Saturday, October 17, 2009



The current financial crisis and worldwide recession have abruptly halted a nearly three decade-long expansion of global capital markets. From 1980 through 2007, the world’s financial assets—including equities, private and public debt, and bank deposits—nearly quadrupled in size relative to global GDP. Global capital flows similarly surged. This growth reflected numerous interrelated trends, including advances in information and communication technology, financial market liberalization, and innovations in financial products and services. The result was financial globalization.

But the upheaval in financial markets in late 2008 marked a break in this trend. The total value of the world’s financial assets fell by $16 trillion last year to $178 trillion, the largest setback on record. At this writing in September 2009, equity markets have bounced back from their recent lows but remain well below their peaks. Credit markets have healed somewhat but are still impaired.

Going forward, our research suggests that global capital markets are entering a new era in which the forces fueling growth have changed. For the past 30 years, most of the overall increase in financial depth—the ratio of assets to GDP—was driven by the rapid growth of equities and private debt in mature markets. Looking ahead, these asset classes in mature markets are likely to grow more slowly, more in line with GDP, while government debt will rise sharply. An increasing share of global asset growth will occur in emerging markets, where GDP is rising faster and all asset classes have abundant room to expand.

In this report, we assess the effects and implications of the crisis through the lens of global financial assets and capital flows.1 Although the full ramifications of the crisis will take years to play out, it is already clear that the financial landscape has shifted in several ways. Most notably, we find that:

  • Declines in equity and real estate values wiped out $28.8 trillion of global wealth in 2008 and the first half of 2009. Replacing this wealth will require more saving and less consumption, which may dampen global economic growth and necessitate significant adjustments by the banking business.
  • Financial globalization has reversed, with capital flows falling by more than 80 percent. This has created turmoil for multinational financial institutions, caused currency volatility to soar, and sharply raised the cost of capital in some countries. It is unclear how quickly capital flows will revive, or whether financial markets will become less globally integrated.
  • Some global imbalances may be receding. The US current account deficit has narrowed, as have the surpluses in China, Germany, and Japan that helped fund it. However, this may be a temporary effect of the crisis rather than a long-term structural shift.

To se the full report: GLOBAL CAPITAL MARKETS



Owing to implementation of Central Electricity Regulatory Commission (CERC)
norms, low base due to one-time items and higher YoY generation, we estimate the I-Sec Power universe to post 23.7% YoY PAT growth. NTPC is expected post 32% YoY profit growth owing to: i) new CERC policy, ii) low base with one-time cost & high tax cost and iii) higher power generation with 84% plant load factor (PLF) versus ~82% in Q2FY09 owing to gas availability. During Q2FY10, CESC announced the acquisition of 600MW Dhariwal power project, thereby improving growth visibility for the company. The quarter witnessed insignificant capacity addition and we expect ~870MW addition in Q3FY10. We believe Tata Power (TPL) is the only company that may post YoY profit decline owing to one-time forex gain of Rs767mn in the base year. We maintain CESC as our top pick in the sector; we prefer NTPC over Power Grid Corporation of India (PGCIL) and NHPC among pure regulated companies

Robust YoY PAT growth owing to new CERC norms, higher generation – overall generation grew to ~57bn kwHr from ~52bn kwHr – low base effect for NTPC and PGCIL, with one-off items, and merchant foray by TPL. Within the I-Sec Power universe, we expect only TPL to post YoY decline in reported PAT owing to onetime forex gain in the base quarter.

Strong topline growth with higher generation, usage of expensive fuel, implementation of new CERC policy and increase in YoY capacity, which would lead to 12.7% growth in topline. QoQ, sales are expected to be down 3% owing to planned maintenance activity carried out in Q2 generally.

Muted capacity addition. In Q2FY10, capacity addition was insignificant, with TPL adding 30MW at Haldia and effective operationalisation of 120MW at Jamshedpur. In Q3FY09, we expect CESC to commission 250MW at Budge Budge, while NTPC may commission 500MW at Karanpura; also, TPL may commission ~120MW at Jojobera.

CESC – Outperformer of the quarter. CESC has outperformed the Sensex 23% in Q2FY10 owing to higher growth visibility with the acquisition of 600MW Dhariwal power project in Maharashtra and 18% underperformance versus the Sensex in Q1FY10. We maintain CESC as our top pick in the sector given cheaper valuations of FY11E P/B of 1.1x, improving growth visibility and reducing retail losses.

To see the full report: UTILITIES SECTOR

>Shree Renuka Sugars Limited (MERRILL LYNCH)

More to come

Raise PO to Rs293 on higher sugar price, 50% upside
Renuka Sugar remains our top sector pick owing to its low-cost sugar refinery. We raise our PO from Rs198 to Rs293 driven by an 86% upgrade in FY10E EPS owing to a higher sugar price. However, we have cut our PO basis from a FY10E EV/EBITDA of 7.5x to 6x as FY10E profit includes a non-recurring inventory gain of Rs6bn. The stock is trading at a trough FY10E EV/EBITDA of 4.7x.

Ample stock and rising sugar price driving up FY10E EPS
We expect FY10E EPS to grow 257% driven by (1) a 113% jump in sugar volume and (2) a 34% rise in sugar price. We raise FY10E EPS by 86% driven by a 25% higher sugar price. The sugar price increase is directly impacting the bottom line given that the 1.75mn tonnes of sugar to be sold in FY10E includes white sugar stock of 0.3mn tonnes and raw sugar stock of 1.2mn tonnes.

Brazil sugar mill acquisition could yield further upside
Renuka Sugar is looking to acquire a sugar mill in Brazil to hedge its sugar refining from volatile raw sugar costs. We believe a successful acquisition could be value accretive as (1) Brazil sugar mills are trading at around US$90-110/t of cane crushed, which is about 10-15% cheaper than Indian mills, and (2) the Brazil mill could help Renuka’s raw sugar refinery benefit from backward integration and yield a lower cost structure.

Flood to delay crushing, but will not hurt sales significantly
Renuka has all its cane crushing mills in Maharashtra and Karnataka and is thus exposed to the possible adverse impact of flooding in these areas in October 2009. Consequently, we cut our assumption for the amount of cane to be crushed in FY10E by 11%. The flood is also likely to delay crushing by 15 days. However, we expect the higher sugar price and refinery throughput to compensate.

To see the full report: SHREE RENUKA SUGARS LTD


Down but not out…
Glenmark Pharma (GPL) is one of the best twin plays in the Indian pharma space. Monetisation of the discovery pipeline has been one of the key drivers of valuation in the past but lack of visibility on it has kept valuations under pressure. We believe current valuations only discount the generics business, as things are getting better on the base business front. On the DDR front, GPL has a robust discovery pipeline, monetisation of which may fetch significant upsides. We initiate coverage on GPL with an OUTPERFORMER rating and a target price of Rs 288.

Specialty business appears major growth driver while India holds the key The specialty business will likely lead GPL’s base business growth in the short-term with India remaining the key to specialty business growth. We estimate the specialty business (ex-India) will grow at ~17% while India will grow at ~18% CAGR over FY09-11E.

Things appear to be getting better now
Given the smart specialty business QoQ growth in Q1FY10, we believe the worst is behind us and visibility is getting better. Better credit conditions and stable currencies are driving the performance.

Speedy approval holds the key in US markets Speedy approval of key ANDAs will likely be the mainstay for US revenue growth. GPL has a robust pipeline of 45 ANDAs pending approval, most of which are for differentiated and controlled substances that generate better margins and have longer lifecycles.

Out-licensing from strong discovery R&D pipeline cannot be ruled out GPL earned ~$110 mn (highest among peers) from discovery R&D till date and has a strong pipeline of 13 molecules, 8 of which are in clinics. Given such a strong pipeline, licensing deals can’t be ruled out.

We believe lower visibility on R&D income kept GPL under pressure. We believe although the global appetite for drug-compound licensing is still low, given GPL’s strong R&D pipeline, monetisation of its key drugcompound cannot be ruled out. On the base business, things are getting better. At 13.3x FY11E EPS, the current valuation discounts the generics business only, which is at a discount to its peers even after considering GPL’s high leverage. We remain confident on GPL’s DDR capability and initiate coverage with an OUTPERFORMER rating. We value GPL at Rs 288, 16x FY11E EPS. We have not attributed any value to the DDR pipeline.

To see the full report: GLENMARK PHARMACEUTICALS


Growth Potential Yet to Be Valued Fully, Stay OW

Investment conclusion: We are raising our price target by 35% to Rs963. This implies upside potential of 19% from current levels. In our view, Sterlite offers one of the best and most balanced growth opportunities in Indian metals. We expect the market to appreciate this over the next 4-6 quarters as Sterlite makes progress on its next-stage expansion, although power project delays may be short-term headwinds
With its strong balance sheet, Sterlite is upping the ante on its aluminum and zinc expansion projects. We expect this to enhance its valuations amid a healthy metals price environment. For the period F09-F12 we project a CAGR in Sterlite’s attributable production of 52% for aluminum and 32% for zinc/lead, with a 10-15% decline in cash costs. As well, its saleable power output is likely to grow by 2,400 MW, despite the likelihood of some delay in the Jharsuguda power project.

Forecasts reflect new projects, new metals price outlook, delay on Jharsuguda power: We include the entire 1.25 mt smelter project in the VAL division now (earlier we assumed just 325 kt), given clear progress. On the other hand, we are pushing forward our commissioning timeline for the 2,400 MW power project by 9 months. Further, in line with the changes made by our global mining team, we raise our aluminum and zinc price forecasts for F2010-11 by 5% to 16%. Our EPS
forecasts change by -0.3% for F2010 and 2.3% for 2011. We introduce our F12 EPS forecast of Rs 106.7.

HZL and Balco stake purchase yet to be priced in properly: We also believe negative impact from Asarco will likely be eased out from the stock price soon.

To see the full report: STERLITE INDUSTRIES