Jubliant Organosys

Jubilant Organosys and Eli Lilly have entered into a 50:50 joint venture agreement in India, focusing on providing drug development services. This is a strategic collaboration which would be focusing exclusively on developing new drugs in the areas of oncology, metabolic disease, cardiovascular and diabetes. This Bangalore based joint venture will focus on developing molecules from the preclinical stage to the Phase II stage. Both the partners will jointly invest $8 million in this venture over the next three years.

By leveraging the expertise of Eli Lilly in the R&D capabilities, Jubilant would strengthen its drug discovery and development portfolio. Also, the partnering of global innovator such as Eli Lilly would boost the global acceptance for Jubilant’s CRAMS and accordingly result in an earning traction. Jubilant’s topline is expected to grow at a CAGR of 35 per cent and net profits at a CAGR of 26 per cent over FY08-10E, on account of robust growth prospects available across the CRAMS segment and better performance by Hollister. The stock currently trades at a P/E of 9x FY10E earnings.

Opto Circuits

Opto Circuits India (OCIL) recently cancelled the proposed $100 million acquisition of a European company, with which it had signed a letter of intent in September 2008. The reason cited is that the demanded price is not justifiable from an economic value perspective. This step is positive for OCIL, as it removes any uncertainty of possible balance sheet risk in the short term.

OCIL’s revenues are expected to grow at a CAGR of 54 per cent and net profits at CAGR of 42 per cent over FY08-10E, led by strong growth in the non-invasive as well as invasive businesses. The growth in the non-invasive business will be led by the recent Criticare acquisition—focusing on patient monitoring systems (PMS) and SpO2 sensors, while the invasive business is expected to show traction through stents and DIOR, used in angioplasty procedures.

OCIL, through its 100 per cent subsidiary EuroCor, has certification to sell its invasive products in 34 countries. Until now, OCIL has traded at a premium to the market because of high growth, healthy margins and upsides from potential acquisitions. However, with the recent market fall and overhang of large ownership by foreign institutional investors, the stock price has corrected more-than-warranted, making it attractive. At Rs 203, the stock trades at a P/E of 10.3x and 7.3x its FY09E and FY10E earnings, respectively.

Key infra sectors growth plunges to 2.3%

Growth in six infrastructure industries plummeted to 2.3% in August 2008 as compared to 9.5% a year ago i.e. in August 2007 including crude oil and petroleum refinery, showing depressing performance.

Crude oil showed a negative growth by 1% in August 2008 compared to a positive growth rate of 6.5% in August 2007.

Growth in petroleum refinery products fell sharply to 2.5% in August 2008 from 8.2%, The crude oil production registered a negative growth of 0.9% during April-August 2008-09 compared to 1% during the same period of 2007-08.

Coal production registered a growth of 5.9% in August 2008 compared to growth rate of 8% in August 2007. Coal production grew by 7.3% during April-August 2008-09 compared to an increase of 2.1% during the same period of 2007-08.

Electricity generation registered a growth of 0.8% in August 2008 compared to a growth rate of 9.2% in August 2007.

Cement production showed a growth of 1.9% in August 2008 compared to 16.7% in August 2007.

Finished (carbon) Steel production witnessed a growth of 4.4% in August 2008 compared to 9.6% in August 2007.

We have seen major downside in our markets since January 2008, we are seeing the effect of US sub prime & later collapse of financial institutions there. Our top politician made us to believe that Indian markets are insulated from the US. If these numbers are anything to go by writing is very clear on the wall….

Its not only sentiments and emotions but the very fundamentals that Indian economy is on target & may miss the mark by 1% seems hard to believe.

May be more pain still left to be seen…. Happy Investing

 

 

Reliance Industries: Refining blues

In the June 2008 quarter, RIL posted GRMs of $15.7 per barrel, which disappointed the Street which had pencilled in margins of $16-17 per barrel, given the sharp rise in crude oil prices. Refining contributes about 55 per cent to the company’s revenues which were Rs 1.37 lakh crore in FY08. Moreover, industry watchers believe there could be a slight delay in the output of gas from KG-D6 basin with it now being available only in November or even later.

Analysts say less than robust demand and fresh refining capacity coming into the market—much of it in Asia and the middle east– over the next couple of years, could cause refining margins to fall 20-25 per cent from FY 2008 levels.

Over one million barrels per day (bpd) of crude oil distillation capacity is estimated to come on stream in CY08 while twice that capacity is expected to be commissioned in the following year. GRMs, which were ruling at roughly $15 per barrel in FY08 could, therefore, come off to levels of around $12 per barrel by FY10.

Towards the end of August, Singapore refining margins had dropped sharply the result of a fall in the margins for diesel.

With the new refineries being complex in nature, the demand for middle distillates such as diesel and kerosene is likely to be met. However, margins for diesel could nonetheless remain higher than those for gasoline.

RIL’s petrochemicals business which brings just over 40 per cent of revenues is expected to do well with petrochemicals margins firming up in recent weeks. Also, the risks of the company being asked to pay a windfall tax appear to have receded.

RIL is expected to end FY09 with revenues of around Rs 1.9 lakh crore and a net profit of close to Rs19,000 crore.

BS Report

Indian Markets : Is it bottoming Out?

The Indian market went through an impressive five-year bull market, beginning in 2003 and running until January 2008, fuelled by over $50 billion in FII inflows. During this period, corporate earnings surged at an unprecedented annualised rate of 32%, while multiples expanded from 9x to 19x at their recent peak.

Unfortunately, since then, India’s market sell-off has been equally intense, accompanied by higher credit costs, inflation, lower industrial production, and several high-profile earnings disappointments. Although recent quarterly earnings growth has remained high, the trend has been one of QoQ deceleration, with contracting EBITDA margins (23% vs 26% last year) and net profit growth of 22% compared to 32% last year.

And rising commodity pricing, particularly oil, of which India is a net importer, are likely to strain margins and earnings growth for the foreseeable future. It is instructive to look at India’s high inflation environment in the mid-1990s.

In 1994, inflation was high at 10.8% compared to today’s 11.42%, and the market was trading at similarly high P/E multiples of 23x. A very sharp correction of over 40% and a de-rating of the market P/E to around 13x soon followed.
Today, by contrast, market multiples have already contracted to 14x. Moreover, in addition to lower inflation, today’s GDP growth is forecast at 7%+, versus only 6.3% in 1994. In short, a strong argument can be made that the economy, as well as the market, are in better shape today.

Nevertheless, the situation could quickly worsen if oil prices continue to rise. India’s net imports of oil as a percentage of GDP is likely to rise to 6% this year, and research shows that every 10% increase in oil prices can shave off at least 0.1% in GDP growth and add 0.4% more inflation. Much, then, depends on where oil prices are heading, not something anyone can confidently predict.

So has the Indian market survived this correction, or can it de-rate further to, say, a 10x multiple, like in 2003? Past bear markets in India have fallen 40- 55%, while MSCI India has already fallen 40% since December 2007. On the plus side, an argument can be made that India’s corporate sector today is stronger, deeper, and better positioned to weather this slowdown than in the past.

In addition, though the economy is not without challenges, with the exception of the oil price, many of these appear less daunting than they have in the past. Combined with a growth to valuation profile that remains attractive relative to global peers, we would argue, the Indian market can avoid a further significant de-rating, unless commodity prices continue to rise.

Nevertheless, we would hasten to add that any immediate upside is also unlikely. Absent improvement on the global market front, the Indian market is likely, more than anything else, to be range-bound.

Ever since markets slid precipitously in January and continued on the downward turn, one has been wondering if the market has fallen enough to see a sustainable trend reversal. Amidst around 7,000 point fall in sensex from January peak till date, there have been as many as four 1,000-point rallies, including a 20% rise from mid-March low to end-April high.

Debate as appeared in ET.

Aban Offshore $55 Million Contract Malaysia

Two contracts secured for Deep Driller

Aban Offshore Ltd. has received letters of intent for the deployment of the jackup rig Deep Driller 2 offshore Malaysia for two separate well programs.

The first three-well program, with revenue of $17 million, has an estimated duration of 90 days in direct continuation of an existing contract.

The second contract has an estimated duration of 210 days and is for a six firm well plus one optional well program, Aban said. The estimated revenue from the contract is $38 million. The deployment is to commence in direct continuation of the first program.

Related post : Rig Market In India , Offshore Support Companies on Rise

 

Source : Oil & Gas Industry

PCPIR, Kakinada AP: $85 Billion Investment

Hyderabad: ONGC Ltd has decided to exit the proposed refinery-cumpetrochemicals project at Kakinada in Andhra Pradesh, making way for the GMR Group, which will hold 51% equity in the project that was originally to cost Rs 31,000 crore.

The project is part of Andhra Pradesh’s Petroleum Chemical and Petrochemical Investment Region (PCPIR) proposed over 600 square miles and envisaged to attract investments worth Rs 340,000 crore over the next ten years.

GMR’s entry is expected to put PCPIR on the fast-track now.

However, the refinery project is likely to cost close to Rs 40,000 crore with GMR indicating that it would like to increase the capacity upwards of 20 million tonnes to make it more viable, sources privy to the proceedings of a board meeting today told DNA Money.

It is understood that GMR has proposed a higher capacity upwards of 20 million tonnes of refining to make the export oriented project more viable.

Reliance Industries had started its own refinery with a capacity of 30 million tonnes and was now going in for an expansion, it was pointed out at the board meeting held on Monday.

ONGC had hiked the initial proposal of 7.5 million tonnes to 15 million tonne and 4.5 lakh tonne per annum petrochemcial complex within the PCPIR to improve viablilty.

But unhappy with the AP government’s reluctance to grant tax sops to the tune of Rs 16,000 crore over eight years, ONGC had been dilly-dallying with the proposal for some time. The two had signed an agreement for the project in September 2006.

ONGC subsidiary Mangalore Refinery and Petrochemcials Ltd (MRPL), held 46% in project, while the Infrastructure Leasing & Financial Services Ltd and the Kakinada Sea Ports Ltd were to hold 51%. The Andhra Pradesh Industrial Infrastructure Corporation (APIC) was to own the remaining 3%.

With the enty of GMR, as per the revised equity structure IL&FS and the Kakinada Sea Ports will hold 46%,while APIC will continue to have its 3% equity. “All issues were resolved at a board meeting on Monday,” Sam Bob, principal secretary, industries department, AP, told DNA Money.

“Apart from GMR, the Hundujas and Essar were the other contenders for the project and we decided on the former seeing their past record,” Bob said. GMR will have management control of the project and will come up with its own detailed project report based on the initial work done by ONGC.

“It is good that we now have GMR in the picture which is a local company and known for its speedy implementation of project,” said APIC vice chairman and managing director B P Acharya.

Another refinery proposed to be developed by the HPCL near Achutapuram near Visakhapatnam at the other end of the proposed PCPIR, is the second anchor for the ambitious special zone.

“The project will be undertaken through a special purpose vehicle of the GMR Holdings Group,” a GMR official said, adding that the group believes the project will help it achieve its overall growth objectives apart from delivering value and creating jobs.

Source : DNA

Nifty: Under pressure

” As soaring crude oil prices, high inflation and weak global cues dampened sentiment, the Indian bourses hit the lowest level in calendar year 2008 during the week”. BS 16th June 2008 

In a process NIFTY has lost nearly 28% from its peak(week ending 05th Jan2008) and  a long term investor like me has lost  more than 33% during the same period.

Is it really worth holding to the investment made during NIFTY’s bull run upto 6275?  

What is more worrysome that till how long this blood bath will continue in the market? (No body can say it for sure).

One can only make educated guess to the above by doing close scuritiny of the Market situation & fundamental shift/changes in last six to nine months. Following factors come to my mind however there could be more :

• High Crude Price : lead to further inflation & secondary effect of transportation will also dampen the demand . see also : Indian Currency: Impact of High Crude Price
• Devaluation of Currency: Higher import cost, could adversly effect the capital invetment & capacity building rate will come down. see also :Currency Valuation : fiorces on play
• Inflation : week after week Inflation is breaching the past record & its already nearing 10% mark. Soaring Inflation & Its impact on economy (covered else where)
• Interest Rates : recent hike in Repo rate will lead to raising of PLR by banks, will further squeeze the already tight liquidity situation 
• FII Exit : If FII outflow is any indication FII are already started quitting Indian market for search of safer heavens, devalued currency has come as a bonus to FII.

Technical Prespective

• The Nifty formed a Doji pattern on Friday’s charts, which indicates uncertainty on the directional front. This pattern is formed when a security opens and closes at the same level.
• According to a technical analyst at Motilal Oswal, the Nifty’s failure to fill the gap at 4,530 and the range-bound trading on Friday indicated continued uncertainty about further downside, and this was further supported by the appearance of Parabolic SAR.

Currency Valuation: forces on play

What are Currency Appreciations and Depreciations?

If nominal exchange rates change so that one Dollar buys more Rupees, then the dollar has appreciated in nominal terms. And the Rupee has correspondingly depreciated in nominal terms because a Rupee can buy fewer U.S. Dollars.

If the real exchange rate between the U.S. and India changes, which can occur because of changes in the nominal exchange rate or relative goods prices in the two countries, or both, then there is a real (purchasing power) appreciation of one currency relative to the other.

What Determines Exchange Rates?

Nominal exchange rates are determined by supply and demand in the foreign exchange market—the market for international currencies. Suppliers and demanders of currencies trade in the foreign exchange market, and trading determines prices (i.e., nominal exchange rates). 

The exchange rate between the dollar and the rupee varies from minute to minute as participants in the foreign exchange markets adjust the amounts of currencies they demand from and supply to the market. Those adjustments are responses to changes in economic conditions or news that might influence future conditions. Economic conditions  (See :Indian Trade and Its Impact on Economy) that seem most relevant to exchange rate determination include relative interest rates, inflation rates (see Inflation: Impact on Economy), and output-growth rates across countries.

Who Demands and Who Supplies Currencies in the Foreign Exchange Market?

There are many players in foreign exchange markets. Consider the exchange rate between the Dollar and the Rupee. Who demands Rupees and supplies dollars? The list includes:

Ø  U.S. companies that import from India, they have Dollars but need Rupees to purchase goods produced in India and imported to the U.S.

Ø  U.S. investors who invest in Indian assets.

Ø  Speculators who have Dollars but want Rupees because they believe the Rupee will appreciate.

Ø  Indian companies who remit Dollar profits back from U.S. operations to headquarters in India and want to convert them to Rupees.

 On the other side of the market, who demands dollars and supplies yen? The list includes:

Ø  Indian companies that import from the U.S. They have Rupees but need Dollars to purchase goods produced in the U.S. and imported to India.

Ø  Indian investors who invest in the U.S. They have rupees but need Dollars to purchase assets denominated in Dollars.

Ø  Speculators who have Rupees but want dollars because they believe the Dollar will appreciate.

Ø  U.S. companies who remit Rupees profits back to the U.S. and want to convert them into Dollars.

 

Inflation : Impact on Economy

Understanding inflation is crucial to investing because inflation can reduce the value of investment returns. Inflation affects all aspects of the economy, from consumer spending, business investment and employment rates, to government programs, tax policies, and interest rates.
What is Inflation?
Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy.

What Causes Inflation?
Economists do not always agree on what spurs inflation at any given time. However, certain forces clearly contribute to inflation.

• Rising commodity prices are perhaps the most visible inflationary force because when commodities rise in price, the costs of basic goods and services generally increase.
• Higher oil prices, in particular, can have the most pervasive impact on an economy. This, in turn, means that the prices of all goods and services that are transported to their markets by truck, rail or ship will also rise.
• Exchange rate movements can presage inflation. As a country’s currency depreciates, it becomes more expensive to purchase imported goods, which puts upward pressure on prices overall.
• Over the long term, currencies of countries with higher inflation rates tend to depreciate relative to those with lower rates. Because inflation erodes the value of investment returns over time, investors may shift their money to markets with lower inflation rates.

How Can Inflation Be Controlled?
Central banks, attempt to control inflation by regulating the pace of economic activity. Management of the money supply by central banks in their home regions is known as monetary policy. Raising and lowering interest rates is the most common way of implementing monetary policy.

• Lowering short-term rates encourages banks to borrow from the central banks and from each other, effectively increasing the money supply within the economy. Banks, in turn, make more loans to businesses and consumers, which stimulates spending and overall economic activity. As economic growth picks up, inflation generally increases. Raising short-term rates has the opposite effect: it discourages borrowing, decreases the money supply, dampens economic activity and subdues inflation.
• Central banks can also tighten or relax banks’ reserve requirements. Banks must hold a percentage of their deposits with the central banks as cash on hand. Raising the reserve requirements restricts banks’ lending capacity, thus slowing economic activity, while easing reserve requirements generally stimulates economic activity.
• The federal government at times will attempt to fight inflation through fiscal policy. The government can attempt to fight inflation by raising taxes or reducing spending, thereby putting a damper on economic activity; conversely, it can combat deflation with tax cuts and increased spending designed to stimulate economic activity.

Indian Currency: Impcat of High Crude Price

The fall in the rupee is primarily being attributed to the high crude oil prices, which touched all-time high of over $135 per barrel on May 22, 2008.

India imports 73 per cent of its crude oil requirements, thus raising concerns over its widening trade deficit-the difference between the value of goods and services exported and imported by a country. The trade deficit, which is already estimated to be about 10 per cent of the GDP, will further worsen with the rising crude oil prices as oil importing companies will have to buy a higher amount of dollars to meet their needs.

Falling Indian Currency:
 Uncertainty about global crude oil prices coupled with heavy demand for US dollar from oil majors to pay the higher crude bill.
 Dollar Inflow in terms of FII & FDI money has remained muted since the fall of Indian stock market from its peak in January 2008.
 Rising crude oil prices also have a cascading effect on the already soaring inflation, currently above 8% mark.
 High Trade deficit leading to further devaluation of the currency (According to estimates, a $10 per barrel rise in crude oil prices may lead to the trade deficit moving up by about $6.5-7 billion or 7 per cent).

Impact of falling Currency:
 For export-oriented companies, which were feeling the pain of the appreciating rupee just a few months ago, this reads like good news.
 Will lead to higher cost of imported goods & make some of the capital intensive projects more expensive to execute.
 Will increase the cost of dollar loans taken by companies.

 

Rig Market in India

A boom in exploration in India has tripled rig usage over the past four years, adding to a global shortage and causing delays in tapping natural gas off the Indian east coast. Transocean, the world’s largest offshore drilling company, may raise rig prices further after India completes the biggest auction of offshore blocks.

• With crude oil prices galloping over $ 135/bbl, increased investments in exploration and production space globally has become inevitable.However, lack of availability of rigs will continue to keep the day rates firm.  

• Rents have tripled since 2005 for new rig contracts stretching up to 2012 as explorers seek to decrease the delay between discovery and development to take advantage of high oil prices.

 

Indian Market

Transocean, the world’s largest offshore drilling contractor with 82 units, made $296 million, or 10.2 percent, of total sales from India, according to its 2005 annual report. Revenue from India more than doubled since 2003, the fastest among Transocean’s main markets

Future Expetation

Reliance is paying $320,000 a day until August 2008 to rent the Deepwater Frontier rig, more than twice what the rig’s owner, Transocean, charged an earlier client, according to Transocean’s Web site. The rent is set to rise to $477,000 a day, if Reliance extends the contract in 2008 for another three years.

Riding on Market Boom :

Aban Offshore (Aban), with its 22 rigs (post acquisition of Sinvest) is well poised to leverage on the industry dynamics. Historically, Aban has clocked the highest operating margins in the industry at a global level.

Contract renewals for six of Aban’s assets (including Sinvest) are due over the next 10 months. With the current tightness in the rig market, the re-pricing of these contracts is expected to happen at significantly higher rates compared to their existing rates.

Essar Oilfields Services, a unit of Essar Shipping & Logistics, in Cyprus, paid $220 million for Transocean Wildcat, a 30-year-old offshore rig that can operate in depths of about 400 meters and capable of drilling up to 7,600 meters

 

Source : BS, Hearld, Transocean

 

Oil prices making headlines..

‘Drowning in oil’ – Economist March 1999
“$10 might actually be too optimistic. We may be
heading for $5.”

‘Oil reaches $30 a barrel’ – BBC 15th Feb 2000
“This rise in price is purely temporary”
-OPEC Secretary General Dr Lukman

‘Oil hits new record above $80′- FT 14 Sept 2007
“too little, too late,” verdict on decision by OPEC to raise output
by 500,000 barrels a day….global oil production is estimated to
have shrunk by 650,000 b/d in the third quarter”

 ‘Oil prices steady near $133 a barrel’ 

The Associated Press , BANGKOK, Thailand.  Wednesday, May 28, 2008

Rigs demand: Offshore support companies on rise

As the quest for discovering oil hidden deep under the sea bed gathers momentum, fortune of Indian companies engaged in providing offshore support solutions to oil exploration companies have been riding high on the bourses.

 The biggest development in this sector was the announcement of NELP-VI in February 2006, under which a total of 55 blocks were offered, including 30 offshore blocks. Further, ONGC, along with its overseas arm ONGC Videsh Ltd, and ONGC Mittal Energy and Reliance Industries Ltd have been scouting for opportunities all over the world. (also see: Reliance Building Assets world over)

 OMEL has bagged two blocks in Nigeria, estimated to have reserves of about 500 million barrels each.

Considering that less than half the wells awarded since 2000 have been drilled, the demand for rigs is set to remain high in the near future. The government has decided to offer more exploration blocks under NELP VII in the coming days.

 

The higher level of exploration activity in India has increased the demand for rigs over the past few years. In 2005-06, about 35 rigs were operating in India (including jack-up rigs, drill barge, platform rigs and drill ships). This rose to 45 in 2006-07 and is expected to go up to 50 by the end of 2007-08 (These figures include ONGC-owned rigs).

Companies such as Aban Offshore, Dolphin Offshore, Garware Offshore, Jindal Drilling & Industries  and Duke offshore, apart from shipping companies such as Great Eastern Shipping that are operating in this space, have seen brisk trades at the counters in the last few weeks. Internationally, a rig could fetch a daily hire charge of about $ 3,00,000 at present,  Great Offshore a leading integrated offshore service company, had placed the order for the rig with Bharati Shipyard. Betting big on the rig, scheduled to be delivered by April 2009, Great Offshore clinched a five-year contract from ONGC for deploying it.

Source: HIndu, Rediff, News

Reliance : FPSO on MA field

Reliance Industries has awarded a FPSO contract to Aker Floating Production. Aker Borgestad Operations will be in charge of operations and maintenance of the floating production, storage, and offloading vessel (FPSO) Aker Smart 1 at India’s MA field.The value of the five-year project is just over USD 100 million. The Reliance includes options to extend the contract period.

In May 2007, Aker Floating Production entered into a contract in excess of USD 750 million contract with Reliance for chartering of the Aker Smart 1 FPSO. The new contract with Aker Borgestad Operations expands the initial scope of work with Reliance to cover FPSO operations and maintenance. Under the contract, Aker Borgestad Operations will be in charge of both technical operations and FPSO operations for the production of oil, gas, and condensate from the MA field.

Aker Smart 1 will be deployed at the MA field, which is located at water depths of 1,000-1,400 meters, some 60 kilometers offshore eastern India. Production start-up will take place in two phases: oil production is scheduled for April 2008, and gas production will begin in the fall of 2008.

Word of Advice:

One more boost to the booming bootomline of RIL, this along with the likely production of Gas from KG basin in April- June  08 will boost the RIL revenue in the years to come.

 Source : Oil & Gas