JANUARY 5, 2009
Economy News
4 The Reserve Bank of India slashed its two key short-term interest rates by 100 bps each. It cut the repo rate, to 5.5% from 6.5%. The reverse repo rate was cut to 4.0% from 5.0%. RBI also announced a CRR cut, by 50 bps to 5.0% with effect from Jan. 17. (FE) 4 India's fertiliser subsidy is likely to touch Rs 1,020.0bn this fiscal, about Rs 140.0bn less than the revised estimate, even as the government says it remains vigilant to thwart any profiteering strategy of global farm nutrient sellers. (BS) 4 In a bid to check sugar prices in the domestic market, the government is likely to make it harder for companies to access release orders (RO) for sugar exports under open general licence (OGL). Under the system, sugar millers and traders are required to seek prior permission from the food ministry for undertaking sugar exports. (ET) 4 Second stimulus package has announced a series of measures to boost the economy. These measures include cut in CRR by 50bps, repo and reverse repo by 100bps, raising FII investment limit in rupeedenominated instruments to $15 billion from $6 billion, liberalization of External Commercial Borrowing norms, allowing IIFCL to raise Rs 30K crore via tax free bonds and withdrawl of exemptions on CVD on cement, TMT bars and structurals. (BS)
Equity
2 Jan 09 Indian Indices SENSEX Index NIFTY Index BANKEX Index BSET Index BSETCG INDEX BSEOIL INDEX CNXMcap Index BSESMCAP INDEX World Indices Dow Jones Nasdaq FTSE Nikkei Hangseng 9,958 3,047 5,674 2,284 7,287 6,241 3,894 3,870 9,035 1,632 4,562 8,860 15,043
% Chg 1 Day 1 Mth 3 Mths 0.6 0.4 1.6 (1.3) 0.7 1.3 2.1 1.6 2.9 3.5 2.9 1.3 4.6 11.1 12.2 20.5 (3.1) 13.7 13.6 16.1 16.5 4.6 8.1 12.7 6.2 10.2 (20.5) (20.2) (11.7) (26.6) (28.8) (25.9) (18.8) (29.2) (12.5) (16.2) (8.4) (19.7) (13.7)
Value traded (Rs cr)
2 Jan 09 Cash BSE Cash NSE Derivatives 4,220 10,460 31,631.7 % Chg - Day 38.7 49.1 41.2
Corporate News
4 Neyveli Lignite Corporation today said it will raise Rs 17.5bn through issue of bonds in order to meet capital expenditure requirement for currently running projects. (BS) 4 ONGC Videsh Ltd (OVL), the overseas investment arm of India's largest oil producer Oil and Natural Gas Corporation (ONGC), is planning to bid for a "few" of the 19 exploration blocks being offered under two bidding rounds by Iraq. (BS) 4 Suzlon Energy today said it has agreed to sell a 10% stake in its Belgium arm Hansen to a London-based investment firm for an undisclosed amount. (BS) 4 Era Infra Engineering has bagged four construction projects worth Rs 2.94bn. (BS) 4 Strides Arcolab has received the US Food and Drug Administration approvals for Abbreviated New Drug Application (ANDA) for two drugs. (BS) 4 TVS Motor Company on Friday reported 21.9% decline in motorcycle sales in December last year at 40,057 units in comparison with 51,293 units in the same month previous year. (BL) 4 Tata Consultancy Services (TCS), India's biggest software services provider, is eyeing tier-II and tier-III cities such as Pune, Nagpur, Gandhinagar, Kochi and Chandigarh to drive its future growth in the domestic market. (BS) 4 Vishal Retail, a value retailer, may miss its Rs 1,800 crore revenue target set for the year ending March 31, as consumers cut down on purchases anticipating job cuts and grim job outlook. (BS) 4 Jindal Stainless (JSL), India's largest stainless steel producer, has decided to go slow on its Rs 2,887-crore ($600 million) overseas projects. It has also decided to delay its Rs 10,000-crore expansion plan in India following a slump in demand for the alloy amid global economic slowdown. (BS)
Net inflows (Rs cr)
1 Jan 09 % Chg FII Mutual Fund 100 45 (964) (88) MTD 100 45 YTD 100 45
FII open interest (Rs cr)
1 Jan 09 FII Index Futures FII Index Options FII Stock Futures FII Stock Options 6,532 8,308 10,706 632 % Chg (0.1) 10.2 0.5 36.3
Advances / Declines (BSE)
2 Jan 09 Advances Declines Unchanged A 138 64 B 1,173 540 53 S 267 150 15 Total % total 1,578 754 68 66 31 3
Commodity
% Chg
2 Jan 09 1 Day 1 Mth 3 Mths
Crude (NYMEX) Gold (US$/OZ) Silver (US$/OZ)
(US$/BBL) 47.2 875.4 11.6
1.9 (0.8) 1.6
15.8 15.1 21.4
(49.7) 4.2 3.9
Debt / forex market
2 Jan 09 1 Day 1 Mth 3 Mths 10 yr G-Sec yield % Re/US$ 5.46 48.75 5.34 48.77 6.85 50.15 8.36 46.61
Sensex
21,100 17,925 14,750 11,575 8,400
Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange
MORNING INSIGHT
January 5, 2009
ECONOMY UPDATE
Saday Sinha saday.sinha@kotak.com +91 22 6621 6312
ANOTHER MONETARY & FISCAL STIMULUS PACKAGE
The Govt. also announced 2nd stimulus package, in tandem with the RBI
RBI has cut the Cash Reserve Ratio (CRR) by 50 bps from 5.5% to 5.0% with effect from fortnight beginning January 17, 2009. RBI also reduced the Repo and Reverse repo rate under LAF window by 100 bps each to 5.5% and 4.0%, respectively with immediate effect. The reduction in CRR is likely to inject additional liquidity Rs.200 bn to the financial system. The cut in policy rates as well CRR would further enable banks to reduce their lending rates (of course accompanied by reduction in deposit rates!!) This is in line with our belief that we are on the downward trajectory of interest rate cycle. With the moderating WPI (6.38% for the week ended December 20, 2008, lowest in last 42 weeks) which is likely to touch even 2.5-3.5% levels by the end of FY09, RBI is providing additional liquidity for onward lending at lower interest rates. The government in tandem with the Central Bank has also announced second stimulus package to invigorate the sagging economic activities. RBI has cut the Cash Reserve Ratio (CRR) by 50 bps from 5.5% to 5.0% with effect from fortnight beginning January 17, 2009. Since mid-September 2008, the RBI has reduced the CRR from 9.0% to 5.0%. The current 50 bps cut is likely to inject additional liquidity Rs.200 bn to the financial system. RBI also reduced the policy rates by 100 bps each with immediate effect. The Repo rate under LAF window has been reduced to 5.5% from 6.5% earlier. This has been reduced aggressively from 9.0% in the mid-September 2008. The Reverse repo rate under LAF window has been reduced to 4.0% from 5.0% earlier. Since mid-September 2008, RBI has reduced this by 200bps from 6.0%. (Repo rate is the rate at which banks can borrow from the RBI through LAF windows whereas reverse repo rate is the rate at which banks park their surplus cash with the RBI for a short term). The cut in policy rates as well CRR would further enable banks to reduce their lending rates (off course accompanied by reduction in their deposit rates!!) The government in tandem with the Central Bank has also announced second stimulus package to invigorate the sagging economic activities. n Government has increased the FII investment ceiling in rupee denominated corporate bonds from the existing $6 bn to $15 bn and removed the interest ceiling on the ECB (external commercial borrowings). This would help in bringing down credit spreads, which are hovering around 300 bps for AAA rated papers, in turn making borrowings cheaper for corporate through issuance of quality papers. n Indian Infrastructure Finance Company is being permitted to raise another Rs.300 bn by means of tax-free bonds. n A SPV (Special Purpose Vehicle) is being created to lend to non-banking finance companies (NBFCs) to the tune of Rs.250 bn. n Norms related to the borrowing by states from the market are also eased to increase public spending. They are now allowed to borrow an additional Rs.300 bn from the market. n Public sector banks are provided with additional Rs.200 bn for recapitalization over the next two years.
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MORNING INSIGHT
January 5, 2009
n The fiscal package has provided a reprieve for troubled exporters in the form of higher rates for tax refunds and a commitment that the DEPB scheme would be extended up to December 2009. Specific sectors such as knitted fabrics, bicycles, agricultural hand tools and some categories of yarn would get duty draw backs at enhanced rates. n The withdrawal of countervailing duty (CVD) exemptions on imports of certain steel products and cement which were provided earlier to contain the price spiral. n Accelerated depreciation of 50% for CVs bought till March 09 has been allowed
Impact
The 50 bps cut in CRR from 5.5% to 5.0% is likely to inject additional liquidity Rs.200 bn to the financial system. The cut in policy rates as well CRR would further enable banks to reduce their lending rates (of course accompanied by reduction in their deposit rates!!). Allowing $9 bn more of FII money into the debt market and external commercial borrowing relaxations would help in bringing down credit spreads, which are hovering around 300 bps for AAA rated papers, in turn making borrowings cheaper for corporate through issuance of quality papers. The flow of credit to the economy will be further enhanced by measures like - SPV designated to provide liquidity support against investment grade paper to NBFCs fulfilling certain conditions, arrangement made with PSU banks to provide line of credit to NBFCs for buying commercial vehicles and credit targets of PSU banks revised upward to reflect the needs of the economy in the present difficult situation. The package provides for recapitalizing PSU banks by Rs.200 bn over the next two years. This move would be healthier for the Indian banking sector. In the easing inflationary environment, RBI is providing additional liquidity to banks for lending to productive sectors at lower interest rates. The higher public spending, easing liquidity and concessions related to foreign trade etc are likely to propel the economic growth and mitigate the impact of global slowdown. This fiscal stimulus package, second within a month and in tandem with monetary stimulus package by the RBI, mark a clear shift from reining in inflation to spurring growth in the challenging global and domestic environment.
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MORNING INSIGHT
January 5, 2009
MARKET S TRATEGY
Research Team +91 22 6621 6301
MARKET STRATEGY
Global markets took comfort in December 2008 from the continued fall in interest rates and fiscal stimulus packages announced by major economies. Investor sentiment improved as concerns regarding further bankruptcies in the US financial sector also receded during the month. Emerging markets including India saw net foreign fund inflows in the month. India announced its first fiscal stimulus package aimed at spurring consumption demand and public sector investments. With the pace in industrial production slackening, the RBI responded through fresh rate cuts and measures to address liquidity. The potential slowdown in the Indian economy has impacted equity markets which, in our opinion, are now discounting the same. Valuations at about 10x-11x current year earnings are not demanding, though they are higher than most Asian peers, according to consensus estimates. Falling commodity prices provide comfort on the inflation and interest rates front. While foreign fund outflows have reversed during the quarter, this trend needs to sustain for the markets to consolidated and move up. We thus believe that, fiscal / monetary measures and sustained foreign fund flows would be the key triggers. We maintain that, in January, markets will focus on potential government (fiscal measures) and RBI actions (further interest rate cuts). A rise in geopolitical tensions in the South Asian region may keep markets nervous. Markets would focus attention on the US as the new President-elect takes office, third quarter earnings and the management-speak thereof. FII flows will also be closely watched. On balance, we believe that, adequate measures and forceful implementation will likely moderate the economy's slide and give us the opportunity of a soft landing. Incremental FII outflows may also continue to moderate and help markets consolidate in the medium term. In the near term, quarterly results will lead to sector specific volatility.
Benchmark indices
Sensex (LHS) Nifty (RHS) 19000 16375 13750 11125 8500 Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec 5300 4625 3950 3275 2600
Sectoral indices (1st - 29th Dec 2008)
20% 15% 10% 5% 0% SENSEX FMCG NIFTY -5%
BSE small cap
PSU
Tech
Capital goods
Oil & Gas
Banking
BSE midcap
Source: Bloomberg
Source: Bloomberg
Healthcare
Metal
Auto
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MORNING INSIGHT
January 5, 2009
Markets recover in December…
Indian equity markets recovered in the month of December and the Sensex even managed to breach the 10,000-mark briefly. The gains were more pronounced in a few of the small and mid cap stocks. Realty, Banking, PSUs and Metals were out-performers for the month. The IT sector was a relative underperformer due to sustained weakness in the US economy. Satyam Computers had to call off its USD 1.6 bn acquisition of two infrastructure companies owned by the promoters, after shareholder dissent and Corporate Governance issues. This added to the overall weakness in IT sector.
…on institutional buying…
FIIs turned net buyers during the month. As of December 24, 2008 they had bought stocks worth about Rs.15bn. FIIs have been liquidating stocks in Indian and other emerging markets to shore up resources to beat the global liquidity crunch. With the improvement in global liquidity situation, FIIs are likely back at bargainhunting in emerging markets. While most of the developed world is already in recession, India is expected to show a 6% - 7% growth in the current fiscal. As per estimates, the total FII holdings in Indian equities have come down to about $60bn as compared to more than $240bn at the beginning of the current calendar. Stabilization of FII flows and / or positive FII flows are important for the markets to stabilize and move up. Nevertheless, India investment story continues to attract FIIs with long-term view. Registrations by new foreign institutional investors have kept pace despite risk aversion towards emerging markets in recent months.
FII & Mutual Fund investment (Rs cr)
20,000 FII 10,000 MF
(10,000)
(20,000) Jan_06 Feb Mar Apr_0 May Jun Jul Aug Sep Oct Nov Dec Jan_07 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan_08 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Bloomberg
…and fiscal / monetary stimulus
The markets reacted positively to the monetary (rate cuts) and fiscal measures (fiscal stimulus) announced by the government. The government announced the fiscal stimulus package to support various sectors of the economy that have been adversely affected by the global slowdown. The measures announced by the government mainly include additional infrastructure spending and excise duty cuts by 400bps aimed at enhancing consumption of cars, cement, textiles and other products. In order to boost the power sector, free import duty has been allowed on naphtha. The excise duty on export of iron lumps has been cut to 5% from 15% and on iron ore fines the levy has been withdrawn. The stimulus package has also allowed India Infrastructure Finance Company Ltd. to raise Rs.100bn through tax-free bonds by March, 2009. The government has reportedly prepared a second fiscal stimulus package aimed mainly at the real estate, infrastructure and other export-driven sectors.
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January 5, 2009
RBI cut the repo rate and reverse repo rate by 100 bps each from 7.5% to 6.5% and from 6.0% to 5.0%, respectively with effect from December 08, 2008. While this directly does not provide liquidity to the system but does give some kind of signal to bankers that the time for an easier interest rate regime has begun. Therefore, we believe that if the present easy liquidity situation prevails, banks are likely to soften the lending rates, going forward. Banking, infrastructure and real estate stocks put strong gains following the various fiscal stimulus announced by the government. Mid and small cap stocks also witnessed renewed buying. The positive sentiment even overshadowed the dismal IIP numbers for the month of October. In early January 2009, the government has announced the second fiscal stimulus package. The package aims to provide additional funding for financing capex to various sectors while allocating additional amounts for infrastructure spending by the government. We believe that the implementation of these packages will be very important as far as public spending is concerned.
IIP growth (%)
Negative IIP in October; Outlook remains weak
The index of industrial production (IIP) for October 2008, which was declared in December, declined 0.4%, as compared to 12.2% growth in October 2007 Mining and electricity grew at 2.8% and 4.4%, respectively during October, 2008 whereas manufacturing sector witnessed decline of 1.2% during the same period. Capital goods grew only 3.1% in the month of October 2008 as compared to 20.9% in October 2007 and 18.8% in September 2008. We believe that, the 0broad moderation in IIP would continue for the rest of the financial year.
16 12 8 4 0 -4 Oct-05 Oct-06 Oct-07 Apr-05 Apr-06 Apr-07 Apr-08 Oct-08
Corporate Governance issues in focus - Satyam and Reliance Communication
Corporate governance came under sharp focus during the month. Satyam Computers had to call off its $1.6bn acquisition of two infrastructure companies owned by promoters, after shareholder dissent and issues on corporate governance. The stock moved down sharply. In response to sharp fall, the management announced decision to consider a share buyback at its forthcoming board meeting. In another instance, as per press reports, the Indian telecom regulator (TRAI) has sent an investigation report on Reliance Communication's revenues to the department of telecom regarding possible evasion of license fees through diversion of revenues through an internet subsidiary.
Source: MOSPI
Federal Reserve acts to avert a prolonged recession…
With strong signs of an economic recession gathering momentum, the Federal Reserve lowered the target for its benchmark interest rate from 1% to between 0% and 0.25%. The Fed also reportedly indicated that the rate was likely to remain "exceptionally low" for a while and that it would use "all available tools" to secure sustainable economic growth and stable prices. This is the first time that the US interest rates have come down to below 1%.
….as economic data from the US continued to be disappointing
The US GDP de-grew by about 0.5% in 3QCY08. Manufacturing goods orders in the US witnessed a contraction in October 08. The National Bureau of Economic Research confirmed that US economy was in recession since December 2007. The fate of the bail out package for US automakers remained in focus during the month. The $13.4 billion in federal loans announced by President Bush may be enough to get the automakers through the next few months. But this may be only a temporary reprieve for the auto industry given tight credit and a weakening U.S. economy. The confidence in the US financial markets took a further beating as US regulators reported an alleged $50bn scam run by Bernard Madoff.
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MORNING INSIGHT
January 5, 2009
Rupee movement (US$)
Emerging economies also report weak numbers
Meanwhile, the Chinese economy which is highly export driven reported a fall in exports for the first time since 2001. China's exports fell by 2.2% in the 12 months to November and its imports plunged by 17.9%, raising the country's monthly trade surplus to a record $40.1 billion. On the other hand, Ireland declared a bailout package of USD10.5bn to support three large banks of the country. India, which gas reported a de-growth in IIP, announced a fiscal-stimulus package of Rs200bn.
51 49 47 45 43 41 39 Feb-07 Jul-07 May-08 Jan-05 Jun-05 Nov-05 Dec-07 Sep-06 Apr-06 Oct-08
Rupee gains against the dollar on foreign fund inflows
Rupee gained against the dollar during the month. The appreciation in Rupee against the USD was in sympathy with the foreign fund inflows. The rupee appreciated 3% on a m-o-m basis and was trading at Rs.48.7/USD as at December 29. Rate cut in USA to near-zero level also provided a strong reason for capital to flow out of the US to emerging markets. The USD weakened against other Asian currencies as well as expectations of another massive bail out package build up.
Source: Bloomberg
Inflation (%)
14.5 12.5 10.5 8.5 6.5 4.5 2.5 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Inflation springs up a pleasant surprise
Headline inflation (WPI) dropped sharply to 6.84% for the week ended December 06, 2008 and further to 6.61% for the week ended December 13, 2008. The recent fall in inflation would provide relief to both RBI as well government and pave their way to take up monetary and fiscal measures, respectively, to spur economic growth. The major decline came due to sharp decline in fuel segment (due to recent cut in fuel prices). In our view, in the backdrop of falling crude and commodity prices, inflation may moderate further in the coming weeks.
Recommendation
Global markets took comfort from the continued fall in interest rates and fiscal stimulus package announced by major economies. Investor sentiment improved as concerns regarding further bankruptcies in the US financial sector also receded during the month. Emerging markets including India saw net foreign fund inflows in the month. India announced its first fiscal package aimed at spurring consumption demand. With pace in industrial production slackening, the RBI responded quickly through fresh rate cuts and measures to address liquidity. The potential slowdown in the Indian economy has impacted equity markets which, in our opinion, are now discounting the same. Valuations at about 10x-11x current year earnings, are not demanding, though they are higher than most Asian peers, according to consensus estimates. Falling commodity prices provide comfort on the inflation and interest rates front. While foreign fund outflows have reversed during the quarter, this trend needs to sustain for the markets to consolidated and move up. We maintain that, in January, markets will focus on potential government (fiscal measures) and RBI actions (further interest rate cuts). A rise in geopolitical tensions in the South Asian region may keep markets nervous. Markets would focus attention on the US as the new President-elect takes office, the third quarter earnings and the management-speak thereof. FII flows will also be closely watched. On balance, we believe that, adequate measures and forceful implementation will likely moderate the economy's slide and give us the opportunity of a soft landing. Incremental FII outflows may also continue to moderate and help markets consolidate. However, if the measures fall short of expectations, we may see lower levels, for our markets.
Source: Bloomberg
Crude (US$/bl)
150 120 90 60 30 Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Jan-07 May-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08
Source: Bloomberg
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MORNING INSIGHT
January 5, 2009
The following are our preferred picks from among the sectors we cover:
Preferred picks
Sector Banking Construction Engineering Food Processing IT Logistics Media Metals & Mining NBFCs Oil & Gas Pharma Other Midcaps Stocks Axis Bank, Union Bank, PNB, BoB, HDFC Bank Punj Lloyd, IVRCL, NCC, BGR Energy, Sunil Hi Tech Bharat Electronics, Cummins. Riddhi Siddhi Gluco Infosys, Infotech Mundra Port, Gateway Distriparks Zee News Sesa Goa LIC Housing Finance, IDFC Petronet LNG Lupin, Piramal Healthcare, Glenmark, Jubilant Organosys AIA Engg, Nitin Fire, Numeric Power, JBF
Source: Kotak Securities - Private Client Research
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MORNING INSIGHT
January 5, 2009
COMPANY UPDATE
Sanjeev Zarbade sanjeev.zarbade@kotak.com +91 22 6621 6305
CUMMINS INDIA LTD
PRICE : RS.226 TARGET PRICE : RS.270 RECOMMENDATION : ACCUMULATE FY09E P/E: 10.9X
q Growth seen tapering off by fourth quarter, Q3FY09 may be strong q Parent's focus on cost-rationalisation should favour Cummins India as a low-cost sourcing location q Maintain Accumulate with a price target of Rs 270. At current price, the stock is trading at 10.9x and 9.9x FY09 and FY10 earnings respectively.
Summary table : Consolidated
(Rs mn) Sales Growth (%) FY08 26555 25 FY09E 34512 30 4866 14 4117 500 20.8 26.7 22.9 4.6 29.7 38.1 1.2 7.0 10.9 9.9 2.9 FY10E 37787 9 5366 14 4509 500 22.8 9.5 25.2 4.6 26.4 33.0 1.0 6.3 9.9 9.0 2.4
Fourth quarter numbers would reflect impact of economic slowdown
Cummins indicated that order enquiries have begun to slow down. The management indicated that the strong growth in the current fiscal may slacken in the fourth quarter. Demand from the infrastructure and commercial real estate sector has been on a declining trend.
EBITDA 3745 EBITDA margin (%) 14 Net profit 3249 Net cash (debt) EPS (Rs) Growth (%) CEPS DPS (Rs) ROE (%) ROCE (%) EV/Sales (x) EV/EBITDA (x) P/E (x) P/Cash Earnings P/BV (x) 1712 16.4 21.3 18.3 4.6 28.8 38.0 1.5 8.8 13.8 12.3 3.6
Expecting a strong third quarter
On the back of capacity addition in the low HP segment and new KVA facility, Cummins has been able to report strong revenue growth in the current fiscal. Revenues grew 50% yoy in the second quarter partly aided by increase in realizations. The management indicated that the company began the third quarter with a strong order board and capacities continue to run at high levels of utilization. Cummins has minimal exposure to the automobile sector, which has seen a sharp dip in demand in recent months.
Exports have done well so far but likely to slow down
A large share of Cummins India's exports go to the US markets mainly for Power Generation applications as back-up/auxiliary power. Although exports have grown well thorugh the year, indications are that exports could also slow down by the fourth quarter. Cummins India ltd's parent ie Cummins Inc has revised its outlook for 2008 due to the continuing decline in many of its key markets around the world. Cummins Inc now expects 2008 sales to increase by 9% over 2007, compared to its previous guidance of a 12% increase. The major decline in the US market has been in the auto and construction market sector.
Consolidated sales mix of Cummins Inc
Source: Company, Kotak Securities - Private Client Research
Distribution 10%
Power Gen 19%
Engine 52%
Components 19%
Source: Company
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January 5, 2009
Parent's focus on cost-rationalisation should favour Cummins India Ltd
Cummins India has long been one of the low-cost sourcing locations for Cummins Inc. With the slowdown in the US and global markets, the parent has been taking several belt-tightening measures including temporary plant shutdowns, eliminating temporary workers and reducing discretionary spends. Within the Cummins group, China and India have been the main sourcing centres for Cummins group. While China facility specializes in meeting the Heavy Duty engine requirements of the group, the Indian facility has emerged as sourcing location for High HP engine segment. Cummins India Ltd competes with Cummins' Darlington facility in UK for sourcing of High HP engines. Given that Cummins India has a clear cost-edge over Cummins UK, there is strong possibility of greater sourcing of High HP engines from India.
Pig iron price (Rs/ton)
40000 35000 30000 25000 20000 15000 30/09/2007 31/12/2007 31/03/2008 30/06/2008 30/09/2008 30/12/2008
Adequate capacity in the system
Cummins is not contemplating further capacity additions given subdued demand outlook for domestic and global markets. Its low HP plants at Pirangute is operating at 60-70% capacity utilization leaving scope for meeting FY10 requirement.
Prices of pig iron has declined
Pig iron is the main input for engine makers and the prices of this commodity has been softening in recent months. We expect this to positively reflect in the company's EBITDA margins in Q3 FY09.
Earnings Outlook
n We see strong possibility of margin expansion on a sequential basis. Due to factors like product price hikes, some softnening of material prices, depreciation in rupee and continuing value engineering exercises, we believe there is a strong case for margin expansion in Q3 FY09.. n Reiterate Accumulate with a price target of Rs 270. Cummins is trading at 10.9x and 9.9x FY09 and FY10 earnings respectively. On an EV/EBITDA basis, the stock is trading at 6.9x FY09. We maintain Accumulate with a price target of Rs 270 (Rs 280 earlier) based on DCF. At the target price, the stock would be valued at 13x FY09 earnings.
PE band
500 375 250 125 0 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Dec-08 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 8x 12x 16x 20x Cummins
Source: Capitaline
We recommend ACCUMULATE on Cummins India with a price target of Rs.270
Quarterly margins (%)
18.0% 16.0% 14.0% 12.0% 10.0% Q1 FY07 Q2 FY07 Q3 FY07 Q4 FY07 Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09 Q2 FY09
Source: Company
Source: Capitaline, Kotak Securities - Private Client Research
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January 5, 2009
Bulk Deals
Trade details of bulk deals
Date Scrip name Name of client Buy/ Sell S B B B S B S B S B B S S B B B B Quantity of shares 94,958 4,415 4,241 61,000 58,808 105,153 88,253 70,000 57,905 71,300 143,500 143,500 113,639 38,988 25,000 40,000 30,647 Avg. price (Rs) 39.48 11.00 11.33 8.21 8.22 79.50 79.50 8.98 10.21 5.21 24.90 24.90 6.50 18.40 27.90 27.90 25.94
2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan 2-Jan
Aries Agro Axon Infotec Axon Infotec Crystal Soft Crystal Soft Force Motr Force Motr Gangotri I&S Ludlow Jute Rama Pul Pap Rasand Eng I Rasand Eng I Sanguine Md Suave Hotel Well Pack Pa Well Pack Pa Winsome Text
WF India Reconnaissance Fund Ltd BDS Share Brokers Pvt Ltd Dr. Vivek Ishwar Hebbar Minaben Thakorlal Modi Kaushal Niranjan Shah Sudha Commercial Co. Ltd. Pinnacle Trades Investments SPJ stock Mega Resources Ltd Lokeswara Reddy Mutra Pinnacle Trades and Investments Ltd. Vincent Commercial Co Ltd Comfort Intech Limited Commercial Concept Private Limited Gandhi Manisha Navneetlal Samir Sureshchandra Shah Nitaben Shaileshbhai Patel
Source: BSE
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January 5, 2009
Gainers & Losers
Nifty Gainers & Losers
Price (Rs) Gainers Reliance Ind DLF Ltd NTPC Losers Bharti Airtel ONGC Infosys Tech
Source: Bloomberg
chg (%) 2.5 3.0 0.9 (2.1) (0.7) (1.4)
Index points 8.1 2.4 2.2 (4.6) (1.6) (1.5)
Volume (mn) 5.0 12.1 3.8 3.9 1.5 1.1
1,286 301 184 705 680 1,132
Forthcoming events
Company/Market
Date 8 Jan 10 Jan 13 Jan Event Mastek earnings expected Satyam Computer to consider buy-back of its shares Infosys Earnings expected
Source: Bloomberg
Research Team
Dipen Shah IT, Media dipen.shah@kotak.com +91 22 6621 6301 Sanjeev Zarbade Capital Goods, Engineering sanjeev.zarbade@kotak.com +91 22 6621 6305 Teena Virmani Construction, Cement, Mid Cap teena.virmani@kotak.com +91 22 6621 6302 Apurva Doshi Logistics, Textiles, Mid Cap doshi.apurva@kotak.com +91 22 6621 6308 Saurabh Gurnurkar Media, IT saurabh.gurnurkar@kotak.com +91 22 6621 6310 Saurabh Agrawal Metals, Mining agrawal.saurabh@kotak.com +91 22 6621 6309 Saday Sinha Banking, Economy saday.sinha@kotak.com +91 22 6621 6312 Sarika Lohra NBFCs sarika.lohra@kotak.com +91 22 6621 6313 Siddharth Shah Telecom siddharth.s@kotak.com +91 22 6621 6307 Shrikant Chouhan Technical analyst shrikant.chouhan@kotak.com +91 22 6621 6360 K. Kathirvelu Production k.kathirvelu@kotak.com +91 22 6621 6311
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