Thursday, April 16, 2009

>Tata Chemicals (EMKAY)

Poor visibility on soda ash business
Tata Chemicals (TCL) management shared cautious outlook on their soda ash business in near future in our recent meeting with company’s key management. Management maintained their view of 10-15% drop in soda ash sales volumes due to recent economic slowdown. However future outlook on global soda ash prices remains wobbly since possibility of price cut by the Chinese players to gain volumes cannot be ruled out. We have factored ~10% drop in sales volume and ~8% decline in prices while any steep cut in global soda ash prices may lead to downgrade in our earnings estimates. Also considering the recent sharp rally of ~50% in TCL’s stock price without any significant improvement in near term visibility in business, we maintain our price target of Rs 140 and maintain our reduce rating on the stock.

Soda ash volumes may decline by ~15% however outlook on prices remain shaky

Company has earlier in its Q3FY09 conference call indicated that its soda ash sales volumes (domestic as well as global) may decline by 10-15% and maintained its view. Soda ash prices are strong in CY09 since new contracts for CY09 have happened at average ~ US$ 20 / mt (~15%) higher than CY08. However soda ash demand in China is down by 20- 25% and operating ratio is down to 75-80%. Low capacity utilization of Chinese plants may trigger price cuts to gain volumes through rise in exports and as a result globally soda ash prices may come under pressure. We highlight that cash cost of Chinese manufacturers (US$ 170-180 / mt) is still 25-30% lower than the current soda ash prices (US$ 230-250 / mt). As a result outlook on medium term soda ash prices remains shaky.

Fertiliser business to improve, while Q4FY09 performance to remain weak
Company’s Haldia plant (phosphatic fertiliser) operations were affected during Dec 08-Feb 09 period due to unfavourable DAP prices and phosphoric acid prices. However production resumed recently after the phosphoric acid prices have come down to make production of DAP viable. Operation at its subsidiary, IMACID was also affected during the same period and has resumed now. Company is also expected to benefit from the completion of debottlenecking at its urea plant. After getting gas from RIL KG basin, company will be able to meet its entire gas requirement for urea production and will benefit from imported parity price (IPP) linked subsidy on additional production of ~15%. In our FY10 estimates, ~ 5% profit is contributed to this incremental production.

Stock has rallied ~50% recently, while visibility remains poor, we maintain reduce rating
TCL’s share price has recently rallied by 50%+ from its lows of Rs 100 and outperformed market by ~30% (sensex midcap index). However medium term visibility on earnings\ remains weak, since there has been no change in business fundamentals. Erosion in global soda ash prices can not be ruled out in near future. We expect company to report an EPS of Rs 24.7 in FY10 (lower than consensus) however possibility of earnings downward cannot be ruled out if price correction happens in soda ash. We have price target of Rs 140 and maintain our Reduce rating on the stock.

To see full report: TATA CHEMICALS

>India Oil & Gas (ANAND RATHI)

Mar ’09 quarter results preview

* Expect low margins to continue. Q4FY09 results would be struck by lower yoy refining and petrochemicals margins; lower realizations for the crude producer will continue. Positive aspects would be the qoq fall in under-recoveries, no upstream subsidy and inventory gains as crude rose US$10/bbl in three months.

* Under-recoveries to be about Rs22bn. Under-recovery in Q4 from losses on sale of LPG (Rs13bn) and PDS kerosene (Rs41bn) would be Rs22bn. This would include over-recovery of Rs5bn on petrol and Rs28bn on diesel (see Fig below). FY09 underrecoveries are expected at Rs1084bn, with upstream support contributing ~30%.

* ONGC, GAIL not expected to provide subsidy. ONGC’s gross realizations on crude would be US$45 a barrel. The net realization would be the same on account of a nil subsidy burden. Gross realizations for Cairn India would be US$48/bbl. The total subsidy payout for ONGC in FY09 would thus be Rs273bn.

* Expect RIL’s refining margins at US$10 a barrel. Reliance’s refining margins could average US$10/bbl, while refining margins of R&M companies would be around US$4-5/bbl. This would include inventory gains on crude. Our estimates for R&Ms incorporate oil bonds. The Singapore benchmark for the quarter was at US$5.7/ bbl.

* GAIL’s and Aban’s profits to increase yoy. GAIL’s PAT is expected to climb 9.6% yoy on account of no subsidies in Q4. Aban’s sales are expected to grow by a third (33%) and net profit rocket 182% yoy, with operating margins at 53% (+1% yoy).

To see full report: INDIA OIL & GAS

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty April futures added 2.04 million shares in OI.With the FII data also showing net addition of longpositions in Index futures, we feel the undertone in themarket continues to remain bullish

• The market turnover has risen sharply by nearly 40%to previous session suggesting cash-based buying hashappened in the last session

• The PCR-OI has surged to 1.78 on account of netaddition of 83601 contracts on the Put side comparedto 35884 contracts unwinding on the Call option front.The maximum addition of contracts was seen in the3200 Put adding 20007 contracts followed by 19763contracts addition in 3400 Put. The 3300 and 3500 Putsadded 16177 and 13404 contracts, respectively. Allthese Puts have observed some Put writing whereinthe 3500 Put has witnessed humongous Put writingwith the rise in OI from 486750 shares to 1156950shares. On the other hand, maximum unwinding wasseen in the 3400 Call wherein the closure was of 12277contracts followed by 10625 contracts in the 3300 Call.The rise in Call IVs suggests significant short coveringby Call writers in these strike prices. The 3700 Calladded 7504 contracts in OI and the volume surged by51742 contracts suggesting that some Call buying hashappened at this strike price

To see full report: DERIVATIVES 160409

>Daily Calls (ICICI DIRECT)

Sensex: We said, "watch the low at 10800 as crucial, holding which, up-trend remains intact. Moveabove 11070 would confirm that." Though Index dipped below 10800, the same was immediatelybought into, from where Index recovered a huge 600+ points. Realty / Cap. Goods / Small-Capsoutperformed. A/D was 8:1.
The action formed Engulfing Bull candle, indicating strong support on any sort of dip. It also takes theIndex above its 200-day EMA, now touching upper end of the Green channel. With the huge surge,however, short term technical position appears overbought. Some profit-booking, as a result, cannotbe ruled out.

To see full report: CALLS 160409

>Daily Market & Technical Outlook (ICICI Direct)

Market outlook

*Indian markets are likely to open flat to positive, taking cues from
global markets. The SGX Nifty was trading 10 points up. Other Asian
markets were trading mixed in the morning after Chinese economic
growth figures came in below some investors' expectations,
dampening optimism over a global economic recovery. Crude oil fell
to settle below $50 on Wednesday after US crude oil stocks rose last
week to their highest level in nearly two decades. Yesterday we saw
Indian markets jump nearly 3% despite the negative global cues and
uncertainty over which party will form the government after the
elections. Today several parts of India are voting in the first stage of
general elections with polls showing the main national parties may
struggle to form a stable coalition

*The Sensex has supports at 11200 and 11040 and resistances at 11510
and 11580. The Nifty has supports at 3460 and 3410 and resistances at
3550 and 3570

*Asian stocks climbed, lifting the regional benchmark index to the
highest in more than three months, as a US Federal Reserve survey
stoked optimism that the world’s largest economy is recovering. The
Nikkei gained 253.4 points, or 2.9%, to trade at 8,996.4. The Hang
Seng dropped 10.3 points, or 0.1%, to trade at 15,659.3

*US stocks rose on Wednesday amid numerous signs the recession
could be abating. Data from American Express signalled that the
ability of some consumers to pay their bills is stabilising. After a
choppy session, the Dow Jones gained 109.44 points, or 1.38%, to
8,029.62. The S&P 500 rose 10.56 points, or 1.25%, to 852.06. The
Nasdaq added 1.08 points, or 0.07%, to 1,626.80

*Stocks in news: Mastek, L&T, Natco Pharma, Dr Reddy’s Lab, Orchid

To see full report: OPENING BELL 160409

>Sugar Sector (MERRILL LYNCH)


Raising sugar price, EPS, PO & rating on leading cos - Buy
The sugar price in India could jump 20% in next six months and remain strong for next three years, in our opinion. Key drivers for such a strong up-cycle are (1) very low production in current season and forth coming season compared to consumption (2) lack of scope for further reduction in dealer stock level and (3) increased cost of production as well cost of imports. Hence, we upgrade Balrampur (leveraged play on sugar price) to Buy. Maintain Buy on Renuka (higher PO) and Triveni. Maintaining Underperform on Bajaj Hindusthan due to high debt and forex loan loss.

Supply shock sets the stage for stronger sugar cycle
We expect sugar production in the current and next season starting Oct09 to fall short of demand by 35% and 16% respectively due to cost pressures. Such a shortfall is likely to drive up the sugar price by another 20%, on top of the 54% rise seen so far since Aug07 trough. Our expectation of trough to peak price rise of 74% is higher than 52% rise seen in last cycle. However, our peak price estimate for the current cycle is only 20% higher than the previous peak and is driven by 48% higher cost. We expect price to remain high till imports falls to zero i.e till end of FY11E.

Bigger earning boost to UP based mills
The higher sugar price is likely to benefit Uttarpradesh-based Balrampur, Bajaj and Triveni the most as they have higher fixed cost. Renuka, has higher variable cost and hence lesser leverage to sugar price, but is likely to see strong volume growth courtesy its refinery which will import raw sugar and meet India’s growing sugar deficit. We raised earnings estimate up to 26% in FY10E and 96% in FY11E for UP based producers. We increased Renuka Sugar’s EPS estimate by 6%.

Prefer Balrampur, followed by Renuka & Triveni - Buy
Our order of preference is (1) Balrampur (best play on sugar price leverage) (2) Renuka Sugar (best play on supply shortfall) and (3) Triveni Engg (most attractive valuation). Our PO is based on long term average EV/EBITDA of 6x applied to FY10E earnings, which to us, is mid-cycle.

Bajaj Hindusthan most leveraged, but too risky – U/P
Maintain Underperform on Bajaj Hindusthan, despite its highest leverage to sugar price as it has (1) very high debt and (2) very low ROE. We raised FY10E EPS by 26%, but kept PO unchanged based on 6x FY10E EV/EBITDA.
Key risks- 1) bumper crop in Brazil 2) lack of sugar
Key risks to our assumption is higher production in Brazil which could depress international price and make imports more attractive. Also UP-based mills may not benefit from higher sugar price next year if they see another production failure.

Sugar price ripe for a flare up
We are now more positive about the prospects of Indian sugar manufacturers following indications of sharper than expected production shortfall in current season. Consequently we raised our EPS estimates, PO and ratings for most companies except for Bajaj Hindusthan, which is saddled with excessive leverage and low ROE. Key drivers for upgrade are the following.
* Significant upside to the price of sugar given the shortage and cost push
* Likelihood of an extended period of shortage driven by lack of new investments both by sugar mill and cane growers
* Limited impact of government intervention due to (1) limited ability to import (2) inelastic demand and (3) government prerogative to balance the need of farmer and consumer.
We show below our earnings and rating changes; and the sensitivity to price movements. While Bajaj Hindusthan is the most sensitive to sugar price, we believe its risk reward is unfavourable as it has 3x debt to equity and the only Underperform in our coverage universe.

To see full report: SUGAR SECTOR

>Intersection of Economy & Credit (WACHOVIA)

I. “What is the current state of the global economy?” Global economic growth averaged nearly five percent per annum from 2004 to 2007, the strongest four-year period of growth in decades (Figure

1). However, real GDP growth rates slowed in most countries in the first half of 2008, and it appears that many major economies have now slipped into recession due in part to the effects of the global credit crunch. Industrial production in the OECD has dropped off sharply (Figure 2). Economic growth in the developing world has also slowed this year.

Recession continues to be the theme for the U.S. economy as well. Coincident indicators such as employment and industrial production have fallen steeply since last autumn, and the unemployment rate has moved up over eight percent. The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit.

Moreover, foreign demand for U.S. goods and services has slumped over the last six months as our major trading partners have fallen into recession, and our estimates of global growth have turned negative for the first time since records began (Figure 1 – forecast in green).1 In all, U.S. real gross domestic product declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter. The sharp contraction in economic activity appears to have continued into the first part of this year. As for inflation, the substantial declines in the prices of energy and other commodities last year and the growing margin of economic slack have contributed to a substantial lessening of inflation pressures around the world. Indeed, overall consumer price inflation compared to a year ago is flat. Core inflation, which excludes the direct effects of food and energy prices, also has declined significantly. In our view, the economic slowdown was driven by the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions and consumer & business confidence around the world. The immediate trigger of the crisis was the end of housing boom in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market. Conditions in housing and mortgage markets have proved to be a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions.



Areva T&D India is the subsidiary of the France-based Areva Group, which is a world-wide leader in the nuclear power business and the third largest player in the global Transmission & Distribution (T&D) space. The Indian subsidiary has been gradually gaining market share over the last few years and has now edged past ABB to achieve the Number 1 position in the Indian T&D market in 2008. However, in the current challenging scenario, several headwinds emerging due to the unfavourable macro-economic environment are taking its toll on the entire Capital Goods Sector including Areva T&D. At the current price of Rs214, the stock is quoting at 19.2x and 15.7x CY2009E and CY2010E EPS respectively, which we believe is expensive. Against this backdrop of an unfavourable broader environment, we Initiate Coverage on the stock, with a Reduce rating and Target Price of Rs177.

* Economic Slowdown weighs heavily on the Sector: Post a strong GDP growth of more than 9% for three consecutive years, the Indian economy has shifted to a lower growth trajectory of around 6-7% atleast for the next couple of years. The Corporate capex plans are also showing signs of deceleration with an increasing number of projects either being shelved or deferred. Hence, in the near term there would be a rising pressure both on future order inflows as well as execution of the current order book for the entire Sector.

* Areva T&D vulnerable to slowdown: Areva T&D too, with around 35-40% private sector orders cannot remain completely immune from the slowdown. In terms of end customer classification as well, the mix for the company stands at 50:50 for Utility and Industrial. Again, the industrial clients are expected to be hit the hardest in wake of the ongoing slowdown.
* Generation delays to impact T&D growth: In the present macro environment, though the Power Sector capex is relatively resilient with majority of projects being envisaged by the Central and State sector utilities, major worry for the T&D Sector is delays in the generation capacity addition. The execution rate even for the current Plan period is pretty dismal with around 54% of projects already running behind schedule.

To see full report: AREVA

>hcl technologies (ANGEL BROKING)

‘Axed on’ growth'

HCL Technologies’ Axon acquisition, while a long-term positive, is expensive and will lead to Margin and Bottom-line pressures, given lower Margins of Axon, US $585mn debt taken on and goodwill write offs. The slowdown has led to greater uncertainty in HCL's prospects and has started reflecting in its financials. Even as valuations are at historic lows, we see little scope of re-rating, given the headwinds faced by the company and 1.4% EPS compounded fall estimated over FY2008-10E. We Initiate Coverage on the stock with a Reduce recommendation and Target Price of Rs96, implying a P/E of 6x FY2010E EPS.

* Axon, an expensive acquisition: HCL Tech had acquired the UK-based Axon Group plc last year for £441.1mn (US $658mn). While the strategic rationale of the deal is well understood, in the medium-term, owing to lower Margins of Axon, debt of US $585mn taken on and goodwill write-offs, HCL Tech's Margins and Bottom-line are expected to remain under pressure. We expect the Axon deal to become EPS-accretive only post-FY2011.
* Forex losses expected owing to significant hedged positions: HCL Tech had a significant US $1.6bn as outstanding hedged positions at the end of 2QFY2009 (nearly 75% of FY2009E Revenues). In an environment of currency volatility and Rupee depreciation, this subjects the company to significant risks. Accumulated losses in "Other Comprehensive Income" in the Balance Sheet stood at US $210mn. With the Rupee not expected to strengthen anytime soon against the greenback, forex losses are likely to continue to negatively impact Earnings, even as the company is not taking any fresh hedges.
* Valuations low, but little scope for re-rating; high dividend yield provides cushion: HCL Tech's stock has traded in a historical 1-year forward P/E band of 5-21x over the past six years. However, over the past year, with the global economic slowdown and deterioration in prospects of the sector, the stock has been severely de-rated with its trough P/E multiple at just 5x. Thus, at current levels of 6.7x P/E multiple, the stock is trading close to its life-time low levels. However, we do not expect any major re-rating going forward given the weak global economic environment, overhang on account of the Axon acquisition and a disappointing 1.4% EPS compounded de-growth estimated over FY2008-10E. However, a dividend yield of 8.4% provides some downside cushion.

To see full report: HCL TECHNOLOGIES

>Investor’s Eye (SHAREKHAN)

Pulse Track >> IIP back in the negative terrain
Stock Update >> Union Bank of India
Sector Update >> Automobiles

To see full report: INVESTOR'S EYE