Thursday, May 28, 2009

>Crude up at 6-Mo high on OPEC rollover

London - Crude oil futures rose to fresh six-month highs Thursday in London after the Organization of Petroleum Exporting Countries left its output targets unchanged at a summit in Vienna.

In a decision largely expected by the market, OPEC - which produces 40% of the world's crude - cited the state of the global economy as a reason for leaving its production policy unchanged.

Despite some recent positive economic indicators, "the world is nevertheless still faced with weak industrial production, shrinking world trade and high unemployment; for this reason, the conference decided to maintain current production levels unchanged," OPEC said in a press release.

At 1154 GMT, the front-month July Brent contract on London's ICE futures exchange was up $0.28 at $62.78 a barrel, after touching the highest level in six months at $63.08 a barrel.

The front-month July contract on the New York Mercantile Exchange was trading $0.05 higher at $63.48 a barrel after earlier hitting a six-month high at $63.93 a barrel.

The ICE's gasoil contract for June delivery was up $7.75 at $495.25 a metric ton, while Nymex gasoline for June delivery was down 177 points at 187.40 cents a gallon.

The recent rally in oil prices is enough to satisfy OPEC members and they "don't want to endanger pushing economies that are still unsteady," by embarking on new cuts, said David Hart, an analyst at Hanson Westhouse in London.

"It's a pretty pragmatic move on their part...[a cut] would have been effectively putting more strain on those economies" trying to get out of recession, he said.

Last year, OPEC embarked on a series of production cuts to reduce oil supplies by 4.2 million barrels a day. The cuts have helped to shore up oil prices, which are 40% higher since the start of 2009.

In the wake of Thursday's meeting, OPEC officials pledged to raise compliance to the 2008 cuts in a bid to counteract oversupply.

Francisco Blanch, head of global commodities research at Bank of America Merrill Lynch in London, warned economic uncertainties and high inventories were still a risk for OPEC.

"The market is steadily but surely coming into balance and obviously they're happy about it...[but] September will be a different environment and maybe we will get a different response there," Blanch said. OPEC's next meeting is scheduled for Sept. 9 in Vienna.

Separately, oil market participants are also looking ahead to the U.S. Department of Energy inventory report, due at 1500 GMT. Analysts surveyed by Dow Jones Newswires expect the DOE to report a 500,000 barrel decline in crude oil stocks, a 1.7 million barrel fall in gasoline inventories and a 1.1 million barrel rise in distillate supplies.



Bharti & MTN merger - Where is the value?

Bharti has renewed its talk with MTN for a possible partnership with the intent of an eventual meeger of the two companies. The two companies have exclusivity until 31st July 2009 to conclude deal. Upon the conclusion of the deal, Bharti will hold 49% of MTN, while MTN would hold 25% of Bharti and MTN shareholders would hold 11% of Bharti through GDR issue. As per our estimates, Bharti is paying a premium of 44% to MTN's Friday's closing price.

  • Merger of Equals
  • Acquisition to be EPS dilutive in short term
  • Synergies, if any, will be back ended
  • We see little value
  • Valuation
Bharti will acquire 36% stake from existing shareholders of MTN (673 mn shares) for a consideration of ZAR86 per share (totalling to USD 6.9bn) and 0.5 Bharti GDRs for every MTN share held (issue of 336mn Bharti GDRs)

MTN will issue 467mn additional shares to Bharti such that Bharti would hold 49% of the post-issue shares. Bharti will hold 1140mn shares of MTN; MTN's equity will go up from 1,869mn shares to 2,336mn shares.

Bharti will issue 745mn new shares to MTN such that MTN would have 25% of Bharti, post the deal. Bharti equity will be increased to 2,979mn shares. MTN would also pay cash of USD2.9bn to Bharti.

To see full report: BHARTI AIRTEL


Political Impetus to lead to Financial Impetus

What Happened…

Global Equity Markets

− Globally, governments are working together to provide a stimulus to the world economy; there is hope of stability in the second half of fiscal FY10
− Chinks in the Global Regulatory framework armor left the investors badly bruised
− Dramatic swing in sentiment as the developed world was plunged in to a series of crisis

• Domestic Equity Markets
− BSE Sensitive Index plunged from ~21,000 levels (in Jan 08) to ~8000 levels (in Mar 09)
– Inflation Rate tumbles down from 12.00% (in Aug 08) to 0.70% (in May 09)
– With Global Trade under clouds of fear, our Exports were affected

Indian Economy – Strong Fundamentals remain Intact!!!
• GDP estimated to grow at 6-7% in the near-term, have already clocked 9% growth rates for the past 3 years
• India stands at 4th rank in Purchasing Power Parity amongst all countries
• Savings rate – 36% of GDP – one of the largest worldwide
• Services constitute more than 50% of GDP, ensuring high employment generation
• Return on Equity (RoE) of corporates remains high & leverage is down significantly over the years
• from cooling commodity prices and new discoveries in the Oil India to benefit & Gas Sector

Why India is standing tall –

− Stable Government – Demographic Advantage & Domestic Consumption
− Robust Banking System – Untouched by Global Sub-Prime Crisis
− Smaller Pie of Exports – Global Trade was a small % of GDP
− Consumption Demand – India, a Domestic Consumption Story

This report also includes information on:

  • Back Tracking: Sequence of Events…
  • The Brighter side – Perspectives to look at!!!
  • Key Challenges: Equity Markets as it will be…
  • India Outlook: Themes to team with…



Stock Is at the Crossroads of Demand; Moving to EW

Investment conclusion: We are upgrading our rating on Unitech to Equal-weight in view of initial repair of the balance sheet (182% net gearing in F09 could drop to 84% in F10) and improving macro (India F10 GDP growth upgraded to 5.8%, better foreign capital flows, and prospects of pro-market policy actions). Worst may be behind us, but not yet out of the woods, we believe.

Several challenges remain: 1) Portfolio of ongoing projects (27 msf) appears weak (since 80% is completed and recognized). 2) Therefore, reliance on new launches and sales to generate earnings/cash is high. 3) Even after significant fund raising (Rs24 bln odd), B/S will remain stretched (84% F10E net gearing and low interest coverage of 2.5x incl interest cost capitalised).

Where we differ: Valuations appear rich (16% discount to F10 NAV, 18x F10 EPSe, 1.9x F10 P/B) and seem to be already discounting revival in business cycle. Nearer term, we see downside risk to the stock price. Our new PT is Rs60 (at 30% discount to F10 NAVe of Rs85), and we would take profits on stock price appreciation.

Something for the bulls: Early monetization (regulations/Telenor permitting) of balance stake
(32.75%) in telecom business could further fix the b/s. We see deep value in Mumbai projects, though given the task of slum rehab, we expect slow delivery of land parcels (1-2 msf launches in F10, 50% share).

Something for the bears: There may be more equity dilution (preferential warrants to promoters, another QIP), economic recovery might be elusive, and low (YTD 2.5 msf) sales contracted (versus 18 msf at Rs3000 ASP to meet our F10 EPSe).

To see full report: UNITECH LIMITED


Out of the frying pan? Fiscal vulnerability takes centre stage

At the risk of great oversimplification, we think emerging economies have passed through two phases of the global crisis, and are now entering a third.

The first phase could be labelled the Financial Vulnerability Phase. At the centre of this was the loan-to-deposit ratio. Countries with a high loan-to-deposit ratio were vulnerable to the immediate consequences of the collapse in foreign banks’ desire for counterparty or credit risk; and their need to bring resources back to their own balance sheet.

An External Vulnerability Phase may have succeeded this, in which the central concern was with countries who, regardless of the health of their banking systems, became vulnerable because of the large size of their external financing needs. The External Vulnerability Phase coincided in some cases with the Financial Vulnerability Phase.

The External Vulnerability Phase seems to be at an end, thanks to i) sharp improvements in trade balances in many countries; ii) the IMF’s commitment to inject larger amounts of liquidity into emerging economies on easier terms; and iii) the re-emergence of risk appetite, particularly among bond and equity investors.

The import compression that has helped to improve the trade balance in many countries has a flipside in very weak growth. That in turn helps to give rise to the third phase of the crisis, a Fiscal Vulnerability Phase, as budgets come under pressure. Thanks to budget discipline in many countries during the past few years, we believe the Fiscal Vulnerability Phase poses fewer risks than what has passed before. The countries most at risk here are likely to be ones with unrealistic budget assumptions and high debt/GDP ratios.




‘We have already cut domestic capacity by ~20% yoy....exceptional efforts will be required for profitability going ahead’–
Wolfgang Prock - Schauer CEO, Jet Airways

• Jet Airways (Consolidated) has reported numbers for FY09 – Revenues were at Rs130.7bn (ahead of estimates at
Rs126bn), EBITDA loss at 8.6bn (against expectations of Rs8.9bn) and net loss of Rs21.2bn without exceptional items (Jet has reported a consolidated net loss of Rs9.6bn including exceptional items for the year).

• For the quarter - Jet Airways (standalone) has reported an 11% decline in revenues at Rs24.6bn, a positive
EBITDAR at Rs5.1bn, EBITDA at Rs3bn (primarily due to the support from international operations and lower ATF prices in the quarter) and a net loss before exceptional items at Rs1.6bn.

• For the quarter - Jetlite has reported revenues at Rs3.1bn, a positive EBITDAR at Rs165mn, and continued to post an EBITDA loss at Rs717m and a net loss of Rs1.3bn.

Capitalization concerns high - Jet reported consolidated debt at Rs166bn taking the debt:equity ratio to ~5X.
Repayment in the current year is at ~Rs10bn. Additional outstandings for the current year include a Rs 1.4bn payment to SICCI (annual installment for the acquisition of Jetlite erstwhile Sahara).

No capacity additions in the current year – The management is in talks with Boeing over cancelling/finding another buyer for the Boeing 777 (Capex at ~$145m) that was due for delivery in August09 (Jet had earlier deferred all future deliveries except the Boeing 777). The current operational fleet (86 aircrafts under Jet and 23 aircrafts under Jetlite) is expected to be maintained as of now. (The management plans to renew the leases that come for expiry in the current year).

Options to fund - Sale and lease back – Inorder to meet its obligations, Jet has the option of a sale and lease back of its existing assets (39 owned planes – 21 narrow bodied aircraft and 18 wide bodied aircraft). While Jet has booked a sale and lease back of an A330 in the current quarter at a $9m profit over its book value (leading to a cash inflow of ~$85m), a premium to book value could be difficult in the current environment. Till date Jet has raised ~$2.5bn inorder to fund the acquisition of its fleet; a sale (at book value) of these assets by the end of the current year can
potentially generate cash (net of repayment of loans) to the tune of ~Rs15-18bn.

To see full report: JET AIRWAYS


Price target achieved
JSW Steel has appreciated by more than 18%, since our last recommendation dated May 11, 2009. We had given a buy call with a price target of Rs 485 on the spectacular guidance given by the management for FY2010E and FY2011E. The management had guided for 70% rise in the production for FY2010E owing to the successful operations expected from the green field facility recently commissioned.

Indian Steel industry is exhibiting resilience:
Indian Steel industry is not showing the panicky conditions exhibited by the global steel majors. The steel prices throughout the country are stable and above the international prices which in turns are exhibiting some strength. The Indian domestic Steel prices have been steadfast. The Steel demand is expected to remain robust despite the recessionary noises through out the globe. According to World Steel Association India's apparent steel demand is forecasted to reach 53.5 mmT in CY09, a 1.7% rise over that of CY08 and is expected to reach 58 mmT in 2010, an increase of 8% YoY.

Steel prices are expected to be stable and rising:
The demand for Indian Steel Industry is expected to steady. Although, the capacity expansion projects of domestic steel majors are on track, the green field plans made by foreign Steel behemoths like POSCO and Arcellor Mittal have been deferred. The mismatch between expected demand and supply is expected to keep the prices steady and rising.

At CMP of Rs 511, the stock quotes at an EV/EBIDTA of 1.7x FY2011E earnings. Currently, we feel that the pricing of the stock is stretched. We advise the clients to book profits at this price and re-enter at lower levels although we are positive on the future prospects of the company.

To see full report: JSW STEEL


IRB’s FY09 results were in line with our estimates. The consolidated net revenue has grown by 35% YoY on the back of ~23% YoY increase in toll revenue and ~56% YoY increase in construction revenue. However, margins have shown a dip due to rise in construction cost on account of higher raw material prices. The construction cost saving upto 20% is estimated on Surat Dahisar BOT which will have a positive impact on the project and aggregate NPV. However, it would be too early to factor in this development as the project has just begun and will be completed in the next 28 months. We believe, in the current scenario, change in our assumptions (traffic growth rate, cost of equity and debt, toll escalation rate) are not warranted. Our calculation suggests the NPV of BOT projects will have the highest sensitivity to the traffic growth rate amongst other factors. We have valued the stock on SOTP (BOT – NPV and EPC – PER) method and believe that the stock remains overvalued at these levels. We maintain a SELL on the stock with target price of Rs 67(BOT - Rs.56 and EPC - Rs.11).

Order book details
The Company has an order book of Rs.58.9 bn as on 31st March 2009 (of which O&M work accounts for 43.7%, EPC in ongoing BOT projects accounts for 51.6% and rest 4.6% is attributed to funded projects). Further, the EPC order book of Rs.30.46 bn is confined to construction work of ~300 kms, out of which Surat Dahisar accounts for 239 kms and KIRDP (Kolhapur Road Integrated Development Programme) for 50 kms. The company expects to execute the order book in next two and half years.

Project update

Surat Dahisar BOT

The EPC cost of the project (~Rs.25 bn) is expected to be reduced by ~20% on account of reduction in raw material prices and cost of funding. This is expected to result in a saving of around Rs.5 bn. However, it would be too early to predict the extent of cost saving as only 2 months of construction period has gone by out of a total period of 30 months. Hence, any upward movement in RM cost in the balance period of construction might not reduce the construction cost to the extent of 20% as anticipated by the company.

IRB has started collecting toll from 20th Feb 2009 on this stretch and has so far collected Rs.335.9 mn on gross level (around 7.3% contribution to total toll revenue) but this is lower than earlier expectation by around ~26%. The current run rate is ~Rs.8.5 mn/day on the gross basis as against the expected ~Rs.11.5 mn/day. The lower toll collection is on account of lesser port traffic on the stretch due to slow down in exports and economic activities.

Sensitivity of NPV to change in construction cost (EPC) at constant 6% traffic growth
The NPV of Surat Dahisar BOT will range between - Rs.4.82 per share to Rs 3.71 per share for 0% to 20% cost saving in construction expense.

Our aggregate NPV is estimated to improve between 3.8% to 15.3% for reduction in construction cost between 5% to 20%. (NPV range – Rs 55.90 per share to Rs 64.43 per share).

To see full report: IRB INFRASTRUCTURE


Margin pressure continues

Sales in line with estimates: Cinemax India’s consolidated revenues for Q4FY09
rose 34.9% YoY to Rs 334mn, broadly in line with our estimates. The exhibition business was the main revenue growth driver, rising 43.4% YoY to Rs 308.3mn. Income from the retail space stood at Rs 22.5mn, while windmill and distribution/production revenue stood at Rs 3.1mn and Rs 0.3mn respectively.

Exhibition revenues increased because of the addition of 22 new screens during
the year along with higher footfalls, although the average occupancy dipped to 25% in Q4 from 29% in comparable properties, and average ticket price (ATP) declined marginally to Rs 129. Occupancy in non-comparable properties was 28% and ATP stood at Rs 118. F&B spend per head at comparable properties increased to Rs 31 from Rs 29 in Q4FY08, whereas it stood at Rs 27 for noncomparable properties.

Lower occupancy rates and decline in ATP lead to margin pressure: Operating
profit declined 25.8% YoY to Rs 35mn owing to lower occupancy rates and ATP. Film distribution cost increased to Rs 67.7mn, rising by 70bps as a percentage of net revenue to 20.3%. Other expenses rose by 68% to Rs 182mn, accounting for 54.4% of net revenue (up 1,080bps). F&B cost and employee cost stood at Rs 18.4mn and Rs 30.6mn respectively.

Net profit drops 55.8% YoY: Cinemax reported a PBT of Rs 2mn in Q4FY09
against Rs 37mn in Q4FY08. In spite of a tax write-back of Rs 8mn, PAT declined 55.8% YoY to Rs 10mn.

Operational highlights – 16 new projects in the pipeline: Cinemax is present in
25 locations as of Q4FY09 with 74 screens, including 5 added during the quarter. The number of footfalls has increased from 6.6mn in Q3FY09 to 8.5mn in Q4FY09. The company has a total of 16 new projects in the pipeline which will add 55 screens and 12,678 seats by FY10.

Earnings estimates cut – Hold: The stock is quoting at 10.2x P/E and 7.5x
EV/EBITDA on FY10E. We have reduced our net profit estimate for FY10 by 12.4%, on account of lower revenue estimates given the standoff between producers and multiplex owners. In addition, we have switched over from a DCF-based valuation to a P/E model in order to capture the overall re-rating in the media sector. Our revised price target thus stands at Rs 61, based on a P/E of 10x on FY10E. We upgrade the stock from Sell to Hold.

To see full report: CINEMAX INDIA


Equity Fund Inflows Losing Momentum

Inflows to Asian funds halved — Although Asian equity funds continued to take in new money this week, the amount fell sharply to US$0.9m vs. US$1.9bn in the prior week, according to EPFR Global. Other emerging market funds (with the exception of LatAm funds) as well as global equity funds also faced decreased inflows: GEM fund inflows were down 24% WoW, EMEA funds 72% less and Global funds –47%.

An early sign of rolling over? — Asian funds saw net redemptions 63% of the time in June over the past eight years. For the rest of the time when net inflows were recorded, redemptions were recorded in May. Given inflows to Asian funds have been strong in April and May this year (US$8.1bn vs. US$7bn over the same period in 2008), we believe that the risk of foreign fund flows is on the downside. For instance, net outflows in June 08 totaled US$4.8bn.

Regional Asian funds took in new money the most in dollar terms — This also indicates that net inflows to all Asian dedicated funds are close to tops, as investors seem to lack clear preferences after strong market rallies.

Inflows to China funds dropped the most; India funds saw increased interest — Inflows to China funds decreased from an average US$501m/week in the past month to US$273m last week. By contrast, flows shifted towards India funds post elections. This country is a consensus underweight at Asian & Global funds.

To see full report: FUN WITH FLOWS


Company Snapshot
Torrent Power is one of the leading brands in the Indian power sector, pro-moted by the Rs. 45 billion Torrent Group – a group committed to its mission of transforming life by serving two of the most critical needs - Healthcare and Power. Torrent Pharmaceuticals Ltd., the flagship company of the Torrent Group, is a major player in the Indian pharmaceuticals industry with a vision of becoming a global entity in the arena. The company has reported earnings results for the full year ended March 2009. For the year, the net sales for the company jumped to Rs 44249.60 million for the FY10 as against the net sales of Rs 36183.20 million for the FY09 with the growth rate of 22.29%. The net profit for the company stood at Rs 4078.90 million for the FY10 versus the net profit of Rs 2112.40 million for the FY09 with the growth rate of 93.09%.

The company posted financial figures for the quarter ended March 2009 in line of expectations. The net sales for the company gone up by 14.93% to Rs 10764.10 million for the Q1FY10 as against the net sales of Rs 10582.30 mil-lion for the Q1FY09. The company posted the EBITDA of Rs 1932.70 mil-lion for the Q1FY10 as against the EBITDA of Rs 1297.90 million for the Q1FY09 with the growth rate of 48.91%. The operating profit margin for the company stood at 18.26% for the Q1FY10 as against the operating profit mar-gin of 14.10% for the Q1FY09. The net profit for the company stood at Rs 1446.40 million for the Q1FY10 in comparison to net profit of Rs 504.60 mil-lion for the Q1FY09 with the growth rate of 152.02%. The net profit margin rose 13.67% for Q1FY10 in comparison to 5.48% for Q1FY09, which clearly shows the strength of the company. The EPS for the company stood at Rs 3.06 for the quarter ended in March 09. The cash EPS for the company stood at Rs 1.07 for Q1FY10. The EPS on TTM (Trailing twelve months) stood at Rs 8.63 for the company.

Business Details
Torrent Power Ltd. (TEL) was incorporated on Apr. 29, 2004 as Torrent Power Trading. The name of the company was changed to Torrent Power on Jan. 25, 2006. Consequent to the conversion of the company into a public sector company on Feb. 8, 2006, the company came to be called as TEL. It came into existence after the merger of Torrent Power AEC, Torrent Power SEC and Torrent Power Generation. Gujarat-based TEL is a part of Rs. 45 billion Torrent Group and is engaged in genera-tion, transmission and distribution of power. Torrent’s venture into power sector began with the acquisitions of utilities, the Surat Electric-ity Company and the Ahmedabad Electricity Company. It turned them into first rate power utilities in terms of operational efficiencies and re-liability of power supply. The company has a generation capacity of 1600 MW and distributes over 7 billion units of power annually to Ah-medabad, Gandhinagar and Surat. The company also bagged the Gold Shield for two consecutive years, 2004-05 and 2005-06, for outstanding performance in power distribution by the Government of India. Distri-bution franchise business is one area which Torrent Power has been aggressively pursuing as part of its current expansion plans. The com-pany created history by entering into the country’s first distribution franchisee agreement with Maharashtra State Electricity Distribution Company Limited for Bhiwandi Circle in December2006.

Industry Outlook
In recent years, the Government of India (GoI) has taken significant action to restructure the power sector and attract investments. The most significant reform package has been the introduction of the Electricity Act, 2003 which has modified the legal framework governing the electricity sector and has been designed to alleviate many of the problems facing India's power sector and to attract capital for large scale power projects. Eleventh Plan of GoI envisages a capital expenditure of more than Rs.10, 00,000 crore in power sector to ensure "Power for All". The Common Minimum Program of the GoI focuses on 100 % village elec-trification by 2009 and 100 % household electrification by 2012. Last year marked the commencement of the I I th Five Year Plan. About 21,200 MW of capacity got added in the 10th Plan against a target of 41,100 MW. Focused efforts are, therefore, required to implement the targeted 80,000 MW in the I I th Five Year Plan by 20I 2. Given the growing demand-supply gap, the Indian Power Sector continues to be fundamentally attractive. The additional capacity required to be built is huge. In this context, we believe that the Generation sector would be of great interest to investors. A lot will depend however upon the Central and State Governments' resolve to address issues concerning Distribution sector reforms, expeditious clearances (land and environment in particular) and allocation/ linkage of fuel.

To see full report: TORRENT POWER