Saturday, July 10, 2010

>Shree Ganesh Jewellery House (SUNIDHI)

Company Description: SGJHL was incorporated in August 2002 in Kolkata with the name Shree Ganesh Jewellery House Pvt Ltd. In the year 2004, it set up its first unit at Manikanchan SEZ with a capacity of 500 kg of gold jewellery per year. SGJHL is the largest manufacturer and exporter of hallmarked and handcrafted gold jewellery in India. Their products are primarily exported to countries such as the UAE, Singapore and Hong Kong.

Its four manufacturing units are located at Manikanchan SEZ in West Bengal, which is presently the only jewellery SEZ in West Bengal. It also manufactures products on behalf of various third parties at its plants at Manikanchan SEZ. The company has 14 subsidiary companies, all of which are into manufacturing and exports of gold products including one overseas subsidiary, Shree Ganesh Jewellery House at Singapore. Apart from Gokul Jewellery House, the company is set to amalgamate its 11 other subsidiaries with one of its subsidiary, Easy Fit Jewellery.

Investment Rationale:
SGJHL tapped the capital market in March 2010 with an IPO of Rs 315 crore priced at Rs 260 per share for expansion. About Rs 145 crore of the IPO will fund the ramping up of manufacturing capacity by setting up plants in three locations. All the projects are expected to be completed by November 2010. The strength showcased by revenues for FY09, which were up 77 per cent over FY08, a difficult period for gems and jewellery players is a confidence building factor. Customers include Wondercut Pte, Denzong Hong Kong, Ibrahim Al Sayegh Jewellery.

The product range include handcrafted and hallmarked gold jewellery, gold enameled jewellery and gold jewellery studded with precious stones such as diamonds, rubies, emeralds, sapphires, pearls, etc and semi-precious stones such as garnet, cubic zirconium, etc. The portfolio includes rings, earrings, pendants, bracelets, necklaces, bangles and medallions. The company markets its jewellery products under brand name ‘Gaja’, ‘Sitaare’, ‘GM’, ‘Marigiold’, ‘G elements’, ‘Gold
Bridals’, ‘Dianique’, ‘You’ and ‘Distar’.

The total capacity of the company as of year ended March 2010 was 30,500 kg of gold products, which is being enhanced to 43,000 kg of gold products per annum by FY 2012. Apart from setting up the manufacturing units, the company plans to expand its reach by opening 49 retail outlets in different formats by FY2013. The breakup of the different format outlets are: 14 owned outlets, 3 outlets on rent, 11 franchise model outlets and 11 shop-in-shop outlets. It has entered into an agreement with Vishal Retail for shop-in-shop arrangements in existing outlets. The Capex for expanding the retail outlets is estimated at Rs 68 crore.

Strategic location of the company in West Bengal makes it easy for availability of karigars (skilled workmen) for handcrafted jewellery at low costs. The market share of the company in the domestic gold jewellery exports has jumped from 1.8% in FY 2007 to 6.1% in FY2009. The company follows a strategy of expanding its presence into various geographies and product portfolios and is foraying into manufacture of machine made jewellery so as to consolidate its presence in the world market.

The company has more than three decades of business relationship with the Middle East customers and its major revenues generate from the jewellery wholesalers of Middle East countries. Risks in this space stem from its small store count and stiff competition from brands such as Tanishq and those of Gitanjali Gems which have a wider reach.

During FY10, Indian gems and jewellery exports advanced by 16% to $28.4 billion from $24.4 billion in FY09. Recognised as the diamond polishing capital of the world, the India is gaining prominence as an international sourcing destination for high quality designer jewellery with global retail majors such as Wal-Mart and JC Penney procuring jewellery from India. The domestic jewellery market pegged at US$ 16 billion, which includes gold, diamond, platinum and others is expected to grow to US$ 25.2 billion in two-to-three years.

SGJHL is likely to post an EPS of Rs 32 in FY11 and Rs 36 in FY12. At the CMP of Rs 113, the share is trading at a P/E of 3.5x on FY11E and 3.2x on FY12E. We recommend BUY with a target of Rs 150 in the medium term.

To read the full report: SHREE GANESH JEWELLERY HOUSE

>The ascension of the Yuan(CNY)

More strength to the CNY
On June 19, China introduced more flexibility into its yuan (CNY) exchange rate policy. Since then, the People’s Bank of China (PBOC) fixing for USD/CNY has fallen from 6.8275 to 6.7768 on July 8. In fixing terms, the CNY has appreciated 0.75% against the USD over this period.

We expect the annual appreciation pace in the CNY to be slower in the next three years compared to the pace seen from 2005 to 2008. The CNY is expected to appreciate against the USD by a total 2% in 2010, followed by 3% in 2011 and 5% in 2012. In the last cycle, the CNY appreciated by 2.6% in 2005, 3.4% in 2006 and 6.9% in 2007. Our end-year targets for USD/CNY are now 6.69 for 2010, 6.50 for 2011 and 6.19 for 2.12.

CNY flexibility is also about monetary policy, not just the exchange rate
When USD/CNY stopped falling in favor of a flattish profile in July 2008, China’s inflation had eased and converged with its US counterpart. Since then, China and US inflation had fluctuated closely with each other, both in direction and momentum. This was an important development that supported its “basically stable” currency emergency measure to safeguard the Chinese economy from the US-led global financial crisis and the Eurozone sovereign debt crisis.

Since March 2010, when both US and China reported the same inflation rate of 2.4% YoY, inflation has risen in China to a 19-month high of 3.1% in May 2010 while falling to 2.0% in the US. Looking ahead, this trend is likely to persist. Between the two countries, China’s labor sector is undoubtedly stronger where wages have increased significantly this year. On the other hand, job creation remains painfully slow in the US.

Looking ahead, we forecast an average inflation rate of 4.0% for China in 2010. This implies that inflation will accelerate by an average 5.1% for the rest of the year from the average 2.5% posted in January-May period. In contrast, US inflation is expected to average 1.8% from June to December, down from the average 2.3% in the first five months (implying full year average inflation of 2.1%).

To read the full report: USD/CNY OUTLOOK

>QUARTER 3 2010 REPORT ON ENERGY (Crude oil & Natural Gas

Summary: The Q3 2010 signifies the beginning of the US summer and also the official beginning of the North Atlantic Hurricane season. The Atlantic hurricane season this year is expected to one of the most active seasons on record. As the US government plans to impose a ban on deep water drilling post the crisis involving BP plc in the Gulf of Mexico the IEA predicts that supplies in US may fall by 300,000 barrels a day if the ban extends to 2 years. While Q3 happens to coincide with the seasonal trend for fuels like gasoline and natural gas as a result the outlook for energy products looks bullish in the coming quarter in the hope that the economy will perform much better than it did in the first half of the year.

Crude Oil: Prices traded near an 18-month high at the beginning of the quarter on better-than-expected economic numbers from the US. The US ISM non-manufacturing index and pending home sales data showed a positive growth. However, the debt crisis in Greece kept the crude oil prices in a tight band during first part of Q2. Events like the volcanic eruption in Iceland and a complaint filed by SEC against Goldman Sach continued to inject volatility into the market. In the month of May, ongoing debt crisis in Euro zone resulted into sharp fall in the prices below $65 per barrel. A rise in supply of crude oil at Cushing, Oklahoma resulted into fall in price of near month contract than farther months. In May, Fitch, the rating agency, downgraded Spain’s credit rating. This resulted into fall in crude oil prices by nearly 14%, the steepest fall since December 2008. At the beginning of June month, prices remained under pressure. However, the fall in crude inventories as reported by the DOE at NYMEX delivery point in Cushing, Oklahoma limited the fall and prompted the price to post positive closing.

Natural Gas: At the beginning of Q2, inventories began to build up earlier–than-expected as the Northern hemisphere winter ended earlier. This led to a rising surplus in overall inventories compared to the five year average. While there was little seasonal demand from nuclear and coal fired plants which were going through their maintenance. Positve economic data from US, however, helped to prevent prices from declining further. The first half of the quarter saw prices declining to as low as $3.92 per MMBtu while a recovery in prices was seen in the second half of the quarter. Good start of summer season, which means higher demand for natural gas at power plants to generate electricity for space cooling needs.

To read the full report: ENERGY SECTOR

>An Indian Bank Analyst In China (CITI)

Industry Structure — We recently attended Citi’s China Financial Tour, to compare the banking industry structures. We expect these to be increasingly benchmarked together given strong growth potential, dominating role of financial systems, and converging valuations. While there is a lot in common, key structural differences are: a) Size: China is 8.5x of India in loans; b) Penetration: 121% loan/GDP in China (India 54%); c) Loan growth: China 30% in 2009 vs. 17%; d) Competition: Fewer scale banks in China; e) Regulations: More protection in China vs. India.

Operating Fundamentals — Fundamentally, return profiles in both countries are relatively similar (ROAs of 1-1.2%, ROEs – 18-20%); details though are different: a) NIMs: implicitly protected in China (controlled lending and deposit rates); b) Loan composition: China banks are mainly corporate focused and concentrated in fewer sectors/SOEs; c) Funding: deposits dominate for both, higher demand deposits in China; and d) Leverage: slightly higher asset/equity for China.

Valuations — There has been a convergence in valuations of Indian PSU banks and Chinese banks recently (China 1.8x, India 1.5x P/BV): a) Historically, Chinese banks trade at premiums to Indian PSUs (Mean: 2.1x vs 1.2x for India); b) Key reasons for premiums: protected NIMs/profitability, greater industry concentration (top 4 banks: 78% of listed market cap vs. 56% for India), implicit government backstop on asset quality; c) Valuations (P/BV) for Indian PSUs have been more stable than Chinese banks (China – Max: 4.0x, Min: 1.2; India PSUs – 1.8x, 0.6x).

Industry Cycles — India and China banks are at opposite ends of the cycle: a) Loan growth, ROEs: India at lower end of historical range (trending up) vs. China at the higher end (trending down); b) Valuations: Indian PSU banks trading at 1SD above mean, China banks at 0.6 SD below; and c) Chinese banks at a similar stage to India banks in Mar09. Citi’s regional banks analyst Simon Ho is overweight China banks and neutral on India; our India strategist Aditya Narain is overweight banks in his India portfolio.

To read the full report: INDIA BANKS

>PHARMACEUTICAL SECTOR: Focusing on gastrointestinal

Summary: In this report, we provide detailed sales trends for the top 10 companies and the top 10 therapy areas in the Indian pharmaceutical market. We also include data for Dr Reddy’s (DRRD IN, BUY) and Glenmark (GNP, BUY), which do not figure among the top 10 companies but are part of our coverage universe.

Among the top 20 companies, in May 2010, Mankind, Sanofi Aventis and Intas continued to grow faster than the market. On the other hand, the notable laggards were Piramal Healthcare, Wockhardt and Alembic.

Focus of the month — gastrointestinal
The gastrointestinal segment, with MAT sales of INR46.8bn (market share of 10.9%), is the third largest segment in the Indian pharmaceutical market. The segment is growing at 19.7% y-y, in line with a market growth rate of 19.6% (May 2010 MAT).

The key players within the gastrointestinal segment include Cadila Healthcare (market share 5.6%), Dr Reddy’s (market share 4.9%) and Alkem (market share 4.4%). However, the trio of Piramal Healthcare-Abbott-Solvay together command a market share of 9.2%. Within the segment, antipeptic ulcerants contribute 35% of the segment’s sales on a MAT basis and this is growing at 21.8%, higher than the segment's growth. The key growth driver for the segment is sales volume. On a May 2010 MAT basis, the segment’s volume growth contribution was 62%, while new products contributed 29%. In comparison, for the Indian pharmaceutical market, volume growth contribution was 58%, while new products contributed 38%.

Key brands within the gastrointestinal segment are Zinetac (Glaxosmithkline, MAT sales INR970mn), Omez (Dr. Reddy’s, MAT sales INR917mn) and Spasmo-Proxyvon (Wockhardt, MAT sales INR915mn). Brand concentration is relatively high in this category. The top 5 brands in the segment contributed 9.7% of sales, while the top 5 brands for the Indian pharmaceutical market contributed 2.3%.

To read the full report: PHARMACEUTICAL SECTOR


The top 6 cities in India have started showing a divergence in terms of demand and pricing. Mumbai is showing stability, while Gurgaon is likely to see an uptick in prices. Bangalore, Chennai and Kolkata could see growth in volumes if prices do not move up. Hyderabad may show a decline in prices as it faces a low demand, high inventory scenario. Noida is witnessing an investor-led boom which may peter out within a year.

In the residential segment, volumes maintained their flattish trend as Feb-Apr 2010 was weak but May 2010 showed a rebound. The lack of volume growth from Mumbai and Gurgaon is understandable given the significant increase in pricing, but lack of volumes in cities such as Chennai, Hyderabad and Kolkata, where prices have not gone up much, is worrying. Kolkata and Chennai started showing some sparks of life in Apr-May 2010 although Hyderabad continued to move down. Bangalore achieved its highest volumes since Aug 2008 in Apr 2010, but May 2010 was a disappointment. With new launches picking up again in the city at reasonable prices, we would expect volumes to move up further. The data from Noida/Greater Noida indicate volumes far higher than they have ever been in the past. We believe that most of the demand is investor-led, especially in projects in the newly set up areas of Noida extension. These apartments could be put back on the market in the future, in our view, and the current strong demand could turn into large future supply.

As expected, post a 35% increase in pricing y-y, volumes in Mumbai have lost their strength, while new launches picked up before the monsoons. Mumbai is unlikely to witness any significant increase in volumes from here although prices may not decline for the next 9 to 12 months. In Gurgaon, inventory has gone down by a large amount and this is likely to lead to pricing increases unless new launches pick up. We have already heard of prices moving up by 10-15% over Jan 2010 levels from our channel checks. Bangalore and Chennai are likely to see volume growth moving up if pricing remains stable, while Kolkata could see some price increases as inventory is moving down while demand is getting stronger.

To read the full report: INDIAN PROPERTY