Saturday, April 10, 2010

>The Fed’s road home (JP MORGAN)

• The exit from exceptional financial market support is under way
• The exit from exceptional macroeconomic support won’t begin until 2011
• Reserve draining will serve as an adjunct to interest rate policy
• Long-run changes to monetary policy framework will be limited

Understanding Fed policy during the past two years has required a comprehension of the detailed mechanics of central banking. Over the next 12 months, a knowledge of this “plumbing” of central banking will still be essential for making sense of the monetary policy outlook. However, as the prospect for positive interest rates begins to reappear on the horizon, some of the more traditional questions regarding interest rate policy will also reemerge.

The following report builds on a series of special studies we have provided through the crisis—beginning with “The Fed’s big bang” in April 2008—that attempts to guide readers through the increasingly complicated thicket of Fed policy considerations. The first half of this report looks at the technical aspects of the move away from balance sheet policy and back toward interest rate policy. Bank reserves and the overnight money market figure prominently in this section, as the “draining” of reserves is a fundamental aim of the exit strategy. The second half of the report deals directly with interest rate policy, including which rate(s) will be hiked, when, and how fast. We conclude with some observations about the longer-term future of the Fed.

Before turning to a discussion of central bank plumbing, we briefly preview what we see as the most likely evolution of the timing and sequencing of Fed moves toward the exit.

To read the full report: FED POLICY


Unitech plans to spin off its non-core businesses (construction, telecom, power, SEZs and amusement parks) and focus entirely on real estate. We believe the objective behind the de-merger is to create two separate listed entities that will allow for a sharper business focus. The move will also enable the management to raise funds more easily in the non-core entity as compared to the real estate business. We see value-accretion for investors from the spin-off and hence maintain a Buy on Unitech with a target price of Rs 101.

Non-core spin-off to unlock value

Non-core line up: We believe the proposed non-core entity would comprise the company’s 40% stake in Unitech Corporate Park (UCP), 50% stake in Unitech Amusement Park, 32.5% holding in Uninor Wireless (telecom), and the in-house construction and power transmission divisions.

Unitech Corporate Park – the SEZ vehicle: UCP – an AIM-listed entity – operates in India’s commercial real estate segment with a focus on IT and IT-enabled services. The company has six properties (five SEZs and one IT park) in the national capital region (NCR) and Kolkata with a total development potential of 21.4mn sq ft (1.05 msf leased out). UCP is a debt-free company with cash of £ 48.3mn as on December ’09. Knight Frank has valued the company’s six assets at £ 517.7mn; we have built in this figure for our best-case valuation of UCP. Accordingly, the value of Unitech’s 40% stake stands at Rs 14bn (Rs 68/£).

Amusement parks: Unitech holds a 50% stake in Unitech Amusement Park which owns two parks, one in Noida and another in Rohini (Delhi). The Noida amusement park is spread over 148 acres in Sector 38. Phase It has been concluded and comprises 20 rides along with 1msf of operational retail space. The park in Rohini called ‘Adventure Island’ covers 61.7 acres and has 22 rides and 0.2msf of retail space operational under the first phase. We have valued this business based on the leased portfolio, at Rs 5bn in the best case scenario.

Telecom, construction and power: Unitech holds a 32.5% stake in its telecom business – Uninor Wireless, which we have valued at Rs 29.6bn (based on Telenor’s 67.5% stake acquisition in Uninor for Rs 61.3bn). We value the construction business at 4x Market cap/EBITDA (~Rs 1bn) and power at Rs 1bn.

De-merger to be value-accretive for investors: Including subsidiaries and JVs, we arrive at a value of Rs 19.5/share for the de-merged entity in the best case and Rs 12.9/share in the bear case at full dilution (see Fig-1). We expect the spin-off to unlock value for investors and hence maintain our Buy rating on the stock with a target of Rs 101. We reintroduce a discounted value for the realty business on concerns of rising interest rates and escalating realty prices, which affect volumes.

To read the full report: UNITECH


Company Description: Promoted by Atlas Wires in 1988, Precision Wires India set up a plant to manufacture enamelled copper winding wires, which was funded by way of a public issue in March '92. AWL’s first manufacturing facility was set up in 1981 in the state of Gujarat. In 2001, AWL was amalgamated with PWIL. PWIL is a market leader for producing enameled copper winding wires which are used for electric motors, switch gears and transformers. PWIL has three manufacturing facilities located at Silvassa, Dadra Nagar Haveli and Palej, Gujarat with a total capacity of 32, 820 tpa. It also manufactures CTC (continuously transposed conductors) and PICC (Peripherally Inserted Central Catheter).

Highlights: PWIL suffered sharp set-back in profitability because during the period July -Dec 08, there was unprecedented fall in copper prices. Due to such meltdown, its customers unilaterally refused to take delivery of finished products against confirmed orders. However, PWIL had to take delivery of high priced copper against its commitments. Due to these reasons, the results for FY09 were adversely affected. The company is now back on the fast track.

PWIL caters to a wide spectrum of industries like power, electronics, industrial equipment, consumer durables, agri-equipments and special purpose machines. Its wires are widely used in equipment such as: rotating machines, alternators, hermetic motors (for refrigeration and air conditioning equipment), power and distribution transformers, control and power supply transformers, ballasts, auto electrical, electric hand tools, house hold appliances, fans, switchgear, relay and magnet coils, Instruments and audio coils etc.

PWIL has a long term technology tie up with Essex, Italy for the manufacture of CTC, enamelled copper strips and various other types of rectangular insulated winding wires. PWIL’s customers include large and medium electrical and electronic equipment manufacturers both in India and abroad. India has the fifth largest generation capacity in the world with an installed capacity of 152 GW as on 30 September 2009, which is about 4 percent of global power generation. The average per capita consumption of electricity in India was estimated at 704 kWh during FY09. However, this is fairly low compared to some of the developed and emerging nations such US (~15,000 kWh) and China (~1,800 kWh). The world average stands at ~2,300 kWh. Aided by ambitious plan to add 78.7 GW of additional generation capacity in the 11th plan by the year 2012, according to CRISIL Research estimates, about Rs 7, 50,000 crore is likely to be invested in the power sector by 2013-14. Of this, INR 4, 80,000 crore is expected to be invested in the power generation space. As the electrical equipment segment is the largest user of PWIL products, the huge investments in the power sector spell bright prospects for PWIL.

At the CMP of Rs 76, the share is trading at a P/E of 4.1X on FY10E and 3.5 on FY11E. We recommend BUY with a target of Rs 100 in the medium term.

To read the full report: PRECISION WIRES