Tuesday, September 1, 2009


Refining margins remained weak for most part of 2009, primarily driven by global economic slowdown. IEA expects oil demand primarily driven by global economic slowdown in 2009, to about 83.8mbpd down 3% yoy, fastest decline since the early 1980s. The decline has happened at the time when refininf capacities hace increased substantially, especially so in Asia. With countries such as India, fast emerging as an export hub, and Cina aiming to increase its domestic capacity utilization, a supply glut is inevitable. Falling heavy-light and sour-sweet spreads have further impacted complex refiners. We believe, the downturn in the sector would extend in the sector would extend to early part of 2010 before any meningful bounce back. Till then the valuations of pure refining companies should continue to reel under pressure. Nevertheless CPCL remains our top pick in the sector.

  • Near term demand outlook remains weak
  • Supply glut inevitable
  • Valuations to remain under stress
To see full report: REFINING SECTOR


Results disappoint; Corus realisations surprise positively

Q1FY10 performance below expectations
Tata Steel’s Q1FY10 consolidated performance came in below expectations with no benefit of a partial reduction in operating costs and higher-than-expected interest and depreciation costs at Corus. Consolidated EBITDA/tonne stood at ~USD (1) as loss at Corus of USD 117/tonne set off positive EBITDA of USD 252/tonne of the Indian operations. Full year cost savings under the “Weathering the Storm” initiative are pegged at ~USD 1.2 bn, of which, USD 460 mn was achieved in Q1FY10; overall, USD 350-375 mn is recurring.

Corus realisation came as positive surprise
Consolidated revenues dipped 11.9% Q-o-Q, primarily led by decline in volumes in India and Corus (19.1% Q-o-Q and 5.7% Q-o-Q) and sharp dip in prices for Nat Steel. Corus realisations came in as a positive surprise at USD 963/tonne, down only 11.8% Y-o-Y (Europe HRC prices are down over 50% Y-o-Y).

Raw material cost to be lower from Q3FY10
The company guided that hard coking coal FOB cost for Q2FY10 will continue to be largely at USD 300/tonne and new cost is expected in full effect in Q3FY10. Full impact of reduction in staff cost of GBP 200 mn is expected in FY11.

Outlook and valuations: Recovery underway; maintain ‘BUY’
Q2FY10 has seen spot HRC prices increase by USD 40-60/tonne in Europe. Corus’ capacity utilisation has increased from 53% in Q1FY10 to 70% currently, based on new orders. We increase our FY10 estimates for Corus’ average realisations to USD 918/tonne from USD 694/tonne earlier, which is lower than Q1FY10 actual of USD 963/tonne. Our FY10 realisation assumption factors in potential deterioration in product mix (as production ramps up) and any pressure of imports into Europe.

However, the slower-than-anticipated decline in raw material costs and higher below-EBITDA costs in FY10 largely negate the aforementioned upside. We cut
our FY10 core EPS by 8.1%, to INR 36.8, and our FY11 core EPS estimate by 6.2%, to INR 83.7 (core EPS is excluding restructuring charges). We maintain our fair value of INR 561/share, based on conservative FY11E EV/EBITDA multiples (6.0x for India operations and 4.0x for Corus). We maintain our ‘BUY’/‘Sector Outperformer’ recommendation on the stock.

To see full report: TATA STEEL



  • The 10-year G-Sec bond yield ended at 7.30%, up by 6bps higher from last week. Short term paper yields witnessed a decline on a weekly basis. 1-year and 2-year G-Sec traded at 6.07% and 5.64% respectively.

  • Central bank absorbed the excess cash worth Rs 129bn from the commercial banks via reverse repo window through LAF. Calll rate ended at 3.23%, down by 2bps on a weekly basis due to continued excess liquidity.

  • RBI announced auctions for Rs120bn of dated securities for September 4 '09. This includes 6.49% GOI 2015 for Rs50bn, 6.90% GOI 2019 for Rs 50bn and 8.24% GOI 2027 for Rs 20bn.
To see full report: DEBT MARKET



Sanghvi Movers Ltd. (SML), the fastest growing equipment company in the country has been adversely impacted by the economic slowdown. The negative global sentiment has led to core sectors going slow on fresh capital investments. Most companies have either delayed their projects or have cancelled them. However, we believe that the factors favoring SML far outweigh the concerns we have regarding the market.

We have revised our revenue and earning estimates to factor in lower rental yields due to the slowdown in demand, reduction in capacity additions, and contractions in margins from lower utilization.

We continue to maintain the rating as Outperformer as we believe that the factors favoring SML far outweigh the concerns we have regarding the market. At the reigning market price of Rs.178, the stock is trading at 10.3x its FY10E EPS of Rs.17.3 and 9.4x its FY11E EPS of Rs.19.0. We recommend 'Accumulate' with a target price of Rs.197.


Capex pruned due to slowdown in core sector activities
SML's fortunes are directly related to the infrastructure and industrial growth. It provides infrastructure support services to the core sectors, which include power, refining and petrochemicals, windmills, cement, steel, metro rail and many more.

The current global financial crisis has resulted in companies going slow on fresh capital investments. Many projects in the core sectors have either been delayed or have been cancelled. This has translated into lower utilization rates of cranes for SML. The company has accordingly curtailed its Capex plan from Rs.1,340m to Rs.600m in FY10.

Impressive clientele
SML’s services find applications in core and Infrastructure sector projects like Windmills, Refineries, Cement, Steel and Power sectors. Its top five customers list includes Suzlon, Reliance, Enercon, BHEL and Aditya Birla Group.

Currently Suzlon and BHEL source 70% of their total requirement from SML. The company has also remained a key partner of Enercon for the last 5 years.

Going forward, we believe that Capex planed by these organizations shall translate into strong demand for cranes.

To see full report: SANGHVI MOVERS LIMITED


March 2011 Sensex target of 20,000
Despite the rally in Indian markets, we believe fundamentals and liquidity are likely to support higher valuations. We believe Indian stocks are likely to re-rate further over the medium term as positive data points relating to IIP, GDP, quarterly earnings show positive momentum. Given FY2011 will fully capture the economic recovery and corporate earnings, we now set a March 2011 target of 20,000 based on a P/E multiple of 14.9x FY12 earnings. Sensex is trading at a forward PE of 15.9x and forward P/BV of 2.6x.

Increase exposure to metals, power, real estate & IT services
We add Tata Steel and JSW Steel with overweight stance on metals sector due to bullish outlook on the Indian steel sector (Indian Steel: Green shoots or weeds? dated 25 Aug 2009). We turn overweight on Power sector due to positive outlook on coal and good progress on projects under execution. We continue to stay bullish on real estate as a play on India's economic recovery. We maintain our O/W exposure to Indian IT services as we believe the sector is a great way to play the global recovery.

Reduce autos, banks, telecom to neutral
We also reduce our weights on autos (neutral), telecom (neutral), banks (neutral) and consumer staples (underweight) as we believe these sectors are likely to underperform given negative newsflow regarding monsoons. We also reduce cement & pharma to underweight. We maintain cash level of 5% in our portfolio.

To see full report: INDIA STRATEGY


Background & Operations:
Globus Spirits Ltd (GSL) is amongst the leading players in the Alcohol industry in North India. Since its inception in 1992, GSL has been in the business of manufacturing, sales and marketing of Indian Made Foreign Liquor (IMFL), Industrial Alcohol and Country Liquor.

GSL is engaged in the business of manufacture, marketing and sale of Industrial Alcohol comprising Rectified Spirit and Extra-Neutral Alcohol, Country Liquor, and Indian Made Foreign Liquor (IMFL). GSL has established its identity in Country Liquor and IMFL business with steady growth and production of high quality liquor. GSL has a brand portfolio of its own in the Country Liquor segment, and caters to reputed Indian brands in the IMFL segment. GSL has already launched its own IMFL brands in the north Indian state of Haryana and proposes to launch the brands in six more states in North India and four states in South India.

GSL has two modern distilleries at the following locations:

  • Behror, District Alwar, Rajasthan: The facility is built on an area admeasuring 17.97 acres of land. The unit has its own captive supply of water and power.
  • Samalkha, District Panipat, Haryana: The facility is built on an area admeasuring 16.575 acres of land. The unit has its own captive supply of water and power.
At present both the units are capable of manufacturing alcohol from both molasses and grain. Both the Units have licensed and installed capacity of 144 lakh Bulk Litres (BL) p.a. each aggregating to 288 lakh BL.

The plants are currently engaged in the manufacturing of Industrial Alcohol (comprising Rectified Spirit, and Extra Neutral Alcohol (ENA); Country Liquor (CL); and Indian Made Foreign Liquor (IMFL). Both the distilleries have modern bottling facilities equipped with bottling machines, which caters to its own production of Country Liquor and IMFL brands. Also, the Company has tie-ups for bottling IMFL products for other brand owners.

GSL’s major brands are as under:

> Country Liquor
  • Rana
  • Rajasthan No.-1
  • Ghoomar
  • Samalkha No.-1
  • Samalkha Ki Saunfi
  • Kinnu
  • Commander

  • White Lace Gin White Lace Dry Gin
  • White Lace Duet Gin GR 8 Times Dry Gin Samurai Gold Extra Rich Blend Whisky
  • Samurai Premium Whisky 20-20 Premium Whisky
  • 20-20 Superior Whisky *
  • GR 8 Times Whisky
  • GR 8 Times XXX Rum
  • Hannibal Legendry Rum
  • Hannibal Legendry XXX Rum *
  • Samurai XXX Rum
  • Samurai Grape Brandy
  • Samurai Superior Grape Brandy *
  • Samurai Superior Whisky *
  • Academy Deluxe XXX Rum
  • Academy Deluxe Brandy
(* = blended and bottled by Tracstar Invesments Pvt Ltd., the licensee in Karnataka)

GSL has already entered the IMFL segment by launching its own brands in Haryana, Rajasthan, Chandigarh, Uttar Pradesh, Kerala, Andhra Pradesh and Karnataka. The Company also proposes to launch the brands in two more states/Union territory in North India and one state/Union Territory in South India. The Company envisages that its presence in more and more states of the Country will give it a better competitive position in the IMFL segment.

Objects of Issue:
The Objects of the Issue are as stated below:
Installation of a Multi-Pressure Distillation Plant to produce quality Extra Neutral Alcohol (ENA) of 35,000 Litres per day from both Molasses and Grain at Behror Unit in Rajasthan

Installation of a Multi-Pressure Distillation Plant to produce quality Extra Neutral Alcohol (ENA) of 35,000 Litres per day from Grain at Samalkha Unit in Haryana

Capacity expansion of Total Spirit-based Starch Liquefaction section from 60 KLPD to 75 KLPD, with modernization at Behror Unit, Rajasthan

Installation of a High-Pressure Boiler and Back–Pressure Turbine, which would use Biogas and Biomass as fuel; and implementation of Green House Gas Abatement project at both units

Brand development for marketing IMFL brands in 10 more States/Union Territories

Acquisition of Canteen Stores Department (CSD) registered IMFL Brands

Revamping of existing storage/bottling capacity at Samalkha Unit
To meet the expenses of the issue

To list the equity shares on the Bombay Stock Exchange Limited (BSE), the Designated Stock Exchange; and National Stock Exchange of India Limited (NSE), which will enhance GSL’s brand name and provide liquidity to its shareholders

To see full report: GLOBUS SPIRITS

>Second day in red (SHAREKHAN)

Markets on Sep 01, 2009: Sudden sell-off

Taking positive leads from markets abroad, the Indian stock market opened optimistic and bounced to the high of the previous rally. But in the second half there was a sudden sell-off and the indices dipped to the day’s lows. Nifty closed in red for the second day in trot taking resistance around 4750, which has been acting as crucial resistance for the last many weeks. Nifty has been holding on to 61.8% retracement i.e. 4750 of the fall from 6357 to 2253, where it has been trading for the last couple of months. Nifty is currently trading above 20 daily moving average (DMA) and 40DMA i.e. 4575and 4494 respectively, which are crucial support levels going forward. The momentum indicator (KST) has given a positive crossover and is trading above the zero line.

On the hourly chart, Nifty was trading in a channel, which has been broken on the downside and the index is also trading below 20 hourly moving average (HMA) and 40HMA i.e. 4676 and 4653 respectively, which is a bearish sign for the market in the immediate run. Our short-term bias is up with reversal at 4350 and target at 4780. The market breadth was negative with 423 advances and 849 declines on the NSE and 1,193 advances and 1,674 declines on the BSE.

Nifty is 37 points down and the Sensex is 115 lower at the closing bell today. Of the 30 stocks of the Sensex, ACC (down 4%) and Ranbaxy laboratories (down 3.2%) were the top losers, whereas Maruti Suzuki India (up 7.30%) and Tata Motors (up 6%) were the top gainers. Selling was witnessed in metal and cement sector stocks, while auto sector outperformed the market.

To see full report: EAGLE EYE 020909


U-turn strengthens

Q1FY10 GDP meets expectations
India’s real GDP growth during Q1FY10 came in at 6.1% Y-o-Y, meeting expectations (consensus: 6.2%). This stands a tad higher than the 5.8% growth recorded during the previous two quarters and directly reflects a pick-up in industrial and construction activity which had experienced a slump in the previous two quarters.

Manufacturing, trade, financial services growth stand out
Industry demonstrated impressive recovery: 5% Y-o-Y against a decline of 0.5% last quarter. Industrial growth during this quarter was broad-based across mining (7.9%), manufacturing (3.4%) and the electricity, gas and water supply group (6.2%). Improved activity in the construction sector was an additional support. After modest performance in H2FY09, the sector has witnessed sustained pickup (7.1% growth this quarter vis-à-vis 5.5 % in H2FY09).

Bulk of the services sector is showing steady-to-improved sequential quarterly growth in Q1FY10. Community, social and personal services had been the only major sub-group that had recorded somewhat subdued growth. This subsegment, however, is also expected to exhibit higher growth rates in the subsequent quarters (with pending disbursement of remaining part of the Sixth Pay Commission awards from the central government, followed by state governments and PSUs).

Growth in the agricultural sector stood at 2.4% against 2.7% in the previous quarter and 3.0% in the corresponding quarter previous year. The current farm growth numbers do not reflect any deceleration on account of a poor monsoon, but are likely to reflect in the coming two quarters.

To see full report: GDP


Alleviating 'power'ty

The significant policy focus on reducing the acute power shortage prevalent in the system is driving huge investments into the power sector. This translates into a lucrative opportunity for power financiers like PFC and REC given that power projects typically entail a debt to equity ratio of 3:1. Based on the Rs10.3tn spend on power sector envisaged during the 11th 5-Year Plan period, we arrive at Rs1.3tn of disbursements opportunity for PFC and Rs1.2tn for REC (an aggregate 40% of the estimated debt component). On their part, the lenders are well-placed to capitalize on the prospects owing to competitive funding costs and a lean operating structure. Accordingly, we expect the growth momentum to propel 22- 29% CAGR in earnings (pre-exceptional) of PFC and REC over FY09-11. Given the high earnings visibility and improving return ratios, valuations appear attractive. Initiating coverage with an Overweight stance and Outperformer on PFC and REC.

High growth visibility: In view of the acute energy deficits and deficiencies in T&D infrastructure, massive investments are lined up in the power sector during the 11th (Rs10.3tn) and 12th (Rs11.4tn) 5-Year Plans. With rich experience in lending to the sector, PFC and REC are well-positioned to leverage the emergent financing opportunities. Accordingly, we expect 21% and 27% CAGR in disbursements for PFC and REC respectively over FY09-11.

Earnings momentum to remain strong: We expect structurally competitive funding costs to support healthy margins for PFC and REC in the near term. Robust business growth and steady margins are likely to propel a 23-28% rise in NII over the period. Also, while superior asset quality will keep credit costs insignificant, operating expenses are likely to be low, and PFC and REC would witness a strong 22% and 29% CAGR in pre-exceptional earnings over FY09-11.

Attractive valuations; we see 23-30% upside: Considering the high growth visibility, valuations of 1.8x-1.9x FY11E book are attractive. While PFC has historically traded at a 24% premium to REC, the premium differential has narrowed owing to REC’s improving growth prospects, steady margins and a stronger RoE. We are Overweight on the sector with our target prices offering 30% upside on PFC (based on 2.4x FY11E book) and 23% on REC (2.3x) from CMP.

To see full report: POWER FINANCE