Wednesday, March 4, 2009

>Oil Sector (ENAM Securities)


Given the highly uncertain global enviroment, we have looked at different oil price scenarios and the resultant impact on the sector

# Oil between USD 50-60/bbl: ONGC realization rises, Under-recoveries begin to burden PSU ONGC realization rises, Under-recoveries begin to burden PSU OMC's

# Oil > USD 60/bbl: Pvt sector booms; PSUs under pressure from mounting under-recoveries

# In line with deteriorating demand fundamentals, we have reduced our crude oil price forecast to USD 53/bbl (from USD 55/bbl) for CY'09 and USD 60/bbl (from USD 65/bbl) for CY'10.

OMCs clear gainers

# Negligible under-recoveries in FY10 if crude oil lesser than USD 50/bbl

Over-recoveries on auto fuels to largely compensate under-recoveries on kerosene and cooking gas

Every USD 1/bbl fall below UD 49/bbl, translates into over-recoveries of Rs 34 bn to OMCs in case of no fuel price cuts.

# Serious impact on ONGC bottom-line only in case crude remains below USD 45/bbl

Rupee depreciation will limit fall in crude oiul realisation in rupee term

Cairn valuation more vulnerable in case of falling crude oil price as NAV gets hit

# Further triggers could be de-regulation and easing liquidity issue for OMCs

PSUs remain good defensive bet; switch from HPCL/CAIRN to IOCL/BPCL/ONGC

# Among OMCs, we prefer IOCL/BPCL vs HPCL due to better earnings visibility and lower vulnerability to high crude prices

IOCL benefits from high pipeline and investment income while BPCL benefits from high share in auto fuels market

# Among upstream, we prefer ONGC due to attractive valuation and relatively stable earnings

De-regulation of auto fuels could lead to re-rating of PSU oil pack

# In short term, may limit OMCs over-recoveries on auto fuels.

# But more visibility on earnings front going ahead

Strong balance sheet for ONGC; while liquidity problems easing for OMCs

# Issuance of oil bonds by the GOI and creation of SMO window by RBI has reduced liquidity problem for OMCs

# Fall in crude oil prices has further reduced working capital requirements

To see full report: Oil Sector

>Market Insight (RELIGARE)


Dow closed in the negative but all Asian markets are positive. Our markets witnessed some sell-off yesterday in the latter part of the day on bad global cues. We continue to believe that the situation in the US remains serious and more downside to the markets from current levels cannot be ruled out. However, we believe that any downside form current levels should be used as an opportunity to build up a long-term portfolio. We expect some bounce back in the market today.

  • Dow : Negative
  • Asia: Positive
  • Day’s view: Positive

To see full report: Market Outlook 04-03-2009

>Tata Steel Ltd. (EMKAY)


Strong performance, bleak outlook

Key highlights

* The average realization for Corus was around USD1,250/t as against our estimates if USD820/t. The realizations were better than fetched by ArcelorMittal from its European operations, which were to the tune of USD950/t. However, the management has guided that the average realization for 4QFY09 will be lower than 3QFY09 as the major reduction in realization was there in the month of Dec ’08, the full effect of which will be visible in 4QFY09.

* The company is taking various measures to reduce cost of production. The average cost of production for Corus was USD1,168/t as against our estimates of USD1,000/t. The management expects to receive operational cash savings of GBP600mn in 2HFY09 through various cost saving measures for Corus. The company also expects to receive synergy benefits in India and UK operations to the tune of USD226mn. In first 9MFY09, Tata Steel has realized synergy benefits of USD186mn.

* The outlook on Indian operations is optimistic, with the management guidance of 4QFY09 volume of around 1.5mt as compared to 1.1mt in 3QFY09. Till Feb ’09, it has done volumes of 1.1mt

* The outlook on Corus seems to be under some pressure with the auto and construction sectors witnessing 40-50% drop in demand. Around 2/3rd of Corus revenue comes from construction, automotive and domestic appliances and distribution segments.

* 30% of the deliveries of Corus are to the automotive sector, which are on contract. These contracts are due for renegotiation and the management expects that there might be some pricing pressure.

* The company has stopped purchasing additional coking coal and iron ore since Oct ’08 and has sufficient inventory to sustain the planned production. However, these inventories have been purchased at higher cost and due to subsequent fall in prices there has been inventory write downs to the tune of Rs17.4bn.

* Around 60% of Corus raw material contracts are due for renegotiation in Jan ’09 and balance 40% in Apr ’09. These contracts are expected to be signed at 40-50% lower rates as compared to FY09 as the current spot prices of iron ore and coking coal are ruling at 30-40% lower than contract rates.

* The 2.9mtpa expansion program at Jamshedpur is progressing as per schedule and the plant is expected to be operational by Dec ‘10.

To see full report: Tata Steel

>Sintex Industries Ltd. (EMKAY)

Attractive Valuations

Downward revision in earnings by 19% and 26% in FY10E and FY11E
We expect the current economic situation to create stumbling blocks in key business verticals of Sintex, leading to downward revision in revenues, EBITDA margins and earnings estimates for FY08-FY11E. We expect the (1) standalone custom moldings vertical to be impacted by slowdown in the auto sector, commodity price deflation and moderation of growth in electricals, (2) prefabs vertical to be impacted by lower tower capex rollout by telecom operators, (3) monolithic construction vertical to be impacted by delay in new order booking and commodity price deflation and (4) subsidiaries to be impacted by global slowdown. Consequently, we have revised our revenue estimates by - 4%, -22% & -29%, EBITDA margins estimates by -38bps, -150bps and -143bps and earnings estimates by 13%, -19% and -26% for FY09E, FY10E and FY11E respectively. The earnings upgrade in FY09E is due to inclusion of FCCB in debt instead of equity earlier. We expect revised earnings CAGR of 23% during FY08-FY11E with earnings of
Rs23.7, 24.8, 29.6 in FY09E, FY10E and FY11E respectively.

Standalone custom moldings to be the worst affected segment
We expect the standalone auto custom moldings business of Sintex to be hit by the (1) slowdown in the domestic auto sector and (2) commodity price deflation, leading to drop in realizations. Consequently, we have factored no growth in standalone auto custom moldings during FY08-FY11E versus CAGR of 12% earlier. Further, the expected moderation in growth in the domestic T&D sector and slump in Industrial capex is expected to impact the high growth standalone electrical custom moldings. Consequently we have factored in revised revenue CAGR at 14% in standalone electrical custom moldings versus earlier CAGR of 40%. Thus, we expect 8% revenue CAGR in standalone custom molding vertical during FY08-FY11E versus 30% CAGR earlier. The above vertical is lead contributor to earnings revision impacting FY10E and FY11E earnings by -6% and -8% respectively.

To see full report: Sintex