Thursday, August 6, 2009

>Crude pares some losses on higher equities

Tokyo - Crude oil futures pared part of their losses Thursday in Asia, supported above USD71 a barrel as traders covered short positions, prompted by a rise in stock markets.

The next focus will be U.S. jobs data due Friday, and until then, crude prices are likely to follow stock market moves for any clues on the outlook for the U.S. economy, analysts said.

At 0612 GMT, front month September light, sweet crude oil futures on the New York Mercantile Exchange were down 36 cents at USD71.61 a barrel on Globex. September Brent crude on London's ICE futures exchange was 36 cents lower at $75.15 a barrel.

In early trading hours, crude dropped as low as USD71.19 a barrel in response to a more-than-expected build in U.S. crude oil inventories.

But the pressure wasn't strong enough to push prices down further.

Views on the U.S. economy have been optimistic, helping to support crude oil prices recently, because "economic indicators aren't as bad as they were, and equity prices have been stabilizing," said Tomokazu Amano, analyst with brokerage Mitsubishi Corporation Futures & Securities.

"Sufficient money has been supplied recently (in the U.S.). People are now feeling more comfortable than before" about economy, said Koichiro Kamei, senior analyst with investment advisory firm Market Strategy Institute in Tokyo.

The U.S. Energy Information Administration reported Wednesday a higher-than-expected 1.7 million-barrel rise in U.S. crude stockpiles in the week ended July 31. Analysts surveyed by Dow Jones Newswires expected, on average, a 500,000-barrel build. This was the second consecutive week of gain, leaving crude stocks above the average range for this time of the year.

Still, "it's difficult to sell down large volume, given that crude prices have been supported around $70 over and over," said Amano.

The Nikkei 225 Stock Average closed up 1.3% Thursday.

Front month September Nymex RBOB gasoline decreased 22 points to $2.0490 a gallon, while September Nymex heating oil fell 124 points to $1.9445 a gallon.


>Crude steady, markets wait on macro data

London - Crude oil futures retreated from new multi-month highs Thursday as market participants adopted a cautious approach ahead of a series of key macro readings.

ICE Brent crude earlier reached $76 a barrel for the first time since last October while Nymex crude reached $72.42 a barrel, its highest since the start of July, before turning lower.

Financial markets were largely static awaiting Thursday's interest rate decision from the European Central Bank, weekly U.S. jobless numbers and Friday's crucial U.S. nonfarm payrolls data for any confirmation that economic recovery is underway.

Crude closed higher Wednesday, after a weaker dollar offset the impact of a fresh round of bearish inventory data from the U.S. Energy Information Administration. Prices could strengthen further if economic optimism remains intact, analysts suggested.

"If equity markets continue to improve, and people think tomorrow is going to be better, then presumably there will be more [crude price] upside," Neil Atkinson, senior consultant at KBC Market Services in London said, even though there was "very little fundamental support" for recent rises.

At 1125 GMT, the front-month September Brent contract on London's ICE futures exchange was down 16 cents at $75.35 a barrel.

The front-month September light, sweet, crude contract on the New York Mercantile Exchange was trading 33 cents lower at $71.64 a barrel.

The ICE's gasoil contract for August delivery was up $6.00 at $613.00 a metric ton, while Nymex gasoline for September delivery was up 21 points at 205.33 cents a gallon.

Wednesday's EIA inventory data showed crude stocks continued to rise last week as U.S. refinery utilization remained depressed. Gasoline stocks fell less than expected despite lower runs, although reduced refinery activity contributed to an unexpected drop in distillate stocks. Nonetheless, distillate inventories remain 21% above levels of the same time last year, swollen by a downturn in industrial and economic activity.

Despite indicating that U.S. demand has yet to stage a meaningful recovery, oil prices closed higher after the data Wednesday, largely as other financial markets continued to proffer hopes of economic recovery.

"I'm still not seeing any demand coming from anywhere yet," said Simon Wardell, analyst at Global Insight in London. "This is all about the markets, not the physical desire for crude. We're expecting a correction."

The ECB is due to give its interest rate verdict at 1145 GMT Thursday. The Bank of England left its rates unchanged Thursday, adding that the U.K. recession was deeper than previously thought. In the U.S., meanwhile, weekly jobless claims are due at 1230 GMT.

Those data, as well as Friday's U.S. monthly unemployment report will likely determine crude's next moves, analysts said Thursday, with any mildly positive elements within them likely to keep the crude price on its upwards trajectory.

"For now, and barring a major bearish macro trigger or a return to extremely overbought conditions, it seems that the path of least resistance is higher still," said Edward Meir, analyst at MF Global in New York. "The market does not have the feeling that it wants to go down. Rather, buyers still seem to be stepping up on weakness."


>Spot gold eases ahead of ECB rate decision

London - Spot gold lost early gains Thursday as the dollar strengthened ahead of interest rate decisions from the European Central Bank and the Bank of England.

With the ECB expected to keep its benchmark rate unchanged, the gold market instead was looking to oil prices and Friday's U.S. jobs data for direction, traders said.

At 0933 GMT, spot gold was 0.15% lower at $960.50 per troy ounce.

Gold remains up 3% above its level a week ago, but its failure to break $970/oz in the past two days indicates a short-term ceiling for the metal, traders said.

"It looks like we're stuck in a range," said Afshin Nabavi, head of trading and physical sales at MKS Finance in Geneva. On the downside, $959-$960 should provide near-term support, Nabavi added.

Analysts expect the dollar to remain as gold's key swing factor, but many predicted limited upside for gold if equities continue on the uptrend.

Citigroup analyst David Thurtell said the relatively listless tone in gold reflected the dwindling interest in the metal among investors. "With equities rallying, money's going out of gold and into equities," Thurtell said.

A rally to the $1,000/oz level isn't likely until the end of the year, when rising commodity prices are likely to prompt investors to buy gold as an inflation hedge, even though statistically the two aren't well correlated, Thurtell added. "If enough people do [think gold is a hedge], then it's silly to fight the trend."

Gold's higher prices this week have also prompted some scrap gold selling in East Asia, which could grow larger if prices rise, traders said.

In other metals, spot silver was 0.2% lower at $14.672/oz, spot platinum was down 0.6% at $1,275/oz and spot palladium was 0.2% at $272.50/oz.

Platinum remained less than 1% below Wednesday's two-month high of $1,287.50/oz, underpinned by worries of a strike at South Africa's power utility Eskom.

The country's biggest trade union Wednesday said a strike early next week was "inevitable."

South Africa produces three-quarters of the world's platinum, and is one of the world's biggest gold producers.




Supply, demand & government

In the pre-Lehman world, we assessed supply and demand to estimate a future price. In the post-Lehman world, having done the supply/demand analysis we have another layer of questions to answer. Does the government want that price? Can it alter that price? And what are the unintended consequences of attempting to achieve that price? We can lament the new rules of the game or profit from them. This research is aimed at those who prefer the latter.

Short western-government debt
Public debt-to-GDP ratios soar even with high real economic growth.
Governments’ long-term solution is high nominal-GDP growth - inflation.
Taxation, inflation and currency deflation are government policies now.

Long inflation plays
The Federal Reserve’s less-liquid balance sheet reduces its inflation-fighting ability.
Never expect a fiscal solution to inflation.
The Fed will target debt to GDP and accept more inflation.

Long emerging-market equities
Lower real rates react with strong banking systems to produce credit growth.
Eventually exchange rates will be permitted to appreciate and the Asian century will begin.
Less economic volatility means higher valuations and capital gains from equities.

Long the US dollar . . . for now!
The USA will reflate first and end quantitative easing first, which will be good for the US dollar.
In the short term, emerging-market support for the US dollar will increase to support growth.
The European Central Bank cannot live with a strong euro at this stage, which is also good for the US dollar.

Long gold
In the long run, negative real interest rates are good for gold.
In the early stages of inflation, equities will beat gold.
A bear market in central banks will bring a bull market in gold.

To see full report: GLOBAL OUTLOOK


Sell: Inline 1QFY10 – Order Inflow Remains a Worry

Inline 1QFY10 results — Voltas’ 1QFY10 recurring PAT at Rs678mn was inline with CIRA estimate of Rs670mn. Revenue at Rs11.7bn grew 16% YoY and was 6% ahead of estimates. Margin at 7.5% declined 18bps YoY and was 47bps below estimates.

Order inflow remains a cause of conern — Voltas’s order backlog at Rs46.7bn is down 18% YoY. International order backlog at Rs34bn is down 26% YoY and provides sales coverage till September 2010 only. International order inflow has not picked up yet, though Voltas has indicated that it has received inquiries from several customers.

Domestic market seems to have bottomed out — Voltas has won ~Rs3bn of domestic orders in 1QFY10 and is seeing MoM improvement in order inflow and product sales in domestic market.

Engineering products and services division is still sluggish — as mining and construction equipment inventory has still not been depleted, and textile machinery is likely to pick up very slowly starting 2HFY10.

Unitary cooling products have improved — helped by prolonged summer. The company has managed to run down inventory to a significant extent and has experienced stock outs in 1QFY10 due to high demand.

Reiterate Sell — Voltas is trading at ~16x 1Yr fwd EPS. We believe that order inflows especially from international projects will take time to pick up. The current price is discounting a very optimistic outlook for order inflow.

To see full report: VOLTAS


  • Stock Update >> Navneet Publications (India)
  • Stock Update >> Alphageo India
  • Sector Update >> Cement

To see full report: INVESTOR'S EYE


Demand yet to check in…

East India Hotel’s (EIH) revenues declined 14.6% YoY to Rs 216.1 crore lead
by continued slowdown in demand for hotel rooms. As a result, its net profits for the quarter also de-grew 49.9% YoY to Rs 19.1 crore. However, the company has been able to maintain its operating margin over 30% through various cost control measures.

Highlight of the quarter

The company reported net sales of Rs 216.1 crore against our expected net sales of Rs 242.8 crore for Q1FY10. Its net sales declined by 14.6% YoY. This was mainly lead by continued slowdown in demand for hotel rooms. As a result, its operating margin continued to remain under pressure. However, the company has been able to maintain its operating margin over 30% through various cost control measures. Operating margin for the quarter was 30.3%, a decline of 440 bps YoY. The company reported net profit of Rs 19 crore, down 49.9% YoY.

At the CMP of Rs 117, the stock is trading at 31.7x and 20.0x its FY10E EPS of Rs 3.7 and FY11E EPS of Rs 5.8, respectively. This looks expensive compared to its peer companies. Considering the company’s sluggish Q1FY10 performance, we retain our target price of Rs 93. We have arrived at this price through the DCF methodology. We continue to maintain our
UNDERPERFORMER rating on the stock.

To see full report: EIH


1QFY10: Bumper profits; but margins hit trough

1QFY10 earnings driven by trading profits; top line was weak
1QFY10 earnings were quite a mixed bag. Reported earnings growth was very strong ranging from 20-50% for most of the banks (and even +100%); beating our estimates by 10-40%. But earnings quality was somewhat weak, as most of the growth came from a jump in trading profits (30-60% of PBT) as banks benefited from high equity gains and trading G-secs during the quarter. In contrast, top-line (net interest income) growth was modest at 10% was a function of a) Margin collapse, especially for govt. banks; and b) Moderation in loan growth.

Margins collapsed as incremental LDR fell to 14%; Fees was the silver lining
The margin collapse can be traced to 3Q of FY09 (when banks’ refused to lend) and continued through Jun’09. Govt. banks are more impacted, as they got much higher deposit inflows during 3QFY09, esp. SBI, while loan growth moderated, saddling them with excess liquidity. The impact of this became very visible in this quarter, as incremental LDR fell to an 8-year low of
14%. Most govt. banks saw 40-60bps qoq margin compression. The 20-40% rise in fees (govt. bk) from technology benefits that helped offset higher opex was the key positive. In contrast, private banks contained costs while fees slipped.

Future outlook: Margins have bottomed out; LDR set to rise
Margins are set to expand sequentially, owing to a) Rising LDR that would allow banks to re-deploy their lower-yielding G-secs towards loans; and b) Re-pricing of their high-cost deposits from Oct’09 onward. The LDR will rise owing to a likely pick-up in
credit, driven by greater infra lending; a likely pick-up in housing (by year-end) and, most importantly, due to the cyclicality of the economy (60-70% of all loans are disbursed in 2H of any fiscal). Hence, core earnings should begin to improve; though reported earnings may continue to seesaw (weak 3Q on high base effect; followed by a very strong 4Q).

Post results, SBI appears amongst the better positioned to see large margin expansion, having raised low-cost funds and likely to grow loans at 20%. ICICI Bk, while disappointing on the top line, delivered ahead of expectations on its B/S profile and is also well positioned for future growth (missing piece) and challenges. HDFC Bk may end the year with highest growth
despite a weaker top line. Amongst govt. banks, PNB and BOI appear to offer the best risk/return.

To see full report: BANKS-RETAIL


Alert: First Take on DLF 1QFY10E

Results ahead of estimates – Though revenues of Rs17.46bn and earnings of Rs3.96bn were down 55% YoY and 79% YoY respectively; this was better than our estimated 70% and 90% fall. QoQ growth was however healthy. EBITDA margins of 45% surprised, despite the fall in revenues; would await more details on this. The company has also announced dividend of Rs2/share for FY09.

Operationally, signs of improvement – 1) Construction activity has picked up, now 42msf under contrs (vs. 36.5msf in 4Q), particularly resi projects; also delivered 1msf of off/comm. space, 2) pre-sold ~2.5msf in the qtr – Delhi, Capital Greens (2msf); and Bangalore (0.5msf); 3) total developable area down to 423msf (vs. 425msf earlier due to sale of few projects/land, 4) de-notified 5-SEZs as commercial/IT space demand still muted – though pick-up in enquiries.

DAL Update – DAL outstanding recd to the tune of Rs25bn in the qtr (vs. target Rs20bn), this has lowered receivable to Rs26bn (vs. Rs49bn as of Mar’09), expects another Rs5bn during FY10.

Focus on liquidity and de-leveraging – 1) Reduced debt by Rs20bn, gearing down to 0.5x in Jun’09 (vs. 0.6x in Mar’09) – targeting to reduce this to 0.3x by Mar’10; 2) Sold non-core assets worth Rs5bn in 1Q, expects another Rs50 by end FY10.

Prima facie thoughts – Better than expected qtr though sustaining these margins going forward appear difficult. Operationally, improved construction activity and reducing DAL receivables and debt are positive signs. The mgmt is scheduled to have a conf call today at 16:00hrs (IST) – will come back with more details post the call.

To see full report: DLF LTD


Alert: 1Q Ahead of Estimates – Signs of Improving Times?

1Q ahead of estimates — Aban reported a 1QFY10 PAT of Rs1.1bn (-10% yoy) vs. a loss in 4QFY09. PAT was ahead of our estimates driven by: (i) better than expected EBITDA margins, (ii) marginal improvement in revenues (+3% qoq), with mobilization revenues from Aban Pearl offsetting the decline in revenues from 6 Deep Driller going idle, and (iii) lower depreciation charge with jack-up Murmunskaya being returned in 4QFY09. EBITDA of Rs4.7bn (+17% yoy, +9% qoq) was also slightly ahead, although in line with 2Q/3QFY09 levels.

EBITDA margins improve; D/E at 10x, but could get restructured — Improvement in EBITDA margins (59% in 1QFY10 vs. 53-56% over FY09) was driven by lower costs on account of discontinuation of the Premium Drilling contract (for managing and operating the DD rigs), commencement of Aban Pearl, and warm stacking of some of the DD rigs. Recent press reports (source: NDTV, DNA) have suggested that Aban’s consol debt of US$3.3bn could get restructured, which combined with a market that is showing signs of turning around, could ensure its continued operation despite the uncomfortably high 10x D/E.

Jack-up market turning around? — Signals are mixed. US driller Noble Corp noted that “signs of life” are showing in the market, after clinching a contract extension in West Africa at US$115K/day, and also that a sharp drop in drilling costs have opened up opportunities for oil majors to lock in jack-ups for multi-year contracts. However, Hercules Offshore noted that international markets are still weak with current utilization rates at ~80% and day rates may come under pressure into 2010, while Pride International does not see the recent up-tick in international shallow/mid-water tendering as a prelude to recovery given sizeable newbuild

Potential opportunities in India, Middle East, Mexico — ONGC has issued one tender for three 300’ independent leg jack-ups for renewal of three rigs for a period of five years. In addition, Pemex may launch one or two tenders for two 500’ plus jack-ups, and four or five 300 foot commodity jack-ups. Press reports (NDTV, DNA) have also suggested that Aban could be exploring contracts from Middle East. Although political uncertainty could be a hindrance for many drillers, Aban already operates two jack-ups there viz. Aban VI and VIII. While the developments appear encouraging and reward of contracts (preferably multi-year) could be
positive, we view the stock is largely already pricing these in. Maintain Sell.

To see full report: ABAN OFFSHORE


Raining trouble: 50bp growth drying up

Met expects monsoon to shower the Ganga…
We hope that the monsoon continues to water the north-east Ganga rice bowl as the Met expects. The good news: the critical July sowing month saw normal 90+% rains, far better than the drought years of FY88 (71%) and FY03 (51%). Besides, rains finally reached the Ganga last week. The bad news: time’s running out, with seasonal deficiency still 19%, albeit much improved from 54% a month ago (Chart 1 and Table 2).

… but dismal 25% lower rice cropping to hit growth 50bp
Let’s face it, while we will wait a week, it looks virtually impossible to recoup rice cultivation – now 25% below last year (Table 3). The sowing calendar is already stretched (Table 4) in UP, Bihar and West Bengal that account for ~30% of the rice crop (Table 5). Yes, rice is but ~1% of GDP, but a ~20% contraction will likely hit growth ~50bp, after second-round effects. The relief is that recovery in other crops should prevent the catastrophic 7% drop in agro growth drought 2002 saw.

Inflation risks rising, but food price spike overdone
We continue to expect inflation – (-)1.6% Thursday – to harden to 6.5% by March (Chart 2 and Table 6). Besides, poor rains pose 150bp upside risk (Table 7), even if rice prices are contained by the large 19.6mt stock, double the July 9.6mt buffer stock norm. We, however, do not expect the current essentially speculative spike in food prices - rice (25%), pulses (40%), onions and potatoes (50%) – to sustain. Improvement in cropping (in case of pulses) and as-usual-belated government action should dampen “hoarding”.

Monsoon liquidity to damp fiscal pressures…
We continue to expect ~US$25bn seasonal liquidity and the 350+bp 10y-RBI policy rate spread to continue to cushion government borrowing (~Rs3200bn/ US$68bn, net of RBI OMO/MSS in FY10). This should keep yields in a trading range for now. At the same time, we have grown more confident of our January/ April RBI hike call, after Gov Subbarao’s relatively hawkish monetary policy last Tuesday (Chart 3). We continue to expect upside pressure on yields by March.

… fx flows to turn on risk, NHPC; RBI to support exports
We expect FII inflows to swing to risk appetite expansionary 50+ PMI & the NHPC IPO, kicking off divestment. Earnings, after all,are more or less,out of the way, without any major disappointment. Successful divestment ,~Rs120bn BASMLe , should alleviate crowding out fears; which, in any case, we find overdone here. We continue to expect RBI intervention to curtail appreciation to protect exports (and recoup fx reserves) for now. Commerce minister Anand Sharma has already disclosed that June 09 exports will still show a large 29% y-o-y drop
Monday. At the same time, this, in no way, detracts from our long-held twin view of BoP risks overdone/ constructive INR outlook.

To see full report: WEEK AHEAD


Sell: Q1 Results – No Major Surprises

Standalone results – Net profit higher due to other income — Net income was Rs363m, higher than our forecast of Rs288m, due to higher-than-expected other income of Rs124m (CIRA exp: Rs40m). Revenues increased ~113% yoy to Rs1.5bn; EBITDA margins declined more than 400bps yoy. However, Q1 contributes to only a small part of full-year numbers for Educomp.

School learning solutions – good growth but margins? — Educomp has reclassified segmental data – Smartclass and I have been merged as School Learning Solutions (SLS). SLS reported a growth of ~150% yoy but margins declined more than 1300bps yoy.

Consolidated results — Consolidated net profits came in at Rs342m, despite a high other income of Rs153m (Rs118m due to gain from stake sale in vocational business to Pearson Inc). Higher depreciation and interest costs (not surprising given the sharp ramp up) resulted in PBT (ex other income) growing at ~74% yoy vis-à-vis revenue growth of ~125%.

Key issues to focus on — (a) Margin trajectory for SLS – post a 13%+ decline yoy; (b) Smartclass school adds going forward – only 173 additions this quarter; (c) Capex and operational cash flows – net debt increased by ~Rs800m qoq. Educomp also raised ~Rs6b from QIP post Q1.

High valuations – needs positive surprises — Educomp trades at premium valuations of ~34xFY10E (~100% premium to the Sensex) and needs positive surprises for the stock to move up meaningfully. We continue to remain Sellers.

To see full report: EDUCOMP SOLUTIONS