>RANBAXY (MERRILL LYNCH)

■ Contingency plans to overcome FDA issues
The company is awaiting an FDA audit for the Dewas facility, and is confident of a clean result. However, corrective action is still being pursued at Paonta Sahib unit, and may take a while. The liquid injectables unit at Ohm, which also received a warning letter, is likely to shut down after resolution. The new unit at Mohali needs to obtain FDA approvals before starting supplies. In the interim, management seemed confident of being able to monetise opportunities through site transfer, e.g. Sumatriptan, Valtrex last year, Flomax in Q2 CY10, and blockbuster Lipitor (Q4 CY11).

■ Focus on growing top line, rationalising costs
Key drivers include (1) domestic (est 15%-plus CAGR), through new launches to plug product gaps, an expansion of the sales force (4,000 from present 2,500), and acquisitions (2) RoW, which include Latam (Brazil), Africa, CIS/Russia, and (3) Japan, leveraging Daiichi Sankyo's product and distribution capabilities (details in April 2010). In Europe, the company will focus on cost rationalisation, already showing up through the turnaround of operations.

■ Improving financials
Recent trends show gradual improvement in sales and margins. Management indicated further 200-300bps increase in EBITDA margins over 2-3 years.

To read the full report: RANBAXY

>Dow Theory for the 21st Century

A person watching the tide coming in and who wishes to know the exact spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the stick
reaches a position where the waves do not come up to it, and finally recede enough to show that the tide has turned. This method holds good in watching and determining the flood tide
of the stock market.

Charles H. Dow wrote those words over 100 years ago on January 31, 1901, and they are as true for the twenty - fi rst century as they proved to be for the twentieth century. No book on the Dow Theory should start or fi nish without his classic quotation, as it is the very essence of the theory . For the record, the rest of the quote that appeared in the Wall Street Journal that day continued: “ The average of twenty stocks is the peg which marks the height of the waves.
The price - waves, like those of the sea, do not recede at once from the top. The force which moves them checks the infl ow gradually and time elapses before it can be told with certainty whether high tide has been seen or not. ”

I wrote this book so that a serious investor will be able to find almost all he or she needs to know about the stock market and how to become fi nancially successful in one place. I don ’ t pretend to know all there is to know about either subject, but I have been an avid market student and successful personal investor all my professional life. If you have aspirations to know the important things about the stock market and are not interested in the fl uff, then this book is for you.

You will soon recognize that most of this book is not sexy or even exciting, and some of it may not even be interesting to you, but it contains a wealth of valuable insights, historical precedence, and useful and usable information. I am not a writer by trade, so I apologize up
front for any shortcomings in that department. I have spent a lifetime with the stock market, starting in college and extending through a short military career, a full financial business career, and even longer “ working ” retirement. I started writing a market timing letter to colleagues in the stock brokerage business in 1977 at the behest of senior
officers in my fi rm, a letter that I continued after I retired. Out of that grew an Internet subscription letter that has attracted subscribers from most of our United States and numerous foreign countries. The purpose of my market letter and of this book is not to make
money personally — the Web site www.TheDowTheory.com is owned by other members of my family who are occasionally surprised by a dividend. My wife and I have been fortunate to have been financially secure for many years, and now it is time to share the “ family secrets ” with the rest of you.

Do not be afraid to skip over segments of the book (such as the background of Charles Dow or William Peter Hamilton ’ s Editorial, or my own, and other perhaps tedious subjects); you can always come back to them. Concentrate on the big picture and review those areas that don ’ t at first sink in. In the end, I think you will feel much better prepared to face the stock market than ever before. I sincerely hope this book will show you the way to a better understanding of
the ingredients that make up the world of finance, specifically the American stock market, and that understanding will lead you further to great investment success.

To read the full report: DOW THEORY

>Structural Liquidity Story Intact (MORGAN STANLEY)

• Key Debate: The latest savings data shows that savings into equities dropped sharply in F2009. Is this a sign of dwindling risk appetite among Indian households and does this challenge the longer-term story for equity savings?

• Structural liquidity story unchanged: India’s structural liquidity story is intact and being reinforced with the passage of time, in our view. We expect savings into equities over the next 10 years to accumulate nearly six-fold over the previous decade’s total to US$300 billion at the current exchange rate. The structural liquidity story is being driven by falling age dependency, lower risk averseness that is typical of a younger population, and a progressive financial economy. We are assuming that India receives adequate policy response in the form of infrastructure spending, health and education spending and a benign social environment. Our simple model assumes an 11.5% nominal GDP growth rate, a linear rise in financial savings, and a growing share of equity savings in the financial savings pool.

• Our model simple and likely conservative: Our model assumes annual growth of 11.5% in nominal GDP (8% real and 3.5% deflator), a linear rise in financial savings to GDP by 25bp annually (supported by demographics), a 50bp annual increase in the share of equities in financial savings (backed by demographics) and positive equity returns. This model suggests that flows into equities from Indian households could aggregate Rs14545 billion or US$300 billion (at the current exchange rate) over the next 10 years until F2020. At about 25% of India’s present market cap, this compares with 25% of current market cap that Indian households own in equities (either directly and through mutual funds) and with US$52 billion that Indian households have saved in equities over the past 10 years (at current exchange rate). At the end of the 10-year period, household savings in equities would be 10% of gross financial savings, on our assumptions, compared with its 39-year average of 5.8%.

• F2009 was an aberration in the long-term story for equities: Despite the fall in savings into equities during F2009, we think that India’s structural liquidity story is intact, albeit with near-term challenges. Note the following points:

• The elevated base of F2008 (when equity savings share in household savings hit a 17-year high of 13%) aggravated the fall in equity savings, which suffered its worst drop since F1971 (earliest data point).

• Households continue to be grossly underexposed to equities. At cost, equity investments are well off the mid-1990s peak and at just 6% of total household assets. Deposits have gained share in the balance sheet, accounting for a substantial 56% of total assets at cost.

• Trailing returns matter to household investors – they are more likely to invest in equities when equities are rising rather than falling. So enthusiasm for equities will only return when households are convinced that equity returns are likely to be strong, which may take some time
post the 2008 debacle in the stock market. In our essay entitled, Equities in the Coming Decade: Gold Class, dated January 21, 2010, we pointed out that equities are likely to be best asset class in the coming decade. This, in turn, will help the structural liquidity story.

• Real rates remain low, and that is a challenge for financial savings to rise. Households have preferred physical assets over financial assets in low real rate environments. Hence a turnaround in equity savings is unlikely in the near term but quite plausible over the next several months as real rates rise from their current low levels.

To read the full report: STRUCTURAL LIQUIDITY

>Draft guidelines on base rate: Impact on banks (CRISIL)

The RBI has come out with a draft circular on the base rate, which is expected to substitute the current Benchmark Prime Lending Rate (BPLR) system with effect from April 1, 2010. The base rate would act as a minimum rate for all commercial loans, including loans up to Rs 2 lakhs where the BPLR currently acts as the ceiling rate.

CRISIL Research estimates the base rate for majority of the banks to be in the range of 8.0 to 9.5 per cent. Moving to a base rate system would increase transparency in lending rates. However, if the base rate were to become the minimum rate for all commercial loans, it would adversely affect the bank’s ability to extend short-term funding to large corporates.

The Reserve Bank of India has released a draft circular on the base rate, which is expected to substitute the current Benchmark Prime Lending Rate (BPLR) system with effect from April 1, 2010. Although final guidelines in this regard are awaited, the draft circular provides broad contours of the new base rate system.

Salient features of the base rate system:
1. The base rate system will replace the BPLR system from April 1, 2010 onwards.
2. Criteria for determining the base rate -

• Cost of deposits
• Adjustment for negative carry in cash reserve ratio (CRR) and statutory liquidity ratio (SLR)
• Unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate offices, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, cost incurred towards deposit insurance
• Profit margin

3. The base rate will act as minimum rate for all commercial loans, including loans up to Rs 2 lakhs where the
BPLR currently acts as the ceiling rate.
4. Actual rate charged to borrowers would be the base rate plus borrower-specific charges, which will include
product specific operating costs, credit risk premium and tenor premium.
5. Base rate to be the reference rate, henceforth, for all new loans and for loans coming up for renewal. The
existing borrower could also shift to the new system on a mutually agreed rate structure between the borrower and the bank. Moreover, the base rate could act as a benchmark for floating rate loans.
6. Interest rates for Differential Rate of Interest (DRI) scheme loans will continue to be fixed without reference
to the base rate. RBI will separately announce the stipulation for export credit.
7. Banks would be required to exhibit information on base rate at all branches and post it on their respective
websites as well.

Impact on banks
CRISIL Research estimates the base rate for majority of banks to be in the range of 8.0 to 9.5 per cent. As of March 2009, around 67 per cent of outstanding advances by scheduled commercial banks (SCBs) were at sub-BPLR. Moving to a base rate system would increase transparency in lending rates. However, if the base rate were to become the minimum rate for all commercial loans, it would adversely affect the bank’s ability of extending short-term funding to large corporates. Currently, banks, saddled with surplus liquidity and lack of avenues to deploy funds, have been providing short-term loans to large corporates (with healthy credit profile) at rates as low as 5.5 to 6.0 per cent. Moving to the proposed base rate system would make it impossible for banks to provide loans at these rates, which, consequently, would lead to corporates considering alternative sources.

Background
A working group, under the chairmanship of Deepak Mohanty, was constituted to examine the lending rate practices of banks and subsequently, submit its recommendations on the same. The RBI’s guidelines (announced approximately 4 months later) are broadly in line with the recommendations of the working group.

The RBI, concerned about the sub-BPLR pricing of commercial loans by banks in India and the wide divergence in BPLRs of major banks, had constituted the working group to review the BPLR system and suggest changes to introduce greater transparency in credit pricing.

The working group was assigned to review and provide suggestions on the following:
1. Extent of sub-BPLR lending and reasons for the same
2. Wide divergence in BPLRs of major banks
3. An appropriate loan pricing system for banks
4. Administered lending rates for small loans up to Rs 2 lakh and for loans extended to exporters
5. Suitable benchmarks for floating rate loans in the retail segment
6. Consideration of any other issues relating to lending rates of banks

To read the full report: BPLR