Tuesday, February 9, 2010

>The six possible scenarios for the future (NATIXIS)

One can obtain six possible scenarios for the future (in the United States and Europe) according to:
whether one believes in a resurgence of inflation or not;
whether one believes that growth will return or not;
whether one believes that the monetisation of public debts will continue or not.

We believe that:
in the short term (2-3 years), we will rather be in an equilibrium without inflation, without growth and with monetisation;
in the long term (5 years and beyond), we will rather be in an equilibrium with inflationary pressures, sluggish growth and without monetisation, and therefore with rising long-term interest rates.

To read the full report: POSSIBLE SCENARIOS


Satisfactory results, valuation discounts possible upside
Axis Bank reported a healthy net profit growth of 31% yoy to Rs. 6.6 bn for the quarter ended December 2010. This was primarily on account of higher fee income and lower cost of funds (led by repricing of higher cost term deposits and positive impact of capital infusion in Q1’10). We expect RBI’s recent increase of CRR by 75 bps will reduce the liquidity in the system andin order to control inflation, we anticipate further tightening of the monetary policy in the coming quarters. Hence, we believe that Axis with its high CASA ratio will be a beneficiary in terms of margins. Our DECF valuation suggests a fair value of Rs.1,166, indicating a potential upside of 11% over the current stock price. Thus, we reiterate our Hold rating.

NIM to improve owing to rising CASA and recent capital infusion: The Bank reported a Net Interest Margin (NIM) of 4.0% for the Q3’10 (a rise of 48 basis points) over the previous quarter primarily on account of rising
CASA ratio along with the capital infusion in the first quarter. In the coming quarters, we expect NIM to remain in the range of 4.0% to 4.1% as we believe the Bank will be able to maintain its high CASA ratio, which will help the Bank in the wake of tightening monetary policy.

Muted advances growth; however, we expect it to pick-up: The advances for the Bank grew by 12.5% yoy to Rs 847.7 bn at the end of third quarter. The growth in the loan book was slower than the previous quarters; however, it was in line with the industry growth. We expect the loan book to expand in the coming quarters as the economy is recovering and the Bank has enough headroom in terms of capital adequacy ratio, which now stands at 16.8%.

To read the full report: AXIS BANK


Reliance Communications’ (Rcom’s) Q3FY10 result fell short of our estimates at the revenue and EBITDA level by 6%. However, the company’s PAT, at Rs 11.1bn, stood significantly ahead of the estimated Rs 5.5bn. The variation in PAT stemmed from a finance income of Rs 4.1bn reported by Rcom as against a finance charge of Rs 4bn anticipated by us. We are marginally pruning our FY11 numbers but maintaining our Sell rating on Rcom. Financial transparency, poor operating matrices and capital productivity coupled with weak balance sheet are key reasons for our sell rating.

Topline slides 6.9% QoQ: Rcom’s consolidated revenue dropped 6.9% QoQ (decline of Rs 3.6bn) as the Globalcom business plummeted 12.5% QoQ to Rs 19.8bn. The management attributed the decline in this business to rupee appreciation (against US$) and booking of a one-time revenue in Q2FY10. The poor performance of the Globalcom business surprised us negatively as the company’s long-distance minutes grew 23% QoQ to 16.4bn (NLD +22% QoQ, ILD + 30% QoQ). Revenues from the broadband business, however, dipped 8.5% QoQ to Rs 7bn which the management attributed to pricing pressure.

EBITDA declines 10.3% QoQ: Rcom’s EBITDA slumped 10.3% QoQ due to a 128bps contraction in the EBITDA margin. This contraction was led by a sharp increase in access charges (up 15.3% QoQ or 199bps) and network costs (up 5% QoQ or 355bps). The drop in margins, however, was restricted by lower SG&A costs (lower 33.6% QoQ or 473bps), which the management attributed to cost optimisation measures like rationalisation of office spaces and outsourcing of contracts / manpower.

PAT grows 56.6% QoQ: Despite lower revenues and EBITDA, Rcom’s PAT improved 56.6% QoQ purely due to the booking of finance income. During the quarter, Rcom had a finance income of Rs 4bn against a finance charge of Rs 6.5bn in Q2FY10. Appreciation of the rupee against the US$ also had a positive impact of ~Rs 6.5bn in Q3FY10.

Management call highlights: Rcom has trimmed its FY10 capex guidance to Rs 45bn against its earlier estimate of Rs 100bn (Rs 150bn estimated at the beginning of the year); its guidance for FY11 stands at Rs 30bn (excluding 3G). The management has indicated good traction for its new Simply Reliance and SMS plan; however, lowerthan- competition subscribers and poor growth in minutes of usage suggest the contrary.

Maintain Sell: We maintain our Sell rating with revised target price of Rs 180 (from Rs160 earlier) due to lower capex assumption and moving forward in terms of time period. We have reduced our FY11 revenue, EBITDA and PAT estimates by 5.5%, 9.7% and 4.6% respectively. The expected in PAT stands lower than in revenue and EBITDA due to the lower capex assumption and thus depreciation.

To read the full report: RCOM


Rajasthan crude boosts profits: Cairn India reported sales of Rs5b for 3QFY10 (v/s our estimate of Rs4.6b),
up 2.4x YoY and 116% QoQ. Sales growth was driven primarily by higher net volumes (+32% QoQ at 24.6kboepd) and higher realization (+12% QoQ at US$66.9/boe). Rajasthan production accounted for 44% of the Cairn’s working interest production of 24.6kboepd. EBITDA was Rs3.5b (v/s our estimate of Rs3b), up 3.7x YoY and 161% QoQ. Reported PAT was Rs2.9b, much higher than our estimate of Rs780m due to (1) lower DD&A expenses – Rs300m v/ s our estimate of Rs1.4b, and (2) lower interest costs – Rs260m v/s our estimate of Rs1.1b.

2010 ramp-up delayed, but management maintains 2011 guidance: Production from the Rajasthan block
averaged 15.4kbpd (gross) and is currently 20kbpd. Management expects production to reach 125kbpd by early 2HCY10 (delay of ~3 months) and 175kbpd by early 2011. We are reducing our average FY11 production estimate to 104kbpd (earlier 132kbpd) but maintain our FY12 production assumption at 180kbpd.

Multiple factors to guide Rajasthan ramp-up: Apart from Cairn’s ability to produce crude, pipeline connectivity and customer’s ability to process crude will guide the Rajasthan block’s production ramp-up. Currently, Cairn is selling its crude to Reliance Industries and MRPL, and expects to commence supplies to IOC and Essar Oil, soon.

Cutting FY11 estimates; maintain Buy: We are reducing our FY11 EPS estimate by 26% to Rs19.4 led by cut in production, but maintain our FY12 EPS estimate at Rs35. We model Brent oil price of US$70/bbl and 12.5%
discount for Cairn’s waxy crude in Rajasthan. At US$80/bbl of average Brent price for FY11 our EPS would stand increased from Rs19.4 to Rs24. Our SOTP-based target price for Cairn India is Rs275 (including potential upside of Rs64). Maintain Buy.

T0 read the full report: CAIRN

>ADANI POWER: 3Q FY10 – A Mixed Bag (CITI)

3Q FY10 PAT at Rs725m — In 3QFY10 Adani Power generated 670 mnkWh at a PLF of 92.8%, significantly higher than 37.7% in 2Q FY10 as the plant stabilized. We will monitor the monthly PLF over the next few months and then take a call if we should hike our PLF assumption to 90% across the board for all units from our current assumption of 85%. Realizations were ahead of expectations at Rs3.86/kWh (CIRA expectation of Rs3.34/kWh).

Fuel costs ahead of expectations — Adani Power’s fuel cost/ unit of generation at Rs1.45/kWh was ahead of our expectation of Rs1.03/kWh as the company initially imported expensive South African coal and blended the same with cheaper Indonesian (Bunyu) coal. According to the company, the plant is running exclusively on Indonesian coal currently and fuel cost is expected to come off in 4Q FY10. O&M cost per unit was more or less in line with our expectations

Mundra Phase I & II delayed marginally - Phase 3 & 4 on schedule — According to management Units 2, 3 & 4 of Mundra Phase I & II are delayed by 2-3 months due to restrictions on Chinese visas. However, Phases 3 & 4 are on schedule.

Update on tax rates — According to management the taxes shown in the profit & loss statement are deferred taxes (not cash taxes). The company has so far not started to avail the 10-year tax holiday (will not pay MAT also) under section 80IB and will start the same once all units are commissioned. The 10-year tax holiday can be availed in the first 15 years from the date of notification (Dec06). We have assumed MAT taxes in our numbers and will take a re-look at the same.

FY10E estimates are at risk — Given than the company has booked only Rs719m of PAT in 9M FY10, our FY10E estimates could be at risk.

To read the full report: ADANI POWER