>India Cement Industry (CITI)

Implications From Conference Call With Pakistan's Lucky Cement

■ Conference call with Pakistan's Lucky Cement — We hosted a conference call with Mr. M.A Tabba, CEO of Lucky Cement, one of Pakistan's largest cement companies by capacity, to get a better sense of export trends. India and Pakistan have some common export markets. Mr. Tabba's comments about cement supply-demand dynamics, pricing trends and export potential suggested that there would be keener competition in export markets, export realizations could fall 15-20% and cement exports from Pakistan to India could dry up in FY10. His views were largely in line with ours.

■ Changing trends in cement export markets — Mr Tabba expects Pakistan cement exports to be 10m tonnes in FY09-10 − 30% by land to Afghanistan and 70% by sea to the Middle East and Africa. India is no longer a viable export market for Pakistan due to low domestic prices and the drop in the Indian rupee. Demand growth for cement exporters is expected to come from Iraq (reconstruction), South Africa (ahead of the Soccer World Cup) and Africa (rising per-capita income in commodity-intensive economies), compensating for likely declines in Oman, Qatar, Abu Dhabi and Dubai.

■ Weak outlook for export pricing — The biggest worry is cement pricing in export markets. Exports are likely to face stiff price competition once new capacities are commissioned in Saudi Arabia, Iran and India. The industry expects the average export price for FY09 to be US$50-55/t and forecasts a decline to US$42-47/t in FY10. Lower prices would adversely impact large cement exporters in India, such as UltraTech Cement and Ambuja Cements.

■ Pakistan has cement surplus — At 38m tonnes of capacity and domestic demand at ~20m tonnes, Pakistan has large surplus for exports. We expect a surplus in India as well due to the completion of several large projects in CY09. As exports may not be a viable route to deflect oversupply, it would add further pressure on domestic prices in India.

To see full report: INDIA CEMENT INDUSTRY

>Ambuja Cement Limited (HDFC Securities)

• Benefits of capacity addition insignificant: ACEM has planned to increase its installed capacity by ~5.5 mt in different stages during CY09 and CY10. Though we expect the entire capacity to get commissioned by H1CY10, we don’t think this will result in a sales volume growth due to a demand-supply mismatch.

• Capacity Utilization rates set to decline: We expect the capacity utilization rate of ACEM to decline to the levels of 81% in CY09 and 77% in CY10 against ~95% in CY08 as we believe the company will perform in line with the industry. We expect the sales volume of the company to grow at a CAGR of 1.4% for the period CY08 to CY10E.

• Cost pressure expected to ease: ACEM is dependent on Imported coal for ~30% of its requirements. The cost of imported coal has corrected by ~50% over the last 5-6 months, which will protect the operating margins of the company in CY09.

• Operating benefits expected to come down in CY10E: ACEM enjoys one of the best operating margins in the Industry. However, we expect this benefit to ease in CY10 with the downturn in the cement cycle. We believe the realization of the company will decline by 3.3% in CY09 and by a further 5% in CY10. We expect the margins of the company to remain stable in CY09, but drop by 506 bps to 23.8% in CY10E.

• Earnings to decline: With operating benefits and realization set to decline over next two years, we believe the earnings of the company will decline at a CAGR of 17.4% for the period CY08 to CY10E.

• Merger with ACC can provide synergy benefits: We feel the merger of Ambuja with ACC can provide synergy benefits going forward, in terms of rationalization of the distribution system and reduction in duplication of work. However, the management has not indicated anything on this.

To see full report: AMBUJA CEMENT

>Automobile Sector (UBS)

2 wheeler dealer survey....

■ Bajaj Auto – model worries, still high dependence on financing
Our dealer survey key findings support our negative view on Bajaj: 1) Close to 50% of Bajaj sales are still on financing. Tighter lending standards have been one of the key reasons for sharp drop in Bajaj Auto sales in Tier 2 cities. 2) Bajaj’s new launches like the Xced 125 and Platina 125 have not been able to deliver on customer expectations and core mktg. proposition. 3) Only 30% of Bajaj dealers surveyed expect volume increase vs more than 80% for HH.

■ Hero Honda - dealers confident of 100cc growth
Our survey indicates customers buying on cash prefer HH for higher reliability and lower maintenance expense. Only about 30% of HH sales are from financing. HH dealers don’t see an evident shift in customer preference towards 125cc bikes. HH dealers attributed the market share increase in the ‘under 125cc’ segment to new launches by the company and expect continuing growth in this segment due to fuel efficiency remaining the key buying criteria for the 2-wheeler buyer.

■ Scooter growth outlook remains strong, HMSI doing well
Dealers felt confident of scooter segment growth going forward driven by demand from women and elderly people. This is positive for HMSI which continues to dominate the scooters market. HMSI’s new bike launches like CBF Stunner continues to gain sales traction. Around 40% of HMSI sales are on financed basis.

■ We reiterate our view on the two wheeler market
We maintain our rating and estimates for Bajaj Auto (Sell) and Hero Honda (Neutral).

To see full report: AUTOMOBILE SECTOR

>India Financial Services (MORGAN STANLEY)

Dependence of Mortgage Growth on Property Prices = Sharper Slowdown Ahead

Quick Comment: In this note, we try and present a simple argument on why mortgage growth for the industry will be extremely weak in F2010 and possibly F2011. Even if we don’t consider slowing economy and rising unemployment, the fall in property prices itself will cause a sharp deceleration in the market. In India, there is no property price index, so it is not possible to get an idea of exact price decline. However, anecdotally it appears that prices have come off by about 20% in the last few months and will likely decline further. New loans (disbursements) are obviously a function of mortgage volumes and prices. With prices declining, volumes have to move up sharply – just to keep the new loans constant. That is unlikely to happen, implying that new loans will contract in F2010 for industry. There will be players, like HDFC, that are likely to gain market share, but overall industry will see a decline. While we are focusing on mortgages in this note, the slowdown is likely to be intense for all other loans, as all asset prices have come off sharply. In fact, in our view, there is a very high probability that loan growth will be in the single digits for Indian banking system in F2010.

Most of the growth in mortgages in the past 5 years was driven by the rise in property prices, in our view. We are handicapped by lack of price data. But we do an approximate analysis, using some data from HDFC. It gives average value of mortgage outstanding; in F2003 this was Rs.370000, which increased to Rs. 1.4 mn in F2008, a CAGR of 30%. This is for the entire loan portfolio – implying that the increase in value of new mortgages would have been even greater.

To see full report: INDIA FINANCIAL SERVICES

>Equity Insight (HSBC)

Pro-cyclical shift reiterated

■ Near-term hurdles: this week’s data flow and Q1 results
■ But financial and economic crises slowly turning a corner
■ Sticking to more pro-cyclical stance and rally to year-end

After one of the sharpest rallies in recent times, some near-term retracement is hardly surprising. This week’s ISM, PMIs and non-farm payroll data and pending Q1 results will doubtless provide opportunities for profit-taking. The Vix has still to break below 40: what we have called the “volatility bubble” has yet to burst.

Looking further ahead, however, we do think that both the financial and economic crises are (very) slowly turning a corner. The Fed’s latest initiative seems to be pulling mortgage rates down – to 50-year lows in some cases – and refinancing applications up (see chart). Meanwhile, some indicators of US consumer and housing demand seem to be stabilising, and the pace of destocking is likely to fade.

Our US economist expects GDP growth could turn positive in the second quarter (Break in the weather?, 27 March 2009). He still doubts that there will be much follow-through, but we think that equities have not been pricing in even a flat economy so soon.

On 19 March 2009 (Q2 preview: adding to cyclical weights), we shifted our sectoral views a little further in a pro-cyclical direction and away from some defensives (pharmaceuticals and utilities). We also set out the case (again) for some further rally to year-end. Whether it is a “bear market rally” or not seems less important than whether it happens – and we still think it can.

To see full report: EQUITY INSIGHT

>BHEL (SHAREKHAN)

• Stock Update >> Bharat Heavy Electricals
• Sector Update >> Banking
• Sector Update >> Pharmaceuticals

BHEL

Key points
■ Bharat Heavy Electricals Ltd (BHEL) will announce its provisional results on April 02, 2009. We expect the company to report a turnover growth of 31.6% year on year (yoy) and profits to grow at 8.3% yoy.

■ For the full year, the company would be making a provision of Rs1,313 crore for increment in wages, as recommended by the Sixth Pay Commission. For Q4FY2009, the provision would be to the tune of Rs475 crore. We expect the total order inflows for FY2009 to rise by 39%, while the backlog should settle at a 19% growth on a year-on-year (y-o-y) basis.

■ The street would keenly watch as the management issues its formal comment on the company’s performance in FY2010E. We expect the company to guide for a 20- 25% growth in its revenues. The operating margin is expected to improve on the back of lower raw material cost and operating leverage. The order flows would also continue to remain strong. In fact, in a recent conference call, the management has guided for an order inflow to the tune of Rs50,000 crore in FY2010E.

■ In Q4FY2009, the order inflows continued to be firm, as the company acknowledged orders to the tune of Rs13,076 crore. The company recently bagged an order for 700MWe steam generators from the Nuclear Power Corporation of India Ltd (NPCIL), valued at Rs345 crore.

■ BHEL’s strong revenue visibility (with an order book of 4.8x FY2008 revenues) coupled with its strong balance sheet makes it our preferred pick in the sector. At the current market price, the stock trades at 16.9x FY2010E earnings. BHEL’s premium valuation to the Sensex owes much to former’s resilient business model. We maintain Buy call on the stock with a price target of Rs1,546.

To see full report: BHEL

>Oil & Gas Industry (PRABHUDAS LILLADHER)

Oil – unlikely to stay much above US$55

■ Crude oil prices trebled from about US$50/bbl in early 2007 to over US$150/bbl during mid 2008, further nose-diving to US$30/bbl.

■ Hedge funds interest pushed up oil prices, though now expecting a decline in their activity

■ Extraneous factors like geopolitical tensions across oil-producing countries, aid by governments to propel their economies etc. will swing the crude prices sharply

■ Expect oil prices to broadly hover between US$45-55/bbl over next year

■ In contrast to the crude prices, natural gas prices moved up, albeit slowly

■ A sudden drop in the economic activity has put pressure on the natural gas prices

■ Natural gas prices to remain quite subdued in the near term due to an expected surge in LNG
supplies

■ Long-term crude futures remain in a contango, with sharp recovery in crude prices towards end of 2010

■ Long-term natural gas futures depict a sharper price recovery and much earlier by end of 2009

To see full report: OIL & GAS INDUSTRY