Monday, May 31, 2010


A reverse merger (“RM”) is a non-traditional method of going public. Instead of hiring an underwriter to market and sell the company’s shares in an initial public offering (“IPO”), a private operating company works with a “shell promoter” to locate a suitable non-operating or shell public company.1 The private operating company then merges with the shell company (or a newly-formed subsidiary of the shell company).2 In the merger, the operating company shareholders are issued a majority stake in the shell company in exchange for their operating company shares.3 Post-merger, the shell company contains the assets and liabilities of the
operating company and is controlled by the former operating company shareholders.4 The shell company’s name is changed to the name of the operating company, its directors and officers are replaced by the directors and officers of the operating company,5 and its shares continue to trade on whichever stock market they were trading prior to the merger.6 Hence, the operating company’s business is still controlled by the same group of shareholders and managed by the same directors and officers, but it is now contained within a public company. In effect, the operating company has succeeded to the shell company’s public status and is therefore now public.

RMs have been around for years but have recently regained popularity. Closed RMs totaled 46 in 2003, 168 in 2004, 179 in 2005,7 and 69 through the first half of 2006.8 Notwithstanding this resurgence, RMs should be viewed critically. Although RMs are often pitched as IPO substitutes, they provide neither a large infusion of equity capital nor share liquidity, the two primary benefits of an IPO.9 This Article proceeds as follows: Part II describes the principal features of an RM, including the origin of shell companies, RM deal structure, and legal compliance. Part III takes a critical look at RMs arguing that comparisons to IPOs are misleading and, for many companies, irrelevant. Part IV discusses why companies nonetheless undertake RMs. Part V briefly discusses RMs involving special purpose acquisition companies (“SPACs”). Part VI states a brief conclusion.

To read the full report: REVERSE MERGERS

>POLAND BANKS: From Wrestling to Merging (CITI)

1Q10 Results In-Line — Our universe of seven Polish banks reported an aggregate 1Q10 net profit of ZL1,976m (+45% yoy, +22% qoq, +3.7% vs. CIRA estimates and +2.3% vs market consensus as reported by PAP). Despite high provisioning on retail loans (+34% yoy, -26% qoq), 1Q10 aggregate provisions came in 8% below our estimates. On the other hand, non-interest income came in 3% below our estimates driven by weak fees (partly due to a lower-than-expected recovery in investment fund fees).

Increased Competition in 2010 — Polish banks are abandoning strategies that concentrated on product niches and are embracing a universal banking strategy. This coupled with growth plans announced by some smaller players (e.g. Meritum Bank and Bank Pocztowy) is likely to lead to increased competition as more banks will sell a full range of products, while demand for banking services is expected to remain muted. This trend may negatively affect margins and revenues and presents a risk to our top-line growth forecasts.

More M&A in 2011? — Given increased focus on capital and funding globally in the sector, foreign players that find it difficult to accomplish their objectives in terms of growth or profitability of their Polish operations may consider engaging in M&A, either as an acquirer or a seller. M&A activity can be also triggered by financial problems of parent banks, as was the case with BZ WBK. Given Pekao’s expressed interest in M&A and PKO BP’s declaration to keep its options open, we analyse possible merger scenarios. Generally we expect consolidation to have a
positive impact on profitability longer-term.

Upgrading on Weakness — Following recent share price correction and due to attractive valuations we upgrade four Polish banks. Our top picks are PKO BP (1L rating maintained, TP ZL49, Tier 1 14.0%, only 24% of loans in FX) and Pekao (upgraded to 1L from 2L, TP ZL179.5, Tier 1 18.4%, only 27% of loans in FX). For investors with a higher risk appetite we recommend buying BRE (upgraded to 1M from 2M, TP ZL279) and BZ WBK (upgraded to 1M from 3M, TP ZL222). We upgrade ING BSK to Hold (2M from 3M, TP ZL809) and maintain our Sell rating on
Bank Millennium (3M, TP ZL4.70) and Kredyt Bank (3M, TP ZL16.9). We change our target prices to reflect our revised estimates and roll forward of our valuatio ns.

To read the full report: POLAND BANKS


What's New — We are cutting our target price to €31 from €34.60, maintaining the ‘Sell’ (3S) code. The value of PAH is no longer linked to the operating performance of the Porsche core operations (simply an associate). Instead it is dominated by the Rights issue due to happen before June 30th 2011 to allow repayment of Tranche 1 of Porsche’s December refinancing, and the Merger with VW, which will need to happen shortly thereafter. Investors now rightly focus on PAH Prefs on the basis of whether they are a cheap/expensive way into VW Prefs. As of today, one cannot fully define the Exchange Ratio, but our analysis suggests that at any price above €32 they are currently a more expensive way to own New VW than buying VW shares directly.

Why so?? — The merger of the two companies is based on values, not share prices, so the number of VW shares available to PAH Pref holders does not change once valuations and liabilities are determined. However the PAH share price determines the potential Rights issue price. We assume a PAH Rights at market, so as more PAH shares are created with a lower price, the eventual exchange ratio will fall, but this is not a linear relationship. At the current price of VW Prefs (€70), only below €31 do Porsche Prefs begin to look a more attractive entry point

Assessment of Liabilities still the critical factor — We make ‘central case’ assumptions about the imponderables among the liabilities of Porsche SE — notably the tax and litigation issues that can’t be fully calculated. This includes options tax/options unwind and litigation liabilities of a total of €3bn. €1bn more value within Porsche offers a 4-5% upside in the value Pref holders achieve on exchange, and boosts the family ownership of New VW by nearly 1%.

Risks — We will be wrong about our low-end assessment of the Porsche share price if we have judged the unquantifiable liabilities too harshly. We do not see failure to complete the merger as a risk to our negative view: in that event we see the value as resting between €20 and €28, with VW shares the only material asset of the rump company, and much of its dividend income required for debt service. We make only detail changes to forecasts with this note.

To read the full report: PORSCHE AUTOMOBILE

>Is this the ‘BRICs Decade’?

The last decade saw the BRICs make their mark on the global economic landscape. Over the past 10 years they have contributed over a third of world GDP growth and grown from one-sixth of the world economy to almost a quarter (in PPP terms). Looking forward to the coming decade, we expect this trend to continue and become even more pronounced.

The last decade saw the ‘arrival’ of the BRICs story. Here, we take a look at the next chapter—at how the BRICs and their relationships with the rest of the world will change in their second decade. We expect many of the trends we have already seen to continue and become even more pronounced. Our baseline projections envisage the BRICs, as an aggregate, overtaking the US by 2018. In terms of size, Brazil’s economy will be larger than Italy’s by 2020; India and Russia will individually be larger than Spain, Canada or Italy.

In the coming decade, the more striking story will be the rise of the new BRICs middle class.
In the last decade alone, the number of people with incomes greater than $6,000 and less than
$30,000 has grown by hundreds of millions, and this number is set to rise even further in the next 10 years. These trends imply an acceleration in demand potential that will affect the types of products the BRICs import—the import share of low value added goods is likely to fall and imports of high value added goods, such as cars, office equipment and technology, will rise.

In the past decade, BRIC equity markets outperformed significantly because the strong growth of these economies surprised many and the BRICs themselves came into focus. At the same time, valuations were low relative to many major markets in 2000. Now that the BRICs story is better known, expectations are higher and the valuation gap is much smaller, the same degree of outperformance seems much less likely, even if the BRICs deliver solid returns.

To read the full report: BRIC'S DECADE

>Telecom Regulatory Authority of India (Trai) has proposed new regulations for telecom service

Telecom Regulatory Authority of India (Trai) has proposed new regulations for telecom service providers with regard to the much awaited announcements on allocation of 2G spectrum charges, M&A guidelines, spectrum sharing/trading and universal license fee. The authority has prescribed a cap of 8 MHz for all service areas and 10 MHz in Delhi and Mumbai for GSM services. However, operators will have to shell out one-time fees for spectrum over the contractual limit of 6.2 MHz for GSM and 5 MHz for CDMA operators. Mergers and acquisitions
will be relaxed to make it easier for telcos to buy out one another as long as the combined entity does not command more than a 30% market share in revenue or subscriber terms. Trai has proposed to replace the 900 MHz band spectrum with 1800 MHz band spectrum at the time of renewal of license in order to re-use the former for 3G services. The regulator has expressed a desire to have uniform licenses fees across all telecom licenses and service areas. It has proposed to bring it to 6% by FY14 in a phased manner.

New Spectrum Management Policy – Spoilsport for incumbents According to the latest Trai recommendations, the amount of spectrum required in GSM is 6.2 MHz for most areas in the country, 8 MHz for districts having cities with a population of 1 million or more and 10 MHz for metro service areas of Delhi and Mumbai.

Similarly, for CDMA, not more than 5 MHz is required in the whole of the country except in metro service areas of Delhi and Mumbai where 6.25 MHz of spectrum will be required. Trai has suggested charging a one-time fee for holding 2G radio spectrum in excess of 6.2 MHz. The fee will be linked to the price of the ongoing auction of 3G spectrum. The worst affected companies will be Bharti Airtel, BSNL, Idea Cellular and Vodafone Essar. If the recommendations are implemented in the current form it would be hugely negative for the overall telecom industry. The overall outgo to the government on account of one-time spectrum fees could be to the tune of Rs 10,000 –12,000 crore.

However, it also said that 4.4 MHz of start-up spectrum that new entrants hold will be enhanced to 6.2 MHz for no additional cost, which favours new entrants.

The priority for granting spectrum would be:

a. Licensees who have received the initial start-up spectrum and met eligibility conditions for grant of additional spectrum up to 6.2/5 MHz will be given top priority. The inter-se priority for such operators, subject to meeting the eligibility norms, would be the date of application for additional spectrum

b. Licensees who have been assigned the committed spectrum but are waiting to get additional spectrum up to the maximum permissible limit will be next in priority.

To read the full report: TRAI


Over the years the two wheeler sector has played a key role in a country like India where majority of population lives in rural or semi-urban areas without adequate transportation facilities. The Indian two wheeler market with an annual domestic sale in excess of 9mn units is 2nd largest globally and accounts for 75% of the total domestic automobile industry sales volume and that clearly demonstrates the popularity of two wheelers among the Indian consumers. After facing a slowdown in FY08 and FY09, the two wheeler industry made a remarkable come back in FY10 and we are optimistic about growth prospects in FY11E. Current retail demand is quite robust and this, coupled with new launches and players' focus on volume generating 100cc segment, would be the main growth driver for the industry in FY11E. Volumes in FY10 grew at a significant pace and on that high base in FY11E industry volumes are expected to grow though at a relatively moderate pace. We expect the domestic two wheeler volumes growth rate to come down from 26% in FY10 to 15% in FY11E. Due to relatively lower base and new launches, we expect players like Bajaj Auto (BAL) and TVS Motor (TVS) to outperform the industry volumes growth rate in FY11E. On the other hand, Hero Honda (HH) is expected to underperform on back of enhanced competition and relatively much higher base. We have an ACCUMULATE rating on all three stocks with preference for BAL and TVS.

Volume growth to come down but remain decent in FY11E
After a substantial volume uptick in FY10, we expect the industry to return to a relatively moderate growth path in FY11E. We expect the demand momentum for two wheelers to continue in FY11E but the rate is likely to be lower than FY10. Robust retail demand, new product launches and lower base effect of 1HFY10 would be the main volume driver in FY11E. However, the relatively higher base of 2HFY10 and absence of one time factors (FY10 had the effect of VIth Pay Commission, farmers loan waive-off etc) will restrict the growth rates to a moderate level, we opine. Accordingly we expect the two wheeler volumes to grow by 15% in FY11E versus 26% growth recorded in FY10.

New launches would remain crucial
New launches over the next 6-12 months would be critical for maintaining the growth in FY11E. Successful product launch generally tends to expand the overall market thereby leading to a robust and higher growth for the industry. With overall two wheelers demand drivers in place; new launches would play a significant role in FY11E to achieve our industry volume growth expectation of 15%. Recent new launches like Pulsar135LS, Twister and Jive would aid industry
volume growth over the next six months.

To read the full report: 2 WHEELER INDUSTRY

Sunday, May 30, 2010

>EUROPEAN INFRASTRUCTURE: Rising Leverage Concerns Causes Equity/Debt Disconnect

Widespread equity sell-off contrasts with debt stability of specific companies — Credit concerns have returned to haunt the Infrastructure space with a vengeance over the past couple of weeks as increasing worries over a second round of the credit crunch have resurfaced against a backdrop of spreading sovereign risk fears. In this context, and with slowing growth expectations for the European economies (particularly in the periphery) S&P cut Brisa's rating by one notch to BBB-, from BBB (although raising its outlook to stable from negative). This followed a similar downgrade for Abertis (4/10) to BBB+. Rising risk aversion, however, has affected the whole sector recently with stocks falling globally by 10- 20% over the last month. Nevertheless, while the stock market has punished in a seemingly indiscriminate fashion, fixed income markets have been more selective.

Greece looks to sell infrastructure assets; Athens airport a potential candidate — The Greek government is looking to raise c€3bn during 2011-13 via the privatisation of several assets including Athens International Airport. AIA is 55% owned with Hochtief holding a further 26.7% and the 13.3% balance in the hands of HTAC, an airport fund owned by CDPQ, Hastings and KfW, but managed by German contractor. Athens airport handled 16.2m pax in 2009 (-1.5%) and Ebitda jumped 46% to €316m due mainly to the recovery of the previous year's impairment charges. For 2010 the company expects a slight dip in pax to 15.8m.

To read the full report: EUROPEAN INFRASTRUCTURE


Industry Overview: The huge investments by the Government of India on development of infrastructure in the country has resulted a positive spill over effects on the economy by triggering growth in other sectors like manufacturing and service sector and helped in sustaining India's growth rate in compared to rest of the world. The investment in infrastructure in India has increased from 4.9 percent of the gross domestic product (GDP) in 2002-03 to 6 percent last fiscal. The Union Budget 2010-11 has allocated USD 37 billion for infrastructure up gradation in both rural and urban areas. This amounts to over 46% of the total plan allocation for infrastructure development in the country. As per the Budget Estimates, disbursements by the India Infrastructure Finance Company Ltd (IIFCL), established by the government to extend long-term financial assistance to infrastructure projects, are expected to touch Rs 9,000 crore by the end-March 2010 and Rs 20,000 crore by March 2011. India's Government is planning a US$ 354 billion investment in its infrastructure by 2012, with another US$ 150 billion expected to come from the private sector, according to the latest report by PricewaterhouseCoopers.
Projected spending under the Eleventh Five Year Plan (FY07-FY12) should see the electricity (US$ 167 billion), rail (US$ 65 billion), roads and highways (US$ 92 billion), ports (US$ 22 billion) and airports (US$ 8 billion) sectors receive a total of US$ 354 billion. India is expected to expand at 8 per cent in 2010, the fastest among major economies in the world, and 8.5
per cent the year after, matching China's growth rate, according to a World Bank. An estimated US$ 500 bn is required by 2012 to upgrade India’s infrastructure.

India has the world's second largest road network, aggregating over 3.34 million kilometers (km). Being well-aware of the necessity to attract FDI in the segment, the Government has allowed 100 per cent FDI under the automatic route for all road development projects, in addition to offering 100 per cent income tax exemption for a period of 10 years. According to the Planning Commission, the road freight industry will be growing at a compound annual growth rate (CAGR) of 9.9 per cent from 2007-08 to 2007- 12. A target of 1,231 billion tonne km (BTK) has been put on road freight volumes for 2011-12. According to industry sources, the road sector in the country would require an investment of US$ 80 billion in the next 3-4 years of which US$ 45 billion is anticipated from the private sector.

To read the full report: INDIAN INFRASTRUCTURE


The Growing Wall of Worry — Uncertainty about European fiscal positions, a surprising ban on short selling, stresses in the interbank market and Korean political tensions have helped drive global equities down 16% from April highs.

No Discrimination — All major regions are down a similar amount. Global equity market correlations are at their highest level in 30 years. Put / call ratios are back at extremes. Investors are not discriminating what they sell, they just sell.

Flight to Safety — German government bond yields are at their lowest level in 90 years. Global forward PE ratios are approaching single digits. Perhaps most dramatically, European dividend yields are back above government bond yields. This extreme valuation event last occurred back around global market lows in 2003 and 2008.

Opportunities for the Brave— We look for stocks around the world where this equity/bond yield crossover has occurred, dividends are forecast to grow and earnings momentum remains solid. They include ABB, BAE Systems, BASF, CEZ, China Mobile, Cielo, Honda, Insurance Australia Group, Johnson & Johnson, Mattel and Vodafone.

To read the full report: EQUITY STRATEGY

>DB CORP LIMITED: Better-than-expected numbers…

On a consolidated basis, DB Corp reported its Q4FY10 results. The results were above our expectations. The topline stood at Rs 257.2 crore (I-direct estimate of Rs 248.5 crore), growing 13.3% YoY on the back of higher ad revenues. EBITDA for the quarter grew 44.9% YoY to Rs 69.6 crore. Lower newsprint prices and cost rationalisation measures adopted by the company led to an improvement of 589 bps in the EBITDA margin, which stood at 27.0%. The company reported a PAT of Rs 36.7 crore as compared to Rs 23.5 crore in Q4FY10.

Highlights for the quarter
DB Corp reported YoY ad revenue growth of 10.8% at Rs 185.1 crore. The ad revenue was led primarily by higher volume growth and re-pricing of old clients. Circulation grew 4.2% YoY to Rs 52.7 crore. The EBITDA margin improved YoY on the back of lower raw material cost that was down 8.5% YoY, while QoQ it declined due to higher selling and administrative expenses. Revenue from the radio business grew from Rs 8.0 crore to Rs 10.3 crore in Q4FY10. The radio business broke even during Q4FY10.

Merger of radio business
The company has demerged the radio business from its subsidiary Synergy Media Entertainment Ltd (SMEL) and merged it into the parent company.

At the CMP of Rs 240, the stock is trading at 20.0x FY11E EPS of Rs 12 and 16.8x FY12E EPS of Rs 14.3. Given the good advertisement growth and break even in the radio business, we are confident about the company’s performance. We have valued the stock at 18x FY12 EPS to
arrive at a target price of Rs 258. This implies an upside of 7.4%. We are maintaining our rating on the stock as ADD.

To read the full report: DB CORP


RIL-ADAG overhaul non-compete agreement. RIL and ADA group companies have signed and approved an agreement canceling all existing non-compete arrangements entered into between them in Jan ’06 pursuant to the reorganization of the Reliance group. They have now entered into a new non-compete agreement with respect to only gas-based power generation for the period extending until Mar ’22.

New opportunities for RIL to deploy excess cash. With the change in the non-compete agreement, RIL now has the freedom to explore investment opportunities in the telecom, power, and financial services segments. While some of these businesses were expected to be out of the non-compete framework after five years of initial de-merger of businesses of the Reliance group, it seems that for businesses like telecommunication, the non-compete agreement was (earlier) until 2015.

Gas agreement under negotiations. RIL’s statement said that they expect to expeditiously negotiate and conclude the gas supply arrangement with RNRL in accordance with the orders of the Supreme Court. We believe that the role of the government still remains critical, as any gas allocation to RNRL or its affiliate can only be done by the government and not by RIL, as per the
existing gas utilization policy.

Valuation. At our target price of Rs1,150, RIL offers 15% upside to current market price.

To read the full report: RIL


Robust 29% yoy revenue growth aided by 30% growth in power division.

Continues to benefit from lower raw material cost, operating margin expands by 225bps yoy to 18.3%

Higher depreciation, due to commissioning of the enhanced capacity, partially offset operating profit growth – thus resulting into 42% PAT growth during the quarter

Order book continues to remain strong at Rs1.4trn, provides earnings visibility for the next 3 years

Maintain BUY, but reduce target marginally to Rs2,709/share to reflect higher competition in FY12.

To read the full report: BHEL

Saturday, May 29, 2010

>The Great Reflation: The Mother of all Financial Experiments

Chuck Prince, the former CEO of Citigroup, who presided over the bank’s collapse, famously remarked in July 2007 that "as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Shortly after, the music stopped, the financial system broke, and Citigroup and other financial behemoths went under.

To rescue the economy and financial system from near‐total meltdown, the government created
an unprecedented package of bailouts, stimulus, free money and massive fiscal deficits. It succeeded, and a 1930s style debt deflation and depression were aborted. Liquidity, on a vast scale was unleashed into the financial system, demonstrating, once again, the power of such flows to drive up the prices of stocks, commodities and other risky assets.

In The Great Reflation we focus on how the authorities pumped air back into the balloon, and
got the music playing again. Investors and banks, including Citigroup, are back out on the dance floor. However, just because the system was saved, doesn’t mean it has been fixed.

Why do we say that the system isn’t fixed? The major theme running through The Great Reflation is that we have been living through a multi‐decade period of money and credit inflation that started back in the 1960s when the post‐World War II global monetary system (Bretton Woods) began to break down. The Great Reflation is about this inflation and the consequences of the Act II, which is now unfolding.

The Engine of Inflation
Inflation is the biggest enemy of investors in the long run. However, in the short term, inflation
in its early stages is often a wonderful elixir, greasing the wheels of the economy and causing riskier assets like stocks, commodities and corporate bonds to levitate. Euphoria tends to build as people get richer. But, it is important to understand that inflation is an undue expansion of money and credit. It can have the effect of raising the prices of things we consume or the prices of assets that we own or want to buy. But those are the symptoms of inflation that, if extreme, tell us that a bust is coming. In the case of rising consumer prices, the central bank ultimately has to raise interest rates and curtail credit. Recession follows. Or, if asset prices rise on the back of credit expansion, debt servicing ultimately becomes unbearable and asset prices—the collateral—start to fall, but debt levels are fixed in the short term. When people can’t service or repay debt, panics and crashes follow, and the risk of a debt deflation and depression rises dramatically.

Too much debt and falling asset prices caused the depression of the 1930s and almost another
one in 2008‐2009. One Important reason that debt rose to such extremes, both in 1929 and 2007 was that the monetary system had a built‐in inflationary bias. In the 1920s, it was called the gold exchange standard, whereby countries held both gold and currencies in their reserves. In the post‐1971 world, it was called the floating dollar standard or Bretton Woods II. Countries held mainly dollars in their reserves. As a result, the U.S. could inflate at will and foreign countries had to buy the excess dollars on the foreign exchange market if they wanted to prevent their currency from rising. In a world of low and falling price inflation, as was the case after 1982, almost all countries want a cheap currency.

To read the full report: THE GREAT REFLATION

>CAIRN INDIA: Takeaways from India Investor Conference, May 26-28

Takeaways from Mumbai — Cairn India presented at our India Investor Conference on May 26-28. Below are key takeaways.

Operational updates — The company has completed the Barmer-Salaya pipeline section, which should enable Train-III to be ready for production by Jun’10. Production from Mangala would be ramped upto 125kbpd in 2H2010 depending on offtake. The field is currently producing ~60kbpd of crude, being sold to both MRPL and RIL. While the company has already tied-up with MRPL, IOC, RIL and Essar for 143kbpd of output, sales discussions are ongoing with others as well. Besides, three wells have been drilled in the Mangala field to gauge the EOR potential.

2011 will be key year for exploration — Cairn plans to commence drilling in its offshore Palar bock and in Sri Lanka in CY11.Of the five exploration wells to be drilled in the onshore block KG-ONN-2003/1 this year, the company has drilled its second exploration well, which has also turned out to be dry.

4Q results takeaways — Cairn produced 17.5 kbpd of crude from Mangala in 4Q, with average realization of US$67/bbl (implying a 12% discount to Brent) vs. a realization of US$66/bbl in 3Q (13% discount to Brent). Even though production has been ramped up to 60 kbpd, sales ramp-up would likely happen with a lag.

To read the full report: CAIRN INDIA

>Fortis Healthcare: No Major Surprise in FY10, All Eyes on Parkway

FY10 Results No Major Surprise; All Eyes on Parkway — We believe Fortis' response to Khazanah's open offer for Parkway will have a greater bearing on Fortis' valuations than results, which were disappointing at the EBIDTA level.

4Q: Revenues Strong, Margins Disappoint — Recurring PAT at Rs272m was ahead of expectations, though largely on the back of lower than expected tax rate. Revenue growth (+91% YoY), on the back of Wockhardt acquisition, was impressive, but the margin decline (-73 bps YoY & 106 bps QoQ) was a surprise, especially as Wockhardt boasted of significantly higher margins than Fortis’ own hospitals. Interest costs ballooned (+245% YoY) due to loans used to finance the Wockhardt acquisition, but were cancelled out by the income earned on the cash from the rights issue. This along with the lower tax rate led to a 470% PAT growth.

FY10: A Transitionary Year — FY10 remains a transitionary year as the full impact of the Wockhardt acquisition and the recent stake acquisition in Parkway will be reflected only in FY11 financials. Recurring PAT was at Rs695m (+376% YoY) driven by strong growth in Fortis’ own hospitals and the acquisition of Wockhardt hospitals in end CY09 as well as the low base. EBITDA margins expanded 140bps YoY due as newer hospitals turned profitable. Numbers were skewed by 4Q results which accounted for more than a third of FY10 topline and bottomline.

To read the full report: FORTIS HEALTH CARE

>Buy the Macro, Hold the Micro, and It’s Not Expensive (CITI)

India should go up — We get more constructive as: a) Domestic Macro headwinds could well have peaked; worst on inflation, rates and the fiscal deficit possibly over; b) Micro momentum and corporate rationality still in place; rising FCFs, higher ROEs, and reasonable earnings growth (albeit some slackening); and c) India is no longer expensive – trading below its long-term averages. India’s rising dependence on global capital flows, and global volatility, will raise market beta; but looking through we raise our Sensex target index to 18,100 (15X 1yr Fwd PE – long term average), and shift to a more aggressive model portfolio.

Buy the Macro — The deteriorating macro has been a significant headwind for the Indian market/economy; we see a possible turn with: a) Inflation showing signs of peaking b) rate rise trajectory easing domestically and globally, and c) fiscal strains easing with oil prices and 3G auctions. It’s not a tailwind yet; rates will still rise and global capital flows could be disruptive (equities, currency and liquidity), but the macro’s direction could well be turning.

Hold the Micro — The corporate sector is sustaining a sweet spot: a) Earnings should rise 24%+ in FY11 (15% over FY11-12) b) ROEs should bounce to 19% in FY12 c) Business should generate cash flows – FCF yields at 3%+ in FY12 d) Sales momentum is high (15%) and sustaining. While earnings revisions momentum is slackening, and earnings vulnerable to lower commodity prices, India’s corporates in decent shape – growth, balance-sheet and confidence wise

It’s not expensive — India is trading below its long-term PE and PBV averages; is no longer expensive in absolute terms, and returns are looking up too. We see the environment supporting average multiples, which suggests 8-10% upside from here. Macro needs to fully align with the micro for premium valuations (or reverse for discounts); don’t see either yet. More aggressive portfolio with OW’s on financials, Capital Goods, Energy and Auto; UW’s on IT, Utilities and Materials.

To read the full report: EQUITY STRATEGY

>What is the economic outlook for OECD countries?

To see the charts and report: OECD COUNTRIES


Everonn Education’s (Everonn) Q4 results were much higher than expectations with sales surging 192% YoY to Rs1,045mn (vs our estimate of Rs845mn). We reiterate our Buy with a target price of Rs540 considering the consistent growth momentum in VITELS and attractive valuations. We believe the company’s ‘Educating India’ initiative and improvement in revenue per points of presence in the VITELS segment would be upside triggers.

Results beat estimates: Q4 sales surged 192% YoY to Rs1,045mn vs our estimate of Rs845mn. This strong growth was mainly driven by the VITELS and Edu Resource (hardware sales) segments. EBITDA margin expanded 207bp to 30.6% due to higher contribution
of VITELS (49% of overall revenue).

Strong VITELS revenue growth as points of presence increase: The VITELS segment, which grew 184% to Rs508mn, was one of the main contributors to the growth in net sales. The company added 150 schools and 171 colleges during Q4.

Valuations attractive; reiterate Buy: At CMP, the stock trades at 10x FY11E and 8x FY12E earnings, we believe is very attractive considering improvement in financial performance. We reiterate Buy valuing the stock at 11.5x FY12E earnings, translating into a target
price of Rs540.

To read the full report: EVERONN EDUCATION

>NTPC: FY10 Adjusted PAT inline (CENTRUM)

NTPC’s Q4 results were inline with our estimates at operational level. Though reported PAT at Rs20.2bn was lower than estimate due to lower other income, adjusted PAT for the full year was inline. Reiterate Buy.

Q4 PAT marginally below expectations: Sales increased 4.2% YoY to Rs127.3bn, 7.6% above our estimate. EBT, which is the right profitability measure for NTPC’s cost plus model, was inline with our estimate of Rs18.3bn. PAT at Rs20.2bn was 15.1% lower than our estimate due to lower other income.

…but full-year adjusted PAT inline: Adjusted FY10 PAT (after adjusting exceptional items like provision for higher wages, prior period adjustments in sales and income tax refunds) came to Rs89.4bn, inline with our estimate of Rs90.9bn.

To retain 80IA benefit; no MAT at plant level: The management has clarified that there would be no minimum alternate tax (MAT) at plant level. This strengthens our view that plant-level ROEs for NTPC’s projects with 80IA benefit would be ~30%.

FY10 PAF was 91.4% for coal plants and 90.6% for gas plants: FY10 average PAF was ~91%, 200bp lower than what we have factored. But high PAF levels (98.3% for coal plants and 93.8% for gas plants) during Q4 sights improving PAF levels.

Reiterate Buy with target price of Rs260. We believe the stock should trade at 3.0x-3.3x FY11E P/BV, assuming sustainable ROE of ~19% from FY13E, earnings growth of ~14% over FY10-17E, sufficient cash to fund its expansion projects and dividend yield of ~3%. We reiterate our Buy with a target price of Rs260 (including value of Rs8 from the JV projects), which implies a P/BV of 3.0x on FY11E standalone BVPS of Rs82.1.

To read the full report: NTPC

Friday, May 28, 2010

>What lessons can be learnt from Japan’s lost decade?

The worldwide recession that followed the subprime crisis was unprecedented in many
ways, but not so unique that no lessons can be learnt from previous experiences. Japanese’s lost
decade comes probably closest. Both episodes were preceded by the bursting of speculative bubbles, with led to a prolonged banking crisis. In the case of Japan, it took the economy more than 10 years to recover. At the end of the period, GDP was around 20% below the level it would have achieved if capital spending growth had followed more normal patterns. Moreover, the slump in world’s second largest economy was not without repercussions for the country’s trading partners.

Even though this episode was followed by the longest boom in Japan’s post-war history, some
scars have remained, making the economy still very vulnerable to external shocks. Indeed, the country was among the most affected by the subprime crisis, even though its banking sector was not particular exposed to this market. The most obvious sign of weakness is that more than 20 years after its dramatic collapse, the Nikkei is still 75% below its peak reached by the end of 1989. In addition, the government accounts have seriously deteriorated.

Gross public sector debt amounts to almost 200% of GDP, and the government does not have a plan to reduce the debt to more manageable proportions. Finally, the economy is still confronted with substantial overcapacity, which has been weighing on prices. In November, the government declared that the economy went again into deflation. In the coming two years, GDP is expected to grow by around 2%, well above Japan’s potential growth rate, estimated at 0.8%. As a result, excess capacity will gradually dissipate. The Bank of Japan (BoJ) expects the economy to exit deflation in FY2011.

The lost decade
Japan’s lost decade was sparked by the bursting of bubbles in the stock and real estate markets in the early 1990 (cf. chart 1). Between December 1989 and December 1991, stock prices fell by 40%, returning them to their pre 1987 level. The property market started to falter in 1991. Between 1991 and 1993, land prices in the six major cities fell by 30%. These two asset categories might have destroyed JPY 1 500 000 billion in wealth, about three times the country’s GDP1.

In the following decade, the economy was characterised by slow growth, falling prices and
dysfunctional financial markets. Between 1992 and 2002, GDP growth averaged only 0.8%, compared with 4.5% in the preceding ten years. The OECD estimates that over this period, the potential output growth declined to 1.4% on average, down from around 4% before the bursting of the bubble.

To read the full report: JAPAN'S LOST DECADE

>To what extent is the financial crisis to blame for the economic problems in the euro zone?

The economic difficulties in the euro zone are most often blamed on the financial crisis, with the following arguments:

− the banking losses led to the credit contraction;
− the financial markets lost all liquidity and closed down;
− global trade came to a halt due to the contraction in trade credit;
− the fiscal deficits stem from the bailout of financial intermediaries.

However, the economic crisis can also be blamed on problems in the real economy:
− poor productive specialisation (construction) and deindustrialisation;
− excess private sector indebtedness, caused by monetary policies aimed at offsetting deindustrialisation and the weakness of wages.

This weakness is a result of either productive specialisation or distortion of income sharing.
In our view, it is in accordance with the facts to say that the most drastic part of the crisis was due to the financial crisis, but that the permanent, structural part of the crisis was due to the real economy.

To read the full report: FINANCIAL CRISIS

>Debt: No Immediate Concerns But No Complacency Either (CITI)

Overall Debt/GDP is high at 143%... — With problems in the EU bringing to the fore issues regarding deficits and debt, India is once again on the radar given its twin deficits and high levels of debt. Despite high deficits, strong growth has resulted in India’s public debt/GDP ratios coming off from the 86% levels in FY05 to 76% levels currently. In contrast, private debt (household and corporate) has risen from 32.5% of GDP in FY00 to 66.2% in FY10.

…but deficits are manageable and the banking system is healthy — On the public side, as is known: (1) India funds its deficit through domestic sources and has a large captive demand for bonds, and (2) Growth and rate dynamics give it more flexibility in running deficits without a rise in debt/GDP ratios. As regards private debt: (1) Besides being largely domestic, loan to deposit ratios are 71%, (2) Reserve requirements are high. While external debt has risen, FX reserves currently stand at 5.5x short-term debt/amortizations.

No room for complacency, now is the time for further reform — India remains vulnerable to a sudden weakening of nominal GDP growth, which could result in a rise in debt ratios unless underlying government deficit is reduced. We thus believe: (1) adhering to timelines on proposed fiscal legislation (13th FC; GST, DTT), and (2) proposals to reduce subsidies both on oil and fertilizers, are key. To this end, the recent approval of the APM gas price hike is positive.

Incremental data is positive — (1) Growth: While the base effect will likely result in a moderation in monthly numbers, growth is now more broad-based, (2) Inflation appears to have peaked with lower commodity prices an added boon, and (3) Deficit could come in lower due to higher telecom revenues.

EU impact on financial markets — While we continue to expect gradual medium-term appreciation based on robust growth, strong capital inflows and ongoing monetary policy tightening, we have moderated the pace of INR appreciation. Although the odds of an inter policy hike have fallen, we maintain our call of a +75bp hike in 2010 as India’s growth/inflation dynamics are domestic-driven.

To read the full report: INDIA MACROSCOPE


Growth in chaos
Despite the significant increase in supply from KG-D6, India remains chronically starved of gas. Current estimates of Indian gas demand are in the range of 225- 260mmscmd, while supply is only 155-160mmscmd. There isn’t enough capacity, because policy concerns are holding up investments upstream, midstream and downstream. Installed capacity is not fully available for supply because of pipeline bottlenecks. However, we believe these are teething problems in the early stages of potentially remarkable growth. We have BUY ratings on Reliance, KG-D6 producer, and transmission company GAIL. However, our spotlight is on four mid/downstream players, all rated BUY: Indraprastha Gas (city gas distribution, our top pick), Gujarat State Petronet (transmission, preferred over GAIL), Petronet LNG (importer of LNG) and Gujarat Gas (city gas distribution). Each of these companies faces some regulatory hindrance, but the stocks have outperformed the market over the past year on strong operational performance. Still, we believe valuations remain inexpensive and operational performance has plenty of room to surprise on the upside. In fact, our proprietary analysis of a regulatory blue-sky scenario finds that these four stocks may be trading at near half their potential fair valuations at current prices, which suggests to us that more than a reasonable element of risk is priced in.

“What if” chaos turns to order soon?
Regulatory concerns could be resolved sooner than expected
The existing confusion on regulatory / policy aspects is no doubt a concern and an overhang on the stocks. However, as we mentioned earlier, in our view the current state of confusion signifies the teething problems in a fast changing/growing industry. We also note that key constituents are all aware of the need to end the current scenario and appreciate the need to create an enabling environment. In our view, the first step in this direction could well be the long pending notification of Section 16 of the PNGRB (Petroleum & Natural Gas Regulatory Board) Act, granting power to authorise PNGRB. This would, in our view, be a big relief and could be the beginning of the end of acrimony between PNGRB and the Petroleum Ministry.

We note that Delhi High Court had ruled in January 2010, that PNGRB does not have powers to authorise, as section 16 is not notified, and now PNGRB has appealed against this in the Supreme Court. Recent media reports (Financial Chronicle, “Petroleum Regulator to offer licenses for piped gas network”, 26 April 2010) indicate that the Petroleum Ministry is now considering soon notifying Section 16. Similarly, news reports (Business Standard, “Gas highway authority plan put on back burner”, 28 April 2010) now indicate that the Petroleum Ministry has now put on the back burner the proposal to create a national gas highway development authority. A new regulatory authority, in our view, would have diluted the powers of PNGRB, and thus PNGRB was opposing this. Going slow or even cancelling this proposal would again be positive, in our view, for an early end to the regulatory/policy uncertainty.

Stocks for action
RIL and GAIL offer broadest exposure to the gas story. Petronet LNG, GSPL, IGL and Gujarat Gas all have strong growth in their respective niches. IGL is our favourite among downstream; we prefer GSPL (over GAIL) in gas transmission.

Large demand-supply gap — yet supply is suppressed
The government’s current estimates of Indian gas demand vary from 225- 260mmscmd, while current supply is only 155- 160mmscmd, even after sharp production growth in FY10F on account of KG-D6. The shortage is exaggerated by the lack of pipeline capacity. While exit gas domestic gas production in March- 2010 was up nearly 72% y-y, we think growth could have been 100% without pipeline bottlenecks. This is despite knowing for many years that supply would increase sharply as KG-D6 comes online and LNG import capacities increase. However, we believe supply will remain suppressed for most of 2010 and perhaps into early 2011F. Despite current capacity of 80mmscmd, KG-D6 production is contained at about 60mmscmd. Similarly, despite significant LNG re-gasification capacity increases, spot LNG volumes have nearly dried up.

India did not get ready for new gas
Despite knowing for many years that gas availability would increase, India did not prepare well. Pipelines seem to be the immediate problem, but concerns abound on many issues. Both regulations and regulators are in place, but without key powers. PSCs provide for marketing freedom and market-determined pricing — but the government seems reluctant to release control of pricing and allocation.

To read the full report: GAS SECTOR

>HOTEL LEELA: Margins take hit on higher costs (ICICI DIRECT)

Hotel Leela posted a lower EBITDA margin of 29.1% for the quarter as against the expected EBITDA margin of 37.3% due to incurring of higher other operating costs. Revenues rose 11.6% YoY and 7% QoQ to Rs 135.3 crore, in line with our estimated revenue of Rs 134.7 crore. Net
profit for the quarter stood at Rs 9.4 crore. It declined by 86% YoY, as last year’s profit included exceptional gain of Rs 64 crore on account of reversal of forex losses on adoption of revised AS-11 guidelines.

Sales growth in line but margin contracts due to higher costs
The growth in revenue in Q4FY10 was in line with our estimates and it grew 32.7% YoY on account of healthy growth of foreign tourist arrivals in India. FTAs in January-March 2010 grew over 7.8% YoY. Since Leela operates in the premium segment, it derives a majority of its revenues from foreign tourists. As a result, the company has been able to post a robust growth in revenues for fiscal year 2010. However, the operating margin has been impacted by the rise in
other operating costs that led to a 1030 bps decline in its operating margin.

Net profit declines sharply on higher depreciation, interest
Interest and depreciation both increased QoQ by 59% and 57%, respectively. This resulted in a 67.5% decline in its net profit. On a YoY basis also, net profits recorded a sharp decline of 86% despite robust growth in sales as last year’s profit included an exceptional gain of Rs 64 crore on account of a reversal of forex losses on adoption of revised AS-11 guidelines.

At the CMP of Rs 44, the stock is trading at 14.3x its FY12E EPS and 15.6x its EV/EBITDA. We have lowered our FY11E and FY12E EBITDA by 12.8% and 1.3%, respectively, to factor in higher costs and concerns over timely execution of its projects. However, we believe Leela would continue posting industry-leading sales growth over FY11-12E due to its presence in strategic locations and its brand value. We maintain our BUY rating.

To read the full report: HOTEL LEELA

>ECLERX LIMITED: Revenue Momentum continues (EMKAY)

Revenues at US$ 15.8 mn (+6% QoQ) beat expectations ( Emkay est. of US$ 15.5 mn). However operating margins at 36.6% were down by ~370 bps sequentially on a/c of significant hiring ( co hired 286 employees at a net level during Q4FY10). Profits at Rs 242 mn (+13.5% QoQ,+50% YoY) were lower than expectations driven by lower margin performance and lower than estimated forex gains. Co continues to hire aggressively driven by up tick in revenue/demands (note that co’s increased headcount by ~45% over the year) with further beef up in sales team abroad. It is worth noting that revenue momentum at eClerx continues to pick up with YoY revenue growth continuing to see improvement over the year (refer chart below).

eClerx continues to deliver in line with our positive thesis. We tweak our FY11E/12E earnings upwards marginally to Rs 51.5/Rs 61.5 (V/s Rs 51.3/Rs 60.4 earlier). Maintain BUY with an unchanged March’11 price target of Rs 540.

Revenue growth momentum continues to pick up
eClerx reported March’10 revenues at US$ 15.8 mn (+6% QoQ) ahead of Emkay est. We note that given the improving demand environment, YoY revenue growth momentum at eClerx continues to pick up with YoY revenue growth accelerating to ~48% YoY in March’10 quarter V/s ~13% YoY revenue growth in June’09 quarter ( refer chart below). Operating profits at Rs 261 mn (-6.4% QoQ) were marginally lower than est on a/c of significant hiring during the quarter (net addition at 286, taking overall employee count to 2,863), with overall employee count up by ~45% over FY10. Profits came in at Rs 242 mn(+13.5% QoQ,+50% YoY).

Hiring remains aggressive, does well on reducing debtor days
eClerx continued to ramp up headcount on a/c of the improving macro environment with the overall headcount up by ~45% during the year. Further the company expects the 1st phase of it’s newly acquired Airoli facility (44,000 sq ft) to come on-stream from June’10 onwards. We highlight that co management deserves appreciation in terms of bringing down debtors days to 56 in FY10 (V/s 83 in FY09)

Maintain BUY with an unchanged price target of Rs 540
eClerx continues to deliver in line with our positive thesis driven by improving macro environment. We tweak our FY11E/FY12E earnings upwards to Rs 51.5/Rs 61.5 (V/s Rs 51.3/Rs 60.4 earlier) (our estimates based at US$/INR of Rs 45/$). Co has paid a final dividend of Rs 10/share, taking full year dividend paid to Rs 17.5/share (dividend payout ratio at ~46%). Maintain BUY with an unchanged March’11 price target of Rs540.

To read the full report: ECLERX

Thursday, May 27, 2010

>A strengthening recovery, but also new risks

Growth is picking up in the OECD area – at different speeds across regions – and at a faster pace than expected in the previous Economic Outlook. Strong growth in emerging-market economies is contributing significantly. However, risks to the global recovery could be higher now, given the speed and magnitude of capital inflows in emerging-market economies and instability in sovereign debt markets.

Keeping markets open has been a strong positive factor in the upturn. The rebound in trade, while incomplete, has been substantial and is proving to be a major force pulling the global economy out of recession. The ongoing recovery in activity could surprise on the upside, with a policy-driven expansion giving way to self-sustained growth. Fixed investment could bounce back more robustly and household consumption could recover more rapidly with household savings rates having risen more slowly than previously anticipated, especially in Europe. The spillover from growth in non-OECD Asia could be stronger than expected, especially in the United States and Japan. From this point of view, the overall economic environment is relatively auspicious.

As activity gathers momentum, global imbalances are beginning to widen again. However, in some emerging-market economies, notably China, strong domestic, policy-driven demand is keeping a large external surplus from rising to the levels seen prior to the crisis. This does not obviate the need to tackle global imbalances through appropriate policies. As discussed in this Economic Outlook, strong, sustainable and more balanced growth can be achieved through a combination of macroeconomic, exchange-rate and structural policies, while delivering fiscal consolidation. Identifying and implementing such a combination of policies is a major goal of international collaboration, most notably within the G20.

Progress in financial market reform will also require international collaboration. Internationally agreed rules and regulations will need to be established to strengthen the stability of the global financial system. Articulating more clearly the roles of monetary and prudential policies in dealing with future credit and asset-price developments is also a priority.

While activity is picking up, employment growth is still lagging. Over the two years through the first quarter of 2010, the ranks of the unemployed rose by over 16 million in the OECD area as a whole, employment fell by 2¼ per cent and many more workers were working shorter hours than before the crisis. But the surge in unemployment, while dramatic and notwithstanding the attendant human and social costs, has been smaller than initially anticipated. The OECD-wide unemployment rate may now have peaked at just over 8½ per cent. At the same time, the pick-up in activity, notably in Japan and in some European economies, will likely be met by increasing average hours worked per employed person and hourly labour productivity, rather than significant net job creation. Thus, prospects for strong employment growth in these countries appear weak. By contrast, firms in the United States have shed large numbers of employees during the downturn and may therefore have to rehire relatively strongly in the upturn.

Appropriate labour market and social policies can do much to promote a jobs-rich recovery. Social protection systems have played an important role as automatic stabilisers to cushion the impact of the recession on employment. Significant additional resources have been allocated to labour market and social programmes in the stimulus packages put in place during the downturn. As the recovery takes hold and countries face the challenge of fiscal consolidation, it is important to continue to make room in budgets for cost-effective labour market programmes that support those workers at greatest risk of becoming long-term unemployed and losing attachment to the labour market. Policies that promote reductions in unemployment through cuts in the effective labour supply, such as early retirement schemes or easing eligibility criteria for disability benefits, would exacerbate labour market imbalances and weaken long-term fiscal positions.

To read the full report: RECOVERY AND RISKS

>Asia’s Fallout from EU’s Sovereign Crisis (CITI)

Growth Fallout: Not yet, but Asia's growth momentum might have peaked. — Fiscal austerity and potential strains in banking systems will probably be a drag for Eurozone growth, but we see no impact on Asia yet. Nonetheless, we think momentum has peaked on both external demand risks and China’s more aggressive move to slow property investment. We find that growth in Singapore, Taiwan, Hong Kong, Malaysia, Korea and Thailand are more sensitive to a Euro area growth downturn, while the domestic-demand driven economies of India, Indonesia, China and the Philippines are relatively more insulated.

Policy fallout #1: Delayed Fed and Asia CB policy tightening — We have delayed most rate hike calls in Asia on the back of delaying a Fed hike to 2Q11 (from 4Q10). Timings of the initial rate hike in Indonesia, Taiwan and Thailand are pushed back to 1Q11 from 2H10 while the Philippines' is pushed to 4Q (from 3Q). We also reduce the amount of hikes this year from China and Korea – BOK to hike only 25bps in 4Q and China to hike two times (+54bps) starting in 3Q. For most countries in 1H11, we reduce the amount of hikes by 25- 50bps. Malaysia is an outlier, with another 25bps hike expected in July, though this is a close call.

Policy fallout #2: Less RMB appreciation — We still expect an imminent RMB move, but RMB strength on a trade-weighted basis with the sharp EUR sell-off, as well as growth concerns, will likely mean authorities will opt for a slower pace of appreciation.

Market fallout: Asia has so far been a “low beta” risk asset — Contagion via financial linkages has been evident, but with fundamentals in the region looking strong and less externally vulnerable than others. Asia FX, credit spreads, and to a certain extent, equities (in $ terms), have fared better than others.

Macro strategy — 1) Asia FX – We remain positive on Asia FX and expect it to diverge with the EUR over the medium term; our top picks are KRW, INR and PHP; 2) Asia rates – We are biased to receive rates selectively on delayed hikes and relatively manageable inflation pressures – we would look for opportunities to receive rates in India (5yr INR OIS), Korea (front-end) and Thailand; and 3) Asian (sovereign) credits – we opt for lower versus higher beta names in this
risk environment – e.g. we like Philippines over Indonesia.

To read the full report: STRATEGY OUTLOOK

>Koutons Retail India (ICICI DIRECT)

Koutons Retail India reported a dismal performance in Q4FY10, far below our and the Street expectations. The company reported net sales of Rs 386 crore against our expectation of Rs 460.9 crore. This translates into a meagre 1.9% growth YoY. The EBITDA margin was at 19.4%
against 25% in Q4FY10, a steep contraction of 560 bps YoY. This was mainly driven by lower average realisation per sq ft and higher discounts offered to push sales. Net profit including prior period expenses (Rs 1.2 crore) declined by 12.2% YoY with net margin of 8.1% against 9.5% in the corresponding quarter of the previous year.

Retail space declines marginally QoQ but rises 7% YoY
The retail space at the end of the quarter stood at 13.6 lakh sq ft with 95.3% of stores on a franchise basis. The company operates 1,307 stores with 702 stores under Koutons (including 15 racks stores) and 605 stores under Charlie Outlaw.

Thrust on better profitability
The company has taken initiatives to improve the profitability by better inventory management, debt restructuring (average cost of capital now between 13-14%), introducing family stores that yield better profitability and focus on better margin products. Koutons is looking at reducing its discounts to improve profitability.

We are positive on the business model of Koutons Retail wherein 95.3% of stores are on a franchise model. The refinancing of debt would be a positive for the earnings of the company. The initiatives taken to improve efficiency and profitability would bear fruit in the near term performance of the company. At the CMP of Rs 309 per share, the stock is trading at a P/E of 9.2x and 8x its FY11E and FY12E earnings of Rs 33.6 and Rs 38.4, respectively. We are maintaining our STRONG BUY rating on the stock with a downward revised target price of Rs 384 valuing the stock at 10x its FY12E earnings.

To read the full report: KOUTONS RETAIL

>Abbott, US has bought the domestic formulation business of Piramal Healthcare

Most profitable business sold out…
Abbott, US has bought the domestic formulation business of Piramal Healthcare (PHIL) for cash consideration of US$3.7 billion (US$2.12 billion upfront and equal annuity payment of US$400 million for four years starting CY11). The deal is valued at ~9.3x the revenue of the domestic
business and is expected to close by Q2FY11 end. The domestic formulation business contributed ~54% to the FY10 topline. The deal includes transfer of manufacturing facilities at Baddi, rights to ~350 brands and trademarks and transfer of ~5,200 employees of the domestic
formulations business to Abbott. PHIL has received Rs 350 crore as nonabatement
fees whereby the Piramal group companies will not enter the branded domestic business for the next eight years. We estimate the residual businesses will clock an EPS of ~Rs 8.2 in FY12E. Valuing the cash per share at Rs 496 and residual business at Rs 98, we have arrived at a fair value of Rs 595 for PHIL, providing 18% upside from current levels. We are assigning BUY rating to the stock.

Highlights of Analyst Meet
PHIL has retained its CRAMS, global critical care, diagnostics and domestic API and vitamins/minerals business. The company is considering a special dividend post the deal. The proceeds from the deal will be used to retire debt of ~Rs 1300 crore and venture into other emerging opportunities. The company will also look at acquisitions to complement the residual business and enter newer businesses.

PHIL is set to receive US$3.3 billion on NPV value. This works out to Rs 496 per share (post long-term capital gains taxed at 21.5%, book value adjustment and debt repayment of ~Rs 1300 crore). The residual business is valued at Rs 98 (12x FY12E EPS). We rate PHIL as BUY with a target price of Rs 595. With cash utilisation by the management post the deal we expect
the stock to get re-rated, going forward.

To read the full report: PIRAMAL HEALTHCARE

>Container Corporation of India (NOMURA)

Container traffic data released by the Indian Ports Association suggest flattish m-m activity in April 2010, though y-y growth was still healthy at 21.4%. Note that April has historically seen subdued EXIM traffic activity over March, with the latter period being inflated by a boost in year-end activity. However, with the stock trading at 17x FY11F P/E and possible downsides to our estimates, we maintain NEUTRAL.

Strength in port traffic could trigger a positive change, in our view, on Container Corp of India. Risks to margins exist in the domestic segment, however, and these could pose as negative risks to estimates and targets.

Anchor themes
A pick-up in industrial activity will likely lead to a turnaround in EXIM traffic, benefiting port entities and container logistics companies. The key is to pick stocks that still offer value after a substantial run-up in 2009.

To read the full report: CCI


Generation grows by 6.3% yoy to 3.8BU during Q4 FY10 against 3.6BU last year, average realizations jump 13.7% yoy

Revenues in Q4 FY10 for the (consolidated entity) coal and power divisions increased by 27.2% and 9.7% yoy respectively

Coal division’s EBIT margin doubles to 22% from 11% last year

Better operational efficiency and higher merchant sale translate into 93.7% yoy growth in adjusted PAT during the quarter

Reduce target price to Rs1,536 on account of marginally lower than expected FY10 earnings, maintain BUY

To read the full report: TATA POWER

Wednesday, May 26, 2010

>The World Cup and Economics 2010

Welcome to our 2010 book on the World Cup and Economics, our fourth since the 1998 finals in Paris. As always, we present this as a fun piece, your companion to the competition, to be perused before, during and after the event. In addition, it might just give you some new ideas on how to benefit from our exciting, changing world.

We hope the book is as popular as past editions. To aid your enjoyment, we have kept some old favourites and added some new features. Once more, in addition to the work of our prodigious economists around the world, we have contributions from some very famous guests.

We include a very exciting contribution from Adrian Lovett of 1GOAL, a campaign designed to raise basic educational standards dramatically in the emerging world through the vehicle of the World Cup. We are happy to add our name to this effort.

Former South African Central Bank Governor Tito Mboweni discusses the host nation’s chances, aided by the football analytical skills of his nephew! Russian Deputy Prime Minister Shuvalov tells us what it is like for Russia not to be in South Africa—and expresses his hopes for a World Cup in Russia in 2018. We also have a very interesting contribution from one of our former partners, Carlos Cordeiro, on why the 2022 competition should be held in the US.

And, to keep it all fair and balanced, Andy Anson, CEO of England’s 2018 World Cup bid, states his case.

We then include a contribution from Kevin Roberts, editorial director of Sports Business Group, who offers his views on the possible hosts in 2018 and 2022. And we have a piece about Euro 2012, to be held in Poland and Ukraine, written by our own Magdalena Polan.

Many of our country pages have been written by guests, including Otmar Issing on Germany, Mayor of Rio Eduardo Paes on Brazil, Edwin van de Sar on the Netherlands, a group of football-loving FX traders on Italy and Tudor’s Angel Ubide on Spain.

In addition to our external contributors, my colleagues from around the world offer their insights into the economies of the participating nations, as well as some football thoughts. And we have a ‘special’ entry on Ireland, which perhaps should be there!

Back by popular demand is a 2010 version of the World Cup Dream Team, selected by you the clients (and GS staff worldwide). We have narrowed down a broad list of 121 players to 11, based on the nearly 3,000 votes submitted, which vastly exceeded the numbers who voted in 2006.
As usual, we also tentatively suggest the likely semi-finalists—always a highly contentious move. We would point out to those annoyed and irritated by our selections that we did name three of the four semi-finalists in 2006 and in 1998 (the least said about 2002, the better)… We complete the book with some interesting World Cup trivia.

We hope you enjoy our World Cup and Economics 2010!

To read the full report: THE WORLD CUP AND ECONOMICS

>What are the positive developments in finance since the crisis, and what issues still give ground for concern?

Some developments since the crisis definitely point to greater financial stability:

- reduction in debt leverage among households, companies and banks, which is making them less fragile: weaker link between indebtedness and wealth;

- since end-2009, slowdown in global liquidity growth due to the incipient reduction in "global imbalances";

- investor rejection of overly complex financial assets with overly complicated risk profiles.

But there is reason to worry about:

- the very high demand for return on equity that still persists, which gives an incentive to look for speculative investments (commodities) and which could subsequently lead to a renewed increase in debt leverage;

- the excessive international capital mobility, in particular between emerging and OECD countries, which is destabilising the economies of emerging countries;

- the conflicts of objectives between regulators, who have a huge risk aversion, and economic policy decision-makers, who normally favour the long-term financing of the economy. Regulators may go too far and hurt long-term growth (with Basel III, Solvency) or financial market liquidity (due to the excessive discouragement of trading).

- the excessive and useless liquidity in OECD countries (but not in emerging countries, as we saw above), which persists, especially in the United States.



Standard Chartered Plc's first-ever Indian depository receipt (IDR) will open on May 25, 2010, at a price band of Rs100-115. The company will issue 24 crore IDRs (10 IDRs representing 1 share), accounting for 1.16% of the bank's capital. The issue of IDRs will allow Standard Chartered to significantly boost its market visibility and brand perception in India. The company is already listed in London and Hong Kong. Standard Chartered Bank (SCB) is the main operating entity of the group. SCB focuses on developing its wholesale and consumer banking business in Asia, Africa and the Middle East, from where it derives 90% of its operating income and profit. The bank operates a network of over 1,700 branches and outlets (including subsidiaries, associates and joint ventures) and employs 73,000 people.

An Emerging Market Play

Rationale for our Subscribe recommendation
Well placed to play the emerging market recovery: SCB is well positioned to benefit from the recovering emerging markets. The bank has well-diversified revenue streams spread across emerging markets such as Hong Kong, Singapore, India, Korea, the Middle East and Africa. Diversification of the business, capital employed and operating income across economies act as a natural hedge and offers the bank an opportunity to dynamically and optimally utilise its resources. In 2009, Asia accounted for 83% of SCB's profit before tax (PBT), 83% of its loans and 78% of its assets.

Wholesale Banking and Trading business-The key drivers for Profit: SCB's wholesale banking business accounts for ~80% of its PBT. Unlike the consumer banking business, this business does not require any large distribution. The bank has enhanced its service capabilities (acquisitions and investments in technology), with relationships increasingly becoming multi-country and multi-product.

RoAs superior to peers and RoEs higher at 18%: From 2007 to 2009, the bank has been consistently reporting return on assets (ROA) and return of equity (RoE) in the range of 0.8% and 14-15%, respectively. Subdued RoEs are a result of high goodwill, which was created on account of acquisitions. If one looks at adjusted RoEs vis-à-vis price to adjusted book value, the parity is quite attractive with 18% RoEs. The bank is adequately capitalised with capital adequacy ratio (CAR) at 16.5% (as on December 31, 2009) and a strong core tier-1 ratio of 11.5%.

Outlook and Valuation: SCB's IDR provides Indian investors a vehicle to invest in a global entity that has a global presence. As a result of its diversified presence and emerging market focus, SCB came out relatively unscathed from the sub-prime crisis and is now well poised to benefit from the ongoing recovery in emerging economies. Hence, the bank is an excellent diversified multinational banking play, with strategic positioning in high-growth emerging markets. The stock is currently trading at 1.7x CY2010 P/B vis-a-vis 2.9x and 3.8x FY2010 P/B for Axis Bank and HDFC Bank, respectively. We recommend Subscribe to the Issue.

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