RESEARCH REPORTS: 12/02/11

Friday, December 2, 2011

>Singapore gross refining margin (GRM) down to US$5.2/bbl last week; RIL GRM US$4.2-5.8

■ Sing GRM last week lowest in over 1 year; down 31% in Nov

Reuters’ Singapore refining margin (GRM) for the week ended November 25 has slumped to US$5.2/bbl, which is the lowest level since early November 2010. Singapore GRM is down 31% month-on-month (MoM) at US$7.0/bbl in November 2011. Theoretical GRM of Reliance Industries (RIL) works out to just US$4.2- 5.8/bbl for the week ended Nov 25 and at US$5.1-6.2/bbl in November 2011.

■ Petrol, fuel oil & diesel cracks fall driver of recent GRM fall

Reuters’ Singapore GRM has declined from US$8.2/bbl in the week ending Nov 11 to US$5.2/bbl in the week ended Nov 25. Almost all product cracks have declined in the last two weeks but GRM have been most hit by US$4.6-5.6/bbl decline in fuel oil and petrol cracks. Petrol cracks (US$18.7/bbl in Oct’11 and US$16.5/bbl in Apr-Oct 2011) are down to US$1.3/bbl last week. Diesel cracks have declined the most (US$2.6/bbl) last week but remain high at US$18/bbl.

■ RIL 3Q GRM (US$6.8-7.6/bbl) below Sing GRM (US$8.7/bbl)

RIL's 3Q TD FY12 theoretical GRM at US$6.8-7.6/bbl is below Reuters’ Sing GRM of 8.7/bbl. RIL has been hit mainly by steep declines in naphtha and LPG cracks and light-heavy crude spread. Arab heavy-Dubai spread at US$0.7/bbl in 3Q is at the lowest level in 9 quarters. RIL’s GRM is also QoQ lower than its 2Q FY12 GRM of US$10.1/bbl and YoY lower than its 3Q FY11 GRM of US$9/bbl.

■ RIL and Sing GRM lower by end-3Q given falling trend

Reuters’ Singapore GRM, which is US$8.7/bbl to date in 3Q, may average just US$7.4/bbl if the rest of 3Q is at the same level as last week. Average 3Q RIL GRM may be just US$5.8-6.9/bbl if its GRM in the rest of 3Q is same as it was last week. Some bounce back in RIL and Singapore GRM from last week’s level is possible but still 3Q GRM being lower than it has to date appears likely.

■ RIL’s FY12-13 earnings to be hit if GRM weakness continues

RIL’s 3Q FY12 net profit works out to Rs51.0-55.3bn at our 3Q TD theoretical GRM of US$6.8-7.6/bbl despite assuming a weaker rupee of Rs50.8. If 3Q profit is as we expect, it would be 3-11% QoQ lower than its profit of Rs57bn in 2Q FY12. It would be down 1% to 8% YoY higher than its 3Q FY11 profit of Rs51.4bn. If 4Q profit is the same as 3Q, FY12 EPS would be Rs65.9-68.5 (up 7-

11% YoY). RIL’s FY13 EPS would be Rs62.3-67.6 if it is annualized at the 3Q FY12 level.

■ R&M companies GRM up QoQ; at US$2.4-2.5/bbl last week

BPCL and HPCL theoretical 3Q FY12 GRM at US$2.5-2.9/bbl is up US$0.9- 1.0/bbl QoQ. However, their theoretical GRM has weakened to 2.4-2.5/bbl for the w eek ending November 25.

To read full report: OIL REFINING & MARKETING

RISH TRADER

>ALLAHABAD BANK (RELIANCE SECURITIES)

We interacted with the management of Allahabad Bank (ALBK) at its analyst meet to understand the business environment for the bank. Key highlights of the same:

 Asset Quality: The management acknowledged a difficult business environment due to slowing domestic economy and high interest rates. However, the bank has practiced prudence in lending to quality borrowers and shying away from risky businesses. The GNPA & NNPA stood at 1.8% & 0.7% as on 2QFY2012 respectively. The bank is 100% CBS as far as the identification of NPAs is concerned and remains focused on improving quality of assets in the backdrop of a challenging business environment. In fact, it has recovered Rs443cr loans of which Rs355cr were small loans of Rs5lakh and below during 1HFY2012. The management expects to recover another Rs550cr over H2FY2012. We expect the slippages to remain low on account of higher recoveries and anticipate GNPA of 1.8% over FY2012 and FY2013.

 Consistent growth & resilient NIMs: ALBK has rebalanced its loan portfolio by getting out of certain riskier accounts such as short-term loan business in 2QFY2012. Nonetheless, the loan growth has been consistent and the bank has guided for loan growth to be 4-5% above systemic growth. Margins have been resilient as evident in 2QFY2012 on the back of lower cost of funds, high operating efficiency and asset re-pricing. We expect NIMs to be at ~3.3% in FY2012 and FY2013.

 Scalability: ALBK has recruited about 7,200 new employees in the last three years and they are all mainly officers with CA or MBA qualification. The bank has become young, median age of junior officers is 36, which is expected to improve the productivity of the bank. Also, the bank is highly focused in scaling up its branches and ATMs. The management plans to increase the access points through expanding its branch network to 3,000 branches and 2,000 ATMs by FY2015. This would give a major boost to its fee income as well. The feebased income has gone up from Rs213cr to Rs257cr, a growth of 21% in 2QFY2012. ALBK continues to be the largest partner of LIC as far as sale of Life Insurance policy is concerned. Also, it has over 2 lakh pensioners in its book. Scaling up of access point would aid fee income growth going forward.

Outlook and Valuation

Total business of ALBK has grown at a CAGR of 22% over the last four years. We expect ALBK to successfully implement the following broad strategies (a) focus on core deposit, reducing dependence on bulk deposits; (b) emphasis on CASA deposit mobilization; (c) maintaining a lean cost structure; (d) maintaining NIMs; (e) reviving fee-based income; and (f) reinvigorating recovery of NPAs. All these efforts would yield results and help the bank to strengthen its balance sheet on the one hand by maintaining moderate level of profitability and overcome the adverse impact of global slow down on the other. We expect ALBK to outperform the industry and continue to grow at the same pace of ~22% between FY2011-13E. ALBK is an attractively valued mid-size public sector bank with above average credit growth, lean cost structure, high CASA deposits and firm asset quality. Further, lower bulk dependence, wide branch network and higher coverage ratio makes ALBK preferable over its peers. At CMP of Rs154, the bank is trading at 0.7x FY2013E ABV. We maintain our Buy on Allahabad Bank based on 1.0x FY2013E ABV, with a target price of Rs212, implying an upside of ~40% from the CMP.

To read the full report: ALLAHABAD BANK

RISH TRADER