Thursday, January 14, 2010


Recent Developments and Performance of Gold ETFs on the Indian bourses
The Reserve Bank of India bought 200 tonnes of gold from the International Monetary Fund in November 2009. It is thought of as the ultimate currency as it came to the country’s rescue in 1991 when India faced its worst balance of payments crisis and had to pledge 67 tonnes of gold to shore up its dwindling foreign reserves.

Gold has been one of the best performing asset classes in 2009. The COMEX gold index was up 25% in 2009. Gold prices in India have been up 23%. It is currently trading close to USD 1,130 per ounce after touching a high of $ 1,226 in early December 2009, compared to the low of $681 in Oct 2008.

The demand really is getting translated into ETFs slowly. But investors are gradually moving into gold ETFs for investment instead of physical form. It has been seen that a lot of SIP type transactions take place as lots of investors buy one-one gold every month and the number of investors have gone up to 60,000-65,000, nearly tripling in the last 4-5 months. The number of new accounts created by Gold ETFs in India surged 57% between March and September 2009.

The prices of the 6 Gold ETFs have moved more or less in tandem with the price of Gold locally (except Quantum GETF that quotes at a discount) . This can be observed from the chart below. The first chart shows the correlation between Gold prices and ETFs namely Benchmark Gold Bees, Kotak Gold ETF, UTI Gold ETF. The second chart shows the correlation between Gold prices and Reliance Gold ETF, SBI Gold ETF and Quantum Gold ETF. The price of Gold and Gold ETFs on the chart below are rebased to 100.

The overall AUM of the Gold ETFs on the Indian bourses has continued growing till December 2009 as per the data of AMFI India. The total AUM of Gold ETFs stood at Rs 781 crs in February 2009. This increased to Rs 1352 crs in December 2009. The growth has been consistent throughout the last few months for Gold ETFs.

Risks to Gold ETFs

Trend reversal in Gold Prices

Lack of liquidity in Gold ETFs remains a major concern for investors. In India large institutional investors and hedge funds are not major participants as in the west where they do so to cover their dollar exposure.

Rupee appreciation could depress returns

Jewellery gold demand could fall as gold remains at high prices.

Gold gives a lower rate of return in an upward trending equity market. Over the last 20 years, the average return from Gold has been around 7%. So, if the past trend continues, one could expect around say 6-9% returns from gold in the long-term.

The rapid growth of gold exchange-traded funds is a two-edged sword for gold, increasing volatility both up and down. By facilitating gold investment and ownership by individuals and institutions they have, without a doubt, brought significant numbers of new participants to the market and boosted buying by veteran gold investors as well. This has already contributed to the increased shortterm day-to-day gold-price volatility over the past year and it is likely to contribute to the long-term cyclical volatility as well.

To read the full report: GOLD ETF

>Revenue growth at an inflection point (DEUTSCHE BANK)

Revenue growth driven by robust domestic consumption: We believe that the key highlight of the Dec 09 quarterly results will be the inflection point in revenue growth which is set to turn robustly positive after three quarters of muted growth, primarily driven by robust domestic consumption, which seems to have grown impressively despite concerns of a poor harvest. We estimate revenue growth of 26%/20% yoy for Sensex and DB universe
respectively. Although exaggerated by a base effect, we believe that the robust top-line growth is a reflection of strong recovery in domestic aggregate demand. Indeed, some of the key metrics, such as growth in auto sales, consumer appliance sales, air traffic, etc have posted multi-period highs during the Dec quarter. We strongly believe that private and government consumption expenditure will be the key driver of Indian GDP growth.

Revenue growth momentum will propel earnings growth to 26% in Dec 09: Earnings growth, which had already seen an inflection point in Jun-09 quarter, will gain further momentum as we expect Sensex’ earnings to grow by 26% yoy while DB univ’s should also grow by 26%yoy (41% cum-PSU OMCs). This will be due mainly to momentum in topline, unlike preceding quarters when margin expansion (driven by lower raw material prices and cost cutting measures) was the key driver for earnings growth. We view this as a more positive signal of recovery and hence emboldened to expect further improvement going forward.

Auto, Oil, and Metals (ex-Corus) to lead while Telecom, Real Estate to lag: We expect the Auto sector to stand out (reflecting strong demand, benign commodity prices and low base), with earnings likely to grow by 261% and EBITDA by 216%. Oil and gas should also show a significant profit jump, but mainly due to lower base in PSU OMCs in the Dec-08 quarter. Ex- OMCs Oil sector earnings should still grow by an impressive 64% yoy due to lower upstream sharing by ONGC. Metals should report EBITDA and PAT growth of ~80% yoy (ex-Corus) on the back of rising volumes, despite lower realizations. The telecom, sector which witnessed an intense tariff battle in the quarter, should unsurprisingly be the biggest laggard with EBITDA and PAT growth at -5%/-28% yoy respectively.

We remain convinced that market will overshoot our fair value target in 4Q: We believe that earnings upgrades, which had reversed in past few months, should resume, underpinned by a significant upturn in quarterly results, rising expectations of upward revisions to GDP growth and better-than-expected growth across key global economies. We remain convinced that the market will overshoot our fair value target of 16,500 in 4QFY10.

To read the full report: EQUITY STRATEGY


Updating estimates: Recovery/upturn continues, but... : We are revising EPS ests. by +6% to +28% for HDBK for FY10E, by -14% to +7% for FY11E and -6% to +6% for FY12E, reflecting H1 results, continued macro recovery/upturn, offset by specific factors. While treasury gains led to stronger H1 earnings, credit growth remains sluggish. Our revisions factor in (1) marginally lower but accelerating credit growth from 4Q10E, (2) lower NII despite NIM gains due to lower asset growth, (3) lower 2H treasury gains and (4) still higher credit costs, including higher regulatory buffers, partly offset by (5) lower operating expenses/cost saving focus.

... tug of war between downside and upside risks: Downside: banks may still deliver lower-than-expected NII, specifically in 3QFY10, due to (1) muted non-food credit off-take at 11.75% yoy so far, (2) lower investment yields as banks book gains on HTM portfolios, and (3) lower overall asset yields due to surplus liquidity and price competition.

Updating ests, keeping Buy on Axis, D/G SBI to Neutral from Buy

Upside risks: (1) Higher treasury gains as banks may continue to book profits from HTM book and G-Sec yields may soften at year-end due to higher liquidity/lower fiscal deficit; (2) decline in credit costs for some banks (especially those meeting the revised 70% provision coverage
norm), on macro recovery and corporate balance sheet restructuring.

Axis Bank remains our top pick/Buy; D/G SBI to Neutral from Buy: We continue to like Axis for its progressive expansion and new build-out (retail lending, insurance/asset mgmt, branding, risk mgmt) efforts on top of a strong CASA franchise and still-reasonable valuations. We D/G SBI to Neutral from Buy reflecting now-normalized valuations plus relatively harsher P&L headwinds from NIM, treasury and credit cost/ provision ramp-up pressures. We are reviewing our sector stance given (1) better macro outlook (est. FY11 GDP gwth of > 8.5%) and falling NPL risks, versus (2) potentially tightening monetary policy and prudential norms.

To read the full report: BANKING SECTOR


Reiterate Buy; attractively poised as de-leveraging gathers pace — We reiterate
Buy on Aban with a new target of Rs1650, imputing an EV/EBITDA of 7x FY11E, in line with global comps (lower P/E though, due to high D/E). While we do not argue for a higher target multiple, the stock appears attractively poised and could deliver further outperformance as de-leveraging gathers pace – net debt now constitutes 65% of our EV vs. 71% earlier; this further reduces to 54% in FY12E after pay down of debt through internal accruals only with no further capital required, which could drive a further ~30% increase in equity value with no change in EV.

Adjusting TP for capital raising — We increase our TP to Rs1650 from Rs1550 as we roll forward our DCF to Sep-10 from Mar-10 earlier. Our FY11-12E EPS is, however, adjusted downwards by 14-16%, primarily due to the 15% dilution following the US$150m that was raised by the company in Nov-09 (our EBITDA and net income numbers are adjusted by a modest 1-2% in comparison).

Reiterate Buy as De-leveraging Commences; Raising TP to Rs1650

3Q preview – better utilisations to drive strong growth — Aban’s weak performance in 2Q was driven by the full impact of the 7 idle rigs. Subsequently, in 3Q, 4 of these rigs having commenced new contracts while drillship Aban Abraham has finally overcome its teething problems to start contributing to revenues. The result is a sharp increase in 3QE net income to Rs1.9bn from Rs714m in 2Q. 4Q should be even stronger sequentially driven by expected commencement of revenues from Aban Pearl and lower interest costs (with the capital raised in 3Q having been used to redeem bonds worth Rs8bn).

Contracts for remaining idle rigs could be next trigger — 4 of Aban’s jack-ups are still idle viz. DD1, DD6, Aban VII, and DD8 (contract recently ended). The company is currently marketing all rigs and any newsflow on contract fixtures could be a +ve trigger, as it would remove any remaining doubts on sustainability of cash flows till debt is paid down to reasonable levels. We currently factor in day rates of US$110-120K for 3 of the idle rigs and assume the 4th (Aban VII) remains idle). On our ests., Aban’s D/E reduces from 11.3x in FY09E to 2.5x by FY12

To read the full report: ABAN OFFSHORE


Margins have peaked out. Though Exide reported good 3QFY10 performance, strong profit growth was tempered by slow revenue growth. We retain our Hold rating, but raise FY10-11e earnings and target price to Rs128 to factor in the strong operating performance.

Slow revenue growth. Despite strong auto volume, revenue grew just 16%, hit by lower 11% growth in its industrial segment (telecoms vertical declined 47%).

Good profit, subdued revenue growth; retain Hold

Operating performance improvement. EBITDA margin improved 590bps yoy to 22.7% (declining 310bps qoq). Although lead prices have risen, increased in-house sourcing from owned smelters – from ~30% to nearly 45% of requirement – helped temper the impact.

Interest cost reduction. Re-structured loans and repaid shortterm loans substantially lowered Exide’s interest cost, raising its profitability. Hence, the 76.8% yoy growth in adjusted profit was higher than the 56.6% growth in EBITDA.

Raising estimates. We raise FY10-11 EPS estimates, by 7% and 13%, respectively, to factor in the good operating performance.

Valuation. We raise our target price to Rs128 (15x standalone EPS and Rs12 value of subsidiaries).

To read the full report: EXIDE INDUSTRIES