Sunday, October 11, 2009

>Is growth back in fashion? (HSBC)

  • Prefer growth investing over value style; better valuation and superior earnings growth create a compelling proposition
  • At 1.3x relative PE, growth stocks are trading at the lowest valuation premium in five years
  • Analysts forecast superior earnings growth for growth vs value stocks
Growth stocks are trading at a relative valuation that is lower than their historical level. The growth index is currently at a 12-month forward PE of 20.4x, while the value index is at 15.8x. The valuation premium of growth stocks, at 1.3x, is in fact one standard deviation below its five-year average. Also, at a 12-month forward PE of 15.8x, value stocks are no longer cheap.

In India, as opposed to other markets, growth stocks have outperformed value stocks over the longer term. Their performance is also better on a risk-adjusted basis; the Sharpe ratio of the growth index is 0.109 vs 0.108 for the value index.

From March 1997 to June 2009, the EPS of growth stocks grew at a CAGR of 13.5% compared to 7.8% in the case of value stocks. In the last two years, the performance of growth stocks lagged that of value stocks, as EPS growth of the former lagged that of the latter. Looking ahead, analysts forecast a turnaround, marked by growth stocks growing earnings at a CAGR of 22.5% versus value stocks at 17.5% over FY2010-12e.

A turnaround in earnings, stronger growth, and lower relative valuation make a compelling case for growth stocks. We recommend investing in growth stocks over value stocks.

From within HSBC’s coverage universe, we highlight growth stocks rated Overweight and value stocks rated Underweight. Some of the Overweight growth stocks are ITC, HDFC Bank and BHEL, while an Underweight value stock is Reliance Infrastructure.

To see full report: INDIA INSIGHTS


Likely implementation of CAS in 2009 to be the key trigger for growth…Emergence of newer delivery platforms DTH & IPTV to drive increase in subscription revenues

Stock appears richly valued in view of intensifying competition in business news space & earnings dilution resulting from proposed rights issue…


It is hard to make real cash flow in any business in India (unless you are in politics)…and nothing
exemplies this better than the Indian news media space. The sector is awash in red ink, and we really can’t see how this will change quickly, unless India’s stock market starts doubling every three
months (which it just did, in case you didn’t notice), or start having national elections every year
(which is definitely not happening for the next 20 years or so).

TV18 has been an outstanding success when it comes to eyeballs, but cash is quite another matter. To have negative EBITDA margin is quite a feat and TV18 achieved that in FY09.

The bewildering array of new initiatives like the portal, etc., are all really long shots. These will

make some money…eventually. Maybe

Hmmm…now what should one rate a stock like this?

We initiate with a Market Perform rating because no broker can anger a financial news network…

Television Eighteen India Ltd. TLEI.IN/TVET.BO, India's premier business and consumer news broadcaster and leading media content provider, has a presence in television through its two business news channels - CNBC-TV18 and CNBC-Awaaz - and in the Internet space through a number of web portals. Both these channels are dominant players in their respective genres, with the English business news channel commanding a consistent market share of 50% over the last five years, while the Hindi channel clearly dominates over its closest peer with a market share of over 68%. In the Internet space, the company has started/acquired a number of web portals Web 18 and has also launched Forbes Business magazine in India in collaboration with Forbes Media. It has also formed a 50:50 JV with Jagran Prakashan for launching a Hindi business daily in the Indian market, which, however, has been currently being put on hold. The company has been recording strong revenue growth since 2001, on the back of the country’s fast paced economic growth, with consolidated revenues growing at a CAGR of 55.17% over the last five years. However, the initial start up costs for its business news channels and web portals and competition from new channels NDTV Profit and the recent launch of UTV I have taken a toll on TV18’s profitability. The company’s proforma profit declined from Rs.383 mn in FY06 to Rs.63 mn in FY08 and it reported a proforma net loss of Rs.2.4 bn for FY09. Moreover, the fortunes of all business news channels are closely linked to the condition of the capital market, which has been witnessing a downturn for the past one year, though it is now exhibiting some signs of a recovery, post the elections.

In order to fund the company’s mounting losses, working capital requirements and debt repayment, TV18 plans to raise Rs.5 bn through a rights issue. We expect the company’s new ventures, particularly, those in the print media segment and web portals, to continue demanding the infusion of additional capital. On the positive side, the key trigger for TV18’s growth will come from the implementation of the Conditional Access System CAS, which is likely to be implemented by 2009. This, coupled with the emergence of newer delivery platforms, such as Direct-To-Home DTH and Internet Protocol Television IPTV, is expected to result in an increase in the company’s subscription revenues.

To see full report: TV18


Don’t wait till the next project win

Only pure-play proxy on highway spending
We initiate coverage on IRB Infrastructure (IRB) with a BUY rating and TP of INR293.00. IRB is a pure-play highway developer with over 1,000km, or INR110.6b, worth of projects in its BOT portfolio. IRB has more than INR215b worth of projects under tender and we estimate new
project wins provide potential upside to the current price. The construction arm has an INR103b order book (represents 19x FY09 construction revenue).

INR1t opportunity over FY10-12; INR215b bids placed
The National Highway Authority of India (NHAI) is likely to tender INR1t worth of projects in the next three years. IRB is pre-qualified for more than INR215b. Separately, the NHAI has also made several changes to the model concession agreement that would attract private developers.

Internal accruals can support additional INR20b projects
We believe the company can win INR20b (approximately 10%) of projects from its existing bid pipeline of INR215b, based on its prequalification. We estimate that the internal accruals will be sufficient to fund equity in these additional projects. This holds true even if the traffic growth declines to 2%. In the worst case, the company can lever its standalone (with net cash of INR838m) or six debt-free projects generating EBITDA of INR1b annually.

Our TP of INR293.00 is based on SoTP valuation. The BOT projects and construction business contribute INR130 and INR108 to our TP. Potential new projects and the real estate venture contribute INR30 and INR25 respectively. We use DCF to value the BOTs and an EV/EBITDA
multiple of 8.0x on our FY11 construction EBITDA of INR4,860m (implied FY11 P/E multiple of 12.6x is at a 40% discount to market leader L&T).

A 0.5% change in annual traffic growth (from current 7%) results in a 5.0% change in TP. A 0.5% change in cost of equity has a 2.0% impact on TP. Our TP increases by 2.7% for every INR5.0b of projects secured

To see full report: IRB INFRASTRUCTURE

>Time for a Healthy Correction…. (MOTILAL OSWAL)

At the start of the month of September, Nifty broke the neckline of "Inverse Head and Shoulder" pattern and it started making higher tops and higher bottoms on the daily chart and made a high of 5110 on 1st Oct. Among the sector indices, the BSE Bankex, BSE Metal and BSE Health Care were the top gainers. On the daily chart Nifty has made a "Evening Star" pattern and the RSI oscillators has given a negative diversion. On the weekly chart, stochastic oscillator is giving sell signal, thus one should be cautious at current levels, but the confirmation of downtrend will come only if Nifty breaks its recent low of 4900, thus one should keep a strict stop-loss of 4900 for all the long positions. On higher levels the recent high of 5110 will play as a strong resistance, if Nifty manages to break this resistance then we may see continuation of upmove in the coming days. However as Nifty made an "Inverse Head & Shoulder" pattern and on the weekly chart Nifty is still making "Higher Tops and Higher Bottoms" thus the long term trend is still bullish.

Going forward, one should be cautious at current levels and keep a stop-loss of 4900 for all the long positions. If Nifty breaks 4900 then it can test 4821 and below that 4731, these are 38.20% and 50% retracement level of the rally from 4353 to 5110. Below 4731 Nifty has strong support at neckline of "Inverse Head and Shoulder pattern, which is placed at 4650. The long term trend is still bullish thus 4750 - 4650 would be a good accumulation range for long term investors.

On higher levels, the level of 5110 will play as a strong resistance for short term. If Nifty manages to break 5110 then it can test 5168 and above 5298, which is May'08 high. However if it sustains above 5298 then it can test Feb'08 high of 5545.


In the current scenario, the strategy for Nifty would be:
1. The existing long positions can be held with strict stop loss of 4900.

2. Fresh long positions can be created only above 5110 with stop-loss of 4968 for the target 5298.

3. If Nifty is able to cross 5298, then by using the trailing stop loss method, the trading buying positions can be continued for the target of 5545.

4. Trading selling positions can be created if Nifty breaches the recent low of 4900 with a stop-loss of 5005 for a target of 4731.

5. If Nifty breaks 4731 then by using the trailing stop loss method, the trading selling positions can be continued for the target of 4650.

To see full report: MARKET OUTLOOK


“Profits in the Pipeline”

Commensurate with the global recovery, the pipe industry is expected to benefit considering the quantum of investments proposed for the pipeline projects across the globe. The business potential for the SAW pipe manufacturers from these projects is pegged at US$ 117 billion over the next four to five years. The Indian Pipe manufacturers which have majority of the revenues coming from exports & having accreditations from oil & gas majors across the globe are expected to garner a sizeable share from these projects. In addition to the new projects, the replacement market in North America would be an additional demand driver for the Indian pipe manufacturers. The demand-led growth coupled with healthy order book and capex plans augurs well for the Indian players. We are initiating coverage on the Pipe Industry with the top three picks being PSL, Welspun Gujarat & Jindal Saw.

Key Investment Highlights

Demand driven growth to continue
The global pipeline requirements is expected to be ~98 million tons with a total of 710 projects and an opportunity of more than $117 billion across the globe for the next five years. Thus the addressable market for the pipe manufacturers is pegged at $23.4 billion per annum while the tonnage requirement is estimated at 19.6 million tons per annum. With the close proximity to the ports coupled with lower labor cost & locational advantage, Indian players are expected to bag sizeable share of these orders. Further we believe the Indian companies is set to benefit from the proposed gas pipeline network to be built by GAIL, GSPL, and other domestic players,
who have announced plans to construct pipeline transmission networks in India worth over Rs 20,000 crore.

High revenue visibility inspires confidence
Indian pipe manufacturers have strong order book despite the challenging circumstances prevalent in the economy. These order books are set to galore with the demand for pipes likely to pick up over the next few years. This provides high revenue visibility for these companies.

Positive outlook especially for SAW pipe manufacturers
While the demand for seamless & ERW pipes remain sluggish, the demand for SAW pipes is likely to remain firm as these pipes are basically oil & gas transportation pipes required for setting up oil & gas pipelines. While PSL is purely a SAW pipe manufacturer, Jindal Saw & Welspun Gujarat have majority of the revenues coming from this segment.

To see full report: PIPE INDUSTRY


Market Value
The Indian hotels and motels industry grew by 15.5% in 2007 to reach a value of $4.5 billion.

Market Value Forecast
In 2012, the Indian hotels and motels industry is forecast to have a value of $8.2 billion, an increase of 80.7% since 2007.

Market Segmentation I
The domestic consumer sector of the Indian hotels and motels industry is the most lucrative, with a 57.1% share of the total value.

Market Segmentation II
India accounts for 5.3% of the Asia-Pacific's hotels and motels industry's value.

To see full report: HOTELS & MOTELS IN INDIA


During 2QFY10E, SpiceJet is expected to report significant improvement over 2QFY09 results. For the aviation industry, July - September period is relatively a lean season as compared to the remaining three quarters. Accordingly, we expect SpiceJet to report net loss of Rs271mn for the
quarter under review but a considerable improvement over 2QFY09 net loss of Rs1,975mn.

We expect SpiceJet to report revenues of Rs4,834mn during 2QFY10E, a YoY growth of 42% over 2QFY09 revenues of Rs3,402mn. Revenues are expected to grow on account of 48% expected rise in departures and expected sharp improvement in load factors from 55.6% during 2QFY09 to 74.1% for the quarter under review. Sharp up-tick in load factors is primarily due to recovery in the domestic passenger traffic coupled with 32% expected fall in average fares on YoY basis. During 2QFY09 average fares for SpiceJet was Rs3,982 and the same is expected to drastically come down to Rs2,689 during 2QFY10E on back of fall in ATF prices. We expect average fuel cost for the quarter to be at Rs34 per liter as against ATF price of Rs64 per liter prevailing during corresponding quarter previous year.

We therefore expect SpiceJet to report negative EBITDA of Rs382mn during 2QFY10E as against negative EBITDA of Rs2,147mn reported during 2QFY09. Accordingly we expect the company's net loss for the quarter to come down from Rs1,975mn to Rs271mn on YoY basis. On back of improving traffic scenario and stable oil prices, we are revising our FY10E estimates. We are revising our sales estimates upwards by 25% from Rs16,130mn to Rs20,106mn and our net profit estimates upward by 10% from Rs833mn to Rs917mn.

Furthermore we are introducing FY11E numbers in our estimates. SpiceJet would complete 5 years of domestic flying by May 2010 and hence would be eligible to fly on international routes. SpiceJet would be adding 4 aircrafts each during CY2010 and CY2011 and 1 aircraft in CY2012 which we believe would be used primarily on international routes. In our FY11E estimates we have assumed load factor of 72.4%, average fares of Rs3,173 and ATF price of Rs40 per liter. Accordingly for FY11E we expect the company to generate revenues of Rs24,104mn, EBITDA of Rs1,115mn and net profit of Rs1,416mn translating into an EPS of Rs3.6. We are increasing our target price from Rs16 to Rs43 on account of increase in PE multiple and rolling over our valuation from FY10E to FY11E. We are increasing our PE multiple from 8x to 12x on account of improving domestic passenger traffic demand, stable oil prices and company's eligibility to fly on international routes from May2010 onwards. At the CMP of Rs35 we rate the stock as an Outperformer.

To see full report: SPICE JET


The global financial crisis has demonstrated clearly that many banks lacked a proper understanding of their true risk profile and realized too late that it was not in line with their desired risk profile. This forced senior management to explain losses that were a multiple of what shareholders had expected to face. The key lesson learned from this crisis is that financial institutions need to have a comprehensive risk appetite framework in place that helps them better understand and manage their risks by translating risk metrics and methods into strategic decisions, reporting, and day-to-day business decisions.

Risk appetite is considerably more than a sophisticated key performance indicator (KPI) system for risk management. It’s the core instrument for better aligning overall corporate strategy, capital allocation, and risk. Regulators, rating agencies, and professional investors are aggressively pushing banks to advance their risk management practices. A comprehensive risk appetite framework is the cornerstone of a new risk management architecture.

To see framework: RISK APPETITE

>“You cannot spend your way out of recession or borrow your way out of debt.”

The “Good” News?
The “good” news is the recession is officially over. Real GDP dropped only 4% peak‐to‐trough, S&P 500 revenues dropped only 18%, and home prices dropped only 31.3% nationwide. Broad‐based unemployment (including the underemployed) reached 17.0%, which translates into 17.4 million Americans out of work and another 9.2 million working part‐time jobs that are insufficient to pay their bills.1 After losing an average of 578,346 jobs every week since October 2008,2 the headline unemployment figure improved in July from 9.5% to 9.4%. Never mind that in August the Bureau of Labor Statistics (”BLS”) revised their prior estimates, and a portion of the “improvement” in July was achieved by adjusting the total size of the labor force (think increasing the denominator to reduce the percentage) and unemployment continued its upward trajectory to 9.7% in August and 9.8% in September. We are left wondering how broad based unemployment went from its most recent trough of 7.9% in December 2006 to 17.0% currently, while total retail sales declined only 3.6% over the same time period.

Bernanke and crew have done a masterful job of pulling out all of the stops (and then some) to save the US and world banking system from collapse. Having gone from potential collapse to valuations well above the 10‐year averages, the S&P 500 now trades at 2x book value and 20x EPS and credit spreads relative to Treasuries are back to pre‐Lehman levels.

Where We are Bullish
There are great businesses which have too much leverage, which are being or will be recapitalized through consensual restructurings or Chapter 11 bankruptcies. These “capital transformation investments” usually involve buying senior debt and working with the company’s stakeholders and management to craft a plausible capital structure to return the entity to health and growth. As the capital markets have recovered, money is flowing and many private equity players are prepared to invest in their existing portfolio companies after or in conjunction with a debt restructuring. It is in these types of situations that we see great opportunity. Our investments are focused on asset‐heavy businesses where we can buy into the right portion of the capital structure in advance of the restructuring. On the back end, we will likely end up owning some amount of senior debt with attractive current pay characteristics and in certain circumstances end up holding equity in the company for little, if any, real cost. This is one area where we are acutely focused and we believe presents the most asymmetric returns for being invested on the long side.

If the story could just finish here with such a happy ending – unfortunately, here is where the really bad news begins.

Never Before and Hopefully Never Again
Western democracies, communistic capitalists, and Japanese deflationists are concurrently engaging in what may be the largest, global financial experiment in history. Everywhere you turn, governments are running enormous fiscal deficits financed by printing money. The greatest risk of these policies is that the quantitative easing will persist until the value of the currency equals the actual cost of printing the currency (which is just slightly above zero).

There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations – all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.

To see full report: BULLISH MARKET


In this particular case, "V" stands for Valuation, because every basis point of this 60% rally in the U.S. equity market from the lows has been due to an unprecedented expansion in P/E ratios. In fact, by some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.

There has been plenty of debate over whether equities are overvalued or not, and certainly we would assume that many investors know where we stand on the topic. Lets look at the facts now that the September data are in.

On an operating ("scrubbed") basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today.