Wednesday, May 20, 2009

>Crude extends gains tracking rise in Japan shares

Singapore - Crude oil futures rose Wednesday for the third straight day in Asia, tracking a rise in Japanese shares and cautious sentiment ahead of oil inventory data from the U.S. Department of Energy.

"The oil price has nothing to do with fundamentals," said Ken Hasegawa, a broker with Newedge Japan. "It has been (strongly) affected by the stock market and currency market."

The Nikkei and the yen rose after better-than-expected GDP data were reported by Japan, the world's second-largest economy and its largest oil importer.

Meanwhile, the U.S. government's Energy Information Administration is expected to report crude oil inventories fell 700,000 barrels in the week to May 15, according to the average estimate of 13 analysts polled by Dow Jones Newswires.

"The EIA doesn't have a big impact on the oil market," Hasegawa said, adding investors recently have shrugged off bearish news.

A larger-than-expected decline in oil stocks may provide some support for oil prices, but larger inventories won't push oil prices down further, he said, adding oil will likely trade in a $57-$62 range Wednesday.

On the New York Mercantile Exchange, light sweet crude futures for delivery in July traded at $60.19 a barrel at 0658 GMT, up 11 cents in the Globex electronic session. July Brent crude on London's ICE Futures exchange rose 4 cents to $58.96 a barrel.

At 0658 GMT, oil product futures were up.

Nymex reformulated gasoline blendstock for June - the benchmark gasoline contract - rose 263 points to 184 cents a gallon, while June heating oil traded at 149 cents, 19 points higher. ICE gasoil for June changed hands at $475 a metric ton, up $5.50 from Tuesday's settlement.

Crude touches USD60 but fundamentals weak

Singapore - Nymex crude holding firm in Asia after touching psychologically important USD60 mark, with strengthening regional share markets offering upside lead. "(Traders) once again drew a long and overextended line between higher equities quotes and an expectation that the economy, and oil demand with it, will improve. It may make some kind of vague and hopeful sense, but we have difficulty trying to assign precise numbers from one to the other," says Peter Beutel at Cameron Hanover. "We still feel prices are constructing a top. A switch of focus from equities to oil market fundamentals would be bearish." June crude - still most actively traded contract ahead of today's expiration - up 77 cents on Globex at USD59.80/bbl.

To see full report: COMMODITIESCONTROL

>Gold to remain supported by economy, diversification

London - Gold demand in the first quarter rose, but there were large differences in demand geographically, with some parts of the world selling precious metal holdings while western economies piled into the metal, the World Gold Council said Wednesday.

Global gold demand rose in the first quarter to total 1,028 metric tons, up 35% on the year. Demand for exchange traded funds, bars and coins offset a decline in jewelry sales and industrial demand elsewhere, the WGC data showed in its Gold Demand Trends report.

Bar hoarding, which largely covers the non-western markets, shifted from a net inflow of 49.4 tons in the first quarter last year to a net outflow, or dishoarding, of 33.2 tons in the first quarter of 2009.

In contrast, other net retail investment, which covers western investor activity in the secondary retail market rose from 9.8 tons to 89.0 tons.

"Non-western markets have heavily succumbed to profit-taking activity of late," the WGC said.

For example, while ETF demand rose more than six times in the first quarter from a year ago to total 465 tons, jewelry demand fell 26% to total 352 tons.

Markets such as India and the Middle East are large jewelry consumers with India being the largest.

"The important factor is that other sectors are taking jewelry's place," said Rozanna Wozniak, investment research manager at the WGC. "And some consumers in India may buy gold on dips."

A recovery in jewelry demand will depend somewhat on the gold price - lower prices tend to spur more buying. However, with economies remaining weak and some forecast to post further losses in growth, jewelry demand could remain under pressure, the WGC said.

Institutional gold demand also appears to have risen in the first quarter, the WGC said.

Inferred investment rose, not due to a rebuilding of speculative positions, but instead demand for larger bars over 1 kilogram rose by 29% to total 115.3 tons, the WGC estimates.

Global gold supply rose 34% on the year to total 1,144 tons in the first quarter of the year.

The growth in supply came largely from gold jewelry recycling flows, which rose 55% on the year to total 558 tons. Mine production rose 3% to total 560 tons in the first quarter, helped by some new projects.

Supply was also boosted by a decline in central bank gold sales to 35 tons, down 54% from the first quarter last year and a drop in producer dehedging.

"Overall I expect investor interest to be underpinned because investors are rethinking allocations seeing gold's role longer term as insurance rather than just a safe haven," Wozniak said.



In good health; Rate Buy......

Reinstate coverage with Buy rating; 25% upside potential
We reinitiate coverage of Dr Reddy’s Laboratories (DRL) with a Buy rating and PO of Rs714. We forecast 20% EPS CAGR over FY09-11, and core EPS CAGR of 49%. At PO, stock would trade at 15x FY11E core EPS, which is a slight premium to peers. Near-term triggers include possible surprise on management guidance later this week, and likely launch of Omeprazole OTC in H2 FY10.

Forecast revenue to grow 11% annually
We expect growth in global generics (~70% of DRL) driven by new products and market share gains, and revamp of supply-chain (in India), even as our forecasts factor continuing pressure in EU (~13%). Based on management indication, we see upside risk to Para IV exclusivities/niche opportunities. In the PSAI segment (~30%), we expect API (ingredients to formulators) to maintain ~13% annual growth on DRL’s sizeable portfolio of filings, and focus on customs manufacturing (rather than slowing customs synthesis), to drive recovery towards 2H FY10.

Stable margin estimates, but may be conservative
Following an expected spike to 18.5% in FY09, we estimate margins at around 18%, restricted by our conservative revenue assumptions for high contribution opportunities with limited competition. However, we expect base margins to rebound around 30% (or 400bps) on improved revenue and mix to higher contributing markets, ie, Russia, US and India.

Valuations attractive in our view
Despite a 27% YTD stock rally, we believe valuations are attractive, given strong 49% core EPS CAGR, compared with domestic peers at 21% CAGR (consensus), as well as global counterparts (14% CAGR). On 2-year price to earnings growth (PEG), DRL trades at 0.3x, which is 60% discount to domestic peers.

To see full report: DR REDDY'S LABS


WPI down to 0.48% - but keeps rising on weekly basis …
• The WPI falls to 0.48% for the week ended May 02, 2009 against 0.70% for the week ended April 25, 2009 (consensus was at 0.26%).

Reading between the lines…

• Though the WPI has fallen on a yearly basis, it has continued to rise on weekly basis - fifth successive week of increase in WPI. This week it was up by 0.39%.

• The yearly fall was solely owed to high base of last year.

• The rise in WPI was led by increase in price indices of all the groups - Primary Articles Group (by 39 bps), Fuel Group (by 22 bps) and Manufacturing Group (by 40 bps).

• In the Primary Articles Group, the price index of Food Articles was up by 28 bps. This is attributed to the higher prices of food grains, vegetables, condiments & spices etc. The non-food
Articles segment price index too was up by 78 bps led by increased prices of fibers and oil seeds. The mineral group price index remained unchanged.

• In the Fuel Group, the mineral group price index (up by 37 bps) led the spike owing to increased prices of naphtha, furnace oil and light diesel oil. However, prices of ATF and bitumen were down.

• Coming to the Manufacturing group, the price index Food Products group continued to go up (this week by 70 bps) owing to increased prices of sugar and oil cakes. The prices of edible
oils was down slightly this week. The other groups that contributed to rise were Chemical Group (up by 126 bps - owing to organic chemicals and fertilisers & pesticides) and Basic metals alloys & metals products (up by 12 bps - owing to iron and steel). The Transport equipment group was infact down by 17 bps.

To see full report: INFLATION METER


For growth to pick up, it must be possible to provide long-term funding

Sustainable global growth demands the provision of funding for long-term projects: productive investment, public investment (transport, energy, environment, water, agriculture, etc.). Unfortunately, the financial crisis has jeopardised this ability to obtain longterm funding at a reasonable cost:

equity investors are discouraged by risk, successive stock market crisis, and regulations;

the medium- and long-term funding costs for banks are high, and are likely to remain so due to heightened perception of bank risk, with toxic assets remaining present on banks' balance sheets for a long time; this results in high costs of medium- and long-term loans.

It might be thought therefore that there should be a sharing of tasks, with the banks providing short-term funding and governments long-term funding. However, the enduring deterioration in the public finance situation could clearly also imply a high cost, in the future, of long-term funding for governments, which is not apparent at present due to the monetisation of public debt by central banks. The most reasonable policies are therefore probably transformations to increase the proportion of long-term savings in total savings and to increase the weight of equity investments in the portfolios of institutional investors, when it is low; efforts should also be made to mitigate the perception of bank risk (by reducing toxic asset portfolios).

This point is obvious. Global growth needs:
productive investment, currently far weaker (Charts 1A and B), with a need for emerging countries to increase per capita capital to increase per capita income (Chart 1C);

investment in infrastructure (Table 1), the United States being an extremely impressive case (Table 2);

investment in energy production and savings (Chart 2A), due to catching-up of per capita consumption levels in emerging countries (Chart 2B), in water purification (Table 3), and in productivity improvements in agriculture due to changing food habits (Table 4) and population
changes (Chart 3), which entail a permanent increase in needs.

To see full report: FLASH ECONOMICS


  • The strong electoral mandate given to the UPA, would build up high expectation in terms of reforms in the banking space.
  • The sentiment would turn positive, with expectation of faster and smoother implementation of reforms now compared to earlier tenure of UPA.
  • The financial institution would play a pinotal role in the attempt to revive the economy. We believe that measures like re-capitalization of weak banks would expedite, as these banks need capital to expand. We view this as a positive development for the banking space, especially for the bank requiring re-capitalization, as this would enable them to enter the growth trajectory.
  • Further measures like rise in FDI limit in Insurance sector; Relaxation of cap on holding more than 10% in bank by single entity; Permitting equity dilution without reducing the government's ownership below 51% would see positive development.
  • We remain positive on banks like SBI, UBI & BOB. We also believe that the bank have a capital contraint showed do well given the possibility of re-capitalization exercise gaining momentum.
To see full report: BANKING SECTOR


Trigger to reduce risk is missing; earnings momentum and quality to re-emerge as drivers of stock selection

On the heels of one of the sharpest market rebounds ever, the widely expected correction could even be seen as healthy. However, we believe the following points still hold:

Asset Allocation: One should remain OW stocks and be buying the dips. Provided that the macro dataflow does not begin to disappoint again, we believe that the technical headwinds and the profit-taking will be transitory. The more “fundamental” trigger to take some risk off the table, in our view, would be when data confirms economic stabilisation. For example, when or if we get the first few ISM prints above 50, the “2nd derivative” story will be over, as per the table on the right.

Still underweight bonds and cash: Even though the potential inflation end game is probably overly discounted for now, government bond yields could continue to grind higher, reflecting better data flow momentum, and this should be taken positively by stocks. In addition, just through income generation alone, equities are beating both cash and bonds.

Sectorwise, Cyclicals have lost a chunk of their performance in the past few days, but this is on the back of a dramatic recent run. We believe there will be one more leg of cyclicals performance and think it would be a mistake to start wholesale rotation into Defensives now.

At stock level, low-quality names did very well during the rally (broadly defined as the most leveraged, the biggest underperformers, lower ROE and “value” stocks). The fundamental factors, such as earnings momentum, did badly, actually showing an inverse correlation with stocks’ relative performance.

• As volatility edges lower, we believe this will start to change, and we expect investors to become more selective, looking for “higher quality” stocks. In addition, we see earnings momentum becoming an important positive driver of relative stock performance again with the stocks of companies showing upgrades to earnings starting to outperform.

• In the report, we screen for the stocks that have underperformed in the latest rally but have seen outright EPS upgrades or have higher ROE than their peer group.

To see full report: EQUITY STRATEGY


“Margins dip on inventory losses”

Chambal Fertiliser & Chemicals Ltd (CFCL) came out with its full year results ended 31st March 09 with a rise in net sales of 69% y-o-y to Rs. 45.95 bn as against Rs. 27.2 bn in FY08. The rise in the revenues was mainly led by the shipping division and traded goods segment. The shipping division saw a rise in revenues of 43% y-o-y to Rs. 4135 mn as against Rs. 2890 mn in FY08. The traded goods segment rose to Rs. 15.3 bn up by 351% y-o-y from Rs. 3.4 bn in FY08. On the consolidated front, net sales rose by 74.6% to Rs. 56.4 bn as against Rs. 32.1 bn in FY08. the rise was mainly on account higher sales of phosphoric acid from JV IMACID, which rose by 125% to Rs. 7.6 bn as against Rs. 3.3 bn in FY 08.

CFCL holds fertiliser bonds worth of Rs 3671.5 mn as on March 31, 2009. The company has so far booked MTM losses of Rs 281 mm. The debt on books st increased from Rs. 15 bn in March 08 to Rs. 21 bn as on 31 March 09, which resulted into a higher interest outgo of Rs. 1225 mn up by 33.4% y-o-y from Rs. 918 mn in FY08. The company reported profit after tax of Rs. 2305 mn in FY09 up by 13% y-o-y to Rs. 2038 mn in FY08. During the quarter ended June30, 2008, the company changed its accounting policy to adjust the forex fluctuation on borrowings towards acquisition of fixed assets, to the cost of fixed assets instead of adjusting it to P& L account as was followed during previous year. The current cash on hand stands at Rs. 7 bn. During the year quarter the company informed that Chambal Infrastructure Ventures Ltd, a wholly owned subsidiary
has divested its entire stake in its subsidiary Gulbarga cement Ltd to Zuari Industries Ltd.

Debottlenecking of Urea plant on track
Debottlenecking of Unit-I of the fertilizer plant of the company was completed in March 09. CFCL had to carry out plant shutdown for a period of about 36 days in the month of February and March 09 for the purpose of debottlenecking. Unit – II debottlenecking is currently under process and is expected to be completed by June 09. With this process CFCL would increase its production capacity by 25% and would be make itself eligible for the new urea policy which links the prices of Urea to Import parity price (IIP).

Shipping division continues to perform well
The shipping division continues to deliver good performance with healthy margins. The revenues
from the shipping division rose to Rs. 4135 mn up by 43% y-o-y from Rs. 2890 mn in FY08. The
company is into the Aframax segment and currently has a fleet of five tankers out of which three
tankers are double hull tankers. It has entered into Time Charter contract for three of its double hull tankers and therefore was uneffected from the slump in spot rates.

To see full report: CHAMBAL FERTILISERS


Company Description:
AIAEL was incorporated on March 1991 as Magotteaux (India) Pvt. Ltd. Ahmedabad. Induction Alloys Pvt. Ltd was merged with the company in 1992 and the name of the company was changed to AIA Magotteaux Pvt. Ltd. Due to the termination of joint venture with Magotteaux
International SA, Belgium in 2000 the name of the company was again changed to AIA Engineering. It manufactures 'mill internals' used by industries such as cement, mining and thermal power plants for crushing and grinding of the production process. It tapped the capital market in Nov 2005 with an issue of 47 lakh shares at a price of Rs 315 per share of Rs 10 each aggregating Rs 148 crore for expansion.

AIAEL sells its products to all major cement groups including Lafarge, Holcim, Heidelberger, and original equipment manufacturers such as FL Smidth, Polysius and major thermal power plants and mines. AIAE has also made inroads into China - the largest market for grinding media in
the world.

Even nearly 70% of the company`s business comes from replacement demand. It has customers in 70 countries. Nearly 57% of the company revenue comes from export.

Debottlenecking will expand capacity by 25,000 -35,000 tpa taking the total capacity to 200,000 tpa by FY10 end.

AIAEL continues to eye the SEZ land for its new facility as international revenues are likely to increase to 75-80% of revenues by FY11. AIA has already identified 2 proposed SEZ facilities, which are yet to be notified.

However, if the proposed SEZ’s do not get notification, then AIAEL may look at expanding its capacity at its existing facilities by further 50,000 tons facility for meeting its demand for its mill internals.

To see full report: AIA ENGINEERING


Ranbaxy (Rs220): Underperformer - Target Price: Rs156

Sun Pharma (Rs1,412) : Underperformer - Target Price: Rs1,245

Jubilant Organosys (Rs163): Outperformer - Target Price: Rs200

Divis Laboratories (Rs1,020): Outperformer - Target Price: Rs1,200

Real Estate Sector Update

Two Wheeler Sector Update.

Everest Kanto Cylinder (Rs153): Marketperformer - Target Price: Rs163

Bank of Baroda (Rs415): SELL - Target price: Rs330

Tata Chemicals (Rs203) Outperformer - Target Price: Rs236

Hindalco (Rs80) Underperformer - Target Price: Rs63

The Great Eastern Shipping (Rs270) Underperformer - Target Price: Rs245

Sical Logistics (Rs27) BUY - Target Price: Rs41

Kalpataru Power Transmission (584) Outperformer - Price Target: Rs683

To see full report: STOCKS & SECTORS UPDATE