Changing Growth Engine - CS
Tuesday, November 25, 2008
India's economic growth engine has not stayed the same for long in the past. Credit Suisse expects investments to no longer be the growth engine from now on. Exports, somewhat surprisingly, could be relatively the fastest growing economic sector for the next few quarters. But why does this Change frequently ? The cyclicality in the savings rate and the frequently recurring twin deficits and profit-oriented private sector are key reasons why India's growth characteristics change constantly.Because of the ongoing crisis and wealth destruction, investment-driven growth has been derailed, at least for the time being. Lower interest rates and more liquidity are unlikely to reverse prospects for capital goods companies. It is debatable whether the investment and savings rates of 30-35%, if sustained, could produce a 9% plus sustainable GDP growth rate for years.
Exports are unlikely to grow robustly around the current economic low point, because of weak external demand. However, many export-focused industries could still outperform the other major economic sectors in the next two years, aided by currency-enhanced competitiveness and a larger policymaker focus on stabilising the balance of payment.
Savings and investment rates also have cycles, or at least mini-cycles on a secular trend. Generally, the savings rate has declined during bad economic times for India. The savings rates of corporates and the public sector are much more pro-cyclical.
Credit Suisse is Neutral on HDFC and ICICI Bank. Outperform on HDFc and Underperfrom on Broking Houses. Under perform on the Real Estate Pack. NEUTRAL on Siemens, Thermax, Punj Lloyd and UNDERPERFORM on Cummins. Outperform on IT Pack, FMCG, Bharti Telecom and Dr. Reddys Lab. Neutral on NTPC and Tata Power.
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Published by Webmaster @ 3:06 PM IST.
Dabur + Fem Care Acquistion - Synergic Fit but Expensive Pricing
Monday, November 24, 2008
Dabur India acquired a 72.15% stake in Fem Care Pharma from the existing promoters for Rs2.04bn in an all cash deal. Overall contribution of skin care products to Dabur's sales is less than 4% and this acquisition would help in nearly doubling it. Besides the well entrenched Fem brand this acquisition provides manufacturing base in Nasik and Baddi (enjoying tax benefits). It also has presence in GCC/Middle East markets which could be expanded. FEMC's direct reach of 25,000 parlors will provide Dabur with a new distribution channel for its own products - the other channels should have some degree of overlap.Though the acquisition complements Dabur's existing business, it wasn't cheap. The transaction transaction happened at multiples of ~3x FY08E EV/Sales and ~20x FY08E EV/EBITDA. Higher than current multiples of our Indian Consumer sector universe. Fem Care had very high brand building and distribution costs and if Dabur can save on this front, it could significantly improve the EBITDA.
Dabur is expected to consolidate the accounts only in FY2010. Dabur's management expects FEMC's sales to be Rs 1bn - 1.1bn for FY09 and operating profit of ~Rs180m.
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Published by Webmaster @ 3:06 PM IST.
Merrill Continues to be Bearish - Big Rally in Late 2009
Friday, November 21, 2008
Merrill Lynch continues to be bearish on India mainly due to slowing economy hurting earnings and the uncertainty of general elections as we move towards the summer of 2009 [Q1-2009]. Economic news should continue to adverse through most of 2009, expect equity markets to recover in 2HCY09. Markets have typically given a over 30% return from its bottom and we could see such a rally start towards Q4CY09 led by - liquidity, lower inflation and fall in interest rates. This is the time when earnings downgrades will be behind us and the earnings revision ratio bottoming out.Merrill Lynch expects the Sensex to hit 7000 levels in 1QCY09 as earnings get downgraded and drag valuations to historic lows of below 8x PE. Expect FY10 to see a flat to negative EPS growth which would bring Sensex EPS to the 850-900 levels.
Sensex EPS Estimates:
Sensex earnings is continuously turning gloomy. For FY09, expectations was at rs 980 and currently has fallen to Rs 925. For FY10, the Sensex EPS estimates is expected to be Rs 1,030 [bottom up approach, likely to be revised downwards] down from Rs 1,170 at the beginning of this year. Macquarie also estimates that earnings could be flat to negative in FY10 when compared to FY09. Investors can take individual stock selection approach rather than the SENSEX in view.
Merrill is Overweight on Telecom, Financials, Pharma, Consumer Discretionary [Like Hero Honda etc] and select Industrials [BHEL etc]. Neutral on Consumer Staple. Underweight on Energy, Real Estate, Software and Metals. For the time being avoid Mid Caps is Merill's mantra as they are more vulnerable to adverse economic cycle and could see substantial earnings downgrade.
Global Slowdown is Impacting India:
India is relatively resilient, expect growth to be impacted by the global slowdown in the absolute sense. This emanates from demand contraction as a result of weakening exports and supply constraints as a result of lower external funding for investment. India should fare relatively better than most Asian economies because of its domestic demand story, with exports, at about 12% of GDP, the least in the region. [This is exactly what Mr. Jain at HDFC Fund had said to us in a conference call]
Political Instability:
2009 is the year of the general elections and the first half will likely be devoted to concerns on the nature and shape of the new Government. While it is early days yet, initial opinion polls could predict a hung Parliament which would be negative for market sentiment.
Indian Capital Market history suggests that as the economic cycle turns down, valuations tend to go below the 10x PE levels and hit the sub-8 levels, a level still to be reached. We believe valuations will hit an all time low in the coming months as earnings downgrades accelerate.
Related Reading:
Long Term Technical Analysis of BSE Sensex - Target 7,000
How Foreign Investors are Looking at Indian Markets and Economy ?
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Published by Komal M @ 4:36 PM IST.
Reliance ADAG Stocks Fall Freely - Where are the Businesses headed ?
Thursday, November 20, 2008
Reliance ADAG Group stocks have been under a Free fall Mode ever since the correction started. LIC the God Father of Indian Stock market did what it could to support but it has likely given up. We guess that not many investors have the confidence in the younger scion of the Ambani family, not even the FIIs [Reliance ADAG Group Stocks are not in FIIs Top-15, while RIL is at Number One] who like flamboyant CEOs, but bottom line matters when it comes to Investing.We decided to conduct the performance of Reliance ADAG stocks in the past 10 months and they have been performing terribly bad, but not as much as Unitech or Ansal properties :-)
Today's closing Prices of AdLabs Films, Reliance Communications, Reliance Capital,Reliance Infrastructure, Reliance Power and RNRL are as indicated below.
Adlabs Films:The Stock is down 92.5% from its high of Rs 1,939 in Jan-08. AdLabs Investors are bleeding heavily as Anil Ambani's personal business interests through privately held Reliance Big Entertainment conflict AdLabs Growth. The following chart shows how AdLabs Investors have lost wealth.
Reliance Capital:Another ADAG Group company where Investors have lost wealth to the tune of 85% since its High of Rs 2,925 in Jan-2008. The following chart shows sell-off in the counter.
Reliance Infrastructure:Erstwhile, BSES, the company was totally professionally managed and enjoyed better rating than Tata Power. Ambanis held majority stake and took-over the company and changed its name to Reliance Energy. What is really bad for investors who have held the stock over long term is the company's projects got transferred into Reliance Power where Anil Ambani holds 80% stake bought at par and rest of the Indian Investors bought it at a Big Premium. Reliance Infra has lost 84% since Jan-2008. Here is the historical chart of Reliance Infra.
Reliance Communications:The only stock in Reliance ADAG group which has fallen the least, i.e 78% [performing below benchmark indices and peer Bharti Airtel] Future looks uncertain as the company has huge CAPEX ahead of it. But we certainly endorse Ambani's GSM expansion plan as he has created more domestic jobs and business opportunities. Historical chart of Reliance Communications.
RNRL:RNRL - an empty company with hardly any manufacturing or industrial activity is involved in a dispute with RIL. RNRL stock is down 83% from its high in Jan-08Here is the historical chart of the same.
Reliance Power:This is the company which has put Millions of Indian Investors in Trouble. Greed was the order of the day when RPower IPO hit the street. We didn't BUY Ambani's Dirty Energy plan. Reliance Power appeared like a Big Scam but Investors still bought. Here is how the stock has performed.
Now, just a school of thought, what is the cause for such big rise and fall in all Reliance ADAG stocks ? Were any operators close to management involved in rigging the stock price higher to challenge Mukesh Amabni's ranking on Forbes List ? Share your views.
We really hope, Anil Ambani will stand up with courage and protect the shareholders before they demand that the companies split up from RIL - RCom, RNRL and Reliance Infra be merged back with Mukesh Ambani's flagship RIL. Can Anil Ambani run the businesses without further erosion to shareholders wealth? What are your thoughts ?
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Published by Sunil K @ 8:31 PM IST.
FII Holding + Activity in Indian Stocks
Wednesday, November 19, 2008
We continue to receive reports everyday written by institutions who didn't know that they would go bankrupt and it is difficult to filter as we study and only present the best content to readers out here. The US crisis is still far from the end if we look into the ground reality in resolving the issues. However, from past experience, a compromise and equilibrium will be reached.Doesn't matter, India in a way is fairly secluded and sometime within the next 12 months the de-coupling theory will come into existence and greed will follow. FIIs have not completely exited India. They still hold about 39% of BSE 500 FREE FLOAT. Or they hold 16.7% of BSE 500 Total Market Cap.
ENAM research has done an excellent analysis on how FIIs have bought and sold across the Indian market. We are presenting the excerpts from the same. At the end of Sept-08, FIIs have sold across Banks, Oil & Gas, Financial and Pharma. [I agree they must have sold some more in the first 2 weeks of Oct-08].
FII Holding Pattern in Front line Stocks - Large Cap:
FII Holding Top 15 by Perecntage Stake in Company and FII Holding Top 15 by Investment Value
Note: This is at the end of Sept-08.
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Published by Webmaster @ 8:32 PM IST.
ITC - FMCG + Hotels - Time to Light Up the Cigarette ?
Tuesday, November 18, 2008
Analysts are now making investment case for Cigarette and FMCG Major - ITC Ltd. ITC's earnings growth has been remarkably stable despite tax increases and regulatory restrictions, reflecting its strong pricing power. ITC's CAGR was 18.4% over the past decade and average variance was only 3ppts. The new smoking ban appears to have had little effect and we do not expect it to have much impact in the medium term.Volume growth of approximately 20% in filter cigarettes in 1HFY09 is encouraging and expect a 15% Cagr in the cigarette business Ebit over FY08-11.
Non-Cigarette Business:
While there has been concern over the need for a cash infusion into the non cigarette businesses, only 12% of post-tax cash generated by the cigarette division over the past seven years has been used for non-cigarette expansion. The paperboard unit is coming out of its capex cycle and the fast-moving consumer goods (FMCG) division's losses likely to shrink in 2HFY09. However, cyclical pressure will remain on the Hotels business.
According to CLSA here is the Sum of the Parts Valuation for ITC
Cigarettes - Rs 178 (19x PE, 20% discount to HUL)
FMCG - Rs 17
Agribusiness - Rs 3
Paperboard Rs 12
Hotels - Rs 12
Cash - Rs 6
Total Rs 225 is the Target price. ITC is expected to report an EPS of Rs 9.1 for FY09 and Rs 10.3 for FY10.
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Published by Webmaster @ 3:06 PM IST.
RBI's Liquidity Measures Fail to Cheer the Market
Monday, November 17, 2008
RBI's latest measures are specific to exporters, real estate, FCCBs and the SME sector - all of which is a step forward towards easing problems currently being faced by each of these segments.RBI has further raised the interest rate ceiling on NRI deposits by 75bps. The interest rates on FCNR(B) deposits now stands at Libor +100bps while that on the NR(E)RA deposits is now at Libor +175bps.
Given the continuation of liquidity pressures being faced by the mutual fund and NBFC segment, the RBI has extended the period under which banks can avail liquidity support upto 1.5% of their incremental deposits to lend to this segment to March 2009.
The RBI's special re-finance facility which allows banks to avail liquidity support upto 1% of their NDTL has now been extended to provide finance to the micro and small enterprises.
RBI cut in general provisioning requirement to the normal 0.4% from (1) 1.0% on standard advances for residential housing loan beyond Rs2mn and (2) 2% on standard advances in commercial real estate, personal loans including outstanding credit card receivables, loans [Are We making a case for small sub-prime here in India ?] and advances qualifying as capital market exposure and non-deposit taking systemically important non-bank financial companies (NBFCs). It also cut risk weights on banks' exposures to unrated claims on corporates, commercial real estate and NBFCs to 100% from 150%.
By the way are they really done by the RBI Governor or by the Finance Ministry ? I wonder :-)
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Published by Webmaster @ 5:04 PM IST.
Dark Clouds over Emerging Markets - Shankar Sharma
Friday, November 14, 2008
Shankar Sharma of First Global echoed his views that he had done in Samvat Trading - Short India, take the profits on table wherever they appear and stay Liquid.Here is an excerpt from the report,
GDP Growth to Slowdown, China could well be in the 6-7% range, and India, in the 4-5% range, in the coming year. The reasons for this will be different. India, with its lack of internal resources, and over-reliance on foreign capital for its growth. China, for its dependence on the US for export growth.
In the next 2-3 months, Emerging Markets will be destroyed led by China and India as the architects of this big fall. The nonsense that comes out each time the market rallies 5% is as follows,
The worst is over. The governments are stringing together stimulus packages like a sausage factory. Markets have discounted the worst.etc.India and China may between 20-30% in the next 2-3 months' time. Of course, in sympathy, the other markets will join in, so expect pretty terrible moves from Brazil and Russia as well.
In India, it will be the index heavies, Reliance Industries (RIL.IN), and Bharti Televentures (BHARTI.IN) [He had spoken about Bharti's rise from Rs 40 levels and there is still profit to be booked in Samvat Diwali Session] that will cause huge strife. Bet on their prices declining 20-40% over the next few months.
In China (China H Shares), Bank of China (3988.HK), China Petroleum & Chemical (386.HK), China Merchant Bank (3968.HK), China Coal Energy Co. (1898.HK)…they all will decline 30-50%.
Stocks have been really beaten down and will they Halve again ?
Remember the Tech boom? Stocks halved, then halved again, then halved again, and again,... [The HFCL, Pentafour, Pentamedia, Silverline etc etc]
For Example, to justify, Shankar's Theory, consider the Real Estate Stocks - Unitech for example from Rs 400 to Rs 200, then to Rs 100, then to Rs 50 and currently trading at Rs 40 may strike Rs 25 :-)
These are just Mr. Sharma's views and Mr. Rakesh Jhunjhunwala's views are exactly the opposite.
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Published by Webmaster @ 11:48 AM IST.
What Foreign Investors think about India ?
Tuesday, November 11, 2008
In an analysis by HSBC about the top 10 questions on the minds of foreign investors for investing in Asia, the outlook for India is gloomy with the slowdown and general elections, approximately 6 months away.
No of Investors argued that the cyclical downturn in India may turn into a full-blown slump as global financial problems start to spill over into the economy. However, HSBC firmly defended that there one should not be worried.
Robert Prior-Wandesforde quoted,
Indian economy remains fairly well insulated from any real sector contagion, given its small share of exports in GDP. The country's vaunted services outsourcing industry is more vulnerable to the global downturn than widely believed. The current stresses seen in India's inter-bank market reflect a temporary adjustment of the financial sector to both the dollar squeeze and the cyclical downturn but do not represent any systemic risk and the Reserve Bank of India remains well placed to handle any potential liquidity squeeze.Robert quoted that the political scenario in India is not favorable,
Most likely outcome is, a broad coalition government without a strong political mandate for reform. This raises the chance that the reform momentum becomes stalled, a scenario that would entice an ever greater risk premium among more wary global investors.CLSA Equity research in its report has echoed similar views - Third Front government which, with neither the BJP nor Congress controlling it, would be inherently unstable and lacking long-term policy direction.
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Published by Webmaster @ 2:00 PM IST.
Sensex Technical Analysis - Long Term
Monday, November 10, 2008
This report is quite scary but we gotta face the truth and read into the data of Technical Analysts. ENAM Research has studied the SENSEX charts of the past 30 years and according to them, the correction is still not over.India has witnessed a Grand bull market in the past 30 years, with intermittent bear markets commencing after every 8 years. Indian markets have experienced significant bear markets/consolidation after peaking out higher every 8 years; that is, after forming a high in the years 1985, 1992, 2000 and 2008.
The Sensex has breached an important 5-year support trendline in the early part of 2008. On the previous occasion when the Sensex breached a similar 5-6 year trend line, in 1992, the Sensex fell/consolidated for the next 3 years upto 1995.
Sensex was only in a cyclical bear market till the end of Sept 2008. It broke the 50-month avg in October at a level of 11,889. The past two bear markets corrected by 58% from the highs over a period of 13-15 months. At the current low of 7,697, the Sensex has already fallen by 63.70% in about 10 months.
This is a forewarning of further weakness to come after a sharp pullback rally. As a caveat, it may be difficult for the Sensex to move above the 50-month averages currently placed at 11,889-12,320.
Below the 50-month averages it is eventually likely to fall up to a range of 6,750-5,720. The Sensex is likely to find support at the confluence of twin trendlines (the 29-year log scale support line and horizontal resistance trendline) in the range of 6,250-6,150. Fib expansion of the wave 17,735-12,514-15,579 is at 7,130.
Sensex could eventually find support between 7,200 and 6,200 levels.
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Published by Webmaster @ 1:37 PM IST.
Titan Industries + Gitanjali Gems
Saturday, November 08, 2008
Titan reported a 53% increase in sales and 88% net profit growth. Moreover, sales growth of both the watches and jewellery divisions was satisfactory; both posted handsome margin expansion. EBIT margins expanded 270bp on mix gains, ahead of expectations, as premium-end Titan and Fastrack continued to grow significantly faster than mass-end Sonata. Titan Eye+ store roll out is on track with 34 stores at the end of the quarter; target being 60 stores by FY09 end.Other growth drivers for Titan are new designs and innovation across products should take wallet share; increase in charges for making jewellery, and increased preference of consumers for branded jewelery.
According to research estimates, Titan is expected to report an EPS of Rs 43-45 for FY09 and Rs 51-53 for FY10.
Gitanjali Gems:
Gitanjali Gems reported sales growth of 14% y-o-y, with jewellery segment growing sales 37%. EBIT margin expanded 69 bps, with EBIT growing 30% y-o-y, driven by an improved mix between diamonds and jewellery. A slowdown is not apparent in the results, we believe it is likely in the future and therefore build in a slower growth rate for jewellery business revenues at 25% for FY09e and 13% for FY10e.
Some of the points in favor of Gitanjali Gems are, low level of leverage - net
debt to equity 26% FY 2008, Indian consumers shift towards branded jewellery, outsourced production in India for its American chains - Samuels and Rogers.
Gitanjali Gems is expected to report an EPS of Rs 18.83 and Rs 21.85 for FY 09 and FY 10 respectively. The stock is trading at a P/E of less than 5, very cheap compared to Titan Industries.
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Published by Webmaster @ 12:56 PM IST.
DLF Vs Unitech - Reviews
Wednesday, November 05, 2008
DLF India's largest realty company reported revenue growth of 15% YoY, while EBITDA and earnings declined 2%-4%. DLF sold ~3.12msf driven by mid-income housing (up 26% QoQ) with festive season good as well. Pre-leased 8msf YTD at rentals of Rs50/sf with backlog thru Dec'09. The company sees low visibility on softening demand ahead.
DLF has net debt/equity at 0.55x. DLF's somewhat strong balance sheet, good asset-geographic mix, paid land bank and execution track record make it a relatively insulated play in these tough times.
Also note that DLF is highly unlikely to pursue large projects at Dankuni and Bidadi aggressively over the next 18-24 months, given the slump in the residential segment. These projects together account for 272m sq ft of DLF's total land reserves of 753m sq ft. DLF is yet to receive any land from the Government and no land payments have yet been made. This essentially reduces the NAV of DLF's Land Bank.
According to Citigroup and HSBC, DLF is expected to see a drop in EPS for FY09 and FY10 to Rs 44 and Rs 38-37.
Unitech:
Unitech's sales from real estate business dropped by 3% y-o-y and 12% sequentially and excluding the money from the Lehman Brothers deal (cINR3.5bn), net sales declined by 45% y-o-y and 50% q-o-q. We attribute this sharp slowdown in execution to funding constraints. Net debt on the balance sheet increased to cINR84bn in Q2 FY09 from INR71bn in Q4 FY08.
Unitech has sold c2,000 residential units in H1 FY09 (we estimate this at c3-3.5m sq ft), with the bulk of the sales coming in Q1 FY09. While the company indicated lack of credit availability for customers, we believe high product prices are hurting business volumes.
Unitech's debt (~Rs80bn) and net debt equity of ~1.8x are amongst the highest in the sector. Given the intensifying liquidity crunch and slowing pre-sales, we see higher
risks of debt refinancing and capital constraints for the company going forward.
According to Ciigroup, HSBC Unitech is expected to see a drop in EPS for FY09 and FY10 to Rs 9 and Rs 7.2 respectively.
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Published by Webmaster @ 12:35 PM IST.
Punjab National Bank - Good Q2
Monday, November 03, 2008
Punjab National Bank (PNB) reported strong Q2FY09 numbers. Net profit was up 31% y-o-y to INR7.1bn and was better than our estimate of INR5.9bn. Key highlight of the result was the net interest income growth at 31% y-o-y, the highest since March 2006 and closely matching the pace of private sector peers. Loan growth too, at 29% y-o-y, for the first time moved above the sector average, having underperformed the sector for the past eight quarters.Opex grew by 11% yoy (6% higher than MLe) as the bank provided Rs1bn towards impending wage revisions (v/s. Rs250mn in 1QFY09). Asset quality concerns have reduced significantly with gross NPAs declining by 4% qoq to 2.4%. Net NPAs too decreased 24% qoq (at 0.4%). Stringent recovery efforts and controlled fresh delinquencies (2% in H1FY09; 2% in FY08; 2.8% in FY07) have led to significant improvement in asset quality. NPL coverage improved to 83%.
PNB reported a 50bps increase in net interest margin (NIM) on a sequential basis to 3.8% in Q2FY09.With this, the NIMs of PNB stand superior to most state-owned peers and closer to select private sector peers.
PNB is expected to report an EPS of Rs72 - Rs 75 for FY09 and Rs86 - Rs 89 for FY10. Dividend / Share is expected to be Rs 14 to Rs 15.
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Published by Webmaster @ 11:23 AM IST.
Punj Lloyd - How it Compares with L&T ?
Saturday, November 01, 2008
Punj Lloyd (PLL) announced its consolidated results; revenue was up 54% at INR29.5bn (our estimate was INR25.9bn, consensus estimate INR26.2bn). Net profit was up 61% to INR1.44bn (our estimate INR0.84bn, consensus INR1.1bn). A large part of the order inflow of INR56bn in 2QFY09 was driven by the INR36.4bn EPC order by Qatar Petroleum.
Management continues to be confident given the robust backlog of Rs217bn (1.9x FY09E sales). The company has minimal exposure to real estate and most of the clients are government companies.
Punj is the only Indian E&C company that can give L&T a run for its money; Acquisition of Semb E&C has helped scale up expertise; Punj has moved up the value chain: order size increasing from US$30mn to US$100mn (FY07) to US$150mn (FY08) - Recent US$800mn Qatar order being case in point.
Punj Lloyd is expected to report an EPS of Rs 14.5 and Rs 19.5 for FY09 and FY10 respectively.
Punj Lloyd Versus L&T: [Expandable Image]
Courtesy: Citigroup ResearchWe personally place our investment bets on Punj Lloyd rather than L&T with the same logic as betting on a horse which has already won in comparison to the horse which is ready to win and hit a jack pot.
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Published by Webmaster @ 2:00 AM IST.
