Saturday, July 25, 2009

>Crude edges down, but econ optimism supports

Singapore - Crude oil futures edged lower Friday in Asia, taking a breather after soaring overnight on stronger fuel futures and an equities rally.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in September traded at $67.05 a barrel at 0617 GMT, down 11 cents in the Globex electronic session. September Brent crude on London's ICE Futures exchange fell 1 cent to $69.24 a barrel.

"I won't read too much into it (the slight drop in Nymex futures)," David Moore, commodity strategist at Commonwealth Bank of Australia said, adding a slightly stronger U.S. dollar might have caused the fall.

Optimism over an economic recovery continues to overrule fundamentals. Recovery hopes were given a further boost Thursday after data showed sales of existing homes in the U.S. had increased for a third straight month.

"The expectation is that fuel demand will recover sometime quite soon," said Toby Hassall, research analyst at Commodity Warrants Australia.

But "we really haven't had any evidence of any recovery yet. There will always be that downside to prices, given the ongoing weakness in the physical market."

Nymex reformulated gasoline blendstock for August - the benchmark gasoline contract - spiked overnight as buyers expect supplies to tighten after Wednesday's data showed an unexpected large decline in refinery activity.

"If traders want to look at the bullish side, lower utilization means fewer refined products; if they want a bearish argument, it means lower crude oil demand," wrote Peter Beutel, president of energy advisory firm Cameron Hanover, in a note to clients Friday.

"Traders could just as easily have focused on lower crude demand; the fact that they did not tells us something."

However, he said "the bears still have a chance, but they will need to see prices turn back from their retracement zones quickly, or these prices seem likely to become little more than surrogates for equities prices."

Meanwhile, crude stocks at Cushing, Okla. are likely to rise, given the contango in the crude market and run cuts at refineries, Jim Ritterbusch from Ritterbusch and Associates said in a note.

"We will maintain our view of a potential top in nearby WTI futures within the $67-$68 zone," Ritterbusch said, assuming a slowdown in equities markets.

At 0618 GMT, oil product futures were mixed.

Nymex reformulated gasoline blendstock for August rose 5 points to 191.37 cents a gallon, while August heating oil traded at 176.20 cents, 24 points lower.

ICE gasoil for August changed hands at $564.25 a metric ton, up $1.50 from Thursday's settlement.



Momentum turns positive

Markets on July 24, 2009: Surge continues

Taking lead from healthy global cues, the stock market, back home, opened on a positive note. Consolidating in the initial two hours it rallied to end the day on a positive note. The Sensex added 147 points to its kitty, while Nifty closed 44 points up. Mid caps and small caps also did well with the BSE MIDCAP, the mid cap index, and the BSE SMLCAP, the small cap index, ending 1.67% and 1.81% higher respectively. On the hourly chart, Nifty has not yet violated the series of higher highs and higher lows. Further, according to wave theory, the upward targets of Nifty are still pending. This indicates that buying on dips should the strategy for the coming sessions. The daily momentum oscillator KST is amplifying northward. The advance to decline ratio on the NSE stood at 2.4 to 1.

We are revising our short-term bias for the target of 4615 with the trend expected to revere at 4380. Our mid-term bias is still up for the target of 5000 with the trend reversal at 4200.

Only the banking sector was down today. All other sectors were up for the day with auto, realty and metal sectors making the most. From the 30 stocks that make the Sensex, Tata Motors (up 10%), DLF (up 6%) and Maruti Suzuki (up 6%) posted maximum gains, while Bharti Airtel and Sun Pharmaceutical (down 2%) were hit the most.

To see full report: EAGLE EYE 270709


Sovereign wealth funds – state investments
during the financial crisis


1Industry overview
2 Impact of economic crisis
3 Growth prospects
4 Investment trends
  • SWF investment transactions
  • Size and shares of SWF stakes
  • SWFs and the financial industry
5 SWF disinvestments
6 Policy issues

To see full report: SOVEREIGN WEALTH FUNDS



1. Consumer discretionary: Maintain marginal underweight: The growth momentum in Auto sales continued in the
month of June 2009 with the domestic passenger car sales growing by 8% YoY and 2 wheelers by 17% YoY. Commercial Vehicle sales however continue to lag, with the segment de-growing by 12% YoY. However, the pace of decline was arrested as compared to the last month (17% YoY de-growth). We had selectively increased our exposure in the sector and reduced our underweight position.

2. Consumer staples: Maintain Overweight. We maintain our overweight position as the sector offers relatively better earnings visibility, and should be a good defensive bet in volatile markets.

3. Energy: Maintain Neutral. We maintain a mixed portfolio of direct play on rising oil prices (E&P) as well as on
falling oil prices through OMCs. Also, favorable regulatory changes in the form of de-regulation of the sector could lead to re-rating in the sector

4. Healthcare: Maintain Overweight. We had re-aligned our exposure to stocks based on relative valuation and the expected risk-return payoff. We had recently increased our weightage given that the sector has been witnessing increased interest from global pharma majors.

5. Financials: Maintain marginal underweight. We continue to maintain our preference for private banks to PSU
banks due to better asset quality and earnings visibility. We would closely monitor the banks’ 1QFY10 results, especially on the asset quality front, and could re-align our weightages accordingly.

6. Industrials: Maintain Overweight. We have increased exposure on account of marginal pick-up in economic
activity and expectations of increased infrastructure spending by the new Government. Also, improved capital availability may boost the capex cycle for the infrastructure sector.

7. Information Technology: Maintain Underweight. We remain cautious on the growth outlook due to uncertainty in
the US economy. However, the first set of 1QFY10 reported numbers for the sector does point to some marginal improvement in terms of easing pricing pressure and lower project cancellations. We have reduced our underweight position.

8. Materials: Maintain Underweight. With better than expected economic data (consumer/business confidence, PMI) and expectation of an economic recovery in 2HCY09, we have started reducing our underweight position. We have added commodity stocks both from the ferrous and non-ferrous segments, but will remain cautious and watchful as it is difficult to fathom whether the current price rise is due to inventory re-stocking or a genuine pickup in demand.

9. Telecommunication: Maintain Neutral. In addition to being a domestic growth story, valuations for the earnings growth are reasonable, although regulatory uncertainty has risk of further de-rating the sector. Also, with the entry of new players during the current year, the competition will only rise.

10. Utilities: Maintain Underweight. We maintain underweight on the sector due to expensive valuations.

To see full report: MID-MONTH STRATEGY


1QF10 Result: Earnings Recovery Begins; Stay OW

Quick Comment – Impact on our views: We maintain our OW stance on the stock despite its strong performance in the last six months, since we feel that JSW’s strong volume growth and improvement in its balance sheet will push up valuations as steel prices show signs of improvement.

Strong Rebound in EBITDA margin in 1QF10: JSW reported good standalone adjusted 1QF10 PAT of Rs1.7bn compared to Rs3.8bn in 1QF09 and a loss of Rs491m in 4QF09. EBITDA at Rs7.2bn was 37% above our estimates as EBITDA margin rebounded to 18.6% compared to 9.4% last quarter

What we liked:
Raw material per ton declined by 32% YoY and 3% QoQ to Rs1,7868 per ton. Captive Coke consumption increased from 55% in 1QF09 to 87%.

EBITDA per ton expanded sequentially from Rs3,144 to Rs,5259 per ton aided by a 7% decline in average production cost per ton (without inventory change impact).

Production Volume increased ~40% YoY and QoQ to 1.38mt in 1QF10 keeping JSW well on track to achieve 6mt in F10. Sales Volume increased 62% YoY to 1.32mt.

Consolidated Net Debt to Equity dropped from 1.79 at 4QF09 end to 1.64 at 1QF10 end. Also, JSW has received covenant waivers on US$325m of loans.

What we did not like:
Average Steel Realization fell 3% sequentially to Rs2,9477 per ton with a sharp jump in proportion of semi finished steel (from 10% in 4QF09 to 24% in 1QF10).

Plate and Pipe Mill performance continues to be a drag on performance with capacity utilization falling below 10% in 1QF10. At the EBITDA level, US operations yielded a loss of Rs589m.

To see full report: JSW STEEL


WPI continues to be negative - increases on a weekly basis

• The WPI continues to be negative at -1.17% for the week ended July 11, 2009 as compared to -1.21% for the week ended July 04, 2009 (consensus was at -1.17%).

• Though this is the sixth successive week of negative inflation (yearly), it continues to increase on weekly basis. This week it has increased by 13 bps.

• The rise in inflation largely owes to increase in price index of Primary Group by 70 bps on a weekly basis. The rise was led by increase in Food Articles (by 91 bps) followed by Non-food Articles (by 29 bps). The Mineral Group again remains unchanged for the week.

• The Fuel Group price index was up by 6 bps led by increase in price index of Mineral Group by 10 bps.

• The Manufacturing Group price index was infact down by 10 bps. This was attributed to decrease in price indices of Food Products (by 43 bps) and Chemical Products (by 4 bps). The group price indices that rose on a weekly basis include - Rubber & Plastic Products (by 18 bps), Textiles (by 7 bps), Machinery & Tools (by 6 bps) and Basic Metal, Alloys & Products (by 4 bps).

• The prices of Food Articles are expected to be at elevated level till the problem of short supply persists. However, revival of monsoon should be an encouraging factor with Kharif Crop sowing started to peak up.

• The WPI figures for the week ended May 16, 2009 has been revised
upwards by 104 bps to 1.65% from 0.61% (twelevth consecutive upward revision and fourth upward revision of 100 bps or more). This was led by upward revisions in price indices of Manufacturing Group (by 129 bps), Primary Group (by 75 bps) and Fuel Group (by 65 bps).

To see full report: INFLATION 230709


After the "lender of last resort" after "the buyer of assets of last resort", now the
"recapitaliser of last resort"?

In this crisis, the three possible roles of central banks and governments with regard to banks and financial markets have clearly appeared:

− the traditional role of a "lender of last resort", which consists in restoring bank liquidity if need be;

− the new role, which is more developed in the United States and in the United Kingdom than in the euro zone, of a "Buyer of Assets of Last Resort", and which allows them to try to rebuild liquidity in asset markets, or remove risky assets from banks’ balance sheets, or alternatively facilitate bank refinancing;

− an even newer role (for governments and even more for central banks): "Recapitaliser of Banks of Last Resort"; this allows banks to survive crises, and their losses on the assets they hold. This role is seen above all in the United States but also in the euro zone.

We would like to consider the perverse effects of this third role played by the authorities. If banks know they will be bailed out by the government should they run into severe problems, and furthermore (as is the case in the United States) that they will be able to pay back this aid subsequently:

− they can choose to hold excessively low capital (therefore have a far too great leverage effect) during expansion periods;

− they are given an incentive to take excessive risks;

− they do not have an incentive to change their model, above all if the government, when withdrawing from the equity of banks, does not exert any pressure to get them to change their model.

The role of Recapitaliser of Last Resort, above all in Anglo-Saxon countries, therefore has perverse effects, but is becoming inevitable. Increasingly, huge banking groups are being built, if this role is played by central banks and by governments to a greater extent in Anglo-Saxon countries than in the euro zone. It will furthermore result in a divergence in banking industries: banks will take greater risks and will be more aggressive in Anglo-Saxon countries; while banks will be more cautious in the euro zone. This divergence is not necessarily disastrous for euro-zone banks , if investors are attracted by "conservative finance".

To see full report: FLASH ECONOMICS



We are bullish on the offshore drilling industry in general and Aban Offshore in particular because of the following positive developments and changes:

1) There has been a dramatic resurgence in the demand for rigs in the Middle East and Latin American markets. We expect offshore drillers to be able to deploy their idle rigs for two-three year fixed term contracts over the next few months.

2) The contract day rates, which were expected to drop to Rs. 90K-100K
have settled between Rs. 115K-125K for two-three year contracts; the day rates in the Middle East markets would be higher at Rs. 130K-140K.

3) We believe banks would reschedule debt tenors for offshore drillers to
between 8 and 10 years from their current five year tenors. This is based on a similar approach by banks to companies needing debt rescheduling in other sectors. This is more so in case of Aban as it already has operational rigs and substantial cash flows from their operation.

We expect Aban to be able to deploy at least six of its currently seven idle assets by the beginning of and during the third quarter of FY10. Further, its deepwater assets – Aban Pearl and Aban Abraham – that are on long-term contracts are expected to start generating revenues beginning August 2009. We expect Aban to have deployed all its assets for FY11. Given the improvement in macro environment for offshore drilling industry and our expectation of Aban’s ability to restructure its debt, we are bullish on the stock with a STRONG BUY rating and price target of Rs. 2,091.

The global offshore drilling industry is hugely dependent on the crude oil prices. The industry suffered heavily during the second half of 2008 as crude oil prices plunged from highs of about $147 to lows of about $32. The recent strong rally in crude oil prices and the expectation of a sustained rising demand should benefit the offshore drilling industry as higher crude oil prices
make several oil & gas projects commercially viable.

It is a simplification to base the fortunes of the offshore drilling industry on the oil and natural gas prices, however, they are a key determinant of the number, length and value of the offshore drilling contracts. The demand-supply mismatches of the offshore drilling rigs being the obvious other key determinant. The graph of number of new offshore rig contracts awarded each month from
January 2008 to May 2009 – a period when oil prices have been extremely volatile – clearly establishes the importance of oil prices for the offshore drilling industry.

To see full report: ABAN OFFSHORE


Results beat expectations led by strong margin expansion.
Higher-than-expected operating margins helped trounce sedate revenue growth. The industrials segment reflected weakness with power and consumer reporting strong growth and margin expansion for the quarter. Management lowered revenue growth guidance upon continued weakness in the industrials segment. Inflows degrowth in 1Q is likely to be temporary and should pick up from 2Q. Reiterate ADD with a target price of Rs31

Higher-than-expected margins help beat expectations
Crompton reported consolidated revenues of Rs22 bn in 1QFY10, up 8% yoy, from Rs20.3 bn in
1QFY09 slightly below our expectations. The margin expansion was led by lower raw material
expenses as a percentage of sales. Higher margins and lower interest expenses helped the
company beat our bottom line expectations.

Crompton reported standalone revenues of Rs11.7 bn (up 8.4% yoy) versus our expectation of
Rs10.8 bn. Profit after tax was reported at Rs1.1 bn, up 29% yoy, from Rs889 mn in 1QFY09.
Operating profit margin for 1QFY10 was reported at 14.8% (210 bps expansion) versus our
expectation of 12.8%.

Slight correction in revenue growth guidance led by slowdown in the industrial segment
The management guided for a revenue growth of 12-14% at a standalone basis and 4-5% on a
consolidated basis down from a guidance of 15% earlier. The growth is likely to be driven by the
power and consumers segment with de-growth expected in the industrial segment. The management cited that the industrial capital expenditure still seems to be on the hold. The
management has guided for a revenue growth of 20% for the power segment and about 14% for
the consumers segment with de-growth of 2-3% expected in the industrials segment. We have
built in a revenue growth of 11.5% for FY2010E with flat margins on a yoy basis.

Marginally revise estimates; maintain target price at Rs315/share and reiterate ADD
We have marginally revised our consolidated earnings estimates to Rs17.7 and Rs20.3 from Rs18.4 and Rs21.3 for FY2010E and FY2011E, respectively. The changes are based on slightly lower revenue growth assumptions and flat margins based on revised guidance by the management. We have maintained our target price at Rs315/share based on a target multiple of 15X FY2011E earnings.

We reiterate our ADD rating on the stock based on (1) the sharp discount to peers, (2) relatively
attractive valuations, (3) diversity of exposure, and (4) resilience of business.

To see full report: CROMPTON GREAVES


Object of the issue
The total issue of 30.16 crore equity shares is aimed at raising Rs2,715 crore to Rs3,016 crore (depending on the price band of Rs90-100 per share). Of the total issue the company is expected to deploy Rs2,193 crore for funding its projects while the balance would be utilised for general
corporate purposes.

Shareholding pattern
After the issue the total number of shares of the company will increase from 187.9 crore to 218 crore, bringing down the promoter group’s stake to 73.5% of the diluted equity

Company background
Adani Power Ltd (APL) is a power project development company that is developing and will operate and maintain power projects in India. The company currently has four thermal power projects under various stages of development, with a combined installed capacity of 6,600 megawatt (MW). In addition, the company is also planning to develop two power projects with a combined installed capacity of 3,300MW.

Adani Enterprise Ltd (AEL), the promoter of APL, is part of the Adani group. AEL is one of the largest traders of coal with coal mining rights both in the international and domestic markets. AEL is one of the largest power traders—in volume terms—in India. Another Adani group company, Mundra Port and Special Economic Zone Ltd (MPSEZL), owns and operates one of the largest private sector commercial ports in India, a special economic zone (SEZ) at Mundra, and a railway line between Mundra and Adipur. This would help APL to derive strong synergies, what with its projects being located in close vicinity.

Key risks

Sourcing equipment from Chinese manufacturers
APL has indicated its intention to procure the equipment for its planned capacity from the Chinese equipment suppliers. There has been significant reports about the quality and poor performance of the Chinese equipment in the country. If the equipment do not operate as required the financials of the company could be significantly affected.

Timely execution of projects
In case the company is not able to execute and commission its projects in time, it could hamper the cash flows and earnings going forward.

To see full report: ADANI POWER IPO


Amara Raja Batteries Limited (ARBL) is engaged in the production of storage batteries used in the industrial and automotive segments since 1985. ARBL entered into a JV with Johnson Controls Inc, USA for the import of technology for the manufacture of Automotive (SLI) batteries.

Investment Rationale

ARBL earns 55% of its revenues from Industrial VRLA batteries that cater to the sectors such as Telecom, Power & Railways which we believe are high growth & high margin businesses & have grown at a CAGR of around 50% over a period of last 5 years.

The slowdown in the Auto sector seems to be over with revival in auto sales in the first quarter of this financial year. Apart from this the replacement markets are expected to boom as the industry had witnessed double digit growth in last five years. The replacement market contributes 66% of the company revenues from Auto segment and has margins in the range of 20‐22%.

The Company is planning to incur a capex of Rs. 90 crores in the current year to expand it two‐wheeler battery capacity from 1.8 mn units to 2.4 mn units & UPS batteries from 1.2mn units to 1.8 mn units. Two wheeler batteries command higher margins in the range of 25‐30% & will help improve overall operating margins of the company.

ARBL batteries are used to power air‐conditioning in AC coaches of Indian Railways, which already has added 45350 new‐age coaches and further plans to add 22869 more, which we believe are a ready market for ARBL batteries.

With a mobile penetration of just 38% in India as against 60% in China, we feel there is enough scope of growth for the telecom sector. With ARBL a preferred supplier to almost all telecom operators in the country, the growth opportunities seem tremendous.

ARBL batteries support the transmission & distribution networks of Power stations. Increased spending by the government in the power sector will boost demand as government plans a 48% growth in transmission grid growth in the eleventh plan.

Valuation Recommendation

At the current market price of Rs. 100 per share, ARBL is currently trading at a PE of 6.3x FY10E and 4.8x FY11E EPS estimates, which looks quite attractive when compared to its peers. At Rs. 100 per share the stock is trading at a discount of 69% from our intrinsic price of Rs. 169 per share
which is 10.7x FY10E and 8x FY11E earnings. We recommend a BUY rating on the stock with a long term view.

To see full report: ARBL


Lower ADC denting ARPU…
Bharti reported Q1FY10 results which were a tad above our estimates. Top line grew by 1.2% QoQ and 17.2% YoY to Rs 9941.6 crore (I-direct estimates Rs 10253.6 crore). EBITDA stood at Rs 4151.8 crore at 41.8%. EBITDA margins improved by 24 bps QoQ and 103 bps YoY to 41.8% led by reduction in termination charges from Rs .30 to Rs .20 (effective from 1st Apr ’09). PAT margins stood at 25.3% as against 22.8% in the last quarter. The company posted a PAT of Rs 2516.7 crore versus our expectation of Rs 2334.6 crore.

Highlight of the quarter
The company crossed 100 million subscriber mark in Q1FY10, ending the quarter with 102 million subscribers. It added 8.4 million subscribers during The quarter with majority of them being from rural India. ARPU declined by 8.8% to Rs 278 primarily due to reduction in termination initiated charges by DoT from Rs 0.30/minute and Rs 0.20/minute (effective from 1st Apr ’09). The reduction of ADC resulted in a negative impact of Rs 12 on the ARPU. During the quarter, the company added 10 bn minutes on its network. Total minutes stood at 140 bn minutes at the end of quarter.

We value the company using the SOTP method. Ascribing a value of Rs 786 to the core businesses, Rs 48 to Infratel and Rs 75 to Indus contribution, we have arrived at a target price of Rs 909/share. Our target price for Airtel discounts the FY10E EPS of Rs 51.7 by 17.6x and FY11E EPS of Rs 61.2 by 14.8x. We upgrade the stock to PERFORMER from HOLD. The company has got an approval for stock split in ratio of 1:2. In case of stock split the effective
target price would be Rs 455.

To see full report: BHARTI AIRTEL


Hold: PAT Disappoints; Positive Surprise on Inflow Momentum

PAT disappoints — 1QFY10 PAT at Rs4.7bn up 22% YoY was 7% below CIRA estimates and 12% below Bloomberg consensus on higher staff costs and marginally higher raw materials costs. The staff costs in 1QFY09 looked unusually high given that FY10E management staff cost guidance is Rs45bn.

Raw material costs will ease from 2QFY10 — Raw material costs were higher in 1QFY10 due to: 1) Use of high cost inventory (9-10 months old) till May09; and 2) Work done on ONGC Hazira, Pragati and one more gas turbine where value added was low. BHEL has started using the inventory bought in Sep08 from Jun09 and as a consequence raw materials costs should ease from 2QFY10.

Order inflow momentum surprises on the upside — Rs126bn of orders in 1QFY10 ahead of CIRA expectations of Rs70bn. Company expects to announce 3.6GW (~Rs72bn) of private sector orders this week. Order inflow guidance for FY10E has been hiked to Rs550bn from Rs500bn at the start of year and the company expects to book Rs550bn of orders in FY11E also. The bulk NTPCDVC
order is likely to be booked in the first month of FY11E. The order inflow momentum is a clear sign of the perceptible shift from Chinese equipment suppliers to BHEL in the private sector.

FY10E consensus and CIRA estimates seem aggressive — Management reiterated FY10E sales guidance of 25% YoY and PAT guidance of 30% YoY. CIRA and consensus EPS estimates are 10% and 8% higher than management EPS guidance of Rs83. The management conference call is tomorrow.

To see full report: BHEL