Thursday, March 19, 2009

>Auto Sector 4 wheeler (RELIANCE MONEY)

Surprise spike in sales volume
Passenger vehicle sales numbers for the month of February 2009 came out to be better than expectations. Sales of companies have shown impressive growth during the month of February 2009 as the excise benefit along with improvement in financing situation by PSU banks have led to improvement in volumes. The CV segment continues to face weak demand but has been reporting sequential growth from the last two months on the back of accelerated depreciation policy and excise cut announced.

We believe that the LCV segment which has recently been offered the excise cut will benefit the most and is likely to show some improvement in volumes on the back of excise benefit. The M&HCV segment is also under the excise bracket but we don’t expect that this segment witness improvement in volumes mainly due to slowdown in the overall economy. It is noteworthy that despite the price hike taken by few players in the last two weeks of February the sales volumes have increased which is a positive signal and we believe this is largely due to the improvement in financing situation. Interest rates are likely to fall down further as RBI has cut repo and reverse repo rates by 50 bps. We expect passenger car industry would continue to report improvement on m-o-m basis due to excise duty benefit and rural market demands, but CV demand is likely to witness pressures as overall economy is still showing weakness.

To see full report: AUTO SECTOR

>Retail Banks (MERRILL LYNCH)

Retail to be key driver for NPL’s: CRISIL
We hosted a conference call with Mr. Tarun Bhatia, Head- Financial Sector Ratings, CRISIL, India’s leading credit rating agency, to have a perspective of the asset quality issues in India. CRISIL expects NPLs to rise sharply through FY10- 11 and reach 4.5%-5.0% of loans by FY11 from 2.3% in FY08. However, this incl. loans that may be restructured. This compared with BAS-ML est. of around 4% for NPLs and +6% (incl. restructured). As per CRISIL, retail is the key driver (pegged at around 5%); with corporate NPLs at 3.5% by FY11.

Retail NPLs: CVs; lower end mortgage to hurt
As per CRISIL, retail NPL formation could begin to peak around end of FY10; with retail NPLs rising to about 5% by FY11. Sectors that could see more pain could be CVs and smaller mortgages, especially loans of Rs1.5mn for most large HFCs. 10% of home loans could see EMI >60% of monthly salary (per CRISIL).

Corporate: SME to be a problem area
Within Corporate segment, CRISIL expects NPLs to come primarily from SME, impacted by export cycle (textiles, gems and jewelry, auto anc.). However, it was fairly sanguine on corporate and infra. loans. Gross NPLs in corporate segment forecast to rise to 2.6% (FY10) and 3.5% by FY11.

To see full report: RETAIL BANKS

>Real Estate (CITI)

High vacancy, weak demand hint at further downside risk in office space market — Cushman and Wakefield data suggests rentals for office space across key cities were down an avg 7% in 4Q08 vs. 3Q08 (Fig 8), with NCR, Mumbai and Pune experiencing the sharpest falls in rentals (8-13%). With a marked slowdown in demand, supply > absorption, vacancy levels up significantly (Fig 7), especially in peripherals of Bangalore, Chennai and Pune (16-18% in 4Q08), we see further downside risks to the office rental market.

Peripheral locations across key cities most at risk — OMR in Chennai registered vacancy of >40% in 4Q08; vacancy stood at 22% in Whitefield and Sarjapur Outer Ring Rd in Bangalore and 18% in peripheral areas of Hadapsar, Kharadi in Pune. Though rentals are already quite low in these locations (Rs25- 38/sf/mth), with slowdown in IT, we do not foresee any near-term recovery.

Supply, however, came off in 4Q08 — This is a trend across most cities (Fig 9- 14). Moreover, actual office supply in end-2008 is much lower than estimated at the beginning of the year, especially for Mumbai, NCR and Pune (Fig 16).

Ishaan sees some cancellations in pre-let commitments — Its total area let-out, pre-let/under option is now down to ~2.6msf vs. 2.9msf in Dec’08. Marked slowdown has resulted in cancellation of let-out options of ~0.4msf at its Hyd and Navi Mumbai SEZs and push back in est. timelines for several projects.

To see full report: REAL ESTATE


Order intake to improve in power segment; automation division under pressure: ABB India’s management indicated that while order intake in power segment is likely to be healthy, automation business is expected to witness slowdown. In CY08, segments like Iron and Steel, Cement and Aluminium contributed to bulk of the growth in the automation segment,
where the demand outlook is weak. We believe that automation products is the weakest link for ABB India (CY08: 23% of Revenues and 26% of EBIT) as it has the shortest order book (0.3x) and given the diverse business profile, capacity and resources need to be constantly adjusted depending on market conditions.

EBITDA margins to decline with change in business mix, pricing pressures: We expect share of revenues of automation business to decline from 42% in CY08 to 40% in CY09 and 36% in CY10; and share in EBIT to decline from 48% in CY08 to 42% in CY09 and 36% in CY10. Given the change in composition towards power business in CY09 / CY10, we expect EBIT margins to decline from 10.7% in CY08 to 10.1% in CY09 and 9.4% in CY10.

Higher than expected working capital, net cash at Rs2.8b in December 2008 (v/s Rs6.5b YoY): Working capital has witnessed deterioration and stands at 17% of revenues in CY08, v/s 8% in CY07. Also, net cash level has declined from Rs6.4b in December 2007 to Rs2.8b in December 2008.

Financials and valuations: We are downgrading our earnings estimates for CY09 by 3.5% and CY10 by 6.7% to factor in the business headwinds. The stock trades at PER of 14.8x CY09 and 15.5x CY10. Maintain Neutral with price target of Rs368/sh (15x CY09E).

To see full report: ABB

>Daily Derivatives (ICICI Direct)

• In yesterday’s trade, Nifty future saw covering in short positions along with some further long closure, which was followed by short rollover into the next series. The Nifty March series witnessed an unwinding of 741300 shares in OI accompanied by a nearly 1% rise in price and widening of the discount to 15.05 pts. The April series added 1.44 million shares in OI.

• The PCR-OI surged to 1.58 on account of huge addition of OI in the 2800 and 2700 strike Puts. An addition of 22299 contracts in the 2800 Put and 18643 contracts in the 2700 Put along with rise in IV. This indicates buying in these strikes. Also, addition of 9663 contracts in the 2600 Put with IV almost unchanged indicates some Put writing at this strike. On the other hand, 2800 Call shed 4727 contracts along with marginal rise in IV indicating some further unwinding of positions by Call writers. The maximum addition in OI (16882 contracts) among Calls was seen in the 2900 Call with drop in IV. Market participants are advised not to carry any aggressive long positions as far as 2800 is held as resistance on a closing basis and 2835 on an intraday basis. However, 2700 may still continue to be a good support for the market.

• FIIs were net buyers to the tune of Rs 222 crore. DIIs were net buyers to the tune of Rs 526 crore.

To see full report: DERIVATIVES 190309

>Daily Market & Technical Outlook (ICICI Direct)

Indian markets are likely to open flat, taking cues from global markets. Asian markets were trading mixed in the morning despite good news on the US Fed’s plan to buy treasuries to boost the economy. US stocks gained after the Federal Reserve on Wednesday stunned markets by announcing it would pump another $1 trillion into the ailing US economy by buying long-term government debt for the first time since the 1960s and by expanding its purchases of mortgage
bonds. We expect Indian indices to follow global cues and inflation data today.

Inflation for the week ended March, 7 is expected at 0.89% against 2.43% in the previous week.

The Sensex has supports at 8800 and 8700 and resistances at 9080 and 9160. The Nifty has supports at 2770 and 2750 and resistances at 2840 and 2850.

Asian markets were mixed despite the US Federal Reserve announcing its plan to buy $1 trillion of bonds that spurred speculation that lower borrowing costs will revive economic growth. The Nikkei fell 49.3 points, or 0.6%, to trade at 7,922.9. The Hang Seng fell 159.4 points, or 1.2%, to trade 12,957.7

US stocks rallied on Wednesday after the Federal Reserve surprised Wall Street when it said it will buy long-term Treasury bonds for the first time in four decades in an effort to revive the recession-hit economy. The Dow Jones gained 90.88 points, or 1.23 %, to 7,486.58. The S&P 500 advanced 16.23 points, or 2.09 %, to 794.35. The Nasdaq rose 29.11 points, or 1.99 %, to 1,491.22

Stocks in news: ICSA India, Essar Shipping, BEML and MindTree

To see full report: OPENING BELL 190309

>Asian Tech Strategy (MACQUARIE RESEARCH)

Asian brands gain shares – from strength to strength. The market share gains of LGE and Samsung are not new news, but the significant weakening of Won further powers up their advantage (Figure 1). Michael and Dohoon estimate that LGE and Samsung are likely to beat their 1Q09 handset shipment guidance by 5–10%. They believe that both are likely to see double-digit QoQ shipment growth in 2Q, with multiple new models. LGE is introducing four to five new models, while Samsung is gunning for 30 models. Importantly, our checks indicate that, with US telecom operators’ handset inventory depleted to as low as one week, it is likely that they will rebuild some inventory. They may have reduced inventory to six weeks in mid-2008 and to just one week in late 2008. LGE and Samsung have strong relationships with operators.

For the smartphone, Chialin estimates that HTC is shipping five new models in 2Q and expanding its Google phones to six operators from two in 1Q. At the lowcost side, the strength from Mediatek is well documented (Figure 3). Importantly, the Chinese government’s subsidy program on electronic goods is critical. Of the 250–300 hand models qualified by this program, 75% is powered by Mediatek’s solution, we estimate. Both smartphone and low-cost handsets are the areas of expected positive unit growth in 2009.

The semi and electronic components are benefiting. Our channels across Asia show that component suppliers are seeing a material pickup in order patterns to support new models to be launched in 2Q09 and inventory restock. Utilisation at semiconductors is picking up materially in March on the back of higher orders from 2G/3G basebands, application processors, CMOS sensors and RF. The former two are expected to lead to an increase of 300mm fab utilisation to 70–80% in April in TSMC and Chartered, while the latter could lead to improvement in the 200mm fab run rate (50%; Figure 5). Samsung’s System LSI fab is experiencing a similar trend. Japanese electronics suppliers such as Hirose and Murate are experiencing sequential improvement in their monthly order patterns (Figures 7 and 8), and George expects double-digit QoQ growth for the June quarter. Murata controls 30% of global MLCC handset market, while Hirose has significant exposure to Tier 1 and low-cost handset vendors.

To see full report: ASIAN TECH STRATEGY

>India Retail Sector (CLSA)

Pantaloon’s Feb-09 update: Marginal SSS growth in value and lifestyle, 10% SSS decline in Home Solutions. See inside for details

Subhiksha and Vishal: Feeling the heat of tight liquidity; Pantaloon also scores low on debt coverage and gearing. See inside for details

Reliance Retail: Aggressive ramp-up, but still running 18 months behind schedule. See inside for details

Rating agency downgrades Vishal Retail; financial position remains tight.

  • Sharp deterioration in profitability and high gearing levels (c.2.4x for FY09CL) has impacted Vishal Retail’s ability to service debt obligations forcing rating agencies to downgrade its short and long-term credit ratings.
  • While the company was recently able to roll-over Rs500m of short-term debt, albeit with some delay, management’s next task is to rollover Rs900m of additional short-term debt.
  • While some of the top level employees have recently resigned, more are, reportedly, expected to submit resignation.
  • While the management recently stated that Vishal has not been able to generate positive cash flows from operations in the first two months of 4QFY09, it is important to note that as on Dec-08, Vishal had debt of Rs7.6bn and inventory of nearly an equal amount.
Bharti Retail plans to close 4-5 of its 28 stores.
  • Bharat Retail, the retail arm of Bharti Enterprises, which operates a chain of 28 ‘Easyday’ supermarket stores in the North India (Punjab, Haryana), plans to close 4-5 of its non-performing stores.
  • In an interview to media group Chairman Sunil Mittal has said, “All of us have to go through that. Pantaloon closed its stores, Reliance closed its stores, we are going to close stores despite having 28. The more you have the bigger the problem you have obviously.”
Spencer’s plans to re-focus on new store opening.
  • Spencer’s Retail, CESC’s 94% subsidiary, plans to re-focus on opening new stores after having closed 50-60 loss making stores over the last six months which has reduced its store count to 310.
  • Spencer's currently has 35 large-format stores under the brand name of Spencer’s Hyper and plans to open 15 new stores in 2009.
  • During FY08, Spencer’s Retail reported sales of Rs8.5bn, pre-tax loss of Rs1.5bn and net loss of Rs0.9bn.
  • In Dec-08, the management of CESC had announced that the group will focus on achieving break-even for the retail business by Dec-09 and if Spencer’sis unable to achieve the desired performance, CESC may even look to exit the retail business.
Sodexo to acquire Radhakrishna Hospitality Services for US$100m
  • Sodexo has signed an agreement to acquire the Radhakrishna Hospitality Services Group (RKHS), one of the leading providers of Food and Facilities Management services in India. The deal is likely to be closed in the next 3-6 months.
  • Promoters of RKHS also own Foodland Fresh, Mumbai-centric chain of convenience stores. The group had recently closed nearly all of its 42 stores in the city.
To see full report: INDIA RETAIL SECTOR

>Reliance Infrastructure (UBS)

CRISIL places Reliance Infrastructure ratings on Negative Watch The credit rating agency, CRISIL, has placed its ‘AAA’ ratings on the Rs10bn and Rs3bn bond of RELI on ‘Rating watch with negative implications’. This reflects the fact that RELI is yet to finalise details of de-merger, proposal for which was announced in Feb’09. This follows similar downgrades by Fitch in 2008 - Fitch downgraded RELI’s rating, to AA+ in July 2008 and to AA in Dec 2008 which were more related to business diversification, and not corporate reorganisation.

Cost of funds could increase but don’t see any more downgrade risks
: Cost of funds could increase 50-100bps if downgraded but given the disclosed net cash levels (excluding Reliance Power), we do not expect further credit downgrades this year. We also believe that the downgrade by itself was to have been anticipated given diversification from being a pure utility business.

Financial closure for Sasan has not been announced yet
: Reliance Power’s 4,000MW UMPP in Sasan requires debt of ~Rs145bn, of which as per our channel checks, Rs120bn has been approved. We do not rule out the possibility of any rating downgrade holding up the financial closure in addition to well-known issues related to land acquisition. Nevertheless, once the business reorganisation is approved, we expect the holding company discounts could widen.


>Indian Power Sector (HEM SECURITIES)

Power is a critical component of any economy’s infrastructure without which its development and growth is a big hindrance. An economy’s growth, development and ability to handle global com-petition, all depends on the availability, reliability and quality of the power sector.
The demand for power is growing exponentially so the scope of growth of this sector is immense. This sector is dominated primarily by Public Sector Undertakings (PSU). The State and Central Government account for 58% and 32% of the generation capac-ity respectively while the private sector accounts for a mere 10%. A major part of the transmission and distribution factors are han-dled by the state utilities. The private sector is gradually making its presence felt in the power sector in distribution and is making a foray into transmission. Power sector is mainly funded through budgetary support and external borrowings were opened to private sector in 1991.

Segments of the industry

• Power Generation
• Power Transmission
•Power Distribution

To see full report: INDIAN POWER SECTOR