Saturday, May 30, 2009


London - The U.S. Congress could approve International Monetary Fund gold sales as early as next week, but that decision shouldn't cause a drop in gold prices, analysts said Friday.

"This issue appears now fully priced into the gold market and any announcement confirming sales should not move the market - apart from perhaps a knee-jerk reaction," said John Reade, an analyst at UBS.

Gold hit a three month high Friday due to U.S. dollar weakness across a number of currencies such as the euro and pound. Traders and analysts said the metal is heading towards $1,000 a troy ounce with speculative buying reentering the market and the dollar weakening.

At 1116 GMT spot gold was trading at $974.90/oz, up 1.7% from Thursday's close.

The approval to sell gold, along with an increase in U.S. funding to the IMF, is scheduled for a debate beginning Monday as part of the 2009 Supplemental.

An initial version of the Supplemental, which includes a wider number of issues such as defense spending, was passed by both the House of Representatives and the Senate earlier this month.

The version passed by the House didn't include the IMF provision but the Senate did approve the limited sale as long as it is done in a way that won't disrupt the market.

Discussions over a final draft between representatives from each house are due to begin next week with a vote possible by next Friday.

At the G20 summit in London in April, nation participants agreed the IMF could sell 403.3 metric tons of gold as part of efforts to leverage up to $6 billion in concessional loans for low-income countries over the next few years.

In order for the sale to proceed, 85% of IMF shareholders need to approve the proposal. Since the U.S. has 17% of the votes, it has a de facto veto over the proposal, which requires Congressional approval, but IMF Managing Director Dominique Strauss-Kahn told Dow Jones Newswires this week he expects Congress will soon approve the sale.

"We do not believe the sales, should they occur, will harm gold prices," said HSBC analyst James Steel.

Other member states must also approve the sales plan, which may take many months, HSBC's Steel said, adding the sales are likely to be included in a new Central Bank Gold Agreement, or CBGA. The current CBGA agreement expires in September and analysts expect a new one to be announced soon.

Under the CBGA, 17 European central banks agreed to limit gold sales to 500 tons a year. The pact is adhered to on an informal basis by the U.S., the Bank of International Settlements and the IMF.



Mumbai - India's gold imports in May will fall by nearly 50% on year to around 15 metric tons, as high prices limit local demand, a top industry official said.

The rally in equity markets have also hit investment demand in gold, said Suresh Hundia, president of the Bombay Bullion Association.

Rising stock prices since early March have spooked investment interest in gold in the world's largest market for the yellow metal, he said in an interview.

Gold imports between January and March were only about 10 tons, but shot up in April to 29 tons because of a dip in prices and strong demand during the Akshaya Trithya festival, which Hindu's consider an auspicious time to buy gold.

But "import demand in May has not improved," Hundia said. Part of the reason was the recent strength in gold prices.

"Demand will pick up only if prices fall to around INR14,000/10 grams," Hundia said, adding that level is likely to be reached by May-end.

Currently, gold is trading around INR14,600/10 grams in the local market.

Stronger Rupee To Lower Local Prices

A stronger rupee, which has risen by over 5% against the dollar since April 1, is likely to bring down the local price of gold, Hundia said.

So far, the impact of a stronger local currency has been marginal as gold has risen in the global market in recent weeks.

"Spot gold prices have risen to $960/oz from about $860/oz, so a correction is likely," he said.

"I expect prices to drop to $912/oz to $932/oz by the end of this month. Once that happens, Indian prices will automatically fall to INR14,000/10 grams and local demand will start picking up," Hundia said.

He said he expects the rupee to strengthen further to about 46.00 to a dollar, in the coming weeks. At 0815 GMT, the rupee was trading around 47.65 to a dollar.

India imports more than 90% of the 700 tons to 800 tons of gold sold in the country annually.

Hundia said gold imports in 2009 are likely to be in line with last year's imports of 396 tons.

The chance of an increase in demand looks remote as investment buying in gold has disappeared with few willing to bet on the yellow metal at prices above INR12,000/10 grams.

However, banks in India, which had imported gold in April just ahead of the Akshaya Trithya festival, have been able to sell most of their stocks, Hundia said.

Scrap gold sales are also thin at the moment and volumes are likely to pickup only when prices rise to INR15,000/10 grams, Hundia said.



Key Takeaways

In line with our expectations Net Sales for FY09 stood at Rs 1,717.1 crores (Elara estimate Rs 1717.3 crores) against Rs 1,370.4 crores in FY08 (up 25%).

The order book for the company as at end of FY09 stands at Rs 3,606 croes (2.1x FY09 sales) with new order intakes of Rs570 crores (2.1x FY09 sales) with new order intakes of Rs570 crores in Q4FY09 from PGCIL (Rs 247 crores) and Maharashtra State Electricity Distribution (Rs 323croes). Of the current order book 65% are for tranmission lines, Substations 15% and Rural Electrification 20%. The order book addition was subdued in the H2FY09 but we expect it to improve with order visibility of up to Rs 3,000 crores for the sector in next two months. JSL would also bid for orders worth Rs 1,300 - 1,500 crores internationally for Gulf Jyoti and JSL Africa.



Owning India Inc.: Foreign Ownership – Ebb...Before the Swell?

Market EBB: Foreign ownership at a 6-year low of 15.03% — Foreign ownership in the Indian market has hit a 6-year low of 15.03% as at March 2009 (latest data), valuing foreign ownership at c.$86bn, but falling 56bps in the quarter ($1.3bn outflow). This is a long way from the September 2007 peak of 21% ownership, a value high of $260bn, and an annual inflow peak of $17bn (CY2007).

Market SWELL: There has been a foreign flood — We estimate inflows from April-to date of $4.1bn have raised foreign ownership levels to c.15.6% of India’s Top500 companies, and that this portfolio value is now c.$130bn. This is amongst the most concentrated foreign inflows (Sept-Oct 2007 ($9.1bn) was the biggest, but there were outflows thereafter). This flood of funds is almost all foreign with domestic MFs negative in current quarter. Domestic Insurance (over a third of foreign money now) should be positive and stable (but no reliable intra-quarter data).

Underweight India/Equities: Domestic getting more defensive than foreigners — Institutional investors started the April quarter relatively defensively: a) FII’s underweight MSCI 46bps, b) Domestics with estimated 14-15% cash weightage, and c) Overall portfolio bias more defensive than at January 2009. Within portfolios, Foreigners are positioning less defensively than domestics in Jan-Mar 2009 quarter.

Sector Positioning — Financials and Industrials are key Overweights with foreigners and domestics. Energy (Reliance effect) and IT are consensus Underweights. Domestics are significantly Overweight Consumer Staples and foreigners are Overweight Telecom (Bharti effect). Relatively few changes in sector positioning in Jan-Mar 2009, although significant outperformance in beta sectors/stocks in Apr- May 2009 suggests the current quarter should see significant portfolio o re-casts.

To see full report: INDIA EQUITY STRATEGY



Based on our interaction with MD & CEO of ICICI Home Finance Company, Mr Rahul Mallick, we believe the residential segment will script a recovery in ’10. However, office and retail segments are fraught with oversupply, and might only improve after two years. Developers have been able to wade through short-term liquidity concerns. Prices have corrected 5-20%, dipping to December ’07 levels and could consolidate hereon although with a marginal drop. Delinquencies in corporate and retail lending are low and home loan rates can drop 75-50bps further. Overall, industry dynamics have improved, but advice guarded optimism.

Residential transaction volumes better. As per our interaction, there is significant demand uptick in new mid-income housing projects. Developers are restructuring new projects to better align with ground realities. In case of revival, residential segment would be the first to improve. Latent demand at the right price point is strong, with most of the demand from end users. Developers who have cut prices to match the market reported best sales in the past three months.

Existing inventory to cause pain since demand is sluggish given that repricing is difficult in residential projects with more units sold, due to cancellation risk. Developers will have to face agony in the next 2-4 quarters to absorb existing inventory, wherein net cash inflow is lower; this could lead to construction delay in existing inventory.

Developers’ ability to hold inventory is improving as per Mr Mallick – Small- and mid-sized players have liquidity; only large-sized players have overextended themselves on credit. Developers who had bought property more than 24 months ago have benefitted, but those who had bought land in the past two years are in trouble. Most developers have reduced prices only in Q4FY09 to revive sales momentum and are mulling asset liquidation and other measures to raise capital.

Do not expect significant defaults by developers. Developers are under stress, but only short-term liquidity is a concern with long-term cashflow manageable. Developer financing is unaffected, with restructuring limited. Many are raising capital via assets sales, tapping vulture investors, private equity investors, high net worth individuals (HNIs) and through secondary markets.

Pan-India price correction within 5-20%. Q4FY09 was the first quarter when prices declined 5-20% across India and ~40% from the peak in some places. Prices have reached December ’07 levels and could consolidate hereon although with a marginal drop. Mr Mallick expects prices to come down to ’07 levels in most cities and even reduce to ’05 levels in some cases.

Home finance companies (HFCs) are tightening lending standards on income coverage and cashflow adequacy. Expect home financing to grow +10% in FY10E. At present, loan-to-value (LTV) is within 70-80% and it might inch up if prices correct. Home loan rates might reduce 75-50bps further. Refinancing has picked pace. Defaults on home loans have been lower then expected.

Commercial segment to remain insipid. As per Mr Mallick, due to oversupply, the commercial segment may remain in the downturn for the next 2-3 years. Bangalore and Hyderabad would feel the maximum pain. Mr Mallick stated that vacancy rates are now at +10% from 5% and could touch a high of 20%.

To see full report: REAL ESTATE


Investment Rationale
Company is world class manufacturer of Aluminum foil products, which are used in hygienic food products packaging. Its facilities are fully automatic and meet health / safety standards of European nations. Company is expanding capacity by three times to cater to rising demand from domestic and global markets. The expansion of Rs 240 Crs is underway and for which funding was raised earlier in 2007-08; wherein company raised about Rs 125 Crs by equity dilution [in the range of Rs 225 to 260 around Jan’08], by placing equity under QIP route. Even equity warrants were issued @ 115, which are being converted now. So whereas most of the equity dilution already happened, the fruits of this mega expansion [which will triple the capacity] will be visible from 2010-11. The company, which is having very healthy B/Sheet, attractive earnings/earnings growth; will be able to grow even faster in coming years.

Company is likely to become one of the biggest Aluminum foil producer in the world, and will be able to achieve turnover close to 1000 crs, once this expansion is completed; is available to you at Mkt Cap of Just around Rs 100 Crs. If we value such companies very conservatively at 0.5 times of sales, then I think this stock should be 4-5 times from current levels in next 3 years. Even at ‘09 expected sales of over Rs 400 Crs, the business value of company should double at least, if not more, from current levels.

Any delay in expansion or quality issues, may change the equation.

Company is likely to report [for March.’09] EPS of Rs 25-28 on diluted equity, which can go up further to Rs 30 in current year. But real growth due to mega expansion will come there after. That’s why we have covered this in Multi-bagger category for long term investors. But in one year also we expect it to give 100% returns.

To see full report: PAREKH ALUMINEX


Additional Capital Infusion Proposed

Quick Comment: The company announced plans to raise Rs43 bn through a fresh equity infusion. The offering is priced at Rs1,000/share (effective price of Rs1,183/share) and subject to shareholders approval.

Background: In January ‘08, the company allotted 43 mn warrants to promoters, which were to be converted at Rs1,822/share by July 19, 2009. The company consequently collected Rs7,835 mn as margin money through this issuance. At a board meeting held over the weekend, the company cancelled the 43 mn equity warrants that were issued then. Subsequently, the board proposed an equity infusion of 42.9 mn shares.

  • The effective cost of purchase comes to Rs1,183/share (Rs1,000/share + 7,835 mn that the company had paid as margin in early 2008); this is 5.5% above the current market price.
  • If the entire issuance is subscribed to by the promoter group, the promoter holding would increase from 37.6% at end-March 2009 to 47.5% post the issuance.
  • At end-March 2009, consolidated book value was Rs169 bn, which would increase to Rs212 bn (Rs787/share). This implies a P/B of 1.4x at current levels.
Investment thesis: The equity issuance plans should be viewed positively, in our view, as it will allow the company to bid for additional infrastructure and power projects. In addition, it will further bolster its balance sheet. We maintain our Overweight rating on the stock.



Selected news

  • GroupM reduces 2009 adspend forecasts
  • Latest Hindi Channel Audience Data (week 17)
  • Commercial exploitation of foreign DVDs is illegal
  • Raj Express launched 2 tabloid newspapers
  • Reliance Big TV plans to sell 49% stake
  • BSNL launches IPTV services in Chennai
  • Walt Disney forms new distribution partnership
  • Number portability service to be launched by September 2009
  • Share price data
  • Deal sheet for 3 months
  • Internet subscriber market
  • Radio audience analysis
To see full report: INDIA MEDIA MONITOR


Price rise likely despite the sugar futures trading ban
  • Ban on sugar futures trading unlikely to impact gradual rise in sugar price
  • Levy price revision and power tariff increase for companies based in Uttar Pradesh are potential positive triggers
  • Reiterate OW(V) ratings on Shree Renuka (TP increased from INR125 to INR150) and Balrampur Chini (TP increased from INR90 to INR105), and UW (V) on Bajaj Hindusthan (TP unchanged at INR65)
Ban on sugar futures trading until December 2009: The Forward Markets Commission has suspended futures trading in sugar until December 2009 as a precautionary measure, considering the demand-supply scenario and inflationary concerns. We believe the government has put forward this measure to avoid speculative spikes in sugar prices, but in our view the price is likely to rise gradually despite the ban as 1) there is a demand supply mismatch: 2) raw/white sugar imports are unviable at the current sugar price level, 3) sugar inventory levels are likely to remain tight at the end of the sugar crushing season (October-September).

Potential triggers: The government may revise the statutory minimum price (SMP) for sugar
cane from INR82/quintal to INR107/quintal (Business Standard, 21 May 2009). The levy price, or the price at which sugar is sold to the government, which is 10% of production, is based on SMP prices. Such an upward revision in cane SMP should increase levy prices by INR2-3/kg from the current INR13.8/kg. We estimate this could lead to an increase of 3-38% in earnings for the sugar stocks under our coverage in FY10. Also, managements of companies based in the state of Uttar Pradesh (UP), Balrampur Chini and Bajaj Hindusthan, have said that they expect tariffs for their power co-generation division to rise from INR3/unit to INR4/unit. If this happens, it could be another potential positive trigger for these stocks, and we estimate that such a revision would increase earnings for these companies by 13-22% in FY10

Maintain Overweight (V) on Shree Renuka (TP INR150) and Balrampur Chini (TP INR105): We value sugar stocks using PB- and EV/EBITDA-based valuation methodologies. We have increased target PB multiples for Renuka from 3x to 4x on expectation of higher refining margin and Balrampur from 1.5x to 2x based on above mentioned potential triggers.

To see full report: SUGAR SECTOR


Updating Price Target; Remains Top Reward Play

Investment conclusion: Over the next two to three years, we expect Jaiprakash to emerge as a top-5 player in India in each of its main businesses: cement, construction, power, and real estate. We believe the company has sustainable advantages in each of its businesses, and it remains the top pick in our coverage.

What's new: We update our price target to account for the uptick in valuations of the company’s peers in the cement and construction businesses. Our price target moves up 33% to Rs221, implying an upside potential of 27%. As one of the biggest beneficiaries of the improvement in the macro scenario, the run-up in Jaiprakash stock over the last few days, on the back of the positive surprise in the central elections, is more than justified, in our opinion. We raise our F2010e and F2011e EPS by 11% and 10% respectively, to account for the upside surprise in F2009 earnings, as well as an uptick in pricing assumptions for the cement sector.

■ Where we differ: We believe the market continues to lay a disproportionate emphasis on potential problems in funding. The courts have approved the intra-group mergers announced in March 2009, paving the way for the treasury stock (14.5% of equity) to become available in the next four weeks, giving the company significant flexibility to raise funds. In addition, while we
conservatively price the stock at or below peer valuations despite having a superior model in every business segment, we believe the market is allocating a large discount to peer multiples, which is unjustified, in our view.



Liquidity intact, maintain Buy

Lacklustre results: Q4 revenues plunged 68% YoY to Rs426mn and PAT declined 27% to Rs156mn owing to higher operating expenses. Although the company reported loss before tax of Rs89mn, exceptional items representing prior period items and excess tax provision resulted in adjusted PAT of Rs156mn.

Core business still under strain: Low off-take in new apartment sales of its Gateway and Metropolis projects targeted at premium segment and weak leasing activity of commercial and retail space in Bangalore continues to be a cause for concern.

PAT estimates revised: We have retained our revenue and EBITDA estimates, but lowered our PAT estimates by 4.5% for FY10 and 5.5% for FY11 owing to higher tax rate and lower
other income.

Affordable housing and hotels hold long-term potential: Brigade intends to launch affordable housing projects in Bangalore and Mysore with flats priced up to Rs2mn and plans to launch ~8-10mn sq ft of projects in FY10. Further, its hotel at Gateway is also expected to become operational in CY10.

Maintain Buy with target price of Rs107: Our FY10E NAV has increased to Rs119 from Rs96 earlier due to balance sheet and project level adjustments. We have included NAV from ongoing projects with remaining land bank taken at book value. We are providing 10% discount to NAV compared to 50% earlier to reflect easing sector liquidity concerns but remain cautious on the commercial and retail space. We maintain our Buy rating with target price of Rs107.

To see full report: BRIGADE ENTERPRISES


Valuations leave little scope for out-performance

Audited results marginally better than provisional results
The order inflow of Rs156bn in 4QFY09 (+3% yoy) drove up the order book to Rs1,197bn (+40% yoy). While net sales rose 46% yoy in 4QFY09 to Rs105.4bn, EBITDA margin declined by 284bps yoy in 4QFY09. For FY09, net sales increased by 35% yoy to Rs262.3bn and EBITDA margin declined by 289bps yoy. This was due to wage provisioning of Rs17.3bn for the year (Rs 8.9bn in 4QFY09 alone) and higher raw material costs. Raw material cost as percentage of value of production increased by 940bps in 4QFY09 and 562bps in FY09. However, audited results were marginally better than the provisional results declared in April 2009.

Changing composition of power equipment demand profile
BHEL is expecting Rs500bn of orders in FY10E (Rs597bn in FY09). This will include bulk ordering from NTPC-DVC and other 12th plan orders. However, BHEL has a lower share of private sector orders in the current backlog. BHEL has only 12% share for plants expected to be commissioned in the 11th plan period. The private sector orders form 28% of 11th plan orders. Increasing the share of private sector orders and not losing orders to Chinese players (either due to lack of capacity resulting in extended delivery timelines or price differences), would be key going forward for BHEL. The orders from private sector are expected to have higher share in 12th plan orders.

In any case, competition will be tougher as BHEL will have to face not only Chinese but also domestic players who are currently setting up capacities. As such realizations and margins are expected to moderate in the longer term.

Valuations leave little scope for out-performance
We do not foresee significant re-rating from current levels as BHEL is already trading at 50% premium to Sensex. BHEL is currently trading at a P/E of 24.8x FY10E and 19.9x FY11E. We expect an EPS CAGR of 28% over FY09-FY11E and RoAE in the range of 29-30%.

We assign 15% discount to the average multiple during FY03-09 to factor in the possibility of
execution delays and higher competition. This is due to the changing composition of power equipment demand in India. Accordingly, our target price of Rs1700 per share is arrived at by taking the average of 16x FY11E PER and 10x FY11E EV/EBITDA – implying 18% potential downside. Maintain Reduce.

To see full report: BHEL