Tuesday, November 3, 2009

>The Trade Mirror: Bond markets and beyond

Sovereign debt: Rally ebbed on pending HTM action; auction devolvement
Corporate debt: Corporates step up CP issuance; 10-yr segment lacked participation
Flow tracker: Overnight liquidity back to INR 2.40 tn in October first week
Swaps, IRF and CDS
Macro variables: WPI witnesses pull-back; revision of 90bps goes unnoticed
Global watch

  • US watch: revolving consumer credit plunges to record low; -13.1%
  • US treasury: US treasury: 10-yr bond yield up 21bps in a week; fears unwinding
  • Treasury issuance and forthcoming releases
  • Economy pulse: UK, Euro zone, Japan
  • Key takeaways from rest of the world
  • Global benchmarks: Sovereign bonds of the world
  • Commodities and currencies: Central Banks intervening to support exports on dollar depreciation
To read the full report: THE TRADE MIRROR


Clinker sales help maintain revenues; PAT marginally below estimates
India Cements (ICEM) posted net profit of INR 1,369 mn in Q2FY10, which was below our expectation of INR 1,514 mn. While clinker sales (10% of total volume) aided revenues, PAT was marginally below estimates. Pure cement realisations declined by ~INR 6.5/bag (3.5% Q-o-Q). Blended EBITDA/tonne stood at INR 1,034, down 14% Q-o-Q and 16% Y-o-Y.

Average imported coal cost/tonne for the quarter corrected to ~USD 83 from USD 88 in Q1FY10. However, cost has inched up and is at USD 88/tonne currently. While power cost has come down to ~INR 3.4 compared to ~INR 3.7/unit in Q1FY10 (due to power shortage in Andhra Pradesh), it continues to be above FY09 average cost of INR 3.1/kwh.

Pricing situation precarious in AP; expected to stabilise going ahead
The management highlighted that prices in Andhra Pradesh (accounting for 20% of total sales) have corrected to INR 157/bag (ex-dealer commission) compared to INR 210/bag in April 2009. We believe, despite sales mix adjustment, full impact of price corrections in Q2FY10 is yet to be reflected due to the timing of price cuts. While all India prices are down ~3% Y-o-Y, prices in South are down ~9.5% Y-o-Y.


Acquisition of coal mine in the offing; 50 MW CPP likely by March 2011
The company guided that it is looking at acquiring an Indonesian coal mine for USD 20 mn. Estimated reserves are 30 MT with calorific value of ~5,800 kcal/tonne. Average FOB cost is likely to be USD 40-45/tonne. Also, of the proposed 100 MW (2x50MW) CPP addition in Andhra Pradesh and Tamil Nadu, ICEM has placed orders for Phase-I – 50MW in Tamil Nadu and it is likely to come on stream by March 2011.

Outlook and valuations: No positive triggers in sight; maintain ‘REDUCE’
We are marginally revising our FY11 PAT estimates down 6.2% to factor in muted realisations. At CMP of INR 111, the stock is trading at EV/tonne of USD 79 and USD 72 for FY10E and FY11E, respectively. We remain cautious on the southern region since it is likely to account for ~50% all-India additions in FY10E, with bulk of the capacity being added by smaller players. Further, costs are likely to inch up going ahead resulting in declining profitability. Hence, we maintain our ‘REDUCE’ recommendation. On relative basis, the stock is rated ‘Sector Underperformer’.

To read the full report: INDIA CEMENTS


Advances growth rebounds; NPLs decline
Kotak Mahindra Bank (KMB) reported consolidated PAT (excluding life insurance) of INR 2.96 bn (in line with our expectation) in Q2FY10, almost double Y-o-Y and up 15% Q-o-Q. Profitability of the auto financing business surprised positively; earnings of banking, securities, and asset management businesses were in line with expectations, while investment banking profits were below our expectations.

Consolidated advances grew 11% Y-o-Y (15% Q-o-Q) to INR 268 bn, primarily led by strong off take in auto loans and corporate credit. The bank is consistently paring its exposure in highly-delinquent personal loans; home loans/CVs remained flat. Consolidated NIMs were maintained at 6% despite a shift in product mix towards corporate/SME and car loans, due to sharp decline in funding cost (benefit flowed from low-cost sweep deposits now forming a significant chunk of
deposits). Consolidated gross NPLs (excluding stressed assets) declined from 3.41% in Q1FY10 to 2.93% in Q2FY10 as accretion to NPLs is slowing down and net NPLs declined to 1.7% (from 2.07% in Q1FY10).

Profits in banking business grew 163% Y-o-Y and 39% Q-o-Q to INR 1.26 bn driven by strong advance growth and lower provisioning. Performance of Kotak Mahindra Prime (auto finance business) was back on track during the quarter— advances grew 8% Y-o-Y and 18% Q-o-Q and profits rose 11% Y-o-Y (almost doubled Q-o-Q) to INR 395 mn due to lower provisioning. Kotak Securities reported a profit of INR 759 mn (up 85% Y-o-Y and almost flat Q-o-Q), in line with the performance reported by peers. Investment banking reported profits of INR 41 mn (compared to profit of INR 48 mn in Q1FY09), which was below our expectations. Asset management (domestic and international) reported strong profitability due to sharp growth in AUMs. Life insurance reported a profit of INR 40 mn (compared to INR 51 mn in Q2FY09 and INR 11 mn in Q1FY10).

Outlook and valuations: Positive; maintain ‘BUY’
KMB has clearly stepped up the pace of loan book growth with YTD growth in advances at 19%. Accretion to NPLs is slowing down and we expect gross NPLs to decline further. However, RBI’s advice to maintain higher provisioning coverage at not less than 70% (currently at 35%) will dent the bank’s profitability over the next 18 months. We expect KMB’s banking business to grow its profitability by 24% CAGR over FY09-11E. We are revising our earnings estimates up for
securities, asset management, and auto financing businesses, while lowering them for the investment banking business. Our EPS estimate now stands at INR 29.3 for FY10 and INR 37 for FY11. The stock is currently trading at 2.6x FY11E book and 17.9x earnings (excluding life insurance) and our SOTP fair value stands at INR 822. We maintain ‘BUY’ recommendation. On relative return basis, the stock is rated ‘Sector Performer’.

To read the full report: KOTAK MAHINDRA BANK


Results above expectations; net revenues at INR 61.3 bn
Sterlite Industries (Sterlite) reported consolidated net revenues of INR 61.3 bn (down 10% Y-o-Y, up 34% Q-o-Q) and net profit of INR 9.6 bn (down 25% Y-o-Y, up 43% Q-o-Q) in Q2FY10, which were above our and consensus estimates. EBITDA was at INR 13.6 bn (down 26% Y-o-Y, up 34% Q-o-Q). Margins, however, were flat at 22.3% Q-o-Q as costs too increased Q-o-Q.

Zinc and copper business perform well; aluminium disappoints
Zinc business performed well with improved zinc premiums and concentrate sales. Margins improved from 51% to 60% sequentially as costs were stable and prices rose Q-o-Q. Copper business was sequentially better even though TcRc margins were constant due to improved byproduct revenues.


Zinc, aluminium projects on schedule; power project slightly delayed
The zinc-lead expansion project (to 1.0 mtpa) is progressing well and may be completed two-three months in advance. VAL and BALCO’s projects are also going as per schedule. The 2,400 MW power project’s initial commissioning date has been delayed by a quarter so as to start from Q4FY10. The company revived the 1,980 MW Talwandi Sabo power project which was deferred during the financial crisis. Captive bauxite mining from Niyamgiri mines has been delayed to H2FY11 against expectation of December 2009. Additionally, copper smelter expansion project of 400 ktpa at Tuticorin will be completed in mid CY11.

Outlook and valuations: Scaling further; maintain ‘BUY’
Q2FY10 has brought out the significance of having a diversified metals portfolio viz. zinc, aluminium, and copper. While Sterlite’s aluminium business disappointed in terms of higher-than-expected costs, zinc and copper business performed, thereby mitigating the issue. The company’s growth projects in zinc, aluminium, and power are expected to lead to earnings growth of 77% in FY11E over FY10 and continue further into FY12 as they ramp up further. We incorporate in our estimates the delay of a quarter in the commercial energy project, the higher-than-expected cost at BALCO due to residual costs at BALCO-I smelter, and lower realisations for surplus power in BALCO. We are revising down our FY10E and FY11E earnings by 13% and 14%, respectively. We retain our ‘BUY/SO’ recommendation. Our fair valuation is INR 849/share.

To read the full report: STERLITE INDUSTRIES


Revenues and PAT in line with estimates
DLF’s revenues and PAT were in line with our expectation. Revenues increased ~6.1% Q-o-Q, to INR 17,509 mn (our expectation was INR 17,527 mn), against INR 16,499 mn in Q1FY10; Y-o-Y, revenues declined ~53%. EBITDA for the quarter increased 22.8% Q-o-Q, to INR 9,139 mn (our expectation was INR 8,764 mn), against INR 7,441 mn in Q1FY10. Tax rate for the quarter was 29.6% (our expectation of 21%) against 20.7% in Q1FY10. Net profit increased 11% Q-o-Q, to INR 4,398 mn (our expectation was INR 4,850), compared with INR 3,960 mn in Q1FY10; Y-o-Y, it declined 77% from INR 19,354 mn in Q2FY09. Net profit margins stood at 25% versus 24% and 51% in Q1FY10 and Q2FY09, respectively.

Execution on order book to ease cash flows
DLF has commenced construction on 6.56 msf in the quarter, post which it has 31.57 msf under execution against transacted space of 32.82 msf. Execution will enable DLF to receive milestone based payments from customers, enhancing their cash flows. Further, as the project nears completion, the company will be able to sell subsequent phases of the projects at prices atleast equal to the initial launches, if not at higher prices.

Testing ground for affordable homes segment
DLF plans to enter the high potential affordable housing segment with a testlaunch spanning 3–4 mn sq ft across five cities. This segment (value housing) will have a brand distinct from DLF. The management is targeting 25-30% EBITDA margin from the segment.

Outlook and valuations: Valuing land bank again; upgrade to ‘BUY’
We value DLF based on value of land and the DCF value of cash flow from launches of FY10-11 (86 mn sq ft) and from projects that are already under execution (346 mn sq ft). However, a reversal of the abundant liquidity scenario prevalent currently can impair the value ascribed to the land, impacting our NAV estimate. We also believe that the Street will be closely watching the way forward for DAL. Our NAV estimate for DLF stands at INR 428. Post the sharp correction in prices, we believe the stock appears attractively valued. Consequently, we upgrade the stock to ‘BUY from ‘HOLD’, and rate it ‘Sector Performer’ on a relative return basis.

To read the full report: DLF LIMITED