>How have the banks reacted since the crisis? An analysis of their balance sheets (NATIXIS)

The crisis was sparked by the decline in bank lending, due to excess indebtedness among borrowers followed by a halt in the supply of credit by the banks when their funding sources (interbank and bond market) dried up.

Today, the deleveraging is continuing (in the United States, the euro zone and the United Kingdom), mainly due to the permanent decline in credit demand. Banking liquidity has been restored due to the very expansionary policies (direct financing of the banks) implemented by central banks.

In this environment, what is the banks’ behaviour?

− they are accumulating massive excess reserves, which earn very low interest rates, and this means that they are de facto abstaining from more profitable uses of their short-term funds. This reflects either a lack of possibilities to invest or lend, or a determination to reduce the risks taken;

− they have increased their equity capital sharply, mainly at the request of the regulators;

− but they are also massively (above all in Europe) net buyers of bonds (above all government bonds), and these purchases are financed in the short term market. This has restored their profitability, thanks to the positive slope of the yield curves, but means that while they have reduced the credit risk drastically, the banks have also increased the interest rate risk (transformation risk) drastically.

Besides, this probably corresponds to what the regulators want. It is therefore surprising to see, simultaneously, in the banks' balance sheets signs of high risk aversion (cash reserves, high equity, reduction in credit and liquidity risk) but at the same time signs of lack of aversion for interest rate risk (duration risk).

To read the full report: ANALYSIS OF BALANCE SHEETS

>CIPLA (MOTILAL OSWAL)

We believe that Cipla has several potential growth triggers. It is well positioned to capitalize on these future growth opportunities emanating from a strong generics pipeline, upsides from potential MNC contracts and CFC-free inhalers.

■ Strong generics pipeline: In the US, Cipla has entered into partnerships for 118 products with about 21 partners. A major portion of pipeline is yet to be commercialized, with only 23 products launched by its partners in the US.

■ Potential MNC contracts can upgrade earnings: Cipla has indicated that it is negotiating with MNCs like Pfizer, GSK, and Boehringer for long-term supply agreements. Generally, such deals span across many products and multiple markets. These potential contracts are likely to raise earnings for FY11/12.

■ CFC-free inhalers remain key long-term trigger: Cipla has the third-largest inhaler capacity globally and can become a key supplier to both MNCs/generics companies. Launch of CFC-free inhalers in EU and the US remains as a key long-term trigger for the company, which is developing nine different inhalers. While the visibility on the launch of these inhalers remains poor, we believe that some of these inhalers are likely to be commercialized in FY11. Our estimates do not include the upsides from these supplies.

■ Large underutilized capacities: The company plans for a capex of Rs10b-12b over FY10-11 post the aggressive capex of about Rs20b for setting up new EoUs and SEZ over the past 4 years. We note that this is one of the strongest capex in the company’s history. This has resulted in large underutilized capacities positioning the company strongly for driving future growth at minimal capex.

We expect Cipla to record EPS of Rs13.8 for FY10 (up 38% on a low base), Rs17 for FY11 (up 23%) and Rs20 for FY12 (up 17%) resulting in 26% EPS CAGR over FY09-12, despite potential rupee appreciation vis-à-vis the US dollar. We expect a gradual improvement in Cipla’s return ratios, as asset utilization ramps up post the large capex of the past few years. The stock quotes at 24.0x FY10E, 19.4x FY11E and 16.6x FY12E earnings. We reiterate Buy with a target price of Rs400 (20x FY12E EPS).

To read the full report: CIPLA

>JINDAL SAW LIMITED (FAIR WEALTH)

Jindal Saw Limited is the flagship company of O.P. Jindal Group, one of the leading groups in India. The company is a leader in Submerged Arc Welded (SAW) pipes that are used for transportation of Oil & Gas and now increased its focus on Ductile pipes which is used for water and waste transportation.

Why to invest in shares of Jindal Saw Limited?

SECTOR:
■ With rising Oil prices, Oil & Gas companies increase their level of exploring and drilling activities. And also, demand is expected to increase with new Oil and Gas finds, and creation and strengthening of national Gas Grid. Players like reliance, ONGC and Cairn are making
investment for setting up pipe infrastructure for Oil & Gas transport.

■ The country is in the midst of huge investments in Oil and Gas pipelines, this will continue for a few more years. Penetration level of pipelines in Oil & Gas transportation is low at 32% as against 59% in the USA and 79% globally, which provide a huge opportunity for
companies like Jindal saw to capture the market.

■ Asia to lead pipe demand with strong growth in energy consumption. Simdex data shows that 33% of the global pipeline demand will come up in asia.

■ The Government has increased budget for Rajiv Gandhi Rural Water mission from at Rs 7400cr, which is a boost for the sector requiring
huge amount of Ductile Iron Pipes.

■ Rs 1200cr is granted for Rural Sanitation program, that will create demand for Ductile Pipes

■ Indian player have the advantage of proximity to the Middle East, which makes Indian imports cheaper than Japan or European

■ Replacement demand for older pipes will also contribute to the growth of the sector.

To read the full report: JINDAL SAW LIMITED

>Gitanjali Gems Limited (FIRST CALL)

■We initiated the coverage of Gitanjali Gems and set a target price of Rs.148.00 for Medium to Long term gains.

■ The company became first to produce the world’s smallest heart shaped diamond (0.03 carat) and developing some 25 patented facet patterns.

■ Gitanjali Group, the jewellery maker and exporter, is planning to invest Rs 400 crore in next 18 months for expanding its retail business in India and overseas markets.

■ Gitanjali Gems’ wholly owned subsidiary, Gitanjali Lifestyle has decided to set up a joint venture company in India in collaboration with Damas LLC, Dubai.

■ The company, which currently has 150 stores across India, is planning to increase it by three fold and double the 140 outlets it owns in US, China and Middle- East.

■ The company’s Net Sales & PAT are expected to grow at a CAGR of 14% & 10% over FY08 to FY11E.

To read the full report: GITANJALI GEMS