Thursday, May 27, 2010

>A strengthening recovery, but also new risks

Growth is picking up in the OECD area – at different speeds across regions – and at a faster pace than expected in the previous Economic Outlook. Strong growth in emerging-market economies is contributing significantly. However, risks to the global recovery could be higher now, given the speed and magnitude of capital inflows in emerging-market economies and instability in sovereign debt markets.

Keeping markets open has been a strong positive factor in the upturn. The rebound in trade, while incomplete, has been substantial and is proving to be a major force pulling the global economy out of recession. The ongoing recovery in activity could surprise on the upside, with a policy-driven expansion giving way to self-sustained growth. Fixed investment could bounce back more robustly and household consumption could recover more rapidly with household savings rates having risen more slowly than previously anticipated, especially in Europe. The spillover from growth in non-OECD Asia could be stronger than expected, especially in the United States and Japan. From this point of view, the overall economic environment is relatively auspicious.

As activity gathers momentum, global imbalances are beginning to widen again. However, in some emerging-market economies, notably China, strong domestic, policy-driven demand is keeping a large external surplus from rising to the levels seen prior to the crisis. This does not obviate the need to tackle global imbalances through appropriate policies. As discussed in this Economic Outlook, strong, sustainable and more balanced growth can be achieved through a combination of macroeconomic, exchange-rate and structural policies, while delivering fiscal consolidation. Identifying and implementing such a combination of policies is a major goal of international collaboration, most notably within the G20.

Progress in financial market reform will also require international collaboration. Internationally agreed rules and regulations will need to be established to strengthen the stability of the global financial system. Articulating more clearly the roles of monetary and prudential policies in dealing with future credit and asset-price developments is also a priority.

While activity is picking up, employment growth is still lagging. Over the two years through the first quarter of 2010, the ranks of the unemployed rose by over 16 million in the OECD area as a whole, employment fell by 2¼ per cent and many more workers were working shorter hours than before the crisis. But the surge in unemployment, while dramatic and notwithstanding the attendant human and social costs, has been smaller than initially anticipated. The OECD-wide unemployment rate may now have peaked at just over 8½ per cent. At the same time, the pick-up in activity, notably in Japan and in some European economies, will likely be met by increasing average hours worked per employed person and hourly labour productivity, rather than significant net job creation. Thus, prospects for strong employment growth in these countries appear weak. By contrast, firms in the United States have shed large numbers of employees during the downturn and may therefore have to rehire relatively strongly in the upturn.

Appropriate labour market and social policies can do much to promote a jobs-rich recovery. Social protection systems have played an important role as automatic stabilisers to cushion the impact of the recession on employment. Significant additional resources have been allocated to labour market and social programmes in the stimulus packages put in place during the downturn. As the recovery takes hold and countries face the challenge of fiscal consolidation, it is important to continue to make room in budgets for cost-effective labour market programmes that support those workers at greatest risk of becoming long-term unemployed and losing attachment to the labour market. Policies that promote reductions in unemployment through cuts in the effective labour supply, such as early retirement schemes or easing eligibility criteria for disability benefits, would exacerbate labour market imbalances and weaken long-term fiscal positions.

To read the full report: RECOVERY AND RISKS

>Asia’s Fallout from EU’s Sovereign Crisis (CITI)

Growth Fallout: Not yet, but Asia's growth momentum might have peaked. — Fiscal austerity and potential strains in banking systems will probably be a drag for Eurozone growth, but we see no impact on Asia yet. Nonetheless, we think momentum has peaked on both external demand risks and China’s more aggressive move to slow property investment. We find that growth in Singapore, Taiwan, Hong Kong, Malaysia, Korea and Thailand are more sensitive to a Euro area growth downturn, while the domestic-demand driven economies of India, Indonesia, China and the Philippines are relatively more insulated.

Policy fallout #1: Delayed Fed and Asia CB policy tightening — We have delayed most rate hike calls in Asia on the back of delaying a Fed hike to 2Q11 (from 4Q10). Timings of the initial rate hike in Indonesia, Taiwan and Thailand are pushed back to 1Q11 from 2H10 while the Philippines' is pushed to 4Q (from 3Q). We also reduce the amount of hikes this year from China and Korea – BOK to hike only 25bps in 4Q and China to hike two times (+54bps) starting in 3Q. For most countries in 1H11, we reduce the amount of hikes by 25- 50bps. Malaysia is an outlier, with another 25bps hike expected in July, though this is a close call.

Policy fallout #2: Less RMB appreciation — We still expect an imminent RMB move, but RMB strength on a trade-weighted basis with the sharp EUR sell-off, as well as growth concerns, will likely mean authorities will opt for a slower pace of appreciation.

Market fallout: Asia has so far been a “low beta” risk asset — Contagion via financial linkages has been evident, but with fundamentals in the region looking strong and less externally vulnerable than others. Asia FX, credit spreads, and to a certain extent, equities (in $ terms), have fared better than others.

Macro strategy — 1) Asia FX – We remain positive on Asia FX and expect it to diverge with the EUR over the medium term; our top picks are KRW, INR and PHP; 2) Asia rates – We are biased to receive rates selectively on delayed hikes and relatively manageable inflation pressures – we would look for opportunities to receive rates in India (5yr INR OIS), Korea (front-end) and Thailand; and 3) Asian (sovereign) credits – we opt for lower versus higher beta names in this
risk environment – e.g. we like Philippines over Indonesia.

To read the full report: STRATEGY OUTLOOK

>Koutons Retail India (ICICI DIRECT)

Koutons Retail India reported a dismal performance in Q4FY10, far below our and the Street expectations. The company reported net sales of Rs 386 crore against our expectation of Rs 460.9 crore. This translates into a meagre 1.9% growth YoY. The EBITDA margin was at 19.4%
against 25% in Q4FY10, a steep contraction of 560 bps YoY. This was mainly driven by lower average realisation per sq ft and higher discounts offered to push sales. Net profit including prior period expenses (Rs 1.2 crore) declined by 12.2% YoY with net margin of 8.1% against 9.5% in the corresponding quarter of the previous year.

Retail space declines marginally QoQ but rises 7% YoY
The retail space at the end of the quarter stood at 13.6 lakh sq ft with 95.3% of stores on a franchise basis. The company operates 1,307 stores with 702 stores under Koutons (including 15 racks stores) and 605 stores under Charlie Outlaw.

Thrust on better profitability
The company has taken initiatives to improve the profitability by better inventory management, debt restructuring (average cost of capital now between 13-14%), introducing family stores that yield better profitability and focus on better margin products. Koutons is looking at reducing its discounts to improve profitability.

We are positive on the business model of Koutons Retail wherein 95.3% of stores are on a franchise model. The refinancing of debt would be a positive for the earnings of the company. The initiatives taken to improve efficiency and profitability would bear fruit in the near term performance of the company. At the CMP of Rs 309 per share, the stock is trading at a P/E of 9.2x and 8x its FY11E and FY12E earnings of Rs 33.6 and Rs 38.4, respectively. We are maintaining our STRONG BUY rating on the stock with a downward revised target price of Rs 384 valuing the stock at 10x its FY12E earnings.

To read the full report: KOUTONS RETAIL

>Abbott, US has bought the domestic formulation business of Piramal Healthcare

Most profitable business sold out…
Abbott, US has bought the domestic formulation business of Piramal Healthcare (PHIL) for cash consideration of US$3.7 billion (US$2.12 billion upfront and equal annuity payment of US$400 million for four years starting CY11). The deal is valued at ~9.3x the revenue of the domestic
business and is expected to close by Q2FY11 end. The domestic formulation business contributed ~54% to the FY10 topline. The deal includes transfer of manufacturing facilities at Baddi, rights to ~350 brands and trademarks and transfer of ~5,200 employees of the domestic
formulations business to Abbott. PHIL has received Rs 350 crore as nonabatement
fees whereby the Piramal group companies will not enter the branded domestic business for the next eight years. We estimate the residual businesses will clock an EPS of ~Rs 8.2 in FY12E. Valuing the cash per share at Rs 496 and residual business at Rs 98, we have arrived at a fair value of Rs 595 for PHIL, providing 18% upside from current levels. We are assigning BUY rating to the stock.

Highlights of Analyst Meet
PHIL has retained its CRAMS, global critical care, diagnostics and domestic API and vitamins/minerals business. The company is considering a special dividend post the deal. The proceeds from the deal will be used to retire debt of ~Rs 1300 crore and venture into other emerging opportunities. The company will also look at acquisitions to complement the residual business and enter newer businesses.

PHIL is set to receive US$3.3 billion on NPV value. This works out to Rs 496 per share (post long-term capital gains taxed at 21.5%, book value adjustment and debt repayment of ~Rs 1300 crore). The residual business is valued at Rs 98 (12x FY12E EPS). We rate PHIL as BUY with a target price of Rs 595. With cash utilisation by the management post the deal we expect
the stock to get re-rated, going forward.

To read the full report: PIRAMAL HEALTHCARE

>Container Corporation of India (NOMURA)

Container traffic data released by the Indian Ports Association suggest flattish m-m activity in April 2010, though y-y growth was still healthy at 21.4%. Note that April has historically seen subdued EXIM traffic activity over March, with the latter period being inflated by a boost in year-end activity. However, with the stock trading at 17x FY11F P/E and possible downsides to our estimates, we maintain NEUTRAL.

Strength in port traffic could trigger a positive change, in our view, on Container Corp of India. Risks to margins exist in the domestic segment, however, and these could pose as negative risks to estimates and targets.

Anchor themes
A pick-up in industrial activity will likely lead to a turnaround in EXIM traffic, benefiting port entities and container logistics companies. The key is to pick stocks that still offer value after a substantial run-up in 2009.

To read the full report: CCI


Generation grows by 6.3% yoy to 3.8BU during Q4 FY10 against 3.6BU last year, average realizations jump 13.7% yoy

Revenues in Q4 FY10 for the (consolidated entity) coal and power divisions increased by 27.2% and 9.7% yoy respectively

Coal division’s EBIT margin doubles to 22% from 11% last year

Better operational efficiency and higher merchant sale translate into 93.7% yoy growth in adjusted PAT during the quarter

Reduce target price to Rs1,536 on account of marginally lower than expected FY10 earnings, maintain BUY

To read the full report: TATA POWER