Thursday, May 6, 2010

>China: inflation, economic growth and exchange policy (NATIXIS)

Following successive statements by China’s authorities (the USD/RMB peg is a “non-conventional” measure linked to the global economic crisis, RMB exchange policy must depend solely on the country’s economic situation...), we know that sooner or later the PBoC will replace the current peg with another exchange rate regime and that stable economic recovery would be a necessary condition.

Today, the 11.9% growth rate in the first quarter 2010, in conjunction with rising prices, are leading some to believe that it is time to revalue the RMB and/or make it more flexible. However, we show that finding a solution that offers both greater flexibility and monetary policy autonomy (controlling inflationary risk) is no easy feat and that a distinction should be made between flexibility and managed RMB appreciation.

We also believe that investment will slacken off (having already reached too high a level at almost 50% of GDP and some restraining measures have been already put in place) and that consumption will be unable to sustain the same dynamic level. China must thus rely on exports in order to achieve sufficiently high growth.

In view of the complexity of this exercise and the macroeconomic instability of China's economy, we do not believe that a shift in the exchange rate regime will come as promptly as the markets anticipate (+1.4% in 3 months being the consensus).

To read the full report: CHINA


Rapid film products – future growth driver
We recently met the management of Ankur Drugs and Pharma (ADPL). Key take aways from the meet were as follows: ADPL is the largest contract manufacturer of pharma products in India. The company’s Baddi facility is fully automated and complies with the US FDA specifications. The company caters to most domestic and MNC pharma companies operating in India. ADPL has created a dedicated facility to manufacture effervescent tablets (prospects in this business are very good, due to little competition). The company has acquired rapid film and skin patches patented technology from APR, Switzerland, and Labtec, Germany. ADPL will manufacture these products in India and supply them in India and 15 neighboring countries. The rapid film business is likely to be future growth driver for the company. The increase in global outsourcing of pharmaceutical formulations is likely to be of great benefit to the company.

Edge over competition
ADPL has an edge over its competitors as it can offer the entire range of pharma manufacturing facilities under one roof. Moreover, it enjoys economies of scale. Its major manufacturing facility is located at Baddi and this offers excise duty and income tax advantages, which give it an edge over some of its competitors. The tax advantages are for a long period (five to ten years) and, during this time, the company would be cost competitive.

Pricing pressure
There is increasing pressure from the US Federal Government and other governments on multi-national pharmaceutical companies to reduce prices of drugs. With the patents of major drugs expiring over the next few years and the introduction of generic products, most governments are promoting to use generics to bring down healthcare costs.MNC pharma companies are faced with tremendous pressures on drug prices. This is likely to result in outsourcing of formulations from India.

Positive outlook
The CMP of Rs 219 discounts the FY10 annualised EPS of Rs41.6 (inclusive of forex gains) by 5.3x and FY10 annualised EPS of Rs35.1 (excluding forex gains) by 6.2x. We are positive on the long term prospects of the company due to the potential upsides from rapid film and skin patch products and increase in outsourcing by MNC pharma companies.

To read the full report: ANKUR DRUGS


OEMs find it difficult to continue strong March momentum
Barring Bajaj Auto, major original equipment manufacturers (OEMs) failed to continue their strong growth momentum in April and have slowed down their speed. Most of the companies have reported de-growth in sales volume from March but the April effect cannot be ignored. Generally, April is always a subdued month after March historically. Comparatively, April 2010 was better compared to earlier years.

Rising raw material prices and supply constraint worrying factor
Rising steel and rubber prices that are trading at peak levels are a cause for concern in sustaining the EBITDA margins. Though many companies have taken a price hike of 3-6% in the near past it will not be sufficient to cover rising raw material prices. These would call for another price hike in
the near future making vehicles dearer leaving an impact on demand. Month on month, they have witnessed a short supply of batteries and components, which has also disturbed the supply despite the robust demand.

Postponement of deadlines for implementing cleaner emission norms
The government has extended the deadline for implementing cleaner emission norms for two-wheelers from April 1, 2010 to July 1, 2010 to upgrade their vehicles to Bharat Stage (BS) III from BS II in 13 cities and October 1, 2010 in the rest of country. The implementation of emission
norms for all segments would inflate the price by 5-6%, bringing demand growth under pressure.

Rise in interest rate
FY10 has seen a spurt in volumes on the back of an increase in liquidity from financial institutions and incentive schemes with lower interest rates (as low as 8%). However, many financial institutions have increased their lending rate by 25–50 bps. We feel these may rise further according to the guidelines from the Reserve Bank of India. The rise in interest rate is likely to mute the growing demand.

Going forward,
FY10 has been a year wherein all segments reported a stellar performance. We believe the trend will continue in the near short-term with improving economic conditions, increase in disposable income and competitive pressure that would result in the launch of best performing models at competitive prices. The outlook for FY11 is strong though we believe the growth in percentage terms will trim down on a high base. The rising commodity prices would be the key concern and would continue to bring profitability under pressure.

To read the full report: MOTOGAZE


Business growth in line, provisioning high...
IDBI Bank reported a 58% YoY jump in NII to Rs 760 crore, which was in line with our estimates. It witnessed higher operating expenditure for the quarter and also maintained higher-than-expected provisions, which led to 60% YoY and 62% QoQ decline in PBT to Rs 151 crore. The bank exercised deferred tax credit of Rs 167 crore leading to PAT of Rs 318 crore in line with our estimate of Rs 310 crore.

NIM to improve to 1.6%
The NIM of 1.6% for Q4FY10 was flat YoY. For the full year, the NIM improved by 29 bps to 1.3%. The bank currently has 720 branches and plans to add another 300 branches in FY11E. This will enable it to improve its CASA ratio from the current 14.6% to 16% by FY12E. Above industry credit growth and a rising interest rate should improve the NIM to 1.6%.

Asset quality improves sequentially
The GNPA improved from Rs 2317 crore in Q3FY10 to Rs 2129 crore for Q4FY10 (1.5% of loan book). Higher provision coverage ratio of 75% led to improvement in NNPA from Rs 1554 crore in Q3FY10 to Rs 1406 crore (1% of loan book). We expect GNPA@1.8% and NNPA@1.1% for FY12E.

Capital infusion awaited
The CAR of the bank currently stands at 11.3% (Tier I- 6.2%), which is below the required limit of 12% (Tier I- 8%). The bank has applied to GoI for capital infusion that will enable the bank to grow its balance sheet over 20% CAGR in the coming five years (approximates about Rs 10,000
crore). But we believe government can’t give such a huge amount and may give about Rs. 5000 crore on singular basis and if full Rs.10000 cr is to be raised, IDBI will have to come to market. Hence, we have currently factored in 10% dilution in FY11E as government funds.

We believe due to lower-than-industry NIMs at 1%, RoE of14%-16% & RoA at 0.5%, the stock cannot trade more than book. We value IDBI at 0.9x FY12E ABV and ascribe Rs 25 to its investment book, to get fair price of Rs 141.

To read the full report: IDBI BANK

>Orient Paper & Industries (ICICI DIRECT)

Volume growth negating realisation pain…
Orient Paper has reported net sales and net profit of Rs 548 crore and Rs 4.8 crore, respectively, in Q4FY10. The reported net profit was ahead of our estimate of Rs 47.3 crore due to higher than expected margin in the electrical fan segment and higher cement volume. It reported healthy cement volume growth and sequential rise in cement realisation. Going forward, we expect cement realisations to be under pressure on capacity surplus in the southern region, where the company operates its cement business, and paper margins to improve. Considering the cement volume growth, paper business revival and cheap valuations, we maintain our target price of Rs 64 on the stock with BUY rating.

Topline up 17% YoY (48% QoQ), cement realisation up 10% QoQ Orient Paper reported net sales of Rs 548 crore in Q4FY10, increase of 17.4% YoY and 48.1% QoQ. Cement revenue increased 17.4% YoY (28.8% QoQ) to Rs 274 crore as cement volume rose by 40.3% YoY (17.5% QoQ). Cement realisation declined by 16.4% YoY but increased by 9.7% QoQ. Paper revenue has declined by 13.7% YoY on lower volumes due to water shortage. Sequentially, it has increased by 8.1%. Revenues from the fan segment have increased b y 37.1% YoY (130.9% QoQ) to Rs 195.4 crore.

Cement margin down 1230 bps YoY (430 bps up QoQ), paper in loss. The company reported cement EBIT margin of 27.6% in Q4FY10, which is 1230 bps down YoY on account of lower realisation. However, the margin increased by 430 bps QoQ as realisation increased during the quarter. EBIT margin of the paper segment was reported at -14.5% in Q4FY10 as compared to -1.6% in Q3FY10. The fan division reported margins were down by 240 bps YoY to 14.4%.

At the CMP of Rs 58, the stock is trading at 6.3x and 5.2x its FY11E and FY12E earnings, respectively. The stock is trading at an EV/EBITDA of 3.5x and 2.6x FY11E and FY12E EBITDA, respectively. On an EV/tonne basis, the stock is trading at $46 and $36 its FY11E and FY12E capacities, respectively. We are valuing the cement business at $42 per tonne (60% discount to the replacement cost) at its FY12E capacity of 5 MTPA and have arrived at a revised target price of Rs 64 with BUY rating.

To read the full report: ORIENT PAPER


Volume growth persists, margin under pressure
Kansai Nerolac Paints Ltd reported its Q4FY10 results and surpassed expectations with tremendous growth in revenue and margins. The company’s revenue increased 35% during the quarter to Rs 423.8 crore from Rs 313.6 crore in the corresponding quarter last year. The EBITDA for the quarter improved 76% YoY but experienced a decline of 3.5% QoQ and stood at Rs 58.6 crore in Q4FY10. This decline was on the back of an increase in crude base raw material prices. Higher EBITDA resulted in a 50% increase in net profit to Rs 30.3 crore from Rs 20.1crore in Q4FY09.

Highlights of the quarter
The company commenced operations at its new facility in Hosur, Tamil Nadu that caters mainly to automobile clients TVS Motors and Ashok Leyland. The plant began operations in January and has a capacity of ~20,000 metric tonnes. The company has already made an investment of
Rs 180 crore in the plant and expects to increase to Rs 230 crore on further investment for increasing capacity. The company would be expanding the capacity of its Jaunpur plant in Uttar Pradesh to increase the company’s total capacity by almost 25%, going forward.

At the current market price of Rs 1499 the stock is trading at 24.4x its FY11E EPS of Rs 68.0 and 22.0x its FY12E EPS of Rs 76.8. The strong demand emanating from automotive paints resulted in sustainable volume growth. However, rising crude prices would, in turn, result in an increase in crude-based raw material that would pressurise margins going forward. Hence, we value the stock at 18x its FY12E EPS of Rs 76.8 to arrive at a price target of Rs 1382.

To read the full report: KANSAI NEROLAC