Weekly Watch - March 7 2009
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Monday, March 09, 2009
India Votes 2009 - Congress surges, BJP loses ground
The DP Poll is seeing changes ! Congress/UPA for the first time has overtaken BJP/NDA
Current stats show 299 votes for Congress to 292 votes to BJP - Khichidi parties have lost ground further!
If you haven't, vote NOW! - Poll on the right top of this page!
Bullion metals rise for second straight day
Silver manages weekly gain though gold remains unchanged
After eight days of drop, bullion metals prices rose for second straight day on Friday, 06 March, 2009. Prices rose as stock prices remained suppressed due to the job report from the Labor Department increasing the appeal of the precious metals.
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 and also vice versa.
On Friday, Comex Gold for April delivery rose $14.9 (1.6%) to close at $942.7 an ounce on the New York Mercantile Exchange. For the week, the yellow metal remained almost nchanged. For the month of February, gold ended higher by 7.4%. For January, 2009, gold had gained 3.9%. Year to date, gold prices are higher by 6.4%.
On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped somewhat (8.9%) since then.
On Friday, Comex silver futures for March delivery rose 21.3 cents (1.6%) to end at $13.333 an ounce. For the week, silver rose 1.7%. In February, 2009, silver had rose 4.3% after climbing 14% in January. Year to date, silver has climbed 20.3% this year. For 2008, silver had lost 24%.
US stocks managed to stay somewhat steady on Friday even after Labor Department announced that the number of jobs lost totaled 651,000 in February, which matched expectations, but previous months were revised downward to show sharper losses. The unemployment rate, however, rose to 8.1% from 7.6%, which was worse than the expected reading of 7.9%.
In 2008, gold prices ended higher by 5.5%. The dollar index had gained 12% that year.
Last year, the weakening dollar and higher global demand for raw materials had led to records for commodities including gold. Gold reached a record in March 2008 as a U.S. housing slump and credit crisis spurred the Federal Reserve to slash borrowing costs. In the last move, the Federal Reserve has cuts its target bank lending rate to 0.25% from 5.25% in September, 2007. The Fed did it in nine steps.
Prior to 2008, gold had witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (31%) in FY 2007 as lower interest rates had sent the dollar tumbling, and crude-oil prices rose to a record. Silver had climbed 16% in FY 2007. In 2006, silver had jumped 46% while gold gained 23%.
At the MCX, gold prices for April delivery closed higher by Rs 406 (2.7%) at Rs 15,397 per 10 grams. Prices rose to a high of Rs 15,429 per 10 grams and fell to a low of Rs 15,008 per 10 grams during the day's trading.
At the MCX, silver prices for May delivery closed Rs 572 (2.6%) higher at Rs 22,424/Kg. Prices opened at Rs 22,051/kg and rose to a high of Rs 22,488/Kg during the day's trading.
Crude shoots up
Prices rose due to weak dollar
Crude prices rose on Friday, 06 March, 2009 as the dollar weakened and traders continued to mull over further announcements of output cuts by OPEC this month.
On Friday, crude-oil futures for light sweet crude for April delivery closed at $45.52/barrel (higher by $1.91 or 4.4%) on the New York Mercantile Exchange. For the week, crude ended higher by 1.7%. For the month of February, crude prices had ended higher by 1.5%.
Prices reached a high of $147 on 11 July, 2008 but have dropped almost 69% since then. Year to date, in 2009, crude prices are higher by 7.1%. On a yearly basis, crude prices are lower by 62%. In the currency market on Friday, the dollar weakened relatively in comparison with its competitors pushing up crude prices.
US stocks managed to stay somewhat steady on Friday even after Labor Department announced that the number of jobs lost totaled 651,000 in February, which matched expectations, but previous months were revised downward to show sharper losses. The unemployment rate, however, rose to 8.1% from 7.6%, which was worse than the expected reading of 7.9%.
The EIA had reported earlier during the week that U.S. crude inventories, excluding those in the Strategic Petroleum Reserve, fell by 700,000 barrels in the week ended 27 February, 2009. Market was expecting an increase of 2.2 million barrels. U.S. refiners operated at 83.1% of their operable capacity last week, up from the 81.4% a week ago. The EIA also reported gasoline inventories rose by 200,000 barrels, and distillate stockpiles, which include diesel and heating oil, rose 1.7 million barrels.
Prices had been sliding since past couple of months after fear gripped the US economy that US banks might be nationalized.
OPEC has been trying to cut production consistently in order to step up prices from their current low levels. There has been conflicting reports in the market regarding the fact that OPEC is likely to reduce output in March, 2009. OPEC has already agreed to cut cartel quotas by 4.2 million barrels a day since September, equivalent to about 5% of global oil demand. The cartel is supposed to meet on 15 March at Vienna.
Also at the Nymex on Friday, April reformulated gasoline rose 1.5% to $1.3322 a gallon and April heating oil jumped 6% to $1.2294 a gallon.
April natural-gas futures fell 3.5% to $3.945 per million British thermal units.
Crude prices had ended FY 2008 lower by 54%, the largest yearly loss since trading began at Nymex.
Zee News
Investors with a two-year horizon can consider accumulating the shares of Zee News (Zee), a news and regional entertainment broadcaster, considering the leading viewer-ship position for several of its channels and strength in subscription-driven revenues.
At Rs 29, the stock trades at about 12 times its likely 2009-10 per share earnings. The current valuation may make the stock appear pricey. But since its independent existence from 2006, the company has seen triple-digit compounded annual growth in revenues and profits. The fact that it is among the few broadcasters that are profitable enables the company to command higher valuations.
Even in the recent December quarter, when broadcasters had revenue declines over the previous year, Zee was able to achieve 45.4 per cent growth in revenues and 18.4 per cent growth in net profits.
A strong regional language general entertainment offering, with either leadership or strong positions in most of this genre continues to help the company unstring purses of regional and national advertisers.
The company derives over 75 per cent of its revenues from advertising. This has actually grown by 10 per cent sequentially even in the most turbulent December quarter. But with the current economic slowdown, advertising budgets of companies are likely to remain under pressure in the medium term.
A recent study by FICCI-KPMG indicates that television advertising revenues are likely to grow from Rs 8250 crore currently, at a compounded annual rate of 13.5 per cent over the next four years to Rs 15,550 crore. There are, however, some near-term triggers.
With the general elections scheduled in April-May, political parties may step up spending on campaigns for better reach.
Regional GEC leadership
Zee has a combination of national news and regional general entertainment channels in its bouquet. Zee Business, its Hindi news channel, commands a 40 per cent viewership share (the rest is taken by CNBC Awaaz).
Zee Marathi and Zee Bangla channels are market leaders in Maharashtra and West Bengal respectively. This position has been maintained despite Star’s launch of channels such as Star Jalsha (Bengali) and Star Pravah(Marathi). Zee, in both these markets, enjoys three-four programmes among the top five viewed, according to TAM and exchange4media ratings.
Even in the south market, which is dominated by the Sun group, Zee has made significant inroads in viewership.
Zee Telugu is now second behind Gemini TV, and has two in the top five viewed programmes. Zee Kanada is in the third position after Udaya TV and ETV Kannada.
These are positives for Zee on many counts.
One, it shows that by adopting the innovative programming route, its channels have been able to penetrate markets that have one or more dominant players.
Two, unlike several broadcasters that are focussed on English News or Hindi general entertainment category, Zee has a wider reach through its regional channels, which would help it garner advertisement revenues from regional companies in addition to ones of national prominence.
Three, there is no dependence on any one channel for advertisement revenues, as five of its channels are in a position to monetise prominent positioning in their respective markets.
The company has also been quick to take unviable channels off air quickly.
A case in point being that the company would shut down Zee Gujarathi from April this year.
There are a slew of channel launches in regional entertainment and 24-hour news categories. These new channels are expected to result in a loss of Rs 70 crore this fiscal.
Subscription spikes
Digital subscription revenues for Zee contribute over 17 per cent to its overall revenues. Over the last one year, subscription revenues have grown by over 45 per cent. This may further ease revenue dependence on advertising alone.
Conditional access system or viewing satellite channels through set-top boxes may continue to grow over the next few years. The Telecom Regulatory Authority of India has made conditional access mandatory in 55 cities across the country by 2011.
This will mean better reporting of revenues by cable operators and, in turn, a better share of revenue for broadcasters such as Zee. The FICCI-KPMG study indicates that there would be 35 million digital cable houses, apart from 55 million analogue ones by 2013.
Besides, the steady headway of DTH as a delivery platform is also a positive for Zee. By end-2008, the country had as many as 10 million subscribers on this platform; this is estimated to go up to 16 million by 2009.
Apart from Dish TV and Tata Sky which are established players in DTH, new entrants such as Reliance-Big TV and others such as Sun Direct and Bharti Airtel may help expand the overall DTH pie.
All these ensure a larger opportunity for the company to garner higher subscription revenues.
Suzlon Energy
Investors with an over three-year perspective can consider accumulating the stock of Suzlon Energy. While there is no denying that Suzlon is the least decoupled from the global slowdown and is also plagued by internal challenges such as the defective blade issue and funding for acquisition, its current valuations have clearly factored in more negatives than perhaps exist now.
The huge potential for renewable energy in the long term and the company’s sound business strategy to tap global opportunities strengthens the case for buying the stock at rock-bottom valuations. At the current market price of Rs 35, the stock trades at four times its expected earnings for FY-10. Investors may, however, have to be prepared for a sedate performance in FY-09. The high volatility in the stock warrants buying it in small quantities on declines.
Why the poor results
A good part of Suzlon’s recent stock decline occurred after the company’s December quarter results, when it posted losses mainly on account of exceptional items. On a consolidated basis, the company made losses of Rs 34.9 crore mainly on account of notional forex losses and a provision for blade retrofit also amounted to Rs 449 crore.
The defective blade issue: While the first is an accounting treatment to comply with accounting standards, the other expense amounting to Rs 233 crore was incurred as part of its retrofit programme for a particular version (S88 V2) of blades that were found to be defective. The provision made was on account of higher cost of replacement as a result of longer period to find the root cause before rectification.
The company has stated that most of the provisioning is done with and nothing significant may have to be provided for in the coming months. Further, as the company has already moved ahead to the next version (V3) and installed the same without any reported cases of defect over the past one year, we believe this provisioning is unlikely to extend much in to the future.
Acquisition-related debt: High interest costs, mostly on account of acquisition-related debt, have also resulted in a strain on profits. However, the company is likely to retire about Rs 250 crore of the acquisition debt in 2009 and one more tranche by June and September. The company intends to repay these amounts partly through the recent stake sale in its subsidiary, Hansen Transmission, which resulted in cash inflows of Rs 550 crore. With this, we expect the debt-equity ratio to reduce to at least 0.8:1 from 1:1 at present.
Leaving alone these two factors, the company’s operations have remained fairly healthy. The Suzlon group alone witnessed a good 53 per cent increase in operating profits for the December 2008 quarter compared to a year ago numbers.
Operating profit margins too expanded by a marginal 30 basis points to 12.8 per cent for the same group (the fully consolidated numbers are not comparable as a result of REpower’s inclusion in the December 08 quarter).
Working capital: Suzlon has accumulated huge inventories this quarter, further dragging its working-capital cycle. The build-up can be partly explained by the US slowdown and perhaps the quality concern overhang resulting from the blade defect issue.
Of its current order book of close to 2,200 MW, at least 800 MW is executable in the last quarter of FY09. Such an execution is likely to ease the working capital strain by way of inventory liquidation. The company may also resort to lower advance purchases of components given the global slowdown and reduced demand. Such a move too can improve working capital.
Acquisition concern
Another near-term concern that has been dragging the stock of Suzlon is the means of funding to pay €205 million (Rs 1,332 crore), for Martifer’s stake in REpower over April and May 2009. For now, the company has a three-pronged strategy for the same. One, it hopes to generate part of the amount through funds released from reduced working-capital requirements. Two, a further stake sale in Hansen (but retaining control) is an option. Three, external borrowings may be resorted to.
Plan 1 appears plausible given that reduced inventory and lower commodity prices could well be a reality in the fourth quarter. A stake sale in Hansen is also not impossible given that it can sell up to 10 per cent and yet maintain a 51 per cent stake. A similar stake sale recently brought in about £73 million (Rs 530 crore). Such a strategy would also not materially affect the earnings picture for Suzlon shareholders. The third strategy though may once again bring the debt to less comfortable levels.
That the company has strategies lined up to address the funding concern provides comfort to its ability to tackle adversity. More importantly, the persistence shown by the company in this acquisition, its success in negotiating for a longer payment period with Martifer and its willingness to carry the burden of low-profit margin foreign associates also suggests its seriousness in gaining a foothold in the robust EU wind market.
These moves, though beset with short-term risks, if overcome, could well generate high returns on integration. These are also clear indicators for an investor that the company is pursuing an aggressive growth model and is a high-risk high-return proposition.
Business opportunities
Suzlon has seen a revival in order flows with the recent projects bagged in Australia and China. The company expects to receive at least 1,000 MW of the 2,000 MW of projects that are currently in its pipeline. While markets outside of the US may hold better opportunities in 2009, the US market, once there appears a revival, could yet hold huge potential given the extension of the production tax credits unto 2012 passed by the US Senate. Other incentives include a $7-billion renewable energy loan guarantee programme, an additional year of bonus depreciation and incentives for small wind investments.
The potential in the Indian market too appears enhanced what with a few states offering higher tariffs for captive investment in wind energy. Further, a number of public sector companies such as ONGC, HPCL are starting to invest in renewable energy to meet the Central target.
Weighing the fortunes of the renewable energy based on price of crude oil alone, as the market appears to be doing now, therefore, appears short-sighted. Regulations, incentives and the planned wind energy programmes for various economies in the context of the slowdown, should instead be the deciding factors for assessing the prospects of the wind energy market.
Bharti Airtel
Investments with a one-, two-year horizon may be made in the shares of Bharti Airtel. The company’s continuing leadership in the mobile division, increasing strength of its enterprise carrier division and improvement in the tenancy in its towers suggest that it is well placed to sustain strong earnings growth.
At Rs 602, the stock trades at 11-12 times its likely 2009-10 per share earnings, a steep discount to its historic valuations. Despite a subscriber addition pace of over 2.5 million a month, especially in rural areas, at lower ARPUs (average revenue per user), the company has been able to maintain its EBITDA (earnings before interest, taxes, depreciation and amortisation) margin above 40 per cent.
The company has joined the competition and launched life-time prepaid recharges at Rs 99, which is further expected to augment subscriber additions. Simultaneously, it has rationalised tariffs across the country and removed/reduced free minutes of usage. This has resulted in stabilising realisations per minute at 64-paise levels, though ARPUs are still declining (they remain the highest in the country).
Realisation per minute may be a better metric as it blends minutes of use and revenues generated on an average. Bharti’s mobile subscriber market share has increased by more than a percentage point over the last one year to 24.7 per cent.
The mobile services division may receive a further fillip with the launch of 2G and 3.5G services in Sri Lanka. It remains to be seen if the low-cost model of India is replicated there, but the company rationalised tariffs and made incoming calls free there, which is expected to boost subscriber growth.
This also opens up provisions for increasing ARPUs through value-added services. Bharti’s enterprise carrier division that carries national and international voice and data traffic has been increasing contribution to the company’s revenues (18 per cent currently up from 16 per cent a year ago) and has seen EBITDA margins expand steeply to 45.4 per cent for the latest quarter (up from 32.2 per cent last year). This has been possible due to the fact that the company carries the traffic for several operators, in addition to its own.
The company’s passive infrastructure business is also witnessing increasing action. Tenancy in its towers has over the last three quarters increased from 1.22 to 1.34, as have rentals. Both these divisions have significant opportunities in the form of the entry of several new players entering the fray and incumbent players acquiring a pan-India presence, who will need new towers and require a network to carry voice and data traffic nationally and internationally. The DTH rollout by Bharti, where it adds about one lakh subscribers a month, is another area to watch out. Though this may post losses in initial years, it may be a source of long-term growth.
Geodesic
We recommend a buy in Geodesic from a short-term trading perspective. It is evident from the charts of Geodesic that it was on a medium-term downtrend from its December 2008 high of Rs 95 to late January 2009 low of Rs 38. This low is apparently a 52-week low of the stock. It reversed direction from here and has been on a medium-term uptrend.
On March 6, the stock jumped by 15 per cent, conclusively penetrating its medium-term down trendline. The volume was above average during this jump. Moreover, the stock crossed its 21-day moving average, reinforcing the bullish momentum.
The daily relative strength index (RSI) is rising in the neutral region towards the bullish zone. We notice prolonged positive divergence displayed in weekly RSI. Moving average convergence and divergence indicator is signalling a buy. We are bullish on the stock from a shortterm perspective.
We expect the stock to move up further until it hits our price target of Rs 58 in the upcoming trading sessions.
Traders with short-term perspective can consider buying the stock while maintaining a stop-loss at Rs 49.
Sunday, March 08, 2009
Govt to induct 4 nominees on Maytas Infra board
The Company Law Board (CLB) passed an order on Maytas Infra Ltd. and Maytas Properties Ltd., the two companies promoted by B. Ramalinga Raju, the tainted founder of IT major Satyam Computer Services Ltd. It asked the Government to appoint four nominees on Maytas Infra's board. One of the government's nominee members will be the chairman of Maytas Infra, the CLB said. The Government will have majority representation on Maytas Infra board. The new Maytas Infra board should give a monthly report to the Government, beginning the first week of April, the CLB said in its order. No government agency should initiate any criminal or punitive action against these nominee directors without the prior approval of the CLB, it added. The new Maytas Infra board cannot meet without at least two government nominees, the CLB said. The CLB, which turned down the Centre's petition to supercede Maytas Infra's board, also asked the Government to appoint one director on Maytas Properties' board.
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