>FII PUMPS MONEY IN INDIA (EDELWEISS)

Who moved my pie? Tracking institutional flows and asset allocation

Strong FII buying pushes up Indian equities in Q1FY10

■ FIIs were strong buyers of Indian equities in Q1FY10, pushing markets up ~50%

• FIIs hold the largest chunk in India’s free-float market or one-half of what all domestic institutions together hold FII’s market hold. FII s activity (net flows) is an important determinant of India’s market movement. Q1FY10 saw substantial buying of ~USD 6 bn across sectors (highest in BFSI and real estate) after five consecutive quarters of net outflows. Maintain strong O/W on BFSI

■ Domestic institutional investors’ market activity subdued during the quarter

• Insurance: Insurance funds were marginal sellers of ~USD 0.3 bn. They sold stakes in most sectors, specifically in consumer discretionary and utilities. They were marginal buyers of BFSI and telecom

• MFs: MFs were marginal buyers during the quarter with ~USD 0.7 bn of net inflows into equities. They primarily bought utilities and energy, and sold BFSI

■ Spate of QIP issuances resulted in lower promoter holding in certain stocks

• With strong liquidity in the system, many companies looking to deleverage or for business investments were able to raise capital through equity issuances to Qualified Institutional Buyers (QIBs). This resulted in dilution of promoter holding in such stocks.

To see full report: FII PUMPS MONEY IN INDIA

>SALORA INTERNATIONAL (CENTRUM)

EBITDA hit on lower revenue

■ Revenue Halves: Salora International (SIL) reported a sharp 47.4% YoY decline (down 20.7% QoQ) in revenues to Rs1.06bn. This drop was on account of 50.7% YoY slide in its Infocom business and 15.5% YoY decline in the consumer electronics division.

■ Steep fall in EBITDA margin: With revenues nearly halved YoY, SIL’s EBITDA margin turned negative with a steep 761bp YoY and 64bp QoQ fall to -3.4%. The company reported an EBITDA loss of Rs36mn vs our estimate of Rs20mn profit for the quarter, primarily due to the poor performance in its Infocom business.

■ Estimates revised; Downgrade to Hold: We have cut revenues by 7.0% for FY10E and by 13% for FY11E. This explains the 28.1% fall in EBITDA and 49.7% in PAT for FY10E. For FY11E, margin is expected to recover on the back of 12.0% recovery in Infocom revenue. At CMP the stock trades at 10.1x FY11E EPS of Rs3.9. We think the stock is fairly valued and do not see much upside from current levels; thus the downgrade to Hold from Buy.

To see full report: SALORA INTERNATIONAL

>GLAXOSMITHKLINE PHARMACEUTICAL (CITI)

Downgrade to Sell: Lacking Valuation Upside

■ Downgrade to Sell — This is purely a valuation call, with the stock now trading at 20x CY10E EPS. While we rate GSK as a good play on the stronger IPR regime in India, we expect any upside to be gradual over a number of years. In the interim, with an EPS CAGR of 15% (CY08-11E) and no near-term catalysts, we see a lack of upside over the next 6-12 months. We prefer Piramal Healthcare (1M) as a play on the Indian market.

■ Fully valued — Post a good run (up 9%/15% over 1/2 months, outperforming the BSE Sensex by 2%/8%), GSK appears fully valued at 23x CY09E and 20x CY10E EPS. While the P/E could expand as IPR benefits flow through to financials, we expect this to take a few years. Thus, while the stock could remain defensive with limited downside, we expect a lack of upside in the near-term.

■ Play on stronger IPR...— We expect GSK to be a key beneficiary of product patent introduction in India. Besides focusing on higher margin priority products, it has started launching patented and in-licensed products, and also intends to focus on branded generics. We expect these steps to drive sales growth to the industry level over the next two years and above industry rates beyond.

■ ...but still a long haul — GSK expects only seven patented/vaccine launches (including Tykerb) over CY08-10. With none of these likely to clock sales in excess of Rs400m by the third year, we expect a lag before any material step up in growth rate and profitability. Risks exist in the form of patent challenges, compulsory licensing, and possible government intervention in pricing.

■ Lowering estimates and target price — We lower CY10E/11E EPS estimates by 6%/2% on higher staff and marketing costs, and expect 15% EPS CAGR over CY08-11E. Our new target price of Rs1,360 is based on 20x Sept-2010E earnings.

To see full report: GLAXOSMITHKLINE PHARMACEUTICAL

>STERLITE INDUSTRIES LIMITED (MORGAN STANLEY)

Media Reports of Balco Stake Purchase – A Positive Step If True

Quick Comment – Impact on our views: We remain Overweight on Sterlite due to its strong volume growth prospects, higher chances on balance stake purchases in HZL and Balco, and likelihood of higher valuations as we come close to the commissioning of its power plant.

What's new: According to the Economic Times, the Government is seeking Rs20bn from Sterlite to exit the balance of the 49% stake it owns in Balco, although this has not been confirmed.

Stake Purchase is value accretive in our view: As per our estimates, the 49% stake in Balco is worth Rs63bn. If this news is accurate, it can add about Rs61/share (about 9% of current stock price) to Sterlite's stock price just due to the gap in valuations of the 49% stake. Value of the option to monetize the mines and infrastructure further after buying out the stake could be bigger, though difficult to quantify now.

We also note here that as per the initial agreement, Sterlite was to pay Rs10.9bn for this stake. But when Sterlite tried to exercise the call option to buy the remaining stake, differences cropped up over the valuation of the company. Nevertheless, we feel the stake purchase of Balco, even at Rs20bn, would be a positive development for Sterlite.

To see full report: STERLITE INDUSTRIES