Saturday, March 14, 2009

>Indian Pharmaceuticals (MACQUARIE RESEARCH)

According to IMS, in the next four years US$109bn worth of branded drugs face the threat of generic competition, Although this provides a strong market opportunity for generic players to capitalise on in the medium term, the number of new molecules launched by the innovator companies is on the decline, and that could put pressure on their long-term growth potentials. Generics are forecast to have a CAGR of ~9% for the next five years Vs low single-digit growth for innovative products.

● Because of dominant positions of Indian players in the global generic space, they could be ideal partners or possible acquisition targets, in our view. Key competitive advantages include an established generic business, low-cost manufacturing, access to fast growing emerging markets and strong and low-cost R&D capabilities.

● As more innovative players evolve this hybrid model, we believe the competition may intensify further. While many promoters could be reluctant to cash out completely at this stage, alliances work out to be alternative arrangements in the medium term. However we believe that given the competitive intensify in the industry, being vertically integrated provides an edge.

● Although the European (GSK, Sanofi, Novartis) and US (Pfizer) large caps are already active in building generic capabilities in one way or another, we believe Japanese firms may also be active players in pursuing a generic strategy.


>Weekly Review (INDIA INFOLINE)

Key Indian stock indices advanced in a truncated trading week, tracking strong gains acroos the globe. The lowest rate of inflation in six and a half years (2.34%) also aided the recovery of Dalal Street. Finally, the BSE 30-shares Sensex surged 5.2% to close at 8,757. The NSE Nifty climbed 3.8% to shut shop at 2,719 shrugging off negative IIP data for January at -0.5% and continuous selling by the FIIs.

Metal stocks surged, led by gains in Tata Steel Following statements by Chinese premier Wen Jiabao that the government will allocate money for stimulating demand. Also, firm steel prices on LME lifted the steel stocks back home. Auto stocks like Hero Honda, Maruti and Tata Motors clocked impressive gains amid hope that the worst for the sector is over. Banking and IT stocks were among the other prominent gainers.

Financial and banking stocks led the reversal across major equity indices. Citigroup, JP Morgan and Bank of America said the banks were profitable in the first two months of the year. Bank of America CEO also said that the bank will not need further federal government capital. In Asia, both the Nikkei and the Hang Seng indices surged over 5%. The Chinese market fell due to poor economic reports.

To see full report: WEEKLY REVIEW 13-03-09


● TP revised to Rs195 — We are reducing our TP to Rs195 from Rs230 earlier on the back of our lower NAV to factor in the change in our crude price forecasts. Also, our NAV is now more in-line with that based on the futures curve. While the near-term outlook on oil has undoubtedly weighed on sentiment, it is being offset by the improving prospects for exploration upside in the Barmer basin (recent discovery, new development area) as well as on par execution. Reiterate Buy (1M).

● Oil forecasts revised — We are adjusting our estimates for Cairn India on the back of a revision in our global oil (Brent) forecasts to US$48/bbl (US$65) for 2009E, US$55 (US$75) for 2010E, and US$60 (US$80/bbl) for 2011E. Our long-term crude assumption (2012E onwards) is now at US$65 (US$85).

● Recent site visit addressed some concerns — Cairn’s recent site visit addressed a few concerns on execution and marketing, which along with weak crude, have dominated sentiment. Management was confident of delivering first oil by Q309 (through trucking) and by pipeline in Q409, reducing risks of delay. Resolution on pricing, cess, and multiple government nominees will have to wait.

● Surplus capacity could indicate upside — Surplus capacity being created (for 205kbpd of production) provides comfort and exhibits management confidence on reserve potential in terms of exploration (3 discoveries recently) and higher recovery (both for MBA and LPD resources). We factor in higher plateau – 185kbpd vs. 175kbpd – but still lower than nameplate capacity.

To see full report: CAIRN INDIA

>Microsoft Corporation (RELIANCE MONEY)

CORPORATE OVERVIEW: Microsoft is the world's largest software product company, primarily due to its dominant position in operating systems, which runs on over 90 percent of all PCs currently in use and business productivity applications, where its Office productivity suite has over 400 million users. The combination of these two strongholds provides MSFT with a strong barrier to entry for competitors, in our opinion. With MSFT generating over $1 billion every month in free cash flow, it had $23.7 billion in cash and investments as of June 2008, despite having paid out more than $116 billion for dividends and share buybacks from FY 04 to FY 08 (Jun.).


● We see total revenues rising by 0.1 percent in FY 09 (Jun.), compared to the 18 percent growth achieved in FY 08. Our forecast of flat revenues reflects our view of a severe economic recession. We expect client revenue to decrease 8.3 percent, based on our forecast of 1 percent growth in worldwide PC unit shipments in 2009 negated by increased pricing pressure due to lower selling prices in emerging markets.

● While we estimate 2 percent decline of overall corporate IT spending in 2009, we project that
server and tools revenue will raise 9 percent and Microsoft Business division 4 percent because of gain in market share in these businesses. We estimate Entertainment and Devices division (EDD) revenue will fall 3.5 percent on weak consumer spending and lower Xbox prices.

● We estimate an EPS of $1.72 for FY 09, compared to $1.87 in FY 08, reflecting lower operating
margins amid a difficult sales environment.


>Gold (UBS)

What is next for gold?
Where could prices go?
We believe that the current environment is one which can best be characterised as having a ‘low margin of error’ for central bankers; with the prospects for deflation/inflation as becoming more extreme. The high potential for policy error is generating considerable interest in certain assets which are perceived as ‘stores of value’ including gold.

Our econometric model indicates upside risk
Using a proprietary econometric model we have generated a probability cone for the future possible price path for gold. Using different environments for the level of inflation volatility, US dollar and absolute level of inflation we have determined that future returns on gold are likely to be positively asymmetric, with potential upside to US$2,500/oz.

Exposure to gold recommended
Our asset allocation team has moved gold to overweight from neutral. Given the broad uncertainties in the current macro climate we believe that investors should look to gold given its historic tendency to act as a hedge against these risks.

Equity performance
Our assessment of equity performance from 1900 suggests that gold equities are strong performers versus the market during periods of financial risk. During the 1929 crash, for example, Homestake Mining strongly outperformed the S&P. Preferred gold mining equities include Goldcorp, Anglogold and Lihir.

To see full report: GOLD


• Post merger Reliance Industries will issue 1 share for every 16 shares of RPL.
• Reliance Industries will issue 6.92 crore new shares thereby increasing the equity capital to 1643 crore. Consequently the promoter holding in RIL will reduce from 49% to 47%.
• The merger will be effective from 1st April 2008.
• The combined capacity post merger will be 1.24 million barrels per day
• The Reliance will emerge as the world’s 5th largest producer of the Polypropelene with the addition of 0.9 million tonnes of RPL.

Recent developments
• The recent developments may cause a pressure on RIL in the short run. The deepening economic crisis in Europe would keep the refining margins capped, delay in production of gas from earlier schedule and merger of RPL would add to the expenses in the initial period.

• Delay in production of gas from KG Basin‐ The Company is ready to start gas production from its eastern offshore KG‐D6 fields by April 2009. Previously the company had planned to start it from February 2009. The production of gas in the basin will be scaled up to 40 mmscmd by end 2009 and to 80 mmscmd by end‐2010. The selling price approved by the government is $4.2 though this price is currently is the matter of litigation.

• Rupee Devaluation‐ Due to rupee devaluation the loan liability has increased as the project cost estimated at Rs.27000 Cr had increased.

To see full report: RIL

>Oil & Gas India (HSBC)

Tightening crude market ahead? OPEC cutbacks have proved larger than we expected, down nearly 3MMbbl/d since September. In the medium to long term, we expect the rate of decline to accelerate in non-OPEC regions due to reduced maintenance spend. With projects being deferred due to weak prices and the credit squeeze, we see risk of a significantly tighter market at some stage in the next decade. Although we downgrade our FY10e Brent forecast to USD52.5/bbl (from USD71) due to weak short-term demand, we upgrade our FY11e forecast to USD75/bbl (from USD60) to reflect the impact of reduced capital spend on future supply.

Near term we favour growth play RIL. We expect RIL to record 29% growth in EPS in FY10e and continue the momentum to clock 77% growth in EPS over FY09-11e, notwithstanding a relatively higher base, on the back of the start-up of two large-scale projects. While RIL is trading at a PE relative (12-month forward) of nearly 121% to the Sensex, it trades at a FY11 PE of 7.8x (on consensus) and of 7.1x on our estimates. We believe this does not reflect its higher growth potential relative to the Sensex.

Medium term we favour crude plays. Owing to significant oil upstream business in their portfolio, the performance of both ONGC and Cairn India is linked to any upside in oil price. At the current price, the implied valuation of ONGC’s core proved reserves is at a 36% discount to our valuation. While Cairn India’s stock reflects the current oil price of USD60/bbl, owing to its high correlation with short-term oil price, it could offer an opportunity to benefit from the
expected tightness in crude price.

To see full report: OIL&GAS SECTOR

>Emaar Properties (SICO RESEARCH)

Emaar Properties announced their preliminary 2008 financial results on February 12, 2009. The major highlights of the press release are discussed below, however, we await the detailed financials and investor presentation for further clarity.

* Loss of AED1.77bn in 4Q08 – The last quarter of 2008 was unpleasant for Emaar Properties. The company not only reported worsening operational performance, but also announced a significant impairment of goodwill (AED1.77bn) as well as inventory write downs (AED0.92bn) on account of its US subsidairy during 4Q08. Overall, Emaar Properties posted a loss of AED1.77bn in 4Q08 compared to a profit of AED1.74bn during 4Q07. Similarly during the full year 2008, net profits declined by 54% (YoY) and reached AED3.06bn (AED0.50/share) compared to AED6.58bn (AED1.08/share) during 2007.

* Write down of development properties
– Emaar wrote down AED1.1bn worth of properties relating to its US based subsidairy WL Homes during 2008, of which AED0.92bn was crystallised in 4Q08. There have been no signs of improvement in business conditions in USA, while reports of lay-offs at the subsidairy have been in the news. Various news items such as the company’s plans to review operations, shutting down of some offices and the discontinuation of development work on an existing project in Colorado have appeared in the media which the company is yet to come out with any clarification.

* Impairment of goodwill adds insults to injury
– Goodwill impairment amounting to AED2.5bn (AED0.4/share), in relation to the acquisition of John Laing Homes in the US, was booked in 2008 - out of which AED1.8bn was impaired during 4Q08. Emaar had acquired WL Homes for AED4.02bn, including a goodwill of AED2.52bn, which now has been fully impaired in 2008.

To see full report: EMAAR