Sunday, November 16, 2008
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Lupin announced that the US Food and Drug Administration (FDA) has completed an inspection of its manufacturing facility in Madideep, Madhya Pradesh. The inspection was a routine Good Manufacturing Practices (GMP) audit. An inspection report (FDA-483) was issued listing 15 inspectional observations rightaway. The FDA has found 15 manufacturing deficiencies at the plant during the course of a two-week inspection which concluded on Wednesday. A complete response to all the observations will be submitted to the FDA expeditiously, Lupin said, adding that it has already addressed eight of the observations made by FDA. The outcome of this inspection does not affect the supply of products manufactured at this facility to markets across the world, or the approvability of pending applications with the FDA, the company said.
China's key inflation rate cooled to a 17-month low, raising the prospects of further government steps, including interest-rate cuts, to bolster growth in the world's fourth-biggest economy amid a worldwide slowdown. Consumer price inflation (CPI) increased at a 4% pace in October from a year ago period, the National Bureau of Statistics said on Nov 11, after gaining 4.6% in September. October's inflation was less than the 4.2% median estimate and has halved from February's 12-year high of 8.7%. It has slowed for six straight months on improved food supplies and falling prices for energy and commodities. Food prices surged 8.5%, the smallest increase since May 2007.
In order to align its production levels with demand in the European market, Corus last month announced plans to reduce its third-quarter production (Oct-Dec 2008) by 1mn tons of crude steel, equivalent to 20% of its output. Corus has now decided to extend the production cuts beyond December.
The company expects to produce about 30% less crude steel than planned during the two quarters to the end of March 2009. Consequently Corus will temporarily idle one blast furnace at each of its Scunthorpe, Ijmuiden and Port Talbot works and will also adjust output levels on its downstream production units to suit market conditions in their respective regions and end-use sectors.
Rio Tinto, the world's second-largest iron ore exporter, said on Nov 10 that it was planning to cut production by 10% from its giant Pilbara mine in western Australia to bring output in line with weakening demand. The Anglo-Australian mining giant said it was revising estimates of iron ore shipments from the Pilbara region to between 170mn tons and 175mn tons in 2008. The company produced 145mn tons of ore from its Pilbara mines last year. It had forecast 2008 output of between 190mn and 195mn tons in October. Rio produced 139.2mn tons in the first nine months of the year. "Operations continue to perform well, but demand has continued to decelerate. This reduction is a prudent move to align production with revised customer delivery requirements in the light of the fourth quarter drop in Chinese demand," said Rio's CEO Tom Albanese.
Deutsche Post on Nov 11 said that it was closing most of its US air and ground business as the delivery services in the face of a severe economic slump in the world's largest economy. Deutsche Post said it will allow DHL to serve overseas clients from the US, but the group said it no longer will deliver US packages domestically effective Jan. 30. The move will lower its cost base from around US$5.4bn to US$1bn, though the restructuring will cost US$3.9bn, up from US$1.9bn. DHL's 13,000 employees will be reduced to between 3,000 to 4,000, and 412 stations will be reduced to 103.
Telecom major Nortel Networks announced that it will slash 1300 more jobs, including key management positions, and freeze salaries after posting a US$3.4bn third-quarter loss. The news sent Nortel's stock plummeting 38 cents or 25.5% to US$1.11 on the Toronto Stock Exchange - the lowest level ever. BT Group said it was to cut 10,000 jobs by April as it tries to slash costs in the face of the looming recession. Royal Bank of Scotland will cut around 3000 jobs worldwide over the next several weeks to reduce costs amid the global financial crisis. Citigroup is cutting at least 10,000 jobs in its investment bank and other divisions.
Strong growth in revenues, a highly diversified geographical base and increasing focus on the high-growth solar wafer business spell long-term potential for Carborundum Universal (CUMI), a leading player in the abrasives and industrial ceramics space. Those with a two-three year investment horizon can consider buying this stock.
At the current market price of Rs 102, CUMI trades at about 11 times its likely FY09 per share earnings. While this may appear pricey when compared to some of the other manufacturing companies whose price earning multiples have been reduced to the single digits, that CUMI is fairly shielded from the impact of an economic slowdown may justify the ‘premium’ valuation accorded to it. For one, it has a highly fragmented user industry base, which may cushion it from the fallout of any significant slowdown in a particular user industry. That despite the slowdown in the auto industry, CUMI has managed to put in modest growth numbers is a case in point.
Two, CUMI’s access to low-cost funds for sustaining its capacity expansion and working capital requirements (at an average of 9 per cent) also allays concerns regarding funding constraints, the reason oft cited for marking down manufacturing companies. Three, a chunk of the demand for CUMI’s products is ‘maintenance and repair’ driven. So, to that extent the demand for its products will continue to remain healthy.
Access to minerals
Another factor in CUMI’s favour is access to rich yet cheaper reserves of minerals (alumina and SiC), essential raw materials for all its products. The company has strategically set up manufacturing facilities in countries such as China and Russia, which not only hold rich reserves of minerals but are also the target market for some of its products; Russian presence also holds significance in terms of providing proximity to CUMI’s clients in Europe.
For the quarter ended September 2008, helped by a strong performance in India, Russia and Australia, CUMI’s consolidated revenues and profits registered an increase of over 67 per cent, each. It has also turned around its Canadian operations. Further, Volzhsky Abrasive Works, the Russian company that CUMI acquired last year, is expected to report higher revenue contributions from this year. On a standalone basis, the company registered a sales growth of over 20 per cent. Margins, however, remained flat at 16.3 per cent as the quarter saw a 41 per cent increase in power costs. This was because CUMI’s manufacturing facilities in TN and Kerala have been battling with intermittent power cuts. An increase in raw material costs across all business segments also led to a cost push.
Segment-wise, abrasives registered 15 per cent growth in sales, while the sale of ceramics and electrominerals increased by 28 per cent and 27 per cent respectively. Forex loss and high interest outgo during the quarter however capped the profit growth at 6 per cent.
Margins to remain stable
The mismatch in supply and demand of minerals globally had driven CUMI to raise the price of its products to the extent of 5 per cent twice this year. The company may yet again hike the price of its products this quarter. Despite the price hikes, CUMI still counts among the low-cost manufacturer of abrasives and ceramics and this may help it sustain both revenue growth and margins.
Margins may also get a lift from the improving product mix and addition of ‘high value’ products to its kitty. From over 10 per cent of revenues last year, the contribution of value-added products has increased to 25 per cent last quarter.
On that note, the company’s proposal to set up a Silicon Carbide Microgrit facility (high-margin products) to cater to the increasing demand from the photovoltaic industry also leaves sufficient scope for margin expansion in the long-term.
The potential home buyers’ concern about market stability is quite apparent as sales dip as high as 85 per cent in some markets this year, say experienced developers. To drive sales marketing companies are coming up with offers that are out-of-the-box and, sometimes, confusing too! It is common to spot ads and hoardings offering freebies such as latest luxury cars, gift vouchers for gold and housing plots on purchase of apartments.
But would these really result in growing the sales for these companies?
“Such marketing gimmicks work when the market is up. Not when it is down.” In these difficult financial times, buyers typically view such offers as a form of discount lacking transparency, says Mr Harish Bijoor, Brand-strategy specialist and CEO, Harish Bijoor Consults Inc. Customers are likely to confront real-estate marketers and asking them to reduce the per sq.ft price instead of these sops that promise the sky, he adds.
According to Mr Koshy Varghese, Managing Director, Value Designbuild, a Bangalore-based real-estate company, if these offers “un-burden the consumer in money terms, then those would be of interest to them.” But beyond that, it doesn’t make too much of an impact. In fact, it confuses people more, he says.
A new marketing initiative from Golden Gate Properties Ltd and development manager Asipac Projects saw six units being sold in three-and-a-half days. It is significant considering that only 8-10 units a month were sold in the last six months. The aim was to assist home-buyers in purchasing the condominiums at Golden Grand, the project in North-West Bangalore exclusively marketed by Asipac. Under the scheme, home-buyers need to pay only 75 per cent of the property value to take possession of a unit costing Rs 60 lakh to about Rs 1 crore . The balance is paid over five years, with no interest charged. “They only have to pay a rent of Re 1 per sq.ft for the unpaid area of their home,” says Parag Sen, Vice-President — Sales and Marketing, Golden Gate Properties Ltd.
“Even though we sold 400 of the 790 condominiums quite fast, sales have slowed down in the past six months due to general market conditions. We spoke with 81 potential buyers who had not bought a home with us and 64 of them told us that they did not buy because the price was above their budget," says Mr Amit Bagaria, Chairman, Asipac Projects.
When asked if such a scheme would interest them, most of them were positive. With this initiative, “we are only deferring our profits. In fact, the customer makes his profit before we make ours,” he says .
Besides, home-buyers are also offered a ‘surety’ that the prices would not go down in the future and “in the unlikely event that there is a drop, the developer would compensate the buyer with 1.25 times the difference in the price,” says Mr Bagaria.
Mr Varghese points to a scheme that Value Designbuild offered recently for a limited period with HDFC, which resulted in 10-12 per cent sale of the 66 units available. The scheme, available only on upfront payment, offered 1 per cent interest for the entire loan tenure being waived off.
For example, on a Rs 40-lakh loan spread over 20 years, the 1 per cent interest that the company would absorb from the customer would work out to about Rs 250 per sq.ft, “which is about Rs 3.5 lakh,” says Varghese. “When the bank disburses the amount to us, we would get Rs 36.5 lakh only, as the 1 per cent interest for the whole tenure would be deducted up front.” This scheme was to woo genuine buyers, for whom “the main problem was high interest rates,” he says.
Similarly, Bangalore-based Alliance Group saw over 20 deals finalised from about 700 enquiries for its ‘exchange offer’ — old flats for new villas — for 100 villas, priced between Rs 1.25 crore and Rs 7.3 crore, in its El Dorado Park integrated township project in Bangalore. “In fact, the response is much better than what we have projected,” says Mr Manoj Namburu, Chairman and Managing Director, Alliance Group.
The offer, he says, is “for those who want to upgrade their living conditions without having to go through the hassle of selling their existing owned dwelling.”
The best marketing tool to get buyers back into the market, according to Mr Bijoor, is transparency in operations. In times such as these, real-estate as a category must use it . to secure the consumer’s trust, he says.
A global de-rating of commodity stocks and worries over a sharp contraction in demand for commodities have bludgeoned Tata Chemicals’ valuation. The stock now trades at a P-E multiple of just 3.8 times its trailing 12-month earnings, down from 8 in August and 14 in March 2008. At the current market price of Rs163, the stock trades at a steep discount to global peers such as Solvay and FMC (9-10 times).
Tata Chemicals is an attractive ‘buy’ for conservative investors with a two-year perspective. A diversified global presence, a relatively strong soda ash cycle and the prospect of higher margins on the fertiliser business, suggest that the company may easily exceed the growth expectations reflected in its current stock price.
The low valuation and high dividend yield (5.5 per cent) provide protection against protracted downside.
Of its two leading business segments (fertilisers and chemicals), the fertiliser business has been the key revenue and profit driver for Tata Chemicals in recent times. It accounted for 60 per cent of revenues and 56 per cent of profits before interest and taxes in the first half of 2008-09.
Selling prices for both urea and complex fertilisers are fixed by the government with the difference between normative import prices or costs and the price reimbursed as subsidy to producers.
In this scenario, a spike in international prices of both fertilisers (urea and phosphates) and spiralling input costs resulted in a significant increase in fertiliser revenues for Tata Chemicals so far this fiscal.
Fertiliser margins to improve
Global urea prices have since fallen by 70 per cent from their peak levels in July, while DAP (di-amonium phosphate) prices have declined 35 per cent.
Revenues from this business are hence likely to decline significantly in the coming quarters. But this may not have significant margin or profit implications, as lower realisations are likely to be offset by a steeper fall in input costs (phosphoric acid prices are half of last year’s levels, while ammonia is at one-third).
In fact, the commodity meltdown may actually improve Tata Chemicals’ cash flows, as lower input costs may lighten working-capital requirements and lead to prompt receipt of subsidies.
The urea business is also likely to see an expansion in volumes and margins as the company’s de-bottlenecking project is commissioned in the first quarter of 2009.
Under the new urea policy, the output from this project will receive realisations linked to import parity prices of urea, which will mean a much higher margin profile.
Soda ash: Still firm prices
If the fertiliser business can look forward to volume growth and stable profit margins, Tata Chemicals’ soda ash business remains in a position of strength, despite the reversal in the global commodity cycle. A relatively tight-demand supply balance has kept global soda ash prices relatively firm, amid precipitous falls in most other commodities.
Global soda ash prices in non-US geographies now hover at $270-310 per tonne levels, 8-10 per cent higher than prices at the same time last year. Further increases are expected in the contracts for 2009.
Tata Chemicals, which markets the lion’s share of its soda ash output through long-term contracts, has already locked into higher prices for two of its facilities when contracts were renewed in August 2008. The remaining contracts are unlikely to see significant slippages. Higher exports from China do have the potential to moderate prices in the Asian region to some extent.
But for Tata Chemicals, a sharp correction in realisations compared to last year appears unlikely. Significant contributions from the Indian market, where prices are likely to remain stable (the depreciating rupee may offset any correction in dollar prices), may also help the company maintain margins in this business.
Easing trends in input prices are also likely to aid margins in the coming quarters.
An edge on costs
From a strategic perspective, Tata Chemicals’ aggressive inorganic growth strategy has also helped lower its cost structure and diversify, to benefit from price and demand trends across the world.
The acquisition of UK’s Brunner Mond in 2007 and the US-based General Chemicals in 2008 have taken the company’s overall soda ash capacities to 5.5 million tonnes, making it the second largest global producer of soda ash after Solvay.
The acquisitions have also endowed Tata Chemicals with manufacturing facilities spread across Northwich (UK), the Netherlands, Lake Magadi (Kenya), Wyoming (US) and Mithapur in India, enabling it to diversify currency and price risks across regions.
With over half the current capacities based on natural soda ash, which is much cheaper to produce than synthetic soda ash, the company has acquired a significant hedge against commodity cycles.
With some of the facilities experiencing teething troubles earlier this year, contributions from the above buyouts are yet to fully reflect in Tata Chemicals’ numbers. Brunner Mond’s Kenyan facility for instance, reported a loss in FY08, due to high fuel costs, which impacted margins. Prospects for the facility have since improved on the back of the sharp fall in energy prices and better capacity utilisation levels.
Profit margins at the Wyoming facility may also show expansion on the back of cost savings and better realisations, from a higher contract price negotiated for the current year.
A better show from acquired facilities has helped Tata Chemicals report a 33 per cent profit growth (after charging off huge notional losses on foreign currency loans), on the back of a near two-fold expansion in sales in the September quarter, with margins improving sequentially.
The acquisition spree has hiked up the leverage on Tata Chemicals’ books, its debt equity rising from 0.7:1 to about 1.4:1 currently. Though refinancing of bridge loans contracted for the General Chemicals buy may peg up interest costs, the overall interest cover (at over 6 in the first half of this year) offers sufficient comfort to absorb a hike.
Notional forex losses arising from any further depreciation in the rupee could also depress reported earnings in the coming quarters; but the prospect of higher revenues and margins in the coming quarters appear likely to offset this impact.
Given its healthy cash flows and strong balance-sheet, the company may also be able to refinance loans at lower rates over the next couple of years.
On a consolidated basis, Tata Chemicals reported a per share earnings of Rs 41.7 over the trailing 12 months ended September 2008.
Investments with a two-year horizon may be considered in the shares of Idea Cellular (Idea), given the telecom operator’s strong pace of subscriber additions, entry into circles with higher realisations and synergies possible from Indus Towers.
Pressures on near term margins and earnings due to entry into new circles and high capital expenditure have seen the stock’s valuation being beaten down to a moderate 13 times forward earnings (estimated 2008-09). At Rs 48, the stock offers a good investment option for investors who are willing to look beyond the next few quarters, for appreciation over a 3-4 year time frame.
Once Idea’s capex in new circles tapers off (likely by mid 2010), its overall profitability would start to expand. Mobile number portability, on the anvil for 2009, may also work in Idea’s favour.
Idea’s profit margins over the last couple of quarters have come under strain, due to the capex for network rollout in Mumbai and Bihar, heavy rentals for tower infrastructure and marketing expenditure related to brand building. Though these forays are likely to remain in the investment phase for a while, the headway that Idea has made in capturing market share is impressive.
In Mumbai and Bihar, Idea has already managed to capture 18.5 per cent and 21 per cent share respectively in new subscriber additions within two months of launch. This is despite being the sixth or seventh operator in these circles. The subscriber churn rate in Idea’s existing 11 circles has declined.
Idea received an infusion of Rs 7,294.9 crore from TMI for a 14.9 per cent stake sale, and Rs 2,748 crore from Providence Equity for a 20 per cent stake sale in its subsidiary – Aditya Birla Telecom. This has ensured funds for Idea’s expansion in existing circles and entry into high-ARPU circles such as Tamil Nadu and Karnataka, where it is set to launch services over the next few months.
The acquisition of Spice Communications, apart from bringing in subscriber base, has given it access to the 900 Mhz band frequency in Karnataka, which entails lower expenses. The company has also improved its National Long Distance volumes and now carries 15 per cent of its own traffic. Over time, an increase here would drastically reduce access charges, aiding margins. Synergies from Indus Towers may aid quicker rollout and expansion in Tamil Nadu and Karnataka.