India Telecom Subscriber Additions

Event
The Cellular Operators Association of India (COAI) has released June 2007 GSM subscriber numbers, except for Reliance Communications. Excluding RCOM, GSM operators in India added a record 5.39m subscribers in June compared to 5.04m subscribers in May, 4.13m in April, 5.9m in March, 4.64m in February and 4.76m in January 2007 (all numbers are excluding RCOM GSM for comparison).

The total GSM subscriber base in India now stands at 135.5m (4.1% MoM growth). June 2007 was one of the strongest months for GSM operators, with second highest monthly net additions ever recorded. The CDMA operators' association (AUSPI) has not yet released the CDMA operators’ (RCOM and Tata Tele) numbers for June. Assuming same net adds run rate as last month for CDMA operators, we should see total monthly net adds of 7.2m, a record in Indian wireless history, in line with our theory of accelerating subs addition.

Impact

Bharti Airtel continued its impressive run with record net adds of 1.96m subs in June 2007, compared to 1.85m in the previous month. Bharti’s total subscriber base now stands at 42.7m subscribers (up 4.8% MoM and 85.1% YoY). We have modelled in 1.92m subscribers per month for the remaining nine months of FY08E in our earnings model. A stronger performance by Bharti would provide further upside to our estimates.

Idea Cellular saw a good month, with net adds of 0.86m in June 2007. Improved performance in Delhi, Rajasthan and UP (West) circles led to strong overall subscriber growth for Idea. Idea’s subscriber base now stands at 16.1m (up 5.6% MoM and 88.9% YoY).

Vodafone Essar (erstwhile Hutchison Essar) (Not listed) also reported record numbers, with monthly net additions of 1.54m in June 2007. Vodafone’s subscriber base currently stands at 30.8m (up 5.3% MoM and 75.3% YoY).

BSNL (Not listed) again saw a poor month with monthly net adds of 0.42m, taking its subscriber base to 28.4m (up 1.5% MoM and 55.4% YoY). Severe capacity constraints continued to choke the growth of BSNL and we think this will continue until its new capacity comes onstream.

Aircel (Not listed) witnessed a poor month with net adds of 0.37m. Low growth in Assam and North East led to slow overall growth for the month.

Category B circles witnessed a strong month with subscriber base growing at 5.13% MoM. Category C and Category A circles also witnessed strong growth with subs growing at 4.27% MoM and 4.08% MoM, respectively. Metro circles witnessed a steady month with growth of 3.14% MoM.

Outlook
Macquarie expects strong subscriber growth to continue in coming months. RCOM remains our top pick in the Asia Pacific telecom universe, and we also reiterate our Outperform rating on Bharti and Idea.

Macquarie - Hero Honda

Macquarie Research is bearish on Hero Honda and has recommended an underperformer rating on the stock with 12 months target price of Rs 608.

Macquarie report on Hero Honda:

Initiate coverage with an Underperform

We initiate coverage on Hero Honda, India’s largest two-wheeler manufacturer, with an Underperform recommendation and a target price of Rs 608. Our target price reflects potential downside of 13% from the current market price.

Structural decline in product mix

The proportion of high-margin products in Hero Honda’s portfolio – notably, its cash cow, the Splendor – has been declining. Going forward, we believe new low-profit products will cannibalise the existing product range. Competition has been directly targeted at Hero Honda’s most profitable motorcycles in the executive segment, further affecting profitability.

Market share losses – competition to the fore

Recent market share gains notwithstanding, Hero Honda has consistently lost market share over the past three years. With competitive intensity set to increase, we expect the company to lose market share over the medium term. Ironically, Honda’s subsidiary, Honda Motorcycles and Scooters India, could be its biggest competitor in near to medium term.

Operating margins under pressure

Our earnings estimates for FY3/08 and FY3/09 are roughly 10% and 7% below consensus, respectively, which reflects our bearish view on EBITDA margins. We expect operating margins to decline by another 100bp to 10.9% in FY3/08, but to rebound marginally in FY3/09 and FY3/10 as irrational pricing subsides. Apart from increasing competitive pressures, we expect rising royalty costs and marketing expenses to impact profitability.

Valuations – still too high

Despite the recent underperformance, we believe the stock price does not completely factor in the lower growth prospects for Hero Honda. The stock is trading at a low PER compared with its recent trading history. However, its lower growth prospects (FY3/07–10E CAGR of 7.6% vs FY3/01–07 CAGR of 25%) warrants the lower multiple, in our opinion. We value the stock at Rs 608 on a two-stage DCF methodology. At our multiple, the stock would trade at 12x FY3/09E earnings, which we believe would reflect the weaker growth prospects.

Key risks and catalysts

Apart from the macroeconomic factors, key upside risks for Hero Honda include exceptional success of a new model, curtailment in Honda Motors’ product plans and an increase in the value of investments. Key catalysts include a further decline in market share, an increase in interest rates and a further decline in operating margins.

Macquarie - Bajaj Auto

Macquarie Research report on Bajaj Auto:

Initiate with an Outperform; value in the parts

We initiate coverage on Bajaj Auto with a non-consensus Outperform rating and a target price of Rs 2,453. While the core two-wheeler business remains weak, the non-core business areas – investment and insurance – provide a strong base. We value the core business on a DCF basis at Rs 1,216 per share. Together with the insurance business (Rs 546 per share) and fair value of investments (Rs 868 per share) at a target price of Rs 2,453, the stock provides share price upside of 17%.

Core business remains weak…

While Bajaj is better-placed than its peers, the core domestic two-wheeler business is likely to face strong pressure in the short-to-medium term. Increasingly intense and even irrational pricing competition coupled with a strong commodity cycle will sustain pressure on operating profitability. While growth in the three-wheeler business could stabilise, we believe exports could be a major sales driver in the future. We estimate that the core business earnings will grow at a CAGR of 13% between FY07–10.

…but is available cheaply

Net the value of insurance, investments and a holding company discount, the imputed value of the core business at current market prices is Rs 869 per share. This would imply a FY09E core earnings multiple of less than 8.3x. This is well below Bajaj’s historical trading band and is based on our earnings estimates, which are 10% below consensus. Our DCF-based target price of Rs 1,216 for the core business would imply a valuation of 12x FY09E core earnings – well below Bajaj’s recent trading band.

Insurance provides strong value

Our value for the insurance business of Rs 546 per share is significantly ahead of the Street; we believe the profitability of the general insurance business is being undermined by the market. On the appraisal valuation method, Bajaj’s life insurance business is valued at an NBAP of 17x FY08E – well below the valuations we assign to its peers like ICICI Prudential (ICICI Pru: 29x FY08E). The stake sale by ICICI Pru has provided a strong valuation benchmark for Bajaj’s insurance business.

Key risks and potential catalysts

Apart from the macroeconomic factor, key risks for Bajaj Auto include strongerthan- expected margin pressure in the automobile segment, a faster-thanexpected decline in the three-wheeler market and a decline in the value of investments. Key catalysts include the listing/stake sale of ICICI Pru, which has provided a market valuation to the insurance business; success of the new motorcycle to be launched in 2H FY08 and a gain in two-wheeler market share.

Macquarie - Bajaj Auto

Macquarie Research report on Bajaj Auto:

Initiate with an Outperform; value in the parts

We initiate coverage on Bajaj Auto with a non-consensus Outperform rating and a target price of Rs 2,453. While the core two-wheeler business remains weak, the non-core business areas – investment and insurance – provide a strong base. We value the core business on a DCF basis at Rs 1,216 per share. Together with the insurance business (Rs 546 per share) and fair value of investments (Rs 868 per share) at a target price of Rs 2,453, the stock provides share price upside of 17%.

Core business remains weak…

While Bajaj is better-placed than its peers, the core domestic two-wheeler business is likely to face strong pressure in the short-to-medium term. Increasingly intense and even irrational pricing competition coupled with a strong commodity cycle will sustain pressure on operating profitability. While growth in the three-wheeler business could stabilise, we believe exports could be a major sales driver in the future. We estimate that the core business earnings will grow at a CAGR of 13% between FY07–10.

…but is available cheaply

Net the value of insurance, investments and a holding company discount, the imputed value of the core business at current market prices is Rs 869 per share. This would imply a FY09E core earnings multiple of less than 8.3x. This is well below Bajaj’s historical trading band and is based on our earnings estimates, which are 10% below consensus. Our DCF-based target price of Rs 1,216 for the core business would imply a valuation of 12x FY09E core earnings – well below Bajaj’s recent trading band.

Insurance provides strong value

Our value for the insurance business of Rs 546 per share is significantly ahead of the Street; we believe the profitability of the general insurance business is being undermined by the market. On the appraisal valuation method, Bajaj’s life insurance business is valued at an NBAP of 17x FY08E – well below the valuations we assign to its peers like ICICI Prudential (ICICI Pru: 29x FY08E). The stake sale by ICICI Pru has provided a strong valuation benchmark for Bajaj’s insurance business.

Key risks and potential catalysts

Apart from the macroeconomic factor, key risks for Bajaj Auto include strongerthan- expected margin pressure in the automobile segment, a faster-thanexpected decline in the three-wheeler market and a decline in the value of investments. Key catalysts include the listing/stake sale of ICICI Pru, which has provided a market valuation to the insurance business; success of the new motorcycle to be launched in 2H FY08 and a gain in two-wheeler market share.

Bull’s Eye

Reliance Industries
Research: UBS Investment (June 14, ’07)
Rating: Buy
CMP: Rs 1,680 (Face Value Rs 10)

Based on an improved outlook for gas price realisation from KG D6 gas, UBS Investment has raised the FY09 EPS estimate by 3.6% from Rs 96.4 to Rs 99.8, while FY08 estimate remains unchanged. Media reports indicate that Reliance Industries (RIL) has received bids in the region of $4.3-4.7/mmbtu (excluding transportation charges, marketing margins and sales tax) for 25 mmscmd of gas. The contracts are likely to be for three years. UBS is upgrading its estimate for average KG D6 gas realisation from $3.55/mmbtu to $4.2/mmbtu. Recent disclosures by RIL’s partner, Hardy Oil (HOGP), indicate additional upside in new blocks D3, D9 and GS-01. HOGP has estimated gross prospective resources of 33.6 tcf of gas in D9 and 4.2 tcf of gas in D3. RIL has 90% interest in these blocks.

Dabur
Research: Macquarie (June 13, ’07)
Rating: Outperform
CMP: Rs 101 (Face Value Rs 1)

Dabur’s competitive advantage lies in its niche position as the premium player in ‘herbal’ personal care products. The company owns some of India’s most trusted brands in hair care, oral care and health supplements on an Ayurvedic platform. These factors support Dabur’s margins due to sustainable pricing power. The trend of margin expansion is unlikely to reverse. The strength of Dabur’s core business and brands, combined with the positive impact of its recent forays on the bottomline, should protect against any margin erosion due to investment in new businesses such as retail. Macquarie expects Dabur to remain among the fastest-growing FMCG players in India and report a three-year earnings CAGR of 18%. The company’s core business strength has enabled it to consistently deliver 20-50% earnings growth over the past five years. Importantly, earnings have outpaced revenues in each of these years. Dabur trades at a P/E ratio of 17x FY08E earnings, which is at a ~20% discount to its domestic consumer sector peers.

Gujarat State Petronet
Research: Citigroup (June 13, ’07)
Rating: Buy
CMP: Rs 55 (Face Value Rs 10)

Citigroup has raised the target price of Gujarat State Petronet as higher volumes of gas are likely to flow from Reliance Industries through GSPL’s network, as indicated by the management of both companies. The gas volumes transported through GSPL’s pipeline network are likely to increase ~2.5-fold to 38 mmscmd by FY12E. Recent speculation on the adverse impact of regulatory intervention in setting pipeline tariffs is premature and overdone. Based on the analysis, introducing regulated tariffs on the cost of service methodology may result in a net positive impact of 7-11% to Citigroup’s steady state (FY10-12E) earnings estimates. GSPL is Citigroup’s top pick in the domestic gas utilities space. A pure play gas transmission company, GSPL is highly levered to increasing consumption of gas in Gujarat, without being exposed to the vagaries of gas pricing. The stock trades at 8.8x FY09E P/CEPS, marginally higher than other gas utilities, but this is justified by its 30% EPS CAGR over FY07-10E (significantly higher than peers) and highest leverage to KG gas

Jaiprakash Associates
Research: CLSA (June 14, ’07)
Rating: Buy
CMP: Rs 690 (Face Value Rs 10)

Jaiprakash is well-positioned for growth in the construction, cement, hydropower and real estate sectors. Cement capacity is set to triple by FY10 and construction revenue should improve by H2 FY08 as the Taj Expressway project takes off. Jaiprakash will triple its cement capacity to 21.7 million tonnes by FY10CL. Its average cost of capacity expansion is 30-40% below benchmark replacement cost, and it will receive excise duty and sales tax exemptions at some of its new plants. The government’s strategic interest in hydropower will boost the company’s construction order flow (hydro-projects comprise 70% of the order book) and provide opportunities for investment in new projects. The company’s two existing projects earn a 22-24% return on equity. Jaiprakash’s construction business will also see a rebound in construction segment revenue in FY09CL, with a pick-up in progress of the Rs 6,000-crore Taj Expressway project. The addition of 650 acres to its existing land bank of 600 acres in Noida, over the next few months, will deliver visibility on the value-creation potential in the Taj Expressway project.

Indraprastha Gas
Research: Enam Securities (June 11, ’07)
Rating: Buy
CMP: Rs 120 (Face Value Rs 10)

Indraprastha Gas (IGL) is the only distributor of compressed natural gas (CNG) and piped natural gas (PNG) in the national capital territory of Delhi (NCTD). IGL offers a leveraged play on the increasing penetration of natural gas in India. During Q4 FY07, IGL continued to benefit from its aggressive marketing strategy in CNG and PNG. As a result, it experienced a 12% YoY and 2% QoQ growth in CNG, primarily driven by conversion towards CNG by private car owners. PNG sales grew 44% YoY and 14% QoQ in Q4 FY07. Overall, IGL posted a 13% volume growth in Q4 FY07. Enam expects IGL to sustain a long-term volume growth of over 10% given: (1) economic benefits of CNG (2) regulatory directives and (3) a relatively under-penetrated market. Although competition remains inevitable in the near future, Enam expects IGL’s leadership position to be maintained, given its access to gas supplies and its first mover advantage. Given IGL’s strong business franchise, superior profitability and inexpensive valuations, it’s attractively valued at 9.8x FY08E EPS.

Gateway Distriparks
Research: ASK Securities (June 13, ’07)
Rating: Buy
CMP: Rs 178 (Face Value Rs 10)

Gateway Distriparks (GDL) is the largest private sector logistics service provider in the container freight station (CFS/ICD) business with a market share of 18%. With India’s containerised traffic set to double to 10 million TEU over the next five years, GDL is well-positioned to capitalise on the same. Unbridled competition in the traditional CFS business has led to a price war, which is most likely to play out for a few more quarters. Hence, margins may remain range-bound at 50%. Landside infrastructure development, particularly with regard to the upcoming dedicated freight corridor, may not lock step with growth in container traffic and therefore, the shift in time lines will impact the overall throughput. GDL is in the right business at the right time. While opportunities are compelling, the near-term prospect for GDL is lukewarm. Hence, GDL is an investment proposition only for the long term. Based on ASK Securities’ DCF analysis, the fair value is Rs 251. GDL discounts its FY08 and FY09 earnings of Rs 9.8 and Rs 11.6 by 18.2x and 15.5x, respectively.

Max India
Research: Merrill Lynch (June 8, ’07)
Rating: Sell
CMP: Rs 250 (Face Value Rs 2)

Merrill Lynch has downgraded Max India to a ‘sell’ as the company continues to lose market share and its first-year premia growth (though up 72% YoY) was 17% below estimates and 30% below the sector growth of 104%. Healthcare revenues were also 16% below estimates. Merrill Lynch has assigned higher NBAP multiples of 20x FY09E NBAP (v/s 16x earlier) due to its strong growth trajectory and higher margins that Max New York Life is likely to have on higher share of traditional policies and lower costs.

Macquarie - Reliance Industries

Macquarie Research is bullish on Reliance Industries and has recommended an outperformer rating on the stock with 12-month target price of Rs 1815.

Macquarie Research report on Reliance Industries:

Reliance Industries is one of our top regional petrochem picks. RIL is not only one of the world’s largest petrochem plays, but it is also poised to nearly double its cracker capacity based on waste gases, challenging the Middle East majors as the lowest-cost producer. We believe that a proposed doubling in refining capacity at the world’s largest refinery complex and large oil/gas finds could triple profits for this USD 60 billion (market cap) giant over the next five years.

Impact:

Integrated petrochemical players such as RIL are best-positioned.

Scott believes that the risks outweigh the rewards for commodity plastics utilisation rates globally. However, integrated producers in refining and intermediates, such as RIL, are the best-positioned.

Polyesters may rebound from all-time lows.

Moreover, we believe that polyester margins (~two-fifths of petrochemical sales), which have hit all-time lows , could rebound. ICAC has forecast a sharp decline in the useto- inventory ratio and a rise in the price of the competing fibre, cotton, for the next two years.

Paradigm shift in global petrochem leadership.

RIL is already among the largest and most-competitive petrochem producers globally. It focuses on significant capacity expansions to drive volume growth and improve economies of scale. Its proposed 2 mt pa cracker will use waste gases from its refinery, which we think will make it as competitive as the Middle East majors.

Refinery poised to double, among three most complex.

RIL’s existing refinery is the third-largest in the world (market share: 0.8%) and has consistently outperformed the Singapore complex by USD 3–7/bbl (Fig 9). Its new 27mmt pa refinery will be among the three most-complex refineries globally , further improving margins and economies of scale.

Huge upside potential from the upstream.

RIL has drilled 23% of the KGD6 block so far, resulting in 27 discoveries with estimated in-place reserves of 35.4tcf. Moreover, the current estimated production of 2.8 bcf/d from only five wells will contribute 0.4% of global oil equivalent. The remaining 22 wells could be exploited further. In fact, although the D-6 block provides further upside potential, we believe that the Mahanadi D-4 block may present muchgreater potential than the D-6.

Price catalyst:

12-month price target: Rs 1,815.00 based on a Sum of Parts methodology.

Catalyst: New oil and gas finds and improved clarity on organized retail.

Action and recommendation:

RIL is our top Indian oil & gas sector pick. A staggering USD 20 billion capex and reserves potentially as large as ONGC’s could triple earnings over five years. RIL may look rich at PER of 18x, but looks attractive at PEG of 0.8.

Macquarie - Unitech, Citigroup - Cairn, India Market Watch

Macquarie on Unitech say,

Unitech announced a strong set of FY3/07 results, with top-line revenue rising 255% to Rs33.9bn from the FY3/06 level, and net profit up 15x at Rs13.05bn; implying an EPS of Rs16.09 for the full FY3/07.

Impact
We estimate that approximately half of EPS, ie Rs8, is from the sale of commercial assets to UCP, a vehicle listed on AIM, London in December 2006. Excluding this sale to UCP, remaining net profit is in line with or core business full year FY3/07 EPS estimate of Rs7.92.

Our estimate suggests that the company must have delivered ~8m sqf in FY3/07 in line with our expectation of 7.8m sqf. We believe the company is on track to achieve our strong development schedule forecasts (FY3/08 and FY3/09), and thereby reduce execution risk.
Operating margins are very strong at 62.0% against our expectation of 44% but the two numbers are strictly not comparable. The reported numbers include the sale of commercial assets to UCP where company has partly monetised its land at relatively higher margins.

UT is planning to hive-off 25¿30% of its hotel assets comprising 28 hotel sites, and press reports suggest this is likely to be valued at $2bn. Presently we have valued these hotel sites around $450m.

UT stated that it plans to spend $6bn over next four years to develop residential, commercial, retail properties and build hotels.

UT's board of directors has also announced 1:1 bonus shares. This is the second time the company has declared bonus shares in the last 12 months. The board also announced a 25% dividend for FY3/07.

Earnings revision
No change.

Price catalyst
12-month price target: Rs501.00 based on a Sum of Parts methodology.

Catalyst: Surging Residential Demand and Higher Realisations
Action and recommendation
We strongly reiterate our Outperform rating. We believe Unitech is a very good proxy for the Indian property sector as it is the most diversified property company both geographically and in terms of business segments. We also see Unitech getting re-rated with DLF soon looking to hit the capital markets. Our best-case scenario (which includes option value of future projects like the 38,000-acre Kolkata project) suggests a potential price of Rs750-800.


Citigroup in their report on Cairn India

Oil forecasts raised

After our global oil numbers were raised to US$63.5/b, US$60/b and US$55/b for 2007E, 2008E and long-term respectively, we adjusted our estimates for Cairn India. Our core NAV moved up to Rs160 from Rs146, with a target price of Rs185 reflecting a 15% premium to NAV. Cairn is highly leveraged to long-term oil price expectations.

Uncertainty over offtake should pass; Buy

The recent newsflow on new refinery and consequent changes to the ¿approved¿ production plan are overdone in our opinion. While the associated political overtones of recent developments could delay first oil, there is unlikely to be a complete overhaul. The sensitivity of NAV to a 6-month delay is a manageable 4%. The recent correction in the stock therefore, in our view, offers favorable risk-reward in the context of consensus oil moving up.

Core valuation support

At long-term Brent of US$55/bbl, the shares trade at 0.85x NAV. But potential bid interest raises the possibility that a higher oil price is used in the bid valuation. In this context, premium to NAV of 15% therefore imputes a long-term oil assumption of US$60/bbl.
Oil upgrade drivers

We remain of the view that a weak US$, rising costs and limited
visibility on new sources of long-term non-OPEC supply strengthen OPEC's ability to set a floor under prices facilitated by a creeping increase in market share


Citigroup in their report India Market Watch...

Spotlight on External Commercial Borrowings: Latest data on external borrowings (ECBs) indicates that corporates raised a record US$25.3bn during FY07, over 50% higher than the amount raised during FY06, and breaching the annual cap of US$22bn fixed by the Finance Ministry. ECBs during March 2007 totaled as much as US$5bn- the highest-ever borrowing in a single month. Over the past year, ECBs. which include loans, buyers/suppliers credit, securitized instruments and Foreign Currency Convertible Bonds (FCCBs) have been a growing source of funding for corporates and have a minimum average maturity of 3 years (for ECBs below US$20mn) and 5 years (for ECBs over US$20mn).

ECB uptrend has created a liquidity dilemma: Given the backdrop of an unfolding capex cycle and rising investment spend across industries such as infrastructure, telecom, cement and financial services; ECBs have emerged as a significantly cheaper corporate financing strategy especially under the current scenario of tighter domestic interest rates and a steady appreciation in the rupee. While overseas borrowings make commercial sense for most companies in the current backdrop, they have posed as a liquidity concern given that higher foreign inflows have resulted in more dollars coming into the system, thus creating inflationary worries.

New Regulations make ECBs less attractive. In order to manage capital flows, the RBI recently imposed several regulations that would make ECBs less attractive. These include (1) lowering interest rate ceilings on ECBs under the automatic route1 thus making it difficult for companies with lower credit quality to access overseas markets. (2) Banning ECBs for integrated townships for100 acres or more thereby further tightening funding towards real estate. While the new norms will help limit borrowings, given the uptrend in FDI, we are maintaining our full year balance of payments estimates of a reserve accretion to the tune of US$21.5 and our rupee appreciation view.

Macquarie - India Earnings

Macquarie in their India Earnings report,

Event
The 4Q FY3/07 GDP growth of 9.1% has obviously fed into corporate earnings for Indian companies. Our coverage universe continues to post strong profit growth, above expectations.

Impact
Most sectors were very strong. Most sectors showed very strong growth.Profit growth rates varied between 23% and 107%, barring a few outliers. Not surprisingly, sectors with close linkage to the economy – banks, cement, construction, metals and telecoms – turned in exceptional numbers.

We were surprised. Most of the high-growth sectors surprised us. The average extent of earnings surprise was 13%. The largest upsides to our forecasts came from pharmaceuticals, banks and construction. Suzlon, the only company we cover in utilities, also posted results significantly above expectations.

Margins the key driver. The earnings surprise came primarily from margins. Sales growth was almost exactly in line for the high-growth sectors. Margin improvements were the strongest in pharma, cement, metals and telecom.

Top sectors: pharma, telecom, cement. Pharma, telecom and cement were the top sectors in terms of YoY profit growth. While pharma was boosted by one-off income in Dr Reddy’s Labs, telecom continued to ride the strong wave of subscriber additions, which also drives operating leverage. Cement was boosted by a strong pricing environment.

Laggards: oil and gas, textiles, retail. The laggards from 3Q continue to disappoint. All three sectors showed declining profits. Oil and gas suffered from a lack of pricing freedom and from being forced to absorb high global oil prices. Textiles, on the other hand, continue to be affected by soft global prices. Retail was affected by dramatic margin pressures.

Outlook
We think that the India growth story is still very much intact. There may be near-term pressures from rising rates, especially if the Reserve Bank of India pushes through with the next rate hike, as we expect it to do. But we do not think that longer-term growth is at risk, and we maintain our bullish view of the markets. The recent run-up has increased the risk of a correction, but that is likely to be temporary.

Our top picks are Reliance Communications (RCOM IN, Outperform, Rs506, TP: Rs650), HDFC Bank (HDFCB IN, Outperform, Rs1153, TP: Rs1270), Tata Steel (TATA IN, Outperform, Rs635, TP: Rs800), Dr Reddy’s Labs (DRRD IN, Outperform, Rs649, TP: Rs838), Reliance Industries (RIL IN, Outperform, Rs1750, TP: Rs1775) and Tata Consultancy Services (TCS IN, Outperform, Rs1219, TP: Rs1654). Our key Underperform calls are Bank of Baroda (BOB IN, Underperform, Rs271, TP: Rs250) and ONGC (ONGC IN, Underperform, Rs910, TP: Rs695).

Lakshmi Machine Works, Crompton Greaves, Nagarjuna Constructions, Britannia, Maruti Udyog, Mahindra & Mahindra, Welspun

ENAM on Lakshmi Machine Works,

Revenue growth expected at 35% in FY08E and 22% in FY09E. A stable pricing environment and volume driven operating leverage is expected to deliver earnings growth of 34% CAGR over the next 2 years.

At CMP (Rs 2,636) the stock trades at P/E of 11x FY08E earnings of Rs 229 and 9x FY09E earnings of 298. We continue to maintain our sector Outperformer rating on the stock.

ENAM on Crompton Greaves

CG has acquired Microsol Holdings, a power automation company for an EV of Euro 10.5mn or 8.7x EV/EBIDTA. The acquisition has further strengthened CG’s power T&D product portfolio, making it a total T&D solutions provider, at par with global majors such as ABB, Siemens, etc. CG believes that it can scale up this acquisition by 5-7 fold to Euro 50-70mn over the next 2 years. Globally power automation is ~20% OPM business and going by CG past track record, we estimate that the acquisition will pay off in < 2 years.

Strong growth in global T&D market and surging corporate capex has enhanced visibility across CG’s segments. Hence, we believe that CG will surpass its guidance of 30% revenue growth and maintain its trend of margin expansion. At CMP (Rs 246), the stock trades at 9x FY09E EV/EBIDTA. Maintain sector Outperformer.

ENAM on Nagarjuna Constructions

NCC has guided for Rs 40bn in revenues in FY08 with an OPM of 9.5%. Further, the management has guided for a 30% tax rate in FY08 due to 80 IB benefits in certain projects. This is inline with our estimates and we maintain our FY08E earnings. We believe that the proposed QIP will accelerate earnings growth for NCC and will be a key trigger for re-rating. At CMP (Rs 161), adjusted for Rs 69/share of BOT + real estate value, the stock trades at an EV/EBIDTA of 6.7x FY08E and 5.7xFY09E. Maintain sector Neutral rating on the stock.

Citigroup on Britannia

Britannia had emerged as the third most attractive candidate for a leveraged buyout (LBO) across our regional consumer universe in Feb-07. While the stock is up 50% since then and no longer attractive in our LBO screen, it is still a good fit for companies like HLL and ITC, which are trying to enhance their presence in the foods segment.

Despite factoring in lower raw material costs we are cutting our FY08E-FY09E EPS estimates by 9.2%-23.5%, mainly reflecting 1) lower than expected FY07 and 2) higher ad expenses going forward. However we increase our price target to Rs1, 825 as we roll forward our target 20x P/E 1-year forward to mid-FY09E.

Citigroup on Maruti Udyog

Domestic sales rose modestly c.10% YoY due to slowdown in mid-size segment. High base effect has also led to a moderation in growth. Maruti is offering attractive finance schemes at around 8% in select cities aided by promotions to maintain steady growth.

Key risk factors are rising rates, changing model mix and higher promotional spends/discounts. Target of 945

Citigroup on Mahindra & Mahindra

Bouyed by strong UV sales (+23% YoY) and modest tractor sales (+2% YoY). Strong Scorpio sales (+28% YoY) led to a strong growth in UV sales. UV sales without Scorpio grew by +21% YoY. 3 wheeler sales also grew by a robust +22% YoY after a modest decline in April 07.

Key downside risks are: reduced market value of principal subsidiaries (off which our sum-of-the-parts target price is pegged); rising interest rates – which could curb growth; rise in input costs. Target of 1032 (37% upside)

Macquarie on Welspun

Appreciation of the Indian Rupee (versus US dollar) is a near term concern but should not dampen Welspun’s intention to grow through multiple routes. Its organic growth strategy aims to tap the 5% interest subsidy provided through the technology upgradation fund to fund massive capacity expansion.

The Christy acquisition is in line with the inorganic strategy of driving margins through increased contributions from designer brands. Welspun is currently trading at extremely compelling valuations, considering its multiple growth drivers (PEG is <0.4). Our revised price target of Rs95 provides 34% upside

Macquarie - SAIL, Hindustan Zinc,JSW Steel, Tata Steel, Sterlite Industries

Macquarie on SAIL

Price catalyst
12-month price target: Rs146.00 based on a PER methodology.
Catalyst: Stable steel pricing environment.

Downgrade to Neutral: We value SAIL at a target PER of 8x on FY3/08E, which is in line with peers. Although the business outlook remains positive, SAIL’s stock price is already factoring in the best-case scenario. The stock has seen a PER re-rating in line with the steel sector as a whole. With very low possibility of the company being acquired, we do not believe that any further re-rating is on the cards.

Switch to Tata Steel: With the re-rating over, SAIL becomes a play on steel prices only. We believe that Tata Steel (TATA IN, Rs629, Outperform, TP: Rs800) provides a much better leverage to play the steel cycle; it is trading at 20% discount to SAIL on both PER and EV/EBITDA multiples.

Macquarie on Hindustan Zinc

Price catalyst

12-month price target: Rs1,035.00 based on a PER methodology.
Catalyst: Expansion of capacity by 50% and generation of huge cashflows should lead to a re-rating of the stock.

Action and recommendation

Attractive valuations: The stock is trading at a PER of just 5.7x on FY3/08 estimates. It is one of the cheapest zinc stocks globally and is trading at a 17% discount to its NPV valuation. Its peers Zinifex and Kagara Zinc are trading at respective premiums of 114% and 73% to their NPV valuations.

Maintain target PER multiple: We maintain our target PER multiple at 9x, in line with our multiple for other metal stocks.

Macquarie on JSW Steel

Price catalyst
12-month price target: Rs772.00 based on a PER methodology.
Catalyst: Strong earnings growth driven by volume growth and strong steel prices.

Action and recommendation
Maintain Outperform: JSW has a robust earnings outlook driven by strong volume growth, stable steel prices and the company’s move up the value chain. We retain our Outperform rating and target PER multiple of 8x, in line with the other Indian steel companies.

Macquarie on Tata Steel

Price catalyst
12-month price target: Rs800.00 based on a PER methodology.
Catalyst: Sustained high steel prices and benefits from the Corus acquisition.

Action and recommendation
Maintain Outperform: We value Tata Steel at 8x FY3/08E PER, in line with our target multiple for other Indian steel stocks, in spite of its better growth profile. Tata Steel is one of the cheapest steel stocks globally and is also trading well within its historical range.

Increasing target price: We have raised our target price for Tata Steel to Rs800 (from Rs556 previously), suggesting upside of 28%.

Risk factors: The main risk factor other than steel prices is the pension liability of Corus. Any change in the discount rate can appreciably affect the valuation of the company.

Macqaurie on Sterlite Industries

Price catalyst
12-month price target: Rs829.00 based on a Sum of Parts methodology.
Catalyst: Acquisition of 26% government stake in Hindustan Zinc and the
ramp-up of expanded capacity in aluminium and copper by FY3/08.

Action and recommendation

Attractive valuations: Sterlite is trading at a PER of 7.1x and an EV/EBITDA of 3.4x on our base-case scenario of 31% dilution and acquisition of additional 26% stake in HZ. In the most pessimistic case of 31%equity dilution and no stake increase in HZ, our sum-of-the-parts valuation is Rs642, an 18% upside.

Maintain Outperform: Sterlite is one of the fastest-growing diversified base metal companies with the lowest cost of production across metals. We retain our Outperform recommendation.

IGL, IOC, Suzlon Energy, Unitech, Mahindra & Mahindra, Nagarjuna Constructions, IVRCL

SSKI on IGL

IGL's Q4FY07 result (EBIDTA growth of 22.5%yoy at Rs 712m) was in line with our estimates of Rs 728m. Robust growth across CNG and PNG (volume growth of 11.6%yoy and 44.4%yoy) led to earnings growth of 34.6%yoy to Rs 401m. Driven by widening cost comparison between CNG and competing fuels, the customer base continues to expand. An established regulated consumption base provides IGL the ideal launch pad to pursue growth in piped gas and private vehicles as also for geographic expansion. We expect a steep jump in CNG volumes as ~1,000 new buses and taxis are deployed in NCR ahead of the Commonwealth Games 2010. The resultant volume growth would drive 14.2% earnings CAGR over FY07-09E as high pricing power (stemming from favorable economics) would enbale IGL to pass on any price hike. Reiterate Outperformer.

SSKI on IOC

Indian Oil Corporation's (IOC) Q4FY07 results – net profit of Rs 29bn –were ahead of our estimates even though numbers are strictly not comparable because of inclusion of IBP numbers. During the quarter, IOC received Rs 30.7bn in the form of oil bonds and Rs 42.4bn as upstream share that more than compensated for the negative impact of total under recoveries of ~46.7bn. We upgrade the stock to Outperformer to factor in an expected improvement in fuel marketing margins driven by lower crude prices. Reiterate outperformer


Macquarie on Unitech

Unitech announced a strong set of FY3/07 results, with top-line revenue rising 255% to Rs33.9bn from the FY3/06 level, and net profit up 15x at Rs13.05bn; implying an EPS of Rs16.09 for the full FY3/07.

We strongly reiterate our Outperform rating. We believe Unitech is a very good proxy for the Indian property sector as it is the most diversified property company both geographically and in terms of business segments.

We also see Unitech getting re-rated with DLF soon looking to hit the capital markets. Our best-case scenario (which includes option value of future projects like the 38,000-acre Kolkata project) suggests a potential price of Rs750–800.

Macquarie on Suzlon Energy

The announcement by Areva, Suzlon’s competitor in its bid for REpower, that it has signed a cooperation agreement with Suzlon agreeing to vote with it means the bidding war is over and that Suzlon has emerged as the winner.

We expect Suzlon to achieve around 76% control of REpower – some of the remaining 39% independent holders of REpower shares may tender their acceptances before the Friday deadline.

We expect this ‘three step’ acquisition to add Rs105 to Suzlon’s valuation and as a result we have upgraded our target for Suzlon to Rs1,125.

Although the transaction brings Rs105 value to Suzlon, we retain our Underperform on the stock due to our continuing concerns for Suzlon’s margins in its core business and risk of investors’ exuberance being overdone. The REpower acquisition accelerates Suzlon’s globalisation which also increases execution risks, at least in the near term.

Macquarie on Nagarjuna Constructions

NJCC reported 4Q FY3/07 numbers which were below both our and consensus estimates. Management has reconfirmed plans to raise US$180m to fund investments in core business, BOT projects and real estate forays.

We have increased FY08 earnings by 5% to account for lower tax rate at 30.5% due to residual tax benefits under Sec 80IB. FY09 estimates are unchanged.

12-month price target: Rs174.00 based on a Sum of Parts methodology

A large impending dilution would impact earnings growth in the core business. Upside from investments in recently awarded BOT and real estate projects is uncertain given the lack of clarity on demand and pricing. We maintain a Neutral rating.

Merrill Lynch on IVRCL

IVRCL, our top pick in the mid-cap E&C space, reported solid 4QFY07 on all fronts. Sales were up Rs10bn +67%YoY; EBITDA margin expanded by 140bpsYoY & PAT of Rs732mn, +67%YoY. PAT was ahead of MLe due to better margins & non-prov of full tax (25% v/s MLe 32%) pending appeal in tribunal. Order backlog remains robust at ~3x FY07 sales. Value creation through the listing of IVR Prime, and 42% earnings CAGR in core business are potential triggers ahead. Buy, PO Rs450.


Our PO of Rs450 is based on an SOTP approach. We have valued IVRCL's core construction business at PER 14x FY09E - a 30% discount to E&C majors despite its faster growth. Risk: Unrelated acquisitions (oil & gas), project execution.


Merrill Lynch on Mahindra & Mahindra

Q4 net profit grew 20.9% to Rs 2.3bn (MLe Rs 2.53bn), as margins declined more sharply than expected, by ~50bps to 11.4%. For the fiscal, standalone net profit grew 35.1%, and margins held up at 12%, mainly due to strong front-ended performance in the preceding quarters.

Our sum of parts value, which is based on FY09E financials, is at Rs791. Key subsidiaries account for 50% of imputed value, and the muted prospects of the tractor and auto business limits core value to the balance Rs 397.

PNB, BPCL, Tata Steel, Sun Pharma, GMR Infrastructure

Merrill Lynch surprisingly keeps a BUY on PNB with a target of 700.They believe PNB is trading at 1.26x FY08E Adj book with forecast ROE of +20%. They believe PNB could trade up to 1.3x to 1.4x FY09E adj book owing to +25% earnings growth, high CASA and being ahead on technology. Rise in bond yield remains key risk to PO.

Macquarie recommends OUTPERFORM on BPCL with a target of 495 (33% upside). Macquarie believes that BPCL is a value play and reaffirm their Outperform rating

Merrill Lynch upgrades Tata Steel from Neutral to Buy with a target of Rs800. They are enthused by with the potential synergies and cost reduction from Corus acquisition. Even though the stock has risen 47% last 3 months, at P/E of 6.6xFY08E,they believe the recent performance reflects only the steel price leverage and the market is not yet appreciating the synergy benefits which should unfold over the next 18 months.

Merrill Lynch recommends BUY on Sun Pharma as they think Taro acquisition is highly Strategic. Sun Pharma's acquition is said to be EPS accretive in 12-18 months

Macquarie initiates coverage on GMR Infrastructure with a OUTPERFORM.GMR was among the first business groups in India to recognise the value proposition of owning monopoly assets in a high growth but supply constrained infrastructure sector. The NPV of its existing asset portfolio is Rs186bn, representing 18% upside from current levels with a target of 560

Suzlon upgraded to NEUTRAL and more..

Merrill Lynch has put a BUY on Suzlon Energy as they feel that risk of bidding war over RE power has been alleviated. They have a target of 1500

Macquarie upgrades ICICI Bank to buy with a 12 month target of 1103

Macquarie also upgrades HDFC to buy with a 12 month target of 2060

Macquarie however put a underperfomer on SBI with a target of 1192

Macquarie says BUY Kotak Mahindra with a 12 month target of 646

Merrill Lynch, Macquarie - Dr Reddy's Labs

Macquarie - Dr Reddy's Labs

Merrill Lynch - Dr Reddy's Labs

Macquarie - SMS from India

Macquarie - SMS from India

Macquarie - Bajaj Auto, Tata Steel

Macquarie - Bajaj Auto, Tata Steel

Macquarie - HDFC

Macquarie - HDFC

Macquarie - SBI, Hero Honda

Macquarie - SBIMacquarie - Hero Honda

Macquarie - Reliance Communications

Macquarie - Reliance Communications

Macquarie - Arvind Mills

Macquarie - Arvind Mills