Thursday, April 29, 2010

>WHERE TO INVEST NOW: Cyclical start, defensive finish

1. Economy: The US economy remains in a fragile state

– GS Economics forecasts sluggish recovery in 2010 & no Fed rate hike until 2012.
– Benefit of inventory re-stocking and fiscal stimulus ends in the middle of 2010.
– Final demand to recover gradually; unemployment to remain high into 2011.
– Excess capacity will affect inflation, interest rates, margins, and capex.

2. Earnings: Focus on 2010 pre-provision EPS of $81

– Our S&P 500 operating EPS estimates are $76 for 2010 and $90 for 2011.
– On a pre-provision and pre-write-down basis our estimates are $81 and $91, reflecting 13% annual growth.
– S&P 500 operating EPS will reach 99% of prior peak in 2011.
– Near peak EPS forecast in 2011 does not imply a new S&P 500 price level peak.

3. Valuation: We anticipate a rally to 1300 and a fade to 1250 by year-end

– P/E typically remains flat or falls slightly in the year following the market trough.
– Equity returns are primarily a function of EPS growth.
– S&P 500 currently 73% above March 2009 low and trades at 14.5x our 2010 EPS.
– Low interest rates in 1H will serve as a tailwind to push P/E toward 15x or 1300.
– Multiple expansion expected to be higher for cyclicals than defensives.

4. Money flows: A bullish back-drop for stock investors in 2010

– We estimate $600 billion of potential flows into the US equity market.
– Individuals: $350 billion of potential money flow into equities.
– Institutions: $150 billion from hedge funds and foreign investors.
– Corporations: $100 billion net flows from capital spending and equity issuance.

To read the full report: INVESTMENT

>The new world: Emerging markets after the crisis

Emerging markets have fared quite well in the crisis
• Particularly against the background of large financial market losses in Sep/08-Mar/09

EM economic growth lower than in the “boom“ years but still very robust
• Roughly 4 pp per year higher than in industrial countries in the next 3-5 years

Some short-term risks to watch
• Risks of bubbles building in some markets; inflation on the rise in some countries
• Policy risks as governments try to manage “excessive“ capital inflows

Medium-term trend: EM position improves but specific risks remain
• Large build-up of public debt in DM has brought issue of sovereign risk to the fore
• Relative risk position of EMs has significantly improved
• Importance of EMs as consumer markets and regarding commodities will rise further
• EM political and policy risks remain important: country-specific knowledge essential

To read the full report: NEW WORLD

>Shree Renuka Sugars Ltd. (MERRILL LYNCH)

PAT of Rs2.24bn up 7x y-o-y, but 10% lesser on FX loss
Renuka Sugars reported PAT of Rs2.24bn in Mar 2010 quarter, up 7x y-o-y and down 14% q-o-q. Profit growth was driven by (1) sugar price increase of 78% y-oy to Rs33.6/kg; (2) volume increase of 96% y-o-y to 239mn kg; and (3) inventory gain on low cost materials contracted in anticipation of sugar price rise. The company’s profit, however, came in 11% lower than our estimate as the company had translation loss in its international subsidiaries owing to rupee appreciation.

1mt sugar inventory at Rs25/kg is cheaper and profitable
At the end of Mar 2010 Renuka had total sugar stock of 1mt including 0.6mt white and 0.4mt raw. Average cost of the inventory is Rs25/kg compared to current sugar price of about Rs27/kg can yield Rs2bn EBIT in H2FY10, while most of its peers will have losses owing to higher cost of inventory.

Balance sheet is in good shape and can add Equipav
Renuka’s net debt to equity increased to 0.8x at the end of Mar 2010 compared to 0.5x at the end of Sep 2009. Increase in net debt to Rs15bn is primarily due to consolidation VDI of Brazil. Net debt to equity is likely to go up to 1.7x following consolidation of Equipav. However, we are not concerned about this debt level as there is three year moratorium on debt payment by its Brazil subsidiaries.

Buy Renuka on diversified business and ethanol price hike
We maintain Buy as Renuka could limit its ROE decline yet again in this downcycle to 17% driven by (1) 3x jump in distillery volume owing to jump in molasses supply in addition to 29% increase in ethanol price as decided by govt recently; (2) around 60% increase refining volume led by commissioning of 1mt Mundra refinery in Dec10; and (3) 2x jump in power sales driven by higher
utilization. Our PO of Rs80 is at 1.8xFY11e P/B owing to 17% trough ROE.

To read the full report: SHREE RENUKA SUGAR

>OIL & NATURAL GAS: Strong domestic reserve replacement; production decline continues (GOLDMAN SACHS)

What's changed
ONGC announced its annual operational metrics for FY10, which indicate strong 1P reserve replacement (1.33x) in domestic fields but declining oil production. Notably, oil production has declined in ONGC’s overseas subsidiary, OVL (ONGC Videsh) as well. Natural gas production grew marginally by about 1% yoy, keeping the overall production volume flat yoy. The numbers were below our volume forecasts for ONGC.

Overall, ONGC’s production profile remains challenged by natural decline in its key blocks in India and overseas. The oil production decline would have been steeper had it not been for ONGC’s share in Cairn India’s oil production from Rajasthan. While ONGC continues its redevelopment efforts in Mumbai High offshore fields in order to arrest the decline, we note that share in Rajasthan oil production likely represents the most significant new avenue of volume growth for ONGC in the medium term.

We maintain our Neutral rating on ONGC with a new 12-m TP of Rs1,010 (earlier Rs1,110), based on EV/GCI vs. CROCI/WACC framework, implying downside of 1%. Our valuation now assumes ONGC’s net oil realization at US$55/bbl in FY10E and US$50/bbl in FY11E vs. US$ 58/bbl and US$53/bbl previously. We have cut FY10E-12E consolidated earnings by 3%-13%,
reflecting our new production forecasts and oil realization estimates.

However, given continued uncertainty in the subsidy-sharing mechanism for loss-making state-owned oil marketing companies, we believe ONGC will likely end up paying a higher subsidy and hence see further potential downside risk to our earnings estimates.

Key risks
1) Higher subsidy burden, 2) lower production volume from legacy fields, and 3) fuel price reforms leading to higher net realization for ONGC.

To read the full report: OIL & NATURAL GAS


Jaypee Infratech Limited (JIL) is engaged in the development of the Yamuna expressway, and related real estate projects. It is a part of Jaypee group, incorporated on April, 2007 as a special purpose company for the development, operation and maintaince of the Yamuna Expressway in the state of Uttar Pradesh, connection Noida and Agra.

Objects of the Issue: Out of the issue proceeds, around Rs 1500 crores are to be used to partially finance the Yamuna expressway, and the remaining general corporate purposes.

Investment Highlights
JIL enjoys strong parentage of Jaypee Group which is a leading integrated infrastructure conglomerate in India.

The Yamuna expressway is a 165-kms access controlled six lane concrete pavement expressway along the Yamuna River, with the potential to be converted into an eight lane expressway. The travel time on this access controlled expressway is likely to take roughly 120-
130 minutes for 165 kms of distance.

The company holds the concession for developing, operating and maintaining the Yamuna Expressway from Noida to Agra for a period of 36 years.

They plan to use cement concrete for the pavements to cut their maintenance costs in future.

The company has a right to develop five parcels of land each of 1235 acres, totalling 6175 acres. The total area which could be developed is roughly 530 mn sq.ft. JIL has taken land parcels on lease agreements for 90 years therebby saving the upfront land costs.

Of the aforesaid saleable area, approx. 21.21 mn sq. ft. of residential area and 3.13 mn sq.ft. of commercial area has been launched for sale, which were approximately 88% sold on a square foot basis which amounts to Rs 4213 crores (residential) as of March 2010.

The entire expressway of 165 kms travels through a single state Uttar Pradesh, so no state toll needs to be paid by travellers, where as if they use the NH, they have to cross two states, hence pay toll. It would also reduce the traffic and the time taken to travel.

The company is eligible for income tax benefits under section 80 I(A) and the same is available for a continuous period of 10 consecutive years in a block of 15 years. The company has decided to claim this benefit beginning with Assessment year 2009-2010 (FY08-09).

The required construction deadline is April 2013, JIL plans to complete the construction by 2011, two years in advance due to contractors’ use of modern construction equipment which significantly reduces construction timeframes without sacrificing the quality of construction.

Key Challenges: The Company will face the tough task of selling the huge land bank of 530 mn sq.ft. at a place where there is already an oversupply.

Advise: The financials till now do not capture the future revenue potential from tolls once the expressway is complete and income from its real estate business (5 integrated townships covering 6175 acres i.e. ~530 mn sq.ft.). Thus valuing the Company based on past performance will not be prudent. The Noida-Agra project is the first of its kind where there will be such a
large real estate development included in the same. Investors with a long-term horizon can consider Subscribing to this issue to benefit from the huge opportunity that the project is likely to present.

To read the full report: JIL

>Satluj Jal Vidyut Nigam Ltd.(SJVN) (INDIA INFOLINE)

Satluj Jal Vidyut Nigam Ltd.(SJVN) a mid-sized hydroelectric power generator has 1,500 MW of operational assets. Over the past three years, it has maintained high efficiency which has allowed it to earn incentives. Against the normative 85% PAF, it operated its plants at 92.4%, 96.7% and 96.1% in FY07, FY08 & FY09 respectively. In order to grow, it plans to expand its installed capacity to 5.5GW over the next decade. Since there is slow progress on majority of the projects (except 412MW Rampur project), we believe most of them will come up only after FY14.

To read the full report: SJVN