Saturday, November 28, 2009

>Goldman Sachs : gold still relatively fair value

London - Gold and other commodities are justified at current pricing levels and aren't exhibiting bubble-like characteristics when macro variables are taken into account, a senior analyst at Goldman Sachs (GS) told Dow Jones Newswires.

"Interest rates on a nominal basis have been relatively flat while inflation expectations have been rising, putting downward pressure on real interest rates, which in turn has been putting upward pressure on gold prices," said Jeff Currie, head of global commodities research at the U.S. bank. "So the gold market looks relatively fair valued when you put it in the context of real interest rates," he added in a recent interview.

A combination of a faltering dollar and central banks' diversification away from a high level of reserves in the weakening currency have helped to lift gold to record highs, leading to talk of a developing asset bubble.

Thursday the previous metal hit a new all-time high of $1,195.10 a troy ounce in the European spot market, also aided by investors' desire for insurance against the risks of inflationary bubbles in other assets.

Other commodity markets and especially metals have also moved higher, with copper at 2009 highs and platinum and palladium trading at prices last seen in August 2008. Oil is meanwhile holding a steady range between $74 and $77 a barrel, up over 40% since the start of the year.

Industry players have been scratching their heads as to why prices in some commodities have been so strong given rising inventories, not least copper.

Copper stocks in London Metal Exchange warehouses are now at their highest level since April, with the highest proportion in the U.S., where even producers admit demand is extremely poor. In China too, Shanghai warehouse stocks have risen sixfold since the start of the year. Comex stocks are meanwhile at their highest since August 2004, when copper prices were less than half current levels of around $7,000 a metric ton.

Total U.S. inventories of crude oil and petroleum products are meanwhile at their highest since 1994, federal Energy Information Administration data for the week ended Nov. 20 showed.

Currie said that copper inventories relative to ten years ago are still at "extraordinarily low levels," while in oil "you're swimming in it," adding that the forward curves of both commodities reflect these relative inventory levels.

"On a day-to-day basis you can make the argument that the inter-correlation between the dollar and commodities is very high. On a longer term basis, you can make the argument that energy drives the dollar, but the dollar drives metals and agriculture," Currie added.

Goldman Sachs' top energy pick is oil, with copper the favored base metal. Goldman Sachs meanwhile tips corn out of the agricultural commodities and platinum from the precious metals complex.

"Platinum is a gold-plus trade," Currie said. "It's got a floor on it provided by gold, and then you get the industrial story on top of it, with the continuous improvement in demand for autos against ongoing tight supply dynamics in South Africa," he added.

In the backdrop of the commodities revival is still robust demand from the emerging markets, especially the BRIC countries, Currie said. "The financial crisis was really targeted at the U.S., Europe and Japan, and the other parts of the world are rebounding much more quickly," he added.



Credit, non-US stocks gain flow share in 4Q For the week ending 11/4, Lipper FMI data and our preliminary estimates suggest equity fundsremained in the outflow mode, shedding another $3 bn, which was once again led by domestic funds. This compares to $1.5 bn of net outflows ($2.6 outflows in domestic and $1.1 bn in international inflows) reported by ICI for the week prior.

Conversely, bond fund flows remained solid at an estimated $7.4 bn for the current week,
following $10.2 bn (comprising $8.9 bn bn in taxable bonds and +$1.3 bn in munis) for the prior
week reported by ICI.

Money manager barometer: Déjà vu… domestic equities, MMFs outflow; credit inflows.

MMFs outflows accelerated once again, reaching $21 bn for the current week. As we approach the middle innings of 4Q, MMFs lost $79 bn qtd, tracking in-line with 3Q’s total outflows of $235 bn. Similarly to 3Q, credit remains the only game in town with over +$50bn of inflows qtd, on track to beat last quarter’s record. Domestic equity funds outflowed $17 bn, while international funds continued to gain share, picking up +$7bn 4QTD.

Equity performance recovers
Equity fund performance recovered somewhat this week but remains in the negative for the
quarter. Specifically, equity funds are down 1.6% 4QTD. CLMS continues to lead the group with
+0.4% of asset-weighted performance, followed by IVZ and WDR. CNS, LM and PZN all rank at the bottom with -4.1%, -3.5% and -3.1%, respectively.

Trade idea: Buy ART ahead of 3Q earnings We recommend buying ART ahead of 3Q earnings
on 11/13. The stock has underperformed the group recently, now trading at just 12.7X 2010E
P/E vs. the group’s 17.6X average. With further strength in non-US mutual fund flows industry wide in 3Q and 4QTD, we expect ART to deliver $500-$550 mn in positive flow for the quarter,
while the near-term investment performance is catching up. Our 3Q EPS estimate is $0.38.

In addition, BEN (Buy) will be reporting October end AUM, which should show continued strength in credit flows, boding well for the stock on the back of the recent weakness.

To read the full report: ASSET MANAGERS

>Seven Themes for 2010 (MORGAN STANLEY)

Key Debate: Investors are looking at several headwinds for equity markets in 2010 – the DXY trade seems to be a consensus one, a lot of the coming growth acceleration seems to be priced in, inflation is likely to rise and cause tightening, whereas equity valuations appear middling. Amidst these concerns, and since leading indices have more than doubled in less than nine months, we ask – where is alpha going to come from in 2010?

These seven themes are our highest conviction ideas for 2010:
I: Buy SOE Banks: The Central Bank is likely to start raising rates in January 2010. Rising rates favor Indian banks as they run a maturity mismatch on their balance sheets (liabilities have a longer maturity). Thus NIMs will rise; coupled with acceleration in loan growth (which trails IIP growth), this will help earnings. The stocks of SOE banks trade at better valuations than their private sector counterparts and SOE banks will also be helped by a declining fiscal deficit, which will likely cap long bond yields. Our favorite stock is SBI (SBIN IN, Rs2305)

II: Avoid Technology: Tightening by the Central Bank will put upward pressure on the rupee with negative consequences for technology stocks. Tech stocks have done particularly well over the past six months and also suffer on a relative basis in an accelerating domestic growth
environment. Tech stocks correlate negatively with INR.

III: Buy Energy:: Energy, especially Reliance Industries, has delivered its worst relative performance ever on a trailing-six-months basis. The sector correlates positively with crude oil, short-term yields (read: local inflation) and industrial production. Thus it provides a hedge against a spike up in crude oil prices.

IV: Buy Industrials: Acceleration in industrial growth will help close the output gap faster than what is possibly in the price right now. This will help a new private capex cycle to start in 2010 and further boost performance of industrials. Our favorite stock: Larsen & Toubro (LT IN, Rs1648).

V: Shift Bias From Rural to Urban Plays: No doubt rural growth remains very strong, helped by rising food prices and government spending. Yet at the margin, urban growth will close the gap vs. rural growth as industrial activity picks up. Two-wheeler and large cap staple stocks tend to correlate negatively with industrial growth and should be avoided in 2010. In contrast, media and niche mid-cap staples may still perform well.

VI: Buy Mid-caps: The broader market is likely to generate faster earnings growth of around 25% in 2010, trades at better valuations than the narrow market, and accordingly could outperform the narrow market. See our Mid-cap picks on page 10.

VII: Stock Picking Could be in Vogue in 2010, Market to be Driven by Earnings: A high market effect, high sector correlation and middling micro factors such as valuation, fundamental and return dispersion sets us up for a better stock picking environment in 2010. Most of the market returns in 2009 have come from a PE rerating, and as the key driver of returns shifts to earnings in 2010, so will the key driver of stock prices from macro to idiosyncratic stock related factors.

Sector Portfolio Changes: We add 100 bps each to Financials and Energy, funding this by reducing consumer discretionary and technology by similar amounts. Consumer discretionary has been the best performing sector over the past two years; we think most of the growth story is in the price. We are now overweight Energy, Financials and Industrials and underweight Healthcare, Materials, Technology and Utilities.

To read the report: INDIA STRATEGY

>Indian Banks’ Exposure to Dubai (MORGAN STANLEY)

Following the last two days events there have been quite a few questions raised on Indian banks exposure to Dubai – Banks have not disclosed single party exposures. Based on available data, BoB seems to have the biggest exposure to Dubai – this could cause the stock to come under some pressure in the near term. However, we have maintain our OW on BoB given that fundamentally we believe earnings progression will be strong.

Among Indian banks, the following have some presence in Dubai:
1. Bank of Baroda has the biggest presence with eight branches in UAE (of which two are in Dubai). Its total loan book (as of December 31, 2008) in the UAE was US$1.7bn (6.5% of total group loans). However, not all of this is in Dubai. According to an article in Gulf News, it had also participated in a syndicated loan to Dubai World – BoB’s exposure in this syndication is US$200mn, ( uae-growth-1.502185) – around 25% of earnings and 6% of book value. The UAE operations contributed AED162mn to BoB’s profits in CY2008 – around 12% of BoB’s earnings. We are seeking further clarity on the exact exposure from management. We maintain our Overweight call on the stock.

2. SBI has a branch but it is new, given that it got a banking license in Dubai in only September 2009.

3. Bank of India has a representative office in Dubai.

4. ICICI and Axis have a branch each. ICICI has said that its exposure in Dubai is only to Indian entities with businesses in Dubai and, hence, the impact is likely to be negligible, if any.


What's new? — PRIL management outlined a broad scheme for the de-merger of non retail assets. In brief: 1) Big Bazaar and Food Bazaar (~70% of FY09 PRIL parent revenues) will be transferred into a 100% subsidiary of PRIL. 2) The insurance ventures and Future Capital Holdings will be placed in a separate finance vertical. The holding company (for the insurance businesses) will be duly listed. 3) Three support businesses (IT, brand development and learning) have been carved out for a consideration of Rs1.9bn.

Implications — a) Positive for parent balance sheet – cash intensive financial services business can chart growth path without dependence on PRIL for capital infusion; b) Creates possibility for separate listing and infusion of FII into Big Bazaar + Food Bazaar at a later juncture (PRIL is at FII limit at present); and c) PRIL's resources to be conserved to meet growth aspirations.

Buy: Organisational Restructuring — Broad Contours Outlined

Other analyst meeting takeaways — a) Timeline for restructuring of financial services business is 30-45 days; b) Balance sheet restructuring should result in debt to equity levels improving – management targets debt equity levels of ~0.8x (vs. ~1.2x now); c) Target to increase retail space to 25m sq ft by FY14, which includes 10m sq ft capex in PRIL (capital outlay of ~US$350-400m); and d) Guidance on key metrics maintained – (i) management targets reducing inventory to ~Rs1600/sq ft, (ii) revenues of ~Rs9000/sq ft.

Maintain Buy (1M) — We expect the stock to remain buoyant as more clarity on the de-merger emerges. Improvement in retail business (solid SSS growth trends in October) also buttresses our thesis that PRIL is well positioned to capture the rebound in urban consumption.

To read the full report: PANTALOON RETAIL


TRAI notifies MNP porting charges at Rs 19; expect MNP to adversely impact EPS of companies under coverage by 8-39%, target prices by 7-22%; maintain 'Under performer' ratings on Bharti and RCOM, downgrade Idea to 'Sell'

The telecom sector regulator, the Telecommunications Regulatory Authority of India (TRAI) has notified the key charges for the implementation of mobile number portability (MNP). The per port transaction charge has been fixed at Rs 19, the porting charge has been fixed at a ceiling of Rs 19, while dipping charges have been left to mutual discussions between the service provider and MNP service provider. We expect the introduction of MNP to be a negative for the Indian telecom sector and for telecom stocks, even as it would be beneficial for subscribers.

In terms of a company-specific impact, we believe Bharti Airtel and Reliance Communications (RCOM) will be less impacted, given their larger scale and country-wide network. We expect Idea Cellular, given its lower scale as compared with Bharti and RCOM, to be impacted more, especially in the event of it losing high-value and more sticky post-paid subscribers. Overall, we believe MNP will be an additional 'pressure point' for telecom companies and even as it is overall a zero-sum game, it will be margin-dilutive. We estimate a 6-9% decline in ARPUs, a 50-82 bps negative impact on margins and consequent EPS declines to the tune of 8-39% in FY11, with consequent changes in target prices by 7-22%. We remain negative on the sector and maintain 'Under performer' ratings on Bharti Airtel (downgrade target price from Rs 289 to Rs 269) and RCOM (downgrade target price from Rs 167 to Rs 151), while we downgrade Idea Cellular to 'Sell' from 'Under performer' (downgrade target price from Rs 45 to Rs 35).

The porting charges notified by TRAI are significantly lower than the range of Rs 75-200 that has been appearing in media reports over the past few days. This makes it considerably cheaper for subscribers to port their numbers and is likely to be a major factor driving the increasing usage of the MNP facility as and when it commences, given the current dissatisfaction with quality of service (QoS), significant choices of operators and plans for subscribers and the dual SIM card phenomenon in the Indian telecom market.

MNP expected to be a negative for the Indian telecom sector, positive for subscribers; next phase of battle to be fought on the post-paid front We believe the implementation of MNP would be a negative for the Indian telecom sector from an operator point of view, while for subscribers it would be a key positive. Churn rates, already in the region of 4-5% monthly (pre-paid subscribers) are likely to increase even further. Competition levels are already very high and in fact, an era of hyper-competition is being witnessed in the sector. Given the spectrum crunch in the key Metro service areas, on account of which call drops are frequent and QoS poor leading to low customer satisfaction rates, these areas in particular could witness higher churn rates. This is a negative, given the higher ARPUs and revenues that subscribers in these circles provide to operators.

For instance, while the Metro service areas (excluding Chennai) accounted for less than 10% of Bharti Airtel's total mobile subscriber base at the end of September 30, 2009, these circles accounted for over 15.5% of the adjusted gross revenues (AGRs) of the mobile segment in 2QFY10. For the industry, in 1QFY10, blended ARPUs of the metro service areas for the GSM segment, as per TRAI data, stood at Rs 221 per user per month as compared with the overall blended ARPU figure of Rs 185, thus implying a nearly 20% premium. Thus, these are a few examples of the importance of high usage subscribers in the key metro circles, the loss of which could hurt telcos' revenues and profitability significantly.

To read the full report: TELECOM SECTOR


A unique investment proposition: Max India is a unique investment opportunity providing direct exposure to two sunrise industries of insurance and healthcare services. Max New York Life (MNYL), its life insurance subsidiary, is among the leading private sector players, has gained the critical mass and enjoy some of the best operating parameters.

Insurance—the key value contributor: MNYL, a 74:26 JV between Max India and New York Life, is the seventh largest insurance player with a market share of 5.2% and an extremely healthy NBAP margin of 21% (in FY2009). It is differentiated from its peers by its focus on traditional products, relatively low dependence on ULIPs, a highly productive agency network and high persistency rates. In our SOTP valuation of Max India, MNYL contributes Rs263 a share based on the appraisal value method.


Healthcare—aggressive expansion plans: Max Healthcare has presence across the healthcare delivery value chain, addressing the primary, secondary and tertiary care needs of patients. The company plans to increase its capacity to around 1,800 beds by 2011. We value the healthcare business of Max India based on the EV/ EBITDA method and the business contributes Rs20 a share to our SOTP valuation.

Other business—aids cash flow: Max India also has a biaxially oriented polypropylene (BOPP) facility running at full capacity of 29,000TPA. It is in the process of expanding its production capacity for BOPP films to 49,000TPA by the end of the next financial year. The specialty product business contributes Rs12 a share to our SOTP valuation, based on the price-to-sales ratio valuation method.

Valuation—price target of Rs295: Apart from the above mentioned business, the company is looking at investing and building other businesses, including clinical research and general insurance, that would add to its valuations in the coming years. Moreover, the possible hike in the foreign direct investment (FDI) limit for the insurance companies and the expected public offerings by the private insurance players are two likely triggers for the re-rating of the stock. We initiate coverage on Max India with a Buy rating and a price target of Rs295.

To read the full report: MAX INDIA


Quick Comment: We believe the one-time shift in revenue and EPS for Mphasis is behind us. Growth rates have been eroding from high 15% QoQ in Oct. ‘08 to a mere 2% QoQ in Oct. ’09, and the stock has reverted to growing in line with sector peers. We believe that at current levels the stock’s risk/reward looks unfavorable and would recommend that investors switch from Mphasis to HCLTech (Rs339, OW) or MindTree (Rs643, OW).

Oct. ‘09 Results: Reported revenue of Rs11.3bn (+2.4% QoQ, +26.5% YoY) was in line with our estimate. EBIT margins were flat at 21.9%. Excluding Fx gains, revenue grew 1.6% QoQ and EBIT margins declined to 21.1% (-53bps QoQ, +220bps YoY), remaining below our estimates. Net income of Rs2.45bn (+6.9% QoQ, +33.9% YoY) was higher than our and the Street’s
expectations due to higher Fx gains.

Oct. ‘09 Results: Revenue Growth Continues To Decelerate; UW

Key Results Positives: 1) BPO revenue grew above the company average at 3.7% QoQ, with strong improvement in margins to 23.9% (+282bps QoQ, -638bps YoY); 2) Telecom and BFSI grew strongly at 11.7% QoQ and 5% QoQ, respectively; 3) Fixed price
revenue improved to 12% of revenue (+300bps QoQ).

Key Results Negatives: 1) ITO revenue was flat at 2.1bn (19% of revenue) and gross margins in ITO declined to 38.4% (-568bps QoQ, +692bps YoY) after seven consecutive quarters of improvement; 2) Top client, top 5 and top 10 clients declined -12.2% QoQ, -9.6% QoQ, -4% QoQ, respectively; 3) Billing rates in BPO declined for the second consecutive quarter

Valuations: The stock trades at ~16x F2010e EPS, a 20–25% discount to larger vendors, and it remains the most expensive mid-cap stock in our coverage universe.

To read the full report: MPHASIS LIMITED


Business Overview
Incorporated in 1995, MBL Infrastructures Ltd is engaged in the construction and maintenance of roads and highways, industrial infrastructure projects and other civil engineering projects for various government bodies and other clients.

The company has a pan India presence and executed a number of projects in the states of West Bengal, Madhya Pradesh, Uttarakhand, Orissa, Maharashtra, Rajasthan, Assam, Uttar Pradesh, Bihar, Delhi etc.

The company is focused on the following sectors:
1. Highway Construction
2. Road Maintenance
3. Industrial Infrastructure Projects
4. Other Civil Engineering Projects
5. BOT (Build Operate Transfer) Projects

The company is engaged in steel trading and waste management (ferrous scrap and slag recycling) at major steel plants. Moreover, the company has ready mix concrete (“RMC”) and bitumen divisions to ensure adequate and timely supply of high quality of RMC and bitumen mixes.

MBL has completed the execution of BOT project of 114 kms. of Seoni- Balaghat- Rajegaon State Highway under the Public Private Partnership (PPP) arrangements. Company also completed the work of construction of additional length of service road and side drains from 146-156Km including 2-lane flyover on Guwahati Bypass section of NH 37 in the state of Assam.

MBL owns a fleet of equipment, including hot mix plants, sensor pavers, tandom rollers, soil compactors, stone crushers, tippers, loaders, excavators, motorgraders, concrete batching plants, transit mixers, concrete pumps, reversible drum mixers, dozers and cranes.

MBL has bagged five contracts relating to the Common Wealth Games which are mentioned below:
1.Construction of Road under bridge on Auchandi road, connecting to G.T. road to Badli Industrial area (on Delhi – Ambala Line) for Municipal Corporation of Delhi (MCD)

2. Construction of Road under Bridge on existing railway line level crossing on Narela Lampur road at Narela for MCD

3. Street Scaping & beautification of MCD roads around Tyagraj Sports Complex, Siri Fort complex and RK Khanna Tennis Stadium

4. Street Scaping & Beautification of MCD Roads around Dr. Karni Singh Shooting Range and JLN Sports complex

5. Street Scaping & Beautification of Various roads around IGI Stadium under PWD Zone M-1

Competitive Strengths
Integrated business model
The integrated structure enables the company to bid for BOT projects,- from tendering for the project to the collection of tolls, and operate the project on a profitable basis.

Own fleet of construction equipment
The company owns most of the construction equipments like hot mix plants, sensor pavers, tandom rollers, soil compactors, stone crushers, tippers, loaders, excavators, motorgraders, concrete batching plants, transit mixers, concrete pumps, reversible drum mixers, dozers, cranes etc and shuttering and centering plates. This gives the company competitive advantage like lower cost & rapid mobilization.

Pan India presence
The company has a national presence and is currently executing projects in 9 states across India. The capability to simultaneously execute projects at geographically diversified locations, gives the company the ability to wider market access.

Availability of raw material at cheaper cost
Having captive capability ensures availability of the bulk raw material at a cheaper cost & enables the company to control and ensure the quality and timely delivery required for the projects.

Operational BOT project
The operational BOT project is providing steady cash flows to the company. The toll revenue for the fiscal ended March 2009 was Rs 7.80 crore and in August 2009 the monthly revenue stood around Rs 66.72 lakh.

Business Strategy
High potential projects
MBL intends to concentrate on projects where there is high potential growth and competitive advantage. The company intends to be associated with larger, technically more complex projects by leveraging their prior experience in infrastructure projects and equipment base. The company believes that high entry barriers for bidding of large order size projects make this an attractive sector to participate in.

Joint Venture with other infrastructure companies
The company continues to develop and maintain strategic alliance and form project specific joint ventures with regional players whose resources, skills and strategies are complementary to the company's business.

Operate BOT and Annuity projects
The company intends to take up annuity projects or contracts on BOT as they provide higher revenue & operating margins due to the added overall control of the project costs that can be exerted by the contractor. MBL believes that such projects will become increasingly more prevalent in the coming years because of the government's reliance on the public-private partnership (PPP) model.

Mining of minerals
The company may enter into mining of minerals such as iron ore, coal etc in the future.

To read the full report: MBL INFRASTRUCTURE