Monday, September 7, 2009


The Global Economic Outlook: Is the Recovery Sustainable?



Connecting the dots…

The bears seem to have extended their weekend by another day, as the Nifty rallied 2.3% through the session. The market opened with a 40 point gap up and continued its trajectory upwards closing at 4788 by the end of the day

Nifty outperformed most of the prominent Asian indices such as Hang Seng and Shanghai, which were up 1.5% and 0.7% respectively. Consumer discretionary and Information technology were the outperforming sectors in the Hang Seng

In the Nifty, the advance decline ratio was ~9:1, with the likes of Tata Motors and Unitech gaining ~11.4% and 7.7% respectively. M&M and ITC were two of the five Nifty losers, correcting ~1.2% and ~0.9% respectively. Industrials led the day, with the sector gaining 3.9% today

In the F&O universe, Bhusan Steel (up 15%) and IOC (up 9%) were the biggest gainers, while PFC (down 1.6%) and Pantaloons (down 1.3%) were few of the bigger losers

Cash markets (NSE) witnessed INR 174,456mn worth of trading, while the NSE F&O segment saw trading worth INR 574,908mn

To see full report: MARKET PLOTTER


Predictable growth, good value…

We met the management of Lupin Ltd. Lupin is an innovation led pharma company producing a wide range of generic formulations and APIs for various markets globally. The company has a significant presence in the therapy areas of CVS, diabetology, asthma, paediatrics, CNS, GI, anti-infectives and NSAIDs in the domestic market.

Business model
Over the years, Lupin has successfully transformed itself from predominantly being an API manufacturer to a formulations manufacturer. At the end of FY09, formulations accounted for 81% of Lupin’s total sales as against 56% in FY06. The company generates a significant portion of the revenue from growing therapies of CVS (21% of domestic formulation sales), antibiotics (22%) and asthma (8%) in the domestic market. The chronic segment, which is growing at over 30% YoY, accounts for ~40% of total domestic formulation revenue while the acute segment accounts for 60%. The domestic acute therapy areas are growing at a lower rate. Lupin recorded robust revenue growth at a CAGR of over 30% over FY06-09. Domestic formulation revenues grew at a CAGR of 23% over FY07-09.

Lupin has a robust revenue distribution in various geographies. It generates ~35% of total revenue from the domestic market and 65% from exports. Developed markets of US account for ~30% of total revenues. Out of the total US revenue, which grew by 65% YoY in FY09 to Rs 1189 crore, 27% accounted for the branded business in the US markets (currently the company has two brands, Suprax & Aerochember in the US market). The EU revenue, (~2.5%) grew ~100% to Rs 102 crore. Lupin has filed for 90 ANDAs in the US market. Out of this, 56 are awaiting approval. Lupin entered as a finished dosage player in the US in 2003 with the launch of Cefuroxime Axetil. Although Lupin was a late entrant in the US market, it made its presence felt by launching Suprax in the branded US market in FY04. Its generic business gained momentum in 2005. The company generated US$74 million from the branded business in the US. In FY07, Lupin’s Lisinopril was rated the fastest growing product in the US. Currently, Lupin has two products in its branded portfolio, which contributes ~27% to US revenues. Till date, the company has filed nine ANDAs in the oral contraceptive segment in the US market. Lupin is the only Indian company to have a significant presence in the Japanese market through
the acquisition of Kyowa Pharma in October 2007. The company also has a significant presence in SRM.

In the domestic market, the company has widened its product basket to include a mix of branded and value added generics apart from foraying into newer therapeutic segments such as gynaecology, oncology and wound management. Simultaneously, the company is also focused on garnering market share in the antiasthma, CVS, diabetes and other chronic segments, while maintaining its dominant position in the anti-TB and anti-Infective segments. During FY08-09, the company launched 54 new products in the market.

Going forward
Over the years, Lupin has been growing at a robust space and delivering a performance in line with large cap players. Lupin will likely witness robust growth in numbers on account of growth in advanced markets and SRM. Incremental benefits are likely to be visible from the inclusion of Aerochamber plus products and AllerNaze to its US branded portfolio. At the CMP of Rs 1014, Lupin is trading at ~16.5x its FY09 EPS.

To see full report: LUPIN LIMITED


With the late upsurge on September 4, 2009, the benchmark indices, the Sensex and the Nifty, managed to report marginal gains of 1.1% and 2.1% respectively since our last ValueGuide issue dated August 6, 2009. Throughout the month the markets remained in a narrow range. Our basket of stocks performed in line with the market, delivering a 2.1% return during the month. Amongst our picks, Godrej Consumer Products continued its smart upmove and gained 9.8% while our new addition last month, Emco, too delivered handsome returns of 8.8% during the month.

For September 2009, we are making two changes in the portfolio. We are replacing Balrampur Chinni Mills and Lupin with IDBI Bank and Ipca Laboratories. Balrampur Chinni Mills could underperform in the near term due to the expected government intervention to control sugar prices. On the other hand, IDBI Bank could get re-rated on the back of capital infusion by the government, as media reports suggest that the World Bank has approved the proposed loan for recapitalisation of certain public sector banks in India. Our second pick, Ipca Laboratories, is a tactical switch from Lupin within the pharmaceutical space.

  • Apollo Tyres
  • Bajaj Holdings
  • Bharti Airtel
  • BHEL
  • Emco
  • Godrej Consumer
  • IDBI Bank
  • IPCA Labs
  • ITC
  • Reliance Industries
To see full report: TOP PICKS



Stock Update >> Mahindra & Mahindra
Sector Update >> Information technology
Market Outlook >> Pause and Play

To see full report: INVESTOR'S EYE 040909


The company is engaged in the manufacture of tea and chemical & fertiliser. Tea accounts for 66% of the revenue, whereas chemical & fertiliser accounts for 32.8% of the revenue. The company’s area under tea is around 8467 hectare, which includes 2064 hectare in Darjeeling. Jayshree Tea’s tea production is 21.5 million kg in 2009, which includes 1.28 million kg of Darjeeling tea. The company manufactures superphosphate and sulphuric acid at its two plants at Khardah in North 24-Parganas, West Bengal and one plant at Pataudi in Gurgaon district, Haryana. The annual installed capacity is 2,25,721 MT superphosphate and 95,710 MT of sulphuric acid with production of 64,795 MT of superphosphate and 48324 MT of sulphuric acid
during 1999-2000.

Tea estates in Darjeeling
Jayshree Tea has six estates in Darjeeling city, which is considered to be a high quality tea area and fetched higher realisation of Rs 270 per kg compared to the average realisations of Rs 103 per kg in 2009. The company produces around 10% of total Darjeeling production.

Global export-led growth
The three major tea exporting countries include India (980 million kg) followed by Kenya (350 million kg) and Sri Lanka (325 million kg). These together contribute 40% of the total global black tea exports. A production shortfall in key producing countries like Kenya and Sri Lanka
led by prolonged dry spells has led to a drastic decline in tea production by 13% and 31.7%, YoY, respectively. This decline, coupled with an increase in international demand, has lead to a rise in global tea prices by around 18-20% in July 2009. Since India accounts for approximately 14%
of world exports this is likely to positively impact the margin on Indian tea exports.The company produces 1.28 million kg of Darjeeling tea, which is being exported to Germany, UK and West Asia. Exports contribute almost 15% to the company’s revenues. Rising global tea prices would benefit the company specifically. The company is also aspiring to increase its exports to Russia, which is a major consumer of orthodox tea.

Soaring tea prices
Tea prices have surged above Rs 130 per kg, almost 30% higher than last year. Major production decline in tea exporting countries like Kenya and Sri Lanka has resulted in soaring tea prices in international markets. Simultaneously, lower area under tea and bad monsoon led to lower production in India, aggravating the situation. We believe lower area under tea in the last four or five years would result in almost flat to negative production growth, going forward. This would keep tea prices firm.

To see full report: JAYSHREE TEA


Highlights: Global Survey of UBS Research

Setting the stage for a gradual recovery in the Global economy
In late July, we conducted a brief survey of the Global Equity Research Department at UBS. We received 380+ responses from across the globe. Looking at the survey results in aggregate, we believe the stage is set for the world economy to gradually recover, driven in part by relatively benign inflation, rolling impacts from global stimulus packages and improving credit conditions. Interestingly, the aggregate “bottom-up” analyst responses to each question on this survey were
consistent with our current “top-down” macro team views.

We see muted inflation as more likely than deflation
Based on our survey, 72% of the 381 Research respondents expect inflation in their regions over the next 18 months, with the remaining 28% expecting deflation. The only region expecting deflation over the next 18 months is Japan.

We expect stimulus packages to be meaningfully effective in 2010
Of the respondents, 27% expect stimulus packages to be effective in 2009, 49% expect stimulus packages in their regions to be effective in 2010 and 11% expect stimulus packages to be effective post-2010. Only 13% indicated that they believe stimulus packages in their regions will never be meaningfully effective.

We expect upward revisions to corporate earnings in 2H 2009
The survey indicated that 41% of the 327 respondents expect upward earnings revisions in 2H2009, 21% expect downward revisions and the remaining 38% expect companies’ earnings guidance to remain unchanged. By sector, Industrials / Materials and Media & Telecomm were the only two sectors that expected earnings to be revised lower. The sectors that expressed the most optimism regarding upwards earnings revisions included Technology, Healthcare and Consumer (see Table below). By region, Japan is the only region that expects earnings to be revised lower.

We believe companies expect improved credit availability
According to our survey results, 50% of the 330 respondents believe their companies expect improving credit availability over the balance of the year. Only 5% believe that companies in their sector expect credit availability to deteriorate.

To see full report: THE DIRECTOR'S CUT


Monsoon concerns & rising stressed loans

Investment Conclusion

We believe PNB will continue to underperform SBI and other bank stocks, owing to the following
negative drivers: 1) PNB now has the highest proportion of stressed assets relative to its net
worth among the Indian banks under our coverage. Stressed assets account for 91% of net
worth for PNB against the sector's 59%. PNB's restructured loans rose 100% q-q in 1QFY10, and
the bank has not clarified the reason for such a sharp rise in restructured loans. 2) PNB is the
most exposed Indian bank under our coverage to the northern farm belt, which is under economic
distress owing to weak monsoons. This will likely impact PNB's loan growth, deposit growth and
asset quality in that region. We estimate that around 45% of PNB's total branches and business
are linked to this region.


We are revising upwards our price target on PNB from INR420 to INR695. We have valued PNB's core business at 1.3x P/BV, based on sustainable RoE of 14.5% and CoE of 12.4%. A change in our credit cost assumption from 1.0% of loans to 0.8% of loans and a change in cost of equity from 13.3% to 12.4% are the key drivers of our price target upgrade.

Downgrading PNB on monsoon concerns and rising stressed loans: Our previous BUY call on PNB was based on its high provisioning cover, low level of restructured loans relative to other banks and conservative top management. While PNB has outperformed the Sensex by 26% since March, it has underperformed the Bankex and Sensex over the past one month following a
sharp rise in restructured loans in its 1QFY10 results. We believe PNB will continue to underperform SBI (SBI NS, BUY) (see our note, SBI – Upgrading to Buy) and other bank stocks, owing to the following negative drivers: 1) PNB now has the highest proportion of stressed assets relative to its net worth among the Indian banks under our coverage. Stressed assets account for 91% of PNB’s net worth against the sector’s 59%. PNB’s restructured loans rose 100% q-q in 1QFY10, and the bank has not clarified the reason for such a sharp rise in restructured loans. 2) PNB is the most exposed Indian bank to the northern farm belt under our coverage, which is under economic distress owing to weak monsoons. This is likely to affect PNB’s loan growth, deposit growth and asset quality in that region, in our view. We estimate that about 45% of PNB’s total branches and business are linked to this region; and 3) After Dr K. C. Chakrabarthy’s departure in June, the bank does not have a new chairman and there is no news flow on who the
government will appoint next.

Revised price target of INR695 at 1.3x P/BV offers potential upside of 1.8%: We are upgrading our price target on PNB from INR420 to INR695. We have valued PNB’s core business at 1.3x P/BV, based on sustainable RoE of 14.5% and CoE of 12.4%. A change in credit cost assumptions from 1.0% of loans to 0.8% of loans and a change in cost of equity from 13.3% to 12.4% are the key drivers of our price target upgrade. For the core business, we have assumed that 25% of the restructured loans will slip to NPL and have accordingly deducted 70% of that slippage as provisions.

Earnings upgrade: We are upgrading our EPS for FY10E by 39.1% to INR98. We have lowered our loan-loss provisioning assumption from 1.0% to 0.8% of loans and increased our forecast for trading gains from INR3.5bn to INR6.5bn. We have increased our forecasts for net interest income from INR76,189mn to INR79,168mn and raised our forecast for core non-interest income from INR19,017mn to INR22,069mn. We also upgrade our EPS for FY11E by 40% to INR114.

To see full report: PNB


The Financial Crisis -a Threat to the Emerging Economies?

  1. A massive shock for EMs
  2. Recovery on the way
  3. Opportunities and risks ahead
To see full report: THE FINANCIAL CRISIS


Company Background & Business Profile

Gillette India Ltd (GIL) was incorporated in 1984. The company divested its Geep battery business in 2003. In 2005, P&G acquired Gillette globally; subsequently making GIL a part of P&G. GIL’s areas of operations on a broader level include personal care, health care and consumer products.

GIL operates in three business segments viz; personal grooming, portable power and oral care. In the personal grooming segment, the company offers razors, blades, shaving brushes, shaving gel & after-shave gel. Some of its major brands include Mach3 Turbo (triple blade shaving system), Vector Plus, Sensor Excel, 7 o’clock, Presto & Wilkinson. GIL also has a small presence into ladies personal care segment (Gillette Sensor Excel for women). In the oral care segment, the company provides toothbrushes under the brand Oral-B. Oral-B Vision and Oral-B Shiny Clean are among some of the prominent toothbrush brands offered by the company. GIL provides alkaline batteries in the portable power segment under the brand Duracell. GIL has a manufacturing facility located at Bhiwadi in Rajasthan and has two packing units in Rishikesh (Uttaranchal) & Baddi (Himachal Pradesh). As of June 30, 2008 the plant had an installed capacity to manufacture 234 mn razors and cartridges (capacity utilisation was 85.9% in FY June 08) and 886 mn safety razor blades (capacity utilisation was 88.5% in FY June 08). The production of shaving brushes, toiletries, toothbrushes & batteries is either through job work or is outsourced.

Personal grooming segment accounts for 73.7% (in FY June 09) to the total revenues, while portable power & oral care segment contribute 5.4% & 20.9% respectively. GIL imports around 76% of its total raw material requirements, while its exports account for 2-3% of the total turnover.

Presence of Gillette worldwide:
Founded in 1901, Gillette Company, US (which was acquired by P&G, US) is the global market leader of shaving products, including blades and razors having presence across many countries. Its portfolio includes grooming products, alkaline batteries, oral care products and personal care products. The global company, unlike its Indian arm GIL, has presence also in hair care & body wash. Also, besides Mach 3, it has brands like five-blade Fusion line (launched in 2006), which is at 30% price premium over Mach 3.

Increasing presence in India
Gillette is tapping the large Indian consumer base to establish a strong presence in the country. The market for shaving blades in India is the largest in the world. The market for oral care (toothbrushes) is the second largest in the world, while that of batteries is the third largest in the world (all in volume terms). Apart from this, the increasing consumer-spending capacity and
the increase in retail activity are also some factors, which attract Gillette to expand its business in India. Going forward, Gillette’s products like hair care & body wash along with new generation five-blade shaving system (premium product sold under brand name Fusion), which at present do not form part of GIL’s portfolio, can also be brought to India.

To see full report: GIL