>STERLITE INDUSTRIES: Earnings growth to bring back focus

Event
■ Downgrades to base metals: Our global commodities team has downgraded their aluminium, zinc and lead price forecasts. However, we believe that Sterlite’s expansions are now coming through, which should bring the focus back to this stock post its underperformance last year. We have retained our Outperform rating but marginally cut target price to Rs850 from Rs930 earlier.

Impact
■ Downgrading aluminium, zinc and lead price forecasts: We have downgraded FY11 zinc and lead price forecasts by 10% and 12% to US$1,877/t and $1,926/t, respectively. Our global commodities team has slightly changed aluminium price forecasts for FY11 by -3% to US$1,935/t from $1,995/t, respectively.

■ Expansions to drive doubling of profits in two years: Sterlite’s expansions of its zinc, power and aluminium businesses are now nearing completion. Highly profitable zinc business continues to contribute 50% to earnings. A large part of the growth is coming from the power business and expansion at Balco.

■ Lack of approvals can hurt production: Approval for its bauxite mines for aluminium projects is awaiting final clearance. In addition to the high costs that we are building in, we are concerned that due to infrastructure bottlenecks it may not be physically possible to get enough bauxite for full production at its JV ‘Vedanta Alumina’.

■ Coal block auctioning can come as blessing: One of the most awaited mining sector reforms involves auctioning of coal blocks by the government. While the timeline is not definitive, it is expected by end of the year. Sterlite can use its strong balance sheet to acquire resources that have eluded it for some time.

■ Sensitivity to commodity prices is low: An increase of 10% in aluminium price should increase consolidated earnings by 2%. Also, a 10% increase in zinc prices would increase consolidated earnings by 5%.

Earnings and target price revision
■ We have revised our EPS estimates for FY11 and FY12 by -6% and -4%, respectively.

Price catalyst
■ 12-month price target: Rs850.00 based on a Sum of Parts methodology.
■ Catalyst: Coal sector reform, clarity of bauxite linkage for VAL.

Action and recommendation
■ Maintain Outperform: We believe Sterlite continues to offer value, with its strong diverse growth pipeline, strong balance sheet and numerous upcoming catalysts. We think that the strong earnings growth should become the focal point driving the stock price. There also is a possibility of sharp re-rating if Sterlite can resolve its long-standing issues involving the government.

To read the full report: STERLITE INDUSTRIES

>ALPHA STRATEGY: The bank for a changing world

■ We are raising China to Overweight and cutting India to Underweight.
■ China upgrade is based on our view of monetary policy easing ahead.
■ India downgrade reflects a market priced to perfection with earnings risk.
■ Downside risk to earnings is the biggest challenge facing markets in 2H10.

We have raised our recommendation in China to Overweight from Neutral and increased our target for the HSCEI index to 15,800. The key driver of our upgrade is our view that the next major change in monetary policy in China will be an easing. This view stems from the risk of a hard landing in the economy as the expected slowdown in domestic demand is joined by an unexpected slowdown in exports. A more dovish tone on inflation from policy makers has erased the risk of policy tightening that was expected and has paved the way for an eventual easing.

We have cut our recommendation for India to Underweight, from Overweight, reflecting our view that the positives have been priced in and there is a meaningful risk to earnings going forward. Our SENSEX forecast of 19,700 signals we still forecast the market will post positive returns over the next 12 months.

Taiwan is trimmed to neutral reflecting the significant earnings exposure of the market to Europe as well as the risk of margin squeeze from the hike in wages in China. Our sample of technology companies with significant China operations highlights the risk of a 32% drop in pre tax earnings based on the assumption of a 50% increase in labour costs.

The euro zone crisis and a short term peak in Asian GDP growth forecasts implies there is a material risk to earnings forecasts in 2H10. The correction in the market year to date has been driven by multiple contraction as opposed to earnings reductions. We anticipate that the next leg down for the market, which we estimate to be 9%, is likely to be driven by downward revisions to earnings. We view this is a mid cycle correction as opposed to trend reversal and forecast a 23% gain in MSCI Asia Ex Japan over the next 12 months.

To read the full report: ALPHA STRATEGY

>MOSER BAER INDIA: Some Recovery in PV Business But Is it Good Enough?

■ Maintain Sell — PV business showed a good recovery in Q4 with ~25MW of shipments. However, the scale of the business remains small with capacity less than 200MW. Optical media showed YoY growth after four quarters of decline but EBITDA margins at ~20% are way off peak levels of ~40%. Balance sheet remains stretched (D/E is estimated at ~2x) – growth is a challenge. Risks remain high; we await more financial details in the annual report.

■ SOTP-based valuation — Our updated SOTP ascribes a multiple of 1.0x Sep 11E EV/S for PV business (previously 1.8x) given the sharp fall in global comps, 1.0x Sep 11E EV/S for home entertainment (unchanged) and 0.75x Sep 11E EV/Capital Employed for optical media (previously 0.7x). Our new target is Rs65.

■ PV business plans lowered — Revenues were ~Rs5b in FY10 (up ~70% YoY but significantly below our estimates). Management expects to emerge EBITDA positive by end-FY11. Company plans to add ~100MW Silicon capacity in FY11, which is much lower than what was envisaged earlier. We believe risks are high, as the business is small and has significant technology /execution risks.

■ Optical media stable; Home entertainment still small — In optical media, volumes were flat while ASPs declined ~5% in FY10. Management expects prices to remain stable in the short term. Home entertainment revenues are still small – less than 10% of standalone. We expect modest improvement in optical media in the coming years on the back of changing mix towards higher priced new formats.

■ Upside risks to our stock call — (1) Successful equity raising in the PV business. (2) Sharp ramp-up in PV margins. (3) Better performance in optical media than factored in our estimates. (4) Increase in crude prices which improve alternate energy viability and drive more funding towards the same.

■ Transfer of coverage — We are also transferring coverage of Moser Baer to Vishal Agarwal from Surendra Goyal, due to reallocation of coverage resources.

To read the full report: MOSER BAER

>INDIAN PORTS: May cargo volume up 4.5% YoY at major ports; MICT, JNPT volume de-grows

May 2010 cargo volume up 4.5% YoY at 47.8mt: In May 2010, cargo traffic at major Indian ports improved by 4.5% YoY to 47.8mt (v/s 45.8mt a year earlier), better than April 2010 growth of 2.7% YoY.

■ Container, POL cargo boost cargo traffic growth: In May 2010, cargo traffic growth was boosted by double-digit container and POL cargo growth. Container and POL cargo grew by 14% and 10% YoY to 8.9mt and 15.2mt, respectively. Iron ore de-grew by 9% to 7.9mt. Coal and fertilizer cargo were flat YoY at 6.4mt and 1.5mt respectively. Cargo in other categories grew 4% YoY to 7.9mt.

■ JNPT container cargo traffic de-grows 5.6% YoY, total container traffic grows 14% YoY: In May 2010, container cargo traffic at JNPT de-grew 5.6% YoY to 4.3mt and all-India container traffic was up 14% YoY at 8.9mt. Other ports posted healthy container traffic growth in May. Chennai grew by 53% YoY to 2.4mt, Kolkata posted growth of 26% YoY to 0.59mt and Tuticorin grew 10% YoY (0.58mt). The four ports account for 7.8mt of container traffic or 88% of the total
container traffic.

■ Cargo traffic grows at seven ports, Cochin posts highest increase of 28%: In May 2010, seven ports posted growth in cargo traffic, of which Cochin, Kandla, Chennai and new Mangalore volumes grew 28%, 22%, 21% and 12% YoY, respectively. POL cargo, which grew by 37% YoY in Cochin and 38% in Kandla, boosted cargo traffic growth at the two ports.

■ Mundra International Container Terminal (MICT) May volumes fall by 5.5% YoY: In May 2010, MICT posted a 5.5% YoY decline in container traffic to 45,789 TEUs (48,432 TEUs in May 2009). This is similar to a 4.6% YoY decline in April 2010. Since January 2010, volumes at MICT have declined each month. Cumulative volume since January declined by 8.7% YoY to 227,280 TEUs.

To read the full report: INDIAN PORTS

>Gruh Finance Ltd.: “Housing-Rural India” (LKP SHARES)

GRUH Finance Ltd. (GFL) is an NBFC providing housing finance to rural and semi urban India. Modeled to complement the business of its sponsor, HDFC, GFL operates in states and regions offering high growth potential. The strong rural presence combined with an improved macroeconomic environment enables asset expansion. Backed by an underleveraged balance sheet and equity support from the promoter, GFL presents a case for higher growth.

■ Pricing power and low competition are its key strengths: Higher operational and credit costs in rural regions have led most aggressive banks and NBFCs to focus on urban and metro regions. GFL has a strong network to service the under penetrated markets and is compensated by high asset yields. Local knowledge and experience on buyer behavior keeps npas low, translating to higher RoEs of 28% (FY10). Although we expect competition to increase over the next few years, GFL will outpace its competitors with higher profitability and lower delinquencies.

■ Firm growth with balance sheet liquidity - 23% loan book CAGR and 24% PAT CAGR over FY10-13. CAR of 16%, strong internal accruals and continued equity support from HDFC provides growth visibility. An underleveraged balance sheet gives comfort to expectations of scalability. As asset book expands through broadening of customer and geographic diversification, pricing power and lower operational costs (C/I ratio of ~20%) translate to greater traction in NII.

■ Valuation at a discount to peers: GFL trades at P/ABV of 2.3x ABV FY12 as against its historical high of 3.3x. Loan book expansion (23% CAGR asset FY010-FY13), higher profitability (RoE of 29% FY12) and proven track record to tide over adverse interest rate cycles reaffirms our belief in GFL. GFL’s business model with ROE >28% and zero net NPA should command a higher multiple and we recommend a BUY with a price target of Rs345 (3x ABV FY12).

To read the full report: GRUH FINANCE

>Yuan Revaluation: Not Necessarily Bad for China

It’s diffi cult, these days, arguing that the yuan is not
undervalued. The widely publicized large current account
surpluses and bulging foreign exchange reserves in China
suggest otherwise and continue to provide fodder to
critics of Beijing’s exchange rate policy. While today’s
revaluation of the yuan was inevitable, given the necessity
to rebalance the global economy, the change in Beijing’s
currency policy need not be detrimental to China.

Why Rebalancing Growth is Important
In fact, a revaluation of the yuan could get China to a more
sustainable growth model faster. While China’s rise to
export prominence was made possible by relatively cheap
labour, the latter won’t last forever, given the rising domestic
wages and the ascent of other low-cost centres (such as
Bangladesh and Vietnam). Note also that consumers are
still a small part of the economy relative to traditional
powerhouses like the US, Japan and Germany (Chart 1).
Strengthening its economic base by stimulating domestic
consumption further, while not relying too much on exports,
is a plus for sustainability of growth. An appreciation of the
yuan goes in that direction, with resources being shifted
from exporters to consumers who will be benefiting from
lower import prices and more choice.

Implications for Trade
The potential harm to exporters, wouldn’t be as dramatic
as feared. Any appreciation of the yuan will result in a
less-than-proportionate increase in the dollar price of
a Chinese product in the US. That’s because only the
domestic component of the product will be impacted
(e.g. the value-added by the producer, refl ecting factors of
production in China). The foreign component of the price,
namely the input prices (such as imports from suppliers),
and US costs (like shipping, retailing, and advertising) will
be unaffected. Of course, that’s assuming that supplier
countries like Japan and other Asian nations do not let
their currencies appreciate as steeply as the yuan against
the US$, a reasonable assumption given policies during
the last yuan revaluation.

Numerous studies1 have noted that the domestic content
of Chinese exports is between 35-55%. Even assuming
the upper-bound of that range, a yuan revaluation of
similar magnitude to the one seen from July 2005 to
July 2008 (i.e. 17% appreciation) would, at worst, raise
the price of imports from China by 9%, not signifi cant
enough to cripple China’s overall exports, especially
considering that any appreciation will be spread out over
several years.

That might explain why China coped well the last time
the yuan was revalued. Trade remained relatively healthy
during the 2005-2008 unpegged period, with exports to
Asia nearly doubling and sales to North America soaring
70%, while exports to other regions were even more
impressive, helped by the yuan’s competitiveness (Chart
2). If history is any guide, a small appreciation is unlikely
to have major detrimental impacts on China’s export
market share.

To read the full report: YUAN REVALUATION

>Direct Tax Code version 2.0… (ICICI DIRECT)

The government of India has come out with a revised draft of the Direct
Taxes Code (DTC) that proposes several changes over the first draft to deal
with some of the major concerns raised in the first draft. It is open for
public comments till June 30,,2010. The proposed changes in the revised
draft, its impact and our views are mentioned herein below.

􀂃 MAT to be calculated on book profits as compared to gross assets
The revised draft suggests that book profits rather than gross assets,
as proposed in the first draft, should be used to calculate the minimum
alternate tax (MAT). However, the tax rate as a percentage of the book
profits has not been specified. Under the previous draft, it had been
proposed to calculate the MAT on gross assets (0.25% for banks and
2% for all other companies). However, the revised draft also does not
allow for carry forward of MAT paid.

Our view: The revised provision is positive for companies that are
eligible for MAT, as the calculation of MAT on gross assets, as
provided in the first draft, could have led loss-making companies,
newly set up infrastructure companies and companies undergoing
major expansions to pay very high taxes.

􀂃 Tax exemption on withdrawal for select saving schemes
Under the first draft, it was proposed that withdrawals towards saving
schemes would be subject to taxation at the applicable marginal rate
of tax (EET taxation). The revised draft now proposes complete tax
exemption for government provident funds (GPF), public provident
funds (PPF), recognised provident funds (RPF), pension schemes
administered by Pension Fund Regulatory and Development Authority,
approved pure life insurance and annuity schemes.

Our view: The provisions are marginally positive for individual
taxpayers. However, the tax exemption on withdrawals applicable
only on pure life insurance schemes is negative as unit linked
insurance plans (ULIPS) would be subjected to tax on withdrawal.
Also, it will be negative for mutual funds as withdrawal from equity
linked savings schemes would be subject to tax post implementation
of DTC. The new pension scheme will, thus, have an edge over the
other market related savings instruments as it will be the only
instrument providing equity exposure (50%) and have the
withdrawals exempted.

To read the full report: DIRECT TAX

>METALS: Early recovery in steel prices unlikely, cost increases more certain

􀂄 Mounting inventories at the producers’ end have dashed all hopes of an early recovery
in steel prices. Steel producers, who held on to prices in April and May in the hope
that prices would recover on the back of rising costs, have lost market share to traders,
who cut prices in line with the changing market reality. With diminishing hope of an
early recovery in prices, given continued production growth in China, steel producers
around the world have also begun cutting prices since the beginning of June. However
cost increases are more certain due to recently negotiated quarterly prices of iron ore
and coking coal.

􀂄 Squeezed by price cuts and cost pressure, steel producers are likely to witness
margin contraction. In 1QFY11, margins would be hit the hardest for SAIL, followed by
JSW Steel and Tata Steel India. There would be a bigger drop in margins in 2QFY11.
Though Corus’ management sounded very confident about 1HFY11 earnings when
Tata Steel reported 4QFY10 results, we are less confident about 2QFY11 due to the
change in market conditions post the analyst meet. However, we believe that margins
will rebound in 2HFY11, as market forces adjust steel prices and raw material costs.

􀂄 We are cutting our FY11 EPS estimates by 19% for Tata Steel, by 24% for JSW
Steel, and by 26% for SAIL to factor in the margin shrinkage in 1HFY11. Based on our
revised FY11 estimates, the three steel companies appear expensive. JSW Steel,
however, appears attractive based on FY12 estimates due to expected addition of
new capacities by March 2011. Volume growth will elude SAIL and Tata Steel in FY12.

To read the full report: METALS

>BANKING INDUSTRY (ICICI DIRECT)

The BFSI space, which has ~25% weightage in the Nifty, lifted the index
in the recent rally from the lows of 4700. Within the banking space, we
saw midcap banks taking the cream of the rally on takeover and
recapitalisation buzz. The credit growth in the system has started to
pick up pace. It grew by 19.1% while deposit growth moderated to
14.3% for the fortnight ended June 4th. Banking sector stocks have
outperformed the market over the past 12-15 months. PSU banks are
now trading between 1.2x and 1.8x FY12E ABV while private banks are
trading at 1.8-3.5x. Both private and public banks have led the rally in
our markets from the lows of March 2009.

􀂃 What next?
In our view, banking stocks are likely to move in line with markets in
the coming quarter as the first quarter is a lull season for bank
credit. We prefer banks that have sustainable NIM (high CASA, low
bulk deposits), higher RoE and growth potential in addition to low
volatility to profitability (i.e. less dependency on treasury gains).
For FY10, credit growth in the system is expected at 20% and
deposit at 18% with an upward bias. We expect the NIM for banks to
stabilise. Base rate implementation is unlikely to impact the
bottomline substantially. Asset quality will remain a concern for a
couple of quarters more on account of slippages from restructured
assets. Most of the banks have already seen a slippage of 6-10%
from the restructured portfolio so far and this is likely to inch up
further in the coming quarter.

On the basis of the following parameters we prefer Oriental Bank of
Commerce, Union Bank of India, Punjab National Bank from the
public sector space and HDFC Bank from the private space. We also
recommend IDBI Bank as our contrarian pick from the coverage
universe.

Bearing in mind the current liquidity scenario where banks are borrowing
under the LAF window from RBI and with inflation at 10.2% in May 2010,
we expect rates to have an upward bias from here on. The RBI may raise
both repo rate and reverse repo rates by 25 bps each to 5.5% and 4.0%,
respectively, in the July monetary policy meet though monsoon will be a
key monitorable.

To read the full report: BANKING INDUSTRY

>INFORMATION TECHNOLOGY SECTOR: Indian IT vendors: New growth opportunities

Indian Tier 1 IT vendors appear to be poised for the next wave of growth, driven by the return of stable IT budgets, improved decision making at clients and higher thrust on offshoring and global delivery model. We expect multiple growth drivers over FY10-FY13E which predominantly includes underpenetrated service lines like Infrastructure managed services, BPO, Package implementation, Engineering and R&D services, as well as increasing focus on new markets like Latin America, Middle east , India and China.

Service line wise growth opportunities:
a) While Remote Infrastructure management services (IMS) is a USD100bn opportunity, Indian exports from this service line stood at USD4bn for FY09, which represents just 4% penetration.

b) BPO services have already been witnessing robust traction for Indian Offshore vendors but can still count a USD130Bn opportunity as on FY09, of which Indian vendors derive just USD12.8bn as on FY09 which represents 9.8% penetration.

c) Consulting and Package implementation, which has been the key growth arenas during the 2003–2008 upcycle for Indian Tier 1 vendors still has a huge market opportunity. The ERP services market which includes ERP, SCM, CRM etc, is a USD71bn opportunity as on CY10 and the top four IT vendors derive just USD3.46bn in revenues from package implementation and consulting as on FY10.

d) Finally Engineering design and R&D services is touted as another growth arena by the Nasscom with a potential for Indian vendors to derive over USD35bn-USD40bn by 2020 as compared to USD8bn (Approx) as on FY09.  Vertical wise growth opportunities: Governments across the world spend around USD154bn on IT services and Indian IT vendors currently have a very minimal penetration in this segment. We expect Government and Healthcare verticals as strong growth opportunities over the coming period. Geographical growth opportunities: Indian vendors are fast expanding the addressable market by ramping up client base in emerging markets like Latin America, Australia, NZ, Middle East, and China. Vendors like TCS have reached critical mass in emerging geographies and are poised for further scalability.

Indian IT vendors: New growth opportunities
Infosys Tech: Infosys appears to be banking on non linear growth initiatives as its new growth drivers. Some of the initiatives include platform BPO, Pay per use services, and Application platforms (Mobile Flypp, Shopping trip 360, Itransform).

TCS: We believe that TCS key growth drivers would be its strong geographical mix with 20% of the revenues derived from the emerging markets like Latin America, India, Australia, NZ, Middle East etc. Platform BPO also appears to be a key forte.
Wipro: Wipro has strong competency in the IMS and BPO service lines, which contribute to 21% and 10.5% of the total revenues respectively for FY10. We expect these two service lines along with testing to be growth drivers for Wipro.

HCL tech: HCL Tech has well diversified service line mix with Enterprise application services, IMS, and Engineering design services, which account to 21.4%, 22%, and 19% of the total revenues and could be strong growth drivers.

To read the full report: IT SECTOR

>INDIAN INFRASTRUCTURE: Accelerating investments... ....…unprecedented opportunities

12th plan spend of Rs 27tn driven by power, roads, railways

We expect India to see an investment of Rs 27tn in infrastructure development
over the 12th plan period (FY13-FY17); 65% of this investment is estimated to
be in sectors like power, roads, and railways. This development will offer
~Rs 12tn of EPC opportunity to construction companies. The Private sector is
likely to account for 39% of the total spend. Overall debt funding of Rs 14tn
may not be a constraint if the proportion of infrastructure credit to total bank
credit continues to rise moderately each year. Key risks include delays in coal
availability (power capex) and road project award activity by NHAI, and slow
execution of railway projects. Within our coverage universe, we prefer L&T,
IVRCL, NCC, Patel Engineering and Ahluwalia Contracts and recommend
buying these stocks for long-term value creation.

Expect infrastructure investments of Rs 27tn over 12th plan period: We estimate
an infrastructure investment of Rs 27tn, up 32% over government’s revised
estimate of Rs 20tn spend for the 11th plan. We expect the government (centre
and state) to account for Rs 16.5tn of the spend (61% of total). We are factoring
in Rs 7.1tn of budgetary support, which is ~1.6% of GDP in that period. In terms
of debt funding, we estimate requirement of Rs 14tn across the private sector,
centre, and state (54:34:12).

Debt funding may not be a constraint: Bank credit to infrastructure, as a
percentage of total bank credit (non-food), has increased from 8% in FY07 to
12.7% in FY10. Even if the share of credit to infrastructure increases by 50bps
every year over FY10-FY17, bank credit itself can meet 47% of the total debt
funding requirement. The remaining requirement will be met through other debt
sources like NBFCs, pension funds, and ECBs.

Private sector share to rise to 39% in 12th plan from 36% in 11th plan: Private
sector share will rise in roads (to 44% in 12th plan from 17% in 11th plan), power
(to 51% from 44%) and railways (to 14% from 4%). However, lower spend in
telecom (large private sector share but capex peaked out) and lower private
sector share in airports will limit the rise in overall share to 39% in the 12th plan.
65% of total spend in power, roads, railways: Power sector will continue to
account for highest share in the 12th plan spend at 32%. The road segment is
likely to see an investment of Rs 4.5tn, 17% of total. Rise in project award
activity by NHAI will lead to higher investment in national highways. Railways
will see an investment of Rs 4.5tn over the 12th plan period.

EPC opportunity of ~Rs 12tn: We estimate an EPC opportunity of ~Rs 12tn from
12th plan, primarily in sectors such as roads, railways, power, irrigation, and
water supply. This will necessitate ramping up of business by existing players.
Key risks: a) Delay in coal availability for power plants; b) delay in road project
awards by NHAI (due to land acquisition, environmental clearances); c) slow
execution by the railway ministry.

Prefer L&T, IVRCL, NCC, Patel Engineering and Ahluwalia Contracts: We expect
companies within our coverage universe to deliver revenue/earnings CAGR of
20%/25% over FY10-FY12E. These companies are set to tap the upcoming EPC
and asset development opportunities. We prefer companies with strong cash
generation, a good execution track record, and reasonable valuations.

To read the full report: INDIAN INFRASTRUCTURE

>Repetitive Pattern of Global Financial Market Turbulence

Summary
■ How should global financial market turbulence be understood?: In our main scenario we anticipate that, while Japan’s economy will momentarily slow in 2H10, it will continue to expand at a moderate pace, supported by recovery of the world economy. For this report, we closely reviewed our risk scenario and examined the history of global financial crises over the last hundred years or so to study the reasons for the repeated turbulence seen in global
financial markets in recent years. This examination led us to identify a pattern where (1)
financial crises are followed by (2) the expansion of fiscal deficits and (3) increased inflationary
pressure. Recent global risk factors (new financial regulations of the Obama administration,
European sovereign risk, concerns of monetary tightening in China) can be placed within this
framework without exception. To conclude, the risks that are currently shaking global financial
markets are not a passing issue but are expected to smolder over the medium and long term
as disruptive factors for the world economy.

Introduction of new financial regulations in the US, European sovereign risk, inflation in China, and higher commodity prices (read in report)

■ Examination of four risks facing the global economy: Building on the study referred to above, we present a multifaceted examination of the following four risks. First, should the
leverage of US financial institutions decrease 10% with the introduction of new financial
regulations by the Obama administration, US GDP would decline 2.8%. Second, European
sovereign risk has the potential of triggering global financial uncertainties. Third, should
inflationary pressure accelerate in China, the world economy may experience a hard landing.
Fourth, should commodity prices increase (the possibility has currently diminished), terms of
trade may worsen for Japanese companies. Land mines are buried throughout the world
economy, and any one of them may go off at a moment’s notice. In conclusion, Japan’s
economy is exposed to a range of downside risks, and its recovery is expected to be weak.

To read the full report: MARKET PATTERN

INDIA STRATEGY: Is it raining enough s enough?

Event
Monsoon 8% below normal: The India Meteorological Department (IMD he IMD) reported that rains in the week end ended ed June 16 were 8% below normal normal. It has also reported that there may be a temporary weakening of the monsoon over the next week week, with no major advance over central and eastern India. Although it is still early days, the q question is: uestion is this a cause for concern? Maybe not not, because there’s no clear pattern pattern; however ; however, monsoon worries may heighten inflation expectations and can dampen sentiment sentiment.

Impact
■ There’s no clear pattern; June does not set the pattern for the entire season season...: ...: Normal rains are defined as falling within 10% of the long long-term average normal. Since 1901, there have been 35 instances when June rainfall has fallen short by more than 10%, and on 24 of these instances the overall monsoon season turned out normal. Also, i in the last 25 years, there have n been five ins instances when June received above tances above-normal rainfall while the remaining months (and the en entire season) were rendered rain tire rain-deficient.

■ …b but can ut dampen sentiment and increase inflation worries worries.. ..: Food ood inflation remains the key concern for the government government, and it has been banking
on a normal monsoon for food prices to ease ease.

■ …and can lead to RBI hiking rates faster than expected… expected…: The latest inflation point of 10.2% YoY was higher than expected, impacted mainly by rise in prices of primary articles articles, while food inflation eased , eased. However, a deficient monsoon could raise worries about a rebound in food inflation. While there is a general expectation of a 2 25 bps hike at 5 the next meeting, any concerns around a persistent high level of inflation can make RBI move on rates much faster than expected expected.

■ ... can also slow down private consumption consumption: High inflation and rising rates could strike a double whammy for priv private ate consumption consumption, particularly urban , consumers. Rural demand was resilient last year but could come under pressure in case monsoons were to worsen.

Outlook
While it is too early to judge, a deficient monsoon can impact agricultural (Khari Kharif) output, inflatio f) inflation, sentiment n, and ultimately private consumption consumption.
Per Persistent high inflation could sistent also prompt RBI to raise rates faster than expected. Such a scenario could impact early cycle consumer discretionary sectors such as autos and telecom and interest rate rate-sensitive real estate. We believe that a an interesting play within consumer staples would be to switch n from HUL (HUVR IN; INR257; TP 210; Underperform) to ITC (ITC IN; INR294; TP 335; Outperform). In past rain rain-deficient years years, we have seen HUL underperformi underperforming relative to the market during the June ng June-September period and ITC outperforming the market (see Fig Figs 5 and 6) 6).

To read the full report: INDIA STRATEGY

>International Conveyors Ltd.: …conveying a robust growth story

Market leader in PVC conveyor belting
■ ICL is the market leader in the Indian PVC mine conveyor belt industry, where it has around 45% market share.
■ ICL is one of the major suppliers of underground PVC Belting for carrying coal & potash, and presently supplies over 150 km of PVC belts of various widths and strengths to underground coal mines in India.
■ With increasing focus on the underground mining by the domestic players, ICL is set to corner a sizeable share of the underground PVC belting business.

Stringent testing resulting in durable and quality products
■ ICL’s state of the art testing facilities ensure stringent quality control for conveyor belts at each and every stage of production process.
■ ICL’s conveyor belts are 50% more durable than the conventional conveyor belts, resulting in a superior value for money proposition.
■ The company’s products are approved by the respective authorities in India, US, Australia, Canada and South Africa — thus providing testimony to the quality of the products.

Superior products and customization created a loyal set of customers
■ The company customizes its R&D as per the customers’ requirement, as well as provides onsite training and demonstration at customers’ premises, thereby extending its services beyond the transactions.
■ The customization and product quality resulted in a high proportion of repeat business from the existing customers of ICL.

Technical capabilities acting as an entry barrier
■ The technical knowhow of manufacturing solid woven fabric reinforced PVC impregnated and PVC covered fire retardant, anti static conveyor belting requires atleast 5-6 years’ gestation period. Hence, ICL’s technical prowess works as an entry barrier for potential new entrants in this field.

To read the full report: INTERNATIONAL CONVEYNORS

INTEREST RATE STRATEGY: Steep curve appeals

• Rate hikes in India no longer mean higher yields on longer-term Gilts

• The future path for short rates implied by the yield curve is steepen enough; it already implies a return of policy rates to pre-crisis levels

• Further rate hikes will mainly bring a flattening of INR yield curves; upward pressure on longer-term interest rates will be minor

• India is one of the few local-currency government bond markets where positive total returns in 3Q10 are expected

• We recommend investors buy IGB 7.02 08/17/16 at a yield above 7.6%. The expected 90-day total return is between 1.80-2.8%

To read the full report: INTEREST RATE STRATEGY

>RELIANCE INDUSTRIES LIMITED: Sticking to knittings

• Playing to strengths: RIL chairman Mukesh Ambani reiterated group focus on domestic growth areas at the AGM. Other than core petrochem areas, he announced investments in power, telecom and retail. We believe this plays to group strengths of managing large, complex
projects in a fluid Indian regulatory environment.

• Entry into power: RIL plans to enter the power sector in India (generation, transmission and distribution). With an amended agreement between the brothers barring RIL from gas-based non-captive generation until 2022, the company would explore clean coal, hydro and nuclear
power.

• Petchem capacity additions: RIL stated its intention to build global scale in its petrochemical businesses, confirming plans to build a ~1.5mmtpa off-gas ethylene cracker at the Jamnagar refinery (43% of monomer capacity). RIL is also adding a cumulative 4.6mmtpa of polyester/polyester intermediate capacity (73% of total) to maintain its leadership position.

• E&P thrust to continue: RIL reiterated its thrust into the E&P segment, stating an intention to accelerate reserve accretion, both domestically (off-shore east coast) and internationally. The company would continue to build its shale gas portfolio in N. America. RIL also stated that they
would supply gas to RNRL once the govt. allocates gas supplies.

• Refining: The new refinery has been tested to run at 700kbopd (as against nameplate of 580kbopd). RIL also plans to build one of the world's largest petcoke gassification plants at the refinery, which would aid margins.

• Broadband/Retail: RIL outlined the vast potential of an increase in penetration of broadband technology, with partnership plans to ensure an asset light operating model. The company expects retail sales to increase 10-fold (from Rs45bn) in the next 5 years, with continued investments in various retail formats.

To read the full report: RIL

>BANK OF INDIA (INDIA INFOLINE)

Our recent interaction with the management of Bank of India BoI) has made us believe that the concerns over deterioration in asset quality are set to recede in the coming quarters. High levels of NPLs had been the key worry for the past few quarters. With stringent provisioning norms and strong recovery mechanism in place, the management has guided for limited accretion in NPL. Moreover, with renewed focus on increasing CASA proportion, improving margins, 400+ branch addition and diversification in loan portfolio, we see BoI entering the next league of growth. BUY

■ 23% CAGR in loans; favorable business mix to boost margins
After a decent 18%yoy growth in loan book during FY10 and a healthy 22% CAGR over FY08-10, we expect BoI to now witness sturdy 23% CAGR in loan book over FY10-12E. Lending towards SME and corporate segment have been the key growth areas. With intention to address its limited exposure towards mid-corporate segment, the bank has now opened 28 branches to cater solely to the needs of this segment. Over 75% of total domestic deposits
excluding CASA deposits) are at interest rate of less than 8%. This is relatively lower as against ~88% of advances at interest rate of over 8%. Increasing proportion of CASA deposits, healthy loan growth and improved loan mix, in our view, would enable the bank
to report improvement in margins.

■ Concerns over asset quality to fade in coming quarters
GNPL for the bank at Rs48.8bn were up 98%yoy and constituted 2.9% of total loans. Net NPLs too, were up 2.5xyoy to Rs22.1bn 1.3% of total loans) largely on account of significant rise in
slippages. We expect high level of slippages to recede with improving health of the economy and recovery mechanism in place. With pace of accretion towards restructured loans having slowed down, we expect minimal loans to come up for restructuring.

■ Valuation gap with peers has widened, BUY
With sturdy 23% CAGR in loans over FY10-12E, we expect the bank to witness 21% CAGR in balance sheet. Returns ratios too are set to improve with average RoE at ~18-19% levels and RoA at 0.8% over the said period. With concerns over deterioration in asset quality to fade in coming quarters, the valuation gap is expected to narrow down. We recommend BUY and assign a multiple of 1.35x FY12 P/Bx marginally lower than its peers) to arrive at value of Rs392.

To read the full report: BOI

>Some scenarios that are not worth considering

The financial markets sometimes bring up extremely unlikely scenarios,
which are normally not worth discussing.

We can mention here:
- certain countries leaving the euro (in the short term);
- the acceptance of a sovereign default in the euro zone;
- inflation;
- the collapse of growth in China.

Yet, these scenarios are mentioned every day.

To read the full report: MARKET SCENARIOS

>NETWORK 18: Q4FY10 Results, Conference Call Transcript

To read the full report: NETWORK 18

>JUBILANT FOODWORKS: 'Pizza mania overdone'

We initiate coverage on Jubilant FoodWorks (JFW) with a Sell rating and a target price of Rs230 (implied P/E of 27.3x FY12E), indicating downside potential of 18.4% from current levels. Though we are confident regarding the company’s ability to cash in on the growing affluence and changing lifestyle of the Indian consumer, we consider the current valuations overstretched due to unrealistic market expectations of higher growth.

􀂁 Current valuations expensive: DCF valuation method suggests fair value of Rs230 (implied P/E of 35.2x FY11E and 27.3x FY12E). At CMP, the stock trades at a PE of 43.1x FY11E and 33.5x FY12E, which we believe is a huge premium primarily ascribed for higher-thanexpected
growth from the company’s existing operations and over-enthusiasm in anticipation of
earnings growth accretive tie-up. Our analysis suggests such run-up in prices is unwarranted and unsustainable and would result downward re-rating in stock prices.

■ Competition to intensify: Though we are positive on the company’s strategy to extend its reach in Tier 2 and Tier 3 cities, we remain a bit cautious on the competitive landscape that would emerge after another two to three years, since we expect a large number of organized
players to realize and tap this opportunity and compete for this market.

■ Market expectations of higher IRR from a possible QSR tie-up may be unrealistic. Our analysis suggests a tie-up with coffee (generating store IRR of 15.4%) and burger (IRR 25%) chains would be IRR decretive for the company, whereas a tie-up with a sandwich chain (IRR
of 33.2%--higher than JFW’s 29.9%) is the only option that would be IRR accretive.

■ Absence of free cash flow deployment to be ROE decretive: Free cash flows generated and not deployed would result in 1,516bps decline in ROE to 31.6% over FY10-12E.

■ Profitable and scalable business model: We believe the dual strategy of increased penetration in Tier 2 and Tier 3 cities and multiple price points (cheapest pizza at Rs39) would enable the company to clock 27.9% CAGR sales and achieve same-store-sales growth (SSSG) in the
higher single digits over FY10-12E.

■ Key risks: Upward: New tie-ups, if value accretive, would result in upward earnings revision.

To read the full report: JUBILANT FOODWORKS

>TATA MOTORS: May'10 JLR unit sales growth (+73% yoy) momentum sustains - ALERT

• Jaguar Land Rover sales growth momentum sustains: Land Rover sales at 13,933 units (+93% yoy) have sustained the YTD growth trend (+91% YTD). Jaguar sales grew for the first time in several months at 5,120 units (+34% yoy).

• Land Rover sales continue to benefit from strong demand in its key UK market, besides healthy industry growth in USA and China.

• Jaguar sales growth aided by the dispatch of the new ‘XJ’: Jaguar has commenced dispatches of its recently launched luxury sedan. Management has highlighted that there is a healthy order book for the new model.

• Global luxury car sales growth is healthy: The growth trend in luxury car sales continued with Mercedes (+18% y/y) & BMW (+12% y/y) reporting healthy sales growth, driven by strong sales in the US and China. Strong US luxury car sales (+35% y/y) offset the weak sales in Western Europe.

• We expect the sales growth at JLR to likely remain encouraging over the near term given a low base: While there are concerns of a potential slowdown in Europe, data indicates that sentiment is currently holding with private demand remaining steady.

To read the full report: TATA MOTORS

>TELECOM: Demystifying WiMAX (AMBIT CAPITAL)

Four years of operation, more than 500 deployments across 148 countries and only 6.5mn subscribers, is not a very good situation to be in for the global WiMAX industry. Despite this, in India the demand for WiMAX spectrum is equally fierce as was in the case of 3G spectrum. At the end of day 12, pan India WiMAX spectrum auction amount reached Rs106bn, 6x the base price of Rs17.5bn. At the current prices, the government is likely to mobilise Rs320bn from this auction.

Why operators need WiMAX?
Despite years of operations, the broadband penetration in the country is still languishing at 8.75mn subscribers as of end-Mar 2010. The number of subscribers accessing data on mobile is much higher at 150mn subscribers. The higher cost of laying fixed line network coupled with absence of unbundling of local loop has resulted in lower competition in the broadband space from private players, thereby restricting the growth of broadband. Therefore, it is evident that the broadband penetration in the country would take off only on the wireless platform. The 802.16d (fixed WiMAX) is a proven technology with more than 500 deployments globally. The cost of deployment is also much lower than the fixed line penetration. Hence, it will help operators to provide broadband services at much lower prices.

WiMAX allows faster data downloads at a speed of 40Mbps, which is much higher than the download speed available on 3G spectrum. Also, operators who have failed to get 3G spectrum in specific circles, would want to get WiMAX spectrum. Both LTE and IEEE 802.16m aim at meeting the IMT Advanced requirements which is to achieve 100Mbps for mobile application and 1Gbps for fixed-nomadic application. Given the uncertainty about predicting technologies as well as uncertainty about spectrum availability, we expect serious operators to opt for WiMAX spectrum.

What goes against WiMAX?
Given that 802.16m is still being developed as a future of WiMAX, we believe that WiMAX in India would be used to provide retail broadband and enterprise leased line services on 802.16e platform. These services are already being provided on other platforms such as DSL, local cable and CDMA data cards, which restricts the revenue earning potential from this spectrum on an immediate basis. Globally, operators have already made huge investments in HSDPA networks and hence the natural progression would be towards LTE. For WiMAX, however operators need to make fresh investments. Also, to provide coverage on a WiMAX network in metro areas (Mumbai/ Delhi) the no. of sites required would be much higher, leading to higher capex. However, some industry participants believe that 3G and WiMAX are not competing but complimentory technologies and both can co-exist, where 3G would be used for voice and WiMAX for data.

Our View
Though securing spectrum may be a good bet from a long term perspective, we remain concerned about operators’ ability to generate significant revenue compared to the cost of spectrum acquisition. We believe that this investment will generate back-ended payoffs only if WiMAX succeeds as a superior technology platform over LTE. Given the domestic deployment challenges facing WiMAX, we remain cautious on this. In the short term, we anticipate higher debt burden for telecom companies. Hence, we maintain our negative stance on the sector.

To read the full report: TELECOM

>ECONOMICS - MARKETS - STRATEGY: 3Q 2010

Asia matters more

Trouble simmers in Europe. Then EUR750bn bailout for the GIIPS (1) has lowered the flame and put a lid on the pot. But inside, the stew still bubbles. Will it boil over into Asia?

To read the full report: 3Q2010

>PLETHICO PHARMACEUTICALS (CRISIL)

Plethico Pharmaceuticals (Plethico) is engaged in the manufacturing of herbal formulations, nutraceuticals and allopathic products. We assign Plethico a fundamental grade of 3/5, indicating that its fundamentals are ‘good’ relative to other listed securities. We assign a valuation grade of 4/5, indicating that the current market price of the stock has ‘potential upside’ from the current levels. We have arrived at a one-year fair value of Rs 458 per share.

Global nutraceutical market is emerging from the nascent stage
We expect the global nutraceutical market to grow at a CAGR of 9% during CY08-13 on the back of an increase in awareness of lifestyle-related health issues and a rise in disposable incomes. We expect Plethico, with around 90% exports, to grow at a faster rate due to increased penetration into new geographies.

Natrol acquisition has strategically enhanced Plethico’s value.
We believe that this acquisition has provided the following benefits to Plethico:

i) It has strengthened Plethico’s product mix and enabled its foray into the US and the UK.

ii) Successful leveraging of Natrol’s products in the non-US markets: In CY09, Plethico introduced Natrol’s products to the non-US markets, pushing up revenues from $ 101 mn to $ 114 mn.

iii) Cross-selling of products: As Plethico and Natrol cater to different geographies, Plethico now plans to cross-sell products to strengthen its position in those markets. It also plans to enter new territories.

CRISIL Equities is of the opinion that the management has successfully leveraged on the Natrol acquisition so far.

Restructuring of manufacturing operations to boost profitability
Plethico has incurred a capex of Rs 2 bn towards setting up a manufacturing facility near Dubai, UAE entitling the company for a 50-year tax holiday. With the commercialisation of the plant in August 2010, Plethico plans to re-organise its manufacturing operations. It will significantly reduce the cycle time, thus saving on costs and taxes. We expect the benefits of the restructuring exercise to accrue by CY12 and project an increase in EBITDA margins from 15.8% in CY11 to 19.2% in CY12.

We expect Plethico’s revenues to grow at a two-year CAGR of 26% from CY09 to CY11. We foresee a growth of 19% in PAT in CY10 and 6.5% in CY11. Due to the Rs 2 bn capex and restructuring of operations, we expect RoE to decline from 23% in CY09 to 22% in CY10 and further to 19% in CY11 before improving to 23% in CY12.

Key risks
High exposure to international markets adds to the risks involved in the operations. The behaviour of the receivables cycle and timely commissioning of the new plant are key monitorables.

Valuation: Potential upside from the current levels
Plethico has been trading at a five-year average PE multiple of 7x. We have applied a fiveyear
historical PE average of 7x to its CY10 EPS of Rs 65.5 and arrived at a one-year fair
value of Rs 458. Our discounted cash flow valuation also supports the PE-based valuation.

To read the full report: PLETHICO PHARMACEUTICALS

>FMCG SECOTR: Monsoon impact and category analysis

Monsoons: A key trigger for the FMCG sector

Companies with agri inputs better off

Stiff competition impacts pricing power

Buy Britannia, Marico, Nestle

To read the full report: FMCG SECTOR

>POWER SECTOR (CRISIL)

HIGHLIGHTS

Capacity addition gains momentum in 2009-10.

Essar Power Hazira achieves financial closure for Rs. 14.33 billion multi-fuel based project.

Jindal Power getd Rs 100 billion loan for 2400-MW Raigarh project.

BHEL bags Rs 63 billion contract for executing 1,600 - MW super critical thermal power project

To read the full report: POWER SECTOR

>UFLEX LIMITED:: AGGRESSIVE EXPANSION PLANS AND INCREASE IN DEMAND WILL DRIVE GROWTH

Uflex Ltd was incorporated in the year 1988, with the name

Flex Industries Ltd. It is the flagship company of the Flex

group is an India‐based flexible packaging company. Uflex has

vast capacities for production of Polyester chips, BOPET and

BOPP films, Printing & Coating Inks, facilities for Holography,

Metallization & PVDC coating, making Gravure Printing

Cylinders, Gravure Printing, Lamination and Pouch formation.

The Packaging Division of UFLEX provides total solutions

based on flexible packaging materials to customers across the

world. The global markets, successfully catered to, include

USA, Canada, UK, Russia, CIS countries, South Africa, the

Middle East and the South Asian Countries.

Investments Rationale

■ Uflex has strong expansion plans to access large and profitable markets in Mexico and Egypt. The move is to counter the anti dumping measures unfavourable to exports of films from India.

■ The company has world class plastic film manufacturing facilities in India, Dubai, Mexico and

Egypt. It has strong global sales and distribution network with customers in more than 100 countries.

■ Flexible Packaging Industry is growing at 22‐25% annually. The increasing demand for flexible

packaging products gives strategic advantage to organized players in the domain.

■ Inspite of the rapid growth achieved by the Indian packaging industry in the past few years, the per capita consumption of packaging in India is still very low at around US$15, against the world average of US$100. Its shows the real opportunity available in the Indian Market.

■ It is one of the low cost producer of packaging sales and a market leader in the flexible packaging industry in India. UFlex is primarily a converter of packaging raw material to commoditised products like packaging film and value‐added customised products like zip pouches and others used in flexible packaging of a wide range of FMCG products.

To read the full report: UFLEX LTD

>COLLATERAL DAMAGE

In the eye of the Storm: Ignore Short-Term Indicators, Focus on the Long Haul

To read the book:COLLATERAL DAMAGE

>CEMENT: Prices in South decline, too soon too fast

Cement prices continued on their downward trajectory for yet another month, but this time at an accelerated pace, particularly in Andhra Pradesh (AP). Cement prices in this market are currently hovering around Rs 150-155/bag, down by Rs 50-60/bag from its peak two months back. Cement prices in Chennai too have declined by Rs 15-20/bag to ~Rs 230-240/bag. Dealers believe that prices in south India could fall further in the coming weeks as demand shows no signs of revival. While prices in central and northern regions, particularly in Delhi, have remained flat, that in the western region of Pune have declined by 15-20/bag. Interestingly, these price corrections have happened during the pre-monsoon period; with the monsoon setting in, a further drop cannot be ruled out. We continue to maintain Sell on ACC, Ultra Tech, and India Cements. Grasim (post steep correction) and Shree Cement remain out best bets in the sector.

■ South prices nosedive: Our dealer checks indicate that cement prices in the south have declined by Rs 15-20/bag across states. This revision has brought down prices in Chennai to Rs 230-240/bag and Bangalore to Rs 230/bag. The decline has been sharper in AP – cement prices in this market have tumbled by Rs 55-60/bag from its peak two months back and currently stand in the range of 150-155/bag. With monsoon setting in and the demand already lackluster, further price cuts in the south are inevitable.

■ Western region a mixed bag: The Pune market in the western region is essentially correlated with the AP market as dispatches enter Maharashtra from AP, once the gap between the prices widens. Prices in the Pune market have corrected by Rs 15- 20/bag in the last 15 days. Dealers opine that prices could well go below Rs 200/bag as monsoon sets in and AP market looks weak. For the Mumbai market, although prices have been steady at Rs 245-250/bag, a decline is expected in the next 15-20 days.

■ Northern region stays flat: Cement prices in New Delhi have remained steady at Rs 245-250/bag. Gurgaon, however, has seen a drop of Rs 5-10/bag to Rs 225- 230/bag and, is likely to see a further decline of Rs 5-10/ bag in the coming weeks. While prices in Jaipur have increased by Rs 5/bag in last 15 days, and are in the Rs 230-238/bag range currently, our dealer checks suggest that since demand is low, the price rise may not be absorbed by the market. Central region flat; eastern markets see a decline: Cement prices in Uttar Pradesh have remained flat at Rs 250/bag; however, demand continues to be weak in this market. In the eastern region, especially in Kolkata, prices have declined by Rs 5/bag and are currently at Rs 280-290/bag; in the bulk segment, prices are hovering at Rs 260-265/bag. Dealer suggests prices in this market
could decline by Rs 10-15/bag.

■ Caution advocated: Given the low single-digit demand growth, lurking monsoons, and increased supply pressure, we believe this is not an opportune time to enter pure cement players. We reinstate a Sell on ACC, Ultra Tech, and India Cements. Grasim (post significant correction in last one month) and Shree Cement remain our best bets in the cement sector.

To read the full report: CEMENT

>INDIAN WIRELESS SECTOR: BWA auctions ended with three major negative consequences

Event
■ BWA auctions ended with three major negative consequences for the alreadybeleaguered
Indian telecom sector. First, the pan-India winning price of Rs128.47bn (US$2.74bn) per slot was well ahead of anyone’s expectations. Second, it led to a fractured verdict, with the largest incumbents coming out croppers with no circle wins, except for Bharti, which won in only four circles. Lastly, in a repeat of 2003, we are seeing the birth of four new players in the Indian telco space. While one could dismiss their entry citing competition only for wireless data, this clearly thwarts the future growth option for incumbents from wireless data during the next five years. Of the four new entrants, most notable is Reliance Industries, India’s largest company, which began the remarkable telecom foray in 2003 of what is now called RCOM.

■ We are clear that one needs a serious reassessment of Indian telecoms, and the hope of consolidation to reduce the number of players to a workable seven or eight is just that – hope. We reiterate our Underperform ratings on the entire listed operator space – Bharti, RCOM, Idea, TCOM and MTNL. In our view, all of it is ‘dead money’ for the next six to nine months. We believe that the only event worth investing in may be RCOM attaining a cash infusion on the 26% stake sale at a good premium.

Impact
■ RCOM, Vodafone, Idea and Tata are notable absentees from the list of BWA spectrum winners. Aircel Maxis continued to surprise in BWA (as in 3G) with wins in eight circles. BSNL and MTNL have been allotted BWA spectrum in 20 and two circles, respectively (the third pan-India BWA slot).

■ The biggest surprise winner is Infotel Broadband, which won all 22 circles (pan-India) for US$2.74bn. Other surprise winners were QUALCOMM (QCOM US, US$35.03, Outperform, TP: US$50.00, Phil Cusick) in four circles, Tikona (unlisted) in five circles and Augere (unlisted) in
one circle.

■ Within hours of the BWA result release, Reliance Industries disclosed that it has acquired a 95% stake in Infotel Broadband by infusing approximately US$1.02bn and that RIL would pay US$2.74bn to the government for Infotel’s BWA spectrum. This marks the reentry of RIL into telecoms, and the fresh capital infusion would help Infotel launch its services targeted at corporates/ enterprises by next year. Although no capex plan has been disclosed, we believe that the size of RIL’s balance sheet (US$46.3bn) and its annual operating cashflow of US$4.4bn would be able to fund expansion in the scope and scale of the telecom business over time and a potential entry into the whole gamut of services, chiefly voice.

Outlook
■ Headwinds galore for the incumbents, in-market consolidation a pipe dream unless regulations change; valuations expensive as downgrades start coming through: MNP implementation could occur by September 2010, which could lead to a 7–8% correction in ARPU, entirely led by postpaid. We view the regulatory framework on M&A as the key hurdle for inmarket consolidation, even while supply of new capacity continues unabated.

To read the full report: WIRELESS SECTOR

>INDIAN BANKS: Uncertainties receding (HSBC)

■ Rating changes. Downgrading Bank of Baroda to Neutral (V) and State Bank of India to UW(V) on stock performance and relatively high provisioning pressures, respectively. Banks to gain from EPS acceleration and PE rerating. We expect 24% EPS CAGR for our coverage banks over
FY10-12e vs. 18% last year, causing PE multiples to expand quicker than PB as the street starts to focus on credit and earnings growth upside rather than asset quality risks.

■ Three uncertainties diminishing. Loan growth, direction of short rates and asset quality trends are all closer to moving up than down, as economic indicators (PMI, industrial growth, overnight liquidity) point to a pickup in the credit cycle and tightening liquidity.

■ Earnings sensitivity analysis on these three parameters points to Canara being most leveraged and Punjab National Bank most insulated. We like both names given relatively attractive valuations vs. peers even after factoring in significantly higher provisions for Canara.

■ Multiples increased. We increase target PE multiples by up to 25% for public sector (PSU) banks to 7.0-8.5x, more so for Union Bank and Canara Bank which historically have traded at discounts to peers in the downcycle.

■ Near term prefer private banks… Underperformance of private banks to PSU banks by ~10% and private banks trading at discounts to their average multiples point to better entry opportunities, particularly given brighter growth prospects in the early stages of the upcycle as well as fewer asset quality issues and more flexible pricing power. …but over 12 months prefer PSU banks, which hold out promise of a higher PE rerating and earnings growth into the upcycle once near-term hiccups are overcome.

To read the full report: INDIAN BANKS