Friday, September 11, 2009



Markets on Sep 11, 2009: Sideways

After a breakout from the range (4700-4350) at the start of the week on Monday, the market traded sideways around 4850 the following days. The market continued to be in the range for the third consecutive day between 4780-4860 today. In the first half of today’s session Nifty traded lower as selling pressure continued around the resistance level of 4850, but it recovered well from its lows in the second half and managed to close marginally positive. This suggests that 4850 and 4890 remain very crucial resistances and a close above that will lead to another leg of rally; till then 4750-4700 remains good supports on the lower side. So, as long as these levels are held on, we maintain are bias up for the target of 5000 and the reversal down below 4575. Nifty is currently
trading above 20 daily moving average (DMA) and 40DMA i.e. 4676 and 4578 respectively, which are crucial support levels going forward. The momentum indicator (KST) has turned up and has given a positive crossover.

On the hourly chart, Nifty is trading above 20 hourly moving average (HMA) and 40HMA i.e. 4811 and 4776 respectively, which are crucial supports in immediate run. The momentum indicator (KST) has given negative crossover but trading above the zero line. The market breadth was
negative with 438 advances and 814 declines on the NSE and 1,129 advances and 1,737 declines on the BSE.

The indices ended marginally positive—Nifty 16 points up and Sensex 47 higher. Of the 30 stocks of the Sensex, Hindalco Industries (up 6%) and Ranbaxy Laboratories (up 4.5%) were the top gainers, while DLF (down 2.5%) and Sterlite Industries (down 2.5%) were at the bottom of the
table. Banking and IT sector stock were trading with positive momentum, while realty stocks were in red.

To see full report: EAGLE EYE 140909


Focus on long-term value – boost from short-term catalysts
Despite Shire’s strong (17%) run since 2Q results, we maintain our Buy rating. We expect the market to continue refocus away from short-term earnings risks and towards the long-term value in Shire driven by its 17% ‘10-13E EPS CAGR and DCF valuation of 1271p. With believe upside to earnings is now possible from: 1) The recent acceleration in Vyvanse Rx share gains; 2) Faster growth/US approval of Velaglucerase (Gaucher’s disease) due to Genzyme’s production
problems; and 3) Faster rollout of recently approved Intuniv (ADHD) vs conservative street estimates. Reiterate Buy.

Investors refocus on long-term growth – PO raised to 1200p
Investors continue to refocus on the long-term value in Shire in our view. From 2010, with the launch of generic Adderall XR behind it, we expect Shire to enjoy superior to growth to its industry peers with a ‘10-13E EPS CAGR of 17% vs the EU sector average of 5%. On a DCF basis, Shire’s strong cash generation yields a DCF valuation of 1271p. Our increased price objective of 1200p (from 1100p) assumes the stock trades closer this following recent positive newsflow (below).

Upside opportunities emerging
We now see several areas of upside to forecasts; 1) Vyvanse Rx market shares have reaccelerated over the last four weeks adding 1% share (more than in the previous 6 months) as we enter the back to school period and likely due to some potential lag effect from a co-promotion agreement in adult ADHD with GSK; 2) Velaglucerase (Gaucher's disease) could benefit from accelerated access to the US market due to competitor Genzyme's manufacturing problems. Approval is likely by March 2010 and would see c10% upside to our 2015E EPS; 3) Intuniv, Shire's non-stimulant ADHD drug, approved last week, could exceed conservative estimates (BAS-MLe 2015: $345m) and offer a further 10% 2015E EPS upside.



Unattractive near-term

Trading above fair value, near-term risks remain
Galenica trades c10% above our DCF-derived fair value of CHF295 (which assumes the stock trades on 9.6x our 2010E EPS estimates) and, in our opinion, is overvalued relative to its ’10-13E EPS CAGR of 2%. While pharma EBIT is growing, this is due to a decline in amortisation from the Aspreva acquisition, with EBITDA in decline (BAS-MLe -18% in 2009E). With the near-term risk to US sales of Galenica’s intravenous (IV) iron Venofer, (c20% of 2008A pharma sales) from a newly launched competitor, AMAG Pharma’s Feraheme, we see only downside risk to consensus 2010E forecasts and maintain our Underperform rating.

2H09 likely to be a tough half
We believe 2H09 is likely to be a tougher half for Galenica than 1H09, as we expect it to face: 1) The full impact of the decline in its US Cellcept royalties following US generic entry in May 2009; 2) New competition to its intravenous (IV) iron Venofer in the US from the launch of AMAG Pharma's Feraheme in July 2009, as well as; 3) The higher development and commercialisation costs
associated with the roll-out of IV iron Ferinject across Europe that saw 1H09 miss versus our expectations.

Feraheme remains key overhang
Feraheme, AMAG Pharma's IV iron, launched in the US in July 2009. Given its more convenient dosing we believe it has the potential to take significant share from Venofer. While uptake may initially be slow as dialysis centres run pilot studies to establish treatment protocols, we forecast that US Venofer sales decline 16% in 2010E as a result of the competition. Feraheme offers more convenient dosing than Venofer in non-dialysis indications and could offer economic benefits to clinics in the dialysis setting.

To see full report: GALENICA (MERRILL LYNCH)



Impact of weak monsoon: No negatives as yet
A weak monsoon has not led to any slowdown in Marico till date and the company expects Q3 to reflect a better picture of any material impact (if any). Only 18% of total sales come from North India (large rain deficit) and thus the monsoon impact is not a big worry. Around 60% of the company’s sales are from South and West, which have seen less rain deficit. Also, the recent pick up in rainfall is a positive.

Saffola and Parachute: On track
Post a strong Q1FY10, Saffola and Parachute have been doing well. However, the company believes that Q1 was an aberration in terms of volume growth as it was backed by promotions, which will cease going forward. For FY10E, the company expects Saffola and Parachute volumes to grow ~11% and ~8%, respectively.

International business: Gaining momentum
In the beginning of FY10, Marico had envisaged its international business to grow at 15-16% (Y-o-Y) on constant currency basis. Post a strong Q1FY10, with 40% growth (Y-o-Y), management expects the number to be ~23-25% for FY10E. Bangladesh, Egypt, and GCC are gaining momentum and expected to do well.

Margin profile: Expansion to continue
For FY10E, the company expects to save around 250-300bps from dip in raw material prices, but will increase its ASP spend by 150-200bps to clock higher volume. Thus, overall EBITDA margins are likely to improve by 100bps in FY10E.

Outlook and valuations: Positive; maintain ‘BUY’
At CMP of INR 90, the stock trades at P/E of 23.1x and 19.9x and EV/EBITDA of 15.3x and 13.0x our FY10E and FY11E earnings, respectively. We remain optimistic on the company’s sustained earnings growth with new product launches (Cooling Oil and Saffola Rice) on the anvil. We maintain our ‘BUY’ recommendation on the stock. On relative return basis, the stock is rated ‘Sector Outperformer’.

To see full report: MARICO

>Rising Interest Rates: Not That Scary (CITI)


Earlier rate hikes — Our economists expect monetary tightening to begin earlier for Asia. Korea (1Q10), India and China (2Q10) likely the first markets to tighten.

Limited impact on loan growth, credit quality — Rates will rise due to normalization rather than cooling off of over-heated economies, and should coincide with improving economic growth. Loan growth is largely still weak across Asia. We have already had an NPL cycle in 4Q08, and NPLs are improving in Asia.

Mostly positive for NIMs — Most major Asian banks have big deposit franchises (high % of low-cost deposits), which mean widening deposit spreads as rates rise, while assets tend to reprice faster than liabilities. Our key conclusions:
1. Insurers are bigger beneficiaries than banks – Insurers carry much less credit risks and are earlier/more direct beneficiaries of inflation/higher asset prices.

2. Korea and China are significant NIM beneficiaries – Chinese banks will benefit from the high % of demand deposits; Korean banks’ deposit and wholesale funding costs should improve while earnings sensitivity is very high.

3. Indian banks appear most negatively affected given limited scope for NIMs to rebound plus large and long duration bond portfolios (revaluation losses).

4. HK and SG beneficiaries are the big deposit franchises (BOCHK, HSB, DBS).

5. Non-issue for Taiwan and Malaysia (rate cycle laggards) and Thailand.

History is inconclusive — Results of reviewing historical price performances going into the first tightening round is highly inconclusive; interest rates may be only one of many factors affecting share prices.

Valuation — Asian banks are trading a little below mid-cycle P/Bs. Outliers: SCB, Fubon (over 20% above mid-cycle); First, CMB, ICBK (20% below mid-cycle).

Beneficiaries / most hurt — Key gainers: Chinese life insurers and banks, Korean banks, large HK banks, DBS. Most hurt: India PSU banks, mid-cap HK banks.

To see full report: ASIAN FINANCIALS



Bailouts, the key reason for increased supply of the dollar

The September Effect

Key gold-demand driver’s during September:
  • The post-monsoon wedding season in India and increased buying before one of the most important festivals of the country - Diwali.
  • Restocking by jewelry makers in advance of the Christmas shopping season in the United States;
  • The holy month of Ramadan in the Muslim world, whose end in late September is marked by a period of celebration and gift-giving;
  • And in China, the week-long National Day celebration starting October 1 and the run-up to the
Chinese New Year in early 2010.

Significance of the recent rally in the precious metals

Bottom-line: The dollar might correct 3-4% from the current levels suggesting a target of 74.2 for DXY. S&P is likely to move towards 1076 level making it a potent of 5% upside. On Gold the target is $1032 per ounce, another 4% from the current levels. Although the momentum is strong in Nifty, still it might be tough for it to cross the psychological level of 5000 during this move as the target for the index remains at 4970 another 6.6% form current levels. Target for Oil is $75/barrel and for Tadawul is 5842.

To see full report: DOLLAR



Optimising presence; maximising long-term growth
Idea Cellular (Idea), currently operating in 17 of 22 telecom circles in India, is set to become a pan-India player by end-2009. The company is a unique wireless play—strong incumbent in a tough industry environment with superior spectrum profile, as well as a new entrant capitalising on new growth opportunities. Idea’s expansion into new circles is expected to provide a leg up to its subscriber and revenue growth in the near term and offer long-term profit growth opportunities. We expect subscribers to double over FY10-12 with new circles contributing ~28% to net adds and ~15% to topline in FY12E.

Growth metrics compelling over FY10-12 vis-à-vis domestic peers
We expect Idea to be the fastest growing domestic teleco (ex-Indus) with healthy revenue CAGR of 14% and EBITDA CAGR of 16% over FY10-12E. While we expect new launches to contribute to subscriber/revenue growth, we believe old circles’ profitability will subsidise new circles’ losses up to FY12. Strong investment focus over FY10-11 is expected to keep net profit under pressure, though we expect an improving FCF profile (expect FCF positive in FY12).

Indus advantage: Operational benefits and likely valuation gains
Idea holds 13.42% effective stake in India’s largest tower company Indus. Indus provides Idea the scope to leverage its presence in 16 circles for its expansion plans through speedier network rollouts. With Indus consolidation, we expect Idea’s revenue, EBITDA and net profit CAGR of 14%, 20% and 14% respectively over FY10-12E. We believe Idea’s stake in Indus is a likely valuation trigger, if the latter were to list or equity stake sale by promoters or with addition of external tenant(s).

Outlook & valuations: Healthy growth metrics; initiating coverage with ‘BUY’
We expect Idea’s consolidated EBITDA and net profit to post a healthy CAGR of 20% and 14%, respectively, over FY10-12E. The company is in a comfortable funding position (ex-3G) post stake sale to Axiata and Providence Equity. We peg Idea’s fair value at INR 98/share, comprising DCF-based core business value at INR 73/share and stake in Indus and owned towers at INR 25/share. Key risks include irrational bidding for 3G spectrum and execution risks on new launches. At INR 80, the stock is trading at a P/E of 24.8x and 25.6x and EV/EBITDA of 10.2x and 8.5x FY10E and FY11E, respectively. We initiate coverage on the stock with a ‘BUY’ recommendation (Sector Outperformer/Medium Risk).

To see full report: IDEA CELLULAR


Fund raising post QIP failure a surprise

Investment Conclusion
We reiterate our REDUCE rating on GMR Infrastructure (GMRI) given what we deem to be its expensive valuation and our expectation of several disappointments relating to growth opportunities and in the airports segment. GMRI revealed plans to raise INR75bn yesterday, although its apparent need is much less, in our opinion. Importantly, it did not share any concrete
plans to use the funds thus raised; this is a key concern.

In an analyst meeting yesterday, GMRI shared its vision to grow at a rapid pace and with a hurdle rate of 16-18% IRR from new projects.

It believes dividends from InterGen would be sufficient to pay off acquisition debt.

Surprisingly, GMRI revealed plans to raise INR75bn over FY10-12 even as medium-term
requirement for projects under development is only INR28.5bn as per GMRI's estimates.

The plan envisages a separate listing of segment holding companies with a view to unlock value. We see this as a negative for the parent as one would now attribute a holding discount to GMRI since investors can pick and choose segments in which they would want to invest.

To see full report: GMR INFRASTRUCTURE


What’s the deal?


Small stake sale or big deal: Struggling to get a foothold in India, world steel major, Arcelor Mittal has entered into an agreement to acquire a 35% stake in a small re-rolling company, Uttam Galva. We think that this deal creates a new bench mark in both valuation and outlook for the Indian steel sector.


The assets – small re-rolling facility: Uttam Galva has 900kt of cold rolling capacity, 750kt of Galvanising lines and 90kt of colour coated capacity.

The valuation – very high: The deal price signifies a trailing valuation of 1.7x P/BV, 14.4x PER, and 7.9x EV/EBITDA. Even though it is just a rolling facility, it is being valued at EV/t of US$652. This compares with Tata Steel trading at EV/t of US$600.

Strategic rationale – entry in lucrative Indian market: The Indian market is one of the few fast-growing markets, which has a supply deficit. Arcelor Mittal’s own efforts to gain an entry through Greenfield projects have been unduly delayed due to land acquisitions and other issues. Uttam Galva mostly imports hot rolled coil for value addition. This gives Arcelor Mittal a ready market to sell its products. Also, it gets exposure to some upstream initiatives which Uttam Galva is pursuing.

Highlights difficulties in setting up large steel capacity: Both Posco and Arcelor Mittal have announced large steel projects of 12mtpa each. Even after 3–4years, and full support of the central government, these projects have hardly made any headway. The issues involved are allocation of resources, land acquisitions and environmental clearances.

Further opportunities – plenty: However, many small steel companies, like Electrosteel Casting, Monnet Ispat etc., have cornered large iron ore and coal resources and are pursuing large steel projects. This deal gives some visibility as to the possible valuation trend.


Maintain Outperform: The Indian steel market is the 2nd fastest growing steel market globally with cheap availability of iron ore making it ideal for steel production. We believe that domestic steel companies are better placed to grow given the issues faced by most multi nationals trying to enter the Indian market. Also, we believe any further consolidation attempts will lead to better value discovery. We maintain our Outperform on Tata Steel and JSW Steel.

To see full report: STEEL SECTOR


Ad environment likely turning more positive

Hindi GECs – Zee TV #1 in prime time; NDTV Imagine loses ground
Competition within tier I of Hindi GECs remained high, with Colors and STAR Plus at the #1 spot alternatively in different weeks in August ’09. Zee TV continued to generate stable GRPs, and bridged the gap from the #1 player to 15-30 GRPs in August ’09 from 30-40 GRPs in July ’09. Zee TV was the clear #1 in prime-time GRPs, while Colors and STAR Plus shared the #2 and #3 spots. NDTV Imagine lost GRP share post the finale of its blockbuster show, Rakhi Ka Swayamwar and its GRP dipped below 100 to 93 in week 35 after 13 weeks of continuous >100 GRPs. Sony Entertainment TV maintained its GRP share and was the #4 player in weeks 33-35.

Ad rate hikes by Deccan Chronicle and Zee Entertainment Enterprises
In an indication of improving ad outlook, Deccan Chronicle (DCHL) announced a 20% hike in its ad rates starting October 1, ’09. However other print players such as Jagran Prakashan and HT Media commented that they do not plan to increase ad rates in the near future. In the broadcasting space, Zee Entertainment Enterprises (ZEEL) is expected to increase its ad rates up to 10% across its different channels. While the macro environment has turned positive, the unknown impact of deficient monsoons could play spoilsport.

Zee News – Competition & distribution issues worrisome

Zee Bangla and Zee Kannada continued to lose GRP share in their respective markets owing to intensifying competition from the STAR Group channels – STAR Jalsha in West Bengal and Suvarna TV in Karnataka – and possible distribution issues. Zee Marathi remained the #1 player in the Marathi market, but intensifying competition from STAR Jalsha led to loss of GRP share. Zee Telugu also lost GRP share in the fragmented Telugu market as Maa Telugu, another #2 spot contender, witnessed increase in GRP share in August ’09.

To see full report: MEDIA SECTOR



Pulse Track >> IIP on the growth path
Stock Update >> Sun Pharmaceutical Industries
Sector Update >> Telecommunications

To see full report: INVESTOR'S EYE 110909