>EM anti-crisis measures (DEUTSCHE BANK)

Separating the wheat from the chaff

Emerging markets have put together sizeable stabilisation and support programmes and other measures to combat the effects of the financial crisis. Looking at the headline figures as announced by the respective governments, the largest packages are in UAE, China, Russia, Kuwait, Hong Kong and Kazakhstan, each amounting to at least 10% of GDP.

There are two main differences between anti-crisis measures in EMs and in developed markets. First, the majority of EM programmes do not contain significant recapitalisation schemes for banks, which to a large extent is due to the relatively good shape of many EM banking sectors. We built a composite index of financial soundness according to which Asian and Latin American banking sectors are faring quite well.

Second, emerging markets have had to fight the EM-specific problem of FX liquidity shortages. When a crisis erupts, typically EM currencies depreciate sharply, creating problems in the balance sheets of governments (less so in recent years) and the private sector. EM governments have reacted by injecting FX liquidity and intervening in the market to contain currency depreciation. This has shown that the amount of FX reserves in relation to external financing requirements is still crucial to the assessment of countries’ resilience to external shocks. From a policy perspective, accumulating FX reserves still seems to be pretty good insurance.

As in the case of developed markets, there is a trade-off between fiscal stimulus and the sustainability of fiscal policy. Given emerging markets’ history of macroeconomic instability, the issue of credibility of policies is especially important for EMs. In terms of their fiscal health at the onset of the crisis, the Gulf countries, Russia, Chile and Hong Kong possessed outstandingly high capacity to implement countercyclical measures.

In recent weeks there have been some signs of stabilisation in financial markets and selected economic data. It is difficult to assess to what extent stimulus packages have played a role (there are indications that this is the case with China). To be sure, the much-enhanced IMF role in providing assistance as well as massive support measures in developed markets have been critical, but the reaction of emerging market governments has been constructive overall, which bodes well for the post-crisis recovery period.

To see full report: ANTI-CRISIS MEASURES

>GLOBAL BANKING TRENDS AFTER THE CRISIS (DEUTSCHE BANK)

Introduction
The ongoing global financial crisis, with its historic dimensions, will have a lasting impact on the world economy, the worldwide distribution of influence and power and, above all, on banks. In this paper, we first provide a brief overview of the consequences of the crisis for US and European banks. This entails taking a look at how much value has been destroyed in the banking industry, which regulatory response is looming, and what issues arise from a sweeping shift in ownership structures as well as in the debate about deleveraging and an increase in capital levels. The second part focuses on the impact the crisis may have on major structural trends that have been shaping the industry for the last 15 years. We will analyse the effects on consolidation, on the structure of revenues and on the geographic composition of banks’ business, i.e. on the internationalisation strategies of European banks and on interstate banking in the US.

The near-term prospects for US and European banks are decidedly grim. The global financial crisis will bring about the most significant changes to their operating framework banks have seen in decades. There will be fundamental re-regulation of the industry, ownership structures are shifting towards heavier state involvement and investor scrutiny is rising strongly. Equity ratios will be substantially higher. As a result, growth and profitability of the banking sector as a whole are likely to decline.

Lean years lie ahead for US banks. Performance improvements during the last 15 years have often been due to strong lending growth and low credit losses. As private households reduce their indebtedness, revenue growth in some European countries but especially the US may remain depressed for several years. With weak loan growth and a return of higher loan losses as well as a fundamentally diminished importance of trading income and modern capital market
activities such as securitisation, banks may be lacking major growth drivers.

Consolidation to continue but with a different focus. While there will still be a considerable number of deals, transaction volumes are likely to decline and restructuring stories rather than strategic M&A may dominate. The probability of domestic deals has increased, while that of cross-border mergers has declined.

Internationalisation of European banks likely to slow. Uncertainty about the future prospects especially of foreign markets and strictly national banking sector stabilisation programmes are triggering a re-orientation towards domestic markets. This is more relevant for European banks that have greatly expanded into other European countries recently, while American banks overall may continue to target the national market rather than going abroad.

To see full report: BANKING TRENDS

>MEDIUM TERM INFLATION RISKS (DEUTSCHE BANK)

Medium-term inflation risks – how much of a threat are they?

Rarely has the inflation outlook given rise to such differences in opinion as today. While some experts – including the OECD – warn against deflation, others believe inflation will accelerate strongly in the medium run.

To be sure, monetary and fiscal policies are currently moving in unknown territory so – of course – caution is advised in the analysis. However, we consider worries about inflation to be exaggerated, even on a 3 to 5-year horizon.

Such worries have been triggered by the huge expansion in central bank balance sheets. But this does not automatically lead to a surge in the money supply, as recent data on money supply growth in the euro area has shown.

When the credit multiplier returns to normal, both the Fed and the ECB will scale back their open-market operations to mop up liquidity. The same holds for fiscal policy with the current attempts to at least partly offset the slump in private-sector demand. Scenarios for reducing the massive budget deficits are already being developed both in the US and in Brussels, to be
implemented once business activity picks up again.

Permanent monetisation of public-sector debt by the central banks or its reduction via higher inflation are unlikely on account of the following structural changes:
— Independent central banks which safeguard the efforts expended on anchoring inflation expectations at a low level.

— The increasing role of international capital markets that are needed for the seamless refinancing of public-sector debt (around one-seventh per year). In addition, the vast majority of new issuance is acquired by institutional investors that react extremely quickly to changes in the inflation outlook. Higher inflation and thus rising interest rates therefore do not represent an attractive option for governments.

— The low money illusion of households that reduces the opportunity for policymakers to levy a stealth “inflation tax”.

— The growing inflation aversion of ageing societies with large financial wealth and on average fewer opportunities to save more to offset the depreciation of their assets caused by rising inflation.

— As much as 38% of outstanding US Treasuries are held by the US social security system. Since pension insurance payments are index-linked, higher inflation would cause huge problems.

In light of the deep recession and dramatic capacity underutilisation, inflation looks set to remain extremely moderate in 2009 and 2010 – in some cases price levels will fall – and not exceed 2-3% p.a. in the larger industrial countries over the medium term.

To see full report: INFLATION

>TRENDS & PROSPECTS IN LIGHT OF THE FINANCIAL CRISIS (DEUTSCHE BANK)

EMU(ECONOMIC & MONETARY UNION): A Role Model for an Asian Monetary Union?

> Some euro lessons for East Asia
> Aims and prerequisites for AMU
> Milestones on road to AMU: Food for Thought
> AMU, financial crisis and global monetary system

Some euro lessons for East Asia

■ The euro celebrated its 10th anniversary on Jan 1, 2009 Main message: The euro has been a success story so far. The main features of its success have been

• Low inflation rates (1999-2008 annual avg. 2.1%)
• Relatively low (real) interest rates
• Boost to trade and FDI
• Catalyst for financial market integration
• Growing international role as trade, investment and reserve currency behind the dollar

■ While EMU has fulfilled many expectations it also has a mixed record and has brought some disappointments. Mixed performance regarding fiscal discipline

• Incentive to consolidate in order to qualify for EMU

• Stability and Growth Pact (SGP) proved its worth in good times but substantial problems when growth has been weak (2002-05; 2009-?)

• Reform of the SGP in 2005 was positive

–Strengthening of the preventive arm(focus on fiscal consolidation in good times, 0.5% of GDP p.a.)

–Greater flexibility of the corrective arm(e.g. longer adjustment period to correct an excessive budget deficit)

• Political will is, however, essential!

■ Main disappointments of EMU: growth and enlargement

Aims and prerequisites for AMU

■ AMU objectives likely to be similar to those of EMU

• Asean objectives specified but not yet AMU objectives. The former likely to be key for AMU: growth, social progress, regional peace, stability

• New Asean treaty needed to lay down aims and prerequisites for joining

• The statute of the ECB could serve as a blueprint for a common central bank in AMU:Priority to price stability (precondition for sustainable growth), independence, ban on financing budget deficits

• Other objectives for an AMU central bank: 1. Support for growth (if price stability is given); 2. key role in securing financial market stability (following experience of financial crisis; potential problem: moral hazard!)

• Ensuring fiscal disciplinein order to avoid an overstretching of the common monetary policy resulting from too lax (national) fiscal policies (Asian SGP!)

To see full report: EMU

>INDIAN BANKS' VALUATIONS (DEUTSCHE BANK)

How blue is my sky

■ Advising caution - we could be pushing the limits in valuation
An in-depth study of valuations of Indian financials from the fundamental, cyclical and regional standpoint, as well as multiple sensitivity analyses re-inforce our belief that the sector could be stretched. This in turn implies that positive performance now becomes almost wholly dependent on continued strength of market liquidity. While news flow may not be incrementally negative, material risks remain. We retain our relative preference for private banks.

■ Historical and regional context: valuation cushion seems to be thinning
Indian banks have outperformed regional peers recently and even the valuation expansion has been higher. Private banks are trading at a lower-than-average premium to Bankex, whereas PSU banks’ discount to Bankex has narrowed. Nearly all banks are trading at higher than historical average valuations. Almost all banks are trading at or above the “recovered” valuation in 2004 when the sector last rode out of a downturn. We have also applied Chinese new business multiples
to Indian insurers, even though the former are more profitable.

■ Need aggressive assumptions to justify higher TPs or even current prices
We demonstrate that present stock prices do factor in elevated levels of expectations, except HDFC Bank and PNB. TPs increase by 0-23% under bullish assumptions, not good enough to offer a cushion. A rollover to FY11 as the base leads to positive upside only in three out of 13 cases. Meaningful positive upsides are obtained only when we apply historically highest-ever valuations or highestever premium to Bankex, and to a lesser extent the “recovered” valuation of 2004. Overall cushion appears to be high for HDFC Bank and low for SBI.

■ Key valuation drivers do not support peak-cycle valuations
Outlook for benchmark interest rates – generally a powerful short-term driver of bank valuations – is no longer benign due to large government borrowings and rising inflationary expectations. RoEs face several challenges, particularly for rapidly growing banks. We also demonstrate the interesting strong correlation between earnings volatility and valuations, but also do not see reasons for the volatility to go down in the near future. Structural drivers such as new products, consolidation and legal changes are also unlikely to be forthcoming.

■ Valuations and risks
We value lending businesses on the Gordon Growth model, insurance on appraisal value, asset management on % of AUM and other non-banking businesses on P/E. The key risks to our pessimistic stand are strong flows, particularly in the context of the progressively reduced foreign investor positions in Indian financials relative to benchmarks, and a significant drop in cost of funds improving margins sharply.

To see full reports: INDIAN BANKS

>TATA STEEL LIMITED (DEUTSCHE BANK)

Is valuation catch up sustainable?

■ Cutting estimates on global steel price forecast cut
We are cutting our FY10 and FY11 EPS estimates by 48% and 13%, respectively, following downward revisions to DB's global steel price forecasts. We have seen a sharp expansion in steel equity valuations across world geographies recently on expectations of restocking. Following the expansion in global valuation multiples for steel equities, we are raising TP for Tata Steel to INR410 but believe the valuation expansion might not sustain if we do not see more solid indicators of steel demand recovery, particularly in Europe. Maintain Hold.

■ Debt covenant reset reduces balance sheet related risks…
Tata Steel has reached agreement with its lenders to reset the covenants on its Corus acquisition related senior debt facility. As per the agreement, testing of Corus’s earnings related covenants will be suspended till Mar’10 without any increase in the current interest costs. We believe that the reset is a strong positive for the company because it eliminates the risk of refinancing compulsions.

■ .. but earnings recovery still elusive at Corus
Last year, the global liquidity crisis had forced investor attention on Tata Steel to shift from income statement to balance sheet. We believe that though the covenant reset now sharply reduces balance sheet risks, income statement risks will continue to dominate investor mindsets until the European steel industry shows signs of a sustainable rebound.

■ TP raised to INR410/share; Maintain Hold
Our TP of INR410 is based on a SOTP valuation - Indian operations valued at FY10E EV/EBITDA of 6.4x, UK ops valued at FY10E EV/EBITDA of 5.1x, Asia ops valued at FY10E EV/EBITDA of 2x. Our target price translates into a blended FY10E EV/EBITDA multiple of 5.7x. Upside risks include: tariff barriers in Europe, downside risks include: protracted steel down cycle.

To see full report: TATA STEEL

>IRB INFRASTRUCTURE DEVELOPERS (DEUTSCHE BANK)

Beneficiary of pick-up in road investments

Demand environment looks buoyant; we reiterate Hold
Road sector infrastructure is likely to see a major up-tick from the government (a) accelerating clearances and adding sweeteners to make road projects more attractive; and (b) giving developers free capacity to bid for new projects as their existing road projects near completion. The sectoral headwinds are positive for IRB, which is one of the largest toll operators in the country. Our revised target price assumes INR40bn in new awards in FY10-11e. With a 30% out-performance in the last month vs. the BSE Sensex and our earnings cut, we reiterate Hold.

Demand environment becoming more benign
Over the next 12-18 months, we expect a flurry of profitable road projects to be awarded with (a) a higher concession period of 20-30 years (vs. 15-20 years previously); and (b) lesser revenue share with the government (vs. the peak of 35-40% in FY08-09). This could drive E&C EBITDA margins to 16% in FY10e, which could improve marginally by 100bps in FY11e.

Our revised estimates factor in new awards, are below consensus for FY10
We lower our traffic assumptions for Surat-Bharuch (by 20%) as well as for Surat- Dahisar in FY10e due to the slowdown in the commercial vehicle movement. Accordingly, we cut our EPS estimates by 39% in FY10e and 2% in FY10e. Our assumptions factor in traffic volume growth of 4-6%, which is in line with historical averages for the respective road stretches.

Reiterate Hold with a target price of INR140/share
Our SOTP valuation calculates the NPV of the toll road business at a CoE of 12.5% (from 15% due to lower equity risk premiums) and EV/EBITDA of the E&C business at 14x FY10e (4x FY09e, increased due to improved demand visibility). Our target price implies an exit P/E of 15.6x FY10e. Key upside/downside risks: (a) traffic growth variability (1ppt change in traffic growth affects target price by 4%); and (b) variability in E&C margins (a 100bps fall could lower EPS by 3% in FY10e).
Downside risks include developers resorting to significantly higher revenue shares, leading to lower NPV projects.

To see full report: IRB INFRASTRUCTURE

>INDIA PROPERTY (DEUTSCHE BANK)

Liquidity driven TP upgrade, but where's the demand?

■ Despite upgrading TP driven by liquidity, retain UW on large outperformance
This capital-intensive sector was caught in a pincer of weak operational cashflows and asset-liability mismatch in a tight financial market. Improving liquidity in financial markets is resulting in 55% increase in float (with significant more to go) by financially savvy developers. This reconfirms our view that physical demand is yet to see any significant pickup. Despite the liquidity driven increase in TP by up to 150%, the 147% spike in Realty Index in last 3m leads us to retain UW rating.

■ Liquidity leads us to increase TP, despite retaining all other assumptions
This capital-intensive sector was caught in a pincer – significant mismatch in operational cashflows and assets-liabilities in a tight financial market resulting in a 90% underperformance from its peak in Jan’08 to the bottom in Feb’09. Improving global financial markets as also support by local banks (with significant growth in outstanding debt and restructuring of old debt) has resulted in a significant lowering of the bankruptcy risk for the sector. Hence, while we retain all other major assumptions, driven by improving liquidity, we cut WACC by up to 200 basis points and a sharp (5-30%) cut in discount to GAV (Gross Asset Value) resulting in up to 150% increase in TP.

■ But fundamentals are yet to fall in place as seen by the rush to raise equity
(a) Despite the sharp cut in prices of new launches that are redesigned with smaller apartments and fewer amenities resulting in ~60% fall in unit prices and upto 300bp fall in mortgage rates, demand seems to have picked up only at city centric locations of Mumbai and NCR. (b) Developers admit that while worse seems behind, demand is yet to pickup in residential with other verticals being further behind. (c) Data on outstanding mortgages available till Feb’09 have shown a consistent and sharp fall in growth from Jun’06, while outstanding credit to developers has ramped up from Feb’08. (d) Data available for cement demand till Apr’09 indicates no significant pickup in last few months (e) Almost all the fresh equity raising in India seems to have been by developers. Despite most developers being reasonably aggressive and BSE Real being 71% below its Jan’08 peak currently, the sector has seen 55% increase in free float from mid Apr’09. Infact proposed issuances could result in upto 140% increase in free float from mid Apr’09. This clearly indicates their unwillingness to “wait for better times” for diluting. It also raises the threat of significant flow of paper.

■ Despite the significant increase in TP, retain most company ratings; Risks
Liquidity driven upgrade in TP by up to 150%. However with a 147% spike in BSE Realty Index vis-à-vis 65% for Sensex in last 3m, we retain most ratings (Hold on DLF and Unitech and Sell on Puravankara and Sobha), while downgrading IBREL to Hold as we now do not see the need to “hide” in a good B/S. Risks: Improving macro environment (with higher GDP growth and a better outlook for IT/ITES), aggressive price cuts by developers’ kick-starting demand across regions and across verticals and continuing liquidity in financial markets.

To see full report: INDIA PROPERTY

>CURRENT ISSUES (DEUTSCHE BANK)

Back to the bad old days?
The return of protectionism

The WTO and the World Bank report a rapid increase in protectionist measures since the beginning of the economic crisis. The World Bank has registered 89 new restrictions on trade since October 2008, 23 since the London G20 summit in early April alone, and the WTO an even greater number still. Protectionist measures have increased particularly since the spillover of the crisis to the real economy. Protectionism is more topical than ever.

There is still a lobby for protectionist measures. In times of slumping national and international demand, countries and companies will continue to favour beggar-thy-neighbour measures which will (unjustifiably) make their products more competitive than those of foreign rivals or else shield them from competition from the outset.

Tariff hikes account for “only” about one-third of the measures recorded world-wide – protectionism has many faces: non-tariff barriers to trade and the abuse of anti-dumping measures, subsidisation of national industries or, very lately, calls to favour domestic products and companies in national economic stimulus packages, and restrictions on international capital flows or immigration.

The competition and trade-distorting effects of subsidies pose the biggest risk. In times of strong intra-industry trade the focus of protectionism is shifting away from discriminating against foreign competitors by imposing tariffs towards actively providing preferential treatment to domestic firms via financial aid. The global automobile industry is a case in point. Retaliatory measures are the response.

These factors threaten to unleash a spiral of protectionism that perhaps may not choke off the global recovery, but it will partly delay its progress. As regards monetary and fiscal policy, the authorities have learnt the right lessons from the Great Depression. What this means here is that policymakers must not sacrifice medium-term growth opportunities for near-term protection interests. Shoring up open markets and free trade is the next major challenge in a globally coordinated drive to cope with the crisis.

To see full report: CURRENT ISSUES

>INDIA EQUITY STRATEGY (DEUTSCHE BANK)

Return of the "Feel good factor"

Electoral verdict: a big positive surprise; Raising Sensex target to 14,500
The surprise electoral verdict where the incumbent UPA was returned to power with a far more decisive mandate (relative to 2004) has come as a huge surprise – surpassing the most optimistic forecast. The political platform thus delivered to the Congress party now raises huge expectations on the roadmap and velocity of economic reform – disinvestment, increasing foreign direct investments, pension and insurance sector reforms etc – which had come to a virtual standstill under the UPA’s previous administration. We believe the verdict is one of those rare instances which justify a re-rating of the Indian equity market. Consequently we are raising our Sensex target to 14,500.

Buy beta with added focus on large cap domestic cyclicals
We see the return of a ‘feel good factor’ in India after a long gap. The return of the feel good factor coupled with our earlier assessment of an economic rebound in 2HFY2010 leads us to recommend investors to seek an aggressive portfolio with growth focused, high beta, domestic plays. Our top picks – DLF, Unitech, Larsen and Toubro, BHEL, HDFC Bank and Mahindra and Mahindra. Investors may also want to look at companies in search of balance sheet restructuring (Tata Steel,
Hindalco), which should be able to raise funds relatively more easily and sharply reduce balance sheet related risks.

Move away from the classical defensives.
We recommend investors to lighten up on the classical defensives and go underweight pharmaceuticals, telecom and consumer staples: Underweight Bharti, Sun Pharma, Dr Reddy’s and Hindustan Lever.

Runaway expectations from union budget, increasing equity issuance are key risks for market
The union budget (expected in July), is likely to be the next key milestone for the markets. We confess that this is going to be one of those budgets where expectations will run very high as the market will look to the government to deliver on the lost years of its earlier administration. Political realities (state election calendar, etc) may not allow government to be too nimble on reforms in its first budget, despite positive intent. We also remain cautious on a spate of new issues supply (private placements, equity raising) which could soak up liquidity from the secondary markets.

To see full report: INDIA EQUITY STRATEGY

>BANK OF INDIA (DEUTSCHE BANK)

Analyst meeting takeaways

■ Consolidation and transition phase, maintain Hold
We believe that the long period of consistently high earnings growth for Bank of India is over. Loan growth is highly likely to moderate in the present sluggish environment, margins may remain under pressure even if they do not fall much, low-cost deposit ratio has failed to pick up for a long time and asset quality headwinds are increasing. An added element of uncertainty is an imminent CEO change in June’09. TP upside to the current price is also limited-Hold.

■ Admits to challenges but maintains a ~20% topline growth target for FY10
The management is targeting a 22% loan growth and 20% deposit growth for FY10. Though their medium term NIM target is 3%, they admit that there is pressure on spreads due to high cost of funds and yields dropping sharply. They believe that it could take still another two quarters for the high-cost deposits to run off. They also have the tough task of taking the low-cost deposit ratio (CASA) from 31% to 35% in FY10 – CASA had fallen in FY09 due to strong growth, high term deposit rates and an over-aggressive deposit mobilization campaign.

■ Asset quality headwinds visible; bank’s disclosures creditably transparent
BoI’s slippages have been rising both on a basic and lagged basis, and Q4FY09 NPL formation was high compared to historical trends. The bank provided the most succinct details on restructured assets that we have seen recently, and their classification norms are arguably conservative. However, the disclosures indicate significant stress: total restructured assets including pending applications 6.3% of loans, 98% of the restructuring bilateral instead of through the industry forum, and SMEs accounting for ~30% of the total restructuring.

■ Valuations and risks
We adopt a single-stage Gordon Growth model (P/BV-RoE) for valuing BoI, as we do for all PSU banks, leading to a rounded-off target price of INR250/share. Main downside risk includes sharp slowdown in international business and lower fee income growth. Key upside risk includes lower than expected wage revision and pension liabilities.

To see full report: BANK OF INDIA

>ONGC (DEUTSCHE BANK)

Downgrade to Hold on rich valuations post recent rally

No positive catalysts; subsidy concerns may revive
We downgrade ONGC from Buy to Hold as the stock offers a 6% total return to our INR787/sh TP. The stock has risen 28%YTD (Sensex up 14%) and now implies US$70/bbl Brent assuming subsidy sharing. The stock will likely be capped by concerns about the subsidy burden in H1FY10, following the Q4FY09 reprieve and the lack of visible catalysts.

Lacklustre volumes, policy concerns dampen FY09-11 earnings outlook
The adhoc government subsidy policy and ONGC’s inconsistent track record in volume growth remain a concern. Our higher subsidy assumptions are based on i) the recent rise in global fuel prices and ii) cuts in domestic fuel prices on petrol, diesel and LPG – a setback for ONGC’s earnings outlook for the next two years.

Our Hold rating reflects a neutral risk/reward
The positives are Deutsche Bank’s rising oil deck from CY10E and likely positive newsflow on EoR/new initiatives and new acreage/reserves. Key negatives: i) an uncertain growth outlook; ii) revival of subsidy worries as India is electing a new government; and iii) rich valuations and a contracting oil demand outlook.

Volatile oil price/newsflow poses 10-15% rise/fall to the stock
We retain our DCF-based TP for ONGC at INR787/sh (over FY10-15E, nil terminal growth) using Deutsche Bank’s India WACC assumption of 13% and EV/2P reserves for OVL. Upside risks: new oil finds, gas price deregulation and subsidy reform. Downside risks: a sharp collapse in oil demand/prices, policy concerns, execution/political risk in domestic/overseas projects, and lack of transparency in its overseas arm OVL. (See pp. 5-6 for more on valuations and risks.)

To see full report: ONGC

>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

>India Steel (Deutsche Bank)

Global steel production down 24% YoY

Global crude steel production declines for the seventh consecutive month...
The cavalry of global steel production cuts continued for seventh consecutive month with a 24% YoY decline in global crude steel production in Mar'09 taking cumulative decline for 1QCY09 to 23% YoY. EU and North America continue to stand out as regions with the most aggressive supply response with YoY production decline of 45% and 52% respectively in Mar'09. China is the only major region that has defied global trends with only a marginal decline of 0.3% YoY in crude steel production in Mar'09.

…But global steel pricing remains weak
Though the global production response has been very aggressive, we are yet to see any sustainable recovery in global steel prices. Our global steel pricing table (Page 3) shows a WoW decline across all major world geographies. Our global team recently cut the HRC price forecasts for U.S. and Europe by an average of 14% in 2009 and 7% in 2010 to reflect market surpluses and reduced costs.

Demand scenario in Europe remains weak; more production cuts required
While Europe has been quite aggressive in reducing steel production – down 44% in 1QCY09, our global steel team believes that it lags US in the inventory destocking cycle and more production cuts are likely required to restore the demand supply equilibrium. Arcelor Mittal has already guided for the continuation of its steel production cuts in Europe into the second quarter in response to the exceptionally weak economic conditions.

Marginal capacity in China remains the key focus area
China continues to stand out as the only major region in the world that has not participated in the global steel production response. The importance of China in the present scenario can not be over emphasized given that its contribution to global crude steel production has increased to 49% in 1Q’CY09 from 38% in CY08. The flexible excess capacity in China remains nimble in responding to the fluctuating cash margins. Though our Chinese steel analyst estimates that the cash margins are negative now, he also expects the cycle to repeat itself over the
course of 2009.

Reiterate SAIL as top pick
We continue to prefer SAIL (SAIL.BO, INR108, BUY) as our top pick in the Indian steel sector. The high exposure to domestic demand and low risk government funded projects provides visibility over SAIL’s ability to push volume sales. Also, strong balance sheet and net cash position removes any refinancing risk. We value SAIL on a FY10 EV/EBITDA of 2.7x leading to a TP of INR108/share. Tata Steel (TISC.BO, INR263, HOLD) remains a Hold with its high exposure to the weak. European steel market through Corus and highly levered balance sheet. We have a TP of INR192/share for Tata Steel based on SOTP valuation. A protracted downcycle in steel remains the biggest downside risk factor. (See page 4 for details on valuation and risks).

To see full report: INDIA STEEL

>Talking Point (Deutsche Bank)

Deficit spending: You'd better keep an eye on it, too

Deficit spending can be helpful to overcome the current economic crisis. However, the necessity to stimulate the economy does not justify public spending sprees. Economic stimulus programmes come with a caveat. Strongly increasing public deficits and public debt can weaken major forces of economic growth.

In Germany as well, higher government expenditure is the policy of choice to fend off the economic crisis. Two stimulus packages of EUR 80 bn have already been enacted by the federal government. The spending programmes, which equal roughly 3% of GDP, are contentious. While advocates expect a sustained boost to economic growth, critics fear that the packages will fail to heal the recession.

The programmes are designed to reinvigorate the weak demand for goods and services and prevent a free fall of the economy. The German government and other advocates do not only count on the direct effects of the rise in public spending. They also expect a boost to private-sector consumption and investment activity. Under the optimistic scenario, the measures will not only push up GDP by EUR 80 bn; the actual added value is expected to be higher as the measures will have a positive effect on the business climate. This will keep more employees on the payroll and thus stimulate consumption and investment, it is argued. But economic stimulus programmes come with a caveat. They push up national debt. This is part of the deal, so to speak. If the government now wants to spend more for economic stimulus programmes such as road infrastructure projects and the refurbishment of public buildings, and supports many citizens wishing to buy a new car by implementing the scrapping bonus, it must not, of course, finance these measures by simultaneous tax increases. The only instrument for the government to stimulate demand is debt financing.

To see full report: TALKING POINT