>SWARAJ ENIGINES: M&M acquisition has clearly been value accretive to Swaraj Engines

■ Fortunes linked to Indian agriculture
SWE manufactures internal combustion engines for tractors manufactured by the ‘Swaraj Tractors’ division of Mahindra & Mahindra. These tractors are largely used for agricultural purposes, although the share of non-agricultural demand has been increasing of late. The key drivers of tractor demand in India include i) Gap in productivity levels (measured in terms of yield per hectare) in India despite having the second largest arable land in the world – resulting in need for higher farm mechanization; ii) Higher Minimum Support Prices (MSP) of farmers resulting in higher ‘income effect’; iii) Policy initiatives such as NREGA scheme, agriculture being classified as priority sector lending, subsidy on interest repayment, diesel subsidies etc. The domestic tractor industry has witnessed a sales CAGR of 16% in the last three years, much higher than long-term average of 8.5% mainly led by the above factors.


■ Access to the world’s largest tractor manufacturer
SWE enjoys access to the world’s largest tractor manufacturer i.e. Mahindra & Mahindra (M&M) by virtue of the latter holding 33% in SWE. SWE caters to nearly 80% of the demand of ‘Swaraj Tractors’ division of M&M, with the balance 20% being met from its second promoter – Kirloskar Oil Engines. Going forward, SWE expects to meet upto 85-90% requirement of ‘Swaraj Tractors’. SWE believes in its own in-house technological capabilities to cope up with the upcoming challenges in terms of technology changes and believes that its technology is at par with that of global players. The company invests in research and development on a continuous basis.


■ Presence in high HP segment, right geographies augurs well
SWE historically has been present across segments in terms of HP i.e. 20-30HP, 31-40HP, 41-50HP and >50HP. However, going forward it believes that incremental demand for tractors are more likely in the >40HP segment. This is mainly driven by i) Increase in use of tractors for non-agri purposes such as transport, construction/ infrastructure activities etc; ii) Shift in demand from the Northern to western/ southern region where the soil is hard and requires high power tractors; iii) replacement of tractors, where typically farmers replace older tractors with new higher HP tractors. SWE is not looking at entering the <20 HP segment unlike its competitors as it feels that it is a low margin segment with much lesser growth rates. Also, while the traditional markets of north are fairly penetrated in terms of tractor demand, other regions such as Bihar, Western region and Southern region are witnessing higher demand traction due to low penetration levels there. In both these regions, not only does M&M enjoy a significant market share (44-50%), it has also experienced significant growth in market shares over the last ten years.


■ Industry growth rates to moderate in the near-term; Long-term fundamentals intact
Historically, the tractor industry has grown at a long-term average of 8.5%. However, the previous 3-year average has been significantly higher at 16% mainly boosted by policy initiatives and diesel subsidies. SWE expects the growth rates to moderate somewhat over the next 1-2 years i.e. 14-15% in FY12E (mainly due to subdued demand in Jan-Mar 2012 period) and 8-10% in FY13E. However, the growth rate is expected to be still higher than the long-term average of 8.5%. Besides, SWE is likely to exhibit higher growth rate of 18% in FY13E driven by higher share of Swaraj Tractor’s requirement. Long-term prospects still remain attractive driven by i) Huge demand potential for tractors in India – potential demand for 6mn tractors v/s an estimated 4mn tractors currently; ii) Low penetration levels in regions such as Bihar, South and West; iii) growing use of tractors for non-agricultural applications; iv) Farmers’ requirement to dig deeper into the soil to make it more fertile; and v) Strong replacement demand – life of a tractor 10-15 years.


■ Excellent track record, experienced management provides comfort
SWE has an excellent past track record in terms of higher than industry average growth rates – SWE volumes grew @ 42% CAGR, fastest in the industry, in the last 3 years v/s industry average of 16%. Besides, post the acquisition of PTL by M&M, the capacity utilization rates have improved manifold. Further, efficient working capital/ balance sheet management (negative working capital, NIL borrowed funds) gives a significant lever to withstand adverse business cycles. Backing of an experienced management (most senior management employees have been with SWE for over 20 years since Punjab Tractor days) with sound knowledge of the industry/ business offering significant comfort to minority investors


■ Earnings to grow @ 17% CAGR over FY12E-14E; DCF based TP of `925/share; Buy
SWE has been able to optimally utilize its capacities in the past three years mainly due to robust domestic demand and efficient management. SWE is expanding its capacities by ~79% to 75,000 engines by end CY 2012. Although, SWE believes it has the wherewhital to increase its installed capacity to 100,000 engines, we believe there wouldnt be any need for additional capex atleast for the next 2 years. We believe SWE would be able to efficiently sweat its capacity of 75,000 engines over FY14E-15E to achieve the modelled volume growth of 10% in the same time frame. We have modelled the next phase of capacity expansion to begin in end FY15E that would culminate in a total capacity of 90,000 engines in FY16E.


Based on the above factors, we model revenue CAGR of 19% over FY12E-14E. We expect EBITDA margins in FY12E-14E to be lower than the trend seen in FY10-11 (16.2%-16.4% v/s 17.5-19% seen in FY10-11) mainly due to a slowdown in industry growth rates. However, higher than average industry growth rates would support earnings CAGR of 17% over FY12E-14E period. We expect SWE to report EPS of `45/share in FY12E, `52/share in FY13E and `61/share in FY14E. Our long-term DCF based target price of `925/share implies an upside of 141% from current levels. We initiate coverage with a ‘Buy’ rating on the company.


■ Risks
Key risks include i) Dependence on single customer i.e. M&M; ii) Less allocation for rural development may temper growth rates going forward; iii) Decline in availability of agricultural credit due to macro-economic circumstances could affect growth rates, adversely; iv) Natural calamities e.g. drought, flood, etc.; v) Fall in Minimum Support Prices (MSP) of foodgrains could impact farmers’ disposable income.


To read report in detail: SWARAJ ENGINES
RISH TRADER

>NIIT TECHNOLOGIES: Low valuations; High potential

We initiate coverage on NIIT Technologies (NITEC) with a Buy rating and one-year Target Price of `290. In our opinion, the current stock prices do not factor in the growth potential and visibility provided by the increased order book. NITEC has been benefiting from its long-term focus on niche verticals of BFSI and transportation, an evidence of which is visible in its marquee client base and recent large-sized deals won by the company. We expect revenues (in US$ terms) and earnings to grow at CAGR of 18% and 15%, respectively over FY12-14E, with stable profit margins. We believe the current valuations of 7.1x and 6.0x its FY12E and FY13E earnings, respectively are inexpensive with a 3.4% dividend yield offering further comfort.


■ Valuations not factoring growth opportunities
The CMP of `233 ascribes a meager 22% value to future growth opportunities for NITEC. This is materially lower when compared to large as well as mid-tier peers in the industry. In our opinion, the market expectations of low growth in NITEC’s future earnings are unduly pessimistic, especially considering an order intake of US$361mn in 9MFY12 compared to US$266mn in entire FY11. More importantly, the order book executable over the next 12 months has risen from US$169mn at the beginning of FY12 to US$245mn at the end of Q3FY12. Historically, the ratio of revenues to the order book executable at the beginning of the year has been in the range of 1.8x to 2.6x.


■ Long-term client relationships with niche vertical focus
Since its inception, NITEC has had an exclusive focus on BFSI and transportation verticals. Revenue contribution from these verticals has been gradually increasing and was ~73% in FY11. The company has established long-term relationships with marquee clients in these verticals which include names like British Airways, Sabre, SEI, Cathay Pacific, Virgin Group, ING and AXA. NITEC has also been diversifying its client base as number of clients contributing >US$1mn in revenues has increased from 32 in FY10 to 56.


■ Healthy revenue and earnings trajectory
Driven by strong order book, we expect revenues (in US$ terms) for the company to grow at a CAGR of 18% over FY12-14E. Our FY13E revenue estimate of US$397mn is 1.6x (vs the 1.8x-2.6x historical range) the executable order book of US$245mn at the end of Q3FY12. EBIT margin is expected to remain stable in 15-16% range with multiple levers like increasing share of non-linear offerings, offshore leverage and broadening of employee pyramid. After a muted performance in FY12 because of higher tax rates, we expect earnings to grow at a CAGR of 15% over FY12-14E. We have assumed exchange rate of `48.5/US$ and `47.5/US$ for FY12E and FY13E, respectively. Our conservative revenue and margin estimates provide room for upward revision in estimates in future.


■ Asset heavy and working capital intensive deals pose a risk
NITEC participates in deals that involve takeover of existing technology infrastructure assets and workforce. The company also participates in government deals that require it to supply technology hardware for the project. The execution risk profile and working capital requirements in such deals are higher than normal IT services projects. The company saw its FY11 working capital rising because of such deals.


■ A preferred play in mid-tier space; initiate with Buy
We have valued the company at 7.5x its FY13E earnings yield at one-year Target Price of `290. We expect the company to announce a dividend per share of `8 for FY12 resulting in a lucrative dividend yield of 3.4%. In our view, strong growth visibility coupled with attractive valuations makes NITEC a good investment candidate amongst mid-tier technology companies. Hence, we initiate coverage on NITEC with a Buy rating and a Target Price of `290.


To read full report: NIIT TECHNOLOGIES
RISH TRADER

>Oct-Dec 2011 Earnings Preview: Sector Specific Expectations- Cement, Construction, Capital Goods, Utilities, Metals & Mining and Oil & Gas (Brent Crude Price & Singapore GRM)

 CEMENT
The cement companies under our coverage are expected to post a growth of 5% YoY and 7% QoQ during Q3FY12 despite insignificant uptick in the infrastructure segment. Low base and improved rural demand are key drivers. Operating margins of the companies are likely to improve as high as 100-700 bps due to a significant improvement in average realization (18-26% growth on YoY) mainly triggered by solid jump in realization in the Southern region. However, a continued operating cost pressure viz- raw materials, power & fuel and transportation has negated realization growth to an extent and is expected to persist in the coming quarters. The industry saw strong pricing power mainly on account of a suitable production discipline maintained by industry players. However, the sustainability of pricing should be the key factor in the coming quarters, for which we strongly believe that industrial capex should pick up and expedite infrastructure activities. We continue to prefer ACC and Ultratech over Ambuja among large players and maintain our BUY rating on India Cement and JK Cement.

CONSTRUCTION
The construction companies under our coverage are expected to report revenue growth of 12% YoY and 19% QoQ in Q3 FY12. JP Associates and Unity Infra are to be the main driver, which are expected to grow by 19% and 18% YoY, respectively followed by 13% growth in Simplex Infrastructures Ltd. We believe this quarter is going to be crucial for the construction sector in the wake of substantial movement of exchange rates, which may be a standstill for companies having exposure to foreign loans. JP Associates is expected to be impacted most due to its unhedged FCCB of US$354mn (due for redemption in Sept 2012).


Key things to watch out for this quarter: 1) pace of execution pick up post the monsoon, 2) effect of exchange movement in the P&L, 3) impact of high interest costs, and 4) working capital management contemplated by many companies in the last two-three quarters.

CAPITAL GOODS
We expect overall order inflows for the capital goods sector to slow down, continuing the trend witnessed in the September quarter. We expect both BHEL and L&T to see a y-o-y decline in order inflows, which is likely to lead to order book depletion for both. At EBIDTA levels, we expect margin pressures to flow in, though not very significant, as the quarterly revenues would be dependent on the existing order book, which should have better margins than the new orders.


The key data points to watch out would be the management commentaries on order inflows going forward and the balance sheet position of these companies, particularly on the working capital side.

UTILITIES
We expect NTPC and Powergrid to post modest growth in line with their capacity expansion. As usual, there would be one offs and provisional write backs and write offs, resulting in an adjusted profit number.


Key data points to watch out would be gross block addition for each of the companies and balance sheet position of these companies, particularly on the working capital side.

METALS & MINING
Ferrous metals: Volume growth (QoQ): We expect flat sales volume growth for Tata Steel, SAIL and JSW Steel ltd.  Realization trend: During Q3FY12, domestic flat steel prices showed no growth q-o-q, whereas long steel products prices were up about 2% q-o-q. We expect steel companies to report flat to about 1% QoQ growth in realization. Raw material prices: Average iron ore prices during Q3FY12 were USD129/MT (63.5% fe – FOB India), declining by 21.6% QoQ. Coking coal contracts for the quarter were done at USD285/MT as compared to USD305/MT during Q2FY12. Profitability: Raw material prices during Q3FY12 were lower as compared to Q2FY12 and steel realizations were flat QoQ. Nevertheless, the significant QoQ depreciation of the Indian Rupee vs the USD by 11% resulted in higher cost of coking coal imports, which dampened the benefits of lower dollar denominated raw material prices of iron ore and coking coal during the quarter.


Non ferrous metals: Realization: Aluminium, zinc, lead and copper prices fell QoQ by 13%, 15%, 19% and 17%, respectively to USD2090/MT, USD1897/MT, USD1982/MT and USD7488/MT during Q3FY12 (YoY prices were also down for all commodities by 11%, 18%, 17% and 13%, respectively).


OIL & GAS


Brent price averaged at US$109.31/bbl, down 3% Q-o-Q but 26% up Y-o-Y in Q3 FY12. Regional GRMs were down 13% sequentially but 45% Y-o-Y at US$7.98/bbl. Crude prices have been resilient despite the global economic slowdown mainly due to supply side issues, particularly in the OPEC region + concerns of impending sanctions against Iran that may disrupt supplies in the near term.


Refining margins come off recent highs
Average Singapore refining margins for Q3 FY12 stood at US$8/bbl v/s US$9/bbl in Q2FY12. This was mainly due to weak product cracks, particularly gasoline (down US$6.6/bbl QoQ) and naphtha (down US$7.1/bbl QoQ). Also, light-heavy spreads (Dubai-Brent) too contracted US$2.6/bbl QoQ. However, Indian refiners are expected to post steeper declines in refining margins mainly led by steeper decline in light-heavy spreads and a decline in product cracks with a higher weightage in the Indian product slate.


Reliance Industries (RIL) is expected to post US$2.3/bbl QoQ decline in GRMs in Q3 to US$7.9/bbl. This is mainly due to i) higher decline in LPG, naphtha cracks, which have a higher weightage in RIL’s product slate and increase in FO cracks, which have a lower weightage; and ii) QoQ lower light-heavy crude spreads (mainly Arab Heavy-Dubai and Oriente-Dubai).


Under recoveries
We model `313bn of under-recoveries in Q3 FY12 – `134bn towards LPG/ kerosene and the balance `179bn towards auto fuels. We assume upstream companies to contribute 33% and R&M companies to contribute the balance in Q3FY12. We have not assumed any government contribution to the overall subsidy in Q3 in addition to the already announced `300bn subsidy in H1. R&M companies are expected to account for the `150bn subsidy support from the government in Q3.


We expect R&M companies to post losses of ` 110.43bn in Q3, mainly due to higher under-recoveries and lack of government subsidy support. The PAT numbers are subject to change as and when any additional support from the government is announced. However, R&M companies may write back MTM forex losses on foreign currency denominated debt incurred in H1 in their Q3 results. The impact of this would be `9.07bn for BPCL and ` 23.1bn for IOC. This write-back, if done, would restrict the losses to `33.35bn and `11.3bn for BPCL and IOC, respectively. However, our base case numbers do not include the impact of this write-back.


Rupee depreciation
Rupee averaged at Rs 51.0 in Q3 FY12, a fall of 11.4% Q-o-Q. For December month, it averaged at `52.6, a drop of 3% compared to average of Q2 FY12. The rupee depreciation is hitting revenues of state-run oil marketing firms as the weakening of the rupee against the dollar by Re 1 impacts costs of diesel, kerosene and cooking gas by ` 9,300 crore per annum.


RIL: RIL is expected to post QoQ decline in PAT mainly due to fall across its business segments viz. Refining, Petchem and E&P. We expect RIL to report PAT of `47bn, a decline of 18% QoQ and 9% YoY.


ONGC: We expect ONGC to report PAT of Rs 81bn in Q3, a YoY growth of 14% but a decline of 6% QoQ. The QoQ decline is mainly due to an increase in subsidy burden by 47% QoQ to `84bn, led by the steep depreciation in the rupee.


Cairn India: We expect Cairn India to report PAT of `21bn in Q3 FY12 v/s Rs 20bn in Q3 FY11. The muted growth in Q3 FY12 PAT despite much higher crude prices (up 27% YoY) is mainly due to the impact of royalty on RJ crude, which will be accounted in this quarter but was not accounted in Q3 FY11 (cumulative impact of royalty from start of production till Q2 FY12 was accounted in Q2 itself). Hence, the numbers are not strictly comparable on a YoY basis.

RISH TRADER

>Prakash Steelage Ltd.: IPO NOTE

Business Overview: Prakash Steelage Limited (‘PSL’) a flagship company of Prakash Group is engaged in the manufacturing of seamless & welded stainless steel Pipes, Tubes and U-tubes. PSL carries production through its two stateof- the-art production units situated at Silvasa and Umbergaon (Gujarat) with total installed capacity of 15,600 MTPA.

Key Rationale:
■ PSL is an ISO 9001: 2008 & PED certified company. Company is also a government recognized 'Star Export House' exporting to several multinationals in over 40 countries across the globe.

■ The Company manufactures a wide range of products based on the customer specifications. Company also plans to add Duplex, Super Duplex and Super Austenitic pipes/ tubes to its product portfolio.

■ PSL's installed capacity has increased at a compounded annual growth rate (CAGR) of 40.5% over FY2007-10. The company's utilization rate has steadily increased from the low of 35.3% in FY2008 to 68.6% in FY2010. PSL is planning to increase its capacity from 15,600MT to 19,000MT by FY2011.

To read the full report: PSL

>ICSA LIMITED: Ready to takeoff

We recently had a conference call with the management of ICSA (India) Ltd. to have an understanding of i) the corporate strategy for their new SMART meters manufacturing facility, ii) new product development, and iii) recent developments within the T&D industry, specifically RAPDRP. ICSA is bullish on the demand potential of the SMART meters facility with peak revenue potential of Rs.1000–1500mn in the next 3-4 years. ICSA is also bullish on Power Quality Management Systems (PQMS), designed to monitor interruptions, durations, voltages etc., at each distribution transformer level. Near-term triggers to the stock include possible order inflow from high margin ESS business from Q3 FY11 onwards, fruition of which could provide an upside to the current order book of Rs.18bn. We reiterate our BUY rating on the stock with a price target of Rs.239/share.

■ Strengthening SMART meter capacity
ICSA has set-up SMART meters manufacturing facility in Andhra Pradesh with a total capacity of 150,000 meters/month at a cost of Rs.260mn. SMART meter is a combination of energy meter and a communication device, which would form a part of smartgrids network in the country. ICSA sees immense demand potential for these meters going forward. Presently, the company is planning to produce energy meters and other embedded solutions like RTU and IAMR in this facility, which would be supplied to its distribution utilities. The company is looking for revenue of ~Rs.1,000–1,500mn/year from this business unit at the peak, which is expected to happen in the next 3–4 years. The company is expecting margins of ~10–12% for energy meters and ~20%+ for SMART meters.

■ Product pipeline getting stronger with Power Quality Management System (PQMS)
ICSA has recently completed a pilot project for installation of a power quality management system (PQMS). PQMS has been designed specifically to monitor interruptions, durations, voltages etc., at each distribution transformer level. This equipment would help to improve power quality. The company expects immense potential for this new product going forward.

■ Expects orders inflow for high margin ESS business by Q3FY11 onwards under RAPDRP
The company is maintaining the same guidance in terms of orders inflow for its high margin ESS business from System Integrators by Q3FY11 onwards under RAPDRP. For SCADA solutions, the company is expecting floatation of tenders after one and a half month. Currently, the company has placed bids for projects worth ~Rs.2bn for ESS business (other than SCADA solutions) and ~Rs.8bn for overall ESS and SCADA solutions. These above said orders are not part of the opportunities available under RAPDRP.

■ Looking for other opportunities available in Oil & Gas and Water segment
ICSA is considering a business opportunity of Rs 16–17bn for its product Intelligent Cathodic Protection System (iCap) from the oil and gas segment in the next 2–3 years. Apart from this, the company is looking for a business opportunity of Rs.21–22bn for its products Intelligent Automatic Water Meter Reading and Agricultural Load Management System from water and irrigation segment in the next 2–3 years.

■ Maintain “BUY”, with a price target of Rs.239/share
We expect a subdued performance in 1Q FY11 – net sales of Rs.3bn, down 2% Y-o-Y and PAT of Rs.247mn, down 27% Y-o-Y. However, we maintain our full year estimates for revenue and PAT despite subdued 1Q as we expect 2H FY11 to be much better than 1H, since generally 60% of revenues get booked in 2H. We thus maintain our BUY rating on the stock with a price target of Rs.239/share.

To read the full report: ICSA LIMITED

>INFORMATION TECHNOLOGY SECTOR: Indian IT vendors: New growth opportunities

Indian Tier 1 IT vendors appear to be poised for the next wave of growth, driven by the return of stable IT budgets, improved decision making at clients and higher thrust on offshoring and global delivery model. We expect multiple growth drivers over FY10-FY13E which predominantly includes underpenetrated service lines like Infrastructure managed services, BPO, Package implementation, Engineering and R&D services, as well as increasing focus on new markets like Latin America, Middle east , India and China.

Service line wise growth opportunities:
a) While Remote Infrastructure management services (IMS) is a USD100bn opportunity, Indian exports from this service line stood at USD4bn for FY09, which represents just 4% penetration.

b) BPO services have already been witnessing robust traction for Indian Offshore vendors but can still count a USD130Bn opportunity as on FY09, of which Indian vendors derive just USD12.8bn as on FY09 which represents 9.8% penetration.

c) Consulting and Package implementation, which has been the key growth arenas during the 2003–2008 upcycle for Indian Tier 1 vendors still has a huge market opportunity. The ERP services market which includes ERP, SCM, CRM etc, is a USD71bn opportunity as on CY10 and the top four IT vendors derive just USD3.46bn in revenues from package implementation and consulting as on FY10.

d) Finally Engineering design and R&D services is touted as another growth arena by the Nasscom with a potential for Indian vendors to derive over USD35bn-USD40bn by 2020 as compared to USD8bn (Approx) as on FY09.  Vertical wise growth opportunities: Governments across the world spend around USD154bn on IT services and Indian IT vendors currently have a very minimal penetration in this segment. We expect Government and Healthcare verticals as strong growth opportunities over the coming period. Geographical growth opportunities: Indian vendors are fast expanding the addressable market by ramping up client base in emerging markets like Latin America, Australia, NZ, Middle East, and China. Vendors like TCS have reached critical mass in emerging geographies and are poised for further scalability.

Indian IT vendors: New growth opportunities
Infosys Tech: Infosys appears to be banking on non linear growth initiatives as its new growth drivers. Some of the initiatives include platform BPO, Pay per use services, and Application platforms (Mobile Flypp, Shopping trip 360, Itransform).

TCS: We believe that TCS key growth drivers would be its strong geographical mix with 20% of the revenues derived from the emerging markets like Latin America, India, Australia, NZ, Middle East etc. Platform BPO also appears to be a key forte.
Wipro: Wipro has strong competency in the IMS and BPO service lines, which contribute to 21% and 10.5% of the total revenues respectively for FY10. We expect these two service lines along with testing to be growth drivers for Wipro.

HCL tech: HCL Tech has well diversified service line mix with Enterprise application services, IMS, and Engineering design services, which account to 21.4%, 22%, and 19% of the total revenues and could be strong growth drivers.

To read the full report: IT SECTOR

>BANKING SECTOR (SYSTEMATIX RESEARCH)

Valuations to catch up with improving sector fundamentals……

We attribute an ‘ATTRACTIVE’ rating to the banking sector on the FY11 estimates as the Banking Sector is believed to be among the key benefactors to gain from the reviving economy. Earnings visibility of the sector has improved with superior outlook on credit, margins and asset quality of the banks. BSE BANKEX has registered 130% returns over the last 5 months, we however believe that the sector offers an upside as valuations are still 30‐40% lower from the peak valuations. An upward revision in earnings and expansion in valuations multiples is expected to underpin the stock prices further. In our view, the sector deserves better valuation multiples than assigned by the market currently.

Banks not to suffer large MTM hits in FY10 as most of them are hedged till 7.5‐8% yield
In our view, interest rates would remain in the range of 7‐7.3% levels in FY10.They are likely to inch upwards by 50‐100 bps from the fiscal year end FY10 in line with improvement in the business cycle, reversal of expansionary monetary policy, and rise in inflation. Banks, being hedged till 7.5‐8% yield, won’t suffer large MTM hits on their AFS book in the current fiscal, even if yields rises to the said rates. Going ahead, in our view, markets would assign better valuations multiples to the banks which are able to post sustainable earnings and are less volatile in nature.

Credit growth – momentum towards the year end
We expect the sectoral credit to grow at a healthy rate of 19‐20% in FY2010E assuming that GDP grows by 6%. We expect credit demand to rise in both the working and the term loans segment. CMIE data shows that the corporates have made investments into capacities of more than 5 trillion which translates into the credit growth of 18% from the industrial segment alone (whose share in the total credit is at 38%). We expect demand for the working capital loans to gain momentum with the upward movement in the commodity cycle and reversal in the economy.

Margins, which are at cyclical low levels currently are expected to improve
Q1FY10 margins across the sector have dropped which is a peculiar feature of the downward movement of interest rate cycle. In this cycle, margins get affected in the near term (3‐6 months) but they show signs of recovery as soon as liabilities start getting re‐priced. We are currently at the beginning of the phase where margins across the sector are expected to improve. An uptick in the credit demand will give the required pricing power to banks thereby capping the fall in their advances yields which would cushion the bank’s margins further.

Economic recovery to reduce NPA concerns
Over the last one year, with the economy entering the slower growth phase there have been looming concerns on astounding higher NPAs levels of banks. The concerns had triggered abrupt sector downgrades. In our view, economic growth would overturn to a recovery phase in the current fiscal which would narrow the NPA concerns to a large extent. Faster the economy recovery, shorter would be NPA cycle. The Q1FY10 performance of the assets which were restructured in Q4FY09 was encouraging as an insignificant amount of assets restructured under the special RBI dispensation slipped during Q1FY10

To see full report: BANKING SECTOR