Tuesday, December 29, 2009

>How could 2010 possibly be worse than 2009 or 2008?: REAL WEALTH REPORT

2010 Gala Forecast Issue ...

My Top Five 2010 Forecasts!

The financial storm of 2008 and 2009 will go down in the record books as two out of three of the most devastating in history.

Why do I say “two out of three?” Because 2010 promises to be another record year of wild swings, market traps, misguided Wall Street and Washington advice, and based on everything I’m seeing ahead, the most dangerous year of all for investors.

How can that be when 2009 is closing out its final days with signs that the economy and markets are improving?

How could 2010 possibly be worse than 2009 or 2008?
I’ll answer these questions in a moment. First, let’s review where the world has come from before I get to my forecasts and where it’s heading in 2010.

So far in the last two years we’ve seen the failures of Merrill Lynch, Lehman Brothers, Bear Stearns, Wachovia, WaMu, Citigroup, Fannie and Freddie, AIG, GM, Ford, Chrysler, and more. Never mind that all but Lehman were bailed out by Washington, or should I say
you and I, the taxpayers. They failed, period.

Our economy and financial system suffered a massive heart attack and a stroke. But as I will show you, they remain in intensive care and on life support.

We’ve also witnessed a devastating collapse in residential real estate markets, with property prices in some areas of the country down as much as 70% from their pre-crisis highs.

In 2008 and 2009 alone, there were over 7.1 million foreclosures, with another 2.4 million on the horizon for 2010. On December 31 of this year, 1 out of 4 homeowners will find themselves upside down on their homes, owing more than their property is worth.
Their biggest financial asset down the tubes.

We’ve also seen the worst stock market routs since the Great Depression.

The Dow lost 35.9% from its 2007 high to its 2008 low. Then another 26% in the first three months of 2009 before surprising almost everyone and rallying back smartly for the balance of this year — with most investors and analysts completely missing the rally, or worse, getting caught on the short side of the markets.

But even those figures hide the damage done in the markets in 2008 and 2009. All told, in real inflation-adjusted terms, the Dow Industrials lost 50% of its value in 2008 and 2009.

Even worse, from its all-time, inflation- adjusted high which occurred when the Dow was at 11,908 in November 2000 — before the Federal Reserve started printing trillions of dollar of
fiat money — the Dow Industrials have lost an amazing 77.9%. And that’s after giving effect to its rally since March.

At its March low, the Dow had lost nearly 89% of its purchasing power since the year 2000 — rivaling the Great Depression.

Meanwhile …

Gold soared to a record high of $1,226 an ounce, up more than 400% since 2000.

To read the full report: GALA FORECAST


Awaiting growth, for now. With key issues of liability management, asset quality, unsecured loans and international banking being addressed to a great extent, the management is awaiting loan growth, resulting in better leverage and RoEs. We also believe that faster growth, funded by core deposits, would be crucial for improving RoEs, resulting in higher valuations for the bank. However, RoE in the near term is likely to be driven by lower provisions and lower costs. Retain ADD.

Retain positive view, but valuations do not provide big upsides
We are increasing our TP for ICICI Bank to Rs880 from Rs850 earlier, mainly to factor is somewhat higher valuations for its insurance business. We value ICICI Prudential Life at Rs230 bn (EV of Rs87 bn + appraisal value of Rs143 bn on factoring 19X NBV FY2011E). The per share value of ICICI Prudential Life works out to be Rs140 per share (for 74% stake and 10% holding discount) from Rs115 earlier. The additional capital requirement for ICICI Prudential is likely to be negligible on account of somewhat slower growth in the current fiscal and seemingly higher cost control. While we retain our positive view for ICICI Bank, upsides might be limited (after an already 8% up-move over last 3 trading sessions)

Image makeover – learning from its mistakes
In a recent meeting, the management highlighted its initiatives to change the general perception
about the bank. Some of these aspects are very important and quite commendable as well, in ourview:

(1) The management is trying to project a very soft image of itself across all customers and
different from its earlier ‘know all’ approach.

(2) The bank is trying to build personal relations with its customers and has been increasing its
branch banking focus, compared to its earlier strategy of pushing customers towards ATMs and
internet, which never allowed any relationship to be built between the customer and the bank.

(3) Most of the loan products would be done by the bank and the use of DSA has been reduced to
bare minimum – should ensure better loan writing and better service.

(4) Media interactions are being handled only at the highest level and dissemination of information taken very seriously – a key issue which also precipitated the crisis last year.

Awaiting loan growth; strategy focused on secured credit
The management reiterated its focus on secured retail and domestic corporate loans — mainly mortgages, auto and project financing. Mortgage disbursements for ICICI Bank have increased to about Rs6 bn per month, as compared to Rs1-2 bn per month over the previous 2-3 quarters. ICICI Bank seems to be back in the auto loans business and intends to grow the portfolio at a faster pace from now on. Further, the traditional business of infrastructure finance is likely to be a big focus area and likely to grow at a fast pace, even as most other segments slow down or even decline.

Unsecured loans unlikely to be a focus area in the near term
We believe that the bank is willing to lose its market dominance in the personal loan and credit cards segment. With these being scale businesses and the bank might not be able to run profitable businesses on a smaller scale, the bank might even look at reducing the book further. The focus is only on its own customers and current volumes in both these businesses are negligible.

International book also likely to shrink
The current bond issuance of $750 mn was placed at a fine rate of 2.93 bps over LIBOR. Also, the spreads have reduced somewhat on its other papers. However, the current spreads are still high and the intent is to slowly scale back its international book. While concerns on asset quality and ALM mismatch have reduced, the overseas operations still don’t seem to be profitable with margins at just 0.5%. International book accounts for 27% of total parent loan book and a declining trend out here is likely to curtail the overall loan growth for the bank; however, it would be positive for margins.

Liability focus working well
We believe that one of the key challenges and a crucial business trend for ICICI Bank would be its ability to grow its CASA deposit franchisee. Post the crisis in 3QFY09, the bank has worked well to improve its core deposits. The strategy of focusing on low-cost deposits over the past few quarters appears to be paying off— savings deposits are averaging about Rs 12 bn every month. However, growth in current deposits (similar to experience of other industry participants) has been sluggish. Significant addition in bank branches can help the company improve its CASA deposits in the future. We model CASA deposit growth of 21% yoy in FY2010E (CASA proportion at 33% as of March 2010) and 21% in FY2011E (CASA proportion at 37% as of March 2011).

Margins to improve on back of deposit re-pricing
A clear focus on correcting its liability profile, steep yield curve currently (wholesale deposit rates are very reasonable) and slower loan growth augur well for margins of ICICI Bank. However, its strategy of not growing its high yielding personal loans and credit cards coupled with high competition in mortgages and project finance will restrict margin growth for the bank. We assume margins of 2.7% (increase of 35 bps) in FY2010E and 2.8% (increase of 8 bps) in FY2011E.

Asset quality under control; should see better trends
We believe that the incremental addition to NPLs (especially the unsecured NPLs) has slowed down in recent months and other segments are also witnessing positive trends with incremental restructuring being low. Overall asset quality trends are behaving well. While we are still modeling delinquencies at around 2% for FY2010E and 1.7% in FY2011E, the trend could be better and could result in upsides. The net delinquencies (net of recoveries) are expected to fall from 1.8% in FY2008 to 0.7% in FY2011E. Hence, credit provision requirement for ICICI Bank is likely to fall from 1.7% of average loans in FY2009 to 1.2% in FY2011E and 1.0% in FY2012E – the biggest driver to profitability.

To read the full report: ICICI BANK


Key takeaways from our management meet with Jaiprakash Associates (JPA) are: i) strong volume growth in cement besides low-cost production and better market mix, ii) robust ~Rs400bn EPC orderbook, predominantly in house, iii) execution of 13.5GW power portfolio proceeding as per plans – merger of unlisted power holding company into listed subsidiary and iv) robust 11.5mn sqft sale of real estate YTDFY10 & soft launch of Jaypee Greens Sport City spread over 2,500 acres. We believe market concerns on funding can be alleviated via: i) annual operating cashflow of Rs10-12bn, ii) sale of treasury shares, currently valued at Rs27bn, iii) securitisation of its power portfolio worth Rs27.5bn and iv) fund raising initiatives of ~Rs40bn in both power and real estate. We expect consolidated revenue, EBITDA and PAT CAGR to be 37%, 40% and 38% in FY09- 12E. We maintain BUY with sum-of-the-parts (SOTP) target price of Rs171/share.

Cement volumes strong. YTDFY10 cement despatches rose 32% YoY to 6.3mnte and crossed 1mnte/month in November ’09. JPA recently commissioned 1.2mnte plant in Gujarat and expects to add 3.5mnte capacity at Baga/Bagheri in North India by February-March ’10. We factor in 36% volume growth to 10.4mnte in FY10E.

Robust EPC order pipeline. The Yamuna Expressway and Karcham Wangtoo are progressing well, likely to be completed by March ’11 & May ’11 respectively. JPA recently bagged Rs11bn contract for developing the inner ring road at Agra. Besides current EPC contracts of Rs400bn, predominantly in house, we estimate additional Rs200bn EPC contracts from in-house power portfolio and real estate construction.

Significant option value exists in power and real estate. With 700MW operational assets and 2,820MW projects under implementation (1,000MW transmission rights), JPA is likely to have ~8.8GW power portfolio by December ’15. The merger of its unlisted power holding company into its listed subsidiary would unlock value, in our view. Besides, JPA sold ~12mnsqft YTDFY10, aggregating upfront collections of ~Rs7.5bn. Also, JPA recently soft launched Jaypee Green Sports City, spread over 2,500 acres. JPA intends to raise Rs25bn via IPO for its real estate and Rs15bn via FPO/QIP during February-March ’10, which would further unlock value.

To read the full report: JAIPRAKASH ASSOCIATES


We initiated the coverage of Uflex Ltd and set a target price of Rs.118.00.

It is a largest Integrated Flexible Packaging Company in Asia and One of its kind in the World, having a turnover of USD 600 million.

Uflex had issued Foreign Currency Convertible Bonds (FCCBs) of the nominal value of USD 85 million out of which FCCBs of nominal value of USD 68.6 million were outstanding.

It recently bought back FCCBs worth $47 million leaving $21.6 million FCCBs outstanding.

Uflex has sold 51% stake of the distillery unit that is part of the wholly owned subsidiary UBIO Chemicals.

Net sales and PAT of the company are expected to grow at a CAGR of 17% and 12% over 2008 to 2011E respectively.

To read the full report: UFLEX LIMITED


A Dampener — The US FDA’s warning letter to one of Ranbaxy’s plants in Ohm Labs does not appear material from a financial perspective – we see a worst case impact at c.2%-3% and c.5% of core sales and EPS respectively, and believe the FTF pipeline appears secure. However, it will likely affect confidence w.r.t. the stock, given Ranbaxy’s history with the FDA. While the stock could trade weaker next week, we would view any dip as an enhanced buying opportunity.

Warning Letter at Ohm Labs — The FDA has issued a warning letter to Ranbaxy's liquid manufacturing plant at Gloversville (NY), citing cGMP violations (inspected in Jul/Aug 2009). It is one of the three plants in Ohm Labs; the others did not have any material deviations. Ranbaxy has engaged a consulting firm (PRTM Inc) to address the issues.

BUY: A Dampener But Negligible Financial Impact

Small Unit; Negligible Financial Impact — Ranbaxy has indicated the plant accounts for under 10% of US (c.2%-3% of total) sales. Sales would continue and while approvals are likely to be on hold, there are not too many major filings pending approval from this plant. We leave our estimates unchanged. In a worst case scenario, where the issue escalates and the plant is closed down, this could affect c.2%-3% and c.5% of our CY11E recurring sales and recurring EPS

FTF Pipeline Appears Secure — The major FTFs (where site transfers have / are being effected) appear to be filed from the other Ohm Labs plants. We therefore do not see any fresh risk to this pipeline or its valuation from this development.

Could Impact Sentiment — While this development, by itself, does not appear to have a material impact on financials or the key drivers, it is likely to affect recently rising confidence levels w.r.t. the stock among investors, given its past issues with the FDA. We would view any share price weakness as an enhanced buying opportunity, given limited fundamental impact and also potential catalysts over the next one to three months (integration plan with Daiichi, strong earnings, Flomax launch).

To read the full report: RANBAXY

>Commercial Vehicle Sector Update December 2009

I. Summary
The Indian Commercial Vehicle industry grew substantially by 95.5 per cent from 23,370 in November 2008 to 45,692 in November 2009. The Government Stimulus Package coupled with low base effect continued to aid the domestic sales growth for the month. The domestic sales grew by 98 per cent on account of growth in both LCV and MHCV segments. The MHCV segment grew by 132.7 per cent while LCV segment grew by 74.5 per cent. The exports too (for the first time in 12 months) grew at a convincing 76.9 per cent.

The domestic CV sales for the period of April-November 2009 grew by 12.4 per cent (Y-O-Y); from 270,335 units to 303,961 units. The growth in CV sales came in primarily from LCV segment which grew at robust 27.4 per cent from 134,705 units in April-November 2008 to 171,604 units in the same period last year. However, the MHCV segment remained subdued with a decline by 2.4 per cent. On a YTD basis, exports stood lower by 22.3 per cent at 26,126 units in April-November 2009 as against 33,628 units in the same period of the previous year.

II. Detailed Segmental Performance Analysis

1. Domestic Sales
The domestic CV sales surged up in November 2009. Lower base effect coupled with improvement in the economy led to growth in the domestic CV sales for the month. The CV sales for the month grew by 98 per cent over November 2008. The <= 3.5 tonnes, LCV goods carrier drove the growth by adding around 7242 units over the November 2008 sales. >16.2 tonnes to <=25 tonnes MHCV goods carrier too supported the growth with sales of 6010 units.

2. Exports
The trend for exports finally confirmed the change in direction in the month of November, growing at an impressive 76.9 per cent as against the exports in November 2008. This was the first time in the year that exports registered a convincing positive trend. Although, a part of the growth came due to the lower base effect of the previous year, even on an M-o-M basis the exports showed a positive trend growing at 27 per cent. The GC category continued to drive the exports. The LCV GC the largest segment of the exports added around 1322 units over the exports in November 2008, growing at 88 per cent. The MHCV GC segment was the next important segment with exports of around 1320 units in November 2009.

III. Company-level Statistics: Top three companies (mentioned in report)

IV. Industry News

Mercedes Benz India, received a bulk order of 150 and 100 trucks each from BGR Energy and Souwmya Mining in December 2009.

Premier Ltd launched 1.5 tonne light commercial vehicle (LCV) Roadstar in December

To read the full report: VEHICLE SECTOR