>MONTHLY PRIVATE EQUITY UPDATE (ANAND RATHI)

Indian Economy Snapshot

• For the week ending 16 May ‘09, inflation was at 0.61% as against 0.57% for the week ending 18 Apr ’09

• Industrial production for FY09 stood at 2.4% compared to 8.5% in FY08. In Mar ’09, industrial production contracted 2.3%

• May was a great month for the markets. The markets rallied due to important events like the declaration of the election results which saw the UPA getting a unanimous mandate. Realty, metal, capital goods and banking sectors witnessed huge buying interest. Indices hit
the 20% upper circuit on Monday, May 18, after the UPA (United Progressive Alliance) swept the Lok Sabha polls.

• With a clear mandate, the new government may look at certain FDI relaxations while a revival in public sector disinvestments is also expected

• The month of May saw FII inflows to the tune of INR 201,170 million (USD 4,100 million) which accounts for nearly 99% of the FII's total investment in the domestic stock exchanges during 2009.

• FII's have been net sellers in the debt market worth INR 27,110 million (USD 540 million) during the month of May which accounted for 40% of the total FII outflow during 2009 in the debt market.

• India’s GDP grew 5.8% during Q4FY09 taking the GDP growth during FY09 to 6.7%. During FY09, services grew by 9.7%, agriculture grew by 1.6% while industry/manufacturing grew by 3.9%. The core growth outlook for FY10 and FY11 remains subdued, around 5.5% although
one off events may prop-up growth significantly in FY10.

• Exports during Apr ’09 contracted 33.2% year-on-year to USD 10,700 million. With this, India’s exports have contracted for the seventh successive month (since Oct ’08).

• RBI has directed banks to refrain from guaranteeing bond issues of corporate entities. In the absence of bank guarantees, the bond’s will have lower rating due to higher risk profile making them more expensive for the companies

• On Friday (29th May), the Indian rupee climbed to a 3-day high of 47.2 against the U.S. dollar

• Globally, OPEC kept output unchanged which resulted in a surge in crude oil prices above USD 66 a barrel.

To see full report: MONTHLY PE UPDATE

>STERLITE INDUSTRIES (ANAND RATHI)

Expanding for the next upcycle; initiate at Buy

■ Buy. We initiate coverage on Sterlite with a Buy and a target price of Rs748. Its status as one of the world’s lowest-cost metals producers, its energy venture in power-starved India and strong
balance sheet make it one of our top picks in our sector universe.

■ Low-cost player. Sterlite is one of the world’s lowest-cost manufacturers in each of its business segments, with a balance sheet tough enough to weather the present meltdown. Given its expansion plans, it is on target to touch yet lower production costs in its aluminium, zinc and copper businesses.

■ Expansion plans on track. Sterlite is moving ahead with its expansion plans in aluminium, zinc-lead and power. The downturn in metals prices has helped it execute these projects at a
lower cost. We expect earnings to rise once metals prices recover.

■ Power to pack some punch. Sterlite Energy, a 100% subsidiary, is on course to commission a 2,400 MW plant by Jul ’10. The first 600-MW phase would start operations in Oct ’09. Merchant
power is an attractive proposition in a power-hungry nation and should boost earnings significantly, in our view.

■ Valuation. We use a sum-of-parts method to arrive at a target price of Rs748. We see short-term triggers from the successful exercise of call options in Hindustan Zinc and Balco, as well as from acquiring the US-based integrated copper producer, Asarco.

To see full report: STERLITE INDUSTRIES

>ELECTROSTEEL CASTINGS LIMITED (ANAND RATHI)

INVESTMENT RATIONALE

Company is a leading Ductile Iron pipes and cast iron pipe manufacturing company. It also offers turnkey solutions in water transport and sewage management. The demand for ductile pipes comes from Govt/ Govt sponsored projects for transportation of potable water and for cast iron pipes - from irrigation / sewage disposal projects. Demand for ductile pipes is growing very fast looking to growing focus of the Govt to provide potable water not only in India but also across Asia and other developing countries.

Company is fully integrated backward, with pig iron plant, sinter plant and captive power plant, as also iron ore & coal mining rights. This kind of integration leads to superior margins for company.

It is thus very cost efficient and large player earning attractive margins. Business is mostly dependent on municipal/Govt orders and is thus immune to economic/business cycle. Under - Accelerated Rural Water Supply Program and Pradhan Mantri Gramodaya Yojana - Rural Drinking Water; significant annual demand for projects and products [pipes] is generated on sustained basis. Through an SPV [wherein company holds 40% stake] it is also setting up a 2.2
million integrated steel plant, fully backed by required iron ore & coal mines. Of this 1.3 million capacity will come on stream by the end of '09 and rest will come on stream by the end of 2010. Captive mining of Ore and coal will also be operational by the same time or slightly latter, so cost of production will be always under tight control.

Company's current working is good and its likely to perform much better in coming years.

RISK: The key concern is Forex derivatives and forex losses. With rupee improving sharply, most of these concerns could be taken care of.

Buy [CMP 36 ] with price target of Rs 60 in 2-3 months. Long term investors can look for still better returns.

To see full report: ELECTROSTEEL CASTINGS

>PAREKH ALUMINEX LIMITED (ANAND RATHI)

Investment Rationale
Company is world class manufacturer of Aluminum foil products, which are used in hygienic food products packaging. Its facilities are fully automatic and meet health / safety standards of European nations. Company is expanding capacity by three times to cater to rising demand from domestic and global markets. The expansion of Rs 240 Crs is underway and for which funding was raised earlier in 2007-08; wherein company raised about Rs 125 Crs by equity dilution [in the range of Rs 225 to 260 around Jan’08], by placing equity under QIP route. Even equity warrants were issued @ 115, which are being converted now. So whereas most of the equity dilution already happened, the fruits of this mega expansion [which will triple the capacity] will be visible from 2010-11. The company, which is having very healthy B/Sheet, attractive earnings/earnings growth; will be able to grow even faster in coming years.

Company is likely to become one of the biggest Aluminum foil producer in the world, and will be able to achieve turnover close to 1000 crs, once this expansion is completed; is available to you at Mkt Cap of Just around Rs 100 Crs. If we value such companies very conservatively at 0.5 times of sales, then I think this stock should be 4-5 times from current levels in next 3 years. Even at ‘09 expected sales of over Rs 400 Crs, the business value of company should double at least, if not more, from current levels.

Risks
Any delay in expansion or quality issues, may change the equation.

Recommendation
Company is likely to report [for March.’09] EPS of Rs 25-28 on diluted equity, which can go up further to Rs 30 in current year. But real growth due to mega expansion will come there after. That’s why we have covered this in Multi-bagger category for long term investors. But in one year also we expect it to give 100% returns.

To see full report: PAREKH ALUMINEX

>BGR Energy Systems (ANAND RATHI)

Moving up the value chain; risks continue; maintain Sell

* Maintain Sell. BGR Energy plans to transform itself into a fullyintegrated
player (manufacturing as well as EPC). While margin expansion is possible over the next couple of years due to softening material costs, we believe execution challenges remain. We maintain our Sell rating, with a marginal increase in target price to Rs112 (from Rs103 earlier).

* Operating margin expansion of 150bps.
We build in a 150-bps increase in margins over FY10-11 to factor in the benefit of lower raw material costs. However, higher interest cost and lower ‘other income’ would continue to have its impact at the PAT level.

* Boiler tie-up in place, turbine to follow.
BGR has announced a tie-up with Foster Wheeler where the latter would license boiler technology. It is also talking to Hitachi for a possible arrangement for turbines.

* EPC projects in design stage.
Projects are in the design and engineering stage (10% completion), with credit lines tied up. Foreign exchange risk would be borne by state electricity boards.

* Earnings revision. We retain our sales estimate but raise PAT estimates for FY10 (by 9%) and for FY11 (by 10%).

* Valuation. Our revised target price of Rs112 implies 5x FY10e earnings (~50% discount to sector multiple).


To see full report: BGR ENERGY SYSTEMS

>India Oil & Gas (ANAND RATHI)

Mar ’09 quarter results preview

* Expect low margins to continue. Q4FY09 results would be struck by lower yoy refining and petrochemicals margins; lower realizations for the crude producer will continue. Positive aspects would be the qoq fall in under-recoveries, no upstream subsidy and inventory gains as crude rose US$10/bbl in three months.

* Under-recoveries to be about Rs22bn. Under-recovery in Q4 from losses on sale of LPG (Rs13bn) and PDS kerosene (Rs41bn) would be Rs22bn. This would include over-recovery of Rs5bn on petrol and Rs28bn on diesel (see Fig below). FY09 underrecoveries are expected at Rs1084bn, with upstream support contributing ~30%.

* ONGC, GAIL not expected to provide subsidy. ONGC’s gross realizations on crude would be US$45 a barrel. The net realization would be the same on account of a nil subsidy burden. Gross realizations for Cairn India would be US$48/bbl. The total subsidy payout for ONGC in FY09 would thus be Rs273bn.

* Expect RIL’s refining margins at US$10 a barrel. Reliance’s refining margins could average US$10/bbl, while refining margins of R&M companies would be around US$4-5/bbl. This would include inventory gains on crude. Our estimates for R&Ms incorporate oil bonds. The Singapore benchmark for the quarter was at US$5.7/ bbl.

* GAIL’s and Aban’s profits to increase yoy. GAIL’s PAT is expected to climb 9.6% yoy on account of no subsidies in Q4. Aban’s sales are expected to grow by a third (33%) and net profit rocket 182% yoy, with operating margins at 53% (+1% yoy).

To see full report: INDIA OIL & GAS

>ICICI Bank (ANAND RATHI)

Value, with lots of negatives cooked in; Initiate at Buy

■ Buy. We initiate coverage on the ICICI Bank with a Buy and a target of Rs430. We expect on-going fundamental improvements and adequate NPA coverage to lead to stable RoEs over FY09-11. We believe the subsidiaries have value, and are not reflected in the stock price.

■ Fundamental improvements underway. The bank has been slowing asset growth and placing greater emphasis on protecting margins, improving productivity and maintaining credit quality. These measures would improvement fundamentals.

■ Subsidiaries have value, not reflected. Key subsidiaries of the bank (in life insurance, general insurance, asset management and the securities business) are leaders in their businesses. In our view, the current price does not reflect the value of the subsidiaries, which we estimate at Rs105.

■ Adequate NPA coverage. At 51%, ICICI’s NPA coverage is not the best, but should hold it in good stead when asset quality is under duress. The coverage ratio is expected to be +50% over FY09-FY11, with net NPAs at ~3.2% in FY10.

■ Valuation. Our fair value of Rs325 (standalone bank) is based on the two-stage DDM (CoE: 15%; beta: 1.3; Rf: 6.5%). We value its subsidiaries at Rs105 a share. At our target price of Rs430, ICICI would trade at 1.1x FY10e ABV. Its target multiple is at a 40% discount to HDFC Bank’s and a 5% premium to the sector.

To see full report: ICICI BANK

>Reliance Industries (ANAND RATHI)

Niko data points sustain E&P promise; Reiterate Buy

■ D6 capex to rise to US$10bn. Niko now expects capex on the current D6 project to be a higher-than-budgeted US$10bn over the life of the project. It expects gas production to start by 1 Apr ’09. We do not expect the higher capex to materially affect the valuation due to the cost recovery mechanism.

■ Production to ramp up to 120m cmd. Niko re-affirmed plans to raise D6’s peak production to 120m cmd by developing nine satellite discoveries at an additional capex of US$6bn. The development plan for these discoveries awaits approval.

■ D4 a wild card; exploration drilling in D6 re-started. Niko stated that the D4 field (RIL owns 85%), could be much larger than D6, based on initial studies. Niko also confirmed that after a 16-month lull, exploration drilling has re-commenced at D4.

■ Earnings. We restate estimates, incorporating the proposed merger, recent rupee depreciation, and higher margins.

■ Valuation. We raise the fair value of RIL to Rs1,625 (Rs1,300 earlier), incorporating RPL’s valuation minus the holding company discount, higher margins, and adjusting for the recent rupee depreciation. We value refining and petrochemicals businesses at EV/EBITDA of 5.5x FY10 estimates, new refinery at DCF and its E&P businesses using DCF/multiple-based approach.


To see full report: RELIANCE INDUSTRIES

>Reliance Communications (ANAND RATHI)

Net-adds drop in February but still tracking in-line

■ 3.4m net-adds in February. This implies a decline of 32% from the record 5.0m reported in Jan, yet RCOM is on track to meet our 4QFY09 forecast of 11.2m net-adds; the company needs to add 2.8m subs in March, which is achievable in our view. Furthermore, our FY10 forecast of sustainable monthly net-adds for RCOM is 2.1m, coupled with a 14% yoy decline in the ARPU.

■ Why the sharp decline in monthly net-adds? Three reasons in our view: (1) 10% fewer days in Feb vs. in Jan, (2) Reduced attractiveness of the promotional GSM package – initial cost to the subscriber is Rs100-110 vs. Rs25-50 in Jan, also reduction in free talktime value to Rs4/day (for 90 days) vs. Rs5-10 previously and, (3) conscious effort on the part of RCOM to limit the supply/sale of promotional GSM SIM cards, especially in those circles where RCOM is close to qualifying for additional spectrum.

■ 4Q recovery thesis intact. A positive surprise on net-adds (vs. our 11.2m forecast) now appears unlikely, but the key is revenue growth. RCOM has been offering discounted tariffs to boost usage and has indicated that the trends in recharge and ‘paid’ minutes are better than their own expectations. Furthermore, prebooking of bulk of the network operating costs and control in ad expenditure should contribute to healthy EBITDA growth in 4Q.

■ We find RCOM stock attractive given potential recovery in revenue/EBITDA growth and inexpensive valuations (FY10 P/E of 7.7x). Key risks include irrational competition and 3G auctions.

To see full report: RELIANCE COMMUNICATIONS

>Areva T&D (Anand Rathi)

● Raising estimates and target price. We marginally increase our sales and earnings estimates for CY09 and CY10 on the back of higher-than-expected execution and improvement in operating margins going forward. Our new target price of Rs159 is based on
13x CY09e earnings. Maintain Sell.

● CY08 results, margins under pressure. Operating margin slipped 200bps to 16.5% in CY08 mainly due to raw material prices which climbed 140bps. Change in product mix and the outsourcing of components resulted in higher material costs. PAT margin declined 220bps to 8.5% due to higher interest expense and restructuring cost. High leverage (debt/equity ~0.6 CY08) and lower ‘other income’ would keep PAT margins under pressure.

● Order backlog 1.5x CY08 sales. The company received orders worth Rs40.1bn in CY08, up 37% over CY07. The order backlog rose 35% to Rs40.9bn at end-Dec ’08 (from Rs30.4bn a year ago). Quarterly the order backlog has declined 4% from Rs42bn at end Sep’09.

● Change in estimates. We raise CY09 and CY10 sales estimates by 2.5% and 0.8%, respectively, and PAT estimates by 2.5% and 2.7%.

● Valuation. We arrive at a target price of Rs158 (earlier Rs155) for Areva T&D based on 13x CY09e EPS of Rs12.2.

To see full report: AREVA T&D

>Reliance Communications (Anand Rathi)

Reliance Communications

Growth Undervalued; Re-iterate Buy

# New TP of Rs260. We have trimmed our EBITDA estimates by
1.0-1.5% and raised medium-term capex forecasts by 10-15%. Our
revised DCF-based Dec ’09 TP is Rs260 vs. Rs275 (Sep ’09)
previously. At 6.0x FY10e EV/EBITDA, we believe RCOM is
attractively valued, given the 17% EBITDA CAGR over FY10e-12e.

# Revenue growth recovery imminent; margins to hold. We
forecast 24% wireless rev CAGR in FY09-11e vs. 15% in FY09e
led by GSM expansion. Despite the build-up of a huge operating
leverage (pre-booking of GSM network costs), we assume another
100-bp erosion in wireless EBITDA margin. Nonetheless, consol.
EBITDA margin should hold at ~40% (40.2% in 3Q) in our view.

To see full report: RELCOM