>RIL may bid for US refiner Valero

Possible RIL bid for largest independent US refiner Valero?

According to press speculation, RIL may bid for US refiner Valero (see Valero Energy Corp., 27 October 2011). Valero is the largest independent US refiner with 2.8m b/d of refining capacity (Nelson complexity of 11.3). Valero can process heavier/sourer, cheaper crudes, which means lower earnings volatility vis-à-vis peers. A bid for Valero at US$48/share (as per some press reports) appears aggressive but would be earnings accretive if Valero’s profit is over US$2.2bn in our opinion. At BofAML’s estimate of US$3.1bn, a Valero acquisition would boost FY13 earnings by 8-19%. Retain Buy.

Acquisition EPS accretive if Valero profit over US$2.2bn

RIL’s net debt is US$3.5bn (gross cash US$15.6bn) and is set to turn net cash assuming no big acquisition by end of FY12. RIL has been looking for acquisitions and had even bid for LyondellBasell in 2009. We believe RIL could bid for Valero. Some reports suggest RIL’s bid may be at US$48/share (82% higher than Oct 27 closing of US$26.2) while BofAML PO for Valero is US$36. Acquiring a 100% stake in Valero at US$48/share would cost US$27.5bn (net debt US$4,6bn). Valero’s acquisition would be earnings accretive if Valero's FY13 net profit is higher than US$2.2bn. BofAML net profit for 2012 is US$3.1bn and consensus is US$2.5bn. At US$48/share its 2011-12 PE is 9.0-9.6x and EV/EBITDA 4.7-5.4x. US and Valero’s refining outlook the key

Paying US$48/share for Valero would mean 65% higher valuation per complex barrel vis-à-vis RIL’s new refinery built in 2009. We believe some premium is justified if Valero’s stronger GRM in 2Q 2011 (US$11.6/bbl vis-à-vis RIL’s US$10.3/bbl) is sustainable. 17% of Valero’s throughput in US mid-continent gains from weak WTI prices but a key question is how long are these gains sustainable?

To read the full report: RIL

>UNITED STATES: Rising from its ashes

�� Now, it’s unquestionable: the US economy did not double-dipped, since GDP actually accelerated in the third quarter, posting the highest rate of growth for 2011. After sluggish growth over the first half of the year (+0.4% in Q1 and +1.3% in Q2, on a quarterly annualised basis), GDP grew by 2.5% in Q3.


�� The public sector kept on weighing down on overall demand, with government spending flat over the quarter. Government demand has been cutting overall GDP growth for a full year, now. Since it peaked, in 2010 Q3, public spending lost 2.4%, subtracting 0.6 point to overall GDP growth. This is to continue: while the budget consolidation process is still ongoing at the state and local levels of government, it will start as next year for the federal government. Additionally, the impact is way larger than the direct one on GDP figures.. Since the summer of 2008, government (federal, state and local) payrolls have been cut by 1 114 000 employees: this represents 22% of the total decline in the US employment over the period. The government directly contributed to the decline in households’ labour income, even it was partly offset with a rise in benefits.


�� With real disposable income constrained by a depressed labour market and rising commodity prices, in a context of deleveraging, households’ demand cannot be buoyant. It however held up quite well in Q3, with a 2.4% increase in consumption and even a small increase in residential investment (+2.4%).


�� The main source of strength was thus in business spending and exports. Non-residential investment grew by an annualised 16.3%, spending on equipment and software being a particularly bright sport, at +17.4%. As for exports, they gained an annualised 4.0% in Q3, highlighting the continuous improvement of the US external competitiveness, achieved through a massive drop in unit labour costs, and helped by a declining dollar.


�� The strengths within today’s report are unquestionable. Even if, together, the business and the external sectors represent only a small part of overall demand, they can feed a self-sustained recovery. For this to happen, the US economy “just” needs the households sector to hold up a little longer. Federal money would help…


To read the full report: US ECONOMY

>AXIS BANK: Low probability of negative surprise from hereon

⇒ AXSB’s Q2FY12 NII at Rs20bn ahead of consensus. Net profit of Rs9.2bn marginally lower due to higher Opex and provisions


⇒ NIMs bounce back sharply (50bps qoq) with help of better yields and CASA (up 170bps qoq). We expect lower NIMs in coming quarters due to higher balance sheet growth


⇒ Slippages move up sharply at Rs5bn, highest in last 6 qrtrs. Rs2.3bn of MFI exposure restructured in Q2FY12. Slippage guidance of 1.3%, marginally higher than our estimate


⇒ Valuations at 2.2x/1.9x FY12E/FY13E ABV. Estimates already factor in higher slippages and NIMs compression. Expect no –ve surprise. Upgrade to ACCUMULATE


NII in line; Opex and provisions drag profits
AXSB’s Q2FY12 NII at Rs20bn (24% yoy and 16% qoq) was ahead of consensus estimates (Rs18.5-19.5bn) and sharply ahead of our estimates. The better than expected NII was largely driven by sharply improved margins at 3.8%, an improvement of 50bps qoq. The net profit at Rs9.2bn was tad lower than expected as 22% yoy growth in operating income was offset by more than doubling of provisions for the quarter to Rs4.3bn.


The growth in advances was at 6.2% qoq with overall balance sheet growth of 7.5% qoq as AXSB seems to have added some more of non-SLR investments too.The advances growth was driven by retail and corporate advances. Commendably, despite adverse interest rate environment, the CASA expanded by 70bps yoy (170bps qoq) in overall deposit growth of 6% qoq.


To read the full report: AXIS BANK

>GAIL LIMITED: Results inline, maintain Accumulate

⇒ Results were inline with our estimate, with EBIDTA at Rs.16.7bn and PAT at Rs10.9bn. Subsidy payout for Q2FY12 grew by 64% YoY to Rs5.67bn


⇒ Revenue from natural gas transmission declined marginally by 1.1% to Rs.9.1bn, While trading business grew by 20.3% to Rs.67.3bn YoY respectively


⇒ Transmission and trading volume grew by 2.4% to 118.6mmscmd and 2.8% to 84mmscmd on QoQ respectively, mainly driven by higher volume offtake of spot and APM gas


⇒ Accumulate with TP of Rs.510, given its dominant market share in transmission business and expected volume growth. Subsidy sharing remains a key overhang on the stock


Highlights of the results
GAIL reported results which were inline with our estimates. Revenue for the quarter was
at Rs97.2bn (against our expectation of Rs.95bn), growth of 19.7% YoY, mainly due to
better performance from petrochemical and LPG & other LHC segment. EBITDA during
the quarter was at Rs.16.7bn, growth of 15%, YoY. During the quarter the company
reported net profit of Rs.10.9bn, (as against our estimate of Rs.10.7bn), growth of
18.5% YoY. Subsidy payout stood at Rs.5.7bn growth of 64% YoY, mainly due to higher
crude oil prices during the quarter.


Better performance from Petrochemical and other LHC segment drives the revenue and profitability in Q2 FY12
Revenue has increased by 19.7% to Rs.97.2bn in Q2 FY12, mainly due to higher volume growth and higher realisation in both Petrochemical and other LHC segment backed by strong pickups in domestic demand. Petrochemical revenue grew by 28.9% YoY and 47.8% QoQ to Rs.9.2bn. Petrochemical volume and realisation grew by 20.6% to 0.13mnt and 7% to $1540/mt YoY respectively. While other liquid hydrocarbon revenue jumped by 34% YoY and 21.4% QoQ to Rs.9.8bn. other liquid hydrocarbon volume and realisation grew by 9% to 0.38mnt and 23% to $560/mt YoY respectively.


Transmission volume and tariff grew marginally by 1.3% and 1.9% respectively on QoQ, mainly driven by higher offtake of spot and APM volumes.
Natural gas transmission volume and tariff gained marginally by 1.3% to 118.6mmscmd and 1.9% to 0.84/scm respectively on QoQ, mainly driven by higher volume offtake of spot and APM gas. However transmission EBIT margin has declined sequentially by 56bps to 3.8% mainly due to higher other expenditure (forex loss on ECB and bad debts provision). We believe transmission volume for Q3 FY12 would be around 119- 121mmscmd.


Subsidy payout for Q2FY12 grew by 64% YoY to Rs5.67bn
During the quarter, subsidy payout stood at Rs.5.7bn, growth of 64% YoY. Also share of subsidy burden has increased sequentially from 5% to 8%. However, subsidy payout declined by 17% sequentially mainly led by duty reduction in petroleum product and recent price hike in LPG, Kerosene and Diesel.


To read the full report: GAIL