Friday, January 29, 2010

Indian Overseas Bank Equity Analysis

Revises credit growth to 15% from earlier expectation of 20% in FY10
Indian Overseas bank has come out with financial performance for the quarter ended December 09 and has conducted Analyst meet in Chennai on 28 January 2010. S A Bhat - Chairman and Managing Director, Nupur Mitra – Executive Director and Y L Madan – Executive Director of Indian Overseas bank addressed the meet:

Highlights of the meet are:

  • Total business of the bank has increased by 14% to Rs 185656 crore in the quarter ended December 09 as against Rs 162575 crore in the corresponding previous year.
  • The total deposits of the bank has increased from Rs 90866 crore as on quarter ended December 08 to Rs 106249 crore in the quarter ended December 09, reporting an increase of 17% on y-o-y basis.
  • Advances of the bank has grown up by 11% to Rs 79408 crore in the quarter under review as against Rs 71709 crore in the corresponding previous quarter.
  • The Credit to deposit ratio of the bank has declined marginally to 74.74% in the quarter under review as against 78.32% in the corresponding previous year.
  • The total investment book of the bank stood at Rs 35426.62 crore as on quarter ended December 09. Bulk of the Investment book, ie. 70% lies in HTM category and the duration of AFS is 2.6 years. The SLR portfolio of the bank as on quarter ended December 09 amounted to Rs 30021.45 crore.
  • NIM of the bank has declined to 2.69% in Q3FY10 as against 2.72% in Q3FY09.
  • The Cost of deposits of the bank has declined to 5.99% in Q3FY10 as against 6.60% in Q3FY09.
  • The yield on advances of the bank has also declined to 9.87% in quarter ended December 09 as against 10.68% in the corresponding previous quarter.
  • CASA ratio of the bank has marginally improved to 29.95% in the quarter under review as against 29.23% a year ago. This was on the back of sharp decline in the current account deposits in the quarter under review.
  • The bank has earned treasury income of Rs 17 crore in Q3FY10 compared to Rs 382 crore for the same period last year, on the back of hardening yields. On the other hand, exchange commission and other income of the bank has improved to Rs 135.63 crore in Q3FY09 as against Rs 127.84 crore in the corresponding previous quarter.
  • Credit sanctioned but yet to be disbursed by the bank was to the tune of Rs 15000 crore, of which only Rs 5000 crore has been disbursed in the last nine months.
  • Capital Adequacy ratio of the bank under Basel II norms stood at 14.64% with Tier I capital of 8.57% as on quarter ended December 09.
  • The total capital funds of the bank has improved from Rs 10394.84 crore as on quarter ended December 08 to Rs 11802.20 crore as on quarter ended December 09 owing to raising of Tier I and Tier II bonds aggregating to Rs 1100 crore apart from retention of profits.
  • Business per employee of the bank as on quarter ended December 09 stood at Rs 6.89 crore as against Rs 6.37 crore a year ago.
  • The book value of the bank as on quarter ended December 09 stood at Rs 112.57 per share as against Rs 105.12 per share as on quarter ended December 08.
  • The % of Gross NPA to Gross Advances of the bank has increased to 4.05% in Q3FY10 as against 3.42% in Q2FY10 and 2.40% in Q3FY09. On the other hand, the % of Net NPA's to Net Advances has also increased to 2.17% in Q3FY10 as against 1.59% in Q2FY10 and 1.3% in Q3FY09.
  • The slippage ratio of the bank in the quarter ended December 09 was 2%.
  • The provision coverage ratio of the bank stood at 53.32% for the quarter ended December 09.
  • The bank expects to sell 15-20% of bad debts to Asset Reconstruction Companies provided they get 60% realization of asset value
  • Of the total amount of Rs 8,200 crore restructured loans Rs 745 crore pertained to bad loans, of which Rs 600 crore of assets would be upgraded to standard assets. The bank has not restructured any assets in the quarter under review.
  • The total no of branches & ATM's of the bank as on quarter ended December 09 was 1973 and 700 respectively.


  • The management has revised previous target of 20% increase in both advances and deposits of the bank to 20% increase in deposits and 15% increase in advances for FY10.
  • The bank expects NIM to be maintained at 2.75% for FY10.
  • The management is focusing to increase its share of CASA to 32% in the coming quarters.
  • The bank plans to add 50 more branches and 300 ATM's in Q4FY10.

Federal Bank Ltd Equity Analysis

Other income falls from the high base
Federal bank, for the quarter ended December 09 has reported lackluster results with 46% dip in the Net Profit to Rs 110.25 crore on the back of 1% dip in the Net Interest income to Rs 381.11 crore. Dip in the other income by 29% to Rs 116.48 crore, 330 bps rise in the cost to income ratio and spike in the contingencies by 111% to Rs 105.31 crore has together pulled down the Net profit of the bank.

Asset Quality

In the absolute terms, Gross NPA of the bank has increased by 26% on y-o-y basis and was flat on sequential basis to Rs 790.72 crore in the quarter ended December 09. However, Net NPA of the bank has more than doubled on both y-o-y and q-o-q basis (up by 108% and 106% respectively) and reported at Rs 146.85 crore in the quarter ended December 09.

The % of GNPA to Gross Advances of the bank has stood at 2.97% in Q3FY10 as against 2.83% in Q3FY09 and 2.99% in Q2FY10. The % of Net NPA to Net Advances has increased to 0.56% in Q3FY10 as against 0.54% in Q2FY10 and 0.33% in Q3FY09.

The total provisions held against non-performing advances, expressed as a percentage of gross NPAs amounted to 80.69% at the end of the quarter ended December 09.

Business Highlights:

  • Total business of the Bank reached Rs 60617 crore, showing an increase of 24% from the corresponding period of the previous fiscal.
  • Net Advances went up by 21% to Rs 26030 crore as on 31st December 2009 from Rs 21553 crore as on 31st December 2008. The growth was driven by Corporate, Retail and SME advances.
  • The retail advances of the Bank grew by 19% on y-o-y basis and reached Rs 8220 crore forming 30 % of the total advances.
  • The advances to priority sector reached Rs 10647 crore as on 31st December 2009 from Rs 9514 crore as on 31st December 2008 thereby recording a y-o-y growth of 12%. Lending to Agriculture sector was at Rs 2638 crore.
  • The Net Interest Margin of the Bank for quarter ended December 2009 is at 4.05 % as against 3.70 % in September 2009. Net Interest Margin for nine months (NIM) at 3.69 %
  • Investments increased by 29% from Rs 9713.46 crore to Rs 12521.48 crore for the quarter ended December 09.
  • Book Value per share of the bank as on quarter ended December 09 stood at Rs 273.26.
  • Return on Average Assets (annualized) of the bank as on quarter ended December 09 stood at 1.17 %
  • The Net Worth of the Bank increased to Rs 4674 crore as on 31.12.2009 from Rs 4263 crore as on 31.12.2008.
  • The Capital Adequacy (CRAR) of the Bank, computed as per Basel 1 guidelines, stands at 17.76 %, against the regulatory minimum of 9 %. The CRAR computed as per Basel 2 norms is 18.50 %. The Tier-1 (core CRAR) capital works out to 15.69 %. (17.05 % under Basel 2)
  • During the third quarter of the current fiscal, assets from 19 accounts worth Rs 6.51 crore was restructured.
  • The Bank opened 26 branches and 37 ATMs during the quarter. The total number of branches and ATMs had increased to 669 and 707 respectively, by the end of the third quarter of the current fiscal.
  • The business per employee and profit per employee as on December 31, 2009 were at Rs 794 Lakh and Rs. 6.10 Lakh respectively as compared to Rs. 669 Lakh and Rs. 7.11 Lakh respectively as on December 31, 2008.

Quarterly Performance

For the quarter ended December 09, Federal Bank has reported 46% dip in the Net Profit to Rs 110.25 crore in the back of 1% dip in the Net Interest Income to Rs 381.11 crore. The Interest earned rose by 8% to Rs 944.64 crore while interest expended grew faster by 15% to Rs 563.53 crore in the quarter under review. The bank had reported Interest Margin of 4.05% for the quarter ended December 09. The other income of the bank has fell by 29% to Rs 116.48 crore on the back of dip in the treasury income owing to hardening of yields. Thus the Net Total income of the bank was down by 9% to Rs 497.59 crore.

The operating expenses of the bank has marginally increased by 1% to Rs 166.05 crore constituting employee cost at Rs 87.43 crore (dip by 15% on y-o-y basis) and Other Operating Income of Rs 78.62 crore up by 27% in the quarter ended December 09. However, the cost to income ratio of the bank has shot up by 330 bps to 33.4% and pulled down Operating profits by 14% to Rs 331.54 crore. Further Provisions and contingencies of the bank has more than doubled (up by 111%) to Rs 105.31 crore pulling PBT down by 32% to Rs 226.23 crore. The effective tax rate of the bank has shooted up by 1220 bps to 51.3% and reported Net Profit down by 46% to Rs 110.25 crore.

Performance for Nine months period

For the nine months ended December 09, Federal bank has reported 10% dip in the Net profit to Rs 347.70 crore on the back of 1% increase in the NII to Rs 1001.14 crore. The other income of the bank has marginally rose by 10% to Rs 400.32 crore and translated to 3% growth in the Net Total Income at Rs 1401.46 crore in the quarter under review. However, 17% increase in the operating expenses to Rs 488.40 crore has pulled down Operating Profit by 3% to Rs 913.06 crore. Despite 19% dip in the provisions and contingencies to Rs 307.40 crore, whooping increase in the effective tax rate by 1140 bps to 42.6% has pave Net Profit at Rs 347.70 crore, down by 10% on y-o-y basis.

Other Information

The Scrip is hovering at Rs 249.30 on BSE.

Federal Bank: Financial Result

0912 (3)0812 (03)Var %0912 (9)0812 (9)Var %0903(12)0803(12)Var. (%)
Interest Earned944.64876.4282720.092449.64113315.382515.4432
Interest Expended563.53491.83151718.951455.08181999.921647.4321
Net Interest Income381.11384.59-11001.14994.5611315.46868.0152
Other Income116.48164.81-29400.32365.2310515.77394.7231
Net Total Income497.59549.40-91401.461359.7931831.231262.7345
Operating Expenses166.05164.991488.40418.9317571.45468.6122
Operating Profits331.54384.41-14913.06940.86-31259.78794.1259
Provisions & Contingencies105.3149.97111307.4379.24-19466.77293.9759
Profit Before Tax226.23334.44-32605.66561.628793.01500.1559
Provision for tax115.98130.55-11257.96175.347292.52132.10121
Net Profit110.25203.89-46347.70386.32-10500.49368.0536

* Annualized on current equity of Rs 171.03 crore. Face Value: Rs 10
Figures in Rs crore
Source: Capitaline Corporate Database

Performance of Top "20" Indian Industries.

NameLatest Equity
(Rs Cr.)
(Rs Cr.)
(Rs Cr.)
Mkt. Cap.
(Rs Cr.)
All Industries 357,911.26 3,961,044.88 284,584.68 5,948,920.47
Refineries 10,776.42 825,683.74 20,895.11 480,858.76
Power Generation 64,841.54 116,958.03 17,799.06 479,114.89
Computer-SW Larg 1,633.14 94,987.57 20,216.71 467,903.44
OilExplr/Allied 5,037.60 83,794.38 20,614.20 324,139.35
Banks-Pub Sector 14,129.85 327,369.57 36,198.70 302,277.75
Banks-Pvt Sector 12,264.82 154,757.78 18,427.01 269,217.73
Mining/Minerals 19,131.52 66,878.78 14,177.77 233,013.09
Trading-Large 1,079.23 120,059.88 1,153.54 202,268.21
Telecom-Service 18,612.34 115,192.42 11,791.84 197,627.67
Steel - Large 14,268.44 160,456.55 14,861.86 181,455.12
ElecEqu-Gen-Larg 819.58 39,387.59 4,050.24 139,086.43
Phrm-I-BD For/Lr 1,364.18 33,649.86 3,316.04 137,927.13
Metal-Cu/CuAlloy 898.40 15,413.14 1,087.25 118,643.27
Engg-Tunkey Serv 1,969.04 46,194.57 3,243.27 108,794.26
Cigarettes 444.48 17,053.26 3,375.23 98,111.75
Const-Hsg-Large 1,113.85 6,373.25 2,500.83 79,481.81
Fin-Hsg-Large 3,050.43 20,800.64 3,718.89 78,476.73
Per Care-MNC 488.07 27,064.04 3,471.97 73,103.84
Stl.-Spong Iron 871.62 14,988.61 1,935.27 64,234.28
Gas Distribution 2,204.13 34,403.78 3,686.95 61,921.47

Thursday, January 28, 2010

IPO Note on Vascon Engineers Ltd.

Vascon Engineers Ltd. is entering in the capital markets with an initial public offering, IPO of 10,800,000 Equity Shares of Rs.10 each, at the price band of Rs 165-185 per share. Bids can be made for a minimum of 35 equity shares and in multiples of 35 equity shares thereafter. Promoters' shareholding will be reduced to 38.41% post issue.

Valuation and recommendation:

At a lower price band of Rs. 165, as per our estimates the Company would provide an ROE of 11% and 14%, for FY10E and FY11E, which is in-line with an average of its peers set of Brigade Enterprise, Mahindra Lifespace Developers and Gayatri Projects. Moreover, at a lower price band of Rs. 165, the Company proposes an EV/EBITDA for FY11E of 11.1x, which offers an upside against its peers set average of 12x for FY11E. Moreover, our DCF based valuation (Cost of Capital 14.3% and Terminal Growth rate 5%), suggests a fair value of Rs. 189. Thus, we recommend investors to Subscriber to the issue at the lower price band.

Issue closes on 29th January 2010

Vascon Engineers Limited (VEL) is an engineering, procurement and
construction (EPC) services and real estate development company
based in Pune. VEL and its other development entities collectively have
equity interest in five hospitality properties and also own and operate a
shopping mall and an office complex. It started as an EPC services
company in 1986, and has diversified into real estate development in the
past few years. VEL intends to raise upto Rs. 2 bn from the issue and
would utilise the proceeds from the IPO of 10.8 million shares for the
construction of its EPC contracts and real estate development,
repayment of debt, to fund its general corporate expenditures and to
achieve the benefits of listing on the stock exchanges.
We see the VEL’s issue as a good investment opportunity as:
• It enjoys a strong EPC order book of Rs. 32.27 bn and an order
book-to-sales ratio of 6.4x, which provide an impressive revenue
visibility for the next three-four years.
• VEL has a diverse client base and ~33% of its total order book is
towards industrial, hospital, educational and airport segments,
offering business stability.
• It has a vast experience of 24 years in the EPC business and boast
of strong execution capabilities and technical expertise. Besides, it
has a good reputation in the Pune market with a track record of
timely delivery to its clients.
• The Company follows the joint development model, which reduces
the working capital requirement as the contribution towards land
cost is only in the form of deposits with the land owners. The risk of
a fall in property prices is shared with the land owner. In this
business model, VEL acts as a real estate contactor as well as
developer thereby earning a larger share of the revenues.


Issue details
Vascon Engineers is entering in the capital markets with an initial public offering, IPO of 10,800,000 Equity Shares of Rs.10
each, at the price band of Rs 165-185 per share. Bids can be made for a minimum of 35 equity shares and in multiples of 35
equity shares thereafter. Promoters' shareholding will be reduced to 38.41% post issue.
Issue objectives
• Construction of EPC contracts and real estate development projects: The Company intends to deploy Rs. 900 mn towards Zenith and Rs. 250 mn towards Nucleus Belgaum, two of its EPC contracts and real estate development projects.
• Repayment of Debt: Rs. 396.28 mn from the Net Proceeds of the Issue would be used towards repayment of the loan taken from Housing Development Finance Corporation Limited.
• General Corporate Purposes: It would include payment towards strategic initiatives and acquisitions, brand building exercises, strengthening of its marketing capabilities and, towards repayment/prepayment penalty on loans as maybe applicable.
• Achieve the benefits of listing on the Stock Exchanges
The individual promoters of the Company are R. Vasudevan, Lalitha Vasudevan, Thangam Moorthy; and Geeta Lulla. The corporate promoters of the Company are Vatsalya Enterprises Private Limited, Premratan Exports Private Limited and Golden Temple Pharma Private Limited. The Company’s operations are headed by Mr R Vasudevan, who has over 32 years
of experience in the construction industry and has been VEL’s director since January 1, 1986. He holds 9.28 million shares in the Company.

Investment Rationale
Strong revenue visibility
VEL has strong order backlog of Rs. 32.27 bn comprising of 47 EPC Contracts for third parties with an order backlog of Rs. 12.15 bn and 23 EPC projects developed by the Company with an order backlog of Rs. 20.12 bn. With a current order book-to-sales ratio of 6.4x, the Company offers a strong revenue visibility for next three-four years. Moreover, as a result of
significant infrastructure and other development opportunities in India and the commitment to these sectors by the Indian central and state governments, we expect VEL to maintain large order book in the future supported by its execution capabilities, track record and technical experience.
Excellent track record and execution capabilities VEL has a significant experience of 24 years in the EPC services, having constructed a diverse range of projects, like factories, hospitals, hotels, office and residential complexes, shopping malls, multiplexes, IT parks and other buildings. As of December 31, 2009, it had completed an aggregate of 181 EPC Contracts, with a total contract value of Rs. 8.89 bn, having a clientele of well-known Indian and multinational companies such as Cipla Limited, Emcure Pharmaceuticals Limited,Zensar Technologies Limited, Kirloskar Brothers Limited, Symbiosis, and Okasa Pharma Private Limited. In addition, as of
December 31, 2009, it and its other development entities had completed an aggregate of 42 real estate developmentprojects, with an aggregate Saleable Area of over 4.99 million square feet.
Benefiting from its presence in real estate development VEL has its operations of EPC business and real estate development in a number of states and union territories in India.
Having started as an EPC services company, it has since diversified into the real estate business leveraging the synergies between the two businesses. Although VEL’s revenue contribution from real estate business declined to 5.53% in FY09 from
43.5% in FY08, leading to decline in EBITDA margins, we expect the current revival in real estate sector to help VEL to improve its margins in the years to come.

Diversified client base, with focus on institutional clients VEL has been able to perform relatively well as compared to other players due to its customer profile. Around 33% of the
total third party order book comes from institutional clients like hospitals and educational institutions, and airports where the impact of the downturn is minimal. VEL’s diversified client base offers better business stability as compared to its other EPC contractor peers.

Effective Development Structure
VEL generally acquires development rights to significant portions of land without having to invest large amounts of money to purchase it by entering into joint development agreements and/or joint ventures with land owners to acquire development rights to their land in exchange for a pre-determined portion of revenues or profits generated from the projects. In case of the
other development entities, they have management control over their projects and can control important business decisions relating to it by owning a majority interest in or control such entities. The company also provides all EPC services to its real estate development projects. As a result of it all, it is able to closely monitor the management and operations of its projects,
apply a uniform management philosophy, optimize revenues and minimize operational costs and risks.

Risks and concerns
High concentration of operations in Maharashtra

The Company’s real estate development business is primarily concentrated in Maharashtra, especially in-and-around Pune, exposing it to a high level of geographic and price risk. As of December 31, 2009, VEL’s 73.5% of order backlog is in Maharashtra. Moreover, 84.5% of its aggregate 55.36 million square feet of real estate projects are being developed in Maharashtra. As Pune city is to a large extent dependent on the fortunes of the IT/ITeS industry, in our view, any pruning of expansion plans by IT/ITeS companies will have negative fallout on VEL’s business and financial prospects.
Successful Implementation of Projects
VEL’s growth strategy and future success is closely knitted with its ability to complete its huge order book of projects on a timely basis without incurring cost overruns. If it is not able to do so, its ability to increase revenues and operating income would be impacted severely.
Company Background
Incorporated in 1986, Vascon Engineers Limited is engineering, procurement and construction services and real estate Development Company with operations in a number of states and union territories in India. Vascon have significant experience of 24 years in providing EPC services which include, constructing factories, hospitals, hospitality properties, office
and residential complexes, shopping malls, multiplexes, IT parks and other buildings.
In addition to developing and providing EPC services for real estate projects, Vascon also continue to own or operate certain projects subsequent to their completion. For example, they own the Vista do Rio, Vascon own an interest in the Galaxy Resorts in Goa, the Golden Suites service apartment complex in Pune, and Marigold Premises Private Limited, which owns
and operates the Mariplex mall and office complex. Additionally they are involved in developing a multi-level car parking for Delhi International Airport.

Tuesday, January 26, 2010

Apple earnings

Apple will announce quarterly earnings on Jan. 25, followed by the likely debut of a tablet PC in a San Francisco presentation on Jan. 27. Analysts predict that Apple's quarterly earnings will rise yet again, buoyed by strong Mac sales, but questions remain about how an Apple tablet would affect the company's future revenue. A new survey suggests that potential buyers would shy away from a tablet if the price is above $700 or if the mobile device forces them to purchase a new data plan.

Apple has a big week ahead of it: Not only is the company's long-rumoured tablet PC expected to make its debut during a San Francisco presentation on Jan. 27, but it will also announce quarterly earnings on Jan. 25.

Despite the economic recession dragging down revenue for a number of tech companies, Apple has managed to consistently outperform estimates for 2009.Reuters quoted StarMine's SmartEstimate as predicting that Apple will post revenue of $12.16 billion for this past quarter.

Apple Chief Financial Officer Peter Oppenheimer previously estimated that the company would earn $11.3 billion in the quarter. However, Apple has traditionally been conservative in its estimates, despite continued strength in iPhone and Mac sales. In the previous quarter it moved 3.05 million Macs, a 17 percent year-over-year rise, and 7.4 million iPhones, a 7 percent increase from the same quarter in 2008.

As worldwide PC shipments increased by 22.1 percent in the fourth quarter of 2009,Apple found its overall position in the United States slip one place to fifth, behind Hewlett-Packard, Dell, Acer and Toshiba. That datacomes from research company Gartner, which also suggested that Apple saw its Mac sales rise 7.5 percent for the quarter.

Apple's revenue in 2010 could be drastically affected by sales of a tablet PC, which current rumors suggest will be offered for sale beginning at some point between March and June. Although Apple has routinely refused to comment on whether it has a tablet currently in development, months of rumors have suggested that the multitouch device will serve as a portable media player, delivering content ranging from e-books to television shows.

Also anticipated are partnerships between Apple and various publishers over content for the device. The Wall Street Journal reported on Jan. 18 that HarperCollins Publishers has been negotiating with Apple to make e-books available on the tablet, quoting unnamed sources supposedly close to the negotiations. The newspaper also suggested that other publishers, including Conde Nast Publications and News Corp., were engaged in some level of discussion with Apple.

Analysts have been conjecturing freely for months about the possible design of an Apple tablet. Piper Jaffray analyst Gene Munster made a number of pronouncements on that front in 2009, noting at various points that the tablet could be based off the iPhone OS, with applications designed for a larger screen, or else a modified version of Mac OS X. Oppenheimer & Co. financial analyst Yair Reiner suggested in a Dec. 8 research note that an Apple tablet would be released in late March or April and would have a 10.1-inch touch screen. However, a source suggested to Boy Genius Report on Dec. 23 that the tablet would have a 7-inch screen.

Despite all the hype, a tablet would carry some marketplace risks for Apple. In a survey of 500 randomly selected users, online electronics marketplace Retrevo found that 70 percent of respondents thought a tablet priced at $700 and above would be out of their price range. Another 44 percent said a monthly data plan requirement would stop them from purchasing a tablet.

According to the rumor mill, Apple's tablet could be priced anywhere from $600 to $1,000.

During a July 2009 earnings call, Peter Oppenheimer noted a sales decline in traditional iPods, a phenomenon he attributed to a natural cannibalization of that device's market by the iPod Touch and the iPhone line. It remains to be seen whether an Apple tablet would cannibalize the market for other Apple touch-screen devices.

Monday, January 11, 2010

Pre- earning sector wise analysis: Automobiles sector

We expect the auto sector to continue witness robust growth in the
near-to-medium term led by a healthy volume growth due to new
product launches, improved consumer sentiments, and significant
planned investments in the sector. However, with the recovery in the
commodity prices, we expect margins to come under pressure in the
near term.
Improved consumer sentiments to boost sales: The auto
industry witnessed a double digit yoy volume growth in December
2009 preceded by robust growth in November 2009. While car sales
went up by 50.5% in November, the two-wheeler and three-wheeler
segments grew by 38.4% and 36.8%, respectively. The strength in
sales was primarily driven by an improving consumer sentiment on
the back of soft interest rates and an increased liquidity in the hands
of public sector employees. For the Commercial Vehicle, the growth
was further aided by an improvement in manufacturing and mining
activities. Although we expect the volume growth to remain strong in
the coming quarters, we believe the growth in H2’10 will be lower
than H1’10, especially keeping in mind the end of the festive
season, a possible increase in interest rates, and that consumers
may delay purchases in anticipation of the excise cuts to be
announced in February 2010.
New launches to aid volume growth: The deliveries of Nano and
the new launches of i20, A-star, Ritz and Estillo aided the compact
car segment sales. The segment grew by 49.8% yoy in November
2009. In addition, the mid-sized car sales grew by a robust 24.9%
yoy in November 2009 as the market gave a thumbs-up to the
launches of the new SX4 and Indigo Manza. The MUV segment
grew by 85.3% in November 2009 on account of the new launches
and strong consumer sentiments.
Exports volume under pressure: Exports in the month of
November 2009 grew by 25.1% yoy. This seems to be a significant
increase as last year’s number was really low. In the coming
quarters, exports are expected to stay under pressure due to the
withdrawal of EU nations from the scrappage scheme.

Maruti Suzuki India Limited

Maruti Suzuki India Limited (MSIL) is expected to ride well on the
growth wave in the automobile sector in the coming quarters, given
the new launches and upcoming increase in its capacity from
800,000/ year to one million/year by the end of FY10. However, in the
near term, we expect MSIL’s volume to grow at a slower pace than
the industry due to stiff competition in the A2 segment which is also
expected to put the margins under pressure.
Competition subduing the growth impetus: We expect the
Company’s growth pace to be slower than that of the market due to
the competitive pressures faced by the A2 segment (which
contributes ~70% of the total volume) as a result of the launch of
small cars by foreign players (especially Hyundai) and the delivery of
Tata’s Nano.
Export to grow at a slower pace: In December 2009, MSIL exports
increased 223.7% yoy primarily due to the boost from the
“scrappage" incentive scheme of Europe. In the coming quarters, we
expect the Company’s export’s growth rate to mellow down as 11
European countries, except the UK, have recently removed their
“scrappage" incentive scheme.
Pressure on margins: The Company should face pressure on its
margins with the recovery in the commodity prices and stiff
competition in the A2 segment. Thus, we expect the EBITDA margins
for Q3’10 to be 11.6%, as against 13% in Q2’10.


Mahindra & Mahindra

In the coming quarters, we expect Mahindra & Mahindra Ltd. (M&M) to
witness growth on the back of the continuing good show of the
domestic UVs and the tractor segments. The Company sold 22,587
vehicles in November 2009, an increase of 96.2% yoy.
Growth in domestic utility vehicle to continue: In December 2009,
total UV sales increased 120% yoy to 16,999 units on account of the
success of its newly launched UV Xylo and the new versions of the
Scorpio and Bolero. Consequently, the Company maintained its market
leadership with a market share of 64.9% in Q2’10 (vs. 54.8% in Q2’09).
In the coming quarters, we expect the Company to continue witnessing
strong growth due to the upsurge in the demand for UVs, market
positioning, and positive response to its new launches. In addition, we
expect the Company to get a boost from the launch of its mini-truck
Gio, which comes with better fuel efficiency and a lower price tag than
the Tata Ace.
Tractor segment to grow in sync with the sector: Although the bad
monsoon season has impacted the volume growth in the agri-sector in
the third quarter, the demand from the non-agri infrastructure
development projects is likely to offset this softening in demand.
However, rural demand is also expected to pick up from the next Rabi
season, particularly keeping in view the Government’s incentives for
rural development.
Pressure on margins: Going forward, we expect the Company’s
EBITDA margins to decline to 15.2% in Q3’10, as against 18.6% in
Q2’10, on account of the pressure on its margins due to the recovery in
commodity prices and stiff competition in the UV segment.

Macro-economic Trend

Economy back on a strong growth curve: Ahead of market
expectations, the economy grew by a robust 7.9% in the September
quarter, propelled by increased Government spending and a surge
in the manufacturing sector. Consequently, the Government has
raised its expected GDP for FY10 up to 7.75%. Additionally, the
GDP growth is likely to revive and get close to 9% in the next couple
of years with further thrust coming from the export markets.

Monetary policies might be tightened: The RBI is likely to reverse
the easy monetary stance in the next monetary policy review.
Although a revision in the benchmark rate may be restricted to 25-50
bps, we believe it can be accompanied by a 50 bps increase in the
CRR rate to rein in the food price inflation, which has been the main
culprit in the tripling of the wholesale inflation rate from 1.34% in
October to 4.78% in November.

High fiscal deficit concerns: India’s fiscal deficit is likely to balloon
to more than 11% of its GDP in FY10 due to an increased stimulus
spending. However, the fiscal deficit may reduce to 9.5-10% in FY11
supported by an increased tax collection. Besides, we believe that
the gradual removal of the fiscal stimulus measures, proceeds from
the aggressive disinvestment program of public sector units, and the
possible selling of 3G telecom licenses will provide additional funds
to control the deficit and ensure sustainable growth.

Rupee on the path to appreciation: The Indian stock markets
have witnessed massive FII flows of over USD 17 bn in 2009 after a
strong recovery in the risk appetite of investors globally, which was
supported by an easy liquidity scenario. The FII flows may remain
strong in the near term as institutions chase high returns in
emerging economies such as India, and as RBI increases interest
rates ahead of developed nations, which may lead to a widening of
the interest rate deferential. As such, we expect the dollar inflows to
remain robust, which could lead to appreciation of rupee in the short
to medium term.

Q3’10 earnings likely to improve over Q2’10: We expect the
revenue growth for companies within Sensex to be at 21.5% yoy
and 9% qoq based on an improved demand scenario. Furthermore,
we expect the margins to improve by 110bps yoy and 80bps qoq,
driven by massive cost rationalization measures undertaken by the
industries in the last one year.

China's 2009 Crude Oil Imports Advance to Record

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Wall Street Journal
By WILL CONNORS ABUJA, Nigeria -- An attack on a crude oil pipeline operated by US oil giant Chevron Corp. marks the latest in a series of political and ...
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When looking at the big picture, the four main factors that drive crude oil prices are supply and demand, the value of the dollar, financial speculation and ...
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How rising crude prices impact oil refiners
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Crude oil for February delivery was at $81.79 a barrel on January 6 on the New York Mercantile Exchange. As long as the government remains reluctant to ...
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China's Strong December Trade Shows Economy On Rebound
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The surprising rally in imports, up 56% last month, came as China's crude oil imports hit a record monthly high and its iron ore imports were the second ...
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Oil Consumption to Surge Across the Middle East
The Media Line
“The main reason for the rise in oil consumption is related to Saudi Arabia' increased use of crude oilin power generation,” David Butter, ...
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Local crude exploration revives as costs decline
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Thailand's crude oil reserves are 160000 barrels per day against demand of 700000 barrels per day, said Mr Kurujit. Thailand has five new crude resources ...
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Texas oil rebound? Maybe not yet
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By Jaime Adame Texas crude oil prices have risen recently, but this doesn't necessarily signal an industry rebound, according to an economist who studies ...
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Russia, Belarus fail to tap compromise solution on terms of oil supplies
MINSK, January 9 (Itar-Tass) – Russia and Belarus have again failed to attain a compromise solution regarding the terms of Russian crude oil supplies to ...
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US-NEWS Summary
Washington Post
BEIJING (Reuters) - China ended 2009 with record monthly imports of crude oil and soybeans and a strong appetite for iron ore and copper, while its aluminum ...
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Sunday, January 10, 2010

Contrarian Investor Sees Economic Crash in China

James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.

James Chanos made his hedge fund fortune predicting problems at companies and shorting their stock.

Now Mr. Chanos is betting against China, and is promoting his view that the China miracle has blinded investors to the risks in that economy.

Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.

As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.

As America’s pre-eminent short-seller — he bets big money that companies’ strategies will fail — Mr. Chanos’s narrative runs counter to the prevailing wisdom on China. Most economists and governments expect Chinese growth momentum to continue this year, buoyed by what remains of a $586 billion government stimulus program that began last year, meant to lift exports and consumption among Chinese consumers.

Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore.

Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New York, has $6 billion under management, is hardly the only skeptic on China. But he is certainly the most prominent and vocal.

For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.

“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”

Colleagues acknowledge that Mr. Chanos began studying China’s economy in earnest only last summer and sent out e-mail messages seeking expert opinion.

But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans.

“In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades,” said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. “He homes in on the excesses of the markets and profits from them. That’s been his stock and trade.”

Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much.

“The Chinese,” he warned in an interview in November with, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”

In December, he appeared on CNBC to discuss how he had already begun taking short positions, hoping to profit from a China collapse.

In recent months, a growing number of analysts, and some Chinese officials, have also warned that asset bubbles might emerge in China.

The nation’s huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth.

But many analysts now say that money, along with huge foreign inflows of “speculative capital,” has been funneled into the stock and real estate markets.

A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 — one that Mr. Chanos and others have called wasteful and overdone.

“It’s going to be a bust,” said Gordon G. Chang, whose book, “The Coming Collapse of China” (Random House), warned in 2001 of such a crash.

Friends and colleagues say Mr. Chanos is comfortable betting against the crowd — even if that crowd includes the likes of Warren E. Buffett and Wilbur L. Ross Jr., two other towering figures of the investment world.

A contrarian by nature, Mr. Chanos researches companies, pores over public filings to sift out clues to fraud and deceptive accounting, and then decides whether a stock is overvalued and ready for a fall. He has a staff of 26 in the firm’s offices in New York and London, searching for other China-related information.

“His record is impressive,” said Byron R. Wien, vice chairman of Blackstone Advisory Services. “He’s no fly-by-night charlatan. And I’m bullish on China.”

Mr. Chanos grew up in Milwaukee, one of three sons born to the owners of a chain of dry cleaners. At Yale, he was a pre-med student before switching to economics because of what he described as a passionate interest in the way markets operate.

His guiding philosophy was discovered in a book called “The Contrarian Investor,” according to an account of his life in “The Smartest Guys in the Room,” a book that chronicled Enron’s rise and downfall.

After college, he went to Wall Street, where he worked at a series of brokerage houses before starting his own firm in 1985, out of what he later said was frustration with the way Wall Street brokers promoted stocks.

At Kynikos Associates, he created a firm focused on betting on falling stock prices. His theories are summed up in testimony he gave to the House Committee on Energy and Commerce in 2002, after the Enron debacle. His firm, he said, looks for companies that appear to have overstated earnings, like Enron; were victims of a flawed business plan, like many Internet firms; or have been engaged in “outright fraud.”

That short-sellers are held in low regard by some on Wall Street, as well as Main Street, has long troubled him.

Short-sellers were blamed for intensifying market sell-offs in the fall 2008, before the practice was temporarily banned. Regulators are now trying to decide whether to restrict the practice.

Mr. Chanos often responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron, Boston Market and other “financial disasters” over the years.

“They are often the ones wearing the white hats when it comes to looking for and identifying the bad guys,” he has said.