Sunday, August 16, 2009


Poor show...

Bharat Forge (BFL) surprised us by reporting a substantial 44.8% degrowth in standalone net sales to Rs 351.6 crore. It was badly hit by a 41.2% fall in domestic sales and 52% fall in export revenues. Margins further slumped by 70 bps from Q4FY09 to 20.9% (24.5%in Q1FY08). This
was mainly on account of a 400 bps rise in the staff costs to sales ratio. Higher finance costs further arrested the bottomline. It plunged by 96.3% to Rs 96 lakh as against profit of Rs 26.6 crore (Rs 61.1 crore in Q4FY09). On a consolidated basis, net sales slipped 53.6% to Rs 1,311.3 crore while at the net level, the company went into the red with a loss of Rs 46.1 crore as against profit of Rs 40.9 crore in the corresponding period. As the company’s standalone profit has been eaten by its subsidiaries and the trend continued in Q1FY10, we are revising our sales estimates and profit estimates downward for FY10E on a consolidated basis. However, improving sales from a changing product mix would support higher sales and profit for FY11E. Revised consolidated EPS for FY10E would be at Rs 4.4 (down 18.4%) while for FY11E it would be at Rs 9 (up 17.2%).


Poor exports and a lingering domestic market provide a bleak outlook for the current year. However, we expect the same to improve next year. Furthermore, multi-year order intake of $25 million from General Motors (reviving out of bankruptcy) and proposed venture with Alstom for power equipment with revenue guidance of Rs 1,600 per annum post FY12 provides a silver lining to the dark cloud. The proposed revenue inflow and expected recovery in domestic and export demand in FY11 emphasises comparatively higher multiples for the company. Accordingly, we value the stock at 20x its consolidated FY11E EPS of Rs 9, to arrive at our target price of Rs 180. Since the stock has run up in the last few days, at the CMP of Rs 241 we reiterate our UNDERPERFORMER rating.

To see full report: BHARAT FORGE


Reviving up for demand revival; new Buy

Initiate with Buy; PO of Rs423 implies 44% upside
Cummins India (CIL), a subsidiary of Cummins Inc, is a play on (1) rising demand for diesel genset (26% of FY09 sales) driven by growing need for uninterrupted power, (2) rising demand for engines (14% of FY10E sales) for industrial m/c led by infra sector, and (3) rising demand for CNG (compressed natural gas) engines driven by rise in natural gas supply, which is relatively cheap.

We expect CIL to re-rate to 15x P/E FY11E from 10.4x now, driven by increased visibility of 38% EPS growth in FY11E following a 13% drop in FY10E. Sustained QoQ sales recovery as seen in the Jun-09 quarter will be a key re-rating trigger. Our FY11E EPS is 41% higher than consensus led by cyclical recovery in exports.

Stronger domestic sales in Jun09 Q driving bullishness
We expect domestic sales of engines (40% of FY09 sales) and spare parts, including miscellaneous service (22% of FY09 sales), to be key earnings drivers going forward. We expect domestic sales to grow 17% in FY10E and 22% in FY11E on faster GDP growth. Recovery in domestic engine sales is evident from 44% QoQ growth in the Jun-09 quarter, after the sharp decline in Sep08-Mar09.

Exports decline hurts FY10E, but cyclical recovery ahead
CIL could report YoY EPS decline until Dec 2009, despite a QoQ recovery. This could be due to the over 60% plunge in exports (38% of FY09 sales). However, we expect exports to recover in FY11E given that (1) channel inventory reached trough level in Jun09 Q, (2) CIL exports typically recover after one year of decline and (3) We at BAS-ML expect Global GDP to rise 3.7% in 2010 vs -1% in 2009.

Key downside risk is adverse macroeconomic condition
There is a strong correlation between industrial growth and CIL’s P/E. It trades in a P/E band of 13-22x during the phase of 8-12% IIP growth. Thus, weak macro economy is a key risk to our PO based on P/E of 15x FY11E earnings.

To see full report: CUMMINS INDIA


Shift of global capital flows (towards Asia) and public debts in OECD countries: Towards an inevitable crisis?

Asia’s attractiveness for capital will pick up very significantly after the crisis: vigorous growth - whereas growth has decelerated in OECD countries; development of domestic demand, infrastructure construction programmes; growth in the size of financial markets and banks; improvement in the perception of emerging risk and deterioration in the perception of risk related to OECD countries.

This means that Asia will become more and more attractive for private capital, and that Asian savings will increasingly be encouraged to remain invested locally. At the same time, public debt in OECD countries will rise considerably. We can therefore see the risk of an imbalance between the sharply increased supply of public debt and fading demand for OECD
countries’ public debt, to the benefit of financing of investments in Asia.

To see full report: FLASH ECONOMICS



Strength of rebound to surprise…
Second quarter data continue to suggest that the pace of contraction in activity has slowed markedly since the precipitous pace of decline in the first quarter. This sets the stage for a return to positive growth rates in Q2. US economic evidence for example continues to surprise on the upside, with demand for housing and autos in particular rising above expectations. Consensus expectations for the US in H2 are shifting higher towards to 2-2.5% range. We see potential for even stronger growth as the inventory cycle alone could add 1.5% in GDP in H2. It’s a similar story in the euro area, where the success of car incentives is coming on top of the cyclical rebound in inventories. We continue to think that the strength of the recovery in manufacturing H2 will come as a surprise to the markets and will strength expectations that central banks will be heading for the exit early next year.

…but rate hike speculation premature
In contrast both the ECB and the Bank of England struck a more cautious tone last week largely on concerns about what happens after the inventory-led bounce in manufacturing. These are concerns that to a certain extend we share. So far the consumer has been supported by falling inflation leading to a resilient consumer outturn in H1. However these trends are about to turn around which will put pressure on consumer spending power in H2. Without a self sustaining recovery in consumption, activity risks falling back next year. As such, expectations of early interest rate rises by the Fed and the ECB look set to be dashed next year even if the market is increasingly moving in that direction in the short term.



Momentum turns down

After a day of distribution the Indian stock market ended the session on negative note. Further persistent selling was seen at higher levels all through the day. Today’s negative close marks the end of the pull-up, and may be from Monday bears will take over the market. The 20- and 40-hourly averages are packed at 4517 and 4539 respectively, below which the fall will gain momentum. The daily KST continues to maintain downward bias. The overall market breadth was almost neutral with 633 declines and 600 advances on the NSE.

The hourly KST has turned down with negative crossover, which is a weak sign for the market. Our short-term bias is down for the target of 4325 with the reversal placed at 4732. However, our mid-term bias is still up for the target of 5000 with the reversal packed at 4325.

The Sensex ended the day 106 points lower and Nifty closed 24 points down. The BSE MIDCAP also closed 0.09% lower. However, the BSE SMLCAP closed 0.40% up. Bar energy
sector all showed some buying interest, all other sectors witnessed selling. From the 30 stocks of the Sensex ONGC (up 5%) and Reliance Infrastructure (up 1%) led the pack of gainers, whereas Jaiprakash Associates (down 4%) and Hindustan Unilever (down 3%) led the clutch of losers.

To see full report: EAGLE EYE 170809


High interest hits bottomline…

Koutons Retail’s Q1FY10 results are better than our expectations in terms of profitability. The company reported net sales of Rs 201.8 crore against Rs 157.8 crore in the corresponding quarter of the previous year, 27.8% growth. This was due to a 23.7% YoY rise in retail space under operations. The EBITDA margin improved 405 bps to 23.8% in Q1FY10 against 19.9% in Q1FY09 on account of more than proportionate reduction in other expenses. The net profit grew to Rs 11.5 crore against Rs 10.3 crore in Q1FY09, a meagre 11.7% growth YoY due to high interest cost (107% YoY increase).

Highlight of the quarter
• Koutons Retail added net 0.25 lakh sq ft in the quarter taking the total space under operations to 12.92 lakh sq ft

• A total of 35 stores were closed during the quarter

At the CMP of Rs 398, the stock is trading at 10.6x and 7.7x its FY10E and FY11E earnings, respectively. We remain positive on the asset-light business model of the company. However, we expect the margins to be under pressure in the coming quarters due to the current macroeconomic scenario and weak consumer sentiments, where we are cautious. We maintain our target price of Rs 505 per share with an OUTPERFORMER rating, valuing the
company at 10x its FY11E earnings of Rs 50.6 per share.

To see full report: KOUTONS RETAIL



Key Copper Market Developments:
• The strength copper prices enjoyed throughout the better part of June was maintained throughout July, as after modest consolidations in the first half of the month, the spot price trended upwards over the second, peaking at $5,750/tonne at end-month, a 9% gain over June’s peak of $5,266/tonne. More recently, further gains have seen prices top $6,000/tonne, for the first time this year, during the first few trading days of August.

• Concerns over tight supply conditions that could eventually fuel a shortage of metal continued to underpin the market, prompting investors to maintain and in fact extend their exposure on the metal. Coupled with healthy demand in China, this more than compensated what we perceive to have been a continued weakness of consumption in the majority of mature economies.

• Looking at reported stocks and focusing on LME inventories, although the month saw these increase on a net basis, at 16,400 tonnes, this offset only a small part of the decline stocks suffered over the first half of the year. At end-month, LME inventories stood at 282,125 tonnes, amounting to just over one week’s Western World consumption.


Key Aluminium Market Developments:
• After a subdued first half of July many market participants have been caught by surprise by the strength and speed of the rally for a metal, which at all times during this rally, has seen record, and rising, LME stocks. This trend has accelerated in the last few days of July, with cash prices ending July at an 8-month peak of $1,864/tonne on 31st July. At the start of August prices have rallied further, exceeding $2,000/tonne for the LME cash price on 5th August.

• This steep increase in the aluminium price also represented the largest percentage increase of all the six LME metals, quite a turnaround for what has often been the laggard of the complex in recent years. Indeed, the cash price is now 61% higher than the lows of late February.

• One supportive factor for the bullishness across base metals was the Chinese macro view,
particularly following the Chinese announcing that Q2 GDP was up 7.9% year-on-year.

• More importantly for aluminium, at least in the short term, is the continued inflow of primary metal into China over the past few months. Chinese import data for June showed that 267,681 tonnes of primary aluminium flowed into China, the second highest level on record.

• Meanwhile data from many of the developed markets was also more supportive than for many months, as the statistics were up month-on-month, even if still down heavily year-on-year. A prime example was North American aluminium mill products were up 5.8% in May from April. Noticeably the previously hard hit extruded products sector which experienced a substantial recovery as shipments jumped 10.1% to 221.7m lbs in May, from 201.5m lbs in April.


Key Nickel Market Developments:
• Nickel prices in July represent a vast improvement on levels seen earlier in the year. The July monthly average at $15,984/tonne is almost 7% up on June and 64% higher than the March low of just under $10,000/tonne. More recently, on July 31, the spot price climbed by $775/tonne in the space of one day to $17,625/tonne, breaching levels not seen since Q3 last year. Further sharp gains have been seen in early August, with cash prices exceeding $20,000/tonne for the first time in almost a year.

• The fundamentals have had little to do with nickel’s progress, and instead it has been the investment community that has been setting the direction for prices, encouraged by the increasing perception of a recovery in economic activity and the stainless steel sector in particular. These investors were buoyed by the latest PMI data, especially from the US, with the ISM manufacturing index for July up by 4.1 to 48.94. This was the slowest pace of contraction since August 2008.

• Stocks on the LME have recently started to show some support falling by around 3,800 tonnes to 105,864 tonnes on August 3, after having reached a one-month high of 109,716 tonnes on July 9. However this figure, by historical standards still represents a very large stockpile. LME inventories represent 7.1 weeks of “Western World” consumption, which is the second highest stock/consumption ratio among LME base metals.


Key Zinc Market Developments:

• Zinc prices maintained and in fact expanded their gains over the course of July. Having started the month in the mid-1,500s, prices suffered a correction in the first half of the month that saw the spot price bottoming at $1,461/tonne. From then on, the price trended upwards to an end-month $1,748/ tonne, which marked a fresh year-to-date peak (breached again by recent advances over $1,850/ tonne). The average price for the month, at $1,579/tonne, was virtually unchanged from June.

• Investor interest has continued, in our view, to be the principal driver of the strength prices
have enjoyed recently. In line with the wider base metals sector, optimism over the prospects of consumption recovering has supported the rally. The metal’s fundamentals on the other hand remain uninspiring and, similarly to the wider complex, talk of ‘green shoots’ has yet to translate in any material recovery in galvanized steel demand and by implications zinc consumption.

• Looking at the LME inventory growth of July, the market seems to still be in surplus. Specifically, stocks rose by 54,575 tonnes over the month to reach 407,950 tonnes, equivalent to a little over three weeks’ Western World consumption. Interestingly, the bulk of the rise in LME stocks took place in the last week of July, as price broke through the $1,700/tonne barrier. There were further additions to LME stocks in early August, but again did not stop further price gains to over $1,850/tonne.


Key Lead Market Developments:
• Prices have surged over recent days, to $1,949/tonne on August 3, representing the highest level since September 2008. We continue to believe that prices are way ahead of the fundamentals, with demand in the mature economies remaining weak and production recovering in China.

• Consequently, this latest surge is difficult to justify on real supply/demand grounds and is largely due to intense speculative buying on the exchanges. We also believe this speculative activity was at the forefront of the strength in prices through June and July, with the monthly average largely unchanged on the previous month, at $1,679/tonne in July from $1,674/tonne in June.

• LME stock levels have picked up over past couple of months in line with the onset of the summer slowdown, increasing by 11,650 in June and around 15,500 tonnes in July. This trend may continue over the near future, taking into account the fact that we are entering a traditionally weak period for lead demand and there have been significant restarts of previously idled capacity in China. Having said this, at 110,550 tonnes on August 3, stocks still remain relatively low in comparison to the other base metals at just over one week’s consumption.

• Lead was also boosted in the closing days of July by news that the US scrappage scheme had completely been utilised in just 7 days, and that Congress was looking to extend the package.

6. TIN

Key Tin Market Developments:

• Having fallen to $12,450/tonne on July 10 – residing to levels last noted in late April – from the year-high of $15,725/tonne on June 10, the cash quote has picked up and at present is trading above $15,500/tonne in early August. The increases seen in recent days are the result of positive economic data, coupled with improving financial markets.

• Nonetheless, out of all of the base metals on the LME, tin was the only metal to see its July monthly cash quote, which came in at $14,039/tonne, fall m-o-m, by 6.3%.

• The intensity of the speculation has been highlighted by the movement of spreads between the cash and three month price. The premium for cash material over three months on 6th August for example was $305/tonne, which compares to around $40/tonne in mid-June. The premium is even larger when compared to contracts dated further out.

• Indeed, the tin market, for some time now, has been in backwardation suggestive of the market being in a short-term deficit. However, this seems at odds with the current market situation, particularly as it is widely perceived to be over-supplied. Stocks on the LME increased by 1,275 tonnes over July to end the month on 18,405 tonnes, which largely reflects the weakness in demand more than a pickup in supply, although Chinese production is increasing. Nevertheless, at least for prices, it can be said that the pace in the acceleration of stocks has slowed down in comparison to the previous month when they surged by 2,650 tonnes.

To see full report: BASE METALS


Goldman Sachs sees Year-end Rally on Wall Street - by Gary Dorsch, Editor

Wall Street has entered a new bull market, and the S&P-500 index could rise as much as 10% from current levels by the end of this year, declared Abby Joseph Cohen, the head of Goldman Sachs’ investment policy committee, on August 6th. Goldman Sachs, the most profitable firm on the street, predicts the S&P-500 will climb into a range of between 1,050 and 1,100 toward year-end, said Cohen.

Since hitting a 12-year low in early March, the S&P-500 index has rebounded 47% from a low of 666-points in March, to above 1,000 this week. “We do think the new bull market has begun. It may prove it began in March of this year,” Cohen said. If correct, a 10% advance for the Dow Jones Industrials will lift the blue-chip indicator towards the psychological 10,000-level, a level first reached in 1997.

Hopes for a summer rally on Wall Street are bolstered by the astounding rebound in the US Purchasing Manager’s Index (PMI), an indicator which measures factory activity. The Factory PMI rose sharply to a reading of 48.9 in July, up from 44.8 in June, and new orders jumped to their highest level in two-years, mirroring improved readings in the industrial sectors in China, Europe, Japan, and Mexico, helping to send global stock markets sharply higher. The PMI has recovered to levels that prevailed before the collapse of Lehman Brothers and the ensuing global credit crunch.

US wholesalers are ready to replenish their inventories, and go on a spending spree, according to the latest reading on second-quarter GDP. US-businesses whittled down their inventories of unsold goods by $141-billion in Q’2, a record pace.

To see full report: MONEY TRENDS


Gaining weight

To see full report: INDIAN FINANCIALS


India Likely To Send Tax Notice To Vodafone Unit –Official — India is likely to send a notice to a Vodafone Group PLC unit asking it to explain why it shouldn't pay up to US$1.8 billion-US$1.9 billion in taxes, an official at the country's tax department said Tuesday. The notice, which will likely be sent within a month, will also ask Netherlands-registered Vodafone International Holdings BV to explain why it didn't comply with the country's tax norms while buying a stake in Hutchison Essar, Prakash Chandra, the director general for international taxes, said. "We are drafting the showcause notice. We hope to complete that process very soon," Chandra told Dow Jones Newswires. The move comes nearly seven months after the country's Supreme Country declined to hear an appeal by Vodafone International, which was contesting the right of India's authorities to impose tax on a deal completed overseas. Wall Street Journal

TOT, True both launch 12Mbps broadband Internet — TOT president Varut Suvakorn said the company had launched 12Mbps and 8Mbps services - with a monthly charge of Bt1,500 and Bt1,000, respectively - to meet the demand for faster Internet speed. TOT plans to invest Bt3.4 billion to improve its broadband Internet network until next August, as highspeed Internet will be a major revenue earner in the near future, he said. TOT still targets 1 million broadbandInternet subscribers, despite a reduction in service charges and faster connection speeds offered by competitors. It currently has 800,000 subscribers. True Corp, meanwhile, has introduced a 12Mbps service and offers free use for two months to subscribers currently using its 8Mbps network. The new service is expected to cost Bt1,699 per month. Bangkok Post

To see full report: ASIAN TELECOS