Wednesday, May 2, 2012


ING Vysya Bank reported a PAT of `1273.9 mn up 40% yoy and 7% qoq. Bottom-line stood in line with our expectations. NII came off by 1.4% qoq due to a 20 bps sequential deterioration in the NIM which was largely seasonal in nature. Provisions increased sequentially despite asset quality improvement as the bank used one off tax deductions to shore up its coverage ratio.

NIM compresses by 20 bps sequentially
ING Vysya Bank reported a NIM of 3.3% for Q4FY12, which was a sequential NIM compression of 20 bps. The NIM deterioration was largely seasonal in nature on account of priority sector lending and subscription to RIDF bonds which led to a 9 bps qoq decline in the yield on advances. In FY13, the NIM is likely to be in line with that of the previous year.

Strong loan book growth led by PSL lending
Advances grew by 22% yoy and 9.3% qoq. Sequential loan book growth was led by the agricultural and rural banking business which grew by 18% yoy on account of priority sector lending. On a yoy basis loan book growth was led by the business banking division. Going ahead the loan book will continue to grow ahead of the industry.

Non-interest grows on the back of growth in forex and core fee income growth
Non-interest income increased by 15.4% yoy and 15.8% qoq. The increase in other income was on account of a strong growth in forex and core fee income.

Asset quality improves sequentially
The asset quality of the bank improved sequentially with %GNPAs coming off by 8 bps qoq though up 4.6% qoq on an absolute basis. Slippages came of sequentially and stood at `600 mn or a slippage rate of 0.9%. The bank used the onetime tax benefits that accrued to it during the quarter to shore up its provision coverage ratio. Hence provisions increased by 69% qoq which led to a 569 bps improvement in the PCR to 90.7%. Due to higher provisions, NNPAs came off by 35% qoq and %NNPAs came off by 12 bps sequentially to 0.2%. The bank has managed to maintain its asset quality despite strong growth in its SME portfolio.

Restructured book at 1.4% of advances
The banks restructured book stood at 1.4% of advances which stood largely in line with that of the previous quarter.

Valuation and view
At the CMP of `355 the bank trades at 1.3x its FY13E ABV and 1.1x its FY14E ABV. At these valuations the bank trades below its long term one year forward P/ABV multiple. The bank is a strong re-rating candidate given its sound asset quality and improving cost to income ratios which will lead to an improvement in return ratios going ahead.


> The Competition Commission of India (CCI) has imposed a fine of INR2.52bn on United Phosphorus (UNTP) on account of charges of cartelization

The Competition Commission of India (CCI) has imposed a fine of INR2.52bn on United Phosphorus (UNTP) on account of charges of cartelization pertaining to collusive bidding to supply aluminium phosphide tablets to Food Corporation of India (FCI). UNTP has, however, denied these charges and decided to approach the Competition tribunal against this order. Moreover, UNTP’s management mentioned that this order of CCI pertains to a bidding done in 2009 for an order from FCI worth INR80mn (~0.34% of UNTP’s FY09 standalone revenue), against which the penalty levied is grossly disproportionate at 9% of past three years average sales of UNTP on standalone basis. We have ‘BUY’ recommendation on the stock.

CCI imposes INR2.52bn fine on UNTP for cartelisation
CCI has imposed a fine of INR2.52bn on UNTP, along with two other companies – Excel Crop Care (INR630mn) and Sandhya Organics (INR16mn). This is on account of charges of cartelization pertaining to collusive bidding to supply aluminium phosphide tablets (ALP; used for pest control of food grains) to FCI. CCI stated that these three companies, by acting together and quoting identical prices, have deprived FCI of competitive bid rates in procurement of ALP tablets. CCI has imposed the penalty on these three companies at a rate of 9% on average of past three years’ revenue. UNTP to approach the tribunal to challenge the order

The management of UNTP clarified two things:

A) It has denied the charges levied against it for cartelization for the bidding done to FCI and decided to appeal against the CCI’s order with Competition tribunal. B) While the CCI order pertains to a bidding of INR80mn worth order by UNTP, which forms a small proportion of the company’s standalone revenues, the fine levied on it is 9% of past three years standalone revenue, which is unfair.

Valuations: Currently, the stock is trading at P/E of 8.6x and 6.8x FY12E and FY13E, respectively. We have a ‘BUY’ recommendation with target price of INR177 at 10x. FY13E EPS.


>VIKAS WSP: Riding on Huge Demand from Shale Gas Drilling Companies In USA

Vikas WSP Limited is world's leading and India's largest manufacturer and exporter of Guar Gum Powder (GGP). The company was incorporated in 1988 to meet out growing global demand of Guar Gum Powder by establishing two 100% export oriented units at Sriganganagar (Rajasthan). The word WSP Stands for "Water Soluble Polymers".

Besides food applications, Vikas WSP also manufactures guar gum products for highly specified applications such as oil and natural gas exploration.

Guar gum is an emulsifier, thickener, and stabilizer and finds application in a wide range of foods, pharmaceuticals, cosmetics, textiles and paper industries . It is sold as a white to yellowish odorless powder, which is available in different grades.

Important derivatives of Guar gum which company produces and used for oil and gas industry are :
a) Hydroxypropyl Guar gum
b) CarboxyMethyl Guar gum
c) Carboxy methyl hydroxy propyl Guar gum

The company exports its entire production.
There are 3 major guar gum players in the world. Vikas WSP is having a capacity of 54,000 tonnes per annum perhaps the largest. Rhodia Chemicals seems the second largest player with 45,000 tonnes per annum capacity of (mainly food grade) Guar Gum Polymers. Hercules of U.S.A. is having a capacity of 30,000 tonnes per annum on (Health care, Industrial, etc.). Others are small-scale players; most of them manufacture Guar Powder and not Guar Polymer.

To read report in detail: VIKAS WSP

>The Business- Impact of a Greek Euro-Zone Exit

Risk Insights
• Although the situation has improved in the past weeks, especially in Italy and Spain, the euro-zone debt crisis is still far from over.

• Low competitiveness, rigid labour markets and high household and company debt levels continue to aggravate the crisis, which started as a mere sovereign-debt crisis in Greece two years ago.

• An immediate disorderly Greek default was avoided in March 2012, but because of the uncertain political outlook the picture can change quickly.

• Worryingly, and despite being on track with the EU-imposed reform programme, Portugal seems to need a second bailout package in the near-to medium-term.

• A complete break up of the euro zone seems unlikely, given the high costs.

• The intervention of the ECB has increased the resilience of the European banking sector and reduced the danger of contagion from Greece.

• If Greece undergoes a disorderly default and leaves the euro zone, the consequences for Greece will be extremely harmful, at least in the short term, and business operations in Greece will break down almost completely.

• We recommend increased vigilance, especially with regard to payment and credit risks.

To read report in detail: GREEK-EURO ZONE

>JYOTHY LABORATORIES LIMITED: Perfect Synergies between Jyothy Lab and Henkel India

Jyothy Lab is among the few companies in the FMCG space which has immense potential for long-term profitability growth. Post Henkel India acquisition Jyothy Lab’ dependence on ‘Ujala Supreme’ will reduce substantially and the management will have numerous options to drive its business growth. 

■ Henkel India strengthened Jyothy Lab’ positioning in the FMCG space 
Jyothy Lab was having only 3 brands and was largely absent in many FMCG segments (primarily in premium segment). Most of Henkel’s brands (7 in total) are positioned at the premium end and provide an entry point into the main stream FMCG home care segment. The acquisition fulfils Jyothy Lab's primary aim of de-risking its portfolio, which relies in a big way on a single brand, Ujala Supreme fabric whitener, which contributes ~32% to its turnover. 

 Perfect Synergies between Jyothy Lab and Henkel India
 In the last few years, Jyothy Lab has tried diversifying into detergents, dishwash and mosquito repellents, but competition in these categories has made the going tough. With a product portfolio close to its own, Henkel India fits perfectly with Jyothy Lab's ambitious growth plans. Jyothy Lab also intends to bring down manufacturing costs by using the respective distribution strengths of both the companies. 

 Well diversified Distribution reach Jyothy Lab expanded product portfolio would benefit the company by providing balanced presence in rural and urban areas, as its ratio of rural and urban presence is 75:25 and that of Henkel India is 30:70. The combined portfolio would be positive as it will create perfect synergies. Jyothy Lab’ strong rural presence and Henkel India’ strong urban distribution reach will complement each other in the combined entity. 

■ Turnaround strategy in place for Henkel India 
The turnaround strategy of Henkel India has resulted margin improvement during 3QFY12. A 5% increase in product prices, and a sharp drop in advertising and promotion spends were two key reasons for the improvement in sales and profitability.

 Brand specific initiatives in place for Henkel products Henko 
Champion will be repositioned as a premium brand without any freebies. A 10-20% price hike for Henko is also on the agenda to increase profits. Priority will be Henko Champion and Mr White which are the largest contributors to Henkel's business. Jyothy Fabricare Services Ltd – good prospects for organised laundry business in India 

 Jyothy Fabricare Services Ltd. (JFSL) – a 75% subsidiary - entered organized laundry business in the year 2009. JFSL caters to 2 broad categories – Institutional and Retail. Under Institutional category the company currently services ~65 clients that include hotels, serviced apartments, hostels and airlines. Currently, the biggest chunk of JFSL’ laundry business continues to come from Bangalore, followed by Delhi and Mumbai. The gross margin for JFSL’ laundry business currently stood at ~68%; however JSFL continues to record losses and management expects to turn it profitable by FY14E.


>NESTLE INDIA: Grammage reduction in noodles and chocolates segment

Expensive valuations

We believe Nestlé India’s revenue CAGR of 19.8% over CY11-14E will be ahead of other non-food companies driven by high market share, low penetration in high growth categories across baby food, dairy whiteners, noodles and chocolates. We are also bullish on the food processing sector in the country and believe leaders including Nestlé would benefit the most with changing consumer behavior. But, high capex driven debt could impact profitability in the near term. At current valuation we believe volume growth risk is not priced in the stock and there is little room for earnings disappointment. Hence we initiate coverage with a HOLD
rating on the stock.

 Volume growth to bounce back: We expect volume growth to bounce back to CY10 levels after it posted a meagre 6.8% in CY11, the lowest since CY06. Volume growth dipped further in Q4CY11 to mere 1.5% on the back of de-growth of11% in chocolate & confectionary and 3.7% in milk products as thre was a ban on exports of milk products. Grammage reduction in noodles and chocolates segment due to raw material price increase and deliberately discouraging sales in the éclair segment due to its low margin profile also affected growth. Sales to CSD channel were low and high milk cost impacted volumes in the milk segment.
Addition of new capacities in each segment would help in launching new products and increase supply of premium products. Widening distribution reach would also help in
volume growth going forward.

 Financials: We expect revenue to grow at a CAGR of 19.8% over CY11-14E to Rs128bn in CY14 on the back of ~16% volume growth while operating profit is set to grow at a CAGR of 19.5% over CY11-14E to Rs26.52bn in CY14E on the back of steady gross margins and operating margins. RoCE is expected to moderate significantly as the company raised Rs9.7bn debt to fund its capex. It raised ECBs loan of $136Mn from its parent Nestlé S.A. for a 5-year period. Due to high capex, the company has capped its dividend at Rs48.5/share over past three years; however this is expected to increase from CY12.

 Stretched Valuations: Nestlé India’s current valuation is expensive as it trades on a one-year forward rolling P/E of ~33x, which is high compared to its long-run 10 year average of 25x, 5 year average of 28x and 3 year average of 32x. Relative to Sensex the stock is trading at 160% premium compared to 10 year average of 65% premium. At 40x and 33x CY12E and CY13E PE, we believe risks are not priced in the stock and there is little room for earnings
disappointment. We initiate coverage with a HOLD rating and a target price of Rs4,428 based on 31x CY13E EPS of Rs142.8 which is at 20% premium to long term average and 100%
premium to Sensex PE. 

 Key risks: i) Premium pricing can impact volumes; ii) Competition intensifies to reduce market share; iii) High cost inflation to impact margins