>RELIANCE INDUSTRIES: Singapore Complex GRM corrects sharply (MARCH 2012)

Singapore Complex GRM corrects sharply: The gross refining margin (GRM) of the Singapore Complex has fallen sharply to around $2.4 per barrel from $5.6 per barrel at the end of Q3FY2012. The correction in the Singapore GRM was on account of contraction in the gasoil crack. Reliance Industries Ltd (RIL) has reported a GRM of $6.8 per barrel for Q3FY2012. Its GRM was expected to improve in Q4FY2012. However, looking at the severe drop in the Singapore Complex’ GRM we believe RIL may post a sequential drop in the GRM in its Q4FY2012 report card. We have factored GRMs of $7.5 and $8 par barrel for FY2012 and FY2013 respectively. With a drop of every $1 per barrel in the GRM, our earnings estimates for FY2012 and FY2013 carry a downside risk of 3-4% for RIL.


Gas output at KG basin falling continuously; likely to reach 27mmscmd by FY2013: The gas output at the Krishna Godavari (KG) D6 oil field has been declining for more than a year now and the field is currently producing 34.5 million standard cubic metre of gas per day (mmscmd) compared to 53-54mmscmd a year ago. According to the field development plan, the production was to touch 80mmscmd by April 2012 after all the 31 wells envisaged in the development plan are drilled and brought to production. However, RIL has so far drilled 22 wells on D-1 and 3, two of the 18 gas finds in the KG-D6
block that have been brought to production, but only 18 have been put-on production. Of these 18, five have ceased due to water/sand ingress. According to the management guidance in the media reports, the gas output at the KG basin is further expected to slide to an all-time low of 27mmscmd by April-May this year due to issues with the reservoir and to about 22mmscmd by FY2014. In our estimates for FY2012 and FY2013 we have factored in gas output of around 40mmscmd. Hence with the likely drop in the gas output to around 27mmscmd in FY2013 there is a downside risk of around 3% to our FY2013 earnings estimate.

RIL demanding upward revision in the gas price: The managements of RIL and BP have sought import parity for the gas produced from KG-D6 fields in the Bay of Bengal. It means a minimum of three-fold increase compared to the current price of $4.2 per million British thermal units. However, the oil ministry has rejected the proposal stating that the price of 4.2 per mmbtu is fixed till FY2014 and could not be revised before the due date. We believe any upward revision in the gas price from $4.2 per mmbtu in the near term augurs well for the company and could support the earnings of its exploration and production (E&P) division.


Petchem margin under pressure with increase in naphtha price: The petrochemical (petchem) business, which accounts for 20% of the revenue and over 35% of the EBIT, is facing severe margin pressure. For M9FY2012 the company has posted over 360-basis-point contraction in its EBIT margin from the petrochemical division. Further, with the increase in the naphtha price (up 18% in the past two months) due to an increase in the crude oil price and a lower than expected demand the margin pressure of the petrochemical division is likely to increase. Hence, a likely drop in the petrochemical margin in the coming quarters could be a downside risk to our earnings estimates for FY2012 and FY2013.


We maintain our earnings estimates and would revise them after Q4FY2012 results of RIL: A few negative developments like the fall in the GRM, the lower than expected output from the KG basin and the margin pressure in the petrochemical division could be downside risk to our earnings estimate for FY2012 and FY2013. However, we maintain our earnings estimates for FY2012 and FY2013 and would revise them after the announcement of the Q4FY2012 results of the company. Further, in this note we are also introducing our FY2014 estimates with the earnings per share (EPS) estimate at Rs71.4.


Outlook
In order to factor in the recent negative developments of falling GRM, lower than expected output from the KG basin and margin pressure in the petrochemical division, we are downgrading our valuation multiple in case of its refining and petrochemical businesses. We thus arrive at a revised price target of Rs890. However, we believe the ongoing buy-back programme to provide support to the stock price and any positive development in terms of an improvement in the GRM and the petrochemical margin could be positive triggers for the company. Currently, the RIL stock is trading at 12.8x and 11.6x of FY2012 and FY2013 estimated earnings respectively. We maintain our Buy rating on RIL with a revised price target of Rs890 (based on the sum-of-the-parts valuation method).

RISH TRADER

>Do the "fundamentals" really exist? The case of equities

Investors like to refer to the "fundamental value" of a financial asset. We shall take the example of equities. The fundamental value of a share is the discounted sum of the company's future earnings. But can it be calculated?


- There is of course uncertainty regarding future growth and future profitability, but this uncertainty is natural.
- The fundamental value of equities is calculated applying a risk premium; however, the equity risk premium has varied significantly over time. Does it have a standard value, or else does it have a conventional value which
may be different at each period?
- What discount rate should be used for future earnings? The current longterm interest rate could be built on the basis of irrational expectations of future interest rates, or it could be distorted by central bank intervention
and by risk aversion.


Perhaps the concept of fundamental value (in this case of a share) is so vague that it is unusable.



A distinction is generally made between "fundamental" investors and others ("chartists", etc.). Fundamental investors refer to the "fundamental value" of the asset they buy.


In this Flash we shall consider the case of equities.


To read full report: Do the "fundamentals" really exist?

>DR REDDY'S LAB: Launches ziprasidone in the US; Post-Geodon pipeline is not “one-off”

OW: Generic Geodon launched in US

■  Dr Reddy’s announces launch of ziprasidone oral capsules in the US, a FTF opportunity with potential USD65-70m sales

■  US pipeline includes non “one-off” opportunities in Lipitor, Plavix, Seroquel, Actos and more going forward

■  Reiterate OW and INR1,950 TP; an Asia Super Ten stock

Dr Reddy’s launches ziprasidone in the US: Dr Reddy’s announced over the weekend that it has launched its generic version of Pfizer’s antipsychotic drug Geodon. The launch is post ‘031 patent expiration on 2 March. While this was largely expected, some elements had earlier suggested that a possible grant of paediatric extension on the ‘031 patent could push the generic launch to September 2012. However, we believe the early FDA warning to Pfizer on paediatric trials covering Geodon could have impacted paediatric patent extension. The base patent of Geodon had earlier got one five-year term extension to March 2012 from March 2007.


Dr Reddy’s is shared first-to-file (FTF): Overall brand sales in the US for all strengths for the most recent 12 months ending December 2011 were cUSD1.34bn according to IMS. We believe Dr Reddy’s enters with three more players, including Lupin, Sandoz and AG (authorized generic), though only Dr Reddy’s has announced the final approval so far. Assuming 25% market share with c60% price erosion during the first six months we forecast sales of cUSD65-70m for Dr Reddy’s. We expect commoditization of the product post exclusivity given there are more than 15 active DMFs on this molecule.


Post-Geodon pipeline is not “one-off”: With the gZyprexa launch not long ago (October 2011), gGeodon should materially add to US revenues near term. We expect US sales to increase qoq for the next 2-3 quarters given strong launches ahead. Contrary to the above two launches, upcoming launches of gLipitor, gPlavix and gSeroquel will be not FTF launches and will sit in the base sales for a significant period of time. As per our current estimates we forecast US sales to peak in FY13 at cUSD900m.


Reiterate OW, preferred pick in universe, an Asia Super Ten stock: The timely gGeodon launch adds comfort to the US growth story for Dr Reddy’s. We expect fondaparinux to ramp up slowly and add to base sales materially in the US over FY13-15. We value the stock at 20x Sep-13 EPS of INR96 and add INR20 for para-IV value. Key risk is higher price erosion in upcoming big launches and slower ramp-up in market share. Slower recovery in the domestic formulations business poses additional risk.


RISH TRADER

>A very Bright chances why MR FM will do a major amendment in INDIAN CASINO LAW (Mammon Capital)

■ IF it happens FM will have free hands to STT cut, 3 lac limit to individual tax payer and many more things that will make this Budget a BIG BANG budget of 2012.


■ Sri Lanka plans to introduce new laws this year to attract investments from casinos and hotel chains abroad. While Sri Lanka already has a thriving local casino industry, the government believes that laws permitting foreign investment in gaming will stabilize the sector and entice international gaming developers.

The size of the international casino business was over USD $70 billion

■ Casinos generate huge revenues for the government via licensing fees and taxation. In 2006, the size of the international casino business was over USD $70 billion and North American casinos can be credited for having generated about half the total amount. In 2007, Macao in China recorded about USD $10 billion in revenues through casino games. Additionally, Internet casinos, which have proliferated recently, is said to generate more than USD $15 billion.


Casinos in Pennsylvania have generated enormous revenues in 2011. One of the reputed casinos brought in more than USD $32 billion. 


■ Casinos in Pennsylvania have generated enormous revenues in 2011. One of the reputed casinos brought in more than USD $32 billion. In the state, revenues increased nearly 14%
and reached USD $199 million, and generated over USD $108.3 million in the form of tax! Macau casino revenue hit USD $33.5 billion this year. Las Vegas brought in USD $482.7 millions in January 2011.


■ Casino gaming also has had a great impact on the tourism industry. In fact, tourism in Las Vegas, which saw a total of 34,450,600 visitors in 2010 and over 37 million in 2011, is a
frequented tourist destination owning to the Strip, on which its casinos are located. The tourism industry in Macao (China), Monte Carlo (France), Sun City (South Africa) owes massively to casino gaming.


Singapore which saw casinos come up two years ago, after an intensive debate, is set to overtake Las Vegas in gaming revenues.

■ Singapore which saw casinos come up two years ago, after an intensive debate, is set to overtake Las Vegas in gaming revenues. Its growth in 2010 of 15 % was attributed largely to
its two huge multi-million dollar casinos. Both casinos cum hotel developments have become must visit places for tourists arriving in Singapore.


Some nations have encouraged the growth of casinos to attract international tourists.

■ Some nations have encouraged the growth of casinos to attract international tourists. For instance, Gold Coast casinos in Australia have successfully attracted South East Asian players. Most nations across the globe, except Asia, have softened their attitude towards casino gaming. Not only this, they have used casinos to address several economic issues,
including the generation of revenues, enhancement of foreign exchange and creation of jobs. Some countries have even managed to combat illegal gambling functions by legalizing casino gaming.

Why can’t we take inspiration from the UK’s Gambling Act of 2005?

■ So, why is live gambling outlawed in India? Indian tourists frequent Lanka and Nepal to enjoy gaming activities. By introducing a licensing policy in various states, like Goa and Sikkim, a tremendous amount of black money deals and criminal activities can also be curbed. Why can’t we take inspiration from the UK’s Gambling Act of 2005? After all, it lays down a regulatory framework for all types of gambling, including the use of mobile phones, televisions and the Internet. A provision for the gaming industry can solve a lot of our economic and social problems.


■ Enough said about economies of casinos. Benefits of bringing over ground, an activity which, because it is illegal, remains in hands of mafia, are obvious. The benefits of having Indians staying in India to gamble, instead of going to Nepal and other countries, are obvious. However, the real benefit is in recognition of human freedom – adults should be free – free to do as they wish, if they are not harming anybody other than themselves. Let adults have a choice to gamble, if they wish.


RISH TRADER