Wednesday, February 24, 2010

>Deposit Rate Hikes in the Offing – A Process of Normalization

Quick Comment: Over the weekend, HDFC Bank raised deposit rates for 1-2 year deposits by 25-50 bps. We expect other banks to start raising rates too – moreover, the first 1-2 deposit rate hikes may come with no hike in lending rates (similar to the last cycle of rate hikes effected by banks).

When interest rates started coming down, Indian banks (especially SOE banks) had been averse to cutting deposit rates: This was the key cause of intense downward NIM pressure banks saw in the first half of CY2009. However, they made up for that inertia, by cutting rates extremely aggressively since the beginning of 2009 as liquidity increased in the system. This caused lending spread (PLR- 1 year deposit rate) to move up sharply last year.

Currently rates offered on 1 year deposits are about 6%: This is unsustainable in India, where there are alternative investment options for individuals offering around 8%. Moreover, with inflation running at higher levels (WPI, core CPI, CPI are all higher), investors are making negative real returns. This caused deposit growth to slow down – term deposits in India are now growing at around 16%, the lowest rate since 2006.

Lending growth has picked up, implying a significant jump in incremental credit deposit ratios: If we look at ICDR on a 3-month trailing basis, this bottomed around July – August and has since picked up. On the last data point, it is running above 100%. This is causing a reduction in excess liquidity, which can allow banks to normalize deposit rates again.

What does this mean for our NIM assumptions – We were not building continuation of the current high spreads on lending to continue. Hence, no change in NIM’s. Moreover, rising rates are good for banks with strong liability franchises.

To read the full report: INDIAN FINANCIAL SERVICES


Upgrade to HOLD and raise SoTP-based TP to INR1010/sh.
3Q results suggest refining has bottomed, recovery likely to be slow.
Switch to Cairn for near-term; prefer ONGC for the long term.
Our concerns on weak refining and delay in gas issue play out.

Refining bottoms out, but don’t expect a sharp uptick
3QFY10 results showed refining bottoming out for complex refiners like Reliance. 3Q refining margins came in higher than we expected, at USD5.90/bbl, on strong utilization rates of 107% for both the refineries. The new refinery impressed with utilization of 115% supported by strong exports. Singapore complex margins increased in the past couple of weeks to ~USD5.5/bbl as oil prices cooled off and product cracks remained stable. While we believe the worst is over for global complex refiners, we do not share the view that there could be a strong recovery in refining. Product demand, especially for high-margin products like gasoline and diesel in US and Europe, remains muted. While China and India are seeing consumption grow at a rapid pace, on a global scale, the incremental demand doesn’t move the needle to enable a refining revival. In addition, greenfield capacity/unit upgradation continues to be a concern.

E&P should be the value driver
RIL has one of most prospective acreages within the Indian E&P space. Its landmark KGD6 field is currently producing 60mmscmd of gas and is capable of producing 80mmscmd, depending on fall-back demand and
additional allocations. In addition, drilling is on schedule at the D3 & D9, the other prospective blocks within the KG basin. However, investors will have to be patient for reserve accretion and for RIL’s E&P story to unravel. While we believe RIL’s acreage within the KG basin to be prospective, we do not assign any value to the KGD3 & D9 blocks as exploration activity is still in the early stages.

We are upgrading Reliance Industries to HOLD from Reduce. Since our downgrade on 24 April, 2009 (“All priced in: time to get out”), RIL shares have gained by 14.9% compared to Sensex at 42.6%. Our concerns of continued downturn in refining, delay in the resolution of the gas issue and no E&P surprises all played out. We do not expect to see the same degree of under-performance going forward for RIL as refining shows signs of bottoming and as the outcome of the court case closes on. We raise our TP from INR815/sh to INR1010/sh as we value refining at a higher multiple as refiners move from trough valuations. We value the refining & petchem business at 8x EV/EBITDA, KGD6 Oil & Gas fields using DCF and CBM, NEC-25 & KGD6 satellite fields at EV/boe of USD5. Key upside risk to our TP is a sudden turnaround in refining.

To read the full report: RELIANCE INDUSTRIES


Company Description: Incorporated in 1989 as Mayur Gem and Jewellery Export Private Limited, RJL was engaged in the business and manufacture of jewellery. In 1997, the Company's name was changed from Mayur Gem & Jewellery Export Private Limited to Renaissance Gem & Jewellery Export Private Limited. In 1998, Sur Style Jewellery Private Limited ('Sur Style') engaged in manufacture and export of studded jewellery was merged with company. In 2005, the Company was converted to a public limited company and the name was changed to Renaissance Jewellery. It tapped the capital market with an issue of 53.24 lakh shares at a price of Rs 150 per share aggregating 79.86 crore. From the IPO proceeds, RJL incurred Rs 35 crore on the US subsidiary, Rs 10.5 crore on increasing manufacturing capacity at Bhavnagar, Rs 4-5 crore for modernisation of its Mumbai facility and rest for the working capital.

Investment Rationale:
RJL has eight retail outlets (five in Mumbai, one in Pune, one in Lucknow and one in Gurgaon) and 16 shops. The retail products are sold under the brand name, Lucera. RJL is in the process of increasing outlets. RJL has two subsidiaries, Renaissance Jewelery New York Inc., which caters to independent mid-range retailers and Verigold Jewellery (UK) serves as a marketing and trading hub in UK and rest of Europe. Its supplies to major retailers like Wal-Mart, NBC, JC Penny & Zales.

Renaissance has a modern design studio complete with a state-of-the-art CAD/CAM facility. Its dedicated team of 40 designers is, well versed on the latest international trends and contributes at least 500 innovative designs monthly to its ever-expanding portfolio of over 25,000 styles. The majority of its current models are produced using CAD/CAM to ensure precision.

USA is the world's largest jewellery market. In the US, Christmas, Thanksgiving, Valentine's Day and Mother's Day are the important jewellery-buying occasions. The US jewellery market has grown at a compound annual growth rate of 5.7% over the last 25 years. RJL is US centric for last 11 years, but will soon move into Europe, Middle East and South East Asia markets. Expects margins expansion as it is able to pass on the full price hike to their customers.

During FY09, Indian Gem & Jewellery industry made exports of $21.1 billon Vs $20.8 billon in FY08. During April-January 2010, exports of gem & jewellery from India have gone up by 14.3% to Rs 1.07 lakh crore according to Gems and Jewelley Export Promotion Council. In dollar terms, exports are up 7.42% to $22.54 billion. The data showed that import of rough diamonds too has gone up 4.82 per cent to Rs 33, 900 crore. The domestic market is estimated to touch USD 28-29 billion in next 3 years by 2012.

The projected share of industry segments and key consumption market trend show that by 2015 China and India together will emerge as a market equivalent to the US market. The Middle East will surface another large market accounting for close to 9 of the global jewellery sales by 2015. The industry has a potential to grow up to US$ 280 billion by 2015 at a CAGR of 6.7%. These augur well for the industry players. RJL is likely to post an EPS of Rs 20 in FY10 and Rs 24 in FY11. At the CMP of Rs 71, the share is trading at a P/E of 3.5x on FY10E and 3.2x on FY11E. We recommend BUY with a target of Rs 100 in the medium term. The stock is in an uptrend as it is moving along the upsloping support trendline. Considering its big fall from early 2007 and its bottom in beginning of 2009, the stock can be seen forming a rounding formation. Technically, the upside target is Rs 115.

To read the full report: RENAISSANCE JEWELLARY