Monday, October 31, 2011

>UNITED STATES: Rising from its ashes

�� Now, it’s unquestionable: the US economy did not double-dipped, since GDP actually accelerated in the third quarter, posting the highest rate of growth for 2011. After sluggish growth over the first half of the year (+0.4% in Q1 and +1.3% in Q2, on a quarterly annualised basis), GDP grew by 2.5% in Q3.

�� The public sector kept on weighing down on overall demand, with government spending flat over the quarter. Government demand has been cutting overall GDP growth for a full year, now. Since it peaked, in 2010 Q3, public spending lost 2.4%, subtracting 0.6 point to overall GDP growth. This is to continue: while the budget consolidation process is still ongoing at the state and local levels of government, it will start as next year for the federal government. Additionally, the impact is way larger than the direct one on GDP figures.. Since the summer of 2008, government (federal, state and local) payrolls have been cut by 1 114 000 employees: this represents 22% of the total decline in the US employment over the period. The government directly contributed to the decline in households’ labour income, even it was partly offset with a rise in benefits.

�� With real disposable income constrained by a depressed labour market and rising commodity prices, in a context of deleveraging, households’ demand cannot be buoyant. It however held up quite well in Q3, with a 2.4% increase in consumption and even a small increase in residential investment (+2.4%).

�� The main source of strength was thus in business spending and exports. Non-residential investment grew by an annualised 16.3%, spending on equipment and software being a particularly bright sport, at +17.4%. As for exports, they gained an annualised 4.0% in Q3, highlighting the continuous improvement of the US external competitiveness, achieved through a massive drop in unit labour costs, and helped by a declining dollar.

�� The strengths within today’s report are unquestionable. Even if, together, the business and the external sectors represent only a small part of overall demand, they can feed a self-sustained recovery. For this to happen, the US economy “just” needs the households sector to hold up a little longer. Federal money would help…

To read the full report: US ECONOMY

>AXIS BANK: Low probability of negative surprise from hereon

⇒ AXSB’s Q2FY12 NII at Rs20bn ahead of consensus. Net profit of Rs9.2bn marginally lower due to higher Opex and provisions

⇒ NIMs bounce back sharply (50bps qoq) with help of better yields and CASA (up 170bps qoq). We expect lower NIMs in coming quarters due to higher balance sheet growth

⇒ Slippages move up sharply at Rs5bn, highest in last 6 qrtrs. Rs2.3bn of MFI exposure restructured in Q2FY12. Slippage guidance of 1.3%, marginally higher than our estimate

⇒ Valuations at 2.2x/1.9x FY12E/FY13E ABV. Estimates already factor in higher slippages and NIMs compression. Expect no –ve surprise. Upgrade to ACCUMULATE

NII in line; Opex and provisions drag profits
AXSB’s Q2FY12 NII at Rs20bn (24% yoy and 16% qoq) was ahead of consensus estimates (Rs18.5-19.5bn) and sharply ahead of our estimates. The better than expected NII was largely driven by sharply improved margins at 3.8%, an improvement of 50bps qoq. The net profit at Rs9.2bn was tad lower than expected as 22% yoy growth in operating income was offset by more than doubling of provisions for the quarter to Rs4.3bn.

The growth in advances was at 6.2% qoq with overall balance sheet growth of 7.5% qoq as AXSB seems to have added some more of non-SLR investments too.The advances growth was driven by retail and corporate advances. Commendably, despite adverse interest rate environment, the CASA expanded by 70bps yoy (170bps qoq) in overall deposit growth of 6% qoq.

To read the full report: AXIS BANK

>GAIL LIMITED: Results inline, maintain Accumulate

⇒ Results were inline with our estimate, with EBIDTA at Rs.16.7bn and PAT at Rs10.9bn. Subsidy payout for Q2FY12 grew by 64% YoY to Rs5.67bn

⇒ Revenue from natural gas transmission declined marginally by 1.1% to Rs.9.1bn, While trading business grew by 20.3% to Rs.67.3bn YoY respectively

 Transmission and trading volume grew by 2.4% to 118.6mmscmd and 2.8% to 84mmscmd on QoQ respectively, mainly driven by higher volume offtake of spot and APM gas

 Accumulate with TP of Rs.510, given its dominant market share in transmission business and expected volume growth. Subsidy sharing remains a key overhang on the stock

Highlights of the results
GAIL reported results which were inline with our estimates. Revenue for the quarter was
at Rs97.2bn (against our expectation of Rs.95bn), growth of 19.7% YoY, mainly due to
better performance from petrochemical and LPG & other LHC segment. EBITDA during
the quarter was at Rs.16.7bn, growth of 15%, YoY. During the quarter the company
reported net profit of Rs.10.9bn, (as against our estimate of Rs.10.7bn), growth of
18.5% YoY. Subsidy payout stood at Rs.5.7bn growth of 64% YoY, mainly due to higher
crude oil prices during the quarter.

Better performance from Petrochemical and other LHC segment drives the revenue and profitability in Q2 FY12
Revenue has increased by 19.7% to Rs.97.2bn in Q2 FY12, mainly due to higher volume growth and higher realisation in both Petrochemical and other LHC segment backed by strong pickups in domestic demand. Petrochemical revenue grew by 28.9% YoY and 47.8% QoQ to Rs.9.2bn. Petrochemical volume and realisation grew by 20.6% to 0.13mnt and 7% to $1540/mt YoY respectively. While other liquid hydrocarbon revenue jumped by 34% YoY and 21.4% QoQ to Rs.9.8bn. other liquid hydrocarbon volume and realisation grew by 9% to 0.38mnt and 23% to $560/mt YoY respectively.

Transmission volume and tariff grew marginally by 1.3% and 1.9% respectively on QoQ, mainly driven by higher offtake of spot and APM volumes.
Natural gas transmission volume and tariff gained marginally by 1.3% to 118.6mmscmd and 1.9% to 0.84/scm respectively on QoQ, mainly driven by higher volume offtake of spot and APM gas. However transmission EBIT margin has declined sequentially by 56bps to 3.8% mainly due to higher other expenditure (forex loss on ECB and bad debts provision). We believe transmission volume for Q3 FY12 would be around 119- 121mmscmd.

Subsidy payout for Q2FY12 grew by 64% YoY to Rs5.67bn
During the quarter, subsidy payout stood at Rs.5.7bn, growth of 64% YoY. Also share of subsidy burden has increased sequentially from 5% to 8%. However, subsidy payout declined by 17% sequentially mainly led by duty reduction in petroleum product and recent price hike in LPG, Kerosene and Diesel.

To read the full report: GAIL

>SESA GOA: Regulatory checks weigh down performance

⇒ Topline in line with estimates at Rs 7897 mn, down 14% YoY and 63% QoQ on low realizations and on sales volume of only 1.55 mt

 EBITDA was down 92% YoY and 97% QoQ at Rs 259 mn including forex loss of Rs 2600 mn, well below estimates. EBITDA/ tonne for iron ore business stood at US$33

 PAT on the back of other income of Rs 504 mn was reported at Rs 12.8 mn. Adjusted for forex loss and tax rate, the PAT stood at Rs 1.6 bn, lower than our estimates of Rs 2.04 bn

 Cutting core EPS estimates for FY12E and FY13E to Rs 24 and Rs 29. We reduce our SOTP target price to Rs 239; Assign Hold rating on the stock

Lower volume and realizations impacted the topline
As reported earlier, iron ore production for the quarter was 1.12 mt (vs 2.88 mt in
Q2FY11) and sales were at 1.55 mt (vs 1.82 mt in Q2FY11). The lower production and
sales are attributed to mining ban in Karnataka, discontinuing of operations in Orissa
and most importantly, planned reduction of inventories. In the quarter, the company sold
0.71 mt and 0.83 mt of iron ore at Karnataka and Goa respectively. Realization during
the quarter remained subdued at US$84/ tonne for iron ore (taking average USDINR at
45.8). We believe, iron ore realizations to remain stable to weak in the immediate future,
whereas, volume growth remains uncertain due to continuing mining ban in Karnataka
and problems arising in Goa.

Raw material costs and INR depreciation depleted the EBITDA
During the quarter, EBITDA was largely impacted by increase in raw material costs and
loss on foreign currency loans and FCCBs. While the raw material costs as a
percentage to sales increased from 4% in Q1FY12 to 13% in the Q2FY12 (6% in
Q2FY11), the forex losses amounted to Rs 2.34 bn, depleting EBITDA to a large extent.
The EBITDA margin came in at 3% as against 54% in the same quarter previous year.
EBITDA/ tonne stood at US$33 during the quarter. We believe weak INR would
continue to be a deterrent for foreign currency outstandings.

Karnataka mining impasse continues; Goa could be a spoil sport
Karnataka continues to be under the mining ban. The company did not sell any amount
through e-auction form Karnataka during the quarter. During October, Sesa sold ~0.3 mt
out of total 0.8 mt inventory. The company is hopeful that Karnataka issue will be solved
by Q4FY12. We believe, Goa could be a spoil sport, as issues related to illegal mining
and export of iron ore are under comprehensive investigation by the Shah Committee.

To read the full report: SESA GOA

>RELIANCE INDUSTRIES: Concerns overdone, attractive BUY

⇒ ¾ Negatives like declining KG D6 gas production, lack of clarity on cash utilization and CAG report findings already priced in. See limited downsides from current levels

⇒ ¾ Any positive outcome emerging from the RIL-BP tie up (in the form of increased production) or a suitable acquisition can boost sentiment and trigger a re-rating

⇒ ¾ Refining business outlook also turning positive owing to the current scenario being favorable for complex refineries like RIL

⇒ ¾ Valuation attractive at 10.4x FY13E and 5.9xEV/EBITDA. Favorable risk reward ratio coupled with stable/improving financials warrant a Buy on RIL. Initiate coverage with TP of Rs.1,119

To read the full report: RIL