Saturday, June 20, 2009

>EM anti-crisis measures (DEUTSCHE BANK)

Separating the wheat from the chaff

Emerging markets have put together sizeable stabilisation and support programmes and other measures to combat the effects of the financial crisis. Looking at the headline figures as announced by the respective governments, the largest packages are in UAE, China, Russia, Kuwait, Hong Kong and Kazakhstan, each amounting to at least 10% of GDP.

There are two main differences between anti-crisis measures in EMs and in developed markets. First, the majority of EM programmes do not contain significant recapitalisation schemes for banks, which to a large extent is due to the relatively good shape of many EM banking sectors. We built a composite index of financial soundness according to which Asian and Latin American banking sectors are faring quite well.

Second, emerging markets have had to fight the EM-specific problem of FX liquidity shortages. When a crisis erupts, typically EM currencies depreciate sharply, creating problems in the balance sheets of governments (less so in recent years) and the private sector. EM governments have reacted by injecting FX liquidity and intervening in the market to contain currency depreciation. This has shown that the amount of FX reserves in relation to external financing requirements is still crucial to the assessment of countries’ resilience to external shocks. From a policy perspective, accumulating FX reserves still seems to be pretty good insurance.

As in the case of developed markets, there is a trade-off between fiscal stimulus and the sustainability of fiscal policy. Given emerging markets’ history of macroeconomic instability, the issue of credibility of policies is especially important for EMs. In terms of their fiscal health at the onset of the crisis, the Gulf countries, Russia, Chile and Hong Kong possessed outstandingly high capacity to implement countercyclical measures.

In recent weeks there have been some signs of stabilisation in financial markets and selected economic data. It is difficult to assess to what extent stimulus packages have played a role (there are indications that this is the case with China). To be sure, the much-enhanced IMF role in providing assistance as well as massive support measures in developed markets have been critical, but the reaction of emerging market governments has been constructive overall, which bodes well for the post-crisis recovery period.

To see full report: ANTI-CRISIS MEASURES



The Bombay High Court has asked Reliance Industries (RIL) to sell 28mmscmd gas to Reliance Natural Resources (RNRL) at US$2.34/mmbtu, 44% lower price than the fixed price by the Government. The Court has also ordered the two parties to explore a fresh agreement within a month for gas sale from RILcontrolled Krishna-Godavari (KG) basin to RNRL. But it is unclear if RIL will start supply of gas to RNRL immediately given that the latter’s Dadri power plant is non functional; It is also not clear as to who would get marketing margins on the sale of the gas. In this context, the Government stand on profit sharing is the key variable. Based on these changes, revival in the global economy and utilisation of KG Gas in Jamnagar refinery, we revise RIL’s fair value to Rs1,756/share. Future E&P finds in KG-D3, D4, D9, NEC-25, GS-offshore and Cambay Basin could add further value. Maintain HOLD.

Big boost to RNRL. The favourable decision will be a boost for Anil Dhirubhai Ambani Group led by Mr Anil Ambani as supply assurance and gas pricing would allow the company to start the Dadri project, which was delayed due to the ongoing court case. Though Reliance Power may have to find additional funding source for the Dadri project, we believe investors and debtors might find the project alluring given the attractive gas pricing and supply assurance.

Negative for RIL; Government stand, the key variable. The Bombay High Court decision is a huge negative for RIL – the stock sharply fell today. RIL will be affected Rs39-171/share (under various scenarios) by the decision. And, the Government stand on profit sharing is the key variable. Though we have assumed that the Government will calculate its share at the actual selling price, but as per the production sharing contract the Government could choose the higher of the market determined selling price or the actual effective sale price; this would be another blow for RIL shareholders.

Fair value at Rs1,756. We value RIL’s extant business, including Reliance Petroleum (RPL) refinery at Rs1,020/share, retail at Rs36/share, gas marketing at Rs42/share, E&P at Rs798/share and special economic zone at Rs9/share. As the current market price is 24% above our fair value, we advice profit booking at current levels. Though our fair value is 19% below the market price, we maintain HOLD as regional peers are trading at a premium to valuations ascribed by us to RIL and the exposure to quality E&P asset portfolio would provide further upside.

To see full report: RIL

>Ten Things for India to Achieve its 2050 Potential (GOLDMAN SACH)

  • As we have shown before, India could be 40 times bigger by 2050.
  • To achieve this, India needs to implement many changes.
  • India needs to improve its governance, control inflation, introduce credible fiscal policy, liberalise financial markets and increase trade with its neighbours.
  • It also needs both to significantly raise its basic educational standards, and increase the quality and quantity of its universities.
  • India needs to boost agricultural productivity, improve its infrastructure and environmental quality.
  • Delivery of all these would ensure strong, persistent, medium to longterm growth, allowing India to reach its amazing potential.

To see full report: GLOBAL ECONOMICS PAPER


Strategic impact of adverse court verdict makes it sensitive for RIL

Unfavourable verdict for RIL; but pricing dispute could linger on
The Bombay High Court has ruled that Reliance Natural Resources (RNRL, RENR.BO, Not Covered) is entitled to receive 28mmscmd of gas supplies from Reliance Industries (RIL, RELI.BO) operated KG D-6 block at US$2.34/mmBtu for a period of 17 years. This is against our floor price assumption of US$4.2/mmBtu – per government guidelines. While market has reacted sharply on this news, we believe the dispute could linger for a while as RIL can appeal against the ruling in
Supreme Court in absence of reconciliation with RNRL within a month (as per court order). In such a scenario, the Supreme Court, typically having a broader perspective of cases, could consider the national significance of D-6 gas project, rather than focusing only on the terms of the RIL-RNRL gas sales agreement.

D-6 valuation could reduce by Rs140/sh - already in the price

Assuming that the government would extract its share of D-6 revenues at its directed gas price of US$4.2/mmBtu, the valuation of D-6 block could reduce by Rs140/sh, which we think is already reflected in the share price. Our calculation also assumes that RNRL can only source gas when Reliance Power’s plants start getting commissioned in FY12E, since D-6 gas cannot be used for trading. This implies that RIL’s FY10E/11E EPS of Rs138.6 / Rs203.44 are unlikely to be affected.
We have not assumed any negative read-across for RIL’s gas supply to other consumers.

But the long term impact of the verdict makes the issue sensitive
Apart from affecting RIL’s EPS from FY12E, low gas prices and high govt share could turn RIL’s cash income from D-6 negative starting from FY20E. We believe RIL could either stop D-6 operations then or, by corollary, could go slow on D-6 capex. Moreover, RNRL could impact RIL’s future gas projects as it would have the option to source all or 40% of RIL’s gas beyond 53 mmscmd of production from all blocks auctioned until 18 June 2005, though at market prices. We keep our Buy on RIL with 12-m SOTP-based TP of Rs 2430 (upside of 13%). Key risk: delay in D-6 ramp-up. We await further clarity on the dispute.

Inability to trade in gas implies RNRL cannot benefit from verdict
Currently, RNRL stock is implying marketing margin of US$1.54/mmBtu (17
years, 28mmscmd gas) vs prevalent margin of US$0.12/mmBtu. But since the gas agreement mentions D-6 gas cannot be traded, we believe RNRL is unlikely to be able to charge these margins as of now, which otherwise imply upside risk for the industry’s margins.

To see full report: ENERGY


The considerable uncertainty surrounding the oil price (USD 40 or USD 100 at the end of the year?) and its effects

If the spot price of oil again reflects the market equilibrium, with speculative stockpiling coming to a halt, it will drop to a very low level (USD 40 per barrel?); however, speculative stockpiling may continue, fuelled by better news about the economy and by the enormous available liquidity, and the oil price may continue to rise (to USD 80 or USD 100?)

This enormous uncertainty surrounding the oil price has massive consequences on any prospects and forecasts concerning:
− the situation of countries relying on oil production (Russia);
− the trend in prices and consumption in OECD countries.

See charts in report on the following headings:

1 - Oil price and situation in spot market

2 - Massive uncertainty surrounding the oil price at end- 2009

3 - Major effects on economic prospects

To see full report: SPECIAL REPORT


The Banker to Every Indian

SBI’s focus on rapid network expansion and gaining market share has yielded results over the past two years. With 100% of its expansive branch network now linked to a common technology platform, a major constraint vis-à-vis new generation private banks is removed. The declining trend in ROE was arrested last year but the bank still lags other major government banks in this respect. Asset quality deteriorated last year and provisioning will likely remain high in the coming years. The six associate banks are in good shape and a consolidation would add value to the SBI Group. Despite the recent run-up in the stock price, valuations remain inexpensive at 1.2x core book. ADD.

Rapid network expansion: SBI is in an expansion mode, having expanded it’s domestic branch network by over 1,200 branches during FY09 (461 branches were added on account of merger of State Bank of Saurashtra), compared to the addition of 1,200 branches in the previous nine years (FY99-FY08). SBI Group (SBI & six associate banks) have combined branch network of 16,055 branches and more than 11,300 ATMs. This rapid expansion seems to be driven by a strategy to increase market share of deposits and garner more low-cost funds. SBI has also achieved 100% computerisation of all its branches, which should help improve customer service and MIS. The bank recruited 33,703 employees during FY09, most of which were clerical, which seems excessive despite the branch expansion and considering the bank’s already low assets/employee ratio.

RoE on a declining trend: SBI’s RoE declined from 19.7% in FY04 to 17.1% in FY09, primarily owing to decline in leverage (assets/equity) from 21x in FY04 to 16x in FY09. Moreover, the bank’s ROE is lower compared to other major government banks because of SBI’s lower NIM and higher operating costs, as demonstrated by the ROA tree analysis.

Associates Banks are in good health: All the six associate banks are in good health with stable RoE, low level of net NPLs and adequate Tier-1 ratio. Associate banks contributed to 24% of consolidated assets and 23% of consolidated profits. State Bank of Saurashtra was merged with SBI in August 2008. We believe the merger of the other six associate banks with the parent is desirable and would make the SBI Group stronger. Among the other major subsidiaries, SBI Cards and SBI Life Insurance reported losses for FY09.

To see full report: SBI



WPI declines YoY during the week ended June 6: The Wholesale Price Index (WPI) declined 1.61%YoY during the
week ended June 6, 2009 compared to +0.13% during the week ended May 30 and +0.48% during the week ended May 23, 2009. Indeed, this is the first time since December,1978 that WPI is in negative territory. This decline in WPI to - 1.61% during the week ended June 6 was below market consensus (as per Bloomberg survey) of -1.52%.

The sub-zero WPI mainly on high base effect: As we have been highlighting, the decline in WPI this week has been mainly on account of high base effect. Inflation accelerated to 11.66%YoY during the corresponding week last year on pass through of fuel prices by the government and high commodity prices. See Table on next page for the key contributors to this decline in inflation.

WPI/PPI decline YoY – A global phenomenon: WPI is primarily reflecting the industrial intermediary product prices, which are highly influenced by international prices. Like India, all the major countries in the world are witnessing a deflation in Producers Price Index (PPI), which is similar to India’s WPI. PPI for US, China and Japan declined sharply to -13.4%, -14.2%, -5.4%YoY respectively in May 2009.

WPI to decline YoY during June-October 2009: We expect the WPI to decline on YoY basis during June-October 2009 on high base effect and slow domestic demand, before recovering to 6.5-7% by end-March 2010.

CPI inflation to decelerate too: Currently, CPI-IW for April 2009 (the last data point available) is 8.7%YoY. We believe
that CPI-Industrial Workers will follow the trend of WPI deceleration with a lag. However, we do not expect CPI deflation in 2009. The weights of CPI components are very different compared to the WPI. The most important differentiating factor is a weighting of food products. While in WPI, food products have a weight of 15.4%, in the case of the CPI it is 46.2%. In our view, food products prices are unlikely to decline YoY.

No policy rate cuts going forward: We believe the RBI is unlikely to cut policy rates going forward. We expect the RBI
to start increasing policy rates from the March 2010 quarter and expect the repo rate to increase to 6.25% by December 2010 from 4.75% currently.

To see full report: WPI


Q4FY09 Results – A disappointing performance
Everonn Systems’ Q4FY09 results were much below our expectations. Revenues came in 22% below our estimates while EBITDA and Net Profit were 44% and 45% below our estimates. The company also missed its annual revenue guidance of Rs1,850 Mn and net profit guidance of Rs290 Mn by significant 22% and 24% respectively.

The main reason for this was the fact that the company added just 80 schools in Q2FY09 and could not manage to add a single school in the ICT segment in last 2 quarters. The total schools under this segment still stand at 4,442 (3,164 schools in FY08). The average revenue per school in this segment also came down by 41% YoY to Rs1.24lakh (Rs2.11lakh in FY2008), reflecting significant pricing pressure in this segment.

ViTELS revenues also decline on a quarterly basis
In Q4FY09, the ViTELS segment recorded revenues of Rs179 Mn (down 15.9% QoQ) and this was the prime reason for underperformance in overall revenues. However, for FY09, ViTELS segment recorded a growth in revenues and PBT of 98% each YoY. In the ViTELS segment, revenues from schools are annual in nature and the company added only 37 schools in Q4FY09 taking the total number to 557, while in the college segment, where revenues are non-annual in
nature the company added 185 colleges during the quarter taking total number to 800. While in FY09, the revenue and profit growth was driven by higher than estimated addition of colleges, to sustain growth in this segment going forward, faster additions has to be made in schools to make revenues and profits predictable.

Margins contract in the quarter due to revenue decline
In Q4FY09, Everonn’s operating margins contracted by 1,443 basis points YoY due to higher operating costs. In FY09 the company recorded a 105 basis points YoY decline in operating margins due to higher employee costs. Employee costs as a percentage of revenues rose by 618 basis points during the year.

Outlook & Valuation
At the CMP of 384, the stock is trading at a P/E of 17.7x and 14.6x our estimated EPS of Rs21.7 and Rs26.4 for FY10 and FY11 respectively. We have revised our estimates downwards to factor in slower growth in the ICT segments as seen in the last three quarters. We now expect Everonn to record revenue and net profit CAGR of 45% and 34.3% respectively over FY09 to FY11E. We now rate Everonn Systems a ‘Market Performer’ as against a ‘Buy’ rating earlier, with a target price of Rs326 based on 15x its estimated FY10 EPS of Rs21.7.

To see full report: EVERONN SYSTEMS


Buy: Leveraging Its Product Portfolio

Strategic alliance with GSK — DRL has entered into a strategic alliance with GSK for emerging markets. We believe this is positive as it allows DRL to leverage its product portfolio much better without spreading itself too thin at the front end. While details on size, revenue sharing, etc. remain unclear, we believe it could be significant. We expect no material impact in FY10, but benefits should start kicking in from the next fiscal & scale up over the years.

Key elements of the deal — a) Effective immediately, GSK gains access to DRL's current portfolio & future pipeline of branded formulations. Key therapeutic areas include CVS, oncology, diabetes, gastro & pain mgmt; b) Covers various emerging markets such as Africa, Middle East, LatAm & AsiaPac ex India; c) The products will be developed & manufactured by DRL and licensed to GSK, which will file registrations & distribute them in the chosen markets. In certain markets, DRL & GSK will co-market the products; d) Revenues will be recorded by GSK & shared with DRL as per agreed terms.

In-line with long-term strategy — The move ties in with DRL's recent announcement that it would focus on fewer markets in terms of a front-end presence. Most of the markets covered are ones where DRL's presence is negligible. We believe these markets could cumulatively be as big, if not bigger than, some of DRL's key markets over the medium to long term. On the other hand, GSK has already expressed its intent to scale up in these markets & is a strong partner, given its robust brand equity & distribution strength.

Financial impact — Given the partnership model, we expect profitability on revenues under this arrangement to be lower than DRL's own branded business. However, it would drive higher absolute profit with little incremental investment, implying plying better RoI. Maintain Buy.

To see full report: DR REDDY


Orchid Chemicals & Pharmaceuticals (Orchid) is an integrated pharmaceutical company with core competencies in the cephalosporin injectable space and that too in regulated markets of US. Having an established strong base in US cephalosporin segment, the company is now spreading its wings to other regulated markets like Europe and Canada. Further the company is progressing well in the non-penicilin, noncephalosporin (NPNC) and drug discovery front.

Tazo+Pip to power earnings ahead
Orchid has recently commenced the comercial launch of Tazobactum & Pipperacillin (Tazo+Pip) injection (the generic version of Wyeth’s Zosynin) in Europe during Q4FY09, with an addressable market of $250mn for Orchid. This product has limited competition with just two generic competitors like Sandoz and APP pharmaceutical. Given by the fact and Orchid’s well planed marketing pact with one of the leading marketers like – Hospira, We estimate Tazo+Pip
injection in Europe bring incremental revenue about $35-40mn during FY10. Further, it foresees the launch of Tazo+Pip injection in US by Q2FY10 with another $250mn opportunity. These two launches would boost the revenues as well as margin going forward.

Strong pipeline opportunities to drive growth
Alongside, Orchid is expected to launch approximately 12 to 13 products with market size worth $2.6 billion in U.S. and Europe together in 1-2 quarters time. On a longer term perspective, Orchid has the pipeline of Carbopenems (like - Imipenem + Cilastatin, meropenem), which are over $1billion opportunity and Ranbaxy is the only known competitor in the space, that would trigger the earnings late FY10 onwards. Also, Orchid holds 5 First-to-file opportunities for
Desloratidine-ODT and ER, Ibandronate, Memantine and Gemifloxacin, would maintain the growth momentum for the company beyond 2010. however, we have not factored Carbopenem and FTF opportunities in model yet and they remain surprising earning triggers.

FCCB Buy back and revised AS-11 to improve earning predictability
Orchid has recently bought back FCCBs worth $40mn (at a discount of above 40%). This would enhance the clarity on profitability front by reducing the possibility forex loss led by currency fluctuation. On the top of that, the forex translation losses, as per the new AS-11, would not impact the earnings rather would be reported directly in balance sheet. Thus, Going forward we do not factor forex translation differences a cause of concern, which has been the major
performance dampener in 9mFY09.

Steady improvement in financials
During 9mFY09, Orchid reported 15% revenue growth coupled with 24.8% OPM. But only the additional fiancial burden and the forex loss of Rs 1715mn (against a profit of Rs 790mn in corresponding period) have resulted in a net loss of Rs 765mn. But the likely reversal of translation losses in the shortly expected Q4FY09 result would boost the FY09E earnings.

Going ahead, with the immediate earning impact of Tazo+Pip launch and subsequent triggering of pipeline opportunities, we estimate revenue would grow at a CAGR of over 20% during FY09-11 and margins to remain firm backed by its cost reducing efforts and new launches. With the capex phase almost over, Orchid management has now committed to reduce its debt/Equity levels from current 2.7x to about 1x.

After factoring the AS-11, our back of the calculation shows that Orchid would report a profit of Rs 507mn resulting a EPS of Rs 5.6 during FY09. But as we expect the adjusted forex loss will be capitalized (resulting a higher depreciation), the EPS for FY10 and FY11 stands at Rs 14.3 and Rs 22.3, respectively.

Orchid is currently trading at an attractive valuation of 5x it FY11 EPS its FY11 EV/ EBITDA. Further looking at the robust earning opportunities in the pipeline and debt reduction comitment, we recommend a BUY rating on Orchid with a target price of Rs 176 (8x FY11E).

To see full report: ORCHID CHEMICALS