>SUGAR SECTOR UPDATE (VENTURA)

El Nino to dampen crop in Brazil
Parts of Brazil have had four times more than normal rain due to the El Nino effect, adversely affecting sugarcane crop. Due to this, Brazil’s sugar production is expected to fall short of the estimated 32 – 33 mt to 30.3 million tons in 2009-10.

Competitive buying pressures from countries apart from India to further accentuate the shortage
Besides India, the largest consumer, with contracted imports of 4 million tons of sugar, neighboring Pakistan and Bangladesh also plan to import the sweetener to cater to their domestic demand. “Pakistan must import as much as 1 million tons of sugar by December’, as per the spokesman for the Pakistan Sugar Mills Association. Indonesia, Southeast Asia’s largest sugar buyer, India, may also step up imports to stem the domestic prices.

International raw sugar prices are expected to reach 30 cents / pound
October raw-sugar contract, which is trading at 23.45 cents a pound on ICE Futures U.S., is expected to go up to 30 cents a pound in 2010’s first quarter on constructive fundamentals and support from speculators. Reports of hoarding, confiscation of stocks and rationing in various parts of the world are indicative that there is more upside in near future.

World outlook
Worldwide demand for sugar will exceed output by 9.35 million tons in the year ending Sept. 30, more than the 7.8 million tons projected in May, according to London-based International Sugar Organization.

To see full report: SUGAR 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

>RELIANCE COMMUNICATIONS (MACQUARIE RESEARCH)

From ugly duckling to top flight eagle

Event
■ We upgrade our target price for RCOM to Rs360 from Rs275 (even with 50bp higher WACC of 13%), following solid 1Q results, a cut in capex guidance and forecasts despite higher subs and a new tower deal. We reiterate our Outperform rating with potential upside of 36.4% to our new target price.

Impact
■ We increased our target price. This is driven by reduced capital intensity, higher subscriber forecasts, the launch of EVDO data cards and introduction of third-party revenues in Reliance Infratel on the back of the tenancy deal with Etisalat DB Telecom. RCOM has cut its FY3/10 capex guidance by 33% to Rs100bn. In addition, FY3/09 capex of Rs190bn was 37% lower than the original guidance of Rs300bn given in January 2008. As such, we have cut our capex forecasts for FY3/10–12 by 21–39% as pop coverage maxes out.

■ Consensus estimate of 15% YoY drop in FY3/10 EPS is aggressive, in our view. Our EPS estimates for FY3/10 and FY3/11 are 32% and 41%, respectively, ahead of the Street. We expect upgrades to drive a re-rating and outperformance in RCOM (see Figure 3).

■ Mobility: Uplift from wireless broadband key reason for 4% increase in wireless revenues. Our FY3/10 wireless revenue forecast is flat with our earlier estimate, as an increased sub estimate has been offset by reduced ARPU to take into account the termination rate cut. Even so, our FY3/11 and FY3/12 revenue estimates have increased by 4% to capture upside from
wireless broadband. We expect FY3/10 wireless revenue growth of 19.8% and attribute approximately 6% YoY growth contribution from wireless broadband (Rs12.3bn revenue opportunity).

■ Broadband and Global business: Minor change in top line but reducing capex forecasts. We have significantly reduced our capex forecasts on the back of a sharp cut in capex guidance by management.

■ Towers: Rolling in contribution from Etisalat DB Telecom deal, potential upside from S Tel and Aircel deal yet to be factored into our estimates. The share of revenue from external tenancy on Reliance Infratel towers is insignificant in FY3/10 (roughly 1% of total revenues). However, Reliance Infratel has signed a deal with S Tel to provide passive infrastructure services, and media reports have hinted at a similar deal with Aircel (Not Listed). The
potential contributions from these deals are yet to be factored in our model.

Earnings and target price revision
■ We raise our FY3/10E, FY3/11E and FY3/12E EPS by 17%, 20% and 21%, respectively. We increase our target price to Rs360 from Rs275.

Price catalyst
■ 12-month price target: Rs360.00 based on a DCF methodology.
■ Catalyst: Launch of postpaid GSM service in 14 new circles.

Action and recommendation
■ RCOM is a favoured beta play in the sector and, in our view, has the potential to deliver outsized returns, if new tenancy deals are incrementally signed by Reliance Infratel.

To see full report: RELIANCE COMMUNICATIONS

>RECOVERY OF INDIAN LIFE INSURANCE INDUSTRY (INDIA INFOLINE)

Indian Life Insurance industry, after reporting a decline for the last two months, staged a recovery in July'09. The industry's total Annual Premium Equivalent (APE) clocked a growth of 6.1% yoy on back of a strong 28.9% yoy growth by LIC. LIC continued to outperform the private players, since December'08 (posted growth of 37.9% points over and above the private players in July'09). Although private players reported a decline of 9% yoy, the fall was substantially lower than 24% yoy reported in the previous two months. IRDA is actively regulating ULIP norms, which dominate insurance sales for most players, to safeguard investors' interest. Recently, IRDA issued clarity on exclusion of mortality and morbidity charges for computiung the overall cap, which provided some relief to the players for controlling their ULIPs overheads. Further, the regulator is keen to increase ULIPs lock-in-period from three to five years, to ensure a higher return for investors.

To see full report: INDIAN LIFE INSURANCE INDUSTRY