17 September 2013

Metals - Sector Update - Centrum

Sell producers, Buy miners

We recommend that investors shift their positions in domestic metals &
mining space from producers to miners. There are multiple pain points
for producers ranging from slow demand, margin pressure, stretched
balance sheets and dismal cash flows. However, miners provide an
attractive mix of better pricing & volume growth potential, healthy
margins, strong books and good dividend yields. We observe the trend
of increasing ownership by FII/DIIs in domestic miners vis-à-vis
producers in the past few years and expect this trend to continue.
Valuations remain attractive on domestic miners with huge discounts to
global average which we feel is unjustified. We recommend Coal India,
NMDC and HZL as our top buys. Sell Tata Steel and SAIL.

$ Producers likely to encounter various challenges: Domestic metal
producers face pricing pressure inflicted by slowing domestic demand
and higher supplies globally mitigated (marginally) by weak rupee. We
note that margins for producers shrank by 400-1000bps in the past 3
years, balance sheets got stretched due to large capital spends and
free cash flow remained dismal with low visibility on volumes from new
projects. Rupee depreciation is expected to dent balance sheets
further (forex debt is a major portion of borrowings) and the threat
of oversupply from China adds to the challenges faced by producers.

$ Multiple factors favor miners: Domestic miners have demand-supply in
their favour in the domestic market and apart from better pricing
ahead we see volume growth at an inflection point for large resource
plays due to strong domestic demand and clampdown on illegal mining
supply coupled with slow clearances for new private mines. Robust
margins due to lowest quartile CoP and healthy balance sheets (debt
free and cash rich) with strong free cash flow generation are key long
term positives. Recent thrust of the government in addressing
regulatory and logistical constraints provide confidence on volume
jump in the long run.

$ Institutional ownership increasing in resource plays over producers;
QE tapering could further support the trend: We observe that
institutional ownership is slowly increasing in miners (backed by
higher free floats) but is coming down or is stable in producers for
FIIs/DIIs respectively. However, absolute ownership remains far higher
in producers and with our thesis suggesting continued outperformance
by miners over producers, we firmly believe the ownership trend will
keep shifting towards miners from producers in the domestic metals &
mining space going forward. We also infer that QE3 tapering could
result in subdued metal prices globally, leading to increased shift of
FIIs/DIIs towards resource plays where the impact of QE has been
lower.

$ Valuations – Risk reward in favor of miners: We note that apart from
better financials and healthier books, miners also provide much better
dividend yields and payouts. While domestic producers are trading at
par with global average, miners trade at high discount, which is
unwarranted and expected to narrow down going ahead in our view. We
recommend Buy on Coal India, NMDC and HZL as our top picks in mining
space but advise investors to Sell Tata Steel (downgrade from Hold
earlier) and SAIL. We see upside being capped in Hindalco and JSW
Steel post sharp recent rally and downgrade them to Hold from Buy.
Risks to our call would be higher pricing & volumes (led by better
demand) for producers and logistical bottlenecks to volumes for
miners.



Thanks & Regards,

HDFC Mid-cap Opportunities: Invest :: Business Line


10 ways in which you can negotiate your salary :: ET

If you didn't bag the best compensation in the market when you switched jobs, don't worry. The best of professionals come up short when it comes to discussing salary with a new employer.

Here are some of the common mistakes you can avoid while discussing your salary with a potential employer.

1) Accept initial offer and lose Rs 1 crore

Always, always, always negotiate. Women and first-time job seekers are more prone to accepting the opening offer without questioning it. A 10% salary difference in the first job with a CTC of Rs 4 lakh represents a lifetime loss of over Rs 1 crore, assuming a 15% annual hike over a 40-year career.

So, politely restate your case and provide justification for a revised offer. In over 95% of the cases, the employer has not made his best offer right away and is expecting you to negotiate upwards. As a ballpark, ask for a 10% increase.

2) Do your homework on position & firm

Thoroughly research the market and the firm. In negotiations, as in war, the better prepared side wins. Never approach a new employer without finding out the standard market salary for the position offered based on your experience and qualification.

Start with online research, and then talk to professionals and recruitment consultants. You can also speak to people in the company to have an idea about the latest state of its business, operations and the compensation structure. Use this data to justify your stand.

Morgan Stanley -Global Cement Markets

Secured, Tax free HUDCO Bonds

SECURED TAX FREE BONDS
HOUSING & URBAN DEVELOPMENT CORPORATION LTD
Coupon rate - 8.76% per annum*

Highlights of the Issue
  • Issue Period: 17th September - 14th October, 2013.
  • Secured, redeemable debentures with tax benefits under Section -10 of The Income Tax Act, 1961.
  • Minimum Subscription: Rs 5000(5 NCDs of face value Rs 1000 each)
  • Rated “AA+” by CARE & IRRPL respectively
  • Attractive coupon of 8.76% per annum,
  • Who can Apply- Resident Individuals, HUFs, QIBs, Corporates, QFIs, NRIs
  • To be listed on BSE
 
Company Profile
  • Established in 1970 as a wholly owned government company.
  • Provides long term finance and undertakes housing and urban infrastructure development programmes.
  • Conferred Mini-Ratna status in 2005 on the grounds of sustained performance & profitability.
  • Pan-India presence across 33 states and union territories covering around 1,800 cities and towns.
  • Profit after tax of INR 700.56 crores for the fiscal year 2013.
  • Net Worth: INR 6,427.11 crores as on March 31st, 2013
     

*8.76% of coupon rate is applicable to category IV investors investing under Series II of the issue. Please refer to the prospectus for more details.
 

Barclays Capital - The day after

‘Markets will continue to see huge volatility’ :Prabhudas Lilladher, : Business Line

Investors must seek complete clarity on products offering returns higher than similar products in the market. — Dilip Bhat, Joint Managing Director, Prabhudas Lilladher
The stock market has turned wildly volatile of late, buffeted by the rupee and hapless economic data. The NSEL issue has also taken its toll on investor morale. We catch up with Dilip Bhat, Joint Managing Director, Prabhudas Lilladher, to gauge the market mood.
What is the mood among retail investors now, are they buying stocks?
Retail investors have been passive spectators for some time now and rightly so. The heavy redemption that we saw in mutual funds in the last one year proved that they were right in their decision as they kept on withdrawing money at every rise, not withstanding the record FII inflows, as the subsequent turmoil that rocked the markets would have eroded the value of their investments considerably. Markets have not enjoyed the confidence of retail investors for the past couple of years and the recent volatility of unimaginable proportions has dented their confidence significantly
Were your investors also caught in the NSEL imbroglio?
We took a conscious decision not to participate in this particular product despite our traditional expertise on arbitrage and yield products as we were never convinced that it would be in the interest of our investors. While we did give up on substantial income over the years, I think we did the right thing by resisting the temptation of earning quick money. There were, of course, repeated discussions with our partners and large clients and every time we pointed out the risks. At times we did lose a few clients to competition but we were firm about our decision not to participate in this product.
What are the lessons for investors from this episode?
Few important lessons emerging from the NSEL crisis are: Investors must seek complete clarity on products offering returns higher than similar products in the market, whether it is because of some loophole or gap in the framework of laws under which the product is regulated.
Investors must seek clear details of the trade guarantee fund (TGF) lying with the exchange as TGF acts as a safeguard for investors from any counter-party default risks.
Investors who would be primarily acting as money lenders should inquire as to who is going to use the funds invested by them, what is their background, credentials, networth and so on. There should be clarity on end use of funds and how the borrower would be able to complete the pay-in obligation in case the contract had to be closed.
What is the mood among the foreign institutional investors in the market?
Large FII inflows have been the bulwark holding up the markets and keeping them buoyant despite the economic sluggishness and political logjam. They have pumped in record funds in the last two years. As we saw recently, small sell-off from them caused a disproportionate upheaval in the Indian stock markets. I think they are always looking for an opportunity to buy further, despite the steep rupee depreciation of over 20 per cent over the last one year pegging back their returns.
However, the current depreciated value of the rupee provides them an opportunity to acquire stocks cheap. Any FII putting fresh money is buying 20 per cent cheaper in dollar terms which means you are buying at Nifty levels of around 4,600!
Following the RBI’s move to tighten liquidity in the system, is there a liquidity crunch in equity markets as well?
Not necessarily linked to the RBI’s move, but most domestic funds have had redemptions and inflows with private insurance companies too. As a result when FIIs are absent or sellers stock markets tend to get rocked as no domestic funds can step in to buy anything significant (as they do not have inflows), the only saviour is always LIC.
Are investors more wary about commodity trading now following losses in NSEL?
I think so. The huge losses are fresh in their minds and in the absence of any clarity on NSEL the collateral damage to confidence on investments in the commodity market is to be expected.
Do you think the worst is over for stocks as far as decline in prices goes or is there more pain in the offing?
I think markets will continue to see huge volatility. I will not be surprised if once again in the near future we see the Nifty touching levels of both 5,000 and 6,000 and I am not talking about the range- bound markets. I feel the upheavals will be something to watch out for. But a sluggish GDP growth of around 5 per cent will cap any runaway rise in the markets and the markets will remain vulnerable if FIIs take the backseat.

Concentrated wealth, only 3% taxpayers are costing real estate sector dearly :: ET

For years, real estate has been a preferred investment in India. This was driven by favourable demographics, shortage of housing, a move to nuclear families, easy credit and increase in black money that required storage. The RBI released excess liquidity into the system during 2009-12, as part of stimulus. This found its way into real estate via various transmission channels and aided a bull run in the sector. 

This was supported by factors like high inflation, negative real returns on financial instruments such as fixed deposits, and choppy equity markets. Today, residential real estate is now priced at an average yield of 2%. This is indicative of a huge bubble in the sector. After a decade, many factors are converging, setting the stage for a deep correction in the Indian real estate sector. Today, the rupee has depreciated considerably from year-ago levels. 

The RBI has also tightened monetary policy. Tighter monetary conditions will force Indian banks to start deleveraging: today, they are running a high investment-to-deposit ratio of 108%, instead of the usual range of 95-100%. The direct real estate-related lending — including mortgages, construction loans and loans against property — amounts to $235 billion, or 25% of the outstanding loans in the banking sector, up from $20 billion, or 12%, in 2004. 

The period from 1997 to 2003 witnessed deleveraging by Indian banks and overleveraged companies. In that period, property prices corrected by more than 50% in the Mumbai metro region (MMR). 

Foreign flows into India are drying up. Foreign private equity funds invested over $20 billion into Indian real estate during 2006-13. The developers were supposed to make housing affordable but, instead, fuelled real estate prices across the country by hoarding finished inventory, diverting money to other projects and investing in land banks for future use. After 7-8 years, these funds are reaching their end of term and, so, would have to sell their holdings. 

Towering Elections Soon 

Real estate has been a store for illicit funds. The need for funds in upcoming central and state polls will accentuate the outflow of money from this sector over the next 18 months. The fiscal deficit funds consumption with policies like farm loan waivers, pay hikes for government staff, NREGA and food security schemes. 

Subsidies remain high and all attempts towards fiscal consolidation remain a distant dream. Today, subsidies account for 42% of gross fiscal deficit, exactly double the size of a decade ago. 

The transmission of fiscal deficit will move in the following way: from corporates to banks to government, and finally landing to people in the form of increased direct and indirect taxes. We are in an era of low growth, accompanied by lower investments by the private sector. 

The slower growth of real personal disposable income per capita over the last few years is a factor slowing demand. NSSO surveys indicate that India is witnessing jobless growth in the formal sector for the last 10 years. Given all this, the ability of the average Indian to afford real estate in our cities is already under serious threat. 

Government records suggest that there are only 35 million taxpayers, about 3% of the population. Only 1.5 million declare annual earnings of more than a million rupees. A recent report by Cushman & Wakefield suggests that more than 30% of apartments under construction in Mumbai are priced at more than Rs1 crore per apartment. 

Credit Suisse- Iron Ore The Last Waltz

Credit-Suisse - Less Stimulus_ More Volatility :PDF link

Morgan Stanley- Volatility and Vulnerabilitymor :PDF link

Flight to premium: How investors are playing stocks in ET

The headwinds buffetting Indian stocks may have eased somewhat but a large number of stocks continue to trade at multi-year valuation lows. Nifty has jumped 9.4%, or 500 points, and the Sensex 1,700 points, or 9.5%, since September 4 but investor enthusiasm has not percolated enough to benefit lower-rung stocks. The reason is very simple. In a slowing economy, investors are increasingly risk-averse, preferring to buy high-quality, well-established companies even if it means paying the ever widening premium.

Today, HDFC Bank not only commands a premium higher than last year's but it is also bigger than that of local and global industry peers. For select IT and FMCG stocks, the picture is even more bullish. ITC, for instance, is now trading at 34.5 times its P/E ratio, compared with the global average of 24.5 times for global consumer companies.

Cigarette rivals such as Philip Morris and BAT trade even lower, about 16 times their recent earnings. TCS is valued at around 26 times compared with 12 times for Microsoft and IBM. Since December last year, when TCS' P/E was 18 times, the premium has only widened. Infosys, in contrast, now commands a multiple of 18 times compared with 15 times in December last year. Why is this happening? IBM and Microsoft are much bigger companies than TCS so financial performance is not the criteria.

The slowing economy and high debt and the renewed focus on corporate governance and management has taken a number of stocks off investors' radar leaving only a few top, frontline stocks to buy. If you take out cyclical sectors, which have brone the brunt of the slowdown, then the universe shrinks even more leaving IT and consumer stocks as the only attractive sectors. Surprisingly, in this slowdown, something different has also happened.

Select cyclical stocks, even in auto and capital goods, are in high demand due to investor perceptions about their management quality and performance. They are managing to fetch a good premium. So you have Bajaj Auto trading at 18 times earnings, up from 15 times in April 2012 while Hero MotoCorp has jumped to 19 times from 17 times in April 2012. Struggling local rival TVS' P/E is down sharply from 15 times in the same period to 8 times now. The premium between the top two two wheeler companies and the fourth player has rarely been this wider. The spread of P/B ratio between HDFC Bank and ICICI Bank also shows a similar trend.

HDFC Bank is now available at 4.2 times compared with ICICI's 1.7 times but India's second-largest private sector bank used to command a much higher price to book in April 2011. So far from fl eeing Indian markets, foreign investors are increasing their purchases of top quality, frontline stocks widening the premium with the rest of the industry. After all, whether it is the badlands of UP or the volatile stock market, there is a price for safety.

J. P Morgan -Asian equities :PDF link

Morgan Stanley -China Pulse Analyst Survey Chartbook