Morgan stanley on Reliance Industries : Significant Growth Ahead

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Ridham Desai, Morgan Stanley : Timing vs Time

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Morgan Stanley: Still UW on Sun Pharma

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Morgan Stanley 17 th Annual India Summit - India Economics -Summit Takeaways :: Video

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Morgan Stanley Research, 2015 top stock Ideas

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Morgan Stanley - State Bank of India - Deterioration Unabated

F3Q14 PAT fell ~35% YoY. Higher credit costs led
core operating profit to fall 20% YoY. Impaired loan
formation was above our estimate at 1.4% of loans.
NII was in line. Fees/FX income picked up, but are
unlikely to be sustained. Weak trends at banking
subs lead us to trim estimates, PT to Rs1,150.
Pace of impaired loan formation still high – 1.4% of
loans (non-annualized). The mid-corporate and SME
segments (where collateral tends to be weak) contributed
to >75% of NPLs. The stock of impaired loans in this book
is ~17% and forms ~50% of overall impaired loans. The
recast pipeline remains high at ~Rs100bn (0.8% of loans)
– vs. ~Rs40bn of restructuring in F3Q14.
PPoP margin improved, but sustaining it will be
tough: This was driven by higher fees and volatile FX
income – unlikely to be sustained, as seen at other
banks. Margins were stable (given base rate hikes) – but
we expect them to trend lower as bad loan formation
remains high and the LD ratio moderates. Loan growth
(domestic) moderated to 15% yoy and will slow further.
Banking subs – even weaker trends: F3Q14 PAT was
down 55% YoY. Share in consolidated profits was lower
at 15% YTD from 18% in FY13 and 30% in FY11.
Impaired loans ratio increased to 11.5% vs. 10.9% last
quarter. Coverage was lower at ~40% vs. 43% last
quarter. These will need capital infusion by the parent.
Weak balance sheet and low profitability imply
continued dilution ahead – remain UW: Even after
the capital raising (9% dilution), F14 consolidated CET
Tier 1 at ~9.5% (by our estimate) is the lowest among
large Asian banks. Further, high impaired loans (9.1%)
with low coverage (~45%) will keep internal capital
generation low. Against the backdrop of Basel 3 and
D-SIB norms, this could lead to continued cash calls.

��

Larsen & Toubro -- Value Unlocking at L&T IDPL? :: Morgan Stanley

Larsen & Toubro
Quick Comment: Value
Unlocking at L&T IDPL?


No impact on our views, based on the current
information: We would wait for more clarity on this
news. We know what the foreign investor might be
looking to put into L&T IDPL (Rs20 bn +) – but the stake
that IDPL is likely to hand out for it is not yet known.
Hence, it is not possible to judge the impact of the deal.
 If the stake ends up at less than 20%, then there
would be upside risk to our target price.
 If the stake is higher than 20%, then there would be
downside risk.
On a probability-weighted basis, at Rs110/share (Rs101
bn), IDPL is around 12% of our target price for L&T
(Exhibit 3) – the biggest chunk after the core business.
We remain on the sidelines pending more visibility
on the revival of Indian capex: An exceptional
long-term story and strong management are being offset
by near-term challenges – both macro and micro.
The first step in management’s vision – delinking
IDPL’s growth from L&T’s balance sheet: On Friday,
L&T informed the exchanges that L&T IDPL (the
subsidiary housing its infrastructure development
business) has submitted an application to the Foreign
Investment Promotion Board (FIPB) for approval of a
foreign direct investment. Due diligence is yet to be
completed and some terms of the transaction still have
to be agreed upon – but according to the company, the
investor is looking to put in an initial Rs10 bn, followed
by another Rs10bn or more in the next 12 months.
Over the next five years (F14-18e), IDPL estimates an
equity requirement of Rs82 bn (Exhibit 1), with ~75%
needed for projects now on hand. Our meeting with
IDPL management in September 2013 (for details, see
our QC of September 23) had indicated that the
company planned to raise 60% of the money from
monetization (including securitization) and 40% from
bringing equity investors into both IDPL and the
Hyderabad metro (mezzanine equity).

MS- India Utilities- CERC’s Draft Regulations Made More Stringent

Quick Comment – Impact on our views: CERC

released the draft regulations that apply to inter-state

generation and transmission utilities for the period April

2014 to March 2019. While CERC has maintained ROE

at 16% (comprised of 15.5% plus an additional 0.5% for

scheduled commissioning), in line with the existing

regulations, it has made the normative operating

parameters more stringent. Hence, these draft

regulations in the current form seem neutral to negative

for NTPC and Power Grid. However, as in the past, the

final regulations (to be released before April 2014) could

relax some of these norms. A public hearing on these

regulations will be held on January 15-16, 2014.

Key changes for NTPC: We believe our earnings and

fair value would remain largely unchanged due to the

following key changes in the draft:

1. The incentive earned due to grossing up of tax is

likely to go away. This may take away about 1% of

additional ROE.

2. Heat rate incentive could fall, as the range from

actuals has been lowered (6.5% to 4.5%), and 25%

of the benefit needs to be shared with beneficiary

states.

3. Availability-linked incentive can now vary a bit more

than earlier on either side. A PLF-linked incentive

(Rs0.5/unit for PLF in excess of 85%) has been

introduced but it may not yield much given lower

PLFs due to SEB and domestic coal issues.

4. The key positive is recovery of water charges on

actuals, which was had been underabsorbed (about

Rs4bn in F2013).

Key changes for Power Grid: The draft regulations

have increased uptime availability norms and reduced

normative O&M expenses. We believe if implemented,

they could negatively affect earnings and fair value by

about 2%.

India Economics A Primer on India’s Exports Story:: Morgan Stanley Research

Why Exports Are Key to India’s Growth Outlook
Trend in exports is important for overall growth outlook in this cycle: We believe that a meaningful of recovery in private capex, government spending or private consumption will be difficult to achieve over the next 6-12 months while policy makers focus on improving macro stability indicators, such as inflation, current account deficit, and gap between loan growth and deposit growth. Hence, we believe that the strength of the overall growth improvement will be largely dependent on improvement in exports. Why CPI and Exports Are Key to India’s Macro Outlook?
Exports have been weak until recently: After declining 1% yoy during the 12 months ended March 2013, India’s merchandise exports continued to decline, falling 1.5% yoy in USD terms from April to June 2013. Similarly, services exports have also been weak, increasing only 1.7% yoy for 12 months ending Jun-13.
India’s market share in global merchandise exports has declined marginally since October 2011. While demand growth in the developed world was weak, India exports suffered due to a loss of market share. India’s market share in global merchandise exports declined from a peak of 1.7% during 12 months ended Oct-11 to 1.65% as of the 12 months ended June 2013. Market share in services exports has remained flat after a continued steady rise for many years.
Overvalued currency and supply constraints were key factors in the loss of market share: As per our real effective exchange rate model (using CPI inflation), INR moved into overvalued territory from Oct-09, only to correct below fair value in Jul-13. Moreover, constraints on mining and exports of iron ore kept export growth weak post credit crisis.
Export growth recovering since Jul-13: Since Jul-13, export growth has moved into double-digit territory. Exports of petroleum refined products, engineering merchandise and textiles have contributed significantly to the improvement in export growth from Jul-13.
Outlook for exports is improving, but sustained gains in market share will need a more systematic effort to improve the business environment: We expect merchandise export growth to be around 8-10% in F2H14 compared with 5.3% in F1H14. We expect services exports to follow the trajectory of merchandise exports, showing recovery in the second half of the financial year. In the near term, the key factor influencing the outlook of export growth will be domestic demand growth in the developed world. Although we do expect the improvement in domestic demand in the US and Europe to continue over the next 12 months, we believe it will be gradual. Moreover, we believe the recent depreciation of the currency (on a CPI-adjusted, real effective exchange rate basis) to below its fair value should help ensure that India’s market share begins to recover again. However, a sustained increase in market share would need an improvement in business environment with policies that create an enabling environment for businesses to operate in.

Morgan Stanley -Sun Pharmaceutical

Sun Pharmaceutical
Industries
Taro Tender Offer Suggests
Inexpensive Valuations?
Quick Comment: Taro (US$4bn market cap, 65.9%
owned by Sun) announced that it has commenced
repurchase of its ordinary shares (up to US$200mn) at a
price not greater than US$97.5 per share nor less than
US$84.5 per share. At these prices, if the offer is fully
subscribed, the number of shares to be purchased
represents approximately 4.6-5.3% of Taro’s currently
issued shares. The offer will expire at midnight (EST) on
December 23, 2013.
Rationale: Taro had approximately US$741mn in cash
as of October 31, 2013. The company said it aims to
return part of this cash to shareholders through this
tender offer and retain the balance for future use. The
annualized F2Q14 results (US$96mn net profit), which
may be sustainable if competition intensifies, implies
9.5-11x P/E multiples (at extreme end of offer pricing).
Taro stock is up 96% YTD and significantly vs. Sun’s
acquisition value (roughly US$260m for 66% stake three
to four years ago).
Implication: Taro’s tender offer at the current stock
price suggests management’s assessment for greater
value in the stock. Alternatively, the decision may be
driven by the low fixed-income yield on the surplus cash.
It would be interesting to note Sun’s reaction to this offer
(i.e., whether it participates or not). If it participates, then
we believe that will lead to a transfer of excess cash
from Taro to Sun. Both companies are generating strong
cash flow.
Investment thesis: We expect strong growth trajectory
for Sun in the quarters ahead driven by its solid base
business, value unlocking in URL/DUSA and greater
market share in Doxil. Surplus cash on the balance
sheet should add an M&A premium to the stock. We
retain our OW rating on the stock and it is part of our
Asia Best Ideas list.

Morgan Stanley Institutional Investor Survey: The Waiting Game

The Indian market is sandwiched between domestic
issues – depressed savings, falling capital productivity
and an election cycle, on one side, and an ever
changing global environment, on the other. Our semi-
annual investor survey of 95 institutional investors
reveals how they are positioned and what they think is
important for Indian equities in the coming months:
 Positioning – Investors turn E-W on India: Only
21% of the investors have an overweight position (vs.
39% in Feb-13) – the lowest level since 2011 and the
lowest since we began this survey. Stock picking is
their preferred portfolio strategy. Only a third of the
polled investors believe that India will beat EM in the
next 12 months – albeit higher than in 2011.
 Waning return and earnings expectations: On
average, investors expect BSE Sensex to be at
20,949 in 12 months, up 2% from current levels. Their
earnings growth expectation for F2014 is 5% vs. 13%
in our February survey and compared to our top down
estimate of 4% and the sell-side consensus number of
10%.

India Consumer Q2F14 Earnings: Remain Selective :: Morgan Stanley Research

India Consumer
Q2F14 Earnings: Remain
Selective
Quick Comment: We expect our India consumer
coverage to report revenue, operating profit, and net
profit growth of 13%, 14%, and 13%, respectively. We
expect some moderation in volume growth across
consumer segments, especially in discretionary product
categories even as companies re-invest part of their
gross margin flexibility in ad-spends to support volume
growth. Higher tax rates will impact earnings growth for
most of the consumer companies in our coverage. We
expect United Spirits, Tata Global Beverages, Marico,
ITC and Dabur to report the strongest Q2F14 PAT
growth. Investors will likely to reward companies with
operating margin expansion this quarter.
HUL – Expect 4-5% volume growth: We expect HUL
to report revenue, operating profit and PAT growth of
9%, 9.9% and 4.8%, respectively. We forecast 7% and
8% volume led growth in soaps & detergents and
personal products, respectively. Operating margins will
likely remain flat in Q2, due to 80bps decline in soaps &
detergents offset by a similar increase Personal Product
margins. Key risk is sluggish volume growth across
business segments.
ITC – Cigarette EBIT growth to remain strong: We
expect ITC to report top-line growth of 15%, driven by
16%, 16% and 15% revenue growth in cigarettes,
non-tobacco FMCG, and agri businesses, respectively.
We forecast (-)2% cigarette volume growth and cigarette
EBIT growth of 18.1% YoY. ITC’s hotel business should
remain sluggish in Q2F14. We expect Q2F14 net profit
growth of 15.2%. The key metric to track this quarter is
non-tobacco FMCG business growth and profitability.
USL – Subdued quarter: We expect USL to report
revenue, operating profit and net profit growth of 8%, 1%
and 79% yoy, respectively. Revenue growth will likely be
driven by price/mix. We expect operating margins to
decline by 70bps yoy, driven by rising spirit costs. Lower
interest cost will drive net profit growth of 79% for the
quarter, we believe.

Morgan Stanley -What Does A Cross-Current :: PDF link

http://www.docstoc.com/docs/162669743/Morgan-Stanley--What-Does-A-Cross-Current

Morgan Stanley -Examining the geographical exposure :: PDF link

http://www.docstoc.com/docs/162669720/Morgan-Stanley--Examining-the-geographical-exposure

Morgan Stanley -Global Strategy Outlook :: PDF link

http://www.docstoc.com/docs/162669728/Morgan-Stanley--Global-Strategy-Outlook

Morgan Stanley -The Fragile Five :: PDF link

http://www.docstoc.com/docs/162669710/Morgan-Stanley---The-Fragile-Five

Morgan Stanley -Monthly Databook :: PDF link

http://www.docstoc.com/docs/162668858/Morgan-Stanley--Monthly-Databook

Morgan Stanley -Global Strategy Forum Back-to-School Macro :: PDF link

http://www.docstoc.com/docs/162668850/Morgan-Stanley--Global-Strategy-Forum-Back-to-School-Macro

Morgan Stanley -European Credit Goes Back-to-School :: PDF link

http://www.docstoc.com/docs/162668842/Morgan-Stanley--European-Credit-Goes-Back-to-School

Morgan Stanley - A Summer Squeeze :: PDF link

http://www.docstoc.com/docs/162669700/Morgan-Stanley----A-Summer-Squeeze