>METAL SECTOR (EMKAY)

Visibility Rising

The macro business environment for all the domestic metal companies seems to be improving, with the increased thrust on infrastructure spending by both India and China. This seems to have provided better visibility to the targeted volume growth by the domestic companies. Moreover, to shield from the meltdown, all the companies have embarked upon huge cost reduction programs, which will provide the much needed cushion to the falling margins due to steep fall in realizations. Most of the companies have shown the actual reduction in cost of production in their earnings. The steel prices seem to have bottomed out and with the improvement in demand, they may catch the northward trend. Considering all these factors, we are giving higher multiples and upgrading all the metal stocks under our coverage

Improving business environment
The macro business environment for all the metal companies seems to be improving with the increasing willingness of the government to spend more on infrastructure development. The same is visible even in China. This is expected to give more visibility to the targeted volume growth by the companies. This may also improve the valuation multiples of the companies leading to higher valuations

Prices seem to have bottomed out
The steel prices seem to have bottomed out giving strong indications that prices may not fall from current levels and with improvement in overall demand scenario, prices may start increasing. Prices in China have increased to around USD440/t from USD400/t FOB. Considering freight and insurance of USD20/t and import duty of 5% in India, the landed cost comes to around USD480/t. The Indian prices are currently around USD500/t. If the domestic steel producers are not allowed to increase prices by the Government, then the imposition of anti dumping duty seems to be less likely as there will not be any significant disparity in the domestic prices and landed cost.

Cost reduction programs to improve margins
Taking cue from the contracting margins, most of the players have embarked on cost reduction programs to maintain their margins. Corus announced 40% production cuts, job cut of around 3,500 employees and other performance improvement programs to reduce cost and increase efficiency. JSW has announced various measures to increase efficiency, optimizing input blends and lower raw material prices (basically undoing the wrong dones during peak times). Sterlite is also targeting to reduce cost of production across divisions, especially aluminum – to reduce cost from as high as USD1,400-1,500/t to around USD900/t and zinc from USD680/t to around USD600/t. Sesa Goa is planning to reduce its mining cost by improving logistics and increasing productivity.

Revision in Target Price
We are revising upgrading Tata Steel from REDUCE to HOLD, with revised target price of Rs489 (1.3x FY11E book value and 4.7x FY11E EPS of Rs103), upgrading JSW Steel from REDUCE to HOLD with revised target price of Rs673 (1.2x FY11E book value and at 11.3x FY11E EPS of Rs59.8), upgrading Sesa Goa from REDUCE to BUY with revised target price of Rs243 (2.2x FY11E book value and at 7.6x FY11E EPS of Rs31.8), upgrading Godawari Power from HOLD to BUY with revised target price of Rs166 (0.7x FY11E book value and at 3.6x FY11E EPS of Rs46.3), downgrading Sterlite Inds from BUY to HOLD with revised target price of Rs738 (1.3x FY11E book value and at 12.9x FY11E EPS of Rs56.9) and revising target price of Monnet Ispat to Rs274 (0.85x FY11E book value and at6.2x FY11E EPS of Rs44.4).

To see full report: METAL SECTOR

>COROMANDEL FERTILISER (EMKAY)

Valuations not yet stretched

We recently met with the management of Coromandel fertilisers (CFL) and were enthused by their growth prospects. Efficient inventory management (by not getting into any long term contracts) and strong negotiating power with raw material suppliers remains their success mantra in the complex fertiliser business. Moreover, the non subsidy based business (water soluble fertiliser, micro nutrients, crop protection and rural retail etc), where margins are almost 2.5-3x higher than fertiliser
business, is likely to drive growth in the near future. We expect the company to transform itself from a mere fertiliser company to a complete farm inputs company. With contribution of the non-subsidy based business to the bottomline increasing, there is strong case for re-rating of the stock. Despite the recent upsurge in the stock price by ~100%, we continue to remain positive on the stock and maintain BUY with a price target of Rs 263. Valuations are yet not stretched, since at our target price, the stock is valued at 8x FY11E EPS, EV/EBITDA of 4.1x and P/BV of 1.9x. Considering
the high returns (RoE of 24-25%), we believe that high P/BV is justified.

More details about the company’s foray into rural retail, possibility of FOSKAR listing and any acquisition, any opportunity to set up an ammonia plant outside India for backward integration can be potential triggers, going forward. However, lower availability of raw material due to volatile price scenario, higher working capital requirement for rural retail are few key concerns for the stock.

■ Efficient inventory management and RM sourcing is their success mantra
CFL has managed to report attractive performance in a volatile scenario, despite IPP linked subsidies. Efficient inventory management, monthly revision of price contracts and strong bargaining power with key raw material suppliers like FOSKAR have helped the company manage the disparity in finished products (DAP) and raw material (Phos acid) prices.

■ Production dependent on availability of raw material, not on capex
CFL has capacity of ~3.3 mn mt of complex fertiliser. However, FY09 production was about 2 mn mt. Key determinant for production is not demand and capacity, but raw material availability. With increasing number of tie-ups and TIFERT production scheduled from Dec’10, we expect a sharp ramp up in production.

■ Non subsidy base business to drive future growth
We expect the company’s non-subsidy based business (which includes water soluble fertiliser, crop protection speciality fertiliser etc) to grow at 30% pa. With margins of 25-30%, we expect this business to contribute about 30% to CFL’s profit by FY11.

■ Valuations are not stretched yet; Maintain BUY
We continue to remain positive on the stock and maintain BUY with a price target of Rs 263. Valuations are not yet stretched, since at our target price, the stock is valued at 8x FY11E EPS, EV/EBITDA of 4.1x and P / BV of 1.9x. Considering the high returns (RoE of 24-25%), we believe that high P/BV is justified.

To see full report: COROMANDEL FERTILISER

>MADRAS CEMENT (EMKAY)

Madras Cement Q4FY2009 results are sharply below our expectations primarily on account of lower than estimated topline growth, higher raw material costs and losses in the windmill division. Cement revenues increased by 20.4% yoy to Rs6.38bn driven by 6.8% volume growth while realizations grew by 12.8% to Rs4027/ton. The wind power vertical registered 24.7% yoy decline in revenues to Rs40mn consequently registering a loss of Rs75mn. Overall EBIDTA declined by 1.7%yoy to Rs1.69bn mainly on account of 54% increase in raw material cost to Rs743/ton. Net profit declined by 12.3% yoy to Rs736mn (our estimate Rs953mn). During the quarter, MCL entered into contract to source its international coal/pet coke requirement at USD40-50. This is substantially lower than our estimate for FY10. With MCL importing 70% of its coal requirements, we expect significant savings on the coal cost front. We maintain our earnings estimate for MCL at Rs18.8/ share for FY10E and are introducing FY11E estimate at Rs18.9/share. We are increasing our valuation multiple for MCL from 5x to 6x mainly on account of lowering of discount as compared to Shree Cement and better earnings outlook on account of significant cost benefits. We are revising our price target upwards to Rs111 and maintain our HOLD rating on the stock. At the CMP of Rs108, the stock is trading at 5.7x FY10E earnings and USD69.6FY10E capacity.

Result Highlights
■ MCL’s revenues increased by 21.1% yoy to Rs6.42bn. Cement revenues increased by 20.4% yoy to Rs6.38bn driven by 6.8% volume growth while realizations grew by 12.8% to Rs4027/ton. The wind power vertical registered 24.7% yoy decline in revenues to Rs40mn consequently registering a loss of Rs75mn.

■ Overall EBITDA declined by 1.7% yoy to Rs1.69bn mainly on account of a 54% yoy increase in raw material cost to Rs743/ton. P&F and Freight expenses were up 14.7% and 13.3%yoy to Rs943/ton and Rs645/ton. However on a sequential basis, the same were down 17% and 4% respectively reflecting fall in prices in international coal and crude oil prices. EBITDA margin for the quarter declined by 613bps to 26.4% which was substantially lower than our estimate of 31.3%.

■ The cement division registered 2.2% decline in profitability with EBITDA of Rs1.61 bn as the division registered 585bps decline in its EBITDA margin to 25.3%. Cement EBITDA was mainly affected by a 46.6% yoy increase in raw material costs to Rs675/ton. Consequently EBITDA/ton for the cement vertical showed a decline of 10% yoy to Rs1043. However the same was up on a sequential basis by 4% as key operating costs P&F and freight were down by 17% qoq and 4% qoq respectively.

■ Windmill division on the back of 24.7% decline in revenue slipped into EBIT loss of Rs75 mn.

■ Interest expense for the quarter increased by 8.8% to Rs299mn while depreciation charge was up 84.5% on account of capacity addition during the year.

■ Consequently net profit for the quarter at Rs736mn which was sharply below our estimates of Rs953 mn.

To see full report: MADRAS CEMENT

>INFLATION (EMKAY)

Falls marginally to 0.48%

■ Inflation for the week ended May 23, 2009 stood at 0.48% as compared to 0.61% reported in the last week

■ The prices of primary articles decreased to 5.90% for week ended May 23, 2009 as compared to 6.22% for the preceding week.

■ The prices of fuel items remain unchanged at a negative of 6.68% during the week.

■ The inflation for manufactured products decline to 0.99% for the week, as compare to 1.09% for the preceding week.

■ Amongst the manufactured articles, the prices of food products, Textiles, and Beverages tobacco & tobacco products rose the most, by 13.41%, 9.27% yoy and 5.88% yoy respectively. While Basic metals alloys & metals products decline by 12.94% during the week.

To see full report: INFLATION

>CEMENT SECTOR (EMKAY)

Apr 09 dispatch grow @13.1%, prices increase 2.91%

Key Highlights
■ The cement industry delivered yet another month of stellar performance with dispatches growing by 13.1% yoy to 16.65mnt. Cement dispatches have registered an average growth of 11% since Nov 08 mainly on account of strong demand from rural housing and higher demand on account of pre election spend.

■ Cumulatively dispatch growth of cement majors (ACC, Ambuja, Grasim & Ultratech) at 13.87%yoy was inline with industry growth. AV Birla Group companies Grasim and Ultratech witnessed high dispatch growth with Grasim registering dispatch growth of 20.83% yoy while the same for Ultratech stood at 22.40%. Ambuja dispatch growth for April stood at 10.74% yoy while ACC was the laggard in the pack registering growth of 4.05% yoy.

■ On a regional basis Northern region witnessed the highest dispatch growth of 19.6% while South, West and Central registered 12.8%, 11.2% and 10.5% respectively. Dispatch growth was lower in East at 8.8%.

■ Cement prices continued their upward trend during the month of April 09 registering a yoy growth of 2.91% to Rs245. Even on a m-o-m basis, cement prices were up by Re1. We believe that the price rise is the result of strong dispatch growth observed over the past 6 months aided by robust demand outlook at least till the onset of monsoon.

■ On a regional basis, the Central region continued to register the highest growth in prices with April 09 growth pegged at 13.32% yoy while on a m-o-m basis, prices increased by Rs2 to Rs249/bag. South and North witnessed price increase of 3.85% and 2.49% to Rs262 and Rs246/bag respectively while prices fell in Eastern and Western regions by 2.25% and 2.07% respectively.

■ During the month of Apr 09, International coal prices witnessed a yoy decline of 42.55% to USD62.4. International coal prices are now down 65% from peak levels witnessed in July 08. However on a m-o-m basis, international coal prices had risen by 6.76%. As on 15th May 09, international coal prices were ruling at USD 58.8/ton.

■ With the onset of monsoon, we expect cement dispatches and prices to witness some softening. Based on our cement demand growth assumption of 6.9% for FY10E, we expect cement dispatches to fall by around 10% qoq this monsoon (July September 22009) and cement prices to fall by 4.3% -5.3% i.e. Rs10-13/bag to Rs232-234 (for details refer our Sector update ‘Monsoon trends’ dated 11th May 2009). We further assume the prices to continue to decline to Rs220 by Mar 10. However even in this case the cement price for the year would average Rs230/bag for FY2010. In our earnings estimates for cement companies we have factored in FY2010 average cement prices of Rs230/bag. Consequently we see little risk of downside to our earnings estimates for cement companies. We maintain positive view on the sector and our top picks are ACC, Ambuja, Ultratech, India Cement and Shree Cement.


To see full report: CEMENT SECTOR

>TVS Motor Company Ltd. (EMKAY)

Worst is behind, upgrade rating to HOLD

We came back positive from our meeting with the management of TVS Motor on (1) profitability of domestic business due to easing metal prices (2) strong management confidence (3) rational growth targets. However, a lot depends on the success of the new launches (upgrade of Flame, a new motorcycle in price range of 40000 to 45000 and a new ungeared scooter).

Having said that, we continue to have concerns with respect to Indonesian venture. We are concerned with the cash burn as well as limited availability of information with respect to the Indonesian venture. The management indicated of a loss of Rs 500 mn (Rs 1.5 per share) in FY09 as well as FY10. Also, TVS has taken a debt of USD 30 mn in the Indonesian venture (30% of FY10 standalone debt).

We believe that worst is over for TVS in the domestic business on volumes as well as profitability front. Infact, we believe that in FY10, the company would report the maximum EBIDTA growth, largely due to low base. We have upgraded our FY10 earnings estimates by 12% to Rs 2.9 per share and introduce our FY11 estimates. We upgrade our target price to Rs 35. At Rs 35, the stock would trade at a PER of 12.2x and 9.1x, EV/EBIDTA of 7x and 5.7x and P/B of 1.0x and 0.9x our FY10 and FY11 estimates respectively. We upgrade our rating on the stock from SELL to HOLD.

Extracts of the management meeting are as follows

New launches
■ In motorcycles, TVS will introduce a new model in he price range of 40,000 to Rs 45,000 in 2HFY10. In June/July 2009, the company will introduce upgrade of Flame, rectifying the errors with the existing Flame.

■ In scooters, TVS will be launching a new ungeared scooter in 100cc+ category, which is around 70% of the scooters market. This will also provide a cushion against the potential market share loss in the sub 100cc segment, with the entry of Honda Motors and Scooters India (HMSI). TVS aims to increase its run rate by 5000 p.m (increase of 27% over FY09 average run rate of 18,400), scooters post the launch of 100cc+ scooter. We have factored in an increase of 2000 units p.m
from 2HFY10.

■ For Mopeds, the company is looking for a modest growth of 5% to 6%. The primary focus area will be accessing the non southern market. The company will be focusing on creating awareness for its mopeds. We do not expect any significant contribution from the new markets in FY10.

Profit margins
■ Gross profit margins (Sales – RM) for mopeds, scooters and motorcycles are comparable. However, there are higher Selling and distribution cost in case of motorcycles and scooters due to low volumes and intense competition. With rising volumes in motorcycles, the per vehicle cost will come down and hence aid EBIDTA margin expansion.

Indonesia operation
■ Till date TVS has invested around USD 80 mn. Of this around USD 40-45 mn is towards physical assets, USD 15 to 20 mn is towards product development and balance towards brand building activity.

■ The funding for the Indonesian venture has been through equity contribution of USD 50 m from TVS (which itself was funded through an ECB) and USD 30 mn through a debt from IFC.

■ Also, the company will need around USD 10 m per annum in the near term for brand building activity.

■ Indonesian venture has made a loss of around Rs 500mn in FY09 and expect similar amount of loss in FY10.

■ It aims to breakeven in FY11 with a target sales of 100,000 units.

■ It has around 100 dealers as on now and the number is expected to increase to 150. The dealers have a very low operating cost model and break even with as low as 35 units per month.

Debt on books
■ Long term debt in standalone books is around 5.3 bn. Out of these around 80 m is through ECB and balance is sales tax deferral loan.

■ Around USD 40 m ECB is repayable in F10 as well as FY11. Capex

■ Capex for FY10 and FY11 will be around Rs 400 mn

Three – wheelers
■ Total investment of Rs 1.5 bn

■ Dealer ship network of around 60 dealers

■ Company aims to breakeven at 15,000 units p.a.

■ We have been very conservative in our volumes assumptions for three wheelers and expect company to sell around 5000 numbers in FY11.

Valuation and View
We believe that worst is over for TVS in the domestic business on volumes as well as profitability front. Infact, we believe that in FY10, the company would report the maximum EBIDTA growth, largely due to low base. We have upgraded our FY10 earnings estimates by 12% to Rs 2.9 per share and introduce our FY11 estimates. Having said that we continue to have concerns with respect to Indonesian venture. We are concerned with both the cash burn as well lack of regular information flow. However, we do not expects the stock price to react negatively to the loss reported by the Indonesian business given the start up nature of the business. We upgrade our target price to Rs 35. At Rs 35, the stock would trade at a PER of 12.2x and 9.1x, EV/EBIDTA of 7x and 5.7x and P/B of 1.0x and 0.9x our FY10 and FY11 estimates respectively. We upgrade our rating on the stock from SELL to HOLD.

To see full report: TVS MOTOR

>Monthly Technical Perspective (EMKAY)

Nifty

Nifty gave a positive start for the April month, and continued its northbound journey. On 8th April it tested our first mentioned target of 3240 and further continued its upside journey and thereby break the 200DEMA and tested second mentioned target of 3451 and made a high of 3511 on 16th April. Thereafter on higher level some profit booking was witnessed and Nifty took support near to 3302, which is 38.20% retracement level of the recent rally from 2965 to 3511 and made a low of 3296.Again Nifty started its upside journey and on 27th April it broke its recent high of 3511 and made a new high of 3517. Finally Nifty closed at 3473 with a gain of 15.00% m-o-m basis. As nifty is continuously making higher tops and higher bottom, thus we maintain our immediate upside target of 3743 which is 61.80% retracement level of the recent fall from 4649 to 2252. On the daily chart Nifty had given Flag breakout, thus in short term Nifty can test 4273, which is the target of the flag breakout. However in the short term 3300 will play as a strong support for nifty.

Sensex

Sensex also gave a positive start for the April month, and continued its northbound journey. On 9th April it tested our first mentioned target of 10945 and further continued its upside journey and tested the 200DEMA, which was placed at 11221 and further made a high of 11367. Thereafter on higher level some profit booking was witnessed and Sensex took support near to10661, which is 38.20% retracement level of the recent rally from 9520 to 11367 and made a low of 10715.Again Sensex started its upside journey and on 27th April it broke its recent high of 11367 and made a new high of 11492. Finally Sensex closed at 11403 with a gain of 17.46% m-o-m basis. As Sensex is continuously making higher tops and higher bottom, thus we maintain our immediate upside target of 12568 which is 61.80% retracement level of the recent fall from 15579 to 7697. On the daily chart Sensex had given Flag breakout, thus in short term Sensex can test 14242, which is the target of the flag breakout. However in the short-term 10715 will play as a strong support for Sensex.

Bank Nifty

Continuing its northbound journey the Bank Nifty broke the mentioned resistance of 4602, and further continued its upside journey and made a high of 5201 on 20th April. However on higher level profit booking was witnessed and took support near to 38.20% of the recent rally from 3871 to 5201 and made a low of 4725. Again buying was witnessed and bank Nifty started its upside journey and broke the recent high of 5201 and further made a high of 5288 on 27th April.
Finally closed at 5130 with a gain of 24.12% m-o-m basis. This index is still looking strong and in the immediate term it can test 5448 and in short term it can test 6164 levels which is 38.20% retracement level of the recent fall from 10774 to 4133. However in the short-term 4725 will play as a strong support.

To see full report: MONTHLY PREVIEW

>Marico (EMKAY)

Marico reported a robust revenue growth of 23.0% yoy to Rs5.6 bn driven by (1) 10% volume-led and (2) 9% attributed to pricing benefit. – in line with our estimates. Operating Profit grew by 60.8% yoy to Rs733 mn driven by strong revenue growth coupled with lower advertising and sales promotion expenses. Adjusted net profit grew by 97.0% yoy to Rs594 mn - above our estimates. Nevertheless, the reported net profit grew by 8.9% yoy to Rs444.1 mn – in line with estimates. Management shared a promising outlook with continuation of growth momentum in FY10E - growth will be largely volume-led with negligible gains from pricing. We fine-tuned our earnings estimates for FY10E to Rs3.7/Share and introduce FY11E earnings estimates at Rs4.2/Share. The stock has rallied by 11.1% in last 15-days in anticipation of Q4FY09 performance and has been out-performer in last 6 months. In absence of near-term news flows and all positives factored in earnings estimates with low probability of earnings upgrades, we downgrade the rating from ACCUMULATE to REDUCE with target price of Rs60.

Adjusted net profit up 97% yoy to Rs564 mn, above estimates
During Q4FY09, Marico reported robust 20.0% yoy growth in revenues to Rs5.6 bn (10% was volume-led and 9% attributed to pricing benefits), in line with our estimates. Marico maintained its volume growth momentum, downplaying concerns of slowdown in growth momentum. The operating profit grew by 60.8% yoy to Rs733 mn, driven by strong revenue growth coupled with lower advertising and sales promotion expenses during the quarter. Consequently, the operating margins jumped 330 bps yoy to 13.1%. Marico reported 8.9% yoy increase in its reported net profit to Rs444.1 mn. Nevertheless, company’s adjusted net profit (excluding exceptional items) jumped higher at 97.0% yoy to Rs594.4 mn, ahead of our estimates.

Robust growth in adjusted net profit is primarily attributed to strong operational performance and lower tax provisioning at Rs0.1 mn compared to Rs39 mn in Q408. Lower tax outgo is on account of provisions for liabilities of Sundari LLC, which was treated as business loss in the quarter. Marico made provisions of Rs150.3 mn towards the liabilities of Sundari LLC in Q409 (exceptional charge) versus a gain of Rs106.1 mn on sale of Sil business in Q408.

Improvement in ‘Saffola’ volumes; Kaya continue the growth pace
After disappointing volume performance in Q309 ‘Saffola’ has shown improvement on qoq basis. Saffola reported 5% yoy growth compared to mere 3% in Q3FY09. Also, the recent drop in Safflower prices and reduction in premium pricing versus competition in few ‘Saffola’ blend is likely to revive the growth momentum in coming quarters. Kaya continues to maintain its high growth momentum and reported 57% growth in FY09 to Rs1.6 bn. ‘Kaya’ downplayed any fears of slowdown in business momentum with (1) revenue growth at 33% yoy to Rs400 mn and (2) same store growth at 13% yoy, purely attributed to higher footfalls. Kaya continued its expansion with addition of 11 clinics in the quarter.

Promising outlook for FY10E, growth momentum to continue
In the analyst meet, management shared a promising outlook with continuation of growth momentum in FY10E. Company believes that FY10E growth will be largely volume-led with negligible gains from pricing. Consequently, Marico is eyeing promising volume growth in key brands and product segments like (1) 8-9% volume growth in ‘Parachute’ (2) 10-12% volume growth for ‘Saffola’ and (3) 12- 14% volume growth in Hair Oil business. Marico continues to remain optimistic on the growth momentum of Kaya business and expects to turn it profitable in FY10. Management has highlighted the softening of raw material costs especially Copra and Safflower – strong probability of margin expansion in FY10E.

We downgrade our rating from ACCUMULATE to REDUCE
We give thumbs up to Marico’s Q409 performance marked by (1) robust volume growth in ‘Parachute’ and ‘Hair Oils’ coupled with (2) above expected performance of ‘Kaya’ fully downplaying the fears of slowdown in growth momentum. Further, Marico has hinted at promising growth outlook coupled with gains at operational level with drop in input costs. Consequently, we fine-tune our earnings estimates for FY10E to Rs3.7/Share and introduce FY11E earnings estimates at Rs4.2/Share. The stock has rallied by 11.1% in last 15-days in anticipation of Q4FY09 performance and has outperformed in last 6 months. In absence of near-term news flows and all positives factored in earnings estimates with low probability of earnings upgrades, we downgrade the rating from ACCUMULATE to REDUCE with target price of Rs60.

To see full report: MAIRCO

>Ballarpur Industries (EMKAY)

Results below estimates

BILT reported poor Q3FY09 results. Revenues remained flat at 6.9 bn while EBITDA margins dropped by 650 bps to 19.8% as a result APAT fell by 76% to Rs 179mn. Results were affected mainly on account of – 1) Poor show at Sabah, Malaysia plant due to sale of high cost inventory and maintenance shut down which have resulted in EBITDA loss of ~Rs 240 mn 2) Lower demand for rayon grade pulp (RGP), Kamalapuram plant resulting in plant shut down, leading to EBIT loss of ~Rs 110 mn. We expect that the current quarter poor performance was mainly driven by extra ordinary circumstances. However global prices still remain weak hence putting pressure on margins at Sabah plant and Kamalapuram plant is likely to resume operation from May’09 and company is expected to start consuming pulp for its captive purpose. Its capex plan at Bhigwan is completed and expansion plan at Ballarpur is on schedule (completing June’09) which will increase its capacity by ~45%. We expect full benefit of this expansion to flow from Q1FY10 and Kamalapuram and Sabah plant should also stabilise by that time. To factor poor ongoing problem at Sabah and its Kamalapuram plant, we are reducing our FY09 revenue estimates by 10.6% to Rs 28 bn and APAT by 37.3% to Rs 1.8 bn. However our FY10 estimates remain unchanged. We maintain our BUY recommendation on the stock with a price target of Rs 24.

Poor show at Sabah plant and pulp plant affected results
Disappointing Q3FY09 results is mainly attributed to poor results from Sabah plant and rayon grade pulp at Kamalapuram plant. Company’s Sabah operation reported losses of approx Rs 413 mn due to sale of high cost inventory during the quarter and also due to maintenance shutdown for a month which affected its production. Sabah plant had an inventory of ~17,000 mt in Q2FY09 which was sold during current quarter at lower prices. Unit Kamalapuram, which produces rayon grade pulp, continued to remain shut due to sluggish pulp demand. Pulp division also contributed a loss of Rs 107 mn for the quarter.

Stand alone results remain stable
BILT standalone performance remained stable. BILT on stand alone reported net sales of Rs 2.5 bn with EBITDA margins of 24.2% and APAT of Rs 321 mn. Paper demand and realisations in domestic market remained stable.

Revising FY09 estimates keeping FY10 unchanged, maintain BUY
We have reduced our FY09 revenue, PAT and EPS by 10.6%, 21.7% and 37.3% to Rs 28.5
bn, 1.8 bn and Rs 2.8, respectively. We keep our FY10 estimates unchanged. We believe
that FY10 growth will be driven by 45% growth in paper capacity. We expect that pulp
operation at Kamalapuram will resume from Q1FY10 and company will start consuming pulp for its captive consumption. We maintain our BUY recommendation on the stock with a price target of Rs 24.

To see full report: BALLARPUR INDUSTRIES

>Wipro Technologies (EMKAY)

Delivers in line but red flags still up

Delivers in line on revenues, margin resilience driven by lower SG&A expenses

Volume decline sharpest amongst peers at ~6.3% QoQ as weakness in financial services and telecom clients catches up with the co. See more pressure ahead on this count.

Reported Pricing holds firm V/s peers because of higher fixed proportion of business (up~900 bps YoY) but reflects in lower volumes/lower realizations

Do not share similar optimism as co management which is in stark contrast to peers as we believe that the lagged effects of weakness for financial services, manufacturing will start reflecting going forward

Upgrade FY10/FY11E EPS by ~3%/2% on exchange rate resets to Rs 23.8 and Rs 24.4 respectively.

Maintain Reduce with a revised target price of Rs 240 (V/s Rs 220 earlier)

Q4FY09 Results; Delivers in line
Wipro reported revenues in line with estimates at US$ 1046 mn (down ~5% QoQ, +1.4% YoY). EBIT margins at 17.7% expanded by an impressive 190 bps sequentially helped by tighter cost controls however driven majority by cuts in SG&A expenses (down by ~140 bps QoQ). Net profits at Rs 9073 mn (+1% QoQ, +3.3% YoY) beat estimates marginally. However we are surprised by the steep decline in volumes at ~12% QoQ onsite and ~4% QoQ offshore which in our view is driven by sharp ramp downs at major financial services and telecom clients.

Reported pricing holds up, isn’t the cut reflecting in lower vols/utilization??
Wipro’s reported pricing ( offshore price realizations down 0.1% QoQ while onsite price realizations up ~0.8% YoY) held up well as compared to much steeper declines for other peers like Infy and TCS (Infy blended pricing down by ~3% QoQ and ~2% QoQ dip for TCS). However we note that actual realization pricing cut may continue to be not reflected in the reported realization metric but show up in lower volumes and lower utilization as a T& M engagement gets converted into a fixed price engagement. Thus in our view some of the pricing pressures being witnessed by Indian IT companies will rather show up in the form of lower volumes for Indian IT companies.

Management appears optimistic but admits to macro weakness as well
Wipro management appear confident of business prospects saying that the ‘worst might be behind us’ however admitted that they were facing pressures in the financial services space (with unpredictable project cancellations/ramp downs etc). Revenues from the Telecom and the financial services business declined by ~13%/5% QoQ respectively. We believe that the co would continue to face more macro headwinds from these spaces going forward (a view confirmed by TPI findings released yesterday).

Up FY10/FY11E EPS by ~3%/2%; Maintain REDUCE with TP of Rs 240.
We have cut our FY10/FY11 US$ revenue estimates marginally and reset our avg estimates at US$/INR of Rs 48.25/Rs 46.25 for FY10/FY11respectively which leads to an upward revision in FY10/FY11E EPS by ~3%/2% respectively to Rs 23.8 and Rs 24.4 respectively ( V/s Rs 23.1 and Rs 23.8 earlier). We maintain REDUCE with a revised target price of Rs 240, based on 10x 1 year rolling forward multiple.

To see full report:WIPRO TECHNOLOGIES

>ACC (EMKAY)

Stellar Performance

ACC Q1CY2009 pre-exceptional net profit at Rs4.08 bn is sharply ahead of our estimates (Rs3.40bn) on account of lower than expected other expenditure and lower Power and Fuel cost. Revenue for the quarter grew by 14.4% to Rs20.5bn, driven by 6.1% improvement in cement volumes (5.73mnt) and 7.9% increase in realizations to Rs3587 per ton. Sequentially realisation improved by Rs106/ton or 3%. Pre-exceptional EBIDTA (adjusting for a write back Rs197 million of reduction in value of actuarial liabilities) for the quarter was up 33.4% yoy to Rs6.28bn (our estimate of Rs5.31bn) while EBIDTA margins increased by 433 bps yoy to 30.5%, mainly on account of lower other expense. Sequentially P&F cost was down 14% reflecting the huge fall witnessed in international coal prices and thereby helping a sequential declined of 6.3% in total cost to Rs2491/ton. On account of strong dispatches, higher realizations and dramatic fall in international coal prices and other operating costs, we had recently upgraded our earnings estimate for ACC by 17% for CY09E to Rs59.5. We are further upgrading our earnings by 7.3% to Rs63.8 per share for CY2009. At current levels, the stock is trading at 10.1x CY09E earnings and USD79.9 EV/ton. We rate ACC as our top pick in sector and maintain our BUY recommendation on the stock with a price target of Rs697.

Note:

1) The reported result by the company includes write back on account of decrease in gratuity liability by Rs197 mn, which has occurred on account of change increase in discounting rate (G-Sec yields) sequentially for valuation of present value of employee benefit liabilities as per AS-15. We believe based on principle of conservatism these adjustments should have been done at the end of year. Also with the recent fall in G-sec yield this write back is likely to get reverse again. Hence we have added back Rs197 million to staff cost.

2) The State of Uttar Pradesh introduced VAT effective from January 1, 2008 pursuant to
which, sales tax exemption benefit was converted into a deferral scheme. Hence ACC’s reported net sales were lower by Rs 275.6 million for the quarter ended March 2008 and lower by Rs278.4 mn for quarter ended June 2008. Subsequently on representation by cement companies to restore sales tax benefit scheme, the State of Uttar Pradesh promulgated an ordinance during September 2008 restoring the sales tax exemption benefit. Consequently ACC net sales for quarter ended September 2008 included sales tax benefit of Rs 554 million for the period January to June 2008. For a like to like comparison we have added Rs275.6 million to Q1CY2008 net sales and shown like to like comparison on a per ton basis separately.

Results Highlights

■ ACC revenues for the quarter grew by 14.4% yoy to Rs20.55 bn on account of 6.1% increase in cement volumes (5.73mnt) and 7.9% increase in realizations to Rs3587 per ton. Sequentially realisation improved by Rs106/ton or 3%. Adjusting for note 2 mentioned above realisation improved 6.2% yoy.

■ Pre-exceptional EBIDTA at Rs6.28bn witnessed an increase of 33.4% yoy and was significantly ahead of our expectation (Rs5.31bn) mainly on account of lower than estimated other expense (Rs3.54bn as against our estimate of Rs4.1bn) and lower Power & Fuel cost (Rs718/ton against our estimate of Rs799/ ton).

■ EBITDA per ton on a yoy basis has witnessed an increase of 25.7% while the same on a sequential basis is up by a huge 33.5% to Rs1096 per ton. EBITDA margin for the quarter improved by 433bps yoy to 30.5% which was higher than our estimate of 26.3%.

■ Other expenses were down 11.5%yoy as last year expenses included approximately Rs250-300 of one time consulting fees relating to implementation of SAP and alternate fuel research. Also post February 2009 cement companies in Western and Eastern regions had cut rebates and discounts to dealers. This also has contributed to reduction in other expenditure for ACC.

■ Despite an 18% increase in Power and fuel cost (per ton Rs718) and 7.5% increase in Freight (Rs485/ton) ACC has management to restrict its total cost to Rs2491 i.e. an increase of just 1.5%. On a sequential basis it has actually declined by 6.3%.

■ However on a qoq basis, ACC power & fuel cost came down 13.7% reflecting the huge fall witnessed in international coal prices (ACC imports around 15% of its coal requirements). The benefit could have been much higher but for ACC carrying some high cost international coal inventory.

■ Interest cost was up 157.6% yoy to Rs144mn (we have treated Rs224mn interest provision on late payments of royalty on limestone as extraordinary exp) while depreciation charge was up 10.6% yoy to Rs789mn.

■ Consequently PBT for the quarter witnessed a growth of 27.4% yoy to Rs5.85bn. Pre exceptional net profit at Rs4.08bn up 24% yoy was significantly higher than our estimate of Rs3.40bn. The reported net at Rs4.04 bn was up 13.2% yoy (Q1CY2008 includes Rs368 mn on account of profit on sale of its investments in subsidiary)

To see full report: ACC

>Cement Sector (EMKAY)

Q4FY09 - Strong dispatch numbers, better realizations and lower costs

* We expect Q4FY09 to be a strong quarter for the cement sector mainly driven by a 9.4% dispatch growth, better realizations and easing of cost pressures.

* Following strong growth in dispatches cement prices have defied consensus expectations and have risen by Rs15 bag and are currently ruling at Rs246/bag as compared to Rs231/bag in early January 2009. However it is to be noted that since most of the hikes were effected form mid February 2009 the average price increase in Q4FY09 over Q3FY09 has been just Rs3 per bag i.e. Rs238/bag in Q4FY09 as compared to Rs235 in Q3FY08. On a yoy basis, Q4FY09 cement prices are up Rs6/bag or 2.6%.

* We expect the cement companies under our coverage to report a 10.6% yoy topline growth. Pure cement sales are expected to be up 15.5% driven by volume growth of 7% and net realisation improvement of by 8.5% (benefits of excise duty cuts not passed on).

* At operational level, we expect cement companies in Emkay universe to witness a decline of 293bps yoy in EBITDA margins to 26.3%. However on a qoq basis, the same is expected to improve by 264bps on account of better realisations and easing cost pressures during the quarter.

* Overall we expect the cement companies to report a marginal 0.2% decline in their EBIDTA as compared to a huge 19.3% decline witnessed in Q3FY2009. Infact pure cement EBDITA is expected to improve 8.1% yoy. EBITDA/ton is expected to touch Rs1064 as compared to Rs907 in Q3FY2009, i.e. a huge 17% improvement QoQ.

* Rising interest cost and higher depreciation charge on account of continuous capex will lead to net profit of Emkay cement universe falling by 6% yoy. However the same is significantly lower than 21.1% decline witnessed in Q3FY2009.

* We have been positive on the sector on account of sharp moderation in cost pressures, better than expected dispatches and higher cement prices. Maintain positive view on the sector and believe that impending consensus earnings upgrade and severe under ownership of the sector will continue to fuel outperformance. ACC, Ambuja Cement, Ultratech Cement and India cement are our top pick in the sector.


To see full report: CEMENT SECTOR

>Hindustan Unilever (EMKAY)

PRICING ACTION

HUL implemented price cut of 4%-20% on select brands and product categories. The price cuts are implemented either directly (20% price cut on Wheel Active Blue) or indirectly through weight changes (4.2% weight increase in Lifebuoy and 6.7% - 8.3% weight increase in Wheel Green). Considering above mentioned price cuts on select brands, total blended price reductions is approximately 1.2%. This translates into net cost saving of Rs5,301 mn compared to Rs7,637 mn earlier and additional EBITDA margin of 2.9% versus 4.1% earlier. Recent price reductions ratify our call that consumer staple companies will retain some savings to improve margin profile and intensify advertisement activities and utilize the balance for price reductions to benefit consumers. The recent price reduction on select brands is in-line with expectation. Despite adjusting the above price actions, HUL can implement incremental price reductions of 3.1% without impacting FY10E earnings estimates and intensify advertisement activities. Our earnings forecasts for CY09E remain unchanged at Rs11.7/Share. We maintain our BUY rating with target price of Rs305.

HUL implemented price cuts of 4%-20% on select brands and product categories
HUL, w.e.f April 2009 implemented price cut of 4%-20% on select brands and product categories. The price cuts are implemented either directly (Wheel Active Blue – Cake) or indirectly through weight changes (Lifebuoy, Wheel Green – Powder). The pricing action undertaken are – (1) 20% price cut in Wheel Active Blue – Detergent Cake (200 gm) from Rs10 to Rs8 (2) 4.2% price cut in Lifebuoy by increasing the weight from 115 gm earlier to 120 gm and keeping the retail price unchanged at Rs15 and (3) price cuts in range of 6.7%-8.3% in two SKU of Wheel Green – Detergent Powder by increasing the weight from 275 gm to 300 gm and 560 gm to 600 gm.

Safety cushion still exists, despite the above price reductions
Drawing reference to our earlier report ‘Material Gains’, HUL is riding on net savings of Rs7,637 mn or additional margins of 4.3%. The report highlighted the magnitude of savings and re-iterated our call on partial retention of savings and partial pass through to the consumers. Considering above mentioned price cuts on select brands, total blended price reductions is approximately 1.2%. This translates into net cost saving of Rs5,301 mn compared to Rs7,637 mn earlier and additional EBITDA margin of 2.9% versus 4.1% earlier. Despite adjusting the above price actions, HUL has enough safety cushions to introduce further pricing actions (upto 3.1% blended price reduction), make aggressive spends on advertisement and enough arsenal to combat price competition.

To see full report : HUL

>Tata Chemicals (EMKAY)

Poor visibility on soda ash business
Tata Chemicals (TCL) management shared cautious outlook on their soda ash business in near future in our recent meeting with company’s key management. Management maintained their view of 10-15% drop in soda ash sales volumes due to recent economic slowdown. However future outlook on global soda ash prices remains wobbly since possibility of price cut by the Chinese players to gain volumes cannot be ruled out. We have factored ~10% drop in sales volume and ~8% decline in prices while any steep cut in global soda ash prices may lead to downgrade in our earnings estimates. Also considering the recent sharp rally of ~50% in TCL’s stock price without any significant improvement in near term visibility in business, we maintain our price target of Rs 140 and maintain our reduce rating on the stock.

Soda ash volumes may decline by ~15% however outlook on prices remain shaky
Company has earlier in its Q3FY09 conference call indicated that its soda ash sales volumes (domestic as well as global) may decline by 10-15% and maintained its view. Soda ash prices are strong in CY09 since new contracts for CY09 have happened at average ~ US$ 20 / mt (~15%) higher than CY08. However soda ash demand in China is down by 20- 25% and operating ratio is down to 75-80%. Low capacity utilization of Chinese plants may trigger price cuts to gain volumes through rise in exports and as a result globally soda ash prices may come under pressure. We highlight that cash cost of Chinese manufacturers (US$ 170-180 / mt) is still 25-30% lower than the current soda ash prices (US$ 230-250 / mt). As a result outlook on medium term soda ash prices remains shaky.

Fertiliser business to improve, while Q4FY09 performance to remain weak
Company’s Haldia plant (phosphatic fertiliser) operations were affected during Dec 08-Feb 09 period due to unfavourable DAP prices and phosphoric acid prices. However production resumed recently after the phosphoric acid prices have come down to make production of DAP viable. Operation at its subsidiary, IMACID was also affected during the same period and has resumed now. Company is also expected to benefit from the completion of debottlenecking at its urea plant. After getting gas from RIL KG basin, company will be able to meet its entire gas requirement for urea production and will benefit from imported parity price (IPP) linked subsidy on additional production of ~15%. In our FY10 estimates, ~ 5% profit is contributed to this incremental production.

Stock has rallied ~50% recently, while visibility remains poor, we maintain reduce rating
TCL’s share price has recently rallied by 50%+ from its lows of Rs 100 and outperformed market by ~30% (sensex midcap index). However medium term visibility on earnings\ remains weak, since there has been no change in business fundamentals. Erosion in global soda ash prices can not be ruled out in near future. We expect company to report an EPS of Rs 24.7 in FY10 (lower than consensus) however possibility of earnings downward cannot be ruled out if price correction happens in soda ash. We have price target of Rs 140 and maintain our Reduce rating on the stock.

To see full report: TATA CHEMICALS

>Ship Building (EMKAY)

Subsidy disbursement – Temporary respite...

· Government commits to pending subsidy disbursement…
The Government of India has approved the subsidy claims of private Indian shipbuilders with respect to all ongoing ship building contracts entered upto 14th August, 2007, the date of expiry of the subsidy scheme. Subsidy will be released as per guidelines, subject to modifications, and on submission of requisite documents. Department of Shipping (Ministry of Shipping, Road Transport & Highways) and Ministry of Defence shall make budgetary provisions for shipyards for subsidy disbursal.

Press reports expect the total liability of the government on this count at about Rs51bn. Subsidy receivable by ABG Shipyard from Government stood at Rs3.1 bn in FY08 (Rs61.4 per share) and is expected to increase to Rs6.8 bn by FY12E (Rs134.4 per share) while that for Bharati Shipyard is Rs1.7 bn as on FY08 (Rs60.9 per share) and is expected to increase to Rs4.4 bn as on FY12E (Rs157.9 per share).

· …To give respite to Indian shipbuilders, though temporary
We believe that the above approval brings much needed respite to the Indian shipbuilders and prima facie serves as a sentiment booster. This is especially in light of miniscule budgetary allocations (refer table below) by the government so far. However, in the absence of committed timelines for disbursal, it will be difficult to quantify when the exact benefit is expected to accrue to the shipbuilders. Further, the subsidy disbursement is presently contingent on delivery of vessels by the shipyards and is not liable for payment in the event of cancellation of the contract. Both ABG Shipyard and Bharati Shipyard have not witnessed any cancellations yet. However, both have\ experienced delays and postponement in delivery schedules to the tune of 7-14 months. Such postponements will result in delayed receipt of subsidy from the government.

· We maintain negative outlook on the industry
We continue to maintain a negative outlook on the industry based on our top-down analysis. We expect no revival in order inflows in the near future and expect cancellations in existing shipbuilding contracts as well as delay and defaults in payments by customers. Order inflows have been the key stock driver for Indian shipbuilders as against earnings growth. In absence of other positive news flows, we believe that lack of order inflows will continue to restrict re-rating of the sector going forward. We maintain our ‘SELL’ rating on ABG Shipyard with target price of Rs63 and ‘REDUCE’ rating on Bharati Shipyard with target price of Rs45 (DCF based).

To see full report: SHIP BUILDING

>PIRAMAL HEALTHCARE (EMKAY)

Restructuring- Long term positive
In a bid to improve operating performance of its Pharma Solution (CMG) business, Piramal Healthcare is re-aligning its CMG assets by closing down its Huddersfield facility. Company will take one time hit of Sterling pound 10.1mn in FY09 itself. Company will be shifting these contracts to Digwal (India) and Morpeth (UK) facilities. Management has indicated that this restructuring will enable them to improve the operating margins of its Pharma Solution business by 6 to 8 ppt from FY10E itself. The improvement in the margins is driven by a) Close down of Huddersfield facility, b) Increase in early phase pipeline, c) Cost improvement & clinical packaging offerings at Morpeth and d) Strong commercial projects pipeline at Digwal. However, because of shifting of contracts and temporary slowdown in CMG space because of inventory rationalization and destocking at customers end (may last till H1FY10E), company has indicated that its revenue from Pharma Solution business will be lowered by 5% in FY10E over FY09.

We view the restructuring of its Pharma Solution business as long term positive for the company. We have revised our revenue and earning estimates downward because of these restructuring. We have downward our revenue estimates by 11% and 11% and earnings estimates by 9% and 8% for FY10E and FY11E respectively. On the back of downward revision in earnings, our target price has been revised downward by 13% to Rs261. At CMP of Rs194, the stock is trading at\ 8.6x FY10E EPS of Rs22.6.

Why Restructuring?
Piramal’s decision to discontinue its Huddersfield facility (FY09 revenue- Sterling pound 19mn and operating margins < 3%, 93 employees, 30-35% capacity utilization) was mainly aided by the change in the customer’s perspective and also it would be financially beneficiary for the company on the Operating level. The customers of Piramal now prefer to move manufacturing directly to Indian assets of the company without having to go to the European site. On the operating level the company expects anexpansion of 6-8 ppt on the margins mainly driven by a) Close down of Huddersfield facility, b) Increase in early phase pipeline, c) Cost improvement & clinical packaging offerings at Morpeth and d) Strong commercial projects pipeline at Digwal.

Impact of Discontinuation of Plant
Shutting down of the Huddersfield facility by the company will take one time hit of Sterling pound 10.1mn on account of redundancy payments, pension top ups, contract termination costs and other professional fees in FY09 itself. However the company will be shifting the contracts which were in the Huddersfield facility to Digwal (India) and Morpeth (UK) facilities. However, because of shifting of contracts from Huddersfield to other sites, which may take 6-9 months in validation and stability temporary slowdown in CMG space because of inventory rationalization and de-stocking at customers end (may last till H1FY10E), company has indicated that its revenue from Pharma Solution business will be lowered by 5% in FY10E over FY09.

To see full report: PIRAMAL HEALTHCARE

>Chemicals Sector (EMKAY)

SUSTAINED RECOVERY AHEAD.......

Mar’09 was marked by price as well as volume stability. In order to have more clarity on the price movement of various chemicals, we have increased the number of products from 19 to 33. Out of the 33 products in our universe, 12 products reported an increase in prices, 7 products reported a decline and prices of 14 products remained stable in Mar’09, indicating a stable price scenario. Emkay chemical index (covering 33 products) almost remained flat since Jan’09. Dealers are in consensus of the view that near term prices should remain stable. However, some volatility in prices cannot be ruled out. Volumes have stabilised with no significant increase on MoM basis in Mar’09. We believe that stable price scenario should continue while more products should report increase in prices in Apr-June’09 quarter. Volumes should pick up further on stable price scenario.

· Price stability continues
We have increased the number of products under our coverage from 19 to 33. We saw price stability during Jan-Mar’09 period in most of the products after a sharp fall in Oct-Dec’08 period. Products reporting positive movement in prices have steadily been on the rise, with 7, 10 and 12 products reporting an increase in Jan, Feb and Mar’09 respectively. Products with a stable price scenario also increased to 9, 13 and 14, respectively (Jan-Mar’09). Products reporting decline in prices reduced to 17, 10 and 7 during the same period. Higher proportion of increasing prices and stable prices in our product universe clearly indicates the stability in prices.

· Restocking boosted volumes in Jan-Feb’09; expect stable scenario now
After a sharp decline in prices in Oct-Dec’08 quarter, led by lower demand and de-stocking, volumes picked up in Jan-Feb’09 period, mainly driven by restocking at dealer’s and consumer’s level. However, the scenario has stabilised now and dealers expect volume and price stability in the near future. However, some volatility in prices cannot be ruled out.

· Outlook – Sustained recovery ahead
As mentioned earlier, we believe that prices of most of the products have bottomed out and should start showing some increase in prices. Many of the products have already shown some improvement in prices. We have seen increasing stability in prices as well as volumes of most of the products during Jan-Mar’09 quarter. We expect Apr-Jun’09 quarter to see a recovery in prices and volumes.

To see full report: CHEMICALS SECTOR

>Power Sector (EMKAY)

UI Regulations bring negative catalysts

The new CERC UI regulations – 1) are likely to negatively impact earnings of utilities such as NTPC and 2) bring negative catalysts for merchant power plants. The reduction in the peak UI rate from Rs10/unit to Rs7.35/unit (Rs4.08/unit for plants using fuel supplied under APM) is likely to reduce the average UI realizations of utilities thereby lowering the supernormal profitability in such transactions. Our back-of-envelope calculations suggest that FY10E earnings of NTPC are likely to be negatively impacted by 2.5-3%. Secondly, the reduction in peak rates is likely to reduce the peak short term tariffs to Rs6-8 /unit from Rs8-10 / unit at present. This in turn is likely to have huge negative impact (~ 20%) on the expected profitability and risk-reward perception of merchant power plants in the country.

New UI regulations bring negative catalysts to utilities* as well as merchant power plants
The new UI regulations brought by CERC bring negative catalysts to utilities* as well as merchant power plants. The reduction in peak UI rate is likely to reduce the average UI realizations of utilities which in turn will reduce the profitability in such transactions. The cap of Rs4.08/unit on plants using APM fuel is likely to further negatively impact earnings of utilities like NTPC which predominantly use fuel supplied under APM. The new UI regulations are also likely to reduce the peak short term tariffs which are directly linked with UI peak rates.

We expect negative impact on NTPC’s FY10E earnings
We manifested our analysis of new UI regulations on NTPC FY10E earnings estimates. We believe NTPC, which is predominantly using fuel supplied under APM, is likely to record lower average realizations per unit under UI transactions now - negatively impacting the supernormal profitability of such transactions. Though it is very difficult to ascertain the exact quantum of impact but our back-of-envelope calculations suggest that FY10E earnings of NTPC could be negatively impacted by 2.5-3%.

Likely to change risk-reward perception of merchant power plants
Our analysis, of different time periods with different peak UI rates, indicates that the peak short term trading tariffs are directly linked with peak UI rate. During January 2006 to April 25, 2007 when the peak UI rate was Rs5.70 / unit, 60% of the short term power was traded in the tariff range of Rs4-6/unit. Further, there were no short term trades at rates higher than Rs6/unit. Similarly during the period Jan 7, 2008 to December 31, 2008 when the peak UI rate was Rs10/unit, 36% of the short term power was traded at tariffs > Rs8/unit and 83% of the short term power was traded at tariffs > Rs6/unit. Thus, with reduction in peak UI rate by more than 26%, we expect peak short term trading tariffs to come down in the range of new peak UI rates. Further, the fact that during last one year, 36% of the short term volumes were transacted in the tariff range of >Rs8/unit, the reduction in peak UI rate is likely to have a major impact on profitability of merchant power plants. This in turn is likely to trigger negative perception towards the risk-reward of the merchant power plants.

To see full report: POWER SECTOR

>Cadila Healthcare (EMKAY)

Cadila Healthcare entered into an agreement with the US-based pharma major Eli Lilly for the discovery and development of drugs in the area of cardiovascular research. Under the agreement, Lilly would have an option to license any resulting molecules at different stages. Cadila Healthcare would receive potential milestone payment of up to $300 million and royalties on sales upon the successful launch of any compounds. The exact impact on earnings will not be ascertained because of lack of information. However, we view this development as positive for the company as it demonstrates the R&D capabilities of Cadila Healthcare. We reiterate our Buy rating on the stock with a target price of Rs339.

R&D pact with Eli-Lilly
Cadila Healthcare will be responsible for identifying potential drug candidates and developing them through to Phase II Human proof-of-concept. Lilly will provide the potential molecules and expertise and feedback for clinical, regulatory and research work. Collaborative research program may continue for a span of up to six years. Cadila Healthcare would receive potential milestone payment of up to $300 million and royalties on sales upon the successful launch of any compounds derived from the research program.

Impact on Cadila Healthcare
Management has not disclosed the exact details of the deal in terms of financial implication and how and when company will get milestone payments, etc. However, seeing the potential milestone payment, we believe that this is a risk-reward sharing kind of a deal where Cadila Healthcare will be working with innovators as a development partner. Cadila Healthcare will bear the pre-clinical and early stage (Phase I & II) development cost, while the partner is responsible for late stage development. Inlieu of this, Cadila Healthcare will get milestone on successful competition of each stage and percentage royalty of global sales. Milestone amount will be higher in the later stage. We expect Cadila Healthcare to start work on this project from FY10E onwards.

To see full report: CADILA HEALTHCARE

>Chemicals Sector (EMKAY)

Sustained recovery ahead.....

Mar’09 was marked by price as well as volume stability. In order to have more clarity on the price movement of various chemicals, we have increased the number of products from 19 to 33. Out of the 33 products in our universe, 12 products reported an increase in prices, 7 products reported a decline and prices of 14 products remained stable in Mar’09, indicating a stable price scenario. Emkay chemical index (covering 33 products) almost remained flat since Jan’09. Dealers are in consensus of the view that near term prices should remain stable. However, some volatility in prices cannot be ruled out. Volumes have stabilised with no significant increase on MoM basis in Mar’09. We believe that stable price scenario should continue while more products should report increase in prices in Apr-June’09 quarter. Volumes should pick up further on stable price scenario.

Price stability continues
We have increased the number of products under our coverage from 19 to 33. We saw price stability during Jan-Mar’09 period in most of the products after a sharp fall in Oct-Dec’08 period. Products reporting positive movement in prices have steadily been on the rise, with 7,10 and 12 products reporting an increase in Jan, Feb and Mar’09 respectively. Products with a stable price scenario also increased to 9, 13 and 14, respectively (Jan-Mar’09). Products reporting decline in prices reduced to 17, 10 and 7 during the same period. Higher proportion of increasing prices and stable prices in our product universe clearly indicates the stability in prices.

Restocking boosted volumes in Jan-Feb’09; expect stable scenario now
After a sharp decline in prices in Oct-Dec’08 quarter, led by lower demand and de-stocking, volumes picked up in Jan-Feb’09 period, mainly driven by restocking at dealer’s and consumer’s level. However, the scenario has stabilised now and dealers expect volume and price stability in the near future. However, some volatility in prices cannot be ruled out.

Outlook – Sustained recovery ahead
As mentioned earlier, we believe that prices of most of the products have bottomed out and should start showing some increase in prices. Many of the products have already shown some improvement in prices. We have seen increasing stability in prices as well as volumes of most of the products during Jan-Mar’09 quarter. We expect Apr-Jun’09 quarter to see a recovery in prices and volumes.

To see full report: CHEMICALS SECTOR