>INFO EDGE (EDELWEISS)

■ Strength in one of the fastest growing internet markets
Internet is increasingly becoming an attractive medium for advertising, recruitment, and e-commerce, and is still at an embryonic stage in India. India’s internet penetration is low at 7% (81 mn internet users), but fastest growing across Asia. This offers an attractive opportunity to monetise a credible internet based business model. Info Edge (IEL) with lead in the online recruitment market (through Naukri.com) and presence in the online classified space has the potential to establish a market leading position and grab large pie of increasing online adoption.

Innovation’s the name of the game

■ Hiring to gain steam after a lull on back of improving corporate health
The recruitment industry is highly correlated to the economic health and growth of the corporate sector. As various businesses come out of the recent slowdown, leaving behind issues like cost cuts, stagnant expansion plans, and layoffs, the focus is back on growth. We expect hiring in financial services, retail, and infrastructure sectors to pick up and, more importantly, in the IT sector (major vertical for IEL) as utilisation has reached peak levels. We see IEL as a direct beneficiary of this trend.

■ Network effect playing out for Naukri.com
Strong growth in new resume registrations (and overall database) has attracted higher number of recruiters at Naukri.com, which in turn has been attracting more new candidate resumes creating a self propelling growth cycle. IEL’s current resume database stands at ~19mn and is growing impressively at a pace of 12,000 new daily additions. The company’s synchronised effort to constantly improvise user interface, algorithms for better job searches, and relevant profiles has led to it achieving and sustaining lead in the recruitment market, and helping it command pricing. Almost 15% of its workforce is dedicated to solutions enhancement, and Naukri.com serviced 34,000 unique customers (FY09).

■ Outlook and valuations: Long term non-linear play; initiate with ‘BUY’
We believe IEL is a long term play and investors looking at internet space in India should take a 2 year plus view. The company’s business model allows it to maximise earnings in a strong environment. We value IEL at INR 1,100 per share using target P/E of 32x (based on PEG of 1.1x on earnings CAGR of 29% over FY10- 12E) on FY12E earnings. We initiate coverage on IEL with a ‘BUY’ recommendation. On relative return basis the stock is rated ‘Sector Outperformer’.

To read the full report: INFO EDGE

>TATA ELXSI (HEDGE EQUITIES)

Company Profile: Tata Elxsi Limited is engaged in providing systems integration and software development services in the information technology field. From Automotive to Aerospace, Enterprise to Consumer Electronics, Entertainment to FMCG, Media to Storage, Semicon to Telecom, Tata Elxsi provide customized design solutions to companies across the globe. The Company operates in four divisions: product design services, industrial design division, visual computing labs, system integration services Tata Elxsi ensure cost-effective, time-to-market solutions through a highly motivated skilled workforce driven by strong design principles, highest levels of quality and ethical business practices.

IT Sector in India
From a few million dollars worth exports in early 1990, today India becomes the major player in global software industry. IT-BPO exports (including hardware exports) grew by 16 per cent from US$ 40.9 billion in FY 2007-08 to US$ 47.3 billion in FY 2008-09. And the government expects to grow at an annual rate of 30 percent per annum, expect s US$ 80 billion export turnover by 2011. According to NASSCOM software and IT services contributed US$ 59.6 billion this year. Springboard Research expects the Indian IT services market to remain the fastest growing in the Asia-Pacific region with a CAGR of 18.6 per cent.

DESIGNING FOR GROWTH

Global financial crisis coupled with the severe pricing pressure has affected the demand for IT services in the first half of 2009-10. But , expecting an improvement in the second half of 2009-10, and believe to be pick up in the December 2009 and March 2010 quarters. Despite the drawbacks, it is believed that the Indian information technology sector continues to be one of the sunshine sectors of the Indian economy showing rapid growth and promise.

Outlook and Scope
After a sluggishness in the business due to the global financial crisis and sluggishness in the economy, now this sector has regaining the strength as the world economy is recovering from the crisis. this sector is still a multimillion dollar industry and it is still a growth engine for the Indian economy. And the Tata Elxsi has the creative leadership in hard-core technology and strength in design. It has the ability to provide point services and end-to-end solutions across the product lifecycle with Augmenting company’s expertise capabilities.

Major Investors: SBI Mutual Fund, Reliance Capital, Life Insurance Corporation of India

Valuations: Global financial crisis has muted the growth rate of the company. Since the world economy is recovering company getting newer orders and global growth in the sales of smart-phones and increased demand for the automotive electronics has amplified the possibility for increased outsourcing of design services. All these have paved the way for a better performance for the company in coming years. At the current market price of Rs.169.70 the stock trades at 9 multiple of its FY-09 earnings and 8 multiple of FY-10E earnings, and 7 multiple of FY-11E respectively.

To read the full report: TATA ELXSI

>The Dubai Debt crisis: What really happened?

Dubai’s debt woes are a lot older and deeper than Friday’s announcement by Dubai World (a
conglomerate of the government of Dubai) might indicate. The announcement-asking for a
standstill on the repayment of USD 60 bn worth of debt till May, 2010-appears to be a culmination of the stress that Dubai has been witnessing over the last year. It is just a visible symptom of the woes of an economy long reeling under the weight of a real estate crash that hit the economy over a year ago. Since their peak in 2008, real-estate prices have plummeted to 60% of their precrisis levels thus exposing highly leveraged real-estate developers to the risk of default. In fact, major credit rating agencies such as Standard and Poor’s and Moody’s had placed several government related entities (GREs) and local banks on negative rating watch as far back as May, 2009 indicating that the prospect of rising credit risk and debt default had become real much earlier than Friday’s announcement.

In an effort to ride over repayments falling due over the year (including USD 327.5 mn to British
contractors and USD 9 bn of international debt falling due over the next four months), Dubai
sought to draw down support from Abu Dhabi- UAE’s wealthiest member and unlike Dubai, an oil producer. On the face of it, this was not such a difficult task with Abu Dhabi having a history of providing big ticket financing to Dubai. Abu Dhabi and Dubai appeared to tie up financing
arrangements. However the negotiations soon turned fractious and acquired a political hue with
Dubai asking for “unconditional” support and Abu Dhabi intent on following through any support
only under the condition of an asset transfer (market rumours suggest that Abu Dhabi was keen on taking over Emirates Airlines, Emistalat, DP World and others) in return for funding. Talks
between the two countries subsequently broke down prompting Dubai to issue a 5-yr USD 20 bn
loan programme in February, 2009. USD 10 bn of this amount was subscribed by the UAE central bank. However, with foreign exchange reserves totaling only USD 25 bn at its disposal and the rest of the reserves parked in sovereign wealth funds of member nations, the central bank could not subscribe to the residual USD 10 bn. The residual amount was originally supposed to be subscribed by Abu Dhabi Investment Authority (ADIA), which handles UAE’s largest forex reserves totaling USD 627 bn. However, it failed to come through and a last minute deal was worked out with two Abu Dhabi banks (Al Hilal Bank and NBAD) subscribing to USD 5 bn of the residual USD 10 bn amount.

Despite securing sizeable financing to meet its debt needs, events snowballed to a crisis last Friday when Dubai announced its willingness to a standstill on the liabilities of Dubai World and declared that the USD 5 bn raised from Abu Dhabi banks would be used for purposes other than the immediate needs of Dubai World. This statement came in the backdrop of a USD 3.5 bn Nakheel (subsidiary of Dubai World) bond falling due on December 14, 2009 thus prompting fears of an imminent default on the note. It also underscored the fact that while investors had expected an ‘implicit’ guarantee on debt raised by GREs like Dubai world (there was no explicit guarantee) the Dubai government was unwilling to play ball.

The status of the repayment falling due remains uncertain as of now. While Dubai World is looking to restructure USD 26 bn of its obligations (including the USD 3.5 bn Nakheel bond falling due in December,2009 and USD 5.7 bn of debt falling due before May,2010) whether banks and creditors will agree to Dubai World’s terms remains to be seen. The fate of the remaining USD 13-14 bn is less uncertain with bulk of the amount held by units such as DP World that have enough cash flow to service impending obligations.

Dubai World’s financial mess is as much a reflection of the real-estate market as it is of the
complexities of UAE politics. With the lion’s share of foreign assets (over 95% on last count) being held by Abu Dhabi, the ability of both the central bank of UAE and the Dubai government to help out in times of crisis is limited. Total foreign exchange reserves of the UAE sum up to USD 700 bn (including Abu Dhabi’s foreign assets) and the USD 60 bn of debt owed by Dubai World or the USD 100 bn of debt held by Dubai is easily manageable if Abu Dhabi co-operates. Would Abu Dhabi not have engaged in a power struggle over Dubai’s assets, chances are that Dubai’s debt problems would not have been as exposed as they were last week. However, with both Abu Dhabi and the government of Dubai now explicitly backing away from Dubai World’s obligations one thing appears clear. Dubai’s GREs (government related entities) and private debtors will have to bear the brunt of bad investment decisions alone.

To read the full report: DUBAI DEBT CRISIS

>GDP Growth in QE Sept 2009 - Much Stronger Than Expected (MORGAN STANLEY)

• GDP growth accelerated to 7.9% in QE Sept 2009: The Central Statistical Organization (CSO) announced that GDP growth in the quarter ended September 2009 (QE Sept 2009) was 7.9%, the highest since QE June 2008. This compares with 6.1% registered in QE June 2009 and 5.8% registered in QE March 2009. The growth was much higher than our expectation of 6.4% and consensus expectation (as per Bloomberg survey) of 6.3%.

• Positive growth in agriculture segment was a surprise: Growth in the agriculture sector decelerated to 0.9% in QE Sept 2009 (vs. 2.4% earlier). The deviation in actual GDP growth numbers in QE Sept 2009 from our forecasts is largely on account of positive growth in the agriculture segment vs. our expectation of a decline due to poor monsoons. Growth in mining and quarrying, on the other hand, accelerated further to 9.5% in QE Sept 2009 (vs. 7.9% earlier).

• Industry segment growth largely in line with our expectations: The industry segment growth accelerated to 8.2% in QE Sept 2009 compared to 4.8% in the previous quarter. Within industry, the manufacturing segment growth picked up sharply to 9.2% (vs. 3.4% earlier). While growth in the electricity, gas & water supply segment accelerated to 7.4% (vs. 6.2% earlier), the construction segment growth decelerated to 6.5% (vs. 7.1% earlier).

• Services segment growth higher than expected due to higher-than-expected growth in government revenue expenditure: Growth in the services sector accelerated to 9.3% in QE Sept 2009, compared with 7.8% in the previous quarter. Within services, the growth in the community, social & personal services segment accelerated sharply to 12.7% vs. 6.8% earlier due to higher government spending in this quarter. While growth in the trade, hotels, transport &
communication segment accelerated to 8.5% (vs. 8.1% earlier), the financing, insurance, real estate & business services segment growth decelerated to 7.7% (vs. 8.1% earlier).

• Growth in consumption and fixed investment accelerated: In QE Sept 2009, consumption expenditure growth accelerated to 8.4% from 2.8% in the previous quarter, driven by acceleration in both private and government consumption expenditure growth to 5.6% and 26.9%, respectively (vs. 1.6% and 10.2% in the previous quarter). Fixed investment growth accelerated to 7.3%, compared with 4.2% in the previous quarter. Net export contribution to growth was 6.1%, compared with 3% in the previous quarter, as the contraction in imports more than offset the decline in exports.

• Upside risks to our F2010 GDP growth forecasts: We believe the headline GDP growth for QE Sept 2009 has been overstated by accounting for poor agriculture growth being pushed to the next quarter. However, even adjusting for this, the non agriculture GDP growth has accelerated sharply to 9% in QE-Sept 2009 (vs. 6.9% in the previous quarter) confirming that the pace of recovery is stronger than expected. We see upside risks to our full year F2010 GDP growth forecast of 6.4%.

• Normalization of interest rates under way: We maintain our view that the RBI will lift policy rates by 25bp in January 2010. By then, the RBI should have had adequate comfort on the pace of recovery. Indeed, we expect a cumulative increase of 150bp in the repo rate in 2010. However, note this potential rate hike is unlikely to derail the recovery as we see this increase in policy rates as a move toward normalization rather than tightening that hurts growth.

To read the full report: GDP