Thursday, December 10, 2009

>OUTLOOK 2010: Global Strategy, Economics, Credit, Quant, & Sector Research

Squaring the portfolio paradox: Risk re-allocation Equity and credit valuations are ‘fair’, global growth remains uneven, and in 2010 market volatility may increase. Yet we opt to increase allocations to equity, credit, commodities, and real estate for 2010. Why? A gradually improving global economy and the prospect of higher policy rates undermine the case for government bonds, nominal and inflation-linked. Cash returns remain unattractive. Stocks and corporate bonds are likely to out-perform, along with commodities and selected REITs. But in a world of lower returns and higher volatility, increased allocations to ‘risk’ assets only makes sense if accompanied by a lower cyclical profile in terms of sector and style. Squaring the portfolio paradox (lower risk-adjusted returns but higher allocation to risk assets) requires a redistribution of risk within the portfolio.

What to avoid: Bond markets By early 2010 investors will anticipate the end of the Fed’s ‘zero-rate’ policy and will expect rate hikes elsewhere, as well. Rising short rate expectations will push up bond yields, as well as bond market volatility. The appropriate asset allocation is
to reduce bond holdings and shorten duration in fixed income portfolios.

Milestones and catalysts Important investment signposts include a peaking of US unemployment (by Q1 2010), validation from the Fed and other central banks that growth is sustainable (by Q2 2010), and healthy corporate profits growth (Q4 earnings season). Upside risks to our view include the advent of asset price bubbles (above all in Asia). The chief downside risk remains a faltering US recovery.

Revised asset allocation Our revised allocations are as follows. We increase overweight allocations to global equities and high-yield corporate bonds, and move REITs and ‘soft’ commodities from market-weight to overweight positions. We reduce our government nominal and inflation-linked bond weightings to underweight. Finally, we retain our maximum underweight position in cash.

To read the full report: GLOBAL OUTLOOK


COMPANY OVERVIEW: GPL is one of the leading real estate development companies in India (Source: Construction World – “India'sTop 10 Builders”) and are based in Mumbai, Maharashtra. GPL currently have real estate development projects in 10 cities in India, which are at various stages of development. Currently, GPL business focuses on residential, commercial and township developments. GPL is a fully integrated real estate development company involved in all activities associated with the development of residential and commercial real estate. GPL undertakes projects through inhouse team of professionals and by partnering with companies
with domestic and international operations

Established brand name
GPL a part of the Godrej group of companies,a leading conglomerates in India. We believe the “Godrej” brand is instantly recognisable amongst the populace in India due to its long presence in the Indian market, the diversified businesses in which the Godrej group operates and the trust it has developed over 112 years of operations. The Godrej group was awarded the “Corporate Citizen of the Year” award by the Economic Times in 2003 and the Godrej brand was selected as the fourth best brand in India in The Week magazine's 'Mood of the Nation @ 60' survey published on August 19, 2007.

Land Reserves in strategic locations
As of October 15, 2009, GPL has Land Reserves comprising 391.04 acres aggregating approximately 82.74 million sq. ft. of Developable Area and 50.21 million sq. ft. of Saleable Area,
located in or near prominent and growing cities across India, such as Mumbai, Pune, Bengaluru and Ahmedabad. These include land parcels which company own directly, and land parcels over
which company have development rights through agreements or memoranda of understanding.

Business development model
Along with selective acquisition of land parcels in strategic locations, GPL entered into development agreements with land owners to acquire development rights to their land in exchange for a pre-determined portion of revenues, profits or developable area generated from the projects. GPL believe that the Godrej brand name and the reputation associated with it contribute in attracting potential joint development partners as well as existing partners. This business model enables to undertake more projects without having to invest large amounts of money towards purchasing land. Company thereby able to limit our risk through project diversification while maintaining significant management control over projects.

To read the full report: GPL


GMR Infrastructure (GMR), a conglomerate with interests in airports, power, highways, mines and SEZ is a complete urban infrastructure play. The company has an exceptional track record of executing world-class infrastructural facilities within and outside India. GMR has an operational presence in high growth sectors like aviation where it is operating three airports in Delhi, Hyderabad and Turkey with an overall passenger (pax) base of ~33.5 million pax in FY09. It is building capacity to handle ~165 million pax by the end of the respective concession periods. In the power segment, GMR has been operating 823 MW of capacity. A huge pipeline of 7,628 MW is at various stages of development. GMR also has six operational road projects with an overall length of 421 km. The assets possess significant growth potential and we expect a CAGR revenue growth of 35% for the period FY08-FY12E from Rs 2,300 crore to Rs 7,700 crore. Thus, we are initiating coverage on the stock with an ADD rating.

Building mega structures…

Superior airports – In a sweet spot with ~27% market share in India
With Delhi and Hyderabad airports, GMR is handling close to ~27% of the overall Indian passenger base. Delhi has shown reasonable stability in the depressing phase over FY09 and Hyderabad is one of the fastest growing airports with passenger traffic growing at a CAGR of ~23% over FY04-09 compared to overall India passenger traffic growth of ~17%. GMR has also forayed into Turkey and inaugurated a new terminal in November 2009 with a capacity of 25 million pax.

Improving visibility for merchant play to support operating profitability
With the opening of the 20% merchant capacity at Vemagiri, GMR’s overall merchant capacity is expected to increase from the existing 220 MW to ~310 MW in the next quarter. GMR is also planning to relocate the existing barge mounted plant from Mangalore to Kakinada and would convert the source of fuel from naphtha to natural gas. We believe it will commence operations in April 2010 and lead to an overall incremental quarterly profit of ~Rs 80 crore from Q1FY11E.

At the current market price of Rs 70, the stock is trading at P/BV of 4.0x in FY10E and 3.8x in FY11E. We have adopted an SOTP based methodology to arrive at the fair value. Airport, along with real estate, will have Rs 25 per share, power segment will have Rs 25 per share while remaining Rs 24 per share comes from various other segments. Thus, we are initiating coverage on the stock with an ADD rating.

To read the full report: GMR INFRASTRUCTURE

>Mundra Port & SEZ Ltd. (UBS)

Factoring increased capacity, longer concession, and stronger cargo growth: We upgrade our rating on MSEZ from Sell to Neutral, factoring: 1) increased capacity of 50mt for the coal jetty (30mt earlier); 2) concession period upto FY51 (FY31 earlier); and 3) stronger volume growth (20% over FY09-12 versus 9% earlier led by higher-than-expected growth and improved outlook). We believe that a pick-up in cargo volumes and long-term growth potential is likely to keep valuations buoyant.

We estimate capacity expansion equivalent to 50% of existing facilities
MSEZ has significant growth potential given: 1) large physical capacity (waterfront is 4x of current utilization); 2) healthy internal accruals (Rs40bn over the next five years); 3) low gearing (average net-debt-to-equity ratio of 0.6x over FY09-12); 4) robust demand outlook (also aided by delays in capacity expansion plans at other ports); 5) management keenness to expand facilities; and 6) strong execution capabilities.

Strong growth commands premium

Pick-up in private sector capex to drive demand for SEZ land
Alstom-Bharat Forge JV is setting up its facility in MSEZ—120 acres was leased in Q2FY10. In Q1FY10, MSEZ had lease income of Rs50m (~60% of value taken upfront). Though the high rates were due to land usage for hotels/buildings, it provides comfort about potential land valuations in the SEZ. The SEZ leasing activity seen over the last two quarters will further gather steam in CY10 led by private sector capex pickup and aided by the advantage of the port infrastructure.

Valuation: sum-of-the-parts-based price target of Rs640 (earlier Rs390)
Our price target, implying FY11 P/BV of 6.3x comprises of: 1) Port – Rs531; 2) SEZ – Rs72; and 3) investments – Rs27 (Dahej, Adani Logistics and Inland Container). We revise our FY10/11 EPS estimates from Rs12.65/16.85 to Rs16.18/19.55.

To read the full report: MUNDRA PORT AND SEZ


Low cost deposits and CASA: Federal Bank Ltd. (FBL) always had advantage of garnering NRI deposits and remittances, which constitute to a healthy low cost deposit base of the bank. Together with CASA of ~ 25%, low cost deposits constitute ~ 40% of total deposits of the bank. Low cost deposits base has anchored its NIMs to a significant extent, helping Federal Bank report one of the highest NIMs in the industry @ ~4% for FY09.

Credit Offtake: FBL witnessed a very healthy loan growth in H1FY10E @ 21% and management is confident of maintaining a robust 25-30% loan growth for the year 2010E, which is more than the average industry standards. Slower credit off take in past quarters as well as infusion of capital has led to contracted growth of the balance sheet and has impacted return ratios. However, credit offtake in the corporate segment as well as retail segments, especially home loans shall remain the focus areas for growth.

Asset Quality: FBL has reported high slippages in H1FY10E, at Rs.4.5bn out of restructured assets. However, FBL's provision coverage ratio, which has historically been in the range of 80-85% is the highest in the industry. Conservative provisioning of FBL is likely to continue going forward, with FBL maintaining ~ 83% as provision coverage, which gives further cushion on the asset quality and profitability. We believe that the incremental slippages should peak out this year, with FBL likely to see Gross NPAs at ~3% in FY11E.

Pending acquisition of CSB: The acquisition of Catholic Syrian Bank (CSB), if it happens, will be a complementary fit to FBL's regional leadership strategy. CSB has s strong branch network of 363 branches and 140 ATMs as at March'09. This merger would provide FBL the market leadership in South India, thus raising the entry barriers for other banks in Kerala. Further, FBL would be able to productively utilize its excess capitalization for acquisition of CSB.

To see full report: FEDERAL BANK