Wednesday, January 13, 2010

>North America: no longer driving the world, but still key to the global outlook

The U.S. economy definitively turned up in the third quarter, with growth initially reported at a 3.5% pace. Revisions have brought this growth down to 2.8%, but it remains on the surface a satisfactory start to a new expansion.

Unfortunately, this incipient recovery is being driven by temporary forces: a combination of fiscal and monetary stimulus, assisted by the beginning of a turnaround in the inventory cycle. Only if these succeed in jump-starting the normal processes of growth in incomes and spending, can the recovery persist for long; and so far there is a critical missing ingredient: jobs.

United States: Recession over, but still waiting for jobs

We continue to believe that employers, who fired workers at an unprecedented pace in the recession, will find that they need to start hiring again as soon as sales pick up even a little. Job market indicators show some improvement, but so far they haven’t added up to gains in total employment. Time is of the essence in re-starting the economic engine, and without jobs the recovery could sputter out. Given the headwinds facing the economy as consumers and banks try to rebuild their balance sheets, there is a real risk that if growth doesn’t accelerate soon, it may actually fall back into a “double-dip.”

Our base-case forecast calls for job gains around the end of 2009, feeding into moderate growth that picks up speed gradually over the course of 2010 and 2011. In this scenario, consumers maintain but don’t increase their saving rate, and the financial system finds ways to keep just enough credit flowing to support a modest expansion. Unemployment declines slowly, but is still over 8% in 2011. Faster growth is entirely possible, given the amount of slack in the economy and the potential impact of pent-up demand for consumer durables and business equipment, but the greater risk seems to be to the downside. The history of financial crises and the associated recessions is not encouraging for those who bank on a rapid pace of recovery. Unprecedented policy measures have averted a much worse economic collapse, but it will take unprecedented insight and timely action going forward to avoid a long and arduous recovery.

To read the full report: ECONOMIC OUTLOOK


Positive stance on Indian stocks maintained
We continue to maintain our positive stance on Indian equities. We are not overly concerned with monetary tightening as we believe 1) Economic recovery is likely to be strong to offset any tightening related demand weakness 2) RBI is unlikely to tighten significantly that stifles the economic recovery. Our structural view on India is bullish based on attractive economic outlook, falling dependency ratio and a stable government. Please refer to “India-the next Asian tiger” report for details.


Turning O/W on Banks, Power; Neutral on Telecom, Autos
We are turning more positive on banks as we believe the tightening related worries are overdone and we expect credit growth to pick up on the back of strong economic recovery. We also increase exposure to power as we believe the upcoming period is likely to be positive for companies with backward integration (in fuel) and strong execution capabilities such as Tata Power and Adani Power. We reduce our O/W stance on telecom as we believe there could be stock price weakness around 3G auctions. We turn neutral on autos as we believe the strong growth expectations in Q4FY10 are already factored in. There is also risk of auto
sector underperformance in case of reversal of excise duty cut by the government.

Top picks – PNB, BOB, Ambuja, Ranbaxy, Adani Power, IBREL
We maintain our March 2011 BSE Sensex target of 20,000. We believe that upside surprises are likely if the government speeds up the reform process (given elections are 4 years away). Economic recovery and corporate earnings recovery could also surprise on the upside. Risks include 1) Rising commodity prices 2) Government fails to deliver on reforms and 3) Geopolitical risks.

To read the full report: MARKET STRATEGY


The Indian auto ancillary industry is one of India's sunrise industries with tremendous growth prospects. The automotive industry is an important segment of the economy in any country as it links many industries and services.

The Indian auto industry has the potential to emerge as one of the largest in the world. Presently, India is:

  • The largest two-wheeler manufacturer in the world.
  • The largest three-wheeler market in the world.
  • The second-largest two-wheeler market in the world.
  • The fourth –largest commercial vehicle market in the world.

The fortunes of the automotive components segment are linked to the performance of the auto industry. The auto ancillary industry gives support to sectors such as metals that includes steel, aluminum, copper and also to many other machine tools, plastics, rubbers, polymers, glass, surface transport.

As per Indian Suppliers’ report, the automotive sector in India contributes to 5% of the nation’s GDP and 17% of the indirect taxes as a result of which the government last year charted a 10-year blueprint for the sector’s growth. This envisages the automotive sector “output reaching a level of $145 billion accounting for more than 10% of the GDP” by 2016.

Indian auto industry has evolved around three major clusters: Mumbai-Pune-Nashik-Aurangabad (west); Chennai- Bangalore-Hosur (south); and Delhi-Gurgaon-Faridabad (north).Export-oriented companies have formed base in the west/ south regions, due to proximity to port.

Foreign Investments:
India enjoys a cost advantage with respect to casting and forging as manufacturing costs in India are 25 to 30 per cent lower than their western counterparts. Seeing the growing popularity of India in the automotive component sector, the Investment Commission has set a target of attracting foreign investment worth US$ 5 billion for the next seven years to increase India's share in the global auto components market from the existing 0.9 per cent to 2.5 per cent by 2015.

French tyre major, Michelin, has gained clearance from the Foreign Investment Promotion Board (FIPB) for its US$ 2.26 billion foreign direct investment (FDI) proposal to set up a manufacturing facility in Tamil Nadu.

Ford motor car is investing about 500$ million (Rs. 2,445 crore) to double capacity at its India plant, which will become a strategic global production hub.

Bosch will continue to maintain its focus in India in spite of global recession as it is planning to set up manufacturing units for electronic control units (ECU) by investing US$ 26.76 million.

Volkswagen has set target to capture 8-10 percent of market share in the passenger car segment in India by 2014 with a series of launches and by doubling the number of dealers.

Domestic Investments:
The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. The sector not only has global players looking to invest and expand but leading domestic component companies are also pumping in huge sums into expanding operations. Indian tyre makers are rolling out investment plans worth US$ 1.24 billion, due to the rising popularity of radial tyres in the commercial vehicles segment.

Some other investments include:
  • Hero Motors will invest US$ 19.84 million in association with Austrian firm BRP Power train for manufacturing automotive transmissions in India.
  • Indian arm of Swedish automotive component maker SKF is investing US$ 30 million in a new ball bearings manufacturing plant at Haridwar.
  • Mahindra & Mahindra will invest approx US$ 400 million for setting up an integrated auto facility in Tiruvannamalai(Chennai).
  • An auto park is coming up near Hyderabad with investments worth over US$ 409.30 million from around 34 automotive ancillary units.

Low labor costs gives Indian auto ancillary companies an absolute cost advantage. ACMA numbers suggest that wage cost accounts for 3% to 15% of revenues for Indian manufacturers as compared to 20% to 40% for US players. Historically, India's strength in exports lies in forgings, castings and plastics. But this is changing with more component manufactures investing in up gradation of technology in recent years.

To read the full report: AUTO ANCILLARY



To read the full report: NUCLEAR ENERGY


Every paisa counts. We are surprised with the recent strength in Idea’s stock price which has gained 13% over the past 1 month. The stock is now back to its post-RCOM tariff- announcement levels despite a spate of tariff cuts post the same. Expectation of better-than-feared 3QFY10 earnings (which we believe will not reflect the impact of tariff cuts completely) and ‘acquisition-premium’ (fraught with many uncertainties, in our view) have possibly driven the recent strength – unjustified in our view. REDUCE.

High-leverage wireless play – every paisa (of RPM/EPM) counts
Our current FY2011E RPM and EPM estimates for Idea (Rs0.45/min and Rs0.08/min), respectively, do not build any sharp pricing correction in the market from hereon. This assumption, we believe, could be tested over the coming months as new players jostle for network fill. Idea’s EBITDA/EPS estimates, the company being a pure wireless play (outside its stake in Indus), are particularly sensitive to pricing (or realized yield or RPM) assumptions. Exhibit 1 (on the next page) depicts Idea’s EBITDA/EPS sensitivity to pricing and volume elasticity. We believe that Idea could report a PAT loss in FY2011E below an RPM of Rs0.40/min.

3G auctions may stretch the balance sheet – a tricky ‘bid or no bid or partial bid’ decision for Idea
Idea is comfortably placed for fund 2G expansion though its balance sheet may get stretched in case of 3G auctions. Based on the current 2G active infrastructure capex, we estimate net debt to EBITDA at 2.5X at end-FY2011E. End-FY2011E net-debt to EBITDA may expand to 4X in case of 3G auction (assuming that it bids for pan-India license and funds the entire 3G investment by debt) and license payment (assuming US$1 bn total license fee outlay) and 4.4X assuming 3G capex (assuming US$300 mn 3G capex in FY2011E, see Exhibit 2). 3G capex and expansion, in addition to investment in new circles, may increase the operating and financial leverage further which is not a good attribute in an increasingly competitive market. We believe that the company may not bid for pan-India 3G license.

3QFY10E results will not reflect the full impact of tariff cuts
Idea’s 3QFY10E earnings will get a boost from (1) the sharp jump in sale of special tariff vouchers and (2) pricing has been cut at various times during the quarter in different circles. Thus, Dec 2009 quarter reported financials will not reflect the impact of pricing action completely. For 3QFY10E, we expect Idea to report revenues of Rs28.7 bn (down 3% qoq), EBITDA of Rs7.1 bn (down 12% qoq), and PAT of Rs654 mn (down 68% qoq); ex-Spice, we expect a 13% qoq drop in RPM to Rs0.48/min, flat MOU at 374 min/sub/month, and 13% qoq drop in ARPU to Rs181/sub/month. Exhibit 3 depicts our Dec 2009 quarter expectations for Idea.

To read the full report: IDEA

>Lavasa site visit (IDFC SSKI)

We recently visited Lavasa, as its Dasve Town Centre is ready to enter into the next phase as an operational town. Apart from the ~80 operational hotel rooms, 42 serviced apartments and several avenues for recreation, the Dasve Town Centre is also ready to hand over 200 apartments and 111 villas to buyers by end-January 2010. During our tour of Dasve town centre, Mugaon and Bhoini, the recently appointed City Manager of Lavasa shared with us the administrative challenges anticipated in this next phase as an operational hill station. We also took stock of the progress made in subsequent phases of Lavasa since our previous visit in February 2009. We returned impressed with the on-going pace of development and Lavasa’s initiatives in creating economic drivers for the creation of a fullfledged city going forward. We detail the key highlights of our visit below.

Out of the planned four access routes to Lavasa, two are operational and the other two under development. The first one (nearest from Pune), via Chandni Chowk exit from the Mumbai-Pune expressway, is an access-controlled toll road operated by Lavasa. The second route, via Hinjewadi exit (also from the expressway), is free access. The other two routes
– one from the Mumbai-Goa highway at Kolad, and another from Lonavala are under development. The government has granted permission to construct a tunnel on the route from Lonavala, which is expected to be ready for use in the next 12- 18 months. This route, which is the shortest distance (~170km) from Mumbai to Lavasa, would reduce travel time by approximately one hour. In terms of connectivity from Pune, the Maharashtra State Road Transport Corporation (MSRTC) has started bus services from Swargate Bus Depot in Pune to Lavasa with seven trips a day.


• The ITC Fortune Select hotel (60 rooms) has been is fully functional since April 2009. Average occupancy at the hotel has been ~70% since commencement of operations. Ekaant, a 20-room resort is also fully operational.

• Waterfront Shaw service apartments (42 fully-equipped units) on the promenade have been operational since April 2009.

• Mercure – a budget hotel with capacity of 132 rooms – is in advanced stages of construction and expected to be operational within a month.

• The 256-room Pullman business hotel building is under construction and is expected to be completed within 12-18 months. The Novotel hotel (200 rooms) is also under construction and expected to be completed by July 2010.

To read the full report: LAVASA