Tuesday, December 20, 2011

>Remittances, Equity and Indian Economy

       According to World Bank, more than 215 million people live outside their home countries by birth and over 700 million migrate within their countries. This means that around 1/10th of the global population migrate within their countries. These migrants repatriate portion of their savings back to their home countries. Over the years, these remittances have proven to be highly beneficial to many countries across the world and accounted for 2% of the GDP (2008) of all developing countries. The World Bank compiles and publishes the country-wise remittances data on a periodic basis. A quick analysis of this data suggests that global remittances have grown by approximately 12x from US$37bn in 1980 to US$449bn in 2010. During 2011, the remittances are expected to grow by 7.5% to reach US$483bn. Being a source of external finance, for developing countries, the contribution of remittances position just next foreign direct investment (FDI). During 2010, the remittances to the developing countries stood at US$325bn i.e. 72% of the total global remittances. One of the key reasons of this remarkable rise in the remittances is persistent inequality of income between nations, undervalued exchange rates and also differential tax rates.

When compared to the capital flows (FDI, portfolio investments by FII’s etc.), remittances are more stable source of external finance and directly benefit the receiving country. In the wake of the Asian financial crisis during 1997, remittances to developing countries continued to rise even though FDI declined. Moreover, these transfers are majorly utilized towards three key areas – health, education and real estate while some portion also goes towards other investments. This means that it serves for the social growth of the nation leading it towards long term economic growth. In addition to this, remittances can also play a key role in poverty improvement and boosting domestic consumption.

According to a study done by Ralph Chami, Dalia Hakura and Peter Montiel, remittance flows have contributed on average to reducing output growth volatility in remittance-receiving countries, and thereby represent an important channel through which they may affect growth and welfare in these countries. Logically speaking, the affect of remittances on growth should be more if the country’s dependence on remittances is high. To understand the economic impact, a ratio of remittances to GDP (R/G) is a good measure.

According to an IMF working paper: Do Worker’s Remittances promote economic growth? (by Adolfo Barajas, Ralph Chami, Connel Fullenkamp, Michael Gapen and Peter Montiel in July 2009), remittances have contributed little to economic growth in remittance-receiving economies and may have even retarded growth in some. So, it remains an open debate about the most relevant impact of the remittances on the growth of the receiving country.

India is the world’s top receiver of remittances and accounted for approximately 12% of the total global remittances in 2010. Over the last 3 decades, the remittances to India have grown 19.6x from US$2.8bn in 1980 to US$54bn in 2010. For India, R/G ratio has grown from 1.5% in 1980 to 3.3% in 2010. Compared to the average GDP growth of 6.1% per year over the last 30 years, remittances have grown at an average 14.6% per year.

In India, Reserve Bank of India (RBI) calculates the total outstanding NRI deposits as a sum of Foreign Currency Non-Resident (Accounts), Foreign Currency Non-Resident (Banks), Non- Resident (External) Rupee Accounts, Non-Resident(Non-Repatriable) Rupee Deposits and Non-Resident Ordinary Rupee Account. As of Mar’11, the total outstanding NRI deposits stood at US$51.7bn and grew by an average rate of 7.3% since 1995.

To read the full report: Remittances, Equity and Indian Economy

>INDIAN TELECOM SECTOR: Policy is the key risk for Indian telcos

Cashflow cake in sight, but government demands a bigger slice

Indian telcos are forced to contend with significant policy flux in an improving competitive environment. We expect mobile revenues to grow at 15-16% YoY, aided by 3-4% growth in revenue/minute and 12-13% YoY growth in minutes. Higher tariffs should drive 200-400bps margin expansion by FY14E. However, we assume negative impact of policy shifts on incumbents as our base case. Based on strength of balance sheet, cash flows and relative impact of likely regulatory costs, our ladder of preference is Bharti, Idea and RCOM.

■ Bharti – Strong FCF and African operations would temper policy risk
Our Buy rating on Bharti reflects its strong competitive position and relative resilience to global factors. We highlight its improving business momentum in India, driven by tariff increases and 3G rollout, and solid progress in African operations. Our FY12E/13E/14E EPS estimates are Rs14.8/25/34.4. Key metrics to watch: India revenue growth (est: 15% YoY), FCF in African operations (est: $-500m). We maintain Buy (target price Rs420).

■ Idea – Robust performance but burden of regulatory costs could be onerous
Idea’s operating performance has been the strongest among incumbents. It has increased its revenue share and improved its cost position relative to sector leader Bharti. The two concerns on Idea are that compared to its peers it has: a) relatively higher impact of likely regulatory costs and b) a weaker FCF profile over the next three years. Our FY12E/13E/14E EPS estimates are Rs1.5/3.9/5.4. We maintain Hold (target price Rs105).

■ RCOM – Stabilising operations but debt burden constrains valuations
RCOM’s operations have stabilised, but it has been forced to constrain capex to generate cash. It is due to repay around $1.2bn in FCCBs in March 2012. While it is favourably placed with respect to policy issues, RCOM’s key challenge is to build momentum in its wireless business, where its EBITDA has been stagnant for the last seven quarters. Maintaining Hold (target price Rs80).

■ Three key policy issues for the incumbents (Bharti, Idea, Vodafone)
The cost of ‘excess spectrum’ and licence extension and a government decision on intra-circle data roaming are key focus areas. The estimated cost of excess spectrum/licence extension is Rs43/57bn for Bharti and Rs19/46bn for Idea. We factored excess spectrum cost in the EPS estimates but the cost of the licence extension will impact FY15E/16E cashflows. The policy decision on intra-circle roaming will effect the 3G investment case for the incumbents.

■ Incumbents likely to be left out of sector consolidation
It is increasingly clear that the incumbents would not be able to meaningfully participate in an industry consolidation. Rather, consolidation would provide additional strategic options for well-funded players such as Reliance Industries (RIL) to enter the telecom market in a more significant manner. The proposed guidelines on spectrum trading, refarming and auction of new spectrum bands (700Mhz) are also unfavourable to incumbents.

To read the full report: TELECOM SECTOR

>ITC: High FCF growth, robust pricing power; raise to Buy

Source of opportunity
ITC has corrected by 8% over the last 30 days, underperforming the sector by 4% and now trades 1SD below the sector aggregate on a 12-month forward P/E. We believe the correction has been led by broader market weakness and concerns on taxation given fiscal challenges. We view this as an entry opportunity since ITC enjoys tremendous pricing power which will help mitigate higher taxes and is not fully factored into the present stock price. We raise ITC to Buy with a revised 12-month target price of Rs232 (from Rs201) as we believe ITC is well protected in the current uncertain environment given improving cash returns and visibility of margins.

We expect ITC to continue to show robust yoy volume growth of 8+% in 2HFY12 as seen in 1Q-2QFY12. ITC enjoys strong pricing power, with key brands seeing retail price increases at a 9% CAGR over the past 5 years against inflation of 6.5%. For FYTD ITC has increased prices by 3% (6% yoy) allowing it leverage to balance increases in taxation. We believe ITC is least affected by input cost inflation or INR depreciation in our coverage.

ITC trades at FY13E P/E of 20.2X compared with 25.1X for the sector. We raise FY12E-14E EPS by 1%-7% to factor in higher volumes for the cigarette business. Our 12m TP is set at 24X FY13E EPS, backed by Director’s Cut analysis. We raise our target multiple from 22X to factor in (1) increased cash generation and higher dividend payout ratio, (2) increased pricing power owing to strong brand portfolio and limited competition, and (3) improvement in CROCI to 50% in FY13E from 39% in FY11. We expect ITC cash surplus to increase to Rs61 bn in FY13E from Rs39 bn in FY11.

Key risks
(1) Increase in VAT rates over 20% by states and significant excise hikes,
(2) Stringent anti-smoking legislation, 
(3) Sustained FMCG losses.

To read the full report: ITC