Tuesday, July 20, 2010

>The double-dip risk and its market implications

Market participants face seriously limited visibility on the pace of near-term growth,
particularly for the advanced economies.

However, we do not believe that the global economy is about to fall back into a recession.

A double-dip – which is not the central scenario we choose – would most likely drive rates even lower, but bond price upside is fairly limited, particularly at the front end.

In the event that the US did become the first to slide back into recession, the USD would be
hard pushed to find any support, at least initially. As the downturn shifts from local to global, it would become clear that there is nowhere to hide from a double-dip scenario. Against this backdrop, the USD would likely regain its status as a safe-haven play.

A serious lack of clarity
Market participants face seriously limited visibility on the pace of near-term growth, particularly for the advanced economies. While this is primarily down to structural impediments, some business cycle-related developments have also been at play.

The two main challenges affecting the advanced economies are the constraints of deleveraging and the need to resume a more neutral monetary and fiscal policy stance. Both of these involve risks. The precise impact of the debt-reduction process on growth is not known. The drop in US housing activity, the European banking industry or the government sector in any advanced country are good examples of the fact that we are entering unfamiliar territory. The risk of a policy blunder should also not be underestimated. How does one simultaneously create the conditions of more economic growth, cut the public deficit and increase the central bank’s
official rate to a more normal level?

To read the full report: RISK & ITS IMPLICATIONS

>ABAN OFFSHORE LIMITED: Book profit and re-enter at lower levels…

Aban Offshore Ltd (Aban) is likely to post a loss in Q1FY11 if the company makes a provision for extraordinary loss on account of the loss of Aban Pearl in Q1FY11.

Expect subdued results in Q1FY11E
Aban is likely to report a 3.6% QoQ drop in topline of Rs 984 crore in Q1FY11E. The loss of Aban Pearl would be the major contributor to the drop in revenue. The operating margin is likely to contract to ~64% with EBITDA at Rs 628 crore.
However, we expect the company to make a provision in excess of Rs 350 crore (to account for the difference in the book value and insured value of the asset), which if provided in the current quarter would result in the company reporting a loss in Q1FY11E. Excluding this one time extraordinary hit the company is likely to report a profit of Rs 267 crore in Q1FY11E.

Fairly valued at current price
The stock price has moved up by 31% since our last BUY recommendation at Rs 677 and achieved the price target of Rs 884 (refer our report on Aban dated May 27, 2010). The stock is fairly valued at the current market price. Hence, investors are advised to book profits and re-enter later.

To read the full report: ABAN OFFSHORE

>INDUSIND BANK: Above expectations: 1Q strong; expansion to drive growth

What surprised us
IndusInd Bank reported 1QFY11 net profit of Rs1,186mn (+21% qoq, +37% yoy), 5% ahead of our estimate. This was driven by: 1) 77% growth in NII to Rs2.96bn (10% ahead of our estimate) on margin expansion (NIM at 3.32%, +13bp qoq), helped by improvement in both corporate, retail yields and higher volumes (+5% qoq, +31% yoy, driven by growth in the commercial vehicle segment), and 2) non-interest income (excluding capital gains) came in 15% ahead of our estimate, up 64% yoy due to higher fees from trade related as well as third-party product distribution. However, costs came in 13% above our estimate (+36% yoy, +10% qoq) as the company added c. 450 employees and 14 new branches during the quarter. INBK also booked higher loan loss provisions (49% above our estimates, +42% yoy), increasing coverage ratio to 70%. Net NPLs were at 0.4%, down 19% qoq; gross NPLs grew to Rs2.75bn (+14% yoy, +8% qoq) and now stand at 1.3% of advances.

What to do with the stock
We raise our EPS estimates for FY11-13 by 3%/2%/1% to factor in higher NII, fees and higher expenses on aggressive branch expansion. We raise our Camelot-based 12m target price to Rs225 (from Rs210) to reflect higher earnings estimates and rolling forward BVPS by one quarter. We remain structurally positive on IndusInd Bank and reiterate our Buy rating.

Key risks: High dependence on wholesale deposits, frequent capital raisings to achieve growth

To read the full report: INDUSIND BANK

>HOTEL LEELA VENTURES: Low base effect; stress test from Q3FY11

Low base effect aided improvement in operations
Hotel Leelaventure’s (HLV) Q1FY11 sales increased 25% Y-o-Y, to INR 1.06 bn, due to the low base effect; it, however, declined 20% Q-o-Q due to seasonal factors. The company had 61% and INR 8,679 as ORs and ARRs for Q1FY11 against 57% and INR 8,314 in Q1FY10, respectively. We expect sales to increase 42% in FY11 as the Delhi property becomes operational and ARRs and ORs improve due to overall buoyant business environment.

EBIDTA margins to expand; high depreciation, interest to hit PAT
We expect EBIDTA margins to improve to 36% in FY11 against 29% in FY10. Operating margins are likely to improve due to the opening of Delhi property at the end of Q2FY11 and a better economic environment. We expect PAT in FY11 to come under severe pressure as depreciation and interest on the INR 11 bn capex on the Delhi property start getting reflected from Q3FY11. We are reducing our revenue estimates from the Delhi property to six months from nine months

Equity raising imminent
Issuance of 10 mn equity shares on preferential basis to promoters will increase the promoter stake to 54.5% from 53.3% currently. We expect the company to raise money using the QIB/FCCB route soon as the D/E ratio, estimated at 3.4x in FY10, is on the higher side.

Outlook and valuations: Expensive on all counts; maintain ‘REDUCE’
With FCCB redemption of EUR 50 mn (with redemption premium of 25.5%) in September 2010 and Delhi property becoming operational by September 2010, we expect interest liability to go up substantially Q3FY11 onwards, unless the company raises money through QIB/FCCB. We believe sale of the office space in Chennai and inflow from Pune land development, along with the QIB/FCCB issue, could be the next milestones. We continue to value HLV based on EV/EBIDTA, and maintain our target price of INR 25. At CMP of INR 50, the stock is trading at 24.1x and 16.4x EV/EBIDTA of FY11E and FY12E, respectively. We maintain our ‘REDUCE’ recommendation on the stock.

To read the full report: HOTEL LEELA VENTURES


Hero Honda: Positive run-rate continues
Hero Honda (HH) continued treading the growth trajectory and registered volumes of 426,454 units in June (up 17% Y-o-Y; flat M-o-M). This is the second straight month of over 425,000 unit volumes, pointing to a strong growth trend. Pleasure (scooter segment) has started clocking monthly volumes of over 25,000 units.

Maruti Suzuki: Tepid volumes
Maruti Suzuki (MSIL) reported total volumes of 88,091 units - up 17% Y-o-Y but down 14% M-o-M. While a sequential volume decline was expected due to a plant shutdown (maintenance) and seasonal factors, its extent is slightly disappointing (domestic volumes were down 20% M-o-M; run-rate the lowest in six months). Export volumes, generally lumpy in nature, surprised on the positive side with 26% M-o-M growth.

Tata Motors: Positive volumes; Nano’s Sanand plant comes on stream
Tata Motors (TTMT) posted strong numbers; total volumes were up 49% Y-o-Y. While M&HCVs continued to be robust (up 52% Y-o-Y; 9% M-o-M), the passenger car (ex Nano up 20% Y-o-Y; 10% M-o-M) and UV (up 9% Y-o-Y; 33% M-o-M) segments surprised positively. This may be partially attributable to the new variant of Indigo launched in May 2010.

Mahindra & Mahindra: Tractor sales disappoint
Mahindra & Mahindra’s (M&M) total vehicle volume of 44,034 units (up 7% Y-o-Y, down 3% M-o-M) disappointed. While the lower sequential UV volumes (down 10% M-o-M) can be attributed to seasonal factors and a scheduled plant shutdown, the Y-o-Y decline is due to high base. M&M had a strike at its Nashik facility in May 2009, which led to volume resurgence in June FY09. While the LCV/three wheeler space continued to post strong volumes on the newly launched products (Gio and Maxximo), tractor volumes (down 4% M-o-M and 9% Y-o-Y) disappointed. The management attributed poor tractor volumes to component shortages, particularly for casting products.

Outlook: Upward trend continues
Notwithstanding disappointment in MSIL’s car volumes and M&M’s tractor sales in June, we believe automobile demand remains strong backed by sturdy economic growth. Yearly growth rates could, however, taper to mid teens for passenger vehicle and two-wheeler segments on higher base. CV may continue to post strong Y-o-Y growth. A normal monsoon would cement the upward trajectory.

To read the full report: AUTOMOBILE SECTOR