Monday, September 28, 2009

>India's ETF investors make up for missing gold buyers

Mumbai - Record prices have forced many of India's traditional gold buyers out of the market in recent months with jewelry demand remaining largely lethargic, but the recent rally in prices is creating a new source of demand - investors who are looking for the safety, convenience and steady returns of exchange-traded funds or ETFs, backed by gold.

Even among investment products, ETFs are gaining an upper hand over gold bars and coins because of the easy liquidity and lower costs associated with ETFs, analysts say. India has for long been the biggest market for gold, but much of that demand has traditionally been from rural households which buy gold in the form of jewelry.

While India continues to be a price-sensitive market with every rally hitting demand for the yellow metal, the rising popularity of ETFs indicate that going forward, the Indian market could see less of an impact from rising prices at a time when gold is again in the limelight because of a falling dollar and increasing fears about the return of high inflation.

"In the last 10 days, our daily volumes have more than doubled to 70-80 kilograms. This is despite it being an inauspicious period to buy gold in the country," said Sanjiv Shah, executive director of Benchmark Mutual Fund, which has the largest volumes and assets under gold ETFs in India.

Domestic spot gold prices rose above INR16,000 for 10 grams for the first time Wednesday after international prices convincingly moved above the key $1,000-per-troy-once level earlier this week.

The rally has come at time when Indian consumer demand has already been at multi-year lows since the start of the year. According to the World Gold Council, India's gold consumption fell 38% on year in the April-June quarter to just 109 tons. During the previous quarter, gold sales were only 17.7 tons, down 83% on year.

Those numbers, however, are not deterring fund houses from launching even more instruments for investors looking at gold as an option.

New Funds To Tap Gold ETF Market Soon

According to market participants, a number of Indian fund houses are planning to launch gold ETFs in the next few months.

Religare Mutual Fund and HDFC Mutual Fund have submitted proposals to the Securities and Exchange Board of India - the industry regulator - to launch new ETFs.

Six fund houses - Benchmark Asset Management Co., Kotak Mahindra Mutual Fund, UTI Asset Management Co., Reliance Capital Asset Management Ltd., Quantum Mutual Fund and SBI Mutual Fund - already offer gold ETFs in India.

Separately, UTI Mutual Fund, Reliance Mutual Fund, and IDFC Mutual Fund have submitted proposals to launch funds that invest in gold ETFs.

"In the last one year, Indian gold ETFs have given excellent returns, prompting major fund players to plan more launches to tap this market," said Kapil Gandhi, a trader with STCI Commodities.

According to data from exchanges and the Association of Mutual Funds in India, gold ETFs have given returns of about 35% in the year ended Sept. 15, while gains from gold futures were around 25% for the same period. The stock market, as measured by the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, returned an even lower 23%, making gold ETFs one of the best investment choices last year.

With some analysts expecting domestic gold prices to hit INR18,000/10 grams soon, more investors are expected to go in for asset re-allocation and increase their investment in gold ETFs.

"Investors who had been waiting on the sidelines are now coming in and volumes have been above average in the last few days," said Arvind Chary, fund manager for Quantum Mutual Fund's gold ETF.

"Out of the total consumption of 800 tons of gold (annually), anecdotal evidence suggests that 200 tons were in coins and bars. Over a period of time, this demand will shift to gold ETFs," said Shah of Benchmark Mutual Fund.

This is expected to result in more gold buying by these fund houses. Currently, gold holdings by the six listed ETFs in India are estimated around 6 tons.

But some industry officials warn fund houses may be getting overly excited about the scope of the market.

"Indians still prefer to hold gold in their hands, (and that is) proving to be a deterrent to the growth of ETFs in India," said Ashok Minawala, former chairman of the All India Gems and Jewellery Trade Federation. "People have started accepting the current high (prices)" as expectations are for prices to rise further. That is helping revive consumer demand, he said.



Balance sheet leverage to drive future growth; initiate with a Buy

Source of opportunity
We initiate coverage on Reliance Infrastructure (RELI) with a Buy rating and a 12- m TP of Rs1,404, or 20% upside potential. The Indian government’s focus to attract investment of c. US$500bn for the 11th plan (FY08-FY12E) to build infrastructure through the public-private partnership route will augur well for the private sector, in our view. We believe that RELI, with 1) its in-house EPC arm & 2) strong balance sheet strength (capacity to build infrastructure order book up to US$8bn) is well placed to benefit from emerging opportunities in the infra segment. Moreover, our scenario analysis on the RIL-RNRL court case suggests that resolution of the dispute would offer RELI asymmetric risk to the upside.

(1) News flow on RELI being awarded infrastructure projects currently in the pipeline, particularly in relation to the road segment; (2) visibility of gas supplies upon the resolution of a court dispute leading to the commencement of work on gas-based plants in Dadri and Shahapur; and (3) completion of financial closure of the Krishnapatnam power project.

We value RELI using SOTP methodology (DCF for its power/infrastructure segments, EV/EBITDA for its EPC business). We value RELI’s 45% stake in Reliance Power using DCF and factoring in a holding company discount of 20% and remove it from the Conviction Sell List. Our bear/bull-case scenario analysis on RELI indicates potential down/upside of 15%/70%. Although the stock is trading close to its mid-cycle multiples, we believe these do not capture the earnings potential of RELI’s infrastructure business which we estimate will constitute about 20% of operating profit by FY12E.

Key risks
(1) Deployment of cash in unprofitable infrastructure projects; (2) delays in commissioning of projects under construction; (3) lower-than-expected EPC margins; and (4) court case outcome in favor of Reliance Industries.



Likely implementation of CAS in remaining parts of three metros & 55 cities by 2009 to be next big positive trigger…

Increase in viewership of business and general news channels to drive advertisement revenues higher…

The Story....

New Delhi Television Ltd. (NDTV) [NDTV.IN/NDTV.BO] is on the transformation path to become a full media conglomerate with interests in television, Internet, radio, mobile content and allied businesses. NDTV is India's first and largest private producer of news, current affairs and entertainment television and is well diversified in different genres of media like general news, business news, General Entertainment Channels (GEC), lifestyle and infotainment. The company has a track record of successfully launching three news channels - NDTV 24x7, a clear leader in the English news segment, NDTV Profit, a 24-hour business plus channel, and NDTV India, which is among the country's leading Hindi news channels. However, NDTV’s financial performance has failed to match its strong business performance. Over the last four years, NDTV’s standalone revenues have grown at a CAGR of 19.3% from Rs.1.5 bn in FY05 to Rs.3.1 bn in FY09, though the company reported a standalone proforma net loss of Rs.732 mn in FY09, as against a standalone proforma net profit of Rs.292 mn in FY05. The decline in the company’s profitability was primarily due to start up costs incurred towards NDTV Profit in FY05-07, as well as weak revenue growth and higher operational cost in FY09, on account of the economic downturn. In FY09, the company posted a consolidated proforma net loss of Rs.5.0 bn, mainly due to launching of five broadcasting properties, including NDTV Imagine, which entails heavy investment in the initial years in the form of operating cost.

Going forward, we expect NDTV to create significant shareholder value, as it has decided to
restructure the company by de-merging its news-related businesses, which is its core strength, into a separate entity. The implementation of CAS in the remaining parts of the three metros and 55 other cities, which is likely by 2009, will be the next big positive trigger for the company as well as the stock, as there will be a decline in under reporting of subscribers, which will lead to an increase in the subscriber base and, consequently revenues. Also, the current uptrend in the stock market, post the elections, coupled with continuous monitoring of the new government’s policy initiatives, will generate significant news content. This will result in viewers returning to the company’s business and general news channels, thereby attracting advertisers, which will lead to higher advertisement revenues. However, in order to fund its mounting accumulated losses, NDTV could resort to equity dilution, thus impacting its return on equity, or take up debt financing, thereby further affecting the company’s profitability, which is a cause for concern to us. On the valuation front, the stock currently trades at an EV/EBIDTA of 43.0x our FY10 estimates. While the stock valuation is expensive, we believe that the company’s success in delivering a strong business performance will help strengthen its financial position significantly over the longer term, apart from being an acquisition candidate. Moreover, our estimate of sum of the parts valuation for the stock is Rs.175. We initiate coverage on NDTV with a rating of
‘Market Perform with Outperform Bias’.

To see full report: NDTV


The Global Financial Crisis: One Year On…

Presentation Path

One Year On…

  • G3 Recession – Worst is behind Us
  • Asia – Sweet Spot in the Inflation and Growth Cycle
  • Welcome the Green Shoots…But there are Challenges
  • Indian Economy – Drought Dampens Outlook
  • Rest of South Asia – External Environment sees an Improvement
  • Appendix – Macroeconomic Forecasts


Rallied hard – What next?

Strong re-rating and further upgrades: Strong demand growth from China and now the restocking cycle gaining momentum in the developed world have provided visibility on the sustainability of metal prices; thus, our commodities team has upgraded its metal price forecasts. However, none of our forecasts is above current metal prices, as we expect a supply response to kick in. The key themes to play are restructuring and domestic growth, in our view.

Our preferred metals: Based on supply-demand fundamentals, we prefer exposure to copper, iron ore, coking coal and zinc. Aluminium remains our least preferred metal.

Themes to play: While we believe that most of the commodity price increases have been factored into stock prices, we focus on the following

  • Restructuring: It is a new world order, and many companies are restructuring to emerge as lean and mean. Tata Steel is our top pick, and we stand 19% ahead of consensus on FY11.
  • Domestic growth: India is one of the fastest-growing economies and is supply-constrained. Sterlite is our top pick, followed by Jindal and Grasim.

Consensus earnings estimates – Earnings upgrades to continue: After our upgrades, our FY10 estimates for most companies are now 7–29% ahead of consensus, except for Nalco and Sail, where we lag by 8–10%. We expect maximum earnings upgrades for Hindalco, Sterlite and Hindustan Zinc, and we expect Jindal to have the maximum upside risk even on our estimates.

Valuations – Looking beyond FY10: The market is already looking at FY11 earnings as companies move towards sustainable operations and the predictability of earnings improves. In addition, the preferred valuation metric is moving from defensive PBV to earnings multiples such as PER.

Steel – Selective Outperforms: With our expectation of a cap on steel prices, we believe that the focus is back to basics. Tata Steel is restructuring to emerge better, while JSW is growing fast; they remain our top picks. Sail remains Underperform, due to its high cost structure and possible negative surprises.

Base metals – Looking for better entry: Our top pick here is Sterlite Industries, as we expect its numerous catalysts to play out. Hindalco is the most improved company; however, given our negative stance on aluminium and the lack of growth in the next two years, we await a better entry point.

Diversified – Maintain Outperform: JSP and Grasim are our top picks in this space. Both are benefiting from domestic growth and their leadership positions in their space.

Top picks: Sterlite, Tata Steel, JSP and Grasim remain our top picks.

To see full report: INDIA BASIC MATERIALS


Investment Rationale

Rich experience in the power sector is reflected in the business model that Tata Power has developed. The model ensures stable profits, coupled with growth on account of capacity expansion and merchant upsides.

  • Adopts a healthy mix of asset types evolving in the sector.
  • Integrated vertically and into related business like T&D, coal mining, etc.
Robust project pipeline, with a track record of timely project execution, ensures visibility to future earnings.

  • Project execution delays.
  • Fuel shortages.
  • Change in the regulatory environment.
To see full report: TATA POWER

>ADAG - 'Set for a big move' (INDIA INFOLINE)

To see report: ADAG

>Inflation, tight supply to boost crude oil

Singapore - Crude oil is the top commodity pick of Bank of America-Merrill Lynch (BAC) in the medium to long run as tight supply and inflation are likely to push up prices, an executive said.

"Inflationary pressures resulting from printing money will manifest most across those sectors that have the tightest capacity utilization, such as commodities and energy in particular," Diego Parrilla, who heads the Asia-Pacific commodities team at the U.S. investment bank, said in an interview with Dow Jones Newswires.

"Metals has a bright picture, but the tightness in supply side is most acute in energy."

Mainly used for production of transportation fuels, crude oil is hard to replace and it has become more difficult to find the next barrel of oil. These supply-side factors will likely drive up prices, said Parrilla.

While limited refining capacity, not speculation, drove crude oil futures on the New York Mercantile Exchange above $140 a barrel July last year, "the next wave up will be driven by strength and tightness in crude oil", he said.

"In the short run, the possibility of a big spike in commodity prices is somewhat limited," Parrilla said. This is because there is still spare production capacity and more refining units are coming on stream.

Oil inventories are relatively high and "it is still questionable whether the health of the recovery is strong enough to sustain much higher prices," he said.

Asia Expansion

BoA-ML is one of several banks including Barclays PLC (BCS), J.P. Morgan Chase & Co. (JPM) and Standard Chartered PLC (STAN.LN) that have expanded their Asian commodities trading teams following a rebound in oil prices.

The bank doubled its commodities team in Asia to 30 in the past year, in stark contrast to the retrenchment that followed last year's downturn, which saw the departure of Mark Long as Merrill Lynch's head of commodities trading in Asia, and several other staff in the region.

Parrilla, a Spanish national who was formerly an executive director of commodities sales at Goldman Sachs, joined the bank in April. BoA-ML also recently hired five senior staff to expand its commodities business in the key emerging markets of China and India, as well as in the energy and metals sector.

Concerns are also growing that proposed trading limits by the U.S. Commodity Futures Trading Commission, or CFTC, in energy markets may drive trade to other exchanges or to over-the-counter venues.

"As part of the rebalancing trend in global commodity demand and supply, it's only natural that we develop more - and more meaningful pricing benchmarks for these markets (in Asia)," Parrilla said.

"Whether the CFTC triggers this or not, I think it's still too early to say."



Could Satyam be a Rs. 200 stock again? We would bet on it…

Given that we see its RoE in FY11 reach 24% (nearly the same as
Infosys’!), a below-sector P/BV of 2.4x looks way too cheap…

The Short Story…

Sometime in June it became clear to us that while Mr. Ramalinga Raju may have fudged more than a few figures here and there, the company he built was for real: the business, the clients, the revenues, in large part, really did exist…and now that the ‘overhang was gone, Mahindra Satyam (SCS.IN/SATY.BO) would slowly begin to be rerated as a regular IT services stock. We
turned bullish on it in June, as a classic contrarian bet, when the stock was Rs.66. We reasoned thus: this was classical mis-pricing: the stock had gotten way too cheap as people were focussed on what Ramalinga did, rather than focus on the fact that on the service delivery front, no client had any complaints of Satyam. Plus the class action issue seemed to be over-blown.

In hindsight, Satyam in June was the trade of the year…you were buying a quality business at
bargain basement valuations.

The good news is: despite nearly doubling from then, the stock still looks set to deliver strong gains over the next year or so.

We would not be in the least surprised if the stock makes its way back to the price at which the
Ramalinga letter hit the wire, back in Jan 2009…

Our base case estimates revenues of Rs.87 bn for FY11 - only marginally above the FY08 numbers - take us to an EPS of Rs.10.7. And a current P/E of merely 11.1x FY11 earnings. Given the Rupee depreciation since FY08, the FY11 revenue estimate is a full 14% BELOW the FY08 revenues. Even our ‘best case’ estimates are built on US Dollar revenues $1,954 mn, 8.7% below FY08 revenues. This gives an EPS of Rs.12.3 and P/E of 9.7x - well below that for sector comparables.

What’s even more compelling is that as per our estimates, Satyam’s FY11 RoE will be 24%...about in the same range as Infosys and Wipro…why then should there be such a big gap in their P/BV ratios? And the P/E gap is there to see, as the Table below clearly shows… Add to this the fact that there is greater room for upside surprise in Satyam than in any other IT services play…simply because of the problems of January ’09. It can win back old customers, win new customers, create growth in a sector that looks mature. Satyam is now a company with room for growth, strangely enough because of Ramalinga…

Think about it…

This one has still lots of juice left…




Utilising the data
Resource equity performance has stalled to some degree as the market has chased beta elsewhere. In that context, we’ve considered a range of relationships in order to build our investment thesis and believe the environment remains ripe for the ongoing recovery in earnings momentum and more selective resource equity performance.

To that end, we’ve concluded that the rate of change in capacity utilisation is more important to equity performance than the absolute level itself despite the apparent need for industry activity to approach capacity rates before higher prices can be sustained.

With that in mind, we expect restocking in the Western World to drive the next leg of demand and (in a generic sense) higher industry utilisation rates following what looks to have been a deep destocking cycle over the last 12 months. In fact, when new orders in the US are compared with inventories we see the potential for a major inventory cycle recovery with direct parallels to the 1974 experience. Therefore, should China remain the positive influence on demand that we expect, it is only reasonable to expect another strong period for commodity markets and robust operating margins.

Hunting for value
That being said, the market has moved in breathtaking fashion to reflect the improved operating outlook. Therefore, despite broad-based upgrades across the complex, it’s only those commodities that express scarcity characteristics where we see the potential for a sustainable move above current spot rates. Once again, copper and coking coal stand out while China’s insatiable appetite for iron ore is expected to re-establish the benchmarks upward trend next year.

For the equities, the likelihood of broad based strength is positive for many of the companies under our coverage. However, with stronger cash flows and revitalised balance sheets the miners are no longer being priced for failure. Rather, in many cases, we’ve actually been surprised by the speed at which the market has been willing to price in the bull case. That reality has left us searching for value which is rapidly becoming as scarce as some of the commodities themselves. That’s not to say that momentum can’t carry the day – it can – although we’re much more comfortable with those companies that are exposed to our favoured commodities while retaining fundamental appeal.

To see full report: RESOURCES SECTOR


Why invest in Waste Water Management?

Household Waste Water treatment
Water Saving devices & equipment,
Water treatment systems
Low water consuming taps
Waterless urinals
Waste water treatment & recycling systems for buildings
Urban and Rural sanitation system upgradement

Industrial Waste Water treatment
Effluent treatment plants
Waste water recycling systems to remove chemicals, reduce waste and water consumption
Industrial Effluent – Treatment and reuse in Agriculture
Use of municipal waste water in industry after treatment
Sewage treatment plants
Recycling of treated waste water
Desalination projects

To see full report: WATER MANAGEMENT

>India steel imports may rise as supply lags demand

New Delhi - India's steel demand is expected to rise 8%-10% in the current fiscal year amid a series infrastructure projects supported by a government stimulus package and work ahead of the 2010 Commonwealth Games, but the domestic steel industry may not be able to ramp up production quick enough after delaying or shelving several expansion projects during the market melt-down.

This could lead to a rise in imports in the coming months, especially as importers take advantage of softer international prices after Indian producers raised prices in recent months.

According to industry estimates, imported hot-rolled coils currently cost about INR27,200/ton ($561.25) in the western Indian city of Mumbai while locally produced HR coils are priced around INR31,000/ton ($639.2) at factory gates.

"I understand, there have been a number of contracts for hot-rolled coil imports signed between Chinese exporters and Indian buyers in the last few months," said a federal government official who did not wish to be named.

According to provisional estimates, imports have already risen by 4% on year between April and August, to 2.75 million metric tons. The shipments were mainly from Russia, Ukraine and France, according to the Joint Plant Committee, a data dissemination unit under the federal steel ministry.

"There is a shortage of hot-rolled coils in the country," said S.C. Mathur, executive director of Cold Rolled Steel Manufacturer's Association. Hot-rolled coils are main input used in making cold-rolled, value-added steel.

India's steel output rose just 2.7% on year to 23.46 million tons in the first five months of the current fiscal year from April while demand rose by 6.6% to 22.14 million tons.

Local steel makers expect demand to rise further from the construction sector after the monsoon season ends this month. The construction sector in India accounts for about 60% of the total steel demand in the country.

"We expect demand to grow by at least 10% in the financial year ending March 2010 on rise in demand from sectors like automobile, engineering goods and construction," said P.K. Rastogi, the top bureaucrat in the federal steel ministry.

In fiscal 2008-09, demand totaled 52.05 tons while output was 56.08 million tons.

Big-Ticket Items To Boost Demand Substantially

Besides the federal government stimulus package, the World Bank has approved an additional $4.3 billion to support India's infrastructure investments.

With the expected surge in construction activity, steel producers are again looking at adding capacity.

"Most companies, which had earlier deferred their investment plans, are starting to invest again in capacity expansion," said Seshagiri Rao, joint managing director of JSW Steel Ltd (500228.BY), India's second-biggest steel company by domestic sales.

"We expect construction sector demand to grow after the festive season (October)...The demand had tapered a little in the last couple of months," Rao said.

Higher car sales during the festive months of September and October are also expected to boost steel demand. In August, car sales rose 26% in Asia's third-biggest automobile market.

Another source of strong demand could be the power sector as the country plans to add 78.7 gigawatt of generation capacity by March 2012, at an estimated investment of INR10.6 trillion to tackle its peak-hour power shortages.

"Enquiries for steel from power companies have increased sharply in the last few months," a senior official of a state-run steel company said adding that power plants consume a lot of steel for construction, machinery and transmission.