India: parsing the impact of rupee depreciation :JPMorgan

https://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=-ncq6p7m&doc=GPS-1147846-0

The last two weeks’ rupee sell-off has been nothing but brutal. But then by now we should have gotten used to such episodic scares. It’s the fourth since 3Q11. In each of these episodes the market has hoped for a quick trend reversal. And each time the hope was dashed with the reversal being partial and temporary. Instead, every episode saw a new lower floor for the rupee being set only to be ratcheted down in the next sell-off.

This time too the pattern seems to be repeating. The USD/INR, which appeared to have settled in the 53-54 range, has fallen nearly 10% since early May. As in earlier episodes, there is still hope that the sell-off is temporary and will be fully reversed when global financial markets settle down. However we fear that, just like in earlier episodes, the rupee is unlikely to revert to its previous range, and instead settle to a new lower range of 57-58—5% lower than the average over Oct12-Apr13.

It is this ratcheting down of the rupee that is disconcerting. While some would see a silver lining in the rupee weakness on the ground that it improves competiveness, as we have argued several times in the past, price sensitivity of India’s export basket is very weak. Rupee weakness does little to increase the demand for India’s exports. Instead, our fear is that the weaker rupee will reignite inflation, stress corporate balance sheets, and increase the budget’s subsidy bill.

India Equity Strategy The INR-Equities Divergence : JPMorgan

 Indian equities outperformed the peer group significantly over the last
month. This followed a sharp correction in global crude oil and gold prices.
Investors expect a substantial reduction in the Current Account Deficit
(CADs) providing the RBI with more leeway to cut benchmark interest
rates. Inflation and the fiscal account are also expected to benefit.
 But the INR has depreciated 5% from its April highs. The bulls will
point to US$ strength as the key reason. That, however, may not explain the
relative underperformance vs. peer group currencies. The currency market’s
caution could suggest that the moderation in CAD may not be as sharp as
expected. J. P. Morgan Economists estimate FY14E CAD at 4.6% (down
only 50 bps from 5.1% for FY13E) vs. consensus estimates of 3.5-4.0%.
 Recent datapoints are supportive of the currency markets. Lower gold
prices have led to a surge in volumes. Crude oil prices have recouped more
than half the losses sustained in early April. Our Global Commodities team
points out that the recent weakness could be more a function of seasonal
factors rather than cyclical or structural factors.
 The INR depreciation, if sustained, will put pressure on inflation and
also increase the cost of capital particularly for companies with
meaningful FX borrowings, in our view. Down the line, any tapering of
easy monetary policy in developed economies could accentuate the stress
for corporate earnings as leverage is high and growth is disappointing.
 We remain cautious on the equity market. Growth is below trend and
investor expectations. The policy environment remains challenging given a
substantial political calendar. Our portfolio stance is defensive and favors
high quality financials, IT services, Energy, State-owned utilities and ‘sin
stocks’ within the consumption basket.

DLF -Stock correction provides a favorable risk reward. Crest/Aman overhang more than discounted : JPMorgan

Following a period of restriction, we are moving DLF from Not Rated
designation to an OW recommendation and Mar-14 PT of Rs300/share. Over
the last 3 months, we note that progress on two of the most sensitive business
parameters has been positive i.e. Debt reduction and successful sell out in
launch of luxury phase 5 project. Recent stay order on Crest construction in
our view whilst worrying has knocked off more than the entire cash flow of
the project and reduced valuation on Aman resorts to zero. This in our view
presents an upside and a favorable risk reward opportunity. Near term
stock catalyst will be progress on Aman closure, launch of Camellia (strong
soft sale demand) and any resolution on stay order of Crest.

State-owned miners finally start paying higher dividends; A structural positive if sustained :: JPMorgan

 Finally dividends increase – and sharply: In our report dated 25 March 2013
(India Miners: Increasing cash balance at state-owned miners with no nearterm requirement - Will the Government opt for higher payout) we argued that
given the increasing cash balances, large operating cash flows and limited
capex, a stated high dividend payout policy (>50%) at the four-state owned
miners (COAL, NMDC, NALCO and MOIL) would be positive for both
minority and majority shareholders, and also positive for valuation multiples.
The dividend increase has finally come through, particularly for COAL,
NMDC and NALCO. As of now, in terms of cash as a percentage of market
cap, MOIL’s net cash is currently at 68% of market cap, NALCO at 54%,
NMDC at 45% and COAL is at 30%.
 Not a stated policy as of now, but enough to suggest that current DPS could
at least be maintained: The companies have not given a stated payout policy
but, in our view, the current DPS could be maintained especially for COAL and
NMDC where we see little risk to earnings for the next two years. While the
companies have not embraced the ‘Net Profit-Capex = Dividends', in our view,
the recent high level focus of the Government on the increasing cash balance of
the State enterprises and the usage of the same, does suggest that a high payout
ratio is likely for the next two years at least.
 Why are higher dividends positive for the company? While investors would
welcome higher dividends, we argue that it is positive for the companies,
particularly for the state-owned miners for two reasons: 1) Capital Discipline –
Given the increasing cash balance, in our view, the miners face the issue of
deploying cash and hence many capital expansion projects are evaluated which
may not fit into company strategy or the returns profile. The higher dividend
payout ensures that companies actually focus on executing projects currently on
the plate as there is no large cash balance accretion to worry about; 2) Makes a
valid case for higher profits and profitability – Given that the profitability of
these companies is essentially tied to regulatory policy and they are suppliers to
companies which are capital-intensive, higher dividends, in our view, allow the
state-owned miners to make a valid case for their profitability as the same would
be returned to the Government (which is the majority owner) in the form of
dividends (and dividend tax).
 Stocks can stabilize at implied yields of 4-5% which suggests significant
potential upside, especially for NMDC: At Rs14/share of DPS, COAL would
trade at Rs350 (4% implied yield) and NMDC at Rs175. In our view, there is
significant upside to NMDC compared to COAL if stocks were to stabilize at
similar yields. While markets see COAL as an effective utility which has
demonstrated pricing power, we argue that NMDC's earnings are not as volatile
as the markets imply.
 Large cash inflow for the Government: We estimate that the total payout to
the Government from the four state-owned miners in FY13 stood at Rs127bn vs
Rs89bn in FY12 and should increase to Rs134bn (at our projected DPS)
 Next step should be to address the existing large cash balance: This is an
issue in particular for COAL (Rs640bn) and to a lesser extent for NMDC
(Rs200bn). We very much doubt any one-time dividend would be given out,
although we do not rule out share buybacks, particularly in COAL India

HDFC Focused Large-cap: Switch :: Business Line

   

Godrej Industries - IC- Axis Capital

·  Godrej Industries - CR - 18 June 2013.pdf

10x in first 10 years and 10x in next 10 years

q  Holding company with 45% M-cap CAGR since inception in 2001 driven by (1) 30% CAGR in consolidated earnings and (2) value unlocking after successfully incubating businesses

q  In 2010-11, management envisaged another 10x growth by 2020. Trajectory seems to be on track, given 2011-13 profit growth at 27%

q  Key strengths: Reputed management, strong brand, high growth consumption driven businesses, history of profitable monetization of new businesses (Godrej Sara Lee, Godrej Foods, Aadhaar, Godrej Hi-care, etc)

q  Core business segments centre around urban and rural consumption – Consumer through Godrej Consumers (GCPL), Agriculture through Godrej Agrovet (GAVL), Real Estate through Godrej Properties (GPL), Chemicals in standalone entity, and urban retail through Nature’s Basket

Yes Bank: Prime bond yield play - CFO meeting takeaways: JPMorgan

We reiterate Yes Bank as OW and our top pick, on the back of falling
bond yields and wholesale rates. The front-ended expansion in NIMs and
treasury profits should help absorb higher credit costs. We expect the
rerating to continue as ROAs hold up, and we raise PT by 15% to Rs560
on better growth prospects. We have reviewed the annual report after
meeting with the CFO and marginally adjusted earnings.

Not a bad deal from Wheels India :: Business Line

India Telecommunications : ARPMs, voice/ data traffic, margins trend up: Morgan Stanley

Higher ARPMs, voice traffic and data growth, as
well as margin improvement, should lead to robust
revenue and EBITDA growth, and higher ROCE. The
companies are operationally free cash flow positive.
Idea’s sensitivity to traffic, ARPMs and strong
execution make it our favourite.

Titan: Recent RBI circular to materially impact Jewelry business :Motilal Oswal

Recent RBI circular to materially impact Jewelry business
Cutting estimates; maintain Buy with a reduced target price
 Titan Industries (TTAN) recently issued a notification/press release to stock exchanges
and later held a Conference Call to discuss the implications of the RBI circular dated 4
June 2013. Key takeaways:
 The management highlighted the unprecedented nature of changes for the Jewelry
business: (a) All gold imports for domestic consumption only on 100% cash margin
basis, (b) No credit allowed for import of gold for domestic use, including gold imports
under lease route, (c) Implementation of these rules in letter and spirit, precluding
any alternate credit mechanism. It refrained from giving any details about the impact
in terms of numbers.
 Key implications for TTAN: (a) Termination of gold-on-lease method and shift towards
cash-and-carry model, with upfront cash payment for procurement, (b) Change in
hedging mechanism - earlier gold on lease used to work as a natural hedge; now TTAN
will explore various means including forwards on domestic exchanges, (c) Higher interest
costs - earlier TTAN incurred 4-5% interest cost on gold-on-lease method; now it may
need to pay existing market borrowing rates, (d) Higher working capital - payable days
will reduce post the shift to cash-and-carry model. Given that its free cash generation
would be impacted, TTAN is reviewing its expansion plans. The management believes
it will turn net debt in 2HFY14 (ended FY13 with net cash of INR11.4b).
 Two silver linings: (a) Availability of direct import route (this is currently allowed for 10
tonnes of import, but the management clarified that this license can be renewed),
which will help save ~100bp of margin (will no longer pay VAT), (b) Continuation of
Golden Harvest Scheme - RBI has not made any adverse decision yet on this scheme
and the management mentioned that it will use the advances taken under this scheme
(currently ~INR10b) for inventory funding.
 Cutting estimates 10-13%: We have revised our estimates to incorporate the changes
in the Jewelry business model. We now model higher credit costs, lower expansion,
lower payable days and higher working capital. Consequently, our earnings estimates
for FY14 and FY15 are cut 10-13%. While the change in business model is indeed
material, given the industry wide impact of these measures, we expect a partial pass
through of costs. However, conservatively we do not model for the same.
 It had appeared to us that regulatory actions would recede. However, the severity of
the current account deficit and currency situation has warranted fresh regulatory
measures. While we do not rule out further measures to restrict gold consumption ,
our conviction on the long-term prospects for Branded Jewelry remains undiminished.
 Changes in gold inventory funding will impact financial metrics, but operational metrics
remain unperturbed, as far as demand is concerned. In other words, nothing changes
as far as TTAN's jewelry consumer is concerned.
 In view of the material changes in the Jewelry business model - TTAN's valuation
multiples need to correct to reflect the lower RoCE of the business.
 We retain our Buy rating, with a revised target price of INR240 (23x FY15E EPS, 15%
discount to three-year average v/s our earlier ascribed P/E multiple of 26x).
Implementation of PMLA, with a lower threshold of INR50k, and changes in gold deposit
scheme remain the key risk factors.