Monday, February 28, 2011

Budget - Sectoral Impact

As mentioned in my yesterday's note the fiscal deficit number of 4.6% for FY12 seems good on paper, but, would be hard to achieve. The assumption is a revenue growth of about 18% and expenditure of just about 3.4%. This is at a time when oil prices are threatening to overshoot, the European economies are dilly dallying, there is high food and commodity inflation. Locally, suggested austerity measures have not yielded the desired results. It would indeed be an achievement if the government does achieve the budgetted number!

Given below is a brief of the sectotral impact on the stocks that can be considered within each sector:

SectorKey changesImpactStock bets
AutomobilesReduction in income tax rates, no increase in excise duties, a plusPositiveBajaj, Auto, M & M
Banking & FinanceFiscal consolidation, FII entry in corp bond mkt, hsg loan limitPositiveLIC Housing, SBI
CementChange from specific to ad-valorem -ve, infra focus +veNeutralACC, Shree Cement
Construction/InfraHigh infra focus, significant increase in budget allocationNeutralSadbhav Engg
Engineering Infra focus, incr in defence allocation, cut in import dutiesPositiveBHEL, Tecpro Systems
FMCGRedn in IT rates, high rural developmental thrustPositiveAsian Paints, ITC
ITMAT on SEZ UnitsNegativeInfosys, HCL Tech
MediaNo major changesNeutralDB Corp, HT Media
MetalsExport duty on import of iron ore +/- for metal companiesNeutralTATA Steel, JSW Steel
Oil & GasSEZ Developers to attract MAT, no mention on tax holiday for NELPNegativeCairns India
HealthcareExcise duty hike on APIs and formulations, Serv Tax on hospitalsNeutralSun Pharma, Divis Labs
Real Estate1% int subvention on hsg loans, incr allocation to urban dev.NeutralSobha Dev, Oberoi Rlty
RetailService tax on lease rentals, excise duty on garments/jewelleryNegativeShoppers Stop, Titan
TelecomNo major change except increase in MATNeutralBharti Airtel
UtilitiesSection 80IA extended until 2012PositiveNTPC, Powergrid
On market declines, I would build up positions in businesses that display consistency. For me banking and all agri-related businesses are good investment bets.


India Union Budget - First Take: Nice total, But Defending it would be Difficult

·         In the Union Budget for FY12, the government announced a reduction in the fiscal deficit to 4.6% of GDP from an estimated 5.1% in FY11, without any new tax revenue measures.
·         The net market borrowing of Rs3.4 trillion was also commensurately lower than market expectations, which is   a positive.
·         We think, however, it will be difficult for the deficit targets to be met given that it is based primarily on optimistic revenue buoyancy. We were expecting more substance on the taxation front and more reforms on the subsidy burden to meet the deficit targets.
·         On the reform front, the budget was more positive especially on opening up the capital account and on firm road-maps for the implementation of the GST and the direct tax code.
·         In general, we think the budget is a typical mid-term budget, not too many new proposals. At the margin, we think the budget is an incremental positive for the INR due to the capital account easing measures, negative for bonds and equities given that no new measures have been taken to cut spending and raise taxes.
Taxation measures
  • The taxation measures were based on broad-basing the services tax and excise duties. There were no new taxes or increases in tax rates for indirect taxes.
  • On the direct tax side, the proposals were revenue negative due to the increases in income tax exemption limits.
Expenditure measures
  • The focus of spending increases remains on infrastructure, agriculture—cold storage, distribution, and warehousing, and the social sector.
Reforms—opening up the capital account
  • The government announced two significant reforms which will encourage capital inflows to meet the high current account deficit. First, individual foreign investors can invest in domestic equity mutual funds. It also increased the foreign investor limit on corporate bonds by US$20 billion to US$40 billion from US$20 billion, with the caveat that these be in infrastructure bonds with a minimum residual maturity of 5 years.
  • There were exact time-frames announced for the direct tax code, the Goods and Services Tax, direct cash transfers on fertilizers and fuel, and the awarding of new bank licenses.

Friday, February 25, 2011

Economic Survey - A Brief

“Back to 9%+ Growth Trajectory ; Reform Orientation Lacking”

Indian economy is on firm footing after emerging with remarkable rapidity from the downturn caused by the global financial crisis. With rebound in agriculture sector and resilient services sector, Indian economy is set to grow by 8.6% in FY11 while the prognosis for FY12 is also very promising as the GDP is expected to grow by 9% with a 25bps variation. Some of the key highlights of the Economic Survey released for 2010-11 are reproduced hereunder:

Key Highlights

  • Indian economy is expected to grow by 8.75-9.25% in FY12 reverting to pre-crisis level. Services sector is expected to grow by 9.6% in FY11E against 10.1% in FY10. A sharp deterioration in weather conditions and disproportionate spike in crude prices may slow down the growth momentum in the short run.

  • Deceleration in industry particularly manufacturing is a matter of concern. The impact of favorable monsoon on the domestic demand driven industrial sector has not been discernible particularly in non-durable segment. The medium to long run prospects of the economy including the industrial sector continues to be positive.

  • Savings rate and investment rate have improved to 33.7% and 36.5% in FY10 from earlier slowdowns. As government is implementing a gradual exit from the stimulus package, savings and investment rates are expected to improve further.

  • Inflation remains at the elevated levels largely driven by food articles. A series of structural and macroeconomic steps have been taken to tame the rising food inflation.

  • India’s export may surpass the target of $200 billion in FY11. Exports are picking up and with import growth slowing down, the concerns of the trade deficit have been allayed. However, rising international commodity prices particularly crude poses serious concerns for the trade deficits.

  • Except telecom sector, infrastructure sector has under-achieved the target. During FY08 to FY10, capacity addition has been lower than target in power, roads (NHDP), new railway lines and doubling of railway lines.

  • The fiscal policy is on the track and the fiscal deficit and revenue deficit are estimated at 4.8% and 3.5% respectively in FY11 given rebound in the economic activity. The fiscal deficit is projected at 4.8% in FY12 and 4.1% in FY13.

  • It suggests that the minimum capital requirement for banks should be graded. It also suggest two types of banking licenses- one for providing basic banking to fulfill the obligation of financial inclusion and the other for full banking encompassing all activities of a commercial bank.

  • It advises that full banking license maybe given to industrial and business houses with provision for avoiding conflict of interest issues while MFIs and NBFCs should be considered for basic banking licenses.
(Source: K. R. Choksey Securities)

Responses to investor questions in Business Standard

These are my responses to questions posed by investors, under the aegis of Business Standard. I am posting them on the blog, as these are commonly asked questions by retail investors.

I am a19-year old studying in Mumbai. I work part-time with an advertising agency and earn a stipend of Rs 5,000 monthly. All my expenses are borne by my parents. I would like to start saving and investing my earnings. How can I start?

It is always a good idea to start investing early. Since you donot have to worry about a living and are starting of early, it could be well worth taking higher risk to be able to generate higher return. You could consider investing into a Systematic Investment Plan (SIP) of a mutual fund, every month. The fund that you identify for investing should have a medium to large asset base, should have a fund manager with long term proven track record of consistent above average performance and the sponsors of the company should be credible.

I have been regularly investing in the mutual funds for the past four years (around Rs 40,000 annually via systematic investment plan). My investment advisor suggested I switch some part of this investment to a daily SIP. Do you agree with this advise? What are the advantages of this?
Yes, you should go ahead and invest in a daily SIP. A daily SIP enables you to be more disciplined in not trying to time the market, helps reduce the adverse impact of volatility on your portfolio and is more convenient since the denominations are small. However, please check on the load structure for such SIPs, before investing. Please note that SIPs tend to deliver good returns only over the longer term and hence regular monitoring of your investments may not be helpful.

Is it a advisable to invest in IPOs, specially the PSU ones? I don't have any direct exposure in equities but after the euphoria surrounding the Coal India IPO, I think I missed the opportunity and I would like to invest in the upcoming PSU IPOs? How should I go about it?
Successful investing is all about objectivity and never about emotiveness.  We in India, are blessed with a variety of businesses and are fortunate to be among the countries that have the most number of listed stocks on the exchanges. Hence, an idea missed should encourage you to look for an idea that is even better. One could invest in equities either through the secondary market or the IPOs. The basic rules of investing remain the same irrespective of the medium of investing. While, the humongous success of Coal India has certainly aided the sentiment for PSU stocks, it would be a good idea to evaluate every offering in isolation rather than basing it on a classification. It would be well worth going through the  offer prospectus and understanding the attractiveness of pricing, before taking the plunge. Incase, this effort does not help you in investing, you may seek the help of an expert to enable you to take the decision.

 I invested in a portfolio management service offered by a brokerage house a few months back. Recently, I received a letter from the company informing me about the change in the fee structure. The letter mentioned about 'high watermarking' principle, now being applicable while deciding the charges. Can you explain how this will work? And how will this affect my investments?
A high water mark  principle is often applied to a performance fee calculation. This means that the manager receives performance fees, at the end of the year, only on increases in the net asset value (NAV) of the fund in excess of the highest net asset value it has previously achieved. For example, if a fund were launched at a NAV per unit of Rs. 100, which then rose to Rs. 130 in its first year, a performance fee would be payable on the Rs. 30 return for each unit. If the next year it dropped to Rs. 110, no fee would be payable. If in the third year the NAV per share rose to Rs. 140, a performance fee would be payable only on the Rs. 10 profit from Rs. 130 (the high water mark) to Rs. 140, rather than on the full return during that year from Rs.110 to Rs. 140. High water marks are intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades.  

After the housing loan scam, the real estate company stocks were the worst-hit. However, just a few trading sessions later most of these stocks bounced back. Do you feel this is a positive indication about the sector's financial health? Does it makes sense to invest in scam-tainted sectors like realty, banking and telecommunication?
It would be unwise to paint all companies, in these sectors, with the same brush. There are several companies within them  that are well managed. Real estate companies with low leveraging and better pricing power, should be considered for investment. Investment in the banking sector too should give good returns over the longer term.

I am 35 years old. I have been trading for almost 10 years now and I am quite well versed with the markets. However, so far I have restricted myself to the cash market. Now, I would like to dabble in the futures market. On what basis should I choose the contracts? Are the fundamentals of cash and futures market the same?
The futures & options(F&O) market is very different and much more dynamic, as compared to the cash market. Savvy portfolio managers use this alternative to hedge their portfolios or to benefit from arbitrage opportunities between both the markets. Before dabbling into the F&O market it is suggested that you become aware of the risks associated with these markets.

Experts are often asked on television if they feel the markets have already discounted the FY12 earnings. What exactly does this mean? Does it impact the current market scenario and our investments?
Discounting is a multiple on estimated earnings, book value, cash flows, etc. that is commonly used by market analysts to evaluate the attractiveness of the markets/stocks.  These ratios may be used either in isolation or in conjunction with each other to evaluate the attractiveness. Simplistically speaking, higher the multiple lower is the attractiveness of the markets/stocks and vice versa. However, the appropriateness of the multiple could vary from industry to industry and stock to stock.

I am a 45-year old. My mutual fund portfolio includes three equity-diversified funds, two thematic funds (focused on infrastructure and banking) and two balanced funds. I have a lumpsum amount of Rs 4 lakh to invest and would like to explore some exotic products like fund of funds or feeder funds. Would you advise these funds? How else should I invest the money?
Fund of funds or feeder funds could be used to invest in markets/asset classes/instruments, that cannot be invested into directly. There are several FoFs available for investors that help  invest in international realty funds, gold funds, country funds, etc. They could certainly be considered for optimal diversification of the portfolio.

 I read an article about an investment strategy based on investing in stocks favoured by foreign institutional investors. Do you think it is advisable? Many of the stocks mentioned in the article were B-group stocks. Are these stocks bankable?

It is never a good idea to put one’s own money to work based on someone else’s comfort. Therefore, the best strategy to adopt for stock investing is one that is based on one’s own research. Well-known successful investors follow a research process that helps them buy into businesses that are run by trust-worthy managements, have a balance sheet that is under-leveraged, have a growth track record that is consistently above average, have good liquidity in the stock and the valuations are attractive. Disciplined application of these filters helps such investors make good risk adjusted returns over the longer term.

My investments in the equity market amount to approximately Rs 6 lakh. Since the start of this year, the value of my portfolio got eroded by almost 30 per cent. It has recovered some of the value but not entirely. I want to exit the market and park my funds in safer instruments. How can I do this, ensuring at the same time that my losses are minimal?
Markets tend to move in cycles. After the meltdown post the onset of financial crisis, we had a very strong recovery in 2009 that continued towards the end of 2010. Corrections tend to follow such strong recoveries. The markets would resume their uptrend, post the completion of the current correction. India continues to be a growth engine, for the world. Therefore, it is safe to assume that it will keep on attracting flows. Hence, it would be unwise to exit the market, at these levels. You may want to shuffle your portfolio to make it a portfolio of fundamentally robust stocks. However, if you very keen to exit from the equity markets, please do so during an uptrend, to minimise your losses. The money that you realise from this sale could be redeployed into fixed maturity plans of mutual funds, postal savings, PPFs, or bank fixed deposits.

I want to start investing for my 3-year old daughter. Most people have suggested I opt for mutual funds. But, I have a long investment horizon of almost 15-20 years. Therefore, I want to adopt a more aggressive investment strategy. I want to invest about Rs 10,000 monthly towards this. Which sectors can I consider? Does the systematic investment option offered by some brokers for direct equity investments work well?

Investing in mutual funds, using the SIP route, is perhaps the best way to invest for the long term. You could adopt an aggressive approach by investing in a sectoral,  midcap or a smallcap fund. However, if you do choose to use the stock route for investments, you could look at investing in stocks from sectors like banking, technology, agrochemicals, agro-equipments, auto ancillaries. Here too, the SIP route is advisable. SIPs would help you mitigate the impact of market volatility on your portfolio. 

Thursday, February 24, 2011

A special report on feeding the World - The 9 billion-people question

A brilliant article - on a s subject that I was looking at writing on. A must read!! Rgds..Paras

THE 1.6-hectare (4-acre) Broadbalk field lies in the centre of Rothamsted farm, about 40km (25 miles) north of London. In 1847 the farm’s founder, Sir John Lawes, described its soil as a heavy loam resting on chalk and capable of producing good wheat when well manured. The 2010 harvest did not seem to vindicate his judgment. In the centre of the field the wheat is abundant, yielding 10 tonnes a hectare, one of the highest rates in the world for a commercial crop. But at the western end, near the manor house, it produces only 4 or 5 tonnes a hectare; other, spindlier, plants yield just 1 or 2 tonnes.
Broadbalk is no ordinary field. The first experimental crop of winter wheat was sown there in the autumn of 1843, and for the past 166 years the field, part of the Rothamsted Research station, has been the site of the longest-running continuous agricultural experiment in the world. Now different parts of the field are sown using different practices, making Broadbalk a microcosm of the state of world farming.
The wheat yielding a tonne a hectare is like an African field, and for the same reason: this crop has had no fertiliser, pesticide or anything else applied to it. African farmers are sometimes thought to be somehow responsible for their low yields, but the blame lies with the technology at their disposal. Given the same technology, European and American farmers get the same results.
The wheat bearing 4 or 5 tonnes a hectare is, roughly, like that of the Green Revolution, the transformation of agriculture that swept the world in the 1970s. It has been treated with herbicides and some fertilisers, but not up to the standard of the most recent agronomic practices, nor is it the highest-yielding semi-dwarf wheat variety. This is the crop of the Indian subcontinent and of Argentina.
The extraordinary results in the centre of the field are achieved by using the best plants, fertilisers, fungicides and husbandry. The yield is higher than the national average in Britain, and is as good as it gets.

Seeds of doubt
But the Broadbalk field shows something else. Chart 1 tracks its yields from the start, showing how the three different kinds of wheat farming—African, Green Revolution and modern—have diverged, sometimes quite suddenly: in the 1960s with the introduction of new herbicides for Green Revolution wheat, and in the 1980s with new fungicides and semi-dwarf varieties. Worryingly, though, in the past 15 years the yields of the most productive varieties of wheat in Broadbalk have begun to level out or even fall. The fear is that Broadbalk may prove a microcosm in this respect, too.
At the start of 2011 the food industry is in crisis. World food prices have risen above the peak they reached in early 2008 (see chart 2). That was a time when hundreds of millions of people fell into poverty, food riots were shaking governments in dozens of developing countries, exporters were banning grain sales abroad and “land grabs” carried out by rich grain-importing nations in poor agricultural ones were raising awkward questions about how best to help the poor.
This time, too, there have been export bans, food riots, panic buying and emergency price controls, just as in 2007-08. Fears that drought might ruin the current wheat crop in China, the world’s largest, are sending shock waves through world markets. Discontent over rising bread prices has played a part in the popular uprisings throughout the Middle East. There are differences between the periods, but the fact that agriculture has experienced two big price spikes in under four years suggests that something serious is rattling the world’s food chain.
The food industry has been attracting extra attention of other kinds. For years some of the most popular television programmes in English-speaking countries have been cooking shows. That may point to a healthy interest in food, but then again it may not. The historian Livy thought the Roman empire started to decay when cooks acquired celebrity status.
At a meeting of the Group of Eight (G8) industrial countries in 2009 the assembled leaders put food alongside the global financial crisis on their list of top priorities, promising to find $20 billion for agriculture over three years. This year the current president of the Group of 20 (G20), France’s Nicolas Sarkozy, wants to make food the top priority. The Gates Foundation, the world’s richest charity, which had previously focused on health and development generally, started to concentrate more on feeding the world. At last month’s World Economic Forum, a gathering of businesspeople and policymakers in Davos, 17 global companies launched what they described as “a new vision for agriculture”, promising to do more to promote markets for smallholders—a sign of rising alarm in the private sector.

Anything for dinner?

Some of this public and political attention has been sporadic, but it is justified. An era of cheap food has come to an end. A combination of factors—rising demand in India and China, a dietary shift away from cereals towards meat and vegetables, the increasing use of maize as a fuel, and developments outside agriculture, such as the fall in the dollar—have brought to a close a period starting in the early 1970s in which the real price of staple crops (rice, wheat and maize) fell year after year.
This has come as a shock. By the 1990s most agricultural problems seemed to have been solved. Yields were rising, pests appeared under control and fertilisers were replenishing tired soil. The exciting areas of research in life sciences were no longer plants but things like HIV/AIDS.
The end of the era of cheap food has coincided with growing concern about the prospects of feeding the world. Around the turn of 2011-12 the global population is forecast to rise to 7 billion, stirring Malthusian fears. The price rises have once again plunged into poverty millions of people who spend more than half their income on food. The numbers of those below the poverty level of $1.25 a day, which had been falling consistently in the 1990s, rose sharply in 2007-08. That seems to suggest that the world cannot even feed its current population, let alone the 9 billion expected by 2050. Adding further to the concerns is climate change, of which agriculture is both cause and victim. So how will the world cope in the next four decades?
That question forms the backbone of this special report. The answer to it cannot be a straightforward technical or biological one because food is basic to life. In the Maya creation myth, the first humans were made of maize dough. In the slang of Marathi, a language of west central India, the man on the street is known as “fried bread”—after the workers’ favourite snack.
Because food is so important, agriculture—more than any other form of economic activity—is expected to achieve a series of competing and overlapping goals that change over time and from place to place. The world looks to farmers to do more than just produce food. Agriculture is also central to reducing hunger (which is not quite the same thing) and provides many people’s main route out of poverty. Food is probably the biggest single influence on people’s health, though in radically different ways in poor countries and in rich ones, where the big problem now is obesity. Food is also one of the few pleasures available to the poorest. In the favelas (slums) of São Paulo, the largest city in South America, takeaway pizza parlours are proliferating because many families, who often do not have proper kitchens, now order a pizza at home to celebrate special occasions.
Given these conflicting aims, it is not surprising that the food crisis has produced contradictory accounts of the main problem and radically different proposals for solving it. One group is concerned mainly about feeding the world’s growing population. It argues that high and volatile prices will make the job harder and that more needs to be done to boost supplies through the spread of modern farming, plant research and food processing in poor countries. For those in this group—food companies, plant breeders and international development agencies—the Green Revolution was a stunning success and needs to be followed by a second one now.
The alternative view is sceptical of, or even downright hostile to, the modern food business. This group, influential among non-governmental organisations and some consumers, concentrates more on the food problems of richer countries, such as concerns about animal welfare and obesity. It argues that modern agriculture produces food that is tasteless, nutritionally inadequate and environmentally disastrous. It thinks the Green Revolution has been a failure, or at least that it has done more environmental damage and brought fewer benefits than anyone expected. An influential book espousing this view, Michael Pollan’s “The Omnivore’s Dilemma”, starts by asking: “What should we have for dinner?” By contrast, those worried about food supplies wonder: “Will there be anything for dinner?”
This special report concentrates on the problems of feeding the 9 billion. It therefore gives greater weight to the first group. It argues that many of their claims are justified: feeding the world in 2050 will be hard, and business as usual will not do it. The report looks at ways to boost yields of the main crops, considers the constraints of land and water and the use of fertiliser and pesticide, assesses biofuel policies, explains why technology matters so much and examines the impact of recent price rises. It points out that although the concerns of the critics of modern agriculture may be understandable, the reaction against intensive farming is a luxury of the rich. Traditional and organic farming could feed Europeans and Americans well. It cannot feed the world.

(Source: Economist)

Oil pressure rising

A MONTH ago Brent crude oil stood at around $96 a barrel and Hosni Mubarak was ensconced as Egypt’s ruler. Now he is gone, overthrown by a display of people power that is shaking autocratic leaders across north Africa and the Middle East. And oil has surged above $111. Little wonder. The region provides 35% of the world’s oil. Libya, the scene of growing violence this week, produces 1.7m of the world’s 88m barrels a day (b/d).
So far prices have not been pushed up by actual disruptions to supply. Oil hit a peak even before news emerged that some foreign oil companies operating in Libya would stop some production and that the country’s ports had temporarily closed. As Adam Sieminski of Deutsche Bank points out, oil prices are driven both by current conditions and by future expectations.
Oil markets don’t like surprises. The sudden ousting of Mr Mubarak and the unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a tenth of the world’s oil) have added 16% to oil prices. But the big worry is that spreading unrest will culminate in another shock akin to the oil embargo of 1973, the Iranian revolution or Iraq’s invasion of Kuwait.
Oil is more global than it was during those previous crises. In the 1970s production was concentrated around the Persian Gulf. Since then a gusher of non-OPEC oil has hit markets from fields in Latin America, west Africa and beyond. Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009; OPEC’s share of production has gone from around 54% in the mid-1970s to just over 40% now.
Yet the globalisation of oil supply has not diminished OPEC’s clout as the marginal supplier of crude. Markets are tight at the moment. Bumper inventories, built up during the downturn, are running down as the rich world recovers and Asia puts on a remarkable growth spurt. Demand rose by a blistering 2.7m b/d last year, according to the International Energy Agency, and is set to grow by another 1.7m b/d this year by Deutsche Bank’s reckoning. Many other producers are already running at full capacity; OPEC has its hands on the only spare oil (see chart).
If Libya’s oil stopped flowing importers would look to Saudi Arabia to make up the shortfall. The oil could probably flow to fill the gap in Europe, Libya’s main market, in a matter of weeks. OPEC claims that it has 6m b/d on tap but that looks wishful. Analysts think the true number is nearer 4m-5m b/d, with 3m-3.5m b/d in Saudi hands. That is ample to plug a Libyan gap but would hasten the day when growing world demand sucks up all spare production capacity and sends oil prices rocketing. Analysts at Nomura reckon that it would only take a halt of exports from Algeria as well to absorb all the slack and propel oil to a terrifying $220 a barrel.
Despite rising prices, Saudi Arabia has so far been reluctant to turn its stopcocks. OPEC claims that the world is amply supplied with oil and seems content with a price around $100 a barrel. Traders hope that Saudi Arabia will boost production stealthily or that OPEC will call a special meeting to raise quotas and calm markets.
The worst-case scenario for oil prices would be some kind of disruption to Saudi supply itself. That concern has become livelier given the unrest in neighbouring Bahrain. The tiny island kingdom produces little oil but is of vital strategic importance in the Persian Gulf, a seaway that carries 18% of the world’s oil. America’s 5th Fleet, which polices the Gulf against troublemakers (ie, Iran), uses the country as a base.
The Saudis may also fear that protests by Bahrain’s Shia population could spill over their own borders. Saudi Arabia’s eastern provinces are home to both its oil industry and most of its Shias, who may also have cause for grievance with their Sunni rulers. One crumb of comfort is that oil facilities across the region are generally located far from the population centres, where protests tend to be concentrated, and are well defended against anything but a concerted military assault.

Building stockpiles
What might be the effects of a more general supply crisis in the Middle East and north Africa? The oil shocks of the 1970s spurred the world to build stockpiles, such as the 750m barrels of crude oil in America’s strategic petroleum reserve, to be drawn on in the event of upheaval in the Middle East. China is building a strategic reserve of its own. America’s Energy Information Administration puts total world stocks in the hands of governments and industry at an immense 4.3 billion barrels, equivalent to nearly 50 days of global consumption at current rates.
The impact of a crisis would therefore depend on how much oil production was lost and for how long. Even seismic shocks in oil-producing countries might not cut off supplies for very long. Yet the example of Iran shows what can go wrong. Leo Drollas of the Centre for Global Energy Studies, a think-tank, points out that pre-revolutionary Iran pumped 6m b/d. The new regime ditched Western oil experts and capital, and it has never come close to matching that level of output since; it now produces just 3.7m b/d. Middle Eastern oil is largely state-controlled but, as Amrita Sen of Barclays Capital observes, foreign investment remains vital to north Africa’s oil industry. If new regimes emerged that were more hostile to outsiders, that might have a lasting effect on production.
The world could probably weather a short-lived crisis. But the damage if oil prices spiked and stayed high for a long time could be great for the recovering economies of the rich world. As for the prospects of reducing the importance of the Middle East to global oil supplies, forget it. Strong Asian demand is likely to mean that OPEC’s share of oil production rises again as it pumps extra output eastward. A troubled region’s capacity to cause trouble will not diminish.

(Source: Economist)

Pfizer Teams With Indian Brewer in $14 Billion Insulin Market

Biocon Ltd., founder Kiran Mazumdar- Shaw learned the intricacies of enzymes while studying how to make beer. Now Pfizer Inc., the world’s largest drugmaker, is tapping that knowledge to revive its insulin business.
The biotechnology company that Mazumdar-Shaw started in her garage in 1978 for about $1,200 is Asia’s biggest insulin maker, with a market value of about $1.35 billion. The Bangalore, India-based group signed a deal in October to supply Pfizer with four generic insulin products in emerging markets, including India and Brazil, and then the U.S. and other developed nations.
Biocon received $200 million upfront from New York-based Pfizer, which is re-entering the $14 billion global insulin market almost four years after it scrapped its Exubera inhaler. India’s biggest drug-supply deal will help meet global demand forecast by market researcher RNCOS to expand 20 percent a year through 2015 as the number of diabetics tops 285 million.
“This is a perfect match,” said Ranjit Kapadia, vice president of institutional research at HDFC Securities Ltd. in Mumbai. “This deal will open up many more avenues for Biocon. Pfizer gets a low-cost manufacturing base, and they just have to market the products.”

Doubling Share

Pfizer likely will start selling Biocon’s insulin under its own brand in the second half of this year, according to the U.S. company. Biocon, India’s biggest biotechnology firm, posted a 25 percent gain in third-quarter profit to $22 million as sales for the period ending Dec. 31 rose 15 percent.
The company’s stock soared about 52 percent last year, beating the 34 percent increase in the Bombay Stock Exchange’s 18-member Healthcare index. Biocon is down 27 percent to 306.85 rupees this year, as the benchmark Sensex has lost 14 percent on concerns government measures to quell inflation will hamper economic growth.
Some of Biocon’s domestic products are subject to state price controls. It had 4 percent of India’s $168 million insulin market last year, according to IMS Health Information and Consulting Services India Pvt. in Mumbai. The Pfizer deal may boost that to 10 percent by value by 2015, said Priti Arora, a pharmaceutical analyst at Kotak Securities Ltd. in Mumbai.
Biocon’s best-selling drugs are statins to reduce cholesterol. It also makes drugs for heart disease and cancer, with most of its revenue coming from generics.

Malting and Brewing

“Insulin will become their biggest revenue generator after this deal,” said Siddhant Khandekar, a pharmaceutical analyst at ICICIdirect in Mumbai.
Biocon, which employs more than 5,300 people, makes insulin in its factory, Asia’s largest, in Bangalore. Mazumdar-Shaw and family members control 61 percent of the company, according to stock exchange filings, and she is India’s fourth-richest woman with a net worth of $900 million, Forbes magazine reported in September.
Mazumdar-Shaw, 57, found her inspiration for starting Biocon in beer. Her father was a brewmaster at India’s United Breweries Ltd. and crafted Kingfisher, the nation’s No. 1 beer.
After graduating from Bangalore University with a zoology degree, Mazumdar-Shaw told her father she wanted to pursue a career in applied sciences. He suggested making beer.
“I said, my God, why would I want to do brewing?” she said. “He said, ‘Don’t look down on brewing. Look at it as a science.’”
She moved to Australia in 1974 and enrolled in what is now the University of Ballarat, outside Melbourne, to study malting and brewing. She was a trainee brewer at Carlton & United Beverages, which eventually became part of Foster’s Group Ltd.

‘Fend for Myself’

Mazumdar-Shaw didn’t drink alcohol before going to Australia, and she was the only woman in the class. She graduated in 1975 as the top student and became India’s first female brewmaster.
“Going to Australia was quite a transformational phase of my life,” she said. “I’d led a very protected and charmed life in India, and suddenly I had to fend for myself.”
When she returned home, breweries wouldn’t hire her because they feared she couldn’t handle the odd shifts and male- dominated workers’ unions, she said.
Mazumdar-Shaw then met Les Auchincloss of enzyme-maker Biocon Biochemicals Ltd. of Ireland, and he asked her to help him start an India subsidiary supplying brewers, packaged-food companies and fruit-juice makers.
She incorporated Biocon India on Nov. 29, 1978, in her garage in Bangalore and used a rented, 3,000-square-foot shed nearby as her factory. Her first employee was a car mechanic.

‘Alarm Bells’

“It was like a kitchen-sink operation,” she said. “I had a real problem getting people to work for me because I was a woman.”
The next year, Biocon started exporting enzymes to the U.S. and Europe, according to its website. Mazumdar-Shaw then realized that the same processes that make enzymes for beer -- growing microbes in large vats under precise temperatures and pressures -- could be applied to making medicines. Insulin, a hormone, can be made synthetically in a similar process.
“I could actually leverage all that I had done for enzymes and start applying it to biopharmaceuticals,” she said.
By 1996, the company entered the generic statin business. Mazumdar-Shaw saw an opportunity in India after learning that most insulin there was made by foreign companies.
“That all sort-of rung a lot of alarm bells in my mind,” she said. “I said, hey, this is the space I should be in.”

Failed Trial

Biocon introduced Insugen in 2004 and now has a 10 percent share of the Indian market for insulin made from recombinant human DNA, the company said.
About 90 percent of diabetics worldwide have the Type 2 variety, in which insulin is unable to regulate sugar in the blood. Type 1, once known as insulin-dependent or childhood- onset diabetes, is caused by the body’s failure to produce enough insulin.
Biocon is developing an insulin pill, called IN-105, which Mazumdar-Shaw said in 2005 could be a “blockbuster” because of its convenience over injections. The drug failed in trials to meet its primary goal for controlling blood-sugar levels, the company said Jan. 10.
Biocon will continue developing it, Mazumdar-Shaw said.
Pfizer took a $2.8 billion charge in 2007 after discontinuing sales of its Exubera insulin inhaler amid complaints about its size and cost. Novo Nordisk A/S, Eli Lilly & Co. and Sanofi-Aventis SA sell more than 90 percent of insulin globally by value, said Henrik Simonsen, a pharmaceutical analyst for SEB Enskilda in Copenhagen.

Kindler Meeting

Pfizer started negotiating with Biocon after former Chief Executive Officer Jeffrey Kindler met Mazumdar-Shaw at a San Francisco conference in January 2010. The deal was announced Oct. 18.
Biocon will supply four generic versions of existing insulin products, including those made by Novo Nordisk, Eli Lilly and Sanofi-Aventis. Pfizer has exclusive rights to market the insulin globally except in India, Germany and Malaysia, where Biocon also can sell it.
“It is one of the most significant deals for Biocon and one of the landmark deals in the Indian generic space,” said Hemant Bakhru, an analyst with CLSA Asia-Pacific Markets in Mumbai.

Wednesday, February 23, 2011

Asia emerging global biotechnology hub

In the biggest M&A deal in the biotech space in Asia last year, Japan's Astellas Pharma snapped up OSI Pharmaceuticals, USA, for $4 billion in June 2010. This was followed by the acquisition of Wuxi Pharmatech, China, by Charles River Laboratories for $1.6 billion and the buy-out of Metahelix by Rallis of India for $46 million.
These deals are clear pointers that Asia, led by China and India, is on its way to becoming a global biotechnology hub. “Once considered to be the exclusive domain of the US and Europe, Asia has now emerged as a centre for research and development activity and is now a strategic partner of choice in the biotechnology space. The biotech industry in the West, which was the worst hit by the financial crisis, underwent drastic restructuring, curtailing new investments, thereby, providing a cost competitive edge to Asia,” says Mr Mahadevan Narayanamoni, National Leader, Healthcare and Life Sciences Advisory, Grant Thornton India.

M&A activity

Asian countries recorded 43 M&A and private equity deals in this sector last year, aggregating $5.5 billion with India, China and Japan dominating the deal table. Of this, India had a share of 19 deals involving a total consideration of $230 million. The Indian biotech industry attained a size of $3 billion last year, clocking 23 per cent growth, while the Chinese market touched $9 million (CAGR 17 pc).
Asia also got a significant slice of the global alliances between biotech and pharma companies. “There were 322 global alliances between a biotech and a pharma company, of which 93 involved at least one Asian country. In the bio-pharmaceutical alliances, Japan led with 41 alliances, followed by China with 22 and India with 13,” a report by Grant Thornton points out.
With an estimated $116 billion of drugs going off-patent in the next five years in developed markets, the global pharma players are sharpening focus on bio-pharma convergence. Here too, Asian countries got a significant chunk of the pie — the landmark deal in India being the global marketing alliance between Biocon and Pfizer for $350 million to market insulin.
“The Indian bio-similar market in 2008 was worth $200 million and is expected to touch $580 million by 2012. Key bio-similar enterprises such as Dr Reddy's, Cipla and Biocon, along with players such as Ranbaxy, Wockhardt, Shanta Biotech and Bharat Biotech, are already in the advanced stages of bio-similar development,” according to the report.
Against this background, it can be safely assumed that 2011 will see increased doses of collaboration with a flurry of inward-bound interest in Asia.

Dubai Can’t Kick Its Building Habit as Glut Forces Prices Lower

Dubai just can’t kick its building habit.
Construction sites are buzzing with work across the Persian Gulf sheikdom more than two years after the financial crisis set off a real-estate slump that caused values to fall by more than 60 percent. In the next two years, tens of thousands of new properties will come onto a market where about 40 percent of homes and offices are empty.
Developers have chosen to complete projects started before Dubai’s property market collapsed rather than canceling them and facing a legal obligation to return all advance payments to customers. Falling construction costs and low interest rates also provide an incentive to build now rather than waiting for property values to increase.
“The cost of walking away from these projects is much higher than completing them,” said Ahmed Badr, head of Middle East real estate research at Credit Suisse Group AG. “Developers would rather continue to build and get some of their investment back than stop and be forced to pay buyers back while their projects stand half-built.”
Homebuyers in Dubai, the second-largest sheikhdom in the United Arab Emirates, typically pay 10 percent up front and make further installments based on how much work is completed. That means a developer that sold a home before the crash and collected 50 percent of the price so far would have to pay back more than the property’s current value if the project was cancelled. Average prices in the emirate have dropped 62 percent since the peak, Deutsche Bank said this month.

Thousands of Homes

As many as 48,000 homes will be completed in the next two years, increasing current supply by 12 percent, Landmark Advisory estimates. London-based real estate broker Cluttons LLC predicts that 35,000 will be completed through 2012, prolonging the price slump for another 18 months.
Around 12 million square feet (1.1 million square meters) of commercial space probably will be completed in Dubai this year, according to Jones Lang LaSalle Inc. Office vacancy rates stood at 41 percent in the fourth quarter and may exceed 45 percent over 2011, the property broker said on Jan. 23. Average rents dropped by 30 percent during the fourth quarter.
“Developers who launched projects and took money have entered into contracts with purchasers and those contracts have timeframes,” said Michael Lunjevich, a partner at Dubai-based Hadef & Partners. “If a developer doesn’t deliver, the buyer can sue and ask for the contract to be terminated and the money returned.”
The new homes are coming onto a market that’s being shunned by buyers. Residential transactions declined 53 percent by volume and 65 percent by value in the year through September, according to Jones Lang.

Boom and Bust

The backlog of unfinished projects is a legacy of Dubai’s rapid rise and fall. The sheikhdom had the world’s fastest- growing property market from 2006 to mid-2008 because of rising demand from a growing expatriate workforce and speculation fueled by borrowing. Prices quadrupled in the six years following the 2002 decision to allow foreign ownership of property in designated areas.
That ended after Lehman Brothers Holdings Inc. collapsed in September 2008, setting off the global financial crisis. Banks across the U.A.E. soon stopped lending and two months later, shares of the country’s two biggest mortgage lenders, Amlak Finance PJSC and Tamweel PJSC, were suspended.
Speculators caught with multiple properties and little chance to turn a profit fled the market and defaulted on purchases. Other buyers continued to honor their contracts, often paying installments even after work was halted in the aftermath of the crisis. About 50 percent of Dubai real-estate projects were canceled or suspended after the collapse.

Advance Payments

Mehdi Nosratlu says he already paid 65 percent of the 3.1 million dirhams ($844,000) he owes on a property purchased in April 2008 in the 29 Boulevard project. The 55-year-old German citizen heads a group of almost 400 investors who agreed to buy homes in the two towers and are trying to reach a settlement with developer Emaar PJSC. So far, the buyers have paid 30 percent to 65 percent of the purchase price, he said. The buildings, originally due for completion in March 2010, won’t be finished before 2013, Emaar said a year ago. Work restarted in September after a two-year suspension.
Under a 2007 law, advance payments are held in an escrow account overseen by Dubai’s Real Estate Regulatory Agency to ensure the money is spent on the project that investors are paying for. Payments made prior to the rule went straight to developers without restrictions on which developments they funded.
The typical contract allows developers to miss a property’s delivery date by as much as 12 months, Lunjevich said. Buyers trying to recoup their investments can make claims against any of the company’s assets, including performance bonds or even advanced payments made to contractors.

Building Resumes

Nakheel PJSC, which along with Emaar spearheaded the building boom in Dubai, said it will restart work on seven projects in various stages of completion after halting construction in 2008. The developments, which include hundreds of homes in places such as Al Furjan and Jumeirah Park, are scheduled for completion by mid-2012.
“There is a reputation factor here,” said Mala Pancholia, a Dubai-based analyst at NBK Capital. “If you finish a project in a down market, there is a trust factor that you can build with customers and that can have a cash impact when a developer decides to work in other countries.”
Emaar halted all its Dubai projects following the crisis except the Burj Khalifa, the world’s tallest skyscraper. The company said that it’s focusing on completing developments that have been started and sold and may consider new ones “in view of the improved economic conditions and demand for properties especially in downtown Dubai.”

Construction Costs

Building costs have dropped by more than 40 percent from their peak in 2008, giving developers another motivation to restart work now, Pancholia said.
“Since construction costs are so cheap, it makes sense for the developer to finish the project at the lowest possible cost now, rather than wait until there is a recovery,” she said.
Drops in U.A.E. interest rates have also been an incentive to move forward on projects and collect further payments from buyers. The U.A.E.’s 3-month interbank offered rate or EIBOR dropped by more than half to about 2.13 percent from its highs in October 2008, Bloomberg data shows.
Many developers that took short-term loans at interest rates of 7 percent or more are seeking to repay those debts to get new loans at lower rates of around 4.5 percent.
“With the lower interest rates now, it makes sense for developers to go for new loans, which they can only pay by collecting money from buyers,” Pancholia said. “To do that, they must show that construction is progressing.”

Best Locations

Some work is restarting as developers find that some of Dubai’s prime locations held their value even as the rest of the market declined. In March, privately owned Damac Properties started building the 49-story Burjside Boulevard apartment tower across the road from Burj Khalifa, which opened in January.
“We are not adding to current supply, but simply completing and delivering to customers the projects that we have already committed to building,” Niall McLoughlin, senior vice president of Damac, said by e-mail. “Like all global developers, the financial crisis has forced us to reassess our timelines for delivery.”

(Source: Bloomberg)

Q3FY11 Results Brief - Thodi Khushi Jyada Gham

Q3FY11 result season has ended, as most analysts on the streets would term as 'mixed', but, in my opinion it is the beginning of some pain, as we move ahead. Here are the brief observations from the results season:
  • Revenue growth has been robust, largely led by volumes and to some extent by improvement in pricing
  • Margins have been under pressure in most cases due to sharp increases in operating costs - raw materials, employees, power, business development, etc.
  • Increasing interest  and depreciation costs would start impinging the net profits
  • Ability to pass on the increasing operating costs looks difficult with most businesses willing to increase prices only partially
  • Exports have begun to do well, due to improving business environment in the West
  • Tight money markets and weak stock market conditions, coupled with inadequate support from policy makers, have led to restricted growth in fresh asset creation
  • Slower growth in order books of engineering and infrastructure companies due to tight monetary conditions and environmental issues
  • Going forward, expect good traction in business growth but margins to trail revenues

Robust sectors: Banking, Auto, Auto Ancillaries, Energy, IT, Media, Agri-related, Textiles
Weak sectors: Cement, Telecom, Realty, Metals

Strong stock performers: Titan Industries, Tata Motors, BGR Energy, Thermax, BHEL, VST Tillers, Banking, D B Corp., LIC Housing, HDFC Ltd., Kewal Kiran Clothing, Vardhman Textiles (among others)
Weak stock performers: Cement companies, Punj Lloyd, Telecom companies, Unitech, Voltas, Colgate, HUL(among others)

Going forward: Expect operating cost pressures to continue. Capital intensive and policy dependent businesses to continue to face headwinds. Some slowdown expected in earnings growth in FY12.

Disclaimer: These are my personal views, based on our in-house research.. Further, it is possible that I may have direct or indirect interest in the stocks mentioned above.  Readers are requested to use their own due diligence before taking investment decisions.