>EMAMI (IIFL)

INNO - VEDIC

Emami is one of the fastest-growing consumer-goods companies in India and one of the few to have successfully monetised ayurveda. The company has seen a rebound in sales growth in 1QFY10, led by a turnaround in its biggest brand, Navratna oil, while there has been impressive progress on cost savings at its subsidiary Zandu (reflected in the over 1,000bps YoY expansion in EBITDA margin in 1QFY10). Emami’s dominant presence in niche categories with low penetration and minimal MNC presence, innovation-led strategy and significant cost savings at Zandu, we estimate, will drive 18% and 30% CAGR in consolidated revenue and EPS respectively over the next three years. We value the stock at 19x FY11ii EPS, in-line with the mid-cap personal-care FMCG peer group. BUY with a TP of Rs465.

■ Rebound in sales growth as Navratna oil sales recover: Emami’s sales growth rebounded to 21% YoY in 1QFY10 after a sluggish 2HFY09. Sales of its largest brand, Navratna hair oil (25% of standalone sales), rose c16% YoY in 1QFY10 after a decline in FY09. The price correction in the key Re1 SKU and focus on variants are driving growth in the brand. The cooling hair-oils category continues to see strong growth, with 1QFY10 seeing 18% revenue growth. Emami’s other key brands, such as Fair & Handsome and Boro Plus, continue to register 20%+ sales growth.

■ Zandu margin expansion on track, sales pick-up in 2HFY10: Management has shown good progress in driving cost savings in Zandu, leading to 10ppts YoY EBITDA margin expansion in 1QFY10. Trade margin rationalisation, reduction in staff costs and other overheads, reduction in excise and tax rates have been aggressively pursued. Zandu is wellpositioned to drive over 900bps expansion in EBITDA margin in FY10. Zandu’s sales growth was muted at 3% in 1QFY10, as a fall in trade margin, discontinuation of distributor credit and depot mergers caused some disruption. We expect growth to bounce back in 2HFY10 as the sales system stabilises and Zandu launches the Rs2 SKU and a new ad campaign.

■ Margin expansion, interest reduction to drive EPS CAGR of 30%: We estimate Emami’s consolidated EBITDA margin will expand by 400bps over FY09-12, as margins at Zandu and Emami standalone both see an expansion. Interest costs will be much lower from 2QY10 due to repayment of debt. We estimate an EPS CAGR of 30% for Emami over FY09-12ii.

To see full report: EMAMI

>A COMMODITY SHORTAGE LIES AHEAD (GOLDMAN SACHS)

Commodities in Crosshairs – a commodity shortage lies ahead

■ We expect a commodity supply shortage in 2010
We have long emphasized that the commodity problem is, at heart, a supply shortage due to decades of suboptimal investment, which has been exacerbated over the past year by the sharp drop in prices and tight credit conditions. As the commodity markets rebound with the broader global economy we expect a redux of 2008 when severe supply constraints forced the rationing of demand through sharply higher prices to keep the markets balanced.

■ Industrialization, Globalization, Westernization drive demand
The world’s population is increasing at its fastest pace in history. As the developed world increasingly begins to consume like Westerners the demands placed on the finite resources of the planet increases. This trend of human populations growing faster than the earth’s ability to produce not only impacts food production but that of commodity usage.

■ China matters for demand … Brazil for supply
The leverage a commodity has to China matters both in the context of their share of global consumption but more importantly their relative shortness of supply domestically. These criteria suggest agriculture and metals have the greatest leverage. Brazil has little in the way of natural resource protectionism and is long commodities in its resource base.

■ Prosecuting the theme through stock selection
We see opportunity to benefit from these trends across four global stock complexes: E&C/Machinery, which take advantage of capex trends, Global Energy, where we highlight key beneficiaries of oil capacity constraints, Agriculture, where companies are addressing the challenges of feeding the world, and Consumer, where we dig into consequences of expected commodity volatility.

■ Introducing the GSGLCIC3 basket
We have created a long basket to help investors track and trade implications of a commodity supply shortage in 2010. The basket contains potential beneficiaries based on our assumptions.

To see full report: COMMODITY

>INDIAN BROKING INDUSTRY (KREDENT FINANCE)

Poised For Growth

INTRODUCTION
India is one of the oldest stock markets in the world with a strong presence of domestic and local
intermediation. Stock markets in India surged over a decade on back of a wide range of economic
reforms, liberalization of financial markets buoyed by greater freedom and flexibility. Some of the fundamental changes that fuelled rapid pace of market growth was the introduction of electronic trading (secondary markets), allowing foreign ownership (FII’s) of shares, permitting Indian companies to raise capital from abroad (ADRs/GDRs), expansion in the product range (equities, commodity, currency, derivatives and debt), book building process and transparency in IPO issuance, T+2 settlement cycle, dematerialization of shares and internet trading (e-broking). These changes resulted in dramatic growth of the stock markets in India as well as the equity broking firms. The broking industry is emerging as a rapidly growing segment in Indian finance, in terms of business growth, distribution & network and enterprise value.

The first signs of trouble appeared in the US and Western Europe in August 2007. Indian economy kept growing at a considerable pace till the middle of 2008. The Indian market continued to rise till January 2008 and appeared to be going through a relatively mild correction till the middle of 2008. It was in September 2008 that Lehman filed for bankruptcy and the whole world was shaken. The credit markets froze in the west and Indian corporate which were accessing western credit markets found their credit drying up and therefore, wanted to borrow in India. Our markets went through a period of unusual liquidity squeeze with its attendant impact on interest rates, foreign exchange rates, and mutual funds till liquidity was restored through aggressive steps (stimulus package) by the Central Bank and Government.

MARKET CAPITALIZATION AND TURNOVER
The market capitalization of BSE was up by 37.23% from Rs. 3,545,041.0 cr as on December 2007 to Rs. 4,865,044.91 cr as on May 2009. The market capitalization of NSE was up by 35.55% from Rs. 3,367,350.0 cr as on December 2007 to Rs. 4,564,572.18 cr as on May 2009. Business has been exceptionally good in primary and secondary markets, in the equities and derivatives segments across both the national level stock exchanges. India’s combined turnover in NSE and BSE in the equity segment which was around Rs. 2,901,471 cr in the year 2006-2007 has grown 1.33 times to Rs. 3,852,097 cr in the year 2008-2009, despite the market fallen by approximately ~50% in the same year. The derivate segment during the same period has gone up by 1.50 times to Rs. 11,010,482 cr.

To see full report: BROKING SECTOR

>RBI buying relaxes market fears (EDELWEISS)

■ Sovereign bonds trailed an impressive trajectory today, the yield curve till the 10- year maturity drifting lower by 18-20bps. The decline yields seemed much like a relief rally to participants who had been reluctant to initiate fresh positions on the NDS-OM; total volumes on closed at a month’s high of INR 160.85 bn.

■ The 10-year benchmark bond yield declined by a massive 31bps to touch the day’s low of 6.99% before closing at 7.13%. The 5-7 year segment yields declined 20- 22bps, trading for 47% of the total volumes. The secondary market buying by RBI (also evident by tomorrow’s INR 60 bn OMO auction) has induced investor optimism to awaken trading interest in government bonds.

■ The INR 60 bn T-bill auction concluded with firmer cut-offs for the 91-day and 364-day instruments; while the former was up 4bps, at 3.40%, the latter inched higher by 17bps to report a cut-off of 4.34%. The auction reported a bid-to-cover ratio of 3.47, inviting investor interest in the non-MTM money market papers.

■ The infrastructure output growth for July stood at a dismal 1.8% relative to the previous month’s 5.1%. Also, contraction was the steepest in petroleum refinery products (at 14.4%), which miserably dragged down the 6-core industries index (the index accounts for 26.68% of IIP).

■ Annual Inflation for week ended August 15 stood at -0.95% relative to market expectation of -1.41% and previous week’s release of -1.53%. Food Prices continued to harden (by 3.2% W-o-W) accompanied by a rise in prices of primary articles of 2.1% (W-o-W).

■ An amount of INR 15.65 bn was raised in the short term non-SLR market; IOC’s INR 6 bn 3-month CP issue that received bids for nearly three times the amount was issued at 4.60%, to Mutual Funds plush with funds in their liquid portfolios.

To see full report: BOND VECTOR