>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 Financial Sector: Entering a strong loan-growth cycle (DAIWA)

■ Credit likely to see a strong pick-up in FY11: High inflation has historically been followed by a strong pick-up in loan growth. The announcement of fresh investment projects totalling Rs3.8tn (US$88bn) during the December quarter was the highest for a quarter over the past two years. We project credit growth to touch 22% YoY for FY11 and remain positive on the sector.

■ Underperformance of the public-sector banks (PSBs) appears overdone: We believe that the underperformance of the PSBs against the private banks over the past couple of months is overdone, as we expect the worst of the asset-quality deterioration to be over by June 2010, and believe that the 10-year government-bond (G-Sec) yield may peak at 8-8.2%, after rising by almost 100bps over the past year. The 10-year G-Sec yield seems to be already discounting at least a 25bps interest-rate/cash-reserve-ratio (CRR) hike in April 2010. We have upgraded our rating for State Bank of India (SBI) to 1 (Buy), as we believe NPL and MTM concerns have been overdone.

■ We expect private banks to continue to outperform: HDFC Bank, Housing Development Finance (HDFC) and Axis Bank remain our top picks among the private players. We are bullish on Power Finance Corp (PFC) and Rural Electrification (REC), as we expect their loan growth to surprise on the upside, and offset the potential compression in interest spreads in FY11.

To read the full report: FINANCIAL SECTOR

>TATA MOTORS (DAIWA)

What has changed?
■ Tata Motors has divested 20% stake in its construction equipment subsidiary Telcon to Hitachi for Rs 11.6bn. Hitachi now has the controlling stake with 60% stake in the business.

Impact
■ We expect the proceeds to be used to repay debt and reduce the leverage on the balance sheet. We estimate automotive debt/equity would reduce to 0.9x by the end of FY12e (from 2.7x currently) if cash proceeds were used to repay debt. Expected cash proceeds are: a) Tata Motors sells 49% stake in Tata Motor finance at Rs 6.4 billion (valued at 1x FY09 P/BV), b) Rs 48 bn of free cash flow generated from domestic business and c) Rs 11.6 bn stake sale in Telcon

■ We have increased our target price to Rs 974 (from Rs 922) as we now value Telcon at a 20% discount to the current deal valuation. Our estimated value for Telcon increases from Rs 6/share to Rs 41/share as we take the current deal as the benchmark for valuations from P/E methodology earlier. Our subsidiary value estimate increases to Rs 117/share from Rs 90/share previously.

■ Our consolidated earnings estimate have been increased by 2.7-3.4% in FY11- FY12e factoring in cash proceeds and increase in minority interest

Valuation
■ The stock currently trades at 8.7x on our FY12e consolidated estimates.

Catalysts and action
■ Develeraging of balance sheet and improvement in Jaguar and Land Rover operations are key catalysts for stock performance.

To read the full report: TATA MOTORS

>India Pharmaceuticals: Domestic-focused businesses

EXECUTIVE SUMMARY
■ We maintain our Positive rating for the sector.
■ We maintain our positive view on domestic formulations sales, but believe the US-market patent cliff may shrink PERs.
■ Contract research and manufacturing services (CRAMS) is a sustainable business model, in our view.
■ We prefer PER-based valuations for the companies in the sector.
– We initiate coverage of GlaxoSmithKline Pharmaceuticals (Glaxo), Lupin, and Torrent Pharmaceuticals (Torrent) with 1 (Buy) ratings, and of Biocon with a 4 (Underperform) rating
– We have 1 (Buy) ratings for Sun Pharmaceuticals (Sun), Cadila Healthcare (Cadila), Dishman Pharmaceuticals (Dishman), Divi’s Laboratories (Divi’s), Jubilant Organosys (Jubilant), and Piramal Healthcare (Piramal)
– We have 4 (Underperform) ratings for Cipla and Dr Reddy’s Laboratories (Dr Reddy’s)
– We have 5 (Sell) ratings for Glenmark and Ranbaxy Laboratories (Ranbaxy)


INVESTMENT SUMMARY
We maintain our positive bias toward companies focusing on the domestic business.
– US generics sales growth looks likely to be hindered by the large number of products due to go off-patent over the next two-to-three years
» The penetration rate for generic drugs in the US rose from 47% for 1999 to 72% for 2009
» Generics continue to gain market share, but increasing competition limits profitability
» Product patents worth in excess of US$28bn are set to expire over the next two years
– European markets are underpenetrated in terms of generics coverage, in our view
– We think the Japan generic market has potential, but is already very competitive
– We expect emerging-market sales to continue to expand at a faster rate than those in other markets
– We forecast domestic-formulation revenue to rise by 12-14% annually over the next three years, and expect the chronic-care segment to be key

To read the full report: INDIAN PHARMACEUTICALS

>OIL & GAS UPSTREAM SECTOR ( DAIWA)

Ready for an upturn

Summary

■ We believe India’s oil-and-gas exploration and production (E&P) potential is being realised gradually with the success of the New Exploration and Licensing Policy (NELP). We expect E&P activity to pick up significantly over the next few years as blocks licensed out during previous rounds of NELP are explored and developed. The recent success of Reliance Industries (Reliance) (RIL IN, Rs1,893, 3) on the east coast and Cairn India (Cairn) on the west coast has given the sector an additional boost.

■ India is the fifth-largest consumer of oil in the world, and we forecast domestic demand to rise at a CAGR 4-5% over the next three-to-five years. Almost 73% of India’s demand for crude oil and 24% of its demand for gas are met by imports. Thus, new finds have a ready and expanding market. We are bullish on the longer-term prospects for crude-oil prices, and have a forecast of US$84/bbl for 2011 and a long-term forecast of US$85/bbl.

■ We initiate coverage of two pure E&P companies in India − Oil and Natural Gas Corp (ONGC)
and Cairn − with 2 (Outperform) ratings, as the stocks offer 7% and 6% upside potential, respectively, to our six-month target prices. We believe Reliance is also an exciting E&P play,
although its other businesses (such as refining and petrochemicals) are also significant.

To see full report: OIL & GAS SECTOR