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>Hotel Industry update

Indian Tourism Industry witnessed over 5 millions of Foreign tourist arrivals in FY08 reporting an impressive growth of 11% over previous year under the Incredible India, the highly successful promotional campaign by Government of India. The high growth in FTA resulted into the economy earning a whopping Rs 50723 crore or US$ 5.83 billion in foreign exchange. Forex earnings grew by 19% in INR terms and by 34% in US Dollar terms.Forthcoming quarters are expected to be a mixed one for the hospitality industry. Factors like weaking global scenario, poor industrial growth witnessed in the recent months, rising inflation, growing competition, rising crude oil prices and liquidity crunch, it will derive benefit from the recent weakening of rupee against all major currencies. In April 08-May 08, rupee has already declined by around 6.5% against US Dollar and by 6% against Euro. As forex constitutes more than 50% of the Hospitality Industry revenue, this is a positive factor for the industry.

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>SENSEX VIEW (ENAM)

Monthly view on Sensex
We have looked at Indian equities from the point of view of the Sensex only. This is because Sensex data is available for the last 30 years as compared to the CNX Nifty for which data is comparable for only 14 years.

A grand bull market has unfolded in India in the past 30 years, with intermittent bear markets
commencing after every 8 years. Indian markets have experienced significant bear
markets/consolidation after peaking out higher every 8 years; that is, after forming a high in the
years 1985, 1992, 2000 and 2008, markets have given in to significant corrections.
The Sensex has breached an important 5-year support trendline in the early part of 2008. This breach of trendline, coupled with an 8-year cyclical top, has brought in the current fall.
On the previous occasion when the Sensex breached a similar 5-6 year trendline, in 1992, the Sensex fell/consolidated for the next 3 years upto 1995.

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>SBI(HSBC)

Earning drivers rebound. State Bank of India (SBI) reported a 2Q FY09 net profit of
INR22.6bn, up 40% y-o-y and better than our estimate of a net profit of INR20.5bn.
Strong growth in both revenue drivers, i.e. net interest income (up 45% y-o-y) and noninterest
income (up 15% y-o-y), helped shore up the bottom line this quarter. It is
interesting to note that each of these revenue drivers grew at a single-digit rate in the
preceding quarters of FY08. In that context, revenue drivers are seeing some rebound, but
sustaining them would be crucial to maintaining profitability.

Signs of aggression visible, but with a cost. SBI showed aggressiveness as it continued
to grow its business well above the sector average. Loan growth of 38% y-o-y and deposit
growth of 28% at September-end defied signs of a slowdown. However, the timing of
SBI’s growth drive during the business downcycle may be less than ideal. This was
reflected in loan loss provisions, which increased markedly in 2Q following a writeback in
the preceding quarter. Because SBI’s loan loss coverage ratio stands at a mere 47% at
September-end, much lower than that of its peers BOB (at 77%) and PNB (at 75%), we
believe risks due to rapid loan growth may not be adequately covered.

Assume higher cost of equity, credit costs. We have raised our FY09-FY11 credit cost
estimates in view of the strong loan growth and deteriorating asset quality. We have also
raised our cost of equity assumption to 15.5% from the 13.5% we assumed earlier, in view
of the deteriorating macroeconomic environment. Increase in credit costs is the key risk.

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