>CANARA BANK (IDFC SSKI)

We recently met the management of Canara Bank and came back convinced about the bank’s ability to deliver a high RoE over the next couple of years. We expect the RoE improvement to be driven by: (i) an improving core performance; and (ii) receding pressure on asset quality. The bank is well poised to accelerate its credit growth, which along with the calibrated strategy of lower growth in FY08, has led to an uptrend in CASA, NIMs and NII (albeit some base effect). Besides the pick-up in credit growth, renewed focus on cross-selling would also contribute to fee income growth. In Q4FY09, the bank surprised positively on asset quality and reported a decline in Gross NPAs, while restructured assets hovered at the industry average. The bank has de-risked its investment book over the year, with AFS proportion in investment book now at 27.5% (duration of ~2 years) from ~37% in FY08. A lower AFS proportion in the investment book implies lesser volatility in earnings going forward. We expect Canara Bank to report 14% CAGR in net profit over FY09-11, with an average RoE of ~21% over the next couple of years. Stock is currently trading at ~1x FY10 adjusted book. We upgrade our recommendation on the stock to Outperformer with a 12-month price target of Rs350.

The key takeaways from our meeting with Canara Bank management are:

■ Growth strategy – foot on the accelerator!

• Credit growth in FY08 was restricted to ~9% as the bank’s strategy was to consolidate rather than grow aggressively (28% CAGR over FY05-07).
• Since July/ Aug ’08 (when the new Chairman took over the running of the bank), the focus has been on returning to growth. In FY09, the bank grew its deposits by ~21% and advances by ~29%.
• In FY10, credit growth is expected to moderate to 20-22%, in line with RBI guidelines.

■ Outlook for margins – stable!

• NIMs improved by 36bp qoq to ~2.8% in Q4FY09, as loan spreads expanded with a higher rise in yield on advances than cost of deposits. Management expects NIMs to stabilize around 2.8%.
• Lending rates are not expected to fall by more than 50-100bp from here unless cost of funds also falls by a similar extent. We believe there is limited scope for reduction in cost of funds, which as fixed deposits would then become unattractive for investors.

■ Gross NPAs contained; restructuring at 1.5%

• Gross NPAs have come down from Rs25bn in Dec’08 to ~Rs21.7bn in Mar’09 on the back of strong recoveries. The bank’s entire Rs4bn Ratnagiri exposure continues to be a part of its Gross NPAs.
• While provision coverage ratio of ~31% looks low, Canara Bank management reaffirms that including Rs40bn of write-offs by the bank, coverage ratio stands at 77- 78%.
• The bank has restructured Rs20.6bn of loans during FY09, bulk of which are payment deferment and not haircut on interest. As of April’09, applications for restructuring worth Rs20bn are still pending, of which the bank does not expect to restructure more than Rs10bn.

■ Expansion plans

• 200 new branches are expected to be opened this year. Around 77% of all branches are CBS compliant, with a target to reach 100% by March-April’10.
• Alongside productivity initiatives for the bank’s workforce, about 1,800 young people are expected to be hired to lower the age profile of the employees.

To see full report: CANARA BANK

>FINANCIAL TECHNOLOGIES (IDFC SSKI)

Billion dollar 'baby'!

Vision, execution and ability to reinvest capital have impelled the evolution of Financial Technologies (FTIL) from India’s leading exchange solutions provider to Asia’s largest exchange conglomerate. The ‘only’ gateway to the potential US$10trn Indian exchanges space, FTIL has captured 87% of the commodity markets through MCX and given taut competition to equity incumbent NSE in currencies through MCX-SX (49% share). Besides pioneering niche models in power and spot, five international exchanges have been set up in potentially under-penetrated regions. FTIL is now ready to take the battle to NSE and BSE’s turf in equity trading (NSE+BSE profits at Rs11bn). While aggression and growth are second nature to FTIL, ability to re-deploy capital (32% divested in MCX at a valuation US$1.1bn; 18% divested in MCX-SX at US$284m) in value creating businesses imparts conviction to its growth longevity. We like the ‘urgency’ in FTIL’s business trajectory and initiate coverage with an Outperformer.

An annuity play in the US$10trn opportunity space: The transition from a license sale business to an annuity model marks the scale up of FTIL. India’s leading exchange solutions provider (350,000 licenses sold; 85% share), FTIL has extended the strong domain expertise to the ‘fundamentally-perfect’ exchanges business and created MCX with 87% share of Indian commodity space.

Risk appetite, execution, monetization and growth: The ‘urgency’ to replicate the success of MCX has steered FTIL to become Asia’s largest exchange conglomeratewith 10 exchanges across segments/ geographies as also six eco-ventures. We like the execution success in its core technology products business, MCX, NBHC (warehousing) as also MCX-SX (currency derivatives). Ability to monetize is evident from partial divestiture in DGCX and capability to fund growth is reflected in the recent value unlock in MCX-SX.

The way to value – SoTP; target price of Rs2,000: FTIL is a compelling business proposition, a gateway to participate in a model with strong technology domain, annuity in a high-growth environment, spanning various geographies (Singapore, Bahrain, Africa, Mauritius and India) as also segments (commodities, equities, currencies, power, spot, etc). We initiate coverage on FTIL with Outperformer and SoTP-based target price of Rs2,000 – 40% upside from the current levels.

To see full report: FINANCIAL TECHNOLOGIES

>BHARAT FORGE (IDFC SSKI)

HIGHLIGHTS OF Q4FY09 RESULTS

Standalone performance
• Bharat Forge Q4FY09 results have been below our estimates primarily on account of significantly lower offtake by domestic OEMs due to the substantial inventory pile-up at their end.

• The company’s Q4FY09 standalone revenues declined 50%yoy to Rs2.9bn (we saw Rs4.4bn). The sharp and sudden drop in automobile sales in Q3FY09 resulted in pile up of inventories at both the OEMs and the dealers end which compounded the impact of the downturn with schedules from OEMs falling substantially during the quarter.

• The sharp fall in margins resulted in 1000bps fall in margins to 14.6%. Absolute EBIDTA for the quarter declined 70%yoy to Rs427m.

• Higher working capital led to an increased interest burden during the quarter of Rs295mn. Bharat Forge (standalone basis) reported a loss of Rs80mn after adjusting for the forex gain of Rs987m during the quarter.

Consolidated performance
• Bharat Forge’s consolidated revenues declined 47%yoy to Rs6.1bn while its margins plunged to its lowest ever at 2.9% (16% in Q4FY08 and 10.1% in Q3FY09).

• Led by a sharp drop in operating income and high interest burden, the company reported a loss on a consolidated basis of Rs503mn after adjusting for forex loss (Rs1bn) and customer claim and manpower redundancy cost of Rs299mn).

Other key highlights:
• Tonnage sales (standalone) for the quarter were down 62%yoy at 18,246T while for FY09 it was down 29%yoy at 133,755T.

• Despite the INR depreciation in FY09, the company was unable to increase its export revenues primarily on account of hedges booked in Q1FY09. No such contracts exist in FY10 and hence BFL might witness higher export revenues in Q4FY09 if INR remains at current levels.

To see full report: BHARAT FORGE

>SONA KOYO (IDFC SSKI)

HIGHLIGHTS OF Q4FY09 RESULTS

• Sona Koyo’s Q4FY09 performance was better than our estimates on account of a better than expected topline growth.

• Net sales for the quarter were ahead of estimates at Rs1.9bn (we saw Rs1.7bn) primarily on account of a strong ramp up in the domestic business. The domestic business grew 37%qoq and 2.5%yoy to Rs1.8bn (we saw Rs1.5bn). Exports, however declined 29%yoy to Rs123mn (we saw Rs178mn).

• The company received compensation for rising raw material costs of the previous quarter (i.e. Q3FY09) in Q4FY09 (a lag of a quarter) from some of its key clients including Maruti Suzuki and M&M and hence its raw material costs (as a % to sales) declined almost 600bps qoq to about 81.5%. Further, driven by aggressive cost rationalization measures (including voluntary compensation cuts taken by the employees) taken by the company, the company was able to improve its operating margins to about 5.3% in the quarter (we saw 4.3%) from an operating loss of Rs94mn in Q3FY09.

• Adjusted for the forex loss, the company posted a loss for the quarter of about Rs46mn (we saw loss of Rs71mn) against a loss of Rs165mn in Q3FY09.

• For FY09, net sales were marginally up 1.4%yoy to Rs6.9bn. Substantial margin erosion (700bps yoy) to 2.3% and a high interest burden at Rs317mn (against Rs118mn in FY08) led to loss of Rs275mn (PAT of Rs230mn in FY08) for FY09.

• Other Key highlights:

• Localisation for CEPS expected to reach about 68% by Jan2010 from 40% currently which would likely help boost margins in FY11.
• Most of the new business including that from Maruti’s Wagon R and the new Swift, Toyota EFC and the Nissan business would be under the joint venture JTEKT Sona Automotive (as all the new designs would be developed by JTEKT) to whom Sona Koyo will supply some major components.
• The capex requirement for the next couple of years is going to be minimal and would primarily be investments for balancing equipments.

To see full report: SONA KOYO

>INDIAN EXCHANGES (IDFC SSKI)

The Final Countdown!

A near US$500trn – 10x world’s GDP – is the turnover on global exchanges today! Intrinsically an annuity business, sticky ‘liquidity’ renders the industry quasimonopolistic where ‘winner takes all’. High operating leverage with EBITDA margins of 60-80% as also limited capital needs, albeit a one-time heavy investment, imply strong cash flows. The nascent Indian exchange landscape is finally evolving from ‘only equity’ into an inclusive blend of asset classes (commodities, forex, power, etc) with underlying physicals warranting a 2.5x growth in industry turnover to US$10trn by FY14. Now demutualized and electronized entities, the compelling business model is bound to translate scale into profitability. With exchanges inherently commanding high strategic valuations (CBOT acquired at 55x earnings; NSE valued at $2.3bn), logical for their risk-free model, we believe it’s time for ‘value creation’ on Indian exchanges. We are BULLISH. Financial Technologies, the only listed player in the space and Asia’s largest exchange conglomerate, is our BIG bet.

Business model…flawless: Revenue sustainability (20% CAGR in global volumes for two decades), high operating leverage (60-80% EBITDA margin) and strong cash flows make exchanges a near-perfect business. With liquidity, the key success factor for an exchange, difficult to ‘poach’, entry barriers in the industry are well defined and lend further resilience to the annuity model.

Indian exchanges – on a high: Indian exchanges (US$4trn turnover), synonymous to equity markets, are finally coming of age. Inclusion of varied asset classes – commodities, currencies, power, etc – is set to impart scale and depth to the industry. Based on underlying physicals, industry turnover is expected to reach US$10trn by FY14, primarily spear-headed by the nascent but high-potential commodity exchanges (4x from US$1tr currently).

Time for value unlock: Having undergone a swift evolution, the demutualized and electronic entities have overcome structural inefficiencies. Catching the eye of global players, the big-ticket sector has garnered high strategic valuations (NSE valued at US$2.3bn, MCX at $1.1bn and BSE at $0.8bn), which is now set to convert into market capitalization. We are bullish. In the listed space, our big bet is Financial Technologies. We recommend Outperformer with a price target of Rs2,000 – a 40% upside from the CMP.

To see full report: INDIAN EXCHANGES

>YES BANK (IDFC SSKI)

'Interest'ing times

Yes Bank will be a key beneficiary of declining interest rates, and thereby a collapse in wholesale borrowing costs, given the bias of its funding mix. Lower deposit costs are expected to drive a structural improvement in CASA – one of the key focus areas. The bank has surprised positively on the strength of its asset book, reflected in the 200bp+ of capital release on migration to Basel-II. We expect 26% earnings CAGR for the bank over FY09-11 driven by margin expansion, stable asset quality and robust fee income growth. Owing to a potential expansion in NIMs and comfort around asset quality, we are upgrading our earnings estimates by 3.9% for FY10 and 5% for FY11. At 1.8x FY10E and 1.5x FY11E adjusted book, valuations are attractive when viewed in conjunction with the stock’s historical trading multiples. Maintain Outperformer with a revised 12- month price target of Rs200.

■ Key beneficiary of collapse in bulk deposit rates: Wholesale borrowing costs, which had soared in Oct 2008 due to tight liquidity, have been rapidly falling over the past few months – CP rates now near to all time lows touched in 2003. Being largely bulk funded (only ~9% of deposits in CASA), Yes Bank will be a key beneficiary of the same. Around 60% of the bank’s liabilities are likely to get re-priced over the next 12 months, translating into lower deposit costs and an expected ~15bp expansion in NIM in FY10.

■ Well-capitalized for growth: Tier I ratio of 9.5% (as of March 2009) provides Yes Bank headroom to grow at ~30% for the next 18-24 months. Migration to BASEL-II has led to capital release of 210bp and enhanced the capital cushion. Further, as more corporate accounts get rated, another 50-100bp of capital release is likely over the next six months. That also underlines superior quality of the bank’s loan book.

■ Attractive valuations; reiterate Outperformer: Yes Bank is expected to report a strong 26% CAGR in earnings over the next two years. We expect RoE expansion (21% in FY10E against 14% in FY07) to lead to re-rating of the stock in the near term. At 1.8x FY10E and 1.5x FY11E adjusted book, current valuations offer an attractive entry point as the stock trades on the lower end of its historical price to book band. Reiterate Outperformer with a revised 12-month price target of Rs200 (3x FY10E and 2.4x FY11E adjusted book).

To see full report: YES BANK

>BOSCH LIMITED (IDFC SSKI)

HIGHLIGHTS OF Q1CY09 RESULTS

■ Bosch Q1CY09 results have been below our estimates primarily on account of higher than estimated raw material costs on account of adverse currency movement and shift in product mix towards the low margin non-auto business.

■ Net sales during the quarter declined 17%yoy to Rs10.1bn (we saw Rs10.9bn). Revenues were impacted primarily on account of the slowdown in the auto OEM space (both domestic and exports) and also on account of the lockout at the Jaipur facility which extended over the first 3 weeks of Jan09. While automotive business revenues declined 21%yoy to Rs8.5bn, the non-auto revenues increased 13%yoy to Rs1.4bn. As a result, the product mix for Bosch has changed adversely in favor of the relatively low margin non-auto business which now contributes to about 14% of its topline from about 10% earlier.

■ Raw material costs shot up sharply during the quarter to 56.2% of net sales as against 51.6%in Q1CY08 and 47.4% of net sales in Q4CY08 primarily on account of depreciation of INR against the USD which increased its import costs as also the change in product mix.

■ On account of a lower topline growth and a sharp increase in raw material costs, margins crashed 960bp yoy and 660bp qoq to 10.2%. Resultant, PAT for the quarter declined 70%yoy to 493mn (we saw Rs1.1bn).

Other Key highlights:

• Given an uncertain outlook for both the automobile and the tractor industry, the company has reduced its capex for CY09 to about Rs2.5bn

• During the quarter the company has bought back and extinguished about 365,627 equity shares after which the equity capital stands reduced to Rs317mn. Post the buyback, the promoter holding has gone upto about 70.6% from about 69.8% earlier.

To see full report: BOSCH LIMITED

>ASHOK LEYLAND (IDFC SSKI)

HIGHLIGHTS OF Q4FY09 RESULTS

■ Ashok Leyland’s Q4FY09 results have been ahead of our estimates primarily on account of better than expected operating performance.

■ The company has posted a steep decline of 53%yoy in net sales to Rs12.2bn (we saw Rs13.3bn) on account of 61%yoy fall in CV volumes. The contribution of non-cyclicals to revenues has increased from 33% to nearly 50% in FY09 due to robust sales of power gensets and spare parts as well as on account of the sharp decline in goods M&HCV volumes during the period.

■ Adjusting for the Rs180mn unrealised forex gain included in other expenses, margins for the quarter at 7.9% (we saw 7.2%) were down 400 bp yoy, but better 100bp qoq.

■ Interest burden for the quarter increased to Rs440m against Rs394mn in Q3FY09 and Rs91mn in Q4FY08 on account of higher working capital and drawdown of the USD200mn ECB loan. Being eligible under MAT the company reported a reversal of taxes of Rs224mn during the quarter.

■ Adjusted PAT for the quarter declined 77%yoy to Rs443mn (we saw Rs338mn).

■ Other key highlights:

• Total inventory in the system for ALL is 7,500 units. The company is targeting to reduce this to 3,000-3,500 units within the next few months which would reduce its working capital requirements by about Rs5bn-7bn and thereby reduce interest costs.

• Given the marked slowdown in the domestic CV industry, the company has consciously pruned its capex over the next three years to Rs20bn from the earlier planned Rs30bn.

• Ashok Leyland has so far received orders to manufacture about 2,800 buses of the total 5,330 bus order released under the JNNURM scheme.

To see full report: ASHOK LEYLAND

>NIIT LIMITED (IDFC SSKI)

HIGHLIGHTS OF FY09 AND MANAGEMENT INTERACTION POST RESULTS

■ NIIT Ltd has reported consolidated numbers for FY09 - revenue growth of 14% at Rs11.5bn (ahead of estimates at Rs11.1bn), EBITDA growth of 15% at Rs1.18bn (our estimates of Rs1.15bn) and PAT (before share of associate) at Rs389mn (our estimates at Rs374mn). PAT post share of associate came in at Rs698m.

■ The company reported other income for the year at ~Rs200mn (including a forex gain of ~Rs96mn, hedging losses to the tune of ~52mn and a one time exceptional gain of Rs158mn which includes sale of land during the year).

■ The company reported a capex of ~Rs1.6bn in the current year. In tandem with the capex, the debt levels shot up to Rs3.5bn (cash at Rs749mn taking net debt to Rs2.7bn). Going ahead the company plans to incur a capex of ~Rs1.3bn in the current year.

■ Reported numbers include a net interest outgo of ~Rs247mn for the year (post interest income of Rs53.2mn and an interest expense of Rs300mn).

■ For the quarter – NIIT reported a revenue growth of 10% at Rs3bn, EBITDA growth of 19% at Rs364mn and PAT decline of 46% at Rs96mn.

To see full report: NIIT LIMITED

>EMCO PROJECTS (IDFC SSKI)

HIGHLIGHTS OF Q4FY09 RESULTS

• Revenues grew by 9.4% yoy to Rs3.74bn, ahead of our estimate of Rs3.32bn led mainly by better than estimated transformer revenues. FY09 revenues increased by 5.5% yoy to Rs9.96bn.

• Transformer revenues showed strong growth of 19.2% yoy during the quarter to Rs2.37bn, while project revenues increased by 4.7% yoy to Rs1.29bn.

• EBITDA margins came in sharply higher than estimates at 15% (+76bps yoy) led mainly by the better than expected revenue growth and higher transformer margins Resultant, EBIDTA grew 15.2% yoy to Rs561mn. FY09 EBIDTA margins stood at 13.9% (+20bps) and FY09 EBIDTA grew by 7% to Rs1.38bn.

• Interest costs grew by ~3x to Rs139m, led by debt of Rs3.56bn on books as on March 31, 2009 and also due to higher average cost of borrowings.

• PAT fell by 18.7% yoy to Rs237mn mainly due to higher interest costs and a relatively higher tax rate (36.7%) during the quarter. Actual PAT was however, ahead of estimates of Rs175mn on the back of the higher than expected revenues and margins during the quarter.

• Total order backlog as on March 31st 2009 stood at Rs15.63bn (1.6x FY09 revenues). The transformer orders constitute 33% of the order backlog, while projects contributed 66% and the balance 1% being meter orders.

• The order inflow for the quarter was Rs6.37bn (~3x Q4FY08 order inflow) as the company booked fresh orders in the project business. For FY09, order inflow showed strong growth of 33% and came at Rs14.59bn.

• The Board of Emco has cancelled the outstanding 1.7mn warrants to promoters and 10% upfront payment made by promoters towards the same has been forfeited. The Board has approved a fresh issue of 6.3mn warrants to promoters, to be converted at a price not less than Rs62/share. The promoters’ stake in the company is likely to increase to 40% in case of the conversion of these warrants.

To see full report: EMCO PROJECTS

>IPCA LABORATORIES LIMITED (EMKAY)

Consistent performance, PAT impacted by Fx losses

Ipca’s focus on building brands through concentrating on branded formulation business has resulted steady growth in revenues and expansion in operating margins. Company has been consistently outpacing the industry growth in domestic formulation segment driven by increased focus on high growth life style segment. In Q4FY09, revenues grew by 29% to Rs3.1bn on the back of a) 38% growth in export formulation business, & b) 34% growth in domestic formulation business. On the operating front, the company reported a growth of 63% to Rs 533mn in Q4FY09, driven by a) 140 bps reduction in raw material cost & b) 300bps reduction in other expenses. Higher interest cost (up by 71%), tax out go (26.8% vs. 8.5% in Q4FY08) and MTM losses of Rs154mn, the company reported a decline of 65% in the bottom line to Rs 79mn. However adjusting to Forex loss of Rs 154mn and Rs 102mn for provision for investment/ loan in subsidiary, the APAT grew by 30% to Rs 296mn. For FY09, revenue was up by 22% to Rs 12.8bn and APAT was up by 64% to Rs1655mn. At CMP of Rs487, the stock is trading at 6.2x FY10E earnings. We upgrade our price target from Rs637 to Rs660 (8x one year forward rolling EPS of Rs82.5). We reiterate our BUY rating.


■ Branded formulation continue to grow at robust pace
Ipca’s focus on high margin branded formulation segment continued to drive revenue and margin growth for the company. Though the tender business for FY09 declined significantly from Rs 470mn to Rs 79mn, the overall domestic formulation business grew on the back of significant growth from lifestyle segments like CVS, CNS and Pain management. For FY09 the branded formulation business in export markets and domestic market grew by 49% and 24% respectively. The contribution of high margin branded formulation business in India and other semi –regulated market has increasedto 51% in FY08 from 48% of sales in FY09. Management has given a guidance of 18-20% growth in the topline in FY10E.

■ EBIDTA margins expanded by 420bps for FY09
Operating margins during the year expanded by 420bps to 20% on the back of 460 bps reduction in raw material cost. The reduction in raw material cost was mainly because of improved product mix and softening of solvent prices driven by reduction in crude oil prices. Going forward we expect, company to maintain similar operating margins.

■ Adjustment of Forex loss & Provisions
During the year, the company has reported a MTM loss of Rs 756.9mn out of which Rs 495 mn was on account of realized losses on forward contracts and Rs 262mn on account of MTM losses on forward contracts, maturing in next 6 months. The company has transferred Rs305mn in the ‘Foreign Currency Hedging Reserve’ account as MTM losses for the contracts which are maturing beyond 6 months. This amount will be charged to P&L account when this contracts will materialized depending upon the currency movement. Company has sold forward contracts worth $80mn at Rs47.5/USD,which is 43% of the projected export sales in FY10E. The company has also made a
provision of Rs 101.9mn for investment/ loan in Brazilian subsidiary.

To see full report: IPCA LABORATORIES LIMITED

>OIL MARKETING COMPANIES (IDFC SSKI)

With a stable and pro-reforms Congress-led government back in power, expectations of speedy and aggressive policy reforms in the areas of oil product pricing and strategic disinvestment have stoked a handsome rally in OMC stocks. Significantly outperforming the Sensex (14% rise) post the election results, IOCL, BPCL and HPCL have gained 23%, 20% and 24% respectively in just five trading sessions. At current prices, IOCL, BPCL and HPCL trade at 6.6x, 6.7x and 8.5x FY10E EV/ EBITDA respectively, and ~1x BV. At these levels, we believe the potential upside from product price deregulation in FY10 is already built into the stock prices. Also, we are skeptical of any concrete measures being effected on the strategic disinvestment front in the near term. We
also note that free pricing of petrol and diesel is feasible only till crude prices below US$65 /bbl, beyond which product price increases would become difficult to implement. We maintain our Neutral stance on the sector.

■ New government expected to be committed to reforms
Initial statements made by Congress party office bearers indicate that the incoming government will have firm focus on the reforms process. This implies that there may be some definitive action at last on the refining and marketing sector reforms that have been on ice for a long time. We see several economic and political reasons supporting the reform process currently:

• The relatively low crude prices would result in small increases in domestic fuel prices even after deregulation, making it politically convenient to implement the measure, while having little impact on inflation.
• The government will see a steep drop in its under-recovery burden, which would improve its stretched fiscal position. We see a reduction of Rs50bn from government’s oil bond contribution.
• Disinvestment of government stake in the OMCs will unlock value for the government, while a larger free float for the companies will result in better price discovery.

■ Lower crude price offers a window for change
Crude prices have cooled down substantially to USD55-60/bbl levels, and global demand continues to be subdued. In this backdrop, we see crude prices trading in a narrow range over the next 12 months, despite the current upturn seen in commodities (tracking the global equity markets). This provides the Indian government a good opportunity to push through a free market pricing regime. At the prevailing crude price levels, this would imply a small increase in
petrol prices and a marginal decrease in diesel prices.

■ Current prices close to international break-even levels
At a crude price of $55/bbl, the subsidy on petrol and diesel combined is estimated at Rs100bn, 84% lower than FY09 levels. We estimate that at a crude price of US$50/bbl, the under-recovery on petrol and diesel tends to be zero. Even at the prevailing crude price of US$60/bbl, removal of price controls will not result in any substantial increase in prices of petrol and diesel. Some reports indicate that at these levels, diesel prices will in fact be lower by ~Rs0.3/ltr,
resulting in substantial benefits to the economy.

To see full report: OIL MARKETING COMPANIES

>MAHINDRA & MAHINDRA (IDFC SSKI)

HIGHLIGHTS OF Q4FY09 RESULTS

• Mahindra & Mahindra (M&M) Q4FY09 results have been better than our estimates primarily on account of the inclusion of Punjab Tractors performance which has been amalgamated with the company from Q4FY09. Hence, the results are not comparable on a yoy basis.

• Net sales grew by 15.5%yoy to Rs36.4bn (we saw Rs33.8bn). While automotive revenues grew by 6%yoy to Rs21.9bn, the farm equipment segment (FES) revenues (including Punjab Tractors and hence strictly not comparable yoy) grew by 48%yoy to Rs14.5bn. The company was able to grow its UV volumes by 5%yoy during the quarter despite a challenging macro-environment primarily due to the strong demand for the newly launched Xylo as well as a sustained demand for the Bolero during the quarter.

• EBIDTA Margins at 11.1% were marginally higher yoy (10.9% in Q4FY08) and substantially higher qoq (8.8% in Q3FY09). Operating margins have been adjusted for the octroi benefit of Rs179.5mn received and the forex gain of Rs1.4bn (pre-tax) during the quarter. On a segmental basis, auto segment margins during the quarter were at 8% (against 10% in Q4FY08 and significantly better than the loss of Rs104mn in Q3FY09) while the FES segment margins were at 11% (against 14.5% in Q4FY08 and 10.7% in Q3FY09).

• Profit on sale of shares from Swaraj Mazda of Rs383.6mn included in other income has been treated below the line as an exceptional one time gain. Adjusted for these extra-ordinary items, PAT for the quarter was at Rs2.8bn.

• M&M’s FY09 consolidated operating income grew by 12%yoy to Rs268bn on the back of 14.4%yoy growth for the standalone company as well as strong performance by its key subsidiaries including Tech Mahindra (19%yoy growth in revenues) and Mahindra Finance (13%yoy growth in revenues). Margins for the full year were at 13.7% while PAT for the year declined 19%yoy to Rs14.7bn. The full year profits for the group were severely impacted by the downturn in the automotive and auto-component sector across the world.

Introducing FY11 estimates: We have assumed 10% UV volume growth driven by new model launches and a recovery in tractor volumes (9%yoy growth) for M&M in FY11E. On a consolidated basis, we expect M&M to post 8% CAGR in earnings over FY09-11E, translating to an EPS of Rs60.3 in FY11E.

To see full report: MAHINDRA & MAHINDRA

>NAGARJUNA CONSTRUCTION COMPANY (IDFC SSKI)

HIGHLIGHTS OF Q4FY09 RESULTS

• Q4FY09 standalone net sales were down 12.4%yoy at Rs11bn, sharply below our expectations of Rs14.6bn. The shortfall in revenues has been mainly on the back of reversal of Rs1.2bn of revenues recognized by the company’s JV with Naftogaz (total order worth Rs12.3bn) and cancellation of a construction order worth Rs3bn by the Karnataka Government (impact of ~Rs1bn). Further, the company’s revenues were also impacted by slower than expected execution of some projects in the electrical division and in the projects awarded by the Satyam Group.

• NCC-Naftogaz JV received an order of Rs12.3bn from Naftogaz Ukraine as a subcontractor pending the approval of the client for the subcontract. The client of the order didn’t approve the subcontractor JV of NCC- Naftogaz as a subcontractor and hence the order was cancelled. As a result of the order cancellation, NCC has reversed revenues of Rs1.2bn in 4Q FY09 along with the corresponding cost have also been reversed. NCC was entitled to a fixed profit based on percentage of revenues amounting to approximately Rs80-90mn, which NCC has retained in the
revenues.

• Q4FY09 standalone EBIDTA declined by 23.4%yoy to Rs838m impacted mainly by the revenue shortfall (as explained above) as well as losses in the company’s own fixed price road BOT projects.

• Consequently EBIDTA Margin stood at 7.6%, down 110bps yoy, 120bps qoq against our expectation of 9.2%

• Q4FY09 standalone PAT stood Rs382m, down 27.4%yoy (we saw Rs612m)

• FY09 consolidated revenue was up 31.6%yoy at Rs47.9bn. EBIDTA was up 26.7%yoy at Rs5bn, implying an EBIDTA margin of 10.5% (against 10.9% in FY08). Consolidated PAT for FY09 was up 8.3%yoy at Rs1.8bn.

To see full report: NCC

>INFRASTRUCTURE (IDFC SSKI)

1. Clear case for increasing infra investments…

■ Grossly inadequate capacity

• 15-16% peak power deficits
• 100%+ capacity utilization at ports
• Only 17% of entire national highway network 4-laned

■ A growing economy will only drive up demand for infrastructure services

2. …but rising concerns on funding of private infra spend

■ Access to capital constrained
■ Complete drying up of equity funding as risk aversion took over
■ Global slump in debt markets – aggravated by severe liquidity crunch in India
■ The impact of increasing debt cost on IRRs keeping away pvt. sector from new projects

3. Government to be the saviour

■ Political will strong to push infra capex - consensus across parties on need for infra investments
■ Low inflation regime providing room for pursuing high growth despite risks of a rising deficit
■ Robust financial health of key PSUs/govt. bodies, to ensure implementation of stated plans

To see full report: INFRASTRUCTURE

>RANABAXY LABS (IDFC SSKI)

Event update: Management change; Daiichi takes charge

Ranbaxy has announced that Mr. Malvinder Singh has stepped down from the positions of Chairman, CEO and Managing Director from immediate effect. While Mr. Tsotomu Une (Daiichi-Sankyo nominee) will take over as the Chairman of the board, Mr. Atul Sobti (erstwhile COO) will be the new CEO and M&D. This marks a new phase in Ranbaxy’s relationship with Daiichi Sankyo (Daiichi) and is indicative that Daiichi has now decided to take more direct control of the business. On the analyst call, the new Ranbaxy management team indicated that this change will accelerate the integration of the Ranbaxy into the Daiichi fold and accelerate the realizations of synergy benefits. While the company did not share specific details of the likely benefits, they hinted at potential cost savings from outsourcing of Daiichi’s manufacturing and R&D operations as well as penetrating the Japanese generics market as some of focus areas. Company also indicated that the management change may help in influencing the FDA’s decision making process with respect to the warning letters. On a negative note, there seems to be some uncertainty over the fate of Ranbaxy’s potential FTF status on the pending applications as the FDA will individually review each ANDA application. At this point of time, there is limited clarity on the timelines for the resolution of warning letters as also the Ranbaxy’s FTF status for different molecules. Given that Ranbaxy FTF status across multiple products is probably the most critical element of its growth strategy over the next few years, this uncertainty is a concern. In our view, the likely synergy benefits of Daiichi – Ranbaxy combination are likely to be realized only over the medium term and offer limited upsides in the near term. Even a quick resolution of the USFDA ban is unlikely to have any material impact on the CY09-10 earnings as Ranbaxy will find it extremely difficult to regain lost market share in a highly competitive US generics market. We reiterate our Underperformer call given the uncertainty on the business outlook across geographies including US and Ranbaxy’s extremely rich valuations (20x CY10E EV/EBITDA excluding Rs60/share of FTF value).

EVENT: MANAGEMENT RESHUFFLE AT RANBAXY

■ Malvinder Singh steps down from the company
Malvinder Singh, Ranbaxy’s erstwhile Chairman, CEO & MD has stepped down. As per the initial agreement, Malvinder was supposed to the CEO and MD of Ranbaxy for five years so this exit even before the expiry of the first full year is a bit surprising. In our view while the agreement to have Malvinder Singh continuing to lead Ranbaxy for 5 years despite selling out his stake was quite intriguing per se, his sudden exit is also surprising. While the management has denied it, we believe it is a reflection / consequence of the myriad challenges that Ranbaxy has been battling over the last few quarters.

■ Daiichi takes more direct control of the company; Atul Sobti to be the new CEO and MD
In a clear indication of its intent to take more direct control of operations, Daiichi Sankyo has appointed Mr. Tsotomu Une – a member of Daiichi’s board – as the head of the Ranbaxy’s board. At the same time, Ranbaxy’s erstwhile COO, Mr. Atul Sobti has taken over as the new CEO and MD of the company.

While there has been a steady attrition in Ranbaxy’s ranks over the last few months, the new management has not ruled out further personnel changes. Nevertheless, Daiichi and Ranbaxy remain very confident in the ability of the current management team to deliver despite the odds.

■ Ranbaxy expects accelerated realization of synergies in the new set-up
Additionally, the management has clearly stated that it would retain Ranbaxy as an independently listed company with a combined operational strategy of being an innovator as well as generics major. This may be a dampener for investors who have looking for a potential open offer from Daiichi as it seeks to “average” its cost of acquisition.

Penetrating the Japanese generics market will be key focus area for the integrated entity. With strong prospects of “genericization” in the Japanese market, Daiichi will aggressively look at launch of generics products by Ranbaxy in Japan. Ranbaxy can benefit from Daiichi’s strong image and presence in the Japanese market. The potential opportunity for generics in Japan remains large as demonstrated by the robust performance by Lupin’s Kyowa acquisition. Ranbaxy is hopeful of building up of “several hundred million dollar generics business” in Japan and this does remain one of the biggest potential upsides from this deal.

To see full report: RANBAXY LABS

>JET AIRWAYS (IDFC SSKI)

HIGHLIGHTS

‘We have already cut domestic capacity by ~20% yoy....exceptional efforts will be required for profitability going ahead’– Wolfgang Prock - Schauer CEO, Jet Airways

• Jet Airways (Consolidated) has reported numbers for FY09 – Revenues were at Rs130.7bn (ahead of estimates at Rs126bn), EBITDA loss at 8.6bn (against expectations of Rs8.9bn) and net loss of Rs21.2bn without exceptional items (Jet has reported a consolidated net loss of Rs9.6bn including exceptional items for the year).

• For the quarter - Jet Airways (standalone) has reported an 11% decline in revenues at Rs24.6bn, a positive EBITDAR at Rs5.1bn, EBITDA at Rs3bn (primarily due to the support from international operations and lower ATF prices in the quarter) and a net loss before exceptional items at Rs1.6bn.

• For the quarter - Jetlite has reported revenues at Rs3.1bn, a positive EBITDAR at Rs165mn, and continued to post an EBITDA loss at Rs717m and a net loss of Rs1.3bn.

• Capitalization concerns high - Jet reported consolidated debt at Rs166bn taking the debt:equity ratio to ~5X. Repayment in the current year is at ~Rs10bn. Additional outstandings for the current year include a Rs 1.4bn payment to SICCI (annual installment for the acquisition of Jetlite erstwhile Sahara).

• No capacity additions in the current year – The management is in talks with Boeing over cancelling/finding another buyer for the Boeing 777 (Capex at ~$145m) that was due for delivery in August09 (Jet had earlier deferred all future deliveries except the Boeing 777). The current operational fleet (86 aircrafts under Jet and 23 aircrafts under Jetlite) is expected to be maintained as of now. (The management plans to renew the leases that come for expiry in the current year).

• Options to fund - Sale and lease back – Inorder to meet its obligations, Jet has the option of a sale and lease back of its existing assets (39 owned planes – 21 narrow bodied aircraft and 18 wide bodied aircraft). While Jet has booked a sale and lease back of an A330 in the current quarter at a $9m profit over its book value (leading to a cash inflow of ~$85m), a premium to book value could be difficult in the current environment. Till date Jet has raised ~$2.5bn inorder to fund the acquisition of its fleet; a sale (at book value) of these assets by the end of the current year can
potentially generate cash (net of repayment of loans) to the tune of ~Rs15-18bn.

To see full report: JET AIRWAYS

>MUNDRA PORT AND SEZ LTD. (IDFC SSKI)

HIGHLIGHTS

■ Cargo handled at the port grew by 12%yoy to 9.5mt, higher than our expectation of 9.4mt. Bulk cargo volumes increased by 25.5%yoy to 5.5mt, crude cargo volumes increased by 7.9%yoy to 1.8mt (reversing a declining trend of previous two quarters) and container cargo volumes declined by 8.5%yoy to 2.3mt. Cargo volumes continue to remain strong with April-09 volumes at 3.25mt.

■ Revenues fell by 13.4% yoy to Rs2.84bn, lower than our estimate of Rs3.1bn, due to Nil income from land sales. FY09 revenues increased by 38.7% yoy to Rs11.35bn.

■ EBITDA margins for the quarter stood at Rs58.2% (-460bps qoq, 1330bps yoy) impacted mainly by Nil SEZ sales during the quarter. Resultant Q4FY09 EBIDTA declined by 29.5%yoy to Rs1.7bn against our expectation of Rs1.9bn. FY09 EBIDTA grew by 37.7%yoy to Rs7.4bn with EBIDTA margins at 64.9% against 65.4% in FY08.

■ Q4FY09 depreciation charges were higher by 34.3%yoy at Rs391m with adverse impact of Rs11.8m due to increase in fixed assets due to capitalization of forex losses of Rs882m for the year. Net interest charges were lower by 21.8%yoy at Rs225m due to higher interest income of Rs255m (Rs158m in Q4FY08) from unutilized proceeds of IPO funds (Rs7.9bn in March-09).

■ Overall, net profit before extra-ordinary items and forex gain/loss grew by 24.5% yoy to Rs1.2bn for the quarter, in line with our estimate of Rs1.2bn. The growth in net profit appears steep in the backdrop of a 39% fall in PBT due to the impact of very high tax provision in Q4FY08.

■ FY09 consolidated total income increased by 42% to Rs12.4bn from Rs8.4bn in FY08. FY09 reported consolidated net profit increased by 105% to Rs4.3bn from reported net profit of Rs2.1bn in FY08.

■ The company declared dividend of 30% for FY09 (including 20% interim dividend) against 15% in FY08.

To see full report: MUNDRA PORT

>FMCG (IDFC SSKI)

‘Small’ – The next BIG play!

Outperformance for the right reasons

■ Growth traction untouched by macro economic slowdown
■ Average revenue growth of 18%yoy in FY09
■ No leverage risk - near debt free / cash surplus companies
■ Healthy cash flow generation – cash profit at 4-5x the capex
■ Strong payouts – 50-70% of profits

Outlook remains ‘attractive’

What does our consumer channel checks suggest?

■ No signs of slowdown – metros witness 6-7%yoy volume growth, tier II 10-12% and rural growth strong at 15%+

■ Rural India, the driving force – 35%+ increase in agri commodity realizations, service sector employment and non-farm incomes

■ No material signs of consumer downtrading – barring in soaps, detergents and edible oil categories

■ Price cuts selective and no risk of price wars

To see full report: FMCG

>Allcargo Global Logistics (IDFC SSKI)

RESULT HIGHLIGHTS

• Consolidated revenues grew by 12.7% yoy to Rs4.8bn led by higher revenues in project cargo of Rs300mn, against Rs100mn in 1Q08 (reflected under MTO operations). However, revenues were lower than our estimates led by lower ECU line revenues, which were impacted by the trade slowdown.

• The CFS business witnessed revenue growth of 16% yoy to Rs350mn led by better realizations on a yoy basis. However, volumes fell by 10% yoy to 40,000TEU’s during the quarter as volumes across ports slowed down considerably.

• The equipment leasing business witnessed a sharp jump on a yoy basis as AGL added 18 forklifts, 10 new trailors and a crane in the quarter. Accordingly, the segment witnessed revenues of Rs160mn in the quarter.

• ECU line and other subsidiaries revenues’ grew marginally by 6.7% yoy to Rs3.5bn in the quarter (aided by euro appreciation). However, on a qoq basis, the revenues fell sharply by 30% as volumes were impacted. Further, realizations were impacted as AGL passed on the lower freight costs to its clients.

• Operating margins during the quarter improved by 150bps to 11.5% led by higher margins in the equipment hiring (+110bps to 37.2%) and ECU line (+30bps to 5.7%) led by cost efficiencies and better utilizations in the quarter.

• However, the MTO business witnessed a fall in margins of 210bps to 12.4% as the volumes fell by 17.6% during the quarter. Similarly, the fall in volumes in the CFS business as well as a lower dwell time (fallen from peak of 16 days to 11days) impacted CFS margins (-470bps to 50.6%).

• Other income increased sharply to Rs40mn led by interest generated on surplus cash of Rs500mn as well as dividend income from subsidiaries.

• The depreciation (+75% yoy) and interest (+184% yoy) costs appear higher on a yoy basis due to the merger of TFSPL and capex incurred in CY08. However, interest costs have fallen sharply by 30% qoq to Rs53mn as the interest rates in ECU line have fallen by almost 300-400bps (LIBOR) as well as the debt levels being reduced from Rs2.5bn at end of 4Q08 to Rs2.1bn at the end of the quarter.

To see full report: ALLCARGO