>GREED & FEAR: Jokowi Update (CLSA)

Jakarta

Wall Street equity benchmarks are back near record highs on relief stemming from America’s renewed military involvement in Iraq, however limited, and the, for now, seeming lack of escalation in Ukraine. Still GREED & fear continues to view the Ukraine situation as one likely to trigger more stress for markets since there is, so far as GREED & fear can tell, no concrete evidence that Russian President Vladimir Putin has backed down.

As for US equities, the incremental reduction in tapering represents a rising risk as does the
fact that the US Treasury bond market is still not confirming the narrative of the consensus,
namely an assumed cyclical acceleration in the American economy. Still the coming days of
central bank speech making at Jackson Hole, with related deliberations on the labour market, should make markets even more sanguine as Chairwoman Janet Yellen is likely to remind investors further, if such a reminder is needed, that she is the uber-dove. Meanwhile, aside from the bond market, the rising fundamental risk to the US stock market is perhaps best illustrated within the equity universe by the fact that American small caps have been underperforming since March. Thus the Russell 2000 Index peaked in early March and has since underperformed the S&P500 by 9.7% (see Figure 1).

To see figures and read full report: JOKOWI UPDATE


RISH TRADER

>GREED & FEAR: China’s technical signal

Verbier
The Eurozone newsflow has not deteriorated dramatically as yet even though the holiday
season is formally ending. Still GREED & fear remains suspicious of further substantive equity
market advances from here. Stock markets want to see the ECB buying periphery sovereign
bonds now. But it looks like they will have to wait, with the latest news reports that the ECB will
defer any announcement until after the German Constitutional Court ruling on 12 September.
Still so long as hopes of the ECB bond buying programme are not dashed completely, markets
can remain hopeful which should prevent a significant decline. It is also likely that Eurozone
leaders will cut some slack to the pleas of Greek leader Antonis Samaras for more time in
meeting its fiscal deficit target. Such a development will in turn reduce near term fears of a
Greek exit. In GREED & fear’s view it remains the case that the German political establishment
does not want to risk a Greek exit for fear of opening Pandora’s Box.


To read report in detail: GREED & FEAR
RISH TRADER

>GREED & FEAR: Front running Mr Flexible

Zurich
As the August stock market rally has proceeded in ever more desultory trading volumes, so the grinning talking heads appearing on CNBC have become increasingly bold in proclaiming that the Eurozone is finally getting its problems “sorted”. GREED & fear should make it clear that such is not the view here. Rather the base case is for renewed risk aversion heading into the fourth quarter.

The reason for the increasingly upbeat mood is clear and was discussed here at some length two weeks ago (see GREED & fear – The road to euro quanto easing, 9 August 2012). That is that Flexible Mario has set out a road map to quanto easing and Frau Merkel has not immediately disassociated herself from his comments. Still that does not mean that the ECB has already embraced quanto easing or, indeed, has already committed itself to purchase Spanish government debt, a development that might be assumed given the dramatic decline in two-year and 10-year Spanish bond yields in the last four weeks (see Figure 1). For such developments hinge critically on the key Berlin-dictated Eurozone concept of conditionality.


This week has seen the first stirrings of reality as European politicians return from holiday,
including Frau Merkel. Thus, the ECB felt it necessary to issue a statement on Monday denying
a Der Spiegel weekend report that the ECB was considering committing itself to capping yields on targeted purchases of specific Eurozone periphery bonds. While GREED & fear has little doubt that Ever Flexible Mario would love to perform that sort of manoeuvre such an ECB
approach, in GREED & fear’s view, would be anathema to Merkel since it would remove all
incentive on the relevant periphery country to get its affairs in order; be it in terms of meeting
fiscal targets or pursuing structuring reforms. True, Merkel does not seem to agree with the
Bundesbank approach which is to oppose ECB purchases of sovereign bonds on a point of
principle. But she will certainly demand a certain due process. This is also why Spanish pleas
for an open-ended commitment by the ECB to purchase Spanish debt would seem to have no
hope of being met right now, most particularly given the current lack of a market panic.

Indeed renewed market panic is probably required to apply the necessary pressure to give the
Spanish what they want. In the absence of such a panic the focus of policymakers will be on
conditionality and what the Spanish must agree to in return for a ECB commitment to purchase
their sovereign debt at the short end of the curve, which is what Draghi has indicated.

To read article: GREED & FEAR

> QE discounted? (CLSA)

Despite the continued downward earnings momentum in corporate earnings, MSCI India has moved up by 5% over the last one month on increasing probability of further global monetary easing. While India is the best risk-on market, our analysis of the previous six global liquidity
events highlights that market performance has been weak post facto if the index has already moved up on anticipation, which seems to be the case now. Our global strategist Chris Wood warns of a risk-off in 4QCY12. We further increase weight in the defensive pharma funded by cutting Tata steel. Private banks remains key OWT.

QE hopes partially built-in, post facto performance may not be strong
■ Our recent micro strategy report ‘Breaking macro barriers’ highlights India as the top pick in Asia in in the event of global money printing.

■ A possible favourable action/hints by the upcoming US Fed and the ECB meeting in early September can cause the Indian markets to move up.

■ We, however, note that Indian markets already up 14% ytd in INR and 8.5% ytd in US$ makes India the best performing large Asian market.

■ Some of the easing hopes are already built-in. Our analysis of the previous five global liquidity events highlights that market performance has been weak post facto if the market has already moved up on anticipation.

Incremental QEs have had limited impact
■ After the initial QEs in CY09, incremental QEs have had diminishing impact on the Indian markets. We have observed that the Indian market has reversed part of the initial gains in the subsequent two months. In five of the six global liquidity events, however, financials have outperformed.

■ On a separate note, the RBI has been infusing liquidity locally, through OMOs. RBI now holds Rs5.6trn (US$100bn) worth of Govt securities / bills on its books, up from Rs3.5trn a year ago and Rs1trn two years ago. With bank borrowings from RBI now less than 1% of deposits, more OMOs appear unlikely in the near-term.

Monsoon revival a positive but policy hopes diminishing
■ With the recent revival in the rainfall activity, monsoon is now 13% deficient from 26% deficient earlier in Jun-12. This should provide some relief.

■ However, with the recent logjam in the parliament on the ‘coal mining issue’, political situation has become more fragile. The new finance minister Mr Chidambaram has also ruled out any near-term revision in auto fuel prices.

Raising Pharma OWT, IT to Neutral; Reducing materials to UWT
■ We raise OWT in pharma by adding Sun Pharma and Cipla to our model portfolio and remove Dr Reddy’s. Sun Pharma 15%+ operating earnings growth can see further upsides through niche US opportunities like Prandin. Cipla will see margins improving with favourable currency and increasing utilization of Indore SEZ. We remove Dr Reddy’s as we see earnings momentum fading with limited number of incremental opportunities in the US.

■ The above is funded by removing Tata Steel. Falling trend in iron ore and steel prices is a negative for Tata steel.

■ We remove BHEL from the portfolio as the stock is up 10% over the last three months and orderflow outlook remains weak. Adding Adani Ports as our preferred infra play. The company should drive multi-year volume growth without much capex.

■ Private sector banks remains our key OWT due to continued better asset quality trends. However, we remove IndusInd bank on CV cycle concerns and replace with cheaper Axis Bank. Investors’ fears on Axis’ asset quality resulted in valuation derating, however the reality on asset quality has been better than expectations with stressed asset ratio of 3% among the lowest in the sector.

■ We raise IT services to neutral by adding 1 pt to Infosys as reasonable valuations coupled with under ownership forms a support. We add 2 points to ITC to maintain our 4 ppts UWT on staples, where premium valuations and risks to growth makes us cautious.

■ Our top 5 picks are ICICI Bank, Axis Bank (earlier Yes bank), BPCL, Power Grid and Lupin.

To read report in detail: QE DISCOUNTED

RISH TRADER

>APOLLO TYRES: Rubber tailwinds

International rubber prices have declined by over 30% since the beginning of May in rupee terms with futures contracts suggesting that weak prices are likely to sustain. While domestic prices have declined a more modest 9%, historic trends suggest that they will converge in the
coming weeks. This bodes well for Apollo given that a 10% change in natural rubber prices implies a 270+ bps increase in India margins and 30%+ increase to consol EPS. Rubber is a much more critical driver for Apollo than volumes and suggests upside risks to FY13-14 earnings. BUY.

Rubber prices have been under pressure in recent weeks
International natural rubber prices have declined over 30% since early May in rupee terms to sub Rs140/kg while the December-January futures point to prices sustaining around the Rs140 mark. While the correction in domestic prices has been more modest so far (~9%), the historic correlation between the two suggests a pull back in domestic prices ahead. Domestic spot prices have already slipped to Rs178/kg. Given the historic premium of ~8% over international prices, a fall to around the Rs160/kg mark seems likely.

Significant positive for Apollo
Rubber is a key component of raw materials for Apollo (65% of India business RM in FY12). Within this, over 60% is natural rubber as the product mix is geared towards CV tyres. A 5% reduction in natural rubber costs points to a 14% increase in domestic Ebitda, 137bps improvement in margins and 16% increase in consol EPS. Factoring in a natural rubber price of 170/kg would imply a 45%+ increase to our consol EPS estimates.


Sensitivity to rubber higher than to volumes
While the soft domestic economic backdrop has raised worries about volumes, this is less critical for Apollo than rubber. A 5% reduction in our domestic volume estimate implies a 13% reduction in domestic Ebitda and 15% reduction in consol EPS estimates. This is actually less than the sensitivity to a 5% change in rubber despite being much less volatile than rubber prices.

Upside risks to earnings, maintain BUY
Given the tailwinds from rubber and the uptick in Europe margins visible in 1QFY13, we see significant upside risks to our estimates for Apollo Tyres. Even on current estimates, valuations are reasonable at 7.7x FY13 PE/1.3x FY13 PB. We reiterate our BUY recommendation on Apollo with a price target of Rs110, 25% upside. We see the worries around CCI as being overdone.

To read report in detail: APOLLO TYRES

>JET AIRWAYS (CLSA)

Jet reported better than expected results for 1QFY13 with pre-ex PBT of Rs.456m after five successive quarters of losses. Yield improvements, particularly in the international business, helped drive 30% revenue growth. Costs remained under control and helped drive a 113% YoY increase in Ebitdar. Looking ahead, a strong yield environment, focus on route utilisation and tight cost control should help sustain performance. We now expect profitability to sustain over FY13-14 and significantly upgrade estimates. Upgrade Jet to BUY with a TP of Rs500.

Back in black after five quarters of losses
Jet’s 1QFY13 results reflected rising yields and high cost discipline amidst pressures from fuel, currency and higher airport charges. Ebitdar rose 113% YoY/100% QoQ with a margin recovery in both segments. Pre-exc PBT returned to positive territory after five quarters of losses, coming in at Rs456m against a loss of Rs2.7bn in 1Q12 and Rs3.3bn in 4Q12. At the reported level, FX losses were largely offset by gains on sale and leaseback of two aircrafts and net profit stood at Rs247m – the highest since 3QFY11.

Domestic – yields strong, focus turns to costs and efficiency
Domestic seat factors were at 76.2% (74.6% in 1Q12) while yields were up 10% YoY/9% QoQ amidst strong industry pricing. Fuel costs rose 8% QoQ/27% YoY as rupee depreciation filtered through while other costs grew slower than sales. Ebitdar margins stood at 15.0% (+700bps YoY/1040bps QoQ). Looking ahead, while 2Q will see seasonal weakness, the overall yield and load environment remains strong. Margin performance is being  complemented by tight cost control with Jet controlling staff, selling, maintenance and other costs to target a 5-8% reduction in cost/ASKM.

International – yields and loads strong, route optimisation in focus
The international business saw yields increase 21% YoY/10% QoQ while loads increased 5.8% YoY to 86.3% - an all time high. The improvement is being driven by route rationalisation and an uptick in gulf markets. Fuel costs rose 25% YoY while selling and staff costs declined. Ebitdar margins improved 580bps YoY/440bps QoQ to 17.0%. Looking ahead, the focus on profitable routes and recovery in gulf markets should help sustain margins.

Asset sales easing balance sheet pressure; upgrade to BUY
Jet is focusing on debt reduction with a target of US$400m for the year. The sale and leaseback of two aircrafts and engines in 1Q helped raise Rs720m and an additional 8-9 aircrafts are planned for 2Q. Given the improved performance in international and cost discipline in domestic, we now expect improved profitability over FY13-14, driving significant upgrades. Continuing strength in operating performance and debt reduction leaves room for upside. Upgrade to BUY from SELL earlier (TP Rs500, 6.9x FY14 Adj EV/Ebitdar).

To read report in detail: JET AIRWAYS

RISH TRADER

>STRATEGY: India’s consumption story has slowed down (CLSA)

Staples growth won’t hold


Slower GDP growth and the environment of economic uncertainty has impacted India’s discretionary consumption growth story. With the nominal GDP growth now expected to slow down by 3-4ppts, staples growth cannot remain immune to the slowdown. Valuation premium at an all-time high will mean that the potential slowdown is not factored in and the sector will not prove to be a defensive anymore. Pharma sector is the best defensive bet with stable domestic growth and some kickers from limited competition launches in the US and the weaker INR. We replace Tata Motors with Lupin in our top 5 buy ideas. Potential QE led rally remains a key risk to our defensive market view. 


India’s consumption story has slowed down…
■ Several data points are now available that document India’s slowing consumption trends. Cars, two wheelers, same store sales growth, etc are all exhibiting a slowdown trend.


■ The above is not unexpected given the issues pertaining to overall economic growth
and continued inflation etc. 


…yet staples growth holds on, but for how long?
■ Consumer staples cos, have generally bucked the slowdown trend so far with a couple of small disappointments in Mar’12 quarter by Nestle and GSK which have been largely attributed to the slower offtake from the CSD (Canteen Stores Department) of Indian defence services.


■ However, with the nominal GDP growth expected to slowdown from 16-17% over the last three years to c.13% for the next couple of years with a possible risk on the downside, staples cannot remain immune to the broader slowdown trend. 
■ The previous economic downturns saw the growth slowdown for staples with a lag.


Valuation premium at all time high and hence not a defensive
■ A 3-4ppts revenue / earnings deceleration for staples companies is not a disaster but we do not believe that the same has been anticipated by the market as yet.


■ Investor focus on cashflow and balance sheet has taken the sectoral valuation to an all-time high PE premium of 109% as against 57% as the average for the last 10 years. The premium valuations makes the sector less defensive in our view.


■ Additionally, our analysis of previous deficient monsoon conditions indicate that consumer stocks tend to underperform in the deficient monsoon period. 


Pharma is the best defensive, raise Lupin to the top five Buy ideas
■ Sentiment in Tata Motors has deteriorated over the last few months with disappointments on JLR margins and the non-Evoque volumes. While the valuations appear attractive at 6xFY13CL earnings, we do not foresee any near-term trigger and replace the stock with a more defensive Lupin in our top 5 buy ideas.


■ Pharma sector offers good revenue growth visibility and the INR depreciation should drive a 5-6% earnings upgrade. Our top pick Lupin, sees triggers from launch of limited competition products like Tricor and Cipro OS in the US market that can l lead to a potential 11-13% upgrade to our and consensus FY13 EPS (expected in July 2012). We expect the company's profits to grow at c. 29% cagr over FY12-14 and find the stock attractive at under 20x 1-year forward.


■ Our other top five BUY ideas remain ICICI Bank, Yes Bank, BPCL and Power Grid.


■ Within consumption stories, we like ITC (pricing power driving earnings growth resilience), Zee (regulatory upside) and private sector banks.


To read report in detail: STRATEGY


RISH TRADER

>PSU Banks: Valuation Mirage (CLSA)

Many PSU banks are trading close to their core book and may not de-rate further; but as core book remains flat/ declines over FY12-14, returns may be negative. PSU banks’ asset quality experience will be far worse than private banks due to 1) higher leverage that will amplify impact of NPLs, 2) higher exposure to risky sectors, 3) higher exposure to riskier project within risky sectors and 4) weaker collateral. These factors compound, hence divergence in asset quality experience could be big. 10% NPL in power loans can impact PSU banks book by ~12% while for private banks impact would be ~2%. Union, PNB and tier II PSU banks will be worst impacted. Higher NPLs, rising costs and lack of capital may lead small PSU banks into losses and force a merger with larger ones.


Attractive valuations or value trap?
Most PSU banks are trading close to core book and look ‘attractively valued’. However, we see limited upside as we expect that core book values for most of these banks would not grow over next two years.


Though they may not ‘de-rate’ further, absolute upside may not be much.
Higher NPLs will be a drag on book values–100bps higher gross NPL impacts the book values by 10%-20% for PSU banks vs. 6%-9% for private (fig 11). 4 compounding factors would lead to a wide divergence


#1: PSU banks are much more levered- average asset / equity ratio for PSU banks is 17x (some are +20x) vs. 10x for private banks. So the impact of 10% higher of NPL for PSU banks will be much more than for private banks.
#2: Higher exposure to risky sectors like Power (3%-11% v/s 1%-5%), SMEs, aviation, textiles etc. (see fig 3-7).
#3: Higher exposure to riskier projects / corporates within high risk sectors - for ex: PSU banks seemingly have higher exposure to UMPPs, projects where coal
linkages are not adequate or where proportion of merchant power is high.
#4: Weaker collateral- Private banks have better collateral for their exposures to troubled corporate / projects - for ex: Kingfisher Airline (see fig 9).


Cumulatively, these factors could lead to a big divergence in impact on profits / net worth; For ex: If 10% of power loans go bad, then impact for PSUs could be ~12% of book while for private banks it would be ~2% only.


Forced mergers of smaller PSU bank to protect depositor interest?
Some small PSU banks carry a risk of getting to a state where they may have to be merged with large PSU bank to protect depositors' interest.


Higher NPL will hurt core net-worth leading to higher capital requirements which most banks would be unable to meet given that the government would need to contribute 50% of the fresh capital.


Factor this - Central Bank of India is a US$1.1bn market cap bank and its Cahairman recently mentioned that the bank would need US$2.5bn of equity in next 5 years. We believe this is highly unlikely and hence the bank may be forced to cut down dividend pay-out and even lower growth targets.


The bigger issue is that most of these banks have relatively 'fixed' increase in their cost structures due to unionised labour, peak branch efficiency etc. 


We believe the inflection / tipping point is 14% growth - a growth lower than 14% in top line could lead to a vicious cycle of ROA contraction as the cost growth would remain at 14% or thereabouts.


Some PSU banks that are highly leveraged would be forced to bring down growth to <14% and may see ROA contracting from 1% now to 30-40bps in 5 years - leading to a forced merger of these banks with a larger PSU banks.


SBI is the only PSU bank we have a BUY on given it's a) stable and strong deposit franchise, b) early recognition of NPLs.


To read report in detail: PSU BANKS

>TATA MOTORS: Buying Opportunity & Evoque demand (CLSA)

JLR’s Apr shipments saw a bigger seasonal drop than its German peers with non-Evoque sales showing particular weakness, triggering a 7% stock price correction. We believe that there are seasonal factors at play here and don’t see any evidence of a broad-based demand weakness. Our sensitivity analysis for JLR’s non-Evoque sales growth suggests favourable risk-reward. 4Q results on May 29 are likely to be strong and we expect a consol net profit of
Rs42.7bn – up 70% YoY. We see multiple positive volume and cost triggers in


JLR going forward and maintain BUY on Tata Motors.
JLR underperforms German peers in Apr with larger seasonal drop JLR’s Apr sales rose 29% YoY to 25K units but fell a sharp 31% MoM. While April is a seasonally weak month, JLR seems to have fared worse since BMW and Daimler saw a lower 21% MoM drop in Apr. The difference is even more acute if we look at JLR’s non-Evoque sales, which dropped a sharp 39% MoM and were 14% lower YoY, which is a cause for concern. Even China volumes fell 17% MoM.


No evidence yet of any underlying demand weakness
Management attributes the weak Apr sales numbers to seasonality and higher discounting by competitors in US and Europe (which has come down in May). The UK market always sees a large seasonal drop in sales in April and JLR has a higher UK exposure than its German peers, which is another possible explanation here. We note that JLR has seen an average drop of 30% in volumes from Mar to Apr in the last 10 years, though the drop has been a lower 22% in the last two years. We were expecting a lower MoM drop this year due to strong Evoque demand. Tata is not seeing any signs of demand weakness in any geography and continues to guide for 100-110K Evoque volumes for FY13 and 4-6% growth for non-Evoque
industry sales, implying FY13 volumes of 370K-385K (we are at 390K).


Sensitivity analysis suggests favourable risk-reward
Our estimates build in a growth of 8% for non-Evoque sales in FY13. If we assume just 0% growth here, our FY13-14 EPS will drop by 8% and our target price will drop to Rs340. Given that the stock is 21% below our pessimistic scenario valuation, we view risk-reward as favourable post stock correction. Multiple positive triggers still intact; reiterate BUY


We continue to like Tata Motors given multiple volume triggers in the form of Evoque ramp-up and the launch of the new Range Rover platform by end-CY12. The latter has the potential of meaningfully lifting FY14 volume expectations for JLR. Multiple cost initiatives are underway, which together with an improving regional sales-mix and favourable currency trends, should drive strong margins. 4Q results on May 29 are likely to be strong as well and we expect a consol net profit of Rs 42.7bn – up 70% YoY (consensus is at Rs38.7bn). We maintain BUY.


To read report in detail: TATA MOTORS
RISH TRADER

>CIPLA: Dymista approval a tad positive for Cipla (CLSA)

■ Dymista approval a tad positive for Cipla
US FDA approved Meda’s drug Dymista for Allergic Rhinitis. Being a partner, Cipla will benefit through product supplies over the longer term. The product is widely estimated to reach US$300-500m in annual sales over the coming years. Apart from approval (outside North America) related milestone payment (US$5m), we expect gradual increase in Cipla’s sales from product related supplies to Meda. Assuming Cipla supplies product at 10-15% of
sales, it could earn US$50-75m at peak sales.


■ Rupee weakening likely to aid margins
Cipla is one of strongest beneficiaries of a weakening rupee. We expect improving margins over the coming quarters on back of a weak rupee and a low base. We expect strong operating profit growth over coming quarters led by margin expansion and high margin product supplies.


■ Lexapro supplies to Teva, a short term boost
Teva launched Lexapro in March 2012 under six months exclusivity. Cipla benefits from formulation supplies (likely at high margin) during this period. This will help Cipla reported numbers though should be excluded while assigning a price to core earnings multiple. Additionally, a low base in domestic formulations could result in reasonable India growth. AIOCD data on domestic market suggests improving growth for Cipla.


■ Reasonable valuations, Upgrade to O-PF
Post 3QFY12 results, Cipla’s share has corrected more than 10%. We believe margin blip shown in 3Q could correct with multitude of positive triggers like Lexapro supplies and continued weakness in rupee. While we expect modest 12% growth in sales to Rs18.2bn, we see margins expanding by nearly 500bps YoY (low base) and flat QoQ resulting in 47% Ebitda growth and 36% PAT growth to Rs2.9bn (assuming higher tax rate). We upgrade the stock to
O-PF on back of multiple triggers and reasonable valuations while maintaining our target of Rs360/ share based on 19x one year forward earnings.


To read report in detail: CIPLA
RISH TRADER

>TATA MOTORS: Rising LCV and car volumes in India (CLSA)

JLR’s volumes have continued to surprise on the upside with Feb and Mar volumes coming in 5-16% above estimates boosted by strong Evoque demand. Rising proportion of China in volumes, operating leverage benefits and stable currencies have also improved margin outlook for JLR. In India, LCV and car volumes have improved in 4Q and profit outlook for India business is also improving. We upgrade FY13-14 EPS by 16-18% factoring in higher volumes in both JLR and India and anticipate upgrades by street in weeks ahead. We upgrade Tata Motors from O-PF to BUY with a TP of Rs370.


■  JLR’s volumes continue to surprise positively
JLR’s monthly global sales improved further in March with volumes at 36.5K units rising 51% YoY and 16% above estimates. This is the second month in a row that volumes have beaten our estimates handsomely. Evoque sales seem to have stabilized at the 10K level and demand outlook for the vehicle remains robust. The recent addition of a third shift at the Halewood plant has effectively increased JLR’s total annual capacity to 390-400K units – enough for FY13 and debottlenecking measures are being planned to take the capacity further up by FY14. Industry premium vehicle demand remains strong as evidenced by the monthly sales of JLR’s peers. More important, China sales of the industry were also strong over Feb and Mar, which should allay concerns of slowing China demand. We upgrade FY13/14 JLR volumes by 7% to 391K/422K units.


■  Improving margin outlook at JLR as well
Operating leverage benefits from higher volumes are fairly meaningful for JLR. Share of China in volumes has improved from 17% in 3Q to 19% in 4Q and should improve further in FY13. The principal currencies relevant to JLR’s margins have been stable from 3Q to 4Q. This has improved our outlook for JLR’s margins and we now build in 18.6% EBITDA margins over FY13-14 (~17.5% previously).


■  Rising LCV and car volumes in India
India LCV volumes have improved substantially in 2HFY12 and we expect strong growth in FY13 backed by higher capacity at the Pantnagar and Dharwad plants. The launch of a new platform for non-Ace LCVs will also boost volumes in FY13. India car volumes (incl Nano) have picked up in 2H. However, outlook for trucks remains subdued with industry growth slowing down to -4% in Mar-12.We upgrade Tata’s India volumes by 9-10% factoring in higher LCV/car volumes.


■ Upgrading FY13-14 EPS by 16-18%; upgrade from O-PF to BUY
We now build in JLR’s capex at £2bn per year (£1.5bn before). Our estimates are 12-14% above consensus and we anticipate EPS upgrades by the street in coming weeks. A strong response to the new Range Rover platform that will be launched by end-CY12 could drive further upgrades to FY14 EPS. Upgrade to BUY.


RISH TRADER

>RUPEE WOES (CLSA)

INR remains one of the riskiest currencies. India’s large and widening current account (CA) deficit and its dependence on volatile capital inflows make it vulnerable to becoming a casualty of swings in global risk appetite and crude oil prices. INR’s recovery in January was due partly to RBI’s aggressive currency intervention, although global risk-on, RBI’s antispeculative measures and deregulation of NRI deposit rates also helped. However, INR has been weakening against USD since early February, despite a surge in portfolio inflows into India (1Q12: around USD13.5bn). Global risk-on will likely boost volatile capital inflows unless domestic factors, such politics and policy coordination, are turn-offs. But capital inflows may not be adequate to eliminate concerns about smooth financing of the CA deficit. On our forecast, the CA deficit of 3.9% of GDP in FY13 is beyond the RBI’s comfort level. This, along with our expectations of a stronger dollar, sets the stage for INR to weaken. We maintain our end-2012 forecast of INR55:USD.


INR has had an exceptionally volatile ride (Figure 1). It slumped to nearly INR54:USD in mid-December before recovering to INR49:USD by mid- February due to a combination of an unexpectedly strong jump in portfolio inflows triggered by global risk-on and RBI’s desperate measures, including aggressive currency intervention in January. However, it weakened subsequently and has broken above the 51-mark despite USD weakness. The pace of capital inflows has slowed recently even as the CA deficit remains large. In the absence of meaningful RBI currency defence, INR had to weaken. But no economy with a large CA deficit should rely mainly on portfolio inflows to finance the deficit as these inflows can be uncertain. Also, it is unlikely that capital inflows will comfortably and smoothly finance the wider CA deficit in FY13.


Second, outlook for USD. We expect USD to strengthen in 2H12, which in turn should be negative for INR. Note that INR has weakened in recent weeks despite USD weakness (Figure 4). Such an outcome does not boost confidence.


To read report in detail: INDIAN RUPEE
RISH TRADER

>FY13 budget – No surprises (CLSA)

India’s FY13 Union budget partially delivered on the market expectations of a move towards fiscal consolidation and incentives to revive investment cycle, even while working within obvious political constraints. While possible fiscal slippages are likely, we are encouraged by the Government budgeting for a 38% in non-defence capex and a slew of measures to help infrastructure sector. Our positive view on Indian equities hinges on sustained affirmative policy action and global liquidity.


Government assumptions more realistic, but slippages still likely
■ Government has embarked on the right path of fiscal consolidation with the target to reduce fiscal deficit from 5.9% of GDP in FY12 to 5.1% in FY13.
■ Increase in excise duties, service tax rates and widening the base should drive tax buoyancy, although collections will likely be impacted as excise duties on petroleum products (40% of excise duties) were left unchanged. Impact on fiscal deficit will be smoothened as some costs (30%+ of tax revenues) are also directly linked to tax collections.
■ The usual underfunding of subsidies as well, which will mean that the actual fiscal
deficit would be about 5.3-5.5% unless crude corrects materially.
■ Higher fiscal deficit and tax increases should put an upward pressure on inflation.


Several initiatives revive investment cycle
■ Several initiatives to revive infrastructure investment visible with lowering imports duty on coal to 0% from 5%, and doubling of tax free infra bonds to Rs600bn should help roads, power and the housing sector.
■ The government itself is budgeting to increase its non-defence capex by 38% to Rs1.2trn should be a positive for the investment cycle
■ Opening up of the ECBs for low cost housing, airlines, power and reduction in withholding tax from 20% to 5% for infra borrowers should be a positive.


Some progress on financial sector reforms
■ Rajiv Gandhi Equity Scheme (RGES) to broad-base equity participation from retail households can be a kicker for the flagging equity participation by retail.
■ The above scheme entitles a new equity investor an income tax deduction of Rs25,000 from income for an investment of Rs50,000 into equities market.
■ Three key reform bills – pension, insurance and banking – expected to be introduced in the budget session


Retain positive market view, replacing M&M with BPCL in top 5 picks
■ The budget announcements positive for M&M (no excise on diesel vehicles), IRB (thrust on roads) and Jet Air (reduction in withholding tax) and for sectors like power (coal import duty reduction) and steel (increase in imports duty.
■ The announcement were negative for upstream oil companies (increase on crude cess), BHEL (no increase in imports duty on equipment), telcos (high expectation of the Government on auction proceeds) and property (imposition of TDS)
■ With the rising oil prices, risks to economic growth are rising but our optimistic view on the markets (Sensex target cut to 20,000; implies 14x, 1x PEG) hinges on global liquidity and sustained affirmative policy action, which should improve the investment outlook. We expect auto fuel price hike after the current parliamentary session in early April.
■ We tweak our model portfolio and replace Mahindra & Mahindra (recently downgraded by Abhijeet Naik on tractor growth concerns) with BPCL. The recent M&A benchmarks for BPCL’s upstream assets suggest an optimistic SoP of Rs1100/sh (with 60% of the value coming from E&P business) or a 50%+ upside. Potential auto fuel price hike could be a near-term trigger.
■ Other top ideas continue to be ICICI Bank, Yes bank, Tata Motors and Infosys.


To read full report: INDIA STRATEGY
RISH TRADER

>GREED & FEAR: Bullet dodged (CLSA)

Lugano


The Greek bullet has been dodged for now though the scheduled April elections in Greece remain an obvious stumbling block. Accordingly, GREED & fear’s base case remains with the “risk on” trade which means that any pullback in equities should be bought. A potential moderate disappointment for the markets may be that the LTRO-2 is not quite as large as previously expected because of the apparent reluctance of the big German and French banks to be seen taking up the carrot of generous ECB funding. For this reason the amount raised may be less than the €500bn-1tn previously guesstimated.


Still this will not be enough to end the “risk on” rally since those banks that really need the funding, or the profits from the carry trade like the Italian and Spanish banks, seem likely to participate again. Meanwhile, it is a telling sign of improving market conditions that Italian bank Intesa Sanpaolo was able this week to issue an €1bn unsecured bond with a five-year maturity, following its successful issuance of €1.5bn in unsecured 18-month bond at the end of January. Such longer term funding would have been impossible prior to the LTRO.


It also continues to be clear that Flexible Mario would like all the major European banks to take advantage of the LTRO. Indeed the ECB stance towards the banks is increasingly likely to be either take funding from the LTRO or raise equity, rather than the other option of pursuing deleveraging and balance sheet contraction. While, as previously noted here, it is also likely that the European Banking Authority (EBA) will come under growing pressure to relax its capital requirements even if nothing specific appears to have been announced yet.


To read the full report: GREED & FEAR
RISH TRADER

>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
RISH TRADER

>GREED & FEAR: Reformulated Outlook (CLSA)

Verbier


Stock markets opened the New Year on a strong note despite the seemingly concerning news from the Strait of Hormuz. Still GREED & fear remains fundamentally cautious. This is also the view propagated in the new reformulated Asia Maxima quarterly which now includes Australia (see Asia Maxima – Pain suspended and extended, 1Q12). The past year ended to GREED &; fear in a kind of truce in the sense that investors were relieved to see the European Central Bank (ECB) make increasing efforts to ease the liquidity situation of European banks, which remain the epicentre of systemic risk globally. Yet, markets had not yet been given what they really wanted in order to celebrate the hoped-for end of the European crisis. That was,
unsterilised monetisation by the ECB and fiscal union.


The result for GREED & fear is that the fault line which has been the cause of the European crisis, itself a nasty mixture of both sovereign debt crisis and banking crisis, still festers. That is, of course, the unsustainable combination of monetary union without fiscal union. So long as this is the case, there remains the likelihood of more euro-tremors and potentially a “euroquake”, to which risk assets globally will continue to be correlated. As a result, this crisis continues to exacerbate the debt deflationary dynamic which has been in play in the Western world since the so-called “global financial crisis” hit in 2008. In truth, of course, the crisis has never really ended with the symptom of that continuing deflationary dynamic the continuing Japanese style correlation of American or German bank stocks with long-term government bond yields (see Figure 1). Thus, the correlation between the German banks index and the 10- year bund yield is 0.96 since the start of 2011.

Still if this is the “big picture”, the New Year begins again with the focus very much on Europe. The issue facing investors is that markets have become used in the last 20 years to celebrating moral hazard-intensifying bailout trades, with most of these policies hailing from Washington. On this occasion, investors have had to contend with German psychology. This provided an abrupt wake-up call for markets in 2011. The first point is that the German political establishment does not like to make policy in response to immediate market pressures. The
second point is that the Germans do not easily accept that a debt problem can be solved by
simply adding more debt, most particularly if it involves the central bank “printing money”.


To read the full report: GREED & FEAR
RISH TRADER

>IT SERVICES: Dec 2011 quarter preview (CLSA)

Dec-11 quarter results from Indian techs are likely to indicate continued moderation in demand. Reported revenue growth will also be hurt by adverse cross-currency moves. Consensus volume growth estimates for FY13 are at 13-15%YY, and downsides seem likely. However, currency movement continues to favour Indian techs and big margin benefits will be seen in Dec-11 quarter. Infosys remains the best bet to ride the weak currency environment amid an overall cautious view on the sector.


Dec-11 quarter: Answers for FY13 will need to wait till Apr’12

• Infosys should be near the lower end of its US$ revenue guidance for the quarter. We expect 3.5%QQ growth to US$1,806m with some adverse impact of crosscurrency on guided growth. Margins should be up ~295bpsQQ with significant tailwinds from a weaker currency. Expect marginal forex losses of Rs300-400m.
• Wipro should be above the middle end of its constant currency guidance. We expect Wipro to report 1.8%QQ growth in US$ revenues. We expect Mar-12 revenue growth guidance of 2-4%QQ. We expect margins to go up only 55bpsQQ given Wipro’s cash-flow hedging as forex losses will be booked above EBITDA line.
• TCS should report a 3%QQ growth in revenues to US$2,601m. Cross currency moves can impact reported $-growth by 150-200bpsQQ. Margins should move up ~270bpsQQ with a benign currency environment the key driver. With US$1.3bn of hedges for Dec-11 quarter, TCS could report forex losses of Rs2-2.5bn.
• HCLT’s 2%QQ US$ revenue growth should be near the bottom end of Tier-1 peers. Higher exposure to GBP/EUR (28%) could impact reported revenues growth by 150-175bpsQQ. Expect 80bpsQQ improvement in margins with $10m of forex loss.
• Among mid-caps, Hexaware should report the best result with a 4.5%QQ $- revenue growth and ~300bps of margin improvement.

No fundamental catalysts for the sector. Infosys is the best bet

• Most vendors are likely to avoid comments on FY13, as CY2012 budgets are still largely in discussion stages and the budgeting process is likely delayed again.
• While risks to revenue growth remain on the downside, the weaker currency does provide some earnings respite. We find no reasons to change our overall cautious stance on the sector yet and have zero BUY ratings.
• Within the sector Infosys is the biggest beneficiary of the weaker INR and is ourfavoured pick going into the quarter.
• High expectations and hopes of a rapid turnaround amid contraction of valuation discount to Infosys/TCS make Wipro the most vulnerable stock at current level

RISH TRADER

>INDIA'S ECONOMY: Doing business in Dharavi

We visited Mumbai’s Dharavi Slum on Boxing Day, gaining a peek into this city within a city. We were moved by the scenes of daily life that we encountered but were most surprised by the sophistication of Dharavi’s economy. As a single data point in India’s informal economy, the recycling, textiles and leather businesses that we saw were vibrant enterprises and had developed sophisticated links with the wider economy.


One of Mumbai’s largest slums
■ Dharavi encompasses a 1.7km2 area and is home to an estimated one million residents
■ Its residents face a daily challenge from their impoverished conditions


Sophisticated businesses
■ Dharavi supports a strong economy, producing ~US$600 million of goods each year
■ We visited local recycling, textiles and leather businesses and were surprised by their sophistication


Sophisticated consumers
■ Even in the midst of poverty, we still saw evidence of growing consumerism
■ We were struck by the number of smartphones in use, satellite TV dishes on the rooftops and motorcycles on the streets


Seeing is believing
■ We recognise that Dharavi is just one slum of many and may not be representative
■ Still, Dharavi provides a fascinating insight into India’s informal economy and refutes the idea that the informal economy must be stagnant and backward
■ We recommend investors contact Reality Tours & Travel to see Dharavi with their own eyes (contact details provided inside)


To read the full report: India's Economy