25 June 2013

India Financial Services Lower Risk Weights: Adding to the Sweet Spot for HDFC:: Morgan Stanley Research,

India Financial Services
Lower Risk Weights: Adding
to the Sweet Spot for HDFC
The RBI has lowered risk weights on certain
categories of individual housing loans: It also carved
out a new segment, ‘CRE – Residential Housing
(CRE-RH)’, within the commercial real estate sector.
Loans to this segment will carry lower risk weights and
standard asset provisioning. This will help release some
capital on existing loans for banks and lower capital
requirements on new loans. The benefit to HFCs,
especially HDFC, is likely to be much higher, if the NHB
follows up with similar regulations (we expect it to follow
the RBI).
Lenders with high exposure to medium / large ticket
home loans will benefit: The RBI has reduced risk
weights on individual housing loans > Rs2 mn and up to
Rs7.5 mn to 50% from 75%. It has also marginally
relaxed the loan to value (LTV) cap on these loans to
80% from 75% previously. Further, loans > Rs7.5 mn will
now attract a risk weight of 75% provided LTV is not
higher than 75% (the previous risk weight was 125%
irrespective of LTV).
This is a positive move given the appreciation in
property prices across the country. Private banks are
likely to benefit more than SOE banks given higher
exposure to medium / higher ticket loans. However,
HFCs, being mono-line lenders, will benefit more (once
the NHB follows up with similar norms).
Lenders to residential housing projects will also
benefit: Because loans to residential housing projects
are less risky and volatile, the RBI has carved out a
separate category, CRE-RH, within the commercial real
estate sector. Loans to this segment will attract a risk
weight of 75% and standard provisioning of 0.75% vs.
100% and 1% respectively for other CRE loans. CRE
exposure in the banking system is relatively limited
(~2.5% of system loans).
The key beneficiary will be HDFC: According to
management ~15% of loans will qualify as CRE-RH.

Credit-Suisse - Global Equity Strategy

Cyclicals: more to go for
In spite of recent cyclical outperformance, we continue to overweight cyclicals
(see Only a mild slowdown: become more cyclical, 17 May 2013) as:
■ The ratio of cyclicals to defensives should be c5% higher given the level of
IFO business expectations, and US macro momentum is still rising;
■ The ratio of cyclicals to defensives should be c20% higher given where the
market is; sector risk appetite, at 0.5σ above average, is still more
depressed than overall risk appetite (at 1.3σ above average);
■ Cyclical rallies almost always continue until cyclicals become overbought,
and for that to happen cyclicals have to be 5.5% higher);
■ The P/B of cyclicals relative to defensives is still below average.
Sector performance since mid-April has been led by cyclicals (the only
underperforming cyclicals were software and mining, while the only defensive
sector to outperform has been energy).
What performs best when ISM rises and there is a bear-steepening of the
yield curve? Semis, ad agencies, mining, cap goods, banks and luxury perform
the best. Tobacco, telecoms, drugs and utilities perform the worst. Retailing
comes out as being a slightly defensive sector.
Our preferred cyclicals continue to be: US corporate spend plays (focusing on
software, advertising agencies, high-end hotels), autos, airlines, UK domestic
cyclicals and US housing plays. Some of our preferred names are: ITV,
Kingfisher, Lufthansa, Assa Abloy, WPP and SAP. We are underweight US
utilities, telecoms and tobacco and European tobacco and food producers.
Screens: If bond yields continue to rise, then we want to focus on companies
with cyclicality, low financial leverage and positive earnings revisions, of which
the following are Outperform-rated: Atos, Taylor Wimpey and Ashtead. Equally,
we want to avoid defensive companies with high financial leverage (net debt to
EBITDA above 2x) with negative earnings momentum and which are expensive
on HOLT: United Utilities and Fresenius Medical Care.

India Financial Services Goodbye Restructuring : Morgan Stanley

RBI released final guidelines on loan restructuring after
considering the comments received to draft guidelines
issued in January 2013. The final guidelines, will make
restructuring redundant from April 2015 onwards
(except infrastructure). At the same time, the RBI has
been more lenient on projects involving changes in date
of completion (both infrastructure and other project
loans).
The salient features of the final guidelines are:
1) No regulatory forbearance on restructuring of
advances (except incase of non-operational
projects): Until now, on restructuring, a standard loan
retained its asset classification and NPAs were allowed
not to deteriorate further in asset classification. The RBI
has now moved to the international practice of
classifying a restructured asset as an impairment, with
effect from April 1, 2015. It is unclear whether old
restructured loans will become NPLs on that day – but
our reading is that they will. This implies that in two years,
SOE banks will potentially see big increases in NPL
stock and consequently provisioning charges.
Regulatory forbearance would continue, on
restructuring of all non-operational projects: The
RBI has allowed date of completion to be shifted by two
years for infrastructure projects and one year for non
infrastructure projects. A mere change in date of
completion (as long as other terms remain constant) will
not be construed as restructuring. This forbearance has
been extended to CRE projects also – where delay is
caused by extraneous reasons – date of completion in
these projects can be shifted by one year.
In our view, this would take up provisioning
meaningfully from F16 onwards – hence expectations of
credit charges at SOE banks declining in two years time
will go away. This also highlights the significant stress
faced by projects under implementation – where banks
are accruing interest income. RBI has pushed these
problems into the future but underlying earnings at
banks with large exposure to these projects is weak.
This justifies the premium multiples at retail lenders

India Equity Strategy 4Q FY13 Earnings Review: Muted Expectations Met : JPMorgan

 4Q earnings met muted expectations. Aggregate adjusted 4Q earnings growth
for the Sensex companies at 5% yoy was largely in line with our estimate of
4%. Ex the Energy sector, growth at 5% was higher than our estimate of 1%.
Sectoral trends were mixed. The breadth was evenly balanced. Consumer
Discretionary, Health Care and Materials reported better-than-expected
earnings. Telecom and Utilities lagged expectations. In Financials, private
sector banks fared well, while the SoE Banks disappointed. With this, aggregate
earnings growth for FY13 came in at 4%.
 Revenue growth at a cyclical low, margins stabilizing. Aggregate 4Q FY13
revenue for Sensex companies moderated to a three-year low of 7%. Sales
growth for cyclical sectors – Energy, Materials and Industrials – was relatively
weak. Exporters benefitted from a weaker INR. Profit margins improved
sequentially and are largely unchanged on a yoy basis. Lower commodity prices
helped margin improvement.
 Earnings expectations moderate. Since the start of the 4Q reporting season,
aggregate earnings estimates have been cut by 2.5% for FY14. Earnings
estimates are down for most sectors, except Health Care. The extent of earnings
cuts has been relatively higher in Materials, Industrials, IT Services and
Consumer Discretionary companies.
 Current Sensex earnings growth expectations of 14% for FY14 appear
optimistic to us. Growth is expected to be driven by Consumer Discretionary,
Financials and Materials. The current muddled macro and recent high frequency
data points are we believe not supportive of consensus expectations. Our macro
model suggests earnings growth of 10% for FY14E.
 Sector strategy. We are overweight IT Services, Energy, high-quality
financials, Government utilities and sin stocks.

Property buying just got TeDiouS :: Business Line

The buyer has to deduct tax at 1 per cent of the entire amount paid to the seller, if the payment for the property is Rs 50 lakh or more.

Phoenix Mills: Sell :: Business Line


Customer service improving? DLF:: Religare

Customer service improving?
DLF, in its recent attempt to resolve complaints raised by customers of its New Gurgaon-based project, seems to have adhered to its newly-forged strategy to enhance CRM practices. This development, we thus believe, is a step in the right direction. While the stock remains under pressure on concerns over delays in debt reduction, we remain positive on DLF over the mid-to-long term on potential improvement in operations. Maintain BUY

Indian IT on watch....It will take much more intensive and effective lobbying to combat the immigration bill :: JPMorgan

 This time it’s different. The immigration bill issue is a battle that Indian IT
will have to fight largely by itself – something that it did not have to do in the
past when the stakes were high. Whenever interventions pertaining to highskilled visa restrictions (H1B) were attempted in the past, the US tech industry,
led by companies such as Microsoft, would oppose any such moves. Now that
the H1B visa limit has been increased to 180,000, and much more liberal views
are proposed towards green-card holders (or in-process green-card applicants),
US tech companies’ issues seem to be largely taken care of. When it
specifically comes to the US Tech IT Services group (e.g. IBM, Accenture,
Deloitte) who have lobbying clout, higher cost provisions (visa/wages) apply to
them as well, but outplacement does not. They are thus unlikely to lead in
opposing the bill, in our view, leaving Indian IT to fight it largely on its own.
 Strong, explicit support from influential clients (e.g. large BFS clients) cannot be taken as a given. They might have larger issues (from their perspective)
to battle/mediate with the administration/law-makers. For example, regulatory
and risk issues are likely far more important for banks than lobbying against visa
provisions in the immigration bill, especially when their incremental outsourcing
requirement could be met (to some extent) through the likes of Accenture, IBM.
 Shouldn’t the government of India (GOI) intervene more forcefully? We
think so, given the importance of IT exports to India’s GDP (~5% of the total, or
7-8% on an incremental basis) and, equally importantly, the multiplier effect
that this sector exerts via consumption and growth of ancillary industries (e.g.
real estate, travel/transportation, hospitability). With the Indian economy
projected to grow by 5.8% in FY14 (GDP), even a 0.3-0.4% downward impact
due to this bill is likely to be a significant issue for the GOI.
 The bill seems to have some inconsistencies, and may have unintended
consequences. If clients are forced to adopt more offshoring in a bid to offset
higher costs, this would probably defeat the purpose of creating more local jobs
(at least in IT Services). Also, we believe large third-party Indian IT firms
(including Cognizant) are not the main H1B visa-guzzlers (contrary to common
perception); they consumed less than 25% of total H1B visas in 2012.
 Why are we not turning more negative on the sector? Why are we just
putting it “on watch” despite our view that Indian IT will have to lobby
much more intensively and effectively than it has had to in the past or is
doing now? The bill is not a done deal – there is a fair distance to go before this
can be written into law. The process could take the rest of this year, which gives
Indian IT firms, with strong intervention from the GOI, some time to lobby for
the retraction of key clauses.
 But this has an attendant cost – client behavior could change with respect to
long-term engagements (more so, if the “outplacement” clause is not
removed early enough). So far, client behavior is unchanged, but it’s too early
to conclude that it will remain so throughout 2013. This remains the primary risk
to our thesis that the overall demand environment will remain healthy and that
2013 will be a better year for growth than 2012. However, we still see our thesis
as a low-risk one – what may happen is redistribution of market share away
from offshore IT Services vendors towards MNCs (e.g. Accenture) and captives

Mr Narayana Murthy is back, but does this mean that Infosys is back? Only time will tell, but this is good for morale:JPMorgan

Mr Narayana Murthy is back. Infosys (OW) announced that Mr Narayana
Murthy is back in the company in an executive capacity. Effective June 1, he is the
Executive Chairman of the company subject to shareholder approval at the AGM
due on June 15, 2013. This development will likely have all stakeholders
(including investors) positive in anticipation; we believe it raises confidence and
likely buys Infosys more time with investors. We expect a positive stock reaction to
this news. We dissect the positives and the (possible) strikes/negatives from this
development.

Time to exit gold mining funds :: Business Line


NMDC- Earnings beat (adjusted for one-time item); Large dividend increase with implied yield at 6% - Remain OW :: JPMorgan

NMDC delivered very strong numbers, with revenues 15% higher than our
estimates. Adjusted for the one-time payment of Rs3.2bn (related to SC
judgment), EBITDA stood at Rs20.7bn vs. JPMe at Rs18bn. The big positive, in
our view, was the dividend increase, with FY13 DPS at Rs7 and a 6% yield at
CMP. With NMDC's strong cash balance (net cash at Rs210bn), strong operating
cash flow and limited capex, we expect DPS to increase. Media reports (steelmint)
indicated that NMDC kept prices unchanged for Jun-13. These factors should
drive the stock up and reverse the large underperformance seen YTD, in our view.