>No rain, only dark clouds; we identify areas of safety/vulnerability

Monsoon data to date suggests rainfall 20% below normal
Monsoon data from the Indian Meteorological Department (IMD) indicates that rainfall is 20% below normal for the season to date. In the past, deficient rainfall in June-July has been a strong indicator of deficient rainfall for the season as a whole. In this note, we analyze the potential impact of a deficient monsoon on the sectors under our coverage.

Still early, but data suggests a wide area of deficient rainfall
Regional data indicates three of the four major meteorological divisions and 21 of 36 sub divisions have rainfall below normal, including key agricultural areas of Punjab, Haryana, Maharashtra, Uttar Pradesh, Bihar, among others. Also, reservoir levels are 24% below the 10-year average.

Data suggests rainfall affects real GDP growth from agriculture
Data suggests that deficient rainfall has a negative impact on real GDP growth from agriculture, although the impact on the overall GDP has reduced in recent years. This is in line with the reducing share of agriculture as well as the growing share of food-grain production from the rabi (spring) crop which has a lower correlation to monsoon rainfall. However, we note that the impact on nominal GDP is more muted due to government response, such as raising minimum support prices (MSP). Our Global ECS team has cut its FY13 forecast for GDP from agriculture to - 0.6% from 2.3% earlier and overall GDP to 5.7% from 6.6% earlier. Autos (cars and tractors), consumer staples (foods), utilities (hydro) likely to see the most negative impact

Sectors like autos and consumer staples may see a slowdown in the rural growth seen over the past few years in case the rainfall is significantly below normal, as rural consumption may fall. In addition, companies may also not be in a position to pass on the higher costs due to the removal of growth stimulus with lower fiscal spending and increased competition. Infra (Construction and roads) likely to see a larger construction
window, utilities (thermal) to benefit from power deficits

Some sectors such as construction and roads may benefit in the near term from lackluster rainfall as the period for construction increases. Thermal utilities may benefit from higher tariffs due to power deficits from a cut in hydropower generation.

RISH TRADER

>CONGLOMERATES: Container port volume at top 8 ports decelerated to 3% yoy in July

Port volume growth slowdown dragged by international trades According to Chineseport.cn, throughput growth at China’s top eight container ports decelerated to 3% yoy in July from 7% yoy in 1H12, driven by weaker international trade which fell 1% yoy (vs. +5% in 1H12). Domestic trade maintained its momentum, up 18% yoy (vs. +21% in 1H12). Reflecting their greater international trade exposure, Yangtze River (YRD) and Pearl River Delta (PRD) regions reported 1% and 2% port throughput decline in July, while Bohai Rim region’s volume held up at 16 % yoy. We continue to observe divergent performance among the ports within the PRD region, with Guangzhou Port losing its strong momentum since mid 2011, reporting 6% yoy volume decline in July (vs. +8% in 1H12). COSCO Pacific, which holds 39% interest in Guangzhou Nansha Phase 2, attributes this to its refocus on higher-yielding international boxes, since Nansha Phase 2’s utilization already exceeds 90%. As a result, some domestic cargos might have gone over to Shekou which reported 20% yoy volume recovery last month. Overall, both East and West Shenzhen reported 1% yoy port throughput growth in July (vs. 2% in 1H12).

Lackluster port volume in 2H. Earnings risk from China Merchants
As discussed previously (“Focus on earnings quality and prefer those with visible catalysts”, July 31, 2012), both leading indicators we monitor (China industrial power consumption and Canton Fair Trade orders) suggested lackluster container port volume growth in 2H12. At the post-result investor meetings, HPHT said that China’s international trade growth could have been weaker than the reported 5% yoy in 2Q, without the boost of factory orders for the London Olympic Games. Given the macro uncertainties and retailers’ cautious stance, we do not expect significant volume pickup in the upcoming peak season. Though not conclusive at this point in time, our recent discussion with SIPG indicated that its port volume in the first week
of Aug averaged 90,000 TEU per day, comparable with 92,000 TEU in July.

We prefer HPHT and COSCO Pacific over China Merchants (144.HK; Neutral), for which we flag earnings risk in its interim results. Excluding container manufacturing and exceptional items, we forecast 4% port earnings decline in 1H12, dragged by 15% less contribution from SIPG affected by a 2-month delay in VAT by the gov’t and 12% yoy port volume decline in MTL HK. Our 2012-13E earnings estimates for China Merchants are 17%-19% below Bloomberg consensus.

RISH TRADER

>Grid failures – catalyst for power sector reforms?

News
As per the Ministry of Power, the grid failure in the Northern, Eastern and Northeast regions on Tuesday afternoon (July 31) resulted in power supply disruption in 22 states (out of 28) of India. These grids are inter connected and the grid failure today is the consequence of failure of the Northern grid on Monday. Consequently, 40% of capacity of NTPC (14,000MW) located in these regions ceased to generate power. The Ministry of Power and the Power Grid Corporation (PGCIL - which manages the grid) expect that power supply could be restored by evening and that the situation may normalize by Wednesday.

Analysis
While we are still waiting for the government’s official clarification, our discussion with power companies and various news flows suggest that the grid failure was due to 1) overdrawing power from states such as Uttar Pradesh and Punjab due to the sudden spike in demand, and 2) imbalance in grid frequency due to excess supply of power from the Western region. We believe these power outages (the worst in the last decade) underscores the urgency of reforms in the power sector mainly through: 1) addressing fuel supply issues which would drive higher utilization levels for generation capacities; and 2) cleaning the balance sheets of state-owned distribution companies which should help fund high cost power supplies and enable increased capex to strengthen the intra state transmission & distribution (T&D) infrastructure. As per Power Grid, total T&D spend for 12th plan (FY13-17) is budgeted at US$88bn - US$22bn for inter state transmission, US$10bn for intra state transmission and US$55bn for distribution. While we witnessed significant investments in the power generation segment due to private sector participation, and inter state transmission segment by PGCIL, we believe capex in intra state T&D segment is not keeping pace and could continue to be a drag on the entire value chain.

Implications
While we expect these grid failures to act as a catalyst for power sector reforms, we believe reforms in the distribution segment could take time as it involves 28 states and some are going to the polls over next 6-8 moths. Among stocks under coverage, we expect Adani Power, Tata Power and NTPC to benefit on the resolution of fuel supply issues and Crompton Greaves and Havells India to benefit on the increase of intra state T&D spend.

RISH TRADER

>PORTFOLIO STRATEGY: 2Q consolidation: Expect flat market, cyclical rotation

■ Expect flat market for 2Q, rotation out of global themes
A period of consolidation is likely after the region’s 14% ytd gain; we expect flat returns in 2Q (+2%). Performance will likely be driven by the interplay between macro newsflow and expectations. We expect market leadership to rotate out of global cyclicals back to domestic themes.


■ Allocations: restack driven by shifting risk/reward
We retain our overweight stance on China, but expect a bumpy period in the very near term until clearer signs of policy easing emerge. We raise Indonesia to overweight and India to market weight (“domestic” theme). We upgrade Australia to market weight; we may be early, but expect a cyclical upturn later this year and find valuations attractive. Hong Kong and Malaysia are underweight on valuation and a lack of catalysts. We are market weight Japan on a 12m view but see near-term outperformance.


■ Stock correlations falling: focus on relative value ideas
We emphasize relative trade ideas given falling intraregional stock correlations and a potential period of consolidation. Ideas include inexpensive ASEAN stocks vs. expensive cyclicals, banks vs. property, and tech hardware vs. semiconductors.


■ Positive strategic stance: higher 12-month target
Our 525 MXAPJ 12m index target equates to roughly 12x our 2013 EPS forecast of $44 and implies 19% upside from current levels. Our positive strategic view is driven by a recovery in EPS growth to 9% and 15% (in local fx terms) for 2012-13 and a moderate improvement in valuation from still inexpensive levels (11.4x forward P/E, 1.5x trailing book).


To read full report: PORTFOLIO STRATEGY
RISH TRADER

>Impact of the budget 2012 on bond yields

We think the budget will likely be marginally positive for bond yields. Our calculations show that the general government borrowing requirement in FY13 can be financed through growth in bank deposits, insurance, mutual, and pension funds. We assume that the government may allow a further US$5 bn of investment by foreign investors in government securities. We also assume that the RBI may do OMOs of the order of Rs300 bn (US$6.3 bn), less than a third of the OMOs in FY12. That said, current long-end bond yields are being artificially depressed due to the large OMOs at the long-end that the RBI has conducted, and would have been higher otherwise. Therefore, we think some fiscal consolidation, and monetary easing at the short end should lead to a steepening of the yield curve. We forecast 10-year bond yields to be in the 7.75%-8.00% range for FY13.

Risks to our expectations

The risks to our expectations of fiscal consolidation come from higher oil prices impacting fuel subsidies, higher phosphate and potash prices impacting fertilizer subsidies, and the economic slowdown persisting into the majority of FY13. Further, an early implementation of the Food Subsidy Bill could further expand the deficit.

The upside on fiscal consolidation comes from larger privatization receipts, including the reauctioning of 2G licenses, greater buoyancy in tax revenues, and a quick pass-through to consumers of higher oil prices—particularly in diesel and LPG. We assess the risks to our fiscal deficit and market borrowing targets for FY13 to be balanced at this stage.

Cross-country comparisons suggests that fiscal consolidation is an imperative

India’s general government fiscal deficit is one of the highest among growth markets. This is largely due to a low tax base, rather than too much spending. Hence, it is imperative that the government increase the tax-to-GDP ratio, and there are low-hanging fruits in increasing revenues. While we expect the FY13 budget to begin fiscal consolidation, we do not envisage the tough, structural reforms that are necessary to lead to a sustainable increase in the tax-to-GDP ratio. These would comprise broad-basing the tax regime, implementing the Goods and Services Tax, and improving tax administration to reduce the extent of the underground economy.


To read full report: BUDGET 2012

RISH TRADER

>SOBHA DEVELOPERS: High visibility, improved cashflow to drive valuations; CL Buy

What's changed
In 4Q, Sobha has launched two projects in Chennai and is on track to launch another residential project in Bangalore. With these, Sobha will have launched 11 mn sqft of residential projects in the last 6 quarters and is in the process of launching 8 mn sqft in FY13. These projects provide sales visibility of Rs78 bn or 16 quarters worth based on the recent quarterly run rate. We expect Sobha to pre-sell residential real estate of Rs16.5-17 bn in FY12 compared to Rs11.2 bn in FY11. This growth of more than 45% yoy is in contrast to the declines seen at most developers in FY12 ytd. We expect this large operational outperformance to be reflected in stock performance as well.


Implications
We see a significant jump in operating cashflow in FY13 on increased customer payments and stable/declining interest payments. Based on recent quarterly results, Sobha offers attractive cashflow yield of 12%. We expect operating cashflow to further increase to Rs3.7 bn in FY13 (operating cashflow yield of 14%), as (1) pre-sales momentum remains robust; (2) interest payments will decrease on lower debt level and interest cost, and (3) a large number of launches are planned. Key stock price catalysts include continued improvement in growth visibility as well as cash flow. In addition, our view of affordability and current property pricing levels in Bangalore is constructive.


Valuation
We reiterate our Buy rating (on CL).Our 12-m NAV based TP of Rs353 is unchanged. Sobha is trading at a 37% discount to our Mar-13 RNAV of Rs392. Ongoing and forthcoming projects provide post-tax cashflow visibility of Rs32 bn against current EV of Rs37 bn.


Key risks
Key risks are lower-than-expected volumes sold and slower execution.
RISH TRADER

VOLTAS: EMP division was strong adjusting for the onetime loss

■ What's changed
Voltas reported a Q3FY12 loss of Rs. 2.0bn after taking one-time impact of Rs. 2.8bn in the loss making Qatar contracts. As a result, 3Q EBITDA margins of 7.5% (350-400 bps above GS and Bloomberg consensus estimates) were more normalized. Revenue for the quarter at Rs 11.6bn also came in above our and consensus expectation, due to better than expected execution on the EMP orders. Order inflow at Rs 9.6bn was slightly above our expectation, with the order book growing 8% yoy partly due to order inflow and partly on account of restatement of the book on yrend foreign exchange rates.


■ Implications
Though the performance of EMP division was strong adjusting for the onetime loss, giving further visibility on normalized margins, we believe that margins are unlikely to go back to historical levels of 8-9% because recent
projects have been bid at lower margins: we expect FY13E EBIT margin of 6.5% for this segment. In addition, the EPS segment is also facing headwinds on the back of a change in the ownership of principal which may result in loss of some domestic contracts for Voltas: we expect revenue growth of 8% in FY13E. Increasing competition and a prolonged winter also leave little to expect from the UCP segment. These headwinds across all segments are the key reason for our Neutral rating.


■ Valuation
We incorporate the one-off in FY12E EPS, but increase EPS for FY13E-14E by 12-16% based on higher inflows, as a result increasing our PE-based 12-m fwd TP to Rs 113 (from Rs 97). The stock trades at 12-m fwd P/B of 2.3X, which in our view is justified given the muted growth: we expect FY11-13E revenue CAGR of 8% and ROEs of 21% vs. 39% over FY05-10.


■ Key risks
Downside risks: lower volumes in the UCP segment. Upside risks: pick-up in order inflows in the Middle East.


To read full report: VOLTAS
RISH TRADER

>PUNJ LLOYD: Reported Q3FY12 profit of Rs703 mn

■ What surprised us
Punj Lloyd reported Q3FY12 profit of Rs703 mn, which included Rs840 mn of accounting gains on write-backs from the deconsolidation of the Simon Carves subsidiary. Adjusting for this, profit for the quarter was below our estimate, primarily due to higher than expected contractor charges. However, revenue for the quarter at Rs27 bn was 7%/5% above GSe and Bloomberg consensus estimates. Order inflow at Rs42bn was 20% ahead of our estimate, resulting in closing order book of Rs283bn being up 31% yoy – highest growth among the stocks within our coverage. Auditor qualification has also come down by Rs5 bn on account of the ONGC dispute and stabilization of the political situation in Libya.


■ What to do with the stock
We retain our Neutral rating on the stock, as despite these positives of: (1) Strong order inflow over the past 9M, which is 124% above the entire FY11’s inflow; (2) reduction in auditor qualification; and (3) close to historical trough valuations, we continue to be concerned over: (1) uncertainty on margin stabilization; (2) our assumption that new projects will likely deliver lower margins being they are competitive bids and given the geographical spread; and (3) uncertainty over potential treatment of the outstanding auditor qualifications.


We adjust FY12E EPS to Rs3.96 from Rs1.59 based on Q3 results and the writeback, and increase FY13-14E EPS by 31%-39% on higher order inflow and stabilization of execution. We also increase our P/B-based 12m TP to Rs57 (from Rs48 at 0.5X FY13E P/B) – now valued at 0.6X FY13E P/B – justified in our view given our expected ROE of about 6% in FY13E. Risks: Upside: lower commodity price and interest rate; downside: lower order inflow and project delays.


To read full report: PUNJ LLOYD
RISH TRADER

>TATA STEEL: The worst may be behind, well poised for recovery; retain Buy

What's changed
Key takeaways from Tata Steel’s 3QFY12 results conference call: (1) Group steel deliveries at 5.84mnt (-5% qoq), were impacted by seasonal weakness and market uncertainties in Europe and floods in Thailand. (2) Europe business witnessed price declines on weak demand while higher priced raw materials impacted profitability, resulting in the company making significant mark-to-market provisions on stock. However, this implies that with steel prices recovering, there is low risk of further inventory write-downs. European demand has picked up with prices inching up. The company is targeting to retain FY13E volumes in Europe at FY12E levels, despite planned temporary closure of the BF4 at Port Talbot for rebuild. (3) India business saw stable prices with long product and downstream prices higher than previous quarters. Margins were compressed on account of higher raw material (imported coking coal) prices. (4) The company expects to commission the Jamshedpur brownfield expansion by March 2012 and
expects to add 1mn tons to current production levels in FY13. (5) European restructuring measures are progressing per plan, leading to about 2500 redundancies. (6) The Benga coking coal project in Mozambique is expected to commence despatches from March 2012.


Implications
We cut our FY12E-14E EPS by -1% to -11% on inventory write-down, and higher cost assumptions. But we believe the worst may be behind in both India and European profitability, and with the Jamshedpur expansion on track, the company is well positioned for a strong earnings recovery in FY13E.


Valuation
We reiterate our Buy rating and lower our 12-month P/B-based TP to Rs550 (from Rs552) on lower earnings estimates.



Key risks
Slower-than-expected demand recovery in Europe, higher-than-expected raw material costs

>Mothballing, capacity delays to lead refinery recovery and upcycle over medium term; Asian refiners key beneficiaries of higher cracks

Closures, project delays, demand outlook to drive upcycle in ’12-13E


While the market focuses on weak 4QCY11 results of refiners, we believe the global refining cycle is now heading for recovery and upcycle during 2012E-13E driven by 1) major mothballing of refineries in US/ Europe, 2) delays in new projects, 3) oil demand recovery from 2H12E. We also note there is only limited capacity addition after 2Q12E. Overall, global utilisation has moved up for all years: 2012E-14E. We believe the Asian refiners would be key beneficiaries of rising cracks while US/Europe refiners are plays on WTI-LLS and light-heavy oil spreads.


■ Supply side reaction to weak margins has picked up in US/Europe
We have witnessed announcements of mothballing of about 1.2 mb/d of refining capacity since Sep ‘11, of which 1.1 mb/d will take place until July 2012. In addition to this, we believe about 2.4 mn b/d of refining capacity in the western hemisphere remains under strategic review. This represents about two years of normalised oil demand growth globally.


■ Delay in new projects to support refining cycle over medium term
Moreover, we believe delays in new projects have become a central theme in the refining sector driven by delays in logistics, delays in acquiring land, obtaining clearances/permits and some tightness in engineering chain. We find more than half of the 1.5 mb/d likely delays for 2012E are in Asia.


■ Raise Singapore cracks for 2H12E-2013E, normalised 2014E margin
in line with oil forecasts; upgrade Asia refining stance to Attractive We raise our Singapore cracks forecasts for 2012E-13E by 20% and upgrade our refining sector stance to Attractive from Neutral. China will continue to have tight distillate supply over the medium term, in our view.


■ S-Oil, Thai Oil, RIL and Western are our favorite refiners
In Asia we upgrade S-Oil to Buy (CL), Thai Oil, RIL and GS Holdings to Buy, Caltex to Neutral; in US, Western Refining (CL), HollyFrontier, and CVR Energy remain our Buy-rated favorites. In Europe, we prefer the oil producers within the refining/integrated sector: RD Shell and BG (both CL Buy). Key risks: 1)Demand slowdown from weak macro, 2) oil price spike from low spare capacity in 2013E, 3) supply crunch from Iran tension escalation.


To read the full report: Global: Energy: Oil - Refining
RISH TRADER

>ITC: High FCF growth, robust pricing power; raise to Buy

Source of opportunity
ITC has corrected by 8% over the last 30 days, underperforming the sector by 4% and now trades 1SD below the sector aggregate on a 12-month forward P/E. We believe the correction has been led by broader market weakness and concerns on taxation given fiscal challenges. We view this as an entry opportunity since ITC enjoys tremendous pricing power which will help mitigate higher taxes and is not fully factored into the present stock price. We raise ITC to Buy with a revised 12-month target price of Rs232 (from Rs201) as we believe ITC is well protected in the current uncertain environment given improving cash returns and visibility of margins.



Catalyst
We expect ITC to continue to show robust yoy volume growth of 8+% in 2HFY12 as seen in 1Q-2QFY12. ITC enjoys strong pricing power, with key brands seeing retail price increases at a 9% CAGR over the past 5 years against inflation of 6.5%. For FYTD ITC has increased prices by 3% (6% yoy) allowing it leverage to balance increases in taxation. We believe ITC is least affected by input cost inflation or INR depreciation in our coverage.



Valuation
ITC trades at FY13E P/E of 20.2X compared with 25.1X for the sector. We raise FY12E-14E EPS by 1%-7% to factor in higher volumes for the cigarette business. Our 12m TP is set at 24X FY13E EPS, backed by Director’s Cut analysis. We raise our target multiple from 22X to factor in (1) increased cash generation and higher dividend payout ratio, (2) increased pricing power owing to strong brand portfolio and limited competition, and (3) improvement in CROCI to 50% in FY13E from 39% in FY11. We expect ITC cash surplus to increase to Rs61 bn in FY13E from Rs39 bn in FY11.


Key risks
(1) Increase in VAT rates over 20% by states and significant excise hikes,
(2) Stringent anti-smoking legislation, 
(3) Sustained FMCG losses.


To read the full report: ITC
RISH TRADER

>MARUTI SUZUKI INDIA: Cutting ests on continuing strike; longer term concerns on margins

What's changed

1) Due to the persistent labour strike at Maruti Suzuki’s Manesar plant and supplier Suzuki Power Train, we cut our volume estimates for Maruti Suzuki to 1.2mn units for FY12E (from 1.35mn), with further potential downside should the current impasse between labour and management continue beyond Oct’11. 2) We believe this will prevent the company from

taking advantage of new capacity at Manesar in the face of demand uptick driven by a) seasonally strong festive season, and b) launch of new Swift model in Aug’11. 3) Due to lower volume estimates, we cut our FY12-14E EPS by 13-15% (revised estimates 20% below Bloomberg consensus), and 12-m FY13E P/E-based TP by 9% to Rs1,071 (from Rs 1,173).

Implications

1) Industry-wide – The Society of Indian Automobile Manufacturers believes rising instances of labour unrest in the industry (e.g. tool-down strikes at MRF Tyres and Bosch India over the last two months) are also due to restrictive employment regulations in India (source: CNBC TV18).

As per a study published by the World Bank in Economic Times in Feb’07, there are 47 central laws and 157 state regulations dealing with labour markets, which are at times contradictory and overlapping, preventing efficient framing of employment contracts. 2) Company-specific – Any

worsening in labour disputes could potentially drive structural downside risk to Maruti Suzuki’s margins from higher staff costs in the long run, in our view. Maruti Suzuki’s current staff cost as a percentage of revenue is one of the lowest among peers in India and Asia.

Valuation

The stock is currently trading at 1.8x FY13E P/B vs global peers trading at 1.5x and 7-year historical average at 2.9x.

Key risks

Greater/longer-than-expected impact of labour unrest and competition; interest rate cycle; volatility in commodity and currency markets.

To read the full report: MARUTI SUZUKI

>Global Financial Events (October 10 - October 16, 2011)

China: In China, we expect CPI inflation to remain elevated in September, while exports growth is likely to show moderation. On the central bank policy front, we expect the Bank of Korea and Bank Indonesia to stay on hold and the Monetary Authority of Singapore to shift to a neutral SGD stance. In the US, retail sales would be key to watch for the latest trends in consumer spending.

India: We expect industrial production (IP) growth to remain weak at 4.5% yoy in August on the back of the poor performance of various activity indicators like the Infrastructure Index, the PMI etc.

Korea: We do not expect the Bank of Korea to raise the policy rate in the October Monetary Policy Committee meeting, given the elevated financial stress in Europe.

Singapore: We now think that an even greater reduction of the slope to a 0% appreciation

stance is the most likely scenario, in light of the increased downside risks to growth and given where the SGD NEER is currently trading.

To read full report: GLOBAL FINANCIAL EVENTS

>INDIA: Financial Services

Banking Sector – In good shape
We recently hosted an Indian Financials road trip, where investors hadextensive interaction with 25 corporates. Our key takeaways:

(1) Credit growth will likely accelerate and will be more broad based in 2H as corporates start drawing down on approvals,

(2) Deposit growth which has been sluggish so far (not indicted to be a concern) will improve as banks have raised deposit rates,

(3) Banks remain optimistic on CASA targets despite a rising rate environment,

(4) Not all banks were confident of margin improvement given less pricing power, which they expect to return with credit growth,

(5) Banks expect NPLs to rise in FY2011 on account of agri debt, and end of moratorium period for restructured assets, both of which could lead to some more slippage, though remain manageable and improve in FY2012,

(6) HR issues seem to be the major concern for PSU banks as they see a large number of senior staff retiring as well as debate about compensation packages to retain and attract talent. Branch expansion and shorter branch breakeven seem to be key drivers of growth for private banks to increase profitability.

Insurance Sector – Jury will be out for some time
Insurance industry interactions were more tepid in tone with the jury still likely to be out for some time on how recent regulations would impact growth and margins. Companies are currently in the process of calibrating strategies – product mix, and focus on cost, productivity and persistency to minimize impact.

From our interactions it emerged that insurance companies expect volume growth to be lower in 2H given a higher base, lower commissions and retraining of agency force to sell new products. Most companies we interacted with indicated a potential shift in product focus to traditional
products from ULIP, though these traditional products along with distributors may potentially be the next target area for the regulator.

We expect margins to fall to 12-15% from 19-20% pre-regulatory changes even despite the potential significant cost cuts planned by companies.

Most companies seem comfortable on capital at least for FY2011. Potential equity issuances are now not on the horizon.

To read the full report: FINANCIAL SERVICES

>BGR ENERGY: BTG JV with Hitachi supports growth prospects; maintain Buy

What's changed
BGR has signed today two JV agreements with Hitachi for design and manufacturing of Boiler-Turbine-Generator (BTG) sets for Thermal power plants in India. These JV’s would involve a total investment of Rs4,400cr (BGR’s share at Rs3,200cr) and would have capacity of c.4,000MW starting from end-2012. This arrangement is on expected lines in terms of total project costs and planned capacities, but slightly ahead of our expectations in terms of aimed commissioning.

Implications
The signing of the JV reiterates our view on the company’s ability to secure such a partnership and also its ability to win future orders in the super-critical thermal sets category. However, the impact of any such orders on revenues would only be visible starting FY13E as most of these orders will be for commissioning of plants in the later half of XIIth five-year plan (2012-2017). So, our current 12m TP of Rs874 (based on 18.6X P/E on average of FY11E and

FY12E EPS) does not include these subsidiaries.
BGR’s share of investment would mean an equity capex of Rs960cr (assumed 70:30 D/E) spread across three years. Based on our cash flow estimates, we believe the company is adequately funded to make this capex from internal accruals without need for external fund raising.

Valuation
BGR currently trades at FY12E P/E of 14.8X, still at significant 33% and 26% discount to FY12E P/E of bigger peers like BHEL and L&T. Given our expectations of better growth and margin profile for BGR, at 39% EPS CAGR over FY10-12E, vs. 2-yr median EPS CAGR of 17% for its Indian peer group, we continue to view current valuations as attractive and reiterate our Buy rating. We fine tune our numbers for FY11E-FY13E on the back of earnings.

Key risks
1) Relatively new business in BTG space, 2) aggressive bidding for orders.

To read the full report: BGR ENERGY

>INDUSIND BANK: Above expectations: 1Q strong; expansion to drive growth

What surprised us
IndusInd Bank reported 1QFY11 net profit of Rs1,186mn (+21% qoq, +37% yoy), 5% ahead of our estimate. This was driven by: 1) 77% growth in NII to Rs2.96bn (10% ahead of our estimate) on margin expansion (NIM at 3.32%, +13bp qoq), helped by improvement in both corporate, retail yields and higher volumes (+5% qoq, +31% yoy, driven by growth in the commercial vehicle segment), and 2) non-interest income (excluding capital gains) came in 15% ahead of our estimate, up 64% yoy due to higher fees from trade related as well as third-party product distribution. However, costs came in 13% above our estimate (+36% yoy, +10% qoq) as the company added c. 450 employees and 14 new branches during the quarter. INBK also booked higher loan loss provisions (49% above our estimates, +42% yoy), increasing coverage ratio to 70%. Net NPLs were at 0.4%, down 19% qoq; gross NPLs grew to Rs2.75bn (+14% yoy, +8% qoq) and now stand at 1.3% of advances.

What to do with the stock
We raise our EPS estimates for FY11-13 by 3%/2%/1% to factor in higher NII, fees and higher expenses on aggressive branch expansion. We raise our Camelot-based 12m target price to Rs225 (from Rs210) to reflect higher earnings estimates and rolling forward BVPS by one quarter. We remain structurally positive on IndusInd Bank and reiterate our Buy rating.

Key risks: High dependence on wholesale deposits, frequent capital raisings to achieve growth

To read the full report: INDUSIND BANK

>Indiabulls Real Estate Limited (GOLDMAN SACHS)

What's changed
Indiabulls Real Estate’s FY10 results provided an update on progress with construction activity. This was encouraging in our view as it indicated that IBREL has about 9 mn sq ft under construction in cities including Ahmedabad, Chennai, Gurgaon, Hyderabad, Madurai and Mumbai (Panvel). It plans to complete a significant proportion of these projects and recognize about Rs10.25 bn of revenue in FY11.

Implications
We upgrade revenue/EPS forecasts for FY11E-FY12E as we expect P&L revenue recognition based on percentage completion to be faster than what we had previously anticipated. We raise EPS by 62% to Rs6.91 (from Rs4.26) for FY11E and by 22% to Rs10.85 (from Rs8.92) for FY12E. Although we raise EPS, our 12-month target price is unchanged at Rs214 reflecting a lower than expected FY10-end net cash position. While visibility on IBREL’s earnings may not be as high as some of its peers given the nascent stage of projects, we believe the market may get better evidence of improving execution over the next 12 months, which could help the stock re-rate. We maintain our Buy rating. We have updated our FY10 numbers for the preliminary information released by the company in its press release. We also introduce FY13 estimates.

Valuation
Our target price is set at a 30% discount to FY11E RNAV, which is at the deeper end of the 10%-30% discount range we use for our coverage. IBREL currently trades at close to a 45% discount to FY11E RNAV.

Key risks
Downside risks to our view include limited signs of improvement in the pace of residential sales and office leasing, execution delays with real estate and power and low earnings visibility, aside from policy tightening.

To read the full report: INDIABULLS REAL ESTATE

>Is this the ‘BRICs Decade’?

The last decade saw the BRICs make their mark on the global economic landscape. Over the past 10 years they have contributed over a third of world GDP growth and grown from one-sixth of the world economy to almost a quarter (in PPP terms). Looking forward to the coming decade, we expect this trend to continue and become even more pronounced.

The last decade saw the ‘arrival’ of the BRICs story. Here, we take a look at the next chapter—at how the BRICs and their relationships with the rest of the world will change in their second decade. We expect many of the trends we have already seen to continue and become even more pronounced. Our baseline projections envisage the BRICs, as an aggregate, overtaking the US by 2018. In terms of size, Brazil’s economy will be larger than Italy’s by 2020; India and Russia will individually be larger than Spain, Canada or Italy.

In the coming decade, the more striking story will be the rise of the new BRICs middle class.
In the last decade alone, the number of people with incomes greater than $6,000 and less than
$30,000 has grown by hundreds of millions, and this number is set to rise even further in the next 10 years. These trends imply an acceleration in demand potential that will affect the types of products the BRICs import—the import share of low value added goods is likely to fall and imports of high value added goods, such as cars, office equipment and technology, will rise.

In the past decade, BRIC equity markets outperformed significantly because the strong growth of these economies surprised many and the BRICs themselves came into focus. At the same time, valuations were low relative to many major markets in 2000. Now that the BRICs story is better known, expectations are higher and the valuation gap is much smaller, the same degree of outperformance seems much less likely, even if the BRICs deliver solid returns.

To read the full report: BRIC'S DECADE

>The World Cup and Economics 2010

Welcome to our 2010 book on the World Cup and Economics, our fourth since the 1998 finals in Paris. As always, we present this as a fun piece, your companion to the competition, to be perused before, during and after the event. In addition, it might just give you some new ideas on how to benefit from our exciting, changing world.

We hope the book is as popular as past editions. To aid your enjoyment, we have kept some old favourites and added some new features. Once more, in addition to the work of our prodigious economists around the world, we have contributions from some very famous guests.

We include a very exciting contribution from Adrian Lovett of 1GOAL, a campaign designed to raise basic educational standards dramatically in the emerging world through the vehicle of the World Cup. We are happy to add our name to this effort.

Former South African Central Bank Governor Tito Mboweni discusses the host nation’s chances, aided by the football analytical skills of his nephew! Russian Deputy Prime Minister Shuvalov tells us what it is like for Russia not to be in South Africa—and expresses his hopes for a World Cup in Russia in 2018. We also have a very interesting contribution from one of our former partners, Carlos Cordeiro, on why the 2022 competition should be held in the US.

And, to keep it all fair and balanced, Andy Anson, CEO of England’s 2018 World Cup bid, states his case.

We then include a contribution from Kevin Roberts, editorial director of Sports Business Group, who offers his views on the possible hosts in 2018 and 2022. And we have a piece about Euro 2012, to be held in Poland and Ukraine, written by our own Magdalena Polan.

Many of our country pages have been written by guests, including Otmar Issing on Germany, Mayor of Rio Eduardo Paes on Brazil, Edwin van de Sar on the Netherlands, a group of football-loving FX traders on Italy and Tudor’s Angel Ubide on Spain.

In addition to our external contributors, my colleagues from around the world offer their insights into the economies of the participating nations, as well as some football thoughts. And we have a ‘special’ entry on Ireland, which perhaps should be there!

Back by popular demand is a 2010 version of the World Cup Dream Team, selected by you the clients (and GS staff worldwide). We have narrowed down a broad list of 121 players to 11, based on the nearly 3,000 votes submitted, which vastly exceeded the numbers who voted in 2006.
As usual, we also tentatively suggest the likely semi-finalists—always a highly contentious move. We would point out to those annoyed and irritated by our selections that we did name three of the four semi-finalists in 2006 and in 1998 (the least said about 2002, the better)… We complete the book with some interesting World Cup trivia.

We hope you enjoy our World Cup and Economics 2010!

To read the full report: THE WORLD CUP AND ECONOMICS

>End game for the RIL-RNRL saga in sight? Revisiting the scenarios

■ Court case outcome likely expected in next few days

According to Reuters, the final verdict on the Reliance Industries (RIL) vs. Reliance Natural Resources (RNRL, not covered) gas dispute is expected in the next few days, prompting us to revisit the possible scenarios and their impact on RIL, RNRL, as well as Reliance Power (RPWL) and Reliance Infrastructure (RELI). We have currently built in a midpoint gas price of US$3.27 for the gas supply from RIL to RNRL from FY12E onward as our base case and have assumed that the government would extract its share of D-6 revenues at its directed gas price of US$4.2/mmBtu from RIL.

■ Favorable result for RIL – anything better than previous judgment While we have assumed a midpoint price of the disputed gas volumes, recent stock movements suggest the Street is largely pricing in a repeat of the previous court judgment, in which RIL was asked to start selling gas immediately at US$2.34/mmBtu. Therefore, 1) not having to supply gas to RNRL, or 2) at a gas price of US$4.2/mmBtu, or 3) supply cheap gas only upon completion of RPWL’s power plants would all be positive for the stock, in our view. Gas price of US$4.2/mmBtu implies upside of Rs17/sh for RIL’s D-6 valuations. Assuming no gas supplies to RNRL and hence to RPWL’s gasbased plants, we estimate RPWL to have downside of about 50% from current market price. Though RELI would be indirectly impacted owing to its 45% stake in RPWL, we believe this is already reflected in RELI’s share price.

■ Favorable result for RNRL – immediate gas as at US$2.34/mmBtu: Assuming RNRL wins a direct verdict and RIL has to start supplying gas to it immediately at US$2.34/mmBtu, we estimate a negative impact of Rs40/sh to RIL – D-6 valuation impact of Rs20/sh and E&P exploration impact of Rs20/sh. We estimate RIL’s FY11 EPS would decline by 7.5%. For RPWL, we estimate upside of 16% vs. 38% for RELI from current levels, as we believe some benefit of cheap gas is already reflected in RPWL’s share price. However, a verdict in RNRL’s favor would create uncertainty over RIL’s existing gas sales agreements with power companies like NTPC, Lanco Infratech, GVK and GMR.

■ Buy RIL (on CL) and RELI, Sell RPWL for potential court outcome

With market’s low expectation on positive outcome for RIL, we think the stock would benefit from removal of court case overhang. We continue to prefer RELI over RPWL given its infrastructure/power exposure and inexpensive valuations.

To read the full report: RIL-RNRL