Investor's Eye: Pulse - RBI cuts repo rate by 25 basis points in the mid quarter policy review; Update - Bajaj Auto (Price target revised to Rs2,111), Construction (Addressing the hurdles in the road sector)

 

Investor's Eye [March 19, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     PULSE TRACK RBI cuts repo rate by 25 basis points in the mid quarter policy review In its mid quarter policy review, the Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points to 7.5%, in line with the market's expectation. The cash reserve ratio (CRR) has been kept unchanged at 4%, though the RBI has vowed to support liquidity via open market operations (OMOs) and other instruments. The RBI has expressed concerns over the global environment and the phenomenon of slower growth and higher inflation visible in the domestic economy. The central bank has taken note of the steps in the Union Budget for 2013-14 to contain the fiscal deficit and of the decline in the core inflation but drawn attention to the rising external vulnerability due to the widening current account deficit. Going ahead, since the RBI has reiterated that under the given circumstances it has limited room to cut rates, the monetary easing in the remaining part of the year would be of about 50 basis points in all unless the monetary easing is supported by significant fiscal measures, which again looks difficult in view of the developing political crisis.     STOCK UPDATE Bajaj Auto  Recommendation: Hold Price target: Rs2,111 Current market price: Rs1,835 Price target revised to Rs2,111 Key points Domestic motorcycle industry to remain subdued in near term: The domestic motorcycle industry remains sluggish. Weak macro-economic conditions and higher fuel prices have affected the demand for motorcycles. From mid single-digit growth in the past quarter, the industry's performance slipped to negative territory in February 2013.  Weak retail sales have led to an increase in the inventory levels at the dealers' end. The inventory levels have risen from the normal four weeks to five weeks. The industry expects the sluggishness to continue in Q1FY2014. The sales are expected to revive in Q2FY2014 on expectations of a normal monsoon. We expect the industry to remain flattish in H1FY2014 and recover in the second half.  BAL maintained market share in the motorcycle segment: Honda Motors and Scooters India (HMSI) has been expanding aggressively in the domestic market putting pressure on the incumbents. Hero MotoCorp and TVS Motor Company have lost market share while Bajaj Auto Ltd (BAL) has broadly maintained its share in the motorcycle segment at 25% in the financial year till date (April 2012-February 2013). New product launches (Discover 125 ST and Discover 100T) have enabled it to retain its market share. Amongst the incumbents we expect BAL to be less vulnerable to HMSI's aggressive expansion.  Competition to increase in the three-wheeler segment: The competition is likely to intensify in the three-wheeler space challenging the dominant position of BAL. Piaggio Vehicles (India) plans to enter the city-centric three-wheeler passenger space, which forms about 30% of the overall market. It has launched the Ape City range of three-wheelers and aims to capture about 15-20% of the market with it. BAL enjoys leadership in the passenger vehicle segment with a market share of 50%.  Similarly, TVS Motor Company plans to enter the diesel three-wheeler market over the next three to six months. The diesel segment constitutes about half of the overall industry. TVS Motor Company's entry is likely to increase the competition. Cutting volume assumptions: We are lowering our volume assumptions in view of the subdued environment in the domestic motorcycle industry and increased competition in the three-wheeler space. We have reduced our FY2014 and FY2015 volume estimates to 4.69 million units and 5.28 million units reflecting a growth of 10.3% and 12.4% respectively.  Valuation: We have reduced our earnings estimates in view of the lower volumes in the domestic market. We have reduced our FY2014 and FY2015 earnings estimates by 3.8% and 4.4% respectively. Our revised estimates stand at Rs132.9 and Rs150.8 respectively. We maintain our Hold recommendation on BAL with a revised price target of Rs2,111. BAL remains our preferred pick in the two-wheeler space.   SECTOR UPDATE Construction Addressing the hurdles in the road sector Project clearance issue addressed In a major relief to the road development sector, the Supreme Court of India on March 12, 2013 ruled in favour of the National Highway Authority of India (NHAI) by delinking the environment clearance (EC) and the forest clearance (FC). Thus, the contracting companies do not have to wait for the FC and can commence the construction work once the EC is received. Consequently, the work on 20 stalled highway projects worth Rs27,000 crore, which were stuck for a long time for want of EC, would be executed soon after the clearance from the Ministry of Environment and Forests (MoEF) and the projects are set to get back on track. Project award activity had been dismal till now, but future seems bright The NHAI has been able to award projects covering 7,957km as against the target of project award covering 7,994km for FY2011-12, which led to the ambitious target of project award covering 8,800km for FY2012-13. However, the NHAI has been barely able to award projects covering 885km as against the target of covering 7,898km for the M9FY2013. Apart from the general economic slowdown, the viability of some of the projects, sectoral lending cap of banks and limitations of concessionaires like availability of equity and other resources to execute the projects have been the main factors for a poor response for the new project awards. The finance minister instilled confidence of awarding 3,000km of road projects in the first six months of FY2013-14. Of the total 3,000 km, around 2,000-2,200km of the projects is expected to be awarded through the engineering, procurement and construction route. Bank credit funding to the sector to rise  Bank credit to the road sector had been growing over 24% till March 2012 but the growth has slowed below 20% year on year (YoY) since. During December 2012, the bank credit growth to the road sector was lowest at 16% YoY. The investment in the road sector collapsed in FY2012-13 with scant interest in the new projects, and large delays and poor execution in the existing projects. Addressing the same, the Reserve Bank of India (RBI) agreed in principle to treat advances to the road sector as "secured" on the strength of the NHAI sovereign guarantee. Advances to the road projects developed in public-private partnership are currently treated as unsecure in the absence of any tangible security, which increases the cost of funds and reduces the quantum of funds available to the sector. Once the RBI notifies this change, we expect a pick up in the credit flows to the sector. Conclusion We believe the government has initiated actions addressing on most of the counts like funding issues from banks, increasing new project awards and addressing the structural bottlenecks, like EC and FC, in existing stalled projects. The asset developer companies, like IRB Infrastructure and IL&FS Transportation Networks (ITNL), do not have projects which are stuck for clearances. However, they will be positively impacted through picking of new project award activity. We believe they stand the best chance in benefitting from the same as they have a strong balance sheet and a credible execution record to hand pick larger and profitable projects. We have a positive rating on IRB Infrastructure and ITNL with a Buy rating on each. Click here to read report: Investor's Eye     Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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