Monday, July 13, 2009

>Crude steady around USD60; fundamentals weak

London - Nymex was broadly steady below $60 a barrel Monday in London, but high oil supplies and low demand continued to weigh on prices.

"Mounting stocks of oil around the world reflect the reality that oil demand remains on its knees," said analysts at KBC Market Services, a consultancy based in the U.K. "Market fundamentals are weak, and if anything getting worse rather than better."

At 1152 GMT, the front-month August Brent contract on London's ICE futures exchange was up $0.25 at $60.77 a barrel, bouncing into positive territory after an earlier selloff.

The front-month August contract on the New York Mercantile Exchange was trading $0.05 higher at $59.94 a barrel, also trimming earlier losses.

The ICE's gasoil contract for August delivery was up $8.25 at $494 a metric ton, while Nymex gasoline for August delivery was down three points at 165.02 cents a gallon.

Prices were bouncing from an oversold position, but the rebound was expected to be short-lived, according to several brokers in London. Oil has sold off nearly 20% in the last two weeks as the outlook for economic recovery - and by inference, oil demand - deteriorates.

"I think with the macro data and weaker equity markets, the market is a little uneasy about firming up too much," a broker said.

Apart from weak fundamentals, investor appetite for oil could be waning due to the potential for greater market regulation to be discussed at U.S. hearings later this summer.

"If these proposals are put in place, we believe the oil price will become more related to the industry's fundamentals," said analysts at Renaissance Capital in Russia. "In the short-term, this could drive oil price below $50 barrel amid excess supply and reduced demand."

Separately, Nigerian authorities Monday confirmed militants had attacked an oil tanker loading facility in Lagos harbor - the first by rebels in the country's main city. Military, police and government spokesmen all confirmed the attack on the Atlas Cove Jetty in Lagos harbor, claimed by the Movement for the Emancipation of the Niger Delta, or MEND.

The market largely shrugged off news of the attack, as violence and disruptions to Nigeria's oil production are largely priced in, brokers said.

"Nigerian news always seems to be taken in its stride - people just expect it now," a broker said.

Participants are still watching technical charts to glean whether oil's recent downward trend will continue.

"Brent still looks weak and could potentially pull back towards $58.31 a barrel once selling intensifies," said Andrey Kryuchenov, vice president of commodities research at VTB Capital in London. A sustained close below $60 a barrel would be "very bearish," he said.

Crude's appeal as inflation hedge fades for now

Crude oil futures remain pressured by a firming USD, and the commodity's use as an inflation hedge could diminish, says Marius Paun at ODL Securities. "Speculative interest in oil has been quelled especially after talks of trading limits and investors appearing to refocus on fundamentals," he says, adding it's "no surprise that crude's appeal as an inflation hedge is slowly starting to fade away for now." ICE August Brent crude -45c at USD60.07/bbl, Nymex August light, sweet crude -62c at USD59.27/bbl.



A fundamental interest rate explanation and forecast

Notwithstanding the recent bond market recovery, the lows marked by US and European government bond yields at the end of 2008/beginning of 2009 are a thing of the past. Yields on 10yr US Treasuries are over 100 basis points, and German bunds 40 basis points higher than at the end of 2008. At first sight this does not appear to be in tune with the real economy. After all, in the first quarter of 2009 most of the major industrialized countries suffered the sharpest drop in overall outputsince the Second World War, and in the second quarter only some of the production losses were offset, despite growing glimmers of hope. So why this marked rise in yields? Several theories are currently being put forward:

• The sharp rise in public debt on the back of expansionary fiscal policy is being funded by the issue of government bonds. An oversupply of government bonds is pushing interest rates up.

• At some point, the flooding of banks with liquidity and the Keynesian fiscal policy are going to stoke up inflation. Markets are anticipating this and are demanding a higher inflation component in interest rates.

• Rising interest rates are merely a reflection that things are returning to normal. The financial market crisis had bloated demand for government bonds; as risk aversion fades, so too demand for government bonds. Yields return to normal levels again.

• The rise in long-term interest rates accompanied by still very low short-term interest rates causes the yield curve to steepen. A steep yield curve serves as a good leading indicator for the economy, as it frequently precedes a robust economic upswing. Rising long-term interest rates are an expression of more upbeat earnings expectations among investors. Provided short-term interest rates remain low, this creates good refinancing conditions.



RNRL Analyst Meeting Key Takeaways

Quick Comment: Reliance Natural Resources (RNRL) had an analyst meeting to discuss the litigation with RIL relating to gas. The key takeaways from the meeting follow.

RNRL suggested the government is concerned about the valuation price of gas and not the salenprice. RNRL suggested there is a difference between selling price and valuation base price for calculating profit petroleum for the Indian government. RNRL believes its contract with RIL was a commercial contract and that the government would not interfere in same. Also, RNRL has no say in what RIL pays to the government as profit on petroleum-based gas price.

RNRL management believes that the US$2.34/mmbtu contract price was “an arms-length contract” with RIL, based on a global bid received by NTPC. In addition, since it was over a tenure of 17 years vs. 5 years for the existing US$4.2/ mmbtu contracts, management believes they are not comparable. The company would not be surprised if once surplus gas is available in the country, US$ 2.34/mmbtu will be used as a valuation price by the government as well as a benchmark for future gas-based power projects.

No bankable gas agreement on hand so far: RNRL believes that it cannot start the Dadri (7480 MW) and Shahpur (2800 MW) power projects until it gets the Gas Purchase Contract inked and it will likely take the company approximately 2-3 years thereafter to set up the project. Assuming the court takes 6 months more to decide, we believe that RNRL could use RIL’s gas until sometime around July 2012. Any delays in the court case decision would delay the start of the project. After the high court judgment that went in RNRL’s favor, the case is up for hearing on July 20 in the Supreme Court. Here the government has not been allowed to be the
third party in the case but has been allowed to intervene.

To see full report: RIL


Beats 1QFy10 by a significant margin reinforcing our positive thesis; Guidance remains conservative; Remain positive

Infosys reported good 1QFY10 results beating consensus and our estimates by a good margin. Revenues at Rs 54.7 billion, were down 3% Q/Q but 3% ahead of consensus. EBITDA margins jumped 50 bps Q/Q against expectations of 200 bps+ decline leading to EBITDA beat of 11% and EPS at Rs 26.7/share was 12% ahead of consensus. British Telecom (BT, largest client) continues to decline with top client US$ revenues down 20% Q/Q, volumes would have grown ex-BT in our view. With BT now contributing <5%> BT going forward.

It is noteworthy that both volumes and pricing were better than expected - volumes were down just 1% Q/Q and reported US$ pricing was up 1% Q/Q (we believe constant currency prices were down ~1% Q/Q, ahead of consensus and indicating that price declines are largely behind us). Other Metrics were largely stable with a slight decline of ~945 people in the quarter, attrition flat, utilization down 1% Q/Q and industry segments largely inline.

US$ FY10 guidance was kept unchanged (though lower end was moved up) but Rupee revenue/EPS guidance was lowered by 1%/5% driven by currency moves. It is interesting to note that guidance implies flat US$/Rupee revenues for the remaining 3 quarters of FY10. On EPS,
guidance implies down 10% for 2QFY10 followed by 4%/4% decline in 3Q/4QFY10. New FY10 EPS guidance is Rs 94.6-96.0.

Implications: Infosys 1QFY10 performance reinforces our thesis that worst is behind us and business for offshore players is stabilizing. We expect similar performances from other large Indian IT players. Further, we believe that Infosys FY10 guidance is highly conservative largely due to tough macro environment and first ever guidance downgrade in FY09.

Investment view: We remain positive on the sector and Infosys and expect
significant consensus upgrades as business accelerated in 2H2009. We keep our FY10E EPS 10%+ above guidance and would advise investors to be Overweight the sector on a 6-9 month view.

To see full report: INFOSYS TECHNOLOGIES


1QFY10 Earnings Preview—Negative Again, Third Quarter Running

Sensex profits to dip -7% yoy, and -6% qoq; metals the primary strain — The pain should continue – we expect India’s Sensex companies (ex-oil) to fall 7% yoy – this would be the third straight quarter of negative growth (-5%, -4% in 3Q09 and 4Q09). It’s a similar story with a wider universe—CIRA universe (138 companies.) would also see profits dip by 4.5% (-10% in Mar'09). If we include oil companies, which we exclude because of inconsistent/varying accounting treatment, it would look even weaker: -14% growth for Sensex and -11% for CIRA universe. Metals are a primary contributor to profit pressure (ex metals, profit growth at -2% for Sensex and +3.8% for CIRA universe).

The primary problem is sales growth (demand?), margins only a partial offset — 12 months ago, Sensex companies were generating sales growth of 35%yoy – this has slipped consistently but will now likely touch a pace of 2.8% (CIRA universe a slightly healthier 8%) and flat to negative qoq. Margins provide some support; rising qoq (falling yoy), on the back of some commodity and cost-cutting support, but not enough. Ex-metals, sales growth at 4.2%, and margins up 81bps yoy.

Leaders and Laggards — Banks (34%+) and Cement (23%) lead the pack with strong profit expectations while the long tail comprises Real estate (-87%), Metals (-39%) and Auto’s (-8.7%). More sectors will see earnings fall (10) than rise (6), reflecting broad-based pressures rather than concentrated ones.

Is this the earnings bottom? — The relative robust Sensex suggests so. And our revised FY10 expectations, +1.7% growth, would also suggest a nadir with backended growth in the current year. Let's wait for the results – an acceleration in earnings de-growth over three quarters is usually fairly challenging to reverse.

To see full report: INDIA EQUITY STRATEGY


• It’s payback time. The V-shaped recovery in industrial production and exports in Asia over the past few months will show up in double-digit GDP growth in most of Asia in 2Q09, starting this week with China and Singapore

• China will report sequential GDP growth of 16%-17% (QoQ, saar). Singapore should report growth of 15%-16%

• Korea and Taiwan will report 2Q growth of 10%-15%; Thailand should grow by 12%. Indonesia’s growth will return to about 4%.

• With this, Asia’s output will take a big step back toward pre-crisis levels

• China’s June trade data show another 10% (MoM, sa) rise in import demand between May and June. Asia-8 exports to China grew by 8%

• Asia’s exports to the US are no longer falling, China and the US are now pulling Asia in the same direction



Aventis Pharma Ltd. (APL) is the Indian subsidiary of the global pharmaceutical giant Sanofi-Aventis S.A. The parent ranks amongst the top 3 pharmaceutical companies of the world & holds about 50% in Aventis Pharma Ltd. Sanofi-Aventis lends strong support to Aventis Pharma, in terms of new product introductions in the Indian domestic markets from its product basket & easy access to its strong & rich product pipeline. The parent has also looked at increasing its stake in the Indian subsidiary.

APL has transformed itself into a company catering to the chronic & critical-care therapeutic segments. It has several products that are market leaders within their respective segments & have grown at double digits over the years. APL is also achieving better results on the exports front year after year. We believe these products to continue their growth momentum & help the company to achieve higher profitability going forward.

With consistently growing brands in its product basket & new product launches every year, the company generates huge cash flows. As of December 2008, APL has net cash balance of Rs. 4,973.7 Mn. on its Balance Sheet, translating to Rs. 216.0 per share. This free cash can be used by the company for suitable acquisitions within the Indian pharma space. Over the years, APL has maintained a constant dividend payout in the range of 20-25%.

We expect the company to achieve 8 - 10% CAGR growth in its top-line & bottom-line over the next couple of years. Besides, cash rich & debt free status adds to the defensive nature of the stock. At CMP of Rs. 1,110.0, the scrip trades at 14.3x CY09E & 12.9x CY10E earnings. We initiate coverage on the stock with an ACCUMULATE rating.

To see full report: AVENTIS PHARMA LIMITED



We expect the I-Sec Utilities universe to post ~17.6% YoY revenue growth and ~19.6% YoY PAT growth in Q1FY10E. Revenue growth will be led by: i) 2,000MW YoY capacity addition by NTPC at Sipat (1,000MW) and Kahalgaon (1,000MW), ii) ~24% rise in NTPC’s fuel costs owing to increase in the price of domestic coal and use of imported coal and iii) ~420MW capacity addition by Tata Power (~190MW merchant, ~230MW regulated). We believe PAT will grow at a slightly higher rate of ~19.6% owing to: i) implementation of new Central Electricity Regulatory Commission (CERC) guidelines, which will boost NTPC’s PAT 6% over and above 9% coming from capacity addition and ii) ~Rs876mn incremental merchant revenues, which will directly boost Tata Power’s bottomline. We expect CESC’s revenues to increase ~5% YoY to Rs8.2bn in Q1FY10E led by ~4%
demand growth in Kolkata licence area. However, CESC’s PAT may dip ~13% YoY as increasing capex for Budge-Budge expansion would lower other income.

NTPC’s PAT to grow ~15% on 2,000MW capacity addition & new CERC guidelines. We expect NTPC’s Q1FY10E PAT to be ~Rs19.9bn (~Rs17.2bn in Q1FY09), led by ~24% revenue growth to ~Rs118bn (~Rs95bn in Q1FY09). We believe 9% of the PAT growth will come from 2,000MW capacity addition (1,000MW at Sipat, 1,000MW at Kahalgaon) in FY09, while 6% from implementation of new CERC guidelines. We expect NTPC to generate ~55bn KWhr in Q1FY10E (~51bn KWhr in Q1FY09, ~57bn KWhr in Q4FY09) as the company will start regular maintenance shutdown of its plants on a cyclical basis from June ’09.

Merchant component to boost Tata Power’s Q1FY10E PAT 71% YoY to Rs2.6bn. Tata Power has added ~420MW in the past 12 months, of which ~190MW may supply merchant power. Given that merchant power rate is at ~Rs8/unit, we expect Tata Power’s bottomline to be boosted ~Rs876mn owing to ~321mn merchant units generated from Trombay (100MW) and Haldia (90MW) plants. We believe higher realisation from merchant will boost Tata Power’s Q1FY10E PAT ~71% YoY to Rs2.6bn even as revenues may decline ~6% YoY to Rs19.1bn on ~28% dip in fuel costs with phased closure of oil-based unit 4.

Capacity addition on track for NTPC and Reliance Power. NTPC synchronised 500MW Unit 7 at Kahalgaon in June ’09, while Reliance Power (RPower) has likely completed all formalities for the financial closure of 300MW Butibori project that is expected to come up in FY12.

Top picks: NTPC (Buy) & CESC (Buy)

To see full report: UTILITIES

>HDFC {Housing Development Finance Corporation} (KR CHOKSEY)

HDFC reported net profit of Rs. 733.4 Crore during Q4FY09 in line with our expectations. During Q4FY09 bank reported a net profit of Rs. 733.4 Crore as compared to Rs.566.1 Crore in Q4FY08 a increase of 29.5% (y-o-y). Key triggers for banks are Net Interest Margins improved incrementally to 2.21% for FY09 from 2.19% for 9MFY09 on back of lower funding costs. CP rates, a proxy for wholesale funding costs in India, have been trending down on account of comfortable liquidity environment and decreasing risk aversion. HDFC has been incrementally shifting its borrowings to the wholesale markets from deposits to benefit from the declining rates. HDFC strategy continues to be to hold onto margins as it has not followed SBI’s aggressive pricing strategy in home loans.

Key Developments
• Interest Income increased 3.8% q-o-q and 31% y-o-y to Rs 2935 crores
• Interest Expense increased 1% q-o-q and 51.8% y-o-y to Rs 2064.1 crores
• Net Interest Income increased 10.9% q-o-q and decreased 1.1% y-o-y to Rs 870.9 crores driven by fees from real estate funds and the AMC business
• Disbursement growth was 17.5% YoY for Q4FY09 while approvals grew 16.8% YoY during Q4FY09.
• Corporate loan growth at 24.8% YoY was higher than individual loan growth of 13.5% as returns continue to be high in this segment
• HDFC sold loans worth Rs 4250 crores during the year to various institutions, primarily HDFC Bank.
• Non Interest Income increased 125.7% q-o-q to Rs 218.6 crores during Q4FY09
• Asset quality improved with gross NPAs declining from ~1.1% in Q3FY09 to ~0.8% in Q4FY09

Healthy Business Growth
The total business has grown by 20% to Rs. 96,993 crore in Q4FY09 as compared to Rs.81,099 Crore during Q4FY08. Advances have grown by 16% to Rs.85,198 crore in Q4FY09 as compared to Rs.73,328 Crore during Q4FY08 and deposits grew by 21% to Rs.83,856 Crore in Q4FY09 as compared to Rs.69,151 Crore during Q4FY08. Advances grew on the back of strong retail loan book which now constitute 73% of the banks advances while deposits grew on the back of huge demand for Term Deposits which stood at Rs.25,371 Crore in Q4FY09 as compared
to Rs. 21,200 Crore in Q4FY08.

At current price of Rs 2345 the stock is trading at 4.33x FY10E BV of Rs. 541 and 26.05x FY10E EPS of Rs. 90. We believe that housing demand will improve in H209 due to better affordability,
leading to a 18 – 20% y-o-y pickup in disbursements (high loan approvals and disbursements in Q4FY09 demonstrates HDFCs ability to withstand stiff competitions from public sector banks); Net Interest Margins will improve as borrowing rates, especially in the wholesale markets, will remain low on account of benign liquidity conditions; income from real estate fund management fees and asset management (HDFC MF) will remain an earnings driver in FY10;strong asset
quality will reduce earnings pressure.

To see full report: HDFC


Lower subsidy burden: a reason to cheer
For Q4’09, Oil and Natural Gas Corporation Ltd.'s (ONGC)’s net sales declined 12.3% yoy to Rs. 137 bn, triggered by lower crude oil prices (at around USD 40-45 per barrel), coupled with the Government of India’s (GoI's) subsidy-sharing arrangement that compensates the oil marketing
companies (OMCs) for their under-recoveries. However, going forward, we expect an improvement in the Company’s top-line, driven by a substantial reduction in the Company’s subsidy burden, a result of the recent price hike in auto fuel prices and the new subsidy-sharing regime. According to this regime, the GoI will absorb the entire subsidy burden of OMCs on the sale of cooking fuel. However, we believe that the current market price (CMP) of Rs. 999 factors in most of these positives. Hence, we give a Hold rating to the stock.

Waiver of the subsidy-sharing regime to add value: On July 1, 2009, the Oil Secretary RS Pandey announced the ruling that upstream oil companies will not be required to share the subsidy on LPG and kerosene. The underrecoveries on the sale of LPG and kerosene will be taken care of by the Government. ONGC contributes more than 30% of the total domestic production of natural gas, and such a move is clearly going to boost the Company’s top-line.

Fuel price hike to reduce subsidy burden on auto fuel sales: Further, the GoI announced an increase in the petrol and diesel prices by Rs. 4 per litre and Rs. 2 per litre, respectively, in an attempt to reduce the underrecoveries borne by the OMCs. ONGC, which shares a substantial portion of these under-recoveries, stands to benefit from this hike in the form of lower subsidy burden.

To see full report: ONGC


The radial tyre has lead to the development of insoluble sulphur. The reason is that for the adhesion of the rubber compound to the steel cord a high level of sulphur is required. With normal sulphur this high level would lead to blooming during storage in the unvulcanized state. This bloom destroys the desired tackiness of the compound. Therefore instead of normal sulphur, polymeric sulphur is used. This is insoluble and hence cannot bloom. Insoluble sulphur, is thus a non-blooming vulcanizing agent used almost exclusively in rubber compounding, mainly in components requiring a high degree of stickiness or tack, including radial tires, belting, and hoses. World wide there are only a few manufacturers of Insoluble Sulphur and the Pick of this Week is the sole manufacturer in the country namely Oriental Carbon and Chemicals Limited (OCCL). This J P Goenka group company has its plant located at Dharuhera in Haryana is also engaged in manufacture of sulphuric acid and oleum which contributed around 18% of the total turnover in FY '09.

With its prospects tied inextricably to the motor vehicle and tyre industries, the insoluble sulfur industry currently faces its most challenging conditions in 25 years. Even prior to the emergence of the global financial crisis in the fourth quarter of 2008, the tyre industry - and, by extension, the insoluble sulfur market was facing a difficult 2008, as a sharp spike in oil prices over the first eight months of the year raised raw material costs nearly across the board, reduced miles driven (and thus decrease in replacement tyre demand), prompted both consumers and businesses to put off new vehicle purchases. The economic crisis has greatly exacerbated these factors, hitting the motor vehicle industry particularly hard. Insoluble sulphur suppliers have responded to these difficulties by idling under-utilized capacity, postponing planned expansions, and reducing their operating costs. The current difficulties follow five years of unusually strong volume growth during the 2002 to 2007 period as insoluble sulphur demand benefited from rising production of radial passenger and truck tyres, particularly in China, as well as in India, Thailand, Brazil, and Russia. In line with the above scenario OCCL also saw its exports drop by 5% to 6483 MT and the local off take was also lower by 11% at 3339 Mt. This impact was more evident in the second half but this was to some extent cushioned by supplying to new customers plants. The second half also saw drop in the raw material prices and the selling prices also got adjusted in line with this though the margins were maintained. The growth rate for insoluble sulphur in the country is twice the growth rate of the tyre industry the primary reason for this is the ever rising share of radial tyres as consumes a higher level of insoluble sulphur. The company is virtually the second preferred supplier of the product to America, Europe and African markets. On the domestic front the demand has turned for the better in the last qtr of FY '09 and this is expected to improve further in the current year.

Internationally there has been a slow and steady shift towards value added insoluble sulphur grades (HS, HD) which are easy to handle and gives more production flexibility to its users. OCCL has also developed these grades and has started supply of High Stable grade to a few tyre companies. This development has given the company an edge over the Chinese suppliers who have yet develop them and it also enables OCCL to get better realization for its product. Seeing the ever increasing future demand, the company has taken up debottlenecking of its plant and this shall increase its capacity by 15% and this expanded capacity is expected to be operational by July '09. The company also has plans to put up a new plant at a SEZ, land for which has been acquired. More details in future on this project.

Investment Concerns
Demand linked to auto industry and increase in crude price can affect margins

At the CMP of Rs. 33, OCCL trades 3x its FY10E earnings of Rs. 9.7. Long term investors can add OCCL to their portfolio.

To see full report: OCCL