Monday, August 10, 2009

>Gold sleepwalks towards sustained break of USD1,000

Singapore - Gold is just 8% below it's record high and yet there's absolutely no excitement or euphoria in the market, unlike on previous occasions. From a contrarian perspective, however, that lack of bullishness could in itself be a positive sign.

Gold's stuttering progress towards another test of the USD1,000 a troy ounce level and a lack of interest in the physical market have many analysts ready to call a top, but others believe pressure is building for a sustained breakout.

Previous spikes over USD1,000 in March 2008 and February this year were brief and prompted deep corrections.

However, it could be different this time, they say, given a lack of the euphoria associated with previous market peaks. There is little evidence of long-liquidation by physical or ETF holders and the metal's technical set up is bullish.

According to Barclays Capital technical analysts, the range of the past 16 months is very similar to the consolidation period back in 2006 and 2007 before the break of USD845/oz, the previous record high seen in 1981.

"As such, into the fourth quarter, we expect a return to the secular bull trend for a move toward the $1,033 (March 2008) peak and beyond," Barclays said in a report.

"I think we will see a breach of $1,000 in the next four to six weeks and will then move to a whole new higher trading range," said a senior commodities trader at a European bank in Singapore.

The trader said that far from seeing the quiet nature of the market as a negative, the fact that gold has appeared well-supported above $900 without any help from India or the Middle East, or any ETF accumulation, was bullish.

"India's imports have collapsed this year, but how long can that last? I know the monsoon has been poor so the farmers might not buy as much, but at some point India will come back to the market," he said.

In the first half of 2009, India's gold imports plunged to just 61.8 tons, from 139 tons during the first half of last year, according to the Bombay Bullion Association.

There is little buying interest elsewhere in Asia too, but there's also a lack of selling with spot gold premiums firm in Singapore between 50 cents and USD1.

Beh Hsia Wah, a trader at United Overseas Bank in Singapore said that while the fabrication side of the market was dull, even ahead of the festival season, on the investment side, there was not much sign of liquidation.

"At this point I think people will be holding on. There are so many reports flying around about USD1,000 gold," she said.

"I'm surprised there hasn't been much physical selling from anywhere in Asia this week despite the fact that we have traded above $960," said Anderson Cheung, director of precious metals at Mitsui Bussan in Hong Kong.

Cheung said he expects gold to test USD1,000 by September at the latest, as the metal, along with other commodities, benefits from a long-term reallocation of fund investment into commodities.

ETF Market Remains Dormant

There has also been an almost spooky lack of action in Exchange Traded Funds (ETFs) where gold holdings have been relatively stable since March, despite a gold price that has fluctuated between an $865/oz low in April and a $990/oz high in early June.

According to UBS, global ETF holdings fell in July to 52.25 million ounces at the end of the month, from 53.7 million ounces at the end of June, the first significant decline since September, but it remains to be seen if this is the start of a trend.

Since the first gold ETF products came to the market in 2003, holdings have enjoyed a sustained uptrend and now sit 3% below their peak of 54 million ounces hit on June 24.

The restrained level of ETF liquidation, despite low inflation readings and bullish equity markets, is easy to explain, according to the senior trader at the European bank. "Gold has become a retail product again. The average ETF investor is thinking of inflation over a ten-year time horizon, not making a quick profit."

The July dip in holdings has also been complicated by the news that Greenlight Capital, a $5 billion New York-based hedge fund switched its gold exposure from the SPDR gold ETF (GLD) into physical bullion, apparently due to storage costs being lower than the fees associated with the ETF holdings, although the fund made no public comment on the issue.

Analysts have suggested more funds might be taking this option, helping explain falling ETF holdings in a month when the gold price rose.

USD Weakness Is Necessary, Not Sufficient

In the absence of much physical demand or ETF accumulation, the dominant factor pushing gold up has been the weaker dollar.

Since gold hit its recent low of USD905/oz on July 8, the euro has risen to USD1.4360 from USD1.3832, while gold has advanced to $960/oz.

In contrast, against a strong euro, gold hasn't made much progress, rising just EUR8 since July 8 to EUR670/oz, while it is flat at GBP570 against the sterling. This partially explains why there appears little excitement about the recent rally in the market. For large parts of the globe, nothing really has changed.

However, things could change if there is a sustained a move above USD1,000. The two seminal moments in gold's long bull run since 2001 were the breach of USD500 in November 2005 and the push through the old 1981 record high of USD845/oz, in January 2008.

Both moves yielded higher trading ranges but were achieved as gold rose against the major currencies in tandem, not just the dollar.

The Bank of England's decision Thursday to inject a further GBP50 billion into the U.K. economy by buying more government bonds will hearten gold bulls in this regard.

The bull case is that central banks have no plan B, and persistent weak loan growth in both the UK and the Eurozone will force monetary authorities to follow the Fed and stay dovish, despite their apparent concern over inflation.

In a sense bears are caught between a rock and hard place with signs of successful reflation - fiscal and monetary stimulus to expand output and curb deflation - likely to be interpreted as gold-bullish. By the same token, continued signs of deflationary pressure will only draw even more grandiose monetary policy moves, further energizing gold bulls.



Sell: Q1 Below Expectations

Results below expectations — NIIT reported revenues of Rs2.6b (flattish yoy) with EBITDA up ~52% yoy (CIRA: Rs2.8b and ~75% yoy respectively). Despite a tax write-back, profits were below our expectations due to lower other income and share of profits from NIIT Tech (NITT.BO; Rs98.05; Not Rated).

Individual business (ILS) slowing — ILS reported revenues of Rs856m (flattish yoy) and operating profits of Rs160m (+6% yoy), below our estimates. Despite seeing an uptick in June, management has scaled down the guidance given at the end of May, to ~10% yoy growth (from 10-15% earlier).

Corporate business challenged — Revenues were down ~4% yoy while margins were up more than 700bps yoy. Significant favorable forex movement would have helped, in our view. Corporate training budgets are largely discretionary in nature, and this business could continue to face challenges.

School business (SLS) growing; New businesses flat — SLS revenues were up ~43% yoy while operating profits were up ~89%. This business has a lower return on capital (compared with ILS), and growth here will pull down the overall return ratios, in our view. New businesses were flat in revenues while continuing to make operating losses.

Maintain Sell — The market cap of NIIT is ~Rs10.2b while that of NIIT Tech is ~Rs5.8b. Taking out the 25% stake in NIIT Tech, the market cap attributable to the core business is ~Rs8.7b (without considering any holding company discount). This values the core earnings at ~20x FY10E – ~20% premium to the Indian market – steep, in our view given the growth outlook.

To see full report: NIIT


Revenue Growth Disappoints but Margins Surprise

Quick Comment: We do not read too much into the slower revenue growth. IVRCL reported F1Q10 revenues of Rs 10.5 bn and profit before tax of 516 mn; 7% and 6% below our estimates, respectively. We do not read too much into the slower revenue growth for F1Q10 as the first quarter is usually the smallest quarter and may not be indicative of the full year. We believe that payments to contractors by the state government were delayed because of the recently concluded elections in Andhra Pradesh and this led to the slower revenue growth this quarter. Given the strong order book position of Rs 149 bn (3x TTM revenue), we expect
the company to make up the revenue in the next 3 quarters and deliver on our numbers for the full year.

Best first-quarter margins in five years: The key positive for us from the results is that IVRCL managed to expand its margins by 50 bps to 9.2% in F1Q10 (Exhibit 4). Even though these margins were on the back of slower revenue growth, the company expects to clock
9.5-10% margins for the full year. As revenues and operating margins pick up over the remaining quarters and below the line items (interest and depreciation) remain similar in size, we would expect operating leverage to kick in, with net profit growth accelerating.

PAT not comparable due to change in tax accounting: Though IVRCL is still contesting the 80IA issue with the tax authorities due to the retrospective amendment introduced in the Finance Bill, 2009, the company has not claimed any deduction in the current quarter. Hence, we would focus on the PBT decline of 3% rather than the PAT decline of 17% YoY, which is not comparable YoY basis.

To see full report: IVRCL


Margins improve….

Kewal Kiran Clothing’s (KKCL) revenues were in line with our expectations
but profitability was significantly higher than our expectations. Revenues increased by 21% to Rs 33.3 crore. A 4% volume growth from 5.43 lakh garments to 5.62 lakh garments and 15% increase in realisation from Rs 542 to Rs 624 drove this growth. KKCL has been able to report a YoY improvement in the EBITDA margin from 13.9% in Q1FY09 to 24.8% in Q1FY10. The sharp improvement in the EBITDA margin was on account of lower raw material cost to sales ratio of 36.4% in Q1FY10 compared to 43.9% in Q1FY09. Lower selling and administration expenses to sales ratio, which has declined from 28.4% to 18.0%, has also contributed to the improvement in EBITDA margin. Coupled with EBITDA growth of 324% and interest expenses declining by 43%, KKCL has been able to report a YoY growth of 137% in net profit to Rs 6.3 crore.

KKCL has reported margins in excess of 20% for the last two quarters on
account of lower costs, while the revenue growth has been muted. We are maintaining our revenue estimates but have fine-tuned our estimates based on significantly lower costs. This has resulted in the EPS being revised upwards by 47.6% and 51.1% for FY10E and FY11E, respectively.


The stock is trading at 8.8x FY11E earnings of Rs 19.6. It has run up significantly from its 52-week low of Rs 92 (May 14 2009). We believe the current price already factors the improved profitability. We believe KKCL is richly valued considering that larger peer like Koutons Retail, with return ratios of nearly 2x of KKCL, trades at 8x its FY11E earnings. We rate it as

To see full report: KEWAL KIRAN


Buy: 1QFY10 – In-line Results And Healthy Order Inflow

Inline 1QFY10 Results — Nagarjuna Construction’s 1QFY10 PAT at Rs382m grew 3% YoY vs. CIRA estimate Rs366m. Margin increased 229bps to 10.3% and was 187bps ahead of estimates. Revenue at Rs10bn grew 5% YoY and was ~4% below estimates.

Sharp increase in interest costs is a cause of concern — Interest cost increased 45% YoY – a cause of worry as it could be indicative of working capital stress/ more than expected investments into subsidiaries. We await more clarity on this.

Order inflow remains healthy — The company has secured orders worth Rs28.7bn in FY10 so far vs. full year guidance of Rs65bn – a healthy trend in the initial part of year especially given election uncertainities. Though breakup of order inflow is not available yet, we expect international orders to remain muted in FY10 due to general slowdown globally.

Sale of stake in Gautami Power — NJCC has sold its 9.5% stake in Gautami Power to GVK for Rs1.13bn, resulting in capital gain of approximately Rs0.5bn.

Overall a good start to FY10 — Order inflow and margins in 1QFY10 have been strong. NJCC is currently trading at 13x 1yr fwd EPS and we believe that risk reward remains favourable at these levels. Maintain Buy.



Taking stock of results from the trio

There is a lot of investor anxiety, in our view, over the slowdown recorded in sector top-line growth in 1Q results (of Bharti, Idea and Vodafone Essar, which reported key 1Q metrics on Friday). We believe that the street has not been able to gauge the strong underlying trends, however we adjust reported numbers for the termination rate cut and give you a low down of the key underlying trends and compare and contrast the results of three of the largest wireless telco-s in India (See Figure 1 on page 2 for detailed comps).

April – June 2009 quarter was the first quarter after the termination rate cut. TRAI had reduced termination charges for all domestic calls by 33% to Rs0.20 per minute from Rs.30, effective 1 April 2009. As a result, all the reported top lines and gross realisation metrics were under visible pressure.

However, one needs to look at adjusted metrics for gross realisations, along with metrics at the EBITDA level, to really gather the true underlying operational trends.

Bharti delivered strong 4% QoQ top-line growth in 1Q FY3/10E. Bharti reported 1Q wireless revenues of Rs82.3bn (up 19% YoY, flat QoQ). The “muted” sequential growth in revenues is due to reduced termination receipts. If we were to adjust for that, wireless revenue growth was 3.9% QoQ.

Vodafone reported 1Q results, wireless metrics similar to Bharti. The termination rate cut has had a maximum impact on Idea (Rs15), followed by Bharti (Rs12) and Vodafone Essar (Rs11). Adjusted ARPU for Vodafone in 1Q was Rs258 (down 22.4% YoY and 6% QoQ). This compares with Bharti’s adjusted ARPU of Rs290 (down 17.0% YoY and 14.9% QoQ).

Investors should focus on wireless EBITDA metrics to measure growth in 1Q. We believe that given the dislocation caused due to the termination rate cut in 1Q, it is imperative to look at EBITDA-related metrics. Bharti delivered EBITDA per minute of Rs0.19 (+0.1% vs our estimate) beating consensus of Rs0.18 by ~5%. EBITDA per minute for Idea was Rs0.16 (2.3% below our estimate).

Two very significant points a lot of people may have missed in Bharti’s results: impressive free cash generation and substantial debt repayment – Free cash generated in the quarter was Rs15bn (US$310m), stacking up at 6.6% of Bharti’s 1Q revenues. Bharti also repaid Rs22bn (US$ 457m) of debt this quarter. We believe the pace of Bharti’s free cash generation will stun the market in a span of just 3–4 quarters. We forecast Bharti’s free cashflow to be Rs92.67bn in FY3/11E (20% of revenues, 7% free cashflow yield) and Rs113.9bn in FY3/12E (21% of revenues, 8% free cashflow yield).

Reiterate Outperform on Bharti after 1Q results. Bharti is our key Outperform in the MacqTel Asia Pac Telecoms Portfolio and is among the cheapest among the Indian big caps, at a PER of 14x FY3/10E. We note that Bharti is among the two fastest growing Asia Pac Telcos on EBITDA and EPS CAGR.

To see full report: INDIA WIRELESS


Buy: Strong 2Q; Spot LNG Improves Volumes

2Q above estimates — GGas reported 2QCY09 PAT of Rs474m, up 8% yoy and 30% qoq, ahead of our estimates. This was mainly due to better realisations driving higher gas margins, which led to a yoy EBITDA expansion of ~400bps.

PMT impacts gas volumes, partly offset by LNG — GGas distributed 2.7mmscmd of gas volumes in the quarter, 6% down qoq. This was mainly on account of a shortfall in supply from PMT. To partly overcome this shortfall the company procured 0.7mmscmd spot LNG in June, which was supplied mainly to the industrial retail sector.

KG becomes less critical as spot LNG commences — The EGoM has allocated 5 mmscmd of KG gas for city gas. While GGas appears to be a contender for a portion of this, uncertainty prevails given the controversy surrounding eligibility (only for domestic/CNG as per the Ministry but also including industrial as per the PNGRB – pertinently, c.72% of GGas’ sales are to industrial retail customers). To make up for this, GGas commenced procurement of R-LNG in the quarter. With spot LNG prices continuing to remain weak, this should serve as a good supply source to boost volumes in the near-term.

Announces bonus; maintain Buy (1L) — GGas has announced a 1:1 bonus and is our preferred pick amongst city gas distributors given its robust business model (less reliance on APM gas), lower regulatory risk (given reasonable operating margins), leverage to KG gas, and growth opportunities within Gujarat. We maintain our Buy rating with a target price of Rs386. Our CY09- 11E earnings have been increased 9-10% on the back of better realisations.

To see full report: GUJARAT GAS


“ Profitability increases even though utilization declines “
QUARTER ENDED JUNE 2009 RESULTS Great Offshore recorded 22% increase in its revenue for QFY2010 to Rs2,470 million as compared to Rs2,027 million in Q1FY2009. For Q1FY2010, consolidating all the wholly owned subsidiaries viz. Deepwater Services (India) Ltd. (which has inchartered “Badrinath”, one of the two rigs), Great Offshore (International) Ltd. (which owns and operates a modern high end AHTSV) and KEI-RSOS Maritime Ltd & Rajamahendri Shipping & Oilfield Services Ltd. (on completion of all procedural formalities in November 2008) the company's revenue stood at Rs2,657 million, registering a net profit of Rs306 million. In Q1FY2010, revenue from EPC contract stood at Rs350 million.

In Q1FY2010, overall operating costs increased by 10% y-o-y to Rs1,307 million, which grew at lower rate than revenues, resulted in OPM rising by 550 basis points to 47% in Q1FY2010 as compared to 42% in Q1FY2009.

Interest expenses increased by 44% y-o-y to Rs251 million in Q1FY2010. Depreciation expenses increased by 16% y-o-y to Rs298 million in Q1FY2010. PAT increased by 244% y-o-y in Q1FY2010 to Rs413 million, as compared to Rs120 million in Q1FY2009. However, after giving effects of EO (invocation of Performance Bank Guarantee for non-delivery of new build Jack Up rig as per terms of the contract) for Q1FY2010, the reported PAT grew by 85% y-o-y to Rs222 million. PAT margin for Q4FY2009 increased by 1,080 basis points to 16.7% y-o-y.


Lower utilization rates : During Q1FY2010, drilling rigs were fully utilised y-o-y. Of the eligible revenue days, offshore supply vessels registered a utilisation of around 72% y-o-y (previous period 88%). The marine construction barge at a utilisation of 91 % ( corresponding period 58%) worked largely for in-house project execution work while the harbour tugs clocked a utilisation of 91% (corresponding period 72%).

Asset profile: As on July 30, 2009, the fleet comprises 41 vessels ( 2 drilling units, a construction barge and a heavy lift vessel , 26 offshore support vessels and 11 harbour tugs). The Company took delivery of a new build tug during June 2009 and would be deploying the same for Gangavaram port operations. More than 90% of its vessels are on long term charter.

Outstanding Debt: GOL's debt has increased to Rs17,000 million in Q1FY2010 as compared to around Rs12,000 million in Q1FY2009.

Revised open offer by ABG Shipyard: ABG Shipyard has raised its offer for control of Great Offshore by 20% to Rs 450 a share, bettering a bid by rival Bharati Shipyard. ABG bought 1,926,721 shares, or 5.2%, of Great Offshore from the open market at an average of Rs450 a share. With this the total shareholding of ABG shipyard is around 7.3%. Rival Bharati owns 19.5% of Great Offshore and is expected to increase its price from Rs405 to exceed ABG's offer. The two companies have time till August 24 to change their offer price.

To see full report: GREAT OFFSHORE LIMITED


Is the next global liquidity glut on its way?

Some years prior to the crisis, abundant global liquidity and investors’ strong risk appetite boosted asset prices to very high levels. When investors started searching for higher returns in 2003, excess liquidity began to pour into financial asset markets, driving prices up and yields down. At the time when investors were confronted with increased default risk but in turn only received low returns the credit bubble burst, starting in the US mortgage market.

The state of the global economy and financial markets deteriorated dramatically when the subprime crisis turned into a full-blown global banking and economic crisis. Central banks around the world were forced to inject extra liquidity to support the banking sector, the credit channel and the overall economy. Owing to sharply expanding central bank balance sheets, some observers have become worried about the formation of another liquidity glut and
its potential impact on CPI and asset price inflation.

Global excess monetary liquidity has never disappeared but keeps growing. Indeed, global excess liquidity (defined as a rising money-to-GDP ratio) is currently created due to shrinking nominal GDP as well as accelerating narrow money and softer, but still positive broad money supply growth, as central banks support the financial system and the economy.

Despite the presence of global excess liquidity short and medium term risks to CPI inflation appear to be limited because of low capacity utilisation and rising unemployment. However, excess liquidity could still potentially stoke new asset price bubbles. Central banks are aware of this risk and are at the moment preparing post-crisis exit strategies from their current accommodative monetary policy stance.

Given accelerating global excess liquidity creation, it may only be a matter of time until investors become increasingly unwilling to hold liquidity at the current low level of return. Once investors try to reduce their liquidity holdings, asset prices may again receive a temporary boost from global excess liquidity.

To see full report: GLOBAL LIQUIDITY


Continuously excessive exchange rate fluctuations

In this Flash, we will look at the currencies of major OECD countries (dollar, euro, yen, pound sterling, Swiss franc, Australian dollar) and emerging currencies taken as a whole. At different periods, new mechanisms appear that lead to excessive fluctuations in exchange rates, for different reasons:

• before the crisis (2005-2006, first half of 2007), carry trades financed with low
interest-rate currencies (yen, Swiss franc) and invested in higher-interest rate currencies (pound sterling, Australian dollar, emerging currencies, euro);

• in a first phase of the crisis (second half of 2007, first half of 2008), firstly a
flight from the dollar as the crisis broke out in the United States, and a switch into emerging currencies (due to the decoupling theory) and into the euro; appreciation of the yen and the Swiss franc, depreciation of the pound sterling and the Australian dollar due to the end of carry trading;

• in a second phase of the crisis (second half of 2008, first quarter of 2009), safe
haven role of the dollar, significant aversion for emerging risk, fall in commodity prices: the dollar appreciated; emerging currencies and the Australian dollar depreciated; the pound remained weak and the yen and the Swiss franc strong;

• since April 2009, rise in confidence again and prospect of an improvement in the economy; renewed investment in the currencies of countries where the markets believe growth will return faster: emerging countries, Australia, United Kingdom.

The "stories" told in the markets to justify the currency fluctuations are sometimes
far-fetched: there was no reason to doubt that growth would return in most emerging countries, the United Kingdom remains in a tricky situation. However, we can see the huge exchange-rate fluctuations fuelled by the masses of capital shifted around, according to the markets perception. These fluctuations are unacceptable for the countries’ real economies, and are threatening global economic and trade integration.

To see full report: FLASH MARKETS


Worst is over...

On a consolidated basis, Cinemax reported its results for Q1FY10, which
were in line with our expectations. The topline was at Rs 23.51 crore against our estimates of Rs 22.7 crore. It recorded de-growth of 17.5% YoY and 29.6% QoQ. The decline in the topline was due to the 65-day strike between producers and multiplex owners. The EBITDA margin at 2.25%, declined by 1326 bps and 833 bps QoQ and YoY, respectively. During the quarter, the company reported a net loss of Rs 0.58 crore as compared to PAT of Rs 1.0 crore during the last quarter.

Highlight of the quarter

Q1FY10 has been the worst quarter ever for the multiplex industry due to the strike, resulting in a sequential de-growth of 29.6% in topline. During the quarter, the company also closed one of its properties at Faridabad and a food court at Ahmedabad due to legal issues. With this, the total number of properties and screens stood at 24 and 70, respectively. The company sold ~1 million units of windmill generated electricity to state electricity boards and GE. It generated Rs 0.33 crore by selling each unit at Rs 3.35.

At the CMP of Rs 50.6, Cinemax is trading at 15.5x its FY10E EPS of Rs 3.3 and 11.1x its FY11E EPS of Rs 4.5. We value the stock at 12.5x FY10E EPS arriving at a target price of Rs 57. We have changed our rating on the stock from HOLD to PERFORMER.

To see full report: CINEMAX