>Offshore Oilfield Services (PINC RESEARCH)

Drilling for value....

Offshore Oilfield Services form an important segment of the oilfield value chain. It includes all activities involved in upstream exploration of hydrocarbons in the offshore environment including drilling, construction and support activities. While offshore capex has peaked after five years of scorching growth, we believe there are pockets of value for domestic players to continue the growth momentum, albeit at a slower pace.

■ Hydrocarbon capex has peaked, but will not subside: We believe that capex in this space peaked in 2008 after 5 years of scorching growth and upstream players will go slow on incremental capex. However, we also believe that oil exploration should continue at a slower pace, given the fact that oil is a perishable commodity and it has faced numerous feast and famine situations in the past.

■ Domestic demand to remain robust: With ONGC being a major upstream player in the domestic market with a clear mandate of ensuring energy security, the demand aspect of exploration is ensured for players with a strong domestic presence.

■ Shallow water players to emerge: Contrary to popular perception, we believe that shallow water players should experience renewed demand despite incremental supply coming in, mainly because with softening oil prices, deep water exploration is fast becoming prohibitive.

■ Niches waiting to be exploited: With the scorching pace of oil capex in the last five years slackening, there is room to breathe for upstream players and focus on revamping an ageing infrastructure. This will give business to players in offshore construction and maintenance space.

To see full report: OFFSHORE OILFIELD SERVICES

>The Global Economic Crisis (UNCTAD)

The Global Economic Crisis: Systemic Failures and
Multilateral Remedies

(Report by the UNCTAD Secretariat Task Force on Systemic Issues and Economic Cooperation)

Executive summary
The global economic crisis has yet to bottom out. The major industrial economies are in a deep recession, and growth in the developing world is slowing dramatically. The danger of falling into a deflationary trap cannot be dismissed for many important economies. Firefighting remains the order of the day, but it is equally urgent to recognize the root causes for the crisis and to embark on a profound reform of the global economic governance system.

To be sure, the drivers of this crisis are more complex than some simplistic explanations pointing to alleged government failure suggest. Neither “too much liquidity” as the result of “expansionary monetary policy in the United States”, nor a “global savings glut” serves to explain the quasi-breakdown of the financial system. Nor does individual misbehaviour. No doubt, without greed of too many agents trying to squeeze double-digit returns out of an economic system that grows only in the lower single-digit range, the crisis would not have erupted with such force. But good policies should have anticipated that human beings can be greedy and short-sighted. The sudden unwinding of speculative positions in practically all segments of the financial market was triggered by the bursting of the United States housing price bubble, but all these bubbles were unsustainable and had to burst sooner or later. For policymakers who should have known better to now assert that greed ran amok or that regulators were “asleep at the wheel” is simply not credible.

Financial deregulation driven by an ideological belief in the virtues of the market has allowed “innovation” of financial instruments that are completely detached from productive activities in the real sector of the economy. Such instruments favour speculative activities that build on apparently convincing information, which in reality is nothing other than an extrapolation of trends into the future. This way, speculation on excessively high returns can support itself – for a while. Many agents disposing of large amounts of (frequently borrowed) money bet on the same “plausible” outcome (such as steadily rising prices of real estate, oil, stocks or currencies). As expectations are confirmed by the media, so-called analysts and policymakers, betting on ever rising prices appears rather riskfree, not reckless.

Contrary to the mainstream view in the theoretical literature in economics, speculation of this kind is not stabilizing; on the contrary, it destabilizes prices. As the “true” price cannot possibly be known in a world characterized by objective uncertainty, the key condition for stabilizing speculation is not fulfilled. Uniform, but wrong, expectations about long-term price trends must sooner or later hit the wall of reality, because funds have not been invested in the productive capacity of the real economy, where they could have generated increases in real income. When the enthusiasm of financial markets meets the reality of the – relatively slow-growing – real economy, an adjustment of exaggerated expectations of actors in financial markets becomes inevitable.

In this situation, the performance of the real economy is largely determined by the amount of outstanding debt: the more economic agents have been directly involved in speculative activities leveraged with borrowed funds, the greater the pain of deleveraging, i.e. the process of adjusting the level of borrowing to diminished revenues. As debtors try to improve their financial situation by selling assets and cutting expenditures, they drive asset prices further down, cutting deeply into profits of companies and forcing new “debt-deflation” elsewhere. This can lead to deflation of prices of goods and services as it constrains the ability to consume and to invest in the economy as a whole. Thus, the attempts of some actors to service their debts make it more difficult for others to service their debts. The only way out is government intervention to stabilize the system by “government debt inflation”.

To see full report: GLOBAL ECONOMIC CRISIS

>Idea Cellular (MOTILAL OSWAL)

■ Downgrading FY10E PAT by 28%: We downgrade FY10E PAT for Idea by 28% to reflect margin pressure in incumbent circles from 1) increased competition and 2) recent termination charge cut. We expect near-term weakness in RPM and MOU on lower subscriber quality and increased discounting. While EBITDA loss in new circles (esp. Bihar) could peak out in 4QFY09, six new circle launches lined up for 1QFY10-3QFY10 will continue to drag margins. Our FY10/ FY11 EBITDA estimate is now 5-6% lower than consensus while PAT is 30-40% lower.

■ Subscriber momentum remains strong but earnings to stabilise only in FY11: Subscriber momentum remains strong for Idea. QTD, Idea (incl. Spice) reported second highest subscriber growth at 9.2%, largely driven by ramp-up in new circles (Mumbai and Bihar). However, aggressive expansion and full consolidation of Spice from FY10 will lead to 15% PAT decline in FY10E (21% decline in FY09E). We expect earnings to stabilise only in FY11 (+6% YoY).

■ More susceptible to negatives; risks to tariffs is on the downside: Idea is highly leveraged to mobile RPM movements given lower margins (PAT margin of 8% v/s 22-25% for Bharti and RCOM) and no significant non-wireless business. We believe that risk to tariffs is on the downside in the current environment due to several simultaneous new launches by Aircel, RCOM, Tata Tele, Vodafone, and Idea itself. We model a 15% RPM decline in FY10E (similar to Bharti) v/s 16-17% decline over FY07-09E.

■ Execution on track; FY09 marks peak capex (ex-3G): Idea remains a solid long-term growth story given strong market share traction, significant network expansion, healthy balance sheet, and lower time-to-market due to its participation in Indus. FY09 will be peak capex for Idea; capex intensity (ex-3G) is likely to decline from 64% in FY09 to 23% in FY11.

■ Indus IRU unlikely to impact consolidated financials: IRU with Indus has been implemented effective January 2009 and consequently Idea will start paying rent on ~11,100 towers. As of December 2008, Idea had ~17,800 owned towers with a tenancy ratio of 1.4x. IRU implementation is unlikely to meaningfully impact consolidated financials as Idea will consolidate Indus on JV basis (16% stake). Standalone EBITDA could be impacted by ~Rs4.3b assuming a rental outgo of ~Rs32,000/site/month.

■ Valuations remain at a premium; Neutral: Idea is trading at 7.1x EV/EBITDA FY10E and 23.7x EPS based on our revised estimates. Valuation premium reflects depressed earnings due to continued investments in new circles (which are currently loss making). However, given competitive pressure on incumbent circles, possibility of consensus downgrades, and low RoIC, stock performance is likely to remain muted. Neutral.

To see full report: IDEA CELLULAR

>Bank Retails (MERRILL LYNCH)

Provisioning norms for NPLs

■ New floating provision norms to impact reported net NPLs
The Reserve Bank of India (RBI) has come out with a notification highlighting the provisioning norms banks are expected to follow (see inside). The key change is in relation to ‘floating provisions’. We believe banks, going forward, may not be allowed to net-off floating provisions from gross NPLs, while reporting net NPL’s. Hence, it would raise the reported net NPL figure for banks’ having floating provisions. But the provisions still reside in the balance sheet. But banks can use floating provisions as Tier 2 capital, up to cap of 1.25% of risk-weighted assets.

■ Overall impact of new norms minimal for most banks
Most Indian Banks like HDFC Bank and SBI have minimal / any floating provisions on their balance sheets. Other banks like BOI, BOB have been using floating provisions as Tier 2 capital. However, banks like PNB, UBI, and ICICI Bk have been using these floating provisions to net-off against gross NPLs. We believe these would be most impacted, as discussed below.

■ UBI and PNB most impacted; ICICI Bk impact minimal
ICICI Bk has been netting-off against gross NPLs, although post change in norms, impact is minimal (see table 1). The biggest impact is on UBI and PNB as it was deducting its floating provision est. at +Rs5.1bn and Rs10bn, resp. Hence, their reported net NPL’s could rise by 2x and 4x for PNB and UBI, resp., although % of loans rise could be only 50bps and 70bps, resp. from reported 3QFY09 levels only on account of this accounting change. Although, impact on BV due to rise in Net NPLs limited to 6-7% for UBI and PNB. However, we strongly contend that this floating prov. does reside in B/S and hence, in our view, this does not materially change the underlying quality of a banks’ balance sheet as you cannot ignore provisions made by the bank.

■ Tier II capital may rise by 50-60bps
The positive takeaway is that it may shore up Tier II capital by 50-60bps of some of the govt. banks (especially those that have done restructuring). This, apart, from helping improve the overall capital position, may also ease some pressure on the funding costs (Tier II debt costs +9-10%), helping earnings, impact <1%.

To see full report: BANK RETAILS