Friday, March 26, 2010

>Emerging countries: a multispeed recovery

Drawn into the same depressive spiral as the developed economies in fall-winter 2008-09, the
emerging economies(1) recovered more quickly and robustly. As of Q2 2009, real GDP growth rates had returned to about 10% qoq annualised. The ones of advanced economies did not return in positive territory until Q3 2009, with real GDP growth rates of less than 2%.

Within the emerging economies, Asian countries have already completed the catch-up phase. With the exception of Argentina and Venezuela, Latin American countries are about to follow in the second half of 2010. Eastern Europe will probably continue to lag behind, hampered by sluggish growth in Western Europe coupled with financial instability within the Euro Zone since the beginning of the year.

Looking beyond these divergent paths, it is worth asking whether the emerging regions, including Asia, have the capacity to fuel world growth over the long term if the recovery were to falter in the main advanced economies.

In this overview, we will first examine the cyclical situation and prospects of the emerging countries (Part I), before reviewing the main risk factors for our central scenario for these countries (Part II). In a future issue of Conjuncture, we will look at the preliminary lessons that
can be drawn from the impact of the crisis on country risk.

Cyclical situation and prospects for the emerging countries

Still driven by Asia, the recovery is consolidating

Since spring 2009, trends in the emerging countries have begun to decouple again from those
in the developed countries. The emerging countries returned to growth rates of over 10% qoq annualised as of Q2 2009, while the developed countries did not begin to recover until Q3, with growth rates of less than 2% (see Table 1).

Based on partial data, industrial growth slowed in Q4 2009, as was to be expected after the strong rebound in Q2 and Q3, although the growth differential was maintained between the emerging and developed countries. At year-end 2009, industrial production in the advanced countries was still 14% below spring 2008 levels, whereas even excluding China, production had declined only 3% in the emerging countries (see Chart 1). In early 2010, Asia is the only region that is no longer formally in a catch-up phase (see Chart 2). Catch-up phases are likely to last through mid 2010 in Latin America, and at best through the end of 2010 or early 2011 in Eastern Europe.

To read the full report: MULTISPEED RECOVERY

>CEMENT SECTOR: Feb volumes grow 4.9% YoY, utilisation at 80% (ICICI DIRECT)

In February 2010, all-India cement dispatches (including ACC and Ambuja) reported a growth of 4.9% YoY at 16.8 million tonnes (MT). The dispatches have grown by 10.4% YoY in YTDFY10. The northern and western regions have posted YoY growth of 12.3% and 11.6%, respectively, (adjusted for ACC and Ambuja). The central region reported 4.8% YoY growth while the southern and eastern region reported negative growth of 1.1% YoY and 0.5% YoY, respectively.

On an MoM basis, all-India dispatches growth has declined by 7.6%. The eastern and northern region reported 12.2% and 9.1% decline in dispatches, respectively. The western and southern region reported decline of 7.9% and 6.4%, respectively, while the central region reported a 6.9% decline in dispatches.

The all-India capacity utilisation declined to 80% in February ‘10 from 87% in January ‘10 and 90% in February ‘09. Northern and eastern regions saw highest fall in utilisation in February ‘10 to 89.5% and 78.7% from the January ‘10 utilisation rates of 98.5% and 90.5%, respectively. Central region’s utilisation rate has fallen to 107.6% in February ‘10 from 115.6% in January ‘10. Southern and western region’s utilisation rates stood at 66.5% and 87%, respectively.

JP Associates reported impressive dispatch growth of 57% on account of capacity expansion. Southern region players, Dalmia Cement, India Cement and Madras Cement have shown dispatch growth of 28.1%, 23.3% and 27.6%, respectively. Ambuja and UltraTech’s dispatches were up 2.5% and 8%, respectively, while ACC reported negative YoY growth of 2.3%.


With ~42 MT of capacity addition across India during April-February FY10, all-India average cement prices have declined by ~3% during the same period. Moreover, capacity of ~42 MTPA is expected by the end of FY12 across all regions. We believe it will pull down capacity utilisation
rates and put further pressure on pricing. We expect the all-India utilisation rate to drop to ~83% in FY11E from the FY10E rate of 90%. We prefer northern and central region players on account of better pricing outlook compared to other regions. These regions have been enjoying firm pricing on the back of continuous strong consumption growth, driven by infrastructure spending by the government and demand from rural and semi-urban housing.

To read the full report: CEMENT SECTOR

>SATYAM COMPUTERS: Up on its feet and running (BNP PARIBAS)

■ Retain BUY. Increased confidence in thesis after recent checks.

■ Deal wins still largely of small sizes, but momentum improving.

■ Attrition in check, hiring picking up, margins likely back on track.

■ DCF-TP of INR130.00. Risky, but compelling turnaround story.

Higher confidence after checks
Our latest round of checks on Satyam gives us increased confidence in our FY10 USD1.1b standalone revenue estimate and our thesis that the company should approach industry average growth and profitability by FY11. Since our last update, we believe that the business has improved, especially from February, partly due to an industry-wide revival. Apart from the recent wins such as the USD48m, deal from KMD and business from South Africa, Brazil and the Middle East, we believe Satyam continues to win short tenure projects, mostly from existing customers. In fact, the deal advisory firm, TPI lists Satyam among only a handful of Indian players that have won 10 or more contracts each greater than USD25m in 2009. The lack of audited financials remains an impediment to winning more large projects, which should change after June, in our view, when the company releases its FY09-10 results.

Operations now at a likely more “normal” level
1) We believe pricing continues to be at industry average levels because of the smaller sized projects that Satyam is working on, where it may have faced limited competition. 2) We believe attrition levels have subsided after the salary hikes in January and after news of another
round planned in April. 3) At its current headcount of a likely 22-23k (25- 26k incl. subsidiaries), Satyam appears well staffed and is possibly operates at a healthy utilization of over 70%. We believe therefore that it is well placed to improve its margins by our expected 9.3ppts in FY11. 4) We also believe Satyam has started hiring aggressively for about 2,000 positions in response to an increased pipeline, in our view. Our revised numbers are largely unchanged, but reflect higher utilization rates offset by higher wages (to retain talent), higher SG&A and a stronger USD/INR.

Risky, but investment case difficult to ignore
We acknowledge the risks that Satyam presents given the lack of audited financials and the near-term overhang of L&T likely selling its stake. However, we believe Satyam still makes for a compelling turnaround story and that the audited results could reflect a better picture than investors fear. We believe an eventual merger with Tech Mahindra would be synergistic and could re-rate both the stocks ahead of the event. We also estimate Satyam has about USD700m or 28% of its market cap in cash that it can use strategically. Finally, large cap IT stocks have rallied 14-19% from their YTD lows, while Satyam is up only 3%, hence presents a case for a catch-up. Retain BUY.

To read the full report: SATYAM COMPUTERS

>TELECOM SECTOR: More stability now, but risks remain (NOMURA)

■ Little noise on competition, but worst may not be over yet
From our recent meetings with operators, regulators and investors in India last week, we believe the operating environment and sentiment are relatively more upbeat. There have been no recent launches and no one player is leading on price. A new issue is that the Department of Telecommunications is requiring approval on all equipment purchases, forcing some new players to delay circle launches.

Rising optimism on 3G auctions
3G auctions are scheduled for early April, and the consensus seems to be “it will happen this time”. Prices are uncertain, but we expect most carriers will bid – even the new operators may bid selectively. There is expectation it could lead to another round of price wars or carriers moving to “bucket-plan” models given the excess capacity generated. We expect limited incremental data growth in the near term.

Amendments to M&A norms likely
We understand from discussions with TRAI that some amendment to the M&A norm could be announced this month. Various criteria are being reviewed –– a 40% limit to market share and a 15Mhz cap on spectrum per circle could remain. Amendments will likely be perceived positively, but any near-term consolidation is unlikely. Our talks with various carriers suggest there are now more buyers than sellers. New operators like Uninor are bullish on their growth prospects. Besides,
we believe their valuations are debatable given the lack of unique subscribers.

IDEA a relative play
We begin coverage on IDEA today with a BUY and it is our preferred pick (see our report, A timely IDEA, for more details). It appears to be executing consistently, its financials are improving, and there is an element of M&A surprise. For Bharti, Zain is still a bit unknown and the deal seems likely to go ahead, which, in our view, will squeeze earnings in the near term. We think RCOM’s execution remains questionable. 3G auction prices can be expected to stretch balance sheets for all carriers.

To read the full report: TELECOM SECTOR

>CAIRN INDIA: Revising estimates upwards (BRICS)

■ Rajasthan block resource potential revised upwards to 6.5 boe from 3.7 boe.
■ Plateau production of 2,40,000 bopd possible in FY13 (as against approved 1,75,000 bopd) with low incremental capex.
■ we revise our base case NAV estimate to Rs246/share (earlier Rs 227/share) at US$60/bbl and Rs 47/US$
■ Cairn remains our top pick in upstream oil segment, Upgrade to Outperform.

To read the full report: CAIRN INDIA