Sunday, December 13, 2009


In Focus
After an initial rebound, global growth may be shallow, hence stimulus is likely to remain in place.
Nevertheless, markets will start to factor in lower liquidity provision, so yield enhancement will be key.
Investors should therefore focus on dividend yield, select risks in corporate bonds, domestic Asian growth and agricultural commodities to mitigate this transition year towards a new monetary regime.

The broad-based cyclical acceleration is continuing to gain speed, but its sustainability remains
The major risk to our baseline scenario is that we may underestimate the short-term strength of the recovery.

CNY appreciation will facilitate the strengthening of other Asian currencies.
Further room for appreciation of commodity currencies that offer a reasonable valuation, like the NOK and the CAD.

Default rates to decline as growth stabilises and generous amounts of liquidity are provided.
High-quality bond segment is expensive relative to the outlook for growth and inflation.

We expect the market recovery to last well into H1 2010. Speculation about rising central bank rates is likely to keep stocks rangebound thereafter.
We recommend focusing on the eurozone and EM Asia as well as on high-dividend strategies, which should become more attractive again as yield enhancement.

The global liquidity glut and inflation fears continue to lift commodity prices, but tension is growing in selected markets.

Speculation about further central bank gold purchases is likely to lift gold to new highs in the near term, but monetary tightening should mark the tipping point.

To read the full report: INVESTMENT OPPORTUNITIES

>Central Electricity Regulatory Commission: Regulatory Views (MOTILAL OSWAL)

Subtle action on regulatory front: Over the past 3-4 months, CERC has come out with regulations, Draft Orders, Discussion Papers, etc on i) medium term and long term open access in inter-state transmission, ii) mechanism to improve grid discipline by regulating UI market, iii) tariff regulations for promotion of renewable energy (RE) and iv) plans to evolve framework for renewable energy certificate. In the interim, CERC also introduced a cap on ST power trading prices to regulate the market, while retaining developer's interest (cap of Rs8/unit). CERC has also proposed to revise power trading margin from an absolute cap of Rs0.04/unit to slab based system, linked to power realizations.

Expect regulatory focus on rationalizing transmission pricing, promotion of Renewables, etc: CERC is in the process of formulating notifications / regulations towards i) Feed-in tariff structure for different renewable energy sources ii) operationalization of Renewable Energy Certificates (including nomination of trading platform, Registry agents, etc) iii) rationalizing transmission pricing which intends to move the system towards marginal pricing method; sensitive to direction, distance and quantum of power flow. Lack of clarity and predictability on transmission charges across the country is one of the key risks in estimating the profitability for a merchant power project.

Issues that need Central Government attention

  • CERC is aware of the Memorandum of Understanding (MoUs) signed by various state governments with power project developers, where which provides either free power (for hydro power project) or specified quantum of capacity (25-37.5%) on CERC norms/ CBT tariffs and Variable cost. Given that fact that most states cannot consume the entire power, home states will emerge as a large trading group, going forward. These are currently outside the purview of CERC
  • Private developers are trying to participate in Competitive Bidding process under Case- I Bidding; this process has been slow and in many cases State utilities have not been able to formulate clear Bid papers which has resulted in delayed decisions. This has also impacted financial closure for such projects.

Focus to create vibrant trading market: The commission re-iterated its view to create free and open power trading market based on demand and supply dynamics. To develop a vibrant power trading market, CERC has come out with various mechanisms and regulations pertaining to Unscheduled Interchange mechanism, Day ahead market, Power Exchanges, Open access in Inter state and Intra state, National Transmission Tariff Framework, etc. All State Regulators have also taken an unanimous view to promote open access to consumers (annual consumption 1MW+) and is a key priority area.

To read the full report: CERC


India is on the threshold of a structural uplift in consumer demand. We are approaching the inflexion point, at which the impact of rising per capita income, favorable demographics, changing lifestyle and growing rural prosperity will combine to accelerate the FMCG sector’s growth rate. While the FMCG sector has a steady profit growth trajectory, we believe consumer monopolies can grow exponentially in the emerging scenario due to strong brands, captive consumers, high pricing power and better terms of trade. Consumer monopolies could be one of the best themes to play the domestic consumption story.

What are consumer monopolies?
Consumer monopolies are companies that occupy a dominant position in a product category or segment. We have identified companies in the consumer space that have emerged as monopolies using criteria such as 1) market share at least 3x that of its nearest competitor and 2) the brand or brand portfolio contributes at least 50% of sales or profits of the company.

A monopoly is established over years and is aided by factors such as regulations, firstmover advantage, technology breakthroughs, distribution, brands and industry consolidation. Monopolies enjoy 1) strong pricing power, 2) revenue growth visibility, 3) better terms of trade with suppliers and distributors, 4) rising margins, 5) low capex, and 6) low to negative working capital. All the companies covered in this report, except United Spirits and ITC, have significantly increased their RoE over the past five years.

Indian consumer market approaching inflexion point, sales growth to accelerate
India’s US$25b FMCG market is on the threshold of major growth acceleration. We estimate per capita nominal GDP will grow at 12.2% CAGR over FY10-14 to reach US$1,666 in 2014. This will change the shape of India’s income pyramid, which could have far reaching implications on consumer demand as per MGI (McKinsey’s Global Institute). Rising income levels in urban and rural India and benefits from increasing affordability, favorable demographics, low penetration, increased availability and distribution expansion will increase the FMCG growth rate to over 20%. We expect a sharp increase in demand for value for money products from the people moving out of poverty and for premium products from a fast emerging upper middle and affluent class.

To read the full report: CONSUMER MONOPOLIES


Jewellery business likely to bounce back in H2FY10
Volumes in Titan’s jewellery business declined significantly (~11%) in H1FY10. Given the uptick in discretionary spending and lower base for H2FY09 volume growth is likely to bounce back in H2FY10. Gold prices have been inching up since the past few quarters and consumers are now getting accustomed to the fact that the commodity has entered a high price regime.

Expansion plans on track
Titan expects to end the year with 300 World of Titan outlets (currently 276), 119 Tanishq outlets (currently 116), and 25 Fastrack outlets (currently 16). Titan eye will go for a brand building campaign to increase awareness. TIL aspires to be a USD 2.5 bn company in the next five years. On the retail front, the company is gearing up to take its multi-brand watch boutique Helios to more cities outside Bangalore. It is also planning to set up two large-format exclusive outlets in Mumbai and Kolkata.


Sales mix to aid margin expansion
TIL’s studded jewellery volumes have jumped 100% in the past 2.5 years, yet sales in value terms have dropped from 33% of total jewellery to 30%. This was due to much higher increase in gold prices. The company’s margins are related to value addition and thus making charges for studded jewellery are about 2.5x that of plain gold jewellery, which in turn are 2.5x that on gold coins. Currently, 30% of total sales are from studded jewellery, 50% from plain gold, 16% from gold coins, and 4% from others.

Outlook and valuations: Neutral; upgrade to ‘HOLD’
We expect the watch and eye wear divisions to see an uptick due to higher discretionary spending and improving consumer sentiment. At CMP of INR 1,352, the stock looks fairly valued at P/E of 29.4x FY10E and 24.5x FY11E. We believe worst is behind for the company and thus upgrade the stock to ‘HOLD’, and rate it ‘Sector performer’ on relative return basis.

To read the report: TITAN INDUSTRIES


Higher than estimated loss for 2QFY10: Tata Steel's consolidated adjusted loss after tax for 2QFY10 declined by Rs1.8b on a sequential basis to Rs18b. We had estimated an adjusted loss of Rs8.7b for the quarter. The reported loss of Rs27.2b includes Rs9b of restructuring costs on account of employee severance and others.

Shipments increased 14% QoQ but realizations declined: Net Sales increased 9% QoQ to Rs254b as deliveries increased 14% QoQ to 6.2m tons. Average realization dropped 5% QoQ, dragged by Corus, despite the general trend of price increases in the spot market. Price decline was sharper for Corus. Average realization for Corus' products declined 9% QoQ to US$820/ton for flats and 22% QoQ to US$675/ton for longs. Corus' crude steel production increased 43% QoQ to 4m tons but deliveries were lower at 3.9m tons (v/s 3.3m tons in 1Q). As a result, inventories increased by 0.2m tons to 2.7m tons. Inventories have increased for Indian operations too, from 0.55m to 0.63m tons.

Corus' EBITDA loss of Rs18b hits again: Cons.EBITDA turned around from loss of Rs299m in 1QFY10 to Rs3.7b in 2QFY10. Corus' EBITDA loss was 3% lower at Rs18b. Losses on account of Teesside plant increased by US$120m QoQ to US$170m due to lower prices of slabs. The benefit of volume growth was fully negated by lower prices.

Turnaround ahead on lower coking coal costs; maintain Neutral: Lower prices (despite higher volumes) and impact from Teesside plant led to an EBITDA loss of Rs18b for Corus. While profitability is likely to improve from 3QFY10, the first half losses would result in Tata Steel reporting a loss for the year. We expect a loss of Rs28/share in FY10 and EPS of Rs50 in FY11. We maintain our Neutral recommendation.

To read the full report: TATA STEEL

>Factor Analysis: India Valuation Dispersion indicator (EDELWEISS)

In last couple of months the market valuations dispersion is hovering below +1.5 SD levels.
As expected the market has consolidated in a broad range. The dispersion indication still
points towards further consolidation in near term.

Valuation dispersion calculation methodology: PE & PB factors across the universe ( BSE-200 stocks) are ranked individually. The difference between the top & bottom deciles medians provides the factor dispersion for each factor. Then a composite valuation dispersion based on an equal weighted average PE & PB dispersion is derived. Valuation dispersions are expressed in z-scores terms (i.e. no. of standard deviation away from the 1 year rolling mean).

To read the full report: FACTOR ANALYSIS