Nomura positive on Diageo-United Spirits deal

According to Nomura, one of the key triggers for Diageo in India will be a reduction in the import duty on imported scotch. One of the most immediate benefits for United Spirits’ shareholders is the potential capital infusion helping to reduce the debt and improve both the profit & loss and the balance sheet

United Spirits has received all regulatory approvals with respect to the stake sale to Diageo.  As previously announced, there are three phases of the deal. Importantly, there is no change to either the phased manner of the deal or the open offer for minority shareholders against what was previously announced. The stock has held up well despite news flow which has been sometimes concerning, according to Nomura Equity Research.
Nomura believes that although the deal closure has been delayed, it has been due to the more time that Diageo and United Spirits have had to wait for regulatory approvals. These approvals have had to come in from the relevant authorities such as the Securities and Exchange Board of India (SEBI), Competition Commission of India (CCI) and Reserve Bank of India (RBI).
Long-term structural story of premiumisation in an attractive underpenetrated category remains intact. Valuations at 25x FY15F P/E versus the sector average of around 24x is reasonable, in our view, given the strong earnings growth expected over the next couple of years. Nomura recommends buying in United Spirits at current levels, ahead of several catalysts that are coming up in FY14F.
With approvals from all the three authorities now in place, the company has finally received the go-ahead to launch its open offer to acquire further shares from minority shareholders. The open offer is scheduled to start from 10th April and shall close on 26 April 2013. The price for the open offer is Rs1,440 per share, in line with the previously announced price and, at the same level that Diageo is acquiring shares from the current promoters of the company. 
The foreign company made it clear that there was no case to increase the open offer price and that all the shares would be acquired at the same level as they pay to the existing promoters of the company. However, with the current share price at Rs1,797 (as of 8 April 2013), the brokerage believes Diageo is unlikely to get any shares tendered in the open offer.
According to the contours of the deal, UB Holdings and other promoters of United Sprits will offload 12.8% of their total holding. This stake would works out to 16.7 million shares at Rs1,440 per share and the total value of that would be Rs24.1 billion.
United Spirits has treasury shares totalling 6.5% which will be sold to Diageo. This money will flow through into United Spirits. This will essentially work out to aroundRs12 billion. Post this stake sale, the shareholding structure for United Spirits will be UB Holdings (+group/ other promoters) having around 14.9% stake and Diageo having 19.3%. Diageo would then be issued additional 10% (post-equity) stake in United Spirits. The total value to that would amount to Rs21 billion. This money will also flow into United Spirits.
The next step is for Diageo to make an open offer to minority shareholders and that would entail an investment of Rs54.4 billion (assuming 100% subscription at Rs1,440 per share). Post completion of this offer, Diageo will hold 53.4% of the enlarged share capital of United Spirits.
Nomura’s analyst spoke to the management of Diageo. The CEO of Diageo also stated that the company is always confident of making bolt-on deals work in emerging markets. However, it will not be pressured into paying up over the odds for any acquisition. This is also evident in the recent potential deal with the Jose Cuervo tequila brand, where Diageo walked away as valuations were not right.
The management added that over the longer-term, Diageo does not intend to own 100% of United Spirits.  It wants to have a local face for its business; however, the key thing is they do want to have a controlling interest in the longer-term. This is one of the primary criteria when they look at acquisitions.
The management stated that Diageo’s experience in other emerging markets where it has made acquisitions like Turkey will help it and lends confidence that the United Spirits acquisition will be positive over the medium-term. The CEO specifically cited as an example of Mey Icki in Turkey, where the company is a market leader in local spirit, Reki, but had a strong route to the market. Diageo was able to leverage this strength and drive its share of scotch higher over a year. Having a good route to market is a significant source of competitive advantage in emerging markets and Diageo will look to use United Spirits’ distribution to push through sales of its global brands.
According to Nomura, one of the key triggers for Diageo for its India business will be a reduction in the import duty on imported scotch. In the case of such an event, the company expects it to happen in a phased manner over 5-8 years. However, Diageo will want to have complete clarity on any such move before it invests or plans on getting its global brands into India at a faster clip.
Investor concerns on the Diageo-United Spirits deal
The short-term concern that the deal will not go through as United Spirits’ current promoters have pledged their shareholding to banks who, in turn, have been selling off the shares in the open market; and the longer-term concern is that Diageo being a majority stakeholder does not result in any significant improvement in profitability as is being built into the stock price currently.
However, Nomura has assessed both these concerns and believes that while the pace of operational improvement may be slower, there is enough room for Diageo to deliver a cleaner, leaner and more profitable company to shareholders over the next 3-5 years.
United Spirits’ shares which are held by the current promoters of the company have been pledged to banks as collateral for loans given to both Kingfisher Airlines and United Breweries Holdings. Nomura’s Banks Research team has worked extensively on understanding the nature of these pledges, and also who are the lenders who own most of these shares as collaterals. Nomura’s banks team expects smaller PSU banks to take a big haircut on their Kingfisher exposure (likely to be spread over the next two-three years through incremental provisions) in the absence of solid collaterals and difficulty in invoking corporate guarantees going by recent history.
According to Nomura Equity Research, one of the most immediate benefits for United Spirits’ shareholders is the potential capital infusion helping to reduce the debt and improve both the profit & loss and the balance sheet. As at the end of FY12, United Spirits had a debt of Rs75 billion on which the interest payments were Rs8.7 billion. The debt/equity stood at 1.6. The deal is expected to go through in 1QCY13, so benefits of this transaction will only flow through in FY14F.
Once the preferential allotment goes through, and new equity is infused into the company, we expect United Spirits will benefit to the tune of Rs33 billion, which Diageo has confirmed will go towards debt repayment. As a result of this change alone, interest repayment in FY14F will go down to Rs4.7 billion. The balance sheet will improve substantially with debt/equity improving from 1.6 in FY12 to 0.5 in FY14F, according to Nomura.
Nomura reiterates a ‘Buy’ rating on the stock and believes that United Spirits will be one of the best consumer stories over the next two years. It notes there are several catalysts which should keep the share price buoyant. Profitability improvement will be one of the key things to watch and Diageo should be able to deliver consistent improvement, post a year of investment in FY14F. “Our numbers already build-in a V-shaped recovery into FY15F. United Spirits currently trades at 25x FY15F P/E against the sector average of around 24x. We reiterate our long-term structural Buy case on United Spirits at these levels,” says Nomura. 


Oil marketing companies likely to post subdued earnings for the fiscal 2012-13

Financial health of companies in the oil and gas sector is under a cloud. Will the government help out, asks Nomura

Nomura Equity Research, in its fourth quarter earnings preview for the Indian oil & gas sector believes that upstream public sector units (PSUs) are expected to report weak numbers while oil marketing companies (OMCs) are likely to post subdued earnings for the fiscal 2012-13 ending March 2013.

To be in profit for FY13F, OMCs need at least 100% compensation from the government, as per Nomura's thinking. They need further support of Rs612 billion (Rs366 billion for 4QFY13F + unpaid Rs246 billion for the nine-month period of April-December 2012). On the other hand, upstream PSUs hope their share in the compensation to OMCs would remain at Rs151 billion. Thus, the Government of India (GoI) needs to pay Rs461 billion for FY13F, but nothing is left from FY13 budget. As in previous years, GoI is likely to tap into next year's budget (Rs618 billion allocated for FY14). But if a large amount is brought forward, next year's fiscal targets would be at risk, feels Nomura.

For 4QFY13F, Nomura assumes that OMCs may receive Rs151 billion from upstream and Rs461 billion from the GoI. But, the risk is high that GoI support will be far less, the brokerage added. If government support is only Rs250 billion (similar to that in the December quarter), the upstream burden may be far higher at Rs362 billion, and upstream PSUs may report losses. If OMCs receive less than 100% support, they could report full-year losses for the first time, as per Nomura's analysts.

Nomura expects Reliance Industries' (RIL) refining margins to improve to $10 per barrel (bbl), but refining EBIT may fall by 5% due to maintenance shut down. It expects further recovery in the company's petrochemicals business, and further declines in exploration and production (E&P).  The brokerage sees the decline in oil/ gas production from KG-D6 block to decline.

For Cairn India, oil production and prices are largely flat q-o-q. Nomura expects flat EBITDA, but around $50 million drywell write-off could impact Cairns profit after tax (PAT). Nomura estimates Cairn's EBITDA at Rs33.9 billion (up 14% y-o-y, 3% q-o-q).

Nomura Equity Research expects a 14% q-o-q decline in 4Q PAT with downside risks. At upstream subsidy share of Rs151 billion, it expects GAIL's subsidy share at Rs7 billion (similar to the past three quarters). But, there is a risk of higher upstream subsidy burden and GAIL's share of subsidy. In such a case, GAIL could report losses in the fourth quarter, according to the brokerage.

Nomura also believes the decline in GAIL's transmission volume would continue. It expects PLNG's utilisation to fall to 105% due to high LNG prices affecting demand in January-February.

For Petronet LNG, Nomura expects 4Q PAT at Rs2.7 billion (up 10% y-o-y, down 15% q-o-q). It expects PLNG's utilisation to decline to 105% due to high LNG prices impacting demand in Jan-Feb. It assumes gross margins to moderate q-o-q despite 5% increase in re-gasification tariff from 1 January.

For Gujarat State Petronet, the brokerage estimates 19% y-o-y and 12% q-q decline in 4Q PAT. GSPL would provide for zonal tariff order and SUG charges from February 2013 (Rs166 million as estimated by Nomura).

Indraprastha Gas is expected to report 4Q PAT at Rs841 million (up 5% q-o-q, down 3% y-o-y), as per Nomura Equity Research. Volume growth is likely to remain muted in 4Q in both CNG and industrial segment. The brokerage expects EBITDA/standard cubic metre (scm) to moderate due to increasing share of LNG and firmed up LNG prices.

With rising share of LNG and high volatility in LNG prices and currency, but not-so-frequent price changes (only once a quarter), Gujarat Gas's margins have been quite volatile. It expects gross margins at Rs5.5/scm, down 3% q-o-q.

Indian Oil Corporation (IOC) is expected to report PAT of Rs142.4 million for the 4Q, up 1% y-o-y and 12%-q-o-q. EBITDA is likely at Rs182.9 million.

Bharat Petroleum Corporation (BPCL) is expected to see PAT at Rs49 million for the 4Q, up 24% y-o-y and 198% q-o-q. EBITDA is expected at Rs68.5 million.

Nomura believes that Hindustan Petroleum Corporation (HPCL) remains in a precarious situation (compared to other OMCs) and even 100% of under-recoveries compensation would not suffice for HPCL to remain in the black for FY13F. The company is expected to see PAT of 61.6 million and EBITDA of Rs62.6 million for the fourth quarter.

ONGC's PAT is estimated at Rs52.5 million, down 7% y-o-y and 8% q-o-q. EBITDA is expected to come in at Rs112.2 million. Nomura Equity Research further states that the reported numbers would depend on the government decision on subsidy sharing, where there remains no pending clarity, it assumes upstream to share Rs151 billion in 4Q (similar to the past three quarters).

Oil India's PAT is expected at Rs8.5 million for the fourth quarter, up 91% y-o-y and down 10% q-o-q. Nomura estimates EBITDA at Rs10.1 million for the last quarter.


Voter information wars: Will the GOP team up with Wal-Mart’s data specialist?

The 2012 Obama campaign set the bar for the use of voter data. The Republicans aren't interested in being beaten again

The Republicans have admitted it: They need to get serious about collecting and analyzing voter data.

Well, you can't get much more serious than talking to Teradata, the "data warehousing" company that helps Wal-Mart, Apple and eBay store massive amounts of information about the behavior of their customers.

Teradata is just one of the major data outfits with which leading Republican strategists are talking in their declared effort to match Barack Obama's big data campaign tactics, according to one person with knowledge of the strategy discussions.

The Republican National Committee would neither confirm nor deny talking with Teradata, but was emphatic that no deal is in place. Teradata also declined to comment. There's unlikely to be any final deals until the RNC appoints a chief technology officer, which it has pledged to do by May 1.

But if Republican strategists are still shopping for formal partners, their goal is clear: a new, more open database that will make it easier for Republican candidates to share what they're learning about voters — and for the party to share voter information with technology developers in order to build apps for use in coming campaigns.

"At lots of levels, for lots of reasons, there's a lot of people that we're talking to," Mike Shields, the RNC's new chief of staff, told ProPublica.

Both Republicans and Democrats already have databases of basic information about every voter in the United States. But Obama's campaign made big strides in connecting data from different sources, like campaign donation records, consumer data and volunteer lists, in order to produce more detailed profiles of individual voters.

The Democratic National Committee has also streamlined the way information flows between local volunteers and the national party, so that data about voters collected by many different campaigns — such as a Minnesota voter's stance on gay marriage or whom a Virginia voter supported in a state senate race — all ends up in the same database in D.C.

Republicans want to match these innovations — especially the flashy ones, like the Obama campaign's ability to link people's Facebook profiles to their official voting records. They also want to use data to make predictions about individual voters, not only about how to influence their vote, but about how to maximize their potential political donations.

This is where Teradata could certainly be useful. The company is not a data broker, an outfit that strictly sells information about consumers. (So, for instance, the GOP wouldn't be getting any of Apple or Wal-Mart's data.) Instead, Teradata helps companies organize their own data, so that they can pick out unexpected trends — for instance, that Wal-Mart shoppers stocking up for a hurricane often buy strawberry Pop-Tarts.

When working with Isle of Capri Casinos, Teradata built a system to combine information about customer gambling habits with data from the company's hotels. The new system sends an automatic alert to casino hosts whenever a "high-value guest" arrives at a hotel. It also tracks how different customers respond to coupons, emails, and special offers.

This kind of detailed tracking has become ever more central to data-driven political campaigns. Almost every day, Obama's re-election campaign tested 12 to 18 different email variations, before sending out the best-performing fundraising email to its entire list — a testing strategy that sometimes earned the campaign an extra million dollars, or more.

The campaign also tracked individual responses to email blasts — storing information on whether someone had, for instance, signed a card wishing Michelle Obama a Happy Mother's Day, and using that information when asking the same people to sign a birthday card for Barack.

Obama's data team also generated individualized predictions about voters. The team calculated, among other things, which people were most likely to be persuaded to support Obama based on a conversation about a certain policy issue — information that then allowed field organizers to be more strategic about the houses they visited and the phone calls they made.

Working with a company like Teradata would only be a first step toward this kind of sophisticated data program. Obama's 2012 campaign considered using Teradata, but ended up going with Vertica, a Teradata competitor, paired with open-source software Hadoop, to organize and search through their huge quantities of data. But, as former Obama staffers point out, having masses of information doesn't do anything on its own: You have to use the data to ask the right questions.

Wal-Mart famously used its database to ask what products customers tended to buy before hurricanes. The Obama campaign used its data to ask whether the voters it wanted to reach were watching the evening news — or other kinds of television shows altogether. The campaign used the television-watching data it acquired to figure out exactly what shows the voters they wanted to reach were watching, all of which made for more cost-effective ad placements.

The result? The Obama campaign bought more targeted ads, while spending less per television spot than the Romney campaign, according to data collected by Kantar Media's Campaign Media Analysis Group.

The campaign also constantly adjusted its predictions — and checked on the big picture of the campaign — by connecting voter information with detailed polling data.

Shields, the RNC's new chief of staff, called the data developments "a space race" between the RNC and the Democratic National Committee.

"They put up Sputnik, but there's no reason that we can't put a man on the moon, and leave them behind," he said.

As well as hiring in-house data analysts, the RNC plans to make it easy for outside software developers to access the party's national database. The goal, Shields said, is to create a "vibrant marketplace" of digital tools and applications that developers can sell to Republican candidates — all based on the party's own voter data. Think about the apps that connect to your Facebook profile — but for politics.

If the plan takes off, some of the GOP's closely-guarded voter data will soon be available in new ways. Obama's 2012 canvassing app, which anyone could download, included a map of the user's current location that displayed the first names, addresses, ages and genders of nearby Democrats.

The RNC will still get to control which developers are allowed to access its data. But its plans for a more open data platform will require that the Republican establishment confront technical, legal and cultural hurdles.

"[The RNC] is an organization that is trying to figure out where they sit with technology in general. They're going to have to make an investment in a big way, if they're going to go on with open development," Harper Reed, the Obama campaign's chief technology officer, told ProPublica.

The hard part about opening up your data is trusting the users, Reed said — including the users you don't like. What happens if some Republican developers want to use Republican data to build a pro-choice app?

"This would be a challenge for any organization, not just a political one," he said. "It sounds interesting. It sounds innovative. It's a challenge."



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