Wednesday, March 24, 2010

>False and real risks for the Chinese economy (NATIXIS)

We often see completely mistaken analyses concerning China:
− inflationary risk: despite rapid monetary creation, this can be ruled out given the situation of excess production capacity and the savings glut;

− risk of a banking crisis as a result of massive lending in 2009: granted, the levels of non-performing loans have increased, but it would be very easy for the Chinese government to recapitalise the banks (something they are doing for the time being in the markets);

− risk of speculative bubbles as a result of the excessively expansionary monetary policy being conducted, which is due to the exchange-rate regime: the central bank is controlling these bubbles by using instruments other than interest rates: credit caps, statutory reserve ratios;

− risk of a slowdown in growth resulting from monetary policy tightening: this risk is nonexistent, first due to the political will to create jobs, and second because private companies and households receive hardly any of the bank loans granted (which above all are used to finance state-owned companies and local authorities).

The two most serious dangers are in reality:
− the Chinese authorities’ inability to reduce the household savings rate and under-consumption;
− the shortfall in certain natural resources, in particular water.

To read the full report: RISKS


• The Indian healthcare industry is estimated to double in value by 2012 and more than quadruple by 20171. The main factors propelling this growth are rising income levels, changing demographics and illness profiles, with a shift from chronic to lifestyle diseases. This is likely to result in considerable infrastructure challenges and opportunities.

• There is growing appreciation for the role private involvement may have in meeting public demand, and government are looking into the use of PPP models to help improve infrastructure and healthcare provision. The government is also exploring setting up state funded healthcare insurance schemes to support healthcare delivery for the poorer sections of the population. For investment to be effective, the provision of healthcare infrastructure and insurance should be strategically coordinated.

• Unlike in developed markets, where there is a focus on generating specialized healthcare facilities and innovations to drive improvements in health services, the Indian healthcare delivery model (including use of PPP) has to date only had success in the provision of more healthcare services in relatively small segments. The challenge remains to develop scalable and sustainable healthcare delivery models to deal with India’s diversity and changing socio-economic population profiles. The major innovation in Indian healthcare delivery models needs to be focused on developing and delivering low cost, affordable, basic healthcare services.

Model Outputs
• Based on the outputs of our econometric model expenditure on healthcare infrastructure across the Indian states is projected to grow by an average of 5.8 percent per annum between 2009 and 2013, taking the total expenditure in 2013 to US$14.2 billion

• Of the 32 states considered, the six states of Maharashtra, Rajasthan, West Bengal, Uttar Pradesh, Tamil Nadu and Andra Pradesh are forecast to represent approximately 50 percent of the expenditures for the 2009-2013 period

• Of the larger states, expenditure on healthcare infrastructure is expected to grow the fastest in Krintala, Rajasthan, and West Bengal.

To read the full report: HEALTHCARE TRENDS

>INDIA AIRLINES: Strong traffic growth (MERRILL LYNCH)

■ On track to clock highest annual traffic
Indian airline passenger traffic at 3.91 mn for Feb represented 15.7% YoY growth, broadly in line with our expectations. Industry, however, witnessed sequential decline of 5% mainly due to seasonality. Airline seat factors were largely unchanged. Indian aviation sector is set to clock the highest annual traffic for FY10 and may marginally beat our BofA-ML FY10 estimate of 45.4mn passenger. We see upside to traffic forecasts from existing 15% over FY10-12, which should partially offset cost pressures related to customs &excise duty hike and new service tax imposed on the air travel.

■ Jet leads charge; gains share
Jet (including Jetlite) increased dominance adding 1% share. While legacy carriers like Jet and Kingfisher gained market share, surprisingly low-cost carriers including Indigo lost market share along with the NACIL.

■ Demand supply growth rates remain favorable
During the month, supply (ASKMs) increased ~10% YoY while demand (RPKMs) increased ~16% YoY. We expect industry traffic to register secular growth of 15% annually, exceeding expected increase in supply (8-10% CAGR).

■ Rising oil prices could delay turnaround
Jet Kero prices have already witnessed an increase of 14% over last one month.
Further strengthening in crude will have adverse impact on profitability of airline companies. Each 1% increase in the fuel prices would negatively affect FY11 EBITDAR by ~2%.

To read the full report: INDIA AIRLINES

>The end of nuclear apartheid (CLSA)

India’s nuclear power capacity at 4GW (3% share) was constrained by poor uranium reserves. With NSG (Nuclear Suppliers Group) waiver in Sep-08, which allows import of uranium and equipment, India’s nuclear power plan is set to take off. 6GW is in construction and another 10- 12GW will be added by 2020. New capacity adds are targeted to double in the following decade to 28-41GW. Like China, India is targeting technology transfer, local manufacturing and potentially exports. BHEL, L&T, NTPC, Areva, Toshiba and Paladin are the likely beneficiaries.

The end of nuclear apartheid sets the stage for strong growth
Following its first nuclear test explosion in 1974, India was banned from trading in nuclear materials by the NSG. Given its poor quantity and quality of uranium resources this hampered India’s nuclear plans.

In September 2008, the NSG adopted an exemption for nuclear exports to India, making it the first such country that has not signed the Non-Proliferation Treaty.

Since then, India’s nuclear power capacity has taken off. It currently has ten nuclear reactors with total capacity of 5,960MW under construction.

India has also signed nuclear-trade arrangements with a number of countries, including France, USA, UK, Kazakhstan, Canada, Russia and others.

Ambitious but achievable goals
To achieve India’s target of 20-22GW nuclear power capacity by 2020, construction of 10GW should start in next 4-5 years which could be easily achieved/exceeded.

Government targets nuclear’s share in total energy at 8.6% by 2032 and 16.6% by 2052. The capacity addition is targeted to double in the decade ending 2030. India will be the second largest installer of nuclear power equipment globally, after China.

India’s government has identified a number of future projects, with in-principle approvals for many of the project sites already been granted.

Key beneficiaries – BHEL, L&T, NTPC, Areva, Toshiba and Paladin
BHEL and L&T have experience in building nuclear power plants in India and would be the key suppliers for 40% of capacity added till 2020, based on domestic technology.

The technology for remaining 60% would come from global players. Like China, India has stressed on local manufacturing and technology transfer for these reactors. NPCIL, BHEL and L&T will likely partner with foreign players for this.

Areva, Toshiba-Westinghouse, GE-Hitachi, MHI and KEPCO are the contestants for future supplies to India. We believe Areva and Toshiba are the likely winners.

NTPC and Nalco are likely to participate via JV with NPCIL, accelerating capacity addition. Paladin Energy will benefit from rapid growth in India’s uranium imports.

To read the full report: NUCLEAR POWER


We spoke to management of Jindal Saw Limited (JSAW) to get an update on the business. We remain confident that JSAW will be able to grow its order book as the demand outlook is improving. Rajasthan iron ore mines are likely to get environmental clearance by 10 April. We believe these mines can add more than 20% to our valuations. Adjusting for investments, JSAW is trading at a modest 6.0x FY12E PER.

Iron ore mines provide 20% upside potential to our valuations. JSAW has received approval from the government for mining of two iron ore mines in Rajasthan. As per a third-party appraisal report, these mines have iron ore resources of 129m tonnes (avg Fe content 30%). Even after factoring in higher cost and low Fe content, we believe these resources have a value of
US$250m based on NPV.

Land acquisition will be a key catalyst. JSAW plans to start beneficiation of mine by August 2010, if it receives the environmental clearance. The block is on the non-forest land; hence, forest clearance should be easier. We think the biggest challenge will be the acquisition of land, as the area covers 71,590 households. We do not believe the market is ascribing any value to these resources, which can change if the project gets these statutory clearances.

Welded pipe order book set to improve: The pipe orders from the MENA region have picked up, as is evident from some of the recent orders. Pipe orders from Iraq, which were held up due to the election, will now be awarded. GAIL’s tenders for three new pipelines have been delayed, and orders are now expected to be awarded in June quarter. We expect JSAW to maintain the order backlog in the current quarter and grow it significantly over the next six months.

DI strong, seamless improving. Order flows in the DI pipe segment remain strong. JSAW is currently making a margin of US$225/t, and the company is confident of being able to raise prices to pass through coal and iron ore prices. Seamless pipe demand is improving, but large orders will likely take a further three to six months to materialise.

Earnings and target price revision
No change.

Price catalyst
12-month price target: Rs242.00 based on a Sum of Parts methodology.
Catalyst: i) New orders and ii) timely commissioning of new facilities

Action and recommendation
Upside risk to our earnings estimates. Management is guiding for production of 850–900k tonnes and a margin of Rs10,000/t in FY11E. Our estimates for production and margins are 8–12% and 5% lower, respectively.
Our SOTP-based target price of Rs242 includes Rs208 (14x FY11E PER) for the pipe business and Rs34 (70% discount to market value) for investments.

To read the full report: NUCLEAR POWER