>Commodity prices and global activity (NATIXIS)

Commodity prices have fluctuated considerably since 2007, with a very rapid rise since the second quarter of 2009. In order to forecast future trends in these prices, it is important to understand whether these fluctuations are linked in a normal manner to those in global activity (output), or whether they are amplified by speculative positions, and to what extent.

To try to answer this question, we use an econometric approach, linking commodity prices to global output. It leads to the conclusion that there is currently a very significant speculative component in commodity prices.

1. Very drastic fluctuations in commodity prices
Since 2006-2007, there have been very drastic fluctuations in commodity prices a surge in the second half of 2007 and early 2008, collapse in the second half of 2008, sharp rise since the second quarter of 2009. The rise in commodity prices in 2009 concerned all commodities with the exception of cereals, and coal to a lesser degree.

2. What prospects?
It is important to ascertain whether these sharp fluctuations in commodity prices are linked in a normal manner to those in global output (total, of industrial products) or are amplified by speculative positions.

3. Commodity prices and economic cycle
We will first study in report the links between commodity prices (oil, non-precious metals, precious metals, food) and the global economic cycle, represented either by global manufacturing output (Chart 3A), or by the global PMI (Chart 3B).

To read the full report: COMMODITY PRICES

>RELIANCE INDUSTRIES LIMITED (FIRST CALL)

■ Reliance Industries Limited (RIL) is India’s largest private sector company on all major financial parameters with a turnover of Rs. 1,46,328 crore (US$ 28.85 billion), cash profit of Rs 22,365 crore (US$ 4.41 billion), net profit (excluding exceptional income) of Rs. 15,637 crore (US$ 3.08 billion) and net worth of Rs 126,373 crore (US$ 24.92 billion) as of March 31, 2009.

■ The company has successfully completed an assessment of the design capacity of the KG D6 deepwater gas production facilities.

■ The company has revised its proposal to buy a controlling stake in bankrupt LyondellBasell Industries.

■ Reliance Retail plans 85 jewellery stores over next 3 years.

■ Reliance Exploration and Production DMCC (REP) has signed a farm out agreement with Ecopetrol SA (Ecopetrol) for Borojo North Block 42 and Borojo South Block 43 in Colombia.

■ Oil Discovery by RIL in Cambay Basin.

■ The company’s net sales are expected to grow at a CAGR of 14% over FY08 to FY11E.

To read the full report: RIL

>REAL ESTATE SECTOR (GOLDMAN SACHS)

■ 2010 outlook: Sector to Attractive from Cautious: Looking into 2010, we believe expectations for office absorption and rentals are still low and this segment could provide the next leg in the sector’s recovery. With some green shoots visible, we expect office absorption to pick up in 2010 as GDP growth returns to 8%+ levels, as our economists forecast. We also envisage steady growth in key residential markets with months of unsold inventory falling back to early 2008 levels and expect residential to remain a significant part of RNAV. We raise our sector view to Attractive from Cautious. Risks to our sector view include policy tightening.

■ Upgrade DLF to Buy from Sell; increase TP to Rs463 from Rs375: We upgrade DLF (DLF.BO) to Buy from Sell and raise our 12-mo TP to Rs463 (from Rs375). DLF offers exposure to the office market (about 20% of FY11E RNAV), where we expect absorption to pick up in 2010, followed by rising rents in 2011. We also expect the proposed DAL integration to reduce an overhang on the stock. The Delhi residential launch in 2009 bodes well for other city-centre launches in 2010. Although long awaited, we also expect progress on asset disposals in 2010. Risks: 1) slow office recovery, 2) execution delays.

■ Indiabulls RE to Buy from Neutral; TP to Rs269 (from Rs264): In addition to not attributing much value for power, we believe Indiabulls RE (INRL.BO) stock is neither pricing in a strong recovery in the Mumbai office market nor taking into account Indiabulls’ Mumbai residential projects. We believe the stock could move higher on 1) a pickup in Mumbai office leasing, 2) execution on residential projects and power, 3) news flow on successful bids for upcoming projects. Key risks include continued weak residential sales momentum and low earnings visibility versus peers.

■ Reiterate Buy (Conviction List) on Unitech; Sobha to Neutral: We remain positive on Unitech (UNTE.BO) with a new 12-m TP of Rs128 (vs. Rs125) and believe the stock will re-rate as the market sees evidence that volumes remain robust and the company is making progress on execution. With stabilization in the Bangalore market, we upgrade Sobha (SOBH.BO) to Neutral from Sell with a 12-m TP of Rs250 (vs. Rs202). We maintain Neutral on HDIL (HDIL.BO) and raise our 12-m TP to Rs379 from Rs349. We raise our 12-m TP on Parsvnath to Rs118 from Rs103 but maintain Sell on a sector-relative basis.

To read the full report: REAL ESTATE SECTOR

>OUDH SUGAR MILLS LTD (FAIR WEALTH)

COMPANY PROFILE: Established in 1932, Oudh Sugar Mills Limited is a KK Birla group company. KK Birla group apart from sugar is a leading player in key industries like fertilizer, chemicals, heavy engineering, textiles, shipping, media, etc. UGSIL has its manufacturing units in UP, Bihar and Assam.

The Company Operates Through Following Divisions:-

SUGAR:
This division consists of manufacturing and selling of sugar, molasses and bagasse.
Presently company has Four sugar manufacturing unit with aggregate crushing capacity of 28700

TCD:-

■ Hargaon Sugar Mills, Hargaon, Dist Sitapur (U.P.) with a crushing capacity of about 10,000 tonnes of sugarcane per day.

■ Rosa Sugar Works, Rosa, Dist. Shajahanpur (U.P.) situated in Uttar Pradesh with a crushing capacity of about 4200 tonnes of sugarcane per day.

■ New Swadeshi Sugar Mills, Narkatiaganj, Dist West Champaran (Bihar) with a crushing capacity of about 7,500 tonnes of sugarcane per day.

■ New India Sugar Mills, Hata. (U.P.) with a crushing capacity of about 7,000 tonnes of sugarcane per day commenced operations this year.

DISTILLERY:
Company has following two distilleries:-
Hargaon facility with a capacity of 100 KLPD of Industrial Alcohol/ ethanol.
Narkatiaganj facility with a capacity of 60 KLPD of Industrial Alcohol/ ethanol.

CO-GENERATION:
This division, presently, operates through two units with aggregate capacity of 25 MW. This segment is involved generation and transmission of power.
■ Hargaon Co-generation power plant with a capacity of 15 MW power.
■ Narkatiaganj Co-generation power plant with a capacity of 10 MW power.
■ Company has setup New Co-genration plant at Hata, (U.P.) with a capacity of 35 MW.

To read the full report: OUDH SUGAR MILLS

>K S OILS (MANSUKH)

FINANCIAL HIGHLIGHTS

■ CAGR growth (FY05 - FY09), Top Line - 62% & Bottom Line - 166%.

■ Segment Revenue - Vanaspati Division around 98% and rest 2% comes from Power Segment.

■ Q2 FY10 - Net Profit Rs 50.18 Cr (Up by 19% YoY), Net Sales Rs 946.52 Cr (surged by 26% YoY.)

■ Interest cost & Depreciation also surged by 98% & 1.20% respectively on account of land acquisition in Indonesia

To read the full report: K S OILS

>ACTION CONSTRUCTION EQUIPMENT (PRABHUDAS LILLADHER)

■ Ease of NBFC funding and Infra-led demand to improve volumes: Demand for equipments related to infrastructure is expected to see a considerable pick-up on the back of NBFC funding being available now and the on-going infra-related spending. Products like Mobile cranes, Backhoe loaders, Crawler cranes and Tandem rollers are expected to see increased volumes. But at the same time demand from the real estate sector (for fixed tower cranes, mobile cranes) might have bottomed out but still hasn’t gathered any momentum. Even on conservative volume estimates (15-25% lower than management guidance) for FY11 and FY12, we expect the company’s revenue to grow at a CAGR of close to 30%.

GATHERING MOMENTUM

■ Tractor foray to gain pace: Action Construction equipment (ACE) sells its tractors in the Northern states of Haryana, Rajasthan and Uttar Pradesh. The company is currently selling these tractors through its dealer network of over 200 dealers. The company has a capacity of 400-500 tractors per month which will be sufficient for the next year. Capex of Rs150-200m is expected to be undertaken in FY11 in order to increase this capacity to more than 700- 800 per month.

■ Margin improvement: Overall volumes are expected to improve considerably in both H2FY10 and FY11. ACE, currently, has a capacity to generate revenue of close to Rs6-6.5bn. Hence, with increased volumes, we expect margins to improve incrementally, with FY10 and FY11 margins expected to be 8-8.3% and more than 10%, respectively.

■ Valuation: With the ease of funding availability from NBFC, to both regular and first equipment buyers, coupled with an improving demand scenario, ACE is well placed at this point in time to take advantage of this increasingly positive scenario. At the CMP of Rs42, the stock trades at 9.9x FY11E and 7.6x FY12E earnings of Rs4.3 and Rs5.5, respectively. We maintain ‘Accumulate’ on the stock.

To read the full report: ACTION CONSTRUCTION EQUIPMENT