>EURO ZONE: Losing confidence

Sentiment continued to lose ground in the eurozone. Today, the European Commission published its closely watched Economic Sentiment Indicator, which came in at 89.9, down by 0.6 with respect to the previous month. The survey clearly suggests that GDP may have fallen in Q2 2012. With activity entering a contraction area and inflation easing, the probability of a rate cut at next week ECB Governing Council meeting are increasing.

􀂄 Sentiment continued to lose ground in the eurozone. Today, the European Commission published its closely watched Economic Sentiment Indicator (ESI), which came in at 89.9, down by 0.6 point over the month, plunging to its lowest level since October 2009. The EuroCoin indicator (which provides an estimation of quarter-onquarter GDP growth rate, also released today), showed a similar trend, dropping from -0.03 in May, to -0.17 in June.


􀂄 Over the quarter, the ESI lost more than 3 points and it is clearly signalling that GDP may have contracted in Q2 after, stabilising in Q1. The unusually high level of uncertainty has significantly weighed on business and consumer confidence. Businesses expect demand to remain extremely weak over the coming months; order indices continued to decline in June. Manufacturers judge their levels of inventories too high, and consequently are scaling downwards their production.


􀂄 Rising fears of unemployment, combined with poor economic prospects, are dampening households’ confidence. Indeed, the relative index lost 0.5 point over the month. Prospects for private consumption are everything but buoyant for this quarter and next.


􀂄 The survey confirms that price pressures are very low. Against a backdrop of falling demand, firms’ selling price expectations are decreasing (in June the relative indices lost 4 points in the manufacturing sector and more than 3 points in the services sector), Consumer price expectations 12-month ahead inched up in June,
remaining, however, on a downward trend.


􀂄 With activity entering a contraction area and inflation easing, the probability of a rate cut at next week ECB Governing Council meeting, are increasing.

RISH TRADER

>AXIS BANK: Key Earnings Drivers & Sensitivity

Margin pressure to weigh on earnings; downgrade to HOLD
We revise earnings down by 8% and 9% for FY13E lower NIMs (down 13bp y-y to 3.01%) as deposit cost extremely sticky (as wholesale rates have not declined whereas lending rates will need to be reduced as loan demand remains weak. Credit cost will remain stable, restricting earnings growth.


CATALYST
Policy reform and faster monetary easing remain key triggers
AXSB’s total power exposure (fund + non fund) stands at 10.3% 30% is operational and 70% under construction, which is prone to restructuring. The current pace of policy reforms leaves a lot to be desired and the stress on earnings reduces the margin of safety. and infrastructure-related issues will continue to remain an overhang.


Key Earnings Drivers & Sensitivity
The key macro factors that can impact AXSB’s earnings credit growth, interest rate environment and deterioration/improvement in asset quality.


In our bear case we are factoring slippages to be 35bp and 25bp higher than that in the base cases for FY13E and FY14E, respectively. In our bull case we are factoring in slippages to be 40bp and 50bp lower than the base cases for FY13E and FY14E, respectively.


To read full report: AXIS BANK
RISH TRADER

>Bharti Airtel launches TD LTE in India; Bharti kicks off 4G in India

EVENT
Bharti Airtel launches TD LTE in india Bharti Airtel, India’s largest wireless operator, became the first operator in India to launch 4G services. The company launched TD LTE in Kolkata, one of the four circles in which it acquired spectrum in June 2010. Our interaction with the company indicated that it is a city-wide commercial launch and the company will be launching in other circles shortly.


SUMMARY
Early days; high service and device price implies urban focus Bharti has launched LTE with a service price largely in line with high usage 3G data plans. However minimum monthly commitment is much higher than for 3G services, at INR999/month (USD20). Bharti has launched 4G with data card and a Wi-Fi device with a minimum cost of INR7,750 (USD155). We expect initial focus to be urban markets.


VALUATION
No significant impact on earnings or capex estimate
We do not expect any significant impact of LTE launch to our estimates, including capex, considering the limited geographical launch, and high device and service price. 3G, which had a much wider launch, has also not had much success one year since launch. Bharti paid INR33b to acquire spectrum in 2.3Ghz band in four out of 22 circles. RIL, which is the only company holding pan-India 2.3Ghz spectrum, will be the key operator to watch for. Our checks indicate that 1) a meaningful launch by RIL in 2012 is unlikely, and 2) RIL will closely watch for developments on 700Mhz spectrum auction as it is much more capex efficient compared to 2.3Ghz. We have a DCF-based TP of INR400 for Bharti.


To read report in  detail: BHARTI AIRTEL
RISH TRADER

>Germany / Allemagne: A large fall in industrial production

Industrial production fell by 2.9% m/m in December 2011 after remaining unchanged the previous month. Output fell in all sectors, but it sharply dropped in construction sector. Manufacturing production also fell by 2.7% m/m (after -0.3% m/m in November). All in all, manufacturing production dropped by 2.3% q/q in Q4 2011. However the development in manufacturing orders (-1.4% q/q in Q4 2011, after -3.7% q/q in Q3 2011) suggests a less unfavourable development of manufacturing activity at the beginning of 2012.



Repli marqué de la production industrielle

La production industrielle a enregistré une baisse de 2,9% m/m en décembre dernier (après 0% m/m). L’activité s’est contractée dans l’ensemble des secteurs, mais elle a particulièrement faibli dans le secteur de la construction. La production manufacturière a également affiché une nouvelle baisse (-2,7% m/m), enregistrant ainsi un repli de 2,3% t/t au dernier trimestre. Toutefois, l’évolution des commandes manufacturières (-1,4% t/t au T4 2011, après -3,7% t/t au T3 2011) annonce une évolution moins défavorable de l’activité manufacturière en début d’année 2012.





■ Industrial production fell by 2.9% m/m in December 2011, its largest decrease since January 2009, after remaining unchanged the previous month. Output fell in all sectors but it sharply dropped in construction sector (-6.4% m/m) after benefiting from a mild start of the winter. Manufacturing production also fell by 2.7% m/m (after -0.3% m/m in November).


■ Output fell for the fifth month in a row in the intermediate goods sector (-2.4% m/m) and recorded an impressive decrease in capital goods sector (-3.6% m/m, after -0.4% m/m in November). Output fell by 2.5% q/q in both sectors in Q4 2011, whereas it dropped by 1.3% q/q in the consumer goods sector. All in all, manufacturing production dropped by 2.3% q/q in Q4 2011 (after +1.9% q/q in Q3 2011).

■ However the development in manufacturing orders suggests a less unfavourable development of manufacturing activity at the beginning of 2012. The manufacturing new orders rose by 1.7% m/m in December (after -4.9% m/m in November) despite the decrease in domestic orders (-1.4% m/m) and the impressive fall in orders from the Eurozone for the second month in row (-6.8% m/m, after -4.4% m/m in November). Indeed orders from outside the Eurozone soared by 12.3% m/m (after -10% m/m in November). All in all, they rose by 3.9% q/q in Q4 2011 (after -6.6% q/q), whereas orders from the Eurozone dropped by 5.4% q/q in Q4 2011 (after +0.1% q/q in Q3 2011).


■ Manufacturing orders are volatile principally because of important change in transport orders, but the downward trend eased. All in all, manufacturing orders fell by 1.4% q/q in Q4 2011 after having decreased by 3.7% q/q in Q3 2011. The ongoing difficulties of some Eurozone countries with respect to their public debt should still have a negative impact on German exports, which account for around 50% of GDP, in the coming months. However foreign demand from outside the Eurozone should support manufacturing activity. Likewise, both the January IFO index and manufacturing PMI (at 51, after 48.4 in December) point to a small improvement at the beginning of 2012.



RISH TRADER

>UNITED STATES: Rising from its ashes

�� Now, it’s unquestionable: the US economy did not double-dipped, since GDP actually accelerated in the third quarter, posting the highest rate of growth for 2011. After sluggish growth over the first half of the year (+0.4% in Q1 and +1.3% in Q2, on a quarterly annualised basis), GDP grew by 2.5% in Q3.


�� The public sector kept on weighing down on overall demand, with government spending flat over the quarter. Government demand has been cutting overall GDP growth for a full year, now. Since it peaked, in 2010 Q3, public spending lost 2.4%, subtracting 0.6 point to overall GDP growth. This is to continue: while the budget consolidation process is still ongoing at the state and local levels of government, it will start as next year for the federal government. Additionally, the impact is way larger than the direct one on GDP figures.. Since the summer of 2008, government (federal, state and local) payrolls have been cut by 1 114 000 employees: this represents 22% of the total decline in the US employment over the period. The government directly contributed to the decline in households’ labour income, even it was partly offset with a rise in benefits.


�� With real disposable income constrained by a depressed labour market and rising commodity prices, in a context of deleveraging, households’ demand cannot be buoyant. It however held up quite well in Q3, with a 2.4% increase in consumption and even a small increase in residential investment (+2.4%).


�� The main source of strength was thus in business spending and exports. Non-residential investment grew by an annualised 16.3%, spending on equipment and software being a particularly bright sport, at +17.4%. As for exports, they gained an annualised 4.0% in Q3, highlighting the continuous improvement of the US external competitiveness, achieved through a massive drop in unit labour costs, and helped by a declining dollar.


�� The strengths within today’s report are unquestionable. Even if, together, the business and the external sectors represent only a small part of overall demand, they can feed a self-sustained recovery. For this to happen, the US economy “just” needs the households sector to hold up a little longer. Federal money would help…


To read the full report: US ECONOMY

>ADANI POWER: Plug in; More upside left

Still more upside despite run-up Adani Power (APL) shares have outperformed the MSCI India by 10.6% in the past three months and have surpassed our previous target price of INR135. We retain our BUY rating, as our new TP suggests another 16% upside from current levels despite factoring in the risk of higher tax incidence and a slight delay in capacity addition. We now
estimate the company will achieve 4.6x net profit growth over FY11-13, on the back of a 10-fold growth in power generation capacity to 6.6 GW by FY13. APL currently has 990 MW of capacity under operation and it will be India’s first power generator to complete a super-critical power plant, when it starts its Mundra III power plant early next year.

Modelling in risk of possible rise in tax incidence
Despite a delay in capacity addition, our FY11E EBITDA goes up by about 9% on higher merchant tariffs and more power available for spot sales. However, our FY11E EPS goes up only by 1.5% as we assume a 20% income tax rate versus 0% earlier to factor in the risk from the
government’s proposals to levy an export duty or to withdraw tax exemptions to units situated in Special Economic Zones (SEZs). Our FY12E EBITDA goes down by 2.7% as we assume lower capacity utilization as new plants ramp-up. We cut our FY12E EPS by 15.9% as we assume a 20% income tax rate versus nil earlier. Ceteris Paribus, our valuation is not impacted by a higher tax incidence as we were valuing APL on a fully taxed basis.

Raising TP to INR160 – BUY
We raise our DCF-based TP by 18.5% from INR135.00 to INR160.00 , primarily on a roll-over to FY12. We continue to like APL as we believe it will be the fastest growing IPP on the back of solid execution. We value APL’s 6.6GW of projects by estimating project free cash flows for the
next 15 years and then discounting it using project-specific WACCs. We consolidate the project discounted cash flows and assume a 3% terminal growth rate. For our WACC calculation, we continue to assume a cost of equity of 15% and a cost of debt of 11.5%. APL trades at our FY13E
EV/EBITDA of 6.0x vs the global peers at 7.4x. At our TP, the stock would trade at an FY13E EV/EBITDA of 6.5x. Key risks stem from execution delays, higher-than-expected coal costs, lower utilization and lower-than-expected merchant tariffs.

To read the full report: ADANI POWER

>ALPHA STRATEGY: The bank for a changing world

■ We are raising China to Overweight and cutting India to Underweight.
■ China upgrade is based on our view of monetary policy easing ahead.
■ India downgrade reflects a market priced to perfection with earnings risk.
■ Downside risk to earnings is the biggest challenge facing markets in 2H10.

We have raised our recommendation in China to Overweight from Neutral and increased our target for the HSCEI index to 15,800. The key driver of our upgrade is our view that the next major change in monetary policy in China will be an easing. This view stems from the risk of a hard landing in the economy as the expected slowdown in domestic demand is joined by an unexpected slowdown in exports. A more dovish tone on inflation from policy makers has erased the risk of policy tightening that was expected and has paved the way for an eventual easing.

We have cut our recommendation for India to Underweight, from Overweight, reflecting our view that the positives have been priced in and there is a meaningful risk to earnings going forward. Our SENSEX forecast of 19,700 signals we still forecast the market will post positive returns over the next 12 months.

Taiwan is trimmed to neutral reflecting the significant earnings exposure of the market to Europe as well as the risk of margin squeeze from the hike in wages in China. Our sample of technology companies with significant China operations highlights the risk of a 32% drop in pre tax earnings based on the assumption of a 50% increase in labour costs.

The euro zone crisis and a short term peak in Asian GDP growth forecasts implies there is a material risk to earnings forecasts in 2H10. The correction in the market year to date has been driven by multiple contraction as opposed to earnings reductions. We anticipate that the next leg down for the market, which we estimate to be 9%, is likely to be driven by downward revisions to earnings. We view this is a mid cycle correction as opposed to trend reversal and forecast a 23% gain in MSCI Asia Ex Japan over the next 12 months.

To read the full report: ALPHA STRATEGY

>LARSEN & TOUBRO (BNP PARIBAS)

■ Upgrade to BUY, from Hold
The stock has returned 4% since October 2009 (Sensex: +0.2%) since our HOLD recommendation. We now upgrade L&T to BUY, due to our greater confidence about its earnings growth prospects, as a result of strong order bookings during the last quarter (95% y-y increase) and better execution (revenue growth of 28% y-y). In our view, the risks to order flow and execution have subsided, and we estimate order inflow growth of 25.6% in FY11 (INR803b), revenue CAGR of 30% (backed by a strong E&C order book of INR997b) and earnings CAGR of 25% during FY10-12. Risks to our recommendation and TP include quarterly earnings volatility, a slowdown in order intake, poor execution, margin contraction and dilution from raising capital. Catalysts for the stock include 1) higher than expected orders, 2) unlocking of value in technology services, finance or infrastructure subsidiaries.

■ Improved order inflow, execution issues behind us
Our concerns on order growth on a high base have been mitigated by visible market opportunity (discussed in the note). Regulatory changes in the infrastructure sector have accelerated the order award process. We forecast INR803b (25.6% y-y) in orders for L&T over FY11 on an
improved outlook resulting from, in particular, public spending on infrastructure development; 70% of our order inflow estimate should come from infrastructure and power. The 12th plan (FY13-FY17) is likely to have an outlay of USD1t (2x 11th Plan), we believe the emphasis on
infrastructure sector will continue during that period as well. We believe execution speed bumps (financial closure, election/ political issues) are behind us, signified by a robust 28% y-y revenue growth in Q4FY10.

■ Flight to quality in uncertain times
We believe L&T is in a better position to withstand any global crisis compared to its smaller peers. In a scenario of risk-aversion due to uncertainties in the European region, we believe L&T represents a relatively better choice within the sector. The company has successfully demonstrated this by posting 23% earnings CAGR during the FY08-FY10, where several of its peers had earnings decline in at least one of the years.

■ Valuation
We arrive at our TP to INR1,933 based on an SOTP valuation of L&T and its subsidiaries. The standalone company now contributes INR1,644 by applying a 14x EV/EBITDA multiple on our FY12E EBITDA estimate (INR1313 based on 15.0x FY11 EV/EBITDA multiple earlier). Our multiple is in line with the 5-year historically traded median multiple. Subsidiaries now contribute INR289 (INR228 earlier) based on their respective metrics.

To read the full report: LARSEN & TOUBRO

>Public finances in developed countries: what is the exit strategy?

The increase in public debt registered over the last few years is without precedent (table 1). In each of the main OECD countries, public debt is not on a sustainable path1 (chart 1). This contrasts with past periods, during which emerging markets have appeared more at risk from this perspective (chart 2). The majority of developed countries will have a public debt ratio in excess of 90% in the middle of the decade.

From 2007 to 2014, according to the IMF (2010), the debt ratio in these countries is expected to rise by an average of more than 30 points of GDP, reaching an average of 110% of GDP. Of this increase, 3 points will be related to supporting the financial system (table 2), 4 points to the increased cost of debt, 10 points to automatic stabilisers, 3.5 points to budget stimulus measures and 9 points to losses of tax revenues relating to the decline in asset prices. The widening of deficits is largely structural in nature. The deficit ratio adjusted for cyclical variations is 4.4% in the eurozone out of a total deficit of 6.7 points, with 9.8 points in the UK (out of a total of 13.3 points) and 8.8 points in the US (out of a total of 10.7 points). In the past, this structural deficit has shown a strong tendency to persist.

For the time being, surplus production capacity limits the risk of public debt having a crowding-out effect on private investment. However, the public finance situation calls for credible recovery measures. While budget stimulus measures are intended to boost demand from financially constrained consumers (in their case, the classic system of budgetary multipliers takes full effect), it may for others - the majority - result in the emergence of Ricardian behaviour, i.e. growth in savings in order to cope with the increased cost of future tax increases. While the conventional crowding-out effect does not have an impact, the budget situation - contrary to the situation before the financial crisis - now affects the assessment of risks and may inflate risk premiums (chart 3). This results in a higher cost of debt, making adjustment even more difficult.

This situation could make an end to the until now observed developments characterised by rising debt with no impact on interest payments because of falling interest rates - a kind of "free lunch" (charts 4 and 5).

A high level of debt increases the probability of an interest rate or growth shock resulting in unsustainable debt, with higher debt ratios and a widening gap between the apparent real interest rate and the rate of growth. This configuration makes adjustment even more difficult and in any case presents a number of threats (snowball effect of debt). From this viewpoint, recent data clearly call for a reaction. Furthermore, as a direct consequence of the financial crisis - with an increase in the cost of capital and structural unemployment and a decline in economic activity (Furceri et al, 2009) - the potential level of GDP in the OECD region is around 3.5 points below the pre-crisis level (chart 6).

To read the full report: PUBLIC FINANCES

>SATYAM COMPUTERS: Up on its feet and running (BNP PARIBAS)

■ Retain BUY. Increased confidence in thesis after recent checks.

■ Deal wins still largely of small sizes, but momentum improving.

■ Attrition in check, hiring picking up, margins likely back on track.

■ DCF-TP of INR130.00. Risky, but compelling turnaround story.

Higher confidence after checks
Our latest round of checks on Satyam gives us increased confidence in our FY10 USD1.1b standalone revenue estimate and our thesis that the company should approach industry average growth and profitability by FY11. Since our last update, we believe that the business has improved, especially from February, partly due to an industry-wide revival. Apart from the recent wins such as the USD48m, deal from KMD and business from South Africa, Brazil and the Middle East, we believe Satyam continues to win short tenure projects, mostly from existing customers. In fact, the deal advisory firm, TPI lists Satyam among only a handful of Indian players that have won 10 or more contracts each greater than USD25m in 2009. The lack of audited financials remains an impediment to winning more large projects, which should change after June, in our view, when the company releases its FY09-10 results.

Operations now at a likely more “normal” level
1) We believe pricing continues to be at industry average levels because of the smaller sized projects that Satyam is working on, where it may have faced limited competition. 2) We believe attrition levels have subsided after the salary hikes in January and after news of another
round planned in April. 3) At its current headcount of a likely 22-23k (25- 26k incl. subsidiaries), Satyam appears well staffed and is possibly operates at a healthy utilization of over 70%. We believe therefore that it is well placed to improve its margins by our expected 9.3ppts in FY11. 4) We also believe Satyam has started hiring aggressively for about 2,000 positions in response to an increased pipeline, in our view. Our revised numbers are largely unchanged, but reflect higher utilization rates offset by higher wages (to retain talent), higher SG&A and a stronger USD/INR.

Risky, but investment case difficult to ignore
We acknowledge the risks that Satyam presents given the lack of audited financials and the near-term overhang of L&T likely selling its stake. However, we believe Satyam still makes for a compelling turnaround story and that the audited results could reflect a better picture than investors fear. We believe an eventual merger with Tech Mahindra would be synergistic and could re-rate both the stocks ahead of the event. We also estimate Satyam has about USD700m or 28% of its market cap in cash that it can use strategically. Finally, large cap IT stocks have rallied 14-19% from their YTD lows, while Satyam is up only 3%, hence presents a case for a catch-up. Retain BUY.

To read the full report: SATYAM COMPUTERS

>Time to revisit sectors and stocks (BNP PARIBAS)

■ Shift in source of growth from stimulus-driven consumption to industrial production.
■ We expect acceleration in credit growth and IP; yield curve to flatten as rates tighten.
■ Feedback from conference: buoyant consumer demand and government policies will likely help capital flows and infrastructure build-out.
■ Overweight: banks, autos, infrastructure, IT, utilities and pharmaceuticals.

Some things have changed, some haven’t
Since our previous rebalancing of the model portfolio (“Changes in our model portfolio”, dated 14 Jan 2010), bank credit growth, which was hovering at 11-12% around late December, has accelerated to c15%. Industrial growth, rather than consumption growth, is clearly driving economic growth, as we anticipated. Some other data points are new. 1) The recent budget signals fiscal consolidation, albeit by relying on one-off non-tax revenue than on reducing expenditure or by increasing the tax-to-GDP ratio. 2) The budget also provides additional impetus to consumer discretionary with the tax-slab adjustments, leading to an increase in personal disposable income. 3) From our recently concluded Investors’
Conference at Delhi, the key message was that the policy framework in all departments (finance, urban development, roads, external affairs, telecom) would focus on facilitating: a) foreign capital inflow, b) acceleration in infrastructure build-out and flow of private capital to infrastructure, and c) access to free trade.

Slight changes to earnings estimates; retain Sensex target at 21,000
Recent earnings revisions from India BNPP analysts have led to earnings growth forecasts declining in energy (particularly Reliance Industries) and increasing in autos (Tata Motors), real estate (DLF) and IT (Wipro). We forecast 31% Sensex EPS growth for FY11 and 15% for FY12. After the recent earnings revisions, BNPP’s estimates for Sensex EPS are INR840 for FY10, INR1,096 for FY11 and INR1,264 for FY12. On these estimates, the Sensex wouldtrade at 15.6x 1-year forward PE – only 3% higher than the long-term average of 15.1x. On P/BV, Sensex would trade at 15.6x versus the 10-year average of 15.1x.

Overweight: banks, auto, infrastructure, IT, utilities, pharma; Neutral: property
Our sector allocation remains largely intact. We continue to prefer the interest-rate sensitivities. We include property (through IBREL), where we had zero weight earlier. Within banks, we exclude Union Bank, include HDFC Bank, reduce weight on PNB and increase weight on ICICI. Clearly, we move away from PSU banks to private banks. Within utilities, we allocate more weight to merchant-power plays through the inclusion of Adani Power. Within IT, we now focus entirely on IT services; we exclude Tech Mahindra and allocate the weight to Infosys. We also increase weight on Reliance Industries, as we believe the period of severe underperformance for the stock has come to an end.

Top picks: Axis Bank, Dr Reddy’s, M&M, IRB and TCS
Our top picks tie-in with the themes that we highlight. Credit-growth acceleration, infrastructure build-out (particularly roads, urban infrastructure and power), increased boost to consumption leading to further acceleration in discretionaries, and healthy cash flows from companies in developed economies leading to higher IT spending are the key investment themes to consider. We try to find reasonably valued exposures for these themes.

To read the full report: MARKET OUTLOOK

>ABAN OFFSHORE (BNP PARIBAS)

■ Management reiterated creditors backing for debt rescheduling.
■ Company to de-risk geographical concentration in Middle East.
■ Management not averse to further equity dilution to reduce debt.
■ Reiterate BUY with TP of INR1561 (7.7x FY11E EBITDA).

Strong creditors backing
There have been concerns about Aban’s ability to service its bullet payments for March 2010 and March 2012, even after debt re-scheduling. Management allayed such fears and said that Indian banks are ready to refinance loans coming up as bullet payments. Also, Indian banks are more willing to extend tenure, rather than take possession of rigs and sell them at a discount to NAV, as Aban has a predictable cash-flow-backed business.

Keen to reduce geographical concentration
Out of the 16 rigs deployed, 6 are in India and 5 in the Middle East (Iran). Management plans to diversify geographically and is reluctant to charter more than one rig in the Middle East from the four idle rigs – DD1, 6, 8 and Aban VII. Management aims to deploy three out of the four rigs by mid-FY11. Utilization rates in Latin America and South East are stabilizing with no visible pressure in spite of incremental supply earmarked for 2010/11. Management believes that rig market fundamentals are improving with E&P companies restarting long-gestation projects estimated to be viable at the current USD70-80/bbl crude price.

Further equity dilution – a risk
With operating cash flows sufficing debt repayment obligations at best, Aban has no growth plans for FY11. While no capex is guided for FY11, if rig environment continues to improve in terms of utilization and day rates, Aban plans to invest in a deepwater vessel backed by a long-term contract by FY12/13. However, until then Aban’s priority is to reduce debt levels to a comfortable 2-3x, giving comfort to creditors, mainly Indian
banks and, for the same purpose, might not shy away from raising equity.

Still steam left to play for new rig orders/de-leveraging
At CP, risk-reward looks favorable; we are comfortable owning the shares for the potential rig contracts and to play the de-leveraging story (we expect D/E to decline from 5x in YTD FY10 to 2.3x by FY12). We do not anticipate significant downside from current levels as more than 75% of the revenue is contracted until FY12. We reiterate our BUY rating and INR1,561 TP. We value ABAN at 7.7x target 2011E EV/EBITDA, in line with the global peer average on Bloomberg consensus estimates. We believe the market will cheer the potential rig contracts from current levels; we look for rig rates of ~USD125,000 for the DD series of jack-ups in line with current world average for jack-ups. Risk: Contract delays.

To read the full report: ABAN OFFSHORE

>ADANI POWER (BNP PARIBAS)

The live wire

■ Plans to raise power-generation capacity 10-fold in next three years.
■ We assume higher coal costs and lower merchant tariffs.
■ Revenue growth of 132% and EPS growth of 127% over FY11-13E.

Initiate with BUY and a DCF-based TP of INR135.00.
At an inflexion point, in our view We initiate coverage of Adani Power (APL), an independent power producer (IPP), with a BUY rating. The company plans to expand its power-generation capacity 10-fold to 6.6 GW over the next three years and by another 6.6 GW. APL has a good mix (75:25) of long-term agreements to sell power and exposure to the spot market where tariffs are higher. This mix provides earnings visibility and high returns. We project APL’s ROE will peak at 41.9% in FY12.

Vertical integration, strong execution
APL is part of the vertically integrated Adani Group, which has interests in coal mining, shipping, special economic zone (SEZ) development, commodities trading (including coal and power), city gas distribution and oil & gas exploration. Listed group companies, namely, Adani Enterprises (ADE IN, CP: INR486.4, Not rated) and Mundra Ports and SEZ (MSEZ IN, CP: INR673.85, Not rated) have a track record of executing large infrastructure projects.

Conservative assumptions but still find upside
We estimate APL’s coal cost for its Mundra plant would increase only 7% if there is an increase in imported coal costs (we expect a 17-18% hike) from a change in the Indonesian mining laws. This is as APL will partly source cheaper coal from Coal India. We also assume conservative merchant tariffs, at INR3.50/kWh in FY11 and FY12, after which we model in a 6% increase. Based on our conservative assumptions, we estimate APL’s revenue will grow an average of 129% pa and EBITDA 141% pa in FY11-13, on the back of the planned10-fold rise in power-generation capacity.

Valuation
We value APL’s 6.6 GW of projects using a DCF model. We estimate project free cash flows for the next 15 years and then consolidate it to determine free cash flow to the firm. We assume a terminal growth rate of 3%. We use a WACC of 9.2%, a tax rate of 30%, a cost of equity of 15%, a cost of debt of 11% and a target D:E ratio of 80:20. APL trades at an FY12 EV/EBITDA of 6.4x versus the global peer group average of 6.6x on Bloomberg consensus estimates (Exhibit 10). At our TP, the stock would trade at an FY12E EV/EBITDA of 8.1x – a premium which we believe is justified given APL’s substantial growth prospects. Key risks stem from higher-than-expected coal costs, lower utilization, lower-than-expected merchant tariffs, non-allocation of captive coal blocks for Tiroda, protracted arbitration for reneging on its PPA with GUVNL, or a withdrawal of tax incentives.

To read the full report: ADANI POWER

>RELIANCE INDUSTRIES (BNP PARIBAS)

■ Upgrade to HOLD and raise SoTP-based TP to INR1010/sh.
■ 3Q results suggest refining has bottomed, recovery likely to be slow.
■ Switch to Cairn for near-term; prefer ONGC for the long term.
■ Our concerns on weak refining and delay in gas issue play out.

Refining bottoms out, but don’t expect a sharp uptick
3QFY10 results showed refining bottoming out for complex refiners like Reliance. 3Q refining margins came in higher than we expected, at USD5.90/bbl, on strong utilization rates of 107% for both the refineries. The new refinery impressed with utilization of 115% supported by strong exports. Singapore complex margins increased in the past couple of weeks to ~USD5.5/bbl as oil prices cooled off and product cracks remained stable. While we believe the worst is over for global complex refiners, we do not share the view that there could be a strong recovery in refining. Product demand, especially for high-margin products like gasoline and diesel in US and Europe, remains muted. While China and India are seeing consumption grow at a rapid pace, on a global scale, the incremental demand doesn’t move the needle to enable a refining revival. In addition, greenfield capacity/unit upgradation continues to be a concern.

E&P should be the value driver
RIL has one of most prospective acreages within the Indian E&P space. Its landmark KGD6 field is currently producing 60mmscmd of gas and is capable of producing 80mmscmd, depending on fall-back demand and
additional allocations. In addition, drilling is on schedule at the D3 & D9, the other prospective blocks within the KG basin. However, investors will have to be patient for reserve accretion and for RIL’s E&P story to unravel. While we believe RIL’s acreage within the KG basin to be prospective, we do not assign any value to the KGD3 & D9 blocks as exploration activity is still in the early stages.

Valuation
We are upgrading Reliance Industries to HOLD from Reduce. Since our downgrade on 24 April, 2009 (“All priced in: time to get out”), RIL shares have gained by 14.9% compared to Sensex at 42.6%. Our concerns of continued downturn in refining, delay in the resolution of the gas issue and no E&P surprises all played out. We do not expect to see the same degree of under-performance going forward for RIL as refining shows signs of bottoming and as the outcome of the court case closes on. We raise our TP from INR815/sh to INR1010/sh as we value refining at a higher multiple as refiners move from trough valuations. We value the refining & petchem business at 8x EV/EBITDA, KGD6 Oil & Gas fields using DCF and CBM, NEC-25 & KGD6 satellite fields at EV/boe of USD5. Key upside risk to our TP is a sudden turnaround in refining.

To read the full report: RELIANCE INDUSTRIES

>Introducing five structural themes (BNP PARIBAS)

■ We identify five structural themes to generate significant alpha in the years ahead.

■ The five themes are: Alternative Energy, Rural Asia, Demographic Challenges,

■ Economic Rebalancing and New Emerging Markets.

■ The report drills down to the drivers behind the themes from a macro perspective.

■ We suggest a list of stocks offering direct exposure to each theme.

We identify five structural themes that should critically influence Asia’s economic growth and should have potential to generate signficant alpha in the years ahead. The five themes are: Alternative Energy, Rural Asia, Demographic Challenges, Economic Rebalancing, and New Emerging Markets. This report analyses the drivers behind the themes from a top-down perspective, and includes a list of stocks offering direct exposure to them (page 4). We plan to revisit these themes over the course of the year when there are new developments.

Theme #1: Alternative Energy: Investing for a greener Asia – We believe environmental change, accelerating investment, government support and strong demand from EM will drive the increased use of alternative energy. We suggest investors select low-cost and efficient Asian producers with reasonable valuation that may offer exposure to the theme.

Theme #2: Rural Asia: Policy support to last – The urban consumption theme is well recognised, but the spending power in rural China and India, driven by supportive policies and rising income, is less analysed. We focus on under-penetrated consumer products and select beneficiaries, including farming equipment and agricultural-related industries.

Theme #3: Demographics: Aging challenge – Asia’s elderly population is expected to increase at a 4.0% CAGR over the next decade, far exceeding the 0.6% CAGR for the rest of population. The challenge is most pressing for Singapore, Hong Kong and China. We suggest a list of healthcare stocks for exposure to the theme.

Theme #4: Economic Rebalancing: Producers moving up the value chain – It’s not only about consumption! Our analysis reveals a different angle to this theme: China’s manufacturers need to move up the value chain as the economy rebalances away from low value-added industries. We suggest stocks that fit into this theme.

Theme #5: New Emerging Markets – Korea will likely graduate from the MSCI emerging market to developed market this year; and this may have positive liquidity repercussion among large caps in Korea. UAE and Qatar are most likely to achieve emerging market status in 2010, while Nigeria could be placed on review for upgrade to emerging market.

To read the full report: THEMATIC STRATEGY

>INDIA TECHNOLOGY: More evidence of a solid FY11 (BNP PARIBAS)

■ CTSH outlook a likely pre-cursor to strong Infosys guidance
Cognizant’s (CTSH) CY2009 results provided the latest data point supporting an improving demand environment for Indian IT services players. The revenue (USD903m) and non-GAAP EPS (USD0.50) topped the consensus view of USD889m/ USD0.47. More significantly, the CY2010 revenue growth guidance of “at least” 20% matches current consensus estimates, and leaves scope for upgrades as the revenue visibility improves. Using this and NASSCOM’s recent industry exports growth estimate of 13-15%, we believe the upper end of Infosys’ initial FY11 (March 2011) growth guidance could be 16-17%. We expect this to be raised through the year (as is typical with Infosys) to eventually meet or exceed our 21% projection. Healthy US corporate free cash flows (because of reduced investments last year) driving increased tech spending through FY11 has been the theme driving our positive sector view; barring unexpected adverse macro events, we see little risk to that outlook.

■ More evidence supporting corporate spending recovery theme
Over the past few weeks, further evidence points to improving pipelines and faster deal closures: 1) Positive commentary from Cisco, Oracle and SAP – all call for a recovery in enterprise spending in 2010; 2) Our recent industry checks suggest an unusually high RFP activity carrying forward from the December holiday season into 2010 so far; 3) Genpact, the US-listed BPO services provider, guided for 14- 17% CY2010 revenue growth, which implies mid-high 20s growth from its non-GE accounts (60% of revenue) to offset flat revenue from GE; 4)Industry hiring is picking up significantly. Our checks with local recruitment agencies suggest significantly increased business for them, while gross hiring is likely to exceed CY08 levels, which would put companies on course to achieve our estimates.

■ Recent correction provides buying opportunity
Frontline Indian IT stocks have corrected 9-13% from their recent highs, in line with the overall market, on heightened concerns of debt default from countries such as Greece, Spain, Portugal and Ireland. We point out that this should not be an immediate concern for Indian players, unless this cascades into another global crisis as: 1) they generate insignificant revenue from the above countries, and 2) the cross-currency impact since December (beyond what we are modelling) from a falling EUR and GBP has been more than offset by a depreciating USD/INR. We reiterate BUY on Infosys and TCS among the large caps, and HCL Tech, Tech Mahindra, Satyam and Rolta among the smaller names. We have a near term bias towards the larger caps, which we see as less volatile stocks.

To read the full report: INDIA TECHNOLOGY

>INDIA CEMENTS: Challenging times ahead!! (BNP PARIBAS)

Weak demand in South + excess supply = D/S disequilibrium We downgrade Indian Cement sector to Negative as the pricing outlook is likely to remain challenging given weakening demand in South and West markets. Weakening demand in South (floods, political instability in AP & Karnataka) will likely exacerbate the pricing outlook for South and Western regions (due to inter-regional transfer). The key themes we highlighted in our initiation report titled “pricing resilience and cost deflation – Mantra for FY10” have played out, with cement companies reporting excellent financials for F1H10. We expect growth over the next two quarters to remain weak due to a) a slower-than-expected pick-up in government infrastructure projects, b) high base effect of F2H09, c) lingering weakness in commercial and industrial segments and d) marginal negative impact of monsoon on rural housing demand.

Margins have peaked; lowering FY11 EBITDA estimates by 5-20% for stocks under coverage: Our recent channel checks with cement dealers in South indicate pricing collapse in certain cities (Hyderabad, Chennai and Visakhapatnam). We expect weak pricing to remain over the next 12-18 months with South and West being the most affected. We expect average cement prices to decline by 2% y-y for FY10 and -8.1% y-y for FY11 (driven by south: -13.0% y-y in FY10 and -13.7% y-y in FY11). We lower our FY11 EBITDA estimates by 5-20% for stocks under coverage.

Target Prices lowered for ACC and Ambuja: We are lowering our TP for ACC to INR604 (from INR684) based on 5.0x our CY10 EBITDA of INR21.5b representing a downside of 18.1%. We lower our TP for ACEM to INR85 (from INR95) based on 5.5x our CY10 EBITDA of INR19.7b. We maintain our BUY rating on UltraTech Cement due to a) a potential rerating on consolidation of Grasim’s cement business, b) lowering of exposure to south and west to 57% from 75% (prior consolidation), c) largest Indian cement company with 48.0mt of capacity. We await details on swap ratio for Smruddhi Cement merger with UTCEM before changing our TPs for UTCEM and Grasim.

To read the full report: INDIA CEMENTS

>Thematic Strategy: A further upswing for tech (BNP PARIBAS)

We believe investors have overlooked the strong possibility of a corporate spending upswing in 2010. The drivers to rising corporate capex are falling into place: Improving economic growth (capex has a beta of 2.5x to GDP), significant increases in free cash flow, and thawing of capital markets for corporate funding. Several industries should benefit, including tech, media, airlines, hotels and capital goods.

Technology is our preferred play on the theme for four reasons. First, with a severe cut in corporate tech spending this year (-8% in the US and -5% globally), tech investment is set to rebound. Second, lead indicators point to a 5-15% rise in real tech spending and a sustained demand recovery. Third, the corporate PC repalcement cycle should take off, spurred by aging PC and the release of Windows 7. Lastly, investors have a large underweight position on tech, whereas our Investment Wheel highlights tech as a major outperformer in Phase 4.

■ We expect a strong upswing in corporate spending in 2010.

■ Tech is our preferred play on this theme, due to 1) positive lead indicators, 2) depressed base, 3) PC replacement cycle and 4) investors’ underweight position.

■ Recommend buying Taiwan hardware producers and select India IT services.

While Asia’s consumer tech demand should stay robust, we believe corporate tech spending will be an important determinant of tech performance next year. Taiwan hardware stands out as the major beneficiary of this theme, due to high operational leverage and attractive valuation. For Indian IT services, a less-pronounced recovery and rich valuation necessitate careful stock selection. Our analyst is also bullish on the Korean memory business. Within these areas, we recommend four stocks to buy.

Strong upside for corporate spending in 2010
We believe markets have overlooked the significant upside potential for corporate spending next year. This is understandable. In this cycle, investors have been focusing on beneficiaries of the strong policy stimulus and resilient Asian domestic demand that triggered this V-shaped rebound. While the global economy is expanding again, concerns on the sustainability of the recovery linger, leading to expectation of muted private-sector investment ahead.

However, three factors support our upbeat view on rising corporate capex. First, corporate spending is a leveraged play on growth. Historically, capital spending has a beta of 2.5x real
GDP growth, based on US quarterly data over the past 40 years (Exhibit 1). With a depressed base in 2009, a moderate global growth outlook still could drive a strong rebound in corporate spending. Our economists forecast US GDP to grow 1.6% next year, up from a 2.6% contraction this year, while Asia ex-Japan is expected to stage a strong 7.4% rebound in 2010, recovering from the 4.8% pace this year.

To read the report: THEMATIC STRATEGY

>Large equity issuance in the pipeline again (BNP PARIBAS)

• In the remainder of FY10, we expect USD11b primary equity issue; including PSU divestment, it could go up to USD14-15bn.
• This could lead to short-term stagnation in the secondary market, like in the mid- May to late-August period.
• 62% of new equity coming in real estate, 18% in power; secondary market performance of these sectors could be under near-term risk.

■ Previous spate of equity issue had stagnated the market
During May-August 2009, around $9bn primary equity was raised, which absorbed $6.6bn FII
money. Consequently, FII inflow into the secondary market during this period was only $1.8bn,
even though total net FII inflow was $8.4bn. As a result, after the election result step-jump (17.3% on 18 May), Sensex stayed virtually flat until the third week of August (up 5% between 18 May and 20 August). In fact, during June, July and August, FII inflows into the secondary market were negative, even though total net FII inflows were to the tune of $4bn.

■ Equity issue comes after secondary market performance
Our correlation analysis shows that primary issuances lag stock market performance by 2-3
months. This is to be expected intuitively – strong return from market bolsters companies’
confidence in issuing equity. As IPOs start coming in, FIIs divert their interest to the primary
markets and take money out of secondary markets, leading to stagnation in the secondary
market, such as in the mid-May to late-August period.

■ Another large equity issue pipeline approaching
In the remainder of FY10, we see another $11b equity issue pipeline. Including potential dilution
of the government’s stake in PSUs, the pipeline could increase to $14-15b, which could lead to
another phase of stagnation in the secondary market in the near term.

■ Sectoral concentration and quality of issues a concern
Unlike the previous round of issues, in this round, there are several second-tier companies and
first-time issuers. Till date in 2009, almost 80% of the $10.27b equity issue has come from four
sectors – banks, oil & gas, real estate and power. Real estate and power have contributed almost
50%. In the future, out of the $7b announced issues, real estate alone is likely to account for
62%, and real estate and power together will account for 80%. We believe that such sector-wise
concentration poses risks for the secondary market performance of these sectors.

■ Longer-term positive for capex and balance sheets
The first wave of equity issues repaired the balance sheets of most companies with stretched
balance sheets. Even in the second phase, we believe some companies (particularly in real
estate, retailing) would target balance sheet repair with equity money. But in many other sectors
(e.g. banks, power, metals and mining), additional equity is likely to be used for expansion
projects. This has positive implications of capex revival as end-user demand strengthens, or
inorganic expansion.

To see the full report: INDIA STRATEGY

>NHPC LTD (BNP PARIBAS)

Hydro Ain’t Electrifying

■ Hydropower – a risky business
We Initiate coverage on NHPC Ltd with a REDUCE rating and TP of INR29.00. NHPC is a regulated government-owned hydropower generation utility with 13 existing plants and a capacity of 5.1GW (12% of India’s hydropower generation capacity). Hydro power projects have long gestation periods taking several years to plan and build. With potential opposition from environmentalists and people displaced by the project, they also face significant execution risks. Seven of NHPC’s 11 projects under implementation have been delayed by a year or more owing to natural calamities, opposition from environmentalists and locals.

■ Low returns for high risks
NHPC assumes a higher risk in building hydropower plants but the Central Electric Regulatory Commission’s (CERC) tariff regulations do not compensate it for the extra risk. Unlike the National Power Thermal Corp (NTPC), NHPC has lower levers to boost its ROE above 15.5%.
New regulated tariffs for the period FY10-14 are negative for NHPC as its profits could be hit if it can’t generate the stipulated amount of electricity owing to water shortages. We estimate every 10% shortfall in generation will lead to an 11.3% reduction in our FY10 EPS estimates.

■ High CWIP and low leverage depress ROEs
The long gestation period and high execution risks mean investor returns in NHPC are low. ROE in FY09 was only 9.1% due to low leverage and a low asset-turnover ratio. Presently 32% of its equity is stuck in capital work in progress, which earns no returns – due to the long gestation of
projects and execution delays, 8% in 8.5% tax-free bonds and 6% of equity is deployed in cash. We expect the same in FY12, when only 49% of the equity will earn returns.

■ Unattractive valuations: Initiate with TP of INR29.00/share
Our TP of INR29.00 is based on 1.4x our FY11 BV/share estimate, a discount to NTPC’s FY11 P/BV of 2.5x. We believe the valuation discount is warranted for the significantly lower ROE of 8.3% vs NTPC’s ROE of 14.6%. We expect upside if more NHPC projects are allowed to sell Carbon Emission Rights under the Clean Development Mechanism.

To see full report: NHPC LTD