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Monday, July 14, 2008
Gold rises as crude rises
Missile tests by Iran and surging crude price makes gold a bet for safe haven
The weak US dollar and the rising oil price pushed bullion metals higher on Friday, 11 July, 2008. Prices rose as tension once again mounted at Middle East and the also rose on reports of more missile tests by Iran. Gold is typically seen as a safe-haven investment and its appeal increases during times of heightened geopolitical tensions. The increase in energy costs also generally increase demand for the precious metal as a hedge against inflation. Silver prices gained for the day.
Generally, a stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies. On the other hand, a lower dollar pushes up precious metal prices as their demand lessens as it becomes cheaper for traders holding other currencies.
Comex Gold for August delivery rose $18.6 (1.97%) to close at $960.6 ounce on the New York Mercantile Exchange. Prices climbed to a high of $967 during intra day trading. For the week, it ended higher by $27 (2.8%). On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped since then.
It was reported on Friday that Iran test fired more missiles on Thursday, after testing missiles the day before that could reach Israel. Iran is the world's fourth-largest exporter of crude oil.
At the currency markets on Friday, the dollar lost ground against other major currencies on rising geopolitical risk and renewed credit worries. The dollar index which tracks the greenback against a basket of major currencies, fell 0.6% to stand lately at 72.03.
In the crude market on Friday, prices fell initially amid a rising dollar but leaped right back on speculation that Israel may be nearer to launching an attack on Iran and on worries that supplies in Nigeria and Brazil may be disrupted. Crude for August delivery closed up $3.43 or 2.4%, at $145.08 a barrel on the New York Mercantile Exchange.
The weakening dollar and higher global demand for raw materials have led to records this year for commodities including gold. Gold has traditionally been used as a safe-haven asset against rising inflation. Investor sentiments are boosted by the fact that gold and silver are alternate sources of good investment in the face of declining dollar and rising energy prices.
Gold prices ended June, 2008 with a gain of 4.1%. The yellow metal ended second quarter with a marginal gain of 0.7%. In May, it ended with a gain of higher by $22.5 (2.5%). Before May, for April, prices closed lower by 6.3%.
This year, gold prices have gained 13.5% till date against a 5.6% drop for the dollar against the euro. For first quarter prices gained 10.7%. In January, prices gained 11%, the highest monthly gain since April 2006. For February, it gained 6%. But in March, prices succumbed and fell by 5.5%.
On Friday, Comex silver futures for September delivery gained 50 cents (2.7%) to $18.82 an ounce. Silver has gained 25% in 2008 till date. For the second quarter, it gained a paltry 1.4%.
Silver prices ended the month of May 2008 with a gain of 2.7%. For April, it closed lower by 5.5%. Silver had gained 16% in Q1. In January this year itself, prices climbed 14%. In February, it gained another 15%. For March, it ended lower by 13%. The metal had climbed 16% in FY 2007. The metal also has gained for seven straight years.
Crude rises on middle east concerns
CRUDE OIL
Middle East tension pushes crude higher
Prices end marginally higher for the week
Geo political tensions in Iran and Nigeria and a lower dollar pushed up crude prices on Friday, Friday, 11 July, 2008. Israel launching an attack on Iran and worries that supplies in Nigeria and Brazil may be disrupted, sent crude prices soaring. Traders also continued to worry about slowing demand and continued selling despite a sharp drop in U.S. inventories. Prices nevertheless ended the volatile week with marginal gains.
Crude-oil futures for light sweet crude for August delivery today closed at $145.08/barrel (higher by $3.43/barrel or 2.4%) on the New York Mercantile Exchange. For the week, prices gained $0.21 (0.2%). A day earlier, on Thursday, 10 July, crude rose by almost $6 at one shot today in the final hour of trading after trading around $2 higher in the previous hours.
Crude prices gained 38% in the second quarter of this year. It was the biggest quarterly increase in nine years. It ended June 2008 higher by 9.9%. Prices are 105% higher than a year ago. For the year, crude is up by 44% till date.
It was reported on Friday that Iran test fired more missiles on Thursday, after testing missiles the day before that could reach Israel. Iran is the world's fourth-largest exporter of crude oil.
At the currency markets on Friday, the dollar lost ground against other major currencies on rising geopolitical risk and renewed credit worries. The dollar index which tracks the greenback against a basket of major currencies, fell 0.6% to stand lately at 72.03.
EIA reported earlier during the week that crude inventories fell 5.9 million barrels in the week ended 4 July to stand at 293.9 million barrels. Daily crude imports averaged 9.5 million barrels last week, down 621,000 barrels from the previous week. U.S. refineries operated at 89.2% of their operable capacity last week, unchanged from the previous week.
EIA also reported that U.S. gasoline supplies rose by 900,000 barrels in the latest week, while distillates rose by 1.8 million barrels.
Against this backdrop, August reformulated gasoline rose 5.23 cents, or 1.5%, to $3.56 a gallon and August heating oil added 3.92 cents, or 1%, to $4.08 a gallon. Natural gas for August delivery, however, reversed earlier gains and fell 40 cents, or 3.3%, to $11.90 per million British thermal units.
Executive Summary
Crude prices showed immense volatility during the week that ended on Friday, 11 July, 2008. Prices gave up more than $9 during the first two days of the week. But then, it touched a all time high price of $147/barrel. It also gained $9.03 during the last two days of the week. For the week, it ended higher by a marginal 21 cents.
Prices fell during the first part of the week due to the strong dollar. But then, it gained back all of its losses after Middle East tensions cropped up between Iran and Israel and also on weekly inventory report from the Energy department.
The Paris based International Energy Agency (IEA) said during the week that it expects 2009 global energy demand to rise 1% from 2008 levels. Robust growth in developing economies will more than offset demand contractions in developed countries.
The IEA also said that the bunching of new projects and Saudi Arabia's pledge for 250,000 barrels a day in additional production should lead to an increase in spare capacity for crude oil next year. But it said current high prices are not just about tight crude supplies, pointing to refinery capacity as another major contributor.
US Markets end with modest losses
Dow sinks below the 11,000 level for the first time in two years
US Market ended the week on Friday, 11 July with moderate losses. But it was the financial sector and the rising crude price that played the role of major villains for the indices registering losses. Upbeat announcement from a major retailer and encouraging economic data were the major reasons as to why the losses were restricted to modest levels.
The Dow Jones Industrial Average lost 188 points for the week to end at 11,100. Tech - heavy Nasdaq lost 6.3 points at 2,239. S&P 500 shed 23.4 points to end at 1,239. In percentage terms, Dow, S&P 500 and Nasdaq lost 1.7%, 1.9% and 0.3% respectively. The Dow fell below the 11,000 level for the first time in two years.
The financial sector came under severe pressure after Fannie Mae and Freddie Mac were two notable laggards in the sector. The two stocks encountered selling pressure throughout the week on news that accounting changes could force the companies to bring off-balance sheet assets on to their books, thus requiring large capital raises. In fact things worsened on reports that the executive branch has been discussing a plan for the government to take over either one or both of them if conditions worsened. It was only during the end of the week when a Reuters source indicated the two lenders would have access to the Fed’s discount window did the stocks rally into the green.
Crude prices showed immense volatility during the week. Prices gave up more than $9 during the first two days of the week. But then, it touched an all time high price of $147/barrel. It also gained $9.03 during the last two days of the week. For the week, it ended higher by a marginal 21 cents and ended around $145/barrel.
Crude prices fell during the first part of the week due to the strong dollar. But then, it gained back all of its losses after Middle East tensions cropped up between Iran and Israel and also on weekly inventory report from the Energy department.
Dow component Alcoa marked the start of second quarter earnings season. The aluminum company reported a drop in earnings due to high energy costs, but the results met Wall Street's forecast. GE also reported earnings in line with expectations.
Wal-Mart reported during the week that June same-store sales were up 5.8% thanks to bargain-hunting consumers. In turn, Wal-Mart raised its second quarter earnings outlook also. This gave the bulls a good reason to come to the forefront during the middle of the week.
In other economic news, the National Association of Realtors reported that May pending home sales fell 4.7%, which is slightly more than the expected decline of 2.8%. However, April was revised higher to a gain of 7.1% from a rise of 6.3%. The data indicated that that the home sales market is still weak, but is not deteriorating at the same rate as in 2007.
Separately, weekly initial claims dropped 58K to 346K, well below the consensus estimate of 395K. The two-week average of 375K put claims at a level that was witnessed in mid-March, so it can be said the claims level is fairly stable.
Cisco Systems weighed heavily on the technology sector during the week after the stock fell to a new 52 week low after UBS said that Cisco faces challenges due to slowing sales in the U.S. and Europe.
Among interesting corporate news, Microsoft is reported to be willing to enter discussions with Yahoo! if Yahoo replaces its board of directors. Next, General Electric's NBC Universal is joining Blackstone Group and Bain Capital to purchase The Weather Channel for $3.5 billion. Also, Merrill Lynch might be planning to sell its stakes in holdings like Bloomberg and BlackRock soon which would generate cash to help offset potential write-downs and adjustments.
In the M&A arena, Dow Chemical announced its intent to acquire Rohm & Haas for $78 per share in cash. That price marked a 74% premium for ROH shareholders based on the stock's closing price the day before the deal was announced.
Executive Summary
For the week, indices registered modest losses. In percentage terms, Dow and Nasdaq lost 1.7% and 0.3% respectively. S&P 500 lost 1.9%. It was the battered financial sector and the rising crude price that played the pranks with the market. Government sponsored Freddie Mac and Fannie Mae were reported to be in distressed condition and this worried the investors. On Friday, 11 July, the Dow sank below the 11,000 level during intra day trading for the first time in two years.
For the year, Dow, Nasdaq and S&P 500 are down by 16.3%, 15.6% and 15.6% respectively.
The coming week as a host of important reports both on economic and earnings front. The earnings reporting will kick up several notches with reports from a number of major financial and technology companies. The minutes from the 25 June Federal Open Market Committee (FOMC) meeting will be released and Fed Chairman Bernanke is slated to present his semi-annual testimony before Senate and House committees. Also, on the dock are key inflation reports in the form of the PPI and CPI Indexes, as well as the latest data on retail sales, housing starts and industrial production.
Today's Pick - Alstom Projects
We recommend a sell in Alstom Projects from a short-term perspective. From the charts of Alstom Projects we note that the stock has been on long-term downtrend from its January 2008 high of Rs 1,085 level, forming lower peaks and lower troughs since then.
However, recently the stock found support at Rs 310 level and witnessed a minor corrective up move to Rs 450 level.
The twin resistance at this level (a key resistance level and the long-term down trendline) halted the up trend. Subsequently the stock declined sharply by 6 per cent on July 11.
The daily momentum indicator is falling in the neutral region and the weekly indicator is featuring in the bearish zone.
Considering that the long-term down trendline is intact we are bearish on this stock in the short-term. We expect the stock to decline until it hits our price target of Rs 365 in the forthcoming trading sessions.
Traders with short-term perspective can sell the stock while maintaining stop-loss at Rs 426.
Sunday, July 13, 2008
Tata Power
The Tata Power stock has declined sharply in the ongoing market correction. The stock has shed 40 per cent from the peak registered in early January which is in tune with the erosion suffered by the benchmark Sensex over the same period. At the current price of Rs 975, the stock appears attractive for investments with a long-term perspective. The current price represents a 22 per cent fall since our recommendation to book profits in the stock in mid-November 2007.
Of all the power generation companies now implementing projects, Tata Power is placed best in terms of revenue visibility over the medium-term. Financing and fuel have been tied up already for over half the projected capacity addition in the next five years while its subsidiaries in transmission and distribution are beginning to contribute handsomely to the consolidated financial picture.
Financial returns from the investment in two Indonesian coal mining companies has started flowing in even as implementation of the 4,000 MW Mundra ultra mega power project is on schedule. Investors would do well to acquire the stock in small lots taking advantage of price weaknesses caused by broad market factors.
Expansion on schedule
The next five years will see Tata Power adding more than 10,000 MW to its existing capacity of a little under 2,500 MW. While the Mundra ultra mega project will contribute 4,000 MW, there are other big capacity projects such as the 1,050 MW Maithon and the 2,400 MW Coastal Maharashtra projects.
The company is well on track to commission the Mundra project by 2012, two years ahead of the committed date in 2014. While financing was tied up in April, orders for boilers, turbines and other equipment that have a long lead time have already been placed and civil construction has commenced at the project site.
While fuel will come from the Indonesian acquisitions, Tata Power has also tied up the logistics by setting up a shipping subsidiary in Singapore which will take care of the transportation of coal from Indonesia to Mundra.
Meanwhile, funding for the Maithon project, which is a 74:26 joint venture with Damodar Valley Corporation, has been tied up as also the coal supply. The project is on schedule for a 2011 commissioning. In the current fiscal, Tata Power will be adding about 600 MW of fresh capacity mainly at Jamshedpur (120 MW, 74:26 joint venture with Tata Steel), Trombay (Unit 8, 250 MW) and Haldia (120 MW). The full impact of the cash flows from these projects will be felt from 2009-10. Projects adding up to another 5,670 MW are at advanced stages of finalisation.
With funding, fuel and customers tied up for more than 5,000 MW of projects under implementation, visibility in revenues and earnings is high.
Subsidiary strengths
Two of Tata Power’s subsidiaries — Powerlinks Transmission, the 51:49 joint venture with Power Grid Corporation that operates the transmission line from the Tala hydroelectric project in Bhutan and North Delhi Power Ltd., the 51:49 joint venture with Delhi Vidyut Praday Nigam which is a distribution licensee in Delhi — have begun to contribute significantly to the consolidated financials.
In 2007-08, North Delhi Power’s post-tax earnings rose by 52 per cent to Rs 282 crore while revenues increased by 11 per cent to Rs 2,287 crore.
The company earned a hefty Rs 53 crore incentive by reducing aggregate technical and commercial losses in its licence area to 18.4 per cent, which is considerably lower than what was mandated. Similarly, Powerlinks turned in a net profit of Rs 58 crore on revenues of Rs 245 crore in 2007-08.
The two Indonesian coal companies chipped in with a handy dividend of more than Rs 300 crore ($75 million); they contributed about 17 per cent to the consolidated post-tax earnings.
The dividends will be useful to service the large debt incurred for the acquisition. Given the rising prices of thermal coal, Tata Power stands to gain significantly from its investment in the Indonesian companies financially.
Tripwire
The downside to our recommendation stems from possible delays in commissioning the projects that are under implementation and on the drawing board. Project schedules could go haywire if there is a delay in delivery of critical equipment, which is something not in the control of the company.
There is also the risk that given the rising interest cost regime worldwide, Tata Power will have to service costlier loans. About Rs 18,000 crore of the total capital requirement of Rs 24,000 crore over the next five years will be funded by debt, domestic and overseas.
The company may be forced to contract loans at a higher rate than what it had bargained for, leading to pressure on cash flows, especially in projects that will operate on a merchant basis.
CII - remove obstactles for investment
Industry body CII has asked the government to remove hurdles in investments, improve access to capital, fast-track fiscal reforms and boost infrastructure building in the wake of slowing industrial production as indicated by IIP figures for May.
CII has expressed its concern over fall in industrial production to 3.8 percent, as this is for the first time IIP growth has fallen to such a low rate since March-2002, CII said in a release.
"It seems that the period of robust 8 percent plus growth of the last four years is coming to an end," the chamber said.
Rising interest rates continued to hit industry as its growth plummeted to 3.8 percent in may against 10.6 percent a year-ago and manufacturing and electricity generation rose by a decelerated rate.
This is the second month in a row this fiscal that the industry performed poorly with industrial growth, as reflected by the index of industrial production (IIP), dipping to 5 percent in April-May against 10.9 percent a year-ago.
"The distinct possibility has arisen that growth will be below potential in the near term," CII said and added that average growth in April-May 2008 was 5 percent down from 10.9 percent in the previous year.
"The slowdown in capital goods is especially worrisome as it indicates slower growth in investment demand. While the other sectors have been slowing down through last year, growth in the capital goods sector had remained strong," it said.
"CII appreciates the dilemma that this causes in the minds of the government and the Reserve Bank of India regarding how to balance the objectives of robust growth and low inflation," it added.
Glenmark Pharma
Investors with a low-risk appetite can avoid taking fresh exposures in the stock of Glenmark Pharmaceuticals at the current levels (Rs 630), given its rich valuations. Glenmark, an integrated pharma major with capabilities in drug discovery and manufacture of finished medicine dosages, has grown its revenues by over 40 per cent and profits by over 70 per cent compounded annually in the last five years.
Partly due to this robust performance and the fancy for ‘drug discovery plays’, a lot of interest has been built into the stock — it trades at around 21 times its estimated 2008-09 earnings per share — making it highly valued, when seen in comparison with other large-cap pharma companies as well as the benchmark Sensex.
Why hold
Though the outlook on the company is positive, there are two concerns. First, on how the distribution of benefits from the reorganisation of Glenmark’s businesses, are going to take shape. The company plans to have two separate companies focussing on speciality and generics. The specialty business will include the discovery and branded business (under Glenmark) while the generics business (housed under Glenmark Generics) will comprise bulk drugs, generic business in the EU and the US, Argentina oncology business as well as a research-based division focused on API and formulation development. Glenmark has already got approval to transfer these businesses for not less than Rs 698 crore to its subsidiary Glenmark Generics, where Glenmark holds 90 per cent and the balance is held by another wholly owned subsidiary. It remains to be seen how Glenmark will utilise the money, as and when it receives the full consideration. Shareholders may benefit from the proposed IPO (of Glenmark Generics), likely to occur later this year, as Glenmark dilutes its holding.
However, they are unlikely to receive any shares as witnessed in de-mergers of companies in the pharma space. While this reorganisation may give both the companies better valuations, on a standalone basis Glenmark will have to make up for the 30 per cent revenue, which are going into Glenmark Generics.
Secondly, even though Glenmark has broadened its drug discovery portfolio (13 in discovery pipeline) and its base business has witnessed major traction in the US and Latin America, Glenmark currently is not a straight-forward investment decision. The sheer presence of the element of drug discovery adds a threat, as does the failure of any molecule, affecting future milestone payments (over $700 million). Plus, compared to generic players of similar size, Glenmark’s front-ended presence is weak and efforts to build its own (Glenmark Generics will have to build capabilities also) could weigh on earnings. Execution will remain a key, especially in regulated markets.
Business profile
Glenmark’s business does present quite a few positives. Its businesses — specialty/proprietary as well as generics — makes it an end-to-end specialty company and integrated generic formulation maker.
Glenmark has also delivered strongly on earnings as well as guidance. Its 2007-08 core revenues grew by 62 per cent, driving profits by over 100 per cent on a year-on-year basis. The US generic business was a key driver (enjoying exclusive products and limited competition). Operating margins expanded by 7.5 per cent to 40 per cent. The outlook is strong with management now guiding sales growth of over 35 per cent for both 2008-09 and 2009-10.
In the 12-15 month horizon, the Glenmark stock could see potential triggers from out-licensing deals, ‘value unlocking’ from Glenmark Generics listing and acquisitions in the EU and the US. However, there continue to be certain areas that may pose challenges.
Glenmark’s US business, which focusses on niche segments, may not find ramping up drug filings that easy over the next two years (currently has 61 approvals). Drug filings translate to approvals needed for selling drugs in the US.
The company’s target to file 25 filings this year, if achieved, would swell the R&D spend, thereby putting pressure on margins. As stated earlier, Glenmark’s R&D capabilities appear to be its key attraction. Having forged four deals, plans to bring eight molecules to the lab by next fiscal and targeting different therapeutic areas — every molecule, including the ones already under work — look promising.
This said, world over most molecules fail to make it to commercialisation in the later stages and in this context, uncertainties associated with research should be assessed.
While early-stage development-linked milestone payments (around $110 million till now) will be retained in an event of a failure, a few more instances reputation could however take a beating.
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