Monday, April 12, 2010

>FX Rates Outlook for Q1 FY11: Global and Indian Rates

The economic data releases for the last quarter of 2009 gave hope of a solid global economic recovery. USA, the largest economy of the world grown at a pace of 5.9% in the fourth quarter with significant improvement in the domestic private investment. Consumption expenditure has been improving with stabilization of the labor market. China and India- leading members of the BRIC nations gave a solid force to the global rebalancing and most of the emerging economies are poised for a better growth in the latter half of the 2010.

However, the contagion risk arising in the Euro zone economies and UK’s rising deficit have dampened the recovery sentiment recently. The fresh “risk aversion” created by the EU and the UK economy pushed the US dollar higher and European currencies started depreciating towards the crisis levels.

Greece- the south European economy and a member of the European Monetary Union-16 is facing criticism due to worse fiscal management. Greece’s public debt to gross domestic product ratio is approaching 120 per cent, its budget deficit has swollen to 12.75 per cent of GDP, and it has lost around 30 percentage points of international competitiveness over the past decade. As Latvia and Ireland's recent experience with budget austerity suggests, attempting to bring Greece’s budget deficit down towards the Maastricht criteria's 3 per cent of GDP limit by savage expenditure cuts and without recourse to currency devaluation could result in a cumulative contraction in Greece’s GDP over the next few years.

The Spain and Portugal which were also known for bad fiscal control are creating “contagion risk” in the common currency area. The Euro zone may witness slower growth in the 2010 and may read negative growth in 2nd quarter of 2010. We see a major downside in the Euro in this quarter with heightening risk aversion.

From UK also, the pressure is mounting on rising public debt and risk of the country losing credit rating has mounted. The economy is fighting with fragile growth and rising inflation. It registered a growth of 0.3% in the fourth quarter of the 2009 while inflation is at 3% YoY, above the targeting limit of the BoE.

The recent set of data releases suggests a negative growth in the 1st quarter of 2010. We see the
“stagflation” in the UK to put downside pressure on the pound.

And in Japan, falling prices has raised fear the deferred domestic consumption expenditure. With
deflationary expectations, producers are expected to get hit and the private investment to slow down. The country faces the risk of rating cut which debts are at an alarming level. To increase spending, the BoJ loosed the monetary policy further and this resulted slide in yen against the major currencies. From the domestic point of view, Indian economy has been very strong with sequential upticks in economic indicators. However, rising food prices prompt the central bank to raise the benchmark repo and reverse repo rate by a quarter basis point, in an unexpected move in March. We are expecting further monetary tightening by the authorities in their coming meets. Rate hikes at this point may slowdown the growth level to some extent and impact may be seen in the 1st quarter of FY11. From the currency context, rising price level may reduce the RBI intervention in the market.

We are quite optimistic in the global economic recovery in the Q4, 2010, but see some downside risks for growth in the next two quarter of the calendar year.

We are bullish on the Indian Rupee, but see limited upside against the US dollar. In terms, of the Euro and the GBP further appreciation is expected

To read the full report: FOREX OUTLOOK

>ICICI BANK: Strong Performance Prompts Downgrade to EW (MORGAN STANLEY)

ICICI Bank has been a strong outperformer recently driven by the expectation of lower credit costs and a pickup in loan growth. We agree with the potential decline in credit costs – this was the reason for our upgrade in January. We are building in 120 bps credit cost in F2011 and 90 bps in F2012 (from 210 bps in F2010). However, to outperform further the stock will have to deliver revenue growth – and that is likely to be tepid, in our view.

NII growth likely to be in low single digits in F2011 – This compares with 25-30% for other Indian banks under our coverage. We expect 12% loan growth in F2011 (dragged by continued contraction in international and unsecured consumer loans). NIM’s for the year will be flat, in our view. We believe NII growth will come off in F1Q11 driven by a change in the savings bank interest rate and the CRR hike – it will likely spend the rest of F2011 regaining the lost NIM in F1Q2010, implying flat NIMs for F2011.

On costs, we believe that as the bank starts growing again – costs will start increasing. We expect costs to grow faster than core revenue in F2011 – implying that core pre provision earnings growth will only be 8% in F2011 – significantly lagging peers.

Weak core profit growth outlook + performance causes us to downgrade – We believe that the strong performance coupled with relative weakness in revenue progression will likely cause out-performance to stall. We believe that management is delivering on the key variables very well, but that the stock is now pricing in near term growth, which is unlikely. We would turn
bullish again if the stock comes off or growth is stronger than our expectations.

To read the full report: ICICI BANK

>INDIA CONSUMER: Expect volatility in performance (MORGAN STANLEY)

MS India Consumer’s PAT growth is likely to slow from 20.1% in Q3 to 17.6% in Q4F2010e: Higher input costs, a volatile advertising to sales ratio, price cuts and forward covers on input costs are likely to lead to significant volatility in the quarterly results for FMCGs this quarter. We expect MS India consumer to report revenue, operating profit and adjusted net profit growth of 13%, 18% and 18% respectively. ITC, Nestle, Colgate are expected to report the strongest underlying performance whereas GCPL, Marico and HUL may disappoint on the underlying performance of the domestic business. We reiterate our OW on ITC and Tata Tea. We retain our Underweight ratings on HUL and Colgate.

HUL – We forecast 7.8% revenue growth, volume growth likely to improve and higher ad-spend to limit margin expansion: HUL is likely to demonstrate revenue growth of around 7.8% yoy largely driven by volumes. Despite huge input costs savings and cost control measures undertaken by the company we believe it is likely to witness margin contraction of around 40bps to 14.6% primarily on account of higher ad spend and product price cuts. Tax rate is likely to be higher by 170bps limiting adjusted net profit growth to 3.9% yoy.

ITC – Strong business profitability: We expect ITC to report net profit growth of 22% driven by improvement in margins across most of its business segments. Cigarette EBIT growth is expected at 15% yoy driven by 8% volume growth and price hikes. The paper business is likely to witness strong EBIT growth of 33% yoy. Non-tobacco FMCG loses are expected to be at Rs900 mn compared to Rs1200 mn in Q4F09. We expect the company to report a top line growth of 14% driven by a strong 12%, 34% and 19% and revenue growth in Cigarettes, agri and paper businesses respectively. Hotels business revenues are expected to be up 8% (after declining consecutively for last five quarters).

To read the full report: INDIA CONSUMER


Building blocks in place; growth set to accelerate
Preferring prudence over balance sheet growth, VYSB consciously slowed down its asset growth. Now, with a sizeable branch network, receding asset quality concerns (with rundown in unsecured portfolio) and strong capital position, coupled with the able guidance of Mr. Shailendra Bhandari, the bank expects to switch from consolidation to growth mode. The bank’s return of confidence reflects in its 7% Q-o-Q growth in Q3FY10. Loan growth is expected to track industry run-rate over a few more quarters before the bank ups the ante and gains market share.

Asset quality slippages to peak by Q4FY10
Deterioration in the asset quality over the past few quarters was owing to VYSB’s conservative restructuring policy and also slippages from the unsecured loan book. Slippages are expected to remain high till Q4FY10, post which they will decline significantly given the rundown in unsecured loan book. Loan loss provisions are likely to remain at elevated levels with a downward bias for a few quarters, to meet 70% coverage norm by Q2FY11.

■ Cost–to-income ratio to move closer to 50%
Cost–to-income ratio has come off to 58% in Q3FY10 from 66% in FY09. With the traction in income and productivity gains, cost-income ratio could lower further to 50% over the next two years. Over the next 3-5 years, with improvement in productivity, cost-to-income will reach the mid 40 levels.

Outlook and valuations: Shifting gears; maintain ‘BUY’
With return of growth, and decline in opex ratio and credit costs, earnings over the next two years are expected to post 27% CAGR. This will push ROA to closer to 1% by FY12E. This, together with better leverage of 14-15x, will drive ROEs to 14-15%. At CMP, the stock is trading at 1.3x FY12 book and 8.4x earnings. We maintain ‘BUY’ on the stock and rate it ‘Sector Outperformer’ on relative basis.

To read the full report: ING VYSYA BANK