Indian indices advanced this week on expectations of further stimulus measures by Government during the vote-on-account on Monday. Inflation fell to a one-year low of 4.39%. However, weak global cues coupled with poor Industrial Production numbers kept bulls under control. Finally, the BSE 30-share Sensex added 3.6% to close at 9,635 and NSE nifty added 3.7% to shut shop at 2948.
# RIL-RPL gains from heavier crude use and Euro III-IV diesel Singapore complex refining margins have recovered after the weakness in 3Q FY09 (ie 4Q 2008). BAS-ML Singapore complex refining margin to date in 4Q FY09 (ie 1Q 2009) is US$7.4/bbl. Theoretical refining margin of Reliance Industries (RIL) works out to US$11.4/bbl in 4Q FY09 and that of Reliance Petroleum (RPL) at US$15.3/bbl. Their premium to Singapore margins is due to ability to process cheaper and heavier crude and produce Euro III-IV diesel, which realizes higher price. We retain our Buy on RIL and Underperform on RPL. # BAS-ML Singapore complex margin at US$7.4/bbl in 4QFY09 BAS-ML Singapore complex refining margin was US$6.9/bbl last week and US$7.4/bbl to date in 4Q FY09 vis-à-vis US$5.9/bbl in 4Q 2008. The recovery in refining margins seen in the last few weeks is unlikely to sustain, in our view. Large new refining capacity including that of RPL will ramp up in 1H 2009E and oil demand can be expected to weaken after winter. # RIL & RPL’s 4Q FY09 theoretical margin US$11.4-15.3/bbl RIL’s theoretical refining margin works out to US$11.4/bbl to date in 4Q FY09, which is higher than US$9.2/bbl in 3Q FY09. This improvement is driven by recovery in naphtha cracks from minus US$15.7/bbl in 3Q to US$0.5/bbl to date in 4Q. Theoretical refining margin of RPL to date in 4Q FY09 works out to US$15.3/bbl, which is lower than US$18.2/bbl in 3Q. RPL has gained in 4Q from gasoline cracks recovery by US$7.7/bbl QoQ. However, Euro IV diesel cracks declined by US$11.5/bbl QoQ and Oriente-Dubai spread fell by US$1.1/bbl QoQ.
# Foreign ownership: Expected exodus takes it back to 2003 — It is no surprise that
foreigners own less of India Inc. after Oct-Dec 08 ($3.3b outflows); just as in each
of the previous 3 quarters. But the last quarter's sell-off (-1.42%) brings FII
ownership to 15.5%; this is the same level as of December 2003, or the early days
of the (last) bull market. FII ownership is still higher in value terms (Dec 03
Sensex at 5123) at approx. $94b, but the level is almost of an age gone by.
#But, domestic institutions for the first time own more than retail — This is a
landmark shift; domestic institutional investors (DII) (Insurance, MFs) own more
than direct retail – a further sign of the maturing market? (Retail volumes,
however, 4X of DII). And domestic investors (ex-promoters) now collectively own
more than foreigners for the first time in four years. The big gainers continue to be
the insurance companies; they now own 5% of India Inc, though recent growth
pangs could moderate the pace of this India Inc. acquisition spree.
#FIIs widen positions, Domestics narrow them and Financials the favorites — FIIs
get a little more aggressive as they move away from benchmarks, the Domestics
get more cautious as they cut hitherto outsized positions, and the Financials
become an even more favored sector across investors. Telecom is the disconnect
– FIIs OW and domestics UW, Industrials an OW for all, but position sizes keep on
reducing. Energy and IT remain consensus UWs across investor classes.
We expect upcycle on slashed property prices after stock/financial collapse Just as seen in their stock prices in early 2008, the 3Q financials of developers were in freefall due to a collapse in demand. Interest rates and apartment sizes are now falling. With significant payables and no other sources of funding, we expect developers to slash prices. Despite the stock price collapse, the global slowdown which led to poor demand forces us to retain UW. We cut our estimates, DCF and TP. Improving macro environment (the only missing driver) should lead to the next upcycle and offer sizeable upsides to survivors (such as IBREL and DLF).
As feared, the higher and faster one climbs, the more painful the “freefall” The India Property sector – a long cycle industry which recorded aggressive growth in property prices, financials and stock prices – has now seen a massive unwinding. While stock prices have fallen 86% in the last 12 months despite using all possible strategies, even large companies reported a sharp drop in financials in the 3Q (revenues collapsed 40%+ on a yoy and qoq basis). Sub-prime was the last straw, leading to a collapse in demand and funding from October 2008.
With drivers falling in place, survivors could win big as demand improves Despite the sharp fall in mortgage rates and size of properties being constructed, a poor economic outlook and weak consumer sentiment has killed demand from Oct’08. Given the significant asset-liability mismatch and difficulty in raising funds, developers seem to be accepting the inevitable – large price cuts. Unlike China, which saw volume-driven growth last decade, prices were the major sector driver in India during its 5-year upcycle. This indicates significant unmet demand, in our view.
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