Monday, February 8, 2010


Is it serious, doctor?

We find very worrying the long list of challenges and difficulties which the United States and the euro zone will be faced with in the medium term, and which are more serious after the crisis than before it:

• accelerated deindustrialisation and offshoring, in a global situation of excess production capacity and anomalies in the formation of exchange rates; need to squeeze production costs;

• ongoing deleveraging by the private sector, for reasons on both the credit demand side (decline in financial and property wealth) and on the credit supply side (less securitisation, new prudential rules for banks, higher cost of banks' funds);

• spontaneous distortion of income sharing to the detriment of wageearners, due to continuing high unemployment and a high required return on equity in a situation of moderate growth;

• inexorable rise in commodity prices and in the use of fossil energy, due to the growth model of emerging countries, including China;

• long-term negative effects of excessive public indebtedness: restrictive fiscal policies or crowding-out of corporate investment.

To read the full report: CHALLENGES AND DIFFICULTIES


At ICICI Bank, aggression of the past has changed color from loan growth, to profitability and risk control. The management has once again meticulously, and consistently, delivered on its recalibrated business plan. The consolidation phase is over and numbers are all there. With credit costs easing, CASA expanding and expenses curtailed, RoA has risen by 30bp to 1.2%. We believe the bank is now all set to execute the next phase of its strategy to deliver high profitability while accelerating balance sheet growth. Over FY10-12, we expect 30% CAGR in the bank’s earnings driven by steeply declining credit costs, expanding margins and strong loan growth. We see a 430bp rise in core business RoE to ~15% over FY10-12. This, we believe, would drive a structural re-rating of the stock from ~1x currently to 2-2.5x core book. Assigning a value of Rs292/ share to non-banking strategic investments and valuing core business at 2.25x FY12E book, we raise our price target on the stock to Rs1,450.

Profitable growth assumes centre-stage: Remaining true to its DNA, ICICI Bank has successfully executed a changed strategy with profitability and risk control at the core. The consolidation has rendered a stronger liability base with CASA deposits rising to 40% as of December 2009, opex to assets down to 1.6% from 2.2% in FY08 and provisions showing signs of peaking out. Importantly, RoA has significantly expanded from 0.9% in FY09 to 1.2% in YTDFY10.

Banking RoE to expand to 15% by FY12E…: Deriving strength from a fortified liability franchise, the bank now looks to rapidly grow corporate and secured retail loans. We estimate the bank’s credit costs to ease from 1.1% of assets in FY10 to 0.7% by FY12 and margins to expand by 20bp. This would drive a 30% CAGR in earnings over the period. Though overall RoE would remain subdued at ~12% due to strategic investments, core banking RoE is expected to rise to ~15% by FY12.

…and drive a re-rating in core business: With high growth potential, ICICI Bank offers the best riskreward in the financials space from a medium-term perspective. Return ratios on core business are catching up with peers, and the stock is due for a structural re-rating. Reiterate Outperformer with an 18- month price target of Rs1,450 (core business valued at 2.25x FY12E book).

To read the full report: ICICI BANK

>Ownership Data for 4Q09 : More Portfolio Churn Coming (MORGAN STANLEY)

Key Debate: Does institutional ownership suggest that sector performance is about to inflect? It appears that institutional investors have been selling Telecoms in the fourth quarter of 2009 but still have that sector as their largest overweight position. In contrast, they have been buying energy in the past quarter and narrowing the underweight position in that sector. Telecoms and Energy were among the underperforming sectors in 2009.

Summary of Shareholding Changes for the QE December 2009: There was little change in aggregate ownership of stocks across various categories of shareholders. FII stake in our sample of India’s top 75 companies as well as the broad market remained more or less unchanged at 19% and 17%, respectively. While domestic institutional shareholding went up slightly, shareholding of households declined a little.

FII Portfolios: By our estimates, about 50% of the net buying by FIIs during the quarter ended December 2009 was outside our sample of India’s top 75 companies. That said, the average sector position size declined to 113 bps, its lowest level since March 2008 – indicating lower conviction at the sector level.

Key Sector Positions: Institutions, on aggregate, sold Telecoms, Industrials, Staples, Utilities and purchased Financials, Energy, Materials, Consumer Discretionary, Healthcare and Technology (all in that order). Institutions at the end of the quarter appear most overweight (versus the MSCI India sector weights) on Telecoms, Financials and Consumer Discretionary and most underweight on Technology, Energy and Utilities. The largest change in sector position for domestic institutions (including insurance companies and mutual funds) was Financials with a 283bp decline in its underweight position, followed by Telecoms, for which the overweight position reduced by 130bp. The three largest overweight positions are Consumer Staples, Industrials and Telecoms whereas the biggest underweight sectors are Technology, Financials and Energy. FIIs appear to be overweight Financials, Telecoms and Consumer Discretionary in their portfolios. Underweight positions in Energy, Industrials and Materials are funding these overweight positions. FIIs sold Telecoms and Financials while purchasing Energy and Consumer discretionary during the quarter ended December 2009.

Conclusion: Our recent investor survey suggested that the buy side consensus is bullish on Financials and Industrials whereas Consumer Staples and Telecoms are the least favored. The ownership data from the previous quarter more or less concurs with this with the exception of industrials. That said it would appear that further changes are needed in ownership levels for their views to be reflected in their portfolios (for example, more selling in Telecoms and more buying in Financials and Industrials).

To read the full report: INDIA STRATEGY


3QFY10 earnings ahead of est. driven by topline and low credit costs (disappointment)
3QFY10 results, on average, were ahead of expectations led by stronger topline and lower credit costs (disappointing aspect). Topline driven by margin expansion (though down yoy) and loan growth (finally getting there). Govt. banks loan growth at 14- 24%, led by SBI, PNB and BOB. Private banks were a mixed bag; ICICI Bank still showing +15% contraction, while HDFC Bank’s loans grew 21% yoy; Axis Bk only at 12% yoy. Trading profits, while lower qoq, ahead of our est. at 8-20% of PBT. NPL’s continue to rise qoq; but NPL accretion lower qoq (key comfort). NPL recognition from agri debt scheme was key difference. Low credit costs and NPL cover (incl. SBI) key disappointment. Core earnings up 9-10% yoy v/s negative in 2Q.

3QFY10: Core ‘+ve’ surprise, lower credit costs a concern

Rising LDRs and expanding margins a big positive; Fees was the silver lining
Banks across the board have seen LDRs rise and margins expand (qoq), helping drive topline growth. Incremental LDR (YTD) is est. at +70-200% for most banks.

Future outlook: Margins to expand; LDR set to rise
Margins are likely to expand sequentially owing to a) Rising LDR that would allow banks to re-deploy their lower yielding Gsecs towards loans; and b) Some more re-pricing of their high cost deposits. The LDR will rise owing to a pick up in credit driven by greater infra lending; visible pick up in housing and vehicle loans and due to the cyclicality of the economy (30-40% of all loans are disbursed in 4Q of any fiscal). Hence, core earnings should see further improvement in the 4Q.

Buy ICICI Bk, HDFC Bk, SBI and PNB; OBC – preferred small-cap pick
Post results, ICICI Bk appears better positioned delivering across key variables (Credit quality, Costs, Capital, Credit) and still likely to see margin expansion (having raised low cost funds) and likely to grow loans at 20% and FY11 earnings at +30%. SBI, while facing NPL provision headwinds still likely to grow earnings at 20% on rising loan growth. HDFC Bk may end the year with highest growth. Amongst govt. banks (ex-SBI), PNB, OBC, BOB had best results. BOI and UBI lagged.

To read the full report: BANKS RETAIL


Company Profile: Incorporated in 2000, ARSS Infrastructure Projects Ltd is engaged in construction of railway infrastructure, roads, highways, bridges and irrigation projects in India. ARSS has business activities in the zonal jurisdictions of East Coast Railway, South Eastern Railway, South East Central Railway, Southern Railway and North Western Railway. ARSS effort in the railway construction projects include earthwork, major and minor bridges construction, supply of ballast, sleepers, laying of sleepers and rails, linking of tracks etc. ARSS has completed around 200 km rail line and about 300 km of roads and highways.

ARSS Infrastructure has significant presence in Eastern India, particularly in the state of Orissa. However, in recent years it has pursued opportunities in other parts of India including states of Chhatisgarh, Rajasthan, Jharkhand, Haryana , Kerla, Andhra Pradesh, Assam, Maharastra and Tamil Nadu.

Strong and diversified Order Book
Company's order book as on January 10, 2010 stood at Rs.2877.53 Cr. The composition of Order Book is well diversified over various segments such as railways, roads and highways and Road Over Bridges (ROB). Diversification into new areas of construction projects helps the company to mitigate the risk of slowdown in revenues from any segment due to unforeseen circumstances.

Client centric approach
Company's client centric approach enables it to develop long term relationship with its clients & receive repeat orders from them. Majority of company's clients include Government, Public Sector Undertakings and other Government agencies, which reduces the risk of default and delayed payment. As on January 10, 2010, 73.11 % of Order Book of Rs. 2877.53 Cr comprised of the repeated order works from Government and Government authorities.

Large fleet of construction equipment
ARSS Infrastructure currently holds large fleet of equipments that enables it to mobilize its equipment to projects sites as & when needs arise.

Successful project execution track record
In a span of nine years, the company has successfully executed over 86 projects involving construction of over 300 km of roads and highways, 200 km of rail tracks, 10 minor and major bridges and other general civil engineering works .The company is known for its timely completion of projects in the eastern part of India.

Forging alliances with established Indian and international strategic partners
The company intends to develop and continue to establish strategic alliances with companies, whose resources, skills and strategies are complementary to its business, which would enhance its business opportunities to achieve competitive bidding advantage.

Enhancement of profitability and capital efficiency
Focusing and structuring on optimum capital utilization will be the strategy of the company going forward. The company believes that actively analyzing and identifying projects yielding higher margins will enhance its returns.

Building a pan-India presence
The company intends to continue to bid for contracts funded by Central & State Government or other recognized development organizations in order to build a pan India presence.

One of the Promoters involved in criminal proceeding
A charge sheet has been filed on January 11, 2006 by CBI wherein Mr. Subash Agarwal, Promoter and Director of the company has been accused in the murder case. Imprisonment of the promoter could have a serious impact on company's reputation & thereby affecting its financials.

Defaulted on payment of interest and repayment of loan
ARSS has defaulted in making payment of interest & repayment of loans in the past. However, the company has cleared all its dues before filing the prospects .In case the company defaults in making payment in the future it could pose a serious setback to company's financial position.

Power supply at one of the units has been disconnected
Due to default in payment of electricity bills by the company to Central Electricity Supply Company of Orissa Limited (CESCO), power supply to its crusher unit at Nityanandpur, Orissa plant has been disconnected. The power requirement at this plant is presently being met by the D.G. Set owned by our Company.

Conflict of interest between group companies
Some of entities owned/promoted by the promoters are in the same line of business as its company. This may result in conflict of interest between the promoters and the business strategies of the Company.

To read the full report: ARSS INFRASTRUCTURE