Saturday, April 3, 2010

>Popular Delusions: when to sell gold (SOCIETE GENERALE)

JP Morgan once said he'd made his fortune by selling too soon. We spend much time thinking about what to buy and when to buy it, when in fact knowing when to sell is more important. The case for owning gold is clear enough, but when should we look to sell?

Some would say the time to sell is now. Gold just isn't the misunderstood, widely shunned asset it was a few years ago. Isn't the gold bull market now long in the tooth, with better opportunities to be found elsewhere? I can understand this view. Had you bought stocks at the bottom of the bear market in 1974 and held them for ten years you'd have seen them go from being hated to being loved. And as the number of mutual funds exploded you could have plausibly argued that since stocks were no longer the deeply contrarian plays they'd been, they should be sold. But you'd have missed spectacular gains over the next 15 years because the social contrarian indicators said nothing as to how favourable underlying conditions were for risk assets.

Though developed market governments are insolvent by any reasonable definition, it's far from inevitable that this insolvency will precipitate an extreme inflationary event … it's just that it might ... And although I've wondered aloud if Ben Bernanke is in fact the reincarnation of Rudolf von Havenstein - the tragic president of the German Reichsbank who presided over the Weimar Hyperinflation (speculative evidence presented below) I don't think he actually is ... it's just that he, and other central bankers, might be closer than they think ...

Gold, like all other commodities, is inherently speculative. Unlike well chosen stocks which you buy to hold to take advantage of their wealth-compounding properties, you only ever buy commodities to sell later. With this in mind, when should you sell gold?

To read the full report: GOLD

>The Jury is Out on Capacity Utilization (MORGAN STANLEY)

Key Debate: How Soon is the Private Capex Recovery Coming? It is almost inevitable that we get the start of a new private capex cycle in 2010, in our view. However, its timing is still a debate. Indicators such as the non-oil trade deficit point to high capacity utilization and hence an immediate start to the capital spending cycle. However, other indicators suggest that we may still be a couple of quarters away from the start of a new private capital spending cycle.

Capacity utilization is still rising but probably not full: While the trade deficit suggests that domestic capacity utilization is running full, several other indicators (both lagging and current) suggest that capacity utilization is still a few months away from hitting the peak. Core inflation has only reverted to its long- term mean, corporate pricing power (defined as the gap between selling price and input costs) is coming off its low and the bank credit-deposit ratio is also just off the bottom. Anecdotal evidence we collected from our sector analysts support this view (see table below).

Pricing power has troughed and is likely to return strongly in the coming months: Unless we get punitive action from the RBI which causes growth to slow down considerably, we expect corporate pricing power to keep rising in the coming quarters. Pricing power troughed about six months ago and is already on a strong ascent. The implication is that earnings are likely to be strong in the coming quarters – an important foundation for capex.

Key capex drivers getting in place: We identify five factors that drive capex: a) Availability of capital; b) Cost of capital; c) State of the balance sheet; d) Capacity utilization; and e) Corporate profits and hence confidence on growth. The availability of capital is definitely improving whereas the cost of capital remains low relative to history. Corporate balance sheets are in good shape with debt-equity ratios reasonable, capacity utilization is rising thanks to acceleration in growth and the fall in capital spending over F2008 and F2009 and, most importantly, confidence in future growth is rising, epitomized by improving corporate profits.

Market implications – Continue to buy Industrials: Indeed, we believe industrial stocks will likely lead a capex recovery. Hence, we think the time to buy industrials is now even if the start of the capex cycle is out by a couple of quarters. The previous rate hike cycle suggests that industrials begin to outperform post the first rate hike. Valuations and ROE also favor industrial stocks over consumption stocks, in our view.

To read the full report: INDIA STRATEGY


Investment conclusion: We reiterate our OW rating on and raise our price target to Rs372/share, implying 26% upside, factoring in: 1) higher reserve potential and increased resource base of the Rajasthan field; 2) higher production potential from the Mangala field; 3)
Cairn signing definitive crude sale contracts, thereby reducing off take concerns.

Resource base getting better: Cairn India has increased gross discovered resource base estimates for the Rajasthan block from 3.7bn boe to 4.0bn boe. Also, Cairn estimates that the Rajasthan basin would have exploration upside with a potential resource base of 2.5bn boe. Overall, we have increased Cairn’s net 2P reserve estimates by 222mn boe to 1.2bn boe.

MBA production ramp-up higher and faster: Cairn expects to reach Mangala plateau production of 125kbpd in 2H10 and sees upside in production potential to 150kbpd, subject to government approvals. We expect Mangala to reach 150kbpd in F4Q13.

Off take concerns fading: One of our biggest concerns, off take of Cairn’s crude, seems to be moving behind us with the company signing sales arrangements for 143kbpd and pricing in line with our assumption of a 12.5% discount to Brent.

Future promising: With the current resources, Cairn is looking at increasing its production from 185kbpd to 240kbpd. Overall we have assumed Cairn’s production will increase from 185k/day to 210k/day in 2013. So, another 10% increase in production would increase our
EPS and DCF estimates by 10% and 13%, respectively.

Valuation: Stock price is discounting a crude oil price of US$78/bbl and is trading on a P/E of 6.2x F2012e. Also the premium of Cairn India over Cairn Plc’s stock price has been lost and it is now at a discount of 3%.

To read the full report: CAIRN INDIA


INR appreciation – Concern for export oriented sectors
The INR has appreciated by 2.4% and 3.3% in the last one month and the last three months respectively. The USD- INR has crossed the psychologically important level of 45 on the back of higher foreign inflows (~USD 4bn, the second highest ever for a month) as funds are being pumped into the Indian equity markets by the FIIs. Resultantly, the stock markets are trading at near one year highs, with Nifty trading currently at over 5300 levels.

This appreciation of INR would affect the export oriented sectors such as Information Technology, Pharma & Textiles. The CNX IT Index has pared 2.5% in the last few trading sessions and the CNX Pharma Index has pared 1.7% from the highs of 26th March due to the appreciating INR.

As can be seen from the above chart, from the highs of over 50 in Feb ‘09, the INR has been gradually appreciating against the USD on the back of robust GDP growth, stronger economic fundamentals (even boosted by an inclusive and progressive budget, which also looks to cut the fiscal deficit), rising inflows into the equity markets from the FIIs, rollback in stimulus packages in the west and a weak sentiment against the USD.

Rising Dollex due to higher risk appetite
From ~75 levels in Nov-Dec, during which the US economy was coming out stronger from the recession than the Euro area, the Dollex has been rising consistently reaching above 80 levels as the Euro and Yen started appreciating against the Dollar. In the last few days, the announcement that Eurozone leaders would help Greece with its debt servicing problems has allayed concerns and resulted in short covering helping the Euro appreciate against the USD.

Also, with the most economies coming out of woods, the risk appetite is gradually returning and the investments are more channeled towards the higher yielding currencies and away from the USD. Recently France has come up with good numbers on economic front and even countries such as New Zealand and Australia have started to report good economic growth. With this, we expect the USD to pare safe haven status in the medium term and hence one could look at a moderately rising Dollex from these levels as currencies such as Euro and Won are expected to be stronger going forward.

To read the full report: INR-USD


■ Developing the largest private sector power generation portfolio
Reliance Power (RPWR) is developing the largest private sector generation portfolio in India with aggregate capacity of 33GW(market share of ~11% by FY18E) supported by fuel linkages of 4BT.

■ Commercializing the surplus coal reserves
RPWRhas been allotted three coal mines with combined reserves of 700MT for the Sasan Ultra Mega Power Project (UMPP). It would have surplus of 336MT, which it intends to commercialize by developing another 3960MW project in Chitrangi. It has already tied up 1241MW with MP Power Transmission Company at a tariff of Rs2.45/kwh. Our combined valuation of Sasan and Chitrangi projects is Rs66/share.

■ Tilaiya coal blocks can support15000MW
RPWR has been allotted captive mines with reserves of 1.2BT for the Tilaiya UMPP. This project would require only 349MT coal over 25 years. Thus, the company would have surplus coal reserves of 851MT that can fuel additional capacity of 11000MW.We have conservatively factored in development of only3960MWfrom surplus coal reserves.

■ Financial closure risks being overplayed
RPWR has already achieved financial closure for 5460MW coal-based capacity.We believe the risks to financial closure have been overplayed because two key prerequisites for financial closure arewell in place: 1) fuel linkages (available for 100% of the balance capacity of 17120MW); and 2) power off-take agreement (for 9201MW).

To read the full report: RELIANCE POWER