Feeding the Dragon: Why China's Credit System Looks Vulnerable

Feeding the Dragon: Why China's Credit System Looks Vulnerable

Edward Chancellor and Mike Monnelly - Published 22/01/2013

The conventional view is that China’s economy has recently experienced a "soft landing" and is now poised for take-off. In this white paper, GMO’s Edward Chancellor and Mike Monnelly tell a rather different story, namely that the Chinese credit system is displaying many of the indicators associated with rising financial instability – most notably, in the explosive growth of shadow banking instruments. As nonbank credit expands, "Red Capitalism" – that is, the ability of Beijing to control domestic credit for public policy purposes - is facing an existential threat.

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link
https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIA6KcUdqlSIwIXyKFLDu0ahgi%2fVwwPhMBjQBiRm%2bRLnDmOmauuxY3ieIGb5rFygoEWoFXDEs8Gu%2bAyctYJBUNhP4Y3avDPBk7WUGH2FqmGe9A%3d%3d

Coal India -Price Pooling – ‘In-principle’ Approval  :: Citi Research

Coal India (COAL.BO)
Alert: Price Pooling – ‘In-principle’ Approval
 In-principle approval — According to press reports (Economic Times, 6 Feb), the
government has given 'in-principle’ approval for pooling prices of imported and
domestic coal. The Ministries of Power and Coal are expected to revert to the CCEA
(Cabinet Committee on Economic Affairs) with specific provisions. Some of the
reported proposals made by the Coal Ministry are: 1) pooling should be applicable to
plants set up before 31 March 2009; 2) imported coal to be supplied to coastal plants.
 No clarity yet — Discussions around price pooling have been on-going since
June/July 2012 and it has been opposed by some states. We lack clarity on the
timing and around certain issues including: 1) impact on varying grades of coal; 2) if
imports would be directed to coastal plants only; 3) impact on plants commissioned
before and after 31 March 2009; 4) whether Coal India (CIL) will sign back-to-back
contracts with customers for imported coal (and the modalities). If CIL signs back-toback
contracts, we expect the impact of pooling on CIL to be largely neutral.
 CIL Board had approved imports on a cost-plus basis — CIL’s Board approved
the modified FSAs (Fuel Supply Agreements) in September 2012 to supply 80% of
the committed quantity – 65% domestic coal and 15% imported coal on a cost-plus
basis to power plants commissioned after 31 March 2009. Our analysis suggests
that if 80% of the power plants (issued Letters of Assurance) sign PPAs, CIL should
be able to supply between 65%-70% of the committed quantity. Link to our note:
Revised Penalty; Negligible Impact.
 Reiterate Buy — CIL is relatively insulated from global price trends, with improving
volumes (despatches up 8% yoy during April 2012 and January 2013 after two
years of muted growth) and odds favoring faster clearances. The stock trades at
10.4x FY14E PE (excl. OBR adj.) vs. Asian peers’ on 10x-13x. It has
underperformed the Sensex by 5% in the last three months. We reiterate our Buy
rating and Rs400 target price on Coal India.

Microsec: India Strategy Feb 2013

Dear Sir/Madam,

During January 2013, RBI cut Repo rate by 25bps as expected and CRR by 25bps, unexpected. Focus shifts on the Union Budget 2013-2014 with expectation of more reformist rather than populist budget. Feb-13 happens to be month of OFS as GOI got to meet the disinvestment targets to reduce the fiscal deficit. Market participation is focused on the primary market issuance (OFS) which may keep secondary market performance bit sideways during the month. 

After several reforms initiated last year, Government has partially deregulated diesel prices, which shall now be increased by 40-50 paisa per liter every month. This bodes well for Upstream companies like ONGC, Oil India. The deferment of GAAR till FY16 has come as a huge relief to the market and FII’s. Result season was a mixed bag with major Large caps giving good set of numbers compared to Midcaps.

We have seen strong earnings from private sector Banks like ICICI bank and  Axis Bank along with PSU such as PNB and Indian Bank and from Oil & Gas behemoth Reliance. We expect these companies to remain in the positive bias. Selective Infrastructure stocks seems good such as L&T, IL&FS Transportation for investment due to its strong order book and thrust on Infrastructure by Govt going forward.

Nifty EPS(E) for FY14 is currently is 438, Bloomberg consensus, down from 440 seen last month. On that basis we believe Nifty is likely to trade 13.25-13.80xFY14(E) earnings, which makes a range of 5800-6050 for February. ICICI Bank, LIC Housing, Bajaj Auto LT, Eros International, M&M, Pidilite, would remain a BUY.

Regards,

Team Microsec Research

Jindal Stainless - Q3FY13 ::Microsec

Dear Sir/Madam,

Jindal Stainless Ltd announced its Q3FY13 on 5^thFeb, 2013.

The company’s net sales arrived at INR2577 crore, which was up by 35.34% and 4.85% on YoY and QoQ basis. The EBITDA for the quarter was INR121 crore, which was down by 40% on YoY, but marginally up by 3% on QoQ basis. The company posted net loss of INR258 crore against a YoY net loss of INR110 crore and QoQ net loss of INR152 crore.

Jindal Stainless Ltd Q3FY13 Results
Particulars	Q3FY13A	Q3FY12A	Q2FY13A	YoY(%)	QoQ(%)
Net Sales	2576.55	1903.82	2457.29	35.34%	4.85%
Other Operating Income	7.72	6.45	6.57
Total Operating Income	2584.27	1910.27	2463.86
Total Expenditure	2463.57	1710.08	2346.69
EBITDA	120.7	200.19	117.17	-39.71%	3.01%
EBITDA Margin (%)	4.67%	10.48%	4.76%	(581)bps	8bps
Other Income	11.6	0.2	9.58
Operating Profit	132.3	200.39	126.75
Depreciation	170.77	109.82	171.37
PBIT	-38.47	90.57	-44.62
Interest	262.82	105.9	250.57
Exceptional Items	-79.67	-147.78	67.76
PBT	-380.96	-163.11	-227.43
Tax	-123.57	-52.78	-75.17
PAT	-257.39	-110.33	-152.26	NA	NA
PAT Margin (%)	-9.96%	-5.78%	-6.18%	NA	NA
Exl. EO	-79.67	-147.78	67.76
PAT Exl. EO	-177.72	37.45	-220.02	NA	NA
PAT Margin (%)	-6.88%	1.96%	-8.93%
Equity Capital	38.11	38.11	38.11
Face Value	2	2	2
No. of Outstanding shares	19.06	19.06	19.06
EPS	-13.51	-5.79	-7.99	NA	NA
Source: Company Data, Microsec Research. All data in INR crores unless specified.

Regards,

Team Microsec Research

Amba Insights

Strategy: Big regulatory changes => big share price impactsA proactive Government in India is usually a harbinger of major regulatory change. Such change, more often than not, significantly impacts share prices in large and heavily regulated sectors such as Banks and Oil & Gas. Add to that the impending implementation of GST and you have a potent cocktail of regulation-driven share price impacts across most large sectors in the Indian market. Winners from the impending regulatory changes: ONGC, OIL, HPCL, BPCL, RIL, Redington, Bajaj Auto, DLF, and Sobha Developers. Losers from the impending regulatory changes: Oriental Bank of Commerce, Central Bank, Indian Overseas Bank, Axis Bank, ICICI Bank, and Gujarat Gas. (Saurabh Mukherjea, CFA, +91 99877 85848) 

NTPC (NOT RATED): Subscribe to the OFS 
On 7 February, the Government of India is planning to divest a 9.5% stake in NTPC through the offer for sale (OFS) route to raise ~Rs120bn. The pricing is still unknown, but it is likely to be at a discount to yesterday’s closing price of Rs155 per share. At the CMP of Rs155, the stock is trading at 1.5x FY14 P/B consensus estimates, in line with its private sector peers. We believe NTPC should be trading at a premium to its peers and hence our advice would be to subscribe to the OFS. (Bhargav Buddhadev, +91 22 3043 3252) 
(click here for detailed note) 

NALCO (SELL): Nailed by the triple punch 
Nalco’s margins have collapsed in the past two years in the face of falling aluminium prices, rising costs & declining volumes. Whilst, in the near term, a sharp decline in aluminium prices appears unlikely, we believe valuations still remain unattractive in the face of low return ratios and an extremely volatile cost base. We reiterate SELL. 
(click here for detailed note) 

HDFC (SELL): HDFC finally cuts its PLR 
Yesterday, HDFC decreased its prime lending rate (PLR) by 10bps to 16.4% along with a similar 10bps reduction in the rates offered to its new customers. HDFC’s floating rate loans are linked to its PLR, and hence, its entire floating rate loan portfolio (~90%) would get repriced at rates that are lower by ~10bps. Whilst HDFC had reduced its lending rates for new customers by ~50bps over the past 12 months, this is the first time since June 2009 that HDFC has reduced rates for its old customers in line with the reduction in rates for its new customers. This makes us believe that going forward it would be difficult for HDFC to cut rates for new customers without cutting rates for old customers resulting in spread contraction for HDFC. (Pankaj Agarwal, CFA, +91 22 3043 3206) 


RESULTS EXPECTATION: 

Apollo Tyres: (BUY, 18% upside) 
Apollo Tyres will announce its 3QFY13 results today, followed by a conference call at 3:00pm IST. At the standalone level, we expect revenue growth of 8% YoY to be driven by volume growth of 5% and by the positive impact from the change in the price/product mix. We expect EBITDA margins to increase by 260bps YoY (73bps increase QoQ) to 10.6%, owing to softening rubber prices. For the international subsidiaries, we expect revenue growth of 5% YoY but EBITDA margin to decline by 155bps YoY (and down 68bps QoQ) due to lower winter tyre sales and slowdown in volumes in the South Africa business. We expect net earnings of Rs1,611mn for the quarter (up 26% YoY and 5% QoQ). (Analyst: Ashvin Shetty, +91 22 3043 3285) 

Manappuram Finance: (BUY, 21% upside) 
We expect net profit of Rs1.1bn in 3QFY13 (vs Rs1.1bn in 2QFY13 and Rs1.6bn in 3QFY12). Our expectation of a QoQ flat net profit in 3QFY13 is driven by our expectation of QoQ flat loan book growth and ~20bps dip in margins. Loan book growth and NIMs would be the key variables to watch for during the quarterly results, both of which have been under pressure due to various regulatory changes over the past year. (Pankaj Agarwal, CFA, +91 22 3043 3206) 

ANALYST NOTES:

Strategy: Big regulatory changes => big share price impacts A proactive Government in India is usually a harbinger of major regulatory change. Such change, more often than not, significantly impacts share prices in large and heavily regulated sectors such as Banks, Real Estate and Oil & Gas. Add to that the impending implementation of GST and you have a potent cocktail of regulation driven share price impacts across most large sectors in the Indian market. More details are provided in the inside pages of today's Insights.
Winners from impending reg changes: ONGC, OIL, HPCL, BPCL, RIL, Redington, Bajaj Auto, DLF and Sobha Developers.
Losers from impending reg changes: Oriental Bank of Commerce, Central Bank, Indian Overseas Bank, Axis Bank, ICICI Bank and Gujarat Gas. (Saurabh Mukherjea, CFA, +91 99877 85848) 

First signs of turnaround PNB :Karvy

First signs of turnaround
PNB numbers came in as a positive surprise. Slippages (net of inter‐quarter
recoveries) came in at 0.5% as against 6.2% during the last quarter. GNPA
has improved by 5bps on a sequential basis to 4.6%. Despite relatively
lower NPL provisions, provision coverage improved by 170bps on a
sequential basis to 56%. Cautious approach has lead to a muted growth in
balance sheet. NIMs are stable on a sequential basis to 3.5%.
 Bounce back in asset quality: After 6 consecutive quarters of
deterioration in gross as well as net NPA, we have seen first of
improvement. Incremental slippages (net of inter‐quarter recoveries) of
0.5% as against 6.2% during last quarter. Net restructuring book
increased by Rs25bn (SEB and Suzlon included) and now forms 10.2% of
loan book.
 Muted growth in balance sheet: On account of calibrated approach
adopted by the management, muted growth is seen in deposits (8%) and
advances (13%). Overseas and retail segment contributed to most of the
incremental growth. CASA has improved by 110bps sequentially to
36.9% on the back of sequential deceleration in bulk deposits.
 Stable NIMs: NIMs are stable on sequential basis; however, it has
deteriorated as against last year by 41bps to 3.5%. Despite reduction of
25bps in base rate, management has guided full year NIMs of 3.5%.
Outlook & Valuation
 At the CMP, the stock trades at 5.2x & 4.5x FY14E & FY15E earnings, and
at 1.0x & 0.9x P/ABV FY14E & FY15E, respectively. Based on 20%
discount to its historical mean valuation implying 1.0x P/ABV FY15E, we
reitrate our “BUY” recommendation on Punjab National Bank with
target price of Rs. 1,075 per share.

Dabur -Motilal Oswal research report

 Dabur's 3QFY13 results were largely in line with our estimates. Consol net
sales grew at 12.3% YoY to INR16.34b (est INR16.3b), EBITDA grew 19% YoY to
INR2.69b (est INR2.69b), while Adj. PAT was higher than est at INR2.1b (est
INR2.01b) due to higher-than-estimated other income and lower tax rate.
 Gross margin expanded 220bp to 51.2% due to softening in key input costs.
EBITDA margin expanded 90bp to 16.5% as ad expenses increased 80bp.
 Domestic sales grew 13.6% to INR11.9b, with underlying volume growth at
9.5%. Gross margin remained flat at 46.2%, while EBITDA margin contracted
50bp to 16.5% due to 60bp increase in ad spend. Steep increase in tax rate
(450bp) to 20.4% curtailed Adj PAT growth at 7.5% to INR1.5b.
 International business grew 9%, while organic business grew 22.4% (constant
currency growth at 16%). Reported growth is lower at 9% as Namaste business
was impacted by restructuring in Africa and re-branding in the US. Correction
in input costs led to significant gross margin expansion in international
business (gross margin up 860bp YoY in consolidated-standalone entity).
 Dabur's consistent volume growth is a reflection of its investments behind
brands and distribution. Recovery in shampoo, oral care and hair care is a key
positive, while deterioration in international business though disappointing,
was a one-off. We expect Dabur to get tailwind benefits from its recent
distribution expansion initiatives and estimate PAT CAGR of 22% for FY12-
15E, one of the best in our staples universe.
 Dabur trades at 23.8x FY14E and 20x FY15E EPS and has underperformed the
BSE FMCG index by 35% in the past 24 months. We expect the valuation gap
to narrow as a) volume growth sustains in 8-10% band driven by recovery in
core categories and b) margins improve led by international business division.
We value the stock at 24x PE (earlier 23x), roll over to FY15E and arrive at a
revised target price of INR156. Upgrade to Buy with a potential 20% upside.
Slowdown in rural FMCG growth and spike in input costs are key concerns.

Cipla (CIPL.BO) Inline 3Q; Raise TP to 405  :: Citi Research

Cipla (CIPL.BO)
Inline 3Q; Raise TP to 405
 Maintain Neutral — 3Q was broadly in line (a tad below consensus), with a higherthan-
expected effective tax rate (a trend seen across the sector) being the only
surprise. With contribution from Lexpro exclusivity tapering off, 3Q is reasonably
close to Cipla’s true, sustainable earnings / margins, in our view. We raise our TP to
Rs405 (Rs390 earlier) as we roll over to June’14E (March ’14E earlier). Lupin,
Wockhardt & Glenmark are our top picks in the sector.
 Key To Note — a) Dymista: supplies initiated to Meda, to ramp up gradually on pick
up in US sales & EU launch; b) Base biz EBIDTA margins to be in the c22% range,
with some upside from unique opportunities from time to time; c) Cipla Medpro offer:
no final decision yet in light of change in biz/market conditions & management; d)
looking for small-medium front ends in emerging markets (Turkey, Latam, etc.); e)
ANDAs: 76 approved (>60% marketed) & 28 pending (incl. five own filings).
 3Q Snapshot — Net profit (+26% YoY) was in line/6% lower vis-à-vis
Citi/consensus estimates on higher effective tax rate. Revenues (+18%) were
steady & EBIDTA margin normalized (23.8%, +154bps YoY, -708bps QoQ), as the
Lexapro exclusivity boost tapered off. RM/Sales improved (better mix) but was
offset by higher staff cost (new hires, annual bonus) & overheads. Forex gain
(Rs190m) gave a small boost.
 Exports Strong, India Muted — The momentum in formulation exports (+38%)
continued, aided by the weaker INR. India (+10%) was muted in line with most of
the market but Cipla expects to end the year with c15%+ growth. API exports
declined (-16%) on the high base of 3QFY12 (one-off supplies).
 Other Earnings Call Takeaways — a) Capex guidance: cRs6.7bn in FY13, Rs3-
4bn in FY14; b) Indore SEZ sales to pick up in 4Q; to end the year with Rs6bn
(Rs4bn in 9m) as supplies to US pick up; c) Forward contracts of US$210m; d)
Effective tax rate to remain c24-25% for the next 2-3 years; f) R&D spend to move
up: c5% of sales (vs. c4% earlier).

Jammu & Kashmir Bank: TP: INR1,675 Buy:: Motilal Oswal

Jammu and Kashmir Bank (JKBK) posted PAT growth of 36% YoY (7% QoQ) in
3QFY13 to INR2.9b. Core operating parameters were healthy, with NIM at 4.1%
(up 44bp YoY and 13bp QoQ), loan growth of 20% YoY (4% QoQ) and PCR of ~94%.
 While slippages were contained at INR1.1b (annualized slippage ratio of 1.5%),
negative surprise came from higher restructuring of INR7.3b (2% of overall
loans). The management mentioned that the restructuring was largely on
account of four large corporate accounts worth INR4.7b.
 While yield on loans declined 11bp QoQ to 12.6%, the decline in cost of funds
was sharper (down 26bp QoQ), and led to margin expansion (13bp QoQ) to
4.1%. Margins were 6% in the home state and 2.5% in states other than J&K.
 Loans grew 6% QoQ within J&K and 4.5% QoQ in other states. Overall loans
grew 20% YoY.
 CASA growth was strong at 7% QoQ and 15% YoY, led by 7% QoQ (17% YoY)
increase in SA deposits. CA deposits grew 10% QoQ (9% YoY). CASA ratio
improved to 39.4% v/s 38.2% in 2QFY13.
Valuation and view: JKBK continues to deliver healthy performance on business
growth and NIM. Some of the core operating parameters like CASA ratio of ~40%,
NIM of 4% with the lowest CD ratio of 62%, PCR of 94%+ and RoA/RoE of 1.5%+/
21%+ remain the best in the industry. While the sharp increase in restructured
loans came as a negative surprise, the management stated that these were
technical and no NPV hit was taken. Further, it does not expect significant
restructuring going forward, which provides some comfort. Maintain Buy.

Apollo Tyres 3QFY13 Result Update_LKP

Volumes decline, but rubber prices keep the bottomline afloat

Apollo’s standalone net sales de-grew by 3% yoy and 11% qoq to Rs 20.4bn on the back of weak OEM volumes and flat realizations. Softness in the domestic CV industry which dropped approximately 40% in December led to disappointment at the topline. Apollo’s volumes declined by 10% yoy in the quarter while its prices fell by 1% due to slightly adverse product mix. The company has gained market share despite the industry wide fall. At the EBITDA levels, profits grew by 22% yoy to Rs2.05 bn and EBITDA margins firmed up to 10.1% from 8% yoy and 9.9% qoq as natural rubber prices moved down in the range of Rs160-170/kg. Other expenses increased as a % of sales to 13.6% from 10.8% qoq and 10.5% yoy as the company initiated an ad campaign on TV which led to higher ad spend. Other income moved up to Rs191 mn as it included a one-off insurance receipt of Rs80 mn. Depreciation remained flattish since last three quarters at Rs547.95 mn. Interest costs went down to Rs 668mn by 3.3% qoq and 3% up yoy, while tax rate was at 30.4%.

Outlook and valuation

Apollo reported Q3 numbers above our expectations mainly on the profitability front. Top line declined due to OEM squeeze at the TBR segment. The TBR industry saw a steep fall in December which led to a below than expected results at the top line. However, at the bottom-line, a fall in natural rubber prices, successful European margin performance, and downtrend in capex cycle, production cuts at domestic plants, reduction in net debt and turning of South African operation in positive territory at the operating levels more than offset the top line underperformance. Going forward, in the domestic operations, the company may continue production cuts and slow ramp up at Chennai plant if CV industry does not improve thus cutting unnecessary costs.

However, with interest rate cycle showing some signs of moving downwards and economic revival expected to follow, we believe TBR segment will see a reversal thus boosting Apollo’s performance. Furthermore, the tyre industry is seeing a revival in replacement cycle from Q3, which may help Apollo to offset any kind dramatic fall in the OEM TBR segment(62% revenues of Apollo comes from replacement segment). European business is expected to continue with a good margin performance while South Africa is expected to fight it out well with the industry issues there. We are slightly increasing our FY 13/14E estimates on falling net debt, operational out performance and reversal in capex cycle. We are upgrading the target price from Rs99 to Rs 104 (@6x times consol earnings). Maintain BUY.

LKP Research