Thursday, May 20, 2010

>Is Global Recovery Still in the Cards? (WELLS FARGO)

The seizing of financial markets that followed Lehman Brothers’ failure in September 2008 caused the global economy to fall into its deepest recession in decades. By the spring of 2009 industrial production (IP) in the 30 countries that comprise the Organisation for Economic Cooperation and Development (OECD) had plunged more than 15 percent from year-earlier levels (Figure 1). But the policy response—unprecedented monetary easing, expansionary fiscal policy, and the shoring up of private sector balance sheets—led to stabilization in economic activity in mid-2009 that subsequently morphed into global recovery. By early this year, the year-over-year rate of IP growth in the OECD countries had turned positive again. However, another financial crisis, in the form of sovereign debt problems in the Euro-zone, could be a distinct possibility. Will the global recovery continue, or does another global recession loom?

Let’s start with the good news. Among the major regions of the world, economic growth in Asia has been strongest to date. For example, real GDP in China increased nearly 12 percent on a year-ago basis in the first quarter of 2010. However, the expansion is not confined to only China. Many other countries in the region, including the large economies of Japan, Korea and Taiwan, are posting positive growth rates again. What makes Asia so special? The financial systems of most Asian economies were not nearly as leveraged as those of their western counterparts, so banks in the region were able to ramp up lending again. In addition, most Asian governments responded to the crisis with expansionary fiscal policy. Because self-sustaining economic recoveries have taken hold, most Asian governments are beginning to remove emergency stimulus measures that were put in place when the outlook was bleak. However, we believe it will be quite some time before economic policies turn restrictive in most Asian countries.

To read the full report: GLOBAL RECOVERY


As per media reports (ICICI Bank’s capital falls on new a/c rules, ET May 12, 2010), the new RBI rules related to securitisation and treatment of special reserves u/s 36(1) (viii) impacted ICICI Bank’s Tier I, which dipped by INR 11.3 bn Y-o-Y to INR 411 bn in FY10 end. If the change had not been effected, the bank’s Tier I would have been higher by INR 32 bn. The INR 32 bn impact can be explained as follows:

• As per the new guidelines, where banks have provided their own guarantees (as credit enhancement) they will have to be deducted from capital (50% each from Tier I and II) against the earlier practice of adding to risk weighted assets (RWAs) of the bank. ICICI Bank took INR 21 bn hit on its Tier I on account of changes in rules related to securitisation.

• Banks could utilise the entire amount of special reserves u/s 36(1)(viii) created by dipping into pre-tax profit as Tier I. However, as per the new rules, the amount of special reserves netted off by notional tax alone can be used as Tier I. This resulted in deduction of INR 9 bn (equivalent to notional tax payable on special reserves) from ICICI Bank’s Tier I.
The decline in Tier I capital is overshadowed currently due to decline in risk weighted assets (a function of reduction of total assets); hence, the ratio has increased from 11.8% in FY09 to 14.4% in FY10. With a 14.4% Tier I ratio, the bank is adequately capitalised for growth for the next couple of years atleast. In the recent past, the bank has not carried out any securitisation transaction. According to the management, the outstanding exposure has infact declined over the previous year.

The entire exposure is expected to rundown over the next two years. Hence, as ICICI Bank embarks on the growth trajectory, release of capital from the rundown of the securitisation exposure will be available for growth.

Outlook and valuations: Re-rating in progress; maintain ‘BUY’
With all the 4Cs of strategy in place, we expect ICICI Bank to return to the growth phase with a more robust business model. On the back of improving core performance and lower credit cost, we expect ~28% CAGR in profits over FY10- 12 and the core ROE to improve to 15% by FY12. Our SOTP fair value for the stock stands at INR 1,143/share (subsidiary valuation of INR 243/share). The stock is currently trading at 1.8xFY12 (adj. book), and we maintain ‘BUY/
‘Sector Outperformer’ on it.

To read the full report: ICICI BANK


Kotak Mahindra Bank (KMB) reported consolidated PAT (excluding life insurance) of INR 3.7 bn (against our expectation of INR 3.5 bn) in Q4FY10, 119% Y-o-Y growth and up 20% Q-o-Q. Profitability of the banking and auto financing businesses surprised positively; trend in earnings for securities and investment banking was on the expected lines, while earnings of asset management was below our expectation.

Contribution from the financing business (banking and auto finance) increased to ~60% for FY10 (70% in Q4FY10) compared with 40% in FY08. Profits were buoyed by recoveries from stressed assets (carrying value of stressed assets now at INR 2.5 bn). Employee cost/operating expenses were higher across business segments, indicating that full year provisioning was largely skewed towards the last quarter. Asset under management (particularly for domestic MF and PMS)
came off significantly, much below expectations.

Consolidated gross NPLs (excluding stressed assets) declined to 2.16% in Q4FY10 from 2.81% due to aggressive write-offs and lower NPL formation. Provisioning coverage (including technical write-off) improved to 58% and net NPLs dipped to 1.14% (from 1.46% in Q3FY10).

• Profits in banking almost doubled Y-o-Y (42% growth Q-o-Q), to INR 2 bn, driven by stressed assets recovery, sustained NIMs, strong fee income (partially offset by higher employee cost).

• Kotak Securities’ earnings declined 14% Q-o-Q, to INR 508 mn, as trading volumes declined 7-8% Q-o-Q, to INR 36 bn. Profitability of the investment banking business improved to INR 134 mn in Q4FY10 (INR 105 mn in 9MFY10).

• Profit of asset management businesses declined >30% due to dip in AUMs.

• Life insurance reported a profit of INR 444 mn (ending this fiscal with profits of INR 692 mn against INR 247 mn in FY09).

Outlook and valuations: financing businesses to drive earnings; ‘BUY’
In FY10, KMB stepped up the pace of loan growth (32%), and management expects to grow at 2x nominal GDP on a sustainable basis. Stressed asset portfolio provides a huge option value as recoverability is a significant multiple of the carrying value. The bank’s earnings and auto financing business are likely to move towards 20% RoE trajectory over the next 2-3 years. While we believe that banking and auto financing deserve premium multiple, we are revising our estimates downwards for the asset management and securities businesses (to factor in Q4FY10 trends). The stock is currently trading at 2.2x FY12E book and 14.0x FY12E earnings (excluding life insurance). Our SOTP fair value for the stock stands at INR 879 per share for FY12E. We maintain ‘BUY’ on the stock and rate it ‘Sector Performer’ on relative returns.

To read the full report: KOTAK MAHINDRA BANK

>Gas Price Hike – Impact Analysis (INDIA INFOLINE)

The Government of India has approved hike in APM gas price from Rs3,200/scm to Rs6,818/scm. The revised price is close to US$4.2/mmbtu, the price approved by Empowered Group of Ministers (EGOM) for Reliance Industries’ KG-D6 gas. The decision comes as a big trigger for ONGC and Oil India, as it substantially improves profitability for both companies. For
ONGC, we estimate an increase of Rs14 in FY11E EPS and for Oil India, we expect an increase of Rs10 in FY11E EPS. One of the key reasons for the steep valuation discount for ONGC and Oil India, when compared with regional peers has been lower gas prices. We believe, the price hike, is the first step towards a market determined pricing mechanism for natural gas in the longer term. We maintain our BUY rating on ONGC and Market Performer on Oil India.

ONGC: Major beneficiary on account of price hike
ONGC’s average realization for sale of natural gas from its own fields was Rs3.2/scm or US$1.7/mmbtu as against average price of US$5/mmbtu for sale of gas from PMT fields and US$4.2/mmbtu decided by EGoM for RIL’s KG-D6 field. The current price hike in administered prices of natural gas would result into 14% increase in FY11E EPS of ONGC. We maintain our BUY rating on the stock with a target price of Rs1,327. Our target does not change as we value the stock on EV/Boe basis. Considering a very high probability of a gas price hike we had raised our target EV/Boe for ONGC by US$0.5 in November 2009, when the government was contemplating a 31% hike in gas prices.

Oil India: dual gains of lower cost and higher realizations
OIL India bears the same risks when compared with ONGC in terms of subsidy sharing and lower gas prices. However, with the company planning to double its gas production over the next five years and most of its production being in low cost onshore regions, we feel price hike if any would translate into robust earnings growth for Oil India in the longer term. The current gas price hike, we believe, will increase Oil India’s FY11E EPS will increase by 10%. We maintain our
Market Performer rating with a target price of Rs1,237.

To read the full report: GAS PRICE HIKE


Revenue growth significantly beats estimate driven by outperformance in all business segments

ViTELS revenue growth was driven by robust school and college additions

Strong revenue growth in ICT business despite no schools additions; Edures and Toppers also post robust growth.

Consolidated OPM contract by 430bps qoq to 30.6% due to sharp margin fall in ViTELS

Everonn turns OCF positive in FY10; upgrade revenue estimates but lower margin assumptions

To read the full report: EVERONN SYSTEMS


Smart Class revenues below estimate in Q4 FY10; company guides for healthy 32-40% growth in FY11

Margin in the K-12 segment contract sharply while revenue performance was strong; HLS segment continues to be in investment mode

Overall consolidated performance below expectations; Management guides for modest 25-30% revenue growth and 22-25% earnings growth in FY11

Downgrade earnings estimates but maintain BUY on recent stock price correction

To read the full report: EDUCOMP SOLUTIONS