Sunday, September 9, 2012

>Does the world have the economic policy weapons to combat a new global recession?

It is not out of the question that the world is once again entering a global recession, due to:

the crisis in the euro zone and in the United Kingdom;
the marked slowdown in the US economy;
the continuing stagnation in Japan;
problems with the growth models of large emerging countries;
the spreading of the crisis to open economies via global trade.

In OECD countries, there is no room for manoeuvre either for fiscal policies or for monetary policies.

As for emerging countries, more expansionary fiscal and monetary policies are possible; but will they help the global economy:

if emerging countries’ problems are structural;
if they lead to a sharp depreciation of the exchange rates of emerging countries?

To read report in detail: GLOBAL RECESSION

> QE discounted? (CLSA)

Despite the continued downward earnings momentum in corporate earnings, MSCI India has moved up by 5% over the last one month on increasing probability of further global monetary easing. While India is the best risk-on market, our analysis of the previous six global liquidity
events highlights that market performance has been weak post facto if the index has already moved up on anticipation, which seems to be the case now. Our global strategist Chris Wood warns of a risk-off in 4QCY12. We further increase weight in the defensive pharma funded by cutting Tata steel. Private banks remains key OWT.

QE hopes partially built-in, post facto performance may not be strong
 Our recent micro strategy report ‘Breaking macro barriers’ highlights India as the top pick in Asia in in the event of global money printing.

 A possible favourable action/hints by the upcoming US Fed and the ECB meeting in early September can cause the Indian markets to move up.

 We, however, note that Indian markets already up 14% ytd in INR and 8.5% ytd in US$ makes India the best performing large Asian market.

 Some of the easing hopes are already built-in. Our analysis of the previous five global liquidity events highlights that market performance has been weak post facto if the market has already moved up on anticipation.

Incremental QEs have had limited impact
 After the initial QEs in CY09, incremental QEs have had diminishing impact on the Indian markets. We have observed that the Indian market has reversed part of the initial gains in the subsequent two months. In five of the six global liquidity events, however, financials have outperformed.

 On a separate note, the RBI has been infusing liquidity locally, through OMOs. RBI now holds Rs5.6trn (US$100bn) worth of Govt securities / bills on its books, up from Rs3.5trn a year ago and Rs1trn two years ago. With bank borrowings from RBI now less than 1% of deposits, more OMOs appear unlikely in the near-term.

Monsoon revival a positive but policy hopes diminishing
■ With the recent revival in the rainfall activity, monsoon is now 13% deficient from 26% deficient earlier in Jun-12. This should provide some relief.

 However, with the recent logjam in the parliament on the ‘coal mining issue’, political situation has become more fragile. The new finance minister Mr Chidambaram has also ruled out any near-term revision in auto fuel prices.

Raising Pharma OWT, IT to Neutral; Reducing materials to UWT
 We raise OWT in pharma by adding Sun Pharma and Cipla to our model portfolio and remove Dr Reddy’s. Sun Pharma 15%+ operating earnings growth can see further upsides through niche US opportunities like Prandin. Cipla will see margins improving with favourable currency and increasing utilization of Indore SEZ. We remove Dr Reddy’s as we see earnings momentum fading with limited number of incremental opportunities in the US.

 The above is funded by removing Tata Steel. Falling trend in iron ore and steel prices is a negative for Tata steel.

 We remove BHEL from the portfolio as the stock is up 10% over the last three months and orderflow outlook remains weak. Adding Adani Ports as our preferred infra play. The company should drive multi-year volume growth without much capex.

 Private sector banks remains our key OWT due to continued better asset quality trends. However, we remove IndusInd bank on CV cycle concerns and replace with cheaper Axis Bank. Investors’ fears on Axis’ asset quality resulted in valuation derating, however the reality on asset quality has been better than expectations with stressed asset ratio of 3% among the lowest in the sector.

 We raise IT services to neutral by adding 1 pt to Infosys as reasonable valuations coupled with under ownership forms a support. We add 2 points to ITC to maintain our 4 ppts UWT on staples, where premium valuations and risks to growth makes us cautious.

 Our top 5 picks are ICICI Bank, Axis Bank (earlier Yes bank), BPCL, Power Grid and Lupin.

To read report in detail: QE DISCOUNTED


>INDIA MINING: SC allows mining in Category A Mines

 Iron ore mining allowed in Category A mines: As per media reports (Bloomberg, CNBC), Supreme Court allowed conditional resumption of mining in 18 iron ore leases in Karnataka. These mines are part of the Category A mines as per the CEC report (included 21 leases in CategoryA). While the court order is not available as yet, media reports (Bloomberg) indicate that the companies have to implement the R&R (rehabilitation and reclamation) plan as approved by CEC and all lease holders must get the necessary forest and environmental clearances. The companies are also required to get pollution clearance certificate and submit an undertaking that no mining laws would be flouted.

 While restart of production provides some relief, ramp up of production may take time: The restart of production in Category A mines was much needed given the declining stockpile and poor quality of ore in e-auction. As per media reports (Bloomberg), these 18 mining leases can produce ~7MT. JSW Steel had indicated that ramp up of production could take 3-6months, which in our view depends on the time taken to get necessary approvals. The production from Category A mines and the NMDC production (currently at 7-8MTPA production runrate) should help ease the iron ore availability in Karnataka but ramp up to full production remains key. The focus now shifts to the Category B mines, which are bulk of the mines in the state.

 Positive for JSW Steel but unlikely to lead to lower costs: We believe iron ore production and hence availability is likely to increase in over the next few months for the state’s steel makers (including JSW) and also the sponge iron producers. But as the ore will continue to be sold through the auction route, we do not expect a material reduction in iron ore costs. The restart of production in Category A mines will help improve utilization at JSTL's Vijayanagar plant, which is currently operating at 74% level (as per July data). The company had indicated that while eauction prices continue to remain high, the quality of ore being auctioned has deteriorated, therefore increasing the iron ore requirement. Sesa’s Karnataka mines are part of the Category B mines and therefore, not impacted by the order.

 A small step but is it enough? The current production level at NMDC and Category A mines will provide 15-16MTPA. The total iron ore production (last 3 year’s average) in Category B mines was 19.4MT, but approved production could be lower. JSW's own steel capacity in Karnataka stands at ~10MT (implying 16MT requirement at full utilization). Even assuming full 25MT iron ore production in Karnataka, we do not see exports starting anytime soon, unless the steel mills do not pick up the iron ore.

To read report in detail: INDIA MINING


Valuation & Recommendation
We had initiated coverage on the company on 29th May 2012 with a price target of Rs.46 after which the stock touched a high of Rs.45. Post discussion with the management; we have altered interest rate projections in our model for FY13E. Interest burden for FY13E now comes to ~ Rs.44 crore (earlier Rs.25 crore). The company is partly paying the debt and utilizing the rest for working capital needs and up gradation of infrastructure in the express division.

We believe worst is over for the company and we can expect revival in its core business of express distribution. In addition, its loss making shipping business is also expected to get into profits in FY13E. Stock remains subdued due to concerns in the overall economy and Gati’s shipping business which made heavy losses in FY12. We believe any signs of improvement in these two factors should see momentum in the stock price. At CMP, the stock is trading at 10.6x itsFY13E and we remain positive about the prospects of the company.

Company Overview
Gati Ltd is India’s largest express distribution and supply chain (EDSC) company operating through a fleet of more than 4000 vehicles and 64 Distribution Warehouses. Apart from the surface express, the company also operates in the supply chain management, freighter and coast to coast shipping businesses. Recently, Company has formed a Joint venture with a Japanese Company KWE and has transferred its EDSC business and a debt of Rs 330 crs to the JV Company Gati Kinetsu Express Private Limited wherein Gati Ltd. would hold 70% of the holding. KWE would be investing Rs 267 crore in this joint venture.

Gati Ltd enjoys early entrant benefits and is the leader in the express distribution segment which includes movement of goods in the commercial segment catering to the Auto, Consumer Durables, Telecom and Technology sector. Within the EDSC segment, Road transport consists of almost 80% means of business, the rest being equal between Rail and Air. In the rail segment, Gati runs 7 dedicated parcel trains on long term lease from railways.

EDSC is the core business of the company and historically has grown at a CAGR of 20-25% yearly. However, with the slowing economy the growth of this segment was lower at ~ 9% in FY12. However, with synergies with KWE JV unfolding and addition of focus on the SME sector as well, the company expects this division to grow over a CAGR of 15% during FY12-FY15 period. Moreover, the company expects implementation of GST and Postal Bill to boost the logistics industry.

Kausar India (cold chain division which was acquired in 2007) grew by 33% in FY12 to Rs.40 crore. Company has plans to expand the fleet size from the current 162 to 350 by 2015. Cold Chain industry is estimated to be growing at a CAGR of 20-25% and is receiving sector friendly policies from the government.

To read report in detail: GATI LIMITED

>PFIZER: Focus on expanding branded generics

Riding the brandwagon; Initiating with a Buy

Continued support from a strong parent and brand equity are Pfizer’s backbone. Focus on expanding branded generics business in emerging markets and higher productivity on account of field force addition in past two years are key growth drivers, going forward. Further, the company’s strong cash position is sure to give it enough leverage to grow the inorganic way. Thus, we initiate coverage on Pfizer with a Buy rating and price target of `1,518.

 Strong parentage and formidable product profile. Pfizer has strong virtues arising from its lasting relationship with parent, Pfizer, Inc. (US) Its product kitty comprises many established brands like Corex, Gelusil, Becosules, Magnex – all ranking among the top-three in their therapeutic areas. Over the years, these products have endowed Pfizer with sustainable revenues growth (14.1% CAGR over FY09-12).

 Branded generics a key growth driver. We expect 13.3% CAGR in revenues over FY12-15 in its domestic pharma segment, in line with the industry growth rate. Revenue growth will be primarily aided by a higher share of branded generics, up from 5% currently to 10% by FY15, in our view. Other products are likely to continue posting steady volumes.

 Strong balance sheet and return ratios. Pfizer has net cash of ~`13bn on its books (~35% of market cap), which gives it adequate leverage to grow inorganically. With no major capex plans in the immediate future,
we expect its core business RoE and RoCE (excl. cash) to improve to over 30% from 25% currently, led by steady net profit growth.

 Valuation. The stock is trading at attractive valuations of 17.8x FY13e and 15.6x FY14e earnings. We value it at `1,518, based on 20x Dec’13e core earnings and `428 for the cash balance (considering 15% discount). Risks: Proposed new pricing policy and keener competition in generics.

To read report in detail: PFIZER


Ricoh India Limited is owned by Ricoh company Limited Japan with 73.6% holding in the company. Ricoh Company Japan is a global leader in sophisticated office solutions. The company deals in wide array of products includes copiers, multifunctional and other printers, facsimiles, duplicators and related consumables and services, as well as digital cameras and advanced electronic devices. Ricoh Japan is number one in the global A3 MFP (Multi Function Printers) and operates in around 180 countries. Ricoh Japan has global sales of $24.14 bn and market capitalization of $6.05bn.

The strong parentage of Ricoh Japan is an assurance for the launch of innovative products and with new found focus in Indian operation will drive the top-line growth going forward.
Renewed focus of Ricoh Japan in India

Ricoh Japan is operating since 1993 in India but had remained low profile till recent past. In last year Ricoh has become more aggressive with new product launches, expansion of distribution network and brand building. The impact of same is also visible in FY12 and Q1FY13 financial performance where the revenue has grown by 45% and 56% respectively.

Ricoh Japan has renewed its focus on Indian market and this delisting process could be part of the overall strategy.

To read report in detail: RICOH INDIA