Direct Tax Code version 2.0… (ICICI DIRECT)

The government of India has come out with a revised draft of the DirectTaxes Code (DTC) that proposes several changes over the first draft to dealwith some of the major concerns raised in the first draft. It is open forpublic comments till June 30,,2010. The proposed changes in the reviseddraft, its impact and our views are mentioned herein below.
􀂃 MAT to be calculated on book profits as compared to gross assetsThe revised draft suggests that book profits rather than gross assets,as proposed in the first draft, should be used to calculate the minimumalternate tax (MAT). However, the tax rate as a percentage of the bookprofits has not been specified. Under the previous draft, it had beenproposed to calculate the MAT on gross assets (0.25% for banks and2% for all other companies). However, the revised draft also does notallow for carry forward of MAT paid.Our view: The revised provision is positive for companies that areeligible for MAT, as the calculation of MAT on gross assets, asprovided in the first draft, could have led loss-making companies,newly set up infrastructure companies and companies undergoingmajor expansions to pay very high taxes.
􀂃 Tax exemption on withdrawal for select saving schemesUnder the first draft, it was proposed that withdrawals towards savingschemes would be subject to taxation at the applicable marginal rateof tax (EET taxation). The revised draft now proposes complete taxexemption for government provident funds (GPF), public providentfunds (PPF), recognised provident funds (RPF), pension schemesadministered by Pension Fund Regulatory and Development Authority,approved pure life insurance and annuity schemes.Our view: The provisions are marginally positive for individualtaxpayers. However, the tax exemption on withdrawals applicableonly on pure life insurance schemes is negative as unit linkedinsurance plans (ULIPS) would be subjected to tax on withdrawal.Also, it will be negative for mutual funds as withdrawal from equitylinked savings schemes would be subject to tax post implementationof DTC. The new pension scheme will, thus, have an edge over theother market related savings instruments as it will be the onlyinstrument providing equity exposure (50%) and have thewithdrawals exempted.

To read the full report: DIRECT TAX

Yuan Revaluation: Not Necessarily Bad for China

It’s diffi cult, these days, arguing that the yuan is notundervalued. The widely publicized large current accountsurpluses and bulging foreign exchange reserves in Chinasuggest otherwise and continue to provide fodder tocritics of Beijing’s exchange rate policy. While today’srevaluation of the yuan was inevitable, given the necessityto rebalance the global economy, the change in Beijing’scurrency policy need not be detrimental to China.Why Rebalancing Growth is ImportantIn fact, a revaluation of the yuan could get China to a moresustainable growth model faster. While China’s rise toexport prominence was made possible by relatively cheaplabour, the latter won’t last forever, given the rising domesticwages and the ascent of other low-cost centres (such asBangladesh and Vietnam). Note also that consumers arestill a small part of the economy relative to traditionalpowerhouses like the US, Japan and Germany (Chart 1).Strengthening its economic base by stimulating domesticconsumption further, while not relying too much on exports,is a plus for sustainability of growth. An appreciation of theyuan goes in that direction, with resources being shiftedfrom exporters to consumers who will be benefiting fromlower import prices and more choice.Implications for TradeThe potential harm to exporters, wouldn’t be as dramaticas feared. Any appreciation of the yuan will result in aless-than-proportionate increase in the dollar price ofa Chinese product in the US. That’s because only thedomestic component of the product will be impacted(e.g. the value-added by the producer, refl ecting factors ofproduction in China). The foreign component of the price,namely the input prices (such as imports from suppliers),and US costs (like shipping, retailing, and advertising) willbe unaffected. Of course, that’s assuming that suppliercountries like Japan and other Asian nations do not lettheir currencies appreciate as steeply as the yuan againstthe US$, a reasonable assumption given policies duringthe last yuan revaluation.Numerous studies1 have noted that the domestic contentof Chinese exports is between 35-55%. Even assumingthe upper-bound of that range, a yuan revaluation ofsimilar magnitude to the one seen from July 2005 toJuly 2008 (i.e. 17% appreciation) would, at worst, raisethe price of imports from China by 9%, not signifi cantenough to cripple China’s overall exports, especiallyconsidering that any appreciation will be spread out overseveral years.That might explain why China coped well the last timethe yuan was revalued. Trade remained relatively healthyduring the 2005-2008 unpegged period, with exports toAsia nearly doubling and sales to North America soaring70%, while exports to other regions were even moreimpressive, helped by the yuan’s competitiveness (Chart2). If history is any guide, a small appreciation is unlikelyto have major detrimental impacts on China’s exportmarket share.

To read the full report: YUAN REVALUATION

AXIS BANK LIMITED (ASIT C MEHTA)

Axis Bank is the third largest private bank with a network of 1,027 branches across India. Axis Bank has established a track record of expanding its loan book at a faster pace than the industry. We expect Axis Bank to maintain its growth momentum and expand its loan book in FY 2010-FY 2012 at a CAGR of 25%. We expect the net profit to grow at a CAGR of 27.6% over the same period. We have estimated RoA of 1.5% and 1.6% and RoE of 17.5% and 20.7% in FY11 and FY12 respectively, driven by loan growth and higher Net Interest Margins (NIM). Given the robust loan growth and relatively superior return ratios, we assign a multiple of 13.5x to FY12 EPS of INR100.1 to arrive at a target price of INR1,350. We thus initiate coverage with a “BUY AT DECLINES” rating on the stock. At CMP of INR1,228 the stock trades at 2.4x FY12E ABVPS and 12.3x FY12E EPS.
Recommendation Rationale

■ Strengthening Liability FranchiseAs on FY 2010, the bank had a network of 1,027 branches. Axis Bank plans to add another 200 branches in FY 2011, which would help the bank to increase its CASA base and support CASA ratio. This we believe will help lower cost of funds and, support Net Interest Margin (NIM). As on FY 2010, the bank’s NIM stood at 3.75%. We expect NIM to grow in long term as rising interest rates will improve yields on advances and higher CASA ratio will lower the cost of funds.
■ Loan growth momentum to continue Axis Bank has established a track record of expanding its loan book at a faster pace than the industry. Its loan book has grown at a CAGR of 46.2% over FY 2005-FY 2010 compared to industry growth of 24.7% over the same period. The bank has aCapital Adequacy Ratio (CAR) of 15.8% and tier 1 capital of 11.2%, which provides enough headroom to grow its loans & advances. We expect higher CAR, strengthening branch network, acquisition of new customers along with improving macro-economic conditions will support loan growth going forward.
■ Core fee income to support revenuesAxis Bank derives its fee income from Corporate segment, Retail segment, Treasury, Agri & SME Banking, Business Banking and Capital Markets segment. Core fee income as a percent of non-interest income has been around at an average of 75% from FY 2006 - FY 2010, reflecting the stability of non-interest income. We expect core fee income to grow at a CAGR of 29% over FY 2010-FY 2012.
■ Adequately capitalizedAxis Bank has been raising sufficient capital at regular intervals to ensure growth in its balance sheet. In Q2 FY10, the bank had undertaken a Qualified Institutional Placement (QIP) and preferential allotment to raise capital amounting to INR37.6 bn. Consequently as on FY 2010, the bank has a Capital Adequacy Ratio (CAR) of 15.8% with tier 1 capital at 11.2%. Also infusion of tier 1 capital would provide enough room to raise tier 2 capital in future, which will further reinforce CAR and give enough headroom for the bank to grow its loan book and capitalize on emerging growth opportunities.To read the full report: AXIS BANK

ASTEC LIFESCIENCES LIMITED (ANAND RATHI)

Astec Life sciences is engaged in manufacturing and sale ofintermediates, active ingredients and formulations in the off patent [generics] category, with main focus on agrochemical [85%] and rest from Pharma segment. It ishaving full backward integration for its key products,which helps in maintaining better control over costs. It has a strong and experienced management team.Company is working on contract manufacturing basis and is in negotiations with a couple of large players for long term contracts for its products. It is expected to clinch sizeable deals – which can lead to significant upside in revenue generation from FY 11 onwards.Increasing registration activities indicates that the company likely to get increasing business from global players,particularly in regulated markets, which will boost margins. Currently Astec has pipeline of 70 registrations in 30 countries. With its strong R&D, it is targeting more & more registrations across the world.Astec has good clientele network domestically and internationally with world’s top 20 agrochemicals companies which gives them the opportunity to expand theirproduct portfolio based on their demands.[Domestic clients include Syngenta India, Indofil chemicals, Atul Ltd, Krishi rasayan exports and international clientele includes Irvita Plant Protection, Nufarm UK ltd, AnNong Co., handelsgesellschaft, Detlef Von Appen etc.]The company is doing extremely well and has reportedaround Rs 8 EPS in FY 10, while estimates for FY 11 EPS are much better around Rs 12. Looking to this, this quality stock, available at below 5X of FY11 earnings appears good for investment. BUY with target of Rs 80 in 3-4 months.To read the full report: ASTEC LIFESCIENCES

OMAXE (PRABHUDAS LILLADHER)

Top-line as per expectation, margins disappoint: Omaxe’s revenues witnessed a sequential increase of 35%, largely led by strong sales booking as well as execution. However, margins were a great disappointment at 7% as against 24% in Q3FY10. One of the main reasons for the drop in the EBITDA margins is project delays at the company’s Grandwoods project in Faridabad and Omaxe Connaught Place in Greater Noida. This has led to an increase in the costs which the company has captured in the current quarters results. Certain provisioning as well as lower margins on construction revenues of Rs550m were other contributors to the fall in margins. The company’s PAT grew by 59% sequentially on account of lower interest cost (larger proportion was capitalized) as well as a tax writeback during the quarter.

■ Execution on track: We note that gross collections for Q4 have been Rs2.92bn as against Rs2.5bn in Q3, indicating traction in execution. As a significant area is in the last stage of construction, large quantum of deliveries is expected in the next two years. The entire 39.4m sq.ft sold by the company up to FY09 is likely to be delivered by March 2012.

■ Strong pipeline of launches: Omaxe posted sales volumes of 3.01m sq.ft in Q4 vis-a-vis 3.66m sq.ft in Q3. This translates into sales value of Rs5.14bn (Rs5.84bn in Q3). In Q4FY10, the company launched projects aggregating 2.65m sq.ft. With a healthy pipeline of launches in the current year, the first two months of FY11 have witnessed a number of launches in locations like Patiala, Mullanpur, Lucknow and Allahabad. On account of a large number of planned “Phase 2” launches in the existing projects over the next few months, we expect sales momentum to continue. We are estimating sales of 9.86m sq.ft in FY11 and 13.72m sq.ft in FY12.

■ Debt: Omaxe’s debt stands at Rs18.1bn which translates to a DER of 1.15. Its mandatory debt repayment obligation for FY11 and FY12 stands at Rs5bn each, while the interest cost stands at 14%.

■ Valuation: Our estimate of the company’s NAV stands at Rs209, which takes into account explicit cash flows of its on-going projects, discounted by a WACC of 18% and future projects at 1.5x the land cost. Omaxe’s construction business has been valued at 6xFY12E, translating to Rs6.2/share. We are assigning a discount of 35% to the NAV to arrive at our target price of Rs142. We maintain ‘BUY’ on the stock.

To read the full report: OMAXE

Jaiprakash Power Ventures (ICICI DIRECT)

In FY10, Jaiprakash Power Ventures reported ~2% YoY de-growth in topline to Rs 691 crore compared to our expectation of Rs 705 crore. On the volume front, JP Power has delivered de-growth of ~1.3% YoY from 3,325 MU to 3,281 MU in line with our expectation. Due to the merger of two amalgamating entities i.e. JP Hydro and JP Power Ventures during the course of FY10 the performance of the resultant company is comparable with the previous year.■ Plans progressing wellJaiprakash Hydro Power is on track to commission the Karcham Wangtoo project ahead of schedule and is likely to commence generation in H1FY11E. Post the commissioning of KarchamWangtoo project in FY12E the company will have an install hydro power capacity of 1,700 MW under its belt. J P Power holds in excess of 56% stake in Karcham Wangtoo project.■ Carbons credits scene improving in the international marketsSince April 10, the carbon credit prices in international markets has improved significantly if the prices are able to sustain at these levels it will benefit the upcoming hydro expansion lined up in FY12E.■ Demonstrated EPC capability of parents adds the edgeJaypee Associate, the parent company, has demonstrated leadership in the construction of hydro power projects over 2002- 2009 with an execution track record of over ~8,800 MW.ValuationAt the CMP of Rs 65, the stock is trading at P/BV of 3.8x of FY11E and 3.3x of FY12E. We are reiterating our SOTP based target of Rs 71 based on the great execution track records of the parent and major expansions lined up in FY12E. We reiterate our price target of Rs 71 with an ADD rating.To read the full report: JAIPRAKASH POWER VENTURES

INDIA PROPERTY: Ears On The Ground 15 – Recovery Becoming Established

Quick Comment – Our views on the pan-Indian residential market based on JLL REIS (1Q) data (top 7 metro cities), recent company disclosures and our channel checks are given below. In summary, the ongoing recovery in the physical market appears to be well established (3 quarters of good absorption) & to be spreading beyond Mumbai and NCR to other metros.Overall picture (JLL REIS data, Exhibit 3) – Both new launches (52K units in 1Q10) and new sales (42K units) remain high, despite property price increases. The average absorption (sales /available inventory) over last three quarters is 19%, despite strong new launches(i.e., addition to inventory). For the past three quarters, new sales have been 80-85% of new launches, implying steady inventory levels. The ongoing recovery appears to be benefiting the listed companies, as inferred by the pick up in pre-sales in F10, Exhibit 2.City wise recovery (Exhibit 6) – Mumbai and NCR started to recover in mid 2009 (together accounting for 65-70% of overall new launches and 20% plus quarterly absorption). Pune was the next in recovery cycle (3Q), and now Bangalore and Chennai appear to be catching up (20% plus absorption in 1Q10). While Kolkata is showing little sign of recovery (15% absorption),Hyderabad (with local issues) continues to be weak.Mumbai steady to slowing (Exhibit 4) – Despite price increases, the number of sales in terms of units remains healthy (2000 units in 1Q10, in line with four quarter average). The spate of new launches in F2H10 has lowered the absorption rate (15% for two quarters).Outlook – For the recovery to be sustained, we believe continued momentum in GDP growth and property price discipline are critical. In our view, the past six months of stock price under-performance and recovery in the physical market appear are contradictory.To read the full report: INDIA PROPERTY

Nothing to fear, but fear itself (DANSKE MARKETS)

■ The recovery is looking increasingly robust as the labour market is turning and underlying domestic demand has improved faster than expected. Downside risks from a jobless recovery are now limited.■ The debt crisis in Europe is the main risk. It is already taking a toll on growth via deteriorating financial conditions. If market conditions do not improve a more pronounced slowdown is in the offing for H2.■ In any case the manufacturing cycle is set for a slowdown in H2 as inventory dynamics turn less favourable. Leading indicators, including the ISM, will start moving lower very soon.■ The longer-term outlook is for moderate growth with tough fiscal consolidation and financial regulation ahead. Easy monetary conditions and pent-up demand are expected to support above trend growth.■ Inflation pressure is expected to remain moderate. Core inflation will bottom around 0.5% late this year and move only gradually higher. Headline inflation is expected to remain below 2% throughout the forecast period.■ Financial turmoil will delay the initial Fed rate hike to March 2011. This will be preceded by verbal preparation of markets and liquidity draining. An escalation in market stress could reverse this process and force the Fed to reintroduce credit and liquidity programmes.A more robust recovery Following a solid Q4 with 5.6% q/q AR growth, the economy performed close to our expectations printing 3.0% q/q AR growth in Q1. The recovery is now looking increasingly robust as job growth has returned and consumers are ramping up spending. While there are still pockets of weakness in housing and commercial construction, the recovery has broadened with all other sectors showing progress.Over the past few months data has been picking up further, suggesting a reacceleration in growth. Consequently, we have revised Q2-Q4 GDP growth up to 3- 3.5% from 2.5-3% q/q AR previously – a revision that would have been even bigger if it was not for the recent financial turmoil. The forecasts for annual growth in 2010 and 2011 have been upped to 3.3% and 3.2% vs 3.2% and 3.0% in Global Scenarios March 2010.Generally, we continue to expect a moderate recovery compared with historical standards and relative to the depth of the recession, as fiscal contraction and financial regulation is set to cap growth in the medium term (see Global Scenarios, March 2010).To read the full report: MACRO RESEARCH