In a meeting held on Friday, June 25, 2010, the Empowered Group of Ministers (EGoM) took a major policy decision on the country's retail fuel pricing. After long deliberation for more than a year, the EGoM has freed the price of petrol from the government's control. On an immediate basis, petrol price has increased by Rs3.7/litre. Diesel prices have been also increased by Rs2/litre and are to be deregulated in a phased manner. However, no timeline for the decontrol has been mentioned. In the cooking fuel segment, domestic LPG prices have been increased by Rs35/cylinder, and kerosene price by Rs3/litre. However, cooking fuels will continue to be subsidized.
While the announcement of petrol deregulation is in line with our expectation, the announcement of the deregulation of diesel prices and increase in prices of kerosene and domestic LPG has surprised us positively. However, absence of
1. the timeline of the diesel price deregulation
2. the frequency of change in petrol price
3. pricing limit (band) for petrol price
takes some sheen off the decision.
We were also pinning hopes on the announcement of the subsidy-sharing formulae. However, the absence of the same has left us a bit disappointed, as it makes it difficult to judge the beneficiaries of the move. All said, we believe the policy change is a significant step in the right direction and has come as a positive surprise for PSU oil companies, viz. ONGC, OIL India, GAIL, IOC, HPCL and BPCL. In case of upstream companies, we were already building in the proposed moves and the same was reflected in higher-than-consensus EPS estimates for ONGC and GAIL.
We believe downstream oil companies are likely to be key beneficiaries of the deregulation on the following counts:
• Reduction in overall subsidies to manageable limits
• Subdued outlook on crude oil prices
• Improved profitability situation of upstream companies post the APM gas price hike, enables them to bear a relatively higher subsidy burden
• Government efforts towards divestment in IOC
Thus, we believe, while the move is likely to benefit downstream oil marketing companies, the same is likely to be neutral for upstream oil companies.
Monday, June 28, 2010
Tuesday, May 11, 2010
Euro crisis behind us
The EU and IMF have agreed to set up an almost US$1tn line of credit for troubled EU nations, which should have a similar effect as the US Federal Reserve’s TARP package in restoring confidence in financial markets. This massive step follows the US$147bn bailout package for Greece on 2nd May, 2010 to prevent it from defaulting on its public debt. In return, Greece had to agree to reduce its fiscal deficit to 3% by 2014. Greece's fiscal deficit had risen to almost 14% in 2009 and public debt was as high as 115% (US$400bn), while domestic savings were abysmal at about 5.5% - necessitating the bailout.
Greece's problems are symptomatic of its high median age of 42 and the resulting low savings rate of 5.5%. In our view, a country with a high median age has two options to improve growth - if it is a net exporter of capital then on the back of its strong currency it can run a higher fiscal deficit to support growth. The other option is to devalue its currency to increase exports as a driver for GDP growth.
In case of Greece, till it is part of the EU, currency devaluation is not an option. In such a situation, even though it does not have its own strong currency, having a higher fiscal deficit on the strength of the Euro would have been a viable option, had it been acceptable to other EU nations. But in its current form, unlike the US bailout packages last year, this bailout comes with substantial strings attached, requiring stringent belt-tightening like public sector wage cuts, sharp increase in tax rates, cut in pension payments and raising of retirement ages, which we believe would have a detrimental impact on domestic demand in the country.
Given its small size (less than 3% of EU GDP and 0.6% of global GDP), the burden on EU to support its fiscal imbalances appear manageable. Therefore, we believe eventually, domestic dissent notwithstanding, the stronger EU nations may end up relaxing the fiscal targets as well, in the larger interest of maintaining financial and political stability. Portugal faces a similar situation, with its GDP less than 2% of EU GDP and 0.4% of global GDP. As far as Spain and Italy are concerned, in our view they have better fundamentals (savings rate of 22% and 16% and current account deficit of 5% and 3% respectively) and, with confidence getting restored in the financial markets, they are unlikely to actually draw down materially on the bailout funds.
Tuesday, April 6, 2010
Auto Sector Update
Momentum Continues…
Auto Sales maintained a robust momentum in March 2010 as well and touched record highs. This was on the back of positive consumer sentiment and advanced buying at the dealer's desk (in anticipation of a price hike, due to the change in emission norms from April 1, 2010). Sales volume of most players showed no signs of tapering off, and recorded healthy growth for the month. The Commercial Vehicle (CV) segment dominated the overall growth in March 2010, led by the Medium & Heavy Commercial Vehicle (M&HCV) segment, as the domestic recovery was affirmed by the overall pick up in economic and industrial activities. The Passenger Vehicle (PV) segment also continued on the growth path, following new launches and thanks to a confident consumer in the market. The Two-Wheeler segment also maintained its growth momentum. Going ahead, we expect the demand to be strong, albeit normalized across segments, after considering that growth may have peaked in the past few months, due to the expected price increase after a spurt in raw material prices.
Maruti Suzuki (Maruti) recorded a good 11% yoy growth at 95,123 vehicles (85,669). The March 2010 numbers include domestic sales of 79,530 units and the highest-ever monthly exports of 15,593 units. The management is positive about its new launch, Eeco, which gave a boost to its C segment volumes and grew by 80.6% yoy. Overall, cars grew by 8.8% yoy, while MUVs fell by 51.4% yoy.
Mahindra & Mahindra (M&M) reported overall volumes at 48,012 vehicles (36,675), led by a 54.4% yoy growth in the Tractor segment, and supplemented by a 21.5% yoy growth in the Automotive division. The Automotive segment growth was led by growth in the LCV and three-wheeler segments at 23.1% and 90.3% yoy, respectively. However, on the high base of last year, UV volume growth was muted at 4.7% yoy in the month of March. The company performed exceptionally on the exports side, growing at around 280.5% yoy, on an overall basis.
Tata Motors (TML) reported a robust 39% yoy growth in total volumes, with the M&HCV segment leading the growth at 68.4% yoy, followed by the LCV segment growing at 53.7% yoy. Exports also boosted the company's performance and grew by 128.2% yoy, partially on account of a lower base from the downturn in FY2009. Passenger cars also displayed a healthy growth of 19.8% yoy.
Ashok Leyland (ALL) reported a robust 96.9% yoy growth in total volumes, led by sales in the Trucks segment, which grew at 509.6% yoy, primarily due to a low base effect, coupled with a recovery in domestic industrial production.
Hero Honda (HH) reported a strong growth in the two-wheeler pack, with a 17.3% yoy growth to 4.6mn units, surpassing the management's expectations of ending FY2010 with an estimated sale of 4.5mn units. Bajaj Auto (BAL) led the pack, with a striking 78% growth on the back of its key brands, Pulsar and Discover, performing well in the month. TVS Motor (TVS) clocked a 20.3% yoy growth, due to good growth registered by its Scooter and Moped Segments. The recently launched TVS Jive (launched in Tamil Nadu) and the TVS Wego supported the high volumes in the Motorbike and Scooter segments.
Auto Sales maintained a robust momentum in March 2010 as well and touched record highs. This was on the back of positive consumer sentiment and advanced buying at the dealer's desk (in anticipation of a price hike, due to the change in emission norms from April 1, 2010). Sales volume of most players showed no signs of tapering off, and recorded healthy growth for the month. The Commercial Vehicle (CV) segment dominated the overall growth in March 2010, led by the Medium & Heavy Commercial Vehicle (M&HCV) segment, as the domestic recovery was affirmed by the overall pick up in economic and industrial activities. The Passenger Vehicle (PV) segment also continued on the growth path, following new launches and thanks to a confident consumer in the market. The Two-Wheeler segment also maintained its growth momentum. Going ahead, we expect the demand to be strong, albeit normalized across segments, after considering that growth may have peaked in the past few months, due to the expected price increase after a spurt in raw material prices.
Maruti Suzuki (Maruti) recorded a good 11% yoy growth at 95,123 vehicles (85,669). The March 2010 numbers include domestic sales of 79,530 units and the highest-ever monthly exports of 15,593 units. The management is positive about its new launch, Eeco, which gave a boost to its C segment volumes and grew by 80.6% yoy. Overall, cars grew by 8.8% yoy, while MUVs fell by 51.4% yoy.
Mahindra & Mahindra (M&M) reported overall volumes at 48,012 vehicles (36,675), led by a 54.4% yoy growth in the Tractor segment, and supplemented by a 21.5% yoy growth in the Automotive division. The Automotive segment growth was led by growth in the LCV and three-wheeler segments at 23.1% and 90.3% yoy, respectively. However, on the high base of last year, UV volume growth was muted at 4.7% yoy in the month of March. The company performed exceptionally on the exports side, growing at around 280.5% yoy, on an overall basis.
Tata Motors (TML) reported a robust 39% yoy growth in total volumes, with the M&HCV segment leading the growth at 68.4% yoy, followed by the LCV segment growing at 53.7% yoy. Exports also boosted the company's performance and grew by 128.2% yoy, partially on account of a lower base from the downturn in FY2009. Passenger cars also displayed a healthy growth of 19.8% yoy.
Ashok Leyland (ALL) reported a robust 96.9% yoy growth in total volumes, led by sales in the Trucks segment, which grew at 509.6% yoy, primarily due to a low base effect, coupled with a recovery in domestic industrial production.
Hero Honda (HH) reported a strong growth in the two-wheeler pack, with a 17.3% yoy growth to 4.6mn units, surpassing the management's expectations of ending FY2010 with an estimated sale of 4.5mn units. Bajaj Auto (BAL) led the pack, with a striking 78% growth on the back of its key brands, Pulsar and Discover, performing well in the month. TVS Motor (TVS) clocked a 20.3% yoy growth, due to good growth registered by its Scooter and Moped Segments. The recently launched TVS Jive (launched in Tamil Nadu) and the TVS Wego supported the high volumes in the Motorbike and Scooter segments.
Monday, April 5, 2010
Weekly Review---April 6, 2010
Markets continue to consolidate
The Indian stock markets continued to consolidate their gains during the current week of trade as well, with both the benchmark indices, the BSE Sensex and the NSE Nifty, ending higher by a mere 0.3% and 0.2%, respectively. The BSE Mid- and Small-cap indices, however, out-performed their large cap counterparts, with both the indices gaining 3.3% and 1.5%, respectively. Notably, volatility was high, with the key benchmark indices even hitting their highest level in more than two years during the week. On the sectoral front, most of the indices mirrored the mixed trend, with the BSE Realty index gaining the maximum of 3.3%, followed by the BSE Metal index; however, the BSE IT index ended in the negative territory, losing 2.9%.
BSE Realty Index - Bottom Fishing
The BSE Realty Index was the highest gainer for the week, up by 3.3%, and outperforming the benchmark Sensex, which was almost flat with minor gains of 0.3%. The top gainers in the real estate space were DLF (+5.8%), Unitech (+5.2%), Omaxe (+4.2%), Peninsula Land (+3.9%) and Sobha Developers (+3.3%), while the top losers were Akruti City (-2.2%) and Ansal Props (-1.4%). The strong performance by the sector is attributed to value buying by investors after a prolonged relative underperformance vis-à-vis the Sensex. Moreover, we expect to witness a strong sales momentum in 4QFY2010 for DLF and Unitech.
BGR Energy (BGR) - Initiating Coverage
BGR has taken several 'bigger' leaps over the years, from being a mere manufacturer of a few BoP (Balance of Plant) components to executing Turnkey BoP projects, and now gradually executing full-fledged EPC contracts. The company has a healthy order book of Rs11,609cr (4.2x FY2010E sales), providing good revenue visibility. At the current price of Rs505, the stock is quoting at 14.9x and at 11.0x its FY2011E and FY2012E EPS, respectively, which we believe is attractive. We Initiate Coverage with a Buy recommendation and a Target Price of Rs641.
Piramal Life Sciences - Visit Note
Piramal Life Sciences is the de-merged R&D outfit of Piramal Healthcare. The company embarked on the basic R&D activity in 1998 consequent to the acquisition of Hoechst India’s R&D Center. With manpower of around 350 scientists, the company has developed good depth and breadth of pipeline. However, on the valuation front, at current levels, the company is trading at 3.5x its Expenses (FY2009), which is at a significant discount to its peer, SPARC, which trades at 46x its Expenses (FY2009). The stock is Not Rated.
The Indian stock markets continued to consolidate their gains during the current week of trade as well, with both the benchmark indices, the BSE Sensex and the NSE Nifty, ending higher by a mere 0.3% and 0.2%, respectively. The BSE Mid- and Small-cap indices, however, out-performed their large cap counterparts, with both the indices gaining 3.3% and 1.5%, respectively. Notably, volatility was high, with the key benchmark indices even hitting their highest level in more than two years during the week. On the sectoral front, most of the indices mirrored the mixed trend, with the BSE Realty index gaining the maximum of 3.3%, followed by the BSE Metal index; however, the BSE IT index ended in the negative territory, losing 2.9%.
BSE Realty Index - Bottom Fishing
The BSE Realty Index was the highest gainer for the week, up by 3.3%, and outperforming the benchmark Sensex, which was almost flat with minor gains of 0.3%. The top gainers in the real estate space were DLF (+5.8%), Unitech (+5.2%), Omaxe (+4.2%), Peninsula Land (+3.9%) and Sobha Developers (+3.3%), while the top losers were Akruti City (-2.2%) and Ansal Props (-1.4%). The strong performance by the sector is attributed to value buying by investors after a prolonged relative underperformance vis-à-vis the Sensex. Moreover, we expect to witness a strong sales momentum in 4QFY2010 for DLF and Unitech.
BGR Energy (BGR) - Initiating Coverage
BGR has taken several 'bigger' leaps over the years, from being a mere manufacturer of a few BoP (Balance of Plant) components to executing Turnkey BoP projects, and now gradually executing full-fledged EPC contracts. The company has a healthy order book of Rs11,609cr (4.2x FY2010E sales), providing good revenue visibility. At the current price of Rs505, the stock is quoting at 14.9x and at 11.0x its FY2011E and FY2012E EPS, respectively, which we believe is attractive. We Initiate Coverage with a Buy recommendation and a Target Price of Rs641.
Piramal Life Sciences - Visit Note
Piramal Life Sciences is the de-merged R&D outfit of Piramal Healthcare. The company embarked on the basic R&D activity in 1998 consequent to the acquisition of Hoechst India’s R&D Center. With manpower of around 350 scientists, the company has developed good depth and breadth of pipeline. However, on the valuation front, at current levels, the company is trading at 3.5x its Expenses (FY2009), which is at a significant discount to its peer, SPARC, which trades at 46x its Expenses (FY2009). The stock is Not Rated.
Wednesday, February 24, 2010
Railway Budget 2010-11 Review
Visionary moves
Ms. Mamta Banerjee's second Railway Budget has turned out to be a non-event from the stock market point of view even though certain key points are worth highlighting, which makes this Railway Budget somewhat different from the earlier ones:
• The release of the 'Vision 2020' document aimed at widening and strengthening the country's rail infrastructure network and regaining the position of the world's second largest network.
• Ambitious target of completing 1,000 route-kms of new lines in 1 year as compared to the last 5-year average of 219 route-kms and 180 route-kms in the last 58 years.
• Special emphasis on building Public-Private-Partnership (PPP) and proposal to set up a special task force to clear investment proposals within 100 days, thus taking care of the administrative and procedural delays.
Apart from the above, other highlights included:
• Private operators to be permitted to invest in Infrastructure and run special freight trains.
• 6 high-speed passenger corridors identified to be executed through the PPP mode. To set up a National High Speed Rail Authority for monitoring of these projects.
• North-South, East-West dedicated freight corridors to be created.
• No increase in Passenger fares; reduction in service charge on e-tickets.
• No increase in freight rates.
• Reduction of Rs100/wagon in freight charges for food-grains for domestic use and kerosene.
• 101 new suburban trains to be introduced in Mumbai.
• 54 new trains to be introduced.
• Various social welfare programmes also formed part of the Railway Budget speech.
• Rs1,302cr provided for passenger amenities in the 2010-11 Budget against Rs923cr last year.
• Allocation for construction of new lines increased from Rs2,848cr to Rs4,411cr.
• Highest ever Annual Plan outlay of Rs41,426cr.
In conclusion
The fact that the Railway Budget spared any hike in passenger fares and freight rates will undoubtedly please both - the common man as well as corporate India.
Further, with the Minister showing continued inclination towards an increase in private participation in the years to come, opens up immense opportunities for the private sector to contribute to the growth story of Indian Railways. Overall, the Railway Budget can be stamped as a positive one with a visionary agenda set for Indian Railways to follow over the next decade.
Ms. Mamta Banerjee's second Railway Budget has turned out to be a non-event from the stock market point of view even though certain key points are worth highlighting, which makes this Railway Budget somewhat different from the earlier ones:
• The release of the 'Vision 2020' document aimed at widening and strengthening the country's rail infrastructure network and regaining the position of the world's second largest network.
• Ambitious target of completing 1,000 route-kms of new lines in 1 year as compared to the last 5-year average of 219 route-kms and 180 route-kms in the last 58 years.
• Special emphasis on building Public-Private-Partnership (PPP) and proposal to set up a special task force to clear investment proposals within 100 days, thus taking care of the administrative and procedural delays.
Apart from the above, other highlights included:
• Private operators to be permitted to invest in Infrastructure and run special freight trains.
• 6 high-speed passenger corridors identified to be executed through the PPP mode. To set up a National High Speed Rail Authority for monitoring of these projects.
• North-South, East-West dedicated freight corridors to be created.
• No increase in Passenger fares; reduction in service charge on e-tickets.
• No increase in freight rates.
• Reduction of Rs100/wagon in freight charges for food-grains for domestic use and kerosene.
• 101 new suburban trains to be introduced in Mumbai.
• 54 new trains to be introduced.
• Various social welfare programmes also formed part of the Railway Budget speech.
• Rs1,302cr provided for passenger amenities in the 2010-11 Budget against Rs923cr last year.
• Allocation for construction of new lines increased from Rs2,848cr to Rs4,411cr.
• Highest ever Annual Plan outlay of Rs41,426cr.
In conclusion
The fact that the Railway Budget spared any hike in passenger fares and freight rates will undoubtedly please both - the common man as well as corporate India.
Further, with the Minister showing continued inclination towards an increase in private participation in the years to come, opens up immense opportunities for the private sector to contribute to the growth story of Indian Railways. Overall, the Railway Budget can be stamped as a positive one with a visionary agenda set for Indian Railways to follow over the next decade.
Sunday, December 13, 2009
Institutional investment
Infosys Technologies - BUY
We had attended the Analyst Meet organized by Infosys at its Phase II Hinjewadi campus in Pune. While the Infosys management at the analyst meet did indicate that near-term pressure on IT Budgets is expected to continue, we remain confident that in-line with the global economic recovery, demand for Indian IT services will be back to the forefront and companies like Infosys stand to benefit in particular on account of the availability of talent and delivery from a low-cost base. Infosys has always focused on organic growth, maintaining its profitability and creating shareholders value, which the company achieved even during the global economic turmoil in FY2009. We believe the company is well poised to take advantage of the upcoming opportunities and face the challenges through its novel business plans and quality manpower. Thus, we recommend a BUY on the stock.
We had attended the Analyst Meet organized by Infosys at its Phase II Hinjewadi campus in Pune. While the Infosys management at the analyst meet did indicate that near-term pressure on IT Budgets is expected to continue, we remain confident that in-line with the global economic recovery, demand for Indian IT services will be back to the forefront and companies like Infosys stand to benefit in particular on account of the availability of talent and delivery from a low-cost base. Infosys has always focused on organic growth, maintaining its profitability and creating shareholders value, which the company achieved even during the global economic turmoil in FY2009. We believe the company is well poised to take advantage of the upcoming opportunities and face the challenges through its novel business plans and quality manpower. Thus, we recommend a BUY on the stock.
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