Saturday, March 17, 2012

>CARE Ratings Survey on Union Budget 2012-13

In light of the presentation of Union Budget for 2012-13 on March 16, 2012, CARE Ratings has conducted a survey on Expectations from this Budget with regard to its orientation, strategy, provisions and reform initiatives.

Results of the CARE Ratings Survey on the Budget are based on the opinion of 50 respondents; across banks, financial institutions and intermediaries including brokerage firms, corporate bodies, consulting firms, research institutes and industry bodies.

Survey Responses

On Budget Orientation
 45.8% of respondents are of the opinion that Budget 2013 would incorporate populist measures, while the majority (50.0%) feel contrary. Therefore, the opinion is almost evenly divided.
 A majority support a focus on fiscal prudence (78.7%) and orientation towards growth (63.0%) in the Budget, indicating a challenge for the government; of borrowing less and financing expenditure through revenue streams.
o While rationalisation of tax slabs could act as a “sweetner” in the budget, it would be critical in case of an expansion in the tax base.
 In accordance with the above expectations, the general belief is that the fiscal deficit target set by the government for FY13 would be less than 5% of GDP. As per the survey 57.1% of respondents expect fiscal deficit to be less than 5%.

To read full report: SURVEY

>GLOBAL EQUITY STRATEGIST: Margins Migrate West, Sales Migrate East

■ Margin Highs, Margin Lows — Non-financial corporate profit margins in the US and Europe are near pre-crisis highs. Investors worry this is unsustainable. By contrast, Asia ex Japan margins are close to their lowest levels in two decades.

 Globalisation At Work — Asian companies have pursued a sales-maximising business strategy, which is consistent with lower margins. At the same time, US and European companies have adopted a margin-maximising strategy, which is consistent with lower turnover. Margins have migrated from East to West.

 Competitive Advantages — A sales-maximising business model allows Asian companies to exploit their competitive advantage of cheap labour. While US and European margins have been rising, there hasn’t been much new capex to compete away these super-normal profits.

 Margin Outlook — Those waiting for the mean-reversion of US/European margins may be disappointed. We believe high Western margins are sustainable. Asia’s wafer-thin margins make it sensitive to swings in global growth. The region should remain high beta until business models reverse. We believe Japanese companies
are neither margin nor sales maximisers so the region deserves a discount rating.

To read full report: GLOBAL STRATEGY

>INFO EDGE: Why do we like the company

Upgrade to Buy – It’s Got the Edge

■ Why do we like the company? – 1) Info Edge (INED) is the dominant player in Indian online recruitment space through its portal, which gives it the benefit of high operating leverage; 2) we like the mgmt’s execution capability – investing (rather than hiding) in the last down cycle helped it increase its market share; 3) the company benefits from structural opportunity in the online space with rising internet penetration (through computers & mobile) and 4) scarcity premium - there are few investible companies in the Indian space, unlike in China.

 Why are we upgrading? – 1) The job market is adjusting to a slow environment and is using such platforms more, unlike in 08 when everything froze; 2) a flexible cost structure with 20% of employee cost (40% of rev) variable helps in margin mgmt; and 3) there are some revenues in the bag, which can support the top line for some time in case the economy slows further (unlikely). Longer term, we think it will stay ahead of the game, despite competition from a large player, LinkedIn. Besides, it is difficult to dislodge a segment leader - Makemytrip in travel, Flipkart in e-retailing. Its real estate portal, 99 acres, is the largest in its segment and should start adding some value.

 How do we value it? – Valuation is based on earnings and EV/Sales. We apply 31x FY13E PER to standalone EPS; in line with its trading history (30x Sep-12E on consol EPS earlier) and reasonable given 1) healthy ROE (ex-cash) of ~50% & 2) strong cash generation. We take standalone and not consol EPS, which is distorted by early stage investments and is unpredictable and offers low earnings visibility (4-14% consol EPS cut in FY12-14E is primarily due to higher-than-expected losses in new segments/investee cos). 99 acres is valued at 4x Mar-14E EV/Sales; in line with peers. 99 acres is 10% of standalone rev but has no EBITDA. The other 2 segments could potentially add value in future. New TP (Rs754+55) imputes consol FY13E PE at 39.9x.

 Key risks – 1) Prolonged slowdown would start to hurt top line with depleted deferred rev unable to support growth; 2) an aggressive foray by a large well-funded competitor like LinkedIn could eat into its market share (it has already hurt Monster’s N America r ev), 3) sustained losses in new ventures – both primary segments or funded cos

To read full report: INFO EDGE