Tale of Bear Stearns

52 Week High: $159.36

March 13 2008 - $57

March 14 2008 Close - 30.00 -27.00 (-47.37%)

March 16 2008 - JP Morgan buys Bear Stearns for $2

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JP Morgan - 22.5K target for 2008

Stock markets in India are expected to rise further next year but at a slower pace as high valuations and a fall in corporate profit growth limit gains, analysts at JPMorgan said. The Mumbai market's benchmark index is expected to rise to 22,500 points by the end of next year, up 16 per cent from Tuesday's close of 19,400.67.

The index has gained nearly 15 per cent in October, its biggest monthly gain in almost four years, taking its rise this year to 40 per cent. It had gained 47 per cent last year and 42 per cent in 2005.

Bharat Iyer, head of research at JPMorgan in India, said corporate profits, which had grown 25-30 a year for the past three years, would slow from a high base.

"You have challenges in the form of rupee appreciation, volatility in interest rates, etc. So you expect earnings growth to structurally slow down.

"It's still very attractive in absolute terms at 19-20 percent, but the fact of the matter is that you are coming down from 30 percent to 19-20 per cent, which is a step down."

He said infrastructure, engineering and construction and steel sectors were likely to perform well, while drug makers and telecoms were not expected to be as strong as they have been.

Stocks you can pick up this week

Motherson Sumi System
Research: Merrill Lynch
Rating: Buy
CMP: Rs 96

Merrill Lynch initiates coverage on Motherson Sumi Systems (MSSL) with a ‘buy’ rating due to the following reasons: (1) 23%+ compounded annual growth rate (CAGR) in EPS during FY07-FY10E and sustainability of 20%+ earnings growth over a longer period; (2) 560 bps expansion in return on equity capital (RoCE); and (3) new business ventures.

Expansion of the rubber components business following the recent acquisition of Empire Rubber in Australia and beginning of commercial production of mobile phone plastics parts business in H2 FY08 are the key growth drivers, apart from the 22% CAGR in wiring harness revenues. There is significant possibility of earnings surprise on account of: (1) management guidance of 43% CAGR in earnings being significantly higher than expectations; and (2) likely benefit of 18% fall in copper prices in the next six quarters, compared to Merrill Lynch’s assumption of flat prices. The stock is trading at 11.97x FY09E EV/EBITDA — a discount of 15% and 31%, respectively, compared to Mico and Cummins India, despite better growth prospects and good track record. At management-guided EPS of Rs 9.8 in FY10E, the stock trades at 9.7x earnings.

Sesa Goa
Research: Buy
Rating: Goldman Sachs
CMP: Rs 2,111

GOLDMAN Sachs initiates coverage on Sesa Goa with a ‘buy’ rating. Sesa Goa is India’s largest exporter of iron ore in the private sector and is a direct play on iron ore price negotiations. With sustained tightness in the iron ore market, it will be a direct beneficiary of higher iron ore prices. High margins, attractive returns, debt-free balance sheet, strong free cash flow generation and cash pile of Rs 220 per share are added positives. The non-iron ore businesses will benefit due to a robust outlook on pig iron and met coke prices. Reining in logistics costs will remain a key focus area. Additionally, after the completion of the ongoing open offer, the new promoters, Vedanta Resources, may deploy surplus cash reserves. Sesa Goa is likely to deliver 40% earnings CAGR over FY07-FY09E on the back of a bullish iron ore price outlook and modest volume growth. Potential announcements on strategic use of the cash pile or expansion plans, post completion of the open offer by Vedanta Resources, can provide upside triggers. At 2.8x one-year forward EV/EBITDA — which is at a 50% discount to global mining companies — the stock is attractively valued.

Tata Motors
Research: Citigroup
Rating: Buy
CMP: Rs 694

Citigroup has put a ‘buy’ recommended on Tata Motors. The management guidance points to a modest revival in truck sales in H2 FY08E, which implies that overall sales for FY08 will be flat or may register modest growth. Truck operators’ profitability remains healthy, despite rise in interest rates. Freight rates continue to remain stable. The company will deploy Rs 8,000 crore over the next three years to launch new platforms in passenger cars and trucks.

The small car remains on schedule and will be launched in mid-CY08 (H1 FY09E). The management has said Tata Motors will start the process of demerging its subsidiaries by end FY08E, but this is still at a nascent stage. Brand, technology and markets are the key decision variables. Cost pressures (steel accounts for 45% of input costs) will continue to affect margins. Cost reduction exercise is nearly complete — the company has achieved Rs 970 crore of its stated Rs 1,000-crore cost-cutting exercise. Hikes in CV prices (~1-1.5%) undertaken in early FY08 will mitigate (but not offset) the impact of cost pressures.
Binani Cement
Research: JP Morgan
Rating: Overweight
CMP: Rs 79

JP Morgan initiates coverage on Binani Cement (BCL) with an ‘overweight’ rating. BCL appears to be at the cusp of aggressive volume growth. Cement production is likely to witness a CAGR of 44% over FY07-09. Increasing volumes, coupled with robust prices (in the current year) should drive 44% EBITDA growth and 40% EPS growth in FY08, as per JP Morgan’s estimates. In FY09, aggressive volume growth is likely to help offset the negative impact of an estimated 6% YoY decline in cement prices. A near 10% CAGR in domestic demand and benefits of consolidation should provide a higher floor to domestic prices, relative to previous cycles. BCL’s valuation looks compelling — the stock is trading at a near 40% valuation discount to mainstream cement players.

IDBI Bank
Research: ICICI Direct
Rating: Outperformer
CMP: Rs 131

ICICI Direct initiates coverage on IDBI Bank with an outperformer rating. IDBI Bank has transformed itself from a development financial institution (DFI) to an active participant in the booming banking and financial services space.

The amalgamation of United Western Bank with IDBI Bank has given the latter the much-needed branch network to enhance its retail presence. This, coupled with unlocking of value in its investments, is expected to lead to a surge in earnings. ICICI Direct expects earnings to witness a CAGR of 19% over FY07-09E to Rs 885 crore. IDBI Bank has a huge investment portfolio of quoted and unquoted equity stocks. It can unlock the value from these stocks and boost its profitability.

The value of the quoted and unquoted equity book is Rs 52 per share of IDBI Bank. The bank is expected to improve its core business gradually with net interest margins (NIMs) expanding from 0.48% in FY06 to 0.74% in FY07 and further to 1.07% by FY09E. At the current price around of Rs 130, the stock is trading at 1.3 its FY09E adjusted book value (ABV) and 10.6x its FY09E EPS of Rs 12.2. Based on a theoretical book value multiple of 0.9x its FY09E ABV, the value of its core banking business comes to Rs 87 per share. Its huge investment portfolio is valued at Rs 52 per share and subsidiaries at Rs 17 per share.

Godavari Chemicals & Fert
Research: IDBI Capital
Rating: Buy
CMP: Rs 129

Godavari Chemicals and Fertilizers — promoted jointly by Andhra Pradesh State Co-operatives (APSC) and the Indian Farm and Fertilizer Co-operative (IFFCO) — is one of the frontline players in the fertiliser segment in the South. It is now a part of Chennai-based Murugappa group, which acquired the stake of the Andhra Pradesh government in the process of disinvestment through Coromandel Fertilizers. Godavari is one of the leading producers of DAP and has a market share of 9% across India, while it has a 73% share in Andhra Pradesh.

During FY07, it increased the sale of traded products like water-soluble fertilisers, micronutrients and G-Sulphur. It has an approximate capacity of 1.2 million metric tones (mt), with a proximity to seaport and good infrastructure. Production during FY07 was highest at 11.35 lakh tonnes, when the average output increased to 72 mt per hour against 65 mt per hour. However, production was hit due to constraints of phosphoric acid supply. The company will expand its capacity by 4.25 lakh mt by June ’09. It has also completed construction of 10,000 mt atmospheric ammonia at Kakinada. Godavari Chemicals has put up a good show for Q1 FY08 with regard to operating and net profits. Its revenue, at Rs 17.3 crore, was down by 35% YoY. PAT was Rs 1.3 crore, against a loss of Rs 40 lakh in the year-ago period. The stock is currently trading at 6x its trailing 12 months EPS of Rs 20.65.

Stocks you can pick up this week

Dr Reddy’s Labs
Research: ABN Amro
Rating: Buy
CMP: Rs 633

ABN Amro maintains its ‘buy’ rating on Dr Reddy’s Laboratories (DRL). DRL reported lower-than-expected sales on lower Ondansetron sales and supply constraints in contract manufacturing. DRL’s subsidiary, betapharm, returned to its usual sales levels at $51 million, and lower selling, general & administrative (SGA) expenses led to better-than-expected operating margin adjusted for one-off opportunities.

The surprise was the 600 bps improvement in betapharm’s active pharmaceutical ingredients (API) margins, which the management attributed to a better product mix, citing Amlodipine Besylate as one of the key products being sold. The key R&D product, Balaglitazone, is in Phase III trials and can provide news flow that may increase its valuation, given the recent listing of Sun Pharma’s R&D business at $500 million.

ABN Amro values DRL’s Balaglitazone at $100 million (Rs 24/share) and cut its FY08 earnings forecast to reflect the lower-than-expected Q1 FY08 result. ABN Amro also lowers its profitability assumption for the contract pharma business, but leaves API profitability untouched.

Kalpataru Power
Research: HSBC Global
Rating: Neutral
CMP: Rs 1,548

HSBC Global Research has downgraded Kalpataru Power Transmission from ‘overweight’ to ‘neutral’, with a potential total return of 13%. Kalpataru has a presence in the infrastructure sector. In FY07, the company increased investments in its three subsidiaries, which will add value to the stock.

To strengthen its balance sheet, it invested Rs 42.9 crore in JMC Projects, a construction company with an order backlog of Rs 1,200 crore, 2.4x FY07 sales. Further investments were made in Shree Subham Logistics and Energylink, another construction company. Kalpataru’s Q1 FY08 sales grew 23% YoY to Rs 370 crore, while net profit was up 28% YoY to Rs 37.1 crore.

EBITDA margin improved to 16.4%, an increase of 40 bps YoY, due to higher margins in infrastructure (transmission and distribution margins were lower). HSBC Global has reduced its EPS forecasts by 5% for FY08E and FY09E to Rs 70 and Rs 96.9, respectively, based on higher depreciation and interest cost.

Patel Engineering
Research: Enam Securities
Rating: Outperformer
CMP: Rs 432

ENAM Securities initiates coverage on Patel Engineering (PEL) with ‘outperfomer’ rating. PEL’s Q1 FY08 results were above expectations, driven by some large transportation projects reaching the threshold revenue booking level. On a consolidated basis, PEL reported revenues of Rs 410 crore (up 43% YoY) and adjusted profit after tax (PAT) of Rs 25.8 crore (up 29% YoY). During the quarter, PEL bagged its first order worth $153 million for a dam project from the high-margin market of Africa.

The order backlog stands at a robust ~Rs 5,300 crore (up 8%YoY). The management has stated a guidance of 25% revenue growth in FY08; it expects operating profit margin (OPM) to sustain at ~13%. PEL has a substantially higher intake capacity and is pre-qualified for new projects worth over Rs 6,000 crore. Going by its historical bid-to-success ratio of ~25%, Enam believes that intake may gain traction, going forward.

Factoring in higher-than-estimated interest cost and a lower tax rate of 25%, compared to 33% factored in earlier, the FY08E and FY09E EPS stand revised at Rs 18 and Rs 21.4, respectively. At current market price, adjusted for value of real estate and build, operate & transfer (BOT) investments of Rs 271 per share, the stock trades at an EV/ EBIDTA of 5x FY09E.

Tata Teleservices
Research: Citigroup
Rating: Sell
CMP: Rs 27

CITIGROUP has downgraded Tata Teleservices (TTML) to ‘sell’ as the current stock price appears to fully reflect the sustained trend of operational improvement witnessed over the past six quarters. Estimates have changed slightly, incorporating the recent subscriber additions and cost structure trends.

TTML’s Q1 FY08 EBITDA growth of 3.8% QoQ at Rs 100.4 crore was 12% below expectations. Even EBITDA margin, at 25.5%, remained flat QoQ. Low tariffs, in addition to a cumulative share of ~8% in Mumbai/Maharashtra, remain sub-optimal and constrained by CDMA network.

Given that TTML is likely to break-even only in FY09, the financial milestones which could drive the next round of re-rating may not be achieved immediately. EBITDA margin improvement of 10% during FY07-09E will be critical for earnings. Citigroup expects Tata group to eventually consolidate its telecom holdings, i.e. VSNL, TTSL and TTML. However, the Tatas lost out on the opportunity to hike their stake in VSNL by forgoing the call option in the latter.

Unitech
Research: JP Morgan
Rating: Overweight
CMP: Rs 512

JP MORGAN initiates coverage on Unitech with an ‘overweight’ rating. The company focuses on developing mixed-use townships in city suburbs. This helps it to acquire land at relatively lower cost and generate better realisations/margins as price increases occur due to occupancy and land price inflation.

Unitech’s key area of operations has been the suburbs of the National Capital Region (NCR), but the company has recently entered Kolkata. Unitech has also acquired large chunks of land in South India, which are likely to come under development soon. The FY08E and FY09E P/E of 31.9x and 15.7x, respectively, are supported by 103% earnings CAGR over FY08-09E.

Mastek
Research: Edelweiss
Rating: Accumulate
CMP: Rs 267

MASTEK has been downgraded by Edelweiss from ‘buy’ to ‘accumulate’, due to the absence of near-term triggers that signal an uptick in growth rates. Mastek’s Q4 FY07 revenues were slightly lower than expected, though net profit was above expectation. Revenues, at Rs 180 crore, were down 6% and net profit, at Rs 23.7 crore, was flat QoQ on a like-on-like basis.

However, higher other income of Rs 6.5 crore reduced this impact at the net profit level. Mastek continues to suffer from several issues that limit its expansion. Its sales and marketing engine is investment-heavy, direct client relationships are few, slowdown in the government sector drags down growth, and the new client acquisition pace is lethargic. The company seems to be highly dependant on acquisitions to meet its stated revenue growth guidance of 35% (in USD) for FY08.

Edelweiss believes the company may come up short of its guidance. Also, its efforts to rationalise its high-cost sales and marketing cost model are unlikely to bear fruit in the near term, due to its investments in expanding solutions footprint in the US insurance segment. At current market price, the stock trades at a P/E of 7.4x and 6.5x its FY08E and FY09E earnings, respectively.

AllSec Tech, India Economy, Market Strategy,Deccan Aviation, Mahindra &Mahindra , Maruti Udyog, Automobiles, Banks,

JP Morgan in their daily report,

Economy: India: Full-year fiscal deficit below forecast

· The central government's fiscal deficit came in at 3.5% of GDP for 2006-07 (year-end Mar-31), lower than official revised estimate of 3.7% of GDP given by the government when it announced the budget for 2007-08 in Feb. Impressive revenues owing to the ongoing economic boom along with spending that was largely in line with expectations caused the fiscal deficit to print INR1,427.93 billion, or 6.3% lower than the revised estimate.
· In 2006-07, gross tax revenue surged 29.3%oya due to exceptional gains in corporate (+41.4%) and personal income (+35.4%) tax collections. Indeed, corporate tax revenue increased its share in gross tax revenue to 30.3% in 2006-07 from 27.7% in the prior year. In contrast, the share of personal income taxes in gross tax intake increased to 16.0% from 15.3% over the same period.
· The government forecasts the fiscal deficit to narrow to 3.3% of GDP in 2007-08. Overall, it appears on track to cut the fiscal deficit to 3.0% of GDP by 2008-09 as envisaged in the Fiscal Responsibility and Budget Management Act. However, it is unlikely that the government will be able to spring another positive surprise on the outcome for the fiscal deficit in the current year. Overall economic growth is poised to be slower this year, and corporate taxes will be impacted by slower top-line growth and increased pressure on margins. On the expenditure side, the government will be under pressure to increase populist spending ahead of the general election to be held by May 2009.

Allsec Technologies Ltd, ALLS.BO, Overweight Muted 4Q FY07; outlook remains robust

· Allsec reported a mixed 4Q FY07, largely below expectations. While demand remains robust, Allsec continues to face supply-side issues leading to lower-than-expected headcount addition in 4Q FY07. Combined with Rupee/US$ appreciation, supply issues led to muted 1% Q/Q revenue growth in 4Q FY07. However, margins were better than we expected due to continued control on costs. Overall, net profit was in line with our estimate.
· Demand remains sound: Allsec continues to see a robust business pipeline in line with strong momentum in offshore BPO business. Further, Allsec is already speaking to few Carlyle investee companies that could lead to significant business in our view over the coming 12-24 months.
· Allsec is making gradual improvements on supply issues: 1) 4Q FY07 attrition dropped to 17% from 20% in 3Q FY07; 2) Allsec plans to open a center in Trichi in 1Q FY08 that should have lower attrition. In fact, management expects to double voice-services headcount to ~4,000 people in FY08.
· Estimate changes: Strong headcount increase should lead to robust 42% revenue and 35% net profit CAGR over FY07-09E in our view. We highlight that our estimates have been reduced (12% for revenues and 17% for EPS in FY08) largely due to sharp Rupee appreciation and partially due to muted 4Q FY07.
· Investment view: We are reducing our DCF-based Dec-07 target price by ~6% to Rs400/share due to reduction in our FY08-09 estimates. With the stock having corrected in the past 2-3 months, we would recommend buying at the current level. Further, Allsec remains an attractive two-year investment story in our view given significant business potential from Carlyle investee companies.




Economy: India: Merchandise trade deficit surges

· India's international trade deficit in April jumped to a record high of US$7.06 billion (JPMorgan: US$5.3 billion). Merchandise exports increased an impressive 23.1%oya in April, while imports surged 40.7%. In the import details, oil imports gained 1.4%oya, but non-oil imports rose 54.3%.
· The over-year-ago growth rates for both exports and imports are much stronger than expected, but it is not clear how much of the increase owes to the underlying trend. This is because the relevant organization that announces the international trade data has adopted an "improved methodology" for estimating the provisional trade data reported today. However, it has chosen not to offer any details about the new methodology and how it is different from the old one.
· Unexplained changes in India's international trade data are not new and typically make meaningful analysis more challenging. Still, we'll attempt for more insightful comments after figuring out the impact of the new methodology.
· We maintain that India's current account deficit will widen to US$17 billion (1.5% of GDP) in 2007-08 (year that began on April 1) from an estimated US$10.5 billion (1.2% of GDP) in the last fiscal year. However, financing the wider deficit will not be a problem (see Tracking the shifts in India's balance of payments, GDW, May 11). The recent appreciation of INR should also cause the trade deficit to widen in the coming months.


Market Strategy
India Monthly Wrap: May 2007: Inflation and liquidity boost

· The MSCI India (US$) index gained 6.9% over May, and the market significantly outperformed the MSCI emerging markets (US$) index, which gained 4.6%. The US$ index gain has been aided by a 1.4% rupee appreciation over the period. Financials, industrials and energy companies are relative outperformers, while IT and consumer discretionary sectors underperformed.
· The index gain has been supported by market expectations of an easier interest rate outlook on the back of lower headline inflation and continued higher risk appetite among global investors.
· 4Q FY07 GDP increased 9.1%oya, below JPMorgan's (+10.0%) expectations, but the shortfall is mainly on account of significant upward revisions for the previous three quarters. The growth is driven by strong gains in industry and services.
· Institutional buying support continued for Indian equities. Domestic mutual funds and FIIs net invested US$ 430 million and US$ 942 million respectively, over the month.
· Among other developments:
1. Coca Cola bought Glaceau for US$ 4.1 billion and Tata Tea's sold its 25% stake in the company.
2. Industrial production unexpectedly surged in March and is up 12.9%oya (JPMorgan expectation-10.4%).


Deccan Aviation Limited, DECA.BO, Underweight
Kingfisher takes the driving seat - ALERT

· Deccan has confirmed that it has placed 35m new share to UB Holdings (the parent of Kingfisher Airlines) at Rs155 per share - equivalent to a 26% equity stake. UB will also bid for a further 20% of Deccan Aviation at the same price.
· UB gets 6 board seats, along with 6 existing directors. Capt Gopinath becomes Exec Chaiman and Vijay Mallya becomes Vice Chairman. Warwick Brady is leaving with a replacement to be appointed. Deccan's CFO remains in situ, but also assumes the acting CEO/COO role until further hires are made.
· Conclusion: The structure of the deal (between two Bangalore based carriers operating identical equipment) looks like a rescue on one hand. On the other, it looks like Vijay is well positioned to move equipment between the two airline brands. At a later stage, a back door listing looks likely.
· We maintain our view that this consolidation marks the bottom of the earnings cycle for the profit starved sector. We believe JAIL offers the best, most liquid play on this rebound. We would look to sell Deccan shares to UB and for Deccan shares to decline thereafter as we do not expect profits to flow easily to Deccan.


Mahindra & Mahindra, MAHM.BO, Overweight
May '07 Sales - Unit sales growth of 17% led by UV's - ALERT

· M&M reported robust unit sales growth of 17% yoy for May. Growth was driven entirely by the automotive segment (+27% yoy) while the tractor segment reported a flattish trend (up 2% yoy).
· In the Auto segment, UV sales grew 25% yoy with Scorpio sales growing 28% yoy while other UV's (semi urban segment and pick up vehicles) grew 24% yoy. The recently launched stripped down Bolero and the Maxi truck are boosting sales for Mahindra's UV's. Low value 3 wheeler sales grew 22% yoy.
· The relative weak trend in tractor sales continues (up only +2% yoy). Apart from a more demanding base effect, tractor sales have likely been impacted by a) pipeline inventories and b) tightening of lending norms by banks for this segment.
· Mahindra launched the Renault Logan (in both petrol and diesel versions) in April in the entry level C segment at a competitive price point of Rs.428,000. In May, the Logan has sold 2,786 units across 11 cities.
· In the recent analyst meet, management has guided to Auto sales growth of 8-12% and tractor sales growth of 6-8% for FY08.
· To drive growth over the future M&M has the following plans: launch a new UV - the Ingenio (in about 12 months), followed by another UV (in 2010) and enter the CV market (in 2010). A new facility at Chennai is expected to be commissioned in 2010 for manufacturing cars and at Pune for trucks.
· Over March, M&M marginally underperformed the market - down 3% vs a gain of 5% for the BSE Sensex. Slowing growth rates in tractors along with concerns on interest rates have resulted in the underperformance. While we remain underweight the auto sector, M&M remains amongst our preferred picks on a relative basis as we expect lower volatility in sales for key product segments and due to the substantial value of investments in high growth areas (account for 40% of the SOTP valuation).


Maruti Udyog, MRTI.BO, Overweight
May '07 unit sales: Sales growth (11% yoy) led by SX4 launch and exports - ALERT

· Maruti reported unit sales growth of 11% yoy for May. Local sales rose 10% yoy, while exports (typically lumpy) increased 38% yoy.
· The A1 segment continued to decline (down 19%) and growth in the A2 segment moderated to 8% - an indication that rising interest rates are beginning to impact demand.
· Growth in the A3 segment was however boosted significantly (up 104%) due to the launch of the new SX4 model. Reviews for the model have been encouraging. The local content in the SX4 is 79%, which has helped price the product competitively at Rs. 618,000 (ex showroom Delhi). Management expects to further bolster its presence in the mid to premium segments over the current fiscal by launching a new SUV model.
· Maruti has had the best product momentum in the Indian passenger car market over the last 2 years. Prominent launches have included the Swift, Wagon R Duo, Zen Estillo, Swift Diesel and the SX4.
· But competition is attempting to play catch up. The month of April has seen 4 new model launched by competition (GM Spark, Hyundai Getz, Fiat Palio & Renault Logan). We see the passenger car space getting increasingly crowded over the next 12 - 24 months, with several competitors setting up additional/ new capacity.
· The Government sold its residual 10% stake in Maruti at Rs.797/ share (a 5% premium to the floor price of Rs.760). The shares were sold to 32 local institutions. The sale price represents an 18% premium to the previous sale price of Rs.678, which was effected in Jan'06.
· Over the month, the stock delivered a positive return of 2% vs. 4% for the broad market. While sales growth and product momentum remain healthy so far, investor sentiment remains cautious due to rising competition and the potential impact of rising interest rates on growth.



Banks
Indian Financial Services: On Bank Street -Vol 85

· Inflation at 5.06 % -in line with expectations - 21 bps lower than last week's release. Inflation likely to moderate below 5% by end June given favorable base effect.
· Stock Movement - Neutral: SOE and private banks up 2.2% and 2.5% respectively - in line with the market. Star stock performers - HDFC up 6.6%, HDFC Bank up 4.6% and SBI up 5.3%. DEVB and CBOP see profit booking after solid runup.
· HDFC to raise Rs31.1 bn via preference issue
· India Infoline to raise Rs. 4.84 bn; Ropes in key CLSA personnel
· PNB chairman retires
· Indian Bank to offload Rs.15 bn bad loan portfolio
· Indiabulls to foray into Life Insurance business


Automobile Manufacture
India Two Wheeler: May'07 unit sales decline further - ALERT

· The slowdown in the two-wheeler sector continued over May with sales declining (10% yoy) for the top three manufacturers - Hero Honda (-6% yoy), TVS Motor (-13% yoy), and Bajaj Auto (-15% yoy).
· The 6% decline in Hero Honda's sales comes off a high base. Sales had crossed the 300,000 mark in May last year as the company had pumped inventory in the system.
· Bajaj Auto's bike sales declined 15% yoy, with sales of entry level Platina taking a hit. We believe the success of Hero Honda's CD Deluxe as well as Bajaj cleaning up channel inventories in preparation for the launch of a new platform in August led to the fall. High-margin three-wheeler sales were flat yoy. Strong export growth for Bajaj (+53%) partially mitigated the effect of the sharp fall in domestic sales (-24% yoy).
· TVS Motors continued to struggle with bike sales (-37% yoy). Hero Honda continued to gain market share at the expense of the other manufacturers.
· Over the month, Hero Honda launched an upgraded variant of the Splendor-- Splendor NXG (100cc) priced at Rs.40,990 (ex-showroom Delhi). This follows the prices of the Splendor Plus being reduced by Rs.1,200 last month.
· We expect competitive intensity in the two-wheeler sector to remain sedate over the next two months until Bajaj launches its new platform in August.
· Over the month, Bajaj Auto announced the re-structuring of the company by creating two new entities for its automotive and financial services business; at the same time the holding company has retained 30% stake in these two companies, thus ensuring control.
· Over the month, the two-wheeler sector performance was a mixed bag. Hero Honda was up 5%, TVS was up 7% while Bajaj Auto was down 9% for the month vs the broad market return of +5%. While Bajaj was beaten down due to concerns on the demerger, Hero Honda rose on the company gaining market share and TVS rose on beaten down valuations. We remain underweight on the sector.

Omax Auto, IVRCL, VSNL, HPCL, India Strategy,Crompton Greaves

Man Financial on IVRCL

IVRCL's Q4FY07 numbers are much above our expectations with sales growth at 67.5% against expectations of 40.2% growth and margins increased to 10.6% as against expectations of 9.5%. With a healthy outlook for the core business and value creation from its real estate ventures, four special purpose vehicles (SPVs), and a strong performing subsidiary, Hindustan Dorr Oliver (HDO), we increase our target price to Rs 448 and maintain BUY.

Man Financial - Crompton Greaves

We expect consolidated eps of Rs 10.2 and Rs 12.5 (excluding upsides from Ganz and newly acquired Microsol) in FY08E and FY09E respectively. CG trades at a PER of of 23x FY08E and EV/EBITDA of 13x FY08E. We currently have a Outperformer rating on the stock. The rating is under review.


Man Financial on HPCL

* HPCL's quarterly results were above estimates as there was marketing over-recovery for Q4FY07 due to higher-than-expected subsidy-sharing by upstream companies.
* Although the refining margins recovered in this quarter, they were slightly disappointing as they lagged industry trends.
* We maintain our Neutral rating with a price target of Rs 315

JP Morgan on VSNL

Valuations and stock view. We maintain neutral rating on VSNL stock with Jun-08 SOP price target of Rs500 (Rs475 previously). Our SOP includes Rs235 from the India business, which we have valued using DCF (implied FY08E EV/EBITDA is 6.0x). Stock is likely to remain in a trading range and we would consider buying around Rs400/share level.

Risks to our view. Downside risks are competition, adverse regulatory changes (regulation of access to cable landing stations) and delay in cash breakeven of TGN. Upside may come from unlocking of surplus land value. Furthermore, listing of RCOM's cable assets (FLAG) could also boost investor outlook on the value of TGN submarine cable system.

JP Morgan on India Strategy

Earnings expectations lowered. Over May, consensus earnings estimates for FY08E & FY09E were revised down by 1.2% and 1.6% respectively. The trend in terms of breadth also remained weak - 29 out of 67 stocks in the MSCI India saw upward revisions, while earnings for 36 stocks were revised down for FY08.
· Consumer, healthcare and financials lead downward revisions. Earnings estimates for the metals, industrials and energy sectors were revised up, while for consumers, healthcare and financial sectors were reduced.
· Earnings expectations and index performance. An analysis of changes in historic and forward EPS expectations vs stock prices indicates significantly higher correlation in the case of materials, financials and consumer discretionary and relatively weaker relationship in the case of IT services, healthcare, telecoms and industrials.
· Key consensus earnings and recommendation changes. Among the stocks mentioned, we have Overweight rating on Jet Airways and Underweight on Bajaj Hindusthan and Arvind Mills

SSKI on Omax Auto

Omax's Q4FY07 revenue and profits have been in line with our expectations, though operating margins were below our expectations. Q4FY07 net sales growth was strong at 27.6%yoy (Rs1.81bn), though operating margins were lower by 130bps qoq (higher 90bps yoy) at 9.1%. Operating profit grew by 42.6%yoy to Rs163m and net profit grew by 10.3%yoy to Rs54.6m, impacted by higher depreciation and interest charges.
The company has trimmed its export target for FY08 to ~Rs400-Rs500m against its earlier target of Rs500-Rs600m. The company's margins which had improved in the first nine months of FY07 due to the company's cost saving initiatives have surprised us negatively in Q4FY07 with an increase in overheads and conversion costs. Further, Omax Auto is not likely to derive any significant cost benefit in its steel procurement from Omax steel as the company's steel production and rolling mill project has not scaled up as planned and the company is now also considering an option of divesting part of its stake in Omax Steel (76% at present). In view of these factors we have lowered our revenue estimates by 4.7% in FY08 and 3.1% in FY09 and also lowered our margin estimates by ~70bps for FY08 and ~30bps for FY09. This has led to a sharp downgrade of 15.8% in earnings for FY08 and 5.3% for FY09. Notwithstanding the sharp earnings downgrade in FY08, valuations at PER of 6.0x and EV/EBIDTA of 4.2x FY09 estimates appear attractive. Maintain Outperformer with revised price target of Rs122 based on PER of 8.0x FY09.

M&M, L&T, Dishman Pharma, VSNL,

SSKI on Mahindra & Mahindra

M&M's standalone Q4FY07 revenues and profits were above our expectations; though margins were lower by ~50bps vis-à-vis our expectations. Net sales grew by 20%yoy to Rs27.47bn on the back of 17.7% volume growth at 75,155 units. The company's EBIDTA margins were lower at 11.4%, lower 50bps yoy and 60bps qoq due to lower margins in the automotive segment. The company's Q4FY07 operating profit grew by 15.2%yoy to Rs3.13bn and net profit before extraordinary items was higher by 47%yoy at Rs2.28bn. M&M's FY07 consolidated revenues grew by 43%yoy to Rs176.2bn led by strong performance of the standalone entity and the company's key subsidiaries. Consolidated EBIDTA margin for the company increased to 15.3% in FY07 against 14.1% in FY06 and consolidated PAT before extraordinary items grew by 54% to Rs16.0bn in FY07.

We expect M&M's core business to remain under pressure due to moderation in growth rates, both in the UV and Tractors segment, pressure on margins and a sharp surge in depreciation and interest charges due to the company's enhanced capex and borrowing plans. The company's consolidated performance for FY07 has exceeded our expectations and its subsidiaries are likely to continue their growth momentum. We have introduced Punjab Tractors into our consolidated estimates, resultant of which, we have recognized amortization of our estimate of goodwill arising due to the acquisition and also adjusted for minority interest in PTL. This, along with higher depreciation and interest charges has led to a marginal earnings downgraded of 1% for FY08 and 2.2% for FY09 - the positive impact of increased revenues has been negated by higher depreciation and interest charges and good will amortization. We have an SOTP based price target of Rs845/share for M&M with the core business valued at Rs402/share, which implies that ~52% of the SOTP value is derived from the company's subsidiaries. Segments other than Automotive and Farm Equipment contribute to ~40% of consolidated revenues and ~51% of M&M's consolidated profits. Thus, we believe M&M is currently more a play on its value accretive subsidiaries than on the core business. Maintain Outperformer.

SSKI on L&T

L&T's 4QFY07 earnings were sharply ahead of our estimates at Rs7bn driven by sharply higher than estimated revenue growth and operating margins of the E&C segment. The overall operating margins improved by 50bps to 13% during the quarter led by 300bps margin improvement in E&C segment as few large projects crossed the profit booking threshold limit. Moreover, order booking during the quarter increased by 19% yoy to Rs61.2bn thereby resulting in strong order backlog growth of 48% yoy to Rs353bn. However, the lower than estimated performance of its subsidiaries led to consolidated earnings being in line with our estimates at Rs18.1bn for FY07. We have upgraded our standalone FY08 and FY09 estimates by 19.3% and 26% respectively (higher operating margins and higher revenue growth), while consolidated earnings are upgraded by 7.5% and 12.1% for FY08 and FY09 respectively (led by sharp upgrade in standalone earnings estimates). L&T is currently trading at 17.4x FY09E earnings on consolidated earnings. Considering its strong order book of Rs353bn and ensuing visibility of revenues and hence earnings growth of 27% CAGR over the next two years, we believe the valuations are attractive. Also, L&T continues to be amongst the largest and most preferred "infrastructure plays" in the country, thereby L&T will continue to trade at a significant premium to the market multiples. As a result, we maintain our Outperformer rating on the stock.

SSKI on Dishman Pharma

Dishman's Q4FY07 results have been impacted by one-offs and regroupings related to consolidation of Carbogen-Amcis and material write-off. Net profits at Rs329m are significantly ahead of estimates due to higher other operating income, lower tax and depreciation provisions even though the operating profits are considerably lower at Rs215m. Operating profits have been impacted have by rupee appreciation (Dishman exports ~75% of sales) and Rs900m of one-off provisions. Overall the broad story remains firmly on track. Carbogen-Amcis is doing better than expected; Solvay is on track while there is very strong momentum in non-Solvay CRAMS business executed out of India. We expect this non-Solvay business to drive growth for Dishman with increasing traction from multiple big pharma clients. Dishman has started to leverage synergies with Carbogen-Amcis with 3 of existing Amcis clients seeking to transfer manufacturing to Indian facilities. We remain positive on Dishman's business model and believe it is one of the best companies on play the CRAMS opportunity in India. Maintain earning estimates and reiterate Outperformer with price target of Rs.312 (20xFY08E and 15.6xFY09E). Commercialization of any of the 3 Phase III products in Carbogen-Amcis will be upsides to estimates. Dishman remains one of our top picks in the space.

JP Morgan on Mahindra & Mahindra


· M&M's 4Q adjusted earnings at Rs.2.4B (up 36% yoy) were in line with our expectations. While EBITDA was lower than expected (the margin was 60bp below our estimate), higher other income and lower rate of taxation offset the impact.
· While unit sales grew 19%, and EBITDA increased just 14%. EBITDA margin at 11.3% (down 60bp yoy) declined due to a 200bp yoy increase in other expenditure. Though RM/sales ratio was lower by 120bp yoy, it could only partially offset the effect of higher other expenditure.
· Higher other income (due to increased dividends from subsidiaries) and lower tax rate (down 540bp yoy) mitigated the drop in operating performance.
· In FY08, M&M expects unit sales grow to moderate to c.8-10% for both UV's and tractors (due to higher interest rates and base effect).
· M&M firmed up plans for its newly announced plants for commercial vehicles at Pune and passenger cars at Chennai. Both plants are expected to commence production in FY10.
· The company is working on two new platforms in UVs: The Ingenio, a Multi Purpose Vehicle (MPV), which is expected to launched over the next 12 months, and a new UV, which will be launched from the Chennai facility.
· For commercial vehicles, M&M will launch a mass market vehicle (both in the goods and passenger segment) besides launching its range of heavy CVs in collaboration with its foreign partner, Navistar.
· M&M has planned a capex of Rs20B p.a. for the above initiatives over the next three years. To fund these activities, M&M will use its internal accruals as well as raise debt; however it would restrict its leverage (Debt: Equity ratio would not exceed 1x).
· Over FY08, M&M plans to list its subsidiary, Mahindra Holidays. It is also in the process of merging the recently acquired forging companies in its group company, Mahindra Forging.


JP Morgan on Videsh Sanchar Nigam Limited,

· Mixed operational performance. VSNL's 4QFY07 (unconsolidated) revenues were up 1.7% Q/Q (+13.0% Y/Y) but EBITDA was down 5.6% Q/Q (+3.0%) because of higher SG&A costs. On full year (FY07) basis, EBITDA increased by only 6.3% Y/Y to Rs9.3 bn but we expect growth to be higher in FY08 based on continued strong volume growth (total LD minutes were up 53% Y/Y, IPLC bandwidth +103% Y/Y in FY07) and cost optimization (impact of recent headcount reduction).
· Consolidated results highlight the challenges. FY07 consolidated EBITDA of Rs10.54 bn reflects start up losses in South Africa and the challenges in revenue generation from loss making Tyco network (TGN). We estimate EBITDA loss from TGN was US$35 mn in FY07 compared with our estimated US$50-55 mn in FY06. EBITDA growth in Teleglobe is a consolation but has been mainly driven by cost reductions.
· Valuations and stock view. We maintain neutral rating on VSNL stock with Jun-08 SOP price target of Rs500 (Rs475 previously). Our SOP includes Rs235 from the India business, which we have valued using DCF (implied FY08E EV/EBITDA is 6.0x). Stock is likely to remain in a trading range and we would consider buying around Rs400/share level.
· Risks to our view. Downside risks are competition, adverse regulatory changes (regulation of access to cable landing stations) and delay in cash breakeven of TGN. Upside may come from unlocking of surplus land value. Furthermore, listing of RCOM's cable assets (FLAG) could also boost investor outlook on the value of TGN submarine cable system.

Religare on Riddhi Siddhi Gluco Oils

Strategic location of Gokak and Pondicherry plants provides substantial operational benefits; upcoming Uttaranchal unit also offers a strategic cost-advantage and opens up access to north and eastern markets Tie-up with French starch giant, Roquette Freres, generates strong value addition for its product portfolio Net sales CAGR of 38.9% expected over FY06-FY09 to Rs 6.2bn We initiate coverage with Buy with an end-FY08 target price of Rs 365, 47% potential upside from the current levels

Merrill Lynch on Larsen and Tourbo

Margins Surprise in FY07; Raising Earnings & PO to Rs2150
We hike our earnings estimates by 15% for FY08 and 10% for FY09 & PO to Rs2150 (1925) led by better-than-expected FY07 parent EBITDA margins (+300bps) and subsidiary performance. Further L&T had 48%YoY growth in order backlog, rebound in parent sales (+35%YoY in 4Q FY07), 300bps EBITDA margin expansion in E&C to 11% and consolidated rec. PAT growth of 72%YoY. Buy

JP Morgan - India Strategy

JP Morgan in their India Strategy report,

Earnings expectations lowered. Over May, consensus earnings estimates for FY08E & FY09E were revised down by 1.2% and 1.6% respectively. The trend in terms of breadth also remained weak - 29 out of 67 stocks in the MSCI India saw upward revisions, while earnings for 36 stocks were revised down for FY08.


· Consumer, healthcare and financials lead downward revisions. Earnings estimates for the metals, industrials and energy sectors were revised up, while for consumers, healthcare and financial sectors were reduced.

· Earnings expectations and index performance. An analysis of changes in historic and forward EPS expectations vs stock prices indicates significantly higher correlation in the case of materials, financials and consumer discretionary and relatively weaker relationship in the case of IT services, healthcare, telecoms and industrials.

· Key consensus earnings and recommendation changes. Among the stocks mentioned, we have Overweight rating on Jet Airways and Underweight on Bajaj Hindusthan and Arvind Mills.

JP Morgan - Torrent Pharma, Centurion Bank of Punjab

Torrent Pharmaceuticals Ltd, Overweight

Torrent has delivered 63% profit growth in FY07 and will double profits over next two years on the back of strong domestic and Brazilian branded business. We reiterate that this leverage will continue to drive growth even beyond FY09, as besides these markets, Torrent will drive growth even from other markets.

We increase our FY08 and FY09 estimates 8% and 5% respectively and set a new Mar-08 target price of Rs330, based on 15x FY09E EPS. The key risk to our call is if Heumann or domestic operations perform worse than our expectations.

Centurion Bank of Punjab, Overweight

Provisions more than doubled sequentially to Rs 563 mn .About Rs 132 mn was due to one time catch up impact of RBI's requirement for additional standard provisioning on certain categories of loans which pulled down pre-tax profit growth to 74% yoy. High effective tax rate of 40% resulted in 8% yoy growth in net profit.

Near term catalyst for the stock is lower foreign holding after RBI approves the LKB merger.

We are reviewing our numbers.


Consumer
India Consumer: Off the Shelf
Key highlights of our fourth edition of the consumer fortnightly:

Domestic : 1) HLL extends its premium soap brand 'Dove' into hair care segment with the launch of shampoos, conditioners and treatments under this brand to counter rising competition from L'Oreal in premium segment, 2) Godrej Consumer is planning to enter the shampoo segment with the launch of a mass market brand in near future. This is likely to intensify competition in this space which is currently dominated by HLL and Procter & Gamble, and 3) Diageo-Radico JV launches Masterstroke whisky targeting mid-premium segment in Maharashtra.

Key commodity trends: Palm oil prices continued their uptrend rising almost 5% over the fortnight. Expected tightness in soyabean (closest substitute) supply and increased demand for bio-diesel is leading to new highs for palm oil (now at over M$2500/tonne). On the other hand prices for wheat softened by 2% over the past fortnight on the back of steady crop arrivals.

International: 1) Luxury brand Christian Dior Couture is planning to set up its subsidiary in India and expand its operations, reflecting confidence of foreign luxury brands in India's fast growing luxury retailing market (35-40% growth p.a.), 2) UK based Cobra beer has announced plans to set up two Greenfield breweries in India.

JP Morgan - Sun Pharma

JP Morgan - Sun Pharma

JP Morgan - Dr Reddy's Labs

JP Morgan - Dr Reddy's Labs

or

JP Morgan - Dr Reddy's Labs

JP Morgan - Matrix Laboratories

JP Morgan - Matrix Laboratoriesor

JP Morgan - Matrix Laboratories

JP Morgan - State Bank of India

JP Morgan - State Bank of IndiaJP Morgan - State Bank of India

JP Morgan - Suzlon Energy

JP Morgan - Suzlon Energy

or
JP Morgan - Suzlon Energy

JP Morgan - India Strategy

JP Morgan - India Strategy

HSBC - Jyothi Structures, Merrill Lynch - Ranbaxy Labs, JP Morgan - Moser Baer

HSBC - Jyothi StructuresMerrill Lynch - Ranbaxy Labs

JP Morgan - Moser Baer

JP Morgan - Mindtree, Mphasis BFL, Canara Bank, DCB, Hindalco, I-Flex, Indian Financial Services

Mindtree

Mphasis BFL

Canara Bank

DCB

Hindalco

I-Flex

Indian Financial Services

JP Morgan - Tata Motors, Suzlon Energy, United Spirits, Automobile Manufacture, Wockhardt

JP Morgan - Tata MotorsJP Morgan - Suzlon Energy

JP Morgan- United SpiritsJP Morgan - Automobile Manufacture

JP Morgan - Wockhardt

JP Morgan - HDFC, Jet Airways, Colgate, Mahindra & Mahindra, Maruti Udyog, Reliance Communications

JP Morgan - HDFCJP Morgan - Jet Airways

JP Morgan - Colgate PalmoliveJP Morgan - Mahindra & Mahindra

JP Morgan - Maruti UdyogJP Morgan - Reliance Communications

HSBC, JP Morgan - Reliance Communications

HSBC, JP Morgan - Reliance Communications