Financial Investment Grounds And Fundamental Pick For Essar Oil

“The safe way to double your money is to fold it over once and put it in your pocket “

Essar Oil, part of Ruia family's Essar group is engaged in exploration and production (E&P), refining and marketing of oil and oil related products. With the production capacity of 14 MMTPA oil refining it has also 1,635 retail outlets of fuel station across the country. In E&P business it is producing about 35,000 scmd from 33 production wells and also has 2C contingent resources of 148 mmboe. Globally it also has refining capacity 300,000 bpsd and also having a controlling stake of 50% stake in Kenya Petroleum Refineries Ltd's 80,000-bpsd refinery.

FINANCIALS: Since FY06 to FY11 the Net Sales of the Essar oil has grown at CAGR of 136% while on account of high cost raw materials it beard losses up to FY09 but now in FY11 the Net Sales jumped by 28.7%% to Rs 46988 crore over FY10 and Operating Profit rose by 114% to Rs 2557 crore, the PAT for the same period also surged 2155% to Rs 654 crore. The OPM & PATM of Essar oil for the same period stood at 5.44% & 1.25% respectively. In Q4FY11 the Net Sales surged by 27.4%, Operating Profit & PAT also grew by 132% & 78% respectively.

INVESTMENT GROUNDS

Industry Outline

After facing an economic slowdown in FY09 the worldwide demand for oil is now on its peak level and even in 2011 the demand for oil has suppressed the highest ever demand of 2010, the global demand for oil in 2010 was 87.81 mmbpd while in 2011 it touched 89.35 mmbpd. The mass consumption is coming from Asian region (0.78), Middle East (0.25) and Latin America (0.20) mmbpd. Despite increase in consumption of Oil & Gas world wide the per capita oil consumption in India is one of the lowest among major countries. In 2010 the annual per capita oil consumption in India was 0.9 barrels/person while in other developing countries like Russia, Brazil and China it stood at 7.5, 4.4 and 2.3 barrels/person in the same period. However, USA and European countries still have the highest per capita oil consumption, In USA it is around 19.4 and in EU it 9.7 barrels/person. The situation is almost the same for the consumption of gas. However, the demand for petroleum products in India is growing at fast rate the demand for oil grew at 6.5% in FY11 from 1.4% in FY06 and demand for Gasoline also increased from 4.8% to 10.9% for the same period.

Capacity Expansion will help to improve the GRM…

Essar oil is enhancing the production capacity of existing refining up to 18 MMTPA from current capacity of 14 MMTPA. The increased production is expected to start from mid Q4 CY11. Essar Oil is also ready to optimize the cost of its six refinery units which is scheduled to be completed by September 2012. This optimization will further enhance its production capacity up to 20 MMTPA and also increase the complexity (GRM) of the company up to US$11.8 from current US$6.1. Further under phase-II Plan company has also targeted to achieve the capacity up to 38 MMTPA. After achieving this much of capacity Essar oil will enjoy the complexity of US$12.8.

Expanding Presence in Retailing by adding more Outlets…

Essar oil is currently running 1,635 retail outlets across the country and to increase the presence in oil marketing segment it aimed to extend 5000 outlets across the country, currently 254 outlets in various stages of construction. Recently company has commissioned two CNG stations in association with Sabarmati & GSPC and also focusing on ALPG & CNG pumps through tie Aegis, Sabarmati Gas and GAIL Gas respectively. Besides this, company is also focusing on revenue from non fuel business and formed alliances with various Govt agencies to for that.

Exploration and Production Business also rapidly growing…

In Exploration and Production segment Essar oil has also presence through diverse portfolio of offshore and onshore oil & gas blocks. Currently it is producing about 35,000 scmd from 33 production wells and also got the approval from MoPNG for drilling another 500 production wells in Raniganj. In Raniganj to start commercial production the construction of 48-km gas evacuation pipeline from Raniganj to Durgapur has also been completed. Company has also signed contracts for 4 Indian Coal Bed Methane blocks with estimated resources of over 7.6 tcf.

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GLOBAL ECONOMY - CHINA WILL OUTSHINE THE US IN NEXT 10-12 YEARS

“Every morning I get up and look through the Forbes list of the richest people in America. If I'm not there, I go to work”

 

For the first time, the international organization has set a date for the evolution when the “Age of America” will finish and the U.S. economy will be leaving behind by that of China. According to the latest IMF official forecasts, China's economy will outshine that of America in real terms up to 2016-2017 — just five to six years from now. And it's a lot closer than you may think. It endow with a painful context for the budget wrangling taking place in Washington right now. It hoists massive questions about what the international security system is going to give the impression of being like in just a handful of years. And it casts a deepening blur over both the U.S. dollar and the gigantic Treasury market, which have been buttress up for decades by their privileged status as the liabilities of the world's hegemonic power. 

In addition to comparing the two countries based on exchange rates, the IMF analysis also looked to the true, real-terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies. Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America's share of the world output down to 17.7%, the lowest in modern times. China's would reach 18%, and rising. Just 10 years ago, the U.S. economy was three times the size of China's. Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. But the outcome is scarcely in doubt.

FED CUTS ECONOMY OUTLOOK: The Federal Reserve Chairman Ben S. Bernanke stated on Wednesday that the US economy still requires monetary support and the Fed will end its $600 billion bond-buying program through June, indicating that the central bank is in no rush to scale back its support for the US economy and will keep its benchmark interest rate near zero for an extended period'. At the first post-policy meeting press conference in the Fed's 97-year history, Bernanke tried to demonstrate the central bank as a dependable custodian of the US recovery as the bank begins to retreat from emergency measures.

But amid relatively higher unemployment rate, a declining housing market and tepid growth, Wednesday's move was far from a full-blown move back from pre-crisis policies. The Fed shielded its ultra-accommodative policy by highlighting that although the labor market is healing, the housing sector remains depressed and the recent surge in energy prices will likely prove transitory. As far as unemployment rate is concerned, it expected to be in a range of 8.4%-8.7% for the calendar year which is upgraded from the 8.8%-9.0% range forecast in January.

The Fed also went ahead to not only lowering its economy outlook for 2011 due to sluggish first quarter growth on the back of adverse inflationary implications of soaring energy costs but the central bank also raised its forecast for inflation. The central bank has cut GDP expansion forecasts to 3.1%-3.3% from the previous outlook of 3.4%-3.9% for the year 2011 and the annual inflation is expected to swell by 2.1%-2.8% compared to January's expected range of 1.3%-1.7%.

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Indian Equity Indices - From The Desk Of Research

Indian equity indices went through a turbulent week as they failed to negotiate a close above the neutral line for even a single session and eventually snapped the week with a cut of over two percent. The week largely remained characterized by choppiness because investors were reluctant to pile up positions and indulged largely in stock specific activities as corporate India continued to divulge their fourth quarterly report card. Volatility gradually accelerated session after session as the April series Futures and Options settlement neared while quarterly earnings' announcements by RIL,Wipro,Bank of Baroda, Ambuja Cement,

Crompton Greaves, TVS Motors were punished badly as they remained below Street's expectations.On one hand spiraling international crude oil prices become the headache of policymakers while on the other, worries over global economic recovery loomed large, given the fact that world's biggest economy continues to grow at a tepid pace. The April series F&O settlement day turned out to be another pathetic trading session for the Indian stock markets as the selling pressure gathered greater momentum after government released the disappointing food inflation numbers which stayed absolutely flat at 8.76% on annual basis during week-ended April 16 compared with 8.74% recorded in the previous week. Rate sensitive counters like Real Estate and Bankex witnessed relentless selling pressure through the week ahead of the RBI's annual monetary policy review meet on May 3rd where it is expected to bite the bullet and hike rates by 50 bps to cool the spiraling inflation which has vehemently hovered at uncomfortable levels on the back of crude oil prices which have skyrocketed by over 50% in last six months. The Foreign Institutional Investors on the other hand ploughed back their money from the local markets to the extent of Rs 2,703 crore in the week on expectations that deteriorating domestic macro headwinds will have adverse impacts on the companies' earnings thereby reducing the returns on investment. The Bombay Stock Exchange (BSE) Sensex lost 466.27 points or 2.38% to 19,135.96 during the week ended April 29, 2011. The BSE Mid-cap index declined by 141.07 points or 1.95% to 7,094.23 and the Small-cap index shed 163.26 points or 1.84% to 8,715.31. On the sectoral front, Reality lost 201.17 points or 8.45% to 2180.10,

Capital Goods (CG) shed 607.16 points or 4.45% to 13,036.91, Bankex declined by 468.163 points or 3.46% to 13545.13, Oil & Gas tumbled by 301 points or 2.92% to 10,008.27 and Metal index down by 467.98 points or 2.81% to 16,190.59,were the top losers on the BSE, while Health Care(HC) adding 74.77 points or 1.21% to 6232.55 and FMCG advanced 24.78 points or 0.66% to 3755.16 were the only gainers on the sectoral space. The S&P CNX Nifty trimmed 135.20 points or 2.30% to 5750. On the National Stock Exchange (NSE), Bank Nifty lost 3.46% to 11,483.75, CNX mid-cap shed 1.36% to 8,200.95, CNX Nifty Junior declined by 1.35% to 11,376.70 and CNX IT tumbled by 0.92% to 6718.35. Conclusively we expect slightly range bound scenario between 5555-5960 though sentiments remain subdued for the upcoming sessions. Any closing above this 5960 with substantial volumes for at least 2 consecutive days may generate another 2-3% return and we might see 6070-6080 in the short term.HAPPY TRADING......

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Equity Research Weekly Market Outlook Report By Mansukh 30th-April-2011

SNAPSHOT

Local Bourses prolonged their losses for the fifth straight session lacking support at higher levels, thereby snapping the week with loss of over 2%. Persistent selling pressure in view of sustained capital outflows by foreign institutional investors coupled with selling across the global equities led to the damage at Dalal Street. The 50 scrip index'Nifty --on National Stock Exchange plunged in trade thereby marking sluggish start for the new F&O expiry series on Friday as investors braced for a hawkish statement from the Reserve Bank when it releases its policy on Tuesday. Financials led the decline with the market expecting the Reserve Bank of India (RBI) to raise key short-term rates by at least 25 basis points to rein in high inflation. It would be the ninth increase since mid-March last year. India VIX, a gauge for market's short term expectation of volatility lost 6.40% at 19.58 from its previous close of 20.92 on Thursday. The S&P CNX Nifty lost 34.50 points or 0.60% to settle at 5,750.95. The index touched high and low of 5,804.30 and 5,706.05, respectively. 24 stocks advanced against 26 declining ones on the index.

WEEK GONE BY

Indian equity indices went through a turbulent week as they failed to negotiate a close above the neutral line for even a single session and eventually snapped the week with a cut of over two percent. The week largely remained characterized by choppiness because investors were reluctant to pile up positions and indulged largely in stock specific activities as

corporate India continued to divulge their fourth quarterly report card. Volatility gradually accelerated session after session as the April series Futures and Options settlement neared while quarterly earnings' announcements by RIL, Wipro, Bank of Baroda, Ambuja Cement, Crompton Greaves, TVS Motors were punished badly as they remained below Street's expectations. On one hand spiraling international crude oil prices become the headache of policymakers while on the other, worries over global economic recovery loomed large, given the fact that world's biggest economy continues to grow at a tepid pace. Updates from the 2G case trial kept hitting headlines through the week thereby weighing down sentiments and prompting investors to book profits in scam linked shares like RCom, Unitech and DB Realty. The April series F&O settlement day turned out to be another pathetic trading session for the Indian stock markets as the selling pressure gathered greater momentum after government released the disappointing food inflation numbers which stayed absolutely flat at 8.76% on annual basis during week-ended April 16 compared with 8.74% recorded in the previous week.

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Turning Point Of Gold: Remain Bullish

January has been a tough month for gold. From its year-end 2010 price of $1,420 an ounce to its recent low just over $1,320, gold has lost some $100 - about seven percent.

On Wednesday, the World Gold Council published its annual Gold Investment Digest for the fourth quarter and full-year 2010 with some interesting insights.

According to the World Gold Council last year’s price performance was driven by developments in key gold markets:

• China saw increased investment activity, driven in part by innovative new gold investment vehicles offering improved access to the gold market.
• Jewelry consumption rebounded in India, the world’s largest gold market.
• Globally, investors remained concerned about uncertainty in the macro-economic environment and turned to gold to hedge against weakness in the US dollar and rising inflation in many economies.

We find the last point particularly interesting, as the USD Index finished the year slightly higher than was the case in 2009. However as we have observed, after 2006 things are much more complicated than simply USD up = gold down and vice-versa.

For the past two weeks we have experienced the risks that we might all face in 2011 and mentioned the problems caused by rising food prices and the social unrest they might unleash. We didn’t expect it to happen so soon.

After Tunisia’s revolution and the ouster of its president after 23 years of rule, Egypt seems to be next on the North African crisis list. One of the main grievances of the protesters in Egypt, just as it has been in Tunisia, has been the soaring price of food in the shops. The crisis and food shortages may spread to other Arab countries and no one knows where that can lead. We only know one thing—in times of crisis and uncertainty, people turn to gold for a safe haven.

The sentiment for the USD Index is short-term bullish which also has bullish implications for gold and silver. Recall that during the past few months, the USD has been leading the precious metals and here could very well ignite a turnaround for the metals.

In this daily short-term chart, we see that once again a cyclical turning point has come into play Summing up, gold appears bullish in the short-term; however the sentiment for the medium-term is mixed. Much depends on how the resistance levels hold the next short-term rally. If they hold and stop the uptrend, then it may very well be prudent to exit a portion of one's long-term positions.

Sluggish Revitalization Ups Risk For Obama By Mansukh

The economy is bouncing back two years into Obama's presidency. But the president is confronting unemployment of more than 9%, record home foreclosures and in all likelihood, the third straight federal budget shortfall of over $1 trillion. About 1.1 million nonfarm jobs were created last year, and economists are forecasting growth of 3.5% in the final three months of 2010. That said, many Americans remain out of work, even as markets have improved. There are 2.8 million fewer jobs now than in January 2009. With planning for his second White House run already underway and with Republicans gunning for his signature health-care plan and seeking aggressive federal spending cuts, Obama must convince voters he can deliver the scaled-back version of Washington they're demanding as well as targeted investments.

The latest Wall Street Journal/NBC News poll, taken Jan. 13-17, showed 53% approved of the job Obama is doing as president, up eight percentage points from December. The poll was conducted after Obama signed a package of tax-cut and jobless-benefits extensions he agreed on with congressional Republicans during the December lame-duck session of Congress. Obama has been road-testing the themes for his sophomore State of the Union in recent days, including in remarks last week at a General Electric Co. plant in New York that will soon be making advanced batteries. He used the occasion to name GE CEO Jeffrey Immelt to head a new White House council on jobs and competitiveness, and underscored how investment will help the U.S. stay competitive.
Obama's address comes as the government is operating on a short-term budget that expires March 4, and a fight over raising the U.S. debt ceiling looms. Treasury Secretary Timothy Geithner has warned Congress that the country could hit its $14.3 trillion debt limit by the end of March if Congress doesn't act, but Republicans are demanding spending cuts in return for their votes. Industries are also eager to hear from the president, who has pivoted in recent weeks to a decidedly more business-friendly posture.

The recently passed tax-cut deal between President Barack Obama and Congressional Republicans has removed some of the pressure on the Fed from being alone on the front line battling the economic crisis. The eighteen members of the Open Market Committee are widely expected at their two-day meeting that kicks off Tuesday to keep interest rates steady at record low levels and make no changes to the controversial $600 billion bond-buying program. The Fed has kept since December 2008, and is expected to keep, its key interest rate in a range of 0% to 0.25% as it seeks to bolster the economy.

The market responce to state of uniom speeches

FUNDAMENTAL PICKS BY MANSUKH JANUARY 2011

Jammu & Kashmir Bank (J&K Bank) is a sole banker to the Government of Jammu & Kashmir. With the majority holding of 53% by J&K Govt it is only a private sector bank designated as RBI's agent for banking business. It also carries out the banking business of the Central Government, besides collecting central taxes for CBDT. The bank operates through its network of 556 branches, out of which 344 branches are located in semi-urban and rural areas. The bank has a network 212 ATMs which is largest ATM network in J&K.

FINANCIALS: The Interest Income of J&K Bank has posted CAGR growth of more than 14% during FY05-FY10, Net Interest Income (NII) and Net Profit of the company has also grown by 13% and 35% respectively in the same period. In FY10 the Interest Earned Income of Bank rose by 2.3% to Rs 3056.88 crore over FY09, NII also surged by 11.9% to Rs 1119.34 crore, J&K Bank has also reported more than 25% jump in Profit after Tax to Rs 512.38 crore over FY09. In Q2FY11 the Interest Earned Income of the bank surged by 22%, NII and PAT also grew by 53% & 21.60% respectively. The NIM & PATM of J&K Bank for the same period were 3.66% & 18.16% respectively.

INVESTMENT GROUNDS
Industry Outlook
Banking Sector is always being playing the key role in the growth of the Indian economy and an ample liquidity in the banking system is always being the exigent task for the RBI. RBI has taken steps many times to squeeze the unusual liquidity condition in the Indian financial system since November. In its latest mid term monetary policy review RBI has left the repo and reverse repo rates unchanged to 6.25% and 5.25% respectively, CRR also retained at 6%. The policy review was lined with the expectations but in forthcoming meetings RBI is planning to raise the rates and may be around 25-50bps in upcoming quarters. RBI has maintained key policy rates unchanged but to encourage banks to increase their lending it cut SLR by 1% to 24%. Reducing SLR is more of a comfort given to banks when loan demand is rising, it is a signal to banks to lend more instead of holding huge SLR. Tight liquidity and slowing deposit growth may have deterred banks from the aggressive lending needed to boost economic growth.

Advantage of Regional Spread
J&K Bank is enjoying the advantage of regional spread across the state of Jammu & Kashmir provenance. Currently it is dominating the region with the total number of 380 branches & 220 ATMs. Bank has largest number of account holders and branches spread almost in every block of Jammu & Kashmir region. It caters around 3.7 million customers through it branches and having a kind of Monopolises Business in the region. It holds market share of 87% in total advances and 70% in the total deposits held by the all banks in this region.

Balanced Loan Distribution to minimize the evasion risk
J&K Bank has maintained a balanced distribution of advances to different section of the society. In Jammu & Kashmir area it has lend 25% of its total loan to Government and 22% to corporate sector, and remaining 53% is almost equally distributed in Agriculture, Personal, Trade and to Small Medium Enterprises. On the national level J&K Bank has distributed major portion of its advances to corporate sector which accounts 60% of the total advances. This well balanced loan distribution loom is also maintaining a good quality of source income.

Healthy Business Growth
J&K Bank has managed to record a healthy growth in all its business mix. The bank has achieved the CASA ratio of more than 41% in Q2FY11 from 37.84% in Q1FY11. Bank has also maintained its most sensitive margin (NIIM) above 3% since last three years to 3.66% in Q2FY11. The bad assets (NPA) of the J&K Bank are at encouraging level of 0.13% in Q2FY11 from 1.38% in Q2FY10. J&K Bank has also given impressive rate of return on Equity and Assets It has given return on equity of more than 18% in last two years and more than 16.5% in previous two years The Return of Assets also consistently grown to 1.34% in Q1FY11 which was always being above 1% in last four years.

INDIAN ECONOMY-ON THE TRACK BY MANSUKH NOV 2010

India´s economy chalked up impressive real GDP expansion of 8.6% year-onyear(y-o-y)(and 13.4% saar quarter-on-quarter [q-o-q]) in Q110 (Q4 FY 2009/10).The quarterly outturn helped to propel full fiscal year growth to 7.4% in FY 2009/10 (April-March).While we believe headline expansion should cool going forward, India´s domestic demand-driven economy and a lack of direct exposure to the Chinese economy should propel real GDP growth to a robust 7.8% for both FY 2010/2011 and FY 2011/2012. With the economy well on track,the government will need to address pressing internal security issues as well as the urgent need to boost the country´s infrastructure capacity. The success of policies on all these issues will undoubtedly help shape the country´s long-term economic prospects,on which we remain bullish overall, penciling average real GDP growth of 7.7% over the next decade.

In the 12 months since the ruling United Progressive Alliance (UPA) won the general elections in 2009, the Indian economy has performed well and,notably,steps are being taken to address the fiscal situation.In particular,we point to the In particular,we point to the removal of fuel subsidies that will have a significant positive impact on the government budget for the longer term.Despite success on the economic front,the UPA still faces considerable challenges in the form of a resurgent Naxalite threat and still-frosty relations with Pakistan.

India´s real estate market has recovered strongly over the last three quarters,sparking fears that emerging Asia´s second-largest economy might be facing a reflated property bubble.In our view,although there are parallels to be drawn with the Chinese property market (on which we are decidedly bearish), we argue that India faces comparatively more benign macroeconomic conditions over the medium term.Therefore,we are in favour of price stability in the residential market over the next year,noting that the bulk of price increases might be behind us. For commercial real estate,ample upcoming supply for the retail and commercial segments should limit rent increases in the coming quarters.

Awaiting February 2010 (as per the 2004-05 WPI series), food and textiles contributed more than 60% of the overall 9.7% WPI inflation on account of the drought-driven increase in the prices of food grains, sugar and cotton, among others. By August 2010, their contribution to the 8.7% WPI, though still high at 47% was on a downward trend. Oil's contribution to overall inflation increased to 18% from 13%. Contribution of other items (having more than 54% weightage in the WPI index) increased to 37% in August 2010 due to the increased prices of coal, metals, electricity and wood products among others, indicating that inflation is becoming more broad based. Over the next few months, we expect inflation to continue to moderate from the peak levels seen in the recent months. underrepresented in GDP.