Thursday, June 3, 2010

>Dollar, official reserves, capital flows, liquidity and exchange rate regime

In the exchange rate regime that prevailed before the crisis, the United States was affected
not only by a high external deficit, but also – and increasingly so - by capital outflows heading to emerging countries.

These countries (as well as oil-exporting countries) wanted to prevent an appreciation of their currencies against the dollar and accumulated huge official reserves, which led to a destabilisation of their domestic monetary policies (excess liquidity and credit, too low interest rates, etc.).

The situation seems to have evolved to a significant extent in the wake of the crisis:
− policies to stimulate domestic demand are being implemented in emerging countries; China in particular now has the will to replace exports - which are weakened by the crisis - with consumption; this is likely to reduce the savings glut in emerging countries;

− in the United States there is a rise in the savings rate due to household deleveraging, albeit only to a limited extent;

− moreover, we can see certain signs that international capital flows are returning to the United States, for different reasons: greater confidence in the US economy (perhaps mistakenly), excessive market valuation in emerging countries, preference for liquidity, crisis in the euro zone. These developments have important consequences if they persist and are confirmed:

− lower liquidity in Asian countries and worldwide, since it is no longer necessary to shore up the dollar;

− greater freedom of action for central banks in emerging countries, since they are less under threat of being flooded with liquidity if they hike their interest rates; accordingly, due to the economic recovery, tightening of monetary policies in emerging countries;

− depreciation of the euro, both against the dollar and emerging currencies.

It is not certain that the spontaneous support for the dollar will become a permanent feature. If that is the case, the winners would be the euro zone as the euro would return towards an exchange rate close to purchasing power parity, and emerging and oil exporting countries due to the regained monetary policy freedom; but there would also be a normalisation of asset prices in these countries due to the return of monetary policies that are suitable for their economic situations. The losers would be the United States, whose economic strategy in the aftermath of the crisis requires a weak dollar.

To read the full report: EXCHANGE RATE REGIME


Voltas Ltd’s Q4FY10 results beat our expectation as net sales grew by 8.1% YoY to Rs14.8bn as against our estimate of Rs11.9bn. OPM expanded by 257bps to 9.4% due to decline in raw material prices. Consequently, adj. net profit rose by 87% to Rs1.1bn (our estimate was Rs777mn). For FY10, adj net profit increased by ~56% to Rs3.6bn against our estimate of Rs3.3bn. Intense summer took revenues northward: Revenues from cooling products segment (contributes ~25% to topline) increased by ~72% (YoY) and more than compensated the decrease in revenues from other segment. Overall, net sales for the Q4FY10 surged by 8.1%
YoY. Margins improved across the segment and resulted in OPM expansion of 257bps in Q4FY10.

Improving order inflows: In our earlier reports, we highlighted the expectations of improving order inflows by the end of FY10 due to lag effect from construction/ infrastructure industry. Voltas received a prestigious MEP order of Rs8bn for the modernisation of Abu Dhabi's Central Market. Total order inflows for Q4FY10 is ~Rs16bn which is an increase of ~5x QoQ. The total order book at the end of Q4FY10 stands at Rs47.2bn (+19% QoQ).

Outlook: Healthy order inflows augur well for bright future for Voltas. We believe that the company should be back on high growth trajectory from FY12 onwards. Performance for the Engineering product division should also improve in FY11 with improvement in industrial activities.

We have increased our earning estimates for FY11 by ~7% on the back of better visibility from MEP segment and have introduced FY12 estimates. At the CMP of Rs172, the stock trades at a P/E of 13.0x and an EV/EBITDA of 7.2x its FY12E EPS of Rs13.3. We upgrade our recommendation to ‘BUY’ with a target price of Rs212

To read the full report: VOLTAS

>Jaiprakash Associates (ICICI DIRECT)

Quarterly numbers below expectation…
Jaiprakash Associates’ (JAL) results were sharply below our expectation due to lower other income of Rs 11.9 crore in Q4FY10 (vs. Rs 42.9 crore in Q4FY09), higher interest expenses and taxes. However, the operating performance came largely in line with our expectation. We have now incorporated these changes into our estimates and have revised our earning estimates. In terms of valuation, we are now valuing the JAL cement business at close to its replacement cost (US$102 per tonne). Also, we have valued JAL’s stake in Yamuna Expressway at a 20% discount to the CMP in our SOTP valuation. Hence, we are revising our price target to Rs 160 per share and upgrading it to STRONG BUY.

Q4FY10 results below our expectation
JAL’s revenues grew 58.8% YoY to Rs 3345.2 crore, above our expectation, driven by the construction division (up 80.2% YoY to Rs 1974.1 crore) and cement division (grew 70.2% YoY to Rs 724.8 crore). However, the adjusted net income declined by 39% YoY to Rs 244 crore, below our expectation due to lower other income on account of adjustment of VAT in the cement division and higher interest expenses and tax rate.

Consolidated numbers remained muted in FY10
JAL’s consolidated revenues grew 36% YoY to Rs 6526.6 crore in FY10 and remained below standalone revenues of Rs 10,088 crore on higher inter segment revenues. In terms of adjusted net profit, it declined 27.4% YoY to Rs 372.7 crore due to a sharp rise in interest expenses to Rs 1286 crore in FY10 from Rs 706.2 crore in FY09.

Monetises Rs 590 crore on Jaypee Infratech IPO
With the completion of the Jaypee Infratech IPO, JAL has successfully monetised Rs 591 crore through an offer for sale of six crore equity shares. However, we have now revised our valuation
for JAL’s stake in Yamuna Expressway at a 20% discount to CMP.

At the CMP, the stock is trading at 21.7x FY12 earning estimates and 2.7x P/BV. We are upgrading the stock to STRONG BUY and revising our SOTP based price target to Rs 160.

To read the full report: JAIPRAKASH ASSOCIATES


WTG sales pick up, but continue to remain muted, 38% lower over the previous year as customers defer deliveries

Gross profit/MW improves to Rs24.6mn/MW during Q4 FY10 from Rs20.3mn/MW in Q3 FY10, expected to stabilize here

High depreciation and tax outgo coupled with lower other income translate into adjusted loss of Rs2bn

Order book and order inflow remain weak during the quarter, concerns on weak order book position continue

Reduce earnings to reflect weaker than expected FY11; but steep correction leaves room for upside despite cut in target price to Rs73/share, re-iterate BUY

To read the full report: SUZLON

>Indiabulls Real Estate Limited (GOLDMAN SACHS)

What's changed
Indiabulls Real Estate’s FY10 results provided an update on progress with construction activity. This was encouraging in our view as it indicated that IBREL has about 9 mn sq ft under construction in cities including Ahmedabad, Chennai, Gurgaon, Hyderabad, Madurai and Mumbai (Panvel). It plans to complete a significant proportion of these projects and recognize about Rs10.25 bn of revenue in FY11.

We upgrade revenue/EPS forecasts for FY11E-FY12E as we expect P&L revenue recognition based on percentage completion to be faster than what we had previously anticipated. We raise EPS by 62% to Rs6.91 (from Rs4.26) for FY11E and by 22% to Rs10.85 (from Rs8.92) for FY12E. Although we raise EPS, our 12-month target price is unchanged at Rs214 reflecting a lower than expected FY10-end net cash position. While visibility on IBREL’s earnings may not be as high as some of its peers given the nascent stage of projects, we believe the market may get better evidence of improving execution over the next 12 months, which could help the stock re-rate. We maintain our Buy rating. We have updated our FY10 numbers for the preliminary information released by the company in its press release. We also introduce FY13 estimates.

Our target price is set at a 30% discount to FY11E RNAV, which is at the deeper end of the 10%-30% discount range we use for our coverage. IBREL currently trades at close to a 45% discount to FY11E RNAV.

Key risks
Downside risks to our view include limited signs of improvement in the pace of residential sales and office leasing, execution delays with real estate and power and low earnings visibility, aside from policy tightening.

To read the full report: INDIABULLS REAL ESTATE

>FM Radio Broadcasting Industry - India


Radio stations generated a revenue of INR 8 bn in 2008 ; expected to reach INR 18 bn by 2012
Share of radio advertising was 3.3 % in 2008; expected to reach 4% in 2012
Most stations use same level of genre of content with little or no differentiation
There are over 240 radio stations beaming across over 90 cities in India

– Increasing radio listener base
– Opportunities in Phase III expansion
– Increasing advertising by small local brands
– Favourable demographics
– Political advertising
– Introduction of new performance measurement tool

– Royalty
– Lack of content differentiation
– Government regulations
– Bargaining tactics used by advertisers

Emergence of Visual Radio
Satellite Radio
Community Radio
Internet Radio
Sales Alliances
Players going Niche

All India Radio (AIR), covers 91% of India's area and reaches 99% of India’s population
Radio Mirchi leads the overall market with share in revenue terms in excess of 40%
Big FM leads in terms of highest number of stations
Majority of players are backed by media houses with interests in media activities like TV or Print

To read the full report: FM RADIO