>SESA GOA LIMITED (MERRILL LYNCH)

■ Upgrade to Buy on stronger iron ore outlook, PO Rs435
We upgrade Sesa to Buy on stronger iron ore outlook. Despite a 70% rally in iron ore spot prices from April lows, we expect spot prices to rise further in FY11 due to tighter iron ore markets. We expect EPS to grow 68% to Rs35.7 in FY11 (20% above consensus) led by 22% increase in avg. spot prices. Despite sharp rally, Sesa trades at 6.9x FY11E EBITDA (6.3x based on FY11E net debt), at a 13% discount to global peers. There are upside risks to our EPS from higher spot prices. We estimate 1% higher spot increases EPS by 1.2%. Our PO set at 1.25x NPV, implies 12.5x FY11e EPS and 7.5x FY11e EBITDA.

Bullish on iron ore, Up to Buy

■ Tight iron ore markets to support higher spot prices
Our global team forecasts deficit of 24-55mn tons over 2010-11, led by strong Chinese import demand, steel output recovery ex China & limited new supply as the top 3 miners are operating at full capacity. Import demand from China should remain strong at ~50mn tons/month. We forecast avg. spot FOB price (current US$80/t) to increase by 22% to US$85/t in FY11 & by 7.3% to US$91/t in FY12.

■ Volume CAGR of 25% seen over FY09E-12E
We expect 3Q vols to disappoint as late rains hurt Sesa’s prodn/exports in Oct. But, we view any potential weakness in the stock as a particularly attractive buying opportunity as volume growth story is intact, led by mine expansions & consolidation of the Dempo acqn. We expect vols of 19.9mn tons in FY10 & 25.6mn tons in FY11. Sesa (net cash US$1.2bn) is exploring acquisition options. Scope for upsides from value-accretive M&A exists in our view.

■ Uncertainty around fraud investigation persists
The Serious Fraud Investigation Office recently initiated an inquiry into Sesa for financial & other irregularities. It appears, the inquiry pertains to an old complaint initiated in 2003, prior to Vedanta’s acquisition of Sesa. Hence, the issue may not be a big concern. However, it is hard to gauge the outcome of the investigation.

To read the full report: SESA GOA

>Shriram EPC Group awarded orders for Rs. 156 crore

Shriram EPC Ltd. (“SEPC”) announced that it has, along with its subsidiaries, received orders amounting to Rs. 156 crore.

Shriram EPC Ltd. (“SEPC”), is one of the leading service providers of integrated design, engineering, procurement, construction and project management services for renewable energy projects, process and metallurgical plants and municipal service sector projects throughout India and overseas and is a leading manufacturer of wind turbine generators.

The order wins include:
- an order of Rs. 90 crore to SEPC’s subsidiary Hamon Shriram Cottrell Ltd. from Mangalore Refinery and Petrochemicals Ltd. for setting up a Cooling Tower and Cooling Water Treatment Plant for Phase – III of the refinery project at Mangalore, Karnataka.

- an order of Rs. 30 crore from Kerala Feeds Ltd. for setting up of a 300 TPD Cattle Feed Plant at Kallelibhagom, Karunagappally in Kerala.

- an order of Rs. 36 crore from the Kerala Water Authority for a Clear Water Transmission Pipeline at Kochi. Commenting on the order wins, Mr. T. Shivaraman, CEO & Managing Director, SEPC, said:
“We are delighted with these order wins. It is heartening to note that the orders are for different verticals highlighting the diversification of our business model on one hand and our competence in our chosen areas of operation on the other. These order wins combined with signs of increased traction in the EPC space gives us confidence that we shall be able to grow our order book meaningfully over the short-to-medium term.”

DETAILS TO THE ORDERS:

■ ORDER FROM MRPL
SEPC’s subsidiary Hamon Shriram Cottrell Ltd. has been awarded an order of Rs. 90 crore from Mangalore Refinery and Petrochemicals Ltd. for setting up of a Cooling Tower and Cooling Water Treatment Plant for Phase – III of the refinery project at Mangalore, Karnataka.

The scope of work for the project will include designing, engineering, supply of materials, construction and installation. The completion period for the project is 18 months.

■ ORDER FROM KERALA FEEDS LTD.
The company has also received an order worth Rs. 30 crore from Kerala Feeds Ltd. for setting up a 300 TPD cattle feed plant in Kallelibhagom, Karunagappally, Kerala. The project involves the design, engineering, procurement, fabrication, transportation, supply, erection, testing and commissioning of all civil, architectural & structural, mechanical, electrical and instrumentation equipments / works.

SEPC will be executing the total engineering, civil, structural, mechanical, electrical & process automation for this plant. The cattle feed plant will be totally automated and based on technology from M/s. Poeth B.V., Holland, with whom, SEPC has a technical collaboration. The critical equipments for the project will be sourced from M/s. Heemhrost B.V., Holland, who has been in the business of cattle feed plants for more than 100 years. The SEPC team had executed a similar project for the same customer earlier. The completion period for this project is about 12 months.

■ ORDER FROM KERALA WATER AUTHORTY LTD.
The Water Division of Shriram EPC Ltd. has been awarded an order worth Rs. 36 crore from the Kerala Water Authority for work on a Clear Water Transmission Pipeline at Kochi. The project falls under the JNNURM Programme for the Corporation of Kochi and involves Design, Supply, Laying, Jointing, Testing and Commissioning of various sizes of pipes for transmission of water from treatment plant to various destinations. The combined length of all pipelines is around 23 Km. The project is scheduled to be completed within 12 months.

To read the full report: SHRIRAM EPC

>CREDIT DEFAULT SWAPS (DEUTSCHE BANK)

The use of credit default swaps (CDSs) has become increasingly popular over time. Between 2002 and 2007, gross notional amounts outstanding grew from below USD 2 trillion to nearly USD 60 trillion.

The recent crisis has revealed several shortcomings in CDS market practices and structure. Lack of information on the whereabouts of open positions as well as on the extent of economic risk borne by the financial sector are partly to blame for the heavy reactions observed during the crisis. In addition, management of counterparty risk has proved insufficient, as has in some instances the settlement of contracts following a credit event.

Heading towards a more stable system

Past problems should not distract from the potential benefits of these instruments. In particular, CDSs help complete markets, as they provide an effective means to hedge and trade credit risk. CDSs allow financial institutions to better manage their exposures, and investors benefit from an enhanced investment universe. In addition, CDS spreads provide a valuable market-based assessment of credit conditions.

Currently, the CDS market is transforming into a more stable system. Various private-led measures are being put in place that help enhance market transparency and mitigate operational and systemic risk. In particular, central counterparties have started to operate, which will eventually lead to an improved management of individual as well as system-wide risks.

Meanwhile, regulation should be designed with caution and be restricted to averting clear market failures. Regulators should avoid choking the market for bespoke credit derivatives, as many end-users are highly dependent on tailormade solutions. From an analytical point of view, it has yet to be established under which conditions CDS trading – as opposed to hedging – does more harm than good, and whether central trading – in addition to central clearing – is required to achieve systemic stability.

To read the full report: CREDIT DEFAULT

>GREAT RECESSION ENDS; AGE OF UNCERTAINTY BEGINS

The day has finally arrived that we can confidently say the Global Great Recession has ended. There were inklings that this transition was getting underway in the second quarter, when a number of the large emerging economies started to shoot out of the gate – particularly the Asian newly industrialized countries, India, China and Brazil. However, this was not all together surprising given that the financial systems of these countries were largely insulated from the mortgage subprime trap that had snared the banking systems of the advanced economies in Europe and North America. Hence the greater signal that the global recession was ending really materialized when France, Germany and Japan stepped out of the recession shadows in the second quarter and were able to extend growth into the following quarter. The global recovery was finally clinched when the North American economies jumped into the mix in the third quarter. Currently, the only G-7 country still stuck in a recession is the U.K., but that economy looks poised to make its lagged exit in the fourth quarter.

So the world economy is gaining traction and is expected to expand at a rate of 3.8% in 2010. Behind the recovery lies a well-synchronized dance. Financial markets are on the mend, as witnessed by sharp rebounds in global equity markets and declines in credit spreads. Housing markets are in repair, as witnessed by falling inventory levels and rising prices, particularly in the US and UK – the epicenter of the problem. Industrial production is on the rebound, as witnessed by replenished inventory levels and a pick-up in global trade. And lastly, but most importantly, consumers are more engaged, hence spurring the improvements in everything above.

The recovery is underway, but for the advanced economies that were deeply snared in the financial crisis, the recovery is not going to have the typical head of steam of past recoveries. For instance, the above graph demonstrates that the 1957-1958 U.S. recession reflected a contraction of similar magnitude to the 2008-2009 recession, but the pace of recovery then was more than three times stronger in the first year. As a rule of thumb, growth in real economic output during the first year of a recovery for an economy is typically 2-3 times larger than the decline over the course of the recession. But, we don’t believe this will be the case this time, as studies of past banking crises show that output for an economy grows more slowly relative to the pre-crisis trend for a number of years after the recovery has taken hold. There are many reasons why this occurs, including employment suffering enduring losses relative to the trend, credit flow destruction, risk aversion among financial institutions, and deep losses in household wealth. We have incorporated this view in our forecast by lowering the potential GDP growth forecast for the U.S. and Canadian economies to an average of just 2% (about half to a full percentage point below pre-crisis levels).

To read the full report: ECONOMIC FORECAST