Tuesday, January 10, 2012

>ECONOMY & STRATEGY: Investment Implications; Key Assumptions made in our inflation model and the ‘Hysteresis Factor’ in the Indian context

With 4QFY12 promising plenty of negative newsflow from India and Europe, our Sensex target of 14,500 remains in play in the first two months of CY12. However, from March onwards, we see the situation improving for the Indian equity market thanks to a reversal in the RBI’s monetary policy stance, significant monetary easing in the West and a semblance of order returning to New Delhi’s policymaking. On a 12-month basis, we see the Sensex moving towards 18,000.

Sensex 14,500 remains in play in Q1CY12…
The first two months of CY12 will be a challenging period for the Indian market for three reasons. Firstly, the Q3 FY12 results season promises to be anything but cheerful and is likely to result in consensus’ FY13 EPS estimates being pulled back further by around 3% points. Secondly with key state elections being rescheduled to end by 4th March, policy chaos is likely to persist over Jan-Feb 2012. Thirdly, Europe is set for a tricky couple of months with: (a) Italy and Spain likely to auction US$180bn of sovereign debt from 12th Jan onwards; (b) European banks must report to their central banks by 20th Jan, as to how they will get their core tier 1 ratio to 9%; and (c) The 17 Eurozone countries will attempt to get their Parliaments to approve the 9th Dec intergovernmental agreement by March 2012.

Hence in the opening 2-3 months of the calendar year, our longstanding Sensex 14,500 target remains very much in play.

… but over the course of CY12, the Sensex should veer towards 18,000
From March 2012 onwards we see the tide swinging in India’s favour. Firstly, with the counting of votes for the State elections drawing to a close on March 4, 2012 and with the UPA administration realizing that it is in the last chance saloon, we expect to see more decisive and more reformist policies from the Government (including retail FDI) in the Budget session that is likely to open in mid-March. Secondly, with economic growth waning, core inflation (33% weightage) is likely to ease and presuming no further advances in global commodity prices, WPI inflation in India is likely to moderate thus triggering RBI rate cuts from March 2012. Thirdly, with the Eurozone heading for a recession, which could slow down the nascent American recovery as well, we expect serious monetary easing (including QE) from the ECB, the Federal Reserve and the Bank of England. In totality, we expect this easing to be comparable with what we saw in the months after the collapse of Lehman in CY08.

Hence over a 12-month period, we see a semblance of normalcy returning to the Indian market. Multiplying our FY13 EPS estimate of `1,160 (0.1% above our long standing FY12 estimate of `1,159: see pg 18) with a forward P/E of 15.5x (in line with India’s long term average) gives us a 12-month Sensex target of 18,000.

Stock specific implications
As you would expect, we reiterate our faith in “Good & Clean 3.0: Battleships”. Since its launch on 19th October this portfolio has outperformed the BSE500 by 377bps and 429bps on a market cap and equal weight basis respectively. Our overall family of Good & Clean portfolios has outperformed the market by over 13% points since launch in mid-March last year.

Beyond Good & Clean, our highest conviction BUYs are HCL Tech (HCLT IN, mcap US$5.1bn), Bank of Baroda (BOB IN, mcap US$4.9bn), Ultratech (UTCEM IN, mcap US$6.0bn), Mannapuram (MGFL IN, mcap US$0.7bn), Torrent Power (TPW IN, mcap US$1.8bn), Engineers India (ENGR IN, mcap US$1.3bn), Petronet LNG (PLNG IN, mcap US$2.2bn) and Oberoi Realty (OBER IN, mcap US$1.3bn).

Our highest conviction SELLs are Wipro (WPRO IN, mcap US$18.5bn), State Bank of India (SBIN IN, mcap US$19.5bn), Dabur (DABUR IN, mcap US$3.3bn), LIC Housing Finance (LICHF IN, mcap US$2bn) and Axis Bank (AXSB IN, mcap US$6.5bn).

To read the full report: ECONOMY & STRATEGY

>MUMBAI REAL ESTATE: Voids and niches in the Floor Space index(FSI) calculations; Discretionary powers of the BMC Commissioner have been substantially reduced

New FSI rules: As per press reports, the Maharashtra government has amended the DCR to include areas like flowerbed, balcony, voids and niches in the FSI calculation. However, official notification is yet to be received on the same. The move is aimed at plugging the earlier loopholes, wherein builders built large flower beds and deck-parking areas to enlarge the project’s saleable area. In the amended rules, an ‘All‐in’ FSI calculation will be applied and the builder will be required to pay a premium amounting to 60% of the ready reckoner rate on the additional 35% fungible FSI to be allowed. For industrial and commercial properties, 80 and 100 per cent premium will be required to be paid.

Costs to go up: As per our understanding and interaction with some companies, this amendment will not result in any extra area for the builder, as a typical project would have included ~30-35% areas like flowerbeds, balconies voids etc. (Free of FSI area) which is over and above the normal FSI. However, the builders shall get the flexibility to use this extra FSI for any purpose and thereby, could increase the carpet area.

However, costs are expected to increase as builders will be required to pay a premium amounting to 60% of the ready reckoner rate for availing the extra fungible FSI. As per our initial calculations, (refer to pg 2) without accounting for any changes in pricing strategies, margins could get hit by ~9% on a standard project. However, we believe that since this FSI can be used to increase carpet area, new pricing strategies based on carpet area shall emerge.

Provides a level‐playing field to developers: In the earlier system, only a few developers could exploit the loopholes in the system to make abnormal profits. Under the new rules, discretionary powers of the BMC Commissioner have been substantially reduced, paving the way to create a more level-playing field in the

Policy clarity to boost approvals: With the passage of this new policy, a significant positive development would be the resumption in granting of approvals, with emergence of clarity on the policy front. Also, the new rules could provide an impetus to land deals, which were earlier stuck owing to lack of policy clarity on FSI norms.

To read the full report: MUMBAI REAL ESTATE

>BAJAJ CORP: New product launches in niche segments and inorganic acquisitions; Sustainable growth of its flagship brand "Almond drops"; New foray into Light Hair Oil segment

We initiate coverage on Bajaj Corp Ltd as a BUY with a Price Objective of ` 136 (target 14x FY13 P/E). At CMP of ` 99, the stock is trading at 12.7x and 10.2x its estimated earnings for FY12 & FY13 representing a potential upside of ~37.4% over a period of 15 months. Strong sustainable volume growth and pricing power of its flagship brand “Almond Drops”, new product launches in niche segments and inorganic acquisitions should lead to an earnings growth of 30.6% CAGR over the period FY11 to FY13. Bajaj Corp Ltd is one of the fastest growing companies in the FMCG space with market leadership in the niche “Light Hair Oil” category and over the years has successfully consolidated its market share.

Brand leadership, product differentiation, and extensive network reach has helped BCL maintain its market leadership
The Light Hair Oil (LHO) segment (~13% of total hair oil market) has witnessed ~25.5% CAGR (in value terms) and ~17.6% CAGR (in volume terms) over the period of 6 years since 2006-07. Further this segment is expected to grow at ~17% CAGR over FY12-14 and Bajaj Corp with its offering of Almond Drops hair oil ADHO (~93% of total sales) is best placed to benefit from this opportunity. Over the years, ADHO has enhanced its market share to 53.9% (+1360 bps since FY08) and has ambitious plans to further consolidate its position in this segment to ~65% over the next five years. Slew of measures like sachets to penetrate the rural market (being the only player), targeted advertising, product differentiation through use of glass bottle packaging (which reinforces its value proposition) and market expansion strategies to convert coconut hair oil users to the higher value added LHO category should stand the company in good stead to achieve its growth targets. 

■  New foray into the fast growing cooling hair oil segment to help diversify product portfolio and boost revenues
Leveraging on its strong presence in the LHO segment and the distribution strength of over 2 mn retail outlets, BCL is looking at strategic brand extension and new product launches. In line with this strategy, the company has forayed into the ~ ` 640 crore cooling hair oil segment with the launch of Kailash Parbat Cooling oil (KPCO). The initial response has been quite promising with KPCO attaining a volume market share of 1% within the first quarter of its launch. However we have not factored this in our model and represents an upside risk to our estimates.

Prospective inorganic growth on the back of cash availability
In its initiative to grow through acquisitions BCL is scouting for brands in the personal care segment in the domestic, as well as, international market. The huge cash pile of ~ ` 346.7 crore is a strong advantage and can be put to work to undertake a sizable acquisition which would catapult the company into a higher growth phase. This would not only help de-risk the brand portfolio but would help diversify the revenue stream and improved profitability leading to better shareholder returns which in turn should lead to higher valuations.

At the CMP of ` 99, BCL is trading at 12.7x and 10.2x its estimated earnings for FY12 and FY13. We initiate coverage on Bajaj Corp Ltd as a BUY with a Price Objective of ` 136 (14x FY13 EPS) over a period of 15 months.

We have valued the stock at ~35.5% discount to Marico‟s valuation of 21.7x FY13 EPS (as per Ventura estimates). BCL‟s earnings are expected to grow at a 30.6% CAGR over the forecast period FY12-13 which is far ahead of the FMCG sector‟s growth. Strong cash generation ability and the better visibility of its earnings over the next two to three years are an added attraction.

To read the full report: BAJAJ CORP

>EVEREST INDUSTRIES LIMITED: Brands are produced at state-of-the-art ISO 9000 certified manufacturing facilities


Modern HIPP Technology
Everest Hi-Tech is a modern non-asbestos roofing system using specially developed HIPP technology (High Impact Poly Propylene) with technology imported from Brasilit, a division of Saint Gobain. It is manufactured in a world class production facility, conforming to all relevant international standards. Its Everest Hi-Tech is ideal roofing and cladding solution for factories and warehouses, especially preferred by sectors like petrochemicals, food, pharma, automobiles, engineering, metallurgy, chemicals, textiles etc.

Out of the estimated 25 crore buildings in India, 46% are considered to have pucca roofs and the rest 54% are made of thatch (kuchcha roofing). The company is into Fibre Cement Roofing which is used for pucca roofing and it costs 1/3rd the cost of an RCC ceiling slab. Everest has a good brand and 17% market share in this business.

Boards & Panels
EIL is into producing Fibre Cement Boards. It is increasingly being recommended by architects, interior decorators and contractors as a substitute for plywood and gypsum boards due to energy efficient parameters (good sound & thermal insulation), high strength, dimensional stability in interior & exterior applications, and resistance against termite & moisture. EIL also makes Solid Wall Panels for rapids construction maximizes space utilization with durability. EIL is a major player in this segment.

Building Products
The construction industry accounts for 8% of India’s GDP. It is a priority on the Government’s agenda to increase industrialisation, infrastructure development and inclusive growth. This, as a result, will increase liquidity, rural prosperity and the demand for building products. In Union Budget 2011-12, government has increased expenditure on rural and infrastructure development.

To read the full report: EIL