Friday, February 24, 2012

>Talwalkars Better Value Fitness

We spoke to Talwalkars’ CFO to gauge the near term outlook for the company. TALW has rolled out 19 gyms in nine months so far and expects to open another 16 gyms in the current quarter. Management also stated that a plan for roll out of clubs has been put on hold and it would retain focus on gym expansion. Mgmt targets FCF +ve in FY14 as a large chunk of gym base would then be operating in the mature state and expansion through franchisees would gather pace. Roll out of HiFi gyms through franchisee route will ensure deeper penetration without concurrent capex needs. Company expects benefits of operating leverage to kick in considering the large share of fixed costs which would help improve margins. We revise lower our estimates and now expect a 33% EPS cagr over FY12-14; retain BUY with revised 9-mth tgt of Rs190.

■ Club roll out plan put on hold; to focus on gym expansion
Talwalkars Better Value Fitness (TBVF) mgmt stated that plans to roll out clubs - a different format compared to gym requiring much larger investments and longer gestation periods - has been put on hold. It would continue to focus on gym expansion where it remains bullish on the opportunity in the market given the low penetration rates for organized players.

■ To end FY12 with total gym base of 126
TBVF has rolled out 19 gyms in 9M FY12 and it is slated to launch another 16 gyms in Q4, a traditionally strong quarter for the fitness business. This would take its total gym base to 126 of which about 90 would be owned and rest would be through a combination of subsidiaries, franchisees/JVs and HiFi gyms. Company plans to add 8 HiFi gyms in the current year through franchisee route which would not entail any capex for the company. We also revise lower our owned gym addition count to 18 in each of next 2 years.

■ Cut earnings on reduced owned gym count but retain BUY
We cut earnings forecasts for FY12/13 as we reduce owned gym additions and now expect ~18 gyms to be added in FY13/14. Expansion in HiFi gyms through the franchisee route would gather momentum over next 2 years which would lower overall capex intensity and generate free cash flow in FY14. Retain BUY rating with revised 9-mth tgt of Rs190.

To read full report: TBVF

>Is The Eurozone At Risk of Turning Into The Rouble Zone?

On February 9, 2012, the ECB’s Governing Council (GC) approved, for seven national central banks (NCBs) (of Ireland, Spain, France, Italy, Cyprus, Austria and Portugal) “… specific national eligibility criteria and risk control measures for the temporary acceptance of additional credit claims as collateral in Eurosystem credit operations”.3 NCBs can choose the eligibility criteria freely, subject to minimum requirements set by the ECB GC.

We consider this to be a dangerous and potentially disastrous decision. Either, this decision could plausibly imply a loss of central control over the Euro Area’s Monetary, Credit and Liquidity (MCL) policy. The amounts of ECB credit and liquidity provided are demand-determined once the eligibility criteria for collateral are set. Delegating the setting of these criteria to the NCBs therefore opens up the possibility of uncontrolled, and therefore accelerated, balance sheet growth for the Eurosystem, if the NCBs in the soft euro area (EA) member states are not restrained by the absence of Eurosystem-wide loss sharing associated with the new, more relaxed national collateral standards. Such a failure to respond ‘responsibly’ to the ‘you break it, you own it’ loss sharing arrangements for the new NCB collateral regimes may be individually rational if both the NCB in question and the sovereign backing it are close to insolvency.

Alternatively, if the absence of a Eurosystem-wide loss pooling regime is recognized (and enforced), the 17 Eurosystem NCBs could become counterparties with very different degrees of default risk. Normally, central bank solvency would not be threatened by increased exposure to high-risk assets, as long as that central bank’s liabilities are denominated in domestic currency — as is the case for the EA NCBs. A central bank’s ability to issue monetary liabilities (to use current seigniorage) or its capacity to borrow by issuing non-monetary liabilities (effectively secured against its future ability to issue seigniorage) should permit it to meet any payment obligations. This is not the case, however, if the ECB GC does succeed in putting a cap on the ability of the national NCBs to increase their balance sheet size despite the widening of the collateral eligibility, and if that cap is tight enough to prevent an individual NCB from saving itself from default through the use of seigniorage, but not tight enough to stop it from getting into trouble in the first place. Such a combination of a loosening of some NCBs’ collateral standards, the absence of loss pooling and effective constraints on these NCBs’ ability to use seigniorage would pose a different danger from that of ‘Roublezoneification’: it implies further differentiation between NCBs and their counterparties along national lines and the segmentation of the Eurosystem into NCBs characterized by possibly significant differences in default risk.

The decision of February 9 introduces a relaxation of collateral requirements in only part of the EA — the ‘soft’ part, consisting of 5 of the 6 EA periphery countries (only Greece is missing) and 2 of the 3 ‘soft core’ EA member states (only Belgium is missing). This selective relaxation creates an uneven playing field for central banks and their counterparties that could easily be destabilizing. And it could further accelerate the bifurcation of the EA into a soft EA and a hard EA.

If it is indeed true that there will be no loss pooling for these additional credit claims (as ECB President Draghi suggested in the Q&A of the press conference, although no formal decision of the ECB’s Governing Council to that effect has been communicated), the solvency of the NCBs in fiscally weak EA countries would be called into question even more. And counterparties in the euro area and elsewhere would start to differentiate more strongly between different Eurosystem NCBs. That would be a further nail in the coffin of a single money, credit and liquidity policy (MCL policy) for the EA and a further step towards the re-emergence of national MCL policies and, eventually, national currencies.

To read the full report: EUROZONE

>MACRO STRATEGY: Draghi-ng the market back from the edge

 Macroeconomic data YTD has beaten expectations, but growth outlook for the full year remains weak
 The rally in asset prices has been supported by the liquidity front-stop and should be sustained by this month’s LTRO
 Tail risks from Greece suggest very near-term caution, but long liquid risk over the next month is still preferred

Less bad...
Developed-economy macroeconomic data has remained broadly better than expected. The same could be said for Asia, but the impact of an early Lunar New Year makes the data far harder to read.

Globally, PMIs have surprised to the upside, with both manufacturing and services PMIs rising in January in aggregate (Chart 1). Both the US new orders and German IFO survey have shown not only resilience but upside. This indicates further improvements in confidence, adding to stronger employment figures from both countries.

The composition of US growth has, however, been materially different to our expectations and signals significant risks ahead. Q4 data showed a weaker contribution from investment (we had expected the investment incentive act to bring forward spending), but an offsetting larger contribution from inventories.

Consumer activity increased, but this was driven by a reduction in savings rather than a rise in incomes. Recent US labour-market reports have painted a more optimistic picture, although the labour overhang is significant. High gasoline prices are also likely to act as a drag on household consumption, with prices at their highest ever level for this time of year (Chart 2).
We still see significant headwinds to US growth. Credit availability remains tight (the NFIB small business optimism index disappointed earlier this week), while the government‟s fiscal policy will also have a negative impact on growth.

To read the full report: MACRO STRATEGY

>THIRD QUARTER FINANCIAL YEAR 2012 REVIEW: Healthy core operations overshadows higher restructuring

Slippages decline sequentially; Sharp rise in restructuring

■ Key highlights for private banks: (1) Largely stable NIM QoQ, (2) Asset quality continues to be strong, with GNPA% stable/declining QoQ, (3) Business growth robust, investment book growth remains healthy, as large corporate funded by credit substitutes, (4) Mid-cap private banks report strong growth in SA Deposit post deregulation of SB rates.

■ Key highlights for state-owned banks: (1) Largely stable margins QoQ, (2) strong fee income performance QoQ, (3) loan growth improves QoQ, however remains low on a YoY basis. (4) fall in CA deposits leading to muted CASA growth, (5) On a higher base (slippages were at an elevated level as in 2QFY12 most of the state owned banks migrated to system based recognition of NPA), slippages declines sharply QoQ (6) Addition of ~100bp of loans to restructured loans largely led by one large telecom account.

■ Positive surprises: (1) ICICIBC: Improvement in margins (+10bp QoQ) and strong performance on asset quality. (2) SBIN: Strong margin improvement (+26bp QoQ) (3) BoB: NIM stable QoQ, and robust fee income growth YoY. Among other banks FB, SIB and VYSB also delivered strong NIM and asset quality performance.

■ Negative surprises: (1) UNBK: Higher provisions due to restructuring of loans (it had taken an NPV hit of 25% on one large telecom account restructured visa–vis 10-15% by its peers). (2) CBK: Sharp contraction in NIM (cal) by 20bp QoQ (3) BoI: Addition to restructured loans of INR30b in 3QFY12.

To read full report: INDIAN FINANCIALS

>VOLTAS: Electro Mechanical Projects (EMP) division & Unitary Cooling Products (UCP) division posted healthy performance

 Healthy performance with adjusted net profit growth at 11% yoy
Voltas reported healthy performance with adjusted net profit growth at 11% yoy to Rs611 mn – growth in adjusted net profit comes after 5 quarters of decline in net profits and a dismal Q2FY12. Revenue growth was healthy at 12% yoy to Rs11.6 bn (above estimates) – led by both EPM (+19% yoy) and UCP (+19% yoy). EBITDA margins remained stable at 7.5% (-10 bps yoy) – above estimates. Led by healthy revenue growth, adjusted net profit was ahead estimates at Rs611 mn (+11% yoy).

■ …Barring for Rs2.8 bn cost over-runs in Sidra (Qatar) project
Voltas reported net loss of Rs1.15 bn after considering Rs2.8 bn cost over-run on Sidra Medical & Research Centre (Qatar) (valued at Rs10 bn) (net of tax – the impact is lower at Rs1.9 bn). The project is 53% complete and is expected to be fully complete by Q1FY13E. Voltas has provided all incurred and expected cost over-runs on the entire project in Q3FY12 itself, however, any further rise in expected costs is likely to negatively impact profitability of ensuing quarters. Also, recognition of claims on above escalations is likely to happen only on acceptance of the same by the customer and near to the completion of the contract.

 EMP & UCP division post strong revenue growth, EPS division slips
Electro Mechanical Projects (EMP) division - posted healthy performance barring for Rs2.8 bn cost over-runs on Sidra project. Key highlights (1) Strong revenue growth at 19% yoy to Rs8.2 bn – led by speedier execution of Sidra Project (revenue contribution at Rs1.5 bn or 18%) (2) EBIT margins up 90 bps yoy to 7.3% with EBIT at Rs0.6 bn (up 37% yoy) – ahead estimates. Rohini Industrial Electricals (RIE) reported Rs80 mn loss (9MFY12 – Rs110 mn) at EBIT level due to execution of legacy orders – expected to be completed by FY12E end.

 Unitary Cooling Products (UCP) division – posted strong performance despite continued decline in room air-conditioners industry (volumes down 28% in 9MFY12)UCP division revenues increased by 19% yoy to Rs2.3 bn (in line) – led by favourable revenue mix and price corrections. EBIT margins declined 360 bps yoy to 6.1% (lower than expectations) – owing to higher advertisement spends.

To read full report: VOLTAS