Saturday, June 13, 2009




Credit crisis is very serious. Fed can keep Fed fund rates at zero percent and pursue even more expansionary monetary policies. Also,fiscal measures can be expanded further. However, in the current conditions such policy measure may actually aggravate and prolong the problem.

Non-financial credit growth has declined from an annual rate of 16% in late 2006 to currently between 1% and 2%. Also,deleveraging is occuring among financial intermediaries. This is extremely negative for an economy addicted to credit growth.

Regardless of policies followed by the U.S. Government and its Agencies the consumer is in recession, and the the recession will deepen. U.S. trade and current account deficits will shrink further and dimnish international liquidity. The shrinkage of global liquidity is bad for all asset prices.

We had an unprecendented global economic boom between 2002 and 2007. A colossal global economic bust has followed. In 2008, almost all asset prices collapsed.

To see presentation: CREDIT CRISIS & CREDIT GROWTH


Resumption of strong inflows — After two weeks of decreasing inflows to Asian equity funds, new money to the region has turned abundant again. According to EPFR data, US$1.5b of new money was taken in by Asian funds versus an average of US$790m in prior two weeks, and was just 12% short of the amount in the first two weeks of May. GEM funds, which have 52% of equity holdings in Asia, saw continued inflows at US$1bn+ last week, whereas inflows to Global funds (Asian stake at 8%) were still lagging behind inflows to most EM fund groups.

The most sustained inflows lasted for 29 weeks; we are in 13th week — Current inflows have been the 4th-longest in history, totaling US$10.9b vs. US$18.2b for the 29-week record inflows between Nov 2005 and May 2006. In terms of average weekly inflows relative to asset size at the beginning of the period, this is as strong as the episode in 2006. Asian real GDP growth was 8.7% at that time vs. Citi forecast of 4.5% for this year; we think investors are focusing on relative growth but forgetting that Asian corporates are poorer in terms of translating GDP to EPS.

ETFs no longer the favorite — When inflows to Asian funds started picking up in April, around 60% of the money went into ETFs, but the share has fallen to just 25% over the past two weeks. Country wise, investors regained interest in China and India funds. Net cash taken in by these two exceeded US$487m in aggregate last week vs. US$45m in prior week. Watch out for Korea funds: inflows rose 13x.

To see full report: FUN WITH FLOWS


This is a real company with real business – February EBIDTA
margin is back to 17.5%...
…with the management change and some restructuring further
improvement in numbers is likely

Current valuation leaves huge room for an upside…

The Short Story…
Satyam Computer Services Ltd. (SCS.IN/SATY.BO) has been no WorldCom or Enron – where when the dust settled, there was nothing left, but for a pile of debris. Here, as the recently announced results have shown – regardless of whether or not Ramalinga Raju had been riding a tiger as he put it, he and his team did build a real company. That company continues to do business (FY10E revenues are Rs 86 bn or USD1.8 bn), remains reasonably profitable and is still available for something close to a song. By February 2009, EBIDTA margin has recovered to 17.5% (preextraordinaries). Cashflows are already back on track.

Now that the management issues are also behind us, valuation ratios – a P/Sales of 0.8x, EV/EBIDTA of 4.8x, P/E of 7.0x, all on conservative FY10 estimates - appear very attractive. We reinitiate with a ‘Buy’ rating and a Target Price of Rs.110-120.

The Slightly Longer Story…
Satyam announced its brief financials today in a disclosure to the stock exchanges, which was much better than the Street’s expectations and painted a pretty bright picture for the company. In Q3 FY09, the company reported an EBIDTA margin of 16%, as against 3% stated by Mr. Ramalinga in a letter to the BSE, while the NPM for the quarter stood at 8%. However, Satyam had a slightly tougher time in Q4 FY09, as a few of its clients moved away, which was reflected in its numbers for the month of January 2009, when the company reported an EBIDTA margin of 4%. Nevertheless, the situation improved significantly in February 2009 and March 2009. In February 2009, the company’s EBIDTA margin improved to 17.5% pre-extraordinary items (12.4% post these).

Currently, Satyam has an employee strength of approximately 41,000, which is also lower than the company’s earlier announced figure of approximately 55,000 in a press conference held in January 2009. We believe that this will aid the company’s margin improvement, going forward. According to the data provided by Satyam in the disclosure, the company’s cash flows were well under control in the January-March 2009 period. Satyam lost business worth $183 mn in the quarter, on account of loss of credibility, though it managed to win additional orders from existing client amounting to $380 mn. This, to our mind, clearly indicates the strong faith and confidence that Satyam’s clients continue to have in the company, which could well become its key future revenue growth driver. More importantly, Satyam’s association with Tech Mahindra could provide some synergistic benefits, going forward.

Satyam has not yet revised its earlier stated financials and we have, therefore, assumed no change in the company’s financials for the first half of the fiscal FY09. We expect Satyam’s EPS at Rs.14.7 and an EBIDTA margin of 18.1% in FY09.

For FY10, we expect the company to face some difficulty in retaining its volumes as well as pricing and, therefore, expect its margins to decline slightly * . We estimate an EBIDTA margin of 16% and an EPS of Rs 9.5 on revenues of Rs.86 bn for FY10. Thus, today’s announcement made by Satyam has allayed concerns over its financial stability and provides a good outlook for the company. The stock currently trades at an EV/EBIDTA of 4.8x, P/Sales of 0.8 and P/E of 7.0x – all on FY10 estimates – all of which are extremely attractive. We reinitiate coverage on Satyam with a rating of BUY.

Price Target
Price targets (if any) are derived from a subjective and/or quantitative analysis of financial and
nonfinancial data of the concerned company using a combination of P/E, P/Sales, earnings growth, discounted cash flow (DCF) and its stock price history.

The risks that may impede achievement of the price target/investment thesis are -
  • Change in the economic climate/legislation against Indian offshore development in the countries where the company provides its services
  • Billing rate pressure from clients
  • Fluctuation on US$-Rupee exchange rate
  • Salary and wage inflation & high employee attrition
  • Availability of tax holidays and incentives from Government of India
  • Unfavourable decision in legal cases (Caterpillar Inc., Bridge strategy group, S&V
  • Management consultant, Venture Global, U.S. Class action Law Suit, Upaid Litigation and Other unacknowledged claims).



Is China starting to implement the same dangerous strategy as the United States or Europe ten years ago: Bolster growth by credit?

From the mid-1990s onwards, the United States and Europe have offset the low spontaneous level of incomes by using credit. Currently, growth is picking up in China, while there is a pronounced upturn in credit. Is China using the same technique as the United States and Europe, which led to the current financial crisis?

We need to ascertain whether:
− credit has indeed jump-started Chinese growth?
− in the medium term, China will not have any other source of growth than credit?

We believe China’s potential, structural, growth will remain strong without any excessive borrowing, and the risk of a financial crisis, such as the one that has recently been witnessed in the United States and in Europe, is accordingly not to be feared in China, even though an increase in nonperforming loans is likely.

To see full report: FLASH ECONOMICS


What is Global Supply Chain Finance?

We see GSCF as four things:

– First, the Supply Chain Finance (SCF) solution is a combination of technology solutions and services that links buyers, their suppliers, and financing providers optimizing the visibility, financing cost, availability, and delivery of cash. Because of the extension of the supply chain, the increase in purchase to pay cycle time, etc. companies are hedging their inventory with cash. Automating the Financial supply chain and employing networked financial services can reduce cost of capital and create an advantaged ecosystem. The opportunity is less about just reducing the cost of finance within the buying organization and more about reducing the cost of finance across the supply chain for all players – particularly suppliers that don’t have readily available sources of financing.

– Second SCF ties logistics and tracking of goods into finance decisions. A growing number of trade platform technology providers have emerged that enable container or cargo movements to be tracked by track and trace software.

– Third, risk retention in its many forms ends up being one of the most significant aspects of the SCF process. Providing secure logistic and financial information paths to third-party liquidity providers and risk carriers enables liquidity to be injected into the Global Supply Chain through the use of sophisticated credit and pricing models.

– Finally, Trade Receivables, unlike Commercial Paper that is due on a specific date, may be paid late or may not be paid in full for a variety of reasons. Trading in trade receivables requires the management of disputes and other discrepancies, whether the payment instrument is an invoice or a letter of credit.

Why we produced the Global Supply Chain Finance Report?

• Supply Chain Finance has become an industry buzzword. CFOs and Treasurers of corporations are increasingly becoming responsible for Supply Chain finance solutions, yet there is a general confusion as to how SCF works and the role of different players. For example, today's buzz words include reverse factoring, vendor financing, payables financing, receivables purchasing and trade payables backed financing, which all tend to be variations on the theme of the umbrella term supply chain finance. These all refer to post-shipment finance programs.

• As the corporate business model becomes more globally distributed, we believe a Guide targeted at corporate end-users will be helpful to better understand the application of SCF in a global environment.

• Global Supply Chain Finance (GSCF) technology and bank providers are developing new models for trade finance. New technologies and financing approaches are emerging. In this report, you will find profiles of the leading global supply chain finance solution providers split in the following:
– Buyer (Payable) and Vendor (Receivable)
– Platform providers
– Transaction risk managers
– Risk Carriers and Liquidity Providers

• Section A of this Guide provides an overview of the Global Supply Chain finance space, segments the space, and provides key trends and evaluation criteria. Section B provides a detailed, independent write-up of example solution providers. Each supplier entry includes a concise history, an overview of the business model, its’ current situation and vision, contact person(s), and key business functionality.

• There is no hidden agenda in this Guide. It is an independent source for anyone determining how their company should proceed with global supply chain finance and working capital solutions. Whether you are simply assessing what is available on the market today or just trying to understand what this space is about, this report will help keep you informed about developments in this important sector.

What’s driving the Growth of Global Supply Chain Finance?

• Globalization and the lengthening of the supply chain are the game changers shaping the new ground rules of business. Companies are outsourcing capital intensive plant, property and equipment and labor intensive activities to global partners down the value chain. In a relatively short period of time, companies have transitioned from manufacturers to managing a complex web of third parties to make, store and distribute their products and brands. No longer is the majority of capital deployed to finance property, plant and equipment but to finance working capital (inventory, receivables, etc.).

• While the supply chain is lengthening as a result of globalization, direct sourcing, offshore production and distribution, many companies have experienced challenges in capital availability. For example:

– Traditional international financing vehicles are in relative decline, like the use of the Letter of Credit for both pre shipment and post shipment finance. Most of these suppliers are Small /Medium enterprises (commonly called SMEs), growing rapidly but having limited access to capital. Capital constrained SMEs are forced to raise capital through traditional A/R factoring or indigenous local banks.

– Non OECD suppliers face pressure from large buyers in the form of extended payment terms. A 15-30 day extension to existing terms would have a very positive impact on the P&L and balance sheet of a buyer spending over €1bn with suppliers, but it could put serious pressure on contractors, sub-suppliers, etc. throughout the overall chain, and potentially disrupt production and goods flow.

– It is increasingly becoming a problem for manufacturers who have established offshore manufacturing (for example, moving production of low-value brands to China from the USA or Germany) to find financing solutions. A key challenge comes from programs which require local content, such as various ECA programs.

– A growing and larger percentage of receivables are international (globalization, offshore, and in a separate legal jurisdiction) and those receivables themselves have longer terms-- a double hit. Many banks do not include these receivables are part of an ‘eligible base’ for lending.

This guide contains following two sections with detailed description:

Section A: Overview

  • The Problem Defined and the Current Environment
  • Market Segmentation
  • Import and Export solutions
  • Data triggered Supply Chain Finance
  • Key CFO Evaluation Criteria

Section B: Key SCF players
  • Supply Chain Finance Platform Providers
  • Transactional Risk Managers
  • Liquidity Providers and Risk Takers



Valuation still compelling after recent rally…

Dena Bank is one of leading PSU banks having a dominant position in the CASA rich western region of the country. With majority of branches in Maharashtra and Gujarat, we believe it has a strong low-cost liability franchise, which provides a good hedge for NIMs. We estimate the core

business of the bank will grow at a CAGR of 20% over FY09-FY11E. The risk reward lies in the compelling valuation at which it is currently trading. Even on a stress case scenario the bank is available at 0.9x FY11E stressed ABV. Hence, we are initiating coverage on the stock with a
PERFORMER rating and a target price of Rs 65 over 12-15 months.

CASA @ 36%: Still one of the best
At the current CASA levels of 36%, Dena Bank is one of the best and most competitive banks in the PSU banking space. A majority of its branches are located in the western region especially in Gujarat and Maharashtra with a tally of 480 and 242 branches, respectively which are CASA rich by nature out of a total of 1184 branches in FY09.

Value buy
In our stress case scenario, we assume the whole GNPA will turn bad. Assuming the GNPA to be at 2.6% for FY10E and 2.2% for FY11E at Rs 890 crore and Rs 953 crore respectively, the adjusted net worth of the bank stands at Rs 2521 crore for FY11E, resulting in ABV of Rs 65 per
share after considering a dilution in FY10E. We believe the stock can command 1.0x ABV (stress case) of Rs 65 and value the stock at Rs 65 per share.

Dena Bank is currently trading at 3.4% of market capitalisation to balance sheet size, which is still below the average of the past three years. We expect the balance sheet to grow at 17% CAGR over FY09 - FY11E and credit-deposit ratio to stabilise around 70%, NIM around 2.8% and CASA around 39%. We expect the bank to bring 100% of its branches under CBS by FY10, which will enable it to generate more fee income and better its operating efficiency. Thus, we value the bank at Rs 65 (0.8x FY11E ABV of Rs 82). Therefore, we have arrived at a target price of Rs 65 by giving equal weightage to both the above scenarios. Hence, we rate the stock as PERFORMER.

To see full report: DENA BANK



Stock Update -- Housing Development Finance Corporation

Stock Update -- Tata Tea


Housing Development Finance Corporation (HDFC) has received an in-principle nod from its Board of Directors for a combined offering of secured redeemable nonconvertible debentures (NCDs) along with detachable warrants. The issue size is pegged at Rs4,000 crore. The NCDs together with the warrants will be issued on a qualified institutional placement basis.

Investment in HDFC Bank and business growth
The capital raising is likely aimed at funding HDFC’s proposed investment in HDFC Bank as well as future growth in the mortgage business. Following the acquisition of Centurion Bank of Punjab (in a share-swap deal), HDFC’s stake in HDFC Bank has come down to ~19%. With a view to maintaining its ~23% stake, HDFC had purchased warrants (each convertible at Rs1,530) and made a 10% upfront payment. The remaining 90% (Rs3,600 crore) is to be paid by December 2009. Besides funding the warrant conversion, the fund raising would help finance growth in the mortgage business. However, the proportion of funds to be diverted towards HDFC Bank’s warrant conversion can be less than Rs3,600 crore.

Maximum dilution seen at 3.5%
According to the management, if and when the warrants are exchanged, the maximum dilution that could take place in future would not exceed 3.5% of the expanded equity. The fund raising structure (NCD + detachable warrant) would enable HDFC to raise near-term debt without diluting its near-term earnings. Importantly, the dilution would occur later (most likely after FY2011) and hence does not call for any change in our assumptions.

Right timing
According to media reports on the development, the tenure of the secured redeemable NCDs is three years with a coupon rate of 7.25-7.50%. The fund raising seems well timed considering that the corporate spreads have normalised to pre-Lehman Brothers levels. As evident below, the spread between the AAA banking company yields and government securities (GSecs) for three years maturity is currently at ~160 basis points down from +400 basis points in November-December 2008. Moreover, the warrant conversion option would act as a sweetener from investors’ perspective.



Result highlights

Tata Tea’s Q4FY2009 numbers (derived from FY2009 and M9FY2009 numbers) are below our expectations. The top line grew by 9.4% year on year (yoy) to Rs1,226.1 crore in Q4FY2009, which is below our expectation of Rs1,319.7 crore for the quarter. Though the operating profit margin (OPM) is marginally above our expectation, a lower than expected top line and higher tax incidence led to a 43.1% decline in the adjusted net profit before minority interest and extraordinary items.

The OPM declined by 218 basis points yoy to 13.8% in Q4FY2009 mainly on account of higher raw material and employee expenses. As per our expectation, the raw material cost as percentage to sales surged by 327 basis points to 36.9%. Also, the employee expenses increased by 22.3% yoy to Rs156.0 crore during the quarter, which were higher than our expectation of Rs131.3 crore. However a 240-basispoint decline in advertisement and promotional expenditure as percentage to sales led the margins to be in line with our expectation of 13.5% for the quarter.

Consequent to a year-on-year (y-o-y) decline in the OPM the operating profit declined by 5.6% yoy to Rs168.9 crore during the quarter (as against our expectation of Rs178.8 crore).

Higher than expected depreciation charges and substantial jump in the tax incidence led to a steep decline in the profit after tax before minority and extraordinary items by 43.1% yoy to Rs56.3 crore during the quarter, which was below our expectation.

See Sharekhan Stock Ideas in report
  • Evergreen stocks
  • Apple green stocks
  • Cannonball
  • Emerging Star
  • Ugly Duckling
  • Vulture's pick
To see full report: INVESTOR'S EYE


Improvement in macro economic scenario & easing of liquidity constraints to drive
overall industry volumes…

Lower input costs to aid margin improvement…rich product mix to help revenue

Reasons for Upgrade

M&M delivered a above expectation performance in Q4 FY09, as the company managed to record an improvement in its net profit as well as margins, despite adverse market conditions in the quarter

Going forward, the improvement in the macro economic scenario, coupled with the easing of liquidity constraints, will help drive the overall volumes of the auto industry

We believe that lower input costs will aid the improvement in M&M’s margins, while its rich product mix will help the company on the revenues front

We expect the full impact of the softening in commodity prices to become evident in FY10 and estimate the company’s margins to improve by 50-100 bps

M&M’s manufacturing facility at Rudrapur provides tax benefits, as a result of which, we expects the company to benefit in the form of a lower tax rate in FY10, which will help partly drive the growth in profitability in the coming quarters

We expect M&M’s UV segment to record a remarkable growth, as the company is quickly gaining market share in the segment with the success of its newly launched ‘Xylo’

The Story

Mahindra & Mahindra Limited (MM.IN) (MAHM.BO) delivered above expected performance in Q4 FY09, as the company managed to record an improvement in its net profit as well as margins, despite adverse market conditions in the quarter. M&M’s net revenues grew 16.1% Y-o-Y to Rs.36.5 bn, aided by the merger of Punjab Tractor Limited’s (PTL) financials with the company. Total volumes grew 3.7% Y-o-Y to 93,112 units in the quarter. As M&M has adopted the new accounting standard by suspending ‘AS11’, based on which, the company adjusted its forex loss amounting to Rs.1.4 bn in its balance sheet, while its profit increased by a similar amount. In Q4 FY09, the Proforma net profit (excluding gain from write back of forex losses) stood at Rs.2.8 bn, up 32.5% Y-o-Y, while the EPS for the quarter came in at Rs.10 as against our estimates of Rs 7.5, up 16.4% Y-o-Y. Raw material/Sales declined 70 bps Y-o-Y and 170 bps sequentially to 69.8% in the quarter, on account of lower commodity prices. At the PBITA level, M&M’s Automotive segment reported a profit of Rs.1.75 bn, while the Farm & Equipment segment recorded a profit of Rs.160 bn in Q4 FY09.

Going forward, the improvement in the macro economic scenario, coupled with the easing of liquidity constraints, is expected to help drive the overall volumes of the auto industry. We believe that lower input costs will aid the improvement in M&M’s margins, while its rich product mix will help the company on the revenues front. We expect the full impact of the softening in commodity prices to become evident in FY10 and estimate the company’s margins to improve by 50-100 bps. We expect M&M’s UV segment to record a remarkable growth, as the company is quickly gaining market share in the segment with the launch of ‘Xylo’. The company’s market share in the UV segment stood at 63% in April 2009, up from 47% in FY09. We are making an upward revision to our estimates. For FY10, we now estimate an EPS of Rs.43.90 on revenues of Rs.163.8 bn, as against our previous estimated EPS of Rs.27.1 on revenues of Rs.130.4 bn. We expect the company’s net revenues to increase by 25.7% Y-o-Y to Rs.41.4 bn and the EPS to come in at Rs.11 for Q1 FY10. We estimate net revenues of Rs.194.6 bn and an EPS of Rs.49.6 for FY11. The stock currently trades at a P/E multiple of 14.6x FY10 earnings. In view of the expected increase in the company’s volumes, margins, and market share, we now upgrade M&M from Moderate Underperform to Marketperform.

Price Target
Price targets (if any) are derived from a subjective and/or quantitative analysis of financial and nonfinancial data of the concerned company using a combination of P/E, P/Sales, earnings growth, discounted cash flow (DCF) and its stock price history.

The risks that may impede achievement of the price target/investment thesis are -
  • Change in regulatory environment affecting the policies of the government towards auto emission norms.
  • Lower than expected decrease in raw material prices, for instance, steel, rubber, etc. may impact the margins of the company.
  • Shift of demand due to unanticipated price cuts/discounts/special offers made by competitors.
To see full report: MAHINDRA & MAHINDRA


Beneficiary of pick-up in road investments

Demand environment looks buoyant; we reiterate Hold
Road sector infrastructure is likely to see a major up-tick from the government (a) accelerating clearances and adding sweeteners to make road projects more attractive; and (b) giving developers free capacity to bid for new projects as their existing road projects near completion. The sectoral headwinds are positive for IRB, which is one of the largest toll operators in the country. Our revised target price assumes INR40bn in new awards in FY10-11e. With a 30% out-performance in the last month vs. the BSE Sensex and our earnings cut, we reiterate Hold.

Demand environment becoming more benign
Over the next 12-18 months, we expect a flurry of profitable road projects to be awarded with (a) a higher concession period of 20-30 years (vs. 15-20 years previously); and (b) lesser revenue share with the government (vs. the peak of 35-40% in FY08-09). This could drive E&C EBITDA margins to 16% in FY10e, which could improve marginally by 100bps in FY11e.

Our revised estimates factor in new awards, are below consensus for FY10
We lower our traffic assumptions for Surat-Bharuch (by 20%) as well as for Surat- Dahisar in FY10e due to the slowdown in the commercial vehicle movement. Accordingly, we cut our EPS estimates by 39% in FY10e and 2% in FY10e. Our assumptions factor in traffic volume growth of 4-6%, which is in line with historical averages for the respective road stretches.

Reiterate Hold with a target price of INR140/share
Our SOTP valuation calculates the NPV of the toll road business at a CoE of 12.5% (from 15% due to lower equity risk premiums) and EV/EBITDA of the E&C business at 14x FY10e (4x FY09e, increased due to improved demand visibility). Our target price implies an exit P/E of 15.6x FY10e. Key upside/downside risks: (a) traffic growth variability (1ppt change in traffic growth affects target price by 4%); and (b) variability in E&C margins (a 100bps fall could lower EPS by 3% in FY10e).
Downside risks include developers resorting to significantly higher revenue shares, leading to lower NPV projects.

To see full report: IRB INFRASTRUCTURE



  • Celanese announces Global Vinyl Acetate Monomer Price Increases: USA
  • The Dow Chemical Company launches New Dow Flooring Business: UAE

  • Dow Chemical to sell US$935m in assets: USA
  • Ashland raises senior note offering to US$650m: USA

  • BASF to build new methylamines plant in Geismar, Louisiana: USA


  • Bill banning plastic-hardening chemical passes: USA
  • American Chemistry Council writes on ICCM2 commitments to Hillary Clinton: USA
  • Business Europe says allowing firms to delay REACH fees payment could save €200m in near term
  • HC directs wildlife body to decide chemical company’s plea on salt plant: India


  • Chinese researchers measure brominated flame retardant content in toys
  • IIP asked to conduct feasibility study on feedstock options for petrochemical industry: India

  • UN Official Challenges Chemical Industry: Global
  • Paints industry to explore voluntary phase-out of lead paint production: Global
  • Arizona Chemical announces closure of Port St. Joe, Fla., Plant: USA
  • BASF earns Green Power Leader status in Tennessee: USA
  • Chemical firms ordered to pay Modesto US$18.3m: USA
  • CANADA: Perfluorinated chemicals used in food packaging detected in humans for first time
  • Firm fined for chemical stink: China
  • April profits of Chinese petrochemical firms rise nearly 45% on lower crude prices
  • CRISIL revises rating outlook on Alkyl Amines and Chemicals to negative: India
  • CRISIL assigns ‘AA’ and ‘P1+’ for Clariant Chemicals' bank facilities: India