Thursday, November 12, 2009


Indian Automobile Sector
The Indian economy has grown at an annual rate of more than 8% over the last five years and the industrial production has made an outstanding contribution to this growth. Auto industry was licensed, controlled and restricted in the early years of independent India and had a limited contribution to the economy. But post delicensing in 1991 the industry has grown at an average rate of 17%. The industry currently contributes about 5% of the GDP and it is targeted to grow five fold by 2016 and account for over 10% of India’s GDP. Automotive mission plan (AMP) expects the industry to reach a turnover of $150-200 billion in the next ten years from the current $45 billion levels. Over the last five years the production of four wheelers in India has increased from 9.3 lakh units in 2002-03 to 23 lakh units in 2007-08 reporting a CAGR of 20%. Vehicle manufacturers are increasingly adopting an outward looking approach and exploring new markets & territories, ranging from Middle East, Europe, South Africa, Algeria, Latin America, Russia, etc. Exports have increased immensely from 84,000 units in 2002-03 to 280,000 units in 2007-08. Crisil estimates the passenger vehicle exports to cross 7 lakh units by 2011-12.

Commercial Vehicle Industry

The commercial vehicle (CV) Industry in India, as is the trend internationally, is cyclical, with periods of volume growth leading to investments in fleet capacity and subsequently to periods of correction. In spite of the inherent cyclical nature, the long-term growth prospects for the industry remain closely linked to the development of road infrastructure, growth in gross domestic product (GDP) and industrial production. The Indian CV industry is currently going through demand correction following one of the longest up-cycles in its history. The Industry which grew at a rate of above 25% over 2001-07 has grown by just 5% in FY08. The long up-cycle was driven by strong economic growth and investments in road infrastructure, besides favorable regulatory changes and a benign financing environment. The industry, on its part, has used its period of growth and the resulting financial surplus to invest in product development and improvement in operating efficiencies. These efforts have resulted in industry extending its presence into newer geographies and exports have increased at a CAGR of almost 40% over the last five years. Going forward this could help in mitigating the effect of down cycle to an extent.

Industry growth
Over the last five years light commercial vehicles (LCV) and medium/ heavy commercial vehicle (M/HCV) segment have grown at a CAGR of 27% and 17% respectively. Although growth of these segments has shown similar trend, volume growth in the M/HCV segment has been more volatile. The demand for M/HCV goods carrier segment mainly depends on higher capacity addition at the fleet operator level and also prone to severe demand shocks. The LCV segment, though cyclical, usually exhibits steadier demand patterns on account of wide usage range.

Structure of Indian CV segment
The CV industry in India is split between the LCV and M/HCV segments, with the classification being based on gross vehicle weight (GVW). According to Industry norms, vehicles with GVW less than 7.5 tonnes are classified as LCVs while the ones heavier than these are termed M/HCVs. In terms of usage, CVs may be categorized as goods carriers and passenger carriers. Among the passenger carriers in the less than 7.5 tonne GVW segment, those with sitting capacity up to 13 are categorized as utility vehicles (UVs, and not part of LCVs) while those with capacity over 13 passengers are grouped as LCVs. According to Crisil statistics, the overall CV industry is split between the LCV and M/HCV segments roughly in the ratio of 45:55.The Indian four-wheeler industry is duopolistic in nature with Mahindra and Mahindra (M&M) and Tata Motors holding a major share in LCV segment (90.8%) and Ashok Leyland (ALL) and Tata Motors holding a major share in M&HCV segment (88.6%).

To read the full report: FOUR WHEELER INDUSTRY


As you and I both know, regardless of what the market is doing, there are always profitable trading opportunities. What’s more, MetaStock has the ability to identify these opportunities, assuming you know how to use it. Yet, if you’re like most people, even though you’ve spent almost $1000 on purchasing it, you probably don’t use it to its full potential. Within this report we’ll show you how you can program MetaStock to find these profitable trading opportunities, and in doing so employ a technique usually only exploited by the professionals.

Before we get into the actual code however it’s necessary that you understand the difference
between two contrasting security selection methods - the top down approach and the bottom
up approach. The former begins its analysis by looking at macro economic and political trends. These trends are used to identify industries expected to outperform the rest of the market. The final stage in this approach is to then select securities from within these industries. The belief behind this method is that if we can select securities in superior industries, these securities will perform along with their respective sectors. This follows the fact that money flows from underperforming areas of the market, to more profitable areas.

Therefore, the odds of success are tipped in your favour.

This is illustrated by Stan Weinstein who said; “… my studies have consistently shown that two equally bullish charts will perform far differently if one is from a bullish sector while the other breakout is in a bearish group. The favourable chart in the bullish group will often quickly advance 50 to 75 percent while the equally bullish chart in a bearish group may struggle to a 5 to 10 percent gain” – taken from “Secrets for Profiting in Bull and Bear Market”

This method is actually at the heart of the RSC exploration.

In contrast to this method is the bottom up approach. This involves scanning the market as a whole, using either a technical or fundamental basis, to find trading candidates. The main strength of this style lies in the fact if we can identify successful companies they usually remain successful regardless of which sector they’re from.

Even though the RSC exploration is primarily used in a top down approach we’ll show you a
way to use it in bottom up analysis too. We believe that both methods have their merits and
together, with their contrasting styles, they compliment each other.

So What Is The Relative Strength Comparison (RSC)?

Simply, the RSC compares a security's price change with that of a "base" or benchmark security.

This is then plotted as a line and can be interpreted as follows:

  • If the RSC is moving up, it indicates that the security is performing better than the base security.
  • If it were moving sideways, it indicates that both securities are performing the same.
  • If it is moving down, it indicates that the security is performing worse than the base security.



Investment conclusion – investors may do well to reposition their portfolios: We believe that FMCG companies are likely to face an increase in intensity of competition. We think EBITDA margins may have peaked; valuations in general leave little room for upside.

We are upgrading ITC, Tata Tea and Dabur to OW…We recommend them as our new top three picks, as they are least likely to be affected by a potential scenario of heightened competition.

…and downgrading five other names: HUL and Colgate are now Underweight; we believe that they are likely to face the most significant threat from rising competitive pressures. Our previous top three picks – Marico, Nestle and GCPL – are now Equal-weight. We see limited upside to the stocks from the current levels.

We See Competitive Intensity Heightening

Likely increase in competitive pressures:
We cite four factors: 1) an increase in advertising and marketing expenditures; 2) sharp improvement in gross margins for most companies, which will likely be reinvested; 3) HUL’s further aggression on market-share-led growth; 4) P&G’s potential focus on increasing its consumer base in India. We believe that a potential rise in
competitive spending could manifest itself in price cuts, increased levels of promotions, and/or a sustained increase in ad spending.

Where could we go wrong? 1. The consumer staples market could display acceleration in growth and accommodate new players, driven by strong rural growth. 2. Competitive intensity slows down as companies reconcile to their existing market shares in their respective segments.

What’s next:
We believe that potential price cuts, increase in promotional offers and/or P&G’s entry into a new product category or segment are likely to be negative triggers for the stocks. Potential reversal of excise tax cuts could also affect the sector adversely.

To read the full report: INDIA CONSUMER


Sugar prices to remain high until 2011. India’s sugar inventory is at a 10-year low (1.7 months of consumption) after a sharp fall in production in the last crushing season (CS) 2008-09. More importantly, production is unlikely to recover in CS2009-10 – the government estimates cane
production will fall 9% y-o-y due to low acreage and this is likely to lead to an historical high 7mt of imports. Furthermore, and despite assuming 30-40% y-o-y FY11 increase in sugar production, inventories will remain tight. Thus, we expect sugar prices to remain high until 2011.

Raising earnings estimates. We expect operating margins to expand as the sugar price increase will be greater than cane cost inflation, and imports will lift volumes and profits. We raise earnings estimates by 40-200% for companies under our coverage for FY10-11; our estimates are now 20- 61% above consensus for FY10.
Higher sugar prices and tight inventories likely to persist till 2011
We boost earnings for India sugar companies by 40-200% for FY10-11
Upgrade Bajaj Hindusthan to OW(V) from UW(V).
Retain OW(V) on Shree Renuka, Balrampur Chini & Triveni Engg

Attractive value and robust earnings. Although valuation multiples (price to book) have expanded 75-220% in the past year, they are still near multiples traded in the last downcycle
of FY07-FY08. We believe that further re-rating is likely as we forecast earnings growth of 26-72% and expect almost debt-free balance sheets by the end of FY11e.

Our top picks are Shree Renuka Sugars (largest importer, strategically located and has highest return ratios) and Bajaj Hindustan (most sensitive to sugar price rise).

Key risks. Higher cane cost, lower levy price and government intervention are key risks to earnings.

To read the full report: SUGAR SECTOR


Cement prices in south and west regions have been falling steeply over the past two weeks, as the increase in supply is outstripping that in demand. At present, cement is cheapest in Hyderabad, at Rs123–145 per 50kg bag—down 18% in the past two weeks and 45% from the peak price reached in April 2009—the sharpest price fall in the past 15 years. According to dealers, price cuts have become a daily occurrence in the southern markets. In Gujarat, price declines have accelerated as supplies originally intended for exports have been diverted to the domestic market, given dwindling demand from the Middle East. Prices in the north have dropped by 2-3% in the past two weeks as supplies to the central region have reduced.

Prices crash in south markets: Cement prices in the south have dropped by Rs15-30/bag in the past two weeks, because of a combination of sharp increase in supplies following huge capacity expansions from small and medium producers, and poor demand from the infrastructure and housing segments. Further price declines could lead to EBIDTA loss for a few cement companies in the Nalgonda cluster in Andhra Pradesh (AP) and is likely to act as a support for prices going forward in Hyderabad. (We estimate EBIDTA loss for selling price below Rs120 per bag, given that cost of production is Rs85, freight Rs7, excise duty Rs11.5, state VAT Rs13, and dealer commissions and other sundry expenses are Rs3). Dealers said a few producers in AP have stopped supplying to Hyderabad and have started focusing on other markets in neighbouring states.

Western markets negatively affected by slowdown in exports and increasing supplies from south: Cement price in Gujarat has declined by Rs15-20 per bag in the last two weeks, as exports to the Middle East have taken a hit, with demand moderating and supply in that region increasing as new production capacities are commissioned. Increasing supplies from the south to Maharashtra have depressed prices by Rs10-20 per bag. We expect sharp price declines going
forward in the western region, as supply increases from Murli Industries, JK Cement and Jaypee Cement are likely to lead to intense market share competition in the region.

Slowdown in demand depresses prices in central region and has a slightly negative effect on prices in the north: Demand from the infrastructure segment has reduced in Uttar Pradesh, following Supreme Court’s ban on construction of memorials in UP. Dealers indicated that offtake is depressed on account of payment delays in government contracts. Prices have declined by Rs10-15 per bag in the last two weeks in the central region. Sluggish demand in the central region and increasing supplies from Grasim’s new plants led northern region prices to decline Rs5 per bag.

To read the full report: CEMENT SECTOR

>Model Portfolio & Focus List: Adding ITC (MORGAN STANLEY)

• Our Consumer analyst Hozefa Topiwalla believes that competitive pressures amongst consumer staples companies are likely to rise over the next 12-months. Input cost savings have peaked; we think a trend reversal, at least for a few companies, has begun from October 2009. The industry is likely to implement more price cuts, promotional activity, and/or marketing expenditures (see today’s note titled.

Changes to Focus List: We are adding ITC (Rs249) to our focus list. Hozefa has just upgraded ITC from Equal-weight to Overweight. He argues that ITC is in a strong position in one of the most attractive cigarette markets in the world and is demonstrating strong pricing power. ITC is likely to be largely unaffected by the potential rise in competitive activity in the Home and Personal Care space. ITC’s Paper and Agri businesses are also demonstrating strong margin momentum and the hotels business is expected to recover.

  • We fund this change by removing HUL (Rs273) from our focus List. Hozefa has downgraded HUL from Equal-weight to Underweight due to the following reasons:
  • Increased earnings growth volatility in the next two to three quarters
  • Potential increase in competitive pressures from P&G likely to affect the stock’s multiple
  • Cash flow pressures will likely rise as HUL makes investments to gain market share in an environment with greater competitive intensity
  • Input cost pressures have begun to rise

We are not making changes to our sector model portfolio which remains biased for a recovery in economic activity. Thus, we believe that consumer and infrastructure sectors will drive growth recovery and, hence, market performance. Accordingly, we are overweight Consumer Discretionary, Industrials, Financials and Energy in our model portfolio while remaining neutral and underweight in technology and materials, respectively.

To read the full report: INDIA STRATEGY