Dr Reddy's Laboratories - Imitrex shines, core business struggles

The performance of authorised generic Imitrex has so far been surprisingly good, and looks set to continue its good run into 4Q. In our view the market is likely to wait for stabilisation in Dr Reddy's major business divisions, in particular Domestic formulations, Betapharm and PSAI, before re-rating the stock.

3QFY09 results– authorised generic Imitrex boosts reported results
Dr Reddy’s reported net revenues of Rs18.4bn (+49% yoy), 6% higher than our estimate. The main surprise was higher than expected gImitrex sales at $72m vs our expectation of $40m. Excluding this, core business revenues were up 21% yoy to Rs14.9bn but 4% below our estimate. Higher margins associated with gImitrex sales boosted the EBIT margin to 21% (+1272bp yoy). Core PAT doubled to Rs1.9bn, translating into EPS of Rs11.4.

Core businesses yet to stabilise
Most of the major business divisions disappointed us. Domestic formulation and Betapharm registered 1% and 3% declines, respectively, while the PSAI (erstwhile API & Custom Pharma) business was flat, excluding the Dow Pharma acquisition. Management attributed the weak performance to a delay in new product launches and a change in supply chain model (in the case of Domestic formulation), destocking due to the AOK tender, and Olanzapine withdrawal from market (in the case of Betapharm). The company indicated that the Domestic formulation business may take a few more quarters to stabilise, while remaining non-committal on Betapharm’s outlook. Furthermore, none of the top 10 products (likely sales of $100m+) in Betapharm appears in the eight contracts awarded by AOK, which might necessitate impairment charges in future quarters. The company is also trying to focus more on its CMO (contract manufacturing) division than its CRO (contract research) division. Overall, we believe it will take two or three quarters for the various businesses to stabilise.

Near-term triggers appear limited
We maintain our estimates and long-term Buy recommendation. The stock trades at 12.1x our FY10F earnings and appears attractive, however we note that the market is likely to wait for Dr Reddy’s various businesses to stabilise before re-rating the stock.

ITC - Cigarettes provide strength

ITC's EBITDA grew 13% yoy in 3Q09 despite three of its businesses reporting negative EBIT growth. Cigarette EBIT increased 17.5% in 2Q/3Q09 despite structural headwinds. Buy, with an increased target price of Rs214 (from Rs211).

The cigarette business gains momentum
ITC's cigarette business faced a significant increase in taxes in the last two years: in 2007, the tax rate increased 30% due to the implementation of VAT on the MRP of cigarettes; and, in 2008, there was a 140-390% increase due to the hike in excise duty on non-filter cigarettes. Nevertheless, cigarette EBIT growth averaged 13.4% in the last seven quarters. In 1Q09, EBIT grew only 2%, but it accelerated to 17.5% in 2Q/3Q09, reflecting an improved product mix. Volumes were hit only marginally, falling 1% in FY08 and 3.5% in FY09, though non-filter volumes were zero (19% of total volumes in FY08). Clearly, ITC's competitive position in cigarettes has improved, thanks to strong brands at all price points.

13% EBITDA growth despite negative EBIT growth in three key businesses
ITC’s 3Q09 earnings were in line with our expectations, although the loss in the other FMCG businesses exceeded our estimate, while hotels and paper EBIT disappointed. The 17.5% EBIT growth in the core cigarette business beat our estimates.

We see positive catalysts in the non-cigarettes business
Hotel EBIT declined 34% in 3Q09, due to the impact of the terrorist attack on Mumbai and the cancellation of a cricket event (for which ITC had several room bookings). While the macro environment remains weak, 3Q09 was also hit by one-off events. For paper, the full impact of the commissioning of a new paper machine and lower pulp and coal prices will be seen from 4Q09. Besides, we expect the other FMCG losses to moderate following the high launch expenses for personal-wash products.

Maintaining Buy at a target price of Rs214
We reduce FY10F EPS by 3.8% and introduce FY11F EPS. We expect EPS to grow 15% in FY09 and raise our DCF-based target price to Rs214, adjusting for changes in our risk-free rate and market risk premium assumptions.

NIIT Technologies - Digging its heels in

3Q09 results showed good margin management despite a sluggish top line and forex losses. With long-term contracts securing revenue stability, we find current valuations too pessimistic. However, given the reality of tiered valuations, we move to a peer-group valuation with a lower target price of Rs74. Reiterate Buy.

Large contracts secured, but revenue growth remains challenging
NIIT Technologies’ (NTL) 3Q09 constant currency revenues were down 4% qoq, with lower volumes and realisation, on higher offshore effort share. The 9M09 order intake was 16% higher than in FY08, as large engagements with key clients were converted to multi-year contracts. With pricing on renewals stable, we estimate a 4% negative revenue impact in FY10 on greater offshoring.

Aggressive bench management key to margin expansion; potential to sustain gains
NTL cut staff 13% in 9M08, pushing up utilisation 650bp and gross margin 472bp. We expect muted salary hikes in FY10, NTL’s recruitment strategy and savings on rent through campus consolidation to support margins, mitigating potential pricing pressure.

Potential margin upside diluted by FX losses, loan losses
We raise our EBITDA margin estimates about 5% for FY10/11 in light of the 339bp expansion in 3Q09. However, we now build estimated hedging losses into our income statement (which we earlier deducted from fair value/share). These reduce our FY10/11F EPS by 32% and 25%, respectively. An unrecognised loss of Rs95m on a loan to the NIITians Welfare Trust could also increase if NTL/NIIT’s share price slips further.

Switching to peer group valuations, Buy rating maintained
NTL’s valuations have hit all-time lows of <3x>

When debt is not a burden

Do not invest in companies merely because they have lots of cash. Instead select those that use the cash better

An economic a slowdown leads to falling demand. Rising interest cost to service the debt taken earlier either for capacity expansion or inorganic growth is the last thing that a company and an investor would want. So while many debt-heavy companies see their profitability erode during a downturn due to the high interest cost component on loans taken to fund capital-intensive grassroots projects or to finance acquisitions, companies with little or no debt have no such worry.

Low debt (or leverage) not only keeps a company's interest cost down, but also gives it flexibility to invest its cash back into the business to expand or develop new products. As debt-free companies are mostly cash-rich, they also do not need to raise large funds from the market to run their operations.

There are many other advantages that debt-free companies enjoy. For instance, debt-free company need not keep aside a portion of the profit to meet the cost of capital. They get interest on their cash deposited with banks, adding to their reserves. They have low interest-rate risk.

However, debtless companies have their share of disadvantages, too. It shows that the company is not proactive on expansion and, thus, would be left out on growth rates when the environment turns bullish. There would be lower chances of debt-free companies getting long-term debt at short notice during an emergency as the company will not have a sufficient debt history to boast.

A zero- or low-debt company, therefore, is not always worthy of investment. Investors have to look at many other factors. "Apart from debt, investors should look into the earning per share, financial history, prospects of the company in the coming years, the sector in which it is operating and last, but not the least, the price earning multiple of the share," says Alex Mathew Head of Research, Geojit Financial Services.

For instance, large IT companies like Infosys Technologies and TCS may not have interest-rate concerns. But their prospects would always be subject to other important factors including exchange rate fluctuations and economic conditions in the US and other major export markets. Not surprisingly, despite being zero-debt companies, IT companies are out of favour of the market at present.

Similarly, it is not always unwise to invest in companies with large amount of debt. Proper use of debt to build new capacities, purchase inventories and make strategic acquisitions in favourable market conditions bring better returns on equity. In most capital-intentive industries, not taking debt is not practical. Equity investors will not like to fund big projects entirely as this will bloat equity capital and reduce return. "Debt is a very small component in the valuation of a company," says Avinash Gupta, Assistant Vice President, Research-Equity, Bonanza Portfolio. "Valuation is largely based on the free cash generated over a period of time, which is the resultant of business potential and capital structure,"

Debt-laden companies can enjoy the benefits of expansion and have better chances of getting more debt as they have a debt history to show. Heavy debt companies, whose operational risk is not high, (i.e., continuity of revenue and profitability is visible) get higher return on equity capital invested.

Debt is good as long as the combined financial and operational risks tend to give right return. "It is wrong to paint debt-free and debt-laden companies with the same brush without looking at the specific business of the company," says Pankaj Chopra, CEO, Iden Investment Advisors. "In the current environment, it may appear that low debt is a good thing. But if the company maintains low debt even when interest rates are low and there is strong business visibility, then its competitive advantage would be lower than others who use low-cost debt more fruitfully."

Debt-laden companies, however, have the disadvantages of keeping some portion of the profit for payment of cost of capital. "The key is to have optimum debt-equity ratio to enhance return to equity shareholders and at the same time reduce balance sheet risk," says Manish Sonthalia, Senior Vice President, Research and Strategy, Motilal Oswal Financial Services. "Hence, it is not true that debt-free companies are always good for investment or debt-laden companies are bad investment choices."

Capital Market decided to study the stock performance of debt-free companies in relation to the BSE Sensex. A list of companies with zero debt was compiled. A further filter was applied to restrict the list to companies with a minimum market cap of Rs 1000 crore.

The list of debt-free companies were dominated by MNC associates, IT companies and PSU companies. They accounted for 71% of the sample. While 12 MNC companies featured in the list, there were seven PSUs and eight IT companies of the total 38 companies that met the criteria of zero debt/equity ratio companies with a minimum of Rs 1000-crore market cap.

Zero-debt MNC companies in the list included ABB, Siemens, GlaxoSmithkline Consumer Healthcare, Crisil, ICI (India), Gillette India, P&G Hygiene, Aventis Pharma, Pfizer, GlaxoSmithkline Pharma, Astrazeneca Pharma and 3M India.

Debt-free IT companies (including MNCs) comprised Infosys Technologies, TCS, Satyam Computer, Oracle Financial, MphasiS, Patni Computer, Info Edge (India) and Sterling Intl.

There were also quite a few debtless PSU companies. They were NMDC, National Aluminium, Container Corporation, Bharat Electron, MTNL, Engineers India and PTC India.

But not all debt-free companies in the list fared well on return. Some lost more, some lost less. But, on an average, debtless companies with Rs 1000 crore and more market cap performed exactly in line with the BSE Sensex, losing on an average 57% of the market cap as against 56% lost by the BSE Sensex between 1 January 2008 and 27 November 2008.

MNC and IT companies outperformed the market fall. The 13 MNC companies lost 55% of their market cap on an average. Market capitalisation of IT stocks shrank by 39% on an average. However, eight debt-free PSUs lost 68% of their value on an average.

Debt-free pharmaceutical companies (which were all MNCs) with a market cap of Rs 1000 crore and more lost 10% on an average. On the other hand, debt-free FMCG companies (which were incidentally all MNCs) shed 32%.

In comparison with the BSE's sectoral indices, the BSE FMCG sector lost just 21%, the Healthcare index 36%, and the BSE IT index 45%. On the other hand, the BSE PSU index shed 57%.

While debt-free MNC pharmaceutical and IT stocks with market cap of more than Rs 1000 crore outperformed both their sectoral indices and the BSE Sensex, debt-free PSU stocks with market cap of more than Rs 1000 crore underperformed both the BSE Sensex and BSE PSU index. MNC FMCG companies also underperformed. But that was due to the unprecedented rise in commodity prices, which have fallen massively of late.

The fact that debt-free PSUs with a market cap more than Rs 1000 crore lost on an average 68% compared with the 56% market-cap loss of the BSE Sensex means investors are not comfortable with PSUs in spite of being debt-free. "This implies that PSU managements do not have the drive/incentive to generate high return on equity (ROE)," says Pankaj Chopra, CEO, Iden Investment Advisors. "Remember, debt means risk and the managers of these companies just do not want to take on risk. There is no incentive for them to do so."

There is no rationale, however, for utility companies not to return shareholders' money and take on some debt. The key is management vision. The problem is lack of continuity of management in PSUs. So even if there are some who give it a vision, they tend to be replaced in a couple of years. So the vision is lost.

IT and MNC FMCG companies have low debt because of low requirement of capital, and high profit margin. They are also mostly in secular businesses, where growth is sustained out of the retained earning. Increased profitability and low capital lead to higher ROE/ return on capital employed (ROCE), resulting in higher P/E.

MNCs in India are funded by their parent companies. The MNC parent is likely to have taken debt to offer higher return to its own shareholders. Hence, there is no intention to leverage the Indian associate/subsidiary.

Non-pharmaceutical and non-FMCG MNCs (excluding MNC IT companies) such as ABB, Siemens, Crisil, ICI (India) and 3M India as a group lost a massive 68%. Individually, ABB lost 71% of its market capitalisation, Siemens 71%, while 3M India, Crisil and ICI (India) 57%, 34% and 30%, respectively. In comparison, the 38 debt-free companies with a minimum market cap of Rs 1000 crore cap lost 57% on an average.

Once market darlings ABB and Siemens have fallen much more than the market due to their relatively high valuation. Even their debt-free status could not help them. These companies cater to industrial demand. There are doubts whether their business growth will be as robust as the market was earlier expecting it to be. The market likes visibility in earning and stock prices are nothing but a reflection of future earning potential of a company. Stock prices start discounting two-three years of earning in advance. This is the reason that Siemens and ABB were quoting at very high P/Es earlier. When the visibility in earning reduces, as is happening now to both these companies (margin compression, low fresh order intake, low revenue growth), prices correct to reflect that change. This is regardless of the fact whether the company has high debt or no debt and has more to do with the changing business dynamics.

Though debt-free companies, on an average, have been market performers, the market seems to have taken the zero- or low-debt status positively when compared with highly leveraged companies. The market cap of the top 50 highly leveraged companies, i.e., the ones with high debt-equity ratio, fell 75% on an average, the market cap of the top 100 highly leveraged companies dropped 83%. The market cap of 322 companies with debt-equity ratio of 2 or more declined 76% on an average.

In the current scenario of high interest rates and slowdown in economy, debt-free companies offer a good avenue for investment. However, fund managers do not make investment decisions solely on the debt status of a company. Investment can be avoided in debt-free companies where growth conditions remain weak and despite net cash/low debt would not lead to any worthwhile appreciation in the stock price.

On the other hand, debt-laden high growth companies, with quality management and where prospects of earning are positive, should be assessed for investment.

Investment in these companies ought to be evaluated regularly as, in a period of downturn, these companies may incur lower earning/losses due to higher interest outgo. In certain cases, the company may also find the going difficult. This is reflected in lower share prices of these companies. 

Debt-free stocks that have outperformed the current bear phase are likely to be underperformers when the uptrend resumes. Majority of debt-free companies fall under the tags of Old Economy and defensive sectors. These stocks have lower betas (volatility), which are very close to 0.75 as against a bet of 1 taken for the broad market. In a falling market, the rate of fall will be substantially lower compared with other stocks. But in a bullish market, these stocks will rise only marginally.

Whether a debt-free or debt-laden company is a good investment bet depends on case-to-case basis. Investors need to see if the business environment of the company is good and warrants the debt it has taken, and if it will be able to refinance that debt. It is very much possible that a company that has debt is more attractive than another which does not have debt. But as the economy is slowing down, debt-free companies — MNC FMCG companies in particular —are good bets to keep volatility of the portfolio at bay.

India Cements - Value in the gloom

We have a negative view on the cement sector's earnings and pricing outlook, but we believe ICEM at its current valuation has priced in all the gloom. The stock is trading at 0.7x FY10F P/B and US$50 EV/mt (half replacement cost), which we see as cheap. We cut our earnings by 20-28% and our target price to Rs103.93. Buy. 

ICEM is exposed to the best cement market in India 
Demand growth ytd is 6.5% on an all-India basis, but 12% in the south. This has meant better pricing for ICEM, which achieved an EBITDA/mt of Rs1,227 in 1HFY09, vs Rs902 for Associated Cement. While capacity additions of 32mmt in the south through FY11F will outstrip our incremental demand forecast of 18mmt and cause pricing pressure, we expect the south to remain one of India's better markets. 

ICEM's expansions are fully funded 
In 2007, ICEM began investing Rs8.4bn to raise capacity in the south from 9.1mmt to 14.2mmt, a move now near completion. This was funded in part by a Rs3.2bn FCCB (May 2011 redemption). The company also began spending Rs14.5bn on two greenfield cement plants in the north, which would raise overall capacity to 18mmt. In December, it raised Rs5.9bn via an equity raising to fund this programme. ICEM has since put one of the greenfield plants (costing Rs6.5bn) on hold, so we believe it should be able to meet all its planned capex to raise capacity now to 16mmt without incremental leverage. We forecast its current debt/equity ratio of 70% will fall to 27% by FY11. 

We see an industry surplus for the next two years 
We downgrade our demand expectation to 6.5% for FY09 and 8% for the FY10-11, due to the slowdown we have already seen on the back of the global credit crisis and reduced activity levels in real estate and construction. While the commissioning of a few cement plants has been delayed, we reckon more than 90% of the announced projects will still be commissioned causing a surplus for the next two years at least. 

We cut our earnings sharply, but maintain Buy 
We lower our FY09-10F volumes by a total of 1.5mmt to 10mmt and 11.5mmt and cut our FY09-10F EPS 20-28% to account for lower cement and coal prices. We value ICEM at a 10% discount to the end-2009 EV/EBITDA valuations of ACC and Ambuja Cement given its focus on the south and higher leverage, giving us a fair value and target price of Rs103.9. Even so, we see ICEM as cheap at current valuations. Buy. 

Associated Cement - A long winter ahead?

ACC seems financially well placed with moderate expansion plans, but we believe its earnings outlook has weakened, given the industry is likely to see excess supply for at least two years, which would lower cement prices. We cut our EPS estimates and downgrade to Sell. 

We see higher earnings risk for the next two years 
FY09F cement demand growth ytd (6.6%) is below our expectations, due, we believe, to the stress in credit markets and delays in capex in many sectors. Hence, we lower our demand estimate for FY10 and FY11 by 200bp each to 8%, which exposes the industry much longer to larger surplus supply. The commissioning of a few cement projects has been delayed, but, with rapid progress at most projects, we expect capacity addition of around 89mmt until FY11, with incremental demand in this period being just 46.3mmt. We believe this will put pressure on prices. 

We expect the current cement downcycle to be shorter than the last 
In the 10 years after ACC's earnings peak in FY96, there were eight difficult years and two good ones. We expect the current earnings downcycle to last until FY11, given better consolidation in the sector (the top five groups now control more than 60% of the market), a large share of capacity is being added by existing players and that we see scope for more consolidation. 

ACC seems financially better positioned to handle this downturn 
Restructuring over the last five years has seen ACC exit many non-core businesses (refractory). The company, which had high gearing in the last business cycle (1997-2003), now seems in a much stronger financial position. We estimate it would have a debt-equity ratio of just 7% even after financing its entire planned capex of Rs37bn over the next three years. This capex would raise it capacity by 9.6%, just slightly ahead of the expected demand growth. 

We cut earnings sharply, and downgrade Sell 
We lower our FY09-11F cement volumes due to macro factors, and also adjust EBITDA to factor in lower cement and coal prices. We cut our EPS estimate by 11-12%, and lower our DCF-based target price to Rs369.9. ACC looks cheap, trading at a cement EV/mmt of US$61 (vs replacement cost of US$110), but we see more downside to earnings, given the overhang of excess supply. 

For all Warren Buffet Fans

A version of this article appeared in print on October 17, 2008, on page A33 of the New York edition.

Buy American. I Am By Warren E. Buffett

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be
scary.

So ... I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month - or a year - from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932 . Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: "I skate to where the puck is going to be, not to where it has been."

I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: "Put your mouth where your money was."

Today my money and my mouth both say equities.

Grasim Industries - Earnings outlook deteriorates

Grasim's ongoing capex should raise its cement capacity by 59%, but the underlying demand outlook has weakened. We expect just 75-80% utilisation in both its VSF and cement businesses, as well as margin pressure. We cut our FY09-11F earnings by 6-37%, and downgrade to Sell.

Grasim to capitalise Rs110bn of assets in the next few months
Grasim says it plans to raise its cement capacity by 18.1mmt to 48.8mmt in the next few months by commissioning capacity in three greenfield locations. However, this comes as the outlook for industry demand growth has weakened due to the ongoing global financial crisis and consequent capex slowdown in many sectors. The slowing of textile exports has weakened the volume outlook even at Grasim's viscose staple fibre (VSF) business, where the company recently raised capacity to 334,000mt per year (from 270,000mt). We expect Grasim's capital-related costs to rise, straining profits.

We see cement oversupply persisting for more than two years
We have lowered our FY09-10 demand growth expectation from 9-10% to 7-8%. FY09 trends, so far, indicate growth of just 6.5%. We expect incremental cement capacity addition of 89mmt till FY11 vs incremental demand growth of just 46.3mmt, which, we believe, will put pressure on prices in FY10 and FY11.

VSF earnings could stabilise after the sharp fall in FY09F
The VSF business, which competes with polyester staple fibre and cotton, has faced slowing volumes due to weak global textile demand. Prices of sulphur, a key raw material, have fallen from US$850 in June 2008 to US$85 currently, reducing overall VSF costs by 12%. However, the recent weakness in both cotton and PSF prices will force Grasim to reduce VSF prices as well. We expect VSF EBITDA to fall 49% in FY09, although they should recover gradually from there on.

We cut earnings sharply, downgrade to Sell
We have reduced our FY09-11 cement volume forecast due to macro factors, and adjusted EBITDA to factor in lower cement and coal prices. We have cut our FY09-11F EPS by 6-37% and lowered our DCF-based target price to Rs919. Trading at 0.8x FY09F book and at an EV/mmt of US$66 (vs replacement cost of US$110) on cement, Grasim looks cheap, but we see more downside risk to earnings in next two years, given the large capacity creations.

Jyoti Structures Limited - 2QFY09 update

JSL’s 2QFY09 numbers were inline with our estimates. Top line grew by 32% yoy to Rs4.2bn & bottom line growth of 18.5% yoy to Rs201mn. EBITDA margin stood at 11.9% down 61bps yoy. The recent correction in the stock price has brought the stock in to value zone where it trades at less then 4.4x its FY10F consolidated EPS. We are revising our target price downward by cutting the target PE multiple from 12x to 7x on account of challenging macroeconomic environment. We maintain BUY.

.. JSL’s 1QFY09 sales were in line with expectation, Sales at Rs4.21bn up 32.3% yoy (expected Rs4.26bn). EBITDA margins stood at 11.9% down by 61bps yoy (11.8%) on account of raw material cost up 40% yoy at 67% vs 63.3% in 2QFY08 & staff cost up 39.6% yoy at 3% vs 2.8% in 2QFY08. However other expense was up only by 12.1% yoy at 18.1% vs 21.3% in 2QFY08. Interest expense stood at Rs174.3mn up 64% yoy (Rs160.6mn). However PAT was marginally above our expectation at Rs201.1mn up 18.5% yoy (Rs197.8mn) due to lower tax provisioning at 35.6% (39.1%).

.. Order book stood at Rs36bn. The order book consists of 60% from transmission line, 20% from substation & remaining 20% from rural electrification. Domestic orders were worth 85% of the total order book while the remaining 15% consist of exports & deemed exports. Management expects ~Rs58bn (Rs30bn in transmission line, Rs6bn in rural electrification & another Rs21bn in substation) domestic jobs to be put for tendering in next couple of months. They also indicated to bid for Rs7-8bn worth of international orders.

.. We keep our forecast intact however revise downward our target price on account of challenging macroeconomic environment. We cut our target PE multiple from 12x to 7x. Planned expenditure on T&D in the 11th five year plan & current order book provides visibility on account of revenue going forward. We retain our positive outlook on the company & maintain BUY. At CMP of Rs63, JSL is trading at 5.5x FY09F consolidated EPS of Rs11.3 & 4.4x FY10E consolidated EPS of Rs14.1. Higher order winning could likely see a re-rating in the stock. The key risk for the stock would be further margin pressure due to higher raw material price, higher interest cost and high institutional holding.

Maruti Suzuki India - Small car for the long haul

Maruti looks well placed to recover from its weak Sep 08 quarter results with the help of product launches amid easing commodity and fuel prices. We trim our EPS estimates, factoring in a gradual recovery in the demand, but maintain our Buy rating.

September 2008 results: EBITDA margins hit a new low
Maruti's Sep 2008 results disappointed us, with EBITDA margin 8% lower than we expected due to higher manufacturing and other expenses. Still, an improving product mix extended the sharp rise in realisation per vehicle. The discrepancies between our expectations and the results include the impact of currency fluctuations on imports and higher power and promotion expenses.

New product launches to limit the impact of weak demand
Maruti's new product launches in the coming quarters should help limit the impact of weak demand. We expect any recovery in car demand to be gradual, especially in an environment of job insecurity, pay cuts in the private sector and limited vehicle finance availability. Maruti's focused efforts to convert government employees' sixth-pay-commission benefits into car purchases should offer some relief. We trim our domestic sales volume estimates 3-6% for FY09-10F to reflect a 7% CAGR in domestic volume. We maintain our export targets, however.

Easing commodity prices to boost profitability in the coming quarters
We expect EBITDA margins to bottom near Sep 2008 levels as new product launches in the compact segment help reduce promotion expenses, and easing commodity prices support profitability. However, factoring in our concerns about domestic volumes, we trim EPS 5% for FY09-11F. We expect a higher yield on the company's Rs52bn investment book to help limit the impact of margin pressure.

We maintain our Buy rating
Maruti looks well placed to weather these turbulent times given its cash-rich balance sheet, and new expanded capacity to support new products and engine series for both the domestic and export markets. We expect competition from international car majors to ease, especially in capacity build and new product launches. On our revised EPS estimates, Maruti trades at the low end of its historical forward PE band, at 10.5x FY09F. We lower our target price to Rs750 to reflect our EPS changes. It remains our top pick in the Indian auto sector.