In this briefing:
- Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom
- Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
- Japan – Chinese Flu
- India Generic Drugs: “Antitrust Unredacted”
- Dabur IN
1. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom
Crude has been gradually reconnecting with its supply-demand fundamentals, and the impact of highly disciplined OPEC cuts just two months into the group’s production restraint deal is becoming evident in relatively stable prices. Through much of last week, crude prices firmed and stood their ground even as global stock markets were skidding.
However, oil is not completely out of the shadows of the global economic sentiment. Crude prices were whiplashed last Friday along with the equity markets as a fresh wave of gloom and doom from the European Central Bank’s downward revision of eurozone growth projections rattled investors. Earlier in the week, China set off fresh alarm bells, by officially revising down its 2019 GDP growth target to 6-6.5%, while Premier Li Keqiang warned that the country’s economy faced a “tough struggle” ahead.
Nonetheless, benchmark Brent and WTI crude futures resisted the lows plumbed during intraday trading Friday, to close marginally higher on the week. While global oil demand growth forecasts remain tentative, supply fundamentals are clearly firming. Output from 11 of OPEC’s 14 members that agreed to collectively curb output by around 812,000 b/d starting January this year almost reached 100% of the target in February.
The race to the compliance finish line was helped by Saudi Arabia, which is slashing its output way beyond its commitment. Meanwhile, the three OPEC members exempted from the latest round of production cuts — Iran, Libya and Venezuela — are also under-delivering. That amounted to OPEC-14 production plunging by around 1.7 million b/d compared with the high of last October.
OPEC will need to be careful not to over-tighten the market, as happened through the first half of last year. We believe the group will be cautious on that front, given its experience of 2018, when it was forced to make two policy U-turns in the space of six months.
2. Global Capital Flows Show China’s Collapsing Export Markets Could Soon Revive
- Capital flows are strongly Granger causal
- Gross capital flows lead World shipping activity by 4 months
- Capital flows have been slowly rising since June 2018: in February they jumped
- Reinforces out pro-Asia and pro-China investment message
3. Japan – Chinese Flu
By Konstantinos Venetis, Senior Economist
- Japan skirts recession but near-term prospects remain weak
- Deflationary headwinds to persist in H1, threatening business spending
- Recovery likely in late 2019 as world trade finds a firmer footing
4. India Generic Drugs: “Antitrust Unredacted”
New information in the government’s investigation into antitrust violations by generic drug companies continues to surface. An unredacted version of the Attorneys General complaint was published recently by a health care trade publication. The unredacted portions of the document paint an incriminating picture of the industry, increasing the pressure to settle. The timetable for the process remains open-ended, and manufacturers will be reluctant to raise prices absent documentable product shortages. Among the Indian companies, Sun Pharmaceutical Indus (SUNP IN), Dr. Reddy’S Laboratories (DRRD IN), and Aurobindo Pharma (ARBP IN) feature prominently in the court filings.
5. Dabur IN
This insight is jointly prepared by Nitin Mangal and Pranav Bhavsar.
Either Dabur India Ltd (DABUR IN) should change the crystal ball or those responsible for gazing at it. Going by its trajectory of strategies in the recent past, the narrative that emerges is that of confusion. Confusion has been a constant about whom Dabur perceived its competitors, its perception of the market while the disruptors reigned and what is and what should be its core strengths.
In this summary insight, we find Dabur heading to hibernation in summers. We believe this confused state of mind at Dabur will lead to lower than expected growth rates and an impact on margins. Our arguments are based on in-depth analysis of over 3 years of conference calls, past 5 year financial statements, competitors balance sheets and primary research covering different parts of the country. Our base case FY 21 EPS is 21% lower than consensus estimates and a potential aggressive case EPS is 26% lower than consensus. We argue for a 35x forward multiple giving us a target price of INR 322 for the base case and an aggressive case target price of INR 305 indicating a potential 26% & 30% downside from the latest close price of INR 437.
A Detailed Insight that includes our detailed arguments and financial forecasts can be found elsewhere here on Smartkarma using the company’s ticker.
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