Tuesday, November 17, 2009

>Global Oil Fundamentals: On The Margin (MORGAN STANLEY)

• Oil fundamentals are weighing on the oil market more so than they have at any point in the last six months, in our view. Demand in the OECD, the easiest of data points for participants to focus on, has continued to fall short of expectations, leaving product stocks bloated and weighing on refinery margins. Margins have now fallen so precipitously that most refiners globally are losing money.

• This bearish development is reflected in the resistance that oil is seeing at $80/bbl. The reflation and liquidity trade that lifted oil together with global equity markets and other commodities does not appear sufficient to overcome currently weak fundamentals.

Crude Oil Fundamentals: On The Margin

• We are staying with our $85/bbl forecast for 2010, as we continue to expect demand to improve and inventories to clean up. The recent data does show inventories easing, consistent with our expectations, however the recent increase in oil stored at sea complicates this assessment.

• We now see global demand rising by 1.5 mmb/d in 2010, with non-OPEC supply to increase by 400 kb/d – more constructive than the IEA which sees demand growth of 1.4 mmb/d and non-OPEC supply higher by 770 kb/d.

• Oil continues to be buoyed by the faltering USD. Oil’s negative correlation with the USD remains impressive and no doubt is frustrating to bears. As a house we remain structurally bearish on the USD through 2010, but given how crowded the short USD trade has become, short-covering rallies are to be expected. Given the weak physical bid for crude at the moment, we expect the negative correlation with the dollar to hold and any dollar rally to be met with crude weakness.

To read the full report: GLOBAL OIL


CV cycle on an uptrend; Ashok Leyland poised to benefit
With a strong macroeconomic recovery, the commercial vehicle (CV) cycle is clearly on an uptrend. We expect M&HCV volumes to rise 10% and 25% in FY10 and FY11, respectively, with the strong underlying growth. The recovery is already visible in South and West India where Ashok Leyland (ALL) previously lagged. The recovery is likely to be further aided by an increase in bus volumes by virtue of the JNNURM scheme

Uttaranchal plant offers strong strategic advantage
ALL’s Uttaranchal plant, to be operational in Q4FY10/ Q1FY11, will have an initial capacity of 30,000 units per annum (to be scaled up to 50,000 units). It is expected to have an initial localization level of 65-70% in the first year, offering ALL a benefit of INR 60,000 per vehicle (~6% the cost of the vehicle). Considering the other key player, Tata Motors (TTMT), does not have a plant in an excise-free zone, ALL enjoys the liberty to either improve margins or to push aggressively for market share gains. The cost advantage will increase in case excise duties are
hiked in the coming quarters.


Strong pricing and operating leverage to benefit margins
The CV space has witnessed strong pricing action in the past year (prices have been raised 7-8%), whilst discounts have been on the decline. Considering cash flow concerns in case of TTMT, we expect pricing discipline to be maintained in the next few quarters. This implies that the current high margin could sustain, despite a potential hike in raw material costs. Further, the operating leverage could play out in FY11 as volumes increase.

Outlook and valuations: Recovery underway; Upgrade to ‘BUY’
Recovery in the CV cycle continues to be strong. We upgrade our estimates for FY10 and FY11, to INR 2.8 and INR 4.0, respectively, to factor in the higher growth rate. ALL is the only pure CV manufacturer in India and, in our view, should trade at a premium to the industry. We upgrade the stock from ‘REDUCE’ to ‘BUY’ with a target price of INR 64, implying 16x P/E in FY11E (in line with the automobile space).

To read the full report: ASHOK LEYLAND

>INDIA CEMENTS: Challenging times ahead!! (BNP PARIBAS)

Weak demand in South + excess supply = D/S disequilibrium We downgrade Indian Cement sector to Negative as the pricing outlook is likely to remain challenging given weakening demand in South and West markets. Weakening demand in South (floods, political instability in AP & Karnataka) will likely exacerbate the pricing outlook for South and Western regions (due to inter-regional transfer). The key themes we highlighted in our initiation report titled “pricing resilience and cost deflation – Mantra for FY10” have played out, with cement companies reporting excellent financials for F1H10. We expect growth over the next two quarters to remain weak due to a) a slower-than-expected pick-up in government infrastructure projects, b) high base effect of F2H09, c) lingering weakness in commercial and industrial segments and d) marginal negative impact of monsoon on rural housing demand.

Margins have peaked; lowering FY11 EBITDA estimates by 5-20% for stocks under coverage: Our recent channel checks with cement dealers in South indicate pricing collapse in certain cities (Hyderabad, Chennai and Visakhapatnam). We expect weak pricing to remain over the next 12-18 months with South and West being the most affected. We expect average cement prices to decline by 2% y-y for FY10 and -8.1% y-y for FY11 (driven by south: -13.0% y-y in FY10 and -13.7% y-y in FY11). We lower our FY11 EBITDA estimates by 5-20% for stocks under coverage.

Target Prices lowered for ACC and Ambuja: We are lowering our TP for ACC to INR604 (from INR684) based on 5.0x our CY10 EBITDA of INR21.5b representing a downside of 18.1%. We lower our TP for ACEM to INR85 (from INR95) based on 5.5x our CY10 EBITDA of INR19.7b. We maintain our BUY rating on UltraTech Cement due to a) a potential rerating on consolidation of Grasim’s cement business, b) lowering of exposure to south and west to 57% from 75% (prior consolidation), c) largest Indian cement company with 48.0mt of capacity. We await details on swap ratio for Smruddhi Cement merger with UTCEM before changing our TPs for UTCEM and Grasim.

To read the full report: INDIA CEMENTS


Investment conclusion: We believe Reliance is poised to show CAGR of 21% p.a, F2009-11, against the expected growth of 10% amongst the SENSEX constituents with both its major projects fully commissioned – its new 58kbpd high complexity refinery, as well as it E&P project from its D6 field. This is despite our expectation of a tough environment in the refining and petrochemical business. The stock has underperformed the market by 22% in the last six months, and trades at 14x F2011e earnings against 15x market multiple, making valuations attractive in our view. We increase our target price to Rs2463/share and maintain our Overweight rating. Key triggers we see are: 1) RIL producing 80mmscmd of gas and the government allocating customers for the gas; 2) the court case between RNRL and RIL getting resolved.

High Growth Ahead, Despite Tough Business Environment

What’s Changed?: We are lowering our F2010/11e EPS by 18%/11%, largely on the back of lower Gross Refining Margin (GRM) estimates; lower gas from KG D6 in F2010 and higher depreciation. RIL’s GRM has been negatively impacted due to oversupply in region, backed with squeeze in Arab light - heavy spreads.

One more quarter of pain ahead: RIL produced 33.5mmsmcd of gas and 10kbpd of oil from the KG-D6 field in F2Q10.The field is currently producing 46mmscmd of gas and awaits government allocation to increase further production. With 18 wells drilled, we believe the company is in a position to produce 60mmscmd of gas by y/e and 80mmscmd of gas by April 2010, at minimal capex. In the interim, Singapore Complex GRMs are currently hovering at US$1-1.5/bbl, which could lead to flat profits in F3Q10. Thereafter, we estimate an 11% sequential growth in net profits.

To read the full report: RELIANCE INDUSTRIES

>Indian Ecnomy,Financial Markets and Products (BIRLA SUN LIFE COMPANY)

Equity markets is in a consolidation phase
Corrective downward movements may be availed of as opportunities to enter the market
Corporate earnings more or less on expected lines
Investments may be predominantly into fairly diversified large cap funds and midcaps to a certain extend
Themes that may be looked at include infrastructure, power, PSU disinvestments, health care, banking etc

The global markets have also not done well
Negative cues from global markets have been a drag on the Indian markets

Rupee likely to move towards Rs 45-46 against the dollar by financial year end.
Rupee supported by FII inflows
The correlation between equity market performance, FII inflows and strength of the rupee are clearly identifiable in the chart
The Dollar continues to remain under pressure after the US Federal Reserve reiterated its commitment to keep interest rates low for an extended period indicating that the US economy
would have a slower than expected recovery.

To read the full report: MARKET STRATEGY