Wednesday, April 18, 2012

>EXCHANGE TRADED FUNDS: How Do ETFs Generate Returns for Investors?

The price of an ETF share depends on the forces of supply and demand in the market and on the performance of the underlying index. Of course, the performance of the index is determined by the performance of each component stock.

In some ways, holding a share in an ETF is like holding a share of any company’s stock. If an investor buys a share of XYZ Company’s stock for $10 on Monday and sells when the share price rises to $20 on Wednesday, he or she has made a $10 profit. But if that investor sells on
Friday, when the price of the stock has fallen to $8, he or she will experience a $2 loss. The same holds true for ETFs.

Pricing, however, differs between mutual funds and ETFs. For a mutual fund, the price at which investors buy and sell shares is equal to the fund’s net asset value (NAV), less any commissions. The NAVs of both mutual funds and ETFs are calculated daily at the close of the markets. While investors can buy and sell mutual fund shares are any time throughout the day, all investors will receive the same transaction price (the NAV). In contrast, the price of an ETF share is continuously determined on a stock exchange. Consequently, the price at which investors buy and sell ETF shares may not necessarily equal the NAV of the portfolio of securities in the ETF. In addition, two investors selling the same ETF shares at different times on the same day may receive different prices for their shares, both of which may differ from the ETF’s new asset value. The price of an ETF share on a stock exchange is influenced by the forces of supply and demand.

For example, when investor demand for an ETF increases, the ETF’s share price will rise, perhaps exceeding the ETF’s net asset value. ETFs are structured, however, so that large differences between their share prices and their NAVs are unlikely to persist. Third parties calculate and disseminate every 15 seconds a measure often called the Interday Indicative Value (IIV), which is a real-time estimate of a fund’s NAV. When an ETF’s share price is substantially above this indicative value, institutional investors may find it profitable to deliver the appropriate basket of securities to the ETF in exchange for ETF shares. Retail investors may find it profitable to take a short position in the ETF’s shares. When an ETF’s share price is substantially below its indicative value, institutional investors may find it profitable to return ETF shares to the fund in exchange for the ETF’s basket of securities. Retail investors may find it
profitable to take a long position in the ETF’s shares. These actions by investors help keep the market-determined price of an ETF’s shares close to the NAV of its underlying portfolio.



  Efficient Trading: ETFs provide investors a convenient way to gain market exposure viz. an index that trades like a stock. In comparison to a stock, an investment in an ETF index product provides a diversified exposure to the market. Depending on the index, investors may obtain exposure to countries/ markets or sectors.

  Equitising Cash: Investors with idle cash in their portfolios may want to invest in a product tied to a market benchmark like an index as a temporary investment before deciding which stocks to buy or waiting for the right price.

  Managing Cash Flows: Investment managers who see regular inflows and outflows may use ETFs because of their liquidity and their ability to represent the market.

  Diversifying Exposure: If an investor is not sure about which particular stock to buy but likes the overall sector, investing in shares tied to an index or basket of stocks provides diversified exposure and reduces stock specific risk.

  Filling Gaps: ETFs tied to a sector or industry may be used to gain exposure to new and important sectors. Such strategies may also be used to reduce an overweight or increase an underweight sector.

  Shorting or Hedging: Investors who have a negative view on a market segment or specific sector may want to establish a short position to capitalize on that view. ETFs may be sold short against long stock holdings as a hedge against a decline in the market or specific sector.


>INDIA STRATEGY- ECONOMY: Growth should be the focus of RBI/government


FY12 turned out to be a year of reckoning for most countries. India witnessed rapid slowdown in growth, coupled with near double-digit inflation. Accordingly, we also had to tone down many of our optimistic assumptions. With the uncertainties persisting, we now focus more closely on the coming quarter (1QFY13), while annual projections would remain a critical input for our forward-looking assessment.

  We estimate inflation at 6.5% for March 2012 and at 6.2% for 1QFY13. These estimates have seen some upward revision in the last couple of months, led by global crude prices, budget proposals, electricity tariff hikes and pending fuel price hikes. These factors have also led us to revise our average inflation estimate to 6.8% for FY13 from 5.6% earlier. We believe inflation would remain within the 6.5% level for a major part of FY13 and will inch above 7% only after December 2012. This presents a reasonable 8-month window of opportunity for the RBI to first ease rates and then pause, as inflation begins rising once again in December 2012. We expect the RBI to cut rates by 100bp in CY12.

 The liquidity deficit persisted through FY12, but became aggravated during 2HFY12. The government/RBI has also scheduled a larger part (65% of gross and 59% of net) of borrowing for 1HFY13. Some softening of the liquidity situation is likely in April-May 2012, but should firm up once again due to large net borrowings, slowing money supply growth and stress from the external situation. To tide over the liquidity problem, we expect the RBI to undertake open market operations (OMOs) totaling INR1.8t during FY13.

 The latest BoP data indicates significant stress on the external situation. While merchandise trade volume has declined in 3QFY12, invisibles have been failing to grow for some time. Trade and current account gaps are reaching their record levels at 10% and 4%, respectively. The scenario is unlikely to improve much in FY13 due to multiple headwinds, including weakness in the western economies, high oil prices, etc. Additionally, the INR is vulnerable to inflation. Considering these factors, the exchange rate should hover at INR50-52/USD barring  unexpected developments in balance of payments (BoP) or inflation.

 Policy flip-flops in many key areas of reform coupled with the coming together of various macroeconomic risks have heightened uncertainties prevailing in the market. While many factors such as coalition politics, political bickering, strained relationship between the government and the judiciary and general lack of governance has been held responsible for this, the combined impact of these events has taken a toll on the investment cycle and attractiveness of India as a destination for foreign capital. We believe meaningful progress in some of these areas is necessary to restore investors’ confidence.

To read report in detail: INDIA STRATEGY

>TIGER AIRWAYS HOLDINGS LIMITED: Potential merger with Scoot or takeover by majority shareholders SIA and Temasek is possible in the longer term

Ready to take-off after the turbulence; initiate at OW

  Initiate at OW with Jun-13 PT of S$0.90: Tiger Airways’ (TGR) share price has rebounded by 19% and outperformed the market by 6% ytd, following its 62% decline and 45% underperformance in the past 12 months largely due to the negative impact of Tiger Australia’s suspension and capacity indigestion in FY12E. Although the near-term outlook is challenging and current valuations look unattractive given TGR’s low earnings base, we believe the expected earnings turnaround in FY13 and our c.108% pa net profit growth in FY14-15 has not been priced in. Our PT implies a 22% upside from the current share price.

  Strong earnings turnaround expected: With the normalization of Tiger Australia’s operations and continued passenger/ancillary income growth, EBITDAR margins are likely to return to c.21% in FY13, similar to the FY10-11 level, after falling to c.5% in FY12, and rise to c.29% by FY15 with greater economies of scale. FY13-15E average c.4% ROA, c.18% ROE and c.7% ROCE are above the Asian airline sector. TGR benefits from the strong financial backing of majority shareholders Temasek and SIA.

  Other positive drivers: 1) New JVs SEAir (Philippines) and Mandala (Indonesia) could help drive Tiger’s earnings growth and regional franchise in these fast-growing markets. There is upside risk to our forecasts if these JVs turn profitable earlier than expected. 2) Move to Changi Airport T2 could help boost traffic feed given its closer operating proximity to a significantly larger critical mass of airlines. 3) Potential collaboration with Scoot could drive synergies. A potential merger with Scoot or takeover by majority shareholder SIA is possible in the longer term, in our view.

  Valuation, key risks: Our Jun-13 PT of S$0.90 is based on 11x 12M fwd Adj. EV/EBITDAR, in line with TGR’s historical average valuation since Tiger Australia’s suspension and supported by the recovery of TGR’s EBITDAR margin to 21% in FY13E and 29% by FY15E vs. 20% for sector peers. Key risks: 1) rising fuel prices; 2) Tiger Australia’s recovery stalls; 3)weaker S$; 4) execution risks in SEAir and Mandala JVs; and 5) potential equity-raising to fund aircraft capex if sale & leaseback options become unattractive.

To read report in detail: TIGER AIRWAYS

>PFIZER: Wyeth merger with Pfizer could be potential trigger

■ Brand Equity
Pfizer has a huge portfolio of products with some very strong brands within its product portfolio that are market leaders in their respective therapeutic segments with significant market share.
Besides this the company has 6 brands that feature in the top 100 pharmaceutical drug brands in the country, of which 2 brands viz. ‘Corex’ (Cough Formulation) & ‘Becosules’ (Multivitamin) continue to be ranked among the top 10 pharmaceutical drug brands in the Indian market. These strong brands have been performing very well for the company over the past. Corex and Becosules contribute close to 24% and 17% to the top line respectively. Besides, Pfizer has been consistent in launching new products from its parent’s product basket. We expect these strong brands along with new introductions to help Pfizer improve its performance going forward. Apart from 10-15 drug launches every year, the company is planning to enter into new segments like Anti-Diabetic, Anti- Malarial etc. to widen its offerings. These launches are expected to start contributing significantly in 24 months time.

  Strong Product Portfolio
Pfizer possesses a strong portfolio of established brands, mainly in Nutraceuticals, Cough Preparations and Gastro-intestinal segments. The company is slowly making inroads in Antiinfective, Cardiovascular and CNS segments.

Within pharmaceuticals, the company is present in both acute & chronic segments, across therapeutic areas like Anti-Infective, Respiratory, Cardiovascular (CVS), Central Nervous System (CNS), Dermatology, Gastrointestinal, Neurology, & Ophthalmology among others.

 Increasing Penetration
Pfizer is also revamping its acute portfolio through new launches. During Q1FY12, the company launched 3 products ( Getex, Cefixime, Getex Suspension) in the Anti-Infective segment. The company also plans to enter into hospitals segment in the Anti- Infective space.

Pfizer-Wyeth combine, which is ranked eighth in terms of domestic sales by AIOCD AWACS, plans to introduce about 30 products in the branded generics segment in the country this year. Globally, the bulk of Pfizer revenues come from exclusive sale of patent protected
medicines — and not branded generics.

To read report in detail: PFIZER


DCB’s Q4FY12 profit at | 17.3 crore (grew 52% YoY, 11% QoQ) was 9% above our estimates mainly due to lower provisioning expenses (down by 18% YoY) and higher-than-expected loan growth of 24% YoY to | 5284 crore. However, NII at | 57 crore declined 4% QoQ owing to a 25 bps sequential fall in NIM. Stable yield and a 41 bps rise in cost of funds led to a decline in NIM during the quarter. The bank raised | 94 crore through QIP and | 98.75 crore through preferential allotment, which resulted into Tier 1 capital rising to 13.8% from 11.2% in Q3FY12. Total CAR stands at 15.4% as on Q4FY12.

We have revised business growth higher to 22% in FY13E from 17% earlier and expect PAT to grow at 29% CAGR over FY12-14E.

  Credit growth surprises positively
After plunging sharply from 23.5% YoY growth in FY11 to 8.9% YoY growth in Q3FY12, advances increased by | 978 crore to | 5284 crore in Q4FY12 recording growth of 24% YoY. Meeting the priority sector target was the major reason for such a sharp rise in loans during Q4FY12. The agricultural loan book rose strongly by 92% QoQ to | 801 crore. The corporate book also witnessed healthy 34% QoQ growth to | 1194 crore. However, the retail portfolio grew by a moderate 8% QoQ to | 1853 crore. We are revising our FY13E credit growth target from 20% to 22%.

  Asset quality improves sharply
Asset quality witnessed a sharp improvement with absolute GNPA declining by | 14.6 crore sequentially to | 242 crore and NNPA declining by | 14.1 crore to | 30 crore. The NNPA ratio at 0.6% was the lowest in the last few quarters. The provision coverage ratio stands at 91% as against 87% in Q3FY12 and Q4FY11.

At the CMP of | 50, the stock is trading at 1.3x its FY14E ABV. With an improvement in loan growth and asset quality and margins of ~3.0-3.1%, we expect NII and profit to grow at 22% and 29% CAGR to | 342 crore and | 93 crore, respectively, over FY12-14E. We maintain our target price of | 60 (1.6x FY14E ABV) from a 12-15 months perspective.

To read report in detail: DCB

>RELIANCE INDUSTRIES: the SEZ business probably lost money before its termination

  Conflicting signals on use of cash; ongoing buy-back program positive, others look negative
We note that RIL’s investments in non-core businesses like SEZs and retailing have not created meaningful value for shareholders (the SEZ business probably lost money before its termination and retailing continues to lose money). We are not optimistic about (1) telecom, given high license fees and a competitive business environment or (2) US shale gas, given very low gas prices in the US, which may result in low NPV of the business. Small investments in hotels and media show lack of focus, especially given limited progress in core businesses.

  Confusing news about the E&P segment
(1) Media articles about a potential sale of Reliance Gas Transportation and Infrastructure’s East-West pipeline and (2) low gas reserves implied for the KG D-6 block, based on BP’s 2011 annual report, will probably raise concerns about RIL’s long-term volumes from the block. The proposed sale is in contrast to recent positive news about satellite fields, R-series fields and progress on new development plans for the MA field and likely submission of the same for D1 and D3 fields in October 2012. There is concurrently limited progress in other blocks (see Exhibit 1).

  Core chemicals and refining businesses continue to struggle
Exhibits 2 and 3 show that current global refining and chemical margins are well below their
historical averages and our assumptions for FY2013-14. We do not rule out downside risks to our EPS estimates resulting from (1) lower-than-expected refining margins, (2) sustained weakness in chemical margins and (3) higher-than-expected decline in KG D-6 gas production.

  Cut FY2013-14E earnings by 1-2%; retain REDUCE rating with a revised TP of `800
We have cut our earnings estimates again to `56.1 (-0.8%) for FY2013 and `58.1 (-2%) for
FY2014 to reflect modestly lower refining margins of US$8.4/bbl and US$8.7/bbl and other minor changes. We see risks to our fair value of RIL from (1) lower recoverable reserves from KG D-6 block and (2) structural decline in chemical margins for naphtha-based crackers due to lower cost structure for gas-based plants in the US and the Middle East.

To read report in detail: RIL


Strong revenue growth to drive up earnings

We expect a strong quarter for auto companies under our coverage universe* driven by 30.5% revenue growth YoY and 14% QoQ. We expect EBITDA margins to expand by 59bps YoY but expect this to contract by 26bps QoQ. Among large-cap auto stocks, Tata Motors and Hero MotoCorp is likely to be the best performers followed by Bajaj Auto. Overall, we expect net profit to increase by 35% YoY and 27% QoQ in 4QFY12E for the companies under our coverage universe.

Key Highlights:
  Volume momentum to be strong for 4W: During the quarter, volume momentum for 4W companies has remained strong (up 13% YoY and 25% QoQ) compared to two-wheeler companies (up 6% YoY but down 2.5% QoQ, in line with overall slowdown witnessed by the industry).

  Margins a mixed bag: Input cost pressure is likely to remain higher on both YoY and QoQ basis. However, strong volume growth for most of the companies will largely help to offset cost pressures. For our coverage universe, we expect EBITDA margins to expand by 59bps YoY, but contract 26bps QoQ. We expect a sharp sequential improvement in margins for both Maruti and Ashok Leyland led by strong volume recovery for both companies. For M&M, we expect sustained margin pressure on account of an adverse mix (lower tractor sales). We expect Tata Motors to drive sector growth with strong 67% earnings growth driven by 44% YoY growth in revenues and 186bps margin expansion YoY.

  Strong revenue growth to drive strong earnings growth: We expect adjusted PAT to register a growth of 35% YoY and 27% QoQ. Among large-cap auto stocks, Tata Motors and Hero MotoCorp are likely to be the best performers, followed by Bajaj Auto.

  Valuations and recommendations: We continue to remain positive on Bajaj Auto in the 2W space and on Mahindra & Mahindra and Maruti in the 4W space. We maintain our Hold rating on Hero MotoCorp and Tata Motors and maintain Sell on Ashok Leyland.