Monday, June 8, 2009


In recent years, the global view of India has been couched in terms of the daunting China comparison. It wasn’t all that long ago—1991, to be precise—when Asia’s two giants had similar levels of income per capita. That was then. Now, China’s standard of living is more than three times that of India.

The China comparison has been India’s wake-up call— a striking example of how economic development can be galvanized by pro-active government policy. It’s not that India has floundered. To the contrary, over the 2001-07 timeframe, India’s real GDP growth averaged close to 7.5% —an impressive pick-up from the 5.5% pace of the 1990s. Perhaps the most remarkable aspect of this accomplishment was that it occurred despite the government—in the face of stiff political headwinds.

Courtesy of the stunning election victory of the Congress-led UPA, India could now benefit from development-friendly government policies.

Those headwinds could now quickly become tailwinds. Courtesy of the stunning victory of the Congress-led UPA in the recently concluded elections, there is a distinct chance that India could now benefit from its own strain of proactive, development-friendly government policies. The
same reformers that were so successful in opening up India in the early 1990s were stymied by the politics of coalition management over the past five years. The massive win of the Congress Party all but removes that impediment—hinting at a new era of reforms that could well unshackle the increasingly robust potential of the Indian economy.

The dirty little secret of the Indian economy is that it has actually been performing much better beneath the surface than the China comparison might otherwise suggest. India has long had a much better micro story than China: a large population of world-class companies, outstanding
entrepreneurs, a well-educated and IT-competent workforce, relatively sound financial markets and banks, a wellentrenched rule of law, and democracy.

By contrast, India has suffered more from its macro deficiencies—especially when compared with China. That’s especially been true of saving, foreign direct investment, and infrastructure. Yet in the past 3-4 years, India has made impressive progress on at least two of those counts. Gross domestic saving rates have moved from the low 20s (as a percent of GDP) in the late 1990s to the high 30s in 2007-08. Foreign direct investment accelerated to a $40 billion annual rate—still short of Chinese style numbers but a four-fold increase from the pace of India’s inflows as recently as 2005. Even on the infrastructure front—where development constraints remain quite serious—the GDP share of such investments is up from the rock-bottom levels of the late 1990s.

That points to a virtuous cycle for India— with the self-reinforcing interplay of its micro and macro drivers augmented by pro-active government policy and reforms.

Therein lies India’s great potential—an increasingly virtuous cycle brought about the self-reinforcing interplay of its micro and macro drivers that now stands a real chance of being augmented by pro-active government policy and reforms. The new government needs to seize this moment—moving aggressively on four fronts: public sector deficit reduction, infrastructure support, privatization, and deregulation of pension funds, retail, and banking. These are all tough battles for any politicians to wage. But if the government makes a down-payment on these critical initiatives, the Indian economy is well positioned to benefit for years to come.

With the world having fallen in love with China, the Indian economy now stands a real chance to emerge as Asia’s biggest surprise.

The world has fallen in love with the China miracle. India has slipped between the cracks in all this euphoria. Yet China now faces increasingly daunting challenges in coming to grips with long-simmering imbalances of its export- and investment-dominated macro structure. That could be a great opportunity for the “sleeper.” Shifting political winds now give a well-balanced Indian economy a real chance to emerge as Asia’s biggest surprise in the years immediately ahead.


Sign of caution

Markets on June 5, 2009: Listless session

After opening on a muted note, the Indian indices continued their northward journey throughout the day. However, during the final hour of trade, on account of profit booking, the markets came off from the day’s high. Finally the Sensex closed 88 points up, while Nifty ended 14 points higher. However mid caps and small caps ended lower with the BSE MIDCAP and BSESML ending 0.67% and 1.02% lower respectively. On the hourly chart though we saw a breakout from the bullish pattern, it does not seem to be favouring the current flow, which is a sign of caution.
On the downside, if the 40-hourly exponential moving average is broken, we may see a sell-off. The daily momentum oscillator KST is still in the sell mode, which suggests that if in the coming two-three days we do not see a sell off, there is a very high probability that bulls will drag the markets in their corner. The overall market breadth was marginally positive with gainers outnumbering losers in ratio of 1.1:1 on the BSE.

The hourly momentum indicator KST is trading flat. Our short- and mid-term biases are still up for the targets of 4700 and 4850 with the short- and mid-term reversal pegged at 4134 and 3861 respectively.

Stocks from engineering, information technology and automobile sectors led the pack of gainers, while select realty and fast moving consumer goods stocks ended the day on a weak note. From the 30 stocks of the Sensex, Grasim Industries (up 6%), Tata Motors (up 5%) and Bharat Heavy Electricals (up 5%) led the pack of gainers, while ITC (down 5%), Reliance Infrastructure (down 4%) and State Bank Of India (down 3%) led the pack of losers.

In report
following details are given:
  • Smart Charts
  • Day Trader’s HIT List
  • Momentum Calls
To see full report: EAGLE EYE


Murli Deora is in charge of petroleum ministry for the second term under the leadership of the new UPA government without the Left is actively considering deregulation of auto fuel prices. This if approved by the cabinet would be shot in the arm for the oil marketing companies and provide relief to the government reeling under huge fiscal deficit of 6%.

The subsidy burden for the government to keep the oil prices under check is around 1.3% of GDP. Deregulation of the auto fuel prices till the time crude is below a threshold level would help to reduce the subsidy burden for the government and thus impacting the fiscal deficit positively.

In April 2002, the APM system was discontinued and a degree of autonomy extended to the oil marketing companies to set prices based on internatinally quoted prices of petroleum products. Between 2002 and 2004, the world prices of crude petroleum had risen by 26% to 32% and prices of HSD and MS by between 19% and 41%. So the government again started implementing APM.

The government has opened discussions on possibility of deregulation of auto fuel prices. This government had appointed Chaturvedi Committee for implementing reforms in the oil & gas sector in India.

To see full report: FUEL PRICE DECONTROL


India’s real GDP numbers for Q4FY09: a bag of surprises

The government expenditure driven growth (47% of incremental
GDP) was expected, but…
...some of the most sensitive sectors, such as trade, hotels, banking &
real estate, show rather unnatural resilience…
…while downward revision to Q4 FY08 numbers for few sectors
inflates their Q4 FY09 growth rates…
…Net Exports make a positive contribution as imports fall more

The Story…

India’s much-awaited GDP for Q4 FY09 came in at 5.8%, which was equal to the upwardly revised figure of 5.8% (from 5.3%) recorded in Q3 FY09, much higher than expected. The GDP growth for FY09 stood at 6.7%, which was not much lower than the official estimate of 7.1% - which was considered absurdly high. Interestingly, India was the only country in the world that did not record a slowdown in its real GDP in the January-March 2009 quarter over the October-December 2008 quarter. Even China, the world’s fastest growing economy, recorded a slower growth (6.1%) in the January-March 2009 quarter, as against the growth (6.8%) in the October-December 2008 quarter.

The better-than-expected GDP numbers for Q4 FY09 have undoubtedly come as a surprise even to us, though most of the improvement appears to have come on the back of government consumption expenditure and its stimulus packages to various sectors. In this report, we have analysed India’s Q4 FY09 real GDP numbers using two available methods – the output method and the expenditure method. The corresponding sectors reflecting the government spending in two ways are community, social & personal services using the output method and Government Final Consumption Expenditure (GFCE) using the expenditure method. These increased by 12.5% and 21.5% respectively (Y-o-Y), contributing 30.2% and 47.3%, respectively to the incremental GDP in Q4 FY09. Apart from this, some sectors, particularly agriculture and construction, were able to record a good growth due to the downward revision in the numbers for Q4 FY08. Though our estimated GDP of 4% in Q4 FY09was far lower than the actual number, the only positive variances were in services, as all the other numbers were lower than our estimates. Based on the GDP numbers, we have also revised our FY10 GDP numbers, which, however, could be significantly impacted by the Budget to be presented in July 2009 – at which point we may revisit the estimates.

To see full report: GDP


Beneficiary of Improving Macro Outlook; Maintain OW

Investment conclusion: We maintain our Overweight rating on Reliance Infrastructure and raise our price target to Rs1,458 as we believe the improvement in the macro outlook and the positive outcome in the Indian general elections bode well for the power and infrastructure sectors in terms of emerging opportunities and easier availability of credit. In addition, improving visibility on execution and increased clarity on balance sheet strength should be positive triggers for the stock.
We believe the stock will trade between our base-case (Rs1,117/share) and bull-case (Rs1,671/share) values and will be a key risk-reward play in the current environment. Our price target tops up our base-case fair value with the investment in preference shares and 50% of the upside available between the bull case and base case for the other components in our sum-of-parts valuation as we believe the probability of our bull case unfolding has increased.

Recent developments: Key developments in the past few weeks include i) Proposed issuance of preferential warrants to be converted into 42.9mn equity shares to the promoters (ADA Group) at Rs1,000/share; ii) Achievement of financial closure by the 600 MW Rosa II power plant and WRSS transmission project; and iii) Possible scheme of arrangement to enable value unlocking in the future.

Where we could be wrong: Any significant slippages on execution or continued ambiguity concerning liquid assets would likely be negative for the stock. In addition, given its high beta, any weakness in the macro environment could put pressure on the stock.



08 June 2009 to 14 June 2009

Sectoral merry-go-round…

Global stock markets rallied sharply during the week on optimism over the slowdown
in the pace of the economic recession as well as the scope for economic recovery in the global economy. The data points in the US, such as jobless claims, productivity, pending home sales, construction spending, and vehicle sales have triggered a rally in global equity markets.

In the domestic markets, both the Sensex and Nifty gained 3.1% and 3.29%, respectively, during the week. Positive global markets and pre-budget expectations in the domestic markets have helped the Sensex to close on a positive note for the 13th straight week. Continued buying interest from FIIs and selling by domestic institutions induced heavy intra-day volatility in the markets. However, due to the dominant FII infl ows, the indices managed to close in the green.

The week witnessed sectoral rotation with the few sectors that enjoy high weightage in the Nifty underperforming, while majority of sectors constituting a lesser proportion outperforming the index. Auto, cement, construction, capital goods, FMCG, metals, software, telecom and power sectors outperformed the broader market, whereas BFSI and energy sectors underperformed the index. The sectoral rotation was due to profit booking in sectors where there was a sharp run-up in the penultimate week, while buying interest came into other sectors due to pre-budget expectations. The trend is likely to continue during the week.

The Nifty is expected to trade in a broad range of 4450-4650 levels during the week. However, a breakout or breakdown is likely to trigger a 150-200-point movement in the Nifty on either side. The F&O traders can utilize the opportunity by designing covered call, bull-call spread, collars, short straddle and short strangle strategies.

To see full report: TRADE WINDS



Tata Power reported consol. PAT of Rs12.6B, lower than our estimate of Rs16.8B – the variance arose from: (1) goodwill impairment charge of Rs2.8B that the company decided to take on its overseas coal mining subs, and (2) prior period tax liabilities of coal mining subs – Rs1.91B. Management stated in its conference call that this additional tax liability pertains to the period before TPWR took a stake in the coal mines: thus, Bumi would reimburse the amount as agreed (Rs2.15B totally incl other adjustments).

Electrical business EBIT at Rs13.9B (up 16%) was in-line with estimate, and the growth largely came from 100% consolidation of Delhi distribution (treated as JV in FY08). Even though NDPL PAT declined 40% as a result of a one-time depreciation reimbursement of Rs2.25B in FY08, NDPL managed to earn Rs790M incentives by surpassing its loss reduction targets.

Coal segment EBIT registered a sharp 272% increase, due to strong contracted coal prices, coupled with the 12-month consolidation vis–a-vis 9- months in FY08. The reported EBIT of Rs14.6B corresponds to our estimated EBIT of Rs17.5B (based on Bumi IJ’s reported nos) less goodwill impairment charge. The write-off came as a surprise to us, because we believe the coal mines are worth more than what the company has paid for, reflected in its book value.

To see full report: TATA POWER


Sailing through…
Steel Authority of India Ltd (SAIL) surprised us with its Q4FY09 numbers, which were ahead of our and consensus estimates. Though there was YoY de-growth, the company was able to report better-than-expected results. This was despite a fall in realisation on improved product mix, lower employee costs and significant rise in saleable steel volume over the previous quarter supported by an improvement in domestic demand. SAIL reported net profit of at Rs 1486.68 crore and Rs 6174.81 for Q4 and full FY09 (against our expectations of Rs 856.4 crore and Rs 5544.5 crore), respectively. The Q4 net profit figure was down 37% YoY. However, it rose 76% QoQ.

Highlight of the quarter
The topline for Q4FY09 was Rs 12057.8 crore, down 10% YoY but up 35% QoQ. The EBITDA margin grew by 480 bps QoQ but fell by 1010 bps YoY to 17.5%, as higher raw material cost mainly on account of coking coal continued to weigh coupled with lower realisation during H2FY09. For the full year FY09 the EBITDA margin, however, stood at 20.4% due to stronger performance during H1FY09. Special steel production rose 11% YoY to 3.7 million tonnes (MT).

At the CMP of Rs 173, the stock is discounting its FY10E earning of Rs 13.3 by 13.1x and FY10E EV/ EBITDA by 5.7x. Based on the good growth prospect of the company in future coupled with higher operational efficiency we assign the stock a multiple of 6.5x on its FY10E EV/EBITDA. This translates to a price of Rs 180/ share, an upside of 4%. We continue to maintain our HOLD rating on the stock.

Strong volume growth offsets fall in realisation
The average realisation per tonne fell again for the second consecutive quarter in Q4FY09 following the global trend. Indian steel prices, however, did not see a significant fall compared global markets. This is because India is better positioned compared to most of its global peers in terms of expected economic recovery. Thus, steel makers that have their major focus on the domestic markets are set to reap the benefit. SAIL, being a PSU, has already shown that. The company, though it saw some drop in realisation, could sell significantly higher quantity (3.6
MT) in Q4FY09 compared to the previous quarter (a QoQ growth of 33%). On a YoY basis, however, saleable steel production declined by 4% to 12.5 MT. Total sales also fell by 8% YoY to 11.32 MT for the full FY09. However, considering the tough situation in FY09 especially from mid-August to December 2008, even this performance seems quite good.

To see full report: SAIL



Bosch Q1CY09 results have been below our estimates primarily on account of higher than estimated raw material costs on account of adverse currency movement and shift in product mix towards the low margin non-auto business.

Net sales during the quarter declined 17%yoy to Rs10.1bn (we saw Rs10.9bn). Revenues were impacted primarily on account of the slowdown in the auto OEM space (both domestic and exports) and also on account of the lockout at the Jaipur facility which extended over the first 3 weeks of Jan09. While automotive business revenues declined 21%yoy to Rs8.5bn, the non-auto revenues increased 13%yoy to Rs1.4bn. As a result, the product mix for Bosch has changed adversely in favor of the relatively low margin non-auto business which now contributes to about 14% of its topline from about 10% earlier.

Raw material costs shot up sharply during the quarter to 56.2% of net sales as against 51.6%in Q1CY08 and 47.4% of net sales in Q4CY08 primarily on account of depreciation of INR against the USD which increased its import costs as also the change in product mix.

On account of a lower topline growth and a sharp increase in raw material costs, margins crashed 960bp yoy and 660bp qoq to 10.2%. Resultant, PAT for the quarter declined 70%yoy to 493mn (we saw Rs1.1bn).

Other Key highlights:
  • Given an uncertain outlook for both the automobile and the tractor industry, the company has reduced its capex for CY09 to about Rs2.5bn
  • During the quarter the company has bought back and extinguished about 365,627 equity shares after which the equity capital stands reduced to Rs317mn. Post the buyback, the promoter holding has gone upto about 70.6% from about 69.8% earlier.

To see full report: BOSCH LIMITED



Ashok Leyland’s Q4FY09 results have been ahead of our estimates primarily on account of better than expected operating performance.

The company has posted a steep decline of 53%yoy in net sales to Rs12.2bn (we saw Rs13.3bn) on account of 61%yoy fall in CV volumes. The contribution of non-cyclicals to revenues has increased from 33% to nearly 50% in FY09 due to robust sales of power gensets and spare parts as well as on account of the sharp decline in goods M&HCV volumes during the period.

Adjusting for the Rs180mn unrealised forex gain included in other expenses, margins for the quarter at 7.9% (we saw 7.2%) were down 400 bp yoy, but better 100bp qoq.

Interest burden for the quarter increased to Rs440m against Rs394mn in Q3FY09 and Rs91mn in Q4FY08 on account of higher working capital and drawdown of the USD200mn ECB loan. Being eligible under MAT the company reported a reversal of taxes of Rs224mn during the quarter.

Adjusted PAT for the quarter declined 77%yoy to Rs443mn (we saw Rs338mn).

Other key highlights:

  • Total inventory in the system for ALL is 7,500 units. The company is targeting to reduce this to 3,000-3,500 units within the next few months which would reduce its working capital requirements by about Rs5bn-7bn and thereby reduce interest costs.
  • Given the marked slowdown in the domestic CV industry, the company has consciously pruned its capex over the next three years to Rs20bn from the earlier planned Rs30bn.
  • Ashok Leyland has so far received orders to manufacture about 2,800 buses of the total 5,330 bus order released under the JNNURM scheme.

To see full report: ASHOK LEYLAND