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23 April 2012
India Ahead of the Pack
J.P. Morgan Daily Valuations
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JPMQ : Pairs Model
Pair Trade Alert : Long ALBK IN / Short DBNK IN (Vivek G Shah) Our BSE Top 200 Pairs Model triggered a "High-Conviction" Switch idea: Long Allahabad Bank / Short Dena Bank (ALBK IN / DBNK IN). Our Pairs Model screens for companies in the same sector, in a similar market capitalization size basket that have recently experienced significant moves in opposite directions. The Model then (systemically and quantitatively) verifies if there appears to be any fundamental reasons for this move (see Q-Score Switch Support Profile on the following page). We find in this particular instance there is no specific reason for the deviation and we therefore expect this divergence to correct itself (i.e., mean reversion).
India Equity Research Team Automobiles and Auto Parts Aditya Makharia, Bharat Iyer, Ritesh Gupta Banks, Financial Institutions and Insurance Seshadri Sen, Dibin Korath Consumer Goods & Media Latika Chopra, Ritesh Gupta Economics Jahangir Aziz, Sajid Chinoy Engineering, Construction, Infrastructure and Utilities Shilpa Krishnan, Sumit Kishore, Deepika Belani IT Services Viju George, Amit Sharma Metals, Mining and Materials Pinakin Parekh, Neha Manpuria Oil & Gas Brynjar Eirik Bustnes, Neil Gupte Real Estate Saurabh Kumar, Gunjan Prithyani Small and Mid Caps Princy Singh, Dinesh Harchandani Strategy Bharat Iyer, Bijay Kumar, Gunjan Prithyani
Reliance Industries Ltd (Underweight)
4QFY12 - Muted downstream drives another weak quarter (Brynjar Eirik Bustnes, CFA) RIL 4QFY12 earnings of Rs42.3bn (-21% y/y) were in line with our expectations. GRMs improved q/q, with higher gasoline/naphtha spreads. While domestic E&P output continued to fall (D6 output at ~36mmscmd), RIL’s shale gas JVs continued to expand output (up ~14% q/q). RIL acknowledged reservoir difficulties at D6 would lead to a downward revision in reserves (12-15%). With upstream difficulties well known, we expect refining and petchem margins to drive earnings and stock performance in the coming quarters. Remain UW. Refining remains soft: GRMs remained subdued in 4Q, but improved sequentially to $7.6/bbl (from $6.8/bbl) as improved gasoline/naphtha cracks helped offset softness in diesel. Narrower light-heavy differentials and strength in fuel oil cracks kept the delta to Singapore benchmarks narrow. The petcoke gasification project will be embarked on soon ($4bn capex) – and per RIL, could add ~$3/bbl to GRMs.
Zinc Subsidiary Conference Call highlights steady state business with FCF set to pick up further - ALERT (Pinakin Parekh, CFA) STLT’s 65% owned zinc subsidiary, Hindustan Zinc (HZ, NR) highlighted that business remains steady state, and overall as of now there are no specific worries for FY13. Payout ratio has been targeted at 20%. Capex for FY13 is expected to be ~Rs18bn. Production is likely to be muted in H1FY13 before picking up in H2. Company expects overall costs to be stable in FY13 compared to FY12. Silver production target reduced due to lower PPM, overall slight increase expected in FY13 for mined metal production: We are not worried about the company’s lower revised guidance for integrated silver production (now 350tonnes v/s earlier of 400-450tonnes). The company has attributed this to lower PPM in the SK mine, with PPM expected to average 130ppm. We do not find the drop in PPM as worrying and believe that PPM is likely to vary depending on the mine block. We continue to see silver as incrementally supportive for revenues and profitability going forward. Full year FY12 silver revenues stood at Rs 12.3bn, up 64% y/y.
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