Thursday, March 25, 2010

>Recovery still looks strong (DANSKE MARKETS)

• The recovery in Asia looks increasingly sustainable. Across Asia unemployment is declining, property prices are increasing and manufacturing investments are rebounding sharply on the back of surging exports and industrial activity.

• In addition, growth in Asia has become more broad based with growth momentum currently strongest outside China and Japan. Our 2010 GDP forecast for India, Indonesia, South Korea and Taiwan has been raised, China is largely unchanged, while our forecast for Japan has been revised slightly lower.

• In Asia excluding Japan, GDP growth has overall been stronger than expected and the pace of the recovery is unlikely to ease in Q1 10. However, with the output gap closing fast, GDP growth is expected to gradually slow from Q2 10. In Japan, the recovery so far has been reasonably strong, but growth will slow substantially in Q1 10. However, a double-dip recession is unlikely in Japan.

• Inflationary pressure has started to emerge across Asia and, with the exception of Japan, inflation has increased more than expected. In Q2 and Q3 10, we expect most Asian central banks to start raising their leading interest rates and we expect China to resume its gradual appreciation of CNY in Q2. On the other hand, we cannot rule out further monetary easing in Japan.

To read the full report: RESEARCH ASIA


Crude price upgrade. Macquarie’s oil economist, Jan Stuart, has upgraded the WTI crude oil forecast by 13-18% for 20010E–13E and long-term forecast from US$75/bbl to US$85/bbl.

Upstream companies’ gain. We sharply upgrade our target price for Cairn India by ~15% as it is India’s only crude oil pure-play. We also upgrade ONGC, OIL & RIL by 2-4%. We re-affirm our switch recommendation from ONGC and Cairn India to RIL and OIL.

Stronger fundamentals. Fundamental data have turned and finally show tightening oil supply and demand balances. Inventories are still high. But it now appears that they did fall late last year and that inventories should normalize quite quickly over the course of this year. The driving force toward leaner balances is demand growth in emerging economies. That will become
especially obvious once OECD oil consumption stops falling next quarter.

We also raise our Long Run oil price. We use $85/b WTI as a proxy for long-term cost of incremental supply, after taking a fresh, in-depth look at cost-structures and margins of Canadian oil sands projects.

GRM estimates remain unchanged: Our refining margins estimates remain unaffected by the increase in crude assumptions, since GRMs follow their own demand-supply dynamics, which we believe is improving.

Cairn India to gain the most as it is an oil pure play: We upgrade our target price by ~15%. Our near-term earnings upgrade is slightly less steep though (+13% FY11E & + 10% FY12E) given a slow production ramp-up.

ONGC, OIL positive impact partially offset by subsidy: Although, there is no clear subsidy-sharing mechanism as yet, the government does tend to increase ONGC & OIL’s subsidy burden as oil prices rise. This takes away a bulk of the upside. Hence we believe gains to these companies would be diluted, and hence upgrade ONGC and OIL’s target prices only mildly by 2.5% and 2.0%, respectively.

RIL is not significantly leveraged to crude with only 4% of its turnover coming from crude oil. Nevertheless it is not burdened by subsidies and it is an operationally leveraged business. We upgrade RIL’s target price by 4%.

GAIL and Reliance Industries remain our top sector pick. We believe both are poised to witness a volume and margin expansion. RIL’s upstream KGD6 gas ramp-up is poised to nearly double GAIL’s gas transmission volumes. While GAIL’s petrochemical margins are poised to improve, we believe RIL’s recently doubled refining capacity is well-timed to capitalise on a rebound in gross refining margins.

To read the full report: OIL & GAS


What's changed
The consortium of Reliance Infrastructure (RELI) and Hyundai Constructions, per the Times of India, agreed to 1) buy the existing Bandra-Worli Sea Link for about Rs16.4bn and 2) and extend the sea link by 3.4km to connect to Haji Ali at the cost of Rs19.6bn. The concession agreement is expected to be signed in another two months and RELI will be eligible to collect a toll for the existing link after completion of financial closure of the project.

Sea link acquired; completion of Worli – Haji Ali stretch key; Buy

Our analysis of the project suggests that RELI’s investment in the existing sea link will likely have an equity IRR of about 10%, based on the existing toll structure of Rs50 for one way, 37,500 PCUs daily (as per MSRDC Oct 2, 2009) and debt equity structure of 70:30, compared with our estimate of 15% equity IRR for RELI’s Mumbai and Delhi metro projects. We believe improvement in equity IRR for this project hinges primarily on traffic growth (we estimate that 60,000 PCUs would be required for an equity IRR of 15%) on the back of the completion of the Worli-Haji Ali stretch (expected to take about 48 months for completion), which may provide more tangible benefits to commuters in terms of time saved on using the combined stretch of Bandra-Worli-Haji Ali sea link.

Though we assume the contribution from this project is not material to our SOTP value, we believe news flow on execution of road and metro projects and EPC order book will be key re-rating triggers for the stock. We reiterate our Buy rating on RELI with a 12-m SOTP-based target price of Rs1,370 which implies upside of 34%.

Key risks
1) Delays in commissioning of infrastructure projects under construction;
2) lower-than-expected EPC margins; 3) favorable decision of the court case between RIL-RNR.

To read the full report: RELIANCE INFRASTRUCTURE

>India Pharmaceuticals: Domestic-focused businesses

We maintain our Positive rating for the sector.
We maintain our positive view on domestic formulations sales, but believe the US-market patent cliff may shrink PERs.
Contract research and manufacturing services (CRAMS) is a sustainable business model, in our view.
We prefer PER-based valuations for the companies in the sector.
– We initiate coverage of GlaxoSmithKline Pharmaceuticals (Glaxo), Lupin, and Torrent Pharmaceuticals (Torrent) with 1 (Buy) ratings, and of Biocon with a 4 (Underperform) rating
– We have 1 (Buy) ratings for Sun Pharmaceuticals (Sun), Cadila Healthcare (Cadila), Dishman Pharmaceuticals (Dishman), Divi’s Laboratories (Divi’s), Jubilant Organosys (Jubilant), and Piramal Healthcare (Piramal)
– We have 4 (Underperform) ratings for Cipla and Dr Reddy’s Laboratories (Dr Reddy’s)
– We have 5 (Sell) ratings for Glenmark and Ranbaxy Laboratories (Ranbaxy)

We maintain our positive bias toward companies focusing on the domestic business.
– US generics sales growth looks likely to be hindered by the large number of products due to go off-patent over the next two-to-three years
» The penetration rate for generic drugs in the US rose from 47% for 1999 to 72% for 2009
» Generics continue to gain market share, but increasing competition limits profitability
» Product patents worth in excess of US$28bn are set to expire over the next two years
– European markets are underpenetrated in terms of generics coverage, in our view
– We think the Japan generic market has potential, but is already very competitive
– We expect emerging-market sales to continue to expand at a faster rate than those in other markets
– We forecast domestic-formulation revenue to rise by 12-14% annually over the next three years, and expect the chronic-care segment to be key

To read the full report: INDIAN PHARMACEUTICALS


■ Raising FY11/12E PAT by 6% on new biz; maintain Buy & PO
We have raised FY10E PAT for Exide marginally and PAT of FY11e and FY12e by 6% as we expect additional benefit from (1) increased cost savings from growth in recycling; and (2) introduction of new product lines. However, we maintain our PO at Rs142 as our EPS for FY11E remains unchanged owing to recent issuance of 50mn new equity shares. Our PO is based on (1) P/E of 15x FY11E EPS of Rs8.7; and (2) Rs11/sh as value of investment in ING Vysya Life.

■ Higher recycling amidst rising lead price to sustain margin
EBITDA margin of Exide has gone up by nearly 700bp y-o-y to around 25% in FY10E driven by (1) increase in extent of in-house recycling of old batteries from 28% in FY09 to 45% in FY10E boosted margin by about 400bp; (2) inventory gain boosted margin by 200bp; and (3) increase in product mix in favor of retail sales boosted margin by remaining 100bp.

We expect Exide to sustain its margin going forward driven by (1) further increase in the extent of recycling to 70% by FY12E; and (2) further rise in lead price by 25% in FY12E vs FY10E.

■ New product plans boost growth outlook
Exide aims to launch new products including (1) battery electric bike; and (2) lowcost battery for grabbing unorganized market share. Exide is targeting to increase its share of the commercial vehicle and tractor battery market from around 10%- 15% now to 25% in three years through the introduction of batteries at lower price points. Increased cost savings from in-house re-cycling is likely to help Exide introduce such product. These new products and capacity expansion at a total cost of about Rs6bn by FY12E are likely to help sustain 20%+ sales growth.

To read the full report: EXIDE INDUSTRIES