>Nifty changing to free float method (KR CHOKSEY)

Proposed changes in Nifty composition

The National Stock Exchange (NSE) has announced that it will switch to a free float market capitalization methodology for calculating the value of the S&P CNX Nifty against the full market capitalization weighted methodology used at present. The new formula will come into effect from June 26, 2009.

Our Key Findings

• Weightage of a stock in the Nifty will be proportional to the public shareholding (non-promoter holding – free float market capitalization method)

• Till now, the weightage was proportional to the market capitalization of the company. So, a company with low public shareholding, but high market capitalizations used to have a higher weightage. This is set to change.

To see full report: NIFTY

>INDIA ECONOMICS (Morgan Stanley)

Road Infrastructure Development – Taking Stock of Progress

Infrastructure spending – critical in the current economic environment: In the current domestic growth environment, while the private business capex is likely to suffer, we believe that the government’s effort to push infrastructure spending will be critical. Within the infrastructure segments, we believe the roads spending is the most important considering its strong multiplier
effect.

Tardy progress in development of roadways over the last few months: Of the total 33,097km planned, only 10,858km had been completed as of February 2009. About 50% of roads tenders have yet to be awarded. According to the monthly data released by NHAI, not a single project was awarded between August 2008 and January 2009 even though there was some pick up in the month of February 2009.

Three key reasons for this poor performance: (a) funding constraints for the private sector on account of deteriorating global and domestic credit markets as well equity markets; (b) change in regulations related to public-private partnership contracts, which has added some uncertainty for the private bidders; (c) typical execution hurdles including land acquisition, removal of
existing structures, and getting the environmental and forest clearances.

Bottom line: We believe that the progress on road development is likely to be tardy until the end of 2009. The new cabinet, which should be in place by June 2009, will need to spearhead this spending and, if need be, take the financial risk on its own balance sheet for such investments as the private sector could remain shy.

To see full report: INDIA ECONOMICS

>Gem Trading Note (MERRILL LYNCH)

Inflection Points & Trades

Three big inflection points for markets in past 9-12 months

• July 3rd ECB hikes rates (possibly one of great policy blunders of recent years); commodity prices peaked the very same day (Baltic Freight, Euro, inflation expectations peak same time); EM equities start to underperform as global growth expectations fall.

• Sept 15th bankruptcy of LEH; initiates de-leveraging and vicious collapse in EM equities/currencies as growth expectations/risk appetite sinks and US dollar surges.

• November 10th announcement of big Chinese fiscal stimulus; CRB troughs vs. S&P500 and EM starts outperforming again as global growth expectations find a floor. Chart 1 tells the tale...

Play a recovery in risk appetite
Last week's Merrill Lynch Fund Manager Survey showed a distinct gap between (recovering) growth expectations and (rock-bottom) risk appetite. But risk appetite turned up in the past week due to a) US/UK/Swiss/Japanese Quantitative Ease (QE) and b) US financial policy (PPIP) to reduce toxic assets. QE has caused a bounce in risk appetite. A genuine inflection point for risk (following bounce in growth expectations) would see:

1. Asset allocation by pension funds out of bonds into equities

2. Outperformance from banks, Europe & EMEA

3. Euro-yen taking out 200mda @ 138

4. 30-year US Treasury yields moving above 4%

5. Rise in US breakeven inflation rates which have strong correlation with many risk assets (e.g. Brazilian real – Chart 2)

Trades…
MSCI EM index target is 650-700 or EEM at $28. Long Russia, China, Brazil our favored ways to play the story in EM

FMS highlighted improvement in risk appetite most positive for EMEA, Korea, Poland, banks, industrials, materials in EM

The trade ends when/if growth rollover later in spring (watch BDIY, China Ashares, China PMI, G7 demand, trade, housing and so on)

To see full report: GEM TRADING

>India Equity Strategy (CITI)

Spring is in the Air, but Hot Summer is Ahead

■ Spring is in the air – India’s strong 25%+ bounce from lows, +ve YTD performance, and recent peer market outperformance has been backed by: a) Near-trough valuations, b) Signs of growth revival and resilience in consumption demand, c) Rising monetary flexibility and rate reductions, d) Liquidity and stabilization of domestic credit market, e) Little inventory build up, and f) Currency support, with possibilities of a current account surplus ahead. All this still holds.

■ But hot election and economic summer is ahead – India’s 2009 spring will change to election season; if it weathers this unscathed, then we see a hot economic summer ahead. The global risk pullback, election buildup and fiscal stimuli would have more lingering impact: a) 10%+ fiscal deficit, b) Peak system leverage, c) Steepening yield curve, d) Weakened investment and corporate confidence cycle, and e) Earnings de-growth. We believe these will not change as quickly or predictably as seasons and are a medium-term cap on economic and market rebounds.

■ India – economy and markets – more crawl than spike? – India’s bear markets have historically lasted 30 months on average, been longer than regional markets (21-23 months), and longer than India’s bull markets (bar the last). Is this bounce the beginning of a bull run? We think not, given India’s equity market lows are shallower, longer, and more in sync with its economic cycle. The market is more likely to crawl rather than spike out of its current trading band.

■ Limited upsides from here, but let's not be too defensive – We expect the market to maintain a 9000-10500 (11x-12.5x) trading range and expect interest rate and rupee gains. We would overweight Banks, Telecom, and Pharma and underweight IT, Capital Goods and Cement.

To see full report: INDIA EQUITY STRATEGY

>Fun With Flows (CITI)

The Lack of Capitulation Suggests That Bear Market Is Not Over....

■ This is a bear market rebound — According to EPFR Global, foreign investors have regained risk appetite and plowed in US$502m of new money into Asian equity funds over the past two weeks as equity prices rebounded. In January 1998, when MXASJ had fallen by half from the July 1997 peak, flows also turned positive amid a bear market rally. Sadly, those who got in suffered from a 30% loss when markets made their final low on the 1st of September.

■ Await signs of capitulation to mark the end of the current bear market — In the last four months of 1998, when Asian markets advanced 50% from the low, hardly any investor believed that equity prices had bottomed and redemptions from Asian funds persisted in three out of four months. In our view, the divergence between fund flows and market performance is an indication of the beginning of a bull run. And this is not the case at the moment.

■ Inflows still concentrated in China funds — Of the total net inflows to Asian funds last week, 50% were taken in by A50 ETF and 43% by other China funds. Greater China regional funds (geo focus on China, Hong Kong and Taiwan equities) also reported strong inflows for the second week, but that was offset by continuous outflows from Asia ex Japan regional funds, Korea and Singapore country funds.

■ Redemptions from Global equity funds ongoing — The good news is that outflows dropped to just US$210m last week, down 90% compared with the average in previous three weeks. GEM fund outflows resumed nevertheless.

To see full report: FUN WITH FLOWS

>SECTORAL SNIPPETS (KPMG)

India Industry Information

TABLE OF CONTENTS

• Indian Economy
• Auto and Auto Components
• Banking and Financial Services
• Consumer Markets and Retail
• Hospitality
• IT / ITeS
• Media
• Oil and Gas
• Pharma
• Power
• Real Estate and SEZs
• Telecom
• Transport and Logistics

To see full report: SECTORAL SNIPPETS

>Powering India (McKinsey)

India is amongst the world’s largest electricity-consuming and generating economies. Its annual electricity consumption accounts for about 4 per cent of the world’s total electricity consumption, and is set to grow at 8-10 per cent per year, propelled by the country’s accelerating economic growth.

To address this growing demand and create a viable power sector, successive governments have undertaken progressive initiatives such as the Electricity Act 2003, National Tariff Policy 2006, the Ultra Mega Power Projects, the Integrated Energy Policy, the National Electricity Fund and many more. Yet, India’s power sector remains plagued by a plethora of financial and physical risks and bottlenecks.

To understand the challenges that confront India’s power sector, McKinsey & Company’s Electric Power and Natural Gas Practice conducted a 6-month long research effort in collaboration with industry leaders and policymakers. The objective of the effort was to assess what additional measures are required at this time to ensure the sector is able to keep pace with the demands of the economy. This report, “Powering India: The Road to 2017” is a result of that effort. It provides a perspective on the demand outlook in 2017, the factors constraining the sector’s development, and proposes a comprehensive 10-point roadmap to unlock the sector’s potential. Finally, it discusses the opportunities, risks and winning approaches that will surface
as the sector develops.

India will need a fivefold to tenfold increase in its rate of capacity addition if it is to meet demand. The magnitude of the challenge at hand makes it clear that piecemeal measures will not be enough. The country needs a radically new approach that enables financial viability, accelerates the pace of capacity addition, improves operational efficiencies and augments fuel supplies. Needless to say, the power sector’s governance structure and monitoring mechanisms need to be strengthened to ensure successful execution of such a programme.

Several rewarding investment opportunities will unfold across the value chain as India’s power sector develops. Our analyses suggest that a US$600 billion investment opportunity will arise over the next 10 years, if key bottlenecks are removed. Besides the traditional opportunities such as large-scale coal-fired plants, several non-traditional opportunities will emerge, such as peaking plants, renewables and demand-side management.

Finally, competing and winning in India will require players to tailor their business models to address existing bottlenecks, market inefficiencies and development risk. Players will need to develop and execute approaches that are quite distinct from conventional global models. In return, the payoff from entering early, when the sector is still underdeveloped, will be substantially higher than when it has matured. This has been proven by companies in other sectors, such as telecommunications and infrastructure development.

India’s power sector is at a watershed in its development, and its progress is imperative to sustaining economic growth. The time is right for all stakeholders — policy makers, regulators, public and private providers, resource holders, equipment providers, financiers and consumers — to act in concert to power the country’s future.

To see full report: POWERING INDIA

>Greed & Fear (CLSA)

ROULETTE WHEEL

The best thing to say about Tiny Tim’s latest ruse for the banking system is that it will probably
take two months or so to see if it has a chance of working. This from a market perspective is
encouraging since it has the potential to keep equity investors hopeful. The second best thing is
that the teleprompter driven Obama administration made sure that on this occasion live televisions cameras were banned from the Treasury Secretary’s press conference.

That said, there are two ways of looking at this bank plan, now known as the Public-Private Investment Program (PPIP). The first is whether it is good public policy. The second is whether it has a chance of removing these toxic assets, or rather (puke) “legacy assets” from weaker hands to stronger hands.

On the issue of public policy, GREED & fear agrees completely with the criticism of the policy made by Paul Krugman in an op-ed in the New York Times published on Monday (“Financial Policy Despair”, 23 March 2009). This is a re-visit of TARP but a more complicated version where the government is providing an indirect way to subsidise for a select group of institutional investors the purchase of bad assets.

Quite why the Obama administration continues with this bizarre sneaky approach is beyond GREED & fear and certainly beyond an increasingly disillusioned Krugman, a once fervent Obama supporter. For all it is doing is seeking to protect the current vested interests on Wall Street which is hardly politically popular or radical. Indeed at a time when the political process is up in arms about bailouts and bonuses, the new administration is proposing to offer more sweet deals for Wall Street types via seemingly federally guaranteed non recourse funding. For this reason, if the scheme fails, Obama’s credibility will be badly damaged politically. In this respect Tiny Tim and his boss are taking a massive political gamble akin to putting everything on black on the roulette wheel. It would clearly be far better from every point of view to take temporary control of the insolvent banks and put the bad assets in a separate entity for their orderly distribution. This is why, contrary to some press reports, this current scheme is not the same as the Resolution Trust Corporation (RTC) which was set up in 1989 to deal with the consequences of the savings and loan crisis. For the RTC was selling assets which belonged to institutions which had already gone bust.

To see full report: GREED & FEAR

>Chemicals Sector (EMKAY)

Sustained recovery ahead.....

Mar’09 was marked by price as well as volume stability. In order to have more clarity on the price movement of various chemicals, we have increased the number of products from 19 to 33. Out of the 33 products in our universe, 12 products reported an increase in prices, 7 products reported a decline and prices of 14 products remained stable in Mar’09, indicating a stable price scenario. Emkay chemical index (covering 33 products) almost remained flat since Jan’09. Dealers are in consensus of the view that near term prices should remain stable. However, some volatility in prices cannot be ruled out. Volumes have stabilised with no significant increase on MoM basis in Mar’09. We believe that stable price scenario should continue while more products should report increase in prices in Apr-June’09 quarter. Volumes should pick up further on stable price scenario.

Price stability continues
We have increased the number of products under our coverage from 19 to 33. We saw price stability during Jan-Mar’09 period in most of the products after a sharp fall in Oct-Dec’08 period. Products reporting positive movement in prices have steadily been on the rise, with 7,10 and 12 products reporting an increase in Jan, Feb and Mar’09 respectively. Products with a stable price scenario also increased to 9, 13 and 14, respectively (Jan-Mar’09). Products reporting decline in prices reduced to 17, 10 and 7 during the same period. Higher proportion of increasing prices and stable prices in our product universe clearly indicates the stability in prices.

Restocking boosted volumes in Jan-Feb’09; expect stable scenario now
After a sharp decline in prices in Oct-Dec’08 quarter, led by lower demand and de-stocking, volumes picked up in Jan-Feb’09 period, mainly driven by restocking at dealer’s and consumer’s level. However, the scenario has stabilised now and dealers expect volume and price stability in the near future. However, some volatility in prices cannot be ruled out.

Outlook – Sustained recovery ahead
As mentioned earlier, we believe that prices of most of the products have bottomed out and should start showing some increase in prices. Many of the products have already shown some improvement in prices. We have seen increasing stability in prices as well as volumes of most of the products during Jan-Mar’09 quarter. We expect Apr-Jun’09 quarter to see a recovery in prices and volumes.

To see full report: CHEMICALS SECTOR

>Voltas Ltd. (KR CHOKSEY)

We met the management of Voltas Ltd to understand the company’s strategy in the midst of the global economic slowdown. Key takeaways of the meeting are as follows:

Huge orders from the international market to provide strong revenue visibility
The total order backlog of the company stands at Rs 5,334 crore at the end of Q3FY09. In domestic business the order book stands at Rs 1,085 crore, a growth of 35% y-o-y and in international projects the order book stands at Rs 4,200 crore, a growth of 58% y-o-y. The domestic projects have timeline of 9-12 months and international projects have timeline of 24-30 months thereby providing good revenue visibility. The company has not witnessed any cancellation of orders as most of the projects are government or semi-government funded.

Diversified business model
Voltas has primarily three business lines where Electro Mechanical Projects & Service (EMPS) is the biggest business segment contributing 54% to the topline in FY08. In this segment Voltas serves both international as well as domestic clients. Going forward we expect the international projects to contribute ~60% to the segment revenue (45% in FY08). The company is now a fully integrated player from a mere HVAC (Heating, Ventilation and Air-conditioning) to MEP player in domestic market on acquiring Rohini Electrical (Mumbai based turnkey electrical and instrumentation projects contractor). Thus being well diversified would ensure revenue growth inspite of economic slowdown.

Competitive Advantage over others
Civil work constitutes 65% of the total construction cost of an In-built environment and 30-35% is MEP works. Voltas is a contractor of choice in MEP (Mechanical which includes HVAC, Electrical & Public health which includes plumbing) in the international market. Thus being a well established player and having strong track record of projects, Voltas has an edge over other players in domestic and international markets.

To see full report: VOLTAS