Brief India: Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply and more

In this briefing:

1. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply
2. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates
3. Yes Bank: In the Cross Hairs of the Regulator

1. Weekly Oil Views: Crude Rallies on US-China Deal Optimism, Tightening Supply

There was no deal out of Beijing on Friday, but the markets appeared overjoyed at the news that the US and China had decided to continue their talks this week, in Washington.

Clearly, the “structural” issues that the US has with China are proving hard to work through (government subsidies for Chinese state-owned enterprises was reportedly one of the major stumbling blocks in last week’s talks). But the markets took the continuation of talks as a positive sign that the two sides are determined to find a resolution.

Could crude, which has been moving in lockstep with the global equity markets since October, be starting to reconnect with its fundamentals and pricing in the supply restraints and risks that have piled up over the recent months? There were signs pointing in that direction last week, as the rally in Brent and WTI to a three-month high at Friday’s settle surpassed the bounce in the stock markets.

We have also created a ready reference sheet of the various crude supply chokeholds across the world that have stacked up over the past few months, while the oil market remained fixated on the demand question. These supply restraints and risks are waiting in the wings as a potential bullish snowball, if and when oil demand worries are firmly pushed aside.

2. Singtel’s Weak 3Q18 Results but Dividend Looks Sustainable and Long Term Upside from Associates

Singtel (ST SP) recent 3Q18 results were relatively lackluster. Singapore revenue trends were encouraging, but EBITDA remains under pressure esp in the Enterprise segment. Optus saw good net subscriber additions, but this came at a cost – lower ARPU and mobile service revenue (MSR). We have lowered our forecast to reflect pressure on EBITDA and continued losses in Group Digital Life (GDL) but maintain a BUY on the stock with a target price of S$4.00. The near 6% dividend yield is the key support and we believe it can continue to be paid without resorting to increased leverage. Longer term, the fate of key associates (India and Indonesia in particular) are key to the stock’s performance

3. Yes Bank: In the Cross Hairs of the Regulator

Yes Bank is in the cross hairs of the Reserve Bank of India (RBI), the banking regulator. On February 13, 2019, the bank issued a press release stating that the regulator’s risk assessment report (RAR) for the year ended March 31, 2018 revealed nil divergence, i.e. the bank’s net profits and asset quality were in conformity with the regulatory norms, unlike in FY2016 and FY2017. However, on February 15, 2019, the bank released a note stating that the RBI had pulled up the bank, as publicly disclosing a part of the RAR breaches regulatory confidentiality and is in violation of regulatory guidelines. While the RAR is indeed confidential, the RBI did not publicly admonish other banks like HDFC Bank, Axis Bank and Kotak Mahindra Bank (KMB) when they had publicly revealed nil divergence from their RARs. It is apparent that Yes Bank is the bad boy in the eyes of the regulator, and the bank will have to renew its efforts to change that perception. Shareholders have to therefore exercise caution and take the surge in the share price with a pinch of salt.