Saturday, May 15, 2010

>Who is next? (NATIXIS)

The help from European countries and the IMF may give Greece time to reduce its fiscal deficit by paying "reasonable" interest rates. But the case of Greece is very particular: Greece’s public finance problems are not the result of economic difficulties, but of bad public management, which must be corrected.

Other European countries are struggling with their public finances because of their economic problems: productive specialisation generating a too low long-run growth to reduce deficits in the wake of the crisis. If the financial markets become aware of the scale of the economic and financial difficulties of these countries (Portugal, Spain and the United Kingdom), the danger is that banks and investors will sell the public debts issued by these countries and that the rise in their interest rates will accelerate their problems.

It has to be pointed out that the risk is far more related to sales due to risk aversion among investors and banks (which now hold huge bond portfolios) than "speculation" by funds.

Are euro-zone countries more threatened than the United Kingdom? On the one hand, the segmentation of sovereign issuers in the euro zone promote crises; we do not know whether the bailout of Greece will persuade investors that other euro-zone countries would also be saved, or that the euro zone has exhausted its capacity for solidarity. On the other hand, the depreciation of the pound sterling is bolstering the British economy, but it may also worry investors.

To read the full report: WHO IS NEXT


Fast Moving Consumer Goods (FMCG) - alternatively known as consumer packaged goods (CPG) are products that are sold quickly and generally consumed at a regular basis, as opposed to durable goods such as kitchen appliances that are replaced over a period of years. The FMCG industry primarily engages in the production, distribution and marketing operations of CPG. FMCG product categories comprise of food and dairy products, pharmaceuticals, consumer
electronics, packaged food products, household products, drinks and others. Meanwhile, some common FMCG include coffee, tea, detergents, tobacco and cigarettes, soaps and others. The big names in this sector include Sara Lee, Nestle, Reckitt Benckiser, Unilever, Procter & Gamble, Coca-Cola, Carlsberg, Kleenex, General Mills, Pepsi, Mars and others.

FMCG in Vietnam urban area grew 19% in 2008 as a result of the rising number of young and sophisticated consumers. Approximately 50% of consumers in Vietnam are under the age of 30 and this figure is projected to increase to 70mn by 2018. In addition, the number of high income earners (from USD500 per month) has trebled over the past six years while the number of low income earners (under USD250 per month) decreased from 62% in 1999 to 9% in 2008 in major cities such as Hanoi and Ho Chi Minh City.

In China, statistics compiled by the China Chain Store and Franchise Association showed that 100 major FMCG firms reaped sales income of RMB530bn in 2006 after sound growth of 20% over figures obtained in the previous year. Sixteen out of the 100 examined firms are foreign-funded firms that garnered RMB168.8bn in sales volume. Improved efficiency also contributed significantly to average sales growth of 27% yoy. Meanwhile, the remaining 84 domestic firms reaped RMB360.8bn in sales after a 17% growth.

To read the full report: FMCG

>RELIANCE INDUSTRIES: Refinding growth

Petrochemical margins unlikely to sustain: We believe petrochemical margins would be under pressure in FY11E and FY12E due to increased supplies, particularly from Middle East. We arrive at the petrochemical margins by estimating operating rates based on global and Indian demandsupply, considering Middle East capacity additions and adding a domestic manufacturer ‘premium’. Annexure 7 lists the estimated margins and operating rates in petrochemicals business.

Refining margins to improve gradually: Refining margins have been under pressure over the last c. six quarters due to decline in demand and negligible refinery shutdowns (c.1.9mnbbl refinery capacity shutdown in CY09 while addition of c.1.5mnbbl capacity). However, we believe the margins seen in CY09 are unsustainable based on simple refinery economics and margins are
unlikely to decline from the levels seen in 3QFY10E. We factor in a slow revival in GRMs and estimate GRMs at $9bbl and $10bbl for FY11E and FY12E respectively based on light heavy spread and global demand-supply scenario.

High margin E&P business to start contributing substantially: The full impact of cash flow from KG is expected to be reflected in FY11E as production ramps up to 80mmscmd. With clarity on gas sales case between RIL-RNRL, we believe that full potential of the Exploration and Production business will ensure visible growth. Further, Reliance has started scouting for opportunities in unconventional energy (shale gas, oil sands) which could provide longer term benefits. Given the visibility in gas price, we value known predominant gas fields (KG D6, NEC and Coal Bed Methane blocks) on DCF basis and other fields on EV/BoE or EV/EBITDA.

Initiate with BUY: With two large businesses – refining and E&P – likely to show an improvement, we initiate with a BUY rating and target price of Rs1,260. This indicates an annualized upside of 18% on previous closing price. We use the SOTP method - valuing refining and petrochemicals business at 7x EBIDTA - and arrive at a value of Rs269 for petrochemicals business and Rs379 for refining business. We value E&P business at Rs572/share.

To read the full report: RELIANCE INDUSTRIES


Company Profile
Great Eastern Shipping Ltd (GESL) is India’s largest private sector shipping company. The company has two main business: shipping and offshore. Shipping involves transportation of crude oil, petroleum products, gas and dry bulk commodities. Currently, company has 37 ships comprising of 31 tankers with average age of 10.9 years and 6 dry bulk carriers with average age of 13.6 years. The offshore business imparts services to the oil companies in carrying out offshore exploration and production (E&P) activities through its fifteen vessels.

Investment Rationale
Substantial value unlocking in offshore business
• Looking at the potential of offshore business, company is expanding its fleet size aggressively. GESL will be having youngest fleets in offshore segment by FY12 with an average age of 3 years. GESL has a capex plan of USD 362 mn (approx Rs. 1630 crore) for nine more assets.

• GESL is planning to list its wholly owned subsidiary, Greatship India as a separate entity. Separate Listing of offshore segment would provide an opportunity to GESL’s shareholders to unlock higher value.

Committed capex for shipping business
• GESL plans to add eight new fleets by FY12 with capex of around USD 577 mn (approx Rs. 2600 crore) aggregating 1.31 mn. dwt. Higher dividend pay out ratio and healthy cash position

• GESL with its higher dividend pay out ratio and healthy cash position is expected to give constant returns over a longer period.

Expertise in sale and purchase of vessels
• Second hand market for sale of ships had been constantly and judiciously used by Great Eastern Shipping Ltd near peaks of shipping cycles that has enabled company to realize significantly superior assets prices.

Turnaround in the world economy & favorable movement of freight rates
• For 2010, International Energy Agency (IEA) has revised its forecast of oil demand significantly upwards to 86.3 million barrels per day. Increased oil demand, accelerated phase out of single hull tankers, continues slippage and cancellation of order book will keep tanker rates
firm in near future.

• GESL with its 80% fleet size in tanker segment is well poised to take advantage of accelerating tanker freight rates.

At current market price of Rs. 299/-, the stock is trading at P/E of 6.0x and 4.6x for FY11E and FY12E earnings respectively and with an EV/EBITDA of 5.2x in FY11E and 4.4x in FY12E. Our SOTP based target price stands at Rs. 363, which represents 21% upside from current level. We hereby initiate coverage on GE Shipping Ltd. and recommend buy rating with a target price
of Rs. 363 in 12 months.

To read the full report: GREAT EASTERN SHIPPING

>ABAN OFFSHORE: Loss of Aban Pearl a big blow… (ICICI DIRECT)

Aban Offshore Ltd (Aban) lost its prime asset Aban Pearl that was the only semi submersible rig in the company’s asset portfolio. It was the highest revenue earning asset for the company with a rate of $3,58,000 per day and ~80% operating margin with the contract extending up to October 2014. With the loss of this asset the earnings visibility has been severely impacted. This will also delay the recovery for Aban.

Loss of Aban Pearl to severely impact the performance
Aban Pearl was deployed off the coast of Venezuela with PDVSA and was the highest earning asset for the company earning $3,58,000 per day with 80% operating margin. The loss of the asset would impact the revenues (11 months) for FY11 by ~ Rs 505 crore and lead to a drop in EBITDA of ~ Rs 404 crore. It has also wiped out the future earnings potential from the asset. The loss could not have come at a worse time as the company is currently under strain due to its large debt and servicing capabilities.

Valuation: Loss of Aban Pearl would severely impact the earnings and profitability over the next two years and lead to reduced earnings visibility. However, the current market price has factored in the impact of the loss. We have valued Aban at 14% discount on a P/BV basis and 26% discount on a P/E basis to its global peers. We have also revised our rating from STRONG BUY to ADD with a price target of Rs 874. Any further dip in the stock price from the current level can be used to accumulate the stock.

To read the full report: ABAN OFFSORE

>HAVELLS INDIA: Strong quarter

Strong earnings growth; margin expands
Havells India (HAVL) reported strong Q4FY10 (standalone) results with PAT growth of 31.8% Y-o-Y, to INR 644 mn, led by strong operating performance and reduced interest cost during the quarter (down 69.2bps Y-o-Y, to 0.2% of sales). With strong operating performance, HAVL reported 165bps expansion in EBTIDA margin Y-o-Y, to 12.2%, due to reduced raw material cost (down 165bps Y-o-Y, to 58.9% of sales), leading to strong growth of 31.4% Y-o-Y in EBITDA, to INR 866 mn during the quarter. Revenues for HAVL improved 22.7% Y-o-Y, to 7.0 bn during the quarter.The company recorded strong growth in the switchgear (27% of sales), lighting & fixtures (15% of sales) and fans (17% of sales) segments with 16.4%, 58.3% and 45.3% growth, respectively. The cables & wires segment (40% of sales), however, recorded slower growth at 8.6% during the quarter.

Sylvania margin to improve; to break-even this year
Sylvania’s revenues dipped 9.2%, to INR 6.9 bn, due to depreciation in the EUR. The company, however, reported flat sales Y-o-Y in terms of EUR, at EUR 108 mn, during the quarter. Adjusted for the restructuring cost, EBITDA margin for Sylvania stood at 4.9% during the quarter against 2.7% during Q4FY09. The management is confident of achieving break-even at PAT for the company during the current year and expects EBITDA margin to improve to 8-9%.

Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on the company’s outlook on the back of its robust domestic business and positive signs from the international business. We believe full impact of the two restructuring projects will start showing from the current year. In view of weakening EUR, we have lowered our EUR assumption, thus reducing the consolidated revenue by 2.4% and 2.3% for FY11E and FY12E, respectively. Having increased our EBITDA margin assumption for Sylvania, we have
increased our consolidated earnings estimates by 3.8% and 0.3% for FY11E and FY12E, respectively. At our target price of INR 730, the stock is trading at 16.3x and 13.4x its FY11E and FY12E earnings, respectively. We maintain ‘BUY’ on the stock and rate it ‘Sector Outperformer’ on relative returns.

To read the full report: HAVELLS INDIA