Saturday, August 1, 2009

>Asia spot gold up on weak USD, commods gains

Sydney - Dollar weakness and general commodity price strength boosted spot gold in Asia Friday, and prices are likely to continue closely tracking the dollar.

Traders also noted a pause in gold outflows from the SPDR Gold Trust, the largest physically-backed exchange traded fund, after hefty outflows this week.

At 0704 GMT, spot gold traded at $937.60 a troy ounce, up $3.90 on the New York close.

Markets across the board continued firming after overnight remarks from Chinese central bankers reiterating their ultra-loose monetary policy, after fears of tightening bank lending prompted an 8% drop on the Shanghai stock market Wednesday, sending jitters through global commodity markets.

In base metals, London Metal Exchange copper rallied to a fresh nine-month high of $5,748 a metric ton, up 2.6% on the previous afternoon kerb, and aluminum built further gains after a strong rise overnight, adding some 4.1%.

"Sentiment in the markets is turning at the drop of a hat. We have low volumes, which indicates summer trading," said a Sydney-based trader, who tipped the U.S. dollar to remain the driving force behind gold for now.

This is particularly so after the outflows this week from the SPDR fund, which total 47.7 tons this week so far to 1,072.87 tons.

"Net monthly outflows during July are now set to be the second-largest ever, after April last year," said Barclays Capital, adding it expected jewelry demand to pick up on price dips, which should limit gold's downside.

At 0713 GMT, spot silver traded at $13.61/oz, up 14 cents on the New York close. Platinum stood at $1,188.50/oz, up $7.50, and palladium was at $256.50/oz, down 50 cents.

On Tocom, the benchmark June 2010 gold futures settled at Y2,883 a gram, up Y31, while June platinum futures were down Y56 at Y3,656/gram.


>Crude gains on softer dollar, equity mkt rebound

Sydney - Crude futures reversed early losses to rise strongly above $67 a barrel in Asian trading Friday, pulled up by a softer U.S. dollar versus the euro and a rebound in equity markets.

Light, sweet crude for September delivery traded up 72 cents at $67.66 a barrel on the Globex electronic platform at 0630 GMT and may be set for more gains later Friday if U.S. GDP data positively surprise.

September Brent crude on London's ICE Futures exchange rose 43 cents to $70.54 a barrel.

The U.S. is the world's largest energy consumer, so any signs that its economic recovery is gathering momentum will help support oil prices. Thursday, the U.S. Labor Department reported a smaller-than-expected rise in new jobless claims, helping the Dow Jones Industrial Average hit a 2009 high.

Economists surveyed by Dow Jones Newswires estimate the U.S. Commerce Department's GDP report will show a contraction of about 1.5% for the second quarter. That would mark a less-severe fall than the first quarter's 5.5% figure, possibly prompting some to declare that an economic bottom has arrived.

Crude futures spent the first few hours of trading on Globex in negative territory, largely due to profit-taking in the wake of the September contract's 5.7% hike on the New York Mercantile Exchange overnight.

Japan's jobless rate in June rising to its highest level in six years also acted as a drag on oil prices. Japan is the world's second-largest importer of crude after the U.S.

Government data showed Japan's unemployment rate rising to 5.4% in June, up from 5.2% in May. The result was slightly above the 5.3% consensus expectation of economists surveyed by and Dow Jones Newswires.

But some positive corporate earnings from the likes of Fujitsu Ltd. and Sharp Corp., following in the wake of a smaller-than-expected loss by Sony Corp. in the April-June period, provided a catalyst for Japan's Nikkei Index to touch a year-to-date intraday high Friday.

Other regional equity markets, including the Hang Seng Index in Hong Kong and the Shanghai Composite Index, were also higher after a turbulent few sessions for stocks.

The September crude contract was also lifted by a 0.5% slide in the U.S. dollar versus the euro to USD1.4141.

David Moore, commodity strategist at Commonwealth Bank of Australia, said trading would continue to be pretty volatile Friday and in coming sessions, with oil prices fluctuating in a fairly broad band.

"I don't think the oil market is especially tight at the moment. It's not far off being balanced, and for that reason I expect there to be a downward bias," he said.

Other analysts also saw limited upside to the current oil price.

"For now, we are viewing the Monday-Tuesday highs around the $69 mark as staunch resistance that should prove capable of containing additional price advances," said Jim Ritterbusch, president of Ritterbusch and Associates.

"Nonetheless, a sharp price sell-off will likely have to await another round of API/EIA statistics next week that are again likely to fall toward the bearish side," he said.

The U.S. Energy Information Administration reported Wednesday that crude oil stockpiles rose by 5.1 million barrels last week as oil imports rose and refiners processed less crude.

At 0630 GMT, oil product futures were higher.

ICE gasoil for August changed hands at $570.75 a metric ton, up $6.00 from Thursday's settlement.



Buy: Handsome Beat in 1Q; Maintain as Top Pick

Strengths shining through — Trends in 1Q reflect the resilience in UPL’s business model, as it absorbed the impact of high cost RM inventory & postponement of sales in key markets to materially beat estimates (rec. PAT by 16%). Concerns over the impact of poor/delayed monsoon in India & pricing pressure in global markets appear overdone to us. Maintain as Top Pick.

1Q: Strong beat — Rec. PAT beat our estimate by 16%. Reported figures up to EBIDTA (sales up 26% YoY; margins down 56bps) are skewed by seeds sales on behalf of Advanta. Excluding this, sales grew 20% YoY despite postponement of sales in India (+2% YoY) & US (+24% YoY) and EBIDTA margins expanded 36bps, despite use of high cost RM in stock. Rec. PAT grew 6% YoY (lower other income & higher interest), which was impressive, given
the high base last year.

Exploring synergies with Advanta — UPL is exploring front-end synergies with Advanta by integrating the sales & distribution teams in India. It has started using its distribution network to sell seeds on Advanta’s behalf (Rs770m sales in 1Q). This will likely remain on a no-profit-no-loss basis (source & sell at the same price) for a year as they figure out the extent of synergies – which would then be shared between the two companies.

Other key takeaways — a) Benefit of lower RM cost to reflect in future quarters as high cost inventory has been used up; b) India: Some pushing out of sales but off-take has picked up over last 15 days; c) Debt higher by cRs3.6bn to fund higher working capital – likely to ease over the year; d) Pricing: EU is still strong, US is better for UPL due to low base last year, and India is competitive.

To see full report: UNITED PHOSPHORUS


Q1FY10 Highlights
Tech Mahindra reported US$ revenues of US$ 228 mn (+7.7% QoQ, -16.3% YoY) V/s our expectations of US$ 223 mn. Operating profits at Rs 2,805 mn was marginally below estimates as company reported operating margins of 25.2% (V/s expectations of 25.8%, note operating margin decline on reporting basis is higher at ~ 200 bps declines as Q4FY09 involved one time provision write back of ~Rs 250 mn). Net profits at Rs 1,316 mn missed expectations (our estimate at Rs 1,658 mn) on account of other income losses of ~Rs 261 mn.

Top client woes continue; Expect more pressure ahead
Revenues from the top client were up 7.7% QoQ in US$ terms at US$ 118.4 mn however were down marginally in GBP mn at GBP 75.9 mn V/s GBP 77.5 mn during Q4FY09. We believe that revenues from core BT segment would continue to be under pressure as IT spending priorities continue to evolve driven by macro weakness. We are surprised by the co’s stance of not disclosing the revenue contribution from the BTGS and the ANDES deals (revenues from ANDES were to kick in from Q1FY10 onwards) and would have appreciated the disclosure of financial given the nature of deal structures for them (note that Tech M has made upfront payments for both of these contracts with significant investor and our attention focused on NPV’s of these contracts). Tech M management during the call noted that it was renegotiating the scope and nature of business under these contracts with BT and expected more clarity to emerge by end of Q2FY10.

Maintain ACCUMULATE with revised TP of Rs 742
We maintain ACCUMULATE on Tech Mahindra with a revised target price of Rs 752 based on 11x consolidated base case FY11 EPS estimates of Rs 67.1 (V/s Rs 550, based on 8x earlier). However we would not rule out near term correction in the stock given ~100%+ run up in the stock over the past 3 months as well as negative reaction to business prospects at the top client.

To see full report: TECH MAHINDRA


Sustainable margin expansion…

Transport Corporation of India (TCI), one of the largest integrated logistic solution providers in India, reported its Q1FY10 results. Net sales De-grew 1.7% YoY and 4.7% QoQ to Rs 311.3 crore in Q1FY10. EBITDA margin surged by 101 bps YoY to 7.2% in Q1FY10 on account low diesel price and cost control measures adopted by the company. TCI registered a bottomline of Rs 7.9 crore in Q1FY10 against Rs 5.9 crore in Q1FY09.


Fuel cost figures around 70% of total cost. Fuel prices were low in Q1FY10 but have increased by Rs 2 / litre in July 2009. However, this increase in fuel price is passed on to the clients in the form of higher freight rates which secures the profit margins. This will lead to considerable improvement in topline. TCI has planned a capex of Rs 160 crore for FY10E of which Rs 110
crore will be invested in high margin shipping business. TCI will raise debt of Rs 120 crore for executing this expansion plan. Being present in the low margin business, TCI is taking steps to improve margins by changing the product mix and the customer mix.

At the current price of Rs 65, the stock is trading at 14.6x its FY10E EPS of Rs 4.5 and 12x its FY11E EPS of Rs 5.4. On an EV/EBITDA basis, the stock is available at 7.7x FY10E earnings and 6.7x FY11E earnings. Considering the continual and sustainable margin expansion we have revised our target price. We rate the stock as HOLD with the target price of Rs 59.

To see full report: TCI


Hold: 1QFY10 Results – Overall, a Solid Quarter

Recurring PAT was above expectations — at Rs 5.84 bn, up 25% y/y and 38% above our expectations. This quarter had everything – volume growth, market share gains, mix improvement and margin expansion. EBITDA margins at 10.4% (+60 bps y/y, 390 bps q/q), were 140 bps above our estimates.

Exports/mix shift drove realizations — 1) Realizations rose 4% sequentially, due to a richer product mix and a 17% q/q increase in exports. We got our export realizations wrong – they are c12% higher than our expectations, a quick sensitivity reveals that FY10 estimates could be increased by cRs7/share if export realizations remain at current levels (ceteris paribus).

Costs/FX move in the same direction — Material costs as a % of sales declined 270 bps q/q; MSIL also benefited from the rupee strengthening against the yen (~60bps benefit on margins).

Cash flows/capex in-line with expectations — inventories are in check – 1mth of sales. Working capital remains tight. FY10 capex is targeted at Rs21bn; the company's cash surplus is ~Rs47bn. Escalating spends on R&D could further cut the effective tax rate (~27% in 1Q).

Overall, mgmt remains cautiously optimistic — Mgmt noted that a) financing has improved (66% today, vs ~60% commencement of fiscal), b) consumer confidence is improving (reflected in richer mix), c) Discounts/car have trended down to Rs9k from Rs12k/car. Risks are macro in nature – muted monsoons, higher rates. We maintain Hold (2L), given expensive valuations.

To see full report: MARUTI SUZUKI