Saturday, December 17, 2011


■ Depreciating rupee to cushion impact of lower commodity prices
Aluminium prices have tumbled from its highs hit earlier in the year (29% from peak) on worries about the strength of the global economy and thus potential industrial demand, particularly as the European sovereign-debt crisis continues. With LME prices near US$2,000/ton, we see half of the industry in red (average global aluminium cost ~US$2,000/ton) and this would lead to production cuts going ahead. We revise our aluminium prices estimates for FY12 to US$2,310/ton and US$2,250/ton for FY13. The impact of lower commodity prices on profitability of domestic metal producers would be cushioned by the sharp depreciation in the rupee against the dollar (19% YTD). So while producers in other countries have seen 10-15% fall in revenues, domestic producers would see just a 1-3% fall.

■ Hindalco: Novelis to drive earnings
Hindalco has corrected sharply on account of 1) delay in capacity expansion plan 2) rising interest costs 3) high coal costs 4) weak commodity prices. We believe that most of the negatives are priced in. In FY13, some rebound in demand and debottlenecking activities would drive 4-5% volume growth for Novelis. We expect adjusted EBIDTA/ton for Novelis to increase from US$346/ton in FY11 to US$359/ton in FY12 and US$368/ton in FY13. On a consolidated basis, we expect the company to witness an EBIDTA CAGR of 14.7% over FY11-13 led by higher contribution from Novelis. Earnings from Novelis would be resilient enough to withstand any global shocks and thereby provide downside support to the stock price. We recommend a BUY based on our sum-of-the-parts (SOTP) 9-month fair value of Rs185.

■ NALCO: Risk-reward favorable; Upgrade to BUY
NALCO’s stock price has halved over the last six months on account of depressed Q2 FY12 results and weak commodity prices. We believe the company has formed a bottom in terms of profitability in Q2 FY12 and the worst is behind us. We expect margins to improve from Q2 FY12 levels on the back of improved coal supply and higher exports of alumina. We expect OPM to improve drastically from the 9.5% reported in Q2 FY12 to 21.1% in FY13. With no major capex over the next two years, we estimate cash levels to increase from Rs56bn to Rs70bn by end-FY13. Our FY13 cash levels account for 54% of the current market cap and would lend support to the stock price. At the CMP of Rs51, the company is trading at 5.2x FY12 EV/EBIDTA and 4x FY13 EV/EBIDTA which is at a ~50% discount to its historic one year forward average multiple of 10.5x. We do not see much downside from the current levels and upgrade the stock from Market Performer to BUY with a revised 9-month price target of Rs60.

To read the full post: ALUMINIUM SECTOR

>NON BANKING FINANCE COMPANIES: TOP PICKS - M&M Financial Services (MMFS) and Shriram City Union Finance (SCUF)

Mission possible: The rural protocol

The operating environment of retail NBFCs is likely to improve over the next 12 months, led by an expected dip in inflation, easing monetary policy stance and falling wholesale borrowing rates. Regulatory issues, barring priority-sector status, are near finalization and are unlikely to have a material impact on earnings. In addition, our NBFC coverage universe is strategically poised to cash in on rising rural demand. At current valuations, the risk-reward appears favourable for these stocks. We initiate coverage on the sector with a positive stance. Top picks: M&M Financial Services (MMFS) and Shriram City Union Finance (SCUF).

 Macro headwinds to ease. We expect the economic environment to improve, led by falling inflation (estimated to soften to 7% by Mar ’12), easing monetary policy stance (estimated ~100bps CRR cut by Mar ’12) and falling wholesale borrowing rates. This is likely to drive growth in NBFCs.

 Regulatory issues unlikely to impact earnings. Regulatory changes regarding capital adequacy, NPA recognition norms and securitization are unlikely to materially impact the earnings of our NBFC universe. We see little possibility of a complete curb on priority sector status on securitization, given: 1) the importance of lending to under-banked regions/credit-starved sections of society and 2) the necessity of meeting priority-sector lending criteria for foreign/small private-sector banks.

■ Strategically poised to cater to rising rural demand. Our coverage universe of retail NBFCs has strong parentage and several decades of expertise. The NBFCs have built large-scale franchises and have improved loan origination and risk management processes. They are now strategically placed to reap the benefit of greater rural demand due to rising food prices, high minimum support prices and rising government expenditure on rural projects and employment-generating schemes.

 Top picks: MMFS (Buy; TP: `845) & SCUF (Buy; TP: `680). Our preference is for wholesale funded retail NBFCs (backed by secured assets) over banks and infrastructure NBFCs. At current valuations, the risk-reward favours NBFCs. We initiate coverage on Magma (Buy; TP: `80), SCUF (Buy; TP: `680), Chola Finance (Buy; TP: `181) and Bajaj Finance (Sell; TP: `712).

To read the full post: NBFC


  India tourism demand expected to grow 9.2% CAGR, second fastest in the world
India’s Travel and Tourism (T&T) Industry demand is expected to grow by 9.2% CAGR from CY10-20E, to reach US$432bn, the second fastest growth in the world, and emerge as one of the top 10 T&T market globally. This growth is expected to be driven by a) 7.8% CAGR in foreign tourist arrivals (FTAs) to 11.9 mn (inbound tourism), b) 14.1% CAGR in outbound traffic to 45.1 mn, and c) 7.7% CAGR in leisure spending to $137.1 bn in domestic tourism. We expect India’s T&T industry to flourish led by a) the favourable demographics of a burgeoning Indian middle class, b) rising purchasing power with higher disposable income, and c) better connectivity (land, sea, air) with improvements in infrastructure. We believe Cox & Kings (C&K) and Thomas Cook (TCIL), India’s two leading tour operators, are best placed to capture this growth potential with their integrated business model and the structural changes in the industry such as the rising market share of organised players.

  Cox & Kings: Best bet in India’s tourism industry with strong global footprint
We believe Cox & Kings (C&K) is best placed to capture the 9.2% CAGR in India’s tourism industry with its a) Pan-India presence and strong brand recall, b) Integrated business model with diversified product offering (price and destinations), and c) Strong overseas network with presence in India’s key outbound destinations such as Europe, UAE, and the Far East.

The company has quickly emerged as a global tour operator with a series of overseas acquisitions in last four years (spread across USA, Europe, UAE and Australia), resulting in a strong set of synergies. These includes a) opportunity to capture more travel spend of the customer, b) improve cost competitiveness through consolidated product sourcing, c) build global distribution network and, d) de-risked business model with reduction in seasonality impact and low event risk.

With the acquisition of HolidayBreak Plc (HBR), we expect the company to register a PAT CAGR of 23.7% in FY11-FY13E despite the higher interest outflow and lower profits in FY12E.

  Thomas Cook: stable forex business and strong traction in travel business
Thomas Cook (TCIL) is the largest forex player and one of the top five tour operators, in India. Its forex business, accounts for 60% of consolidated revenues, and is expected to remain one of the major growth drivers with strong growth in outbound leisure travel, FTAs in India and global inward remittances to India.

However, the travel business is expected to outperform with 15.7% CAGR in revenues, compared to a 10.3% CAGR in forex revenues in CY10-13E, owing to strong growth in India’s tourism industry. Consequently, its PAT is expected to witness a steady growth of 11.1% CAGR in CY10-13E.

The stocks has corrected sharply in the recent past due to its parent company, Thomas Cook Plc (TCG) being burdened with a huge debt and lowering its guidance thrice in the last 18 months. We believe the concerns for TCIL are over done and expect the stocks to witness a strong recovery in the coming months.

  Valuation and views
Historically, C&K and TCIL have traded at 20-25x one year forward earnings multiple driven by strong growth visibility. We initiate coverage on Cox and Kings with BUY rating and target price of `243/share (16.8x FY13E EPS), a 30% discount to its average historical multiples due to a) huge debt, b) high interest outflow, and c) acquisition integration concerns despite C&Ks strong track record. We initiate coverage on Thomas Cook with BUY rating and target price of `46.5/share (15.2x CY13E EPS), a 30% discount to its historical multiples. We believe the concerns of TCG’s debt position and its impact on TCIL are overdone.

To read the full post: TOURISM INDUSTRY

>AUTOMOBILE SECTOR: Tractor demand - more stable than Cars / M & HCVs trucks

There have been rising concerns on the sustainability of tractor demand owing to certain adverse developments and the strong performance of the tractor segment over the last few years (17% CAGR during FY08-11 and 20% YTDFY 12)

Recent adverse developments like (1) declining Agri term of trade (ATOT)(2) lack of buying support by FCI, resulting in produce being sold below MSPs and (3) slowdownin agri credit/rising NPAs (of PSU banks) have raised concerns over cash flows of the farmers

Some of these concerns are overdone, while others are still nascent. If these concerns materialize, then there can be pressure on tractor demand in the short term. However, this would be a temporary blip as structurally, demand continues to be on an upswing and it is nowhere near its peak. Our confidence stems from a number of indicators highlighted below

  • Indian tractor industry is more than stable Card/M&HCVs. Since 1973, the tractor industry has registered a CAGR of 8.6%.
  • While India's tractor penetration at 19 per 1000 hectares appers reasonable, we believe it is misleading. Penetration per 1000 agricultural people is a better indicator. At 5 per 1000, India's tractor penetration is among the lowest. 
  • Across the globe, there has been a sharp reduction in population relying on agriculture as a source of income.
To read the full post: AUTOMOBILE SECTOR