Wednesday, January 6, 2010

>Emerging country risk is still overvalued by the markets (NATIXIS)

Probably because of historical habits, financial markets still consider emerging countries to be riskier than OECD countries: this can be seen from the level of risk premia and the reaction of financial markets when risk aversion rises.

This is maybe still true overall, but in many cases it seems to us that emerging countries as investment vehicles are at least as solid as OECD countries today, considering the situation of foreign trade, public finances, growth prospects, technological progress, education, demographics and now the solid monetary management in emerging countries and the exchange-rate policies.

We take as examples the cases of Brazil and Spain, and look at the relative risk of these two countries.

To read the full report: EMERGING COUNTRY RISK

>Time to glide after the stride (ICICI DIRECT)

Equities — The asset class to be in
Equity as an asset class has outperformed other asset classes including gold in CY09. The outperformance also sustained over a longer period of time as can be seen from the exhibits below. Emerging equity markets have outpaced their developed counterparts in the last 10 years since 2001, indicating growing importance of developing economies as a preferred
investment destination.
Commodities, as represented by Reuters/Jefferies CRB Index, have performed well in phases but huge volatility makes them less attractive visà- vis equities over a long period of time.

Investor’s dilemma in 2010
The year 2010 would be a litmus test for the markets after we witnessed one of the best calendar year returns of all times, surprising us all. Investing was easy in 2009 with markets rewarding a basket of asset classes. Year 2010 would be different in this regard, where an investor would need to choose the right asset class and of equally sound quality. At the same time, the return expectation needs to be moderated as a repeat of 2009 is unlikely.

Choosing an asset class in 2010 will become even more difficult when the global economy still throwing conflicting signals about the intensity of recovery. An investor would be facing major dilemmas and this noise is going to get even louder when we have lower liquidity, going forward. Some of the major predicament an investor could face would be whether
the market would rally further and how emerging markets are likely to perform on that scale? Would there be tightening of money supply and could we face a double dip? or is Chinese growth for real? Even domestic factors like higher inflation, economic growth and efficacy of the government’s role would create impediments in the minds of an investor.
We try to asses these factors and hope to bring clarity on the same.

Emerging markets to lead the global recovery…
Global economies, despite some concerns have been on the recovery path for sometime now backed mainly by sustaining manufacturing activities, improvement in inventory cycle, rising home sales, etc. The International Monetary Fund (IMF) has revised upward the global growth prospect with ~3% growth in 2010 following a contraction of ~1% in 2009. During 2010- 14 the growth is forecast to be ~4%, below the average of ~5% just before
the financial crisis.

However, the pace of recovery is faster in emerging economies. Still, the stronger domestic demand helped these countries to replace the export dependence to a large extent. This, in turn, helped them to come out of the recession at a faster rate compared to the developed countries. The IMF has upgraded China’s GDP growth prospect again with the current forecast of 9% growth for 2010. On the other hand, however, India’s growth forecast has been downgraded marginally to 6.4% for the same period. We believe this is because of the adverse effects of the poor monsoon in the country.

Share of developing economies in total GDP to improve…
It is clear that the importance of emerging economies would improve, going ahead, in the global economic arena. The balance of power is also likely to shift towards emerging countries, as the share of emerging economies to the total world GDP is rising steadily.

Whether out performance by emerging markets will continue?

To read the full report: MARKET STRATEGY


The JM Financial Group is one of the leading players in the financial services field with business interests in investment banking, equity broking, wealth management, securities-based funding, asset management and alternative asset management. JM Financial Ltd (JM Financial) is the holding company for the operating entities in the group

CRISIL's Fundamental Grade represents an overall assessment of the fundamentals of the company graded in relation to other listed equity securities in India. The grade facilitates easy comparison of fundamentals between companies, irrespective of the size or the industry they operate in. The grading factors in the following:

  • Business Prospects: Business prospects factors in Industry prospects and company's future financial performance
  • Management Evaluation: Factors such as track record of the management, strategy are taken into consideration
  • Corporate Governance: Assessment of adequacy of corporate governance structure and disclosure norms

Leading player in investment banking space
JM Financial has established a strong market position in the investment banking segment, which includes capital raising and mergers and acquisition advisory. The company has been a lead manager in around 30% of the total equity capital raised in the last 3 years. The strong relationships built with clients over the years and a robust track record has enabled the company to maintain its market position. Its revenues in the investment banking segment declined sharply by 60% in FY09, reflecting the subdued environment in the capital markets. Going forward, with reviving economic growth, we expect revenues from this segment to increase at a healthy pace.

Expanding footprint in the broking business
In the retail broking and wealth management businesses, the company has been keen on expanding its reach and client base through the franchisee route. On the institutional equities front, the company is still building up scale post its split from Morgan Stanley. JM Financial is currently focused on expanding its research capabilities across sectors and companies and strengthening its derivatives desk. While the broking revenues witnessed a slump in 2008-09 on account of adverse market conditions, they are likely to regain momentum with an expected recovery in the market.

Securities funding business linked to capital market activities
In the securities funding business, the company provides loan against securities, IPO financing, and sponsor funding. In FY09, the company entered the asset reconstruction business in association with public sector banks. As of March 2009, this business had a book size of around Rs 9 bn. We believe that the company’s comfortable gearing and strong net worth provides it the leeway to expand and sustain during bouts of volatility in the capital market.

Uncertainties inherent in capital markets
Fortunes of JM Financial’s businesses are inextricably linked to the capital markets. While the company’s diversified product profile and healthy market position would provide some succour to revenues, its earnings remain vulnerable to volatility in capital market related businesses.

Revenues growth to be buoyant
CRISIL Equities expects JM Financial’s turnover to register at a CAGR of 37% between FY09 and FY12. Growth across all its major business segments is expected to remain
ealthy, provided economic conditions continue to improve. Adjusted EPS is projected to grow at a CAGR of 43%. JM Financial’s balance sheet strength – net worth of Rs 16 bn as of March 2009 – gives it the ability to withstand market volatility.

To read the full report: JM FINANCIAL LIMITED


KEY INVESTMENT HIGHLIGHTS: Vardhman Textiles is totally integrated play on textiles with 669000 spindles increasing by 50000 further and 92mn mtrs gray and 51mn mtrs processed fabric capacity increasing by 2mn mtrs further. Presence in entire textile value chain benefits the firm to capture growing domestic and international market. We expect volume improvement with increasing realization to improve bottomline at a CAGR of 21% over next two years.

Evolution through consolidation: Vardhman Textiles to be major beneficiary of strong consolidation witnessed in the spinning industry. Wherein, total spinning capacity has increased at a CAGR of 1% over a decade Vardhman was able to increase its capacity at 3.5% CAGR. Capacity expansion of 50000 spindles and 2 mn meters fabric will improve volume

Healthy demand to absorb high yarn prices: Improving textile demand outlook, rising raw material cost and reduced yarn inventory levels (3%) in the international market will maintain at current high level. However, healthy demand will be able to absorb high prices. Domestic textile demand growth is expected at 7%. Vardhman to improve its margins in such scenario as yarn contributes 55% of its total sales.

Export demand adding spice: We expect Vardhman’s internationalbusiness to increase, which currently contributes around 25%. With China’s cotton production expected to reduce by 9% for 2009-10, we expect increased yarn imports from China and even from neighboring countries like Bangladesh. India is well positioned to cash on this as India’s cotton production is expected to increase 5% in 2009-10.

Forward integration to benefit: With forward integration into gray and processed fabric with total capacity of 91mn mtrs and 40mn mtrs respectively increasing by 2mn mtrs Vardhman dominates its presence in entire textile value chain. We expect this business to contribute around 32% to total revenue.

Improving profitability and reducing leverage: Improving volume and reducing interest saddle with reducing debt is expected to improve profitability of the company. We expect topline and bottomline to grow at 15% and 21% respectively over FY09-FY11E. The firm holds consolidated debt of Rs2200 cr with Rs450cr cash and Rs250 cr capex plan ahead. Strong free cash flow expected at Rs500cr next year would be able tofulfill capex requirement and bring down debt level at Rs2000cr by FY11E.


  • Higher than expected increase in raw material prices could dampen the margins of the company.
  • Lower than expected demand could dampen growth volume growth of the company.

VALUATION: Vardhman is consistent dividend paying company with positive ROE. With improving profitability’ ROE of the firm is expected to improve further to 15% by FY11E. All the positives are offered at very discount, which makes re-rating of the stock evident. Currently stock is trading at 4.9xFY11E earnings and 4.3xFY11E EBIDTA. We recommend
“BUY” with price target of Rs310.

To read the full report: VARDHMAN TEXTILES


Mortgage: GDP ratio at 7% provides room for further growth
The ratio of mortgage to GDP in India has remained low at 7%, as against 12% for China, 41% for Hong-Kong and more than 80% for developed countries, thus providing potential for further growth in the housing sector during the coming years.

Revival in real estate volumes supported by low interest rate
The correction in the real estate prices in the initial period of the year and low interest rate schemes announced by the banks/HFCs have resulted in significant surge in real estate volumes over the past few months.

Home loan rates - a number play game

Sluggish credit demand; banks increase their exposure to housing sector
Due to sluggish credit demand (up 10.1% yoy for the fortnight ended November 20th, 2009), banks have been diverting their funds towards housing loans.

HFCs continue to do business as usual
HFCs foresee the increasing share of banks exposure towards home loan segment as a temporary phenomenon. In our view, banks are likely to face asset-liability mismatch as these loans have a long hestation period.

Differential interest rate may not remain for long
While the discounted/special scheme rates are offered to new home loans, existing customers continue to pay higher rate of interest. The Indian Banks Association has planned to introduce a uniform rate for all borrowers.

See also major events/Rate cuts announced by banks/HFCs in report

To read the full report: HOUSING PRICES


An improvement in H2 FY10 occupancies across room portfolio coupled with steady average room rates (ARRs) has been key to Hotel Leela's recovery from amongst the worst downturn in the hospitality industry. Even so, Numbai and Bangalore luxury markets (~65% of FY11E room revenues) have not shown the kind of business ramp up seen in Delhi or Hyderabad.

We now expect FY11 occupancies to be in the range of 66-74% (an increase of 200 - 400bps from previous estimate)while room tariffs may be flat yoy. Revise Fy11 revenue and EPS estimates by 11% and 16% respectively. Raise TP to Rs35 but retain SELL.

H2 occupancies better than expected

Volume growth in FY11 partly offsets weak ARRs

Co in recovery mode remains expensive: SELL

To read the full report: HOTEL LEELAVENTURE