Friday, June 19, 2009


The ongoing global financial crisis, with its historic dimensions, will have a lasting impact on the world economy, the worldwide distribution of influence and power and, above all, on banks. In this paper, we first provide a brief overview of the consequences of the crisis for US and European banks. This entails taking a look at how much value has been destroyed in the banking industry, which regulatory response is looming, and what issues arise from a sweeping shift in ownership structures as well as in the debate about deleveraging and an increase in capital levels. The second part focuses on the impact the crisis may have on major structural trends that have been shaping the industry for the last 15 years. We will analyse the effects on consolidation, on the structure of revenues and on the geographic composition of banks’ business, i.e. on the internationalisation strategies of European banks and on interstate banking in the US.

The near-term prospects for US and European banks are decidedly grim. The global financial crisis will bring about the most significant changes to their operating framework banks have seen in decades. There will be fundamental re-regulation of the industry, ownership structures are shifting towards heavier state involvement and investor scrutiny is rising strongly. Equity ratios will be substantially higher. As a result, growth and profitability of the banking sector as a whole are likely to decline.

Lean years lie ahead for US banks. Performance improvements during the last 15 years have often been due to strong lending growth and low credit losses. As private households reduce their indebtedness, revenue growth in some European countries but especially the US may remain depressed for several years. With weak loan growth and a return of higher loan losses as well as a fundamentally diminished importance of trading income and modern capital market
activities such as securitisation, banks may be lacking major growth drivers.

Consolidation to continue but with a different focus. While there will still be a considerable number of deals, transaction volumes are likely to decline and restructuring stories rather than strategic M&A may dominate. The probability of domestic deals has increased, while that of cross-border mergers has declined.

Internationalisation of European banks likely to slow. Uncertainty about the future prospects especially of foreign markets and strictly national banking sector stabilisation programmes are triggering a re-orientation towards domestic markets. This is more relevant for European banks that have greatly expanded into other European countries recently, while American banks overall may continue to target the national market rather than going abroad.

To see full report: BANKING TRENDS


Fulfilled promises; new vigour

Unitech trades at 59% lower than pre-Lehman levels while the broader market is now up 2%. Also, its discount to DLF has widened from an average of 16% to 46%. Over the same period, Unitech has raised Rs16 bn in equity and Rs11bn proposed from promoters; sold assets worth Rs9bn and also found a partner for its telecom business. Greater management focus is evident in new project ramp-up with 3.2m sf of space sold over the last three months. We raise its Mar’10 NAV estimate by 17% to Rs129/share driven by volume buoyancy and consequent better price assumption. Unitech remains our best pick in the sector.

Significant improvement on project execution
Over the last three months, Unitech has launched 24 projects (in Kolkata, Gurgaon, Mumbai, Chennai etc) adding up to 13.9m sf of saleable space with an estimated total sale value of Rs54bn. 3.2m sf of this space adding up to estimated Rs11bn of value has been sold. This performance is better than our expectations and we have raised Unitech’s FY10 & FY11 volume assumptions by 100% and 33% to 12m sf and 14m sf. This is a big improvement from an estimated 4m sf and 2m sf of sales in FY08 and FY09 respectively.

Ambitious deleveraging target; asset sale appears to be on track
The company plans to lower gross debt from Rs85bn as at Mar’09 to Rs50bn by Mar’10. We believe that this target is too ambitious and we have built in debt reduction to Rs60bn by the year-end. The company has already paid about Rs7bn in debt in FY10 so far with the gross debt down to Rs78bn.

NAV raised to Rs129/share; more visibility on Mumbai projects
With improved liquidity conditions for property developers and volume buoyancy, we believe that the level of desperation among developers will reduce. We have now factored in a 10% recovery in prices in FY11 (0% earlier). Additionally, the company’s Mumbai plans have gained visibility with 0.15m sf of space sold and 2 large project (1m sf each) launches in Central Mumbai now in the offing. We raise Mar’10 NAV estimate by 17% to Rs129/share. Reduction in the landbank has partially offset the NAV increase.

Unitech trades at an unjustified 46% discount to DLF
Since the pre-Lehman days, Unitech’s discount to DLF has widened from 27% to an unjustified 46%. Over the same period, we believe that Unitech’s bankruptcy risks have reduced dramatically. Resolution of the telecom business JV means that the management can now focus on the core businessmuch more evident in improvement in execution capabilities as explained above and transparency. We raise the stock to Outperform with a target of Rs97/share set at 25% discount to Mar’10 NAV.

To see full report: UNITECH


Benefits of court ruling are already in price; re-iterate Sell

What's changed
The Bombay high court ruled today (June 15) that Reliance Natural Resources (RNRL) is entitled to receive 28mmmsmd of gas supplies from Reliance Industries (RIL) operated KG D-6 block at US$2.34/mmBtu for a period of 17 years. We believe RNRL is likely to re-sell the gas to Reliance Power (RPWR) which has10.3GW of planned capacity using gas as fuel.

The court ruling will benefit RPWR’s upcoming gas based power plants in Dadri (7.8GW) and Shahapur (2.6GW) which constitute about 32% of RPWR base case NAV and operate partly on merchant mechanism. While we have assumed availability of gas supplies for operation of these
plants, we did not reflect the benefits of lower gas price (US$2.34/mmbtu against our assumption of US$4.2/mmBtu) in our base case valuation primarily due to 1) uncertainties relating to price at which RNRL will supply gas to RPWR; and 2) pending gas sales agreement between RIL-RNRL.
Our calculations indicate that our base case NAV would increase to Rs140 from Rs105/share in the event RPWR gas based plants will receive gas at US$2.34/mmBtu.

We re-iterate Sell (Conviction List) on RPWR with 12-m TP of Rs105 (earlier 90) implying 48% downside. We rolled forward our TP to FY11E and decreased our cost of equity assumptions to 13% from 15% to reflect low funding risk. RPWR share price is implying near perfect execution of its 32GW of power projects in the pipeline which will come on-stream over the next 7-10 years. With most of the positives already in the price, we believe RPWR share price has more downside risks with delays in achieving its project milestones. RPWR is trading at FY11E P/B of 3.4X, 20% premium to Indian peers.

Key risks

Completion of projects milestones ahead of timelines we expect.

To see full report: RELIANCE POWER


Billion dollar 'baby'!

Vision, execution and ability to reinvest capital have impelled the evolution of Financial Technologies (FTIL) from India’s leading exchange solutions provider to Asia’s largest exchange conglomerate. The ‘only’ gateway to the potential US$10trn Indian exchanges space, FTIL has captured 87% of the commodity markets through MCX and given taut competition to equity incumbent NSE in currencies through MCX-SX (49% share). Besides pioneering niche models in power and spot, five international exchanges have been set up in potentially under-penetrated regions. FTIL is now ready to take the battle to NSE and BSE’s turf in equity trading (NSE+BSE profits at Rs11bn). While aggression and growth are second nature to FTIL, ability to re-deploy capital (32% divested in MCX at a valuation US$1.1bn; 18% divested in MCX-SX at US$284m) in value creating businesses imparts conviction to its growth longevity. We like the ‘urgency’ in FTIL’s business trajectory and initiate coverage with an Outperformer.

An annuity play in the US$10trn opportunity space: The transition from a license sale business to an annuity model marks the scale up of FTIL. India’s leading exchange solutions provider (350,000 licenses sold; 85% share), FTIL has extended the strong domain expertise to the ‘fundamentally-perfect’ exchanges business and created MCX with 87% share of Indian commodity space.

Risk appetite, execution, monetization and growth: The ‘urgency’ to replicate the
success of MCX has steered FTIL to become Asia’s largest exchange conglomeratewith 10 exchanges across segments/ geographies as also six eco-ventures. We like the execution success in its core technology products business, MCX, NBHC (warehousing) as also MCX-SX (currency derivatives). Ability to monetize is evident from partial divestiture in DGCX and capability to fund growth is reflected in the recent value unlock in MCX-SX.

The way to value – SoTP; target price of Rs2,000: FTIL is a compelling business
proposition, a gateway to participate in a model with strong technology domain, annuity in a high-growth environment, spanning various geographies (Singapore, Bahrain, Africa, Mauritius and India) as also segments (commodities, equities, currencies, power, spot, etc). We initiate coverage on FTIL with Outperformer and SoTP-based target price of Rs2,000 – 40% upside from the current levels.




Resistance is futile

As the markets gain new heights, investors are now worried whether the rise is too fast to last. We worry as well. But our analysis suggests resistance might be futile. On the back of a sharply improving 2011 earnings that, in turn, should benefit from rising availability and falling cost of capital, we expect the BSE Sensex to rise to 18000 in the next 200 days. In this note we go through the rationale and help you position for that rise.

18000 by year end
We expect the BSE Sensex to trade between 17x and 19x FY11 earnings by December 2009, which, in turn, is expected to rise by an impressive 17-22% over FY10. There is scope, however, for a further rise in the market’s multiples. Put simply, India is at a significantly superior growth and risk category relative to its past cycles or competing global investment destinations. Past cycles have seen better than 20x one-year forward earnings.

Global forces to determine returns
Domestic factors like elections might appear to trigger the rally, but make no mistake: the Indian market will be dominated by global dynamics. The excess liquidity created by the global monetary authorities WILL drive asset prices, and in particular emerging markets, higher. Capital costs are key for consumer and investment demand in India. On the back of expected greater credit availability and falling credit costs, our economist expects Indian FY11 GDP growth of 7%. The global asset allocation shift will magnify the dollar-denominated returns from markets like India, feeding a virtuous cycle.

Material risks remain and are rising
While we wish it could be a one-way bet, risks are indeed rising in global markets that could, in turn, impact India. The wall of liquidity could well fuel inflation in developed markets resulting in monetary tightening. Such a tightening would impact the key driver of Indian earnings—the availability and cost of capital. For the moment, though, rising global bond yields are a good sign. Indian markets have significantly outperformed global and most other emerging markets but this is not new and could continue as many domestic investors have been sceptical and are playing catch up. It is extremely rare for Indian markets to have just a 12-14 week rally: the average is 53 weeks.

Launching Reliance Equities International Model Portfolio: “REIMP”
We launch our model portfolio, REIMP, along with a recommended sectoral asset allocation. This is a synthesis of our bottom-up and top-down view.

Nice run but where next?
In late March, we set our Sensex target for the year end (December 2009) at 13700 and launched our deep value portfolio, REIDV. Little did we realise how “short sighted” the target would prove to be. As we watched the post election relief rally in amazement, the question arose: what is the year-end target now? Cutting to the chase, we now see the market in the 16500-19000 range by December 2009, i.e., about 15-30% upside from here.

The market currently trades at about 15.5x our March 2011 bottom up earnings estimates or about 19x March 2009 earnings. This might appear fairly expensive. Figure 1 below suggests that, relative to the history of the market, it really is not. At the cusp of the cycle, it is usual for analyst estimates to lag significantly. Analysts wait for hard data prior to revising earnings. Alas, markets do not wait for such niceties. Markets typically move ahead of analysts and such other mere mortals discounting somewhat incomplete or inconclusive data and more distant future earnings resulting in a significant expansion or contraction of trailing P/Es.

We base our revised target on what we consider to be the most plausible scenario but with a margin of safety—a Grahamesque concept. Our target is based on FY11E EPS growth of 17-22% and a P/E of 17-19x FY11E. Looking at it from a trailing earnings perspective, our target implies a trailing P/E of 22x FY09 consensus earnings. In the last two market recoveries, one-year forward P/Es crossed 20x while trailing P/Es crossed 25x.

To see full report: INDIA STRATEGY


Ears On The Ground 8 – Vol Trends In New Launch Surge

What are we seeing in the market – 1) New launch (residential) momentum is picking up (see Exhibit 1: New Launch Tracker inside), 2) prices continue to fall (or stabilize) & 3) modest pick up in absorption.

New launches – Competition warming up - In May & June, we saw several launches from ‘non listed/non traditional’ property companies – BPTP, Jaypee, Emaar MGF, Hiranandani, Kumar Builders, Mantri, Nirmal etc – while DLF was relatively quiet. We also saw a few new launches by UT (NCR plots, Chennai) & IBREL.

Pricing trends - ‘Book building’ route to ascertain ‘right pricing’ for high volume absorption during ‘soft launch’ phase appears to be becoming common. Consequently, we are seeing high volume sales at deep discount prices soon after ‘hard launch’ happens. Recent price quotes
(BSP only; PLC, car parks etc extra) include – Rs2,100 psf for Noida (Jaypee), Rs1,400 psf – Faridabad (BPTP), Rs2,600 – Gurgaon Sector 65 (Emaar), Rs1,500 psf – Ahmedabad (IBREL), Rs2150 – Vadodra (IBREL), and Rs2,999 – Panvel (Hiranandani) – all of which appear at
30-50% discount to last peak/neighborhood. City centre launches are at a premium to suburbs – Rs4,500 psf – Pune (Kumar) and Rs5,500 psf – Mumbai (Nirmal).

Volume absorption - Even at deep discount pricing, only NCR and Mumbai markets appear to be doing good volumes. Jaypee (Noida, NCR) and BPTP (Faridabad, NCR) each sold 4,000 odd apartments. Most other recent launches sold 300-600 units.

Debates to settle - 1) Pick up in volumes (in the last 3-4 months) is pent-up demand (since little was sold in 2008) or steady state demand (return of GDP growth). 2) Price outlook - Pricing power appears squarely out of developers hand – there has been no price increase even in projects selling 4000 units. We believe that surge in volume sales (for non-Mumbai markets) & rise in rentals (Mumbai) should precede price increase. 3) Commercial demand is muted, recovery is uncertain.

To see full report: INDIA PROPERTY


A case to Buy

Concerns regarding business model
Low oil price was a matter of concern as consumer switch to Naptha, coal and fuel.

Reliance KG gas could increase significant supply in domestic market leading to less demand of Petronets gas.

Increase in volumes as Petronet has achieved 125% of rated capacity in FY09.

Short term availability of gas in the globe.

Failure to enter long term agreement for supply of gas.

What has changed now?
Oil prices have since moved.. resulting in all the substitutes getting expensive be it fuel oil, coal and naphtha.

Recent high court verdict granted 29 mmscmd of gas to RNRL for Dadri plant. This will
reduce gas supply in India once plant is commissioned by the same quantity.

Petronet has recently expanded its Dahej terminal capacity by 5 MMTPA and the facility
will be operational for atleast 9 month in FY10. Additional terminal at Kochi (2.5 MMPTA
expandable to 5.0 MMPTA) commissioning by Dec. 2011.

Spot market availability of gas has eased after November 2008 due to global slowdown.

The company has made long term arrangement for supply of gas from Ras Gas (Quatar)
and Exxon Mobil for additional supply for expanded capacity.


  • All-India cement dispatches up 10.7% YoY in May 2009
  • Northern region dispatches up 26.3%, South up by 4.1%

Robust growth
In May 2009, all-India cement dispatches reported a growth of 10.7% YoY on the back of strong growth in the northern and central regions. On an MoM basis, cement dispatches were down 1.2% mainly on account of a drop in capacity utilisation. On a YTD basis, (April-May’09) cement dispatches have grown by 11.9%. Among major players, Shree Cement, Jaiprakash Associates and Grasim reported impressive growth of 32.2%, 25.7% and 22.1% YoY, respectively, due to capacity additions and strong demand in the northern and central region. Ambuja (8.3%) and UltraTech’s (16.4%) growth have also been higher than the industry average on account of
lower base due to the ban on cement export last year.


Infrastructure spending undertaken by the government prior to the election and demand from rural and semi urban housing mainly drove the strong YoY growth in cement dispatches. The lower base of last year also contributed to the YoY growth as export was banned in the first two months of FY08. The slowdown in the real estate sector has increased the uncertainty of cement demand in the near future. The uncertainty has further increased on account of growth driven by rural spending,
which is heavily dependent on monsoons. On the cost front, the recent surge in fuel prices will increase the cost pressure for cement companies from Q3FY10 (depending upon inventories and long-term contracts). With new capacities coming on stream, the industry would be unable to pass on the cost increase. Thus, we expect the margin to come under pressure.

Region wise performance
Among major regions, the northern region has reported the highest growth of 26.3% YoY led by incremental demand from major projects, namely Commonwealth Games, sewerage line project in
Punjab, national irrigation project in Haryana, Delhi Metro, flyover and Delhi airport. The central region’s dispatches have reported growth of 11.0% YoY due to spending by the UP government on
low-cost housing. The western region has reported 8.3% growth on account of lower base due to ban on cement export last year (last year western region had reported growth of -6.2%). The eastern region has reported growth of 7.7% while southern region has reported moderate growth of 4.1% YoY on account of slowdown in construction activities due to assembly elections in Andhra Pradesh.

To see full report: CEMENT SECTOR


Atul Ltd is a totally integrated chemical company with manufacturing plants based at Valsad and Ankaleshwar in Gujarat. It operates through six business divisions, namely, Agrochemicals, Aromatics, Bulk Chemicals & Intermediates, Colors, Pharmaceuticals & Intermediates and Polymers. It is a part of Lalbhai Group of companies and has crossed the landmark of Rs. 1000 Cr turnover last year. It manufactures a range of chemicals products and caters to diversified user segments. Over the years, Atul Ltd had joint ventures with American Cyanamid Corp (1952), Imperial Chemical Industries plc (1955) and Ciba-Geigy Ltd (1960) namely, Cyanamid India Ltd, Atul Industries Ltd and Cibatul Ltd respectively.

Atul Ltd came out with its full year results ending 31 March 09, with an increase in net sales by 16.5% y-o-y to Rs. 11.8 bn. The growth was mainly led by specialty chemicals which registered a healthy growth of 19% to Rs. 9.3 bn from Rs. 7.8 bn in FY08. The colors division registered a flat growth of 1.8% and stood at Rs. 3.2 bn as against Rs. 3.1 bn in F Y08.

Segment Revenues
The company achieved healthy EBITDA margins of 12.7%, up 570 bps from FY08. This was possible on account of lower input prices as compared to FY08 and is evident from the decline in raw material cost and cost of power and fuel. The raw material cost and cost of power and fuel as a percentage of net sales declined to 52% (as against 57% in FY08) and 9.4% (as against 10.6% in FY08) respectively. The absolute EBITDA excluding other income has more than doubled Rs. 1.4 bn as against Rs. 0.7 bn in FY08.

Interest expenses for FY09 rose by 25.3% y-o-y to Rs. 410 mn as compared to Rs. 327 mn in FY08. However the company has repaid some of it's debt, and currently has a net debt of Rs. 3.48 bn as against Rs. 4.28 bn in FY08. The Profit before tax from ordinary activities stood at Rs. 897.3 mn, an increase of 219% from Rs. 281.5 mn in FY08. However it reported forex losses to the tune of Rs. 440.4 mn as against a gain of Rs. 100.2 mn in FY08 which led to Profit before tax of Rs. 456.9 mn as against Rs. 381.7 mn in FY08. During the quarter the company had tax refund in respect of earlier years to the tune of Rs. 23 mn which inflated the profits to Rs. 378.7 mn as against Rs. 366.2 mn. The EPS for the year FY09 stood at Rs. 12.7 as against Rs. 12.3 in F Y 08.

Margins continue to remain at healthy levels
The uptrend in the commodity prices in the early of the year had put tremendous pressure on Atul's operating margins. It reported a very low operating margin of 4.3% for the quarter ended March 08. Since then Atul's has been consistently trying for higher pricing of its products from the clients and has been very successful in it. The efforts are now being realized with the rise in margins as shown in the chart. Secondly the recent cooling off of commodity prices is also driving the margin expansion.

To see full report: ATUL LIMITED


New wine in a new bottle…!!!

IndusInd Bank is in restructuring mode after a change in the top level management. The bank historically was characterized by low business growth and profitability. However, the restructuring efforts have started showing results with improved performance in the various business segments – profitability, NIMs and business growth. We believe the stock is yet to completely re-rate with the change in business performance. At CMP, the stock trades at 11x FY11E EPS of Rs 7.1, 1.6x FY11E book value of Rs 47 and 2.2x FY11E adjusted book value of Rs 35. We recommend a BUY with a target price of Rs 94 (2x FY11E book value) over the next 12 months.

Investment Rationale

Change of guard to augur well for business growth
IndusInd bank has roped in a new management with a clear focus on profitability, productivity and efficiency. The new management aims to reposition the bank as a top 3 performer – in terms of RoE, RoA, NIM, Asset Quality and efficiency amongst the new private banking space. The management has created separate business units to cater to the needs of specific customers and increase the client base. Additionally, effort has been made to increase per branch productivity and efficiency with a focus on cost reduction. The bank has licenses for 30 branches from RBI and intends to apply for additional licenses. This, in our opinion, would entail higher CASA and consequently stronger NIM’s. We expect the bank’s core earnings to register a 31% CAGR during FY09-FY11e.

Improvement in core operations
The restructuring process has started showing results in the bank’s performance with core earnings growing 53%, NIMs improving to 1.9% (1.5% in FY08) and net profit growing by 98% in FY09. Further, the C/I ratio has improved to ~60% (67% in FY08). Going forward, we expect the bank’s core earnings to grow by a 31% CAGR driven by business growth of 22.2% CAGR and NIMs improving to 2.3%. Net profit is expected to grow by 30% CAGR after factoring higher slippages and also increasing the coverage ratio to 48.5% (30% in FY09). The RoE and RoA improve to 13.7% and 0.7% in FY 11e respectively.

Factoring in asset quality deterioration but no major worries
The bank has been saddled with poor asset quality historically. However post the turnaround in its strategy, the bank has been able to improve its gross NPL’s and net NPLs to 1.6% and 1.1% respectively (3.1% and 2.3% in FY08) with a coverage ratio of 30%. We factor in increased slippages for the bank (gross NPL’s at 3.3% in FY10E and net NPL’s at 1.7% in FY10E) and consequently build in higher provisions in our estimates.

View and Valuations

We believe that the bank will continue to reap the fruits of its turnaround strategy and record an impressive growth on the business and operational front. We believe the stock is yet to completely re-rate with the change in the business performance. At CMP, the stock trades at 11x FY11E EPS of Rs 7.1, 1.6x FY11E book value of Rs 47 and 2.2x FY11E adjusted book value of Rs 35.4. We recommend a BUY with a target price of Rs 94 (2xFY11E book value) over the next 12 months.

To see full report: INDUSIND BANK