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~ A c tio n
On an overall basis, we view the budget as a non-event and neutral to negative at
best. The budget was not overly populist and the government achieved fiscal
consolidation, on paper at least, by under-provisioning for expenditures, especially
subsidies. In terms of structural reforms, the budget did not achieve much.
a C a ta ly s ts
With expectations largely built around an excise duty hike going into the budget, the
market did take the absence of a hike in universal excise duties as positive in
general, especially for sectors that get impacted by excise duty hikes.
A n c ho r th e m e s
We remain cautious on the market, underpinned by our concerns on stubbornly
high inflation, weakening growth momentum, a sputtering capex cycle, elevated
interest rates amidst tight liquidity and headwinds to corporate earnings.
Budget 2011 — a non-event
c Neutral to negative at best; expenditures under-provisioned
We think that with this budget the government has effectively projected a tidy
house by under-provisioning for expenditures and leaving itself very little room to
manoeuvre should revenue buoyancy not pan out as expected or the rise in
commodity prices breach threshold expectations. We are not fully convinced about
the government’s ability to meet its budgeted expenditure targets.
d No major reforms announced
In terms of structural reforms, the budget did not achieve much. Expectations of
the opening up of FDI for insurance or multi-brand retail, or a significantly higher
thrust on infrastructure were largely not met. In any case, the reform process does
not necessarily have to be part of the budget and can be undertaken separately.
e No hike in universal excise duty
With expectations largely built around an excise duty hike going into the budget,
the market took the lack of a hike as positive in general, especially in sectors that
get impacted by excise duty hikes. ITC (as the tobacco excise was expected to
increase dramatically) and auto stocks (which would have been impacted by the
excise increases as well) rallied. Some of the banks and infrastructure stocks have
reacted positively owing to some policy push on infrastructure and/or the
seemingly low government borrowing number put out by the finance minister.
f Market concerns remain
We are not convinced that this budget, as presented, will go far in addressing our
immediate concerns on headwinds facing the market — stubbornly high inflation,
weakening growth momentum, a sputtering capex cycle, elevated interest rates
amidst tight liquidity and headwinds to corporate earnings (although the lack of a
hike in indirect tax rates is a positive for the corporate sector on an overall basis as
compared to expectations pre-budget)
Budget 2011 — a non-event
Fiscal consolidation achieved through under-provisioning of expenditures: The
FY12 budget was essentially a statement of central government finances without any
major reform impetus. For those looking for structural changes in policy from the
budget, it likely comes as a disappointment. From the perspective of numbers, the
budget achieves significant fiscal consolidation — FY12 deficit budgeted at 4.6% of
GDP, a significant improvement compared to 5.1%, based on revised estimates for
FY11 — but only on paper, we think. A closer look at the numbers reveals that the
fiscal consolidation has been achieved with rather aggressive assumptions about
government expenditure and, therefore, the credibility of fiscal numbers is rather low,
in our view.
Overall, no major reforms were announced: In terms of structural reforms, the
budget did not achieve much. Expectations of the opening up of FDI for insurance or
multi-brand retail, or a significantly higher thrust on infrastructure were largely not met.
In any case, the reform process does not necessarily have to be part of the budget and
can be undertaken separately. The budget paid lip service to agricultural sector
reforms. The budget did not give us reason enough to believe that economy-wide
supply-side constraints will ease enough to change dynamics of food price inflation in
the near-term.
Market borrowing below expectations, but would likely overshoot: More
importantly, the budget surprised positively on the fiscal deficit and government’s
projected market borrowing. However, we think that these numbers are underpinned
by under-provisioning on the expenditure side, especially for oil subsidies. We expect
the government to revise upwards its projected FY12 subsidy bill through the course of
the year in light of the currently elevated commodity and oil prices.
Budgeted expenditure is not overly populist: It was clear heading into the budget
that the government had limited spending headroom given the pressure on
expenditures from the rising subsidy bill, the absence of significant one-off revenues
and the path of fiscal consolidation dictated by elevated inflationary pressures. Indeed,
the government seems to have reined in its expenditure by budgeting a lower-thanexpected 3.4% increase in total expenditure on the back of a 4.1% increase in revenue
expenditure and a 1.4% decline in total capital expenditure (planned capital outlay has
increased about 23%).
While interest payments and defence expenditure have remained sticky, subsidies,
non-plan expenditure on economic and social services — the previous year’s figures
include Sixth Pay Commission arrears — and non-plan capital expenditures
(investment) have been cut significantly. Expenditure on the flagship rural employment
scheme has also remained flat, although with wages in the scheme now linked to CPI
inflation we expect upside risk to the budgeted figure. Ditto for the subsidy bill.
No hike in excise duties — maintained status quo, but a positive for the
corporate sector vs expectations: With limited flexibility on expenses it was widely
expected (including by us) that the government would resort to hiking excise duty rates
to augment revenues. With the GST and DTC implementation pushed out by another
year, the budget did not hike indirect tax rates. With expectations largely built around
an excise duty hike going into the budget, the market did take it positively in general,
especially sectors that get impacted by excise duty hikes. ITC (as tobacco excise was
expected to increase dramatically) and auto stocks (which would have been impacted
by the excise increases as well) rallied. Some of the banks and infrastructure stocks
have reacted positively owing to some policy push on infrastructure and/or the optically
low government borrowing number put out by the finance minister.
Conclusion — the budget is neutral to negative at best: We think that with this
budget the government has effectively projected a tidy house by under-provisioning for
expenditures and leaving itself very little room to manoeuvre should revenue buoyancy
not pan out as expected or the rise in commodity prices breach threshold expectations.
In addition, the budget does not make major strides towards reforms either. Even
though we are not fully convinced about the government’s ability to meet its budgeted
expenditure targets, we believe that fiscal slippages might not go much beyond what
the market was expecting in terms of borrowings before the budget.
Our fundamental market concerns remain: We are not convinced that this budget,
as presented, will go far in addressing our immediate concerns on headwinds facing
the market — stubbornly high inflation, weakening growth momentum, a sputtering
capex cycle, elevated interest rates amidst tight liquidity and headwinds to corporate
earnings (although no hike in indirect tax rates is a positive for the corporate sector on
an overall basis as compared to expectations pre-budget).
Valuation Methodologies and Risks
Mahindra & Mahindra (MM IN)
Valuation Methodology. We value MM at INR803/share (from INR892/share), based
on a sum-of-the-parts (SOTP) methodology (unchanged). We value the standalone
auto business at 12x FY13F EPS (ex-subsidiary dividends) at INR615/share. We value
investments at INR188/share, after a 20% holding discount. Our previous valuation
was based on SOTP methodology with a 13x multiple on the average of FY12F and
FY13F EPS of INR51.20, and INR226 for investments. We have lowered our multiple
to factor in the higher risk to volume growth from increased interest costs and a
possible rise in either diesel prices or excise duty on diesel vehicles.
Key risks:
Acquisition of Ssangyong Motors: MM is planning to complete its acquisition of
Ssangyong Motors, Korea, by March 2011 (announced in August 2010). The fact that
it is not a free cashflow positive company will likely pose a risk to MM’s cashflows. We
are awaiting a financial plan from Mahindra & Mahindra before incorporating this
acquisition into our estimates. Below-normal rainfall in 2011: We have assumed a
scenario of normal rainfall in 2011. However, if rainfall is significantly below normal, it
could have a material impact on our volume estimates. Excise duty increases: We
have assumed that the excise duty will not be increased from the current 10%.
However, if it is raised further, it could have a materially negative impact on our margin
estimates, as the company may not be able to pass through the increases in excise
duty to tractor components.
Tata Steel (TATA IN)
Valuation Methodology. We value TATA Steel at INR846, with its domestic business
contributing INR753/share at 10x FY12F standalone EPS of INR75.30. We have
valued Corus South East Asia business at 5x FY12F EV/EBITDA. TATA Steel’s stake
in Riversdale contributes INR44/share to our price target based on current market cap
of the company.
Key risks:
1) Weak steel prices; 2) further deterioration in European economies, and; 3) raw
material prices rising significantly.
Pantaloon retail India (PF IN)
Valuation Methodology. We value the core business at INR610/share. We value all
the subsidiaries and support businesses at 1x capital employed. The combined value
for all the other businesses stands at INR74/share. After deducting net debt of
INR131/share, our price target comes to INR553.
Key risks:
The retail sector is a leveraged play on the macro fundamentals in the country. Any
downward trend on the macro front presents a downside risk to our numbers.
Cairn India (CAIR IN)
Valuation Methodology. We value Cairn India on an SOTP basis combining NAV and
DCF. We calculate the NAV of its key fields Mangala, Bhagyam and Aishwariya (under
development) and Rageshwari & Saraswati (FDP approved) using a discounted
cashflow (DCF) methodology. Our NAV of MBA and R&S field is INR276/share. The
Ravva and Cambay blocks are valued at INR7/share and INR2/share, respectively. We
value Cairn's 10% share in the 2P reserves in KG-DWN-98/2 block at a conservative
US$6/boe. We value recoverable resources (140mmboe now) in other 20 fields at
US$6/boe and prospective resources of 1.76bboe (net of recoverable resources) at
US$1/boe. We also assign a value of US$6/boe to exploration upsides (prospective
recoverable resources of 250mmboe — Cairn’s share of 175mmboe). Our SOTP
based NAV for Cairn is INR369/share. Our PT for Cairn India is INR370.
Key risks:
Delays in ramp-up of production; lower oil prices and higher discounts and higher cess
than our assumptions.
HPCL (HPCL IN)
Valuation Methodology. Our 12-month price target of INR270 is based on 0.8x the
stock’s P/BV per share for FY12F.
Key risks:
The key upside valuation risk is a significant change in the government policy on fixing
retail prices. Complete deregulation would be a big positive in the long term and could
lead to a re-rating of the stock. Even partial deregulation, but with a clear policy on
sharing of any under-recoveries, would also be positive for HPCL. A significant and
sustained decline in global oil prices would also be a positive, since losses on retail
fuels decline sharply at low oil prices. Also, refining margins that are higher than our
estimates would be positive for HPCL.
Ambuja Cement (ACEM IN)
Valuation Methodology. We value Ambuja Cement on an EV/IC multiple based
valuation technique using our average ROCE forecasts for the next three years.
Key risks:
1) Better-than-expected volume growth in CY11F on the back of an overall pick-up in
demand in the sector would put our earnings estimates at risk; 2) Stronger-thanexpected realisations in the company’s core markets (north India) would result in better
profitability for Ambuja Cement.
Adani Pow er (ADANI IN)
Valuation Methodology. We deploy FCFE-based methodology to value operational /
under construction / reasonable likelihood power generation projects of the company.
In order to capture the risk of a power project from conception to commissioning, we
adjust the FCFE value of the projects for ‘milestone discounts’ (risk weights assigned
to the non-achievement of six key milestones we identify for various types of projects).
Key assumption of our FCFE model is 13% cost of equity.
Key risks:
Upside risks: 1) increase in tariff/delay in commencement date of 1000MW PPA with
GUVNL; and 2) milestone achievements, especially related to fuel security and off-take
arrangement. Downside risks: 1) lower-than expected merchant tariff realisation; and 2)
lower GCV/higher price of imported coal from Adani Enterprises Ltd (AEL).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
~ A c tio n
On an overall basis, we view the budget as a non-event and neutral to negative at
best. The budget was not overly populist and the government achieved fiscal
consolidation, on paper at least, by under-provisioning for expenditures, especially
subsidies. In terms of structural reforms, the budget did not achieve much.
a C a ta ly s ts
With expectations largely built around an excise duty hike going into the budget, the
market did take the absence of a hike in universal excise duties as positive in
general, especially for sectors that get impacted by excise duty hikes.
A n c ho r th e m e s
We remain cautious on the market, underpinned by our concerns on stubbornly
high inflation, weakening growth momentum, a sputtering capex cycle, elevated
interest rates amidst tight liquidity and headwinds to corporate earnings.
Budget 2011 — a non-event
c Neutral to negative at best; expenditures under-provisioned
We think that with this budget the government has effectively projected a tidy
house by under-provisioning for expenditures and leaving itself very little room to
manoeuvre should revenue buoyancy not pan out as expected or the rise in
commodity prices breach threshold expectations. We are not fully convinced about
the government’s ability to meet its budgeted expenditure targets.
d No major reforms announced
In terms of structural reforms, the budget did not achieve much. Expectations of
the opening up of FDI for insurance or multi-brand retail, or a significantly higher
thrust on infrastructure were largely not met. In any case, the reform process does
not necessarily have to be part of the budget and can be undertaken separately.
e No hike in universal excise duty
With expectations largely built around an excise duty hike going into the budget,
the market took the lack of a hike as positive in general, especially in sectors that
get impacted by excise duty hikes. ITC (as the tobacco excise was expected to
increase dramatically) and auto stocks (which would have been impacted by the
excise increases as well) rallied. Some of the banks and infrastructure stocks have
reacted positively owing to some policy push on infrastructure and/or the
seemingly low government borrowing number put out by the finance minister.
f Market concerns remain
We are not convinced that this budget, as presented, will go far in addressing our
immediate concerns on headwinds facing the market — stubbornly high inflation,
weakening growth momentum, a sputtering capex cycle, elevated interest rates
amidst tight liquidity and headwinds to corporate earnings (although the lack of a
hike in indirect tax rates is a positive for the corporate sector on an overall basis as
compared to expectations pre-budget)
Budget 2011 — a non-event
Fiscal consolidation achieved through under-provisioning of expenditures: The
FY12 budget was essentially a statement of central government finances without any
major reform impetus. For those looking for structural changes in policy from the
budget, it likely comes as a disappointment. From the perspective of numbers, the
budget achieves significant fiscal consolidation — FY12 deficit budgeted at 4.6% of
GDP, a significant improvement compared to 5.1%, based on revised estimates for
FY11 — but only on paper, we think. A closer look at the numbers reveals that the
fiscal consolidation has been achieved with rather aggressive assumptions about
government expenditure and, therefore, the credibility of fiscal numbers is rather low,
in our view.
Overall, no major reforms were announced: In terms of structural reforms, the
budget did not achieve much. Expectations of the opening up of FDI for insurance or
multi-brand retail, or a significantly higher thrust on infrastructure were largely not met.
In any case, the reform process does not necessarily have to be part of the budget and
can be undertaken separately. The budget paid lip service to agricultural sector
reforms. The budget did not give us reason enough to believe that economy-wide
supply-side constraints will ease enough to change dynamics of food price inflation in
the near-term.
Market borrowing below expectations, but would likely overshoot: More
importantly, the budget surprised positively on the fiscal deficit and government’s
projected market borrowing. However, we think that these numbers are underpinned
by under-provisioning on the expenditure side, especially for oil subsidies. We expect
the government to revise upwards its projected FY12 subsidy bill through the course of
the year in light of the currently elevated commodity and oil prices.
Budgeted expenditure is not overly populist: It was clear heading into the budget
that the government had limited spending headroom given the pressure on
expenditures from the rising subsidy bill, the absence of significant one-off revenues
and the path of fiscal consolidation dictated by elevated inflationary pressures. Indeed,
the government seems to have reined in its expenditure by budgeting a lower-thanexpected 3.4% increase in total expenditure on the back of a 4.1% increase in revenue
expenditure and a 1.4% decline in total capital expenditure (planned capital outlay has
increased about 23%).
While interest payments and defence expenditure have remained sticky, subsidies,
non-plan expenditure on economic and social services — the previous year’s figures
include Sixth Pay Commission arrears — and non-plan capital expenditures
(investment) have been cut significantly. Expenditure on the flagship rural employment
scheme has also remained flat, although with wages in the scheme now linked to CPI
inflation we expect upside risk to the budgeted figure. Ditto for the subsidy bill.
No hike in excise duties — maintained status quo, but a positive for the
corporate sector vs expectations: With limited flexibility on expenses it was widely
expected (including by us) that the government would resort to hiking excise duty rates
to augment revenues. With the GST and DTC implementation pushed out by another
year, the budget did not hike indirect tax rates. With expectations largely built around
an excise duty hike going into the budget, the market did take it positively in general,
especially sectors that get impacted by excise duty hikes. ITC (as tobacco excise was
expected to increase dramatically) and auto stocks (which would have been impacted
by the excise increases as well) rallied. Some of the banks and infrastructure stocks
have reacted positively owing to some policy push on infrastructure and/or the optically
low government borrowing number put out by the finance minister.
Conclusion — the budget is neutral to negative at best: We think that with this
budget the government has effectively projected a tidy house by under-provisioning for
expenditures and leaving itself very little room to manoeuvre should revenue buoyancy
not pan out as expected or the rise in commodity prices breach threshold expectations.
In addition, the budget does not make major strides towards reforms either. Even
though we are not fully convinced about the government’s ability to meet its budgeted
expenditure targets, we believe that fiscal slippages might not go much beyond what
the market was expecting in terms of borrowings before the budget.
Our fundamental market concerns remain: We are not convinced that this budget,
as presented, will go far in addressing our immediate concerns on headwinds facing
the market — stubbornly high inflation, weakening growth momentum, a sputtering
capex cycle, elevated interest rates amidst tight liquidity and headwinds to corporate
earnings (although no hike in indirect tax rates is a positive for the corporate sector on
an overall basis as compared to expectations pre-budget).
Valuation Methodologies and Risks
Mahindra & Mahindra (MM IN)
Valuation Methodology. We value MM at INR803/share (from INR892/share), based
on a sum-of-the-parts (SOTP) methodology (unchanged). We value the standalone
auto business at 12x FY13F EPS (ex-subsidiary dividends) at INR615/share. We value
investments at INR188/share, after a 20% holding discount. Our previous valuation
was based on SOTP methodology with a 13x multiple on the average of FY12F and
FY13F EPS of INR51.20, and INR226 for investments. We have lowered our multiple
to factor in the higher risk to volume growth from increased interest costs and a
possible rise in either diesel prices or excise duty on diesel vehicles.
Key risks:
Acquisition of Ssangyong Motors: MM is planning to complete its acquisition of
Ssangyong Motors, Korea, by March 2011 (announced in August 2010). The fact that
it is not a free cashflow positive company will likely pose a risk to MM’s cashflows. We
are awaiting a financial plan from Mahindra & Mahindra before incorporating this
acquisition into our estimates. Below-normal rainfall in 2011: We have assumed a
scenario of normal rainfall in 2011. However, if rainfall is significantly below normal, it
could have a material impact on our volume estimates. Excise duty increases: We
have assumed that the excise duty will not be increased from the current 10%.
However, if it is raised further, it could have a materially negative impact on our margin
estimates, as the company may not be able to pass through the increases in excise
duty to tractor components.
Tata Steel (TATA IN)
Valuation Methodology. We value TATA Steel at INR846, with its domestic business
contributing INR753/share at 10x FY12F standalone EPS of INR75.30. We have
valued Corus South East Asia business at 5x FY12F EV/EBITDA. TATA Steel’s stake
in Riversdale contributes INR44/share to our price target based on current market cap
of the company.
Key risks:
1) Weak steel prices; 2) further deterioration in European economies, and; 3) raw
material prices rising significantly.
Pantaloon retail India (PF IN)
Valuation Methodology. We value the core business at INR610/share. We value all
the subsidiaries and support businesses at 1x capital employed. The combined value
for all the other businesses stands at INR74/share. After deducting net debt of
INR131/share, our price target comes to INR553.
Key risks:
The retail sector is a leveraged play on the macro fundamentals in the country. Any
downward trend on the macro front presents a downside risk to our numbers.
Cairn India (CAIR IN)
Valuation Methodology. We value Cairn India on an SOTP basis combining NAV and
DCF. We calculate the NAV of its key fields Mangala, Bhagyam and Aishwariya (under
development) and Rageshwari & Saraswati (FDP approved) using a discounted
cashflow (DCF) methodology. Our NAV of MBA and R&S field is INR276/share. The
Ravva and Cambay blocks are valued at INR7/share and INR2/share, respectively. We
value Cairn's 10% share in the 2P reserves in KG-DWN-98/2 block at a conservative
US$6/boe. We value recoverable resources (140mmboe now) in other 20 fields at
US$6/boe and prospective resources of 1.76bboe (net of recoverable resources) at
US$1/boe. We also assign a value of US$6/boe to exploration upsides (prospective
recoverable resources of 250mmboe — Cairn’s share of 175mmboe). Our SOTP
based NAV for Cairn is INR369/share. Our PT for Cairn India is INR370.
Key risks:
Delays in ramp-up of production; lower oil prices and higher discounts and higher cess
than our assumptions.
HPCL (HPCL IN)
Valuation Methodology. Our 12-month price target of INR270 is based on 0.8x the
stock’s P/BV per share for FY12F.
Key risks:
The key upside valuation risk is a significant change in the government policy on fixing
retail prices. Complete deregulation would be a big positive in the long term and could
lead to a re-rating of the stock. Even partial deregulation, but with a clear policy on
sharing of any under-recoveries, would also be positive for HPCL. A significant and
sustained decline in global oil prices would also be a positive, since losses on retail
fuels decline sharply at low oil prices. Also, refining margins that are higher than our
estimates would be positive for HPCL.
Ambuja Cement (ACEM IN)
Valuation Methodology. We value Ambuja Cement on an EV/IC multiple based
valuation technique using our average ROCE forecasts for the next three years.
Key risks:
1) Better-than-expected volume growth in CY11F on the back of an overall pick-up in
demand in the sector would put our earnings estimates at risk; 2) Stronger-thanexpected realisations in the company’s core markets (north India) would result in better
profitability for Ambuja Cement.
Adani Pow er (ADANI IN)
Valuation Methodology. We deploy FCFE-based methodology to value operational /
under construction / reasonable likelihood power generation projects of the company.
In order to capture the risk of a power project from conception to commissioning, we
adjust the FCFE value of the projects for ‘milestone discounts’ (risk weights assigned
to the non-achievement of six key milestones we identify for various types of projects).
Key assumption of our FCFE model is 13% cost of equity.
Key risks:
Upside risks: 1) increase in tariff/delay in commencement date of 1000MW PPA with
GUVNL; and 2) milestone achievements, especially related to fuel security and off-take
arrangement. Downside risks: 1) lower-than expected merchant tariff realisation; and 2)
lower GCV/higher price of imported coal from Adani Enterprises Ltd (AEL).
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