Wednesday, February 10, 2010

>Is the International Role of the Dollar Changing?

Recently the U.S. dollar’s preeminence as an international currency has been questioned. The emergence of the euro, changes in the dollar’s value, and the financial market crisis have, in the view of many commentators, posed a significant challenge to the currency’s long-standing position in world markets. However, a study of the dollar across critical areas of international trade and finance suggests that the dollar has retained its standing in key roles. While changes in the global status of the dollar are possible, factors such as inertia in currency use, the large size and relative stability of the U.S. economy, and the dollar pricing of oil and other commodities will help perpetuate the dollar’s role as the dominant medium for international transactions.

By many measures, the U.S. dollar is the most important currency in the world. It plays a central role in international trade and finance as both a store of value and a medium of exchange. Many countries have adopted an exchange rate regime that anchors the value of their home currency to that of the dollar. Dollar holdings figure prominently in official foreign exchange (FX) reserves—the foreign currency deposits and bonds maintained by monetary authorities and governments. And in international trade, the dollar is widely used for invoicing and settling import and export transactions around the world.

Periodically, however, the dollar’s preeminence as a cross-national currency has been questioned. The emergence of the euro in 1999 as a major currency and global competitor fueled the debate over the dollar’s international role. More recently, the global shortage of dollars during the financial market crisis placed extraordinary strains on international firms needing to support their dollar-denominated assets and led to calls for changes in the international monetary system. Several developing countries, for example, have proposed that for certain transactions the dollar be replaced with a type of “world” currency based on International Monetary Fund special drawing rights. In addition, participants at the April 2009 meeting of the Group of Twenty finance ministers raised questions about the dollar’s preeminence as a reserve currency, and People’s Bank of China Governor Zhou Xiaochuan has pressed for a shift away from U.S. currency in various activities.

A change in the dominant role of the dollar in world markets would have consequences for the currency issuer and users alike. The dollar’s international status helps insulate the U.S. economy from foreign shocks, reduces transaction costs in trade and finance, and contributes to the international transmission of U.S. shocks and monetary policy effects. For foreign economies, broad use of the dollar in reserves and in international transactions typically results in greater sensitivity of trade, inflation, and asset values to exchange rate movements between their currencies and the dollar. Furthermore, dollar banknotes—physical bills of different denominations —used abroad provide some foreign households and businesses with a more stable store of value and a sounder transaction currency, especially during periods of turbulence overseas.

To read the full report: DOLLAR

>INDIA MARKETS: Flying high; Best is behind? (CLSA)

Our analysis of the 3QFY10 results of 1,600+ companies (1. However, sequentially margins have contracted by 100bps and profits declined by 1%.

In our 10th Jan note, we wrote, “We expect markets to be volatile in 1H 2010, but if earnings optimism in mid caps proves correct, then mid caps will likely yield better returns than large caps. However, given that valuations are reasonably rich, we believe that 2010 will be the year of stock picking.” Our view remains unchanged. The present correction will likely provide entry opportunities in stocks that we like for the long term – Bharat Electronics, Bosch, Exide, Thermax and Titan. Post results, we have upgraded Jet Air to BUY. Other stocks that we like: Balrampur, Bombay Dyeing, Cadilla, HCL Info, Ipca, Jagran, Petronet LNG, Shree Cement, and Sobha Dev.

3QFY10: Strong growth in profits, but…
1,607 companies with market cap of

Sequentially revenues grew by 5.7%, and Ebitda grew by only 0.7%, as raw material and energy prices increased sequentially. Interest costs have not risen. Net profit actually declined by 0.6%. Does this mean that the best is behind us?

Ex-financials and oil & gas, the mid cap universe’s earnings grew by over 4x yoy and ebitda margins expanded by 549bps. But, sequentially revenues grew by 6.2%, ebitda margins declined by 50bps and profit grew by 3.4%.

Depreciation trends indicate that capex is yet to pick up. Broad participation; visible recovery across the board

We divided the universe into four buckets as per market cap. Revenues of 1,160 companies having market cap

46 companies with mkt cap >US$1bn have turned in the worst performance during the quarter with revenues increasing by 6% YoY but net profits declining by 6.5% YoY. Net profits declined sharply by 31% on QoQ basis.

The aggregate results are consistent with what we saw in 1QFY10 and 2QFY10. We believe that the smaller companies had been the worst impacted by the downturn and credit crunch last year and thus, had to take drastic measures to cut costs and inventories. This is standing them in good stead as revenue growth recovered.

Earnings upgrades continue; Optimism remain high
Momentum in earnings upgrade cycle continued. Consensus FY11 earnings of CNXmid- cap Index was upgraded by 3.5% versus downgrade of 2.6% for Sensex. �� 57/90 actively covered mid-cap stocks has optimism ratio greater than 1 compared to only 12/30 stocks in Sensex.

What’s next?
We expect markets to remain volatile in 1H 2010 on macro concerns. However, if the current earnings optimism in mid caps proves correct, then mid caps will likely yield better returns than large caps. But given that valuations are reasonably rich, we believe that 2010 will be the year of stock picking.

The present correction will likely offer entry opportunities in some of the stocks that we like in the long term. Post the results, we have upgraded Jet Airways to BUY and downgraded Jain Irrigation to O-PF.

To read the full report: INDIA MARKETS

>India: Construction: Infrastructure (GOLDMAN SACHS)

Industry context: On-the-ground execution is robust
Our analysis of projects in the Indian infrastructure sector shows a strong improvement in execution as well as a robust depth in projects to be executed over the next three years. Leading indicators of execution pickup like lending to infrastructure (47% growth vs. 10% industry credit growth over the past 12 months) and demand for infrastructure inputs like cement (21% increase in dispatches over past four months) are showing very strong upwards momentum.

Strong pipeline to drive growth; Sell-off creates opportunities

Source of opportunity: Sell-off creates attractive entry levels: We maintain our attractive stance on the Indian infrastructure sector as we believe spending on this sector is increasing at a rapid pace, offering substantial asset growth opportunities. Share prices have moved -21% to -2% ytd, offering some attractive entry levels. Valuations are at a 19% discount to median despite an estimated 30% sales CAGR and an average ROE improvement of c.400 bp over FY10E-FY12E for our Buy-rated stocks.

Best Buy ideas: IVRCL, IRB and JPA: We recommend IVRCL (Buy, on Conviction list, 61% potential upside), IRB (Buy, 35%) and JPA (Buy, 44%). Our Conviction list stock, IVRCL, has outperformed L&T in the last seven out of nine years, including this year, and – driven by higher earnings growth and multiple expansions – we expect the outperformance to continue for the rest of the year. Following the release of 3Q results, we have revised our FY10E-FY12E EPS estimates for our capital goods and infrastructure coverage groups by -27% to +10%, and our 12-month target prices by -8% to +9%.

Best Sell idea: We continue to hold a structurally negative view on BHEL (Sell, on Conviction list, 23% potential downside) due to its high valuations not reflecting upcoming risks that we foresee related to pricing and profitability.

New project awards and commissioning of projects under construction, reflected in strong quarterly growth, remain key catalysts.

To read the full report: CONSTRUCTION SECTOR

>Hathway Cable & Datacom Ltd. (ANTIQUE)

Key highlights
Digitising opportunity: The company is acknowledged as the pioneer in the yet consolidating the Indian cable industry with 20% digital subscriber base of the expected 10m pass through homes in FY12e. With a demonstrated track record it is best-positioned to drive the digitisation move, reaping the benefits of scale and entertainment consumption spend.

Cross selling monetisation: Huge broadband opportunity - Hathway’s leadership in digital cable has the potential to tap the huge unserved broadband market. The cross-selling opportunity of the existing digital infrastructure augurs well for profitability with the added competitive advantage of last mile connectivity through local operators.

Valuation and outlook
The digitisation of the cable subscriber base is very capital intensive and the landscape is still evolving with scale being the differentiator. With ~8.2m pass through homes, we expect revenue CAGR of 19.3% over FY10-12e with 23.8% CAGR in revenue generating units. The scale would help in expanding EBITDA margins to 31% in FY12e aiding EBITDA CAGR of 48.8%. The global media companies trade at EV/EBITDA to growth ratio of ~0.7-0.9x, but we are valuing the company at a ratio of 0.4x, considering the nascent stage of the industry and future funding requirement at 19.5x FY11e EV/EBITDA on post money basis. We have a price objective of INR309, indicating an upside of 28.8% and 16.6% from lower and upper band of issue price, respectively.

To read the full report: HATHWAY CABLE

>Indian consumer: Exorcising the ghost of the downturn (NOBLE)

The recent Q3FY10 results signalled an end to the urban consumer downturn with retailers reporting resurging confidence among consumers in the major metros even as food inflation becomes a worry for lower income households. These broad trends, coupled with the inherent operating leverage of retailers and the possibility of a price war in FMCG, lead us to prefer retailers over FMCG companies as a play on the “India consumption story.”

The recently concluded Q3 results hinted at some significant developments as far as the Indian consumer is concerned. The main messages we take away from the results as well as the surrounding commentary are:

The Metro consumer is coming back: companies across the retail sector made bullish noises about the metro consumer, highlighting the recovery against the despondent performance in Q3 of FY09 and hinting at much more to come.

Semi-urban/rural demand has held up: the semi-urban and rural consumer has surprised on the upside with FMCG companies as well as small town retailers seeing momentum continuing despite the toughening comparables.

Inflation a worry: multiple companies have cited inflation as a worry for FY11. With food inflation running in the high teens, household budgets are being put under pressure, creating uncertainty around spending in other areas. This is a bigger worry for lower income consumers than for mainstream metro consumers.

The broad based nature of these trends has specific implications for the FMCG and Retail sectors:

FMCG – for whom the bell tolls: the continuing newsflow around FMCG has increased the conviction level of our Negative stance on the sector even further. We see significant risks for the sector arising from three main trends: food inflation running in the high teens which may dent consumer demand and pricing flexibility for FMCG companies; rising input costs (both raw materials and advertising) are pressuring the inordinately buoyant margins seen in H1FY10; and the price war in detergents may spread to other segments, dragging down margins across the sector. The punchy valuations that the midcap FMCG companies in particular trade at (24x FY11 PE for Colgate and Dabur), seems to be ignoring these risks.

Retail – the roller coaster turns: organised retail will benefit from the resurgence in urban demand on the back of three factors: concentration in metros alongside higher exposure to mid-high income segments; higher exposure to discretionary products; and high operating leverage. All these factors make retailers a levered play on the urban consumer recovery with momentum likely to gather in revenues as well as margins. Whilst valuations in the sector are high, we expect that upgrades to consensus numbers are likely to keep multiples elevated and drive share prices higher still. As such, stocks like Titan and Pantaloon are likely to perform well despite the punchy valuations. Overall, the two sectors seem to have a materially different outlook for CY10 with retailers likely to outperform in terms of earnings growth as well as share price performance. On relative terms, Pantaloon and Titan trade at 11x and 17x FY11 EV/EBITDA whilst Dabur and Colgate trade at 19x. Given that the retailers’ earnings are likely to see upgrades while the FMCG companies’ might see downgrades, the valuation premium for Dabur and Colgate seems inverted. Among the retailers, Koutons is at a disadvantage as it is less exposed to the metro consumer and more exposed to lower income segments.

To read the full report: INDIAN CONSUMER