Saturday, July 4, 2009


  • Global update: Sustainability doubts
  • Market movers ahead
  • Financial views
  • Fixed Income: Disappointing payrolls send yields down
  • FX: China requests USD debate meeting
  • Denmark: GDP and jobless figures better than expected
  • Sweden: Open up the goodie-bag
  • Norway: All indicators pointing up
  • US: Payrolls disappoints
  • Euroland: No new weapons
  • Asia: Japanese consumption stabilises
  • UK: House prices past the bottom
  • Switzerland: Still some way to 1.50
  • Macroeconomic forecast
  • Financial forecast
  • Calendar
To see full report: WEEKLY FOCUS


Last month Nifty opened on a positive note and continued its upside journey and on 12th June it tested our short term target of 4649 and further made a high of 4693. But on higher levels selling pressure was witnessed and Nifty fell sharply and on 17th June it broke the support of 4365 and further continued its downside journey and made a low of 4143. Thereafter Nifty took support and recovered some of its losses and finally closed at 4291 with a loss of -3.53% on m-o-m basis. On the daily chart Nifty had formed Lower Top and Lower Bottom, thus the short term trend is still looking weak and we maintain our downside target of 4092. However in the long term Nifty has strong resistance at 4693 levels.

Last month Sensex opened on a positive note and continued its upside journey and on 12th June it tested our short term target of 15579 and further made a high of 15600. But on higher levels selling pressure was witnessed and Sensex fell sharply and on 17th June it broke the support of 14526 and further continued its downside journey and made a low of 14016. Thereafter Sensex took support and recovered some of its losses and finally closed at 14493 with a marginal loss of -0.90 % on m-o-m basis. On the daily chart Sensex had formed Lower Top and Lower Bottom, thus the short term trend is still looking weak and we maintain our downside target of 13518. However in the long term Sensex has strong resistance at 15600 levels.

Bank Nifty
Continuing its northbound journey the Bank Nifty opened on a positive note and was trading in the range of 7559 to 6909. On 29th June Bank Nifty broke the recent high of 7567 and made a new high of 7626. Thereafter it shed some of it gainsand finally this index closed at 7338 with a loss of -1.05% on m-o-m basis. As this index is continuously making higher tops and higher bottom, thus it is still looking strong and in the immediate term if this index starts trading above 7626 levels then it can test 7924 which is 61.80% retracement level of the recent fall from 10774 to 4133. However in the short-term 6813 will play as a strong support.



The Innovative Package

Time Technoplast Ltd (TTL) is the market leader in India in the polymer based industrial packaging industry with a market share of more than 75%. The company has a technical collaboration with Mauser Germany for packaging products.

TTL has key strengths in polymers, technology and innovation. Based on this, it has successfully diversified into high-end polymer based innovative applications for infrastructure, healthcare, auto components, and lifestyle products that typically enjoy higher margins. It has also diversified into telecom battery business and formed a JV with Schoeller

Arca Systems for material handling solution and systems. We believe the recently commissioned new plants in India, Poland and Sharjah, expansions, acquisitions and a strong product pipeline would lead to 21.9% growth in revenues and 33.8% growth in profitability for the company in FY10E. We are positive on the long term growth prospects of TTL. Therefore, we are initiating coverage with a BUY recommendation on TTL with a price target of Rs.60 (50% upside potential) over a 12-month horizon. This is based on the DCF method of valuation, with 13.2% WACC and 4.0% terminal growth rate.

Key Investment Rationale
Market leader in industrial packaging. TTL is the market leader in the industrial packaging segment with more than 75% market share. These are used as barrels or containers for packing by users in specialty chemicals, paints, inks, pharmaceutical intermediates, FMCG intermediates, construction chemicals, additives, lube oils and food industry among others.

Tie up with Mauser-Werke GmbH of Germany. The company has a tie up with Mauser-Werke GmbH of Germany, which is one of the largest producers of intermediate bulk containers, plastic, steel and fiber drums in Europe and the US with annual revenues of more than $1.0 bn. Mauser has a presence in over 54 countries worldwide through its licensees.

Strengths - Polymers, technology and innovation. TTL has key strengths in polymers, technology and innovation. Based on this, it has successfully diversified into high-end polymer based innovative applications for infrastructure, healthcare, auto components, and lifestyle products that typically enjoy higher margins. It is important to note that all its products are based on the polymer platform primarily to replace metals and to give superior strength and overall performance utility to its customers. The company believes in R&D and has developed most of the products in-house.

Foray into battery business. TTL has diversified into telecom battery business by acquiring Hyderabad based NED energy systems and Bahrain based Gulf Powerbeat WLL. Through the acquisitions, TTL plans to leverage NED's technology in automotive batteries to achieve significant growth for its well established automotive segment where it enjoys strong relationships with major OEMs as Tier-I supplier. We expect the battery vertical to contribute more than 20% to the overall revenues of the company from FY10E onwards and it has high growth potential, going forward.

To see full report: TIME TECHNOPLAST


Below estimate 4QFY09/FY09 performance on continued one-offs: During 4QFY09 Suzlon reported below estimated EBITDA of Rs3.1b (-67% YoY) and adjusted net profits of Rs190m due to non-linear increase in other operating costs to Rs12.7b (+145%YoY, 57%QoQ). Also, the FY09 EBITDA was impacted due to increase in the other costs of Rs6.5b (part of which is non-recurring majority of which is booked in 4QFY09), including: (1) Availability loss on installed WTG of ~Rs2.8b, (2) Liquidity damages of ~Rs2.8 due to delays in commission, shipment etc, and
(3) higher consultancy and financial costs of ~Rs1b.

Lower order book, realizations; higher fixed costs to impact FY10 WTG performance: Current order book for the WTG business stands at 1,463MW (-57.6% YoY, -23.6% QoQ), which provides visibility for only next 2-3 quarters. For FY10, per MW realization is also likely to witness decline of 5-7%YoY. We model FY10 revenues of 2,400MW, at lower end of management guidance of 2,400-2,600MW. With the current order book of just 1,463MW (including 200MW to be delivered in FY11), our assumptions look challenging since the company will need to secure orders during next 2-3 months to achieve these volumes for FY10. Also, higher fixed costs at lower volumes will impact FY10 performance. We are estimating just Rs414m of net profit in FY10 as against Rs6.3b in FY09.

Cutting earnings; maintain Neutral: We have cut our FY10 and FY11 earnings by 36% and 31%, respectively, to factor in lower volumes and very high fixed costs. We are less optimistic about Suzlon’s ability to reduce fixed costs, and thus higher volumes would be the only upward risk to our estimates. Maintain Neutral with target price of Rs95, based on 18x FY11 earnings for WTG, Hansen and REPower.

To see full report: SUZLON ENERGY


Investment Rationale

Being conservative in FY09 due to bleak economic scenario has led SIB in strong footing to capitalise on better economic prospects ahead. We expect SIB's advances and NII to grow at a CAGR of 20% (vs 16% in FY09) and 16% respectively over FY09-FY11E. We believe that faster re-pricing of deposits coupled with strong growth in advances will stablise NIMs at 2.8 % levels.

In Q4FY09, NPA have shown steep rise due to a technical slippage of INR 1bn in one major account. However, the account has become performing and has been upgraded in the current quarter. Going forward, we expect that the aggressive recovery policy and cautious lending will keep NPA under check.

The bank has large number of loyal NRI clients that contribute about ~20% to the bank's deposits. About 45% of its deposits comprise of low-cost CASA deposits and NRE deposits. SIB is planning to open 45 more branches mainly in northern states which will improve CASA ratio.

We expect SIB's fee income to grow at a CAGR of 18% and overall non interest income to grow at a CAGR of 12% over FY09-FY11E. The bank has recently tied up with LIC, Mutual Funds and Insurance companies to distribute their products and is targeting income of INR 1bn from distribution of these products. We also expect increase in volumes of remittances and forex to boost fee income growth.

We expect SIB's earnings to grow at CAGR of 19% over FY09-FY11E led by 16% CAGR growth in net interest income. Resultantly, ROE will increase to 17 %( by FY11E) whereas RoA will remain above of 1% levels.

SIB is trading at an attractive valuation of 0.7x FY10E ABV. Peer banks like KTK Bank, KVB etc continue to trade at 1x FY10 ABV, although operational parameters are comparable with SIB. We therefore believe that SIB’s valuations will catch up with peer banks. Our target price of INR 120 for the stock (based on DDM model) discounts 1x FY10E ABV. We recommend Buy on the stock.

To see full report: SOUTH INDIAN BANK



Investment Argument
• Company is an integrated agrochemical player and largest producer of 2 of its key products [ Mencozed & Glyphosate ], in India and second largest in world.

• Capacities of its key products doubled recently [in Jan’09], full benefit of which will accrue from current year onwards. Withmost of the production tied up for sales to large MNCs, accounting for almost 70% of total sales, hence domestic monsoon conditions will have limited impact on sales.

• With over 200 product registrations of bulk & 45 for formulations across 35 countries, export potential is huge.

• Company is targeting to grow from current sales of Rs 366 Crs to around Rs 1000 Crs in next 3 years, with commensurate rise in profits.

• The valuations of company deserve a re-rating because – post Chinese Olympics, dynamics of industry changed for better. [This is following Chinese stricter norms for environmental protection, leading to closure of capacities and for remaining plants, there was a rise in cost due to installation of waste/water treatment facilities]. This led to a general rise in product prices since last year.

• This led to a general improvement in margins for this industry, which is yet not captured in by valuations of this sector, [which were very poor traditionally due to low margins], now needs to

be re-rated due to better margin trend.

• The Present Mkt cap [Rs 80 Crs] of company is less then 25% of the sales for ’09, and replacement cost is just 30%. Thus offering huge scope for appreciation.

• At present stock discounts 2010 earnings by just 2X and going by stated target of attaining Rs 1000 Crs turnover in 2-3 years, it deserves at least 4-5X discounting, leading to one year target of

Rs 48-60 and 2 years target of Rs over Rs 75-90.

To see full report: SABERO ORGANICS


Sell: US$60-70 Crude Reduces Deregulation Hopes

Oil forecasts revised — We are adjusting our global oil (Brent) forecasts tovUS$56/bbl (US$48) for 2009E, US$65 (US$55) for 2010E, and US$65 (US$60/bbl) for 2011E. Our LT assumption (2012E+) stays at US$65/bbl.

Modestly increasing FY10-11E earnings — Our assumptions for ONGC are increased marginally, by 1-5% over FY10-11E. The FY10E estimate change is primarily on account of the APM gas price hike (15-20%) that we are now assuming, in line with the likely Cabinet proposal. This however falls short of the market’s heightened expectations ($4.2/mmbtu). For FY11E, while our crude assumption increases from US$60 to US$65, the EPS increase is more subdued at 5%, as net realisations on domestic crude remains flat at ~US$50.

Subsidy burden to increase in FY11 — Our earlier FY11E assumptions incorporated only LPG/SKO under-recoveries (Rs319bn total; 1/3rd sharing) at US$60 crude, which we now expect to rise to Rs466bn (incl. auto fuel losses) at US$65 crude, suppressing net realisations. While full deregulation of auto fuels could lead to a lower figure (Rs374bn), our assumption is premised on some losses on auto fuels as well, as the quantum of price hikes will likely lag the required increases as long as crude is between US$60-70.

Maintain Sell; Rs910 target price — We maintain Sell with a target price of Rs910 (Rs820 earlier) as we roll forward to Sep-10E (Mar-10E) while maintaining our 10x target P/E. The stock trades at 11x P/E, the upper end of its historical 7-11x trading band. Any move by the government to fully deregulate auto fuel will be a positive surprise and upside risk to our estimates.

To see full report: ONGC


A giant in the making!

Essar Oil (EOL) is inching closer to becoming an integrated player in the Indian energy space. Expansion plans at its Vadinar refinery are gathering pace, and phase I (10.5m to 16m tpa) is well on track for commissioning in Q4FY11E. The uncertainties around global economic outlook and funding issues have affected timelines in the past, but we believe the relative stability in global economy and easing liquidity will aid execution of phase II (16m to 34m tpa) as well. This huge capacity addition by Q4FY12E is expected to help EOL leverage the product demand revival over FY10- 12E, while increase in complexity will improve GRMs. The nascent, but exciting, E&P portfolio has high value accretion potential as well. The slowdown in global refinery expansion plans implies a good opportunity for EOL to deliver in a tight supply environment over FY11-13E. However, a deeper economic slump may push timelines on the expansion backwards, and is a risk to our estimates. Reinitiating coverage with Outperformer and an SOTP-based price target of Rs242 per share.

EOL – moving towards scale and efficiency: The capacity expansion to 16m tpa in phase I and 34m tpa in phase II over FY10-13E would impart scale to EOL. Post expansion, EOL will have one of the largest single-location refineries in the world, which would lend sourcing flexibility and improve operational efficiencies. The complexity of the refinery would also expand considerably from 6.1 to 12.8 post phase II expansion.

Increased complexity to drive margin expansion: Higher Nelson Complexity would
drive optimization of sourcing with ability to process a wider and tougher range of crude to produce superior quality products (38 varieties of crude processed in FY09). The additional secondary processing units will allow for greater middle distillate production, improving realizations and profitability of the refinery.

Valuation – firm GRMs and E&P provide upsides: Our optimism on the stock stems
from the potential size and scale of the business, along with an attractive E&P portfolio. We see E&P proving to be a significant growth driver for EOL in the long term, and have attributed a value of Rs58 per share to the reserves. Based on higher volumes, improving GRMs and the value-accretion potential in E&P portfolio, we reinitiate coverage on the stock with Outperformer and a price target of Rs242.

To see full report: ESSAR OIL


The loss of confidence in dollar denominated assets continues to grow

In this Flash we will look at the nature and severity of the loss of confidence resulting from the extremely expansionary fiscal and monetary policies being implemented in the United States. We must take into account the particular situation of the United States: if the US external deficit increases, central banks in many countries are forced to accumulate dollar-denominated assets
in order to stabilise the dollar:

the deterioration in the creditworthiness of the public debt (due to excessive fiscal deficits, the Treasury’s purchases of risky assets, etc.) is leading investors to increasingly prefer private-sector assets to public assets. This does not pose any problem for central banks: the dollar can be shored up through purchases of dollar-denominated private-sector securities. The result of this first stage of loss of confidence in the dollar is a rise in interest rates on public debts relative to private debts;

the deterioration in the quality of the Federal Reserve’s assets, due to the large number of programmes to buy risky assets, may entail a loss of confidence of a different kind, i.e. in the money issued by the Federal Reserve. This may trigger a flight-from-money phenomenon: economic agents get rid of money and buy real assets (real estate, companies, commodities, durable goods, etc.), and this triggers a surge in real asset prices (also known as "hyperinflation").

If central banks in countries posting a surplus reject dollar money as well, the stability of the dollar's exchange rate can no longer be maintained. In an initial phase, if the flight from dollar money concerns only private economic agents, central banks’ holding of dollar-denominated assets must significantly increase.

To see full report: FLASH ECONOMICS



Asset quality in Indian banking is rearing its ugly head but is not immediately discernible on account of regulatory forbearance that has allowed banks to classify poor quality loans as restructured standard loans with minimal provisioning requirements. Such a practice, sadly, results in severe under-reporting of non-performing loans and inflation of past and future net profits. Our study reveals that the government banks' poor quality loans (net nonperforming loans and restructured standard loans) for FY2009 constitutes around 48% of the it’s net worth as compared with nearly 18% of net worth in FY2008 and the segment is therefore in need of equity recapitalization
which the government can ill-afford on account of fiscal constraints.

Non-performing assets (NPA) disclosure does not accurately reveal extent of the problem: In our sample of 26 (23 government and 3 private) banks; gross NPAs in FY2009 increased by 18% to Rs 558bn while net NPAs rose by 23% to Rs 261bn. As a percentage of loans, the data shows an improvement with gross NPAs declining to 2.2% from 2.3% in FY2008 while net NPAs falling to 1% from 1.1% in the same time period. As a percentage of net worth, net NPAs rose marginally from 10.2% in FY2008 to 10.8% in FY2009. The all-important coverage ratio reported a decline to 53.3% in FY2009 from 55.3% in FY2008. On the reported NPAs there appears to be no major cause of concern but that is because a significant amount of poor quality loans were reported as restructured standard loans instead of NPAs.

Significant increase in restructured standard loans: While NPAs increased less alarmingly, the huge increase in restructured standard loans is an ominous sign that all is not well in Indian banking. In our opinion, restructured standard loans have to be classified as non-performing as we believe that without restructuring the terms of the loans, such loans would have had to be classified as NPA. Total restructured standard loans in our sample of 26 banks increased 4.2x over FY2008 to Rs650bn. which was more than the gross NPAs of Rs558bn. Within restructured standard loans, the bulk of the increase is coming from non-corporate debt restructuring (CDR) standard loans which implies that the broad underlying loans in the banking sector from small & medium enterprises (SME), retail and agriculture are deteriorating. The huge increase in restructured

standard loans is a more accurate depiction of the deterioration in asset quality in FY2009. As a result, gross impaired loans (gross NPAs plus restructured standard loans) increased by 93% in FY2009 to Rs1,208bn while net impaired loans (net loans plus restructured standard loans) rose by 149% to Rs910bn.

To see full report: BANKING SECTOR