>SOE DIVESTMENT POLICY (MORGAN STANLEY)

SOE Divestment Policy: Missing the Big Picture?

India government is sitting on considerable assets: Our very broad estimate indicates that the total market value of government companies is US$406 billion. Our estimate, which we believe is conservative, excludes central government assets in the form of infrastructure facilities and operations that are not yet corporatized.

India’s divestment plan on a slow track so far: India has so far collected only about US$14.4 billion from divestment over a period of 18 years, an average of US$800 million p.a. About 87% of the divestment receipts are from the divestment of stakes without transferring management to the private sector.

Opposition to divestment protects only a narrow section of the population: The common concern is that divestment will result in job losses in the public sector. In our view, this argument misses the bigger picture as it focuses on a very narrow portion of the population. The total work force employed in quasi government entities (including public sector undertakings) of the central government is 5.9 million people, just 1.4% of the total workforce.

Formal efforts to protect labor actually work against labor’s interests: India is likely to add 141 million to its working age population of 750 million by 2018, according to estimates by the United Nations. Restrictive labor laws now in place have been a deterrent to employers, forcing them to prefer capitalintensive options over production. We believe the solution to rising unemployment in India is more flexibility, not less.

Gains from divestment can outweigh job losses in privatized PSUs: The government could, we believe, easily collect US$15-20 billion per annum for the next three to four years from divestment and invest this in rural and urban infrastructure. Indeed, we believe this would trigger a matching amount of investment in manufacturing by the private sector, boosting overall employment.

To see full report: SOE DIVESTMENT POLICY

>DALMIA CEMENT (ICICI DIRECT)

Sugar business drives bottomline...

Dalmia Cement Q1FY10 results were broadly inline with our expectations. Net profit grew 16.1% YoY and 32.3% QoQ basis. For Dalmia cements given the restricted presence in the Southern region and likely expectation of an over supply scenario in south which will translate into low return ratios, we maintain our HOLD rating on the stock.

Highlight of the quarter
Net sales grew 32.9% YoY to Rs 551.7 crore in Q1FY10 from Rs 415.0 crore in Q1FY09 due to higher cement and sugar volumes. The EBITDA margin has declined by 180 bps YoY to 27.8% primarily due to decline in margins from cement business. EBITDA has reported YoY growth of 24.7% to Rs 153.4 crore. The growth in EBITDA was mainly contributed by Sugar division. Interest expense have increase by 19.2% YoY to Rs 41 crore while depreciation has increase by 50.8% to Rs 30.2 crore due to capitalizations of Andhra Pradesh (AP) Plant The net profit has reported growth of 16.1% YoY and 32.3% QoQ to Rs 58.6 crores.

Valuations
At the CMP of Rs 141 per share, the stock is trading at 6.4x and 6.3x its FY10E and FY11E earnings, respectively. The stock is trading at 4.4x and 4x EV/EBIDTA. Given the restricted presence in the Southern region and likely expectation of an over supply scenario in south which will translate into low return ratios, we maintain our Hold rating on the stock with price target of Rs
130.

To see full reporrt: DALMIA CEMENT

>ASIAN CURRENCY RESEARCH (DBS)

Reserve currency debate – more than meets the eye

In March 2009, China triggered a debate by recommending to reform the international monetary system with a new super reserve currency. Many viewed this as a challenge to the USD’s role as the world’s dominant reserve currency. Since then, confidence in the greenback has been persistently dogged by fears that central banks might diversify their foreign reserves away from dollars.

To shed more light on the subject, we examined the history and evolution of the international monetary system. While we make no bold claims as to the outcome of this debate, we hope to shed some light on what we consider to be the more important issues in this debate.

We believe that the debate goes beyond the fireworks pressurizing the USD and its reserve currency status. To us, these calls are symptoms to a larger and more pressing problem that manifest itself most as a shortage in global trade finance. With the American consumer saving and not spending, the US is no longer able to maintain its long-held role of supply dollars for the expansion of the global economy and world trade without imperilling its fiscal position.

Suffice to say, this is not the first time the dollar’s status has been questioned and neither is it likely to be the last. Talks about adding the CNY to the IMF’s Special Drawing Rights (SDR) basket of currencies is not a new development. Ironically, the last time the SDR was expanded was in 1971 when Bretton Woods ended. Except that today we not talking about ending, but about the need for some form of new Bretton Woods system after the global financial crisis in 2008.

Nonetheless, the objective of expanding the SDR was the same then and now. The goal was to get other countries to help the US in its role to supply currencies to support world economic and trade activities. We see this as part of an evolutionary process where the post-WW2 world economy shifts its dependence solely on the US economy to other G7 nations. And today, the growth driver of the world economy has and is continuing to move away from the G7 nations towards the G20 economies. The lesson learnt in the 1970s was that while other currencies came to play a bigger role in the internationalization of the SDR, the dollar continued to dominate
the scene.

Apart from expanding the SDR, there is the other issue about creating and promoting the use of a new super reserve currency for payments in trade and investments. To us, this goes beyond the call to abandon the USD as the world’s chief reserve currency. Implicitly, and more importantly, this call to reform the international financial system may also be a proposition to abandon the flexible exchange rate regime that exists today. The common goal of Bretton Woods in 1944 and the search for a new Bretton Woods today is to rebuild the world economy via stability in exchange rates and commodity prices so that businesses can plan and implement investments. The use of a single currency by most countries as payments will be difficult to achieve without returning to a fixed exchange rate regime.

And before the world rushes to believe that the SDR will replace the USD, it must answer one simple question. Just as the US had to convince the post-war world that the USD would be “as good as gold” at Bretton Woods in 1944, China must first convince the world that the SDR will be “as good as dollars”.

To see full report: ASIAN CURRENCY RESEARCH

>CHART OF THE WEEK (HSBC)

How big is Asia?

Let’s be honest, it’s the only reason we’re all getting out of bed each morning. No matter the extent of credit crunching in other parts of the world, Asia is still around and, if things turn out right, it should one day be the largest market by far. Over a billion Chinese consumers – enough said. But, how big is the region, really? Papers are full of references these days. Take car sales, for example. Year-to-date, more cars have been sold in China than in the United States. Not bad, although US shoppers are taking a little time out for the moment, and the numbers may reverse again when they return. Elsewhere, turnover on the Chinese stock market is now higher than in New York, and even turnover in Asia ex Japan and China is roughly equal to that in the US; that’s a watershed, arguably, although the numbers are flattered in each direction by both overly bouncy Asian investors and their still despondent US counterparts.

These are all snippets. What about the numbers that matter: consumption and investment? We keep reading various estimates and forecasts, so we thought it would be worthwhile to settle the matter once and for all. Here’s what we did: we took nominal expenditure in USD dollar terms for 2008, converted at market exchange rates. For the projections, we used long-run forecasts for real growth. Using nominal growth rates introduces too many distortions as inflation varies a lot across countries. So we deem our approach defensible. What’s the bottom line? Asia isn’t going to carry the world. But incremental consumption growth is already helping to offset the weakness in the West. Moreover, in terms of investment spending, Asia rules the day. Those who benefit are commodity exporters and producers of investment machinery. Those who want to tap into an Asian consumer market have growth to look forward to, but scale can only be achieved by exporting to the
West. Asia is getting bigger, time to get out of bed.

To see full report: CHART OF THE WEEK