Tuesday, January 26, 2010

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

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

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

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

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

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

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

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

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

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

To read the full report: ASIA-PACIFIC ECONOMIES

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

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

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

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

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

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

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

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

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

Valuation and risks

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

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

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

To read the full report: HPCL & BPCL


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

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

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

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

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

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

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

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

To read the full report: KOTAK MAHINDRA BANK


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

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

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

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

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

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

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

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

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

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

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

To read the full report: ENTEGRA LIMITED