01 July 2013

Stubborn residential prices in Mumbai continue to affect demand :: Goldman Sachs

Prices continue to be stubborn in Mumbai
Residential prices in Mumbai continue to remain sticky. According to
PropEquity data, 3-month rolling average prices have increased 27% yoy.
Average prices are up by 49% since March 2010, which is higher than the
national average increase of 41%, and are now 1.7X national average. We
believe the price increase was on account of: (1) investor buying; (2)
curtailed supply due to slower approval process.
Strained affordability leading to subdued demand
Sustained higher prices have led to lower affordability and consequently
tepid demand. Volume absorption in March was lower by 25% yoy, while
rolling 3-month average absorption has dropped by 15%. Recent
absorption has fallen by 65% compared to peak level in Nov-2010. We
estimate 15+% price correction is required in Mumbai to drive demand.
15% price correction along with lower interest rates/ marginal salary hike
will improve affordability by 25%. Another possible scenario is price
stability for 3-4 years with gradual improvement in affordability.
Flurry of subvention schemes introduced to propel demand
We have seen several developers offering structured schemes or reducing
size of apartments (thus reducing ticket size) to boost sales. 20:80
subvention schemes are one of the most popular mechanisms to propel
demand, in which the buyer has to make 20% upfront payment and
balance after defined period/possession. Most developers are charging 2%-
3% higher prices on these schemes, but they offer customers an interest
savings of around 15% over a construction period of 3-4 years. While
these schemes can help improve project level volumes, we believe
absolute price correction is required to improve sentiment.
Fine-tune estimates for Oberoi realty and HDIL
We lower our FY14E-FY16E EPS estimates for Oberoi and HDIL by 1%-14%
to reflect slower launches and further delays in regulatory approval. Thus,
we change our 12-m NAV based target price for Oberoi to Rs 290 (from Rs
315) and for HDIL to Rs 50 (from Rs 60). While we await further visibility of
launches (Worli, Mulund and JVLR) before turning more constructive on
Oberoi, we think delay in regulatory approvals will be a key overhang for
HDIL in the near term. Maintain Neutral on both stocks.

Lower Risk Weights: Adding to the Sweet Spot for HDFC :: Morgan Stanley Research

Lower Risk Weights: Adding
to the Sweet Spot for HDFC
The RBI has lowered risk weights on certain
categories of individual housing loans: It also carved
out a new segment, ‘CRE – Residential Housing
(CRE-RH)’, within the commercial real estate sector.
Loans to this segment will carry lower risk weights and
standard asset provisioning. This will help release some
capital on existing loans for banks and lower capital
requirements on new loans. The benefit to HFCs,
especially HDFC, is likely to be much higher, if the NHB
follows up with similar regulations (we expect it to follow
the RBI).
Lenders with high exposure to medium / large ticket
home loans will benefit: The RBI has reduced risk
weights on individual housing loans > Rs2 mn and up to
Rs7.5 mn to 50% from 75%. It has also marginally
relaxed the loan to value (LTV) cap on these loans to
80% from 75% previously. Further, loans > Rs7.5 mn will
now attract a risk weight of 75% provided LTV is not
higher than 75% (the previous risk weight was 125%
irrespective of LTV).
This is a positive move given the appreciation in
property prices across the country. Private banks are
likely to benefit more than SOE banks given higher
exposure to medium / higher ticket loans. However,
HFCs, being mono-line lenders, will benefit more (once
the NHB follows up with similar norms).
Lenders to residential housing projects will also
benefit: Because loans to residential housing projects
are less risky and volatile, the RBI has carved out a
separate category, CRE-RH, within the commercial real
estate sector. Loans to this segment will attract a risk
weight of 75% and standard provisioning of 0.75% vs.
100% and 1% respectively for other CRE loans. CRE
exposure in the banking system is relatively limited
(~2.5% of system loans).
The key beneficiary will be HDFC: According to
management ~15% of loans will qualify as CRE-RH.

Nomura research :: Asian Paints- Margin upside, but demand still uncertain

Margin uptick offset by INR
depreciation and subdued
demand environment; Neutral

India Strategy 8 Large cap rupee plays:: ICICI Securities

The rupee has depreciated by over 7% in the past one month. While most of the
rupee depreciation plays except metals and mining stocks have outperformed the
index, their performance is not in line with the quantum of benefits. We attempt to
pick the winners based on 1) The level of gearing of the stock earnings to rupee
depreciation, 2) Business / pricing conditions allowing the players to benefit from
rupee depreciation and 3) Valuations among sectors / large cap stocks positively
geared to rupee depreciation – IT, pharma, oil & gas, metals, and automobiles.

Hindustan Unilever — Open Offer: Book Profits :: Business Line


CMC (Rs 1283.1): BUY:: Business Line,


NTPC :: One step closer to a solution on issues with CIL :: JPMorgan

NTPC’s Board has approved the fuel supply agreement (FSA) with CIL
for post FY09 power plants, as per Economic Times. CIL's Board is
scheduled to consider the FSA today, after which the final agreement will
be signed. This puts a lid on the uncertainty surrounding the fuel pact for
~10GW capacity to be commissioned over FY10-15, which had coal LoA
from CIL. This and other developments below are positive for NTPC, we
reiterate OW.
 Closer to resolving the standoff over coal quality-pricing mismatch.
NTPC Board has agreed to CIL’s decision to put in place systems for
third party sampling and analysis at the loading end before Sep-2013.
CIL would also ensure that auto mechanical samplers of coal are made
operational in a time bound manner. This solution to the standoff with
CIL is a long term positive for NTPC, as lowering price quality
mismatches would allow it to remain competitive in cost of generation.
 Incentives to CIL only if supply thresholds are exceeded. For new
FSAs, CIL would be eligible for incentives only if they meet and exceed
80% of the contracted quantity of domestic coal. In our assessment,
NTPC’s stand is that they do not want to pay incentives if the threshold
is crossed using coal imports by CIL. NTPC has set import target for
FY14 at 16MMMT (vs. 9MMT in FY13), lower than 24MMT target
intimated in Aug-2012.
 There is give and take too. NTPC has decided that if CIL supplies stone
and mud with coal or inferior grade coal, the quality of the fuel will be
adjusted for payments. Only after adjusting volumes for quality would
incentives be worked out. As a leeway NTPC will accept coal quality
below 3100Kcal/kg, a move it was opposed to earlier. However, NTPC
would incentivize CIL only for 25% of the inferior grade coal quantities
supplied.

Sundaram Finance: Hold :Business Line


India gas -Govt takes a bold gas price decision :: Nomura research

Govt accepts the Rangarajan formula from April 2014; a positive
move, and could more than double domestic gas prices
The Indian government has finally acted on gas prices. The full details of
Cabinet committee on economic affairs (CCEA) meeting are not yet
available, but as per CNBC and other news channels reports:
 Govt has accepted all the recommendation of Rangarajan committee
on gas pricing. The only difference seems to be that there will be
quarterly revision (and not monthly as recommended).
 New price applicable from 01-April-2014; and valid for five years.
 The likely price is USD8.4 to 8.6/mmbtu in April 14, and this could
potential increase to over USD10/mmbtu in three years.
 Applicable to all domestic gas including APM gas, but not applicable
where prices are determined by PSC mechanism (like NELP blocks)
or where contracts provide for price indexation (like PMT).
The approved formula, in our view, would not directly apply to NELP
blocks like RIL’s KG-D6. Under the PSC mechanism, the price is market
determined and government approval is required only for formulas. But,
with the benchmark being set for domestic prices and government keen
to control price, we think any new NELP price formula would be at least
similar if not better than the Rangarajan formula.
ONGC and OIL biggest beneficiary; but, will much benefit stay?
On our estimate, each USD1/mmbtu of higher gas price raises ONGC
/OIL’s FY15 EPS by 8–9%. Thus a near doubling of price to USD
8.4/mmbtu can possibly raises ONGC/OIL’s FY15 earnings by nearly
35–40%. But, the catch is that nearly 90% of APM gas goes to the highly
price-sensitive fertiliser and power sectors, where passing on price
increases is particularly difficult. And it is unlikely, in our view, that the
cash-strapped GoI would be willing to foot the nearly USD2.8bn increase
in the gas bill for the power and fertilizer sectors.
We highlight, that when APM gas prices were raised last in June 2010 (from
USD 2/mmbtu to USD 4.2) not much benefit stayed with the upstream
producers. The effective subsidy share of upstream was increased from
near 1/3rd level earlier to nearly 40% in FY11 and FY12. Assuming that all
of the impact of a higher subsidy is passed on to ONGC/OIL, the benefits
would be rather modest at only 7–8%, in our view.
Positive for RIL: KG-D6 price revision will get easier; CBM price
also can be decided soon; no change in PMT pricing
Adoption of the Rangarajan committee recommendations paves the way
for discussion to commence on KG-D6 and CBM blocks as per the
production sharing contract (PSC) mechanism. We think a USD8 plus
price is good to attract new investments. But, we think unlikely
contractors will readily agree, and will still seek higher pricing. The
contractors have been seeking LNG import parity pricing (results in price
of USD13-15/mmbtu). The gas pricing for the Panna, Mukta & Tapti

ONGC gets higher gas prices, but likely from FY15 :: Credit Suisse

● CNBC suggests the CCEA have accepted the recommendation of
the Rangarajan committee to increase gas prices in India with
quarterly reviews. Prices are estimated to increase from $4.2/mmbtu
to $8.4/mmbtu by April 2014 when the increase is effective.
● It seems ONGC will realise higher prices only in FY15 and not
immediately. At $7.5/mmbtu for the year, ONGC’s FY15E EBITDA
can benefit by Rs120 bn (USD/INR: 58.9) due to the increase.
● If FY15E under-recoveries moderate (continued diesel price hikes,
modest currency/commodity moves), and ONGC delivers the
promised volumes growth, then the company can witness strong
EBITDA growth despite high subsidy payments. Assuming ONGC
pays Rs680 bn in FY15, EBITDA could still grow 16% over FY13E.
● FY14E EBTIDA may benefit from a weaker INR and improved
subsidiary performance, but is at risk to increased subsidies. We
update FY14/15E EPS +4/2% and TP from Rs339 to Rs345. Until
government policy on subsidies (and how they treat the large
gains at ONGC) become clear, FY15 growth may not be fully
priced in. Maintain NEUTRAL rating.

India Inc’s wage bill soars 16% even as sales, profits sag :: Business Line