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Thursday, April 19, 2012
>EXCHANGE TRADED FUNDS: Strategy Implementation with ETFs
Below, we highlight eight strategies that can be implemented through the use of ETFs.
ETFs can be used by fund managers to quickly reduce or increase exposure to a particular sector, industry, country or region.
■ Equitization and cash flow management
ETFs can be used to gain exposure to the market effectively, thus reducing a fund’s cash drag.
■ Index/portfolio changes
ETFs can be used to manage flows arising from portfolio rebalancing events more effectively.
■ Hedging
ETFs can be used to hedge a portfolio in various sectors, industries, regions, countries, etc. Since ETFs can be shorted on a downtick, this is a useful advantage.
■ Short term tactical exposure
The convenience and speed of trading ETFs enables fund managers to take advantage of short-term opportunities.
■ Relative value strategies
The ability to short-sell ETFs enables investors to take a view on the spread between two markets – on a sector or country basis.
■ Efficient access
Retail investors can gain access to a particular market very efficiently. The lowcost and small denomination make them very attractive for retail investors. Inaddition, they may be used to provide exposure to nondomestic markets that maytrade in different time-zones and currencies.
■ Arbitrage opportunities
Professional market participants may exploit arbitrage opportunities between the ETF, the underlying market and the futures (if available).
RISH TRADER
>Fulfilling the promise of India’s manufacturing sector
India’s manufacturers have a golden chance to emerge from the shadow of the country’s services sector and seize more of the global market. McKinsey analysis finds that rising demand in India, together with the multinationals’ desire to diversify their production to include low-cost plants in countries other than China, could together help India’s manufacturing sector to grow sixfold by 2025, to $1 trillion, while creating up to 90 million domestic jobs.
Capturing this opportunity will require India’s manufacturers to improve their productivity dramatically—in some cases, by up to five times current levels.1 The country’s central and state governments can help by dismantling barriers in markets for land, labor, infrastructure, and some products (see sidebar, “Four imperatives for India’s government”). But the lion’s share of the improvement must come from India’s manufacturers themselves. Recognizing this, a few leading ones are upgrading their competitiveness by bolstering their operations to improve the productivity of labor and capital, while launching targeted programs to train the plant operators, managers, maintenance engineers, and other professionals the country needs to reach its manufacturing potential. A closer look at the experiences of these companies offers lessons for other Indian manufacturers and for global product makers considering opportunities in India.
Made in India?
India’s manufacturers have long performed below their potential. Although the country’s manufacturing exports are growing (particularly in skill-intensive sectors such as auto components, engineered goods, generic pharmaceuticals, and small cars) its manufacturing sector generates just 16 percent of India’s GDP—much less than the 55 percent from services.2 Moreover, a majority of India’s largest manufacturers don’t return their cost of capital (Exhibit 1), a factor that dampens investment in the sector and makes it less attractive than its counterparts in competing economies, such as China and Thailand. Indeed, China’s manufacturers captured nearly 45 percent of the global growth in manufacturing exports from low-cost countries between 2001 and 2010, whereas India accounted for a paltry 5 percent.
Nonetheless, India’s rapidly expanding economy, which has grown by 7 percent a year over the past decade, gives the country’s manufacturers a huge opportunity to reverse the tide. History shows that as incomes rise, the demand for consumer goods skyrockets. And many of India’s consumption sectors—including food and beverages, textiles and apparel,
To read report in detail: MANUFACTURING SECTOR
RISH TRADER
>CONSUMER CONFIDENCE INDEX MARCH 2012: The Indian consumer pulse rate is 39.9 indicating a pessimistic consumer sentiment
>SPICEJET LIMITED: Fare hikes will mitigate some cost pressures
Recent fare hikes positive but could impact passenger demand
■ Fare hikes will mitigate some cost pressures... After hiking fares during 3QFY12 (yields up 19% YoY), SJET has taken another round of fare hikes in March (Source: Indian Express, CNBC). Rising ATF prices (+30% YoY YTD) and weaker rupee (-14% since Mar-11) have put significant pressure on margins. Despite steep fare hikes, we do not expect SJET to completely pass through cost increases.
■ …but could impact passenger demand. During 3QFY12, SJET witnessed 29% YoY growth in passenger traffic driven by launch of Q400 operations across Tier II and Tier III cities. Load factors, however declined to 80% (vs.88% in 3QFY12). We suspect that rising fares are adversely impacting the price-sensitive Indian passenger demand. The addition of a further 8 Q400 aircraft in CY2012 should help sustain passenger growth for SJET, but more price hikes could put pressure on load factors, in our view.
■ Equity infusion from promoter to strengthen balance sheet, recent sops from government to aid earnings. SJET’s promoters recently infused equity of Rs1B raising their stakes by 5% to 48.6% to strengthen the balance sheet. Further, Indian government recently approved sops to help the aviation sector which includes 1) Direct import of ATF fuel resulting in savings of sales tax (~5%-32% applicable across various Indian states), a difficult to implement proportion in our view 2) ECB loans up to US$1B permitted for working capital requirements for period of 1 year (Interest differential of 6%-8% between domestic loans and ECBs), 3) Aircraft parts/tires exempted from imports duties/excise duties. In addition, proposal to allow foreign airlines to buy up to 49% of equity in Indian carriers is under active consideration. We believe that any potential announcement on permitting FDI in aviation could be a significant stock price trigger.
■ Valuations. Our Mar-13 PT of Rs35 is based on 9x FY14E EV/EBITDAR, a 13% premium to our target multiple for JETIN. We believe that SJET is better positioned than JETIN, given its low gearing on its balance sheet (net debt to equity of 0.7x in FY13E). In addition, SJET is looking to enhance its international operations in FY13 (once it gets government approval) to
short-haul destinations mainly in South Asia and the ME, which should enhance its asset utilization and should aid profitability.
To read report in detail: SPICEJET
RISH TRADER
>HCL TECHNOLOGIES: Mar-12 results highlight weakness in financial services and US, in line with Infosys’
Quick Comment: Overall we maintain our OW rating on HCLT and expect the stock to continue outperforming in the current environment. We believe its continued revenue growth, stable margins and earnings outperformance are likely to support the stock price.
Mixed Mar-12 results: HCLT reported revenues below our estimates; however, EBIT margins and net income were ahead of our expectations. Revenues were US$1,048m (+2.5% qoq, +14.6% yoy). On constant currency, basis revenues grew 1.9% qoq. EBIT margins declined marginally to 15.3% (-18bps qoq, +141bps yoy) despite rupee appreciation of 3% qoq. Overall, net income improved to Rs5.8bn (+5% qoq, +33% yoy)
Strong addition to order book: HCLT has won over 30 new deals over the last two quarters with financial services leading the vertical contribution. Despite weakness in BFSI in Mar-12 quarter, management remains hopeful of continued growth in the segment. Quantum and volume of deal wins for HCLT are in line with our thesis of a stable business and demand operating environment for the offshore IT vendors.
However, employee additions lag: HCLT has benefited from vendor consolidation opportunities and won large new deals of over US$2.5bn in last six months. However, net headcount addition (420) remains muted in the software services and infra services. We believe that given strong deal wins and high 79% utilization rates, headcount addition appears modest.
Mar-12 results highlight weakness in financial services and US, in line with Infosys’: BFSI revenues declined 4% qoq in constant currency (vs Infosys’ -5% qoq). Overall management indicated that it won US$690m of deals in financial services vertical, which is likely to drive revenue growth ahead of company average. HCLT reported growth in revenues and volumes for Mar quarter, in stark contrast to the volume and revenue declines reported by Infosys.
To read report in detail: HCL TECHNOLOGIES
RISH TRADER
>COAL INDIA LIMITED: More coal is the goal as FSA clarity emerges…
We expect Coal India Ltd (CIL) to turn the tide of flat production growth during past three years and achieve higher coal production and sales with a CAGR of 5% and 5.6% respectively during FY12-15E. We believe that the market at present is not willing to factor in CIL’s ability to increase production as well as prices and seems to have remained overly concerned over issues related to FSA signing and reduction in e-auction coal volumes. We expect this perception to change going forward and expect net sales and EBITDA CAGR of 8.8% and 13.6% during FY12-15E. Valuations appear attractive to us with a huge cash balance (~25% of market cap). We initiate BUY with a target price of Rs395.
■ Production at an inflection point, we expect smart up move from here: After flat production growth during FY10-12, we believe the production is at an inflection point and expect production CAGR of 4.6% during FY12-17E. We expect higher production on the back of i) increased capacity utilization at several coalfields and faster approvals for new projects as well as capacity expansions at existing mines. We see FY13E/14E coal production of 458/481 MT respectively.
■ FSA signing - a blessing in disguise and would lead to higher dispatches: We see the forced FSA signing (as enforced through Presidential directive) as a blessing in disguise for CIL. We believe that market perception and concerns on FSAs have been overdone for long. In our view FSA signing would give the necessary push to CIL to produce and sell more. Also, with the penalty clause becoming practically non-existent after CIL’s board meeting on April 16, 2012, we see the present FSA situation as a win-win for CIL. We expect CIL sales volume to
reach ~546 MT by FY17E (CAGR of 4.7%). We see ~7% sales growth in FY13E to 463 MT supported by better railway logistics. We expect e-auction sales to remain constant at ~48.5 MT over the next three years.
■ Shift to GCV based pricing positive, price increase matters the most now: We see the shift to GCV based pricing as a positive and expect 4% price increase each in FY13E & FY14E from Coal India on the new GCV based price list.
■ Low cost open cast operations remain key strength: Low cost and open cast (90% of overall mining) operations continue to remain the key strength and earnings driver for the company. Wages have been hiked by ~25% and we expect stable employee cost/tonne from FY13E onwards as the number of employees drop and production increases.
■ Valuations – attractive, initiate with a Buy: We see CIL stock trading at attractive valuations with FY14E adj. EV/EBITDA of 5.6x and FY14E adj. P/E of 10.4x. With increasing comfort on higher volumes going forward and expected price increase, we value the stock at 7x FY14E adj. EV/EBITDA (~15% premium to global peers) to arrive at a fair value of Rs395 for the stock. Our DCF valuation fair value stands at Rs363. We initiate buy with a target price of Rs395.
■ Key Risks: Flat to negative production growth, lower sales volumes due to logistics constraints, lower e-auction volumes for meeting FSA quantities and price increase not allowed by the government.
RISH TRADER
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