>INDIAN INDUSTRIAL PRODUCTION (MORGAN STANLEY)

Industrial Production Recovers in May

• Industrial production (IP) growth recovers to 2.7%YoY in May: This compares with growth of 1.2%YoY (revised downwards from 1.4% earlier) in April and a decline of 0.8% in March 2009. The growth in May was higher than the market’s and our expectations.

• Growth in the manufacturing segment rebounds: Growth in the manufacturing segment picked up to 2.5%YoY in May, compared with 0.4% registered in the previous month. The key contributors to this improvement were food products, other manufacturing industries, rubber, plastic, petroleum & coal products, and basic chemicals & chemical products. Mining segment growth decelerated slightly to 3.7%YoY (vs. 3.9% in the previous month). Growth in the electricity segment decelerated to 3.3%YoY, compared to 7.1% in April.

• Growth in consumer goods improves; capital goods turns less bad: On use-based classification, growth in the consumer goods segment accelerated to 1.2%YoY in May after declining 3.6%YoY in April. Within consumer goods, while the durables segment growth decelerated to 12.4%YoY (vs. 17.2% in April), the YoY decline in the non-durables segment narrowed to -2.3%YoY (vs. -9.1% in April). Capital goods declined 3.6%YoY, compared with a decline of 7.3% in the previous month, helped partly by the low base effect. Growth in basic and intermediate goods decelerated to 3.8%YoY and 6.1%YoY, respectively, in May (vs. 4.7% and 7.3% in April).

• IP growth to stay on the recovery path: Most domestic demand indicators, such as passenger car sales (18.1%YoY in June vs. 8.7% earlier), commercial vehicle sales (-15.1%YoY vs. -18.9% earlier), two-wheeler sales (14.9%YoY vs. 11.5% earlier), and cement dispatches (13.2%YoY estimated vs. 10.8% earlier), are indicating improvement in industrial activity in June.

To see full report: IIP

>INDIAN ALUMINIUM SECTOR (UBS)

Compelling story; valuations stretched

■ Aluminium is least preferred metal; Sell Hindalco & Nalco
Aluminium is our least favoured metal; UBS has cut LME aluminium expectations by 6% for 2010 and 9% in 2011. Earnings for Hindalco are now expected down 22%/27% for FY10/11E but for NALCO, the world’s cheapest producer of aluminium, we have brought profits up 22%/30% in FY10/11E as lower input prices raise margins. We downgrade our ratings on both companies to Sell from Neutral on expensive valuation and weakening demand fundamentals for aluminium globally.

■ Indian aluminium a long term story
We believe the fundamentals of the Indian aluminium industry are strong. This is primarily driven by two factors: 1) the cost of production in India; given the availability of bauxite and coal in close proximity, and 2) the demand situation in India should improve dramatically driven by growth in the power, automobile and industrial segments. Standardized IRR’s are 16%, at LME aluminium at $1,750.

■ Key picks
In our coverage universe, we prefer Vedanta Resources, as it offers one of the most compelling growth arguments across diversified resources and has the lowest capex cost/TN & the lowest cash costs/TN. We rate Hindalco and NALCO as Sells given near-term operational issues at Novelis and valuation concerns, respectively.

■ Valuation: Buy rating on VED and Sell ratings on Hindalco & NALCO For Vedanta, we get our price target of £17.6 per share by taking a 0.75x P/NPV on our base case Mar’10E NPV of $32/share. We maintain our SOTP -based price target of Rs 55 for Hindalco and raise our price target from Rs 190 to Rs 250 for NALCO, based on a target FY10E 15.0x EBITDA (trough) multiples.

To see full report: ALUMINIUM SECTOR

>INFORMATION TECHNOLOGY SECTOR (JM FINANCIAL)

Industry interaction update

Our interaction with industry experts across the BFSI (US, Europe) & Telecom (Europe) from Gartner on the business and IT demand environment pointed to early signs of stability in the North American market. Europe, however, remains troubled, and could lead to continued stress on IT vendors in the current fiscal.

US BFSI seems to stabilizing, but Indian ISPs are still reeling under pressure with services such as Application Development and Package Implementation (where they have greater presence) continue to be rationalized. While consolidation could bring in some short term M&A work, industry experts think it is unlikely to compensate for overall budget decline.

BFSI demand in Europe remains under stress, with critical economies such as the France, Netherlands and Germany still under fire. Consolidation is also far from over in Continental Europe. Offshoring maturity continues to remain low, with clients preferring near shore delivery over the pure play offshore model.

Telecom Service Providers (TSP) have been relatively stable in Europe and could see better budget disbursals in 2H CY09E. However, BT, which is the largest offshorer, continues to be the pain point for ISPs given the restructuring in the BTGS division, and problems in its core Fixed-line carrier business.

Banking and Financial Services (BFSI) -US:

■ US stabilizing, some up tick in discretionary spend but…: Gartner believes that BFSI IT budgets in North America are seeing signs of stabilization with a marginal recovery in discretionary spending. However, the bulk of the activity is currently focused at opposite ends of the services spectrum, namely Consulting and ITO. Such contracts are currently being awarded to pure play consulting companies such as IBM, Accenture, KPMG, Deloitte, or strong infrastructure vendors such as IBM and HP-EDS who are willing to leverage their balance sheets.

■ …. Indian vendors (ISPs) are still facing the heat: The sweet spot of ISPs, namely Application Development and Package Implementation (~25% and 20% of revenue respectively), continues to remain under pressure. Gartner’s recent 1Q CY09 IT services update (02 July 2009)
suggests that Consulting, followed by System Integration and Application Development could lead the revival cycle. However, no such signs seem to be visible in the US BFSI sector at present. .

■ Testing could offer ISPs some relief: ISPs seem to be having better luck with Testing deals (4-7% of revenue), where volumes have witnessed a moderate pick up. However, our channel checks suggest that pricing pressure continues to be intense for these services.

To see full report: IT SECTOR

>GLOBAL EQUITY QUARTERLY (CITI)

Edging Towards Recovery

■ Rebound — After a record seven consecutive losing quarters, global equities bounced by 21% in 2Q09. While some consolidation would be welcome, we think that markets can move higher again in 2H09.

■ Earnings — Global trailing earnings are now down 41% from the end-2007 peak. Our long-held expectation of a 50% peak/trough fall suggests that we are approaching the final stretch of this earnings downturn.

■ Valuations — Even given the market rebound, we think that global equities look cheap. P/BV and PEs on trend earnings are still down at 1980s levels.

■ Welcome To The Twilight Zone — This is the period towards the end of most global recessions when equity valuations are cheap and investors start to anticipate recovery. Share prices rise even though EPS are still falling.

■ Cheap Recovery Plays — We look towards those regions and sectors where the potential for EPS recovery looks greatest but valuations remain attractive.

■ Regional Strategy — We prefer the higher-beta European markets to the safer but more expensive US. We generally favour Emerging over Developed Markets.

■ Global Sector Strategy — We have a balanced sector strategy, which seems appropriate for highly rotational markets. Our favourite cyclical is now Financials. Our favourite defensive is Telecoms.

To see full report: GLOBAL EQUITY QUATERLY