Sunday, June 7, 2009


What can be done to reduce liquidity preference?

The present situation is of a deflationary type because there is a very strong liquidity preference (by banks, investors and households). This is preventing a pickup in credit and in purchases of risky assets. What can be done to lessen the liquidity preference once interest rates have been lowered to zero?

− try to create inflation expectations (quantitative monetary policy, currency depreciation) to cause investors and banks to switch from cash to assets that provide a hedge against inflation (real estate, productive capital, etc.);

− increase the return on risky assets (through fiscal policy, for example), because the return on risk-free assets cannot be reduced further (despite some far-fetched proposals to introduce negative interest rates).

Policies discouraging the holding of liquid assets are more effective than policies of creating additional liquidity, although they are similar in certain respects (inflation expectations).

It must also be recognised that if banks are faced with a fall in credit demand, it is only on the investor side that action can be taken.

If, moreover, there are fears of excessive monetary creation and expected inflation, the most advisable policy is therefore to increase the returns on risky assets via incentive policies.

To see full report: FLASH ECONOMICS


Is the imposition of safeguard duty on imported HRC required to protect
Indian steel majors?

The Story…

At a time when the US and European governments are trying hard to close their doors on foreign steel by imposing anti-dumping duties on steel products imported from India, there has been a sharp surge in steel imports into the country. According to data by the Directorate General of Commercial Intelligence & Statistics, India’s average monthly steel imports rose from 80,000 tonnes in September 2008 to 250,000 tonnes in February 2009, following an increase in purchase by galvanised steel players, engineering and construction companies. Presently, countries, such as China and Ukraine, continue to ‘dump’ steel into India.

In order to protect the interests of Indian steel majors, the Director General of Safeguards had recommended imposing a safeguard duty of 25% on HRC imported at a price of less than $600/tonne, which was, however, turned down by the government. Considering that all Indian steel majors operated at full capacity in the January- March 2009 quarter and recorded a significant growth in volumes for the period, the demand for steel in India appears quite strong. Moreover, steel currently trades at a premium in India in comparison to world steel prices. The question that now arises is whether there is actually a need for the imposition of safeguard duty on imported steel for Indian steel companies, particularly at a time when the infrastructure, construction and auto sector (all steel users) badly require cheaper steel for an early revival. Read on for the answer...

The case presented by Domestic Steel Players

M/s Ispat Industries Ltd. and Essar Steel Ltd. have filed an application for the imposition of
safeguard duty on imports of Hot Rolled Coils/Sheets/Strips. The application is supported by SAIL and JSW Steel Ltd. The applicant, along with the supporting companies, accounted for 79.50% of India’s total production in April 2008-February 2009.

As much as 7,00,000 tonnes of HR coils are estimated to land on Indian shores between May 2009 and July 2009 from Ukraine and Turkey. The imports have been contracted at a price of $400- 415/tonne at Indian shores, while Indian prices stand at $500-540/tonne. These low cost imports could put pressure on Indian steel prices, thereby impacting the profitability of steel majors.

The other side of The Coin

Since the last four months, all major primary steel producers in India have been operating at 100% capacity utilization and recorded a growth in sales volumes for the period. These companies managed to sell their total output in spite of comparatively higher imports (as against last year), as it is not possible for all players with a requirement for HR coils to import the same into the country and only a few big producers having huge requirements are capable of importing the product. Moreover, there also still exists a strong domestic demand for steel and according to latest projections by the World Steel Association, India might be the only country in the world to record a growth (2%) in steel demand in CY09. India has overtaken Russia and the US to become the world’s third largest steel producer, amidst the present scenario of slowing demand and drastic production cuts in both the countries.

Presently, in India, steel prices have stabilised (with an upward bias), which coupled with the significant decline in coking coal and iron ore prices, has provided relief to the major steel producers. We have made some rough calculations in order to arrive at the production cost of crude steel under the new raw material contract prices.

To see full report: STEEL SECTOR


KG D3, D9 - Hardy Update - ALERT

Technical Evaluation report from GCA: Hardy Oil (10% stake holder in KG D3 and D9) released a technical evaluation report by Gaffney, Cline & Associates (GCA) on resource estimates for KG D3 and D9 blocks. Risked resource data on both blocks indicate increase in resource estimates and higher Geological Chance of Success (GCoS) indicating higher probability of a prospect's drilling leading to a discovery.

KG D3: GCA’s resource estimation based on identified prospects and leads for KG D3 block is 5.5TCF (unrisked) and 2.5 TCF (risked) with a 45% GCoS (chance of success), higher than 15-25% GCoS indicated earlier (GCA estimate May 2007). Additionally, GCA conducted a playbased exploration methodology estimate for resources to address both the current prospect inventory and the “yet to find” resource potential, the study indicates 9.5TCF of risked prospects.

KG D9: Risked resource estimate for KG D9 is 10.8TCF, with unrisked
resource estimate of 54TCF, up from 45TCF declared earlier (GCA estimate May07), leading to a 22% increase in unrisked prospects. Also, the GCoS (chance of success) has increased to 20% from 15% earlier.

Drilling in 2HCY09 and CY10: For KG D3 (where two gas discoveries
have been made), 2D data acquisition would be done till 1H09 with 4 exploration wells planned to be drilled in CY10, and for KG D9, exploratory drilling is planned in 1H09.

Positive data point: The GCA ratification of high prospectivity in other
blocks is positive for sustainability of RIL’s E&P business and valuation.

To see full report: RIL


Godrej Properties - the next trigger

Higher raw material costs impact PAT: Net sales (consolidated) for the full year (FY09) grew 16.3% YoY to Rs34.2bn vs. our estimate of Rs32bn. However, PAT plunged 33.6% to Rs1.1bn (vs. estimate of Rs1.8bn) mainly due to increased raw material costs.

Revised rating and target price: The stock has achieved our target price of Rs120. Hence, we have changed our rating to Hold and set a revised target price of Rs129 on SOTP valuation. Currently the stock trades at 19x FY10 EPS of Rs19 and 15.6x FY10EV/EBIDTA.

Godrej Sara Lee stake merged with GCPL; SOTP value revised: GIL’s stake in Godrej Sara Lee is being merged with Godrej Consumer Products (GCPL) at a 1:1 swap ratio. This would consolidate the FMCG businesses under GCPL. Further GIL’s holding in GCPL would increase to 25%. We have revised our SOTP value to Rs163 and revise our target price, post a 20% conglomerate discount, to Rs129.

Godrej Properties results in-line: Godrej Properties reported revenues of Rs2.5bn (excluding other income), exactly in-line with our estimates. We believe revenues were booked mainly from the Planet Godrej project at Mahalaxmi in Mumbai and Bangalore projects. PAT stood at Rs750mn vs. our estimate of Rs583mn.

Chemicals division dampens results: The slump in the chemicals business, which contributes 22% to topline, impacted overall results. Fluctuations in commodity prices and currencies, curtailment of natural gas supplies to factories and sluggish business environment impacted the division on the cost and margin fronts.

To see full report: GODREJ INDUSTRIES


Yamuna Expressway construction site visit

Yamuna Expressway (formerly Taj Expressway) is one of the largest infrastructure projects under execution in India (cost Rs89b). The project would connect Noida to Agra, and also act as a check dam for Yamuna waters over a stretch of 165km. Post initial delays, execution is now progressing at an accelerated pace and is targeted for substantial completion by October 2010. The project is being executed by Jaypee Infratech, 97% subsidiary of Jaiprakash Associates (JPA).

We present below key takeaways from our visit to the construction site.

Earthwork completed on ~60%+ of project length, target to make road “motorable” by October 2010: For YE project construction, land for entire expressway over 165km is in possession. The construction work has been divided into 3 packages comprising (i) Earthwork, (ii) Interchanges, under passes, culverts, bridges, etc, and (iii) Concreting. Currently, earthwork and construction of interchanges / structures have commenced, and concrete work will commence post monsoons (from October 2009). To date, 60%+ of the earthwork has been completed and 80%+ is expected to be completed by monsoons.

Project achieved financial closure, incremental funding to be met through RE monetization: Total cost for YE project stands at Rs89.2b, including Rs11b towards cost of balance land acquisition for real estate (RE) development (5,175 acres). The project has achieved financial closure and is to be funded as: equity Rs12b, debt Rs30b (sanctioned by ICICI Bank), and Rs40b RE monetization at Noida, while balance is toward soft costs. Till date, total capex on YE project stands at Rs35b, and is financed through equity Rs10b, debt Rs20b and RE customer advances Rs5b. We understand that financing is comfortable, given: (i) RE pre-sales of 5.3msf at Noida (Rs27b) and target sales of 8- 10msf in FY10-11 (Rs30-40b), (ii) part of the project capex (~Rs20b+) towards interchanges, structures, etc could be spent post October 2010 with improvement in traffic, providing extra time period.

Valuation and view: We expect JPA to report PAT of Rs9.9b in FY10E (up 16% YoY) and
Rs9b in FY11E (down 9% YoY). Using SOTP, we arrive at price target of Rs224/share, of
which YE project is valued at Rs95/share (net off negative value for BOT projects). The stock
trades at a P/E of 21.1x FY10E and 22.7x FY11E. Maintain Buy. About Yamuna Expressway project: YE project will connect Noida to Agra through 165km 6-lane expressway built on BOT basis, with concession of 36 years, excluding 6 years for construction. The project also entails RE
development at five locations of 1,250 acres each (total 6,250 acres).



Enough Adjustment?
Headwinds remain, but ready to recover

• Official recession ends soon

• Double-dip 2010 recession avoided
• Core inflation to fall on labor slack

This report updates our US economic forecasts.

The 2009 story has not changed much since our 27 March report, Break in the Weather. The official recession may soon be over. Consumers have cut back enough, as saving ratios have climbed to high enough levels, as long as asset prices can stabilize. On this front, stock prices have risen while house prices are still falling, but housing valuations appear cheap enough that a bottoming is in sight.

We stick with our view that GDP could rise as early as the second quarter, building up some strength in the second half of the year, but it will be a jobless recovery for a while, so unemployment will keep rising to about 9.75%. This should set the stage for a sizable decline in core inflation in 2010, down to under 1%. As a result, the Fed will not need to raise rates in 2010, providing a bullish backdrop for 10-year note yields despite the recent sell-off in response to deficit concerns. This will help keep mortgage rates low.

The loosening of financial conditions has been more than we anticipated over the past three months, and so we have taken out our “double-dip recession” scenario for the first half of 2010, where we now look for slightly positive growth rather
than slightly negative growth. This has had the effect of raising our 2010 year-average forecast from 0.5% to 1.9%.

However, 2010 growth will nevertheless be constrained and below trend, because significant financial headwinds remain and deleveraging will continue (but not enough to produce another recession, in our view).

Much of the upgrade to 2010 growth, however, is likely to be productivity led, so we have not changed our unemployment forecasts much. Indeed, payrolls could stay negative for much of this year and not stabilize until later in 2010, keeping wage growth and core inflation very low.

To see full report: US ECONOMICS


Losing Steam

NTPC, India’s largest power producer is facing huge delays in most of the plants under construction. Delays in capacity addition resulting in lower rate of return on core business, coupled with rich valuations of 3.1xFY10E BV and 25X FY10E EPS makes the stock richly valued. In addition, the free-float adjustment in Nifty is expected to bring down the stock weightage in the index by around 550 bps is a key negative for NTPC. We believe that the above market valuations and slow earnings growth do not justify the current price. We initiate coverage on NTPC with a SELL rating.

Key Highlights

Delayed execution: Of the 22,430 MW (inc. JVs) power generation capacity targeted to be added during 11th five year plan ending 2012, only 3,740 MW has been commercialized. Of the 17,430 MW under construction, we expect NTPC to commission only 9,560 MW by FY12. Poor execution resulting in idle CWIP earning zero returns and inefficient utilization of cash generated through operations is expected to suppress NTPC’s ROE.

Rich valuations overweigh tariff regulations gains: Though, the new tariff regulations are positive for NTPC, the current valuations more than overweigh the gains from new tariff regulations.

Reduced weightage in Nifty: From June 26th 2009, NSE is expected to move to free-float market capitalization basis from the current method of full market capitalization basis for the index constituents. NTPC, with free float of only 10.5%, will be severely impacted with a 550bps fall in weightage in the Nifty.

Valuation: We ascribe 1-year forward value of Rs161 per share to NTPC‘s generation business based on DCF approach and Rs16 per share for equity investments and cash & cash equivalents to arrive at our 1-year forward target price of Rs177 per share. At current market prices Rs229, NTPC is trading at 3.1xFY10E BV of Rs74.3 and 25XFY10E EPS of Rs9.1, a steep premium to the market valuations. We initiate coverage with a SELL.

To see full report: NTPC


Forex loss spoils the show…
Ipca Lab ’s results for Q4FY09 were in line with our expectations. The topline grew ~25% YoY to Rs 317 crore. Net profit de-grew 65% YoY to Rs 7.9 crore. Ipca’s EBITDA margin in Q4FY09 expanded by over 243 bps YoY on account of higher revenue from promotional markets and efficient cost control. Lower realisation from the sterling pound had a negative impact on operating profitability. For FY09, the topline grew 22% YoY to Rs 1284 crore. The EBIDTA margin expanded 259 bps but net profit margin declined by 551 bps on account of Rs 76 crore of forex loss. Overall, we are confident about Ipca’s growth momentum and rate the stock as PERFORMER.

Highlight of the quarter
On account of robust growth in the high margin promotional business, the overall EBITDA margin expanded 243 bps. A forex loss of Rs 76 crore, largely translational in nature, dented the bottomline by 65% YoY in Q4FY09. Input cost as a percentage of sales declined by 243 bps but increase in employee cost by 140 bps restricted further expansion in the operating margin.

Given the strong traction in the branded business, Ipca is looking to log higher growth in the promotional market. In the domestic market, the company already has a good portfolio of offerings. For FY09, exports witnessed a robust growth of 27% YoY led by 49% YoY growth in the branded business. We expect Ipca’s revenue and profits to grow at a CAGR of 15% and 14.6%, respectively, through FY11E. Due to the recent rally in mid-caps, the stock has run up significantly. Thus, we are revising our rating on the stock to PERFORMER with a target price of Rs 627, 8x FY10E EPS of Rs 78.4.

Result analysis

Topline growth in line with expectations
Ipca’s topline grew at 25% YoY in Q4FY09 to Rs 317 crore buoyed by a robust 31% growth in the exports revenue backed by 38% growth in the export formulation business. During Q4FY09, the domestic business grew strongly by 26% YoY to Rs 124 crore, backed by higher than 14% growth in the fixed dosage business. For the full year, exports grew 27% YoY. Fixed dosage
exports grew 28% YoY to Rs 437 crore on account of entry into the US market in September 2008 and robust growth in promotional markets. API exports logged a robust growth of 25% to Rs 243 crore in FY09.

The generic business grew 17% YoY to Rs 269 crore in FY09 vis-à-vis Rs 229 crore in FY08. The institutional business is showing good growth momentum. However, growth in the UK market has been disappointing as the region is witnessing lot of price fluctuation in the Amoxy based products. The domestic formulation business also grew at a good rate of 15% registering revenues in excess of Rs 600 crore. The company has filed 11 abbreviated new drug applications (ANDAs) in the US and has received approval for nine. Ipca currently has only five formulations selling in the US garnering market share in excess of 15%.

Operating margin instills confidence
The EBITDA margin of 16.8% in Q4FY09 was way above our expectation of 14%. For the full year, the margin improved by a solid 259 bps on account of higher revenue generation from the promotional export markets of CIS countries, LATAM (Latin America) and African markets, etc. The higher margin branded business, which has been growing at a CAGR of 35% for the last four
years registered a 49% YoY increase in sales. Although sales grew over 20% YoY, lower realisation due to the Sterling pound had a negative impact on operating profitability. The company also suffered losses on rupee-dollar hedging. However, a decline in raw material and other expenses as a percentage of sales supported the margin expansion.

To see full report: IPCA LABS


Revised AS-11 guidelines lead PAT growth…
Kamat Hotels came out with its Q4FY09 numbers that were marginally below our expectations. The net sales declined by 35.1% YoY and 2.5% QoQ, respectively. The margin continued to remain under pressure despite a reduction in operating costs. It declined 1690 bps YoY and 560 bps QoQ,
respectively. During the quarter, the company adopted revised AS-11 guidelines and reversed notional forex loss of Rs 14.48 crore. As a result, it reported net profit of Rs 9.7 crore against loss of Rs 1.5 crore in Q3FY09.

Highlight of the quarter
During Q4FY09, the company reported net sales of Rs 28.8 crore as against our expected net sales of Rs 31.0 crore. Net sales dropped 35% YoY. QoQ also, the company was unable to maintain growth due to heavy cut down in travel budgets by Indian companies, as its major clientele comprise Indian companies. Operating profit for the quarter was Rs 7.6 crore. It declined by
60.6% YoY and 10.3% QoQ. During the quarter, the company adopted revised AS-11 guidelines and reversed notional forex loss of Rs 14.48 crore. It also received luxury tax refund of Rs 1.7 crore for FY04-05. As a result, it reported net profit of Rs 9.7 crore against loss of Rs 1.5 crore in Q3FY09.

Over a short-term perspective, we may continue to see sluggish performance as majority of the company’s clients are corporate clients which are currently cutting costs steeply. However, on the other hand, with leading macroeconomic data showing some signs of recovery, hotel players having majority ‘corporate clientele’ like Kamat Hotels would tend to benefit faster compared to those having a higher presence in the leisure segment over a longer term. Hence, we are revising our FY10E EPS estimates marginally upward to Rs 9.9 and introducing our FY11E EPS estimates at Rs 13.1. We value the stock at 6x its FY11E EPS estimates to arrive at a target price of Rs
78. We are changing our rating from UNDERPERFORMER to PERFORMER.

Result analysis

Sales continue to decline on cut down in corporate travel budgets
During the current quarter, Kamat Hotels again reported a sharp decline in its sales. Its net sales declined by 35.1% YoY to Rs 28.8 crore. One of the main reasons for such a sharp decline in sales was a heavy cut down in corporate travel budgets by Indian companies on account of the global slowdown. Since Kamat Hotels’ major clientele (i.e. ~80% of its clientele) comprise Indian companies, it has seen a sharp decline in sales on a yearly basis compared to other hotel companies like Viceroy Hotels.

Adoption of revised AS-11 guidelines results in robust PAT growth
During the quarter, the company adopted revised AS-11 guidelines. Accordingly, a notional forex loss of Rs 14.48 crore on its FCCB of US$18 million got reversed. As a result of this, the company reported net profit of Rs 9.7 crore and Rs 5.7 crore for Q4FY09 and FY09, respectively. A receipt of Rs 1.71 crore towards luxury tax refund for FY05 also aided the growth in net

Focusing on core business
In order to improve its performance and ease liquidity issues, the company sold its 60% stake in Concept Hospitality (non-core asset) for ~Rs 6 crore. The company is now focusing more on its core business expansions. Currently, it has three major projects underway, which include
commissioning of new hotel property at Nagpur, Bhubaneshwar and expansion of its Mumbai property ‘The Orchid’. These entail total capex of ~Rs 140 crore. A majority of these projects are expected to be complete by 2010 according to the guidance given by the management.


Over a short-term perspective, we may continue to see a sluggish performance as majority of company’s clients are corporate clients that are currently cutting costs steeply. However, on the other hand, with leading macroeconomic data showing some signs of recovery, hotel players having a majority ‘corporate clientele’ like Kamat Hotels would tend to benefit faster compared to those having a higher presence in the leisure segment. Though the stock price has rallied sharply in the last one month, it still offers some further upside as liquidity concerns have eased. With the overall macro scenarios improving, we are also expecting an improvement in hotel occupancies and, thereby, rise in room rates by the end of FY10E. Hence, we have revised our FY10E EPS estimates upwards to Rs 9.9. We are introducing our FY11E EPS estimates at Rs 13.1. We value the stock at 6x its FY11E EPS estimates to arrive at a target price of Rs 78. We are changing our rating from UNDERPERFORMER to PERFORMER.

To see full report: KAMAT HOTELS


Higher realization to boost profitability
Average sugar realization for SY09E is expected to be around Rs 22.1 per kg against Rs 14.9 per kg in SY08, higher by about 47% YoY. Though we expect sales volume for SY09 to decline by ~23% YoY due to lower sugar production, higher realization will boost overall profitability of the company.

Better utilization of plant capacities
The company will also have better plant capacity utlisation as there are a limited number of sugar mills in the region and it has maintained good relations with farmers, ensuring easy availability of sugar cane.

Lower Debt burden
The company will have higher profit margins in SY09E and SY10E due to lower fixed costs (including interest and deprecation) than its peers as it chose not to expand at the pace of Bajaj Hindustan. The current debt equity ratio of the company is 1.33x, which is set to improve in SY09E to 0.71 and 0.32x in SY10E.

Significant drop in production estimates for SY09E
Domestic production of sugar is expected to be ~14.5 mn tonnes against our previous estimate of ~21 mn tonnes in SY09E mainly on the account of lower recovery rates, shorter crushing period due to lower availability of cane and higher sugar cane prices paid by gur and khandsari producers resulting in steep decline in the drawal rate.

Outlook & Valuation

As cane costs increase going forward, we believe firm sugar prices, higher realizations from distillery products and high inventories will enable the company to improve profit margins in SY09E and SY10E. However, due to a significant drop in sugar cane availability sales volumes will drop of distillery and cogen segments leading to an overall revenue drop in SY09E and SY10E. At the current market price of Rs. 93.8, the stock is trading at 11.6x and 9.5x its SY09E and SY10E earnings of Rs. 8.10 and Rs. 9.90 respectively. We have valued the stock at 6x EV/EBITDA for SY10E. We maintain our Buy rating on the stock with an increased target price of Rs. 103.5 (due to
higher sugar realizations) an upside of 10.3% over the CMP from our earlier target of Rs 90.5 on the stock.

To see full report: BALRAMPUR CHINI