BASF India

The leading player in speciality chemicals catering to varied industries continues to maintain good chemistry for consistent growth

Sales of BASF India were higher by 61% to Rs 380.82 crore in the quarter ended June 2008 over the June 2007 quarter. Operating profit margin increased 90 basis points (bps) to 15.1%, taking up operating profit 72% to Rs 57.39 crore. Other income jumped 248% to Rs 2.92 crore and interest expense fell 5% to Rs 21 lakh. As depreciation cost rose just 8% to Rs 3.50 crore, profit before tax shot up 84% to Rs 56.60 crore. Net profit surged 84% to Rs 36.65 crore.

Revenue from agricultural products & nutrition jumped exponentially by 134% to Rs 175.90 crore. It accounted for 46% of the total sales. Profit before interest and tax (PBIT) from the segment rose 116% to Rs 43.83 crore, accounting for 67% of the total PBIT. The agricultural products business recorded higher sales and profit mainly due to the extended soya season, higher realisation, marketing initiatives and rationalisation measures undertaken in the fiscal ended March 2008 (FY 2008) and effective working capital management. The agrochem industry is witnessing good growth following the thrust on agriculture by the Union government and greater emphasis on improving agricultural productivity.

Revenue from the performance products soared 28% to Rs 150.44 crore. It accounted for 40% of the total sales. PBIT from the segment rose 8% to Rs 14.49 crore, accounting for 22% of the total PBIT. The performance chemicals business, catering to a wide spectrum of industries like textile, leather, plastics and coatings, is on a growth path due to good prospects of user industries. Demand for paper chemical is improving, with paper mills expanding capacities and introducing new products

Revenue from the plastics and fibers division spurted 21% to Rs 40.14 crore. It accounted for 11% of the total sales. PBIT from the segment fell 9% to Rs 2.69 crore accounting for 4% of the total PBIT. The plastic business comprises styropor (used for packaging and insulation) and performance polymers (engineering plastics). The major end-users in the packaging segment include consumer electronics, white goods automotive, electrical switchgear and accessories, and barrier films. In the insulation segment, the major consumers include cold storage and air-conditioning industries.

BASF India undertook a project to revamp the styropor plant for expanding its capacity from 20 kilotons (kt) to 30 kt per annum and also upgraded the process in FY 2008. The upgraded facility was commissioned in February 2008. With a view to cater to the increasing demand from the automobile industry, the company is planning to set up a compounding plant for engineering plastics with a capacity of 9,000 tonnes. This is expected to go on stream in the second half of 2009. This plant will also cater to the needs of the electrical as well as electronics industry.

Revenue from the chemical business jumped 41% to Rs 11.05 crore. It accounted for 3% of the total sales. PBIT from the segment soared 71% to Rs 3.96 crore, accounting for 6% of the total PBIT. BASF India’s products are used as intermediates in pharmaceutical products. The company also acts as indenting agent for chemicals supplied by the BASF group. The Indian pharmaceutical, agrochemical and coatings industries are on a growth path. These user industries continue to be active in supplying generic products to global pharma and agrochemical companies, which require high quality BASF chemicals.

BASF India has shown good growth despite the rise in crude oil prices — a key influencing factor for its raw materials cost. However, with crude trending down, that risk is reduced.

Recently the parent (BASF, Germany) increased its stake from 52.7% to 71.2% at Rs 300 a share. We can expect an EPS of Rs 28.2 in FY 2009. The current price of Rs 284 discounts this only 10.1 times.

Federal Bank

One of the best old private sector banks with excellent track record and comfortable CAR

Kerala-based Federal Bank (FBL), with 606 branches and 559 ATMs all over India, is looking to expand to Gujarat, Uttar Pradesh, Maharashtra, West Bengal and other parts of north India in this financial year, in line with its organic growth plans. Three hundred branches are in Kerala and the rest across the country. The bank plans to open more branches in the Gulf region, where is has got good customer base.

Interest earned grew a healthy 34% to Rs 745.12 crore in the first quarter ended June 2008. Interest expended increased 27% to Rs 278.19 crore. Net interest income (NII), thus, advanced 47% to Rs 278.19 crore.

Other income declined 8% to Rs 96.21 crore, restricting net total income to 28% at Rs 374.40 crore. Although the aggregate non-interest income registered a negative growth, fee income rose 75%, supported by fee and commission income, and remittance distribution, cash management and depository businesses.

Operating expense including staff cost and other expense was up 15% to Rs 120.88 crore, leading to operating profit rising 35% to Rs 253.52 crore. Though there was a significant jump in other operating expenses due to branch expansion and migration of the operating system to the central banking solution, FBL could contain the cost-to-income ratio at 32% as against 36% in the previous fiscal, which is one of the lowest in the industry.

However, provisions & contingencies including provision for non-performing assets (NPAs) spurted 157% to Rs 172.40 crore, in the June 2008 quarter. Investment provision amounted to Rs 131.79 crore on account of depreciation of investments held in trading book. This higher provisioning affected the growth in net profit, with profit before tax falling 33% to Rs 81.12 crore. However, tax provision slipped 76% to Rs 12.97 crore, lifting net profit 2% to Rs 68.15 crore.

Boosted by capital, Federal Bank’s net interest margin (NIMs) was up a strong 60 basis points (bps) to 380 bps over the June 2007 quarter. NIM was the highest among old private sector banks. Moreover, core fees (ex recoveries and treasury) increased 75% over the June 2007 quarter.

Capital adequacy ratio (CRR) was 20.74% end June 2008 as against the regulatory minimum of 9%. Tier-1 (core CRR) was 17.84 %. FBL holds Rs 189.72 crore in investment fluctuation reserve to take care of the depreciation in the held-to-maturity (HTM) category, though this is not required as per the Reserve Bank of India (RBI) guidelines. The bank is fully prepared to move to Basel II.

Gross and net non-performing advances as percentage to advances were 2.64% and 0.46%, respectively, end June 2008 as against 2.93% and 0.37% end June 2007.

The business per employee and profit per employee moved up to Rs 669 lakh and Rs 3.88 lakh, respectively, end June 2008 from Rs 533 lakh and Rs 4.05 lakh end June 2007. The cost-to-income ratio improved to 32.28% from 35.74% end June 2007.

FBL continues to be the favourite choice of NRIs. As an old generation private bank with roots in Kerala, with a fairly large population residing outside the country, the bank has got good NRI deposit and savings composition in its deposit base. NRI deposits constituted 26% of its total deposits. These low cost deposits are considered to be much more stickier than other term deposits. Its current-and-savings-account (CASA) ratio is also a healthy 25%.

Total business increased 32.7% to Rs 47178 crore end June 2008 over end June 2007. Total deposits spurted 28.7% to Rs 26893 crore and rose 38.3 % to Rs 20285 crore. FBL has a target of Rs 100000 crore of total business and to open 1,000 branches by 2012.

We expect FBL to register EPS of Rs 25.5 in the fiscal ended March 2009 (FY 2009). The share price trades at Rs 213. P/E works out to just 8.4. The bank’s book value (BV) stood at Rs 229.16 in FY 2008. BV is expected to go up to Rs 250. Thus, price/BV on FY 2008 numbers works out to just 1 and falls to 0.9 on our FY 2009 estimated BV. With the Left parties losing their hold on the Indian political scene, chances of liberalisation in banking regulations and allowing foreign banks to acquire Indian banks have increased. FBL offers one of the best acquisition opportunities among the private sector banks.

Banks - Sifting through macro signals

A virtuous cycle of lower lending rates, lower fiscal deficit and higher economic growth has propped up the banking economic system in the past few years. The benign economic environment now appears to be under threat. We believe valuations reflect the threat. Buy Axis Bank, ICICI Bank, Canara Bank and Power Finance Corp.

Virtuous growth cycle appears to be under threat
In the past couple of years, absolute fiscal deficit has been significantly lower than nominal GDP growth, which has boosted private participation in the economy. Private savings and investments have risen, underpinning economic growth. This has resulted in buoyant tax revenues, hence falling fiscal deficits. We believe this scenario is now under threat with rising fiscal deficit and slowing economic growth. Unlike in the past, the fiscal slippage and the increase in government borrowings are coinciding with high credit demand from the private sector. We also see pressure on domestic liquidity from a sharp moderation in balance of payments surplus.

Bulls may argue the interest-rate cycle has peaked or is close to doing so
We see some merit to the bull argument. However, loan growth, money supply and inflation are running ahead of the targets set by the Reserve Bank of India (RBI). Our economics team sees the possibility of another 25-50bp hike each in the cash reserve ratio and the repo rate over the next six months. Both lending and deposit rates have increased sharply in the past couple of months, and may have to be raised further to accommodate further tightening. The pass-through effect of the rate hikes on loan growth and asset quality should be seen in the next six to 12 months.

Banks appear unscathed so far
We believe net interest margins will remain under pressure and mark-to-market losses may rise. However, other levers, such as fee income growth and expense control, should partly offset challenges on the margin front. Asset quality remains healthy due partly to the diversified loan books of banks, while profitability is unlikely to slip sharply.

Valuations seem to reflect concerns; select stocks look attractive
The long-term attractiveness of the Indian economy and the banking industry remains intact, in ourc view. Near term, we believe the changes in the macro environment are reflected in sector valuations. We maintain Buy on Axis Bank, ICICI Bank, Canara Bank and Power Finance Corporation. We advise investors to Buy HDFC Ltd on dips.

Construction Materials - Are the conglomerates back?

During 1990-2000, more than 55% of the country's cement capacity addition came from conglomerates, led by L&T, Grasim, Tisco (steel), Raymonds (textile) and Zuari Industries (fertiliser). Following this, the industry saw disappointing returns over 1997- 2004. This period also saw the exit of most conglomerates, which laid the foundation for a structural boost to industry margins. In the past few months, a few conglomerates - JSW Steel (which generates slag from steel, which can be used to make blended cement) and Reliance Power/ RNRL (which would generate fly ash from the upcoming thermal power plants, which can be used to make blended cement) - have hinted at adding cement capacities through the greenfield route. Most recently, ABG International (holding company of ABG Shipyard) said it plans to set up a 4.6mmt facility in Gujarat and leverage the group's shipbuilding knowledge to transport cement via coasts in India/ Gulf.

Improved margins are attracting conglomerates
While the sales-tax exemption regime of the 1990s, which made new cement capacity more viable than existing capacity, is no longer operative, the step jump in EBITDA margins to Rs1,100/mt in FY08 (vs an average of Rs570/mt for the preceding 15 years) is again attracting new players. Clearly, the return profile of the industry is very healthy – we estimate the ROCE on greenfield investment at peak capacity is a healthy 20% today, compared to
10% during 1996-2004.

However, past experience shows entry of conglomerates is a negative
The collective move by conglomerates into the cement sector in the 1990s had seen margins collapse below justifiable levels, with a prolonged period of poor margins over 1997-2004. We believe this is due the ability of the conglomerates to cross-subsidise returns/profitability longer than a pure cement company can.

Reliance Industries - Refining risks - Abn Amro

RIL has rallied 16% over last month even as refining margins have fallen. Lower-thananticipated margins present the biggest risk to our estimates and valuation. We maintain our Rs1,850 target price and downgrade the stock from Hold to Sell.

Refining looking shaky
Singapore complex refining margins have averaged US$4.6/bbl to date in 2QFY09, according to Reuters, compared to US$8.2/bbl in 1QFY09 and US$6.4/bbl in 2QFY08. Gasoline margins have been weak even in the traditionally strong April-July period as US demand has declined. Given US car manufacturers are replacing their truck plants with small car plants, this decline could be structural rather than cyclical. Middle distillate (diesel/jet fuel) margins have been very strong (US$30/bbl+) since March 2008, but have dropped by US$10/bbl in August. Basically, demand growth appears to be slowing down just as new refining capacity is set come on stream. We believe the refining cycle will turn down from FY09 and forecast RIL GRMs will decline from US$15/bbl in FY08 to US$12.5/bbl in FY10. But, just as the upside in GRMs over last three years was under-estimated by the market (RIL GRM in FY04 was US$6.4/bbl), it is possible the downside will also end up looking worse.

Upsides all in E&P
We have assumed that RIL will sell 40mmscmd of gas to RNRL/NTPC for the next 17 years at the disputed contract price (US$2.6mmbtu), however litigation on this issue is continuing. If there were no such liability, our FY10 and FY11 EPS estimates would rise to Rs206 and Rs192 respectively and our valuation could increase to Rs2,000, assuming no other changes. There is potential for surprises in terms of large new discoveries. However, our valuation is based on a gross reserve estimate of 7.7bn boe by March 2009, compared to RIL's disclosed 2P reserve estimate of 4.4bn boe.

Downgraded to Sell, target price Rs1,850
We maintain our EPS estimates and our SOTP-based target price, which values RIL as of end- FY09 (post conversion of promoter warrants). Our estimates factor in no government policy risks from any imposition of minimum alternate tax (MAT) on Reliance Petroleum, loss of tax holiday for gas production or any export tax on refined products.

Commodity comment - Macquarie

Dollar drives base metals down, Chinese
metals output softens in July
Feature article
We look at the impact of the US dollar on the recent fall in base metals prices
and also review that latest Chinese production data.
Latest news
Nickel rallied 3.3% over the past week, lead fell by an astounding 14.8%,
while most other metals ended the week unchanged. On Friday, the main falls
occurred across the precious metals space, with silver down by 13.7% to
$12.82/oz and platinum dropping 7.4% to $1,400/oz, their lowest levels since
late 2007.
The Chinese government seems to be taking domestic power shortages
seriously, implementing a number of tax increases for coal and aluminium
alloys. Coking coal export taxes are to rise from 5% to 10% from 20 August,
coke from 25% to 40%, and a temporary export tax of 10% will be
implemented on thermal coal. In addition, a 15% export tax will be placed on
aluminium alloys (previously zero), the trade in which has been increasing
significantly in recent months as producers seek to escape the duties on
primary aluminium.
Latest data from the International Nickel Study Group showed the global
nickel market moving further into surplus in June. The group reported refined
nickel production of 117,000t in June versus consumption of 109,000t. For the
first half of 2008, the INSG reported production of 719,100t and production of
983,300t; a surplus of 35,800t.
Rio Tinto has been forced to cut alumina production at its Yarwun refinery in
Australia because of a blocked pipeline. The 1.4mtpa refinery has been idled
since July 29 and the company expects it to continue to run at a reduced rate
until the end of August, spokesman Diane Collier said. The company has not
specified the extent of the disruption, but said that it expects to be able to
meet its alumina sales commitments by running down stockpiles, diverting
some material from its other refineries and buying alumina from outside
sources.
The Macquarie Group is acting as adviser to Rio Tinto Plc in relation to the
proposed acquisition of Rio Tinto Plc by BHP Billiton Plc as announced on 8
November 2007.

Rocks from Stocks - Macuarie

Currencies: a turning point for policy
Event
Significant changes in currencies create opportunities.
Impact
Asian currencies have depreciated in recent weeks. This is more than just
USD strength; instead it represents a policy change in Asia. Four countries
that tightly control their currencies (China, Taiwan, Malaysia and Singapore)
have decided to support their export sectors by allowing depreciation. This
implies they are less concerned about inflation, and more concerned about
growth. It is less clear whether Korea has made this decision, given the
monetary policy tightening last week.
Currency changes in these countries should be seen as the first line of attack
on the policy front. Other measures of policy easing, including rhetoric, direct
measures, monetary and fiscal policy will inevitably follow as Asian inflation
rates head towards zero over the next few quarters.
Policy support should be a major positive for market sentiment. Growth
outcomes will be a lot better if policy is forthcoming, and we think this broadly
supports a stance towards domestic sectors in Asia such as banks, real
estate and consumer.
We expect the largest depreciations to occur in Singapore, Malaysia and
Taiwan. In China, international political pressure will prevent a significant
depreciation (but a large appreciation is now off the table). Since these are
supported by policy decisions, the depreciations are likely to continue even if
the USD stabilises. Korea probably should allow depreciation but we are
concerned that it will keep policy tight perhaps due to concerns about a likely
blow-out in its current account deficit.
Recommendation
We have identified stocks that have the greatest proportion of USD revenue
and costs as winners and losers from translation gains. Some caution must be
taken here though, because we must bear in mind that the reason the USD is
rising is that non-US growth is declining. Looking at translation effects:
⇒ Translation winners (ie those with high proportion of USD revenue) are
Keppel, Olam, Sembcorp, TSMC, ASE and Powerchip, but for the last
three the growth impact could swamp the translation impact.
⇒ Translation losers (ie those with high proportion of USD costs) are HTC,
Astro. There are a significant number of Koreans also including LG
Chem, SK Energy and Honam Petrochem. an asset allocation perspective, the implied policy shift that thesecurrency movements represent is a reason to be more optimistic on domestic
demand sectors in China, Taiwan, Malaysia and Singapore. We are
overweight banks and property across the region, particularly in China and
Singapore, and see these developments as supporting this stance.

Reliance Industries - Macquarie

Niko says D6 oil, gas start in 3Q CY08
Event
Niko Resources (NKO CN, Not rated), which owns a 10–15% stake in
Reliance Industries’ three E&P blocks, has given an update on the 1Q FY09
operations. It has made one new discovery in the KG-D6 block and two wells
– one each in KG-D6 and NEC-25 are being evaluated. It expects the first gas
and oil production from KG-D6 before the end of the current quarter.
Impact
New hydrocarbon zone discovered in KG-D6. Niko has completed the
exploratory drilling in two wells; while one has been declared a discovery, the
results of the second well are being evaluated. We expect Reliance Industries
(RIL) to announce new discoveries in KG-D6 soon.
⇒ The L1 well, located just outside the D1 and D3 development area, was
the first discovery in the Pleistocene submarine channel complex play.
This complex extends over a significant portion of the block, particularly in
the northern and eastern areas. We believe this opens a new oil and gas
play in the deeper part of the block.
⇒ The MK-1 Cretaceous exploration well, located 11km from the MA oil
development was drilled in 1Q FY09. The results of this well are under
evaluation.
KG-D6 oil and gas production will start in the next two months. The plan
for the development of D1 and D3 gas fields provides for gas production
at a rate of 80mmscmd envisaged within the first year of production. MA
oil field is expected to have peak oil production is 40,000bbl/d.
One new discovery is likely to be announced in NEC-25. One well, B3,
was drilled during the quarter and the well results are under evaluation. RIL
plans to drill additional exploratory locations during the year. The development
plans have been submitted for the six gas discoveries that have been
declared commercial by the Director General of Hydrocarbons (DGH).
Drilling will commence by 3Q CY09 in Mahanadi D4, which could
potentially be much larger than KG-D6. Initial production from 5% of KGD6 is
poised to add 1.4% or US$20bn pa to India’s GDP. Based on the analysis of a
2,365km 2D seismic programme, a further 2,800km 2D seismic programme
and a 3,600sq km 3D seismic programme have been designed and
acquisition is underway with completion expected in 4Q CY08. Once the new
seismic data is processed and interpreted, initial drilling locations will be
selected, possibly as early as mid-CY09. Drilling is expected to follow shortly
thereafter.
Earnings revision
No change.
Price catalyst
12-month price target: Rs2,780.00 based on a Sum of Parts methodology.
Catalyst: New oil and gas finds and enhanced clarity on organised retail.
Action and recommendation
RIL is our top sector pick. We believe RIL's upstream business holds large
potential. We reiterate our Outperform rating and a target price of Rs2,780.

Suzlon - Macquarie

Harnessing wind power
Initiate coverage with an Outperform rating
We initiate coverage of Suzlon (SUEL IN, Rs243; MCAP: US$8.8bn), the world’s
fifth-largest wind turbine maker with an Outperform rating and target price of
Rs315, or 29% upside potential. Despite execution risks, we expect the
company’s longer-term integration strategy to deliver solid results.
Supply shortages expected to persist
While global demand for wind turbines is likely to remain strong due to higher
energy costs and environmental issues, we expect further supply constraints.
With just a handful of global wind turbine suppliers and considerable entry
barriers, we expect pricing power to remain strong through to the end of the
decade. Capacity additions from new players are at least two years away. We do
not expect the decline in crude oil prices to substantially impact longer-term
demand for renewable energy.
Integration strategy – a long-term positive
We expect Suzlon’s integration strategy and its quest to stretch across the value
chain to generate medium-term benefits. The strategy is particularly important in
the face of component shortages across the supply chain. With the acquisitions
of Hansen (HSN LN; £2.71, NR) and REpower (RPW GR, €205, NR), Suzlon
has gained strength across geographies while shoring up the supply of various
components.
Earnings robust, expect new order inflows
Suzlon’s management indicated that it is negotiating large multi-year contracts. With
no delay in capacity expansion (which is slated to double by 3Q FY09) and amid
tight global supply, we expect new order inflows in coming months. We forecast an
earnings CAGR of 50% from FY08-11, backed by strong output growth and
sustainable margins.
Execution problems are not unusual
Suzlon has faced execution problems and order cancellations (rotor blade cracks
in the US) and output issues for its core S88 turbines. While the concerns are
valid, we note that other global players – Vestas (VWS DC, DKK 584, NR) (23%
market share) and Gamesa (GAM SM, €28.7, NR) (15%) have faced similar
issues.
Strong derating, discount not justified
Suzlon has underperformed the broader Indian market by 11% (down 35% YTD
vs 24% for the broader market). At 15x FY10E earnings, Suzlon trades at a 20%
discount to its global wind energy peers vs a 40%+ premium previously. Further,
adjusting for the valuations of Hansen and REpower, the WTG business trades
at a mere 9x FY10 earnings – compensating for the execution concerns.

Bajaj Auto - Macquaire

Skidding on margins
Initiate with an Underperform
We initiate coverage on Bajaj Auto with a non-consensus Underperform rating and
a target price of Rs460, implying downside potential of 19% from the current level.
Our Underperform also reflects our negative stance on the two-wheeler space.
Automobile sector reeling under pressure
The automobile sector in general and the two-wheeler space in particular are
reeling under the impact of strong commodity prices on the one hand and a
strong credit crunch on the other. With large banks such as ICICI effectively
pulling out of the two-wheeler lending space (nearly 70% of vehicles are bought
on loans), volume growth remains a challenge even on a lower base. We expect
both these trends to continue in the near to medium term. Our view is reflected in
the lacklustre earnings and valuations of Bajaj Auto.
Bajaj – the perpetual challenger
Bajaj Auto’s plans to improve profitability and sales with a major thrust in the
most profitable executive segment by challenging Hero Honda seems to have
been thwarted with the below par performance of its new product launches over
the past two years – Discover, Platina and XCD. This has resulted in Bajaj Auto
losing market share to market leader Hero Honda (HH IN, Rs784, UP, TP:
Rs590) over the past two years. We remain sceptical on Bajaj’s ability to regain
lost ground through planned product launches (four in FY09).
Profitable three-wheeler space to slowdown
The three-wheeler segment – a highly profitable segment for Bajaj Auto (35% of
operating profit) – is reeling under pressure from a general economic slowdown.
While the domestic market seems to be on a steadily declining trend; export
markets have cooled down after a surge in the past two years.
Lacklustre outlook; below consensus earnings
Our EPS estimates (6% below consensus for FY09 and FY10) imply a CAGR of
5% between FY08−11E. We would expect volume growth to recover over the
medium term as and when the credit squeeze eases. However, with strong
competition and a negative product profile (lower proportion of profitable threewheelers),
we do not expect profitability to return to the peak levels of FY07.
Valuations could get cheaper
Bajaj’s valuations at 10x FY09E earnings are below its historical band but
broadly in line with its peers. However, valuations could come down further given
the poor growth scenario in the near-to-medium term. We value Bajaj Auto at
Rs460/share based on DCF, or an implied PER of 8x FY09E earnings.
Key risks
Key risks we see for Bajaj Auto include reduced competitive intensity amongst
the top two player leading to an improvement in overall profitability, macro
economic variables – including interest rates and GDP growth which could lead
to stronger than anticipated revenue growth, as well as delay in capacity
expansion or new product launches, particularly by new players.

Ambuja Cements - Not out of the woods yet

We believe downside risks to Ambuja's earnings persist with 40% exposure to North Indian markets where imports from Pakistan and new capacity will exert pricing pressure. Despite falling, the stock still does not look cheap relative to peers. We cut our EPS forecasts by 5-14%, Sell.

Pricing power reduced in ACEM's key markets
ACEM sells over 66% of its cement in Gujarat and North India, where we see limited pricing power in FY09. In Gujarat, there is government pressure (producers agreed to reduce prices in return for the lifting of a ban on exports from the state), while, in North India, we believe imports of around 0.1mmt/month from Pakistan are reducing pricing power. This was clearly visible in ACEM's 2QFY08 results, which saw a decline of 1% qoq in realisations, while companies like India Cements raised prices by 3% qoq.

Cost pressures could accelerate
ACEM's coal sourcing is as follows: 33% imports, 50% from linkage coal of Coal India and 17% from local spot markets. Management said it would be importing coal at contracted prices of US$140 CIF until the current contracts run out in 3QFY08. Thereafter, its imported coal would cost US$210 CIF, which we see putting further pressure on margins. ACEM's power & fuel costs, at Rs717/mt in 2QFY08, were still lower than those of players like India Cements, at Rs832/mt.

We expect India cement pricing to come under pressure in 2009
We forecast an incremental capacity addition of 75.6mmt in India over the next two years, vs incremental demand growth of 39.8mmt. While most of the new capacity commissioned this year will go into full production only in calendar 2009, we forecast a surplus of 23.6mmt (which represents 9% of the cement industry's capacity) in FY10. We have modelled a 5% drop in realisations in FY09 and, so, expect EBITDA/mt to fall from Rs1,087 in 2008 to Rs866 in 2009.

Sell maintained with lower target price of Rs78
After the weaker-than-expected 2QFY08 results, we have cut our FY08-09F EPS by 5-14%. We have lowered volume estimates due to loss of market share to imports in North India and our margins due to higher coal costs. Despite the stock correction, ACEM at US$124 EV/mt still more expensive than ACC at US$97 and India Cement at US$86.

Tata Chemicals - Time for a breather

Tata Chem has outperformed the index by 40% since November. Positive news on the US acquisition and fertiliser policy changes seems to have played out. We cut our target price to Rs387 and await further signals on long-term soda ash pricing for 2009.

Strong 1Q09 result; but some of the gains may not sustain
Tata Chem saw the fertiliser division's consolidated operating profit improve from just Rs461m in 1Q08 to Rs1,872m in 1Q09. Most of this was contributed by the DAP division, which was able to take advantage of import parity pricing for 1Q09 even while it had locked in rock phosphate prices for the quarter. Going forward, we believe international rock phosphate suppliers are likely to increase prices to claw back some of the margin gains made by phosphoric acid producers and Indian DAP producers such as Tata Chemicals in 1Q09.

New urea pricing policy has a positive impact on FY10F
The Ministry of Fertiliser has announced a new urea pricing policy linked to import parity prices for new domestic capacity additions. Tata Chem has planned a debottlenecking at its Babrala urea plant, which should increase its capacity by about 0.2Mtpa starting December 2008. Under the new policy, we believe this new unit will generate an additional US$30m of operating profit and thus we boost our FY10F EPS estimate by 10%.

Stock has had a good run; clouds forming on the horizon
Tata Chem has outperformed the index by about 40% since November 2007 and, in our view, much of the anticipated positive news flow on the fertiliser policy has played out. We now see a few clouds on the horizon, which include a potential rise in working capital requirements on the fertiliser side and the impact of any potential slowdown in the Chinese economy, post-Olympics, on the global soda-ash cycle.

We reduce our target price to Rs387
We lower our target price from Rs450 to Rs387 as we adjust our India risk-free rate in our DCF model from 8.2% to 9.2% and increase the holding company discount for TTCH's investment portfolio from 30% to 50%. At this target price, the stock would trade at an FY10F PE of 9.4x, in line with similar cyclical commodity exposures. So, while we still see upside potential, the riskreward is becoming more balanced and we await clearer signals on 2009 soda-ash contract pricing.

Banks' Subprime Losses Top $500 Billion on Writedowns- Pain Not over

12^th August 2008 (New York) - Bloomberg

By Yalman Onaran

Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as write-downs spread to more asset types. The write-downs and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion.

`It just keeps spreading from one asset to another, so it's hard to know when these write-downs will stop,'' said Makeem Asif, an analyst at KBC Financial Products in London. ``The U.S. Economy needs to stabilize first. But even then, Europe could lag and recover later. There's still a lot more downside.''

Auction-rate securities have begun adding to the losses as regulators and prosecutors force banks to buy back bonds they'd sold as safe investments. UBS set aside $900 million to cover potential losses from repurchasing the securities, while Citigroup Inc. and Wachovia Corp. estimated losses at $500 million each.

Subprime Collapse

The collapse of the U.S. subprime mortgage market last year has saddled banks worldwide with $501 billion of losses from declining values of securities tied to all types of home loans and commercial mortgages as well as leveraged-loan commitments.

Banks and brokers have raised $353 billion of capital to cope with the write-downs, according to data compiled by Bloomberg. The gap between losses and capital infusions, which now stands at $148 billion, has regularly narrowed to about $80 billion as capital raising follows write-down announcements.

The following table shows the asset write-downs and credit losses as well as the capital raised in response. All numbers are in billions of U.S. dollars, converted at today's exchange rate if reported in another currency.

Firm	Write-downs & Loss (US$ Bn)	Capital Raised (US $ Bn)
Citigroup	55.1	49.1
Merrill Lynch	51.8	29.9
UBS	44.2	28.3
HSBC	27.4	3.9
Wachovia	22.5	11
Bank of America	21.2	20.7
IKB Deutsche	15.3	12.6
Royal Bank of Scotland	14.9	24.3
Washington Mutual	14.8	12.1
Morgan Stanley	14.4	5.6
JPMorgan Chase	14.3	7.9
Deutsche Bank	10.8	3.2
Credit Suisse	10.5	2.7
Wells Fargo	10	4.1
Barclays	9.1	18.6
Lehman Brothers	8.2	13.9
Credit Agricole	8	8.8
Fortis	7.4	7.2
HBOS	7.1	7.6
Societe Generale	6.8	9.8
Bayerische Landesbank	6.4	-
Canadian Imperial (CIBC)	6.3	2.8
Mizuho Financial Group	5.9	-
National City	5.4	8.9
Lloyds TSB	5	4.9
IndyMac	4.9	-
WestLB	4.7	7.5
Dresdner	4.1	-
BNP Paribas	4	-
LB Baden-Wuerttemberg	3.8	-
Goldman Sachs	3.8	0.6
E*Trade	3.6	2.4
Nomura Holdings	3.3	1.1
Natixis	3.3	6.7
Bear Stearns	3.2	-
HSH Nordbank	2.8	1.9
Landesbank Sachsen	2.6	-
UniCredit	2.6	-
Commerzbank	2.4	-
ABN Amro	2.3	-
DZ Bank	2	-
Bank of China	2	-
Fifth Third	1.9	2.6
Rabobank	1.7	-
Bank Hapoalim	1.7	2.4
Mitsubishi UFJ	1.6	1.5
Royal Bank of Canada	1.5	-
Marshall & Ilsley	1.4	-
Alliance & Leicester	1.4	-
U.S. Bancorp	1.3	-
Dexia	1.2	-
Caisse d'Epargne	1.2	-
Keycorp	1.2	1.7
Sovereign Bancorp	1	1.9
Hypo Real Estate	1	-
Gulf International	1	1
Sumitomo Mitsui	0.9	4.9
Sumitomo Trust	0.7	1
DBS Group	0.2	1.1
Other European banks*	7.2	2.3
Other Asian banks*	4.6	7.8
Other U.S. banks*	2.9	1.9
Other Canadian banks*	1.8	-
TOTAL**	501.1	352.9