Microsoft Word - Research Speak_03.07

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Market Commentary

RBI has raised the key policy rates repo and reverse repo rates by 0.25% to 5.50% and 4% respectively to

contain inflation. Inflation as measured by WPI has risen by 10.2% in May mainly led by non food

inflation, twice the RBIs expectation of 5.5% for March 2011. Though some action on the policy front

was expected from the RBI in its quarterly review in July, particularly after the recent fuel price hike, the

timing has surprised the markets. In effect, RBI has moved quickly and has continued with its gradual

policy of monetary tightening started in its Annual Policy in April. We feel that the gradual hiking in

rates is desirable as it would not hurt the current strong growth momentum of the Indian economy and at

the same time have the effect of controlling credit growth. From the market standpoint on a longer term

basis, this is to be seen as positive as the RBIs monetary policy seems to be enabling growth of the

Indian economy while at the same time controlling inflation and preventing any asset bubbles in sectors

like real estate. However in the coming few days the markets should see some profit taking after the

recent run up due to rate hike fears and also due to negative clues from the global market. Last week both

Dow and S&P declined by nearly 5% on weak economic data with lower growth in jobs and factory

orders as well as concerns on growth of the Chinese economy. Among the sectors metals would continue

to underperform, IT and auto sector could also come under pressure. In IT we expect lower growth in ITspends due to weakness in Euro zone economies and in autos there would be concerns on the consumer

sentiment front and hence expectation of slower sales growth in the coming months. Oil and gas sector

would continue to be in the limelight after the fuel price deregulation and after the Prime ministers

announcement that diesel prices would also be deregulated.

Automobile Sector Monthly Sales Update

Automoblie companies continue to report good growth in sale numbers on a YoY basis though growth

dipped on MoM basis.

In the passenger car segment, the leader Maruti reported solid growth of 17%mainly led by 43% growth

in C and 32% growth in A3 segment . Eeeco in C and Dzire in A3 segment have reported good

sales numbers. Tata motors sales have also grown handsomely led by higher sales of its Indigo model and

increasing sales of Nano after the commencement of production in Sanand. Indigo reported doubling of

sales of 7502 units compared with 3522 units in June. Nano reported sales of 7704 units in June against a

Research Speak Week Ended 2nd July, 2010


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monthly run rate of 3500 units. M&M, Honda Siel and Fiat showed negative growth. M&M reported

negative numbers due to 3% drop in UV sales and lower sales of its Logan model.

Particulars June '10 June'09 %

growth

Maruti 72812 61773 17.87%

Tata Motors 27811 17039 63.22%

Hyundai 27336 23016 18.77%

M&M 17573 18154 -3.20%

GM 9539 4492 112.36%

Ford 7269 1982 266.75%

Toyota 6180 4367 41.52%

Honda Siel 4595 5048 -8.97%

Fiat 2137 2474 -13.62%

Skoda-auto 1638 1145 43.06%

Total 176890 139490 26.81%

Motorcycle players reported double digit growth in sales buoyed by strong consumer spending across

India. Hero Honda reported strong growth of 17% of over 4 lac vehicles in line with May sales. However

for Bajaj Auto the growth was the highest with 68% YoY growth and the June numbers were highest

monthly numbers ever. Even TVS motors showed a dramatic improvement in sales with 32% YoY

growth.

Particulars June '10 June'09 %

growth

Hero Honda 426454 365734 17%

Bajaj auto 282808 167945 68%

TVS motor 139905 105631 32%

In the CV segment, Tata motors and Ashok Leyland showed robust sales growth driven by growth in

sales of Medium and Heavy commercial vehicles and light commercial vehicles.

Particulars June '10 June'09 % growth

Tata Motors 34791 26245 33%

Ashok Leyland 8400 3966 112%


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Steel

Global steel prices continued to be weak on the back of poor demand. Buyers chose to wait and watch in

the anticipation that prices may fall further. This dampened the buying sentiments and most of the

purchases were based on immediate needs. This has created a tremendous pressure on the margins of

steel makers, and in case the downward price trend continues, there is bound to be production cuts.

Already certain areas are witnessing some overcapacity situation. Thus, the buyers are lowering their

offers to speed up sales. According to a recent UBS report, the steel price should not fall much further

because: the price has already fallen quite sharply; steel demand has improved significantly since its

2008-09 lows and still appears to be rising. However, certain market pocket witnesses a drop in the steel

buyers inventories. Amidst this condition, deliberate capacity closures or plans to idle capacity for more

than a month or two can be positive leading indicators to bring the steel markets supply and demandback in balance. Although the prevailing weakness in the market indicates a fall in the prices, but the iron

ore and coking coal costs will rise which will not permit the mills to lower their prices significantly.

Flat Products

The flat products market remained weak in the absence of demand. Prices across the globe softened with

buyers expecting further price declines. Meanwhile, given the expectation that iron ore prices may move

up, July prices are expected to stabilise at the current level. However, the removal of tax rebate in China

might stop China from exporting, helping to control an oversupply situation. Continuing weak sentiment

in the domestic market is encouraging Indian traders and distributors to press for cuts in mills ex-works

prices. Traders who had been anticipating large price cuts from domestic mills were disappointed earlier

this month when flat product base prices were trimmed by only Rs 2000 to Rs 3000 per ton for June.

Most of them are now incurring losses as their customers are deferring purchases in anticipation of a

further decline in prices.

Another factor causing the domestic market to soften is cheaper imports, particularly from China.

Inventories of imported commercial grade HRC have reached 5,00,000 tons in Mumbai alone and are

expected to surge by an additional 1,00,000 to 2,00,000 tons this month. The overall situation of the

market was sluggish where buyers preferred to buy only for immediate needs. The market sentiment was

poor.

As the weakness prevailed in Chinese flat steel prices, given the combined prospect of high iron ore costs

and high market inventories, the Chinese domestic hot rolled coil prices will have little room to drop

further but also are unlikely to rebound. The prices will remain at their current low level until at least

mid-July The prices have almost dropped to mills production costs. And given the high iron ore costs,

there is not much room for the mills to cut their ex-works prices further. However, on the other hand, the


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demand for HRC has not improved much and HRC market inventories will soon increase again as mills

are unwilling to cut their production

Long Products

The long market was weak as demand failed to see any recovery. The softness in prices was further

backed by the weakness in the scrap market. Most of the market witnessed negative sentiments and

anticipation in terms of the price direction. Although with some re-stocking activities, Turkey witnessed

some pickup in demand but this is likely for a short run as the general sentiment continued to remain

weak. The long product market in India remained weak as the demand continued to remain weak. The

prices have been moving down although many feel that it has already hit the bottom. This is creating a

pressure on the margins of primarily the smaller players and re rollers. There is almost no demand from

the end users. Moreover, with the onset of monsoon, the construction activities have also slowed down.Thus, the demand for TMT bars is almost negligible. The inventory level both with the producers and

traders are moving up, further dampening the sentiments.

Already owing to the weak market conditions, the secondary producers have cut their production, and if

this continues it might result in shutting of certain units, noted a local producer. The weakness in the

global steel market has also resulted in some pessimism in the market, which is hampering the exports of

the secondary producers. Besides, with increase of cheap imports in the market, mainly semis have

further added to the woes of the market. The market is thus unlikely to seen any improvement soon.

Iron Ore

The global iron ore market which was giving an impression of stability in the previous week, has dipped

once again in the week gone by. Despite the reduction in offer prices, buyers in the Chinese market did

not engage themselves in actual deals. The announcement made by the Chinese government regarding the

withdrawal of export rebates on a number of steel products further dampened the spirit of the buyers.

Also prices of domestic iron ore in China have gone down, which is keeping the buyers away from

imported ore. There is a general feeling in the market that prices would fall further in the coming week

and hence, buyers are ready to wait before they start making fresh purchases. The withdrawal of export

tax rebate will adversely affect Chinese steel prices which would consequently impact iron oreconsumption in the country. After remaining fairly consistent for almost two weeks, prices of Indian iron

ore in the Chinese market dipped once again during the last one week. As per market reports, there was a

deal concluded for 63.5% Fe content Indian iron ore fines at $150 per ton cfr towards the earlier part of

last week. The movement of ore was to take place from Krishnapatnam port in India.


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Our View

The demand for steel is likely to remain low as it has traditionally been during the monsoon months.

However, at least in the domestic market, the demand is going to improve post September and October.

In the intermediate term, we expect that the prices are going to remain soft, however, with the withdrawal

of export tax rebate import prices from China is likely to rise, though not substantially. Moreover, with

the prices of iron ore remaining firm along with coking coal prices there in not much room for the

Chinese manufacturers to cut price from the current level. We expect that the steel prices will stabilize

post the destocking drive in the international market and we would be able to see it post September of the

current fiscal.

We continue to be cautiously optimistic about JSW Steel and SAIL, and would urge investors to

accumulate these stocks at lower levels in small quantities in their long term portfolio. The weight of

steel stock should not exceed 2-3% of the total portfolio size. However, we maintain our AVOID rating

in Sesa Goa and Tata Steel.

Media & Entertainment

After a year of muted performance of the M&E Sector in the FY 2009-10 the industry experts expected

the ripple effects of the slowdown on the sector. But the sector has bounced back sooner than expected.

The advertising segment, which is a key contributor to the M&E industry's revenue, has shown signs of

revival during the current year. The advertisement budget allocations for some of the top investors in the

advertisement segment like the FMCG, Auto and the IT sector is showing buoyancy. These revivals also

lead to changed expected growth rates of the industry.

According to the recent reports by KPMG we see that the industry expects the subscription revenues to

go up by 24% per year till CY 2014 and the Advertising Revenue to go up by 15% per year till CY2014.

These are the revised figures published by KPMG which have been issued by reviewing the performance

of the economy and the industry. The previous figure said that the subscription revenues are expected to

increase at a rate of 14.9% and Advertising revenues at a rate of 13.5% during the period from 2009-

2014. This figure was calculated keeping in mind the slowdown in the industry. Information technology

(IT) spending by the M&E industry is expected to grow to Rs 1,440 crore by 2010, with a CAGR of 32%.

The largest contributor of advertisement revenues of broadcasters is FMCG sector which accounts for

nearly half the television spending. The FMCG sector is expected to grow by 15-20 percent in the nextyear, considering the massive competition in the sector at all levels the advertising volumes and rates are

expected to grow. The advertising rates are expected to grow by 15%.


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SOURCE: FICCI/KPMG

Thus some of the key players in the market like Zee Entertainment, Sun TV, NDTV and Television are

expected to reap huge benefits from the industry growth.

Apart from the industry growth India also has low Advertisement to GDP Ratio compared to other

countries like USA (1.34), UK (0.95) and China (0.54). Even though the Advertisement to GDP is low in

comparison to most of the developed countries and neighbouring countries it has consistently been

showing a slow and steady increasing trend. This shows huge untapped potential for the advertisementspends and the media industry.


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The recent recommendations from TRAI on liberalization of the FDI norms of the M&E sector was

welcomed by the market and lead to most of the sector stocks reacting in a positive way. Media stocks

like Dish TV India Limited, Hathway Bhawani Cabletel & Datacom, Reliance MediaWorks Limited, Zee

Entertainment Enterprises Limited and Mukta Arts Limited surged upto 5.44%, 4.97%, 3.86%, 3.5% and

3.45% respectively on the Bombay Stock Exchange (BSE) after the policy was announced.

The latest recommendations from the Telecom Regulatory Authority of India to the Ministry of

Information and Broadcasting are summarized below:

SEGMENT FDI LIMIT

DTH, IPTV, Mobile TV, HITS, Teleport & Multi System Operators

(MOS)

74%

Local Cable Operators (LCO) 26%

News & Current Affairs TV channels 26%

Radio 26%


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Infrastructure

Pre-paid toll collection system for highways: Revenue leakages to come down significantly.

Minister for Road Transport and Highways Kamal Nath on Friday announced the possibility of putting

this system in place by May 2012, accepting the recommendation of the committee headed by UIDAI

chairman Nandan Nilekani. Based on the radio frequency identification technology (RFID), each vehicle

will be identified by a unique number tag fitted on the windscreen. The road user is expected to recharge

their smart card like a pre-paid mobile phone. The RFID will read the tag and deduct the specified toll

from the account. The account balance can be verified via SMS or e-mail. The government is hoping to

plug the current leakage of 15 per cent revenue in toll collection, amounting to an annual loss of close toRs. 300 Cr. Only 8,000 km of the national highways is tolled currently and the Road Minister aims to

take this figure to 30,000 km in the next five years. Government is also in consultation with the Society

of Indian Automobile Manufacturers (SIAM) to influence them to agree to incorporate the chip in each

vehicle at the production stage itself. Mr. Nath is confident of developing the system within the next 20

months and gets all the States to agree to have a common toll collection technology across the country.

Efforts were under way to bring the State highways under the same network for smooth running of

vehicles, avoiding loss of time and fuel, and to bring down emission levels.

Our View

While 2012 is still a long time, we must appreciate the kind of development which is taking place. This

signifies that in infrastructure sector in India latest technologies and best practices are being assimilated.

It would surely increase the toll collection in booths significantly. This technology is already being

implemented successfully in the US, Mexico, Chile, Argentina and Dubai. Even in India there are two

booths (Delhi-Gurgaon Highway and Bangalore electronic city Elevated Highway) where toll is

collected electronically. A broad based government measure like this would certainly boost the

confidence of both the private developers and highway commuters.

Stock In Focus

Gayatri Project Limited

Gayatri Projects Limited (GPL) was originally incorporated on September 15, 1989 as Andhra Coastal

Construction Private Limited in the state of Andhra Pradesh for undertaking construction activities. On

April 1, 1994 Gayatri Projects Private Limited took over all the assets of Gayatri Engineering Company,

a partnership firm which was established in the year 1975 as Special Class Contractors on a going

concern basis. Gayatri Engineering Company had been undertaking civil and engineering works of

various state governments, central governments, public / autonomous bodies / corporations. It is engaged


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in the execution of major Civil Works including Concrete/Masonry Dams, Earth Filling Dams, National

Highways, Bridges, Canals, Aqueducts, Ports, etc.

It has 7 BOT projects in its portfolio, out of which 5 project are expected to generate revenue in FY11.

While the earlier projects would derive healthy toll revenues and annuity, the two new projects of

Hyderabad-Karimnagar and Indore-Dewas would contribute to the construction revenue going forward.

With the NHAI and state highway authorities working towards removing execution hurdles, we expect

the company to derive significant value from the growth potential in this sector.

Order Book

The companys order book is at 7000Cr, which is 5.5 times FY10 revenue. Road projects form 42% of

the order book while share of irrigation projects have come down to 54%. The execution cycle has been

improving as the two road projects, Hyderabad Express and Cyberabad Express were completed six

months ahead of schedule. Due to faster execution, GPL is entitled to bonus of 70 Cr. However, the

execution delays in two projects (Gayatri Lalitpur and Gayatri Jhansi) have escalated the project costs.

The execution delays were mostly due to the inefficiency from the part of the concession authority; hence

the company has applied for an extension of the concession period in these projects. Going forward we

expect faster execution cycle would lead to growth in construction revenue.

Valuation and Recommendation

GPL has reported good set of numbers for the FY2010. There has been a YoY growth of 24% in the

consolidated Revenues (FY10 Revenues: Rs 1274.51 Cr). PAT has increased from Rs 32 Cr in FY09 toRs 51 Cr in FY10 (YoY growth: 60%). Our valuation for the company comes to Rs 509. This means a

potential upside of 19.76% from the current level.

A formal report on the stock would be mailed to you in the coming week.

Stock Recommendation

Stock CMP Target Recommendation

IRB Infra 263 313 Buy

IVRCL Infra 186 215 Buy

NCC 187 210 Buy

Gayatri Project 425 509 Buy

Note: We have revised our target price for IVRCL. In the report which was released on 7th April, 2010 we arrived

at the target price of Rs. 192 but due to the recent development in business and earnings of the company we

have revised our target to 215.


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DISCLAIMER:This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not

intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basisof the information contained herein is your responsibility alone and Eureka Stock & Share Broking Services Ltd [hereinafterrefereed as ESSBSL] and its subsidiaries or its employees or directors, associates will not be liable in any manner for theconsequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of theinformation contained herein, but do not represent that it is accurate or complete. ESSBSL or any of its subsidiaries orassociates or employees shall not be in any way responsible for any loss or damage that may arise to any person from anyinadvertent error in the information contained in this publication. The recipients of this report should rely on their owninvestigations. ESSBSL and/or directors, employees or associates may have interests or positions, financial or otherwise in thesecurities mentioned in this report.

Analyst Team

Analyst Name Sectors E-mail Contact Number

Samudrajit Gohain Oil & Gas, Engineering [email protected] +91- 9748860335

Kinshuk Acharya Steel, Agriculture [email protected] +91- 9681478735

Md. Riazuddin, FRM Banking, Economy, Power [email protected] +91- 9903062346

Rajiv Agarwal Auto, Tea, Sugar [email protected] +91- 9903076345

Ankit Kanodia Infrastructure [email protected] +91- 9163278562

Research Desk:

9B, Wood Street

1st

Floor.Kolkata- 700016Ph. No. 033- 39180386/87

Registered Office:7 Lyons Range,

2nd Floor,Room No. 1.Kolkata 700001

Corporate office :B3/4, Gillander House,8 N S Road, 3rd Floor.Kolkata - 700001Ph. : 2210 7500 / 01 / 02 Fax: 2210 5184e-mail: [email protected]

Mumbai Office:909 Raheja Chamber,213 Nariman Point.Mumbai-400021Ph.: (022) 2202 5941 / 5942 Fax: (022) 2288 8168e-mail: [email protected]

Microsoft Word - Research Speak_03.07

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