India Daily, September 21, 2011
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INDIA DAILY September 21, 2011 India 20-Sep 1-day1-mo 3-mo Sensex 17,099 2.1 5.9 (2.6) Nifty 5,140 2.2 6.1 (2.6) Contents Global/Regional indices Special Reports Dow Jones 11,409 0.1 5.5 (6.4) Nasdaq Composite 2,590 (0.9) 10.6 (3.6) Initiating Coverage FTSE 5,364 2.0 6.4 (7.1) Bajaj Finserv: Focusing on profitable growth Nikkie 8,722 0.0 0.0 (7.8) Daily Alerts Hang Seng 18,744 (1.4) (3.4) (14.2) KOSPI 1,836 (0.1) 5.2 (10.4) Company Value traded – India DB Corp: DBCL's Marathi expansion Cash (NSE+BSE) 127 136 138 Sector Derivatives (NSE) 1,323 1,907 1,702 Deri. open interest 1,410 1,467 1,378 Consumer products: Takeaways from Godfrey Phillips' AGM Energy: Subsidy Sudoku remains unresolved Strategy Forex/money market Strategy: Takeaways from our GameChanger forum: The Next Big Things Change, basis points 20-Sep 1-day 1-mo 3-mo Rs/US$ 48.1 0 239 321 10yr govt bond, % 8.3 1 9 13 News Round-up Net investment (US$mn) 19-Sep MTD CYTD ` IMF lowers global growth forecast to 4% in 2011 & 2012. India to see growth FIIs (1) 338 392 slowdown to 7.5% in 2011 from 10.1% in 2010. (FNLE) MFs 31 (171) (282) ` Green ministry softens stand in coal mining. Ray of hope for power, metal companies. The GoM is yet to evolve a consensus over the classification of coal Top movers -3mo basis Change, % mining areas into 'go' and 'no-go' zones. (BSTD) Best performers 20-Sep 1-day 1-mo 3-mo ` Coal India (COAL IN), the government's near-monopoly producer, is planning to MM IN Equity 814.4 1.8 13.3 28.5 again try to interest major firms, here and abroad, into reviving some of its IDEA IN Equity 98.3 1.6 4.6 25.9 abandoned mines. Its first attempt, in 2008, finally had no takers. (BSTD) BJAUT IN Equity 1628.1 1.6 14.1 23.2 UTCEM IN Equity 1144.3 0.7 15.8 18.2 ` Reliance Industries Ltd (RIL IN) announced on Monday that it is planning a IBULL IN Equity 166.7 2.0 15.3 14.3 maintenance and inspection shutdown of the Light Cycle Oil Hydrocracker and Worst performers Vacuum Gas Oil Hydrotreating unit of its refinery at Jamnagar refinery complex from IVRC IN Equity 40.3 (3.4) 14.0 (39.4) EDSL IN Equity 243.2 4.7 10.5 (38.9) September 19 and September 23 respectively. (THBL) CRG IN Equity 159.7 0.1 17.0 (36.2) ` NTPC Ltd (NTPC IN) is on course to achieve a target of 75,000 MW in just over five HDIL IN Equity 112.4 1.3 11.7 (28.4) years up from the current capacity of 34,854 MW. (THBL) RPWR IN Equity 83.8 4.9 1.0 (23.8) ` L&T (LT IN) is set to partner government-owned Hindustan Shipyard for ship-building, as the defense ministry has recommended the company as the preferred partner. A deal would give L&T lots to cheer about after it expressed disappointment over the recent deal between Pipavav Shipyard (PIPV IN) and Mazagon Dock. (BSTD) ` Bhel (BHEL IN) has informed BSE that the board in its meeting on Tuesday has fixed October 4 as the record date for the purpose of sub-division of existing equity shares of face value of INR 10 each into 5 equity shares of face value of INR 2 each. (FNLE) ` The 2,400-MW gas based Samalkot power project of Reliance Power (RPWR IN) is gathering steam with all six turbines from US-based GE arriving in India. (THBL) ` HCL Technologies (HCLT IN) will establish a software delivery center in Dublin, Ireland, that will create 80 jobs for IT graduates over three years. (BSTD) Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD Bajaj Finserv (BJFIN) Banks/Financial Institutions SEPTEMBER 20, 2011 INITIATING COVERAGE Coverage view: Attractive Focusing on profitable growth. We believe that a robust insurance business and Price (Rs): 566 expansion across segments of financial services will drive the business prospects of Bajaj Target price (Rs): 650 Finserv. A well-established life insurance business, rapidly growing lending business, BSE-30: 17,099 brand equity of the Bajaj group and strong financial capability are its key strengths. We like the business though the current stock price captures most of the value. We initiate coverage with an ADD rating and SOTP-based TP of Rs650/share. SOTP-based valuation provides 15% potential upside We initiate coverage on Bajaj Finserv with an SOTP-based target price of Rs650, i.e. 10X PER and 1.6X PBR FY2013E for 11% core earnings CAGR and about 16% RoE. Life insurance remains the largest contributor (61%) followed by the rapidly growing NBFC—Bajaj Finance. Faster-than- expected growth in the lending business, turnaround in the general insurance industry and optimal utilization of the surplus generated by the life insurance business will likely provide an upside to our fair estimate. Bajaj Finserv proposes to enter into new businesses like financial distribution and mutual fund, which will likely accrue value over time. Group-wide focus on margins over market share Bajaj Finserv has emerged as a diversified financial services company operating across the spectrum of lending and protection. Its businesses have focused on developing a diversified and sustainable business model with a clear preference for profitability over volume growth. ` Resisting temptation to grow (in an unfavorable environment) over the past three years, Bajaj Life is the first private company to coup its accumulated losses. ` Diversification and transformation of new business strategy have taken Bajaj Finance to a high profitability zone (RoE of 18-20%) and 23% PAT CAGR over the next three years. ` The general insurance business will likely generate normalized RoE of 16-17% though near- term earnings will likely be subdued. Key risks: Underperformance due to extreme caution, regulatory changes (1) Consistent decline in growth rate in APE and low persistency in the life insurance business can pull down embedded value; management’s proposed growth plans are hence positive. (2) Changes in regulatory environment have affected the businesses of life and general insurance; impending changes by RBI can affect the NBFC business. (3) Higher-than-expected losses in the third-party motor pool can put more pressure on profitability. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Bajaj Finserv Banks/Financial Institutions Bajaj Finserv SOTP-based valuation, March fiscal year-end, 2013E Value per Share of Value Ownership share SOTP (Rs mn) (%) (Rs) (%) Comments Bajaj Allianz Life Insurance 123,749 51 392 61 NBAP margin of 10.5%, EV+18X NBV FY2013E Bajaj Allianz General 13,226 51 42 6 1.3X PBR FY2013E for 16-17% medium-term ROE Bajaj Finance 43,830 63 171 27 1.9X PBR FY2013E for 18-20% RoE Net cash 2,164 100 15 2 1X cash Windmills 2,400 100 17 3 15X net earnings FY2013Efrom windfarm business IRR on insurance investments 1,445 10 2 Total 646 100 Source: Kotak Institutional Equities Bajaj Finserv: Consolidated P&L and Balance Sheet March fiscal year-ends, 2009-2014E (Rs mn) 2009 2010 2011 2012E 2013E 2014E Profit and loss (Rs mn) Total income 97,896 238,527 178,922 177,740 188,865 214,532 Interest income 704 840 14,842 21,912 27,708 32,880 Bajaj Finance — — 14,061 21,156 26,934 32,086 Others 704 840 780 755 774 794 Insurance premium 124,924 132,755 117,248 105,242 105,148 119,624 Investment income (27,780) 103,045 43,929 50,075 55,498 61,517 Other income 49 1,887 2,903 511 511 511 Expenses (96,037) (229,567) (160,069) (159,255) (171,090) (194,237) Interest expenses — — (3,780) (7,812) (10,399) (12,522) Provisions — — (2,046) (1,787) (2,785) (3,367) Operating expenses (25,017) (23,393) (27,864) (29,366) (34,270) (40,504) Commission expenses (10,594) (9,944) (6,533) (5,871) (6,132) (6,936) Depreciation (297) (219) (100) (75) (50) (40) Benefits paid (21,638) (40,223) (66,899) (70,005) (62,021) (65,578) Change in reserve (38,490) (155,788) (52,848) (44,339) (55,433) (65,291) Income from associates 140 382 — — — — PBT 1,859 8,959 18,853 18,486 17,774 20,295 Tax (1,083) (1,644) (3,938) (5,760) (5,587) (6,392) PAT 776 7,315 14,915 12,725 12,187 13,902 Minority interest (64) (1,721) (3,598) (3,648) (3,304) (3,806) PAT post minority interest 713 5,594 11,317 9,078 8,883 10,097 PBT before surrender premium 1,569 6,859 15,253 15,486 16,774 20,295 Shares (mn) 145 145 145 145 145 145 EPS (Rs) 4.938.778.262.761.469.8 BVPS (Rs) 144 178 242 334 415 483 Balance sheet Fixed assets 3,641 4,616 5,967 5,226 5,595 6,044 Loan book — — 72,701 115,395 137,771 168,314 Investments 206,002 371,313 440,781 493,475 546,739 606,082 Other current assets 15,683 20,310 25,052 36,629 53,980 77,207 Total assets 225,326 396,239 544,501 650,724 744,084 857,647 Borrowings 3,107 3,107 67,085 106,506 124,589 153,678 Policyholders funds 158,658 314,446 367,294 411,634 467,066 532,357 Funds for future appropriation 5,023 9,430 11,577 14,380 16,759 19,455 Other liabilities 34,221 38,243 49,481 51,282 53,353 55,734 Total liabilities 201,009 365,226 495,437 583,801 661,768 761,224 Shareholders funds 20,879 25,804 35,068 48,256 59,999 69,825 Equity capital 7,234 7,234 7,234 7,234 7,234 7,234 Reserves 13,645 18,570 27,834 41,022 52,765 62,591 Minority interest 3,439 5,209 13,997 18,668 22,317 26,598 Source: Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 BUY DB Corp (DBCL) Media SEPTEMBER 21, 2011 UPDATE Coverage view: Neutral DBCL’s Marathi expansion.