October, 2007 | Dalal Street

Lehman Brothers India Portfolio Strategy

October 3, 20071 min read

FII, Lehman Brothers just a while ago has released India strategy report.After the recent strong run, market valuations have become quite expensive compared with historical levels. However, the declining global interest rate environment coupled with strong flows could mean that the market remains expensive.

The report said,

We are overweight domestic cyclicals, especially those for which interest rates are key inputs in driving demand and valuations. These include banks, automobiles and utilities as key sector plays. We also recommend overweighting construction stocks given strength in both corporate and infrastructure capex. Moreover, we expect large consumption buoyancy, especially in durables, following the award of Sixth Pay Commission.

One can avoid sectors with INR costs and USD revenues. This means underweighting the technology and pharmaceutical sectors. Also underweight on global cyclicals such as metals at this time..

Ten large cap picks include Reliance Industries, ICICI Bank, Larsen & Toubro, Maruti Udyog, Mahindra & Mahindra, Union Bank, SBI, Nagarjuna Construction, NTPC and Zee Telefilms.

Breaking Corporate India Earnings News

Global Telcos Rush for Indian Telecom Licenses

October 3, 20071 min read

We have received reliable information from insiders that AT&T Bids For India Telecom License With Mahindra Unit – US Telecommunications major AT&T Inc. Sources said it has bid for licenses to provide mobile services in all 22 circles in India.

Bharti Airtel has become the first Indian telecom company to hit a subscriber base of over 50m (about 48m of these would be mobile customers) till the end of September, making it the tenth largest wireless telecom operator in the world. The company will also launch its DTH by the end of March 2008.

Omaxe’s wholly owned unit Satvik Hitech Builders Pvt. Ltd. will apply for a license to provide telecommunications services in 22 circles.

So considering this rush of new applications, Vodafone’s BUY out of HTIL appears to be really cheap and reasonable.

Breaking Corporate India Earnings News

Sobha Developers + IndiaBulls Real Estate

October 3, 20071 min read

Sobha Developers has entered in to a joint development agreement with QVC Realty and Chintels India, to develop an integrated township spread over 192 acres in Gurgaon, Haryana. This is an addition to the list of integrated township projects already launched by the company in Kochi and Thrissur.

Projected investment estimated to be over Rs 20,000 million and the total development in excess of 6.5 million square feet.

US-based private equity fund Goldman Sachs is learnt to be in talks with Indiabulls Real Estate (IREL) for investing $200 million (around Rs 800 crore).

Insiders told us that half of the proposed investment, around Rs 400 crore, could be in a 50:50 special purpose vehicle (SPV) to be floated by Goldman Sachs and parent firm Indiabulls, while the remaining Rs 400 crore could be in IREL’s existing projects.

Indiabulls Group is also looking to diversify into sectors like power, retail and telecom. The group has already applied for mobile licences.

Equity Research

Infosys EPS Estimates and Analysis – Edelweiss

October 2, 20072 min read

Indian IT major, Infosys Technologies which mainly banked on large maintenance and lower end IT work is now going through mid life crisis. Founding member, Naryana Murthy who takes much credit is responsible for the current mess Infosys is in today. Had he been a visionary, he should have stepped down long before to pave wway for other Infoscions who have different vision apart from being mere consulting company. Unfortunately all those guys parted ways with Infosys to successfully build tech companies – OnMobile is one of them.

Scenario 1: Indian Rupee at 39 for FY09 and 3-4% appreciation from current levels.

In this scenario, our EPS estimate for FY2010 is INR 110 (considering the higher tax rate in 2010) and EPS is expected to grow at a CAGR of 25% between FY10-12.

1a. Assuming a historically traded PEG of 1, the stock price in 18 months should be INR 2,750 (25x FY10 EPS, upside of 44%).
1b. Assuming a lower PEG of 0.8 to factor in lower ROEs (31% in FY10 from 40%+ in FY05-07) and risk of further depreciation, the stock price in 18 months should be INR 2,197 (upside of 15%, 20x FY10 EPS).

Scenario 2: Indian Rupee at 38 for FY09 and 3-4% appreciation p.a. from there

In this scenario, we think FY10 EPS will be INR 104 (considering the higher tax rate) and EPS will grow at a CAGR of 25% between FY10-12.

2a. Assuming historically traded PEG of 1, the stock price in 18 months should be INR 2,599 (upside of 36%).
2b. Assuming a lower PEG of 0.8 to factor in lower ROEs (29% in FY10 from 40%+ in FY05-07) and risk of further depreciation, the stock price in 18 months should be INR 2,079 (upside of 9%, 20x FY10 EPS).

Assigning a 33% probability to scenario 1b and 2b and 17% to 1a and 2a (of course there can be more optimistic and pessimistic scenarios). 18 month target price comes to INR 2,314 (annualized return would be 14.5%). Therefore, it should be rated accumulate from the current levels. It becomes a buy only below INR 1,800

Economy, Markets and Macro Views

Tata Motors + Maruti Udyog – Buy or Hold

October 2, 20072 min read

Tata Motors – Weak Sales
Weak domestic sales (down ~3% YoY); strong exports (+16%YoY) mitigated the impact somewhat. Within the domestic segment, MHCV sales fell 7%, whilst cars declined 4%. LCVs continued to exhibit strong growth (+13%) driven by product extensions of the ACE platform. Although sales fell Y/Y, sequentially (MoM) sales rose almost 22%, rising from an average of around 11k units to ~14k.

Interest rates are on a downtrend, with high credit quality clients reporting bulk CV deals at 10-10.25% (almost 400bps lower than the peak in Apr-May). For the broader industry, rates fell 200-250bps. TAMO management said incentives on trucks are minimal, while discounts on cars are now ~6-9% off face value, to push a jaded vehicle line. Citi maintains BUY with a price target of Rs 1,029.

Maruti Udyog Ltd – Sales Rise in September
Domestic sales rose 11%Y/Y (vs17.5% YTD), hampered by a strong base effect, which management indicated will temper growth rates over 2HFY08 too. The last few days of September were also hit by a religious festival, when consumers typically eschew vehicle purchases. Exports rose 55% Y/Y, 51% YTD as it continues to increase penetration in new African and Latin American markets (FY08 target of 55000 units appears achievable).

MUL has maintained its market share at 51% in Aug, with the main gain being c3.3% in the key A2 segment – driven by the Swift variants. Near term, Swift diesel might face competition from the newly launched Getz diesel (~9% more expensive than the Swift diesel).
Citigroup maintains a hold on Maruti Udyog with a price target of Rs 945.

Breaking Corporate India Earnings News

Mahindra Logistics to be Hived off as a Separate Company

October 1, 20071 min read

The Mahindra Group is planning to hive off its logistics division, Mahindra Logistics, into a different company. The group will invest at close to Rs 1,200 crore for expansion of the business.

Mahindra Logistics is also reportedly in talks with international players in similar businesses for investing and exploring joint venture possibilities.

The report indicated that usually large firms have a logistics division to handle in-house and external transportation business. But as the Indian economy continues to grow at near double digit rates, the demand for logistics, as well as the sector itself, is rapidly increasing.

Mahindra Logistics handles transportation requirements of specified projects for other companies. It also offers corporate employee transportation services mainly to information technology and outsourcing companies.

Mukesh Ambani is also entering Logistics in a big way. Previously he was unsuccessful in BUYING out India’s largest Logistics company – VRL – Vijayanand Roadlines Pvt Ltd. VRL will go public sometime in 2008 according to our sources.

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