IT Earnings Preview - Q1FY09
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Monday, July 07, 2008
Sunday, July 06, 2008
Weekly Technicals - July 6 2008
The markets ended with losses for the seventh week in a row as they continued to be haunted by global market cues, record crude oil prices, rising inflation and political worries.
The Sensex crashed to a low of 12,822 during the week - down almost 1,000 points from its previous close. However, some bargain hunting in beaten-down financial and realty stocks helped the index cut losses towards the end of the week. The index finally ended with a loss of 348 points at 13,454. It has shed a whopping 22.8 per cent (3,981 points) in the last seven weeks.
Among the index stocks, ACC, Maruti, Grasim and Reliance Infrastructure dropped 13-17 per cent last week. Tata Steel, Tata Motors, Ambuja Cements, ICICI Bank, Reliance Communications, ITC and Mahindra & Mahindra shed 7-12 per cent each.
On the other hand, BHEL surged nearly 9 per cent. Jaiprakash Associates, ONGC, Satyam and L&T gained 5-7 per cent each.
Political concerns, inflation worries and possible action by the RBI would continue to affect the markets in the short term. The market sentiment will also be driven by the earnings season.
Technically, the Sensex may drift towards its yearly support of 12,100. However, if the index manages to sustain above the 12,750-12,800 range in the short-term, there may be a pull-back rally upto 13,900 and 15,200. The index is likely to find support around 13,050-12,930-12,800 and resistance at 13,855-13,980-14,100.
The Nifty moved in a range of 315 points during the week. From a high of 4,163, the index dropped to a low of 3,848 and finally settled with a loss of 121 points at 4,016. The index tumbled over 22 per cent (1,142 points) in the last seven weeks. The Nifty shall seek support in the broad range of 3,750-3,850, below which it is likely to fall to 3,500.
via Business Standard
Dishman Pharma
Contract Research and Manufacturing Services (CRAMS) is expected to grow faster than other sub-sectors in the pharmaceutical industry. This is due to the expected ramp up in revenues as global pharma majors look to cut costs through outsourcing and strong operating margins for players which usually work on a ‘cost-plus’ base.
Early players, which are at the last leg of their capex cycle and have put together acquisitions that stretch from early stage to late-stage commercialisation of medicines, may stand to reap greater benefits from this trend. Dishman Pharmaceuticals and Chemical, a leading CRAMS player catering exclusively to innovator companies, appears a good bet, in this context.
Initially constrained by small size, low capacities and a business skewed towards fine chemicals, the company today has manufacturing capabilities focussed on patented molecules, key medicine intermediates and special chemicals.
CRAMS accounted for 75 per cent of net sales in 2007-08. Acquisition of Carbogen Amcis has given it the much-needed strength to carry out full-fledged CRAMS, with the subsidiary now contributing more than half of CRAMS’ revenues.
Taking stock
Our earlier recommendation on Dishman was a ‘buy’ at Rs 275 in February. The stock has held its ground even as the broader markets have fallen by 33 per cent in the period that followed. The company’s annual results strengthen conviction in the company’s growth prospects. Dishman managed to register strong growth on both sales (39 per cent) and profit terms (32.5 per cent) against an appreciating rupee (around 8 per cent).
Quite a few new contracts are lined up for execution in the next 12-18 months even as Dishman is engaged in advanced talks with major MNC clients for new orders.
Post-commissioning, its new units are expected to generate over Rs 500 crore each year at optimum utilisation (expected in two-three years). On a consolidated basis, taking into account losses in some subsidiaries and a poor performance from the marketable molecules segment (19 per cent of sales), Dishman’s net profit margins came down to 15 per cent from 16 per cent last year.
Investment rationale
Higher realisations from CRAMS business (with new contracts), good client management history and rupee depreciation are set to play out well for Dishman, which draws 90 per cent of its sales from exports. At the current market price of Rs 286, the stock trades at around 14 times its estimated per share earnings for 2008-09. This is at a fair discount to sector leader Divi’s Labs. The valuation is comparable to Piramal Healthcare (formerly Nicholas Piramal), which is a much larger player (but less exposed to CRAMS).
Changing dynamics
Dishman’s client dependence has been de-risked further with Solvay accounting for less than 14 per cent, against 20 per cent in the December quarter. Cumulatively, top five clients now account for around 35 per cent of the business compared to more than 45 per cent even a year ago.
Dishman’s FY-08 EBITDA margin was muted at 19 per cent. Several extraordinary and one-off costs took their toll. Plus, the marketable molecules business was hampered with unexpected price hike in raw materials. Going forward, coupled with 5-10 per cent price increases (management expectations) for that business and absence of the non-recurring expenditure, Dishman’s core margins are expected to be back to 22 per cent levels.
CRAMS is also expected to profit from higher capacity utilisation. Profit margins will also be aided by the fact that most of Dishman’s subsidiaries are expected to break-even this year.
Way ahead
There are several opportunities and challenges for Dishman over the next two years. The company is looking at new areas such as manufacturing high potency (hipo) products. Unit 9, which is expected to be operational from March 2009, would cater to these typically high-cost and low-volume products such as anti-cancer drugs, steroids, hormonal drugs etc.
Indian CRAMS players are involved in initial stages of these ‘hipo’ products whereas Dishman (benefiting from Carbogen’s specialisation) will target class 3 and 4 substances.
Margins of Dishman’s Vitamin D business (4 per cent of turnover) are expected to normalise at 18 per cent over the next two years.
Business from marketable molecules segment is expected to remain under pressure for the next two quarters (the China unit starting soon may provide some relief). Dishman’s bulk drugs JV in Saudi Arabia is unlikely to pay off before 2010 and much will depend on the speed of execution.
Lastly, the company could book forex losses (as against forex gains in last one year) on its $100-million forex loans as the rupee begins to depreciate, affecting near-term earnings.
Marico Industries
Inflation, rising interest rates and a slowing economy — if any set of companies is well-placed to weather this turbulent environment — it is a select set of FMCG makers. The FMCG business is not capital-intensive and generates high levels of cash; FMCG spends also make up a small, “core” portion of the consumer’s portfolio that is not immediately vulnerable to a cyclical economic slowdown.
Marico Industries, with a strong clutch of brands in personal products, hair care and edible oils, appears a good investment in this backdrop. Amidst spiralling input prices, strong brand equity in its traditional hair oil business has allowed the company to take periodic price increases without impacting volume growth or market share.
The company is also firmly ensconced in high potential FMCGs such as hair care, branded foods and male grooming, targeted at the affluent urban consumer. A healthy pipeline of new products and a successful retail services foray (Kaya Skin Care & Kaya Life) also have the potential to add significantly to earnings over the medium term.
The stock, trading at Rs 53 (16 times estimated FY-09 earnings), is at a valuation discount to the FMCG space (20 times forward earnings), not having participated in the recent up-move in the sector. The stock offers potential for a 15-20 per cent return, with relatively low downside risk.
Improving product mix
From relying mainly on coconut oil and edible oils for revenues, Marico Industries has in recent years expanded its portfolio through brand extensions and forays into lucrative niches such as post-wash conditioners, male grooming, skin care services and functional foods.
The hair oil portfolio, where Marico continues to be the national market leader, has been extended well beyond Parachute coconut oil, into value-added offerings such as Shanthi Amla, Hair & Care, Parachute Advansed and Parachute Jasmine.
With a 13 per cent growth in 2007-08, hair oil has been among the fastest growing segments within FMCGs over the past year, driven by consumer uptrading from plain to value-added oils and from unbranded to branded offerings.
Marico’s entry into the niche post-wash care market with Parachute After-Shower cream for men (42 per cent market share) and Silk N Shine for women (32 per cent) has resulted in strong market shares for Marico in both these markets.
The company has a strong new product pipeline in hair care, with nascent forays into cooling oils (Maha Thanda), hair care (Night repair cream) and kids shampoos and oil (Parachute Starz).
In edible oils, Marico has gradually exited the price-sensitive sunflower segment (Sweekar) and has focused on its premium Saffola franchise, which is strongly positioned on the health platform. Marico’s offerings of blended oils have delivered a 22 per cent volume growth in 2007-08 amidst rising edible oil prices, heavy competition and consumer down-trading to low-priced brands. Marico’s plans for Saffola include an expansion in blended edible oils and a foray into functional foods such as Saffola atta — targeted at diabetes and cholesterol management.
Changes in the product mix, with a higher proportion of premium products, have contributed to a sharp expansion in Marico’s operating profit margins from 9 to 14 per cent over the past five years.
A higher proportion of premium brands ensures that Marico retains strong pricing power to pass on input cost increases to consumers. Marico’s foray into the retail skin care services through Kaya Skin Clinics has showed good traction, growing 45 per cent over three years and attaining breakeven in 2007-08.
Inorganic route
Apart from nurturing a healthy pipeline of new products, Marico has also embraced inorganic growth through a string of domestic and overseas brand acquisitions. Domestic acquisitions have brought in strong regional brands such as Nihar and Oil of Malabar coconut oil and Manjal soap, which extend the company’s distribution reach. Marico’s overseas buys have focussed on building a brand and marketing presence in countries such as Bangladesh and the West Asian and African regions, which offer a large consumer market with good growth potential. This overseas presence entails some currency risks, but allows Marico to build brands in new geographies, with lower competitive pressures than in the Indian market.
Though some of these acquisitions (Sundari LLC, Enaleni Pharmaceuticals) are yet make a significant contribution to numbers, the international business has managed a sharp 50 per cent growth in 2007-08 (21 per cent organic).
The string of acquisitions, costing Rs 550 crore in all, has been funded by a QIP offer (Rs 151 crore) and pegged up debt on Marico’s balance-sheet. However, both the debt:equity and interest cover remain well within comfort zone.
Financials
The company closed 2007-08 with a 22 per cent growth in revenues (17 per cent organic) and a 27 per cent growth in sustainable net profits on a consolidated basis. Compounded sales and profit growth rates for the past five years, stand at 21 per cent and 30 per cent respectively.
via BL
Prime Focus
With a strong presence in the niche area of post-production services for films, a unique cross-border business model and a good pipeline of film projects, Prime Focus is a preferred pick within the media sector. A substantial correction in recent months has the stock trading at about 15 times its likely FY ’09 consolidated earnings per share, which is reasonable given the high visibility in earnings growth. An investment can be considered in the stock with a three-year perspective.
Prime Focus has an estimated 60 per cent market share in India. With six facilities across Mumbai, Hyderabad and Chennai, its domestic business continues to grow at a fast pace, as the use of visual and special effects in Indian films is on the rise. The business is highly profitable with operating margins at 50-60 per cent, although higher employee costs have moderated margins in recent quarters. A large pipeline of 8-10 film projects in FY 09 should ensure a steady stream of revenues for the domestic operations.
Prime Focus has built an international presence with facilities spanning the UK, US and Canada. Its first acquisition in the UK (VTR) has paid off, with Prime Focus successfully turning around the company and the facility has begun to outsource work to India. As the London operation works more on advertising film projects, it has been affected by the advertising slowdown witnessed in these markets in recent times.
Prime Focus acquired Frantic Films and Post Logic Studios for $43 million in late 2007, which gave it access to facilities and talent pools in key markets of Los Angeles, New York, Vancouver and Winnipeg. The targets have combined revenue of $25 million (Rs 107 crore) and have been associated with films such as Spiderman 3, Fantastic Four and Superman Returns. These businesses are yet to be consolidated with Prime Focus and may not contribute to profits in the next one year. However, the presence of cross border facilities have helped create a unique business model, where a significantly higher amount of work can be carried out by facilities across time zones in a cost efficient manner. Prime Focus’s tie up with Warner Bros’ Motion Picture Imaging appears to be recognition of the merits of this international operation. The benefits of the strategy are likely to pay off from FY ’10. An unexpected slowdown in domestic operations is a key risk to earnings estimates. The stock’s small-cap status may call for careful timing of investments.
Market - long term outlook
We had expected the four-year long bull-phase to terminate in the first quarter of 2008 in our long-term outlook at the beginning of this year.
Our outermost target for the Sensex for 2008 was at 13700. Now that this level has been conclusively breached, a review of the long-term counts is called for.
The signs of a significant bull-market top were littered all over in the last quarter of 2007 – irrational price movement, excessive speculation, unjustifiable valuations, bottom-rung stocks coming out of wilderness to enjoy their days in the sun, surfeit of exorbitantly priced IPOs and so on. The party had to come to an end and it did at the peak at 21206 on January 11.
As explained in our yearly outlook, it is possible to anticipate a correction but difficult to judge the nature of the correction. We had taken the more optimistic view at the beginning of this year and anticipated the corrective move to halt at the first long-term support at 13700.
A halt here would have implied a sideways move between 13700 and 21000 for a couple of years before the up-trend resumed to take the Sensex beyond 30K.
But the decline below 13700 brings the next long-term supports for the Sensex at 11900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus.
We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980.
The fifth leg (upward) would then take the index beyond 25000 again. Caveat - decline below 9703 would need recasting of the counts.
The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move.
The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a long-drawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years.
Second half of 2008
Though the Sensex appears to be hurtling lower in to an abyss right now, a three wave A-B-C movement downwards is drawing close to termination. A 1:1 relation between the A wave and the C wave gives us the target at 11206. Fifty per cent retracement of the bull market from 2001 gives us the support at 11900. The decline from January can halt somewhere between these two levels.
However, it needs to be borne in mind that the down-move from 21206 could be the first leg of the long-term correction. But once this leg ends, we would have an intermediate term up-trend that would provide some respite to the battered stocks.
The preferred view is that the index would halt in the zone between 11000 and 12000 and spend the rest of 2008 in a range between 12000 and 16500. Our outer targets for the year would be 18000 and 9700. We await clues from subsequent rallies to tell us how the rest of this correction will shape-up.
via Businessline
Saturday, July 05, 2008
India forex reservces fall
India's Forex reserves fell by USD 691 million for the week ended June 27 to USD 311.79 billion as against USD 312.481 billion in the last week.
Reserves had jumped by USD 1.794 billion to USD 312.481 billion in the previous week.
Similarly, Foreign Currency Assets (FCAS) posted a decline of USD 694 million during the week and stood at USD 302.05 billion as compared to USD 302.744 billion in the previous week, reserve bank said in its weekly report in Mumbai on Friday.
FCAS, expressed in US dollar terms, include the effect of appreciation or depreciation of non-us currencies such as euro, sterling and yen held in reserves, RBI said.
Gold reserves and special drawing rights, during the week, were static at USD 9.202 billion and USD 11 million respectively, the apex bank said.
India's reserve position in the international monetary fund rose in the second consecutive week to USD 527 million, up USD 3 million from USD 524 million in the past week, RBI said.
Worst economic outlook in a decade awaits G8
Between surging oil prices, food inflation and a credit crunch that's depressed global growth, leaders from the Group of Eight economic powers face the gravest combination of economic woes in at least a decade when they gather next week.
The outlook has darkened dramatically since last year's summit in Germany, when the leaders declared the global economy was in "good condition" and oil cost USD70 a barrel — which seemed high at the time.
Since then, the US subprime mortgage crisis has erupted, roiling markets and battering financial firms. Oil has doubled to above USD140 and food prices have jumped, hurting the poor in particular and raising the threat of political instability.
"Things have changed for the worse across the board," said Robert Hormats, vice chairman at Goldman Sachs (International) Corp. in New York.
Hormats argues that the economic problems now are more serious and widespread than during the Asian financial crisis of 1997-98, where the pain was largely limited to emerging markets.
"Now you have a financial disorder where the epicenter is the US," he said. And fuel and food inflation "are serious matters that affect large numbers of people."
Host Japan had put global warming at the top of the summit's agenda, but the dilemma of how to respond to accelerating inflation and slowing global economic growth could grab the spotlight.
Prime Minister Yasuo Fukuda has said he hopes the July 7-9 meeting at a hot springs resort in Hokkaido, Japan's northern island, will "show some direction" in tackling oil and food prices but stressed it was only "one step" in a longer process.
On oil, analysts are skeptical that the G-8 leaders — representing the US, Japan, Britain, France, Germany, Russia, Italy and Canada — will come up with much beyond urging major petroleum producers to boost output, reiterating the message of their finance ministers, who met last month in Osaka.
Foreshadowing possible disagreement among the leaders, the finance ministers were divided on where to assign blame for the run-up in oil prices. Germany, France and Italy held speculators largely accountable, while the US and Britain said the focus needed to be on boosting production capacity that has barely kept up with growing global demand.
Soaring crude prices have already forced India, Malaysia, and Indonesia to cut subsidies and raise state-set prices on gasoline and other fuels. Last month, China hiked fuel prices as much as 18 percent.
At the same time, prices of corn, wheat, rice and soybeans and other farm goods have surged due to changing diets, urbanization, expanding populations, extreme weather, growth in biofuel production and speculation.
Spiraling fuel and food costs could drive millions into poverty, the Asian Development Bank has warned. In India, inflation has jumped to a 13-year high of 11.4 percent.
On the food front, the G-8 leaders may announce an aid package or pledging agricultural investment in poorer countries, experts say.
The credit crisis and global market turmoil are sure to be discussed, but with central bankers absent the leaders will most likely avoid saying anything specific about interest rates and currencies. The European Central Bank raised its benchmark interest rate a quarter point Thursday, suggesting it saw inflation as a greater threat than slower growth.
Overall, the summit's main goal will be demonstrating confidence that they can "work through the oil crisis without causing the global economy to melt down," said Tom Cooley, dean of New York University's Stern School of Business.
Given the meeting's emphasis on climate change, the leaders could highlight the links between energy issues and global warming by stressing the importance of energy efficiency and alternative forms of energy, said Goldman's Hormats.
"The key thing is not what they do at these meetings but what they do at home," he said.
Oil and energy have remained recurring themes at the annual summits, said Hormats, who participated in several of the first meetings, which started in 1975. That initial gathering came after the 1973-74 oil embargo, when fuel prices surged after Middle East oil producers cut off the US and other countries supporting Israel.
"We now have another oil crisis," Hormats said.
The summits were originally meant to focus on economic issues, but the agenda has expanded to include terrorism, Africa's development and the environment.
The group's membership also has grown from six to eight, adding Russia in 1997.
But many argue that it should be expanded to include China, the world's fourth-largest economy, and other emerging powerhouses like India and Brazil — especially to tackle global issues like energy and climate change.
"At what point will the G-8 realize we're no longer the steering committee for the world economy?" said Lael Brainard, a former deputy national economic adviser in the Clinton administration who attended several summits in the 1990s and now is a director at the Brookings Institution, a Washington think tank.
Already, the G-8 has been reaching out. It plans meetings with African leaders on the summit's first day, and later with leaders from China, India, Mexico, Brazil and South Africa — countries that someday might be a part of the Group of 13.
"These countries are critical to the solution of any of these problems," said Brainard. "I believe it's only a matter of time" until the club expands.
World News
ECB hikes key interest rate by 25 bps
As expected, the European Central Bank (ECB) hiked its key interest rate by 25 basis points to reign in inflation, even though economic growth has slowed in line with the global trend. The ECB boosted its key lending rate to 4.25%. This was the first increase by ECB in 13 months. President Jean-Claude Trichet hinted that he was done boosting borrowing costs for now. He played down the prospects of a series of interest-rate increases, saying that the quarter-point hike will help bring inflation back below 2%. The euro headed for a weekly decline against the dollar on speculation a worsening European economic outlook will rule out future rate increases. The 15-nation currency traded near a one-week low against the dollar after Trichet said he has no bias and that economic growth is not flattering.
IEA cuts oil demand forecast on record prices
The International Energy Agency (IEA) cut its five-year forecast for global oil demand, saying that record high prices and slower economic growth will reduce demand. The Paris-based agency cut more than 3mn barrels per day from its 2012 global demand forecast. A drop in OPEC spare capacity to 1mn barrels per day by 2013 will keep the market tight, the IEA said in its Medium-Term Oil Market report. The agency, which advises 27 of the world's most industrialised nations, cut oil demand estimates for each year between 2009 and 2012 by about 3%. The IEA forecast that global oil demand will rise to 86.87mn barrels a day in 2008, down 1.4mn from the 88.27mn barrels it projected in last year's report. Global oil demand will expand by 1.5mn barrels a day, or 1.6% a year on average in the five years between 2009 and 2013, the agency said, compared with a forecast of 2.2% a year to 2012 in its previous report, issued last July.
Moody's upgrades Japan's debt rating
Japan's debt rating was increased one level to 'Aa3' by Moody's, citing government's continuous effort to restrain spending to reduce debt. This is now the fourth-highest investment grade. "The increase from A1 was prompted by expectations of continued fiscal restraint and consolidation, coupled with an easing-out of the debilitating effects of deflation," Thomas Byrne, senior vice president of Moody's said. The upgrade came eight months after Moody's raised the rating to 'A1' and puts Japan on a par with Taiwan and Cyprus. Japan still ranks the lowest among the G7 nations. Within the G7 only Italy, with 'Aa2', and Japan have ratings below the top 'Aaa' grade. Economists say Japan has not done enough to pare the debt, which the OECD estimates stands at 182% of GDP.
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