Tuesday, July 6, 2010

>Globalization’s critical imbalances (McKinsey)

Future financial crisis could accelerate the rebalancing of global economic activity from developed to emerging markets.

The problem
Labor can’t be freely traded on a single global market, but capital and commodities can. This dynamic is creating significant tensions in global currency, commodity, and debt markets.

Why it matters
The release of those tensions will have profound strategic implications. For example, the dollar and euro would need to be devalued by between 30 and 50 percent for the purchasing-power-parity exchange rate of emerging-market currencies to reflect financial foreign-exchange rates more closely. Such a shift would dramatically affect the attractiveness of running operations and serving customers in different countries.

What you should do about it
Don’t assume prevailing globalization norms will continue. Prepare for future financial shocks, partly through scenario planning around rapid currency or commodity price shifts. Also, prepare for a time when emerging markets are at least as important as drivers of consumption as they are platforms for low-cost operations.

To read the full report: CRITICAL IMBALANCES

>VOLTAS: Room AC driving growth (MERRILL LYNCH)

Raising PO on strong AC growth and uptrend in new project
Our management meeting left us positively surprised on demand, but negatively surprised on FY11e margin. We have tweaked up FY12e EPS to Rs15/sh, which is 20% above consensus. We have cut FY11e EPS by 7% on stock-out cost. We raised our PO to Rs240, as stock could re-rate to a PE of 16x FY12e driven by (1) rising outlook of residential AC market; and (2) cyclical upturn in project business.

Room air-conditioner growing 30%+ and has long way to go
Voltas, as the second-largest room AC company in India, with about 18% share, is a key beneficiary of the extremely strong demand growth being seen in room air-conditioners. In fact, AC is the fastest-growing consumer goods in India and likely to remain so, owing to (1) rising affluence along with climate change; and (2) fall in ownership cost owing to rising energy efficiency. Voltas expects room AC revenue, contributing to 25% of its revenue, to grow 30-35% in FY11e.

MEP cyclical recovery & new market benefits from H2FY11
Order inflow of project business (65% of FY10 sales) could start growing at a faster pace from H2FY11e, after two flat years. Rising new order inflow in the Middle East for last six months, lack of order cancellations, and rising enquiry level make Voltas confident about a resumption of the MEP boom from H2FY11e. Voltas is increasing its presence from four countries to seven countries to maximize growth. It is also expanding its presence in water treatment and
industrial electrical to boost sales.

Strong growth from FY12E; but flat FY11E on stock-out cost
Voltas suffered from excess demand for room ACs in Apr-Jun2010, as it had to source components on short notice and, hence, at higher cost. An increase in the margins in the engineering product segment (15% of FY10e profit), owing to stronger growth of textile & mining equipment having higher margins, could partly offset cost pressure.

To read the full report: VOLTAS

> TATA STEEL LIMITED: Key divisions of production department

Following are some of the key divisions, through which TSL make products;

• Ferro Alloy and Mineral Division: TSL’s Ferro Alloy and Minerals division is a leading player in the Ferro Chrome space in the domestic market. The key products manufactured by the division include Chrome alloys, Manganese alloys, Chrome concentrate, Fluxes like dolomite and Pyroxenite and has also launched Manganese oxide as a new product. The company is amongst the top six chrome alloy producers in the world with its operations are spread across 2 continents.

• Tata Agrico:
TATA Agrico is a pioneer in manufacturing superior quality agricultural implements. It product portfolio includes Shovels, Powrahs, Crowbars, Kudalies, Pickaxe and Hammers. These implements primarily are aimed at fulfilling the needs of Agricultural, Horticulture Industry, construction, dams, Railway- Tracks, mining and many more industries in India and abroad. Currently the company has enhanced its product offering by introducing new products like files, general-purpose hand tools and garden tools.

• Tata Bearings: The division is one of the leading bearings manufacturers in India. The division has various credentials in the form of ISO certificates, suggesting the focus on quality of the products manufactured. The products manufactured include ball bearings, tapered bearings, magneto bearings, double row angular contact bearings, clutch release assemblies, fan support assemblies and cylindrical roller bearings (under development).

Tata Pipes: The division is a leading manufacturer of pipes in the country. It makes a wide variety of pipes, broadly categorized as Commercial tubes, Precision tubes and Tata Structurals. The commercial tubes encompass plumbing, irrigation, cold storage and HVAC pipes while the precision tubes segment encompass products for automobiles, boilers and general engineering purpose.

• Wires Division: TSL’s wires division is one of the leading wire manufacturers catering to the needs of the domestic and international customers. The company has manufacturing facilities spread across India, China, Thailand and Srilanka. The wires division includes the following companies: Tata Steel and wire division – India, The Siam industrial wire company- Thailand, Wuxi Jinyang Metal Products Co limited – China, Indian steel and wire products – India and Lanka special steel limited- Sri Lanka. The wires manufactured find their application in the automobile, construction, power and general engineering industries.

To read the full report: TSL

>RANBAXY: Integrating R&D with Daiichi – Margin Accretive

Daiichi & Ranbaxy’s move to integrate its NDDR efforts was expected, given their respective strengths. Besides some cash inflow, we believe this could be accretive at the EBDITA (by c140bps) & net income (by c8%) levels. This is the first tangible sign of the synergies that Daiichi could bring in & should help bring margins closer to the normalized range from current low levels. Maintain Buy.

Integrating NDDR division into Daiichi – Ranbaxy has transferred its New Drug Discovery Research (“NDDR”) division to Daiichi Sankyo India Pharma Pvt Ltd. This is on expected lines, as it made sense for Daiichi, given its strengths, to spearhead the group’s new drug discovery efforts. Ranbaxy would remain active in R&D for drug delivery systems and generics.

Deal Contours – Ranbaxy would transfer all its NDDR assets and around 150 employees to Daiichi. In return, it would receive some upfront consideration (undisclosed).

Margin & Net Income Accretive – Ranbaxy spends c7% of its sales on R&D – we estimate c20% of this spend is on new drug discovery. This move could potentially lead to EBIDTA margins expanding by c140bps (c13% of our CY10E EBIDTA estimate). It remains to be seen whether the entire saving would flow down toEBIDTA or Ranbaxy chooses to step up its efforts on generics & NDDS R&D. The upside at the net income level would be lower, as Ranbaxy loses some of its tax shield (R&D gets a 200% weighted deduction for tax purposes). We estimate that if the savings are not redeployed, our CY10E recurring net income could increase by c8%.

To read the full report: RANBAXY

>PETRONET LNG: APromising growth story in an emerging market

To read the report: PETRONET LNG