>TELECOM SECTOR (AVENDUS)

Incumbency may confer a strategic advantage in the 3G auctions because of the infrastructure, customers and cash flows of the large companies. All the winners in 3G may find reasons to observe price discipline and tone down the tariff war. Another force that may end the tariff war would be exhaustion of spectrum with new operators after Mar11. Number portability may act differently in India because the forces triggered by it in other parts of the world have existed here
for some time; portability may actually be good for incumbents. Underperformance of telecom stocks for five quarters suggests that 3G and the tariff war are priced in. However, a rebound may not be round the corner due to the risks to FY11f earnings. We initiate coverage on BHARTI (Hold), IDEA (Add) and RCOM (Hold).

■ Incumbents hold the edge in 3G auctions
The strategic advantage of large incumbents arises from their infrastructure, customer relationships and cash flows. Winners could quickly lift quality of service in 2G. Later, they could tap the high‐ARPU segments to identify customers for 3G offerings. A potential positive spin‐off from the 3G auctions is the return of pricing discipline. Incumbents with a superior quality would not need to resort to aggressive pricing. A new provider who wins a 3G license may only obtain funding with covenants that prescribe superior returns on capital.

■ Tariff war could end after Mar11
Aside from the influence of 3G a potential inflection point may emerge after Mar11 when new operators begin to exhaust their spectrum. Exhaustion of spectrum with large incumbents since 2007 had slowed the decline in tariffs. However, the tariff war resumed in 2009 because new entrants used the pricing tool to grab incremental market share. We believe the situation in FY11
would be similar to that in 2008 with a high probability of bottoming out of tariffs.

■ MNP may add little to the high ambient competition in India
Global precedents indicate that onset of portability leads to high churn rates, loss of market share by incumbents and a cut in ARPU. Much of these effects have been present in India for 5 quarters. Portability may be favorable to incumbents in India due to extensive network coverage, distribution reach, customer service and brand.

■ Near‐term downside risk to earnings may delay a re‐rating
Across the globe, winners in 3G auctions had seen consequent erosion in market value. In India this phase may be over. Underperformance of telecom stocks to the Nifty after Dec08 correlates with concerns over 3G and the tariff war. Yet, stocks may not rebound soon as net profits for FY11f face potential downside arising from the persistence of low tariffs and the possible rise in financing costs. FY12 may have more positives such as the likely return of price discipline and payback in some projects where investments were made till FY10. We initiate coverage on BHARTI (Hold), IDEA (Add) and RCOM (Hold).

To read the full report: TELECOM SECTOR

>GLOBAL MARKETS: Risky assets retain their appeal

■ Despite a temporary blip, economic data has again begun to surprise consistently to the upside, and risky asset returns are trumping uncertainty for investors in 2010.

■ The current point in the cycle is a swwet spot, with output gaps that can accomodate above trend growth, yet inflation that keeps central banks on the sidelines.

■ Whereas global central bank rates fell roughly in unison as the financial crisi struck, there is an obvious divergence on the way back up, with the emerging markets and commodity players moving before the major advanced economies.

■ The publication also includes quarterly interest rate and exchange rate forecasts for the U.S., Canada, Australia, and New Zealand and also offers additional exchange rate forecasts for the Japenese yen, the euro, the U.K. pound and the Swiss franc.

To read the full report: GLOBAL MARKETS

>Analysis of Equity Moves by Mutual Funds in March 2010 (HDFC SECURITIES)

This note analyses the equity moves in March 2010 by Mutual Funds having month-end equity corpuses of more than Rs. 2,000 cr (except Fidelity Mutual Fund whose portfolio for February 2010 was not available). The source of data for this analysis is NAV INDIA, who in turn takes into account the monthly-declared portfolios of the respective schemes wherever available (excluding offshore funds, FMPs and new fund offers). NAV INDIA at times revises data for past periods depending on the need thereof.

AMFI disseminates the data about mutual funds on a monthly basis based on the monthly average AUMs declared by the Mutual Funds while NAV India calculates the data based on month end AUMs. Hence the analysis and findings based on these two may not match.

Summary: Total AUM fell 15.5% in March 2010 over February 2010 to Rs. 6,41,866 cr. This fall is mainly on account of massive outflows (in terms of percentage) in the bond funds, liquid funds, index funds and FOF segments. Only 8 of the 36 fund houses that have disclosed their assets under management (AUM) figures for March 2010 have seen a rise in assets compared with the previous month. Even though the benchmark indices saw a growth of over 6% during March 2010, the AUMs fell as banks and corporates withdrew mainly from fixed income funds to pay off their advance tax payments. Banks also withdrew funds from mutual funds to shore up their year-end credit growth numbers. This happens during every fiscal year-end. Another reason for the decline has been the large dividend payouts by the mutual funds during the month. The Bond Funds saw a fall of 26% and Liquid Funds and Index funds, fell by -14% and 12% respectively. FOF fell by 13% in March 2010 after a 10% rise in February 2010. According to figures released by the Reserve Bank of India in its weekly statistical supplement, banks' investments in mutual funds stood at Rs 55,503 crs in the last fortnight of March 2010 as against Rs 1,09,453 crs as on February 26, 2010 as against Rs 1,47,279 crs on December 18, 2009.

The Equity Diversified funds showed a marginal rise of 1% in their corpus for the month of March 2010 mainly due to the increase seen in the benchmark indices during the month. Gilt Funds rose the maximum by 7% followed by Tax Planning Funds, which rose by 5% during March 2010 (to benefit out of the tax reliefs by investing before the fiscal year end). As per SEBI data, mutual funds were net sellers of Rs 3, 809 crs worth equity shares during the month of March 2010 in the secondary markets.

To read the full report: STOCK ANALYSER

>AXIS BANK: Low cost of funds propels bottomline (ICICI DIRECT)

Axis Bank declared its Q4FY10 earnings, which were above our expectations. The PAT grew 32% YoY to Rs 765 crore (we estimated Rs 716 crore). A drop in the cost of funds, primarily driven by repricing of bulk deposits, growth in demand deposits and QIP proceeds, helped the
bank to inch up its NIM to 4.1% (3.4% in Q4FY09).

Strong business growth leads to NIM improvement YoY, QoQ
The bank witnessed 23% YoY and 24% YoY growth in advances and deposits to Rs 1,04,343 crore and Rs 1,41,300 crore, respectively. This resulted in 23% YoY growth in total business of the bank. The key highlight for Q4FY10 was sequential 39 bps improvement in cost of funds, which helped the NIM to be at 4.1% levels. On the other hand, CASA was stable at 46%. We expect NIM to stabilise around 3.5% by FY12E.

Non-interest income
The non-interest income of the bank grew moderately by 10% YoY in Q4FY10 to Rs 934 crore. This was lower than our estimate of Rs 1,010 crore. Going forward, we expect 37% CAGR in non-interest income over FY09-12E to Rs 5,403 crore.

Asset quality showing early signs of stress
GNPA inched up QoQ by Rs 144 crore whereas NNPA improved by Rs 11 crore to Rs 419 crore. The GNPA slipped from 0.9% in FY09 to 1.1% in FY10, while NNPA stayed stable at 0.36%. The silver lining for asset quality remains the fact that provision coverage has improved sequentially from 69% in Q3FY10 to over 72% in Q4FY10. We have built in higher provisioning for the bank till FY12E to absorb any shock on asset quality.

Valuation
We expect the bank to generate a business CAGR of 22% over FY09- FY12E with NIM hovering around 3.5% levels. We expect the bank to deliver healthy return ratios with improvement in credit offtake. We expect RoA of 1.7% and RoE of 19% for FY12E. We are rolling over our target price on FY12E estimated ABV of Rs 544 and valuing the bank at Rs 1302 (2.4x ABV).

To read the full report: AXIS BANK