>SUZLON ENERGY (JM FINANCIAL)

■ 1H’10 results uninspiring… Suzlon reported consolidated 1H’10 Sales -7.5%, EBITDA -88% and reported net loss of Rs10 bn vs. Rs2 bn loss in 1H’09. Costs were higher on increased fixed costs on new facilities (capacity ~2x to 5.7 GW in FY09-10) and lower WTG delivery volumes (-62% YoY in 1H’10 to 406 MW).

■ … but debt woes easing: Investors’ worries on high debt and its serviceability are easing as Suzlon sold Hansen’s 35.22% (of its 61.28%) stake to raise US$370 mn. The company has repaid US$780 mn worth of acquisition loans through combination of Hansen stake sale and refinancing from a new US$430 mn offshore facility from SBI. It may also convert promoter’s Rs12 bn loan to equity through preferential/ or rights issue (see Annexure I).

Global demand rising

■ Visibility improving; ~23 GW of wind capacity addition probable: Improving global economic scenario, continued policy support and higher credit availability has led to better order visibility for WTG companies. Developments over last 6M are promising- a) ~$1.7 bn cash grants have been infused in the system; b) MoM improvement in order inflow to 350 MW/month (from 150 MW/month in Aug) + large framework on-shore orders being placed (954 MW to REpower); c) ~700 MW wind projects commissioned after debt tie-ups. d) Gamesa estimates wind projects under development at ~23 GW, with ~2.2 GW projects to be ordered soon; and e) Iberdrola, EDP, Duke have not just raised wind capacity targets but also raised funds for future expansion (Exhibit 14).

■ Indian regulations bode well for Suzlon’s growth; market size may increase from 1.5-2x to 4 GW/pa: Regulatory changes in the form of new RE tariff norms (15.8% PT-ROE) and draft regulations for RE Certificates are a precursor to national RE Purchase Obligation (RPO), which has been agreed to by Forum of Regulators at 5% for 2010, & 1% increase p.a. till 2020. We think Indian markets will inch to 4 GW/p.a by CY’11 from ~1.5-2 GW/pa currently.

■ Price target lowered to Rs95; Maintain Buy: Post Hansen divestment, there is lack of clarity on Suzlon’s consolidated balance sheet. We have cut our estimates to factor in lower volumes; unconsolidated Hansen (considered as profit from associates) and introduced FY12E (Exhibit 18). We have changed our valuation methodology from DCF to a one-year forward PE multiple, and now value Suzlon Wind at 15x FY12E earnings, at a 25% discount to current peers’ average (20x), while REpower and Hansen are valued at 18x. We get a Mar’11 target price of Rs95 for fully diluted equity of Rs3,835 mn including Rs1.0 bn YTM for out-of-the-money FCCB. Maintain Buy as- a) we remain optimistic on recovery in wind taking lead from positive commentary by Siemens, REpower & Crompton; b) regulatory push & market expansion in India; c) easing debt concerns; and d) management’s focus to legally integrate REpower in FY11E.

■ Risks: Oversupply concerns in China and their possible global foray could lower WTG prices. 200 MW variation in volumes will vary earnings by ~7%.

To read the full report: SUZLON ENERGY

>STEEL PICTURE BOOK (CITI)

■ Prices Rising in All Regions — Carbon steel prices are slowly moving higher as the arbitrage gaps between US/European and China prices close, and raw material prices increase. We believe there is additional upside potential for steelmaking raw materials as the northern hemisphere summer starts (with the concomitant seasonal construction increase). In our selection we prefer raw material-integrated and spot price-focused steel producers.

■ China Cost Position Deteriorates — Higher raw material costs are leading to higher proportionate costs for China, as raw material costs are US$-based and the renminbi is pegged. We believe the short-term demand outlook for China is supportive and cost pressures and lack of raw material access will moderate the impact of any potential future slowdown on other steel-producing regions.

China Strength Feeding through to Raw Materials

■ OECD Restocking to Accelerate — Inventory restocking slowed in December, as consumers protected fragile balance sheets and kept working capital levels low. We anticipate a re-acceleration of the restocking process as price momentum improves and seasonal demand lifts in 1H2010.

■ Operating Rates Recovering — Global steel production has recovered, with production reaching 107.5mt in November (+22.4% YoY, but -4.2% MoM) and operating rates at 77% also significantly better than 69.8% in November 2008. Asia posted another strong production month in November (66.8mt, +23.5%). and now constitutes >62% of global production.

■ China: Raw Materials — Iron ore import volumes for November were 51.07mt (+12.3% MoM). Domestic iron ore production was another monthly record at 86.78mt (+4.1% MoM and +19.4% YoY). Coking coal imports of 2.9mt were 29.4% up MoM, and export volumes were at 74.7kt compared to 129.1kt in October.

■ Short-Term Positives Increase — Restocking activity is modest, but supportive of demand in the near term, and raw material price settlements are expected to support steel prices (the key driver of shares) into 2010e. Although the short term outlook looks positive, we have not turned structural bulls due to the high levels of excess capacity in the system. We remain selective on our outlook for steel companies, and cautious on the full year outlook for 2010. We prefer companies with raw material integration and spot price focus in the near-term.

To read the full report: STEEL PICTURE BOOK

>NATIONAL ACTIVITY INDEX

What is the National Activity Index?
The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Why are there two index values?
Each month, we provide a monthly index number, which reflects economic activity in the latest month for which we have data, and a three-month moving average. Month-to-month movements can be volatile, so the index’s three-month moving average, the CFNAI-MA3, provides a more consistent picture of national economic growth.

What do the numbers mean?
When the CFNAI-MA3 value moves below –0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. When the CFNAI-MA3 value moves above +0.70 more than two years into an economic expansion, there is an increasing likelihood that a period of sustained increasing inflation has begun.

Led by improvements in production-related and employment-related indicators, the Chicago Fed National Activity Index increased to –0.32 in November, up sharply from –1.02 in October. Two of the four broad categories of indicators that make up the index improved, although only the production and income category made a positive contribution.

The index’s three-month moving average, CFNAI-MA3, increased to –0.77 in November from –0.87 in October. November’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The level of activity, however, remained in a range that has historically been consistent with the early stages of a recovery following a recession. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of +0.35 to the index in November, compared with –0.09 in October. This contribution accounted for much of the improvement in the index
in November. Industrial production rose 0.8 percent in November after being unchanged in October; and manufacturing production increased 1.1 percent in November after decreasing 0.2 percent in the previous month. Furthermore, manufacturing capacity utilization increased to 68.4 percent in November from 67.6 percent in October.

Employment-related indicators made a contribution of –0.12 to the index in November, up from –0.42 in October. Initial unemployment insurance claims in November declined to their lowest level during the past year; and the unemployment rate edged down to 10.0 percent in November from 10.2 percent in the previous month. In addition, payroll employment decreased by 11,000 in November after declining by 111,000 in October; and average weekly hours worked in manufacturing increased to 40.4 in November from 40.1 in the previous month.

The consumption and housing category’s contribution to the index was –0.48 in November, roughly unchanged from its value in October. The sales, orders, and inventories category made a contribution of –0.07 in November, down slightly from –0.02 in October.

To read the full report: NATIONAL ACTIVITY INDEX

>First quarter 2010: 2010 to be turning point for world economy (LLOYDS TSB)

In this, our inaugural World Economic Quarterly (WEQ), we focus on the G10 and E10 countries. Our G10 and E10 groups are defined as the top ten countries by gross domestic product (gdp) in each segment. The rest of the world is also analysed, but in less detail. Our approach is to recognise that investors want to focus on the fastest growing, and largest, of the world’s economies, but at the same time not lose touch with what is occurring in other parts of the world. Many countries in the latter are also fast-growing and are as instrumental in the reshaping of the world economy that is underway.

Two decades or so ago, the developed economies accounted for over two-thirds of global gdp, by
2006 this fell closer to one-half and on current trends it will fall to around one-third by 2020. That is a measure of the pace at which the global economy is evolving and why there needs to be focused research and analysis of the opportunities and challenges this opens up for companies. In this publication, we focus on the economic and financial market implications of this rapid change over the next two years.

The overall theme is that 2010 will be a year of global economic recovery after the deepest downturn since the Great Depression. However, the effects of the policy loosening that has led to
recovery will also be felt for many years.

Financial market themes in this Quarterly

1. US dollar to rally against its main trading counterparts
Among our G10 advanced economy grouping, we look for the US to record the fastest pace of economic growth in 2010. A more rapid closure of its output gap should see the US Federal Reserve raising interest rates well before the ECB, BoJ and BoE. This is likely to support the US dollar going forward. In addition, we feel that the dollar will soon start to benefit from stronger US economic fundamentals as the theme of a dollar-positive response to risk aversion fades on a better-established global recovery.

2. Emerging Asian currencies to extend gains in 2010
The main impetus to global economic recovery will continue to come from emerging markets in 2010, notably in emerging Asia. Assuming only a limited risk that activity in China slows in response to rising bad debts after the recent surge in bank lending, the orientation of emerging East Asian economies towards export-led activity should propel global growth. Relatively faster growth and accelerating inflation pressures (related to rising commodity prices) should see some emerging market central banks raise interest rates from early 2010, benefiting their currencies. But some (East European) emerging markets are in a different position, with interest rates likely to be lowered further now that the risk of currency collapse has been reduced (often as a result of IMF bail-outs). Hungary is one such example.

3. Divergent economic performances to keep volatility high
Notwithstanding our central view of a return to global economic growth, starkly divergent performances across countries will almost certainly feature in 2010. This may be a source of uncertainty and volatility in financial markets. As noted above, some emerging market economies - particularly those dependent on external financing - may experience difficulties in the form of additional currency weakness and/or higher bond yields. Equally, confirmation that the rally in ‘riskier’ assets seen since March is sustainable could fuel a further rebound in equities and commodities with government bonds falling out of favour. Given the challenging fiscal backdrop in many countries at the moment, rising government bond yields and tougher financing conditions represent a potentially significant downside risk to the global outlook.

4. Inflation pressures of increasing concern for central banks
At first glance, the excess spare capacity created by deep recessions in various economies points to subdued inflation pressures going forward. In economics jargon, aggregate supply exceeds aggregate demand. But under these conditions, inflation pressures will only be muted if inflation expectations are under control. At the current juncture, there is a risk that these expectations start to become elevated. First, inflation rates in many countries are poised to accelerate in the short term as energy price declines in the previous year fall from the annual comparison. Second, central banks around the world may keep so-called ‘unconventional’ monetary policy measures in place for too long (or unwind them too slowly). And third, the nature of the economic and financial crisis means that supply potential in many countries will have been partially destroyed, so adding to inflation pressures. All of these indicate potentially significant upward pressure on government bond and swap yields over our forecast horizon.

5. De-leveraging holds the key for the US dollar longer term
While our central view is for the US dollar’s trade-weighted exchange rate to appreciate into next year, the medium to longer-term outlook may be rather different. If private and public sector de-leveraging is too slow (or non-existent), the US will run large current account deficits well into the future - a structural drag on the US dollar. Our latest forecasts show the US current account deficit narrowing to 3.2% of gdp in 2009, from a shortfall of 4.9% in 2008 but then widening back to a similar level by 2013. Given that progress is likely to be only gradual, it is not inconceivable that financial markets turn their attention to the theme of wider external deficits quite quickly.

To read the full report: FIRST QUARTER 2010