John Thain kicked out of Merrill Lynch

John Thain, the former CEO of Merrill Lynch will step down from its position just days after the Wall Street firm reported a huge loss in the fourth quarter, hurt by the persistent turmoil in the financial markets. Thain met Bank of America CEO Ken Lewis in New York on Thursday. They mutually agreed that the situation was not working out, and that Thain would resign, said Bob Stickler, a spokesman for Bank of America. Thain was set to oversee Bank of America's investment banking and wealth management operations following its purchase by the banking giant in mid-September. "This is a change of leadership, not a change in the direction of the business," Stickler said. "We are very happy with how business has performed since the acquisition closed on January 1." Merrill lost US$15.3bn during the fourth quarter, forcing Bank of America to ask the US government for billions of dollars in extra support to close its acquisition of the brokerage firm.

Merrill Lynch - $15 billion writedown

Merrill, the nation's largest brokerage firm, is expected to disclose the huge write-down when it reports earnings next week, according to people who have been briefed on its plans. The loss far exceeds the $12 billion hit many Wall Street analysts had forecast.


To shore up its deteriorating finances, Merrill is now in discussions with investors in the United States, Asia and the Middle East, including American private equity firms, to raise about $4 billion in the coming days, these people said.

Merrill Lynch - invest in India and China

Global investment banking firm Merrill Lynch expects portfolio investors will continue to pour money in India and China over the next one year as the two Asian nations are growing at a much faster pace compared to most other countries in the world.

Robust economic growth story has made foreign institutional investors (FIIs) to look at India and China as their favourite investment destinations. India has seen a flow of over $17 billion in the equity market since January.

In future, synergies of the two giants will reward the investors in the two economies which are beginning to combine their expertise for fresh growth potentials, it said.

"Combination of India and China will be powerful moderating influence on global prices of goods and services, stimulating new consumption around the world and demand for Chinese and Indian products," Merrill Lynch's Investment Strategy report said.

"Growth in Asia is likely to be led by India and China because the two economies are getting associated which is driving rapid growth," the study observed.

Indian software developers are also providing the software and design for many of the things being manufactured in China.

Just as China is cornering the market for manufacturers, India is doing the same with services. India plays a crucial role in the global innovation chain with multinationals like Hewlett-Packard and Cisco Systems using teams of software designers and programmers for hardware manufactured in China.

India's services sector account for over half of real GDP growth, enabling it to take a huge leap in catching up with other developing economies.

China and India are forecast to have the strongest growth of around 9 to 11 per cent over the next few years while the regional average is slightly above six per cent.

India's economy is around $1,125 billion as compared to China's $3,250 billion economy.

"In India, FIIs own 21 per cent of the market and 45 per cent of the free float," a report by Merrill Lynch said.

Within Asia, India has the second-strongest growth and the second largest economy after China.

Another reason for the FIIs going bullish on India and China is the fact that elsewhere in the world, there is not much growth expected in near future, with Merrill Lynch's forecast of 1.4 per cent GDP growth for the US next year, 1.0 per cent for Japan and 2.3 per cent for Europe.

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.

TCS Brokerage Views

Merrill Lynch retains TCS as TOP pick in IT

Credit Suisse neutral - 1275 Target

HSBC overweight - Target 1450

Stocks you can pick up this week

Infosys Technologies
Research: Ask
Rating: Buy
CMP: Rs 1,940

Infosys Technologies’ Q1 FY08 results were above the Street’s expectations. But the company has missed its topline guidance for the second time in a row (though it has outdone its EPS guidance in both quarters). Revenues, at Rs 3,773 crore, were flat sequentially (against ASK’s expectation of Rs 3,885 crore) and PAT was also flat at Rs 1,028 crore (against ASK’s expectation of Rs 945 crore). The guidance in rupee terms for FY08E has been revised downwards (-5.1% at the higher end), while the dollar guidance has been increased marginally. Though demand looks robust, the rupee seems to have taken the fizz out of the growth story. ASK has revised its FY08E EPS downwards to Rs 80 (-1.7%) and FY09E EPS to Rs 97.4 (-2.7%). It has also revised the exit P/E multiple from 25x to 24x as earnings growth has slowed considerably. ASK anticipates an EPS CAGR of 20.6% over FY07-09E (vis-à-vis 39.3% over FY05-07E). But ASK remains positive on the company’s fundamentals and believes that most of the bad news has been factored into the current market price. It maintains ‘buy’ recommendation on the stock.


Chennai Petroleum
Research: Citigroup
Rating: Buy
CMP: Rs 300

Citigroup has raised Chennai Petroleum Corporation (CPCL)’s FY08-09 estimates by 19-25% on the back of sustained strength in the refining cycle and reduced subsidy burden. Dividend yield of 5.6% provides downside support. The company reported PAT of Rs 323 crore (EPS Rs 21.7) during the quarter, which was slightly higher than expected due to strong gross refining margins (GRM). Reported GRM of $8.8/bbl was in line with Singapore complex GRM of $9.6/bbl. Adjusting for subsidy payouts, CPCL has broadly tracked Singapore GRMs, apart from certain one-off quarters. New estimates are based on GRMs of $6.5/bbl in FY08E and $6.0/bl in FY09E, though gains are partially offset by a stronger rupee. Citigroup does not expect pure refiners to be included in the subsidy net as duty protection has fallen to 1% and a major contribution from RIL’s refinery is unlikely, given its EOU status. Replacement cost analysis suggests further hidden value. On a conservative EV/complexity bbl of $1500 (against replacement cost of $2,000 and RIL/RPL’s current multiples of $1,900-2,200), CPCL could be worth Rs 490. The steep discount to replacement cost offsets the risks from a potential merger with IOC.


HDFC Bank
Research: Edelweiss Securities
Rating: Buy
CMP: Rs 1,231

HDFC Bank’s Q1 FY08 numbers were in line with Edelweiss Securities’ estimates. Net profit grew 34% YoY to Rs 320 crore, while net interest income grew 28% YoY. Net interest margins improved YoY to 4.2%, while non-interest income increased by 46%. The proportion of low-cost deposit declined slightly to 52%. The bank’s operating expenses increased 40% YoY due to expansion in its branches. Higher general provisioning led to overall provision growth of 50% YoY, while the balance sheet grew by 32% YoY. Edelweiss maintains its EPS estimate for FY08 at Rs 43 and reduces EPS estimate for FY09 by 2.15% to Rs 56.6. Edelweiss is incorporating actual FY07 numbers, reducing its margin expectations and increasing fee income growth expectations to 30% from 27.5% in FY08E. Edelweiss likes the bank for its liability franchise and asset quality. It believes the bank is a safe bet compared to its peers due to its stable and predictable growth. The stock trades at 3.1x FY09E book and 20x FY09E EPS. Edelweiss Securities’ maintains its ‘buy’ recommendation.


DLF
Research: Motilal Oswal
Rating: Buy
CMP: Rs 600

Motilal Oswal’s target net asset value (NAV) premium for DLF is higher than the target average it would apply for other property development companies. Motilal Oswal believes that DLF, India’s largest real estate company, is the best proxy for the promising domestic real estate opportunity. It is excited about DLF’s dominant presence in emerging segments of premium apartments, commercial offices and retail, which are highly profitable businesses with strong entry barriers. Thus, DLF is relatively better-placed to face the challenging macro environment, which will encourage lower risk premiums, going forward.


JP Associates
Research: DSP Merrill Lynch
Rating: Buy
CMP: Rs 870

DSP Merrill Lynch initiates coverage on JP Associates (JPA) with a ‘buy’ recommendation. JPA offers a blend of asset play (hydro power, real estate and expressway) and 20% CAGR in parent EPS over FY07-09E. Key rationales for DSP Merrill Lynch’s bullish stance are asset accretion led by infrastructure concessions, acquisition/monetisation of 6,250 acres of real estate in Noida. NAV may get a boost following rise in the value of land bank, with the likely transformation of the Delhi-Agra region led by the expressway, and the proposed Greater Noida airport. Other NAV kickers are a three-fold rise in power capacity by FY12E and new infra concessions. DSP Merrill Lynch believes JPA’s aggressive management will be able to leverage potential for growth as India builds infrastructure on the purchasing power parity (PPP) model.


Tata Motors
Research: Enam
Rating: Buy
CMP: Rs 767

Medium and heavy commercial vehicles (M&HCV) volumes are key to short-term profitability. Tata Motors’ product portfolio is highly leveraged towards M&HCV (~32% of volumes and >60% of EBITDA), making it vulnerable to a slowdown in the segment. M&HCV volumes remain uncertain for FY08 due to increase in lending rates and risk to fleet operator economics. But long-term drivers are in place. Tata Motors is undertaking structural changes to mitigate product cyclicality and reduce its dependence on M&HCVs from 60% of EBITDA to less than 50% over the next 2-3 years. The reasons for this are: an agreement with FIAT to jointly manufacture and distribute FIAT cars in India by end FY08, quantum of exports to increase from 18% to 25% in the next 2-3 years and substantial potential value in five key subsidiaries, especially Tata Technologies.


HDFC
Research: Goldman Sachs
Rating: Buy
CMP: Rs 1,981

Goldman Sachs believes stable macro economic conditions, a favourable growth outlook for the mortgage business and unlocking value of strategic investments are likely to be the key drivers of HDFC’s stock performance. It reiterates ‘buy’ rating on the stock, which has a total return potential of 20%. Goldman Sachs sees HDFC as a play on opportunities in the mortgage market and one that offers investors value due to growth in other areas of financial services. Over time, the value accruing from these investments, particularly life insurance, will grow faster than the value of the mortgage business. Key catalysts for the stock include signals of stable monetary conditions, a less volatile interest rate environment, earnings delivery in line with consensus expectations and clear visibility on the sell-down of some of HDFC’s strategic investments in FY08.

Merrill Lynch - Larsen and Tourbo, Panacea Biotec

Merrill Lynch on L&T

We came back reassured of our bullish stance on L&T, with the management reiterating its strong growth guidance & the possibility of further margin expansion at our Asia conference. Besides, the potential listing of its L&T IT in 2008 is on track & new projects addition at L&T Infra subs., ensure value creation. Buy

Price target of 2150


Merrill Lynch on Panacea Biotec

Panacea’s 4Q PAT of Rs234mn (104% growth YoY) was 27% ahead of MLe, buoyed by strong 66% YoY growth in revenues (Rs2.26bn). As in the previous quarters, both vaccines and domestic business registered strong growth of 74% and 37% YoY, respectively. Despite a sharp 250% increase in personnel expense (YoY) and 60% increase in R&D spend, EBITDA margin for 4Q remained high at 19%. Reiterate Buy with PO of Rs513/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.

Merrill Lynch - Computer Services

Merrill Lynch in their report on Computer Services

Growth led 20%+ stock upside despite INR led EPS & PO cut
Retain our positive stance on sector, given forecast 2-yr EPS growth of 18 to 27%, even post earnings cut of upto 6% over FY08 & FY09, for the top four IT vendors. Our estimate cuts factor in avg Rs41/USD & Rs40 for FY08E & FY09E (vs earlier Rs42.5 & 41.5) offset by upside to rev growth and companies pushing on margin levers. High treasury yields also helping. Post PO cuts of upto 8% we still expect over 20% potential upside. We see triggers in strong H2 & possible Re depreciation.

Revenue could surprise; Margin cushions being used
Channel checks and our ML CIO survey in late April, boost our confidence in robust demand of 30 to 35% revenue growth in USD terms. We believe the stronger Rupee is adding weight to negotiations for bill rate hikes. Vendors are also focusing on utilization, with recruitments passing through heightened scrutiny. Travel & G&A costs are being tightened, apart from continued efforts at offshoring and broadening of employee pyramid.

Brace for a bleak Q1; Infy annual Re EPS guidance cut likely
Measures to protect earnings, as above, would take a few quarters to bear fruit and we believe investors need to brace for the Q1 shock of companies missing guidance by 4 to 6% and for sequential declines in profits of 3 to 9% in recurring earnings for the majors. For the first time, we believe, Infy may have to lower annual EPS guidance by 3 to 5% implying 17-20% Rupee EPS growth.

INR surge largely priced in; Top picks TCS & Infosys; Niche plays Rolta and Educomp
Believe the 3-month 15% sector underperformance has largely priced in INR concerns. We expect Q1 weakeness will be priced in when we are close to July results season. Our top picks of the secular trend are leaders TCS and Infosys, where TCS has greater margin levers and is seeing broad based client traction. Top niche growth ideas are Rolta and Educomp, in our view, which stand out in our coverage as India stories insulated from forex fluctuation.

Merrill Lynch - Sun TV

Merrill Lynch has put a buy on Sun TV with a 12 month target of 1625, they say its India's No.1 media company and deserves the premium

Havell's India, Mahindra & Mahindra, HPCL

HSBC in their report on Havell's India

We lower sales expectations on volatile copper prices; cut standalone EPS forecast by 11% and 20% for FY08e and FY09e to INR26.3 (+38% y-o-y) and INR32.1 (+22.4%)
Sylvania acquisition should be earnings-accretive even at 10% equity dilution; consolidated EPS for FY08e and FY09e estimated at INR34.4 and INR39.4, 31% and 23% higher than standalone, respectively Await more information on the acquisition; retain Overweight (V) rating and revise target price to INR631 from INR635

HSBC in their report on Mahindra & Mahindra say,

PAT for core auto and farm equipment business up 11.6% y-o-y, and for the remaining divisions, up 147% for FY07 We estimate contribution of non-auto and tractor business to total EPS is likely to go up to 57.5% in FY08 from 48.6%
currently Maintain Overweight with sum-of-parts valuation based target price of INR950/share. Restructuring of auto-parts business and potential IPO of hospitality division should help off-set lower value of auto and tractor divisions

Man Financial in their report on Mahindra & Mahindra

Mahindra and Mahindra's (M&M) Q4FY07 results were in line with our estimates, both on the top-line and bottom-line front. However, operating margins were under pressure and fell 50bps YoY to 11.4%, below expectations. M&M stock is down by about 24% from its peak in January 2007, turning the valuations attractive. We continue to believe that M&M is one of the best plays on the growing Indian automotive industry from a long-term perspective. Maintain BUY with target of Rs 1060, based on SOTP valuation.

Merrill Lynch in their report on HPCL

Attractive dividend yield, P/BV of 0.99; retain Buy
HPCL's FY07 EPS, at Rs46.4, is almost 4x FY06 EPS of Rs12. Quality of FY07 earnings is admittedly poor as it is entirely attributable to oil bonds. There is also uncertainty on FY08E earnings. However, recent government decisions suggest bond issue may be generous even in FY08. HPCL's dividend yield is attractive - 6.5% for FY07 and 5.4% for FY08E. It is also cheaper than peers on PE and is trading marginally below estimated NAV. We retain our Buy rating on HPCL.

Infotech Enterprises, IVRCL, Aban Offshore, Gujarat Ambuja Exports

Merrill Lynch in their report on Infotech Enterprises

Infotech proposes to offer 13.1% stake (7.14m fully converted shares) to an entity of General Atlantic Partners. Simultaneously it plans to issue 1.17m shares to a Pratt and Whitney entity to maintain stake at 14.4%. On a full conversion basis it would raise US$73m by issuing 8.3m equity shares at Rs360/share, at market, including 2.72m Compulsorily Convertible Preference Shares, 1.77m equity shares & 3.81m shares as underlying for ADRs. EGM is scheduled for Jun 23, 07. Believe this could spur acquisition plans & help branding. Buy with PO of Rs450.

Emkay on IVRCL

Value of real estate business at Rs 160 per share
IVRCL has 80% holding in its real estate subsidiary IVRCL Prime Urban Developers
Ltd. (IVRPUDL). IVRPUDL has total land reserves of 2298.75 acres (56.63 mn sq.ft
developable land) spread over 20 locations in cities of Hyderabad, Chennai, Bangalore,
and Pune & Noida. Cushman & Wakefield have valued the net value of developable
land after deducting developer’s margins at a NPV between Rs 28,898 million & Rs
31,940 million. We estimate the net present value of the land at Rs 160 per share at
a 10% discount to Cushman & Wakefield’s valuation.

Business Outlook
We believe the IVRCL to be a good long term investment in the construction space
especially in the water segment where the company is a leader, and the stock is
expected to outperform the broader market in the long term. Order backlog for the
company currently stands at Rs 8000 crore which is a YoY increase of 27% of which
water based projects account for about 56%. With growing urbanization infrastructure needs in the water segment is expected to increase which would hold good for the company. IVRCL’s holding in Hindustan Dorr Oliver would enable the company to synergise its engineering capabilities and bid for higher value added projects. IVRPUDL’s IPO would be a trigger resulting into value unlocking for the parent company.

Valuation:
At the current price of Rs 351, the stock quotes at P/E of 26x FY08E and 20xFY09E.
We believe the stock to be a good long-term investment in the construction space.
We value the business of the company on Sum of the parts method.

We recommend a BUY call at the current price of Rs 351 with a target price of Rs
437 which is an upside of 25% from the current levels. At the target price the stock
trades at an EV/EBITDA of 14.4x FY09E & a PE of 25.4xFY09E.

Emkay on Aban Offshore

We initiate coverage on Aban Offshore (Aban) with a BUY rating and a price target of Rs3355. With exploration activity set to rise amid soaring energy prices and acute supply constraints for new rigs in view of the long gestation period of 3-4 years, day rates for offshore drilling rigs, are expected to remian highly remunerative going forward. Aban Offshore, is a direct beneficiary of this buoyant demand for offshore rigs and the firm day rates for them. With 100% acquisition of Sinvest ASA, Aban now boasts of an arsenal of 20 offshore drilling assets. With this, Aban is all set to chart a steep growth trajectory on the back of the highest volume growth globally. Rigs in the standalone entity, which are due for contract renewal by March 2008, are likely to lock in a 3 fold increase in charter rates, giving a significant boost to its earnings. Aban
earnings are expected to register a CAGR of 177% over FY2007-10E with EPS of Rs324 in FY2009E and Rs451 in FY2010E. The stock is discounting its FY2009E earnings by 7.8 and FY2009E EBIDTA by 5.6 X . We initiate coverage on Aban with a BUY rating and DCF based price target of Rs3355.

SSKI on Tata Power

Tata Power's 4QFY07 pre-exceptional earnings were sharply ahead of our estimates at Rs2.93bn, primarily due to lower tax rate and sharply higher other income. However, the reported earnings fell by 33% Rs927mn as TPC passed on surplus profits generated in earlier years of Rs2.24bn to customers during the quarter. TPC, in pursuit of its new growth opportunities, is setting up 250MW thermal power plant & 100MW DG power plant for Mumbai circle and is also exploring nearly 4000MW of thermal power projects in Maharashtra, West Bengal and Uttar Pradesh. Moreover, TPC has recently won the bid for 4000MW Mundra power plant at a levelised tariff of Rs2.26/unit, which we believe would be value accretive over a longer run. Moreover, in order to tie up the coal for the Mundra power plant, TPC has acquired 30% stake in Bumi Resources, Indonesia at US$1.1bn. We believe the acquisition is value accretive for TPC over the long run. TPC is currently trading at 20x FY08E earnings and 7.8x FY08 EV/EBITDA, which we believe are attractive considering its huge cash reserves and focus on the core power business to exploit new value accretive growth opportunities across the entire value chain of power business. We maintain our Outperformer rating on the stock.

Kotak on Gujarat Ambuja Exports

We recently met the management of GAEL and are very positive about the growth prospects of the company. We are introducing our FY09 estimates on higher earnings visibility due to a clear understanding of the expansions plans of the company. In FY09, we expect GAEL to report net sales of Rs.21.1 bn, EBIDTA margins of 9.8% and PAT of Rs.957 mn, thereby translating into an EPS of Rs.6.9 and CEPS of Rs.9.9.

We have also done our one year forward rolling band analysis for GAEL, which revealed that most of the time the stock has traded around 6x one year forward
estimates. Our FY09E EPS of Rs.6.9 suggests that GAEL's fair value is 6 x 6.9,
that is, a price target of Rs.42.

Merrill Lynch - IDEA Spice Merger

Media says Spice Tele to merge with Idea; confirm awaited

Media (CNBC) has flashed that Spice Telecom will likely merge with Idea Cellular. Spice shareholders would reportedly own ~12% of the merged entity. As per media the deal values Spice at Rs45-50bn. Idea is yet to confirm the news.

Spice – 2 circle presence; No.2 in Punjab; weak in K’taka
Spice operates in 2 circles - Punjab & Karnataka. The Co’s wireless sub base totaled ~2.8mn subs as of Apr '07 i.e ~1.7% subscriber mkt share on a pan-India basis. In Punjab, Spice is ranked No.2 (behind Bharti) with ~23% share of total subs. In Karnataka, Spice is ranked No.6 with ~7% mkt share. Latest (Sep ’06) financials indicate Spice is EBITDA positive but makes net loss.

Good strategic fitment with Idea
A merger with Spice would take Idea a step closer to becoming a pan-India operator. Currently, Idea does not have any presence in Spice’s circles.

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

HPCL, IVRCL, IOC, Larsen Tourbo, BHEL

Merrill Lynch in their report on HPCL,

Attractive dividend yield, P/BV of 0.99; retain Buy HPCL's FY07 EPS, at Rs46.4, is almost 4x FY06 EPS of Rs12. Quality of FY07 earnings is admittedly poor as it is entirely attributable to oil bonds. There is also uncertainty on FY08E earnings. However, recent government decisions suggest bond issue may be generous even in FY08. HPCL's dividend yield is attractive - 6.5% for FY07 and 5.4% for FY08E. It is also cheaper than peers on PE and is trading marginally below estimated NAV. We retain our Buy rating on HPCL.


Merrill Lynch on IVRCL

Key Triggers: Growth, Margin Expansion & IVR Prime IPO 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.

ENAM on Mahindra & Mahindra

While outlook for the subsidiaries remains buoyant, we are concerned about a likely moderation in the core business and the high capex outlined by M&M and its JVs (details on pg2). We continue to maintain our sector Neutral rating on the stock. At CMP of Rs 765, the stock trades at 10x FY08E and 9.2x FY09E core EPS of Rs 34.6 and Rs 38.5 respectively. Our target price of Rs 825 is based on 12x FY08 core EPS + value of subsidiaries at Rs 410/ share.


ENAM on Larsen and Tourbo

L&T’s management has guided for 25-30% revenues as well as order intake growth and 11% margins for the E&C business. Further, its tie up for supercritical technology in thermal power, foray into shipbuilding, defense and aerospace are likely to drive long term growth for L&T. Value unlocking of its IDPL and Infotech subsidiaries will be the icing on the cake. We maintain our earnings estimates. At CMP (Rs 1,857), the stock trades at 12.0x FY08E and 8.5x FY09E EV/EBIDTA (adj. for investments Rs 218). Maintain sector Outperformer and a target of Rs 2200

ENAM on IOC

Maintain Outperformer, retain price target IOC in our opinion is a low risk play in the OMC pack, given its diversified revenue stream. Also, given its relatively low regulatory
exposure to earnings, its valuations are likely to be at a premium to its domestic peers. We maintain our sector Outperformer rating and a target of Rs 525

ENAM on HPCL

HPCL reported profits largely on the back of oil bonds and upstream subsidiary assistance. Going ahead in FY08 profits remain leveraged to - (1) issuance of oil bonds and (2) sustained assistance from the upstream subsidiary. We still await clarity on the subsidy sharing mechanism as well as on the issuance of oil bonds. Given this weak
regulatory outlook, earnings uncertainty remains high and therefore HPCL is likely to trade at a discount to regional peers. HPCL has declared a final dividend of Rs12/share (in addition to an interim dividend of Rs 6/share) thereby offering a yield of 4.5% on the final dividend. This is likely to offer support for the stock. We maintain our
sector Underperformer rating. Target of Rs 280.

ENAM on BHEL

A healthy order backlog of Rs 550bn provides a strong near-term growth visibility. BHEL has an estimated outlay of Rs 44bn over FY08-09E taking its total capacity from 6000MW to 15000MW. Factoring in the higher than estimated order inflows in Q4FY07, we raise our FY08 earnings estimates by 10% to Rs 31.2bn and introduce a FY09 earnings estimate of Rs 36.3bn. We believe that order intake traction is likely to significantly slow down going forward due to increasing competitive intensity, technology gaps in the high rating hydro, nuclear and 765kv T&D space, and limited visibility in the fast growing super-critical technology space. Despite this, BHEL has set a target of doubling revenues in 3 years and reaching USD 10bn in revenues by FY12. This implies that BHEL may end up servicing unfavorable international contracts.
Hence, we believe that a premium in valuations is not justified given the uncertainties cited above. At CMP (Rs 2,856) the stock trades at a 13.2x FY08E EV/ EBIDTA. We maintain our sector Underperformer with a target of Rs 2500

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.

Kotak Mahindra Bank, BPCL, Construction, Consumer, IOC, IVRCL

Morgan Stanley in their report on Kotak Mahindra Bank

Kotak’s stock is up 40% YTD, buoyed by strong capital markets. Its earnings continue to be largely dependent on capital markets: 78% of F2007 PBT was contributed by businesses linked to capital markets, such as securities, distribution income, investments, etc. With competition intensifying in these segments due to entry of strong players, we expect Kotak’s capital markets-related earnings to come under
pressure. This, coupled with steep valuations, will keep further stock performance in check, in our view.

Increased competition likely to depress brokerage earnings. Kotak’s average daily volume rose 52% in F2007, but its PBT increased by only 12%, implying downward pressure on brokerage rates – which we expect to accelerate with entry of Reliance Money (brokerage rates offered are significantly below the current market rates) in retail broking and distribution business.

Full Valuations – Our New Target Price of Rs450 implies 22% downside from current levels. Kotak is trading at 32x our F2008E earnings – highest in our coverage universe in India. Given its dependence on capital markets, we view these valuations as full. We
maintain our Underweight rating but raise our target price to Rs450 based on sum of parts.


HSBC in their report on BPCL say

BPCL’s FY07 profits almost quadrupled on higher oil bonds and increased subsidy sharing by upstream companies

Subsidy sharing based on oil bonds looks set to continue in high crude price scenario – positive for R&M companies

We revise our target price marginally upwards to INR445 to reflect change in EPS, BVPS and value of investments


B&K on Construction

In line with the NHDP, the government has embarked ambitious programme for the state highways and has urged state government to take a cue from the NHAI in expanding the road network. The government has also advised private sector to prepare for a bigger role in the development of infrastructure sector. The government is ready to provide financial assistance and do handholding for the state government in setting technical and procedure standards.

Although, few state governments have taken initiatives for highway construction. Ability and willingness of most of the state government and PWD departments to implement the projects of such magnitude is yet to be seen. The states needs to raise fair amount of resources on their own by taking the partnership route and even collecting levies from the public to meet the additional burden for highway construction.

Though, order book is not a concern for the construction sector, even if state governmentsare able to convert small portion of proposed investment into actual projects, it would be big opportunity for the construction sector. We remain upbeat on the construction sector.

JP Morgan on Consumer 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.


Merrill Lynch on Indian Oil Corporation

IOC has attained a recurring consolidated EPS of Rs50.2/share in FY07, which implies 31% YoY earnings growth. The rise in earnings has been driven by generous issue of oil bonds in FY07 by the government. IOC received Rs139bn of oil bonds in FY07, which is almost twice the Rs70bn of oil bonds received in FY06. FY08E earnings outlook is uncertain. It is entirely dependent on the
government decision on oil bonds. We remain Neutral on IOC.

We are keeping our FY08E earning forecast unchanged at Rs49/share, which implies 2.5% YoY earnings decline. There could be upside risk to our earnings forecast if the government is generous in the issue of oil bonds to R&M companies even in FY08E. Clarity on earnings outlook for FY08E is possible in the next two months. The government may announce a subsidy sharing plan for FY08E as it did in June 2006 for FY07. The fact that it stuck to its announced subsidy sharing plan in FY07 would lend credibility to any such plan for FY08E

Merrill Lynch on IVRCL

IVRC, 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.

Nestle, Indraprastha Gas, IOC, CBoP, Gokaldas

ENAM recommends OUTPERFORMER on Nestle

We believe Nestlé India has a significant intrinsic value (~Rs 2056 per share) and value unlocking will unfold in stages on successful introduction of brands / products from its parent¿s global portfolio and an improvement in its existing portfolio¿s reach and affordability in the rural markets. At CMP (Rs.1143) Nestlé India is currently trading at P/E of 24x CY08E and EV/EBITDA of 14x CY08E, close to its long-term one-year forward valuations. Given the growth momentum and EBITDA margin (pre provisions) expansion in Q1CY07, we believe the company has the potential to positively surprise consensus growth expectations in the interim term. We maintain sector Outperformer rating on the stock.


ISEC recommends BUY on Indraprastha Gas

IGL reported impressive 35% YoY growth in Q4FY07 recurring net income to Rs401mn, the best ever quarterly performance. Recurring net income was 11% higher than our estimates on the back of higherthan- expected volumes and margins. The company's growth prospects are bright based on accelerated conversion of private vehicles to CNG and incremental demand of 1,000 CNG buses due to Commonwealth Games in '10. Valuations are attractive as the stock has fallen 14.1% YoY and has underperformed the BSE-200 45% in the past one year. Maintain BUY.

ISEC on Indian Oil Corporation

Indian Oil (IOC) reported recurring net income of Rs29bn in Q4FY07 as against Rs8bn in Q4FY06. The impressive 262.5% YoY growth was post pro-rata adjustment of oil bonds worth Rs65.7bn issued to IOC in Q4FY06 for full FY06. However, reported net income at Rs16.1bn was down 60.1% YoY. Overall, fall in crude prices reduced gross underrecoveries, which, along with the surprise increase in subsidy relief through upstream sharing and oil boosted IOC¿s performance. Further, the healthy outlook on refining margins and expected reforms on cooking fuel subsidies is a key positive for IOC. Added drivers include the impact of the company¿s petrochemicals business (paraxylene, PTA) and the upside from oil & gas finds from IOC¿s E&P assets. The stock rose 13.2% QoQ, outperforming the Sensex 7.7% QoQ based on the benign subsidy sharing scheme implemented by the Government. The stock is currently trading at FY07 P/E of 8.3x.

ENAM on Centurion Bank of Punjab

Our FY08 numbers take into account the LKB merger, Bank of Muscat preferential allotment and a part of warrants conversion by Sabre Capital. This will keep the reported ROE low, but the ROA will likely be maintained at 0.8%. Given that valuations at 3.6x FY09E are rich, the stock may underperform in the short term. However, along with the strong growth prospects and high execution capability, the bank is also a strong takeover candidate post 2009. Hence, valuations are
likely to remain high in the coming years. Maintaining our sector Outperformer rating on the stock.

ENAM on Indraprastha Gas

In our view, market is largely ignoring IGL¿s business franchise, itsability to manage the costs and seems to be concerned on the impactregulations. However, at current valuations (9.8x FY08E EPS), theconcerns seem to be overdone, making it one of the mostinexpensive stock in oil & gas universe. We maintain our sectorOutperformer rating on the stock.

Merrill Lynch on Gokaldas Exports

Valuations at 10x FY08E PER, look undemanding, being at the lowest end of thehistoric PE band (12-15x). However, with expectations of an earnings slowdown inFY08, these multiples may just about be right, for now. We note that impendinglabor reforms and the big domestic opportunity remain as key long term growthdrivers for Gokaldas. However, in the absence of any near term triggers and theoverhanging concern on Re appreciation, we maintain our Neutral rating

Merrill Lynch - The second half of the bull

In the first half of the bull market (Oct 2002 to May 2006), global growth was strong, led by the United States. A falling US dollar boosted commodity prices and liquidity (as appreciating currencies in EM allowed interest rates to fall). EPS in EM rose sharply, and asset price returns were very strong with deep value commodity-sensitive sectors such as energy leading the way. In fact, the four global cyclical sectors (energy, materials, tech and consumer discretionary) contributed 56% of the total returns in all emerging markets between Oct 2002 and May 2006.

In the second half of the bull market (which we believe began in June 2006), emerging economies are likely to spend more of their savings to fund strong domestic economic activity. EPS should become less dependent on G7 demand. Domestic demand themes such as the consumer and infrastructure spending should wrestle leadership within the equity market away from the commodity cyclical and export groups. Returns should be positive, just less dramatically so, and domestic demand stocks should assume leadership. Micro drivers and the ability to deliver EPS likely will grow in importance, as should leverage in the corporate sector

Merrill Lynch is however Underweight on India as it is an Expensive GEM market with inflation, CB tightening. A Cheaper market would change their view.

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