Monday, December 7, 2009

>2010: The return of the Sovereign Wealth Fund (ING VYSYA)

Having dominated the headlines in 2007 and 2008, Sovereign Wealth Funds (SWF) have been more introspective in 2009, looking to help beleaguered domestic economies.

Yet the resurgence of global trade volumes and the prospect of continued heavy FX intervention from Asian authorities suggest FX reserves and SWF assets under management (AUM) will rise.

The lack of transparency means that sizing the SWFs remains difficult. We believe AUM are closer to the lower end of the US$3-5tr range. We look for these to grow to US$6-8tr by 2015.

Yet transparency should improve in 2010 as SWFs implement newly agreed principles.

High-profile funds, such as China’s CIC, will probably take on more risk. CIC investment since July 2009 has centred exclusively on the energy sector.

To read the full report: SOVEREIGN WEALTH FUND


India sets emission cut targets: India has set its bargaining position for Copenhagen as a voluntary emission cut target of 20-25% by 2020 from 2005 levels and has said that they will not accept any legally binding cuts to emissions. The target is lower than what China, and Brazil are targeting but is in line with India’s own reduction of emissions by 17.6% from 1990-2005. Given all the backroom work carried out, we think the Copenhagen summit will take the whole process of emission cuts forward rather than setting the clock back. But, it is unlikely to set very aggressive targets.

Run up to Copenhagen

If a consensus emerges, we think the development would be positive: In our view, the key to step forward is to arrive at a consensus among developing and developed countries on emission cut targets. An acceptable agreement could boost the focus on renewable and in our view, wind turbine industry would see long-term tangible benefits. In addition to wind, we see opportunities in smart grids (ABB, IT services companies), super-critical equipment (L&T, BHEL)/coal gasifiers (L&T), energy efficient buildings (ABB) and transport related.

For Suzlon, wind turbine market recovery is critical: We think the market will be more focussed on the expected revival in industry wide orders in 1HCY10. We estimate that the sector should re-activate from H1/10 on improved economics, as (1) turbine prices should be c20% lower in 2010 vs 2008; (2) project financing returns.

Valuation: Maintain Neutral: Our DCF-based price target of Rs100 is based on: 1) intermediate growth of 10%, 2) long-term growth rate of 5%, 3) WACC of 11.8%.

To read the full report: SUZLON ENERGY


Cash volumes back to pre-rally levels, but F&O maintain uptrend: Cash equity volumes are showing marginal signs of improvement since the bump up in May 2009, driven by the General Election outcome and a global equity rally. In fact, at Rs4,264bn in November 2009, the monthly cash volumes are now back to pre-May levels. However, delivery volumes have been steadily improving since May, indicating that much of the speculative activity has moved to the F&O segment. Thus, even as cash volumes are getting flaccid, F&O volumes are maintaining a rising trend. At Rs16,618bn, F&O volumes in November 2009 are up by about 10.0% MoM and 45.3% as compared to April 2009 (pre-rally) levels. Year-on-year comparisons are now going to become meaningless over the next couple of months for analyzing momentum, given the extreme disruptions seen during this period.

Volumes not getting any better now

Cash and F&O Volumes: Institutional cash volumes show no improvement since May levels: The decline in the overall cash volumes is accompanied by similar trends in Institutional volumes. DII and FII volumes declined by 11.4% MoM and 25.2% MoM, respectively in November 2009. DII volumes largely remain unchanged from May levels, while FII volumes are down by about 27.5% from May 2009.

DII and FII Volumes: Domestic Mutual Funds see only modest inflows despite rising markets: DII weak volume trend is almost surely an outcome of weak AUM growth of the domestic mutual fund industry and low trading intensity of Insurance players (whose AUMs are still growing). The equity AUMs of the mutual fund industry have grown by 47.3% YTD October end, versus 35.6% rise in the Nifty over the same period, indicating only modest inflows. This is partly because the investors have not entirely overcome the trauma of 2008 and partly due to
the regulatory issues regarding commissions for the distributors. We see no change in this situation over the next couple of quarters at least.

AUM growth over Nifty growth: Improvement in overall trading and fund raising activity crucial for Brokerage stocks: We have been positive on the Indian Brokerage sector based on an improvement in all the key revenue segments for the sector. Clearly, for stocks in this sector to outperform the broader market, improvement in trading activity and corporate fund raising is going to be crucial and will be monitored closely. Edelweiss Capital remains our top pick
in this space.

To read the full report: INDIAN BROKERAGES

>Ranbaxy Launches GSK’s blockbuster drug (VALTREX) in US.

Ranbaxy Laboratories has launched generic Valtrex (valacyclovir hydrochloride) tablets in the
US market, two years after it settled a patent dispute with GlaxoSmithKline (GSK) and secured
a 180-day sales exclusivity for it. Though Industry had an apprehension that whether Ranbaxy
will be able to monetize this opportunity or not because of ongoing issue at Dewas facility from
where this molecule was filed earlier. But company has managed to get Valacyclovir
manufactured from the production facility of its US subsidiary, Ohm Laboratories, thereby
salvaging the six-month exclusive marketing opportunity.

• As it is the only other player to launch this drug after innovator company Glaxo Smith Kline Pharma (GSK), we expect the company to garner about 11-12% market share of US$ 2.2 billion annual market of Valtrex for next six months (exclusivity period). At topline level, we expect drug to contribute Rs 1,000-1,050 crore in next 6 months.

• Launch would strengthen Ranbaxy’s presence in the antiviral segment- Valterx (valacyclovir) is an antiviral drug used to treat genital herpes, cold sores and shingles. Our View
We have revised our earnings estimate keeping in view the revenue inflow from the launch of
Valtrex. Going forward, we will see further improvement in topline as it has entered into
various strategic alliances i.e. with Medy-Tox Inc. & Validus Pharmaceuticals. We believe the
company would post good numbers in Q4 CY09 and outperform its own guidance, sales target
of Rs 7,000crore.

We believe the alliances with GSK and Merck in the area of New Drug Discovery Research and
upcoming first-to-files (FTFs) Flomax (market size of ~ US$1.2 billon) are the positive triggers
for the company. Company also holds marketing exclusivity rights of another drug Flomax
whose patent expires in March 2010. The company is hopeful of getting the US FDA clearance
for its Dewas plant in the next few months.

To read the full report: RANBAXY LABORATORIES


• Four Soft is a CMMI level 3 certified company, which provides innovative software solutions and IT consultancy services exclusively for the transportation, logistics and supply chain management market place.

• Four Soft Ltd. will be entering the business process outsourcing (BPO) vertical to offer services like freight settlement reports, customer service and transaction entry to global freight forwarding companies in the next quarter.

• Four Soft Netherlands BV, a subsidiary of Four Soft India, has signed a new contract with Smart Logistics BV, Netherlands, to automate its freight forwarding operations by implementing 4S eTrans SME at its multiple locations

• Operating Profit and PAT of the company are expected to grow at a CAGR of 18% and 53% over 2008 to 2011E respectively.

To read the full report: FOUR SOFT


Initiate coverage of Adani Power with a Buy rating
We are upbeat on the power generation growth story in India and believe the key positives for Adani Power are: 1) earnings could rise 5x from FY10 to FY12 with ROE a robust 25%+ in FY12E; 2) ROE versus P/BV appears attractive on a comparable basis (2.5x P/BV versus 25% ROE in FY11E); and 3) significant upside potential from merchant power (surplus power with producers, which is not tied in to any long-term PPAs) and new power plants/reinvestment.

Unparalleled execution capability; capacity expansion upside
We believe the company’s execution track record is unparalleled. Adani Power took only three years to commission its first power unit (330MW) and we expect the entire 6,600MW to be commissioned by end-FY13. It also has 3,300MW in an advanced stage of development and 5,280MW planned. This could provide significant upside to the share price in the medium to long term.

An emerging utility major

Core operating earnings to start in FY10
Based on rapid capacity additions we believe EPS growth will be significant, from Rs2.22 in FY10E to Rs11.24 in FY12E. In addition, the first few months of operation indicate that Adani Power’s 330MW unit has reached a 90%+ plant load factor. By FY15, we believe the company will become a major private sector power generation utility, despite being a late entrant to the sector.

Valuation: project-based DCF price target of Rs130
We derive our price target using a plant-by-plant DCF, assuming COE of 13.2%, a risk-free rate of 7.2% and beta of 1.2. Under development/planning capacity is the key upside potential and our valuation could rise 23% if we include these projects.

To read the full report: ADANI POWER