Wednesday, December 7, 2011

>INDIA RETAIL: A step back for government; a set‐back for sector!!

Government has suspended 51% FDI in Multi‐Brand Retail till a consensus is
reached amongst all stakeholders (Political parties, State governments etc).
Proposal has faced widespread political (government allies, opposition parties) as
well as trader’s opposition ever since it was announced in a cabinet meeting. We
don’t expect government to explicitly rollback the proposal given that it will
reinforce the perception of “policy paralysis” and will be seen as giving in to political
pressure. However, given the perceived political cost attached to the proposal and
impending state government elections, primarily UP (most populous state which
accounts for ~15% of Loksabha members) we believe it will be a while before
government ventures to bring this reform back as it lacks the requisite numbers as
its key allies (DMK, TMC) are opposed to the Retail FDI reforms. While there exists a
remote possibility of some give and take/ appeasement of allies, watering down of
proposal (26% instead of 51%, starting with top 10 metros instead of 1mn plus
towns etc) we believe evolving a consensus amongst all stakeholders is a
cumbersome process and will take its own time and will be a drag on the sector.
Going by the fate of several other policy proposals, we will be positively surprised if
the proposal goes through during the term of this government.
A step back for the government; a set‐back for the sector: After much flip-flop
and endless debate (DIPP had floated discussion paper in July’10), Government
had cleared the politically sensitive reform, only to suspend it now till wider
consensus is reached amongst stakeholders. Proposal had faced widespread
opposition from political parties (opposition as well as government allies),
trader’s lobbies and had stalled the working of Indian Parliament for 10 days
since the proposal was announced. The announcement had created positive
sentiments around the sector with the assumption of inflow of capital and
foreign expertise post the clearance of FDI. We don’t expect the government to
revive this legislation anytime soon given the lack of numbers and impending
state government elections in next 12 months. We expect the proposal to
remain in cold storage and meet the same fate which several other government
proposals have met (Urea policy, GST, DTC, Land Acquisition etc). We will be
positively surprised if it goes through during the tenure of current government.

Media speculation on Future Cap stake sell: As per media report (Economic
times dated 7th Dec’11), Pantaloon is about to announce the Future Capital
stake sell to Deccan Chronicle for ~Rs6-7bn. We spoke to management and it
has denied this transaction. Media report also mentions “Industrial Investment
Trust (IITL) has purchased Pantaloon's 26% stake in its insurance joint venture
Future Generali Life for Rs 250‐300 crore”. If both these deals indeed fructify, PF
will be able to raise ~10bn and mitigate the strain on debt and cash flow. Core
retail debt stands at ~Rs45bn. We estimate an interest cost saving of ~Rs500mn
for FY12e, potentially resulting in ~30% upgrade to our FY12e EPS (Rs8.5)

Maintain ACCUMULATE on PF: While the FDI proposal is now being put in
abeyance, we anyways didn’t expect it to immediately solve the current
challenges of high leverage, high inventory and lack of FCF generation for PF.
While fundamental concerns of slowing same store growth and high leverage
putting pressure on cash flows remain, we believe current price discount the
same. Any stake sell announcement on non-retail subs will be key trigger.

To read the full report: INDIA RETAIL


>ROADS SECTOR: NHAI's improved financial maneuverability, reduced competitive intensity augur well

NHAI has awarded ~3,685km in YTD FY12: NHAI targets to award 7,300km of road projects in FY12 and has already awarded ~3,685km till date. The pace is encouraging and we believe that the target is achievable, with ~1,700km of projects under bid evaluation/submission stages. We expect the momentum in project awards to continue, as there exists a ready bank of ~15,000km, where critical milestones are being achieved. Unlike other Infrastructure segments
like Airports, Power, etc, that are facing regulatory, systemic and resource issues, the Roads segment continues to enjoy high visibility of investment activity. A large opportunity canvas coupled with established regulatory framework and peaking out of the interest rate cycle bodes well for several incumbents in the segment.

Key initiatives help expedite project awards: NHAI carried out an exercise to pre-qualify bidders on an annual basis, rather than carrying it out on project-to-project. This along with past initiatives like setting up land acquisition cell have started showing results, helping NHAI expedite project awards.

Increased premium collections to partially aid funding: The total premium quoted by developers for projects awarded in YTD FY12 stands at INR20b, up from just INR4b each in FY10 and FY11. Given the escalation of ~5% and possibility of continued premium on further bids, we believe premium collection has emerged as an important source of annuity funds for NHAI.

NHAI's financial maneuverability has improved: Raising incremental resources through bonds would be a very important strategy for NHAI. During FY12, it intends to raise INR100b through tax-free bonds; the quantum is likely to increase substantially, going forward. This compares with cumulative market borrowings of just INR130b-150b over the past decade. NHAI's revenues in FY11, comprising of cess and tolls, stood at ~INR110b. Market borrowings coupled with increased premiums have improved NHAI's financial maneuverability.

Competitive intensity easing in past few awards: In the past few project awards, the number of bidders has been significantly lower. The Road sectos has gone through bouts of excessive aggressiveness in bidding, and at times complete apathy in bidding for the projects. With the kind of capital that has got committed from various players in the sector, we now believe that there is only limited appetite that would be available for future projects to come up and as such we expect the bidding aggressiveness to reduce. Players like IRB have, in fact, raised the internal threshold for return to 18% (v/s 15% earlier).

To read the full report: ROADS SECTOR


A year marked by dwindling hope and sense of resignation
2011 began with the hope of “muddle through” and is ending with a resignation to
“it’s so bad, it’s almost good”.

The year though will be remembered as a watershed year for many reasons:
The wide spread social unrest that will likely leave some indelible marks on
the global canvass. Many countries, e.g., Tunisia, Egypt, Libya, Syria,
Yemen, etc. witnessed strong demand for a change in the extant political
structures; whereas many other in the west saw people coming to street
seeking significant structural changes in the functioning of financial markets.
India also witnessed a popular public moment against corruption and
accountability gap.
The public debt crisis in EU assumed threatening proportions that could
impact the global fiscal policy framework in the decades to come.
A major nuclear accident in Japan triggered a debate on desirability of
nuclear energy in the global energy mix.
Enduring Japanese earthquake, US credit rating downgrade, a full blown
European sovereign debt crisis, and unrest in MENA, the asset class returns
in 2011 have been surprisingly resilient. Bond returns up 5%, commodities
flat, and global equities have lost only 6%.
Underperformance of BRIC markets. One of the most notable features of
global equities in 2011 was stark underperformance of BRIC, especially India
and China, still the two fastest growing economies.
Emerging markets underperformed the developed markets and US.
The big story of 2011 was the de-rating of equity multiples, making equity
valuations cheap as compared to the historical averages.

Indian equities: down and out of favor
Led by deteriorating macro, slipping growth and consequent earnings downgrade
and negative publicity generated due to frequent scams and revelation of
accountability gaps in many instances, Indian equities find place amongst the
worst performers globally.

Domestic consumption largely saved the day for the economy, as the investment
cycle descended sharply. The trend was reflected in the sector performance
where consumers substantially outperformed.

To read the full report: INVESTMENT STRATEGY