>FLASH ECONOMICS (ECONOMIC RESEARCH)

What will the world look like after the crisis?

We believe that the crisis may have changed the functioning of the global economy structurally in several ways, but some points remain uncertain:

− the role and regulation of finance: are we heading towards a financial sector devoting itself mainly to medium-term financing of growth?

− the use of savings: will it become more efficient? (financing of useful investment in the United States, financing of emerging countries);

− location of activities and growth: Can Asia replace the United States as the global growth engine?

− where will new jobs be created in advanced OECD countries? Probably not in "old industry" that will be offshored even more or depends on credit. Is green growth ("green business") really an interesting approach, and is its size sufficient?

− will consumers behave differently? Will they abandon the model of high, credit-driven consumption?

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>CURRENT ISSUES (DEUTSCHE BANK)

Back to the bad old days?
The return of protectionism

The WTO and the World Bank report a rapid increase in protectionist measures since the beginning of the economic crisis. The World Bank has registered 89 new restrictions on trade since October 2008, 23 since the London G20 summit in early April alone, and the WTO an even greater number still. Protectionist measures have increased particularly since the spillover of the crisis to the real economy. Protectionism is more topical than ever.

There is still a lobby for protectionist measures. In times of slumping national and international demand, countries and companies will continue to favour beggar-thy-neighbour measures which will (unjustifiably) make their products more competitive than those of foreign rivals or else shield them from competition from the outset.

Tariff hikes account for “only” about one-third of the measures recorded world-wide – protectionism has many faces: non-tariff barriers to trade and the abuse of anti-dumping measures, subsidisation of national industries or, very lately, calls to favour domestic products and companies in national economic stimulus packages, and restrictions on international capital flows or immigration.

The competition and trade-distorting effects of subsidies pose the biggest risk. In times of strong intra-industry trade the focus of protectionism is shifting away from discriminating against foreign competitors by imposing tariffs towards actively providing preferential treatment to domestic firms via financial aid. The global automobile industry is a case in point. Retaliatory measures are the response.

These factors threaten to unleash a spiral of protectionism that perhaps may not choke off the global recovery, but it will partly delay its progress. As regards monetary and fiscal policy, the authorities have learnt the right lessons from the Great Depression. What this means here is that policymakers must not sacrifice medium-term growth opportunities for near-term protection interests. Shoring up open markets and free trade is the next major challenge in a globally coordinated drive to cope with the crisis.

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>TATA MOTORS (RELIANCE MONEY)

No signs of revival

TAMO’s Q4FY09 (implied results) performance is better than our expectations mainly due to adoption of new guideline for AS-11. TAMO’s margins remained under pressure for FY09, but net profit was better than our expectations. The company has already tied up for funds for JLR, but its leverage remains a concern in the short to medium term. We expect interest cost to go up in the near future. We continue to remain negative on CV industry as there are no signs of revival yet and assign SELL rating to the stock.

■ FY09 top line declines by 11% y-o-y
TAMO’s FY09 net sales reported a decline of 11% y-o-y to Rs.256.6bn on account of lower volumes. Sales volume for year were down by 16% y-o-y due to fall across all the three segments viz. passenger car, CV and exports. PC, CV and export sales of the company reported a fall of 5% y-o-y, 15% y-o-y and 39% y-oy respectively. However the company has improved its market share in the CV industry from 62.2% to 63.8%. Net sales realizations of the company during FY09 reported an improvement of 6% y-o-y to Rs.488,516 per vehicle. TAMO’s implied results for Q4FY09 suggests its top line went down by 21% y-o-y to Rs.68.9bn mainly due to drop in sales volume by 23% y-o-y.

■ AS-11 supports net profit
For FY09 TAMO’s EBITDA declined by 41% y-o-y to Rs.17bn and EBITDA margins came down by 334bps y-o-y to 6.6%. Higher raw material prices, lower volumes and higher employee cost impacted margins for the year. TAMO during the year has divested few of its investments (TACO, Tata Tele, Tata Steel etc) which supported its other income for the year. Other income for FY09 went up by 92% y-o-y to Rs.9.25bn. Net profit for the year came down by 51% y-o-y to Rs.10bn. TAMO has also taken advantage of change in AS-11 guidelines and due to which its PBT went up by Rs.5.19bn for the year. TAMO’s implied results for Q4FY09 suggests its EBITDA margins declined by 125bps y-o-y to 7.8% better than Q3FY09 margins of 1.6%. Net profit for Q4FY09 went up by 236% y-o-y to Rs.7219mn mainly due to change in AS-11 benefit.

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>VOLTAS (MERRILL LYNCH)

COOLEST ONE; NEW BUY

■ Initiating with Buy and Rs185 PO based on 16xFY11E
We initiate on Voltas, the second largest air-conditioning & engg co in India (70% of sales) and Middle East (30% of sales), with a Buy. We expect it to be a key gainer of (1) thrust on infra in India; & (2) rise in oil price that could drive up capex in Middle East. Voltas FY10E PE has doubled to 16x since 15 May09 led by (1) new govt (2) 20% oil price rise & (3) new orders. We expect the 16xPE to be sustained due to expected 30%+ ROE and 25%+ EPS growth, hence have based
our PO at 16xFY11E.

■ Market size attractive; lead indicators showing uptrend
We expect market size for MEP (air-conditioning, electrification, plumbing etc), engg equipment and room AC in India to double in next five years, driven by India’s thrust on infra and 7%+GDP growth. We expect Middle East MEP market, which is US$5bn+ in size to grow 10% pa driven by US$60/bbl+ oil price. Uptrend is evident from new order wins, rising order execution and declining inventory.

■ FY09-12E EPS CAGR at 26%; 31% higher than consensus
We expect profit to grow 22% in FY10E and 38% in FY11E. Order backlog of 1.9x FY09 sales for MEP key for FY10E. Expect stronger growth in FY11 to be driven by (1) 56% rise in new orders; and (2) 80bp increase in EBITDA margin driven by change in sales mix to favor more profitable mining and construction equipmenT sales. MEP, room AC and engg equipment contributed 60%, 21% and 19% of Voltas FY09 operating profit, respectively.

■ New initiatives + acquisitions could yield further upside
Recent initiatives could yield further upside. These are (1) expansion of presence in MEP work in industrial units like power plants following acquisition of 51% stake in Rs2bn Rohini Electrical last year and (2) entry into water treatment biz where it recently won order worth Rs500mn in India. It has surplus for acquisitions.

To see full report: VOLTAS