Friday, July 30, 2010

>Is Austerity the Road to Ruin? - JAMES MONTIER

Let me share with you one of my guilty secrets: I occasionally indulge in the dark art of macroeconomics. I don’t try to forecast the future (that would be truly pointless), but I do think that understanding the macro backdrop can, on occasion, help inform the investment process. For instance, those who understood the impact of a bursting credit bubble stayed well clear
of the value trap opportunities offered in financial stocks during 2008. Those who focused purely on the bottom-up tended to plow in and repent at leisure, as the deteriorating fundamentals generated a permanent loss of capital. So why share this confession now? I think we are seeing
a very worrying trend around the world: the rise of the Austerians. This breed is the latest incarnation of what used to be called the deficit hawks, a group set upon reducing what it sees as the government’s profligate spending.

The power of the paradox of thrift
The Austerians either ignore or dismiss the paradox of thrift. This paradox (which appears first in the Fable of the Bees1) was popularized by John Maynard Keynes inThe General Theory of Employment, Interest and Money. He wrote:

For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.

In essence, the paradox of thrift is a fallacy of composition. Whilst it may be perfectly rational for one household (or section of the economy) to save more, if everyone tries to save more, total income is lowered. If you aren’t spending, then neither are the people who depend upon
you for their source of income. Firms won’t invest if there is no demand for their products, and we end up in a nasty downward spiral.

To read the full report: Is Austerity the Road to Ruin?

>New takeout financing norms - Positive for banks, NBFCs and infra companies

ECBs) after the project risks stabilize. We believe this is positive for non-bank finance companies (NBFCs) and banks as it will help them manage ALM risks better and can also earn fees on selldowns. Some investors are worried about domestic credit growth being impacted with this. We do not subscribe to that view because there is a significant requirement for bank funds to finance infra projects and with economic growth, working capital requirements will also be cyclically strong, in our view. We believe rather that it will help banks manage their ALMs better.

The Reserve Bank of India (RBI) yesterday evening released new ECB takeout financing norms. The norms allow infra companies to convert their domestic debt to ECBs only after project risks stabilize (but within three years). Such refinancing will require approval from RBI and is not automatic. Until now, infra companies were not allowed to refinance their domestic debt with foreign debt during the course of the loan. We believe this is positive for NBFCs and to banks who finance infra projects, as it will help them manage ALM risks better and can also earn fees on sell downs. Some investors are worried about domestic credit growth being impacted with such refinancing. We do not subscribe to that view because there is a significant requirement for bank funds to finance infra projects and with economic growth working capital requirements will also be cyclically strong. We believe rather that it will help banks manage their asset liabilities better because the key risk for banks in financing infra was that they did not have enough long-term funds (more than 3 yr funds) to support these projects. For NBFCs, the key advantage would be that they can improve leverage.

Key highlights:
i. The corporate developing the infrastructure project should have a tripartite agreement with domestic banks and overseas recognized lenders for either a conditional or unconditional take-out of the loan within three years of the scheduled Commercial Operation Date (COD). The scheduled date of occurrence of the take-out should be clearly mentioned in the agreement.

ii. The loan should have a minimum average maturity period of seven years.

iii. The domestic bank financing the infrastructure project should comply with the extant prudential norms relating to take-out financing.

iv. The fee payable, if any, to the overseas lender until the take-out shall not exceed 100 bps per annum.

v. On take-out, the residual loan agreed to be taken-out by the overseas lender would be considered an ECB and the loan should be designated in a convertible foreign currency and all extant norms relating to ECB should be complied with.

vi. Domestic banks / financial institutions will not be permitted to guarantee the take-out finance.

vii. The domestic bank will not be allowed to carry any obligation on its balance sheet after the occurrence of the take-out event.

viii. Reporting arrangement as prescribed under the ECB policy should be adhered to.

ix. The refinancing option will be available to sea port and airport, roads including bridges and power sectors for the development of new projects. Eligible borrowers may, accordingly, apply to the Reserve Bank for necessary approval before entering into a take-out finance arrangement.

To read the full report: FINANCING NORMS


Growth Prospects
1. The performance of the Indian economy in 2009/10 greatly exceeded expectations. The farm sector which was expected to contract showed resilience, growing by 0.2 per cent despite the weak South West monsoon. The non farm sector also did well. It is the assessment of the Council that the Indian economy would grow at 8.5 per cent in 2010/11 and 9.0 per cent in 2011/12. In the current fiscal year, agriculture will grow at 4.5 per cent, industry at 9.7 per cent and services at 8.9 per cent.

Global Prospects
2. The global economic and financial situation is recovering slowly. The large fiscal deficits and high debt ratios coupled with slow economic growth have created unsettling conditions for business and have potential for causing great volatility in financial markets. It is hard to visualize strong economic growth in the advanced economies in 2010 and to a large extent in 2011. The implications of this, for India’s strategy to return to the 9.0 per cent growth trajectory, are that public policy must promote business confidence and facilitate increased investment.

Structural Factors
3. In 2008/09 the investment rate fell on account of the drawdown of inventories. This trend has reversed and the Council expects the investment rate to be higher at 36 per cent (of GDP) in 2009/10, rising to 37 per cent in 2010/11 and 38.4 per cent in 2011/12. Similarly we expect the domestic savings rate to pick up and reach 33.4 per cent in 2009/10, 34.3 per cent in 2010/11 and 35.5 per cent in 2011/12. These rates should enable the economy to grow in a sustained manner at 9.0 per cent.

4. Private corporate investment and total investment in fixed assets is expected to recover strongly but will not reach the previous high levels. Government Final Consumption Expenditure to GDP which hit a peak of 12.3 per cent in 2009/10 is expected to fall to 10.3 per cent in 2011/12. On the contrary, Private Final Consumption Expenditure which declined in 2008/09 and 2009/10 is expected to increase in the current and next fiscal year. Since 2001-02 the progressive decline in the Private Final Consumption Expenditure has been accompanied by a matching increase in the investment expenditure component of GDP.

Sectoral Growth Projections
5. In the backdrop of a weak South West (SW) monsoon in 2009, the Council had expected the farm sector GDP to decline by 2 per cent. However, the actual loss in farm sector output was less. The strength in horticulture, animal husbandry and fisheries, as well as higher cotton output, helped farm sector GDP to ultimately register a marginally positive growth of 0.2 per cent.

6. On the basis of a normal SW monsoon forecast by the Meteorological Department, one may reasonably expect a strong rebound in crop output in Kharif and Rabi in 2010/11. The better seed and fertilizer availability and the construction of a large number of water harvesting structures through the MNREGA lend strength to these expectations. Moreover, the expansion in horticulture and animal husbandry and a low base effect should generate a farm sector GDP growth of around 4.5 per cent in the current fiscal.

7. Industrial sector recovery became evident in June 2009 and by August 2009 the General Index of Industrial Production (IIP) registered double digit growth rate driven by similar growth rates in output in the manufacturing and mining sector. The service sector has also shown strong recovery with GDP originating in the important sub-sector of “trade, hotels, restaurant, transport & communication” surging in the second half of 2009/10. The impact of the civil service pay hike and the arrears lifted growth of the “community personal services” sub-sector in the first half, but eased up in the second. Export related service activity (software and Business Process Outsourcing) was sluggish throughout 2009/10 but was more than offset by the recovery in domestic-oriented service activity. Overall, non-farm sector GDP grew by 8.8 per cent in 2009/10.

8. In 2009/10 the mining sector output grew at 10 per cent but a slowdown is expected in 2010/11 with a projected growth of 8.0 per cent in both output and GDP arising in the sector. Manufacturing output growth in 2009/10 was strong in all the quarters, especially in the case of capital goods and durable consumer goods. The only exception to this was non-durable consumer goods which were impacted by poor export growth and a lower output of sugar. Even though the manufacturing sector has recorded strong growth rate in April and May 2010, we expect this to ease as the base effect wears off. The projected growth rate in the manufacturing sector and the general index (IIP) is expected at 10 per cent in 2010/11.

9. The expected expansion of investment in physical infrastructure, including housing will drive the construction sector. Accordingly, the GDP arising in the construction sub-sector would rise by 10 per cent in 2010/11, which is likely to inch up to 11 per cent in 2011/12. In the “trade, hotel, restaurants, transport & communication” sub sector, growth picked up in the last two quarters of the year. We expect this trend to be reinforced with 10 per cent growth in both 2010/11 as well as 2011/12. There will be no contribution to expansion from civil service pay in the current year but the private sector component of the sub-sector “community and personnel services” will continue to register strong expansion in line with the rest of the economy. Software and BPO activity is expected to expand significantly in 2010/11, both in the domestic and export sectors. Alongwith steady expansion in the financial industry we expect this sub-sector to record growth of 9.5 per cent in 2010/11 which will rise further in 2011/12.

10. Overall, we expect GDP arising in the industrial sector to expand 9.6 per cent in 2010/11, rising to 10.3 per cent in 2011/12. The expansion in the services sector is expected to approach 9 per cent in 2010/11 and inch up to 9.6 per cent in 2011/12. Over all, the non-farm sector is expected to grow by 9.2 per cent in 2010/11 and 9.8 per cent in 2011/12.

Trade & External Sector
11. According to the DGCI&S report the merchandise trade exports touched $176.6 billion in 2009/10 which was 4.7 per cent less than 2008/09. Engineering and electronic goods were the hardest hit declining by more than 20 per cent. Because of currency fluctuations, the rupee value of exports showed practically no decline in 2009/10. The value of merchandise imports in 2009/10 in dollar terms was 8.2 per cent lower at $278.7 billion and 4 per cent lower in rupee terms.

To read the full report; ECONOMIC OUTLOOK

WIPRO: Result Update 1Q FY11

WIpro’s IT services volume growth was in-line with our expectation but way lowerthan peers; however we expect it to catch up peers (in terms of volume growth) from 2Q FY11 onwards. Further, our view of the company gaining ground is corroborated by double-digit onsite volume growth indicating strong momentum in new projects and 6.1% QoQ revenue growth guidance for 2Q FY11 (in US$). Moreover we are impressed by the company’s ability to maintain margins despite decline in billing rate, dip in utilization rate, cross currency headwinds and impact of wage hike (it was effective from February 2010). Considering, strong momentum in new projects, 6% QoQ revenue growth guidance (in US$) for 2Q FY11 and the company’s ability to manage cost despite many headwinds, we upgrade our recommendation on the stock to “BUY” from “HOLD” and assign P/E of 19x to FY12E EPS of INR24.6.

• Consolidated revenue recorded modest growth: Wipro’s consolidated revenue in 1Q FY11 increased 3.7% to INR72.4 billion, from INR69.8 billion in 4Q FY10, primarily led by IT services and consumer care and lighting segment. The IT products business continues to be under pressure for the third consecutive quarter.

• Growth in IT led by double-digit onsite volume increase: Global IT services’ revenue was US$1218 million (in constant currency) in the quarter, marginally higher than the management’s guidance of US$1215 million.

To read the full report: WIPRO

Wednesday, July 28, 2010

>Analysis of royalty payments in view of Maruti’s margin surprise

Meaningful overhang on margins and valuations for foreign equity companies

Maruti delivered a big negative surprise this weekend as Suzuki raised royalty payments by 150 bps from 3.6% to 5.1%. While the impact on Maruti is already discounted (stock down 10% today), we have looked at the other companies in BSE-500 to ascertain the impact on broader Indian market. We find that that 75 (32 of them to foreign entities) companies in BSE500 pay
royalties largely dominated by automotive, capital goods, pharmaceuticals and FMCG sectors.

With the recent government regulation allowing for higher royalties, we could see the Maruti case being played out in several of these players. While the exact impact is difficult to quantify (as it will be case specific), we note that increasein royalties could hurt margins substantially by 370 bps if implemented across the board. We would closely watch out for more such announcements/changes over the next few months.

Govt. allows companies to pay royalty under automatic route: The Govt. recently allowed companies to remit royalty payments (upto 8% on exports, and 5% on domestic sales) on foreign technology collaboration under the automatic route (With retrospective effect from Dec 2009, notes attached). Companies have since raised royalty payments to foreign collaborators: Maruti raised royalty payments to parent Suzuki Motor Corp by 150bps to 5.1% of sales this quarter.

15% of the BSE500 pays royalties, 32/500 to foreign equity holders: Royalty payments are made by 75 companies in the BSE500 universe, and comprised~19% of the overall SG&A costs in FY09, accounting for ~130bps on EBITDA margins. The new notification affects companies (32/500) that have technical collaborations with foreign (non-portfolio) equity-holders, and thus excludes domestic companies that have no restrictions on royalty payments. Whollyowned
foreign subsidiaries have no restrictions either.

Sector/stock focus: Royalty payments are generally made by companies in the auto and capital goods (technical know-how and collaboration), pharma (marketing rights) and FMCG companies (brand equity). Margin Impact: Royalties for these 32 cos. constituted 11% of their SG&A, accounting for 100bps at the EBITDA margin level (FY09 margin at 16%; FY10 figures available for 8 companies thus far). A quick sensitivity analysis shows that a rise in payments to a blended 5% of sales would hurt margins by a further 390bps, i.e. margins would fall to 11.8%.

Royalty payments vs. dividends: Royalties paid amounted to more than 40% of the total dividends declared in FY09. With little information on the actual value of the technical expertise, or by way of equity of certain brands, a potential rise in payments could raise questions on fair distribution of earnings to common stockholders.

To read the full report: INDIA STRATEGY

>Kotak - Lending biz improves, but all others in a weak spot

Kotak Mahindra Bank - Lending biz improves sharply, but all others in a weakspot [Dipankar Choudhury, Manish Shukla] Q1FY11 results, which were in line with our estimates on a headline basis, continue to reflect the trends visible for the last few quarters and could sustain for some time. The bank reported consolidated loan growth of 42% YoY driven bysecured retail and corporate lending, and a NIM of 5.7% that was down 40bps QoQ. The bank in their earnings call guided for a 30-35% loan growth for FY11E, which they had earlier estimated at mid-twenties, but also indicated that margins could correct to 5-5.5% despite the capital infusion expected soon.

HDFC Bank – Signs of strength in growth, costs stabilising [Dipankar Choudhury, Manish Shukla] We maintain Buy on HDFC Bank after increasing the target price to INR 2,090 from INR 2,050. The bank with its high share of low cost deposits and largely floating rate assets is the best play in a rising interest rate environment. Loan growth from both retail and short-term wholesale loans remains strong. We believe that operating cost ratios could improve further due to productivity improvement from the erstwhile Centurion network.

Yes Bank -Strong asset growth, but CASA remains low [Manish Shukla, Dipankar Choudhury] We maintain Hold on YES Bank with a target price of INR285. The bank continuesto gain good traction in corporate loans, and core fee income growth is also strong. Operating expenses are likely to rise, and the low share of CASA remains aconcern. Trading at 2.8x FY11E P/B, the stock appears fairly priced.

Sector & Company News
** RBI may up capital ratio for banks
** HDFC, Kotak to rework profit forecast for insurance arms
** Yes Bank to raise Rs 15bn tier II capital

To read the full report: INDIAN BANKS


Revenues at Rs582bn, higher by 81.7% yoy and 1.1% qoq; much in line with our estimates

OPM falls 243bps yoy driven by fall in petrochemical EBIT margins yoy

PAT at Rs48.5bn v/s our estimate of Rs49bn

Gas production from KG-D6 field continues to be at 60mmscmd;management guidance as reported by media for not being able to sustain production higher than current levels a cause of concern

We maintain our Market Performer rating as key business segments of refining and petrochemicals will continue to see muted environment

To read the full report: RIL


SKS Microfinance (SKSMF) is the largest microfinance company in India with loan portfolio of ~US$1bn, 2,000+ branches spread across 19 states and 6.8mn members. Its strengths include pan-India presence, scalable operating model, diversified product revenues and access to various
sources of capital. Lending primarily to poor women, the business model involves village centered group lending, thereby ensuring a check on asset quality. The hugedemand-supply credit gap and inability of banks to penetrate into unbanked areas have driven the growth of microfinance industry. While valuations appear expensive, the scalable business model, market leadership position and high earnings growth provide comfort. Recommend

Rural centric business model
The success of SKSMF has evolved around five key elements: a) village selection, b) focus towards women, c) member training, d) group lending and e) village level lending and collection. With lending primarily to poor women, the company has expanded its reach to 2,029 branches spread across 19 states and over 6.8mn members. The pan-India presence has further helped mitigate the risk towards local economic slowdowns and disruption. Through systems and solutions in place, it has developed a scalable 3C’s model – Capital, capacity and cost reduction, which in turn has helped reach rural masses in large.

Diversified sources of revenue and capital
In addition to core business towards providing traditional loan products, the company has started offering productivity loans directly linked to business. This involves strategic alliances with Nokia, Airtel, Bajaj Allianz, HDFC, METRO and FAL. Despite being NBFC-ND, the company has benefited from benign interest rate regime and enhanced sovereign ratings. Historically, it has raised funds via alternate channels including – equity and debt issuance, loans with various maturities raised from domestic and international banks, and the securitization of components of loan portfolio.

Limited concerns over asset quality
The village centered, group lending model has ensured SKSMF an adequate check on asset quality. Innovative product structuring, focus on income generating loans and primary focus at women have enabled the company to maintain its GNPA and NNPA at low 0.33% and 0.16% respectively. In case of default by an existing member, the group is required to typically make the payment on behalf of a defaulting member. Any negligence towards payment bars the group from further borrowing.

To read the full report: SKS MICROFINANCE

>MONETARY POLICY: Hawkish stance; more hikes in the offing

The RBI hiked policy rates today – repo by 25bps and reverse repo by 50bps, in
line with our expectations. The central bank also increased its FY11 GDP growth
projection to 8.5% from 8% and fiscal-end headline inflation (March ’11)
forecast to 6% from 5.5% in the last review. The overall stance was hawkish and
the RBI appears to be gearing for a full-blown war against inflation. In our view,
today’s rate hike is effectively 50bps as liquidity is expected to return into the
system in 3–4 weeks, making reverse-repo the effective policy rate. However, we
believe that the RBI is still behind the curve, and that inflation will remain
elevated this fiscal and a risk to growth.

RBI’s hawkish monetary stance; liquidity to ease shortly: The RBI hiked repo by
25bps and reverse repo by 50bps today. We had anticipated either a 50bps hike in
both policy rates or a 25/50bps hike in repo/reverse repo respectively, as against
the consensus expectation of a 25bps hike in both rates. The RBI in its statement
said “With growth taking firm hold, the balance of policy stance has to shift
decisively to containing inflation and anchoring inflationary expectations”. The rate
hikes tell us that the RBI is confident liquidity will return to the comfort zone in 3–4
weeks, when the effective policy rate will be reverse repo, and not repo as is the
case now.

FY11 GDP and inflation projections hiked: The central bank appeared rather
convinced about the strength of India’s economic recovery. However, the concerns
over inflation have become more intense now. The central bank has acknowledged
that inflation has decisively become generalised, citing evidence from sectoral
price inflation as well as other measures (CPI-IW). The RBI raised its FY11 GDP
growth projection to 8.5% from 8% earlier and fiscal-end headline inflation
(March ’11) projection to 6% from 5.5% earlier.

Rate corridor narrowing a positive step: The rate corridor – the difference between
repo (rate at which banks borrow from the RBI) and reverse repo (rate at which
banks lend to the RBI) – has diminished to 1.25 percentage points now from 1.50
earlier. This will result in reduced interest-rate volatility in the money market.
Our GDP and headline inflation numbers remain unchanged: Our FY11 GDP
estimate stands at 7.9%, with some downward bias, while inflation is likely to
average at 8.5%, peaking at ~14% in August before declining and closing the fiscal
(March) at ~6.5%. We continue to believe that the persistently high inflation is
likely to hurt private consumption and investment demand, and poses a significant
risk to economic growth.

More rate hikes this fiscal (at least 75bps): With Delhi’s diminishing reservations
against an aggressive monetary policy stance (due to political-economic realities:
eight states go into elections in the coming 10 months and an opposition devoid of
any credible election agenda), we believe the RBI will try to get back on the curve.
We expect a further 75bps rate hike at least in the current fiscal, while the rate
corridor may narrow further by 25bps. Further, we do not rule out another rate hike
before the next scheduled policy meet on 16 September. The benchmark 10-year
bond yield fell below previous day’s closing (7.67%) just before the policy
announcement. It then rose to peak at 7.72%.

To read the full report: MONETARY POLICY

Tuesday, July 27, 2010

>Affordable Housing – A key growth driver in the real estate sector?

“Affordability” as a concept is very generic and could have different meanings for different people based on differences in income levels.

Affordable housing refers to any housing that meets some form of affordability 1 criterion .
Different countries have defined affordable housing to present the economic potential of an individual buying a house. In the United States and Canada, a commonly accepted guideline for affordable housing is that the cost of housing should not be more than 30 percent of a household's gross vary with regions and income levels.

Another point to note is that the definition of affordable housing is not just restricted to the three categories mentioned above, but applies to people across the country. Affordable housing can be defined using three key parameters viz. income level, size of dwelling unit and affordability. While the first two parameters are independent of each other, the third parameter is correlated
income. Housing costs here include taxes and insurance for owners, and utility costs. If the monthly carrying costs of a home exceed 30–35 percent of household income, the housing is considered 2 unaffordable for that household .

Defining affordable housing in India is a difficult task given that at every square kilometer of the country, the dynamics of the market are different. At KPMG and CREDAI, we have therefore broadly defined affordable housing in India for Tier I, II and III cities based on three key parameter

To read the full report: HOUSING SECTOR

>IRB INFRASTRUCTURE LIMITED: Strong Macro + Pure Play = Perfectly Priced

Target price Rs278 — We use a sum-of-the-parts methodology to value IRB: 1) BOT assets are valued at Rs164 on a discounted FCFE basis; 2) The EPC business is valued at Rs84 (11x Dec 2011E P/E), a 25-30% discount to its E&C peers given the captive nature of its order book; 3) Other investments and cash on books are valued at Rs13 (book value); 4) Probability adjusted value of future projects is at Rs17, based on our market-share estimates in the projects awarded.

Pure play on roads, making it expensive — IRB is one of very few listed pure plays on roads in India and the scarcity premium it has already attracted would likely limit its upside potential. IRB is trading at an average P/E of ~19x FY11E, in line with mid-cap E&C peers but at a 31% premium to its global peers. We might get constructive on the stock at lower levels or better than expected order wins.

Leading player, looks well positioned to benefit from strong macro tailwinds… — NHAI intends to award 12,000km of road contracts in FY11 (~4x the FY10 level). IRB has a portfolio of 16 road assets covering ~1,250km. It has a market share of 7% in GQ projects and ~12% in NHAI FY10 project awards. While we do not expect IRB to maintain its current market share in future projects given larger rollouts, it looks well positioned to win a reasonable share of projects based on its technical qualification and net worth. IRB recently tied up with Reliance Infra to bid for the US$1bn Kishangarh-Udaipur-Ahmedabad highway.

PAT CAGR estimated at 15% over the next 2 years — 1) A revenue CAGR of 46% over the next 2 years due to project ramp-ups; 2) An EBITDA margin decline of 745bp due to a higher percentage of lower-margin EPC revenues. In its FY10 investor meeting, management indicated that another Rs60-80bn-worth of projects can be funded without resorting to dilution. Our sense is that if the order flow is strong and faster than expected, there could be dilution.

To read the full report: IRB INFRASTRUCTURE


Capital infusion, fuel for growth:
As on 31st March 2010. Tier 1 capital of IDBI Bank was 6.2%, which is lower than the RBIs suggested level of 8%.

To increase the Tier 1 capital to 8% GOI is expected to infuse capital of Rs.31000 Mn. by way of preferential placement of equity.

This will provide headroom to IDBI bank to raise funds to support its business growth.

Healthy business growth:
With the capital infusion, IDBI Bank would be in position to grow its business above the industry average, though achieving the previous high growth rate will not be possible. We believe that Total business for IDBI Bank will grow at the CAGR of 24% from FY09 to FY12E.

This growth would be supported by:
1. Branch expansion.
2. Capital infusion.
3. Targeting infrastructure lending.

Increased emphasis on CASA deposits:
IDBI Bank has been depending on borrowings to support its lending business. Now bank is emphasizing on deposits to support its lending, leading to decreased cost.

The bank has been growing its concentration on mobilizing the CASA deposits as witnessed by the CASA ratio trend which we estimate to increase from 14.78% in 2009 to 17% by 2012E.

Robust profitability:
Reshuffling of deposits and skew ness towards low cost deposits will improve margins and on this basis we expect to see growth in NII by 56% and 36% for FY2011E and 2012E respectively.

Fee based income is also expected to grow in line with growth in credit, helping to sustain high growth in PAT.

At present IDBI Bank is trading at 1.2x Adj. BV of FY10. Our target price of Rs.154 is 1.2x and 1.1x to Adj. BV per share of FY11& FY12 respectively.

We hereby initiate coverage on IDBI Bank and recommend buy rating with a target price of Rs.154/- (24% upside) in 12 months.

To read the full report: IDBI BANK


Low inventory for the company: Most of the projects for Omaxe in Noida, Greater Noida, Faridabad and Lucknow have all been sold out the extent of 70-75%. Major portion of the projects are at the completion stage or ready to move in stage which provides them with an edge over their competitors whose projects are still under construction.

Timely execution of the projects: The company has good execution capabilities, as most of its projects were executed in a period of 3 – 3.5 years. Timely execution leads to a higher demand as compared to peers since it provides with ready possession and there is hardly any waiting period for the customers, which aids in increasing the market visibility of the company.

Demand scenario in Delhi and Lucknow: The markets at New Delhi and Lucknow are diverse in terms of the product demand by the customers. There is great demand for luxury and super luxury apartments in Delhi, which have an average realization in the range of Rs. 5,500 – Rs. 6,000 per sq ft. and with the construction cost being Rs. 2,000 per sq ft., the EBITDA margins, are higher as compared to that in Lucknow which has an average realization of Rs. 1,800 per sq ft. and construction cost of Rs. 1,100 per sq ft. where the margins are relatively lower.

Upcoming projects in the pipeline: The company has a large project line up for launch in the coming quarters. For instance the Hi Tech City at Lucknow which is 2,700 acres will be executed in phases, it’s Phase – I of 500 acres is to be launched in November 2010. It has a visibility of 10 - 12 years for the entire development.

To read the full report: OMAXE


Revenues increase 4.6% sequentially: KPIT’s consolidated revenues grew by 4.6% in 1QFY11 to Rs2,061mn. In US$ terms, the growth was 5 .6%. The growth in 1QFY11 was driven by a 3% volume growth and around 2.5% increase in realisations. The increase in realisation was on account of higher share of revenues from SAP and auto businesses, which have a higher average
realisation. In 1QFY11, the SAP business grew by 9.6% sequentially, with auto and engineering business growing by 4.8%. The company also commented there were some early starts to the projects resulting in higher-than-expected revenue growth in 1QFY11.

EBITDA margins decline by 310bps: In line with expectations, KPIT’s EBITDA margins declined by 310bps in 1QFY11 on account of a) Salary increases of 12% offshore and 2% onsite and b) Addition of more than 400 employees in 1QFY11. Going forward, we expect margins could improve on account of a) Economies of scale and b) Improving utilisation as the freshers
hired in 1QFY11 start getting billed in the quarters ahead.

Net profit declines by 6.8%: Though the company’s EBIT declined by 15.6% sequentially, the net profit declined only by 6.8% to Rs194mn. This was mainly on account of a) Lower forex losses as the INR appreciated by 1% in 1QFY11 and b) Lower taxes.

To read the full report: KPIT CUMMINS

Sunday, July 25, 2010

>The rise of the aspirational Indian

In our 1st July note we highlighted that ‘aspirationals’ stocks have outperformed ‘essentials’ on both fundamental and stock price performance over the past decade. Today we highlight that in a high inflation environment in particular, ‘aspirationals’ deliver higher top and bottom line growth than ‘essentials’.

Aspirationals outperform essentials in all ‘GDP growth – inflation’ combinations barring ‘low GDP growth, low inflation’

An 11 year time-series analysis of the ‘aspirational’ vs ‘essential’ product companies’ financials yields the following results (see Table 1 below for a summary):

• In terms of EBIDTA growth, aspirationals outperform essentials under all four macro settings (see Fig 1 and 2 on the right side). In fact aspirational product companies’ EBIDTA expanded at a greater pace (YoY) than that of essentials in 31 of 43 quarters under study (see Fig 3 below).

• In terms of net sales expansion, aspirationals outperform essentials under all but one (low growth, low inflation) setting.

• In a high inflation environment in particular, ‘aspirationals’ deliver higher top and bottom-line growth than ‘essentials’ irrespective of the GDP growth environment.

To read the full report: MACRO OUTLOOK

>LARSEN & TOUBRO: The leader takes it all

LT- MHI, Joint ventures start production
L&T and MHI has started the production at its facility in it newly set facility at Hazira. The JV’s (50% each) will have installed capacity to produce 4,000 MW of Boilers and Turbines annually.

Apart from these two factories, the company is also setting up dedicated factories for axial fans, air-preheaters, electrostatic precipitators, high pressure piping and a forge plant. We believe these units will increase the indigenization of the manufacturing of the overall BTG
units for L&T and would result in higher margins.

LT emerges as lower bidder for Hyderabad Metro Project
L&T has emerged as the lowest bidder for the Hyderabad Metro Project. The company has put in INR14.6bn as the Viability Gap Funding (VGF) which is the lowest. The project has a 5 year construction and 30 years concession period which can be extended by another 25 years.

Transtroy BEML constortium (VGF- INR22bn) and Reliance Infrastructure (VGF – INR29.9bn) were second and third in terms of lowest VGF.

The project will provide ~INR90bn of EPC opportunity for the company which will be executed over the next 5 years.

Order inflows to meet guidance – 25% growth for 1QFY11
Based on the announced orders we believe the company is well positioned to have a 25% order inflow growth – as per guidance.

We estimate that the total order inflow for the quarter would range from INR106bn to INR129bn implying a 11.2-35% growth in order
Our base case for order inflow stands at INR118bn translating into 24% order inflow growth.

Target upgraded to INR2,097
The strong order inflow for the last 4 quarters and strong execution in 4QFY10 would take the company to a high growth trajectory.

We have revised our target price from INR1,781 to INR2,097 on 1 year rolling basis and INR2,186 on FY12 basis.

To read the full report: L&T


Bullish on Sterlite’s exposure to zinc
Sterlite has augmented its zinc capacity though organic and inorganic routes. Dariba smelter added 210ktpa, Anglo’s assets would add c.400ktpa taking the total zinc-lead capacity to 1,462ktpa; in all c.11% of the world’s total zinc-lead capacity. We are bullish due to two emerging themes for the zinc market - China’s robust concentrate imports, coupled with struggling global mine supply.

Downward revision to our short term metal estimates
The UBS global commodity team has decreased its 2010 estimates for zinc from 105c/lb to 93c/lb (-12%) and aluminium from 103c/lb to 94c/lb (-9%). This is due to aggressive sell-downs in inventory on concerns over policy tightening in China, slower loan growth and industrial activity and the ‘post-stimulus’ slowdown. We incorporate lower metal prices into our estimates.

Expect to catch up underperformance to metals index
We have revised our earnings estimates by -9.2%/ -7.3% for FY11/12 following the revision to our metal price estimates. Sterlite has underperformed the BSE Metals index by c.8% YTD; we believe it should catch up on the underperformance with the bullish outlook on zinc

Valuation: Reiterate Buy; lower price target to Rs225
We reiterate our Buy rating with a lower price target of Rs225. We base our price target on a sum-of-the-parts valuation of individual businesses. The value of businesses is derived from an NPV valuation method using explicit mine life forecasts. We assume a WACC of 13.2% for the copper and zinc business and 12.1% for BALCO.

To read the full report: STERLITE INDUSTRIES


Strong bounce back in order inflows; current valuations stretched
Armed with a robust order book, Thermax started FY11 with a sharp bounce back in growth during 1QFY11. Revenues grew by 45%, while PAT grew by 42% during the quarter. More pertinently, the standalone order backlog increased to Rs63bn (96% growth YoY), with an across-the-board improvement in order inflows.

An improvement in the macro environment and a pick-up in the capex cycle enhances the visibility in order flows for the company’s base boiler and captive power divisions. This apart, the new technological tie-ups in the power and environment space is expected to result in strong order accretion in FY11. Despite the increased visibility for growth, valuation has got stretched on account of the sharp run-up in the stock’s price. Thermax currently trades at 22x, a premium to the large cap companies in the capital goods space. Hence, we downgrade the stock from Buy to Hold.

Key highlights
Across-the-board improvement in order accretion: Order inflows during the quarter improved significantly with a 70% growth to Rs17bn. All the divisions of the company witnessed a growth in order flows. In the captive power segment, Thermax won large orders of Rs5.8bn for a 72 MW combined cycle gas based power plant. Even after excluding this large ticket order, the order flows remained strong. The closing order backlog at a standalone level stood at Rs63bn, a growth of 96% YoY. The key industries contributing to the order backlog include power, refineries, ferrous metals, paper, cement and mining.

Update on JVs: Thermax has started negotiations with state governments for acquiring land for the boiler plant under the JV with B&W. The company expects the process to be completed well in time to bid for the NTPC tender for 800 MW supercritical sets. The manufacturing plant is expected to commence operation by Feb-Mar11. The team under the JV with SPX has been formed and has already generated order enquiries worth Rs5bn. The order accretion in this venture is expected to commence in 3QFY11.

To read the full report: THERMAX LIMITED

>UNITED SPIRITS: Less Bulk, More Brands (CITI)

W&M: Brand focused — Mgmt noted that W&M will focus on emerging markets and branded scotch, moving away from its current bulk business. We believe this is a long-term positive. The new business model is in keeping with W&M’s status as a leading global scotch manufacturer. Execution will remain a key imponderable In the near term; earnings will be affected – mgmt has guided to EBITDA of £33m (-40%) in FY11 on a revenue base of £110m (3.5-4m cases). Mgmt expects EBITDA growth of ~15% CAGR over the next 2 years. W&M's scotch inventory of 103m litres is valued at £430m as of June 2010.

Domestic business: Directionally positive — Wet goods costs have softened to Rs143/case in 1QFY11, down from ~Rs151-152/case in 1QFY10 and Rs148/case in 4QFY10. Mgmt expects input costs to remain at current levels during 2Q before softening in 2HFY11. However, mgmt noted that glass prices (~20% of COGS) are expected to harden in August by ~7%. Lower input costs coupled with better fixed cost mgmt and controlled BTL spends should ensure EBITDA margins remain ~20%. Volume growth is expected to continue at a healthy pace of 12-15% Y/Y.

Capital structure: Remains challenged — Overall, gross debt is Rs56.8bn end June, up ~Rs2bn Q/Q, driven by higher requirements of working capital (~Rs1.8bn), and investments in 3 tie-up units (~Rs1.6bn). We don’t expect debt levels to meaningfully reduce, despite strong profit growth, in the backdrop of: a) elevated capex spends over the next 3 years (Rs11bn – firmed up from ~Rs7-8bnearlier), and b) uncertainty on working capital/NCA. From a cash flow/debt servicing perspective, UNSP is comfortably poised. The option of selling treasury shares (8.4m shares, value of Rs11.6bn) and reducing debt is a tangible positive.

Maintain Buy — Given the recent run-up in the stock, we might not see meaningful stock price appreciation in the near term, especially in the context of W&M’s revised forecasts. We note W&M’s EBITDA cut of ~40% could adversely impact our consolidated PAT estimates by ~13-18% over FY11-12E.

To read the full report: UNITED SPIRITS

>NHPC LIMITED: Established track record in implementing hydroelectric projects (ICRA)

Company Overview: Incorporated in 1975, NHPC Limited, formerly known as National Hydroelectric Power Corporation Ltd, is the largest hydro power company in India. It has developed and constructed 14 power stations and its current total installed capacity is 5,295 MW with a major presence in the Northern and Eastern parts of the country. Its 51 per cent subsidiary, NHDC, has 1,520 MW under operation and is also considering development of a 1,320 MW thermal power project in Madhya Pradesh. The company has 4.6 GW capacity under construction, while 6.7 GW is under different stages of planning and awaiting clearances.

Key Business Highlights
Established track record in implementing hydroelectric projects
NHPC has vast experience in the development and execution of hydroelectric projects. The company has managed the development and implementation of 12 hydroelectric projects, and two thermal power projects through its subsidiary, NHDC. The two hydro power projects ‐ Chamera‐II and Dhauliganga‐I were completed ahead of schedule.

New tariff order for FY10‐14
New tariff norms will provide incentives for early commissioning of projects, while the ROE has also improved to 15.5 per cent from 14 per cent. NHPC is entitled to receive incentives for achieving a plant availability factor greater than the Normative Annual Plant Availability Factor (NAPAF) as well as for generating energy in excess of the design energy level of the plant.

Long term PPA (power purchase agreements) with the customers
At the time of making investment decisions on new capacity or expansion of existing capacity, NHPC typically has commitments for the purchase of the output. In FY09, NHPC derived 84.81 per cent of its consolidated total income from the sale of energy to State Electricity Boards (SEB) and their successor entities, pursuant to long term power purchase agreements. These billings to
state entities are currently secured through letters of credit generally entered into through tripartite agreements among the GoI, the RBI and respective state governments.

Capacity expansion by 80 per cent by 2013
NHPC is set to increase capacity by 80 per cent from 5.1 GW in FY09 to 9.4 GW by FY13. The company has 4.6 GW capacity under construction, while 6.7 GW is under different stages of planning and awaiting clearances from CCEA. Further 7.6 GW is under survey and investigation.
Key Risks

• Hydro‐power projects typically require a long gestation period thus posing a risk of delay in execution.

• Border dispute with China over Arunachal Pradesh can hamper the future prospects of projects planned in that region by NHPC.

The stock is currently trading at a P/E multiple of 17.1x on its FY10 EPS of Rs. 1.8 and 11.9x EV/EBITDA multiple based on FY10 EBITDA of Rs. 4,129 crores.

To read the full report: NHPC LIMITED



Saturday, July 24, 2010

>The Artificial Economic Recovery

Economic recovery in the U.S. and elsewhere has slowed rapidly and private and some
public forecasts are being downgraded accordingly. The Federal Reserve is sounding much
more cautious, although they are not yet prepared to talk of further monetary easing. The most
optimistic observers are now having to face reality. The massive stimulus packages did the job
of stopping a self-feeding downward spiral but they have given us an artificial recovery.

Growth is now gravitating back towards 1% in the U.S. and Europe, close to what final
demand has been. In the U.S. the inventory cycle has stopped adding growth, state and local
governments are slashing expenditures and jobs, the nascent housing recovery has gone into
reverse, and deleveraging continues. Realistically, it is difficult to picture where any new growth
surge may come from.

One of the most important implications of this dampened outlook is that government tax
revenues will be disappointing and expenditures will remain elevated. The cyclical component
of the deficit will remain high and the structural component will be hard to cut in a weak
economic environment with unemployment likely to rise further.

To read the full report: ARTIFICIAL RECOVERY

>STARCH: Poised for growth

To read the report: STARCH

>BHEL: Gross sales seen at Rs400-410bn in FY11E (CITI)

Gross sales seen at Rs400-410bn in FY11E — This mgmt estimate compares to official "base target" of Rs380bn and official "excellent target" of Rs395bn. To what extent sales actually exceed Rs400bn is a function of execution and client preparedness. Our gross sales estimate of Rs422bn now appears to have downside risk.

Trying to maintain RM % of sales at FY10 levels — Raw materials (RM) % of sales was ~60% in FY10 and can be maintained at the same levels in FY11E, though internal stretch targets are to reduce it to 58%. We assume 76bps increase.

Staff costs — These were Rs51.53bn in FY10. BHEL expects this to go up 10% in FY11E to Rs56.68bn, plus Rs1.5bn of pension provisions, implying FY11E staff cost of Rs58.18bn. Our estimates are Rs1.1bn higher at Rs59.26bn.

Rs600bn of inflows in FY11E — BHEL has won ~Rs90bn of orders in 1QFY11, a bit low vs. FY11E guidance, but this should be made up in next 9 months. In FY10, BHEL factored in the NTPC-DVC block tender in the guidance of Rs600bn, and despite the same slipping over to FY11E, still managed Rs590bn.

Chinese imports into India could be curbed — Against domestic manufacturers’ demands of duties of ~15% on Chinese equipment, the Arun Maira committee recommended ~10%. Ministry of Heavy Industries was demanding this be implemented immediately and Ministry of Power wanted this to be implemented only post FY12E. We believe duty of ~ 5% could be imposed in next budget. CEA might also specify technical norms (both sub and supercritical) for all power
plants in India which may curb Chinese imports. Mgmt maintains that the market is large enough only for 2 of the 3 – BHEL, domestic suppliers & Chinese.

30GW/year market — This based on BHEL is winning 16-17GW annually and maintaining ~55% market. Out of 100GW in XIIth Plan, 62GW has been ordered. But 100GW number is not cast in stone and can be revised up in FY12E.

To read the full report: BHEL


Company Background: GEI Industrial systems (GIS) was founded in 1970 with its manufacturing facility located in Bhopal (Madhya Pradesh). The company was incorporated as General Engineering Industries. Later on in 1993 the company was converted in to a joint stock company. In 1997-98 Hammon industries, France bought a 30% stake in the company (29.95 lakh shares) and hence the name of the company was changed to GEI Hammon Industries. Hammon sold 25 Lakh shares in August 2008, post disagreements between the two parties. It
continues to hold on 4.95 Lakh shares in GIS. Initially the company was formed as an ancillary unit of BHEL (Bharat Heavy Electricals Limited). GIS is one of the leading players in the heat transfer industry (cooling media) and primarily caters to the requirements of the energy sector i.e. oil & gas sector and power sector.

Share holding Pattern:
The promoters stake as of June 2010 stands at 41.4%, which has been steady since the past four quarters. The total Non- promoters (institutional) stake has gradually increased to 8.1% as of June 2010 from 6.13% in June 2009. The following table depicts the changes in the share holding structure of the company.

Amongst the institutional shareholders Banyan tree Growth capital LLC owns 8.72% stake in the company (allotted in August 2009 at Rs 75 per share), while the Compagnie Financiere Hamon owns 2.98% stake, PCA India infrastructure Equity open fund Ltd holds 5.25% stake and Premier investment fund holds 2.08% stake in the company.

Business and Operations:
GIS is one of the leading players in the heat transfer industry (cooling media). It manufactures various types of heat exchangers. The company has two manufacturing plants based in Bhopal. The two key products from the company are Air cooled heat exchangers (ACHE) and Air Cooled Steam Condensers (ACSC), which are used in the Oil & Gas companies and power plants respectively. GIS undertakes design, manufacture, fabrication, erection, commissioning and maintenance of the heat exchangers and condensers. The following charts show the products manufactured by the company and their respective applications.

To see chart and full report: GEI INDUSTRIAL SYSTEMS

>DISH TV: Highlights of Q1FY11 results

Dish TV’s performance for the quarter is marginally below estimates with revenues of Rs3.04bn (flat QoQ), EBITDA of Rs322m (estimates of Rs370m) and net loss of Rs632m (estimates of Rs575m) in Q1FY11

During the quarter, Dish TV has added 0.6m gross subscribers (7.5m subscribers) and 0.4m net subscribers (6.2m subscribers). Churn has improved on QoQ basis at 0.7% per month

ARPU has improved from Rs137 in Q4FY10 to Rs139 in Q1FY11 with renewal ARPU at Rs172 (up from Rs163)

ARPU based revenues stood at Rs2.5bn, rental revenues stood at Rs450m and bandwidth revenues stood at Rs55m.

As WWIL has discontinued HITS, the revenue from the same has stopped (Rs210m of revenues from HITS in Q4FY10). However, as this business was EBITDA neutral, corresponding costs have also reduced (transponder cost in particular)

Content cost during the quarter has increased by 2.2% QoQ at Rs1bn inspite of strong addition of subscribers, as Dish TV has entered into fixed contracts with most broadcasters. However as some contracts come up for re-negotiation in Q2FY11, content costs would witness an increase in next quarter.

Advertising, selling and distribution expenses have increased QoQ on the back of strong subscriber addition during the quarter as also launch of HD services. Advertising spends have increased by 36.9% QoQ at Rs249m while S&D expenses have increased by 26% QoQ at Rs421m.

During the quarter, license fees, transponder costs and other goods and services costs have decreased by 15.7% at Rs574m. This is primarily attributable to exclusion of HITS related transponder costs.

Total operating expenses have increased by 1.4% QoQ at Rs2.72bn

Overall subscriber acquisition cost has dropped on quarterly basis from Rs2383 in Q4FY10 to Rs2147 in Q1FY11.

To read the full report: DISH TV


Globus Spirits is a leading North Indian player engaged in manufacturing, marketing, and sale of country Liquor, IMFL and industrial alcohol comprising rectified spirit and ENA apart from taking contract bottling to cater to renowned Indian players.

GSL has two modern distilleries, one at Behror, Rajasthan and the other at Samalkha, Haryana. Both are spread out in an area of around 17 acres each and have a combined capacity of 28.8 million bulk liters of alcohol on an annual basis. Both of them are state-of-the-art plants capable of distilling alcohol from grain or molasses.

These units are currently operating at 100% capacity and to meet the current demand, the Company also has to procure alcohol from various other distillers. To fill this demand-supply gap, GSL is implementing expansion projects to almost double the capacities of both plants which will require a capex of INR 705 million.

The capex for this project will be funded from the IPO proceeds, term loans, and internal accruals. The total capacity of these units post-expansion will add up to 48.6 million bulk liters and is estimated to be completed by July 2010.

Apart from the planned expansion for doubling distillation capacity in each unit, the Company has also planned to expand its boiler capacities to 20 metric tons per hour at 42 kg pressure, and install a 2-MW turbine at each of its distillery.

In fact, Company’s project teams have successfully been able to re-engineer and place orders for 25 Metric tonne boilers at higher pressure of 67 kg/cm2 and also up the power generation to 3 MW at each distillery.

To read the full report: GLOBUS SPIRIT LIMITED

Friday, July 23, 2010

>The ingredients that contributed to the European crisis are many:

Slow-growing, unproductive and uncompetitive economies.
Low birthrates and aging populations. (“In the 1950s there were seven workers for every
retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to
1.” – New York Times, May 23)
Generous benefits and social services; cradle-to-grave safety nets.
Extensive vacations and strict limits on the work week.
Early retirement.
Artificially high debt ratings and resultant low interest rates.

To read the full report: EUROPEAN CRISIS

>SHADOW BANKING: Federal Reserve Bank of New York

The rapid growth of the market-based financial system since the mid-1980s changed the nature
of financial intermediation in the United States profoundly. Within the market-based financial
system, “shadow banks” are particularly important institutions. Shadow banks are financial
intermediaries that conduct maturity, credit, and liquidity transformation without access to
central bank liquidity or public sector credit guarantees. Examples of shadow banks include
finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance
companies, structured investment vehicles, credit hedge funds, money market mutual funds,
securities lenders, and government-sponsored enterprises.

Shadow banks are interconnected along a vertically integrated, long intermediation chain, which intermediates credit through a wide range of securitization and secured funding techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo. This intermediation chain binds shadow banks into a network, which is the shadow banking system. The shadow banking system rivals the traditional banking system in the intermediation of credit to households and businesses. Over the past decade, the shadow banking system provided sources of inexpensive funding for credit by converting opaque, risky, long-term assets into money-like and seemingly riskless short-term liabilities. Maturity and credit transformation in the shadow banking system thus contributed significantly to asset bubbles in residential and commercial real estate markets prior to the financial crisis.

We document that the shadow banking system became severely strained during the financial crisis because, like traditional banks, shadow banks conduct credit, maturity, and liquidity
transformation, but unlike traditional financial intermediaries, they lack access to public sources of liquidity, such as the Federal Reserve’s discount window, or public sources of insurance, such as federal deposit insurance. The liquidity facilities of the Federal Reserve and other government agencies’ guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks. Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system.

To read the full report: SHADOW BANKING

>SESA GOA: A ttractive at current valuations

India’s largest iron ore exporter; a play on volume growth
We assume coverage of Sesa Goa (Sesa) with a Buy rating. We forecast FY2011/2012 PAT will rise 60%/8%, driven by 55%/0% growth in realisations and 9%/26% growth in volume. Sesa is India’s largest iron ore exporter (it exports around 94% of total sales by volume) and iron ore contributed 97% of EBITDA in FY10 (it also has metcoke/pig iron businesses). It expects iron ore capacity to increase to 50mt by end-FY12 (from around 25mt currently). Sesa has proven plus probable (2P) reserves of 353mt (it produced around 21mt in FY10).

Key upside catalysts: strong iron prices; inorganic growth; new reserves
Sesa is a direct play on spot iron ore prices. We assume US$114/t India free-onboard (FOB) price for iron ore fines with 63.5% Fe grade (US$81/t for 58% Fe grade, a 29% discount) in FY2011/2012. Its share price is likely to react positively on new reserve findings. Sesa added 97mt of new reserves over the past two years from new exploration (compared to the 37mt it produced). It also added 70mt of 2P reserves from its acquisition of the Dempo mines in 2009.

Downside risks: higher mining taxes; a significant decline in spot prices
We do not assume a significant downside to iron ore prices from current levels (a 1% decline in iron ore prices would lead to 1.8% decline in earnings). Another risk is if the government imposes a mining tax or increases the export duty/royalty.

Valuation: assume coverage with Buy rating and Rs440.00 price target Given limited current reserves (around eight years of production) but aggressive reserve findings, we believe it will not be fair to value on an NPV basis. Hence, we value Sesa on 4.5x FY12E EV/EBITDA, the average valuation of its global peers for 2011.

To read the full report: SESA GOA

>INDIA STRATEGY: QE June 2010 Earnings Season Thus Far

Key Highlights from the Earnings Season
• Still early days of earnings.

• Within Morgan Stanley coverage, three-quarters of the reported companies (9 out of 12) have beaten our analyst expectations.

• Narrow and broad market earnings appear strong.

To read the full report: INDIA STRATEGY

>CESC:: Still A Lot Of Value In Power - Maintain 1M Rating

Parent power continues to deliver — CESC’s parent power business, with 1225MW of generation capacity and the T&D circles of Kolkata and Howrah, continues to grow at a steady clip with FY10 PAT at Rs4.3bn up 6% YoY. We expect PAT CAGR of 7% over FY10-13E, driven by benign regulatory norms. With the commissioning of the 250MW Budge Budge, CESC has increased generation capacity by 25%+.

New projects on track — In Chandrapur (600MW), out of total capex of Rs29bn, CESC has already invested Rs7bn as equity. The BTG and BoP orders have been placed with Shanghai Electric and Punj Lloyd respectively. In Haldia (600MW), out of 380 acres of land required, CESC had already acquired 340 acres and 40 acres remain. CESC has now sorted the situation and has started distributing cheques for acquisition of the remaining 40 acres.

Retailing continues to bleed — CESC’s retailing business had a recurring cash loss of Rs2.5bn in FY10 vis-à-vis management guidance of Rs2.0bn. Further, the company also booked exceptional cash losses of Rs430mn. The retailing business continues to be a major drag on CESC.

Earnings revision — We revise down our parent EPS estimates by 7-9% and consolidated EPS estimates by 27% over FY11E-12E. We expect the parent business to grow EPS at a CAGR of 7% and consolidated business to grow EPS at a CAGR of 24% over FY10-13E.

Target price cut to Rs498 — The cut factors in – (1) earnings revisions; (2) roll forward of DCF on parent/ Dhariwal/ Haldia to Dec10E from (Sep10E earlier); (3) removal of 15% discount on two new projects and (3) no franchise value to CESC’s retailing business, given losses here have been ahead of expectations.

To read the full report: CESC

Tuesday, July 20, 2010

>The double-dip risk and its market implications

Market participants face seriously limited visibility on the pace of near-term growth,
particularly for the advanced economies.

However, we do not believe that the global economy is about to fall back into a recession.

A double-dip – which is not the central scenario we choose – would most likely drive rates even lower, but bond price upside is fairly limited, particularly at the front end.

In the event that the US did become the first to slide back into recession, the USD would be
hard pushed to find any support, at least initially. As the downturn shifts from local to global, it would become clear that there is nowhere to hide from a double-dip scenario. Against this backdrop, the USD would likely regain its status as a safe-haven play.

A serious lack of clarity
Market participants face seriously limited visibility on the pace of near-term growth, particularly for the advanced economies. While this is primarily down to structural impediments, some business cycle-related developments have also been at play.

The two main challenges affecting the advanced economies are the constraints of deleveraging and the need to resume a more neutral monetary and fiscal policy stance. Both of these involve risks. The precise impact of the debt-reduction process on growth is not known. The drop in US housing activity, the European banking industry or the government sector in any advanced country are good examples of the fact that we are entering unfamiliar territory. The risk of a policy blunder should also not be underestimated. How does one simultaneously create the conditions of more economic growth, cut the public deficit and increase the central bank’s
official rate to a more normal level?

To read the full report: RISK & ITS IMPLICATIONS

>ABAN OFFSHORE LIMITED: Book profit and re-enter at lower levels…

Aban Offshore Ltd (Aban) is likely to post a loss in Q1FY11 if the company makes a provision for extraordinary loss on account of the loss of Aban Pearl in Q1FY11.

Expect subdued results in Q1FY11E
Aban is likely to report a 3.6% QoQ drop in topline of Rs 984 crore in Q1FY11E. The loss of Aban Pearl would be the major contributor to the drop in revenue. The operating margin is likely to contract to ~64% with EBITDA at Rs 628 crore.
However, we expect the company to make a provision in excess of Rs 350 crore (to account for the difference in the book value and insured value of the asset), which if provided in the current quarter would result in the company reporting a loss in Q1FY11E. Excluding this one time extraordinary hit the company is likely to report a profit of Rs 267 crore in Q1FY11E.

Fairly valued at current price
The stock price has moved up by 31% since our last BUY recommendation at Rs 677 and achieved the price target of Rs 884 (refer our report on Aban dated May 27, 2010). The stock is fairly valued at the current market price. Hence, investors are advised to book profits and re-enter later.

To read the full report: ABAN OFFSHORE

>INDUSIND BANK: Above expectations: 1Q strong; expansion to drive growth

What surprised us
IndusInd Bank reported 1QFY11 net profit of Rs1,186mn (+21% qoq, +37% yoy), 5% ahead of our estimate. This was driven by: 1) 77% growth in NII to Rs2.96bn (10% ahead of our estimate) on margin expansion (NIM at 3.32%, +13bp qoq), helped by improvement in both corporate, retail yields and higher volumes (+5% qoq, +31% yoy, driven by growth in the commercial vehicle segment), and 2) non-interest income (excluding capital gains) came in 15% ahead of our estimate, up 64% yoy due to higher fees from trade related as well as third-party product distribution. However, costs came in 13% above our estimate (+36% yoy, +10% qoq) as the company added c. 450 employees and 14 new branches during the quarter. INBK also booked higher loan loss provisions (49% above our estimates, +42% yoy), increasing coverage ratio to 70%. Net NPLs were at 0.4%, down 19% qoq; gross NPLs grew to Rs2.75bn (+14% yoy, +8% qoq) and now stand at 1.3% of advances.

What to do with the stock
We raise our EPS estimates for FY11-13 by 3%/2%/1% to factor in higher NII, fees and higher expenses on aggressive branch expansion. We raise our Camelot-based 12m target price to Rs225 (from Rs210) to reflect higher earnings estimates and rolling forward BVPS by one quarter. We remain structurally positive on IndusInd Bank and reiterate our Buy rating.

Key risks: High dependence on wholesale deposits, frequent capital raisings to achieve growth

To read the full report: INDUSIND BANK

>HOTEL LEELA VENTURES: Low base effect; stress test from Q3FY11

Low base effect aided improvement in operations
Hotel Leelaventure’s (HLV) Q1FY11 sales increased 25% Y-o-Y, to INR 1.06 bn, due to the low base effect; it, however, declined 20% Q-o-Q due to seasonal factors. The company had 61% and INR 8,679 as ORs and ARRs for Q1FY11 against 57% and INR 8,314 in Q1FY10, respectively. We expect sales to increase 42% in FY11 as the Delhi property becomes operational and ARRs and ORs improve due to overall buoyant business environment.

EBIDTA margins to expand; high depreciation, interest to hit PAT
We expect EBIDTA margins to improve to 36% in FY11 against 29% in FY10. Operating margins are likely to improve due to the opening of Delhi property at the end of Q2FY11 and a better economic environment. We expect PAT in FY11 to come under severe pressure as depreciation and interest on the INR 11 bn capex on the Delhi property start getting reflected from Q3FY11. We are reducing our revenue estimates from the Delhi property to six months from nine months

Equity raising imminent
Issuance of 10 mn equity shares on preferential basis to promoters will increase the promoter stake to 54.5% from 53.3% currently. We expect the company to raise money using the QIB/FCCB route soon as the D/E ratio, estimated at 3.4x in FY10, is on the higher side.

Outlook and valuations: Expensive on all counts; maintain ‘REDUCE’
With FCCB redemption of EUR 50 mn (with redemption premium of 25.5%) in September 2010 and Delhi property becoming operational by September 2010, we expect interest liability to go up substantially Q3FY11 onwards, unless the company raises money through QIB/FCCB. We believe sale of the office space in Chennai and inflow from Pune land development, along with the QIB/FCCB issue, could be the next milestones. We continue to value HLV based on EV/EBIDTA, and maintain our target price of INR 25. At CMP of INR 50, the stock is trading at 24.1x and 16.4x EV/EBIDTA of FY11E and FY12E, respectively. We maintain our ‘REDUCE’ recommendation on the stock.

To read the full report: HOTEL LEELA VENTURES