>Smart Ideas (LKP SHARES)

MAY 2009

Focus Issue of the Month
We have analysed the composition of India's GDP and attempted to present the opportunities in each of the components in the wake of the ongoing slowdown in the focus issue for this month.

Company Reports

BATRONICS INDIA
Integrated business model with robust order booking, which in our view should grow, going forward as revenues from government contracts start kicking in and the company would strengthen its market leadership. BIL growing at 75% and trading at 5xFY09E is an attractive investment bet.

CONTAINER CORPORATION
With a dominant position in the railway haulage business we expect Concor to benefit from the growth in the logistics space driven by port capacity additions.

DABUR INDIA
We expect the domestic rural demand to partly offset the lower growth in overseas business going forward given its large share in the ruralmarket and niche positioning.

FAG Bearings
Most profitable and de-risked bearing company trading at 4.5xCY'10E earnings is well placed to capitalize on an upturn in demand from its well diversified user industries.

MRF
The market leader in tyres should be done with the higher raw material inventory this fiscal and in our view the first half has seen the worst at MRF.

MIC Electronics
The pioneer in LED having seen the worst of the global credit crunch on its overseas business is beefing up its product offerings for the emerging opportunities in India.

SKF India
Investment phase in a highly challenging business environment would in our view enable the market leader to reap the benefits from next fiscal onwards.

GUJARAT GAS
Although gas supply and tariff structure regulations remain a concern, we believe that newer sources of gas supply would add to the top-line and we remain optimistic.


To see full report: SMART IDEAS

>SKF India Ltd. (LKP Shares)

INVESTMENT ARGUMENT

• SKF India is the 53.5% subsidiary of the Swedish bearing giant and is the largest bearing producer in India. It derives 90% of its revenues from bearings comprising of ball and hub bearings, deep groove ball bearings, cylindrical roller bearings and tapered roller bearings. The balance 10% of revenues comes from its four new technology platforms like seals, lubrication systems, mechatronics and services. The strategy has been to bundle all service platforms together so as to provide the customers an integrated solution, which can positively impact
their cost of operations.

• Domestic business accounts for 90% of its revenues and both the automotive and industrial segment have an equal share of this pie with most of the large players being customers of SKF India. SKF India being the industry leader controls a 30% share in the Rs50bn bearing market in India.

• SKF India with a capacity of producing 119m bearings at its facilities in Pune and Bangalore was prior to CY'06 following the indenting commission business model and shifted to the direct customer delivery model since then which enabled the company to account for revenues accrued from trading activities which was substantial at ~ 40%.

• The Rs16bn SKF India has been a victim of the slowdown in both the automotive and the industrial segment during Q4-CY'08 with net profit during Q4CY'08 dropping sharply to Rs163mn as automotive companies resorted to plant shutdown and lesser working days since November 2008 to reduce inventory piling and align their production with market demand which contracted due to reduction in freight availability on account of moderation in economic growth. The situation has not turned any better for the company even in Q1-CY'09 and we expect SKF India to face the pressure on the bottom line as net profit during the same period last year was Rs378mn on net revenues of Rs4bn.

• The automotive sector continues to be impacted by tight credit terms, high cost of finance, pricing pressures and weak consumer demand from fleet operators while the industrial segment is witnessing a slowdown across industries and CY'09 is expected to be a challenging year for SKF India even as softening input costs like steel would start benefiting the company from Q1-CY'09.

• SKF India is now going ahead with its new 48m ball bearing unit at Haridwar in Uttarkhand which would add close to 50% more capacity from CY'10 onwards at a cost of Rs1.5bn and would initially service the two-wheeler companies whose demand is expected to show a marginal rise on account of the incremental demand from the rural and semi-urban markets. The game plan for SKF India is in sync with that of its key customers like Hero Honda and its plans from its Haridwar unit.

• The investment phase for the company this fiscal along with the challenging environment is expected to put pressure on the ROI, as the benefits would start accruing only from next fiscal onwards. SKF India with a strong balance sheet trades at 7xCY'09E and 5.7xCY'10E and we believe that a 15% correction in the stock price from current levels would be a good opportunity for gaining an entry into the stock with an 18-month price target of Rs190. Over a longer time frame a revival in its key user industries could propel the stock to Rs240 over a two-year time frame.

To see full report: SKF INDIA

>Advanta India Limited (LKP SHARES)

…best bet to play the agricultural productivity theme

INVESTMENT ARGUEMENT

• We believe that Advanta India Ltd - AIL is the most aggressive and geographically diversified hybrid seed play available to investors to play the agricultural productivity improvement theme in key markets across the globe.

• Fox Paine LLC a private equity firm based in the US sold Advanta in bits and pieces and the United Phosphorus Group acquired the Asia Pacific and Latin America business in March 2006 and Advanta India Ltd - AIL came out with its IPO in March 2007 by raising Rs2.2bn by issuing shares of Rs10 each at a price of Rs640 per share. AIL part of the UPL group is the holding company for the global business of Advanta spanning five major geographies - Australia, USA, Thailand, Argentina and India. AIL has a leadership position in Sorghum Sunflower and Corn and is a leading agronomic global seed company competing with Syngenta, Limagrain, Monsanto,
Pioneer (Dupont group) and Pro Agro (Bayer group) in most of the markets.

• Australia is a $35mn business and Sorghum is the focus crop accounting for close to 40% of the business. The other key crops are corn, canola, sunflower, oats and pearl millet among others. Acquisition of Longreach Plant Breeders, a wheat research company in Australia has reinforced its presence in the wheat market in Australia. Exports of AIL are channeled out of Australia and the key countries where hybrids of sunflower and canola are sold include Pakistan, Bangladesh, Sudan, Iran and Indonesia. However the profitability is not high as the operating costs in Australia is high.

• US business was reinforced in sweet sorghum with the acquisition of Garrison and Townsend-GT, which essentially is a private label business with no branding. AIL acquired the $10.5mn business at one time revenues and the acquired companies have proprietary traits and a good germplasm in grain and forage sorghum and we expect this crop to fill the gap arising due to corn in the bio-fuel market. AIL remains the third largest player in Sorghum after Monsanto and Pioneer. It is among the few players in the world to have a quality sweet sorghum germplasm and while GT is the vehicle in the US, AIL has tied up with the TATAS in India. Sweet sorghum although a relatively small component in its portfolio would be a fast growing segment as the cost of production is low and can develop into a preferred crop in the bio-fuel market. AIL also acquired the sunflower seed business of Limagrain in the US last year which consolidated its position in the sunflower seed market. The US business is expected to grow at the rate of 15% annually.

• Thailand is a $15mn business where Corn is the key crop and it has a 60% market share in corn. Thailand is also a good market for vegetable seeds. AIL is a strong player in the Thai corn market in baby corn and sweet corn and is now building a strong presence in the field corn market.

• India is a $30mn business and the focus crops include paddy, vegetables, corn and sunflower and we expect the business to grow at 20% annually led by vegetables, paddy and mustard. With the acquisition of Golden Seeds and Unicorn Seeds AIL now has a 10% market share in the Rs6bn vegetables seeds market in India. As India is the second largest producer of vegetables in the world, AIL is looking to tap the opportunities in vegetable seeds like cabbage, cauliflower, chillies and okra. Hybrid rice is a huge opportunity with 42 million hectares of acreage under rice of which only 2 million is under hybrid and Bayer, Pioneer and Advanta are the key players in this segment.

To see full report: ADVANTA

>Sugar Sector Update (LKP SHARES)

….sweet gains on shortage

INVESTMENT ARGUMENT

• Steep drop in sugar production this season in India: Given the opening inventory of 8mt and production of 16.5mt we believe that India would need to import 2mt of sugar given the consumption of 23mt if there has to be a closing inventory of at least 3.5mt which is a stock to use of 15% - a steep drop from the levels of 45% witnessed in FY'07 and 35% seen in FY'08.

• Even a production of 20mt next fiscal would not help: With this opening inventory of 3.5mt even if production next season were to touch 20mt the scenario would just about match our consumption and India would still need to import at least 2.5mt to maintain a minimum closing inventory of 3.5mt and the stock to use ratio of 15%.

• Sugar gets sweeter: Lower cane cultivation owing to attractiveness of alternate crops and poor recovery of 9% in the state of UP has led to diversion of cane to gud and khandsari leading to firming up of sugar prices. Yields have declined in both the ratoon crop as well as the plant crop and the lower sucrose content in the cane has impacted recovery as well.

• Sugarcane prices driven politically: Given the fact that mills in UP have to pay significantly higher prices for cane compared to peers in southern parts of the country, we expect UP based mills to face a double whammy of higher cane costs and shortage of cane.

• South based sugar mills would benefit : South based mills crush longer and pay less for the cane and the cane availability is not as bad as that in UP, AP and Maharashtra.

To see full report: Sugar Sector

>Union Bank of India - BUY (LKP SHARES)

Union Bank of India - BUY

Investment Rationale

# Strong profitability: UBI has reported operating profit at Rs.8.5bn, a growth of 34% yoy. NII increased to Rs.11bn, a strong growth of 50% yoy thus resulting in robust operating and net profits. PAT was reported at Rs.6.7bn growing by 84%. We are impressed by the NIMs reported at 3.22% vis-à-vis 2.7% a year ago, an increase of 52bps due to significant pricing power as well as credit growth.

# Asset quality: Looking at the trend over past five quarters for the company, the asset quality has consistently shown improvement which gives us further comfort as this would enable lower provision requirements going ahead. Currently, the provision coverage ratio stands at 92%, giving good strength to bank’s balance sheet. Higher provision coverage ratios in excess of 90 per cent and lower net NPA ratio at 0.14 per cent would keep it on strong footing in terms of
asset quality. The provision coverage ratio is expected to be in the range of 85-90 % going forward, which would help contain net NPAs at lower levels of ~ 0.3 %.

# Business Growth: UBI has been able to maintain an average pace of growth at 23% over past 5 quarters, in line with the industry growth. However, going forward with the prevailing slowdown, we expect the credit growth to slow down to ~ 20% for next two years. CASA, as a % of total business mix stood at 30% vis-à-vis 33% last year. We believe UBI shall be able to maintain this healthy CASA ratio, thus able to leverage NIMs at close to ~3% going forward.


# Ratios: This bank has been able to maintain robust return ratios on equity and assets. RoA stands at 1.92% up from 1.31% yoy. RoE has also significantly improved from 26.11% to 39.15% in Q309. We expect UBI to maintain healthy return ratios going forward as well.

To see full report : UBI

>Gwalior Chemical(LKP SHARES)

Gwalior Chemical Industries Ltd. (GCIL) is a producer of toluene - based (derivative of crude oil) specialty
chemicals. Toluene being sensitive to crude oil prices, GCIL enters into price fixing contracts with suppliers
on a monthly/quarterly basis for requirements for upto 3 months to hedge its position against rising prices.
What once was beneficial to the company in the face of ever increasing crude oil prices has turned
detrimental due to steep fall in prices.

Read full report here Gwalior Chemical(LKP SHARES)