Thursday, February 25, 2010

>Resumption of second generation reforms? (DEUTSCHE BANK)

Budget session agenda signals strong policy intent
The Indian parliament’s agenda for the current budget session (apart from discussing the union budget) seems to signal a strong intent to move ahead on the long outstanding reform agenda. The agenda includes 16 pending bills for consideration and passing (of these 10 to be taken up only in case standing committee reports are presented in time), and introduction of 63 new bills.

Pension, Insurance, Mining and Land Acquisition Bills on parliament agenda
Bills listed for consideration and passing include the Mines and Minerals Amendment Bill (for amendments in coal mining, permitting auction of coal blocks and paving way for Coal India’s listing), and Insurance Bill (key objective is to raise FDI cap from 26% to 49%). Bills listed for introduction include Banking Regulation Amendment Bill (to lift 10% limit on voting rights in private sector banks) and State Bank of India Amendment Bill (reducing minimum govt stake in SBI from 55% to 51%), Pension Fund Regulatory and Development Authority Bill (for deepening and improving regulation of pension sector), Land Acquisition Amendment Bill and Rehabilitation and Re-settlement Bill (to facilitate easier land acquisition).

Strong on intent, will government deliver?
Since taking power last year, this is the first time; the UPA administration has decisively put many of these long-awaited bills on the business agenda. We believe that politically, the timing is also propitious with the next state election more than six months away, positive coalition dynamics and a government that has firmly signaled the compulsion to return back to the pending reform agenda. Even on the economic front, the near restoration of GDP growth to the 8-9% trajectory has created a compelling platform to resume long pending reform. While we do not see all the proposed bills being taken up/passed, on account of the need for long and arduous debate, even if some of the bills are taken up, the government will send out a very strong message of its intent on moving decisively on the pending reform agenda. This should be very positive for market sentiment.

Banking on return to 8-9% GDP growth trajectory
We view the government as growth biased and one of the key premise of our
positive outlook on India is the restoration of Indian GDP growth to an 8-9% trajectory over next 12 to 15 months. We maintain our year end target of 22,000. Our top Buys are: Asian Paints, BHEL, HDFC Bank, ICICI Bank, Infosys, Maruti, M&M, SAIL, Sterlite, and TCS.

Risks to our positive investment thesis
The return of non-food inflation could bring back the overhang of an ‘inflation wary’ government, a sharp rise in global oil prices raises the risk of an aggressive policy response and a fat pipeline of fresh issuances. A strengthening dollar and weakerthan- expected global growth are key exogenous risks.

To read the full report: EQUITY STRATEGY