Saturday, December 24, 2011

>3G Roaming pact cancellation impact (BRICS)

Media reports cite department of Telecom secretary R Chandrashekhar as saying that 3G roaming pacts between telecom operators are illegal and that all such pacts should be annulled. So far, the goverhment has not imposed any penalty. If a decision to disqualify roaming pacts is taken, it will adversely affect Bharti, Idea and vodafone the most, as they were the first to launch such services under a roamaing pact. They may have to spend more to acquire spectrum and licenses in the future.

■ Limited impact on topiline

■ Idea's margins to improve slightly in the short run

■ NTP-11 may provide relief

■ Buying 3G spectrum will be expensive

To read the full report: 3G Roaming pact


Rocky Path to Recovery

Executive Summary

Indian equity markets were weak even before the global sell-off commenced in August, and have since followed the regional correction. On a year-to-date basis, this has made India one of the worst performing equity and currency markets in Asia. While the earlier weakness was as a result of India-specific factors (growth weakness, stubborn inflation, reform paralysis, and governance scandals), the latest bout of weakness can best be explained by acute global risk aversion. However, despite the accumulation of headwinds in recent quarters the economy's resilience has been impressive, particularly in the services and trade sectors. Despite the high inflation and rising interest rates, consumption demand remains stable and India’s rural economy remains on a solid footing.

However we expect headwinds from global conditions and lagged implications of domestic policy tightening are likely to lead to slower growth in the quarters ahead. The next couple of quarters will be crucial and any likely pick-up in project execution (aside from the interest rate dynamics) could be crucially linked to the sentiment factor. The government thus, on its part, needs to move ahead with reform measures. Nevertheless, we believe that part of the investor concerns in relation to lower growth and a lack of project execution are now priced in, as evidenced by India’s sustained underperformance versus other Emerging Markets since the beginning of the year. As such, we expect a combination of monetary and government policy action to bring some confidence back and to help capex growth momentum into the second half of financial year 2013.

With the exception of a further sharp rise in oil prices and a potential runaway increase in already elevated commodity prices, we expect to see a gradual recovery in the domestic macro situation as we head into the second half of financial year 2013.

Equity Outlook
In this backdrop, we believe equity markets will mirror the economic recovery. We expect inflation to come down to ~7.5-8% levels by March 2012, post which we expect Reserve Bank to start the monetary easing which should drive the economic growth. We expect market recovery to be back ended and should see Sensex inching up only by latter half of the next year.

Fixed Income Outlook
As far as interest rates are concerned, both domestic as well as international factors indicate towards a bullish bias. Domestically, slower GDP growth combined with fall in inflation may cause RBI to cuts interest rate in Q1 or Q2 of FY2013. At the same time slower growth in the Emerging Markets along with any shocks coming from the Euro zone countries due to the sovereign debt crisis may lead to continued lower interest rates of safe haven economies. This presents a very attractive opportunity for investors in fixed income markets with a time horizon of 6 months or more as there could be a sharp fall in interest rates in the next 2 to 3 quarters. However, in case fiscal deficit continues to be high or if there is a sharp upwards movement in commodities prices globally, the fall in interest rates could be moderate.

To read the full report: OUTLOOK 2012

>GREED & FEAR:Bank Junkies (CLSA)

If the ECB has not been doing enough to monetise according to many its critics, it is going out of its way to help the banks. It is this liquidity provision which is the prime reason why markets have calmed down of late, not the half-baked “Merkozy Plan” for a “fiscal pact”. The news yesterday that 523 euro area banks have borrowed €489bn for three years from the ECB should help European banks through their massive bond refinancing schedule in coming months, though it should be noted that nearly €300bn of this amount will be absorbed meeting maturing loans. Meanwhile, the level of demand for the ECB’s three year money is, of course, a
symptom of European banks’ general stress levels.

The other issue is whether the banks will use this facility to buy lots of Eurozone sovereign debt, as the hyper active Nicholas Sarkozy seems to expect. While there will doubtless be some buying of short term government paper, GREED & fear doubts the banks will behave in such a manner so long as these banks have not been nationalised and taken over by governments.

The reason is that, for now at least, these banks are still in the private sector. The interest of their shareholders, which increasingly includes senior employees on deferred equity linked remuneration, is to deleverage rather than to take on new risky lending. It is also not to be diluted by raising equity at current distressed prices. Of course, if banks are nationalised down the road, as is quite possible, then coercing them to buy their respective government bonds becomes much more likely, a form of financial “suppression” long discussed by CLSA’s legendary investment guru Russell Napier.

The other point is that the ECB’s expanded funding of the banks will simply ensure that the Eurozone sovereign debt crisis, and the related European banking crisis, become ever more intertwined. A good article on the weaving and dodging going on to help European banks without calling it a “bailout” was published in yesterday’s Wall Street Journal (“Bank Aid: Just
don’t call it a bailout”, 21 December 2011).

In the meantime, GREED & fear would still advise investors to use any rebound in the S&P500 to the 200-day moving average as an opportunity to reduce exposure further to risk assets. The 200-day moving average is now 1260. While the decline in activity can partly be explained by the time of the year, the dramatic collapse in trading volumes in recent weeks is also an indication of the damage done by the relentless volatility. Thus, Asia ex-Japan stock market average daily trading volume has fallen from US$27bn in early November to US$20bn in the past two weeks (see Figure 2). GREED & fear would also advise investors to continue to bet against the euro. As is only to be expected of a former employee of a famous investment bank, Mario Draghi has already shown himself to be a far more flexible fellow than his predecessor, and he will be cutting interest rates again as soon as he believes he can get away with it.

Returning to the theme of financial suppression, Asia saw an example of suppression of late with Singapore’s decision earlier this month to impose a draconian 10% additional buyer’s stamp duty (ABSD) on foreign purchases of residential property. Since the residential property market in Singapore was already correcting as a result of rising supply and a succession of previous anti speculation measures, this latest measure was virtually akin to kicking someone in the head who is already lying prostrate on the ground. This is why the Real Estate Developers’ Association of Singapore did not welcome the decision arguing that the local property market had long ceased to be speculative. As a result of the latest measure, CLSA’s Singapore property analyst, Chin Hong Pang, now forecasts a 10% decline in residential property prices next year and a 35% decline in private new home sales (see CLSA research News muncher: Singapore property – A surprise move, 8 December 2011).

To read the full report: BANK JUNKIES

>RANBAXY: Resolution of manufacturing issues at Paonta Sahib and Dewas facilities takes shape under consent decree

■ Consent Decree with the FDA: Ranbaxy announced that it has entered into a consent decree with FDA resolution of affected facilities – Paonta Sahib and Dewas. Although the terms and conditions of the decree will be publicly available soon, we believe resolution is likely a long process. Additionally, Ranbaxy has made provision of USD500mn in connection with investigation by the US DoJ which is in excess of USD300-400mn expected (though actual fine may be lower).

■ Resolution timeline unpredictable: As per previous consent decrees entered by other companies with the FDA, the resolution process can take any time between five and eight years. Watson vacated consent decree put in 1998 against its Steris Lab facility in 2004. KV Pharma too announced approval of first discontinued product (Potassium Chloride) in Sep-10 after entering consent decree in Mar-09 (and closing its Ethex corp. facility). Among other Indian generics, Sun Pharma’s subsidiary Caraco entered a consent decree with FDA in 2009 and it is still working towards remediation process having received no
product approval during this time.

■ Slower ramp up of generic Lipitor adds to concern: In the second week of launch, Ranbaxy managed to grab c14% of total prescription market versus Watson’s (authorized generics) share of 45%. We have assumed net profit of cUSD200mn from generic Lipitor assuming 40% market share for Ranbaxy with c65% price erosion. Meanwhile, the company is satisfied with the initial performance and expects ramp-up in additional weeks. Additionally, the company expects to ramp up its base business through new US FDA approved facility at Mohali. While Mohali can be a replacement site for large part of products for Paonta, the site transfer will take significant amount of time and recovery will be a slow process. Ranbaxy has started Nexium formulation supply to AstraZeneca from Mohali facility in Nov-11. Cash position is cUSD360mn for the company.

■ We reiterate Neutral with a revised TP of INR454: We value the stock at 20x (10% premium to 5-yr sector average) Sep-13 EPS of INR 20 and INR53 for para-IV opportunities. We maintain Neutral given lack of clear near-term drivers and built in impact of cash outgo in relation to fine payment. Upside in base business and overall margin improvement can be a positive surprise. Inability to scale up gLipitor and slower domestic recovery is a negative risk in our view.

To read the full report: RANBAXY