commercial space.
16. Demand for low cost housing would translate into a broader net interest margin.
17. Board has decided a stock split in the ratio of 1:5 subject to share holders approval from the current face value of Rs. 10 to Rs. 2.
18. The stock is currently trading at PE of 33X on FY09 EPS of Rs. 82 and PE of 25X on EPS of Rs. 113.

About the Industry

1. Indian Mortgage industry is estimated to be at USD 18 billion.
2. Rising middle class population
3. Increase in Infrastructural and Real estate based activities.
4. The mortgage penetration levels increased from 2% in 2002 to 7% in 2007. However it has remained at 7% since then.
5. HDFC, SBI, ICICI bank and LIC HF dominate the domestic mortgage market.
6. The mortgage penetration level in the IM industry is very low at 7% as compared to China (12%) and Malaysia (29%).

Factors that may act as trigger points in the industry

1. GOI focuses to revive the demand in housing through Rs. 4000 cr. refinancing facilities for National Housing Bank by granting approvals of loan amt upto Rs. 20 lacs per dwelling unit per family under the approval by NHB by housing finance companies.
2. Government eased the ECB norms by allowing the Housing finance companies to raise money overseas through FCCBS subject to RBI approval.
3. Interest subvention of 1% on loan upto Rs. 10 lacs where the price of the house does not increase Rs. 20 lacs. Finance minister is said to provide Rs. 700 cr. for this scheme.
4. The interest rates have come down to 8% from 12% thus reducing the EMI by 15-25%.

GAIL June Review

Gas Authority of India limited
It is a natural gas company which is into the business of Gas transmission

June 2010 review (Amsec)

About the Company

1. Established in 1984 by GOI to develop gas infra in the country. (Gas Transmission)
2. Also involved in petrochemical business, Liquid hydrocarbon business and Optical fibre cable business, exploration and production and CGD businesses.
3. Transmission business – Natural Gas transmission (80% mkt. share) and LPG transmission
4. Natural Gas trading – Buy wholesale from OMCs and sells it.
5. GAIL has 20% of Indian Polymer market. Products are HDPE and LLDPE for plastic industry.
6. Has total hydrocarbon facility of 1.3 mmtpa. 12% of total LPG production.
7. GAILTEL has 13000 km of Optical fibre cable network at is in 200 cities.
8. E&P is to vertically integrate and it has been successful to get 30 blocks (10%-80% participating interest).
9. Power Generation unit (RGPPL) has 1940 MW gas based power plant at ratnagiri. ( 5 mmtpa LNG degasification terminal ) Produces 1000 MW of power.

Review Short note

1. Mega capex plans of Rs. 429 bn ( Rs. 4290 cr.) to expand the pipeline infrastructure
2. Gas transmission business is expected to grow at 19% CAGR
3. PNGRB (Petroleum and Natural Gas Regulatory Board) tariff increase is a positive ( blended tariffs)
4. Transmission volumes to double from 108 mmscmd to 208 mmscmd by 2014 ( 17% CAGR growth)
5. Transmission capacity to to be increased from 155 mmscmd to 330 mmscmd
6. Currently 30mmscmd flows through KG D6 to GAIL, to be increased to 35 mmscmd by this year.
7. Current gas transmission network at 7200 km. Planned to expand the same to 14000 km.
8. CGD (City gas distribution) is the focus for GAIL through GAIL gas limited.
9. E&P (Exploration and production) portfolio of 27 oil and gas blocks and CBM (Coal Bed Methane) blocks. 4 bn investments to be made on a yearly basis through 2014
10. EBIT contributions from transmissions expected to increase from 43.9% to 63.6% through FY 14 ( Making it a utility play)
11. FY11 P/E is 13.5X and EV/EBIDTA is 7.6X
12. Increase in target price with P/E multiple of 15X.



Gas Transmission Business - GAIL

1. World Class discoveries in the east coast ( KG basin)
2. Availability of natural gas and LNG to improve and grow at 19% CAGR
3. Nations plan to have a national gas grid for extensive gas transmission infrastructure
4. Transmission volumes to increase because of the KG D6 discovery.
5. RILs KG-MMA (10 mmscmd), ONGC KG-DWN -98/2 (25 mmscmd) and GSPCs Deendayal block (15 mmscmd) might get monetized by 2014
6. Increase in tariffs to Rs. 35.39/ mmbtu from 28.48/ mmbtu for the existing HVJ-GREP-DVPL line (DAHEJ VIJAIPUR GREP) and Rs. 62.12/ mmbtu for the combined DVPL/GREP up gradation system.
7. Increase in tariff for new pipelines to be at 53.65 / mmbtu
8. Overall if the new tariff get implemented it will have an 18% increase in tariff boosting GAILs profitability
9. Increase the petrochemical complex capacity at Pata UP from 410 ktpa to 500 ktpa. To be increased to 800 ktpa by FY14.
10. BCPL (70% GAIL stake) assam would have capacities of 220 ktpa ( ethylene) and 60 ktpa (propylene).However this business is cyclical.
11. CGD licenses for a demand potential of 74 mmscmd. In 250 cities by 2018. Total 11 cities have been awarded till now. Currently GAIL operated nine CGD through JVs.
12. Recently formed GAIL gas limited for exclusive CGD business. It was won licenses in Kota, Dewas, Meerut and Sonepat. Expected to break even by FY 11. Capex decided at Rs. 0.5 –1 bn. Growth expected to be at 24% through CGD.
13. 10% stake in overseas blocks in Myanmar A-1 and A-3. Cauvery basin is a major gas discovery block and Cambay basin is a major oil discovery block.
14. Subsidy sharing might be removed as and when the Govt. decides to free the auto fuel pricing.
15. The subsidy burden is placed at 9% for GAIL it would entail Rs. 246 cr. which might come down to 150 cr. if govt. decided to tinker with the subsidy scheme.

Industry

1. Gas used in power generation, fertilizer production, industrial fuel in steel and petrochemical plants and transportation fuel.
2. Contribution of natural gas to the primary energy mix has risen from 1% in 1980 to 9% currently. Globally this proportion is 24%. To become 20% by 2020.
3. Domestic gas supply to increase at 20% CAGR over FY 14.
4. LNG capacity to increase from 14 mmtpa to 30 mmtpa by FY 14.
5. Current demand for Gas is at 226 mmscmd whereas supply is 155 mmscmd (31% deficit)
6. 4800 MW of Gas powered power stations to come up in the next 4 years. Captive power capacity to increase to 7500 MW.
7. Demand from power and fertilizer sector is expected to grow at 10% CAGR.
8. CGD would have a demand growth of 12% CAGR

Disadvantage/ Risks

1. Laying pipes which involves a lot of money becomes unviable if there isn’t a steady stream of supply.
2. The existing pipelines are skewed towards northern India hence industrial development is seen more in the northern India.
3. National Gas grid to set up pipelines in under developed regions to promote inclusive growth.
4. A delay in increase in production level at KG D6 and delay in commencement at RIL ONGC and GSPC blocks by 2014 would have a negative impact on valuation.
5. Additional petrochemical facilities coming up in China and Middle East would dampen the polymer prices. Thus realization from petrochemical businesses might get affected.
6. No change in the subsidy sharing policy may adversely affect GAIL prices.

Financial Analysis

1. Top line growth of 16.2% over FY 06 to FY 10
2. Expected revenue CAGR of 10.4% over FY14.
3. Transmission services contributed 12.2% to GAILs revenue which is expected to increase to 225 by FY14.
4. Transmission business which is a high margin business is expected to improve GAILs EBIDTA from 20.5% to 30.3%
5. Currently it has a low gearing at 0.3X.
6. Adjusted PAT increased by 44.6% YOY on better operating margins, lower interest costs and higher other income.
7. GAIL’s subsidy burden was down from 17.8 bn to 13.3 bn.