Friday, December 11, 2009


Dubai World, with $59 billion of liabilities, is seeking to delay debt payments, sending contracts to protect the emirate against default surging by the most since they began trading in January. The state controlled company will ask all creditors for a standstill agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due on Dec. 14 from its property unit Nakheel PJSC, the builder of palm tree-shaped islands. Extending the maturity of Nakheel debt is feeding the market’s uncertainty on which debt Dubai will honour in full. They look desperate and the market is concerned that in the long term Dubai's indebtedness is rising not falling. Dubai accumulated $80 billion of debt by expanding in banking, real estate and transportation before credit markets seized up last year

Bond Program- Dubai, the second biggest of seven sheikhdoms that make up the United Arab Emirates and home to the world’s tallest tower and the biggest man-made islands, suffered the world’s steepest property slump in the global credit crisis as home prices fell 50 percent from their 2008 peak. The central bank, headquartered in Abu Dhabi, bought all of the 4 percent, five -securities that Dubai sold on Feb. 23. Dubai’s ruler said, Nov. 9 the emirate’s bond program to raise a further $10 billion. Abu Dhabi, the U.A.E.’s capital, is owner of the world’s biggest sovereign wealth fund and holds almost all of its oil.

Repayment Schedule- Sheikh Mohammed last week removed the chairman of Dubai holding LLC and Dubai World, two large statestate-owned business groups, as well as the head of U.A.E.’s biggest developer Emaar Properties PJSC from the board of the Investment Corp. of Dubai the emirate’s main holding company. He also ejected the governor of the Dubai International financial Centre, Omar Bin Sulaiman, who had led efforts to transform Dubai into the Middle East finance hub.

To read the full report: ECONOMETER

>Convergence with IFRS (CLSA)

There are significant differences in the accounting treatments proposed under Indian GAAP and IFRS. If the experience of the UK companies is anything to go by, convergence with IFRS can have a meaningful influence on the reported financial performance of certain sectors/companies. Our analysis suggests that banking, real estate, and infrastructure sectors in India are most sensitive to the changes in the accounting framework. Given that all listed companies will report their FY12 results under the IFRS provisions, we expect investors increasingly start considering its potential impact as we move closer to 2011.

Banks will have to distribute income and expenses related to acquisition of assets and liabilities over the expected term of assets/ liabilities.
Banks will be permitted to recognise MTM gains on assets (classified as AFS and HFT). MTM gains/ losses on AFS will be routed through reserves (presently through P&L) making quarterly earnings less volatile.
Recognition of impairment to assets and related provisioning will be based on management estimate of expected losses (after factoring likely recoveries). Banks will also be permitted to recognise income on impaired assets on accrual basis.
Indian Banks Association (IBA) has asked RBI to push transition to IFRS by a year due to inconsistencies in regulations, IT bottlenecks and lack of trained staff.

Real estate
IFRS can lead to delayed revenue recognition on sale of under-construction apartments as they are likely to qualify as sale of goods, in which case revenue is recognised only on completion of construction.
In a scenario of rising prices, valuing investment property at fair value (under IFRS) will increase profits of real estate developers.

IFRS requires that in the case of service concession arrangements, a part of the overall profits should be recognised in the construction phase; and the infrastructure asset should be treated as a financial/intangible asset (rather than a fixed tangible asset).
Embedded derivatives in various contracts need to be recorded at their fair values.

Other sectors

Power: Under IFRS, some long term PPAs might be treated as leases; decommissioning obligations need to be recorded at their present values; embedded derivatives in long term fuel purchase contracts are to be recognised at their fair values; and components approach needs to be followed for fixed assets.

Extractive: According to IFRS, costs incurred on unsuccessful wells/mines cannot be capitalised; impairment needs to be tested at least annually on the basis of certain specified indicators; and abandonment costs are to be recorded as a liability at their present values.

Technology: Under IFRS, share-based payments need to be recorded on the basis of fair value method (intrinsic method is not permitted); and a higher proportion of product development expenses need to be expensed.

Telecom: Certain Indefeasible Rights to Use (IRUs) might be treated as leases; decommissioning costs need to be recorded at present values; multiple elements contract are to be split for revenue recognition; and components approach is to be followed for fixed assets.

Consumer/ Autos: Under IFRS, all retailer discounts and rebates are required to be subtracted from revenues; a higher proportion of R&D expenses needs to be expensed; certain contract manufacturing contracts might be required to be treated as leases; and component approach needs to be used for fixed assets.

Pharmaceuticals: Assets and liabilities of an acquired entity can be consolidated only at their fair values; and components approach needs to be followed for accounting for fixed assets.

To read the full report: MARKET STRATEGY


Reliance Industries (RIL) is well on its way to be a fully integrated energy major with a growing upstream portfolio complementing the refining and petchem businesses. KGD6 start-up is set to transform RIL’s business profile with 12% share in revenues and 49% in EBITDA in FY11E from E&P. Commissioning of the new refinery at Jamnagar and the ongoing economic revival would likely support margins in the refining and petchem space. Notably, the next leg of growth could come through an inorganic initiative; the latest bid for Lyondell provides a hint of RIL’s intended strategy in this direction. Though an adverse Supreme Court verdict on pricing could depress KGD6 value, we remain optimistic on RIL’s long-term prospects. Reinitiating coverage with Outperformer and a price target of Rs1,207.

New frontiers await…

Integration adds tremendous value: A 1.24m bpd refining hub at a single location and 2bn boe deepwater gas play combine to make RIL one of world’s largest global integrated energy players. E&P should provide a hedge to revenue cyclicality of refining and petchem, while usage of KG gas for captive use is likely to help margins in the refining and petchem business as well. We expect 36% CAGR in RIL’s PAT over FY09-11.

Market undervaluing E&P upside: Besides the producing assets, we see ~23bn boe (4bn risked) of resources in RIL’s exploration assets, a part of which should be proved up (booked as reserves) over the next 3-5 years. We see significant upside from these assets going forward, and attribute Rs243 per share of value to the same in our SOTP valuation, over and above the value from the producing assets.

Valuation upside from E&P and margins: We have valued RIL using the SOTP method with refining & petchem delivering Rs532 per share and E&P Rs631 per share to our valuation. The current stock price, we believe, does not fully capture the strength of RIL’s E&P portfolio, while pricing in too much pessimism around the refining and petchem business. Our target price of Rs1,207 per share implies a 13% upside from here.

To read the full report: RIL


New norms that require all banks to reach 70% specific provision cover by Sep10 could catalyze merger activity within Indian public sector banks. In particular, SBI stands to gain if the amalgamation of its associate banks were to revive and accelerate. At end of Mar09 the provision cover of the standalone bank was 38.5%, 10.8% below that in the consolidated bank. The new norms would erode net profit for FY10f and FY11f by up to 18%. The erosion for the consolidated bank would be capped at 13%. Two associate banks have been merged with the parent and this experience could help to quicken the process for the other five. While these mergers may not have material impact on the numbers used in valuing the stock they could potentially re‐rate the P/E. We value the stock using a combination of P/E, P/B and DCF method. We maintain ‘Hold’ rating on the stock with Dec10 target price of INR2,123.

Provisioning norm may erode standalone pre‐provision profit by 18% The additional specific provisions required to raise the cover to 70% are estimated at INR72.5bn. If equally distributed over FY10 and FY11 they would erode our current forecasts for pre‐provision profit by 18% and 15%, respectively. Due to higher loan loss provisions, we had downgrade EPS forecast for FY10f and FY11f by 12% and 22%, respectively in our report dated 18th Nov09 “Rising concern on NPL provisions’’.

Accelerated NPL provisioning could catalyze mergers

Higher provision cover in consolidated book would cut burden by c5%: At the end of Mar09, the provision cover of standalone SBI, including writeoffs, was c57%. That for the consolidated bank, assuming the amount of writeoffs stays unchanged was 61%. So, the additional provisions required to reach the mandated 70% level would be INR69bn. Consequently, the potential erosion in pre‐provision profit would be capped at 13% and 10% for FY10f and FY11f, respectively. The erosion would be even lower if we consider the additional write‐offs made by the associate banks.

Merger with associate banks would cut the provisioning burden: Over the past two years two of the smaller associate banks were merged into SBI. The natural corollary of extending the mergers to the other five associates is taking a pause due to opposition from the bank unions. Now, the mandated surge in NPL provisioning adds to the argument for rapid progress of mergers with these banks. We value SBI using the consolidated numbers. So, the actual merger is likely to have little material impact on the valuation of the stock. However, these mergers have potential to re‐rate the P/E in the near term.

We value the stock using a combination of P/E, P/B and DCF method. We maintain ‘Hold’ rating on the stock with Dec10 target price of INR2,123.

To read the full report: SBI


Open offer battle draws to a close with ABG exiting its stake...

Bharati revises bid to Rs 590 per share: The open offer battle came to an abrupt end with ABG Shipyard (ABG) exiting its stake in Great Offshore Ltd (GOL) by offloading its 8.27% stake in GOL at an average price of Rs 576 per share. Meanwhile, Bharati Shipyard (BSL) has revised its open offer price to Rs 590 per share for acquiring an additional 20% stake in GOL. Both open offers i.e. of ABG as well as BSL will run simultaneously from December 3 to December 22 and shareholders can tender their shares to either of them. ABG’s open offer price of Rs 520 per share is irrelevant now for obvious reasons but BSL’s offer price at Rs 590 is 15% more than the current market price. However, with an acceptance ratio of 25.8%, only one-fourth of the shares tendered would be accepted in the open offer. Hence it would be prudent for investors to sell their shares in the open market as our target price of Rs 429 is much lower than the current market price of GOL and the market price could correct further post the conclusion of the open offer.

To read the full report: GREAT OFFSHORE


SYNOPSIS: • Liberty Shoes is the flagship company of the Liberty Group, a leading footwear company in India and one of the largest manufacturers of leather footwear in the world with a turnover exceeding U.S. $100 million.

• The company is now focusing on the domestic market in a big way. “Liberty Shoes is bullish about retail. It is now ramping up retail and distribution channel in India.”

• Liberty launches Autumn-Winter 2009 Collection.

• Credit rating agency, ICRA has revised the rating assigned to the Rs.300 million Commercial
Paper/Short Term Debt (STD) programme of Liberty Shoes (LSL) from A1 to A2+. The revised rating indicates above-average-credit quality in the short term1.

• Foot Mart Retail, the joint venture between Pantaloon Retail and Liberty Shoes, seems to be on
shaky grounds due to a couple of operational issues. The JV did not take off as planned, and Future Group may pump in more funds and up its stake in the venture. While Liberty Shoes will continue to be a stakeholder in the business, the operational control could move to Future Group.

To read the full report: LIBERTY SHOES