News Round-up :: Kotak Securities: December 7, 2010

News Round-up
` The govt. has agreed in principle to ensure a minimum 10% return on investment to
ONGC (ONGC IN) in Cairn India's (CAIR IN) Rajasthan blocks, boosting the firm's
valuation ahead of its follow-on public offer & removing a big obstacle for the USD
9.6bn Cairn-Vedanta deal. (ECNT)
` ONGC (ONGC IN) will pick up 25% in Kazakhstan's Satpayev block after 6 year delay.
(ECNT)

` SBI (SBIN IN) has raised deposit rates by 50 to 150 basis points giving a clear
indication that lending rates are set to rise by the end of this month. (ECNT)
` Maruti Suzuki India (MSIL IN) said it would increase prices of its vehicles soon, to
offset rising input costs and impact of the strengthening yen. (BSTD)
` Mukesh Ambani is planning to provide USD 222 mn seed capital to begin a new
venture that would invest in innovative business ideas, including technology and
healthcare segments. (BSTD)
` Suzlon Energy (SUEL IN) said it would acquire the tower business division of fullyowned unit, Suzlon Towers & Structures, and the operations and maintenance
division of wholly-owned Suzlon Infrastructure Services. (BSTD)
` Glenmark (GNP IN) gets FDA nod for painkiller drug. (BSTD)
` Siemens (SIEM IN) bags USD 28 mn order from Jaypee. (BSTD)
` Mahindra Finance (MMFS IN) to raise up to USD 127 mn in January. (FNLE)
` M&M (MM IN) in pact with Italian firm for supply of tillers. (THBL)
` The shares of Tata Steel (TATA IN) surged 3.4% after news that global mining major
Rio Tinto had made a USD 3.5bn bid for Africa focused Riversdale Mining, in which
the Tata own a 24% equity stake. (ECNT)
` Religare Enterprises (RELG IN)  is close to buying 85% of the Ajay Piramal Group
promoted real estate fund Indiareit Fund Advisors, valuing the entire fund at around
USD 55.55mn. (ECNT)
` JSW Steel (JSTL IN) has got shareholder's nod to  issue 0.97mn shares equity shares
on a preferential basis to Japanese steelmaker JFE Steel. (ECNT) 
` Piramal Healthcare's (PIHC IN) shareholders have approved a proposal to buyback
20% of its total shares that will entail an outgo of USD 557.37mn. (ECNT)
` NRI businessman C Sivasankaran has acquired 2.99% stake through open market
purchases in the Bangalore based  Karuturi Global (KARG IN) in the past few weeks.
(TTOI)
Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line

Bank of Baroda:: concerns on capital constraints recede:: JP Morgan

Bank of Baroda Overweight
BOB.BO, BOB IN
Capital infusion: concerns on capital constraints
recede but infusion EPS and ROE dilutive


• Large capital infusion by the government: According to CNBC
reports, the Indian government has infused ~Rs100bn in PSU banks with
stakes of <57-58%. BOB has received Rs35bn and assuming current
market prices, the infusion would lead to ~10% dilution and would take
the government’s stake in BOB from 54% to 58% and lead to ~175bps
increase in BOB’s Tier 1.


• Positives - No constraints on capital now: The capital infusion
addresses concerns about capital constraints not only in the near term but
also longer term, as the increase in the government’s stake to 58% leaves
leeway for further capital issuance without government help in the
future.

• Negatives: EPS and ROE dilutive, capital marginally higher than
required: Assuming current prices, EPS dilution would be ~6% over
FY11-12E and ROEs would be brought down by ~250bps to ~20-20.5%
for FY12-13. Given strong internal capital generation, we estimate that it
would take more than three years for BOB to leverage up again, leading
to lower ROEs over that period.

• Prefer PNB now vs. BOB: Though we currently have no official
confirmation of the same, we assume the infusion to be 100% equity.
Given very low dilution for PNB, we would prefer PNB vs. BOB as the
capital infusion would widen ROE differentials for BOB vs. PNB from
200bps earlier to 500bps now and valuations would be on par on a post
diluted book basis.

• Maintain Overweight: Though the news is positive for PSU banks in
general as it addresses their capital issues, we believe for BOB the large
dilution is at best neutral, given the large EPS and ROE dilution. We
continue with our Overweight on BOB, given superior asset quality but
would prefer PNB for return ratio differentials post the capital infusion.

Economy & Corporate News:: Kotak Sec: 07/12/10

Economy News
4 Foreign direct investment (FDI) in multi-brand retail and insurance may
be opened up soon in India, Mr Montek Singh Ahluwalia, Deputy
Chairman, Planning Commission, indicated on the sidelines of  a
Federation of Indian Chambers of Commerce and Industry (FICCI) event.
(BL)

4 France on Monday signed deals with India worth euro 13.3 billion in the
nuclear power, civil aviation and defence sectors. India and France have
signed as many as five agreements in the civil nuclear power sector. They
included a framework agreement to construct two civil nuclear plants in
Jaitapur, Maharashtra, costing euro 7 billion (roughly $9.5 billion). The
sixth agreement was on film co-production and one MoU on cooperation
on earth system science and climate. Plans are also afoot to construct
another four nuclear power plants (a total of six), all by French nuclear
giant Areva, at a total cost of $25 billion. (BS)

Corporate News
4 State Bank of India, on Monday, hiked interest rates on fixed deposits
by 50-150 basis points. The sharp rise of 150 basis points is for short-term
deposits having maturity up to three months, while for longer term
deposits; the hike is between 50 and 100 basis points, which indicate tight
liquidity in the system. (BL)
4 Engineers India Limited said it is mulling to bid under the ninth round
of the New Exploration and Licencing Policy (NELP) of oil and gas blocks
and enter city gas distribution projects. The company is looking to enter
city gas distribution projects and provide consultancy for nuclear power
projects. (BS)
4 Piramal Healthcare on Monday said its shareholders have approved a
proposal to buyback 20 per cent of its total number of shares that will
entail an outgo of Rs 25.08bn. A resolution seeking shareholders nod for
contributing to charitable and other funds up to an amount of Rs 2bn, has
also been approved by the shareholders. (BS)
4 Shares of Tata Steel, surged 3.4% on Monday after news that global
mining major Rio Tinto had made a $3.5-billion bid for Africa-focused
Riversdale Mining, in which the Tatas own a 24% equity stake. While the
development sparked speculation that Tata Steel, one of the three major
shareholders in Riversdale Mining, could launch a counter bid, people
familiar with the group said the Mumbai-based conglomerate would not
go alone in putting in such a bid. (ET)
4 India and Kazakhstan will iron out some unspecified commercial issues by
February next year, paving way for state-run ONGC to pick up 25% stake
in Kazakhstan’s Satpayev block after six years of delay. The Cabinet
Committee on Economic Affairs (CCEA), India’s apex body on economic
matters, has already approved the deal last year. (ET)
4 Suzlon Energy Ltd has informed BSE that the board of directors of the
company has approved the acquisition of tower business division of
Suzlon Towers and Structures Ltd and operations and maintenance
division of Suzlon Infrastructure Services Ltd, both are wholly owned
subsidiaries of the company, under a composite scheme of arrangement,
subject to receipt of all statutory and regulatory approvals. (BL)

SBI:Aligning deposit rates to market rates:: Kotak Sec

State Bank of India (SBIN)
Banks/Financial Institutions
Aligning deposit rates to market rates. We see SBI’s recent move to increase rates as
a measure to counter the rising cost of tight liquidity and normalize its interest rates in
line with market rates. We expect a marginal decline in NIMs in 2HFY11E from the
elevated levels of 2QFY11 and our earnings estimates capture that. We believe high
CASA banks will have a lower impact of rising funding costs compared to peers. We
maintain our estimates and believe the bank would benefit from better operating
leverage and lower provisions in FY2012. Maintain BUY.




Deposit rates across buckets increased by 50-150 bps; move aimed at normalization 
SBI today announced a hike in its deposit rates by 50-150 bps across various buckets as the
liquidity environment continues to remain tight (advance tax outflows in December). Lending rates
remain unchanged. The overall increase looks sharper, regardless, we believe this rate hike is
aimed at aligning SBI’s interest rates towards market rates and the tight liquidity environment
experienced by the industry. The sharpest rise has been in the 46-90 day bucket at 150 bps (5.5%
and one of the highest in the industry), indicating that SBI is probably looking at the current
liquidity deficit to be temporary in nature, a situation likely to reverse in 4QFY11 as government
spending improves. This rate however, continues to be lower than prevailing call money rates.
However, the rates have been increased by 100 bps in the 1-3 year categories (7.75-8.5%)   

Strong CASA ratio of 48% to cushion rising costs; building NIM decline in estimates
In light of tight liquidity environment, we favor high CASA banks like SBI to cushion the impact of
steep rise in deposit costs. As of 2QFY11, SBI had a CASA ratio of 48% (domestic deposits),
second highest in the industry following HDFC Bank. 

We anyways build reasonable cushions in our 2HFY11 estimates as we expect FY2011
improvement in NIM (calc) of about 45 bps while the bank has been running at about 60 bps
higher NIMs during 1HFY11, as compared to FY2010 NIMs. Also, our earnings already factor NIMs
to decline in FY2012 by about 10 bps to 2.8% (calc). 

Logical to expect lending rate hike as well; credit growth is also picking up 
We believe SBI will also raise lending rates in due course. Even in the past, lending rate hikes have
followed deposit rate hikes. Further credit growth has just started to pick up – bankers have been
highlighting that credit growth has been firm during recent times and is getting more diversified.
We believe pricing power remains with bankers on the back of steady loan demand coupled with
tighter liquidity in the system

Earnings impact limited as strong levers available 
We believe SBI has multiple levers to deliver over 20% earnings growth and RoAs of 1%
despite NIM pressure in FY2010-12E, mainly from better operating leverage and lower loan
loss provisions. A cost-income ratio of 47% and opex/assets at 2% has scope for further
improvement as the bank has completed near-term investments in branches, technology and
employees. 2HFY12 would see loan loss provisions to ease as the bank reaches 70%
provision coverage ratios as mandated by RBI. Also, strong improvement in the underlying
economy would also see lower slippages and higher recovery cycle resulting in lower loan
loss provisions (we are building FY2012 loan loss provisions to remain at FY2011 levels).

10 Yr bond infringes the 8.20% level; sentiment remains subdued: Edelweiss

v10 Yr bond infringes the 8.20% level; sentiment remains subdued

Government securities
 Bond yields edged higher as sentiment remained subdued on concerns of the
additional strain on liquidity due to the outflow of advance taxes in mid December
approximated to be INR 550 bn. Market participants are hopeful of the central
bank intervention to provide respite from the stiff liquidity situation, at its policy
meet on 16th Dec. The benchmark bond closed 3 bps higher at 8.21% while the
8.13% 2022 maturity bond closed 4 bps higher at 8.21%.



 Concerns over the liquidity and the selloff in the bond market drove swaps rates
higher. The one swap closed 6 bps higher at 6.91% while the five year swap ended
7 bps higher at 7.33%.

Non-SLR market
 Banks mopped up INR 40 bn in Certificate of Deposit. Mutual fund preferred to
invest in 3 month CD as the spread between the 3 month & 1 Yr CD narrowed to
25-30bps. Allahabad Bank placed INR 15.50bn CD maturing on 8th Mar, 2011 at
8.90% while Corporation Bank placed INR 5bn March maturity CD at 8.85%.
Punjab National Bank and IOB placed INR 10bn & INR 7bn respectively in March
maturity CD at 8.95%. Bank of India placed INR 250mn in 1 Yr CD at 9.12% while
LIC Housing Finance placed 2 Yr NCD amounting to INR 2bn at 9.40%
Money markets
 Overnight rates ended firm at 6.72%, well above the central bank’s lending rate,
at the onset of the new fortnightly reporting cycle. The temporary flexibility given
to banks allowing their holdings for SLR to fall to 23% of deposits has helped
control the call rates. However with the outflow of the third installment of
corporate taxes by 15th Dec will further strain the liquidity situation. RBI injected
INR 1.15 trn in to the system through the LAF today compared to the average of
INR 1 trn in the last fortnight.

Biocon (More milestones ahead, BUY): IIFL

Biocon (More milestones ahead, BUY): 


We came out more positive from our meeting with Biocon’s management. Licence fees from the recent insulin deal with Pfizer will start getting recognised from this quarter; the upfront payment of US$200m is significantly more than the development expense, ensuring good margin on the revenue recognised, and emerging market ramp-up of the partnership will come soon (India launch expected in 2011). Listing of CRAMS subsidiaries and progress in monoclonal antibodies partnership with Mylan could be medium-term upsides. We raise our FY11-12 core earnings estimate by 10–11%, as revenue from the Pfizer deal will more than offset high R&D expense of EU insulin trials. We upgrade Biocon to BUY and raise our price target to Rs492.

HDFC -Rising home loan rates will temper loan growth:: Kotak Sec

HDFC (HDFC)
Banks/Financial Institutions
Rising home loan rates will temper loan growth. HDFC has raised home loan rates
for existing customers by 75 bps with effect from December 1, 2010. HDFC has
withdrawn the dual rate home loan scheme and now offers new home loans at 9.5%
as against 8.75-9% earlier. The management expects margins to remain stable post the
current hike. We believe that the rise in real estate prices coupled with rise in lending
rates will likely affect loan growth in the retail lending business. Valuations remain rich,
retain REDUCE.




HDFC has increased home loan rates, others to follow suit 
HDFC has increased its PLR by 75 bps with effect from December 2010. This hike follows a 50 bps
rise in PLR in September 2010. Home loan rates for new customers have also been increased to
9.5% for loans up to Rs3 mn, 9.75% for loans between Rs3 mn and Rs7.5 mn, and 10% for loans
above Rs7.5 mn. HDFC and ICICI Bank have withdrawn their dual rate (teaser) home loan schemes
following sharp rise in interest rates. In the recent credit policy review, RBI has increased standard
asset provisions for dual rate loans offered by banks to 2% from 0.4% earlier. 
Over the weekend, ICICI Bank has also increased their home loan rates by 50 bps. SBI will review
the rates in January 2011; however, most other banks are currently reviewing their home loan
rates and will likely announce rate hikes over the next few weeks. 

Borrowings cost has increased, hike will support margins
The bulk borrowings rates have increased by about 100-300 bps over the last two quarters. CP
rates have now increased to about 9.5% due to the liquidity crunch. Last week, liquidity in the
system was at a peak deficit of about Rs800 bn. We believe that the rise in bulk borrowings rates
in the system will prompt the bank to hike lending rates. Banks with high CASA—HDFC Bank,
PNB, BoB and Union Bank—will likely be better-placed in the current environment. HDFC’s
management has highlighted that the company will be able to maintain margins post the current
hike. The entire portfolio will be re-priced within next three months. 




SOTP-based target price of Rs720; retain REDUCE
We retain SOTP-based target price of Rs720. In our fair value estimate, we value HDFC’s
mortgage business at Rs400/share—6X core PBR and 19X core PER FY2012E. In order to
capture the impact of the likely warrant conversion in FY2013E, we have valued the business
using a residual growth model as of March 2013E and discounted back the value to March
2011E at 12.5%. At our fair value estimate, the mortgage business will trade at 4X core PBR
and 15X core PER FY2013E for RoEs of about 26-30% (2% core RoA and leverage of 13-
15X).

SBI: Deposit Rates – 100 bps Hike:: Morgan Stanley

India Financial Services
Deposit Rates – 100 bps Hike
Quick Comment – What’s new: State Bank of India
has raised deposit rates by 50-150 bps across maturities.
In the 1-2 year bucket (using 555-day deposit as
benchmark) SBI has increased rates by 100 bps. No
changes in prime lending rates / base rate have been
announced as yet.  SBI’s rate increase follows increases
by other entities during the past week 



Pace of increase was a surprise: While we were
building in deposit rates to increase at about 50 bps per
quarter – the pace of the increase (+100 bps) was
sharper than expectations. Historically, we have not
seen such a sharp in increase at one go by SBI.

Margins to normalize going forward: Over the last
few months Indian banks were benefitting from higher
lending rates, lag in feeling the impact of higher deposit
rate and higher LD ratio. However, now NIM’s are close
to peak levels and ready to normalize. We expect NIM’s
to come down (though likely to stay higher than historical
average) – today’s rate hikes don’t have a material
impact on our numbers. These rates will flow through
earnings over next 12 months and we will not be
surprised if the bank increases lending rates by then.

Our numbers will be affected if banks raise deposit rates
further without touching lending rates. 

Why didn’t the bank raise lending rates – As we have
mentioned in our previous notes, historically banks used
to raise deposit rates and touch lending rates with a lag
of 3-6 months (loans are floating rate while deposits are
fixed rate). In this cycle, SBI raised lending rates along
with deposit rate, till now – probably to ensure adequate
revenue momentum to meet higher credit costs. Now
with NIM’s at 3.4% and rising, it can afford to revert to
old style rate hikes. Exhibit 10 shows how banks with
strong funding had seen lending spreads expand during
last rate hike cycle.


Why a sharp increase in deposit rates? Deposit growth in
India continues to lag credit growth owing to low real deposit
rates – hence incremental credit-deposit ratio both on trailing
3M and 1 yr basis have been elevated. This is also reflected in
the tight-interbank liquidity conditions. The sharp increase
announced today would have likely been driven by the fact that
we are entering the “busy” season in terms of credit growth and
banks may be looking to raise deposits ahead of the same.
How many more deposit rate hikes?  We expect another 50
bps deposit rate hike (over 3-6 months) and about 75 bps PLR
hike (over next 6-9 months). While the first reaction on seeing
the 100 bps rate hike is to think that rates are going to rise
sharply, history provides some perspective. The last time SBI
was offering around 8.5% on 1 year deposits (April 2008), repo
was at 7.75% (6.25% right now), CRR was 7.75% (6% now),
crude was US$ 115/barrel, WPI inflation was at 8% and rising
to 11.2% by July. Unless inflation goes awry, we are likely
coming close to the end of higher deposit rates.

Near term pressure likely, buy liability franchises – We
continue to prefer strong liability franchises. Stocks could be
under pressure in the near term especially until liquidity
conditions improve. In this environment, we continue to prefer
HDFC Bank and State Bank of India wherein the strong liability
franchises will provide an offset and revenue growth will
continue to be robust. 

We have also liked asset aggregators but given the pressure
on liquidity stock performance is likely to be weak in the near
term. However, we would look at buying on weakness as we
expect these stocks to do well in 2011.