>MACRO ASIAN ECONOMICS (HSBC)

Blowing bubbles
Money’s too loose in Asia

• Excess liquidity in Asia raises the spectre of asset bubbles, especially in property
• The bubble will grow for several years to come if policy-makers don’t step up
• But lingering growth risks will reinforce caution, pushing asset prices up further

Here we go, again
We’ve been here before. A crisis erupts, markets panic, and policy-makers, reading the news along with everyone else, slash interest rates to pump up growth. In principle, this is perfectly all right. The trouble is, however, that if policy stays too loose for too long, it will blow bubbles. In Asia, liquidity is far too abundant to keep interest rates this low. Yet, it appears unlikely that the region will strike out on its own and tighten while everyone else is stuck in the emergency room. In short, the seeds are being sown for Asia’s next bubble. The world has not changed, it just moved places.

Chapter 1: Still standing
Two points to note. First, liquidity is extremely abundant in Asian financial systems. There is no credit crunch to speak of. Sure, banks have become more cautious since the crisis, but this is a cyclical response and does not reflect a breakdown in the financial transmission mechanism. Second, Asia, unlike other parts of the world, does not suffer from a balance sheet crisis, allowing leverage to build quickly if rates stay low.

Chapter 2: Bubble economics
Monetary policy is far more powerful than a fiscal stimulus, but develops more gradually over time. Low growth and lingering uncertainties are preconditions for bubbles to emerge, as they force officials stay accommodative. Asset price increases can occur even if growth fundamentals appear
unsupportive. In fact, the divergence of asset values from their fundamentals is precisely why the thing is called a “bubble”.

Chapter 3: The trilemma, again
For Asia to tighten independently, it needs to let go of the idea of exchange rate competitiveness. But such beliefs are so deeply ingrained after decades of export-led development that aggressive, independent action appears unlikely.

To see full report: ASIAN ECONOMICS

>EXIDE INDUSTRIES LIMITED (MERRILL LYNCH)

Strong June Q raises hope

■ Raising PO to Rs88 driven by stronger June Q; Buy
Exide Industries Q1FY10 PAT at Rs1.22 is up 49% y-o-y and is 20% higher than our estimate, driven by higher margin and volume. We have raised EPS estimates for FY10E and FY12E by 11% and 18% respectively, driven by higher EBITDA margin. Consequently we have raised our DCF based PO to Rs88 from Rs74. We maintain our Buy owing to (1) strong EPS growth of 40% likely in FY10E and (2) attractive valuation as stock is trading at a PE of 12xFY10E after adjusting for the value of the company’s 51% stake in ING Vysya Life Insurance.

■ June Q beat expectation on better margin and product mix
Strong earnings growth in June09 Q can be attributed to increase in EBITDA margin by 770bp y-o-y to 23.2% owing to (i) decline in cost of lead (ii) FX gain of Rs10mn and (iii) inventory gain. The company also benefited from delayed monsoon that led to stronger demand for UPS and improved the product mix.

■ Inventory & FX gain to boost FY10E, higher vol in FY11
We expect that nearly 90% of incremental profit in FY10E could come from (1) marginal FX gain in FY10 owing to appreciation of rupee compared to loss of around Rs544mn in FY09, owing to 26% depreciation in value of rupee (2) marginal gain inventory is likely in FY10E compared to an estimated loss of Rs1bn in value of lead inventory in FY09, owing to 46% decline in cost of lead. We expect the company to sustain 16-18% EPS growth in FY11/12E owing to recovery in volume growth to trend line level.

To see full report: EXIDE INDUSTRIES

>EVEREST KANTO CYLINDERS (IIFL)

Performance under high pressure

We continue to view EKC as a structural story with short-term challenges owing to the situation in Iran and domestic gas supply disruptions. The company remains confident of robust growth in 2HFY10 on the back of improved gas availability. The second half of FY09 was a weak period for EKC’s standalone operations, leading to increased inventory at the end of the year. We expect the inventory situation to improve once demand starts picking up in 3QFY10. The product mix continues to improve, with the low-margin industrial business now forming only 10% of the total revenues.

■ MD&A highlights the big opportunity in the domestic business: Natural gas currently forms only 8% of India’s total energy mix, as against the global average of 24%. Gas supply is expected to increase from 119.98mmscmd currently to 197.09mmscmd in FY11. Demand for CNG is expected to treble at 7% of total gas demand in the next five years. CNG is currently available at only 1% of India 35,000 retail fuel outlets. With the government’s plans to launch city gas distribution
in over 200 cities, demand for CNG vehicles is likely to surge, which in turn would lead to demand for cylinders.

■ Healthy operating cash flows despite worsening of inventory situation: The Company’s inventory situation worsened in FY09. The company ended the year with almost 10 months of inventory, including finished-goods inventory of 30 days and WIP inventory of 64 days—an indication of the weak demand in 4QFY09. Raw-material inventory also increased by 10 days, as weak demand for CNG cylinders in 4Q precluded inventory reduction. In spite of an incremental investment of Rs2,039m into inventory funding, the company registered positive operating cashflow of Rs1,201m.

■ Lower-margin industrial business now forms only 10% of overall revenues: The share of the low-margin industrial cylinders business in EKC’s revenues has dropped to 10% after the CPI acquisition. Jumbo cylinders form only 0.3% of EKC’s volume sales, but their high realisations mean they account for 18% of overall revenues. UAE operations now contribute ~60% of the company’s profit. Given the tax incentives at that plant, EKC’s tax rate has dropped from 19% in
FY08 to 10% in FY09.

To see full report: EKC

>MULTIPLEX PREVIEW (KARVY)

Q1 FY10 has been an abnormal quarter for the multiplex industry as the producers' went on strike with respect to the revenue sharing issues. There was hardly any content being released for the first two months of Q1 FY10 with only a handful of off-beat movies being released. The multiplex operators tried to show alternate content at their properties but with no success as IPL and the general elections swept all the attention. To make matters worse movie producers from the Telugu and Kannada film industry also joined the strike called by the Bollywood film fraternity. As a result we expect sub-15% occupancies to be reported by the multiplex companies in Q1 FY10. Many multiplex companies operated below capacity by keeping
some of their screens shut for this time period.

■ The final settlement between producers and exhibitors….
The final settlement between the producers and exhibitors was reached only in the first week of June. According to the new agreement, the multiplexes will have to share 50, 42, 35 and 30 percent for the first, second, third and fourth week respectively for all movies and 52, 45, 38 and 30 percent respectively for all blockbuster movies that manage to collect more than Rs 175 mn only at the six leading multiplex chains.

■ Abysmal earning numbers expected in Q1 FY10….
We expect abysmal earnings for the multiplex companies in Q1 FY10 on the back of the abnormal quarter witnessed by the industry. We expect all companies across our coverage universe to report an operating loss in Q1 FY10. This will be due to the fixed costs like theatre rentals, employee costs, administrative costs and other operating costs which have to borne by the multiplex operators irrespective of the movie flow and quality of content.

■ Earnings cut for FY10E….
We have reduced our FY10E earnings estimates for all the multiplex companies under our coverage, keeping in mind the expected Q1 FY10 earning numbers and delay in launch of new properties and a budget-to-forget for the multiplex industry. For the record, no company under our coverage was able to launch any new property in Q1 FY10.

To see full report: MULTIPLEX PREVIEW