Monday, October 19, 2009

>Wake-Up Call for the Next Asia (MORGAN STANLEY)

In a growth-starved, post-crisis world, many have presumed that the baton of global economic leadership has already been handed off from the West to the East. The onset of the Asian Century is taken as a given. While such an outcome is entirely possible, I argue in my new book, The Next Asia (Wiley, September 2009) that it hasn’t happened yet. A silver lining of the Great Recession is that this transition may actually occur sooner rather than later — yet more by necessity than by design.

The enthusiasm over Asia is certainly understandable on one key level. On the surface, there can be no mistaking the sheer power of the Asian growth miracle. The broad collection of economies that comprise Developing Asia expanded at an 8.3% average annual growth rate over the 2001-08 period — basically three times the 2.8% average growth pace of the rest of the global economy. Putting it another way, the extraordinary dynamism of Developing Asia added about 1.2 percentage points extra to annualized global growth over the past eight years.

But here’s the critical catch: Over this same period, Asia has continued to direct an increasing portion of its production to others. The export share of Developing Asia’s GDP rose from 35% to 45% over the past decade, whereas the share going to internal private consumption fell to a record low of 45% of pan-regional GDP in 2008. As such, the region does not satisfy the most basic pre-condition of autonomous economic leadership — an economy where production support is dependent increasingly on home markets rather than on external demand.

In short, these are not the footprints of a new autonomous engine of global growth. As the shifting mix of Developing Asia’s GDP indicates, the region’s growth premium has been driven more by exports — and by the ancillary support of export-led fixed investment in infrastructure and export-producing capacity — than by internal private consumption. For now, the dreams of Asian-led global leadership are wishful thinking. Developing Asia is still more of a follower than a leader.

Validation of this critical deduction comes from the unmistakable repercussions of the current global crisis. In the aftermath of a US-led synchronous downturn in the developed world, every Asian economy either went immediately into recession or experienced a sharp slowdown. Asia’s ever-rising external connectivity made such an outcome inevitable. The Asia consumer — despite all the hype — wasn’t nearly strong enough to forestall this outcome.

The good news is that the region now appears to be rebounding. The bad news pertains to the quality of the recovery — an upturn that could very well be heralding a false dawn. That’s because it is being driven largely by an unprecedentedly vigorous bank-funded investment boom in China. On the heels of RMB 7 trillion in new bank lending in the first half of 2009 — by far, the sharpest six month burst of Chinese loan growth on record — surging fixed asset investment accounted for fully 88% of China’s total GDP growth in the first two quarters of the year. That’s more than double the 43% average growth contribution made by this sector over the previous decade and enough to take the investment share of Chinese GDP to over 45% — an unheard of investment ratio for any major economy in the modern era. To the extent that Asia has now become a China-centric growth machine — a transformation that can be validated by a sharply increased China focus to intra-regional trade flows — the sustainability of the Chinese recovery holds the key to recovery prospects for the region as a whole. Given the unbalanced character of the Chinese post-crisis rebound in the first half of 2009, there are serious questions in this regard.

To see the full report: WAKE UP CALL


The Alcohol Goliath

Investment Highlights
The Indian liquor industry, traditionally dominated by low-end country liquor, has shifted to IMFL (Indian Made Foreign Liquor).

The IMFL industry has grown at a higher rate, particularly during the last three years, led primarily by opening up of distribution in key markets in North India and banning of country liquor in the southern states.

Strong entry barriers, such as ban on advertising and restrictions on interstate movement of the products, have restricted the entry of global spirit players.

USL has continued to be the leading player in the IMFL industry with consistent volume share on a standalone basis of nearly 55% during the last four years.

The Indian beer industry has been witnessing steady growth of 8% CAGR per year over the last five years led by strong beer segment, which contributes approximately 63% of the total beer volumes in India. This has aided UB's leading position in the industry.

Indian alcoholic beverages poised for long term growth led by low per capita consumption, higher young and working population clubbed with increase in disposable incomes.

We initiate, coverage on United Spirits with a BUY recommendation and a target price of INR1,092, while coverage on United Breweries Ltd. with a HOLD recommendation with a target price of INR142.

To see the full report: FMCG SECTOR


Membership-led growth

Leading player with differentiated offering for leisure travellers: Mahindra Holidays & Resorts India (MHRIL) offers a differentiated product, offering quality holiday services to leisure travellers with its unique Vacation Ownership (VO) model. We expect the business model to be self-sustainable with negligible debt and free cash flow of INR 5,000 mn over FY10-12E. We expect the company’s membership to grow at 25% CAGR over FY10-12E with its diverse product offering and regular addition of resorts.

Leisure travel and vacation ownership set to boom in India With rising income levels, favourable demographics, growing urbanisation and better infrastructure, more Indians are ready to take holidays. The Indian timeshare industry posted a CAGR of 15% since 1998 (Source: AIRDA estimates) and we expect growth to pick up in the future. With growing consumerism, MHRIL will benefit with an increasing population opting for VO-based holidays.

Upfront membership fee utilised to build fixed assets: As MHRIL charges membership fees upfront, it helps the company build resorts without resorting to borrowed capital. Securitisation of membership fee receivables gives the company access to lump-sum money. As company retains the title of the property, it provides holiday resorts services over a period of time to members. Members gain as the company goes on adding more resorts every year. The company gains as it gets the membership fee upfront and uses the money to create resorts. We expect the company to generate free cash flow of INR 5,000 mn over FY10-12E.

Outlook and valuations: Attractive; initiating coverage with ‘BUY’ At CMP of INR 346, MHRIL is trading at 18.8x our FY11E consolidated EPS of INR 18.3 and 13.8x our FY12E consolidated EPS of INR 24.9. On historical PEG basis, the stock is trading at an attractive 0.4x. Our DCF analysis gives a fair value of INR 404 over the next 12 months. We expect memberships to touch approximately 175,000 by FY12E from 98,224 members as of Q1FY10. We expect revenues and PAT to post CAGR of 33% and 38%, respectively, over FY09-12E. Given the company’s unique business model, brand image, track record of execution, critical mass of members, relatively less volatile business model compared with a hotel, healthy return ratios, and attractive valuations, we initiate coverage on the stock with a ‘BUY’ recommendation.

To see the full report: MAHINDRA HOLIDAYS & RESORTS



• The key benchmark indices may remain volatile as investors may refrain from taking large positions ahead of extended holiday. Market will remain closed on Monday, 19 October 2009 on account of Diwali. Asian markets were trading mixed.

• Investors will keenly watch Q2 result from India's largest software services exporter TCS
today, 16 October 2009. A total of ten brokerages expect a between 6.8% fall to a 4.9% growth in TCS' consolidated net profit as per US accounting standards at between Rs 1416.30 crore to Rs 1595.40 crore in Q2 September 2009 over Q1 June 2009. Their expectations peg a between 0.4% to 3.8% growth in revenue at between Rs 7237.70 crore to Rs 7478.40 crore in Q2 September 2009 over Q1 June 2009.

• Meanwhile, Inflation based on the wholesale price index (WPI) rose 0.92% in 12 months to 3 October 2009, slightly above previous week's annual rise of 0.7%, data released by the government on Thursday showed. Within the WPI, the food articles index rose 13.34%. The government revised upwards inflation for the year through 8 August 2009 to a much smaller decline of 0.37% from an estimated fall of 1.53%.

• The IPO of Indiabulls Power was subscribed 21.84 times. Indiabulls Power, a unit of
Mumbai-based developer Indiabulls Real Estate, is developing five thermal power plants in western and central India, with total capacity of 6,600 megawatts, and will use the issue proceeds to fund two projects. The issue closed on Thursday, 15 October 2009.

• Asian stocks were trading mixed today as a decline among financial shares was offset by
a weakening yen that boosted the outlook for Japan's exporters.

• US markets closed with marginal gains after a topsy- turvy session on Thursday on
positive economic news and better than estimated earnings from Goldman Sachs and Citigroup.

• As per provisional data, foreign funds on Thursday, 15 October 2009, bought equities worth a net Rs 752.48 crore. Domestic funds dumped stocks worth a net Rs 443.08 crore

To see the full report: ESCORTS


Across-the-board Margin Expansion to Continue in F2Q

Quick Comment –Tepid revenue growth, but margins to expand on lower input costs: We expect
the India consumer companies we follow to report F2Q revenue, operating profit, and adjusted net profit growth of 10.3%, 16.7%, and 16.1%, respectively. Tangible margin expansion (driven by input cost savings) should be visible across the FMCG companies. Operating margin for the sector is likely to improve by 115bp, led by GCPL, Colgate, ITC, and Nestle. We expect GCPL,
Colgate, and Nestle to report the strongest earnings growth of 62%, 31%, and 29%, respectively. We reiterate our In-Line rating on the group and maintain GCPL, Marico, and Nestle as our top picks.

HUL – 12% revenue growth; volume growth likely to improve sequentially; higher ad spending to limit margin expansion: HUL is likely to demonstrate revenue growth of around 12% YoY, driven largely by price and mix improvement. Despite huge input cost savings and cost control measures, HUL is likely to witness margin expansion of around 6bp to 13.9% primarily due to higher ad spend. The tax rate is likely to be higher by 125bp, limiting adjusted net profit growth to 9.9% YoY. We expect reported net profit to decline 12% on exceptional income reported in the Sep-08 quarter.

ITC – Margin expansion in Cigarettes & Paper; Hotels & Agri to drag revenue growth: We expect the company to report a muted top-line growth of 3.5% due to a downturn in the hotels business and a decline in revenue from the agri business. However, cigarette revenue is likely to grow 12.5%, buoyed by price hikes and a low base. We expect Cigarette EBIT growth of 16% YoY driven by 6% volume growth and price hikes. The paper business is likely to witness strong EBIT growth of 21% YoY. We look for Non-tobacco FMCG losses of Rs957mn compared to Rs1,166mn in F2Q09. ITC’s EBITDA and PAT are expected to rise 12.9% and 13.6%, respectively.

To see the full report: INDIA CONSUMER