Way ahead of the competition....
Hero Honda Motors Limited (HHML) is the undisputed market leader in the domestic two wheeler industry with 48.6% share (59.4% market share in domestic motorcycle segment). We believe HHML would benefit from Bajaj Auto Ltd’s (BAL) change in strategy to focus on 125cc+ segment as the sub 125cc segment still accounts for majority of domestic sales volume. HHML has a strong presence in the rural and semi urban market which is expected to perform in the current economic slowdown. On back of margin improvement and tax benefits from the new plant the company is expected to continue its strong earnings growth for the next two years. We are optimistic about HHML's future prospect and therefore we initiate coverage on the stock with an Outperformer rating.
HHML to continue its dominance in the domestic motorcycle segment: HHML has a strong presence in the sub 125cc segment and is expected to further strengthen its position in this segment on back of BAL's shift in focus from the 100cc segment to the 125cc+ segment. HHML would take advantage of the benefits ushered to the rural economy through its strong rural distribution network and thereby survive the current difficult economic scenario. Furthermore, the company's higher dependence on cash sales (relative to its peers) would facilitate strong performance vis-à-vis its peers in the current high credit risk situation. Improvement in EBITDA margins: HHML's margin is expected to improve on account of cooling off of raw material prices and excise duty benefit. Major raw material like steel and aluminium which accounts for ~75% of the total raw material cost have been on a declining trend since the past few months. Due to lowering of excise duty by the government and excise duty exemption at Haridwar plant the effective excise duty is expected to come down significantly. We expect the company to report EBITDA margin of 13.8% and 14.0% for FY10E and FY11E respectively.
Haridwar plant to help boost bottom line: During FY09, HHML started production at its 0.5mn unit capacity plant at Haridwar (Uttaranchal). Haridwar plant offers various fiscal benefits which include 100% excise duty exemption for 10 years and 100% income tax exemption for the first 5 years and 30% for the next 5 years. Due to lower effective excise duty and lower effective tax rate, net profit is expected to grow at CAGR of 19% over FY08- FY11E as against 10.4% expected CAGR growth in revenues during the same period.
Valuations: HHML is the market leader in the Indian two wheeler space having presence in all the significant sub segments and categories. Better EBITDA margin and lower tax rate would help the net profit to grow strongly at a CAGR of 19% over FY08-FY11E. HHML is a debt free company having cash reserves of Rs27bn and the same is expected to double by FY11E. HHML enjoys strong return ratios with FY08 RoCE and RoE of 49.2% and 35.5% respectively. HHML is trading at 15.6x and 13.3x its FY10E and FY11E estimated earnings respectively. We initiate coverage on the stock with an Outperformer rating and value the stock at Rs1,250 (15.3x its FY11E EPS of Rs81.7). In our view, HHML’s high return ratios, strong balance sheet, double digit earnings growth, negative working capital cycle, positive net cash flow and huge cash reserves justifies the premium valuations assigned to the stock.
To see full report: HERO HONDA
воскресенье, 29 марта 2009 г.
>Bharti Airtel (MERRILL LYNCH)
Cutting margins; growth still strong
Earnings & PO cut by 4-10%; still offers strong growth - Buy
We have cut Bharti’s FY10E & onwards earnings by 4% & lowered our DCF-led PO to Rs715/sh (-10% vs earlier). Despite the PO and earnings cut, we believe Bharti remains one of the strongest growth stories in AsiaPac & offers ~20% YoY EPS growth potential at a PE of ~11x FY10E. This compares with local market PE valuation at ~11x FY10E for no YoY grwth expected & avg. AsiaPac-wireless PE of ~10x CY09E for ~3% YoY earnings fall. We expect Bharti to sustain ~15-20% LT earnings growth despite new competition.
Margin hit: USO deferral, lower termination, pot’l SMS cut
We have cut wireless FY10E-11E EBITDA margin by ~70bps vs earlier, to 30.1%. This reflects 1) reported deferral of USO concession by the government (assumed to be ~100bps for Bharti), 2) lower termination charges (10p cut) announced earlier (~40bps margin hit) and, 3) potential cut in roaming SMS tariffs (~30bps margin hit). These factors coupled with competitive pressures will likely offset the margin cushion (~100bps) from stable spectrum charges.
Government defers USO concession
As per media reports, today, the government has decided to defer the USO concession that was scheduled to apply from April 2009 onwards. Earlier, in Oct ’08, the government had announced 200bps concession in USO levy (part of licence fee) on achieving >95% coverage of a service area. We had assumed that Bharti would qualify for the concession in ~50-60% of its coverage area.
Revised estimates safe unless usage collapses
We think our FY10E earnings forecasts are safe as they imply virtually no usage elasticity (flat MoU/sub YoY) despite f’cast 12% decline in tariffs (rpm). Our industry feedback so far, post RCom’s GSM launch, suggests that tariffs are not seeing major pressure (-1-2% QoQ) & usage (MoU/sub) maybe down ~2-3% QoQ
To see full report: BHARTI AIRTEL
Earnings & PO cut by 4-10%; still offers strong growth - Buy
We have cut Bharti’s FY10E & onwards earnings by 4% & lowered our DCF-led PO to Rs715/sh (-10% vs earlier). Despite the PO and earnings cut, we believe Bharti remains one of the strongest growth stories in AsiaPac & offers ~20% YoY EPS growth potential at a PE of ~11x FY10E. This compares with local market PE valuation at ~11x FY10E for no YoY grwth expected & avg. AsiaPac-wireless PE of ~10x CY09E for ~3% YoY earnings fall. We expect Bharti to sustain ~15-20% LT earnings growth despite new competition.
Margin hit: USO deferral, lower termination, pot’l SMS cut
We have cut wireless FY10E-11E EBITDA margin by ~70bps vs earlier, to 30.1%. This reflects 1) reported deferral of USO concession by the government (assumed to be ~100bps for Bharti), 2) lower termination charges (10p cut) announced earlier (~40bps margin hit) and, 3) potential cut in roaming SMS tariffs (~30bps margin hit). These factors coupled with competitive pressures will likely offset the margin cushion (~100bps) from stable spectrum charges.
Government defers USO concession
As per media reports, today, the government has decided to defer the USO concession that was scheduled to apply from April 2009 onwards. Earlier, in Oct ’08, the government had announced 200bps concession in USO levy (part of licence fee) on achieving >95% coverage of a service area. We had assumed that Bharti would qualify for the concession in ~50-60% of its coverage area.
Revised estimates safe unless usage collapses
We think our FY10E earnings forecasts are safe as they imply virtually no usage elasticity (flat MoU/sub YoY) despite f’cast 12% decline in tariffs (rpm). Our industry feedback so far, post RCom’s GSM launch, suggests that tariffs are not seeing major pressure (-1-2% QoQ) & usage (MoU/sub) maybe down ~2-3% QoQ
To see full report: BHARTI AIRTEL
>Alpha Bet Strategy (KOTAK SECURITIES)
Switching it on. We initiate four new trades-(1)long RIL, short GAIL on positive catalysts for one versus none for the other, (2)long REC, short PEC on lowering of valuation differential, (3) long Ultratech cements, short ACC on market share gains, cost leverage and valuations and (4)long IBREL, short DLF on contrasting business developments.
■ Trade 1: Long RIL, Short GAIL-Relative potential triggers in the near team
We recommend a long Reliance Industries(RIL), short GAIL pair trade given relative catalysts for the stocks which will determine the performance on the near term. We see potential triggers for RIL on account of (1)availability of income tax exemption for gas production, (2)availability of gas for internal consumption and (3)disclosure of reserves. We do not see any positive triggers for GAIL in the near term, which will result in muted stock performance.
■ Trade 2: Long Ultratech, short ACC-Growth for a song
We recommend a long Ultratech Cements, short ACC pair trading offering 10% returns on the following-(1) unjustified valuation premium of ACC trading at US$87/ton on FY2010E production relative to US$77/ton for Ultratech; (2)declining market share of ACC versus gains for Ultratech and (3)cost leverage available from switch over to coal-based captive power plants will reflect in better March 2009 quarter performance versus ACC.
■ Trade 3: Long REC, short PFC-Valuation differential to narrow
We recommend a pair trade of long Rural Electrification Corporation(REC) and Short Power Finance Corporation(PFC) based on the 20% valuation gap between the two despite the two superior ROE profile of REC. REC trades at 1X FY2010E PBR versus 1.2X PBR for PFC.
■ Trade 4: Long IBREL, short DLF-Contrasting business developments
We recommend a pair trade of long India Bulls Real Estate(IBREL) and short DLF on account of (1) IBREL trading a higher discount(52%) to the NAV versus DLF(42%); our comfort on NAV of IBREL is higher, (2) leasing concerns of INREL's Mumbai commercial properties will reduce in the near term while business concerns for DLF will persist for atleast three quarters and (3) we expect weak March 2009 quarter performance from DLF.
To see full report: ALPHA BET STRATEGY
■ Trade 1: Long RIL, Short GAIL-Relative potential triggers in the near team
We recommend a long Reliance Industries(RIL), short GAIL pair trade given relative catalysts for the stocks which will determine the performance on the near term. We see potential triggers for RIL on account of (1)availability of income tax exemption for gas production, (2)availability of gas for internal consumption and (3)disclosure of reserves. We do not see any positive triggers for GAIL in the near term, which will result in muted stock performance.
■ Trade 2: Long Ultratech, short ACC-Growth for a song
We recommend a long Ultratech Cements, short ACC pair trading offering 10% returns on the following-(1) unjustified valuation premium of ACC trading at US$87/ton on FY2010E production relative to US$77/ton for Ultratech; (2)declining market share of ACC versus gains for Ultratech and (3)cost leverage available from switch over to coal-based captive power plants will reflect in better March 2009 quarter performance versus ACC.
■ Trade 3: Long REC, short PFC-Valuation differential to narrow
We recommend a pair trade of long Rural Electrification Corporation(REC) and Short Power Finance Corporation(PFC) based on the 20% valuation gap between the two despite the two superior ROE profile of REC. REC trades at 1X FY2010E PBR versus 1.2X PBR for PFC.
■ Trade 4: Long IBREL, short DLF-Contrasting business developments
We recommend a pair trade of long India Bulls Real Estate(IBREL) and short DLF on account of (1) IBREL trading a higher discount(52%) to the NAV versus DLF(42%); our comfort on NAV of IBREL is higher, (2) leasing concerns of INREL's Mumbai commercial properties will reduce in the near term while business concerns for DLF will persist for atleast three quarters and (3) we expect weak March 2009 quarter performance from DLF.
To see full report: ALPHA BET STRATEGY
>KEC International Ltd. (RELIANCE MONEY)
Encouraging domestic order inflow during Q4FY09
During the 4th quarter of FY09, KEC International Ltd (KEC) has seen addition of seven significant orders largely from domestic markets. The management earlier in post Q3FY09 results conference call had indicated the company intended to increase focus in domestic market. In Q4FY09 KEC received domestic orders to the tune of ~Rs.12.5bn as against Rs.11bn in Q3FY09 (out of which Rs.8.8bn were export order). We remain impressed with the order inflow and remain confident about earnings for FY09E and FY10E. But the major risk we foresee is possibility of lower order inflow during Loksabha election period.
Easing of input material cost and interest rates
The key input raw materials like steel, copper, aluminum etc have corrected significantly from the highs during 1st Quarter of FY09. Steel Billets prices have fallen by 24.5% from the high of Rs.40025/Tonne during April’08 to Rs.30200/ Tonne in Feb’09. Similarly RBI has cut repo and reverse repo rates for three times during last 6 months which has resulted in reduction in interest rates by most of the banks. We expect the company will able to improve its profitability with these positive developments.
Order inflow uncertainty foreseen during 1st Half of FY10E
As 15th general elections are near the corner, the first half of FY10E is expected to be muted in terms of new order inflow both from state and central utilities due to funding arrangement and other regulatory issues.
Well equipped to compete in current scenario
Domestic market is likely to witness high competition and due to which the margins are likely to come under pressure, which is expected to intensify further as bigger players like BHEL are also expected to enter the market. We believe KEC is better equipped with its planned tower capacity of 200,000 MT and established execution skills for this competitive scenario.
Business Outlook and Valuation
KEC currently has a healthy estimated outstanding order book position of ~Rs.54.5 bn. We continue to remain cautious in terms of new order inflow from international market as well as domestic market during the 1st half of FY10E. At current market price of Rs.144, the stock is currently trading at P/E of 4.2x and EV/EBITDA of 3.9x of its FY10E earnings. We maintain our HOLD recommendation on the stock with target price of Rs.147.
To see full report: KEC INTERNATIONAL
During the 4th quarter of FY09, KEC International Ltd (KEC) has seen addition of seven significant orders largely from domestic markets. The management earlier in post Q3FY09 results conference call had indicated the company intended to increase focus in domestic market. In Q4FY09 KEC received domestic orders to the tune of ~Rs.12.5bn as against Rs.11bn in Q3FY09 (out of which Rs.8.8bn were export order). We remain impressed with the order inflow and remain confident about earnings for FY09E and FY10E. But the major risk we foresee is possibility of lower order inflow during Loksabha election period.
Easing of input material cost and interest rates
The key input raw materials like steel, copper, aluminum etc have corrected significantly from the highs during 1st Quarter of FY09. Steel Billets prices have fallen by 24.5% from the high of Rs.40025/Tonne during April’08 to Rs.30200/ Tonne in Feb’09. Similarly RBI has cut repo and reverse repo rates for three times during last 6 months which has resulted in reduction in interest rates by most of the banks. We expect the company will able to improve its profitability with these positive developments.
Order inflow uncertainty foreseen during 1st Half of FY10E
As 15th general elections are near the corner, the first half of FY10E is expected to be muted in terms of new order inflow both from state and central utilities due to funding arrangement and other regulatory issues.
Well equipped to compete in current scenario
Domestic market is likely to witness high competition and due to which the margins are likely to come under pressure, which is expected to intensify further as bigger players like BHEL are also expected to enter the market. We believe KEC is better equipped with its planned tower capacity of 200,000 MT and established execution skills for this competitive scenario.
Business Outlook and Valuation
KEC currently has a healthy estimated outstanding order book position of ~Rs.54.5 bn. We continue to remain cautious in terms of new order inflow from international market as well as domestic market during the 1st half of FY10E. At current market price of Rs.144, the stock is currently trading at P/E of 4.2x and EV/EBITDA of 3.9x of its FY10E earnings. We maintain our HOLD recommendation on the stock with target price of Rs.147.
To see full report: KEC INTERNATIONAL
суббота, 28 марта 2009 г.
>Nifty changing to free float method (KR CHOKSEY)
Proposed changes in Nifty composition
The National Stock Exchange (NSE) has announced that it will switch to a free float market capitalization methodology for calculating the value of the S&P CNX Nifty against the full market capitalization weighted methodology used at present. The new formula will come into effect from June 26, 2009.
Our Key Findings
• Weightage of a stock in the Nifty will be proportional to the public shareholding (non-promoter holding – free float market capitalization method)
• Till now, the weightage was proportional to the market capitalization of the company. So, a company with low public shareholding, but high market capitalizations used to have a higher weightage. This is set to change.
To see full report: NIFTY
>INDIA ECONOMICS (Morgan Stanley)
Road Infrastructure Development – Taking Stock of Progress
Infrastructure spending – critical in the current economic environment: In the current domestic growth environment, while the private business capex is likely to suffer, we believe that the government’s effort to push infrastructure spending will be critical. Within the infrastructure segments, we believe the roads spending is the most important considering its strong multiplier
effect.
Tardy progress in development of roadways over the last few months: Of the total 33,097km planned, only 10,858km had been completed as of February 2009. About 50% of roads tenders have yet to be awarded. According to the monthly data released by NHAI, not a single project was awarded between August 2008 and January 2009 even though there was some pick up in the month of February 2009.
Three key reasons for this poor performance: (a) funding constraints for the private sector on account of deteriorating global and domestic credit markets as well equity markets; (b) change in regulations related to public-private partnership contracts, which has added some uncertainty for the private bidders; (c) typical execution hurdles including land acquisition, removal of
existing structures, and getting the environmental and forest clearances.
Bottom line: We believe that the progress on road development is likely to be tardy until the end of 2009. The new cabinet, which should be in place by June 2009, will need to spearhead this spending and, if need be, take the financial risk on its own balance sheet for such investments as the private sector could remain shy.
To see full report: INDIA ECONOMICS
Infrastructure spending – critical in the current economic environment: In the current domestic growth environment, while the private business capex is likely to suffer, we believe that the government’s effort to push infrastructure spending will be critical. Within the infrastructure segments, we believe the roads spending is the most important considering its strong multiplier
effect.
Tardy progress in development of roadways over the last few months: Of the total 33,097km planned, only 10,858km had been completed as of February 2009. About 50% of roads tenders have yet to be awarded. According to the monthly data released by NHAI, not a single project was awarded between August 2008 and January 2009 even though there was some pick up in the month of February 2009.
Three key reasons for this poor performance: (a) funding constraints for the private sector on account of deteriorating global and domestic credit markets as well equity markets; (b) change in regulations related to public-private partnership contracts, which has added some uncertainty for the private bidders; (c) typical execution hurdles including land acquisition, removal of
existing structures, and getting the environmental and forest clearances.
Bottom line: We believe that the progress on road development is likely to be tardy until the end of 2009. The new cabinet, which should be in place by June 2009, will need to spearhead this spending and, if need be, take the financial risk on its own balance sheet for such investments as the private sector could remain shy.
To see full report: INDIA ECONOMICS
>Gem Trading Note (MERRILL LYNCH)
Inflection Points & Trades
Three big inflection points for markets in past 9-12 months
- July 3rd ECB hikes rates (possibly one of great policy blunders of recent years); commodity prices peaked the very same day (Baltic Freight, Euro, inflation expectations peak same time); EM equities start to underperform as global growth expectations fall.
- Sept 15th bankruptcy of LEH; initiates de-leveraging and vicious collapse in EM equities/currencies as growth expectations/risk appetite sinks and US dollar surges.
- November 10th announcement of big Chinese fiscal stimulus; CRB troughs vs. S&P500 and EM starts outperforming again as global growth expectations find a floor. Chart 1 tells the tale...
Play a recovery in risk appetite
Last week's Merrill Lynch Fund Manager Survey showed a distinct gap between (recovering) growth expectations and (rock-bottom) risk appetite. But risk appetite turned up in the past week due to a) US/UK/Swiss/Japanese Quantitative Ease (QE) and b) US financial policy (PPIP) to reduce toxic assets. QE has caused a bounce in risk appetite. A genuine inflection point for risk (following bounce in growth expectations) would see:
1. Asset allocation by pension funds out of bonds into equities
2. Outperformance from banks, Europe & EMEA
3. Euro-yen taking out 200mda @ 138
4. 30-year US Treasury yields moving above 4%
5. Rise in US breakeven inflation rates which have strong correlation with many risk assets (e.g. Brazilian real – Chart 2)
Trades…
MSCI EM index target is 650-700 or EEM at $28. Long Russia, China, Brazil our favored ways to play the story in EM
FMS highlighted improvement in risk appetite most positive for EMEA, Korea, Poland, banks, industrials, materials in EM
The trade ends when/if growth rollover later in spring (watch BDIY, China Ashares, China PMI, G7 demand, trade, housing and so on)
To see full report: GEM TRADING
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