>GOLD: Forecast 2010

Given the surge in prices in late 2009, it is not surprising that the 2010 forecast prices are all much higher than last year’s forecast prices. With the gold values hitting a new all-time high in December 2009, the 2010 forecast average for gold at $1,199, is well above the 2009 forecast level of $880. There has been an even sharper rise in silver predictions from $11.58 last year to $19.02 in 2010. Average PGM forecasts have also increased dramatically: for platinum from $996 to $1,558 and for palladium from $217.9 to $446.5. The forecasts are well above the year averages recorded for 2009 as shown above: for the four metals together, the average increase for 2010 forecasts relative to the average prices in 2009 is 38%. Compared to the level in early January, 2010 the increase is 5.4%.

Trading ranges are expected to be wide for all four metals in 2010.
All forecasters expect gold to hit record highs this year, with a predicted average high of $1,394. Lower central bank sales are at the forefront of contributors’ predictions.

Compared with January levels, the most bullish view is on silver, with some predictions that the price will reach the $30 level in 2010. The major influencing factor for silver emerging from the contributors’ analysis was portfolio diversification. Improving industrial demand is expected to play a role in the advance of silver prices. In platinum, contributors predict $1,843 as the average high, $300 above the level in early January. The average increase for the year as a whole relatively to early January is only 1.8%, well below the corresponding increases for the other three metals. Platinum ETFs are expected to be a major factor in the price of platinum. In palladium, contributors, on average, see the market reaching a peak of $570.5. Higher investor interest and industrial demand are reasons contributors think palladium will have an exceptional year in 2010: the forecast increase relative to the 2009 average is no less than 69%.

To read the full report: GOLD

>NIIT: Reasonable Valuations; Leveraged to Recovery

■ Upgrade to Buy — We are upgrading NIIT to Buy/Medium Risk (1M) from Sell/High Risk (3H). Our target price is Rs85 based on 15x Sep 11E EPS (10x Sep10E earlier) – below the last three-year trading average (~17x). We believe that this increase is fair given: (1) pick-up in hiring by the IT industry – benefits ILS, (2) improvement in US corporate sentiment – benefits CLS. Our estimates are largely unchanged with EPS CAGR of ~16% over FY10-13E.

■ Operating metrics improving — NIIT is a midcap with a presence in the growing education segment. Though FY10 was sluggish in terms of revenue growth, some of the key operating metrics showed improvement with: (1) EBITDA margins up by ~240bps, (2) ROCE increased by ~150bps, and (3) FCF positive after being negative in FY09. We expect the improvements to continue over FY10-13E.

■ Recovery in Individual Learning Solutions (ILS) — ILS recovered in FY10 with YoY growth rates improving from ~0% in Q1 to ~11% in Q4 (with margin improvement of ~130bps YoY). With a perceptible pick-up in hiring across the IT sector, we factor in ~11% YoY revenue growth and ~30bps margin improvement in FY11.

■ Corporate Learning Solutions (CLS) back to growth — CLS came back to growth with ~3% YoY in Q4 after registering negative growth rates from Q1 to Q3. With US revenues at ~90%, CLS stands to benefit from the pick-up in online training and training outsourcing. In FY11, we build in ~5% YoY revenue growth ($-terms) and ~90bps improvement in margins. INR appreciation remains a risk in CLS.

■ School Learning Solutions (SLS) – prudent choice a key for profitability — SLS was the growth driver in FY10 with revenues up ~45% YoY. The government schools business is working-capital intensive, making a prudent choice of contracts a necessity. We expect SLS to see ~9% YoY revenue growth and ~20bps margin improvement. New businesses, still small, could provide revenue upside though profitability is still sometime away.

To read the full report: NIIT

>SHREE RENUKA SUGARS LIMITED: Sweetened acquisition

■ Reduced acquisition cost & sugar price stability raises hope: Renuka has finally completed acquisition of 50.34% stake in Brazil’s Equipav for US$250m and at 25% discount to the cost agreed upon in Feb. The deal will be funded by existing cash of about Rs4.5bn and draw down of Rs6.5bn from cash credit account at 8.5% cost. Post acquisition net debt of Renuka could rise to Rs45bn in FY10e and net debt to equity will rise to 1.8x. Acquisition at reduced\ cost along with signs of stability in sugar price globally augurs well for Renuka.

■ Brazil investment could yield 15% return if sugar rises 25%+: Renuka sugar has invested a total of US$330mn in acquiring sugar mills in Brazil in the last six months. Including Equipav, total cane crushing capacity attributable to Renuka stands at 8.5mtpa in Brazil and 7mtpa in India. We estimate that the Brazil mills will breakeven at raw sugar price of UScent16.5 per pound. Thus Renuka could start getting a 15% return on investment in Brazil if the international sugar price rises by 25% from its current level to UScent20/lb.

■ Recent sugar price rise globally suggests good deal timing: The international raw sugar price bottomed out at UScent13.7/lb in early May 2010 after falling by 55% from the Jan2010 peak. The price is already up 20% from the low led by concerns of lower than estimated production in Brazil this year along with the prospect of a production decline next year. The key reason for the supply shortfall in Brazil, in our view, is very dry weather in recent months and lack of new investment.

■ Maintain Buy owing to lower cost and attractive valuation: We maintain Buy as Renuka could limit its ROE decline in the current down cycle yet again to 17% driven by (1) 3x jump in distillery volume owing to jump in molasses availability; (2) 60% increase refining volume led by commissioning of 1mt Mundra refinery in Dec10. Our PO of Rs80 is at 1.8xFY11e P/B.

To read the full report: RENUKA SUGARS

>Gulf Oil Corporation Limited

Gulf oil corporations Ltd (GOCL) is engaged in a blend of diverse business areas such as industrial explosives, lubricants, mining services, specialty oils, & chemicals, active pharma ingredients (bulk drugs) & pharma formulation.

Strong organic growth is expected across segments driven by increased prices & robust economic growth.

Gulf oil is planning to develop a 39 acre land in Bangalore, for the development of the land, Gulf Oil has a joint venture with Hinduja Realty Ventures.

Gulf Oil is planning an IT/ITES park at Bangalore to cover hotel, retail outlets, commercial malls and service apartments.

GOCL also planning to develop 9.8 million square feet underway called “Hi- Tech City” project in Hyderabad. Currently it is in discussion with Hyderabad Municipal Corporation for connector roads to the Hi Tech City.

GOCL management is planning to develop Hyderabad property, plans for developing 9.8 million sq.ft. is under way. The Company is currently in discussion with the Greater Hyderabad Municipal Corporation (GHMC) which has proposed a major 100 ft. connector road through property to the Hi-Tech City.

Gulf Oil Corporation Ltd, another Hinduja-promoted company, plans to raise between USD 800 million and USD 1 billion through a public listing of Petromin, the Saudi-Arabia based-lubricant company it acquired, The IPO, which is likely by the end of this year, will dilute up to 30 per cent of Gulf Oil's stake in Petromin.

To read the full report: GOCL

>Auto & Auto Ancillary: The Outsourcing Opportunity

Global OEMs are increasingly sourcing components from cheaper manufacturing destinations and Indian component manufacturers offer a great cost-quality proposition. The global auto components industry is estimated at US$1.2 trillion. An average cost reduction of nearly 25-30%
has attracted several global automobile manufacturers to set up their base. The value in sourcing auto components from India includes low labor cost, raw material availability, technically skilled manpower and quality assurance.

The global auto ancillary industry is expected to reach US$1.9 trillion by 2015, of which around 40% (US$700 billion) is potentially expected to be sourced from low cost countries including India. Launch of new vehicles by global auto majors for both domestic and export market will augur well as localization content is higher at ~75% which helps to control cost and compete with peers.

Current scenario and future prospects for OEMs
The CV industry has positive factors working for it now – increased road activities and infrastructure activities that are boosting demand thus enabling transporters to pass on increasing fuel prices in freight rates. The key indicator of underlying demand in the CV industry, the index of industrial production (IIP), has been improving steadily over the past two quarters, following strong revival in industrial activity. We anticipate CV industry to grow by 14% CAGR over next 3 years and by 17% in FY11.

Natural Rubber prices to remain firm till late 2011…until supply recovers but pricing power to remain in favor of tyre manufacturers.

Buoyant demand from China, India and US for automobiles coupled with drought-like-conditions in major rubber producing countries and rubber trees reaching declinng yield phase, led rubber prices to rise sharply. Apart from the buoyant demand and drought-ridden supply other factors influencing the rubber market included the weakening US dollar, volatility in yen and the increasing crude oil prices.

The existing yielding trees in major producing countries were mostly planted during 1980. Most of the trees planted have reached declining yield phase, thus the age composition of the existing yielding area is unfavorable for yield improvement. However period from 2005 onwards has seen substantial expansion in rubber area and hence net impact of the trees planted during 2005 onwards (less the trees that are needed to be uprooted) are expected to start yielding from 2012 onwards.

To read the full report: AUTO ANCILLARY

>Oil Subsidies: Costly and Rising

Reducing subsidies worldwide can bring substantial environmental benefits and create much - needed fiscal space

Who subsidizes?
Whereas all pretax subsidies are found in emerging and developing economies, advanced economies account for a sizable share of tax-inclusive subsidies. Of projected pretax subsidies totaling $250 billion in 2010, emerging economies account for 65 percent, developing economies for the remaining 35 percent. Of projected tax-inclusive subsidies of $740 billion in 2010, emerging economies account for 57 percent, developing economies 20 percent, and advanced economies the remaining 23 percent.

To see full snapshot: OIL SUBSIDIES