>MACRO STRATEGY: Draghi-ng the market back from the edge

■ Macroeconomic data YTD has beaten expectations, but growth outlook for the full year remains weak
■ The rally in asset prices has been supported by the liquidity front-stop and should be sustained by this month’s LTRO
■ Tail risks from Greece suggest very near-term caution, but long liquid risk over the next month is still preferred


Less bad...
Developed-economy macroeconomic data has remained broadly better than expected. The same could be said for Asia, but the impact of an early Lunar New Year makes the data far harder to read.


Globally, PMIs have surprised to the upside, with both manufacturing and services PMIs rising in January in aggregate (Chart 1). Both the US new orders and German IFO survey have shown not only resilience but upside. This indicates further improvements in confidence, adding to stronger employment figures from both countries.


The composition of US growth has, however, been materially different to our expectations and signals significant risks ahead. Q4 data showed a weaker contribution from investment (we had expected the investment incentive act to bring forward spending), but an offsetting larger contribution from inventories.


Consumer activity increased, but this was driven by a reduction in savings rather than a rise in incomes. Recent US labour-market reports have painted a more optimistic picture, although the labour overhang is significant. High gasoline prices are also likely to act as a drag on household consumption, with prices at their highest ever level for this time of year (Chart 2).
We still see significant headwinds to US growth. Credit availability remains tight (the NFIB small business optimism index disappointed earlier this week), while the government‟s fiscal policy will also have a negative impact on growth.


To read the full report: MACRO STRATEGY
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>THIRD QUARTER FINANCIAL YEAR 2012 REVIEW: Healthy core operations overshadows higher restructuring

Slippages decline sequentially; Sharp rise in restructuring


■ Key highlights for private banks: (1) Largely stable NIM QoQ, (2) Asset quality continues to be strong, with GNPA% stable/declining QoQ, (3) Business growth robust, investment book growth remains healthy, as large corporate funded by credit substitutes, (4) Mid-cap private banks report strong growth in SA Deposit post deregulation of SB rates.


■ Key highlights for state-owned banks: (1) Largely stable margins QoQ, (2) strong fee income performance QoQ, (3) loan growth improves QoQ, however remains low on a YoY basis. (4) fall in CA deposits leading to muted CASA growth, (5) On a higher base (slippages were at an elevated level as in 2QFY12 most of the state owned banks migrated to system based recognition of NPA), slippages declines sharply QoQ (6) Addition of ~100bp of loans to restructured loans largely led by one large telecom account.


■ Positive surprises: (1) ICICIBC: Improvement in margins (+10bp QoQ) and strong performance on asset quality. (2) SBIN: Strong margin improvement (+26bp QoQ) (3) BoB: NIM stable QoQ, and robust fee income growth YoY. Among other banks FB, SIB and VYSB also delivered strong NIM and asset quality performance.


■ Negative surprises: (1) UNBK: Higher provisions due to restructuring of loans (it had taken an NPV hit of 25% on one large telecom account restructured visa–vis 10-15% by its peers). (2) CBK: Sharp contraction in NIM (cal) by 20bp QoQ (3) BoI: Addition to restructured loans of INR30b in 3QFY12.


To read full report: INDIAN FINANCIALS

>VOLTAS: Electro Mechanical Projects (EMP) division & Unitary Cooling Products (UCP) division posted healthy performance

■ Healthy performance with adjusted net profit growth at 11% yoy
Voltas reported healthy performance with adjusted net profit growth at 11% yoy to Rs611 mn – growth in adjusted net profit comes after 5 quarters of decline in net profits and a dismal Q2FY12. Revenue growth was healthy at 12% yoy to Rs11.6 bn (above estimates) – led by both EPM (+19% yoy) and UCP (+19% yoy). EBITDA margins remained stable at 7.5% (-10 bps yoy) – above estimates. Led by healthy revenue growth, adjusted net profit was ahead estimates at Rs611 mn (+11% yoy).


■ …Barring for Rs2.8 bn cost over-runs in Sidra (Qatar) project
Voltas reported net loss of Rs1.15 bn after considering Rs2.8 bn cost over-run on Sidra Medical & Research Centre (Qatar) (valued at Rs10 bn) (net of tax – the impact is lower at Rs1.9 bn). The project is 53% complete and is expected to be fully complete by Q1FY13E. Voltas has provided all incurred and expected cost over-runs on the entire project in Q3FY12 itself, however, any further rise in expected costs is likely to negatively impact profitability of ensuing quarters. Also, recognition of claims on above escalations is likely to happen only on acceptance of the same by the customer and near to the completion of the contract.


■ EMP & UCP division post strong revenue growth, EPS division slips
Electro Mechanical Projects (EMP) division - posted healthy performance barring for Rs2.8 bn cost over-runs on Sidra project. Key highlights (1) Strong revenue growth at 19% yoy to Rs8.2 bn – led by speedier execution of Sidra Project (revenue contribution at Rs1.5 bn or 18%) (2) EBIT margins up 90 bps yoy to 7.3% with EBIT at Rs0.6 bn (up 37% yoy) – ahead estimates. Rohini Industrial Electricals (RIE) reported Rs80 mn loss (9MFY12 – Rs110 mn) at EBIT level due to execution of legacy orders – expected to be completed by FY12E end.


■ Unitary Cooling Products (UCP) division – posted strong performance despite continued decline in room air-conditioners industry (volumes down 28% in 9MFY12). UCP division revenues increased by 19% yoy to Rs2.3 bn (in line) – led by favourable revenue mix and price corrections. EBIT margins declined 360 bps yoy to 6.1% (lower than expectations) – owing to higher advertisement spends.


To read full report: VOLTAS
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>INDIA MARKET STRATEGY: India on sustained global liquidity conditions, and if domestic retail investor returns to equity, the risks will be on the upside (CLSA)

India has been the best performing Asian market YTD and we believe the strong performance would continue as the liquidity driven rally is now getting the policy support and corporate earnings stability. Any initiative to improve coal production and power generation, we believe, will further increase our enthusiasm. CLSA’s global strategist Chris Wood prefers India on sustained global liquidity conditions, and if domestic retail investor returns to equity, the risks will be on the upside. We continue to add more beta to our portfolios and add Tata Motors and Yes Bank to our top 5 ideas replacing ITC and Dr Reddy’s. The rising crude and potential
delays/lower rate cuts by the RBI will be a negative.


■ Liquidity rally has moved the valuations back to July level
► With the liquidity driven rally, Indian stock market has now moved back to the July 2011 level, valuations are also similar at 14.5x as time effect offset by earnings downgrade.
► Recent stock price reactions to bad results etc imply that the investors are now much more willing to look beyond the near-term, focussing on longer-term trends.


■ Initial signs of policy level improvement visible
► The Government has certainly moved beyond the policy noise to some concrete steps (refer to our earlier note: Policy Paralysis no more?). While still a few uncertainties exist, the direction is clear.
► The possibility of Coal India being able to ramp-up production whether from the existing mines (relatively easier and could be effective in a year) or the new mines (production will likely take a couple of years assuming fast-track clearances) can be rerating trigger for the Indian markets.
► With these policy initiatives and the willingness of the investors to look beyond the near-term patches makes us more sanguine about the current rally.


■ CY2012 market returns to be front ended; retail support should
► With primary markets being slow to pick-up, we believe that the CY12 market returns will be upfronted as easier global liquidity continues.
► Domestic retail investors have been virtually absent from the equity markets for the last three years (FY10-12) with 0.2% of incremental saving going into equities as against 5% as the trend prior. A reversion mean (3.5% average over the last 8 years), could bring in US$13-14bn creating potential buffer for equity issuances.


■ Adding more beta to portfolio
► Corporate earnings trend stabilising (our FY13 Sensex EPS has remained unchanged at 1,269 over the last 45 days and through the 3QFY12 results season), and earnings downgrade cycle has ended.
► We raise market target multiple to 14.5x – in line with the last 10 year average to take the Sensex target to 20,800. Rising international crude prices and possible tax hike / fuel hike may delay the potential rate cuts by RBI. This could be a risk to market sentiments which are building in large hopes on rate cuts.
► In line with the view of our global strategist, Chris Wood, who believes in continued global liquidity, we add more beta to our portfolio. We remove ITC and Dr Reddy’s from our top 5 ideas and replace with Yes bank and Tata Motors.
► We raise weight on financials by 5 ppts to become OWT. We also raise industrials to Neutral (+2). Lower pharma by 4 pts to UWT from OWT earlier. Weight in IT also cut but 2.5ppts but maintain the OWT stance. Reduce staples weights by 2ppts to increase our UWT further. Also reduce weight in Energy by 2pts to make it UWT.


To read full report: STRATEGY
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