Thursday, February 18, 2010

>India gold imports may recover to 500 tons in 2010

Mumbai - India's gold imports may recover to 500 metric tons in 2010 but imports will continue to remain below levels seen before the global economic crisis and the subsequent rally in prices, a senior World Gold Council official said late Wednesday.

"I believe 500 tons is the bare minimum that the country needs to import this year," said Ajay Mitra, managing director of World Gold Council India.

WGCI works to promote the consumption of gold in India, traditionally the biggest consumer of the yellow metal.

India's gold demand fell by 33% to 480 tons in 2009, from 712.6 tons the previous year, the council said earlier this week. Out of this, imports accounted for 459 tons, down from an average of 700 tons in previous years, as high prices dented buying interest in the first half of last year.

But demand is stabilizing as consumers get used to higher prices with investor confidence improving amid a global economic recovery.

According to initial data, domestic demand has nearly doubled in January 2010 from the 17 tons bought in January last year, Mitra said.

"January was a very difficult month last year. But demand has been recovering and I think the worst is over. The fourth quarter of 2009 saw an upswing in demand and that has continued into January 2010," he said.

Demand in the fourth quarter rose 13% on year to 180.7 tons, WGC data showed. The recovery in jewelry demand has been sustained by a further correction in domestic prices.

Spot gold in India fell to INR16,500/10 grams in January after touching a record high of INR18,340/10 grams in early December.

Meanwhile, investment demand, which fell by as much as 65% last year, is also looking up in 2010, Mitra said.

"Investment demand this year should be good. (Going by) the number of initial public offerings in the market, there is definitely consumer confidence in investment," he said.

Europe's economic problems, highlighted by the recent turmoil in Greece and the possibility of economic sanctions on Iran will all boost investment demand for gold, he said.

Mitra, however, downplayed the threat of high food prices limiting the purchasing power of Indian consumers and affecting the demand for gold. Rising food prices haven't reduced the demand for other items such as consumer durables and automobiles, he noted. Food prices, a core part of household expenditure, rose 17.94% on year in the week ended Jan. 30.

May Launch New Investment Products This Year

Besides promoting gold sales through regular channels during festivals and other special occasions, the World Gold Council is also looking to launch investment products for Indian consumers by the end of the year.

"We are planning to meet fund managers and investment bankers in mid-March to explore a couple of products," said Mitra. The first product could be ready by the end of the third quarter, provided all regulatory hurdles are crossed by then, he said.

These will be localized instruments, tailored to the needs of investors in metros and tier-II cities. The products haven't been finalized, but gold certificates could be an option.

WGC also has plans to launch a gold accumulation scheme by the second half of 2010. Under the scheme, investors can deposit a monthly or daily amount into a micro-finance company and get an equivalent amount of gold credited to their account.

"Some global players who have products overseas are looking at entering the Indian market with their products. We are in talks with them" on potential partnerships, Mitra said.

Meanwhile, a joint scheme by India Post and WGC to sell gold coins will likely be extended to 1,000 post offices in 2010, up from 553 last year.

On the global outlook, Mitra said $1,000 per troy ounce will now serve as the new floor price for gold. "Prices will move in the $1,000-$1,100 range for the next couple of months."


>The Push and Pull of Earnings vs. Inflation vs. Risk Appetite (MORGAN STANLEY)

Key Debate:The market is currently grappling with three key developments –strong growth, policy exit (relating to prospects of higher inflation) and global uncertainty or declining risk appetite. Global risk appetite will determine the absolute multiple for the market, whereas the inflation outcome will determine India’s relative multiple. How will the market respond to the interplay of these factors?

Growth Accelerating Faster Than Expected:The earnings environment is very strong. We see upside risks toour earnings forecast, which is in any case ahead of the consensus. We are expecting BSE Sensex earnings growth to compound at 18% annually to F2012 versus the current consensus estimate of 14%. Both top-line growth and margin improvement are supported by the macro environment and are driving earnings higher. As in the previous cycle, the broad market earnings growth will likely beat that of the narrow market. Indeed, broad market earnings (ex-energy) are almost at the previous cycle peak (note that the small and mid-cap indices are still 42% and 37% off peak, respectively). The key risk to earnings, in our view, is that weak global risk appetite causes capital flows into India to slow down, thus negatively affectinggrowth.

Policy Exit –To Do or Not to Do:While strong earnings growth should augur well for the market, the market is currently grappling with two headwinds. The first headwind is home grown and relates to the risk of rising core inflation (and hence higher short rates). History suggests (and we go back to 1997, 2000 and 2004) that the market multiple tends to decline when short rates inflect in the upward direction. While in 1997 and 2000 the rate rise happened in a slowing growth environment, causing significant damage to market multiples, the 2004 rate change took place in an accelerating growth environment, and the fall in market P/E proved temporary. We believe that the current environment resembles 2004, with a rise in short rates likely to pre-empt inflation pressures in an accelerating growth environment. Indeed, the policy environment remains close to emergency levels even though the economy does not appear to be anywhere close to a crisis. The key risk is that the central bankfalls behind the curve and rising inflation ultimately hurts growth and stock prices in 2011. We believe that the central bank will react to incoming data, especially on credit growth, and tighten accordingly. Of course, the challengefor the central bank is to estimate the impact of stimulus on growth (how much of the current growth acceleration is autonomous), the next monsoons and global growth (which, in turn, may depend on behavior of risk assets).

Global Risk Appetite –A Tricky Phase:The second headwind is a reduction in global risk appetite relating to growth, monetary policy exit and sovereign contagion. Global risk appetite continues to be important (Indian equities are still highly correlated to the rest of the world), as India depends on capital flows from financial markets to fund its balance sheet. A sharp and protracted reduction in risk appetite would affect India’s growth rate and, ultimately, share prices.

End game:The good news is that the market is already aware of most of the risks but needs time to settle the debate. The near term is likely to continue to be volatile, but we think investors should be buyingthe dip rather than selling the rally. 2004 is a good example of how “dip buying”paid off handsomely. Our scenario analysis on the BSE Sensex suggests a base case upside of around 20% in 2010, which probably compensates investors for the risks they may be taking in the near term.

To read the full report: INDIA STRATEGY


Navabharat’s 3QFY10 results came largely in line with our expectations, with revenues at Rs. 2,637 mn (8% qoq) and earnings at Rs. 1,322 mn (10% qoq) due to higher PLF and improved ferro alloy price realization. We believe Navabharat remains attractive for a long term and we expect it would continue to generate healthy operating cashflows from its existing 228MW power assets which would in-turn fund their 364MW capex without any equity dilution, importantly with a lesser leverage. We tweak our FY10E estimates marginally upwards due to lower effective tax rates on account of MAT credit.

Strong operating performance; Retain BUY

Takeaways from management call
Average PLF was at 88% compared to 82% in Q2FY10. Average realization was at Rs. 5.1/- for outside sale and Rs. 3 per unit for supply to GRIDCO. Prices are contracted for Rs.5 per unit for the next quarter.

Expansion work is going ahead as per schedule in Orissa (64MW by Dec’10) and financial closure for 300MW is expected by Feb’10 and order for critical equipments to be placed by Mar’10

The 1050 MW plant in Orissa which is being planned in 50:50 JV with malaxmi power is still facing hurdles S Vijayaraghavan +91.44.4344 0022 | 1 Public 49.0% due to equity contribution from its JV partner. Currently there is no progress on the execution of this plant

Average realization of Ferro Chrome and Silico Manganese in 3QFY10 was at around Rs. 50,000/tonne and Rs.54,000/tonne respectively. Realizations came in better sequentially from Rs.43,000/tonne in 2QFY10. Total production is expected to be around 35,000 MT in FY10E and 40,000 MT in FY11E

Average realization of sugar in the quarter was at Rs.31/kg and it expects to crush 400,000 tonnes in FY11E with a recovery rate of ~9.5%. Besides it has also imported 4000 tonnes of raw sugar. During this quarter it sold around 5,661 MT of sugar and 23,104 MT in 9MFY10.

Coal extraction from Indonesian mine has commenced. However export (trading) of coal has been delayed on account of pending clearances. The first coal shipment is expected by Jun’10 with a production target of 600,000 tonnes in FY11E. The company is in the process of executing PPAs with Zambian government and expects to commence extraction by Sep’10 with a target of 300,000 tonnes for FY11E

Valuation and view
We believe Navabharat would continue to generate strong operating cashflows and RoE in excess of 20% due to stable merchant power realization, improving ferro alloy pricing and bumper sugar season. Our 12-month target price of Rs. 475/- is arrived based on average of 2x FY11E book value of Rs.217/- and 12x of FY11E EPS of Rs.43/- which leaves us with a 24% upside.

To read the full report: NAVABHARAT VENTURES


Demand outstripping supply: Exide management is seeing retail demand for its lead acid battery growing at more than 18%. Company is stretching its capacity to meet such demand growth to accelarate along with stronger GDP growth in India.

High margin to sustain: According to the company current profit margin though quite high compared to historical average, is sustainable. Company is not ruling out the possibility of a moderate decline in margin at EBITDA level. However, net profit margin is sustainable and revenue growth is likely to be stronger going forward. Sustained net margin and stronger revenue growth could help Exide achieve 20%+ EPS growth in FY11e.

New growth driver attractive: Exide has identified a host of new growth opportunities and investment plans including (1) battery driven bycycles and motorcycles (2) battery for solar power (3) Lithium battery (4) lead smelter capacity in Middle East and Eastern Europe, (5) expansion of Sri Lanka battery business that will have tax advantage and can export and (6) new greenfield battery plant.

To read the full report: EXIDE INDUSTRIES

>BHARTI AIRTEL: Pricing to ease; rural markets to fuel growth (IIFL)

Bharti Airtel attended IIFL’s conference and was represented by Manik Jhangiani (Group CFO) and Harjeet Kohli (Group Treasurer and IR head) and addressed concerns with regards to the ongoing tariff wars and regulatory challenges facing the industry. Bharti was cautiously optimistic on recovery prospects for the industry and bullish on its own prospects for reasons of reach, scale, low debt levels and brand strength. Key takeaways were:

Tariff wars cannot go on for long, as new entrants are on capex-light and opex-heavy model. Hence, losses will be visible at EBITDA level and increase with volumes—making sustained price aggressiveness very expensive.

Rural subscribers start with 50-100 MoUs a month, but within nine months, reach 70% of the average of 450 minutes. 56% of Bharti's net adds are rural. In rural areas, rate per minute is higher, while real estate costs are lower; tower-sharing helps lower opex, and diesel costs will be replaced by electricity over time. Hence, rural expansion is not such a drag on profitability as is generally presumed.

50% subscribers and a majority of high-ARPU prepaid subscribers have migrated to per-second billing. Hence, fall in rate per minute from migration should be largely over by 4Q. Rural subscribers, and to a small extent, urban subscribers, exhibited elasticity, delivering positive growth in 3Q.

Pricing strategy was determined by associate Singtel's experience through its investment in Telkomsel of Indonesia, one of the most competitive markets in the world. The main learning was that the leader should not match the aggressor, because the aggressor becomes desperate to maintain a rate gap. This is why Bharti’s rate has stayed at 1.2p/second instead of 1p/second.

3G would definitely be positive for Bharti, as bid value will be based on benefits from voice traffic decongestion and data-related upsides. Competitors would need to match Bharti's bid, but without matching payoffs. 3G capex will largely replace 2G capex.

In DTH, EBITDA loss was flat QoQ. Over 120m mobile subscribers form a big captive market, even if only 10% of mobile subscribers convert to DTH. Dish TV broke even at 4m and Bharti is at 2m, with better cost structure. Distribution synergies significant with mobile. 1.5m retail outlets and 10,000 exclusive distributors reaching Bharti DTH to places even Dish TV cannot.

To read the full report: BHARTI AIRTEL


NIM to be 2.6–2.75%: NIM expanded by 30bps QoQ during 3QFY10to 2.82%; adjusting for one-off tax benefit, it was 2.67%. The management expects NIM to be 2.6% for FY10 and improve further to 2.75% in FY11. Part of the margin expansion in FY11 would be driven by improvement in CASA ratio, which the management expects to improve to 46% by end-FY11 from 43% as at end- 3QFY10. The bank is seeing strong growth in savings bank deposits, and expects them to grow by 35%.

IIFL Conference key takeaways

Strong fee income growth: The management expects non-interest income (ex-treasury) growth of 25-30% over the next two years, significantly ahead of the NII growth. The bank has diverse fee income sources, such as cash management, dealer financing, vendor financing and remittances of Indian Army. SBI group now accounts for about 65% of government business, which provides a good source of fee income.

No material increase in employee expenses: Employee expenses rose sharply in 3QFY10 as the bank made provisions for wage revision and pension liability. However, going forward, the management does not expect any significant increase in employee expenses. The bank is likely to recruit about 10,000 employees every year for the next two years, while about 5,000-6,000 employees are expected to retire every year. Average cost of a retiring employee is about 2.5x of an incoming employee’s. Also, all the new hires will be part of defined-contribution pension plan, as against the defined benefit plans for all current employees.

Low NPL coverage a concern: The bank needs to provide an additional Rs32bn to reach NPL coverage of 70% by September 2010 at the current gross NPL level. If NPL level rises, the bank will have to provide more. The bank expects to reach 65% NPL coverage by September 2010 and 70% by March 2011, based on its estimates of NPL slippage and provisions.

To read the full report: SBI