Friday, October 2, 2009



Markets on Oct 01, 2009: Indecisive close

Today Nifty moved in a very narrow range of 5040-5090 and closed with a Doji candlestick formation, which points towards indecisiveness. Nifty has been trading in an upward parallel channel, where the upper-end is at 5150 and the lower-end is at 4900. It is now important for the index to surpass 5150-level to gain further momentum, however there are quite a lot crucial supports at lower levels. Nifty is also trading above averages, which increases its probability to move upwards. So, till these supports are held we maintain our positive bias.

On the daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA i.e. 4880 and 4719 respectively, which are crucial supports going forward. The momentum indicator (KST) has given negative crossover and is above the zero line. Market breadth was negative with 445 advances and 834 declines on the NSE and 1,163 advances and 1,718 declines on the BSE. On the hourly chart, Nifty is trading above its 20 hourly moving average (HMA) and 40HMA i.e. 5039 and 5011 respectively, which are crucial supports in short term. The momentum indicator (KST) has given positive crossover and trading above the zero line.

Nifty and Sensex closed almost flat. Of the 30 Stocks of the Sensex, Bharti Airtel ( up 4.01%) and Reliance Communications (up 3.25%) were the top gainers while Dr Reddy’s Laboratories ( down 3.63) and Maruti Suzuki India ( down 2.82%) were the top losers.

To see full report: EAGLE EYE 05/10/09


We believe India is about to resume an extended period of high economic growth. This article summarises the determinant factors over a 10-15yr timeframe, then illustrates what this implies for investment and consumer spending. Just two factors tell us India could be waking up to an extended period of high trend growth, we believe, of 8-9%pa: high savings and rising industrialisation. Government intervention matters, but ultimately more intervention just reduces economic efficiency and thereby the step-up in real growth. The basic question is: will real growth centre around 10% pa or sink nearer 5%? The difference between these two boundary rates is the difference between doubling or more than trebling of per capita GDP over a 10-15yr timeframe. As per capita GDP rises from c.$3k today, within the next 1-2years the intensity of spending on investment goods, materials & energy rises almost vertically; then on approach to $10k per head ten years hence consumption spending follows suit. Successive industrialising nations reach these points earlier and India’s no exception. Finally, on structure, whether India continues to run current account deficits or swings to surplus ought not to matter for growth per se. But a deficit path makes growth more volatile because it is vulnerable to: (i) twin external shocks (trade & capital) and (ii) the 'grow-inflate-devalue' pattern due to overemphasis on pro-growth demand stimulation.

Miracles explained

Common factors
What are the common factors that drive a sustainable step-up in economic growth rate? The main one turns out to be the savings rate (or economic surpluses) (Chart 1). What helps generate this at a very basic level is things like: technology and the cost and availability of labour; demographics. But irrespective of whether economic surpluses come from agriculture, services or manufacturing they also need to be retained. Here, secondary factors like inflation play a role. For some economies in their high-growth phase they attain a ‘low’ (0-5%) long term inflation rate; for others inflation’s closer to 10% or even higher. Long run inflation rate matters because, if relatively high, it pushes savings overseas and keeps local cost of capital higher than that abroad. This typically corresponds to a savings-investment gap (current a/c deficit) funded by overseas borrowing (Chart 2). Unsurprisingly economies with higher inflation and persistent current a/c deficits have ingrained expectations of currency depreciation.

Another common factor is export and trade share of GDP. In East Asia a very common pattern is export-led industrialisation. Exporting manufactured goods to the rest of the world is a common contributory factor to rapid economic growth. This requires (i) relatively open global markets - ie access to new export markets and technologies, (ii) an abundant and therefore relatively cheap pool of labour (shown by falling dependency ratios) and; (iii) heavy investment in export industries. Mature Asian economies have already passed this phase and we can track their paths in Charts 3-6. The question is: is India in this picture and can we look forward to a similar pattern over the next 10-15 years.

To see full report: INDIA 2025


The world's largest PPP playground

The Minister for Road Transport and Highways, Mr Kamal Nath, is spearheading the effort to revamp the lacklustre performance of the National Highways Authority of India (NHAI). Although NHAI has a project pipeline of 135 projects valued at approximately INR1t, we believe approximately INR400b- 500b will be bid out during FY10.

The ticket size of metro projects (approximately INR3.0b) has been too low to evoke interest among the larger developers. However, the three-fold approach comprising increasing complexity (and subsequent bigger tickets), the PPP route for development and the passing of the Metro Act should provide an impetus to the sector. The projects pipeline, worth INR1,010b for five metropolitan cities, will lead the development in the sector.

The game plan, according to the Minister for Shipping, Mr Thiru G K Vasan, involves the award of 22 projects during fiscal year 2010. However, the ministry has missed its first milestone: during the first 100 days of the new government, only three of the six scheduled projects were awarded.

We profile IRB Infrastructure Developers Limited, a pure-play highway developer, as an opportunity in the highway sector. Acceleration in highway project awards should also benefit other major infrastructure companies such as L&T, GMR Infra, and Reliance Infra; however, highways would contribute less than 10% of their revenue.



Missing the zing thing…

Largest integrated zinc producer globally by FY11 - Hindustan zinc with ~5.9% (CY2008) share in total global production is currently the fourth largest zinc producing company globally. Expansion of lead-zinc metal capacity from the current 762ktpa to ~1mtpa by June 2010 will
catapult it to the top position globally.

Low cost producer with captive mines & captive power - Its high grade captive mines (Zn 11.4%; Pb 1.9%) with a mine life of over 20 years, represent 25m ton of equivalent zinc metal and 6.1m ton of lead metal. Captive power plants (437 MW) meet ~80% of its requirements placing it in the lowest deciles of global cost curve. Decline in international coal prices and sourcing from domestic linkages will reduce power costs further.

Zinc medium term price outlook to remain subdued- We believe that the recent run-up in zinc prices (55% YTD returns) would be capped due to slowing imports from China, high inventory levels and incremental supplies of ~1.1m ton of Chinese smelting capacities waiting on the sidelines. ILZSG expects a surplus of ~ 299k tons in 2009 and ~ 397k tons in 2010. Zinc is trading at ~US$1,900/ton on LME which is 47% higher than the 90th percentile cash cost of US$1,296/ton.

Valuations – Presence in the lowest deciles of global cost curve, aggressive capacity ramp up to 1mtpa (June 2010) and strong balance sheet with net cash of Rs228/ share, positions the company to benefit the most in case of demand and price recovery. However, a subdued price
outlook for zinc coupled with a sharp run up in stock price (~144% YTD) caps further upside. We value the stock at Rs 787/ share based on 5x FY11E EV/EBITDA. We initiate coverage with a HOLD rating.

To see full report: HINDUSTAN ZINC


Run-up in stock price unwarranted

We believe the recent run-up in stock price by 31% in last one month was mainly in anticipation of increased order flows on the back of the improving economic outlook. However, no new pipeline projects have been announced as yet. Though we have raised our estimates due to change in the company’s accounting period from December to March, we reiterate Hold and expect 18- 20% correction in the stock price if the anticipated orders do not materialise.

Order book still subdued: The company’s order book currently stands at $780mn (SAW pipes – US$525mn, seamless pipes – US$95mn and ductile iron pipes – US$160mn) to be executed by March 2010. Exports account for over 40% of the order book. The management expects to bag orders worth US$120mn by Dec 2009 from the Middle East, which would boost earnings visibility by three months.

PQF pipe mill to commence operations in Oct 2010: The management is confident of starting commercial operations of its premium quality finishing (PQF) mill in October 2010. The PQF technology would improve the product quality and cost and help in reducing yield loss from 18%-19% currently to 10%-12% by FY11E, thereby improving margins.

Estimates revised: We raise our earnings estimates by 39.9% to Rs82.9 for FY10 and 54.3% to Rs73.3 for FY11, mainly due to the change in the company’s financial year ending from December to March (FY10 will be for 15 months from 1 Jan 2009 to 31 March 2010).

Fairly valued, maintain Hold: At CMP, the stock trades at 9.1x FY10E and 10.3x FY11E earnings, 6.0x and 6.6x FY10E and FY11E EV/EBITDA. We believe expectations of a surge in order book are overdone. We reiterate Hold rating on the stock and value it at 10x FY11E earnings, translating into a revised target price of Rs730.

To see full report: JINDAL SAW


Aggressive XII plan makes it a high voltage proposition…

Powergrid is a Navratna public sector enterprise and a near monopoly play in the power transmission market wheeling about 45% of the total power generated within the country. It is the notified central transmission utility operating 71,500 ckm of transmission network with a transformation capacity of 79,500 MVA and is having an interregional power transfer capacity of 20,800 MW. Powergrid has diversified into telecom business having established a 20,000 km
telecom network and it also offers consultancy business.

Aggressive growth lined up
Focus of the sector is likely to shift towards the XIIth five year plan in the near future from the present XIth plan. Overall inter-regional power transfer capacity is expected to grow ~5.3 fold from 14,100MW at the start of the XIth five year plan to 75,000MW by the end of XIIth five year plan.

Implementation of new tariff policy will bolster performance
New CERC policy has improved the return on equity for the company from 14% to 15.5% which will improve the accounting return ratios as well for the company. This will continue to bolster
the operating performance in near term.

Historical performance
On a quarterly basis the company is maintaining a good momentum In Q1FY10 the company reported a revenue of Rs 1,822.3 crores compared to Rs 1,407.9 crores signifying a growth of 29% YoY and also reported a bottomline of Rs 545.2 crores compared to Rs 305.7 crores signifying a growth of 78% YoY.

Risk to our call
Risk to our call would be if the planned projects witness significant delays the company will loose out on the returns during the interim. Also any adverse development on the regulatory front will impact our investment case.

Power grid is a virtual monopoly trading at 3.1x on the trailing FY09 BV. Power grid enjoys an ROE of ~13% and with a significant growth prospect on offer due to aggressive XIIth five year plan. Visibility of multifold growth prospect makes it a safe bet to play for the inherent
growth on offer in the power sector.

To see full report: POWER GRID CORPORATION


Market performance in the last six months has been stupendous across the globe, India not being an exception. However, the recent run up has baffled most of the investors and putting fresh money into stocks is being considered a risky affair, unless one is ready to invest at higher valuations on stocks selected on bottom up approach.

However, some of the Public Sector Undertaking companies, or the PSU’s are not only likely to outperform the key indices during the period of the stable government, they are also likely to act as a cushion to protect portfolios from sharp volatilities in times of uncertainties. The latest initiatives undertaken by the stable Indian government towards PSU disinvestment and focused approach in
infrastructure developments such as roads, ports, airports, railways and the hydrocarbon sector are likely to benefit companies in the PSU arena. In addition, valuations of the companies mentioned below remain attractive despite the recent run up in the market. Investment in these companies with an 18 months time horizon is likely to deliver return between 36-42 percent. The basis of selection is expected good earnings visibility, high ROE, high cash reserves, and investments.

The following return charts between SENSEX and BSEPSU Index reflects an interesting trend. During the previous coalition government, SENSEX outperformed the BSEPSU Index throughout the 5 year period as shown in exhibit II.

During the current stable government, BSEPSU Index has outperformed SENSEX during the last five months as shown in exhibit I. The trend is likely to gain further momentum as the current government is expected to focus on an improved performance of the PSU companies.

  • Container Corporation of India Ltd
  • Engineers India Ltd
  • Balmer Lawrie & Company
  • Bharat Electronics Ltd
  • BEML Ltd
  • GMDC Ltd
  • REC Ltd
  • Indian Bank
To see full report: PSU PICKS


Cyclical, not structural

  • We update our proprietary Asian earnings database
  • Analysis includes country and sector breakdowns, DuPont models, and P&L, balance sheet and cash flow analysis
  • Although last year was difficult, with EPS falling 31%, ROE bottomed at 12.5% – higher than in ’98 or ’01 and above COE
We have updated our MSCI Asia ex-Japan universe earnings database for the period 1993-2008. This report includes detailed analyses of aggregate earnings, plus country and sector breakdowns. We use a DuPont framework to decompose ROE, and we provide tables and charts of key ratios for 10 Asian markets and nine sectors.

Key trends
ROE fell to 12.5% in 2008 from 17.8% in 2007. But that is higher than in previous recession years (6.3% in 1998 and 9.1% in 2001). This suggests the fall in ROE in 2008 is cyclical rather than structural.

Indonesia produced the highest ROE last year, at 31%. Indonesia’s ROE has been consistently above 25% since 2000. The lowest ROEs were in Taiwan and Korea: 7.0% and 7.9% respectively. These were the only markets in which ROE was lower than COE; but, in both, ROE was higher than the 1998 and 2001 lows.

Telecoms was the best sector last year in terms of ROE/COE ratio. ROE was 17.4%, up from 17.0% in 2007; it has ranged in a tight band between 16% and 20% since 1999. We estimate COE for the sector at 7.7%. Three sectors – industrials, IT, and utilities – had ROEs lower than COE.

Gearing increased sharply last year. Net debt rose 48% y-o-y. Net debt to equity rose to 35% (from 25% in 2007), the highest gearing level since 2002. The 21% rise in interest expenses brought the interest coverage ratio (EBITDA/interest expense) down to 10.7x.