Weekend Highlights – 23 August, 2014

Moodys revises outlook on Asian steel industry to stable from negative

Moodys Investors Service has revised its outlook on the Asian steel industry to stable from negative.

The improved outlook mainly reflects our expectation that the profitability of Asian steel manufacturers will increase moderately year-on-year in the next 12 months, says Jiming Zou, a Moodys Assistant Vice President and Analyst.

The improvement will be mainly driven by faster demand growth than net capacity increases in China, which will result in higher utilization rates. China is the key driver for the Asian steel industry, because the country accounts for a large proportion of steel production and consumption in the region, adds Zou.

Moodys expects steel demand growth in China to slow to about 3% during the next 12 months from about 9% in 2013 because GDP growth, fixed-asset investment and housing construction will slow.

However, this level of demand growth will still outpace projected net capacity growth, which will be largely flat. The low level of net capacity additions will be owing to the slower pace of new capacity additions and the acceleration of the removal of inefficient capacity by the Chinese government (Aa3 stable).

While Moodys expects the benefit from lower input cost of iron ore and coking coal to decline over the next few months, as pressure on steel prices increases, the lower costs will continue to help steelmakers improve their profitability.

100 entities waiting to apply for small and payment banks: ASSOCHAM Study

Recent draft guidelines on small and payment banks have enthused about 100 entities including microfinance institutions, telecom players, non-banking finance companies (NBFCs) and public sector companies to apply for such banking licence once RBI invites applications for the same, reveals the ASSOCHAM latest study.

These interested firms are awaiting final guidelines which will provide more clarity to firm up their plan to apply for the differentiated bank licence to further the objective of financial inclusion, according to a study conducted by ASSOCHAM.

Those which are looking to enter small banks space are awaiting clarifications like if a small bank can operate in an industry clusters across various states or it can operate in a particular state only, said Mr. D S Rawat Secretary General ASSOCHAM.

Besides, presence in a particular area could lead to potential threat of concentration risk that final guidelines can provide more light to avoid such a situation, added Mr. Rawat.

The study said, for example if there is draught or flood in a particular area, it will have quite a significant adverse impact on the balance sheet of a small bank with little diversification of risk.

Small banks would perform all basic banking operation like a commercial banks but with restricted area presence. It can collect deposits and disburse small-ticket loans to farmers and small and medium businesses, unorganised sector through high technology-low cost operations as par draft norms circulated by RBI.

As far as payment banks are concerned, it will cater to marginalised sections of society, including migrant labourers, for collecting deposits and remitting funds. They would not be allowed to indulge in lending operation.

Decline in WPI Inflation is motivating: PHD Chamber

Decline in WPI inflation to five months low is really encouraging and would pave the way for growth to pick up pace in the coming times, said Mr. Sharad Jaipuria, President, PHD Chamber.

The WPI inflation for the month of July 2014 declined to 5.19% in July 2014 from 5.43% in June 2014. The decline in WPI inflation is attributed mainly to decline in the prices of fuel costs.

The moderation in inflation despite the seasonal firming up of prices of fruits and vegetables is setting room for soft monetary policy stance in the coming times, said Mr. Sharad Jaipuria.

The recent announcements made in the Union Budget to improve agriculture infrastructure would go a long way to facilitate farm produce to deliver at consumers doorsteps, he said.

As the monsoon scenario is not that much promising in the current year, the government should take measures to mitigate the impact of deficient monsoon on prices of agricultural commodities, he said.

In view of the heavy dependence on monsoon for agriculture produce, it is necessary to facilitate farmers in the bad years by ensuring increased power supply, availability of fuel etc to farmers so that the sowing process is completed without delay, said Mr. Jaipuria.

Ranbaxy overcharged in Texas for drugs under its public-funded Medicaid programme

Ranbaxy overcharged in Texas for drugs under its public-funded Medicaid programme: State of Texas has imposed another hefty fine in the United States of close to `240cr. The company has been in negotiation with the US state over settlement of this issue for quite some time now. While final details are awaited, it is expected that the fine could be broadly split into two components. One of this, about 38%, could relate to some additional dues that the state may have claimed on account of Ranbaxy’s previous slippages from the US-prescribed manufacturing practices, which led to its coughing up US$500mn as fine in the US in May last year.However, a second component of about 61% of the settlement sum could be flowing from an assessment by the US state, which shows that the drugmaker has overcharged the state of Texas on one or more drugs under its public-funded Medicaid programme. In its first quater results, Ranbaxy Labs one-time provision of `237cr, which was slated to kept aside for specific ongoing settlement discussions with government authorities in the US.While the details are not avaible, the development will not have significant implications on the company’s financials,as the company has a comforable net debt position. Hence we maintain our neutral stance on the stock.

Cipla – 1QFY2015 Result Review

Results below expectations

Stock up 1.3%

Cipla (CMP: `448/ TP: `480 / Upside:7.1%)

1QFY2015 results for the company came below expectations. For the quarter, the company posted consolidated sales of `2647cr V/s `2720cr, expected         (`2331cr in 1QFY2014) a yoy growth of 13.6%. The growth on the top line came on back of domestic sales posting a growth of 17% yoy to end the period at `1289cr, while exports posted a low growth of 10.5%. The export formulation grew by 12.7% yoy to end the period at `1218cr, while export API posted a dip in sales which ended the period at `140cr V/s `148cr during the last corresponding period. With this formulations now constitute 95% of sales for the company. On the operating front, the EBDITA margins came in at 17.7% V/s 24.5% expected and V/s 22.2% during the last corresponding period. This was however much better than 13.1% during 4QFY2014. While the gross margins came in at 61.3% V/s 59.9% during the last corresponding period, still the margins dipped, on back of 48.5% yoy rise in employee expenses and 24.5% yoy rise in other expenditure. Further, the deprecation rose by 47.5% yoy, which lead the PAT came in at `295cr V/s `575cr expected, (`485cr in 1QFY2014) registering a yoy de-growth of 39.1%. We maintain our accumulate with a target price of `480.

Weekend Highlights – 16 August, 2014

Indian Railways Carry 357.57 Million Tonnes of Freight during April-July 2014

Indian Railways carried 357.57 million tonnes of revenue earning freight traffic during 1st April- 31st July 2014. The freight carried shows an increase of 14.57 million tonnes over the freight traffic of 343.00 million tonnes actually carried during the corresponding period last year, registering an increase of 6.25 per cent.

During the month of July 2014, the revenue earning freight traffic carried by Indian Railways was 89.89 million tonnes. There is an increase of 3.68 million tonnes over the actual freight traffic of 86.21 million tonnes carried by the Indian Railways during the same period last year, showing an increase of 4.27 per cent.

RBI to transfer Rs. 526.79 billion surplus to Government

The Central Board of Directors of the Reserve Bank of India approved the transfer of surplus amounting to Rs 526.79 billion for the year ended June 30, 2014 to the Government of India. The amount was Rs 30.10 billion for the year ended June 30, 2013. The surplus transfer will be effected August 11, 2014.

FDI enhancement in defence & up to 100% FDI in railways will boost manufacturing and reduce transportation costs: PHD Chamber

The Union Cabinets decision to enhance composite cap for foreign investments in defence sector to 49% from 26% is encouraging and it will go a long way to infuse innovation and to generate employment opportunities in the defence products manufacturing processes, said Mr. Sharad Jaipuria, President, PHD Chamber of Commerce and Industry

The move is expected to reduce dependence on defence imports and soften the burden of trade deficit in the coming times, said Mr. Jaipuria

The decision to permit FDI upto 100% in some railway operations in the country is also inspiring, he said.

This would overcome the problem of deficient financial resources of the Indian railway sector which has been a major deterrent to its capacity building and operational efficiency. Initiating the high speed train projects and development of dedicated freight corridors would enable the country to speed up the transportation mechanism and reduce the costs of transportation, he added.

Dishman Pharma – 1QFY2015 Result Review

Results below expectations on OPM and net profits, sales better than expected

Stock down 11.2%

Dishman Pharma (CMP: `147/ TP: `177 / Upside:20.4%)

Dishman Pharma, announced numbers better than expected on sales front, but lower than expected on OPM and net profit front. The company posted revenue of `362cr V/s `332cr expected, up 18.1% yoy. On the EBITDA front, OPM’s came in at 20.5% V/s 23.0% expected and V/s 27.8% during the last corresponding. The dip in the margins is on back of the 431bps dip in the gross margins ( 71.1% v/s 75.4% during the last corresponding period) and a 21.3% and 32.8% yoy growth in the staff and other expenditure respectively. A higher depreciation expenditure , during the period, lead the company to post a PAT to come in at `24cr, a yoy de-growth of 18.6% yoy. This was much lower than expected `37cr, on back of higher than expected interest expenditure during the period. We maintain our buy rating on the stock with a price target of `177.

Sun Pharma – 1QFY2015 Result review

Results better than expected on OPM front, sales and net profit lower

Stock up 1.2%

Sun Pharma (CMP: `784/ TP: / Upside:)

For the 1QFY2015, the company posted results lower than expectations on sales and net profit front, while OPM came in higher than expectations. Sales during the quarter came in at `3,927cr, a yoy growth of 13% over same quarter last year. This was lower than the expectations of `4200cr.Branded generic sales in India at `992cr, up by 17% yoy over last corresponding period. US finished dosage sales at US$ 389mn  grew by 7% (in US$ terms).  The US sales were mainly due protection charge of US $55mn, taken by Taro during the quarter. International formulation sales outside US at US$82mn, grew by 2% (in US$ terms) over last corresponding period. Overall international revenues accounted for more than 75% of total revenues for the quarter.

On the operating front, the EBITDA came in at `1,724 cr grew by 13%; resulting EBITDA margin of 44%, same as 1QFY2014. This was higher than 41.8% expected. Thus the Adjusted Net profit at `1,391 cr a growth yoy of 12% over 1QFY2014. This was lower than `1,428cr expected. Reported Net profit at `1,391 cr, compared to Net loss of `1,276cr in 1QFY2014. The reported net profit was lower than the expected net profit in spite of higher than expected OPM, On back of higher taxation during the period and lower than expected sales during the period. We remain neutral on the stock.

2QCY2014 Result Review – Glaxo Pharma

Below expectations on OPM and net profit front

Stock dips marginally by 0.5%

Glaxo Pharma (CMP: `2,495/ TP: / Upside:)

Glaxo Pharma announced its 2QCY2014 numbers today, which came below expectations on OPM and net profit front. On the other hand the sale was in line with expectations. The company posted revenue of `655cr V/s `660cr expected, up 2.8% yoy. EBITDA margin came in at 16.7% V/s 19.8% expected an 116bps yoy dip. This was mainly on back of the gross margin dip, which came in at 51.5% V/s 53.6% during the last corresponding period. The staff cost and other expenditure on the other hand posted a mere 3.4% yoy growth and a dip of 2.1% respectively. Thus, PAT came in at `98.2cr V/s `125cr expected , a dip of 3.4% yoy. Also other income during the period was lower by 31.7% yoy to end the period at `45cr. We maintain our neutral rating on the stock.

Weekend Highlights – 9 August, 2014

ASSOCHAM supports govt. on WTO stand, but India needs to strengthen alliances

India is fully justified in seeking a fair deal in the WTO, a deal which is balanced and in the interest of the developing countries as India cannot accept an international obligation which will disallow it to protect the vulnerable sections of the society, apex industry body ASSOCHAM said.

The food security is crucial for us. While Indian industry is all for global trade facilitation, we must stand behind the government in seeking a deal that is fair to all sections of the society and not the industry alone, said Mr D.S. Rawat, secretary general of The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

However, Indian negotiators need to work aggressively on building and forging alliances with the developing countries like Brazil, South Africa and China as also the members of the G-33 grouping so that India is not projected as a fall guy in the global negotiations, said Mr Rawat.

Moodys global review of Basel III implementation highlights progress made and jurisdictional differences

Moodys Investors Service says that while implementation of Basel III is proceeding globally, notable differences are evident between jurisdictions in a host of areas, such as pace, the degrees of strictness relative to Basel Committee guidance, and the resulting challenges banks face.

Moodys views the key requirements being implemented as part of Basel III as credit positive, addressing many of the deficiencies in banks pre-crisis management of risk, capital, liquidity and funding and leverage.

Moodys also argues, however, that it is apparent that some of the weaknesses associated with Basel II have not been sufficiently addressed and that it is too soon to say that the industry has so far achieved fundamentally stronger creditworthiness as a result of Basel III.

Moodys conclusions were contained in a just-released report titled Basel III Implementation in Full Swing: Global Overview and Credit Implications. The report – co-authored by Laurie Mayers and Meredith Roscoe – reflects contributions from Moodys banking analysts worldwide, and brings together assessments on the progress of implementation of Basel III in the Americas, Middle East & Africa, Asia Pacific, and Europe, or a total of 38 jurisdictions.

Themes include implementation trends and credit implications, the implications for banking industry strength, and the background to Basel III. In particular, Moodys discusses how the Basel III framework addresses the deficiencies of previous frameworks which became apparent as a result of the global financial crisis. The report also contains tables and exhibits analyzing and comparing the situation in each jurisdiction.

For those systems where the banks already hold high levels of capital and liquidity – such as in Asia Pacific, the Middle East, and Latin America – authorities are imposing higher, super-equivalent requirements, and maintaining the liquidity and capital in their systems, a credit positive.

In this case, a key challenge for banks will be the replacement of non-qualifying instruments through organic capital generation or issuance of new Tier 1 and Tier 2 instruments.

Continuing on its themes of the differences between jurisdictions, the report notes that in some countries, including the UK, Canada, and in Asia, implementation is stricter than the Basel Committee for Banking Supervision (BCBS) guidance so as to avoid regulatory back-stepping – that is, capital or liquidity requirements were already stricter than the requirements of previous regimes, such as Basel II.

Ind-Ra: Currency Stability As Important a Consideration As Inflation for Rate Cut

An interest rate cut could trigger a rupee depreciation, affecting the coverage metrics of net importers, says India Ratings & Research (Ind-Ra). There have been instances of an interest rate cut by the Reserve Bank of India (RBI) in the past being followed by a 1.1%-5.8% rupee depreciation. Around 53% of BSE 500 corporates, which are net importers and account for 70% of balance sheet debt, have been estimated to have historically suffered a 1.3% EBITDA erosion for a 1% rupee depreciation.

According to Ind-Ra, a 25bp interest rate cut followed by a 2% rupee depreciation could stress 14% of the debt in BSE 500 corporates (excluding banking and financial services) compared with 10%, currently. However, a 50bp interest rate cut followed by a 5% rupee depreciation could stress 21% debt of BSE 500 corporates.

In the last four instances of a repo rate cut since March 2010, the rupee depreciated on three occasions one month post the effective date of the rate change. The average and median rupee depreciation in these three instances was 4.1% and 5.2%, respectively. The current study shows that a reduction in policy rates (repo) since FY10 has not been transmitted into lower lending rates immediately as well as in full. However, rupee rates react almost immediately.

Any rate change decision over the next six to nine months could profoundly impact corporates. An increase in interest rate may increase the debt servicing burden of several overleveraged corporates. Conversely, a rate cut need not be considered unequivocally positive, given the possible depreciation in rupee.

While an argument for a rate cut may be created if domestic inflation comes down meaningfully, it need not be the only consideration for a rate cut in FY15. Other possible factors that may support arguments of a rate cut are a continued benign global risk appetite and the position of Indias real interest rate relative to other emerging market players.

RBI may like to ensure that a rate cut, if implemented in FY15, is promptly transmitted to lenders. However, there is a possibility of a rate cut leading to currency depreciation and the interest rate benefit not being transmitted to borrowers. Net importers may thus be more severely affected than suggested in this study, which assumes immediate transmission of an interest rate cut.

Lupin launches Basugine

Lupin launches BasugineTM: Lupin announced a strategic distribution agreement with LG Life Sciences (South Korea) to launch Insulin Glargine, a novel insulin analogue under the brand name Basugine™. According to the agreement, Lupin would be responsible for marketing and sales of Basugine™ in India. The overall diabetes market size within the Indian Pharmaceutical Market (IPM) stood at `6032cr growing at 18% (IMS MAT April 2014). The total insulin analogue market size is valued at `585cr with 3 year CAGR of 24%. The total Glargine molecule market is `218.5cr with 3 year CAGR of 23%. Lupin ranks 2nd in the conventional insulin market and grew more than the market at 10.82% in April 2014 (IMSD MAT), while the market grew at 8%.

Lupin is amongst the fastest growing players in the OAD (Oral Anti-Diabetes Drugs) market and also in the insulin segment Insulin Glargine is indicated for once – daily subcutaneous administration for the treatment of adult patients with type 1 diabetes mellitus or in type 2 diabetes mellitus; patients who need basal insulin (long acting) for controlling hyperglycemia. Luoin’s entry into the insulin analogue market with launch of Basugine™ is a step in the right direction. Lupin’s foray in this segment will help us further strengthen its Diabetes portfolio enabling it to grow deeper into the Diabetes segment and will fuel its growth in the years to come. We maintain our neutral view on the stock.

Weekend Highlights – 2 August, 2014

Gujarat acquires lions share in new investments attracted by power sector: Study

Gujarat is ranked on top acquiring highest share of over 17 per cent in the new investments attracted by the power sector during the course of financial year (FY) 2004-05 and FY 2012-13, apex industry body ASSOCHAM said.

n++Gujarat has attracted new investments worth over Rs 5.3 lakh crore of the total new investments worth over Rs 31.3 lakh crore attracted by the power sector from various public and private sources across India thereby indicating significant development in power availability across the state,n++ noted a study titled State-wise analysis of power sector: Consumption, demand & investment, conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

During the FY 2012-13, Gujarat attracted new investments worth over Rs 1,560 crore of which private sector accounted for lions share of about 56 per cent as against 44 per cent share of public sector.

n++Flow of private investments is determined by attractiveness of investment opportunities as they are mostly driven by profitability considerations,n++ said Mr D.S. Rawat, national secretary general of ASSOCHAM while releasing findings of the chambers study.n++Bureaucratic efficiency, infrastructure facilities, and ease of land acquisition influence the flow of private investments,n++ said Mr Rawat. n++Tax concessions, product market conditions and exit policies are effective tools of private investment attraction.n++

With investments worth about Rs 22 lakh crore, Gujarat also accounts for highest share of over 44 per cent in total outstanding investments worth over Rs 49.5 lakh crore attracted by the power sector across India as of FY 2012-13 clocking compounded annual growth rate (CAGR) of about 26.5 per cent, highlighted the study prepared by The ASSOCHAM Economic Research Bureau (AERB).

Gujarat has also taken a great leap forward in this behalf as the total outstanding investments in power sector attracted by the state have increased from over Rs 20 lakh crore as of FY 2004-05 thereby growing at a CAGR of about 35 per cent, besides, the state share has improved drastically from just about seven per cent to over 44 per cent, the study added.

Apart from this, with just about 29 per cent of investment projects in the power sector remaining non-starter as of FY 2012-13, Gujarat has registered significant improvement in the power situation as against over half of investment projects being non-starter as of FY 2004-05.

FDI in insurance & pension sector will induce long-term investments: PHD Chamber
Cabinet approval to the FDI in insurance sector to 49% from 26% and 26 per cent FDI in pension sector is inspiring and it would go a long way to rebuild investment sentiments in the country. There is a strong need to channelize the household savings from physical assets to financial assets and allowing FDI in pension sector and enhanced cap in insurance sector will facilitate financial sector vis-n++-vis strong financial infrastructure, said Mr. Sharad Jaipuria, President, PHD Chamber of Commerce & Industry.FDI in insurance sector will also strengthen the capital flows in the coming time. Long-term capital investments in insurance industry and pension sector would be critical to protect human life and to boost infrastructure, he said

Cap on foreign direct investment in insurance has been raised from 26 per cent to 49 per cent, and pension sector has been allowed 26 per cent FDI.

Rs. 73,392 crore will be an Estimated Completion Cost of Railways Two Dedicated Freight Corridors, Excluding Sonnagar-Dankuni Section


At present two Dedicated Freight Corridors (DFCs) viz. Eastern Corridor (Dankuni-Ludhiana, 1839 Kms.) and the Western Corridor (Jawaharlal Nehru Port Terminal (JNPT) to Dadri, 1499 Kms.) have been sanctioned. On Eastern DFC, construction work is in progress in Mughalsarai-Sonnagar section. Civil contract has also been awarded on 343 Kms. Khurja-Kanpur section and work has started. On Western DFC, civil contract has been awarded on 625 Kms. Rewari-Palanpur section and work has started. Construction of 25 major and important bridges between Vaitarana and Bharuch has been completed.The estimated completion cost of construction of the two Corridors, excluding land, and excluding Sonnagar-Dankuni section, which is to be implemented through Public Private Partnership (PPP), is Rs. 73,392 crore (Eastern DFC Rs. 26,674 crore and Western DFC: Rs. 46,718 crore). The cost of land is estimated at Rs. 8067 crore (Eastern DFC Rs. 3684 crore and Western DFC-Rs. 4383 crore.)

Western DFC is being funded by loan from Japan International Cooperation Agency (JICA) funding is Rs. 38,772 crore, which is 77% of project cost.

World Bank is funding the 1,183 kms. Section from Ludhiana to Mughalsarai of the Eastern DFC. World Bank loan is Rs,13,625 crore which is 66% of the project cost. 122 kms Section of Mughalsarai-Sonnagar Section of Eastern DFC is funded by Gross Budgetary Support and the cost is Rs. 3679 crore. 534kms of Sonnagar-Dankuni Section of Eastern DFC is to be implemented through PPP.

The balance excluding debt is funded through Budgetary Support from the Government. Land for DFC Projects is being acquired under Railway Amendment Act (RAA) 2008. Out of 10,667 hectare of land to be acquired for the project, Award under 20F of RAA 2008 has been declared upto June 2014 is 9641 hectare of land (Western DFC: 5600 hectare and Eastern DFC: 4041 hectare).

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