Wednesday, July 7, 2010

>Indian Mutual Fund Industry - Towards 2015

India is undoubtedly emerging as the next big investment destination, riding on a high savings and investment rate, as compared to other Asian economies. As per a report authored by PwC “The World in 2050”, the average real GDP growth in India was likely to be in the range of 5.8% between 2007-50, (the actual average GDP growth between 2007-10 has been 7.6%) with per
capita income rising to USD 20,000 from the current USD 2,932. Over 50 per cent of the population is less than 25 years of age, with the proportion of working population likely to increase significantly over the next decade. The trend of rising personal incomes has been
witnessed not only amongst the young population, but also the high net worth (HNI) segment, which have sizeable sums to invest. One estimate indicates that there are more than 120,000 dollar millionaires in India and the number is increasing. The house-hold segment therefore proffers immense scope for attracting investments. India has a strong middle class of 250-300
million, which is expected to double over the next two decades.

It is in the backdrop of some of these encouraging statistics that the Indian mutual fund industry has
fostered itself. Since the 1990’s when the mutual fund space opened up to the private sector, the industry has traversed a long path, adapting itself continuously, to the changes that have come along. Growth in Assets Under Management (AUM) experienced has been unprecedented, growing at a CAGR of 28% over the last four years, slowing down only over the last two years, as a fallout of the global economic slowdown and financial crisis. Although investor confidence was
significantly eroded and AUMs suffered a dent, the sale of mutual funds has revived over the last few quarters, which implies regained confidence of investors, striving to look at alternate investment opportunities and any attendant higher returns, though the markets continue to
be choppy.

In today’s volatile market environment, mutual funds are looked upon as a transparent and low cost investment vehicle, which attracts a fair share of investor attention helping spur the growth of the industry. Over time, inclusive growth across the financial sector, seems to have taken centre-stage, re-designing all business strategies around this sole objective. The mutual fund industry being no exception, various measures are being taken by fund houses and distributors to spread access and reach to the semi-urban and rural segments. Clearly, the role of technology as a growth enabler
has assumed enhanced responsibility in this respect, to enable improved reach, inclined towards efficient distribution.

The landscape of the financial sector in India is continuously evolving, accredited to regulatory changes being undertaken, which is leading market participants like the asset management companies (AMCs) and distributors to restructure their strategies and adopt business models which will yield sustainable benefits.

Some of the other trends which have emerged strongly over the past year are heavy outflows triggered by market volatility and partnering of asset management companies with banks, to increase the strength of distribution networks.

It is worthwhile at this point to take note of some of the business and regulatory trends taking shape across the global economies, which might cast a shadow on the Indian markets. Developments on aspects of entry load, management fees paid to asset management companies, regulation of distributors and taxation of mutual funds from the investor point of view, are some of the areas which deserve to be given attention. The road ahead for the mutual fund industry will be paved by the performance of the capital markets. But, more importantly, it remains to be seen, how fund
houses adapt themselves to changes in regulations, thereby shaping growth for the future. A continuously evolving regulatory framework makes it mandatory for the industry to elicit a clear growth path, making it easier to assess obstacles and tide over them with time. It remains to be seen, how the industry progresses towards achieving its growth vision for 2015.

High growth story envisaged for the mutual fund industry in 2015

Last year the summit ended on the note of a vision for 2015, stating a positive outlook for assets under management growing at 15%-25%, between 2010 and 2015, the pace of growth being matched by the GDP growth rate of the economy. Profitability of the industry though, may decline substantially, as a fall out of spiraling operating costs and lower revenues. Higher penetration levels were also estimated riding o n the back of the accelerated drive for investor awareness, increase in investible surplus and a younger population with the capacity to absorb higher risks (of market movements in NAVs). In addition, regulatory environment was expected to take a turn, towards an alignment of financial regulations across the financial services sector.

Where do we stand in 2010?
The Indian mutual fund industry is undergoing a metamorphosis, which inadvertently marks a point of inflection for the market participants. However, even amidst volatile market conditions, average assets under management indicated vibrant growth levels posting a y-o-y growth of 47% in 2009-10, and the total AUM stood at Rs 613,979 crore, as of March 31, 2010. Aggregate funds mobilized during the year also grew 84%, supplemented by around 174 new schemes launched during April 2009 to March 2010. The investor base has also steadily expanded and between
November 2009 to March 2010, there was an addition of 60,834 investors.

These statistics testify, that the Indian mutual fund industry has weathered the financial crisis, but it
cannot be denied that the industry still continues to deal with challenges of low retail participation and penetration levels.

To read the full report: MUTUAL FUND

>Hindustan Media Ventures Ltd.: IPO NOTE

Hindustan - 3rd largest read Hindi daily with readership of 9.9mn
HMVL prints and publishes ‘Hindustan’ – the 3rd largest read newspaper in India with
readership of 9.9mn (source: IRS Q1 2010). Hindustan has strong presence in 6 out of the
14 Hindi newspaper markets, with leadership in Bihar & Jharkhand markets. Hindustan has
seen consistent and highest growth in readership over the last 5 years taking itself from 8th
largest to 3rd largest in terms of readership. We believe that the launch of new editions would further grow the readership which would result in healthy ad-revenue growth, going forward.

Ad-market revival and strong GDP growth provide healthy opportunity
Economic revival and expectations of strong GDP growth provides very healthy environment for growth in advertisement revenues. While the industry advertisement revenues are expected to grow by 12% CAGR over FY10-12E, we believe that the vernacular print medium would outperform the industry growth. Recent ad-rate increase of over 10% together with volume growth recovery would result in strong ad-revenue growth for the company.

EBIDTA and PAT to grow by 45% and 48% CAGR over FY10-12E
We expect HMVL to register 11% revenue CAGR despite 16.4% ad-revenue CAGR due to
the impact of cover price cut on the circulation revenues. With steady newsprint prices and
high operating leverage in the business, we expect EBIDTA and PAT CAGR at 44.5% and
48% over FY10-12E. The high growth of HMVL over its peers can also result in valuation
premium to peers, in our view.

Valuation at reasonable discount to peers - SUBSCRIBE
Since the Hindi newspaper business under the brand Hindustan was transferred from HT Media to HMVL w.e.f. 1st Dec-2009, the financial performance of HMVL is not the right indicator of the business performance and potential. Based on our estimated PAT of Rs781mn & Rs993mn for FY11E & FY12E respectively, the issue is priced at 12x and 12.8x our estimated earnings at lower and upper price band for FY12E respectively. Considering the reasonable discount of 14-21% v/s the market leader Jagran Prakashan, we recommend investors to SUBSCRIBE to the issue.

To read the full report: HMVL

>India 2010: Watch out for the 2nd half (MOTILAL OSWAL)

To use football parlance, Earnings remains a star striker for Team India. It should remain in steady form in 1QFY11, with Sensex PAT growing 19% YoY. Second half of 2010 for Indian equities depends on the interplay of 11 different drivers. Monsoons and Global markets remain the near term triggers for market direction. Our model portfolio is overweight on domestic plays - Financials (SBI, ICICI Bank), Infrastructure & allied sectors (BHEL, ACC, Unitech) and Oil & Gas (BPCL, GAIL). Amongst the global plays, we prefer IT and Pharma over cyclicals.

Steady 1QFY11 for the Indian corporate sector; Sensex PAT up 19% YoY
We expect MOSL Universe (excluding oil marketing companies) to report 1QFY11 earnings growth of 17% YoY. This growth is a moderation compared to 31% YoY in 2HFY10, when earnings were largely driven by low base. Telecom sector and ONGC are the two key reasons for lower growth. Ex these, growth for rest of Universe would be 31%.1QFY11 will also be a quarter, where absolute PAT will be lower QoQ (first time in last 4 years). This is driven by flat growth QoQ in Oil & Gas and drop in earnings in Metals and Telecom sector. Sensex performance is marginally better than aggregate with PAT growth of 19% YoY.

India 2010: Watch out for the second half
Indian markets had a lackluster first half 2010, rising just 1-2%. However, just like the ongoing football World Cup, Indian equities could throw up a few surprises in the second half of the year. How the second half plays out for India depends on the interplay of 11 different forces that we have identified and lined up like a typical football team.

Markets to remain range-bound; stock-picking to drive portfolio performance
Accelerating economic and corporate profit growth will limit downside in the markets. At the same time, above-average valuations cap the upside. Expect benchmark indices to remain with a range of 10% from current levels. Thus, 2010 will be a year of stock picking, with market contribution to aggregate performance being the lowest in three years. We believe stocks in our model portfolio offer growth at reasonable valuations. We are overweight on domestic plays - Financials (SBI, ICICI Bank), Infrastructure & allied sectors (BHEL, ACC, Unitech) and Oil & Gas (BPCL, GAIL). Amongst the global plays, we prefer IT and Pharma over cyclicals.

To read the full report: INDIA 2010


On Sunday, 4 July, the Boards of RPWR and Reliance Natural Resources Limited (RNRL, NR) approved a scheme of amalgamation of the companies in a 4 (RNRL) for 1 (RPWR) share swap. Our initial thought is that this transaction is done out of necessity rather than value creation. An investor call is being held before market tomorrow. We retain our Underperform.

Look like a defensive move, rather than value creation: The recent RNRLRIL Supreme Court decision highlighted that the Government has ultimate control of how gas supply in India is allocated. RNRL itself has no power projects of its own – it’s essentially trading the gas – against the Government’s desire to allocate gas to end users and not traders. Therefore in our view, the absence of any gas assets in RNRL meant that this transaction was done as a necessary step to ensure gas allocation, rather than for value creation.

Pro forma accounts – RPWR still expensive: We provide a snapshot of pro-forma accounts of the transaction. The Price/Book Value (P/BV) after adjusting for the potential goodwill created from the transaction, sees the metric worsen to around 3.2x P/BV. Stripping out cash + investments implies a P/BV of 11.8x highlighting the early stage of the execution cycle for the combined RPWR-RNRL entity.

Other RNRL assets more speculative: The only real fundamental value that RNRL could bring to RPWR shareholders, in our view, is the undeveloped gas assets. Again, it seems that RPWR has paid an enterprise value of ~US$1.4bn for this more speculative upside. We need to do more valuation work around these assets.

Finer details on conference call tomorrow morning: at 8:15am (India time) to discuss the transaction. Call details within the note.

Earnings and target price revision
No change.

Price catalyst
12-month price target: Rs107.00 based on a DCF methodology.
Catalyst: Details of gas pact between RIL-RNRL within the next month.

Action and recommendation
Underperform, with the stock trading at approximately a 40% premium to our valuation. With financial closure only achieved for 17% of its project pipeline, we believe there is still a long way to go regarding project execution.

To read the full report: RELIANCE POWER


Indian TV Distribution industry, world’s second largest with 105m cable & satellite (C&S) homes, is set for a makeover as the long-awaited ‘digitization’ becomes a reality. As of 2009, there are 22m digital homes with 18m of these on the DTH platform. Going forward, we expect digitization to gather pace not only in DTH but also in the ‘hitherto laggard’ cable space. While funded DTH players have invested Rs110bn so far, cable players too are now equipped to seed set-top-boxes (STBs) after the recent fund raise and would look to lock-in customers given the threat from DTH. We expect the total digital homes tally to rise 4x to 86m by 2015E, and address the biggest concern of ‘under-reporting’ in its wake. In the backdrop, we expect a 6.5x increase in the organized pie to Rs340bn even on a modest 14.5% CAGR in industry revenues to Rs480bn by 2015. As we expect C&S operators to retain the economic benefit of improved declarations and turn profitable, the sector makes a compelling case for re-rating. We recommend Outperformer on Dish TV, DEN Networks and Hathway Cable and expect 50% returns over an 18-month period.

Digital base to grow 4x…: India’s digital C&S base is set to expand to 86m by 2015E with 48m DTH (18m as of 2009) and 38m digital cable (4m) homes. While the six funded incumbents keep the momentum ticking in DTH, we believe digitization is no longer a ‘choice’ for cable operators and assumes a sense of urgency in the face of increasing threat from DTH. Importantly, national MSOs are now funded (Rs13bn of recent fund raise) to exert customer pull through subsidized STBs – a competitive edge of DTH players so far. Limited scope of ‘carriage fees-led economics’ from here and industry consolidation are the other drivers of cable digitization.

…and organized pie to swell 6.5x by 2015E: We expect a modest 14.5% CAGR in C&S industry revenues to US$10.8bn over 2009-15 as the C&S homes base expands to 140m and ARPU increases from $3.8 per month to $6.3. However, digitization is bound to reduce the incidence of under-reporting – the bane of the Indian C&S industry, and we expect the declared subscriber base to grow 4x from 23m to 89m by 2015. This, we believe, would drive a 6.5x rise in revenues of organized players.

Economic retention to drive value creation: With the net share of organized MSOs and DTH operators increasing from <10%>

To read the full report: TELEVISION DISTRIBUTION