>CAIRN INDIA LIMITED: We believe new promoters will support Cairn India’s production growth endeavours

We expect regulatory approvals to be the next catalysts for the stock. Government of

India has in principle approved the Cairn/Vedanta deal after Cairn India agreed to share

royalty and cess on its production from Rajasthan fields; however, some routine approvals

are due. We expect these approvals by the end of the year, which should pave the way for

production growth from 125,000bopd currently. Furthermore, we believe the new

promoters namely Vedanta Group will support Cairn India’s ramp-up endeavours as they

have done with their previous acquisitions (details in the note).

The current environment of stronger oil prices, rupee depreciation and narrow heavylight

spread should benefit Cairn. Despite worries concerning global growth, crude oil has

remained around the current level of more than US100/bbl. Our analysis indicates that the

Brent oil price is unlikely to fall below USD90/bbl (refer to the note by our global oil team:

‘2009 all over again? We doubt it’ dated 11 August 2011). Also, rupee depreciation is likely to

benefit Cairn India, which sells crude oil in US dollar denomination. With the return of oil

production from Libya, the spread between heavy-light crude has fallen, which could also

moderately decrease the discount that the company offers on its Rajasthan crude. Our

valuations are for Brent of USD90/bbl, INR45/USD and an 11% discount to Brent against

current crude oil price of USD110/bbl and USD/INR of 52.

Rajasthan block, the main value driver has significant upside potential. Our detailed

analysis indicates substantial reserves upside in CIL’s Rajasthan block, which is currently

producing 125,000bopd. We believe the in-place oil volume can more than double with

the consequent increase in probability-weighted reserves by c40%. It is important to note

that the Rajasthan block constitutes c95% of our current valuation for CIL.

Valuation and risks. We reiterate OW on the stock with a target price of INR350. We

value Cairn India on DCF for production from known reserves, and a risk-weighted

multiple for reserves upsides. Lower crude oil price, rupee appreciation and slower pace

of production ramp-up are key risks to our rating.

To read the full report: CAIRN INDIA

RISH TRADER

>Foreign Direct Investment in multi brand retail is finally here

As expected the approval comes with the following caveats. These were however well known before, so nothing very surprising in the fine print.

1. Companies will have to invest a minimum of $100mn or more

2. They can only open stores in cities with populations of 1mn or more.

3. At least 50% of the investment has to be in back end infrastructure – warehouses and cold chains

4. States will have the final say as stores have to comply with local legislation

We have highlighted before that this will be positive for the sector as a whole, where capital is severely constrained and companies have had to take on significant debt to put up front end stores as well as invest in back end infrastructure. With foreign participation now approved, this will allow them access to cheaper capital, which can significantly bring down the debt burden and help them improve profitability.

Operationally, investment in back end infrastructure will lead to efficiency improvements which will help these companies improve margins in the medium term.

Current penetration of organized retail is 6-7% of overall retail trade in India, which can increase significantly once capital is available at cheaper rates over the next few years. Indian retail companies have already been in talks with interested foreign retailers, so this final clearance gives them the chance to finalize their partnerships. We still think this will be 6-8 months away, but certainly a very strong medium term positive impact for retail companies.

To read the full report: FDI in Retail
RISH TRADER

>GREED & FEAR (Stock Market): Financial Gangrene

Investors this week got a whiff of the ultimate logic of the core contamination trade. This is

that the longer the Eurozone crisis continues, the more likely that it ultimately affects

Germany’s own credit rating. GREED & fear refers of course to the “failed” German bund

auction yesterday. The auction of 10-year German bunds attracted bids totalling only €3.889bn

or 65% of its sales target of €6bn. As a consequence, the 10-year German bund yield surged

by 23bp yesterday to 2.15%.

This is the sort of market pressure that is likely to lead, sooner or later, to German agreement

to a more overt move to monetisation by the ECB. But the German demanded quid pro quo for

such a development will be a move to a more concrete fiscal union, as discussed here

previously. Still as this week’s bond auction makes clear, Frau Merkel cannot wait too long. For

otherwise Germany’s own credit will be undermined by the spreading disease caused by

Euroland’s fault line, namely monetary union without fiscal union. Still for now Frau Merkel has

continued to tolerate this financial equivalent of spreading gangrene. Thus, this week she

seemingly shot down European Commission President José Manuel Barroso’s proposal for

eurobonds. Merkel said in a speech before the Bundestag on Wednesday that “it is extremely

worrying and inappropriate that the European Commission is directing the focus to eurobonds

today,” and that it was false to assume that “collectivisation of debt would allow us to overcome

the currency union's structural flaws”.

Still the pressure continues to mount, even if the French-German bond spread has of late

declined. Thus, the spread between the 10-year French government bond yield and the 10-year

German bund yield, which rose to a euro-era record high of 190bp on 16 November, has since

fallen to 154bp due to a 33bp rise in the German bund yield over the past week (see Figure 1).

Investors should continue to focus on this spread. But they also now need to keep an eye on

the absolute level of bond yields, both in the case of the French and German ten year bonds.

This is because the time has now passed where it only made sense to look at spreads.

Meanwhile, it is becoming ever clearer that the contagion in the Eurozone sovereign bond

markets has been aggravated by the efforts not to trigger CDS payments in the proposed

private-sector “voluntary” Greek debt restructuring. The result has been to motivate banks to

sell their underlying bond holdings since they can no longer be sure that they can hedge these

positions. It is interesting whether this unintended consequence of the latest Greek bailout package has finally caught the attention of European policymakers. It probably has since it finally caught the attention of the editorial writers in the pinko paper today (see Financial Times article “In praise of CDS”, 24 November 2011). Still the damage has already been done.

To read report in details: FINANCIAL GANGRENE

RISH TRADER

>BANKING SECTOR: Corporate Debt Restructuring (CDR) picks up pace; serves as worrying lead indicator for non-CDR restructured assets

High interest rates, waning business confidence and subdued macroeconomic environment has precipitated increase in restructuring cases over the last couple of quarters. In Q2FY12, total cases referred under Corporate Debt Restructuring (CDR) increased to 19 vs. 16 in Q1FY12. The total CDR amount involved however, went up over 5x QoQ – from Rs56.7 bn to Rs288.9 bn in Q2FY12. Though Q2FY12 figure constitutes only 0.7% of total banking sector advances, the worrying aspect is that CDR may serve as a coincidental indicator for non-CDR cases. Over FY04-FY11, non-CDR restructuring has averaged ~5x the CDR amount. Total amount involved under CDR in H1FY12 was Rs345.6 bn, highest since last 8 years. Further looking at the pace of increase in CDR cases, total restructuring (CDR + Non CDR) is expected to put significant stress on the banking system.

CDR referral delays stress asset recognition and provisioning

Corporate Debt Restructuring (CDR) framework ensures timely and transparent mechanism for restructuring the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. The scheme covers

• Only multiple banking accounts, syndication/consortium accounts, where all banks and institutions together have an outstanding aggregate exposure of Rs100 mn and above.
• Involves approval by super-majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line with the majority decision.

Once a case is referred to CDR, a ‘standstill’ period of 90/180 days is revoked. Within the ‘standstill’ period, both the borrower and lender agree to keep things as they are (standstill) and commit themselves not to take recourse to any legal action during the period. ‘Standstill’ is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise.

Due to the ‘standstill’ clause, the category of the asset continues to remain as it is in the books of the banks. This prevents banks from making additional provision on account of restructuring (for standard assets) and also help them ‘gain’ additional time period (in the form of standstill period) before the provisioning on restructured accounts hit their profitability.

The accounts of borrowers engaged in industrial activities (under CDR Mechanism, SME Debt Restructuring Mechanism and outside these mechanisms) continue to be classified in the existing asset classification category after restructuring. This benefit of retention of asset classification on restructuring is not available to the accounts of borrowers engaged in non-industrial activities except SME borrowers.

India banking restructured book set to expand

We undertook an exercise to analyze and gauge the cases being referred to CDR cell so as to get a sense on the medium term outlook of banking sector in India, which we believe is troublesome. Number of cases that has been referred to CDR has increased from 35 in the first half of FY12 as compared to 22 in the same period last year. Corresponding amount of loan referred has also increased to Rs345.6 bn in H1FY12 as compared to Rs51.8 bn in H1FY11. However, there is a one-off in H1FY12 due to the total debt of Rs226.2 bn of GTL group (Chennai Network India Limited, GTL Ltd and GTL Infrastructure). Excluding the total debt of GTL group, the total figure still stands at Rs119.4 bn, which is ~2x compared to last year.

In Q2FY12, total amount referred under CDR was Rs288.9 bn. We have tried to estimate the increase in restructuring by various banks in the coming quarters (see table below). Out of the above Rs288.9 bn, our analysis covers only Rs180 bn of debt due to lack of complete data, which is not public.

To read the full report: BANKING SECTOR

RISH TRADER