Wednesday, May 26, 2010

>The World Cup and Economics 2010

Welcome to our 2010 book on the World Cup and Economics, our fourth since the 1998 finals in Paris. As always, we present this as a fun piece, your companion to the competition, to be perused before, during and after the event. In addition, it might just give you some new ideas on how to benefit from our exciting, changing world.

We hope the book is as popular as past editions. To aid your enjoyment, we have kept some old favourites and added some new features. Once more, in addition to the work of our prodigious economists around the world, we have contributions from some very famous guests.

We include a very exciting contribution from Adrian Lovett of 1GOAL, a campaign designed to raise basic educational standards dramatically in the emerging world through the vehicle of the World Cup. We are happy to add our name to this effort.

Former South African Central Bank Governor Tito Mboweni discusses the host nation’s chances, aided by the football analytical skills of his nephew! Russian Deputy Prime Minister Shuvalov tells us what it is like for Russia not to be in South Africa—and expresses his hopes for a World Cup in Russia in 2018. We also have a very interesting contribution from one of our former partners, Carlos Cordeiro, on why the 2022 competition should be held in the US.

And, to keep it all fair and balanced, Andy Anson, CEO of England’s 2018 World Cup bid, states his case.

We then include a contribution from Kevin Roberts, editorial director of Sports Business Group, who offers his views on the possible hosts in 2018 and 2022. And we have a piece about Euro 2012, to be held in Poland and Ukraine, written by our own Magdalena Polan.

Many of our country pages have been written by guests, including Otmar Issing on Germany, Mayor of Rio Eduardo Paes on Brazil, Edwin van de Sar on the Netherlands, a group of football-loving FX traders on Italy and Tudor’s Angel Ubide on Spain.

In addition to our external contributors, my colleagues from around the world offer their insights into the economies of the participating nations, as well as some football thoughts. And we have a ‘special’ entry on Ireland, which perhaps should be there!

Back by popular demand is a 2010 version of the World Cup Dream Team, selected by you the clients (and GS staff worldwide). We have narrowed down a broad list of 121 players to 11, based on the nearly 3,000 votes submitted, which vastly exceeded the numbers who voted in 2006.
As usual, we also tentatively suggest the likely semi-finalists—always a highly contentious move. We would point out to those annoyed and irritated by our selections that we did name three of the four semi-finalists in 2006 and in 1998 (the least said about 2002, the better)… We complete the book with some interesting World Cup trivia.

We hope you enjoy our World Cup and Economics 2010!

To read the full report: THE WORLD CUP AND ECONOMICS

>What are the positive developments in finance since the crisis, and what issues still give ground for concern?

Some developments since the crisis definitely point to greater financial stability:

- reduction in debt leverage among households, companies and banks, which is making them less fragile: weaker link between indebtedness and wealth;

- since end-2009, slowdown in global liquidity growth due to the incipient reduction in "global imbalances";

- investor rejection of overly complex financial assets with overly complicated risk profiles.

But there is reason to worry about:

- the very high demand for return on equity that still persists, which gives an incentive to look for speculative investments (commodities) and which could subsequently lead to a renewed increase in debt leverage;

- the excessive international capital mobility, in particular between emerging and OECD countries, which is destabilising the economies of emerging countries;

- the conflicts of objectives between regulators, who have a huge risk aversion, and economic policy decision-makers, who normally favour the long-term financing of the economy. Regulators may go too far and hurt long-term growth (with Basel III, Solvency) or financial market liquidity (due to the excessive discouragement of trading).

- the excessive and useless liquidity in OECD countries (but not in emerging countries, as we saw above), which persists, especially in the United States.



Standard Chartered Plc's first-ever Indian depository receipt (IDR) will open on May 25, 2010, at a price band of Rs100-115. The company will issue 24 crore IDRs (10 IDRs representing 1 share), accounting for 1.16% of the bank's capital. The issue of IDRs will allow Standard Chartered to significantly boost its market visibility and brand perception in India. The company is already listed in London and Hong Kong. Standard Chartered Bank (SCB) is the main operating entity of the group. SCB focuses on developing its wholesale and consumer banking business in Asia, Africa and the Middle East, from where it derives 90% of its operating income and profit. The bank operates a network of over 1,700 branches and outlets (including subsidiaries, associates and joint ventures) and employs 73,000 people.

An Emerging Market Play

Rationale for our Subscribe recommendation
Well placed to play the emerging market recovery: SCB is well positioned to benefit from the recovering emerging markets. The bank has well-diversified revenue streams spread across emerging markets such as Hong Kong, Singapore, India, Korea, the Middle East and Africa. Diversification of the business, capital employed and operating income across economies act as a natural hedge and offers the bank an opportunity to dynamically and optimally utilise its resources. In 2009, Asia accounted for 83% of SCB's profit before tax (PBT), 83% of its loans and 78% of its assets.

Wholesale Banking and Trading business-The key drivers for Profit: SCB's wholesale banking business accounts for ~80% of its PBT. Unlike the consumer banking business, this business does not require any large distribution. The bank has enhanced its service capabilities (acquisitions and investments in technology), with relationships increasingly becoming multi-country and multi-product.

RoAs superior to peers and RoEs higher at 18%: From 2007 to 2009, the bank has been consistently reporting return on assets (ROA) and return of equity (RoE) in the range of 0.8% and 14-15%, respectively. Subdued RoEs are a result of high goodwill, which was created on account of acquisitions. If one looks at adjusted RoEs vis-à-vis price to adjusted book value, the parity is quite attractive with 18% RoEs. The bank is adequately capitalised with capital adequacy ratio (CAR) at 16.5% (as on December 31, 2009) and a strong core tier-1 ratio of 11.5%.

Outlook and Valuation: SCB's IDR provides Indian investors a vehicle to invest in a global entity that has a global presence. As a result of its diversified presence and emerging market focus, SCB came out relatively unscathed from the sub-prime crisis and is now well poised to benefit from the ongoing recovery in emerging economies. Hence, the bank is an excellent diversified multinational banking play, with strategic positioning in high-growth emerging markets. The stock is currently trading at 1.7x CY2010 P/B vis-a-vis 2.9x and 3.8x FY2010 P/B for Axis Bank and HDFC Bank, respectively. We recommend Subscribe to the Issue.

To read the full report: STANDARD CHARTERED


We like Apollo Tyre due to its dominance in tyre market (28% market share in T&B vs. 19% of closest competitor) and capacity addition, ahead of its peers, to leverage on the structural shift from cross-ply to radial. The company has already taken 12-15% hike in tyre prices (as per price hikes taken by industry) and we believe even further price hikes wont taper demand for tyres. We initiate coverage with “ Accumulate” rating on the stock.

In past markets have exhibited growth along S-curve once the level of 11-12% is breached. Going by that trend and coupled with thrust on road development put forth by the ministry of road we expect T&B tyre market to witness inflection point in 2011 and reach at 25% radialisation level by 2013. To leverage upon this opportunity company is expanding its radial manufacturing capacity by 440 MT/day at Chennai with an aggregate capex of Rs 2000 crores.

Rubber prices are hovering at Rs 160/kg and we expect rubber prices to become favorable from 2012 while the current capacity constraints coupled with buoyant demand will remain in favor for tyre manufacturers to raise prices and maintain margins. It has been observed that EBITDA margin remains impacted for some quarters when rubber prices are on rise as manufacturers pass-on the prices gradually while Apollo tyres has shown better margins than its peer during rising rubber price scenario and the difference between company’s and industry margins has widen during such situation.

We expect South African facilities acquired in 2006 and acquisition in Vredestian Banden in 2009 will contribute 30% of overall business in FY11 from 18% in FY09 and report sales growth of 5% CAGR over FY10- 13. Acquisitions offers cross leveraging benefits of technology, marketing network and low cost production, which will drive profitability of the overall business.

We expect sales to grow at 15% CAGR over 2010-13 and PAT to grow at 17% over the same period, mainly due capacity addition, increase in gross realization due to rubber price increase and change in product mix. Since rubber price volatility translates into volatile earnings we believe that looking at EV/Sales is better indicator and show a better picture. The stock trades at 0.53x and 0.45x its FY11E sales of Rs 9080 cr and FY12 E sales of Rs 10624 cr. Our target price of Rs 80 implies a 1 yr fwd P/E of 6 (Hist. 1yr Fwd P/E of 8.3 and 1 yr fwd EV/ sales of 0.57 (Hist. 1yr Fwd EV/sales of 0.45). Hence we are extremely positive on the medium term prospects of Apollo Tyres considering the fact it is the market leader in the CV segment where a major portion of its sales accrue and where overall demand traction continues to remain

To read the full report: APOLLO TYRES

>EDELWEISS CAPITAL: Financing book comes to the rescue (ICICI DIRECT)

Edelweiss Capital reported disappointing numbers from its core broking and treasury operations. This signifies the pressure on yields, which fell from 6.2 bps in Q3FY10 to 5.6 bps in Q4FY10. Treasury yields fell to a low of 11% in Q4FY10. Both these factors led to only 34% contribution of broking and treasury income to total income, which ranged at ~50% in the previous three quarters. The company closed 17 deals during the quarter in investment banking (IB), which led to a five-fold QoQ jump in IB fees in Q4FY10. The significant jump in the loan book led to higher interest income and resulted in 43% YoY and 14% QoQ rise in total income to Rs 262 crore.

Broking volumes fall, market share sinking
The broking volume of the market fell ~3% QoQ to Rs 95,985 crore but Edelweiss reported ~17% QoQ fall in its ADT to Rs 3,913 crore leading to a 70 bps fall in the market share to 4.1% in Q4FY10 and 4.5% in FY10. We expect the market share to stay stable at current levels without factoring in volumes that will be added after the Anagram acquisition.

Finance income recoups bottomline
The loan book of the company grew 191% YoY and 78% QoQ to Rs 1,837 crore. Of the total loan book, promoter funding is ~Rs 1,000 crore while margin funding and the corporate book constituted ~Rs 250 crore each. We do not expect a drastic change in the composition of the funding book over the next couple of years. The management expects a significant scaling up of the financing book by FY12E. We expect this segment to contribute over 40% to the total income of the company.

At the CMP of Rs 404, the stock is trading at 12.2x FY12E EPS, which is at a 6% discount to the multiple we have assigned to India Infoline and Motilal Oswal. We are now valuing all three companies under our coverage at par and not assigning any premium to any player. We,
therefore, value Edelweiss at 13x FY12E EPS and downgrade the target price to Rs 429. Our target multiple does not capture any upsides for the company after taking over Anagram Capital, which will give it a diversified retail clientele that was lacking in its portfolio.

To read the full report: EDELWEISS CAPITAL

>Will Eastern Europe catch cold? (CITI)

Western Europe’s turmoil has affected financial markets in Central and Eastern Europe (CEE) worse than anywhere else; not a surprise given the importance of “neighbourhood risk”. CEE faces three channels of contagion: a “financial” mechanism that works via European banks’ exposure to CEE; a “real” mechanism that threatens CEE export growth if Eurozone woes deepen; and a “thematic” mechanism in which investors might target CEE economies with large debt burdens. Although these three mechanisms pose a risk, there are a number of factors that help cushion CEE: the region’s credit-dependence has fallen, partly as a result of the post-Lehman adjustment process they’ve gone through; and with the exception of Hungary, public debt burdens remain low in spite of the crisis.

On balance, though, any deepening of the Eurozone crisis will keep CEE vulnerable relative to other emerging economies. As a rule we think the strongest CEE countries are likely to be those where competitiveness is relatively high; where economies are relatively closed; where Western European banks have shown little desire to exit, and where their exposure is relatively small; and where public debt burdens generate few concerns. Poland, Romania and Ukraine seem to be a lot better-protected on these measures than, say, Hungary.

To read the full report: EASTERN EUROPE