>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