Thursday, August 13, 2009

>Asia spot gold up with base metals

Sydney - Spot gold prices rose in Asia Thursday, boosted by strong gains in base metals, as London Metal Exchange copper prices rose by 2.6%.

To make more headway and to break resistance in the $960 a troy ounce area, gold would need further dollar weakness, market watchers said.

"The inverse relationship with the dollar is quite strong at the moment, so that's the main driver," said Adrian Koh, analyst at Phillip Futures in Singapore.

At 0626 GMT, spot gold traded at $952.20/oz, up $5.00 on the New York close, and the euro stood at $1.4261, up from a low of $1.42 earlier in the day.

While gold was up, prices are still essentially rangebound at $930-$960/oz, said Charles Dowsett, head of precious metal trading at RBS.

LME metals were strong across the board, and LME copper hit a new 10-month high of $6,350 a metric ton, up 2.6% compared with the previous afternoon kerb.

Base metals accelerated during the day following the end of the Federal Open Market Committee meeting. The Fed said it saw signs of the U.S. economy leveling out, providing a boost to commodities.

Spot platinum benefited more strongly from the rise in industrial metals' prices given their primary use in autocatalytic converters.

Platinum traded to an intraday high of $1,257/oz, up $18.

Markets reacted calmly to the Fed's decision to let its Treasury purchase program expire once it runs through the $300 billion it pledged to help keep consumer borrowing rates low.

At 0645 GMT, spot silver traded at $14.65/oz, up 22 cents. Platinum was up $13.50 at $1,252.50/oz and palladium was $1.00 lower at $270.00/oz.

On Tocom, benchmark June 2010 gold futures settled up Y45 at Y2,955 a gram; platinum futures were also higher, up Y106 at Y3,887/gram.




Net Sales increase marginally: For 2QCY2009, Wockhardt reported Net Sales of Rs954.2cr (Rs910.3cr), which were up 5% yoy. As per ORG-IMS, Wockhardt’s domestic formulation business grew by 9% during the quarter, and currently ranks 15th in the market. The company’s Europe business grew by a mere 3% during the quarter, with sales from Pinewood and Negma flat yoy, and sales from the UK growing by a healthy 11%. Further, the US business of the company grew by a strong 24% during the quarter, and now contributes 19% of the Total Revenue. Wockhardt received 7 ANDA approvals till Q2CY2009, and has launched 64 products in the US. For 1HCY2009, the Net Sales were up by 5% to Rs1,817.4cr (Rs1,731.5cr). During the quarter, the company has also entered into a definitive agreement to sell Esparma (its German business), Animal Healthcare and the Nutrition business, in order to raise funds for debt repayment by divesting the non-core businesses.

Operating Margin contracts: For 2QCY2009, the OPM of the company contracted by 561bp to 17.6% (23.2%). This was primarily on account of a fall in the Gross Margin by 1106bp to 54.3% (65.4%). However, Employee and R&D expenses de-grew by 10% and 36%, respectively. For 1HCY2009, the OPM was down by 470bp to 19.2% (23.9%).

The Bottom-line plunges in the red: Wockhardt reported a Net loss of Rs189.9cr (Profit of Rs105.8cr), on the back of Rs255.3cr MTM losses. We are negatively surprised by the quantum of the MTM losses, given the fact that the Rupee has appreciated by 5.6% during the quarter and, during the last 2 quarters, the company has cumulatively booked Rs500cr on the MTM front. For 1HCY2009, Wockhardt reported a Net loss to the tune of Rs200.1cr (Profit of Rs156.7cr).

To see full report: WOCKHARDT



UML came out with its 1QFY10 result which was dismal at operating level. However, the Company maintained its non-operating expenses (depreciation, interest cost) at lower levels during the quarter. Performance of domestic business was quite subdued primarily due to lower realization as well as high cost of raw materials. All the subsidiaries, however, performed well, despite lower sales volume, with significant improvement in margins. We are positive on the business outlook of UML and expect the Company to perform better from
2QFY10 onwards. Maintain 'Buy'

UML (standalone) 1QFY10 performance
UML reported 17% y-o-y fall in net sales primarily due to fall in realizations of steel products. EBITDA was down 46% y-o-y due to higher cost of raw materials. EBITDA margin fell from 27% in 1QFY09 to 18% in 1QFY10. Net profit fell even by a higher percentage of 76% mainly due to higher tax rate. EPS for the quarter stood at Rs.0.5 compared to Rs.2.3 in 1QFY09.

Subsidiaries performance
Subsidiaries performed well during 1QFY09 and compensated to the dismal performance of standalone business. Despite 2% y-o-y fall in net sales, EBITDA and net profit increased by 40% and 122% respectively during the quarter primarily due to higher realization of value added products and lower tax rate. The calculated EPS for the quarter stood at Rs.0.7 compared to Rs.0.3 in 1QFY09.

To see full report: USHA MARTIN



We raise our FY10E NAV estimates for Unitech to Rs238bn or Rs91/share from Rs126bn or Rs66/share on the back of: i) pick-up in volumes due to revival in midincome housing, ii) reduction in WACC to 14.6% from 16.1% and iii) Rs40bn fall in net debt. Unitech has raised Rs54bn from QIPs and warrants and another Rs10bn from asset sales; this has resulted in a clean balance sheet, decrease in interest burden and better funding for project launches. However, we believe these positives are factored in current stock price and, hence, downgrade Unitech to SELL from Hold with target price of Rs73/share (20% discount to NAV of Rs91/share). We believe Unitech’s execution ramp up is aggressive and, given its past execution record, difficult to achieve. Further, the company’s net debt has reduced Rs29bn despite Rs54bn capital infusion, implying working capital requirement remaining high. Unitech trades at FY10E & FY11E P/E of 21.7x & 18.9x respectively and P/BV of 2.2x; downgrade to SELL.

Expensive valuations. We raise FY10E NAV to Rs238bn or Rs91/share from Rs126bn or Rs66/share owing to pick up in volumes (revival in mid-income housing), 150bps reduction in WACC to 14.6% from 16.1% and decrease in net debt by Rs40bn (the company raised Rs54bn from QIPs and warrants). Unitech’s FY10E BV increased to Rs40.5/share; the stock trades at P/BV of 2.2x.

Aggressive pipeline. Unitech plans to launch 30mn sqft in FY10E (90% residential & 10% non-residential) across 40 projects in 22 cities, including ~100 acres/year in Mumbai. We believe the plans are aggressive, given Unitech’s past execution track record and difficult to achieve.

Easing liquidity. Post QIPs, warrants issued and asset sales, Unitech raised Rs64bn; we expect the company’s FY10E net debt to reduce to Rs50bn from Rs90bn. We believe that Unitech will continue to raise further cashflows through asset sales (hotel/office properties) going forward.

Unitech’s Q1FY10 results in line, but below Street. Revenues rose 34% QoQ to Rs5.1bn (I-Sec: Rs4.8bn); but, PAT dipped 44% QoQ to Rs1.6bn (I-Sec: Rs1.5bn). YTD, Unitech has sold 7mn sqft and launched 16.5mn sqft; it plans to launch 30mn sqft (40 Projects across 22 cities) in FY10. Unitech is focussing on mid-income housing (ticket size of Rs1-5mn) under the brand name Unihomes; the company expects the segment to contribute 70% to revenues going forward.

To see full report: UNITECH


Discontinuing Coverage

We are discontinuing coverage of Shoppers Stop due to a reallocation of analyst resources.

The firm's last recommendation for the security is Sell/High Risk, and our target price is Rs66.

This is our final rating on Shoppers Stop; we will not provide updates to our research or ratings. You should not rely on this or previous research with respect to this company going forward.

To see full report: SHOPPERS STOP


Research Tactical Idea

We believe the share price will rise in absolute terms over the next 30 days.

This is because the stock has traded off recently, making short term valuation much more compelling. This follows our recent upgrade of the stock to EW. Moreover, earnings yesterday were a mixed bag. Non interest income and subsidiaries performance were clear positives. However, NIM and asset quality progression were negatives. Given the recent underperformance, we think the stock may do well in the near term - hence, for a short-term trade, we would be buyers of SBI.

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: Equal-weight
Industry View: In-Line


Sell: Subsidy Sharing – What’s On The Government’s Mind?

Upstream vs. consumer on auto fuels — The government has announced plans to constitute a committee to fix the subsidy mechanism. A telescopic sharing structure on auto fuels could be one of the options, where upstream share increases progressively with crude px. We build various workable scenarios with the upstream share rising gradually to as much as 100% of incremental losses at crude >$85/bbl. Such scenarios could lead to ONGC’s FY10E EPS peaking at ~Rs135 according to our analysis, without factoring in meaningful downside risks from higher diesel cracks and/or possible review of LPG/SKO exemption.

Scenario I — In this scenario, we assume upstream bears a lower (25%) share of auto fuel losses at lower crude (US$60-75/bbl), a higher (50%) share between US$75-85/bbl, and 100% at >US$85/bbl. This presumes the remaining share is borne through consumer price hikes. We estimate this could lead to FY10E EPS of ~Rs125-139 and resultant net realisations of US$58-62.

Scenario II — ONGC’s FY10E EPS could be ~Rs115-125 if upstream bears 50% of auto fuel losses at crude <$85/bbl (net realisations of US$55-57). We also build a Scenario III with complete price deregulation (i.e. no sharing) until $75/bbl and 100% sharing beyond that, although this appears extremely unlikely (FY10E EPS could be ~Rs130-160).

Don’t forget the diesel spreads — We assume flat diesel cracks i.e. a $1 increase in diesel for every $1 of crude. This is rather simplistic especially if a further rise in crude is led by a pick up in distillate demand. A $2 increase in diesel crack from present levels could increase losses substantially, shaving ~Rs5-6 off FY10E EPS in scenarios I and II above. Besides, exemption from LPG/SKO subsidy for upstream needs to be reaffirmed more widely within government.

To see full report: ONGC


Cognizant Q2: Another “Beat and Raise” Quarter

Good Q2; CY09 guidance raised — CTSH reported $777m in revenues (+4% qoq) ahead of consensus at $764m. Q3 revenue guidance of at least $800m (~3% qoq) is also ahead of Street expectations ($783m). CTSH also increased its CY09 revenue guidance to “at least” 11.5% yoy growth (earlier “at least” 10%).

"Full quarter of stable budgets" — CTSH indicated that this was the first full quarter where IT budgets were stable; clients started spending as per plans. Application development increased ~4% qoq – inline with application management. The company indicated that a large part of the pipeline was cost containment kind of work and was cautious on development in the near term.

BFSI stable, Healthcare continues to do well — BFSI stabilized – in core banking, some growth in America/Continental Europe was offset by decline in a couple of UK banks. Healthcare continues to be a growth driver – increased ~8% qoq and is now ~26% of revenues. Retail and logistics had another good quarter (~8% qoq).

Pricing stabilizing — On pricing, management was confident that the downward trend was largely over; pricing should be stable sequentially over the rest of CY09. Management indicated that this would be ~3-5% decline yoy; however, most of that has already happened in 1H.

How does it compare to outlook given by Indian peers — (1) Stable demand/IT budgets. (2) Better pipeline. (3) Stability in BFSI. (4) Weakness in technology/manufacturing – comments similar to Indian peers. On pricing, Infosys/TCS had indicated that they would not rule out some customers renegotiating prices again – CTSH was confident about future stability.

Earnings upgrades the key to further upside – prefer Infosys/TCS — As highlighted post earnings season for Indian IT, business seems to have stabilized – the big question is the pace of recovery. However, Indian IT stocks are already close to pre-slowdown multiples. Any further up move in stocks would require meaningful EPS upgrades/positive news. We continue to prefer Infosys/TCS.

To see full report: IT SERVICES


Earnings-driven market rally led to resumption of strong inflows

An exceptional summer doldrums — Better-than-expected results have driven global markets up 11% over the last three weeks and reignited foreign interest of buying “growth” Asia. As per the EPFR data, net inflows to offshore Asian funds totaled US$2.7bn this month with 93% coming in the past two weeks. This is the 2nd biggest summer inflows in history after some US$6b recorded in July 07.

The potential buying power of Global funds — Among the three fund groups that have investment in Asian markets, Global funds are the lone ones holding above average cash weights of 3.7%. They are currently 29bp overweight Asia versus some 160bps in Jan 2007. They used to overweight Asia by 220-350bps during 2003-2005 with average cash weights around that time at 3.1%. Comparing these with their current position suggests Global funds could potentially add US$15b to Asian equities if they turn aggressively bullish.

Consensus Asian funds still positioning for a weaker USD — While Asian funds remain largely overweight Diversified Financials and Materials, they have gone 150bp further underweight the Tech sector with Semis still being the least-favored among three. Sector weights in Banks are at a new high of 17%, narrowing the bank underweight to just 106bps compared with 373bps in October 2008. Real Estate is likely to be the source of funding of the move.

To see full report: FUN WITH FLOWS


Retrospective – July 2009: A Month of Consolidation

Despite underperforming emerging markets and other global indices for the second consecutive month in July, India continues to be the second best-performing emerging market year to date. India’s performance ranking rose to 16th position in July compared to 19th in June. While the performance of the large-cap index was in line with the small-cap index, it underperformed the mid-cap index for a second successive month.

The following were notable market indicators in July:

• Technology was the best-performing sector in July for the second consecutive month while Telecoms was the worstperforming
sector. Consumer Discretionary and Telecoms were the best- and the worst-performing sectors on a 12- month trailing basis. Sector rotation was low with only two sectors changing direction of relative performance MoM.

• FII flows in the cash market were positive for the fifth consecutive month. FIIs turned buyers of derivatives after two
months of selling. Domestic insurance companies were buyers for the second consecutive month. Domestic mutual funds have now been net buyers for five straight months.

• Market activity was dull with trading volumes in the cash market down 21% (after touching an all-time high in June), intra volatility at a four-month low, breadth weaker by 36% MoM, and close to no change in delivery volumes and open interest. The exception was the surge in derivative market volumes, which breached an 18-month high.

• The yield curve steepened by 55bp MoM and touched an 11-year high. The 10-year bond yield rose 14bp MoM and touched an 8½-month high while the 91-day yield fell to its lowest level since1993 to 3.23%.

• Aggregate consensus EPS growth estimates for the BSE Sensex constituents were revised upward for the third
consecutive month to 3% and 18% in F2010 and F2011, respectively (from previous forecast of 1% and 19%).

• Credit growth was lower than deposit growth for a sixth month in a row. Credit growth decelerated to a five-year low.

To see full report: MONTHLY REVIEW