GDP Growth of the OECD region

Japan has committed ~ Rs 2,557 cr (Yen 46.401 bn) under the first batch of FY2010 Japan’s Official Development Loan Assistance (ODA) package to fund 3 projects in India in the agriculture, forestry and the environment sectors.

The consumer-price index in the US advanced 0.4 percent for a second month in January as the rising global demand for food and fuel in more than two years pushed up the U.S. cost of living more than forecast

U.S. stocks increased with the Standard & Poor’s 500 Index reaching a new32-month high before closing at1340.3as improving corporate earnings and manufacturing data overshadowed higher- than-forecast growth in consumer prices.

Asian stocks rose for the fourth day this week, as Taiwan announced faster-than-estimated economic growth and companies announced earnings better than forecasts. Shipping stocks in Japan increased after cargo rates rose.

Oil traded near a five-day high, heading for its biggest weekly gain in five weeks as tensions mounted in the Middle East and reports showed the economic recovery in the U.S., the world’s biggest crude user, is gaining momentum.

Food inflation for the week ended February 5, 2011 stood at 11.05%, reducing more than 200 bps compared to the previous week figure of 13.1% and 700 bps form all-time high figure of 18.3% registered for the week ended December 25, 2010. We expect further easing in food inflation going forward on the back of falling vegetable prices and also due to high base effect. Inflation in primary articles for the same period stood at 14.6%, down from 16.2% a week ago.

Foreign Direct Investment (FDI) inflow into the country rose 30.6% y-o-y to $2.014 bn during December 2010 and posted 23.7% m-o-m growth.

Sector Developments:

Natural rubber prices increased further by Rs.500 per tonne yesterday to Rs 239,500 per tonne. Rubber prices in the international markets have increased 29% from Rs.226 per kg to Rs.291 per kg since the beginning of this calendar year. However, prices in the domestic markets have risen only by 16% only during the same period. Therefore, tyre companie’s plans to import natural rubber may not be financially feasible in spite of the Government reducing the customs duty to 7.5% on 40,000 tonnes.

RBI has raised the minimum capital adequacy ratio requirement for all deposit taking NBFCs to 15% (earlier 12%) from 31st March 2012.

Oil Marketing Companies are incurring a loss of Rs.430 crore per day by selling fuel at subsidized rates/

Corporate Developments:

BHEL has successfully test runned it’s first indigenously manufactured turbine developed in collaboration with GE of US and plans to deliver two more units by the end of the current fiscal.

Royal Sundaram and Reliance General are reported to be re-applying for the merger. We expect that Sundaram Finance might exit or sell a partial stake in the non-life insurance business in the future. Any such divestment would unlock substantial value for the shareholders of Sundaram Finance.

The Environment Ministry is likely to respond to the concerns raised by various stakeholders on issues relating to coal mining while protecting the forest cover by March 15, 2011. The Environment Ministry's classification of nine major coal fields into ‘Go' and ‘No Go' areas depending on the forest cover is seen impacting the coal output resulting in a widening demand-gap supply. A softer stance taken by the Ministry of Environment is positive for Coal India.

As part of the recapitalization package for increasing the equity capital of the banks, the Government plans to infuse Rs. 539 crore in Dena Bank and Rs. 368 crore in Vijaya Bank.

The Government has begun the road-show for 5% stake sale in ONGC. The size of the issue which is expected to realize Rs.12000 crore is significant considering the Government’s budgeted figure of Rs.40,000 crore from disinvestment in this fiscal year.

Our Views:

Yesterday, the Sensex rose for the fifth consecutive session by 206 points to close at 18,507 points on the back of declining food inflation. FIIs were net buyers to the tune of Rs. 37.99 crore while DIIs bought equities worth Rs. 244.4 crore. For the last five sessions Sensex has recovered over 1000 points which is the longest rally over the last five months. The markets may remain volatile till the Budget. However, we hold optimistic view on the domestic equity market and hence, we continue to advise clients to accumulate “deep value stocks” and especially companies whose price has been badly hammered but having the fundamentals intact like Lakshmi Vilas Bank, City Union Bank, Tide Water Oil and Harrisons Malayalam. In large cap space, we recommend accumulating stocks like BHEL, Neyveli Lignite, Hindutan Zinc, etc.

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Tide Water Oil Compan

Tide Water Oil Company (India) Ltd (TWOC)

Buy

Target Price: Rs. 9600

CMP: Rs. 6550

Upside: 47%


Solid Growth, Great Value


Investment arguments



Led by strong growth with a strong Balance Sheet:

Tide Water Oil Co. (TWOC) has posted 11 fold jump in EBITDA from Rs.8.1 cr to 89.7 cr during the five year period FY2005-FY2010 while its net sales in value terms have grown by 3 times (CAGR of 24.6%) from Rs. 217 cr to Rs.652.6 cr during the same period. Sales volume of synthetic/lubricant oils for the same period grown just by 1.5 times (CAGR of 9%). The year FY2009 being the only year which saw a decline in volumes (down 8% YoY) in the recent period – however, it was compensated by significant rise in realization. Moreover, the company has hiked the dividend consistently to as high as 500% in FY2010 from 50% about a decade ago. TWOC is a ‘zero’ debt entity having a small equity base of Rs 0.87 crore (Rs 10 paid up) with an ROE of 33% for FY10.



Growing EBITDA margins, ability to pass on burden of oil price hike:

TWOC uses base oil, which is derived from crude oil as the core input. Despite significant fluctuations in the cost of base oil, TWOC has improved its realization proportionately more than the increases in base oil costs over the years. Further, counting on a strong brand ‘Veedol’, the company has been able to consistently increase its EBITDA margin 4-fold from 3.7% in FY2005 to 13.7% in FY2010.



Thematic play on growing automotive population:

Despite strong growth in the automobile industry in the last few years (India’s domestic sales has doubled to 12.3 mn vehicles in FY2010 over the last six years), India still remains an under-penetrated market as compared to other emerging economies. Centrum Research estimates that sales of two wheeler volumes and Passenger cars would grow at a CAGR of 16% and 17% respectively for the period FY10-12. Further, according to a study by CRISIL, commercial vehicles industry is expected to post a CAGR of 16-18% over the next 5 years (2009-10 to 2014-15) on the back of a sustained growth in the economy. Thus, amidst growing automobile production, India’s finished lubricants market is expected to consistently expand. We expect TWOC, with 70% of the volume sales coming from the replacement market and with a strong brand ‘Veedol’, to be a major gainer of booming automobile population.



Attractive Value Play:

Andrew Yule & Co. (AYC, a Public Sector Undertaking, with Government of India holding of 94%) has a stake of 26.20% in TWOC. AYC was classified as a BIFR case (a sick company) in the past. During the last 3 years, the core business of AYC was under stress with ‘Other Income’ (basically income from sale of assets/investments) mainly contributing to its bottom line. While the contribution of ‘Other Income’ has been Rs 66.59 cr, Rs 89.54 cr & Rs 114.06 cr, its net profits were Rs 18.27 cr, Rs 17.29 cr and Rs 17.32 cr respectively during the years FY2008, FY2009 and FY2010. Hence, we believe that there is a possibility of AYC divesting its stake in TWOC and any such divestment would unlock substantial value for TWOC shareholders by significantly improving its valuation multiple. At current market price of Rs 6,550, Tide Water has a market capatalisation of about Rs 570 crore i.e. ¾ of its FY11E net sales of Rs 741 cr.


Risk to our view

Any sudden spike in crude oil prices could lead to some margin pressures in the short term. However, we believe that eventually TWOC would be able to pass on the cost hike to the end customers as it has been the case in past.


Valuation and Recommendation

We expect, for the period FY2010-FY12, net sales to grow at a CAGR of 15%, while net profit to rise at 10% (CAGR) to Rs 857.6 cr and Rs 69.7 cr. EBITDA margin for FY2011 is expected to continue at lower level, however, the same is expected to rise in FY12 with the company passing on cost hikes to its customers with a lag effect. The stock currently trades at 10.3x FY2011 and 8.2x FY2012 estimated EPS of Rs 636.6 & Rs 799.5 respectively. We recommend a BUY with a target price of Rs.9600 (12x FY2012E EPS).

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Lakshmi Vilas Bank

Lakshmi Vilas Bank (LVB)

Buy

Target Price: Rs. 140

CMP: Rs. 101.4

Upside: 38%



Focus on consistent growth and improving asset quality
Investment arguments


Initiatives of the new management expected to provide growth momentum

Lakshmi Vilas Bank (LVB) was incorporated in 1926 and has operations largely in the southern states of India. In August 2010, the bank inducted a new management team consisting of senior executives from leading foreign and Indian private sector banks. This new team has plans to grow advances with an improved risk framework at LVB and focus on new verticals as well as the retail side of the bank. LVB has been witnessing improvement in its operating parameters as well as quality of assets over the last few quarters. The company’s Net Interest Margin (NIM) has improved from 2.5% in March 2009 to 3.8% in September 2010. Its provision coverage ratio has gone up to 70.1% in December 2010 from 26.3% in December 2009. RoA has improved from 0.7% in March 2009 to 0.9%* in September 2010. Also, RoE has improved from 11.5% in March 2009 to 12.6%* in September 2010. LVB plans to increase its branch network substantially (by 37%) by opening 100 new branches over the next two years. The new management also intend to keep their focus on micro and small and medium enterprises (MSME), which currently forms 36% of the total loan book. Setting up a housing finance company and improving overall efficiency would be key focus areas of the bank, going forward.



Significant improvement in asset quality improves conviction in the new management

LVB has witnessed considerable improvement in its asset quality over the last few quarters. The gross Non-Performing Assets (NPAs) have come down from 5.7% in December 2009 to 3.0% in December 2010. Similarly, the net NPAs have also fallen from 4.2% in December 2009 to 2.0% in December 2010. The new management has set a target for focussed reduction of NPAs as well as consistent and profitable growth. The new team is quite aggressive on the recovery front – the bank has sold a few NPAs and reportedly recovered Rs. 70 cr from these activities in the current quarter (Jan-Mar 2011). Consequent to these efforts, we expect the Net NPA to fall significantly below 2% by end of the current quarter. The bank aims to bring down its net NPAs to less than 1% over the next two years.



We expect consolidation of Old Private Sector Banks to continue

While the Old Private Sector Banks (OPSBs), like LVB, lack identifiable promoters, we firmly believe that the issue of new banking licenses are likely to be quite restricted. Further, we expect that even if new banking licenses are issued, it would take a minimum of 1-2 years for the new players to start and scale up their business. Hence, we believe there is further scope for significant consolidation in this space by means of either an outright takeover or by acquiring a sizeable equity stake. We expect LVB could be one of the beneficiaries of the expected further consolidation process.



LVB stock, available at an attractive valuation

LVB’s stock price has corrected by nearly 30% from its peak price of Rs.143/ reached in September 2010. At the current price, the stock is available at attractive valuations of 1.2x its FY12E Adj. BV of Rs.83.5/. An analysis of some of the recent M&A deals in the OPSB segment reveals that such deals were done at much higher valuations than what some of the old private sector banks, like LVB, are enjoying at present. The acquisition of Bank of Rajasthan, at 5.5x its book value, by ICICI Bank in May 2010, is a case in point. Prior to that, in 2008, HDFC Bank had acquired Centurion Bank of Punjab at 4.5x its book value. We believe that LVB might eventually be a significant beneficiary of anticipated further consolidation process in the OPSB segment.

Risk to our view

Any significant slow down in the industrial economy could increase its NPAs and thereby impact its profitability adversely.

Valuation and Recommendation

We believe that the medium to long-term prospects of the banking sector remain strong as India’s GDP is expected to grow at 8%+, over the next few years at least. This improved growth prospects augur well for the banking sector, which has enjoyed a credit multiplier of about 3x over GDP growth rate in the past. LVB, with a new management team in place, is witnessing improvement in its operational parameters and also in its asset quality. Considering LVB’s improving operational performance, attractive valuation and further opportunity for consolidation process in the OPSB segment, we recommend a BUY on the stock which currently trades at 1.2x FY12E Adj. BV of Rs.83.5/, with a fair value of Rs.140/, based on a valuation of 1.7xFY12E Adj. BV.

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US Stocks

Economic Developments:

US Stocks rose to a 32- month high for the S & P Index which closed up 0.6% at 1,336, on account of improving earnings from companies and a more optimistic outlook from the Federal Reserve as per minutes of its meeting on January 25 released yesterday.

The Comprehensive Economic Partnership Agreement (CEPA) signed by India and Japan yesterday is expected to double the bi-lateral trade between the two countries to $ 25 bn by 2014 with textiles & pharma sectors to be the major beneficiary.

Sector Developments:

Natural rubber prices yesterday rose further by Rs 1,000 per tonne to touch an all-time high of Rs 239,000 per tonne.

For CY2010, sales of Personal Computers (desktop + notebooks) showed a phenomenal growth of 26.3% to 98.9 lakh units after having experienced a decline in sales of 1% yoy & 5% yoy in CY08 and CY09.

Corporate Developments:

About half-a-dozen government-owned banks such as Indian Overseas Bank, Allahabad Bank, UCO Bank, Andhra Bank, United Bank of India, and Syndicate Bank, Corporation Bank plan to raise Tier 1 Capital through preferential allotment of equity shares to the Government of India. This would raise Government holding in these banks to over 51% thereby allowing the banks to raise further capital from the market thus raising lending capacities of the banks. UCO Bank (Rs 940 cr) & Corporation Bank (Rs 309 cr) have already announced their limit for raising of capital.

SAIL plans to set up a 3 million tonnes per annum plant in Mongolia with a total investment of Rs 15,000 cr if the company is provided with raw material linkages and land in the country.

Rising material prices seems to be continuously denting the margin of Maruti and Hero Honda in the current quarter (Jan-Mar 2011) as well. For instance, the steel prices have gone up by about 20%-25% since the start of 2011.

The Ministry of Environment has sent show-cause notice to Sesa Goa for revocation of environmental clearance of the Pirna mines.

Tata Power & Tata Motors plan to raise upto$1 billion through perpetual bonds route.

Reliance Industries is planning major investments totaling upto $30 billion in the next five years in its various businesses including energy and telecom.

Petronet LNG is planning to set up a 5 MT import capacity terminal at Kochi by October 2012.

Our Views:

Yesterday Sensex rose for the 4th consecutive day (up 27 points) to 18,301as the Prime Minister yesterday assured the nation of taking stern action to stop corrupt practices, and also taking steps to bring about reforms and to boost infrastructure outlays going forward. However, FII’s and DII’s remained net sellers for yesterday in the equity markets to the tune of Rs 230.06 cr and Rs 68.49 cr respectively. Sensex at the current levels trades at comfortable levels of 14.6x 1-year forward earnings estimates. We see positive aspect of present concerns on corruptions – this would lead to better governance and hence, result in better realization of proceeds from the sale of government assets like telecom spectrum and divestments of public sector undertakings in the future. We continue to advise clients to accumulate good value stocks like Aurobindo Pharma, Dhanlaxmi Bank, BHEL and Hindustan Zinc.

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US Stocks saw a decline

US Stocks saw a decline, with the Standard & Poor’s 500 Index closing down 0.3% at 1,328. This was due to retail sales grew at a 0.3% increase in January 2011 (less than economists’ estimates) as compared to 0.5% increase in December 2010 and prices of imported goods climbing.

Japanese stocks rose for the eighth day, after brokerages raised investment recommendations on some companies and on account of weakening of the yen.

For January 2011, UK experienced a 26 month high inflation rate at 4% YoY as against 3.7% YoY in December 2010.

China experienced a decade high inflation (ex-food) of 4.9% yoy for January’ 2011.

Gold prices rose to a 4-week high. Gold futures for April delivery were at $ 1,373.2 on the COMEX (New York) while it traded at $ 1,372.25 an ounce in London.

India would be signing free-trade pact with Japan today, which would result in removal of trade tariffs on more than 90% of goods traded between the two countries. Through this agreement, India is to provide National treatment to both pre- & post-investments from Japan i.e. Japanese companies investing in India would be treated on par with Indian companies at every stage. This is a positive development for the economy in general and also for the domestic sectors like textiles (on which duties expected to come down from 5%-15% currently to 0-5% at par with Japanese companies), pharma (agreement would allow speedier clearance for exports to Japan) and services in particular.

Buoyed by estimates of robust wheat production (81.47 mn tonnes) for 2011-12, the government is targeting second highest procurement of 26 mn tonnes (YoY up 16%) for FY2011-12; previous record procurement being 25.3 mn tonnes in FY2008-09.

UN joint stock pension fund with a total corpus of $ 42 bn has shown increasing interest for further investments in the Indian stock markets. As of December 31, 2010, the Fund’s investments in the Indian assets were $419mn of which $ 346 mn were in the Indian equities.

Government has disallowed investments by Employee Pension funds (EPF) in the Indian stock markets. This is a negative development as EPF with a corpus of Rs 5 lakh cr would have been in a position to make considerable investments in the Indian stock markets.

Sector Developments:

Oil marketing companies have raised the prices for Aviation Turbine Fuel (ATF) by over 4%. This is the ninth straight increase in jet fuel prices since October 2010.

According to the IATA estimates, India & China will be among the five largest domestic aviation markets in the next 2 years. By 2014, China is expected to have 379 mn passengers (CAGR of 13.9%) while India is expected to have 69 mn domestic passengers (CAGR of 10.5%).

Commerce and Industry ministry has proposed the establishment of a $9 billion-‘revolving fund' with equal contribution from India and Japan to kick start the implementation process of the $100-billion-Delhi Mumbai Industrial Corridor Project.

Corporate Developments:

The Environment Ministry's move to ease restrictions imposed on mining projects in critically polluted areas such as Chandrapur and Korba would help Coal India Ltd increase its output for FY2012 by about nine million tonnes (~2%).

Tata Steel Q3FY2011 consolidated net profit was up 122% at Rs.1,003 crore as compared to Rs.473 crore in Q3FY2010, on a yoy basis. Consolidated net sales were up 9.74% at Rs .28,610 crore against Rs.26,070 crore on a yoy basis. The increase was mainly due to improved product mix and higher output

Jindal Steel and Power‘s integrated steel plant in Orissa has received a conditional approval from the Ministry of Environment.

Our Views:

Sensex continued its uptrend yesterday (rising by 72 points) to close at 18,274 amidst volatility. FII’s were net buyers to the tune of Rs 233.05 cr in the equity markets while DII’s sold equities worth Rs 167.85 cr. An analysis of Nifty50 stocks for the quarter ended December’2010, suggests companies have reported rise yoy in sales by 18%, while EBITDA and PAT have risen yoy by 22% & 30% respectively while interest cost is up by 17% yoy. This suggests the fears of rising raw material prices and interest costs are over done and we believe that the domestic companies would continue to do well during Q4 FY11 as well. Though the markets may remain volatile till the budget day, we remain optimistic on the Indian growth story and continue to advice accumulating value stocks like Super Spinning, Indian Bank, Dhanalaxmi Bank, BHEL, etc, with a time-frame of 6-12 months.

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