Sunday, February 19, 2012

>JAIPRAKASH ASSOCIATES: JPA looking to divest stake in Gujarat & AP cement plants

■ Revenue at Rs 32.6bn +12.6% yoy marginally lower led by Real estate JPA’s Q3FY12 Revenue at Rs 32.6bn +12.6%yoy v/s exp. Rs33.6bn. Cement vertical – Performance in line (Rs 16.9bn + 37% yoy led by +17% volume growth, +17% realization growth to Rs 4,065/ton), Construction vertical – Performance marginally lower (Rs 12.4bn v/s exp. Rs 12.7bn. Real estate vertical – Performance disappoints – Rs 3.1bn v/s exp. Rs 4bn.

■ Cement biz stabilizing – Volumes+17.2% to 4.25mt, Real.+17% to 4065/ton With sharp price hike witnessed in 3Q in JPA’s key markets, the cement business saw sharp improvement with the division reporting EBITDA/t of Rs743/ton v/s Rs 201/ton witnessed in Q2FY12. With the company commissioning its Balaji Cement Plant at AP the installed cement capacity has reached ~ 30 mtpa (27.5 mtpa in standalone & 2.2
mtpa in JV with SAIL). We expect these capacities to see gradual ramp up and expect overall FY13E dispatches growth of 22.7% yoy to 21.5 MT (Ex Balaji growth of ~15%).

 Maintain Hold – TP Rs 89 - Upsides appeared capped in the short term JPA’s Q3FY12 profit beat is driven by E&C vertical led by one time milestone payment. We believe adjusting for the one off milestone payment in Q3FY12, the sustainable margins of this segment will be close to 18% & we model in the same for FY13E. JPA plans to divest stake in its Gujarat & AP cement plants (target capacity of ~ 10 mtpa) to de-leverage its stretched balance sheet (FY12 E standalone D:E of 2.2X) & hence the divestment remain key trigger. However we believe the sharp run up over the last month (+43%) partially factors in the positive of divestment & hence valuations at 8.2x FY13E EBITDA, leaves very little upside. Maintain a Hold rating with a target price of Rs 89.


>Towards the end of global imbalances?: The term "global imbalances" is mainly used for the clash between the US structural external deficit and the structural external surplus of emerging and oil-exporting countries, in particular China

The term “global imbalances” is mainly used for the clash between the US structural external deficit and the structural external surplus of emerging and oil-exporting countries, in particular China. We will look at the conventional analyses of this situation of global imbalances.

But we show that there are currently a number of mechanisms that could eventually wipe out these global imbalances:

■ the much faster growth in domestic demand in emerging countries than in the United States;
■ the rise in production costs in emerging countries, relative to OECD countries;
■ the incipient reindustrialisation in the United States;
 the reduction in the US energy dependence on oil-exporting countries thanks to the increasing role of shale gas.

This will in particular lead to a slowdown in global monetary creation and to a greater stability of asset prices and exchange rates.

To read full report: GLOBAL IMBALANCES

>STRATEGY: Rally Reality – 30% in 33 days! Seen it before?

 30% in 33 days! Seen it before? — Actually Yes. This rally – 33 trading days so far, and currency adjusted - only makes the middle of the 5 big rallies in the last decade. It is however clearly a very impressive rally: leader in local currency (+20%) and currency adjusted terms (+30%) amongst large EM/DM markets, India’s strongest USD rally vs. EMs, and more broad-based (i.e. mid/cap and Small cap participation) than the index’s performance would suggest. All this is good (and past), so we look closer at the reality of this rally, and (more importantly) question how real it is.

 The Reality of this Rally — How does this rally stack up against the previous 5 rallies? It is a) more broad-based (relative mid-cap/small cap performance is second best) b) starting from a relatively higher valuation (1yr fwd PE: 12.6x – second highest; range:9x-16.5x) c) Outperformance is led by the usual sector suspects (Materials: 16%, Industrials:10%, Financials: 8% and as always d) has been led by strong foreign Inflows, though this time there has been aggressive domestic selling (almost 50% of foreign buying). Not enough to say its ‘different this time’, but there are differences.

■ Real? Will it Rally on? — India’s had a few false starts - (11/21 15%+ rallies have petered out. But the four that have lasted 100 days have generated a 48% median local currency return (55% averages) and volumes have gone up sharply (86%). So far, the domestics haven’t even participated; equities worldwide continue to rally , and Citi’s Global and EM strategist expect the equity rally to go on:+11% for global equities, +15- 20% for EM, from here. Will India continue to lead the rally, or at least rally along?

 Fundamentally, we believe India's fair value is now near — The Indian market, at 18,154 on the Sensex is almost at our fundamental December 2012 target of 18,400. We are holding our target. We would continue to position our portfolio relatively aggressively and for risk (and stay away from defensives): see overshoot risks on the upside rather than the downside. But we believe the markets’ move now prices in a quickly recovering economy/corporate sector; this will likely take time (3/4QFY13), and the market will likely wait for most 2012 for the economy to catch up.

To read the report: RALLY REALITY

>RELIANCE INDUSTRIES: RIL has been diversifying into broadband, retail, financials and defence sectors.

■ Existing business under pressure: Reliance’s existing upstream and downstream businesses are under pressure owing to falling gas production and a decrease in downstream margins. We anticipate the trend will continue near term. The recent net fair value reduction of its stake in the KG-D6 gas block by partner BP Plc (BP/ LN, 496p, OW) in its CY11 earnings release also confirms our view that gas production has been below expectation.

■ Benefits of new businesses not obvious. RIL has been diversifying into broadband, retail, financials and defence sectors, but is yet to spell out its strategy for the latter two; however, its has moved ahead with its retail and broadband foray. The outlook for these businesses, however, is not robust. The retail business has yet to turn profitable, while the broadband business requires significant infrastructure ramp-up. The experience with the rollout of 3G data services, a lead indicator for the success of RIL’s broadband business, in our view, has been that it is yet to become popular from a mass-market perspective.

■ Gas production to continue declining for another year at least. We expect gas production to continue falling in the absence of any maintenance/workover. We further anticipate production ramp-up to kick in only in FY15, given the lead time required for data gathering, analysis, drilling and construction spread mobilisation. We believe the current production could reach as low as c30mmscmd before workover can arrest the decline with about 10-15mmscmd additional production from FY15 onward.

We expect another year of flat to poor earnings growth. Following the weak Q3FY12, we anticipate a flat to sequentially lower Q4FY12 as well, as detailed in our report "Reliance Industries: Lacking a near-term trigger", 12 January 2012. We forecast a c5% EPS decline in FY13, followed by EPS growth of 18% in FY14 as expansions kick in.

■ Valuation and risk. We continue to value RIL on the basis of the sum of its refining, petrochemical, E&P and other small businesses. We value refining and petrochemical on an average of 6x EV/EBITDA and 10x PE on FY14e earnings. E&P and other businesses like retail and broadband are valued on a DCF basis. The combined businesses give us an unchanged valuation of INR800/share, and we downgrade the stock to UW (from N). The near-term risk to our rating is the technical support emerging from the up-to INR104bn buyback at up to INR870/share.

To  read full report: RIL

>RELIANCE INFRA: Improvement in Mumbai/Delhi

■ Raising target price — Our 19% TP increase to Rs722 factors in (1) EPS increases of 54% & 19% in FY12E & FY13E, (2) increase in parent target EV/EBITDA to 7x (from 6x) on better op performance, (3) R-Power at 20% discount to mkt price of Rs110 (from Rs85). R-Infra’s 3Q12 cons BVPS was Rs945. Even if we knock off investments in pref shares/ICDs and regulatory assets in Delhi/Mumbai and add back recoveries, the adjusted cons BVPS is Rs703. This provides valuation support. We remove the High Risk rating as regulatory overhang in Mumbai and Delhi distribution now eliminated.

■ Parent PAT +151% YoY, Cons PAT +4% YoY — Parent 3Q12 PAT at Rs4.2bn was up 151% YoY led by 181% YoY growth in EPC sales, and higher margins in power and EPC. 9M12 parent recurring PAT at Rs11.6bn is +99% YoY. Cons PAT at Rs4.1bn grew at slower rate of +4% YoY on elimination of internal EPC sales/profits and losses in infra projects at PBIT level. 9M12 Recurring PAT at Rs10.2bn is down 8% YoY. The company has bought back 4.43mn shares for Rs2.34bn thru 14-Feb-2012.

 Update on regulatory assets — In Mumbai, distribution R-Infra has accrued regulatory assets of Rs22bn. According to mgmt, MERC has approved recovery of Rs48bn over six years; NPV works out to Rs35bn. In Delhi, distribution R-Infra has accrued regulatory assets of Rs82bn and has made claims for recovery of Rs144bn. The company has also infused Rs5.2bn in Delhi and currently has a stake of 51%.

 Improvement in Mumbai/Delhi — Renewal of distribution license for 25 years has removed uncertainty. Regulations are clear that distribution license and assets are different and R-Infra can decide to let any other distribution licensee (except Tata Power) use its network on commercial terms. With decline in load from 1.3GW to 1GW, power purchase costs have come down and regulator has approved levy of crosssubsidy charge on customers migrating to Tata Power. In Delhi, R-Infra has infused Rs5.2bn and Delhi Government has infused Rs5.0bn. A package of Rs51bn has been approved by IDBI Bank and tariff has been hiked 22%.

To read full report: RELIANCE INFRA

>STATE BANK OF INDIA: Bank booked INR1.1bn loss in treasury largely from the equity book

3QFY12 earnings came in at IN 32.6bn, in line with our estimates. NIM surprised positively yet again, only to be offset against higher loan loss provisions. The stock ended Monday (13 February) 2% below its previous day’s close.

Highlights: Core operating performance continues to remain strong for SBI with the loan book growing higher than system supported by robust and improving margins (4.05%), which were largely domestic driven (4.4%) and contained operating costs. The Bank booked INR1.1bn loss in treasury largely from the equity book, but also wrote back investment depreciation of INR8.7 bn. Although asset quality continued to disappoint with high slippages of c4% (INR81.6bn) and weak recoveries, the bank continued to grow its advances aggressively, largely in the agri and corporate segment. The corporate and SME segments continued to witness higher slippages with their GPNLs now 5.5% and 7.9%, respectively, while agri NPLs worsened further to c9.5%. Overall, GNPLs and NNPLs increased to 4.6% and 2.2%, respectively, while credit costs remained high at 145bps. Key sectors that witnessed slippages were iron and steel, one large account in aviation, textiles and agriculture. Restructured loans have also increased with the gross book now at 4.7% of loans and slippages at 26%.

Outlook: We believe margins will continue to aid SBI in providing for higher credit costs. However, it seems much of this margin improvement is driven by growth in riskier loan segments like SME and agriculture. We remain cautious on asset quality and adjust our estimates for FY12, FY13 and FY14, maintaining our overall cautious outlook. Downgrade to UW (from N), target price remains at INR2,000: SBI currently trades at 12- month forward multiples of 10.9x PE and 1.6x PB against its average five-year multiples of 13x PE and 1.8x PB. The stock has risen by 14% since the 2QFY12 results, largely due to a liquidity-driven rally in January. Fundamentally, however, there has been little improvement in the outlook and concerns on asset quality remain with lower earnings’ visibility. SBI continues to trade at 40% premium to PE and 30% premium to PB over its PSU peers, despite its lower RoE (15%) and RoA (0.8%). We therefore, maintain our target multiples at 9.3x PE and 1.4x PB, implying a 58% and 40% premium on PE and PB to peers, respectively. Key upside risks: Upturn in economic cycle; asset quality improves.

To read full report: SBI