>INDIA MACROSCOPE (CITI)

It's Getting Better, and Here’s Why

■ Macro is looking up: While some incremental data have yet to recover (exports, industrial production), we think India will do better on the back of (1) election results, (2) an improvement in the investment climate, both domestic and global and (3) signs of thawing credit markets. Our revised GDP numbers of 6.8% in FY10E and 7.8% in FY11E are investment-led and assume stability on the consumption front.

■ How and where will this growth come from? We think focus on the following will drive growth: (1) facilitating infrastructure development, (2) sticking to the Inclusive Growth Mantra, (3) improving the business environment – rationalize taxes, land, labor, (4) education and (5) opening up and out: global integration and financial liberalization.

■ Wild cards – can swing both ways: While we expect growth momentum to be stable and deeper, there are wild cards: (1) Agriculture – an El Niño threat is hanging large, but food stocks are a buffer. (2) Global capital markets – India needs capital; it is there today, but will it continue? (3) Oil and commodities – rising prices will hurt but lower prices will benefit. (4) Expectations are high, but promises stand a better chance of delivery due to the new monitoring
mechanisms in place.

■ Financial markets — Although the RBI is close to the end of its easing cycle, yields will likely stay in the 6% to 7% range due to (1) the possibility of one last cut and (2) the RBI’s continued participation in the borrowing program. The rupee, which has gained ~6% after the election results, is likely to strengthen further in the medium term due to (1) higher growth and (2) increased capital flows. However, in the immediate near term like most other emerging market currencies, the rupee is likely to oscillate between “risk aversion” and “return to risk.”

To see full report: INDIA MACROSCOPE

>ECONOMY (KOTAK SECURITIES)

Budget FY2010 likely to spur infrastructure investment, go slow on fiscal consolidation

• Budget likely to keep GFD/GDP ratio in 6-6.5% range
• Expanded NREGP, Bharat Nirman likely to sustain stimulus to rural economy
• Infrastructure investments may get a boost through annuity-based schemes, funding of SPVs for financing equity component
• We expect tax cuts to stay, but disinvestment of Rs200 bn can help check deficits

Gross Fiscal Deficit (GFD) likely at 6-6.5% of GDP for FY2010E
We believe the Union budget for FY2010 is likely to peg GFD/GDP ratio in the range of 6-6.5%. Since the budget-making exercise is still at a nascent stage, a clear idea of the fiscal gap is yet to emerge. We believe the government is likely to strive to keep GFD/GDP ratio in 6.0-6.5% band as higher than 6.5% on-budget deficit for the centre could (a) make the path of future fiscal consolidation that much more difficult and (b) be a negative with the financial markets, especially foreign investors and rating agencies. At the same time, a deficit lower than 6% of GDP is seen as hampering growth revival and coming in the way of government spending on rural safety nets.

• GFD/GDP ratio below 6% appears improbable as the UPA government is committed to push its mandate for inclusive growth agenda further by expanding National Rural Employment Guarantee Program (NREGP) and Bharat Nirman Yojana

• A 6-6.5% GFD/GDP is considered possible even with expanded coverage of NREGP with the carry-over of unused allocations from last year’s budget

• A GFD/GDP exceeding 6.5% is seen as risking future consolidation and GOI is keen to find ways for additional resource mobilization, including disinvestment, to check the deficit from spinning out of control. A 7% GFD/GDP ratio is seen as potentially triggering negative reactions from important stakeholders in a globalized economy.

Combined deficit seen at about 10% of GDP
We believe it may be possible to contain the combined deficit of the Centre (including offbudget) and States to 10% of GDP as off-budget deficit could be restrained to about 0.5% of GDP with subsidies reforms. State governments’ deficit, with some prudence, could be contained at about 3% of GDP in FY2010E. We understand that officials consider this wide fiscal gap a legitimate counter-cyclical policy that is being adopted by several countries across the globe. In our assessment, fiscal deficits in India should start correcting from FY2010E at a moderate pace.

Subsidies reforms may be difficult
There appears to be is serious consideration of subsidies reforms, but political constraints may still hamper progress therein. While substantive suggestions for reforms aimed at capping GOI’s subsidy bill have been mooted, whether or not these get reflected in the forthcoming budget is a political call for policy makers. The proposals under consideration could possibly include:

• Capping fertilizer subsidies by capping the amount and fixing subsidy per kg of nutrients
• Deregulating prices of petrol and diesel, while retaining price controls on kerosene and LPG with modest price adjustments
• Making provisions for higher food subsidy bill while aiming at reasonable procurement policy

To see full report: ECONOMY

>BANK OF INDIA (KR CHOKSEY)

INVESTMENT RATIONALE
Bank of India reported net profit of Rs.810.4 Crore during Q4FY09 in line with our expectations. During Q4FY09 bank reported a net profit of Rs.810.4 Crore as compared to Rs.757.1 Crore in Q4FY08 a increase of 7% (y-o-y). Key triggers for banks are Other Income was higher on back of strong fee income growth (up 103% y-o-y) and trading gains (up ~273% y-o-y). Operating Performance was slightly worse than expectations on account of higher operating expenses, which increased 23.5% q-o-q on account of higher wage costs and a non recurring investment to migrate all bank branches to the core banking system, decline of Net Interest Margin, and higher cost on account of branch expansion and branding. Net Interest Margin had significantly decline from 3.38% in Q3FY09 to 2.98% in Q4FY09.

Key Developments
• Interest Earned increased 3% q-o-q to Rs 4493.1 crore on account of at 6% qo- q growth in loan book

• CASA ratio declined 120 bps q-o-q to 30.5% as deposit mobilization campaign in December 2008 brought in mostly Fixed Deposits

• Capitalization remains comfortable with Tier I capital ratio at 13.0%, giving room for balance sheet expansion and additional fund raising

• Management is planning aggressive channel expansion of ~150 branches and ~500 ATMs in FY10

• Majority of bank’s advances are concentrated in the corporate sector (~48%) with the rest coming from SME (22%); agriculture (14%) and retail (15%). Management expects a similar profile of advances to be maintained in FY10

• Management expects incremental credit demand to come from the infrastructure (power, roads and telecom) and services (hotel and hospitals) sector

• Management indicates that it has been able to deploy resources towards advances and investments while parking minimal amount of funds with the RBI through reverse repo

Healthy Business Growth

The total business has grown by 26% to Rs. 3,34,440 crore in Q4FY09 as compared to Rs.2,64,804 Crore during Q4FY08. Advances have grown by 26% to Rs.1,44,732 crore in Q4FY09 as compared to Rs.1,14,793 Crore during Q4FY08 and deposits grew by 26% to Rs.1,89,708 Crore in Q4FY09 as compared to Rs.1,50,012 Crore during Q4FY08. Advances grew on the back of strong retail loan book which now constitute 79% of the banks advances while deposits grew on the back of huge demand for Term Deposits which stood at Rs.1,59,487 Crore in Q4FY09 as compared to Rs. 1,26,010 Crore in Q4FY08.

Valuations

• At current price of Rs 324 the stock is trading at 1.14x FY10E BV of Rs. 465 and 4.62x FY10E EPS of Rs. 70.

• We believe that Bank of India has low valuations (~1.2 FY10E BV/s) compared to public sector banking peers, moderating business growth (~18- 20% advances growth expected in FY10) will be positive as it will allow management to focus on asset quality and improving funding mix, stabilizing NIMs ~3% as high cost differential interest rate deposits run off or are repriced in next two quarters and CASA ratio of 35% is achieved in H2FY10, asset quality headwinds will likely subside as economy improves

• We recommend a “BUY” on the stock with a 12 month target price of Rs. 465 giving an upside potential of 43% from current level.

To see full report: BANK OF INDIA

>GREED & FEAR (CLSA)

BULLDOG

The current psychology in world stock markets is clear. A growing number of markets have returned to their pre-Lehman levels in mid September 2008, and those that have not have room for more “catch up” (see Figure 1). Such a psychology is what can continue to drive the S&P500 higher in the short term towards GREED & fear’s 1,000-1,050 bear market rally target, just as it can also drive stocks in Asia higher which are still below pre-Lehman levels.

Still at this point it also has to be noted that there is one macro risk which has emerged that potentially threatens stock markets in the short term. That is that the US dollar index is now around the same level where it found support in December last year (see Figure 2). The index fell to an intraday low of 78.3 on Tuesday and closed at 79.5 on Wednesday. If the index breaks this key technical level convincingly and its decline proceeds to accelerate, then a collapsing dollar could become a major negative for equities in stark contrast to the gently declining US dollar which has been a bullish driver for equities, particularly Asian equities, in recent months.

That said, GREED & fear still does not expect this full-scale dollar collapse to happen now. Rather the view here remains that the collapse comes later and that the recent dollar decline reflects renewed risk appetite causing the dollar to become the funding currency of choice for a new carry trade. This also suggests that the dollar will be due a decent rally when equities correct. Still the dollar collapse risk must be noted this week given the currency’s decline to a key technical level. A dramatic decline in the dollar, as opposed to a gradual depreciation, could in no way be viewed as positive for equities since it would signal a loss of independence for US monetary policy.


Originally scheduling a trip to India after the country’s general election seemed like a good idea to GREED & fear. But clearly in a certain respect the action has already happened. The Sensex is up 23% since the result of the poll was announced on 17 May while the benchmark index is now “only” 29% below its all-time high of 21,206 and 7% above the level reached prior to the Lehman collapse.

If this is the case, GREED & fear is fortunate in the sense that a reasonable overweight position in India was maintained in the relative-return portfolio prior to the election’s result while a 30% of the Asia long-only portfolio was also invested in India, which was subsequently raised to 34% after the result (see GREED & fear – flash, 18 May 2009). It is also the case that GREED & fear has seen nothing in India this week to cause a severe questioning of the long-held view here that a structural bullish position towards the market should be maintained by specialist emerging market investors and indeed by global investors in general.

Indeed, if there is a risk to the market it is probably in the short term. The Sensex has moved a long way in a hurry as sidelined foreign investors reacted to the surprisingly decisive election result. As a result, there is talk of US$15bn of equity issuance in the pipeline while hopes of positive reform initiatives are also high for the budget announcement due in early July. There is also the risk that, with crude at US$67/bbl, the oil does not have to move too much higher before it starts to influence sentiment negatively towards India.

To see full report: GREED & FEAR