Thursday, April 30, 2009

>Market Opportunities (WHARTON)

Finding Market Opportunities in 'the Best Place to Get Sick'

India's health care industry ails from severe under-penetration among its population, especially in rural areas. Still, the low penetration levels are a glass half full for global pharmaceutical companies, many of whom have steadily increased their investments in the country, drawn by India's talent base and R&D capabilities for drug development, and its strengths in alternative medicine, like Ayurveda (India's traditional system of holistic medicine). Insurance providers, meanwhile, like the country's low cost of health care, which has made it a destination for so-called "medical tourists" from developed countries.

Those are the key drivers for pharmaceutical firms, hospital chains and investment funds as they look for opportunity in India's health care industry, according to a panel discussion on "The Health Care Duopoly: India, the Medical Center of the World" at the recent Wharton India Economic Forum in Philadelphia. The panel included top executives from pharmaceutical companies GlaxoSmithKline and Cadila Pharmaceuticals, Asia's largest health care chain Apollo Hospital Group, and investment funds, who identified areas
of advantage in an otherwise dismal scenario.

The Upside of Low Penetration

"I am happy and delighted there is under-penetration [in India's health care industry]," said Anula Jayasuriya, co-founder of the Evolvence India Life Science Fund, a US$90 million venture capital fund formed three years ago to invest in pharmaceutical, biotechnology, medical device and related contract service companies based in India. "From an investor's perspective, we see a great opportunity" to extend the health care industry in under-served areas.

Jayasuriya added that she expected Indian pharmaceutical companies to become a bigger force globally in the near future. "My crystal ball says ... I see an Indian company and a European and U.S. pharmaceutical company becoming one," she said, noting that Sanofi-aventis and GlaxoSmithKline are reportedly talking about a possible acquisition with India's Nicholas Pharmaceuticals. That's only speculation, she said, "but that [kind of deal] would be one measure of success."

Jayasuriya was responding to a relatively pessimistic scenario offered at the beginning of the session by the panel's moderator, Michael Fernandes, executive director of the investments division and country head for India at Khazanah Nasional, the investment arm of the Malaysian government. Fernandes said that while global pharmaceutical companies had steadily increased their investments in India over the last 50 years, including contract research in the last five years, the overall results of these investments have been disappointing. He also noted that the largest Indian pharmaceutical company -- Ranbaxy Laboratories -- was sold last year to Japanese firm Daiichi Sankyo.

"It doesn't seem like an Indian company would be among the top three in generics globally," Fernandes said. "Some experts say it may not happen at all." Pharmaceutical innovation in India, too, has had "a number of false starts," he added. "Lots of phase two and three products have failed; not a single Indian-innovated product has been launched globally, although there are a number in the pipeline."

Jayasuriya read the scenario differently. "Innovation is an attrition game," she said. "The number of molecules that failed in India is not surprising, even if you use a fraction of the U.S. failure rate." She added that she is encouraged by the pipeline of Indian generics, and that while pharmaceutical drug development in the U.S. has many of its roots in universities, "Indian companies are hotbeds of innovation." Offering an example, she talked of Indian biotechnology company Biocon launching the country's first new drug -- a monoclonal antibody for head and neck cancer. The drug was originally created in Cuba, "but that is also a developing country, an emerging market," she said.

Hasit Joshipura, GlaxoSmithKline's vice president for South Asia and managing director of
GlaxoSmithKline India, was also optimistic about the ability of India's health care industry to deliver on new drug development. "I can see an Indian role in every major new drug, such as developing medicines for AIDS or other problems of poor countries," he said. For many years, pharmaceutical companies in India were, for the most part, subsidiaries of multinational players, so "there was no need to look at innovation.... But now you see frenetic activity, and in five to six years, you will see the next innovative products coming out of India."

Indian pharmaceutical companies could seize the opportunity to be "at the forefront for the next generation of vaccines and biologics," according to Michael Ross, president of the U.S. subsidiary of Indian drug firm Cadila Pharmaceuticals. His company is currently working on a vaccines program. "For every dollar you spend on vaccines," he noted, "you save US$8 down the line. It's a very efficient way to lower costs of healthcare."

Here Come the Medical Tourists

Ross said India's relatively lower health care costs have also spurred a surge in "medical tourism -- although I hate that term." Hospitals in India could secure accreditation from the non-profit Joint Commission International to take advantage of the increasing interest from patients and insurers in developed countries, he added. "The cost of a procedure is a third less in India, but the care is excellent. You will see more and more people going overseas for health care."

Insurers like Blue Cross waive a patient's co-pay if they go overseas for surgery because of the lower costs. For companies having trouble keeping up with today's medical expenses, this could be a tremendous opportunity, Ross said, joking that ailing companies like General Motors could benefit. In fact, he suggested to fellow panelist Shobana Kamineni, executive director of Apollo Hospital Enterprises, that her chain consider alliances with large insurers to lower the cost of its services for patients, and thereby expand its market opportunity.

According to Kamineni, about 15% of Apollo's patients are foreigners, and they come not "for vanilla care" like cosmetic surgery, but for complex surgeries like hip replacements. "India can become a real hub for medical tourism," she said, noting that Apollo attracts patients from Canada, the U.K. and even countries like Afghanistan because of lower costs and also shorter wait times. Over the years, costs for medical services have remained low in the country because they would be otherwise unaffordable for most of India's citizens, who are unable to obtain health insurance beyond age 60. "India is probably the best place to get sick -- it is the cheapest," Kamineni said.

In recent years, health insurance in India has been growing at a rate of 38% to 40%, according to Joshipura of GlaxoSmithKline. He said that although India has shown increases in life expectancy, its health care industry will have to factor in the need to treat a wider range of diseases as health awareness and affordability grows, especially in the larger rural markets.

Increasing Reach

Joshipura stressed the need to develop health care infrastructure to ensure access to the rural markets. He pointed out that India's expenditure on health care is just about 4.5% to 5% of its GDP, compared with 10% to 11% in France, Germany and Switzerland, and more than 15% in the U.S. The government could play a greater role in expanding access to health care in India, he added: Government-funded health care reaches only 0.9% of the market; the private sector fills in the gap.

But intelligent use of technology could help reach "the 500 million people who don't have access to health care" in India, according to Jayasuriya. She cited applications for India's rural markets, such as diagnostic labs in kiosk-like facilities where, for instance, a sick child's parents could determine whether or not an infection calls for rapid intervention. Sanofi-aventis had a model built around such kiosk-type labs that don't necessarily have to be staffed by doctors, she noted. Similar applications could also find uses in developed markets like the U.S. in, for example, neonatal screenings. Another technological
innovation Jayasuriya referenced was a reverse-engineered home dialysis machine that Indian computer maker HCL had developed for US$400 compared to a price of US$4,000 in the U.S. market.

Expanding the reach of health care services is easier said than done in India, Kamineni said. Apollo Hospitals, which now has 42 hospitals and 8,000 beds nationwide, plans to open four hospitals next year in Mumbai. Creating new capacity in hospital beds is a formidable challenge, she noted, adding that the high cost of land in urban areas is not offset by any government concessions even though the end use is health care. "My dad [Prathap Reddy, the group's founder and chairman] says it is easier to build a liquor factory, because the risks are so much [higher] with hospitals. It's like flying a plane every single day."

Finding good talent is also a problem, Kamineni said. Her group runs two medical colleges and 14 nursing schools to serve its talent needs. The solution lies in privatizing education with a for-profit model to attract investors, she argued. "There is no [talent] planning in the health care business. Between last year and this year, we added 20,000 people to our work force."

Alternative Medicine

Kamineni was, however, optimistic about the possibilities with India's traditional systems of alternative medicine, notably Ayurveda. Johnson & Johnson is looking for Ayurvedic drugs, for both prescription and nonprescription uses, including non-alcoholic mouthwashes and pain-relieving medications, according to Ross. "They are hunting in India for products to sell all over the world."

According to Joshipura, India hasn't done enough to develop its alternative systems of medicine. "China has done a good job with Chinese medicine," he said, suggesting India follow that example. "It's going to take time for a Western company to develop familiarity [with alternative medicine systems like Ayurveda]." Ross agreed: "If you talk to the multinationals [about alternative medicine], you have to develop scientific data; it's not just about word of mouth."


Chronology of recoveries: Credit, asset markets or the real economy first?

We consider it very important to know whether, in an economic recovery, it is credit, asset prices or the real economy that recovers first. An examination of economic recoveries in the past (1992 to 1995, 2002 to 2005) shows two different chronologies: in the former case, the real economy first, then credit and asset prices; in the latter case, credit and asset prices first, then the real economy.

The current economic situation is special: in a situation of global deleveraging, it is hard to expect a recovery in credit or the prices of assets for which purchasing is credit-related; does this rule out a recovery in the real economy? The two recoveries of the past give different indications on this subject. It is also unclear whether other asset prices will recover before or
after the real economy; if they recover before it, there will be no exit strategy for central banks, which will be unable to destroy excess liquidity until it is too late. We have seen in the past that tightening of monetary policy always came last, after both the economic recovery and the recovery in credit and asset prices.

If we could know the order in which credit, asset prices and the economy will recover in the present situation, this would clarify a number of important questions:

1. Can there be an economic recovery without a recovery in credit?

Deleveraging is continuing at present (we will examine the situations of
the United States and the euro zone, See Charts), and may be longlasting, because the high debt levels reached before the crisis (except for companies in the United States, See Charts) will normally take several years to come back to acceptably lower levels, given the fall in asset prices, the rise in interest rate margins on loans, higher risk aversion, etc.

The question therefore is whether an economic recovery can take place
before credit picks up again.

2. Can a recovery in asset prices be expected?

We have seen in the recent period a slight recovery in:

− stock markets (See Charts);

− the prices of oil and certain other commodities(e.g. aluminium, copper, maize, (See Charts));
− credit markets (See Charts).

To see full report: FLASH MARKETS

>Economic effects of Swine Flu (WACHOVIA)

Economic Effects of Swine Flu: Mexico and Beyond

The swine flu epidemic has become front page news this week. Mexico is the epicenter of the outbreak and thousands of cases have been reported in that country. However, scores of cases have been confirmed in the United States, and countries as far afield as Israel and New Zealand have hospitalized people with symptoms that resemble swine flu. Not only have the Mexican stock market and currency been hammered over the past few days, but financial markets in most other countries have been adversely affected as well.

The financial and economic costs of the epidemic will ultimately depend on its severity. The outbreak of Severe Acute Respiratory Syndrome (SARS) that swept through Asia in the spring of 2003 is instructive. The SARS epidemic was deadly—nearly 800 people in 7 countries died—but it was not catastrophic. The economic effects of that epidemic were significant but temporary. However, if the current outbreak were to morph into something like the influenza pandemic of 1918, which killed 50 million people worldwide, the economic and financial fallout would obviously be much more devastating.

In this brief note, we attempt to outline how the economies of Mexico and other countries could be affected by the current outbreak of swine flu. In that regard, we draw on the experience of the 2003 SARS epidemic to inform our economic prognosis and we reference some analytical work that has modeled the economic effects of severe pandemics. We acknowledge, however, that it is ultimately impossible to forecast precisely the economic and financial effects of the current outbreak due to the unpredictable nature of the epidemic.

Significant, But Temporary, Economic Effects Likely in Mexico
Because Mexico is the epicenter of the swine flu outbreak let’s begin our discussion with the Mexican economy, which could be adversely affected in a number of ways. First, Mexico’s trade with the rest of the world could be disrupted. Indeed, many nations have already announced import restrictions on Mexican pork products. We do not have data on Mexican pork exports, but they surely represent a small proportion of the $7.9 billion worth of agricultural goods that Mexico exported last year. Moreover, the direct effects of an import embargo by foreign countries on Mexican pork products would be rather miniscule in terms of the $1 trillion Mexican economy.

To see full report: SWINE FLU

>Zee Entertainment (DEUTSCHE BANK)

Improving GRPs, weak ad scenario

Weak ad scenario, strong DTH revenues
A relatively weaker advertising environment has nullified the 35% sequential growth in DTH revenues and led to a 19% YoY decline in Zee's Q4 earnings. We expect a weaker Q1 FY10 due to a strong base in Q1 FY09, and thus we cut our FY10 earnings estimates by 12%. However, this comes at a time when GRPs (the key driver for higher ad rates) have improved in a consolidating GEC scenario and DTH revenues remain strong. Thus we recommend Buy with a new TP of INR 160.

New programming drives operational metrics
Zee’s GRPs have remained solid: The flagship channel improved its average GRPs to 208 for the quarter against 201 GRPs in Q3 FY09 (the latest GRPs stand at 235 with an improvement across time bands which should be reflected from the September quarter onwards). New prime time programming has been the key driver of relatively strong ratings.

Competitive landscape has eased, consolidation of GRPs
Competition has eased among the general entertainment channels (GEC), with Sony, NDTV Imagine and 9X continuing to struggle. Although Star Plus has lost momentum over the past two weeks, we believe it will recover as it strengthens its weekend slots. Overall, the top three networks achieved more than 800 GRPs, i.e. 85% of the GRPs of the mainline GECs.

Revising our target price to INR 160 (from INR 175)
Our new, DCF-derived target price of INR 160 is based on 12.7% cost of equity, 11% earnings growth FY9-11E and 4% terminal growth. We believe our earnings growth estimates are conservative, factoring in a drop in Zee’s relative market share and the uncertain ad environment. At the current price, Zee trades at 13.8x FY10E earnings. Key risk includes a significant drop in weekly GRPs. See valuation and risk details on pages 6-8.

To see full report: ZEE ENTERTAINMENT

>Steel Picture Book (CITI)

World Steel Association Demand Growth Estimates Drift Lower

Inventory De-stocking Decelerates — CIRA anticipates a trough in demand in 2Q09, as inventory de-stocking abates, but underlying demand is expected to remain extremely weak in 2H09. Steel output in Europe dropped 43.8% in 1Q09 compared to 1Q08. North American steel production fell 52.1% YoY, whereas Asia’s steel production only fell 8.9% YoY.

WSA Growth Outlook — The World Steel Association (WSA) published its shortterm
growth outlook for steel demand on 27 April. The WSA forecasts a global 14.9% decline in apparent steel consumption in 2009: a -28.8% decline in the EU-27, -32.2% in NAFTA, -23.1% in the CIS, and -8.1% in Asia and Oceania.

Growth Outlook — CIRA forecasts a 30% YoY decline in crude steel production in Europe and a similar decline in the USA in 2009.

Production Discipline Tested — Cash constraints are driving traders and distressed companies to sell steel products below cash costs. Steel prices are likely to increase from the lows as inventory de-stocking comes to an end, but will place pressure on spot-focused producer profitability.

China, the Ongoing Focus — The WSA forecasts -5% growth in apparent demand in China in 2009. China’s lower exports and a slowing domestic economy are the cause. Apparent steel use for the world excluding China is expected to decline by -20.4% in 2009. CIRA forecasts China’s demand growth as flat YoY.

Stay Selective and Defensive — We see the risk of negative guidance and earnings shortfalls as extremely high in 2009. We believe the market’s shift to reflation trades is too early and remain cautious on the sector. Working capital build will test balance sheets in the early phase of the recovery.

To see full report: STEEL PICTURE BOOK


Where do we go from here?

■ We provide an update on the latest valuations and risk/reward trade-off for Asian equities.

■ Asia ex Japan has rallied strongly over the last seven weeks, rising 27.5% from its local trough on 2 March. The rally has, however, been supported by improving fundamentals – stresses in the (global) financial sector have eased; there is growing evidence that the global economic cycle may be forming a floor; investors’ appetite for risk (particularly for emerging markets) has risen; and, importantly, our earnings revisions indicator for Asia ex Japan has
continued to move higher.

■ Moreover, with Asia ex Japan now trading on 13.9x forward earnings, 10.8x trailing earnings, 1.5x BV and 6.7x cash flow, valuations – particularly on those metrics that are the most reliable signals of value – remain well below long-run average levels. The only exception to this is forward PER, which, impacted by both a rising market and falling earnings, is now above its longrun average of 13.0x.

■ Low valuations and improving earnings revisions mean the 12-month risk/reward trade-off for Asian equities is extremely favourable. If history is any guide, the odds of losing money on a 12-month view are currently a mere 12%, while the odds of a better than 10% return are 70%. History suggests that Korea is likely to give the most beta over this time horizon, while along the sector dimension tech, banks and consumer discretionary sectors are the sectors most likely to outperform.

■ The three-month outlook is, however, considerably more uncertain. Markets have run hard, investor sentiment towards – and appetite for – emerging markets is certainly very elevated at present (relative to other risky asset classes, that is) and we are very mindful of the potential for this to pull back in the coming weeks and months.

■ On the other hand, backtesting of fundamentals does suggest a palatable 3-month risk/reward trade-off, earnings revisions suggest the near-term balance of risks could be to the upside and the overwhelming investor sentiment is to buy on any decent pullback (which suggests that any pullback is likely to be limited in terms of duration and magnitude).

To see full report: ASIA STRATEGY

>Monthly Economy Review (SHAREKHAN)

Economy: All eyes on RBI monetary policy review

■ The Reserve Bank of India (RBI) will announce its annual policy review on April 21, 2009. The policy review is staged against the backdrop of near-zero inflation (in terms of the Wholesale Price Index [WPI]) but near double-digit increase in the Consumer Price Index (CPI) and slowing economic growth. Besides, the credit growth has witnessed a sharp deceleration while the banking system is awash with liquidity. In view of this, we expect the RBI to announce a token cut of 25 basis points each in the repo and reverse repo rates in keeping with its stress on a low interest rate regime. The central bank is expected to keep the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) unchanged. However, we feel the business growth target for the banking system and the outlook for the economy to be given by the RBI for the current fiscal will remain a key monitorbale.

■ India’s trade deficit stood at USD4.91 billion in February 2009 compared with USD6.07 billion in the previous month. The trade deficit for February 2009 declined (for the second consecutive month in FY2009) by 26.9% year on year (yoy) and by 19.2% on a month-on-month (m-om) basis. With this, the year-till-date (YTD) trade deficit has widened to USD104.98 billion from USD74.89 billion in the comparable period of FY2008.

■ In February 2009, industrial production growth once again entered the negative zone as it declined by 1.2% yoy. The fall in the industrial output was led by a y-o-y decline of 1.4% and 1.6% in the output of the manufacturing and mining segments respectively. On a

YTD basis, the IIP growth for the period April 2008- February 2009 stood at 2.8% and was significantly weaker compared with the 8.8% growth achieved during the comparable period of the previous year. Importantly, the Index for Industrial Production (IIP) figure for January 2009 has been revised upwards to indicate an increase of 0.4% yoy against a drop of 0.5% (provisional) earlier. While there has been some improvement in automobile sales, cement dispatches and steel production during March 2009 (indicating better industrial activity), the high base effect is likely to play a spoilsport.

■ Inflation continued its southward journey and stood at 0.18% for the week ended April 04, 2009 after touching a record high of 12.91% in August 2008. However, on a week-on-week (w-o-w) basis, the inflation rate inchedup by 0.4% on the back of higher food and fuel prices.
The inflation rate is at near zero levels and we believe it is likely to enter the negative territory in the coming few weeks as the high base effect comes into play. Furthermore, the Indian Meteorological Department (IMD) expects the monsoon rainfall to be near normal to normal this year (96% of the long-period average). We believe a near normal to normal monsoon would help in bringing down the food inflation, which is currently at elevated

To see full report: ECONOMY REVIEW

>Ballarpur Industries (EMKAY)

Results below estimates

BILT reported poor Q3FY09 results. Revenues remained flat at 6.9 bn while EBITDA margins dropped by 650 bps to 19.8% as a result APAT fell by 76% to Rs 179mn. Results were affected mainly on account of – 1) Poor show at Sabah, Malaysia plant due to sale of high cost inventory and maintenance shut down which have resulted in EBITDA loss of ~Rs 240 mn 2) Lower demand for rayon grade pulp (RGP), Kamalapuram plant resulting in plant shut down, leading to EBIT loss of ~Rs 110 mn. We expect that the current quarter poor performance was mainly driven by extra ordinary circumstances. However global prices still remain weak hence putting pressure on margins at Sabah plant and Kamalapuram plant is likely to resume operation from May’09 and company is expected to start consuming pulp for its captive purpose. Its capex plan at Bhigwan is completed and expansion plan at Ballarpur is on schedule (completing June’09) which will increase its capacity by ~45%. We expect full benefit of this expansion to flow from Q1FY10 and Kamalapuram and Sabah plant should also stabilise by that time. To factor poor ongoing problem at Sabah and its Kamalapuram plant, we are reducing our FY09 revenue estimates by 10.6% to Rs 28 bn and APAT by 37.3% to Rs 1.8 bn. However our FY10 estimates remain unchanged. We maintain our BUY recommendation on the stock with a price target of Rs 24.

Poor show at Sabah plant and pulp plant affected results
Disappointing Q3FY09 results is mainly attributed to poor results from Sabah plant and rayon grade pulp at Kamalapuram plant. Company’s Sabah operation reported losses of approx Rs 413 mn due to sale of high cost inventory during the quarter and also due to maintenance shutdown for a month which affected its production. Sabah plant had an inventory of ~17,000 mt in Q2FY09 which was sold during current quarter at lower prices. Unit Kamalapuram, which produces rayon grade pulp, continued to remain shut due to sluggish pulp demand. Pulp division also contributed a loss of Rs 107 mn for the quarter.

Stand alone results remain stable
BILT standalone performance remained stable. BILT on stand alone reported net sales of Rs 2.5 bn with EBITDA margins of 24.2% and APAT of Rs 321 mn. Paper demand and realisations in domestic market remained stable.

Revising FY09 estimates keeping FY10 unchanged, maintain BUY
We have reduced our FY09 revenue, PAT and EPS by 10.6%, 21.7% and 37.3% to Rs 28.5
bn, 1.8 bn and Rs 2.8, respectively. We keep our FY10 estimates unchanged. We believe
that FY10 growth will be driven by 45% growth in paper capacity. We expect that pulp
operation at Kamalapuram will resume from Q1FY10 and company will start consuming pulp for its captive consumption. We maintain our BUY recommendation on the stock with a price target of Rs 24.

To see full report: BALLARPUR INDUSTRIES


Decent show…
3i Infotech announced flat q-o-q top line at Rs 607 crore, which was in line with our expectation. EBITDA margin improved 157 bps sequentially driven by improvement in gross margins in the products and services segment. The company has also been able to maintain gross margin in the transaction services segment. Buy-back of FCCB and one time advisory and legal fee payment led to profits increasing to Rs 90.5 crore (profit removing these exceptional items increased 3.3% to Rs 67 crore).

Highlight of the quarter
The flat q-o-q performance by the company was primarily a result of the poor performance of the services segment which saw de-growth of 11% qo-q. Transaction services segment was comparatively the best performing segment with sequential growth of 6.2%. Product revenue bounced back this quarter with 3.1% q-o-q growth in Q4FY09 (compared to q-o-q degrowth
of 4.5% in Q3FY09. the company has bought back FCCB worth Rs 152 crore during the quarter. For the full year FY09 the company grew 89.6% on the top line. More than 50% of this growth was contributed by the acquisitions made by the company during the year.

3i-infotech has an outstanding order book of Rs 1445 crore which is 56% of FY09 revenue. The order book growth has slowed down in the recent past. The management has also refrained from giving guidance for FY10 due to the uncertain demand environment. We recommend a Hold rating on the stock with a revised price target of Rs 49.

To see full report: 3I INFOTECH

>Jaiprakash Associates Limited (MORGAN STANLEY)

Adjusting Price Target for Higher Liquidity Environment

Investment conclusion:
Over the next two to three years, we expect Jaiprakash to emerge as a top-5 player in India in each of its main businesses – cement, construction, power, and real estate. We believe that
with worries on execution and funding receding a bit (given the strong results and the easing debt funding environment), the stock can trade above our base case. We add 30% of the differential between our base and bull case to our base case to set our PT of Rs166, which
implies potential upside of 27% from current level.

Strong Results Ease Execution Issues:
Jaiprakash declared a strong set of numbers in F4Q09, with its construction and real estate businesses driving revenues and profits up 55% YoY and 52% YoY, respectively. With the company also commissioning 2.5 mn tons of cement capacity in F4Q09, and taking their
presales on Yamuna Expressway up to 5.23 mn sq ft (0.73 mn sq ft in F4Q09), we believe that execution worries have reduced.

Debt Funding Availability Easing from Crunch in

F3Q09: Our interaction with banks also reveals that debt funding in no longer as difficult to secure as in F3Q09. We continue to expect the company to use presales of real estate, sale of treasury stock, and discounting of power asset cash flows to fund the equity requirements
of their planned power generation assets.

What’s next:
We believe that declaration of financial closure on the company’s generation projects (especially Bina and Nigrie) will be a driver of stock price. Also, we believe the execution of the projects it has in hand (especially the internal ones) will reassure the market, driving the multiple and the stock price up.


Wednesday, April 29, 2009

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty near month witnessed unwinding in OI to the tune of 5.88 million shares whereas the May series added 5.69 million shares in OI. With the May futures premium almost vanishing and April sliding into a discount of 7.40 points, we infer noteworthy short positions have been formed in Nifty May series. Also the rollovers have picked up from 48% to 61% yesterday. All these suggests closure of long positions in April and build up of fresh shorts in May series

• The put writers who had entered on Monday at 3400 and 3500 levels were forced to exit on Tuesday. 29654 and 24703 contracts got unwound in 3400 and 3500 puts respectively. This indicates that 3400 is no longer a support for the market; rather it may now act as a resistance since 15234 contracts got added in this call option along with stupendous rise in volume and drop in IV. Call writing was also seen in 3500 call which added 10024 contracts in OI. Moreover, the 3300 call added 21258 contracts indicating some call writers were also active at this strike price. However, the 3300 put which added 5201 contracts in OI also showed signs of put writing. This further suggests that the expiry may be somewhere close to the 3300 mark

• FII Index futures depicted closure of long positions to the tune of Rs 796 crores along with a drop in OI by 2.60%.

To see full report: DERIVATIVES 290409

>Daily Calls (ICICI Direct)

Sensex: We said, "upper shadow is indicating profit-booking ... see if can hold Monday's low of 11176. Positive if it does, else Green support line can be tested." Index couldn't hold 11176, as a result of which, it lost over 3% and tested the Green support line as suspected. Realty/Metals/Banks lost more, about 5%. A/D worsened to 1:9.

The action formed a Belt Hold Line Bear candle, which is bearish if selling continues below its low at 10961. Such an action would open downsides testing previous crucial support near 10719. On the other hand, protecting its low can appear as an attempt to hold the 31-day long Green support line.

To see full report: CALLS 290409

>Daily Market & Technical Outlook (ICICI Direct)

Key points
􀂃 Market outlook — Open flat to positive, Asian markets mixed
􀂃 Positive — Rupee likely to rise
􀂃 Negative — FIIs & MFs Selling

Market outlook

􀂃 Indian markets are likely to open flat to positive, taking cues from the global markets. SGX Nifty was trading 20 points up in the morning. Other Asian markets were mixed in the morning trade as stocks were on shaky ground as concerns over US bank balance sheets and fears over the spread of swine flu persisted. US stocks fell on Tuesday as fresh worries that major banks may need to raise more money offset more reassuring data that suggested the worst may be over for the US economy. Rupee is likely to rise on Wednesday, after a two-day fall, as it gets a boost from gains in Asian stock markets and the dollar's
weakness against some currencies.

􀂃 The Sensex has supports at 10960 and 10720 and resistances at 11210 and 11330. The Nifty has supports at 3350 and 3300 and resistances at 3420 and 3460.

􀂃 Asian stocks mixed, as concerns over US bank balance sheets and fears over the spread of swine flu persisted. Hang Seng rose 195.6 points, or 1.3%, to trade at 14,750.7.

􀂃 US stocks fell on Tuesday as fresh worries that major banks may need to raise more money offset more reassuring economic data that suggested the worst may be over and a big dividend boost from IBM. The Dow Jones slipped 8.05 points, or 0.10 %, to 8,016.95. The S&P 500 dropped 2.35 points, or 0.27 %, to 855.16. The Nasdaq declined 5.60 points, or 0.33 %, to 1,673.81.

􀂃 Stocks in news: RIL, Britannia Industries, Dr. Reddy’s Lab.

To see full report: OPENING BELL 290409


A radical estimate of the bank losses

International institutions regularly publish enormous estimates of banks’ non-provisioned losses: recently USD 2,200 bn or even USD 4,000 bn.

It is well known that these estimates make no sense, because they are based on the market value (actual or supposed) of assets whose market prices are meaningless, and which will be kept by the banks.

However, we can carry out a radical estimate of the bank losses by starting off with the assets held by banks and applying market prices to these assets.

Our maximum estimate of the banks’ loss (in the United States, the euro zone and the United Kingdom), nonprovisioned on assets other than loans to households and non-financial companies, is USD 1,240 bn, markedly less than the figures provided by international institutions.

What losses for the banks?

The banks (we look at the situation of US and European banks) have already significantly written down the portfolios of assets held (Table 1 in Appendix).

But international institutions (IMF, OECD) continue to publish enormous estimates of the bank’s non-provisioned losses: USD 2,200 bn, even USD 4,000 bn recently.

It is well known that these estimates are meaningless. The market prices of numerous assets have been extremely depreciated and are far below the value at which these assets
will eventually be repaid.

But we will try to reconstitute them in a simple manner by looking at the losses - at market prices - realised by the banks on their asset portfolios. Given this method, we are of course
talking about a radical and excessive assessment of bank losses.

Banks' balance sheets

We look at banks' balance sheets in the United States, the United Kingdom, and the euro zone.

On the asset side of the banks’ balance sheets we find:

− loans,

− liquidity and monetary assets, on which there are no capital losses,
− other assets: equities, government bonds, corporate and financial bonds (which includes Agency bonds, ABS, structured credit, etc.).

To see full report: SPECIAL REPORT

>Reliance Industries & Reliance Petroleum (HSBC)

Downgrade to N(V) while raising targets: Growth priced in

■ Following the completion of key projects in FY10, we expect RIL to refocus on new E&P development and exploration; raise our E&P valuation to INR920/share (INR661)

■ A 56% increase in RIL’s stock price since March has closed its alpha with Sensex that grew 39%

■ Raise our targets to INR1,945 (INR1,640) for RIL and INR122 (INR102) for RPL, but downgrade both to N(V) from OW(V)

E&P upside key to valuation
RIL plans to complete three key projects in FY10, resulting in 77% growth in our FY09-11e EPS estimates. We now expect RIL to focus on new E&P development projects and exploration. Recognising the E&P projects pipeline and potential resources in RIL’s E&P portfolio, we increase our valuation of the E&P business to INR920/share (INR661). In our valuation, we have considered 20tcf (12tcf) of 2P reserves, resources from the KG D6 block, and the potential for the ramp-up of gas production to 120MMcmd owing to satellite discoveries. With exploration regaining priority, we also take into account 1,500MMbbloe of additional risked prospective resources at a valuation multiple of USD2/bbloe. RIL’s partners, Niko Resources and Hardy Oil, suggest healthy potential for the KG D9 and Mahanadi D4 blocks, respectively.

RIL’s recent run-up closes its alpha with Sensex
RIL’s 17% outperformance against Sensex since March 2009 has closed the valuation gap between the two. At the current price, the stock trades at a FY11e PE of 10.6x. While the news flow on project ramp-up is likely to be positive over FY10, changes in the valuation band are dependent on the execution of the next set of growth projects and discovering new resources, in our view. We expect focus on these to be back-ended in FY10, with existing projects being a priority.

RIL and RPL: Downgrade to N(V) from OV(W)
We cut our FY10e estimates for RPL by 4.5% and for RIL by 3.1% due to the flow-through effect of the FY09 actuals and a slower start of the second crude unit than our earlier expectations. We raise our target price for RIL to INR1,945 (INR1,640) mainly due to our higher E&P valuation. Based on a swap ratio of 1:16, we raise our target price for RPL to INR122 (INR102).

To see full report: RIL & RPL


Q4 FY09 Result
Sesa Goa has announced its fourth quarter results and it was in line with our expectations. The company’s consolidated Q4 FY09 net sales were down 14.9% yoy at Rs 14299 mn versus Rs 16813 mn and its net profit was down 32.5% yoy at Rs 5476 mn versus Rs 8116 mn. The OPM for the quarter was at 52.7% versus 72.4%.

Volume remains flat
Iron ore volumes for Q4FY09 remained flat yoy at 5 million tones because of sudden fall in demand from China in the last five months, however for the full year company saw 22% growth in volumes despite difficult market conditions. The company also saw an improvement in the inventory situation in February‐March 2009. The company is looking at 20‐25% volume growth for FY10.

Realisation comes down
Realisations were lower in last quarter due to weak iron ore prices, iron ore prices have fallen more than 50% since October 2008 however depreciating Indian rupee partially offset the negatives. The benefit of Rs 200/ tonne from abolition of 8% export duty on iron ore fines since Dec’08 was also passed on to customers.

Increase in reserves, exploration going on
Exploration and drilling programme in Karnataka and Goa have yielded gross additions of 54 million tonnes and after considering mined output of 16 million tonnes during the year from all mines, a net addition of 38 million tonnes. Reserves and resources as on 31 March 2009 were 240 million tonnes compared with 202 million tonnes at the end of FY 2008.
Additional 500 mt of iron ore reserves would be added over next 2‐3 years.

We believe that the demand for steel and iron ore will start improving from September onwards, however realizations for FY10 will be lower than FY09. According to us the company is likely to see 15% increase in sales volume for FY10, and the average realization for the year will remain between USD 45 to 50 per tonne, depreciation in Indian rupee against USD will compensate to some extent for the fall in realisations. As the company exports two third of its production to china, the improvement min demand for steel and iron ore in china will act as a catalyst, also any rise in iron ore prices in the second half of the year will benefit the company because the company sells 80% of its produce in the spot market. We have valued Sesa Goa on EV/EBITDA basis, giving a target EV/ EBITDA of 3 and recommend a accumulate rating for the stock with a target price of Rs 131.

To see full report: SESA GOA

>Corporation Bank (CITI)

Sell: 4Q09 Results – Quantity, Not Quality

Profits up 26%, above estimates; but qualitatively not so sound — Prima facie Corp Bank's results were good – up 26%yoy, 37% ahead of estimates – driven by bond gains, core fee momentum and moderation in costs. However, beneath the surface there are clear signs of pressure - declining margins, sharp rise in restructured loans and lower loan loss charges, despite the large trading gains.

Asset quality: Restructuring stress — Reported NPLs still look good (1.15% NPLs, 75% coverage); however, it masks underlying stress - 2% of loans restructured, another 3% pending. This is ahead of peers and management has missed an opportunity to provide more (utilizing the large bond gains). We expect higher lapses to NPLs given its mid-scale and mid-market franchise.

Growth: Accelerating but appears unsustainable — 4Q09 has seen growth accelerating (8% QoQ loan growth; 20% deposits), but comes at a cost (NIMs down 40bps QoQ). Sharp improvement in CASA ratio (31% vs. 25% in 3Q09) results from 100% QoQ rise in current account balances, suggesting it could be temporary; and possible unwind will pressure growth.

P&L: Trading boost and fee momentum; but margins disappoint — Bond gains, (5x rise, likely profit taking on HTM book), cost moderation (-20% QoQ) and healthy rise in core fees (+28% YoY) were key profit drivers. Core operating profits were up a more modest 7% YoY. NIMs were the key disappointment (down 40bps QoQ) and are now among the lowest in the industry.

Risks remain high, maintain sell — We adjust earnings (+3-4% for FY10-11E) to factor in above estimates FY09 earnings; retain Sell (3H) due to Corp Bank's rising profile with our EVA-based Rs175 target price.

To see full report: CORPORATION BANK

>United Spirits (IDFC SSKI)

Tracking the market momentum, recovering from the knee jerk reaction post the poor financial performance in Q3FY09 and triggered by the ongoing talks with Diageo for stake sale in United Spirits (USL), USL’s stock is up by ~70% from the bottom. However, at the CMP of Rs730 and trading at a valuation of 16x (net of treasury stock), we see a strong trading ‘short’ opportunity given the pressure on near term profitability (rising prices of molasses) and continued uncertainty over the ‘stake sale’ transaction. While USL’s growth momentum remains robust (sold 90m cases - 88.5m cases in USL and 1.5m cases of W&M in FY09 – 20% growth), we see increasing pressure on the near term profitability as molasses prices are set to stay over Rs5200/ ton (25% higher yoy), less likelihood of material price hikes (given the election period) and limited scope for portfolio uptrade (first line brands account for 93% of the business now). We see continued gross margin erosion in USL’s domestic business in FY10 (expect 200bp). Globally too prices of Scotch whisky could see correction as economic recession hits consumption, thereby limiting the upside gains for W&M as and when the contracts come for renegotiation. Besides operationally, there could be likely GBP5-10m risk on numbers on account of pension scheme provisioning in FY09. All these factors pose a risk to our earnings estimates in FY10. Also, while USL is in talks with Diageo and various private equity players for stake sale, there could be likely delay in the completion of the transaction. Citing all these risks, maintain our Neutral stance on the stock with a near term trading ‘short’ opportunity. Global liquor majors – Diageo and Pernod Ricard have seen 20-25% correction in their stock price since December 2008 (while broader markets have moved up) and are trading at PER of 11x.

USL – 70% up from the bottom
After the dismal performance in Q3FY09 (860bp of margin contraction), USL’s stock had corrected to Rs425 in January 2009. However the stock has since then seen 70% uptick to current market price of Rs730. This was driven on three counts – the fall, we believe, was sharper than expected and was a knee jerk reaction to the dismal performance (margins below 12% after a span of 7 quarters) and hence the recovery, secondly on account of strong market momentum (25% from the bottom) as indeed the ongoing talks of stake sale to Diageo and deleveraged the company balance sheet (net debt of Rs61bn).

While Q4FY09 numbers expected to be better than Q3FY09…
In Q3FY09, United Spirits saw the sharpest of the margin contraction for the past many years – EBITDA margin contraction of 860bp and gross margin contraction of 940bp. This was primarily on account of sharp increase in molasses and ENA prices (accounting for 40% of material cost) and glass prices. Effective molasses prices had increased from Rs290/quintal in Q3FY08 and Rs460/quintal in Q2FY09 to Rs525/quintal in Q4FY09 (80% higher yoy and 14% higher qoq). ENA prices too were higher by 50% yoy at Rs31/ltr. With cut down in sugarcane cultivation, molasses and ENA prices have remained higher. However, the scenario improved in Q4FY09 (effective molasses prices were down to Rs480/quintal and ENA prices were at Rs28/ltr in Jan-Feb 2009), with slow down in economy resulting in slow down in ENA and molasses consumption for industrial purpose. This, we believe would help improve upon the margins in Q4FY09 over Q3FY09. While the sales growth remains robust (expect 17% growth yoy), EBITDA margins are expected at 14.4% (310bp higher qoq, but 340bp lower yoy).

To see full report: UNITED SPIRITS


Buy: 4Q Results – Cannot Pick a Hole in the Quarter

Profits up 34% yoy; qualitative reinforcement — Qualitatively, the quarter was ahead, while quantitatively (i.e. net profit), it was just a little behind. The key takeaway is that HDBK continues to stand out in the troubled crowd with its asset book holding comfortably, profitability remaining stable and outlook good enough for it to maintain 20%+ loan growth. We believe HDBK is making significant franchise (and market share) gains in these relatively uncertain times – and doing so profitably.

Asset quality: Continues to defy and widens the gap — The pace of deterioration remains stable (comfortably covered by operating profitability). The restructuring phenomenon appears to have passed it by (0.1% of loans), and 20-25% loan growth looks achievable. Mgmt has a cautiously optimistic growth and quality outlook (consistent through Oct-Nov 2008 lows), and its track record for working through the cycle builds. The risks are the economy and the now-rising expectation that HDBK is immune to asset quality issues.

P&L: Fees and costs impress, while trading one-offs provide provisioning cushion — The P&L is fundamentally the upside surprise – fees have accelerated (bolstered by a strong bounce-back in derivative revs), costs are showing signs of moderating (almost a first among peers), and margins continue to hold at 4%+ levels – significant stability in varying interest rate environments. A surprise trading gain (second quarter running now, though) provides the cushion for a provisioning boost, which is otherwise too high for a normal earnings cycle.

Maintain Buy (1L) — While HDBK becomes even more expensive, we find that we cannot pick a hole in its quarter or business strategy, and until that happens, valuations will likely remain high

To see full report: HDFC BANK

>Bharti Airtel (HSBC)

Retain OW (V); Focussing on the last mile

■ Bharti may be considering outsourcing the last-mile
connectivity as per news reports

■ We would view such a move positively, as it should allow Bharti to leverage its investment in fibre assets

■ We retain our Overweight (V) rating and INR786 target price; we expect Q4 (March) results to be lacklustre

News reports suggest that Bharti may consider outsourcing its last-mile connectivity of its broadband operations and enterprise operations. The reports, by the Business Standard, among others, suggest that this will help the company focus on its core competencies, beyond reducing costs of operations. Outsourcing has been a key part of Bharti’s overall strategy; its mobile network has been outsourced to Nokia Siemens and Ericsson and its IT operations to IBM.

Frost & Sullivan, a business research and consulting firm, estimates the Indian enterprise data services market at INR51bn and expects a CAGR of 25.1% for this segment to INR154bn by FY13e. Large enterprise contributes c70% of the total market, and growth of the data market is driven by MPLS/VPN, which is expected to have a market share of nearly 50% in FY12-13.

While there is no official confirmation of the news item, we believe that an outsourcing deal would allow Bharti to boost its capabilities in network integration. In our view, network integrators have assumed significance recently on the back of complications involving sourcing equipment from multiple vendors and equipment interoperability.

We expect Q4 FY09e (March) results will be lacklustre for Bharti as a result of pricing pressures following the RCOM GSM rollout. We estimate Q4 revenues will decline 2% q-o-q. We estimate the EBITDA margin at 40%, compared to 41% in Q3 FY09. Similarly, we expect net income for Q4 to decline 2% sequentially. We retain our Overweight (V) rating on Bharti shares and our INR786 target price.

To see full report: BHARTI AIRTEL

Tuesday, April 28, 2009

>Crude down 2% as swine flu hits economy sentiment

Singapore - Crude oil futures fell more than 2% Tuesday in Asia as rising concerns over the impact of swine flu on the global economy kept traders cautious, damping buying interest.

Sentiment is also under pressure on expectations oil stockpiles held in the key U.S. market will stay well above seasonal levels.

The American Petroleum Institute industry group will put out weekly oil statistics at 2200 GMT, ahead of Wednesday's official data release from the federal Energy Information Administration.

"The trend is going to be downward...I think there's room to (fall) further. Sentiment is weak," said Ken Hasegawa at Newedge Japan.

On the New York Mercantile Exchange, light sweet crude futures for delivery in June traded at $49.04 a barrel at 0655 GMT, losing $1.10 in the Globex electronic session.

June Brent crude on London's ICE Futures exchange fell $1.21 to $49.11 a barrel.

Oil prices on both sides of the Atlantic tumbled Monday as the spread of swine flu from Mexico fueled uncertainty over the prospects for an economic recovery and by extension, the outlook for energy demand.

The World Health Organization raised its alert level overnight, with confirmed cases of infection in the U.S., Europe, New Zealand, Canada and the epicenter Mexico, where the suspected death toll climbed to 149. Several Asian countries also reported suspected cases, triggering risk aversion Tuesday across markets.

"It's possible for the market to drop to $45 a barrel" within the week, Hasegawa said.

The EIA, in its Weekly Petroleum Status Report due Wednesday, is expected to post an eighth straight weekly increase in crude stockpiles and only minor changes for products, which are above five-year average levels.

Commercially held crude inventories are expected to have climbed 2.3 million barrels in the week to April 24, according to the average prediction from six analysts polled by Dow Jones Newswires.

Stocks previously stood at 370.6 million barrels, the highest since September 1990.

Gasoline stockpiles may have declined by 300,000 barrels while distillates, which include heating oil and diesel, probably increased by 200,000 barrels, the survey showed.

Refinery utilization rates are likely to average 83.4% of capacity, unchanged on week.

Meantime, oil traders will also take their cues from movements in the dollar as well as equities, analysts said.

So far Tuesday, Asian share markets were mixed, with airline and tourism-related stocks staying weak.

The greenback fell to a fresh four-week low against the yen, which in theory should support the demand for dollar-denominated commodities, although the mood was cautious.

"Oil will be more decisive in following financial guidance lower rather than higher going forward, given decidedly bearish fundamentals," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

A two-day policy meeting of the U.S. Federal Reserve under way Tuesday could further lend direction, he added.

At 0650 GMT, oil product futures also lost ground.

Nymex heating oil for May slipped 169 points to 130.60 cents a gallon, while May reformulated gasoline blendstock traded at 138 cents, 132 points lower.

Both May contracts will expire at Thursday's settlement.

ICE gasoil May changed hands at $417.50 a metric ton, down $3.50 from Monday.



Life above 200-DMA....

IDFC is doing a balancing act around the 200-DMA. Technically, the 200-DMA is a critical level above which the bulls take charge and below which, bears look to take advantage. Reamrkably, the stock is testing its 200-DMA after May 2008.

On the daily chart (as shown in this report), the stock has been trading in a rising channel from a low of Rs44 in early March 2009, thus indicating strong build up in the stock. In fact, a detailed study of the daily chart suggests that stock has given a breakout past its 6-month resistance line with heavy volumes. In the same period, the stock made three attempts to break the resistance but failed. On Tuesday, it finally broke the crucial level with highest volumes in April 2009. Even if it declines from the current level, the short-term moving averages should act as a strong support for the stock.

IDFC was listed on the bourses in August 2005 at Rs 60, 76% premium to its issue price. Thereafter, it fell to a low of Rs44 in July 2006. Between July 2006 and January 2008, the stock saw a rally up to the levels of Rs229. A worldwide fall out in global financial markets brought IDFC back to the levels of Rs45 in October 2008. Since then, the stock has bounced back at several occassions from the critical support levels.

We believe the stock has formed a nottom at Rs44-45 levels. Rebound from here is in progress and further upside cannot be ruled out. Technical charts are appearing interesting from a long term view. The longer term target for the stock is above Rs 100, and corrections should be used as entry points. The near-term support is at Rs 56. We recommend traders to buy the stock in the range of Rs70-78 for a target of Rs 100 and Rs 105.

To see full report: IDFC

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty near month witnessed closure of long positions to the tune of 3.17 million shares whereas the May series added 5.60 million shares in OI. With the May futures premium narrowing from 10.30 points to 8.45 points we feel few long positions have been added at lower levels in yesterdays session. No aggressive long rollovers are witnessed in Nifty since

past couple of sessions

• The options data shows addition of 11048 contracts in 3500 call followed by 9760 contracts addition in 3600 call while unwinding of 9762 contracts was seen in 3300 call. The IVs of all options have surged since the overall volatility in market has risen. Some call writing
was seen in 3600 call whereas short covering was seen in 3300 call. On the other hand, accumulation of 13039 and 19356 contracts was seen in 3400 and 3500 puts where we feel some put writing could have happened at 3400 level. Almost all other puts witnessed unwinding in OI. The 3400 put with 4.80 million shares may continue to hold as a decent support for Nifty on closing basis in today’s session

• FII Index options depicted a rise in OI by 4.36% along with a net buy of Rs 831 crores

To see full report: DERIVATIVES 280409

>Daily Calls (ICICI Direct)

Sensex: We said, "Previous resistances can attract profit-booking ... However, till Friday's low holds, positive bias should continue ... " Gap-down opening held Friday's low, encouraging recovery to previous highs, where profit-booking was seen. While Sensex ended flat thanks to ICICI Bank, Realty lost 2.7%. A/D turned -ve.

The action formed a bull candle but with an upper shadow, which is indicating suspected profitbooking at previous resistance. Monday's profit-booking got absorbed without violating Friday's low. Today, see if any profit-booking can hold Monday's low of 11176. Positive if it does, else Green support line can be tested.

To see full report: CALLS 280409

>Daily Market & Technical Outlook (ICICI Direct)

Key points
Market outlook — Open flat on mixed global cues
■ Positive — FIIs & MFs Buying
■ Negative — Swine flu dampens economic outlook

Market outlook
■ Indian markets are likely to open flat, taking cues from the global markets. Asian markets were mixed in the morning trade on fear that an outbreak of swine flu could become a pandemic brought a new threat to the global economy, just as some economic indicators appeared to be bottoming out. The World Health Organisation is moving closer to declaring the first flu pandemic in 40 years as more people are infected in the US and Europe. Rupee is expected to ease for a second consecutive day on Tuesday due to month-end demand for dollars from oil refiners, and traders will be looking to the stock
market for direction

■ The Sensex has supports at 11180 and 11080 and resistances at 11490 and 11600. The Nifty has supports at 3440 and 3390 and resistances at 3515 and 3550

■ Asian stocks advanced, overshadowing declines among the region’s commodity producers. Nikkei increased 38.5 points, or 0.4%, to trade at 8,764.9. Hang Seng rose 55.1 points, or 0.4%, to trade at 14,895.5

■ US stocks fell on Monday on concerns the spreading of a new strain of flu could dampen optimism about the economy, overshadowing a sweeping overhaul of General Motors Corp and gains in biotechnology stocks. The Dow Jones fell 51.29 points, or 0.64 %, to 8,025.00. The S&P 500 dropped 8.72 points, or 1.01 %, to 857.51. The Nasdaq shed 14.88 points, or 0.88 %, to 1,679.41

■ Stocks in news: 3i Infotech, Mirc electronics, Omaxe, Sun Pharma, Glenmark Pharma, ONGC

To see full report: OPENING BELL 280409

>Smart Ideas (LKP SHARES)

MAY 2009

Focus Issue of the Month

We have analysed the composition of India's GDP and attempted to present the opportunities in each of the components in the wake of the ongoing slowdown in the focus issue for this month.

Company Reports

Integrated business model with robust order booking, which in our view should grow, going forward as revenues from government contracts start kicking in and the company would strengthen its market leadership. BIL growing at 75% and trading at 5xFY09E is an attractive investment bet.

With a dominant position in the railway haulage business we expect Concor to benefit from the growth in the logistics space driven by port capacity additions.

We expect the domestic rural demand to partly offset the lower growth in overseas business going forward given its large share in the ruralmarket and niche positioning.

FAG Bearings
Most profitable and de-risked bearing company trading at 4.5xCY'10E earnings is well placed to capitalize on an upturn in demand from its well diversified user industries.

The market leader in tyres should be done with the higher raw material inventory this fiscal and in our view the first half has seen the worst at MRF.

MIC Electronics
The pioneer in LED having seen the worst of the global credit crunch on its overseas business is beefing up its product offerings for the emerging opportunities in India.

SKF India
Investment phase in a highly challenging business environment would in our view enable the market leader to reap the benefits from next fiscal onwards.

Although gas supply and tariff structure regulations remain a concern, we believe that newer sources of gas supply would add to the top-line and we remain optimistic.

To see full report: SMART IDEAS

>Reliance Industries (BNP PARIBAS)

All priced in: time to get out

Recent rally overdone – no major catalysts lined up

RIL’s shares have gained 43% YTD, compared with the BSE Sensex at 15%. During this time, the gas sale ban on RIL has been lifted and the company has had favorable pricing of USD4.20/mmbtu to sell the gas (reflected in our TP). In addition, the company successfully started gas production and commenced sales from Reliance Petroleum Ltd (RPL). We believe all the above positives are priced in the shares at current levels. The current price factors in GRMs of 13.0/bbl and Petchem EBIT margins of 13.3%, which are significantly higher than our expectations, and also do not tie in with the global outlook for the refining and petchem businesses. For FY10, we expect consolidated GRMs at 9.5/bbl and petchem margins of 10.3%.

In-line quarter; no positive surprises
RIL reported its 4QFY09 results in-line with our estimates with PAT coming in at INR38.74b versus our estimate of INR38.53b. RIL’s GRMs came in at USD9.9/bbl versus our expectation of USD11/bbl. In our view, the GRMs were disappointing considering there was little crude volatility for 4QFY09 and lack of meaningful inventory losses as seen in
3QFY09. However, the weakness in refining was more than offset by the petchem business, which saw ~4% q-q increase in EBIT while the EBIT margins jumped from 13.1% for 3Q to 17.7% for 4QFY09 led by a combination of price increases and inventory valuation gains. Overall, the petchem business offset the weakness in refining.

Valuation – limited case for upside to TP
We are downgrading RIL to a REDUCE rating, primarily on the back of recent rally which we believe fully prices any near-term catalyst. Our TP goes up to INR1,450/share from INR1,322/share accounting for USD4.20/mmbtu for the entire production and change in house crude and currency estimates. We estimate GRMs of USD9.5/bbl and Petchem EBIT margin of 10.3% for FY10. We value the refining and petchem business at 6x EV/EBITDA, which is at the high-end of trough multiples for refiners and petchem companies as seen in the previous downcycles. We do not assign any option value to any block, wherein production/reserve news flow is not expected in the next 18-24 months.

To see full report: RIL

>Special Report: (ECONOMIC RESEARCH)

Magnitude of the declines in global growth during recessions: What explanations?

We will study the scale of the shortfalls in global growth during recessions, and we try to understand why this shortfall is so substantial during the current crisis.

What explanations can we think of?

− the greater correlation of economies due to greater global trade;

− the higher level of indebtedness, which requires more substantial deleveraging during recessions,
especially as the indebtedness is linked to asset prices;

− the inefficiency of monetary policies, due to the high level of indebtedness;

− the transmission of the crisis via finance.

To see full report: SPECIAL REPORT


Strategic Direction – Finally?

Strategic direction – signs of a more prudent, and return-oriented one — ICBK does appear to be following in deeds (and words) a more prudent, returnoriented and ‘market palatable’ strategic direction. This is showing through in better margins, lower/negative growth, signs of asset quality and balance-sheet mix management, and apparently greater respect for capital (while not closing out the growth option). There are gaps – off-shore strategy remains debatable, asset risks/funding gaps could widen and the new strategy could be environment induced (reverts, when economy turns); but combined with a meaningful management revamp, we are more positively biased than skeptical.

Asset deterioration continues, but is not worsening — ICBK continues to see almost 2.5%pa deterioration; poor and lags industry, but retail appears to be stabilizing (in-line with industry trends). There is 1.5% of new restructured loans (not a big surprise); we do see further deterioration (management cautious on outlook), but would not expect ICBK to lag industry here-on.

P&L disappoints, but there are positives — 4Q09 profits are down 35%, and 12% below our estimates; primarily on weak fee incomes (-30% yoy, flat qoq), and possibly suggesting some recent franchise damage. But margins have bounced 20bps qoq, and management has put out a robust medium-term outlook (well grounded too); ICBK’s core profitability problem being addressed?

Maintain Buy, High Risk — If ICBK were to continue down its espoused strategic path (with some tweaks and changes), and gets support from the economy; it could well retrieve more of its lost profitability and valuations.

To see full report: ICICI BANK

>Oracle Financial Services Software Ltd. (BONANZA)

Company Background
Oracle Financial Services Software Ltd (OFSS) is a world leader in providing products and services industry. The company has a host of products that offer a gambit of solutions and services for the BFSI segment

Investment Rationale
Growth in Turbulent economic condition: ‐ OFSS would witness growth of nearly 60% in FY09 over the topline of FY08. The company, which is a leader in financial services software, has been able to maintain a robust growth despite a slowdown in the industry that is its chief client. The increase in revenue vindicates company’s software solution prowess for financial institutions.

Strong product pipeline: ‐ Company has a strong product pipeline that commands premium in the BFSI industry. OFSS’s Flexcube suite of product is a market leader and its products have more than 320 clients world over. Its other products such as Reveleues and Mantas are also well received in the industry. Going forward, we expect the company’s new products such as daybreak etc would rake in more revenues for the company.

Growth from key area of software products robust: ‐ The Company has witnessed a robust growth in its product business, which includes product licensing. The products business, which is a high margin business and adds significantly to the bottom line, has witnessed good growth. The company has witnessed 33.3%.

To see full report: OFSS

>India Steel (Deutsche Bank)

Global steel production down 24% YoY

Global crude steel production declines for the seventh consecutive month...
The cavalry of global steel production cuts continued for seventh consecutive month with a 24% YoY decline in global crude steel production in Mar'09 taking cumulative decline for 1QCY09 to 23% YoY. EU and North America continue to stand out as regions with the most aggressive supply response with YoY production decline of 45% and 52% respectively in Mar'09. China is the only major region that has defied global trends with only a marginal decline of 0.3% YoY in crude steel production in Mar'09.

…But global steel pricing remains weak
Though the global production response has been very aggressive, we are yet to see any sustainable recovery in global steel prices. Our global steel pricing table (Page 3) shows a WoW decline across all major world geographies. Our global team recently cut the HRC price forecasts for U.S. and Europe by an average of 14% in 2009 and 7% in 2010 to reflect market surpluses and reduced costs.

Demand scenario in Europe remains weak; more production cuts required
While Europe has been quite aggressive in reducing steel production – down 44% in 1QCY09, our global steel team believes that it lags US in the inventory destocking cycle and more production cuts are likely required to restore the demand supply equilibrium. Arcelor Mittal has already guided for the continuation of its steel production cuts in Europe into the second quarter in response to the exceptionally weak economic conditions.

Marginal capacity in China remains the key focus area
China continues to stand out as the only major region in the world that has not participated in the global steel production response. The importance of China in the present scenario can not be over emphasized given that its contribution to global crude steel production has increased to 49% in 1Q’CY09 from 38% in CY08. The flexible excess capacity in China remains nimble in responding to the fluctuating cash margins. Though our Chinese steel analyst estimates that the cash margins are negative now, he also expects the cycle to repeat itself over the
course of 2009.

Reiterate SAIL as top pick
We continue to prefer SAIL (SAIL.BO, INR108, BUY) as our top pick in the Indian steel sector. The high exposure to domestic demand and low risk government funded projects provides visibility over SAIL’s ability to push volume sales. Also, strong balance sheet and net cash position removes any refinancing risk. We value SAIL on a FY10 EV/EBITDA of 2.7x leading to a TP of INR108/share. Tata Steel (TISC.BO, INR263, HOLD) remains a Hold with its high exposure to the weak. European steel market through Corus and highly levered balance sheet. We have a TP of INR192/share for Tata Steel based on SOTP valuation. A protracted downcycle in steel remains the biggest downside risk factor. (See page 4 for details on valuation and risks).

To see full report: INDIA STEEL

>FMCG Snippet (CLSA)

Price cut to help maintain volumes & prevent consumers from down trading to cheaper brands…

Margins in Soap & detergent segment to remain intact…

The Story....

The recent announcement of a price cut by FMCG giant, Hindustan Unilever Ltd. (HUVR.IN) (HLL.BO), in order to provide a boost to its volumes, was very much in line with our expectations…

“With the inflation in input costs beginning to recede and prices of key FMCG inputs, such as
palm oil, LAB and packaging material climbing down significantly in the past two months, we believe that HUL will pass on the benefits of the softening in commodity prices to consumers, which will result in a surge in the company’s volumes, going forward.”

(From First Global’s, “Hindustan Unilever Ltd. ((HUVR.IN) (HLL.BO): Passing on of benefits of softening of commodity prices to drive volumes; reiterating Moderate Outperform”, dated February 4, 2009).

Since the benefit of lower commodity prices and consequent price cut was predicted and modeled in, our estimates for HUL remain unchanged. The ongoing recession, which has already led to a reduction in discretionary spending, is now making consumers increasingly price-value conscious even in the case of their daily necessities. HUL has chosen to reduce prices in the lower and mid segment over the premium segment, as the former is comparatively more price sensitive. Moreover, the intense competition from local players in
the soap & detergent arena is keeping HUL on its toes on the price front. In several cases, HUL has opted to increase the package weight/volume, thus bringing down per gram costs, instead of directly reducing prices. It has increased the weight of its Wheel Green detergent powder packet by 50 gm, while the weight of its 115 gm Lifebuoy toilet soap has been increased to 120 gm, resulting in a benefit of 8.3%% and 4.2% for consumers respectively. HUL’s bold move appears to have kicked off a price war, with P&G also taking a price cut of 19.35%, to Rs.50, on its 750 gm pack of Tide detergent. We believe that the price cut will help HUL maintain its volumes, which had declined sharply in Q4 FY09, and also prevent consumers from down-trading to cheaper brands, though the company’s margins in the Soap & detergent segment will not get affected materially.

Cutting prices to lure consumers…
At the beginning of Q1 FY10, which is the peak period for soap & detergent sales, HUL has raised the weight of its Stock Keeping Units (SKUs) instead of changing the price point, as raising prices again after cutting prices could negatively impact sales. Also, companies like to stick to ‘round-number’ pricing like Rs.10/-, Rs.25/- etc. Hence, HUL has increased the weight of Wheel Green detergent powder by 50 gm, but has kept its prices unchanged, while the weight of Lifebuoy toilet soap has been increased from 115 gm to 120 gm without changing its existing price of Rs.15 per piece. Thus, HUL has passed on a relief of 8.3% and 4% on Wheel and Lifebuoy respectively to consumers. The strategy behind the price cut is to enable the company ride out the recession and at least maintain its volumes by retaining
consumers through attractive prices.

To see full report: FMCG SNIPPET