Sunday, May 10, 2009

>India Equity Strategy (JP MORGAN)

Color of Money - Tracking Institutional Ownership

Bulls retain momentum. Most indicators of investor sentiment and activity remained positive over the last month. These include trading values and volumes, institutional activity and outstanding positions in the F&O segment. FIIs bought equities aggregating US$1.3 bn. Selling by insurance companies (US$157 mn), after 17 consecutive months as buyers, was a weak data point though. Also, inflows into both local mutual funds and insurance schemes remain weak.

Insider activity. Insider activity picked up over the month, skewed towards the buy side.
Net buys: Jaiprakash Associates, Jindal Steel, GMR and M&M
Net sell: Kotak Mahindra Bank

New Pension Scheme launched. The much awaited New Pension Scheme (NPS) was launched in early May by the government. The key objective of the scheme is to provide low cost, long-term savings options, for the large number of unorganized sector employees (90% of the workforce). The NPS should over a period of time help enhance the flow of domestic savings into the equity markets.

Rates market – liquidity surge sustains. Liquidity in the overnight inter-bank market remains near all-time highs. Subsequent to the RBI cutting benchmark interest rates by 25 bps, the yield curve has shifted meaningfully south and steepened over the month. Improvement in liquidity and sentiment is also reflected in the sustained easing in commercial paper rates and the spread between corporate and government bonds.

Special focus – Quarterly changes in Institutional ownership: Latest data released for the March 2009 quarter indicates that FIIs and insurance companies have been adopting a more aggressive portfolio stance and cutting back on defensive sectors. Local mutual funds, on the other hand, have been increasing their exposure to defensive sectors. We have been overweight Autos, Cement, Financials and IT services over the last two quarters and underweight telecoms and global cyclicals.

To see full report: EQUITY STRATEGY

>Bits & Pieces

Interesting bits and pieces that I've seen this week at CLSA - 8 MAY 2009

What Me Worry? Yes i do when markets run as far as fast as they have - Asia ex-Japan is up 48% in two months (reminds me mid-2007's rapid >40% rise). Many Asian markets are above or close to their end September 30 2008 levels, the point from which they then cliff dived to lows. Valuations have also recovered to the point where no Asian market is trading below 10x PER (although we could be facing earnings upgrades which may change that overnight). How much higher can markets fly? I ran a few calculations based on previous dates and prices, while Laurence balano senses the potential for a melt up. Yet i still feel we are far from out of this mess despite the parade of supposed green shoots.

"We note that the failure to make more substantial downward progress has to be recognised as a bullish development and as such we believe the risk of a melt-up type advance is great" Technical wizard, Laurence Balanco.

"If i hear the expression, :GREEN SHOOTS" one more time I may throw up". US Trader, Ross Levin.

"Alternatively, there is still time-just-for another freefall leg, but timing is running out. Investor confidence is still fragile, and should we get a series of particularly shocking data points, which, in the unique position we find ourselves is quite possible (say, one out of three), the confidence could crack one more time and the market could go to a new low before the major anticipatory rally" GMO Chairman, Jeremy Grantham.

Fiscally challenged, CLSA's economics team highlihts the expansion of Asian budget deficits as expenditure rises and revenues fall. Interest rates as a result are likely to head lower - a positive for stock markets as money is now dead if it sits in the bank.

"Asian budgets deficits are deteriorating quickly. Deficits are set to double and treble over the forecast period to 2010" CLSA Economics team.

Volumes on a tear - Taiwan close to "boom time" highs
World equity markets regain US$8 trillion to the US$35 trillion they "lost"
Get confident, stupid- consumer confidence charts show an uptick but still in doldrums

To read full article: BITS & PIECES

>Bharti Airtel (INDIA INFOLINE)

■ Revenues increase 6.1% qoq in-line with estimate driven by 9.7% rise in subscriber base.

■ MOU falls 4% qoq on fewer number of days in the quarter and free minutes offered by RCOM in its GSM launch.

■ PAT growth better than expected on lower interest expense; Maiden dividend of 20% signals tapering off in capex cycle, lower phase of growth.

■ Notwithstanding wireless leadership and superior return ratios, we downgrade the stock to Market Performer with a revised price target of Rs776.

To see full report: BHARTI AIRTEL

>Oil Marketing Companies (KSL)


■ Average Crude Oil price has hardened in the past couple of months
  • February $43 / bl
  • March $47 / bl
  • April $51 / bl
  • May (till date) $54 / bl
■ OMCs have once again begun reporting under-recoveries on sale of subsidized petroproducts
■ Current under-recoveries: Petrol-INR 0.5/lt, Kerosene INR 12/lt, LPG INR 32 /cylinder
■ Diesel is still earning surplus of INR 3/lt, however on account of lower benchmark prices globally
■ GRMs also remain under pressure
■ Government unable to pass-on fuel price hike due to precarious political environment


■ Our Technical Desk is bullish on crude oil in near term forecasting $64 /bl in the next month and $75 per barrel over the next two months

■ Based on the above forecast, we believe OMCs’ under recoveries will start mounting in the
near future

■ New government may not be in a hurry to take unpopular measure to effect retail fuel price hike

■ Fuel price hike imminent to mitigate mounting under recoveries mentioned above. However, it could be possible only after new government takes over the office and gets coalition partners to agree for a hike.


■ Expect OMC stocks to underperform near term. These have outperformed the market over the last six months. We suggest to book profits on BPCL, HPCL and IOC and go long on upstream stocks like CAIRN and ONGC instead.

After a brief honeymoon with excess recoveries on sale of petrol and diesel, the country’s oil marketing companies — Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) — are back to square one, reporting under-recoveries on the sale of their subsidized products which include diesel, petrol, kerosene and LPG.

The under recoveries have begun all over again in Petrol due to spurt in crude oil prices. Currently with crude oil price at $54 per barrel and INR at 49.5/$ Petrol has begun incurring under recovery of INR 0.57/lt. Diesel is still earning surplus of INR 3/lt, however on account of lower benchmark prices globally and not because of lower crude oil prices as witnessed in the recent past. Consequently they are losing on diesel cracks on the other hand. They continue to bear under recoveries in Kerosene and LPG currently being INR 12/lt and INR 32 / cylinder respectively.

The refining margins are also currently pressurized and will continue to be so in medium term. Crude has hardened in the past couple of weeks and if the spike continues OMCs will be back to square one earning negative marketing margins along with lower refining margins.

From an over-recovery of as high as Rs 12.35 on a litre of petrol and Rs 2.70 on diesel in December 2008, the OMCs are back to reporting under-recoveries currently. However, ironically the stocks seem to have outperformed the market in the same period. We believe next hike in fuel prices cannot be before crude oil reaches within the range of $66-$70 per barrel.

We suggest to book profits on BPCL, HPCL and IOC and go long on upstream stocks like CAIRN and ONGC instead on account of regulatory and industry headwinds and expected spurt in crude oil price.


>Telecom Services (CRISIL)

Telecom Services IMPACT ANALYSIS

TRAI directive on mobile VAS

CRISIL Research believes that the Telecom Regulatory Authority of India’s (TRAI) order, directing mobile service providers to obtain explicit consent from subscribers to activate value added services (VAS) will adversely impact both the service providers as well as the VAS players. According to our estimates, a 10 per cent decline in VAS revenues per subscriber would lead to a 20-30 basis points (bps) reduction in the operating margins of service providers. For VAS players, a 10 per cent decline in the adoption of caller ring back tones (CRBT) would bring down the industry growth rate to 31-32 per cent in 2009-10 instead of our earlier projection of 37 per cent.

Explicit subscriber consent mandatory for VAS activation

In order to regulate the indiscriminate imposition of VAS by service providers and its manner of delivery to subscribers, TRAI, in its directive, issued on April 27, 2009, has directed all service providers to seek and obtain ‘explicit consent’ from subscribers, either through telephone, SMS, fax, e-mail, or through other electronic means, before activating VAS. Service providers have been asked to comply with this directive before June 10, 2009.

In its order, TRAI stated that it had been receiving several complaints from customers alleging accidental activation of CRBT through facilities such as the “Press * to copy” feature (pressing the * key on the mobile keypad to copy the ring back tone of the called number before the call is answered). Following these complaints, TRAI carried out a customer survey encompassing 22,009 respondents, of which 24 per cent of the subscribers claimed that VAS had been activated on their mobile phones without their explicit content. TRAI’s move to regulate VAS is a culmination of this survey.

The telecom regulator has shown an inclination to impose regulations for the benefit of subscribers in the past as well. The best example of TRAI’s pro-consumer regulatory initiative would be the implementation of the “Do Not Call Registry”.

Impact on mobile service providers

VAS (excluding person-to-person SMS) currently accounts for around 5 per cent of the revenues of the Indian mobile service. Moreover, operating margins in this business are estimated to be 45-50 per cent, which is much higher than the margins earned in the voice business. CRISIL Research believes that the TRAI order would have a negative repercussion on service providers, at least in the short-term. According to our estimates, a 10 per cent decline in VAS revenues per subscriber would bring down operating margins to the tune of 20-30 bps. Assuming the decline in VAS adoption is more pronounced, such as a 25 per cent decline in revenues per subscriber,
operating margins could fall by 50-60 bps.

Impact on VAS players

The impact of the order on the middlemen in the VAS value chain is likely to be more severe. We believe the TRAI directive, if implemented in its current form, would severely impact the adoption of CRBT, the most popular VAS application. CRBT alone accounts for 40-45 per cent of the estimated Rs 40 billion earned by mobile VAS operators in India in 2008-09.

In our Telecom Data Services Annual Review, dated March 2009, we projected mobile VAS revenues to grow by 37 per cent in 2009-10. If the CRBT uptake reduces by 10 per cent as a result of the TRAI directive, the industry growth rate would come down to 31-32 per cent.

To see full report: TELECOM SERVICES

>Cognizant (JP MORGAN)

1Q First Look- Strong 1Q, 2Q Guidance Should Ease Concerns on 10+% FY09 Growth Guidance - ALERT

CTSH reported better than expected revenue in 1Q09, and reiterated its FY09 revenue growth guidance of 10%+. More importantly 2Q09 guidance of $760M+ was also ahead of our above consensus expectations, and implies an achievable ~3% sequential growth in the back half of 2009. We think overall results and guidance should ease concerns over achievability of CTSH’s FY10 growth rate. Expected stock reaction: mild positive, despite the recent stock run (up 38% YTD vs. S&P 500 up 0.4%). We continue to prefer it relative to peers given its premium growth. Call at 10:00 AM Eastern, 800-374-0467.

1Q09 revenue beat. Actual $746M; JPM Est.: $739M, Consensus: $734M; Guidance: “at least $735M”. Revenue grew at a very solid 16% rate y/y and (1%) q/q, despite a ~1% q/q currency related drag on 1Q growth (JPMe) and continued macro deterioration during the quarter. As a comparison, offshore peers posted revenue declines of (7%)-(4%) q/q on organic basis during 1Q.

In-line EPS. Actual $0.38; JPM Est.: $0.38; Cons.: $0.37; Guidance: $0.37-$0.38. Relative to our model, $0.02 in operating beat was offset by below-the-line FX loss in other income ($0.01) and lower interest income ($0.01).

FY09 and 2Q09 growth guidance. CTSH maintained its FY09 revenue guidance of $3.1b+, representing a 10% revenue growth rate. CTSH also issued 2Q09 revenue guidance of $760M+ (vs. JPMe $755M, cons. $749M), representing q/q growth rate of 2%- above offshore peers (INFY (5.4%)-(3.7%), WIT (2%)-(4%)). Reported 1Q09 results and 2Q09 guidance requires an achievable 3% q/q growth through rest of the year to achieve FY guidance. As of now, we expect a slight increase in consensus FY revenue estimates after the call.

FY09 EPS guidance modestly lowered. CTSH modestly lowered its FY EPS guidance from $1.54+ to $1.53+, which the company attributed to the quarterly non operating FX loss during the quarter. We think modest guidance revision will likely be discounted as it may be attributed to potentially lower interest income and non operating FX loss. Importantly, revision in EPS guidance also indicates that the company is probably not going to cut its reinvestments to manage near term earnings.

Operating margin upside. 1Q non-GAAP OPM (excl. stock-based comp.) of 20.2% compared with our estimate of 19.8%, and the company's targeted 19%-20% range. We think margins benefited from 1% appreciation in the USD Indian rupee vs. the Indian rupee (~25bps in operating margins) and potential increase in utilization, which was partially offset by the company’s continued reinvestments and pricing.

• We maintain our Overweight rating.

To see full report: COGNIZANT



• Titan delivered a disappointing performance in Q4 FY09, both on the topline as well as bottomline front, as the economic downturn led to a slowdown in the company’s revenues, while higher operating costs, coupled with an increase in depreciation and interest expense took a toll on its profitability

• The company witnessed a slowdown in sales of the Jewellery segment, while sales of the Time Products segment declined in the quarter

• The ongoing recession forced Titan to close down two Tanishq boutiques in the US

• With gold prices scaling new highs, sales of Titan’s Jewellery segment will continue to be adversely impacted, while the ongoing economic slowdown will affect sales of the Time Products segment

• Also, the company’s high operating cost structure, coupled with rising interest costs, will keep margins under strain, going forward

The Story.....

Titan Industries Ltd. (TTAN.IN)/(TITN.BO) delivered a disappointing performance in Q4 FY09, both on the topline as well as bottomline front, as the economic downturn led to a slowdown in the company’s revenues, while higher operating costs, coupled with an increase in depreciation and interest expense took a toll on its profitability. Titan witnessed a decline in revenues of the Time Products segment, while the revenue growth in the Jewellery segment also slowed down. The company reported net revenues of Rs.8.89 bn for the quarter, up 6.3% Y-o-Y, as against our estimate of Rs.10.52 bn, while its net profit declined 54.0% Y-o-Y to Rs.278 mn in the quarter. The EBIDTA margin declined 392 bps Y-o-Y to 6.3% in Q4 FY09, while the net margin was down 419 bps Y-o-Y to 3.2%. The ongoing recession also forced Titan to close down two Tanishq boutiques in the US, which led to the company incurring a charge of Rs.290.2 mn for the quarter.

With gold prices scaling new highs, sales of Titan’s Jewellery segment will continue to be adversely impacted, while the ongoing economic slowdown will affect sales of the Time Products segment. Also, the company’s high operating cost structure, coupled with rising interest costs, will keep margins under strain, going forward. We are now lowering our FY10 EPS estimate from Rs.59.3 to Rs.32.8. On the valuation front, the stock currently trades at a P/E of 22.7x our FY10 EPS estimate of Rs.32.8 and an EV/EBIDTA of 10.3x our FY10 estimate. We, therefore, downgrade Titan to Moderate Underperform.

In Q4 FY09, Titan reported net revenues of Rs.8.89 bn, up 6.3% Y-o-Y, as against our estimate of Rs.10.52 bn. Jewellery sales grew 14.1% Y-o-Y to Rs.6.07 bn (a topline contribution of 68.7% in Q4 FY09, as against 63.5% in Q4 FY08). Time Products sales declined 13.4% Y-o-Y to Rs.2.41 bn and contributed 27.3% to the topline, while Others, which primarily includes Eye wear, Precision Engineering, Machine Building and Clocks, grew 28.6% Y-o-Y to Rs.354 mn and contributed 4.0% to the topline.

Raw material costs, as a percentage of sales, increased by 156 bps Y-o-Y to 69.4%, due to rising gold prices, while Personnel expenses, as a percentage of sales, declined 17 bps Y-o-Y to 5.7% in the quarter. Advertisement expenses and Other expenses, as a percentage of sales, also increased by 32bps Y-o-Y and 222 bps Y-o-Y to 4.2% and 14.5% respectively in Q4 FY09, thus severely eroding the company’s margins. Other expenses included an amount of Rs.290.2 mn incurred on account of two Tanishq boutiques being closed down in the US due to the economic recession. The higher than proportionate increase in total operating expenses led to a decline of 392 bps Y-o-Y in the EBIDTA margin to 6.3% in Q4 FY09. Titan reported a decline of 34.1% Y-o-Y in the EBIDTA to Rs.552 mn in the quarter.

The Jewellery segment recorded an EBIT margin of 1.8% in Q4 FY09, as against 5.1% in Q4 FY08, while the Watches segment reported an EBIT margin of 19.2% in Q4 FY09, as against 21.6% in Q4 FY08. The EBIT margin of the Others segment came in at a negative 28.6% in Q4 FY09, as against a negative 29.5% in Q4 FY08. An increase of 130.5% Y-o-Y in depreciation, coupled with a rise of 97.8% Y-o-Y in interest costs, led to a decline of 54.0% Y-o-Y in the profit after tax to Rs.278 mn in Q4 FY09. The net profit margin declined 419 bps Y-o-Y to 3.2% in Q4 FY09. Titan reported a proforma diluted EPS of Rs.6.3 for Q4 FY09, as against Rs.13.6 in Q4 FY08.

To see full report: TITAN


Upgrade to Neutral (V): Change in strategy is positive

  • Q4 FY09 results disappoint, but the decision to pull out of long gestation projects is positive, in our view
  • Cut-back in development pipeline is encouraging, as it should avoid strain on cash flow and strengthen the balance sheet
  • Reduce NAV discount to factor in improved strategy; raise target to INR233 (INR140), upgrade to Neutral (V) from UW (V)

Disappointing results. DLF reported a 93% y-o-y drop in net profit to INR1.6bn, sharper than our estimate of 78% drop and consensus estimate of an c83% decline. The main reasons for the decline were the repricing of some projects (PBT impact of INR302m) and lower DLF Assets Ltd (DAL) revenues (85% y-o-y drop).

Pulling out from long gestation projects should improve business focus. DLF has pulled out of large township projects like Dankuni and Bidadi, which should improve its business focus on more profitable projects. Earlier, we had estimated that c50% of this development could materialise. We expect the market to view this as an acceptance of the difficulties in developing mega townships.

Moving away from such ambitious development plans is positive. DLF has further curtailed its development pipeline in commercial and retail segments, with its projects under construction coming down from c47m sq ft in Q3 FY09 to c21m sq ft in Q4 FY09. This should help DLF prioritise, and avoid strain on cash flows. We have cut our earnings forecast by c26% each in FY10e and FY11e to factor in a slower rate of development and lower prices.

Upgrade to Neutral (V) from UW (V); raise target price to INR233 (from INR140). We view the change in DLF’s development strategy as a positive move, which should help to cut balance sheet stress and improve business focus. While receivables from DAL are still an issue, improved market liquidity means an increased probability of DAL being able to source funding and repay DLF. This, we believe, should ease price/NAV compression for DLF. We hence lower our NAV discount to 10% from 50% previously. We have also rolled forward our NAV to FY10e after factoring in revised land estimates.

To see full report: DLF

>Grasim Industries (KOTAK SECURITIES)

Best is already factored in the price...

Grasim Industries, a diversified player in cement, viscose staple fibre (VSF), chemicals and sponge iron, is set to become the largest cement player in India post commissioning of its new capacities. However, due to demand slowdown, we expect decline in realizations across its core
businesses - VSF and cement, which may result in muted revenue growth between FY08-FY10. Pricing outlook for next one year for VSF continues to remain negative due to adverse global conditions impacting textile exports while oversupply and lower-than-expected demand growth may impact cement realization negatively. Lower realizations are also expected to offset the benefit of reduced raw material prices, thereby keeping margins lower going forward. Along with this, higher depreciation and interest charges post commissioning of new capacities are likely to keep the earnings growth depressed.

We value the company on sum-of-the-parts methodology on FY10 estimates and arrive at a price target of Rs.1600. Our assumptions of better cement prices based on prevailing firm cement prices as well as healthy dispatch growth for FY10 also leaves no stock price upside at current valuations. Though company has got pan India presence and is increasing its capacity significantly, most of the positives related to firm cement prices, low power and fuel costs as well as volume growth are already factored in the current stock price. Hence we initiate coverage with a REDUCE recommendation. We would wait for declines in the stock price for upgrading our recommendation.

Key disinvestment rationale

Cement oversupply and moderation in demand to impact cement realizations negatively. Cement demand had registered a growth of nearly 9% between FY06-FY08 driven primarily by strong demand from construction, infrastructure and real estate projects. However, with the slowdown witnessed in the real estate sector and overall moderation witnessed in the GDP growth, cement demand is expected to grow at a CAGR of 7% between FY08-FY10. We expect capacity addition to the tune of 60-70MT between FY08-FY10 while demand is expected to remain subdued in the next two years. We thus opine that, pace of commissioning of new capacities is expected to exceed the demand growth and will likely result in fall in cement prices. We expect cement prices to decline in next one year post commissioning of new capacities from Q1FY10. We have assumed total dispatches of 39 mn tonne and average cement realizations of Rs.3345 per tonne in our estimates on a consolidated basis for the company.

VSF division is also witnessing demand slowdown and price declines.
Adverse economic factors such as US recession, declining demand from textile sector and declining exports have impacted the VSF division negatively in terms of volumes as well as prices. Grasim has also further reduced prices by Rs 7 per kg (7.2%) in January, 2009 and we expect prices to remain under pressure due to poor demand from the textile sector going forward. Margins are also expected to remain subdued since company has correspondingly passed on the benefits of cost reduction by reducing the VSF prices because of low demand.

To see full report: GRASIM INDUSTRIES

>Top Picks (SHAREKHAN)

The rally gained further momentum in April 2009, driven by better than expected economic data and easing risk aversion that resulted in sustained inflows into the emerging markets. Consequently, the Indian markets outperformed the global markets with the benchmark indices Sensex and Nifty surging by 14.8% and 12.8% respectively in the month. Our portfolio of top picks more or less performed in line with the benchmarks, registering a gain of 13.1% during the

We are making three changes in our portfolio of top picks this month. In the FMCG space, we are replacing ITC with Godrej Consumer Products as we expect the mid-tier FMCG companies to significantly outperform the front-line peers in terms of financial performance in the coming quarters. We are removing Crompton Greaves as the stock has reached our price target and are adding Shiv-Vani Oil & Gas Explorations in view of its strong order book position and the firming up of oil prices. Lastly, we are removing Grasim Industries from our top picks basket, with its stock price closer to our price target, and are replacing it with 3i Infotech, as we feel that compared with the front-line technology companies the tier-2 technology companies would perform better due to the widened valuation gap.

To see full report: TOP PICKS

>Asia Strategy Quarterly (MACQUARIE RESEARCH)

Green shoots or red herrings?

The global cycle is getting less worse

Accompanied by a turn in the second derivative of global economic activity and tentative signs of stabilisation in important leading indicators, Asia ex Japan has risen 28% from its recent trough on 2 March and is now up 39% from the late October low.

Valuations are still well below long-run averages

At 1.5x P/BV, 11.0x trailing earnings, 6.8x P/CF, Asia ex Japan is still well below long-run average levels on three of the four standard valuation metrics. On a forward PER basis, Asia ex Japan is currently trading on 14.4x, around half a standard deviation above its long-run average level of 13.1x. However, the uncertainty surrounding the ‘E, makes this measure only marginally better than useless at the current point in the cycle.

The 12-month risk/reward trade-off is attractive
With valuations still well below long-run average levels and key indicators of the cycle – such as the OECD leading indicator and our earnings revisions indicator for Asia ex Japan – moving higher, the 12-month risk/reward trade-off for Asian equities is undeniably attractive. If history is a guide, the odds of losing money are a mere 12%, while the odds of a greater than 10% return are 70%.

Upgrading Korea and Taiwan, tech and banks

Accordingly, it is time to selectively add beta to our model portfolio. Tech and banks stand out at the current juncture. These two sectors have underperformed in the rally so far; in the past they have been big outperformers when the OECD leading indicator is rising; and with valuations now only a touch above all-time lows, they command an overweight position, in our view.

We have also upgraded Korea, Taiwan and Singapore. With earnings expectations extremely low, Chinese institutional investor money on its way, and trading on a P/BV of 1.4x, Taiwan looks particularly attractive. Valuations are not as attractive in Korea, and its net-debtor status concerns us. But you are taking on history by being underweight Korea when the OECD leading indicator is rising and that is something we try to avoid doing. At 1.2x P/BV, Singapore is deep
value and it looks like 1Q09 was the weakest point for growth.

Underweight China and Hong Kong

China has had a monopoly on good news flow in recent months and as a result is by far the most over-owned and over-loved market in the region. Moreover, from a bottom-up perspective, we are now struggling to find value. In addition to being cyclically challenged, Hong Kong is now plain and simply too expensive.

To see full report: ASIA STRATEGY