Saturday, May 9, 2009

>Asia fuel oil strengthens but demand doubts remain

Singapore - Expectations of tightening supply is lifting sentiment in Asia's physical fuel oil market this week, but it remains to be seen whether this strength can be sustained against the weight of a suspect demand outlook.

The global economic slowdown slashed demand for residual fuel in the core marine and power sectors in the first quarter, causing stocks to build up to 21 million barrels as of Wednesday in Singapore, Asia's oil hub.

Supply may tighten in May, however, as the Europe-to-Asia arbitrage window has closed and refineries are expected to produce less fuel oil during the second quarter maintenance season.

"May crude runs are likely to be lower," due to poor margins, an Indian refiner said.

Refineries in several Asian countries, especially those in Japan, plan to reduce crude runs in the April-June quarter by at least 10% on year, as refining margins have been cut by weak distillates demand.

Supply cuts by the Organization of Petroleum Exporting Countries have also made heavy sour crude more expensive, causing some refiners to switch to lighter grades with lower fuel oil yield, traders said.

Asia, which gets the bulk of its residual fuel supply from the West, is unlikely to get more supply from Europe in May as the arbitrage window is "closed by a few dollars," a Singapore trader said.

While there is still some time left to fix May arrivals, there isn't much oil in Europe "to be pointed this way", he said.

Some of the Middle Eastern supply has recently been diverted to Europe, and exports from the region could fall as domestic demand starts to build up in June with the start of the Middle Eastern summer, traders said.

Weak Demand Weighs

On the demand side, lower fuel oil prices earlier this week have drawn inquiries from the key China market, and buying from Japan, South Korea, Vietnam, Taiwan and Indonesia has rebounded slightly.

Wholesale gasoline and diesel prices in China are rising and could prompt independent refiners to raise operating rates. These refiners use straight-run fuel oil as feedstock, as they aren't allowed to import crude oil.

"It's easy to raise prices (of oil products) but hard for them to fall. So the government is likely to maintain prices at current levels to ensure healthy refining margins," a Chinese trader said.

In Japan, low-sulfur fuel oil demand revived after Tokyo Electric Power Co. failed to restart its Kashiwazaki-Kariwa nuclear power station.

Pakistan State Oil's large fuel oil requirements for May-July could also help to tighten supply in the Middle East.

But some traders doubt that the demand is sustainable.

China's demand could wither if crude continues to recover and push fuel oil prices higher, they say.

High stocks and large inflows due in April also continue to weigh on sentiment.

"There's still an awful lot of oil on its way," the Singapore trader said.

"It's far more than what we need in Singapore and bunker demand is still subdued," he said.

Average monthly bunker sales at Asian ports this year have fallen about 10%-20% on year, according to traders estimates.

Tepco is still keen to restart its nuclear plant by summer, and if liquefied natural gas prices drop as expected it could pull some operators away from fuel oil.

Meanwhile, exports from the U.S. and Carribean Sea to Asia could rise in May to "well over 2 million tons", a second Singapore trader said, adding that some of these cargoes had originated from Europe.

"I am not convinced we're going to be tight. Demand is still falling and we don't need that much oil," he said, pointing out that the market is still in contango.

"The key is whether the Middle East will slow down (fuel oil) exports, but their (domestic) demand is falling as well. We're already seeing May barrels from Saudi Arabia," he said.



■ Revenues higher by 15% yoy to Rs7.5bn, as overall PLF and average realizations improve.

■ PAT stood at Rs 940mn, higher by 9% yoy, higher than our estimate.

■ Budge Budge II progressing well, expected to commercialize by September-09.

■ Spencer's estimated loss for FY09 stands at ~Rs2.5bn, higher than our estimate.

Recommendation parameters for fundamental reports:

Buy - Absolute return over +10%

Market Performer - Absolute return between -10% to +10%

Sell - Absolute return below -10%

To see full report: CESC

>Jindal Saw (MF GLOBAL)

As expected Jindal Saw declared strong Q1CY09 results

Net sales was up by 53.7% yoy at Rs 14,636 mn in Q1CY09. The company sold 99,500 ton Saw pipes (up 1%), 68,200 ton DI pipes (up 12.5%), and 18,800 ton Seamless pipes (up 22.1%) respectively. Of the total sales, 73% was contributed by domestic demand while rest from overseas market.

Blended margin was lower by 279bps yoy to 12.6% on account of higher raw material cost and higher share of outsourcing and traded goods, however it was flat on qoq basis.

Blended EBITDA was around Rs.9,896 per ton of pipes sold in Q1CY09 against Rs 9,695 in Q4CY08 and Rs8,403 in Q1CY08. EBITDA increased by 25.9% to Rs1,846 mn in Q1CY09.

Interest and depreciation cost was higher due to capacity expansion undertaken in CY08.

The company reported net profit of Rs979mn and EPS of Rs18.8 in Q1CY09 up by 14.5%.

To see full report: JINDAL SAW

>Alpha Strategy (BNP PARIBAS)

Index targets raised on EPS turnaround
  • We are raising our country index targets by 23% and increasing Taiwan,India and Indonesia to Overweight.
  • Future EPS expansion in markets following 6 months of PE multiple expansion is the main driver of the upgrade.
  • Asian markets are benefiting from substantial capital inflows as investor risk appetite increase as signaled by VIX, VDAX and the KIX. Risk of a short-term correction remains, but substantial cash waiting on the sidelines implies correction will be shallow.
Earnings turnaround
The key change in our assumptions, which has resulted in across the board increases in our index targets, is the revised outlook for earnings. Regular readers will be familiar with the Fair Value Earnings Model (FVEM), which we introduced in the Nov 2008 Alpha Strategy report – see appendix for model explanation. Data from the model highlights a dramatic change in the
market’s expectations for earnings. As recently as February, the model signaled a 10% contraction in 2009 EPS, which was in line with consensus. This has now changed to an implied 24% growth for 2009 EPS as of the end of April and compares to consensus EPS forecasts of an 11% contraction.

Earnings expansion takes over from multiple expansion
The past six months have been characterized by multiple expansion, as reflected by the current PE multiple for Taiwan, which is trading on 40x 2009 EPS forecasts. The next six months will be characterized by market expectations for increased earnings forecasts. Initially this will be through an improvement in the second derivative – the earnings revision index and the ratio of earnings upgrades to downgrades; however, it will eventually give way to an increase in actual earnings.

To see full report: ALPHA STRATEGY

>Indian Cement Industry (UBS)

Turn positive on the sector

Turn positive as capacities get delayed; pricing pressure unlikely to materialise
We turn positive on the sector as: 1) we believe cement prices are unlikely to fall in FY10 on a YoY basis—based on our channel checks, we lower our excess capacity estimates (from 22-24% to 15% for FY10-12 on expected project delays/cancellations); 2) we estimate higher despatch volumes as we raise our capacity utilisation estimates to around 85% from around 80%; 3) higher consolidation (top two/five companies have 38%/58% capacity) will enable supply to be more responsive.

Assume demand to grow conservatively at 5% in FY10
We estimate cement demand to grow at 5% in FY10 in line with UBS’s India GDP forecast of 5.1%. Historically, cement demand has grown at an average 1.4x the real GDP growth rate. We believe cement growth in excess of 5% will further reduce excess capacity in FY10, alleviating concerns on price declines.

Raise our net realisations, volume assumptions; factor in lower coal costs
We now factor in no YoY decline in average gross prices for FY10 though we estimate average net realisations to increase by around 4% YoY in FY10 due to excise cuts (4%) and recent price hikes (we earlier estimated declines of 8-11% YoY for FY10). We factor in higher despatch volumes. We assume lower coal costs of US$90/100/ tonne for 2009-10 (US$115-121/tonne earlier) but this is offset by our higher FX assumption of US$/INR of Rs54.95/52.13 for 2009/10 (earlier Rs48.75/Rs46.13)

Preferred picks in the sector: Grasim and Ambuja
Our preferred picks are: 1) Grasim due to front-loaded capacity addition and a significant increase in captive power capacity; and 2) Ambuja due to a significant increase in captive power capacity, its net cash position, and a significant scheduled cement capacity increase over 2010. We also have Buy ratings on ACC and India Cements.

To see full report: INDIAN CEMENT INDUSTRY


Removed from Asia Pacific Conviction Buy List

Off Conviction list, but maintain Buy on still resilient prospects

What happened
We remove ICICI bank (ICICIB) from our Asia Pacific Conviction Buy list as the stock has breached our previous target price. ICICIB’s share price has risen by 22% since we added it to the Conviction Buy list on April 27, 2009 vs. a +7% move by the BSE index. Over last 12m, ICICIB fell by 39% vs. 31% decline for BSE. We reiterate our Buy due to: 1) improving earnings growth prospect; 2) reduced concerns about risk profile of assets; and 3) a mean reversion in its multiples as a result of the strengthening fundamentals. We raise our 12-m TP by 11% to Rs590 on upside to near term as well as long-term growth expectations.

Current view
Our constructive view on ICICIB is based on: 1) reduced stress on funding position from lower wholesale costs domestically and globally; 2) improving visibility on growth returning back to sustainable levels by 2010E; 3) cost reduction measures that would likely put the bank in an
advantageous position when growth returns back to sustainable levels; 4) continued focus on profitability; and 5) a moderate valuation (1.2X 09E P/B vs historic median of 1.6X) despite the run-up in share price since March 2009 lows. While the ROE would likely remain low through 2011E, rising ROA together with increase in leverage brightens the prospect of ROE returning back to historic mean of over 16% in the long-term. We believe this would likely remain as a catalyst for the mean reversion of valuation towards historic P/B median levels of 1.6X. We raise our 2009E/2010E EPS by 7%/5% on higher NIM, lower operating costs and progressively
declining credit costs. We also introduce 2011 estimates. Our 12-m TP of Rs590 is derived using SOTP methodology. We value the banking business at the mid-point of GS CAMELOT-derived P/B multiples and ex-growth value. We value the strategic investments of ICICIB using
multiple methodologies.

To see full report: ICICI BANK

>Reliance Industries Ltd (JP Morgan)

Embracing a 2H recovery; Raising PT to 2300

Recovery’s Child… RIL earnings, valuations are leveraged to the global economic recovery. JPM global economics team believes that global data points are tracking a 2H recovery scenario. We raise our FY11 refining margin estimates and align our March-10 PT to reflect higher earnings, risk appetite. Maintain OW.

…with unique growth visibility: RIL is one few companies in the Asia Energy, Chemicals space with earnings growth visibility. Ramp up in refining) new volumes can compensate US$5/bbl drop in GRMs) and gas volumes will drive 35% earnings CAGR over FY09-11E.

Is there steam in this rally? Yes, in our view We are raising our Mar-10 PT to Rs2,300, based on raised earnings. We also raise our PE multiple to 11x (from 10x earlier) as earnings visibility, risk appetite will improve further, if recovery pans out in 2H09.

Green shoots abound… Our global economic team has raised US and Japanese growth forecasts on back of positive datapoints. Demand growth in India is robust, particularly for polymers, and the margin environment is healthy with local petchem premium to import parity. Ramp up in E&P, new refinery revenues are further positives for RIL.

…but we would look out for the weeds: Apart from global economic risk factors, India elections results in mid-May could bring a fresh round of volatility. If the materials’ restocking is not followed through with end-demand, cyclical stocks could face a further leg down. RIL also faces legal and regulatory risks in gas and petroleum marketing business which could impact earnings and stock.

T0 see full report: RIL

>Canara Bank (ICICI Securities)

Canara Bank’s Q4FY09 net profit growth was robust at 55% YoY, driven by strong 41.5% YoY NII growth and high trading gains at Rs3.5bn. Despite ~Rs4bn still being classified as NPAs related to the Dabhol power project, GNPAs improved substantially 38bps QoQ to 1.56%. Restructured assets at Rs20.7bn (1.5% of total advances) were a positive surprise. We raise FY10E & FY11E estimates 16% and 14.6% respectively to reflect improved margin sustainability and traction in other income. We upgrade Canara Bank to BUY with target price of Rs252/share (FY10E P/BV of 0.9x). The stock trades at FY10E P/E of 4.4x & P/BV of 0.7x. Sharp rise in NPAs is the key risk to our call.

Advances growth to moderate; margins to sustain. High 29% YoY advances growth in Q4FY09 was driven by 65% YoY & 28% YoY rise in credit to corporate & SMEs respectively. NIMs rose 36bps YoY to 2.78% driven by 57bps YoY rise in yield on advances to 10.79%, while cost of deposits rose only 7bps YoY to 6.87% in Q4FY09. We expect the fall in cost of deposits to aid healthy NII CAGR of 17.9% through FY09-11E. NIMs are likely to sustain at 2.4% through FY11E.

Other income high on trading gains; costs rise. Other income growth at 18.5% YoY was driven by high trading profits of Rs3.5bn (versus Rs1bn in Q4FY08) and healthy core fee income growth of 20.7% YoY in Q4FY09. Operating expenses rose 26% YoY due to 48.6% rise in staff costs on Rs1.5bn provision for wage revision, leading to QoQ increase in cost-to-income ratio to 41% in Q4FY09.

Asset quality improved; restructured assets low. Asset quality improved substantially with GNPAs declining 38bps QoQ to 1.56%. Restructured advances at Rs20.7bn (~1.5% of total advances) were much lower than expected, surprising us on the upside. Given that the bank has maintained ~Rs4bn of Dabhol power project as NPA, the sharp QoQ improvement is commendable. Provisions were lower 5.7% YoY despite provisions on restructured assets. We model loan loss provisions at 100bps each for FY10E and FY11E.

Upgrade to BUY on improved earnings visibility. Canara Bank’s core operating profit growth of 10.2% and sharp improvement in asset quality are directionally positive. We expect sustained margins and traction in other income to be key earning drivers through FY11. We raise FY10E & FY11E estimates 16% & 14.6% respectively to reflect improved margin sustainability. The stock trades at FY10E P/E of 4.4x & P/BV of 0.7x. We upgrade Canara Bank to BUY with revised target price of Rs252/share (FY10E P/BV of 0.9x). Sharp rise in NPAs is the key risk to
our call.

To see full report: CANARA BANK

>India Essentials (MACQUARIE RESEARCH)

ICICI Bank (Downgrade to Underperform)
Too much too soon

We downgrade ICICI Bank to Underperform from Outperform following the recent rally in the stock price. We cut our target price to Rs436 from Rs465. Limited leverage to economic growth. We believe ICICI's ability to leverage on economic growth is constrained by the need to restructure the deposit base first – and we estimate this will take at least 4–6 quarters. Thus the upside, in case of a sooner-than-expected recovery, could be limited to fees.

Rocks on Stocks
Cashburn in 2009

Margins across Asia remain will remain low for several years as Asia digests a decade of over-investment. Asia's financial position deteriorated during 2008, as leverage ratios rose for the first time in a decade. This represents a major inflection point. An even greater increase will occur in 2009; even if restocking leads to a production rise in Asia over the rest of the year, many Asian companies will continue to burn significant amounts of cash.

Rocks on Stocks
Watching margins

We examine analysts' EBITDA margin forecasts for 2009. Profit margins across Asia fell to their lowest levels in a decade during 2008. The good news is that analysts are assuming that margins remain subdued in 2009. In aggregate, margins are assumed to be about the same in 2009 as 2008. However, there are some sectors where a large amount of good news is already factored into margin forecasts, while in others, margin forecasts are too pessimistic.

Macquarie Commodities Comment
Promising PMIs Isaac

PMIs ticked up again in April, with promising new orders data, but ex-China remain substantially below 50, the threshold between growth and contraction. Latest news Base metals prices were mixed on Tuesday, with copper closing down by 1.6%, while the other metals made small gains on Friday's close. US construction spending rose by 0.3% in March, the first increase in six months. In other US construction news, pending home sales jumped by 3.2% MoM as buyers were encouraged by favourable prices and mortgage rates.

To see full report: INDIA ESSENTIALS

>Allcargo Global Logistics (IDFC SSKI)


• Consolidated revenues grew by 12.7% yoy to Rs4.8bn led by higher revenues in project cargo of Rs300mn, against Rs100mn in 1Q08 (reflected under MTO operations). However, revenues were lower than our estimates led by lower ECU line revenues, which were impacted by the trade slowdown.

• The CFS business witnessed revenue growth of 16% yoy to Rs350mn led by better realizations on a yoy basis. However, volumes fell by 10% yoy to 40,000TEU’s during the quarter as volumes across ports slowed down considerably.

• The equipment leasing business witnessed a sharp jump on a yoy basis as AGL added 18 forklifts, 10 new trailors and a crane in the quarter. Accordingly, the segment witnessed revenues of Rs160mn in the quarter.

• ECU line and other subsidiaries revenues’ grew marginally by 6.7% yoy to Rs3.5bn in the quarter (aided by euro appreciation). However, on a qoq basis, the revenues fell sharply by 30% as volumes were impacted. Further, realizations were impacted as AGL passed on the lower freight costs to its clients.

• Operating margins during the quarter improved by 150bps to 11.5% led by higher margins in the equipment hiring (+110bps to 37.2%) and ECU line (+30bps to 5.7%) led by cost efficiencies and better utilizations in the quarter.

• However, the MTO business witnessed a fall in margins of 210bps to 12.4% as the volumes fell by 17.6% during the quarter. Similarly, the fall in volumes in the CFS business as well as a lower dwell time (fallen from peak of 16 days to 11days) impacted CFS margins (-470bps to 50.6%).

• Other income increased sharply to Rs40mn led by interest generated on surplus cash of Rs500mn as well as dividend income from subsidiaries.

• The depreciation (+75% yoy) and interest (+184% yoy) costs appear higher on a yoy basis due to the merger of TFSPL and capex incurred in CY08. However, interest costs have fallen sharply by 30% qoq to Rs53mn as the interest rates in ECU line have fallen by almost 300-400bps (LIBOR) as well as the debt levels being reduced from Rs2.5bn at end of 4Q08 to Rs2.1bn at the end of the quarter.

To see full report: ALLCARGO


Will the contribution of the Asian upturn to global growth be sufficient?

In all likelihood, there is a lasting upturn in growth under way in China, driven by government expenditure and credit, and that also concerns private demand: it is also likely that this recovery will extend to the rest of Asia, given the trade links, but probably to a lesser degree to Japan, because of the yen’s appreciation against other Asian currencies.

On the other hand, it is unlikely that there will be a significant pick-up in domestic demand in the United States, Europe, and Japan, due to the continued deleveraging, the high level of funding costs, and offshoring.

The question therefore arises whether the Asian (Chinese) recovery is sufficient to jump-start the global economy. We show that China and other Asian emerging countries have a substantial weight, since their contribution to the growth in global trade in a normal period is the same as that of the United States + European Union + Japan taken as a whole.

To see full report: SPECIAL REPORT