Wednesday, November 29, 2006

>King Cement

Cement industry’s performance once again has beaten the market expectation in the recent quarters and has registered spectacular growth. Looking at the demand supply mismatch, firm price realization, and operational efficiency it is believed that this sector still has potential to perform in the near future.
The cement prices have witnessed appreciation of Rs.5 per bag second time post monsoon on account of robust demand in construction and infrastructure segment. Currently Indian cement industry is witnessing a growth of 9.5% - 10% in consumption whereas supply is growing at 8% rate annually, thereby creating a shortage in the domestic market.
All India Price movement of cement price (Rs per bag)

Quarterly Performances:
In the quarter ended September, 2006, the industry registered a growth of 47.5% in top line and 185% in the bottom line. Operating margin has reached 28% on account of firm realization, demand-supply mismatch and reduction in coal prices. The net profit margin has almost doubled to 17% despite a huge tax provision and higher deprecation cost.

Investment Argument

  • For the month of October 2006, all India cement despatch figure has improved by 8% on YOY basis to 12.55 million tonne.
  • Around 12-15 TPA additions in demand is expected due to approvals of more than 130 SEZs and NHB’s project of ‘A’ house for Rs 1 lakh on massive scale.
  • The proposed capacity expansion of about 70 million tonne is expected to come on stream over the next 2-3 years, which may create surplus of supply, but it is believed that most of the capacities will start from the second half of FY08 and beyond.
  • So for the next one-year cement sector will experience deficit, which will give positive outlook for cement industry.
Cement despatches – Strong growth continues
All India cement despatch figures improved by 7.96% y-o-y to 12.55mn tonne and m-o-m increase was 3.64%. Despatch for the 7-month period ended October 2006 increased by 9.98% to 86.27 mn tonne. The industry has seen increase in despatches grow by 7.96% despite increase in production capacity by 5.96%. The capacity utilization of the industry has gone up from 90.24% to 93.24%.

Most of the plants are operating at the optimum level and the capacity utilization has gone up to 93 % in October month and it is expected to go up further. Most of the companies are investing heavily in installing the captive power plant in order to reduce the power and fuel cost, which accounts for about 28%-30% of total production cost. Any reduction in this cost has direct impact on the operating margins of the companies.

Proposed Capacity Expansions:
The proposed capacity expansion of about 70 million tonne is expected to come on stream over the next 2-3 years, which may create surplus of supply, but it is believed that most of the capacities will start from the second half of FY08 and beyond. So for the next one-year cement sector will experience deficit, which will give positive outlook for cement industry.
In Mn. Tonnes
Completion Year

Despite sharp increase in the stock prices in the recent past, Broking house Anagram Stock broking is bullish on some of the stocks in the sector like Ultratech Cement, Shree Cement and India Cement.
Top picks in this sector as per Broking house India Infoline are Kesoram industries, Ultratech and shree cement. It has also given hold recommendation for ACC.

Net Sales
Name Q2FY07 Q2FY06 % Change Q2FY07 Q2FY06 % Change
ACC 1,358 1,084 25 225 192 17
Amb. Cem. East. 147 120 22 33 19 77
Birla Corp. 365 282 29 68 17 292
Chettinad Cement 187 101 85 34 6 491
Dalmia Cement 250 139 80 52 12 344
Guj. Ambuja Cem 984 773 27 245 88 178
Guj. Sidhee Cem. 89 71 26 9 5 76
India Cements 516 347 49 117 7 1,525
J K Cements Ltd 268 222 21 34 8 336
J K Udaipur Udyo 27 27 2 -10 -7 35
JK Lakshmi 163 153 7 23 11 106
K C P 58 35 68 10 3 240
Kalyanpur Cement 29 18 58 -5 -5 11
Madras Cement 407 243 68 90 10 839
Mangalam Cement 120 86 39 20 7 184
Mysore Cement 151 96 57 20 -17 223
Prism Cement 159 127 25 22 3 561
Shree Cement 316 144 119 78 28 178
UltraTech Cem. 1,005 783 28 127 24 434


>Power-India's Achilles Heel

No matter what be the contrarian logic Indian GDP growth will lag without adequate power. ABB, BHEL and Siemens become automatic Power plays, inspite of stiff valuations.

Over the past quarter of a century, India's energy consumption has tripled. The rate of growth is faster than China's, albeit from a lower base, though the causes are the same: rapid economic development, a large and growing population and increasing urbanization. So is the potential threat to air quality and water supplies.

Even under conservative estimates of growth, India's energy requirements are likely to increase by a further third in the second half of this decade, driven by industry, transportation and domestic electricity consumption as living standards rise. Yet India's ambition to grow its economy at a long-term annual rate of 8% is running up against an energy constraint.

Solving it will require continued reliance on fossil fuels--notably coal--greater energy imports and root-and-branch reform of electricity generation, which in India is an inadequate, insufficient and insolvent provision of power that is already causing environmental damage to water supplies.

India currently uses coal for about half of its energy needs. Few see that share changing much over the next two decades, even as overall energy use grows. The country risks creating the same environmental problems for itself that now confront China?

India already has energy-related water shortages. The country's legions of small farmers are heavily subsidized to pump water for irrigation. This not only drains an unreliable and insufficient supply of rural power but also depletes water tables across the subcontinent.
This creates a vicious cycle. Lower water tables require farmers to consume more energy to pump ever-deeper water supplies with ever larger pumps. This, in turn, puts more strain on power supplies and contributes to higher levels of greenhouse gases.
Electricity reform is central to both India's economic development and its environmental protection. India produces a lot of electricity, but 30% to 50% is lost along the delivery chain. Utilities that collectively lose $7 billion a year not only fail to deliver the power needed but are soaking up billions of rupees in bail-outs--money that could otherwise be spent on education and health services.

The government has been liberalizing the sector for the past 15 years, but progress is slow, despite the priority given to distribution reform. Thousands of villages are still off-grid, and power shortages in cities are common.

Power generation accounts for most of the coal consumed in India, with heavy industry a distant second. Most electricity is generated from pollution-generating, high-ash coal. The government is promoting a switch from coal-fired to natural-gas plants for power generation and cutting subsidies for low-quality coal--part of a general move to market pricing for energy and anti-pollution measures.

That is happening slowly, too. Replacing existing coal-fired plants is a capital-intensive and time-consuming process. Many of India's highly polluting, low-efficiency coal-fired power plants will stay in operation for years to come. The most feasible alternative, natural gas, has seen its share of India's energy consumption rise from 1.4% in 1980 to only 7% today.

While natural gas is at the heart of the government's policy for cleaner power generation and fertilizer production for the country's huge farm sector, India faces potential problems. Its natural gas imports come from Turkmenistan, Bangladesh, Iran, Miramar--all places that raise questions about the reliability of supply. India's own untapped natural gas fields lie under deep seas.

Renewables are not seen to be feasible on a commercial scale in the foreseeable future. India has one of the largest national programs to promote the use of solar energy, but unlike many developed countries that have turned to solar energy mainly out of concern about the environment and energy security, solar power in India is seen as a cost-effective way to provide energy to small villages and remote areas off the national grid where there is a shortage of electricity.

Nuclear power may by the long-term alternative to coal, but for now, there is little that will check the rapid growth of India's carbon emissions--rising faster than even China's. India has not made the same progress in energy efficiency as China. Its ability to wring economic growth out of each unit of energy it consumes has remained flat for two decades, whereas China has improved markedly.

A big reason is the lack of energy efficiency and conservation measures in most industries at the local level. Ever since the Bhopal disaster in 1984, India has had strong environment protections enshrined in law. However, their effectiveness diminishes due to a lack of enforcement that grows laxer the closer administration gets to the local level.

Thus, air pollution has become India's most severe environmental problem, and one that is likely to continue to worsen. India's per capita carbon emissions are relatively low, at 1.2 metric tons of carbon per person in 2003. (China's emissions were 3.2 metric tons per person, and the U.S.'s 19.8). But India's emissions are forecast to triple by 2020 due to the rapid pace of urbanization, increased use of cars and trucks and the continued use of older and more inefficient coal-fired plants for power generation.

As in China, continued urbanization has exacerbated the problem of rapid industrialization. Cities are frequently unable to implement adequate pollution control, and some India cities--including New Delhi, Mumbai, Chennai and Kolkata--are among the world's most polluted. Urban air quality ranks among the world's worst.

Also as in China, sheer population growth and urbanization make it all the more difficult to pull off the balancing trick of continuing to generate economic growth without destroying the quality of life in both the cities and villages. But unlike China, India has a strained power generation, transmission and distribution infrastructure that is already hampering growth.

Tuesday, November 28, 2006

>Housing prices start cooling off

Although I have no interest in Indian real estate market I do track it due its strong macroeconomic linkages. I'm seeing disquieting news from US shores on housing market. The prices are down, new house sales are down even more. The forecasts are even more bleak.

Though it may not be directly linked to Indian market, you shouldn't forget that the boom in Indian real markets was not a local phenomenon. The property prices went up all over the world and the prices are now cooling off. In India I have seen many people stretching beyond their means to buy expensive houses. More often than not they aren't aware of the risk they are taking because

1. They presume that the prices would keep going higher irrespective of current price level

2. They are blissfully unaware of the huge leverage. A person taking a 30 year loan on floating interest rates to invest in equity market would be considered highly risk taking individual. But in real estate people think they are quite conservative.

3. People are unable to differentiate between consumption demand and investment demand(a large portion of it may be speculative)

I should forewarn you that I'm just a layman when it comes to real estate. But I feel I should give you a `heads up' when I smell some trouble. It may well be a false alarm.

From Kamlesh Pandey (La Warren Buffett, yahoo group)


Housing prices expected to drop more

It may take the California housing market three years to recover from its downturn because homes have simply gotten too expensive for most buyers, whose salaries haven't risen nearly as fast as housing prices, an economist said.


Housing market gets ugly

Why the sudden crackup? When prices were rising rapidly, some people bought houses purely as investments, betting that prices would keep going up. Other people rushed to buy houses, or stretched themselves to buy houses they couldn't really afford, because they feared that prices would rise out of reach if they waited. And all this speculative demand pushed prices even higher. In other words, there was a market bubble.

Monday, November 27, 2006

>India heading for surplus gas supply in 2 years

From a gas-starved country forced to resort to spot purchases, India is set to emerge as a gas-surplus territory in the next two years, according to R C Sharma, president (LNG) of Reliance Industries (RIL).

RIL itself will be a significant contributor to this turnaround when it starts production from the gas-rich Krishna-Godavari (KG) basin by mid- 2008.

Estimates of production from its block KG-D6 have been doubled to 80 million metric standard cubic metres per day (mmscmd) earlier this month. This is almost equal to the 84 mmscmd produced in the country today. The blocks in the region have got further "upside potential. The deeper we are going, we find more and more potential," Sharma said at a conference on gas in Delhi.

Other operators in the KG basin area, like Gujarat State Petroleum Corporation (GSPC), are also expected to start production by early Jan 2009.

There will thus be a sharp spike in domestic gas production to 188 mmscmd in 2009-10, according to the Directorate General of Hydrocarbons. Supply will also be augmented by coal bed methane (CBM), with first gas expected by end-2007.

However, demand for gas is unlikely to see sharp spikes since gas-guzzling projects like power plants, which typically account for the largest chunk of gas consumption (about 40%) are being avoided in the 11th Plan period.

An aggressive GSPC, however, had a contrarian view. "Demand for gas is also driven by supply. Whatever supply is coming is being consumed. We believe demand for energy is a bottomless pit, and so is the case for gas," said Ravindra Agrawal, commercial head at GSPL, a subsidiary of GSPC.

Projecting a gas requirement of 194 mmscmd over the next five years, and a possible supply of 130-150 mmscmd, he said that the demand-supply gap would widen.

>Biggest ever US trade team to India

A delegation representing 227 American firms is arriving in India on November 28 in what will be the largest ever trade delegation sent by the US to any country in the world.

Telecom giant Avaya is a part of the delegation, as are Exxon Mobil Gas, Exxon Mobile India, GE Energy, Lockheed Martin, Motorola India, Net2phone and Northrop Grumman International..

Several state-level boards, like the Wisconsin Department of Commerce, are also a part of the team, the largest chunk of which—15 per cent—represents the information technology and services firms.

US Under Secretary of International Trade Franklin Lavin told Business Standard via a teleconference from Washington that the purpose of the mission was as much to persuade India to amend policies to facilitate US investment as it was to enable US industry to gain new insights into the working of the Indian companies.

Interestingly, several companies which will be represented have no room under the present policy regime. For example, BWXT, which specialises in heavy nuclear components, will have to wait for as it will be able to get business in India only after the policy structure governing the Indo-US civil nuclear agreement is put in place.

There is little scope for further opening of the insurance sector but Holmes Murphy and Associates, which specialises in health insurance, has chosen to be a part of the team.

Lavin said the idea was to suggest “improvement in policy” and hold a “commercial dialogue to afford improvement in the business climate.”

“We would like to see a debate on ownership caps. Indian business will benefit and consumers will get better access to quality goods and services. For instance, in the financial sector and retail; we would like to see India rationalise tariffs. Tariffs on motorcycles in India are the highest in the world. The Intellectual Property Rights (IPRs) worries some investors. We would like this to be addressed,” he said.

Ficci’s Amit Mitra says 46 per cent companies represented in the delegation have never been to India before. He said one of the sessions during the discussions would be on Mumbai as a regional financial centre and piracy in the entertainment sector. Most of the delegates were either CEOs or MDs of their companies, he said.

The meetings will take place in Mumbai, though later, some groups may break off and form teams to travel to other cities.

Meanwhile, within days of the US Senate endorsing the Indo-US civil nuclear deal, the Bush administration has advised top American energy firms to start negotiations with their Indian counterparts without waiting for the final approval of the agreement.

"We have advised the US companies to start their business negotiations right away because we do not know when the final green signal comes through,” Lavin said.

>Small services earn India big money

They may seem insignificant, but they are actually raking in the big bucks. Not-so-hot items like business management and consultancy, advertising and trade fairs, legal advice and architectural & engineering services have earned the country a gross $12.9 billion in 2005-06.

Lost in the basket of miscellaneous services, the little known earnings from these streams make up for more than half of software services that are more widely talked about.

The contribution of these services to the Indian economy was revealed by a study on “invisibles” in India’s balance of payments by the Reserve Bank of India (RBI).

These services under the head “Business services” — which also include accounting and auditing services and environmental services (income out of trading in carbon credits) — earned the country a gross of $12.9 billion in FY06 as against $23.6 billion from software services.

And for the first time, these services earned a surplus of $2.5 billion as compared to a deficit of $500 million to $2 billion annually over the past six years. According to sources at the central bank, individually many of these services earned insignificant amounts. But in the past few years, income has grown so much that it has become necessary to report them separately.

Architectural and engineering services, comprising predominantly engineering services raked in a net of $3 billion in FY06. According to Nasscom, $10-15 billion of the $750 billion spent on engineering services is offshored. And India corners about 12% if this offshore market. It projects a strong potential for this segment as the global spend is expected to grow more than $1 trillion, with outsouricing also expected to grow.

India has the single largest pool of engineering talent among the emerging countries capable of taking on more work than Russia and China combined.

The current Indian graduate talent pool suitable for engineering services represents 28 % of the total in low-cost countries. But on the flip side, not all are equipped with the skill sets required to succeed in the market. Another business service-management and consultancy generated $1.6 billion during the year.

Of the 12 items classified as business services, eight are net forex earners. While the deficit under two heads — advertising and trade services has significantly narrowed. Gross advertising revenue jumped from $162 million in FY05 to $435 million in FY06. As a result, the deficit under this head halved to $172 million from $352 million in the previous year. Another area which has done well is environmental services. Net earnings, though small at present went up to $8 million in FY06 from a mere $1 million in the previous year.

With many polluting units (with emissions beyond the threshold level permitted by the Kyoto Protocol) in Europe committed to reduce their emission levels through purchase of credits from non-polluting units (those with emissions below the threshold level) from lesser developed countries, India has a strong potential in this area.

Besides, software and business services, even financial services have emerged as net earners of foreign exchange. Net inflows on account of financial services amounted to $1,087 million in 2005-06, according to the latest balance of payments figures.

Flows from financial services in the balance of payments are non-interest receivable and payable in respect of a financial entity. These essentially comprise brokerages, commissions and discounts earned by banks and other authorised dealers for various financial services rendered and guarantee fees on certain overseas borrowings.