Saturday, January 30, 2010


Unitech, one of the largest pan-India residential developers, continues with its aggressive growth plans raising execution concerns, in our view. While it has largely addressed the leverage issues, we expect margin pressure on lower monetising opportunities in near term. We initiate with a Rs72 target price. Sell.

Execution remains a challenge

Pan-India residential real-estate developer focused on affordable housing
Unitech is one of the largest pan-India residential developers. When the market was buoyant, the company shifted its focus to the higher-margin, non-residential segment and monetised some of its IT parks/SEZs. However, the change in demand caused by the economic downturn prompted Unitech to return its focus to its forte of developing residential projects.

Aggressive growth strategy raises execution and marketing concerns, in our view
In FY10, Unitech plans to launch 30m sq ft (launched 24m sq ft in 9MFY10), despite already having 17m sq ft of past projects under construction. We believe its potential pipeline of about 47m sq ft is aggressive, given its average annual execution run-rate of 7m-9m sq f even in buoyant markets. While Unitech is now focusing on executing its past projects, we are concerned that its recent aggressive launches might result in execution delays for upcoming projects. Furthermore, while Unitech's project launches in metros have been successful, the poor response in non-metro areas raises concerns about marketing, as about 44% of the company's land bank is in tier-II cities.

Expect margin pressure due to lack of significant near-term monetisable opportunities
While Unitech has successfully reduced its net gearing from about 160% in March 2009 to 59% now, its net debt is still high (US$1.3bn) as only about 58% of its US$900m QIP was used to repay debt. This could lead to continual high interest outgo (about 47% of our FY11 EBITDA estimate). We expect margin pressure due to Unitech's changing product mix and lack of near-term higher margin monetisable assets (unlike about 40% of revenue in FY07-09). With demand for IT Parks/ SEZs yet to show significant revival and such projects owned by Unitech and UCP being in initial stages of development and leasing, we do not expect monetisation in the near term. Also, Mumbai slum-rehabilitation projects should add significant value only in the medium to long term.

We initiate coverage with a target price of Rs72 and a Sell rating
We value Unitech on a SOTP-based target price of Rs72, comprising: 1) Rs62 end-FY11F DCFbased NAV for real estate (at a 15% discount to GAV); and 2) Rs10 for Unitech's stake in telecom unit, Uninor (at a 20% discount to Teleno's acquisition price). With our target implying 19% potential downside from the current price, we initiate coverage of Unitech with a Sell rating.


Biocon’s results surpassed our estimates by a comfortable margin, as the contribution from Axicorp increased by a robust 67% YoY. The biopharma business also followed with a strong 33% growth, surprising us positively as it touched new highs in the last 15 quarters. The base business too logged a healthy growth of 29% during the quarter. The company also registered its highest ever licensing income during any quarter at Rs 175mn in Q3FY10. The performance of the research services business, however, was marginally below our estimates as it managed to post a modest 13% growth. We maintain our positive stance on Biocon. Buy.

Axicorp, biopharma forge ahead

Net sales up 46% YoY: Biocon’s net sales jumped 46% YoY during Q3FY10 as contribution from Axicorp skyrocketed 67%. The company also saw increased traction in its licensing income that touched its highest ever quarterly mark of Rs 175mn (vs. Rs 28mn in Q3FY09). Even after excluding the growth in Axicorp and licensing income, the underlying base business posted a healthy 29% growth – this was driven by a 33% and a 13% growth in the biopharma and research services businesses respectively.

Base business margins contract: The EBITDA margin for Biocon’s base business (excluding Axicorp and licensing income) contracted 188bps YoY to 32.6% for 9MFY10 (vis-à-vis 28% for FY09) on higher raw material costs. Axicorp’s margin, however, improved sharply to 7.2% vs. 2.7%. Biocon’s overall margins for the quarter dropped to 21.5% from 23.1% in Q3FY09.

Adj. PAT grows 26% YoY: The company’s adj. PAT surged 26% driven by strong growth in the EBITDA and lower interest costs during the quarter. Licensing income soars: Biocon generated a licensing income of Rs 175mn during Q3FY10 – its highest ever during any quarter. Earlier, the company’s licensing income stood at Rs 450mn in FY08 but plunged more than three times to Rs 122mn in FY09. The jump in the licensing income in the current quarter signals a revival in the company’s research partnerships.

Maintain Buy: We have marginally revised our revenue estimates for the next two years to factor in the stellar performance of Axicorp and the biopharma business. We, however, have pruned our earnings estimates for FY11 on expectations of lower other income. We maintain our positive stance on Biocon due to the company’s improving performance across business verticals and the continued strength in its balance sheet. Currently, the stock trades at a PER of 17.6x FY11E and 16x FY12E, and an EV/EBITDA of 12.3x FY11E and 11.2x FY12E. Buy.

To read the full report: BIOCON

>DOCOMO can get controlling stake in JV if TTSL fails to meet targets

Shareholders’ Pact Requires TTSL To Meet Profit Margin & GSM Tower Targets By ’15

Rohini Singh NEW DELHI
January 29 2010

JAPANESE telecom major NTT DOCOMO could acquire a controlling stake in Tata Teleservices (TTSL) in which it has a 26% stake, if the latter is unable to meet some performance benchmarks, according to the shareholding agreement between the two, details of which are available with ET. These benchmarks may account for the aggression with which TTSL, which operates GSM services under the brandname Tata DOCOMO, has been increasing its subscriber base and market share, said an industry source. GSM is the dominant technology standard underpinning mobile telephony in India. The shareholders’ agreement gives DOCOMO the right to increase its stake in TTSL to 35% by March 2012 by infusing fresh equity at what document describes at fair market value, though without any premium to the valuation at that point in time.

By March 2015, DOCOMO can further raise its stake in TTSL to 51% and take control of the company by subscribing new shares at fair market value plus a 30% control premium. But these options get triggered only if TTSL is not able to meet the aggressive performance criteria set out in the agreement. These targets include reaching a minimum operating profit (EBIDTA) margin of 15% and rolling out 20,000 GSM towers by March 2012. By March 2015, TTSL has to increase the number of GSM towers to 26,000 and further hike its EBIDTA margin to 25%.

Currently, DOCOMO has a 26% stake in TTSL, which it bought in 2008 for $2.7 billion that valued the loss-making TTSL at over $10 billion. A Tata spokesperson responded to ET’s query by saying, “We do not comment on speculative queries or those related to our partners and shareholders.” DOCOMO also has the option of selling back its entire stake in the company to the Tatas at 50% of the value it paid to pick up the initial 26%. But this option cannot be exercised, if DOCOMO exercises the option of hiking its stake to 35% in 2012. TTSL’s operating profit margin for FY08-09 was 3.4%. A person close to the company told ET that the low margin is because the company is currently in the process of building its network throughout India. The operating profit next year would also be low, this person said. The changes that Tata DOCOMO have introduced in the market, include per-second billing that saw tariffs falling sharply, as other companies responded. The price-war has seen margins shrinking with even market leader Airtel reporting EBIDTA margins of 30%, last quarter down more than a percent. According to information available with ET, TTSL posted a loss of Rs 2,505 crore in FY09, excluding one-time gains. The loss widened from Rs 1,814 crore in the previous year even as the company recorded a robust growth in subscriber base in FY09.

TTSL is the majority shareholder in Tata Teleservices (Maharashtra), which offers landline services in Maharashtra and Goa. Besides GSM services offered under the Tata DOCOMO brand, it also operated a CDMA-based mobile phone service under a brand called Tata Indicom and is one of the two leading CDMA operators in India, apart from the Anil Ambani-controlled Reliance Communication. CDMA is a rival to GSM.

By March 2015, DOCOMO can further raise stake to 51% and take control of the company by subscribing to new shares But these options get triggered only if TTSL is not able to meet the aggressive performance criteria The targets include reaching a minimum operating profit margin of 15% and rolling out 20,000 GSM towers by March 2012 By March 2015, TTSL has to increase the number of GSM towers to 26,000 and further hike EBIDTA margin to 25%


First full quarter of crude oil production from Rajasthan field translates into 135% yoy growth in revenues.

Realization for crude oil was higher by 42% yoy, while that of natural gas was up 12.5% yoy.

OPM jumps 25ppts yoy on account of higher inventory available of crude oil for sales

Higher exploration write-offs, increase in interest costs and lower other income restrict net profit growth

Rajasthan sales volume ramp up slower than our earlier estimates, lowering estimates and factoring DCF value.

To read the full report: CAIRN INDIA

Friday, January 29, 2010

>RBI Raises CRR by 75 bps – Impact on Indian Banks (MORGAN STANLEY)

Quick Comment: The Reserve Bank of India has raised the cash reserve ratio (CRR) by 75 bps. The policy interest rates – reverse repo and repo rates – have been left unchanged at 3.25% and 4.75%, respectively.

In our view, the direct impact of this move is that NIMs for banks will be impacted by about 5 bps, implying a F2011 earnings impact of 3-4% for banks in our coverage (assuming all else is equal). In our estimates, we had factored in a 100 bps rise in CRR through the coming year.

Move would absorb a part of the excess liquidity in the banking system: We estimate the CRR hike will absorb about Rs360 bn (US$7.7 bn) – implying that about 20-25% of the excess liquidity with the banks will be absorbed. This excess liquidity was so far being parked by banks at the shorter end of the yield curve.

Yield curve should start flattening: The RBI move is likely to cause short rates in India to start moving up, in our view. This could act as a cushion for banks as although they will lose interest on the liquidity taken up by the CRR hike (wherein they have earnt no interest) -- the interest that they will earn on the balance excess liquidity will go up.

RBI moving to tightening mode could reverse credit disintermediation: Further, a rise in short rates could reverse some of the credit demand that has been disintermediated by the commercial paper market.

Remain positive on Indian banks: As we highlighted in our recent note – “Rising Rates & Banks Stock Performance”, dated January 25, 2010 – history suggests that banking stocks could underperform in the period following the first tightening move. However, we would be buyers on dips given that: a) fundamentally, the negative impact of rate hikes should be materially lower this time around; and b) we believe a gradual rise in rates will be good for earnings progression, as it would support margin expansion for Indian banks.

To read the full report: INDIAN FINANCIAL SERVICES


RIL reported a 16% YoY rise in 3Q FY3/10 PAT to Rs40bn, marginally beating both our and market expectations. A 24% YoY surge in petrochemical EBIT and a doubling in upstream profits offset a 27% drop in refining profits and a 5% rise in tax due to an increased minimum alternative tax (MAT).

More important, in our view, RIL looks poised to strongly accelerate growth from this quarter (4Q FY10). Key drivers include a 30–40% QoQ rise in gas volumes, a sharp rebound in GRMs and switching to sharply cheaper in-house gas.

Inflection point has been reached

Our analysis suggests a 54–90% QoQ rise in 4Q FY10 profits. (1) RIL looks poised to increase gas volumes by 30–40% QoQ. (2) Our regional refining team is becoming more positive, as GRMs have doubled over the last quarter to US$3.9/bbl from near ten-year lows with evidence of a further recovery. Reliance’s recently doubled capacity looks well-timed to capitalise on our forecast rise in refining margins from US$3.5 in 2009 to mid-cycle levels of US$6/bbl in 2010. Moreover, we believe a potential widening in the light-heavy crude price differential would be a further significant benefit given that it is one of the most complex refineries in the world. (3) RIL has switched over from LNG for in-house use to KGD6 gas, saving it between US$3– 5/mmbtu. Our scenario analysis shows that PAT may rise by Rs22–36bn QoQ during 4Q FY10 due to the above (see Fig 1).

RIL’s 3Q FY10 refining EBIT fell 27% YoY. GRMs were US$5.9/bbl during 3Q FY10 vs US$10/bbl in 3Q FY09. The spread over Singapore complex fell to US$4/bbl from US$6.4/bbl in 3Q FY09 as light-heavy differentials narrowed.

Oil & Gas EBIT +145% YoY, contributing toward 30% of EBIT from 15% in 3Q FY09. KG-D6 production kicked in, averaging 45mmscmd for gas and 9,150bpd for oil. RIL realised US$4.2/mmBTU for gas. RIL is currently producing at 60mmscmd. Production ramp-up to plateau of 80–89mmsmd is likely to be partly delayed to end-CY10, once GAIL’s expanded HBJ pipeline is fully commissioned. During the quarter RIL made one oil discovery in the CB-10 block and one gas discovery in KG-D3. RIL is on target to drill 8–10 more exploratory wells during 4Q FY10 in addition to the 13 drilled in 9M FY10.

Petrochem EBIT increased 24% YoY, driven by a 20% rise in volumes from the PP start-up in 1Q. Domestic demand for polymer surged 24% and polyester 17%. The company expects the new PP plant to achieve 10–15% higher production.

Earnings and target price revision
No change.

Price catalyst
12-month price target: Rs1,250.00 based on a Sum of Parts methodology.
Catalyst: New oil and gas finds and revival in GRMs.

Action and recommendation
RIL is one of our top regional picks, as we believe it is best levered to rebounding GRMs.

To read the full report: RIL

>Vascon Engineers Limited: IPO Grading (CRISIL)

CRISIL IPO Grade ‘3/5’: CRISIL Research has reaffirmed CRISIL IPO Grade ‘3/5’ for the proposed initial public offering of Vascon Engineers Ltd. (VEL) (CRISIL Research has undertaken a fresh grading exercise for VEL as the grading assigned to the company on Dec 31, 2007 had expired.) The grade indicates that the fundamentals of the issue are average relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals.

Company Background
VEL is a Pune-based player, engaged in real estate construction and development. The company was incorporated in January 1986, and commenced operations with the construction of Cipla’s Patalganga factory in November 1986. Up to 1998, the company was a real estate contractor - executing contracts for third parties.

VEL’s real estate business comprises construction of residential and office complexes along with IT parks, industrial units, shopping malls, multiplexes, educational institutions and hotels. As of August 31, 2009, the company completed construction contracts worth Rs 8.8 billion, out of which Rs 6.4 billion was for third parties. In terms of saleable area, VEL has constructed over 4.58 million square feet during the last 5 years. In 2008-09, the construction business and development business contributed to around 93 per cent and 6 per cent respectively to the company’s total revenues.

Grading Highlights

Business Prospects
• Strong EPC order book provides comfort on revenues and margin front.
• Third EPC Order book concentration (around 33 per cent of the total order book) towards industrial, hospital, educational and airport clients gives better revenue visibility.
• Being in the construction business for over two decades, the company has built strong technical and design expertise. A large part of the company’s reputation in the Pune market is on account of its track record in providing timely delivery to clients.
• The joint development model reduces the working capital requirement as the contribution towards land cost is only in the form of deposits with the land owners. The risk of a fall in property prices is shared with the land owner. In this business model VEL acts as a real estate contactor as well as developer thereby earning a larger share of the revenues.
• The company’s real estate development business is primarily concentrated in Maharashtra, especially in-andaround Pune, exposing it to a high level of geographic and price risk. Also, Pune city, in terms of demand for residential and commercial space, is to a large extent dependent on the fortunes of the IT/ITES industry.

Financial Performance
• Healthy revenue growth at a CAGR of 54 per cent driven by high growth in EPC business over the past 3 years.
• EPC business in which the company undertakes civil construction of buildings etc formed close to 93 per cent of the company’s sales in 2008-09. The EBITDA margin in EPC business improved from 13.5 per cent in 2005-06 to 15 per cent in 2008-09. Real estate development business accounted for ~ 6 per cent of sales in 2008-09. Real Estate development business has also witnessed EBITDA margin expansion from 31.0 per cent in 2007-08 to 76.0 per cent in 2008-09.
• In spite of the Indian real estate sector going through a downturn, the company’s EPC business witnessed a healthy CAGR of 20.0 per cent from Rs 3,624 Mn in 2006-07 to Rs 5,114 Mn in 2008-09.
• The company postponed around 90 per cent of its projects on the development front. This though impacted revenues and lead to postponement of cash flows, it helped the company to maintain low gearing and also weather the demand uncertainty.

Management Capabilities
• Mr.Vasudevan provides the company leadership and direction. He is a qualified engineer - BE (civil) - from the University of Pune and has worked with organization such as Maharashtra Industrial Development Corporation, Hindustan Construction Company Ltd, Atul Constructions Company Ltd and Beck Engineer Company Pvt Ltd.
• The company has a strong and capable second line of management who has been with the company since its inception.

Corporate Governance
• VEL’s corporate governance meets the required corporate governance standards.

To read the full report: VASCON ENGINEERS


The metal czar…
Sterlite Industries (SIIL) is India’s largest non-ferrous metals and mining company with its primary business spread across copper, aluminium, zinc & lead and power. With its world class mining and smelting assets ensuring low cost of operations across all base metals (especially zinc), strong organic growth pipeline through massive expansion and robust balance sheet with cash/share of ~Rs 300 (December 2009), SIIL is set to reap the benefits of the current commodity up cycle. We expect SIIL to register an FY09-12E CAGR of 23.2% and 32% in net sales and net profit, respectively, and initiate coverage on the stock with a BUY rating.

Unprecedented organic growth story unfolding
SIIL combines an impressive mix of world class assets across base metals, diversification benefits through merchant power foray, excellent project execution and value addition skills and visibility of volume growth in the years ahead. An unprecedented organic growth story is unfolding at SIIL with capacity expansion ranging from 40- 175% across base metal products slated to be on stream by FY12E.

Zinc operations – The real cash cow
SIIL’s zinc operations have emerged as the real cash cow with lowest decile cost structure on a global level and integrated model amid extremely robust zinc and lead prices. We expect zinc operations to contribute ~45% to SIIL’s consolidated FY12E bottomline.

Aluminium operations – Diversified yet powerful growth
Diversification through selling of captive power and smelter expansions in Balco and VAL backed by low cost integrated structure would result in power packed growth in aluminium operations.

Valuations – Positive surprises and upside remain
At the current market price of Rs 768, the stock is trading at 7.9x FY12E EPS of Rs 96.8. With positive surprises (minority buyouts & captive bauxite feed kick-off) expected in due course, we expect an upward re-rating of the stock, going forward. We value the stock using sum of the parts methodology. We are assigning a target price of Rs 918 to the stock and initiating coverage on SIIL with a BUY rating.

To read the full report: STERLITE INDUSTRIES

>India’s Plans to Sell Shares in State-owned Companies

Jan. 28 (Bloomberg) — Following is a table (in report) showing Indian state-run companies in which the government may sell stakes through initial public offerings or secondary share sales.

The government wants profitable listed public-sector companies, where its stake is more than 90 percent, to have at least 10 percent of their shares held by the public. Prime Minister Manmohan Singh’s administration also plans to sell shares in some profitable unlisted companies.

To see the table: DIVESTMENT


  • Robust growth in stand-alone revenues drives better-than-expected consolidated performance.
  • OPM contracts by 110bps driven by adverse revenue mix change and increased losses of subsidiaries; PAT grows by 3% qoq.
  • Maintain BUY on Everonn with target price Rs 558.

To read the full report: EVERONN SYSTEMS

Thursday, January 28, 2010

>IRON ORE: Strong Spot Market Conditions Persist (CITI)

What’s New — Spot prices in China for imported iron ore have weakened a little in recent days to around $130/t (from $135/t), but are still up 25% in the past month and 60% in the past 4 months. Pre-buying of iron ore and steel has been a factor, but spot prices are expected to remain robust as suppliers prioritize contracted customers. Seaborne demand in 2010 is likely to exceed the previous peak in 2008. Investor sentiment is overwhelmingly bullish, with most believing that ratetightening in 2010 will not slow steel production.

Spot Prices — Spot iron ore prices are at $135/t (63.5% Fe, dry), up from $85/t in mid-September. Contract parity would require +90-100% price increases (Figure 2). Spot prices are not a direct indicator of where contract prices will settle, but it gives a clear indication of how tight the market is. Contract typically settles below spot in bull markets and at/above spot in bear markets. Investor consensus on the contract price is around +30-40% for 2010, and +10-20% for 2011.

Demand — Chinese steel production was flat m/m in December at 47mt. Total China steel production was 566mt in 2009 (+13% y/y) and annualized 600mt in 2H09. CIRA's China steel analyst is looking for production as high as 650mt in 2010. This is very bullish requiring another 80mt of 63%-Fe supply vs 2H09 – and this capacity does not exist. China at 650mt would lift global crude steel output back to 1.3bt, similar levels to 2008.

Supply — Brazil iron ore exports rose to 24mt in December, +7% vs November. 4Q09 exports were below 3Q09, as lower sales to China offset higher sales to Europe and Japan/Korea (Figure 6). Australian producers reported record production for 4Q09 but leaving little room for incremental supply in 2010. BHPB sold nearly 50% of sales at spot prices vs contract. Chinese domestic ore production has recovered rapidly reaching the peak of the year in November.

Market Share — Brazil is maintaining 20-25% market share of Chinese iron ore imports in recent months. Australia has 40-45% share. Vale is looking to maintain current tonnage into China in 2010, with incremental sales coming from other regions. Australia has limited new capacity, and low-grade domestic China iron ore will have to fill the supply gap if bullish demand forecasts are realized.

Recent Sector Developments — Baosteel names a new price negotiator. Producers are negotiating with Japan, sidelining China, according to a Financial Times report. BHPB discusses new Africa JV with Mittal. Vale's ferrous director estimates seaborne market >900mt in 2010.

To read the full report: IRON ORE


The Indian paint industry is out of blues faced in FY09 and is back on track delivering double digit growth in sales with improved profitability. H1FY10 has seen major paint companies witnessing revival in demand for both decorative and industrial paints, thanks to pick up in economic activity boosting demand for construction and infrastructure development. While price corrections in realty, easing of credit availability, abating concerns on sustain ability of income have revived consumer sentiment and inturn demand for housing and consumer durables; enhanced government spending on infrastructure development and resurgence in investment by private sector have led to increased industrial activity boosting demand for industrial paints. With user industries gaining vigour, paint industry has also seen revival in demand.

Decorative paints are witnessing strong demand traction from both housing and commercial construction. Factors like low per capita consumption of decorative paints, existence of large unorganized market, improving financial status, growing nuclear family culture, increasing urbanization are driving demand for residential housing; where as strong growth in IT&ITES and Organized Retail sectors and the general economic development are drivingdemandfor commercial construction.

Demand for industrial paints is increasing because of increasing demand for automobiles (automotive paints), consumer durables (powder coatings), enhanced road development activity (road markings) and general infrastructure development (high performance coatings for power and other plants).

We are initiating coverage on Indian paint sector recommending two companies Kansai Nerolac Paints Limited (KNPL) and Berger Paints India Limited (BPIL) which are a pure play on India growth story with low country risk (minimal exposure to international markets) and currency risk (only to the extent of imported raw materials). These companies with pan-India presence, strong brands and products covering all price points are set to benefit from uptrading from lime-wash kind of low end products to paints as well as from growing number of high income class consumers driving demand for premium emulsions.

While revenue growth in H1FY10 was subdued despite strong volume off take due to price corrections; profitability has improved from Q1FY10 onwards due to year-on-year (YoY) lower raw and packing material cost. This revival in volume growth and improved profitability as also positive outlook for future has led to a re-rating of these companies post Q1 results. However, we believe there is room for further upside from current levels. We hence recommend a BUY on KNPL and BPIL with one year target price of Rs.1476 and Rs.70 respectively giving a potential upside of 39% and 20%respectively.

To read the full report: PAINT SECTOR

>Industrials and Power Utilities (JM FINANCIAL)

Industrials will continue with good results. However, the transformer sector – which includes ABB, Areva and smaller transformers companies like Voltamp, Emco and Indo Tech Transformers – is an exception, as demand <>

T&D EPC companies’ results are likely to improve on enhanced order inflows and improving international T&D demand.

Power Utilities - NTPC will post good results because of 4% higher generation while Tata Power will see de-growth in revenues (-4.8%) due to flat generation.

Our top picks for the sector remain BHEL, Crompton, Kalpataru Power and Suzlon.

India has added ~3.7 GW in 3Q FY10 (8.1 GW in 9M FY10).

Base deficit stood at 9.5% for 3Q FY10, while peak deficit remained at 12.7%. Higher gas and nuclear availability offset lower hydro generation.

Lower seasonal demand and higher volumes led to decline in spot rates (average price of Rs5.3/kWh, while the peak was at Rs8/kWh on power exchanges.

To read the full report: INDUSTRIALS & POWER UTILITIES


Performance of Quarter Ended, December 2009
For the quarter ended December 09, SBI – India's largest bank has reported subdued results with Consolidated Net Profit slipping by 8% to Rs 3304.59 crore on the back of 9% increase in the Net Interest Income to Rs 8781.70 crore. Despite 51% increase in the other income to Rs 7283 crore, 49% increase in the Operating expenses to Rs 9572.66 crore and whopping increase in the provision for taxation to Rs 1454.01 crore has resulted in Net going down.

The core fee income of the bank was up by 36% in the quarter under review. The other income of the bank was marginally up by 4% to Rs 3365.71 crore, while the cost to income ratio has expanded by 220 bps to 52.3% restricting Operating Profits up by just 3% to Rs 4618.14 crore.

The operating expenses were mainly driven by opening 1091 new branches and 6842 ATMs over the year. Further 7% increase in the total provisions including taxation has paved Net Profit flat for the quarter ended December 09.

Asset Quality
Net NPA of the bank has increased by 62% on y-o-y basis and 14% on q-o-q basis to Rs
11270.79 crore.
The % of GNPA of the bank stood at 3.11% in Q3FY10 as against 2.99% in Q2FY10 and 2.50% in Q3FY09. The % of NNPA was at 1.88% as against 1.73% in Q2FY10 and 1.39% in Q3FY09. The provision coverage ratio including Assets under correction was 56.19%.

Business Highlights

  • The total business of the bank grew by 15% to Rs 1378139 crore for the quarter ended December 09 as against Rs 1202495 crore in the corresponding previous year.
  • The Aggregate deposits of the bank rose by 11% to Rs 770985 crore in the quarter ended December 09 as against Rs 692922 crore in the corresponding previous quarter.

Performance of Associates and Subsidiaries:
  • Associate Banks' net profit increased by 9.85% from Rs.2015 crore to Rs 2213 crore in nine months ended December 09.
  • SBI Funds Management Average Assets under management (AUM) have increased from Rs 24104 crore as on Dec 2008 to Rs 37900 crore as on Dec 09, a growth of 57% on y-o-y basis.
  • SBI Factors: Net profit has grown by 43% to Rs 38.20 crore in nine months ended December 09 compared to Rs 26.79 crore in corresponding previous year.
  • SBI Card has reported Net loss of Rs 123 crore during nine months ended December 09

To read the full report: SBI


3QFY10 results above estimates: Bharti's 3QFY10 earnings (Rs22.1b; up 2.3% YoY, down 4.8% QoQ) were ahead of our estimates driven by relatively lower margin decline in the mobility segment (down only 160bp QoQ despite sharp tariff cut) and Rs1.5b forex gain. While revenue (Rs97.7b; down 0.7% QoQ) was broadly in-line, EBITDA (Rs39.1b, down 5.6% QoQ) was above expectations. Mobile EBITDA declined 6.5% QoQ to Rs24.2b. Telemedia
(EBITDA up 7.6% QoQ) and passive infrastructure (EBITDA up 6.2% QoQ) posted strong numbers while enterprise business was soft with 9% QoQ EBITDA decline.

Wireless metrics mixed: Mobile APRU declined 8.7% QoQ (MOU down 0.9% QoQ to 446, RPM down 7.9% QoQ to Rs0.52) to Rs230 (in-line). Mobile traffic grew 6.6% QoQ (vs 2% growth in 2QFY10 and 6-8% growth in preceding three quarters) due to elasticity, lower MOU arbitrage post tariff cuts, and likely seasonal strength. RPM declined 7.9% QoQ to Rs0.52 and was 2.3% above estimate.

Upgrading earnings by 5-7%; maintain Buy: While 3QFY10 traffic growth (+6.6% QoQ) was below expectations, growth is likely to sustain driven by full migration of subscribers to new tariff schemes. We upgrade FY11/FY12 revenue estimates by 2-4% to reflect better RPM, EBITDA by 2-4% (4% growth in FY11, 18% growth in FY12 as competitive intensity recedes) on relatively stable margin performance, and earnings by 5-7%. Bharti trades at EV/
EBITDA of 7.4x FY11E and 6.2x FY12E; and P/E of 13.7x FY11E and 12.5x FY12E. While sector revenues and margins are likely to remain under pressure over the next 2-3 quarters due to hypercompetition, Bharti remains best placed given low capex intensity, unlevered balance sheet, and scale advantage. We maintain Buy with a revised DCF based price target of Rs414 (implied EV/EBITDA of 8x FY12E).

To read the full report: BHARTI AIRTEL


Revenue up 35% to INR 8.7 bn; mix tilting towards telecom
Sterlite Technologies’ (SOTL) Q3FY10 revenue recorded a robust growth of 35.1% Y-o-Y to INR 8.7 bn primarily driven by a strong execution in its telecom business,which grew 108.6% Y-o-Y to INR 4.5 bn. The power transmission business, however, posted a marginal dip of 1.9% to INR 4.2 bn. The telecom segment’s contribution to the overall revenue improved to 51.7% against 33.5% in Q3FY09. On the volume front, SOTL recorded a 68% Y-o-Y growth in optical fibres volume to 2.1 mn km, while that for power conductors increased 6.5% Y-o-Y to 33,000 MT.

Strong telecom execution drives PAT

Strong execution boosts performance
During the quarter, reduced raw material (down 219bps to 73% of sales) and employee (down 22bps to 1.8% of sales) costs were negated to an extent by an increase in other expenses (up 138bps to 13.2% of sales), limiting improvement of EBITDA margin by 104bps to 12%. The EBITDA margin improvement led to a robust 47.8% EBITDA growth Y-o-Y to INR 1,044 mn. Further, halving of the interest cost (down 53.2% Y-o-Y) and significant improvement in other income helped post a strong PAT. Adjusted PAT recorded a strong growth of 78.6% Y-o-Y to INR 636 mn (after adjusting for profit on sale of asset worth INR 101.1 mn). Hence, we revise our EPS estimates upwards for FY10E and FY11E by 2.2% and 14.3% respectively on the back of higher than expected margins.

Strong visibility; order book up 52% Y-o-Y; expansion on schedule
SOTL’s order backlog recorded a strong growth of 52% Y-o-Y to INR 21.5 bn (0.8x FY10E revenues) with INR 16 bn (increase of 33% Y-o-Y) backlog in power conductors and the balance INR 5.5 bn (increase of 156% Y-o-Y) in the telecom business. Management has indicated that expansion projects for both optic fibres (6 mn km to 12 mn km) and power conductors (115,000 MT to 160,000 MT) are on schedule and likely to be completed by Q4FY10 with volume impact visible from Q1FY11.

Outlook and valuations: Positive; maintain ‘BUY’
Demand for power conductors continues to remain strong on the back of significant spending expected in power T&D in the country. Fibre optic demand is driven by growing number of mobile subscribers, 3G auction, and increase in the number of broadband users. With gradual shift in the business towards high margin telecom business together with strong outlook in the power T&D space we remain positive on the SOTL. The stock is currently trading at P/E of 12.3x and 10.5x FY11E and FY12E, respectively. We maintain our ‘BUY’ recommendation on the stock.

To read the full report: STERLITE TECHNOLOGIES

Wednesday, January 27, 2010

>A Tale of Two Recoveries (NOMURA)

The aftermath of the crisis should constrain the developed world recovery, but, led by a booming China, emerging markets look set for strong growth.

Our View on 2010 in a Nutshell

• The developed-world recovery looks set to be weak given de-leveraging forces and other legacies of the crisis.
• With good fundamentals and a lack of aftermath issues, the emerging world, particularly Asia, is set to grow strongly.
• Developed-world inflation should stay low amid ample spare capacity, but exchange rate -targeting central banks risk bubbles.
• The main downside risks include a re-eruption of financial distress, a commodity price bubble and premature fiscal tightening.
• A possible upside surprise: animal spirits stir and, with monetary conditions super-loose, help release pent-up demand.
• We forecast an average Brent oil price of $72 in 2010 and $75 in 2011, after $62 in 2009.
• We expect further dollar weakness, especially vs EM, but the yen should gradually trade weaker on MOF intervention.

United States
• The “Great Recession” has ended, but the after-effects of the financial crisis are likely to weigh on the recovery.
• Job market conditions are improving, but business uncertainty should limit job growth and keep the unemployment rate high.
• Typical of the first phase of recovery, ample capacity is likely to put downward pressure on inflation.
• We expect the Fed to focus on an orderly exit from credit easing, but not to hike rates until early 2011.
• Proposals for a jobs-focused fiscal policy must overcome resistance from those worried about adding more to a record deficit.

• We expect sub-par growth given household de-leveraging in the UK and feeble domestic momentum in the euro area.
• The fiscal policy challenge: deliver short-term stimulus within a credible framework of medium-term consolidation.
• Headline inflation is set to rise in the UK and euro area, but underlying inflation is likely to stay very weak.
• We expect the ECB to start gradually removing exceptional liquidity measures but not to start hiking rates until October 2010.
• The BoE MPC faces uncertainties on both sides and we do not expect rate hikes until November 2010.

• We expect the Japanese economy to slow again through H1 2010 but for growth to pick up again in the second half.
• Faster-than-expected excess supply corrections and expanding exports, particularly to Asia, should drive a recovery in H2.
• Given a wider negative output gap, we expect CPI deflation to persist for the foreseeable future.
• The BOJ is likely to adopt additional easing measures, such as increasing long-term JGB purchases, in H1 2010.

• Things look ripe for a paradigm shift – domestic demand is replacing exports as the main growth driver, led by China.
• China: The investment and consumption booms are set to continue and to deliver double-digit growth.
• Korea: We see an inflationary economic recovery in 2010, driven by a prolonged macro stimulus and strong China demand.
• India: With both growth and inflation headed towards 8%, we expect the RBI to lead Asia in tightening monetary policy.
• Australia: Despite less expansionary policies, we see GDP growth quickening on stronger capex, exports and housing.
• SE Asia: Bullish on Indonesia, Singapore and the Philippines; less so on Thailand and Malaysia; concerned about Vietnam.

EEMEA (Emerging Europe, Middle East and Africa) and Latin America
• Key themes in 2010 are the removal of supranational support, fiscal sustainability and the effects of exit strategies on rates.
• CEE will likely be the slowest region to recover. Vulnerabilities persist, especially with banks’ NPLs set to peak in Q2 2010.
• Elections in CEE are a risk, with knock-on effects for fiscal policy sustainability. We see Poland entering ERM-II in Q4 2010.
• South Africa: World Cup and restocking will mask a weak recovery in consumption; we see a change in the SARB mandate.
• Russia should return to stable, if subdued, growth in 2010, supported by oil prices and pent-up domestic demand.
• Turkey should show a strong rebound in 2010, allowing some policy normalisation. Inflation should remain in check.
• Middle East: The Dubai story is a key test of investor confidence in the region; growth momentum should be maintained.
• LatAm: Strong growth in Asia and expansive monetary and fiscal policy are leading to a cyclical recovery.

We expect a strong recovery in most of EM but a shallow one in the developed world.
Two key features of the global economy evident since the financial crisis of 2008 inform our global economic forecast for 2010. The first is that the developed economies, particularly the US and Europe, experienced their worst financial crisis since the Great Depression. The aftermath will cast a long shadow on their recovery. The second is that emerging markets (EM), particularly emerging Asia, after absorbing the initial hit to exports from the crisis-induced collapse in developed-world domestic demand, have performed remarkably well. Continuing this trend, EM economies are likely to post strong domestic demand-driven growth in 2010 (Figure 1).

Looking back, the growth numbers that we expect for the full year of 2009 speak for themselves. The global economy overall likely contracted by almost 1% in 2009, but developed-world GDP likely fell by 3.4% while EM economies expanded by 2.0%. Within EM, there was notable differentiation: EEMEA (Emerging Europe, Middle East and Africa) and Latin America likely contracted by 3.2% and 2.8%, respectively, while Asia looks likely to hit 5.5% growth.

China’s expected 8.5% growth in 2009, in such a challenging global environment, stands out. As well as benefiting from strong domestic growth momentum associated with a 30-year economic development take-off, China, at the outset of the crisis, moved quickly to re-peg its currency against the US dollar and engineer a fiscally and credit-driven investment boom. But India’s expected 6.5% growth in 2009 also merits attention. The world’s two most populous economies were the fastest growing in 2009 and together look like contributing 1.5 percentage points (pp) to likely global growth of -0.9% (put another way, and a bit too simply, had these two economies stood still rather than grown, global growth would have been -2.4% in 2009) (Figure 2).

Looking to 2010, the first point to note is that the global recession is over – the quarter-on quarter contractions in global GDP having ended in Q2 2009 (for the G10, Q3) – and we think will stay over. Recessions are not the natural state for an economy and tend to self-correct over time, with counter-cyclical macro policy hastening the process. This recession threatened to throw the developed world economy in particular into a great depression and deflation, but concerted and unprecedented monetary, fiscal and financial-system policy action headed that prospect off at the pass. Absent another major shock, which we do not expect, the global economy should continue on its recovery path. We forecast global growth of 4.2% in 2010.

To read the full report: A TALE OF TWO RECOVERIES


Dish reported mixed 3Q results. Revenues matched our estimate, and the net loss was better than our expectation. However, operating metrics were uninspiring. We have trimmed our subscription ARPU estimate by about 5% for outer years post weak 3Q trends. This partially offsets the upward revision made to reflect reduced capex due to fall in set-top box prices and increased comfort in future growth potential following US$100m cash infusion from 11% equity sale via GDR. Retain OP with revised TP of Rs55 (from Rs45).

Story on track. We believe that DTH is best media subsector via which to participate in the domestic consumption growth story, and Dish TV is the only pure-play DTH operator. Although 3Q subscription ARPU and gross additions were below our estimates, we do not believe this alters the structural growth course for the company. We expect new subscriber addition momentum (industry adds expected at 8.5m subs for each of the next three years) and gradual improvement in subscription ARPU (5% YoY growth assumed in our model) to drive stock price performance.

Funding in place to meet growth requirement. Apollo Management picked up an 11% stake in Dish TV for US$100m (Rs4.6bn) in November 2009 via GDR issuance. In addition, Rs4bn of final tranche of rights issue (expected to be called in March) would enable Dish to participate in robust DTH industry growth over next three years without needing additional cash infusion.

3Q top line meets estimate, net loss lower than expected. Dish reported 3Q revenues of Rs2.8bn (up 7.7% QoQ and 43.8% YoY), meeting our estimate. However, EBITDA of Rs114m was significantly lower than our forecast of Rs158m due to higher cost of services. The negative surprise at the EBITDA level was mitigated by lower interest expense. As a result, the reported loss of Rs762m was lower than our Rs888m loss expectation.

Earnings and target price revision
We expect lower net losses in FY3/10 (1% lower) and FY3/11 (28% lower), as reduced interest burden should more than offset the negative impact of lightly lower EBITDA. Our new target price is Rs55.

Price catalyst
12-month price target: Rs55.00 based on a DCF methodology.

Catalyst: Sequential improvement in subscription ARPU.

Action and recommendation
Reiterate OP. Dish TV remains our top pick in the Indian media sector. We recommend that investors pare exposure to ZEEL (Z IN, Rs274, UP, TP: Rs130) and accumulate Dish TV. Competitive headwinds in the Hindi GEC (General Entertainment Channel) genre would hurt ad revenue growth for ZEEL’s flagship channel, Zee TV. Dish is currently trading at an EV/sub value of US$203 vs the global average of US$1,468.

To read the full report: DISH TV



At the Oct09 monetary policy, the RBI withdrew some unconventional liquidity support measures and tightened the prudential norms particularly for the property sector. The monetary policy statement clearly shows that those steps represented the first step towards "exit".

In the coming meeting on 29th January 2010, there is an expectation on 50 bps CRR hike. On a more aggressive stance, there is also a slim possibility of Reverse Repo hike at the same time (25 bps) in the policy meeting. The possibility for this measure remains slim as the current market is in a revers repo mode with approximately Rs 80,000 crore parked with the RBI.

To read the full report: MONETARY POLICY


Overall EBITDA in-line; PAT lower than estimate: Overall EBITDA was Rs78b (v/s our estimate of Rs76b), up 46% YoY and 9% QoQ. Reported PAT grew 14% YoY and 4% QoQ to Rs40b, lower than our estimate of Rs41b due to higher depreciation and lower other income.

Better than expected GRM, petchem margins decline: GRM for the quarter was US$5.9/bbl down from US$10/ bbl in 3QFY09 and US$6/bbl in 2QFY10. However, it was higher than our estimate of US$5/bbl, and believe it could be led by higher margin contribution from the new refinery and use of KG-D6 gas. Petchem margins declined QoQ (as expected) to 13.9% (v/s 13.1% in 3QFY09 and 16.5% in 2QFY10) primarily due to higher input cost. However, impact on the absolute profit was lower, due to higher volumes.

E&P profitability impacted by higher depreciation charge; KG-D6 unlikely to reach 80mmscmd by March 2010: E&P EBIT margin was 41.8% as against 58.7% in 3QFY09 and 41.7% in 2QFY10. RIL’s KG-D6 gas volumes averaged 46mmscmd in 3QFY10 (v/s 32 in 2QFY10 and 19 in 1QFY10). Current volumes of ~60mmscmd are unlikely to increase till the capacity in GAIL’s HVJ-DVPL is increased (additional phase-1 capacity of ~10mmscmd in HVJ-DVPL expected by March/April 2010).

Reducing KG-D6 volume estimates; increasing GRM estimates: We are reducing our KG-D6 average volume assumptions for 4QFY10/FY11/FY12 from 65/80/100mmscmd to 62.7/70/95mmscmd. We are increasing our GRM assumption for 4QFY10/FY11 from US$6/7 per bbl to US$7/8 per bbl due to current strong GRM and expected refinery closures, worldwide.

Valuation and view: Adjusted for treasury shares, RIL trades at 11.5x FY12E adjusted EPS of Rs92. Our SOTPbased target price is Rs815/share. Further, we believe there is potential E&P upside of ~Rs239/share. We remain positive on RIL, primarily due to its large E&P potential. Maintain Buy.

To read the full report: RIL


Strong Y-o-Y growth, but sequential disappointment
Escorts reported a profit of INR 234 mn in Q1FY10 (versus a loss of INR 0.4 mn in Q1FY09). Revenues, driven by strong tractor volumes at INR 6bn were up 21% Yo- Y but flat Q-o-Q. Although EBITDA margins improved 260bps Y-o-Y, the sequential decline in excess of 350bps disappointed. The tax rate was also well ahead of expectations.

Margins disappoint but expect improvement ahead

High material costs compress margins
EBITDA margin, at 8.9%, posted a sequential decline of 370bps during the quarter, which was disappointing. While cost-cutting measures led to a sequential decline in other operating expenses (down 110bps Q-o-Q), raw material expenses-to-sales ratio jumped 460bps Q-o-Q. This may be partially attributable to higher commodity costs.

Lower interest costs reflect improved balance sheet strength
The 48% sequential decline in interest costs to INR 67.8 mn reflects the substantial decline in debt with the D/E ratio close to 0.12:1. Also, the absence of any one off / extraordinary items seems to indicate that most balance sheet related issues have been adequately addressed in the past quarters.

Outlook and valuations: Positive; maintain ‘BUY’
We believe Escorts is now more focused with the teething balance sheet issues subsiding. While Q1FY10 results do disappoint, we believe the coming quarters are likely to post better results on account of: (a) the average increase of 3-4% in tractor prices that the company has effected in January; and (b) lower tax rate on account of write offs in the previous years. Further, we expect strong cost cutting measures to flow through in the next few quarters.

On our estimates, the stock trades at a P/E of 11x FY10E and 9x FY11E, respectively, considerably lower than its peers. We maintain our ‘BUY’ recommendation on the stock.

To read the full report: ESCORTS


Tech Mahindra (TechM) reported Q3FY10 results below our expectation due to the ongoing restructuring process with BT account. We believe that demand in the telecom sector has started showing early signs of stabilization, but for TechM, any gain made would be eroded by key account problem. We reiterate our ‘Reduce’ rating.

Below expectation, non-recurring gain boosted topline by Rs1.5bn: TechM’s revenue grew by 4.0% QoQ to Rs11.8bn, ahead of our expectation Rs11.3bn. However, topline included ~Rs1.5bn (last 3 quarters amortization) non-recurring gain from BT restructuring. Excluding this, revenue declined by 9.2% QoQ. For the next quarter, Rs1.5bn would be down by Rs1bn due to one-quarter accounting. BT restructuring helped a one time pay of £126m (Rs9.6bn) that company will amortize over the next four years (~Rs0.5bn/quarter).

Other key highlights – restructuring to give reprieve: 1)TechM used the BT restructuring fee to pay-off debt of Rs4.5bn and Rs3.5bn in Q3FY10 and Q4FY10. 2) The deal restructuring with BT for Barcelona and Strada would help TechM gain definitive volume of work. The company is also reaching a definitive agreement for Andes contract (expected to finalize in Q4FY10). The management was confident of £70m run-rate from BT. 3) Total debt outstanding ~Rs17bn and cash of ~US$140m. 4) The company has total hedged position of $735m (USD-INR @ Rs46.3) and £280 (GBP-USD @ $1.80). 4) EBITDA margin erosion by 198bps (including non-recurring payment) is attributed to lower utilization level and currency appreciation. We believe that margin could be further down next quarter due to lower non-recurring revenue contribution. 5) The performance in non-BT (top 2-10 clients) witnessed growth of 10% QoQ in INR terms, a silver lining of improved business environment in telecom vertical.

Valuation & Recommendation: We believe that BT trouble and subdued IT spending in telecom vertical could reduce earnings visibility in the near term. However, we liked the non-BT revenue growth that would shield further downside risk to our numbers. We reiterate our ‘Reduce’ rating, with a target price of Rs900, a target multiple of 14x FY11 earnings.

To read the full report: TECH MAHINDRA


Provogue (India) is a major player in the branded retail segment and also has a presence in retail development and mall management. The company operates the retail segment under the brand Provogue and the real estate business under the brand Prozone. With the revival in consumer offtake, we expect its retail business to get back to the higher growth trajectory. While the retail business remains the key growth driver, we expect prozone to contribute positively, going ahead. Prozone, with three projects under execution, appears to be in a sweet spot, as these properties would enable Provogue to earn annual rental income and contribute to its earning growth.

In a sweet zone…

Retail expansion on the fast track
Provogue’s retail operations have a pan-India presence with 125 Provogue studios and mega studios (premium segment) and two Promart stores (bargain department stores). With easing rentals and the improving macro scenario, Provogue has stepped up its retail expansion plans. It plans to add 15 Provogue stores and four to six Promart stores annually.

Prozone to start contributing from Q2FY11
Prozone, (75% subsidiary of Provogue), through its 70% held SPV (Prozone Liberty International) plans to build about 15 million sq ft of malls/offices/hotels in Tier II cities of India. Prozone plans to build malls in Aurangabad, Coimbatore, Nagpur, etc. Its Aurangabad property that has a saleable area of 0.83 million sq ft is expected to commence operations in June 2010. Nearly 60% of this property is pre-leased at an average rental of Rs 47 and would add significantly to the revenue and profitability of the company from FY11 onwards.

Financial performance to improve from H2FY10 onwards
With improving consumer sentiments, the retail industry is expected to register enhanced growth momentum. Provogue, with its pan-India presence and strong expansion plans with lower cost structure owing to downward revision of lease rentals of its few properties would be able to enhance its profitability, going ahead.

At the CMP of Rs 65.7, the stock is trading at attractive valuations of 18.7x and 1.1x FY11E consensus earnings and book value, respectively, which are at a significant discount to valuations of other retail companies. We recommend the stock with a 10% upside from current levels as our Pick of the Week.

To read the full report: PROVOGUE

Tuesday, January 26, 2010

>The Asia-Pacific Economies: How far from the pre-crisis potential?

KEY MESSAGES: Asian economies are spearheading the global recovery with their stronger than-expected rebound in growth. Fiscal and monetary stimulus has played a crucial role in this rebound.

Some economies such as Australia have benefited from the strong trade-linkages with China, whose own recovery has been underpinned by massive fiscal stimulus.

Significant output loss in 2008 and 2009 imply that none of the countries in the next couple of years would attain the output level, had they continued to grow at the rate witnessed in the pre-crisis period.

In the Asia-Pacific region, Indonesia and Australia have been least affected by the crisis, and their economies are likely to rebound close to the pre-crisis output potential by 2011.

The Indian economy would not be able to reach the potential size it may have achieved had it not been hit by the meltdown; the estimated output loss due to the crisis would be around 8 per cent of the pre-crisis potential GDP by 2011.

Out of the Newly Industrialsed Economies (NIEs), three economies - Singapore, Hong Kong and Taiwan - would witness the maximum output loss to GDP in 2011; consequently, their recovery to pre-crisis levels will be delayed.

After having suffered the worst recession since World-War II, which was intensified by the Lehman burst in October 2008, economies across the world are slowly and steadily marching their way towards recovery. There has been discernable improvement in the global economy in the second half of 2009, underpinned by output expansion in emerging market economies, particularly in Asia. World manufacturing activity has picked up, trade is recovering, financial market conditions are improving, and risk appetite is returning. As a result The International Monetary Fund (IMF) has been upgrading the growth outlook for the global economy. It now expects the global economy to shrink by 1.06 per cent in 2009 (IMF, October 2009), as compared to its earlier estimate of a contraction of 1.4 per cent (IMF, July 2009), before expanding by 3.5 per cent in 2010 (Figure 1).

The critical question is - with a recovery underway, which countries would bounce back to their pre-crisis potential? In other words, we assess, over the next couple of years which countries would (or would not) be able to compensate for loss in economic output as a result of the crisis. This is our focal issue in this paper.

The paper is divided into two broad sections. The first section analyses the role played by expansionary fiscal and monetary policies in the rebound of Asian economies by examining the drivers of recovery in domestic as well as external demand. The second section addresses the crucial question of the likelihood of economies in the region reverting to their potential size of the economy by comparing the pre-crisis trend and expected economic growth rates over the next couple of years. The analysis has been presented for the 13 Asia- Pacific economies (APAC economies, henceforth), namely, Australia, New Zealand, Japan (bucketed under industrial Asia), Singapore, Hong Kong, Korea, Taiwan (the Newly Industrialsed Economies, NIEs), Malaysia, Indonesia, Thailand, Philippines, Vietnam (the ASEAN-5 economies), and finally, India. China has been excluded from the analysis because of non-availability of relevant GDP data.

To read the full report: ASIA-PACIFIC ECONOMIES

>India oil marketing companies: HPCL & BPCL (MACQUARIE RESEARCH)

Ministry confirms fear
Our fears that OMCs may have to bear a part of losses on the sales of transportation and cooking fuels seem to be materialising.

The Secretary of Ministry of Petroleum and Natural Gas, India (MoPNG) confirmed today that oil marketing companies shall bear a part of losses incurred on the sales of transportation fuels like gasoline and diesel. This differs from the MoPNG’s previous stance that Government-owned upstream companies would bear 100% of the losses from the sales of transportation fuels and the Government would bear 100% of the losses on sales of cooking fuels.

Separately, the Government has in the meantime agreed to pay only INR120bn towards losses on sales of cooking fuels against demand of cINR200bn, implying that OMCs are likely to bear a part of losses on sales of cooking fuels as well. Focus therefore is changing to the “bearing ability” of various stakeholders. This is in line with our expectation that OMCs shall bear a part of the losses (please refer to our report titled, Oil Marketing Companies HPCL & BPCL: worse days ahead, dated 15 January 2010).

Our forecast continues to be below consensus. Our FY12e EPS is lower than consensus by 42% for BPCL and 46% for HPCL. This is despite factoring in the impact of an increase in the regional benchmark margin (cracking) to USD4-5/bbl from the current USD2/bbl and expansion of refining capacity by both BPCL and HPCL by about 30% each by FY12e.

Take profit on HPCL and BPCL: We recommend taking profits on HPCL and BPCL. Our target price for HPCL is INR280 and for BPCL INR552.

UW(V): Under-recovery fears seem to be materialising
Ministry confirms that oil marketing companies (OMCs) shall be sharing losses on sales of transportation fuels

Shortfall in government payout towards its share of cooking fuel losses indicate that OMCs are likely to bear part of losses on sale of cooking fuels as well

FY12e EPS 40-50% below consensus; remain UW(V) with TP of INR280 for HPCL and INR552 for BPCL

Valuation and risks

We value OMCs using a sum-of-the-parts valuation of their core refining and marketing business and investments. We value core refining and marketing business using a combination of PE (50% weight) and EV/EBITDA (50% weight) multiples.

We use target PE of 10.0x for BPCL on the basis of the last 6 month average. Historically, BPCL has traded at a premium to HPCL on PE multiples, mainly on account of 10-12% lower under-recoveries per barrel of throughput. This is due to the fact that BPCL has higher refining cover than HPCL. But we expect HPCL’s multiple to come closer to BPCL’s due to commissioning of its Bhatinda refinery and implementation of various upgrade projects. Hence, we target PE of 9.5x for HPCL. We value listed investments at market price and others at book value. We use a target EV/EBITDA multiple of 5.5x for HPCL and BPCL.

We also value BPCL’s E&P portfolio at INR39/share, valuing its discovery in the block CM-30-101 in Brazil at USD160m based on our initial estimate of 2bn bbl of resources, 25% recovery factor, 50% risk weight and USD5/bbloe valuation and valuing BPCL’s investments in nine blocks in India and five blocks in Australia, Oman and UK at cost. As HPCL’s investments in E&P are still at an initial stage, we have not accorded any value to HPCL’s E&P portfolio.

To read the full report: HPCL & BPCL


Quick Comment: Kotak reported consolidated F1Q10 earnings of Rs3.3 bn, up 153% YoY and 11% QoQ. Key trends during the quarter:

1) Kotak’s lending businesses showed good momentum during the quarter as the loan book grew at 10% QoQ (23% YoY), driven by growth in both the Bank and Kotak Prime.

2) With the exception of asset management, trends in the other capital market linked businesses were muted. Overall capital market linked income (ex-capital gains) were down 13% QoQ.

3) Asset quality trends were mixed. The standalone bank’s NPLs rose 7% QoQ, while other businesses (Kotak Prime) saw a 12% QoQ decline. Credit costs for the standalone bank increased to 250 bps as the bank increased coverage from 41% to 50%.

4) The bank remains well capitalized with a Tier I ratio of 18.3% at the group level.

Lending businesses showing good growth momentum: Kotak’s lending businesses delivered good growth for the second consecutive quarter as it appears management has started to become more comfortable with asset quality and macro outlook.

Consolidated loan book grew by 10% QoQ (23% YoY), driven by growth in both Kotak Bank and Kotak Prime. The top three segments where the bank delivered good growth were corporate banking (+19% QoQ, +67% YoY), home loans (+15% QoQ, +21% YoY) and auto loans (+6% QoQ, +23% YoY).

Margins for the consolidated entity were steady at 6.3% (and up 40 bps QoQ). However, we note that the share of corporate loans in overall loan book increased to 30% from 28% in the prior quarter and 22% a year back. Hence, it seems unlikely that the bank will be able to sustain margins at these levels into the future.

To read the full report: KOTAK MAHINDRA BANK


Background: Entegra is primarily in to the renewable energy sector, with its 400 MW Maheshwar Hydro Power project and also into solar and integrated renewable energy (RE) solutions. This could be a interesting play for investment in renewable sector. It is one of the best placed companies to capture the emerging opportunities in green
energy on the strength of huge cash flows from soon to start Hydro power project. Entegra has created two primary business verticals:

(i) Enner Green Resources - which focuses on development & generation of renewable energy

Project details:
Rs 27.6bn 400MW Maheshwar Hydro Power Project to be fully commissioned by Dec 2010 under the SPV Shree Maheshwar Hydel Power Corporation Ltd. (SMHPCL). SMHPCL has entered into a 35-year Power Purchase Agreement (PPA) with the Madhya Pradesh Electricity Board (MPEB), after which it is free to sell power on merchant basis. The PPA provides for reimbursement of fixed and variable costs and a guaranteed base return on equity (ROE) of 15.5% for generation up to design energy level (970mn units). The project is expected to generate approximately 50% higher energy levels
considering the water flow from the upstream projects – 1,000MW Indira Sagar and 520MW Omkareshwar. Considering 99% utilization and generation of 1,370mn units p.a., the project can earn approximately 16.3% additional ROE taking the total effective ROE to 31.8%.

Other BOO projects including 10MW Concentrated Solar Power (CSP) grid connected
project and 1MW Concentrated Solar Photo Voltaic (CSPV) grid connected project – both in Rajasthan

MOU with the Gujarat Energy Development Agency for 50MW CSP project in Kutch region under 25 years PPA with State Government.

(ii) Enner Green Solutions - Which provides customized renewable energy solutions and undertakes EPC projects.

Project details:
Design, supply and installation of 5 Wind/Solar Hybrid Systems of 12KW each in the premises of Rajiv Gandhi Proudyogiki Vishwa-Vidyalaya (RGPV), Bhopal.

Supply and installation of Solar Water Heating Systems of 36,000 litres per day for a residential complex in Kalyan, Mumbai

Development of an integrated renewable energy facility for Palais Royale- a landmark 60 floors residential tower being built at Worli, Mumbai

Supply, installation & commissioning of 10KW Wind-Solar Hybrid System for Vehicles R & D Establishment, Ahmednagar (a GoI, Ministry of Defence organisation) on turnkey basis.

Attractive Valuations: The latest bench-marks for Hydro-power projects valuations indicate appx. Rs 6-7 Crs per MW. This project is valued around Rs 3.5 Crs per MW closer to completion stage [June’10], thus offers good upside to investors in medium term. Accumulate.

To read the full report: ENTEGRA LIMITED