Friday, October 16, 2009

>Emerging countries: A recovery that remains to be confirmed (ECLAIRAGES)

Emerging market countries: After the shock:
The global crisis has affected all emerging market countries, to different degrees, through the real channel (with lower demand from developed countries and lower commodity prices) and the financial channel (with a freeze or even reversal in capital flows). Economic activity, and industrial production in particular, contracted sharply in late 2008 and Q1 2009. Q2 saw a sometimes sharp rebound, which should continue with support from the reprieve in the developed countries, and from the same technical factors, i.e., inventories and a base effect. In the medium-term, however, despite fundamentals that are sound on the whole, the pace of growth in the emerging market countries will continue to depend on growth in the developed countries, which could remain soft.
"They died not all, but all were sick"

Asia: On the road to recovery
Asian countries have been able to resist well during the global turmoil. However a complete recovery can only take place in Asia when the US economy fully exits the crisis and job markets return to normal. Beyond that, Indonesia, Philippines and Vietnam will be able to pick up more rapidly due to specific features that will bring further support to the economy. The reaction to the crisis has been the same throughout Asia. Without exception, all countries rapidly shifted towards a pro growth policy. Central Banks made drastic interest rate cuts. And helped by large fiscal leeway, policy makers implemented massive stimulus plans. Supportive measures are bearing fruits. The Chinese economy is recovering and is now expected to reach its growth target of 8% in 2009. In turn, this has led to a revival of Asian countries to a certain extent. The massive stimulus plan in China resulted in increased needs for commodities and intermediate goods which then led to a rise in Asian exports towards China. GDP growth in Asia also stood better than expected in Q2. Business sentiment improved following various signs of an upturn in USA and Europe. Even in Korea, confidence has gradually been restored since March. The won is now strengthening rapidly against the USD (30% appreciation since March 09 after a depreciation of 26% in 2008). These signs of recovery are increasingly fuelling hopes that the worst is over.

To see the full report: EMERGING COUNTRIES


Pause before year-end rally

We expect near term correction
Indian markets are entering a seasonally strong quarter. On an average October has been a poor month but markets rally sharply in December. While valuations are looking expensive to us, the bulls argue that they are not yet in a bubble territory. An ideal cocktail of easy liquidity and improving economy/earnings are providing support to the markets. While any meaningful change in the uptrend is unlikely till the global liquidity changes, we expect a near term correction in the market (maybe 7-10%) before the year-end rally, led by:

#1: Markets may sell on “good news on earnings”
While headline profits for Sensex companies should decline by 18%, ex-metals EBIDTA should grow 20% and profits 9.4%. While we think earnings will beat estimates, market expectations are running much higher. We expect markets to sell on “good news”. Secondly, the pace of analyst upgrades is starting to slow down which could be negative for markets.

#2: Cash with domestic MFs at 18-month low
Cash with domestic MFs are at an 18 month low of 8% (down from over 20% in Feb, 2009). These low levels of cash were last seen at the peak of the markets in Jan, 2008. While insurance companies are bigger buyers than MFs, it does indicate that buying from domestics will be lower going forward.

#3: Supply of paper to suck secondary market liquidity
Over next 6 months, we could see $10 bn of primary issuances, largely in infrastructure and real estate sectors. This could cap secondary market performance.

#4: Inflation, interest rates could be worries
We expect headline inflation to show a rapid increase to 6-7% over next 6 months. We also expect RBI to hike interest rates in January.

To see the full report: INVESTMENT STRATEGY



At the end of 2008, the • world’s population of high net worth individuals (HNWIs1) was down 14.9% from the year before, while their wealth had dropped 19.5%. The unprecedented declines wiped out two robust years of growth in 2006 and 2007, reducing both the HNWI population and its wealth to below levels seen at the close of 2005.

• Ultra-HNWIs2 suffered more extensive losses in financial wealth than the HNWI population as a whole. The Ultra-HNWI population fell 24.6%, as the group’s wealth dropped 23.9%, pushing many down into the ‘mid-tier millionaire’3 pool.

• T he global HNWI population is still concentrated, but the ranks are shifting. The U.S., Japan and Germany together accounted for 54.0% of the world’s HNWI population in 2008, up very slightly from 53.3% in 2007. China’s HNWI population surpassed that of the U.K. to become the fourth largest in the world. Hong Kong’s HNWI population shrank the most in percentage terms (down 61.3%).

• H NWI wealth is forecast to start growing again as the global economy recovers. By 2013, we forecast global HNWI financial wealth to recover to $48.5 trillion, after advancing at a sustained annual rate of 8.1%. By 2013, we expect Asia-Pacific to overtake North America as the largest region for HNWI financial wealth.

To see the full report: WORLD WEALTH REPORT


Good performance…

Shiv Vani Oil has reported strong Q2FY10 results with topline growth of 70.8% YoY to Rs 319.8 crore and bottomline growth of 18.5% YoY to Rs 56.4 crore. The EBITDA increased by 52.2% YoY from Rs 90.8 crore in Q2FY09 to Rs 138.2 crore in Q2FY10. However, net profit growth was lower on account of higher interest and depreciation costs. The company has a robust order book of Rs 3900 crore with execution period of ~2.5 years. We continue to maintain our OUTPERFORMER rating on the back of a robust profit outlook for the next two years.

Highlights for the quarter
Traction in project execution has led to a 70.8% YoY rise in sales from Rs 187.2 crore in Q1FY09 to Rs 319.8 crore in Q2FY10. The company has 30 rigs fully under operations in the current quarter. More rigs are expected to come under operation in the coming quarters. Depreciation charges increased on the back of more rigs coming under operation while interest costs also increased on account of higher debt for funding capital expenditure. Shiv Vani reported a net profit growth of 18.5% YoY from Rs 47.6 crore in Q2FY09 to Rs 56.4 crore in Q2FY10. The company has bid for tenders worth Rs ~3,000 crore and would consider equity dilution for capital expansion if it bags orders for some of the above tenders.

Shiv Vani’s current order book of ~Rs 3900 crore to be executed over the next ~2.5 years has improved its visibility, going forward. Traction in execution has also improved the fundamentals of the company. The stock is currently trading at 5.5x FY11E EPS of Rs 61.6 and at an EV/EBITDA multiple of 5.1x FY11E. We have valued Shiv Vani at 6x FY11E EV/EBITDA and rate the stock as OUTPERFORMER with a price target of Rs 456.

To see the full report: SHIV VANI OIL & GAS


GMR is India’s leading infrastructure company, with presence in airports, power, roads and special economic zones (SEZs). GMR’s superior airport assets (Delhi, Hyderabad & Sabiha Gokchen) have high growth potential with monopoly characteristics & downside protection. The company’s domestic power portfolio consists of 823MW operational capacity and another 6,860MW is in pipeline; it also has 631Kms of road projects. GMR has expanded international footprint with the acquisition of coal mines (188mnte), InterGen (~7,700MW installed power capacity) and Island Power Singapore (800MW). GMR has demonstrated astute ability to garner high quality and big-ticket projects with significant upside potential. Though short-term valuations are rich and funding risk remains, GMR’s assets would be value-accretive in the long term and capital raising could help tide short-term concerns – we are comforted by strong management & execution capabilities. GMR is a key play on India infrastructure, capitalising on burgeoning opportunities in the sector. We initiate coverage with BUY and Rs80 target price.

Airports – Superior-quality monopoly assets. GMR’s portfolio consists of two busiest Indian airports (Delhi & Hyderabad with 27% market share). Despite the downturn in FY09, traffic at Delhi and Hyderabad airports has grown at 12% & 16% through FY06-09. India is estimated to be the fastest growing market at 10.4% over the next 20 years. Given the strengthening demographics, rising international traffic, emergence of low-cost carriers and better infrastructure, GMR is in a sweet spot to capitalise from these assets and new projects opening up in the Indian aero space.

Power & real estate to provide significant upside. With 823MW operational capacity and 6,860MW in the pipeline, GMR is well positioned in the power sector. Further, it has internal presence with 7,700MW installed capacity via InterGen and intends to add 3,400MW globally. The company has 1,750 acres of premium land adjoining Delhi & Hyderabad airports, providing significant upside to valuations.

Strong management and execution capabilities. GMR has the ability tide through tough scenarios and has timely executed complex infrastructure projects. Despite the downturn, it has sold 29.3 acres (eight hotel plots) at Delhi International Airport (DIAL), raising Rs13.5bn as deposits with another Rs9.8bn as rental realisation.

Valuations. Our sum-of-the-parts (SOTP) valuation for GMR is Rs291.8bn or Rs80.2/share, with 30% from airport & real estate and 42% from power. GMR trades at FY11E & FY12E P/E of 52.4x & 36.2x with 40% earnings CAGR in FY09-13E. Though valuations are rich in the short term, we believe GMR’s superior positioning and long-term potential ensures premium valuations.

To see full report: GMR INFRA

>Global Metals Playbook – 4Q09 (MORGAN STANLEY)

A Strengthening Cycle

• Cyclical trends are supportive for commodities as unprecedented fiscal and monetary easing has re-ignited growth, the global rate tightening cycle has only just begun and will likely be protracted, liquidity conditions are generous as quality spreads have narrowed, the US dollar remains in a sustained weakening trend, and asset allocations towards commodities are increasing.

• Metals sector outlook: We expect the broad and strong gains in base metal prices in 2009 to be sustained into 2010 and beyond, led by copper which remains our preferred base metal exposure.

• A weakening US dollar and easy liquidity conditions will particularly favour precious metals, and we expect prices of gold, silver, and platinum all to register further gains over the next year.

• We also expect to see the beginnings of a cyclical recovery in bulk commodity prices in 2010 as global steel production and power consumption are set to rise further after registering initial
gains in 1H09, with hard coking coal and iron ore prices set to register the strongest percentage increases, in our estimation.

• Our highest conviction Overweight stock picks based on these views are JFE, China Zhongwang, Vedanta, Mechel, Grupo Mexico, and Kazakhmys.

To see the full report: METALS PLAYBOOK