Buy NHPC :2Q not as good as expected ::BNP Paribas

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2Q not as good as expected

RESULTS REVIEW
Sales beat, but EPS misses on higher costs and taxes
NHPC’s 2QFY12 standalone adjusted sales of INR17.2b was 5.6% above our
estimate. However adjusted EBITDA of INR11.9b missed our estimate by
7.5% on higher operating expenses. Recurring EPS of INR0.62 missed our
estimate by 11.7% on EBITDA miss and a higher effective tax rate (24.8%
vs our expectation of 20%).
SUMMARY
NHPC allowed to pass on cess on water as expected
The Jammu and Kashmir (J&K) government had imposed a tax on water
consumed by NHPC’s hydro power plants located in J&K. As we expected,
the CERC allowed NHPC to pass on this water tax to the consumers.
Consequently, in 2QFY12, NHPC recorded sales of INR4.64b pertaining to
1HY12 water taxes it had already expensed.
VALUATION
Retain BUY with TP of INR30
We arrive at our P/BV-based TP of INR30 by splitting NHPC’s FY12E BVPS
of INR22.7 into: 1) regulated equity of INR7.7/share, which we value at 2x
P/BV; and 2) INR15/share of equity invested in Capital Work in Progress
(CWIP) and other items, which we value at 1x. Near-term catalysts
include capacity addition of 678MW (13% of existing capacity) over the
next six months, which should rerate the stock.

NIFTY up 6% wow on dovish statement from RBI & positive measures from the EU summit Goldman Sachs,

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NIFTY up 6% wow on dovish statement from RBI & positive measures from the EU summit
 CNX Energy rose 6.4% wow while Public Sector banks (-1.0%) underperformed broader indices.
 Ytd foreign outflows of US$366 mn and domestic inflows of US$5.3 bn as of close of Oct 24, 2011.
 The RBI hiked key policy rates by 25bp and freed up the savings bank deposit rate with immediate effect.
 It revised down its FY12 GDP growth forecast to 7.6% from 8% and expects inflation to moderate to 7% by Mar-2012.
Overview
NIFTY climbed 6.2% in a short trading week with
encouraging macro news flow. After delivering
the 13
th
 hike in policy rates since Mar 2010 (25
bps, in line with consensus & GS expectations),
the RBI struck a relatively dovish tone in its
statement. The EU summit produced a package
that included a leveraged EFSF to provide more
than EUR 1 tn, “soft” restructuring of Greek debt
(including a “haircut” of 50%), and a new
insurance scheme to allow the EFSF to guarantee
new debt issued by a peripheral sovereign.
NIFTY price performance
Source: NSE, DataStream, GS Global ECS Research.
Foreign and domestic flows
Foreign investors sold US$93 mn wow (as of Oct
24, 2011).
Earnings sentiment
MSCI India Consumer Discretionary saw the
strongest EPS sentiment (15% wow) while
Industrials had the weakest EPS sentiment (-20%
wow).
Commodities
Commodities surged 5.3% wow, led by Copper
(+8.2%) and Energy (+8.6%).
2QFY12 earnings results (Ex 23-24)
Wipro, ICICI Bank(Oct 31); ACC (Nov 01)
Economic data releases
Sep Trade (Nov 01)

RIL may bid for US refiner Valero :: BofA Merrill Lynch

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Reliance Industries Ltd.
   
RIL may bid for US refiner
Valero
„Possible RIL bid for largest independent US refiner Valero?
According to press speculation, RIL may bid for US refiner Valero (see Valero
Energy Corp., 27 October 2011). Valero is the largest independent US refiner with
2.8m b/d of refining capacity (Nelson complexity of 11.3). Valero can process
heavier/sourer, cheaper crudes, which means lower earnings volatility vis-à-vis
peers. A bid for Valero at US$48/share (as per some press reports) appears
aggressive but would be earnings accretive if Valero’s profit is over US$2.2bn in our
opinion. At BofAML’s estimate of US$3.1bn, a Valero acquisition would boost FY13
earnings by 8-19%. Retain Buy.
Acquisition EPS accretive if Valero profit over US$2.2bn
RIL’s net debt is US$3.5bn (gross cash US$15.6bn) and is set to turn net cash
assuming no big acquisition by end of FY12. RIL has been looking for acquisitions
and had even bid for LyondellBasell in 2009. We believe RIL could bid for Valero.
Some reports suggest RIL’s bid may be at US$48/share (82% higher than Oct 27
closing of US$26.2) while BofAML PO for Valero is US$36. Acquiring a 100%
stake in Valero at US$48/share would cost US$27.5bn (net debt US$4,6bn).
Valero’s acquisition would be earnings accretive if Valero's FY13 net profit is
higher than US$2.2bn. BofAML net profit for 2012 is US$3.1bn and consensus is
US$2.5bn. At US$48/share its 2011-12 PE is 9.0-9.6x and EV/EBITDA 4.7-5.4x.
US and Valero’s refining outlook the key
Paying US$48/share for Valero would mean 65% higher valuation per complex
barrel vis-à-vis RIL’s new refinery built in 2009. We believe some premium is
justified if Valero’s stronger GRM in 2Q 2011 (US$11.6/bbl vis-à-vis RIL’s
US$10.3/bbl) is sustainable. 17% of Valero’s throughput in US mid-continent gains
from weak WTI prices but a key question is how long are these gains sustainable?

IRB Infrastructure Developers - Management meeting takeaways ::UBS

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UBS Investment Research
IRB Infrastructure Developers
M anagement meeting takeaways
􀂄 Event: We had met the CMD of IRB
Key takeaways from the meeting are- 1) Internal accruals would be sufficient for
funding needs and no capital raising is required, 2) construction business margins
are likely to be 18-20% at the EBITDA level (we estimate ~18%) and 3) IRB will
continue to focus on the road sector (primarily toll-based projects) and aims to
have a ~10% market share (funding through internal accruals, re-levering of
existing projects and stake sale at project level rather than dilution at parent).
􀂄 Impact: NHAI should be able to award 6,000km+ over next few years
Management believes that- 1) NHAI should be able to award 6,000-6,500km of
road projects this year as well as next year (please also refer our note Asia On The
Ground: India Infrastructure- Near-term momentum in roads; railways to pick up
next year dated 22 September 2011), 2) over-bidding in the sector is likely to fade
away soon and has been due to lack of momentum in other infra sectors and 3)
traffic growth should be about 0.8-1x of real GDP growth rates at a portfolio level.
􀂄 Action: Saving in Surat-Dahisar project cost; Kolhapur to commence soon
Savings of about 10% have been achieved in the Surat-Dahisar project cost. Toll
notification for the Kolhapur project is expected soon. The company also
highlighted that the value of its land bank has appreciated significantly (we value it
at book), though there are no development plans in the near-term.
􀂄 Valuation: Reiterate Buy
IRB has earnings visibility, sectoral momentum and has an inflation hedge (both
Surat-Dahisar/Bharuch-Surat toll-rates increase by ~10% this year).

Hero Motocorp: Pricing power back, but will it last? ::CLSA

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Pricing power back, but will it last?
Hero Motocorp’s (HMCL) 2Q results highlighted the company’s improved
pricing power with a 220 bps QoQ expansion in gross margins, which drove a
19% YoY growth in net profit – 6% ahead of our estimates. With robust
industry growth, no incremental competition and declining commodity prices,
margins could expand further in 2H. Our concern though is on the FY13-14
period when we believe that an aggressive HMSI poses risks to both market
share and margins for HMCL. We upgrade FY12 EPS by 8% but FY13-14 EPS
by only a modest 2-3%. At 15x FY13 P/E, we believe that the near-term
positives are there in the price but the 12m risks are not. We maintain U-PF
with a target price of Rs1925.
Strong 2Q results – 6% above estimates
HMCL reported 2Q EBITDA at Rs9.2bn – up 12% QoQ and 10% above estimates.
While top-line and ASPs were inline with expectations, RM/Sales declined 220 bps
QoQ and drove the EBITDA surprise. Raw material costs declined 1.4% QoQ on a
per vehicle basis as HMCL benefited from lower commodity prices, particularly
base metals. This, together with 1% QoQ higher ASPs due to a small price hike in
end-1Q, led to the drop in RM/Sales. Higher amortization of the fixed royalty
payment to Honda due to Yen appreciation ate into part of the surprise due to
which the net profit beat at 6% was lower than the EBITDA beat of 10%.
Pricing power is back…
With strong industry growth, no incremental competition and stable market share,
HMCL seems to have regained some of its lost pricing power. These conditions are
likely to prevail in 2H and could have the added benefit of lower commodity prices
as well. Gross margins could expand further in 2H as well.
…but will it last?
HMSI is expanding its capacity to 2.8mn units by end-FY12 from 1.6mn in FY11
and further to 4mn units by end-FY13. This is being accompanied by furious
network expansion as well. We anticipate multiple bike launches from HMSI in the
FY13-14 period (most likely in the executive 100cc space) and see risk to HMCL’s
market share and margins beyond FY12.
Near-term positives in the price but 12m risks are not; maintain U-PF
Improved visibility of strong 2H results is likely to boost HMCL’s defensive
credentials in an uncertain market in the near-term. However, valuations at 16.6x
FY12 and 15.0x FY13 P/E don’t leave any room for absolute returns. Investors
having a 3-6m horizon could continue to stay invested in HMCL purely as a
defensive but we would advise 12m horizon investors to stay away at current
levels. We maintain U-PF with a target price of Rs1925

Fighting the battle against debt:: Business Line,

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Akash was an IT employee who was well settled in his career. With a comfortable take-home pay, he indulged in a premium car and apartment. He invested all his savings in stocks. But then, the stock market started tumbling. To make matters worse, Akash was laid off when his company was brought over.

DEBT COUNSELLING

How did Akash cope? He approached a debt counselling centre. They showed him the right way to manage his finances besides mediating between him and his bank. Based on the debt counsellor's advice, his wife obtained a loan against ancestral property bequeathed to her. This was used to pay a portion of Akash's home loan and another portion of his car loan as part prepayment. He also obtained written consent from his bank allowing him to resume repaying his loan once he got a job. Yes, banks do oblige in such cases, if you manage to repay most or at least a part of the money. Six months later, Akash managed to land a job with a reasonably good pay. He resumed his EMI payments, and, as banks were slashing interest rates, he negotiated with his bank for a lower interest rate.

SIMPLE RULES

Agreed, luck was on his side. However, he started following simple but smart methods, which you can too, to avert a future disaster.

- He put aside three months of his pay into a separate account meant to serve as an emergency fund with an aim to add three more months of pay.

- He ensured that his current EMI did not exceed 40 per cent of his current income. He managed to prepay his home loan at regular intervals to help reduce the debt period.

- He kept his monthly expenses, including loans, within 60 per cent of his income and put aside the rest as savings and investments.

- When investing, he took care to diversify portfolio and not stick to equities alone.

COPING WITH DEBT

The suggestions above help you manage debt. But should find yourself stuck in debt and don't know how to cope, here are a few suggestions.

- Negotiate with your bank to try lowering your interest rate. If it's a credit card loan that's bothering you, convert it into a personal loan. Interest rates will definitely be lower than the credit card interest rate.

- Calculate your net worth and see if any of your investments could help you prepay a part of your loans.

- Make a contingency plan for the immediate future. Talk to your bank along with your debt counsellors. Explain your situation and see if you can resume your loan at a later date, but do make an effort to prepay some amount.

- In case you are suffering from a lay off, and if you're in a double-income household, see if your spouse can support you in the short term before you land a job.

- Manage your current finances judiciously to battle through the current situation and emerge wiser.

Deciding on lifecycle and target-date funds::Business Line,

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Lifecycle funds and Target-date funds form an important part of the market for retirement products. This article explains the difference between the two retirement funds and discusses the important features that investors should look for in target-date funds.

We have, in this column, discussed about the relevance of lifecycle fund and target-date fund as part of an investor's retirement portfolio. The question is: What features should these products offer to make them optimal retirement solution to investors?

This article explains the difference between traditional lifecycle funds and target-date funds. It then discusses the typical features of such funds and also suggests what asset management firms can offer to make the funds more attractive.

Lifecycle funds and target-date funds carry stocks and bonds in their portfolio. They primarily differ in their asset allocation policy. Lifecycle funds typically offer three variants based on the investors' risk tolerance levels — aggressive, moderate and conservative. The aggressive variant has higher allocation to equity while the conservative variant has higher allocation to bonds.

Suppose an investor aged 25 invests in the aggressive variant of the lifecycle fund, she will continue to have high exposure to equity till retirement date. It is generally true that risk tolerance level of a mass-affluent investor declines with age: this is not true for the rich, for risk tolerance is driven more by the level of wealth. But lifecycle funds are not sensitive to changes in an individual's risk tolerance level.

Target-date funds have an investment horizon. Such type of funds adopt an asset allocation policy that continually reduces equity exposure as the fund reaches the target retirement date. Target-date funds are sensitive to changes in risk tolerance level of individuals. The question is: What features should such funds offer to help investors achieve their retirement objectives?

GLIDE PATH

The process that a target-date fund adopts to reduce its equity exposure based on the investors' age and risk tolerance level is called the glide-path. It is the glide-path and the individual asset exposure that differentiates target-date funds.

The following features would be optimal for a retirement fund: One, the fund should have a closed-end structure. This spares the portfolio manager from holding cash to meet redemption requirements. Open-end funds will suffer from cash drag. This refers to the lower returns that an open-end fund may earn because returns earned on cash held for redemptions are typically lower than returns the fund can earn if it invests the cash in stocks or bonds.

Two, retirement funds should have optimal glide-path; for it is the optimal asset allocation policy that will drive portfolio returns. A target-date fund should typically change its asset allocation policy based on investors' age and risk tolerance. A fund that changes its asset allocation less frequently is likely to expose the investor to high risk.

Three, lifecycle and target-date funds are typically fund-of-funds. Such a structure suffers from high costs due to additional layer of fees. Retirement funds that directly invest in stocks and bonds are preferable, as the saving on fees could be substantial, given the long-investment horizon.

Asset management firms should pay close attention to glide-paths when offering target-date funds. Such funds should also offer a judicious mix of passive equity exposure and maturity-matched bonds. Passive exposure to equity will mitigate active risk on equity while maturity-matched bonds will remove market risk on bonds. Such a fund can form part of an investor's core retirement portfolio. Retirement funds can also offer complete solution by changing the investment composition at the target date to generate retirement income.