Macquarie - Unitech, Citigroup - Cairn, India Market Watch

Macquarie on Unitech say,

Unitech announced a strong set of FY3/07 results, with top-line revenue rising 255% to Rs33.9bn from the FY3/06 level, and net profit up 15x at Rs13.05bn; implying an EPS of Rs16.09 for the full FY3/07.

Impact
We estimate that approximately half of EPS, ie Rs8, is from the sale of commercial assets to UCP, a vehicle listed on AIM, London in December 2006. Excluding this sale to UCP, remaining net profit is in line with or core business full year FY3/07 EPS estimate of Rs7.92.

Our estimate suggests that the company must have delivered ~8m sqf in FY3/07 in line with our expectation of 7.8m sqf. We believe the company is on track to achieve our strong development schedule forecasts (FY3/08 and FY3/09), and thereby reduce execution risk.
Operating margins are very strong at 62.0% against our expectation of 44% but the two numbers are strictly not comparable. The reported numbers include the sale of commercial assets to UCP where company has partly monetised its land at relatively higher margins.

UT is planning to hive-off 25¿30% of its hotel assets comprising 28 hotel sites, and press reports suggest this is likely to be valued at $2bn. Presently we have valued these hotel sites around $450m.

UT stated that it plans to spend $6bn over next four years to develop residential, commercial, retail properties and build hotels.

UT's board of directors has also announced 1:1 bonus shares. This is the second time the company has declared bonus shares in the last 12 months. The board also announced a 25% dividend for FY3/07.

Earnings revision
No change.

Price catalyst
12-month price target: Rs501.00 based on a Sum of Parts methodology.

Catalyst: Surging Residential Demand and Higher Realisations
Action and recommendation
We strongly reiterate our Outperform rating. We believe Unitech is a very good proxy for the Indian property sector as it is the most diversified property company both geographically and in terms of business segments. We also see Unitech getting re-rated with DLF soon looking to hit the capital markets. Our best-case scenario (which includes option value of future projects like the 38,000-acre Kolkata project) suggests a potential price of Rs750-800.


Citigroup in their report on Cairn India

Oil forecasts raised

After our global oil numbers were raised to US$63.5/b, US$60/b and US$55/b for 2007E, 2008E and long-term respectively, we adjusted our estimates for Cairn India. Our core NAV moved up to Rs160 from Rs146, with a target price of Rs185 reflecting a 15% premium to NAV. Cairn is highly leveraged to long-term oil price expectations.

Uncertainty over offtake should pass; Buy

The recent newsflow on new refinery and consequent changes to the ¿approved¿ production plan are overdone in our opinion. While the associated political overtones of recent developments could delay first oil, there is unlikely to be a complete overhaul. The sensitivity of NAV to a 6-month delay is a manageable 4%. The recent correction in the stock therefore, in our view, offers favorable risk-reward in the context of consensus oil moving up.

Core valuation support

At long-term Brent of US$55/bbl, the shares trade at 0.85x NAV. But potential bid interest raises the possibility that a higher oil price is used in the bid valuation. In this context, premium to NAV of 15% therefore imputes a long-term oil assumption of US$60/bbl.
Oil upgrade drivers

We remain of the view that a weak US$, rising costs and limited
visibility on new sources of long-term non-OPEC supply strengthen OPEC's ability to set a floor under prices facilitated by a creeping increase in market share


Citigroup in their report India Market Watch...

Spotlight on External Commercial Borrowings: Latest data on external borrowings (ECBs) indicates that corporates raised a record US$25.3bn during FY07, over 50% higher than the amount raised during FY06, and breaching the annual cap of US$22bn fixed by the Finance Ministry. ECBs during March 2007 totaled as much as US$5bn- the highest-ever borrowing in a single month. Over the past year, ECBs. which include loans, buyers/suppliers credit, securitized instruments and Foreign Currency Convertible Bonds (FCCBs) have been a growing source of funding for corporates and have a minimum average maturity of 3 years (for ECBs below US$20mn) and 5 years (for ECBs over US$20mn).

ECB uptrend has created a liquidity dilemma: Given the backdrop of an unfolding capex cycle and rising investment spend across industries such as infrastructure, telecom, cement and financial services; ECBs have emerged as a significantly cheaper corporate financing strategy especially under the current scenario of tighter domestic interest rates and a steady appreciation in the rupee. While overseas borrowings make commercial sense for most companies in the current backdrop, they have posed as a liquidity concern given that higher foreign inflows have resulted in more dollars coming into the system, thus creating inflationary worries.

New Regulations make ECBs less attractive. In order to manage capital flows, the RBI recently imposed several regulations that would make ECBs less attractive. These include (1) lowering interest rate ceilings on ECBs under the automatic route1 thus making it difficult for companies with lower credit quality to access overseas markets. (2) Banning ECBs for integrated townships for100 acres or more thereby further tightening funding towards real estate. While the new norms will help limit borrowings, given the uptrend in FDI, we are maintaining our full year balance of payments estimates of a reserve accretion to the tune of US$21.5 and our rupee appreciation view.