Tuesday, February 23, 2010


The Indian Finance Minister is going to announce Union Budget 2010-11 on 26th February, 2010. Everyone is as eager to know the India Budget 2010 expectations as the final budget itself. The budget results 2010 are keenly awaited for several reasons.

Some of these are:
1. What measures will be taken up to tame high inflation rate, which has given rise to high prices of primary food articles and has caused fiscal deficit?
2. How a balanced budget will be managed to cope up with rapid economic growth and the stagnancy seen in the below poverty level?

The finance minister has plenty of issues to take into notice in order to come up with an ideal budget plan that meets everyone's expectations. The results will be unfolded in the month of February. But, the expectations from budget 2010 that have come to the notice are vital and play significant role in the pre-budget scenario.

The common men and the corporates are looking for decrease in taxes. The Finance Minister is likely to augment exemption limit of individual taxes to Rs 3 lakh from Rs1.60 lakh for salaried people. Exemption limit for women is expected to be increased from 1.80 lakh to 4 lakh and for senior citizen from Rs 2 lakh to 5 lakh. However, taxes levied on the perks availed by income earners are expected to be restructured on higher level. This arrangement may satisfy junior employees and senior citizens. But, it may not go well with the people belonging to higher position.

Corporate Tax:
A reduction of 30% is expected in the corporate tax. The expectation is found in line with the introduction of Direct Tax Code (DTC) suggesting a 25% rate. The individual rate was lowered by 30% previous year also.

Capital Gains Tax:
As far as the 2010 India Budget expectation in the area of capital gain tax is concerned, finance minister is unlikely to bring any reform in this category of tax. It is predicted to be included under the Direct Tax Code, to be implemented from April 2011.

Re-fixing of Tax Slabs:
As mentioned earlier, the tax slab for women is expected to be revised to 4 lakh and senior citizens to Rs 5 lakh. However, second and third slabs of tax would see significant change.The second tax slab is expected to be augmented from the existing Rs 3 lakh to Rs 1 million to be taxed at 20%. The third slab is likely to be increased from Rs 5 lakh to Rs 25 lakh to be taxed at the rate of 30%. These revisions would act in favor of the reputed advocates as well as the doctors.

Gratuity Limit:
The India Budget 2010 expectations show that significant revision in gratuity limit is also considered. The gratuity limit of the income class is expected to be raised to Rs10 lakh in the budget 2010 from Rs 3.5 lakh. Both the upper as well as middle level executives will benefit a lot, if this revision is brought into effect.Employees are paid gratuities in the government as well as corporate organizations during the time of their retirement. The amount that is dished out as gratuity falls outside the tax regime. If the gratuity limit is enhanced, the employees will surely benefit from it.

Self Assessment Slab:
The self assessment slab for businessmen and professionals is Rs 40 lakh at present. According to expectations, the slab may be revised to Rs 1 crore to lower the burden felt by the business people and professionals

India Budget 2010 speculations suggest that it is not the right time for the government to roll back stimulus packages, despite the fact that GDP growth of the nation in the Q2 (July – September) of the current fiscal stood at 7.9%.However, experts believe that government would withdraw few of the subsidies from the market. The oil companies were aided with the stimulus package to check loss. Government did not allow the Oil companies to raise product costs of kerosene and diesel, which would have forced the common men to pay more. As high prices of diesel and petrol would bear adverse effect on the transport rates of food products, the stimulus packages are expected to continue in the oil industry. However, partial withdrawal of the stimulus aid can be expected in this sector to tackle the situation of increasing fiscal deficit. Nevertheless, stimulus packages from engineering as well as export sectors are expected to be rolled back

Agriculture Sector:
According to India Budget 2010 expectations, the agriculture sector would be the highlight of the session. This sector is likely to receive enormous boost from the government. Finance minister's invitation to the farmers for the pre-budget meet is held to be the main reason behind such speculation.

Infrastructure and Social Sector:
Infrastructure industry is also expected to be the focus of the budget results of 2010. Many believe that development in this sector would account for massive growth in GDP. However, it is unlikely to ease monetary policy to better infrastructure. Interest rate cannot be reduced as well. Railways: According to 2010 budget speculations, the transportation charges for bulk commodities in railway industry are likely to be increased. The turnaround in the economic conditions of India is expected to boost the transport costs of cement, coal, iron ore and steel. Previous year, the Ministry of Railway refrained from raising transportation costs to help sector tackle the scenario of global meltdown. The ministry has not come up with its plan for hikes yet. But, the range can be fixed somewhere between 5 and 10%. If this becomes effective, one would need to pay Rs. 100 to 200 per tonne.

Other Sectors:
While taking into account the India Budget 2010 expectations of various sectors, it was found that the garment industry of India is looking for considerable cut in interest rates in its exports segment. The garment exporters also want the ministry to remove all the confusion faced in the case of excise as well as custom duties. The sector wants major commercial as well as fiscal relief. Similarly, the Indian tea industry is expecting to get an allocation of more than Rs 130 crore, which was granted in the fiscal year 2009-10.


Is the education system ‘over-regulated and under-governed’?

Can the government achieve the goal of universalization of quality education alone?

Is the current trust structure dysfunctional?

Privatization of education…are we there yet?

PPP – can education be the next ‘power’ play?

Can India become a global hub for education?

What needs to change?
  • Reduce hierarchical multiplicity of governing bodies; morph into a quality controller (such as SEBI or TRAI)

  • Encourage private participation via monetary benefits and autonomy to run institutions

  • Institutionalize the ‘dysfunctional structures’

  • Focus on quality and allow ‘profiteering’. Use private participation to increase R&D and further inclusive growth

  • Define PPP models leading to sustainable IRRs for players; hand over management control

  • Incentivize and institutionalize the process to set up foreign universities beyond just allowing 100% FDI in education on paper

To read the full report: EDUCATION SECTOR

>India Edible Oil Outlook 2010 (FITCH RATINGS)

Fitch Ratings has a stable outlook on the Indian edible oil sector in 2010 — in the wake of continuing improvement in demand, driven by India’s growing per capita GDP. Those operators with conservative hedging and inventory policies, strong raw material sourcing arrangements, and geographically dispersed plants (which keep logistical costs optimal), are likely to present stable credit profiles. However, many are entering the branded edible oil segment, where margins will be lower during the entry phase due to the associated sales and marketing expenses. This will also result in higher working capital requirements. Some operators, anticipating higher prices, are believed to have built up inventories — which could constrain liquidity and have an adverse impact during any price decline. Aggressive inventory strategies would remain a rating concern.

The oil seed deficit in the Indian market is likely to continue, with the ongoing shortage in production together with strong demand growth. To meet this increased demand, the government has reduced duties on crude edible oils, a process which Fitch believes is likely to continue. The agency believes that the higher duties on refined oils (in the range of 7.3% to 7.75%) relative to crude oil (nil import duties) will continue to support the margins of edible oil refiners.

With a shift in consumption patterns in India towards the relatively cheaper palm oil, many larger operators are increasingly shifting their focus towards palm oils. Fitch expects that the larger entities such as KS Oils Limited (KSO, ‘BBB+(ind)’/Stable/‘F2+(ind)’) will eventually have the flexible capacity to process both palm and soya oils which, together with mustard oil, accounts for around 70% of Indian edible oil consumption.

With the increased consumption of palm oil, some companies like KSO and Ruchi Soya Ltd have plans to set up palm plantations in South‐East Asia, for backward integration. Although this exposes them to execution risk during the implementation phase, this should on completion support margin stability for these

Fitch expects tightly balanced global demand/supply dynamics for palm oil, as incremental production is expected to be lower than demand growth — with prices likely to remain at current levels (in the region of USD700/tonne). With other edible oils typically moving in tandem, Fitch expects the prices of other key oils
like soya and mustard to also remain firm.

Integrated players which are present primarily in smaller oils like mustard, ground nuts, coconut, and, to a lesser extent, soya, will continue to exhibit relatively stable margins. With the relative shortage of mustard seed production during Q110, mustard seed prices have remained firm — which Fitch expects to continue over 2010. The agency believes that for larger players, this additional cost could be partly offset by an increased proportion of higher‐margin branded products and growing demand.

Stable Credit Profiles
Fitch expects revenue growth across the industry. Although increased branded sales from large companies could lead to wider margins, the positive impact could be partly offset by the corresponding higher inventory and receivables due to the Market sources indicate that there could be an increase in inventory levels across
the sector in anticipation of further price increases; although, as these inventories are sold during the year to meet demand, they could revert to “normal” levels during 2010. Commodity and currency hedging policies remain critical given the previous volatility. The industry has traditionally required substantial investments
in working capital; although with the expectation of stable prices and strong demand growth, further liquidity pressures appear unlikely — barring any sharp build‐ups in inventory in expectation of future price movements. Fitch expects any negative surprises to primarily come from working capital fluctuations.

The agency also notes that large players like KSO, Ruchi Soya and Liberty Oil Mills (‘BBB‐(ind)’/Stable/‘F3’) have either recently completed — or are expanding — their refining capacity in order to meet the growing demand. However, the impact on credit profiles would depend on the relative scale of these expansions and
funding patterns. KSO has funded a large part of its expansions using equity infusions, and has completed its entire domestic refining capacity expansion in the third quarter of financial year 2010 (Q3FY10).

With players like Ruchi Soya and KSO investing in backward integration in palm plantations, Fitch expects a substantial rise in the share of palm oil in Indian consumption. On completion of these initiatives over the medium‐term, Fitch expects these companies to benefit from the added margins, as well as higher resilience to any future price volatility. However, in the interim, they remain exposed to execution risk to an extent.

Global Palm Oil Production
Market estimates indicate Malaysian crude palm oil (CPO) production in 2010 at similar levels as 2009, in the region of 17–18 million tonnes (mt), although adverse weather conditions like El Nino could curtail production in H210. Furthermore, the Malaysian government‐backed replanting programme could further lower production by up to 0.5mt in 2010. Yet, with the palm trees recovering from bad weather, yields are expected to improve in 2010.

In Indonesia, CPO production is expected to be marginally higher than in 2009 (around 20mt). However, with global palm oil demand rising faster than supply — primarily driven by India and China, which have significant edible oil deficits — palm oil prices are likely to remain firm in 2010. Palm oil prices have been rangebound at between MYR2,200 and MYR2,600 since mid‐2009. However, seasonal variations will continue, eg in H210 during the soya harvest season. Fitch notes that soya and palm oil prices have traditionally moved in tandem, with soya trading at a premium to palm.

Raw Material Dynamics
Indian oil seed production is expected to remain largely stable during 2010 for key oil seeds such as mustard and soya. Whilst mustard seed production could be slightly lower than in 2009, demand growth has driven mustard prices substantially higher. Fitch believes that the bulk of the impact will be felt by the unbranded segment, which may find it challenging to pass on the price increases to consumers — in light of the relatively lower palm oil prices. However, branded players will retain a cushion due to brand premiums.

Industry estimates indicate that the soya crop is likely to marginally grow from 2009’s levels, although prices should remain the same. Many firms are preferring to refine crude soya oil rather than using their soya crushing capacity due to the nil import duties on crude soya oil. This would continue as long as there is no change in the current duty structure.

To read the full report: EDIBLE OIL

>Big Fiscal Deficits (CITI)

Unsustainable — Some countries’ fiscal positions are now unsustainable. Greece is the most worrisome. But government balance sheets in Portugal, Spain, Ireland and the UK also look problematic. Most Emerging Markets (EM) fiscal positions are strong by comparison.

Global Contagion — There should continue to be some contagion stemming from sovereign credit concerns. However, it is unlikely to be severe enough to drive a double-dip. Cheap valuations should limit the impact on global equities.

Local Resolution — There are a number of resolutions for big fiscal deficits. Some are positive for equities, others are not. Equity investors should tilt away from areas where fiscal issues are most acute until the problems are seriously addressed.

Easy Money For Longer — Sovereign credit concerns may dampen the recovery and are delaying the withdrawal of cheap money. We think Emerging Markets will benefit. EM governments have strong balance sheets and EM companies provide solid growth.

To read the full report: FISCAL DEFICITS


Automotive Axles (AAL) is well placed to benefit from the ongoing recovery in medium and heavy commercial vehicles (MHCV). AAL belongs to the Kalyani Group and has a technological edge given its strong parentage (36% holding by Meritor HVS, USA). AAL is India’s largest independent manufacturer of rear drive axle assemblies and its top clients include Ashok Leyland and Tata Motors. AAL has emerged well out of the recent downturn and with MHCV demand remaining buoyant we expect FY09-12E revenues to grow at 40% CAGR. Margin expansion coupled with lower interest costs are set to drive a strong 81% earnings CAGR. Our target price of Rs478 offers 40% upside and is based on a 5-year average trading PE multiple of 15.8x 1-year forward earnings. Initiate coverage with a BUY.

Domestic truck sales surging ahead
Medium and heavy commercial vehicles (MHCV) are witnessing a strong rebound led by recovery in industrial growth and improvement in availability of vehicle financing. Outlook on MHCV demand in FY11 remains positive on the back of strong economic growth and robust demand for goods movement led by industrial sector – our Economics Team pegs FY11 GDP industry growth rate at 8.5% (cf. 8.2% in FY10). While we expect FY11 growth rates to moderate to 15% (from 25% in FY10E), in absolute terms, unit sales (at 290K) will be almost at par with earlier peak cycle (296K) levels.

Market leader in the axle segment
Automotive Axles (AAL), a market leader in the independent rear drive axle assemblies market, is thus well placed to benefit from increased MHCV demand. AAL’s product portfolio consists mainly of higher margin axle assemblies, while it also manufactures axle housings. While AAL’s largest client remains Ashok Leyland, over the years it has raised supplies to Tata Motors (from 10% of sales in 2003 to 20% currently) and gained
new customers like Asia Motor Works. AAL continues to expand its client base and is now targeting Man Force Trucks and Eicher-Volvo as new clients.

Valuations remain attractive
With MHCV demand in top gear, we expect AAL’s capacity utilization to improve from 20-35% in FY09 closer to 60-75%, driving a robust 40% revenue CAGR over FY09-12E. Margin expansion, coupled with lower interest costs should drive our forecasted 81% earnings CAGR over the same period. Cash generation is set to rise, driving gearing to lower levels and given AAL’s high dividend payout (50% in FY09) we expect sharp improvement in capital efficiencies. Stock trades at 14x adj-Mar-11 earnings (16x FY10E Sept-year-end) and we base our target price of Rs478 on a 5-year average PE multiple of 15.8x on FY11 (adj) earnings. Initiate coverage with a BUY.

Safehaven: The Announcement of the I.M.F. Sale of 191.3 tonnes of Gold - What does it really mean? (Source)

When India announced its purchase of 200 tonnes, it added a statement that it may buy more of the I.M.F. gold. This implied that it was limited by the I.M.F to 200 tonnes. But the I.M.F. never said that. Rather it said it would announce the sale of any other portion of their gold to the public. It has been several months since another sale has taken place. Now with this announcement, we are given the impression that central banks have not come forward to buy and are not buyers. Talk about 'spin’! China for sure would not buy if an announcement were to be made. It would rather buy once the gold were sold in the open market, for it could buy through its chosen bullion bank or bullion banks and do so, under the radar. In fairness to the I.M.F. we have to say that they have said they are open to central banks buying direct from them still, and will announce such sales. But you must realize that any further sales through the 'open' market will be done anonymously. This levels the playing field. However, all we will now hear is the completion of such sales. If the I.M.F. decides to sell 4 tonnes a week, we will hear about it through the E.C.B. website in tonnage terms but with no further details. Will we hear of a 100 tonne sale done this way? Unlikely, but possible! The market first reacted by fearing a dumping of this amount of gold, but once it gathered itself together, realized that it could as well be bullish for the gold price. After all 191 tonnes is an amount that the gold market does not see often, so a big buyer in the wings, finding that for one price can get a good lump might well come and bid for it. Will the I.M.F. offer the amount to the market or drip feed it? No one knows. Will they say to the market there is 191.3 tonnes on offer, we don't know. They can now play the game as they choose. If they want to sell the gold quickly, it is incumbent upon them to accept a bid for the entire amount, but rarely is life so straightforward, these days. The waters are now muddied! The reality is that there is the demand for such amounts in one sale. But the real question is, "do the I.M.F. want to sell it in one go?" We now have to wait and see. The impact on the gold price, whichever way it goes is clear.

Money Game: China Announces Even Tighter Restrictions On Loan Growth (Source)
The China Banking Regulatory Commission (CBRC) issued a new post on their website Saturday explaining new regulations aimed at tightening both personal and working capital business loans. Banks must set a lending quota after "prudent calculation" of borrowers' "actual demand" and must not lend excessively, Banks are also required to improve risk control after granting loans and to be aware of factors that might influence the repaying capabilities of borrowers through inspections and monitoring. For personal lending, the CBRC asked banks to be more sophisticated in the management of the lending process, especially on the use of the loans, according to the regulation. Borrowers will not be able to obtain loans without declaration of a specific use, and they should meet bank representatives in person to avoid false claims, according to the CBRC.These new regulations actually went in effect on February 12th, despite the Saturday web site release. It seems the regulator is trying to explain themselves further, or was just slow.

To read the full report: AAL