ambit bfsi

8/11/2019 Ambit Bfsi

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Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital

may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

AMBIT INSIGHTS2 September 2 14

DAILY

Top export plays

Stock Rating FY15 P/E (x)HCL Tech BUY 15.7

Bajaj Auto BUY 17.3

Dr. Reddy's BUY 22.5

AIA Engineering BUY 22.5

Balkrishna Inds. BUY 13.1

TTK Prestige BUY 38.7

Eclerx NR 15.4

Elgi Equipments NR 36.9

Source: Bloomberg, Ambit Capital research

NR = Not Rated

UR = Under Review

Thematic

BFSI

Likely merger of HDFC with HDFCB - No winners here

(Click here for detailed note)

Updates

Economy

BoP 1QFY15 - CAD narrows from a year ago, but expands compared to4QFY14

Auto - August 2014 volume update

Gearing up for the festival season

Oil & Gas

Diesel losses down to NIL, de-regulation soon?

Derivatives

Alpha This Week

An alternative take on markets

(Click here for detailed note)

Analyst Notes: Auto: August despatch numbers Ashvin Shetty, CFA, 3043 3285

Whilst the MHCV segment’s volume performance in August 2014 (10% YoY growth) was in line with our expectation, the performance of the two-wheelers (2Ws) (27% YoY growth) and passenger vehicle (PVs) (21% YoY growth) segments came in aheadof our expectations. Our recent interactions with 2Ws and PV dealers indicate thatthe inventory levels at the dealers end are above the normal inventory levels due tobuild-up of inventory ahead of the upcoming festive season. Hence, we believe that

August 2014 2Ws and PV volumes could have been helped by despatches for theupcoming festive season. Overall, we expect a volume CAGR of 18% for MHCVs,15% for PVs and 14% for 2Ws over FY14-16. Our top BUY idea in the auto space is

Ashok Leyland while our top SELL idea is Hero MotoCorp.

Source: Ambit Capital research

http://webambit.ambit.co/reports/Ambit_BFSI_Thematic_02Sept2014.pdf

http://webambit.ambit.co/reports/Ambit_AlphaThisWeek_02Sep2014.pdf

http://webambit.ambit.co/reports/Ambit_AlphaThisWeek_02Sep2014.pdf

http://webambit.ambit.co/reports/Ambit_BFSI_Thematic_02Sept2014.pdf



AMBIT INSIGHTS

Ambit Capital Pvt Ltd 2 September 2014

EconomyBoP 1QFY15 - CAD narrows from a year ago, butexpands compared to 4QFY14 As expected, a decrease in import growth and relatively steady export growth

n 1QFY15 led India’s CAD to be recorded at 1.7% of GDP compared to thealarming 4.8% of GDP recorded in 1QFY14. However, the 1Q CAD is higherthan the 4QFY14 figure of 0.2% of GDP. For FY15, we expect India’s exports togrow at a faster pace than FY14. However, the moderate pick-up in domesticGDP growth coupled with the prospective relaxation of gold import duties isikely to result in an expansion in India’s CAD in FY15 to 3.0% of GDP.

The Event

As per the most recent Balance of Payments (BoP) data, India’s current account deficitCAD) was recorded at 1.7% of GDP in 1QFY15. Simultaneously, India’s capitalaccount surplus (KAS) was recorded at 4.3% of GDP thereby leading the overall

balance of payments to record a healthy surplus of 2.6% of GDP. Unsurprisinglytherefore, net accretion to India’s foreign exchange reserves in 1QFY15 was USD11.2 billion compared to a drawdown of USD 0.3 billion in 1QFY14.

What led to the improvement in CAD in 1QFY15 as compared to 1QFY14?

The reduction in CAD in 1QFY15 (compared to 1QFY14) was mainly driven by adecrease in the imports growth rate (from -4.7% YoY in 1QFY14 to -6.5% YoY in1QFY15) as well as an increase in the exports (from -1.5% YoY in 1QFY14 to 10.6%YoY in 1QFY15). This in turn was due to a continued slowdown in gold imports growthwhich recorded a growth rate of -57.2% YoY in 1QFY15). The contraction in importsand expansion in exports meant that the CAD narrowed.

However, on a QoQ basis, the CAD was 1.7% of the GDP in 1QFY15 as compared to0.2% of the GDP in 4QFY14.

The expansion in CAD as compared to the 4QFY14 was in-line with our expectationsas the overall growth showed signs of improvement in 1QFY15 (5.7% YoY GDP in1QFY15 growth vs 4.7% in 4QFY14). This is again supported by the fact that the non-gold imports increased 1.3% YoY in 1QFY15 as compared to a contraction of 0.6% in1QFY14 indicating that underlying aggregate demand is indeed recovering in India.

ndia’s KAS was 4.3% of the GDP in 1QFY15. While inflow on account of portfolionvestments was USD12.4bn as against the outflow of USD0.2bn in 1QFY14, FDInflow was substantially higher at USD8.2bn as compared to USD6.5bn in 1QFY14. Ahealthy KAS in turn meant that the net Balance of Payments (BoP) was recorded inpositive territory at 2.6% of GDP. The healthy net BoP balance in turn meant thatndia’s foreign exchange reserves increase by USD11.2bn in 1QFY15. In specific,foreign exchange reserves at the end of June 2014 stood at a robust USD319bnthereby providing what the RBI Governor calls his “second line of defence”, the firstbeing the overall attractiveness of India’s economy to FIIs).

Where do we go from here?

n FY15, we expect exports to expand by 11% YoY v/s 5% YoY recorded in FY14. Ourexpectations of a further recovery in export growth rates are driven by our expectationof a pickup in the US GDP growth rate by 90bps in CY14 (as per IMF estimates).However, we expect imports growth to also rise by 17% YoY in FY15 v/s -8% YoY inFY14, driven by an anticipated easing of gold import curbs and a modest recovery inthe economy. Consequently, we expect India’s CAD in FY15 to be recorded at 3.0% of

GDP. For a detailed analysis of India’s FY15 Balance of Payments, please click here for our 12 Feb 2014 note.

Quick Insight

Analysis

Meeting Note

News Impact

Analysts

Saurabh Mukherjea, [email protected]

Tel: +91 99877 85848Sumit [email protected]: +91 22 30433229

http://webambit.ambit.co/reports/Ambit_Economy_Update_12Feb2014.pdf






AMBIT INSIGHTS


NR to tend to INR59-60/USD by FY15-end

Historically, exchange rate movements have been tightly linked to India’s net balanceof payments. There exists a high negative correlation (correlation = -0.6) between theannual change in INR/USD rate and India’s net balance of payments (BoP) whereby anegative BoP is accompanied by a currency depreciation and vice versa.

Assuming that the Fed continues to taper in a calibrated manner over FY15 and hence

assuming that:

1

FII inflows into India are recorded at around USD15-20bn (i.e. in-line with India’s

5-year average FII flows),

2 the Foreign Currency Non-Repatriable (FCNR) deposits window does not deliverthe windfall USD30bn that were raised in FY14, and

3

the remaining constituents in the capital account balance are recorded in-line withtheir 5 year averages,

We expect India’s capital account surplus to be recorded at around 3.0% of the GDPn FY15 (as we expect FII inflows of USD 15-20bn in FY15). This KAS would be able tooffset current account deficit at 3.0% of GDP. Assuming overall balance of payments

to be to be close to zero, our modelling process suggests that the INR’s fundamentalvalue is likely to be INR Rs59-60/USD by the end of FY15 given that CAD and KASshould cancel each other out.



AMBIT INSIGHTS


Auto - August 2014 volume updateGearing up for the festival season

Whilst the MHCV segment’s volume performance in August 2014 was in linewith our expectation, the performance of the two-wheeler (2W) and

passenger vehicle (PVs) segments was ahead of our expectations. Our recentdiscussions with PV dealers indicate that the inventory levels of dealers areabove the normal levels due to an inventory build-up ahead of the upcomingfestive season. Hence, we believe that PV volumes (and also the 2W volumes)n August 2014 could have been helped by despatches for the upcomingfestive season. Overall, we expect a volume CAGR of 18% for MHCVs, 15% forPVs and 14% for 2Ws over FY14-16. Our top BUY idea in the auto space isAshok Leyland whilst our top SELL idea is Hero MotoCorp.

Passenger vehicles: Domestic volumes of the market leader, Maruti Suzuki,ncreased 29% YoY in August 2014 vs 20% YoY growth in June 2014, above ourexpectations. Maruti’s domestic sales growth was largely driven by growth in thecompact car segment (largely Swift, Celerio, and Dzire). The compact segment’s

volumes increased 51% YoY partly helped by the absence of the Celerio in last year’sbase. Exports grew by 10% YoY in August 2014. The domestic volumes of the top-sixpassenger vehicle players put together increased 21% YoY (vs 14% YoY growth in July2014). On a MoM basis, August 2014 volumes increased 8% over the July 2014evels. Apart from Maruti, the YoY growth has been the sharpest for Honda at 88%,which is attributable to its recent launches (such as Mobilio and Honda City), followed

by Hyundai which recorded 19% YoY growth.

Domestic passenger vehicles - Monthly volume trends (units)

Company Aug-14 Aug-13 YoY Jul-14 Jul-13 YoY Jun-14 Jun-13 YoY

Maruti 98,304 76,018 29% 90,093 75,137 20% 100,964 77,002 31%

Hyundai 33,750 28,311 19% 29,260 25,965 13% 33,514 30,610 9%

Tata Motors 10,975 11,564 -5% 9,167 10,824 -15% 7,911 11,804 -33%

Mahindra 14,140 15,821 -11% 14,708 15,530 -5% 16,780 17,232 -3%

Toyota 11,215 12,007 -7% 11,921 11,515 4% 12,010 11,010 9%

Honda 16,758 8,913 88% 15,709 11,223 40% 16,316 9,297 75%

Total 185,142 152,634 21% 170,858 150,194 14% 187,495 156,955 19%

Source: Company, Ambit Capital research

Commercial vehicles: The aggregate sales of medium and heavy commercialvehicles (MHCV) for Tata Motors, Ashok Leyland, Eicher Motors and MahindraNavistar increased 10% in August 2014 as compared to a decline of 3% YoY in July2014. The August 2014 sales growth was led by Ashok Leyland (18%) and TataMotors (11%). On a MoM basis, total MHCV volumes declined 5% mainly due to a

decline in the volumes of Mahindra Navistar (down 18%), Eicher Motors (down 13%)and Tata Motors (down 6%). However, this was offset to some extent by the MoM

growth in volumes for Ashok Leyland (up 2%).

MHCV – Monthly volume trends (units)


Tata Motors (MHCV) 9,141 8,249 11% 9,725 9,758 0% 9,620 11,130 -14%

Ashok Leyland (ex-Dost) 5,830 4,939 18% 5,736 6,266 -8% 5,542 4,717 17%

Eicher Motors (ex-Volvo) 2,571 2,757 -7% 2,955 2,915 1% 3,474 3,090 12%

Mahindra Navistar 597 471 27% 725 730 -1% 995 911 9%

Total 18,139 16,416 10% 19,141 19,669 -3% 19,631 19,848 -1%


POSITIVE

Quick Insight

Analysis Meeting Note

News Impact

Ashok Leyland BUY

Bloomberg Code: AL IN

CMP (Rs): 39

TP (Rs): 44

Mcap (Rsbn/US$ mn): 110/1,825

3M ADV (Rsmn/US$ mn): 741/12.2

Maruti Suzuki SELL

Bloomberg Code: MSIL INCMP (Rs): 2,913

TP (Rs): 2,200



Tata Motors BUY

Bloomberg Code: TTMT IN

CMP (Rs): 520

TP (Rs): 550

Mcap (Rsbn/US$ mn): 1,583/26,154

3M ADV (Rsmn/US$mn):

2,937/48.5

Eicher Motors BUY

Bloomberg Code: EIM IN

CMP (Rs): 10,052

TP (Rs): UR



Hero MotoCorp SELL

Bloomberg Code: HMCL IN

CMP (Rs): 2,755

TP (Rs): 2,300


3M ADV (Rsmn/US$ mn): 1,478/24.4

Analysts

Ashvin Shetty, [email protected]

Tel: +91 22 30433285

Ritu [email protected]: +91 22 30433292



AMBIT INSIGHTS


Two-wheelers: Volume growth of the top two-wheeler players (excluding Bajaj Autoand Yamaha which are yet to report their August 2014 volumes) for August 2014 at27% was ahead of the 20% YoY growth (for these players) witnessed in July 2014. TheYoY growth in August 2014 was largely contributed by TVS Motors and HondaMotorcycles & Scooters India (HMSI). TVS Motor’s August 2014 volumes increased47% YoY (driven by 84% YoY growth in scooters and 36% YoY growth in motorcycles).HMSI’s domestic volumes recorded a growth of 27% (underpinned by volume growth

of 48% YoY in scooters). The market leader, Hero MotoCorp, recorded a volumegrowth of 21% in August 2014 (vs 9% YoY in July 2014). On a MoM comparison, theaggregate volume growth of the 2W players (Hero, HMSI and TVS) was 5%. TVSrecorded the highest MoM volume growth at 12% followed by Hero MotoCorp at 5%MoM. Overall, the 2W category continued to outperform the other vehicle categories

passenger vehicles and MHCVs).

Two-wheelers monthly volume trends


Hero MotoCorpinc exports)

558,609 459,996 21% 529,862 487,545 9% 541,594 502,000 8%

TVS Motorsinc exports)

217,662 148,469 47% 194,128 146,671 32% 193,758 157,351 23%

HMSI

incl exports) 388,210 308,881 26% 381,411 287,177 33% 323,224 252,114 28%

Total 1,164,481 917,346 27% 1,105,401 921,393 20% 1,058,576 911,465 16%


Where do we go from here?

n the passenger vehicle category, Maruti Suzuki’s August 2014 volumes were about5% ahead of our expectations. Our recent channel checks indicate that inventoryevels at dealers have increased on an average to around 2 months as compared tothe normal average levels of 4-5 weeks. This inventory build-up is in anticipation ofsales for the upcoming festival season (Navratri starting in the last week of September2014 and Diwali in October 2014). This could have played a role in the strongdespatches for August 2014.

The PV industry’s volume performance for August 2014 indicates that demand is onthe mend on the back of the improvement in consumer sentiment. We indeed factorn a recovery in PV sales and estimate the domestic PV industry to expand at 15%CAGR over FY14-16E. However, as discussed earlier, we believe August 2014

volumes could have been helped by despatches for the upcoming festive season.

Our current FY15 estimates for Maruti imply that volumes have to record 14% growth117k/month) for the remaining 7 months of FY15. The stock is currently trading at18.1x FY16 net earnings (vs the historical average of 15.0x). We retain our SELLstance on Maruti Suzuki.

The MHCV segment’s volume performance was broadly in line with our expectationthat domestic MHCV volumes are recovering. In our September 1 note on Ashok

Leyland (click here), we indicated that our survey amongst the commercial vehicledealers, CV financiers and fleet operators highlight green shorts of recovery in MHCVsales. We continue to expect a recovery in MHCV volumes and factor in 18% volumeCAGR in the MHCV space over FY14-16.

2W volumes (ex-mopeds) have seen an uptick in recent months, with April-July 2014domestic industry volumes recording a growth of 14%. Similar to PVs, we believeAugust 2014 could have been helped by despatches for the festive season. We factorn a volume CAGR of 14% over FY14-16 (significantly higher than the 6% CAGR overFY12-14).

http://webambit.ambit.co/reportsAmbit_AshokLeyland_CompanyInsight_01Sept2014.pdf






AMBIT INSIGHTS


We expect recovery in 2HFY15 for all the vehicle categories – MHCVs to record thesharpest volume CAGR over FY14-16

000 units FY14 FY15E FY16ECAGR

(FY14-16E)

2Ws^ 14,083 16,176 18,250 14%

% growth 8.3% 14.9% 12.8%

PVs 2,504 2,879 3,311 15%

% growth -6.1% 15.0% 15.0%

MHCVs* 201 222 278 18%

% growth -25.3% 10.7% 25.0%

Source: SIAM, Company, Ambit Capital research. Note: * goods and passenger vehicles; ^ excludes mopeds

We retain our stock-specific recommendations, with a BUY stance on AshokLeyland (primary beneficiary of a revival in CV sales being a pure play CVplayer), Tata Motors (positive view on the Jaguar Land Rover business), EicherMotors (driven by strong outlook for Royal Enfield) and TVS Motor (marketshare regain in key segments). We retain our SELL stance on Maruti Suzuki(sharp share price run-up leaves little room for upsides) and Hero MotoCorp(continuing and rising competitive intensity in the 2W industry).

Comparative valuation

Mcap EV/EBITDA (x) P/E (x) CAGR (FY14-16) Price perf (%) RoE

US$ mn FY14 FY15 FY16 FY14 FY15 FY16 Sales EBITDA EPS 3m 1 yr FY14 FY15 FY16

Tata Motors 26,147 6.4 5.0 4.4 20.6 13.3 11.6 17.8 20.3 33.1 25 74 29 25 22

Bajaj Auto 10,806 12.7 11.2 9.8 20.2 17.3 14.9 15.6 13.9 16.3 16 23 37 37 37

M&M* 14,279 18.1 15.4 13.1 22.0 22.1 18.7 11.9 17.6 8.6 14 79 24 21 21

Maruti Suzuki 14,536 14.2 11.6 9.8 29.8 23.5 18.9 17.1 20.2 25.4 28 134 15 17 18

Hero Motocorp 9,090 14.3 12.4 11.1 26.1 18.9 16.5 12.5 13.3 25.8 17 35 40 48 48

Eicher Motors* 4,501 37.6 23.5 15.3 68.9 39.4 25.9 32.2 57.0 63.0 51 215 21 28 33

Ashok Leyland 1,824 83.4 16.4 9.4 NA NA 17.7 23.4 198.4 NA 20 223 (15) 2 14

TVS 1,518 20.2 13.9 10.5 38.1 21.6 15.6 20.7 38.4 56.5 49 531 18 27 31

Averageex-Ashok Leyland)

17.6 13.3 10.6 32.3 22.3 17.5

Source: Bloomberg, Ambit Capital research. Note: * All figures are based on Ambit estimates except for M&M and Eicher Motors



AMBIT INSIGHTS


Oil & GasDiesel losses down to NIL, de-regulation soon?

Diesel under-recovery has declined to almost NIL due to a mix of (a) monthlyprice hikes and (b) moderation in crude prices. The key things to now watch

out are: (a) when will the Government announce diesel price de-regulation ast would give OMCs the freedom to align prices with international prices and(b) Government’s strategy to bring down cooking fuel under-recoveries. Adeclining under-recovery is positive for upstream PSUs (ONGC and Oil India),hence we reiterate our BUY as these stocks are still factoring in a perpetualnet crude realisation that is ~US$5/bbl lower than the historical average(US$58-60/bbl) and a gas price of only US$5/mmbtu. However, we re-iterateour SELL on OMCs (i.e. HPCL, BPCL and IOCL) as they are pricing in allpositives whilst ignoring the risk of competition in the fuel marketingbusiness post diesel deregulation. We, therefore, recommend a switch fromOMCs to Upstream PSUS.

Diesel under-recovery down to NIL: Diesel under-recovery has declined to almost

NIL (~Rs0.1/litre) due to a mix of (a) monthly price hikes (of Rs0.5/month)mplemented by the Government since January 2013 and (b) moderation in crudeprices. Diesel under-recovery has declined to almost NIL (~Rs0.1/litre), significantlyower than: (a) the Rs17/litre under-recovery seen in September 2012 (when the fuelprice reform process began); and (b) the Rs9.6/litre under-recovery in January 2013when the monthly diesel price hike started). Further, the sharp price hike (46% hike indiesel price over the past couple of years) has resulted in diesel demand declining by1.1% in FY14, whilst growing by only 1.7% over Apr-July (sharply lower as comparedto historical average growth of 6-7% growth p.a.).

Further, Brent crude price has declined by 10% over the past couple of months due tothe limited impact on production from the local insurgency in Iraq and signs of risingproduction from Libya. Every US$1/bbl decline in crude price reduces diesel under-

recovery by Rs0.43/litre (i.e. almost equivalent to the monthly price hike taken byOMCs).

Diesel under-recoveries down to NIL [Rs/litre]

Source: IOCL, Ambit Capital research

Diesel de-regulation likely soon? With diesel under-recovery down to NIL, the key

thing to watch out now is when the Government announces a de-regulation of diesel

price. De-regulation of diesel would give OMCs the freedom to align diesel prices

with international prices on a fortnightly basis, as is the case with petrol currently.

Hence, if say crude prices jump by US$5/bbl, then would OMCs have the freedom to

ncrease diesel price by ~Rs2/litre in the subsequent fortnight. This would providevisibility that no losses will be incurred on diesel irrespective of adverse movement in

nternational oil prices.

-20

-15

-10

-5

0

S e p-1 2

N o v-1 2

J an-1 3

M ar -1 3

M a y-1 3

J ul -1 3

S e p-1 3

N o v-1 3

J an-1 4

M ar -1 4

M a y-1 4

J ul -1 4

S e p-1 4

POSITIVE

Quick Insight

Analysis

Meeting Note

News Impact

ONGC BUY

Bloomberg Code: ONGC IN

CMP (Rs): 440

TP (Rs): 500

Mcap (Rs bn/US$ bn): 3,761/62

3M ADV (Rs mn/US$ mn): 3,151/52

Oil India BUY

Bloomberg Code: OINL IN

CMP (Rs): 620

TP (Rs): 684

Mcap (Rs bn/US$ bn): 373/6.2

3M ADV (Rs mn/US$ mn): 315/5.2

BPCL SELL

Bloomberg Code: BPCL IN

CMP (Rs): 705

TP (Rs): 563


3M ADV (Rs mn/US$ mn): 1,228/20.3

HPCL SELL

Bloomberg Code: HPCL IN

CMP (Rs): 467

TP (Rs): 388


3M ADV (Rs mn/US$ mn): 946/15.6

IOCL SELL

Bloomberg Code: IOCL IN

CMP (Rs): 381

TP (Rs): 331


3M ADV (Rs mn/US$ mn): 424/7.0

Analysts

Dayanand Mittal , CFA,[email protected]

Tel: +91 22 3043 3202

Parita [email protected]: +91 22 3043 3223



AMBIT INSIGHTS


Our under-recovery assumption: We expect under-recoveries to decline by 50-

60% to Rs871bn in FY15 and Rs571bn in FY16, down from Rs1,610bn in FY13 and

Rs1,398bn in FY14 assuming: (a) Rs0.5/litre monthly diesel price hike to continue till

t is fully de-regulated, (b) kerosene price increase of Rs2.5/litre in FY15 and Rs3 in

FY16 and (c) LPG price increase of Rs50/cylinder each in FY15 and FY16.

Sharp decline in crude price (down to US$101-102/bbl v/s our assumption ofUS$108/bbl) has resulted in diesel under-recovery declining to NIL about 2-3 monthsahead of our expectation. However, there exists a risk of no hike in cooking fuel pricesn FY15 due to the impending state elections, which could result in our FY15 under-recoveries rising by Rs80bn. However, decline in crude price (to ~US$102-105/bbl inFY15 v/s our assumption of US$108) should broadly offset the impact of no hike incooking fuel prices. Every US$1/bbl decline in the Brent crude price has the potentialto reduce our FY15 under-recovery estimate by Rs46bn.

Base-case assumptions for computing fuel under-recoveries

FY13 FY14E FY15E FY16E Comments

Brent crude (US$/bbl) 110.5 107.6 108.0 108.0Given the heightened geopolitical risks, our fuel under-recovery computation isbased on US$108/bbl of Brent crude price, similar to FY14 levels.

NR/USD exchange rate (Rs

) 54.4 60.5 60.0 60.0 Closer to current spot rate of INR/USD. Volumes

Subsidised diesel (mmtpa) 67.7 65.3 68.3 71.1Given the sharp hike in diesel prices, we have assumed FY15-16 diesel sales

volume CAGR to be muted at +2% vs -1.1% growth recorded in FY14.

Kerosene (mmtpa) 7.5 7.2 6.6 5.9 Volumes to decline at 8-10% CAGR in FY15-16, higher than the decline of 7%CAGR in FY10-13.

Subsidised LPG (mmtpa) 14.8 15.2 16.0 16.7 Subsidised LPG volume to record 5% CAGR, in line with the historical growth rate.

Average retail prices

Subsidised Diesel ( Rs/litre) 49.6 60.0 66.9 70.5 Assumed monthly diesel prices hike of Rs0.5/litre continues till diesel is fullyderegulated.

Kerosene ( Rs/litre) 14.4 14.4 17.0 20.0 Assumed kerosene price increase of Rs2.5/litre in FY15 and Rs3 in FY16.

Subsidised LPG ( Rs/cylinder) 430 441 500 550 Assumed LPG price increase of Rs50/cylinder each in FY15 and FY16.

Under-recoveries ( Rs/unit)

Diesel ( Rs/litre) -12.4 -8.3 -2.7 0.0Diesel under-recoveries are likely to decline to Rs2.7/litre in FY15 and NIL inFY16, vs average under-recovery of Rs8.3/litre in FY14 and Rs4.5/litre currently.

Kerosene ( Rs/litre) 30.6 33.7 31.0 28.1Under-recoveries still at a high level; however, leakage to be plugged over thenext 2-3 years due to implementation of Direct Benefit Transfer.

LPG ( Rs/cylinder) 393 445 374 325 To gradually decline due to price hike assumed in FY15-16.

Fuel under-recoveries ( Rs bn)

Subsidised diesel 1000 648 219 1 Based on higher domestic prices and moderation in diesel volume growth.

Kerosene 305 299 254 207 Based on higher domestic prices in FY15 and decline in volume.

Subsidised LPG 399 451 398 363Based on higher domestic prices in FY15, moderation in subsidised LPG volumegrowth, and moderation in LPG cracks.

Total 1,704 1,398 871 571

Source: PPAC, Bloomberg, Ambit Capital research

nvestment implications: De-regulation of diesel prices and decline in fuel under-recoveries are positive for Upstream PSUs as it would increase their net crude

realisation and also positive for OMCs as it would boost their RoEs due to a reductionn interest burden.

(A) Positive for oil PSUs: We reiterate our positive view on upstream PSUs, as theircurrent share prices factor in: (a) net crude realisation at ~US$10/bbl lower thanhistorical levels and (b) a gas price of only ~US$5/mmbtu vs ~US$8/mmbturecommended by the Rangarajan committee. Despite assuming that upstream PSUsbear 100% of the subsidy burden from FY16 onwards (vs 50% in FY14), their netcrude realisation could rise to more than US$60/bbl (vs US$41-47 in FY14).ONGC istrading at 9.9x FY16 P/E (five-year average of 10.0x) and Oil India is trading at 7.5xFY16 P/E (five-year average of 8.8x). Decline in under-recovery burden and clarity on

net crude and gas realisation are key triggers. Please ref er to (click here) our 19th June2014 sector update, “Oil PSUs - Is there more steam left” for details.

http://webambit.ambit.co/reports/Ambit_Oil&Gas_SectorUpdate_19Jun2014.pdf






AMBIT INSIGHTS


ONGC's valuation sensitivity to gas and crude pricerealisation (Rs)

Net crude price realisation (US$/bbl)

Net gas pricerealisation(US$/ mmbtu)

50 55 58 60 65

4.2 378 411 433 447 482

5.0 408 442 463 477 5126.0 446 479 500 514 549

7.0 483 517 538 552 587

8.0 521 554 575 589 624

Source: Ambit Capital research; Ourb se c se

is highlighted in grey shade

Oil India's valuation sensitivity to gas and crude pricerealisation (Rs)

Net crude price realisation (US$/bbl)

Net gas pricerealisation(US$/ mmbtu)

50 55 58 60 65

4.2 494 555 591 615 676

5.0 536 596 632 656 7176.0 587 648 684 708 768

7.0 639 699 735 759 820

8.0 690 751 787 811 871

Source: Ambit Capital research; Our b se c se is highlighted in grey shade

(B) OMCs: Given the sharp rally, OMCs’ share prices are factoring in all positiveswhilst ignoring negative impact of competition in their marketing business fromprivate fuel marketing companies (RIL and Essar Oil). In addition, OMCs’ share pricesare factoring in aggressive assumptions on: (a) exemption from the subsidy burden;and (b) faster decline in interest burden, owing to a sharper-than-expected fall in

under-recoveries (due to strengthening INR and plugging of subsidy leakage incooking fuel). OMCs are trading at 1.0-1.7x FY16 P/B, a 20-30% premium to the lastfive-year average. We, therefore recommend a switch from OMCs to UpstreamPSUS.



Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capitalmay have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Alpha This Week

Sep 02, 2014

Derivatives

Securities featured in this note

CompanyNearTerm

Mediumterm

Nifty <-> ()

Bajaj Auto () ()

Bharti () ()

Bank of Baroda <-> ()

ONGC () ()

ICICI Bank

(

) (

) Larsen & Toubro <-> ()

MSCI EM () ()

() denotes positive view , () denotesnegative view, <-> denotes no major view

Analyst Details

Gaurav Mehta, CFA+91 22 3043 [email protected]

n alternative take on m arkets

7th Sept 2 13

With the crucial 7950 resistance having been taken out now, it is criticalfor market breadth to improve for a healthy upmove to sustain. For thefrontline index however, upsides may be capped at about 8130 in theimmediate term. Net options’ protection bought by FIIs is at multi-yearlows suggesting a near lack of hedges and hence caution, which may beworrying from a contrarian standpoint. On the flip side, DIIs havefinished buyers of Indian equities for August after several months ofoutflows lending credence to the view that retail money rotation mayprovide structural support to financial assets over the next few years. Netnet, we stay positive on Indian equities over the next year and more butaren’t as convinced in the near term. On stocks, we maintain that the fivelarge caps best placed technically are ICICI Bank, ONGC, Bajaj Auto,Bank Baroda and Bharti.

Index : We reiterate our view that the Nifty has been and stays to be in astructural uptrend ever since the mega 6350 breakout.

From a near term perspective, however, we had highlighted caution on theback of a trendline resistance near 7950, declining breadth and negativedivergences with momentum.

With the 7950 resistance having been taken out now, it is critical for marketbreadth to improve for a healthy upmove to sustain. For the frontline indexhowever, upsides may be capped at about 8130 in the immediate term.

Stocks: From a near term perspective, Bank Nifty and Oil & Gas stayattractive pockets with ICICI Bank, Bank of Baroda and ONGC being the most

attractive stocks from these spaces. We also like Bajaj Auto and Bharti fromthe large cap universe.

FIIs’ net options protection at multi-year lows, below zero now!

Source: Metastock

FIIs in derivatives: FIIs’ index futures long positions have moved upsignificantly over the past few weeks but are still away from optimisticextremes! However, net options protection bought by FIIs (net puts minus netcalls), has plunged into the negative territory and is now at the lowest pointsince Jan’12. This implies a complete lack of hedge and hence may besuggestive of caution being nearly absent!

Institutional flows: While FIIs stay buyers of Indian equities, DIIs too haveturned the corner and finally finished buyers in August after several months ofnegative flows.

(200,000)

-

200,000

400,000

600,000

800,000

1,000,000

J a n - 1

2

M a r - 1 2

M a y - 1

2

J u l - 1 2

S e p - 1

2

N o v - 1

2

J a n - 1

3

M a r - 1 3

M a y - 1

3

J u l - 1 3

S e p - 1

3

N o v - 1

3

J a n - 1

4

M a r - 1 4

M a y - 1

4

J u l - 1 4 n

e t p u t s m i n u s n e t c a l l s



AMBIT INSIGHTS


Institutional Equities Team

Saurabh Mukherjea, CFA CEO, Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Nitin Bhasin - Head of Research E&C / Infra / Cement / Industrials (022) 30433241 [email protected] Aadesh Mehta Banking / Financial Services (022) 30433239 [email protected]

Achint Bhagat Cement / Infrastructure (022) 30433178 [email protected]

Aditya Khemka Healthcare (022) 30433272 [email protected]

Ashvin Shetty, CFA Automobile (022) 30433285 [email protected]

Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected]

Dayanand Mittal, CFA Oil & Gas / Metals & Mining (022) 30433202 [email protected]

Deepesh Agarwal Power Utilities / Capital Goods (022) 30433275 [email protected]

Gaurav Mehta, CFA Strategy / Derivatives Research (022) 30433255 [email protected]

Karan Khanna Strategy (022) 30433251 [email protected]

Krishnan ASV Real Estate (022) 30433205 [email protected]

Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected]

Paresh Dave Healthcare (022) 30433212 [email protected]

Parita Ashar Metals & Mining / Oil & Gas (022) 30433223 [email protected]

Pratik Singhania Retail (022) 30433264 [email protected]

Rakshit Ranjan, CFA Consumer / Retail (022) 30433201 [email protected]

Ravi Singh Banking / Financial Services (022) 30433181 [email protected]

Ritesh Gupta, CFA Midcaps – Chemical / Retail (022) 30433242 [email protected]

Ritesh Vaidya Consumer (022) 30433246 [email protected]

Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected]

Ritu Modi Automobile (022) 30433292 [email protected]

Sagar Rastogi Technology (022) 30433291 [email protected]

Sumit Shekhar Economy / Strategy (022) 30433229 [email protected]

Tanuj Mukhija, CFA E&C / Infra / Industrials (022) 30433203 [email protected]

Utsav Mehta Technology (022) 30433209 [email protected]

Sales

Name Regions Desk-Phone E-mail

Sarojini Ramachandran - Head of Sales UK +44 (0) 20 7614 8374 [email protected]

Deepak Sawhney India / Asia (022) 30433295 [email protected]

Dharmen Shah India / Asia (022) 30433289 [email protected]

Dipti Mehta India / USA (022) 30433053 [email protected]

Hitakshi Mehra India (022) 30433204 [email protected] Shah, CFA USA / Europe (022) 30433259 [email protected]

Parees Purohit, CFA UK / USA (022) 30433169 [email protected]

Praveena Pattabiraman India / Asia (022) 30433268 [email protected]

Production

Sajid Merchant Production (022) 30433247 [email protected]

Sharoz G Hussain Production (022) 30433183 [email protected]

Joel Pereira Editor (022) 30433284 [email protected]

Nikhil Pillai Database (022) 30433265 [email protected]

E&C = Engineering & Construction



AMBIT INSIGHTS

A bi C i l d 2 S b 2014

Explanation of Investment Rating

nvestment Rating Expected return(over 12-month period from date of initial rating)

Buy >5%

Sell <5%

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