Monday, June 7, 2010

>Higher stipulated threshold for public shareholding to cap performance (JP MORGAN)

Government raises threshold for public shareholding in listed companies: The Indian government today amended the Securities Contracts (Regulation) Rules, making it mandatory for listed companies to have a minimum public holding of 25%.

At current market prices, the policy would entail selling down of equities aggregating US$32bn: Of this, at least US$13B will have to be raised over the next 12 months, given the stipulation of at least a 5% increase in public shareholding every year to get to the target.

State-owned companies to dominate equity offerings. In terms of promoter groups: a) the government of India will have to raise the lion's share, US$27bn, b) followed by the Indian private sector at US$4 bn. c) Multinational companies will have to raise a nominal US$600 m to
comply. We would not be surprised to see some of the MNCs to take the companies private and de-list.

Supply overhang to check performance: We estimate the current equity issuance pipeline for the next 12 months at about US$35 bn. Of which govt. divestments are expected to account for about US$10 bn. During the past, equity issuances in India have averaged about 2% of outstanding market cap every year. The change in regulation, coupled with the capital intensive phase that the Indian economy is in, implies that over the medium term equity issuances as a percentage of outstanding market cap could average 3-5%.

Global risk appetite becomes even more important: The amount to be raised this year is not daunting in comparison to peer group markets over the last decade. Global risk appetite will, however, have to be supportive, given India's over-dependence on external capital.

To read the full report: EQUITY STRATEGY

>RELIANCE INDUSTRIES: FY10 Annual Report Analysis

Commissioning of mega projects leads to doubling of balance sheet size in three years: RIL’s balance sheet size has doubled in three years, led by its investments in KG-D6 and the RPL merger. Its gross block has more than doubled in the last two years, led by commissioning of the KG-D6 project and the merger of RPL. Capitalized cost of KG-D6 is ~Rs390b while that of RPL is ~Rs330b.

RoE depressed due to higher DD&A and increased tax rate: RIL’s RoE for FY10 was depressed at 13.4% v/s an average of 20% in the last three years, led by higher DD&A charge, reduction in interest capitalized, and higher tax rate (21% in FY10 v/s an average of 16% in last three years).

Expanding gross block, contracting RoE

Average interest cost down 390bp to 4.4%: Gross interest cost for FY10 was 4.4% v/s 8.3% in FY09. As 85% of RIL's total debt is forex-denominated, its interest cost is partly a reflection of LIBOR rate, which declined from 2.9% to 1.3%. Despite 15% reduction in gross debt, net interest cost increased 14% to Rs20b, led by lower interest capitalization (33% in FY10 v/s 66% in FY09).

1P reserves remain almost flat over the last four years: Though RIL has reported large number of discoveries in the last few years, its 1P (only reports 1P) reserve numbers have not increased significantly. Total reserves remained flat in FY10 at 1.5bboe. We expect RIL to upgrade its reserve numbers once the appraisal of the pending blocks is completed and approved by DGH (Director General of Hydrocarbons).

E&P has highest share in capex and depreciation: KG-D6 production start has lead to significant increase in the depletion charge for RIL, resulting in highest share in the overall company depreciation. Also, in terms of capex share, E&P capex was highest in FY10 at Rs118b as against total capex of Rs219b.

Key things to watch: We believe investors should focus on: (1) ramp-up of KGD6 volumes; (2) clarity on 7-year income tax holiday for KG-D6 gas (we model tax holiday); (3) margin trend in refining and petchem and (4) any announcements in terms of new projects, acquisitions, discoveries. (We estimate US$8b of FCF over next 2 years).

Valuation and view: We value RIL on SOTP basis to arrive at a price target of Rs1,133 (incl E&P upside potential of Rs205/share). Adjusted for treasury shares, RIL trades at 11.7x FY12E EPS of Rs87.9. Maintain Buy.

To read the full report: RIL

India monsoon advances; condition positive for 2-3 days

Mumbai - India's monsoon advanced further Monday--after a brief pause last week because of Cyclone Phet--and is likely to cover more parts of the southern states in the next two to three days as conditions had turned more favorable, a senior weather official said.

The southwest monsoon had reached the Indian coast a day earlier than usual on May 31 and covered the southern state of Kerala and parts of neighboring Tamil Nadu before Cyclone Phet over the Arabian Sea halted the rains' progress.

"The monsoon has advanced today into most parts of coastal Karnataka and some more parts of south interior Karnataka," said the official, who declined to be named.

The western parts of India including Goa, Konkan and central Maharashtra, would also be covered in the next two to three days, the official said.

The state-run India Meteorological Department said pre-monsoon showers have also lashed the northwestern state of Rajasthan and the western state of Gujarat.

Kerala and Karnataka are key producers of coffee and spices while Gujarat and Rajasthan are large producers of cotton and oilseeds.

Sowing of summer-season crops, which includes rice, sugarcane, soybean and cotton, starts with the onset of the June-September monsoon. This is a crucial time when most of the rains fall in India, where about 60% of the farmlands are rain-fed.

The worst drought in nearly four decades withered last year's summer-sown farm output, driving inflation.

The weather official said Cyclone Phet has weakened into a depression over Rajasthan and it will further weaken in the next 48 hours, bringing showers over Rajasthan, Haryana and Uttar Pradesh.

While in its latest update, the weather body said an upper-air cyclonic circulation is likely to form over the Bay of Bengal during the next 48 hours.

"At present, there is no clear indication of any other cyclone, but we are monitoring the situation constantly," said the official.

Last Friday, Ajit Tyagi, director general of the weather body had said the monsoon is likely to cover the entire country by end-July.

Typically, the monsoon covers the entire country by mid-July.

Tyagi had added that India wasn't revising its forecast, which predicted normal monsoon rains this year, despite Cyclone Phet and late last month's Cyclone Laila that lashed India's eastern coast.

To read the full report: COMMODITIESCONTROL

>World sugar production to rise 3.5pc - FAO

Mumbai - World sugar production is expected to recover by 3.5 percent to 156.3 million tons in 2009-10, largely due to relatively favourable growing conditions and high returns, a recent report of Food and Agriculture Organisation 'Global Food Outlook' cited.

In 2007-2008 it was 167.6 million tons, up 151.1 million tons in 2008-2009.

Nevertheless, global output is still to remain short of consumption for the second consecutive year, with the deficit foreseen in the order of 6.3 million tons.

The report apprised that world trade is expected to grow by 12 percent this year, sustained by strong import demand in India, where consumption would outstrip production by 7 million tons. It would be around 53.3 million tons this year which is 5.8 million tons more than the last year. In 2007-08 it was 47.3 million tones.

It also forecasted an increase in utilization of sugar by 1.8 million tons or 1.1 per cent. It is expected to be around 162.6 million tons in the current year. In 2007-08, it stood at 158.7 million tons.

“Also, global reserves are set to decline to about 54.4 million tons, which is 9.8 million tons below the ten-year average. Ending stocks in 2007-08 accounted for 74.8 million tons and in 2008-09 it was 60.9 million tons”, FAO added.

This year, per capita consumption will decrease by 100 gram. In 2008-09, per capita consumption of essential commodity was 23 kg per year while it was 22.9 kg per year in 2007-08.

According to the report, preliminary projections for the year 2010-11 indicate a small production surplus for the first time since 2007-08, providing some downward pressure on prices. In May, prices averaged US 15.10 cents per pound, down 42.93 percent from their highs of US 26.46 cents per pound in January 2010.