>AXIATA GROUP (CITI)

Downgrade to Sell: Fully Valued + Fire Behind Idea Smoke?

■ Fully valued now – We see the stock as fully valued on a sum-of-parts after its ~60% rise off March 2009 lows. Operational outlook is underwhelming as is the patchy execution track record. Valuations are expensive (14x PE, 6.0x EV/EBITDA) and dividend yield is paltry at best. We downgrade to Sell/High Risk (from Hold/High Risk) with a new target price of RM2.25 (from RM2.07).

■ More Idea? – The Business Standard in India reported (28 May 09) that Axiata intends to launch a voluntary offer for 20% of Idea at Rs130-135/share. Axiata has dismissed the report as speculation and cites a shareholders' agreement limiting Axiata's stake to 20% (at 14.99% now, 19% post Spice+Idea merger). Should a deal materialize as reported, though, we believe the market would focus on funding concerns (we est. US$1.8bn for the stake) and valuation
premiums (66% above CIRA TP of Rs80) as overshadowing long-term positives.

■ Overseas assets need work – We still believe that Axiata's stable of overseas assets hold long-term attractions, particularly given exposure to growth markets. Still, short-term challenges can't be ignored, with Dialog struggling with poor profitability and XL facing a funding crunch likely necessitating a rights issue. Celcom stays the main earnings and cash driver for now.

■ Cutting 2009 estimates – Following 1Q09 results, we cut 2009 earnings by 5.4%, reflecting weak Dialog and XL earnings but offset by stronger than expected Celcom performance. Our new TP of RM2.25 reflects higher Celcom contribution to NAV and CIRA's new TP for Idea of Rs80/ share.

To see full report: AXIATA GROUP

>THE GOLD REPORT (IIFL)

“It gets dug out in Africa or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from
Mars would be scratching their head.”

~ Warren Buffett

No other object is like gold—perfectly useless yet universally treasured for millenniums. A controversy in itself, gold has always been an amazing magnet for contentious debates and opposing views. The abolishment of the gold standard stripped gold of its official monetary role, but inadvertently made it the unoffi cial “money of last resort”. Gold thrives on fears and suspicions of government’s fi at power, reasons for the heightened interest of late in the precious metal. This report delineates the perils and promises of investing in gold and presents a fundamental mechanism (with future scenarios) of gold price movement in this truly interesting time of ours.

The perils of investing in gold
The great peril would be mistaking gold for what it is not: an investment asset, an inflation hedge or a “safe haven”. Gold carries no economic returns and has underperformed equities for most of the time since it has had a price; in the short to mid term, gold price does not even move in tandem direction with consumer prices; and it only becomes a “safe heaven” when (the purchasing power of) money is in jeopardy.

The promises of gold
Yet gold is the market’s best and only credible alternative should fiat currency fail. For a rational investor, gold resembles a market priced, public-traded and non-expiring insurance against the extreme event of hyperinflation. Gold speculators, on the other hand, can trade on and profit from changes in outlook of inflation risks and market sentiment. Gold’s diversification benefits also emerge during times of crisis: a 4-8% allocation of gold might be suitable for a mid-risk portfolio.

Gold from now on
That would hinge on the outcome of the US recovery efforts and the ability and will of the Federal Reserve to mop up excess money supply to keep inflation at bay. Here we present four (in fact, five) scenarios: gold would sink to US$500/oz or lower in case of a Japanese-style deflation or if the Fed achieves recovery while pre-empting inflation with surgical precision; on the other hand, gold would shoot up towards US$2,000/oz if inflation reaches doubledigit levels as the Fed hesitates between choosing to kill inflation or a nascent recovery. A black-swan scenario, however, would be one in which gold bugs have their dream come infl ation and a total meltdown of flat currency.

Following topics are discussed in this report:

• The nature of gold and gold price
• Gold: demand and supply
• Myths, rhetoric and facts
• Gold-plated countries
• Histories
• The Gold Rush
• Gold equities: leveraged gold play
• India and gold: A history of fascination
• IIFL Gold Survey
• Silver: Gold’s often forgotten cheaper cousin
• Platinum: the high-octane gold

To start full report: THE GOLD REPORT

>WEEKLY MACRO SCOPE (FINQUEST)

HIGHLIGHTS

• GDP growth revised at 6.7 % for FY09
• World Steel production declines 23.6% YoY in April
• India's Crude oil prod drop by 3.1% in April 2009
• Gems & Jewellery Exports decline by 34.3% in April 2009
• Inflation remained unchanged at it's previous week's level of 0.61% YoY

To see full report: MACRO SCOPE

>CROMPTON GREAVES (JAYPEE CAPITAL)

We initiate coverage on Crompton Greaves with a ‘BUY’ recommendation and a target price of
INR 320 per share implying an upside of 22% from current levels. We expect Crompton Greaves
to maintain its leadership position in transformers space with robust spending planned in power
generation over 11th and 12th five year plans resulting in robust demand for power equipments.
We believe the increasing synergies arising from the international acquisitions and technological
prowess in high end power T&D products would create significant value going forward.

■ Power infrastructure to witness heavy investments
The peak power deficit, at 16.6%, is at a multi year high. With demand for power expected to grow at 8 to 10% annually, power supply will face even greater strain. In order to meet the shortfall, heavy investments are planned in increasing the installed capacity of power generation. Huge investments will also be made in increasing inter regional transmission capacity to facilitate transfer of power across the regions. With an investment of INR 1,400 bn ministry of power plans to increase the capacity of integrated national power grid from 17,000 MW to 37,000 MW by 2012.

■ Strongly placed to tap power growth
Every 1 MW of power generation capacity requires 7 MVA of new transformer capacity addition. Ministry of power plans to increase installed power generation capacity from 147.7 GW to 200 GW which would result in huge demand for transformers. With the installed capacity of 27,000 MVA Crompton Greaves is the largest manufacturer of transformers in India. With the product synergies and technological advancement arising through international acquisitions it is now one of the very few companies having experience in execution of high end power equipment products in which incremental investment will come going forward.

■ Avantha acquisition a downer
Crompton Greaves recently purchased 41% stake in group company Avantha Power and
Infrastructure Ltd (APIL) for INR 2.27 bn. The entire investment will be towards the equity infusion in APIL’s 600 MW Korba power project. We believe that such non – core investment was made in order to enable the Korba project to reach financial closure as banks disburse funds in proportion to equity contribution. Although the cash outflow is sentimentally negative and could have been utilized for more strategic business purposes it is not likely to have a negative impact on the financials of Crompton Greaves in the long term.

■ Steep discount to peers unwarranted, BUY with a price target of INR 320
Crompton Greaves has historically traded at a discount to its peers which we believe should narrow down considerably going forward. It did not get the same valuations as its peers due to the fact that it was not as techhmmmnologically superior, had gaps in its product portfolio, lack of presence in high end range of power equipments products and lack of proven track record world wide. But it has addressed these issues considerably through successfully integrating its international acquisitions. Although we still believe that the relative premium of companies like ABB and Siemens will continue going forward primarily due to its strong parentage, the extent of discount shall reduce considerably. We assign a p/e multiple of 16 times FY11E estimated EPS of INR 20 to arrive at a target price of INR 320 per share implying an upside of 22% from current levels.

To see full report: CROMPTON GREAVES

>INDIAN NATURAL GAS (CITI)

Looking for Value After Market Run-up

■ GAIL new top pick, TP of Rs339 — Given the recent run-up in the markets, we take a fresh look at our stock recommendations among Indian gas utilities. We now prefer GAIL over other gas utilities driven by recent underperformance (-10% vs. Sensex in the last month) and strong performance by GSPL, our erstwhile top pick (+12%). Our TP increase (from Rs288 to Rs339) is driven by lower WACC and subsidy assumptions, with further upside possible given conservative assumptions on tariffs and no value accretion from city gas.

■ Maintain Buy on GSPL — While GSPL growth outlook is more pronounced than GAIL, outperformance will likely be contingent on a change in the outcome, likely or perceived, of the social tax issue. We are increasing our TP to Rs70 following our lower WACC assumptions. While we continue with 30% social tax contribution, we are now assuming it to be tax deductible. Further upside could come from partial or complete revocation of the directive by the state gov’t.

■ PLNG stays Sell; prefer Ggas among city gas distributors — We maintain Sell (3H) on Petronet LNG, the best-performing stock in our universe, outperforming Sensex by 40% in last two months, as a robust global long-term LNG outlook drives uncertainty on the future viability of R-LNG in India. Amongst the city gas distributors, we prefer Ggas, Buy (1L), to IGL, Hold (2M), due to relatively lower regulatory risk and negligible impact of proposed increase in APM prices.

■ Increasing TPs on lower cost of capital — We are increasing TPs across our universe driven by our lower cost of capital assumptions, which now factor in riskfree rate of 6.5% and equity risk premium of 6.0%.

To see full report: INDIAN NATURAL GAS

>INDIA WATCH (HSBC)

Stepping up structural reform?

• Pace of reform may disappoint an expectant audience
• Left of Congress party and debate over the appropriate economic model imply a cautious approach will continue
• Significant labour market reform remains unlikely

Now that the dust has settled after India’s surprising general election results, we can consider the prospects for reform. With the Congress-led government in a far more comfortable position in Parliament, many expect the pace of change to pick up. Such optimism no doubt helps to explain the post-election leap in Indian markets.

But before we all get too carried away, a couple of observations are worth making. First, while the Prime Minister and many of his cabinet are reform-minded, Sonia Gandhi and her son Rahul are also crucial to decision-making, and they stand to the left of the Congress party. We suspect their priority is not so much business and financial-sector change as promoting the welfare of the hundreds of millions of people in rural areas and the urban poor. Many attribute the party’s electoral success to measures such as the farm loan-waiver scheme and the rural workers employment-guarantee programme.

Second, in view of the acute problems in the West, a global debate is taking place over the merits of a highly liberalised financial system. During the election campaign, many in the UPA coalition suggested one reason India had outperformed during the worldwide recession was precisely because it hadn’t liberalised as much as some, but had maintained a large state-owned banking sector and limits on foreign investment in certain areas.

This is not to say the government will ignore reform during its next five-year term. But it is likely to remain slow and cautious, in our view. In particular, we would be surprised to see labour-market changes intended to make it easier to hire and fire workers. Greater privatisation and cuts to government bureaucracy would provide a much-needed boost to government revenue, but they may be considered a step too far for now. That raises the question of how the huge budgetary shortfall will be addressed. So far, the new finance minister, Mr. Mukherjee, has argued things will look better once the recovery gets under way. He is correct, of course, but recent events have taught us the country doesn’t have just a cyclical budget problem – it has a structural one as well.

To see full report: INDIA WATCH

>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