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India Equity Strategy: Dec10 preview : Low-base effect fading out [Abhay
Laijawala]
Our analysts expect Sensex earnings growth to moderate to 19% yoy in 3QFY11
from 26% yoy in 2QFY11. This implies an almost 22% yoy growth in Sensex’
earnings (29% on free float basis) for 9MFY11. In an inflationary environment, high
raw material prices have started to exert pressure on margins. However, as
aggregate demand remains strong, companies have been able to broadly pass on
raw material price hikes (for e.g. auto and steel companies) to the end consumer -
thus containing EBITDA margin compression in 3QFY11 to a moderate 30 bps yoy.
India Upstream: Oil price forecast raised; upgrading Cairn India to Buy
[Harshad Katkar]
Deutsche Bank has raised its oil price outlook for CY11-14 by 2-11% on stronger
oil demand, but kept the long-term forecast unchanged at US$100/bbl. Driven by
higher oil prices, we raise Cairn India’s price target to INR385 and upgrade it to
Buy on 17% potential upside. At the current price, Cairn India is only factoring in a
US$82/bbl Brent crude price to perpetuity compared with a spot price of
US$95/bbl and Deutsche Bank’s long-term forecast of US$100/bbl. We maintain
Buy on ONGC and OIL with target prices of INR1520 and INR1620, respectively.
Aurobindo Pharma: Divests China subsidiary; Up TP by 7% [Abhay
Shanbhag]
Aurobindo (APL) announced definitive agreement to divest 51% stake in its fully
owned subsidiary – Aurobindo (Datong) Biopharma (ADB) for ~USD 26m (Source
CNBC) to Sinopharm, China’s largest healthcare group with ~USD 9.7bn revenues.
As per press release, APL will receive USD 23m that it had loaned to ADB.
Oversupply had resulted in ADB running losses for most of its lifespan of ~6 years
with loss of INR 350m on revenues of INR 1.85bn in FY10. Most of ADB’s
production of 6 APA (a Pen-G derivative) is consumed by APL. Sinopharm will
infuse funds to relocate the plant as required by the local authorities, hike capacity
and add downstream products.
Economics Special Report: Economic Update – January 2011 [Abhishek
Singhania]
We continue to expect a slowdown into 2011, albeit a soft landing. Cyclical
dynamics will be shaped by two forces: fiscal consolation and external demand.
Divergence between the financially unstable periphery and the more robust core
will remain a key characteristic in 2011. We don’t expect the crisis to end until a
line is drawn on the crisis between Portugal and Spain. We continue to find the
fundamentals of Spain sustainable: further recapitalization of the banking sector (in
our view, affordable) coupled with structural reforms can keep Spain out of the
EU-IMF umbrella. The ECB may need to lend more assistance to make sure
markets remain functional.
Commodities Outlook: Bull Markets In 2011 [Michael Lewis]
We believe commodities will enjoy a fresh wave of investment inflows during
2011. To exploit the properties of mean reversion, carry and momentum we are
introducing the DBLCI Apex index, which performs well when commodity prices
are trending.
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