>India Equity Strategy(CITI)

Easy foreign money (part of the India story so far) no more — India has been a big
beneficiary of freely flowing foreign capital. In FY08 the flow was equivalent to
26% of domestic savings and almost 25% of gross capital formation – accelerating
India’s economic growth. The capital inflow scenario has changed for now, and
probably the medium-term, which will have implications for growth, interest rates,
corporate balance sheet risks, and leverage.

1 Debt rather than equity flows could be the bigger issue — Debt inflows have
exceeded equity inflows (1.2x), growing more rapidly (2.1x, over 2 years) and
accessed by more sectors. We believe debt flows, and the outlook, would have
greater implications for the economy than would equity flows (US–$12b YTD, the
market’s focus). Debt inflow-outflow cycles are usually longer than equity ones,
and could have more meaningful medium-term implications.

2 Foreign debt skewed toward long end; chunky trade credits near-term pressure —
Corporate India’s FX loans are predominantly long-term (by regulation), so
medium-term global (rather than short-term) credit trends will determine
availability and price. However, chunky short-term trade credits ($40b+) appear to
be facing some refinancing, and significant pricing, pressures. This is straining
corporates, banks and the currency, and is a near-term issue.

3 Overall corporate leverage OK, FX share less so, and there are skews and risks —
India’s corporate sector leverage is fairly modest (24%). Its foreign debt share,
however, is 34%. With incremental FX debt rising (46%), credit spreads hurting
(400-800bps, from 50-150bps in Jan), and sectors and companies differently
exposed, we detail corporate macro and micro FX and leverage issues.

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>Sharekhan Special(November)

Q2FY2009 earnings review

Key points

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The Sensex’ earnings (adjusted for the one-time items) grew by nearly 10.1% in Q2FY2009 on the back of the strong performance of the financial service companies (earnings up 30% year on year [yoy]), telecommunications (telecom) companies (earnings up 28% yoy) and capital goods companies (earnings up 18% yoy). However, the Sensex (excluding the oil companies) saw an earnings growth of 13.4% yoy during the quarter and the same is ahead of our estimate of a 10.1% earnings growth for the quarter.
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Notably, the revenue growth for the Sensex companies (ex-oil and banking companies) was healthy at 28.3% yoy. However, the same could not translate into an equally good operating performance largely due to a 228-basis-point contraction in the operating profit margin (OPM) and a higher capital cost. The margins in most sectors were affected by the rising input cost, employee cost (especially provisions for wage hikes by the public sector undertakings [PSUs] as per the Sixth Pay Commission’s recommendations) and a steep spike in the cost of power & fuel (both coal and oil). The margin contraction was more pronounced in case of automobile, cement, real estate (read DLF), pharmaceutical, cement and oil & gas sectors. On the other hand, metal and information technology (IT) companies registered an expansion in their EBITDA (earnings before interest, tax, depreciation and amortization) margin on an annual comparison basis.

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