>FLASH ECONOMICS (ECONOMIC RESEARCH)

What can be done to reduce liquidity preference?

The present situation is of a deflationary type because there is a very strong liquidity preference (by banks, investors and households). This is preventing a pickup in credit and in purchases of risky assets. What can be done to lessen the liquidity preference once interest rates have been lowered to zero?

− try to create inflation expectations (quantitative monetary policy, currency depreciation) to cause investors and banks to switch from cash to assets that provide a hedge against inflation (real estate, productive capital, etc.);

− increase the return on risky assets (through fiscal policy, for example), because the return on risk-free assets cannot be reduced further (despite some far-fetched proposals to introduce negative interest rates).

Policies discouraging the holding of liquid assets are more effective than policies of creating additional liquidity, although they are similar in certain respects (inflation expectations).

It must also be recognised that if banks are faced with a fall in credit demand, it is only on the investor side that action can be taken.

If, moreover, there are fears of excessive monetary creation and expected inflation, the most advisable policy is therefore to increase the returns on risky assets via incentive policies.

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>STEEL SECTOR (FIRST GLOBAL)

Is the imposition of safeguard duty on imported HRC required to protect
Indian steel majors?

The Story…

At a time when the US and European governments are trying hard to close their doors on foreign steel by imposing anti-dumping duties on steel products imported from India, there has been a sharp surge in steel imports into the country. According to data by the Directorate General of Commercial Intelligence & Statistics, India’s average monthly steel imports rose from 80,000 tonnes in September 2008 to 250,000 tonnes in February 2009, following an increase in purchase by galvanised steel players, engineering and construction companies. Presently, countries, such as China and Ukraine, continue to ‘dump’ steel into India.

In order to protect the interests of Indian steel majors, the Director General of Safeguards had recommended imposing a safeguard duty of 25% on HRC imported at a price of less than $600/tonne, which was, however, turned down by the government. Considering that all Indian steel majors operated at full capacity in the January- March 2009 quarter and recorded a significant growth in volumes for the period, the demand for steel in India appears quite strong. Moreover, steel currently trades at a premium in India in comparison to world steel prices. The question that now arises is whether there is actually a need for the imposition of safeguard duty on imported steel for Indian steel companies, particularly at a time when the infrastructure, construction and auto sector (all steel users) badly require cheaper steel for an early revival. Read on for the answer...

The case presented by Domestic Steel Players

M/s Ispat Industries Ltd. and Essar Steel Ltd. have filed an application for the imposition of
safeguard duty on imports of Hot Rolled Coils/Sheets/Strips. The application is supported by SAIL and JSW Steel Ltd. The applicant, along with the supporting companies, accounted for 79.50% of India’s total production in April 2008-February 2009.

As much as 7,00,000 tonnes of HR coils are estimated to land on Indian shores between May 2009 and July 2009 from Ukraine and Turkey. The imports have been contracted at a price of $400- 415/tonne at Indian shores, while Indian prices stand at $500-540/tonne. These low cost imports could put pressure on Indian steel prices, thereby impacting the profitability of steel majors.

The other side of The Coin

Since the last four months, all major primary steel producers in India have been operating at 100% capacity utilization and recorded a growth in sales volumes for the period. These companies managed to sell their total output in spite of comparatively higher imports (as against last year), as it is not possible for all players with a requirement for HR coils to import the same into the country and only a few big producers having huge requirements are capable of importing the product. Moreover, there also still exists a strong domestic demand for steel and according to latest projections by the World Steel Association, India might be the only country in the world to record a growth (2%) in steel demand in CY09. India has overtaken Russia and the US to become the world’s third largest steel producer, amidst the present scenario of slowing demand and drastic production cuts in both the countries.

Presently, in India, steel prices have stabilised (with an upward bias), which coupled with the significant decline in coking coal and iron ore prices, has provided relief to the major steel producers. We have made some rough calculations in order to arrive at the production cost of crude steel under the new raw material contract prices.

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>RELIANCE INDUSTRIES LIMITED (JP MORGAN)

KG D3, D9 - Hardy Update - ALERT

• Technical Evaluation report from GCA: Hardy Oil (10% stake holder in KG D3 and D9) released a technical evaluation report by Gaffney, Cline & Associates (GCA) on resource estimates for KG D3 and D9 blocks. Risked resource data on both blocks indicate increase in resource estimates and higher Geological Chance of Success (GCoS) indicating higher probability of a prospect's drilling leading to a discovery.

• KG D3: GCA’s resource estimation based on identified prospects and leads for KG D3 block is 5.5TCF (unrisked) and 2.5 TCF (risked) with a 45% GCoS (chance of success), higher than 15-25% GCoS indicated earlier (GCA estimate May 2007). Additionally, GCA conducted a playbased exploration methodology estimate for resources to address both the current prospect inventory and the “yet to find” resource potential, the study indicates 9.5TCF of risked prospects.

• KG D9: Risked resource estimate for KG D9 is 10.8TCF, with unrisked resource estimate of 54TCF, up from 45TCF declared earlier (GCA estimate May07), leading to a 22% increase in unrisked prospects. Also, the GCoS (chance of success) has increased to 20% from 15% earlier.

• Drilling in 2HCY09 and CY10: For KG D3 (where two gas discoveries have been made), 2D data acquisition would be done till 1H09 with 4 exploration wells planned to be drilled in CY10, and for KG D9, exploratory drilling is planned in 1H09.

• Positive data point: The GCA ratification of high prospectivity in other blocks is positive for sustainability of RIL’s E&P business and valuation.

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>GODREJ INDUSTRIES (CENTRUM)

Godrej Properties - the next trigger

■ Higher raw material costs impact PAT: Net sales (consolidated) for the full year (FY09) grew 16.3% YoY to Rs34.2bn vs. our estimate of Rs32bn. However, PAT plunged 33.6% to Rs1.1bn (vs. estimate of Rs1.8bn) mainly due to increased raw material costs.

■ Revised rating and target price: The stock has achieved our target price of Rs120. Hence, we have changed our rating to Hold and set a revised target price of Rs129 on SOTP valuation. Currently the stock trades at 19x FY10 EPS of Rs19 and 15.6x FY10EV/EBIDTA.

■ Godrej Sara Lee stake merged with GCPL; SOTP value revised: GIL’s stake in Godrej Sara Lee is being merged with Godrej Consumer Products (GCPL) at a 1:1 swap ratio. This would consolidate the FMCG businesses under GCPL. Further GIL’s holding in GCPL would increase to 25%. We have revised our SOTP value to Rs163 and revise our target price, post a 20% conglomerate discount, to Rs129.

■ Godrej Properties results in-line: Godrej Properties reported revenues of Rs2.5bn (excluding other income), exactly in-line with our estimates. We believe revenues were booked mainly from the Planet Godrej project at Mahalaxmi in Mumbai and Bangalore projects. PAT stood at Rs750mn vs. our estimate of Rs583mn.

■ Chemicals division dampens results: The slump in the chemicals business, which contributes 22% to topline, impacted overall results. Fluctuations in commodity prices and currencies, curtailment of natural gas supplies to factories and sluggish business environment impacted the division on the cost and margin fronts.

To see full report: GODREJ INDUSTRIES