| Summary of Contents STOCK UPDATE Orbit Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs350
Current market price: Rs285
Upgraded to Buy -
Focus on volume rather than price: Over the last two quarters, the sales figures of realty market in Mumbai in general and the residential property in particular have seen a marked improvement. This is very much reflected in the Q2FY210 presales figures of Orbit. In tandem, property prices in most areas of Mumbai have increased by around 10-15% from the bottom. At present residential property prices in some of the key operational areas of the company such as Napean Sea road is quoting in the range of Rs40,000-45,000 per square foot (sq ft) while that in Lower Parel is in the range of Rs17,000-20,000 per sq ft. Going forward, the company would focus more on the volume rather than price to drive its revenue growth. Further, as per the management, the pre-sales figures in Q3FY2010 will be higher even when compared to Q2FY2010. -
New project launch post Q2FY2010: In the current quarter, the company has launched a new residential project, Park Residency at Andheri in Mumbai. The project is a gated residential complex of multistoried towers and offers 1, 2 and 3 bedroom apartments with excellent amenities at the rate of Rs6,300-7,500 per sq ft. The project slated to be completed in two years has a total saleable area of 284,000 sq ft. As per the management the project have got good response and 20-30% of the total area has already been sold. -
Visibility for next few quarters: Orbit would launch about four projects over the next three to four quarters. Currently, these projects are in land acquisition stage and are progressing smoothly. This provides us visibility about the company for at least the next few quarters. The company will come up with two projects, Orbit Sky Chateau and Villa Orbit ? Annex at Napean Sea Road while the other two projects?Orbit Enclave and Orbit Gamdevi?would come up in Nana Chowk. Orbit Sky Chateau will most probably be launched in Q4FY2010 as almost 90% of land required for the project has already been acquired. -
Placement for Mandwa Project likely by the end of Q4FY2010: The company under a special purpose vehicle Orbit High City will develop 400-500 villas for high net worth individuals on 200 acre of land in Mandwa and has already acquired 130 acre of land. The project has a total estimated saleable area of 23.95 lakh sq ft. The management expects revenues from the project to start flowing in by FY2011. To fund the project the company is looking to raise up to Rs200 crore through private equity placement in Orbit High City, and post the equity placement the company?s stake in the project will get diluted to ~60% (as against the present holding of 82%). The said deal is expected to be signed by Q4FY2010. -
No impact of cap on water supply: The company does not face any threat from the recent announcement by the Municipal Corporation of Mumbai of putting a cap on water supply beyond two lakh litres per day, as all its ongoing and upcoming projects will be consuming lesser than the prescribed limit. -
Outlook: We are upgrading our recommendation on the stock from Hold to Buy mainly on account of strong presale, which the company is expected to post in Q3FY2010 and the recent correction in the stock. Additionally, the company has still not utilised its QIP proceeds, which it planned to use to acquire new projects. Though the company has identified some new projects, nothing has been finalised as of date. So any development on this front would provide revenue visibility post FY2011. Further, any development in the Orbit?s key pipeline projects (Lalbaug Redevelopment and Mandwa Project) could unlock value for its shareholders. At the current market price the stock is trading at 10.3x FY2011 earnings estimates and 1.6x FY2011 price to book value. We mantain our price target of Rs350.
SECTOR UPDATE Banking PSBs in for a rough patch The public sector banks (PSBs) have under-performed the BSE Bankex as well as the broader market since November 2009. The under-performance by the PSBs primarily stems from: (1) the firming up of bond yields on speculation over possible tightening of monetary measures by the Reserve Bank of India (RBI), which implies sharply lower treasury gains (if any); and (2) the trends in loan disbursals remain weak with a pick-up in credit demand remaining elusive. Pick-up in credit demand to be gradual
While the credit growth has revived marginally (from 10.1% during Oct 2009 to 11% as on December 4, 2009), the pace of improvement of the pick-up is likely to be gradual despite a favourable base effect. Our expectation of a gradual revival in the credit growth stems from the following facts: -
The corporate India?s thirst for capital is being quenched by non-bank credit sources (equity, debt etc). Our correlation analysis suggests a meaningful revival in the credit demand in mid Q4FY2010, as corporate India would leverage the fresh equity raised recently. -
Deleveraging in some pockets of economy along with lower capital needs of the petroleum and fertiliser sectors have resulted in huge repayments. This has put additional pressure on credit growth trends. Muted treasury gains in H2FY2010
The spike in the inflation rate during November this year has pushed up the bond yields higher across maturities. In view of the firming up of the bond yields, the treasury gains during Q3FY2010 are likely to be much lower on a sequential basis. In addition, if the yields sustain at higher levels, we expect some of the banks to report marked-to-market (MTM) loss provisions during the quarter as the yields are above the level up to which their investment portfolio was protected. In light of this, the support from treasury activity to the bottom line growth will be limited, unlike in H1FY2010 when treasury gains had driven a strong bottom line growth. Our analysis suggests that Allahabad Bank, Bank of India, Union Bank and Corporation Bank are relatively more sensitive to movement in bond yields. Changes in recommendations
In light of likely gradual than earlier expected credit demand revival and relatively lower support from treasury activity, we are cautious on the PSBs in the near term. While we maintain our estimates and our price targets, we are revising our recommendations after the run-up in banking stock prices recently. -
Buy: Bank of Baroda, Andhra Bank, IDBI Bank, ICICI Bank and HDFC Bank. -
Hold: Allahabad Bank, Andhra Bank, Corporation Bank, Punjab National Bank, State Bank of India, Union Bank of India and Axis Bank. -
Reduce: Bank of India
VIEWPOINT Oil marketing companies OMCs? valuations seem full
In H1FY2010, the government had not issued any oil bonds and that has raised serious concerns regarding the delay in the issue of oil bonds. However, the finance secretary?s statement on compensating the OMCs in cash instead of oil bonds if implemented will be a positive and is expected to allay the concerns related to the intention of the government with regard the OMC compensation. The positive indications from the government on the subsidy front, the hike in automobile fuel prices and the oil moving in a narrow band for sometime have led to a steep run-up in the stock prices of the OMCs. Since April 01, 2009, IOCL, BPCL and HPCL are up by 58%, 68% and 49% respectively. Further, in our view the current market price factors in nil share of OMCs in the under-recoveries estimated for FY2010. Hence, at the current market price, we believe the valuation of the OMCs seems full. We highlight here that any development or any notification from the government related to the de-regulation of the automobile fuels (the expert committee is likely to submit its report on de-regulation of fuel prices in January 2010) could result in the re-rating of the OMCs.
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