Sunday, June 14, 2009



After witnessing a rise in early hours, the stock market fell into the red on persistent profit booking all through the day. This week’s feeble closing sounds a ring of caution, as after thirteen consecutive positive weeks, we have a negative close. It seems that bull’s momentum has been arrested and the rally has come to a stand still. So from here a correction cannot be ruled out. The Sensex ended the day 173 points lower, while Nifty closed 54 points down. Stocks from the mid-cap and small-cap spaces also moved downhill as the BSE MIDCAP and BSE SMLCAP were
down by 2.10% and 2.21% respectively. On the daily chart, Nifty is forming a rising wedge with negative divergence in the momentum oscillator KST, which indicates there is high probability of wedge breaking in favour of bears. On the hourly chart, Nifty is still traveling aligned to the upper boundary of the channel, but on the other hand moving average support has been violated. Bears totally dominated the market breadth with 1,041 declines and 214 advances on the NSE.

The hourly KST is in sell mode. Our short-term bias is down for the target of 4200 with the reversal pegged at 4700, while our mid-term bias is still up for the target of 4850 with reversal placed at 3861.

Consumer goods, realty and auto sector scrips tanked the most, while buying was seen in metal and oil & gas stocks. From the 30 stocks of the Sensex, Reliance Industries (up 2%) and Sterlite Industries (up 2%) led the pack of gainers, while Ranbaxy Laboratories (down 6%), DLF (down 6%) and Reliance Communications (down 4%) led the pack of losers.

To see full report: EAGLE EYE 150609


Does valuation not matter any more?
  • Asian markets are up 65% since early March
  • Valuations are becoming a concern, with prospective PE now 16.3x and PB 1.9x
  • For markets to rise much further requires a bubble
We wrote a month ago – in the AI of May 8 – that it was time for Asian equities to “take a breather”. Our main argument was that the better news on the economy was already largely priced in to markets. Markets did briefly pause for breath in mid-May, but in the past week or so they have set off at a sprint again. Since our piece, Asia ex Japan is up another 9% – taking the rebound since March 2 to 65% (Chart 1).

We are now starting to get alarmed about valuations. PE (based on 12-month forward earnings) for Asia ex Japan has reached 16.3x. Even if we use analysts’ forecasts for 2010 (which are highly optimistic, expecting 30% EPS growth (Chart 2), with many countries expecting a new peak for earnings), PE is still a pricey 14x. Price/book is similarly expensive at 1.9x. We think that comparisons with the normal (i.e. pre-bubble) phase of the last bull market, 2002-6, are most useful: in that period PE averaged 11.4x and PB 1.7x. And, even though the economy is clearly improving, we find that the market has already discounted the US manufacturing ISM getting back to 55-60 (it is now 42.8) by the autumn.

In this AI, we look at various possible reasons why multiples could justifiably be higher this time around – lower interest rates (maybe), less risk (hardly), higher expected trend growth (unlikely) – but reject all of them. The truth is that if Asian stocks rise much further they will, frankly, be getting into bubble territory. We think markets need to move sideways for a couple of quarters to allow fundamentals to catch up.

To see full report: ASIA INSIGHTS


Solution Overview: JPMorgan Chase leads the industry as the sole provider of an innovative and
comprehensive suite of integrated supply chain management solutions that gives buyers and sellers the ability to link the financial flows of their trade transactions with the physical movement of goods.

Background: JPMorgan Chase has been building capabilities around integrating cash, trade and logistics solutions to address the physical and financial supply chain. In 2006, it acquired Vastera and renamed the company JPMorgan Chase Vastera. Vastera was combined with the Logistics and Trade Services businesses of JPMorgan Chase's Treasury Services unit. More recently, JPMorgan Chase acquired Xign, a leading provder of invoice presentment and payment solutions.

Key Strengths:
• JPMorgan Chase brings a vast array of global treasury and international cash management capabilities and is applying its experience integrating cash, trade, and logistics across the physical and financial supply chains in a way that maximizes benefits to its clients

• With a banking presence in over 55 countries serving 75,000 customers, and a global trade management staff of more than 1,200, JPMorgan Chase applies expertise and technological sophistication to all aspects of our clients’ supply chain needs.

• JPMorgan Chase is uniquely positioned to offer clients a creative combination of financial and logistics capabilities whereby clients are offered a true end-to-end solution. JPMorgan Chase has gained specific industry knowledge as well as an understanding of trade lanes outside of North America (eg. Asia to Latam)

• Successful players in today’s international trade environment need to understand their entire supply chain process and have strong knowledge on the data model that takes into account the breadth and depth of information exchanged between the multiplicity of interrelated entities. JPMorgan Chase has financial and logistics solutions closing the gap that currently separates the management of financial flows from the management of inventory.

• JPMorgan Chase Global Trade Services is uniquely positioned to offer our clients a creative combination of financial and logistics capabilities whereby clients are offered a true end-to-end solution.

To see full report: JP MORGAN CHASE


Markets Up, EPS Revisions Up

Markets have risen and earnings have been revised up — Back in early 2009 earnings revisions were the most bearish since 1990. In many cases we are now back above the average and heading towards the upper end of the post 1990 range. In March 2009 the risk was upside surprise, but increasingly the risk is downside surprise. Australia and Singapore have seen the least earnings revisions, Indonesia, Korea and Taiwan the most.

IBES forecast for 2009 is for a 5% decline and then a 30% increase in 2010 — Excluding the 1980’s cycle, which culminated in the 1987 crash, it takes on average 17 months for earnings to go from trough to prior peaks. Once the old peak is reached, the average P/BV has been 1.8x. We are currently on 1.8x P/BV, the 10-year and 30-year average, so we ask ourselves are these average times?

Terms of trade are worsening again and exports need to grow 48% to reach prior peak — The rise in commodity input costs has increased downside pressure on corporate profitability, a distinct change from Q4 of 2008. Without sharp improvements in exports, i.e. volume, we view the risk to earnings is to the downside for the manufacturing sector.

With P/BV at the same multiple historically seen two years post the recovery, the risk reward is fading — Markets have discounted further than in any prior cycles. On its current trajectory the MXASJ will have recaptured the 2007 peak by Christmas of 2009, a fantastic wish but not one we’re sure we’ll get.

To see full report: ASIA EX STRATEGY


Weathering the downturn: Strong brands & a rural focus help Marico sustain growth in consumer goods; Kaya skin care & the global business are less insulated

Decline in raw material prices will have a positive impact on margins in the short to medium term

The Story…
Marico Ltd. (MRCO.IN/MRCO.BO) has an unflappable image – no leaky-topline-shrinking margins recession story here. While others in the FMCG business negotiate a painful downturn, Marico almost seems to be sailing through the bad times… almost... In FY09, revenues were up by a robust 25%, higher than the 22.5% growth achieved in FY08 and 21% in FY07. With no
acquisitions during the year, organic growth was 13% while 12% was inflation-led growth. Both flagship brands – Parachute in the coconut oil category and Saffola in the edible oil category clocked volume growth of 9% and 11% respectively.

The company did experience some slowdown in the final quarter (Q4 FY09) when growth slipped to 20% Y-o-Y, down from 23.2% during the same period in the previous year. But EBIDTA margins for the quarter, quite remarkably, expanded to 13.1%.During the same quarter HUL -- just to take the example of the largest FMCG company, which is actually not strictly comparable in terms of size or product range -- suffered a drastic deceleration in sales growth to a mere 6% Y-o-Y from 16% in the previous year, and there was the added trauma of a margin squeeze.

How did Marico beat the slowdown so? Did its consumers not downtrade? Did it manage to
exercise the pricing power it enjoys on its flagship brands? Here’s what is really interesting: Far
from recession-induced downtrading in FY09, Marico had consumers in the rural segment upgrading from loose coconut oil to Parachute. Marico successfully leveraged on the rural market opportunity (arising from higher disposable incomes due to better realization on farm output) by the introduction of low-cost, small-unit packs promoted through van campaigns held close to rural households. What is even more remarkable is that Marico went ahead with an intrepid 5% increase in the price of Parachute in Q3 FY09, and still managed a volume growth of 9% for the year. Clearly, the impressive performance of Marico’s domestic consumer products business, led by Parachute inthe coconut oil category, is attributable to its undisputed position of leadership – Marico is not only a market leader in branded coconut oils, it also enjoys this position in other select niche categories like fabric starch and anti-lice treatment.

Going forward, apart from its focus on the rural market, Marico’s growth is also likely also be driven by product innovation in the high-growth beauty & wellness segment. Marico is leveraging on the brand equity of Parachute and Saffola and introducing newer variants to drive market expansion. Marico will also continue looking for strategic brand acquisition opportunities in domestic as well as international markets. Marico’s skin care solutions business offered through Kaya clinics (6% of revenues) and its international consumer product business, have been growing in importance in recent years. Both these businesses have been vulnerable to the economic downturn and may experience slower growth.

Things look good for Marico on the margin front too. Its EBIDTA margin was a healthy 12.6% in FY09. The company expects copra prices to ease in the near future, and this will have a positive impact on margins in the forthcoming quarters. But some of the benefit could be offset by the planned reduction in the price of Saffola and the increase in the advertising and sales promotion budget.

The stock currently trades at a P/E multiple of 18.8 times our FY10 earnings estimates, which appears attractive in comparison to its peers, given the company’s strong fundamentals, higher RoE, growth potential in new ventures and efficient management. We expect the company’s earnings to grow 16% (excluding extra ordinaries) for FY10. We reinitiate coverage on Marico with a rating of Moderate Outperform.

Marico will continue to weather the recession well. The company has the wherewithal in the form of strong brands, market leadership, capabilities in product innovation and pricing power to sustain healthy growth and profitability through the downturn and recover from any setbacks -- if there are any at all.

We expect healthy a 6-8% growth in volumes of coconut oil in medium term to be driven by rural demand for low-value, flexi-packs in coconut oils, value-for-money products in edible oils and hair care categories. We expect Parachute oil to contribute over 30% of revenues of Marico in FY10. Its new product launches i.e., coconut oil variants under the Parachute brand, health foods under the Saffola brand and variants of fabric starch under Revive, will help in expanding its consumer base.

Of its key brands, Parachute will continue to grow in strength and will steadily attract consumers out of the Rs.10 bn loose oil segment. We believe growth will essentially come from volume increases, as Marico is unlikely to risk further price increases in any of its categories under recessionary conditions. Saffola is likely to regain volume growth in response to reduced prices and edible oils contribution will be around 20% of its revenue.

Things look good on the margins front as well, as following the increase of 25% in copra prices in FY09, the company expects prices to cool off in FY10. However, the planned increase in advertising and sales promotion expenses and a reduction in Saffola prices could offset some of the gains. We, therefore, expect an EBIDTA margin of 12.7% for FY10.

There are some concerns regarding Marico’s Kaya skin care services business, as a prolonged recession could adversely impact discretionary spending on high-end services of this nature. While the company plans to continue expanding its network of clinics, the growth may slow down and the business could take longer to break even.

Key Growth Drivers
  • Strong rural demand
  • Brand extension & product diversification
  • Inorganic growth: Brand acquisitions in domestic & global markets

To see full report: MARICO


Valuation and metrics. See no near-term impact on MA and V from credit card legislation.

Consulting and Outsourcing
Our posture on the Consulting and Outsourcing sub-sector remains guarded. Admittedly, systemic risks have faded, but we believe that economic risks over the next 12-months remain. In particular, we see continued risk to our estimates from a weak discretionary backdrop, and limited 2H09 growth acceleration. From a share performance perspective, we expect continued trailing performance of the sub-sector (-2,058 bps behind the GS Tech Index on a YTD basis), given late cycle exposure vs. other areas of Tech more exposed to the earlier part of the cycle (e.g., Semis, CommTech, etc).

Indian IT Services
We expect a weak demand environment and recent INR strength vs. the USD to negatively impact earnings into 2H09. In our view, sub-sector valuation remains ahead of earnings growth prospects. As such, we see YTD sub-sector performance (+2,786 bps ahead of the GS Tech Index on a YTD basis) as unsustainable, consistent with our Cautious coverage view.

Transaction Processing
Continuing with recent credit card industry reform efforts (e.g., Credit Cardholders’ Bill of Rights Act of 2009 and Unfair or Deceptive Acts or Practices rules), on 6/4 we saw the re-introduction of the Credit Card Fair Fee Act of 2009 by Rep. John Conyers (H.R. 2695). This Bill is aimed specifically at interchange rates, which are set by the networks (Buy-rated MA and V). Assuming the Bill clears Congress, we do not see near-term impact on our network and merchant processors (Buy-rated GPN) as our models have no direct interchange revenues.

Over the long-term, however, any material reduction to interchange could impact the payments industry as credit availability and consumer fees are raised to offset reduced interchange; ultimately impacting credit volume and our models potentially. Separately, we assess MA and V share conversion programs, which based on their size, are expected to have little impact on the shares, and should be absorbed in daily volume.

To see full report: TECHNOLOGY


4QFY09 numbers lower than estimated: IOC reported EBITDA of Rs86b (v/s our estimate of Rs127b) for 4QFY09. Reported PAT was Rs66b (v/s our estimate of Rs91b). Quarterly numbers are not comparable as Bongaigaon Refinery (BRPL) has been incorporated in 4QFY09 results.

Fully compensated for under-recoveries in FY09: Led by positive margins in petrol and diesel, IOC reported gross over-recovery of Rs11.7b in 4QFY09. It received oil bonds worth Rs62b (v/s our estimate of Rs84b) and upstream discounts of Rs1.5b (v/s our estimate of nil), resulting in net over-recovery of Rs75.4b. For the full year, IOC’s under-recovery of Rs586b was fully compensated by oil bonds of Rs404b and upstream discounts of Rs182b.

Reported GRM of US$4.5/bbl: IOC’s reported GRM for 4QFY09 was US$4.5/bbl (v/s our estimate of US$4/bbl) as against US$9.02/bbl in 4QFY08 and negative US$2.1/bbl in 3QFY09. Throughput in 4QFY09 was 14.8mmt, up 20% YoY and 23% QoQ.

Maintain Buy: The key issue to watch in the near term would be likely freeing of retail prices (the Petroleum Minister has indicated that the proposal to free retail prices will be submitted to the Cabinet Committee in 6-8 weeks). The stock trades at 11.2x FY10E EPS of Rs54.2 and 1.4x FY10E BV of Rs419. Our target price is under review.

To see full report: IOC


Winds of change

We met the management of Mercator Lines (MLL) recently to discuss the current outlook on the shipping sector and the company’s business prospects. Following are the key takeaways:

Surge in Baltic Dry Index reflects changing conditions: The Baltic Dry Index has tripled over the past five months on increase in Chinese import of iron ore, increase in tonne-mile demand on Brazil-China route and congestion at Chinese ports.

Tanker market to recover only in winter: The tanker market is expected to remain subdued in the near term. However, we anticipate a recovery in the winter months on account of seasonality and indications that the OPEC is unlikely to cut production at current crude rates.

Contract renegotiation crucial for MLL: Currently, time charter rates are 2–3x higher than spot market freight rates. We believe that MLL will strike term contracts sooner than later given that supply in the dry bulk market is slated to increase in CY10. The company’s term clients have sound credit ratings as certified by various rating agencies. Hence, the risk of default is minimal.

Rig contribution set to increase: We anticipate that the rig contracted to Great Eastern Shipping is likely to contribute 8% of the topline and 18% of the profits in FY10 on a consolidated basis. The rig, operating under the Singapore subsidiary, MLL Offshore, is exempt from paying tax for a period of five years.

Dredger and coal mining business to supplement shipping performance: A major capital dredging project at Sethusamundaram is currently being carried out, in which an estimated 83mn cubic metres of sediment has to be dredged. As per the last update, only 34% of the dredging work has been concluded, leaving tremendous untapped potential for coming years. MLL has indicated the likelihood of further dredger acquisitions to tap the market in India. Also, its coal mining contribution is expected to supplement performance as and when global coal prices exhibit signs of improvement.

Revised target of Rs 79: We are rolling forward our target price to FY11, valuing the stock at 4x EV/EBITDA. Our revised target price stands at Rs 79 (earlier Rs 65), offering a 22% upside from current levels. We maintain our Buy rating on the stock. At our target price, MLL is trading at a P/E of 5.5x, EV/EBITDA of 4.9x and P/BV of 0.7x FY11E. We note that an unanticipated increase in dry bulk tonnage or change in contract mix (spot to term ratio) will depress freight rates and impact our estimates.

To see full report: MERCATOR LINES



Standalone performance

• Bharat Forge Q4FY09 results have been below our estimates primarily on account of significantly lower offtake by domestic OEMs due to the substantial inventory pile-up at their end.

• The company’s Q4FY09 standalone revenues declined 50%yoy to Rs2.9bn (we saw Rs4.4bn). The sharp and sudden drop in automobile sales in Q3FY09 resulted in pile up of inventories at both the OEMs and the dealers end which compounded the impact of the downturn with schedules from OEMs falling substantially during the quarter.

• The sharp fall in margins resulted in 1000bps fall in margins to 14.6%. Absolute EBIDTA for the quarter declined
70%yoy to Rs427m.

• Higher working capital led to an increased interest burden during the quarter of Rs295mn. Bharat Forge (standalone
basis) reported a loss of Rs80mn after adjusting for the forex gain of Rs987m during the quarter.

Consolidated performance

• Bharat Forge’s consolidated revenues declined 47%yoy to Rs6.1bn while its margins plunged to its lowest ever at 2.9% (16% in Q4FY08 and 10.1% in Q3FY09).

• Led by a sharp drop in operating income and high interest burden, the company reported a loss on a consolidated
basis of Rs503mn after adjusting for forex loss (Rs1bn) and customer claim and manpower redundancy cost of Rs299mn).

Other key highlights:

• Tonnage sales (standalone) for the quarter were down 62%yoy at 18,246T while for FY09 it was down 29%yoy at 133,755T.

• Despite the INR depreciation in FY09, the company was unable to increase its export revenues primarily on account of hedges booked in Q1FY09. No such contracts exist in FY10 and hence BFL might witness higher export revenues in Q4FY09 if INR remains at current levels.

To see full report: BHARAT FORGE


Two-wheelers move ahead

‘Speedometer’, a monthly product on the automobile sector, comprises relevant themes, industry statistics and analysis of trends. The auto sector saw mixed growth in May ’09, with both two-wheeler and passenger vehicle (PV) segments in the positive owing to reduction in interest rates and improvement in sentiment post general elections. Two-wheelers led the trend, registering 11.5% YoY growth – domestic volumes rose 12.4% YoY and exports grew 3.7% YoY. PVs followed with 4.5% YoY volume growth – domestic volumes were marginally down 0.8% YoY and exports were up 39.2% YoY. Threewheeler volumes declined 4.3% YoY on account of sharp 29.5% dip in exports, even as domestic volumes registered 5.3% YoY growth. The commercial vehicle (CV) segment remained in the negative – M/HCVs dipped 35.4% YoY; LCV volumes declined 1.9% YoY. Hero Honda Motors (HHML) and Mahindra & Mahindra (M&M) remain our top picks in the sector.

PVs – Exports led. PV volumes in May ’09 improved 4.5% YoY to 170,586 units on the back of 39.2% YoY growth in exports to 29,763 units, even as domestic volumes marginally declined 0.8% YoY to 140,823 units. PV volume growth was led by 20.6% YoY rise in volumes of compact (B) category, albeit 12.6% YoY decline in the mid-size (C) category. Among various sub-segments, while volumes of passenger cars and MPVs rose 8.7% YoY and 33.4% YoY respectively; UV volumes dipped 29.9% YoY. In May ’09, Maruti Suzuki India’s (MSIL) overall market share improved 510bps YoY to 50.3%, followed by drop in market share of 60bps YoY to 16.7% in
of Hyundai Motor India (HMI) and 180bps YoY to 13.4% for Tata Motors (TAMO).

Two-wheelers – Revving up. Two-wheeler volumes rose 11.5% YoY in May ’09 – while domestic volumes rose 12.4% YoY to 727,937 units, exports grew 3.7% YoY to 80,138 units. In the domestic market, volumes of scooters grew 11.2% YoY (excluding electric-scooter volumes of 688 units, down 52.9% YoY), motorcycles rose 12.3% YoY to 576,541 units and mopeds increased 20.3% YoY. In motorcycles, HHML’s market share rose 440bps YoY to 62.3.%, while that of Bajaj Auto (BAL) and TVS Motor (TVSM) stood at 19.7% (down 560bps YoY) and 7.5% (down 70bps YoY) respectively.

CVs – Decline continues. CV volumes dipped 18.9% YoY to 33,072 units in May ’09 on account of sharp 35.4% YoY drop in M/HCVs to 13,392 and LCVs registering marginal decline of 1.9% YoY to 19,680 units. TAMO maintained leadership in CVs (M/HCVs: up 880bps YoY to 70.8%; LCVs: up 90bps to 58.3%), followed by Ashok Leyland (ALL) in M/HCVs (down 12.8 percentage points -pps YoY to 13.5%) and M&M in LCVs (up 50bps YoY to 29.1%).

To see full report: SPEEDOMETER