>Is there a risk of new bubbles? (NATIXIS)

Since the 1990s, there has been one speculative bubble after another linked to excess liquidity and indebtedness: equities, real estate, emerging assets, commodities, etc.

Could new bubbles appear today, in the aftermath of the crisis?

Certain developments could indicate that the answer is no:
− the reduction in "global imbalances" that is leading to a smaller increase in global
liquidity;
− the reduction in debt leverage in OECD countries (not seen at all in emerging countries),
which results both from demand effects (excess indebtedness) and supply effects (greater caution among banks and increased capital requirements); this should normally rule out bubbles directly linked to indebtedness;
− the memory of crises (bursting of bubbles in the past);
− the lower proprietary trading activity in banks.

But other developments may on the contrary indicate that bubbles will return:
− excessively high demand for return on equity, which persists;
− while global liquidity growth is lower, its level remains extraordinarily high, and monetary policies in OECD countries will remain expansionary;
− renewed expansion in hedge funds;

− very high international capital mobility, precisely seeking high returns (on emerging
country equities and commodities) and which, moreover, is preventing emerging countries from conducting more restrictive monetary policies;
− decorrelation between commodity prices and the spot market situation of these commodities, which already shows the presence of "bubbles".

What would be needed to prevent bubbles in the future? Probably:
− the return of "normal" guidelines of monetary policies and a reduction in excess liquidity;
− increased capital requirements for "non-banks"; a more specific monetary policy
management (for example via statutory reserve ratios);
− obstacles to international mobility of purely financial capital, enabling a return to
"normal" monetary policies in emerging countries;
− extending the horizon for investors in terms of holding assets, to reduce the number of
investors seeking short-term capital gains.

To read the full report: NEW BUBBLES

>TWIN PILLARS OF EMERGING MARKET (MICROSEC)

■ India and China registered PMI (Purchasing Managers Index) value of 57.2 and 55.7 respectively for the month of Apr 10’. Manufacturing activities in both India and China continued to improve. Since Dec 2008, India registered a higher PMI than China in first four months of CY2010.

■ India’s PMI has outperformed China in 10 out of 17 months. India’s PMI decreased from 57.8
to 57.2 on a sequential basis, while during the same period, China’s PMI increased from 55.1 to 55.7.

■ China’s HSCEI curved in by 4.06% and domestic market (Shanghai composite) decreased by 8.79% in last one month. In comparison, Nifty outperformed the former indices during the same period.

To read the full report: INDIA STRATEGY

>HEG LIMITED (ICICI DIRECT)

Margins dip as realisations drop…
HEG reported lower-than-expected results for Q4FY10 with EBITDA and net profits registering QoQ decline of ~20% and ~14%, respectively, due to moderation in the graphite electrode price (down 7-10% QoQ) and increase in raw material costs. Net profit for FY10 stood at ~Rs 171 crore, up ~60% YoY on the back of higher realisations (up ~7% YoY) and lower power costs. EBITDA margins for FY10 came in at a healthy 30.7%, showing growth of 560 bps YoY but remained subdued in Q4FY10 due to product price fall. Though price moderation remains a short-term concern we maintain our positive stance on the company on the back of i) largest single location advantage resulting in operational cost benefits ii) 100% captive power availability with surplus 25 MW merchant sales iii) brownfield expansion activities to 80,000 tonne getting triggered at an opportune time and iv) increase in capacity utilisation on the back of a smart recovery in the global steel industry.

■ Increase in capacity utilisation overshadowed by price fall
The company continued to achieve better capacity utilisation (~90% in Q4FY10, up from 75% in Q3FY10) on the back of improved demand from the steel industry. Graphite electrode prices have seen a moderation in Q4FY10 due to increased competition among graphite players globally. Prices are expected to remain subdued for most of 2010.

Valuation
At the CMP of Rs 345, the stock is trading at FY12E P/E of 8.4x and FY12E EV/EBITDA of 6x (~15% discount to global average). We expect the company to operate at above 85% capacity utilisation levels on the back of robust demand and value the stock at 6.5x FY12E EV/EBITDA (10% discount to global average). We have arrived at a revised target price of Rs 423 and assign a STRONG BUY rating to the stock.

To read the full report: HEG LIMITED

>Tata Teleservices Maharashtra Limited (TTML)

KPIs under pressure…
Tata Teleservices Maharashtra (TTML) reported its results, which were slightly higher than our expectation. It reported a topline of Rs 621.4 crore against our expectation of Rs 628.8 crore for Q4FY10. The topline grew 3.3% and 28.8% QoQ and YoY, respectively. The company reported better-than-expected EBITDA margin of 25.8%, growing 366 bps QoQ and 511 bps YoY. The improvement is attributed to lower SG&A and marketing cost, which declined 7.0% and 8.5%, respectively QoQ. Net loss for the quarter was at Rs 64.3 crore vs. our expectation of Rs 113.2 aided by higher other income and lower interest cost.

■ Highlights of the quarter
The company hived off its wholly-owned tower business subsidiary 21st Century Infra Tele Ltd to TT Info Services Ltd. The towers are valued at Rs 52 lakh per tower with an enterprise value of Rs 1,318 crore. The transaction would result in a net cash inflow to the company in excess of Rs Rs 900 crore. During the quarter, TTML added 1.4 million subscribers, growing 13.3% QoQ. ARPU for the quarter stood at Rs 125 down from Rs 143, declining 12.5% QoQ, higher than our estimate of 6.5%. MoU also declined by 6.0% QoQ to 250 minutes resulting in a 7.4% decline in ARPM from Rs 0.54 in Q3FY10 to Rs 0.50 in Q4FY10. However, the share of VAS was up from 13.9% in Q3FY10 to 14.8%. In the wireline segment, the company added 3,700 new subscribers in Q4FY10.

Valuation
The overall telecom industry is going through an unprecedented phase of hyper intensive competition. This has resulted in a sharp fall in operating metrics and slowing down of revenue growth and declining profitability. Valuing the stock at 1.4x FY12E sales of Rs 2515 crore, we have arrived at a target market capitalisation of Rs 3609 crore, implying per share value of Rs 19. At Rs 23, the stock is trading at 1.8x FY12E sales. Our target price implies downside potential of 17%. We rate TTML as SELL.

To read the full report: TTML