Category: Economy, Markets and Macro Views

Citigroup Research has downgraded Central Bank of India [CBI] and set a target price of Rs 130. It has initiated coverage with a SELL rating on the stock.

The Citi report says that the banking industry is well poised to grow in India. However, it is skeptical about CBI’s performance. Central Bank appears well positioned to capitalize on this growth through its strong pan-India distribution, above-industry deposit franchise and large corporate lending portfolio. Citi estimates pre-provision profits, earnings and loan growth of 16%, 13% and 18% over FY07-10E. This is well below the PSU Banking industry expectation of 20%.

Expect profitability to remain structurally challenged amid competitive margins, low fees and higher NPLs and delinquencies relative to peers. Though management has taken corrective steps, we see only a gradual recovery.

Central Bank is valued at Rs130 per share based on EVA model, which better captures the long-term value of the business and is a standard valuation measure for Indian banking coverage. At a price-to-book (P/BV) of 1.2x FY09E, which is at a slight discount to target multiples for peer government banks, a value of Rs127 per share of Central Bank is arrived at.

We reported that Lupin has acquired Rubamin Pharma.[RLL]

RLL is a research driven organization with 145 employees, of which 30% are involved in R&D. The company’s R&D capabilities encompass activities such as Product Development and Optimization, and NCE Development Support. This acquisition would provide Lupin access to RLL’s customer base of innovator and generic companies in the US and Europe and various technology platforms, which Lupin does not have. We believe that Lupin would be able to use this customer base, and technology platforms to leverage its own CRAMS initiatives. Lupin will also fill gaps, which RLL has in terms of scale-up and forward integration. Apart from this, we expect Lupin to initiate operational restructuring to reduce cost and improve profitability.

Currently, RLL has sales less than Rs500 mn and EBITDA margin lower than Lupin’s margin. However, ASK India expects sales of RLL to grow to Rs2.5- 3 bn in three years and significantly improve profitability. ASK maintains a BUY on Lupin with a price target of Rs 807. Fully diluted EPS expected for FY08 and FY09 are – Rs 36.9 and Rs 44.8.

UBS Equity research is underweight on the prospects of Indian market compared to others globally. It has rated India at position 15 amongst 16 countries.
Rank of India across various parameters in the UBS Report are as follows, [1=Highest Score, 16=Lowest Score]

• Country Risk Rank – 15
• Economic Rank – 16
• Political Rank – 9
• Budget Deficit – 15
• Current Account – 13
• Tariffs – 16
• Currency – 13
• Inflation – 14
• Sovereign Credit Rating – 14
• Economic Rank – 16
• Contract enforcement – 16
• Investor protection – 4
• Liquidity – 5
• Size of Government – 3
• Corruption – 11
• Reforms – 9

The sectors UBS is globally looking for are Banking, Telecom and Consumer Services and Goods.

Merill Lynch has raised the stock target price of Reliance Capital [R-Cap] to Rs 1850. R-Cap is expanding its distribution at a very rapid pace which could result in growth, ahead of Merill’s estimates, remaining very strong through FY10 and possibly beyond. Based on FY10E sum of parts valuation, a value of Rs 2033/share, the target price for Mar’09 (18 months from now), a 36% upside. Hence, 12 month PO is Rs 1850.

By Dec’08, it is likely to have 10,000 touch points in retail in 1 year (v/s 4,000 now), 5,000 locations (v/s 700), 300,000 agents in life insurance (and 400 cities) and +1500 dealers.

• Consumer loan book [Housing, Auto, Personal etc] to expand 10-fold to US$4.1bn by FY10, delivering ROE of +20%.
• General insurance too is likely to show +100% growth through FY09 and 75% in FY10.
• R-Money is likely to be the other strong growth driver as it expands distribution and customers hit 1 million mark.
• Overall, life insurance should, however, remain the biggest contributor at 37% of target value with premia income forecast to rise 7-fold from FY07 levels.

Reliance Capital is likely to emerge amongst the top 3-4 players in the financial services segment. R-Cap is expected to report an EPS of Rs 41.16 for FY 08 and Rs 59.27 for FY09.

In a separate report, Merill Lynch’s most preferred stocks are – BHEL, Bharti Airtel and Grasim Industries. While the least preferred are Hindalco, Tata Motors and Pantaloon Retail India Ltd.

Power Grid Corporation of India (PGCIL) selected Reliance Energy (REL) as a joint venture partner through international competitive bidding for setting up the transmission lines for the Parbati and Koldam hydro-electric projects in Himachal Pradesh and two projects under the Western Region System Strengthening Scheme-II (WRSS-II) in Maharashtra and Gujarat on a build, own, operate (BOO) basis.

These projects would entail an investment of about Rs 3,500 crore. The two companies would sign a letter of intent for the WRSS-II project and a shareholder agreement for a joint venture for the Parbati and Koldam projects soon, the reports added.

In a separate development, there was a wide spread rumor that Reliance Energy will file for a DRHP to raise $2 Billion for Reliance Power Ltd. REL may also bid for another Ultra mega Power Project.

REL also wants to hive off its EPC construction business, which fueled the rally ignoring Citigroups recommendation.

Nifty opened 2.20 points higher and surged to strike an all time high of 5015.55, at the onset of the trading session boosted by strong demand for index pivotals. The market surged today as weak US economic data reinforced expectations for another interest rate cut from the Federal Reserve, following a steep half-point reduction to 4.75% last week.

Nifty took a little under ten months to advance 1000 points from 4,000 to 5,000. It had first hit the 4,000 mark on 1 December 2006.

BSE Sensex has crossed the 17,000 mark a new life time high and many fund managers are of the view that the Indian indices will continue to rise until the end of 2007. FIIs have poured in $3 Billion in the Indian equities until the 25th of this month.