>Inflation Meter (INDIA CAPITAL MARKETS)

Negative inflation could be delayed

WPI rises to 0.31% - but downside will continue.......

• The WPI rose to 0.31% for the week ended March 21, 2009 - the first weekly increase in yearly figure in last eleven weeks. (consensus was at 0.18%).

• On a weekly basis the WPI has increased by 0.13%. It was led by increase in price indices of Manufacturing group (increased by 20 bps) followed by Primary group (increased by 4 bps). The Fuel Group price index was marginally down by 3 bps.

• This is the second consecutive increase on a weekly basis (the first instance since week ending of Aug 30 and Sep 06 - ’08 when the WPI rose by 8 and 12 bps respectively on a weekly basis).

• The weekly increase in WPI largely owes to the increase in the price indices of Manufactured Products group by 20 bps (for the second consecutive week). The increase in Food Articles’ price index was led by increase in prices of oil cakes, tea and coffee whereas the prices of sugar,
salt and edibles oil were decreased. However, this rise was cushioned by decline price indices of Textile Group, Chemical Products, and Basic metals alloys & metals products.

• It was a mixed bag for the Primary Articles Group (rose by 4 bps). The price index of Food Articles was down whereas the price index of Non-food Articles went up.

• The Fuel Group price index was down marginally by 3 bps (prices of ATF rose and that of Furnace oil declined).

To see full report: INFLATION METER 040409

>Mphasis Ltd. (ULJK Securities)

MphasiS is India’s 8th largest software company with revenues of Rs.19, 065 Mn for the period October end FY08 (7 Month Period). EDS (Electronic Data Systems) has acquired 60% stake in MphasiS after which HP has acquired EDS. Thus HP has become the parent company of MphasiS. The company’s operations have been divided mainly into three segments namely Applications, BPO and ITO services across many verticals.

• The company is maintaining its business mix ratio of 2:1:1 in its Applications, BPO and ITO services respectively. In the applications segment nearly 34% is the form application maintenance and the 66% is in the form of applications development.

• In the ITO business the back office jobs are mainly done by the MphasiS and the front office job is mainly in the hands of the EDS India Ltd.

• The acquisition from the EDS has helped MphasiS to start its ITO space. After the acquisition of EDS by HP, a major chunk of the solutions based projects are bound to go for MphasiS and the projects coming from the HP might have a major competition from the EDS and HP India.

• The main drivers of consolidation in the sector are of two reasons like cost and the better solution.

• Company has expressed its view that the vendor consolidation may increase because of this bleak economic scenario and the companies are going to reap over the wallet sharing.

• The company is increasing the sales expenses as the market is still uncertain. Thus the company is going to show a marginal increase in the SGA expenses.

• The company may see the losses in the hedging because of forex forward covers that they have done in the past period.

• From the BPO business the company is still facing high attrition rates and the absentees. But the company is trying to decrease its buffer levels in the BPO.

• As of now the company is not going to have any lay‐offs and the salary cuts. The company is mainly focusing on the productivity plans and the planning cycles.

• The currency exposure for the revenues are in the order of 8%‐9% ‐ INR, 80%‐82% ‐USD and 18‐10% from the other currencies.

• Company expressed a view that the pipeline of the order book is healthy.

• Cash in hand is $60mn and planning cycle for the Capex is larger because of the decrease in the hiring. We are positive on the stock as far its operations and the clientele list is concerned, though the near term concerns remain.

To see full report: MPHASIS

>Ranbaxy (KR Choksey)

Daiichi expanding its wings to Indian market

Ranbaxy to Launch Daiichi Sankyo’s innovative antihypertensive drug, “Olvance” in India

First product from Daiichi Sankyo’s portfolio to be introduced through Ranbaxy -
Ranbaxy, the idnian subsidiary of Japan’s Daiichi Sankyo has annpounced that Ranbaxy would launch Olvance (Olmesartan Medoxomil, antihypertensive), which was originally discovered by Daiichi Sankyo. This follows a licensing agreement between the two companies authorizing Ranbaxy to promote and market the drug in India.

Benefits to Daiichi Sankyo

• This move would scale up Daiichi’s innovative product introductions in India, through Ranbaxy.

• The drug is expected to be launched in 50 countries world wide thus strengthening company’s portfolio in the antihypertensive segment.

Benefits to Ranbaxy

Launch would strengthen Ranbaxy’s presence in the antihypertensive segment.
• Olvance is an effective, fast acting and well tolerated antihypertensive agent aand the clinical trials of Olmesartan have shown it to be significantly more effective at reducing blood pressure. Ranbaxy being a significant player in the cardiovascular disease segment and leader in Statins the cholesterol reducing agents the introduction of Olvance will further strengthen Ranbaxy’s presence in the antihypertensive segment.

Impact on Earnings

“Olvance”, an antihypertensive drug, enjoyed a market size of ~ Rs 42 Cr last year (growth of nearly 91%). We expect the drug, which would be launched in April, 2009, to contribute ~ Rs 20 -25 Cr to the topline of the company from the Q2 CY09. The antihypertensive segment enjoys the domestic market size of ~ Rs. 2500 Cr.

Competitor

Glaxo Smith Kline Pharma (GSK), which is having a licensing agreement with Daiichi, would be launching the same drug in India; and would turn out to be a major competitor. Apart from GSK there are two to three small players in the same drug category.

Valuation

We have revised our earnings estimate keeping in view the revenue inflow from the approval for the generic version of Imitrex and the launching of anti hypertensive drug, Olvance. We are positive about Ranbaxy as Medicines and Healthcare products Regulatory Agency (MHRA) of UK, and the Therapeutic Goods Administration (TGA), Department of Health and Ageing of the Australian Government, have issued Good Manufacturing Practice (GMP) certificates for its manufacturing site at Paonta Sahib (India), following a joint audit conducted in October 2008. The MHRA approval will not only cover product filings for the UK but will also apply to product filings for the entire European Union.

To see full report: RANBAXY

>ICICI Bank (Morgan Stanley)

We are still not Buyers

While ICICI appears to be trading at attractive multiple (0.8x book), we will stay away. We expect ROE around 5% for F2010 and F2011, as revenues come off and credit costs rise. Given cost of equity of 12-14% in India, fair value (under Gordon growth) comes to 0.4-0.6x book. Plus, we see significant potential pressure on asset quality from the international asset book, adding to problems already existing in the consumer book. Until economic growth rebounds, ICICI’s fundamentals are uncertain.

International assets make up 25% of balance sheet, a significant source of concern The bank increased this book from a small base to US$22bn in about three years, implying a significantly unseasoned book. Moreover, many Indian corporates that went abroad to acquire or borrow are facing problems. We now build in impairment of about 10% on these loans with severity of 50%, suggesting a cumulative loss of about 5%.

Current impairment ratio is about 8%. We expect this to go into double digits in F2010. We make relatively conservative assumptions on severity across asset classes. However, we still expect further provisioning of Rs120bn over the cycle. We build in a further Rs80bn of provisioning for F2010 and F2011 combined, but it could be much higher.

Our new target price on the stock is Rs330. Our bear case value is Rs175 and our bull case is Rs600. But, to achieve the bear or bull case, either asset quality has to deteriorate sharply (bear) or the economy and markets have to improve significantly (bull). Neither of these is likely to happen quickly. Until then, the stock is likely to trade in a range of Rs225-440. Should it move meaningfully above or below this range, we would consider it a trading opportunity.

To see full report: ICICI BANK