Tuesday, June 1, 2010

>Why Asia’s banks underperform at Mergers & Acquisitions (MCKINSEY)

Compared with Europe and the United States, Asia emerged from the global downturn a winner, with its economies continuing to post higher growth rates and its banks suffering far less damage from the credit crisis. But if Asia’s financial institutions thought that the region’s good fortunes were sufficient to provide a competitive edge, they ought to think again. When it comes to M&A, for example, acquisitions by the region’s banks have significantly underperformed those by what we call principal investors—a group that includes private-equity firms and sovereign-wealth funds—even in a rapidly growing market.

That is among the findings of a recent McKinsey analysis of financial-sector M&A in Asia.1 The study found that acquisitions by principal investors generate a median annual internal rate of return (IRR) of 22 percent, compared with –7 percent for strategic investors. This finding holds true for deals of similar sizes, across time and across Asian countries—before, during, and after the global financial crisis.

• Principal investors have done a better job at selecting the right geographies. Despite the higher risk profile associated with opportunities in emerging markets, these investors completed more deals in the Asian ones, such as China, India, and Indonesia. The deals generated significantly higher returns than did those in more developed markets, such as Japan and Taiwan. In contrast, strategic investors—the financial institutions—completed more deals in the low-return developed markets. While principal investors outperformed strategic investors everywhere, this difference in geographic focus played a significant role in creating the performance gap.

• Once deals are complete, strategic players appear to gain less advantage from their deep industry expertise than principal investors do from an active approach to ownership. In developed Asia, as much as 46 percent of the value in acquisitions by principal investors comes from improving the earnings of the companies they invest in. In contrast, the earnings performance of the strategic players declined, cutting their IRR in developed Asia by 23 percent. Among deals in Asia’s emerging markets, both types of players earned comparable returns from earnings enhancement.

• In deals where principal investors have strategic control, they are better able to use it to create value, with a median 30 percent IRR, compared with 2 percent for strategic players. Certainly, in countries such as China, India, Malaysia, and Vietnam, regulatory restrictions make it difficult for foreign players to gain control of financial entities. Deals without a controlling stake may be riskier, yet they can make sense if a general rerating of market multiples is expected (as in China and India) or if the acquirer can find ways of exerting influence, such as controlling board seats, influencing changes in management, or bringing in experts to improve business operations.

To read the full report: ASIA'S BANKS

>TATA MOTORS: Result Update Q4 FY10 (IIFL)

Consolidated net sales rose 84.6% yoy driven sharp improvement in JLR performance

JLR continues to report profit at bottomline level on back of robust operational performance

Strong standalone performance on back of robust growth in volumes and improved realizations

Standalone margins were under pressure on account of raw material pressures

Maintain BUY as we see continued recovery in consolidated financial performance

Sharp down turn in volumes from either Europe or US could be a key headwind

To read the full report: TATA MOTORS


Funding in place for projects
GMR's March quarter was affected by weaker sales momentum and a steep hike
in interest expense owing to new project commissions. With a combined equity issuance of US$510m for GMR and GMR Energy, we believe GMR is well placed to deliver projects as scheduled. We reiterate our Buy rating.

4QFY10 results – airports gaining traction
GMR’s 4QFY10 results were affected by a steep increase in interest costs (37% qoq and 93% yoy) owing to a 14% qoq increase in debt. Net sales were lower than we expected at Rs11.3bn but were up 5% qoq, and EBITDA dropped 9% qoq to Rs3.14bn. The company attributed the sequential sales momentum to a full quarter of operations at the new Sabiha Gökçen International Airport (SGIA) in Turkey and an increase in non-aero revenue at Delhi airport, DIAL. Normalised EPS for 4Q was Rs0.19 and, except for the Power division, all of GMR’s divisions recorded impressive FY10 sales and EBITDA growth to yield EPS of Rs0.34.

Power and road building progress as planned
In 4QFY10, GMR began construction work at Vemagiri Power Plant in India and paid an advance towards equipment for Chattisgarh power plant and EMCO Energy projects, both in India. The company recently completed financial closure of Hyderabad-Vijayawada project in its Roads division. In Airports, it plans to run the Hyderabad airport duty-free business as a fully owned subsidiary, as Nuance Group AG has withdrawn from the venture. DIAL integrated terminal (T3) is undergoing trial runs to ensure it can open for traffic in July, and a steep jump in traffic at SGIA (96% yoy) has prompted a feasibility study for a second runway.

Equity funds in place to deliver projects on time
The April 2010 qualified institutional placement of US$310m, coupled with US$200m in private equity funding for subsidiary GMR Energy, augurs well for GMR’s projects, considering that it has nearly Rs41bn in liquid investments and cash in its consolidated entity. GMR has several large infrastructure projects in the high-entry-barrier infrastructure BOT (build-operate-transfer) space that are scheduled to get under way over 1HFY11. Since early May, the stock has marginally underperformed the Sensex, which we believe indicates a buying opportunity. With a debt service coverage ratio of 1.36x for FY10, we reiterate Buy with a target price of Rs78.40.

To read the full report: GMR INFRASTRUCTURE

>CINEMAX LIMITED: Disappointing on the margins front… (ICICI DIRECT)

On a consolidated basis, Cinemax reported its results for Q4FY10, which were above our expectations. The topline was at Rs 44.8 crore against our estimate of Rs 42.8 crore. The company recorded a topline growth of 32.3% YoY while it declined 24.5% QoQ. The decline was primarily due to the seasonal effect. The YoY revenue growth was led by higher number of screens under operation. The company disappointed on the margin front. The EBITDA margin came at 9.4%, a decline of 2047 bps QoQ and 260 bps YoY. It declined due to higher theatre rent, which increased by 72.9% QoQ to Rs 9.32 crore and higher other operating expenses. PAT stood at Rs 4.4 crore, aided by higher other income of Rs 4.0 crore and negative tax of Rs 3.1 crore.

Highlights of the quarter
The company did not roll any new property during Q4FY10. However, it added two new screens and 670 seats at the Ghatkopar property. With this, the company ended FY10 with the total count of properties at 28 with a total of 90 screens and seating capacity of 24,539. Occupancy for Q4FY10 stood at 26% as compared to 27% in the last quarter. The ATP improved to Rs 128 as compared to Rs 126 in Q3FY10.

The company reported other income of Rs 4.0 crore and E-tax reversal of Rs 3.1 crore. Had other income not been at these levels and tax reversal, the company would have reported a net loss for Q4FY10.

At the CMP of Rs 49.0, the stock is trading at 17.1x FY11E EPS of Rs 3.4 and 11.9x FY12E EPS of Rs 4.1. We have valued the stock at 14x FY12E and arrived at a target price of Rs 58, implying an upside of 18%. We upgrade our rating on the stock from ADD to BUY.

To read the full report: CINEMAX LIMITED


Consolidated Q4 FY10 revenue jumped 8.7% qoq in dollar terms to US$6.1bn led by higher steel realisations

Standalone revenue of 73.3bn, 12.2% higher on a qoq basis and higher than our estimate on account of a 8.3% increase in realisations

Volume growth remained flat at 2.1% qoq as the company had announced the mothballing of Teeside plant and had taken maintenance shutdown at one of its blast furnace

EBIDTA/ton at Corus increased from US$37 to US$94, higher than street expectations

The expansion in EBIDTA was led by an increase in realisations as manufacturing costs largely remained flat on a qoq basis

Q4 FY10 adjusted PAT stood at Rs27.9bn, 3x on a qoq basis

Standalone profit stood at Rs20bn higher than our estimate of Rs13.5bn

We believe that the 26% correction in stock over the last one month is overdone; Upgrade to BUY with a target price of Rs548

To read the full report: TATA STEEL

>TORRENT POWER: Q1FY10 Performance Highlights (HEM SECURITIES)

Torrent Power is one of the leading brands in the Indian power sector, pro-moted by the Rs. 45 billion Torrent Group – a group committed to its mission of transforming life by serving two of the most critical needs - Healthcare and Power. Torrent Pharmaceuticals Ltd., the flagship company of the Torrent Group, is a major player in the Indian pharmaceuticals industry with a vision of becoming a global entity in the arena. The company has reported earnings results for the full year ended March 2009. For the year, the net sales for the company jumped to Rs 44249.60 million for the FY10 as against the net sales of Rs 36183.20 million for the FY09 with the growth rate of 22.29%. The net profit for the company stood at Rs 4078.90 million for the FY10 versus the net profit of Rs 2112.40 million for the FY09 with the growth rate of 93.09%.

The company posted financial figures for the quarter ended March 2009 in line of expectations. The net sales for the company gone up by 14.93% to Rs 10764.10 million for the Q1FY10 as against the net sales of Rs 10582.30 mil-lion for the Q1FY09. The company posted the EBITDA of Rs 1932.70 mil-lion for the Q1FY10 as against the EBITDA of Rs 1297.90 million for the Q1FY09 with the growth rate of 48.91%. The operating profit margin for the company stood at 18.26% for the Q1FY10 as against the operating profit mar-gin of 14.10% for the Q1FY09. The net profit for the company stood at Rs 1446.40 million for the Q1FY10 in comparison to net profit of Rs 504.60 mil-lion for the Q1FY09 with the growth rate of 152.02%. The net profit margin rose 13.67% for Q1FY10 in comparison to 5.48% for Q1FY09, which clearly shows the strength of the company. The EPS for the company stood at Rs 3.06 for the quarter ended in March 09. The cash EPS for the company stood at Rs 1.07 for Q1FY10. The EPS on TTM (Trailing twelve months) stood at Rs 8.63 for the company.

To read the full report: TORRENT POWER