Tuesday, May 11, 2010

>2010 Credit Markets Symposium

> Corporate Defaults Down Dramatically in 2010 - Test of Sustainability is the Strength of the Economic Recovery

> Negative Rating Drift has Stabilized but Debt Remains High – Lower Rated Credits and Smaller Companies Particularly Vulnerable

> Considerable Risks Remain and New Ones Continue to Emerge – Most Recent Example: Spike in Energy Costs

> Longer Term Impact of Credit Shock Still Unknown: 2001 / 2002 Downturn Led to Cash Hoarding. Will Lean Cost Structures / Persistently High Unemployment Mark this Downturn?

> Strategic Mergers, Optimal Leverage, Liquidity Further Redefined

To read the full report: CREDIT MARKETS

>RIL-RNRL case: RIL gains ground

Supreme Court decision in favor of RIL in the ratio 2:1
Today, the Supreme Court of India ruled in favor of Reliance Industries (RIL) in the 2:1 ratio, in the RIL-RNRL (Reliance Natural Resources) case. Chief Justice and Judge Sathasivam has favoured RIL, while Judge Reddy expressed dissent to the other two judges. Following is the summary of the court decision:
• MoU is not legally binding as it does not fall under the corporate domain. Production Sharing Contract (PSC) and Gas Utilisation Policy (GUP) override any other contractual agreements.

• The government has the power to determine both valuation and price of gas. It also states that EGOM has set the price of gas, which must be followed.

• Directs RIL and RNRL to renegotiate within six weeks and finalise contract in eight weeks, keeping in mind: (a) the terms of PSC; (b) GUP; (c) EGOM decision on pricing; and (d) the family MoU as reference.

Our take: Pricing may be at USD 4.2/mmbtu; quantum not known
We always understood that the PSC provided marketing freedom for hydrocarbons. But the court directive indicates marketing freedom subject to Government of India (GoI) approval/PSC for price, quantum, and tenure. While the court has directed a negotiation between RIL and RNRL, it has also asked them to follow PSC, GUP, and EGOM decision. This may leave little room for flexibility on pricing beyond the EGOM rate. Hence, it is likely that RNRL may contract gas at USD 4.2/mmbtu. Gas allocation to the power sector will continue to get priority in line with GUP. Quantum of gas supply to RNRL is unclear and may be negotiated. If 40 mmscmd gas is supplied to RNRL and NTPC, then: (1) It will not leave incremental gas from domestic fields; (2) this will create shortage of natural gas; and (3) increases LNG demand in India; may increase
gas demand from Petronet LNG.

Outlook and valuations: Verdict positive; upgrade to ‘BUY’
The court verdict has no impact on our estimates and we maintain SOTP at INR 1,197/share. Risks are lower pricing on the RIL-NTPC case. At CMP of INR 1,033, RIL is trading at 14.7x FY11E and 11.5x FY12E our consolidated estimates. We upgrade stock to a ‘BUY’, as overhang may be over and on positive E&P/refining outlook. We rate it ‘SO’ on relative return basis.

To read the full report: RIL - RNRL


Maharashtra Electricity Regulatory Commission (MERC) has directed Tata Power (TPWR) to provide power on a regulated basis to Reliance Infrastructure. As per media reports, TPWR is expected to maintain status quo by continuing to sell 460 MW and 200 MW until June 2010 and March 2011, respectively, at regulated prices. Lower offtake post June 2010 is due to TPWR’s PPA with BEST and its new customer acquisition in the Mumbai license area.

Fallout: The management had earlier guided for ~200 MW of merchant sales, starting
April 2010, due to Reliance Infrastructure refraining from signing a PPA with TPWR. However, based on the recent directive, this will not be possible; hence, any upside in earnings due to this would be limited.

Takeaway: We had always assumed that TPWR’s entire generation from Trombay units
would be sold on a regulated basis and, hence, had not factored in any merchant sales. We believe TPWR would appeal against this order in the Supreme Court.

Stock impact: Based on the management’s guidance, since investors had assumed upside from merchant sales, there could be a correction. However, we recommend investors to ‘BUY’ at ~INR 1,250 price levels.

To read the full report: TATA POWER


Consolidated sales grew 7.3% to Rs6b due to 14% volume growth. Lower input cost (copra prices down ~14% YoY and safflower prices down ~9% YoY) enabled gross margin expansion of 687bp YoY, but a 470bp increase in ad spends restricted EBITDA margin expansion to 100bp at 14.1%. PBT grew 16.8% and adjusted PAT de-grew 2.7% to Rs578m due to a low tax rate in 4QFY09 (tax credit on the Sundari sale).

Volume growth momentum intact; value growth suffers due to price cuts: Volume growth momentum remained intact for Marico even as value growth declined due to price cuts. Domestic sales growth of 6.7% was largely volume led (14%) as product prices (both Parachute and Saffola) were lower YoY. Parachute volumes grew 10% YoY; Saffola volumes were up 13% YoY. In 4QFY10, hair oil volumes grew 27% YoY.

Lower input costs enable EBITDA margin expansion of 100bp: Marico's margins expanded as a fall in input prices offset declines in realizations. In 4QFY10, prices of major raw materials like copra (~40% of raw material cost) and safflower (13% of raw material cost) declined by ~14% and ~9% respectively YoY, and dropped 20% and 22% respectively in FY10. We are positive about the management's pricing strategy, which involves according priority to building the franchise instead of expanding margins at the cost of volumes.

Expected PAT 21% CAGR over FY10-12; excise case resolution, Kaya turnaround upside risks: We expect Marico to sustain its double-digit volume growth and value growth to be muted due to fewer price increases. We are factoring in the impact of (1) lower excise provision up to 75% of the disputed amount, (2) lower tax rates due to the commissioning of a new unit in Ponta Sahib, and (3) the impact of price cuts in Parachute coconut oil. Our estimates factor in 16.8% sales growth over FY10-12; a 40bp margin contraction in FY11 and flat margins in FY12. We are
assuming a lower tax rate of 20% in FY11 and 19% in FY12. PAT is expected to post 21% CAGR over FY10-12. The stock trades at 23.7x FY11E EPS of Rs4.7 and 19xFY12E EPS of Rs5.9. Maintain Buy.

To read the full report: MARICO


Biocon’s 4QFY10 operational performance was above our estimates.

Key highlights:
Sales grew by 40.9%YoY to Rs6.6b (versus estimate of Rs6.2b) while PAT grew 219%YoY (on a low base) to Rs806m (versus estimate of Rs730m).

Topline growth was led by 49%YoY growth in Biopharma revenues and 44.3%YoY growth in Axicorp. Contract research revenues grew moderate 5.3 %.

EBITDA grew 45%YoY to Rs1.3b (versus estimate of Rs1.2b) primarily due to higher revenues while EBITDA margins expanded 60bpYoY to 19.8% (in line with our estimate). EBITDA margins expanded due to lower staff cost and higher licensing income (Rs206m versus Rs64m in 4QFY09).

PAT grew by 219%YoY to Rs806m (on low base of 4QFY09 due to forex losses), and was higher than estimate of Rs730m due to higher than expected revenues and improvement in EBITDA margins.

Traction in the company’s Insulin initiative and domestic formulation business coupled with incremental contribution from immuno-suppressants and ramp-up in contract research business would be key growth drives for FY11E. However, higher R&D costs and higher expenses linked to the scale-up of the domestic formulations business and currency appreciation will continue to temper down earnings growth. Option values for future include separate listing of Syngene
and a potential out-licensing of the oral insulin NCE. We estimate EPS of Rs17 for FY11E and Rs20.2 for FY12E leading to 17% earnings CAGR for FY10-12. Based on our revised estimates, the stock is currently valued at 17.8x FY11E and 15.0x FY12E earnings. Maintain Buy.

To read the full report: BIOCON