>EXIDE INDUSTRIES (BNP PARIBAS)

Thesis reiterated post mgmt call

• Impressive 20%, 17% growth in replacement, industrial volume in 4QFY09; demand remains unscathed by slowdown.

• Company confident of improving margin given lower lead price, smelting capacity expansion and minimal price cuts.

• TP of INR70 (based on 13x FY10E EPS and INR10 for ING Vysya Life stake). Reiterate BUY.

■ Improved confidence in sustainable earnings growth
Our recent call with Exide’s management gave us confidence in our expectation of a greater than 25% EPS growth in FY10, on strong volume growth led by the replacement segment of automotive batteries and margin expansion led by lower lead price. The replacement segment, which accounts for more than half of Exide’s operating profits, rose 18-20% in 4QFY09. The segment will continue to impress in FY10 due to battery replacements driven by a higher vehicle base post the auto boom in FY03-07. The management was also confident about continued growth in the industrial segment, which was up more than 15% in FY09.

■ Pick-up in auto OEM demand a long-term positive
Exide is seeing improvement in demand from auto OEMs, coming out of the trough in the December 2008 quarter. Sales to auto OEMs, being low-margin, may only be marginally beneficial for the bottom-line in the near-term. However, it is a key long-term positive since higher OEM sales will eventually translate to higher replacement sales, due to increase in the vehicle base, and also because customers tend to largely replace worn-out batteries with the same brand which is pre-fitted in the vehicle.

■ Expect strong margin expansion in FY10
We expect a 250bp EBITDA margin expansion in FY10, driven by lower lead price (lead cost accounts for more than 50% of revenue) as well as greater reliance on cheaper recycled lead. FY10 will not be affected by the problem of ‘high-cost inventory in a falling lead price environment’ which affected 2HFY09, since about 55% of Exide’s revenue is governed by pass-through agreements. Since lead prices have stabilized in the USD1,200-1,400 range, the full margin potential should be visible starting 1QFY10.

■ Stock attractively valued
Our TP of INR70 is based on INR60 for the core business based on 13x FY10E EPS and INR10 for Exide’s 50% stake in ING Vysya life insurance. Even if we assign a zero value to the stake in the insurance business, Exide is currently trading at 10.7x FY10 EPS.

To see full report: EXIDE INDUSTRIES

>INDIA INFRASTRUCTURE (BNP PARIBAS)

Railways: on the right track
We attended the IndiaRail 2009 conference in New Delhi on 12 May 2009. The key speakers at the conference were policy makers and industry representatives. The agenda of the conference was to discuss opportunities in the sector.

Opportunities galore …
Opportunities in the sector are close to INR2.7t over the next five to eight years, of which the INR800b-900b will be awarded in the next two years. The Dedicated Freight Corridor (DFC) is the largest opportunity worth INR680b. Other areas of opportunities include station modernization, port connectivity, gauge conversion, rolling stock and logistic parks. The Railway budget for 2009-10 has earmarked INR379b (compared to INR367.73b for 2008-09 revised estimates). Major beneficiary in our coverage from these investments is Larsen and Toubro, which we believe will benefit from its latest venture into the railways segment. The company also has investments in Kalindee Rail Nirman (Engineers) Limited (owns 14% of the company) that specializes in track and signaling systems.

… but challenges remain
We believe land acquisition is the most significant challenge, which could delay project implementation. Other key challenges highlighted by the industry representatives were related to inability of Indian players to execute projects on a turnkey basis due to obsolete technologies.
Shortage of trained engineers and suppliers is another impediment. However, these impediments may not materially affect the overall investment rationale.

Key takeaways
■ Increased focus on investments through Public Private Partnerships
■ Thrust on Dedicated Freight Corridor (DFC)
■ Major beneficiaries – rolling stock manufacturers, players offering track and signalling technologies, logistic & construction companies
■ Financing for the DFC from Ministry of Railways’ internal generation, budgetary support, multilateral and bilateral agencies, private investments and market borrowings.


To see full report: INDIA INFRASTRUCTURE

>Alpha Strategy (BNP PARIBAS)

Index targets raised on EPS turnaround

• We are raising our country index targets by 23% and increasing Taiwan,India and Indonesia to Overweight.
  

• Future EPS expansion in markets following 6 months of PE multiple expansion is the main driver of the upgrade.
  

• Asian markets are benefiting from substantial capital inflows as investor risk appetite increase as signaled by VIX, VDAX and the KIX. Risk of a short-term correction remains, but substantial cash waiting on the sidelines implies correction will be shallow.

Earnings turnaround
The key change in our assumptions, which has resulted in across the board increases in our index targets, is the revised outlook for earnings. Regular readers will be familiar with the Fair Value Earnings Model (FVEM), which we introduced in the Nov 2008 Alpha Strategy report – see appendix for model explanation. Data from the model highlights a dramatic change in the
market’s expectations for earnings. As recently as February, the model signaled a 10% contraction in 2009 EPS, which was in line with consensus. This has now changed to an implied 24% growth for 2009 EPS as of the end of April and compares to consensus EPS forecasts of an 11% contraction.

Earnings expansion takes over from multiple expansion
The past six months have been characterized by multiple expansion, as reflected by the current PE multiple for Taiwan, which is trading on 40x 2009 EPS forecasts. The next six months will be characterized by market expectations for increased earnings forecasts. Initially this will be through an improvement in the second derivative – the earnings revision index and the ratio of earnings upgrades to downgrades; however, it will eventually give way to an increase in actual earnings.

To see full report: ALPHA STRATEGY

>Reliance Capital (BNP PARIBAS)

Obstacle course for growth and margin

Initiate with REDUCE – valuation ahead of fundamentals We initiate coverage on Reliance Capital (RCFT) with a REDUCE rating and a TP of INR400. While the long-term outlook for RCFT is attractive, we expect significant growth and margin pressure in the near to medium
term. We expect all of its core businesses (insurance, asset management, general insurance, broking and consumer finance) to slow down. We believe the recent rally in the stock price is out of line with fundamentals and investors can find more attractive alternatives, given the overhang in the market.

Multiple pressures on growth and margins
RCFT’s core business growth is tied to the outlook for equity and capital markets in India – in the form of unit-linked life insurance products, returns on its proprietary investment book, income from asset management and broking. We expect relatively muted equity markets in FY10 to impact RCFT’s revenue growth. We expect RCFT (which has more than 95% of its life products in ULIPs) to clock life premium growth of 11% for FY10 compared to 40% y-y growth in FY09. We estimate RCFT’s consolidated net revenue will decline by 4% y-y for FY10. We expect a sustainable NBAP margin for life insurance of 15% compared to management guidance of 18-19%. Based on our channel checks and analysis, we believe RCFT’s insurance business growth was based on aggressive pricing, which is more evident in the general insurance business. In addition to margin pressures, RCFT’s core businesses are still in a capital consumption mode and will impact ROE over FY10-11. RCFT is a high beta play and in addition to improvement in core businesses, we’ll turn more positive on signs of a sustained market rally.

Valuation
We value RCFT at INR400 using a sum-of-the-parts approach. On a per share basis, we value life insurance at INR145 (8x FY10E NBAP), asset management at INR130 (3.5% to FY10E AUM), the standalone book along with consumer finance business at INR100 (0.8x FY10E ABV) and Reliance Money at INR25 (8.0x FY10E EPS). Our TP implies 15.5x and 1.3x price to FY10E consolidated EPS and ABV respectively.

To see full report: RELIANCE CAPITAL

>Reliance Industries (BNP PARIBAS)

All priced in: time to get out

Recent rally overdone – no major catalysts lined up
RIL’s shares have gained 43% YTD, compared with the BSE Sensex at 15%. During this time, the gas sale ban on RIL has been lifted and the company has had favorable pricing of USD4.20/mmbtu to sell the gas (reflected in our TP). In addition, the company successfully started gas production and commenced sales from Reliance Petroleum Ltd (RPL). We believe all the above positives are priced in the shares at current levels. The current price factors in GRMs of 13.0/bbl and Petchem EBIT margins of 13.3%, which are significantly higher than our expectations, and also do not tie in with the global outlook for the refining and petchem businesses. For FY10, we expect consolidated GRMs at 9.5/bbl and petchem margins of 10.3%.

In-line quarter; no positive surprises
RIL reported its 4QFY09 results in-line with our estimates with PAT coming in at INR38.74b versus our estimate of INR38.53b. RIL’s GRMs came in at USD9.9/bbl versus our expectation of USD11/bbl. In our view, the GRMs were disappointing considering there was little crude volatility for 4QFY09 and lack of meaningful inventory losses as seen in
3QFY09. However, the weakness in refining was more than offset by the petchem business, which saw ~4% q-q increase in EBIT while the EBIT margins jumped from 13.1% for 3Q to 17.7% for 4QFY09 led by a combination of price increases and inventory valuation gains. Overall, the petchem business offset the weakness in refining.

Valuation – limited case for upside to TP
We are downgrading RIL to a REDUCE rating, primarily on the back of recent rally which we believe fully prices any near-term catalyst. Our TP goes up to INR1,450/share from INR1,322/share accounting for USD4.20/mmbtu for the entire production and change in house crude and currency estimates. We estimate GRMs of USD9.5/bbl and Petchem EBIT margin of 10.3% for FY10. We value the refining and petchem business at 6x EV/EBITDA, which is at the high-end of trough multiples for refiners and petchem companies as seen in the previous downcycles. We do not assign any option value to any block, wherein production/reserve news flow is not expected in the next 18-24 months.

To see full report: RIL

>BHEL (BNP PARIBAS)

Visibility and growth priced-in: HOLD

Limited positive news & likely delays in 12th plan orders
Bharat Heavy Electricals (BHEL) management has guided to an order intake of INR500b. We estimate a less-optimistic intake of INR425b due to likely delays in the 12th plan orders, tighter financial markets impacting ordering by IPPs and drop in export orders.

No structural erosion of market share
We disagree with the Street’s view that BHEL’s order intake has peaked. Though we are modeling a 28.8% decline in FY10 orders due to delays in 12th plan orders and base effect, we expect orders to revive in FY11. We expect BHEL’s 12th-plan share to be approximately 45-50% (compared to its 55% share for the 11th-plan projects) due to: 1) Its strength in the sub-critical segment (up to 500MW); 2) strong relationships with government utilities; 3) focused execution of its strategy to indigenize super critical technology (>660MW).

No change to our FY10 sales and margin estimates
BHEL management reiterated its FY10 guidance of 20-25% y-y growth, hinting that the lower end of the guidance is conservative. We maintain our FY10 sales growth estimate of 26.7% y-y supported by: 1) easing of raw material supply constraints; 2) benefits from line balancing and additional bays at Trichy; 3) industrial slowdown freeing up capacity at ancillaries in Trichy (please refer “Visit Notes from Boiler Capital of India,” 12 March 09); and 4) a higher percentage of BTG orders among the backlog.

Downgrading to HOLD on limited upside
BHEL has outperformed the BSE Capital Goods Index over the last one year by 26.9%. We downgrade BHEL to HOLD as the stock has limited upside from current levels. BHEL stock is also trading close to our DCFbased valuation of INR1,600/share. BHEL is trading at a P/E of 16.9x our FY10 EPS estimate of INR90.33 compared to its Indian capital goods peers at 15.6x. The valuation gap between BHEL and its peers has dropped (our target P/E multiple was set at a 20% premium to peers) due to the recent liquidity driven rally. We reiterate REDUCE on ABB and Crompton Greaves which are trading at 18.4x and 9.9x on FY10 EPS respectively.

To see full report: BHEL

>India Strategy (BNP PARIBAS)

Election 2009 – confusion galore
• India’s General Elections begin on 16 April and end on 13 May. There are no clear national issues or expectations.

• UPA government without their former Left Front allies or the NDA Government appears to be the best-case scenario for the market, but these outcomes have low probability.

• Prior to elections, we advocate caution with defensive portfolio stance. Sun Pharma, Bharti, M&M are top choices.

Elections in five phases start tomorrow
India’s General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June.

A highly fragmented political landscape
The two major parties – Congress and BJP hold 52% of the total Parliamentary seats, and opinion polls seem to indicate that their total seat share could decline. Both major alliances – Congress’ UPA and BJP’s NDA, have suffered defections by their alliance partners. Therefore – not only do we have a Third Front today, but a ‘Fourth Front’ as well – consisting of parties who were members of the UPA or NDA in the last Parliament but are now reluctant to join any alliance.

No clear issues, no clear expectations
Election 2009 is characterized by a lack of strong national issues, and confusion among political experts and pollsters regarding the potential outcome. Consequently, state-level issues, and outcomes in some of the “swing” states have become important. Most opinion polls suggest UPA will get 190-200 seats, NDA 180-190 seats and about 150 seats will go to a mixed group of other parties (i.e. the Third and the Fourth fronts).

Expect market correction during election
After a 35% rally since 9 March, the Indian market is trading at 13.2xFY10E, and appears ripe for a correction. The market declined during three out of the past four elections, and we don’t expect any
divergence from that trend.

Go defensive during elections
During elections, the most consistent outperformers are pharmaceuticals, telecoms and autos. We highlight Bharti, Sun Pharmaceuticals and M&M as our top picks during this phase of shortterm uncertainty.

Post election sector choice to depend upon outcome A UPA Government not supported by Left parties or an NDA Government appears to be the best possible outcome from the market’s point of view. However, the probability of such an outcome appears low (less than 50% in our opinion), despite some recent improvement (according to media) in NDA’s chances. A “market-friendly” government should lead us to overweight banks, engineering and capital goods.

General Election 2009 – a massive exercise
Every five years, or sometimes even before the completion of the term (as was the case in the second half of the 1990s), India holds the General Elections. The largest democracy in the world (with nearly 715m voters, 543 Parliamentary seats) votes out the incumbent government or keeps it in office – though in the past 20 years, the former has been a more frequent outcome. In the six elections since 1989, only once – in 1999 – the incumbent ruling party (the BJP) – stayed in power after the elections. The sheer size of the General Election exercise (e.g. total number of eligible Indian voters is thrice that of the US which has 208m voters) makes it imperative that the elections are held in phases. General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all the 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June.

To see full report: INDIA STRATEGY

>Larsen & Toubro (BNP PARIBAS)

Delays likely in infra projects.....

Takeaways from meeting with K Venkatesh, CEO L&T Infrastructure Development Projects Ltd (IDPL) on March 26.

Company estimates opportunity of INR750b in near-term
These opportunities exist across highways (NHAI + state), ports, railways, water, power transmission and hydropower. L&T is considering approximately 50% of this total opportunity; the company is cautious about bidding for Public Private Partnership (PPP) projects due to complex regulations. Government regulations and policies are primarily responsible for delays. Some projects have become commercially unviable due to change in policy/regulation. As a result, achieving financial closure for these projects is challenging.

Highways offer near-term opportunities, but are risky
National Highway Authority of India (NHAI) has reduced concession periods for several projects resulting in lower IRRs, so project finance is difficult to obtain. NHAI has also capped the upside from increase in traffic estimates. State government projects are preferable as there is a single-point regulatory clearance; however, annuities and projects with Viability Gap Funding (VGF) face cash flow mismatch risk. L&T is wary of servicing debt obligations with cash flows from the state governments.

Select opportunities in railways, ports, and transmission
The New Delhi Railway Station redevelopment project (INR90b), Mumbai Metro Line 2 (INR76.5b) and Bangalore high speed rail link (INR45b) are under consideration vs total opportunity of INR331b in railways. In ports, the container terminal contract at Ennore port
(INR13b) and coal import terminal project at Mormugoa port (INR6b) are the only projects that are attractive, with a total opportunity of INR86b. Power transmission offers an INR109b opportunity and the company is considering INR67b of these.

Valuation
We maintain our REDUCE rating on L&T due to lower order intake and elongation of the execution cycle of existing orders. We maintain our INR536 TP based on our SOTP valuation (INR460 from standalone based on 8.5x FY10E EBITDA + INR76 from subsidiaries).

To see full report: LARSEN & TOUBRO

>HDFC Bank (BNP PARIBAS)

We discussed a few key issues with HDFC management and we are also revising our estimates. We are reducing TP to INR1,600 from INR2,250. We expect HDFC to continue to enjoy a premium over its banking sector peers with its sticky customer base, better asset quality, a sector leading opex ratio and stable spreads. Reiterate BUY.

Loan growth – The company guided towards loan growth in the range of 18-20% for FY10. We are factoring for a loan growth of 16% for FY10 and we believe this growth will be more back end loaded in FY10.

Competition from state owned banks – Some state owned banks have announced a limited period mortgage loans at an interest rate of 8% for the first one year. While there has been wide spread speculation around the possible loss of market share for HDFC due to these competitive offers, we believe these concerns are misplaced for the following reasons –

1) We do not see a meaningful increase in property purchases as yet, an interest rate of 8% notwithstanding.

2) Given this is a limited period offer and the slow processing times of state owned banks, we do not anticipate a significant volume pick up through these offers.

Funding strategy – Management intends to use a flexible funding strategy depending on the prevailing liquidity situation. When liquidity is tight and term borrowing becomes expensive, HDFC has mobilized incrementally greater amounts of retail deposits as seen during October
2008 and vice versa. In easier liquidity conditions, the company enjoys a 50bps advantage for term borrowing vis-à-vis retail deposits. The current blended loan yield is 11% while the blended funding cost is approximately 8.6%.

Valuation - We are revising our TP for HDFC to INR1,600 from INR2,250– core mortgage TP revised to INR1,200 from INR1,700 and embedded value of subsidiaries revised to INR400 from INR550 after factoring in our recent TP reduction for HDFC Bank. At our revised TP, core HDFC trades at 2.3x our FY10E BV.

To see full report: HDFC BANK

>Cipla Ltd. (BNP PARIBAS)

• Initiate with a BUY rating and TP of INR250 on the back of steady growth and a risk averse business model.
• Conclusion of its capital expenditure programme will mean capital efficiency returns to high levels.
• We value the stock at 19x FY10 EPS; target price implies 33% upside.

A breath of fresh air

Performance enhancing drugs
We initiate coverage of pharmaceutical company Cipla Pharmaceutical with a BUY rating and target price of INR250, implying 33% upside from current levels.Cipla has a unique business model that insulates it from fluctuations in end-user demand and from regulatory and R&D
investment risk. This is due to an effective partnership strategy and dominance in the domestic formulation market. We believe its recent outperformance vs. the broader market and its valuation premium will continue, on the back of strong earnings growth.

A clean bill of health
Cipla, unlike other large Indian pharma companies that have adopted aggressive growth strategies, has stuck to its core business of supplying pharmaceutical products to its customers (pharmaceutical companies) across the globe. This focus has resulted in more modest growth than some of its peers, but has ensured predictable cash flow and steady, long-term growth. Cipla’s geographically diverse and low-cost business model is well placed to leverage the growth of generics globally, which is relatively insulated from the broader economic environment.

To see full report: CIPLA

>NALCO (BNP PARIBAS)

No surprises here; Maintain REDUCE

* Demand weakness leads to inventory pile up
We estimate that aluminium (Al) inventory level at Nalco has increased
about 200%, increasing from seven days to about twenty days as at the
end of 3QFY09. We further estimate that inventory levels will rise to
nearly a month’s production of Al by the end of 4QFY09. We expect
sales offtake will continue to be poor going into 4QFY09. Also as Nalco
is a public sector undertaking (PSU), we believe that it will not curtail its
production immediately, thereby adding to inventory.

* Lower power and input costs to show up from 4QFY09
We believe that Nalco stands to benefit from lower power and raw
material costs beginning 4QFY09 due to a sharp decline in commodity
prices. Electricity generation costs will decline by about 15% as Nalco
has stopped purchasing expensive imported coal. Overall, we believe
that COP for alumina will trend down by about 18% and that for
aluminium by 9% over the next 6 months.

To see full report : NALCO

>India Banks (BNP PARIBAS)

3QFY09 Earnings Wrap

We summarize the key trends from the 3QFY09 earnings for our banks
coverage universe and also infer some takeaways for the few quarters
ahead. All our earnings estimates are currently under revision.

* Loan growth: A sequential slow down in loan growth was evident for
the banks, barring Axis Bank and Bank of India. Y-y credit growth was
still robust at 25%. On an average, we clearly expect more muted loan
growth – in the sub 15-18% range for our coverage universe.

* Deposit growth: Total deposit growth continues to be robust, y-y
growth in the range of 27% (28% for CASA and 27% for term deposits).
But the flight-to-quality of deposits was evident, with SBI recording a
sequential increase of 12% in deposits compared with 8% for HDFC
Bank, 3% for Axis Bank and -3% for ICICI Bank. We expect term deposit
growth to slow down – muted loan growth driving less demand for term
deposits and lower deposit rates in general.

* Net interest margins: 3QFY09 saw a flat to modest expansion in NIMs
across our coverage universe – flat for ICICI and SBI, a 20bps
expansion for BOI and a 39bps contraction for Axis Bank. These trends
were primarily resulting from the magnitude of expansion in the loan
book and the resulting need for high cost term deposits.

To see full report: India Banks

>Sun Pharmaceutical Industries (BNP PARIBAS)

Protonix fading, focus back to core

* 3QFY09 results in line with expectation
Sun Pharma reported 3QFY09 earnings in line with our estimates but
below that of the Street’s. We believe Sun sacrificed its Protonix sales in
favor of margin preservation. The rupee depreciation and an evolving
product mix seems to have helped base business margins. We believe
rest of the world (ROW) markets and the impending Taro acquisition
would be the key to the stock’s continued out performance.

* Diversified revenue base to offset US market slowdown
Sun maintained it’s revenue guidance notwithstanding Caraco’s cautious
outlook on the U.S business.Sun’s base business growth remains on
track with domestic formulations increasing 14% y-y and bulk business
(both export and domestic) continuing to post strong growth. Branded
generics exports to the rest of the world market are likely to be the
incremental growth drivers. The company maintains its FY09 guidance
of 18-20% growth on consolidated basis, notwithstanding the cautious outlook issued by its US subsidiary Caraco.

To see full report: Sun Pharmaceuticals

Suzlon Energy (BNP PARIBAS)

Strong 3QFY09; First sign of orders

* Strong 3QFY09 marred by several one-offs
Suzlon’s consol. sales (wind and Hansen) rose 50.9% y-y (16.3% higher
than our estimate) due to better than expected growth in wind business
(600MW vs actual of 679MW) and Hansen (up 79% y-y versus our 30%
y-y growth). RM costs on a consolidated basis (ex REpower) came in at
57.3% (down sharply by 6.4% q-q) helped by lower commodity prices
and better product mix. Other expenses were high (up 6.8% y-y) partly
due to INR0.83b liquidated damages for one particular customer. Total
exceptional items for the quarter were: a) blade retrofit charges
(INR2.3b); b) MTM losses of INR1.2b; and c) FCCB loss of 0.92b. Pro
forma EPS came in at INR2.75 vs our estimate of INR1.70.


* Early signs of order revival
While order booking has been weak (only 195MW in 3QFY09), the
company’s pipeline (in addition to order backlog of 1916MW) includes
2000 MW orders of which the company is confident of booking around
1000MW of orders in the next six months. This supports our revenue
estimate of around 2866MW in FY10. Key positive in this quarter was
the financial closure of Rattlesnake project of Horizon Wind with the S88 V3 turbines.

To see full report: Suzlon Energy

>Crompton Greaves - BNP Paribas

Read full report

Crompton Greaves - BNP Paribas

>MTNL(BNP PARIBAS)

We initiate coverage on Mahanagar Telephone Nigam (MTNL), a
government-owned telecom operator, with a REDUCE rating and TP of
INR55 based on a cash per share of INR39 and a core business
valuation of INR16 at 2.5x FY09 EBITDA. Historically MTNL traded close
to its book value but the valuation is now converging towards its cash
per share as its ROE has declined to 3.3%, well below its cost of capital,
and one-fourth of its book value is amount recoverable from Department
of Telecom, which is unconfirmed and outstanding for several years.

To read full report MTNL(BNP PARIBAS)