>Special Report (ECONOMIC RESEARCH)

Should US banks be nationalised?

There is a heated debate under way in the United States between those who believe that the economic policy conducted currently (very expansionary fiscal policy, massive monetary creation linked to the Federal Reserve’s purchases of various assets, measures aimed at driving down long-term interest rates, etc), will eventually kick-start activity and those (such as Paul Krugman) who believe that it is necessary to go much further, and in particular to nationalise banks in order to clean up their balance sheets and jump-start credit.

Should US banks be nationalised? The answer is positive if:
− without nationalisation, banks will ration credit,
− and if the credit crunch will prevent an economic recovery.

We believe that the real problem is not the nature of the banks’ shareholders but the cost of long-term funding for the banks; this problem can be settled by specific measures (loans guaranteed at more favourable conditions, transparency on the value of "toxic assets"), but not by nationalisation.

1 - Everything seems to have been tried to jump-start banking credit in the United States
The US administration and the Federal Reserve have implemented:

− a very expansionary monetary policy;

− purchases of real-estate related securities (the Federal Reserve’s purchases of Agency bonds and MBS, up to USD 1,450 billion), in order to drive down mortgage interest rates and encourage mortgage refinancing, which has been efficient;

− guarantee on the debts of Freddie Mac and Fannie Mae, which has markedly reduced their borrowing costs;

− asset purchases (including Treasuries) by the Federal Reserve;

− guarantee of debt and equity for funds that are to purchase banks’ toxic assets (PPIP programme, up to USD 700 billion);

− incentives to renegotiate and refinance mortgage loans (Housing Bill, providing up to USD 1,000 bn to the FHA);

− a guarantee on bank loans by the FDIC, up to USD 1,400 bn.

To see full report: SPECIAL REPORT

>RELIANCE INDUSTRIES (CITI)

Downgrade to Hold: Factoring in US$10 GRM + E&P Upsides

■ Wait for better risk reward — Stock leaves little upside to our new target price of Rs1835 (from Rs1475) which factors in: (i) E&P value at Rs729, 40% premium to NAV thus factoring in meaningful reserve upside, (ii) stable refining margins (blended assumption of US$9.7-10.8 over FY10-11E), and (iii) roll fwd to Mar-10E with ref/petchem valued at 6x FY11E EV/EBITDA. Downgrade to Hold (from Buy) with Low Risk rating (from Medium Risk).

■ How much to pay for FY11E and E&P upside now? — Though we expect 28% earnings CAGR over FY09-11E, RIL is trading at PER of 11x FY11E. Current valuation recognises the superior earnings mix (KG is 38% of FY11E EBITDA) and the upside potential in E&P, but leaves low margin for error in the cyclical businesses. A more constructive view on the stock is contingent on (i) material improvement in refining/petchem outlook, and/or (ii) stock correction.

■ 4Q slightly below — EBITDA at Rs54.4bn was impacted as GRMs ($9.9/bbl) were lower due to weak diesel spreads. Premium to Singapore was lowest in last 10 qtrs. Polymer margins and volumes rebounded in 4Q after production cuts in 3Q. PAT (adj.) however beat expectations due to higher other income.

■ E&P - D6 under control, new exploration will have to wait — Company is aiming at 40mmscmd by end-Jun and 80mmscmd by end-FY10. Exploration wells in other blocks will be in 2HFY10, with one rig from D6 and one new delivery. Entry in domestic oil retailing is likely to be gradual and at a controlled pace.

■ Balance sheet — Net debt was Rs280bn. FY10E capex guidance at $4.5-5.0bn incl. RPL’s remaining capex of US$0.5bn (total project cost of US$6.5-7.0bn).

To see full report: RELIANCE INDUSTRIES

>India Equity Strategy (CITI)

4Q09 Earnings Tracker 1: Managing Deflation?

■ In-line, positive, with a few wide variances — It's still early days in India’s earnings season, but the first trends suggest earnings are in-line with modest expectations – +2.3% vs. 3.3% est. for the Sensex (10/30) and +1.1% vs. -1.9% for the larger CIRA India Universe (34/138 reported). There are a few outliers – banks and Cement on the upside and Ranbaxy on the downside, but trends so far suggest overall earnings growth should largely be on track to reflect our -4% 4Q09yoy growth for the Sensex, and -14% for the wider CIR set.

■ It's deflation, but corporates appear to be managing it fairly well — It’s a deflationary environment. Sales growth has plummeted to -4%yoy (+38% a year ago) against our +8% expectation, suggesting pricing and demand issues. While this in itself augurs poorly, the corporate sector appears to have adjusted fairly aggressively and well to the changed environment (with a little help from commodity prices, no doubt). EBITDA margins are up a sharp ~130%yoy and qoq, suggesting operational and cost adjustments at aggregate have been fairly sharp. While sales and margin performance allow for divergent interpretation and
extrapolation, we would wait for more results before calling either way.

■ Broader market appears more robust: A wider sample of 100 companies (BSE500) suggests a more positive bias. Profits are up 6%yoy and 12%qoq while sales growth is flat sequentially. Pertinently, over 2/3Q09, the wider set was consistently weaker than narrow Sensex companies, possibly suggesting greater stress at the top end than the broader market? Let's wait for more of the earnings season.

■ Sector Leaders and Laggards —Banks (weak asset quality, but better than expectations) and Cement lead. Autos, Utilities and Ranbaxy make up the rear.

To see full report: EQUITY STRATEGY

>Indian Banks (ABN-AMRO)

Sensitivity analysis

We assess that the negative impact of the proposed change in the method of calculating interest payments on savings accounts will be 3-8% of FY11F earnings across our coverage universe, assuming the banks do not pass on the increased cost to customers or alter the deposit rates.

Interest payments on savings accounts to be calculated on a daily basis from 2010: Currently, administered interest payment of 3.5% is calculated on the minimum balance held in the account from the tenth day to the last day of each calendar month. RBI has proposed that the payment of interest on savings bank accounts by scheduled commercial banks (SCBs) be calculated on a daily product basis with effect from 1 April 2010.

Sensitivity suggests negative impact on earnings of 3-8%, actuals may be lower: We estimate the adverse impact from this move will be 3-8% of reported earnings in our
universe. This is assuming the banks do not pass on the increased costs to customers or
realign their deposit rates. We believe banks will most likely reduce the deposit rates on
short-term products to compensate for the higher cost of deposits on savings bank balances.

Impact would be a function of the proportion of savings deposits and return on assets: We believe the impact on a bank’s profitability is a function of the proportion of savings deposits and the return on assets (RoAs). Generally, banks with a higher proportion of savings deposits would be adversely placed relative to peers. However, if the RoAs are high, the overall impact may not be as much.

Key assumptions of our sensitivity analysis
Our calculations assume banks do not pass on the increased cost to borrowers or align their
deposit rates. We assume a flat cost of 3% on savings account balance, while actuals may
vary by +/- 10bp. Also, note that sensitivity is based on FY10F RoAs, whereas the impact of
the development would be on FY11F earnings.

To see full report: INDIAN BANKS

>Hero Honda (KR Choksey)

INVESTMENT RATIONALE

Hero Honda (HH) reported net sales of Rs 3,422.5 crore, up 23% y-o-y & 19% q-o-q. Operating Profits stood at Rs549.1 crore, increased by 33% y-o-y, improved realization along with reduction in commodity prices helped OPM to improve by 127bps. Net profit reported was Rs.402.2 crore, improved by 35% y-o-y and profit margins enhanced by 104 bps y-o-y to 11.8% on account of margin expansion and lower tax.

Higher than expected volumes enhanced the topline: Topline improved by 23% y-o-y to Rs3,422.5 crore in Q4FY09 on the back of 13% growth in volumes and 9% growth in realisation. Realisation improved by 7% y-o-y due to price hike in earlier this year and better product mix. HH outperformed the two-wheeler industry with a domestic market share of over 57%. HH witnessed a volume growth of 12% in FY09 whereas the industry grew by 5% y-o-y.

Robust operating performance: HH OPM stood at 16.0%, an improvement of 127 bps y-o-y. The margin was 64 bps higher than our estimates due to higher than expected benefits from the softening in raw material prices. Raw material cost as a percentage of sales declined from 70.2% in Q3 to 68.9% in Q4FY09.

Net Income improved due to tax benefit from the Haridwar plant: Net profit stood at Rs402.2 crore, a growth of 35% y-o-y. The effective tax rate for the quarter was 28% due to tax benefits enjoyed in the Haridwar plant. Thus sharp growth on the Opearting performance and decline in the tax rate led to the expansion in the NPM by 104 bps y-o-y to 11.8%.

KEY DEVELOPMENTS

• HH has chalked out Rs.350 crore capacity expansion and modernization plan in FY10 to upgrade plants and to develop two-wheelers engines conforming the emission norms of 2010

• During FY09, the company posted 3.72 million vehicles sales and aims to reach 4 million mark in FY10. To maximize tax benefit at Haridwar plant HH plans to produce 1.2 million units by FY10

• Commencement of Haridwar plant during the fiscal was another advantage for the company as 100% tax exemption benefit for this plant for 5 years started in this fiscal

To see full report: HERO HONDA

>Wockhardt (AVENDUS)

Cut target price; near‐term events to determine value

Wockhardt’s 2008 results point to large uncertainty over the nearterm. While operational performance has been in‐line with expectations, excessive leverage and undisclosed hedging positions could continue to heavily influence net income. A claim of INR4.9bn on the company on forex contracts adds to the air of uncertainty. We paint two scenarios that could lay ahead for Wockhardt. Assuming the company stays unbroken and functions as a going concern, the strong visibility in operating margins would be rewarded by the market. In our assessment, this could draw a value of INR204/share, to which we assign a probability of 15%. In a second scenario analysis, an assets stripping sale of individual businesses indicates INR87/share, to which we assign a probability of 85%. Combined valuation for the company thus stands at INR104/share. Downgrade to HOLD. Near‐term movement in the stock would be driven by news flow on sale of assets by the company.

Uncertainty clouds thicken over net earnings
Wockhardt is saddled with debt, with 2008 closing at a D:E of over 3.8:1, by our estimates. The high degree of leverage would keep the company’s bottom‐line vulnerable to changes in interest outgo. In 2008, the company’s coverage ratio was a low 2.6x. We believe the number would slip further in 2009. Concern over MTM losses may persist until publication of unabridged annual accounts. A claim on the company for INR4.9bn pertaining to forex losses lies unaccounted. We assign a probability of 50%.

Scenario I: Significant upside if company stays unbroken
Assuming the company stays unbroken, the strong visibility in operating margins would be rewarded by the market. Over the last 16 months, the company has traded at an average 1‐year forward MCap/EBITDA of 2.7x. Doing away with the extreme ends of the valuation range we arrive at a steady‐state mean MCap/EBITDA of 2.5x. The company, in our view, is operationally sound with a steady growth in revenues and healthy operating margins. At 2010 EBITDA of INR9.1bn, we arrive at a per share value of INR204. Assigning a 15%
probability we draw a valuation of INR31/share.

Scenario II: Strip‐down asset valuation at near distress sale
Wockhardt has initiated the process of hiving off parts of its business in a bid to raise its cash coffers. We estimate the cumulative sale values of individual businesses would close at INR46.4bn, about 16% lower than the current EV of the company. Per share value from a strip‐down method thus stands at INR87. We assign an 85% probability, drawing a valuation of INR74/share. Weighted average value of INR104; news flow to drive momentum Our sum‐of‐scenarios valuation stands at INR104/share. Upside risks pertain to higher than estimated proceeds from asset sales and interest waiver benefits from the CDR. Above estimated losses on derivative contracts is the single biggest downside risk to our call. Downgrade to HOLD.

To see full report: WOCKHARDT

>Neyveli Lignite (KARVY)

Not lignitng enough value

Neyveli Lignite Corporation (NLC) is engaged in power generation (capacity 2,490 MW) with back ward integration of lignite mining. Though, it is adding significant capacity of 1750 MW, existing 600 MW (TPS-I) would be shut down gradually. Further additional 1000 MW capacity (coal based plant in JV) would be margin decretive without having captive mine, unlike existing plants. While, Public Sector Unit (PSU) pay revision to pressurize EBITDA margin in FY09 and FY10, higher interest and depreciation cost would penalize net profit growth. Hence, despite 16% sales CAGR, net profit is estimated to grow only at a CAGR of 9% during FY09-14. Moreover, due to high un-deployed cash we expect ROE ~ 9% in next two years, against achievable 16%. Therefore, we rate it as Underperformer with a price target of Rs 75, based on DCF valuation.

Capacity addition will be margin decretive: Though NLC is adding significant capacity, majority of those would be margin decretive as it would not have captive mine like existing plans. NLC is adding 1,750 MW by FY13; out of which 750MW would be lignite based integrated capacity with captive mines by FY11. However, existing lignite based 600 MW (TPS-I - the oldest power plant of NLC) is planned to shut down gradually by end of FY14 which would trim net addition (integrated units) to 150 MW. It is also adding a 1,000 MW coal based non integrated plant by FY13 where fuel (coal) would be sourced from outside (Orissa, ~1400 Km from Neyveli) unlike existing integrated plants. Hence new 1000 MW, is expected to fetch lower EBITDA margin of ~ 30% compared to ~40% in existing integrated plants. So, we expect most of the new capacities would be margin decretive.

Margin pressure leads to unimpressive earnings growth: We expect EBITDA margin to touch 32% and 36% respectively in FY09 and FY10, against ~40% previously. This is primarily on account of significant hike in staff cost stemmed from PSU pay revision. However, NLC is in the process of applying for tariff revision factoring current pay hike, which should help it to regain ~ 40% of EBITDA margin in FY11 and FY12. Nevertheless, it would not be sustainable; with commencement of coal based non-integrated plant from FY13. Moreover, higher interest and depreciation cost (lead by on going capex) would hinder in net profit growth. Effectively, despite a sales growth of (CAGR FY09-14E) of 16%, net profit to record a CAGR of only 9%.

High cash accumulation in balance sheet, to hurt returns: Though huge cash (Rs 48 bn) reserves of NLC could be seen as positive for a power company, we read it as inability of NLC to leverage the current high growth environment and deploy cash efficiently. We believe it carries opportunity cost as by deploying cash in projects NLC could earn ROE of 16%, much higher than earned by cash in bank. Current trend of net cash being ~20% of capital employed to continue in future, indicating one fifth of capital idle. Effectively it will drag ROE as assured ROE is earned only on core net worth (invested in projects). Hence, against achievable ROE of 14%, NLC has achieved 8-12% in history and expected to earn below 12% in future against achievable 15.5%.

Valuation: We estimate 9% net profit CAGR (FY09-14E) and ROE of ~9-10%, while it is trading at 20x FY10 EPS. Though there are some positives in the stock, we believe those are already factored in the current price. Hence, we initiate coverage on NLC with a target price of Rs 75 (based on DCF) and rate as under performer.

To see full report: NEYVELI LIGNITE

>FMCG Sector (EDELWEISS)

Marico and GSK: The trend setters

Marico and GSK have been the first companies to report March quarter results. We have listed here the key thoughts and trends that emerge for the FMCG sector from these two results.

Topline and volumes robust in March quarter
Sales growth for both Marico and GSK Consumer Healthcare (GSK) remained robust in the March quarter. Volume growth for Marico remained steady (8% growth in Parachute, 5% in Saffola - 3% Y-o-Y growth in the December quarter). For GSK, volume growth was very high at ~20% (out of this ~6% has come from growth in international business and pipeline inventory of new products).

International markets remains a key growth driver
The international sales of Marico and GSK have grown by 35% and 45% Y-o-Y, respectively in the March quarter. In FY10, growth rate, especially for Marico, is however, likely to come down owing to higher base and lower inflation-led growth in some of its markets. Growth in international markets will be a key factor to watch out for even in the case of Godrej Consumer Products (GCPL), Dabur, and Asian Paints.

Innovation pipeline aids volume growth
Both Marico and GSK have benefitted from their new product launches in the recent past. In the past few quarters, Marico launched Saffola Cholesterol Management and Saffola Diabetic, Parachute Advansed (revitalizing hot hair oil), Saffola Zest and Saffola Rice. GSK too introduced three new prodcuts in the past few quarters (Horlicks Nutribar, Dood, Activ Grow). These new product launches are likely to propel incremental sales growth for the company.

Sharp dip in ad rates expand margins
We had predicted in our report ‘FMCG- Sunny days ahead’, dated November 7, 2008, that ad rates will correct in the March quarter and will help FMCG companies increase margins. In line with our estimates, ad revenues of Zee Entertainment Enterprises (ZEEL) were down 7% YoY (against ~30% YoY growth in H1FY09). For Zee News, ad growth came down sharply from ~39% in Q3FY09 to ~24% in Q4FY09 (largely growth was from new channels). Consequently, EBITDA margins were up 330bps Y-o-Y and 40bps Q-o-Q for Marico, and 203bps Y-o-Y and 980bps Q-o-Q for GSK. We expect the pressure on ad rates to continue in H1FY10, and then see the ad rates firming up in H2FY10 if the economy revives. In case of Marico, ad costs (as a percentage of sales) were down 510bps Y-o-Y and 80bps Q-o-Q in the March Quarter. For GSK, they were down 230bps Y-o-Y and 60bps Q-o-Q. However, both companies expect ad costs to be higher by 200bps for FY10/CY09 over the March 2009 quarter, owing to higher ad investments in new products.

Packaging costs – mixed signals
Packaging costs are partly linked to crude prices and account for 10-15% of costs for most FMCG companies. In case of Marico, it was down 140bps Y-o-Y, while for GSK, it was higher 35bps Y-o-Y, largely due to change in packaging and new launches.

Signs of downtrading visible
In Kaya, same store clinic sales (clinics over a year old) have grown 10% Y-o-Y against 13%
in Q3FY09, which clearly shows that discretionary spends are impacted. Sales growth for
Saffola, although up marginally Q-o-Q, is still lower than the growth seen in H1FY09. This is due to downtrading by consumers to low-cost vegetable oils due to high price differential. We expect the same trend for GCPL and Hindustan Unilever (HUL). In fact, GCPL’s soap volumes are likely to grow faster than HUL’s, owing to down-trading in favour of GCPL’s value–formoney (VFM) platform and the successful launch of Godrej No.1 – Strawberry and Walnut.

Volumes likely to remain robust; margins to expand for other companies
We expect volume growth to remain robust (especially for companies which have a strong presence at lower price points) and margins to expand for most FMCG companies (due to a
mix of lower costs of ad, palm oil and packaging materials) in the March quarter.

To see full report: FMCG SECTOR

>Bank Of India (ICICI Direct)

Muted quarter but in line…

Bank of India’s (BOI) Q4FY09 results were in line with our estimates with PAT growth of 7% YoY to Rs 757 crore. Total global business of the bank grew 26% YoY to Rs 334440 crore, contributed by global deposit growth of 26% to Rs 189708 (domestic deposit growth of 27% to Rs 159487 crore) and global advance growth of 26% to Rs 144732 crore (domestic advance growth of 26% to Rs 115354 crore). GNPA rose by 28% YoY to Rs 2471 crore (1.71%) while NNPA was well controlled up 6% to Rs 628 crore (0.4%) with provision coverage slipping by 667 bps to 74.6%.

Highlight of the quarter
Total income grew by 19% YoY to Rs 2219 crore backed by NII growth of 18% to Rs 1433 crore and non interest income by 20% to 785 crore. Operating profit grew by 16% to Rs 1408 crore because of rise in operating expense by 23% to Rs 811 crore. The bank restructured assets worth Rs 5049 crore (1.8% of domestic loan book) during the year.

Valuations
We have revised estimates for FY10E PAT downwards by 8% on the back of moderation in loan growth with downward bias on NIM’s, moderation in fee income and inch up in slippages. We expect the BOI to register PAT CAGR of 14% over FY09-FY10E. Going forward we believe that asset quality will face pressure and hence we have built in higher provisions for the same. We expect the GNPA to be at 2.2% and 2.3% in FY10E and FY11E respectively. The ability of the bank to generate higher than industry average ROE’s will fetch it premium valuations over its peers and hence we value the bank at 1.1x its FY10E ABV to arrive at a target of Rs. 269.

To see full report: BANK OF INDIA

>Fun with Flows (CITI)

Back To Billion Dollar Inflows To Asian Equity Funds

■ Asian fund inflows reached US$1bn for the first time in a year — According to EPFR Global, inflows to offshore Asian equity funds carried on and rose to a 50- week high of US$946m in the week ended last Wednesday. The continuous inflows over the past seven weeks have taken YTD net flows to a positive US$1.6bn, compared with net outflows of US$8.1bn during the same period in 2008. From a 4-week average perspective, inflows are now as strong as those experienced in 2006 and 2007 (figure 2) and further upside seems limited.

■ China, Taiwan & India funds winners of the run of inflows; Singapore the loser — While inflows to Korea funds were losing momentum, new money to China, Taiwan and India funds remained strong last week. On the contrary, Singapore country funds saw the most net outflows, not only last week but also last month. YTD this is the lone fund group for which net outflows have been reported. Singapore has been a consensus overweight at Asian funds for quite a while, but the overweight position has been narrowing, from 190bps in December to the current 110bps.

■ Excess liquidity seeking for high-return asset classes s.a. emerging market equities — Not just Asian funds benefited from the significant increase in excess foreign liquidity (we look at the gap between supply and demand of money growth in G7), Global Emerging Market funds also received billions of US dollars of net cash last week. Year-to-date, net inflows to all global emerging market funds have totaled US$9.4bn, contrasting net redemptions of US$5.8bn from International equity funds.

To see full report: FUN WITH FLOWS

>Nymex crude up on shares; cautious econ optimism

Singapore - Crude oil futures rebounded Thursday in Asia on an upside lead from firming equity markets, amid a renewed sense of optimism over the global economic outlook.

However, traders continued to weigh the implications of swine flu as well as weekly U.S. oil data Wednesday, which served as a reminder near-term fundamentals remain weak.

"With the swine flu, I'd imagined the market as a whole would move downward. But FOMC's somewhat optimistic outlook yesterday may be supporting the market," Ryoma Furumi at Newedge Japan said of a relatively positive statement on the economy overnight from the U.S. Federal Reserve.

On the New York Mercantile Exchange, light sweet crude futures for delivery in June traded at $51.52 a barrel at 0652 GMT, up 55 cents in the Globex electronic session.

June Brent crude on London's ICE Futures exchange rose 44 cents to trade at $51.22 a barrel.

Oil prices rebounded Wednesday on the back of buoyant stock markets, despite weak U.S. stockpile data.

The federal Energy Information Administration posted sizable increases in the country's crude and distillate inventories, although gasoline stocks fell on a drop in imports and refinery output.

The demand for motor gasoline rose an anemic 0.2% in the week to April 24 to 9.151 million barrels a day, the EIA said in its Weekly Petroleum Status Report.

"Under normal market conditions, we would be viewing the EIA report as a further reinforcement of our near-term bearish trading ideas. But within the current economic climate, supply/usage balances are being forced to the backburner in favor of a broad-based entry of hedge funds into the equity and commodity markets generally," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

"This dichotomy between bearish fundamentals and bullish financial guidance could easily maintain crude values within a sideways pattern thorough the balance of the spring period."

So far Thursday, Asian equities were steadily higher, with automotive and technology stocks leading in Japan after positive industrial output data and Taiwan shares surging on hopes for improved ties with China.

Dow Jones Industrial Average futures were recently up 45 points.

The Federal Reserve said in a statement Wednesday "the economic outlook has improved modestly since the March meeting," though it could remain weak "for a time."

The dollar weakened to $1.3320 against the euro, from $1.3250 overnight, presenting a small incentive for traders to be long on dollar-denominated commodities.

"There must be sizable position-squaring going on" (in oil), Furumi said of a Singapore public holiday Friday, with Japan having kicked off its own Golden Week break Wednesday.

At 0652 GMT, oil product futures also advanced.

Nymex heating oil for May climbed 59 points higher to 133.50 cents a gallon, while May reformulated gasoline blendstock traded at 145.74 cents, up 90 points.

Both May contracts will expire at Thursday's settlement.

ICE gasoil May changed hands at $430.50 a metric ton, up $3 from Wednesday.

Source: COMMODITIESCONTROL

>Spot gold trading lower; equities weigh

London - Spot gold prices traded lower in Europe Thursday weighed by higher equity markets and weak demand for the precious metal, and analysts said both indicate prices could trade lower in the weeks ahead.

European stocks opened higher Thursday due to increased risk appetite after the U.S. Federal Reserve's upbeat outlook on the economy Wednesday boosted investor confidence.

At 0942 GMT spot gold was trading at $888.60 a troy ounce, down 1% from Wednesday's close. Spot silver was at $12.59/oz, down 1.3%. Spot platinum was at $1,104.50/oz, up 0.9%. Spot palladium was at $218.50/oz, unchanged from the close.

"Investors are becoming more confident that we will have a recovery this year and that is weighing on gold," said Commerzbank analyst Eugen Weinberg.

Weinberg said gold prices could trade down to $800/oz in the summer before trading back above $1,000/oz next year when inflation could again be in focus.

For now, jewelry demand remains weak and investor exchange traded fund buying is stagnating, Weinberg said.

Daily data from the SPDR Gold Trust fund, the largest gold exchange-traded fund, showed gold holdings were unchanged for a fourth day at 1,104.45 metric tons, despite this week's drop in prices.

"The only reason for the rise in the last month was investor demand," Weinberg said.

Gold prices have been range trading but technical indicators suggest the precious metal will have a "breakout," said FuturesTechs analysts.

Volatility is contracting significantly and "this usually happens ahead of a breakout - like pressure building up on a Champagne Cork," FuturesTechs said.

In other news, Japan's auto production in March fell by 50%, making it the sixth straight month of declines. The auto industry is a key consumer of platinum and palladium for use in catalytic converters.

Source: COMMODITIESCONTROL

>Market Opportunities (WHARTON)

Finding Market Opportunities in 'the Best Place to Get Sick'

India's health care industry ails from severe under-penetration among its population, especially in rural areas. Still, the low penetration levels are a glass half full for global pharmaceutical companies, many of whom have steadily increased their investments in the country, drawn by India's talent base and R&D capabilities for drug development, and its strengths in alternative medicine, like Ayurveda (India's traditional system of holistic medicine). Insurance providers, meanwhile, like the country's low cost of health care, which has made it a destination for so-called "medical tourists" from developed countries.

Those are the key drivers for pharmaceutical firms, hospital chains and investment funds as they look for opportunity in India's health care industry, according to a panel discussion on "The Health Care Duopoly: India, the Medical Center of the World" at the recent Wharton India Economic Forum in Philadelphia. The panel included top executives from pharmaceutical companies GlaxoSmithKline and Cadila Pharmaceuticals, Asia's largest health care chain Apollo Hospital Group, and investment funds, who identified areas
of advantage in an otherwise dismal scenario.

The Upside of Low Penetration

"I am happy and delighted there is under-penetration [in India's health care industry]," said Anula Jayasuriya, co-founder of the Evolvence India Life Science Fund, a US$90 million venture capital fund formed three years ago to invest in pharmaceutical, biotechnology, medical device and related contract service companies based in India. "From an investor's perspective, we see a great opportunity" to extend the health care industry in under-served areas.

Jayasuriya added that she expected Indian pharmaceutical companies to become a bigger force globally in the near future. "My crystal ball says ... I see an Indian company and a European and U.S. pharmaceutical company becoming one," she said, noting that Sanofi-aventis and GlaxoSmithKline are reportedly talking about a possible acquisition with India's Nicholas Pharmaceuticals. That's only speculation, she said, "but that [kind of deal] would be one measure of success."

Jayasuriya was responding to a relatively pessimistic scenario offered at the beginning of the session by the panel's moderator, Michael Fernandes, executive director of the investments division and country head for India at Khazanah Nasional, the investment arm of the Malaysian government. Fernandes said that while global pharmaceutical companies had steadily increased their investments in India over the last 50 years, including contract research in the last five years, the overall results of these investments have been disappointing. He also noted that the largest Indian pharmaceutical company -- Ranbaxy Laboratories -- was sold last year to Japanese firm Daiichi Sankyo.

"It doesn't seem like an Indian company would be among the top three in generics globally," Fernandes said. "Some experts say it may not happen at all." Pharmaceutical innovation in India, too, has had "a number of false starts," he added. "Lots of phase two and three products have failed; not a single Indian-innovated product has been launched globally, although there are a number in the pipeline."

Jayasuriya read the scenario differently. "Innovation is an attrition game," she said. "The number of molecules that failed in India is not surprising, even if you use a fraction of the U.S. failure rate." She added that she is encouraged by the pipeline of Indian generics, and that while pharmaceutical drug development in the U.S. has many of its roots in universities, "Indian companies are hotbeds of innovation." Offering an example, she talked of Indian biotechnology company Biocon launching the country's first new drug -- a monoclonal antibody for head and neck cancer. The drug was originally created in Cuba, "but that is also a developing country, an emerging market," she said.

Hasit Joshipura, GlaxoSmithKline's vice president for South Asia and managing director of
GlaxoSmithKline India, was also optimistic about the ability of India's health care industry to deliver on new drug development. "I can see an Indian role in every major new drug, such as developing medicines for AIDS or other problems of poor countries," he said. For many years, pharmaceutical companies in India were, for the most part, subsidiaries of multinational players, so "there was no need to look at innovation.... But now you see frenetic activity, and in five to six years, you will see the next innovative products coming out of India."

Indian pharmaceutical companies could seize the opportunity to be "at the forefront for the next generation of vaccines and biologics," according to Michael Ross, president of the U.S. subsidiary of Indian drug firm Cadila Pharmaceuticals. His company is currently working on a vaccines program. "For every dollar you spend on vaccines," he noted, "you save US$8 down the line. It's a very efficient way to lower costs of healthcare."

Here Come the Medical Tourists

Ross said India's relatively lower health care costs have also spurred a surge in "medical tourism -- although I hate that term." Hospitals in India could secure accreditation from the non-profit Joint Commission International to take advantage of the increasing interest from patients and insurers in developed countries, he added. "The cost of a procedure is a third less in India, but the care is excellent. You will see more and more people going overseas for health care."

Insurers like Blue Cross waive a patient's co-pay if they go overseas for surgery because of the lower costs. For companies having trouble keeping up with today's medical expenses, this could be a tremendous opportunity, Ross said, joking that ailing companies like General Motors could benefit. In fact, he suggested to fellow panelist Shobana Kamineni, executive director of Apollo Hospital Enterprises, that her chain consider alliances with large insurers to lower the cost of its services for patients, and thereby expand its market opportunity.

According to Kamineni, about 15% of Apollo's patients are foreigners, and they come not "for vanilla care" like cosmetic surgery, but for complex surgeries like hip replacements. "India can become a real hub for medical tourism," she said, noting that Apollo attracts patients from Canada, the U.K. and even countries like Afghanistan because of lower costs and also shorter wait times. Over the years, costs for medical services have remained low in the country because they would be otherwise unaffordable for most of India's citizens, who are unable to obtain health insurance beyond age 60. "India is probably the best place to get sick -- it is the cheapest," Kamineni said.

In recent years, health insurance in India has been growing at a rate of 38% to 40%, according to Joshipura of GlaxoSmithKline. He said that although India has shown increases in life expectancy, its health care industry will have to factor in the need to treat a wider range of diseases as health awareness and affordability grows, especially in the larger rural markets.

Increasing Reach

Joshipura stressed the need to develop health care infrastructure to ensure access to the rural markets. He pointed out that India's expenditure on health care is just about 4.5% to 5% of its GDP, compared with 10% to 11% in France, Germany and Switzerland, and more than 15% in the U.S. The government could play a greater role in expanding access to health care in India, he added: Government-funded health care reaches only 0.9% of the market; the private sector fills in the gap.

But intelligent use of technology could help reach "the 500 million people who don't have access to health care" in India, according to Jayasuriya. She cited applications for India's rural markets, such as diagnostic labs in kiosk-like facilities where, for instance, a sick child's parents could determine whether or not an infection calls for rapid intervention. Sanofi-aventis had a model built around such kiosk-type labs that don't necessarily have to be staffed by doctors, she noted. Similar applications could also find uses in developed markets like the U.S. in, for example, neonatal screenings. Another technological
innovation Jayasuriya referenced was a reverse-engineered home dialysis machine that Indian computer maker HCL had developed for US$400 compared to a price of US$4,000 in the U.S. market.

Expanding the reach of health care services is easier said than done in India, Kamineni said. Apollo Hospitals, which now has 42 hospitals and 8,000 beds nationwide, plans to open four hospitals next year in Mumbai. Creating new capacity in hospital beds is a formidable challenge, she noted, adding that the high cost of land in urban areas is not offset by any government concessions even though the end use is health care. "My dad [Prathap Reddy, the group's founder and chairman] says it is easier to build a liquor factory, because the risks are so much [higher] with hospitals. It's like flying a plane every single day."

Finding good talent is also a problem, Kamineni said. Her group runs two medical colleges and 14 nursing schools to serve its talent needs. The solution lies in privatizing education with a for-profit model to attract investors, she argued. "There is no [talent] planning in the health care business. Between last year and this year, we added 20,000 people to our work force."

Alternative Medicine

Kamineni was, however, optimistic about the possibilities with India's traditional systems of alternative medicine, notably Ayurveda. Johnson & Johnson is looking for Ayurvedic drugs, for both prescription and nonprescription uses, including non-alcoholic mouthwashes and pain-relieving medications, according to Ross. "They are hunting in India for products to sell all over the world."

According to Joshipura, India hasn't done enough to develop its alternative systems of medicine. "China has done a good job with Chinese medicine," he said, suggesting India follow that example. "It's going to take time for a Western company to develop familiarity [with alternative medicine systems like Ayurveda]." Ross agreed: "If you talk to the multinationals [about alternative medicine], you have to develop scientific data; it's not just about word of mouth."

>Flash Markets (ECONOMIC RESEARCH)

Chronology of recoveries: Credit, asset markets or the real economy first?

We consider it very important to know whether, in an economic recovery, it is credit, asset prices or the real economy that recovers first. An examination of economic recoveries in the past (1992 to 1995, 2002 to 2005) shows two different chronologies: in the former case, the real economy first, then credit and asset prices; in the latter case, credit and asset prices first, then the real economy.

The current economic situation is special: in a situation of global deleveraging, it is hard to expect a recovery in credit or the prices of assets for which purchasing is credit-related; does this rule out a recovery in the real economy? The two recoveries of the past give different indications on this subject. It is also unclear whether other asset prices will recover before or
after the real economy; if they recover before it, there will be no exit strategy for central banks, which will be unable to destroy excess liquidity until it is too late. We have seen in the past that tightening of monetary policy always came last, after both the economic recovery and the recovery in credit and asset prices.

If we could know the order in which credit, asset prices and the economy will recover in the present situation, this would clarify a number of important questions:

1. Can there be an economic recovery without a recovery in credit?

Deleveraging is continuing at present (we will examine the situations of the United States and the euro zone, See Charts), and may be longlasting, because the high debt levels reached before the crisis (except for companies in the United States, See Charts) will normally take several years to come back to acceptably lower levels, given the fall in asset prices, the rise in interest rate margins on loans, higher risk aversion, etc.

The question therefore is whether an economic recovery can take place before credit picks up again.

2. Can a recovery in asset prices be expected?

We have seen in the recent period a slight recovery in:

− stock markets (See Charts);
− the prices of oil and certain other commodities(e.g. aluminium, copper, maize, (See Charts));
− credit markets (See Charts).

To see full report: FLASH MARKETS

>Economic effects of Swine Flu (WACHOVIA)

Economic Effects of Swine Flu: Mexico and Beyond

The swine flu epidemic has become front page news this week. Mexico is the epicenter of the outbreak and thousands of cases have been reported in that country. However, scores of cases have been confirmed in the United States, and countries as far afield as Israel and New Zealand have hospitalized people with symptoms that resemble swine flu. Not only have the Mexican stock market and currency been hammered over the past few days, but financial markets in most other countries have been adversely affected as well.

The financial and economic costs of the epidemic will ultimately depend on its severity. The outbreak of Severe Acute Respiratory Syndrome (SARS) that swept through Asia in the spring of 2003 is instructive. The SARS epidemic was deadly—nearly 800 people in 7 countries died—but it was not catastrophic. The economic effects of that epidemic were significant but temporary. However, if the current outbreak were to morph into something like the influenza pandemic of 1918, which killed 50 million people worldwide, the economic and financial fallout would obviously be much more devastating.

In this brief note, we attempt to outline how the economies of Mexico and other countries could be affected by the current outbreak of swine flu. In that regard, we draw on the experience of the 2003 SARS epidemic to inform our economic prognosis and we reference some analytical work that has modeled the economic effects of severe pandemics. We acknowledge, however, that it is ultimately impossible to forecast precisely the economic and financial effects of the current outbreak due to the unpredictable nature of the epidemic.

Significant, But Temporary, Economic Effects Likely in Mexico
Because Mexico is the epicenter of the swine flu outbreak let’s begin our discussion with the Mexican economy, which could be adversely affected in a number of ways. First, Mexico’s trade with the rest of the world could be disrupted. Indeed, many nations have already announced import restrictions on Mexican pork products. We do not have data on Mexican pork exports, but they surely represent a small proportion of the $7.9 billion worth of agricultural goods that Mexico exported last year. Moreover, the direct effects of an import embargo by foreign countries on Mexican pork products would be rather miniscule in terms of the $1 trillion Mexican economy.

To see full report: SWINE FLU

>Zee Entertainment (DEUTSCHE BANK)

Improving GRPs, weak ad scenario

Weak ad scenario, strong DTH revenues
A relatively weaker advertising environment has nullified the 35% sequential growth in DTH revenues and led to a 19% YoY decline in Zee's Q4 earnings. We expect a weaker Q1 FY10 due to a strong base in Q1 FY09, and thus we cut our FY10 earnings estimates by 12%. However, this comes at a time when GRPs (the key driver for higher ad rates) have improved in a consolidating GEC scenario and DTH revenues remain strong. Thus we recommend Buy with a new TP of INR 160.

New programming drives operational metrics
Zee’s GRPs have remained solid: The flagship channel improved its average GRPs to 208 for the quarter against 201 GRPs in Q3 FY09 (the latest GRPs stand at 235 with an improvement across time bands which should be reflected from the September quarter onwards). New prime time programming has been the key driver of relatively strong ratings.

Competitive landscape has eased, consolidation of GRPs
Competition has eased among the general entertainment channels (GEC), with Sony, NDTV Imagine and 9X continuing to struggle. Although Star Plus has lost momentum over the past two weeks, we believe it will recover as it strengthens its weekend slots. Overall, the top three networks achieved more than 800 GRPs, i.e. 85% of the GRPs of the mainline GECs.

Revising our target price to INR 160 (from INR 175)
Our new, DCF-derived target price of INR 160 is based on 12.7% cost of equity, 11% earnings growth FY9-11E and 4% terminal growth. We believe our earnings growth estimates are conservative, factoring in a drop in Zee’s relative market share and the uncertain ad environment. At the current price, Zee trades at 13.8x FY10E earnings. Key risk includes a significant drop in weekly GRPs. See valuation and risk details on pages 6-8.

To see full report: ZEE ENTERTAINMENT

>Steel Picture Book (CITI)

World Steel Association Demand Growth Estimates Drift Lower

■ Inventory De-stocking Decelerates — CIRA anticipates a trough in demand in 2Q09, as inventory de-stocking abates, but underlying demand is expected to remain extremely weak in 2H09. Steel output in Europe dropped 43.8% in 1Q09 compared to 1Q08. North American steel production fell 52.1% YoY, whereas Asia’s steel production only fell 8.9% YoY.

■ WSA Growth Outlook — The World Steel Association (WSA) published its shortterm
growth outlook for steel demand on 27 April. The WSA forecasts a global 14.9% decline in apparent steel consumption in 2009: a -28.8% decline in the EU-27, -32.2% in NAFTA, -23.1% in the CIS, and -8.1% in Asia and Oceania.

■ Growth Outlook — CIRA forecasts a 30% YoY decline in crude steel production in Europe and a similar decline in the USA in 2009.

■ Production Discipline Tested — Cash constraints are driving traders and distressed companies to sell steel products below cash costs. Steel prices are likely to increase from the lows as inventory de-stocking comes to an end, but will place pressure on spot-focused producer profitability.

■ China, the Ongoing Focus — The WSA forecasts -5% growth in apparent demand in China in 2009. China’s lower exports and a slowing domestic economy are the cause. Apparent steel use for the world excluding China is expected to decline by -20.4% in 2009. CIRA forecasts China’s demand growth as flat YoY.

■ Stay Selective and Defensive — We see the risk of negative guidance and earnings shortfalls as extremely high in 2009. We believe the market’s shift to reflation trades is too early and remain cautious on the sector. Working capital build will test balance sheets in the early phase of the recovery.

To see full report: STEEL PICTURE BOOK

>Asia Strategy (MACQUARIE RESEARCH)

Where do we go from here?

Event
■ We provide an update on the latest valuations and risk/reward trade-off for Asian equities.

Outlook
■ Asia ex Japan has rallied strongly over the last seven weeks, rising 27.5% from its local trough on 2 March. The rally has, however, been supported by improving fundamentals – stresses in the (global) financial sector have eased; there is growing evidence that the global economic cycle may be forming a floor; investors’ appetite for risk (particularly for emerging markets) has risen; and, importantly, our earnings revisions indicator for Asia ex Japan has
continued to move higher.

■ Moreover, with Asia ex Japan now trading on 13.9x forward earnings, 10.8x trailing earnings, 1.5x BV and 6.7x cash flow, valuations – particularly on those metrics that are the most reliable signals of value – remain well below long-run average levels. The only exception to this is forward PER, which, impacted by both a rising market and falling earnings, is now above its longrun average of 13.0x.

■ Low valuations and improving earnings revisions mean the 12-month risk/reward trade-off for Asian equities is extremely favourable. If history is any guide, the odds of losing money on a 12-month view are currently a mere 12%, while the odds of a better than 10% return are 70%. History suggests that Korea is likely to give the most beta over this time horizon, while along the sector dimension tech, banks and consumer discretionary sectors are the sectors most likely to outperform.

■ The three-month outlook is, however, considerably more uncertain. Markets have run hard, investor sentiment towards – and appetite for – emerging markets is certainly very elevated at present (relative to other risky asset classes, that is) and we are very mindful of the potential for this to pull back in the coming weeks and months.

■ On the other hand, backtesting of fundamentals does suggest a palatable 3-month risk/reward trade-off, earnings revisions suggest the near-term balance of risks could be to the upside and the overwhelming investor sentiment is to buy on any decent pullback (which suggests that any pullback is likely to be limited in terms of duration and magnitude).

To see full report: ASIA STRATEGY

>Monthly Economy Review (SHAREKHAN)

Economy: All eyes on RBI monetary policy review

■ The Reserve Bank of India (RBI) will announce its annual policy review on April 21, 2009. The policy review is staged against the backdrop of near-zero inflation (in terms of the Wholesale Price Index [WPI]) but near double-digit increase in the Consumer Price Index (CPI) and slowing economic growth. Besides, the credit growth has witnessed a sharp deceleration while the banking system is awash with liquidity. In view of this, we expect the RBI to announce a token cut of 25 basis points each in the repo and reverse repo rates in keeping with its stress on a low interest rate regime. The central bank is expected to keep the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) unchanged. However, we feel the business growth target for the banking system and the outlook for the economy to be given by the RBI for the current fiscal will remain a key monitorbale.

■ India’s trade deficit stood at USD4.91 billion in February 2009 compared with USD6.07 billion in the previous month. The trade deficit for February 2009 declined (for the second consecutive month in FY2009) by 26.9% year on year (yoy) and by 19.2% on a month-on-month (m-om) basis. With this, the year-till-date (YTD) trade deficit has widened to USD104.98 billion from USD74.89 billion in the comparable period of FY2008.

■ In February 2009, industrial production growth once again entered the negative zone as it declined by 1.2% yoy. The fall in the industrial output was led by a y-o-y decline of 1.4% and 1.6% in the output of the manufacturing and mining segments respectively. On a
YTD basis, the IIP growth for the period April 2008- February 2009 stood at 2.8% and was significantly weaker compared with the 8.8% growth achieved during the comparable period of the previous year. Importantly, the Index for Industrial Production (IIP) figure for January 2009 has been revised upwards to indicate an increase of 0.4% yoy against a drop of 0.5% (provisional) earlier. While there has been some improvement in automobile sales, cement dispatches and steel production during March 2009 (indicating better industrial activity), the high base effect is likely to play a spoilsport.

■ Inflation continued its southward journey and stood at 0.18% for the week ended April 04, 2009 after touching a record high of 12.91% in August 2008. However, on a week-on-week (w-o-w) basis, the inflation rate inchedup by 0.4% on the back of higher food and fuel prices.
The inflation rate is at near zero levels and we believe it is likely to enter the negative territory in the coming few weeks as the high base effect comes into play. Furthermore, the Indian Meteorological Department (IMD) expects the monsoon rainfall to be near normal to normal this year (96% of the long-period average). We believe a near normal to normal monsoon would help in bringing down the food inflation, which is currently at elevated
levels.

To see full report: ECONOMY REVIEW

>Ballarpur Industries (EMKAY)

Results below estimates

BILT reported poor Q3FY09 results. Revenues remained flat at 6.9 bn while EBITDA margins dropped by 650 bps to 19.8% as a result APAT fell by 76% to Rs 179mn. Results were affected mainly on account of – 1) Poor show at Sabah, Malaysia plant due to sale of high cost inventory and maintenance shut down which have resulted in EBITDA loss of ~Rs 240 mn 2) Lower demand for rayon grade pulp (RGP), Kamalapuram plant resulting in plant shut down, leading to EBIT loss of ~Rs 110 mn. We expect that the current quarter poor performance was mainly driven by extra ordinary circumstances. However global prices still remain weak hence putting pressure on margins at Sabah plant and Kamalapuram plant is likely to resume operation from May’09 and company is expected to start consuming pulp for its captive purpose. Its capex plan at Bhigwan is completed and expansion plan at Ballarpur is on schedule (completing June’09) which will increase its capacity by ~45%. We expect full benefit of this expansion to flow from Q1FY10 and Kamalapuram and Sabah plant should also stabilise by that time. To factor poor ongoing problem at Sabah and its Kamalapuram plant, we are reducing our FY09 revenue estimates by 10.6% to Rs 28 bn and APAT by 37.3% to Rs 1.8 bn. However our FY10 estimates remain unchanged. We maintain our BUY recommendation on the stock with a price target of Rs 24.

Poor show at Sabah plant and pulp plant affected results
Disappointing Q3FY09 results is mainly attributed to poor results from Sabah plant and rayon grade pulp at Kamalapuram plant. Company’s Sabah operation reported losses of approx Rs 413 mn due to sale of high cost inventory during the quarter and also due to maintenance shutdown for a month which affected its production. Sabah plant had an inventory of ~17,000 mt in Q2FY09 which was sold during current quarter at lower prices. Unit Kamalapuram, which produces rayon grade pulp, continued to remain shut due to sluggish pulp demand. Pulp division also contributed a loss of Rs 107 mn for the quarter.

Stand alone results remain stable
BILT standalone performance remained stable. BILT on stand alone reported net sales of Rs 2.5 bn with EBITDA margins of 24.2% and APAT of Rs 321 mn. Paper demand and realisations in domestic market remained stable.

Revising FY09 estimates keeping FY10 unchanged, maintain BUY
We have reduced our FY09 revenue, PAT and EPS by 10.6%, 21.7% and 37.3% to Rs 28.5
bn, 1.8 bn and Rs 2.8, respectively. We keep our FY10 estimates unchanged. We believe
that FY10 growth will be driven by 45% growth in paper capacity. We expect that pulp
operation at Kamalapuram will resume from Q1FY10 and company will start consuming pulp for its captive consumption. We maintain our BUY recommendation on the stock with a price target of Rs 24.

To see full report: BALLARPUR INDUSTRIES

>3I INFOTECH (ICICI Direct)

Decent show…
3i Infotech announced flat q-o-q top line at Rs 607 crore, which was in line with our expectation. EBITDA margin improved 157 bps sequentially driven by improvement in gross margins in the products and services segment. The company has also been able to maintain gross margin in the transaction services segment. Buy-back of FCCB and one time advisory and legal fee payment led to profits increasing to Rs 90.5 crore (profit removing these exceptional items increased 3.3% to Rs 67 crore).

Highlight of the quarter
The flat q-o-q performance by the company was primarily a result of the poor performance of the services segment which saw de-growth of 11% qo-q. Transaction services segment was comparatively the best performing segment with sequential growth of 6.2%. Product revenue bounced back this quarter with 3.1% q-o-q growth in Q4FY09 (compared to q-o-q degrowth
of 4.5% in Q3FY09. the company has bought back FCCB worth Rs 152 crore during the quarter. For the full year FY09 the company grew 89.6% on the top line. More than 50% of this growth was contributed by the acquisitions made by the company during the year.

Valuations
3i-infotech has an outstanding order book of Rs 1445 crore which is 56% of FY09 revenue. The order book growth has slowed down in the recent past. The management has also refrained from giving guidance for FY10 due to the uncertain demand environment. We recommend a Hold rating on the stock with a revised price target of Rs 49.

To see full report: 3I INFOTECH

>Jaiprakash Associates Limited (MORGAN STANLEY)

Adjusting Price Target for Higher Liquidity Environment

Investment conclusion:
Over the next two to three years, we expect Jaiprakash to emerge as a top-5 player in India in each of its main businesses – cement, construction, power, and real estate. We believe that
with worries on execution and funding receding a bit (given the strong results and the easing debt funding environment), the stock can trade above our base case. We add 30% of the differential between our base and bull case to our base case to set our PT of Rs166, which
implies potential upside of 27% from current level.

Strong Results Ease Execution Issues:
Jaiprakash declared a strong set of numbers in F4Q09, with its construction and real estate businesses driving revenues and profits up 55% YoY and 52% YoY, respectively. With the company also commissioning 2.5 mn tons of cement capacity in F4Q09, and taking their
presales on Yamuna Expressway up to 5.23 mn sq ft (0.73 mn sq ft in F4Q09), we believe that execution worries have reduced.

Debt Funding Availability Easing from Crunch in
F3Q09: Our interaction with banks also reveals that debt funding in no longer as difficult to secure as in F3Q09. We continue to expect the company to use presales of real estate, sale of treasury stock, and discounting of power asset cash flows to fund the equity requirements
of their planned power generation assets.

What’s next:
We believe that declaration of financial closure on the company’s generation projects (especially Bina and Nigrie) will be a driver of stock price. Also, we believe the execution of the projects it has in hand (especially the internal ones) will reassure the market, driving the multiple and the stock price up.

To see full report: JAIPRAKASH ASSOCIATES

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty near month witnessed unwinding in OI to the tune of 5.88 million shares whereas the May series added 5.69 million shares in OI. With the May futures premium almost vanishing and April sliding into a discount of 7.40 points, we infer noteworthy short positions have been formed in Nifty May series. Also the rollovers have picked up from 48% to 61% yesterday. All these suggests closure of long positions in April and build up of fresh shorts in May series

• The put writers who had entered on Monday at 3400 and 3500 levels were forced to exit on Tuesday. 29654 and 24703 contracts got unwound in 3400 and 3500 puts respectively. This indicates that 3400 is no longer a support for the market; rather it may now act as a resistance since 15234 contracts got added in this call option along with stupendous rise in volume and drop in IV. Call writing was also seen in 3500 call which added 10024 contracts in OI. Moreover, the 3300 call added 21258 contracts indicating some call writers were also active at this strike price. However, the 3300 put which added 5201 contracts in OI also showed signs of put writing. This further suggests that the expiry may be somewhere close to the 3300 mark

• FII Index futures depicted closure of long positions to the tune of Rs 796 crores along with a drop in OI by 2.60%.

To see full report: DERIVATIVES 290409

>Daily Calls (ICICI Direct)

Sensex: We said, "upper shadow is indicating profit-booking ... see if can hold Monday's low of 11176. Positive if it does, else Green support line can be tested." Index couldn't hold 11176, as a result of which, it lost over 3% and tested the Green support line as suspected. Realty/Metals/Banks lost more, about 5%. A/D worsened to 1:9.

The action formed a Belt Hold Line Bear candle, which is bearish if selling continues below its low at 10961. Such an action would open downsides testing previous crucial support near 10719. On the other hand, protecting its low can appear as an attempt to hold the 31-day long Green support line.

To see full report: CALLS 290409

>Daily Market & Technical Outlook (ICICI Direct)

Key points

􀂃 Market outlook — Open flat to positive, Asian markets mixed
􀂃 Positive — Rupee likely to rise
􀂃 Negative — FIIs & MFs Selling

Market outlook

􀂃 Indian markets are likely to open flat to positive, taking cues from the global markets. SGX Nifty was trading 20 points up in the morning. Other Asian markets were mixed in the morning trade as stocks were on shaky ground as concerns over US bank balance sheets and fears over the spread of swine flu persisted. US stocks fell on Tuesday as fresh worries that major banks may need to raise more money offset more reassuring data that suggested the worst may be over for the US economy. Rupee is likely to rise on Wednesday, after a two-day fall, as it gets a boost from gains in Asian stock markets and the dollar's
weakness against some currencies.

􀂃 The Sensex has supports at 10960 and 10720 and resistances at 11210 and 11330. The Nifty has supports at 3350 and 3300 and resistances at 3420 and 3460.

􀂃 Asian stocks mixed, as concerns over US bank balance sheets and fears over the spread of swine flu persisted. Hang Seng rose 195.6 points, or 1.3%, to trade at 14,750.7.

􀂃 US stocks fell on Tuesday as fresh worries that major banks may need to raise more money offset more reassuring economic data that suggested the worst may be over and a big dividend boost from IBM. The Dow Jones slipped 8.05 points, or 0.10 %, to 8,016.95. The S&P 500 dropped 2.35 points, or 0.27 %, to 855.16. The Nasdaq declined 5.60 points, or 0.33 %, to 1,673.81.

􀂃 Stocks in news: RIL, Britannia Industries, Dr. Reddy’s Lab.

To see full report: OPENING BELL 290409

>Special Report (ECONOMIC RESEARCH)

A radical estimate of the bank losses

International institutions regularly publish enormous estimates of banks’ non-provisioned losses: recently USD 2,200 bn or even USD 4,000 bn.

It is well known that these estimates make no sense, because they are based on the market value (actual or supposed) of assets whose market prices are meaningless, and which will be kept by the banks.

However, we can carry out a radical estimate of the bank losses by starting off with the assets held by banks and applying market prices to these assets.

Our maximum estimate of the banks’ loss (in the United States, the euro zone and the United Kingdom), nonprovisioned on assets other than loans to households and non-financial companies, is USD 1,240 bn, markedly less than the figures provided by international institutions.

What losses for the banks?

The banks (we look at the situation of US and European banks) have already significantly written down the portfolios of assets held (Table 1 in Appendix).

But international institutions (IMF, OECD) continue to publish enormous estimates of the bank’s non-provisioned losses: USD 2,200 bn, even USD 4,000 bn recently.

It is well known that these estimates are meaningless. The market prices of numerous assets have been extremely depreciated and are far below the value at which these assets
will eventually be repaid.

But we will try to reconstitute them in a simple manner by looking at the losses - at market prices - realised by the banks on their asset portfolios. Given this method, we are of course
talking about a radical and excessive assessment of bank losses.

Banks' balance sheets

We look at banks' balance sheets in the United States, the United Kingdom, and the euro zone.

On the asset side of the banks’ balance sheets we find:

− loans,
− liquidity and monetary assets, on which there are no capital losses,
− other assets: equities, government bonds, corporate and financial bonds (which includes Agency bonds, ABS, structured credit, etc.).

To see full report: SPECIAL REPORT

>Reliance Industries & Reliance Petroleum (HSBC)

Downgrade to N(V) while raising targets: Growth priced in

■ Following the completion of key projects in FY10, we expect RIL to refocus on new E&P development and exploration; raise our E&P valuation to INR920/share (INR661)

■ A 56% increase in RIL’s stock price since March has closed its alpha with Sensex that grew 39%

■ Raise our targets to INR1,945 (INR1,640) for RIL and INR122 (INR102) for RPL, but downgrade both to N(V) from OW(V)


■ E&P upside key to valuation
RIL plans to complete three key projects in FY10, resulting in 77% growth in our FY09-11e EPS estimates. We now expect RIL to focus on new E&P development projects and exploration. Recognising the E&P projects pipeline and potential resources in RIL’s E&P portfolio, we increase our valuation of the E&P business to INR920/share (INR661). In our valuation, we have considered 20tcf (12tcf) of 2P reserves, resources from the KG D6 block, and the potential for the ramp-up of gas production to 120MMcmd owing to satellite discoveries. With exploration regaining priority, we also take into account 1,500MMbbloe of additional risked prospective resources at a valuation multiple of USD2/bbloe. RIL’s partners, Niko Resources and Hardy Oil, suggest healthy potential for the KG D9 and Mahanadi D4 blocks, respectively.

■ RIL’s recent run-up closes its alpha with Sensex
RIL’s 17% outperformance against Sensex since March 2009 has closed the valuation gap between the two. At the current price, the stock trades at a FY11e PE of 10.6x. While the news flow on project ramp-up is likely to be positive over FY10, changes in the valuation band are dependent on the execution of the next set of growth projects and discovering new resources, in our view. We expect focus on these to be back-ended in FY10, with existing projects being a priority.

■ RIL and RPL: Downgrade to N(V) from OV(W)
We cut our FY10e estimates for RPL by 4.5% and for RIL by 3.1% due to the flow-through effect of the FY09 actuals and a slower start of the second crude unit than our earlier expectations. We raise our target price for RIL to INR1,945 (INR1,640) mainly due to our higher E&P valuation. Based on a swap ratio of 1:16, we raise our target price for RPL to INR122 (INR102).

To see full report: RIL & RPL

>SESA GOA (ULJK)

Q4 FY09 Result
Sesa Goa has announced its fourth quarter results and it was in line with our expectations. The company’s consolidated Q4 FY09 net sales were down 14.9% yoy at Rs 14299 mn versus Rs 16813 mn and its net profit was down 32.5% yoy at Rs 5476 mn versus Rs 8116 mn. The OPM for the quarter was at 52.7% versus 72.4%.

Volume remains flat
Iron ore volumes for Q4FY09 remained flat yoy at 5 million tones because of sudden fall in demand from China in the last five months, however for the full year company saw 22% growth in volumes despite difficult market conditions. The company also saw an improvement in the inventory situation in February‐March 2009. The company is looking at 20‐25% volume growth for FY10.

Realisation comes down
Realisations were lower in last quarter due to weak iron ore prices, iron ore prices have fallen more than 50% since October 2008 however depreciating Indian rupee partially offset the negatives. The benefit of Rs 200/ tonne from abolition of 8% export duty on iron ore fines since Dec’08 was also passed on to customers.

Increase in reserves, exploration going on
Exploration and drilling programme in Karnataka and Goa have yielded gross additions of 54 million tonnes and after considering mined output of 16 million tonnes during the year from all mines, a net addition of 38 million tonnes. Reserves and resources as on 31 March 2009 were 240 million tonnes compared with 202 million tonnes at the end of FY 2008.
Additional 500 mt of iron ore reserves would be added over next 2‐3 years.


Outlook
We believe that the demand for steel and iron ore will start improving from September onwards, however realizations for FY10 will be lower than FY09. According to us the company is likely to see 15% increase in sales volume for FY10, and the average realization for the year will remain between USD 45 to 50 per tonne, depreciation in Indian rupee against USD will compensate to some extent for the fall in realisations. As the company exports two third of its production to china, the improvement min demand for steel and iron ore in china will act as a catalyst, also any rise in iron ore prices in the second half of the year will benefit the company because the company sells 80% of its produce in the spot market. We have valued Sesa Goa on EV/EBITDA basis, giving a target EV/ EBITDA of 3 and recommend a accumulate rating for the stock with a target price of Rs 131.

To see full report: SESA GOA

>Corporation Bank (CITI)

Sell: 4Q09 Results – Quantity, Not Quality

■ Profits up 26%, above estimates; but qualitatively not so sound — Prima facie Corp Bank's results were good – up 26%yoy, 37% ahead of estimates – driven by bond gains, core fee momentum and moderation in costs. However, beneath the surface there are clear signs of pressure - declining margins, sharp rise in restructured loans and lower loan loss charges, despite the large trading gains.

■ Asset quality: Restructuring stress — Reported NPLs still look good (1.15% NPLs, 75% coverage); however, it masks underlying stress - 2% of loans restructured, another 3% pending. This is ahead of peers and management has missed an opportunity to provide more (utilizing the large bond gains). We expect higher lapses to NPLs given its mid-scale and mid-market franchise.

■ Growth: Accelerating but appears unsustainable — 4Q09 has seen growth accelerating (8% QoQ loan growth; 20% deposits), but comes at a cost (NIMs down 40bps QoQ). Sharp improvement in CASA ratio (31% vs. 25% in 3Q09) results from 100% QoQ rise in current account balances, suggesting it could be temporary; and possible unwind will pressure growth.

■ P&L: Trading boost and fee momentum; but margins disappoint — Bond gains, (5x rise, likely profit taking on HTM book), cost moderation (-20% QoQ) and healthy rise in core fees (+28% YoY) were key profit drivers. Core operating profits were up a more modest 7% YoY. NIMs were the key disappointment (down 40bps QoQ) and are now among the lowest in the industry.

■ Risks remain high, maintain sell — We adjust earnings (+3-4% for FY10-11E) to factor in above estimates FY09 earnings; retain Sell (3H) due to Corp Bank's rising profile with our EVA-based Rs175 target price.

To see full report: CORPORATION BANK

>HDFC Bank (CITI)

Buy: 4Q Results – Cannot Pick a Hole in the Quarter

■ Profits up 34% yoy; qualitative reinforcement — Qualitatively, the quarter was ahead, while quantitatively (i.e. net profit), it was just a little behind. The key takeaway is that HDBK continues to stand out in the troubled crowd with its asset book holding comfortably, profitability remaining stable and outlook good enough for it to maintain 20%+ loan growth. We believe HDBK is making significant franchise (and market share) gains in these relatively uncertain times – and doing so profitably.

■ Asset quality: Continues to defy and widens the gap — The pace of deterioration remains stable (comfortably covered by operating profitability). The restructuring phenomenon appears to have passed it by (0.1% of loans), and 20-25% loan growth looks achievable. Mgmt has a cautiously optimistic growth and quality outlook (consistent through Oct-Nov 2008 lows), and its track record for working through the cycle builds. The risks are the economy and the now-rising expectation that HDBK is immune to asset quality issues.

■ P&L: Fees and costs impress, while trading one-offs provide provisioning cushion — The P&L is fundamentally the upside surprise – fees have accelerated (bolstered by a strong bounce-back in derivative revs), costs are showing signs of moderating (almost a first among peers), and margins continue to hold at 4%+ levels – significant stability in varying interest rate environments. A surprise trading gain (second quarter running now, though) provides the cushion for a provisioning boost, which is otherwise too high for a normal earnings cycle.

■ Maintain Buy (1L) — While HDBK becomes even more expensive, we find that we cannot pick a hole in its quarter or business strategy, and until that happens, valuations will likely remain high

To see full report: HDFC BANK