Friday, January 29, 2010

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

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

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

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

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

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

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

To read the full report: INDIAN FINANCIAL SERVICES


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

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

Inflection point has been reached

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

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

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

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

Earnings and target price revision
No change.

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

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

To read the full report: RIL

>Vascon Engineers Limited: IPO Grading (CRISIL)

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

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

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

Grading Highlights

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

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

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

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

To read the full report: VASCON ENGINEERS


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

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

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

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

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

To read the full report: STERLITE INDUSTRIES

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

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

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

To see the table: DIVESTMENT


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

To read the full report: EVERONN SYSTEMS