15 August 2013

CS :: Tata Steel: Strong results, but unconvincing, UP Rs.210

● Consolidated EBITDA beat our estimates by 18%, with Rs5.1 bn
of the Rs5.2 bn surprise coming from Europe; slightly better
operations in India offset weakness elsewhere. Net profit was
substantially higher due to leverage and non-recurring tax gains.
● The EU surprise though was far from convincing; while sentiment
has improved, business hasn't. The EBITDA/t surprise was likely
due to fixed costs getting transferred to inventory. With high
inventory, spot prices weak and intent to regain share, this does
not portend high margins ahead.
● Caution on Phase II is welcome news even if it means Phase I will
be suboptimal. But debt is still an issue: 1Q saw a minor rise in
debt due to higher working capital, but large drawdowns linked to
capex are ahead. We expect US$12 bn-plus of debt by FY15.
● Having fallen dramatically this year, the stock was due a bounce,
esp. with global IP recovering. The reported gains in EU may
make these persist a few months. But we would use the
opportunity to cut positions, as problems of oversupply and rising
debt are likely to last several years.

The next shoe to drop? Feeling the pinch yet, Mr. Consumer? Nomura research,

Risk rising for consumer stocks – Timing is everything
 While we have been OW FMCG stocks for growth protection and due to
significant headwinds to the investment cycle, we are beginning to grow
concerned about the possibility of a bigger-than-expected consumer
slowdown. The first signs are visible – growth in discretionary
consumption has already turned weak. Weakness in non-discretionary
consumption is starting to show up in company results.
 Consumers have benefitted at the expense of future growth because of
the government’s loose fiscal policy post-GFC, which has also played a
significant role in India’s CAD problem. The result has been India’s
imbalanced growth – high consumption and slower investments.
 The pressures on currency, inflation and sovereign ratings have finally
forced the hand of the government. For the first time subsidy cuts are
happening before, rather than immediately after elections.
 We estimate that the overall effect of hikes in fuel prices, electricity tariffs
and railway fares so far has been to the tune of USD28-30bn. We
reckon that another USD9bn impact could come through if a full catchup on diesel prices were to happen. Additional electricity tariffs could
likely cause another USD13bn burden on consumers.
 A slowing investment cycle implies a significant slowdown in job
creation. This will likely hinder the ability of consumers to both spend
and trade up. Further, recent depreciation of the rupee will likely raise
prices for consumers, especially for items such as electronics etc., which
have become increasingly large in consumer outlays.
 Even as investments remain weak, the added consumer slowdown
implies that overall GDP growth may continue to disappoint, in our view.
 However, while the recent RBI action to stem rupee depreciation
realigned expectations of a declining rate cycle, we believe that the
slowdown in consumption and investment demand will in turn lead to a
reduction in CAD which should clear the way for a positive rate cycle
emerging over the next few quarters. We are neutral on banks.
 Tactically, RBI’s moves to tighten liquidity have increased the overhang
on rate cyclicals with the implication that consumer sectors may continue
to perform till such time when the rate cycle starts to move down again.
 We are turning neutral on FMCG as we think that economic conditions,
coupled with RBI’s tightening stance may extend the consumer sector’s
run for a bit longer. However, extreme sector valuations could well put
the sector in harm’s way when the consumption slowdown begins to
show up in company earnings and macro data.
 Among defensives, we prefer IT services and pharma to FMCG.

India consumer sector: The last bastion rolling over?:: Credit Suisse,

■ China and Thai consumer sectors have rolled over. India consumer
next? We are generally not fans of the expensive Consumer stocks,
particularly those associated with consensus EPS downgrades. Figure 2
under focus charts highlights that the MSCI China Consumer Staples has
been underperforming the MXASJ (MSCI Asia ex-Japan) since November
2011. Figure 3 highlights that the MSCI Thai Consumer Staples has been
underperforming the MXASJ since April 2013. In both these instances, the
sectors started to underperform as EPS downgrades started. We wonder
whether the India Consumer sector is next as we are starting to see
consensus EPS revisions roll over. Figures 1, 8 and 9 highlight that the peak
for 2013E consensus EPS for Hindustan Unilever was in January 2013 and
for ITC in February 2013.
■ We continue to OVERWEIGHT stocks with US exposure and FX tailwind.
As highlighted in our report of 4 July—Cheap stocks with US exposure, we
continue to suggest switching into and/ or OVERWEIGHT cheap stocks with
US exposure and FX tailwind such as Indian IT and Korean autos.
■ Top picks in India. The price-to-book gap between cyclicals (defined as
Tech, Consumer Cyclicals, Energy, Industrials, Materials) and defensives
(defined as Consumer Staples, Telcos, Utilities) in India is -6.9x. With the
gap in India the biggest in the region, top stock picks in India from a regional
perspective are HCL Tech, Wipro, Tata Motors and Reliance Industries

Bajaj Auto : Riding on the Rupee :: Citi Research

Bajaj Auto (BAJA.BO)
Alert: Riding on the Rupee
 1QFY14 Con Call Takeaways: Outlook is fairly positive for FY14 — given a) the
current weakness in the INR, and b) a pick-up in domestic 3W volumes. Mgmt
noted that export hedges are in place for the remaining 3Qs of FY14 for ~740mn
USD of exports. 2Q hedges should yield a realization of ~Rs58.5/US$, vs Rs55.56
in 1Q. Our FY14/15 estimates remain unchanged, given that currency will buoy
margins and offset weak volumes.
 Domestic 3W outlook is also healthy — as fresh permits are opening up -
~20,000 in Hyderabad, another 30k-35k in Maharashtra. Overall, the 3W run-rate
from Aug should stabilize at ~45k units / month – implying around ~520k units for
FY14.
 Export volume weakness continues — For FY14, mgmt reckons that overall 2W
export volume growth will be ~5% (10-12% earlier). Key end markets like Nigeria
remain weak (volumes down ~12% YoY for Bajaj, -22% for industry). Mgmt is
seeding new markets like Kenya, Ivory Coast and Uganda. In the long term, the
association with Kawasaki in Indonesia and possibly markets in Lat Am should yield
benefits too (citing Philippines as precedence, wherein market share for the
Kawasaki/Bajaj combine rose to 45% from 10% when Kawasaki was on its own).
Mgmt might contemplate taking actions to grow export markets, but doesn’t see the
need to cut prices as of now, to stimulate market growth.
 Domestic 2W outlook remains challenged, at least for 1H — Mgmt noted
industry retail volumes declined ~11% in June and expects volumes to decline 5%
in July. A recovery, if any, will be in 2H post monsoons. Bajaj will launch around six
variants under the Discover brand, with some of the focus being on the Economy
100cc space, given the down-trading that’s occurring due to fuel costs. Inventory
remains at around 5 weeks for the Discover; the Pulsar is lower at around 3 weeks.
Maintain Neutral. For detailed analysis of 1QFY14 results, see our note dated 19
July 2013 Bajaj Auto (BAJA.BO) - 1QFY14: Exports Offset Domestic Weakness

India Infrastructure, Power and Industrials :: JPMorgan

In this report, we analyze four aspects of stock ownership: free float,
institutional holding, insider transactions and promoter share pledges.
Together, these are good indicators of share performance, in
conjunction with fundamentals, of course.
 FII interest remains in select stocks in the power sector: In the June
quarter, the FII stake in average free float increased 214bps, while DIIs
were sellers. FII flows improved in our preferred picks NTPC, JSW
and PWGR, while DIIs were sellers of the regulated utilities. FIIs
were sellers of leveraged IPPs JPVL, Lanco and Adani, while DII
interest in these was largely flat.
 Institutional holding in Industrials stays flat. FII holdings in
Industrials declined 46bps, to 20%, with holdings in L&T declining by
62bps qoq, to 16%, while DIIs were buyers of the stock (up 57bps qoq,
to 37%), led by LIC, which purchased 14M shares (15 July at
Rs1,006/share).
 Ports saw institutional holding pick up due to promoter stake sales.
With the OFS/QIPs in ADSEZ and Essar Ports, institutional holding (led
by FIIs) as a % of free float increased for both, but more meaningfully
for ADSEZ (81% vs. 70% in the Jun-q). GMR saw a slight uptick in both
DII and FII holding, while institutions were sellers of GVK and RELI.
 Insider transactions: In the Jun-q, promoter stakes decreased in Essar
Ports, ADSEZ, ADE and JSW as they complied with SEBI norms to
maintain a 75% free float. Promoter holdings increased in Adani Power
(500bps, to 75%) with the issue of preference shares in lieu of converting
promoter debt to equity. JPA promoters reduced their stake to 44.7% in
the Mar-q with the sale of 64M shares in a QIP at Rs83/share (CMP
Rs47), while Jaypee Ventures (a promoter-owned company) purchased
8.5M shares in the Jun-q, increasing promoter holdings to 45.1%.
 Promoter pledge ratio: Promoter pledge is the highest for JPVL (69%,
up ~160bps qoq), Crompton Greaves (64%, up 260bps qoq - consistent
increases over past 4Qs), Lanco (77% vs. 36% in Mar-q) and Suzlon &
Essar (both stable at 100%) within our coverage universe. Pledges also
increased for GMR (~320bps qoq and ~1,200bps yoy, to 40%) and JSW
Energy (up 1,700bps qoq, to 50%), while declining for the leveraged
Adani Power (down 820bps qoq, to 13.7%) and Tata Power (down
~220bps qoq, to 4.6%)

Asian Paints 1QFY14: Results Disappoint; Unfavourable Risk Reward Balance :: Citi Research

Asian Paints (ASPN.BO)
 1QFY14: Results Disappoint; Unfavourable Risk Reward Balance
 PAT declines 5% YoY despite a weak base — Consol revenues at Rs28.2bn rose
11% YoY - below expectations (Citi / consensus: Rs28.8/ Rs28.3bn). Decorative paints
volume growth is est. ~10% YoY on a low base (no growth in 1QFY13). Despite input
cost tailwinds, EBITDA was flat & PAT down 5% to Rs4.4bn & Rs2.8bn - missing our /
street ests by >10%. While some cost pressures (operating / capital costs on Khandala
plant + higher fuel & freight costs) were known - but the revenues miss, lower than
expected GM expansion & certain negative surprises (discount rate change for
gratuity/leave liabilities + FX loss) led to the sharp profit miss.
 Rupee plays spoilsport — ~40-45% of inputs are imported & thus weak INR is a net
negative (offsets any translation gains from international revs). Soft global commodity
prices haven’t flown through entirely; TiO2 was flat-to-marginally higher in INR terms.
 Paring ests, TP — We cut EPS ests by 3-6% (lower revenues, GMs & cost pressures)
& consequently TP to Rs4,050 (28x Sept14E EPS). Retain Sell.
 There are structural positives… — APNT is a solid business benefiting from: a) its
dominant positioning, b) pricing power, c) extensive portfolio, d) slow, but steady
premiumisation trends, and, e) high entry barriers given the extensive dealer network.
 ... but priced into current valuations (+3 std. deviations above mean) — However,
expectations on the stock are fairly high & we see downside risks to consensus nos.
Valuations at ~36x 1-yr fwd P/E are ~3 std. deviations above its historical mean,
providing limited comfort and making the risk reward balance unfavorable.
 And the business negatives / imponderables? — a) The economy is still slow & we
think it is early to call a demand recovery; base effect going forward isn’t as favourable
as 1Q. b) Mgmt admits operating margins may be capped given sharp increase in
manufacturing & distribution costs. c) Diversification into home improvement is a
strategic change – questions around capital allocation, higher capital intensity, limited
scalability, APNT’s USP, and, lower near/medium-term profitability remain.

L&T Finance Holdings- Strong AUM growth offset by credit cost increase :: JPMorgan

LTFH 1Q earnings at Rs1.45B, up 20% Y/Y, were below expectations, with
high credit costs (+57% Y/Y) offsetting strong NII growth (33% Y/Y). AUM
growth for the Q was strong at 31% Y /Y, aided by Infra book and rural
financing. Disbursements continue to remain sluggish. Asset quality witnessed
a deterioration in the Jun-Q. Overall GNPA levels increased to 2.54% (vs.
2.03% in Q4) partly due to seasonality in retail business; while there is also
increased stress in CV/CE segment and corporate/infra assets. Credit costs
were up by 50-90bps Y/Y across infra/retail biz and are expected to remain
elevated near term given the overall macro. Further, recent liquidity
tightening measures by RBI pose a downside risk to margins. Maintain N.
 Retail & Corp Finance – NIM improvement offset by higher credit
costs and opex increase: ROE for the business came down to 10.3% (vs.
14.5% in Q4). This as improvement in NIMs (6.2%, +70bps Y/Y) was
offset by higher credit costs and increased operating costs (due to Family
Credit addition). Credit costs increased by 50bps Y/Y to 1.7% levels due to
stress in corporate and CE segment. Company expects credit costs to
improve from 2H, which should take the ROAs back to target 2%+ levels.
Overall AUM & disbursement growth was healthy at 24% Y/Y / 26% Y/Y,
respectively. Growth in LT Retail has primarily been driven by rural
(tractors & cars) and capital markets products, while MFI has also started to
see good growth albeit off a small base. Construction equipment and
transport equipment finance continue to witness de-growth.
 Infrastructure Finance – Improvement contingent upon overall macro:
ROE for the Q at 13.1% came in lower than target ROEs of 16% levels.
This given higher credit costs as the company made some voluntary
provisions due to increased stress & delayed payments in some sectors.
Credit costs are expected to stay elevated near term given uncertain macro.
Fee income was also lower in 1Q due to slow momentum in syndication
deals. AUM growth stood at healthy 36% Y/Y even though disbursements
were sluggish (down 47% Q/Q). Longer tenor loans (lower repayments) has
helped growth in infra business. Further, management expects IDF to get
operational in 1H.
 Investment management – Close to breaking even: AUM growth and
better cost control has helped the company curtail margin loss to 10bps of
AUM in Jun-Q (vs. 90bps in FY13). AAUM growth of 23% Y/Y is
encouraging although aided by lower revenue fixed income products.

Enjoy Independence Day Holiday! Markets (BSE, NSE, MCX) closed. Next holiday :09-Sep-2013 Monday Ganesh Chaturthi

715-Aug-2013ThursdayIndependence Day
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1214-Nov-2013ThursdayMoharram
1325-Dec-2013WednesdayChristmas

ING Vysya Bank : 1Q14 results: in line, asset quality normalizing :: JPMorgan

ING Vysya Bank reported 1Q14 PAT of Rs1.75B, up 16% y/y and in line
with our estimate. Revenue and PPOP growth were strong, led by higher
fee and treasury income and lower opex growth. Credit costs inched
upwards – against the backdrop of a weak economy, this was in line with
our expectations. Overall the customer asset growth was higher than the
industry average with more focus on large corporates and mortgages. We
maintain our OW on the better long-term growth outlook for the stock.
 Credit cost inched upwards. Credit costs doubled in 1Q FY14 and
stood at 84bp. This was mainly on account of two accounts which
slipped into the NPL category amounting to Rs1.15B in the mid-sized
segment. Management expects some stress in the mid-market segment
and is consciously reducing its exposure to this segment. Given the weak
macro environment we expect credit costs to remain elevated in the
medium term. We maintain our credit cost estimate of 78bp for FY14.
 Strong customer asset growth. Customer asset growth was strong at
18% YoY, although overall loan growth was 13% YoY. Loan growth
was driven by low-risk mortgages and the wholesale segment, which is a
good strategy in the current weak macro environment. Management
expects loan growth to be higher than the system average, in line with
our expectations.
 Decline in NIMs on expected lines. NIMs stood at 3.56%, down 17bp
QoQ, mainly due to lower YOA, which was down 18bp QoQ.
Management had earlier guided that the 3.7% NIM reported in 4Q FY13
was not sustainable, so the decline was along expected lines. Given the
focus on good-quality low-risk loans, management is likely to trade off
lower margins for asset quality in the current weak environment. CASA
ratio declined 230bp QoQ as overall CASA decreased 8% QoQ, partly
due to seasonality in 1Q FY14.

Brokers on the warpath against FT group, NSEL: Business Standard


Jignesh ShahTop brokers on Tuesday went all out in their attack on the Financial Technologies group and promoter Jignesh Shah over the crisis surrounding National Spot Exchange Ltd.

Four broker associations accused the FT group of keeping them in the dark on the progress in dues settlement, while NSEL Investor Forum, which represents more than 15,000 investors, called for the government to take over the operations of the beleaguered exchange -- like it did in the case of Satyam Computer Services after the accounting scandal at the information-technology firm.

Representatives of brokers, including IIFL Chairman Nirmal Jain and Motilal Oswal Financial Services CMD Motilal Oswal, alleged at a press meet on Tuesday that the exchange did not have adequate stock in its warehouses to meet obligations.

At the stormy meeting, they sought explanation on the whereabouts of the Rs 5,600 crore (Rs 56 billion) NSEL owed its brokers and investors.

“There are apprehensions the stock is not even there, a lot of firms involved are shell companies and the money to be paid is still not coming in,” said IIFL’s Jain.

The brokers suggested the exchange would be able to repay only Rs 500 crore (Rs 5 billion) of the Rs 5,500 crore (Rs 55 billion) due.

Investors’ money has been stuck in NSEL contracts, as the exchange, on a directive from the consumer affairs ministry, suspended transactions in all contracts.

Leading brokers are facing the ire of their clients after the move, which made it impossible for them to settle their claims.

Brokers had hard-sold a scheme based on NSEL’s derivative contracts as a product that could fetch better returns than fixed deposits.

However, NSEL took a tough stand on the issue.

In a late-evening statement, MD & CEO Anjani Sinha said 23 buyers were required to meet their pay-in obligations and any default would be dealt with according to legal default proceedings.

“The management of NSEL, under the supervision of the board, is making all attempts to ensure settlement is achieved.

"This institution has been used by industry satisfactorily for three years.

"Exclusively holding the promoter responsible now is inappropriate,” he said.

Brokers, at the press conference, declined to share the responsibility in the matter, saying they acted as ‘facilitators’.

“The brokers’ responsibility in a transaction is restricted to ensuring client KYC and other such things. . . if you think the broker is underwriting. . . for a minimal brokerage. . . that is not the law — either in this country or anywhere else,” said IIFL’s Jain.

In the wake of the latest protests, the department of consumer affairs on Tuesday again asked the commodity derivatives regulator, the Forward Markets Commission, to look into investors’ grievances.

Last week, the government had asked FMC to look into the settlement issue between NSEL and investors.

Sharad Kumar Saraf, who said he was an investor and acted as the spokesperson of the forum, expressed lack of confidence in the committee set up to oversee the settlement process.

“The committee has been set up by NSEL. It has no sanctity,” he said.

The NSEL Investor Forum was contemplating a class-action suit if the group defaulted on payments, said Saraf.

A class action, or class-action suit, is a process by which a large number of people collectively bring a single legal claim against an entity.

“If money doesn’t come, we will,” said Saraf. He said preliminary legal consultations on the possible action had already been made.

Brokers and investors said they had approached the Central Bureau of Investigation, as well as senior government officials, over the matter.

Anand Rathi Financial Services Chairman Anand Rathi said the overall confidence in commodity trading had been shaken after the NSEL debacle.

“If the payment is not scheduled properly, business in FT Group’s other exchanges will also be affected. This has already started happening, with lower volume in MCX,” he said.

“As in the case of all financial frauds, we will take a legal action, for which we have already consulted lawyers.”

The broker associations, in a joint press release, raised concerns on whether Jignesh Shah and his team were ‘fit & proper’ to run their exchange business.

“Why should MCX’s licence not to be suspended and why should these promoters be allowed to run international exchanges and risk India’s reputation,” asked a joint press release of NSEL Investors Forum, Commodity Participants Associations of India, Association of National Exchanges Members of India and BSE Brokers Forum.

The broker associations sought clarity on how the trade guarantee fund of Rs 800 crore got reduced to Rs 5 crore (Rs 50 million).

“Which borrowers did the margin money belong to, and where has it been appropriated,” the release asked.