Tuesday, August 11, 2009


After a breather in June 2009 the markets resumed their upward journey in July 2009 with the Sensex and the Nifty gaining 10.5% and 10.1% respectively. Better than expected first quarter results and positive global cues improved the overall sentiments at the domestic bourses last month. Our portfolio of top picks outperformed the benchmark indices by giving a return of 15.4% led by smart outperformance by consumer goods stocks, Godrej Consumer Products, ITC and Balrampur Chini Mills (the latter two were added in the last month). Apart from the consumer stocks, Shiv-Vani Oil and Gas Exploration Services (Shiv-Vani) was the top performer in the top picks basket with a stupendous return of 32.6% for the month.

  • Apollo Tyres
  • Bajaj Holdings
  • Balrampur Chini
  • Bharti Airtel
  • Bharat Heavy Electricals
  • Emco
  • Godrej Consumer
  • ITC
  • Lupin
  • Reliance Industries
To see full report: TOP PICKS


Take a breather

  • The pros and cons of the FMCG sector are now very finely balanced
  • We downgrade most of our stocks to Neutral; only Nestle is Overweight
We believe it is time for us to lower the Overweight ratings we have had on most FMCG stocks over the last few months. The arguments against the FMCG sector are now as powerful as those favouring it. On the one hand we have robust volume growth, good margin expansion, a cut in expenses, and government spending on the social sector; on the other we have high valuations, lower margin expansion from here on, higher ad-spend, and a weak monsoon.
The tug of war between these forces is evenly poised, in our
view. Investors are enamoured by the “consumption theme” and the performance of the companies is likely to be good, so we do not envisage a steep fall in stock prices. But nor do we expect a substantial increase from these levels, as incremental buyers at these valuations are unlikely to emerge, especially since most investors have already bought these stocks at much cheaper levels. In this report, we downgrade HUL and ITC from OW to N, and upgrade Colgate from UW to N. Except for Nestle, which is OW, all our stocks are now N or N(V).

In this situation, this is what we recommend:

For the next two quarters, most stocks should trade within a narrow range. Hence any sharp moves up may be an opportunity to sell, and vice versa.

Nestle, being OW, is obviously our top pick, and within the Neutral stocks our order of preference is Dabur, followed by HUL and ITC, then Marico and Colgate.

To see full report: INDIAN FMCG


Capital raising plan ahead of timeline
Axis Bank (Axis) notified the stock exchanges that its board of directors
had approved issuance of new equity shares by way of GDR/qualified institutional placement (QIP) and preferential issue to the promoters of the bank. Axis has proposed to issue 71.4 mn new shares (20% dilution) and would likely seek shareholders’ approval through postal ballot. The notification did not provide details of the offer structure, pricing, use of proceeds and the likely timeframe for the share issuance.


We believe the capital raising plan is unlikely to surprise the market and consensus expectation, given the strong loan growth rate that the bank has had in recent years and statements in the past that it may consider potential capital raisings. However, the timing of such an announcement is likely to surprise expectations negatively. Given a Tier I capital ratio of 9.4% as at end June 2009—much higher than the target ratio of 7.5%-8%, we believe the market was more likely factoring in capital raising in 2010E when given current loan growth forecast Tier 1 would approach its target ratio. We await the details for the rationale behind raising such additional capital, however, we can think of some reasons for making such a proposal at this time, including: 1) the bank may be indicating its preparedness to leverage any resumption in growth momentum; 2) intention to diversify into other areas of financial services such as life/nonlife insurance and; 3) the need to strengthen its capital position given its large exposure to corporate banking segment—this could help the bank absorb potential shocks from any adverse loan concentration risks.


We believe the market could get concerned about the potential dilution
impact on EPS in the near term. However, we would not rule out the potential for accretion, depending on how the proceeds will be used. We reiterate our Buy rating and 12-m target price of Rs970, based on GS CAMELOT 3-stage DDM. Risks: significant deterioration in asset quality.

To see full report: AXIS BANK


Time for a good break. We see very little value in most large cap. Indian stocks and do not rule out a 15-20% market correction in case of (1) weak monsoons and (2) global economic weakness. Our last tactical move in mid-June 2009 to a defensive portfolio (select PSU banks, consumers, technology) has also played out with those names having run up over the past 4-6 weeks. In our view, the predominance of macro factors and rich valuations across sectors precludes stock picking currently.

  • Continue to recommend defensive portfolio but even there valuations are rich
  • Minor changes to composite market earnings following 1QFY10 results
  • 1QFY10 results better than expected on an ex-energy basis.
  • Valuations- little room to grow with most sectors at around 20XFY1010E

To see full report: INDIA STRATEGY



  • Net sales down 36.3% YoY to Rs 935.3 Crores
  • EBITDA down by 77.3% YoY to Rs. 167.4 crores - "due to sharp drop in sales realization".
  • PAT down at 75.9% YoY to Rs 126.4 Crores
To see full report: NALCO


1Q10 Results Review: Great Headlines, but Look Beyond Them

The headlines look great, but the fine print doesn’t — 1Q10, at first glance, looks great. Profits are up 56% yoy (highest in four years, 22% ahead of estimates), most stocks (not all) have gone up post results, and in terms of the outlook it appears to be business as usual. We do not believe all is that well. There are qualitative strains, the outlook remains a little uncertain, and operating pressures have risen. While some of these pressures might have peaked, the recovery might be a little slower and less certain than the market is likely extrapolating.

P&L: Fundamentally tough — The sector's profit surge is a trading gains/writeback phenomenon. Excluding these, pre-provisioning profits were down 5% yoy and –16% qoq, the lowest in four years. More importantly, they reflect strains in profit parameters: a) Margins: down a further 20bps (50bps from 3Q09 peak); b) Fees: growth down to +9% (–10% for private banks, third consecutive qtr of decline); and c) Costs: continued high growth, though predominantly for Government banks. The worst is probably over – margins should start firming up – but banks need a strong 2H10 for a quick bounce back in margins.

Balance sheet: Difficult, though under control — The overall balance sheet for the sector probably did better than expected: a) Modest and continued asset quality deterioration, but no alarm bells; b) Increased loan restructurings – actually a doubling to 4% of loans – but largely along guided lines (PNB was the big exception); and c) Loan growth – relatively flat over the quarter, but still up 16% yoy. Managements are relatively measured on asset quality – expect some pain, but generally manageable – and hoping for a 2H10 economic bounce-back, which would provide the growth, asset improvement and P&L support to reverse recent pressures.

Government banks taking the more aggressive approach — The Government banks are now growing faster, lending more aggressively and trading more actively than their private peers. This shows in their relative B/S and P&L trends, but more importantly leverages them even more to the economic outlook. We believe that a real 2H10 recovery would not favor the private banks (on a relative basis), recovery with stable rates would favor Government banks stocks, while a recovery with rising interest rates would tend to be more stock specific.

We believe relatively full valuations are discounting a recovery and would be a little cautious here — Bank stocks seem to be already discounting a recovery in 2H10, which we believe is a little early and would be a little more cautious (though still overweight) here. Preferred picks are SBI, HDFC Bank, Yes Bank and Corporation Bank.

To see full report: INDIA BANKS


Novelis: Volume and product mix drive earnings. Novelis reported 1QFY10 adj. net loss before tax of US$29 mn compared to US$124 mn qoq and adj. net profit before tax of US$40 mn yoy. Adj. EBITDA for the quarter was at US$124 mn (+133% qoq and -43% yoy). Rolled product volumes at 650K tons were lower by 16% yoy and higher by 6% qoq. EBITDA improved across all geographies over the 4QFY09 with Asia EBITDA jumping sharply from US$3 mn to US$38 mn. We maintain our BUY on Hindalco.

Net income reconciliation – Many one-off items
Reported net income before tax of US$273 mn for 1QFY10 is unadjusted for several one-off items such as (1) unrealized gains on fair value of derivative instruments of US$299 mn,
(2) restructuring charges of US$3 mn, and (3) tax litigation settlement in Brazil of US$6 mn. After these adjustments the net loss before tax for the quarter would stand at US$29 mn. Similarly, reported net income for 4QFY09 were also impacted by several one-off items and, as against reported net income before tax of US$62 mn, the adj. net loss before tax would be US$124 mn.

Volumes pick up compared to 4QFY09
Total shipments (incl. rolled products and ingots) for the quarter were 691,000 (+6% qoq and - 16% yoy). Shipments have improved in Asian and North American geographies 1QFY10 compared to the sequential quarter, however, Europe and South American geographies reported modest declines. Key highlights of performance across geographies during the quarter are as follows:

  • Asia reported the sharpest increase in volumes (+51% qoq and -2% yoy) driven by a recovery in demand in China and Korea. Segment net income at US$38 mn (+13X qoq, +23% yoy) rose sharply due to improvements in conversion premiums, conversion costs and foreign exchange measurement, which was partially offset by volume reductions.
  • North American shipments at 254,000 tons (+3% qoq, -11% yoy) continue to see the impact of the economic downturn. Baring the can business volumes, shipments for most other products were below the prior years levels. Segment net income at US$57 mn (+54% qoq, +36% yoy) was lifted by a reduction in conversion costs, improved conversion premiums and a net favorable metal price lag, offsetting volume reduction impact.
  • South American shipments at 81,000 tons (-5% qoq, -4% yoy) were largely stable due to a high presence in the can markets. Can shipments comprised more than 85% of total shipments. Segment net income at US$11 mn (+10% qoq, -77% yoy), were sharply impacted by sharp drop in profitability from the smelting operations which were lower by US$29 mn yoy.
  • European shipments at 185,000 tons (-1% qoq, -32% yoy) continues to see the impact of the economic downturn. Segment net income at US$33 mn (+120% qoq, - 70% yoy) was impacted by lower volumes and metal price lags, which were partially offset by favorable conversion premiums, conversion costs and foreign exchange movements.

Maintain BUY
We believe that better economic conditions in the next two-three quarters will likely result in an uptick in volumes. 1QFY10 adjusted EBITDA was largely impacted by a 16% yoy decline in volumes (resulting in EBITDA decline of US$109 mn).

Traction on account of better price and volume mix and lower costs lifted earnings by US$75 mn and US$40 mn, respectively. Other major items that negatively impacted earnings were metal price lags and metal long positions, which impacted earnings by US$68 mn and US$50 mn, respectively.

To see full report: HINDALCO INDUSTRIES


Research Tactical Idea

We believe the share price will rise relative to the country index over the next 60 days.

This is because of an earnings release. Hexaware has reported stable revenues of US$53.6m (+1.9% qoq) and strong
improvement in operating margins to 18.8% (+650bps qoq, +1891bps yoy). Revenues appear to have stabilized after declining -22% from its peak. We believe current operating margins are sustainable for the company with further room to lower operating costs. Given the earnings visibility, we expect Hexaware to narrow its valuation discount with peers.

We estimate that there is about a 70% to 80% or "very likely" probability for the scenario.

Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario.

Stock Rating: Overweight
Industry View: Cautious


Dip in crude boosts margin…

Asian Paints reported a 17.0% rise in topline to Rs 1164.8 crore in Q1FY10 on the back of higher volumes lead by improved demand conditions in the decorative paints segment. On account of a major dip in crude prices and a simultaneous decline in its derivatives PAN and Penta, raw material costs rose by a mere 9.8%. This resulted in a significant improvement in the EBITDA margin to 21.0% from 15.5%. Depreciation provisioning increased by 29% to Rs 15.0 crore from Rs 11.6 crore in Q1FY09 on account of the capital expenditure undertaken. A higher EBITDA margin resulted in net profit growth of 66.8% to Rs 164.5 crore from Rs 120.0 crore in Q1FY09.

Highlight of the quarter
A significant decline in crude-based raw materials has resulted in a sudden jump in the EBITDA margin to 21.0%. We believe the company would be unable to maintain these margins as crude prices remain volatile.

At the CMP of Rs 1360, the stock is trading at 22.7x its consolidated FY10E EPS of Rs 59.8 and 20.9x its consolidated FY11E EPS of Rs 65. We believe demand for decorative as well as industrial paints is likely to witness robust growth on the back of a gradual revival in real estate and automobile industry. Simultaneously, a significant improvement in the EBITDA margin on the back of a decline in prices of crude derivatives would boost the bottomline for the company. We believe the stock is fairly valued after the recent run up in stock prices. Subsequently, we value the stock at 21x its consolidated FY11E EPS of Rs 65 to arrive at a target price of Rs 1365.

To see full report: ASIAN PAINTS


Higher clinker purchase pulls down margin...

Ambuja Cement’s Q2CY09 results were below our estimates. The company’s reported and adjusted net profit declined by 43.7% and 3.1% YoY due to a sharp decline in margins. Higher clinker purchase pulled down the margin of the company. Ambuja is trading at a steep premium to its peers despite the fact that it does not have the best return ratios and best margins in the industry. Thus, we are maintaining our UNDERPERFORMER rating on the stock.

Highlights of the quarter
Net sales grew 18.2% YoY to Rs 1847.4 crore in Q2CY09, from Rs 1563.5 crore in Q2CY08. The EBITDA margin fell by 360 bps YoY to 26%. Thus, the EBITDA reported a growth of 3.8% YoY to Rs 479.7 crore. The reported net profit declined by 43.7% YoY as the company had an extraordinary income of Rs 314.2 crore in Q2CY08. The adjusted net profit has declined by 3.1% YoY to Rs 324.7 crore.

On a QoQ basis, net sales have remained flat due to a decline in volume on account of plant shutdown. The EBITDA margin fell by 210 bps. The reported and adjusted net profit has declined by 2.4% and 1%, respectively.

At the CMP of Rs 95, Ambuja Cement is trading at 11.4x both its CY09E and CY10E earnings, respectively. On an EV/tonne basis, it is trading at $127/tonne and $110/tonne its CY09E and CY10E capacities, respectively. We maintain our UNDERPERFORMER rating on the stock with a target price of Rs 76 per share.

To see full report: AMBUJA CEMENT


Maintain Sell: Raising Our Target Price to Rs503

PAT 32% below expectations — 2QCY09 PAT at Rs836mn was down 37% YoY on sales growth of -7% YoY and 326bps EBITDA margin compression. Inflows down 4% YoY at Rs21bn and order backlog at Rs76bn up 13% YoY.

Severe price undercutting in the T&D segment — In the transmission segment prices have declined 15-20% since Jan09 and fallen 25-30% in the distribution segment (lower technology and intense competition). With the entry of Korean players there is a panic reaction in market with major price undercutting. Fall in commodity prices will provide some cushion so full impact will not come to the bottom line but margins will be definitely hit.

Earnings revised down 7-8% — To factor in marginally lower sales and structurally lower EBITDA margins in the face of severe competition. We expect ABB to grow EPS at a CAGR of 8% over CY08-11E with average RoE 20%.

Maintain Sell (3L) — We believe that consensus estimates are more aggressive (higher by 5-13%) than ABB can achieve and we find no merit in investors according a CY09E P/E multiple of > 25x when 1) earnings should de-grow in CY09E and 2) RoEs are moving to 20% levels.

Target price increased to Rs503 — Up from Rs380 to factor in 1) our earnings revision; 2) increase in target P/E multiple to 20x (from 15x) earlier; and (3) roll forward of our target multiple to Dec10 from June10 earlier. Our target P/E multiple is set in line with that of Areva T&D and ~ 10% discount to BHEL.

To see full report: ABB

>Crude up on dollar; waits on Fed, inventories

London - Crude oil futures slightly higher, boosted by weaker dollar, but much of the market sidelined waiting for US inventory data and conclusion of FOMC meeting Wednesday. "The US interest rate decision tomorrow will be pivotal for the direction of crude," say analysts at ANZ. Chinese oil import and refining data also lending some upside support. Meanwhile NOAA now tracking three Atlantic weather patterns, although potential for cyclone formation rated between low to medium. ICE September Brent +18c at USD73.68/bbl, Nymex September light, sweet +32c at USD70.92/bbl.


>Crude breaches USD71/bbl ahead of FOMC meeting

Singapore - Crude futures breached $71 a barrel in Asia Tuesday ahead of the U.S. Federal Open Market Committee meeting that starts later in the day.

Oil markets are expecting the FOMC meeting to be upbeat about the U.S. economy, said Ben Westmore, commodities economist for National Australia Bank in Melbourne. "They are likely to have some sort of comment on the (improving) global growth outlook."

At 0640 GMT, the contract for light, sweet crude for September delivery traded at $71.05 a barrel, up 45 cents. September Brent crude on the ICE futures exchange was up 43 cents at $73.93 a barrel.

Crude oil futures have been correlated with equity markets as of late, said Christoffer Moltke-Leth, head of sales trading at Saxo Capital Markets in Singapore. However, he said equity markets were overbought and would likely decline between 15% and 25% this quarter - a correction that could spill over into crude markets.

"The market may test a little bit higher, but in the near term, it likely will fall down to the low $60s," he said.

Meanwhile, crude inventories data from the U.S. Energy Information Administration could provide some direction for the market Wednesday, analysts said.

As demand for distillates such as gasoline remains bearish, U.S. refineries may continue to cut back on processing of crude, creating a further build up in stockpiles, NAB's Westmore said.

U.S. crude inventories rose more than expected in the week to July 31, the EIA reported. Data due this week is expected to show a modest rise in crude stocks, according to a preliminary survey of analysts by Dow Jones Newswires.

ICE gasoil for September changed hands at $615.25 a metric ton, up $4.00 from Monday's settlement.

Front-month September reformulated gasoline blendstock, or RBOB, was up 146 points at 204.20 U.S. cents a gallon. September heating oil was up 140 points at 194.16 cents a gallon.


>Spot gold steady but risks for lower price

London - Spot gold is trading steady Tuesday in Europe after the drop at the start of the week, and traders and analysts said the risk in the short term is for more selling in gold due to the large number of long positions.

Net long positions in traded gold gained sharply recently and, due to the absence of physical buyers, that speculative trade makes it "increasingly dangerous to hold gold or enter the market at these levels," said VTB Capital commodity analyst Andrey Kryuchenkov.

He said the rise in gold last week was due primarily to weakness in the dollar and speculative trade, which makes the metal vulnerable to bouts of liquidation.

The dollar was mildly weaker against the euro Tuesday but remained generally strong. European stocks were higher at the open. The market will watch the comments surrounding the U.S. Federal Reserve meeting beginning Tuesday with an interest rate decision due Wednesday.

At 0848 GMT, spot gold was trading at $947.35 a troy ounce, up 0.3% from Monday's close. Spot silver was at $14.46/oz, up 1.1%. Spot platinum was at $1,250/oz, up 0.5%. Spot palladium was at $270/oz, down 0.7%.

Immediate support for gold is at $940/oz and $945/oz, VTB's Kryuchenkov said. Some consolidation should occur, unless the dollar strengthens further, in which case the price could fall to $925/oz in the near future, he said.

"The risk is lower near term in gold," Barclays Capital said.

Support for gold is around $937/oz and then $921/oz, but if the precious metal trades towards that support, it will attract fresh demand, Barclays Capital said.

UBS said it maintains its one-month gold price forecast at $950/oz.

Longer term, Goldman Sachs said prices will remain around current high levels, consistent with a supportive low real-rate environment.

The SPDR Gold Trust exchange traded fund holdings fell further, down 0.35 metric tons to 1,068.55 tons as of Aug. 10.


>Asia spot gold creeps higher, awaits FOMC

Sydney - Spot gold rose in Asia Tuesday on the back of light buying in light of a steadier dollar, but trading activity was muted before the end of the Federal Open Market Committee meeting Wednesday.

Bullion price direction continues to be dominated by the dollar, and a steadier tone in the currency market after Friday's strong upward move allowed gold to rise off levels close to 10-day lows.

Market participants were awaiting the end of the FOMC meeting, with comment from Federal Reserve Chairman Ben Bernanke on the economic outlook and money supply in focus, said Ronald Leung, director at Lee Cheong Gold Dealers.

The committee is expected to leave interest rates unchanged.

At 0714 GMT, spot gold traded at $947.80 a troy ounce, up $1.20 on the New York close.

Prices are expected to stay in a $930-$960/oz range, with reduced volumes during summertime trading potentially pushing large intraday swings, said RBS head of precious metals Charles Dowsett.

"Volumes in the market are thin due to a lack of interest, so we're likely to get large (price) swings for the time being," Dowsett said, adding gold traditionally rallies toward year end, with prices starting to pick up in September-October in time for Christmas.

In the news, the SPDR Gold Trust exchange traded fund shed a smidgen more from its gold holdings, falling 0.35 metric tons to 1,068.55 tons as of Aug. 10.

At 0723 GMT, spot silver traded at $14.46/oz, up 12 cents. Platinum was up $5.00 at $1,250.00/oz and palladium down $1.00 at $272.00/oz.

On Tocom, benchmark June 2010 gold futures were down Y31 at Y2,962 a gram and platinum futures were also lower, down Y17 at Y3,892/gram.