Saturday, July 18, 2009


Of rains, hope and despair…

Met expects the monsoons to advance…
We join a parched India in praying for rain. The Met does expect widespread rainfall over the west, central and north-east this week. The good news: rains are resuming at last (Table 2). Weekly deficiency has shrunk to 8% by July 8 from July 1’s 29%. Besides, rains are watering the south’s relatively early June sowing.

The bad news: time’s running out. The north need sow by early August (Table 3).
Although better than 54% a fortnight ago, 36% seasonal deficiency remains scary. What if rains fail? We expect a 100bp downside risk to our expected 6.3% FY10 growth and ~150bp upside risk to our 6.1% March 10 inflation forecast (Table 4). When would we know? End-July. Do read Jyoti and my monsoon report here.

Cropping doubled last week; but still 20% lower y-o-y
Yet, all is still not lost. We are relieved to report that autumn – kharif – cropping doubled last week as the monsoon penetrated the hinterland (Table 5). Rice farming is now up 33% from last year in contrast to last week’s 27% fall. Soya is also staging a recovery. And NCDEX oilseed prices are softening.

(-)1.4% deflation on 40bp fuel price hike impact
We expect the 40bp ‘direct’ impact of July 1’s fuel price hike to limit deflation to (-)1.4% Thursday (Tables 6-7). Oil minister Deora has promised to roll back the fuel price hike if oil slips below US$60/bbl. On our part, we expect US$64/bbl Brent this fiscal. This, in turn, should induce neither a fuel price hike/cut from Delhi. We thus expect inflation to climb back by March 10, forcing the RBI to hike CRR/rates by January/April (Chart 1). Do read our oil report here.

RBI will issue new borrowing calendar…
Gilts will watch out for the RBI’s new borrowing calendar expected by weekend. On our part, we estimate that the government need borrow Rs3260bn/US$68bn in FY10 (Table 8), net of repayments, MSS maturity/”desequestering” and Rs1200 bn RBI OMO here. Seasonal July liquidity and a large ~375bp 10y – 3.25%RBI rate spread should hold fiscal pressures for now. Do read Ashish and me here.

… fx flows swing on earnings: HDFC Bank (Tue), L&T (Thu)
We expect FII inflows to swing to June 09 earnings. Our analysts see BSE Sensex earnings bottoming at 4-5% (ex metals) (Table 9, here). By the way, bouts of INR volatility in no way detract from our long-held twin view of BoP risks overdone/ constructive INR outlook. Do read Christy and me here.

7.6% 2Q09 China growth supports Asia bottoming out
We expect China to grow 7.6% in 2Q09, up from 1Q09’s 6.1%. At home, 2.7% May 09 industrial growth surprised us (1%) and consensus (1.3%) on the up Friday (Tables 10-12).

To see full report: INDIA WEEK AHEAD


Technical views on global and Asian market

Intermarket analysis. In this piece we review the technical levels for copper (HG1 - $230.50), crude oil (CL1 - $69.19), the US dollar index (DXY – 79.8) and the US long bond (US1 – 118.35). Since the summer of 2008 these markets have tendered to move in opposite directions depicting the markets sentiment towards inflationary and deflationary fears. The idea it to identify the key levels in these markets which would suggest that the deflationary pressures have reemerged.

Asia: The road ahead. What we see developing over the second half of the year for Asian markets, represented by the MSCI Asia ex Japan, from a technical perspective is:
  • A mid July peak, closer to the 405-430 range. The key markets that are expected to drive the index higher in the short-term are Taiwan, India, Indonesia, Singapore and Hong Kong.
  • This final thrust higher should be followed by a partial retracement of the advance off the March low. We would focus on the typical retracement levels, 50-62% of the advance, near the 300-330 range (20-30% decline).
  • We would look at using the summer weakness as a buying opportunity for another cyclical advance.
  • Our preferred markets to look for buys on weakness during the summer months: Indonesia, India and Taiwan.
  • We believe that the biggest risk to our preferred roadmap is that Asian markets continue to squeeze higher in a rising wedge type pattern.

US: Big picture. In April we placed a chart of the S&P500 over the Dow Jones Industrial from 1937 to 1942 and noted the remarkable similarity. Such analogies rarely work to perfection, but given the striking replication this one bears watching. The large trading range pattern may be the best-case scenario for US equities. In the short-term 875 remains our main reference point for the S&P500.

India: Nifty – 5,000+. The 4,090-4,200 support zone has held and the market is starting to push higher again. Our minimum expectation for this advancing phase is for a retest of the recent peak at 4,696-4,700 with risk of extending towards our Elliot wave target zone of 5,500-5,700. We would buy ICICI Bank (ICICIBC IN – Rs724) on a break above Rs772.

Taiwan; Taiex targeting 7,100-7,700. We note that the daily chart of the Taiex (last – 6,667) shows a clear positive divergence. This tells us that the market is building underlying strength and projects a minimum upside target of 7,113. The Taiex’s heavyweight, TSMC (2330 TT – NT$55.10), has room for further gains and we like the set-up of Hung Poo Real Estate (2536 TT – NT$46.25) and AU Optronics (2409 TT – NT$34.05).

The recommended list: We would take profits in CNOOC (883 HK – HK$9.54) and Gazprom (GAZP RU - $5.22).

To see full report: PRICE ACTION


Research Tactical Idea

We believe the share price will rise relative to the country index over the next 15 days.

This is because the stock has traded off recently, making short term valuation much more compelling. IDBI reports tomorrow and we believe the results will be supported by some improvement in NIM's and also some pickup in fees. One of the issues facing IDBI has been its low NIM's at 0.1-0.2%, but in the current interest rate environment, NIM's could improve, which would have a positive bearing on the stock price, in our view. Moreover, IDBI has corrected by 25% from

the peak on June 29. We expect the stock to pick up some of this return post earnings release.

We estimate that there is about a 70% to 80% or "very likely" probability for the scenario.

Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario.

This is a near term call. Our fundamental 12 month view on the stock remains intact. In the near term, IDBI should benefit from lower rates and higher asset prices. For us to turn more positive, we would need to see a sustainable improvement in NPL's.

Stock Rating: Underweight

Industry View: In-Line



• IBN18 Broadcast (IBN18) numbers for the quarter are not comparable as it includes financials of IBN7. IBN18 has positively surprised on standalone as well as consolidated financials

• IBN18’s standalone (including CNN IBN and IBN7) revenues stood at Rs565m and operating profits at Rs59m in Q1FY10. Reported profit stood at Rs170m, which includes Rs515m of gains on sale of treasury stock (9m shares) and Rs305m of write off of option premium paid to TV18 for acquiring the balance stake in Viacom18.

• Driven by high spends on news broadcasting during the election period, the news operation (CNN IBN and IBN7) has seen like to like growth of 35%, EBITDA profit of Rs53m in Q1FY10 (loss of Rs113m in Q1FY09).

• IBN18 on a consolidated basis (including CNN IBN, IBN7, 50% share of IBN Lokmat and 33.7% share of Viacom18) reported revenues of Rs1.1bn, operating loss of Rs43m and net profit of Rs59m (including extraordinary income/expenses).

• We are extremely impressed with the financials of Viacom18. Share of revenues from Viacom18 (33.7% share) stood at Rs494m, which means Rs1.5bn of revenues for the property.

• Share of losses in Viacom18 is at just at Rs61m, which means only Rs181m of losses during the quarter. With continued sales traction and stabilizing cost structure, the property is expected to turn profitable at the operational level in Q3FY10

• Colors, the GEC property, is in a close battle with Star for the top slot in the GEC space. While in the last week, Colors’ GRPs stood at 284 as against 287 for Star Plus, Colors has been the leader in the genre with average GRPs of 258 as against 255 for Star Plus and 234 for Zee during the quarter. Viacom18’s other property – MTV is also emerging as a strong youth based GEC property.

• IBN18 has paid Rs.1.5bn to TV18 to exercise the option for the remaining stake in Viacom18. Now IBN18 owns 50% In Viacom18. The payment includes Rs300m towards option premium, which is expected to be written off in Q2FY10.

To see full report: IBN18


Moving away from the Abyss

The Outlook Improves — Although cautious in select markets, Citi steel analysts are generally bullish on the outlook for equities in 2H09. The outlook for prices and margins is positive in the short-term, as demand recovers, destocking ends and raw material costs fall, but the strength of a recovery, and resultant operating rates will be critical to determine sector profitability.

Steel Demand Growth — The World Steel Association (WSA) forecasts a 14.9% global decline in apparent steel consumption in 2009; a -28.8% decline in the EU- 27, -32.2% in NAFTA, -23.1% in the CIS and -8.1% in Asia and Oceania. Citi forecasts an 11% YoY decline in global crude steel production in 2009.

Stay Selective and Defensive — We remain selective on specific equities given the weak demand environment in Developed markets, weakness of producer currencies against US$ compression (which could linger into mid-year) and valuation multiples that have moved up closer to Mid-Cycle values.

Stock Recommendations. — Our preferred stocks by region include Steel Dynamics in the US, Usiminas in Brazil, Salzgitter and voestalpine in Europe, POSCO and Dongkuk Steel in Korea, JFE Holdings and Nippon Steel in Japan, JSW Steel in India. We prefer NLMK, MMK and Severstal in Russia.

US Perspective — While credit issues, auto troubles and a decline in construction spending have hit steel demand hard, we see little evidence to suggest that end demand for steel has fallen as hard as production, especially in construction. We anticipate higher utilization rates in 2H09, as production normalizes.

Europe Perspective — Construction activity is expected to reduce seasonally in the summer, partly offset by an end to de-stocking and a slow recovery in manufacturing. The outlook remains poor, despite the improvement from low levels.

Asia Perspective — Price declines in Japan have matched the decline in input costs, maintaining metal spreads; a unique position globally. After the summer, we expect a gradual recovery in margins in Korea, and solid domestic demand in India and China. We are more cautious on Australian producers.

Developing Markets Perspective — We prefer the low-beta names in Russia, and low-cost exports in Brazil, with specific preference for the flat product producers. We are cautious on South Africa due to the strength of the Rand against the US$.



Incorporated in 2003, Excel Infoways is a BPO and Customer Contact Centre based in India. The company is a provider of offshore BPO services to Clients primarily in Telecommunications and Financial Sector. The BPO service is provided mostly to clients in the US and UK. Initially the company commenced its operations with the capacity of 50 seats as compared to the current 150 seats. Company’s present manufacturing facility is at Andheri (W) in Mumbai and it further proposes to set up a 300 seat facility in Mumbai at Borivali (W ) and Kandivali- Charkop in Financial Year 2010-2011.


Diversified business model
The Company’s income is diversified across a range of geographies and industries. Diversified income is a competitive strength, as it provides a hedge against cyclicality or other adverse developments (including changes in laws or regulations) within any particular industry sector or geography or affecting any client. The diversified business model will result in relatively less volatility in the income, profits and cash flows, which will allow more effective planning and investing in the growth of the business. In telecom, the company provides the clients with a broad range of services, including customer acquisition, provisioning and fulfillment support, customer service, billing support and collections. In Financial services, Excel provides broad range of services including Customer acquisition, customer service, funds management and overseas property management, Business & Financial Transcription, e-media Transcription.

In technical services, the company provides the clients with Network Management and Monitoring, Solution of complex connectivity problems to increase bandwidth, improve response times, maximize performance, and support global operations. In the healthcare industry, Excel provides with a broad range of services, including Insurance Claim Processing, Medical Billing and Coding.

Proven delivery model
Excel is recognized for its service delivery. The company efficiently designs and implements outsourced solutions to suit customer’s requirements. Such solutions are measured, monitored and audited by the company on an on-going basis.

Excel has leveraged its experience in the telecom fulfillment solutions, Financial Services, Technical Services and healthcare industries and its operational expertise to expand the service offerings to new areas within those industries, as well as to clients in other industries. The strategic positioning within the key target industries is a significant competitive strength that will provide key growth opportunities to the company.

Extension of exemption under the Software Technology Parks of India (STPI) scheme
Excel benefits from certain tax incentives provided by the Government of India. Further, 100% Income Tax holiday as per the provisions of Section 10B of the Income Tax Act, 1961 in respect of profits derived by its undertaking/s from the IT Enabled services was available only upto Fiscal year 2010. However, Benefit of tax holiday to export oriented units (EoUs) under Section 10A and Section 10B has been extended by one year as announced in the Union Budget 2009-2010. It would now be available up to assessment year 2011-12.

To see full report: EXCEL INFOWAYS LIMITED


Buy: Tax Incentive for Pipelines Could Add Rs20/share to DCF

Tax benefit could add ~Rs20/share to DCF — While there are still some unresolved issues, we attempt to analyse the impact to GAIL’s DCF of the tax incentives provided in yesterday's Union Budget for gas pipelines (Section 35AD – almost entire investment on gas pipelines to be made tax deductible). As per our analysis (see Figure 1), our DCF value could increase by ~Rs20/share (from Rs339 currently) due to the tax benefits accruing as the cash tax payable declines (only MAT for the first 6-7 years). While impact on cash flows is material, impact on earnings need not be meaningful as deferred tax component may also rise (if effective tax rate remains largely unchanged).

Key assumptions — Our analysis is premised on – (i) Rs240bn of capex over FY10-13E as per company guidance, (ii) tax benefit allowed only on all gas transmission earnings, (iii) accumulated losses allowed to be carried forward (if capex in a particular year exceeds gas segment earnings), and (iv) loss on the gas business cannot be set off against income from other businesses (viz. petchem, LPG). While there is still some uncertainty on some of the issues, we expect these to sorted out given the government impetus for the sector.

Maintain Buy/Low risk — We maintain our Buy (1L) rating with a TP of Rs339. The announcement in the Budget of the development of a blueprint for a National Gas Grid is a long-term positive for the sector in general and GAIL in particular, as it could be an active participant in this roll-out. GAIL is also aggressively pursuing city gas opportunities, which would be given a thrust following the gov’t impetus for roll out of gas infrastructure, and this could be another medium-term value driver, though we currently ascribe no value to it.

To see full report: GAIL



To see report: GLOBAL MARKETS


Investment Rationale
Everonn Systems India Ltd is a leading education and training company in India. The company is offering a wide range of services that include creating educational and training content of global relevance, designing and executing large learning initiatives and setting up the requisite infrastructure. They are the Education Service Providers for several State Governments in India, for their Computer Education, Computer Literacy, Computer Aided Learning and Teachers Training projects. The company is a pioneer in computer education has partnered with various State Governments to bridge the digital divide by setting up computer lab infrastructure at schools and colleges and imparting IT education through well-trained Everonn faculty under their ICT programme.

ICT segment has potential to surprise
Everonn has Point of presence in 4442 schools in ICT. The average revenue per school decline by 41% to Rs1.24 lakh in FY09. No new schools were added during Q4FY09. The company had Bid for 1092 schools in Uttar Pradesh but could not win the order. Everonn added 1278 schools in FY09. The current Order book stands at 130 crore executable over the next five years. The company expects ~35,000 schools are expected to come up for bidding in FY10.

ViTELS segment Vital contribution

The number of schools grew by 209% y-o-y to 557 in FY09. The number of colleges soared by 248% y-o-y to 800 in FY09. ESIL has a point of presence of 1357 currently. The point of presence is expected to double in FY10E. The company Added 37 schools In Q4FY09 and 185 colleges in Q4FY09.

Key Developments
Everonn received a LOI from M S Ramaiah Medical College and Teaching Hospital, Bangalore. As per the LOI, the Company would be installing a studio to facilitate the process of e-learning and for networking their CME programmes to their group of 7 Colleges. These courses will also be taken to other Everonn colleges.

Everonn received Letter of Intent (LOI) from West Bengal University of Technology for implementation of Everonn Learning through VSAT enabled classrooms in 147 colleges in West Bengal. A studio will be set up by Everonn at the West Bengal University campus from where the professors will take classes to students of the various colleges. The classes will be in a live and interactive mode. The Technology setup will also be used for training of Trainers and for imparting Examination inputs. This will increase the student base for Everonn courses by 80,000 plus students.

At current price of Rs 286 the stock is trading at P/E of 18.2 x TTM EPS of Rs.15.8 and it is trading at EV/EBITDA of 8.3x. We recommend a “Hold” on the stock with a 12 month target price of Rs312


Where will liquidity flow to?

Many questions are posed concerning the use that will be made of the very abundant liquidity created especially since the beginning of the crisis, but the use will differ depending on the nature of this liquidity and its holders:

banks hold very abundant surplus reserves with the central banks; a concern for avoiding additional consumption of equity, together with weak credit demand, could lead them to invest in government securities to profit from the steep yield curve, which would prevent long-term interest rates from rising despite fiscal deficits;

households hold very large monetary assets (deposits, money-market securities and funds, etc.) on which the return is virtually zero; when pulling out of a crisis, their usual behaviour is to reinvest in equities, which should benefit the stock market when the economy recovers;

investors and funds have very plentiful cash reserves; they are reluctant to go back into government securities, due to low yields and the risks of a rise in interest rates; they will probably first go back into assets offering potentially high returns: credit (which is already largely the case), emerging markets, commodities and “toxic” assets, as has already been seen since March 2009.

The question of re-investment of liquidity in the financial markets and excess liquidity is very important for investors: what asset classes will profit from this reinvestment; will it cause further asset price bubbles?

But, to answer this question, one must be more precise and distinguish between the various types of liquidity (monetary base, money supply) and the various holders of liquidity (banks, households, investors). Note that monetary policy accounts for the increase in all forms of liquidity: conventional monetary policies (asset purchases from banks and repos) increase the monetary base (Charts 1A and B) and bank liquidity; unconventional monetary policies consist in buying assets in the financial markets (which is at present very widespread in the United States, Table 1), thereby providing the sellers with liquidity (money supply), of whatever kind; the accumulation of official reserves (Chart 2) provides liquidity (money supply) to the sellers of foreign-currency assets purchased by the central bank.

To see full report: FLASH ECONOMICS


Flows choppy, trading rule neutral

EM equity funds saw around $0.5bn of redemptions in week to July 8th

Choppy flows in recent weeks as market has paused, follows huge Q2 inflows.

Prior 3 weeks' flow pattern: +$1bn, -$2bn, +$1bn (chart 1)

Most of redemptions due to ETF selling this week but small outflows also seen by
LO mutual funds

By region: outflows from Asia, LatAm. Inflows into Global EM funds. EMEA flat

By country: outflows from Brazil (3rd largest on record), China. Inflows into India

YTD EM has seen $29bn of inflow. Main beneficiaries have been GEM funds and
Asia. EMEA funds have actually seen outflows this year (table 1)

Fund flow trading rule remains in neutral territory as flows over past 4w = -0.1% of
AUM (chart 2 in report)

To see full report: EM OUTFLOWS


Revenue visibility adequate; retain Buy

Visit takeaways. We estimate that Allied’s revenue target for FY10 is achievable. However, we reduce our margin estimates on account of a challenging environment in the US and thus lower margins from EPGS. Our new target of Rs410 is at target PE of 7x (58% discount to Infosys target multiples). Retain Buy.

Adequate revenue visibility. Allied has adequate revenue visibility, backed by its order book. The Solutions order book is Rs1.3bn (to be executed over the next three to four months). The Services order book is Rs3.6bn (executable over the next 12 months).

Working capital a concern. Debtor days of the standalone business, at 178, are high. Debtor days for EGS are a manageable three months. Allied is trying to bring them down. In the current economic environment, however, that would be difficult in the short term, in our view.

Lowering estimates. We trim FY10/11 EPS, by 10.7% and 3.5%, respectively on account of lower margins in EPGS.

Valuation. We assign a target multiple of 7x for Allied Digital, which is at a 58% discount to Infosys target PE of 16.5x and a 36% discount to HCL Tech and MphasiS (11x). Based on the
target PE of 7x one-year forward EPS of Rs58, we arrive at a target price of Rs410.




Investment Conclusion: Aban has outperformed the
market by 26% over the last three months; however, the stock is still down 30% YTD. We reiterate our Overweight rating on Aban Offshore and raise our price target to Rs1,114/share, on the back of: 1) improving fundamentals for the offshore jackup industry with rising crude oil prices; 2) increased probability of financial restructuring; and 3) our global view of higher crude oil prices which we believe should lead to even higher rig rates and more contracts for Aban.

Improved fundamentals for jackup players: With crude oil prices having rebounded from the US$40/bbl levels, oil services companies are seeing an uptick in tender inquiries across the globe, especially Mexico, N. Africa and Iran. The day rates for the contracts have been in the region of 110k/day to 120k/day, which we believe would be the contract rates for Aban’s high end “DD” jackup rigs. Aban’s two deepwater assets, 1) Aban Abraham, and 2) Aban Pearl should start earning revenues from September 2009. We expect Aban to deploy another three of its seven
idle rigs by end-F2Q10 and all twenty assets by F2011.

Look forward to F2011; Short-term pain ahead: We expect Aban to report losses for F1H10 as we believe seven of Aban’s assets will remain idle during this period and F2010 will likely be a poor year for the company. We expect Aban to deploy all its assets by end-F2011 and believe that investors should focus on the company’s F2011 earnings.

Financial restructuring in the pipeline: We believe Aban has three options: 1) do a Qualified Institutional Placement; 2) listing of Aban Singapore; and 3) restructure its US$3.2bn of foreign currency debt. We believe any of these choices would be a positive trigger for the stock.

To see full report: ABAN OFFSHORE