>GLOBAL MARKET RESEARCH (DANSKE MARKETS)

Global: historic inventory cycle to boost growth

• A key factor behind our above-consensus global growth forecast is our view on the inventory cycle. Our thesis is that, even if the demand recovery is slow during 2009, we will still see a significant production rebound in H2 09.

• This is the main difference between our forecast and, for example, those of OECD and IMF, which predict a considerably slower and later recovery.

• The inventory cycle is a very important cyclical driver and in this downturn it has been much more forceful than we have seen historically.

• Production has been cut at a record pace in order to deplete inventories. However, with inventories lean, production substantially below demand and demand rising due to massive stimulus, we believe the ground is laid for a rapid production rebound in H2 09.

• It is important to note that inventories will continue to fall in H2 09 even as production rises. Hence it is not a case of rebuilding of inventories but a case of aligning production with demand.

• We already see recovery in Japan and other Asian countries and we expect to see it soon in US and Europe. The auto sector should be a prime example of this.

Since the beginning of the year we have argued that the strong force of the inventory cycle in this downturn would lay the ground for a manufacturing recovery during 2009 (see Research – US: Manufacturing recovery ahead, Jan 09). We have already seen signs that this is materialising, in surveys such as ISM and leading indicators, but we believe the story has further to run. Hence we expect ISM and global leading indicators to continue to surprise on the upside. Importantly we should also start to see improvement in the hard data over the coming quarters. This is about six months earlier than, for example, OECD and IMF are predicting; they also forecast a much slower recovery. We don’t disagree that the recovery in demand will be slow as headwinds linger for a long time due to the financial crisis and wealth destruction. However, that does not mean we don’t see a strong rebound in production.

See inside:

• Production - demand = change in inventory
• Further ISM increases in the pipeline
• Euroland production should also recover
• Bottom line: global production to rise in H2, perhaps strongly

To see full report: MARKET RESEARCH

>ZICOM ELECTRONIC SECURITY SYSTEMS (PRIME BROKING)

Sense of security

RESULTS HIGHLIGHT
Zicom reported a 29.5% increase in topline to Rs. 3,757.6 mn. EBITDA jumped substantially by 224.3% to Rs. 505.2 mn versus Rs. 155.8 mn for FY08 with EBITDA margin improving to 13.4% versus 5.4% for FY08. This was primarily because the company had taken the advertising expense of Rs. 231.6 mn for their retail arm as one-time expense in FY08. Depreciation and interest cost increased by 78.4% and 72.3% respectively.

At PBT level, profit was up significantly by 2,572% at Rs. 240.2 mn. The company’s net profit increased by 447.3% to Rs. 222.9 mn versus Rs. 40.7 mn for FY08. The net profit figure after adjusting for minority interest was Rs. 195.9 mn versus Rs. 14.5 mn for FY08.

Zicom reported consolidated Q4FY09 revenues at Rs. 1,038.4 mn with EBITDA of Rs. 152.1 mn. Net profit figure for the quarter stood at Rs. 67.6 mn. EBITDA margin and net profit margin for the quarter were at 14.7% and 6.5% respectively.

INVESTMENT RATIONALE
The electronic security solutions market in India is at a nascent stage compared to developed countries of the world. While the U.S. and Europe may account for more than 60% of the global electronic security industry, the rate of growth of the industry in India is expected to be much higher at 30% compared with the single digit growth rates expected in these developed markets. We believe that there is a huge potential for security business in India for the following reasons:

1) The security perception of the government has changed drastically due to continued threats from terrorist activities in India. With the government giving increased importance to safety and security measures, we expect significant demand from the government for integrated security solutions to protect public infrastructure.

2) The industrial segment’s rising demand for new generation network-based integrated products and solutions to support remote access and monitoring across their physically scattered plant locations.

3) The consumers’ growing awareness and change in attitude about safety, security and preference for integrated electronic security systems.

4) The need for security systems at the increasing number of public places such as malls, multiplexes, retail chains, etc that have come up over the past few years. Further, need for security equipments such as burglar alarm system, video phone doors, etc for large number of residential townships across metros, tier 1 and tier II cities in India as these are increasing considered as basic facilities or lifestyle products by the consumers.

To see full report: ZICOM

>FLASH MARKETS (ECONOMIC RESEARCH)

Liquidity is decorrelating financial markets from the real economy

The viewpoint we defend in this Flash is as follows: normally, the value of financial assets should reflect the situation of the real economy (growth, inflation, profits, etc.), in a more or less long-term perspective depending on the nature of assets and investors’ ability to anticipate. However, if global liquidity is over-abundant, and in a situation where inflation in prices of goods
and services cannot make a comeback, asset prices are successively affected by bubbles when investors use the surplus liquidity to try and buy assets.

This leads to asset price cycles that are less and less correlated with economic cycles, and are linked to the interaction between the excess liquidity and investors’ opinions or risk aversion.

This decorrelation between financial markets (asset prices) and real economy is very serious, since it implies that asset prices no longer give any reliable information about the situation of the real economy, and simply reflect the quantity of liquidity and the most often herd-like behaviour of investors.

To see full report: FLASH MARKETS

>UNITECH (GOLDMAN SACHS)

Sales momentum robust; raise target price, reiterate Conviction Buy

Source of opportunity
Unitech reported FY2009 EPS about 20% ahead of our estimate and Bloomberg consensus. More importantly, trends since March have been upbeat with sales of 3.5-4.0 mn sq ft in 1QFY2010, which is more than what Unitech sold in all of FY2009. Accordingly, we increase our area sold forecast to 14 mn sq ft pa on average in FY10E-FY14E versus our earlier projection of 11 mn sq ft pa. We assume 14 mn sq ft of area sold in FY10E versus over 8 mn sq ft previously. We raise our target price to Rs95 from Rs88 and maintain our Buy rating (on Conviction List).

Catalyst
Unitech is looking to launch 30 mn sq ft of projects and get bookings for about 20 mn sq ft in FY2010. Although 1Q trends are reassuring, our forecasts are conservative vs. guidance, tempered by taking into context the area sold during the previous upcycle, which was about 10 mn sq ft pa in FY06-FY07. With plans to launch in 15 cities in FY10E, we believe news flow on project launches over the next three quarters could drive the stock higher. We also see Unitech’s debt burden reducing over the next three quarters, which we believe would be reassuring.

Valuation
We raise our 12-m TP to Rs95 (a 20% discount to FY11E RNAV), and revise our EPS forecasts by +18% for FY10E, +18% for FY11E and -8% for FY12E, reflecting revised development pipeline forecasts and optionality of any additional asset disposals. We believe the stock price reflects about a 12% decline in property prices across the board in FY10E, which seems pessimistic given Unitech’s recent launches at lower ticket sizes.

Key risks
Any signs that 1QFY10 sales trends might not be sustained and if we see cancellations on recent bookings; execution delays.

To see full report: UNITECH