Saturday, February 27, 2010

>GREED & FEAR: No reprieve (CLSA)

One week on and “oversold” markets want to celebrate the fact that Greece has been given a one month reprieve to get its fiscal house in order. While it is natural that investors would like to forget about the problem, in GREED & fear’s view it is clear that the real crisis over Greece and the rest of the PIIGS lies in the future not the past.

The past week has made it clear that German public opinion, and therefore the German political process, will not tolerate a crude bailout of Greece; even if it is via “subtle” off balance sheet guarantees and the like. For example, why should Germans agree to a bailout of Greece with its statutory pension age of 61 when Germans do not receive pensions until the age of 67? Meanwhile, the level of fiscal austerity being demanded of Greece, namely a decline in the projected fiscal deficit from 12.7% of GDP in 2009 to 2.8% of GDP in 2012, is in GREED & fear’s view wholly incompatible with the reality of Greek democracy. In this respect the charge by the Greek Prime Minister George Papandreou over the weekend that the country was being treated as a “laboratory animal” by the European Commission is a reflection of the prevailing “Club Med” mentality.

The reality is that this drama will come to a head sooner or later. And with Greece needing to raise €20bn in the next three months it could be sooner, especially as some other “Club Med” countries also face significant debt refunding schedules between March and May. Thus, Spain and Portugal have €31bn and €11bn of government debt maturing in the next three months.

Macro traders should therefore keep on the long recommended PIIGS spread trade (see Figure 1). Investors should also assume that there will be further negative pressures on the euro, which implies continuing strength in the US dollar. In this respect Otmar Issing, a former member of the European Central Bank’s executive board, is quite right to argue, as he did in an article in the Financial Times on Tuesday (“A Greek bail-out would be a disaster for Europe”, 16 February 2010), that a bailout of Greece would undermine the foundations of European monetary union and, therefore, the credibility of the euro.

All this means that the future of the euro as a hard or soft currency will be determined, as noted here last week, by whether Europe’s politicians opt for the hard or soft option (see GREED & fear – Hard or soft in Europe, 11 February 2010). But until Europe passes this stress test the market is likely to assume bailouts and the like, so accustomed have investors become to the moral hazard generated by government guarantees in the Greenspan and Bernanke eras.

But what investors need to remember is that this is a crisis not centred on Washington. GREED & fear remains sceptical whether Germany will really opt for a bailout, or even a “fudge” option. And if it does not the deflationary consequences will come as a real shock to markets. Meanwhile, it goes without saying that the fundamental flaw in Euroland is the incompatibility of having monetary union without political union. This was always understood by the eurosceptics in Britain, like the great Margaret Thatcher, though naturally the Euro-enthusiasts will try and spin the latest crisis to argue for the need for political union. They are unlikely to

Meanwhile, with European issues dominating the headlines, focus has switched away from Asia for the moment. Still GREED & fear remains convinced that sell-offs caused by Greece and the like represent great buying opportunities in Asia since this further assures a continuing environment of very low interest rates in the West which can only generate excess liquidity bound for Asia. Who, for example, is talking about exit strategies in Europe right now?

To read the full report: GREED & FEAR

>Benefit from Budget 2010-11 (RELIGARE SECURITIES)

Budget has proposed reduction in tax plan making more money available for common man to increase consumption.

GDP – growth expected at 7.2% in 2009-10 and 8.5% in 2010-11
Additional Banking License to Private players / NBFC
Growth– Manufacturing sector grows 18.5% in Q3 FY2010
Fiscal deficit– pegged at 6.9% for 2009-10 and 5.5% for 2010-11
Lower rolling fiscal deficit targets for 2011-12 at 4.8% and 2012-13 at 4.1% of GDP augur well for Market.
Disinvestment– Rs. 25000 cr to be raised by disinvestment in PSUs.
Government borrowing – Net borrowing by govermnt in 2010-11 is lower than expectation, standing at Rs. 3.45 lac crore. Gross borrowing stands at Rs. 4.57 trillion.
Infrastructure thrust – Rs. 1.73 lac crore allocation to infrastructure development. This stands at 46% of the total planned allocation.
Water resources– emphasis on rain water harvesting and eco-friendly measures
Foreign Trade– boost to export sector by extending interest subvention on select exports, standing at 2%.
Budget Estimates

  • Plan Expenditure – stands at Rs.3.73 trillion, rising 15% from previous year
  • Non Plan Expenditure – stands at Rs.7.36 trillion, rising 6% from previous year
  • Fiscal Deficit stands at Rs.3.81 trillion.

To read the full report: BENEFITS FROM BUDGET


Source of opportunity
We downgrade Nestle India to Sell and add it to our Conviction List, from Neutral, on valuation grounds and revise our 12-month target price to Rs2,376 from Rs2,362. We believe Nestle India’s current valuation is expensive as it trades on a one-year forward rolling P/E of about 29X, which is high compared with its long-run average of 25X. Although Nestle India remains structurally well positioned to deliver strong 19% topline CAGR in FY09-FY12E given its exposure to low-penetration processed food categories and urban skew, we forecast flat gross margins in FY10E driven by a spike in raw material costs.

Expensive valuation overshadows strong topline; down to Sell

Nestle India’s current absolute P/E and 35% P/E premium relative to our India consumer staples coverage are both about one standard deviation above their long-run trends. With EPS CAGR moderating from 28% in FY06-FY09 to 22% in FY09-FY12E given a high base and limited margin expansion, we expect mean reversion of its P/E. We also believe Nestle India would need to continue investing in brands to maintain its high topline growth.

We revise our 12-month target price to Rs2,376 based on 26X March 2011E time-weighted EPS (from Rs2,362 based on 26X December FY10E EPS previously) in order to capture earnings 12 months ahead. We also lower FY10E-FY12E EPS by 2%-4% post FY09 results. Moreover, our target price is backed by Director’s Cut analysis that indicates Nestle India is currently trading above the sector trendline despite a trajectory of moderating CROCI.

Key risks
Upside risks include significantly better top-line growth than our forecasts on the back of strong domestic demand, increased penetration, new launches and higher exports; a fall in input costs that could result in much better margin expansion than we estimate.

To read the full report: NESTLE INDIA

>Asia Energy: Getting Bullish on Oil Services (MORGAN STANLEY)

We are becoming incrementally positive on offshore drillers, key being our positive view on the jackup market. We expect utilization for international jackups, currently under 80%, to reach significant levels of 85% by mid-year and 95% by year-end. We expect E&P capex to increase substantially in next few years, and hence highlight two stocks to play on our bullish view on offshore drillers:

1) COSL is our preferred play on E&P capex with China, with strong earnings growth for the next five years. We expect COSL to spend US$2 bn in the next two years; add eight more jackups and three more semis. COSL has exposure in the offshore China region, and in the overseas offshore market following the acquisition of Awilco.

2) Aban has deployed twelve of its sixteen jackups with long-term contracts of one to three years. Increased utilization rates due to rising E&P capex should be a positive, as it increases the probability of idle assets deployment and increases the efficiency of currently deployed assets. Anan currently has four idle jackup assets and three coming up for redeployment in F2011 and F2012. We believe Aban will be able to deleverage its balance sheet through diluting equity. We expect the pain of debt repayment to subside for the next two years, and believe Aban will be able to service its debt with operational cash flows.

We have marked to market our refining margin assumptions for Q110 to $5/bbl from $3.5/bbl, thereby increasing our 2010 full-year estimate by 10% from $3.7/bbl to $4.1/bbl.

To read the full report: ASIA ENERGY

>ADANI POWER: 1,320MW project award in MP is positive (UBS)

Adani Power has been awarded LOI for a 1,320MW project in MP
Adani Power (APL) has been awarded Letter of Intent (LOI) by Madhya Pradesh Government to develop 1,320MW power project at Chhindwara. The project is like a Case 2 bid (similar to UMPPs) and has significant advantages for Adani Power in the form of; a) land availability, b) state government support for obtaining fuel linkages, c) water availability, d) support for infrastructure facility by MP Govt. The project also has a good mix of regulated and open capacity.

The project may be commissioned in FY14/FY15
As per the LOI, the first unit of 660MW is to be commissioned in 2Q FY14 and the second unit by end-FY14. We believe Adani Power has made reasonable progress on this project as the company has already invited EPC bids for the project.

We don’t include under development/under planning projects in valuation
In our current price target, we only include 6,600MW of commissioned/under construction capacity (4,620MW Mundra and 1,980MW Tiroda). We don’t include 3,300MW and 6,600MW of under development and under planning projects respectively. As highlighted in our initiation report, Adani Power: An emerging utility major dated 25th November 2009, this could add ~26% in our price target.

Valuation: Maintain Buy and price target of Rs130
We derive our PT using a plant-by-plant DCF (for 6,600MW of commissioned/ under construction capacity), assuming COE of 13.2%. Developments in APL are similarly positive for its parent entity, Adani Enterprises (AEL); APL contributes ~62% of our SOTP-based PT of Rs550 for AEL (maintain Buy).

To read the full report: ADANI POWER

Friday, February 26, 2010

>India Budget: Realistic and Progressive (MORGAN STANLEY)

In the Right Direction: The market’s rally post the budget reflects a realistic and progressive F2011 budget.
The government is achieving fiscal consolidation program which is positive for earnings growth and market performance. The key risk factors in what seems to be a very strong growth environment are a combination of rising inflation and fragile risk appetite. We remain positive on Indian equities and are buyers of dips. Going forward, we expect to see policy action on rates to pre-empt demand side inflation.

a) Yield curve flattening is likely more certain – the government's market net borrowing is estimated to fall
13% in F2011 – this is positive for banks, especially public sector banks. Indeed, given the conservative
estimates on the budget the likelihood is that the borrowing program is lower than expected.

b) Consumption will likely stay strong – the increase in excise taxes is offset by reduction in personal taxes.

c) The balance of government spending is shifting from ‘non-plan’ to ‘plan’ expenditure with benefits to
infrastructure and rural spending. We are positive on industrials particularly for the second half of 2010.

d) Overall, change to earnings is insignificant – the cut in corporate tax surcharge is neutralized by the change in MAT, in our view. Costs are slightly higher on the back of increased fuel costs and excise duty. On the other hand, we think that stronger growth and improving pricing power represent upside risks to earnings estimates.

e) Tax reforms are on track for implementation in F2012. A new company law, the food security bill and possible energy sector reforms are likely in the coming months. Divestment target of Rs400 billion should be reassuring to the market as a signal for further reform on top of Rs250 billion to be achieved in F2010.

>Character of Recovery: Yes, It Is Very Different This Time

Production: Slow But Catching on Nicely
Industrial production was slow to catch on to the recovery but in recent months has improved sharply (top graph). The manufacturing sector continues to make progress for both auto and non-auto components. Over the last three months there have been double-digit gains in high-tech and 8.7 percent gains in manufacturing ex-high-tech.

The most recent ISM report indicated expansion in orders, production and employment along with longer delivery times. Therefore, the outlook remains positive for production.

Sales: On Track and Not Far off the Usual Recovery Pace
Real manufacturing and trade sales have generally followed the typical recovery path, although the pace of sales is below trend. This is to be expected given the rebalancing of the American household balance sheet and the limitations on credit given the new ethic of caution on the part of both borrower and lender (middle graph). For 2010 our outlook is for real final sales growth of less than two percent which is down from the 2.5 percent of 2007 with much of the weakness centered in personal consumption spending.

Employment: Economic Outlier, Political Problem, Policy Driver
The outlier in this pretty economic recovery picture is employment (bottom graph). While recent months have seen a decline in the loss of jobs there is clearly a pattern of below-average job recovery as the economy has improved. There are obviously two problems—supply and demand.

On the supply side, the U.S. has had an issue for years of an oversupply of low-skilled and semi-skilled workers and a shortage of high-tech scientists and engineers. In an era of the closed U.S. economy of the 1950s-1960s, increases in U. S. production were met with increased demand for workers of all types, and as such the excess supply of low-semi skilled workers was not as apparent. Meanwhile, the immigration of health professionals, engineers and scientists continued to make up for a shortage of domestic professionals.

In the 21st century, we deal with the realities of a global trading/production model. In this case, increases in U.S. domestic demand are not met by an equal increase in domestic supply. On the contrary, increases in domestic demand are frequently met by increased imports. In this way, the response in the domestic job market lags the rise in domestic demand. Yet, on the supply side, many workers are unable to respond to changing skills demand since the development of human capital often takes more time than the market desires. Two results are evident in recent data. First, job growth lags economic recovery. Second, many unemployed are unemployed because of a mismatch of skills—not just due to weakness in the economy.

To read the full report: CHARACTER OF RECOVERY


To quickly revert to the high GDP growth path of 9 per cent and then find the means to cross the ‘double digit growth barrier’.
To harness economic growth to consolidate the recent gains in making development more inclusive.
To address the weaknesses in government systems, structures and institutions at different levels of governance.

India among the first few countries in the world to implement a broad-based counter-cyclic policy package to respond to the negative fallout of the global slowdown.
The Advance Estimates for Gross Domestic Product (GDP) growth for 2009-10 pegged at 7.2 per cent. The final figure expected to be higher when the third and fourth quarter GDP estimates for 2009-10 become available.
The growth rate in manufacturing sector in December 2009 was 18.5 per cent - the highest in the past two decades.
A major concern during the second half of 2009-10 has been the emergence of double digit food inflation. Government has set in motion steps, in consultation with the State Chief Ministers, which should bring down the inflation in the next few months and ensure that there is better management of food security in the

Fiscal Consolidation
With recovery taking root, there is a need to review public spending, mobilise resources and gear them towards building the productivity of the economy.
Fiscal policy shaped with reference to the recommendations of the Thirteenth Finance Commission, which has recommended a calibrated exit strategy from the expansionary fiscal stance of last two years.
It would be for the first time that the Government would target an explicit reduction in its domestic public debt-GDP ratio.

Tax reforms
On the Direct Tax Code (DTC) the wide-ranging discussions with stakeholders have been concluded - Government will be in a position to implement the DTC from April 1, 2011.
Centre actively engaged with the Empowered Committee of State Finance Ministers to finalise the structure of Goods and Services Tax (GST) as well as the modalities of its expeditious implementation. Endeavour to introduce GST by April, 2011 People’s ownership of PSUs
Ownership has been broad based in Oil India Limited, NHPC, NTPC and Rural Electrification Corporation while the process is on for National Mineral Development Corporation and Satluj Jal Vidyut Nigam. This will raise about Rs 25,000 crore during the current year.
Higher amount proposed to be raised during the year 2010-11.

Fertiliser subsidy
A Nutrient Based Subsidy policy for the fertiliser sector has been approved by the Government and will become effective from April 1, 2010.
This will lead to an increase in agricultural productivity and better returns for the farmers, and overtime reduce the volatility in demand for fertiliser subsidy and contain the subsidy bill.

Petroleum and Diesel pricing policy
Expert Group to advise the Government on a viable and sustainable system of pricing of petroleum products has submitted its recommendations.
Decision on these recommendations will be taken in due course.

Improving Investment Environment
Foreign Direct Investment
Number of steps taken to simplify the FDI regime.
Methodology for calculation of indirect foreign investment in Indian companies has been clearly defined.
Complete liberalisation of pricing and payment of technology transfer fee and trademark, brand name and royalty payments.

Financial Stability and Development Council
An apex level Financial Stability and Development Council to be set up with a view to strengthen and institutionalise the mechanism for maintaining financial stability.

This Council would monitor macro-prudential supervision of the economy, including the functioning of large financial conglomerates, and address interregulatory coordination issues.

To read the full report: BUDGET 2010-2011

>Nuclear Power revival in India (MACQUARIE RESEARCH)

A new Asian dawn for nuclear power led by China and India
We released a thematic report on Asian nuclear power on 18 February 2010 (Hunting Stocks-A new Asian dawn for nuclear power). Outlook for nuclear power in Asia looks increasingly favourable amidst fast-growing electricity demand in China and India. China and India are poised for a substantial expansion in their nuclear electricity generation capacity. The IAEA projections imply that Asia and the Middle East will account for 52% and 66% of the global nuclear power capacity by 2020 and 2030 respectively versus 29% in 2008. In
this note, we focus on nuclear opportunity in India.

Positive but long-drawn benefits
India is in the midst of a nuclear power renaissance. The country has rejoined the international nuclear community after more than three decades in the wilderness. However, we believe it is likely to be a lengthy process, with the opportunities best seen from a long-term perspective for equipment manufacturers and the power generation sector.

Nuclear still a very miniscule part of India’s power plans
Power from India‘s nuclear power plants contributed to just 3% of the country‘s installed capacity base at the end of April 2009, and nuclear power still provides just 2% of India‘s total electricity generation. A further 2.8GW in net capacity is being constructed now, which will take India‘s net nuclear power capacity to over 7GW –7.8GW in gross capacity – by the end of the current 11th Five-Year Plan in 2012. Even before the Nuclear Supplier‘s Group waiver, India had aimed to have 20GW of capacity by 2020. However, now that India has joined the international nuclear community, these targets are likely to be scaled upward.

NPCIL, the nodal agency, driving growth
Government-owned NPCIL is responsible for constructing and operating India‘s
commercial nuclear power plants. It has 17 nuclear power stations in operation, and one entering into operation now. Five more nuclear power plants currently are under construction. NPCIL is preparing to build more power reactors, backed by improving access to nuclear fuel and technology.

Foreign investment starting to kick in
Fuel supply agreements have been signed with countries like France, the US and Russia post the 123 agreements and NSG waiver that guarantee uninterrupted uranium fuel supplies for its nuclear power reactors and unrestricted transfer of technology. Also, international players from Russia, France, etc are expected to
put up 6-8GW of nuclear power plants in the near future for which sites are being finalised already. Construction opportunity for players like L&T, BHEL, HCC, etc could be as large as US$4-5bn from this in the next couple of years.

Power equipment manufacturers could be key beneficiaries
Indian power equipment manufacturers now have an opportunity to supply spares and components not only to indigenous power plants but also to manufacturers of power plants based on foreign technology. Firms that may benefit in the manufacturing sector include L&T and BHEL, Gammon and HCC. Private utilities would still have to wait until India signs subsequent agreements to make the NSG waiver and 123 agreements operational.

To read the full report: NUCLEAR POWER

>Indian Housing Finance companies: Ready for a takeoff once again

Given India’s rapid population growth, increasing urbanisation and rising affordability the housing finance market will continue growing. However, given increasing competition in the sector from banks, HFCs with access to low cost funds, better operational and credit cost control, and better service quality will find life easier. In a supportive macroeconomic environment and with competition from banks likely to reduce due to the new base rate regime, we initiate coverage on LIC Housing with a “Buy” stance.

Structural Growth Drivers in Place
An underpenetrated mortgage market (~Mortgage to GDP at 7% vs ~80% for USA and 12% for China), favourable demographics (60% of population <> years), increasing urbanisation and improving affordability will ensure that
demand for mortgage loans will continue to grow at a healthy pace (FY00-10 CAGR of 24%).

However the road ahead is not smooth
However, given the perpetual competition from banks, lower spreads, highly rate sensitive customers, HFCs need to exhibit the following key characteristics to compete successfully:

Access to low cost funds and liquidity: Whilst the importance of low cost of funds has always been obvious, Sep-08 brought home the importance of having access to liquidity.

Credit appraisal skills: This is particularly hard in India given the weakness of credit bureau data and difficulty in credit enforcement.

Quality of customer service: This is the key differentiator in a commoditised market where banks are bound to have lower cost of funds.

Cost efficient structure: Critical if an HFC is to competitively price its loans and still maintain profitability.

A growing and underpenetrated market
Against the backdrop of an economy growing at a 10 year CAGR of 7%, mortgage disbursements have risen at a CAGR of 24% over the last decade and the total mortgages outstanding have increased to ~Rs, 4,100 bn at Dec’09 (vs ~Rs. 1,200 bn five years ago). We see this trend continuing due a variety of reasons none of which are particularly contentious. At around 7%, the mortgage:GDP ratio in India is amongst the lowest in the world (see figure 2). A huge shortage of housing units (~25 mn), limited availability of housing finance, the limited reach of HFCs and Indians traditionally being averse to credit had been the major reasons behind low mortgage penetration in India. But this trend is changing, with more Indian households becoming more open to credit, increased availability of home financing and with increasing construction of affordable housing units.

Some socio-economic trends are also helping on this front:

Increasing urbanization and nuclearisation: India is increasingly becoming an urbanized country (urban population is~31% of total population vs 28% a decade ago) with people migrating to the cities in search of employment. This is leading to higher demand for household units in urban areas where availability of housing finance is higher than in rural areas. Moreover from being a nation of joint families, India is increasingly becoming a nation of nuclear families (average family size has come down to ~5 vs 6 in 1981) leading to higher demand for housing units.

Increasing affordability: Various surveys show that more Indian households are entering into higher income brackets leading to improving affordability despite increased in property prices. Whilst there is no independent data on long term affordability trends (CRISIL’s data dates back to FY02 – see Figure 3), the data provided by HDFC Ltd. shows that affordability has increased four-fold over last fifteen years as rise in salary levels have kept pace with the increase in property prices (see figure 4). Low interest rates and greater availability of housing finance has further improved the overall affordability factor.


>India Infoline Limited (ICICI DIRECT)

Next delta missing for steep growth…
India Infoline (IIFL) has diversified its core business of equity broking to a widespread bunch of financial services. Broking revenues contribute ~55-60% to the total topline, financing income ~22-23% while insurance distribution & online media contribute 10% to the total income. IIFL commands ~3.7% market share of total market volumes clocking Rs 3700 crore daily volume and generates higher-than-industry average yields of ~8 bps due to higher share from the retail segment (~60% of total turnover). We expect IIFL to maintain a stable market share. This will lead to revenue CAGR of 14% (FY12E Rs 1431 crore) and PAT CAGR of 19% (FY12E-Rs 246 crore).

Higher broking yields to help 17% CAGR in broking income
IIFL has a market share of ~3.7%. With the anticipated average daily market turnover rising from current levels of Rs 90,000-95,000 crore to Rs 1,20,000-1,25,000 crore by FY12E, we believe yields will stabilise around 8 bps (comparatively higher than peers). This should help it to generate brokerage income at 17% CAGR over FY09-FY12E to Rs 844 crore.

Financing business to be driven by margin funding, LAS
We expect the financing book to grow from the current Rs 1200 crore to Rs 1480 crore by FY11E and Rs 1710 crore by FY12E implying 21% CAGR over FY09-FY12E. Margin funding, which constitutes ~40% of the funding book will allow yields to be maintained at 15-16%. This will enable 13% CAGR in NII to Rs 333 crore by FY12E.

Higher operating leverage leads to lower than peers EBIDTA margins
EBIDTA margin fell from 33% and 39% in FY07 and FY08, respectively, to 30% in FY09. The margins are lower compared to listed peers on account of higher proportion of owned branches resulting in higher operating ratio of approximately 18%. The company has lately shifted to the blended model, which will improve its EBIDTA margin to 32% by FY12E.

At the CMP of Rs 111, the stock is ruling at 13.3x and 12.8x its FY11E and FY12E EPS, respectively. The stock has historically traded at a premium to market multiples due to its diversified revenue stream and higher than industry blended yields of ~8 bps. RoEs are expected to stay in the range of 13-14% in the next two years. Since we do not expect steep rise in bottomline till FY12E, we have not ascribed any premium to the market multiple (15x FY11E EPS) thereby valuing the stock at Rs 121/share.

To read the full report: INDIA INFOLINE

Thursday, February 25, 2010

>Resumption of second generation reforms? (DEUTSCHE BANK)

Budget session agenda signals strong policy intent
The Indian parliament’s agenda for the current budget session (apart from discussing the union budget) seems to signal a strong intent to move ahead on the long outstanding reform agenda. The agenda includes 16 pending bills for consideration and passing (of these 10 to be taken up only in case standing committee reports are presented in time), and introduction of 63 new bills.

Pension, Insurance, Mining and Land Acquisition Bills on parliament agenda
Bills listed for consideration and passing include the Mines and Minerals Amendment Bill (for amendments in coal mining, permitting auction of coal blocks and paving way for Coal India’s listing), and Insurance Bill (key objective is to raise FDI cap from 26% to 49%). Bills listed for introduction include Banking Regulation Amendment Bill (to lift 10% limit on voting rights in private sector banks) and State Bank of India Amendment Bill (reducing minimum govt stake in SBI from 55% to 51%), Pension Fund Regulatory and Development Authority Bill (for deepening and improving regulation of pension sector), Land Acquisition Amendment Bill and Rehabilitation and Re-settlement Bill (to facilitate easier land acquisition).

Strong on intent, will government deliver?
Since taking power last year, this is the first time; the UPA administration has decisively put many of these long-awaited bills on the business agenda. We believe that politically, the timing is also propitious with the next state election more than six months away, positive coalition dynamics and a government that has firmly signaled the compulsion to return back to the pending reform agenda. Even on the economic front, the near restoration of GDP growth to the 8-9% trajectory has created a compelling platform to resume long pending reform. While we do not see all the proposed bills being taken up/passed, on account of the need for long and arduous debate, even if some of the bills are taken up, the government will send out a very strong message of its intent on moving decisively on the pending reform agenda. This should be very positive for market sentiment.

Banking on return to 8-9% GDP growth trajectory
We view the government as growth biased and one of the key premise of our
positive outlook on India is the restoration of Indian GDP growth to an 8-9% trajectory over next 12 to 15 months. We maintain our year end target of 22,000. Our top Buys are: Asian Paints, BHEL, HDFC Bank, ICICI Bank, Infosys, Maruti, M&M, SAIL, Sterlite, and TCS.

Risks to our positive investment thesis
The return of non-food inflation could bring back the overhang of an ‘inflation wary’ government, a sharp rise in global oil prices raises the risk of an aggressive policy response and a fat pipeline of fresh issuances. A strengthening dollar and weakerthan- expected global growth are key exogenous risks.

To read the full report: EQUITY STRATEGY

>Rail Budget 2010-11: Focus on PPP… (ICICI DIRECT)

Earning guidelines
Freight rates have been increased in January 2010 to the tune of 5-8% while the freight loading target is up 8 MT to 890 MT. This is getting reflected in higher freight earning estimates for FY10E by Rs 191 crore. Freight earning revenue estimates for FY11E were kept in line with volume growth expectations as freight rates were maintained at current levels. Hence, the growth indicated was much below the historic trend

However, passenger earnings and coach earnings have been trimmed down for revised FY10E but kept high for FY11E

Focus on wagon procurement
To set up five wagon manufacturing plants through PPP mode
To set up wagon repair shop at Badnera
Establishments of coach factories at Rae Bareilly, Kanchrapara and Palakkad are in progress
To set up a rail axel factory

For rail infrastructure and rail operating players
A solution in the form of setting up a special task force to clear the pending investments within 100 days is a fine step towards growth
Preliminary engineering cum traffic survey on four other freight corridors to be taken up in FY11E
To construct dedicated passenger corridors
Premium tatkal services for parcel and freight movements is under consideration
To examine the need for special wagons for iron ore, fly ash, automobiles, etc
To set up 10 auto ancillary hubs
To set up six bottling plants for clean drinking water at cheaper rates
To build multi level parking complexes through PPP mode
Modernisation of Chittaranjan Locomotive Works to augment the present capacity of 200 locomotives to 275 locomotives
Work on loco factories at Madhepura and Marhora is also in progress
Private operators investing in rail infrastructure can run special freight trains to carry automobiles, vegetable oil, molasses, chemicals, petrochemicals and bulk traffic like fly ash and cement

For public in general

To construct more under-passes, limited height subways besides road over-bridges (ROB) and road under-bridges (RUBS)
To add 10 more Duronto trains to be introduced
Routes of 21 trains to be extended
To add 101 new suburban trains for Mumbai
To set up 381 diagnostic centres throughout India alongside hospitals
Within the next seven months, 117 trains to be flagged off
Withdrawal of railway examination fees for minorities, women and OBCs
To introduce modern trolleys at railway stations
To launch double-decker trains on a pilot basis
To start five sports academies at Delhi, Chennai, Secunderabad, Kolkata and Mumbai
Service charge on sleeper class cut to Rs 10
Service charge on AC Class cut from Rs 40 to Rs 20
Larger section of the population to get connectivity over the next five years

For employees

Housing for all railway employees in the next 10 years
To set up 50 crèches for children of railways women employees.

To read the full report: RAILWAY BUDGET REVIEW

>Asia tilts scales in global steel market (ELARA CAPITAL)

Global demand set to rebound from CY09 lows
Steel production worldwide is showing a steady revival after suffering a major setback in Q3CY08 due to the financial turmoil. Going ahead, we expect China and India to lead the demand growth for steel in CY10 and CY11. The World Steel Association (WSA) estimates the steel demand growth to be 12.4% in CY10, primarily driven by China with the developed world likely to register a muted expansion in demand.

Demand – supply balance seen in China and India
With the rising demand in the developing world, we expect the Chinese as well as the Indian mills to continue to operate at a healthy utilization levels of 85 – 90%. With no new large greenfield capacity visible in the near term, coupled with the fact that the Chinese regulations are compelling small and inefficient blast furnaces to shut down, we expect the Chinese and Indian steel markets to remain in balance. Although the developed world is expected to operate at 65 - 70% utilization levels, the high cost structure in those parts of the world makes the movement of steel into the developing world unviable at the current prices.

Steel prices to nudge upwards by 10-15%
We expect steel prices in the Chinese region to settle at least 10 – 15% higher, driven by the cost push factor as well as the market dynamics which indicate that steel markets in the region would remain in balance with little threat of overcapacity. We believe that steel prices in CY10 would settle at a higher level riding the following: (a) an increased cost of output thanks to higher contract price settlements for iron ore and coking coal (b) no oversupply scenario in the developing world and (c) a sustained higher cost of production in the developed world which nullifies the import threats from these regions (despite a lower capacity utilization level).

Indian steel companies are likely to see benefits of firm steel prices and a no-surplus market in FY11 and FY12 despite the big capacity additions. We like the ‘volume story’ and expect large players with big expansions to benefit from the favorable steel pricing scenario. JSW Steel with its healthy volume increment remains our top pick as we believe that such a spurt in volumes would offset its lesser level of integration as compared to peers. We recommend a Sell / Switch on SAIL to JSW as we are circumspect of its ambitious expansion programme, the timeline and continuous upward revisions in its capex plan. We are neutral on Tata Steel and see an overhang of Corus on the consolidated performance.

To read the full report: INDIA STEEL

>BHARTI AIRTEL: African safari gamble worth it (ICICI SECURITIES)

We upgrade Bharti Airtel (BAL) to BUY from Hold as its entry into Africa via Zain’s African assets (ZAF) is positive from a long-term horizon and reduces the risk of intense competition in India. BAL has bid for ZAF (excluding Sudan & Morocco) at US$10.7bn. The acquisition will give BAL control over ZAF and we believe while valuations are at a premium based on FY10E EV/E of 9.6x, the strategy will pay rich dividends in the long term. ZAF’s assets have been impacted in terms of growth and profitability by the currency devaluation and poor economic conditions. ZAF’s revenues declined 12% through 9MFY09 (annualised), but grew 5% based on constant currency. The ZAF acquisition is likely to lead to only 6% EPS dilution in FY12E (the second year of acquisition) and be EPS-accretive from FY13. We see the current fall in BAL’s stock price (11% post announcement) as a chance to accumulate since the performance will likely improve post more clarity on the deal structure and business fundamentals. Upgrade to BUY.

ZAF acquisition EPS-accretive by FY13. The ZAF acquisition is EPS-dilutive in FY11 and FY12, but we expect it to be EPS-accretive from FY13. We expect dilution in FY12 to be 6% assuming 100% debt funding. The acquisition through leveraging BAL’s balance sheet will improve the capital structure with low interest cost. In our view, this is a one time opportunity for BAL to enter the African markets and the premium valuations are justified for control.

“Cash combined with courage in a crisis, is priceless.” – Warren Buffett

African assets – Hidden jewel. We see the current profitability and market situation in Africa as misleading – post the credit crisis in ’08, African currencies significantly devalued 3-39%, with African nations highly dependent on natural resources (crude) and remittances. With current mobile penetration at 36% in ZAF’s markets of presence, Africa presents an opportunity similar to that in India in ’08 and will likely witness the maximum interest by global telcos in this decade.

We upgrade BAL to BUY at Rs345 target price as the current price correction is a knee jerk reaction in our view and entry into Africa via ZAF is a long-term strategy, thereby reducing the risk of hyper competition in the Indian markets. BAL’s increased debt owing to the ZAF acquisition leads to better capital structure, given that BAL’s balance sheet is being currently underleveraged in spite of its ability to raise low-cost debt. We attribute Rs273 value to BAL’s mobility business and Rs72 to towers with a total value of Rs345, implying an upside of 24%.

To read the full report: BHARTI AIRTEL

Wednesday, February 24, 2010

>Deposit Rate Hikes in the Offing – A Process of Normalization

Quick Comment: Over the weekend, HDFC Bank raised deposit rates for 1-2 year deposits by 25-50 bps. We expect other banks to start raising rates too – moreover, the first 1-2 deposit rate hikes may come with no hike in lending rates (similar to the last cycle of rate hikes effected by banks).

When interest rates started coming down, Indian banks (especially SOE banks) had been averse to cutting deposit rates: This was the key cause of intense downward NIM pressure banks saw in the first half of CY2009. However, they made up for that inertia, by cutting rates extremely aggressively since the beginning of 2009 as liquidity increased in the system. This caused lending spread (PLR- 1 year deposit rate) to move up sharply last year.

Currently rates offered on 1 year deposits are about 6%: This is unsustainable in India, where there are alternative investment options for individuals offering around 8%. Moreover, with inflation running at higher levels (WPI, core CPI, CPI are all higher), investors are making negative real returns. This caused deposit growth to slow down – term deposits in India are now growing at around 16%, the lowest rate since 2006.

Lending growth has picked up, implying a significant jump in incremental credit deposit ratios: If we look at ICDR on a 3-month trailing basis, this bottomed around July – August and has since picked up. On the last data point, it is running above 100%. This is causing a reduction in excess liquidity, which can allow banks to normalize deposit rates again.

What does this mean for our NIM assumptions – We were not building continuation of the current high spreads on lending to continue. Hence, no change in NIM’s. Moreover, rising rates are good for banks with strong liability franchises.

To read the full report: INDIAN FINANCIAL SERVICES


Upgrade to HOLD and raise SoTP-based TP to INR1010/sh.
3Q results suggest refining has bottomed, recovery likely to be slow.
Switch to Cairn for near-term; prefer ONGC for the long term.
Our concerns on weak refining and delay in gas issue play out.

Refining bottoms out, but don’t expect a sharp uptick
3QFY10 results showed refining bottoming out for complex refiners like Reliance. 3Q refining margins came in higher than we expected, at USD5.90/bbl, on strong utilization rates of 107% for both the refineries. The new refinery impressed with utilization of 115% supported by strong exports. Singapore complex margins increased in the past couple of weeks to ~USD5.5/bbl as oil prices cooled off and product cracks remained stable. While we believe the worst is over for global complex refiners, we do not share the view that there could be a strong recovery in refining. Product demand, especially for high-margin products like gasoline and diesel in US and Europe, remains muted. While China and India are seeing consumption grow at a rapid pace, on a global scale, the incremental demand doesn’t move the needle to enable a refining revival. In addition, greenfield capacity/unit upgradation continues to be a concern.

E&P should be the value driver
RIL has one of most prospective acreages within the Indian E&P space. Its landmark KGD6 field is currently producing 60mmscmd of gas and is capable of producing 80mmscmd, depending on fall-back demand and
additional allocations. In addition, drilling is on schedule at the D3 & D9, the other prospective blocks within the KG basin. However, investors will have to be patient for reserve accretion and for RIL’s E&P story to unravel. While we believe RIL’s acreage within the KG basin to be prospective, we do not assign any value to the KGD3 & D9 blocks as exploration activity is still in the early stages.

We are upgrading Reliance Industries to HOLD from Reduce. Since our downgrade on 24 April, 2009 (“All priced in: time to get out”), RIL shares have gained by 14.9% compared to Sensex at 42.6%. Our concerns of continued downturn in refining, delay in the resolution of the gas issue and no E&P surprises all played out. We do not expect to see the same degree of under-performance going forward for RIL as refining shows signs of bottoming and as the outcome of the court case closes on. We raise our TP from INR815/sh to INR1010/sh as we value refining at a higher multiple as refiners move from trough valuations. We value the refining & petchem business at 8x EV/EBITDA, KGD6 Oil & Gas fields using DCF and CBM, NEC-25 & KGD6 satellite fields at EV/boe of USD5. Key upside risk to our TP is a sudden turnaround in refining.

To read the full report: RELIANCE INDUSTRIES


Company Description: Incorporated in 1989 as Mayur Gem and Jewellery Export Private Limited, RJL was engaged in the business and manufacture of jewellery. In 1997, the Company's name was changed from Mayur Gem & Jewellery Export Private Limited to Renaissance Gem & Jewellery Export Private Limited. In 1998, Sur Style Jewellery Private Limited ('Sur Style') engaged in manufacture and export of studded jewellery was merged with company. In 2005, the Company was converted to a public limited company and the name was changed to Renaissance Jewellery. It tapped the capital market with an issue of 53.24 lakh shares at a price of Rs 150 per share aggregating 79.86 crore. From the IPO proceeds, RJL incurred Rs 35 crore on the US subsidiary, Rs 10.5 crore on increasing manufacturing capacity at Bhavnagar, Rs 4-5 crore for modernisation of its Mumbai facility and rest for the working capital.

Investment Rationale:
RJL has eight retail outlets (five in Mumbai, one in Pune, one in Lucknow and one in Gurgaon) and 16 shops. The retail products are sold under the brand name, Lucera. RJL is in the process of increasing outlets. RJL has two subsidiaries, Renaissance Jewelery New York Inc., which caters to independent mid-range retailers and Verigold Jewellery (UK) serves as a marketing and trading hub in UK and rest of Europe. Its supplies to major retailers like Wal-Mart, NBC, JC Penny & Zales.

Renaissance has a modern design studio complete with a state-of-the-art CAD/CAM facility. Its dedicated team of 40 designers is, well versed on the latest international trends and contributes at least 500 innovative designs monthly to its ever-expanding portfolio of over 25,000 styles. The majority of its current models are produced using CAD/CAM to ensure precision.

USA is the world's largest jewellery market. In the US, Christmas, Thanksgiving, Valentine's Day and Mother's Day are the important jewellery-buying occasions. The US jewellery market has grown at a compound annual growth rate of 5.7% over the last 25 years. RJL is US centric for last 11 years, but will soon move into Europe, Middle East and South East Asia markets. Expects margins expansion as it is able to pass on the full price hike to their customers.

During FY09, Indian Gem & Jewellery industry made exports of $21.1 billon Vs $20.8 billon in FY08. During April-January 2010, exports of gem & jewellery from India have gone up by 14.3% to Rs 1.07 lakh crore according to Gems and Jewelley Export Promotion Council. In dollar terms, exports are up 7.42% to $22.54 billion. The data showed that import of rough diamonds too has gone up 4.82 per cent to Rs 33, 900 crore. The domestic market is estimated to touch USD 28-29 billion in next 3 years by 2012.

The projected share of industry segments and key consumption market trend show that by 2015 China and India together will emerge as a market equivalent to the US market. The Middle East will surface another large market accounting for close to 9 of the global jewellery sales by 2015. The industry has a potential to grow up to US$ 280 billion by 2015 at a CAGR of 6.7%. These augur well for the industry players. RJL is likely to post an EPS of Rs 20 in FY10 and Rs 24 in FY11. At the CMP of Rs 71, the share is trading at a P/E of 3.5x on FY10E and 3.2x on FY11E. We recommend BUY with a target of Rs 100 in the medium term. The stock is in an uptrend as it is moving along the upsloping support trendline. Considering its big fall from early 2007 and its bottom in beginning of 2009, the stock can be seen forming a rounding formation. Technically, the upside target is Rs 115.

To read the full report: RENAISSANCE JEWELLARY

Tuesday, February 23, 2010


The Indian Finance Minister is going to announce Union Budget 2010-11 on 26th February, 2010. Everyone is as eager to know the India Budget 2010 expectations as the final budget itself. The budget results 2010 are keenly awaited for several reasons.

Some of these are:
1. What measures will be taken up to tame high inflation rate, which has given rise to high prices of primary food articles and has caused fiscal deficit?
2. How a balanced budget will be managed to cope up with rapid economic growth and the stagnancy seen in the below poverty level?

The finance minister has plenty of issues to take into notice in order to come up with an ideal budget plan that meets everyone's expectations. The results will be unfolded in the month of February. But, the expectations from budget 2010 that have come to the notice are vital and play significant role in the pre-budget scenario.

The common men and the corporates are looking for decrease in taxes. The Finance Minister is likely to augment exemption limit of individual taxes to Rs 3 lakh from Rs1.60 lakh for salaried people. Exemption limit for women is expected to be increased from 1.80 lakh to 4 lakh and for senior citizen from Rs 2 lakh to 5 lakh. However, taxes levied on the perks availed by income earners are expected to be restructured on higher level. This arrangement may satisfy junior employees and senior citizens. But, it may not go well with the people belonging to higher position.

Corporate Tax:
A reduction of 30% is expected in the corporate tax. The expectation is found in line with the introduction of Direct Tax Code (DTC) suggesting a 25% rate. The individual rate was lowered by 30% previous year also.

Capital Gains Tax:
As far as the 2010 India Budget expectation in the area of capital gain tax is concerned, finance minister is unlikely to bring any reform in this category of tax. It is predicted to be included under the Direct Tax Code, to be implemented from April 2011.

Re-fixing of Tax Slabs:
As mentioned earlier, the tax slab for women is expected to be revised to 4 lakh and senior citizens to Rs 5 lakh. However, second and third slabs of tax would see significant change.The second tax slab is expected to be augmented from the existing Rs 3 lakh to Rs 1 million to be taxed at 20%. The third slab is likely to be increased from Rs 5 lakh to Rs 25 lakh to be taxed at the rate of 30%. These revisions would act in favor of the reputed advocates as well as the doctors.

Gratuity Limit:
The India Budget 2010 expectations show that significant revision in gratuity limit is also considered. The gratuity limit of the income class is expected to be raised to Rs10 lakh in the budget 2010 from Rs 3.5 lakh. Both the upper as well as middle level executives will benefit a lot, if this revision is brought into effect.Employees are paid gratuities in the government as well as corporate organizations during the time of their retirement. The amount that is dished out as gratuity falls outside the tax regime. If the gratuity limit is enhanced, the employees will surely benefit from it.

Self Assessment Slab:
The self assessment slab for businessmen and professionals is Rs 40 lakh at present. According to expectations, the slab may be revised to Rs 1 crore to lower the burden felt by the business people and professionals

India Budget 2010 speculations suggest that it is not the right time for the government to roll back stimulus packages, despite the fact that GDP growth of the nation in the Q2 (July – September) of the current fiscal stood at 7.9%.However, experts believe that government would withdraw few of the subsidies from the market. The oil companies were aided with the stimulus package to check loss. Government did not allow the Oil companies to raise product costs of kerosene and diesel, which would have forced the common men to pay more. As high prices of diesel and petrol would bear adverse effect on the transport rates of food products, the stimulus packages are expected to continue in the oil industry. However, partial withdrawal of the stimulus aid can be expected in this sector to tackle the situation of increasing fiscal deficit. Nevertheless, stimulus packages from engineering as well as export sectors are expected to be rolled back

Agriculture Sector:
According to India Budget 2010 expectations, the agriculture sector would be the highlight of the session. This sector is likely to receive enormous boost from the government. Finance minister's invitation to the farmers for the pre-budget meet is held to be the main reason behind such speculation.

Infrastructure and Social Sector:
Infrastructure industry is also expected to be the focus of the budget results of 2010. Many believe that development in this sector would account for massive growth in GDP. However, it is unlikely to ease monetary policy to better infrastructure. Interest rate cannot be reduced as well. Railways: According to 2010 budget speculations, the transportation charges for bulk commodities in railway industry are likely to be increased. The turnaround in the economic conditions of India is expected to boost the transport costs of cement, coal, iron ore and steel. Previous year, the Ministry of Railway refrained from raising transportation costs to help sector tackle the scenario of global meltdown. The ministry has not come up with its plan for hikes yet. But, the range can be fixed somewhere between 5 and 10%. If this becomes effective, one would need to pay Rs. 100 to 200 per tonne.

Other Sectors:
While taking into account the India Budget 2010 expectations of various sectors, it was found that the garment industry of India is looking for considerable cut in interest rates in its exports segment. The garment exporters also want the ministry to remove all the confusion faced in the case of excise as well as custom duties. The sector wants major commercial as well as fiscal relief. Similarly, the Indian tea industry is expecting to get an allocation of more than Rs 130 crore, which was granted in the fiscal year 2009-10.