Citi says supply & demand for fertilisers continues to shift east, urea prices are correcting, DAP prices could slow down in the near term, and capacity is expected to exceed demand. For a net importer of fertiliser such as India, this could be good news
Citi attended the Gulf Petrochemicals & Chemicals Association Fertiliser Convention in Dubai where companies such as Saudi Arabia's Sabic & Ma'aden, Qatar's QAFCO, Kuwait's PIC, Bahrain's GPIC and Oman's OMIFCO, Australia's Incitec Pivot, Norway's Yara, Germany's K+S, Fertiliser Association of India, and China's Sinochem participated. In a report early this week about its conclusions after the conference, Citi said that the fertiliser market appears to be in the midst of a price correction with prices having fallen by $10-$15 per tonne in the last week after a two-month run-up of $100-$120 per tonne.
The broker expects a fall in utilisation rates to below 80% (versus the 86% peak of 2007) in the medium term as new capacity comes on stream. Even assuming consumption at more than 2x the historical average, Citi still arrives at utilisation rates of 80% for 2011 and 81% for 2012.
From 2011-14, around 13 million tonnes (MT) of new capacity will come on stream with almost 65% of this coming from the Middle East and North Africa (MENA). MENA producers have two distinct advantages - low gas costs and phosphate rock deposits (in Morocco, Tunisia, Jordan and Saudi Arabia).
While DAP prices are steady at around $570 per tonne right now, Citi believes these may soften because of the recent slowdown in demand and resistance to the 2-month run-up in prices. Also, a lot of new new capacity is coming on stream, e.g., from Saudi Arabia's Ma'aden, which is due to add around 3MT of annual new DAP capacity - its commercial operations are set to begin in 2Q2011.
Under India's nutrient-based scheme, DAP consumption is expected to increase. India could import over 8MT of DAP in 2010 against 5.5MT in 2009. Indian demand is crucial for DAP imports since these account for almost 45% of global trade. India's bias to urea (81% of the country fertiliser use) still continues but Citi believes demand for other fertilisers will increase.
China, says the report, has increased its fertiliser self-sufficiency and has now become a net exporter of urea and DAP. Its urea market will remain balanced due to capacity cuts which are almost equal to additions. However, if it introduces a year-round 15%-20% export tariff versus its current staggered system, DAP exports may increase.
Early this month, Udai Shanker Awasthi, managing director of the Indian Farmers Fertiliser Co-operative had told the media that fertiliser demand may rise up to 60MT this year. This will mean more import due to India's problem of low domestic production. India imports almost 1/3rd of its fertilisers, most of them potash and phosphate.
In the past few weeks of September, a panel headed by former farm secretary T Nanda Kumar submitted its report, which said that urea should be urgently brought under the free pricing regime under the Nutrient Based Subsidy scheme and the government should slash subsidy for urea significantly to ensure that high price discourages its unproductive use.
Fertiliser stocks in India are showing mixed trends - some are trading near their all-time highs such as Coromandel International at Rs623 (high of Rs678 mid-September), Chambal at Rs74 (high of Rs78), and Deepak at Rs179 (high of Rs188) while others are quite below their all-time highs - such as National Fertiliser at Rs119 (high of Rs149) and RCF at Rs86 (high of Rs118).
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).
Mumbai: Global financial services firm Barclays Bank has acquired a 12.75% equity stake in BPO company Intelenet Global Services, reports PTI.
"Barclays Bank has acquired 12.75% fresh equity issue in SKR BPO Services, the holding company of Intelenet Global Services," Intelenet managing director and CEO Susir Kumar told journalists yesterday. Mr Kumar said Intelenet, which added 25 new clients during the last fiscal, plans to make an initial public offer in a year or two. The company, however, did not disclose the value of the deal.
Intelenet was a 50:50 joint venture between HDFC and Barclays before both stakeholders exited the company in 2007, in favour of Blackstone for a consideration of $200 million in a management-led buyout. At the time, Blackstone had an 80% stake in the firm and the Intelenet management 20%. Following the current stake sale Blackstone's stake has come down to 66.75% and the Intelenet management has 16.75%. HDFC also has 4.69%.
"We are pleased to again welcome Barclays as a shareholder and are grateful to them for their unwavering support," Mr Kumar said.
"At Blackstone, we continue to be very excited about the Intelenet management team's execution of its growth strategy and the further strengthening of its partnership with Barclays," Blackstone India chairman Akhil Gupta said.
Intelenet's revenues in 2009-10 were at about $240 million, compared to $90 million when Barclays exited three years ago. "In the last three years our growth has trebled and we hope the topline would jump by 20% to about $290 million this fiscal," Mr Kumar said.
He pointed out that the company planned to focus on the healthcare segment, which accounts for 10% of its revenues. "We expect the healthcare sector to grow between 12-15 per cent this fiscal," he said. Banks and other financial services customers account for about 42% of Intelenet's revenues. About 22% comes from travel and hospitality and 10% from telecom.
Mr Kumar also said that the company was scouting for acquisitions in the Philippines, China and Europe that would help it gain niche or special capabilities that would enhance its portfolio.
Here is what analysts are expecting from these sectors
Yesterday (http://www.moneylife.in/article/8/9771.html) we had written on how analysts are expecting the metals, financials, petrochemicals, engineering and retail sectors to come out with good numbers. Sectors like cement, telecom and real estate are most likely to be underperformers.
Fast moving consumer goods (FMCG), capital goods and information technology (IT) sectors are likely to perform in line with the Sensex growth. Between 1st July and 30th September, the index rose 15% to 20,069 points.
We continue our sectoral preview:
During the second quarter, the Index of Industrial Production (IIP) witnessed an uptrend. The IIP had an average growth of 13% between August 2009 and September 2010, while for FY10 it was 11%. The IIP growth indicates the demand traction for industrial goods from end-user segments. During the quarter to end-September, the Moneylife Engineering Index rose 8% to 2,263 points from 2,100 points as on 1st July.
Motilal Oswal Securities Ltd, in a research note said, "In Q2FY11 we expect engineering companies under our coverage to post revenue growth of 14% y-o-y, adjusted EBITDA growth of 18% y-o-y and adjusted net profit growth of 17% y-o-y."
Engineering firms are likely to report 16% y-o-y growth led by a pick-up in execution across companies as also the low base effect, which had been impacted sharply due to the slowdown.
During the quarter to end-September, prices of steel and copper increased by more than 50% from their Q1FY11 levels.
"For Q2FY11 we expect revenue growth of 14% y-o-y, given a pick-up in execution in the power and infrastructure segments. Growth is being driven largely by BHEL, Crompton and Thermax. We expect them to post 2QFY11 revenue growth of 17%, 14% and 35% y-o-y respectively," said Motilal Oswal.
Going forward, as capacity utilisations across key sectors pick up, order-books of capital goods companies are likely to rise sharply, resulting in accelerated revenue and profit growth.
Factors to watch out for the engineering sector are order inflows, execution and operating margins.
Click to view earnings projections
Source: Motilal Oswal Securities Ltd
Over the past three-four months, most FMCG companies increased product prices by 5%-10%. However, this has not affected sales or volume growth yet. A normal monsoon and receding inflation would help FMCG companies because of benign agri-input prices and improved pricing power. During the second quarter to end-September, FMCG companies continued to launch new products, particularly in the foods & beverages (F&B), personal care and household care categories. During the quarter to end-September, the Moneylife Consumer Products (FMCG) Index rose 10% to 288 points from 261 points as on 1st July.
"We estimate our FMCG coverage universe will post Q2FY11 sales growth of 18.2% y-o-y, higher than the 16.2% growth posted in 1QFY11. We estimate 16.9% growth in EBITDA compared with 13.8% in the previous quarter. EBITDA margins are expected to decline 20 basis points (bps)
y-o-y as against the 40bps decline in Q1FY11 as selective price increases and lower prices of a few inputs will restrict margin contraction. We estimate PAT growth of 15.3% in Q2FY11 compared with 13.5% growth in the first quarter," said Motilal Oswal.
In the recent past, most FMCG companies have witnessed a sharp rally and are currently trading at peak valuations compared with their historical averages.
Factors to watch out for in the FMCG sector are advertising & sales promotion (ASP) expenses, agri-input prices, raw material costs compared with sales and rural demand.
Click to view earnings projections
Source: IDFC Securities Ltd
Information Technology (IT)
The IT industry continues to witness a surge in volumes due to the sudden spurt in demand for discretionary spend by clients. The trend in spending is broad-based spanning industries as well as service lines. The nature of spend has seen a shift since Q1FY11 with deal discussions relating to change-business initiatives like consulting and package implementation as well as engineering and research & development (R&D) spend gaining strong momentum. During the quarter to end-September, the Moneylife Software and IT Services Index rose 13% to 387 points from 342 points as on 1st July.
Motilal Oswal said, "We expect the top-tier IT companies to continue to grow in Q2FY11, posting 4.7%-6% sequential growth, driven by broad-based demand. We expect Infosys to outperform its peers with 6% q-o-q growth."
During Q2FY11, the dollar depreciated against major currencies like the euro, pound and the Australian dollar by 1.5%, 3.9% and 2.5% q-o-q, respectively. The rupee also depreciated by 1.9% q-o-q against the dollar. This is likely to result in higher rupee revenues as well as aid margins to the tune of 60-70 bps q-o-q, said another brokerage.
Factors to watch in the IT sector are attrition outlook, discretionary traction and performance in the EU.
Going forward, says Motilal Oswal, "We expect IT demand revival in FY11 with 19%-25% volume growth and Q2FY11 results will reinforce this expectation. We prefer playing the sector through companies that gain from pick-up in discretionary demand, better operational scope and greater MNC off-shoring."
Click to view earnings projections
Source: Motilal Oswal Securities Ltd
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security).