Monday, April 19, 2010

>Which countries benefit from a weak euro? (NATIXIS)

It is likely that the euro will continue to depreciate against the dollar, not so much because of the euro zone’s institutional problems as above all because of the weakness of its economy and the fact that the dollar is being shored up by the central banks of emerging and oil-exporting countries. Which countries would benefit from a persistently weak euro? Most analysts reply that it will be Germany because of the heavy weight of its industry but is this certain?

  • Germany has above all gained market share within the euro zone, imports a great deal from emerging countries due to outsourcing and manufactures high-end products for which demand is relatively insensitive to price; this implies that the euro has little effect on Germany;
  • countries which have a weak export capability and significant trade deficits (Spain) are normally the losers if the euro depreciates, since the predominant effect of the euro’s depreciation on these countries is to increase the prices of imports;
  • countries that continue to have a substantial industrial sector but which is oriented more to the mid-range or which is in direct competition with companies in the dollar zone (France, Italy) are normally those which gain the most from the euro’s depreciation.
Contrary to accepted wisdom, neither Germany nor Spain would benefit from a weak euro.

To read the full report: WEAK EURO

>RELIANCE INDUSTRIES: What Does Shale Gas Mean to Reliance? (MORGAN STANLEY)

■ Update on the Reliance-Atlas JV: Atlas Energy, Reliance’s (RIL) JV partner in the Marcellus Shale assets, held a conference call on 12th April. Based on the call and our discussion with RIL management, we have built a business model to understand the impact of shale gas assets on RIL. Our key conclusions are:

■ Base case scenario – we estimate gas production of 16 mmscmd (net to RIL): The Marcellus Shale JV should contribute US$793mn in EBITDA and US$488mn to RIL’s PAT in 2014. We expect the JV’s production to ramp up to 24mmscmd by 2019.

JV shale gas assets equate to NPV of Rs.13.4/share: We expect Reliance to invest $5.3bn in the JV, including the acquisition cost of $1.7bn. Assuming a discount rate of 10%, we estimate that RIL’s investments have a NPV of US$987m. We estimate the IRR of the investment to be 19% including acquisition cost.

■ Lower acreage cost considering optionality: At the deal value of US$1.7bn, the acreage acquisition cost is $14,167/acre – however, if we discount RIL’s obligation to pay 75% of Atlas’ capex over the next 5.5 years at a rate of 10%, the cost falls to $10,797/acre. This could further decline to $9,480/acre, since RIL has the ‘Right of First Offer’ to acquire 278,000 acres at $8,000/acre and another 222,000 acres at $5,000/acre, whenever Atlas decides to sell these assets.

■ Potential impact on earnings/PT is marginal: We estimate that the JV could add Rs6.6/share to RIL’s FY2015 EPS – 5-6% of earnings then, ~8% of FY2012 EPS. Applying a target multiple of 9x (based on global comps) could add Rs 59/share to our RIL target price.

To read the full report: RELIANCE INDUSTRIES

>MCHI Property 2010 Expo (CENTRUM)

We attended the property exhibition hosted by the Maharashtra Chamber of Housing Industry (MCHI) in Mumbai. About 75 developers participated and customer interest was strong with ~70,000 visitors thronging the fair. However, affordability continues to suffer with prices having crossed their 2008 peak levels. We reiterate our view that prices could correct 10%- 20% across projects in Mumbai.

Strong turnout, but expectations belied: Similar to previous property exhibitions, the recent four-day event (April 8-11) held in Mumbai attracted over 70,000 footfalls. Notwithstanding the higher number of enquiries, the fresh round of price increases of 10%- 15% in April 2010 has had a visible impact on buyer sentiment.

Prices in Mumbai have breached the previous peak: Property prices in Mumbai have crossed their 2008 peak levels vs other property markets like the NCR, Bangalore and Chennai, where prices are still 20%-30% below their peak levels of Q1CY08. We view this negatively and expect prices to correct again. We see higher chances of a ‘double dip’ fall of 10%-20% from current levels.

Premium housing rules the roost: Developers have renewed focus on premium housing. Only ~20% of the homes were priced below Rs4mn (this segment accounts for over 60% of the potential housing demand in the Mumbai Metropolitan Region). Prices for a 2BHK home outside Mumbai city are now over Rs5mn.

Buyer poll reveals expectations of price cuts: Our poll of 100 visitors at the expo reveals that most buyers are waiting for prices to fall by 10%-20% and would take a purchase decision only after six months as they simply cannot afford to buy homes at the exorbitant rates.

Prefer HDIL among Mumbai players: We prefer Mumbai-based developers with a diversified business model with less dependence on premium projects. Accordingly, HDIL (Buy, NAV Rs397/share) is our top pick due to its diversified revenue stream and cash flow visibility. We remain cautious on premium players like Orbit Corporation (Hold, NAV Rs295/share) and DB
Realty (Not Rated).

To read the full report: MCHI PROPERTY


Global environment continues to remain weak.
Domestic market continues to remain strong
Restructuring provides room to breathe
Extended bleak outlook, downgrade to MP

To read the full report: SUZLON