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| Asia Pacific Equity Research 04 June 2010 |
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| India Ahead of the Pack Top Stories Electric Utilities Indian Power Sector: Regulatory bytes: Crystal ball gazing (Shilpa Krishnan) Our take on regulatory risks reported by the media- (a) Proposal to cap merchant prices for coal-based capacity-possible, and a sentiment negative, (b) Import parity pricing for domestic coal-unlikely, newsflow to recur ahead of proposed Coal India Ltd. IPO, in our view. CERC is reportedly going to propose a Rs5/Kwh cap on merchant prices for coal based plants, as per Hindu Business Line. The move follows the Planning Commission's view that despite this cap projects with merchant aspirations enjoy high RoE (we estimate 30%-100%+, given avg. cost of generation of Rs2/Kwh). In Sept '09 CERC had imposed a Rs.8/Kwh ceiling on both bilateral and exchange traded ST prices for 45 days, to rein in merchant prices which had spiked to ~Rs19/kwh (between 21-29th Aug avg. IEX price was Rs13/kwh). Bank of India (Underweight) Management meeting takeaways: Expect a backended recovery in FY11 - ALERT (Adarsh Parasrampuria) We met with the management of Bank of India recently. Management does expect asset quality to improve but a large part of the recovery is expected to be back ended in FY11 with some slippages expected in the first half. Valuations have corrected post further asset quality deterioration in 4Q10 but we maintain our cautious stance given near term asset quality risks. Asset quality: Expect a back-ended recovery: Post significant deterioration in asset quality in FY10, management expects slippages to be sharply lower in FY11. Management does expect some slippages in 1HFY11 which is expected to be lower in magnitude to slippages in FY10 but recoveries and upgradation are expected to be back ended. Management maintained that they expect Rs20-25bn of recoveries/upgradation over next 12-18mnts. In terms of restructured book, slippages are expected to be <25% with very modest slippages expected from restructured book going forward. Godrej Consumer Products Limited (Neutral) On an acquisition spree - ALERT (Latika Chopra, CFA) Godrej Consumer announced another acquisition in Latin America further strengthening its position in the hair color space in Argentina. GCPL announced acquisition of Argencos which dominates the hair styling spray segment (with 50% market share) and also has presence in the mid-price hair color space (17% market share in the kit format in hair colors) in Argentina. This follows GCPL's acquisition of Issue Group which was announced last month. Issue Group dominates the mass hair color segment in Argentina with over 20% volume market share. It also has dominant presence in hair colors in other Latin American markets like Peru, Uruguay and Paraguay and has emerging presence in Brazil. Issue Group had revenues of US$33mn in 2009. Hindustan Unilever Limited (Underweight) Buy back - Impact likely to be minimal - ALERT (Latika Chopra, CFA) In an unexpected move, Hindustan Unilever announced that the company's board will consider a buy back of shares at its board meeting to be held on June 11, 2010. While the terms of the buy back are not yet known, we think HUL may consider the market purchase route. As per current rules, the company could buy back up to c.1.2-1.5% of its outstanding equity as the total buy back amount is capped at 25% of total paid up capital and free reserves. Unless the buy back price is at a significant premium to its current market price we believe its impact on current shareholder value would be minimal. Oil and Natural Gas Corporation (Neutral) Analyst meet take-aways - ALERT (Pradeep Mirchandani, CFA) Reform agenda dominates: Management was upbeat on expectations of at least partial reforms on fuel pricing being carried out post the EGoM meeting on June 7. On ONGC's recommendation, the Kirit Parikh committee had suggested a sliding scale for upstream subsidy sharing, based on the crude price (see table below). Aggressive production targets: Management guided for ~12% growth in production in FY13 (flat through FY11/12) – we believe this could be a little aggressive, as it builds in no decline in ONGC's older producing fields, and incremental production from newly developed marginal fields.
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| Bharat IyerAC (91-22) 6639-3005 India Equity Research Team Automobiles and Auto Parts Aditya Makharia, Bharat Iyer Banks, Financial Institutions and Insurance Seshadri Sen, Adarsh Parasrampuria Consumer Goods & Media Latika Chopra Economics Jahangir Aziz, Sajid Chinoy Engineering, Construction, Infrastructure and Utilities Shilpa Krishnan, Sumit Kishore, Deepika Belani IT Services Viju George, Nishit Jasani Metals, Mining and Materials Pinakin Parekh, Neha Manpuria Oil & Gas Pradeep Mirchandani, Neil Gupte Real Estate Saurabh Kumar, Gunjan Prithyani Small and Mid Caps Princy Singh, Dinesh Harchandani Strategy Bharat Iyer, Bijay Kumar, Gunjan Prithyani Telecom Nishit Jasani |
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| See the end pages of each individual note for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. | ||
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