>India Goes Easy On Gold Buying In Oct-Dec As Rupee Slides

Depreciating rupee and high gold prices have jointly forced to India to cede its long-held position as the world’s No. 1 con-sumer of the precious metal to China in October-December.


India and China together account for more than half of total global demand for gold, with demand from India typically surpassing that of China’s. But the fourth quarter of 2011 registered a change in the trend.


According to World Gold Council data, total demand for gold in India was 173 tonnes in October-December, down 42% from a year ago. Demand in China, on the other, increased marginally from a year ago to 190.6 tonnes.


While both countries registered high inflation, particularly in the first half of 2011, weakening of the rupee against the US dollar dampened demand for gold in India.


In October-December, while gold prices rose 23.5% in dollar terms from a year ago, in rupee terms, gold prices shot up a whop-ping 39%.


Rupee depreciated 8.4% versus the dollar during the quarter, while the Chinese yuan that appreciated 0.2% in the same period.


On December 16, rupee weakened to its all-time low of `54.30 versus the dollar.
Impact of rupee depreciation is also reflected in the fact that while international gold prices (in dollar terms) fell 0.8% in October-December on a sequential basis, Indian prices were up 8.8% dur-ing the same period.


In the quarter that went by India’s jewellery demand nosedived 44% from a year ago to 103 tonnes and investment demand plunged 38% to 70 tonnes.


It was mainly depreciation of rupee in the second half of the year that resulted in India’s gold demand during July-December weak-ening 33% from the first half.


To read full report: GOLD
RISH TRADER

>HIGHWAY DEVELOPMENT: Near term challenges; smoother times ahead

Roads & Highway development presents a structured, planned & definitive opportunity of ~` 1365bln (USD 26.25bln) to EPC & BOT developers. Dissecting this opportunity, we find that the scale, size & regional distribution of majority of balance projects may not be attractive for a BOT developer. Also, the competitive intensity of bids has challenged all industry players alike & warrant caution. In our opinion, these bids assume a consistent availability of cheaper source of finance which in itself is unsustainable over a longer time frame. We believe capital markets shall, in the long run, create a valuation differential between aggressive company managements and those with conservative & sustainable strategy. Hence, we like companies with business model & management style which does not encourage excessive risk taking, have projects with longer concession tail & are able to consistently generate positive FCFE with minimal support from the parent entity.


■ Definitive opportunity, award activity has already peaked
Highway development under the planned NHDP presents an opportunity of ~` 1365bln (USD 26.25bln). While we don’t deny the size & certainty of the opportunity we are concerned about limited projects fitting the size & scale of a PPP development. The regional spread too is not quite encouraging. Also, we expect FY12 to see peak of awards in near term.


■ Competitive pressures – no respite in near term
The recent bids by developers belie their stated IRR objective. Also, the expectation of gradual decline in competitive intensity has been proven otherwise. Supply side constraints along with demand side factors of declining order backlog/sales, lower asset utilization & scope for financial leveraging has attracted the breadth of the construction players to road projects particularly the NHAI project awards. Hence, we expect the competitive intensity to remain at elevated levels in near term restricting IRR’s of projects to lower teens.


■ Takeout essential (debt & or equity), equity requirement to pull plug on competitive intensity
We estimate an equity requirement of ` 2687bln over the next 3 years for projects currently under implementation. Additionally, ` 339bln of equity shall be required for projects which are expected to be awarded in the next 2 years. In our opinion, this shall be the sole factor for pulling the plug on the competitive intensity of the sector.


■ Challenging times to continue; Valuations offer comfort
The competitive intensity, amongst other reasons has led to underperformance of the sector with broader markets. The current average valuation of 1.5x P/B offer significant comfort from further downside. We initiate coverage on Ashoka Buildcon & ITNL with a Buy rating, downgrade IRB Infra to Hold, maintain Buy on Sadbhav Engineering. Sadbhav Engineering continues to occupy the top slot in our pecking order of stock selection.


To read full report: HIGHWAY DEVELOPMENT
RISH TRADER

>TATA STEEL: The worst may be behind, well poised for recovery; retain Buy

What's changed
Key takeaways from Tata Steel’s 3QFY12 results conference call: (1) Group steel deliveries at 5.84mnt (-5% qoq), were impacted by seasonal weakness and market uncertainties in Europe and floods in Thailand. (2) Europe business witnessed price declines on weak demand while higher priced raw materials impacted profitability, resulting in the company making significant mark-to-market provisions on stock. However, this implies that with steel prices recovering, there is low risk of further inventory write-downs. European demand has picked up with prices inching up. The company is targeting to retain FY13E volumes in Europe at FY12E levels, despite planned temporary closure of the BF4 at Port Talbot for rebuild. (3) India business saw stable prices with long product and downstream prices higher than previous quarters. Margins were compressed on account of higher raw material (imported coking coal) prices. (4) The company expects to commission the Jamshedpur brownfield expansion by March 2012 and
expects to add 1mn tons to current production levels in FY13. (5) European restructuring measures are progressing per plan, leading to about 2500 redundancies. (6) The Benga coking coal project in Mozambique is expected to commence despatches from March 2012.


Implications
We cut our FY12E-14E EPS by -1% to -11% on inventory write-down, and higher cost assumptions. But we believe the worst may be behind in both India and European profitability, and with the Jamshedpur expansion on track, the company is well positioned for a strong earnings recovery in FY13E.


Valuation
We reiterate our Buy rating and lower our 12-month P/B-based TP to Rs550 (from Rs552) on lower earnings estimates.



Key risks
Slower-than-expected demand recovery in Europe, higher-than-expected raw material costs

>SELAN EXPLORATION TECHNOLOGY: Robust realisation; await ramp-up in production volumes

Result highlights
Strong results driven by realisation; volume growth unimpressive though: In Q3FY2012, the net revenues (adjusted for the petroleum profit) of Selan Exploration Technology (Selan) grew by 54% year on year (YoY), as a 76% year-on-year (Y-o-Y) improvement in the realisation over-compensated for the 6% decline in the volume during the quarter. Though sequentially the volume improved by 14% to 41,853 barrels of oil, but the realisation supported 6% growth QoQ taking the sequential sales growth to 20%.


PAT records 65% growth YoY: The operating profit grew by 77% YoY and 5% quarter on quarter (QoQ) to Rs14.7 crore. Following the trend, the profit before tax (PBT) grew by 80% YoY and 5% QoQ to Rs16.7 crore in Q3FY2012. However, there was an extraordinary item to the tune of Rs2.4 crore pertaining to foreign currency variation in Q3FY2012. Therefore, the reported profit after tax (PAT) recorded a growth of 65% YoY and 17% QoQ to Rs10.5 crore. Excluding this extraordinary item, the adjusted PAT seems to jump by 100% YoY and 12% QoQ to Rs12.9 crore.


Volume estimate revised down; consequently profit estimate trimmed: Given the delay in obtaining regulatory approvals for further exploration & development of the company’s oil fields, we are fine-tuning our assumptions for the production volume in FY2012 and FY2013. However, the impact of the delay on the net revenue will be limited by the higher than expected blended realisation. We are also introducing our FY2014 estimates for the company in this note. We remain positive about the field development programme and the potential ramp-up in the volume from the same in the coming years. Thus, we maintain our Buy recommendation on Selan with a price target of Rs500.


Other updates: Last week, Andrew Wenk, President & CEO, Selan, resigned from the company for personal reasons. Mr Wenk's resignation is effective from February 15, 2012. He had joined Selan during July 2011.


The company has declared an interim dividend of 30% (ie Rs3/- per equity share) for the financial year 2011-12.