>RELIANCE CAPITAL (CITI)

Sell: Life Valuations Not Assured

■ Capital markets have bounced, but so has the stock — RCap's businesses are highly levered to capital markets, and recent equity performance should result in higher growth/earnings of individual segments. We revise our target price to Rs821 but maintain Sell (3M) as we believe RCap's earnings/operating growth will lag the sharp increase in its stock price (+137% outperformance in last 3 months), thereby making the stock expensive at current levels.

■ ...But the business will grow with a lag — While equity market performance has a strong correlation with RCaps' businesses, we expect growth in most businesses to lag the rebound in broader markets – in particular, we expect relatively moderate growth in life insurance, non-life insurance and consumer finance segments.

■ Implied valuations for life insurance appear to be at a significant premium — RCap is seeking to sell up to a 26% stake in its life insurance business, including likelihood of inducting a strategic stakeholder. The transaction does not come under current FDI cap (100% owned) but requires other regulatory approvals. However, current stock price implies valuations of 20x 1Yr Fwd NBAP multiples, which is at 30-40% premiums to our benchmark values for peers.

■ Asset management, equity broking likely first to rebound — RCap's asset management and brokerage segments should be the first to rebound. While AUMs in the domestic business have grown 46% over Dec'08, retail equity inflows so far, have been modest. We expect brokerage revenues to grow but led by institutional segment as retail investors participate with a lag.

To see full report: RELIANCE CAPITAL

>DR REDDY (CITI)

Buy: Leveraging Its Product Portfolio

■ Strategic alliance with GSK — DRL has entered into a strategic alliance with GSK for emerging markets. We believe this is positive as it allows DRL to leverage its product portfolio much better without spreading itself too thin at the front end. While details on size, revenue sharing, etc. remain unclear, we believe it could be significant. We expect no material impact in FY10, but benefits should start kicking in from the next fiscal & scale up over the years.

■ Key elements of the deal — a) Effective immediately, GSK gains access to DRL's current portfolio & future pipeline of branded formulations. Key therapeutic areas include CVS, oncology, diabetes, gastro & pain mgmt; b) Covers various emerging markets such as Africa, Middle East, LatAm & AsiaPac ex India; c) The products will be developed & manufactured by DRL and licensed to GSK, which will file registrations & distribute them in the chosen markets. In certain markets, DRL & GSK will co-market the products; d) Revenues will be recorded by GSK & shared with DRL as per agreed terms.

■ In-line with long-term strategy — The move ties in with DRL's recent announcement that it would focus on fewer markets in terms of a front-end presence. Most of the markets covered are ones where DRL's presence is negligible. We believe these markets could cumulatively be as big, if not bigger than, some of DRL's key markets over the medium to long term. On the other hand, GSK has already expressed its intent to scale up in these markets & is a strong partner, given its robust brand equity & distribution strength.

■ Financial impact — Given the partnership model, we expect profitability on revenues under this arrangement to be lower than DRL's own branded business. However, it would drive higher absolute profit with little incremental investment, implying plying better RoI. Maintain Buy.

To see full report: DR REDDY

>INDIA MACROSCOPE (CITI)

It's Getting Better, and Here’s Why

■ Macro is looking up: While some incremental data have yet to recover (exports, industrial production), we think India will do better on the back of (1) election results, (2) an improvement in the investment climate, both domestic and global and (3) signs of thawing credit markets. Our revised GDP numbers of 6.8% in FY10E and 7.8% in FY11E are investment-led and assume stability on the consumption front.

■ How and where will this growth come from? We think focus on the following will drive growth: (1) facilitating infrastructure development, (2) sticking to the Inclusive Growth Mantra, (3) improving the business environment – rationalize taxes, land, labor, (4) education and (5) opening up and out: global integration and financial liberalization.

■ Wild cards – can swing both ways: While we expect growth momentum to be stable and deeper, there are wild cards: (1) Agriculture – an El Niño threat is hanging large, but food stocks are a buffer. (2) Global capital markets – India needs capital; it is there today, but will it continue? (3) Oil and commodities – rising prices will hurt but lower prices will benefit. (4) Expectations are high, but promises stand a better chance of delivery due to the new monitoring
mechanisms in place.

■ Financial markets — Although the RBI is close to the end of its easing cycle, yields will likely stay in the 6% to 7% range due to (1) the possibility of one last cut and (2) the RBI’s continued participation in the borrowing program. The rupee, which has gained ~6% after the election results, is likely to strengthen further in the medium term due to (1) higher growth and (2) increased capital flows. However, in the immediate near term like most other emerging market currencies, the rupee is likely to oscillate between “risk aversion” and “return to risk.”

To see full report: INDIA MACROSCOPE

>INDIAN REAL ESTATE (CITI)

Run-up Leaves No Room for Error; Equity Dilution an Overhang

■ What’s changed? More the market... — A significant increase in risk appetite, capital flows and preference for high-beta names have largely driven the 55% outperformance of property stocks over the past 3 months. While ~$1.7bn raised last month (more on the anvil) has eased liquidity, we believe it’s coming at the cost of sizeable dilution, which would take time to digest and act as an overhang.

■ ... than the business — Fundamentals are still weak. Some pick-up is seen in volumes with new launches and B/S concerns addressed, but there are no signs of a meaningful recovery yet. Risk of cancellations/bad debts is high, and there is a marked slowdown in leasing and mortgage growth to 8% in 4Q (vs. 10% in 3Q) despite the recent price/rate cuts. We await sustainability of sales, improved execution and cash flows to get positive.

■ Raising NAVs and TPs, lower risk ratings; but rally raises risks — We factor in: 1) lower cost of capital of 13-14% (vs. 17-18%), 2) reduced debt, 3) roll-forward to Mar 10E, 4) lower NAV disc. of 15-35% (vs. 35-50%). Trading at an avg. 13% disc. to NAV, the market seems to be pricing in strong recovery that has yet to materialize. Execution risks seem to be ignored. We see risk of disappointment.

■ India’s narrowing NAV disc. similar to China — This is unwarranted given China’s strong and more sustained recovery in volumes. Trends in China suggest property stocks offer maximum upside when trading around 40% or more NAV disc. But downside risks are high at <20%>

■ DLF our Top Pick — DLF is our best play. Its proactive measures to address recv worries (without dilution), boost pre-sales and ensure liquidity have differentiated itself. Maintain Sells on Unitech, HDIL, IBREL. With most stocks trading at NAV premiums and equity dilution a likely overhang, we view risk/reward as unfavorable.

To see full report: REAL ESTATE

>ASIA EX STRATEGY (CITI)

Markets Up, EPS Revisions Up

■ Markets have risen and earnings have been revised up — Back in early 2009 earnings revisions were the most bearish since 1990. In many cases we are now back above the average and heading towards the upper end of the post 1990 range. In March 2009 the risk was upside surprise, but increasingly the risk is downside surprise. Australia and Singapore have seen the least earnings revisions, Indonesia, Korea and Taiwan the most.

■ IBES forecast for 2009 is for a 5% decline and then a 30% increase in 2010 — Excluding the 1980’s cycle, which culminated in the 1987 crash, it takes on average 17 months for earnings to go from trough to prior peaks. Once the old peak is reached, the average P/BV has been 1.8x. We are currently on 1.8x P/BV, the 10-year and 30-year average, so we ask ourselves are these average times?

■ Terms of trade are worsening again and exports need to grow 48% to reach prior peak — The rise in commodity input costs has increased downside pressure on corporate profitability, a distinct change from Q4 of 2008. Without sharp improvements in exports, i.e. volume, we view the risk to earnings is to the downside for the manufacturing sector.

■ With P/BV at the same multiple historically seen two years post the recovery, the risk reward is fading — Markets have discounted further than in any prior cycles. On its current trajectory the MXASJ will have recaptured the 2007 peak by Christmas of 2009, a fantastic wish but not one we’re sure we’ll get.

To see full report: ASIA EX STRATEGY

>THE FLOOD'S SECOND WAVE (CITI)

■ Resumption of strong inflows — After two weeks of decreasing inflows to Asian equity funds, new money to the region has turned abundant again. According to EPFR data, US$1.5b of new money was taken in by Asian funds versus an average of US$790m in prior two weeks, and was just 12% short of the amount in the first two weeks of May. GEM funds, which have 52% of equity holdings in Asia, saw continued inflows at US$1bn+ last week, whereas inflows to Global funds (Asian stake at 8%) were still lagging behind inflows to most EM fund groups.

■ The most sustained inflows lasted for 29 weeks; we are in 13th week — Current inflows have been the 4th-longest in history, totaling US$10.9b vs. US$18.2b for the 29-week record inflows between Nov 2005 and May 2006. In terms of average weekly inflows relative to asset size at the beginning of the period, this is as strong as the episode in 2006. Asian real GDP growth was 8.7% at that time vs. Citi forecast of 4.5% for this year; we think investors are focusing on relative growth but forgetting that Asian corporates are poorer in terms of translating GDP to EPS.

■ ETFs no longer the favorite — When inflows to Asian funds started picking up in April, around 60% of the money went into ETFs, but the share has fallen to just 25% over the past two weeks. Country wise, investors regained interest in China and India funds. Net cash taken in by these two exceeded US$487m in aggregate last week vs. US$45m in prior week. Watch out for Korea funds: inflows rose 13x.

To see full report: FUN WITH FLOWS

>ASIA MACRO VIEW (CITI)

Who Benefits Most From China’s Domestic Demand?

■ Countries best able to latch on to China's resilient domestic demand will likely see a swifter cyclical recovery — While only one quarter of China’s imports from Asia are for its own domestic demand, rather than its exports, the mix varies amongst countries. The extent to which each economy benefits from China’s domestic demand depends on: (i) How closely each individual country’s export mix is geared towards meeting China’s domestic demand, (ii) How important China is as an export market for each country, and (iii) The degree of openness of each economy.

■ Imports from ASEAN are more geared towards China's domestic demand, even though NEA has greater overall export exposure to China — China’s imports from ASEAN, particularly Indonesia and Vietnam, are mostly in commodities and therefore are more strongly oriented towards China’s domestic demand. While China is a more important export market for Korea and Taiwan, almost 80% of China’s imports from these countries are in the export-oriented electronics and/or capital goods sectors.

■ On balance, exports for China’s domestic demand comprise a larger proportion of GDP for Taiwan, Malaysia and Singapore — In all three countries, this is largely a function of the openness of the economy, although for Taiwan this is enhanced by its large export exposure to China (comprising nearly 40% of Taiwan total exports). In addition, Malaysia and Singapore may benefit from commodity exposure (CPO and crude oil for Malaysia, refined oil for Singapore).

■ Greater urgency for Asia to re-orientate exports to support China's domestic demand — (i) While China cannot lift Asia out of recession now, this could change over the next 5-10 years, as we believe China’s GDP could be 50% that of the US by 2014, up from just 25% in 2007. (ii) China’s domestic market is already so large that Asian firms cannot afford to ignore it, with retail sales overtaking Japan from 2007. (iii) China’s evolving comparative advantages, and the increasing localization of the pan-Asian production chain within China, may imply greater competition rather than complementarity vis-à-vis China in export-oriented manufacturing industries. In recent years, China’s imports from ASEAN have seen a greater shift towards
domestic demand-oriented products, due to both higher commodity prices as well as greater competition from China in the manufacturing space.

■ Given the evolving nature of China’s comparative advantages, Asian countries could do well to focus on industries where they have a sustainable comparative advantage — These include consumer services, commodity related sectors, and perhaps niche areas within manufacturing. More broadly perhaps, greater economic integration may be the key for Asian economies to remain viable, not just in the face of greater competition from China, but to become sizeable markets in their own right.

To see full report: ASIA MACRO VIEW

>CESC (CITI)

Retail Limits Power Value & Upside Potential – Downgrade to Sell

■ Power business continues to add value — Aided by a benign West Bengal Electricity Regulatory Commission (WBERC) and its reasonable tariff orders, CESC’s power business continues to create value. The power business has turned around from losses of Rs1.3bn in FY99 to profits of Rs4.1bn in FY09E.  Retail limits power value and upside potential — CESC extended loans/ advances of Rs2.5bn to SRL in FY08. We estimate Rs5.5bn and Rs8bn will be extended in FY09 and FY10-12, respectively. In the absence of Rs8bn of investments over FY10E-12E, CESC would be worth Rs58/share more and if Rs8bn had not been invested over FY08-09E its value would have been higher by Rs64/share). Not only does retail limit power upside, but there is an opportunity cost in not investing these cash flows into productive power assets.

■ Stock looks expensive - Downgrade to Sell (3M) — A look at just the parent P/E multiples could mislead investors into believing that the company is trading at an inexpensive P/E multiple of 10.3x FY10E. But if one incorporates the retail business losses, the company looks expensive at 17.9x FY10E. As a consequence we downgrade CESC to Sell/Medium Risk (3M).

■ Target price hiked to Rs369 — We factor in a higher power business value of Rs388 (vs. Rs333 previously) on our: (1) earnings revision; and (2) lower WACC of 12.1% (13.1% previously). Negative NPV for power business support to retail is Rs58. We increase EV/Sales multiple for the retail to 1.0x FY08 (0.75x) in line with other peers.

■ Upside risks — Divestment, shutdown, and/or equity fund raising in SRL.

To see full report: CESC

>INDIA EQUITY STRATEGY (CITI)

New Government: Expectation = Action?

■ Broad blueprint spelt out — The new government has laid out its broad 5-year governance agenda – in the form of the president’s opening address to the parliament. This agenda covers socio, economic and political issues, and is wider and a little more detailed than the Congress Party’s pre-election manifesto. We do not believe there are any big surprises, or any key specifics, on economic policies; though the primary forum for that is the Budget, slated for the 1st week of July.

■ More socio-economic, than pure economic — The agenda of governance, expectedly, is most heavily biased toward socio-economic policies and objectives. These account for 7/10 top priorities of the government, and 90%+ of its 100-day plan – in sync with its pre-poll manifesto, and reflective of the mandate it has got. While expectations of a meaningful economic and policy change (and execution) are fair and will run alongside its socio-economic focus – we believe the ‘givens’ are in the area of rural infrastructure, health, education, agriculture and small business support, rather than headline economic reforms.

■ There is enough economics — The president has spelt out key economics issues and policies for the government – these cover: a) medium-term strategy for prudent fiscal management; b) counter-cyclical investment in the Infrastructure sector – PPP model, and policy changes; c) encouragement of foreign flows; d) recapitalization of government banks, and creating a pension regulator; e) rural infrastructure; f) land acquisition and rehabilitation laws; g) introduction of a
general service tax; h) 13,000MW of power capacity creation annually; and i) energy security, including oil exploration, coal policy and nuclear developments. If executed, and well, could well provide the economic action the market is expecting.

■ Right noises – wait for the budget — The new government has got off to a fairly positive start – ministerial allocations, right noises on economic policy and reform, and fairly positive GDP and market data to boost. While we do expect policy making to be an ongoing exercise – the budget, slated for early July, will be an early test of how much expectation actually translates into action.

>DOWNSTREAM R&M (CITI)

What Needs To Happen And What Can Happen?

■ Stocks up on de-regulation talk — BPCL, HPCL, and IOCL all spiked up today on a statement by the Oil Minister regarding a fresh proposal for pricing decontrol to be submitted to the Cabinet in six weeks. We think the proposal could contain: (i) petrol/diesel pricing freedom to a limit (say US$75 crude), and (ii) efforts to better direct LPG/SKO subsidy. This is not the first such proposal but implementation has proved to be tricky. Duty cuts may be difficult given fiscal constraints.

■ What are the stocks factoring in? — Our base case factors in “status quo” on LPG/SKO and pricing freedom on auto fuels, which in our view cannot result in a marketing margin beyond normative levels of US$5/bbl (Rs1.5/l). Assuming LPG is completely deregulated (SKO is outside bounds), then the FY10E EPS for BPCL, HPCL, IOC would go to Rs48 (+29%), Rs45 (+45%), and Rs55 (+10%), respectively. On current prices this translates to P/E’s of 9.7x, 8.0x, and 11.0x respectively, implying that the market is already pricing in decent probability of LPG de-regulation.

■ Lower oil prices remain critical — In the above scenario, net under-recovery (post upstream
sharing) comes to Rs100bn (on SKO only). For this to be recovered fully from over-recoveries on petrol/diesel, it is imperative that crude slides to US$50levels. Lower crude therefore remains critical to get constructive on downstream names, notwithstanding the government’s efforts to partially de-regulate.

■ Sell on newsflow — Newsflow on various proposals could remain strong for a few weeks. However, given that the Oil Ministry’s wish list has only been halfway met in the past, we would advice investors to use any strength as an exit opportunity. To see full report: DOWNSTREAM R&M.

To see full report: DOWNSTREAM R&M

>Bharti + MTN - FAQs (CITI)

• Current and proposed shareholding structure?
• What are the key shareholder and regulatory approvals that would be needed?
• Will Bharti be issuing new shares to be traded as GDRs in JSE?
• Why is Bharti doing this deal? What are the synergies?
• Does the 74% foreign ownership limit in India impact Bharti in any way?
• Will/Can MTN be given the 25% stake at the Bharti parent level?
• Why has the Bharti stock price been weak since the deal was announced? Who has been selling?
• What should MTN shareholders be thinking about into the scheme of arrangement?
• What should Bharti shareholders be thinking about?

To see full report: BHARTI AIRTEL

>AXIATA GROUP (CITI)

Downgrade to Sell: Fully Valued + Fire Behind Idea Smoke?

■ Fully valued now – We see the stock as fully valued on a sum-of-parts after its ~60% rise off March 2009 lows. Operational outlook is underwhelming as is the patchy execution track record. Valuations are expensive (14x PE, 6.0x EV/EBITDA) and dividend yield is paltry at best. We downgrade to Sell/High Risk (from Hold/High Risk) with a new target price of RM2.25 (from RM2.07).

■ More Idea? – The Business Standard in India reported (28 May 09) that Axiata intends to launch a voluntary offer for 20% of Idea at Rs130-135/share. Axiata has dismissed the report as speculation and cites a shareholders' agreement limiting Axiata's stake to 20% (at 14.99% now, 19% post Spice+Idea merger). Should a deal materialize as reported, though, we believe the market would focus on funding concerns (we est. US$1.8bn for the stake) and valuation
premiums (66% above CIRA TP of Rs80) as overshadowing long-term positives.

■ Overseas assets need work – We still believe that Axiata's stable of overseas assets hold long-term attractions, particularly given exposure to growth markets. Still, short-term challenges can't be ignored, with Dialog struggling with poor profitability and XL facing a funding crunch likely necessitating a rights issue. Celcom stays the main earnings and cash driver for now.

■ Cutting 2009 estimates – Following 1Q09 results, we cut 2009 earnings by 5.4%, reflecting weak Dialog and XL earnings but offset by stronger than expected Celcom performance. Our new TP of RM2.25 reflects higher Celcom contribution to NAV and CIRA's new TP for Idea of Rs80/ share.

To see full report: AXIATA GROUP

>INDIAN NATURAL GAS (CITI)

Looking for Value After Market Run-up

■ GAIL new top pick, TP of Rs339 — Given the recent run-up in the markets, we take a fresh look at our stock recommendations among Indian gas utilities. We now prefer GAIL over other gas utilities driven by recent underperformance (-10% vs. Sensex in the last month) and strong performance by GSPL, our erstwhile top pick (+12%). Our TP increase (from Rs288 to Rs339) is driven by lower WACC and subsidy assumptions, with further upside possible given conservative assumptions on tariffs and no value accretion from city gas.

■ Maintain Buy on GSPL — While GSPL growth outlook is more pronounced than GAIL, outperformance will likely be contingent on a change in the outcome, likely or perceived, of the social tax issue. We are increasing our TP to Rs70 following our lower WACC assumptions. While we continue with 30% social tax contribution, we are now assuming it to be tax deductible. Further upside could come from partial or complete revocation of the directive by the state gov’t.

■ PLNG stays Sell; prefer Ggas among city gas distributors — We maintain Sell (3H) on Petronet LNG, the best-performing stock in our universe, outperforming Sensex by 40% in last two months, as a robust global long-term LNG outlook drives uncertainty on the future viability of R-LNG in India. Amongst the city gas distributors, we prefer Ggas, Buy (1L), to IGL, Hold (2M), due to relatively lower regulatory risk and negligible impact of proposed increase in APM prices.

■ Increasing TPs on lower cost of capital — We are increasing TPs across our universe driven by our lower cost of capital assumptions, which now factor in riskfree rate of 6.5% and equity risk premium of 6.0%.

To see full report: INDIAN NATURAL GAS

>4Q09 EARNINGS TRACKER 2: LIKE THE MOOD…BETTER (CITI)

■ Flat so far, but better than modest expectations — About two thirds of India’s biggest companies have reported 4Q09 earnings so far, profit growth has been flat yoy (lowest in seven years), but ahead of modest expectations (-5%). This trend is consistent across Sensex companies (21/30), and across Citi’s coverage universe (80/138), but on a broader basis 294/500 companies have done better, growing profits 8% yoy. Mixed performance across companies with 39/80 beating expectations, 29 lagging, and 12 in-line. Bottom-line the 4Q results are a little better than expected, and may be contributing to the improved mood.

■ Sales slacken further, while margins hold out (again) — Operating trends have tracked the previous quarter (3Q09), sales growth has fallen (2-3% yoy vs. 6-8% expected), while margins remained largely stable yoy and qoq. This weak demand and/or deflationary environment is a distinct negative, particularly given that margin support is likely beginning to erode, in our view. While Jan-Mar'09 could well be a ‘bottom’ quarter (from a real and market mood/confidence perspective), weaker demand vs. margin mix would make a rebound that much harder.

■ Broader market doing better than market top end — Interestingly, the broader market is doing better than bigger companies, with 294/500 companies recording 8% growth in sales and earnings. This could suggest medium sized businesses have not been hurt as much as the larger ones (big companies did better on way up), challenging ‘Conventional Wisdom’ that mid-cap businesses are more vulnerable and therefore should be valued lower too.

■ Banks and Cement lead, while Metals and Autos bring up the rear — Domestic cyclicals surprised on the upside, perhaps a result of too much caution built in, while Autos and Metals bring up the rear. The sunrise businesses of the last year, Real Estate and Retailing, do worst – falling 80-90% (not far from expectations).

To see full report: INDIA EQUITY STRATEGY

>FUNDS FLOW AFTER MARCH (CITI)

■ Three major changes in country preferences — First, China has gone from one of the most overweight markets in February to 25bp underweight. Second, the underweight in Taiwan has narrowed by 100bps to the smallest in thirteen months. Third, Indonesia has moved from Neutral to Top-2 most overweight markets at Asian funds. Historically once the consensus moves a country from neutral to Top-2 it outperforms the region by 1000bps in the next six months.

■ Asian funds no longer hold a defensive portfolio — Asian funds’ overweight in Consumers has fallen from 516bps in October 2008 to the current 195bps. Telecom has now become a consensus underweight (previously the biggest overweight when markets tumbled). Asian funds are now moderately underweight Technology compared with a 430bp underweight at the 2007 market peak.

■ GEM funds the potential source of additional liquidity — With the resumption of strong inflows to Asian funds since the first week of March, yet cash weights remain at 2.9%, they are fully invested in our view. GEM funds, by contrast, see cash levels at 3.7%. With GEM funds still largely underweight Asia, and taking in more new money than Asian funds (65% more this week), by the time they unwind their position it could provide further liquidity to the region.

■ Inflows to Asian funds decrease for the second week to 2-month low — In particular, China fund inflows drop to US$19m vs. US$484m/week in the previous month.

To see full report: FUN WITH FLOWS

>COMMODITY HEAP (CITI)

Iron Ore – Closing the Circle

■ Chinese Iron Ore Imports Surge — Iron ore imports are up 25% YTD. Yet steel production is up a more modest 3%. The explanation is falling domestic production and inventory accumulation.

■ Supply Demand Reconciliation Only Partial — The supply demand balance for the first five months highlights two concerns. Firstly annualized crude steel production (510Mt) is well above our forecast for the year of 485Mt. Secondly, reported domestic iron ore production (677 Mt) and required supply of iron units (after imports and stock changes) implies a further fall in ore grade to 20% from 23% in 2008. However, it would be reasonable to believe that grade is increasing, given the 100 Mt production cut. We conclude that unreported inventory continues to build, perhaps by 30Mt.

■ Contract Price Settlements; China Will Probably Follow — We think it most likely that China’s steel mills will follow the contract benchmark settlements agreed between Rio Tinto, the JSM and Posco, although perhaps only following further drawn out negotiations.

■ China’s Options — As we see it China’s steel mills (led by Baosteel, with CISA as a strong voice) have four options: 1) settle in line with the JSM; 2) no settlement – as much as half China’s imports are priced on spot anyway; 3) negotiate a lower price – this would put Rio Tinto in an untenable position; 4) agree but on a short-term basis, with the provision to renegotiate quarterly. We would attach the highest probability to option 1.

To see full report: COMMODITY HEAP

>INDIA WIRELESS (CITI)

It's All About the Risk Premium

■ Stable government doesn’t alter fundamentals much — While competition will keep coming and is the key driver of subdued elasticity assumption in FY10E (3% MOU growth for 21% rev/min decline), a sharper-than-expected recovery in economic activity could improve that. No changes likely to 3G/MNP policy but M&A norms could be relaxed. Since it's early to factor the positives in numbers, the target revisions are solely a result of 50-100bps reduction in country risk premium.

■ Bharti – MTN offsets some of the India re-rating; still a Buy — Raising our target price to Rs930 based on WACC of 11.3% (from 12%). The lower WACC is due to a reduced risk premium though we add back 50bps for the perceived higher risk post-MTN. Dilution of India-centric play, and not the 4-5% EPS dilution, is a bigger issue for India-bound flows. However, MTN related overhang offers long-term entry points given Bharti’s execution track record and cheaper valuations (15x) relative to market (17x).

■ RCOM – Sell, Risk in vogue again, but fundamentals lagging — We reduce RCOM’s discount on Bharti’s target EV/E to 15% and value it at Rs270 based on EV/E of 7.8x FY10E. However, we eliminate any value from towerco (Rs26 earlier) to reflect the low visibility of tenancy. The jury is still out on GSM’s ability to drive faster growth; sustenance of traffic share post the free mins is key challenge.

■ Idea – M&A/cleaner play? but don’t compromise on valuations — Inclusion in MSCI, cleaner play (post Bharti’s MTN agenda) and M&A talk could benefit Idea. However, smaller scale and relative vulnerability (should competition worsen) means too much compromise on valuation is risky. Axiata open offer (if at all) would be factored in at Rs90-100. Downgrade to Sell with TP of Rs80 on EV/E of 7.8x and towerco at Rs21 .

To see full report: INDIA WIRELESS

>ASIA MACRO & STRATEGY OUTLOOK (CITI)

When it Rains, it Pours

■ The sharp rally in Asian assets is accompanied by both a rapid expansion of domestic liquidity and optimism about Asia prospects “relative” to the rest of the world. While relative growth optimism about the region is valid — strong fiscal, bank and household balance sheets are supportive — lingering risks need to be factored in. A sub-par recovery path in G2 on top of still significant inventory overhang would stall re-stocking momentum, and China’s investment-driven growth engine could worsen excess capacity.

■ Recent data confirm that economies are bottoming in the region. The growth rate bottomed in 4Q08, but even for countries still experiencing sharp contraction in 1Q09, like HK, SG and TW, we expect growth to turn sharply positive on a SAAR basis by 2Q09.

■ We remain fundamentally bullish on Asia FX over the medium to longer term. While we could see a near-term pull-back after a sustained run, we expect the longer-term appreciation story to remain intact on external flows, further anchored by CNY’s growing undervaluation as the dollar weakens. Our most aggressive FX appreciation expectations vs. spot in 12 months are in KRW, IDR and MYR.

■ Forces of “inflation” are currently winning over “deflation” – While we don’t foresee any monetary tightening in the near-term, we remain biased to pay rates (MY, TW) or steepeners (SG, TH) with the exception of IDR bonds, where we like being long on improving IDR sentiment, carry and BI accommodation.

■ Sovereign credit spreads are now close to or even tighter than pre-Lehman levels, so we see little value in going outright short protection on Asia CDS. We see more relative value opportunities with the Indonesia-Philippines CDS spread gap narrowing to 80-100bps and going long cash to play the negative basis.

To see full report: ASIA MACRO & STRATEGY OUTLOOK

>INDIA EQUITY STRATEGY (CITI)

Owning India Inc.: Foreign Ownership – Ebb...Before the Swell?

■ Market EBB: Foreign ownership at a 6-year low of 15.03% — Foreign ownership in the Indian market has hit a 6-year low of 15.03% as at March 2009 (latest data), valuing foreign ownership at c.$86bn, but falling 56bps in the quarter ($1.3bn outflow). This is a long way from the September 2007 peak of 21% ownership, a value high of $260bn, and an annual inflow peak of $17bn (CY2007).

■ Market SWELL: There has been a foreign flood — We estimate inflows from April-to date of $4.1bn have raised foreign ownership levels to c.15.6% of India’s Top500 companies, and that this portfolio value is now c.$130bn. This is amongst the most concentrated foreign inflows (Sept-Oct 2007 ($9.1bn) was the biggest, but there were outflows thereafter). This flood of funds is almost all foreign with domestic MFs negative in current quarter. Domestic Insurance (over a third of foreign money now) should be positive and stable (but no reliable intra-quarter data).

■ Underweight India/Equities: Domestic getting more defensive than foreigners — Institutional investors started the April quarter relatively defensively: a) FII’s underweight MSCI 46bps, b) Domestics with estimated 14-15% cash weightage, and c) Overall portfolio bias more defensive than at January 2009. Within portfolios, Foreigners are positioning less defensively than domestics in Jan-Mar 2009 quarter.

■ Sector Positioning — Financials and Industrials are key Overweights with foreigners and domestics. Energy (Reliance effect) and IT are consensus Underweights. Domestics are significantly Overweight Consumer Staples and foreigners are Overweight Telecom (Bharti effect). Relatively few changes in sector positioning in Jan-Mar 2009, although significant outperformance in beta sectors/stocks in Apr- May 2009 suggests the current quarter should see significant portfolio o re-casts.

To see full report: INDIA EQUITY STRATEGY

>EMERGING MARKETS MACRO AND STRATEGY OUTLOOK (CITI)

Out of the frying pan? Fiscal vulnerability takes centre stage

■ At the risk of great oversimplification, we think emerging economies have passed through two phases of the global crisis, and are now entering a third.



■ The first phase could be labelled the Financial Vulnerability Phase. At the centre of this was the loan-to-deposit ratio. Countries with a high loan-to-deposit ratio were vulnerable to the immediate consequences of the collapse in foreign banks’ desire for counterparty or credit risk; and their need to bring resources back to their own balance sheet.



■ An External Vulnerability Phase may have succeeded this, in which the central concern was with countries who, regardless of the health of their banking systems, became vulnerable because of the large size of their external financing needs. The External Vulnerability Phase coincided in some cases with the Financial Vulnerability Phase.



■ The External Vulnerability Phase seems to be at an end, thanks to i) sharp improvements in trade balances in many countries; ii) the IMF’s commitment to inject larger amounts of liquidity into emerging economies on easier terms; and iii) the re-emergence of risk appetite, particularly among bond and equity investors.



■ The import compression that has helped to improve the trade balance in many countries has a flipside in very weak growth. That in turn helps to give rise to the third phase of the crisis, a Fiscal Vulnerability Phase, as budgets come under pressure. Thanks to budget discipline in many countries during the past few years, we believe the Fiscal Vulnerability Phase poses fewer risks than what has passed before. The countries most at risk here are likely to be ones with unrealistic budget assumptions and high debt/GDP ratios.



To see full report: EMERGING MARKETS MACRO AND STRATEGY OUTLOOK