Thursday, April 1, 2010


Our global refining team believes that gross refining margins should improve faster than consensus forecasts. We believe RIL shall be a key beneficiary, given its recently doubled capacity and highly complex facilities. We raise our target price for RIL by 3% to Rs 1,293/share. RIL is one of our top regional sector picks.

The global refining team is bullish on GRMs due to an anticipation of improvement in middle distillate balances, led by the economic recovery. While Asian gasoline demand is driving gasoline cracks currently (~US$13/bbl, up 2.5x from Oct-Dec 2009), middle distillate cracks are expected to rise from the present US$7/bbl levels to US$15/bbl by 2013.

RIL stands to benefit heavily from the spurt in crack spreads. Reliance’s high-complexity refinery has a high proportion of light and middle distillates (especially diesel) in its product slate (~75% in total). Thus, RIL is poised to take maximum advantage of the anticipated rise in distillate cracks, through a larger positive impact on its GRMs vis-à-vis Singapore Complex margins.

Above consensus earnings forecasts. We are raising our GRM forecasts for RIL by US$0.8/bbl for FY11, and forecast a corresponding 3.7% increase in FY11 earnings for RIL. We now stand ~25% above consensus.

Earnings and target price revision
We are hiking RIL’s earnings forecasts by 3.7% for FY11 and 2.2% for FY12, and our target price by 3% to Rs 1,293/share.

Price catalyst
12-month price target: Rs1,293.00 based on a Sum of Parts methodology.
Catalyst: Exploratory upsides, and a decision of RIL-RNRL court case.

Action and recommendation
We anticipate a strong 4QFY10 for Reliance, and maintain our Outperform rating on the stock. We recommend RIL as one of our top sector picks, as it benefits from the upswing in GRMs (see fig 2) apart from the volume ramp-up of KG basin gas.

To read the full report: RIL

>INDIA INSURANCE: Growth remains modest (CLSA)

During Feb-10, sector’s annualised new business premiums (NBP) grew by 28% YoY led by 41% YoY growth of LIC. NBP of the private sector grew by 18% YoY in spite of a lower base (Feb-09 NBP was down 27% YoY). ICICI’s sales fell 7% YoY due to lower group premiums, but HDFC and Reliance Life’s strong collections were boosted by group businesses. In spite of being late entrants, the life insurance JVs of PSU banks have scaled-up quite fast and are now larger than many of their older peers.

Sector growth led by LIC
In Feb-10, NBP for the sector grew by 28% YoY, led by 41% growth in NBP of LIC. LIC continues to dominate the sector with +46% market share; up 60bps MoM.
The NBP of the private insurers grew by 18% YoY, in spite of lower base of Feb-09 when premiums had declined by 27% YoY.
The strong growth in premiums of LIC was also supported by the launch of single premium high-assured returns scheme ‘Jeevan Nischay’.
On YTD basis, sector premiums have grown by 13% YoY led by LIC (25%), but private sector has grown by just 5%.

Strong growth for HDFC and Reliance
During Feb-10, ICICI’s premiums declined by 7% YoY, second consecutive month of YoY drop in NBP. The fall in premiums is largely due to lower group premiums (down 64% YoY; this is a volatile business), while individual premiums were up 9%. ICICI has retained its #1 position among private insurers.
SBI’s premium growth also moderated during Feb-10 to 24% YoY (up 60% YoY in Jan-10). Due to higher share of group business, SBI’s premiums have been volatile.
HDFC Standard Life reported strong growth of 96% YoY (47% MoM) led by large group premium collections.

While Reliance and Bajaj reported growth of 21% and 11% respectively, Birla and Max’s NBP declined by 21% and 2% YoY, respectively.

Newly formed insurance JVs of PSU banks are scaling-up well
Over the past 6-12 months, the newly launched life insurance JVs of PSU banks- (Canara, OBC, HSBC); (BoB, Andhra Bank, Legal and General); and (BoI, Union Bank and Da-ichi) have grown to collectively garner 2-3% share in total NBP and 4-5% share within the private sector.
As a result, these JVs are now much larger than many private sector players that have been in operation for a longer period.
A large branch network of the promoter banks and huge customer base are the key drivers of such a fast ramp-up by these companies.
Our industry interaction also suggests that to some extent these JVs are also taking away market share from LIC, especially in the smaller towns and cities.

To read the full report: INDIA INSURANCE

>Indian Hotels Sector: Operational Recovery Not Enough; Sector Still Expensive

■ Good occupancy recovery, but still way below peak levels — Average occupancy across 11 key cities is up a healthy 68% as of Jan’10 (vs. 65% in 3QFY10 and 58% in Jan’09)...but still far below peak levels of 79% in Jan’08. While we expect this to pick up further to 72-73% levels in FY11 with business and tourist traffic picking up; increased room supply will however limit upside.

Negative trajectory for ARR growth continues — Most players are concentrating on getting occupancy/traffic back with a focus on attractive pricing – ARRs decline of 21% YoY as of Jan'10 despite healthy recovery in occupancy levels underscores this. With impending room-supply, competition intensifying, we do not see ARRs going back to the peak rates in the medium-long term.

New room supply to cap RevPar upside — Industry grapevine expects ~15,600 new rooms to get operational across all segments in 2010 – this is ~15% of India’s total room inventory; 45% being targeted in key 5-cities of Bangalore, Pune, Mumbai, Chennai and NCR (has >6,000 rooms under construction). Though we expect occupancy levels to pick-up further, given likely supply and tariff pressures due to competition, we believe RevPar upside is limited.

Global hotel players more aggressive than domestic peers on room supply — Global chains are expected to add 300+ properties (est. ~55,000 rooms), investing ~$11bn in India by 2013. Marriott, Hyatt, Hilton are likely to be more aggressive than most domestic peers who have slowed expansions due to capital/leverage constraints.

Valuations rich — Its 3-mth relative underperformance to Sensex and volatility, explains our val concerns - reiterate our cautious outlook on the sector. Though earnings recovery is expected to continue in FY11 – we believe sector valuations (25x FY11PE, 15.6x FY11EV/EVITDA) already disc this. Indian Hotels is relativelybetter as an asset play, but believe valuations are not compelling at 2.1x P/BV.

To read the full report: HOTELS SECTOR


Quick Comment – Mumbai residential market update based on our channel checks and JLL REIS (sample size of roughly 140 developers) is detailed below.

New launch (for delivery in 2012-13) momentum continues – Notable projects include: Unitech (Parel), Orbit (Gamdevi, Prathana Samaj, Napean Sea Road), DB (Mahalaxmi, Jacob Circle), Kumar (Prabhadevi), RNA (Chembur, Kandivali), Dheeraj (Bandra E). Base Selling Price (BSP) is by and large back to the previous cycle high – Rs22-24k psf in Lower Parel, Rs50-60k psf at Napean Sea Road, Rs16k psf at Bandra E, Rs9.5k psf at Goregaon and Rs10-12k psf at Chembur. According to JLL’s 4Q09 data for Mumbai, roughly 5400 new units were launched, likely the highest in the last 12 quarters. See adjoining Exhibit.

What has been the sales is the key question - We believe there has been a marked slowdown in new sales in 4Q09, coinciding with the swift pace of price increases and multitude of new launches. JLL’s 4Q data indicate sale of 1600 units (roughly 15% quarterly absorption rate), versus 2600 units in the preceding two quarters. To compare, sales in 2006, 2007, 2008 and 2009 have been 9.2k, 11.8k, 5.3k and 7.5k units.

So, what is the view – From current price level, we expect limited pricing power with the developers based on 1) lagging rental rates (still 30% below last peak), 2) steady delivery of completed projects and 3) good pipeline of new launches (such as DLF, UT, DB, Lodha).

Spotting new trends – 1) Project specifications are improving. Importantly, the unit sizes are getting much bigger – 3000-12000 sf apartments – implying ticket size of $1.5-6 mln per unit S. Mumbai. 2) New projects are getting more dense and come with public car parking provision, since developers are availing higher ‘car park’ FSI (3-4 versus 1.33 earlier in the Island city).

To read the full report: INDIA PROPERTY