Wednesday, April 28, 2010

>Checking the Pulse of the Economy

Conclusions and Investment Implications

• The Federal Reserve has already begun to exit markets without disrupting the economic progress.

• Housing appears to be stabilizing earlier and at higher levels than we expected

• Fiscal stimulus is a strong positive in 2010, but becomes a negative thereafter

• Significant uncertainties remain, but the near-term outlook is positive

• All of these factors, however, are set against a backdrop of deleveraging that has just begun

To read the full report: PULSE OF THE ECONOMY


To read the report: INDIA'S URBAN AWAKENING

>Weakness Begets Weakness: from Banks to Sovereigns to Banks

The Greek debt situation has been an interesting case study for students of the sovereign bond
markets. If there’s a lesson to be learned from Greece’s experience thus far it’s that sovereign bailouts are far more complicated than bank bailouts. They require more sophisticated negotiations and proposals and involve an extra layer of diplomacy that makes them especially difficult to accomplish. As we write this, the European Union has recently announced new lending terms to support the Greek government, with great efforts made to assure the markets that these new terms do not constitute a ‘bailout’. The problem with the Greek situation is that an actual bailout would involve an almost impossible coordination among all the major powers within the EU. It would require the unanimous pre-approval of all the EU heads of state. It would involve the European Commission, the European Central Bank and the International Monetary Fund (IMF) all visiting Greece to perform financial assessments.1 And finally, it would involve at least seven EU countries affirming support through parliamentary votes - all of this before a single euro is spent. A true bailout involves an almost impossible number of hurdles that essentially guarantee nothing will happen until all other avenues of rescue are exhausted. However, judging by the recent increase in yields on 10-year Greek bonds, Greece may soon need more than a loan package proposal to solve its fiscal problems.

One aspect of the Greek situation that has been obscured by all the recent political wrangling is the crisis’ impact on the Greek banks. Although the banks were supposed to be rock solid after all the government-injected capital they received (not to mention zero-percent interest rates and generous lending terms from the European Central Bank), data shows that Greek bank deposits have fallen 8.4 billion euros, or 3.6 percent, in two months since December 2009.2 With no restraints on capital flows within the European Union, Greek savers are free to transfer their assets elsewhere. Given that bank deposit guarantees in Greece are the responsibility of the national government rather than the European Central Bank, we suspect Greek citizens are pulling money out of their banks because they question their government’s ability to honour its domestic deposit guarantees. We envision Greek depositors asking themselves how a government that can’t raise enough money to stay solvent can then turn around and guarantee their bank deposits? It’s a fair question to ask.

To read the full report: WEAKNESS BEGETS


We recently met with the management of Consolidated Construction (CCCL) to enhance our understanding about the company. Key highlights of our interaction are summarised below:

Current order book at ~ INR 38 bn, L1 in ~ INR 5 bn worth projects CCCL’s current order book is at ~ INR 38 bn. The company is also L1 in projects worth ~ INR 5 bn. Infra orders form ~36% of the current order book with ~50- 55% coming from the commercial segment; residential and industrial projects contribute the balance.

Order intake picking up; negligible developer exposure
Management stated that the company’s order inflow is picking up. Its order intake during 9mFY10 stood at INR 18 bn; the company has bagged orders worth ~ INR 4 bn in the current month itself. Its exposure to real estate developers is negligible and currently stands at ~1-2% of order book.

􀂄 Looking to expand footprint in various infra segments
CCCL is planning to increase its presence in the infra space to diversify its business model and enhance its business offerings. The company is planning to bid for a couple of state BOT-annuity road projects. It is also eyeing the BoP space in the power segment, where it has provided only civil construction services till now.

Looking at PE investment at subsidiary level
CCCL’s wholly owned subsidiary, CCCL Infra is the vehicle for its asset ownership ventures. The company is developing a 294 acre food processing SEZ. It is also L1 in an INR 2.5 bn multi-level underground car parking project in Delhi. The company is eying PE funding for CCCL Infra.

■ Outlook and valuations: Promising; ‘NOT RATED’
The management believes that with improvement in economic outlook, CCCL is poised for better growth prospects ahead. At CMP of INR 92, the stock is currently trading at P/E of 14.7x and 12.0x FY11E and FY12E (consolidated earnings, consensus estimates), respectively. The stock is currently not under our coverage.

To read the full report: CONSOLIDATED CONSTRUCTION


Dr Reddy’s initiates Class III recall of 9 batches of risperidone
Dr Reddy’s fell 3% today following news that co. has initiated a Class III recall (a situation in which use of or exposure to a violative product is not likely to cause adverse health consequences) for 9 batches of Risperidone tablets. The reason for the recall is out of specification results at the 18 month time point. Out of the 9 batches being recalled 7 of them were to expire in April 2010.

Limited negative fallout seen from this recall
Co. indicated that the drug accounts for less than 0.1% of U.S. revenues and therefore has negligible financial impact. These batches were manufactured before the previous recalls in early Oct’09, following which the co. took strong corrective action at its facility. The plant was re-inspected by the FDA in Nov’09 and received only one minor observation. We therefore do not expect any further negative fallout from this recall.

Maintain bullish stance
We continue to see significant near term drivers for the stock with ramp up of Prilosec OTC and launch of Allegra D-12 and D-24 in Q1FY11. Fondaparinux generic approval remains another trigger, although not a part of our estimates. We also expect the API business to benefit from the strong wave of patent expiries over 2011-2012 in US.

Valuation: Maintain Buy, PT Rs 1,500
We continue to derive our price target using DCF-based methodology, explicitly forecasting long-term valuation drivers using UBS’s VCAM tool (WACC of 11%).

To read the full report: DR. REDDY