Sunday, January 1, 2012

>Havells India announced a 50:50 JV with China’s Shanghai Yaming Lighting Co. Ltd. to set up a lighting products plant in China

Looking East for accelerated growth

Event: Havells India announced a 50:50 JV with China’s Shanghai Yaming Lighting Co. Ltd. to set up a lighting products plant in China. The JV will start operation by April 2012 under the name Jiangsu Havells Sylvania Lighting Co (JHSL) with an initial investment of US$50mn by the two partners. Our interaction with the management of Havells India reveals that the company will invest US$25-50mn in the JV over the next 3-4 years (through internal funding) and expect to achieve a turnover of US$100mn in the said period (US$20-25mn in FY2013 itself).

Our view: We take this JV as a positive development for the company as our preliminary analysis shows that the development is expected to be marginally EPS accretive for Havells India over the next couple of years. However, we view this JV to be significantly beneficial for the company over a medium-to-long-term horizon in terms of entrenching into the Chinese market with a local partner. We expect Havells India to record a turnover of Rs125-130cr in FY2013E and scale upto Rs450-500cr until FY2015E. While, we have limited clarity on the margins front, we have assumed JHSL to operate at the same margins as Havells India (China’s demographics is similar to India and the JV is formed on the existing business strength of Havells India). Going forward, we expect EPS accretion of upto 2-3% for Havells India from this JV over the next 2-3 years based on the limited information available.

Outlook and Valuation
Havells India’s current exports to China is to the tune of US$5-6mn in revenue terms. While we believe that the JV will help Havells establish a local presence in the Chinese market, thus aiding the company further to cater to the growing demand and need in China for lighting products, we have not factored the JV into our numbers yet due to lack of clarity. We expect Havells India to clock ~13% CAGR in Net Sales over FY2011-13E to Rs7,205cr (Rs5,613cr in FY2011) and also anticipate that the company would achieve a Net Profit CAGR of ~20% during the same period. At the CMP of Rs385 the stock is trading at a P/E of 12.8x and 11x its FY2012E and FY2013E EPS respectively. We maintain our Buy recommendation on the stock with a target price of Rs455 based on 13xFY2013E EPS of Rs35, indicating a potential upside of ~18% from the current levels.

Risks to the view

  •  Increase in input costs (Copper and Aluminum) and currency fluctuation could have negative impact on profitability
  •  Slowdown in Europe (contributes ~70% revenue of Sylvania’s sales) will impact profitability adversely

To read the full report: HAVELLS INDIA

>DLF sells Pune IT SEZ: Its impact and analysis

Based on DLF’s 67% stake in the IT SEZ, the sale will provide a pre-tax cash inflow of INR 5.4bn. The IT SEZ in Hinjewadi is spread over an area of 5m sq. ft. with 1.8m sq. ft. currently operational with tenants such as Cognizant, TCS, and Barclays, among others. Although the sale price of INR 8.1bn achieved for the asset was below our expectation of INR 12.8bn, we view this development as positive, as it is the largest asset sale achieved by DLF so far after it decided to sell its non-core assets to reduce its debt.

Earlier this month, DLF sold its 100% stake in DLF Hotels & Hospitality, expected to give company a net cash inflow of INR 4.3bn. In addition to this, the company also received the first tranche of c.INR 2.0bn for its ~71% stake sale in 1.3mn sq ft IT Park in Noida. Based on our estimates, from the sale of a total of five assets (over the past two quarters), DLF will receive total pre-tax cash inflow of c.INR 20bn that will help net debt reduction by around 6-7% from its current c.INR 255bn level by 4QFY12. With the company close to appointing a property consultant for the sale of Lower Parel land in Mumbai and also targeting to achieve the sale of Aman Resort by 4QFY12, monetization of either of these assets would be a key positive catalyst for the stock, in our view. We remain confident in management’s ability to sell non-core assets and improve the company’s balance sheet. We maintain our Buy recommendation on the stock, as it is currently trading at a ~29% discount to our NAV of INR 270 per share.



 Lower slippages despite economic down-cycle. 
Our recent interaction with the management indicates that SBI’s slippages will likely decline due to significant strengthening of its monitoring systems even as the economic cycle trends otherwise. However, overall revenue growth is likely to be subdued despite healthy NIM as loan growth and fees remain weak. We expect the bank to raise capital by 4QFY12E though the quantum is not yet clear. Stability in slippages will be the key stock driver over the next few quarters, in our view. Maintain BUY with TP of `2,300 from `2,600.

■ Slippages to remain above normal though pace is likely to decelerate from current levels
SBI’s recent initiatives in HR and technology are likely to result in decline in slippages and reduce the incidence of NPLs from extraneous factors such as the migration exercise, incomplete documentation etc. The bank is comfortable with the early warning signals that are in place across most product verticals and branches. In the near term, we expect a healthy harvest season to reduce slippages and improve recovery in this portfolio. However, weak macro environment will keep slippages at higher-than-average levels. We expect slippages at 2.8% levels and loan-loss provisions at 1.4% levels for FY2011-13E.

■ Subdued revenue outlook on the back of lower fee and loan growth; NIM outlook comfortable
We expect revenue growth to remain subdued at 13% CAGR for FY2011-13E as loan growth is likely to be below industry average while fee and forex income will remain weak. Weak macro, focus on slippages over growth and capital conservation is likely to moderate loan growth. We expect muted fee income performance but contribution from treasury to increase on the back of decline in interest rates in FY2013E. RBI’s move to curb foreign exchange activities is likely to impact forex income from the next quarter.

■ Discussion continues on capital infusion; we don’t see an immediate requirement
The bank is in active dialogue with the GoI for capital and expects the exercise to be completed by 4QFY12. The timing, quantum and nature of infusion are yet to be finalized. Tier-1 is at 7.5% with overall capital adequacy ratio at 11.4% for 2QFY12 but this excludes 1HFY12 profits. 

We believe that SBI does not have any immediate requirement for capital. (1) Growth has definitely slowed over the past few quarters and we are building 14% CAGR for FY2011-13E, (2) Internal accruals are reasonably strong with RoEs (pre-dilution) at 17% levels and payout ratios of 20%—reasonably sufficient for underlying loan growth trends, (3) management shifting focus on capital conservation through loan guarantees and is likely to release capital, especially in segments like export and SME credit. However, some of these benefits are likely to be countered by deterioration in ratings of its loan portfolio resulting in increase of risk-weighted assets.

■ Valuations attractive for a strong franchise.
 We maintain a favorable outlook on SBI valuing the bank at Rs2,300/share. We are valuing the core bank at 1.4X book and its banking subsidiaries at 1.2X FY2013E book. Valuations are attractive at 0.8X book and 5X FY2013E EPS for RoEs in the range of 17-18% levels and earnings growth of 30% CAGR for FY2011-13E. Valuation multiples are moving closer to the bottom levels witnessed in FY2009.

On the back of subdued outlook, we are revising our earnings downwards by 14% for FY2013-14E to factor (1) lower revenue growth on the back of lower loan growth and fee income and (2) higher loan-loss provisions on the back of weak macro trends. Our NIM assumptions are conservative as we factor compression in the next few quarters as pricing power shifts to borrowers. Sharp reduction in interest rates is likely to result in lower provisions for retirement benefits and higher treasury gains which would result in an improvement in cost-income ratios; but we are factoring cost-income ratio to increase to 49% from 45% levels witnessed currently.