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Archive for October 2011

Euro Region Leaders Statement on Resolving Crisis

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Thursday, October 27, 2011

The Eurozone summit that ended today was the fourteenth in 21 months and the markets feel that this time around the Euro leaders have found a solution and the global equity and credit markets are all rallying in unison.

The headlines were expected. Anything less than what was achieved would have been very disastrous.

As Angela Merkel put it “The world is watching Germany and Europe. They are looking to see if we are ready and able to assume our responsibilities during Europe’s worst crisis since the end of World War II,”  The announcement of the deal helped lift the euro, with investors reacting positively to the outlook for the region’s growth and single currency.

“The Eurozone has adopted a credible and ambitious response to the debt crisis,” a visibly tired French President Nicolas Sarkozy said at a news conference early in the morning in the Belgian capital.

Let us look at the achievements in the last 24 hours:

–           Europeans agreed to increase banks’ capital adequacy ratios — the amount of cash that banks must hold in reserve — up to 9 percent by June of 2012. The European Banking Authority said leading banks in 13 countries will need to come up with an additional €106.4 billion in so-called core Tier 1 capital by that date. The EBA said it based its evaluation on a sample of 70 banks across the continent. But how will the banks get all this money is a question?

–           Private-sector holders of Greek government debt will take a 50% write down on the value of their holdings. The official statement from IIF “The IIF agrees to work with Greece, euro-area authorities and the IMF to develop a concrete voluntary agreement on the firm basis of a nominal discount of 50% on notional Greek debt held by private investors” does not clarify how they are going to get it done.

–           The firepower of the European Financial Stability Facility will be increased by as much as five-fold or about €1 trillion. At present, the €440-billion fund has between €250 billion and €275 billion available after bailouts of Greece, Ireland and Portugal. The expanded EFSF may be used for credit enhancement for sovereign bonds or for setting up special purpose vehicles to finance operations. The question is where will the EUR 1 trillion in cash going to come from? The EFSF consists only of guarantees and is not a cash injection that can be used to buy the bonds. 

–           German parliament voted overwhelmingly to bar any further expansion of European bailout structures that might require a greater contribution by Germany even though they agreed to leverage the EFSF. The motion passed by German lawmakers states that the EFSF cannot be financed through the ECB and with a leveraged EFSF, the central bank will no longer need to buy bonds on the secondary market. So what happens if the EFSF cannot get the desired level of funding? Where is the backstop?

–           Signal from leaders that the European Central Bank will maintain bond purchases in the secondary market. This was really in contrast to what the Germans want. 

–           A commitment from Italy to do more to reduce its debt. Mr. Berlusconi has pledged to balance the country’s budget in 2013. But will Mr. Berlusconi be in power till then?

The question now is how will all these broad brush directions be actually implemented?

Will all the banks play ball? What about the credit-rating agencies. Can they interpret the position taken (now very public) the position taken by the European leaders really not voluntary?

How the decision was made: Euro-area leaders who called Dallara into a meeting at about midnight, forcing a break in their 10-hour summit, said that while the bond transaction will be voluntary, the decision resulted from an offer he couldn’t refuse. “It was the fiercely delivered wish by Merkel, Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of the total insolvency of Greece,” Luxembourg Prime Minister Jean-Claude Juncker told reporters. That “would have cost states a lot of money and would have ruined the banks.”

The next question is where will the EUR 1 trillion come from? The response at G20 meeting for a potential IMF solution was not encouraging. Opposing new funds for the IMF, finance ministers from the US, UK, Japan, Canada and Australia rejected the idea. Tim Geithner, US Treasury secretary said the Fund had “very substantial resources that are uncommitted”.  India, Russia and Brazil ruled out contributing to the Eurozone bailouts – though it has been reported that Chinese leaders were considering offering help. So now the European governments are trying to approach China as the main investor in the EUR 1 trillion funding.

What was very clear in the G20 meeting was that Europe needed to find their own solution to the crisis.

The agreement fell well short of offering a comprehensive solution to the financial problems facing Europe. What is very clear is that Europe, even though for its bold statements, have really not applied its resources to solve the route of the problems. There is little desire to take the steps necessary to save the structures of modern Europe. Europe needs about EUR 1.5 to 2 trillion of resources to ensure that it can withstand all risks and can help turn Europe around over time. And there are only two credible parties which can provide that degree of support in unison – ECB and Germany. But the Germans have very clearly stated in the Wednesday parliamentary vote that they will not provide any more support and using the ECB to buy the bonds is not an option. The only thing Europe has for sure is EUR 440 Million of guarantees, half of which has already been utilized.

So really .. Do we have a solution!!!! All that Europe has managed to achieve through great showmanship is as usual postpone, the pain hoping for some magic solution. As 2012 rolls in, the European sovereigns and banks have to roll over their debts who will buy their papers and at what price? The current statements only give the markets a hope which will keep the RISK – ON trade alive for a while till the markets realize that the solution is very far from the promise.

Stratfor summarizes the situation very well … “Despite failing to articulate the specifics of any credible financial resolution to Europe’s debt crisis, this was about as good of a political response as Europe could hope for given the circumstances. By alluding to — but not mandating — a restructuring, no crushing pressure has been put on the banks, yet. By not announcing the details of how the European Financial Stability Facility will be expanded, European leaders have denied critics for now the opportunity to proclaim failure. That Germany, the one country whose participation is required in any solution for Europe, is pursuing its own interests in such a brash manner does not bode well for Europe’s future.”

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Written by Sayanta Basu

October 31, 2011 at 5:05 pm

Cairn India does it again

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Cairn India does it again

Cairn Lanka (Pvt) Limited, a wholly owned subsidiary of Cairn India, has made a Gas Discovery in the block SL 2007-01-001, Mannar Basin, Sri Lanka. Cairn Lanka (Pvt) Limited is the Operator and has a 100% participating interest in the block. Further drilling will be required to establish commerciality. This well is the first to be drilled in Sri Lanka in 30 years and the first successful discovery in the country. Cairn has committed $ 100 mn for its 3-well drilling campaign in this block.

 Consequent to Cairn India’s acceptance of royalty as a cost recoverable item and cess liability on its share of production, the Board of ONGC has issued its NOC to the Cairn-Vedanta deal. We believe that this is a major step forward for the consummation of the deal as well as for obtaining the necessary approvals for production ramp up from Mangala and production start from Bhagyam. We expect news flow regarding production ramp up to be positive near term triggers for the stock going forward.

 We expect production levels to be ramped up to 210,000 bpd by Q4CY12. We expect EPS of Rs 37.5 and Rs 46.5 in FY12 & FY13 respectively. We expect free cash flows of Rs 33 bn & Rs 70 bn during FY12 & FY13 respectively.

 Following the steep correction in the stock price, we upgrade our rating to BUY with a target price of Rs 334, translating to an upside of 23.4%.

Written by Fundamental Side

October 13, 2011 at 12:38 pm

Markets are poised for an upward swing

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Amid high volatility Indian markets have closed with loss of 1.34% for the week however, it was the gap up opening of Friday that managed to bring down 2.8% of losses for the week.

In the last two months, markets have been consolidating with so many gap-up and gap-down openings. There are sign of divergence in momentum oscillators, indicating we could see bottoming out around these levels.

Further, looking at charts of last few weeks, the 50-share Nifty index has to close above 4,950 lveel, otherwise it could see a further downside. The market have found support between 4700 and 4750 levels however, it is only stability above 4,950 which could once again raise hopes for bulls to enter the market.

On the long term charts 15,650 on the Sensex and 4,675 for the Nifty are very important levels to watch out for. Based on charts perspective these are the lowest levels since 2010 and have significant down side impact if it breaks.

The chart patterns, oscillators and short-term averages suggest that the indices are poised for an upward swing up to 5100. This looks difficult but, not impossible as bears could become uncomfortable above 4950.

I would like to reiterate that these tussles of bulls V/S bears is getting interesting and will only get over on a close below 4750 or above 5175. The sectors like realty, metals, IT and RIL could see a sharp rally in the swing expected on a close above 4950.

Written by Rakesh Gandhi

October 10, 2011 at 2:18 pm

CVs and 2Ws celebrate, PVs not doing great

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With the onset of festive season in the month of October, September has shown good signs of robust sales performances from CV and two wheeler space. Companies like Hero Motocorp, Bajaj Auto and TVS all have put up record breaking sales performances in September. Despite the inauspicious period of shradh paksha, the two wheeler sales refused to show any signs of softening. On the CV side as well, unexpected jumps were seen in this month as M&M and Tata Motors posted good sales numbers. Troubled by its ongoing labor issues, rising competition, rising fuel costs and interest rates, Maruti Suzuki has posted a fall in volumes again for four straight months .

 

Bajaj Auto – (TP – Rs1,647, BUY) – Crossed the 2mn mark in H1!

Bajaj Auto has posted a record performance in September by selling 4.17 lakh units, a growth of 18% yoy and 9% mom. This has been the second month post the launch of 150cc Boxer, which sold 10,000 units and helped the company to achieve the 4 lakh mark a month. The twin brands Pulsar and Discover reported strong growth and contributed about 67% of total motorcycle sales. The company has recorded highest ever motor cycle sales thus indicating that the 2Wheeler sector is insulated from any macro headwinds. Three wheeler sales came in at 46,478 units, a growth of 18% yoy, 5% up mom. Opening up of permits in 4-5 states will help the company to sell a significant amount of 3Wheelers in the coming months. On the export side, Bajaj Auto sold 1.41 lakh units, a growth of 39% yoy and contributed 34% of sales v/s 29% yoy, which indicates a better profitability in the month. For the first half of the year, the company reported 17% yoy growth to cross the 2.2 mn mark.

 

Hero Motocorp – (TP – Rs1,560, SELL) – Breaking its own records

HMCL posted a record breaking volume performance in the month of September as it sold 5.49 lakh units v/s 4.33 lakh units, a growth of 27% in a festive environment. However with the stretched valuations, we believe that the stock is factoring all the expected positives like the upcoming production plant, foreign venture and improvement in margins on softening RM costs.

 

Mahindra and Mahindra – (TP- Rs 831, BUY) – Holding strong

M&M sold 40,168 units, a 23% growth yoy and 7% mom. UV sales in the month grew by 8% yoy to 17,887 units. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 45% growth yoy as the LCV segment continued to grow at a strong pace. Verito has posted yet another stellar month with a growth of 56% yoy with sales recorded at 1,560 units , 9% mom decline v/s 1,710 units. Export sales moved up by 129% with traction seen in major export markets. Farm Equipment Segment (FES) posted a very robust growth of 41% yoy to 17,841 units, while sequentially they were up by 12% on continuation of good monsoon in September in various parts of the country producing a good crop. The festive launch of new SUV XUV500 priced in the range of Rs11-14 lakhs is expected to boost the UV sales

 

Maruti Suzuki – (TP – Rs 1,195, Underperformer)- Nothing to cheer about

Maruti Suzuki (MSIL) ‘s sales in September came at 85,565 units, a decline of whopping 20% yoy, while on mom basis it was down by 6% thus indicating slowdown in PV segment despite festive season. With the ongoing labor unrest, the company shifted Swift Dzire production to Gurgaon, while Swift, A Star and SX4 produced at Manesar are getting impacted. Along with the new Swift (-9.3% yoy) whose waiting period has shot up to 10 months, the slowdown has hit the vans segment as well where Eeco and Omni sales were down by 15% yoy. Exports were down by 48% yoy as A Star, the best selling exports model is facing the brunt of labor unrest at Manesar. Going forward, the recent and the expected hike in interest rate by RBI will lead to it getting passed to customers sooner or later, which will further impact demand. New launches from competitors and fuel price hikes will add fuel to this. Hence , we believe that Maruti will continue to underperform its peers and the auto industry over the next one year.

 

Tata Motors – (TP – Rs 172, BUY)- Festive demand lifts up sales across the board

September sales for the company were at 78,786 units,22% down yoy as well as mom. CV sales grew by 29% yoy, out of which LCV sales were up by 47% yoy and MHCV sales were 9% higher yoy. This reflects strong CV sales despite macro headwinds. PV segment sales showed some improvement in line with the festive demand by 6% yoy to 27,137 units while utility segment sales went up by 60% yoy.  Indica range reversed the trend by growing by 64% yoy as a new variant of Indica was launched in the last month.  Indigo range sales were also low by 11% yoy. Nano also underperformed, continuing its downward trajectory selling only 2,936 units, down 47% yoy , while on mom basis, Nano’s sales more than doubled on a lower base.

 

TVS Motor – (TP- Rs 66, BUY)- Three wheeler growth was the highlight, 2 wheelers post a stable growth

TVS sold 2.19 lakh units in September, a strong growth of 17% yoy, while on a mom basis it inched 13.5% up. Scooter sales grew by 30% on strong Wego sales, while motor cycles grew by 12% yoy despite Jive being a failure. Total domestic two wheelers grew by 16% yoy, while exports sailed by 27%. This growth indicates that the macro concerns have still not hit the two wheeler sector and TVS’s brands are showing a good demand. 3W sold 3,679 units up 14% yoy while the segment saw a 11% decline mom. Opening up of new 3W permits, expansion of 3W capacities from 6000 pm to 8000 pm  and launch of 2 new 2W will lead to a good traction in TVS sales going forward.

 

Written by Fundamental Side

October 4, 2011 at 12:12 pm