>INFLATION OR DEFLATION WHICH WAY IS ASIA HEADED? (CUSHMAN AND WAKEFIELD)

A REPORT ON THE ASIA PACIFIC ECONOMY & ITS IMPACT ON COMMERCIAL REAL ESTATE

Young populations and low debt levels enhance long-term real estate investment opportunities in many asian countries

A logical strategy
The current debate raging is whether we are headed for inflation. And if so, what will be the effect on commercial real estate prices? Recent Government and central bank actions have resulted in unusual monetary and fiscal policies ranging from quantitative easing in the UK, ‘cash for clunkers’ in the USA and very large bank loans in China. Some view these policies, put in place since the credit crunch hit a year ago with the collapse of Lehmann, as being inflationary. Others argue that with output running at well below capacity, inflation is impossible, and deflation is the more likely scenario. Here we separate out consumer price inflation from asset-price inflation, and discuss that in the medium- to longer term, inflation is the more likely scenario for Asia, not including Japan. This goes to show that investing in certain Asian real estate asset markets remains a logical strategy in the present economy.

Figuring out where we stand
Consumer price indexes are currently low in most Asian countries, as demand and prices of things like commodities have fallen along with global GDP output. Real estate asset prices are falling as the availability of debt is curtailed, leading to a shifting of yields upwards. Governments across the globe are printing and spending money in an effort to restart credit flows put a floor under falling asset prices and boost consumer demand. But what will happen next in Asia? Generally there are two schools of thought:

1.Printing and spending money will prove to be inflationary and in high 1. inflationary times one should not hold cash, but rather real assets including real estate.

2. We are in a deflationary period and prices will continue to fall, as demand is far below the global economy’s output capacity. In a deflationary period, it is better to hold cash, as you will be able to get a better deal tomorrow.

In order to prop up weak economies and put cash back into the seized banking system, governments and central banks have introduced regimes of increasing money supply with exceptionally low interest rates, for example in the USA and UK. Usually, low interest rates:

1. Drive investors to put money into assets - and that includes real estate – compressing yields. The opportunity cost of holding savings is reduced, pushing investors to buy assets.

2. Drive down the value of the currency against other currencies.

3. Are linked to increasing money supply, which can have an inflationary effect on goods and services.

An easy way to see the interconnection of these three points is to think about the prices of money1.

1. The price of money relative to time --> interest rates
2. The price of money relative to foreign currency --> exchange rates
3. The price of money relative to all goods and services --> inflation rates

To see the full report: ASIA PACIFIC ECONOMY

>QE Sep-09 Earnings Season thus Far (MORGAN STANLEY)

Quick Comment: So far, eight companies in our coverage universe have reported results. Aggregate earnings are up 13% YoY, a tad ahead of our analyst expectations of 12%. In terms of surprise breadth, three of these eight companies reported net profit that exceeded expectations by 5% or more, while two trailed our expectations by 5% or less (see page 2 for company-wise details). Four companies in the BSE Sensex have reported 20% growth in earnings, ahead of
MS analysts’ expectations of 15% growth. It is still early days to analyze the earnings at the sector level. Nevertheless, Industrials is the best-performing sector while Materials is the worst-performing sector in terms of profit growth thus far.

EBITDA Margins Rise: EBITDA margins for the sample are up 3.5ppt. Excluding the materials sector, EBITDA margins are up 4.3ppt. Out of the four sectors that have reported earnings, three have seen margin expansion, with Industrials leading the list. Revenue growth for the sample is up 8% YoY and for the Sensex companies it is up 4%.

Broader Market Earnings Lead the Narrow Market: So far, 212 companies have reported. Aggregate earnings for the broad market are up 24%. The sharp recovery in margins, up 5.8ppt YoY, is the key driver for the strong earnings growth. However, revenues for the sample are up 4% YoY. Of these 212 companies, only 31 companies or 15% have reported losses for the quarter while almost 30% or 62 companies have reported earnings growth in excess of 50% for the quarter ended June 2009. We maintain our view that earnings are likely to surprise on the upside, ahead of our analyst expectations (as has been the case for the past two quarters) with the broader market outpacing the narrow market in terms of growth.

To see the full report: INDIA STRATEGY

>US Q3 results: feel the beat (HSBC)

■ With a third of the S&P 500’s market cap having now reported, we find that the season is coming in significantly ahead of analysts’ expectations

■ 78% of companies have beaten on the bottom line, many by a wide margin; moreover, we are now seeing more top-line surprises emerging with beats here outnumbering misses by a factor of two-to-one

■ The positive news is broad-based, but technology is the standout sector, with a hugely impressive 90% of companies beating on the EPS line and 95% beating on the sales line

The US Q3 results season has so far significantly exceeded market expectations. With 35% of the S&P 500’s market cap having now reported (through Wednesday 21 October), our analysis shows that 78% of the constituent companies have provided a positive EPS surprise in the third quarter and only 12% have missed (remember on average 60% beat expectations and 20% miss).

However, it’s not just the number of companies beating expectations that has impressed, but also the magnitude of the beat – we estimate a positive EPS surprise of 21% for the S&P 500 index. And even if we exclude the volatile financials sector (where the EPS surprise stands at a huge +224%) we still get an impressive EPS surprise +12%. If we combine the figures from the companies that have reported with the consensus forecasts of those still to report, we arrive at a ‘blended’ growth rate of -23%. Note, Q3 will be the ninth consecutive quarter where EPS growth has been negative, but it is almost certain to be the last in the current cycle, with the rate set to turn sharply positive in Q4.

So what about sales? Isn’t aggressive cost-cutting the only reason companies are beating? No, is the short answer. Our analysis shows that 59% of companies have also beaten sales expectations and these have outnumbered the number missing by a factor of two-to-one.

The fact that we are now getting more upside surprises coming through at the top line is reassuringly positive for the earnings outlook and we see no reason to change our view (recently set out in Equity Insights Quarterly: upgrade cycle to continue, 6 October 2009) that the earnings upgrade cycle has further to run and that consensus expectations for 2010 earnings are too low.

We are maintaining our pro-market view and we stay pro-beta at both the regional and sector levels.

To see the full report: EQUITY INSIGHTS

>FUNDAMENTAL ANALYSIS ON CEMENT SECTOR

CEMENT INDUSTRY
■ India is the world’s second largest producer of cement after China with industry capacity of over 200 million tonnes (MT)

■ Total installed capacity was 204.29 MT as on August 31, 2008

■ Total despatches has been 100.17 MT during April–October 2008–09 100.96 MT during April–October 2008–09.

CEMENT INDUSTRY ANALYSIS
■ India’s cement consumption grew 9.6% yoy.
■ South market witnessed strong demand supporting firm pricing (up 4.7% yoy) in the region.
■ The key concern dip in construction and infrastructure activities in the country.
■ Contradictory pricing trend emerge; realizations remained robust in South
■ Capacity utilization improves MoM but remains lower yoy
■ Key performers were players who have recently added capacities
■ Coal prices cool from peak; freight index fell to the lowest levels since 2002.

To see the full report: CEMENT SECTOR

>Markets Headed for New High (Ride the wave with Caution)

Long term View - Nifty
After making a low of 2539 in March’09, Nifty started making a “Higher Tops and Higher Bottoms”. It started a fresh bull run but it faced lot of resistance in the range of 4600 – 4700. It started consolidation on the range of 4000 – 4600 and spent almost three months. In August’09, Nifty broke the above mentioned range of 4600 – 4700 and continued its northbound journey and made a high of 5152 on 15th Oct.09.

Technical Pattern
•On August’09 Nifty broke the neckline of “Inverse Head & Shoulder” pattern on the weekly chart.

•The value of neckline of “Inverse Head and Shoulder pattern is around 4650.

•On the weekly chart, Nifty is continuously making “Higher Tops and Higher Bottoms”

•Nifty is trading above the 61.80% retracement level of the entire fall from 6357 to 2252.

•For last 6 month Nifty is trading above the 200 DEMA, now the value of 200 DEMA is 4205.

•On the weekly chart RSI and Stochastic oscillators are in the overbought zone.

To see the full presentation: MARKET OUTLOOK

>EXIDE INDUSTRIES LIMITED (PPFAS)

Improving OE and Replacement Sales to sustain the growth momentum
Exide Industries Ltd. (EIL) has clocked a 92% Y-Y bottom line growth to Rs. 1,497Mn for Q2FY10 v/s Rs. 778.4Mn for Q2FY09, on the back of falling raw material costs. The company's top line growth was flat at 5.5% Y-Y to Rs. 9,503Mn (Rs. 9,004Mn), which came ahead of our expectations. Improving growth in OE and Replacement sales aided EIL's Auto Battery segment in clocking better growth during the quarter, this was also supported by the robust growth in its Industrial Battery segment.

The strong growth in profits was attributed to a 1,142bps fall in raw material to sales ratio owing to a huge decline in lead prices and an exchange gain of Rs. 20.4Mn for Q210 as against a loss of Rs. 29.7Mn for Q209. The fall in raw material costs pulled up the operating margins to 26% for Q210 v/s 16.5% for the corresponding previous quarter.

Other Highlights:
■ Operating Profit was up by 66.5% to Rs. 2,471Mn for Q210 v/s Rs. 1,484Mn for Q209

■ Margin Increase was also on account of lower imports and growing backward integration, i.e., captive sourcing of lead and lead alloys from Tandon Metals and Leadage Alloys India which EILhas acquired during the year

■ This acquisition will augment availability of indigenous raw materials and also facilitate the company in recycling scrap batteries

■ Further on, Exide plans to increase its Automotive and Industrial battery capacity by 50%, at an investment of Rs. 4,500-5,000Mn over the next 10-12months.

Outlook and Valuation:
The unprecedented growth reported in the past, huge upcoming capex signaling volume growth in the business and focus on new products catering to different industries will ensure improved performance by the company. The backward integration and expansion will also support the growth in business.

We upgrade our EPS estimates of Exide to Rs. 5.5/- (earlier Rs. 4.4/-) and to Rs. 6.2/- (earlier Rs. 5.3/-) for FY10E and FY11E respectively. At the CMPof Rs. 106.9/-, the stock is trading at 17.3x FY11E earnings (net of insurance value). We recommend HOLD on the scrip with a SOTP based revised target price of Rs. 126.8/- (19x FY11E earnings + Rs. 9.3/- value of Exide's investment in ING Vysya Life Insurance).

To see the full report: EXIDE INDUSTRIES LIMITED

>CHETTINAD CEMENT LIMITED (GEOJIT)

■ Chettinad Cement has reported excellent result for Q2 FY 2010. Net sales grew @ 28.7% to Rs. 361.16 crore (Rs. 280.7 crore). OPM% improved significantly to 40.8% (35.4%) owing to reduction in material cost to 11.6% (14.1%) of sales (in view of lower cost of coal and steel) and in other expenditures to 20.7% (24.6%) of sales. Consequently, PBT more than doubled to Rs. 65.73 crore (Rs. 30.99 crore) even after accounting for 77.9% spurt in interest of Rs. 22.66 crore in view of on-going capacity expansion. However, higher tax rate of 32.3% (-10.2%) restricted growth in PAT of Rs. 44.49 crore (Rs. 34.16 crore) to 30.2%.

■ For H1 FY 2010, net sales registered 29% growth in sales of Rs. 726.07 crore (Rs. 563.03 crore). OPM% enhanced to 39.8% (37.4%) resulting in 45.2% surge in PBT of Rs. 117.13 crore (Rs. 80.65 crore) after absorbing almost doubled finance cost of Rs. 44.08 crore (Rs. 22.88 crore). However, owing to nominal tax rate of 32% (3.7%), PAT of Rs. 79.63 crore (Rs. 77.7 crore) inched up by just 2.5%

■ CCL is Tamil Nadu based cement player with major markets in Tamil Nadu, Kerala and Karnataka.

■ With government focusing on development of infrastructure and impetus to housing sector, there is lot of opportunities for Cement Industry both in short term and long term.

■ To cater to growing demand, CCL is on expansion spree. Company has commissioned Line-I Greenfield Cement manufacturing unit with 2 million tpa capacity in Q4 FY 2009 and expects 2nd units with 2 million tpa capacity to commission during FY 2010. Moreover, it has also started process of land acquisition for its proposed 2 million tpa Greenfield Cement Plant at Karnataka. Meanwhile, Board of Directors have approved proposal for installing 2nd cement manufacturing facility with 2 million tpa capacity at Karikkali, thus taking cement capacity to ~ 10 million tpa. Company is also enhancing its power generation capacity from 15 mw to ~ 70 mw.

■ All these proposed plants should be commissioned and ready for production by the time Indian and world economy is fully on the path of resurgence and thus, company would be in a position to make the most of the economic recovery.

■ Company’s cash generation is significant. In H1 FY 2010, cash profit was s. 214.89 crore (Rs. 235.7 crore in FY 2009 full year).

■ At CMP of Rs. 416/-, the share (Rs. 10/- paid up) is trading at 6.9 times FY 2010 expected EPS of Rs. 60/-. In view of excellent future prospects, we recommend to “BUY” the share at CMP.