Tuesday, December 27, 2011

>INDIA STRATEGY: Not the bottom yet (CLSA)

Despite the underperformance, MSCI India still trades at 15% premium to MSCI Asia leaving room for downside. On the positive, at 11.9xFY13CL earnings, Indian market now trades at 10% away from the Mar’09 lows which should limit downside, implying a range bound market. Our recent field trips make us more cautious on consumer discretionary demand outlook and we remove 3 ppts from our model portfolio. We also reduce 2.5ppts and 1 ppt each from banks and industrials to maintain UWT stance and add it to IT services to close the UWT there, primarily attributable to weaker INR outlook.

India premium has come down, but still a premium
 Indian stock market (Sensex) is now trading at 11.9xFY13CL earnings or 27% discount to the last five year average and 17% discount to the 10 year average.
 Over the last five years, Indian markets have traded at a 25% premium over Asian peers – which also stands corrected to 17% now. Indian market has traded at lower premium only during the GFC, when India traded at a discount.
 While the GFC type of situation cannot be ruled out now, India is only 10% away with Mar-09 low multiples and valuation support should restrict the downside.

Governance a drag but several negatives now built-in
 With a near roll back of FDI in retail, the Government inaction is once again in the forefront. The possibilities of agitation by Mr Anna Hazare, on the ‘Lokpal bill’ remains an outstanding issue. But the ‘Government paralysis’ is not really new.
 Many of the government facing industries viz. infrastructure /property stocks have already corrected by c.50% over the last one year and earnings lowered by 20- 50%. While more damage can happen but we believe downside is limited.
 33% of stocks (30% of mcap) of stocks under CLSA India coverage universe are already trading below Mar-09 PE multiples.

Consumer demand slowing
 Our recent field trips to the Northern state of Punjab and channel check by On The Road confirm signs of a consumer slowdown spreading. We temper our enthusiasm on consumer discretionary by slashing a 1 ppt each from Mahindra, Bajaj and Jet.
 We do see downside risks to some expensive staples names viz. HUL, Nestle, Colgate etc owing to the triple impact of a small slowdown in demand growth, margin pressure due to the INR depreciation and high valuations. Our key picks here include ITC, Godrej Consumer and Jubilant.
 We add 1 ppt to ITC by taking away 1 ppt from United Spirits to take into account the impact of higher ENA prices and a steep duty hike in West Bengal. 

Weights lowered in discretionary and banks; added to IT services
 Underperformance by the banking sector has reduced our UWT to only 2ppts. We reinstate our 4.5ppts UWT on banks by removing SBI (-1.5ppts) and 1 ppt from ICICI Bank. We continue to be worried about the growth slowdown and asset quality concerns for the sector. Similarly, we also take out 1 ppt from Jaiprakash to maintain our small UWT on industrials. The near term risk to our UWT on banks would be a potential rate cut by the RBI in January’12.
 We add these 6.5ppts to IT services sector to close our UWT position in the sector. While the companies will likely disappoint on US$ growth numbers, the reported performance, due to weaker INR, will drive street upgrades to earnings.
 Our portfolio now has a 57% active bet reflecting our view that bottom-up stock picking would be crucial for outperformance.
 Our top picks for the market are ITC, Dr Reddy’s, M&M and ICICI Bank. ITC and Dr Reddy’s appear good on earnings visibility. M&M’s volume sales have been robust so far and we expect similar trend to continue. Core auto business now trades at 10x. ICICI at 1.2x in line with PSU banks and already builds in asset quality risks.

To read the full report: INDIA STRATEGY

>PORTS & LOGISTICS: Stock Performance of Gateway Distriparks, All Cargo Logsitics, Container Corporation, Essar Ports, Mundra Port & Gujarat Pipavav Port


■  November Major port volumes decline 8.3% YoY: Major port volumes declined 8.3% YoY to 45.7 mt, however on a MoM basis volumes were flat (+1%). As a result YTD (Apr-Nov) growth in volumes has been extremely tepid at ~1.3% on a low base of 0.8% YTD growth last year. A declining trend in volumes of major commodities like iron ore and fertilizers in FY12 has resulted in this weak trend.

■ Iron volumes decline sharply on extension of export restrictions to Orissa ports: Iron volumes have been on a downtrend since the Karnataka mining ban to rein in illegal mining in the state, was imposed by the SC in Aug 2011. November witnessed a particularly sharp fall, clocking a decline of 36% YoY and ~20% MoM, as export ban restrictions were extended to ports in Orissa. Volumes at Orissa ports, Paradip and Vishakapatnam, have plummeted 74% and 47% respectively on a MoM basis.

 Container volumes exhibit divergent trends at JNPT and Chennai: Overall major port container volumes exhibited a flattish trend, rising +2% YoY but down 4% MoM. The trend is similar on a YTD (Apr-Nov) basis as volumes are up by ~4%. An overall slowdown in trade seems to have impacted JNPT container volumes where we are seeing a 5% YoY and 9% sequential decline in container volumes for the month of November. However, individual ports are seeing divergent trends. Chennai volumes rose 21% YoY and 15% MoM after a lacklustre three months (Aug-Oct). A temporary solution to the access road problem at the port has likely resulted in a spurt in volumes.

 Impact: A slowdown in volumes at JNPT is likely to increase the competitive intensity at CFS s operating near the port, adversely impacting companies like Gateway Distriparks. Although a slowdown in trade has impacted container volumes at major ports, our interaction with private port players suggest a minimal impact of the same, mainly on account of market share gains for these players at the expense of JNPT. However, growth has moderated to an extent, and we are expecting a flattish trend in container volumes for ports like Gujarat Pipavav on a sequential basis. Going forward a continued slowdown in trade can impact the growth trajectory at minor ports like Mundra and Gujarat Pipavav port

To read the full report: PORTS & LOGISTICS


■ USD-INR Weakness creeps in

The USD-INR touched the upper end of the long-term rising  channel and sold off sharply. For the week it formed a  candle with a long wick on the upside. The weekly  momentum indicator is showing a negative divergence in  the overbought territory. Hence the high of Rs54.32  becomes a key resistance. As long as that holds on a closing  basis the price can fall down towards the 21-daily  exponential moving average (DEMA), which is near the  50% retracement mark, ie Rs49.

■ GBP-INR: Channel resistances
The GBP-INR halted at the upper end of the long-term falling channel. In terms of Fibonacci retracement the 78.6% retracement mark turned out to be a crucial hurdle. The upper end of the short-term rising channel added to the downward pressure. As a result, the GBP-INR formed an inverted hammer on the weekly chart. Unless the level of Rs84 is surpassed it is expected to trade with a bearish bias. The targets on the downside are at Rs77-74 levels.

■ EUR-INR: Pressure builds in
The EUR-INR made a throw over the rising channel and entered back into it. It faced resistance at the all-time high of Rs71.31, which can potentially result in a double top. At the upper end of the channel, the price formed a bearish outside bar. The momentum indicator is showing negative divergence and has given a sell signal. On the downside, the channel target is Rs65, ie the lower end of the channel, whereas the weekly lower Bollinger Band and the monthly middle Bollinger Band are near Rs64.

To read the full report: CURRENCY UPDATES

>PRINT MEDIA: Hindustan Times, Jagran Prakashan, Mint & Dainik Bhaskar

We upgrade DB Corp to BUY from ADD owing to the recent correction in the company’s stock price, while maintaining our target price at Rs244/share. HT Media remains our top pick in the sector and we expect it to outperform other print media players on the back of its increasing readership (both Hindi and English) and turnaround in its new media ventures. High newsprint prices remain a concern for the sector.

HT Media – Steady performance. HT Media witnessed a steady performance as per the IRS-2011-Q3 with its Hindi segment readership growing at 0.4% QoQ and English remaining flat. Hindustan Times maintained its leadership in Delhi ahead of Times of India in the English segment. In the Hindi segment, Hindustan maintained its leadership in Bihar and Jharkhand while posting a steady increase in its readership in Uttar Pradesh.

DBCL – Strong growth. Dainik Bhaskar continued with its steady performance, growing 0.6% ex-Jharkhand as per the IRS-2011-Q3. The newspaper posted a strong 2% and 8% growth in readership in Madhya Pradesh and Chhattisgarh respectively, thereby maintaining its leadership. Dainik Bhaskar’s performance in Jharkhand was strong given that the IRS-2011-Q3 included the readership of its Ranchi edition for only nine months.

Jagran Prakashan – Numero uno. Dainik Jagran maintained its overall leadership in 2011 Q3 in terms of Average Issue Readership (AIR), growing 0.4% over the previous quarter. Jagran’s AIR grew a robust 4.9% QoQ and 6.1% QoQ in Bihar and Uttaranchal respectively. In Uttar Pradesh, Jagran’s readership declined by 0.3% QoQ but it continues to report strong numbers in key urban towns of Kanpur, Lucknow and Varanasi.

Mint – Maintains its no. 2 position. Mint maintains its position as the country’s no 2 business daily in terms of AIR, witnessing a 5.4% growth QoQ. Mint (ex-Hyderabad and Ahmedabad) enjoys an AIR of 253,000 against 812,000 for The Economic Times and 161,000 for Business Standard as of Q3 2011.

Mid-Day posted a strong 6.4% QoQ growth, reversing its trend of declining readership since 2009R2. Mumbai Mirror’s AIR was flat in the latest IRS at 760,000 against 380,000 for Mid-Day.


>PIRAMAL GLASS LIMITED (PGL): Manufacturer of glass containers for the Cosmetics & Perfumery (C& P), Pharmaceutical and Specialty Food & Beverages (SF& B) industries

Piramal Glass Ltd (PGL) has a multi product industrial profile and is a global leader in deliveringworld-class packaging solutions. It is a manufacturer of glass containers for the Cosmetics & Perfumery (C&P), Pharmaceutical and Specialty Food & Beverages (SF&B) industries. PGLhas its manufacturing facilities in India, US and Sri Lanka with 11 furnaces having a total installed capacity of 1145TPD(tonnes per day).

■ Focus on high-margin C&P business to drive revenues: PGL believes the market share in the C&Ppremium segment can grow to 7-8% over the next two years from current levels of ~3%.PGLcurrently has a global leadership position in the colour cosmetic (Nail polish bottles) segment with a 50% market share. We believe that as the contribution of theC&Psegment to the revenue increases and with the share of the premium segment within the C&P segment also increasing rapidly, will drive growth and improve margins going forward.

■ Significant cost advantages Labour Arbitrage: In countries like US, which accounts for 37% of the global C&P premium segment, 80% of the C&P requirement is imported. The total cost of production in India, where manpower is among the cheapest in theworld is ~60% of the global costs and is less than half of that in France and almost half of that in the US. This gives PGL to have a significant cost advantage over its global peers.

■ Stronger balance sheet to support growth:  PGL had a debt of INR 9200 mn (as per FY11 Consol. balance sheet) and debt/equity of 3:1. In H1FY12 the debt/equity ratio was reduced to 2.5:1 from 3.4:1 in H1FY11. The debt service cover improved to 3.2 in H1FY12 as compared to 3.4 in H1FY12. PGL has been able to restructure its debt by going into to relatively lower interest rate of 7.5% foreign currency loan from peak rate of 13% to strength its cash flow. PGL follows an active hedging policy to its naked exposure which is currently to the tune ofUSD12-14 mn.

■ Capacity expansion to meet the future demand: For FY12 and FY13, the company has a planned capex of INR 2600 mn, with INR 1000 mn assigned to a Greenfield expansion of 160 TPD for the C&P segment to the at Jambusar. This project is scheduled to be operational by March 2012. The remaining INR 1600 mn will be spent on realignment of 4 existing furnaces which will increase the capacity by ~50-60TPDand will increase the total capacity by ~210 TPD.

At theCMPof ~INR92, the stock trades at ~8.0x and 5.2x of its FY12E and FY13E earning respectively. The company has been steadily shifting its product mix from low margin commodity business to high yield specialized business of C&P. We expect the C&P contribution to company's revenue to increase from 49% in FY11 to 56% in FY13E which is expected to boost EBITDAmargins from 23% in FY11 to 25% in FY13E.We have valued the company at ~8x of it FY13E earnings which is at premium compared to other domestic peers, due to PGL's better margins profile and return ratios. We maintain our BUY rating on the stock with a target price of INR143.