Standard Chartered -Global gold :: PDF link

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Bajaj Auto Strong quarter, but challenging outlook Standard Chartered Research,

Bajaj Auto
Strong quarter, but challenging outlook
 Bajaj Auto‟s (BAL) 1QFY14 earnings at INR 8.1bn were
ahead of our estimates, led by better-than-expected
margins.
 Operating performance was aided by favourable currency
movement in 1QFY14.
 Favourable currency hedges are likely to further improve
margins in subsequent quarters, in our view.
 However, the volume outlook continues to remain
uncertain in both domestic and export markets.
 The stock appears fairly priced at current valuations. We
maintain our In-Line rating with a revised price target of
INR 1,952 (versus INR 1,910 earlier).

Standard Chartered Research,Global gold All that glitters

Following our commodities team‟s gold price revisions, we cut our 2013-14E earnings
forecasts for gold equities under our coverage 12-41%. Our new gold price assumptions are
USD 1,437/1,400/1,300/oz for 2013/2014/2015.
 We downgrade Zhaojin Mining and G-Resources to In-Line (from Outperform) and Philex
Mining to Underperform (from In-Line).
 Zijin Mining remains our top sell in the China gold sector, given its rapidly rising gold
production costs – we forecast a 2012-15E CAGR of 15%, compared to 8% for Zhaojin
Mining.
On 10 and 16 July 2013, our commodities team lowered its 2013-15 gold and copper price
forecasts by 3-13% and 2-17%, respectively, along with other precious metal and base metal
prices. (See the full reports: Gold – Searching for a floor, as lease rates spike and Metals –
Precious metal markets lead the way down) We highlight key points and summarise the changes
to their forecasts below.
 For gold, it is still too early to conclude that the wave of investor selling has ended, but strong
outflows through 1H13 have been replaced by a more neutral picture so far this month.
 The physical market for gold is currently mixed and demand is not as strong as it was in late
April. We expect weak import numbers for India in July and August, following an 80%
decrease in June from May‟s very strong number. Demand from China and Vietnam has
helped offset the weakness in India.
 Central banks, including those of Kazakhstan, Russia and Turkey, have continued to buy.
In his 10 July note, our commodity analyst, Dan Smith, expected gold prices to find a floor soon
and then slowly rise over the next year, as supply is likely to be choked off by lower prices and
demand should slowly recover. A rising cost floor should provide support over the long term.

India – RBI focuses on INR stability with a hope of easing ahead  Standard Chartered Research

India – RBI focuses on INR stability with a hope of
easing ahead
 RBI leaves policy rates unchanged; a dovish policy statement focuses on currency stability
 Reversal of liquidity-tightening measures and a return to monetary policy easing depends on INR stability
 Presses for urgent action to reduce C/A deficit as RBI’s measures cannot help INR on a sustained basis
 We shift to a Neutral duration stance on GoISecs, from Underweight, and adjust our rates forecasts

Bharat Heavy Electricals - At a cyclical inflexion point ::Standard Chartered Research,

 We upgrade BHEL to OP from UP, with a PT of INR 230,
valuing it at 1.5x FY15E PBR and implying 12x FY15E PE.
Though earnings could decline over FY13-15E, order book
visibility is more important at current depressed valuations.
 The SEB restructuring plan and acceptance by key states
are likely to support orders in the next 12-18 months.
 Chinese competition is likely to ease, as the INR has
depreciated 30% against the CNY in the past 20 months.
 While the CCI has had mixed results overall, it is positive at
the margin, with specific wins in oil & gas, state-sector
power projects and mining, in our view.
 Given a re-allocation of resources, we transfer coverage of
BHEL to Satish Kumar.

India emerging companies - Why bother with small/mid-cap stock selection? :: Standard Chartered Research

 Reason #1: Under-researched stocks = Higher returns. For similar improvement in RoEs, under-researched stocks
have generated better returns1. The Indian small/mid-cap (SMID) space has also produced the maximum number of 10
baggers over the past decade in the region2.
 Reason #2: It’s not just beta. Post GFC, correlations of the BSE mid-cap index vs the Nifty has been falling while RoE
dispersion within the SMID space has magnified3, making stock selection more important.
 Reason #3: Alpha generation. Macro-economic cycles can be played via sector rotation strategies, but stock selection
can be a dominant performance driver between cyclical turns4.
 What’s a winning strategy? Investing in small/mid-caps (1) with high RoEs or (2) where the stock is discounting a high
cost of equity (i.e., low PB/RoE) has proved to be the most rewarding strategy over the past five years5.
Is there a method to the SMID madness? We have assessed the predictive capability of 10 financial parameters over
the past five years. We rank the SMID universe using the four factors that our backtests reflect as the statistically most
influential drivers of share price performance (RoE, PB/RoE, EPS growth, RoE momentum). Our backtests show that
selecting the top quartile stocks based on our four-factor merit order would have led to 20% CAGR over five years from
2008 to 20126. Our findings largely align with our regional Emerging Company approach of identifying “Value Creators”
(Refer report Value Creators by Jeremy Sutch).

Bharti Infratel -Passive play on aggressive data rollout  Standard Chartered Research

 We initiate coverage on Bharti Infratel (BIL) with an Outperform rating and PT of INR 240. Potential re-leveraging and one-off dividends provide upside triggers.
 BIL offers investors a low risk option to gain exposure to the ongoing wave of data network rollout.
 Robust free cash generation capacity and potential for higher dividends will lead to a re-rating notwithstanding the moderate EBITDA CAGR (~9% over FY12-15E).
 Strong parentage provides superior visibility to tenancy even as stability in telecom tariffs might alleviate any pricing pressure on rentals.

Standard Chartered - 2013 A Year of Transition

Standard Chartered - 2013 A Year of Transition

Sizzling stocks: AstraZeneca Pharma India; Standard Chartered : Business Line

STAN C IDR: Eyeing Fungibility--EDEL

Background

STAN C issued IDR (first of its kind) in June 2010 with a 100% fungibility post one year (IDR used to trade at an average discount of 5% to its PLC). After one year, SEBI introduced a clause that fungibility will be permitted only if IDRs are infrequently traded. Consequently, IDR hit a lower circuit of 20% and spread widened to a discount of 60% in the next four months. In the recently concluded budget, finance minister made a fresh announcement that IDRs will become fungible subject to a ceiling. STAN C IDR hit upper circuit of 20% and the discount narrowed down to 25%.

India strategy The flipside of policy inertia – rising FCF yields:: Standard Chartered Research

Standard Chartered IDR: Buy:: Business Line

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Global economy: Fragile West, resilient East :Chief Economist at Standard Chartered Bank in:Business Line

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As the Chinese economy grows bigger, it becomes harder to manage than in the past. The need to switch from investment to consumption-led growth poses many challenges. 

There are two key influences that impact global economic outlook this year. The first is the shift in balance of economic and financial power, highlighted by the emergence of China, India and Brazil — not to mention a host of other economies across Asia, Africa and the West Asia. This is a strong, positive driving force.

The overhang of debt that continues to weigh on the recovery in Europe and the US are the other factor. The need to de-leverage points to a steady but unspectacular recovery in the US, and signals further problems in the Euro area.

India – Time for a bold budget  Standard Chartered Research,

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India – Time for a bold budget
 FY13 budget should attempt fiscal consolidation; the deficit should shrink to 5.3% of GDP from 5.8%
 Expenditure compression will be difficult to achieve; the proportion of capital spend should rise
 Indirect tax rates might be increased and the emphasis will be on non-tax revenue to reduce the deficit
 RBI OMOs will be required to relieve supply pressure as gross market borrowing is likely to be INR 5.4trn

STANDARD CHARTERED PLC Hong Kong, Singapore leads; India, Korea disappoints ::Edelweiss

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We met the top management team (Asia region) of Standard Chartered
Bank (SCB) for a better understanding of its performance in CY11 and
growth outlook and strategies going forward (particularly India). The bank
delivered PAT growth of 12% (USD4.7bn) despite moderating growth in
Asia, political/economic stress in Euro zone/Middle East and regulatory
changes. While two of its largest markets viz., India (down 33%) and Korea
(down 56%) faltered, the overall performance was offset by surge in Hong
Kong (up 41%) and Singapore (up 40%) earnings. Global NIMs improved
10bps to 2.3% on account of strong liquidity surplus and higher liability
margins; global advances grew ~9% led by wholesale banking.

Glaxo SmithKline Consumer Healthcare -- Limited upside:: Standard Chartered Research,

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 We downgrade GSKCH to In-Line on the back of rich valuations (trades at 25x CY13E) and the poor performance of its non-core business.
 We are disappointed with increased investments in new categories as commensurate returns/ success remain low
 4Q CY11 − Sales growth was in line with expectations at 18.6%, with steady volume growth of 11%.
 EBITDA growth was moderate at 13% due to higher adspend (up 27.1%) and other expenses (up 25.1% yoy).
 Headline net profit growth was lower at 10.7%, but adjusting for prior period expenses net profit grew 23% yoy.

StanChart Bullish on India, China:: WSJ

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Standard Chartered PLC remains bullish on the major Asian economies of India and China, encouraged by the policy outlook for the two countries this year, the bank’s Asia chief executive said.

The U.K.-based lender, which focuses almost exclusively on Asia and emerging economies, also sees European rivals retreating from those markets as they are beset with challenges at home, Standard Chartered Asia Chief Executive Jaspal Bindra said in an interview on the sidelines of the World Economic Forum.

In India last year, Standard Chartered confronted a range of challenges including slowing growth, rising interest rates and a depreciating rupee. Revenue from the bank’s India unit fell by 12% in the first half of 2011 and by the “mid-teens” in the third quarter, Group Finance Director Richard Meddings said earlier.

Mr. Bindra blamed higher interest rates. “Interest rates went up almost 400 basis points in a short period, and it is very difficult, if you do wholesale business with the best clients in the country, to pass on a 400 basis point increase at any one time.”

But the central bank’s surprise move to loosen monetary policy this week has sent a “clear signal” that there will be no further rate hikes and the government is shifting its focus to promoting growth, Mr. Bindra said.

The Reserve Bank of India Tuesday held its key lending rate steady for a second straight policy meeting but cut the minimum cash reserve requirement by 0.50 percentage point to ease liquidity.

“The government has for a long time shown a huge preference to manage inflation through monetary policy,” he said. But following the RBI cut, “I think we will see a more balanced approach.”

Mr. Bindra also said that the recent “normalization” of the rupee exchange rate — it is up 6% against the dollar so far this year after declining 15.1% in 2011 — will encourage renewed foreign investment.

In China, Mr. Bindra believes authorities will be successful in guiding the economy to a “soft landing” ahead of a leadership transition at the end of the year.

“The priority for all of 2012 and beyond is going to be ‘how do we keep things stable,’ as they have this transition of power at the top,” he said, adding that not just the top political leadership, but also the leaders of major financial institutions and regulators are all due to be reshuffled. “It is quite a massive-scale change of power.”

As European banks regroup and retreat from Asia, Standard Chartered sees an opening. The trend is especially pronounced in industries including shipping and commodities and in markets like Indonesia and India where dollar liquidity is scarce, he said.

“It gives us an opportunity to scale up market share, and second, it gives us a little bit of pricing advantage.”

India auto sector 3Q FY12 preview – Cost pressure to limit earnings growth: Standard Chartered Research,

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We expect auto companies in our coverage universe to post 24% yoy revenue growth in 3Q
FY12 – sector growth could be limited by muted performances from MSIL and TVS.
 Sustained cost pressure is likely to impact margins; hence, we expect the sector to witness
slower 10% yoy earnings growth in the quarter.
 We expect most companies to post strong earnings growth, except for MSIL and TVS.
 Bajaj Auto and Maruti Suzuki remain our top picks
 We maintain Underperform on HMC on expensive valuations.
 All companies (except for MSIL and TVS) to post strong revenue growth – In 3Q, we
expect companies in our coverage universe to post robust 24% yoy revenue growth. Sector
growth would be impacted by the 22% revenue decline at MSIL and muted 7% yoy growth at
TVS Motor. Both the CV majors are expected to outperform sector growth with 39% yoy
revenue growth. Among two-wheeler majors, Bajaj Auto is likely to outperform with 21% yoy
revenue growth. Within PVs, we expect M&M to sustain its strong revenue momentum with
30% yoy growth.
 Earnings growth to be a mixed bag – Input cost pressure is likely to remain flat qoq. Given
this, we expect sustained margin pressure on most companies. Bajaj Auto and Tata Motors
are likely to benefit from favourable currency movements. Ashok Leyland’s earnings growth at
138% yoy would be over a very low base. For Hero MotoCorp, steady volume ramp-up is
likely to be offset by rising ad spend; hence, margin is likely to remain stable. For M&M,
sustained cost pressure is likely to limit earnings growth to 9% despite strong revenue growth.
As for Maruti Suzuki, slower volume ramp-up and an appreciating Yen are likely to impact
earnings (we expect 63% yoy earnings decline). For TVS Motor, we expect margin to decline
led by an adverse product mix.
 Valuation – Bajaj Auto continues to be our top pick given robust export momentum is likely to
drive earnings growth. We also like Maruti Suzuki for its attractive valuations. As for Tata
Motors, we like it given the revival in the domestic PV business, steady growth in CVs and
sustained momentum at JLR. These are likely to drive consolidated earnings growth – expect
the consensus upgrade cycle to continue post results. We have an Underperform on Hero
MotoCorp for its expensive valuations and an In-Line rating on M&M and TVS Motor.

IT Services – 12 trends that could shape 2012  Standard Chartered Research,

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12 trends that could shape 2012
 We define 12 trends that could collectively shape 2012 earnings for IT services players.
 IT spend will remain opportunistic; we expect moderated volume growth but yoy decline
in reported realizations, even though rate-cards will likely remain stable.
 Even on lower revenue growth + appreciating INR scenario in 2H12, we see no risks to
margin; modest wage hike (8-10%) + pyramid rationalisation will be the key levers.
 Our 10-17% FY13 EPS growth forecasts for the Top4 players build moderating yields;
look out for increases in hedge positions over 1H12 for later period FX impact.
 For 3Q12, we estimate 2-3% US$ revenue growth for the Top4 players; Infosys to see
minimal cross-currency impact/maximum INR depreciation benefit to PAT.
 HCLT remains our pick on renewal deal opportunity theme; we also find Infosys as an
attractive mid-range play.
Renewal deal wins to be the key growth differentiator. We expect an ‘opportunistic’ CY12 IT
spend to restrict FY13 volume growth to 15-22% for the Top4 players. Market share gains in the
renewal deal pipeline will be a key differentiator of volume growth across players in our view (see
our note India IT services - The shape of things to come dated 12 Dec 2011). Note, deals worth
at-least US$47bn are up for renewal over CY12, on our estimates. Further deterioration in macro
environment remains a key risk to volume outlook.
Stable pricing, but realization could trend down. We do not expect rate-card cuts like in 2008-
09; however, increased client scrutiny of vendor practices to push up ‘effective’ pricing + higher
share of lower priced application/infrastructure management services in volume pipeline could
drive a 2-3% drop in blended realization for the Top4 players in FY13. Players’ desperation (for
volume growth) to be key to industry’s pricing discipline in 2012, in our view.
No risk to margin, even ex-currency. Fresher hiring (for FY13 joining) is tracking FY12 (68,000
versus 65,000 for TCS and Infosys combined). FY13 wage hikes will likely be lower; these should
help manage margin in an appreciating INR scenario over 2H12. We expect 13-172bp EBITDA
margin drop for Top4 (building 0-4% yoy INR appreciation). Likely moderation in yields could be a
drag on EPS print (note 11% share of non-operating income to 1H12 PAT for Top4).
3QFY12 results preview – All about currency. We estimate 3-4% qoq volume growth though
cross-currency impact could restrict reported US$ revenue growth to 2-3% for the Top4 players.
INR depreciation will likely flow into Infosys/TCS margins (+212bp/228bp); but reinvestments/
hedge losses could restrict upside for HCLT/Wipro. Focus on deal wins momentum, realization
changes ex-currency and changes in hedge positions for cues to FY13 outlook.

‘Good time for NRIs to invest in India' :: Head Wealth Management, Standard Chartered Bank. in Business Line

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If investors do not want to take risk of price volatility, then fixed maturity plans are also good options as the tenures of these plans are matched with the underlying instruments. — Mr Vishal Kapoor, Head — Wealth Management, Standard Chartered Bank

Should you allocate high sums to equity SIPs? What should you do when the last of the fixed-return options — the small savings schemes — have an interest rate that swings every year? These are some of the questions we asked Mr Vishal Kapoor, Head Wealth Management, Standard Chartered Bank. He provides some solutions to these, along with investment ideas for 2012.

We see many mutual fund investors now allocating a larger portion of their surplus or their salaries to SIPs? Is it a good strategy to allocate such high sums? 

If the SIP value is in line with the strategic allocation planned for that person, then I would not be too concerned. For example, if a person in his 20s is building a retirement nest, and the targeted allocation for this person is 75 per cent equities, then for this person to have about three-fourth of his monthly savings going in to a set of good funds through SIPs may not be a bad idea.

This said, it is very important to try and diversify across a few fund managers. It is also very important to choose funds carefully and stay with consistent performers and with strategies that fit your requirement.

 However, your point is right when it comes to senior people. Taking high exposure to equity SIPs may certainly not be right for somebody close to retirement.

 Increasing large-value SIPs are also a validation that a lot of people have benefited from SIPs. In the past, investors were experimenting with a small proportion of their assets. For instance, when the fund industry was relatively nascent, a large-value SIP used to be Rs 20,000-25,000 a month and the average was around Rs 5,000-8,000.

Nowadays, with income, savings and conviction in SIPs going up, SIPs aggregating Rs 1 lakh a month are not uncommon. Many of them are the same customers who in the past were toe-dipping with Rs 20,000-25,000 a month, knowing fully well that their savings potential is much higher.

After having gone through a cycle they have now realised that they actually did relatively well and SIPs did make sense. So they have become more serious now and have increased their contribution.  

With small savings options too being linked to interest rate cycles, returns can also go down. What strategy should debt investors adopt?

 Besides bank deposits, investors can explore the wide array of fixed income products available through the fund route. In addition to regular returns, this space can also offer the additional opportunity of capital appreciation, especially in times when interest rates peak and are expected to come off.

If investors do not want to take risk of price volatility, then fixed maturity plans are also good options as the tenures of these plans are matched with the underlying instruments.

They are also efficient on a tax-adjusted basis. Then there are also fixed income instruments offered by non-banks. These may be deposits, debentures or bonds, with some of them offering tax advantages as well.   

But aren't the risk associated with corporate debt products also high?

The fundamental rule when you invest in any product — equity or debt — is that you need to understand the product you are buying. Debt is no exception. You need to know and understand how the instrument promises to give you a better return.  

In general, one should be wary of instruments without a credit rating. Yet another simple rule is to avoid a scheme that looks too good to be true. Also, stick to names and companies that you have some understanding of.

We do a full-fledged due diligence on the products we recommend. And yes, appetite for risk varies across customers. We may offer only a triple-A rated product or a government security to one, while another investor may be comfortable with an AA- .

It does not mean that a AA- is a bad product. But it may not be suitable for someone who does not understand the difference in the risk levels. So matching risk is important. 

Would you advocate buying gold?

It has been a part of our asset allocation strategy for customers to take a 5-10 per cent exposure to gold. But we have not yet changed our medium-term recommendation on the asset class. Our house view on gold in dollar terms is still 14-15 per cent higher than where we are today.

Why are we bullish? Gold continues to be a safe haven, given current global uncertainties. Second, both India and China have real demand for gold. It is not just a hedge or an investment. That will continue to drive prices. Three, many Central Banks will continue to buy gold as reserves, with their own currencies going through volatility. So that means more institutional demand.  

It is also a hedge against negative interest rate. That situation continues with potentially high inflation and low interest rates across the world. Gold then becomes a store of value by choice. We prefer a financial asset based route to investing in gold, since it avoids the many disadvantages of buying physical metal.  

What are your investment ideas for 2012?

 We think gold equities are a good opportunity, if you believe gold is a sound asset class now. Traditionally, gold equity has a high correlation with gold prices. It has the additional benefit of operating leverage on top of the increase in commodity price. Gold equities have not caught up with gold commodity rally. We see opportunity when gold equities catch up.

The second theme we like are long-term gilts. That is based out of our research view that interest rates should start coming off next year.  This is, however, only appropriate for the more sophisticated customers who are willing to live with the volatility that gilts have.

The third theme that we think might be interesting is international equities, in markets such as China or North-east Asia, as valuations, after correction, look more attractive. Of course, international equities can only be diversifiers to holding Indian equities. 

Are you seeing more interest from NRI investors?

 NRIs have always been very keen to invest back home. If you look at the current environment, it now looks even more attractive for them to invest. This is because you have a rupee that has sharply depreciated.

If you are an NRI holding a relatively strong foreign currency, then you have a big conversion-rate benefit to start off with. Two, interest rates differentials are huge between India and developed countries. When you have triple-A rated bonds with tax-free status and eight per cent plus rates, then it becomes very attractive for NRIs.