Tuesday, April 21, 2009

>Gold higher on physical, safe-haven buying

London -Spot gold rose for the second straight day Tuesday on physical demand from Asia and doubts about the nascent recovery in equity markets. The tumble in financial stocks Monday unnerved investors, prompting them to seek cover in safe-haven assets like gold. Further equity losses could drive gold above its near-term resistance at $890 a troy ounce, traders said. At 0956 GMT, spot gold was trading at $888.80/oz, up 0.4% on the day. Spot silver followed gold's lead and was 1.1% higher at $12.18/oz. Spot platinum bounced 0.5% to $1,165.50/oz, while spot palladium was 2% higher at $226.50/oz. The Dow's reversal Monday after six weeks of gains gave fresh life to worries that the banking industry remains vulnerable. "It goes to show...you get some bad data and the old fears reassert themselves very quickly," said a precious metals trader in London. Further weakness in equity markets are likely to sustain investor interest in gold and force more shorts to cover, he said. Traders said a break above $890/oz could lead to a test of $900/oz. If gold closed above that level, it would break its recent downtrend and possibly generate enough momentum to rally to $940/oz, said James Moore, an analyst at TheBullionDesk.com. European equity markets were higher Tuesday, which could damp some of that safe-haven demand. Should equity markets retain those gains, gold may retrace but hold above last week's lows, traders said. Physical demand from India remains steady since its reappearing recently after being absent in the first few months of 2009. Demand from East Asia is also healthy, and this stronger bid should continue to provide a near-term bottom at $865/oz, which may keep investors interested, said Narayan Gopalakrishnan, a trader at Swiss bullion house MKS Finance. "As long as we hold $865/oz, we can still see minor interest coming in," Gopalakrishnan said.


>Talking Point (Deutsche Bank)

Deficit spending: You'd better keep an eye on it, too

Deficit spending can be helpful to overcome the current economic crisis. However, the necessity to stimulate the economy does not justify public spending sprees. Economic stimulus programmes come with a caveat. Strongly increasing public deficits and public debt can weaken major forces of economic growth.

In Germany as well, higher government expenditure is the policy of choice to fend off the economic crisis. Two stimulus packages of EUR 80 bn have already been enacted by the federal government. The spending programmes, which equal roughly 3% of GDP, are contentious. While advocates expect a sustained boost to economic growth, critics fear that the packages will fail to heal the recession.

The programmes are designed to reinvigorate the weak demand for goods and services and prevent a free fall of the economy. The German government and other advocates do not only count on the direct effects of the rise in public spending. They also expect a boost to private-sector consumption and investment activity. Under the optimistic scenario, the measures will not only push up GDP by EUR 80 bn; the actual added value is expected to be higher as the measures will have a positive effect on the business climate. This will keep more employees on the payroll and thus stimulate consumption and investment, it is argued. But economic stimulus programmes come with a caveat. They push up national debt. This is part of the deal, so to speak. If the government now wants to spend more for economic stimulus programmes such as road infrastructure projects and the refurbishment of public buildings, and supports many citizens wishing to buy a new car by implementing the scrapping bonus, it must not, of course, finance these measures by simultaneous tax increases. The only instrument for the government to stimulate demand is debt financing.

To see full report: TALKING POINT


Weakness likely to persist in Q4 FY09.
Q4 FY08 had seen record quarterly revenues for the three hotel companies under our coverage. However, the slowdown in Revenue Per Available Room (RevPar) growth worked its way through 9M FY09 with Q3 FY09 bearing the burnt of recession and terror attacks in Mumbai. Dec'08 has proved a 'wipe-out' month for the indudtry as luxury market ARRs fell 15% yoy. The weakness in room rates and occupancies is likely to persist in Q4 FY09. We expect revenue declines ranging from 16-25% yoy, partly owing to the high-base effect of the last year.

Margin pressure may contiue unbated.
We expect margin pressure to continue unbated as revenues come under pressure yoy. Relatively fixed expenses such as fuel and staff are likely to impact operating margin. Indian hotels and EIH are expected to report more than 10 ppts drop in OPM.

Occupancies may improve qoq for Indian Hotels.
In the aftermath of terror attacks and holiday season, occupancies in business hotels dropped to ~50% in Dec'08, a sharp fall of over 24ppts yoy. However, we expect larger players such as Indian hotels to witness improvement in occupancy rate qoq from the Dec'08 trough. On the other hand, ARRs are likely to remain weak, due to ongoing economic weakness, especially in cities such as Bangalore where we estimate room rate decline of about 7-8% yoy and occupancies of about 63-68% in the quarter.

To see full report: HOTELS Q4 FY09

>Chambal Fertilisers and Chemicals (PRABHUDAS LILLADHER)

Expansion plan – On track

* De-bottlenecking of Gadepan-I urea plant completed: De-bottlenecking of the Gadepan-I urea plant has been completed and the commercial production has commenced from March 31, 2009. Post the de-bottlenecking, plant capacity has increased from 2850tpd (tonne per day) to 3100tpd. The de-bottlenecking of the Gadepan-II urea plant is on and expected to be completed during May 2009. It will increase the capacity from 2850tpd to 3000tpd. Total capex for the debottlenecking would be around Rs4,500m (Rs3,000m for Gadepan-I and Rs1,500m for Gadepan-II plant). Chambal Fertilisers and Chemicals (Chambal) is expected to get the KG basin gas from the current month. We believe that Chambal will add EBIT of Rs636m in FY10E on the back of de-bottlenecking of both the urea plants and use of the KG basin gas.

* Shipping business: Chambal has five Aframax ships in their portfolio (added three new ships during the year) at present. The company has a long-term time contract till the end of FY10 for all the ships, with an average freight of US$22,000 per day per ship. They will further add one more ship in Q4FY10. Chambal has taken a debt at an attractive rate of Libor plus 40bps to 90bps for the shipping business. All the ships are fully insured.

* Debt and bond position: At present, Chambal has total debt of Rs21,500m, which consists of a long-term debt of Rs18,000m and working-capital debt of Rs3,500m. The company has a fertiliser bond of Rs3,800m in their books. They could book a provision for MTM losses on such bonds. We have assumed 5%
discount i.e. Rs190m in our FY09E estimate.

* Valuation: Chambal’s 90% of the urea business is on cost plus 12% post tax ROE (i.e. fixed earning) basis and shipping business is on time contract till FY10E. Hence, we believe that a downward pressure on earnings would be less. We maintain an “Accumulate” rating on the stock.


>United Phosphorus (CITI)

Buy: Strong Biz, Concerns Overdone; Raise TP to Rs183/sh

* Concerns overdone — We believe that UPL’s valuations do not reflect its strong fundamentals due to overplayed concerns on industry growth and pricing prospects. Our discussion with UPL and channel checks along with recent
earnings and management speak from global peers suggest that while the outlook is more cautious than 6 months back, things are better than is being perceived. Maintain as one of our top picks with a 14% higher TP of Rs183/sh.

* Global cues — Besides good results, management speak from global peers indicate that farm economics and demand are sound across markets, with the exception of some LatAm countries. The outlook for the next fiscal is strong in most cases and concurs with our positive view on UPL’s business.

* B/S strength could throw up opportunities — UPL has a steady B/S, with net D/E of 0.6x, low refinancing risk (most debt redeemable in 2011) and rising cash flows. As asset valuations come off, we believe UPL is one of the few
players positioned to be an active participant in any industry consolidation.

* Adjusting earnings — We believe conversion of warrants issued to promoters in Oct'07 is now unlikely. Our FY10-11E PAT estimates are lower by 4% due to lower other income, but the lower share count leads to c6-7% higher EPS.

* Core thesis — UPL is among the fastest growing and most profitable generics crop protection firms in the world. Its presence in regulated markets and low cost manufacturing base in India give it a competitive edge, while growing
scale and cash flows provide the ability to seed growth. At 7xFY10E earnings, the stock appears very attractive in light of the 30% EPS CAGR (FY08-11E).

To see full report: UNITED PHOSPHORUS

>Offshore rig sector (FIRST GLOBAL)

The Story…

The offshore rig sector has recently been witnessing a sea of change. With very little activity from the time when crude oil prices spiked and tanked in the early 80s, the offshore drilling and exploration space has remained quiet over the years. While the first Gulf War did create some interest in the sector, it proved to be short lived. Throughout the 90s until almost 2006, nothing significant really happened in this space. However, from around 2006 onwards, the massive rise in crude oil prices suddenly made the offshore rig space one of the hottest sectors, led by strong demand, all time high day rates, and significant investments made by the players themselves for procuring new rigs (leading to increase in orders for ship builders), as well as by investors looking to make their fortunes. Stocks belonging to rig providers became the favourites in the market and rig service companies earned handsome returns with their high operating margins. Then came the oil price crash – one that we had predicted:

“It is our case. Nay, stand: Crude Oil will tank (short term bear market rallies notwithstanding) to below $90 by this year-end, and by our reckoning, should hit $50 in the next 12 months’ time.”

Until a few months ago, when it was widely believed that the oil prices would go nowhere but up, the entire upstream space had become red-hot. However, all that has now changed due to the recent steep fall in oil prices, which has resulted in a sudden change in investor sentiments towards the sector. To make matters worse, the fall in oil prices has been accompanied by a crash in the global financial markets due to the credit crisis. The combination of these factors has driven down the stocks of rig service providers.

To see full report: Offshore Rig Sector


Could oil prices increase due to speculation?

Current trends in the spot oil market are not expected to be able to trigger a sharp increase in prices, even though the production cuts are pronounced, since there continues to be substantial excess capacity. The recent increase in the oil price is also linked to the appearance of several encouraging economic signs (recovery in China, etc.) and is therefore perhaps a leading signal of a stronger increase linked to speculation in addition to the rebalancing of the spot oil market seen at the end of the first quarter of 2009. It is thus important currently to determine whether the sharp increase in the oil price in 2007 and early 2008 were accounted for by speculation or not. If the answer is yes, we can again now fear an increase in the oil price that is not only due to the physical characteristics of the oil market.

We shall show, through the analysis of causalities and an econometric analysis that the futures market plays a major role in the formation of the spot oil price. The number of open long futures positions is the variable that most fully explains fluctuations in the price, which also depends on the imbalance of the spot market. This would seem to confirm the major role played by speculative positions in the formation of the spot oil price.

To see full report: FLASH MARKETS

>>Indian Banking Sector (MACQUARIE RESEARCH)

Bond yields, NPLs in focus

We preview the 4Q FY3/09E results for Indian banks.

Decelerating NII:
Net interest incomes will decelerate this quarter as a result of slowing loan growth and lower margins, in our view. Systemic loan growth has slowed from the October peak primarily because of disinflation; company revenues (and thus, working capital needs) have shrunk. Cancelled capital projects have emphasised the slowdown. NIMs have also been under pressure, due to aggressive benchmark rate cuts from the banks – the benefits from lower deposit rates will take a couple of quarters to offset this.

Bond profits will disappear: Bond profits are expected to reverse this quarter, as bonds collapsed over this quarter. Bond yields are up by almost 200bp over the quarter, reversing a 300bp fall in the previous quarter. Almost all banks benefited strongly from bond profits in 3Q FY3/09E, and that trend
should significantly reverse over this quarter.

NPLs pushed into FY3/10E: Despite the dramatic slowdown in the economy from October/November, we think it is too early for NPLs to show up in most P&L accounts. The worst period for NPLs is likely to be FY3/10E and FY3/11E, with probably an even spread of provisions. One of the key reasons
for the postponement is the window that the RBI has allowed banks to restructure assets: It allows banks to absorb the losses over a long period.

Revising forecasts: We are revising our forecasts for some of the banks under our coverage, partly due to the strong loan growth and margins that came up in 3Q FY3/09, and our view that the provisions will be postponed to later years.

We remain cautiously optimistic on Indian banks, and believe that:
* The valuations, in many cases, factor in an asset quality slippage situation that is too pessimistic.

*The deep interest rate cuts actioned by the RBI since October 2008 will
have a medium-term beneficial impact on the banks.

* We upgrade Bank of Baroda to Outperform from Underperform, given the belief that its core profitability is improving while NPLs will be cushioned by its high provision coverage. Our top picks in the sector remain HDFC (HDFC IN, Rs1,577, OP, TP: Rs1,738) and HDFC Bank (HDFCB IN, Rs1,037, OP, TP: Rs1,106).

To see full report: BANKING SECTOR

>What’s Happening? (ANAGRAM)]


• What’s Happening in the Markets.
• What’s Happening in the World
• What has improved?
• What’s Next ?
• What’s the outlook ?

To see full report:WHAT’S HAPPENING