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Reliance Power limited (REPL) has announced bonus shares on, June 02, 2008. Reliance power will issue 3 bonus shares for every 5 shares hold by investors at the end of day June 02, 2008.
Banking CRR hike to hurt sentiments
The Reserve Bank of India (RBI) has raised the cash reserve ratio (CRR) by 50 basis points to 8% to check inflationary expectations by sucking out excess liquidity from the system. The hike would be implemented in two stages: a 25-basis point hike on April 26, 2008 followed by a 25-basis point rise on May 10, 2008. The fact that the RBI has not waited for the policy review (due on April 29, 2008) for announcing the CRR hike is likely to weigh down heavily on sentiments towards the banking stocks.
BSNL drives the volume growth This growth in the subscriber base can be attributed to the year-end push by BSNL (Bharat Sanchar Nigam Ltd) and the launch of aggressively priced schemes by various players. As mentioned earlier, it is important to watch the expansion in minutes of usage due to reduction in rates.
GSM operators (excluding Reliance Communications) reported a robust addition of 7.3 million subscribers during March, taking the total subscriber base to 192.3 million. The GSM subscriber base grew by 4.0% during the month, which is higher than the average growth of 3.6% reported during the previous four months.
With an unprecedented increase in raw material (iron ore and coking coal) prices in the last few years, the steel industry is witnessing a structural upward shift in cost structures. Iron ore and coking coal contract prices have surpassed all estimates and are up by 65% and 210% yoy respectively for 2008. However, despite concerns that the US may be slipping into a recession, steel manufacturers have globally demonstrated strong ability to pass on the incremental costs. In addition, Indian steel manufacturers are bearing the brunt of rising inflation in the domestic market and grappling with government intervention to control steel prices in the country. Even as we see the measures announced/ proposed by the government having a limited impact on numbers, investor sentiment has been hurt badly. Reacting to these concerns, Indian steel stocks have seen a sharp correction in multiples and the valuation discount to global peers has further widened. Even as we believe that this gap is unlikely to narrow in the near term, investors should use the opportunity to invest into these otherwise strong businesses. Once the dust settles, we see a bounce-back in steel stocks.
In the last quarter, banking stocks have been hammered due to multiple concerns and ensuing expectations of weak sector earnings in Q4FY08. We foresee muted NII performance in Q4FY08 especially PSU banks, owing to slower credit growth and negative pressures on margins outweighing the positives in the short-term. Also, strong treasury gains of Q2FY08 and Q3FY08 would be amiss this quarter, given the high volatility in equity markets. Banks’ AFS bond books would suffer from MTM provisions with yields reining higher than the December 2007 cut-off level (by ~15bps). On the other hand, private banks (excluding ICICI Bank) would continue to march on with robust bottom-line forecasts, driven by strong loan growth, stable-rising NIMs and robust fee income growth. This strong income profile would enable these banks to absorb the expected downside in derivative business (fees and MTM losses). While increased credit losses on the unsecured retail portfolio would dent profits of these private banks, ICICI Bank would be additionally hit by MTM provisions on credit derivatives. We expect a 13% yoy growth in NII and 19% yoy rise in net profit of our banking universe for Q4FY08. Axis Bank, HDFC Bank and Bank of India are our top result picks for Q4FY08 with least risk to earnings forecasts.
STOCK UPDATE Trade Recommendation:: Bharti Airtel Q4 earnings to be flat sequentially Key points Banking earnings preview The earnings of banking companies are much awaited in the forthcoming earnings season owing to the various concerns that have emerged since the end of Q3FY2008. We present our analysis on the macro variables and earnings estimates for the banks under our coverage.
Trade Recommendation: Buy
Price target: Rs 1,100
Current market trading price: Rs 799The Finance Ministry has suggested additional charges for spectrum usage for new and existing operators. In our opinion this move is a regressive step and indicates inconsistency in the regulatory environment. Though there is limited scope of implementing such stiff terms, we view the development as sentimentally negative for telecom services stocks.In Q4FY2008, we expect a flat sequential growth in the earnings of Bharti Airtel due to tariff revision in the pre-paid segment and higher net interest cost. A key data point to watch out during the quarter would be the expansion in minutes of usage, as a result of the reduction in prepaid call rates. We maintain Buy call on the stock with price target of Rs1,100.
Pharma earnings preview Key pointsAfter months of underperformance, the pharmaceutical sector is finally back in the limelight. The uncertain market conditions have forced investors to take shelter in defensive plays like pharmaceuticals. Further, under-ownership of the sector by foreign investors along with high dividend yield of most of the pharmaceutical stocks has made them an attractive investment opportunity. We remain positive on the Indian pharmaceutical sector on account of the steady domestic growth, growing revenues from generics in the regulated markets, geographical expansion into growing emerging markets, synergies arising out of integration of acquisitions, and unlocking of value from the demerger and listing of discovery research operations. The domestic market maintained its growth momentum at 13.6% during the fourth quarter of FY2008. We expect companies like Cipla, Sun Pharmaceuticals (Sun Pharma) and Lupin, which have a high exposure to the domestic market, to benefit from the sustained momentum in the domestic pharmaceutical market and continue to outpace the industry growth. After continually appreciating for the last three quarters, the rupee has reversed its trend by depreciating 1.3% against the US Dollar during Q4FY2008. This will lead to companies with outstanding foreign exchange (forex) liabilities (including foreign currency convertible bonds [FCCBs]) reporting translation losses. We expect Ranbaxy Laboratories (Ranbaxy) and Orchid Chemicals (Orchid) to report marginal forex losses in their Q4FY2008 results (as compared with strong forex gains recorded in the previous quarters). However, the rupee is yet almost 10% stronger against the US Dollar on a year-on-year (y-o-y) basis, resulting in lower realisation on exports year on year (yoy). Further, the Indian Rupee has appreciated by around 8.7% against the Pound Sterling over the last one year. Thus, companies like Wockhardt, which have a high exposure to the UK market, will suffer, even though the impact will be partially mitigated by the 3.1% depreciation in the rupee against the euro. Any further movement in the rupee/pound or the rupee/euro exchange rates will affect the performance of companies like Wockhardt (through Pinewood, Negma, CP, Wallis and Esparma), Dr Reddy's Laboratories (DRL; through Betapharm) and Ranbaxy (through Terapia), which have a high exposure to the European market. The competition in the US generic market continues to remain stiff. While the competitive scenario is unlikely to improve, further deterioration is also unlikely, given that most products are already at a 97-99% discount to the innovator's brand. In view of the tough competitive landscape in the USA, companies with vertically integrated business models, a large product portfolio with complex and niche products, a strong pipeline of Para IV/one-time opportunities and a geographically diversified presence will remain at an advantage. The risk-appetite of the Indian players has been on the rise. Apart from becoming aggressive participants in the risky Para IV patent challenge space, Indian companies like Sun Pharma have also taken calculated risks by making at-risk launches of Para IV-related products like generic Protonix and generic Ethyol. We expect the combined exclusivities of Protonix and Oxcarbazepine to add substantially to Sun Pharma's revenues and profits during Q4FY2008, while the revenues from the recently launched generic Ethyol under exclusivity will reflect in the Q1FY2009 performance. Over the past few quarters, Indian pharmaceutical companies have been looking at innovative ways to unlock value of the assets that they have built over the years. While Sun Pharma, Nicholas Piramal, Ranbaxy and Wockhardt have decided to de-merge and subsequently list their drug discovery operations, Glenmark has decided to split its business into specialty and generics segments, along the lines of Novartis and Sandoz. The announcement of the demerger details and listing of the demerged entities in the coming quarters will act as a strong trigger for these stocks. Companies under our coverage are expected to report a 25.0% growth in profits on the back of a 23.8% increase in the revenues for Q4FY2008. The top line of the companies under our coverage would be driven by the new product launches in the regulated markets, strong growth in the contract research and manufacturing services (CRAMS) businesses of these companies and consolidation of the acquisitions made in the previous year. The operating profit margin (OPM) of companies under our coverage is expected to expand by 360 basis points, largely driven by one-time exclusivity revenues (Sun Pharma), savings arising out of the de-merger of research and development (R&D) units (Ranbaxy, Nicholas Piramal) and the low base of Q4FY2007 (Ranbaxy and Ipca Laboratories). The sharp expansion in the margins will be mitigated by the relatively lower other income, due to forex losses (Ranbaxy & Orchid) and higher interest and depreciation costs (due to acquisitions in the case of Wockhardt, Lupin and Cadila Healthcare). The key risk to our estimates for Q4FY2008 is the disclosure of any forex losses in the derivative segment reported by companies. However, most leading companies like Ranbaxy and Wockhardt have denied having recorded any such losses. Front-line companies such as Ranbaxy and Cipla would show good growth in revenues and earnings whereas DRL would post a decline in both the top line and the bottom line due to the high base of Q4FY2007 (during which the company had recorded one-time revenues from the Ondansetron exclusivity). Further, the minor translation losses recorded by Ranbaxy (as compared with the translation gains recorded in the previous quarters) due to the depreciation of the Indian Rupee against the US Dollar would restrict the profit growth posted by the company. We have not provided quarterly estimates for Aurobindo Pharma (Aurobindo) in the report below as the company reports stand-alone quarterly numbers while our projections and valuations are based on the consolidated numbers reported by the company. Further, from hereon, we are discontinuing our coverage on Unichem Laboratories in view of the lack of visibility on the export front as the company has been trying to re-negotiate its export contracts after the sharp appreciation in the Indian Rupee against the US Dollar, on account of which export realisations had been sharply hit.
FMCG earnings preview We expect the overall revenues of Sharekhan's FMCG universe to increase by 13% yoy with Marico maintaining its 20%+ growth trend. Though the growth in the top line is a combination of higher volumes and price increases, price hikes had a bigger role to play this time around. We expect all the companies under our FMCG universe to improve their margins yoy. Thus, we expect the operating profit growth (of 19.2% yoy) to outpace the increase in the top line. The adjusted net profit is expected to grow by 16%.
Q4FY2008 Media earnings preview Q4 is the best quarter for the media industry with the union budget being the key revenue driver. We expect media companies under Sharekhan universe to register a 45.6% year-on-year (y-o-y) growth in revenues with TV18 and Zee News putting up a strong show. However the net profit growth on an overall basis is expected to be 28.4% with Zee News outperforming its peers.
Advanta (CMP: Rs951) Mkt Cap: Rs16bn; US$401m Bloomberg code (ADV IN)
In the midst of the global credit market turmoil, as apprehensions regarding growth and profitability of Financials rein high, negative news is often blown out of size. Like other Indian Banks, Axis Bank has been caught in the quagmire of varied market concerns (though valid in concept but their impact is highly exaggerated):
(1) Contingent legal claims as banks’ clients contest forex derivative contracts sold to them, having suffered outsized MTM losses (2) Spillover impact causing a slowdown in fee income from derivative business (3) Prolonged downturn in equity markets hurting distribution fees from insurance, and thereby fee income estimates (4) Trading gains are a high proportion of the bank’s PBT (5) Loan loss coverage is low relative to peers, exposing the bank’s earnings to volatility (6) Expansion in NIMs is largely aided by capitalization.
We have analyzed each of these issues and believe that their cumulative impact is of no material consequence to our PAT projection of 28% CAGR over FY08-10E:
· Worst case hit on account of Forex derivatives is 4-5% on the bank’s PBT (actual hit would be a fraction)
· 1-2% worst case impact on PBT due to closure of derivative business, given the bank’s limited exposure
· Slowdown in third party distribution fees (no visible signs in Q4FY08) to affect only ~8% of fee income; estimates already factor in a slower growth
· Trading gains to PBT is not high at 28% for Q3FY08, but actually ~12% (excluding fees from clients and effect of provisions in excess of RBI norms)
· Loan loss coverage for FY07 is high at ~76% and not optically low at ~37%, due to the bank’s aggressive write-offs (~40% of gross NPAs)
· NIMs improve by 50bps to 3.43% in Q3FY08 over Q4FY07, after adjusting 25-30bps benefit of capitalization.
| Valuation metrics | ||||||
| Year to 31 March | 2005 | 2006 | 2007 | 2008E | 2009E | 2010E |
| Net profit (Rs mn) | 3,346 | 4,851 | 6,590 | 10,351 | 13,266 | 17,027 |
| yoy growth (%) | 20.2 | 45.0 | 35.9 | 57.1 | 28.2 | 28.3 |
| Shares in issue (mn) | 274 | 279 | 282 | 357 | 357 | 357 |
| EPS (Rs) | 13.2 | 17.6 | 23.5 | 32.4 | 37.2 | 47.8 |
| EPS growth (%) | 9.8 | 32.6 | 34.0 | 37.9 | 14.7 | 28.3 |
| PE (x) | 56.4 | 42.6 | 31.8 | 23.0 | 20.1 | 15.6 |
| Book value (Rs/share) | 88.0 | 103.1 | 120.5 | 245.9 | 276.5 | 315.8 |
| Adj. Book value (Rs/share) | 83.3 | 99.2 | 115.5 | 243.8 | 277.4 | 320.3 |
| P/ Adj. Book (x) | 9.0 | 7.5 | 6.5 | 3.1 | 2.7 | 2.3 |
| ROAE (%) | 18.9 | 18.4 | 21.0 | 17.0 | 14.2 | 16.1 |
STOCK UPDATE Balaji Telefilms Price target revised to Rs355 Q4FY2008 IT earnings preview The frontline tech stocks are expected to show a sequential revenue growth of 5-8% during the fourth quarter ended March 2008. The sequential growth is likely to be driven by a 4-7% growth in the volumes aided by the depreciation of rupee by around 90 basis points over Q3FY2008. We expect Satyam Computer to continue with its strong growth momentum and outperform its frontline peers. On the other hand, Tata Consultancy Services (TCS) could lag behind due to customer specific issues, whereas HCL Technologies will face pressure on its earnings growth due to foreign exchange (forex) fluctuation. SECTOR UPDATE Automobiles Mixed bag
Recommendation: Buy
Price target: Rs355
Current market price: Rs198
Balaji Telefilms Ltd (BTL) and Star entered a 49:51 joint venture (JV) in April 2007 (with BTL having a 49% stake) to launch regional entertainment channels in Telugu, Kannada, Malayalam, Bengali, Marathi and Gujarati. Star transferred its Tamil channel Star Vijay to the JV. Forward integration in regional broadcasting arena (especially south Indian language channels) with a world-class broadcaster like Star (with BTL's expertise in content) promised immense value creation potential for BTL and acted as a trigger for the stock. However the broadcast venture has been considerably delayed, as the first of these channels in Telugu that was to go on air by September 2007 and to be followed by the launch of at least four other regional language channels over a period of time are still to operationalise. The management has cited procedural issues to get the required approvals as the reason for the delay. In the absence of clarity on the timeline for the launch of these channels, the worst-case scenario would be that the JV might be called off. Considering this, we have conservatively revised our estimates and price target for the stock.
Sales of automobile majors for March 2008 were a mixed bag. Two-wheeler sales improved, particularly for the market leader Hero Honda, however our channel checks reveal that the segment is still witnessing pressures because of non-availability of finance, as financers are still reluctant to lend in the wake of rising cases of delinquencies and defaults. Maruti Suzuki's sales were affected due to intense competition in the passenger car segment, while the commercial vehicle (CV) segment appears to have started witnessing a recovery of sorts with the recent improvement in the freight rates, which also points to an end to the CV downturn. However, a delay in the interest rate cut could prolong the downturn.
WPI Inflation, at 6.68% (for the week ending 15 March 2008), is at a 59-week high – far above the RBI’s comfort zone of sub-5%. Though we have observed a broad-based price increase since January 2008, a sharp rise in prices of ‘manufactured products’ (specifically metals & alloys) in the recent weeks has pushed inflation numbers up. Along with the continued rise in primary inflation caused by rising prices of food products (cereals, oil seeds, fibers); it presents a serious ‘cause of concern’ for regulators. We expect a slew of monetary and fiscal measures, which could impact the expectations of lower interest rates in the economy; as well as fear of govt. enforced price control. These developments will be negative for interest rate sensitives and commodity stocks (e.g. steel).
Cement Strong demand continues in North and South
In February 2008, cement industry recorded sales of 14.72 million metric tonne (MMT) against 13MMT in February 2007, thereby registering a growth of 13.2% year on year (yoy). On a year-to-date (Y-T-D) basis, the industry posted a growth of 7.7% and sold 150.56MMT of cement during 2007-08.
Real estate Possible price rise in NCR; IT slow down points otherwise Information Technology Outlook on IT spending worsens
According to media reports, BPTP has won the bids for the development of 95 acre in Noida for Rs5,006 crore. BPTP, which quoted approximately Rs1.30 lakh per square metre, outbid the real estate giants DLF and Omaxe, which had made bids of Rs1.17 lakh per square metre and Rs0.80 lakh per square metre respectively. BPTP is planning to develop hotels, commercial complexes and financial hubs on the acquired land.
Recent reports in media indicate that there has been no improvement in the outlook for IT budgets till now. In the post result interaction, Infosys management had indicated that there would be clarity in the IT budgets of its clients by March. However, in the recent media reports, the company officials stated that some of the clients have still not finalised their IT budgets for CY2008, whereas some others have finalised the budget but are still to make allocations. The management expects the situation to improve by April.
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