Tuesday, April 6, 2010

>The recovery continues while uncertainties still linger...

The economic climate seems to be stabilising. In developed countries a partial recovery is currently underway. This is a recovery because indicators show that growth has resumed and probably on a lasting basis. But its partial characteristics can be seen in several areas: bank lending has not yet recovered and consumer spending and construction investment are
lacklustre. In emerging countries the prospects are more flattering. GDP growth is forecast to run at around 6% this year and next. For most of these countries inflation is under control, policymakers seek to tighten monetary settings in line with price trends and government budgets are in relatively good shape—all in all, a reassuring and attractive picture.

Our favourable outlook will not prevent the business community from remaining a little cautious. The feeling of lack a of clarity will not disappear easily. There are three main reasons. The crisis has taught us that the market did not always know better than everyone else. This means that a sharp rise in asset prices would not necessarily lead to a greater preference for spending at the expense of saving. However, it is feared that the contrary (falling asset prices) would lead to a net loss of confidence and a downward revision of purchasing intentions

Uncertainty over the political/regulatory landscape is dampening ’animal spirits’ that often animate business investment decisions. For example, the financial services sector still does not know what lies ahead in terms of regulatory reform and that will affect its profitability. Other sectors are also confronted by the same kind of uncertainty. For example, in the US firms face uncertainty over how much they will pay for their employees’ health care costs given recent health care reform measures.

The post-crisis period will demand a great deal from economic policy. In developed countries, the aim is to simultaneously normalise the very accommodative monetary policy stance that the crisis forced upon us and to nurture economic growth that will initially be on the weak side. In emerging countries the aim is to stop markets spinning out of control and to consolidate the culture of stability that has gradually grown up over the past decade. Much is at stake, and knotty questions will be raised, as to the timetable (when to swing into action?), the preferred tools and the degree to which they should be applied. The markets will be attentive to the credibility and expected effectiveness of the measures undertaken.

To read the full report: MACRO PROSPECTS


■ Dawn replacing darkness — better days ahead
In our note, Increased darkness before dawn? on 27 November, 2009, we highlighted that RIL’s offer to acquire LyondellBasell (LB) added to near-term uncertainties. Refining margins were also among the lowest then. Reliance is now nearly out of the LB race. Refining margins have sharply improved from lows in 4Q09. The Supreme Court verdict on the long pending gas litigation is expected soon. The period of darkness is abating, in our view.

Focus to shift on earnings growth in FY11F
Despite the large base, we expect RIL’s earnings to grow 44% in FY11F (consensus is marginally lower at 39%). Growth will be driven by refining (the new refinery will see its first full year of operations and margins have recovered sharply) and exploration and production (KGD6 gas volumes will reach initial peaks in 2H FY11F).

Large E&P upsides remain
With the group focused on KG-D6 (both development and litigation), there has been relatively less exploration effort in other blocks and little news flow on RIL’s plans for its large inventory of discoveries. Exploration is scaling up and after the Supreme Court ruling the company could surprise with more concrete plans for other KG-D6 discoveries and other discovered blocks, in our view.

Upgrade to BUY with price target of INR1,275
We have rolled forward valuations to end-FY12F. Valuations for core refining, petrochemical and currently producing E&P assets (PMT, KG-D6) are largely unchanged. We are more optimistic than ever on E&P upside and assign a significantly higher value of INR421 (earlier INR167) for other discovered blocks and exploration upsides.

To read the full report: RIL

> IT Services – positioning for 2010 (GOLDMAN SACHS)

Focused on enterprise IT spending and payments
■ We remain positioned around tech enterprise exposure into 2010

• Into 2010 we positioned our top picks around earlier-cycle stocks in our Consulting and Outsourcing group that should directly benefit from improvements in enterprise IT demand.

• Incremental spending associated with various technological changes taking hold at the infrastructure and application level provides an additional driver.

■ Focused on payments in Transaction Processing
• Although Neutral on the Transaction Processing coverage group, we see selective opportunities in this coverage area with Buy ratings on MasterCard (MA), Visa (V), and Alliance Data Processing (ADS).

■ In February we initiated coverage of three new specialized payment names, broadening our Transaction Processing coverage group
• Alliance Data Systems (ADS) – Exposure to the loyalty and private label card segments.
• CyberSource (CYBS) – Exposure to the fast-growing online payments universe.
• Wright Express (WXS) – Exposure to the fleet card processing industry.

■ Remain underweight on SMB, lagging HR/payroll names, and secularly challenged models
• Weak SMB conditions, a sluggish labor market, and lagged revenue models keeps us underweight on payroll names and selected stocks with secularly challenged end-market exposure.

Cycle rebound and secular shifts provide strong tech spending tailwinds
■ Improvement in key macro indicators leads to upward bias in our IT spending forecasts
• Given sustained traction in key indicators such as GDP, corporate profits, and emerging markets fixed investment in the past couple of months, our tech forecast bias positive.
• Our worldwide tech spending forecast remains set at 5% growth for 2010; this follows an 8% decline in 2009.

■ Our IT spending indices continue to point to growth expectations
• Our total IT spending index in February (which includes salaries, services, depreciation, and occupancy) came in at 57.0, up from 56.0 in our prior survey in December, implying modest growth.
• Our tech capital spending index (representing spending only on new equipment and software) also gained, rising to 58.5 from 57.5 previously, consistent with our view of pent-up demand

To read the full report: IT SERVICES


Preface: In 2007, we launched our landmark India NTD (Next Trillion Dollar) report. This report brought out a simple, yet profound, fact: it took India 60 years since independence to generate the first trillion dollar of GDP. Its next trillion dollar (NTD) would take only 5-6 years, based on 12-15% nominal GDP growth.

This NTD era spells exponential growth for several businesses which, in turn, throws up several investment themes and opportunities. Since our first NTD report, we have captured such ideas in an "NTD Thematic" series. We already see the NTD opportunity playing out in Gas and in Consumer non-durables.

We now release a TRILOGY of reports - Cement, Construction and Engineering - all of which offer a play on the India NTD theme.

We have lined up many more NTD Thematics in 2010. Stay tuned!

Cement demand to enter new growth trajectory: Driven by a structural shift in demand drivers, the cement industry is at an inflection point as growth trajectory is estimated to shift upwards from its historical average of 8% to 10-12% over 5 years. Higher cement consumption (~1.5x from 1.25x of real GDP growth) is expected in the next trillion dollar (NTD) phase of GDP. We believe all ingredients are in place for the cement industry to move from a cyclical to a secular growth story.

Capacity utilization will surprise positively…: With most of the capacity addition expected to be operational by FY11, we estimate the industry's capacity utilization will bottom out by 2HFY11. With strong demand growth, excess capacity is expected to be absorbed faster by FY12. This will lay a solid foundation for the next growth phase as no major capacity additions have been planned beyond FY12. We estimate capacity utilization will bottom-out at 75% in 2QFY11 against 71% in 2QFY02 (the previous cycle).

…leading to positive surprise on pricing, profitability…: Given strong volume growth (10-12% v/s flat in FY01) and higher consolidation (the top 5 groups control 56% of capacity v/s 48% in FY01) will result in better operating parameters than in previous cycles. Hence, we anticipate the return of pricing power to the industry by 2HFY12 for a longer period, supported by strong secular demand growth and higher consolidation in the industry. A decline in average cement prices will be lower and operating margins (26% in FY11 v/s 13% in FY03) will be higher than the trough of the previous cycle.

…driving sector re-rating: Strong secular growth, higher consolidation and a stronger balance sheet would act as a catalyst for re-rating of the cement sector. We estimate cement stocks will bottom-out at higher valuations (than pervious cycles) over the next 2-3 quarters as cement prices remain volatile due to the impact of new capacities. However, a structural shift would be the key driver of premium valuations in the next upcycle. Cement stock valuations are attractive and offer a good entry point for the next upcycle. We prefer companies offering strong volume growth, cost saving possibilities and a strong balance sheet. Among large cap stocks, ACC and UltraTech are our top picks and we prefer Birla Corp, India Cement and Shree Cement among mid-caps.

To read the full report: CEMENT SECTOR

>DIC India(Formerly known as Coates of India) BSE Code 500089

This company is a wholly owned subsidiary of DIC - Japan (Dainippon Inks and Chemicals).

About DIC – Japan.
The parent company is the world’s largest supplier of inks, organic pigments, varnishes,
coatings, resins, and toners and ink jet inks. DIC India enjoys 40% market share in printing inks,
organic pigments and resins.

About DIC (India):
It has pan India seven production facilities at Kolkata, Delhi, Mumbai, Chennai, Noida and
Ahmedabad. It recently sold its industrial coatings manufacturing facility of its wholly owned
subsidiary DIC Coatings India Limited is located at Bangalore. DIC India’s major revenues are
generated from printing inks.

It caters to the requirements of these three segments in printing ink, viz., Publishing inks
(covers newspapers, magazines & books), Packaging inks (as covers FMCG sector, has
tremendous potential to grow) and high quality emerging segment - Commercial printing inks
(covers sales literature, leaflets, brochures, tourist literature, catalogues, etc).

It manufacture inks covering all printing processes used in India - black inks, offset inks, liquid
inks, screen inks and print finish inks.

Investment rationale:
1. Active support from DIC – japan: In order to sync its product line with the objectives of parent
It has decided alter the scope of biz segments into the following.
a) Graphic Art materials
b) Industrial Materials
c) High Performance& Applied products
d) Electronics and Information material
Access to Technology know how from parent will enable the company to have an edge over its peers.

2. With the fortunes of printing ink industry directly related to the GDP growth, the company’s revenues are expected to turnaround with the improvement in industrial activity and the trend in IIP nos. are a suggestive evidence. Many print media companies have witnessed winds of change in the advertisement revenues. Majors of Printing ink industry are likely to be single largest beneficiaries. DIC India enjoys 33 % market share.

3. With special focus on education spending in the recent budget, effective implemetation of Sarva Siksha Abiyan Yojna there will be more demand for text books mainly in rural area. This will generate indirect demand for printing inks.

4. Improvement in general economic activities to generate more demand to emerge in commercial printing inks segment viz: sales literature, brochures, tourist literature, catalogues. DIC being a market leader will be a direct beneficiary of increase demand of packaging inks.

5. Chemical Divn. To generate income from trading/agency business in pigment segment in years ahead.

6. DIC – India has entered into a Share Purchase Agreement with The Valspar (Singapore) Corporation Pte Ltd, for sale of entire stake in its 100% subsidiary DIC Coatings India Ltd. It is learnt from reliable source that the sale is likely to fetch > Rs.300 mn in Cy10.

7. Reduction in interest cost in CY 10 to expand EPS by Rs.3/-: Company is focused on reducing its borrowing cost . in Cy 09 it has reduced its interest cost from Rs.62.5 mn ( Cy08) to Rs.48 mn

With no major capex cost in offing the sale proceeds are likely to be deployed in reduction of debt and meeting working capital requirement.

8. Miniscule Royalty Cost: DIC India pays a nominal fee of ~1.26% of its net sales to DIC Japan. (CY08 royalty fee Rs.57.87 mn on net sales Rs.4592 mn).

Promoter Shareholding : 72%

To read the full report: DIC INDIA


New contracts tied up for two rigs

Estimates pruned to factor lower than expected day rates

Debt repayment happening on schedule

Steep discount to global peers not justified, maintain BUY

To read the full report: ABAN OFFSHORE