26 April 2014

IPO Grey market - Wonderla

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J.P. Morgan -Cairn India Limited

Cairn India Limited (CAIR IN)
Vedanta update points to Cairn India’s operational delivery on track

Overweight
Price: Rs351.00
09 Apr 2014
Price Target: Rs400.00
PT End Date: 30 Sep 2014

Vedanta’s quarterly production update reinforces our view that Cairn India’s production growth is on track. Rajasthan production 4Q averaged c.191kbopd (up 2.5% q/q), with production crossing 200kbopd in March – meeting company guidance. A continued rise in production, particularly meeting approved production rates at Bhagyam/Aishwarya would be an important component of meeting FY15E/16E production/earnings targets (JPMe – 220kbopd/250kbopd).
· Rajasthan output crosses 200kbopd: Vedanta stated that Rajasthan production for the quarter averaged c.191kbopd (up from c.186kbopd in Q3), with output likely rising at both Bhagyam and Aishwarya, and has crossed 200kbopd in March. Output for FY14 averaged 181.5kbopd.
· Continued ramp up of production important: Raising output at Bhagyam to approved levels (c.40kbopd) would be an important component of meeting FY15E/16E production target (JPMe – 220kbopd/250kbopd). Inability to reach the approved peak rate of 40kbopd would impact expectations of higher output in FY15, in our view. Bhagyam currently accounts for c.10-12% of Cairn’s Rajasthan output.
Figure 1: Rajasthan production (bopd)
Source: Company reports and J.P. Morgan estimates.

 

Investment Thesis

With a high-quality resource base of high-margin barrels, and strong potential organic production growth, with leverage to elevated crude prices, and a large discount to peers (c.50% on FY14E EV/EBITDA), we see Cairn as attractively priced. We expect earnings delivery to have a positive impact on stock performance, but concede that a continued focus on shareholder returns is essential to close the valuation gap – as such, newsflow on corporate restructuring/shareholding should also guide stock performance.

Valuation

We have an OW rating and Sep-14 PT of Rs400. Our PT is based on NAV. We use a risk-based methodology to arrive at an NAV estimate through a bottom-up approach. We have grouped Cairn India’s assets into two main categories: core NAV, which is the value of producing assets and those under development, and risked upside which is generated by the value of Cairn India’s exploration and appraisal (E&A) assets on a risked basis.

Risks to Rating and Price Target

Key downside risks are lower crude prices, upstream execution risk and F/X appreciation.
Asia Oils

India: March headline inflation predictably re-accelerates, and the stubbornness of core is worrying :: JPMorgan

India: March headline inflation predictably re-accelerates, and the stubbornness of core is worrying

 
 
We had expected that, after decelerating for three straight months, CPI and WPI inflation would likely re-accelerate in March on the back of firming food prices and sticky core inflation (see. “India Monthly Data Outlook: April 2014,” MorganMarkets, April 7). As it turned out, headline CPI rose to 8.3% in March from 8% in February – exactly in line with expectations (JP Morgan and Consensus: 8.3%). And, in fact, WPI reaccelerated more than markets had expected, printing at 5.7% oya (JP Morgan 5.4%, Consensus 5.2%), hurt by an unfavourable base effect and the fact that food prices increased more than high-frequency data had suggested.
The core of the problem
But even as the dynamics of headline inflation were broadly anticipated, the details were worrying. The momentum of core CPI is showing no signs of abating and rose to 0.8% m/m, sa in March on the back of off a slightly-downward-revised February core print. Therefore, even as the year-on-year core CPI printed at 7.9% -- and may gave the impression of a modest softening over the last two months – it is masking a more elevated underlying momentum, with the 3m/3m, saar rising to 8.4% in March, the highest since November 2013. Furthermore, core price pressures were not narrowly focused with the momentum of housing, education, transport and communication, and household requisites remaining elevated and/or firming up. More generally, the stubbornness of core CPI is evident from the fact that, despite a weakening of growth, it has been close to or above 8% for 27 consecutive months.
Such worries will be reinforced by the fact that core WPI prices also reaccelerated, though not to threatening levels as yet. After remaining very contained over the last two months, core prices rose 0.3% m/m, sa in March, consistent with a year-on-year March print of 3.5% oya. But markets were spooked by the fact that core WPI jumped to 3.5% in March from 3.1% in February, causing the benchmark 10Y government bond to initially sell-off before recovering and inducing equity markets – riding a wave of euphoria in recent weeks -- to correct on worries of a stickier-than-expected inflation path. Market worries were likely predicated on the fear that if core WPI inflation were to reaccelerate it does not bode well for already-elevated core CPI inflation.
We have long maintained (see, “India in 2014: five questions that keep us awake, Jan 2014,” MorganMarkets, January 28th) that the fact that core prices have not collapsed in the face of weak growth is a worrying sign. And this suggests, that if demand actually accelerates in the coming months, core inflation could see significant upward pressures as firms rush to normalize margins.
 
Food prices get back to their old ways
In line with expectations, food prices increased sequentially in March, as the vegetable price correction plateaued and other food prices continued to tick up. CPI food prices ticked up 0.5% in March consistent with the high-frequency data, but WPI food prices rose more sharply (1.1%) than daily price date had suggested – causing a small upward surprise to the headline rate. As it turns out, food prices seem to be firming at a faster pace in the first half of April, and therefore could pressure the headline rate even further this month.
Dynamics consistent with our baseline forecast of more tightening
To be sure, there are large favourable base effects that kick in from June to November which will temporarily pull down year-on-year CPI and WPI inflation. But we believe the RBI will look through this temporary phenomenon. Instead, if the underlying sequential momentum of inflation continues to firm at the pace seen in March (+0.7% m/m, sa for headline CPI) – with food prices mean-reverting and core inflation being pressured by the growth cycle bottoming out -- more monetary tightening is likely later in the year – consistent with our baseline call -- to ensure the RBI’s January 2015 headline CPI target of 8% is not under threat.
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JPMorgan: Alcoa conf call highlights- Expects ally deficit in CY14; Strong demand outlook for downstream segment; +ve for Novelis

Hindalco Industries (HNDL IN)
Alcoa conf call highlights- Expects ally deficit in CY14; Strong demand outlook for downstream segment; +ve for Novelis

Overweight
Price: Rs137.35
07 Apr 2014
Price Target: Rs145.00
PT End Date: 30 Dec 2014

Alcoa (AA, covered by North America analyst Michael Gambardella) posted a loss in Q1, but profit excluding charges beat estimates. AA reported strong downstream earnings with Rolled Products (RP) reporting adjusted EBITDA/T of $315/T from $185/T in the Dec quarter, with record auto sheet volumes, while packaging saw pricing and volume pressure. Unlike previous quarters, AA commented substantially on the company’s downstream business investments across Autos, Packaging and Aerospace, opportunities and outlook in that segment v/s its historical focus more on the upstream business. AA also commissioned its downstream Automotive expansion.
Comments on Demand: AA commented that Aerospace and Autos demand outlook remained solid with North America Auto and Heavy truck demand expected to increase by 2-9% in North America, while Auto demand is improving in Europe. Beverage cans and packaging is expected to decline by 1-2% in North America but increase in Europe and China. AA expects global aluminum demand growth of 7% in 2014, with ex China growth of 4% and, more importantly, expects an aluminum deficit of 730KT in 2014.
Implications for Hindalco/Novelis: HNDL has rallied in sync with many of the global aluminum names as the incremental outlook for Ally improves. The recent court ruling regarding LME’s rules have also helped sentiment. We are more enthused by AA’s results in its downstream business and more importantly the bullish demand outlook. We believe the AA’s results and comments (esp. in the downstream business) are positive for Novelis, given the capacity expansion Novelis has undertaken in the segment.
Figure 1: Alcoa GRP segment vs. Novelis Adjusted EBITDA/t (US$/t)
Source: Company reports and presentation

Investment Thesis

We see improved visibility at Novelis (as capacity expansion flows through) and copper smelting earnings (as multi-year pressure on TC RC eases on higher mine supply). However, the India aluminum business continues to face challenges. The projects should aid EBITDA in FY15E but would result in higher capital costs. The key positive remains the de-leveraging we would likely see as the capex cycle comes to an end in FY14E as Novelis generates FCFs. We remain OW with a Dec-14 PT of Rs145. Our Dec-14 PT of Rs145 is based on our FY15E SOTP valuation.

Valuation

Hindalco Valuation Summary

Multiple
EBITDA FY15E
EV FY15E
Aluminum India
5.5
31,654
174,095
Copper India
5.5
13,419
73,802
Novelis
6.5
64,288
417,869
ABML
5.5
1,673
9,199
Total EV


674,966
Net Debt


511,717
Adj for CWIP


137,250
Mcap Implied ex CWIP


163,249
Mcap Implied


300,499
No of Shares (MM)


2,065
Target Price (Rs)


145
Source: Company reports and J.P. Morgan estimates.

Risks to Rating and Price Target

Key risks remain a) sharp decline LME and/or premium, b) sharp decline in US subsidiary earnings, and c) Utkal project delays
Metals & Mining

Samsung Electronics (005930 KS) Our take on GS5 strong sell-through at Day 1:: JPMorgan

Samsung Electronics (005930 KS)
Our take on GS5 strong sell-through at Day 1

Overweight
Price: W1,365,000
11 Apr 2014
Price Target: W1,600,000
PT End Date: 31 Dec 2014

According to Maeil Economic newspaper (based on company reported data), Samsung Electronics (SEC) reported Galaxy S5 (GS5) Day 1 sell-through volume was at a much stronger level vs. Galaxy S4 (GS4). The company expanded the initial launch target to 125 countries for GS5 vis-à-vis 60 countries for GS4. According to our supply chain check, the production schedule reveals ~6M/month running rate and goes up 7 to 8M/month in May at a lower level compared to GS4. Contrary to some noise at the initial stage, however, we believe all production issues are resolved.
· Strong Day 1 consumer acceptance: SEC meaningfully increased the number of initial launch countries with GS5 and witnessed strong Day 1 sell-through volume; UK/Czech/Vietnam posted two times higher vs. previous models. Besides, US sales result for GS5 was 30% stronger vs. GS4 as SEC included all major carriers (Verizon, AT&T, T-mobile, Sprint) and U.S. cellular while there were some time lags among carriers for GS4. Within the domestic market, the company is estimated to ship more than 120K units since March-27 (10K/day), at a much weaker level mainly due to regulatory pressure on operation (Hankyung).
· Too early to draw a conclusion: Strong Day 1 result is clearly encouraging, however, given that there are no significant changes in pricing or specifications along with saturating high-end market conditions, it is difficult to assume the GS5 posting stronger result vs. GS4 throughout full-year, in our view. Street consensus for GS5 shipment in 2Q14 is a wide range from 16 to 21M; we estimate the company to deliver 17M in 2Q followed by 15M in 3Q, full-year base 10% lower vs. GS4 (46 million units in 2013). However, there are uncertainties about 3Q and onward due to the change in competition dynamics as there is a potentially high chance of Apple adopting the larger screen size iPhone. This could likely take away the GS5 replacement demand to some extent as larger screen size is no longer a merit.
· Share price expectation: Since the preliminary earnings result (see our comment published on April-8-2014), the stock has remained flattish as we expected. We continue to believe the stock remains range-bound until the market is convinced with sustainable OPM in the handset business. Given the relatively robust GS5 shipments in 2Q14, however, there would be upside risk to our 2Q14 earnings estimates while 2H14 earnings are heavily dependent on the competition landscape from Apple. Also, its marketing and promotion related expenses are one of the major swing factors for its profitability, which is not hard to estimate until we see actual sell-through data and competition landscape. Of note, the company will disclose full 1Q14 result on April 25, 2014 (Friday morning in KST) with 2Q14 and rest of the year outlook.
Table 1: Samsung Electronics – Galaxy S5 vs. S4 initial launch

Galaxy S5
Galaxy S4
ASP (KRW) - unlock price
W 868,000
W 899,000
ASP (USD) - unlock price
US$ 599.99
US$599.99
# of countries for initial launch
125
60
Day 1 sell-through volume
30% Y/Y up at US, 2x higher at few countries
Not Available
Days required to sell 10M
Not Available
27 days
Source: Company data, J.P. Morgan.

 

Investment Thesis

Samsung Electronics continues to hold a dominant position in the respective markets (both component and set businesses); however, it faces a growth dilemma due to a lack of killer products and high market expectations. However, as valuation appears to be attractive, we believe the downside risk is limited and expect the share price to remain range-bound.

Valuation

We maintain our mid-cycle valuation based Dec-14 PT of W1.6 million (implying 8.6x FY14E P/E and 8.0x FY15E P/E).

Risks to Rating and Price Target

Key downside risks to our price target are sudden and substantial changes in DRAM and LCD prices, the global economy, and weaker-than-expected end-demand for PC, handset, and TVs.
Technology - Semiconductors

JPMorgan: India: IP and trade data emit conflicting growth signals as gold imports tick up

India: IP and trade data emit conflicting growth signals as gold imports tick up

 
 
Expectations that February IP would build on the long-awaited January gains and thereby signal some inflection of industrial activity were quashed with IP slumping badly in February (-1.9 % m/m, sa), significantly below market expectations (Actual: -1.9 % oya, JP Morgan – 0.3 %, Consensus + 1%) and thereby giving up all of the January gains. In particular, the gains accrued in consumer goods production in January were reversed in February with non-durables, in particular, having a devastating month. That said, it may be too early to completely write off industrial growth. For the second time in three months, non-oil, non-gold imports surged (+10.4 % m/m, sa) in March signaling that domestic demand may be picking up and could eventually translate into higher domestic production. For now, however, this dynamic along with the fact that gold imports rose to $2.7 bn in March – still not at threatening levels but at an 8-month high – meant that the March trade deficit widened to $10.5 bn from $8.1 bn in February. However, such levels of the monthly deficit are still not threatening and conform with our full year forecast of the CAD at 1.7% of GDP in FY14.
IP: one step forward, one step back
After months of weakness and disappointment, IP finally gained meaningfully in January on the back of increasing consumer goods production. It was thought that a second strong harvest would boost rural demand and help engineer some turnaround in the IP cycle. Unfortunately, February IP thwarted such hopes. IP slumped 1.9% m/m, sa giving up all the gains incurred in January (+2 % m/m, sa). Worryingly, the biggest payback was in the consumer non-durables sector – which should theoretically benefit the most from stronger rural demand. Instead, the sector sequentially contracted almost 7% (m/m, sa) more than offsetting the gains of the previous two months. This was compounded by the fact that consumer durables also retracted in February – albeit less acutely (-1.6% m/m, sa) – and capital good production, which has remained flat over the last three months, declined more than 4% sequentially in February, making for weakness across the board.
Given the aforementioned dynamics, manufacturing predictably had a weak month (-2.1 % m/m, sa) on the production side. But what was disappointing, if not surprising, was the weakness in mining and electricity production. The latter has grown solidly for much of the last year and partially offset the manufacturing weakness. But it has now contracted sequentially for two successive months (Feb and March), reflecting the reduction in plant load factors as power production has slowed both on account of the general economic slowing and financial constraints on the balance sheets of state electricity boards.
Trade deficit widens, but for the right reasons
On the face of it, a widening trade deficit in March should add to the IP gloom. But there are important caveats. First, the trade deficit widened from an excessively low level ($8.1 bn) in February to a still-very-contained level of $10.5 bn. To put this in perspective, such a run-rate of the monthly trade deficit is consistent with an annual CAD of just over 1% of GDP.
Second, the deficit widened for the “right reasons”. Non-oil, non-gold imports which have been very sluggish in recent months – reflecting weak demand impulses in India – surged for the second time in three months. On a 3m/3m, saar basis they are now growing at almost 20%. If this sustains, it would signal a firming up of domestic demand which would eventually be expected to translate into higher domestic production.
To be sure, it was not all hunky-dory in the trade numbers. Exports surged to $29.5 bn in March from $25.6 bn in February. But, as we had previously pointed out, this is the typical end-of-year effect wherein exports increase at the end of the financial year. In fact, on a seasonally adjusted basis, they declined sequentially (-1.7% m/m, sa) for a second successive month.
Furthermore, the anecdotal evidence that gold imports were increasing on the ground, finally showed up in the data. Gold imports in March printed at $2.7 bn – still not at alarming levels – but the highest since July 2013 when the import curbs were imposed. It suggests that latent demand for gold is not as weak as the numbers in recent months have suggested and – if and when the import curbs are eased – gold imports could tick up further. All told, however, these dynamics are consistent with the full-year CAD forecast of 1.7% of GDP – more than half its level from the previous year.
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India Financials Draft guidelines on credit pricing:: JPMorgan

India Financials
Draft guidelines on credit pricing

The RBI today released draft guidelines on Credit pricing by banks. The RBI had constituted a working group to examine discrimination in credit pricing between old and new customers & sudden changes in spreads by banks. RBI has asked for comments on the recommendations by May 16, 2014. We believe the guidelines are marginally negative for banks as it would make the ALM management more difficult and banks will be more vulnerable to money market fluctuations.
· Change in spreads. Banks will not be allowed to increase spreads except in the case of deterioration of credit profile of a customer. We believe it will be negative for banks with volatile funding costs and hence margins could remain under pressure. It will also be negative for PSU banks as they have a high proportion of base rate-linked loans.
· Uniform floating-rate products. A new benchmark rate for floating rates products-starting with home loans will be developed and published on a periodic basis. Banks can consider to offer floating rate loans based on the new benchmark rate. Though this is just a suggestion, it will be difficult for banks to implement it given a different funding profile. Also banks with higher share of retail loans will be impacted.
· Option for retail borrower to prepay loan before maturity. Banks should give the option to borrowers to prepay retail loan before maturity. The customer should be able to prepay loans without any impediments. We believe it will make banks more vulnerable to interest rate fluctuations and ALM management will become more difficult.

JPMorgan India Equity Strategy 4Q FY14 Earnings Preview: Global Lift Continues...

India Equity Strategy
4Q FY14 Earnings Preview: Global Lift Continues...

· We preview the forthcoming 4Q FY14E reporting season in the enclosed excel file (among the large caps, Infosys kicks off on Tuesday, April 15th).
· For the Sensex, we expect aggregate quarterly earnings to increase a robust 31% YoY. But the aggregate growth number is boosted significantly by a substantially supportive base effect for Tata Steel (reported a loss for the corresponding quarter last year). Excluding Tata Steel, the aggregate growth corrects to a more reasonable but still healthy 14% YoY.
· Earnings growth will likely continue to be driven by global sectors (IT services, Healthcare) and companies (Tata Steel, Tata Motors). Earnings for this pack are estimated to grow 160% (30% ex-Tata Steel). Ex these, earnings for the remaining universe are likely to increase a more sedate 9% YoY, reflecting the stresses in the local macro.
Table 1: J.P. Morgan Coverage Universe – 4Q FY 14 Sectoral earnings growth expectations


YoY %


Change in EBIDTA Margin

Net sales
PBDIT
PAT

QoQ - bps
OYA- bps
Auto
12
17
9

(22)
70
Building Materials & Construction
5
(5)
(19)

325
(192)
Consumer Staples
11
14
12

(41)
56
Financials
13
14
4



Capital Goods
(12)
(31)
(38)

140
(433)
Metals
20
18
247

(369)
(23)
Energy
4
(16)
(23)

573
(293)
Health Care
20
30
20

(230)
222
Real Estate
(9)
(16)
(27)

129
(259)
Retail
9
4
(3)

54
(48)
Technology
28
41
36

(22)
256
Telecom
12
23
52

(41)
302
Gas Utilities
26
60
77

(49)
210
Utilities
13
26
15

153
339







Total
9
4
3

253
(84)
Ex Energy
14
17
27

(15)
64
Ex Energy, Financials
14
18
38

(56)
69
Source: J.P. Morgan
Table 2: Sensex Companies – 4Q FY 14 Sectoral earnings growth expectations


YoY %


Net sales
PBDIT
PAT
Auto
12
18
9
Consumer Staples
11
17
14
Financials
15
18
10
Health Care
23
30
19
Capital Goods
(9)
(35)
(34)
Metals
20
2
119
Energy
17
2
15
Technology
27
40
35
Telecom
15
20
91
Utilities
22
30
47




Total
15
13
31
Ex Energy
14
16
39
Source: J.P. Morgan
· Aggregate Sales growth for the Sensex companies is expected to be 15% YoY.
· The trend in EBITDA margins is expected to be mixed. IT Services, Health Care, Consumer and Telecom companies are expected to report improved margin performance compared to the previous year. Margin expansion can be attributed to INR depreciation, stable global commodity prices and companies’ efforts on cost management.
· The domestic demand environment continues to remain sluggish. Investment linked sectors continue to witness margin compression.
· For the Sensex universe, Metals, Telecom, Auto, IT Services and Utilities are expected to drive growth, while Industrials, Consumer Discretionary and Financials are expected to lag.
Figure 1: Sensex companies – Net Profit growth (% yoy)
Source: J.P. Morgan
· J.P. Morgan estimates vs. Consensus: Our estimates are higher-than-consensus for Consumer Discretionary (Tata Motors, Bajaj Auto), Financials (Axis Bank, ICICI Bank) and Energy (Coal India) while it’s lower in Industrials (BHEL). It must, however, be highlighted that consensus data for quarterly results is sketchy and limited.
· The earnings cycle appears to be in the midst of a long drawn bottoming out process. Consensus earnings growth estimates for the Sensex for the current year at 10% appears realistic. But, next year’s growth expectation of 17% has a downside risk, in our view, as it is expected to be driven mainly by local sectors.
· We believe that even if there is a positive outcome in the National Elections, a decisive turn around in economic growth and corporate profitability will take some time. Note that earnings growth estimates for FY15E have been downgraded consistently over the last quarter, despite positive sentiment in the equity markets.
· Markets are going into the reporting season with relatively higher expectations compared to the last quarter. But that said, the equity markets are at this stage largely focused on the National Elections and expectations of a positive outcome herein.
· Consequently we expect the reporting season itself to have limited impact on market direction.
· Outlook and portfolio stance: Indian equities have rallied by nearly 8% over March largely on the back of opinion polls forecasting an impressive showing by the BJP led NDA coalition in the forthcoming National Elections. We would at this juncture caution against chasing beta, particularly low quality financials and investment cycle related names, given the nature and extent of challenges facing the economy.
· Our portfolio stance since the beginning of the year has been:
biased towards Global sectors IT services (Infosys, Tech Mahindra), Healthcare (Dr. Reddy’s Lab), Metals (Tata Steel, Sesa Sterlite), Energy (Reliance Industries)
Recommended playing a potential recovery in the economy later in the year through high quality financials (HDFC Bank, ICICI Bank), Commercial Vehicles (Tata Motors) and Cement (Grasim) rather than through sectors and stocks with high leverage which could take some time sorting out.
We maintain our portfolio stance. Note that Metals and Energy were among the three best performing sectors even during the beta rally last month.