ABG Shipyard
Buy/Medium Risk
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
Showing posts with label CitiGroup. Show all posts
Showing posts with label CitiGroup. Show all posts
Friday, April 13, 2007
Thursday, April 12, 2007
Idea Cellular
Initiate at Buy: Free from Shackles, Poised for Growth
> Initiate coverage at Buy/Low Risk — Our DCF-based target price of Rs112 implies a target valuation of 11.6x FY09E EV/EBITDA – in line with that of Bharti. We believe Idea’s relatively undiluted exposure to India’s wireless growth, its higher growth rates (FY07-09E EPS CAGR of 47.7%) and long-term M&A possibilities make it a better proxy for Bharti than is RCOM.
> Leverage to wireless growth restored — Post its restructuring and IPO, Idea is placed to expand and deepen its network in what is essentially a supply-driven market (FY10E penetration of 32.8%). Roll-outs in three new circles have done well; two more rollouts are due based on spectrum. Margins will soften with new rollouts, but recover gradually to generate FY07-09E EBITDA CAGR of 42.6%.
> Strong regional player — Idea Cellular has a national market share of 8.7% (Feb-07). More importantly, its strong presence in the eight old circles with 18.2% share and top-three ranking in six of them indicate inherent strengths. Besides, respectable key performance indicators (KPIs), which imply rational competitive behaviour, provide a boost to our confidence in Idea’s ability to achieve NAV accretion from new rollouts.
> Key risks — Delays in procuring spectrum impacting the rollout timetable and project cost overruns remain the key risks. From an industry perspective, we believe low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.
Buy/Low Risk 1L
Price (10 Apr 07) Rs94.90
Target price Rs112.00
Expected share price return 18.0%
> Initiate coverage at Buy/Low Risk — Our DCF-based target price of Rs112 implies a target valuation of 11.6x FY09E EV/EBITDA – in line with that of Bharti. We believe Idea’s relatively undiluted exposure to India’s wireless growth, its higher growth rates (FY07-09E EPS CAGR of 47.7%) and long-term M&A possibilities make it a better proxy for Bharti than is RCOM.
> Leverage to wireless growth restored — Post its restructuring and IPO, Idea is placed to expand and deepen its network in what is essentially a supply-driven market (FY10E penetration of 32.8%). Roll-outs in three new circles have done well; two more rollouts are due based on spectrum. Margins will soften with new rollouts, but recover gradually to generate FY07-09E EBITDA CAGR of 42.6%.
> Strong regional player — Idea Cellular has a national market share of 8.7% (Feb-07). More importantly, its strong presence in the eight old circles with 18.2% share and top-three ranking in six of them indicate inherent strengths. Besides, respectable key performance indicators (KPIs), which imply rational competitive behaviour, provide a boost to our confidence in Idea’s ability to achieve NAV accretion from new rollouts.
> Key risks — Delays in procuring spectrum impacting the rollout timetable and project cost overruns remain the key risks. From an industry perspective, we believe low revenue yields and moderate EBITDA margins leave little room for disruptive pricing.
Buy/Low Risk 1L
Price (10 Apr 07) Rs94.90
Target price Rs112.00
Expected share price return 18.0%
ABG Shipyard - CitiGroup
Buy: Raising Estimates on Improved Earnings Visibility
> What's new — ABG Shipyard recently announced that it has secured an order worth US$139m from Essar Shipping for the construction of 4 bulk carriers. This follows the US$13m repeat order that the company recently won for the construction of one APS tug vessel for Lamnalco, Cyprus.
> Order visibility improves — ABG's total unexecuted order book now stands at c.Rs33bn (5x FY07E sales) vs. Rs25bn earlier. With order backlog extending well into FY10 and orders for the company's upcoming Dahej facility yet to be completely tied up (5 slots are still available even after the recent order wins), earnings visibility for the company over the next 3 years has improved significantly – we expect ABG to deliver an EPS CAGR of 46% over FY07-09E.
> Revising FY09E earnings by 21% — We are raising our FY09E earnings by 21% factoring in improved earnings visibility following the order wins; FY08E earnings, which would not be affected by the Dahej expansion, remain relatively unchanged. Our earnings forecasts do not currently factor in any upside from yet-to-be announced rig orders. However, these are unlikely to have any significant impact on FY09 performance.
> Maintain Buy/Medium Risk — We believe fundamentals for Indian shipbuilders remain strong, driven by: (1) the robust E&P cycle ensuring strong demand in the OSV segment and (2) the continued tightness in the global shipbuilding sector. ABG's expansion plans remain on target and are well-timed to capture the continued upswing in the shipbuilding cycle. Maintain Buy / Medium Risk with a target price of Rs430.
Buy/Medium Risk 1M
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
> What's new — ABG Shipyard recently announced that it has secured an order worth US$139m from Essar Shipping for the construction of 4 bulk carriers. This follows the US$13m repeat order that the company recently won for the construction of one APS tug vessel for Lamnalco, Cyprus.
> Order visibility improves — ABG's total unexecuted order book now stands at c.Rs33bn (5x FY07E sales) vs. Rs25bn earlier. With order backlog extending well into FY10 and orders for the company's upcoming Dahej facility yet to be completely tied up (5 slots are still available even after the recent order wins), earnings visibility for the company over the next 3 years has improved significantly – we expect ABG to deliver an EPS CAGR of 46% over FY07-09E.
> Revising FY09E earnings by 21% — We are raising our FY09E earnings by 21% factoring in improved earnings visibility following the order wins; FY08E earnings, which would not be affected by the Dahej expansion, remain relatively unchanged. Our earnings forecasts do not currently factor in any upside from yet-to-be announced rig orders. However, these are unlikely to have any significant impact on FY09 performance.
> Maintain Buy/Medium Risk — We believe fundamentals for Indian shipbuilders remain strong, driven by: (1) the robust E&P cycle ensuring strong demand in the OSV segment and (2) the continued tightness in the global shipbuilding sector. ABG's expansion plans remain on target and are well-timed to capture the continued upswing in the shipbuilding cycle. Maintain Buy / Medium Risk with a target price of Rs430.
Buy/Medium Risk 1M
Price (12 Apr 07) Rs350.35
Target price Rs430.00
Expected share price return 22.7%
India Economics
Feb Industrial Production – Growth remains strong up 11%; it could result in one last policy hike
➤ Feb Industrial production – in line with expectations: Industrial production rose 11% in Feb with growth led by manufacturing, up 12%; mining up 6.3%; and electricity came in surprisingly lower at 3.3% as compared with an average of 7%+ in the past few months. Other highlights include strong growth in capital goods (18.2%), basic (10.4%) and intermediate goods (13.7%). Consumer non-durables remained buoyant at 9.7%, but growth in durables came in at 1.6% - partially attributed to the base effect. Overall industrial growth during Apr-Feb was 11% and bodes well for the government's 9.2% GDP estimate for FY07.
➤ So will the RBI hike in or around its April 24 Policy? Although we expect inflation to trend below 6% from the week ending Mar 30 (data due tomorrow), we think there is a 50:50 chance that the RBI will hike its policy rates once more given that inflation is likely to remain over its target range of 5%-5.5% till the week ending May 5. Further, the RBI remains concerned on trends in money supply (22%) and bank credit (29%). While we expect policy rates to peak shortly, we maintain that the RBI will continue to use the CRR to keep liquidity tight, but could lower SLR in 2H07 to ensure credit availability for the real sector.
➤ Maintaining our macro forecasts: The near-term outlook is a bit clouded given the RBI’s recent tightening measures coupled with the government’s semi-regressive measures to dampen inflationary expectations (price controls and export bans on commodities such as cement, steel, iron-ore, etc). However, given the continuation of the key economic growth drivers coupled with the uptrend in both savings and investment both touching new highs of 32.4% and 33.8% of GDP, respectively, we expect GDP growth to sustain around the 9%
level for FY08. Key risks would be politics and much further tightening.
➤ Feb Industrial production – in line with expectations: Industrial production rose 11% in Feb with growth led by manufacturing, up 12%; mining up 6.3%; and electricity came in surprisingly lower at 3.3% as compared with an average of 7%+ in the past few months. Other highlights include strong growth in capital goods (18.2%), basic (10.4%) and intermediate goods (13.7%). Consumer non-durables remained buoyant at 9.7%, but growth in durables came in at 1.6% - partially attributed to the base effect. Overall industrial growth during Apr-Feb was 11% and bodes well for the government's 9.2% GDP estimate for FY07.
➤ So will the RBI hike in or around its April 24 Policy? Although we expect inflation to trend below 6% from the week ending Mar 30 (data due tomorrow), we think there is a 50:50 chance that the RBI will hike its policy rates once more given that inflation is likely to remain over its target range of 5%-5.5% till the week ending May 5. Further, the RBI remains concerned on trends in money supply (22%) and bank credit (29%). While we expect policy rates to peak shortly, we maintain that the RBI will continue to use the CRR to keep liquidity tight, but could lower SLR in 2H07 to ensure credit availability for the real sector.
➤ Maintaining our macro forecasts: The near-term outlook is a bit clouded given the RBI’s recent tightening measures coupled with the government’s semi-regressive measures to dampen inflationary expectations (price controls and export bans on commodities such as cement, steel, iron-ore, etc). However, given the continuation of the key economic growth drivers coupled with the uptrend in both savings and investment both touching new highs of 32.4% and 33.8% of GDP, respectively, we expect GDP growth to sustain around the 9%
level for FY08. Key risks would be politics and much further tightening.
Wednesday, April 11, 2007
Strategy In-Depth April 10th, 07
Slower Inflows Despite Stronger Asian Markets
> Inflows to offshore Asian funds decelerate from US$1.1bn to just US$295m — But Asian markets rose 3.4% and turnover increased 8.3% in the week ended 4 April. Either domestic funds or local individual investors supported the markets.
> India and Singapore country funds take in 30% of new money to Asia — Unlike most other country funds that still face redemptions, India and Singapore funds received net cash for a second week. The difference between these two investments, however, is that inflows to India funds are under water (the BSE Sensex has declined in the past two weeks) while new investment in Singapore funds has been profiting thus far.
> Foreign investors returning to Korea and Taiwan — Of the US$3.9bn foreign net purchases in emerging Asian markets over the past 2 weeks, the majority targeted Taiwan and Korea equities (US$1.7bn and US$0.7bn, respectively). Net purchases in the Philippines reached US$415m, close to foreigners' total net buying in India. But the market cap of the former is just 9% of the latter.
> Abundant liquidity to global equity funds — In contrast to the decelerating inflows to Asian funds, money going to global equity funds increased 33% WoW to US$1.7bn. As highlighted in our last Weekly, Asian markets did not benefit much from the strong inflows to global funds. Net selling of Asian equities by these funds was at a record high in February, when they offloaded Asian weight.
Inflows to offshore Asian funds decelerated from US$1.1bn to just US$295m in the week ended 4 April. Nevertheless, Asian markets rose 3.4% and turnover was up 8.3%.
Either domestic funds or local individuals were the major supporters of the markets.
Inflows to Global Emerging Market funds slowed 62% week-on-week to US$267m, taking total outflows of the first quarter down to US$491m versus net inflows of US$1.4bn to all Asia dedicated funds. Back in 1Q06, inflows to GEM and Asian funds were around US$8-9bn individually.
Contrasting the decelerated inflows to Asian funds, money going to Global equity funds increased 33% WoW to US$1.7bn. As highlighted in our last Weekly, Asian markets did not benefit much from the strong inflows to global funds. Net selling of Asian equities by these funds was at record high in February when they offloaded Asian weight.
Net Purchases/Sales by Foreign Investors
Of the US$3.9bn foreign net purchases in emerging Asian markets over the past two weeks, the majority targeted Taiwan and Korea equities (US$1.7bn and US$0.7bn respectively). Meanwhile, net purchases in the Philippine market reached US$415m, which is close to foreigners' total net buying in India. But the market cap of the former is just 9% of the latter.
> Inflows to offshore Asian funds decelerate from US$1.1bn to just US$295m — But Asian markets rose 3.4% and turnover increased 8.3% in the week ended 4 April. Either domestic funds or local individual investors supported the markets.
> India and Singapore country funds take in 30% of new money to Asia — Unlike most other country funds that still face redemptions, India and Singapore funds received net cash for a second week. The difference between these two investments, however, is that inflows to India funds are under water (the BSE Sensex has declined in the past two weeks) while new investment in Singapore funds has been profiting thus far.
> Foreign investors returning to Korea and Taiwan — Of the US$3.9bn foreign net purchases in emerging Asian markets over the past 2 weeks, the majority targeted Taiwan and Korea equities (US$1.7bn and US$0.7bn, respectively). Net purchases in the Philippines reached US$415m, close to foreigners' total net buying in India. But the market cap of the former is just 9% of the latter.
> Abundant liquidity to global equity funds — In contrast to the decelerating inflows to Asian funds, money going to global equity funds increased 33% WoW to US$1.7bn. As highlighted in our last Weekly, Asian markets did not benefit much from the strong inflows to global funds. Net selling of Asian equities by these funds was at a record high in February, when they offloaded Asian weight.
Inflows to offshore Asian funds decelerated from US$1.1bn to just US$295m in the week ended 4 April. Nevertheless, Asian markets rose 3.4% and turnover was up 8.3%.
Either domestic funds or local individuals were the major supporters of the markets.
Inflows to Global Emerging Market funds slowed 62% week-on-week to US$267m, taking total outflows of the first quarter down to US$491m versus net inflows of US$1.4bn to all Asia dedicated funds. Back in 1Q06, inflows to GEM and Asian funds were around US$8-9bn individually.
Contrasting the decelerated inflows to Asian funds, money going to Global equity funds increased 33% WoW to US$1.7bn. As highlighted in our last Weekly, Asian markets did not benefit much from the strong inflows to global funds. Net selling of Asian equities by these funds was at record high in February when they offloaded Asian weight.
Net Purchases/Sales by Foreign Investors
Of the US$3.9bn foreign net purchases in emerging Asian markets over the past two weeks, the majority targeted Taiwan and Korea equities (US$1.7bn and US$0.7bn respectively). Meanwhile, net purchases in the Philippine market reached US$415m, which is close to foreigners' total net buying in India. But the market cap of the former is just 9% of the latter.
SEZ Review
SEZ Update – Positives outweigh the negatives
➤ Special Economic Zone (SEZ) Policy Overhauled: Late last week, the government lifted the ban on SEZ’s that was imposed in Jan07 following protests seen in W Bengal by families displaced by land acquisition1 for SEZs.
The amendments relate to size, processing area, forex earnings and the role of state – most of which we believe are positive. We thus maintain our view that benefits in terms of infrastructure, trade, employment and investment could offset the negatives, with SEZs serving as catalysts to growth rather than fostering unbalanced development.
➤ Key parameters that have been amended include:
1. Land ceiling: The upper limit of the area for multi-product SEZs has now been capped at 5000 hectares. However, state governments can prescribe a ceiling lower than 5000 hectares. In addition, there is also a cap of 12,500 hectares for a single applicant. While this could impact the mega SEZ plans of Reliance, DLF, Omaxe, Unitech etc, it is reported that companies are looking at options such as splitting the SEZs to comply with the new rules3 2. Processing Area: The minimum processing area has been uniformly raised to 50% for all SEZs. Earlier, the minimum processing area was 35% for multiproduct SEZs and 50% for sector-specific SEZs. This could adversely impact developers who initially intended to use 65% of the SEZ land to build hotels, malls, schools and entertainment centres.
3. Land acquisition and rehabilitation: The onus of land acquisition will now fall on the private sector as compared to the earlier rules where states could acquire land. This is positive as in some cases, state governments powers were being mis-used. More-over the new rules will shield the land-owners from the states who had the power to forcibly acquire land for public use under the land acquisition Act.
Current Status on SEZs
Since the SEZ Rules came into effect in Feb 06, the Board has granted formal approval to 234 SEZ proposals, and in-principle approval to 162 proposals. 63 SEZs have been notified. However, with the Nandigram protests, the fate of several SEZs – including projects by Infosys Technology in Pune, Wockhardt at Aurangabad, and Mahindra World City in Jaipur – hung in the balance. This backlog will now be cleared, with the BoA resuming processing approvals. We think the move is an overall positive since it resolves several long-standing issues, and lends much needed clarity to development of these zones.
Are SEZs beneficial?
The concept of SEZs in India has been subject to much controversy and debate over the past year. Although Indian SEZs are much smaller in scale than their Chinese counterparts, we think they are a step in the right direction. While norms may have to be further tightened to prevent leakages, the government's thrust on SEZs coupled with private sector participation is likely to promote industrial activity. Further, estimates by the Ministry suggest that SEZs will bring in investments to the tune of Rs1000bn by the end of Dec07, creating 500,000 direct jobs. Net-net, we believe the benefits that will accrue in terms of infrastructure, trade, employment, and investment will offset the teething problems that SEZs have encountered so far.
Amendments to SEZ Policy over the past year
Over the past year, we have seen a number of amendments to the SEZ Policy. Key amendments during the last year include
1 Companies operating in SEZs would have to make fresh investments in plant and machinery;
2 Companies that import for the purpose of re-export would get tax breaks while those sourcing from domestic tariff areas would not.
3 Earlier the SEZ developer was permitted to allot land to anyone in the onprocessing
area for business and social purposes. These rules were changed so that vacant land can be leased only to a co-developer approved by the authorities.
4 The RBI issued a directive that said all loans given towards setting up SEZs will be treated in the same manner as exposure to commercial real estate, the stock market, and venture capital. This implies higher provisioning norms (100bps as against 40bps for standard loans) as well as higher risk weights (150% instead of 100% for standard loans). Higher capital requirements are yet another way of curtailing fly-by-night SEZs mushrooming over the country, and help retain only the more serious players.
5 Rules regarding minimum investment and net worth have also been amended, with promoters in multi-product SEZ's required to have a net worth of Rs2.5bn and a minimum investment of Rs10bn. (Sector specific Net Worth=Rs0.5bn and minimum investment =Rs2.5bn).
6 In contrast to the earlier rules where units had to be net forex earners over the first five years to get SEZ benefits, under the new rules export earnings from SEZs
will now have to be equivalent to their purchases from domestic areas.
➤ Special Economic Zone (SEZ) Policy Overhauled: Late last week, the government lifted the ban on SEZ’s that was imposed in Jan07 following protests seen in W Bengal by families displaced by land acquisition1 for SEZs.
The amendments relate to size, processing area, forex earnings and the role of state – most of which we believe are positive. We thus maintain our view that benefits in terms of infrastructure, trade, employment and investment could offset the negatives, with SEZs serving as catalysts to growth rather than fostering unbalanced development.
➤ Key parameters that have been amended include:
1. Land ceiling: The upper limit of the area for multi-product SEZs has now been capped at 5000 hectares. However, state governments can prescribe a ceiling lower than 5000 hectares. In addition, there is also a cap of 12,500 hectares for a single applicant. While this could impact the mega SEZ plans of Reliance, DLF, Omaxe, Unitech etc, it is reported that companies are looking at options such as splitting the SEZs to comply with the new rules3 2. Processing Area: The minimum processing area has been uniformly raised to 50% for all SEZs. Earlier, the minimum processing area was 35% for multiproduct SEZs and 50% for sector-specific SEZs. This could adversely impact developers who initially intended to use 65% of the SEZ land to build hotels, malls, schools and entertainment centres.
3. Land acquisition and rehabilitation: The onus of land acquisition will now fall on the private sector as compared to the earlier rules where states could acquire land. This is positive as in some cases, state governments powers were being mis-used. More-over the new rules will shield the land-owners from the states who had the power to forcibly acquire land for public use under the land acquisition Act.
Current Status on SEZs
Since the SEZ Rules came into effect in Feb 06, the Board has granted formal approval to 234 SEZ proposals, and in-principle approval to 162 proposals. 63 SEZs have been notified. However, with the Nandigram protests, the fate of several SEZs – including projects by Infosys Technology in Pune, Wockhardt at Aurangabad, and Mahindra World City in Jaipur – hung in the balance. This backlog will now be cleared, with the BoA resuming processing approvals. We think the move is an overall positive since it resolves several long-standing issues, and lends much needed clarity to development of these zones.
Are SEZs beneficial?
The concept of SEZs in India has been subject to much controversy and debate over the past year. Although Indian SEZs are much smaller in scale than their Chinese counterparts, we think they are a step in the right direction. While norms may have to be further tightened to prevent leakages, the government's thrust on SEZs coupled with private sector participation is likely to promote industrial activity. Further, estimates by the Ministry suggest that SEZs will bring in investments to the tune of Rs1000bn by the end of Dec07, creating 500,000 direct jobs. Net-net, we believe the benefits that will accrue in terms of infrastructure, trade, employment, and investment will offset the teething problems that SEZs have encountered so far.
Amendments to SEZ Policy over the past year
Over the past year, we have seen a number of amendments to the SEZ Policy. Key amendments during the last year include
1 Companies operating in SEZs would have to make fresh investments in plant and machinery;
2 Companies that import for the purpose of re-export would get tax breaks while those sourcing from domestic tariff areas would not.
3 Earlier the SEZ developer was permitted to allot land to anyone in the onprocessing
area for business and social purposes. These rules were changed so that vacant land can be leased only to a co-developer approved by the authorities.
4 The RBI issued a directive that said all loans given towards setting up SEZs will be treated in the same manner as exposure to commercial real estate, the stock market, and venture capital. This implies higher provisioning norms (100bps as against 40bps for standard loans) as well as higher risk weights (150% instead of 100% for standard loans). Higher capital requirements are yet another way of curtailing fly-by-night SEZs mushrooming over the country, and help retain only the more serious players.
5 Rules regarding minimum investment and net worth have also been amended, with promoters in multi-product SEZ's required to have a net worth of Rs2.5bn and a minimum investment of Rs10bn. (Sector specific Net Worth=Rs0.5bn and minimum investment =Rs2.5bn).
6 In contrast to the earlier rules where units had to be net forex earners over the first five years to get SEZ benefits, under the new rules export earnings from SEZs
will now have to be equivalent to their purchases from domestic areas.
Tuesday, April 10, 2007
Indian Equity Strategy April 10th, 07
Mar-07 Quarter Results Preview
> Last quarter of the year, lesser surprises — Being the last quarter of the year for most of the market, Mar-07 quarter results should hold lesser surprises. The focus
will clearly be on the year ahead, starting with guidance from IT services companies and a close watch on how companies view growth prospects in the face of higher interest rates, tighter liquidity and likely slower credit growth.
> Sensex ex-oil profit growth expected at 26% — While not high as the last couple of
quarters, we expect ex-oil profit growth to still be strong at 26% for Sensex as well
as Citigroup India Universe. FY07 is likely to end as the 5th consecutive year of 25-
30% earnings growth in India. The quarter should also mark the end of this highgrowth
phase, as earnings growth in coming years is expected at around 15%.
> Robust topline growth, steady margins — Although top line growth will likely moderate from +30% seen in the last couple of quarters, it is steady expected to remain robust at 23-24%. EBITDA margins should be stable overall, albeit with wide variation across sectors. Impact of higher interest rates and tighter liquidity would be felt mainly in banks and autos.
> Leaders & laggards — Sectors to lead profit growth should be Cement, Hotels, IT
Services, Pharma and Telecoms. Laggards should be Autos, Chemical, Oil & Gas, Power and Sugar sectors.
Mar-07 Quarter Results Preview
Being the last quarter of FY07, Mar-07 quarter results will likely carry lesser
surprises and the focus will be clearly on the year ahead. Guidance by IT services companies will as usual set the tone. Key to watch will be whether higher interest rates and tightening liquidity have started to bite into growth.
For the Mar-07 quarter, we expect 26% profit growth for Sensex ex-oil as well as
Citigroup ex oil universe. Though slower than the last couple of quarters, it should help FY07 to end as the 5th consecutive year of 25-30% earnings growth. It should also mark the end of such high earnings growth, as we expect overall earnings growth to moderate to around 15-16% over FY08 and FY09. Sensex ex-oil profit growth expected at 26% yoy Ex-oil profit growth for Mar-07 quarter is expected at 26% for the Sensex, and the Citigroup India Universe. Significantly higher subsidy losses for downstream
oil majors implies that earnings growth would drop to 3.4% for the Citigroup Universe. However, Sensex including oil should see a higher numbers at 30%, primarily due to ONGC which is likely to see a 58% jump in earnings on a yoy basis.
We expect profit growth will be led by Cement, Hotels, IT Services, Pharma and Telecom sectors (40-80% growth expected in these sectors). Capital Goods, Consumer, Textiles and Metals likely to see steady growth. Key underperformers will likely be Autos, Chemicals, Oil & Gas, Power and Sugar sectors.
Top line growth should moderate from +30% in the last two quarters, but stay robust at around 23% for the Sensex, and 24% for the Citigroup universe. Given that overall trend, acceleration in topline growth will be hard to come by, notable exceptions being Banks / Financials, Capital goods, IT Services, Sugar and Telecom. Sharpest deceleration in topline growth will likely be seen in Autos, Hotels and Petrochemicals.
Overall margins are expected to be flat. Largest margin improvements are likely in Cement, Media, Hotels, Telecom and Pharma sectors. Sectors likely to see significant margin erosion are Sugar, Metals and Oil & Gas.
Sectoral Comments
Autos — Over the quarter, margins expected to compress 200-400bps on a yoy basis across passenger cars and 2-wheelers, due to a combination of a stiff base effect, as also rising input cost pressures. Overall volume trends have been divergent – 2-wheeler sales for the quarter have been a sedate 6% (compounding margin pressures), whilst for 4-wheelers, sales growth has been more robust – CV sales are up 22% yoy (Ashok Leyland (ASOK.BO - Rs36.25; 3L), Tata Motors (TAMO.BO - Rs698.00; 1L), whilst car majors like Maruti (MRTI.BO - Rs783.25; 1L) have reported 27% y/y growth in domestic volumes.
Banks — Earnings growth likely to be in line with expectations at 15%. Margins should hold contrary to some market expectations. Downside risks are provisioning requirements for private banks for loans, and mark-to-market losses on bonds and corporate debt portfolios with rising interest rates. No definite trends expected in asset quality.
Capital Goods — Earnings growth expected at 25%. Construction sector might see decline in earnings on account of tax payments for the entire year at one go. L&T (LART.BO - Rs1,573.50; 2L) should see healthy sales growth but margin compression. Earnings are expected to be steady for the power sector reflecting growth in generation capacities.
Cement — Expect relatively flat or lower volumes. Prices up ~30% across the sector, hence margins should improve significantly. Grasim’s (GRAS.BO - Rs2,156.00; 1L) VSF margins are expected to be lower due to lower volumes, and higher pulp prices, and cement margins higher on the back of increased prices.
Consumer — Expect profit growth to look up, on the back of strong top-line growth and margin expansion driven by softening in raw materials prices. Our top picks are HLL (HLL.BO - Rs203.75; 1L) and United Spirits (UNSP.BO - Rs813.00; 1L). Likely laggard — ITC (ITC.BO - Rs153.00; 3L).
Hotels — Expect strong profitability to continue - sales growth at 37% and earnings growth at 52% driven by rise in average room rates, and higher occupancy rates across metro markets and tourist destinations. Our top picks are Indian Hotels (IHTL.BO - Rs145.00; 1L), and EIH (EIHO.BO - Rs95.50; 1L).
IT Services — Expect 4QFY07 to be a solid quarter, although currency appreciation should impact reported numbers. Expect 7.5% qoq revenue growth (US$-terms) and 6.7% qoq profit growth for our coverage universe. Revenue growth should be driven by volumes with a marginal uptick in pricing. Q4 historically not a great quarter for hiring – volume growth driven by improved utilization. Currency impact on reported profits should be significant, with the rupee appreciating 1.8% against the $ both on an average as well as period-end basis. TCS (TCS.BO - Rs1,217.00; 1L), HCL Tech (HCLT.BO - Rs291.10; 1M) appear best hedged against currency movements. We reiterate our view that Tier-I players are best placed in the present environment. TCS and Infosys (INFY.BO - Rs2,037.00; 1L) remain our top picks in the large-cap segment while Hexaware (HEXT.BO - Rs169.10; 1M) and KPIT (KPIT.BO - Rs132.80; 1M) look best placed in the mid-tier space.
Metals — Aluminium pricing should be better on the back of a supply side crunch due to smelter constraints and the entry of hedge funds. Alumina prices higher on a sequential basis but lower YoY. Relatively flat margins overall, with Copper margins likely to decline due to expected TC/RC decline. Steel expected to do better than non-ferrous metals on the back of higher volumes, and better pricing.
Oil & Gas / Chemicals — Gross under-recoveries were higher compared to the previous quarter. Besides, the oil marketing companies would receive oil-bonds on a quarterly basis, rather than a full-year basis like last year. So while oil bonds issued were flat on a qoq basis at about Rs50bn, they are significantly lower than the one-time tranche issued last year of 140bn. Sales growth of ~10% is basically due to higher prices but expected to have little impact on margins. Singapore refining margins are up by US$3, which would help Reliance Industries’ (RELI.BO - Rs1,383.80; 2L) earnings. Our top picks — ONGC (ONGC.BO - Rs862.80; 1M), GSPL (GSPT.BO - Rs49.75; 1M) and ABAN (ABAN.BO - Rs2,240.00; 1H). We see laggards being — HPCL (HPCL.BO - Rs256.00; 3M), BPCL (BPCL.BO - Rs312.00; 3M), and IOC (IOC.BO - Rs393.75; 3M).
Pharma — Sector is expected to witness robust revenue growth of 31% YoY driven primarily by the Indian, Russian, and EU markets, as wells as inorganic initiatives by some of the leading companies. The consequent operating leverage along with improving product/geographical mix should lead to continued improvement in EBITDA margins (up 400 bps), and profits will likely be up 65% YoY. Our top pick is Nicholas Piramal (NICH.BO - Rs251.00; 1M). Likely laggard — Cipla (CIPL.BO - Rs235.10; 3L).
Telecom — Subscriber addition momentum has continued to accelerate during the quarter. We expect stable ARPUs and moderate EBITDA margin gains would continue to drive strong earnings growth ~80%. Bharti’s net-add should be more stable than its peers. Our top pick — Bharti (BRTI.BO - Rs760.55; 1L). Likely laggard — MTNL (MTNL.BO - Rs153.90; 3L).
Textiles — Results expected to be a mixed bag, due to continued pressure on domestic business, and pressure on yarn prices (down by 4–5%). Players on the garmenting side, branded apparel and home textiles are likely to benefit. Our top picks are Raymond (RYMD.BO - Rs332.05; 1L) and Gokaldas (GOKL.BO - Rs229.00; 1M). Likely laggard — Arvind (ARMI.BO - Rs43.90; 2M).
> Last quarter of the year, lesser surprises — Being the last quarter of the year for most of the market, Mar-07 quarter results should hold lesser surprises. The focus
will clearly be on the year ahead, starting with guidance from IT services companies and a close watch on how companies view growth prospects in the face of higher interest rates, tighter liquidity and likely slower credit growth.
> Sensex ex-oil profit growth expected at 26% — While not high as the last couple of
quarters, we expect ex-oil profit growth to still be strong at 26% for Sensex as well
as Citigroup India Universe. FY07 is likely to end as the 5th consecutive year of 25-
30% earnings growth in India. The quarter should also mark the end of this highgrowth
phase, as earnings growth in coming years is expected at around 15%.
> Robust topline growth, steady margins — Although top line growth will likely moderate from +30% seen in the last couple of quarters, it is steady expected to remain robust at 23-24%. EBITDA margins should be stable overall, albeit with wide variation across sectors. Impact of higher interest rates and tighter liquidity would be felt mainly in banks and autos.
> Leaders & laggards — Sectors to lead profit growth should be Cement, Hotels, IT
Services, Pharma and Telecoms. Laggards should be Autos, Chemical, Oil & Gas, Power and Sugar sectors.
Mar-07 Quarter Results Preview
Being the last quarter of FY07, Mar-07 quarter results will likely carry lesser
surprises and the focus will be clearly on the year ahead. Guidance by IT services companies will as usual set the tone. Key to watch will be whether higher interest rates and tightening liquidity have started to bite into growth.
For the Mar-07 quarter, we expect 26% profit growth for Sensex ex-oil as well as
Citigroup ex oil universe. Though slower than the last couple of quarters, it should help FY07 to end as the 5th consecutive year of 25-30% earnings growth. It should also mark the end of such high earnings growth, as we expect overall earnings growth to moderate to around 15-16% over FY08 and FY09. Sensex ex-oil profit growth expected at 26% yoy Ex-oil profit growth for Mar-07 quarter is expected at 26% for the Sensex, and the Citigroup India Universe. Significantly higher subsidy losses for downstream
oil majors implies that earnings growth would drop to 3.4% for the Citigroup Universe. However, Sensex including oil should see a higher numbers at 30%, primarily due to ONGC which is likely to see a 58% jump in earnings on a yoy basis.
We expect profit growth will be led by Cement, Hotels, IT Services, Pharma and Telecom sectors (40-80% growth expected in these sectors). Capital Goods, Consumer, Textiles and Metals likely to see steady growth. Key underperformers will likely be Autos, Chemicals, Oil & Gas, Power and Sugar sectors.
Top line growth should moderate from +30% in the last two quarters, but stay robust at around 23% for the Sensex, and 24% for the Citigroup universe. Given that overall trend, acceleration in topline growth will be hard to come by, notable exceptions being Banks / Financials, Capital goods, IT Services, Sugar and Telecom. Sharpest deceleration in topline growth will likely be seen in Autos, Hotels and Petrochemicals.
Overall margins are expected to be flat. Largest margin improvements are likely in Cement, Media, Hotels, Telecom and Pharma sectors. Sectors likely to see significant margin erosion are Sugar, Metals and Oil & Gas.
Sectoral Comments
Autos — Over the quarter, margins expected to compress 200-400bps on a yoy basis across passenger cars and 2-wheelers, due to a combination of a stiff base effect, as also rising input cost pressures. Overall volume trends have been divergent – 2-wheeler sales for the quarter have been a sedate 6% (compounding margin pressures), whilst for 4-wheelers, sales growth has been more robust – CV sales are up 22% yoy (Ashok Leyland (ASOK.BO - Rs36.25; 3L), Tata Motors (TAMO.BO - Rs698.00; 1L), whilst car majors like Maruti (MRTI.BO - Rs783.25; 1L) have reported 27% y/y growth in domestic volumes.
Banks — Earnings growth likely to be in line with expectations at 15%. Margins should hold contrary to some market expectations. Downside risks are provisioning requirements for private banks for loans, and mark-to-market losses on bonds and corporate debt portfolios with rising interest rates. No definite trends expected in asset quality.
Capital Goods — Earnings growth expected at 25%. Construction sector might see decline in earnings on account of tax payments for the entire year at one go. L&T (LART.BO - Rs1,573.50; 2L) should see healthy sales growth but margin compression. Earnings are expected to be steady for the power sector reflecting growth in generation capacities.
Cement — Expect relatively flat or lower volumes. Prices up ~30% across the sector, hence margins should improve significantly. Grasim’s (GRAS.BO - Rs2,156.00; 1L) VSF margins are expected to be lower due to lower volumes, and higher pulp prices, and cement margins higher on the back of increased prices.
Consumer — Expect profit growth to look up, on the back of strong top-line growth and margin expansion driven by softening in raw materials prices. Our top picks are HLL (HLL.BO - Rs203.75; 1L) and United Spirits (UNSP.BO - Rs813.00; 1L). Likely laggard — ITC (ITC.BO - Rs153.00; 3L).
Hotels — Expect strong profitability to continue - sales growth at 37% and earnings growth at 52% driven by rise in average room rates, and higher occupancy rates across metro markets and tourist destinations. Our top picks are Indian Hotels (IHTL.BO - Rs145.00; 1L), and EIH (EIHO.BO - Rs95.50; 1L).
IT Services — Expect 4QFY07 to be a solid quarter, although currency appreciation should impact reported numbers. Expect 7.5% qoq revenue growth (US$-terms) and 6.7% qoq profit growth for our coverage universe. Revenue growth should be driven by volumes with a marginal uptick in pricing. Q4 historically not a great quarter for hiring – volume growth driven by improved utilization. Currency impact on reported profits should be significant, with the rupee appreciating 1.8% against the $ both on an average as well as period-end basis. TCS (TCS.BO - Rs1,217.00; 1L), HCL Tech (HCLT.BO - Rs291.10; 1M) appear best hedged against currency movements. We reiterate our view that Tier-I players are best placed in the present environment. TCS and Infosys (INFY.BO - Rs2,037.00; 1L) remain our top picks in the large-cap segment while Hexaware (HEXT.BO - Rs169.10; 1M) and KPIT (KPIT.BO - Rs132.80; 1M) look best placed in the mid-tier space.
Metals — Aluminium pricing should be better on the back of a supply side crunch due to smelter constraints and the entry of hedge funds. Alumina prices higher on a sequential basis but lower YoY. Relatively flat margins overall, with Copper margins likely to decline due to expected TC/RC decline. Steel expected to do better than non-ferrous metals on the back of higher volumes, and better pricing.
Oil & Gas / Chemicals — Gross under-recoveries were higher compared to the previous quarter. Besides, the oil marketing companies would receive oil-bonds on a quarterly basis, rather than a full-year basis like last year. So while oil bonds issued were flat on a qoq basis at about Rs50bn, they are significantly lower than the one-time tranche issued last year of 140bn. Sales growth of ~10% is basically due to higher prices but expected to have little impact on margins. Singapore refining margins are up by US$3, which would help Reliance Industries’ (RELI.BO - Rs1,383.80; 2L) earnings. Our top picks — ONGC (ONGC.BO - Rs862.80; 1M), GSPL (GSPT.BO - Rs49.75; 1M) and ABAN (ABAN.BO - Rs2,240.00; 1H). We see laggards being — HPCL (HPCL.BO - Rs256.00; 3M), BPCL (BPCL.BO - Rs312.00; 3M), and IOC (IOC.BO - Rs393.75; 3M).
Pharma — Sector is expected to witness robust revenue growth of 31% YoY driven primarily by the Indian, Russian, and EU markets, as wells as inorganic initiatives by some of the leading companies. The consequent operating leverage along with improving product/geographical mix should lead to continued improvement in EBITDA margins (up 400 bps), and profits will likely be up 65% YoY. Our top pick is Nicholas Piramal (NICH.BO - Rs251.00; 1M). Likely laggard — Cipla (CIPL.BO - Rs235.10; 3L).
Telecom — Subscriber addition momentum has continued to accelerate during the quarter. We expect stable ARPUs and moderate EBITDA margin gains would continue to drive strong earnings growth ~80%. Bharti’s net-add should be more stable than its peers. Our top pick — Bharti (BRTI.BO - Rs760.55; 1L). Likely laggard — MTNL (MTNL.BO - Rs153.90; 3L).
Textiles — Results expected to be a mixed bag, due to continued pressure on domestic business, and pressure on yarn prices (down by 4–5%). Players on the garmenting side, branded apparel and home textiles are likely to benefit. Our top picks are Raymond (RYMD.BO - Rs332.05; 1L) and Gokaldas (GOKL.BO - Rs229.00; 1M). Likely laggard — Arvind (ARMI.BO - Rs43.90; 2M).
India Market Watch April 9th, 07
CitiViews – India Market Watch
➤ Spotlight on Water Management in India: With “inclusive growth” becoming the new mantra of policy makers, water management is an emerging focus area for India, given that both agriculture and the provision of basic services – two basic offshoots of inclusive growth depend on it. Inaugurating the 2007 World Water Day which focused on “Coping with Water Scarcity,” two interesting comments from PM Singh were that water is now fast becoming the most critical constraint for India’s agricultural development and that un-cleaned dirty water is a major cause for child mortality. This issue is further compounded by concerns on climate change which India is most vulnerable to as its monsoon systems and flow of Himalayan rivers are all dependent on current climatic patterns1.
➤ Water: A growing critical constraint for agriculture: Though total precipitation in India, including snowfall, amounts to 4000bn cubic meter across the country, 50% of the precipitation takes place in 15 days and 90% of the rivers are filled within four months. This makes the availability and distribution of water in India uneven across both space and time. Another concern is that storage facilities are poor – Indian dams can store only 200 cubic meters per capita, as compared to over 1,000 cubic meters in China and 5,000 in the US. All of this has resulted in erratic trends in the agriculture sector. This points to emerging opportunities in irrigation, tube-wells as well as building more dams, as climate change is likely to further increase the variability of rainfall in India.
➤ Water Treatment – An emerging opportunity: Another water-related challenge is provision of basic services which includes the quality of water. The UN estimates that 1.1bn people do not have access to an improved sources of drinking water which is a major cause of child mortality. Child mortality rates in India are still high at 65 per 1000 vs. 30 in China and 6.4 in the US. To this end,companies that have made forays in water treatment/water purification facilities in India include Thermax, Ion Exchange, HLL, Eureka Forbes and WHI2.
➤ Measures to curb the crisis are encouraging: To its credit, the government has recognized the urgent need to address water infrastructure and has declared 2007 as the Water Year. Further, its National Water Policy recognizes water as a ‘national asset’ and prioritizes water allocation; encouraging various forms of rain water harvesting. Moreover, the proposed establishment of a water authority for the Brahmaputra along the lines of the Tennessee Valley Authority would combine water infrastructure with modern management approaches to make water a stimulus for growth. One study finds that for every Rs100 of direct benefits, the construction of a dam in northern India generated Rs90 of indirect benefits for the regional economy as well. Government efforts are positive and could help solve the water crisis, provided they are implemented.
➤ Spotlight on Water Management in India: With “inclusive growth” becoming the new mantra of policy makers, water management is an emerging focus area for India, given that both agriculture and the provision of basic services – two basic offshoots of inclusive growth depend on it. Inaugurating the 2007 World Water Day which focused on “Coping with Water Scarcity,” two interesting comments from PM Singh were that water is now fast becoming the most critical constraint for India’s agricultural development and that un-cleaned dirty water is a major cause for child mortality. This issue is further compounded by concerns on climate change which India is most vulnerable to as its monsoon systems and flow of Himalayan rivers are all dependent on current climatic patterns1.
➤ Water: A growing critical constraint for agriculture: Though total precipitation in India, including snowfall, amounts to 4000bn cubic meter across the country, 50% of the precipitation takes place in 15 days and 90% of the rivers are filled within four months. This makes the availability and distribution of water in India uneven across both space and time. Another concern is that storage facilities are poor – Indian dams can store only 200 cubic meters per capita, as compared to over 1,000 cubic meters in China and 5,000 in the US. All of this has resulted in erratic trends in the agriculture sector. This points to emerging opportunities in irrigation, tube-wells as well as building more dams, as climate change is likely to further increase the variability of rainfall in India.
➤ Water Treatment – An emerging opportunity: Another water-related challenge is provision of basic services which includes the quality of water. The UN estimates that 1.1bn people do not have access to an improved sources of drinking water which is a major cause of child mortality. Child mortality rates in India are still high at 65 per 1000 vs. 30 in China and 6.4 in the US. To this end,companies that have made forays in water treatment/water purification facilities in India include Thermax, Ion Exchange, HLL, Eureka Forbes and WHI2.
➤ Measures to curb the crisis are encouraging: To its credit, the government has recognized the urgent need to address water infrastructure and has declared 2007 as the Water Year. Further, its National Water Policy recognizes water as a ‘national asset’ and prioritizes water allocation; encouraging various forms of rain water harvesting. Moreover, the proposed establishment of a water authority for the Brahmaputra along the lines of the Tennessee Valley Authority would combine water infrastructure with modern management approaches to make water a stimulus for growth. One study finds that for every Rs100 of direct benefits, the construction of a dam in northern India generated Rs90 of indirect benefits for the regional economy as well. Government efforts are positive and could help solve the water crisis, provided they are implemented.
Thursday, April 5, 2007
Week Ahead
China - We expect the Chinese government may introduce more policy measures to shrink trade surplus, but it will take a while to set in.
India - Similar to trends in recent months, we expect industrial production growth to remain in the double-digit range.
Korea - Steady job growth likely to continue.
Malaysia - The export number suggests a further consolidation of the industrial production trend.
Philippines - Export growth in February may correct to 12% yoy, following slower electronic exports.
Singapore - 1Q07 GDP flash estimate will likely come in at about 6%, as manufacturing holds up despite tech slump.
Taiwan - Exports likely continued to decelerate in March on weak tech demand, while imports likely bounced back on rising energy imports.
India - Similar to trends in recent months, we expect industrial production growth to remain in the double-digit range.
Korea - Steady job growth likely to continue.
Malaysia - The export number suggests a further consolidation of the industrial production trend.
Philippines - Export growth in February may correct to 12% yoy, following slower electronic exports.
Singapore - 1Q07 GDP flash estimate will likely come in at about 6%, as manufacturing holds up despite tech slump.
Taiwan - Exports likely continued to decelerate in March on weak tech demand, while imports likely bounced back on rising energy imports.
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