Tuesday, December 15, 2009

>Households consumption: an economic heavyweight but the weakest link in US recovery (ECONOMIC RESEARCH)

The strength of the recovery taking shape in the United States depends on resilient household

A review of the main determinants of this vital component of GDP, such as confidence, incomes, inflation, wealth and credit, nevertheless does not tell us with any certainty which forces will prevail in the play-off between cyclical support and structural curbs.

Our baseline scenario assumes that there is sufficient monetary and fiscal stimulus, along with pentup demand, to ensure that the nascent “technical” recovery is transformed into a lasting one. However, the recovery seems likely to be sluggish by US standards, as growth in consumption is hobbled by high unemployment, tight credit and households deleveraging.

According to the retail sales figures of the past three months, the recovery in household demand is less and less a mirage and more and more a real trend taking shape. The improvement follows a sharp, prolonged contraction in real consumption spending in the second half of 2008 followed by a stabilisation phase in the first half of 2009 made possible by the fiscal stimulus injected at that time, with lower taxes and higher transfer incomes. In Q3 of this year, the rebound in consumption (up an annualised 2.9% according to second estimates) is mainly due to the success of the “cash for clunkers” car scrappage scheme, but not entirely so. If we factor out cars and
gasoline, retail sales are also up, which is a sign that vehicles sales have not cannibalised other spending items and that the Q4 payback due to the expiry of the scrappage scheme should be softened.

What is there to drive a recovery in household consumption at a time when the US economy continues to destroy large numbers of jobs? While there is no doubt that the environment is scarcely favourable, what counts is the fact that the main determinants of consumption are gradually becoming less and less unfavourable, with rising consumer confidence levels, less job destruction, less and less stringent lending conditions, the dissipation of negative wealth effects, and low inflation(absent a new oil shock).

The conditions still exist, however, for an upward trend in the saving rate which, for a given income level, will hamper the recovery in consumption as households build up their precautionary savings in light of high unemployment (and the high budget deficit, assuming that some US households are Ricardians and thus increase today their saving to pay for higher taxes tomorrow), and with the lagged impact on wages of rising unemployment, the lagged impact of the collapse in personal wealth, plus the indirect impact of the elimination of leverage from Mortgage Equity Withdrawals and Home Equity Lines Of Credit, not to mention less abundant, less cheap credit and the process of shedding debt.

The confidence effect
As a leading indicator, confidence plays a key role in cyclical reversals, up or down. Confidence is also a capital that appreciates, runs out and reconstitutes itself. An upturn in confidence is a sign that the timeframe of economic agents (households and firms alike) is lengthening, and is favourable to more active spending behaviour. That said, it is an indicator of willingness, rather than capacity: if households do not have the means to fund their spending, their increased confidence will have a limited impact on their purchases. Currently, consumer confidence is no
longer at its lowest ebb due to the recovery in the equity markets and the fall in oil prices since their July 2008 peak. But recovery is still fairly tough going and the uptrend remains hesitant (the increase is not (yet) generating increases in a cumulative, self-sustaining process) due to the continued difficult conditions on the labour and credit markets.

Constraints on recovery
Our baseline scenario assumes that there is enough monetary and fiscal stimulus, along with pent-up demand, to ensure that the “technical” recovery we are seeing right now transforms into a lasting and selfsustaining recovery – in other words, to trigger a virtuous circle of supply and demand. However, this is likely to remain sluggish by American standards, as growth in consumption is being held back by high unemployment, tight credit and the necessary households deleveraging.

The income constraint
The deterioration in the labour market has put severe pressure on wage and salary disbursements (53% of the personal income), while the sharp rise in unemployment is prompting agents to build up their precautionary savings. And even if employment picks up in 2010, the lagged adjustment of wages to the unemployment rate means that wages will continue to be dragged down: the risk of wage deflation is not zero.

The wealth constraint
Between Q3 2007 and Q1 2009, just over 10 trillion dollars’ worth of financial wealth evaporated and between Q1 2007 and Q4 2009 around 4 trillion dollars’ worth of housing wealth followed suit. The negative effects of this severe, huge destruction of wealth will have a long-term adverse impact on household consumption, even if they are likely to dissipate gradually

In addition, the rebound in the equity markets since the trough of March this year (since when the S&P 500 has risen 42%) has put the dramatic erosion of their household wealth on hold. And since financial assets comprise 60% of total wealth, compared with 40% for housing assets, what is happening to the former is decisive, at least at the aggregate level. The big inequalities in the distribution of financial wealth mitigate the impact of stock prices fluctuations on consumption: the richest are not those with the highest propensity to consume. The estimates of the wealth effect are consistent with this observation: a 100-dollar drop in financial wealth results in a more moderate fall in consumption (of 3-5 dollars) than a similar drop in housing wealth (4- 9 dollars).

The credit restriction
We believe that the crisis is likely to make US households more conservative, frugal and risk averse. Their shedding of debt, partly forced and partly voluntary, looks set to be a long process so important do the past excesses to be purged appear. Yet it is quite difficult to measure the extent of those excesses, as they have to be measured against a yardstick that is very difficult to define: what is sustainable? A first criterion is debt service. This is falling but is still a long way from the previous peak of 12% reached in the mideighties. Low interest rates are undoubtedly contributing to keeping monthly payments under control. But if the fall is to continue, the stock of debt must be further reduced.

To read the full report: HOUSEHOLDS CONSUMPTION

>Economic Cruise: Watch out for the 'Rate-Berg' (CITI)

Market Outlook — We believe India is getting the platform right: a) Growth is back, and is fairly broad-based, b) Policy measures are beginning to come through, c) The fiscal shows signs of stabilising, and the Government appears cognizant of the risks on hand, and d) The RBI has signalled the exit from easy monetary policy. While this mix will support stronger and steadier growth, the unwinding of fiscal and monetary risks will likely hold back a retracement to peak growth levels or to aggressive valuations. We see the market settling at long-term average valuations – for a Sensex range of 15,000-16,000 – before it commences on a sharper growth trajectory.

Key positive themes for 2010 — a) Rising and broad-based urban consumption, b) Government-driven rural and social sector thrust, c) Investment momentum, and d) Government policy aggression: Divestment, and quicker implementation.  Key negative themes for 2010 — a) Rising interest rates, regulator-driven, on account of rising inflation risks, b) Increased Government borrowing squeezing liquidity and constraining fiscal spend, and c) Monsoon impact on agri and related parts of the economy being more severe than has been factored in.

Sector Winners — We would be a little more defensive: a) IT – we expect a demand pick-up, b) Pharma – defensive, business in decent shape, c) Autos and retail – catch the urban consumption pick-up, d) Energy sector – refiners & gas, and e) Telecoms – The bad news is largely in.

Sector Losers — Interest rate cyclicals: a) Banks and financial services, b) Real estate, and c) Materials (cement). The penny still needs to drop – and when it does, that’s the time to catch it.

To read the full report: INDIA ROAD AHEAD 2010


Background & Operations: DB Corp Ltd is one of the leading print media companies in India, publishing 7 newspapers, 48 newspaper editions and 128 sub-editions in three languages (Hindi, Gujarati and English) in 11 states in India. Its flagship newspapers, Dainik Bhaskar, Divya Bhaskar and Saurashtra Samachar, has a combined average daily readership of 15.5 million readers, making it one of the most widely read newspaper groups in India

Daink Bhaskar with a total average daily readership of 11.7 million readers is a widely read newspaper in Madhya Pradesh, Chattisgarh, Rajasthan, Haryana, Punjab, and Chandigarh. Divya Bhaskar is the number one Gujarati daily newspaper in terms of circulation in Gujarat. DBCL’s other newspapers are Business Bhaskar, DB Gold and DB Star and, on a franchisee basis, DNA. It is one of the fastest growing major newspaper groups in India with a growth in readership of more than 5.0% from 2003 to 2009 (with a combined readership of 15.5 million readers) In addition to newspapers, it publishes 5 periodicals, namely, Aha Zindagi, a monthly magazine published in Hindi and Gujarati, Bal Bhaskar, a Hindi magazine for children, Young Bhaskar, a children’s magazine in English and Lakshya, a career magazine in Hindi.

DBCL produces print products at 31 facilities spread across 31 cities with a total installed capacity of approximately 1.94 million copies per hour. In addition to its newspaper and publication businesses, it operates an FM radio business under the brand name MY FM through its subsidiary, Synergy Media Entertainment (SMEL) Through SMEL; it operates 17 FM radio stations. Through I Media Corp Limited (IMCL), DBCL also operate Internet portals, which contain editorial content from the daily editions of its newspapers in the form of e-papers and SMS portals.

Objects of Issue:
The objects of the Issue are:
• Setting up new publishing units
• Upgrading existing plant and machinery
• Enhancing brand image through sales and marketing
• Reducing existing working capital loans
• Prepaying existing term loans
• General corporate purposes

To read the full report: DBCL


November 2009 cargo volume up 13% YoY: In November 2009, cargo traffic at major ports in India improved by 13% YoY to 48.2m tons (vs 42.5m tons YoY). Cargo traffic for November 2009 also grew by 3.4% MoM, on the back of 9.8% MoM growth for October 2009. This indicates pick-up in monthly run rate of cargo from 42.5m in Sep-09, 46.7m in Oct-09 and 48.2m in Nov-09. Also, the cargo traffic for the month of Nov-09 is the second highest monthly cargo since April 2008, next to 50.4m ton in March 2009. For YTDFY10, cargo traffic grew by 4.7% YoY to 362.8m tons.

Iron Ore, Container and Coal cargo are key drivers: For the month of November 2009, iron ore cargo grew by 16.4% YoY to 9.2m tons (vs 7.9m ton in November, 2008), while Container cargo grew by 15.2% YoY to 8m tons. Coal cargo up by 10.9% YoY to 6.2m ton, while fertilizers cargo grew marginally by 4.8% YoY. POL was the only category of cargo which reported a YoY decline of 2.7%, while other cargo grew by 40% YoY to 8.2m ton.

November 2009 cargo at major ports up by 13% YoY; Paradip port registers highest increase of 43% YoY in cargo traffic

Container cargo traffic at JNPT up by 9.7% YoY, vs total container traffic growth of 15.2% YoY: Container cargo traffic for the month of November 2009 stood at 8m ton, up by 15.2% YoY, while container traffic at JNPT stood at 4.3m ton, up by 9.7% YoY. This is however given lower base effect, as container cargo at JNPT started declining since November 2008 on YoY basis. During YTD FY10, container cargo handled by JNPT declined by 4.4% YoY to 34.1m ton
(vs 35.7m ton), which accounts for 53% of total container cargo (vs 56% in YTDFY09). The others ports have however been reporting a healthy growth in YTD FY10 container traffic: Chennai - up 14% YoY (15m ton), Tuticorin - up 12% YoY (4.2m ton), Kolkata - up 19% YoY (4.5m ton). These four ports cumulatively account for 57.8m tons of container traffic i.e. 89% of total container traffic.

Twelve ports register cargo traffic growth in November 2009; Paradip port registers highest
increase of 43% YoY: During November 2009, twelve ports reported growth in traffic of which Paradip, Chennai, Vishakhapatnam, Mumbai volumes up 43%, 27%, 19% and 18% YoY, respectively. For Paradip port, Coal (41% of the total port cargo) cargo grew by 21% YoY, whereas cargo traffic growth at Chennai port was boosted by Container cargo.

Mundra International Container Terminal (MICT): Volumes for November 2009 grew by 3.4% YoY to 54,268 TEUs vs 52,484 TEUs in November 2008.

To read the full report: INDIAN PORTS


Initiating coverage with Neutral rating and Mar-11 PT of Rs160: Essar Oil Ltd (ESOIL) is emerging as an integrated player across the energy chain with value-creation options in refining and upstream. While the competitive position in refining could be advantageous in the current environment, further value-unlocking through low-cost refinery expansion and the development of Ratna fields are likely to be contingent on funding and government approvals.

Positive drivers: ESOIL is upgrading its 10.5mmtpa refinery to 16mmtpa, adding significant secondary processing capacities. The expansion would give ESOIL significant advantages in: (1) complexity—allowing ESOIL to process a tougher crude diet (API 24.8), enabling better GRMs; and (2) competitive cost structure—an opex of c.US$2/bbl vs. US$4-5/bbl for western peers. By 1HCY10 ESOIL will begin to monetize its CBM asset at Raniganj—this will deliver significant revenue (Rs8.3B over FY11-12E) and value (US$662MM based on a 17-year plateau of 3.5 mmscmd) to ESOIL.

An emerging integrated play

Key challenges: We expect global new refining capacity of 1.5MM- 2MM bopd/annum over 2009-11, in a weak demand environment, which will put pressure on refining utilization/margins. OPEC production cuts have resulted in narrower light-heavy crude differentials, which hurt complex refiners. ESOIL’s ability to accrete value through low-capex cost (US$875/complexity bbl) refinery expansion is contingent on funding. The development of the newly discovered Ratna field (US$810MM value for Essar) awaits government approval.

Valuation, PT and risks: Our PT of Rs160 is based on 7x EV/ EBTIDA for 16mmtpa refinery, NPV for Raniganj, and the value of tax incentives. We assume option values for refinery expansion (50% value accretion) and Ratna field (50%). Downside risks to our PT are project delays and a prolonged refining downturn. Upside risks are availability of funding for expansion, and approval for Ratna development.

To read the full report: ESSAR OIL