December 27, 2011
Indian markets are expected to open in the green following positive cues from opening trade in most of the Asian markets today and gains in US markets on Friday. There was quite a lot of volatility, but the Indian markets managed to end in the green, gaining close to 1.5% over the last week.
US stocks closed higher on encouraging economic reports as the number of Americans that applied for unemployment benefits dropped last week to the lowest level since April 2008 in the latest sign that the job market is healing. The Conference Board also reported that its measure of future economic activity had a big increase in November. It was the second straight gain, signalling that the US economy is picking up some speed.
The markets will closely track the developments on the domestic front; RBI is likely be more watchful now as moderating inflation is likely to resolve the predicament of trimming interest rates in order to support growth. Nonetheless, one cannot rule out the pessimism surrounding the policy paralysis on the macro front which, in tandem with weakening of global cues, can reverse the market directions.
The trend deciding level for the day is 15,774 / 4,724 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 15,876 – 16,014 / 4,754 – 4,794 levels. However, if NIFTY trades below 15,774 / 4,724 levels for the first half-an-hour of trade then it may correct up to 15,636 – 15,534 / 4,684 – 4,653 levels.
Increase in NRE FD rates
Following the deregulation of NRE Savings and Fixed Deposit rates by the RBI, several banks, including smaller private banks such as Yes Bank as well as larger ones such as HDFC Bank have aggressively increased the rates on these deposits. NRE FDs are rupee denominated accounts meant for NRI customers on which the interest earned is tax-free. For banks, these deposits are a source of raising rupee funds just like ordinary domestic FDs.
Hence, following the deregulation, several banks have increased the rates offered on these accounts close to their domestic FD rates (as in case of HDFC Bank offering 8.5% on NRE FDs less than Rs.15 lakhs vs. 9.25% on domestic FDs) or in some cases equal to their domestic FD rates (as in case of Yes Bank offering 9.6% on both domestic and NRE FDs as well as 7% on domestic and NRE savings accounts greater than Rs.1 lakh). Prior to the deregulation, interest rate on NRE FDs had been increased on November 23, 2011, by 100bp to LIBOR+275 bp (which worked out to about 3.75-4%). Considering that the interest on these FDs is tax-free, at about 8.5-9.5%, in our view this represents a compelling return (and a massive jump from the rate hardly a couple of months back of 2.75-3%), which could attract significant NRI inflows into the country.
Within the banking sector, Federal Bank and South Indian Bank have a disproportionately large share of NRE deposits in their overall funding mix at about 12% and 8.5%, respectively. Immediately post the deregulation, both the banks had increased their NRE FD rates to around 6.5%, but following the recent moves by other private banks, Federal Bank has also raised the rate to 8.25-9.10% and South Indian Bank’s management has also indicated that by Monday it will hike NRE FD rates to similar levels (management has indicated that it is unlikely to hike rates on NRE savings account). Hence, the low-cost advantage of these FDs vis-à-vis domestic FDs is expected to erode going forward. Also, so far, rates on NRE savings accounts were higher than NRE FD rates prior to the deregulation, but now with NRE FD rates being more than 500bp higher, a large part of NRE savings balances of these banks are also likely to move to NRE FDs.
Assuming that the entire NRE term and savings balances re-price gradually over the next one year to the new NRE FD rates, the impact on the NIMs could be up to 35bp for South Indian Bank and up to 45bp for Federal Bank. In any case, both these stocks (along with other older private sector banks) have outperformed of late, and current valuations at about 1x P/ABV are significantly higher than mid-size PSU banks with similar or better fundamentals. Accordingly, we downgrade both stocks to Neutral.
IRB’s Goa road BOT project terminated by NHAI
IRB’s Goa road BOT project (TPC: Rs.833cr) has been terminated by NHAI (formal letter received by IRB) due to NHAI’s inability to provide land for implementation of this project. This move by NHAI was on expected lines as IRB had removed this project from its order book in 2QFY2012 and subsequently we had factored the same in our model (read IRB 2QFY2012 result update). Further, according to management, IRB will claim compensation charge as per the provisions of the concession agreement.
Project details: IRB had received LOA from NHAI on January 5, 2010, for the four laning of Goa/ Karnataka Border to Panaji – Goa stretch in Goa on BOT toll basis. The company had subsequently incorporated SPV – IRB Goa Tollway Pvt. Ltd. (wholly owned subsidiary of IRB) for the project’s implementation. IRB Goa Tollway Pvt. Ltd. had executed concession agreement with the NHAI in February 2010 and subsequently the project had also achieved financial closure in March 2010. Construction period of the project was 30 months. However, NHAI could not provide necessary land for implementation of the project.
We have arrived at an SOTP-based target price of Rs.182/share, which implies an upside of 30.0%. Hence, we recommend a Buy rating on the stock.
Monnet Ispat Board approves share buyback
Monnet Ispat Board has approved share buyback upto Rs.100cr from the open market at a price not exceeding Rs.500/share. We expect the company to finance the buyback program from its internal accruals as it has been consistently generating quarterly EBITDA in excess of Rs.100cr. The share buyback could boost Monnet Ispat’s FY2013 EPS by 3-5%, depending on the average cost of shares bought back. We maintain our Buy recommendation on the stock with an SOTP target price of Rs.528.
Discontinuation of coverage
We have discontinued coverage on the following stocks: Electrosteel Castings, Godawari Ispat, Prakash Industries, Sarda Energy, Gujarat Gas, Gujarat State Petronet, Indraprasth Gas and Petronet LNG.
Economic and Political News
- Energy deficit may rise up to 15% as weak rupee hurts coal imports
- Forex reserves dip by US$4.67bn
- FDI dips 50% to US$1.16bn in October 2011
- State run banks told to discard fast-track promotion policies
- Oil Ministry says no provision for penalty in RIL’s KG-D6 contract
- Power trading firms hit by payment delay
- Domestic airfares fall as capacity rises
- Coal India will switch to new pricing mechanism from January 2012