The Indian markets are expected to open flat to negative tracking negative cues from global markets. Asian stocks fell for a second day as U.S. service industries expanded less than forecast.
The US markets closed lower yesterday amongst a mixed set of data releases. The stocks came under pressure following the release of a report from the Institute for Supply Management showing an unexpected slowdown in the pace of growth in the service sector in the month of April. The ISM said its non-manufacturing index dropped to 53.5 in April from 56.0 in March. The markets largely shrugged off the release of a Labor Department report showing a bigger than expected drop in initial jobless claims in the week ended April 28th, with traders looking ahead to the release of the monthly jobs report on Friday.
Indian shares fell for a second consecutive session on Thursday, with heavyweight auto, metal and banking shares pacing the declines. The rupee hit a fresh fourmonth low of 53.45 against the dollar, as overseas investors awaited more clarity on how the government will resolve tax policy issues like GAAR.
Markets Today
The trend deciding level for the day is 17,181 / 5,195 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,242 – 17,332 / 5,210 – 5,232 levels. However, if NIFTY trades below 17,181 / 5,195 levels for the first half-an-hour of trade then it may correct up to 17,091 – 17,030 / 5,174 – 5,159 levels.
RBI releases Basel–3 Guidelines
What the guidelines entail: Reserve Bank of India (RBI) released the final guidelines regarding the Basel-3 norms yesterday. Amongst other details, the key point is that the banks will have to achieve a minimum Core Equity Tier-I capital adequacy (CET1) of 5% by FY2014, which in a staggered manner will then have to be increased to 8% by FY2018.
Immediate impact: For 27 banks under our coverage (comprising 85% of the sector), as on FY2012 none of them are estimated to be below the immediate threshold of 5% of CET1 to be achieved by FY2014. However, in our view by FY2014, almost all banks will look to maintain a minimum CET1 of at least 8% to be comfortably above the minimum requirements.
Based on this, a handful of banks including primarily a few small PSU banks like Central Bank, Vijaya Bank and UCO Bank would be the only ones that would be below the 8% threshold. This is because, for most other banks post the government infusion already announced, they are likely to be above 8% CET1 from FY2013 itself. Few others such as Corporation Bank, IOB, IDBI and United Bank would also be marginally below 8%. SBI is likely to be the only large-cap that may end up below 8% (unless their risk-weighted asset growth lags total asset growth). In case of the smaller banks, since they are trading well below 1x P/ABV, capital raising would result in dilution in EPS of 4% to 18% and in book value to the extent of 2% to 5% of our current estimates. In case of SBI, dilution would be book-accretive but EPS-dilutive.
Medium-term impact: The immediate impact is restricted to few smaller banks (of which, in case of the three most exposed banks vis. Central Bank, Vijaya Bank and UCO bank we have a Neutral / Reduce rating). However, in the medium-term in our view the Basel 3 guidelines imply significant capital shortage for the Indian Banking system. By the end of FY2018, as the minimum CET1 requirement itself moves to 8%, we believe most of the banks would look to maintain closer to 9- 10% CET1 capital adequacy.
At the same time, if we factor in 17% asset growth for the sector between FY2014- 18E and assume that average ROEs for the sector improve by 100-200bps, then based on retained earnings alone, CET1 is estimated to decline to 7.9% from the current 9.1% estimated for FY2012. Even if on average, the sector is to maintain 9% CET1 this implies a capital shortage of about Rs.1.4lakh cr and at 10% CET1, a shortage of Rs2.6lakh cr. This amounts to 14% and 27% of the sector’s networth, respectively, or an additional equity requirement of 2.5%-4.5% every year for the next 6 years.
New Bank licenses: In our view, the issue of more new bank licenses than the earlier anticipated 3-4, including to some large corporates, with each of them looking to invest about Rs.5,000-10,000cr of equity capital, was one of the key risks on the horizon for the banking sector. However, in light of Basel 3 requirements, even if the RBI does give more new bank licenses, in our view in light of the capital shortage in the banking sector post Basel 3 requirements, over a 6 year period, this would still not amount to a supply glut. On the contrary, even after the Rs.30,000cr-40,000cr of fresh capital, there would still be significant capital shortage which would have to be met by the incumbents.
Positive implications of capital shortage: For the sector as a whole, in our view, even after factoring in new bank licenses, we expect intensity of balance sheet competition to be low especially from the PSU banks. As a result, we continue to have a positive outlook on overall margins and ROEs from a one-year + perspective (notwithstanding any short-term re-pricing and asset quality related volatility in margins).
The benefit of this will be especially enjoyed by those banks which already have high capital adequacy (main beneficiaries include ICICI Bank and HDFC Bank) or which can raise equity at high book-accretive premiums (such as Axis Bank and Yes Bank). In our view, these banks will stand to benefit from high margins/ROAs/ROEs as well as market share gains from a medium-term perspective. Of these, taking into account valuations as well, we reiterate Axis Bank, ICICI Bank and Yes Bank as our top picks.
Reliance Industries fined Rs.6,600cr for lower KG-D6 output
The Oil Ministry has imposed a penalty of ~ Rs.6,600cr (US$1.2bn) on Reliance Industries (RIL) for the steep fall in gas output from the KG-D6 block. Production from KG-D6 had gradually declined to 35mmscmd in 4QFY2012 from 51mmscmd in 4QFY2011. The penalty for lower production stood at US$457mn and US$778mn for FY2011 and FY2012, respectively. The Oil Ministry stated that RIL had violated the production sharing contract (PSC) and wilfully drilled fewer wells than what it had committed in its approved plan, Amended Initial Development Plan (AIDP). However, RIL had stated earlier that unexpected geology had resulted in decline in gas production. We await further clarity on this issue from RIL. Until then, we maintain our Buy rating on the stock with a target price of Rs.872.
IRB’s stock plunges 11% as Chairman is being investigated in murder case
As per media reports, IRB’s Chairman, Virendra Mhaiskar, is one of the 10 people identified by the Central Bureau of Investigation (CBI) of being potentially involved in the killing of Satish Shetty (RTI activist) in 2010. The outbreak of this news led to a decline in IRB’s stock by as much as 18%; however, the stock recovered and closed down by 11%.
As per the clarification given by the company to stock exchanges, the deceased RTI activist's brother had named various people, including Mr. Mhaiskar, as suspects. The Police Department had conducted an inquiry in the matter and given a clean chit to Mr. Mhaiskar. However, the deceased's brother was not happy with the investigation conducted by the department; and upon his petition, the state government had handed over the investigation to CBI. During the course of the investigation, CBI has, along with several other suspects, asked Mr. Mhaiskar and other two company officials to undergo a polygraph test.
Mr. Mhaiskar and the company’s officials have readily agreed to undergo the polygraph test since they are confident of their non-involvement in the matter. Fundamentally, we have a target price of Rs.228 for IRB. However, we believe that the stock could remain volatile until clarity emerges on this case. Thus, this event could remain an overhang on the stock in the near term.
Result Reviews
Marico
For 4QFY2012, Marico posted 22.9% yoy growth in its consolidated net sales to Rs.917cr, which was in-line with our estimates. Top-line growth was driven by volume growth across categories in the domestic business as well improvement in realizations. Marico’s international business also posted strong organic growth of 24% yoy. The company’s OPM stood at 12.3%, up 134bp on a yoy basis, aided by a decline in input costs. Net profit fell by 4% yoy to Rs.69.4cr as the company had exceptional gain of Rs.76cr in 4QFY11. We maintain our Neutral recommendation on the stock.
Aventis - (CMP Rs.2,138/TP: - /Upside: -)
Aventis reported a higher than expected sales growth, while the net profit came in below expectations. For the quarter, the company posted sales of Rs.323cr, a rise of 16.7% yoy. On the operating front, the Gross and Operating margins came in at 50.6% and 15.3% respectively. While the Gross margins were in line with expectations, the OPM’s came in higher than the expectations of 14.6%. However, in spite of the higher than expected improvement in the sales and OPM front, the net profit came in at Rs.40.1cr, V/s expectations of Rs.51.5cr, on account of higher than expected deprecations expenses during the quarter. Currently the stock is valued at 20.5xCY2013E earnings. We maintain a Neutral stance on the stock.
KEC International – (CMP: Rs.56/TP: Rs.73 /Upside: 31%)
KEC International (KEC) posted a strong set of numbers for 4QFY2012, exceeding our expectations. The company’s consolidated revenue grew strongly by 32.7% yoy to Rs.2,069cr (Rs.1,559cr), which was 8.8% higher than our estimate of Rs.1,902cr. Stellar growth was mainly due to strong execution in the international transmission business, delivering robust 68.7% yoy growth.
On the operating front, EBITDA margin saw a ~230bp yoy contraction to 8.2%, slightly better than our estimate of 8.0%. The company’s margin was primarily impacted by higher raw-material cost. Interest expense grew by 28.2% yoy to Rs.41cr on the back of higher interest rates. PAT declined by 5.3% yoy to Rs.74cr, 9.1% higher than our estimate of Rs.68.2cr and consensus estimate of Rs.62.9cr.
Order book at the end of the quarter stood at Rs.8,572cr, majorly aided by robust order inflows totaling Rs.1,800cr during the quarter. Strong order accretion since the past few quarters is mainly attributable to the company’s diversified business operations, with equal exposure to domestic and international markets.
At the CMP, the stock trades at cheap valuation of 4.6x FY2014E PE. Thus, we recommend Buy on the stock with a target price of Rs.73.
Automotive Axles (CMP: Rs.525/TP: - /Upside: -)
Automotive Axles (ATXL) reported modest 6.3% yoy (1% qoq) growth in net sales to Rs.296cr in 2QSY2012, which was in-line with growth in the medium and heavy commercial vehicle segment (up 5.5% yoy). EBITDA margin remained stable at 12.5% on stable commodity prices. As a result, EBITDA grew by 5.8% yoy to Rs.37cr. Led by higher other income (Rs.2cr as against Rs.0.1cr in 2QSY2011), net profit reported 4.6% yoy (down 2.5% qoq) growth to Rs.19cr. At Rs.525, we believe the stock is fairly valued at 9.3x its SY2013E earnings. We, therefore, maintain our Neutral rating on the stock.
Finolex Cables (CMP: Rs.34 / TP: Rs.60 / Upside: 78%)
Finolex Cables announced a strong set of numbers for 4QFY2012. The company’s net sales grew by 21.1% qoq and 12.1% yoy to Rs.605cr on the back of strong sales in the electrical segment. The electrical cables segment registered 39.5% qoq and 21.3% yoy growth in revenue to Rs.506cr. While the company’s other two segments – communication cables and copper rods division continued their poor run, witnessing a decline of 27.4% and 36.7% yoy in revenue, respectively. The company’s EBITDA increased by 45.9% yoy to Rs.58cr (Rs.40cr) on the back of higher revenue and margin expansion. EBITDA margin expanded by 223bp yoy and 136bp qoq to 9.6% on account of lower raw-material costs. Raw-material cost as a percentage of sales declined to 74.9% in 4QFY2012 compared to 80.2% in 4QFY2011. PAT increased by 139% yoy to Rs.45cr (Rs.19cr) on the back of margin expansion, lower forex loss, higher other income and tax adjustments. Other income increased by 130% yoy to Rs.9cr, while forex loss declined by 15.6% to Rs.10cr. Consequently, PAT margin increased by 391bp yoy to 7.4% (3.5%). We currently have a Buy recommendation on the stock. We may revise our estimates and target price post an interaction with management.
Result Previews
Bank of Baroda
Bank of Baroda is scheduled to announce its 4QFY2012 results. We expect the bank to report healthy net interest income growth of 7.3% yoy to Rs.2,804cr. Noninterest income is expected to grow higher by 14.7% yoy to Rs.957cr. While overall operating income growth is expected to come in at 9.1% yoy, a 12.1% yoy decline in operating expenses is expected to lead to an improvement in cost-to-income ratio to 35.1% from 43.6% in 4QFY2011. Provisioning expenses are expected to grow by 5.4% yoy, which coupled with expected tax expenses of Rs.521cr compared to Rs.61cr in 4QFY2011 would result in nearly flat yoy growth in net profit to Rs.1,297cr. At the CMP, the stock is trading at 1.1x FY2014E ABV. We maintain our Buy recommendation on the stock with a target price of Rs.943.
Corporation Bank
Corporation Bank is slated to announce its 4QFY2012 results. We expect net interest income of the bank to grow by healthy 17.8% yoy to Rs.897cr. Non-interest income is expected to decline by 3.3% yoy to Rs.474cr. While operating income is expected to grow by 9.6% yoy, operating expenses are expected to decline by 5.0% yoy to Rs.480cr, leading to healthy 19.4% growth in pre-provisioning profits to Rs.892cr. Provisioning expenses are expected to increase by 9.0% yoy. Net profit is expected to increase by 20.4% yoy to Rs.416cr. Currently, we have a Buy rating on the stock with a target price of Rs.508.
ITNL
We expect IL&FS Transportation Networks (ITNL) to post a weak set of numbers for the quarter on account of high base in 4QFY2011. The company’s revenue is expected to decline by 9.0% yoy to Rs.1,507cr. We expect the company to register flat EBITDAM of 24.8%. Further, on the back of high interest cost, which is expected to come in at Rs.200cr, we expect ITNL’s earnings to decline by 30.1% yoy to Rs.111.3cr. We recommend Buy on the stock with a target price of Rs.265.
Economic and Political News
- Oil Ministry disallows US$1.4bn cost recovery by RIL from KG-D6
- Government to infuse Rs.30,000cr in Air India over nine years
- Mobile operators add 8mn users in March 2012
- Orissa government mulls cap on iron ore output
Corporate News
- Dr. Reddy's gets U.S. FDA nod for osteoporosis drug
- Cipla slashes cancer drug prices by up to 76%
- Bosch to invest Rs.300cr on capacity expansion
- Pantaloon raises Rs.200cr from Bennett Coleman
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