Friday, November 20, 2009

>‘Exit’ Strategy: The Road Ahead (MORGAN STANLEY)

• AXJ industrial production (IP) growth has recovered close to trend line: AXJ IP growth is back to the trend line of 9% YoY in September, compared with a decline of 12.4% in the EU and 6.1% in the US for the same month. This acceleration has so far has been largely driven by domestic demand, but exports are also beginning to recover.

• Policy support withdrawal to remain gradual: We cite three reasons: a) recovery so far been largely policy-induced and quick reversal in stimulus would risk a double-dip in growth; b) although exports are recovering, they are still far away from pre-crisis levels; c) AXJ core inflation remains low below Central Banks’ comfort zone.

• Monetary policy ‘Exit’ to begin from 1Q2010: We expect India and Korea to start lifting policy rates from Jan-2010. Currently, the short-term real interest rate on core inflation in the region is very low at an average of 1.6% even as the industrial production has accelerated to 9.1%. We expect the weighted average policy rate in the region to rise to 5.8% by end-Dec11, from 4.6% as of end-Dec09. We see this as a trend towards normalization of rates.

• Except for China, most countries in AXJ should begin reversal in fiscal stimulus soon: Tax and other incentives have already resulted in a sharp rebound in auto and property transactions in the region. We believe that taxation-related stimulus measures that were announced for a limited period may not be renewed or extended. We expect a further rise in China’s fiscal deficit, but the rest of AXJ is likely to start unwinding fiscal stimulus in 2010.

To read the full report: ASIA PACIFIC ECONOMICS

>Identifying Over-Owned/ Under- Owned Stocks

FII Portfolio: U/W on Energy & O/W on Telecom decrease; U/W on Metals & Utilities fall
The quarter saw massive buying by the FIIs in Metals as they participated in the GDR/ADS issues of Sterlite & TISCO. This reduced the u/w of the metal sector. Sterlite and TISCO have entered the top-10 O/W stock list.

Overall financials continue to be the biggest over-owned sector. The top three positions in the over-owned list are Banking stocks (HDFC, ICICI and SBI) once again reiterating the known FII bias. Energy continues to be biggest under-owned sector, however buying in RIL coupled with index change led to decrease in the U/W on Energy.

Telecom was the only key sector which saw selling by the FIIs led by Bharti. This has reduced the O/W of Telecom for FIIs.

Key buys in this quarter were: Sterlite, Unitech, Tata Steel, RIL and Axis Bank. Key sells were ONGC, Bharti, BHEL, NTPC and ITC.

Domestic MF Portfolio: Industrials and Consumers major O/W; Energy, Financials and IT major U/W

Nifty moved to a “free float market capitalization weighted” method from the end of June’09 from the “market capitalization weighted” method. This has changed the O/W and U/W of domestic mutual funds for many sectors and stocks over the last quarter with respect to the Nifty.

Domestic mutual fund portfolio is in stark contrast with that of FIIs, with Industrials being major overweight sector, sector on which FIIs are only marginally positive. Consumer Staples is another sector where mutual funds are heavily overweight in contrast to FIIs who are U/W on the sector. They are also underweight on Financials on which FIIs are highly Over-weight.

On the similar lines of the FIIs domestic mutual funds are also under-weight Energy and IT.

During the quarter mutual funds bought Utilities, Financials and Autos and sold Telecom.

LIC: Net buyer
On the lines of FIIs and MFs who were major buyers, LIC also was a net buyer during the quarter. LIC bought Financials (ICICI Bank, PNB, SBI), Energy (RIL, ONGC) and Metals (SAIL, Tata Steel). In contrast to FIIs and MFs they bought Telecom (Rcom, Bharti) and sold Real Estate (Unitech).

To read the full report: INVESTMENT STRATEGY


Key highlights of the discussion paper and our analysis are reproduced below:

Dual GST model: The central government will levy central GST (CGST) and state governments will levy state GST (SGST). Hence, there will be one CGST statute and one SGST statute for each state.

GST will achieve harmonisation of tax base, laws, and administration across the nation (though multiple SGST statutes). This will encourage investments in the organised sector.

It will be applicable to all transactions of goods and services made for a consideration, except the exempted list and transactions below the threshold limit. This will result in broadening of the tax base and help lower effective tax rates.

Two rate structure for goods and single rate structure for services: Standard rate for goods in general and a lower rate for necessities and goods of basic importance.

Standard rates for CGST and SGST will be prescribed based on the revenue neutrality principle. We uphold our view that the combined CGST and SGST rate will be in the 14-16% range.

GST will facilitate seamless flow of input tax credit (ITC) across the value chain..

Integrated GST (IGST) mechanism for inter-state transactions will ensure no input credit loss even in inter-state transactions.

CST, which is a big hindrance to all inter-state trades, will be phased out.

GST will enable cross utilisation of input credit between goods and services.

GST will minimize cascading of taxes.

Cross utilization of ITC between CGST and SGST will not be allowed, except in the case of inter-state supply of goods and services.

GST will be levied on imports also. This will benefit domestic industry as imports will be taxed at par with domestic production.

Point of levy of CENVAT (excise duty) will shift to the stage of first transaction, which will lead to significant unblocking of working capital.

Exemption will be replaced by an explicit refund-based system, which will make it more difficult for respective state governments to give new exemptions. Current exemptions will continue up to legitimate expiry.

The paper is non committal whether roll out deadline of 1st April, 2010 will be met. Considering various procedural and legal hassles we holds our view that target date of 1st April, 2010 will be missed and GST roll out may happen with 6 months to 1 year delay.

Tax credit on inter-state transaction
For inter-state transactions an innovative model of integrated GST (IGST) will be adopted by
appropriately aligning and integrating CGST and SGST.

In case of inter-state trade, the central government will levy IGST which will be CGST plus SGST on all inter-state transactions of taxable goods and services.

The inter-state seller will pay IGST on value addition after adjusting available credit for IGST, CGST and SGST on his purchases.

The exporting state will transfer to the credit of the Center the SGST deducted in the payment of IGST.

Dealer in the importing state will be allowed to set-off IGST paid while discharging his output tax liability in his state.

IGST used by dealer in the importing state will be transferred by central government to
the importing state. Unlike currently, there will be no loss of input credit for inter-state trade as tax collected in value chain flows to the state of final consumption.

To read the full report: GOODS & SERVICE TAX


October 2009 all India generation up ~1% YoY, PLF down 86bp YoY
During October 2009, all-India generation stood at 64.1BUs (v/s 63.8BUs in October 2008), while overall PLF was down 86bp to 62.5% (v/s 63.4% in October 2008). Coaland- lignite-based power generation declined 4% YoY to 44.4BUs (69% of total generation) at PLF of 74.9% (down by 181bp YoY), whereas gas-based generation increased 25% YoY to 8.1BUs (13% of total generation) at PLF of 65.9% (up 714pp YoY). Hydro-power generation declined marginally to 9.8BUs, while nuclear power generation increased by 31% YoY to 1.7BUs.

During YTDFY10, all-India generation increased 6.6% to 443.8BUs (v/s 416.4BUs in YTDFY09). Coal-based generation increased 6% to 307BUs (v/s 289BUs in YTDFY09) at a PLF of 71.7% (down 260bp YoY) whereas gas-based generation increased 34% to 54.5BUs (v/s 40.7BUs in YTDFY09) at a PLF of 66.6%.

Adani Power: PLF of 74% for October 2009
During October 2009, Adani Power (APL) has reported generation of 178MUs from the first unit of 330MW of Mundra Phase-1 commissioned in June 2009. We calculate PLF at 74%, based on the reported generation by the company. During YTDFY10, the company has reported net generation of 451MUs, consisting of commercial sale of 322MUs; the balance represents in-firm power. Based on our interaction with management, we understand that Unit-1 has been operating at ~90% PLF since mid-October, 2009.

NTPC: generation up 3.5 YoY, PLF flat at 86%
During October 2009, NTPC net generation increased 3.5% YoY to 17.6BUs (v/s 17.0BUs in October 2008), while PLF for coal-based projects was flat at 86%. During YTDFY10, net generation of NTPC increased 1.7% to 611.7BUs (v/s 601.7BUs in YTDFY09).

PLF for gas based projects on uptrend
GVK Power reported PLF of 87% for JP 1 and 2, while PLF for Gautami Power Project stood at 63.3%.
GMR’s barge-mounted project reported lower PLF at 37% for October 2009, while its Chennai Project reported a decline in PLF to 61.3% from 72.5% in October 2008). Vemagiri Power Project reported 99.6% PLF.
JSPL sustained its higher PLF for Chhattisgarh Power Project Post maintenance shutdown in 2QFY10. PLF stood at 98.2% v/s 96.6% in October 2008.
Reliance Infrastructure’s Dahanu Project (500MW) reported PLF of 104.9% (flat YoY), while PLF for Samalkot Project (220MW) in AP was meager at 3.4% (v/s 53% in October 2008). Kochi Power Project (200MW) did not operate during the month.
Tata Power’s Trombay unit reported PLF of 72.5% v/s 95.6% in October 2008, while its Karnataka IPP reported PLF of 50.3% (v/s 77.3% in October 2008). Tata Steel CPP operated at 72.3% PLF (v/s 73.7 % in October 2008).
Torrent Power Project existing units reported YoY improvement of ~270bp in PLF to 88%, while Sugen reported healthy PLF of over 96.5%.

To read the full report: POWER GENERATION


The Print Media sector has started gaining momentum after witnessing a setback in FY09 due to the economic slowdown coupled with newsprint prices peaking at $960/tonne. We have seen a selective recovery in the sector with companies with a regional focus finding solace in rising advertisement spends and declining newsprint prices ($560/tonne) in the current fiscal. High cost inventory is already out of the system & is expected to aid margins from Q3FY10E. However, accelerated revenue growth in core businesses would be seen post FY10E. We expect our print universe to post revenue CAGR of 11.8% and EBITDA CAGR of 36.6% over FY09-12E. With highest margins & additional contribution from IPL, Deccan Chronicle (DC) is our top pick. We initiate coverage on DC and HT Media with STRONG BUY and REDUCE rating, respectively. Being a pure regional player, we reiterate our BUY rating on Jagran Prakashan.

Regional - the way to go…

Rising ad spend
Advertisement is the major revenue driver for the media industry, contributing ~65% of total revenue of print companies. Over the past three years, advertisement is expected to have grown at a CAGR of 17.1%. Although the recent past has yielded mixed results, the longterm scenario looks positive for the Indian advertisement industry. India is still under penetrated and behind developed nations and even China when compared on advertisement to GDP ratio. This indicates further potential for rise in ad spend for the Indian media industry. Advertisement revenue in the print Industry is expected to grow at a five year CAGR (FY08-13E) of 10.0% led by expansion in emerging sectors like organised retail, telecom, insurance, BFSI and education.

Growing regional focus
The Indian print industry is highly fragmented with over 60,000 newspaper published in 22 languages. According to IRS, Hindi newspapers have highest penetration followed by English, Marathi, Tamil and Telugu. In the backdrop of consumption shifting to smaller towns and villages, the industry has seen various vernacular launches in order to increase circulation and shield against seasonal downturn in national advertising in the recent past. In total, 14 of the top 15 most read dailies in the country are either Hindi or vernacular. In the recent economic slowdown, national players were the most impacted while their regional counterparts did not really face the heat. Going forward, we expect companies with a regional focus like Jagran Prakashan to outpace their national counterparts in terms of print revenue growth.

Outlook and recommendation
Print media companies have exhibited a diverse trend in the recent past, with regional players posting robust revenue growth while their national counterparts have witnessed a decline in advertisement revenue. We believe regional players would continue to outperform the overall print industry as demand in Tier II and Tier III cities and towns has proved to be more resilient to the slowdown.

We advise cherry picking among media companies with a preference for companies with higher regional exposure. We maintain Jagran Prakashan as BUY and initiating coverage on HT Media with REDUCE rating. Deccan chronicle with highest operating margin and additional contribution from IPL is rated as STRONG BUY.

To read the full report: PRINT MEDIA SECTOR