Thursday, January 28, 2010

>IRON ORE: Strong Spot Market Conditions Persist (CITI)

What’s New — Spot prices in China for imported iron ore have weakened a little in recent days to around $130/t (from $135/t), but are still up 25% in the past month and 60% in the past 4 months. Pre-buying of iron ore and steel has been a factor, but spot prices are expected to remain robust as suppliers prioritize contracted customers. Seaborne demand in 2010 is likely to exceed the previous peak in 2008. Investor sentiment is overwhelmingly bullish, with most believing that ratetightening in 2010 will not slow steel production.

Spot Prices — Spot iron ore prices are at $135/t (63.5% Fe, dry), up from $85/t in mid-September. Contract parity would require +90-100% price increases (Figure 2). Spot prices are not a direct indicator of where contract prices will settle, but it gives a clear indication of how tight the market is. Contract typically settles below spot in bull markets and at/above spot in bear markets. Investor consensus on the contract price is around +30-40% for 2010, and +10-20% for 2011.

Demand — Chinese steel production was flat m/m in December at 47mt. Total China steel production was 566mt in 2009 (+13% y/y) and annualized 600mt in 2H09. CIRA's China steel analyst is looking for production as high as 650mt in 2010. This is very bullish requiring another 80mt of 63%-Fe supply vs 2H09 – and this capacity does not exist. China at 650mt would lift global crude steel output back to 1.3bt, similar levels to 2008.

Supply — Brazil iron ore exports rose to 24mt in December, +7% vs November. 4Q09 exports were below 3Q09, as lower sales to China offset higher sales to Europe and Japan/Korea (Figure 6). Australian producers reported record production for 4Q09 but leaving little room for incremental supply in 2010. BHPB sold nearly 50% of sales at spot prices vs contract. Chinese domestic ore production has recovered rapidly reaching the peak of the year in November.

Market Share — Brazil is maintaining 20-25% market share of Chinese iron ore imports in recent months. Australia has 40-45% share. Vale is looking to maintain current tonnage into China in 2010, with incremental sales coming from other regions. Australia has limited new capacity, and low-grade domestic China iron ore will have to fill the supply gap if bullish demand forecasts are realized.

Recent Sector Developments — Baosteel names a new price negotiator. Producers are negotiating with Japan, sidelining China, according to a Financial Times report. BHPB discusses new Africa JV with Mittal. Vale's ferrous director estimates seaborne market >900mt in 2010.

To read the full report: IRON ORE


The Indian paint industry is out of blues faced in FY09 and is back on track delivering double digit growth in sales with improved profitability. H1FY10 has seen major paint companies witnessing revival in demand for both decorative and industrial paints, thanks to pick up in economic activity boosting demand for construction and infrastructure development. While price corrections in realty, easing of credit availability, abating concerns on sustain ability of income have revived consumer sentiment and inturn demand for housing and consumer durables; enhanced government spending on infrastructure development and resurgence in investment by private sector have led to increased industrial activity boosting demand for industrial paints. With user industries gaining vigour, paint industry has also seen revival in demand.

Decorative paints are witnessing strong demand traction from both housing and commercial construction. Factors like low per capita consumption of decorative paints, existence of large unorganized market, improving financial status, growing nuclear family culture, increasing urbanization are driving demand for residential housing; where as strong growth in IT&ITES and Organized Retail sectors and the general economic development are drivingdemandfor commercial construction.

Demand for industrial paints is increasing because of increasing demand for automobiles (automotive paints), consumer durables (powder coatings), enhanced road development activity (road markings) and general infrastructure development (high performance coatings for power and other plants).

We are initiating coverage on Indian paint sector recommending two companies Kansai Nerolac Paints Limited (KNPL) and Berger Paints India Limited (BPIL) which are a pure play on India growth story with low country risk (minimal exposure to international markets) and currency risk (only to the extent of imported raw materials). These companies with pan-India presence, strong brands and products covering all price points are set to benefit from uptrading from lime-wash kind of low end products to paints as well as from growing number of high income class consumers driving demand for premium emulsions.

While revenue growth in H1FY10 was subdued despite strong volume off take due to price corrections; profitability has improved from Q1FY10 onwards due to year-on-year (YoY) lower raw and packing material cost. This revival in volume growth and improved profitability as also positive outlook for future has led to a re-rating of these companies post Q1 results. However, we believe there is room for further upside from current levels. We hence recommend a BUY on KNPL and BPIL with one year target price of Rs.1476 and Rs.70 respectively giving a potential upside of 39% and 20%respectively.

To read the full report: PAINT SECTOR

>Industrials and Power Utilities (JM FINANCIAL)

Industrials will continue with good results. However, the transformer sector – which includes ABB, Areva and smaller transformers companies like Voltamp, Emco and Indo Tech Transformers – is an exception, as demand <>

T&D EPC companies’ results are likely to improve on enhanced order inflows and improving international T&D demand.

Power Utilities - NTPC will post good results because of 4% higher generation while Tata Power will see de-growth in revenues (-4.8%) due to flat generation.

Our top picks for the sector remain BHEL, Crompton, Kalpataru Power and Suzlon.

India has added ~3.7 GW in 3Q FY10 (8.1 GW in 9M FY10).

Base deficit stood at 9.5% for 3Q FY10, while peak deficit remained at 12.7%. Higher gas and nuclear availability offset lower hydro generation.

Lower seasonal demand and higher volumes led to decline in spot rates (average price of Rs5.3/kWh, while the peak was at Rs8/kWh on power exchanges.

To read the full report: INDUSTRIALS & POWER UTILITIES


Performance of Quarter Ended, December 2009
For the quarter ended December 09, SBI – India's largest bank has reported subdued results with Consolidated Net Profit slipping by 8% to Rs 3304.59 crore on the back of 9% increase in the Net Interest Income to Rs 8781.70 crore. Despite 51% increase in the other income to Rs 7283 crore, 49% increase in the Operating expenses to Rs 9572.66 crore and whopping increase in the provision for taxation to Rs 1454.01 crore has resulted in Net going down.

The core fee income of the bank was up by 36% in the quarter under review. The other income of the bank was marginally up by 4% to Rs 3365.71 crore, while the cost to income ratio has expanded by 220 bps to 52.3% restricting Operating Profits up by just 3% to Rs 4618.14 crore.

The operating expenses were mainly driven by opening 1091 new branches and 6842 ATMs over the year. Further 7% increase in the total provisions including taxation has paved Net Profit flat for the quarter ended December 09.

Asset Quality
Net NPA of the bank has increased by 62% on y-o-y basis and 14% on q-o-q basis to Rs
11270.79 crore.
The % of GNPA of the bank stood at 3.11% in Q3FY10 as against 2.99% in Q2FY10 and 2.50% in Q3FY09. The % of NNPA was at 1.88% as against 1.73% in Q2FY10 and 1.39% in Q3FY09. The provision coverage ratio including Assets under correction was 56.19%.

Business Highlights

  • The total business of the bank grew by 15% to Rs 1378139 crore for the quarter ended December 09 as against Rs 1202495 crore in the corresponding previous year.
  • The Aggregate deposits of the bank rose by 11% to Rs 770985 crore in the quarter ended December 09 as against Rs 692922 crore in the corresponding previous quarter.

Performance of Associates and Subsidiaries:
  • Associate Banks' net profit increased by 9.85% from Rs.2015 crore to Rs 2213 crore in nine months ended December 09.
  • SBI Funds Management Average Assets under management (AUM) have increased from Rs 24104 crore as on Dec 2008 to Rs 37900 crore as on Dec 09, a growth of 57% on y-o-y basis.
  • SBI Factors: Net profit has grown by 43% to Rs 38.20 crore in nine months ended December 09 compared to Rs 26.79 crore in corresponding previous year.
  • SBI Card has reported Net loss of Rs 123 crore during nine months ended December 09

To read the full report: SBI


3QFY10 results above estimates: Bharti's 3QFY10 earnings (Rs22.1b; up 2.3% YoY, down 4.8% QoQ) were ahead of our estimates driven by relatively lower margin decline in the mobility segment (down only 160bp QoQ despite sharp tariff cut) and Rs1.5b forex gain. While revenue (Rs97.7b; down 0.7% QoQ) was broadly in-line, EBITDA (Rs39.1b, down 5.6% QoQ) was above expectations. Mobile EBITDA declined 6.5% QoQ to Rs24.2b. Telemedia
(EBITDA up 7.6% QoQ) and passive infrastructure (EBITDA up 6.2% QoQ) posted strong numbers while enterprise business was soft with 9% QoQ EBITDA decline.

Wireless metrics mixed: Mobile APRU declined 8.7% QoQ (MOU down 0.9% QoQ to 446, RPM down 7.9% QoQ to Rs0.52) to Rs230 (in-line). Mobile traffic grew 6.6% QoQ (vs 2% growth in 2QFY10 and 6-8% growth in preceding three quarters) due to elasticity, lower MOU arbitrage post tariff cuts, and likely seasonal strength. RPM declined 7.9% QoQ to Rs0.52 and was 2.3% above estimate.

Upgrading earnings by 5-7%; maintain Buy: While 3QFY10 traffic growth (+6.6% QoQ) was below expectations, growth is likely to sustain driven by full migration of subscribers to new tariff schemes. We upgrade FY11/FY12 revenue estimates by 2-4% to reflect better RPM, EBITDA by 2-4% (4% growth in FY11, 18% growth in FY12 as competitive intensity recedes) on relatively stable margin performance, and earnings by 5-7%. Bharti trades at EV/
EBITDA of 7.4x FY11E and 6.2x FY12E; and P/E of 13.7x FY11E and 12.5x FY12E. While sector revenues and margins are likely to remain under pressure over the next 2-3 quarters due to hypercompetition, Bharti remains best placed given low capex intensity, unlevered balance sheet, and scale advantage. We maintain Buy with a revised DCF based price target of Rs414 (implied EV/EBITDA of 8x FY12E).

To read the full report: BHARTI AIRTEL


Revenue up 35% to INR 8.7 bn; mix tilting towards telecom
Sterlite Technologies’ (SOTL) Q3FY10 revenue recorded a robust growth of 35.1% Y-o-Y to INR 8.7 bn primarily driven by a strong execution in its telecom business,which grew 108.6% Y-o-Y to INR 4.5 bn. The power transmission business, however, posted a marginal dip of 1.9% to INR 4.2 bn. The telecom segment’s contribution to the overall revenue improved to 51.7% against 33.5% in Q3FY09. On the volume front, SOTL recorded a 68% Y-o-Y growth in optical fibres volume to 2.1 mn km, while that for power conductors increased 6.5% Y-o-Y to 33,000 MT.

Strong telecom execution drives PAT

Strong execution boosts performance
During the quarter, reduced raw material (down 219bps to 73% of sales) and employee (down 22bps to 1.8% of sales) costs were negated to an extent by an increase in other expenses (up 138bps to 13.2% of sales), limiting improvement of EBITDA margin by 104bps to 12%. The EBITDA margin improvement led to a robust 47.8% EBITDA growth Y-o-Y to INR 1,044 mn. Further, halving of the interest cost (down 53.2% Y-o-Y) and significant improvement in other income helped post a strong PAT. Adjusted PAT recorded a strong growth of 78.6% Y-o-Y to INR 636 mn (after adjusting for profit on sale of asset worth INR 101.1 mn). Hence, we revise our EPS estimates upwards for FY10E and FY11E by 2.2% and 14.3% respectively on the back of higher than expected margins.

Strong visibility; order book up 52% Y-o-Y; expansion on schedule
SOTL’s order backlog recorded a strong growth of 52% Y-o-Y to INR 21.5 bn (0.8x FY10E revenues) with INR 16 bn (increase of 33% Y-o-Y) backlog in power conductors and the balance INR 5.5 bn (increase of 156% Y-o-Y) in the telecom business. Management has indicated that expansion projects for both optic fibres (6 mn km to 12 mn km) and power conductors (115,000 MT to 160,000 MT) are on schedule and likely to be completed by Q4FY10 with volume impact visible from Q1FY11.

Outlook and valuations: Positive; maintain ‘BUY’
Demand for power conductors continues to remain strong on the back of significant spending expected in power T&D in the country. Fibre optic demand is driven by growing number of mobile subscribers, 3G auction, and increase in the number of broadband users. With gradual shift in the business towards high margin telecom business together with strong outlook in the power T&D space we remain positive on the SOTL. The stock is currently trading at P/E of 12.3x and 10.5x FY11E and FY12E, respectively. We maintain our ‘BUY’ recommendation on the stock.

To read the full report: STERLITE TECHNOLOGIES