Fw: Investor's Eye: Pulse - IIP growth at 4.1% in February 2012; Update - Max India (Exit New York Life, enter Mitsui Sumitomo), Fertilisers (Impressive volume offtake despite lean season)

 

 

Investor's Eye [April 12, 2012]  Sharekhan www.sharekhan.com

Summary of Contents PULSE TRACK IIP growth at 4.1% in February 2012 In February 2012, the Index of Industrial Production (IIP) grew by 4.1%, which was lower than the market's expectations. The January 2012 IIP numbers have also been revised down drastically to 1.1% (as against 6.8% announced earlier) due to a sharp correction in the consumer segment (namely sugar production). On a year-till-date (YTD) basis, the IIP growth stands at 3.5% as against 8.1% in YTD FY2011.   Outlook The IIP numbers have been quite volatile recently and the recent downward revision for January 2012 has raised doubts on their reliability. We continue to track the 3-MMA as well as the YTD growth as these give a better picture. The 3-MMA declined to 2.6% whereas the YTD growth stood at 3.5%. Both the indicators show a slowdown in the industrial activity which is likely to increase the pressure on the RBI to cut the policy rates. Even though the inflation rate remains above the RBI's comfort zone, the Street is factoring in a rate cut (repo rate) by 25 basis points in the forthcoming policy meet on April 17, 2012 to address the declining investment activity.   STOCK UPDATE Max India Cluster: Emerging Star Recommendation: Buy Price target: Rs234 Current market price: Rs204 Exit New York Life, enter Mitsui Sumitomo Max India today entered into a tripartite agreement for its life insurance joint venture, Max New York Life. The agreement would pave the way for the exit of its existing foreign partner, New York Life (which holds a 26% stake) and the entry of Mitsui Sumitomo Insurance Company (Mitsui Sumitomo).   Structure of the deal  As per the terms of the deal, Mitsui Sumitomo would acquire a 16.63% stake from New York Life and a 9.37% stake from Max India for a total consideration of Rs2,730 crore. The deal will value the insurance business at Rs10,500 crore.   Max India would get Rs984 crore to sell the 9.37% stake but it would acquire the 9.37% stake left with New York Life for Rs182 crore. In the process, Max India's stake in the insurance business remains at 70% but it gains close to Rs802 crore in the bargain.   Upside to our SOTP valuation The implied valuation of the insurance business at Rs10,500 crore is at a 31.5% premium to Rs7,975 crore as per our calculation. The premium works out to over 40% if we consider the Rs800 crore profit on the deal with Max India. This implies an upside of Rs60-80 per share to our price target.   In October last, the company had also sold 26% stake in its healthcare subsidiary to South African Life Healthcare. The implied valuation of the deal stood at a 25% premium to our SOTP based price target.   Taking the implied valuations of both the deals, there is a potential upside of 30-40% (Rs72-90) to our current price target of Rs234 per share. We are currently not revising our price target but will come out with a detailed note on the company after the conference call scheduled on Monday (April 16, 2012). We remain extremely bullish on Max India and retain our Buy recommendation on the stock.     SECTOR UPDATE Fertilisers Impressive volume offtake despite lean season   Key points Robust volume offtake in March 2012: In March 2012, the aggregate sales of the domestically produced fertilisers (by 15 leading manufacturers) increased by 39% as compared with that in the same period of the last year. In March 2012 the import of fertilisers (urea, DAP, MOP and complex fertiliser) increased from 4.4 lakh tonne to 18.3 lakh tonne. The import of DAP, MOP and complex fertilisers have grown by 332%, 104% and 1,997% respectively on a low base due to the logjam over prices between the Indian importers and the global manufacturers. The import of urea also increased from 6,833 tonne to 44,217 tonne during March 2012.  Government may increase price of urea by 10%: The government may increase the price of urea by 10% in order to restrict the subsidy bill and to reduce the price difference between urea and non-urea fertilisers. For FY2013 the government has already reduced the subsidy on non-urea fertilisers, assuming a reduction in the prices of the raw materials in the international market. An increase in the price of urea will also help to check the excess use of urea which can damage the soil. Consumption of fertiliser grows by 5.6% in FY2012 for top 15 companies: In FY2012 the consumption of fertiliser saw a marginal rise of 5.6% even though there was a decline in the import of DAP and MOP due to their higher prices in the international markets and a low demand for MOP and DAP. The import of DAP and MOP declined by 6% and 29% respectively in FY2012 as compared with the last year's imports. Click here to read report: Investor's Eye Industry statistics: consumption rose by 7% in FY2012 despite lower import of DAP and MOP: The consumption of fertilisers increased by 7% during FY2012 but the consumption was lower as compared with that in FY2011 (when consumption had grown by 14%). The consumption of urea has increased by 4% while that of DAP has fallen by 3% on the back of lower imports due to tight demand and supply in the international market. The consumption of MOP in FY2012 declined by 23% as there was deadlock over prices between the Indian importers and the global suppliers of MOP during the first four months of FY2012. India depends completely on imports of MOP because it doesn't have natural resources to manufacture MOP locally.   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.