Thursday, April 8, 2010

>Global Sovereign Credit Risk Report: 1st Quarter, 2010

This paper focuses on changes in the risk profile of sovereign debt issuers, with the intention to identify trends and drivers of change.

We have divided world debt risk into eight regions: US & UK, Western Europe, Emerging Europe, Scandinavia, Latin & South America, Middle East & Africa, Australasia and Asia. In addition to identifying themes within each of these regions, macro trends across the sovereign debt sector are also discussed.

CDS Values are calculated by CMA DataVision – an independent CDS pricing service based on data collected from CMA’s consortium of over 30 swap market participants. CMA DataVision is the only CDS pricing service to provide independent, intraday price verification for single name CDS, indices and tranches. Unless otherwise stated, all CDS values will be the midpoint on the 5 year tenor and are based on London closing values from 30th March, 2010.

Cumulative Probability of Default (CPD) quantifies the probability of a country being unable to honour its debt obligations over a given time period. Unless otherwise stated, all stated values are for the 5 year CPD. CPD is calculated using an industry standard model fed with proprietary credit data from CMA DataVision.

Implied Ratings are calculated using a proprietary model developed by CMA and fed with CDS pricing data from CMA DataVision.

Data Access: CMA provides independent, intra-day pricing on over 1,500 single name CDS and CDS Indices. Widely used by risk managers, treasurers and researchers in financial institutions across the world, CDS data is available directly from CMA or via our strategic partners.

To read the full report: CREDIT RISK


Strong March: Automobile sales witnessed another month of good sales growth aided by economic recovery, an improving bank financing and job outlook, and strong rural demand. Pre-buying support for trucks is evident in March as well, due to change in emission norms. In our view, the truck demand should soften in Q1 FY11 due to prebuying effect. Two-wheeler demand continues to be strong due to improved outlook for winter crop and return of urban demand.

Car demand surprises: Despite pre-buying in February (since excise duty was expected to be raised in March), strong car demand has surprised us. Improvement in outlook for IT services sector, bank financing, and overall job outlook are the key factors that support our bullish outlook for car demand in FY11.

Monthly sales numbers: Ending year with a strong March
■ Strong growth seen in March across segment

■Two-wheeler demand continues to benefit from farm income

and return of urban demand; pre-buying evident in trucks

■ Despite pre-buying in February, strong car demand

surprises; Maruti Suzuki is our preferred play

Maruti Suzuki is our preferred play: Maruti Suzuki has underperformed the Sensex by 12% YTD over concerns of sales’ being affected post excise duty rollback, as well as increasing competition. In our view, both concerns are overdone as demand continues to be strong despite the increase in excise duty in March by 2%. Market share loss is likely to be limited to the bigger towns. Wide reach within the country should help the company tap the rural demand and grow volumes. Also, we should keep in mind that the industry pie is getting bigger. Q1 sales and earnings are likely to be the key stock catalysts. We maintain our target price of INR1,880. Currently, the stock is trading at 13x FY11e EPS of INR106. We expect post Q1 earnings surprises; the multiple should expand to 15.4x (last five-year average). Our target price implies 15.4x our FY12e EPS of INR122. Key risks include higher-than-expected input costs and competition.

To read the full report: INDIAN AUTOMOBILES

>Godrej Consumer Products Limited: On a global acquisition spree - ALERT

• After Africa, Godrej Consumer is now eyeing the Indonesian market. Today it announced its decision to acquire Megasari Group, a leading household care company in Indonesia. With revenues of US$120MM in 2009 (+20% y/y), Megasari holds dominant market shares in household insecticides (35%), air care (45%), wipes (80%), and breakfast cereals (15%) segments. The three leading brands (Hit insecticide, Stella air care and Mitu baby wipes) contribute 71.8% to total sales. See the table below for details on market size and growth profile for these segments. With this acquisition GCPL will now be the No.2 household insecticide company in Asia (ex-Japan) region.

• This acquisition will add approximately 25% to GCPL’s consolidated top line with operating margins likely in the mid-teen range. While no financial details have been disclosed for the transaction by the company, some media reports (ET Now) have reported that the likely purchase price for Megasari is Rs12B, which implies valuation at P/Sales of 2.2x. For the previous acquisitions, GCPL had valued Kinky at 2.8x P/Sales while the purchase of a 49% stake in Godrej Sara Lee was done at a valuation of 2.3x P/Sales. Management expects this transaction to be earnings accretive from first year itself.

• GCPL will look to fund this acquisition via a combination of cash and debt. Currently GCPL has Rs2B of net cash and debt/equity of 0.4x which allows it to comfortably leverage up the balance sheet. In Dec’09 GCPL’s board approved the proposal to raise capital up to Rs30B via a combination of debt and equity which was primarily to fund the inorganic growth plans.

• This acquisition fits well with GCPL’s strategy of pursuing a global emerging market footprint. Earlier last month, company announced its acquisition of Tura, a leading personal care company with wide presence in soaps and skin care segment in Nigeria. These acquisitions provide GCPL a strong platform to launch its portfolio of hair care and personal care products into African and Indonesian markets.

• The company is hosting a conference call tomorrow April 7, 2010 at 4.30p.m. IST to discuss the acquisition of Megasari. The conference dialin numbers are +91 22 3065 0101 and +91 22 6629 0301.

To read the full report: GODREJ PRODUCTS


Power generation space would continue to offer significant opportunities to equipment manufacturers for the next few years as the country grapples to manage the huge peaking shortages that is currently faced. We believe the ever-increasing electricity consumption also requires a quantum jump in power generation capacities. Apart from the huge market opportunity, the consistent order flows along with the superior return ratios enjoyed by the equipment companies, make the power generation space one of the most attractive segments in the capital goods industry, in our view. The Central Electricity Authority’s (CEA) planned capacity addition target for the XIIth Five Year Plan translates to a market opportunity of Rs4-4.5tn (about US$100bn), which we expect can materialise over the next three to four years.

Key investment highlights
To contain the peaking shortages and to meet the incremental demand, CEA has targeted a capacity addition of 1,00,000 MW in the XIIth Five Year Plan, a growth of 27%. We believe the plan targets would continue to increase going forward. The shelf of the projects planned for the XIIth Five Year Plan stands strong at 1,38,000 MW.

Private sector utilities are expected to account for around 50% of the capacity additions in the XIIth Five Year Plan. With private sector utilities’ better execution capabilities, a better visibility exists for equipment companies, as more projects would take off.

Power plants based on supercritical technology are expected to dominate the capacity addition plans in the XIIth and the XIIIth Five Year Plan. Hence, in our view, companies with technological tie-ups and faster indigenisation in manufacturing over the next two to three years would have an edge.

Going by the past trend, equipments order for projects related to a five year plan are placed one to two years ahead of the beginning of the plan period. Of the shelf of 1,38,000 MW for the XIIth Five Year Plan, orders for around 43,000 MW have been placed, while orders for the balance equipments are expected to be placed in the near to medium term.

We expect this to translate into robust growth for the power generation equipment companies and drive a strong growth in their order book, revenues and profits. We are positive on the industry and initiate coverage with an Overweight rating on the sector and a Buy recommendation for BHEL, BGR Energy and Thermax.

To read the full report: CAPITAL GOODS


Chinese iron ore spot prices above US$150/ton
Contract prices cross US$100/ton
Upgrade target price on higher iron ore realizations; however valuations remain a concern.

To read the full report: IRON ORE