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Archive for November 2011

MRPL – play the refining cycle

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MRPL – play the refining cycle

Mangalore Refinery & Petrochemicals is expanding its refinery to 15 MMT by Jan/Feb 2012. The expansion will witness the refinery complexity rising from 5.5 to 9, which will be helpful for maximizing GRM. The expanded refinery will also consist of a 2.2 MMTPA Polypropylene (PP) FCCU which will mark the entry of the company into the petrochemical space. The PP unit is expected to achieve mechanical completion by Apr 2012 and commissioning by Jun 2012. Excellent product slate of the expanded refinery, due to reduction in fuel oil and introduction of PP, is expected to result in GRM jumping by ~$ 3.5/bbl during FY12-13. Realization for PP is currently ~$ 1500/ton, which is almost double that of other refined products. We estimate GRM of $ 5.1/bbl and $ 8.7/bbl in FY12 & FY13 respectively.

Upon completion of the expansion project, MRPL would be eligible for a 7 yr tax holiday under section 80IB of Income Tax Act. The company is also in talks with Karnataka State Govt. for Rs 1.25 bn Sales Tax deferment benefit, Rs 0.9 bn of CST benefit, Rs 0.8 bn of saving of Entry Tax on crude and one-time benefit of Rs 3 bn on exemption of Entry Tax on project benefits. GRM will be significantly higher than our estimates if the company is granted these tax incentives.

We value MRPL using a target EV/EBITDA multiple of 6x on FY13E EBITDA and reiterate BUY with a target price of Rs 81, which translates to upside of above 30%.

Written by Fundamental Side

November 16, 2011 at 6:24 pm

Stuck in short range

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There was some upward move seen last week but, such optimism was tempered when it came under renewed selling pressure on Monday. Globally markets were down owing to continued European concerns. While day-to-day fluctuations are reducing investor risk appetite it would be difficult to see the trend change soon. We have been advocating bearish view after the close of Friday and advised traders can short with stop loss of 5300. A sharp decline was seen in momentum stocks like Lovable, Dish TV , Delta corp and VIP inds which is indicating that bulls are also acknowledging the weakness. Markets are currently stuck in a small range and for Nifty future 5100 and 5300 can be considered as short range and between these range bias remains negative. If Nifty manages to break out from this range there could be a very sharp move on either side for minimum 3% to 4%. Based on short term charts averages 5100 will act as strong support and if indices sustain below 17000 and 5100 there could be sharp decline in subsequent days. A renewed buying interest can be expected only once these global concerns trim down otherwise market are likely to become lackluster in coming weeks.

Written by Rakesh Gandhi

November 15, 2011 at 1:32 pm

Confidence likely to come back into our markets

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With major boost coming from Italy accepting the austerity measures, the global markets romped their way back to register strong gains on Friday. Bulls were in clear command, and that would likely be the trend for the Asian markets as well. Last week, even though a truncated one proved to be a blessing in disguise for our markets, as on Thursday 10th Nov, the Asian markets saw a sharp cut, with Hang seng notably down more than 1000 points. However, our markets were closed on Thursday, and on the next trading day we managed to relatively outperform the Asian peers. IIP numbers were also announced on Friday, and it was not a strong set of numbers, however, the new question which lingers in everyone’s mind now is “Whether the worst is taken care of in terms of IIP?.” Technically markets are still trading above their critical support levels of 5150 on closing basis, and if all bodes well for the market, this retracement from the 200 DMA ( 5400 levels) on Nifty, might well be over and done with, and we could now start inching back towards that level of 5400. Look closely and there is a definite confidence coming back into the market. The probability of upside moves has increased, and now breaking 4700 seems to be difficult. It would need an extremely strong negative event to break this support level for the markets now. Now the critical question remains, how should we trade our markets now? The dramatic events in Euorpe appear to be settiling down – atleast in the short term. This should be a boost to the global markets. We could also see the Asian markets showing short term rally. Ideally for all long positions the stop loss should now be placed at 5150 levels. And the next few days will be very critical for the market, especially the first test to 5280. As you can see from the short term channel on Nifty, the resistance is placed at 5280. Above that we can convincingly say that the market would likely head to 5400 levels again.

Written by Kunal Bothra

November 14, 2011 at 12:52 pm

Savings Bank Interest finally deregulated

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Savings Bank Interest finally deregulated

Saving bank account interest rate deregulation has finally arrived. The first banks to lead the way with higher rates were the ones with nothing much to lose namely Yes Bank, IndusInd Bank and Kotak Bank. Low saving deposit balance meant that these banks have a greater scope as the gap between SA and term deposits remains a 400-450 bps gap.  The mammoths of the banking system have yet to budge. I understand the insistence that saving accounts are transaction related products. However, with standardization across transaction banking services and the small banks named above no less technologically savvy my guess is the argument won’t last too long.  So should we expect a rush at branches for account opening applications? Unfortunately the answer is NO. The reason being, large banks continue to enjoy huge network, yes it does matter even in the days of internet banking and cross linkages of ATMs, and not to mention transaction related tie ups and linkages. Savings account products are convenience related and with real interest rates negative on most retail deposits, it is hard to imagine savings accounts as the next investment vehicle. So will the large banks increase saving account rates? I believe that eventually they will, things have a way of balancing out, it’s just my hunch but they are holding off as long as they can.

There also seems a split in the nature of customers and between banks. One is the urban and rural divide. Rural customers sub Rs1 lakh deposits are a lot more loyal to banks. Can’t blame them really, a trip outside of the metros and Tier I cities will explain the presence PSU banks have built. PSU banks have thrived on this fact and dominate this category of rural and semi urban customers. The issue now comes to urban centers and metros. Here there is a mix of the sub Rs1 lac and higher depositor and PSU and Private Banks. This is where large banks cannot write off the rate increase by smaller technologically advanced new generation banks.  

A lot has been said on the subject over the past 2 weeks and a number of citations have been made of developed countries offering deregulated rates. However, there aren’t any free lunches. Deregulation has been introduced at a time when money supply is under pressure and banks may be pulling all strings to maintain a low cost deposit base. Hence we are experiencing a rising saving rate cycle. However, just like the pattern in developed countries this could reverse itself when money supply is easy. Also, banks could impose a levy on transaction services offered to saving account holders or pass higher cost of funds through higher base rate. From what we have seen over the past 2-3 quarters bankers are in no mood to absorb higher rates and if their second quarter margins are intact it only means that they have passed on the increase in cost of funds.



Written by Fundamental Side

November 9, 2011 at 11:29 am

No real cheer in Motown during the festive season

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No real cheer in Motown during the festive season

 With festive pre-buying set in the month of September, October showed comparatively subdued numbers sequentially. Going forward, we believe that seasonality will creep in towards the end of calendar year and the next two months will be even more subdued. Additionally, PVs will face the heat considering the interest rate hikes and fuel price hikes. Two wheeler demand is expected to be firm with positive developments happening in the rural markets such as good monsoon, rise in MSPs and employment schemes enforcement. CVs are expected to grow at a steady pace close to 10% on demand from LCV segment.

 Bajaj Auto – (TP – Rs1,893, BUY) – Curfew at Pantnagar led to a loss of 25,000 units

Bajaj Auto has posted a record October performance by selling 3.95 lakh units, a growth of 7% yoy while it declined 7% mom. This has been the third month post the launch of 150cc Boxer, which again sold 10,000 units. Production got affected due to curfew at Pantnagar to the extent of 25,000 units. The twin brands Pulsar and Discover reported strong growth and contributed ~70% of total motorcycle sales. The company has recorded highest ever motor cycle sales in any October thus indicating that the 2 Wheeler sector is insulated from any macro headwinds. Three wheeler sales came in at 44,191 units, a growth of 8% yoy, and a fall of 5% mom. On the export side, Bajaj Auto sold 1.31 lakh units, a growth of 20% yoy and contributed 33% of sales v/s 29.7% yoy, which indicates a better profitability in the month. For the first seven months of the year, the company reported 15% yoy growth to cross the 2.65 mn mark.

 Hero Motocorp – (TP – Rs1,928, SELL) – Sequential de-growth

HMCL had posted a record breaking volume performance in the month of September as it sold 5.49 lakh units in the festive environment. However, in October it failed to reach that mark and reported just 5.12 lakh units , a growth of 1.2% yoy and a decline of 7% mom. The company mentioned that at retail levels, the sales were more than 6 lakhs in October. 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 – (Under Review) – Tractor sales robust, but auto sales slipped mom

M&M sold 41,506 units, a 20% growth yoy while it declined 6% mom. UV sales in the month grew by 6% yoy to 16,938 units, while declined 7% mom. 4W pick-up segment which includes Gio, Genio and Maxximo posted a robust 41% growth yoy as the LCV segment continued to grow at a strong paceindicating market share gain. Also new variants of Maxximo and Genio launched over the past month, which have performed well. Verito has posted yet another stellar month with a highest ever monthly sales recorded at 1,818 units , 16% mom growth v/s 1,560 units. Export sales moved up by 7% yoy with traction seen in major export markets. Farm Equipment Segment (FES) posted a very robust growth of 31% yoy to 31,838 units, while sequentially they zoomed up by a whopping 29% on festive demand post a strong monsoon and MSP on food grains being hiked. The festive launch of new SUV XUV500 priced in the range of Rs11-14 lakhs is expected to boost the UV sales as it has already attracted bookings of 8000 units and the company has stopped taking any more orders.

 Maruti Suzuki – (TP – Rs 930, Underperformer)- Lowest ever monthly sales in the last decade

Maruti Suzuki (MSIL) ‘s sales in October came at 55,595 units, a sharp decline of 53% yoy, while on mom basis it was down by 35% driven by labour unrest at its plants leading to a production loss of 40,000 units. Also macro factors spoiled the game as PV sector is struggling to gain its lost luster. The company was completely unable to enjoy the festive season this year. The bread and butter segment, the mini segment de-grew by 55%, while the compact segment fell by 56% yoy.  Exports were down by 64% yoy as A Star, the best selling export model faced the brunt of labor unrest at Manesar. We do not see Maruti to punch more than one lakh units in the near future and hence report a negative growth in FY 12. MSIL’s market share in the first half of the year has gone down below 40%. 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 – (Under Review)- Sales slip sequentially

October sales for the company were at 68,009 units, 5% up yoy and 16% up mom. CV sales grew by 13% yoy, out of which LCV sales were up by 6% yoy, signifying some loss of market share to M&M and MHCV sales were 23% higher yoy, a trend reversal. This reflects strong CV sales despite macro headwinds. PV segment sales declined by 3% on macro pressures on the PV segment to 25,746 units while utility segment sales went up by 23% yoy.  Indica range grew by 11% yoy as a new variant of Indica was launched 2 months back. Indigo range sales were also low by 24% yoy. Nano sales grew on lower base at 3,868 units albeit low, up 26% yoy , while on mom basis, Nano’s grew by 30%.


Written by Fundamental Side

November 4, 2011 at 5:18 pm

The real wild card – Middle East and its impact on oil

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Monday, October 24, 2011

Today all eyes are on Europe, but there is another part of the world where there are several events that have happened in 2011 and will continue to happen over the next several months that will definitely have implications globally in the medium and long term. With all headlines talking primarily about Europe the incidents in Middle-East are getting short bursts of airtime.

But, Middle-East according to me is a wild card. I can say with certainty that we will only have uncertainty in the Middle East for the foreseeable future.

There are a lot of incidents that have happened from the beginning of this rather extraordinary year starting with the vast and inspiring gathering in Tahrir Square and now a bloody end to Muammar Gaddafi. Each of these incidents in isolation will not have a global impact, but when you combine them with the fact that 60% of the global oil reserves are in the Middle-East and Africa then suddenly the scenario starts looking a bit ominous. With really no serious alternative to Oil despite years of research and billions of dollars spent on alternate energy, it is only but natural to have a secular view that Oil prices will continue to be pressured upwards. We all of course know about the demand side coming from the Emerging markets, but let us not forget the potential challenges that could erupt on the supply side.

The timeline of events in the Middle-East in 2011:

January 2011: TUNISIA: The cyberactivist group “Anonymous” announces Operation Tunisia in solidarity with the protests by striking a number of Tunisian government websites with “direct denial of service” attacks, flooding them with traffic and temporarily shutting them down. Saudi Arabia officially announces that it is hosting Ben Ali and his family for an unspecified period of time.

January 2011: EGYPT: Activists in Egypt call for an uprising in their own country, to protest against poverty, unemployment, government corruption and the rule of president Hosni Mubarak, who has been in power for three decades.

February 2011:  BAHRAIN: Anti-government “Day of Rage” in Bahrain. Bahrain police storm Pearl roundabout, the focal point of protests, on a Manama square, to clear activists camped out there. At least seven people are killed.  Bahrain declares martial law, a day after Saudi troops enter Bahrain.

Mar – till date 2011 SYRIA: In March at least 200 people march in Damascus and there are reports of at least 23 dead around the country including, for the first time, in Damascus. President Assad sacks the governor of the northern province of Hama after mass demonstration there, eventually sending in troops to restore order at the cost of scores of lives. Assad still has not fallen — and for all the expectations that he would be unable to hold out, he has held out quite well to this point.

May 2011: OSAMA BIN LADEN: In a televised address, Mr. Obama announces Bin Laden’s death after months of secret planning and operations.

Feb – Oct 2011: LIBYA: LIBYA’S National Transitional Council announced elections and the formation of an interim government and declared itself liberated after 42 years of rule by Muammar Gaddafi. It ended with his capture and death last week. It all started with the arrest of human rights activist Fethi Tarbel starts a riot in Benghazi in Feb and Anti-government militias taking control of central coastal city of Misrata after evicting forces loyal to Gaddafi. Then with NATO and U.N. Security Council combining forces it only was a matter of time for Col Gaddafi to lose control.

Feb – Apr 2011 OMAN: In Oman, Sultan Qaboos has acquiesced in protesters’ demands that he release nearly 300 dissidents arrested since the Arab Spring protests began in Oman a couple of months ago

June 2011 SAUDI ARABIA:   The kingdom is spending $130 billion to pump up salaries, build housing and finance religious organizations, among other outlays, effectively neutralizing most opposition.

June 2011 YEMEN: President Ali Abdullah Saleh wounded in a bombing on his palace in the capital Sana’a. The attack comes after widespread protests, the killing of hundreds of demonstrators and violent battles between army loyalists and defectors. Saleh evacuated for treatment in Saudi Arabia but confounds expectations by returning to Yemen, where he repeats promises to resign that few believe.

October 2011: Hamas reached a deal with Israel on Tuesday for the release 1,027 prisoners in exchange for Shalit, who was captured in 2006 and has since been held in the Gaza Strip. The Palestinian prisoners will be released in two phases.

October 2011:  Mr. Obama said Friday that the estimated 40,000 U.S. soldiers still in Iraq would return home by the end of the year, after the failure of tense and protracted negotiations with the Iraqi government to amend an existing military agreement between the two sides to allow for a contingent of combat troops in the country beyond Dec. 31.

October 2011:  U.S. agents disrupted an Iranian assassination-for-hire scheme targeting Saudi Arabia’s ambassador to the United States

There are multiple moving parts in the region and many of the unexpected events of recent weeks including the sudden peace arrangement between Hamas and Israel add to that uncertainty. But the biggest one in my opinion is the planned American troop withdrawal from oil-rich Iraq after spending close to USD 1 trillion in real money, losing 4,481 troops and having 32,195 soldiers injured with 20% of whom have serious brain or spinal injuries. Until the fall of Saddam Hussein following the U.S. invasion in 2003, Iraq was known as the “Shield of the Arabs” because it prevented Iran from expanding its influence westward. With Saddam gone, Iran will easily be able to re-emerge.

Iran is the leading conventional power in the region with more than 500,000 troops on the ground and this time around, taking very measured and careful steps.

Stratefor describes the Bahrain uprising as a test of strength for the Iranians. Shiites rose up in Bahrain against their Sunni rulers with at least some degree of Iranian support. Saudi Arabia, linked by a causeway to Bahrain, perceived this as a test of its resolve, intervening with military force to suppress the demonstrators and block the Iranians. To Iran, Bahrain was simply a probe; the Saudi response did not represent a major reversal in Iranian fortunes.

The main game for Iran is in Iraq. The Iranians will not be in control of Iraq, but they have sufficient allies, both in the government and in outside groups, that they will be able to block policies they oppose, either through the Iraqi political system or through disruption. They will not govern, but no one will be able to govern in direct opposition to them. Iraq in recent months has moved closer to Iran. Iraq, for example, has supported Iran’s right to nuclear technology and advocated U.N. membership for Palestinians. Prime Minister Maliki and his party were in exile in Iran for 10 years. Many of the Kurdish leaders, including the current president of Iraq, was in Iran. Many of them speak fluent Persian. They have long and ongoing ties. Muqtada al-Sadr, when he finds that things get difficult for him in Iraq he head backs to Iran. So all of these political officials have been nourished and sustained by Iran.

The potential rise of Iran in the Middle-East and its resulting discomfort to the US is easily demonstrated by the fact that Secretary of State Hillary Clinton warned Iran against assuming that U.S. would allow it to flex its muscles. She said that Tehran “would be badly miscalculating” if it interpreted the Iraq withdrawal as a sign of diminished American military commitment to the region. U.S. is quickly trying to make its moves by trying to persuade Europe to put tough measures on Tehran’s central bank, Iranian airlines and port companies in an effort to increase pressure on Iran.

But, as Frederick Kagan, a scholar at the conservative American Enterprise Institute who helped craft the Bush administration’s 2007 Iraq troop-surge strategy said “I don’t see how you can talk about containing Iran, when you leave Iraq to its own devices in such a way that it has no ability to protect itself. There is no upside to this decision.

President Obama used some rhetoric which was more intense than he usually does in response to the alleged assassination plot on the Saudi Arabian ambassador.

There are also reports that the United States will this week commence huge military maneuvers aimed at Iran, with a massive air fleet patrolling middle eastern skies ready to land at any time, in response to Iran’s involvement in an alleged assassination plot that experts have labeled dubious, amidst fears that US and Israeli targets could be hit by attacks.

The Arab Spring events in Middle East have been transformational, and have been led by the youth of the country who want a future, a job and above all dignity. But, how the future will shape up is not at all clear today. The uprising was really not about democracy, but all about economic development, distribution of wealth and prosperity. Will the region act more matured in its way it positions for the future and focus on co-operation and development so that the youth in the countries get a future. I guess there is a strong probability that this might be the case. But, with US leaving the region who will fill the void and ensure that the region unites?

There is a serious possibility that Iran will manage to take a dominant position in Iraq. In Iraq, Iran sees an opportunity to extend its influence westward. Syria is allied with Iran, and it in turn jointly supports Hezbollah in Lebanon. The prospect of a U.S. withdrawal from Iraq opened the door to a sphere of Iranian influence running along the southern Turkish border and along the northern border of Saudi Arabia. It will be interesting to see how the Saudi’s position themselves with Iran. They are ultimate pragmatists.

There would be a dramatic change in the balance of power in the region and it would also be something that would reshape the global balance, as the world is dependent on oil from this region and is going to cooperate with whoever has it. I am of the view that this will possibly ultimately mean that the western world will have to potentially find a middle-ground and forget the past and deal with the region on a more matured basis. Iran will possibly understand that this would be an opportunity for them to lose. They clearly have the upper hand in the region now. The ultimate solution will end up being a compromise where all sides get a fair deal, but it is unlikely that the path to that solution will be a straight line.  

To conclude, I feel that supply side issues will keep oil prices supported. In the medium term Oil price range will be higher in the USD 100 to 150 range rather than below USD 100 for a sustained period.


Written by Sayanta Basu

November 1, 2011 at 5:25 pm