Yellow metal- Where is it headed?

Half way through 2014, markets remain confused where gold prices are headed. Investors are still in dilemma and are now looking

at fresh set of factors that will drive the price trajectory for rest of the year. While there was no real sign of sustained economic

strength in 2013 for the world economy, just the idea of Federal Reserve in the US may start tapering at some point was enough to

send gold bullion prices lower and the “Bull Run” in gold ended losing around 30 percent of its value last year.

Investors lean toward gold and other precious metals as a hedge against both a weak U.S. dollar and inflation. A tapering of the

Federal Reserve’s monetary policy suggests that the U.S. economy is getting stronger. This optimistic view comes from the fact that

housing sector and job market (the two important sectors) in the US is gaining traction as depicted in the graph above.

Although, the creation of ETFs like SPDR Gold Trust has changed the investment environment, the investment flows in the commodity

remains largely subdued in 2014. Inflows in SPDR gold trust stood at 790.7 tonnes as on June 30’2014 which is largely flat when

compared to gold holdings at the end of last year (31st Dec’ 2014) which stood at 798.2 tonnes.

Gold prices are nearly up by 10 percent in first half of 2014. The prime reason being Russia’s military intervention in Ukraine led to safe-haven buying and investors ditched assets perceived as riskier such as equities.  In addition, lower U.S. 2014 growth forecast by

the Fed and its lack of commitment to raise interest rates and continued tensions in the Middle East unleashed a wave of short covering.

The recent esclated geopolitical situation in Ukraine and fresh round of sanctions imposed by the US on Russia also lifted the prices

of the yellow metal.

However, further prices moves would be dependent on the complex set of factors. A report from the World Gold Council earlier this year

said gold imported in to China was being used via gold loans and letters of credit to raise low-cost funds for business investment and speculation. China, the biggest consumer of the yellow metal is set to see imports’ declining

as the government tightens controls on gold financing deals and measures to restrict the abuse of gold lending and other financial plays.

In India, the premiums charged by banks have declined from a high of $190 an ounce to $7-15 currently because of improved supply since May 21 after RBI renewed import licenses of nearly a score premier trading houses.

On the contrary, there were wide expectations of the bullion industry that the government might reduce import duty (currently at 10%)

on gold in the recent budget. The government however defied market expectations as it may not be keen on the move as increased gold

imports following a duty cut (if any) could widen the current account deficit and impact the rupee adversely, raising inflationary

expectations.

All other factors remaining constant, if gold prices do start to rally, investors will probably wait a little bit longer before jumping back

into gold. However, taking in to consideration, the optimism in the US economy (growth in housing and the labor market),

strength in the PMI numbers from US and China and possible tapering of QE by the end of this year and probability of rise in interest

rates in the US sometime in 2015 are all indications that rally in gold price will not last long. Besides, growth in the world economy

at large will be a driving factor for investors to put their money in to other asset class other than gold.

Spot gold prices can correct to an extent of $1100/oz ( from current price of $ 1315/oz)  while gold prices on the MCX can

correct towards Rs.26,500/10 gms in 2014 ( CMP : Rs. 28,000/ 10gms).

GDP growth %age change year over year

Projections
2012 2013 2014* 2015*
World Output* 3.2 3 3.6 3.9
Advanced Economies 1.4 1.3 2.2 2.3
United States 2.8 1.9 2.8 3
Euro Area @ -0.7 -0.5 1.2 1.5
China 7.7 7.7 7.5 7.3
India 4.7 4.4 5.4 6.4

Source: IMF, World Economic Outlook, April 2014

Naveen Mathur

Associate Director – Commodities & Currencies

Angel Broking

Monsoon- The driving factor for Indian Agriculture

India, predominantly an agriculture based economy is largely dependent on the monsoon. The agriculture sector is the backbone of the Indian economy, and thus, monsoon should be considered as the backbone of Indian Agriculture. The four month southwest monsoon season, which accounts for nearly 75 percent of the country’s total rainfall plays a very crucial rule as about 55-60 percent of the area sown is still rain-fed. India gets nearly 53 percent of its agricultural produce from the Kharif season (June-September) as compared to the Rabi season (November- February), where the production is around 47 percent. The impact of south west monsoon is also crucial for rabi crops as it impacts the ground water and also the reservoirs which is critical for irrigation of rabi crops.

Southwest monsoon is vital and the agricultural schedule of India is governed by the same. Agriculture contributes about 14 percent of gross domestic product (GDP) in Asia’s third-largest economy and any divergence from the normal progress or distribution may have direct impact on the agricultural output and a cascading effect on the overall economy, food inflation and therefore, consumer spending in India.

The onset of monsoon this year was behind schedule, and the advancement has also been delayed and the rainfall from the start of the season is 43 percent below normal. The Indian Meteorological Department (IMD) had forecast monsoon below normal at 95 percent of Long Period Average (LPA) which was revised to 93 percent of LPA in their Second Long Range Forecast. Skymet, a private agency had forecast monsoon at 94% of LPA. However, with the slow advancement on monsoon, Skymet has lowered its forecast to 91% of LPA, which is a cause for concern. The weather forecasting agencies across the global have forecast 60-70 percent chances of emergence of El Niño in 2014, which is expected to further impact the rains in the latter half of the southwest monsoon. Now, we have to see the severity of El Niño.

Deficient rains from the start of the season has not only delayed sowing but also led to a decline in the acreage of most of the kharif crops viz rice, pulses, cereals, oilseeds and cotton. Total area sown is nearly 34 percent lower compared to the corresponding period last year.

The newly formed NDA government has just come into power recently and has set taming the rising inflation and food prices as it priority. However, below normal rains has played a spoilsport as it led to a spurt in the prices of fruits and vegetables. The government has been proactive and has taken a host of measures like increasing the MEP of onions to discourage exports and restricting creating fresh positions in Potatoes on the futures among others. The government has also said that it will take strict action against food grain hoarders, blaming them for artificially raising the prices.

A weak monsoon this year can have a drastic effect on the Indian economy, as it may lead to a decline in the agricultural production. Lower output of pulses and oilseeds will lead to increased imports, denting the food import bill which in turn will impact the fiscal deficit. The earlier expectations that the RBI may cut the interest rates may now take a backseat.

It is now very important to track the further advancement of the monsoon in the days to come. The IMD expects a revival of the monsoon in the coming days. Apart from the overall monsoon rainfall, the distribution across regions and its withdrawal will also play a crucial role in determining the output of agricultural commodities.

-Naveen Mathur
Associate Director-Commodities & Currencies,
Angel Commodity Broking

Crude oil – Iraq takes the centre stage

Oil markets have always been the favorite of momentum traders as these markets are always tensed with the state of affairs in the OPEC nations which contributes to a third of world supplies. Also, the geo-political tensions, seasonal demand, supply outages, refinery maintenance and turnarounds are the key factors determining price trajectory.
The year 2014 has been full of events for oil as prices have been trading in a positive trend after bottoming out at $91. Starting with the US, the country was hammered with frigid temperatures at the start of the year that led to record consumption of natural gas which in turn led to shortage of heating fuels prompting utilities to turn towards fuel oil for electricity generation. Rally in US equities and unemployment rate falling to five year led to rally in crude oil prices. On the flip side, geo-political tensions in Ukraine, unrest in Libya and production disturbances in South Sudan supported Brent.
Prices rose on concerns over the possibility of tougher sanctions on Russia and potential supply disruptions. In addition, positive US economic data, stronger US gasoline demand and continued tight supplies at Cushing, Oklahoma, led to the rally. Also, data from China suggested that banks disbursed the highest amount of loan in last four years and oil imports by China were at record highs in the first few months of the year. This coupled with strong world oil demand forecasts in 2014 by IEA (International Energy Agency) has been driving factor for oil prices. Half of 2014 is almost over and its time we assess the state of oil markets (Iraq situation) and the way going forward.

Iraq- the nation at war

Iraq borders Turkey to the north, Iran to the east, Kuwait to the southeast, Saudi Arabia to the south, Jordan to the southwest, and Syria to the west. The country with such strategic importance has been in a state of sectarian war between Sunnis and Shias for a very long time. The Sunni-Shia split is rooted in the question of who succeed Prophet Muhammad in leading Muslims after his death in 632. Iraq, which is in danger of exploding in sectarian bloodshed owing to targeted killings of Shias by the al-Qaeda offshoot ISIS, is 60 to 65 per cent Shia, and 32 to 37 per cent Sunni, according to the CIA’s World Fact Book.
Iraq, the second largest crude supplier in the OPEC (Organization of Petroleum Exporting Countries) producing around 3.3 million barrels on an average has been in a state of civil war creating supply constraints in oil markets. The violence in Iraq has stoked regional tensions as militants advance swiftly over northern Iraq, a biggest threat to its sovereignty and integrity in years. Since seizing Mosul on June 10, the Islamic State in Iraq has been attacking towns along the main highway heading south, coming closer and closer to the capital. Hundreds of people have been killed since the start of the militant offensive in last couple of weeks, many of them believed to be captured soldiers publicly shot by ISIS-led firing squads. The militants have also taken control of the country’s biggest oil refinery (Bajji oil refinery). The refinery which is now shut down is critical for Iraq’s supplies of petrol and other petroleum products. It supplies a quarter of the country’s refining capacity.
Oil markets will closely watch how the events unfold in Iraq. If militants take control of the southern Iraq where major oil fields and infrastructures are located it would be nightmare for the country’s government and an uncertain situation leading to supply imbalance in turn higher crude prices. WTI crude prices can now head towards $114/barrel (CMP: $106/bbl) while on the MCX crude prices can turn higher towards Rs.6560/barrel.

Indoco Remedies Gets Approval From US Drug Regulator for Goa Facilities

Indoco Remedies Gets Approval From US Drug Regulator for Goa Facilities: Indoco Remedies has received a nod from the USFDA for two of its facilities in Goa. The US health regulator has approved the sterile facility (plant-II) and solid dosage facility (plant -III) located at Verna.The nod will facilitate the generic approvals in the US market and subsequent product launches there and will boost high-margin revenues from the highly remunerative US market. Officials from the US drug regulator visited the facilities in August last year. With this, the number of Indoco facilities having approval from the US regulator has gone up to six- three for finished dosages, two for APIs or active pharmaceutical ingredients. The company derived 35% its revenues from exports in 2013-14.

The development is very positive, as Indoco’s ophthalmic business , as company has filed products from these facilities, and hence the approval opens up avenues for high-margin, low-competition product sales in the US. In the last four years, the company has filed ~15 ANDAs in the ophthalmic space and expects to secure approval for ~5 products over FY15-FY16E, addressing opportunities of US$1bn brand sales. Thus we estimate, the company to garner around `120cr sales in FY2016, and hence enhance our estimates on sales and net profit front by 12.1% and 34.1% respectively. Thus for FY2014-16E, we expect the company to post a sales and net profit of CAGR of 17.9% and 47.5% respectively. Also we upgrade our price target on the stock to `192 with a buy rating on the stock.

TCS – 1QFY2015 Result Review

Result better than expected on sales and net profit front, while EBIT margin lower

Stock up 3.7%

TCS (CMP: `2,381/ TP: `2,778/Upside: 16.7%)

TCS reported its 1QFY2015 results better than expected, both on revenue and net profit front, while EBIT margins came in lower. The USD sales growth for the quarter came in at 5.5% qoq to US$3,694mn V/s US$3,671mn expected, mostly volume lead (5.7% qoq). In rupee terms, revenues came in at `22,111cr V/s `21,944cr expected, up 2.6% qoq. EBIT margins came in at 26.3% V/s 27.1% expected a 284bps decline qoq. However, a higher other income (grew by 16.6% qoq) and low tax rate (a dip of 6.1% qoq) during the quarter, aided the PAT came in at `5,057cr V/s `4,807.3cr expected, a dip of 4.5% qoq. We maintain our buy rating on the stock with a target price of `2,778.

Rallis India – 1QFY2015 Result Review

Stock up 2.7%

Rallis India (CMP: `218/TP:/Upside:)

Rallis India, posted robust set of numbers. For the quarter, 1QFY2015, the company posted net sales of `465.4cr V/s `409.3cr in 1QFY2014 ,a yoy growth of 13.7% yoy. EBITDA margins came in at 11.9% V/s 12.9% during the last corresponding period; in spite of the 50.2% GPM V/s 48.3% in 1QFY2014.This was mainly on back of a17.5% yoy rise in other expenses. Also during the quarter, the other income came in at `6.3cr V/s `4cr during the last corresponding period. Consequently, PAT came in at `369.8cr V/s `274.9cr, a 34.5% yoy. However, the adj net profit growth was 5.7% yoy during the period. We remain neutral on the stock.

Cipla to buy 51% stake In Yemen-based distributor for $US 21mn

Cipla to buy 51% stake In Yemen-based distributor for $US 21mn : Cipla has signed a definitive agreement to acquire a 51% stake in a pharmaceuticals manufacturing and distribution business in Yemen (owned by a UAE-based parent company) for $ US 21mn. This is second buyout of Cipla this month. Two weeks ago, Cipla had acquired 60% stake in a Sri Lanka-based company for $US14mn. According to the company, buyout in Yemen will secures company’s presence in a fast growing market, where it already has a leading position with over 200 products. The deal includes additional considerations to be paid over the next three years on achievement of agreed milestones. Since the acquisition is unlikely to add significantly to the overall financials and hence we maintain our target of `480, a an accumulate rating.

Weekend Highlights – 27 June, 2014

Ministry of Railway partially rolls back passenger fare hike

The circular for revision of passenger fares issued by Ministry of Railways that was to come into effect from 25 June 2014 had among other things made a change in the way the fare for monthly season tickets (MSTs) was to be calculated. In the existing system, the MST is 17-15 times the value of a single journey ticket for the same distance slab whereas the circular indicated that MSR fare would be now equivalent to 30 single journey fare for the same distance slab. Inclusive of the 10% fare hike and 4.2% FAC, the new MST fares ranged 1.7 times to 3.5 times of the old MST fare.
Despite the fact that MSTs are highly subsidized, Ministry of Railway has now decided to modify the fair revision circular and hence a decision has been taken to increase the cost of existing MST fare by only 14.2% inclusive of FAC, i.e., the Monthly Season Tickets for both suburban and non-suburban shall now be charged at 14.2% over the existing rates rounded off as per extant instructions.

Further, in the second class ordinary suburban single journey fares, it was noticed that upto a distance of 80 kms, there was increase in 3 of the slabs only and because of rounding off, the increase was coming to more than 14.2%. A view was therefore taken to avoid any hike in fares upto a distance of 80 kms. Thus, there is no change in fare for second class suburban travelers for a distance upto 80 kms.

Retail asset securitization market rated volumes declines in FY2014: Care Ratings

Indian retail asset securitization market rated volumes have decreased marginally by around 6% to Rs 28300 crore in FY14 as against Rs 30300 crore in FY13. In FY14, although there was greater clarity with the introduction of a new tax regime in Union Budget, the market started moving towards direct assignment route due to a combination of factors making it an attractive proposition for both the originators as well as the investors.
RBI issued guidelines on reset for credit enhancement (CE) for Securitization transactions. It will provide capital relief for the originators by the partial release of CE.

The RBI circular for change in treatment of Rural Infrastructure Development Fund (RIDF) and certain other funds under priority sector guidelines has come as a relief for banks, but this could too have a negative impact on new securitisation issuances going forward.

RBI allows banks to appoint non-deposit taking NBFCs as business correspondents
Taking into account the recommendations of the Mor Committee, the existing guidelines on appointment of Business Correspondents (BCs) have been reviewed allowing banks to appoint non-deposit taking NBFCs (NBFCs-ND) as BCs. However, the banks have to ensure that there is no comingling of bank funds and those of the NBFC-ND appointed as BC, while there has to be a specific contractual arrangement between the bank and the NBFC-ND to ensure that all possible conflicts of interest are adequately taken care of.Banks should ensure that the NBFC-ND does not adopt any restrictive practice such as offering savings or remittance functions only to its own customers and forced bundling of services offered by the NBFC-ND and the bank does not take place.With a view to ensuring adequate supervision over the operations and activities of the retail outlet/sub-agent of BCs by banks, every retail outlet/sub-agent of BC is required to be attached to and be under the oversight of a specific bank branch designated as the base branch.The distance between the place of business of a retail outlet/sub-agent of BC and the base branch should ordinarily not exceed 30 kms in rural, semi-urban and urban areas and 5 kms in metropolitan centres. In case there is a need to relax the distance criterion, the District Consultative Committee (DCC)/State level Bankers Committee (SLBC) could consider and approve relaxation on merits in respect of under-banked areas etc.

Ranbaxy to launch generic Diovan in US

Ranbaxy to launch generic Diovan in US: Ranbaxy Labs, is expected to finally launch in the US market, the first generic version of Swiss drugmaker Novartis’ Diovan (Valsartan), for which it enjoys a 180-days exclusive marketing opportunity.This launch, pending since September 2012 would happen immediately without any delay as it has managed an approval from the US Food and Drug Administration (USFDA). Novartis, which earns about US$3.4bn from this drug globally.The Swiss firm reckons that every month without a generic in US for Diovan helps it earn roughly US$100mn. The company may clock close to US$200mn during its 6-month exclusivity period if it launches the drug at a 40-50% discount to innovator’s branded version and manages to corner half of the marketshare in the US.On the net profit, it can garner around US$30mn, during the period. Since, its main API plant at Toansa in Punjab was barred from shipping to the US, now sourcing its API from an external party would mean Ranbaxy may have to share a part of the sales. This one of the key oppurunities fo the company, however, the main upsides for the stock would from heron would accrue from the merger with Sun Pharma ( pending the legal hurdles) , pending which we remain neutral, as of now.

Weekend Highlights – 21 June, 2014

Moodys: Indian banks continue to face asset quality risks from power sectors weaknesses

Moodys Investors Service says that the power sector would continue to be a source of asset quality risk for public and private-sector banks in India if the poor financial profiles of state electricity board distribution companies (discoms) do not improve through further structural reforms.
The poor financial health of discoms in India is one of the key factors weighing on the asset quality of the countrys banks, says Srikanth Vadlamani, a Moodys Vice President and Senior Analyst.

So far, these problems have almost exclusively affected public-sector banks, which represent more than 70% of total banking system assets, and which are directly and indirectly exposed to the credit quality of discoms, adds Vadlamani.

While private-sector banks have almost no direct exposure to discoms, they are exposed indirectly if problems with discoms affect the credit quality of other borrowers in the electricity supply chain, especially power-generating companies, which are also creditors of the discoms, says Vadlamani.

The two government-owned financial institutions specializing in the provision of funds to the electricity sector: Power Finance Corporation (Baa3 Stable) and Rural Electrification Corporation (Baa3 Stable), are not completely immune from the power-sector challenges. However, Moodys views these specialized financial institutions position as being comparatively more stable, as they benefit from a number of protections, including an escrow account structure that effectively grants them priority of claims on their borrowers receivables, including those of discoms.

Business Confidence at Cloud 9 With New Govt. In Power: PHD Chamber

India Incs business index confidence and business opportunity cost have shown substantial improvements with Modi Government firmly in place ever since it occupied the office late last month as both these indices peaked up at 9 points out of 10, concludes a random survey, undertaken by PHD Chamber of Commerce and Industry.
Not only the massive stock market boom was witnessed in the last two weeks but also couple of other policy measures undertaken ever since the new government returned to power in the last 10-12 days such as scraping of Group of Ministers (GoM) and Prime Ministers assurances to bureaucracy not to fear intimidation scrutiny from watchdogs like the CBI in its day-to-day decision making are the two leading factors that have led to drastic improvements in rising business index confidence and business opportunity costs in Indian industry, further highlights the survey.

The Survey in which the opinion of 300 entrepreneurs, having affiliation to PHD Chamber of Commerce and Industry were polled in also indicates that the momentum of doing business in India would accelerate to a level that cannot be fathomed now.

Releasing its findings, President of the PHD Chamber Mr. Sharad Jaipuria said that over 80% of business people reasoned that Mr. Modis leadership spurred stock market boom and brought back confidence at higher echelon of bureaucracy for expediting decision making with his assurance that consequential after effects noticed later on in their decision taken for serving the public cause will not be subjected to scrutiny.

Establish Inter-State Council for Effective Governance-ASSOCHAM

In line with the Prime Minister Shri Narendra Modis initiatives to address issues concerning State Governments on priority by setting up a cooperative federal structure, ASSOCHAM strongly recommends establishment of an Inter-State Council for the following initiatives by the Central Government to create synergy and effective delivery with State Governments:
n++Formulate a National policy with the consensus of State Governments in key sectors like agriculture, mining and real estate to break the current logjam and kick-start seamless multi-state economic revival

n++Encourage active participation of State Governments in key infrastructure sectors like river linkage project, power grid management, GST and environment clearances

n++Build consensus in Central fund allocation and higher accommodation of demands from the State Governments

n++Create greater co-ordination between Union and State Governments in policy compliance and law enforcement, lack of which might impact business sentiment adversely

ASSOCHAM believes that activation of Inter-State council will dramatically enhance Centre-State relations and provide the opportunity for meaningful dialogue on all pending issues in time-bound manner, thereby creating a Team India approach to governance, economic growth and sustainable development.

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