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Sunday, March 16, 2008

BHEL India

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,845
Current market price: Rs1,878

Conquering new frontiers

Key points

  • According to media reports Bharat Heavy Electricals Ltd (BHEL) has been awarded the order to supply boiler package for National Thermal Power Corporation (NTPC)'s 1,320-megawatt (MW) Barh stage-II supercritical power project in Bihar. The value of the order has not been disclosed. The breakthrough in the supercritical space would help address the concerns over the company's capability to secure supercritical orders and beat competition.
  • BHEL has a healthy order book. It has already won orders worth Rs10,583 crore or 3,345MW in Q4FY2008 so far. We expect the order inflow to remain buoyant especially for the projects based on the supercritical technology.
  • The company has brought on stream an additional manufacturing capacity of 4,000MW during the current quarter, taking its total installed capacity to 10,000MW. The timely expansion of its manufacturing capacity augurs well for the company considering the favourable demand outlook across the globe.
  • The robust order inflow and timely capacity expansion provide visibility to the company's future earnings. We continue to remain positive on the stock and reiterate our Buy recommendation on it with a price target of Rs2,845.
  • We believe the recent correction in the stock and the concerns over the company's ability to secure supercritical orders are overdone. The stock's current valuations are extremely attractive. At the current market price it trades at 22.4x FY2009E and 16.5x FY2010E earnings. In terms of enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA), the stock trades at 15.5x and 11.1x its estimates for FY2009 and FY2010 respectively.

Shipbuilding Sector

Shipbuilding Sector

Weekly Market Wrap - March 14 2008

Sensex, India`s benchmark index, continued to decline for the week ended Mar. 14, 2008, by tracking falls in global markets and unexpected drop in IIP (Index of Industrial Production) numbers. Global markets were unable to withhold the gains arrived after the Federal Reserve` efforts to promote liquidity in the financing markets by injecting USD 200 billion on concerns about the widening credit losses in US and worries that record oil prices will curb global growth.

Investors are also worried about industrial growth which was showing signs that the Indian economy is slowing, as it declined sharply at 5.3% for January 2008, as compared to 11.6% in the same month last year. Overseas investors and Indian mutual funds were also net sellers in the week. Analysts are expecting bearish performance in the markets over short term. Some recovery is expected after the Federal Reserve meeting on March 18. The Federal Reserve is likely to cut interest rate further in the meeting.

All sectoral stocks declined in the week except oil & gas shares. Broad based fall in the market was led by IT, consumer durable, technology, metal and consumer durable. Mid-cap and small-cap shares were not exception to this fall.

The 30 share index, Sensex lost further 215 points, or 1.34%, to 15,760.52 in the week ended March 14, whereas the broad based NSE Nifty declined 25.80 points, or 0.54%, to 4,745.80 in the same period. However, the BSE mid-caps and the small-caps lost 3.25% and 3.92% respectively over the week.

The only gainer in the sectoral indices was Oil & Gas which settled 3.31% higher over the week on higher record oil prices.

Major losers in the sectoral indices were BSE IT, which dropped 6.37%, Consumer Durables fell 5.51%, TECK lost 4.39%, Consumer Goods declined 3.17%, Auto went down 2.06% and Bankex fell 1.82%. Health Care, FMCG, Realty and Power indices posted less than 1% losses.

Overseas investors were net sellers in equities worth Rs 13.39 billion in the period of March 10 to 13. As per the provisional figures, they sold net of Rs 3.58 billion worth equities on March 14. Including the provisional figures, they were net sellers in equities worth Rs 16.97 billion during the period March 10 to 14. On the other hand, mutual funds were net seller in equities to the tune of Rs 2.21 billion during the period March 10 to 13.

Major Corporate Developments
Shares of Rural Electrification Corporation got listed at a premium of 19.05%, or at Rs 125, as against its issue price of Rs 105 a share at the Bombay Stock exchange (BSE) March 12.

Shares of Kerala-based V-Guard Industries got listed at a premium of 9.76%, or at Rs 90, as against its issue price of Rs 82 a share at the National Stock exchange (NSE) on March 13.

Larsen & Toubro, a USD 5 billion technology, engineering and construction company with global operations, announced it is likely to post Rs 2 billion in losses related to commodities derivatives in current financial year. However, the company mentioned that it will maintain the guidance on order booking, sales and operating margins for the year with an emphasis on improvement in the operating margins.

India`s inflation stood at 5.11% for the week ended Mar. 01, 2008 as against 5.02% for the previous week on increased in prices of primary articles and aviation turbine fuel. The annual rate of inflation stood at 6.51% as on Mar. 3, 2007.

Sita Shree Food Products IPO Note

Sita Shree Food Products IPO Note

India Strategy - March 14 2008

India Strategy - March 14 2008

HT Media, Tata Steel, Hindustan Unilever, Nestle India, Jindal SAW

HT Media, Tata Steel, Hindustan Unilever, Nestle India, Jindal SAW

Tata Steel, India Economy - IIP Numbers

Tata Steel, India Economy - IIP Numbers

No, not cutting rates

With inflation again creeping up to worrisome levels, Finance Minister P Chidambaram Saturday virtually ruled out any government intervention to ease interest rates.

Chidambaram, who hoped for cheaper credit at least on housing one week ago, changed his tone Saturday saying the Reserve Bank of India (RBI) would determine rate policies.

Speaking at the India Today Conclave, the minister said: 'We are not insulated from international commodity or crude prices.

'Interest rate policies are determined by the RBI. The main purpose of interest rates is to contain inflation. Please remember India is not entirely insulated from rising commodity prices.'

He said crude oil prices were USD 37 a barrel in 2004 and moved up to USD 67 in April 2007, USD 93 this February and now to USD 110. Similarly, he added, palm oil moved up from USD 471 a tonne to USD 710, USD 1,777 and USD 2,270 during the period.

'So long as there is a threat of inflation, we have to trust the RBI to use interest rates in order to contain inflation and to dampen inflationary expectations,' Chidambaram said.

His comment came in the backdrop of India's wholesale price index-based inflation rate rising to a nine-month high of 5.11 percent for the week ended March 1, above the central bank's 5 percent threshold.

Speaking in Lok Sabha Friday, Chidambaram said: 'Inflation is on the rise. It is a matter that causes worry to any government.'

He admitted that there was a slowdown in the Indian economy, but added that he was optimistic of gross domestic product (GDP) growth reaching 8.8 percent during the current fiscal.

'The idea is to maintain the same batting average. Adam Gilchrist is here,' Chidambaram said, referring to the presence of the former Australian cricketer in the audience. 'The question is how to make it happen.'

'Industry will continue to grow at a clipping pace,' the Finance Minister said.

Orchid Chemicals

Investment with a two-year perspective can be considered in the stock of Orchid Chemicals and Pharmaceuticals, an exporter of generics operating in the niche segment of antibiotics. Likely earnings from over 12 products over the next two years and the company’s proven track record of garnering shares in regulated markets augur well for prospects over the medium-term.

In the last five years, the company’s profits have grown by a compounded annual growth rate of 28 per cent on the back of 13 per cent rise in sales. Orchid has progressively built its strategy around categories such as cephalosporins, penicillin, betalactams, carbapenems and also non-antibiotic products.

With internal accruals and debt used to build capacities, interest outgo (8-10 per cent of sales) has been a drag on earnings. But, now, with the required facilities in place for formulation manufacturing and bulk drugs, Orchid is well-positioned to capitalise on export opportunities.

Orchid is looking to launch three cephalosporin-based products every six months for the next the two years in the overseas markets. This represents a potential generic market of $1 billion (based on conservative estimates) with limited competition in the offing.

At the current price of Rs 213, the stock discounts the company’s 2008-09 earnings by nine times, which appears justified in relation to the earning prospects. Factors such as possible equity dilution through $200 million FCCB issue (used to retire debt), ambitious capex and muted sales growth in recent years have weighed on the stock price. Nevertheless, Orchid’s performance in antibiotic injectibles, guided sales growth of over 30 per cent in 2007-08 and the possibility of five exclusive product launches in 2009, suggest a sustainable earnings picture.
Changing profile

From a fledgling bulk drug player targeting lesser-regulated regions, Orchid has transformed itself into a formulations maker operating in a difficult-to-venture area such as generic antibiotics.

It has gained foothold in sterile injectibles market in the US through Cefazolin, Ceftriaxone and Cefoxitin, mainly through a strategy of launching drugs with overseas partners such as Apotex, Actavis, Hospira and DAVA. These profit-sharing agreements reduce the need to have a front-end presence and also shorten the “time to market” for highly competed drugs.

Cephalosporins, which is now a key revenue contributor, could turn out to be Orchid’s strength over the next two years. With Day One launches becoming a major source of profits on antibiotics, existing players such as Orchid with strong distribution partnerships, may be at an advantage.

However, not many such drugs are going off patent in future. So, in the long-term, to maintain the 50 per cent revenue contribution from US generics,

Orchid has laid emphasis on betalactams (which would kick in from 2008), specific carbapenems going off-patent sequentially from 2009. In the case of non-antibiotics, Orchid has received approval for its ANDA (Abbreviated New Drug Application) for Granisetron Hydrochloride tablets, an anti-emetic product. By 2009,

Orchid would launch six more non-antibiotics in both US and EU, adding 5-7 per cent to revenues. By 2011, as the contribution from cephalosporins decline, the other drug antibiotic classes together with non-antibiotics will hold key to Orchid’s revenues and profitability.
R&D trigger

Orchid’s drug discovery initiative is carried out under its wholly-owned subsidiary, Orchid Research Laboratories Ltd. (ORLL). ORLL has seven pre-clinical entities (total 15 molecules) targeting diabetes, infection, inflammation and oncology areas. With major drug companies spinning off R&D units, ORLL could also turn out to be a possible candidate for the same.

Orchid spends about 6-7 per cent of its sales on R&D. ORLL has filed 162 patent applications for new drugs and other innovative products.

Any possible deal (out licensing) that validates ORLL’s skills and also subsequent spin-off of the unit will be triggers for the Orchid stock.

Any delay in executing product launches, especially in cephalosporins, disappointments related to Tazobactam and increasing competition from Indian generic companies leading to steeper price erosion are risks to our recommendation.

More than 80 per cent of Orchid’s sales come from exports. Though earnings are exposed to rupee appreciation, eign currency convertible bonds might provide a temporary hedge.

Via BL


An investment can be considered in the stock of Bharat Heavy Electricals (BHEL). Strong order-book, ongoing capacity expansion to meet Twelfth Plan target, entry into new business segments and efforts to tackle competition in the super-critical plants are factors that enhance prospects for earnings growth over the medium term. However, given the near-term capacity constraints, order book growth could slow down over the next year.

Invest with a perspective of at least three-four years so as ride the growth that the company is likely to witness through enhanced capacities as well as order inflows from newer segments.

At the current market price of Rs 1,879, the stock trades at 22 times the expected earnings for FY09. The current volatility in the market has resulted in valuations that are attractive compared to average historical valuations. Consider buying in lots to benefit from any declines linked to the broad market.
Comfort in order-book

BHEL has been continuously bagging orders in the current year resulting in a backlog of Rs 72,700 crore, about 3.4 times its expected revenue for FY 2008.

The increased order flow is mainly due to the upcoming deadline for utilities to award orders under the Eleventh Plan. Further, BHEL timed its first phase of capacity expansion (from 6,000 MW to 10,000 MW) to go on stream by January 2008, thus enabling it to accept new orders without capacity constraints.

Once the Eleventh Plan target is met, there may be some lull in orders before projects under the Twelfth Plan are awarded. This may result in some momentary slowdown in order flows in FY-09. However, the orders on hand would ensure that revenue growth remains healthy.

BHEL is also preparing to meet long-term demand. Its second phase of expansion to 15,000 MW is slated to be ready by December 2009. The company also plans to double its transformer capacity to 38,500 MVA over the same period. While there would be more private players in the utility space, Central and State utilities will continue to be the major contributors towards achieving the Twelfth Plan target. As BHEL still remains a favoured supplier for the Government, the company is likely to continue bagging orders, especially in the sub-critical boiler segment.
Testing waters

BHEL has not had any major breakthrough in the super critical plants technology, given the acute competition it faces from Chinese players. This is despite its technology tie-ups with Alstom and Siemens for boilers and turbines respectively. Of the projects bagged so far, Chinese players have been scoring over BHEL in ‘pricing’ due to the huge capital cost advantage that they possess.

While this may be a major issue to reckon with, BHEL’s advantage may lie in its being a local company, capable of providing repair and maintenance services, and a ready supply of spares. Further, as the quality of equipment from Chinese players is yet to be tested over a longer period (super critical plants are a relatively new phenomenon in India), some local utilities may prefer a known player such as BHEL. However, there is still no evidence of any such preference for the company over overseas players.

BHEL’s strategy of acquiring minority stakes in projects by Government utilities is an encouraging move. The company has started off with a joint venture with the Tamil Nadu Electricity Board for setting up 2 x 800 MW supercritical thermal power project.

While this means that the company would essentially produce for captive consumption, it would provide a good platform to make a mark in the super critical segment and gain qualification to supply to third parties. Given the company’s rich cash position and low debt, such a move appears a viable choice to clinch some market share in this segment.
New domains

In the sub-critical space, the company continues to dominate the industry in terms of order flows. BHEL now produces 270 MW and 600 MW boilers targeted to compete with Chinese boilers in the sub-critical space.

This apart, the company has forayed successfully into the advanced class gas turbine segment, winning its firm commercial order from Reliance Industries. It has since, in quick succession, won two more such orders in Gujarat.

BHEL also has capability to produce equipment and sub-assemblies for onshore drilling rigs. It recently won a three-year contract from ONGC to supply wellhead assemblies and other critical spares for oil exploration. With increasing activity in this area, we expect BHEL to supplement its income from these allied activities.

The first phase of expansion by BHEL witnessed some delay. Any such drag in implementing the second phase could slow revenue growth. BHEL’s market share in the private utilities space has been about 25 per cent, essentially indicating that its strength remains in Government utilities’ orders. With increasing private participation, BHEL faces the risk of intense competition and possible slowdown in order flows.

Via BL

Tulip IT Services

Investments with a one-two year horizon can be considered in the shares of Tulip IT Services (Tulip IT).

At Rs 957, the share trades at 18 times its current earnings and 14 times its estimated FY-09 earnings. Though Tulip IT has strictly no comparable peers, it faces competition in some of its segments of operation from hardware and system integration players. With expanding margins and a healthy revenue mix, the company appears well-poised to tap potential opportunities.

The company broadly operates in two business segments — network integration and corporate network and data services. The latter includes the fast growing IP VPN (internet protocol virtual private network) service that connects branches of companies, banks and many other data transfer-intensive organisations. This service has enabled Tulip IT to count several blue-chip companies in its client base. Strong technical advantages in its segment of operations, continuing engagements with high-value clientele with big technology spends and bright prospects for new business segments give Tulip IT an edge in the domestic market.
Business Advantages

Wireless last mile connectivity: Tulip IT offers wireless last-mile connectivity for its VPN services. ‘Last mile’ here refers to the connectivity between the company’s point of presence in any city to the client’s premises in that city.

This removes the dependence on wired leased lines that is usually resorted to by players such as Sify. It also enables quicker implementation and deployment of VPN services and becomes especially important in difficult terrains or where last-mile leased line is not available or the incumbent inordinately delays allocation. Most other players in VPN services depend on leased lines for last-mile connectivity.

MPLS based backbone: The company has built a multi-protocol label switching (MPLS) technology based backbone network. This technology is regarded as being easily scalable in architecture and superior to traditional ATM or Frame Relay-based technologies. This MPLS VPN of Tulip IT is offered in around 1,000 cities across the country giving it strong edge over competitors. The company offers inter-city connectivity through optic-fibre network, leased from players such as Gailtel, Railtel and Power Grid Corporation, among others.

Vendor Neutral: In the network integration segment where the company offers implementation and system integration services related to IT and telecom infrastructure, Tulip IT works with multiple vendors with no special preferences. This enables it to retain flexibility to customise services to the specific requirements and preferences of clients.
Business Drivers

IP VPN service well-poised: The IP VPN market is estimated to be Rs 3,343 crore in size by 2013, growing from the current Rs 1,200 crore levels , according to a report from Frost & Sullivan. Tulip IT is estimated to have a market share of 28 per cent in this segment.

Tulip IT has managed to win a large client base in this segment. These include banks such as Punjab National Bank and some PSU banks, ADAG group companies, Bajaj Allianz, France Telecom and Idea Cellular among others. Most of these companies are data intensive and would require secure VPNs to communicate between branches.

The company is especially targeting PSU banks. This becomes important with many PSU banks adopting core banking facilities across the country. Such services will also cater to the CRM and ERP requirements of companies. Tulip IT with its presence and execution capabilities appears well-placed to cater to these opportunities. This creates a sustainable revenue stream for the company. The IP VPN business has been growing rapidly for the company and now contributes over 50 per cent of the revenues. It is also a higher margin service.

Government SWAN deals and budget cues: The company has been able to secure a host of government deals in IT infrastructure and implementation. These include state wide area network (SWAN) deals of the governments of Haryana, Assam and West Bengal. These are e-governance deals to enable offering of government-to-citizen services, each of which is worth over Rs 50 crore. With both the Union and Railway Budgets setting higher outlays towards IT, order flows from this segment may increase for Tulip IT. Defence, another sector with increased allocation, also offers opportunities for Tulip IT to cross-sell its IP VPN capabilities.

Data centres business: Tulip IT also hosts and fully manages data centres on behalf of companies. This is an emerging area as it allows companies to outsource critical IT infrastructure. Tulip IT offers this service in the form of co-location with the client as well as on a fully managed service basis.

This becomes important for small and medium enterprises adopting IT for the first time and wanting to minimise cost. This opens up a wide potential client base for the company. Significantly, many of the domestic IT services companies also view the SME segment as offering a lot of promise.

Fully integrated telecom players such as Bharti Airtel or Reliance Communications increasing their presence in the enterprise VPN space and possibly trying to offer wireless last mile connectivity may pose competition to Tulip IT. A ramp up in government deals may lead to a smaller deal size as well as lower margins; apart from extending the receivables cycle. In hardware-intensive deals, the company faces competition from players such as CMC, HCL Infosystems, Wipro Infotech and Datacraft.

Via BL

Grey Market - Titagarh, Kiri Dyes, Gammon Infra

Gammon Infra 167 to 200 3 to 5

Sita Shree Food Pro. 27 to 30 4 to 6

Titagarh Wagons Ltd. 540 to 610 40 to 45

Kiri Dyes & Chemicals 125 to 150 12 to 15

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