Tuesday, February 16, 2010

>INDIA BUDGET: Muted expectations!!!! (HSBC)

We expect that the budget for the fiscal year ending March 2011 is unlikely to represent a major shift in government policy. A gradual winding down of fiscal stimulus, a 15-20% rise in government expenditure, and building in robust economic growth of 8.5-9% is likely to lead the government to project a lower deficit (of 5.5%). However, given that most of the lower deficit number is on account of cyclical rather than structural factors, our economist, Robert Prior-Wandesforde, believes the RBI may raise rates at or shortly before the next policy on 20 April 2010, given the combination of this modest budget disappointment and more inflation upside surprises. Risk of this may blunt any budget related enthusiasm for stocks.

FY2010/11 budget unlikely to unfold any major stock catalysts other than higher spending plans in key areas

Sectors likely to benefit: Infrastructure, Construction & Engineering, Banks on higher spend

Stocks impact: Positive – L&T, BHEL, IRB, Voltas, Banks, HCL Tech; Negative – BPCL, HPCL, ACC

Notwithstanding our expectation of a muted market impact, there may be select sectors that could benefit from higher spending (construction & engineering, infrastructure) and higher growth + rates (banks), but oil marketing and cement companies (in the South) run the risk of a negative market reaction given the sharing of subsidy burden and lack of pricing power.

Key downside risks are 1) likely optimistic revenue projections in case economic growth fails to pick up, and 2) large borrowing by the government to fund the deficit potentially crowding out private borrowers.

Please refer our summary of macro and sector related impacts of the budget inside.

To read the full report: INDIA BUDGET

>INDIA WIRELESS SECTOR: Aircel, Idea rise; Bharti, Vodafone stable (MACQUARIE RESEARCH)

GSM operators (excluding the GSM SIMs of RCOM and Tata Tele) added 13.9m SIMs in January 2010, suggesting an accelerating trend, following 12.5m SIMs added in December, 11.1m in November, 10.3m in October and 8.6m in September. We caution investors that multiple SIM ownership is increasing and that accelerating SIM addition will likely not translate into revenue growth. As greenfield operators Uninor and S Tel ramp up their GSM services, we expect competition to intensify, hurting the revenue market share and profitability of GSM incumbents. We reiterate our Underperform rating for all Indian wireless telcos under our coverage.

Industry net adds reaches 13.9m, helped by ramp up of Uninor, S Tel. Uninor and S Tel ramped up their operations, with Uninor capturing 33% of net add share in its eight circles and S Tel cornering 20% net add share in its three circles in January.

Key notables in January net adds: Aircel, Idea – positive. Both Aircel and Idea registered sharp increases in net adds in January, with Idea reporting MoM growth of 33% (up from MoM decline of 33% in December) and Aircel reporting MoM growth of 21% (up from MoM growth of 4% in December). Idea’s net add growth chiefly came from Bihar and Gujarat, while Aircel continued its strong performance in Tamil Nadu.

Monthly net adds for Vodafone remain stable. Vodafone added 2.74m subscribers in January (vs 2.79m in December and 2.78m in November), while Bharti added 2.9m in January the same as that in December.

Price cut contagion is likely to spread to key segments of postpaid/ corporate, wireless data, international roaming and SMS. Further ramp-up and rollout of services by greenfield entrants will likely lead to a further cut in prepaid and increasingly aggressive on-net pricing. Tata DoCoMo has started this with its Buddy plan, which includes unlimited friends. Furthermore, MNP remains a negative catalyst for price cuts by incumbents to stay competitive in the segments of postpaid/corporate, wireless data, international roaming and SMS. Key risks to the downside emanates from our current EBITDA per minute estimate of 14 paisa for Bharti, 12 paisa for Idea and 12 paisa for RCOM in FY3/11, as EBITDA margin dislocation will likely be much higher.

Reiterate Underweight view on India Telecom stocks. We expect wireless KPIs for listed telcos to continue to deteriorate for the next two quarters, and we see downside risks to consensus estimates for FY3/11. Valuations remain pretty full, in our view, while industry consolidation is at least 12–18 months away. If the share prices were to correct by 10–15%, we could become more positive.

To read the full report: WIRELESS SECTOR


Arvind Rao (CEO) and Sandhya Gupta (Head M&A – Investment & Strategy). Most questions were centred around OnMobile’s dilution plans and impact of falling voice revenues on VAS pricing. OnMobile’s 3QFY10 results have been in line with revenue growth of 6.3% (QOQ) and improved EBITDA margins. Key takeaways
from the presentation: 1) OnMobile is likely to raise capital to execute a ‘Telefonica-type’ deal or a big-ticket overseas M&A; 2) the company expects Telefonica revenues to add to topline by FY11 and execution is on-track. International revenue contribution should grow to 50% in 2 years; and 3) management expects some ‘rub-off’ effect of tariff wars to hit VAS pricing, but believes that volume growth should offset pricing decline, leading to revenue growth. We retain BUY with a target price of Rs620.

Capital-raising plans to execute more ‘Telefonica-type’ deals and overseas M&A: Management said it may raise capital to expedite execution, and the board has already approved capitalraising to the tune of Rs10bn. Even with Rs3bn equity capital, the dilution would be 13-14%, which is very high.

International execution on track; better cost management, dollar depreciation could hurt: The company further indicated that it is confident of bringing down content costs (which have been increasing over the last few quarters). OnMobile would complete the Telefonica roll-out in three countries by April and the rest by June 2011. The Vodafone roll-out will scale up to full potential over the next two years.

VAS pricing could be the next source of tariff cuts by operators, but volumes to compensate: The management believes that while voice pricing has taken a severe hit over the years, falling from Rs25 per minute to Rs0.5 per minute, VAS has been fairly untouched. But with pricing cuts for VAS products, penetration of the products has enormous scope to grow and should be revenue-accretive.

To read the full report: ONMOBILE GLOBAL


• Everonn is India’s second-largest technology-aided knowledge services company, offering comprehensive learning solutions across the education value chain.

• The company provides Education Service for several State Governments in India, for their Computer Education, Computer Literacy, Computer Aided Learning and Teachers Training projects.

• Everonn has the technological capabilities to stream relevant educational content simultaneously and seamlessly through VSAT, Broadband and the 3G Spectrum (Mobile). Everonn currently operates live and interactive sessions through over 13 studios at Chennai and New Delhi.

• The revenue of the company for the quarter ended on Dec 31th increased 83.5 % YoY while profit increased 54%.

• The topline of the company are expected to grow at a CAGR of 51% over 2008A to 2011E.

To read the full report: EVERONN EDUCATION LIMITED