Monday, March 15, 2010

>GREED & FEAR: Housing and samba (CLSA)

The Greek bullet has been dodged for a while with a suspiciously easy sale of €5bn worth of 10-
year Greek bonds last week at a yield of 6.25%. So suspiciously easy in the sense that the Greeks are now reportedly rushing to sell another €10bn worth of Greek bonds.

The buyers would seem to be European state related banks adopting a buy and hold strategy. At least that is what is suggested by the apparent lack of trading in the recently sold bonds and by the apparent banning of hedge funds from the sovereign bond sale. GREED & fear has no idea whether implicit promises of government guarantees have been made or not by the most relevant government. But the suspicion lingers. Meanwhile, GREED & fear is convinced that the last has not been heard of Greece’s fiscal problems or those of the related PIIGS. Investors for now should assume continuing weakness of the euro against the US dollar.

Hopes are rising again for the cyclical prospects for the American economy. GREED & fear
refers to the improving capex picture mentioned here last week (see GREED & fear - Temporary fudges, 4 March 2010). Then there are the markets’ hopes for better jobs data next month given the better than expected data announced last week in the context of a weather affected month. Thus, US nonfarm payrolls fell by 36,000 in February, compared with the expected losses of 68,000 jobs (see Figure 2). The consensus is now expecting about 300,000 new jobs generated in March. Finally, US consumer credit rose by US$5bn in January. This is the first such month-on-month gain in twelve months.

If all this indicates improving cyclical prospects, and therefore the potential for a renewed pick up in Fed tightening expectations, GREED & fear would also like to draw attention to the continued fundamental sickness of the all important US housing market; most particularly when federal government support actions are taken out of the equation. The fundamental weakness of housing can be seen in the continuing rising tide of mortgage delinquencies and foreclosures. Thus, US residential mortgages 90 days or more past due rose from 4.38% of all mortgage loans in 3Q09 to a record 5.09% in 4Q09, according to the Mortgage Bankers Association. While foreclosure inventory increased from 4.47% to a record 4.58% of outstanding mortgages over the same period (see Figure 4). The weak state of housing can also be seen in the collapse in the shelter component of the core CPI which captures the falling trend in rents. Thus, the shelter CPI index fell by 0.5% MoM and 0.1% YoY in January (see Figure 5). This is the biggest month-on-month decline in shelter costs since December 1982 and the first year-on-year drop since the data series began in 1953.

To read the full report: GREED & FEAR

>Investors Continue to Favor Developed Market Equities (CITI)

US$4b of new money taken in by Global/International funds in past three weeks — In particular, inflows last week were up 69% WoW to US$2.2b. This has been the second largest in history after some US$2.8b received in the first week of February 2006. Year-to-date, Global funds have taken in US$5.5b of fresh money, the biggest of all equity fund groups and compares to US$2b for Japan funds in 2nd place. That said, the latter is the category that has seen the most sustainable inflows YTD.

Inflows to global emerging market equities lagging — Dragged by the redemption from GEM funds, net inflows to all dedicated emerging market equity funds fell 74% WoW to US$239m in the week ended last Wednesday. Nevertheless, flows to regional dedicated Asian funds, Latin American as well as EMEA funds remained positive. Relative to AUM, inflows to EMEA funds were three times of Asian and LatAm fund inflows individually.

Asian fund inflows at US$170m last week, the biggest since February — The resumption of inflows was skewed towards 3 out of 13 fund types with investment in the Asia ex Japan region, namely Greater China regional funds, India and Korea country funds (see Figure 1). Indeed, foreign net purchases of equities in these two countries rose to US$2.1b in the past three weeks vs. net sell of US$3.3b in the three weeks prior to Chinese New Year.

To read the full report: FUN WITH FLOWS

>The companies, which have paid their Q4 advance tax, are as follows

The corporate India has announced their January-March quarter advance tax payment numbers. Advance tax is paid in four installments in June, September, December and March, and is based on taxpayers' projected income, giving an indication of company's performance in coming months.

To read the full report: ADVANCE TAX


Indian growth has recovered well, led by the industry, services

Investment too showing signs of recovery

Weak global cues, tightening, equity supply = choppy 1H

Valuations near mean; upgrades from 2H10 to drive market

Sensex target of 17% to year-end; add into any 1Q weakness

Overweight - Industrials, IT, materials

Underweight - Autos, energy, utilities and consumer staples

Recovery visible . . . but pause in earnings upgrades

Car sales at 34% YoY, IIP consumer durables up 45%.

14/17 components of IIP positive, vs. 5/17 in Dec 09

Net hires of 0.5m in Jul-Sep 09, vs. 0.13m jobs lost in Apr-Jun

Sensex FY11CL EPS up 17% from low, but flat since Sep 09

Upgrades > downgrades, but oil & gas, banks, telcos are drags

Investment upturn, global recovery key to upgrade cycle.

To read the full report: INVESTMENT STRATEGY

>IndIan Food ProcessIng Industry (KREDENT FINANCE)

Extend green revolution to the eastern region of the country at an outlay of Rs. 400cr.
Organize 60,000 "pulses and oil seed villages" in rain-fed areas during 2010-11
Grant of Rs 300cr. for pulses and oilseeds through Ashtray Kristi Visas Yolanda
Allocation of Rs 200cr. for launching climate resilient agriculture initiative focusing on soil health, water conservation and preservation of biodiversity
For reducing wastage, private sector participation for hiring god owns by Food Corporation of India increased from 5 years to 7 years
Provide impetus to the development of food processing sector by providing state-of-the art
Set up five more mega food parks in 2010-11
Agriculture seeds get service tax exemption
Nutrient based fertilizer pricing from 1st April 2010
Availability of credit to farmers increased from Rs 325,000cr. In the current year to Rs 375,000cr.

In 2010-11
Farm loan repayment schedule extended by 6 months from December 31, 2009 to June 30, 2010
Transportation of cereals and pulses by road to be exempted from service tax
Concessional import duty to specified machinery for use in the plantation sector to be extended up to March 31, 2011 along with a Counter Veiling Duty exemption
Availability of External Commercial Borrowings for cold storage or cold room facility All this strategy will help in promoting inclusive growth, enhancing rural incomes and sustaining food security in the country.

To read the full report: FOOD PROCESSING INDUSTRY

>BANKING: Cherry-picking key to outsized returns (CENTRUM)

We believe a combination of defensive bets within the sector and a strategy that would call for reduction in betas would be stocks to bet heavily on within the Indian financial sector. Banking stocks with lower C/D ratios, adequate capitalization (not exceeding 11% in Tier I) and better resource franchise will likely be better positioned to deliver superior returns. With this, our preferred picks within our universe are Bank of Baroda (BoB), HDFC Bank, Indian Bank, Federal Bank and South Indian Bank. Axis Bank, Indian Overseas Bank (IOB) and Bank of India (BoI) continue to be high conviction Sells.

Cherry-picking on margin strength…: A bank’s margin strength can be determined from a
combination of its liability franchise and composition of its asset franchise. With credit offtake showing signs of growth in spurts, franchise quality holds the key.

…and lower C/D ratios: We believe banks with higher C/D ratios may either need to cut back or witness a capping of opportunity for margin augmentation. Further, in an environment of lower pricing power, banks with better liquidity would be better equipped to tap the resurgence.

Asset quality to be watched closely: While certain banks would surprise positively in terms of NPL recoveries, this space needs to be watched closely. Within our banking universe, Indian Bank and IOB currently have the highest restructuring ratios and we reckon, with the improving macro-economic picture, the former should surprise positively, given its fundamental strength. Indian Bank’s current estimates do not factor in this upside.

Change of guard … now at PSU banks: We would see change of guard at several PSU banks in 2010. Management quality will likely become a key focus theme across the financial services space and a likely driver for valuations.

To read the full report: BANKING UPDATE



CLSA organised investors meetings in USA with the senior management team of HDFC (Deepak Parekh, Chairman; Keki Mistry, Vice Chairman and CEO and Ms Renu Karnad, MD). Our interaction with the management backs our view that competitive environment has improved in recent months as PSU banks are facing difficulties in delivering on turnaround time. Our interesting notes from management were:

PSU banks facing backlog: The demand for mortgages has been very strong and supported by cut in interest rates and real estate prices. While aggressive cut in rates helped PSU banks to gain market share in 2009, they are now facing significant backlog of applications that has increased their turnaround time to 3-4 weeks compared to that of 10 days for HDFC.

HDFC to gain market share as teaser rates are withdrawn: Management believes that most banks have either withdrawn or will shortly withdraw teaser rate schemes. This will help HDFC to gain market share, especially due to its better service standards and faster turnaround time.

Teaser rates were spread accretive: Management highlighted that its limited offering of fixed rate mortgage loans (8.25% fixed for 2 years) generated higher spreads, in spite of lower yields. The scheme was funded by low cost borrowings leading to spread of ~2.4% compared to overall spreads of 2.25% in 3QFY10.

Loan growth at +20%; RoE will improve 1% every year: Management reiterated its target of 20% annualised loan growth over the next 3-5 years, as its benefits from a growing market. Focus on asset quality and cost controls will help HDFC in improving RoE by 100bps annually.

Subsidiaries scaling-up well: Management expects 175% YoY growth in general insurance and believes that profitability of life insurance business is ‘comfortably’ in line with analysts’ expectations.

Value unlocking likely: Management expects that listing of HDFC Standard Life in next 12 months and transfer of strategic stakes in non subsidiaries and associate companies to a separate company will help HDFC group in unlocking value from investments made over the past 8-10 years

New business initiatives: HDFC may deploy the funds raised through listing of life insurance business either to fund the foray into the education business and financing of education loans or increase dividend payouts.

To read the full report: HDFC