>What were the initial causes of the crisis? (ECONOMIC RESEARCH)

The crisis is often blamed on the "excesses" in finance and banks. However it is important to understand that the crisis has far deeper causes. If we go from the most recent events to the earliest events, we can identify:

- the excesses of finance and banks;
- the rise in debt ratios and the excess liquidity;
- income inequalities and the need to boost demand via credit;
- deindustrialisation and the dichotomy of labour markets;
- globalisation and the gaps between real exchange rates.

It is sad that governments and the G20 only look at the most recent causes of the crisis (finance and banks); "intellectuals" go as far as income inequalities, but rarely link them to deindustrialisation and globalisation. This hierarchy of causes of the crisis must be identified (from the most recent to the earliest) to conduct efficient policies: in the near term, redistributive policies, in the long term, policies of reindustrialisation and maybe coordinated management of exchange rates.

To respond to the crisis, the chronicle of causes behind the crisis must therefore be clearly identified, from the most upstream causes to the most downstream causes.

We believe that the hierarchy of the causes of the crisis, from the earliest to the most recent, is as follows:

1. globalisation, and reinforcement of the competition from emerging countries by distortions in real exchange rates;
2. deindustrialisation, deskilling and dichotomy of labour markets;
3. income inequalities, low level of wages, and need to boost demand via credit;
4. rise in debt ratios and excess liquidity;
5. financial engineering, and excesses in finance and banks.

To read the full report: CAUSES OF CRISIS

>RESILIENCE OF INDIAN ECONOMY

India: Faring its way in a challenging environment
The increasing economic and political influence of the BRIC countries has attracted considerable attention over the past five years. India is no exception. Key reforms implemented in the 1990s have pushed the economy on an exceptional growth path and enabled important progress in the social area. The dynamic IT sector which has lifted India amongst the world’s leaders in this sector has also put the country in the spotlight. As regards to future prospects, they remain positive. With the second world’s largest population and a rapid economic growth, India is expected to overtake the Japanese economy in PPP terms by 2025 to become the world’s third largest economy. Its attractiveness in terms of market potential is also huge due to a rising middle class. However many obstacles lie ahead and further reforms will be crucial to overcome them. On top of the list comes the need for a wider coverage of social safety nets, an improvement in government practices, a reduction in income inequality and poverty and infrastructure improvements. Moreover, the public finance burden must be reduced in order to provide an enhanced leeway to implement vital structural reforms. In the short term, India’s economy is proving resilient in the face of the global economic crisis and will perform rather well compared to other Asian countries. These good growth prospects will be further boosted by the strong mandate of the Congress-led coalition which has injected some optimism in the economy. Nonetheless it is worth noting that the country will still head towards a marked slow down after having enjoyed five years of high economic growth.

Resilience of the Indian economy in FY 2009/10
Asian countries are caught again in the global economic turmoil a decade after the Asian financial crisis. Highly exposed to trade, these economies have experienced a sharp economic slowdown. Although 2nd quarter data seems to indicate a timid rebound, many Asian countries are expected to post negative GDP growth in 2009. On the contrary, the Indian economy is likely to rank amongst the best performing economies in the region in 2009. Moreover, the overwhelming victory of the Congress- led coalition party in the recent elections will likely give a boost to growth. We are expecting a 6% GDP growth in FY 2009/2010 and 7% in FY 2010/2011. However, these good growth prospects mark a slowdown in FY 2009/10 compared to an average growth of 8.5 % over the past 5 years.

Some sectors nevertheless affected…
Strong demand plus stimulus measures have not been enough to compensate downward pressures brought by the global crisis and past restrictive policy measures.

In fact, since 2004, the Indian economy was booming as a result of buoyant investment in the industrial sector. In addition to that, the growing bubble in the real estate has made access to property unaffordable and was thus becoming unsustainable (see chart). In reaction to this situation, the Reserve Bank of India (RBI) adopted a restrictive monetary policy since the beginning of 2008 to cool down economic activity.

To read the full report: RESILIENCE OF INDIAN ECONOMY

>INFO EDGE (EDELWEISS)

■ Strength in one of the fastest growing internet markets
Internet is increasingly becoming an attractive medium for advertising, recruitment, and e-commerce, and is still at an embryonic stage in India. India’s internet penetration is low at 7% (81 mn internet users), but fastest growing across Asia. This offers an attractive opportunity to monetise a credible internet based business model. Info Edge (IEL) with lead in the online recruitment market (through Naukri.com) and presence in the online classified space has the potential to establish a market leading position and grab large pie of increasing online adoption.

Innovation’s the name of the game

■ Hiring to gain steam after a lull on back of improving corporate health
The recruitment industry is highly correlated to the economic health and growth of the corporate sector. As various businesses come out of the recent slowdown, leaving behind issues like cost cuts, stagnant expansion plans, and layoffs, the focus is back on growth. We expect hiring in financial services, retail, and infrastructure sectors to pick up and, more importantly, in the IT sector (major vertical for IEL) as utilisation has reached peak levels. We see IEL as a direct beneficiary of this trend.

■ Network effect playing out for Naukri.com
Strong growth in new resume registrations (and overall database) has attracted higher number of recruiters at Naukri.com, which in turn has been attracting more new candidate resumes creating a self propelling growth cycle. IEL’s current resume database stands at ~19mn and is growing impressively at a pace of 12,000 new daily additions. The company’s synchronised effort to constantly improvise user interface, algorithms for better job searches, and relevant profiles has led to it achieving and sustaining lead in the recruitment market, and helping it command pricing. Almost 15% of its workforce is dedicated to solutions enhancement, and Naukri.com serviced 34,000 unique customers (FY09).

■ Outlook and valuations: Long term non-linear play; initiate with ‘BUY’
We believe IEL is a long term play and investors looking at internet space in India should take a 2 year plus view. The company’s business model allows it to maximise earnings in a strong environment. We value IEL at INR 1,100 per share using target P/E of 32x (based on PEG of 1.1x on earnings CAGR of 29% over FY10- 12E) on FY12E earnings. We initiate coverage on IEL with a ‘BUY’ recommendation. On relative return basis the stock is rated ‘Sector Outperformer’.

To read the full report: INFO EDGE

>TATA ELXSI (HEDGE EQUITIES)

Company Profile: Tata Elxsi Limited is engaged in providing systems integration and software development services in the information technology field. From Automotive to Aerospace, Enterprise to Consumer Electronics, Entertainment to FMCG, Media to Storage, Semicon to Telecom, Tata Elxsi provide customized design solutions to companies across the globe. The Company operates in four divisions: product design services, industrial design division, visual computing labs, system integration services Tata Elxsi ensure cost-effective, time-to-market solutions through a highly motivated skilled workforce driven by strong design principles, highest levels of quality and ethical business practices.

IT Sector in India
From a few million dollars worth exports in early 1990, today India becomes the major player in global software industry. IT-BPO exports (including hardware exports) grew by 16 per cent from US$ 40.9 billion in FY 2007-08 to US$ 47.3 billion in FY 2008-09. And the government expects to grow at an annual rate of 30 percent per annum, expect s US$ 80 billion export turnover by 2011. According to NASSCOM software and IT services contributed US$ 59.6 billion this year. Springboard Research expects the Indian IT services market to remain the fastest growing in the Asia-Pacific region with a CAGR of 18.6 per cent.

DESIGNING FOR GROWTH

Global financial crisis coupled with the severe pricing pressure has affected the demand for IT services in the first half of 2009-10. But , expecting an improvement in the second half of 2009-10, and believe to be pick up in the December 2009 and March 2010 quarters. Despite the drawbacks, it is believed that the Indian information technology sector continues to be one of the sunshine sectors of the Indian economy showing rapid growth and promise.

Outlook and Scope
After a sluggishness in the business due to the global financial crisis and sluggishness in the economy, now this sector has regaining the strength as the world economy is recovering from the crisis. this sector is still a multimillion dollar industry and it is still a growth engine for the Indian economy. And the Tata Elxsi has the creative leadership in hard-core technology and strength in design. It has the ability to provide point services and end-to-end solutions across the product lifecycle with Augmenting company’s expertise capabilities.

Major Investors: SBI Mutual Fund, Reliance Capital, Life Insurance Corporation of India

Valuations: Global financial crisis has muted the growth rate of the company. Since the world economy is recovering company getting newer orders and global growth in the sales of smart-phones and increased demand for the automotive electronics has amplified the possibility for increased outsourcing of design services. All these have paved the way for a better performance for the company in coming years. At the current market price of Rs.169.70 the stock trades at 9 multiple of its FY-09 earnings and 8 multiple of FY-10E earnings, and 7 multiple of FY-11E respectively.

To read the full report: TATA ELXSI