Saturday, March 27, 2010


In the aftermath of the credit crunch, the outlook for most developed economies appears pretty
bleak. Households need to de leverage. Western governments will have to tighten their purse strings. Faced with such grim prospects at home, many investors are turning their attention toward China. It’s easy to see why they are excited. China combines size – 1.3 billion inhabitants – with tremendous growth prospects. Current income per capita is roughly one-tenth of U.S. levels. The People’s Republic also has a great track record. Over the past thirty years, China’s Gross Domestic Product has increased sixteen-fold.

So what’s the catch? The trouble is that China today exhibits many of the characteristics of great speculative manias. The aim of this paper is to describe the common features of some of the great historical bubbles and outline China’s current vulnerability.

Section One: Identifying Speculative Manias and Financial Crises
Can we confidently identify a speculative mania before the bubble bursts? Is it possible to spot an incipient financial crisis before it explodes in our faces? Based on the performance over the last decade of most leading economists, central bankers, and Wall Street pundits, the answer to these questions is surely a resounding NO!

In fact, bubbles can be identified ex ante, as the economists like to say. There also exists an interesting, if rather neglected, body of research on leading indicators of financial distress. A few years ago, many of these indicators were pointing to rising economic vulnerability in the United States and other parts of the globe. Today, those red fl ags are fl ying around Wall Street’s current darling, The People’s Republic of China.

To read the full report: RED FLAGS

>Jaiprakash Power Ventures Ltd (ICICI DIRECT)

On a firm footing…
Jaiprakash Power Ventures Ltd (JPVL), a part of the $7 billion Jaypee group, is the result of amalgamation between the erstwhile Jaiprakash Hydro Power (JHPL) and Jaiprakash Power Ventures (JPVL). The combined entity has a successful track record of operating 700 MW of hydro projects - Baspa-II (300 MW) commissioned in 2003 and Vishnu Prayag (400 MW) commissioned in 2006. In FY09, the erstwhile JHPL generated 1,291.9 million units (MU) while JPVL generated 2,033.3 MU vis-à-vis 1,280.8 MU and 1,871.0 MU in FY08, respectively. The conglomerate entity is aiming to achieve ~13,500 MW of installed capacity by FY19E with a diversified fuel mix. JPVL is expected to command an optimal 60:40 thermal-hydro mix. The upcoming hydro project at Karcham Wangtoo (1,000 MW) is well on track to achieve the commissioning six months ahead of schedule in May 2011. The parent company (JAL) has demonstrated significant execution strength clubbed with better operational performance at existing projects. Thus, we are initiating coverage on the stock with an ADD rating.

Total ~16 fold growth in installed capacity over the next six years
JPVL has an installed capacity of 700 MW as at the end of December 2009. The company has an ambitious growth plan and is targeting ~11,050 MW by the end of FY16E. Total ~1,500 MW is expected by FY12E. JPVL is diversifying into other fuel mix with the first thermal plant Bina – I expected in the second half of FY12.

Superior asset quality getting reflected in operational numbers
JPVL is generating at an implied plant load factor (PLF) of ~100% in the peak flow season. This is far in excess of the overall PLF generated by hydro-based capacities in India. For FY09, the overall Indian hydro generation is operating at an implied PLF of ~34.1% and JPVL is commanding a much superior implied PLF of ~54.6%.

At the CMP of Rs 67, the stock offers ~6.2% upside potential. JPVL has 700 MW of plants operational, which comprises Rs 17 per share and ~24% in overall value. Expansion plans form the remaining portion of overall value. The demonstrated capability of parent company (JAL) renders significant comfort to upcoming expansion plans. Thus, we initiate coverage on the stock with ADD rating and target price of Rs 71.

To read the full report: JAIPRAKASH POWER


Sesa Goa is targeting to increase iron ore output to 50 mtpa by FY14 from ~20 mtpa in FY10, which will make it one of the world’s largest iron ore producers. This will require addition of at least 300 mn tons of reserves from existing mines and/or acquisition of new mines. Our NPV analysis suggests that one needs to be a believer in Sesa adding these reserves at a very low acquisition cost and also in iron ore prices staying at $100/t till FY15 to justify 10%+ returns in stock price. Strong iron ore prices and rising production will ensure a strong 81% profit growth in FY11 but post recent run-up, we view risk-reward as unfavourable. We initiate coverage on Sesa Goa with an Underperform rating and a target price of Rs385.

Reserve accretion is crucial for volume growth
We believe that Sesa needs to augment its iron ore reserves by at least 300 mn tons by FY14 when its output hits 50 mtpa, assuming a minimum 10-year mine life. Sesa is undertaking extensive exploration efforts at existing mines to boost reserves. Sesa is also targeting to acquire reserves via acquisitions of smaller mines, which looks likely given its balance sheet strength and the high degree of fragmentation in India’s iron ore sector. Sesa is also hopeful of getting ~90 mn tons of reserves from the Jharkhand mine in 4 years, where it holds a prospecting lease and has applied for a mining lease.

NPV analysis suggests unfavourable risk-reward
An NPV on Sesa’s existing reserves using CLSA’s iron ore forecasts yields a value of just Rs287/sh. However, we believe that this is conservative as 1) There is a high probability that Sesa will augment its reserves in an NPV-accretive manner; and 2) We see upside potential to CLSA’s near and long-term iron ore price forecasts. If we take a leap of faith and assume that 1) Sesa adds 105 mn tons of reserves from existing mines, acquires another 105 mn tons at a very low acquisition cost of just US$3/ton and the Jharkhand mine comes through in 4 years; and 2) Iron ore prices stay at $100/t (FOB India) till FY15 and use a 30% higher long-term price of US$70/t (real terms) FY16 onwards, we arrive at an NPV of Rs506/sh – just 14% upside.

Initiate coverage with U-PF rating
We see potential delays in Sesa getting the Jharkhand mine and also see a risk of Sesa having to acquire new mines at a much higher acquisition cost. This, combined with the relatively small upside even in our blue-sky scenario, makes us view risk-reward as unfavourable. Put another way, we believe that the current stock price implies a 25+ year mine life or $105/t iron ore price from FY12 till perpetuity – both very unlikely. Stock moves with spot iron ore prices and could outperform for short periods if spot prices rise further. However, we struggle to justify a positive stance on a 12m view. We initiate coverage on Sesa with an U-PF rating. Our TP of Rs385 implies 8.3x FY12 P/E, 4.1x FY12 EV/EBITDA and is at a 34% premium to NPV on existing reserves.

To read the full report: SESA GOA

>RBI releases First Financial Stability Report : Says Limited Risk to Financial Stability, but Monitoring Required on an Ongoing Basis

As announced in the Annual Policy Statement of April, 2009 the Reserve Bank of India established a Financial Stability Unit in August, 2009. The Second Quarter Review of Monetary Policy in October, 2009 made specific mention of a periodic Financial Stability Report (FSR) for India to enhance transparency and augment confidence in the financial system. The Financial Stability Report (FSR) published today is the first of these reports and is an attempt at institutionalising the implicit focus and making financial stability an integral driver of the policy framework.

In general, the Financial Stability Reports will focus on reviewing the nature, magnitude and implications of risks that have bearing on the macroeconomic environment, financial institutions, markets and infrastructure. It will also assess the resilience of the financial sector through stress tests. It is hoped that FSRs will emerge as one of the key instruments for directing pre-emptive policy responses to incipient risks in the financial system.

The FSR will be a key supplement to the evolving institutional arrangements in the coming months. The specific composition and the role of the proposed Financial Stability and Development Council (FSDC) is yet to crystallise. But the role of the Reserve Bank in any future arrangement, as regards financial stability, will continue to be critical. This inaugural report details the prevailing financial system in India and also gives some background on past financial stability initiatives.

Global Outlook
The forceful and coordinated global policy response to the crisis has facilitated the relative stabilisation of global markets and easing of credit risk concerns after the financial turmoil, especially in the second half of 2009. Uncertainties about growth prospects and financial stability, however, persist. The unevenness of the global recovery adds to this uncertainty. Further, concerns about sovereign credit risk have also intensified in the light of the fiscal woes of Greece and some other Euro zone nations.

While global imbalances declined somewhat due to contraction of demand in advanced economies during the financial crisis, the structural problem associated with the imbalances remains. There are some incipient signs of the recurrence of these imbalances with the economic recovery, which is reminiscent of the pre-crisis days and could emerge as a cause for concern. Though the exposure of the Indian financial system to the international markets remains relatively low, the contagion impact from the global macroeconomic shocks on the Indian financial sector cannot be ruled out.

Outlook for India
There are evident signs of recovery in the growth increasingly taking hold. Hence, the process of monetary policy exit has already begun. Early steps to exit from the fiscal stimulus measures have also been initiated with the Union Budget for 2010-11 committing a return to the process of fiscal consolidation. The process of fiscal consolidation should facilitate better monetary management. In recognition of the Government’s intent to bring down deficit and debt levels, along with the positive outlook on domestic economic growth, S&P has recently upgraded its outlook on India from “Negative” to “Stable”.

Going forward, however, there are several factors which may have a bearing on financial stability considerations, including inflationary pressures and expectations, management of government borrowing program, and capital flows.

To read the full report: FSR


Eyeing power: Thermax is moving up the value chain with in-house capability of up to 300MW, and JV with B&W for super-critical and 300+ MW. We initiate coverage with ADD and target of Rs 725 (comprising Rs 650 for core business and Rs 75 for JV with B&W) based in (1) long-term upside from breadth of capabilities, (2) growth on the back of large backlog, (3) revival in industrial capex, and (4) cash flow and execution record. Slower- than - expected execution and valuation pose risks.

■ Profile: Leading player in energy and environment, moving up power equipment value chain

Capability expansion, execution pick-up and investment recovery to boost growth.

■ Financials: Strong growth expectation on back of strong backlog and capability scale-up

Recommend ADD with an SOTP-based target price of Rs 725/share.

To read the full report: THERMAX