JP MORGAN DOWNGRADES KPIT & A REPORT ON CEMENT INDUSTRY .

JP MorganWe are upgrading KPIT from Neutral to Overweight following a 20%+ share price correction since Jan-2007. Our DCF based Dec-07 target price remains Rs 150/share. We had downgraded the stock in Jan 2007 primarily due to expensive valuations and believe that the share price correction has again made the stock attractive at current levels. Further, our concerns on a possible equity dilution are behind us after an investment from Cargill Ventures. We expect 36% revenue CAGR over FY06-09E with 39% EPS CAGR (post Cargill dilution) over FY06-09E.
Investment of US$9m by Cargill Ventures: Cargill Ventures will invest $4.5 million as preferential share allotment and further US$4.5m as convertible warrants into KPIT. Cargill can convert the warrants into shares at the end of 18 months. Post the Cargill investment, we expect the cash position of KPIT will increase to ~US$25m improving from ~12-13% of annualized sales to a more comfortable 22%. We expect a minor negative impact on FY08-09E EPS of 1-2% due to this dilution.
Fundamentals remain strong: We expect KPIT to see continued business traction especially in the BPO and Automotive segments- driven by strong growth in non-Cummins customers. We expect 36% revenue CAGR over FY06-09E; inline with management's strategic intent of US$250 million revenues by FY10E. Further, we expect margin expansion leading to 43% net profit CAGR and 39% EPS CAGR (post Cargill dilution) over FY06-09E.
Recommendation: KPIT is currently trading at P/E of 14x FY08E EPS, with 39% EPS CAGR over FY06-09E. While we do not expect P/E re-rating, strong EPS growth ahead of the mid-cap peer group would provide share price upsides in our view. Key PT risks include further rupee appreciation and slowdown in IT spending environment.


>Cement: Dont forget the Great Wall of China
As GOI makes Cement imports easier, the local biggies fool themselves-Chinese Cement manufacturing are estimated to be close to 1 billion tonnes compared to India's 156-160 million Tonnes.-China can export Cement from the interiors to Thailand, and use the Thai ports to further ship the Cement to India.-The Chinese can also use the South China based ports like Shanghai and Shenzhen to export cement to South East Asia, thereby free-ing regional surpluses in Indonesia and Thailand to be exported to India and Middle East.-Chinese Institutions backed by the Authoritarian Government, are Volume or Bulk players and they will fight the Indian Cement manufacturers on price.-The so-called domestic infrastructure required to move Bulk Cement, set up local packaging plants and moving it to interiors can be done if the will is there.-The Retail Cement traders sell all brands possible, and do not limit themselves to Exclusive dealer-manufacturer relationship. So the same distribution channels can be used to Sell Chinese manufactured Cement.-Some of the finest pieces of contemporary World Architectural marvels have been built in Beijing where the Asian Games were held, and the next Olympics will be held, and people who have visited Shenzhen, Shanghai, Xian and many more South China cities were give testimony about the quality of Chinese Cement.-Finally, the Great Wall of China was made with the Chinese gravel, it was not imported and the Wall still stands after having been made 400 years ago.-Collectively, a Rs 0.50 decline in domestic Cement prices would mean a loss in profits of roughly Rs 700 to Rs 800 crore per annum for Cement manufacturers.-The companies most at risk would be South based manufacturers and GACL, which has coast based plants.-Creation of a Bulk Cement infrastructure would be beneficial to the Nation and industry at large where most projects now use Ready Mix Concrete (RMC).-So do you still want to own Madras, India and Mysore Cement, as also ACC, GACL and Ultra-Tech???Most cement stocks have been under pressure ever since the Government got into the job of managing cement prices. Big cement company stocks have taken the maximum hit.Imports difficult"As far as cement imports are concerned it is a high volume, low value commodity. Our ports are not equipped to handle huge quantities to make imports feasible. Storage, transportation and handling will add to the cost. Imports are possible only by large consumers," said a cement company official.A minimum consignment of cement imports should be 25,000 tonnes to make it cost-effective. A large cement project at best can consume 2,000 tonnes per month except hydropower projects, which consume about 4,000-5,000 tonnes per month. Cement has a two-month shelf life.Though the Government measures are unlikely to have any financial impact on cement companies, it may hit investor sentiment. "The Government move will not have any financial impact but it is sure to affect investor sentiment. Cement prices in the Indonesian markets are quoting at around $45 per tonne while the average prices in India are around Rs 220 per 50 kg bag.With the fresh Government sops, the landed cost of Indonesian cement will be on par with local prices. However, handling and transportation costs could make it costlier. This apart, none of our ports are capable of handling cement imports," said Mr Hitesh Agarwal, Senior Research Analyst, Angel Borking Ltd.Recently, Pakistan had sent a shipment of 10,000 tonnes cement for sampling. "The prices in Pakistan are higher at Rs 260-270 per bag (50 kg). Even if they offer concessions for bulk exports, it is not going to be feasible," said Mr Agarwal.