INSURANCE: Business traction improves in last month of FY2012.

Business traction improves in last month of FY2012. Private insurance companies reported 6% growth in APE collections for March 2012 on the back of subdued performance for the past several months. Most large insurance companies (except Birla SL and Reliance Life) reported positive yoy APE trend. Bajaj Allianz (up 26% yoy) was the major surprise. We believe that private players will need to sustain APE growth trends order to maintain/improve expense ratio.



Higher APE growth last month
Private insurance companies reported 6% growth in APE collections for March 2012 after subdued performance for the past several months. LIC’s APE for the past two months of FY2011 was distorted and hence we don’t read much in its 16% yoy growth for March 2012.


Most companies fared well
Most large insurance companies (except Birla SL and Reliance Life) reported yoy growth in APE. Bajaj Allianz (up 26% yoy), Max NY (up 20% yoy) and HDFC SL (up 16% yoy) were the key fastgrowing players. ICICI Pru Life reported marginal yoy growth but 50% mom growth; Birla SL also reported almost 170% mom growth.
FY2012E APE significantly weaker than expected


APE for FY2012E was down 22% for private players; Bajaj Allianz, Birla SL, ICICI Pru Life, Reliance Life and SBI Life reported over 20% decline. LIC reported 12% positive growth. Base effect of the new IRDA regime pulled down APE by 44% for private players in 1HFY12. In 2HFY12, HDFC SL was the only large player to report yoy growth (up 8% yoy); other companies reported yoy decline in 2HFY12: Bajaj Allianz (down 10%), Reliance Life (down 21%), Birla SL (down 9%), SBI Life (down 8% yoy), Max (down 6% yoy).


RISH TRADER

>Ambuja Cements

Realizations decline in peak construction season. Ambuja Cements saw its net
realizations decline by Rs90/ton in 1QCY12 despite a Rs10/bag increase in its key
markets, as the benefits of price increase were likely passed on to dealers in the form of
higher trade discounts. Inability to effect an improvement in realizations in the peak
construction season does not augur well for full-year earnings that will likely be
susceptible to higher input costs. Maintain SELL rating and target price of Rs150/share.



Sequential decline in realizations despite price hikes
ACEM reported revenues of Rs26.3 bn (19% yoy, 13% qoq), operating profit of Rs7.4 bn (22%
yoy, 77% qoq) and adjusted net income of Rs5.1 bn (25% yoy, 96% qoq) against our estimate of Rs28.3 bn, Rs7.3 bn and Rs4.6 bn respectively. Despite cement prices increasing by Rs10-12/bag over the past quarter, ACEM’s average realizations declined by Rs90/ton likely on account of higher dealer margins eating into the pricing benefits. Sharp sequential jump in profitability (53%) was largely aided by (1) decline in raw material cost and (2) leverage benefits of higher volumes. We note that reported net income of Rs3.1 bn includes prior-period depreciation of Rs2.8 bn as the company retrospectively changed its depreciation policy for captive power plants from SLM to WDV. We discuss key details of the result in a subsequent section.


Pricing discipline continues to remain precariously positioned
We further note that the under-utilization of capacities is likely to continue even in CY2012E
despite factoring 8% consumption growth. In our view, pricing discipline continues to remain
precariously positioned in the wake of (1) a weak demand environment coupled with a continued capacity overhang and (2) potential action by the Competition Commission of India (CCI) apart from the hefty penalty that could be levied in case of an unfavorable ruling.


Valuation indicating an optimistic scenario, ignoring potential regulatory risks; SELL
We maintain SELL on ACEM with a target price of Rs150. ACEM is currently trading at 9X
CY2012E EBITDA and EV/ton of US$186/ton on CY2012E production as against a replacement cost of US$110-120/ton. We note that the current market price implies 25% yoy growth in profitability in CY2012E on a multiple of 8.5X CY2012E EBITDA (see Exhibit 3), which in our view does not take cognizance of risk to earnings given (1) the continued demand-supply overhang and (2) threat of an unfavorable regulatory action. We note that our estimates factor sustenance of pricing discipline as well as demand revival (to an extent) as we build 6% and 13% growth in volumes and realizations and a corresponding 20% improvement in profitability in CY2012E.


RISH TRADER

>STRATEGY: No escaping GAAR.

No escaping GAAR. The Government issued certain clarifications on GAAR and clarified that GAAR would apply on all impermissible arrangements from April 1, 2012. However, GAAR provisions will not apply with retrospective effect. The Government’s clarifications effectively extinguish hopes of postponement of GAAR provisions or implementation of a ‘sunset’ process to allow sufficient time for affected entities to deploy alternatives.



GAAR will apply to all impermissible structures
The Revenue Secretary categorically stated that GAAR would apply to all ‘impermissible arrangements’. As part of the clarification on ‘impermissible arrangements’ in the context of foreign institutional investors (FIIs), he stated that an arrangement would be deemed impermissible if it did not have a reasonable operation in a country (and where it does not have to pay tax) and the actual operations, such as fund management and trading, are done from some other country.


GAAR will apply from April 1, 2012; no retrospective application
The Government clarified that the provisions of GAAR would apply from April 1, 2012. However, it would not apply with retrospective effect. Besides, GAAR would not be invoked if the entities pay short-term capital gains tax or income tax, as the case may be, in India. The Government will put in place sufficient safeguards to ensure that GAAR provisions are not applied haphazardly. In terms of procedural issues for taxing an entity under GAAR, the IT department will have to prove that (1) an arrangement is impermissible for it to invoke GAAR provisions and (2) the arrangement has been made for the sole purpose of avoiding taxes.


GAAR would apply to P-Note providing FIIs if the structure is deemed impermissible
On the specific issue of P-Note providing FIIs, the Revenue Secretary clarified that GAAR applied to investors investing in India and an FII would be liable for tax under GAAR if the arrangement were not permissible. The Government clarified that GAAR would apply to all investors (foreign or resident) and it is not directed at any country or investor.


RISH TRADER

>INDUSIND BANK: Firing on all cylinders

IndusInd reported better‐than‐expected PAT of Rs2.23bn (up 30% YoY) led by a beat in loan growth and stronger‐than‐expected fee income momentum. Apart from improving profitability and strong growth, IIB continues to deliver on all its cycle II growth strategies, and like HDFCB, is well placed to deliver strong PAT growth in FY13. Current valuations at 3.1x FY13 book are not cheap but consistent and all round performance inspires confidence. Hence, we maintain our ‘BUY’ rating, with a revised PT of Rs400/share.


■ Surprise in top‐line performance: NII was ~4% higher-than-expected due to strong sequential loan growth (8% QoQ) and surprise in margins, with ~5bps accretion QoQ v/s a marginal contraction expected. Fee income growth has been exceptionally strong at ~60% YoY growth in Q4FY12, with growth across all segments. With margins expected to improve in FY13, we believe IIB will be able to sustain its top-line growth momentum in FY13.


■ Delivering on all its cycle II growth drivers: After the 08-11 growth phase, management had laid out it’s cycle II growth drivers and we continue to see management delivering on most counts including (1) improving liability franchise with ~2.5% SA accretion post SA re-regulation (2) filling up the product gap (LAP/credit cards) on the retail side and most importantly (3) gaining significant fee income traction in personal distribution and IB business.


■ Strong PAT growth to sustain in FY13: With a large fixed rate asset base, we expect margins to improve by ~15-20bps in FY13 and drive profitability improvement. We increase FY13/14 estimates by ~7-8% on higher growth and margins and with credit costs at ~75bps for FY13, there could be further upsides.


■ Maintain ‘BUY’, with a PT of Rs400/share: Current valuations at 3.1x FY13 book are not cheap but high loan growth, strong fee income momentum and very limited asset quality risk inspire confidence. We maintain our positive view on IIB.


RISH TRADER