Monday, December 14, 2009

>MARUTI SUZUKI: Volkswagen US $2.5bn Suzuki stake - Mutually beneficial (ANGEL BROKING)

Germany's Volkswagen (VW) has announced the purchase of a 19.9% stake in Suzuki Motors for US $2.5bn, giving it access to the Japanese firm's expertise in small cars and to its dominance in emerging markets like India, and inching VW closer towards its objective of becoming the world's top automaker. The closing of the transaction is subject to the approval of the relevant authorities and is expected in January 2010. Suzuki intends to invest up to one-half of the amount received from Volkswagen into shares of Volkswagen. Both companies will form a long-term strategic partnership from this deal, which will support their strategies in these challenging times.

In terms of a global presence and product diversity, the partnership marks an important step towards the future for both Volkswagen and Suzuki. The companies plan a joint approach to the growing worldwide demand for more environmentally-friendly vehicles.The combined sales volume of VW and Suzuki would surpass the volume of Toyota (the world's number one company in terms of vehicle sales).

What are the implications for Maruti Suzuki?
There is not going to be any immediate structural change in Maruti Suzuki's business model. However, in the long run, it can have access to better technological knowhow and can strengthen its position further in the global markets, where cost-effective and fuel-efficient cars are gaining acceptance. As indicated by its management, in the near-term, Maruti Suzuki may look at a deal like the one it has with Nissan. However, it is premature to comment on the possible future developments of the deal and its impact on Maruti Suzuki. On the face of it, the deal will benefit Maruti in the long run.

However, in the near-term, on account of the favourable relative trade-off, the stock could continue to gather momentum on any positive surprises on the Volume or Operating performance fronts. We maintain an Accumulate rating on the stock, with a Target Price of Rs1,882.

To read the full report: MARUTI SUZUKI


We returned positive from IDFC’s management meet, which reinforced our confidence about the company optimising on the infrastructure sector upcycle. Though IDFC’s lending RoEs are likely to remain low, we believe the company’s diversified fee-income stream would prop the reported RoE to ~15%. We expect asset quality to hold up, and maintain our earning estimates with target price at Rs149/share, which implies 9.7% downside from current levels. The stock trades at FY11E P/E and P/BV of 18.7x and 2.7x respectively, which is expensive in our view. We expect the business to witness a slow pick-up and spreads to normalise at ~2.3%. Maintain HOLD.


Business pick-up sluggish; spreads to normalise at ~2.3%. As the approvals pipeline builds up and disbursements follow with a lag, we expect IDFC’s loan growth to pick up H2FY10 onward. We estimate 20.5% loan CAGR through FY09- 11E, with energy, transport and telecom as the key growth segments. However, erosion of pricing power, probable decline in systemic liquidity and subsequent hardening in interest rates will lead to spreads normalising to 2.2-2.3% (much below the rolling 12-month spreads of 2.6% in Q2FY10).

Other income to remain buoyant in a resurging market. Other income streams are expected to remain buoyant, with revenues from asset management and fees from IDFC SSKI being key drivers. Credit-linked fees are also expected to remain buoyant, more so due to loan growth picking up. We expect non-interest income-tototal income to sustain at ~50% through FY09-11E, aided by resurging capital markets.

Commendable asset quality. IDFC’s asset quality is commendable, with NNPAs at 0.2% in Q2FY10 and the company abstaining from risky asset-backed lending such as loan-against-shares. We do not foresee material risk to asset quality and assign FY10E & FY11E loan-loss provisions of 27bps each on the outstanding book.

Valuations expensive; maintain HOLD. We believe the low RoEs on the lending book will result in reported RoE at ~15%, as per earlier estimate. We maintain our expectation of 20.5% loan CAGR through FY09-11E, sustainable spreads at ~2.3% and nil material risk to asset quality. We maintain earnings CAGR at 22.9% through FY09-11E and our sum-of-the-parts (SOTP) target price at Rs149/share, implying 9.7% downside from current levels. Maintain HOLD with target price of Rs149/share. Spreads holding firm for longer and sharp rise in leverage, leading to higher-thanexpected RoE remain key upside risks.

To read the full report: IDFC

>Indian Oil & Gas, Chemicals (J P MORGAN)

Special Focus - Dollar decline: The dollar index has pulled back 3% this quarter, and with the Fed unlikely to intervene significantly, J.P. Morgan analysts now expect a 2Q10 bottom for the dollar. This decline has masked a softening in crude, which has remained flat in Euro terms. With crude fundamentals under pressure, we expect softer crude prices will benefit downstream India R&M cos and negatively impact Cairn.

News feed: GSPC sells a 5% stake to institutions, BPCL’s Wahoo block shows potentially large reserves, IOCL cuts jet fuel rates, PLNG expects Qatar gas in Jan '10, and may buy a stake in OPaL, Jubilant Energy finds gas in Assam Arrakan basin and more.

Feedstock- Vol XVII- Dollar decline masks crude weakness

Feedstock Trends: Oil prices inched up with increased volatility in the Middle East, following the Dubai crisis. Inventories continued to build, with a much higher than expected number across crude, gasoline and distillates. Refining margins across Europe remain muted.

Stock Feed: The BSE Oil & Gas Index was up 3% in the last fortnight, outperforming the broader market. BPCL was the stand-out performer, rising 16.5% on the back of news of confirmation of reserves in the Wahoo block in Brazil.

To read the full report: INDIAN OIL


The decline in aggregate container volumes moderated to 1.8% YoY in October ’09, as compared to drops of 8.1% and 4.3% posted in Q1FY10 and Q2FY10 respectively. With the exception of JNPT and Kolkata, all major ports posted a healthy performance, in line with the improving economic climate. Commodity-wise, fertilisers and coal remained sluggish with a decline in traffic of 29% and 3.1% respectively, while iron ore and other cargo rebounded with growth rates of 66% and 38% YoY respectively.

Slowdown in container traffic moderates: Aggregate container volumes (in teu) dipped 1.8% YoY during the month of October, a significant improvement over the drops of 8.1% and 4.3% YoY registered in Q1 and Q2FY10 respectively. Over April – October ’09, container volumes dropped 5.7% YoY across major ports. In tonnage terms, volumes grew marginally by 1.4% YoY in October, as against the slippages of ~5% and 2.7% seen in the first two quarters respectively.

Modest decline in volumes

JNPT records steep slippage: All the major ports, barring JNPT and Kolkata, clocked healthy growth in container volumes over April – October. For the month of October, JNPT recorded a steep drop of 11.2% YoY as against 8% in Q1FY10 and 4.8% in Q2FY10. Chennai, the second largest container port, resumed its positive trajectory with 2.1% YoY growth in October, from dips of
11.5% and 1.7% in the first and second quarters respectively.

Aggregate cargo volumes improve: Despite lower container traffic for the month, an increase in iron ore and other cargo (up 66% and 38% YoY respectively) led to an 11.1% growth in aggregate cargo for the month of October – a marked improvement over the 1.9% and 2.9% YoY growth rates posted in Q1 and Q2 respectively. The fertiliser segment remained subdued and dropped 29% YoY during the month. With a relative improvement in macro conditions, aggregate cargo volumes increased 3.6% YoY during April – October ’09. Iron ore and other cargo recorded growth rates of 11.6% and ~15% YoY respectively over this period, while fertiliser cargo dropped 18% YoY. In tonnage terms, container volumes remained flattish.

Medium-term positive for container logistics players: The gradual improvement in container traffic is positive for CFS (container freight station) and rail haulage players in the medium term. But any subsequent slowdown in the global economy may dampen the recovery. We maintain our positive bias on logistics players and continue with our Hold rating on Concor and Buy rating on Gateway Distriparks (GDL).

To read the full report: LOGISTICS SECTOR


ABG locks in an extraordinary profit of ~ Rs 53 crore...
ABG Shipyard (ABG) exited its stake in Great Offshore Ltd (GOL) by offloading its 8.27% stake in GOL at an average price of Rs 576 per share. ABG had picked up its stake in GOL at various intervals and the average cost of acquisition was Rs 403 per share. By liquidating its stake in GOL, ABG made an extraordinary profit of Rs 53.2 crore, which would result in an increase in its EPS from Rs 34.5 to Rs 41.3 for FY10.

Short-term gain but an opportunity lost…

...but loses golden opportunity to acquire GOL
Although ABG has made a significant profit from this transaction, it has also lost the opportunity to acquire GOL. The acquisition of GOL would have propelled ABG into a higher growth trajectory with a significant ramp up in revenues and de-risking of its business model.

Exiting the race would allow its nearest competitor Bharati Shipyard Ltd (BSL) to race ahead and gain significant size. Keeping in context the present valuation of ABG, we recommend an ADD rating on the stock with a revised price target of Rs 227.

To read the full report: ABG SHIPYARD