Tuesday, March 20, 2012

>CEMENT SECTOR: Growth in production & dispatches for the month of February 2012

Cement giants ACC, Ambuja and Ultatech together reported 8.64% growth on YoY basis to 7.67million tones in their dispatches for the month of February, after being stable for a month. Cement prices again witnessed an upward pricing trend in the range of INR20/bag across the western and Eastern regions again. This uptrend in prices is due to the improvement seen in demands. Cement Companies in Western region are contemplating a further hike of INR 10/bag due to lower Railway rake availability.

ULTRA TECH CEMENT: UltraTech cement’s dispatches decreased by 5.46% on MoM basis.
■ During February, 2012, UltraTech Cement’s (Aditya Birla Group Company) production stood at 3.468 million tonnes, growing by 3.83% on YoY basis and dispatches stood at 3.517 million tonnes, increasing by 5.68% on YoY basis. On monthly basis, both the production and dispatches decreased by 8.25% and 5.46%, respectively.

 For the period, January- February of 2012, UltraTech’s production and dispatches were 7.248 million tonnes and 7.237 million tonnes respectively, against 6.729 million tonnes and 6.669 million tonnes during the same period of the corresponding year.

AMBUJA CEMENT:  Ambuja Cement reported 4.33% growth in dispatches on MoM basis.
 Ambuja Cement registered a growth of 11.28% on YoY basis in its production to 1.993 million tonnes for February, 2012. The company’s dispatches also grew by 12.74% to 2.00 million. Ambuja Cement’s production and dispatches both increased by 4.40% and 4.33% on MoM basis.

 Cumulative dispatches of the company during the period, January - February jumped by 8.36% to 3.916 million tonnes against 3.614 million tonnes during the corresponding period a year ago.

ACC: ACC reported a growth of 7.50% on YoY basis in cement dispatches in February, 2012.
 ACC registered an increase in sales for the month of February, 2012 by 7.50% to 2.150 million tonnes. The company had sold 2.00 million tonnes cement in the same month of last year. Production also rose to 2.140 million tonnes in February this year compared to 1.970 million tonnes in the corresponding month of last year. ACC Cement’s production and dispatches both decreased by 4.89% and 3.59% respectively
on MoM basis.

 ACC's cumulative sales during the period, January-February of the current year stood at 4.380 million tonnes over 4.040 million tonnes in the same period of last year. Production also increased to 4.400 millions tonnes against 4.030 million tonne.


>ONGC: Adverse subsidy sharing would make us bearish

■ FY13-14 EPS cut by 11% and PO by 17% to Rs298
The cess on crude oil has been raised from Rs2,575/ton (US$6.9/bbl) to Rs4,635/ton (US$12.4/bbl) in the FY13 budget. It has meant a cut in ONGC’s FY13-14 EPS by 11%. We have also cut ONGC’s PO by 17% to Rs298/share from Rs358/share earlier. ONGC’s revised PO implies 9% potential upside. We downgrade ONGC to Neutral given the hit from rise in cess and also as hope of reforms are fading after the recent state election results.

■ EPS cut due to rise in cess by 80% (US$5.5/bbl)
Cess would increase on production from ONGC’s nomination blocks and the pre-NELP Rajasthan block. The increase in cess on crude oil by 80% (US$5.5/bbl) to Rs4,635/ton (US$12.4/bbl) has meant a cut in ONGC’s FY13-14 EPS by 11%. If there is no diesel price hike or only a modest hike ONGC’s FY13 EPS is likely to be YoY lower. Share in subsidy of ONGC and its upstream peers is another crucial factor, which will influence its earnings outlook.

■ Cut PO on rise in cess; PO at 10% discount to fair value
ONGC’s fair value is down by 7% to Rs332/share due to the rise in cess on crude. ONGC trades at discount to its fair value when there is no progress on reforms, there is uncertainty on subsidy sharing and earning outlook is poor. We are skeptical on reforms in the remaining 2-year term of this government. When there is no progress on reforms risk of adverse subsidy sharing also rises. We have therefore fixed ONGC’s PO at 10% discount to its fair value at Rs298/share.

■ What would make us bullish or bearish on ONGC?
Hefty hike in subsidized products or steep fall in oil price and favorable subsidy sharing, which improves earnings outlook would make us bullish. Sharply higher oil price and adverse subsidy sharing would make us bearish on ONGC.

To read full report: ONGC

>India Infrastructure Insights - 15: State Power Utilities Need Tariff Hikes of 45-60% - But It Is Not That Simple!

 Required tariff increase of 45- 60% — Indian SPUs as a whole need to raise tariffs by 45-60% to recover their costs (without subsidies). Recent tariff hikes have managed to reduce the quantum of incremental required hikes only marginally. The worrisome aspects are (1) quantum of required hikes have increased (from 35-50% in FY06); (2) cost of supply of power has accelerated in recent past due to rising fuel cost, wage cost, interest burden and purchase of expensive merchant power; (3) delay in increase in tariffs will lead to further cost escalation due to debt taken on to fund current losses.

 High level of cross subsidization complicates tariff revision process — Domestic (24% of consumption) and Agriculture (24% of consumption) with average tariffs at Rs2.64/kWh and Rs0.9/kWh respectively are much lower than Industrial (35% of consumption) and Commercial (8% of consumption) at Rs4.25/kWh and Rs5.6/kWh respectively. This suggests that tariff hikes in domestic and agriculture tariffs will have to be much higher than 45-60%. This will severely test the will of the political leadership to pass-on costs to domestic and agriculture consumers.

 SPU financials continue to deteriorate — PAT loss of SPUs without subsidy has increased to Rs635bn in FY10 while D/E has increased to 21.0x due to erosion in net worth. Subsidy received as proportion of subsidy booked has declined to 56% in FY10 from 94% in FY07. Estimate of losses for FY11 vary from Rs700bn to Rs750bn.

 Key problems highlighted by the Shunglu Committee — Influence of State Government in the working of SPUs/ state regulators, lack of good quality financial and operational data, trifurcation of SEBs (which has been done only in name and not in substance), lack of open access, interference of State Governments in tariff setting process, regulators not exercising powers to ensure financial health of DISCOMs, and lack of progress in improving operational and technical aspects of distribution.

 Key recommendations — The committee has suggested (1) measures to ensure independence of regulators; (2) timely tariff increases; (3) measures to improve quality of reporting; (4) increasing scope of R-APDRP to reduce losses; (5) setting up of SPV to buy out loans given to SPUs under the condition that State Governments commit themselves to a time bound implementation of reforms; (6) emphasis on distribution circle franchisees.

 India Utilities top picks — PGCIL, Jindal Steel & Power, CESC and JP Power.

To read full report: INDIA INFRA INSIGHTS

>Crude Watch: Stress Tests

Crude Market Having Its Own Stress Test As Spare Capacity
Heads to Zero, Which Could Test the Global Economic Recovery

 We are marking to market and raising our price forecasts for the rest of the year as recent developments point to higher oil prices to come and the odds of a spike to new peaks rises. Our base case has Brent trading at $125 in 2Q, $130 in 3Q and $125 in 4Q, though we think that the risks are to the upside.

 The drop in Iranian loadings over the past few weeks is a major concern for the market. Iran has significant volumes of onshore storage and these are presumably getting filled, but once they are done, if Iran continues to struggle to find takers for its oil or ships on which to store it, then next step is to shut in production. In Iran’s case, with their heavy slate and decrepit infrastructure, this would mean production effectively being lost for a long while. Global spare capacity has been dwindling, and crude demand is about to start rising seasonally. Saudi Arabia is gearing up to take production to 11-m b/d over the summer; this would take global spare production capacity to close to zero, while other supplies are already faltering. If the Kingdom draws on ample commercial stocks and deploys even more storage abroad, prices could moderate.

 The inflammatory rhetoric between the US and Israel and Iran shows no sign of abating, and should continue to support the market. Israeli comments that there will be no public debate before a strike promises to keep that support in the market even if the rhetoric does calm down.

 Loadings data are now showing a bounce in North Sea supplies coming in April, but the complete set of March loadings data for Russia, Angola, Nigeria, the North Sea and CPC and BTC pipelines show a steep 320-k b/d drop in m-o-m supplies, and a y-o-y slump from 10 to 9.4-m b/d. North Sea, CPC and Russia are the main contributors to the y-o-y fall, but other lost volumes include Yemen, Syria, South Sudan, China and Brazil.

 The crude market is very strong, and the problem for the oil bears is that gasoline is there to pick up any slack. We have been bullish gasoline for months on the basis of Atlantic Basin refinery shutdowns, and the outlook remains extremely constructive despite the weak demand environment. Stocks have turned seasonally lower in the US, and European stocks are already low and likely will not rebound with the weak margins driving refiners to cut runs.

 The macro environment provides a third reason to stay bullish. Citi’s Economic Surprise index remains positive — though the US is losing ground on that front — while liquidity continues to flow with major countries’ base money growth accelerating again and inflation breakevens continuing to edge higher. Global equity earnings revisions look set to turn positive; an earnings upgrade cycle would further support oil prices.

To read full report: CRUDE WATCH

>INDIA STRATEGY: Risk-reward not favourable

Global liquidity and attractive valuations have driven a 15-17% rally in the Indian stock market from the start of 2012 to date. Will additional liquidity continue to benefit the market or hurt it? We believe the Indian market’s huge rally post QE-1 in the US and large underperformance post QE-2 provide a good basis for analysis. We find the current conditions similar to the post QE-2 period and, in our opinion, the market seems set to repeat the post QE-2 underperformance, owing to: i) expensive valuations relative to global peers, ii) high crude oil prices contributing to fiscal and current account deficits and inflation, iii) underwhelming preceding-period performance constraining policy action, iv)weak macro-economic fundamentals, and v) weak corporate earnings growth with risk on the downside. Likely political constraints to policy-making too could be added to the list. Market valuations are above their 10-year average, trading at 13.7-13.9x FY13 EPS. We expect Sensex to range between 16000-18600 based on 12.5-14.5x FY13 EPS corresponding to the Nifty range of 4975-5770. Though liquidity could stretch valuations, we expect markets to fall in the next few months to the lower end of the range.

Most expensive relative to peers: At 15.2x 12-month forward consensus earnings, the Indian market is the most expensive among its peers. It is also the second-best performing market YTD (CY12) in USD terms. These could constrain incremental FII inflow, global liquidity notwithstanding, triggering underperformance.

Crude oil at a high, impacting twin deficits and inflation: The India recovery story is largely based on lower inflation leading to interest rate cuts triggering investment. A forced sharp increase in retail oil product prices is likely to push inflation up by 300bps, derailing the recovery, in our view. Fiscal deficit and current account deficit too would be hugely impacted.

Weak macro-economic fundamentals: i) GDP growth recovery likely to be impacted by weak manufacturing sector growth due to lower investment (Q3FY12 loans for capex was down 77.5% YoY and 61.5 QoQ) and agri growth due to base effect and possibly poor rainfall, ii) inflation likely to flare up due to fuel price hike, iii) fiscal deficit set to remain above 5% in FY13 too, and iv) historic high current account deficit leaving the INR hugely vulnerable, are the factors that could trigger a domino effect once again.

Moderate earnings growth: We forecast FY13 Sensex EPS of 1,282 up 16.7% YoY and Nifty EPS of 398, up YoY 16.7%, with some downside risk on account of asset quality on banks, margin pressure on metals and possibly forex loan provisions, if the INR weakens.

Prefer Technology, Auto and Cement sectors: We recommend overweight on auto and cement despite our negative view on the market, as volume growth catches up. The technology sector is likely to achieve Nasscom’s 11-14% revenue growth guidance, with possible INR weakness adding to it.


>INDIA BUDGET: Tame, at a Tough Time

 Playing too safe —This budget takes few chances: Economically, Politically and sentiment-wise. It could well be the most measured approach, but with no meaningful longer-term structural reform, only modest attempts at fiscal reform and few handouts to businesses, this budget is unlikely to change the underlying economic momentum/mood. That could be a little negative for the market – given its 15%+ move in 2012 – partly anticipating an economic and Government policy-making revival.

 Budget Maths: more realistic but not entirely — The Budget targets a fiscal deficit of 5.1% (against market hopes of sub 5%). The maths is more reasonable than last year, but we expect slippage of about 40bps due to fuel subsidies and growth risks. The bond market for now is clearly not impressed or believing, with yields rising in reaction.

 Reforms and Tax increases are both small — The Government has signaled some reform; subsidies (2% of GDP), incentives for retail equity investors, corporate debt market opened for foreigners; and softly reiterated old promises - FDI in Retail/Aviation, implementation of DTC and GST. It has also expectedly raised Excise and Service taxes (from 10% to 12%) and tightened the screws on loopholes and evasion. All of this is in the right direction, but these are cautious and small steps, and none of them are likely to meaningfully alter either the longer-term landscape or the near-term prospects.

 Investment over Consumption this time— The budget’s thrust is on investment; Infrastructure, utilities, Power and Coal imports – all of which benefit from breaks (also Cement). It is consumption which sees higher taxes that could face some risks (Autos), while Energy stocks will likely see the biggest earnings downgrades. We expect overall market earnings to fall marginally by 1-2% if growth largely holds.

 Steadying the Ship, but stoking the rally? — No. This budget seeks to tread the middle ground on fiscal consolidation and sustaining growth. It could well be the most appropriate course of action, but this is not what would drive markets over the near term.

To read full report: INDIA BUDGET

>The global race for excellence and skilled labour

The race to boost skill levels and enhance academic excellence is in full swing: expenditures for higher education and for research and development are increasing sharply around the world – and especially in emerging economies.

Higher education is on an uptrend not only in developed countries but also worldwide: the share of the world population with tertiary educational attainment is increasing rapidly. Only sub-Saharan Africa shows relatively disappointing performance; too little has been done there – except in South Africa.

The positions of the individual BRIC nations in the race are mixed: Russia is a ―nation of learning‖ which has had a lead on many developed economies for decades. Russia should step up its pace again, though, since China is rapidly catching up. Brazil and India are also showing improvements.

Industrial countries still hold the lead in the current dash to boost excellence: higher education systems are difficult to compare on account of data availability, yet an analysis of the ―Shanghai rankings‖ shows that the industrial countries dominate the field in terms of the excellence of their higher education systems.

However, the emerging markets have joined the fray: the share of Chinese and Brazilian top universities has simply jumped since 2003.

Excellence via investment in research universities: our analyses show there is a significantly positive correlation between expenditures on education and scores in the Shanghai ranking. Germany poised to catch up: Germany trails comparably developed countries both in terms of spending on tertiary education and the share of tertiary educational attainment in the population. However, Germany produces more excellent universities than is to be expected from a statistical analysis.

A cross-border, project-economy approach to collaboration is a key factor in the dash to boost educational achievement: there is a need for cross-border projects, programmes and partnerships with aspiring institutions in other developed countries and emerging economies and for the creation of new possibilities to finance these initiatives in order to compete in the long-term race to produce more tertiary graduates and spur global progress in knowledge.

To read full report: GLOBAL RACE