For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. INDIA DAILY April 2, 2014 India 1-Apr 1-day1-mo 3-mo Sensex 22,446 0.3 6.3 7.5 Nifty 6,721 0.3 7.1 8.0 Global/Regional indices Dow Jones 16,533 0.5 1.3 0.6 Nasdaq Composite 4,268 1.6 (0.9) 3.0 FTSE 6,653 0.8 (2.3) (1.0) Nikkei 14,976 1.2 0.9 (8.1) Hang Seng 22,517 0.3 (1.4) (3.5) KOSPI 1,997 0.3 0.9 1.5 Value traded – India Cash (NSE+BSE) 158 167 140 Derivatives (NSE) 1,310 823 337 Deri. open interest 1,288 1,091 1,143 Forex/money market Change, basis points 1-Apr 1-day 1-mo 3-mo Rs/US$ 59.9 6 (234) (247) 10yr govt bond, % 9.1 - (6) (10) Net investment (US$mn) 27-Mar MTD CYTD FIIs 375 - 3,606 MFs 3 - (1,234) Top movers Change, % Best performers 1-Apr 1-day 1-mo 3-mo FTECH IN Equity 363.6 (2.7) 9.1 95.6 ADE IN Equity 352.7 (4.2) 38.7 38.1 IOCL IN Equity 274.0 (2.7) 10.3 33.1 BPCL IN Equity 446.9 (2.9) 18.2 31.7 HPCL IN Equity 303.5 (2.0) 14.6 30.6 Worst performers RBXY IN Equity 370.9 1.6 1.4 (19.8) TPW IN Equity 92.9 (1.2) 11.5 (18.5) IBREL IN Equity 56.5 3.6 19.3 (17.5) IVRC IN Equity 13.5 1.9 26.3 (17.2) IDEA IN Equity 137.6 0.1 6.7 (14.4) Contents Daily Alerts Company Nestle India: Analyst meet takeaways - bold bets, not working yet New year, new guard; old message, old debate Stiff valuations and uncertainty on earnings rebound keep us SELLers Sector Automobiles: A mixed end to the year Two-wheeler players report strong growth Maruti reports ~5% yoy decline in domestic volumes M&M UV volumes surprise positively; Ssangyong Motors sales increase 23% yoy Tata Motors' commercial vehicle sales remain weak; sales volumes decline by ~30% in FY2014 Banks/Financial Institutions: Sanctions improve a bit; 9MFY14 performance flat Sanctions improve in 3QFY14 but show no growth in 9MFY14 NII growth likely to remain lower than loan growth Impact may be higher for private banks Economy Economy: RBI policy: Extended pause with hawkish undertone Interest rates unlikely to soften soon RBI maintains a hawkish undertone Liquidity management via term repo to increase short-term cost of funding at the margin Monetary policy to be on a pause in FY2015, but chances of hikes remain
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For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.
INDIA DAILYApril 2, 2014 India 1-Apr 1-day1-mo 3-mo
Sensex 22,446 0.3 6.3 7.5
Nifty 6,721 0.3 7.1 8.0
Global/Regional indices
Dow Jones 16,533 0.5 1.3 0.6
Nasdaq Composite 4,268 1.6 (0.9) 3.0
FTSE 6,653 0.8 (2.3) (1.0)
Nikkei 14,976 1.2 0.9 (8.1)
Hang Seng 22,517 0.3 (1.4) (3.5)
KOSPI 1,997 0.3 0.9 1.5
Value traded – India
Cash (NSE+BSE) 158 167 140
Derivatives (NSE) 1,310 823 337
Deri. open interest 1,288 1,091 1,143
Forex/money market
Change, basis points
1-Apr 1-day 1-mo 3-mo
Rs/US$ 59.9 6 (234) (247)
10yr govt bond, % 9.1 - (6) (10)
Net investment (US$mn)
27-Mar MTD CYTD
FIIs 375 - 3,606
MFs 3 - (1,234)
Top movers
Change, %
Best performers 1-Apr 1-day 1-mo 3-mo
FTECH IN Equity 363.6 (2.7) 9.1 95.6
ADE IN Equity 352.7 (4.2) 38.7 38.1
IOCL IN Equity 274.0 (2.7) 10.3 33.1
BPCL IN Equity 446.9 (2.9) 18.2 31.7
HPCL IN Equity 303.5 (2.0) 14.6 30.6
Worst performers
RBXY IN Equity 370.9 1.6 1.4 (19.8)
TPW IN Equity 92.9 (1.2) 11.5 (18.5)
IBREL IN Equity 56.5 3.6 19.3 (17.5)
IVRC IN Equity 13.5 1.9 26.3 (17.2)
IDEA IN Equity 137.6 0.1 6.7 (14.4)
Contents
Daily Alerts
Company
Nestle India: Analyst meet takeaways - bold bets, not working yet
New year, new guard; old message, old debate
Stiff valuations and uncertainty on earnings rebound keep us SELLers
Sector
Automobiles: A mixed end to the year
Two-wheeler players report strong growth
Maruti reports ~5% yoy decline in domestic volumes
Tata Motors' commercial vehicle sales remain weak; sales volumes decline by ~30% in FY2014
Banks/Financial Institutions: Sanctions improve a bit; 9MFY14 performance flat
Sanctions improve in 3QFY14 but show no growth in 9MFY14
NII growth likely to remain lower than loan growth
Impact may be higher for private banks
Economy
Economy: RBI policy: Extended pause with hawkish undertone
Interest rates unlikely to soften soon
RBI maintains a hawkish undertone
Liquidity management via term repo to increase short-term cost of funding at the margin
Monetary policy to be on a pause in FY2015, but chances of hikes remain
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
New year, new guard; old message, old debate
Nestle’s strong belief in its strategic drive towards a more ‘value-added/ premium’ portfolio while slowly moving away from ‘price point packs’ remains unchanged. That the company’s performance (volume growth, value growth, EPS growth, return ratios) has deteriorated in recent years is a fact. What is arguable is whether the company’s strategic choices have led to the deterioration and if yes, to what extent. Debate around any key strategic shift or decision is never a short-term one; even as the initial results of portfolio rationalization do not encourage, attributing the recent underperformance to the portfolio-related strategic choices is at best conjecture.
We do think, however, that some of the SKU-related decisions that Nestle has taken in recent years, especially the company’s reluctance to be in the low-price SKUs, may be suboptimal in certain cases. We call these suboptimal essentially on one front—reduced competitiveness in the new user recruitment market. Losing the mindshare of these perhaps low profitability ‘new’ users when they are entering the category as consumers is a risky bet, even from a medium-to-long-term perspective. We do not, for example, foresee a Colgate exiting the `5 price-point pack space—we do highlight here that Colgate’s realization (MRP) on the `5 price-point pack (roughly `28 per 100 gm) is significantly lower than the realization on the larger 200 gm pack (roughly `37 per 100 gm). Colgate is clearly making substantially lower margins on the low-unit-price recruiter pack. We do understand that different categories have different dynamics and what is right for Colgate may not be right for another company. However, Nestle’s ‘blanket’ reluctance to be in the low-unit-price packs is something we do not completely appreciate, at this point.
Stiff valuations and uncertainty on earnings rebound keep us SELLers
At a P/E multiple of 37X forward earnings, we find Nestlé’s valuations expensive given volatile volume growth, weakening consumption trends and significantly lower-than-historical return ratios. While we model volume recovery in CY2014E (led by base and new launches), we believe the same also remains at risk. Maintain SELL with a TP of `4,500.
Nestle India (NEST)
Consumer Products
Analyst meet takeaways—bold bets, not working yet. ‘Portfolio rationalization’ was once again the central point of discussion in the company’s annual analyst meet. Even as we acknowledge the risk of attribution error when blaming portfolio rationalization steps for the recent slow earnings growth trajectory, the fact of the matter is that not only has the company’s absolute growth/return metrics deteriorated in recent years, it has underperformed competitors too, meaningfully. Rich valuations demand a turnaround, which we do believe will happen at some point. Timing and extent remain uncertain; valuations do not fully discount the uncertainty. We remain SELLers.
Nestle IndiaStock data Forecasts/Valuations 2014 2015E 2016E
Nestle posted overall organic revenue growth of 9.2% in CY2013 led by 6.8% real internal growth (RIG) and 2.4% (down from 3.3% in CY2012) pricing growth.
Domestic revenue growth in CY2013 stood at 7.1% led by 0.8% volume growth and 6.2% price/mix-led growth (mix of price hikes and portfolio rationalization). However, we note volume growth was flat in 2HCY13, indicating further deceleration from 1.6% volume growth registered in 1HCY13.
Exports posted a strong 46.5% yoy revenue growth in CY2013 led by 35% jump in volumes.
Category-wise performance
Milk products & nutrition. Nestle posted 2.4% revenue growth in this segment in CY2013, largely led by pricing/portfolio rationalization as volumes declined 3.6% yoy. We note, revenue growth in this segment has further decelerated to just 1.6% yoy in 2HCY13 (versus 3.2% in 1HCY13), despite improvement in volume growth trajectory, due to weaker realizations (portfolio rationalization benefits getting captured in the base). Nestle highlighted that the key issue in this segment has been weak growth in Everyday whitener (underinvested in this category due to lower margins and lost some share in the North East as underestimated competition). We note management did highlight that two-thirds of the milk products and nutrition portfolio grew in line with the company average.
Prepared dishes & cooking aids. Nestle posted a modest 12.1% yoy revenue growth in this segment, aided by a mix of ~4% volume growth and ~8% price/mix-led growth. We note, this portfolio too has witnessed material deceleration in 2HCY13 with volume growth falling to 1.6% yoy in 2HCY13 versus 6.5% volume growth in 1HCY13. While this category wasn’t influenced too much by portfolio rationalization, growth has slowed down as Nestle has lost market share to an aggressive ITC (Nestlé’s market share in noodles now stands at ~80%). Management highlighted that its future strategy for the segment is to focus on both (1) premiumization, i.e. break price point barriers and drive value upgrading. For example moving consumers from `5/10 price points to `15/20 and to higher priced products like pasta and (2) recruit new consumers at the bottom of the pyramid through initiatives like investments in regional advertisements and push `5 price point in Maggi noodles. Management highlighted that noodles household penetration of 75% in 2013 (from 54% in 2009) in Sec D&E consumers compares with 85% in Sec A consumers (from 75% in 2009), which still has a lot of potential room for growth.
Chocolates & confectionery. Nestle posted 8.6% yoy revenue growth in this segment, completely driven by pricing/portfolio rationalization as volumes declined 2.3% yoy for CY2013. However, we note this segment has witnessed some improvement in 2HCY13 with revenue growth accelerating from 5.8% (volume decline of 3.4%) in 1HCY13 to 11.3% (volume decline of 1.3%) in 2HCY13. We note, along with milk segment, this segment has witnessed the biggest impact of portfolio rationalization. Management highlighted that the key issue in this segment is the performance of Munch chocolates (re-launched last quarter), market share loss in select brands and lower share of voice versus key competitors who have spent disproportionately in recent quarters. Alpino chocolate, launched last quarter, has met company expectations.
Consumer Products Nestle India
4 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Beverages. Nestle posted a modest 12.8% revenue growth in this segment driven by a mix of ~3% volume growth and 9% pricing/portfolio rationalization for CY2013. However, this segment has witnessed material deceleration in 2HCY13 with flattish volume growth versus 6.5% growth registered in 1HCY13. We note this segment was impacted by portfolio rationalization, especially on small packs/ LUPs of Nescafe. Nestle has introduced several new variants under Nescafe through imported channel like Nescafe Gold, Nestle Coffee Mate and Nescafe Ice Café to target consumer uptrading.
Other takeaways
Significant improvement in cash position. Management highlighted that Nestle India now has enough cash to pay off Nestle SA’s debt and still have some surplus (not an easy feat to achieve given decelerating growth rates, in our view). Nestle India had taken US$192 mn debt from Nestle SA to fund the recent capex program. The company highlighted that it saw material improvement in net working capital cycle in CY2013, which helped free cash generation. Average trade net working capital as % of sales declined from 6% in CY2012 to 4.1% in CY2013 aided by 140 bps reduction in inventory and 50 bps savings from trade payables. It did indicate that the working capital cycle is likely to worsen a tad going forward.
Material costs. Nestle gross margins remained flat in CY2013, despite 220 bps impact on account of input cost inflation and 40 bps adverse channel mix impact, on account of (1) 175 bps gain from price hikes/better realizations, (2) 60 bps gain due to product mix improvement and (3) 30 bps gain from SHARK cost reduction program.
P&F costs. Power & fuel costs declined 20 bps yoy partially aided by base effect as last year was first year of commercialization of new factories (now stabilized).
Effective tax rate. ETR was up nearly 220 bps due to several reasons—(1) surcharge up from 5% to 10% in budget (110 bps impact), (2) deferred tax liabilities revalued (50 bps impact) and (3) timing difference of contingency provisions (60 bps).
Capex for full-year CY2013 stood at `2.8 bn, down from `9.7 bn in CY2012.
Exhibit 1: CY2013 was yet another year of weak volume/revenue/ EBITDA growth Volume growth and EBITDA growth/margin trends, December calendar year-ends, 2008-13
Exhibit 2: Real internal growth dipped to multi-year low of 6.8% yoy in CY2013 Revenue break-up into RIG and price-led growth, December calendar year-ends, 2009-13 (%)
16.1 17.014.5
9.26.8
2.6
5.6
5.6
3.3
2.4
-
5
10
15
20
25
CY2009 CY2010 CY2011 CY2012 CY2013
Real Internal Growth (RIG) Price Increase
Source: Company, Kotak Institutional Equities
Exhibit 3: Domestic volume growth in CY2013 stood at just 0.8% yoy Revenue and volume break-up, December calendar year-ends
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Two-wheeler players report strong growth
Two-wheeler players ended FY2014 on a strong note with each major manufacturer reporting strong yoy growth in sales. Hero Motocorp reported 11.9% yoy increase in sales volumes to 524,028 units in March 2014. TVS Motors reported a sharp 17.5% yoy increase in total sales led by a sharp 63% yoy growth in scooter sales and ~16% yoy growth in motorcycle exports. Honda Motorcycle reported 57% and 53% yoy increase in total motorcycle and scooter sales respectively.
Maruti reports ~5% yoy decline in domestic volumes
Maruti Suzuki reported a 5.2% yoy decline in domestic sales volumes led by 11% yoy decline in Alto segment and 14.1% yoy decline in Dzire segment, which was partially offset by 9.3% yoy increase in Swift segment. We highlight that retail volumes increased sharply during the month (+15% yoy) driven by the success of new model Celerio, which has helped in correcting the dealer inventory levels to four weeks now.
We note that passenger car sales in the domestic market (for other car manufacturers as well) continued to be driven by new model launches. Ford India reported 21% yoy increase in domestic sales while Honda reported a sharp 83% yoy increase in its domestic sales during March 2014 led by the success of its new models, while Hyundai Motors reported 3.4% yoy increase in sales.
M&M passenger UV volumes surprised positively by reporting yoy stable sales in March 2014 versus double-digit decline for the past few months, led by pick up in XUV 500 and Bolero sales. Ssangyong Motors reported a sharp 23% yoy increase in sales volumes during March 2014 led by 19% yoy increase in domestic sales and 27% yoy increase in exports. However, tractor volumes remained subdued and grew by a modest 2% yoy due to unseasonal rains in several regions of the country. We believe the subdued growth was a temporary pattern and expect volumes to remain strong over the next two years driven by increasing agriculture labor costs.
Tata Motors’ commercial vehicle sales remain weak; sales volumes decline by ~30% in FY2014
Tata Motors reported another month of sharp decline (~36% yoy) in CV sales volumes in March 2014, while passenger car volumes increased by ~8% yoy. The company is launching petrol engine in its new models (Zest and Bolt) in 2QFY15, which will increase the company’s presence in the petrol segment (which is gaining back share form the diesel segment in the recent months). This will likely help the company prevent further market share loss in the passenger vehicle segment, in our view.
Automobiles India
A mixed end to the year. Automobile sales volumes in March 2014 showed mixed trends—two-wheeler sales volumes grew at a handsome pace, commercial vehicle sales remained sluggish while passenger car sales volumes continued to be driven by new model launches. Key negative surprise was flattish growth in tractor sales volumes. We believe cost of ownership will decline from the current high levels going forward, which will likely aid volume growth during the next year. We expect a high single-digit growth rate for both motorcycles and passenger vehicle segments in FY2015E led by pent-up and replacement demand. Bajaj Auto and Mahindra & Mahindra remain our preferred picks in the large-cap space.
NEUTRAL
APRIL 02, 2014
UPDATE
BSE-30: 22,446
India Automobiles
10 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 1: TVS reported ~18% yoy increase in total sales in March 2014 TVS Motors monthly sales volumes, March fiscal year-ends (units)
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Sanctions improve in 3QFY14 but show no growth in 9MFY14
After a disappointing performance in fresh sanctions in 1HFY14, 3QFY14 showed some improvement with total sanctions of `791 bn (~3% of loans) against `575 bn (~2% of loans) in 1HFY14. However, sanctions in 9MFY14 were `1.4 tn (6% of loans, negligible growth of 2% yoy), a steep decline of ~60% from FY2010 levels. The power sector contributed ~44% of sanctions (~40% in 9MFY14). As we see no revision of prior-period data in the past few reports from the RBI we are not too sure about the extent of cancellations/modifications. We maintain that loan growth may ease from current levels and our outlook of 12-14% is with significant downside risk.
NII growth likely to remain lower than loan growth
We maintain our negative outlook on NIM for banks and believe NII growth is likely to be slower than loan growth.
Loan mix to remain adverse from a yield perspective. Retail loans are likely to have higher contribution to loan growth and we believe the current difference in yields between the retail and corporate loan portfolios should be 75-100 bps.
Pricing pressure in the corporate portfolio. Banks may see increased pricing pressure in the corporate portfolio for (1) opportunity costs between growth (especially as the repayment cycle has begun) and yields, which would imply banks may choose the former; (2) demand, which is likely to shift towards working capital loans whose yields are lower than term-loan yields and banks have seen aggressive expansion in spreads in the corporate loan portfolio (see Exhibit 6) and (3) preference towards top-rated borrowers on incremental projects, which is likely to have a negative impact on yields in this portfolio.
Material improvement in liability franchise looks unlikely. Just as in a rising interest-rate scenario, in which banks see positive impact when there is an increase in the base rate, the same is likely to reverse from hereon. Any marginal positive impact on CASA ratio as interest rates soften is likely to be passed on to borrowers at the earliest as the focus shifts to growth.
Impact may be higher for private banks
We maintain our cautious outlook on NII growth for private banks, noting that the impact is only now being gradually felt across all banks (see Exhibit 7). NII growth is likely to slow to about 15% from over 25% last year. Private banks are likely to have a short-term positive impact due to low regulatory costs on FCNR deposits raised last quarter but the medium-term trends suggest the full impact of the slowdown is yet to be reflected in earnings. Slower NII growth and rising credit costs (see Exhibits 5 and 6) imply slow earnings growth.
Banks/Financial Institutions India
Sanctions improve a bit; 9MFY14 performance flat. Sanctions in 3QFY14 were better than in 1HFY14, a marginal relief. But sector-wise data on sanctions shows a skewed performance to power (40% for 9MFY14). Overall sanction growth in 9MFY14 was flat, indicating loan-growth recovery is unlikely to be great. Our negative outlook on loan growth stays and we are a bit negative on NIM outlook for private banks.
CAUTIOUS
APRIL 02, 2014
UPDATE
BSE-30: 22,446
Banks/Financial Institutions India
KOTAK INSTITUTIONAL EQUITIES RESEARCH 13
Exhibit 1: Fresh sanctions in 9MFY14 were ~2% of loans, indicating low loan-growth visibility March fiscal year-ends, 2010-14 (#, ` bn)
Exhibit 2: Power and metal companies continue to have a high share of sanctions Break-up of sanctions across sectors, March fiscal year-ends, 4QFY12-3QFY14 (%)
Metal and metal products 18 9 6 56 15 41 8 Cement 0 1 4 4 13 NA 7
Construction 5 NA 4 2 NA NA NA
Textiles NA 1 NA 1 19 NA NA
Others 50 31 25 7 20 37 41
Source: RBI, Kotak Institutional Equities
Exhibit 3: The difference in yields between corporate and retail loans have expanded sharply Difference in lending yields between corporate and retail loans, March fiscal year-ends, 2003-2012 (%)
0.5
1.2
2.31.9
1.5
0.5
(0.3) (0.1)
0.60.9
(0.8)
-
0.8
1.5
2.3
3.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: RBI, Kotak Institutional Equities
India Banks/Financial Institutions
14 KOTAK INSTITUTIONAL EQUITIES RESEARCH
Exhibit 4: NII growth likely to be subdued for private banks NII growth, March fiscal year-ends, 2008-16E (%)
Exhibit 6: Wholesale NIM appears to have expanded sharply in recent years, driving NIM expansion Break-up of NII growth across business segments for ICICI Bank, March fiscal year-ends, 2010-13 (` mn)
Even as the RBI kept the interest rates unchanged, we believe there is little chance for any rally in the bond markets in the short term.
The RBI maintained its hawkish policy communication and also primed the market not to expect any easing of monetary policy even as headline inflation comes off due to base effects.
The RBI will now allow FIIs to invest only in G-Secs with residual maturity of one year and above and not in T-bills. FIIs had recently shown interest to mainly invest in the T-bill segment in an atmosphere of election-related uncertainties. Thus, this move can reduce FIIs investments in G-Secs.
Chances of OMOs are reduced with the RBI moving further into the term-repo structure. We maintain our view that 10-year G-Sec is likely to hover in the 8.60-8.90% band in FY2015.
RBI maintains a hawkish undertone
The RBI kept the policy rates unchanged, largely premised on the fact that the disinflationary process has evolved better than expectations but the surprise factors for inflation could be (1) weather uncertainties and El Nino effects, (2) extent of MSP increases and pricing of other administered items, (3) the fiscal stance and (4) geopolitical risks to global commodities. Further, the RBI reduced hopes of monetary policy easing due to softer headline inflation by indicating that it will gloss over transitory effects and maintain the glide path to 6% by January 2016 (after 8% by January 2015). In the same vein, any food-led increase in inflation will also be critically evaluated to understand the transient versus longstanding implication of this on overall inflation.
Liquidity management via term repo to increase short-term cost of funding at the margin
In line with the Patel Committee’s recommendations, the RBI has reduced access to overnight LAF to 0.25% of bank-wise NDTL, while compensating with a commensurate increase in term repos to 0.75% of system NDTL. While this is likely to lead to a better transmission of monetary policy changes, it pushes the onus of liquidity management more towards the banking sector. As the banking sector will have even limited access of funds (~`200 bn drop in the liquidity access via the LAF window) at the fixed repo rate, risks to fluctuations of the overnight money market rate within the LAF-MSF corridor are likely to increase, leading to a higher cost of funds for the banking sector.
Monetary policy to be on a pause in FY2015, but chances of hikes remain
The RBI reiterated “if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture”. As a base case, we think that the RBI will likely remain on an extended pause but with a higher probability of moving higher in the event of inflation failing to behave as per expectations. If growth cheers emerge under a new government, this could exacerbate inflation expectations, as the negative output gap is closing down. Risks of weather-related shocks in primary articles inflation can also not be ruled out immediately.
Economy.dot
Economy Monetary Policy
RBI policy: Extended pause with hawkish undertone. The RBI maintained status quo on policy rates but the communication remained hawkish with adequate risk factors being highlighted for inflation. With the RBI indicating that it will look beyond the transitory dip in inflation on account of base effects, the RBI has set itself up for an extended pause. We believe that in the medium term, the probability of policy tightening is higher than policy loosening. The cost of funding for the banking sector will likely increase marginally with shift in liquidity injection through term repos away from the LAF.
INDIA
APRIL 02, 2014
UPDATE
BSE-30: 22,446
QUICK NUMBERS
• Repo rate and MSF stay at 8.0% and 9.0% respectively
• LAF window restricted to 0.25% of bank-wise NDTL, term repos to account for 0.75% of system NDTL
• Base case—expect an extended pause by the RBI
Economy
KOTAK ECONOMIC RESEARCH 17
Exhibit 1: Majority of the FII debt investments lately have been in short-term T-bills Trends in FII investment in T-bill as a proportion of the limits allotted
0
20
40
60
80
100
29-J
ul-1
3
13-A
ug-1
3
28-A
ug-1
3
12-S
ep-1
3
27-S
ep-1
3
12-O
ct-1
3
27-O
ct-1
3
11-N
ov-1
3
26-N
ov-1
3
11-D
ec-1
3
26-D
ec-1
3
10-J
an-1
4
25-J
an-1
4
9-Fe
b-14
24-F
eb-1
4
11-M
ar-1
4
26-M
ar-1
4
% FII limits exhausted in T-bills
Source: NSDL, SEBI, Kotak Economic Research
Exhibit 2: Headline CPI inflation likely to soften in FY2015, while core will remain largely sticky Trends in headline and core CPI inflation (% yoy)
6
7
8
9
10
11
12
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep-
12
Nov
-12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep-
13
Nov
-13
Jan-
14
Mar
-14
May
-14
Jul-1
4
Sep-
14
Nov
-14
Jan-
15
Mar
-15
Headline CPI inflation Core CPI inflation
March 2015: 7.9
March 2014: 8.3
March 2014: 7.8
March 2015: 7.5
Source: CEIC, Kotak Economic Research estimates
KO
TAK INSTITUTIO
NAL EQ
UITIES RESEARCH 18
In
dia D
aily Sum
mary - A
pril
Ind
ia Daily Su
mm
ary - Ap
ril 2, 2014
Kotak Institutional Equities: Valuation summary of KIE Universe stocks
Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships
Source: Kotak Institutional Equities As of December 31, 2013
Percentage of companies covered by Kotak Institutional Equities, within the specified category.
Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.
* The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over the next 12 months; Sell = We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 31/12/2013 Kotak Institutional Equities Investment Research had investment ratings on 162 equity securities.
14.2%
27.2%
39.5%
19.1%
4.3% 4.9%
0.0%1.9%
0%
10%
20%
30%
40%
50%
60%
70%
BUY ADD REDUCE SELL
Ratings and other definitions/identifiers
Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
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