Wednesday, September 9, 2009


A pharmaceutical growth story

High exposure to Emerging Market pharmaceutical markets
Our positive view on Hikma reflects: 1) Double-digit organic growth ('10-'13E EPS CAGR of 16%) driven by Hikma's exposure to the Middle East and North Africa (MENA) markets where demographics and economics are more favourable than in the developed pharmaceutical markets and; 2) Opportunities for further acquisitions and in-licensing that could see upside to forecasts and valuation. Our 533p price objective assumes the stock trades on 16x 2010 earnings, in-line with our sum of the parts analysis. Maintain Buy.

MENA demographics and economics drive organic growth
Hikma has a strong brand in MENA and a top 5 market position (behind Sanofi, GSK, Novartis and Pfizer), making it well-placed to benefit from a region whose population and healthcare expenditure is growing twice as fast as the US. At the same time, healthcare expenditure per capita is 4% of US levels, offering the scope for increases as GDP grows, the young population ages and patients become more health-aware.

Potential upside from further acquisitions and licensing
Hikma continues to pursue acquisitions to both increase market share in territories where it feels it lacks critical mass and to expand into territories where it does not currently have a presence. These acquisitions, which we believe are likely to be accretive, should offer upside to forecasts and valuation. The stronger the MENA business becomes, the more attractive Hikma appears as a licensing partner to companies with no sales presence in the MENA region, increasing the potential for Hikma to acquire high value products.

To see full report: HIKMA (MERRILL LYNCH)



Sugar high

Last month’s rally was the most ‘unbelieved in’ I can remember in over 30 years. And yet a scuttlebutt of cash rich fund managers here suggests that many of them will continue nervously funnelling money into equities on a 12 month view. But where are the combined top and bottom
line corporate earnings growth coming from?

An alternative plotline
The world has far too many factories, office blocks, container ships, freight lorries, retail spaces and workers, especially workers, for the amount of ‘stuff’ that consumers in the US, Europe, Japan and China can or want to buy. American and European consumers are shell shocked and
retrenching, and Chinese consumers don’t spend anything like enough to lead the world to recovery.

Maybe a better bet to help at the margin is Mrs Watanabe in Japan — currently sitting with her purse shut tight on up to $14 trillion of savings — if the mood music changes with a
new party in government or the first time, virtually, in over 50 years, promising to deflect public money to fructify in consumers’ pockets, notably via cash subsidies to families with young children. There’s always the high risk of course that Mrs Watanabe will simply save more, and that the political change will be more like ‘a small earthquake than a tsunami.’ But, see the last MoM …

As for China, it still needs Western consumers to go on ‘sugar highs’. Its own household consumers still only account for some 30% of the GDP — putting their spending at about a tenth of the stricken US household sector. The country’s current ‘statistical recovery’ has been based on pouring cement, expanding already serious overcapacity - now being addressed in the steel and cement sectors — and swelling, already bloated NPLs. Most of China’s growth between 1990 and 2007 was down to the impact of the ‘wealth effect’ enabled by debt securitisation in the West, and credit-based consumption. That’s all in sharp reverse. Even when household and bank de-leveraging is mostly done, a strong new cycle of credit-based consumption is unlikely to kick in for at least five years. China’s formidable drive to wean itself of dependence on Western markets, reskew its domestic economy, and create an Asian ‘coprosperity sphere’ for the bulk of its external trade will take some years yet to achieve.

And India’s household spending, despite its growth trajectory and that it accounts for over 60% of Indian GDP – which, however, is only a third of China’s – is likewise far too small a buyer of foreign wares to help the global economy.

To see full report: MIND OVER MANIA


Company Profile:
Balrampur Chini Mills Ltd. (BCML), promoted by K.N.Saraogi in 1975, is one of the largest integrated sugar companies in India. The allied businesses of the Company comprise of distillery operations, cogeneration of power and manufacturing of bio-composites.

Investment Rationale:
Sugar demand exceeding supply: Due to a demand-supply mismatch, the sugar prices have started to soar upwards. Against an estimated consumption of 23 million tonnes in SS 2009, the
sugar production is only projected to be 14.5 million tonnes.

Leader in the Eastern UP market: BCML is the largest sugar manufacturing company in eastern UP, which gives it an edge in procuring sugarcane in the region, where the cane prices are lower
than rest of the state. Also, the ground water level in the Eastern UP region is accessible at lesser than 100 feet, making the sugar cane produce lesser susceptible to droughts or low rainfalls.

One of the largest and most efficient integrated sugar companies in India: BCML is one of the largest sugar companies in India. Along with sugar, the company also has power and distillery businesses, which make its business model superior.

Outlook & Recommendation:
With the festive season round the corner, the demand for sugar is expected to go up. As the consumption is about to outweigh demand, the domestic sugar prices have already touched a 30 year high, and is projected to move up even further. BCML is well poised to substantially gain from the price rise, on account of lower contracted import cost, improved margins and better realizations.

We recommend a BUY on the stock with a 12 month target price of Rs. 157 at 10x FY10E earnings, giving it an upside potential of 39%.

Indian sugar industry overview

• India is the second largest producer of sugarcane next to Brazil. Presently, about 4 million hectares of land is under sugarcane with an average yield of 70 tonnes per hectre. The Indian sugar Industry is the second largest agro processing industry in India and it accounts for 15% of the total world consumption. About 50 million people are employed in this industry, that roughly contributes Rs 3000 crore to the Government exchequer. India's average recovery rate at 10.27% is quite meagre in comparison to the international average.

• Indian sugar industry is divided into organized and unorganized sector with the former accounting for 20 % of the total production. Sugar Industry is a cyclical industry with two years of deficit followed by two years of surplus, influenced by the production of sugarcane.

• In India, sugarcane is the key raw material for the production of sugar. Most of the sugarcane produced in India is a 10- 12 month crop planted during January to March. In northern Maharashtra and parts of Andhra Pradesh and Karnataka, there is also an 18 to 20 month crop. In most areas, the 12-month crop is followed by just one ratoon crop, that is, a new crop grown from the stubble of the harvested crop.

• At present, sugarcane is being cultivated throughout the country except in certain hilly tracts in Kashmir, Himachal Pradesh, etc. The sugarcane growing areas may be broadly classified into two agro-climatic regions—subtropical and tropical. The major sugarcane producing states in the sub-tropical areas include Uttar Pradesh (UP), Uttaranchal, Bihar, Punjab, and Haryana. In tropical areas of India, sugarcane is grown primarily in Maharashtra, Andhra Pradesh (AP),
Tamil Nadu (TN), and Gujarat.

• The sugarcane price in India is paid on the basis of weight of cane while in most other sugar producing countries, the same is paid after taking into account the sucrose content of the cane supplied to the mills. The latter system has an advantage as it provides incentives to the growers to plant high sucrose varieties and adopt cultural practices which increase the sucrose content of the cane at the time of its supply to the mills, including harvesting of cane at maturity and minimizing the time involved from harvesting of cane and its supply to the mills.

• The process of manufacturing sugar starts with pressing of sugarcane to extract the juice. Then it is followed by boiling the juice until it begins to thicken and sugar begins to crystallize. The crystals are spinned in a centrifuge to remove the syrup, producing raw sugar.

• The raw sugar is then transported to a refinery where it is washed and filtered to remove remaining non-sugar ingredients and color. Crystallizing, drying and the resultant packaging of the refined sugar then follow it.

By-Products of Sugar

• One tonne of sugarcane crushed gives 100 kg of sugar, 350 kg of bagasee and 45 kg of molasses and around 500 kg of pressmud. The 350 kg of bagasee can be converted to generate around 100 units of power. The 45 kg of molasses can be converted into 11 ltrs of ethanol. Hence, a tonne of sugarcane crushed gives 100 kg of sugar, 11-12 ltrs of ethanol and around 100 units of power.

• Bagasse is the fibrous material that results from the extraction of juice from the sugarcane. It can not only be used as a fuel for co-generation plants but also for the purpose of manufacturing paper, newsprint, insulation board, furniture and others.

• Pressmud, another by-product obtained in sugar factories contains sizeable quantity of micro and macronutrients besides around 20% of organic carbon. The organic manure made out of Press mud maintains Soil health, sustains sugarcane and sugar production, improves soils physical properties, retains soil moisture and reduces the erosion hazards. Application of enriched press mud, either alone or in conjunction with Bio fertilizers recorded higher sugarcane yield and sugar recovery.

• Molasses is a brownish liquid that is created during the crystallization of brown sugar in the refining process. It is used not only as a mixed cattle feed but also for manufacturing industrial and potable alcohol.

• Ethanol, resulting from the processing of molasses is used as an additive in fuels like petrol. Currently in India, 5% blending of ethanol in fuel is mandatory (in 9 states). Government is also looking into several options to increase its share to 10%.

To see full report: SUGAR SECTOR


Compelling valuations in a turnaround sector

Organised retail to be out of woods; to grow at healthy CAGR of 19% India’s organised retail industry is set to post ~19% CAGR over the next four years to reach INR 2,024 bn by FY13E. Clothing and fashion accessories account for 38% of total organised retail spending and, hence, they will be one of the key beneficiaries of this growth. We believe, low penetration, favourable demographics, steady economic growth, increasing availability of credit, and improving cost structures will reverse the now sagging fortunes of organised retail.

Presence across value chain; garment manufacturer to specialty retailer Koutons Retail (KRIL) is a specialty apparel retailer cum manufacturer offering a complete range of apparels (casual and formal). The company operates ~1.29 mn sq ft (CAGR of 126% over FY05-09) of retail space through 1,374 outlets. Almost 82% of KRIL’s stores are franchisee owned and operated. This model limits upfront capex required to set up a store and allows greater flexibility in terms of location.

PAT margins to expand; earnings CAGR of 24.6% over FY09-11E likely The company now plans to focus on large format ‘family stores’ (where garments co-exist with accessories and footwear) which attract higher footfalls and are more economical. KRIL plans to convert its existing stores to family stores and rationalise stores based on demand (it closed 38 unviable stores and opened 17 new family stores in Q1FY10). We expect interest costs to dip due to restructuring of high cost debt and softening of interest rates. This is likely to increase its PAT margins over the coming quarters.

Outlook and valuations: Attractive; initiating coverage with ‘BUY’ KRIL’s USP is its ability to cut down intermediaries and bring fashion to masses at affordable prices. We are positive on the company’s growth based on its business model, expansion plans, and higher margins compared to other retailers on account of integrated operations. We initiate coverage on the stock with ‘BUY’
recommendation and value it at 12.5x FY11E EPS (50% discount to Pantaloon’s FY11 P/E multiple) to arrive at a target price of INR 500. Our key concern is the high level of inventory the company carries on its books. On relative return basis, the stock is rated ‘Sector Outperformer’ (refer rating page for details).

To see full report: KOUTONS RETAIL


Precious Metals – Investment Drivers Abate

Inflation prospects reducing — We now expect interest rates in major economies to be increasing in 2010, stemming inflationary pressures. High real rates are bearish for gold.

USD weakness the main bull point — Resumed USD weakness will be the main source of price support.

Gold physical Investment is weakening — In 2Q09 ETF holdings were flat after doubling over the prior 12 months. Bar hoarding, coins, and identified retail investments are all declining. Unidentified investments are increasing although we don’t find this a convincing sign.

But paper investments are increasing — Investments in futures and options are increasing, probably as investors become more comfortable with counterparty risk.

China the long term bull — Higher prices in more distant years could come from continued growth in China's demand for jewellery and central bank investments.

Silver — We believe silver is set to outperform gold given silver has superior leverage to the industrial cycle over gold.

Platinum — With the potential restocking in the global auto market and the curtailment of supply, there is potential for the platinum price to break out of the range and approach $1400/oz by year end. We have lifted our price forecasts for platinum and palladium to reflect the improved macro outlook.

To see full report: PRECIOUS METALS


Gold awakens from Summer Slumber, Eyes $1,000 /oz

The value of gold has been the subject to intense debate for centuries. Baron Nathan Rothschild, the richest man in Britain and probably in the world during his lifetime once commented, “I only know of two men who really understand the true value of gold – an obscure clerk in the basement vault of the Banque de Paris and one of the directors of the Bank of England. Unfortunately, they disagree,” he remarked.

Nathan Rothschild, who used to lean against the famous “Rothschild Piller” at the London Stock Exchange, hung his heavy hands into his pockets, standing silent, motionless, and with implacable cunning, said, “I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man that controls Britain’s money supply controls the British Empire. Whoever controls the volume of money is the absolute master of all industry and commerce.”

His brother Mayer Amschel Rothschild, operating the banking house in Frankfurt, Germany concurred, “Give me control of a nation’s money, and I care not who makes her laws,” he said.
From 1809, the Rothschilds began to deal in gold bullion, and developed this as a cornerstone of the family dynasty.

The gold market is shrouded in mystery, and many conspiracy theories surround it, but eyeing the volume of the money supply offers the most helpful clues.

Several other wise men have advised investors to be on the lookout for politicians who commit fraud upon unsuspecting citizens. “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. And while the process impoverishes many, it actually enriches some, and not one man in a million will detect the theft,” wrote John Maynard Keynes in his book, the Economic Consequences of the Peace, 1919.

“You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold,” advised George Bernard Shaw in 1928. “When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Fed writes a check, it is creating money,” explains the Boston Federal Reserve Bank.

To see full report: GOLD



Markets on Sep 09, 2009: Triangle consolidation

After a seesaw session Nifty managed to close marginally positive today. The index has closed positive above 4750 for the third day in row, which is a positive sign going forward. However, the breadth was negative, which signaled some selling pressure around 4850. The market continues to hold its support at 20 hourly moving average (HMA), 40HMA and the upper band of the bullish Island i.e. 15275, which are key supports going forward. So till these levels are held by the market our short-term bias remains up for the target of 5000 and reversal down below

On the daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA i.e. 4619 and 4555 respectively, which are crucial supports going forward. The momentum indicator (KST) had given positive crossover and is trading above the zero line. The market breadth was negative with 511 advances and 750 declines on the NSE and 1,329 advances and 1,550 declines on the BSE.

On the hourly chart, Nifty is trading above its 20HMA and 40HMA i.e. 4778 and 4740 respectively, which are crucial supports in the short term. The momentum indicator (KST) has given negative crossover and is trading above the zero line.

To see full report: EAGLE EYE 100909


“To get powered from growth in power sector"


Largest Manufacturer of transformer oil with around 55% market share: Apar is the market leader in transformer oils with over 55% market share in India under the brand POWEROIL. The company's focus is more on the power transformer side (132 Kv – 800 Kv), where it has more than 60% market share. Apar's domestic customers include BHEL, Emco, Crompton Greaves, Bharat Bijlee and Alstom among others.

One of the largest player of conductors in domestic market with around 25% market share: Apar has a strong presence in conductors and is the second largest manufacturer in India with around 25% market share after Sterlite Technologies. Apar is the largest exporter of conductors from India. The export markets span Middle East, Japan, Europe, USA, South America and Africa.

Huge capex expected in power transmission sector, which will boost ancillary industries: For the 11th Plan Rs1,400 billion is planned to be spent on transmission schemes, against Rs744 billion in the 10 plan. Power transformers account for around 70% of the transformers market where as the distribution transformers constitute around 30%.

Export market: A lucrative advantage: Apar is the largest conductors exporting company in India. Its product goes in more than 43 countries with significant presence in Africa. It is expected that demand for transmission conductors is expected to grow by a CAGR of 8-9% till
CY 2011

Highly volatile raw material prices: Aluminum and base oils are the two major raw materials of the company and both of them are highly volatile.

Foreign exchange variation: As more than 35% of business of the company comes from international markets, it is inhered exposed to foreign currency.

Since all the losses are already accounted and looking at the inelastic nature of demand for the company's products, we believe that thing will start moving up soon.

At CMP of Rs148, the stock is trading at 6.63x its FY2010 estimates and 5.50x its FY2011 estimates and an EV/EBITDA of 0.87x and 0.84x its FY2010 and FY2011 estimates respectively.

We INITIATE coverage on the company with a rating with of , implying a P/E multiple of 9.00x FY 2011 earnings, which is an upside of 36% from CMP. We value the company at EV/EBITDA
of 1.89x on FY2011(E) EBITDA of Rs1,598 million.

To see full report: APAR INDUSTRIES


Telecom, Insurance drive long-term growth

Aditya Birla Nuvo Limited’s (ABNL) Q1’10 results, though adversely affected by the global slowdown, are better than the previous quarter’s and higher than our expectations. While the company registered a 3.7% yoy growth in Q1’10 consolidated net sales, we continue to believe that its growing telecom, financial services, and life insurance businesses along with the improving performances of other businesses will provide long-term value to the shareholders. Accordingly, we have upwardly revised our fair value estimate to Rs. 1,210, which is 18.8% upside from the current stock price. Thus, we reiterate our Buy rating on the stock.

Significant value from the telecom business: ABNL’s stake in Idea comprises over one-third of our fair value estimate for the stock. Owing to India’s relatively robust economic growth outlook and a lower tele-density at 36.98% (TRAI), we believe the Telecom sector has a high growth potential.
We further believe that Idea’s pan-India presence (by the end of December 2009) will help it capture this growth opportunity and drive economies of scale and operational synergies. Accordingly, we expect Idea’s net sales to grow at a CAGR of 32.4% between FY09 and FY11. Moreover, with the cash inflow from the Providence Equity Partners deal, Idea is well positioned to
fund its growth plans and participate in the 3G auction.

Financial services and insurance businesses provide potential for growth: We believe that ABNL’s financial services and insurance businesses hold immense future value potential for shareholders. During Q1’10, revenue from financial services segment increased by 33% yoy and the reported EBIT margin stood at 19.9%. While private life insurers new business premium fell
~18% yoy in Q1’10, the premium of Birla Sun Life Insurance fell only 12.1%.

To see full report: ADITYA BIRLA


Weak monsoon unlikely to dampen demand.

Strong volume growth to drive revenues....

....but margin pressure seen ahead

Tweak earnings estimates but retain Market Performer

Supply glut looms on the horizon.

Shift in geographic mix: rising exposure to Southern region.

Retain Market Performer; Valuation appears reasonable.

To see full report: ACC LTD