HDFC (Analysing the impact of IFRS, ADD): The introduction of the International Financial Reporting Standards (IFRS) could provide significant upside to the earnings estimates for HDFC. Our analysis suggests that the upside to FY10 reported earnings for the parent company could be 20%, owing to consolidation of subsidiary earnings and bridging the gap in accounting methods from Indian GAAP to IFRS. With a likely increase in the share of the non-mortgage business over time, upside to earnings could be higher. Our estimates for FY12ii show that earnings for the parent under IFRS could be 34% higher than our estimate under Indian GAAP. Valuation under the new paradigm could be significantly lower than the current multiples that are based on estimates of the parent company only.
United Spirits (Margin tailwinds gather more steam, BUY): Visibility of a sustained reduction in ethanol prices has improved with the first advance estimates of the government projecting 17% YoY increase in sugarcane output. We estimate ethanol supply will exceed demand by c400m litres in 2011, despite an increase in ethanol blending with petrol. Surplus ethanol left over from 2010, would further add to supply. As a result, ethanol prices will likely remain benign over FY11-12 driving 450bps EBITDA margin expansion for United Spirits (USL) over FY10-12. An increase in marketing spends would only marginally offset the raw-material cost savings. We increase our EPS estimates for FY11-13 by 4-6% and revise our target price to Rs1,705. Retain BUY.
Cement (Castles in the air): Cement stocks in our universe have appreciated by 7–25% in the past two months, as against the Sensex’s appreciation of 10%. More stocks are trading at a premium to replacement cost compared to the previous down-cycle. To assess whether this steep re-rating is warranted, we have compared the current cycle with the previous one on four key parameters: 1) visibility on acceleration in demand growth; 2) capacity utilisation; 3) industry fragmentation; and 4) ratio of earnings to replacement cost. We find that on most of these parameters, industry fundamentals have deteriorated compared to the previous down-cycle. We have compared valuations of ACC and Ambuja Cements (ACL) in both these cycles, as their market shares and business profiles are pretty similar. We continue to be negative on the sector, as valuations do not reflect the deterioration in fundamentals. Ambuja Cements is the top SELL in our sector.
Dumb Commodities (Olam’s backbone and the French fox): This week has been quiet, so much so that commodity traders have been worked up by a possible but remote merger between Olam and Louis Dreyfus. But we pray for Olam to have a stiff backbone when dealing with the 159-year-old French fox Louis Dreyfus. Next, we calculate what (and how much) China can buy with US$15bn from a country whose GDP is US$15.5bn.
Corporate Front Page:
- L&T bags Rs7bn order from various customers for construction related work. (ET)
- L&T infra files for Rs4.5bn bonds public issue. (FE)
- Tata Steel to refinance Rs25bn loan. (ET)
- SAIL to add 1,725 MW power generation capacity. (ET)
- ICICI Bank estimates loan growth in the current financial year at around 18%; higher than an earlier forecast of 15%. (BS)
- M&M enters motorcycle segment with two models. (ET)
- SBI hikes deposit rates by 25-75 bps, keeping base rate unchanged. (ET)
- PNB raises base rate by 50bps to 8.5%. (BS)
- Maruti Suzuki expects to record its highest-ever monthly sales in September with a growth of 32-33% yoy. (BS)
- Tata Motors will commercially launch the Tata Aria, a crossover of a sedan and a sports utility vehicle, on October 11. (BL)
- Axis Bank revised its base rate to 7.75% from 7.5%. (ET)
- IDBI Bank revised its base rate upward by 0.50% to 8.5%. (ET)
- ICICI opens first retail outlet in Singapore. (ET)
- Reliance Capital has acquired a 4.98% stake in an infra developer Trinethra Infra through an open market transaction. (FE)
- ADAG to acquire 26% in ICEX; gets FMC approval. (FE)
- Piramal Healthcare to formally close its Vitamin-A factory, adjoining Thane tomorrow. (BS)
- Power Grid Corporation is establishing a 1200-kV National Test Station at Bina in Madhya Pradesh. (BL)
- Kingfisher Airlines has decided to revamp its capital structure by converting 30% of total debt into equity to reduce the loan burden. (BS)
- IVRCL Assets raises Rs2.5bn from IFCI. (ET)
- Hindustan Motors plans to double its capacity at its Tiruvallur facility to 24,000 units to support new launches. (BS)
- Aarvee Denims has decided to infuse around Rs1.2BN for expanding its manufacturing capacity in two phases. (BS)
- Suven Life Sciences to raise Rs900m for R&D. (BS)
- Shriram Properties, the real estate arm of Shriram Group, plans to raise US$100m this year from private equity investors. (BS)
- Firstsource announced a five-year outsourcing partnership with Barclaycard. (BS)
Economy Front Page:
- Food inflation increased to 16.44% in the week ended September 18 (FE)
- India’s current account deficit rose sharply in the quarter ended June 30 to US$13.7bn from US$4.5bn a year ago due to lower invisible surplus and growth in imports outpacing exports. (BS)
- Fiscal deficit falls 17% to Rs1.5tn during Apr-Aug (ET)
- The Department of Industry and Policy has relaxed FDI rules which will mainly help retail firms in JV with foreign retailers and the overseas NBFCs. (BL)
- Commodity market regulator FMC today lifted the ban on trading in sugar futures (FE)
- Rains 37% below normal in past week as per Meteorological Department (ET)
- Fuel for future thermal power projects — both coal and gas — will be allocated under a new score-card system where the use of higher-efficiency units and progress on land acquisition have the highest weights. (BL)
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