Wednesday, June 17, 2009


London - Crude oil market is likely to closely eye fortunes of equity markets as doubts over economic recovery gather pace, say Simon Wardell at Global Insight. "Optimism and confidence may be just petering out at this stage. If stock markets have definitely hit a top in the near term we could see some knock on in the commodities," he says. "You're hearing a little more concerns about the great green shoots - they don't seem as strong as they did a few months ago." ICE August Brent -9c at $70.15/bbl, Nymex July light, sweet -25c at $70.22/bbl.

Crude drops on econ doubts, EIA data eyed

London - Crude reverses earlier gains ahead of weekly US EIA inventory data due 1430GMT Wednesday. Market expecting another round of crude stock draws, gasoline expected to build. Tuesday API reported 1.3m bbl crude draw, 2.1m bbl gasoline build. Financial markets continue to influence crude - dollar pares earlier weakness, while equity markets drop on recovery unease. "Stock markets seem to have stalled a little bit which is one of the reasons why crude prices have stopped going up. Even with crude stock draws it may be a while before we break to the upside," says Christopher Bellew at Bache. ICE August Brent -4c at $70.20/bbl, Nymex July light, sweet -27c at $70.20/bbl.

Nymex crude rebounds ahead US oil inventories data

Singapore - Crude prices in Asia rebounded Wednesday, rising above $71 a barrel as traders bet on higher prices ahead of weekly U.S. oil inventories data due later in the global day.

"The past two days, we have seen oil trade below $70 and not hold," said Mike Santander, investment adviser at Sander Capital Advisors in Seattle. "We will need oil to close below that barrier if we want it to trade lower."

At 0645 GMT, New York Mercantile Exchange sweet crude futures for delivery in July traded at $71.15 a barrel, up 68 cents in the Globex electronic session. August Brent crude on London's ICE Futures exchange rose 70 cents to $70.94 a barrel.

People are really starting to look closely at the EIA data," said Ben Westmore, commodities economist at National Australia Bank in Melbourne. "We probably need to see a more than 2 million barrel drop in stockpiles before oil prices will move upward."

The Energy Information Administration is expected to report that crude stocks fell by 1.7 million barrels last week, according to the average estimate of 12 analysts survey by Dow Jones Newswires.

Meanwhile, gains in crude prices have been correlated with the weakness of the U.S. dollar, Westmore said. The dollar weakened during Asian trading against the euro and pound, making commodities such as oil more attractive to investors.

At 0644 GMT, oil product futures were mixed.

Nymex reformulated gasoline blendstock for July, the benchmark gasoline contract, fell 75 points to 206.36 cents a gallon, while July heating oil traded at 184 cents, 150 points higher.

ICE gasoil for July changed hands at $583.00 a metric ton, down $6.00 from Tuesday's settlement.



EMU(ECONOMIC & MONETARY UNION): A Role Model for an Asian Monetary Union?

> Some euro lessons for East Asia
> Aims and prerequisites for AMU
> Milestones on road to AMU: Food for Thought
> AMU, financial crisis and global monetary system

Some euro lessons for East Asia

The euro celebrated its 10th anniversary on Jan 1, 2009 Main message: The euro has been a success story so far. The main features of its success have been
  • Low inflation rates (1999-2008 annual avg. 2.1%)
  • Relatively low (real) interest rates
  • Boost to trade and FDI
  • Catalyst for financial market integration
  • Growing international role as trade, investment and reserve currency behind the dollar
■ While EMU has fulfilled many expectations it also has a mixed record and has brought some disappointments. Mixed performance regarding fiscal discipline
  • Incentive to consolidate in order to qualify for EMU
  • Stability and Growth Pact (SGP) proved its worth in good times but substantial problems when growth has been weak (2002-05; 2009-?)
  • Reform of the SGP in 2005 was positive
–Strengthening of the preventive arm(focus on fiscal consolidation in good times, 0.5% of GDP p.a.)

–Greater flexibility of the corrective arm(e.g. longer adjustment period to correct an excessive budget deficit)
  • Political will is, however, essential!
■ Main disappointments of EMU: growth and enlargement

Aims and prerequisites for AMU

AMU objectives likely to be similar to those of EMU
  • Asean objectives specified but not yet AMU objectives. The former likely to be key for AMU: growth, social progress, regional peace, stability
  • New Asean treaty needed to lay down aims and prerequisites for joining
  • The statute of the ECB could serve as a blueprint for a common central bank in AMU:Priority to price stability (precondition for sustainable growth), independence, ban on financing budget deficits
  • Other objectives for an AMU central bank: 1. Support for growth (if price stability is given); 2. key role in securing financial market stability (following experience of financial crisis; potential problem: moral hazard!)
  • Ensuring fiscal disciplinein order to avoid an overstretching of the common monetary policy resulting from too lax (national) fiscal policies (Asian SGP!)

To see full report: EMU


F2009: In Line with Expectations

Quick Comment: SCI reported F2009 revenues of Rs 41.2 bn (up 12% YoY) vs. our estimate of Rs 41.3 bn, and EBITDA of Rs 10.9 bn (up 19% YoY) vs. our estimate of Rs 10.6 bn. Reported profits were Rs 9.4 bn (up 16% YoY while adjusted profits were Rs 9.8 bn (up 20% YoY). SCI has significant exposure to tanker rates, and we believe they were relatively stable during the first
9 months of the year compared to bulk carrier rates, which helped the company to avoid volatility in earnings.

What's new: For F4Q09, SCI reported revenues of Rs 8
bn (down 24%) and EBITDA of Rs 918 mn (down 61% YoY). EBITDA margins for F4Q09 were down 1,062 bps YoY at 11.4%. Reported profits were Rs2 bn (down 19% YoY); however, we believe adjusted profits (adjusted for forex impact) were Rs892 mn (down 64% YoY).

During the year, the company sold two vessels – a dry bulk carrier in F4Q09 and a crude oil tanker in F2Q09. It realized Rs345 mn as profit on the sale of these ships. In addition, during the year, the company is likely to have taken delivery of two container vessels and one VLCC. The company declared a dividend of Rs 6.5/share.

In our view, tanker freight rates could stabilize or
improve from current levels after having been beaten down in the past few months.

To see full report: SCI


Subscriber Watch

GSM net adds decline further; Aircel impresses

GSM net adds for May ’09, excluding Reliance Communications (RCom), were at 8.3mn versus 9mn in March ’09, mostly due to lower GSM net adds by Bharat Sanchar Nigam (BSNL) at 0.5mn versus 1mn in April ’09 and 2.5mn in March ’09. Bharti Airtel (BAL) continued to lead with 2.8mn net adds in May ’09, while Vodafone Essar’s net adds were lower at 2.5mn versus 2.8mn in April ’09. Idea’s net adds (including Spice) increased to 1.3mn (1.15mn in April ’09), but Idea lost subscribers in Delhi for the second month in a row.

Aircel continues its impressive performance adding 1.1mn subscribers in May ’09,
partly driven by ~180,000 net adds in Delhi and Mumbai. High net adds share of Aircel in Delhi (42.3%) and Mumbai (29.6%), which are almost saturated markets and where subscribers are expected to be less price sensitive, is remarkable.

BAL’s net adds of 2.8mn were the highest with net add share at 33.9%, taking subscriber base to 99.5mn. Vodafone slightly lagged at 2.5mn net adds with net add share of 30.6%, taking subscriber base to 74.1mn. Vodafone continued to glean ~20% net adds share in most of the B-circles, where it launched services in FY09.

Idea’s net adds improved to 1.3mn from 1.15mn in April ’09 and its net adds share rose to 15.6%. However, Idea’s performance in the two metros was poor, mostly due to strong push by Aircel. Idea continued to lose subscribers in Delhi (30,654 loss in May and 48,465 in April), and its net adds in Mumbai declined to 30,376 (74,232 in April). Among other recently launched circles, Idea’s net adds in Bihar were robust at 199,311 or 23.5% of the net adds (139,058 in March). Idea added 65,218 subscribers in Orissa (launched in April ’09) and 6,066 in Tamil Nadu (launched in May ’09).

Aircel added >1mn net adds for the third month in a row, driven by better performance in recently launched circles, especially in highly competitive metro circles of Delhi & Mumbai. Aircel added 99,244 subscribers (42.3% of net add share) in Delhi where it had launched services in March ’09 and added 79,335 subscribers in Mumbai (29.6% of net add share) where it launched services in April ’09.

A & B circle net add share increased, though absolute net adds decreased across all categories. B circle net adds increased to 38.3% and A circle net add share rose to 31.9% of the total GSM net adds (ex-RCom), while that for metros declined to 8.5%.

Competition to intensify with more launches & mobile number portability, which is expected by year end. Tata Teleservices (TTSL) has announced the launch of its GSM services, Tata DoCoMo by end-June, starting with South India and then in West and North. MTS (earlier Shyam-Sistema) launched its CDMA services in Tamil Nadu and Kerala in April ’09.

To see full report: TELECOM SECTOR


Sonata Software is a mid-tier company, which has seen a PAT CAGR of 48% over the past five years. The company is strategically expanding in new geographies (Middle East). We believe the current valuations make it a compelling buy…

Company background
Sonata Software is a Bangalore headquartered company having offices across the globe in the US, Europe, Middle East and Asia Pacific.

The company’s portfolio of services includes IT consulting, product engineering services, travel solutions, application development, application management, managed testing, business intelligence, infrastructure management and packaged applications. It serves segments like manufacturing, travel transport & logistics, independent software vendors (ISV), BFSI, telecom and construction.

Investment arguments

Entering new geographies
Through the years, the company has expanded its geographical presence both organically and inorganically. For the European region, it formed a joint venture with TUI, Europe’s largest tourism group. Sonata has a majority stake in TUI InfoTec, which provides a portfolio of services comprising IT operations and IT services. TUI InfoTec's basket of IT operations includes infrastructure management, helpdesk and hosting services, while it offers IT services such as application development, application management, business intelligence and managed testing.
The company is currently trying to offshore a lot of work, which is currently being done in Germany, to its development centres in India. TUI InfoTec employs around 440 IT professionals in Germany. The company has recently opened up a 100% subsidiary in Dubai to cater to the growing demand of the Middle East market.

Well diversified in terms of geography
The company has a good mix of business coming from the international and domestic market in the ratio of 60:40. We believe this augurs well for the company, as in comparison to some of the other peers in the sector it is not totally dependent on international clients for its growth.

Looking at acquisitions for growth
The company has cash of Rs 8 per share, which makes the valuations even more attractive. Sonata is looking at acquisitions to further fuel its growth and is looking at companies with $50 million revenue with mature business models. It is also looking at companies specialising in niche markets.

Risks & concerns
With the reduction in IT spend globally clients are asking for price cuts, which could affect margins, going ahead. The company also has a large dependence on the travel segment the IT spend of which is largely discretionary and within such global uncertainty would take time to revive.

To see full report: SONATA SOFTWARE


Maintain UW(V): Forex losses overhang to continue

FY09 reported loss of INR355m based on exception loss of INR870 m due exposure to foreign exchange derivative

■ Forex losses are an overhang for FY10e based on outstanding derivative contracts

■ Maintain Underweight (V) raise target price to INR30 from INR16; higher EBITDA margin is the key upside risk

FY09 ends with loss. In our previous report, Finolex Cables Remain UW(V): Losses in FY09,
dated 28 January 2009 we had mentioned that company’s outstanding foreign currency derivatives exposure would lead to net losses for FY09. For FY09, the company has reported losses of INR355m while sales were -5% y-o-y at INR13bn. EBITDA margin decline 400bps to 5.5% due to volatile raw material prices. The key highlights for Q4FY09 results were tight control on working capital and an exceptional loss of INR870m in FY09

Tight control on working capital. The company has capitalised assets of its Rorkee plant (INR700m) and its Urse plant (INR700m). In spite of the capitalisation of assets, capital employed has not increased due to sharp reductions in debtors and inventory which is positive.

Exceptional loss of INR870m in FY09: The Company reported an exceptional loss of
INR870m, which comprised of losses on account of foreign exchange derivative transactions of cINR879m, losses based on effects on accounts of exchange fluctuation of INR262m and a credit for reversal of impairment of optic fibre assets of cINR271m due to revival in business.

Forex losses overhang to continue in FY10: Though most of the outstanding derivative
contracts have been booked in FY09, a few contracts are still outstanding, and we believe that the overhang of these will continue on the stock.

Maintain UW(V) raise TP to INR30: We have increased our target PE and PB multiples
based on signs of improvement in business momentum , tight control of working capital and the fact that a significant portion of derivatives contracts have been booked inFY09. Our target price of INR30 is the midpoint of PB (Target PB 0.9x; fair value INR35) and PE (Target PE 8x; fair value INR25) multiple based valuations.

To see full report: FINOLEX CABLES LIMITED


NCDs+warrants: the right mix

HDFC is planning to raise up to INR 40 bn through non-convertible debentures (NCDs), issued along with warrants (convertible at a premium). The proceeds will be utilized for subscription to HDFC Bank’s warrants (INR 36 bn) and capital infusion in the life insurance subsidiary (~INR 3-4 bn). We are positive on the structure of the deal as it will provide funding for warrant subscription with minimal impact on profitability and RoEs. The bank’s warrants are due for conversion in December 2009 and HDFC Bank’s stock price is nearing exercise price of INR 1,530/share. Moreover, the stake sale in life insurance/AMC subsidiary is likely to take more than six months. HDFC Bank would gain ~INR 80 per share in book value due to warrant subscription by HDFC.

Optional value of warrants to lower effective interest cost
Optional value attached to warrants will result in lower effective interest cost. We believe the tenure of debentures could range from 3-5 years and warrants will be converted into equity shares at a premium (30-50%) in 3-5 years. HDFC is incrementally borrowing 3-year money through debentures at ~7.7% and 5-year money at ~8.25%. Considering few structures around which the product can be built, we expect effective interest cost (considering similar tenure for debentures and warrant conversion) to be ~3.25% (assuming 30% premium to CMP for warrant conversion) and ~5% (for 50% premium). Potentially, the deal can also be structured in a way with varying maturities such that the effective cost is minimal at 0-2% (refer table 1).

Earnings revision
As the money raised via NCDs will be utilized for investment in subsidiaries, spreads are likely to compress by 15-20bps (assuming 3-5% effective interest cost). We believe the company will structure the product in such a way that there is minimal impact on profitability and RoEs. We expect core mortgage earnings to post 18% CAGR over FY09- 11E. We are also building in investment profit of INR 3-4 bn over FY10-11E and stake sale in life insurance by FY11E considering improved capital market sentiments. Our EPS estimate now stands revised at INR 94.9 for FY10E and at INR 114.8 for FY11E.

Outlook and valuations: ahead of fundamentals; maintain ‘REDUCE’
The outlook on mortgage growth and asset quality has improved since January with change in macro environment and increased availability of capital. We are revising our SOTP fair value for HDFC upwards to INR 2,387 per share for FY11E (equivalent to next 12 months fair value of INR 2,170 per share). As core mortgage book will appear distorted for the next two years due to significant investment in HDFC Bank’s warrants (with no corresponding increase in net worth), we are using equivalent P/E of 17x (as consequent impact on earnings will be minimal). Though we are positive on the improved business outlook, we believe the stock has run up ahead of our fair value estimates. We maintain our ‘REDUCE’ recommendation on the stock.

To see full report: HDFC



Favourite stock picks in the portfolios of equity and mid-cap funds

An analysis has been undertaken on equity and mid-cap funds’ portfolios, indicating the favourite picks of fund managers for the month of May 2009. Equity funds comprise of all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 24 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Mid-cap Fund etc.

What's in?

Top new stocks added to the portfolio of equity funds
  • Brandhouse Retails
  • Essar Oil
  • Goodricke Group
  • Hexaware Technologies
  • Indiabulls Securities
  • Jupiter Bio Science
  • KLG Systel
  • Mahindra Forgings
  • Oil Country Tubular
  • Parsvnath Developers
  • Prism Cement
  • Redington India
  • Rohit Ferro-Tech
  • Selan Expl.
  • State Bank of Mysore
  • Sterling Biotech
  • Swaraj Engines
What's out

Complete exits in the portfolio of equity funds
  • Solarson Industries
  • Whirlpool of India
  • Subhiksha Trading Services Pvt
  • National Stock Exchange of India
  • LG Household & Health Care
To see full report: FUND ANALYSIS


Exports likely to dip

Cummins India Ltd (CIL) reported better than expectation results for Q4FY09 on a standalone basis. Results for Q4FY09 are not comparable as CSS and CASL are amalgamated with CIL in Q4FY09 results. On a comparable basis CIL reported decline in net profit by 12% as per guidance given by the management. We recommend a Reduce.

Standalone net sales grows by 54% y-o-y in Q4FY09
CIL’s standalone revenue reported growth of 54% y-o-y for Q4FY09, which is better than our expectations. The results for Q4FY09 are not comparable with Q4FY08 mainly because of amalgamation of CSS and CASL in CIL. It reported revenue of Rs.10.71bn for Q4FY09 fuelled by growth in engines segment which grew by 31% y-o-y and others segment grew by a whopping 1630% y-o-y. Domestic sales jumped 54% y-o-y to ~Rs.7,437mn and exports went up strongly
by 54% y-o-y to Rs.3,276mn. But the management has indicated that there could be a severe drop in exports revenue in FY10E. However on the positive side, domestic markets have started picking up during last two months. We expect with the focus on infrastructure projects by new government, there will be increase in domestic demand for CIL’s products in near future.

Smart jump in standalone EBITDA margins by 258bps y-o-y
Because of favorable product mix and decline in raw material cost by 431bps yo-y, CIL’s EBITDA jumped by 81% y-o-y to Rs.1,821mn and EBITDA margins went up by 258bps y-o-y to 17% for Q4FY09. For FY09, its standalone EBITDA went up by 208bps y-o-y to 17.6%. On a consolidated basis CIL’s EBITDA margins came down marginally by 24bps y-o-y to 17% mainly due to rise in other expenditure during FY09. Net profit on a consolidated basis for CIL went up by 43% y-o-y to Rs.4,629mn and its segmental results suggest it earned healthy ROCE of 47% on its engines business.

To see full report: CUMMINS


Valuations not yet stretched

We recently met with the management of Coromandel fertilisers (CFL) and were enthused by their growth prospects. Efficient inventory management (by not getting into any long term contracts) and strong negotiating power with raw material suppliers remains their success mantra in the complex fertiliser business. Moreover, the non subsidy based business (water soluble fertiliser, micro nutrients, crop protection and rural retail etc), where margins are almost 2.5-3x higher than fertiliser
business, is likely to drive growth in the near future. We expect the company to transform itself from a mere fertiliser company to a complete farm inputs company. With contribution of the non-subsidy based business to the bottomline increasing, there is strong case for re-rating of the stock. Despite the recent upsurge in the stock price by ~100%, we continue to remain positive on the stock and maintain BUY with a price target of Rs 263. Valuations are yet not stretched, since at our target price, the stock is valued at 8x FY11E EPS, EV/EBITDA of 4.1x and P/BV of 1.9x. Considering
the high returns (RoE of 24-25%), we believe that high P/BV is justified.

More details about the company’s foray into rural retail, possibility of FOSKAR listing and any acquisition, any opportunity to set up an ammonia plant outside India for backward integration can be potential triggers, going forward. However, lower availability of raw material due to volatile price scenario, higher working capital requirement for rural retail are few key concerns for the stock.

Efficient inventory management and RM sourcing is their success mantra
CFL has managed to report attractive performance in a volatile scenario, despite IPP linked subsidies. Efficient inventory management, monthly revision of price contracts and strong bargaining power with key raw material suppliers like FOSKAR have helped the company manage the disparity in finished products (DAP) and raw material (Phos acid) prices.

Production dependent on availability of raw material, not on capex
CFL has capacity of ~3.3 mn mt of complex fertiliser. However, FY09 production was about 2 mn mt. Key determinant for production is not demand and capacity, but raw material availability. With increasing number of tie-ups and TIFERT production scheduled from Dec’10, we expect a sharp ramp up in production.

Non subsidy base business to drive future growth
We expect the company’s non-subsidy based business (which includes water soluble
fertiliser, crop protection speciality fertiliser etc) to grow at 30% pa. With margins of 25-30%, we expect this business to contribute about 30% to CFL’s profit by FY11.

Valuations are not stretched yet; Maintain BUY
We continue to remain positive on the stock and maintain BUY with a price target of Rs 263. Valuations are not yet stretched, since at our target price, the stock is valued at 8x FY11E EPS, EV/EBITDA of 4.1x and P / BV of 1.9x. Considering the high returns (RoE of 24-25%), we believe that high P/BV is justified.



Market size pegged at US$1.6bn with ample scope of growth
Mobile Value Added Services (VAS) has evolved in to a US$1.6bn ancillary industry to the Rs950bn a year Indian wireless market. Voice offerings such as Ring back tones and Voice portals are dominant in the domestic non-SMS space as against more data-centric VAS abroad. VAS accounts for 8-9% of wireless revenues which leaves ample scope of market expansion.

OnMobile dominates the market with 12.3% share.
OnMobile Global has emerged leader in a fragmented industry deal with a 12.3% market share in the non-SMS segment. It enjoys several early-mover advantages. Firstly, long-term relationships with major telecom operators are in place as its servers are embedded in the operators' core network.

OPM likely to stay in narrow band
Upfront content development costs and relatively fixed staff and other expenses have led to margin drop of over 14ppts over Fy07-09. However, as the company indicated in its Q4 earnings call,content costs, which have been edging higher in the past few quarters, which is likely to stablize at current levels. We forecast OPM to stay within a narrow band of 30-33% in the next two years.

Dominant status underpins EPS CAGR 32.3%; BUY

Mobile VAS has transformed in to ~US$1.6bn industry

To see full report: ONMOBILE