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Monday, February 22, 2010
Volatile precious metals end higher
Prices recover from intra day lows despite strong dollar
Yellow metal prices pared earlier losses and ended higher on Friday, 19 February 2010. Prices were volatile as Fed decided to hike its discount rate after a long time leading to speculation about withdrawal of stimulus package. The dollar rose to nine-month highs on Friday once again.
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, gold for April delivery ended at $1,122.1 an ounce, higher by $3.4 (0.3%) an ounce on the New York Mercantile Exchange. During intra day trading, it fell to a low of $1,099.3. For the week, gold gained 3.1%. For January 2010, gold lost 1.2%. Year to date, gold is higher by 2.5%.
On Friday, March Comex silver futures ended higher by 2.5 cents (0.2%) at $16.085 an ounce. For the week, silver ended higher by 4.1%. In January 2010, silver shed 3.9%. Year to date in FY 2010, silver has dropped by almost 0.7%.
In the currency market on Friday, the dollar index, which weighs the strength of dollar against the basket of six other currencies rose by almost 0.3%.
Among economic report scheduled for the day, The Labor Department in US reported Friday, 19 February 2010 that core consumer prices fell 0.1% in January, the first such decline since 1982.
The World Gold Council reported during the week that demand for gold climbed 2.6% in the fourth quarter from the prior three-month period. Gold consumption increased to 819.7 metric tons with prices averaging 15% more on a quarter-to-quarter basis. Conversely, demand for gold fell 24% in the fourth quarter from a year ago, and was down 11% in 2009 versus the year earlier.
Gold had ended FY 2009 higher by 24%. Silver futures had ended 2009 up 50%. The dollar index had lost 4.2% against its counterparts last year.
Last year, after hitting a low at $807.30 per ounce on 15 January 2009, gold futures rallied almost 51% to hit an all-time high at $1217.40 per ounce during early December of 2009 but fell from those levels at the end. Silver futures had hit a low at $10.42 on 15 January 2009 and hit a high at $19.30 per ounce on 2 December 2009. Like gold, silver also ended lower than its all time high level.
Crude registers good weekly gains
Crude still stays a little shy of $80
Crude prices ended higher on Friday, 19 February 2010. Prices were volatile and pared earlier losses as Fed decided to hike its discount rate after a long time leading to speculation about withdrawal of stimulus package. The dollar rose to nine-month highs on Friday once again.
On Friday, crude-oil futures for light sweet crude for March delivery closed at $79.81/barrel (higher by $0.75 or 0.9%). During intra day trading, prices fell to a low of $77.76. For the week, crude gained 7.7%. In January 2010, crude ended lower by 8.3%. On a year to date basis, crude is higher by 0.8%.
In the currency market on Friday, the dollar index, which weighs the strength of dollar against the basket of six other currencies rose by almost 0.3%.
Among economic report scheduled for the day, The Labor Department in US reported Friday, 19 February 2010 that core consumer prices fell 0.1% in January, the first such decline since 1982.
The EIA reported earlier during the week that U.S. crude stockpiles rose by 3.1 million barrels in the week ended 12 February. The EIA also said gasoline supplies rose by 1.62 million barrels, more than the 1.5 million barrels forecast. However, distillates fell by 2.94 million barrels on the week, far greater than the 1.6 million barrels expected.
Among other energy products on Friday, gasoline rose 1.65 cents, or 0.8% to end the session at $2.0857 a gallon in New York.
Natural gas fell to its lowest price in 10 weeks in New York on Friday anticipation of milder weather that would cut demand for the heating fuel. Natural gas for March delivery fell 12.8 cents, or 2.5% to settle at $5.044 per million British thermal units. Gas fell 7.8% this week.
Onmobile Global
Investors with a two-year horizon can retain the shares of Onmobile Global Services, a mobile value-added services provider, given the strong revenue growth in lucrative overseas markets that are likely to kick in over the next 12-18 months. Its model of driving international growth by targeting multi-year, multi-country implementations for large operators such as Vodafone and Telefonica provides long-term revenue visibility. Onmobile is looking at targeting a few more deals of this kind.
At Rs 382, the stock trades at 24 times its likely FY11 per share earnings. Though there are no strictly comparable listed peers, the valuation is at a premium to the broader markets. But given that Onmobile is set to expand its international footprint, through large executions for top mobile operators to nearly 50 per cent over the next 2-3 years, nearly double that of current levels, its revenues and margins are set to expand significantly. There is thus scope for capital appreciation over the next few years. Investors may also choose to accumulate the stock in declines linked to the broader market.
This apart, its strong presence in India continues with deals with most of large incumbent operators, though, due to the ongoing tariff war, there could be some hitches in driving ARPU (average revenue per user) for operators.
In FY09, OnMobile's revenues grew by 55.2 per cent to Rs 406.3 crore, while net profits grew by 41.3 per cent to Rs 85.2 crore over FY08.
In the recent December quarter, the company saw its revenues grow by 6.3 per cent sequentially to Rs 115.5 crore, while net margin increased from 8.6 per cent to 10.9 per cent.
International footprint
OnMobile's deal with Telefonica for deployment of value-added services to the latter in Latin America provides further thrust to its expanding global footprint. The company will be deploying value-added services covering 130 million of Telefonica's subscribers across 13 countries.
The company expects this deal to contribute a third to 40 per cent of revenues in the next 3-4 years.
Latin America has a mobile penetration of over 83 per cent, which creates a larger market for selling VAS products. The deal with Telefonica envisages delivery of services such as ring-back tone, music search and soccer portal for its subscribers.
Soccer is a highly popular sport there and is expected to generate rich interest in related mobile value-added services .
Telefonica's subscribers in countries such as Brazil, Mexico, Chile, Argentina, and Venezuela, its key markets, generate high ARPU of $10-30, which is substantially higher than the $5-6 that the Indian market generates .
The revenue share with operators such as Telefonica would thus be more lucrative for OnMobile.
The company had earlier won a contract with Vodafone to deploy its VAS products in many emerging markets such as Eastern Europe, Africa and Latin America. The deal, over a three-year period, is expected to contribute 25-30 per cent of OnMobile's overall revenues. The revenues from these deals are set to flow in from late 2010-2011.
These projects would ensure that OnMobile will be able to develop high-level implementation expertise. The company is negotiating 3-4 of such large deals currently and hopes to convert some of them.
Domestically, the company caters to most of the top operators in the country. Though the current tariff war may strain the potential of deriving value-added services revenues, the arrival of newer operators may result in prospective new clients and drive volumes for the company. These apart, the company is also looking at increasing its footprint by delivering value-added services to social networking sites, which is another rapidly expanding space.
Risks
The company recently got the approval to raise Rs 1,000 crore for funding the capex of any large deals that it may enter into or for any large acquisition. A part of this (around Rs 300 crore) could be through equity, which means significant equity dilution for Onmobile.
Unitech
Strong demand, ramp up in execution and a fortified balance sheet augur well for Unitech's earnings growth for the next 2-3 years.
Investors can consider buying the stock of this real estate developer. At the current market price of Rs 70, the company's stock discounts its expected consolidated per share earnings for FY-12 by nine times. If the current revival does not witness any major speed-breakers, we expect Unitech's revenues to grow by over 50 per cent annually over the next two years to FY-12.
Unitech has had an impressive fiscal year, selling over 50 per cent of the 24.4 million sq ft of projects it launched. In terms of value, this would convert to Rs 5,550 crore of booking, much of it expected to convert into revenue over the next two years (as revenues are accounted for based on completion). Most of the sales came from the residential segment, which had a mix of high end and mid-sized homes.
The pace of booking, added to the fact that most of the projects are located in places such as Gurgaon, Noida and Mumbai – markets that have shown decisive signs of revival – provide comfort on the likelihood of absorption of these properties.
The massive launch has, however, raised concerns over Unitech's execution capabilities. Apart from increasing the work force to about 20,000, that construction work has commenced in over 53 per cent of the recent launches shows progress on execution.
Faster execution has also accelerated the pace of bringing revenue to books. In the latest ended quarter, Unitech's consolidated revenue at Rs 775 crore was 58 per cent higher than year ago numbers; sequentially too, sales grew by 53 per cent. But operating profit margins of Unitech suddenly crashed to 24 per cent (from 50 per cent levels).
The company attributed this to cost hikes – a result of construction delays during the slowdown period – being accounted now. While these margins may not be a continuing feature, we expect margins to come down to 30-35 per cent levels, as budget homes start contributing significantly to revenues.
However, Unitech's recent tie-up with local Mumbai players for slum rehabilitation projects with an estimated saleable area of 42 million sq. ft, if successful, holds potential to prop profit margins to earlier levels.
Unitech's debt restructuring and equity addition together resulted in bringing down its debt:equity ratio to 0.5 from 1.5 a year ago. With projects in full swing, advances from customers (at Rs 7,730 crore) may help meet the working capital requirement.
Sunday, February 21, 2010
REC FPO Review
Investors can subscribe to the follow-on offer from Rural Electrification Corporation (REC), as the valuation at which the offer is made is reasonable in the light of the strong earnings visibility and growth expectations. REC, which specialises in financing power projects, is witnessing a huge and sustainable demand for funds, which would drive loan book growth for the next few years.
Superior net interest margins (NIM) of 4.54 per cent, despite secured lending, continue to aid profit growth. High return on net worth (21 per cent estimated for the fiscal ended March, 2010 despite equity expansion), low operating costs, high levels of capital to support the loan growth and near-zero non-performing assets are the key positives. At the offer price of Rs 203, the stock trades at nine times its estimated FY-11 EPS and 1.8 times its expected FY-11 adjusted book value. In book value terms, it is at a slight premium to its peer, Power Finance Corporation. A valuation of nine times earnings is cheap as the company may post an earnings growth of more than 30 per cent annually for the next three years.
Capital augmentation
REC, a navaratna PSU, is tapping the primary markets to augment its capital base to support future loan growth; this in addition to disinvestment of the government's stake. REC is expected to realise more than Rs 2,600 crore from the issue and, as a result, the company's net worth would increase by at least 38 per cent.
However, the dilution in equity base is only 17.39 per cent. We expect no earnings dilution for the current shareholders despite equity expansion, as the company may grow at a higher rate. Assuming a 70:30 debt-equity mix in funding for the upcoming power projects, around Rs 14 lakh crore of debt investment is required for the power sector over the 11th (2007-12) and 12th Plans (20012-17).
This offers immense scope for REC to grow. According to working group report of power projects, REC was to fund 16 per cent of the debt component in the 11th plan.
The company's loan book grew at an annual rate of 24 per cent during the period 2004-09. Even as the loan book expands, we expect the company to grow at a healthy rate (greater than 25 per cent) as the sanctions get converted into disbursements. As new projects get awarded, the sanctions may only increase. REC also plans to diversify into other power-allied activities such as coal mining and equipment financing, which would open up new funding opportunities for the company.
Business
Loans to the power generation segment, as a proportion of total loans, increased to 38 per cent, as of September 30, 2009, from 23 per cent in 2007. Majority of incremental sanctions are arising out of this segment.
Private sector now constitutes only 6 per cent of total loan book. However, this proportion would increase as bulk of capacity additions in 12th plan are being added by private players. This may have a beneficial impact on margins as private sector loans have higher yields compared to loans extended to state owned companies. The company's borrowing profile is pretty much diversified, with 19 per cent raised through 54EC bonds, 20 per cent from bank borrowings and 51 per cent from taxable bonds.
Net profit grew by 29 per cent compounded annually over 2005-09, driven by strong disbursements and improved NIM. For the nine months ended December 31, 2009, net profits grew by 62 per cent.
NIMs may moderate as rates harden, as majority of loans disbursed are fixed in nature. However, REC would continue to maintain superior margins within the financial services space thanks to its access to low cost funds..
Few risks
Delays in power projects could lead to rescheduling of loans; REC has 3.31 per cent of its total loan book as rescheduled loans which would delay the cash flows.
The cost of fund advantageis falling by the quarter as the 54EC proportion bonds, as a share of funding, is declining. The key upside risk is the allowance of government to raise tax-free bonds to bridge the funding gap in the power sector.
Vascon Engineers slips on listing
Vascon Engineers Ltd., an engineering, procurement and construction (EPC) services and real estate development company, closed the maiden trading day on the bourses at Rs146.45, down 11.24% to its issue price of Rs165. It touched an intraday low of Rs145.10 and high of Rs171.95 on the NSE. Traded volume stood at 94,70,462 shares and the turnover was Rs1.44bn. On the BSE, the stock touched a day's high of Rs173.45 and low of Rs144, before closing at Rs147.20, down 10.8%. The public issue of 10,800,000 equity shares was opened for subscription between January 27 and January 29 at a price band of Rs165-185 and was subscribed 1.22 times. The company raised Rs1.78bn from the IPO, which will be used for construction of EPC contracts and real estate development projects; repayment of debt and general corporate purposes.
BOJ leaves key rate unchanged
As widely expected, the Bank of Japan (BOJ) left its benchmark interest rate unchanged at 0.1%. The policy-setting board of Japan's central bank voted unanimously to leave borrowing costs steady. The BOJ also maintained its overall view for the world's second-largest economy, and didn't issue any new policy initiatives, though it repeated the pledge to do all it could to pull Japan out of deflation. The policy board kept the loan facility for commercial banks and monthly purchases of government bonds unchanged, keeping the powder dry just in case it faces dire situation on deflation going forward.
Given the fiscal deterioration, the BOJ will face increasing pressure to tackle deflation. Prime Minister Yukio Hatoyama’s government may find little room to maneuver fiscal spending and instead put more heat on the central bank to prop up the economy ahead of a July election. Finance Minister Naoto Kan said this week in parliament that Japan should adopt a policy target of achieving 1% inflation and the government wants to work with the bank to spur prices.
The policy board kept its assessment of the Japanese economy unchanged at the meeting, saying that it is picking up. There is not yet sufficient momentum to support a self-sustaining recovery, the BOJ said. It also reiterated that beating deflation is a critical challenge for the economy and the bank will aim to maintain the extremely accommodative financial environment.
Toyota head agrees to testify before US Congress
Toyota Motor Corp. President Akio Toyoda finally agreed to testify before the US Congress about the Japanese car maker's recent safety recalls. Toyoda, who had earlier suggested that he would not attend hearings on his company's recall of over 8 million vehicles, said in a public statement that he has accepted an invitation to testify sent by Edolphus Towns, chairman of the House Oversight and Government Reform Committee. "I have received Congressman Towns' invitation to testify before the House Committee on Oversight and Government Reform on Feb. 24 and I accept," Toyoda said in a statement. "I look forward to speaking directly with Congress and the American people," he said. Toyoda's comments came after the US Transportation Secretary Ray LaHood said that the Japanese auto giant was "a little safety deaf" as problems with various models surfaced. Earlier this week, the US ordered Toyota to hand over internal documents related to its recalls. US car-safety watchdog asked Toyota to provide documents for its investigation into whether the Japanese carmaker’s recent huge recall was conducted in a timely manner. The company said that it would co-operate fully. Meanwhile, problems got compounded for Toyota, this time with the steering on the Corolla.
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