>UNITED SPIRITS LIMITED: Downgrade due to Kingfisher Airlines hangover

Downgrade due to Kingfisher Airlines hangover [EXTRACT]

■ Downgrade from Buy to Neutral
We downgrade United Spirits (USL) to Neutral due to uncertainty surrounding Kingfisher Airlines (KFA). USL’s share price is down 51% since 1 January 2011, and we expect it to remain under pressure until the KFA issue is resolved. We also cut our FY12-14 EPS estimates by 18-19% to take into account its higher debt as of December 2011.


■ A raw material cost reduction is possible
USL has been investing in primary distillation capacity, which should help lower its raw material costs. However, we will only incorporate these into our forecasts once the benefits kick in fully. USL is facing high raw material costs, with high energy prices boosting its system costs.


■ Business is intact; underlying debt and governance are concerns
Our underlying view on USL remains resilient growth in branded spirits. We think: 1) USL should remain a beneficiary of India’s growing, young population and rising discretionary spending; and 2) USL has one of the widest and most dominant distribution networks in India, which aids its 34 ‘millionaire brands’ (brands that sells more than 1m cases annually) in the segment; and 3) USL will benefit from investments made in primary distillation capacity.


■ Valuation: lower our price target from Rs850.00 to Rs780.00
We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of 11.4%. We lower our FY12/13/14 EPS estimates from Rs34.47/43.90/54.85 to Rs28.25/35.22/44.31.


To read full report: UNITED SPIRITS
RISH TRADER

>UNITED SPIRITS LIMITED: Downgrade due to Kingfisher Airlines hangover

■  Downgrade from Buy to Neutral
We downgrade United Spirits (USL) to Neutral due to uncertainty surrounding Kingfisher Airlines (KFA). USL’s share price is down 51% since 1 January 2011, and we expect it to remain under pressure until the KFA issue is resolved. We also cut our FY12-14 EPS estimates by 18-19% to take into account its higher debt as of December 2011.


■  A raw material cost reduction is possible
USL has been investing in primary distillation capacity, which should help lower its raw material costs. However, we will only incorporate these into our forecasts once the benefits kick in fully. USL is facing high raw material costs, with high energy prices boosting its system costs.


■  Business is intact; underlying debt and governance are concerns
Our underlying view on USL remains resilient growth in branded spirits. We think: 1) USL should remain a beneficiary of India’s growing, young population and rising discretionary spending; and 2) USL has one of the widest and most dominant distribution networks in India, which aids its 34 ‘millionaire brands’ (brands that sells more than 1m cases annually) in the segment; and 3) USL will benefit from investments made in primary distillation capacity.


■  Valuation: lower our price target from Rs850.00 to Rs780.00
We derive our price target from a DCF-based methodology and explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of 11.4%. We lower our FY12/13/14 EPS estimates from Rs34.47/43.90/54.85 to Rs28.25/35.22/44.31.


To read report in detail: USL
RISH TRADER

CHART OF THE DAY: The food glut charts

What it means
One of the enduring reader requests among our daily charts is for an update of the annual Food Glut series. As a reminder, once a year we show capital expenditure in the agricultural sector as a share of total agricultural value-added – i.e., the sectoral investment/GDP ratio – for India, China and Russia, the three major EM countries that have data available (unfortunately, the Brazilian authorities don’t report fixed investment from the national accounts, otherwise we could show “BRIC-wide” figures).




Those data are reported with roughly a 12-month lag, and so here are the updated numbers through the 2010 calendar year. In Chart 1 we show the average for all three economies, and in Chart 2 below we show the individual country trends.


As you can see,
• EM agricultural investment spending has never been higher, and indeed is orders of magnitude larger than during the previous food price boom in the mid-1970s, and


• The aggregate investment ratio continued to accelerate right through the crisis and the post-crisis period. (This is particularly true for India and China, while Russian investment was clearly impacted by the dramatic financing recession in 2009-10).


To read full report: FOOD GLUT CHARTS
RISH TRADER

>GLOBAL EQUITY STRATEGY: Multiple expansion

■ A slowing growth backdrop . . .
Global earnings growth is set to slow significantly in 2012 as the cycle matures. Further, ongoing public- and financial-sector deleveraging are apt to result in a persistently sluggish economic growth backdrop.


■ . . . with mounting margin pressure
Another implication of the maturing cycle is increased margin pressure. Corporate profit margins have begun to roll over in recent quarters. Historically, these turns have been followed by anaemic earnings growth (which we detail below). In fact, in nearly half of the episodes we examined, earnings contracted over the 3-year period following a peak in profit margins.


■ But multiples can expand
Within economic cycles, earnings growth and valuation multiples typically have an inverse relationship. So while we’re stuck with a lousy growth backdrop, the good news is that multiples do typically rise at this stage of the cycle. Further, the combination of undemanding current valuations and an elevated risk premium lend additional support to the re-rating case.


■ Piecing it together: Total return expectations
We expect global earnings growth in the low-single-digit range over the next few years. Add the current 2.7% dividend yield and some modest multiple re-rating, and it’s not overly demanding to expect total returns in the high single digit range in coming years. This outlook is predicated, of course, on fading cyclical and systematic risks, which would allow the equity risk premium to moderate.


To read full report: EQUITY STRATEGY

>POWER GRID CORPORATION OF INDIA: Low-risk exposure to India’s s power sector

■ We initiate coverage with an anti-consensus Buy rating
Power Grid Corporation of India (Power Grid) is the government-appointed central
power transmission utility. We estimate India will add 100,000MW of generation
capacity in FY11-17, a three-fold increase, and that transmission and distribution
capex will reach 80% of generation capex by FY15 (compared with the historical
average of 40-45%). We think Power Grid will be a key beneficiary of this growth;
it already has more than a 50% market share and we expect this to increase.

■ Natural monopoly business, Power Grid is the central transmission utility
Power transmission is a natural monopoly and Power Grid’s status as the central
transmission utility means it is also the co-ordinator of private sector participation in
the sector. This is the key difference from generation where no utility has this role.

■ Low-risk business model, 17-18% assured ROE
Power Grid has a low-risk business model, earning a regulated ROE of 17-18% on
operating assets. We estimate it will invest approximately Rs600bn in transmission
capex over the next five years, funded 70:30 through debt:equity, with the equity
contribution coming from internal accruals. As a government-owned company,
debt funding is not a concern. Power Grid has an ROIC of approximately 12% on
its transmission investment, with all costs as pass through.

■ Valuation: price target of R135.00
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool, assuming 10.1% WACC.
Based on FY12E P/BV, Power Grid is trading at a 5% discount to National
Thermal Power Corp (NTPC), which we think makes it particularly attractive.

To read the full report: POWER GRID

>STERLITE INDUSTRIES: Best zinc play

■ Bullish on Sterlite’s exposure to zinc
Sterlite has augmented its zinc capacity though organic and inorganic routes. Dariba smelter added 210ktpa, Anglo’s assets would add c.400ktpa taking the total zinc-lead capacity to 1,462ktpa; in all c.11% of the world’s total zinc-lead capacity. We are bullish due to two emerging themes for the zinc market - China’s robust concentrate imports, coupled with struggling global mine supply.

■ Downward revision to our short term metal estimates
The UBS global commodity team has decreased its 2010 estimates for zinc from 105c/lb to 93c/lb (-12%) and aluminium from 103c/lb to 94c/lb (-9%). This is due to aggressive sell-downs in inventory on concerns over policy tightening in China, slower loan growth and industrial activity and the ‘post-stimulus’ slowdown. We incorporate lower metal prices into our estimates.

■ Expect to catch up underperformance to metals index
We have revised our earnings estimates by -9.2%/ -7.3% for FY11/12 following the revision to our metal price estimates. Sterlite has underperformed the BSE Metals index by c.8% YTD; we believe it should catch up on the underperformance with the bullish outlook on zinc

■ Valuation: Reiterate Buy; lower price target to Rs225
We reiterate our Buy rating with a lower price target of Rs225. We base our price target on a sum-of-the-parts valuation of individual businesses. The value of businesses is derived from an NPV valuation method using explicit mine life forecasts. We assume a WACC of 13.2% for the copper and zinc business and 12.1% for BALCO.

To read the full report: STERLITE INDUSTRIES

>SESA GOA: A ttractive at current valuations

■ India’s largest iron ore exporter; a play on volume growth
We assume coverage of Sesa Goa (Sesa) with a Buy rating. We forecast FY2011/2012 PAT will rise 60%/8%, driven by 55%/0% growth in realisations and 9%/26% growth in volume. Sesa is India’s largest iron ore exporter (it exports around 94% of total sales by volume) and iron ore contributed 97% of EBITDA in FY10 (it also has metcoke/pig iron businesses). It expects iron ore capacity to increase to 50mt by end-FY12 (from around 25mt currently). Sesa has proven plus probable (2P) reserves of 353mt (it produced around 21mt in FY10).

■ Key upside catalysts: strong iron prices; inorganic growth; new reserves
Sesa is a direct play on spot iron ore prices. We assume US$114/t India free-onboard (FOB) price for iron ore fines with 63.5% Fe grade (US$81/t for 58% Fe grade, a 29% discount) in FY2011/2012. Its share price is likely to react positively on new reserve findings. Sesa added 97mt of new reserves over the past two years from new exploration (compared to the 37mt it produced). It also added 70mt of 2P reserves from its acquisition of the Dempo mines in 2009.

■ Downside risks: higher mining taxes; a significant decline in spot prices
We do not assume a significant downside to iron ore prices from current levels (a 1% decline in iron ore prices would lead to 1.8% decline in earnings). Another risk is if the government imposes a mining tax or increases the export duty/royalty.

■ Valuation: assume coverage with Buy rating and Rs440.00 price target Given limited current reserves (around eight years of production) but aggressive reserve findings, we believe it will not be fair to value on an NPV basis. Hence, we value Sesa on 4.5x FY12E EV/EBITDA, the average valuation of its global peers for 2011.

To read the full report: SESA GOA

>GRASIM INDUSTRIES:Samruddhi lists today; to be merged with Ultratech by July end (UBS)

■ Upgrade to Buy after significant underperformance
We upgrade Grasim from Neutral to Buy and remove our short-term Sell rating on: 1) significant underperformance since the fixing of the record date of the demerger of the cement business i.e. 14 May 2010; and 2) compelling valuation at EV/T of US$80/t (US$115-140/t for other larger companies). We do not change our earnings or valuation estimates; we remove the value of the demerged cement business of Grasim (Samruddhi Cement, which lists today) and consequently, lower our price target to Rs2300 (from Rs2,875).

■ Samruddhi lists today; to be merged with Ultratech by July end
Samruddhi (the demerged cement business of Grasim) lists today on the BSE/NSE. We expect Samruddhi’s share price to mirror Ultratech’s share price in the ratio of 4:7 (i.e. one share of Samruddhi to trade equivalent to 4/7th of Ultratech’s share price) as Samruddhi will be finally merged with Ultratech (four shares of Ultratech to be issued for seven shares of Samruddhi) by July end.

■ Ultratech to become largest cement player post merger
Ultratech will emerge as the largest pure-play cement company in India with a capacity of 48.8mt. It is planning to add additional 25mt capacity in the next five years. Post merger with Samruddhi, Ultratech’s shares outstanding should increase to 274m from 124.5m shares (124.5+261.7*4/7). Samruddhi’s shares outstanding are 261.7m (including 91.7m shares issued to Grasim’s shareholders).

■ Valuation: upgrade to Buy; adjust price target to Rs2300
We continue to value Grasim on a sum-of-the-parts basis with Cement on 6.5x EV/EBITDA, VSF on 5.5x EV/EBITDA, and apply a 10% holding company discount to the cement business.

To read the full report: GRASIM INDUSTRIES

>INDIA INFRASTRUCTURE: Next five years—bigger and better (UBS)

■ Sector set to grow strongly; government steps up debottlenecking
We forecast strong growth for the sector with likely ordering activity of US$300bn over three years and likely spending of US$500bn over five years. We also think the government has taken a number of measures over the past year to ease pre-execution hurdles (the major cause of delays in infrastructure development) in critical sectors such as power and roads. We believe there is an improvement in funding availability, a trend we think could continue.

■ Revenue visibility and robust margins should drive earnings
FY10 order inflows of engineering and construction (E&C) companies under our coverage were ahead of our expectations, and revenue visibility (order book) is at its peak for most. We expect revenue to pick up strongly in FY11, driven by larger project portfolios and an improved macroeconomic environment. We believe companies will largely be able to maintain their margins (at peak levels in FY10), driven by operating leverage and reasonable pricing (without compromising on margins).

■ E&C companies will benefit; L&T, BHEL and Nagarjuna are key plays
We prefer contractors and equipment suppliers under the infrastructure theme due to the earlier impact of rders on their earnings. We think strong ordering activity should keep multiples buoyant. Our top picks are: 1) L&T—multi-sector exposure, integrated model and strong financials; 2) Bharat Heavy Electricals (BHEL)—near-term earnings intact, operating leverage should drive margins; and 3) Nagarjuna Construction (Nagarjuna)—our preferred mid-cap play.

■ Among developers, we prefer power utilities
We prefer power utilities that have large merchant capacities and strong execution. Our top pick is Lanco Infratech (Lanco). Among the diversified developers under our coverage, we like GVK Power and Infrastructure (GVK) and Reliance Infrastructure due to their attractive valuations.

To read the full report: INDIA INFRASTRUCTURE

>DR. REDDY'S LABORATORIES (UBS)

■ Dr Reddy’s initiates Class III recall of 9 batches of risperidone
Dr Reddy’s fell 3% today following news that co. has initiated a Class III recall (a situation in which use of or exposure to a violative product is not likely to cause adverse health consequences) for 9 batches of Risperidone tablets. The reason for the recall is out of specification results at the 18 month time point. Out of the 9 batches being recalled 7 of them were to expire in April 2010.

■ Limited negative fallout seen from this recall
Co. indicated that the drug accounts for less than 0.1% of U.S. revenues and therefore has negligible financial impact. These batches were manufactured before the previous recalls in early Oct’09, following which the co. took strong corrective action at its facility. The plant was re-inspected by the FDA in Nov’09 and received only one minor observation. We therefore do not expect any further negative fallout from this recall.

■ Maintain bullish stance
We continue to see significant near term drivers for the stock with ramp up of Prilosec OTC and launch of Allegra D-12 and D-24 in Q1FY11. Fondaparinux generic approval remains another trigger, although not a part of our estimates. We also expect the API business to benefit from the strong wave of patent expiries over 2011-2012 in US.

■ Valuation: Maintain Buy, PT Rs 1,500
We continue to derive our price target using DCF-based methodology, explicitly forecasting long-term valuation drivers using UBS’s VCAM tool (WACC of 11%).

To read the full report: DR. REDDY

>ROE pick-up likely to drive re-rating (UBS)

■ Two themes: ROE analysis; public sector undertaking (PSU) divestment
The BSE Sensex has gained 118% since bottoming out on 9 March 2009. We examine two themes in this report: 1) Does the Sensex warrant a further re-rating based on higher ROE? 2) Will PSU divestment limit secondary market gains?

■ ROE analysis indicates scope for further re-rating
We expect Sensex stocks’ (ex oil & gas) ROE to expand to 17.0% (+120bp) in FY11 and to 17.7% (+66bp) in FY12. With improving ROE, we believe stocks will trade at an average 12-month forward PE of 16.3x compared with 15x currently. Coupled with our 24% and 20% earnings growth forecasts for FY11 and FY12, we raise our March 2011 Sensex target from 21,000 to 22,000.

■ PSU divestment unlikely to derail stock market gains
India plans to raise Rs400bn from the divestment of PSUs in FY11. We believe this target will not hamper stock market momentum because of three factors. 1) Rs311bn was raised in the last eight months of FY10. 2) We expect FII and domestic insurance company flows to continue, driven by positive momentum in data points such as quarterly GDP and earnings growth. 3) We expect insurance companies in India to invest Rs777bn in Indian equities in FY11.

■ UBS India model portfolio changes
We move from Underweight to Overweight infrastructure and conglomerates; from Overweight to Underweight cement; from Neutral to Underweight consumer staples; and from Overweight to Neutral petrochemicals. We increase our real estate exposure from 2% to 5%. We add Adani Enterprises, GVK Power and Infrastructure, and Housing Development & Infrastructure (HDIL), and remove Ambuja Cements, Hindustan Unilever, Hindalco Industries and Nagarjuna Construction.

To read the full report: MARKET STRATEGY

>ITC: BUDGET IMPACT (UBS)

■ Excise duty increased; new format of cigarettes allowed
Prima facia, the Budget is negative for the cigarette business, the excise duty has been raised by 11-18% for King Size and RSFT which is higher than we assumed. The Budget has introduced a new format for cigarettes at <60mm>

■ Positive for hotel business
ITC however, will gain from an investment-linked tax incentive of 100% deduction in respect of the whole of capex in the hotel business. ITC will be commissioning a 600-room hotel in FY11E, we believe the tax incentive on the capex should contribute to c.3% to PAT estimates.

■ Interim growth higher, EPS remains unchanged
We do not change ITC's estimates for FY11E but reduce price target from Rs325 to Rs300, given a worsening margin profile of the cigarette business in the near term. In our interim period, however, the estimated volume growth in the cigarette business improves from the 4.2% trend growth in volumes to 5.5%, as the microfilter segment should emerge as a volume driver in the cigarette business.

■ Valuation: ITC is our top pick, price target of Rs300
We derive our price target from a DCF-based methodology and explicitly forecast long-term drivers with UBS’s VCAM tool. Our price target of Rs300 assumes an interim growth rate of 12% and a WACC of 11.6%.

To read the full report: ITC

>Indian Steel: Steel majors raise prices post budget 2010 (UBS)

■ SAIL has increased prices by Rs600; JSW Steel by 2%
SAIL has increased steel prices by Rs600/t post the 2% hike in excise duty announced in the government’s annual budget. JSW Steel raised its prices by 2%. Our channel check indicates similar price hikes by Tata Steel. Average prices in India before the budget were Rs34,800 for HRC and Rs32,500 for wire rods (including 8% excise duty and 4% VAT).

■ Other Asian companies such as JFE and Nippon Steel raised prices
JFE and Nippon Steel raised their export steel prices by US$200/t (previously around US$550-600 versus the domestic price of around US$800).We believe this is largely in anticipation of higher raw material contract prices and could be positive in the near term as it highlights steelmakers’ ability to pass on raw material price hikes. However, we remain concerned global overcapacity (especially in China) and tightening measures in China could lead to softening of steel demand and prices in H210.

■ Key near term event—raw material negotiations
BHP will be in Tokyo next week to negotiate coking coal contracts with Japanese steel makers. We believe it could press for quarterly price contracts, as an alternative to annual benchmark prices. Spot coking coal is more than US$200/t versus the contract price of US$129/t last year. Iron ore spot (CIF China) is around US$138/t versus the contract price of US$61/t last year.

■ We remain cautious on the Indian steel sector
We believe it will be difficult for the sector to outperform in a rising cost scenario. We would prefer mining names over steel names. However, we think Indian steel companies could outperform Asian peers due to higher iron ore integration (most Indian companies import the bulk of their coking coal requirements).

To read the full report: INDIAN STEEL

>INDIA CONSUMER FINANCE (UBS)

■ ‘What if’ note highlights the potential of Indian consumer finance market In an idea piece today titled ‘
What if… Chinese and Indians used more personal credit?’, Asian product manager Simon Smiles highlights the potential consumer finance market size in India which could grow multi fold from current levels if penetration reaches a fraction of that in developed markets.

■ Under penetrated market
Consumer finance in India even after a healthy 23% CAGR growth during FY05- 09 is still fairly underpenetrated with housing loan to GDP at ~9% and total consumer loans to GDP at ~16%. Key players in the consumer market are 1) ICICI Bank 2) HDFC Group (HDFC Bank +HDFC) and 3) State Bank of India.

■ Structural drivers are in place
Falling dependency ratio, rising income levels, urbanization and banks’ increasing focus on consumer loans; all of these strengthen the prospects of consumer finance in our view. Attractive risk adjusted return (normally) in consumer loans is likely to make the business more competitive but incumbents are well placed in our view.

■ ICICI, HDFC (group) and SBI best placed; prefer ICICI the most
Consumer loan business is cost intensive which makes achieving scale critical in ensuring sustainable profitability. ICICI, HDFC group (HDFC+HDFC Bank) and SBI are market leaders across various consumer products. We find ICICI Bank attractively valued at 1.3x PBR FY2011E (standalone entity) while SBI (1.3x FY11E PBR) is our least preferred pick. HDFC and HDFC Bank are Neutral rated.

To read the full report: INDIA CONSUMER FINANCE

>ADANI POWER: 1,320MW project award in MP is positive (UBS)

■ Adani Power has been awarded LOI for a 1,320MW project in MP
Adani Power (APL) has been awarded Letter of Intent (LOI) by Madhya Pradesh Government to develop 1,320MW power project at Chhindwara. The project is like a Case 2 bid (similar to UMPPs) and has significant advantages for Adani Power in the form of; a) land availability, b) state government support for obtaining fuel linkages, c) water availability, d) support for infrastructure facility by MP Govt. The project also has a good mix of regulated and open capacity.

■ The project may be commissioned in FY14/FY15
As per the LOI, the first unit of 660MW is to be commissioned in 2Q FY14 and the second unit by end-FY14. We believe Adani Power has made reasonable progress on this project as the company has already invited EPC bids for the project.

■ We don’t include under development/under planning projects in valuation
In our current price target, we only include 6,600MW of commissioned/under construction capacity (4,620MW Mundra and 1,980MW Tiroda). We don’t include 3,300MW and 6,600MW of under development and under planning projects respectively. As highlighted in our initiation report, Adani Power: An emerging utility major dated 25th November 2009, this could add ~26% in our price target.

■ Valuation: Maintain Buy and price target of Rs130
We derive our PT using a plant-by-plant DCF (for 6,600MW of commissioned/ under construction capacity), assuming COE of 13.2%. Developments in APL are similarly positive for its parent entity, Adani Enterprises (AEL); APL contributes ~62% of our SOTP-based PT of Rs550 for AEL (maintain Buy).

To read the full report: ADANI POWER

>BHARTI AIRTEL LIMITED (UBS)

■ Bharti enjoys significant first mover & scale advantages:
Bharti, thanks to its management’s vision has been a big believer in the potential of the Indian mobile market that led the company to invest earlier than its rivals in a nationwide network. This has led to Bharti having a much superior scale vs. its competitors. There is significant operating leverage as we believe 52% of the operating costs in the mobile business are fixed (please refer to table 1).

Positioned to emerge stronger

■ Bharti’s cost focus implies that it is likely to emerge stronger
We believe Bharti management is currently taking appropriate steps to optimize the cost structure further with a view to protect margins in a low pricing power environment. We think consolidation is inevitable in the Indian mobile sector over the next 2-3 years and some pricing power is likely to return. Bharti should emerge as the major beneficiary of any consolidation in the Indian mobile sector.

■ Quarterly results are likely to be uninspiring
Given the price war in the Indian mobile sector the quarterly performance of Bharti is likely to be adversely impacted over the next 4-8 quarters. For Q3FY10, we expect consolidated revenues to grow 0.8% qoq to Rs99.2bn, EBITDA to decline 5.8% to Rs39.0bn. Mobile revenue to decline 2.5% qoq to Rs78.9bn, and mobile EBITDA to decline 8.4% qoq to Rs23.7bn. We expect voice rev/min to decline from Rs0.51 to Rs0.47/min.

■ Maintain Buy rating and SoTP based PT of Rs450
3G licensing related developments may act as a dampener for Bharti stock price. We believe this could create attractive buying opportunities in Bharti stock on this potential weakness.

To read the full report: BHARTI AIRTEL

>INDIA MARKET STRATEGY (UBS)

■ Positive stance on Indian stocks maintained
We continue to maintain our positive stance on Indian equities. We are not overly concerned with monetary tightening as we believe 1) Economic recovery is likely to be strong to offset any tightening related demand weakness 2) RBI is unlikely to tighten significantly that stifles the economic recovery. Our structural view on India is bullish based on attractive economic outlook, falling dependency ratio and a stable government. Please refer to “India-the next Asian tiger” report for details.

STAYING BULLISH

■ Turning O/W on Banks, Power; Neutral on Telecom, Autos
We are turning more positive on banks as we believe the tightening related worries are overdone and we expect credit growth to pick up on the back of strong economic recovery. We also increase exposure to power as we believe the upcoming period is likely to be positive for companies with backward integration (in fuel) and strong execution capabilities such as Tata Power and Adani Power. We reduce our O/W stance on telecom as we believe there could be stock price weakness around 3G auctions. We turn neutral on autos as we believe the strong growth expectations in Q4FY10 are already factored in. There is also risk of auto
sector underperformance in case of reversal of excise duty cut by the government.

■ Top picks – PNB, BOB, Ambuja, Ranbaxy, Adani Power, IBREL
We maintain our March 2011 BSE Sensex target of 20,000. We believe that upside surprises are likely if the government speeds up the reform process (given elections are 4 years away). Economic recovery and corporate earnings recovery could also surprise on the upside. Risks include 1) Rising commodity prices 2) Government fails to deliver on reforms and 3) Geopolitical risks.

To read the full report: MARKET STRATEGY

>OUTLOOK 2010: Global Strategy, Economics, Credit, Quant, & Sector Research

■ Squaring the portfolio paradox: Risk re-allocation Equity and credit valuations are ‘fair’, global growth remains uneven, and in 2010 market volatility may increase. Yet we opt to increase allocations to equity, credit, commodities, and real estate for 2010. Why? A gradually improving global economy and the prospect of higher policy rates undermine the case for government bonds, nominal and inflation-linked. Cash returns remain unattractive. Stocks and corporate bonds are likely to out-perform, along with commodities and selected REITs. But in a world of lower returns and higher volatility, increased allocations to ‘risk’ assets only makes sense if accompanied by a lower cyclical profile in terms of sector and style. Squaring the portfolio paradox (lower risk-adjusted returns but higher allocation to risk assets) requires a redistribution of risk within the portfolio.

■ What to avoid: Bond markets By early 2010 investors will anticipate the end of the Fed’s ‘zero-rate’ policy and will expect rate hikes elsewhere, as well. Rising short rate expectations will push up bond yields, as well as bond market volatility. The appropriate asset allocation is
to reduce bond holdings and shorten duration in fixed income portfolios.

■ Milestones and catalysts Important investment signposts include a peaking of US unemployment (by Q1 2010), validation from the Fed and other central banks that growth is sustainable (by Q2 2010), and healthy corporate profits growth (Q4 earnings season). Upside risks to our view include the advent of asset price bubbles (above all in Asia). The chief downside risk remains a faltering US recovery.

■ Revised asset allocation Our revised allocations are as follows. We increase overweight allocations to global equities and high-yield corporate bonds, and move REITs and ‘soft’ commodities from market-weight to overweight positions. We reduce our government nominal and inflation-linked bond weightings to underweight. Finally, we retain our maximum underweight position in cash.

To read the full report: GLOBAL OUTLOOK

>Mundra Port & SEZ Ltd. (UBS)

■ Factoring increased capacity, longer concession, and stronger cargo growth: We upgrade our rating on MSEZ from Sell to Neutral, factoring: 1) increased capacity of 50mt for the coal jetty (30mt earlier); 2) concession period upto FY51 (FY31 earlier); and 3) stronger volume growth (20% over FY09-12 versus 9% earlier led by higher-than-expected growth and improved outlook). We believe that a pick-up in cargo volumes and long-term growth potential is likely to keep valuations buoyant.

■ We estimate capacity expansion equivalent to 50% of existing facilities
MSEZ has significant growth potential given: 1) large physical capacity (waterfront is 4x of current utilization); 2) healthy internal accruals (Rs40bn over the next five years); 3) low gearing (average net-debt-to-equity ratio of 0.6x over FY09-12); 4) robust demand outlook (also aided by delays in capacity expansion plans at other ports); 5) management keenness to expand facilities; and 6) strong execution capabilities.

Strong growth commands premium

■ Pick-up in private sector capex to drive demand for SEZ land
Alstom-Bharat Forge JV is setting up its facility in MSEZ—120 acres was leased in Q2FY10. In Q1FY10, MSEZ had lease income of Rs50m (~60% of value taken upfront). Though the high rates were due to land usage for hotels/buildings, it provides comfort about potential land valuations in the SEZ. The SEZ leasing activity seen over the last two quarters will further gather steam in CY10 led by private sector capex pickup and aided by the advantage of the port infrastructure.

■ Valuation: sum-of-the-parts-based price target of Rs640 (earlier Rs390)
Our price target, implying FY11 P/BV of 6.3x comprises of: 1) Port – Rs531; 2) SEZ – Rs72; and 3) investments – Rs27 (Dahej, Adani Logistics and Inland Container). We revise our FY10/11 EPS estimates from Rs12.65/16.85 to Rs16.18/19.55.

To read the full report: MUNDRA PORT AND SEZ

>SUZLON ENERGY (UBS)

■ India sets emission cut targets: India has set its bargaining position for Copenhagen as a voluntary emission cut target of 20-25% by 2020 from 2005 levels and has said that they will not accept any legally binding cuts to emissions. The target is lower than what China, and Brazil are targeting but is in line with India’s own reduction of emissions by 17.6% from 1990-2005. Given all the backroom work carried out, we think the Copenhagen summit will take the whole process of emission cuts forward rather than setting the clock back. But, it is unlikely to set very aggressive targets.

Run up to Copenhagen

■ If a consensus emerges, we think the development would be positive: In our view, the key to step forward is to arrive at a consensus among developing and developed countries on emission cut targets. An acceptable agreement could boost the focus on renewable and in our view, wind turbine industry would see long-term tangible benefits. In addition to wind, we see opportunities in smart grids (ABB, IT services companies), super-critical equipment (L&T, BHEL)/coal gasifiers (L&T), energy efficient buildings (ABB) and transport related.

■ For Suzlon, wind turbine market recovery is critical: We think the market will be more focussed on the expected revival in industry wide orders in 1HCY10. We estimate that the sector should re-activate from H1/10 on improved economics, as (1) turbine prices should be c20% lower in 2010 vs 2008; (2) project financing returns.

■ Valuation: Maintain Neutral: Our DCF-based price target of Rs100 is based on: 1) intermediate growth of 10%, 2) long-term growth rate of 5%, 3) WACC of 11.8%.

To read the full report: SUZLON ENERGY