>FLASH ECONOMICS (ECONOMIC RESEARCH)

At what horizon will global inflation return?

There is currently inflation in certain countries with supply side problems, and higher inflation in emerging countries than in large OECD countries because of the convergence of price levels, but no overall (global) inflation despite very rapid growth in the money supply.

For global inflation to return, the following conditions must be met:
− for wage inflation (underlying inflation,) the world must get close to full employment, which will be a very long process due to the magnitude of available labour resources, and the high level of investment;

− for commodity inflation, the pick-up in global growth must bring demand for commodities back towards levels that generate pressure on prices, and this could take at least two or three years, barring a surprise linked to speculative positions.

Only protectionism could cause a faster return of inflation.


To see full report: FLASH ECONOMICS

>ITC (GOLDMAN SACHS)

In line with expectations: Robust cigarette profit growth in FY09

What surprised us
ITC’s FY2009 results were broadly in line with our forecast, with EPS up 5% yoy to Rs8.64 vs. our expectation of 6% growth, despite a lower-than expected performance in 4Q. Cigarette segment volume was down 3%- 3.5% yoy, in line with our expectation, while its EBIT growth was strong at 15% and margin rose 140 bp yoy. FMCG – Others losses were below Rs5 bn in FY2009, a tad better than we forecast. However, EBIT in Hotels was lower than we forecast, reflecting a high base in 4QFY08 and a significant industry slowdown. Agri Business revenue and EBIT also fell short of our estimates, reflecting lower soya volumes and portfolio rationalization.

What to do with the stock
Maintain Buy on ITC; our 12-mo P/E-based TP of Rs211 implies 15% upside. FY2009 was a year of modest EPS growth as we had forecast, but we expect an acceleration to double-digit earnings growth in FY2010E, led by 1) robust cigarette EBIT growth – ITC delivered 15% pa growth in FY08-09 despite steep tax hikes and an increase in contraband volumes; ITC’s consistent market share gains over the years reflect the strength of its brands and pricing power over peers; 2) we expect FMCG – Others losses to narrow; 3) Hotels should also stabilize in FY10E, while we expect strong growth in the paper business. Risks include adverse cigarette tax hikes, or any prolonged weakness in FMCG – Others and Hotels.

To see full report: ITC

>MARKET STRATEGY (ICICI DIRECT)

Opportunity lying outside the index

Who says Black swan events always have a negative impact? They can also work well on the positive side, as is the case of the outcome of the Indian general elections. Who could have predicted the clean sweep by the UPA in the elections? However, the UPA is indeed about to form a government at the Centre with the Indian National Congress being the major political party in the coalition with 206 seats.

Much to the consensus relief, the new government formed will not need the support of the Left and the alliances of local regional parties, which would have otherwise impacted the decision making process of the government had they been party to the coalition. This will indeed send huge positive signals to the economy and the capital markets.

So, the big question that remains is where does the market head from here?

In our recent strategy report, we had mentioned that if the election results are favourable then the markets may reach 14500 levels on the upside in the short run. It did that within two trading sessions after May 16 2009. However, on the first day when markets opened, within a few seconds, for the first time ever, the market hit the 15% upper circuit followed by an additional 5% rise. This gave no chance to the investors to buy into the markets. As large caps have rallied substantially, mid caps soon followed suit. Since the substantial appreciation in large caps has created a huge valuation divergence between large caps and mid caps, the ongoing run in the mid caps is simply a case of catching up.

We believe that within the midcap universe only quality midcaps will witness sustainable buying interest. Within this segment, PSU banks, private regional banks, power companies and high leveraged plays will be preferred. In addition, we are of the view that one should view any deep correction in the markets as an opportunity to accumulate quality stocks at reasonable valuations.

However, one thing is for sure. This black swan result has indeed increased the visibility of the India growth story in front of the international investor community. Now, on the back of expectations of better policy reforms, increased focus on fiscal deficit and high probability of PSU divestments and prudent & speedy executions related to the important bills like that of FDI in insurance will result in increased FII participation in India.

Key expectations from the new government:

• Improvement in fiscal management/public finances via disinvestments
• Increased focus on infrastructure spending especially power and road/highways.
• Thrust on agriculture and rural development
• Financial sector reforms like increasing FDI in retail and insurance sector
• Increased focus on education and healthcare
• Providing ample liquidity to corporates and individuals at affordable rates

We believe the above factors will help in bringing fresh capital into the country in terms of FDI, FII flows and ECB flow

Key Beneficiaries

• Insurance plays like SBI, Kotak Mahindra Bank and Reliance Capital

• Infrastructure plays like Bhel. L&T, NTPC etc.

• PSU banking stocks with trigger of government stake dilution for example: OBC, Dena Bank, etc.

• PSU space will be in limelight on expectations of divestments and new IPOs

To see full report: MARKET STRATEGY

>PUNJAB NATIONAL BANK (INDIA INFOLINE)

■ Strong growth momentum continues in Q4 FY09; Fy09 loan growth at 29.5% yoy.

■ NIM correct by 30 bps qoq, in-line with expectations.

■ Other income remains elevated; spike in C/I ratio hurts profit growth

■ Significant reduction in NPA levels; capital adequacy improves

■ Bank taregts 23-35% loan growth and ~3.5% NIM in FY10

■ Downgrade to MP with target Rs 700; valuations have become fair post recent rally

To see full report: PNB