Tuesday, June 30, 2009


GSM subscribers cross 300mn mark

GSM operators recorded net additions of 8.3mn subscribers in May (excluding Reliance Communications), as against 8.96mn in April – a MoM dip of 7.4%. The decline in May follows a 20.3% MoM drop in April. Lower additions in both months were primarily due to BSNL whose new subscriber tally has fallen from 2.9mn in March to 0.45mn in May. Seasonally as well, the first half of the financial year is a slow period. In the last four years, ~42% of new subscribers
were added in the first half of the fiscal. We expect a repeat of this trend in FY10 with several new network launches in the second half.

Bharti’s net additions flat at 2.8mn: Bharti Airtel’s net additions at 2.8mn were consistent with the previous month while remaining at the same level for close to a year now. In a highly competitive market, we see Bharti’s ability to maintain a run-rate of 2.8mn additions as an encouraging sign and indicative of the company’s strength and leadership position.

Vodafone’s tally down 8.4% MoM: As in April, Vodafone witnessed a drop in additions for May. This comes after a consistent rise in subscriber additions till March following the extension of network coverage across India (seven new circle launches between August and December). May net additions at 2.54mn were down by 8.4% MoM.

Idea’s net adds up 13.3%: Idea Cellular’s net additions at 1.3mn subscribers in May (including Spice) were above its 1.15mn tally for April.

BSNL witnesses 55.9% plunge: BSNL’s subscriber additions at 0.45mn were 56% lower than the company’s April figure of 1.03mn and far short of the March figure of 2.9mn. However, as we have noted in the past, this is a common phenomenon in the BSNL subscriber trajectory owing to the year-end push in March to meet growth targets. We also believe BSNL is facing increasing pressure on rural subscriber retention and thus witnessing a higher churn due to the increasing penetration of market leaders in rural areas.

Aircel net adds flat at 1.1mn: Aircel’s net additions were flat MoM at 1.1mn with 30% of the new subscribers coming from its leadership market in Tamil Nadu. Aircel recently raised US$ 500mn in ECBs in March ’09.

Maintain Neutral sector outlook: In Q4FY09 all the major telecom players fared well with the exception of Bharti, whose revenue growth was below our expectations, and Rcom which witnessed a downturn in its wireless business. Further, operators have managed tariffs well by not responding to the reduction in mobile termination charges. However, increased competition over coming months would raise pressure on tariffs. We thus maintain our Neutral outlook on the sector.

To see full report: TELECOM SECTOR


Takeaways from India Investor Conference, June 24-26

Takeaways from Mumbai — Tech Mahindra presented at our India Investor Conference on June 25. Below are key takeaways from management.

BT Business — On BT business, the uncertainty continues. Tech Mahindra's focus is on maintaining market share. Project Andes should start in Q1FY10.

Non-BT business — Management is more optimistic here as it is seeing some good signs. Clients are awarding new projects – these are small as of now, but even small projects were not happening previously.

Future outlook — (1) Plans to span the different horizontals (Applications, Security, Network Services, VAS, IMS and BPO) of the telecom vertical. (2) Focus is on account mining. Apart from BT, the focus on other accounts is to maintain or grow market share.

Initiatives at Satyam — The priorities for management are: (1) Customer retention – Management is meeting everyone to assure them of the long term viability of the business. (2) Cost rationalization – Initiatives like virtual pool creation, rationalizing costs on infrastructure, etc. A lot of customers have responded well.

Open offer issue — Management does not plan to hike the open offer price. If there is zero response then the TechM stake will go up to ~43%. The proposed QIP is to primarily pay off debt on the books (~Rs22b).

To see full report: TECH MAHINDRA


Driven by volume growth

‘Retail Counter’ is a quarterly update, in which we analyse domestic sales trend of FMCG companies based on ACNielsen’s retail audit data. ACNielsen’s FMCG retail-sales audit figures for April-May ’09 indicate 16.2% YoY growth, lower than 19% YoY growth in FY09. We believe this is due to sales growth being driven by volume growth on account of lower inflation, which led to fall in prices of many products. The sector witnessed robust volume growth as only three of the top-10 categories saw lower growth over April-May ’09 vis-à-vis FY09. However, only six of the top-10 FMCG companies grew >10% YoY. Hindustan Unilever’s (HUL) sales growth at 9.6% indicates reversal of the strong, double-digit topline growth in the past six quarters. Notably, this lower value growth is mainly due to volume dip in categories such as toilet soaps, washing powder and detergent cakes. Market share fall continued in key categories such as toilet soaps, shampoos, detergent cakes, toothpaste and skin creams. Nestlé India sustained its spectacular performance, with 20% sales growth.

FMCG sales growth slackens with fall in inflation. FMCG retail sales grew 16.2% YoY over April-May ’09, lower than the 19% YoY growth achieved in FY09. We believe this is on account of sales growth being driven by volume growth on account of lower inflation, which led to fall in prices of many products. The sector saw robust volume growth as only three of the top-ten categories witnessed lower growth over April-May ’09 vis-à-vis FY09. Robust volume growth in large categories indicates marked resilience in consumer spending on FMCG.

Six of ten FMCG companies see over 10% sales growth. Only six of the top-ten FMCG companies grew over 10% YoY in April-May ’09. Britannia Industries, Dabur, Colgate-Palmolive and HUL registered less than 10% growth. However, with ACNielsen shifting to a new, larger data panel, we perceive some anomalies in the data and believe the lower growth number may not be unreservedly accurate. Nestlé India maintained the sales growth momentum, rising 20%. On the back of sharp price increases, sales in Tata Tea grew a strong 28.3%.

HUL – Even new ACNielsen data panel indicates sharp volume & market-share dip in key categories. Sales growth at 9.6% indicates reversal of the consistent,, strong double-digit topline growth in the past six quarters. Notably, this lower value growth is mainly due to volume decline in key categories – Fall of 10.5% in Toilet Soaps, 5.7% in Washing Powder & 19.4% in Detergent Cakes. HUL lost significant market share in Toilets Soaps, Toothpaste, Skin Care, Detergent Cakes and Shampoos.

To see full report: RETAIL SECTOR


Advancement continues to be weaker

The advancement of the Southwest monsoon continued on weaker trend during the week ended June 24, 2009 as weighted average rainfall during the week stood at 54% below normal same as that in the preceding week. The number of divisions with deficient/scanty rainfall continued to stand at 28 for the week ended June 24, 2009. The key takeaways of our analysis upto June 24, 2009 are as under:

The weighted average rainfall across the country continued to remain way below 10-year average as it stood at 54% below normal for week ended June 24, 2009. n Number of divisions receiving deficient/scanty rainfall stood at 28 during the week.

In the rain dependent areas the weighted average rainfall stood at 60.6% below normal.

The total rainfall till date is now just about 6.5% of the normal (see table IV) rainfall for the full season compared with 19% for the corresponding period last year.

The precipitation graph for next one week is indicating slight advancement to northern areas like Uttar Pradesh, Bihar, Jharkhand, and towards north eastern states. Advancement is also likely in Madhya Pradesh, Marathwada and Vidarbha. States like Rajasthan, Gujarat, Punjab and Haryana may continue to face dry spells.

To see full report: SOUTHWEST MONSOON


Long-term play

Unique business model
Mahindra Holidays and Resorts India (MHRL) is one of the leading leisure hospitality providers in India, offering family holidays with a range of services designed to meet the diverse holiday needs of a family. In addition to providing Vacation Ownership (VO) memberships, it also manages the operations at its resorts, which helps it control the quality of its offering thereby enhancing customer experience.

Apart from its flagship service offering of VO, as part of its growth strategy it diversified its portfolio by introducing new vacation ownership offerings, Zest and Club Mahindra Fundays, Mahindra Homestays and travel and holiday related services through clubmahindra.travel.

As of May 31, 2009, MHRL had 96,067 Club Mahindra Holiday vacation ownership members.

Likely increase in income levels to augur well for MHRL
Over the next two decades, the Indian market is likely to undergo a major transformation. Income levels will almost triple and India is poised to become the fifth largest consumer market by 2025. As Indian incomes rise, the shape of the country’s income pyramid will also change dramatically. Over 291 mn people will move from desperate poverty to a more sustainable life, and India’s middle class will swell by over ten times from its current size of 50 mn to 583 mn people.

Revenues extremely sensitive to incremental member additions
The fact that 60% of upfront onetime membership fess is booked upfront (currently accounting for 75% of revenues), topline for MHRL is extremely sensitive to incremental membership additions. Hence, unless the incremental number of new member addition is higher than the previous year, the topline for the company may not grow.

Strong parentage
MHRL is a part of the Mahindra Group of companies that is amongst the top 10 industrial houses in India. Forbes has ranked the Mahindra Group in its Top 200 list of the World’s Most Reputable Companies and in the Top 10 list of Most Reputable Indian companies. The Mahindra Group’s activities have spread over various areas such as automotive, farm equipments, engineering, forging, steel, infrastructure development, leisure hospitality, information technology, systems and technology, consultancy and software services, general retailing, and trade and financial services.

Outlook and valuations
Although the IPO is stiffly priced, we recommend ‘SUBSCRIBE’ from a long-term perspective at the lower end of the price band, betting on the strong parentage, management track record, early-mover advantage and the company’s dominant position in the vacation ownership business suggesting growth potential over the long term. At the upper band of INR 325, MHRL is valued at 34.2x its FY09 earnings and at the lower price band of INR 275, it is valued at 29x its FY09 earnings (on a fully diluted basis).




We raise our FY10E & FY11E earnings estimates for HDFC Bank 5.3% and 8.2% respectively to factor in better operating environment than envisaged earlier, high capital owing to HDFC’s warrant conversion and NIM traction due to improving CASA. We believe asset quality stress will persist; however, it is likely to be lower than expected going forward. Despite earnings traction and likely warrant conversion, upside from the current levels is limited in our view. We value HDFC Bank at 18x FY11E EPS (implied P/BV of 2.74x), which implies Rs1,453/share fair
value. The stock trades at FY11E P/E & P/BV of 18.1x & 2.8x respectively. HOLD.

Earnings growth to be led by higher credit growth, steady NIMs. We estimate 27.5% credit CAGR through FY11E to drive margins and hence earnings growth. Low systemic term deposits rates and improving branch productivity in the erstwhile Centurion Bank of Punjab (eCBoP) are likely to lead to CASA improving to ~46% by FY11E from 44% in FY09, helping sustain margins ~4%. We expect 28.3% NII CAGR through FY11E. HDFC Bank is likely to continue purchasing mortgage portfolios originated by it for HDFC in our view as the repurchased portfolio is AAArated and most of the loans repurchased fulfil priority sector lending requirements.

Fee income likely to be buoyant; costs to remain high. Fee income is likely to see strong traction, with pick-up in core fee income and third-party sales likely to drive 27.8% other income (ex-treasury) CAGR through FY11E. Given the retail oriented business model, we expect cost-to-income to stabilise at ~50% by FY11E.

Asset quality deterioration likely to be manageable. Despite threats to asset quality having declined significantly, we believe there is some stress from the eCBoP book. As per the management, the two-wheeler book from eCBoP is likely to run-off completely in the short term. We expect manageable deterioration in asset quality and envisage GNPAs to peak at ~2.65% in FY10E. We maintain our loan loss provision assumptions at 180bps through FY11E.

Valuations offer little upside despite strong fundamentals. Improved fundamentals – economic outlook and reduced NPA threat – are likely to drive higher credit growth and earnings traction. Based on these, we upgrade FY10E & FY11E earnings 5.3% and 8.2% respectively. Capital infusion by conversion of warrants is likely to strengthen tier 1 capital further. We value HDFC Bank at 18x FY11E EPS (implied P/BV of 2.74x), implying Rs1,453/share target price. The stock is currently trading at FY11E P/E and P/BV of 18.1x and 2.8x respectively. HOLD.

To see full report: HDFC BANK


Richly valued

Downgrade rating to Sell from Accumulate: We have revised our rating to Sell from Accumulate with a target price of Rs31.4/share. Even after capturing the company’s improving business fundamentals, we believe that stock is richly valued at FY10E EV/sub of Rs6,900. We value the stock at FY10E EV/sub of Rs5,600.

Q4 revenue below estimates: Q4 revenue at Rs2.0bn (up 7.5% QoQ and 52.4% YoY) was below our estimate of Rs2.4bn. The lower-than-expected revenue was due to the 14% YoY ARPU decline to Rs136/month, while we anticipated an increase in ARPU.

EBITDA break-even a positive surprise: EBITDA margin improved from negative 20.2% in Q3FY09 to positive 2.0% during Q4FY09. This sharp improvement came on the back of 23% QoQ reduction in content cost since company has moved from a variable content cost model
to a fixed content cost model during the quarter.

Estimates revised upwards due to change in content cost model: We have raised our EBITDA estimates to Rs1.0bn from an expected loss of Rs0.9bn for FY10E. In addition, we raised EBITDA margin estimates for FY11E from 6.5% to 23.7%. This change is primarily due to shift in its content cost model from variable cost per sub to fixed cost model.

To see full report: DISH TV


Finance Minister is expected to present the union budget on 6th July 2009.

Expected Key Highlights of the Union Budget :
1) Listing, Divesting of Government holdings in public sector undertakings (PSUs).
2) Investment- friendly regulatory and legal framework for public private partnership.
3) Recapitalise banks to boost their financial position.
4) Post offices will be leveraged to deliver more services.
5) Focus on small enterprises, textiles, export etc.
6) At least 13,000 MW additions every year envisaged.
7) Rural health institutions are expected to be recognised.
8) Autonomy in education through an independent regulatory authority.
9) SEZs: Land Acquisition and Resettlement and rehabilitation (R&R) bills to be reintroduced.
10) Infrastructure spending to be centerpiece of growth.
11) There will be an additional spending of Rs. 500 bn in social sector in rural and urban area.
12) Reform will be introduced in insurance, Special economic zone (SEZ), disinvesment, power and education sector.
13) The tax stimulus will have to come through a reduction in excise duties.
14) Tax Reform - Implementation of the goods and service tax (GST) will be pushed forward.
14) Reforms in Coal sector - PSU dilution.
15) Policy changes to reorient subsidies.
16) Reforms to empower panchayats.

The budget is expected to focus on the following sectors:

  • Infrastructure sector
  • Agriculture sector
  • Commercial vehicles sector
  • Textile industry

Following are the sectors where government is expected to take reformist path:

Disinvestments in PSUs
  • Publicly listed PSUs saw a revival of interest after the 2009 election as disinvestments may unlock hidden wealth in those PSUs. The UPA Government is expected to sell its stake in central PSUs. Divestment is expected to improve the fiscal deficit.
  • IPOs from government owned companies could also help revive the IPO market and boost the stock market. PSUs, where the government stake is much higher than 51%, may be the first where stake sales will be pushed through.
Banking sector
  • Reduce the long-term deposit's tenure from 5 years to 3 years, in order to bring the investments at par with ELSS. Loans against these fixed deposits should also be allowed.
  • Interest income of overseas lenders on external commercial borrowings should be made tax-free. The banks get loans at higher rates of interest, as foreign lenders gross up the tax liability to the interest rate.
  • Inter bank transactions of purchase and sale of foreign currency should be made tax-free.
  • Banks should be allowed to claim full deduction on the interest earned on long term lending to the infrastructure sector.
  • Banks are expected to be guided to lend at lower rates.
  • Process of consolidation of banks will be hastened.

Infrastructure Industry
  • The government is expected to give highest priority for infrastructure spending. The Government of India has planned infrastructure spending of US $550 billion during 11th five-year plan. Project like Bharat Nirman scheme aimed at strengthening the country's rural infrastructure including water supply, power, housing and roads, and proposed a `specific financing window' for Rs 1,740 bn programme, to provide a boost to the infrastructure sector.
  • ·Road projects are expected to launch on annuity-based BOT schemes rather than tollbased BOT schemes to a certain extent.
  • ·Part guarantee of debt for major infrastructure projects is expected.
To see full report: BUDGET EXPECTATION


When long-term interest rates dominate the yield curve

Since end-2008, volatility in long-term (10-year) interest rates has exceeded volatility in short-term (2-year) interest rates. It is therefore long-term interest rates that primarily determine the slope of the yield curve. There are several possible explanations for this phenomenon: 1- money market rates are "politically" frozen at their lowest possible level. Only the long end of the curve is free; 2- there is a liquidity trap phenomenon; 3- public finances are deteriorating drastically; 4- inflationary risks are on the rise. Question: is this situation set to last? Answer: in all likelihood, despite some governments’ determination to implement exit strategies.

To see full report: SPECIAL REPORT

>Emerging markets: global crisis, local political risks (ECONOMIC REEARCH)

  • The rise of political risk
  • Latin America—revolutionaries, structuralists, and inequalities
  • Eastern Europe: governance shortcomings
  • NMS: Will the Great Recession Spoil the Double Anniversary?
  • Rising political risk in North Africa and the Middle East
  • Asia: rising tensions on the horizon
  • Sub-Saharan Africa’s demography time-bomb
To see full report: EMERGING MARKETS

>Crude falls in Asia; rally may be over

Singapore - Crude prices slipped in Asia Monday, weighed on by lower Asian equity markets, as speculators began losing interest in supporting oil due to a lack of clear fundamentals.

"Given crude oil's parabolic rise from mid-April through mid-June, we think it quite telling that the rash of recent headlines has yet to spur the market toward the magical USD75 level that all of those Wall Street types like to tout," said analysts at the Schork Report in a note to subscribers.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in August changed hands at USD68.81 a barrel at 0654 GMT, 35 cents lower in the Globex electronic session.

August Brent crude on London's ICE Futures exchange was down 32 cents at USD68.60 a barrel.

Rising crude prices recently have been correlated with higher equity markets and a weaker U.S. dollar, which makes commodities such as oil more attractive to investors. But crude fell in Asian trading hours even though the dollar was broadly lower against its major counterparts.

"The demand side is what's concerning investors," said Christoffer Moltke-Leth, head of sales trading at Saxo Capital Markets in Singapore. "It looks like crude has come a little bit ahead of itself."

Investors typically invest in commodities such as oil as a hedge against inflation, which has provided support to oil prices, he said, adding that the lack of a strong mention of inflation from the U.S. Federal Open Market Committee last week may have tempered those concerns.

Protests in Iran, supply disruptions in Nigeria and a weaker dollar "haven't even mustered a yawn from the bulls," Schork Report analysts said. "Markets that fail to endure upon receipt of news that would reasonably be expected to sustain that trend are often a sign, a good sign, that that trend has run its course."

Meanwhile, Moltke-Leth said he expects oil to trade between $60 and $70 a barrel for most of the year.

"OPEC seems pretty prepared to protect this level," he said. "It's not unthinkable that we'll see supply cuts from OPEC if crude should slip below $60," he added.

Nymex reformulated gasoline blendstock for August, the more actively traded contract, fell 69 points to 186.50 cents a gallon, while the more actively traded August heating oil contract was at 176.99 cents, 111 points lower.

ICE gasoil for July changed hands at $555.25 a metric ton, down $2.25 from Friday's settlement.