Saturday, June 6, 2009


We met the management of Adlabs. Following are the key takeaways

Re-crafting of business verticals
Adlabs has re-crafted its business segments, by demerging its radio business and discontinuing its film production business. The re-crafting of the business verticals is expected to add significantly to EBITDA and PAT margins, as operational losses and amortization of radio segment will not reduce, overall profitability.

Aggressive expansion plans
Adlabs is aggressively expanding both its domestic as well as international operations. The company is expected to add around ~123 screens and ~ 49 screensin FY10 and FY11 respectively from the current 473 screens. Around 70% of the currently operational theatres are in the form of multiplexes, which provides significant operating efficiencies as some costs are semi-fixed in nature, which enables the company to spread costs, over a higher revenue base and add to the profitability.

To see full report: ADLABS FILMS


What Needs To Happen And What Can Happen?

Stocks up on de-regulation talk — BPCL, HPCL, and IOCL all spiked up today on a statement by the Oil Minister regarding a fresh proposal for pricing decontrol to be submitted to the Cabinet in six weeks. We think the proposal could contain: (i) petrol/diesel pricing freedom to a limit (say US$75 crude), and (ii) efforts to better direct LPG/SKO subsidy. This is not the first such proposal but implementation has proved to be tricky. Duty cuts may be difficult given fiscal constraints.

What are the stocks factoring in? — Our base case factors in “status quo” on LPG/SKO and pricing freedom on auto fuels, which in our view cannot result in a marketing margin beyond normative levels of US$5/bbl (Rs1.5/l). Assuming LPG is completely deregulated (SKO is outside bounds), then the FY10E EPS for BPCL, HPCL, IOC would go to Rs48 (+29%), Rs45 (+45%), and Rs55 (+10%), respectively. On current prices this translates to P/E’s of 9.7x, 8.0x, and 11.0x respectively, implying that the market is already pricing in decent probability of LPG de-regulation.

Lower oil prices remain critical — In the above scenario, net under-recovery (post upstream
sharing) comes to Rs100bn (on SKO only). For this to be recovered fully from over-recoveries on petrol/diesel, it is imperative that crude slides to US$50levels. Lower crude therefore remains critical to get constructive on downstream names, notwithstanding the government’s efforts to partially de-regulate.

Sell on newsflow — Newsflow on various proposals could remain strong for a few weeks. However, given that the Oil Ministry’s wish list has only been halfway met in the past, we would advice investors to use any strength as an exit opportunity.
To see full report: DOWNSTREAM R&M.

To see full report: DOWNSTREAM R&M


Back in the 1960s and 1970s, the 'Nifty Fifty' were 50 large American companies whose shares were regarded as solid, dependable, low-risk growth stocks with stable earnings. Companies like Coca-Cola (NYSE:KO), GE (NYSE:GE), Procter & Gamble (NYSE:PG), and Johnson & Johnson (NYSE:JNJ), in other words: the bedrock of the American economy.

The proposition for investors was simple. These were companies that were built to last, well-positioned for growth, and well-managed -- so buy a broad cross-section of the Nifty Fifty, hold for the long term, and forget about fancy stock picking. Over 40 years on, investment strategists at HSBC (LSE: HSBA) have now revisited the Nifty Fifty notion -- with a twist. What would a global Nifty Fifty look like, they wondered? And -- of even more interest to UK investors -- a European Nifty Fifty?

The global Nifty Fifty includes several members of the original (and American-only) Nifty Fifty -- companies such as Coca-Cola, Johnson & Johnson, and Caterpillar(NYSE: CAT). It also includes American companies that were relative minnows when the original Nifty Fifty were formulated -- Wal-Mart Stores (NYSE: WMT), for example. There are also some that didn't exist at all back then: Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO) and Oracle (Nasdaq: ORCL). Of the complete global listing, 24 companies are American, 10 are Asian, and 16 are European. And of the European companies, six are British.

What might a global ‘Nifty Fifty’ look like? (SEE IN REPORT)

To see full report: THE GLOBAL NIFTY FIFTY


ITC has underperformed Sensex by 45% in CY09 (YTD). With Budget being just a month away expectations of steep increase in excise duty are doing the rounds. Cigarettes contribute 42% to sales and 87% to PBIT of ITC. The company has been facing headwinds on the regulatory front for the last two years, with the imposition of VAT (12.5%) and 5% increase in excise duty in FY08, followed by a sharp increase in excise duty on non-filter cigarettes (391% increase on
micros; 140% increase on plains) in FY09. ITC has discontinued non-filter cigarettes (19.4% of FY08 volumes). Consequently, volume growth of 7.1% in FY07 has decline to minus 3% in FY09.

Pictorial warnings unlikely to impact volumes: From 31 May 2009, it has become mandatory to display pictorial warnings on cigarette packs. However, as the pictorial warning is required only on one side of the cigarette pack to the extent of 40% of pack size, the consumer will not be able to see the warning if the retailer displays the back side of the pack or if the pack flap is open. Cigarette volumes are unlikely to be impacted due to the implementation of pictorial warnings. ITC will take a one-time hit of Rs150m-200m on replacement of cylinders for packing material.

Industry expects 6-8% excise duty increase in FY10 budget: Cigarette industry expects 6-8% increase in excise duty for FY10, which would result in 2-3% volume growth (v/s 4.5% decline in FY09). However, higher increase in excise duty would result in lower volume growth. We believe that fiscal constraints might force the government to propose a double-digit increase in excise duty. We don't rule out higher excise increase on filter cigarettes as this segment had not seen any excise increase in FY09.

Stock has reacted negatively to large excise hikes in the past: ITC’s stock price has reacted negatively to sharp increase in duties in the past. The stock declined by 6.1% in 2005 (10% excise increase after a gap of three years) and 17% in 2007 (imposition of 12.5% VAT and 5% increase in excise).

We currently factor in 7.5% increase in excise and 4% volume growth: We are currently factoring in 4% increase in cigarette volume and 7.5% increase in excise duty. Double-digit excise duty increase will be viewed negatively by the markets, in our opinion. Expanding margins by increasing prices will not be an easy option in FY10 as cigarette prices have increased by over 25% in the last two years. Maintain Buy with target price of Rs200.

To see full report: ITC


Industry Outlook

Computer/Business Services- Full Recap From

Last Week’s Tech Conference

Conclusion: Most IT Services vendors pointed to relative stability in IT spending trends, as funding remains firm for various cost-savings driven initiatives (application maintenance, BPO), while spending on discretionary, large projects remains cautious. Having said that, certain vendors highlighted improving pipeline conversions, with pricing pressure gradually abating (in
fact, most pricing renegotiations have already been completed). With somewhat improving visibility, partially driven by positive signals from the financial services sector (the industry’s largest vertical), the inflection point for the sector could be the September quarter, resulting in an industry-wide sequential revenue growth. Accordingly, we maintain our Outperform ratings on ACN, CTSH, INFY, WIT, ACS, VRTU, and NSTC.

Secular Growth Drivers Intact. We continue to believe that once spending decisions return to normalized levels, the offshore sector could continue to post strong revenue growth rates reflecting low penetration rates (IT spending dedicated to offshore projects as a percentage of overall IT budgets).

Pricing Trends Seem Manageable. While vendors have been working with clients in order to reduce offshore delivery costs by 10%-15%, greater mix of offshore execution and fix price work have resulted in an actual impact on pricing of 300-500BPTS.

EBIT Margins Sustainable. As we believe sector’s utilization rates are depressed by 500-1000BPTS.

Financial Services Could Lead The Spending Recovery. A number of vendors during our conference suggested improving pipeline conversion from this critical vertical (accounting for 30%+ of sector revenues), as the business environment in this vertical has stabilized.



Result analysis: Q4FY09
Quarterly net sales were up by 10%, slowest in past 12 quarters, operating profit up 17%, EBITDA down 11% and net profit down 33%. Operating profit increased due to lower raw material inflation, almost flat employee cost and less than proportionate increase in other operating expenses. However, starkly lower other income during the quarter affected the EBITDA. Lower EBITDA and higher tax provision coupled with exceptional & extraordinary items led to a 33% drop in net profit.

Result analysis: FY09
Annual sales growth momentum was maintained at 20%, whereas operating profit growth was restricted to 13.5% due to high commodity prices in the first half of FY09. Healthy other
income in Q3 and Q4 of FY09 buoyed up the EBITDA by 14.8%. Despite healthy EBITDA, and lower tax rate, net profit (bei) for the full year grew less than proportionately, up 9.7%, due to
higher financial expenses and depreciation. Extraordinary items further dragged the PAT down by 5.5%.

Management vision
As per Ms.Vinita Bali, MD, Britannia Industries, the company will continue to focus on:

• Building brand ‘Britannia’ in India and abroad and leverage the Middle East acquisition to expand its global footprint
• Continue to enhance portfolio of brands offered in India to cash in from buoyant demand for both healthy and indulgence food products from urban as well as rural India
• Cost efficiency to drive profitability
• Focus on both bakery and dairy to drive future growth

Despite disappointing quarter we maintain our positive outlook due to Britannia’s leadership in biscuits category, which is expected to grow ~15% for next couple of years, as well as its increasing focus on other bakery products like bread and also on dairy businesses. We like Britannia’s aggressive innovation to cash in from rising demand for on-the-go snack foods and
presence across price points to cater consumers at all levels in the income pyramid. Buoyant demand from urban markets coupled with increasing demand from rural markets will keep the ball rolling for the bakery manufacturer, which controls 35% of the market.

Change in estimates and recommendation
Though, we maintain our positive outlook on the stock and expect the biscuit major’s revenues to grow by double digits, we revise our Earnings estimates (and in turn target price) downwards due to commodity inflation (sugar and vegetable oil), higher brand investment and increased debt burden to service bonus debentures (carrying 8.5% coupon for 3 years). We now estimate FY10 EPS at Rs91.1 and FY11 EPS at Rs111 and value the stock at 20xFY10E EPS arriving at a target price of Rs1823, upside potential of 8% from current price of Rs1682.

Recommendation changed from Buy to Market Perform.

To see full report: BRITANNIA INDUSTRIES


PO implies 19% potential downside; cut to Underperform
HPCL’s share price is up 40% since the election results on 16 May on hopes that auto fuel pricing may be freed up. Even as investors turn bullish, the FY10E earnings outlook has deteriorated, in our view. Auto fuel marketing margins were at supernormal levels until March 2009, but have collapsed and turned negative. Even if auto fuel prices are freed up, only a normal auto fuel margin is likely in FY10E. In this scenario, we only expect a healthy FY10E EPS if oil bonds are issued. HPCL’s new PO of Rs291.4, based on base-case FY10E EPS, implies 19% potential downside. Thus we downgrade HPCL from Buy to Underperform.

Cut FY10E EPS 20% on drop in auto fuel marketing margins
We already assumed weak refining margins and significant LPG and kerosene subsidies in FY10E. We were earlier assuming a supernormal auto fuel margin of Rs2/l (US$7/bbl) in FY10E. Auto fuel margins have collapsed since March 2009 and are now negative. Margins to date in 1Q FY10 are Rs0.7/l. Assuming auto fuel pricing is freed up, FY10E margins would be Rs1.1/l. A lower auto fuel margin would have meant EPS of just Rs1.3. Assuming Rs13.6bn of oil bonds limits our FY10E EPS cut to 20% to Rs29.

Base- and worst-case PO implies 19-81% potential downside
We calculate HPCL’s PO on three FY10E EPS scenarios. PO based on base and worst-case EPS implies 19-81% potential downside. PO based on best-case EPS implies 18% potential upside. However, the best-case EPS, which assumes a supernormal auto fuel margin of Rs2/l and Brent at US$50/bbl, is improbable, in our view.

HPCL to be in red in FY09E
In 9M FY09, HPCL booked a pretax loss of Rs133/share. Although we expect a.4Q pretax profit of Rs114/share, this still means red for HPCL in FY09E.

To see full report: HPCL


Gains are capped!!!!


The newly elected Government is planning to revive the divestment process. Many divestment stocks are rising rapidly on bourses. Instead of selling majority holdings or completely privatizing, the current thinking is to sell small amount of stocks.

Government is thinking with a short term goal of gamering resources but will not fundamentally change the picture. Neither ownership or management of these companies will change in any major way. If government were to privatize them that will infuse fresh managerial talent and new ideas to make these resources much more profitable. If they sell in large chunk, the price they will receieve will be substantially higher than what they will get for a small stake sells.


In less than three months time. almost half of the BSE 500 stocks have returned more than 50% to its holders. 21% have risen more than 75% and almost 10% stocks have risen more than 100% from its recent lows in March.

99% of the stocks listed on BSE exchange are above 50 day moving average. 95% of the stocks are 200 day moving average. The kind of bullishness is difficult to sustain in such economically challenging times.

India's market capitalization has risen more than 75% in a short span of three months.

Our Market cap to GDP ratio has gone up by more than 66% during time and now reaching fair value level of 1.

This suggest stocks have risen quite rapidly. Now, in order to sustain such rapid moves in the markets, the fundamentals have to turn and improve drastically in next 6 months. If economic data does not improve to that extend, we may be setting ourselves for a negative surprises.

This led us to believe that gains from here are going to be capped at best. Investors will do follow trailing stop loss methodology to protect their precious gains.


It's always been easy to participate in the gold market and there are three options available in India. First, buying physical gold coins, bars and jewellery and store it somewhere safe. Secondly, to trade futures gold on Commodity Exchange. And thirdly buying a Gold ETF on NSE.

All the ingredients are in place for a big run in gold.

To see full report: INFORGRAM


Falls marginally to 0.48%

Inflation for the week ended May 23, 2009 stood at 0.48% as compared to 0.61% reported in the last week

The prices of primary articles decreased to 5.90% for week ended May 23, 2009 as compared to 6.22% for the preceding week.

The prices of fuel items remain unchanged at a negative of 6.68% during the week.

The inflation for manufactured products decline to 0.99% for the week, as compare to 1.09% for the preceding week.

Amongst the manufactured articles, the prices of food products, Textiles, and Beverages tobacco & tobacco products rose the most, by 13.41%, 9.27% yoy and 5.88% yoy respectively. While Basic metals alloys & metals products decline by 12.94% during the week.

To see full report: INFLATION


Deregulation vs crude prices

The state owned oil companies have rallied 26-42% since the election results on hopes of pricing deregulation. We view deregulation as a low crude- price outcome, however, and crude remains the dominant variable; earnings pressures will re-appear as crude rises. We recommend taking profits in IOC, BPCL and ONGC. Investors who do not concur with our views on (rising) crude prices or the policy direction could choose HPCL given its lower valuations (1x PB) and higher upside leverage.

Integrated R&Ms trading at 1.35x PB
The state owned oil stocks have rallied 26-42% since India’s election mandate.
While underpinned by expectations of deregulation, even pure refiners Chennai and MRPL have spiked indicating that the rebound also corrected for low valuations.
ONGC’s stock price is already pricing in auto fuel deregulation, in our view, but the
integrated R&Ms (which trade at 1.35x trailing PB) may still have room to rally.

Still no clarity on FY10 earnings, even deregulation may not help
This will require clarity on FY10 earnings; this depends on pricing policy, subsidy sharing and the trajectory of crude prices. Meanwhile, lower GRMs will hurt in FY10.
Our models build in Rs100bn in net under-recoveries for the R&Ms in aggregate. At our crude price ($64 Brent) and spread forecasts, this implies that the R&Ms share only 17% of the under-recoveries implying continued support via oil bonds.

We are skeptical on deregulation; policy canvas remain uncertain
While we do not expect changes in cooking fuel pricing, the impending proposal to allow the flexible pricing in petrol and diesel may lower auto fuel under-recoveries.
The government wants to cap prices at $75 crude, though. This will likely unravel the proposal; two similar bands were abandoned in 2004/5 as crude rallied.
Further, the implementation itself will test the political will of the government even as five states (including Maharashtra) go to their assembly polls over the next year.
Further, auto-fuel deregulation will likely also lead to a higher burden on the R&Ms for cooking fuel under-recoveries; these equations will be uncertain till end FY10.

R&Ms remain crude price plays; favour HPCL over IOC and BPCL
Crude prices remain the dominant variable, therefore – more so as it is only $10/bbl lower than the government’s proposed price ceiling of US$75/bbl.
In this context, we view the R&Ms as crude-price and not deregulation plays and see earnings risks returning as crude rises. We forecast US$80/bbl long term.
For example, every $10/bbl rise in crude increases gross under-recoveries by US$7.3bn – this is 1.25x the aggregate core FY10 Ebitda of the R&Ms (US$5.8bn).
We recommend taking profits in IOC, BPCL and ONGC. Investors who do not concur with our views on (rising) crude or the policy direction could choose HPCL given its lower valuations (1x PB) and higher upside in a low crude and deregulation scenario.

To see full report: INDIA OIL & GAS