>INDIA BANKS: Looking for some cheer in the New Year 2012

We (HSBC Research team) met YES Bank, HDFC Bank and ICICI Bank for a quick update, particularly on a asset quality, in particular power loans, b) growth prospects given near peak rates, and c) the impact of savings account deregulation.

■ Asset quality: Overall, the private banks do not face the same set of problems as public sector banks (PSUs), evidenced by their lower NPLs, restructured book, credit costs and higher coverage ratios. We think the gulf in asset quality between the private and PSU banks is likely to remain wide for a few more quarters before we see the bottom of the current credit downcycle. The state and central governments need to address problems in the power sector related to SEBs and coal availability. If the erstwhile go/no-go problems are largely resolved, coal shortages may not be as significant as perceived currently.

■ Growth prospects: Most private banks are likely to outpace system growth by anywhere between 3% and 10% over our forecast period to 2014e. YES is more focused on liabilities and we believe its growth is likely to be dominated by wholesale for now. On our estimates, HDBK is likely to maintain strong growth in the consumer segment although we expect a slowdown in vehicle loans to a more moderate pace averaging 25% over the medium term. We think ICBK is likely to grow in line with the system as retail loan repayments could hamper any acceleration in mortgage growth in the near term; thus its focus remains more on leveraging its now-large branch franchise for retail liabilities, assets and fees.

■ Savings account deregulation: YES has seen improving customer traction with new account additions roughly doubling, although the balance build-up will occur over time, as it leverages off both retail and its corporate relationships. It is also targeting bulk savings accounts with trusts and societies, albeit these are a small part of the pie.

■ Waiting for the pause: Although widely expected at the 16 December meeting, we are hearing increasing talk of an earlier-than-expected cut in rates by the RBI, particularly if inflation eases and growth slows more quickly than expected (watch out for loan and industrial growth data reported in December). Private banks remain our favourites on a 12-month basis.

To read the full report: INDIA BANKS

RISH TRADER

>APOLLO TYRES: Profitability to look up

■ Standalone business margins to improve in Q4FY12E: We expect 23% CAGR in the standalone top-line for FY11-FY13E period, driven by capacity expansion at the Greenfield Chennai facility. Standalone margins are likely to improve from Q4FY12E onwards on account of softening of rubber prices. However, with 15- 20% of the rubber requirement being imported, depreciation in rupee has nullified the impact of softening rubber prices for Q3FY12E.

■ Replacement demand likely to recover: Demand scenario is likely to be better in the replacement side of the market, going forward. According to the management, the abolishment of anti-dumping duty on Chinese tyres has not been approved by the Ministry and thereby, they don’t see any negative impact on their business.

■ Chennai capacity expansion on track: Greenfield project at Chennai has a total capacity of 500TPD, with a capex outflow of Rs23bn. For FY13E, the average tonnage from the Chennai plant is pegged at 300TPD. Majority of the capex is already incurred in the current fiscal, with the remaining Rs3-4bn likely to be spent in FY13E.

■ Natural Rubber prices likely to remain stable: Natural Rubber prices have declined by ~5% in the last one month to Rs200/kg currently, from an average price of Rs215/kg in Q2FY12. The growth rate of rubber production in CY11 in all ANRPC (Association of Natural Rubber Producing Countries) members is expected to be 4.9%, whereas India’s rubber production is anticipated to perk up by 5.6%. We expect the rubber prices to remain range-bound with the onset of the tapping season in November. We have assumed rubber prices at Rs205/kg, going forward.

To read the full report: APOLLO TYRES

RISH TRADER

>EQUITY STRATEGY: India Investor Tours: Glass half full...or half empty?

The last quarter has been challenging for Indian equities, given the macro uncertainties – both local and global. In this backdrop, we hosted Investors in a series of Tours covering Senior Policy makers, Opinion leaders and Managements of more than 30 companies from the Financials, Investment and Consumption sectors over the last week. In this note, we have summarized the takeaways from these meetings. We believe these notes should serve as a useful guide to the current mood in business circles.

Key highlights:

■ Policy environment – Slowdown, but no Paralysis. The pace of economic reforms has not matched expectations. But that said, senior bureaucrats opined that allegations of a ‘policy paralysis’ are over done and largely a media creation. A sense of urgency appears to be coming

through. But execution will require consensus building and coordination. We discerned a heightened commitment towards containing inflation and fiscal consolidation. Progress on rural and social initiatives appear to be solid and may not be well appreciated.

■ Financials – A mixed bag. Interest rates have probably peaked, but the easing cycle could be some time away. Recent regulatory changes – abolition of prepayment charges, savings bank rate deregulation and tougher priority sector norms – are not seen as disruptive to sector dynamics. Loan growth remains healthy. But asset quality concerns remain at the fore given a slowing economy and the collapse in the INR. But balance sheet risk is expected to be episodic rather than systemic.

■ Investment cycle – Advantage SoEs. A muddled macro is taking a toll on investment cycle, particularly as it pertains to the private sector in the infrastructure segment. Management focus appears to be on internal measures to turn around viz. de-leveraging, working capital rationalization, etc. State owned companies however appear to be bucking the weak trend. A regulatory regime with assured returns and conservative leverage have allowed them to push ahead with their investment plans.

■ Consumption cycle – Moderating. The slowdown in discretionary spending appears to be gathering momentum. Demand for staples has been holding out until recently. But early signs of a moderation are beginning to manifest themselves. The bigger concern for managements remains margin pressure. A weak currency is adding to their woes, even as volumes moderate and competitive pressures remain intense.

To read the full report: EQUITY STRATEGY

RISH TRADER

>INDIAN STEEL SUBSECTOR: Shifting sands: Initiating coverage

We argue that sustained hikes in iron ore export duties have subsidised the domestic steel industry at the expense of miners. This, coupled with the ongoing mining impasse, make us negative on the iron ore mining space, even as stock valuations are attractive. We initiate coverage of NMDC and Sesa Goa with a 3-UW. We see the contours of the Indian steel industry slowly but certainly changing in favour of the large steel producers. JSPL 1-OW is our top pick, given its superior business model and strong growth visibility. We rate SAIL 3-UW, given muted volume growth and cost pressures. Tata Steel (1-OW) offers a favourable riskreward trade-off, given that peak debt is down (c20%), ROE accretive India expansion is closer to commissioning and valuations are already factoring in a negative value for its European operations. We rate JSW Steel as 2-EW, as although negatives are already in the price, the mining impasse would delay a rerating.

■ More bullish on the medium-term outlook for Indian steel relative to iron ore mining:

While global iron ore miners have captured value from rising steel prices, rising regulatory costs in India have capped upside for the Indian miners (read export duties). In fact, India now has one of the highest taxation regimes on iron ore globally, and could increase even further if the proposed mining tax and increase in export duties get implemented. We expect NMDC (3-UW) and Sesa Goa (3-UW) to be negatively impacted by this trend. Furthermore, ongoing government probes into potential illegal mining is a further risk to earnings of Sesa Goa (3-UW) and to some extent on JSW Steel (2-EW).

■ See structural changes in the steel sector benefiting the larger, established players: While we cannot ignore the short-term risk to steel pricing in India (which has held up well relative to global prices, due to currency depreciation and supply disruptions), we expect the larger integrated mills to capture further market share in India at the expense of the sponge iron producers (whose survival is threatened from declining coal and gas linkages). The big mills are also forming JVs with technology leaders globally and improving their product specifications, thus improving long-term margin potential. Domestic overcapacity is inevitable, but there is an opportunity in sub- segments such as value-added long products. We see JSPL (1-OW) and Tata Steel (1-OW) benefiting most from these changes, relative to SAIL (3-UW).

■ Further increase in regulatory costs and exchange rate are key risks: Over and above iron ore prices and the risk of increased Chinese exports, we highlight that a further increase in the regulatory burden for iron ore miners and exchange-rate risks on foreign currency-denominated debt are two issues investors need to keep an eye on.

To read the full report: INDIAN STEEL

RISH TRADER