>STEEL SECTOR (GOLDMAN SACHS)

Prefer steel over metals
We reiterate our preference for steel over base metals. Our incrementally bullish view on India Steel hinges upon : 1) strong demand momentum as we enter into steel-intensive phase of economic growth, 2) constrained supply response till 2011 and 3) tight market conditions in Asia, coupled with the rise in cash costs, leading to higher steel prices in Asia and consequently India. While there are concerns on rising raw material prices and potential impact on steel margins, we believe that against the backdrop of robust demand, Indian steelmakers are in an advantageous position, given access to low-cost captive iron ore and high leverage to rising prices. On the other hand, we believe base metal prices have run ahead of fundamentals, and we expect a pullback in the medium term.

Strike while the iron is hot; Steel over Metals; Buy JSW, Tata

Add JSW to Conviction Buy, U/G Tata Steel to Buy
We add JSW Steel (JSTL.BO) to the Conviction Buy List with a 12-m P/Bbased TP of Rs1,346 (from Rs1,199) as we continue to believe that it is in the best position to capitalize on a recovery in steel demand and pricing vs. its peers - we expect 40% EBITDA CAGR over FY09-FY12E, highest amongst peers. We upgrade Tata Steel from Neutral to Buy with a 12-m P/B-based TP of Rs702 (from Rs496) on sustained strong profitability at its India business and a constructive outlook for the European steel sector which drives our expectations of earnings recovery at Corus.

Add Nalco to Conviction Sell, Buy on Sterlite, off CL
We remove Sterlite (STRL.BO) from our Conviction Buy List, as we see better relative upside in JSW Steel. We reiterate a Buy on Sterlite with a 12-m SOTP-based TP of Rs962 (fromRs951), as we believe that the current valuation does not reflect the earnings upside from the power business. Its diversified exposure, low cost position, volume growth and balance sheet strength make it our top pick in base metals. We reiterate Sell on NALCO (NALU.BO) and add to the Conviction list with a 12-m PB based target price of Rs305. We believe that NALCO’s valuations at FY11E PB of 3.2x don’t justify its deteriorating fundamentals – limited volume growth,
muted aluminum outlook and frequent coal supply disruptions.

To read the full report: STEEL SECTOR

>UNITECH (HSBC)

■ Q3 PAT was 5% below estimates; EBITDA margin halved on higher costs. Unitech’s reported PAT of INR1.8bn (+30% y-o-y) was 5% lower than our estimate, despite net sales of INR7.7bn (+58% y-o-y) 17% higher than estimates. While strong sales growth reflects improving execution, EBITDA margin halved from 50% in Q3 FY09 to 24% in Q3 FY10 as Unitech adjusted for construction cost growth on old undelivered space of 17m sq ft.

■ Business momentum maintained, though well reflected in share price. During 9M FY10 sold 10.7m sq ft of residential space (2.8m sq ft in Q3 FY10), and 2.4m sq ft of commercial space (0.3m sq ft in Q3 FY10). Volume growth was in line to meet our FY10 estimate of 13.5m sq ft residential and 2.8m sq ft commercial space. However we believe the market is factoring in the good volume growth and current valuation leaves limited room for upside.

■ Execution and higher than estimated volumes to act as catalysts. Unitech improved its execution pace (57% y-o-y sales growth) during Q3 FY10. However it will need to sustain the momentum, to allow delivery of 17m sq ft of old presold inventory by FY11. We believe sustained execution momentum and higher than estimated volume growth would act as key drivers for a valuation upgrade and vice-versa.

■ Lower TP to INR83 (INR 85) as we cut NAV by 3%. We lower earnings by 14% in FY10 to INR6.8bn, 18% in FY11 to INR8.9bn and 7% in FY12 to INR14.3bn to factor in escalation in project costs on old undelivered projects. However the impact on our NAV is limited to 3%. In line we cut our target price to INR83. We retain our valuation at a 10% discount to our FY11 NAV, along with INR8 for Unitech Wireless and INR6 for terminal value.hsbc

To read the full report: UNITECH

>Vaccines Market; Apollo (Capex Plans), Fortis (Fund Raising); Sun Pharma (Effexor XR Launch Closer) (CITI)

■ Bill Gates, vaccines and a $1.5bn Carrot — Bill Gates has said that his foundation would spend $10bn on vaccine delivery and R&D over the next 10 years. Gates devoted a chunk of his annual letter, published earlier this week, to vaccines “We expect that manufacturers will commit to building factories much earlier than they
would otherwise in order to compete for this money,” Gates wrote in his letter this week. (WSJ Health Blog)

■ Apollo Hospitals to invest Rs18bn in 2 yrs — Apollo Hospitals today said it will invest around Rs18bn in the next two years for increasing the number of hospitals under its operation to 70 with a capacity of 13,500 beds. At present, the company has 46 hospitals under its operation with a capacity of around 8,000 beds. It also announced opening its 47th facility in Bhubaneswar. (Business Standard)

■ Fortis to raise Rs4.5bn as part of additional capex — As part of an additional outlay of Rs6bn to fund its capital expenditure programmes, Fortis Healthcare plans to raise Rs4.5bn through a combination of term loans from banks as well as internal accruals. Yogesh Sareen, CFO, said 60% of this would be raised through internal accrual and the remainder by term loans from banks. (Business Standard)

■ Sun gets a boost as FDA rejects rival Osmotica’s plea — Sun Pharma's plan to launch a copy of Wyeth’s anti-depressant Effexor XR got a big boost after the US drug regulator rejected rival Osmotica’s appeal. The FDA rejected Osmotica’s appeal a few days ago, though the FDA’s website is yet to notify the development, Sun Pharma CMD Dilip Shanghvi said. Though Osmotica’s second petition is still pending, Mr Shanghvi said it was not a significant challenge. (Economic Times)

■ Other stories (Pg 2) — Cipla, Wockhardt, GSK, Sanofi-Aventis, Philippines plans further drug price cuts.

To read the full report: INDIAN PHARMA

>GLOBAL DISEQUILIBRIA: Don’t expect lasting stability

Our basic view remains unchanged; we remain positive on equity markets, credit spreads and most commodities because liquidity flows are still very positive and key indicators discussed below are supportive. However, we still are very concerned about the artificial nature of the economic recovery and financial markets and when the relatively benign environment might change for the worse.

Past issues have pointed to the widespread and huge disequilibria in the U.S. economy and financial system. That is also true globally. No one knows what’s real and what is not when it comes to the economic recovery and market prices for assets and currencies. Market forecasts are always a big part of the game; in today’s context, we can’t attach much confidence to any of them. Rather, it makes more sense to think in terms of whether the environment is favorable for assets or not and to watch for benchmarks to gauge when that might change and how it would affect the different markets.

One thing we do know: markets eventually correct disequilibria and it is usually painful. However, time lags are variable and frequently longer than most people can imagine. But when the adjustment comes it is usually swift and substantial. This makes for an uncertain environment because the risks are not easily quantifiable.

Financing the U.S. Treasury Debt
As we have pointed out frequently in past letters, the explosion in the deficit and the government debt to GDP ratio is not a problem in the short run when the U.S. economy is in recession, inflation is low, private savings are rising, the dollar is firm and the existing debt ratios relatively moderate. But now that the economy is growing, possibly quite fast, financing the deficit may not be easy at existing interest rates as people are looking ahead to government debt ratios which will be anything but moderate.

Who has been buying the massive issues of U.S. government debt? In an interesting recent piece, “Is it all Just a Ponzi Scheme?,” Eric Sprott and David Franklin looked behind the published numbers to see who bought the $2 trillion of net new U.S. government debt last year to finance the budget deficit and other cash requirements. The Treasury data shows the “Other Investors” sector increased its holdings of government debt by 200% in 2008 and 2009 (Charts 1& 2). Similarly, flow of funds data shows that the ‘Household” sector was the largest net purchaser in late 2008 and 2009. These two categories - “Other” from Treasury statements and “Households” from FRB statements are residuals: if the figures don’t add up, they are used to “balance” the numbers.

Investment Conclusions
January was a month of correction. U.S. and international stock markets were virtually all down, some by negligible amounts, others such as the key Shanghai market, by as much as 10%. Shanghai was hit hard because the government ordered a clampdown on bank lending and increased reserve requirements to counter too rapid economic growth and strong asset price increases in some real estate markets. Commodities and precious metals also sold off in January.

U.S. 4th quarter GDP data indicate almost 6 % real growth and many are predicting a mini boom to last for some time. One of the main arguments used to project strong growth is based on past experience which shows deep recessions are followed by rapid recoveries. If this occurred, the expectations of continued easy money and ultra low interest rates would

To read the full report: GLOBAL DISEQUILIBRIA