Wednesday, July 29, 2009


20-HSMA violated

Markets on July 29, 2009: Dragon eclipses bulls

After a poor start the Indian indices saw a massive selloff in morning, as Asian markets especially that of China witnessed heavy selling. However, in afternoon it recovered a part of morning losses. Finally the Sensex ended 158 points lower, while Nifty was 50 points down at closing bell. Mid-caps and small-caps also closed lower with the BSE MICAP BSE SMLCAP closing 0.9% and 1.4% down respectively. On the daily chart, after today’s selloff we have a negative crossover in stochastic oscillator, which is not a good sign for the market. Further if the sell in stochastic is accompanied by the negative crossover in KST, the probability of the slide to deepen further may increase. On the hourly chart, the rising wedge finally saw a downside break down with 20-hourly simple moving average (20-HSMA) getting violated. Now the next support can be expected around 20-day simply moving average packed near 4350. Bears with 837 declines and 417 advances dominated the market breadth.

The hourly KST sank below the zero line. Our short-term bias is down for the target of 4339 with the reversal pegged at 4600. However our mid-term bias is still up for the target of 5000 with reversal nailed at 4200.

Selling was seen in realty, consumer durables, metal and fast moving consumer goods sectors. From the 30 stocks of Sensex, Tata Consultancy Services (up 4%) and Tata Power (up 3%) led the pack of gainers, while DLF (down 7%), Tata Steel (down 6%) and Sterlite Industries (down
6%) led the pack of losers.

To see full report: EAGLE EYE 300709

>Spot gold extends fall on dollar strength

London - Spot gold extended losses in Europe Wednesday due to a stronger U.S. dollar against the euro, and traders said with volumes low and demand down the metal could fall further.

"For the time being we see limited near term upside to gold prices, with equity markets weakening leading to strengthening of the dollar which is a negative for gold," said investment bank Fairfax IS.

Gold fell sharply Tuesday after weaker than expected U.S. consumer confidence sparked selling across commodities. That selling could carry on and gold may test $925 a troy ounce, said a London-based trader.

"The speculative line of least resistance appears to be emerging back to the downside," the trader said.

At 0923 GMT spot gold is trading at $934.17/oz, down 0.3% from Tuesday's close.

The rest of the precious metals traded down too. Spot silver was at $13.54/oz, down 1.1%. Spot platinum was at $1,184.50/oz, down 0.7%. Spot palladium was at $254.50/oz, down 0.8%.

However, longer term the metal remains supported due to the shortage of major new mine projects and the potential for inflation from stimulus packages in U.S. dollar terms once Western economies begin to recover, Fairfax said.

The risk of a strike at South African gold operations is declining.

South Africa's largest gold producers signed a two-year wage agreement with unions. The deal replaces contracts that expired at the end of June and averts a threatened strike.


>Crude falls on CFTC, weak demand concerns

Singapore - Crude futures fell by more than $1 a barrel in Asia Wednesday as uncertainty over potential curbs on speculative trades and weak demand concerns resurfaced.

Losses in China's equity markets widened in late afternoon trading, as mix of bad news about profits and weak commodity prices sparked a broad sell-off in local bourses.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in September hovered near one-week low of $65.40 a barrel. It traded at $65.89 a barrel at 0247 GMT, down $1.33 in the Globex electronic session.

September Brent crude on London's ICE Futures exchange fell $1.07 to $68.81 a barrel.

The chairman of the Commodity Futures Trading Commission Tuesday said he believes the agency must "seriously consider" setting strict limits on traders who place bets on energy contracts.

The Wall Street Journal said that the CFTC would in August reverse the findings of last year's study, more closely linking speculators to the rise in prices.

"The uncertainty related to this announcement is really impacting on market activity at the moment," said Yingxi Yu, analyst at Barclays Capital. "Until we get more clarity from the hearing, the market is likely to find a lot of downside pressure."

Demand concerns resurfaced as U.S. consumer confidence for July was weaker than expected.

Comments from BP PLC (BP) Chief Executive Tony Hayward Tuesday also suggested that oil prices are up on speculation - not necessarily on fundamentals, Mike Sander from Sander Capital Advisors said in a note.

U.S. crude-oil inventory data due Wednesday from the Department of Energy may shed more light.

Crude-oil inventories are expected to fall by 400,000 barrels, according to the mean of seven forecasts in a Dow Jones Newswires survey of analysts.

Gasoline inventories are seen decreasing by 400,000 barrels while stocks of distillates, which include heating oil and diesel, are expected to rise by 500,000 barrels.

Barcap's Yu doesn't expect the data to have a large impact on crude prices.

If the stocks data are positive, showing a fall in crude, but a rise in products, the response may be muted, Yu said, but the reverse will add to the downside.

Fundamentals aside, some analysts called Tuesday's sell-off a technical correction after a nearly three-week rally.

"It may be in for one more push higher," said Jonathan Kornafel, director for Asia at Hudson Capital Energy in Singapore.

September Brent crude on London's ICE Futures exchange fell 44 cents to $69.44 a barrel.

At 0249 GMT, oil product futures were lower.

Nymex reformulated gasoline blendstock for August - the benchmark gasoline contract - fell 162 points to 174.85 cents a gallon, while August heating oil traded at 189 cents, 206 points lower.

ICE gasoil for August changed hands at $561.75 a metric ton, down $3 from Tuesday's settlement.



Upgrade to Buy on Strong Order Booking

Upgrade to Buy (1M) from Sell (3M) — After losses of Rs2.3bn/tepid backlog of Rs208bn up 6% YoY in FY09, Punj Lloyd started FY10 with ~ Rs94bn of orders in 3 months. Following a lull in Jan-Feb, bidding activity has picked up, and the company has identified US$30bn+ of projects for the next 2 years.

Underlying business is more robust — Punj Lloyd’s skill sets have not translated into superior profitability like that of L&T, and the answer lies in Simon Carves. Removing Simon Carves from Punj Lloyd suggests that the business is delivering 5.5-5.9% PAT margins (upper end of mid cap E&C). Punj Lloyd needs to restructure Simon Carves and integrate the same fast.

Earnings revised upwards — By 2-7% over FY10E-12E on higher inflows, sales and margins. Rs701mn of qualifications (~ 12% PBT) continue to be a worry.

Target price revised up to Rs263 — From Rs217 earlier to factor in: (1) our earnings revision, (2) hike in target P/E multiple to 17x (from 15x earlier) post robust order inflows in 1QFY10 & (3) value of shipyard at 50% discount to book value. Our target multiple is pegged at a small premium to mid cap E&C peers like IVRCL at 16x and Nagarjuna at 15x and set at ~ 23% discount to L&T.

Big international bias — ~ 80% of Punj Lloyd’s business comes from outside India. Big international exposure implies jobs are being picked up in a more competitive environment, and there could be worries on profitability. On the positive side, it also implies with time the scale and ability to counter competition can be transferred to India to take on the formidable L&T.

To see full report: PUNJ LLOYD


Sell: Disappointing 1Q Results

1Q well below estimates — PLNG’s 1Q PAT came in at Rs1.03bn, down 2.2% YoY and significantly below our expectations. Despite volumes increasing QoQ from 82 to 99 TBTUs as was expected, EBITDA did not grow correspondingly and in fact registered a sharp decline (46.8% QoQ, 5.2% YoY) due to losses made on spot cargoes.

Losses on spot cargoes drive down profitability — Petronet bought and regassified c5 spot cargoes during the quarter, which contributed to the QoQ increase in volumes. Though global LNG prices were down sharply in the quarter due to the economic slowdown, Petronet had probably contracted these at higher prices and was unsuccessful in passing the prices to consumers when prices fell. This was likely further exacerbated by the commencement of KG gas which resulted in consumers shifting away from spot gas. This is a trend that we expect will likely continue over the coming few quarters and is the main thesis our Sell recommendation is premised on.

Maintain Sell — Given total capacity of 17.5 MMTPA after expansion, PLNG would have to sign more long-term contracts or continue its reliance on spot cargoes to improve its utilization levels (we factor total long-term plus spot volumes of 14.1 MMTPA in the long-term in our DCF). Spot volumes could be under risk with commencement of KG gas and if LNG prices pick up from current levels. Besides, robust long-term LNG outlook increases uncertainty for the company. Power plans, though interesting, are still a few years away and would be contingent on competitive pricing of long-term LNG. At current prices, the stock appears fully valued. W maintain our Sell (3H) rating.

To see full report: PETRONET LNG


Challenging FY10E; Expensive Valuations; Downgrade to Sell

Raising target, but downgrading to Sell — We increase our target to Rs414 (from Rs211), based on a P/E of 16x Sept 10E (vs. 8x FY10E earlier) – a 27% discount to BHEL given lower visibility into revenues. Thermax, up ~134% YTD, is at a P/E of 19x FY10E, factoring in a broader economic revival. We believe FY10E could remain challenging and downgrade the stock from Buy to Sell.

1Q FY10 revenues down 25% yoy; PAT declines 27% yoy, worse than expected — The revenue decline was due to lower order intake in 3Q FY09. Margin improvement, driven by cost-cutting initiatives, was a positive surprise and commendable given the revenue decline. Thermax’s order book at Rs32bn is up 22% yoy and 11.4% qoq – positive as a slowdown in orders was an overhang on the stock.

Management expects decline in FY10E revenues, pickup in 2H FY10E — FY10 revenues are likely to decelerate due to lower order intake in FY09. Thermax expects FY10 order inflows to grow marginally on a recovering economy, especially in 2H FY10E. Food processing, agro-based industries, distilleries & cement sectors are picking up, while the metal sector remains subdued.

Cutting EPS for FY10E by 16% — We factor in lower revenues given order renegotiations /cancellations, and expect order inflows to pick up meaningfully only in 2H FY10E/1H FY11E, which would lower revenue booking in the current year given the short-cycle nature of orders of its product business.

Early beneficiary of recovery, but order inflows have to grow meaningfully While there has been some pickup in order inflows, we believe it has to pick up strongly for the stock to re-rate from current levels. Also, while 1Q FY10E order book is up YoY, at end-2Q FY10E it could be flat/negative given the high-base effect (adjusted for cancelled orders).

To see full report: THERMAX


1Q10 Results: Not A Margin(al) Impact

1Q10 profits up 94% YoY, but NIMs under significant pressure — Union's profits were 28% above estimates led by higher fee growth and trading gains. Growth remained strong and management is hopeful of maintaining stable asset quality. The key pressure point of the quarter was, however, a sharp 50bps drop in NIMs, which overshadows gains in the quarter.

Sharp margin pressure overshadows fee growth and support from bond gains — Union's NIMs declined 50bps QoQ to 230bps, sharply ahead of 10-15bps declines amongst peers. High growth in high-cost deposits and declining loan yields resulted in margin pressure. Management suggests repricing of deposits in 2Q/3Q and targets FY10 NIMs of 300bps (which looks ambitious, in our view). Fee growth of 47% YoY was strong and reverses the previous quarter's slower growth. A jump in bond portfolio gains further boosted profits in 1Q10.

Growth at a strong clip, with stable asset quality — Loan growth continued at 27% YoY, spread well amongst various segments with retail and agriculture growing faster. Management suggests credit demand is picking up and is hopeful of 25% growth in FY10 (also targets 500 new branches). Deposit growth at 34% is relatively high, mix has deteriorated to 30% CASA (34% in
4Q09) and Union has paid the price in NIMs. While management is keen to grow at a fair clip, the challenge is to improve NIMs.

Quality bank, but valuations leave little room for disappointment — Union still has amongst the best fee growth, cost ratios and asset quality relative to peers. However, 1.2x 10E P/BV valuation leaves little room for further disappointment.

To see full report: UNION BANK OF INDIA


Indian ABS Performance Report: July 2009

This report provides analysis on the performance of the 21 Indian ABS transactions currently under surveillance. The key performance trends for each individual asset type are highlighted and detailed performance data for each Fitch‐rated transaction are provided. The ongoing analysis of the performance of these transactions forms an essential part of Fitch’s rating process. Fitch Ratings’ surveillance team analyses both the structure and the receivables’ performance to evaluate the transaction in comparison to the agency’s initial expectations and to
determine future trends.

As anticipated in the Fitch Outlook report entitled “Indian Structured Finance report‐2008 Review and 2009 Outlook”, dated 4 February 2009, the performance of most asset classes has deteriorated. In particular, performance measures, such as current collection efficiency and overdue collection efficiency, have worsened. Fitch notes that the relative decline in overdue collection efficiency has been higher than the decline in current collection efficiency. However, given the level of amortisation and available credit enhancement cover ‐ in the range of 4x and 6x ‐ the ratings Outlook for the majority of the rated series is Stable.

Performance by Asset Class

Commercial Vehicle Loans
Fitch currently monitors the performance of 15 ABS transactions backed by commercial vehicle (CV) loans. The collection efficiency of CV loans has shown a declining trend since July 2008. The performance of heavy commercial vehicle (HCV) and medium heavy commercial Vehicle (MHCV) loans has been more susceptible to the recent downturn than other sub‐categories of CV, such as light commercial vehicles (LCV) and tractors.

Retail Auto
Fitch currently monitors the performance of three ABS transactions backed by auto loans (see pages 29 to 34). All three transactions had amortised significantly by Q308, to the extent that the deterioration in current collection efficiency of these transactions has been limited; in contrast, the overdue collection efficiency has deteriorated very significantly and is currently around 6.0%.

To see full report: STRUCTURED FINANCE


RCOM-Etisalat Deal – First Visibility Of Towerco Value

Tower deal is a positive — RCOM today announced Etisalat DB (Swan Telecom) as the first external tenant on its towerco (RTIL). We believe this is a material positive for RCOM given: 1) it helps increase credibility around RCOM’s towerco value which till now had only captive tenancy (GSM + CDMA), and 2) capex recovery at 13-14% is also higher than our base case for RTIL (12.5%) and the industry (~10%).

Etisalat’s base load goes to RTIL — As per the company, the deal involves Etisalat becoming tenant on 30k of RCOM’s towers across 15 circles over next 18-21 months. As a result, tenancy could be >2.0x by 2011 (1.6x being captive) vs. our long-term assumption of 2.3x. The deal, while not exclusive, gives first preference to RTIL for the proposed cell site locations.

Deal terms ensure good return potential — Management claims incremental revenue potential of Rs100bn over 10 years. On a base of 30k towers, assuming marginal opex increase, capex recovery is estimated at 13-14%. Though high capex recovery could partly be attributed to inclusion of backhaul in the deal (~10-15% of capex), it is still materially higher vis-à-vis our industry estimates (i.e. Indus/Bharti Infratel). At first glance, based on the sharing targets and capex recovery, we estimate towerco could add up to Rs30/share to RCOM’s value.

Trends to watch — 1) Ability to attract other tenants at 13-14% capex recovery given its adverse impact on a new entrant’s cost structure, and 2) ability to offer deeper coverage – 50k towers vs. 100k of Indus.

To see full report: RCOM


Sell: Strong 1Q, But Can This Sharing Formula Continue?

Strong 1Q driven by low subsidy — 1QFY10 PAT at Rs48.5bn was above expectations, primarily on account of the lower subsidy burden driving higher net realisations and also lower other expenses. Even though gas sales recovered to 5.1bcm from the slight dip seen in 4Q09, crude sales remain depressed at 5.45MMT vs. FY09 average sales of 5.72MMT. Dry well expense declined from Rs18.6bn in 4Q09 to Rs10.7bn in 1QFY10, but remains high on a yoy basis (Rs5.5bn) due to a structural increase in costs and higher exploration intensity.

Subsidy sharing only on auto fuels — ONGC’s subsidy burden of Rs4.29bn was in-line with the oil ministry’s assertion of upstream sharing for under-recoveries only on auto-fuels. This burden translates into a subsidy discount of US$2.3/bbl, resulting in healthy net realisations on own crude of US$60.6/bbl. While the government has followed up intent with action, it is difficult to extrapolate this for the full year.

Government policy continues to be a risk — Even though Petmin has stuck to upstream sharing losses only on auto-fuels in 1Q, the Budget did not make requisite allocations to confirm that. Given that net under-recovery of Rs200bn (gross loss on LPG/SKO of Rs300bn minus oil bonds of Rs100bn) will be too much for the OMCs to bear (esp. when GRMs are likely to stay depressed), we see the risk on ONGC sharing the LPG/SKO subsidy as well is very much intact.

Maintain Sell, lacks triggers — ONGC currently trades at 12x Sept-10E P/E, the top end of its historical 7-12x trading band. Any move by the government to fully deregulate auto fuels could take time as it has recently constituted an expert committee for pricing recos. We maintain our Sell (3M) rating.

To see full report: ONGC


To see full report: ONMOBILE GLOBAL LTD


“ Increased asset base lifts up revenue “

For Q1FY2010, Garware Offshore Services (GOSL) reported 106% y-o-y growth in revenues to Rs571 million as compared to Rs277 million in Q1FY2009. Increase in revenue was due to addition of 5 assets during the end of FY2009, which increased the revenue days.

The Operating Profit Margin (OPM) of the company declined by 400 basis points y-o-y to 56% in Q1FY2010. The major reason for decline in operating margin is decline in stock in trade. Operating profit by 91% y-o-y to Rs319 million in Q1FY2010.

Interest expenses for Q1FY2010 showed a massive jump of 120% y-o-y to
Rs89 million as compared to Rs40 million in Q1FY2009. This increase in debt is mainly attributable to addition of vessels. Depreciation increased by 95% y-o-y in Q1FY2010 to Rs77 million. After deducting tax of Rs1.2 million, PAT witnessed a growth of 74% y-o-y in Q1FY2010 to Rs154 million. Moreover, GOSL gained around Rs11 million in gain on sale of vessels and lost Rs155 million in foreign exchange in Q1FY2009, after giving effects to the extraordinary items there was net loss of Rs55 million in Q1FY2009.

Vessel deliveries are expected to be on time
In FY2010, the 2 vessels (a 60 Tons PSV and a 300 Tons Construction Barge) are expected to join the fleet by middle of the year (on BBC basis) are expected to join as per the schedule.

No dry dockings in Q1FY2010
In Q1FY2010, there was no dry docking activity carried out. In Q2FY2010, 1 PSV is expected to go on dry docking (M.V Kailash), where the amount is expected to be negligible.

In FY2010, Apart from 1 PSV (M.V Everest, which was about to its trip to North Sea) all other vessels were working and utilizations was close to 100%. M.V Everest has already reached to the North Sea and will start working in next couple of days. It will be working on spot.

The outlook for the offshore services sector remains positive as the prices of crude oil remains high above US$60, which is a positive indicator for Exploration and Production activities. Almost all the vessels of the company is employed for around 2 years provides revenue visibility for the company in such bad phase. At the CMP of Rs160, the stock is trading at around at a P/E of 7.0x its FY2010 estimated earnings, 5.5x its FY2011 earnings. We maintain our FY2010 revenue estimate of Rs2,390 million and PAT estimate of R541 million. Hence, we maintain our BUY rating on the stock with same target price of Rs227, which is an upside of around 42% from current levels.

To see full report: GOSL


Noble intent turns ignoble

Prima facie, the government’s new policy of replacing benefits from Section 80-IA of the Income-tax Act for gas-pipeline companies with Section 35AD is bound to backfire as it is both EPS- & NPV-detrimental. Although government intent was noble, it has turned ignoble for the industry; but, all is not lost. We expect the gas-transmission industry (Reliance Gas Transportation & Infrastructure-RGTIL, GAIL and Gujarat State Petronet-GSPL) to persuade the government to alter this policy, hence leading to gas-transmission companies spending aggressively on setting-up a wholly-entrenched network of pipelines in the country. Based on its current format, the policy would impact GAIL’s fair value Rs14/share. However, if the government allows losses on the pipeline business to offset profits from other businesses, it would improve GAIL’s fair value by Rs15/share. Another alternative for the government would be revamping the complete policy and making it positive for the industry.

Section 35AD detrimental to fair value of gas transmission firms. As per Section 35AD, effective tax rate on earnings from new gas pipeline investments would not change substantially as, even earlier under Section 80-IA, such companies were paying nil tax on new pipeline investments. Moreover, tax coverage due to depreciation post the first ten years is absent in the present policy. The new policy allows 100% depreciation in the first year of operations itself, which would lead to lower earnings in the long term. Our estimates suggest that companies would commence paying corporate tax rate (34%) from the ninth year of operations vis-à-vis eleventh year earlier. Moreover, companies would pay higher taxes from the ninth year of operations under Section 35AD vis-à-vis Section 80-IA, under which depreciation benefits would have continued.

Government intent positive, but policy impact negative. The new policy is set to be detrimental to the industry. However, we believe government intended to encourage investments in gas pipeline infrastructure and provide further incentives via introduction of Section 35AD. We believe that the policy turning negative is more a result of miscalculation by the government and expect sanity before the finance bill is passed. Also, we expect the government to modify policy terms and, at least, allow losses from the pipeline business to offset profits from other businesses. This move itself would lead to Section 35AD being NPV-positive for GAIL vis-à-vis benefits from Section 80-IA earlier.

GAIL – Most upsides priced-in. Post change in the subsidy-sharing formula (when we favoured GAIL as our top pick in the sector), the stock has run up 8.4% since July 2, ’09, significantly outperforming the Sensex 7.8%. The stock is currently trading at par with our fair value of Rs336/share. Even after including Rs15/share upside as per the new policy, the stock offers minimal 4.5% upside from current levels. We believe GAIL would not significantly outperform from here going forward.

ONGC, now our top pick in sector. Based on recent positive announcements (media reports suggesting that government would bear 100% cooking fuel underrecoveries in Q1FY10), we favour ONGC as our best bet in the large-cap O&G space. We value ONGC at Rs1,250/share, which offers 19.8% upside. Notably, the stock has corrected 10% post budget due to absence of provisioning by the government for cooking fuel under-recoveries in FY10. We expect the stock to
retrace this 10% decline over the short-term. In the long-term, impending Oil India (OIL) IPO would result in positive newsflow, which would boost ONGC’s stock price.

To see full report: OIL&GAS SECTOR


Orders drying out…

Maharashtra Seamless (MSL) performance for Q1FY10 was above our estimates on higher sales realisation and lower input costs. The seamless pipes reported higher profitability for the quarter whereas ERW pipes performance was affected on account of pressure on the realisations. The top line grew at 20.1% YoY whereas the bottom line grew at 8.2% YoY on flat EBITDA margins (slightly downwards) and lower other income. The slowdown in the capex in the oil & gas sector has led to the decline in order book position to Rs 401 crore.

Highlights for the quarter
MSL reported 20.1% YoY growth in sales to Rs 422.5 crore in Q1FY10 on higher realisations of the seamless pipes segment. MSL reported an EBITDA of Rs 99.3 crore in Q1FY10 against Rs 83 crore in Q1FY09. The EBITDA margins declined ~10bps YoY to 23.5% in Q1FY10. The
net profit of MSL grew 8.2% YoY to Rs 65.2 crore in Q1FY10 as against Rs 60.3 crore in Q1FY09.

The volatile crude oil prices have impacted the order-flow of tubular product companies like MSL. However, given the recovery in crude oil prices, order book of MSL would improve in quarters to come. The company trades at 3.2x FY11E EV/EBITDA. We rate the stock as a PERFORMER with a price target of Rs 296, 4x FY11E EV/EBITDA.

To see full report: MAHARASHTRA SEAMLESS


Fading lustre

JSW Steel’s (JSWS) Q1FY10 results were much below Street and I-Sec estimates (adjusting for extraordinary forex gain). Adjusted standalone net profits decreased 77% YoY to Rs1.04bn. The revenue increase was muted at 19% QoQ and 6% YoY, despite 61% YoY and 24.5% QoQ volume growth. This was mainly owing to 3% QoQ and 34% YoY drop in blended realisations. Margins improved sequentially to US$112/te from US$57/te on reduction in coking coal prices. Consolidated reported PAT declined 15% YoY. Adjusted for extraordinary income, consolidated reported loss was Rs198mn. Though the management has guided for strong 72% YoY volume upside in FY10, we believe significant volume risks exist owing to GP/GC exports and domestic market share gain in rebars and wire rods. We will shortly revisit our estimates. Maintain HOLD.

Margin outlook partially improves. Reduced coking coal prices to US$129/te from US$300/te have helped improve Q1FY10 EBITDA margin ~800bps QoQ to 18.6%. But margin was below Street estimates on high-cost coking coal & iron ore inventories. We expect margins to improve in Q2FY10 as the full impact of reduction in coking coal contract price comes in. Also, Rs2,000/te rise in HRC prices in Q2FY10 and reduced sales of semis (from 23.5% in Q1FY10) with the commissioning of the bloom caster in Vijaynagar will help boost margins. However, margin expansion will be partially offset by: i) increasing spot iron ore prices, currently at US$90/te, which will form ~40% of JSWS’ requirement in FY10E and ii) US$22/te impact coming from carry-over coking coal volumes.

Volumes, the key risk. JSWS continues with its niche positioning strategy of increasing incremental volumes from the recently completed 2.8mtpa expansion in Vijaynagar. While management has guided for 6.1mtpa sales in FY10, we estimate it to be 5.5-5.7mtpa. Monthly exports of value-added products at ~45,000tpa and monthly sales of domestic wire rods of ~55,000tpa are at risk. Also, sales from the US will be subdued. Pipe capacity in the US is currently running at 30% utilisation.

Upside priced in. JSWS continues to moderate its debt gearing, with consolidated and standalone D/E declining 6.7% QoQ and 5.6% QoQ to 1.67x and 1.17x respectively. The stock trades at FY10E P/E & EV/E of 5.6x & 5.3x respectively, leaving little scope for further re-rating. Maintain HOLD on the back of volume and margin uncertainty and increased leverage.

To see full report: JSW STEEL LTD


Sell: 1Q Follows The Trend; Weak MOU, Higher Margins, Churn Up

In-line EBITDA despite lower revenue growth — Idea’s 1QFY10 EBITDA at Rs7.7bn (+8% yoy, +4% qoq) came exactly in-line with expectations. The slight disappointment in top-line (net revenue growth of 5.3% qoq, in-line with Bharti) was offset by the 80bps EBITDA margin expansion. Margins expanded as a result of termination cut and relatively stable SG&A. However, PAT was
slightly ahead due to lower depreciation and finance charges (attributable to forex gains), although the tax rate at 5% came in higher than expected.

KPI trend was in line with Bharti — 5p rev/min decline was as expected, with termination cut contributing 3p. However, MOU dipped 1% qoq, likely due to the competition’s free min offer and slower usage ramp up of rural subs. Overall, ARPUs dipped 9% qoq, with half of that coming from the termination fee cut.

Churn continues to go up — Pre-paid churn continued to rise, reaching an alarmingly high level of 6.9% in 1Q (5.3% in 4Q). The increase was much higher than that witnessed for Bharti (3.2% going to 3.5%) and is possibly a reflection of new circles in Idea’s footprint. Incidentally, Spice’s churn was even higher at 9.1% in the quarter.

New launches had limited impact on EBITDA, will be a drag in 2Q — EBITDA losses in new circles (TN, Orissa launched in 1Q in addition to the existing new circles of Mumbai/Bihar) remained stable qoq. However, the full impact of new launches will only be felt in 2Q as: (i) the TN launch was in mid-1Q, and (ii) higher rollout increases the costs gradually over 3-6 months from the launch.

To see full report: IDEA CELLULAR


This stock was first recommended (VOL 1 No 32) at the then price of Rs 45 and was projected to be priced at Rs.75 in year’s time. Subsequent to our recommendation the stock touched a high of Rs 87 and at the time of doing the review we had stated that we shall not hesitate to recommend it again. Now for a brief: Rural India’s recently discovered fondness to consume everything from shampoo to motor vehicles has introduced a very useful product segment of Consumer Durables. These consumer durables can be divided into three price baskets - a sort of equivalent of the “premium, regular and low priced” categories. Group I comprises a basket of basics like watches, radios, irons, fans etc., Group II comprises higher priced durables like television, mixers and music
systems. Group III where we have concentrated and chosen, comprises of high priced durables like air conditioners, refrigerators, microwaves to mention a few. The last group appears to be in the infancy stage but is explosively growing and is also a litmus test of whether rural India is integrating into the mainstream of New India Consumerism. Hitachi Home & Life Solutions (India) Limited (HHLS) is a leading manufacturer of Window ACs, Split ACs, Takumi range of Ductable Split ACs, Self contained packaged air conditioners, Set Free VRF systems and chillers. It is also marketing its range of Refrigerators and Washing Machines.

The Indian market is fast moving towards high-end customized products, which are aesthetically designed to complement the modern households. The companies are thus concentrating to continuously innovate and come out with product variations across categories to meet the expectations of a varied class of customers. In a sector where new products are being introduced with increasing frequency and the lifecycle of products getting shorter, research and development plays an important role. Hitachi has remained at the forefront of the air-conditioning industry due to its wide range of products available in the market. New technological breakthrough allows Hitachi to provide higher quality, efficient and reliable air conditioning solutions.

Due to intensified competition, tight liquidity scenario and demand supply imbalances, the demand for consumer durable products has been under pressure in the recent past. The consequent strain on margins coupled with increased working capital and brand building investments has resulted in an increase in borrowed funds / capital, along with fewer options to protect cash flow for most players. In future the parents’ commitment to their Indian venture, sustenance of their own credit profile and the ability of their subsidiaries to further improve market position will be the key factors influencing their future growth and prospects. HHSL has during the year launched ACE FOLLOW ME (a feature where the cool draft of air follows the user in the room) and ACE CUT OUT (a feature of auto humidity control and it is in 0.9Tr and 1.2Tr). The company has started making its mark in the premium refrigerators market also.

HHLS has been changing its product mix in line with the change in customer’s
preferences. There has been a shift towards Split ACs (industry share has gone up to 50%) in the market place due to the narrowing of the price difference when compared to window ACs. HHSL has introduced Auto Humid Control ACE Split AC, Atom Square and Quadricool to reaffirm its place as the innovative leader in the minds of the Indian consumers. The Ductable Category of products has immense growth potential and in a short period of time the company has made its mark in this segment.. Emergence of retailers, nuclear families, increase in disposable incomes, growth in Tier II & III class cities all augur well for the growth of this industry.

Cheap imports from China and volatility in input costs of raw materials like aluminum, copper and sheet metal could affect profitability.



Sell: 1QFY10 PAT Declines On LME Woes

1QFY10 PAT falls 15% — Hindustan Zinc's (HZL) 1Q PAT of Rs7.2bn was 9% ahead of our estimates. The PAT decline was on account of a 30-35% decline in zinc (to US$1,476/t) and lead LME prices (to US$1,506/t) and a sharp fall in sulphuric acid prices. PAT, however, bettered estimates largely due to higherthan- expected concentrate sales. EBITDA margin was 64% vs. 72% last year.

Factors benefiting HZL in 1Q — Zinc volumes rose 9% yoy to ~139,000 tonnes as capacity rose by 88ktpa in 1QFY09. The element of surprise in 1Q was the sale of 74,000 tonnes of surplus zinc concentrate (vs. 10,500 tonnes last year). Rupee depreciation (49.2 vs. 41.6) helped offset the impact of lower LME prices to an extent. Effective tax rate fell to 19% vs. 24% last year as the Chanderiya Hydro I smelter was converted into an EOU in May 2008.

Expansions on track — HZL enhanced its zinc-lead capacity by 13% to 754ktpa in April 08. Its plan to expand by a further 210ktpa by mid-2010 is on schedule.

Strong balance sheet — Cash and cash equivalents on its books were Rs101bn as at 30 June 2009. This equates to Rs239/share (~36% of the current price).

Zinc: further through the race — Zinc LME prices have risen 44% YTD to ~US$1,600/t. This is largely because it is further ahead in the process of production cuts compared to other non-ferrous metals. It had been announced 1.2m tonnes of production to be curtailed in 2009 (18% of global supply). However, following the price rally, ~400kt has been restarted. Capacity restarts could lead to some near-term price weakness. We retain a Sell rating on HZL.

To see full report: HINDUSTAN ZINC


What would be the characteristics of a worldwide coordination of economic policies?

Global growth is set to remain slower due to:
  • the wider growth gap between emerging and OECD countries;
  • on average inefficient monetary policies in OECD countries, but efficient in emerging countries;
  • already excessively expansionary fiscal policies in countries where the savings rate is insufficient (United States, euro zone ex Germany and Netherlands, United Kingdom and India).
The worldwide coordination of economic policies is a utopian objective, but it would consist in this environment in:
  • monetary policies becoming more expansionary in the countries where they are efficient;
  • fiscal policies becoming more restrictive in the countries where there is not enough savings, and more expansionary in the countries where there is a savings glut (Asia, oil producers, Germany, Netherlands, Japan, etc.).
To see full report: FLASH ECONOMICS


Q1: Sustains Growth Momentum; Margin Expands on Lower Adspend

Quick comment: Beats expectations: Colgate reported 14.8%, 30.2% and 42.9% revenue, operating profits and net profit growth for Q1F10, ahead of our expectations of 13%, 23% and 24%, respectively. Toothpastes volume growth was robust at 14% with overall volume growth at 12% for the quarter. Colgate’s strategy of focusing on its core business rather than diversifying into new categories has been working well, especially in the context of the under-penetration that characterizes the oral care segment in India.

455 bps decline in adspend ratio results in 300 bps expansion in OPM: EBITDA grew by 30% yoy as advertising spend fell 16% yoy. We believe the current level of adspend to sales ratio of 12.5% is unlikely to be sustainable as competitive activity (by the #2 and #3 players in the toothpaste market) is likely to increase in the space. Surprisingly, despite some price increases
and benign input cost environment, gross profit margin contracted marginally by 80 bps, partly on account of relatively adverse mix. MS Colgate Input Cost Index was up 1.2% yoy for the quarter.

Other income and lower depreciation buoy PAT: Other income rose 175% yoy while depreciation rose marginally by 2.2% yoy. Sequentially, depreciation declined by about 11% as there was no incremental capex. Tax rate was lower by about 340 bps, as higher production from the Baddi facility resulted in greater tax benefits. Overall net income rose by 43% yoy.

Market share rose to 52.3% by volume: Market share in toothpastes increased to 52.3% for Jan-May09 (it was 52.2% during Jan-Mar09). For toothbrushes, market share improved to 38.2% while for the toothpowder category, the market share stood at 48.8% for the Jan-May09 period.

To see full report: COLGATE PALMOLIVE


ACC Ltd. declared its second quarter result today. The net sales came below the street expectations while, net profit was above. The sales were around 5.2% below Bloomberg consensus estimate, whereas the net profit was around 35.5% above, which was mainly on account of lower input cost


The net sales for the quarter ended June 09 grew by 14.79% to Rs. 2,188.21 cr, backed by higher sales volumes and better price realization

The average realization per bag (50kg) increased by 12.04% y-o-y to Rs. 201.86 mainly on account of price hike taken in late March and April 2009 while, the volume increased by
2.46% y-o-y to 5.42 million tones

Driven by benefits of prices and significant cost moderations, EBIDTA for the quarter improved by whopping 90.62% y-o-y to Rs. 766.48 cr while its EBIDTA margins stood at 34.40% registering a massive 1,347 basis points (bps) improvement on a y-o-y basis.

The power and fuel cost and other expenditure as a percentage of net sales declined by 383 bps and 465 bps to Rs. 376.22 cr and 403.3 cr respectively, as compared to that of last year
§ Company’s interest expense increased by 47.5% y-o-y to a level of Rs. 15.96 cr while the other income declined by 62.34% y-o-y to Rs. 17.55 cr

Company’s Net Profit for the quarter ended June 09 rose by significantly 84.7% to Rs. 470.94 cr as compared to Rs. 255.01 cr reported a year ago. The increase in the net profit was on account of easing commodity prices

Company’s Diluted EPS grew by around 84.7%, to Rs. 25.05/ share

Significant new capacity is expected to be added in the coming months, demand, led by housing, retail and infrastructure sectors is expected to remain firm. However, prices of major inputs for
the cement Industry, including coal, may rebound from recent lows because of an anticipated uptrend in the commodity business cycle. Thus, the profitability of the companies might be
impacted going forward

To see full report: ACC LTD.