DB - Indian IT Services - Currency tailwind for the sector_ HCL Tech and TCS key beneficiaries

In our view, HCL Tech and TCS will be the main beneficiaries of the recent
rupee depreciation. Our sensitivity analysis suggests that, ceteris paribus, for
every 1% depreciation of the INR vs. the USD, earnings of the top-tier Indian IT
service companies are likely to increase by 1.5-1.9%, while EBIT margins will
be up 20-25bps in FY14E. We believe HCL Tech and Infosys are the most likely
to post better-than-expected margin performance if the rupee weakness
persists, while TCS will reinvest the gains from the weaker rupee to improve its
top line. We reiterate our positive view on the sector, with TCS and Tech
Mahindra our top picks.
Prolonged rupee weakness could accelerate turnaround at Infosys
Rupee depreciation further improves the competitiveness of the Indian IT
service companies. In particular, it will enable vendors to enhance win rates in
IMS (infrastructure management services) based deals. Margin pressure
exerted by these deals (which, in some cases, involve transfer of assets and
employees) can be offset by gains from a weaker rupee. In keeping with recent
trends, we believe TCS will use the current rupee weakness to win more
transformational engagements (involving IMS) and improve its top line, while
maintaining operating margins. With regard to Infosys, a weaker rupee can
help accelerate the ‘course correction’ undertaken by the company. In the
short term, however, we expect it to partially offset the impact of (a) pricing
pressure, (b) wage increases, (c) the deferred cost of the Lodestone acquisition
and (d) heightened investment in sales.
Weak rupee to improve operating margins by 100-150bps in the June-Q
In the June-Q, the rupee has depreciated 5% (average for the quarter) vs. the
USD. We believe this will likely improve operating margins (EBIT) positively by
100-150bps. For TCS, wage hikes offered during the quarter will affect
operating margins by 200-250bps qoq. Overall, we expect TCS to deliver a
25.5% (-100bps qoq) EBIT margin during the Jun-Q.
Valuing Indian IT service stocks at PE of 13-20x FY14E earnings; risks
We continue to value the stocks at 13-20x one-year forward earnings (relative
to their historical trading range, comparing with peers, as well as growth rates)
and will revisit our earnings estimates and target PE multiples once there is
more clarity on the nature and size of IT budgets and the sustainability of the
demand pick-up. The key sector risks relate to cross-currency headwinds.

Just Dial -Powering Local Search Engine :Nirmal Bang

Powering Local Search Engine
With a first-mover advantage and strong brand recall, Just Dial (JDL) has taken the
top position in voice-based search and is also likely to strengthen its muscle in
Internet-based search in India. By offering its existing membership packages from
only 11 states to major cities across various states in India, adding more business
categories and creating specialised membership packages, JDL is likely to maintain a
healthy and profitable growth in the long run. With control over employee costs,
operating margin can improve significantly in the long run, while increased product
offerings can provide non-linear revenue growth. JDL stock trades at 30.6x/21.8x
EV/EBITDA and 48.6x/35.6x PE for FY14E/FY15E, respectively, lower than global peer
Yelp Inc, which trades at 37.4x/75.8x CY14E EV/EBTIDA and P/E, respectively. The
likely strong revenue/PAT CAGRs of 36.1%/43.1%, respectively, healthy free cash flow
of Rs1.5bn over FY13E-FY15E and cash/share of Rs93 should command a premium
valuation. We have assigned a Buy rating to JDL with a target price of Rs800, valuing
it at FY15E 42.2x/26.5x/7.5x P/E and EV/EBITDA, EV/S, respectively.
Ability to offer non-linear growth: Currently, JDL’s advertisement revenue is from paid
campaigns. The company is in the process of improving its offerings like launching enabling
transactions such as taxi booking/hotel reservation etc, car listing, quick quotes, and user
ratings. JDL has also developed a master application for Android operating system-based
mobile phones and is in process of developing such an application for Blackberry phones.
We believe these new offerings would open up new sources of revenue, thereby providing
non-linear revenue growth in the long run.
Assured growth with annuity income: JDL has changed its payment policy from three-four
months’ advance payment to weekly/monthly payment for the advertisers under its normal
packages, which start from as low as Rs299/week. We expect it to reduce the churn rate and
book in clients for the long term, thereby reducing the impact of competition apart from
providing better comfort to advertisers’ cash flow by improving the return on investment. We
expect JDL to post a 29% campaign CAGR over FY13E-FY15E, leading to healthy 36.1%
net sales CAGR over the same period.
Lower employee costs to improve margins: A significant portion of sales executive costs
is linked to advertisement revenue, very much similar to the compensation of an insurance
agent. An employee gets annuity income from JDL as long as the advertisers secured by
him continue their association with JDL. If an employee leaves JDL, he loses future annuity
income from JDL in respect of existing advertisers, and therefore it becomes challenging for
competitors to attract the talent from JDL. As a result, costs per employee increased by a
mere 8.2% CAGR over FY09-FY13E. Employee costs formed 48.8% of revenue in FY13.
With the rising share of Internet-based search, lower costs per employee and better
utilisation of its call centre employees, employee costs can reduce significantly in the long
run, thereby improving the margins. We have factored in a moderate 60bps improvement in
margins over FY13-FY15E as against the management’s guidance of 200bps-250bps
improvement annually. JDL aims to achieve operating margin of 30.0%-40.0% compared to
27.8% currently.

India: groundhog day again – a cautious central bank, an ugly trade deficit :JPmorgan

https://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=-rltpsl2&doc=GPS-1144915-0

As had been increasingly expected since INR pressures started a month ago, the RBI today kept both policy rates and reserve requirements (cash reserve ratio) on hold. The rupee’s sharp depreciation in recent weeks was clearly weighing on the central bank’s mind because it indicated that the decision to stay on hold was driven by the “evolving growth-inflation dynamics…..as well as recent developments in the external sector”

RBI lobs the growth ball into the government’s court

On the growth front, the RBI admitted that growth and macroeconomic conditions remain weak, “hamstrung by infrastructure bottlenecks, supply constraints, lackluster domestic demand and subdued investment sentiment.” That said, the central bank pointed to some rays of hope referring to a pick-up in consumer on-durables (as we had highlighted in “The Indian soap opera: INR stabilizes, Fitch upgrades, IP languishes and CPI disappoints,” MorganMarkets, June 12, 2013), the May services PMI and a strong and timely monsoon thus far.

Yet, the RBI was clear what it considered to be the main drag on growth, stating that the “key to reinvigorating growth is accelerating investment by creating a conducive environment for private investment, improving project clearance and leveraging on the crowding-in role of public investment.”

Sees upside risks to inflation

The RBI acknowledged that WPI inflation pressures have moderated meaningfully but in line with projections. However, it saw “upside pressures on the way forward from the passthrough of rupee depreciation, recent increases in administered prices, and persisting imbalances, especially relating to food, pose risks of second round effects”

The central bank clearly has a point. Much is made of global commodity disinflation, but the rupee depreciation has swamped this. As the accompanying charts show, measured in local currency, the CRY global commodities index is the highest in seven month! And, oil prices, are 7% higher in local currency than a month ago – necessitating a two rupee petrol price hike over the weekend. The only open question is whether the pass-through from rupee depreciation to manufacturing inflation will be lower than previous episodes because pricing power is weak? But wishing for that is living on a hope and a prayer.

Morgan Stanley Fifteenth Annual India Summit

http://linkback.morganstanley.com/web/sendlink/webapp/BMServlet?file=rkb31474-3omd-g002-8261-002655211100&store=0&d=1&user=27g8gtdpyblz3-2&__gda__=1496580025_d5baf87b534d729511c04d16816a4d62#.m4v

Emerging market rout :JPMorgan

 MSCI EM declined 2.9% in May underperforming DM by 2.7%.
Concerns that the Fed could taper QE earlier than expected plus JGB
sell-off drove a rout in EM bonds and FX markets. EM equities remain
fundamentally weak. EPS revisions for most major country sectors are
negative. BRIC economic growth remains disappointing.
 The sell-off in EM FX was sharp and widespread. Commodity/cyclical
currencies suffered the most. The ZAR was the worst hit down 11%; it
depreciated 20%ytd even underperforming the Yen (-16%). ZAR
underperformance was initially driven by local factors; rising labor
tensions in the mining sector plus FX hedging of imports for renewable
energy loans and risks to electricity power cuts. The underperformance
was exacerbated in the second half of May as the rise in US bond yields
triggered concerns over South Africa’s ability to fund its large current
account deficit. LatAm currencies declined sharply with the BRL and
MXN down 7% and 5% respectively. The DXY gained 2%. CNY was
the only currency that appreciated against the US dollar (+0.5%).
 LatAm (-7.2%) was the worst performing EM region while EM Asia (-
1.1%) outperformed. The top three markets were Egypt (+4%), Poland
(+3.3%) and Malaysia (+2.7%). Chile (-8.6%), Peru (-8.4%) and Brazil
(-7.8%) were the worst performers (See page 9). The top three country
sectors were China industrials, Korea consumer discretionary and China
consumer discretionary. Brazil materials, SA financials and SA
materials performed the worst. (See page 11).
 Total EM equity funds had net redemptions of US$3bn, the highest since
end 2011. GEM equity funds had the largest outflows (-1.4bn), followed
by Asia ex Japan (-872mn), EMEA (-324mn), LatAm (-303mn) and
BRIC (-111mn). YTD inflows into EM are at US$26bn. EM bond fund
flows turned negative amid heightened market volatility with outflows
of US$143mn for the week ending May 29, the first weekly outflow
since August 2012. YTD flows are at US$35bn.

As spot iron ore and equities correct sharply, steel production cuts pick up: JPMorgan

 A repeat of Aug 2012 - Spot iron ore and equities correct sharply: The
awaited iron ore price collapse (similar to what we saw in Aug 2012) has finally
come through with spot iron ore prices down to $113/T (~10% w/w fall) and
prices from the peak of $157/t of Feb-13 are down ~28%. The fall is similar in
quantum to the iron ore price collapse see in 2011 (fell 31% from a peak of
$192/T to $132/T) and 2012 (fell 30% from a level of $138/T to $99/T). The
only difference in 2013 v/s 2011 & 2012 is the pace of decline, with the 2013
correction actually spread over a relatively longer period of ~3 months
(admittedly most of the fall has taken in the last 45 days) while the 2011 &
2012 declines were over 1 month period. Surprisingly the Indian iron ore
equities like NMDC, TATA and SAIL have underperformed high beta iron ore
equity like Fortescue over the last 1 month when spot iron ore prices fell.
Interestingly the swaps iron ore market has stabilized for the time being.
 Steel production cut news flow starts to pick up: As per the metals press
(SBB, MB, Bloomberg), Chinese mills are announcing steel production cuts.
While the production cuts are not large as of now, the announcements have
halted the spot HRC price correction. JPM China analyst Daniel KangAC in his
update highlights, ‘While steel inventories remain at high levels, absolute levels
are falling which signal that real demand is improving. This has resulted in
inventory days falling to 16.1 days in mid May from the peak of 21 days in
February. This month’s steel PMI suggests conditions are now “less bad” but
sentiment amongst mills and traders remain very weak’.
 Price update: Global HRC export price continue to dip lower with CIS HRC
export prices at $545/T (~2% decline) while Chinese HRC prices are at $520/T.
Ferrous scrap prices have fallen in sync with iron ore prices and are down to
$325/T. Spot coking coal is down $140/T. Landed HRC steel prices in India
work out to Rs34K/T still at a premium to local prices as the INR depreciation
has pushed up import prices.
 Met coal update from BHP analyst briefing: JPM Resource analyst Lyndon
FaganAC in his updates on BHP’s coal site tour of BHP highlights that ‘BHP
reiterated its sobering view on met coal prices, highlighting that since the GFC,
its demand forecasts have disappointed, and the supply side has surprised on the
upside. BHP’s forecasts assume: 1) seaborne met coal demand to grow at a
CAGR of 3.5% over the next 18yrs (global demand at 1.5% CAGR), 2) peak
steel production in China of 1.1Btpa by ~2025 (no change), 3) met coal
consumption will plateau before steel production in China peaks, and 4)
China’s scrap usage (scrap ratio to steel output) will top 40% in 2030, from
~12% in 2012. Overall, the company believes the market will be well supplied
with met coal over the near term, When asked whether BHP’s production
growth could lead to lower prices, management stated many producers in the
US were already loss making. In the event of a further downturn, management
believes these producers are likely to curtail production before any of BHP’s
QLD coal assets’.
 JPM Global Metals outlook downgraded: JPM Global metals strategist Colin
Fenton has revised downwards the price forecasts for base metals on weaker
then expected demand growth and select improvement in supply outlook.

J. P Morgan - Larsen & Toubro

Amid a weak investment cycle, a strong order inflow performance and growth
outlook affords superior medium term earnings visibility for L&T compared to its
peers. Margin worries have intensified post the 4Q miss but favorable commodity
price trends, revenue mix and benefits of a stable working capital cycle might be
getting overlooked in our view. Our revised Mar-14 SOP PT of Rs1,635 (vs.
Rs1,650 earlier) includes value for parent business at 13.5x FY15E EPS. Reiterate
OW. We provide food for thought on key parameters in this report

Credit-Suisse -India Consumer Sector

FMCG outlook remains positive; discretionary
weakness to continue
The FMCG sector continues to demonstrate resilience in volume growth despite
the slowdown in the economy. Our analysis of results and management
commentary of a wide array of 30 consumer companies, reveals only marginal
moderation in overall FMCG revenue growth, with most companies seeing
stable or accelerating volume growth. In contrast there is a clear slowdown in
discretionary consumption, with management commentary indicating no
recovery in the near term..

Colgate-Q4FY13 earnings disappoint; P&G entry to watch out for :: JPMorgan

Colgate’s 4Q performance was a mixed bag, with sales growth coming in ~2%
ahead of our expectations, but earnings were significantly below estimates owing
to weak margin performance. Colgate reported Sales, EBITDA and PAT growth
of 18%, -1%, and -6% y/y. We revise our FY14/15 earnings estimates downwards
by ~4-5%. Competitive activity has stepped up in the toothpaste category (by
GSK and HUL) and this will intensify further with P&G’s potential entry soon,
posing downside risk to Colgate’s margins. We think current valuations at 35x
FY14E and 30x FY15E P/E are expensive and we maintain our UW stance on the
stock.

India among the least impacted fundamentally from the bond market sell-off": Credit Suisse,

● Given the euphoric sentiment in bond markets until May (Figure 1), a
correction was overdue, in our view. EM sovereign bond prices are
down 4.1% from peaks, back to levels where QE3 started. They could
fall 2.7% more, if they revert to levels where expectations of QE3
started. That said,CS economists don’t expect a stoppage to QE3 until
end-CY14.
● This sell-off could affect growth in EMs by affecting cost of capital.
Given India’s (relatively) closed debt markets, less than 5% of
bonds are foreign owned, much lower than other EMs (Figure 2).
This limits the impact on the broader economy: India’s yields have
risen the lowest since the sell-off started (Figure 3).
● But India would still be badly impacted if capital flows to EMs slow
structurally: mainly through the currency, given the precarious
BoP situation. A weak INR drives higher inflation, further stresses
government finances, and thus impacts RBI’s ability to cut rates.
● But with a lot of bond market selling behind us, unless a crisis
emerges somewhere, a further exodus of capital is unlikely except
in the very near term. We remain cautious on growth in India, but
won’t be surprised if the market rebounds.

BofA- ML on Yes Bank

Yes Bank Ltd
Management meet re-affirms
positive stance on bank; Buy
„Management meeting reaffirms growth trajectory on track
We recently met with Yes Bank to get an operating-level update and also insight
on recent news flow with regard to a single large promoter shareholder filing a
case against the bank in High Court for their nomination to the board. This has
resulted in significant stock volatility in the last few sessions. While the promoter
case is subjudice, we believe that impact on business may be ‘nil’, but stock
sentiment could remain weak in the near term. We reiterate our Buy rating and
believe that there is an opportunity to buy into any correction.
Loan growth at +20-25%; NIMs higher by ~15-20bps in FY14
Yes Bank re-affirmed that loan growth will be at +20-25%. However, FY14
customer asset growth could see a slowdown, as falling rates could lead to slower
new credit substitute demand and the bank selling down its existing invst. book to
realize portfolio gains. NIMs are expected to rise by ~15-20bps in FY14, led by a)
rising CASA (est. to rise by ~350-400bps in FY14) and b) substituting investments
for loans (higher yields). However, specific to 1QFY14, NIMs could be flat, qoq.
Not ‘overtly’ worried on NPL; ~50bps credit costs guidance
While no material NPL (barring the usual run-rate of ~Rs200-300mn/qtr) /
restructuring is in the pipeline, the bank indicated that ~Rs1bn of restructured MFI
(micro-fin.) exposure could, at some point in FY14, turn to NPL. However, it is
confident of maintaining, all inclusive, ~50bps of credit costs, similar to FY13.
Introduce FY16 earning estimates; RoEs to remain at +25%
We introduce our FY16 est., post the FY13 annual report. We believe bank is on
track to deliver +25% EPS growth in FY14/15 (tweak-up FY15 EPS by <2 even="" nbsp="" p="">in challenging macro environment. RoEs to remain above avg., at ~25%, and,
hence, we retain ourBuy rating and PO of Rs625, for upside potential of 30%.

Rupee Depreciation, Companies Most Impacted ::Qunats Partner

Rupee Depreciation, Companies Most Impacted

We have created 5 list of Companies to understand which are the companies, and how will they get impacted on account of rupee depreciation. These lists can be used as ready reckoner. In case of most of the companies, financial data relates to FY12, being the most recent year for which audited annual accounts are available.

The Lists are as follows:

Companies which are ‘Huge Importers’.

Companies which has ‘Significant foreign debt interest expense’.

Companies which has ‘Significant FX Capital outflow as % of Net Assets’.

Companies which are ‘Foreign Exchange Earner’.

Companies which are ‘FX Earner but also has outflow on account of Interest or Capex’.

Background:

Recently, Rupee against USD has depreciated significantly. This will impact importers badly, their import cost will rise and if they are not able to pass on the rising cost it will squeeze their margins making them unviable to survive for longer.

To some extent they will be able to pass on the rising cost to other producers and consumers. However, this will further fuel the inflation in the economy.

In the recent past, cooling off inflation has proven to be the biggest challenge for the government, thereby deterring it to cut the interest rates, which in turn has led to slowing down of the growth engine of the economy.

On the positive side, depreciating rupee will benefit exporters and other foreign exchange earners.

For a country like India which has high Current Account Deficit (CAD), depreciating rupee will have overall huge negative impact.

India Cements: Buy :: Business Line

Morgan Stanley Research, Sun Pharmaceutical Industries 4Q Beat, Robust F14 Guidance – 18-20% Growth

Sun Pharmaceutical
Industries
4Q Beat, Robust F14
Guidance – 18-20% Growth
Quick Comment – Sun reported F4Q13 results
ahead of our expectations: Sales were up 32% yoy
(7.7% qoq) and operating margins expanded 10bps to
41.3% (contracted 320bps qoq). Together that led to a
23% rise in net profits to Rs10.1 bln (our forecast was
Rs8.7 bln). During the quarter, Sun benefited from a
sharp (but temporary) spike in doxycycline, generic
Doxil launch and DUSA (full quarter)/URL (2 months).
Strong F14 guidance: On a high sales base of F13 (up
41% to US$2 bln), Sun has guided for 18-20% growth in
constant currency terms in F14. This will include the
full-year benefit from URL/DUSA ($100 mln incremental
uplift), but F14 guidance also absorbs one-off
opportunities in F13 (Lipodox, doxycycline) and Taro
pricing risk. Other elements of guidance include – R&D
expenses (6-8% of sales), Rs8 bln capex, 25 ANDA
filings and 18-20% tax rate. The company has net cash
of $1.3 bln as of March 2013.
Conference call highlights: Sun remains excited
about the growth prospects in regulated markets. It
continues to pursue its plans to gain scale in controlled
substance-based drugs in the US. It seeks to scale up
DUSA’s 6% share in the actinic keratoses (AK) market
through higher device installation and rising usage per
device. SPARC is in dialogue with FDA for levetiracetam
XL, and one way to overcome bioequivalence in fed
condition is to increase the patients in trial. Starhaler has
been launched in May in select cities in India. Near-term
risks include 1) possible entry of Sandoz in Taro’s
largest product (nystatin/trim) and 2) upcoming jury trial
in June 2013 for Protonix.
We reiterate our OW rating on Sun: We expect the
company to continue to deliver strong growth over the
next couple of years. Please see our latest report – Sun
Pharmaceutical Industries – Asia Insight: Best Getting
Better, dated May 12, 3013 for details

YES Bank Limited: Buy :: Business Line

Telecom: TRAI's new roaming regulations a positive :: Kotak Sec

Sector
Telecom: TRAI's new roaming regulations a positive
` The event - TRAI announces revised roaming regulations
` The nub - the sky has not fallen; it has not become darker, even
` We remain positive on incumbents - 'normalization' theme has begun to
play out

Tin price decline may reverse :: Business Line

Steer clear of the urge to average :: Business Line

Of all the popular stock market concepts, there is none as credulous as the oft followed ‘averaging down'. To put it simply, when the stock price goes down, more stock is bought at lower levels so that the average cost of the stock in the portfolio goes down.

This is done with the hope that the total holding of the stock will move in to profit soon. Emotions have no role whatsoever in trading.

The first thing to do when a trade goes against you is to admit that you were wrong.

Secondly, stick to the stop-loss and exit in time. The loss should not be allowed to grow so large that you feel tempted to average.

Averaging can work sometimes. But if it does not, the pain gets exacerbated and so does the hole in your pocket. Professional traders never average down. They only average up.

In other words, they add to their profitable positions, not to loss making positions.

There is a method to do it, called ‘pyramiding'. The maximum quantity is bought first. As the profit starts building up, half the original quantity is added and then half of the previous lot and so on. To elucidate, if a trader purchases 100 shares of Infosys initially, he will buy 50 more shares more as the price moves up and another 25 as the price moves up further and so on.

The question arises about when exactly to add to your winning position. Those who follow charts can use moving averages, supports and resistances as levels at which to do pyramiding.

Those who do not use charts can pyramid after a certain pre-determined percentage move in the right direction.

It all boils down to the age-old trading maxim — cut your losses rapidly and let your profits run.

So, the next time you feel tempted to average down, don't do it. Book your loss instead. Easier said than done. But then, who said trading was easy.

Adani Port & SEZ -Nomura

Adjusting TP, estimates for new equity issue
Recent fund-raising further
pares down gearing, while
preparing for inorganic growth

Gold under pressure :: Business Line

Gold was once again in focus as international gold prices declined below the April low at $1,320.

If we consider 50 per cent retracement of the up-move from $680-lows, we get the target at $1,300.

The metal is currently halting here. Next long-term support based on Fibonacci retracement is at $1,155.

If we consider the wave counts of the move that began at $1,920 peak in September 2011, the third wave is currently in motion.

Next targets for this move are at $1,261 and then $1,170.

Recurrence of the zone around $1,155 in various counts makes it a good place where we can look forward to a halt if the gold prices get into a serious decline. The prices would need to record a weekly close above $1,475 to signal that the worst is over from a short-term perspective.

India Monthly Wrap May 2013: Losing Steam...JPMorgan

 MSCI India (US$) lost a meaningful 3% and performed largely in-line
with the MSCI EM index over the month. The global environment was
volatile as the surge in developed market treasury yields created uncertainty
over the sustainability of growth recovery. Economic indicators in key
developed economies surprised positively though. Global commodity prices
remained range-bound. At home, political developments and growth
indicators were disappointing. Inflation surprised positively. Sector
performance reflected risk aversion - IT Services, Consumer Staples, and
Consumer Discretionary outperformed while Utilities and Industrials
underperformed.
 Rate cut, tone hawkish. In the quarterly credit policy meeting, the RBI cut
the benchmark Repo rate by 25 bps to 7.25%. The CRR was left unchanged
at 4.00%. The central bank maintained a hawkish tone and indicated that the
scope for further easing is limited. The Central bank is targeting year-end
WPI of 5.0% and estimated FY14E GDP growth of 5.7% oya.
 Monthly Inflation and IP surprise positively. April composite CPI print at
9.4% oya was lower-than-consensus expectation. WPI inflation at 4.9% was
the first sub-5% print in over three years. The fall in inflation was broad
based. March IP growth at 2.5% oya was in line with expectations, driven
largely by the volatile capital goods segment.
 FIIs buyers, DIIs sellers. FIIs remained buyers of Indian equities and
invested a significant US$3.6 bn over May. DIIs were sellers of US$2.2 bn.
Insurance companies and mutual funds sold US$1.6 bn and US$634 mn
respectively.
 Other key developments over the month:
 10 Year treasury softened a significant 50bps to 7.22%
 INR depreciated a significant 5%
 4Q FY13 GDP increased 4.8% oya

Pivotals -Reliance Industries, SBI, Infosys, Tata Steel, :: Business Line :: Business Line

 

India Banks by Anand Rathi

India Banks
What can drive bank stocks?
Key takeaways
Policy rate-cuts usually aid in bank outperformance. Our brief analysis
of the Bankex (from 2002) reveals that policy rate (repo) cuts have a positive
effect on banking stocks. Since 2002, the Bankex has outrun the Sensex by
an average 3.2% in the month after a repo rate cut. Of the last 15 such
instances, bank stocks have outclassed in 10. Buying bank stocks one
quarter before rate-cut events, however, usually leads to better payoffs, with
the Bankex outperforming the Sensex an average 5.5%.
Asset quality improved in 2HFY13. In our theme report dated 20 Nov’12,
India Banks: IIP recovery in 2HFY13 to lift asset-quality overhang, we had stated that
asset-quality headwinds for banks are likely to subside, led by a likely recovery in
industrial production. In 2HFY13, incremental gross NPA for large-cap banks
was `38.7bn, substantially lower than the `229bn of 1HFY13. Over the same
period, IIP grew 2.1% yoy, better than the 0.1% registered over 1HFY13.
Moreover, in 4QFY13, banks' asset quality improved a shade, with gross NPA
for large-cap banks down 2% qoq to `1,083bn.
Yet, banks underperformed in 4QFY13. Over Jan-Apr’13, policy rates
were cut by 50bps, while gross NPAs of our banking universe fell. However,
despite this favourable combination of lower interest rates and lower NPAs,
the Bankex undershot the Sensex by 6.3% over the same period. A likely
reason for the underperformance could be the ballooning of restructured
loans for large-cap banks - from 4.6% of loans in FY12 to 5.3% in FY13,
and the perception that defaults from these loans could be meaningful in
FY14.
Congenial policy rate and asset quality outlook. With a 75-bp cut in the
repo rate since Jan’13, the RBI has frontloaded monetary easing; this has yet
to manifest itself in lower base rates of banks. Led by softening inflation and
a slow pickup in overall economic growth, we expect the central bank to cut
policy rates by another 50bps in CY13. This is likely to be positive for bank
stocks. Moreover, our chief economist expects IIP growth to rebound from
1.1% in FY13 to 4.4% in FY14. Since there appears to be a strong
correlation between NPA accretion and IIP growth, IIP revival could
translate into lower NPAs and, consequently, manageable incremental credit
costs for banks.
Our sector bias. We prefer banks with a high proportion of low-cost
deposits, which could protect NIM when asset yields fall, and greater tier-1
capital to tap growth opportunities, both highly desirable attributes ahead of
the likely monetary easing. Top picks. ICICI Bank, Yes Bank, ING Vysya
Bank and South Indian Bank