Sunday, October 4, 2009



  • Tools for an exit strategy
  • The credibility to do it
  • Saying and doing

Since the financial crisis broke in the summer of 2007, central banks have been extremely active. On the liquidity front, all the central banks without exception acted as lenders of last resort with operations that were exceptional in terms of their size, their maturity, and the range of assets accepted as collateral. This was combined with aggressive rate cuts, starting with preemptive cuts by the Fed in late 2007, followed by the other central banks from October 2008, in response to the sharp, sudden deterioration in the economic situation.1 This phase of post-Lehman-bankruptcy financial distress plunged the economy and finance into an adverse feedback loop in which the traditional mechanisms for monetary policy transmission became ineffective, forcing the central banks to greater innovation in order to continue to act on economic activity and credit. They adopted less-orthodox methods frequently referred to as Quantitative Easing (QE), with the deployment of unprecedented measures involving active management of the size and composition of their balance sheet.

As the economic and financial environment stabilizes, thought turns to unwinding the web of unconventional measures and a return to more conventional forms of intervention. In our opinion, the central banks have numerous tools at their disposal for withdrawing, at the appropriate time, the monetary stimulus they injected into the economy. The process will take many forms, with differences across countries. The key difficulty in these exit strategies will be determining when to begin tightening monetary and financial conditions, and at what pace. This issue of Eclairages is reviewing the three dimensions of the debate: when, how, and how fast (see article “Tools for an exit strategy“, page 2). There are many possibles, as will be seen, but the central banks can depend on two assets for accomplishing this difficult task. They have very high credibility (see article “The credibility to do it“, page 6), supported by effective communication policy (article “Saying and doing“, page 10). They will be able to say what they do, be believed in what they say, and finally do what they say, with maximum efficiency.

Tools for an exit strategy
D iscussions about an exit strategy from unconventional monetary policy began shortly after the initial measures to counter the crisis, in late 2007-early 2008. The debate was sparked by the unprecedented, aggressive approaches put in place. The question was initially "how," but more recently, with signs of an improvement in the real and financial spheres, the question "when" has been added. Today, the issue thus encompasses both dimensions ("how" and "when"), and everything that will reverse current ultra-accommodative monetary policy. In other words, the exit strategy is not just a matter of what central banks do to reduce the size of their balance sheet, nor the date of the first rate hikes; they will use both of these approaches to tighten monetary and financial conditions when it becomes necessary. The reversal will also be a multifaceted process, just as the easing was, and it will unfold differently, depending on prospects for growth, inflation, and the financial system in each country.
  • How to exit
  • Why to exit
  • When to exit from current policies
To see full report: EXIT STRATEGIES


Healthy topline growth and rising margins, due to higher sugar prices
We believe that EID Parry (India) Ltd (EID) will ride the upturn in the sugar cycle, which coincides with the capacity enhancements of its integrated operations. Its topline and adjusted PAT are projected to grow at a two year CAGR of 61% to reach Rs 19.6 Bn and 68% to Rs 3.6 Bn by FY11, respectively. We expect margins to improve further to 16.2% and 17.6% in FY10 and FY11, respectively from around 9.3% in FY09.

Presence in south India bless EID with a longer cane-crushing season
EID’s sugar mills located in Tamil Nadu and Puducherry enjoys geographical advantages in the form of long crushing season (240 days in a year, as against 175 days in North India). This enables higher utilisation of EID’s combined 19,000 TCD sugar capacities.

Well placed to deal with sugarcane shortage
EID is well-placed than most of its peers in Tamil Nadu and other UP-based sugar producers, due to its better relationship with farmers enabling better availability of cane and proximity to ports enabling raw sugar refining. Besides, the company’s sugar mills are integrated for making power and spirits from its by-products, which helps in de-risking the business.

Port-based refining capacity to aid growth in long term
EID is setting up a one million tonnes per annum sugar refinery in a SEZ at Kakinada, through a 51:49 JV with global food giant Cargill. It is expected to be operational within the next 6 months. We expect the JV to contribute nearly Rs 430 Mn to EID’s profitability in FY11.

Regulatory risk in sugar industry can temper our fundamental grading
Despite expected robust financials over the medium term, government policies on sugar and sugarcane prices will continue to influence and render volatility to the overall profitability of sugar manufacturers, including EID. The non-linkage of sugarcane cost to sugar realisation is the key negative for the industry and would continue to result in huge volatility in EID’s earnings.

Coromandel fertilisers to contribute 39% to EID’s valuation
With a 62.9% stake in Coromandel, EID receives significant dividends from CFL. With an expected decline in CFL’s profitability; we expect dividend payment to reduce to Rs 654 Mn in FY11. Nevertheless, the subsidiary will remain a key contributor in the EID’s consolidated operations and valuation (we value EID’s stake in CFL at Rs 154 per share).

We assign EID a ‘4/5’ grade on Fundamental and ‘4/5’ on Valuation
EID’s fundamental grade of ‘4/5’ indicates that the company’s fundamentals are ‘Superior’ relative to other listed securities in India. The grading factors in the current buoyancy in the sugar industry, good management and EID’s position in the industry. However, the grading could be lowered if there are significant regulatory changes, which influence sugar realisations. The valuation grade of ‘4/5’ indicates potential ‘Upside’ (Fundamental value of Rs 394) from the current market price of the stock.

To see the full report: EID PARRY LIMITED


Time to go Shopping???
Not Now...!!!

India Retail Forum - 2009
The Retail industry in India is $400bn with the industry accounting for around 27% of the GDP. The organized or modern retail penetration levels are abysmally low for India and account for 3-5% of the total retail sales and the rest is catered to by unorganized retail mainly ‘Kirana Stores’. In other countries the penetration levels for organized retail are much higher at ~80% in USA, ~40% in Mexico and Turkey and ~20% in China. The lower penetration levels give an opportunity for Modern retail to increase penetration and increase the scale of organized retail in the country.

Although the opportunity is there, the retail sector will show a steady growth and not explosive growth as witnessed in the telecom sector. For the growth to happen in this sector there needs to be inclusive growth and there is a need to drive consumption.

Key Highlights

Retail Sector to grow
India’s organized retail market is currently growing at the rate of 40% annually. The growth is expected to be fast paced over the next three years with global players like Wal-Mart, Tesco, and Carrefour entering the fray. At the current growth rate organized retail is expected to reach USD 90-95bn by 2010. The entry of foreign players will drive the growth as the penetration levels of organized retail increase. The penetration of organized retail is expected to touch 10% by 2014, which will be based on inclusive growth and driving consumption. Although the retail sector will grow, profitability remains a key issue and needs to addressed.

Real Estate Cooling off
The real estate which consists of half the expenditure for retailers has cooled off considerably with prices falling up to 30%. There were 400 malls to be completed by December 2010. Now this number is down to 100. With the fall in real estate prices most of the retailers have been able to derive better deals. Real estate players also indicated that they wont be doing any strata sales and will be looking at rental and revenue share models. The revenue share models come with a minimum guarantee. There have been some revenue sharing deals that have been sprung in the past one year, but these have been few and come with a lot of caveats.

Driving Private Labels
Almost all the retailers are looking at some kind of backward integration by introducing private labels across categories. The need for private labels comes from their ability to derive higher margins than CPG goods. Retailers also emphasized that they will be looking at branding these private labels and creating newer markets for them. Retailers are looking at private labels actively in the food and grocery business.

Technology Key Driver
Retailers earlier were not too keen on embracing technology. IRF2009 indicated that the retailers are now ready to address the technology bits by actively implementing technology. The demand for Business Intelligence solutions, item data management, and vendor management came to the fore with all almost all retailers citing the need for technology for effective supply chain management.

We remain cautious on the sector. The growth in the retail sector will be slow and steady and not explosive. Retailers need to set their home in order first and then look at growing the scale. We like Titan and Trent in this space.

To see full report: RETAIL SECTOR


We interacted with the management of Mahindra & Mahindra Financial Services Limited. The
key takeaways of the meeting are as under.

Disbursement growth
The disbursements are expected to grow at a CAGR of 20% over FY09-FY11E. This would be driven by revival in the auto segment (MoM growth in auto numbers) and relatively stable interest rates. Additionally, the several schemes launched by the government for rural India and the higher budgetary allocations towards the farm segment are likely to fuel demand in rural areas.

Spreads/ Margins
MMFSL is suitably placed between the money lenders and organized players like banks which has contributed to lesser competition and better yields (compared to urban areas). Presently, the tractor segment has the highest average yields of 20-24% followed by CV (avg yield 20%) and UV segments (avg yield ~18%). Going forward management expects to maintain spreads of ~11%.

Funding Mix
NCD's/ Debentures will continue to be the major source of funding for the company whereas the dependence on securitization will come down. According to the management, the company would restrict securitization to 15% of the funding mix in-order to improve balance sheet growth.

Asset Quality
NPA's have increased significantly (GNPA at 9.8% in Q1FY10) in the last 2-3 years led by the defaults from the tractor and CV segments. MMFSL follows aggressive provisioning policy (provision coverage of ~70%) thereby capping net NPA's at ~2.5% levels despite increase in slippages. However, considering the very nature of business, the gross NPAs are expected to remain high.

Capital adequacy
MMFSL maintains high capital adequacy ratio of 18.8% (tier I CAR of 17.2%) against the minimum requirement of 12% by RBI. Management plans to maintain CAR above 14% which leaves significant room for expansion of business.

The company's asset quality risk is already priced due to aggressive provisioning policy. Currently the stock is trading at 1.6x FY10 ABV, a significant discount to Shriram Transport finance. We believe that MMFSL will make ~17% RoE's by FY11 (15.4% in FY09) led by strong earnings growth and should trade at 1.7x FY11 ABV. We initiate coverage with a target price of INR 275.

MMFSL growth is dependent upon the growth of the parent company (M&M) as 60% of the vehicles financed are M&M vehicles.



TP raised but Maintain Sell

United Breweries Limited (UBL)’s Q1’10 net sales grew by 17.2% yoy, above our expectation, to Rs. 5.6 bn primarily on the back of improved market share. However, EBITDA margin dropped slightly by 70 bps yoy to 12.8%. This was largely due to rise in packaging and advertising cost.
Considering the improved market share, we have revisited our revenue growth estimates and revised our Target Price (TP) on the stock to Rs. 102. However, due to expensive valuation, we maintain our Sell rating on the stock.

Target priced raised on upgrade in market share: UBL has displayed strong performance in last 2-3 quarters in improvement in its market share. In Q1’10 the Company achieved the market share of 51% (ex- Andhra Pradesh) as it strengthened its product portfolio through new launches. Subsequently, we upgrade our market share estimates for FY10 and FY11 to 49.3% and 48.4%, respectively from 48.4% and 46.6% earlier. We revise the target price for UBL from Rs. 78 to Rs. 102.

However, stock appears overpriced: Although we have raised our DCF based target price, we maintain our sell rating on the stock as it more than discounts UBL’s brand equity through Kingfisher, and market leadership position. When compared to FMCG companies, which command far superior ROE of 60-65% compared to UBL at 8%, the stock appears expensive at current P/E of 58x (vs. 26x for FMCG companies). Moreover, UBL’s Free Cash Flow per share is likely to remain at negative Rs. 1.34 in FY10 and at low Rs. 2.38 in FY11 on account of heavy capex plans, which represents a tiny FCF yield of 1.6% for FY11.

To see full report: UNITED BREWERIES

>National Thermal Power Corporation Limited (CRISIL)

Largest power generation player
National Thermal Power Corporation (NTPC) is India’s largest power generator, with capacity and generation shares of 19% and 29%, respectively, as on FY09. Currently, the company is executing power capacity addition of ~18,000 MW which is planned to be completed by FY12 taking the total capacity to more than ~48,000 MW. We expect some slippages in the scheduled addition of the power plants. The company is expected to add 10,990 MW of capacity during FY09-12.

Power deficit provides prospects
India is a power-deficit country, with peak power deficit of more than 10% in FY09. The base demand was 775 Bn units while supply was only 689 Bn. This gap in demand and supply throws high potential. The demand is expected to grow at a CAGR of 7.5% while supply is projected to grow at a CAGR of 8.7%. Also NTPC, being the central utility player, is expected to get the lion’s share of the government’s share of power addition plans.

CERC tariff norms provides stability of earnings
The Central Electricity Regulatory Commission new tariff norms (2009-14) mandates 15.5% return (Additional incentive of 0.5% on timely completion), with further income from Unscheduled Interchange (UI), incentive for higher availability and better operating parameters. Though regulated returns cap NTPC’s upside potential, they provide stable cash flows and earnings. However, earnings do not provide inflationary hedge as they are based on regulated equity and therefore, mostly fixed.

Sales to post a CAGR of 13%, PAT to grow 13.3% over next three years
Over the next three years, sales are expected to increase at a CAGR of 13% to Rs 630.7 Bn, on back of increase in power capacity; the company is expected to add 10,990 MW of power capacity over the next 3 years. During the same period PAT is expected to grow at a CAGR of 13.3% to over Rs 117.7 Bn.

ROE to increase on higher returns from of power business
NTPC is currently executing ~18,000 MW of capacity additions, involving capex of around Rs 900 Bn. The new norms is expected to lead to improvement in profitability of the power business. The return from power business is expected to increase by 400bps to 26%. The improvement in the profitability is expected to improve ROE to 16.1% in FY10.

To see full report: NTPC


The market mood remained upbeat during September 2009 on sustained buying interest from domestic as well as foreign institutions amidst good liquidity flow. This was despite rising discomfort on valuations. During the month, the Sensex and Nifty gained 9.2% and 8.6% respectively and our portfolio of top picks performed much in line with these indices delivering returns of 8.2%. Two additions made to the portfolio of top picks in September 2009—IDBI Bank and IPCA Laboratories—proved to be portfolio out performers rising by handsome 17.5% and 14.4% respectively.

For October 2009, we are making two changes to the basket of top picks. We are replacing Bajaj Holdings and Investment, which ran up by sharp 14.3% in September, with UltraTech Cement. We believe, UltraTech Cement would attract substantial buying on the proposed merger of Grasim Industries’ cement business with UltraTech Cement. We are also replacing Emco Transformers with Torrent Pharmaceuticals, which is trading cheap on valuations despite strong growth prospects and expectations of good results for the quarter ended September 2009.

  • Apollo Tyres
  • Bharti Airtel
  • Bharat Heavy Electricals
  • Godrej Consumer
  • IDBI Bank Ltd.
  • IPCA Lab
  • ITC
  • Reliance Industries
  • Torrent Pharma
  • Ultra Tech Cement
To see full report: TOP PICKS


Poised for re-rating; PO raised

Earnings upgrade, likely re-rating
We raise PO to Rs341 (earlier Rs165) based on (1) upgrade in EPS forecasts by 25-28% over FY10-11, following improved sales visibility in bio-pharma and customs research, as well as milestone receipts, and (2) expected re-rating to 18x FY11E EPS (earlier 11x) on growth ahead of peers as well as past averages, and potential triggers of further outsourcing deals.

Stronger traction in biopharma and custom research
We expect insulin and immunosuppressant i.e. biopharma, which represents ~34% of sales, to grow at 25-32% over next 2 years (compared to earlier 22-25%) driven by new launches in RoW and EU markets. We similarly expect Custom research (~15%) to register 34% CAGR compared to earlier 27% CAGR, on faster scale-up of BMS contract, from 260 to 400 scientists. Outlook for residual domestic formulations and statins business is stable in line with our expectations.

Upside risk to our forecasts
We see upside risk from (1) technology income from recently concluded deal with Mylan on biogenerics research, which may be as high as US$20mn vs our peak assumption of US$10mn for FY11 (12% of EPS), and (2) outlicensing for oral insulin (IN-105, Phase III) which may have upfront receipts upto $30mn.

Valuations attractive, upside triggers ahead
Stock trades at 13.7x 1-yr forward P/E, which is 10% disc to historical average. We expect stock to re-rate given (1) improved growth visibility, (2) expectation of upsides from Mylan deal & out-licensing deal (IN-105).

To see full report: BIOCON LIMITED


Sitting pretty.

Asian Paints (APNT) continues to be our top pick in midcap FMCG as we
see (1) good volume growth sustaining, (2) potential for positive margin surprise in FY2010E versus Street estimates and (3) likely pickup in residential sales volumes in FY2010-11E. Our EPS estimates are the highest on the Street and 10% higher than consensus. Reiterate ADD.

Sustaining good volume growth
In our view, factors aiding the good volume growth in decoratives (likely >12% in 1QFY10, similar trends seen in 2QFY10E) for APNT are (1) continuing good demand conditions in Tier II and III towns, (2) shorter repainting cycle driven by likely improvement in penetration and (3) likely return of demand in key metros. Media reports suggest APNT’s sales growth in Tier II, III towns are outperforming top metros—confirming the view highlighted earlier (report titled “Bright prospects” dated July 27, 2009). The company is likely deriving ~65% of revenues from these markets.

Mix improvement and input cost correction pose upside risks to our (relatively high) estimates
We believe that upside risk to our aggressive EBITDA margin assumption of 17.5% for FY2010E
exist as there is opportunity for APNT to retain significant portion of input cost correction in
FY2010E as the competition is rational and price differentiation is not a critical decision making
factor for the consumer (in higher end products, particularly emulsions). We highlight that our EPS estimates are highest on the Street, Rs60 and Rs69.8 (standalone) for FY2010E and FY2011E, respectively (Street estimates are Rs56.7 and Rs66.7 (consolidated)).

While APNT prefers volume growth over pricing led growth, we believe that, (1) relatively stronger position in emulsions, (2) underlying mix improvement and (3) benefits of input cost correction have helped EBITDA margins expansion of 650 bps to 21% in 1QFY10. We note that 1QFY10 margin performance is probably an outlier as (1) the company has effected a ~2.5% weighted average price correction in July 2009 and (2) 1QFY10 likely had the highest benefits of input cost correction (particularly MTO).

Favorable structural growth drivers
Growth drivers over the medium term, in our view, are, (1) growth in number of tinting machines = growth in emulsions, (2) upside in residential demand, (3) strong performance in South India and (4) improvement in mix.

  • Growth in tinting machines implies a corresponding growth in emulsions. APNT has a reach of ~26,000 distributors, we believe that further upsides from mix improvement is likely over the next 3-4 years as the company’s plans to continue adding 1,000 TMs every year. At present, APNT has about 13,000 tinting machines (TM) installed, and it was adding about 1,000 TMs annually over the last 4-5 years. We believe that the addition of TM has a direct correlation to emulsions growth which APNT had over the last few years.
  • Upswing in residential demand. APNT derives about 10 % of paints volume from new construction and the rest from repainting activity. Likely upswing in residential demand in FY2010E after the slump in FY2009 augurs well for APNT. KIE’s real estate analysts, Puneet Jain and Sandeep Reddy, expect a strong pick up in residential sales volumes in FY2010E and FY2011E.

To see full report: ASIAN PAINTS


ING Vysya Bank with an asset base of Rs318 bn is the sixth largest bank in the private banking space. The bank had a market share of mere 3% in loans and ~3.5% in deposits among private banks at end FY09. IVB is gearing up for brisk growth by aggressively expanding its presence outside South India, its traditional stronghold market. The recent capital infusion of Rs4.15bn would support this initiative. At CMP Rs 270, the stock trading is 1.4x FY11 P/BV based on consensus estimates.

  • Loan growth to revive in H2 FY10
  • Aiming at pan-India presence
  • NIM ti improve with decrease in cost-of-deposits
  • Raised capital at relatively cheap valuations
To see full report: ING VYSYA BANK