>ABG SHIPYARD (ICICI DIRECT)

■ ABG locks in an extraordinary profit of ~ Rs 53 crore...
ABG Shipyard (ABG) exited its stake in Great Offshore Ltd (GOL) by offloading its 8.27% stake in GOL at an average price of Rs 576 per share. ABG had picked up its stake in GOL at various intervals and the average cost of acquisition was Rs 403 per share. By liquidating its stake in GOL, ABG made an extraordinary profit of Rs 53.2 crore, which would result in an increase in its EPS from Rs 34.5 to Rs 41.3 for FY10.

Short-term gain but an opportunity lost…

■ ...but loses golden opportunity to acquire GOL
Although ABG has made a significant profit from this transaction, it has also lost the opportunity to acquire GOL. The acquisition of GOL would have propelled ABG into a higher growth trajectory with a significant ramp up in revenues and de-risking of its business model.

Exiting the race would allow its nearest competitor Bharati Shipyard Ltd (BSL) to race ahead and gain significant size. Keeping in context the present valuation of ABG, we recommend an ADD rating on the stock with a revised price target of Rs 227.

To read the full report: ABG SHIPYARD

>INVESTMENT OPPORTUNITIES IN 2010

In Focus
■ After an initial rebound, global growth may be shallow, hence stimulus is likely to remain in place.
■ Nevertheless, markets will start to factor in lower liquidity provision, so yield enhancement will be key.
■ Investors should therefore focus on dividend yield, select risks in corporate bonds, domestic Asian growth and agricultural commodities to mitigate this transition year towards a new monetary regime.

Economics
■ The broad-based cyclical acceleration is continuing to gain speed, but its sustainability remains
questionable.
■ The major risk to our baseline scenario is that we may underestimate the short-term strength of the recovery.

Currencies
■ CNY appreciation will facilitate the strengthening of other Asian currencies.
■ Further room for appreciation of commodity currencies that offer a reasonable valuation, like the NOK and the CAD.

Bonds
■ Default rates to decline as growth stabilises and generous amounts of liquidity are provided.
■ High-quality bond segment is expensive relative to the outlook for growth and inflation.

Equities
■ We expect the market recovery to last well into H1 2010. Speculation about rising central bank rates is likely to keep stocks rangebound thereafter.
■ We recommend focusing on the eurozone and EM Asia as well as on high-dividend strategies, which should become more attractive again as yield enhancement.

Commodities
■ The global liquidity glut and inflation fears continue to lift commodity prices, but tension is growing in selected markets.

■ Speculation about further central bank gold purchases is likely to lift gold to new highs in the near term, but monetary tightening should mark the tipping point.

To read the full report: INVESTMENT OPPORTUNITIES

>Central Electricity Regulatory Commission: Regulatory Views (MOTILAL OSWAL)

Subtle action on regulatory front: Over the past 3-4 months, CERC has come out with regulations, Draft Orders, Discussion Papers, etc on i) medium term and long term open access in inter-state transmission, ii) mechanism to improve grid discipline by regulating UI market, iii) tariff regulations for promotion of renewable energy (RE) and iv) plans to evolve framework for renewable energy certificate. In the interim, CERC also introduced a cap on ST power trading prices to regulate the market, while retaining developer's interest (cap of Rs8/unit). CERC has also proposed to revise power trading margin from an absolute cap of Rs0.04/unit to slab based system, linked to power realizations.

Expect regulatory focus on rationalizing transmission pricing, promotion of Renewables, etc: CERC is in the process of formulating notifications / regulations towards i) Feed-in tariff structure for different renewable energy sources ii) operationalization of Renewable Energy Certificates (including nomination of trading platform, Registry agents, etc) iii) rationalizing transmission pricing which intends to move the system towards marginal pricing method; sensitive to direction, distance and quantum of power flow. Lack of clarity and predictability on transmission charges across the country is one of the key risks in estimating the profitability for a merchant power project.

Issues that need Central Government attention

• CERC is aware of the Memorandum of Understanding (MoUs) signed by various state governments with power project developers, where which provides either free power (for hydro power project) or specified quantum of capacity (25-37.5%) on CERC norms/ CBT tariffs and Variable cost. Given that fact that most states cannot consume the entire power, home states will emerge as a large trading group, going forward. These are currently outside the purview of CERC

• Private developers are trying to participate in Competitive Bidding process under Case- I Bidding; this process has been slow and in many cases State utilities have not been able to formulate clear Bid papers which has resulted in delayed decisions. This has also impacted financial closure for such projects.

Focus to create vibrant trading market: The commission re-iterated its view to create free and open power trading market based on demand and supply dynamics. To develop a vibrant power trading market, CERC has come out with various mechanisms and regulations pertaining to Unscheduled Interchange mechanism, Day ahead market, Power Exchanges, Open access in Inter state and Intra state, National Transmission Tariff Framework, etc. All State Regulators have also taken an unanimous view to promote open access to consumers (annual consumption 1MW+) and is a key priority area.

To read the full report: CERC

>CONSUMER MONOPOLIES (MOTILAL OSWAL)

India is on the threshold of a structural uplift in consumer demand. We are approaching the inflexion point, at which the impact of rising per capita income, favorable demographics, changing lifestyle and growing rural prosperity will combine to accelerate the FMCG sector’s growth rate. While the FMCG sector has a steady profit growth trajectory, we believe consumer monopolies can grow exponentially in the emerging scenario due to strong brands, captive consumers, high pricing power and better terms of trade. Consumer monopolies could be one of the best themes to play the domestic consumption story.

What are consumer monopolies?
Consumer monopolies are companies that occupy a dominant position in a product category or segment. We have identified companies in the consumer space that have emerged as monopolies using criteria such as 1) market share at least 3x that of its nearest competitor and 2) the brand or brand portfolio contributes at least 50% of sales or profits of the company.

A monopoly is established over years and is aided by factors such as regulations, firstmover advantage, technology breakthroughs, distribution, brands and industry consolidation. Monopolies enjoy 1) strong pricing power, 2) revenue growth visibility, 3) better terms of trade with suppliers and distributors, 4) rising margins, 5) low capex, and 6) low to negative working capital. All the companies covered in this report, except United Spirits and ITC, have significantly increased their RoE over the past five years.

Indian consumer market approaching inflexion point, sales growth to accelerate
India’s US$25b FMCG market is on the threshold of major growth acceleration. We estimate per capita nominal GDP will grow at 12.2% CAGR over FY10-14 to reach US$1,666 in 2014. This will change the shape of India’s income pyramid, which could have far reaching implications on consumer demand as per MGI (McKinsey’s Global Institute). Rising income levels in urban and rural India and benefits from increasing affordability, favorable demographics, low penetration, increased availability and distribution expansion will increase the FMCG growth rate to over 20%. We expect a sharp increase in demand for value for money products from the people moving out of poverty and for premium products from a fast emerging upper middle and affluent class.

To read the full report: CONSUMER MONOPOLIES