>FUND MANAGER SURVEY GLOBAL (MERRILL LYNCH)

■ Growth up+ risk down+ defensives in = another opportunity
The July FMS shows how a modest correction in equity markets together with a larger one in commodity prices punctured investor confidence and prompted a hasty retreat back toward defensive sectors. This nervous response came despite growing conviction that we are through the worst of the economic problems and still rock-solid faith in the GEM story. It does suggest that any surprise in Q2 results could see markets being squeezed upward into H2.

■ Past-the-worst conviction rises; inflation scare eases
Investors are convinced that global growth will improve (+79% vs. 78% in June) and that this will lift corporate margins & profits (a net 51% see improvement over the next 12 months). However, a downtick in risk appetite saw a very skittish retreat back into defensive areas. That is, apart from GEM assets, which remain famously popular; and this despite China optimism coming off the boil, only to be replaced by Indonesia - now the most O/W GEM. Meanwhile, inflation fears eased as commodity & oil prices tumbled (a net 14% now see higher inflation, down from 19%) and this stabilised views on how quickly interest rate are likely to rise.

■ Asset allocators skittish as risk appetite falters
Asset allocators are in wait-and-see mode as overweights in cash (+9%) and equity (+7%) were trimmed, with bond U/W easing to -13% from -15%. Risk appetite fell, with our composite indicator standing at 36 from 38. Average cash balances saw a very sharp jump to 4.7% (vs. 4.2%), with only 12% of investors now reporting higher-than-normal risk-taking in portfolios. Hedge funds are more
active, with leverage rising to 1.2, but net long exposure fell to 23% (from 35%).

■ Equities good value, but it’s GEM vs. the Rest of the World
Equities are viewed as undervalued by a net 8% of investors, while a net 30% say bonds are expensive (up from 22% in June). But it’s not about value: a net 8% of respondents view GEM as overvalued and yet it is still seen as the only game in town, with nearly half of all investors saying it is the region they want to O/W on a 12-month view (vs. -30% for Eurozone, the lowest reading ever).

■ Retreat to defensives provides chance to re-load
Having fleetingly been U/W all big 4 defensive sectors last month, investors turned on a sixpence in July with telecom, pharma and staples all recovering strongly, at the expense of materials, energy and industrials. The degree of optimism on EM vs. Eurozone looks dangerously extreme and, more broadly, the retreat to the defensive positioning of February, in our view, provides another
opportunity to reload on cyclical over defensives trades on the expectation of confirmation of real economic growth emerging across all regions from Q3.

To see full report: FUND MANAGER SURVEY

>INDIA CONSUMER (MACQUARIE RESEARCH)

Stay on the front foot

After the rally − what next?
The recent rally in the consumer discretionary and retail stocks in India was breath-taking. In some cases, stocks are up as much as 200% in three months. Stocks are (naturally) taking a breather at this time. The sharp rally makes a defensive stance look more compelling, in our view. We however continue to believe that this as a good time to accumulate ‘beta’ from a longer-term perspective. Staples may outperform by holding ground in a falling market, but most (notably HUVR) seem too expensive to be able to deliver material absolute performance. Macquarie’s regional consumer analyst, Mohan Singh, in his 7 May 2009 flyer, “Going cyclical”, noted that “the excess premiums that consumer staples companies enjoyed in 2H08 due to the credit squeeze and declining consumer confidence levels appear to be dissipating”. This Asia-wide theme was clearly applicable in India.

2010 will see the resurgence of the urban consumer
The last twelve months have been the year of the rural consumer. While samestore- sales (SSS) growth and demand for high-end discretionary goods came under pressure, rural consumption growth was resilient. A good monsoon in 2008 and pump priming by the government helped demand for low ticket items, helping staples companies deliver 15−20% top line growth. Our conversations with consumer companies suggest that the buoyancy of rural demand is likely to
continue driven by continued support from the government unless the monsoon fails. In any case, we believe that the largest delta on company sales growth is likely to be delivered by a resurgence of growth in urban consumer demand.

GDP growth in India has surprised positively, coming in at a healthy 5.8% for 1Q09. Macquarie India economist (Rajeev Malik) has since upgraded his GDP growth forecast for FY10E and FY11E to 7% and 7.5%, respectively. This is likely to spur demand growth for discretionary goods and SSS growth, which is also likely to get a boost in 2H FY10 due to a low base effect. In fact, the first signs of a demand revival have started showing up in reported SSS numbers.

Focus on stocks with upgrade potential
To play the theme of GDP growth recovery, we would recommend that investors focus on stocks which are leveraged to economic growth.

• Demand perspective: A recovery in GDP growth would lead to upgrades in sales forecasts for Pantaloon (driven by SSS), UNSP and Marico (demand for discretionary products) and ITC (hotels and high-end cigarettes).

• Cost perspective: After reaching their worst point in 4Q08, debt and capital markets have revived. The de-leveraging story is playing out in the case of UNSP and Pantaloon (see individual notes for further details).

For investors who prefer a defensive stance after the recent rally, we highlight stocks with some element of growth and upgrade potential. We would pick ITC (notably after the union budget) and Marico in the mid cap staples space.

UNSP stands out amongst beverage/consumer companies with a discretionary element. Pantaloon is our top retail sector pick. In both cases, we expect earnings upgrades and triggers on the back of a stake sale and capital raising.

To see full report: INDIA CONSUMER

>RELIANCE INDUSTRIES (KARVY)

Resilience through vertical integration

Reliance Industries Ltd (RIL) continues to move forward on growth trajectory with the commencement of gas production from Krishna Godavari (KG) Basin and commissioning of the new refinery. We believe that there could be further positive news coming from exploration & production (E & P) business, which would act as the catalyst for the stock. The company's gas based petrochemical plant helps it to weather the global downturn. We rate the stock as an Outperformer with target price of Rs 2,169.

INVESTMENT ARGUMENT

E & P business has taken off with the KG Basin gas production: RIL operates the block KG-D6 in the Krishna- Godavari basin, which is the largest natural gas discovery in India. The company commenced production of natural gas from KG- D6 block on April 2, 2009. The exploration business is expected to give a boost to the valuation of the company as the blocks under exploration / yet to be explored are likely to have significant reserves of oil and gas. We expect the exploration and production (E & P) business to contribute at least 30% of the company's total EBITDA after the commissioning of KG basin gas production.

Refining earnings to be boosted once the new refinery stabilizes: After the merger of RPL with RIL, RIL's refining capacity has increased from 33 mn tonnes per annum to 62 mn tonnes per annum. The new refinery i.e. RPL has a distillation capacity of 580,000 barrels per day (bpd). Such a large scale of operations should provide economies of scale, leading to a relatively lower operating cost base. The new refinery has been designed to have a Nelson Complexity Index of 14.0, which makes it amongst the most complex refineries in Asia. Since the new refinery is located in special economic zone (SEZ), it will have significant tax benefits.

Petrochemical cycle down, but gas based cracker limits the impact on RIL: Though the global petrochemicals cycle is down, gas based petrochemical plants are less affected due to their lower input cost as compared to the plants, which use naphtha as the input. Gas based plants have the cost advantage as the gas price is generally 0.5x of naphtha. The merger of IPCL has helped RIL in acquiring a gas based cracker having vastly superior economics of these plants as against naphtha-based ones. RIL is also building the largest integrated petrochemical complex based on gas as a feedstock with capacity of 2 million tonnes per annum at Jamnagar SEZ. The project is expected to be commissioned by FY2010-11.

Valuation: RIL is currently trading at a P/E of 11.2x and EV/EBIDTA of 7.8x based on our FY2011E estimates. We have analyzed one year forward multiples of P/E, EV/EBIDTA and P/BV for RIL in the last firve years. Based on the same, we arrive at target price of Rs2,169. At our target price, the stock would trade at one year forward P/E of 13x and EV/EBIDTA of 9x based on FY2011E estimates, which is in line with its normal range except for the brief spurt between June 2007 to January 2008. We rate the stock as an Outperformer.

To see full report: RELIANCE INDUSTRIES

>INDIAN CEMENT (HSBC)

Examining inter-regional dynamics

• Market share of cement players varies across India. Inter-regional dynamics play an important role
• Players in the more fragmented South are the major losers; our top sell ideas are India Cements and Madras Cements
• Our top pick is Shree Cement for its focus in the North and Central regions

We analyse market share trends and capacity addition. Our analysis shows that the divergence in market share trends across regions will persist. Cement companies in North and Central India should be able to retain market share despite potential overcapacity, which will provide some pricing discipline. But we expect the southern market to become fragmented.

We also examine the role of inter-regional dynamics. In the South, moderating demand growth and capacity additions hint at overcapacity. This may cause increased supply of cement to the West, which meets 20% of its requirements from the South. Further new capacity in the
North may also result in volumes being pushed westward.

Forecasts adjusted. We have revised FY10e EBITDA for our coverage universe in a range of -7% to 31%, primarily to reflect change in our volume and price assumptions.

Target prices upgraded; ratings unchanged. We move to average historical EV/EBITDA valuation from trough. We think demand positives are in the price and the sector will lose momentum from here. Maintain UW(V) on ACC, Ambuja, Madras and India Cements.

To see full report: INDIAN CEMENT