>The ingredients that contributed to the European crisis are many:

■ Slow-growing, unproductive and uncompetitive economies.
■ Low birthrates and aging populations. (“In the 1950s there were seven workers for every
retiree in advanced economies. By 2050, the ratio in the European Union will drop to 1.3 to
1.” – New York Times, May 23)
■ Generous benefits and social services; cradle-to-grave safety nets.
■ Extensive vacations and strict limits on the work week.
■ Early retirement.
■ Artificially high debt ratings and resultant low interest rates.

To read the full report: EUROPEAN CRISIS

>SHADOW BANKING: Federal Reserve Bank of New York

The rapid growth of the market-based financial system since the mid-1980s changed the nature
of financial intermediation in the United States profoundly. Within the market-based financial
system, “shadow banks” are particularly important institutions. Shadow banks are financial
intermediaries that conduct maturity, credit, and liquidity transformation without access to
central bank liquidity or public sector credit guarantees. Examples of shadow banks include
finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance
companies, structured investment vehicles, credit hedge funds, money market mutual funds,
securities lenders, and government-sponsored enterprises.

Shadow banks are interconnected along a vertically integrated, long intermediation chain, which intermediates credit through a wide range of securitization and secured funding techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo. This intermediation chain binds shadow banks into a network, which is the shadow banking system. The shadow banking system rivals the traditional banking system in the intermediation of credit to households and businesses. Over the past decade, the shadow banking system provided sources of inexpensive funding for credit by converting opaque, risky, long-term assets into money-like and seemingly riskless short-term liabilities. Maturity and credit transformation in the shadow banking system thus contributed significantly to asset bubbles in residential and commercial real estate markets prior to the financial crisis.

We document that the shadow banking system became severely strained during the financial crisis because, like traditional banks, shadow banks conduct credit, maturity, and liquidity
transformation, but unlike traditional financial intermediaries, they lack access to public sources of liquidity, such as the Federal Reserve’s discount window, or public sources of insurance, such as federal deposit insurance. The liquidity facilities of the Federal Reserve and other government agencies’ guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks. Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system.

To read the full report: SHADOW BANKING

>SESA GOA: A ttractive at current valuations

■ India’s largest iron ore exporter; a play on volume growth
We assume coverage of Sesa Goa (Sesa) with a Buy rating. We forecast FY2011/2012 PAT will rise 60%/8%, driven by 55%/0% growth in realisations and 9%/26% growth in volume. Sesa is India’s largest iron ore exporter (it exports around 94% of total sales by volume) and iron ore contributed 97% of EBITDA in FY10 (it also has metcoke/pig iron businesses). It expects iron ore capacity to increase to 50mt by end-FY12 (from around 25mt currently). Sesa has proven plus probable (2P) reserves of 353mt (it produced around 21mt in FY10).

■ Key upside catalysts: strong iron prices; inorganic growth; new reserves
Sesa is a direct play on spot iron ore prices. We assume US$114/t India free-onboard (FOB) price for iron ore fines with 63.5% Fe grade (US$81/t for 58% Fe grade, a 29% discount) in FY2011/2012. Its share price is likely to react positively on new reserve findings. Sesa added 97mt of new reserves over the past two years from new exploration (compared to the 37mt it produced). It also added 70mt of 2P reserves from its acquisition of the Dempo mines in 2009.

■ Downside risks: higher mining taxes; a significant decline in spot prices
We do not assume a significant downside to iron ore prices from current levels (a 1% decline in iron ore prices would lead to 1.8% decline in earnings). Another risk is if the government imposes a mining tax or increases the export duty/royalty.

■ Valuation: assume coverage with Buy rating and Rs440.00 price target Given limited current reserves (around eight years of production) but aggressive reserve findings, we believe it will not be fair to value on an NPV basis. Hence, we value Sesa on 4.5x FY12E EV/EBITDA, the average valuation of its global peers for 2011.

To read the full report: SESA GOA

>INDIA STRATEGY: QE June 2010 Earnings Season Thus Far

Key Highlights from the Earnings Season
• Still early days of earnings.

• Within Morgan Stanley coverage, three-quarters of the reported companies (9 out of 12) have beaten our analyst expectations.

• Narrow and broad market earnings appear strong.

To read the full report: INDIA STRATEGY

>CESC:: Still A Lot Of Value In Power - Maintain 1M Rating

■ Parent power continues to deliver — CESC’s parent power business, with 1225MW of generation capacity and the T&D circles of Kolkata and Howrah, continues to grow at a steady clip with FY10 PAT at Rs4.3bn up 6% YoY. We expect PAT CAGR of 7% over FY10-13E, driven by benign regulatory norms. With the commissioning of the 250MW Budge Budge, CESC has increased generation capacity by 25%+.

■ New projects on track — In Chandrapur (600MW), out of total capex of Rs29bn, CESC has already invested Rs7bn as equity. The BTG and BoP orders have been placed with Shanghai Electric and Punj Lloyd respectively. In Haldia (600MW), out of 380 acres of land required, CESC had already acquired 340 acres and 40 acres remain. CESC has now sorted the situation and has started distributing cheques for acquisition of the remaining 40 acres.

■ Retailing continues to bleed — CESC’s retailing business had a recurring cash loss of Rs2.5bn in FY10 vis-à-vis management guidance of Rs2.0bn. Further, the company also booked exceptional cash losses of Rs430mn. The retailing business continues to be a major drag on CESC.

■ Earnings revision — We revise down our parent EPS estimates by 7-9% and consolidated EPS estimates by 27% over FY11E-12E. We expect the parent business to grow EPS at a CAGR of 7% and consolidated business to grow EPS at a CAGR of 24% over FY10-13E.

■ Target price cut to Rs498 — The cut factors in – (1) earnings revisions; (2) roll forward of DCF on parent/ Dhariwal/ Haldia to Dec10E from (Sep10E earlier); (3) removal of 15% discount on two new projects and (3) no franchise value to CESC’s retailing business, given losses here have been ahead of expectations.

To read the full report: CESC