Monday, November 9, 2009

>Finding Value in a Crowded Market

China or India: Which Is the Better Long-term

Investment for Private Equity Firms?
The prospects for investment are strong in both China and India, according to Wharton faculty
and industry experts. But the debate over which country is the better venue for investing is
less important than knowing how the strengths and weaknesses of each nation would impact a
specific investment.

The End of Oil? Venture Capital Firms Raise the
Profile of Alternative Energy
Clean technology companies are hoping for blockbuster returns in the capital markets, and venture capital firms are fattening them up with equity infusions in preparation. Will the sector live up to its promise?

‘Early Matters’: Creating Value through
Operations at Portfolio Companies
According to speakers at the 2006 Wharton Private Equity Conference, the most important elements of operational performance are selecting the right management team and driving returns through management incentives, tight monitoring and forward-focused strategies.

Bad News Is Good News: Distressed for Control Investing
2005 was a record year for distressed for control transactions, and Wharton faculty and private
equity experts say “a growing wave” of bankruptcies is on the horizon, leading to what one fund
co-founder calls “an extraordinary market” for distressed for control investors.

Limited Partner Roundtable: Outlook for Private Equity
Four leading limited partners discuss the convergence of private equity and hedge funds, distressed debt, changes in venture capital, and the outlook for general partners.

Case Study in Operations: Eldorado Stone
Graham Partner’s investment in Eldorado Stone is just the kind of situation in which operations oriented firms can thrive, but not without certain risks, say industry experts. One key consideration: timing the exit.

To read the full report: Wharton Private Equity Review

>No need to rush in(KOTAK SECURITIES)

No need to rush in: 1QFY10 results belied hopes of earnings upgrades unlike in 1QFY10 and we have cut FY2010E 'EPS' for the BSE-30 index by 2.9% and 2.8%. 2Qfy10 bse-30 index earnings were largely in line with our expectations (+ 0.6% ahead). Overall earnings declined 0.3% yoy while the BSE-30 index (ex-Energy) declined 0.5%. We do not see any urgency to buy on the recent sharp correction in the Indian market, the market is only fairly valued now.

To read the full report: INDIA STRATEGY

>Commodities face conundrum as stimulus packages ease

London - Commodities trading activity is set to stay choppy until the markets' conundrum--whether or not signs of recovery lead governments to cut stimulus packages too early--is resolved.

This is leaving data, which has exceeded expectations in most instances, to rule the roost. But the problem is that the pendulum of positive sentiment generated from recent U.S. manufacturing and home sales figures, for instance, just as swiftly swings back the other way when attention returns to the possible end to state-led support programs.

"Investors remain more concerned that the widespread signs of recovery generated by all the recent Purchasing Managers Index releases will lead governments to cut economic and fiscal support too early, a fear that has contributed to a reversal of prices right across the markets," said Alex Heath, global head of base metals at RBC Capital Markets.

Just this week, PMIs in a host of countries, including the U.S., China, the U.K., South Africa and the euro zone, posted increases, indicating that major economies are slowly returning to growth. The surveys show the percentage of purchasing managers in a certain economic sector that reported better business conditions than in the previous month.

With sentiment skittish, prices have been reacting accordingly. Copper has been extremely volatile of late, moving over 5% in the course of some trading days. Nickel has fluctuated by 6%, aluminum by 5% and zinc by 7%. Iron ore and cocoa have meanwhile both moved around 3%, while crude oil has traded in a nearly 6% range on a single day.

There are, of course, other factors that drive commodity prices, including their own underlying fundamentals, investor appetite for commodities, the U.S. dollar and improving equity markets. But the bigger picture remains dominated by the longer-term growth story, and how sustainable it'll be once government aid is withdrawn.

Undeniably, the size of the various stimulus packages has been unprecedented, as the world's governments tried to prop up their economies in what has been widely deemed the worst economic crisis since the Great Depression in the 1930s. For industrial metals like copper, zinc, nickel and aluminum, used in a range of applications including construction, housing, steelmaking and automotives, this support has been critical.

"The world economy has certainly been given a massive push in the right direction through sizable, sustained, and what looks like successful policy stimulus," said Gerard Lyons, chief economist and group head of global research at Standard Chartered Bank. "The questions now being asked are, how sustainable is growth? And how soon can policy be tightened?"

China, the world's largest consumer of commodities, has been heralded as the "savior" of the copper market through the first half of the year, as its government embarked on a strategic commodities stockpiling program at the same time as pushing trillions of yuan into the economy in various investment forms.

These include investment in the auto and home appliance industries and an increase in the supply of credit, which has supported rapid growth in fixed-asset investment and property.

According to Tao Wang, head of China economic research at UBS Securities, while China won't withdraw its government stimulus in 2010, the contribution of stimulus-related fixed investment to gross domestic product growth will drop significantly. "We see a modest global recovery to turn export growth from a sharp decline this year to a single-digit growth next year," he said.

There's also concern over China's buildup of domestic inventories, the restarting of domestic coal and iron ore mining, and narrowing price differentials between China and global markets, which have closed down arbitrage opportunities, analysts said.

Similarly, across Asia data has been improving for several months: South Korea has seen its economy rebound with three successive quarters of growth. But despite improvements elsewhere--Australia was the first nation to start tightening monetary policy as demand for exports leapt and its economy substantially improved--the picture isn't quite so strong.

"It's not possible for Asia to boom if the West is not booming. The trouble is that Asia is still heavily export-dependent," said Standard Chartered's Lyons.

This is especially true for the U.S., China's most important export market for finished and semifinished products. The world's largest economy posted impressive growth of annualized 3.5% in the third quarter, spurred by China's stimulus package.

Western nations have embarked on commodities-intensive programs such as car scrappage schemes, which have provided support for platinum--used in automobile catalytic converters--and aluminum--used to make car parts. But those programs are now coming to an end, and traders said any improvements in the demand and supply picture are tentative.

This hasn't stopped commodities prices pushing higher, however; it's just made the markets more volatile.

"The markets seem to cling on to positive news and react accordingly, which means there is a real incentive for many investors to keep pushing prices higher," said London-based Michael Khosrowpour of Triland. "Volatility in the markets is evident as signals of the status of the major economies are derived--interim highs in metals have been witness to vicious pullbacks," he said.

Consequently, commodities players say they'll be paying close attention to how the U.S. Federal Reserve, in an accompanying commentary to its interest decision later Wednesday, assesses both current and future economic development.

If the U.S. Fed appears more hawkish, leaning towards some form of fiscal tightening, this could send the dollar sharply higher and cause a sharp re-pricing of the dollar-denominated metals and energy sector, they said.

"The underlying supply and demand situation in the individual markets continues to play only a secondary role at the moment," said Commerzbank commodities analyst Eugen Weinber

>Jindal Steel and Power Limited (MERRILL LYNCH)

2Q disappoints, power nearing peak, rich valuations, U/P
Group PAT declined 18% q-o-q to Rs8.1bn, below our Rs10bn est. This was led by lower power profits due to lower avg. tariff and vols. Also steel profits disappointed due to lower vols & higher costs. We raise our FY10-FY11e EPS by 2-7% as we raise our domestic steel price est. to reflect mark to market prices & higher cost support in FY11e. Power biz outlook is strong, but earnings momentum is close to peak. Its leverage to steel price is low (1% chg changes EPS by 1.2%). Our SOTP NPV of Rs435 implies 32% downside potential.

Standalone PAT was up 2% q-o-q, volumes disappoint
2Q standalone PAT (mainly steel biz) was Rs3.0bn. EBITDA declined 1% q-o-q to Rs5.5bn. Realizations were better, up 6% q-o-q. Volumes declined 12% q-o-q, 13% below our est. This may due to sluggish demand for long products during monsoons. Inventories appear to have increased by ~0.05mt in 2Q. Steel cost/t increased 5% q-o-q. We forecast standalone EPS to grow 21% in FY11e.

JPL profits down 27% q-o-q on lower tariff and volumes
Power subsidiary, JPL’s 2Q PAT was Rs5.1bn. Est. sales volumes were down 11% q-o-q due to shut down at two of its units & seasonally weak demand during monsoons. Average tariff was down 18% q-o-q at Rs5.3/unit due to lower power tariff. We forecast JPL profits of Rs24.9bn in FY10e and Rs21.9bn in FY11e.

SOTP valuation implies 32% downside potential
We understand JSPL plans to sell excess power from 810MW Orissa captive power unit at a tariff of Rs3/kwh. Hence, we raise our tariff forecast for power sales from Orissa captive power to Rs3/kwh (Rs2.5/kwh earlier). JSPL is up 308% YTD. JSPL is trading at 15.6x FY11e EPS and 4.8x P/B, expensive in our view. Our SOTP NPV of Rs435 implies Rs135 for steel & Rs300 for power business.

To read the full report: JINDAL STEEL


RIL is present across the entire power chain – generation, transmission and distribution. Further, it also has a presence in EPC (engineering, procurement and construction) projects for the power sector and in Infrastructure projects (Metros, Roads and Real Estate). Reliance Infrastructure Ltd (RIL) recently came out with its Q2FY10 results.

For Q2FY10, RIL reported net income of Rs. 2,649.9 cr, 7.1% higher y-o-y and 8.3% higher q-o-q on the back an increase in EPC activity. The electrical energy segment degrew by 17.8% y-o-y (due to lower cost of electricity and cost of fuel) while the EPC segment recorded growth of 113.9% y-o-y. Operating margins expanded by 60 bps y-o-y to 11.8% in Q2FY10. Other income fell by 19% y-o-y as the company used surplus cash to pay back debt. Tax reversal of Rs. 42.5 cr during the quarter helped boost bottomline. RIL reported a PAT of Rs. 306.9 cr, up 6.2% y-o-y and down 3.1% q-o-q (mainly due to lower other income). On standalone basis, the net worth of the company stood at Rs. 13,464 cr and book value per share at Rs 598 as on 30 Sept, 09. At the CMP of Rs. 1089.30, RIL is trading at 1.8x its standalone book value.

To read the full report: RELIANCE INFRASTRUCTURE


Export revenues drag on the topline; merger propels margin
Cummins India’s (KKC) Q2FY10 revenues, at INR 4.8 bn (ex-Cummins Sales and Services, CSS), were down 39% Y-o-Y, as export revenues (~40% in FY09) collapsed 80% Y-o-Y, to INR 723 mn in the quarter. Additionally, revenues were lower by INR 700 mn in the quarter due to an illegal strike at one of the production facilities. KKC revenues, including CSS, fell 23% Y-o-Y, to INR 6.2 bn, although the same is strictly not comparable, as Q2FY09 numbers do not include CSS financials. EBITDA margins (including-CSS) improved 310bps Y-o-Y, to 18.3%; ex CSS, they improved 100bps Y-o-Y, to 13.0%, indicating that margins on CSS could be ~36% for the quarter. Margins were higher (ex CSS), mainly due to lower commodity prices and efforts at cost reduction initiatives.

Order intake yet to pick up; enquiries on the rise
According to the management, domestic business continues to see rebound in activity. In Q2, the industrial segment continued to grow, driven by improvement in orders from the manufacturing end-user industries like mining and construction. In the domestic business, power generation continues to remain the dominant business vertical with 50% contribution to revenues, while the industrial segment contributed 15-20% and auto business 10%. According to the management, the domestic business is likely to see 10-15% growth from Q4FY10.

Domestic business to grow; revising estimates upwards
After the rebound in activity in the past two quarters, the management indicated that their capex plans are back on track. Over H2FY09, the company had slowed down its capacity expansion undertaken in Phaltan, Maharastra. Apart from expanding the services portfolio, the company is also expanding capacities for 5.9 litre engines at Phaltan. Investment for the same is likely to be ~INR 1 bn spread over 2-3 years.

Outlook and valuations: Superior business model; upgrade to ‘BUY’
While revenues are likely to decline in FY10, we believe the outlook for FY11E is significantly better driven by the domestic business. We maintain our estimates for FY11E, upside risks to the same cannot be ruled out on account of superior growth in revenues and margins. At our consolidated EPS estimates of INR 20.2 and INR 24.4, the stock is trading at P/E of 18.5x and 15.4x for FY10E and FY11E, respectively. We believe KKC has a robust business model, backed by a strong product profile leading to impressive return ratios. We upgrade our recommendation on the stock to ‘BUY’, and rate it ’Sector Outperformer’ on a relative return basis

To read the full report: CUMMINS INDIA


Earnings higher than estimate; boosted by extra-ordinaries
GMR Infrastructure (GMR) reported PAT of INR 536 mn in Q2FY10 against our estimate of INR 295 mn. The variance was due to extra-ordinary elements like write-back of depreciation of INR 95 mn in the Vemagiri power plant, deferred tax write-back of INR 97.7 mn, and higher-than-expected other income of INR 155 mn. Adjusted profit stood at INR 447 mn for the quarter.

Passenger and cargo traffic at airports registers growth
Passenger traffic rose 5% Q-o-Q and 8% Y-o-Y at Hyderabad International Airport (HIAL), while at Delhi International Airport (DIAL), it was flat Q-o-Q but rose 21% Y-o-Y. Cargo tonnage increased Q-o-Q as well as Y-o-Y at HIAL and DIAL. However, higher capex servicing costs and prior period service tax in HIAL negated the benefits.

Extra-ordinaries boost PAT

Merchant sales at Vemagiri power plant to commence by Jan 2010
GMR’s power plants posted stable PLFs—Vemagiri clocked 89% (due to increased gas supplies from KG D6), Chennai clocked 73%, and the Mangalore plant clocked 26% PLF. The Mangalore plant will be shifted to KG basin in Q4FY10 and, hence, will not be operational during the same period. APERC has recently proposed to allow sale of 20% power from the Vemagiri power plant (388 MW) on merchant basis. Management expects this to be effective by January 2010.

Financial closure for 600 MW EMCO power plant complete
GMR had acquired the rights to develop a 600 MW coal-fired power plant from EMCO in Q1FY10 for a consideration of INR 1.2 bn. It has achieved financial closure of the same. The company has made the lowest bid at INR 2.88/unit (levelised) for supplying 200 MW to MSEDCL and is in the process of tying up the balance.

Outlook and valuations: Rich; maintain ‘REDUCE’
We incorporate the value of the recently financially closed EMCO project and have assumed sale of 20% output on merchant basis from the Vemagiri power plant from Q4FY10 in our valuation. We are, therefore, raising our target price to INR 54/share (from INR 51.5/share). However, we believe that the losses at airports will continue to drag profitability in the near term. We maintain our ‘REDUCE’ recommendation on the stock. On a relative basis, we rate the stock ‘Sector Underperformer’

To read the full report: GMR INFRA