Friday, October 23, 2009

>The G20 and the new global order (MACQUARIE RESEARCH)


The recent Group of Twenty Finance Ministers and Central Bank Governors (G20) summit in Pittsburgh made clear the global economic order is transitioning to a more multilateral axis post the financial crisis. Comprising the major advanced and emerging economies, 85% of global gross national product, 80% of world trade and two-thirds of world population, the G20 is certainly a broadbased economic forum. Cooperation on the recovery through the Group has codified some important global economic realities, laying the foundations for a new global economic structure.

The new reality
The decision to enlarge the G7 to the G20 in the fallout of the financial crisis finally catches up policymaking with the evolving dynamics of the global economy. Indeed, the emerging economies now account for more than one-third of world output, and have contributed more than half to global GDP growth in the years leading into the crisis. Furthermore, the world’s economies are highly interdependent, highlighted by the recent collapse in financial and trade linkages.

The enlargement certainly puts power on more even footing. Australia, South Africa and India are among the key beneficiaries of the broader governance structure. And with the major developed and emerging economies at the table, more balanced global growth could also be in reach. Explicit agreement gives encouragement that this transition could be expedited and could provide a sustainable base for global activity over the longer-term. Furthermore, structural rebalancing in global demand is already happening in the aftermath of the financial crisis.

Time to cooperate
With the growing importance of the G20, increasing coordination of macroeconomic management is also expected to emerge. The success of coordinated fiscal and monetary responses to the financial crisis certainly vindicates an internationally-consistent approach to policy.

Still, trade and currencies could certainly be contentious issues. In spite of consensus on the importance of more flexibility, these could be a throwback to the old economic order for some time. Indeed, recent comments from European policymakers are an important reminder that reluctance to allow currency adjustment and cut trade imbalances could be a major sticking point to global rebalancing. Japan’s new government’s plans to shift to an economy that is less
export dependent also seem vague.

A more even, and prosperous, keel
More balanced growth and a more equitable international governance structure mark an important break with global economic dynamics in recent years. Still, one important thing does not look to change. While it’s clear the emerging economies will likely grow their domestic demand base and global economic might, they are nonetheless expected to remain closely coupled with the advanced economies for some years yet. At the same time, the major developed powers are also expected to remain dependent on emerging markets, for example with the severe market disruptions of the past two years exposing US weaknesses that had been building for decades. So if the G20 can achieve global rebalancing, this relationship should become much more prosperous.

To see the full report: GLOBAL VISION

>Large equity issuance in the pipeline again (BNP PARIBAS)

  • In the remainder of FY10, we expect USD11b primary equity issue; including PSU divestment, it could go up to USD14-15bn.
  • This could lead to short-term stagnation in the secondary market, like in the mid- May to late-August period.
  • 62% of new equity coming in real estate, 18% in power; secondary market performance of these sectors could be under near-term risk.
Previous spate of equity issue had stagnated the market
During May-August 2009, around $9bn primary equity was raised, which absorbed $6.6bn FII
money. Consequently, FII inflow into the secondary market during this period was only $1.8bn,
even though total net FII inflow was $8.4bn. As a result, after the election result step-jump (17.3% on 18 May), Sensex stayed virtually flat until the third week of August (up 5% between 18 May and 20 August). In fact, during June, July and August, FII inflows into the secondary market were negative, even though total net FII inflows were to the tune of $4bn.

Equity issue comes after secondary market performance
Our correlation analysis shows that primary issuances lag stock market performance by 2-3
months. This is to be expected intuitively – strong return from market bolsters companies’
confidence in issuing equity. As IPOs start coming in, FIIs divert their interest to the primary
markets and take money out of secondary markets, leading to stagnation in the secondary
market, such as in the mid-May to late-August period.

Another large equity issue pipeline approaching
In the remainder of FY10, we see another $11b equity issue pipeline. Including potential dilution
of the government’s stake in PSUs, the pipeline could increase to $14-15b, which could lead to
another phase of stagnation in the secondary market in the near term.

Sectoral concentration and quality of issues a concern
Unlike the previous round of issues, in this round, there are several second-tier companies and
first-time issuers. Till date in 2009, almost 80% of the $10.27b equity issue has come from four
sectors – banks, oil & gas, real estate and power. Real estate and power have contributed almost
50%. In the future, out of the $7b announced issues, real estate alone is likely to account for
62%, and real estate and power together will account for 80%. We believe that such sector-wise
concentration poses risks for the secondary market performance of these sectors.

Longer-term positive for capex and balance sheets
The first wave of equity issues repaired the balance sheets of most companies with stretched
balance sheets. Even in the second phase, we believe some companies (particularly in real
estate, retailing) would target balance sheet repair with equity money. But in many other sectors
(e.g. banks, power, metals and mining), additional equity is likely to be used for expansion
projects. This has positive implications of capex revival as end-user demand strengthens, or
inorganic expansion.

To see the full report: INDIA STRATEGY


Realty surprise; #1 Developer In NOIDA

Visit to Yamuna Expressway – Realty sales to surprise; PO Rs300
We were pleasantly surprised at real estate sales at JP Greens, NOIDA on our visit to Yamuna Expressway & its land-bank. Channel checks indicate that JP has emerged as #1 developer in NOIDA region with booking of ~9mn sq. ft. in 1HFY10, in our view. PO to Rs300 (270) to factor-in hike in valuation of JP Infratech by 40%, re-rating of cement to US$85/tn (75) & hike in value of treasury stock. Infra assets trading at 15% discount to NAV, option value in its power & realty businesses & pipeline of high RoE projects drive our Buy. JPA remains one of our top Infra picks.

#1 Developer in NOIDA Region
JP group has emerged as #1 developer in NOIDA region of NCR market, in our view, led by a) low cost landbank (Rs65/sq. ft.) being part of expressway projects, b) rational mid-market pricing (~Rs3K/sq. ft), but with aspirational facilities such as ‘chip-and-putt’ golf course & c) development of community at ‘Wish Town’ . Its new product launches such as AMAN & KOSMOS has made it a leader in respective market segments selling ~4-5mn sq. ft each in 1HFY10. Consequently, JP has sold 14-15mn sq. ft. worth Rs51bn since the launch of Wish Town 2 years back & has received advances worth Rs15bn. We hike value of JP Infratech to0 Rs63/sh (45) on advanced monetization of NOIDA land-bank by 2 years.

First 15kms of Yamuna Expressway By Jan’10 - +ve for Realty
Our talks with sub-contractors indicate that JPA aims to complete the first 15kms of the Expressway by Jan’10. This should re-rate the value of its parcel #2 of Yamuna Expressway (not yet in our SOTP) & 650 Ha of landbank of its subs. executing F1 circuit. JP Infratech has spent Rs50bn of Rs97bn capex till 2QFY10. Expect Yamuna expressway with all its structures should open in 2011.

Buy value assets 15% discount & 24% EPS CAGR in FY09-11E
Buy JPA as it offers a blend of asset play (15% discount to NAV) & 24% CAGR in parent EPS (FY9-11E). Triggers are a) timely execution of projects (esp. Karcham), b) monetization of realty land bank & c) development of Delhi-Agra region (airport).

To see the full report: JP ASSOCIATES


Orders revival in 1HCY10

Our latest Q-series on wind power expects recovery in 1H10
In the Q-series on wind titled: “Are skies clear again for wind power?”, dated 15 Oct’09, we conclude that the sector should re-activate from H1/10 on improved economics, as (1) turbine prices should be c20% lower in 2010 vs 2008; (2) credit spreads are back to pre-crisis levels and project financing returns; (3) base rates are at trough level. After 3% y/y growth in global installations to 29.1GW in ‘09E, we forecast growth by 15% to 33.3GW in ‘10E and 16% to 38.6GW in ‘11E.

We think Suzlon could re-rate on industry-wide recovery in orders
We raise our PT from Rs60/sh to Rs100/sh and upgrade rating from Sell to Neutral as we see expect recovery in wind orders in 1H10 to re-rate the stock. Our rating upgrade is after lowering FY10/11E EPS, and reflects lower capex over ’11-14E, and lower intermediate growth owing to this. However, we believe upside is capped in near-term due to estimated loss of Rs1.75bn in 2QFY10E and consensus downgrades, and Suzlon’s weak liquidity position.

Lower near term estimates for Suzlon
We lower MW sales for FY10/11E by 100MW to 1,900/2,350. We also lower EBITDA margins for FY10/11E by 90bps and lower FY10/11/12E EPS from Rs3.8/7.4/13.8 to Rs1.6/4.2/11.6. Our estimates are 44-66% below consensus. There are no positive catalysts near-term except recovery in wind orders in 1H10E.

Valuation – Raise Price Target and Upgrade Rating to Neutral
The key reasons for changes to our DCF-based price target are: 1) rolling forward to FY11, 2) lower capex in FY11-14E; and 3) lower intermediate growth from 15% to 10%.

To see the full report: SUZLON ENERGY


Steady outlook; receding FDA risk; raise sector TPs; RBX off C-List

Stable long-term outlook; Receding FDA risk; raise TPs
Our fundamentally stable outlook for the sector has over the last year been overshadowed by FDA risks around mainstream companies. However, recent developments (with Cipla, Sun) demonstrate that FDA issues can be resolved, allowing the focus to shift back to a longer term view for the sector (despite near-term pain). We continue to believe that the sector will grow at mid-teen rates, sustain its operating margins at 18%-19% and generate consistent cash returns over FY10E-12E. Hence, we raise our Director’s Cut based (evaluates cash returns calculated by EV/GCI vs CROCI/WACC) multiple for the sector to 1.30x (1.04x prev.) and increase our target prices by 17%-45%.

Ranbaxy off Conviction list, retain Sell; 39% potential downside
We remove Ranbaxy from the Conviction Sell list but maintain our Sell rating on expensive valuations, trading at 108% premium to peers on FY11 P/E. The stock has underperformed the sector by 32% since the FDA import alert in Sep 2008. Despite a positive move by Ranbaxy inviting FDA to reinspect Dewas, we have limited visibility into progress of the key issue of Paonta Sahib resolution. Owing to the rupee’s appreciation trend, we expect hedging losses to be fully reversed and revise our EPS estimates from Rs (14.72) to Rs2.78 for CY2009E and by 37% and 6% for CY2010E and 11E respectively.

Best Buy idea
Our top picks in the sector continue to be Dr Reddy’s Labs (REDY.BO; TP – Rs1060), Cadila (CADI.BO; TP – Rs646) and Piramal (PIRA.BO, TP – Rs443) yielding potential upside of 10%, 27% and 18% respectively.

Best Sell idea
We maintain our Sell rating on Ranbaxy; we also maintain Sell ratings for Sun (SUN.BO; TP – Rs1099), Cipla (CIPL.BO; TP – Rs201) and Biocon (TP – Rs224), yielding potential downside of 21%, 33% and 15% respectively. We expect the next quarterly results to provide greater clarity on FDA impact on US sales for Sell rated stocks Ranbaxy and Sun.

Translational risk of currency volatility, especially strengthening rupee and still existing overhang of FDA.

To see the full report: PHARMACEUTICAL SECTOR

>India cane price dispute could further cut 09-10 sugar output

New Delhi - India's sugar output may fall further in the crop year starting Oct. 1 because an ongoing dispute over price between cane farmers and mills in Uttar Pradesh, the nation's second-biggest producer of the crop, is prompting growers to sell their output to companies that make molasses - an ingredient for making alcohol.

The state is already reeling under a sugar shortage this year due to a lower output following weak rains. The area under the crop is estimated to drop by 16% this year to 1.8 million hectares. It is expected to produce 4 million-4.5 million metric tons of the sweetener, a volume that may fall further if cane is diverted to molasses manufacturers, who are offering better prices.

"We are being offered INR300/100 kg by molasses manufacturers and most of them are paying part of this as advance," said Virinder Mohan Singh, convener of the Kisan Mazdoor Sangathan, a farmers' lobby group. That's more than double the INR140/100 kilograms that sugar mills are offering, he said.

The tussle may result in a further increase in local prices, and force the world's largest consumer of the sweetener to step up imports. India may need to ship more than the estimated 5 million-5.5 million tons if output is below the forecast of 16 million-17 million metric tons because of the dispute. Sugar prices in the Asian nation have already risen by 70% in the past one year because of lower output.

"If the diversion to molasses is not controlled, then there could be a drop in output," said S. Gupta, secretary of the Uttar Pradesh Sugar Mills Association.

While disputes such as this aren't uncommon, and had delayed the crushing by a month in the current year, the fall in area and crop output has compounded the problem by setting off a scramble for sugar cane. The nation's output of the crop may fall from a peak of 26.3 million tons in the year ended Sept. 30, 2008.

Usually, 40% of the crop is sold to sugar mills and another 40% to molasses makers, while the rest goes to smaller mills, Uttar Pradesh state government officials said.

Indian sugar mills aren't able to pay a higher rate because the price to be paid to farmers is fixed by the government.

"As the retail sugar prices have nearly doubled, we expect the state government to double the mandatory purchase price also to help the farmers," the farm lobby group's Singh said.

The lobby is seeking a rise in state-set prices to INR280 from INR 140/100 kg paid in the current year. Wholesale sugar prices have risen in to INR2,900 per 100/kilograms Friday from INR1,700/100 kg a year earlier.

"The threat of diversion to molasses is very high this year and will be much more than last year," said Ajeet Kumar, a research analyst with commodity brokerage SMC Global Securities Pvt.

The price of an intermediate product from which molasses is made have touched multi-year highs, Kumar said. Smaller manufacturers have already started purchasing cane since the beginning of September, he said.

Molasses is processed into country made liquor, whose output has risen sharply in recent months.

Besides increasing the state-set price, the government must set a minimum mandatory sugar cane quantity that farmers are needed to sell to mills in order to discourage diversion, Kumar said.