>ICICI BANK (JP MORGAN)

• Back to growth: ICICI Bank, after a cautious approach to balance sheet growth for the last six quarters, is kicking back on the growth track. Loan sanctions have picked up especially in the infrastructure segment and management expects this to translate into robust loan growth over next 6-9 mnts. Also ICICI is getting back into the auto and home loan segments. Loan book contraction for the international book would also not be as severe as expected earlier but refinancing costs have not come off enough for the bank to look again at growing the international book aggressively. Overall loan book is expected to be flat for FY10 and grow in-line with the system credit in FY11.

• Margins to keep improving: Domestic margins are expected to improve to ~3.0% from 2.8% due to increasing CASA (maintain 33- 35% levels) and positive impact of deposit re-pricing though loan pricing would dilute some of the benefits. Margins for the international book are likely to stay ~0.5% in the near term but improve over the medium term (next 2-3 yrs) as re-financing costs come-off. Overall margins would continue to improve due to increasing domestic book mix and higher CASA margins.

Visibility improving, leverage to high growth - ALERT

• Worst over for asset quality: Delinquencies have likely peaked out in 1H10 and expected to be lower going forward. Management expects greater than Rs12bn of slippages per qtr. Provisioning could remain elevated for next 3-4 qtrs to comply with the RBI's 70% provisioning requirement.

• Insurance market share improving. ICICI’s 74% life insurance subsidiary, ICICI Prudential is recovering market share after a sustained decline over the past year or so. The growth outlook remains positive, despite the restrictions on distributor payouts.

• Capital more than adequate? Management expects ROAs to normalize to industry levels over the medium term but ROE normalisation would be gradual as natural leveraging up would take
time, and management is not very inclined to leverage up through higher payout or other measures of aggressive capital deployment.

• Fee income and costs: Management expects fee income growth to recover with credit growth and FY11 fee income could surprise with a higher than balance sheet growth. Operating costs have declined by ~15% in 1HFY10 but branch expansions and possible salary hikes could lead to nominal costs increases.

• Overall, ICICI is returning back to growth after a period of consolidation and we believe ICICI offers leverage to high growth with improving profitability and asset quality.

To read the full report: ICICI BANK

>INDIAN AIRPORTS (MOTILAL OSWAL)

■ Delhi airport overtakes Mumbai airport to emerge as Largest airport: During YTD FY10, passenger traffic handled at Delhi airport stood higher than Mumbai airport at 12.2m (vs 12.1m for Mumbai airport). In FY04, Delhi airport had 22% lower passenger traffic vs Mumbai airport, which declined to 2.5% in FY09.

■ September-09 traffic growth robust, third consecutive month of double digit growth: In September 2009, passenger traffic at Delhi airport grew by 21% YoY and for Mumbai airport at 15% YoY. For Hyderabad airport, the growth in passenger traffic stood at 15% YoY. For 2QFY10, passenger traffic at Mumbai airport grew by 10% YoY and 20% YoY for Delhi airport. The difference in growth rate is attributable to International passenger traffic, which grew by 4.8% YoY for Delhi airport, vs decline of 0.8% YoY at Mumbai airport for Sep-09. Key thing to note is that Delhi airport has been recording positive international traffic growth from last 5 months, vs de-growth at Mumbai airport over the same period.

■ All-India August 2009 passenger traffic MoM run-rate improves, YoY growth driven by low base: In August 2009, total passenger traffic grew by 17% YoY to 9.8m, comprising of domestic passenger of 7m (up by 22% YoY) and international passenger traffic of 2.8m (up by 6% YoY). This represents second consecutive month of double digit growth, supported by the lower base effect, as passenger traffic reported first YoY decline in July 2008. However, there has been improvement in MoM run-rate. The average monthly run rate has improved from sub-9m
passengers/month to 9.5m+passenger/month.

■ ATMs grew by 6% YoY, Cargo growth at 8% YoY: In August 2009, total Air Traffic Movement (ATMs) stood at 111k up by 6% YoY vs passenger growth of 17% YoY. For Delhi airport, ATMs grew by 30%, vs 21% growth in passenger traffic; while for Mumbai airport ATMs de grew by 1.1%, vs passenger growth of 15%. Hyderabad airport witnessed 3.2% growth in ATMs, vs passenger traffic growth of 14%. All India air cargo traffic in August 2009 was up 8% YoY to 160k tons, comprising of 21% YoY increase in domestic cargo and 2% YoY increase in international cargo.

To read the full report: INDIAN AIRPORTS

>Priced to perfection (MERRILL LYNCH)

Expect correction in Q1; year of consolidation; index target 18,000
2009 has been a big surprise and is on track to be the best year for markets since 1991. The surprise for 2010 can be that it is a year of consolidation rather than the “boom-bust” years seen recently. The last time we had a single digit move in the market was in 2002. While liquidity will likely remain easy for an extended period of time and earnings and the economy are recovering, we think valuations are pricing in a lot of good news. We expect markets to correct in Q1 led by:

1. Rising inflation: We think inflation can hit 5% by December 2009 and get close to 8% by March 2010. Rising inflation has been historically negative for markets on 5 of 7 earlier occasions.

2. Exit policy by Government/RBI: We expect the RBI to start hiking CRR/repo rate in January and the Government will likely start phasing out its stimulus in the budget in February through roll-back of some excise duty cuts.

3. Burgeoning supply of paper: We see supply of paper of nearly $7-8bn (including Government disinvestment) in Q1, which will absorb the surplus liquidity. The de-leveraging by corporates will also mean lower sustainable RoEs.

Government policy key to market
We think the timing of the “exit policy” of Governments/central banks, both in India and developed markets, will be key to markets. The pace of reforms by the Indian Government (disinvestment, infrastructure, GST) will drive re-rating.

Can markets hit their all-time highs?
If surplus liquidity conditions prevail, there is a possibility of bubble like valuations some time during the year. However, we don’t expect this to sustain. Based on historical V-shaped recoveries, markets have fallen 30-40% after hitting earlier highs.

Sector strategy – domestic plays still
Global cyclicals account for 45% of our EPS growth in FY11. However, we still remain O/W domestic plays – banks, infrastructure and autos are our biggest bets followed by pharma.

Most preferred stocks: SBI, Mahindra & Mahindra, Dr Reddys.
Least preferred stocks: Ambuja, Infosys, NTPC

1. Liquidity vs. valuations – Sensex target 18,000
2009 has turned out to be a big surprise. It is on track to be the best year for markets since 1991, though after a disastrous 2008.

Surprise of 2010: A market consolidation
So what can be the surprise for 2010? We expect the “surprise” in markets in 2010 to be a year of consolidation rather than the “boom-bust” years we have got used to over the past few years. The last time we ended a year with a single digit move (either positive or negative) in the market was in 2002 and 2004 was the last year with a move of under 25% in the markets. Our Sensex target of 18,000 for the Sensex prices the market at 15x FY12E earnings. The positives for the market are well flagged:

1. Global liquidity is likely to stay easy for an extended period of time and provides the backdrop for the rally in equities.

2. The Indian economy is recovering and we expect GDP to grow at 7.8% in FY11 vs. 6.2% in FY10. Industrial production growth is likely to accelerate to double digits from a low of 3% early this year.

Can market hit its all time high in 2010?
This is not our base case. But if the easy liquidity conditions globally lead to an asset bubble, we could get equity markets hitting the old highs. However, we do not think the markets will sustain at these levels in 2010.

Even if we look at past history on the 2 occasions that market had fallen more than 50%, it took 294 and 571 days to hit the old peak. This means we should hit the peak between May 2010 and June 2011. Interestingly, on both these occasions, the markets gave a 30-40% negative return in the next 6 months.

Government policies important determinant of markets
We think the Government policies will be an important determinant of markets in 2010.
1. The global central banks and the Governments in developed markets will be a key driver of global liquidity.

Global recovery, no double dip
Global recovery in 2010 supports Indian growth
BofA Merrill Lynch economists expect a global recovery in 2010. We do not share concerns about a double dip, given that economic policy should remain accommodative of recovery. Global GDP growth is forecast to turn around to 4.3% in 2010 (and 4.5% in 2011) from a contraction of 0.8% in 2009 (Table 8). The US, in particular, is expected to see a “square root” recovery to 3.1% in 2010 (and 3.3% in 2011) from the particularly sharp GDP contraction of 2.4% in 2009.

To read the full report: INDIA STRATEGY

>YES BANK: Next generation bank (CLSA:)

A differentiated business model that focuses on niche sectors and aims to maximise revenue per customer by effective cross selling, has enabled Yes Bank to deliver profitable growth in past 5 years. We expect growth momentum to remain strong and earnings to grow at a Cagr of 32% over FY09-12. Building of strong CASA franchise will be important to reduce liquidity risk in the present wholesale funded model. Healthy growth and a consistent track-record, with RoEs of +20%, will support premium valuations. BUY to our target price of Rs335, implying 31% upside.

Unique banking model promises high growth potential
Yes Bank (Yes) focuses on select sectors where it develops domain expertise and offers a full range of financial products / services to companies in those focussed sectors. Its unique business model has helped it to deliver +75% earnings growth over past 3 years with its domain expertise helping better ‘credit risk evaluation’ (in the recent economic downturn Yes had the lowest proportion of stressed assets). Rising demand for non-vanilla corporate loans will help Yes to grow at a cagr of 39%, over the twice sector growth rate.

Earnings to grow at a cagr of 32%, sustainable RoE of +20%
Yes’ multiple relationship model, its presence across the value chain of niche sectors will enable it to earn a healthy RoA of 1.4-1.5% (sector average ~1.1%). Improving share of CASA deposits, higher share of non-vanilla loans will help Yes to sustain NIMs at +3%, higher than the sector.. A wide product and service offering will also enable it to have higher contribution from fee income, supporting the higher RoA. Earnings estimated to grow at Cagr of 32% (FY09-12), sustainable RoEs to be +20%.

Improvement in liability franchise would be the key
Yes is highly dependent on wholesale funding, making it vulnerable to the volatility in liquidity conditions. Over the next 3-5 years, we expect CASA ratio to improve to 200-300bps annually led by (1) more than doubling of branch network, (2) improving branch efficiency and (3) build up of retail deposit franchise. Given its aggressive growth plans, Yes will need an estimated US$500mn in capital in next 4 years.

Valuation premium to sustain; Buy
We believe that Yes’ valuations will track those of its peers (HDFC Bank) in their initial days of operation supported by a healthy growth trajectory, higher profitability and consistent delivery track-record. Our one year price target of Rs335 is based on 3.5x one year forward price/ adjusted book. BUY.

To read the full report: YES BANK