Sunday, August 1, 2010

>How the Great Recession Was Brought to an End

The U.S. government’s response to the financial crisis and ensuing Great Recession included some of the most aggressive fiscal and monetary policies in history. The response was multifaceted and bipartisan, involving the Federal Reserve, Congress, and two administrations. Yet almost every one of these policy initiatives remain controversial to this day, with critics calling them misguided, ineffective or both. The debate over these policies is crucial because, with the economy still weak, more government support may be needed, as seen recently in both the extension of unemployment benefits and the Fed’s consideration of further easing.

In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.

When we divide these effects into two components—one attributable to the fiscal stimulus and the other attributable to financial-market policies such as the TARP, the bank stress tests and the Fed’s quantitative easing— we estimate that the latter was substantially more powerful than the former. Nonetheless, the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are broadly consistent with those made by the CBO and the Obama administration. To our knowledge, however, our comprehensive estimates of the effects of the financial-market policies are the first of their kind.3 We welcome other efforts to estimate these effects.

To read the full report: END OF GREAT RECESSION


CRISIL Limited has reported a flat financial performance by reporting 11% rise in consolidated total income for the quarter ended June 2010 to Rs. 1,506Mn. from Rs. 1,357Mn. in June 2009. Margins have declined on account of increased headcount and rental costs. Currently the valuations are steep at 24x CY10E earnings. We maintain our REDUCE rating on the scrip.

Performance Highlights:
Revenues from rating services have improved by 17% Y-Y to Rs. 710Mn. for the quarter ended Q2CY10 as against Rs. 608Mn. for the quarter ended Q2CY09, driven by Bank Loan ratings (BLR) & Small & Medium Enterprise ratings (SME). The company announced its 4000th BLR during the quarter.

Research services segment, recorded a 16% Y-Y growth to Rs. 666Mn. in the current quarter v/s Rs. 572Mn. for the corresponding quarter of last year. On the other hand, revenues from advisory services recorded a de-growth of 26% Y-Y at Rs. 131Mn for Q2CY10 as against Rs. 176Mn. for Q2CY09.

CRISIL has added ~10-11% employees on roll, resulting in a sharp increase in staff costs. Rental costs have also increased on account of shifting to a new rented place. As a % of sales, staff and rental costs have risen by 365bps and 209bps respectively. As a result, operating margins (OPM) have been hit by 664bps to 31% for the quarter ended June 2010 as against 38% for the quarter ended June 2009.

Reported net profit declined by 13% Y-Y to Rs. 333Mn. for Q2CY10 v/s Rs. 383Mn. for Q2CY09. This was on account of forex loss of Rs. 6.4Mn. and gratuity expense of Rs. 36Mn. After adjusting for the same, PAT declined by 6% Y-Y to Rs. 370Mn.

At CMP of Rs. 5,845.6/-, CRISIL is quoting at 24x CY10E and 22x CY11E earnings. We have kept our estimates unchanged for CY10 and CY11 and believe that the valuations are stretched. Hence, we maintain our REDUCE rating on the scrip.

To read the full report: CRISIL


Rollovers in Nifty (76.55%) has been on the higher side but its open interest has decreased around 8% month-on-month with 1.66% in price levels which indicates there has been short covering in 2nd half of July series. BANKNIFTY (83.42%) has seen healthy rollover and rise in OI indicating long rolls. FII’s have been very active in cash market segment and have been buyers there in most of the sessions in last expiry. Interestingly they have been buyers of options and their activity in index futures is mixed. DIIs on the other hand, have sold substantially. Implied volatility too supports buying of options rather selling. Initial options data suggests that new range for 1st half may be 5300-5600 levels. High open interest in market should not be seen with caution as most of the built up is in option segment and in futures participants are divided in opinion so don’t expect significant deleveraging or short covering. Range bound market and rise in futures open interest also suggests that activities will get further skewed towards stocks.

To read the full report: ROLLOVER REPORT

>BHARAT HEAVY ELECTRICALS LIMITED: Margin surprise led to 1Q11 numbers well above expectations

Strong order flows should continue in FY11F; order book remains robust
The outlook for FY11 remains strong, as orders for the 12th five-year plan start to pick up.
NTPC is planning a further tender for 9x800MW supercritical capacity in addition to its bulk
tender for 11x660MW. The company is progressing well on order conversion of its joint
ventures with states. We expect private sector orders to be strong as well for BHEL in FY11.
All these factors give us confidence in the company’s ability to meet its FY11 inflow guidance
of Rs600bn. The current order book stands at Rs1.48trn, which is 4.4x FY10A sales and
provides strong medium-term visibility.

Margin surprise led to 1Q11 earnings well above expectations
BHEL reported 1Q11 earnings well above our expectations on the back of higher-than anticipated margins. Overall, revenue and PAT grew 16.4% and 41.9% yoy respectively to Rs66bn and Rs6.7bn. Margins expanded 418bp yoy to 14.6%, primarily on the back of a 480bp improvement in RM/net sales. Although the company reported a top line marginally below our expectations, we expect execution to catch up in the coming quarters and believe that the lower-than-anticipated top line might be due to a slight delay in revenue booking. On the margin front, we believe there is limited room for improvement over FY10, given rising material prices, and expect margin expansion to be lower for the rest of the year.

Introducing FY13 numbers, maintaining our Buy recommendation
We retain our estimates for FY11 and FY12. We also introduce our FY13 numbers and roll forward our DCF, which raises our target price to Rs2,793, a change of 8% compared with our previous target price of Rs2,590. We continue to like BHEL and remain confident in its ability to maintain its leadership and profitability, even in the increasingly more competitive scenario in the industry. In this regard, we watch keenly the upcoming NTPC tender for bulk supercritical equipment. Buy rating maintained.

To read the full report: BHEL

>SUNDARAM FINANCE LIMITED: Key Subsidiaries and their performance

Sundaram BNP Paribas Home Finance Limited (50.10%)
Despite the challenges posed by the volatility and uncertainty in the operational environment, and stiff interest-rate competition, the Company managed to turn out a reasonably good performance during FY10, helped by an upswing in the business during the second half of the year, after a sluggish first half. The net profit for FY10 at Rs. 27.72 crores was 3.4% higher than in FY09 (Rs. 26.81 crores).

Sundaram BNP Paribas Asset Management Company Limited (50.10%)
This subsidiary earned a total income of Rs 111.71 crores for the year 2009-10, by way of investment management and advisory fees and other income during the year as compared to Rs. 86.05 crores in 2008-09. It reported a profit after tax of Rs 20.83 crores for the year as compared to Rs. 10.67 crores in the previous year. The Average Assets Under Management of
Sundaram BNP Paribas Mutual Fund as at March 31, 2010 was Rs. 13,878 crores, as compared to Rs. 9,267 crores for the previous year ending March 31, 2009. This represents a growth of 49.76% over the previous year. The closing AUM as on March 31, 2010 was Rs. 12,770 Crores. This represents a share of 2.08% of the Industry AUM of Rs. 6,13,979 Crores. It opened 11 branches and closed 9 branches during the year 2009–10, taking the total number of branches to 57 as at the yearend.

Sundaram Finance Distribution Limited (SFDL) (100%)
In spite of significant changes in the regulatory guidelines and decline in the number of New Fund Offers by mutual funds, the income from mutual fund distribution has gone up to Rs.1.58 crores during 2009-10 from Rs.1.04 crores during 2008-09. Despite reduction in insurance premium levels consequent to de-tariffing, the subsidiary has earned a higher commission of
Rs.4.01 crores through stepped-up efforts in distribution of insurance products during the year as against Rs.2.28 crores in the previous year. The profit after tax for the year amounted to Rs.1.96 crores as against Rs.1.37 crores in the previous year.

LGF Services Limited (100%)
In its sixth year of operation, this subsidiary has earned a higher commission of Rs.5.58 crores through stepped-up efforts in the distribution of insurance products as against Rs. 4.38 crores in the previous year. The profit after tax for the year was higher at Rs.1.83 crores as against Rs.1.77 crores in the previous year.

Sundaram BNP Paribas Trustee Company Limited (50.10%)
During the year under review, this subsidiary earned a gross income of Rs.1.24 crores by way of trusteeship fees and other income as against Rs. 1.05 crores in the year 2008-09. This translates to a growth of 17.75% on a year-to-year basis. It reported a PAT of Rs. 0.42 crores for the year ended March 31, 2010 as against Rs. 0.36 crores in the previous year, registering a growth of 16.67%. After taking into account a sum of Rs. 0.29 crores brought forward as surplus from the previous year, a sum of Rs. 0.71 crores is available for appropriation for the financial year 2009-10.

T0 read the full report: SUNDARAM FINANCE

>ABAN OFFSHORE LIMITED: 97% of the USD235mn claim received:

On consolidated basis, Aban suffered loss of `1.4bn on account of write off of the rig. Revenue was in line with our expectation while Ebitda was higher than our expectation. Sales have grown 6% y‐o‐y but declined 17% q‐o‐q to `8.4bn. EBITDA grew by 11% y‐o‐y and was down 21% q‐o‐q to `5.2bn. The EBITDA margin declined to 61% from 64% in the previous quarter. Depreciation
increased by 30% y‐o‐y and 1% q‐o‐q to `1.2bn and Interest cost was down 4% y‐o‐y and up 4% q‐o‐q to `2.2bn. Depreciation and interest cost stood at 15.3% and 27% of sales. Net Loss stood at `1.4bn. We give a Hold rating with a revised target price of `882 per share.

97% of the USD235mn claim received:
Aban pearl has received 97% of the USD235mn insurance claim. The company has written off balance USD70mn against Q1FY11 profits. Another `0.13bn extra ordinary item was on account of write off in relation to its `1.95bn investment in Norway based drilling company that filed bankruptcy. The company is considering the replacement of Aban Pearl.

Equity dilution a must in near future:
After the sinking of Aban pearl, a high yielding asset of Aban that used to earn $3,58,000/per day, the company will face the brunt of huge debt repayment. Its debt as on date stands at ~ `142bn. USD375m is due in FY11E and 650m in FY12E. Yet there is no clarity on new repayment schedule. We have assumed equity dilution to get earning of `107 and `130 in FY11E and FY12E.

Aban currently trades at a PER of 8.3x, 6.8x its FY11E and FY12E earnings of `108 and `132 and EV/EBITDA of 6.6x and 5.7x in the same period. We value Aban by assigning a 4.5x EV/EBITDA multiple to its FY12E EBITDA, considering lack of clarity on debt repayment. Based on this, our target price is `.882, which offers a 1% downside, thus we assign a Hold rating on the stock.

To read the full report: ABAN OFFSHORE