>INDIA: FINANCIAL SERVICES (GOLDMAN SACH)

Back to secular growth path; upgrade SBI to Buy, add to Conv. list

Turning constructive on improved growth outlook
We believe the Indian economy and the financial sector are returning back to a potential growth path, post a period of adjustment to the intense dislocation in the global economic environment. We now turn constructive on Indian financials due to better fundamentals: 1) we forecast aggregate net income growth for the sector to rebound strongly from a subdued level of 1% in 2009E to 32% in 2010E and 23% in 2011E due to acceleration in loan growth, rising NIM and stable credit costs; 2) we forecast ROE to rise from 13% in 2009E to 17% in 2011E reflecting a pro-cyclical environment. We raise our 2009E-2011E EPS by up to 73% and our 12-m TP for stocks under our coverage by 26%-115%.

We see GARP ideas despite rally in stock prices
We turn constructive from our earlier cautious stance which was based on concerns about potential increase in NPL and credit costs. We note that the run-up in share prices since the lows seen in March 2009 partially reflects the improved outlook for the operating environment. However, we highlight potential GARP ideas based on sustained earnings growth, underperformance relative to benchmark index and inexpensive valuations despite the run-up.

Upgrade SBI to Buy, add to Conviction list; PNB to Buy from Sell
We upgrade SBI (SBI.BO) to Buy and add it to our Conviction list and reiterate Buy on Axis (AXBK.BO). Further, we upgrade PNB (PNBK.BO) and IOB (IOBK.BO) to Buy from Sell and Neutral, respectively; we also upgrade BOB (BOB.BO) to Neutral from Sell.

Add IDFC to Conviction Sell list; downgrade IBFSL to Sell
We downgrade HDFC (HDFC.BO)and ICICIB (ICBK.BO) to Neutral from Buy as we believe current valuations factor in potential upside from their respective operating fundamentals. We downgrade IBFSL (IBUL.BO) to Sell due to a strong price rally and concerns arising from a weak 4Q2008 performance. We maintain Sell on IDFC (IDFC.BO), and add it to our Conviction list, and on KMB (KTKM.BO); we maintain Neutral on HDFCB (HDBK.BO).

Key risks
Setback to growth expectations for the economy, rise in interest rates (policy rate as well as long bond yields), and deterioration in credit quality of loans for banks.

To see full report: FINANCIAL SERVICES

>Ten Things for India to Achieve its 2050 Potential (GOLDMAN SACH)

• As we have shown before, India could be 40 times bigger by 2050.
• To achieve this, India needs to implement many changes.
• India needs to improve its governance, control inflation, introduce credible fiscal policy, liberalise financial markets and increase trade with its neighbours.
• It also needs both to significantly raise its basic educational standards, and increase the quality and quantity of its universities.
• India needs to boost agricultural productivity, improve its infrastructure and environmental quality.
• Delivery of all these would ensure strong, persistent, medium to longterm growth, allowing India to reach its amazing potential.

To see full report: GLOBAL ECONOMICS PAPER

>INDIA: ENERGY: GAS (GOLDMAN SACH)

Strategic impact of adverse court verdict makes it sensitive for RIL

Unfavourable verdict for RIL; but pricing dispute could linger on
The Bombay High Court has ruled that Reliance Natural Resources (RNRL, RENR.BO, Not Covered) is entitled to receive 28mmscmd of gas supplies from Reliance Industries (RIL, RELI.BO) operated KG D-6 block at US$2.34/mmBtu for a period of 17 years. This is against our floor price assumption of US$4.2/mmBtu – per government guidelines. While market has reacted sharply on this news, we believe the dispute could linger for a while as RIL can appeal against the ruling in
Supreme Court in absence of reconciliation with RNRL within a month (as per court order). In such a scenario, the Supreme Court, typically having a broader perspective of cases, could consider the national significance of D-6 gas project, rather than focusing only on the terms of the RIL-RNRL gas sales agreement.

D-6 valuation could reduce by Rs140/sh - already in the price
Assuming that the government would extract its share of D-6 revenues at its directed gas price of US$4.2/mmBtu, the valuation of D-6 block could reduce by Rs140/sh, which we think is already reflected in the share price. Our calculation also assumes that RNRL can only source gas when Reliance Power’s plants start getting commissioned in FY12E, since D-6 gas cannot be used for trading. This implies that RIL’s FY10E/11E EPS of Rs138.6 / Rs203.44 are unlikely to be affected.
We have not assumed any negative read-across for RIL’s gas supply to other consumers.

But the long term impact of the verdict makes the issue sensitive
Apart from affecting RIL’s EPS from FY12E, low gas prices and high govt share could turn RIL’s cash income from D-6 negative starting from FY20E. We believe RIL could either stop D-6 operations then or, by corollary, could go slow on D-6 capex. Moreover, RNRL could impact RIL’s future gas projects as it would have the option to source all or 40% of RIL’s gas beyond 53 mmscmd of production from all blocks auctioned until 18 June 2005, though at market prices. We keep our Buy on RIL with 12-m SOTP-based TP of Rs 2430 (upside of 13%). Key risk: delay in D-6 ramp-up. We await further clarity on the dispute.

Inability to trade in gas implies RNRL cannot benefit from verdict
Currently, RNRL stock is implying marketing margin of US$1.54/mmBtu (17 years, 28mmscmd gas) vs prevalent margin of US$0.12/mmBtu. But since the gas agreement mentions D-6 gas cannot be traded, we believe RNRL is unlikely to be able to charge these margins as of now, which otherwise imply upside risk for the industry’s margins.

To see full report: ENERGY

>RELIANCE POWER (GOLDMAN SACH)

Benefits of court ruling are already in price; re-iterate Sell

What's changed
The Bombay high court ruled today (June 15) that Reliance Natural Resources (RNRL) is entitled to receive 28mmmsmd of gas supplies from Reliance Industries (RIL) operated KG D-6 block at US$2.34/mmBtu for a period of 17 years. We believe RNRL is likely to re-sell the gas to Reliance Power (RPWR) which has10.3GW of planned capacity using gas as fuel.

Implications
The court ruling will benefit RPWR’s upcoming gas based power plants in Dadri (7.8GW) and Shahapur (2.6GW) which constitute about 32% of RPWR base case NAV and operate partly on merchant mechanism. While we have assumed availability of gas supplies for operation of these
plants, we did not reflect the benefits of lower gas price (US$2.34/mmbtu against our assumption of US$4.2/mmBtu) in our base case valuation primarily due to 1) uncertainties relating to price at which RNRL will supply gas to RPWR; and 2) pending gas sales agreement between RIL-RNRL.
Our calculations indicate that our base case NAV would increase to Rs140 from Rs105/share in the event RPWR gas based plants will receive gas at US$2.34/mmBtu.

Valuation
We re-iterate Sell (Conviction List) on RPWR with 12-m TP of Rs105 (earlier 90) implying 48% downside. We rolled forward our TP to FY11E and decreased our cost of equity assumptions to 13% from 15% to reflect low funding risk. RPWR share price is implying near perfect execution of its 32GW of power projects in the pipeline which will come on-stream over the next 7-10 years. With most of the positives already in the price, we believe RPWR share price has more downside risks with delays in achieving its project milestones. RPWR is trading at FY11E P/B of 3.4X, 20% premium to Indian peers.

Key risks
Completion of projects milestones ahead of timelines we expect.

To see full report: RELIANCE POWER

>INDIA APRIL 2009 INDSUTRIAL PRODUCTION (GOLDMAN SACHS)

India April industrial production: A higher-than-expected up-tick The Industrial Production Index (IP) rose 1.4% yoy in April versus a (upwardly revised) 0.8% yoy fall in March. The positive IP growth was above the consensus forecast of a 0.1% yoy decline and our expectation of a 0.9% yoy expansion. The monthly momentum (seasonally-adjusted) rose 1.8% mom in April versus a 0.5% mom decline in March (see Exhibit 1).

Both the capital and consumer goods indices showed sequential up-ticks. The Capital Goods Index grew 1.6% mom s.a. versus a 9.1% mom decline in March. This was in line with the Infrastructure Index, which rose 4.3% yoy in April. Production of consumer goods rose 0.8% mom in April versus a decline of 2.9% mom in March. However, on a yearly basis, both the capital and consumer goods indices continued to be in negative territory.

We expect a pickup in activity in 2HFY10. Several large investment plans that were mothballed in part due to election-related uncertainties will likely be put back in place. There are several other reasons which suggest to us that there will be an improvement in investment demand in 2HFY10. Domestic demand indicators such as the Purchasing Manager’s Index, the Infrastructure Index and cement dispatches have shown substantial up-ticks recently. Financial conditions have eased considerably. Historical peak-to-trough declines in the investment cycle suggest a bottoming out in the first half of 2009, and the economy continues to have significant pent-up demand for investment, especially in infrastructure and in affordable housing. Our GDP growth forecast for FY10 is at 5.8% with risks now to the upside.

We think monetary policy easing is at an end. Policy rates have come down aggressively and there is excess liquidity in the system. We expect the INR to appreciate further against the USD as the stable government and relatively resilient domestic demand become key catalysts for foreign inflows, deleveraging pressures easing further and the basic balance of payments turning positive in FY10 due to the trade deficit narrowing. Our USD/INR targets are at 47.3, 46 and 44.7 over 3, 6 and 12-month horizons.

>GLOBAL: TECHNOLOGY: IT SERVICES (GOLDMAN SACHS)

Valuation and metrics. See no near-term impact on MA and V from credit card legislation.

Consulting and Outsourcing
Our posture on the Consulting and Outsourcing sub-sector remains guarded. Admittedly, systemic risks have faded, but we believe that economic risks over the next 12-months remain. In particular, we see continued risk to our estimates from a weak discretionary backdrop, and limited 2H09 growth acceleration. From a share performance perspective, we expect continued trailing performance of the sub-sector (-2,058 bps behind the GS Tech Index on a YTD basis), given late cycle exposure vs. other areas of Tech more exposed to the earlier part of the cycle (e.g., Semis, CommTech, etc).

Indian IT Services
We expect a weak demand environment and recent INR strength vs. the USD to negatively impact earnings into 2H09. In our view, sub-sector valuation remains ahead of earnings growth prospects. As such, we see YTD sub-sector performance (+2,786 bps ahead of the GS Tech Index on a YTD basis) as unsustainable, consistent with our Cautious coverage view.

Transaction Processing
Continuing with recent credit card industry reform efforts (e.g., Credit Cardholders’ Bill of Rights Act of 2009 and Unfair or Deceptive Acts or Practices rules), on 6/4 we saw the re-introduction of the Credit Card Fair Fee Act of 2009 by Rep. John Conyers (H.R. 2695). This Bill is aimed specifically at interchange rates, which are set by the networks (Buy-rated MA and V). Assuming the Bill clears Congress, we do not see near-term impact on our network and merchant processors (Buy-rated GPN) as our models have no direct interchange revenues.

Over the long-term, however, any material reduction to interchange could impact the payments industry as credit availability and consumer fees are raised to offset reduced interchange; ultimately impacting credit volume and our models potentially. Separately, we assess MA and V share conversion programs, which based on their size, are expected to have little impact on the shares, and should be absorbed in daily volume.

To see full report: TECHNOLOGY

>STATE BANK OF INDIA (GOLDMAN SACHS)

Concerns about loan restructuring likely to fade; still Neutral

News
SBI reported a much larger than previously reported figure for loan restructuring in its detailed financial report. The detailed financial report was published on June 5, 2009. Restructured loans as of 31 March 2009 at the parent level stood at Rs130 bn versus Rs83 bn reported on 9 May 2009 when it announced the results for 4Q2008. Further, the detailed financial statement also reported that Rs90 bn of loans would be restructured in 2009 taking the total value of restructured loans to Rs220 bn. We believe this surprised the market expectations negatively and pushed down SBI’s share price by nearly 4%.

Analysis
The total loans restructured including those to be implemented in 2009 for SBI would be 4% of loans. Market expectations would likely be impacted by two factors: 1) negative surprises from under-reporting stressed assets; and 2) higher restructured loan levels than reported by its peers thus far. PNB (PNBK.BO) and BOB (BOB.BO) reported stressed asset levels of 3% (proportion of loans restructured, including those to be implemented in 2009), while ICICIB (ICBK.BO) reported 1.4% with the potential of it being revised upward as more borrowers could seek loan restructuring. This could raise market concerns about banks potentially facing higher levels of NPL and credit cost. However, as our Economists believe the economy could get back to trend growth level over the next 24 months, we believe such concerns of the market would likely be transient and unlikely to affect expectations of earnings growth.

Implications
Maintain Neutral and 12-m target price of Rs1150 for SBI, based on SOTP methodology. Upside risks: higher than expected demand for loans and lower credit costs. Downside risks: government policies that could negatively influence the economic environment and interest rate outlook.

To see full report: STATE BANK OF INDIA

>CAIRN INDIA LIMITED (GOLDMAN SACHS)

Ready for first oil; issues getting addressed; add to Conviction list

Source of opportunity
We add Cairn India to our regional Conviction Buy list based on the following factors: 1) the Rajasthan project is ready to start producing oil within next few weeks; 2) our concerns on the stock have materially reduced as the issues on oil pricing and off-take are getting addressed by the stake-holders; 3) our positive outlook on oil prices for 2H2009E and 2010E; 4) Cairn’s earnings leverage to oil prices and production growth profile being among the best in the peer group. Cairn India, in our view, is the best Indian stock for taking exposure to the improving fundamentals of
the oil market and is now our top pick in the Indian E&P space.

Catalyst
1) Removal of remaining uncertainty over pricing of Rajasthan oil before commencement of production in June 2009; 2) increase in oil prices through 2H2009E and 2010E; 3) completion of Cairn’s pipeline around Sep’09 and ramp-up of production volumes; 4) any success in Cairn’s exploration portfolio; 5) demonstration of EOR potential in Rajasthan.

Valuation
We reiterate Buy on Cairn India with new NAV-based 12-m TP of Rs290/sh (Rs240 earlier), implying potential upside of 25%. Currently, Cairn stock is implying long term Brent of US$60/bbl vs. our forecast of US$85/bbl from 2013E onwards. The stock is trading at 3.0x EV/DACF for FY12E (on full ramp-up), making it one of the least expensive E&P stocks globally. Based on global price trends, we believe there is limited risk of the price of Rajasthan oil being lower than our forecast of 15% discount to Brent. We updated Cairn’s earnings estimates following release of FY09 results and converted the financials and production profile to March fiscal. As a result our EPS estimates for FY10E-13E have changed by 3% to 174%.

Key risks
1) Delay in oil production, ramp-up, 2) adverse regulatory development.

To see full report: CAIRN INDIA

>AUTOMOBILES SECTOR (GOLDMAN SACHS)

Initiate on Indian 2-wheelers; Sell Bajaj Auto, Neutral Hero Honda

■ Initiate coverage: Defensive exposure, but well priced in
We initiate coverage on the Indian 2-wheeler automobile industry with a Neutral sector stance and 2 stocks representing 30% of Indian auto industry’s market cap. We like the structurally under-penetrated nature of Indian market and the strong brand franchise of companies under coverage. However, given that valuations have already moved higher (stocks are up 100% on average ytd), risk/reward appears fairly balanced, in our view. The sector is currently trading at an average of 16X FY10E P/E, and offers 20% CAGR earnings growth over FY09E-FY11E. Our positive outlook on the sector is offset by financial market weakness and competitive headwinds, particularly in the premium segment of the market.

■ Exploring global and Indian industry themes
Themes explored in this report are: (1) oligopolistic nature of the 2-wheeler industry globally – implications for India; (2) structural reasons behind superior earnings growth and returns of Indian 2-wheeler companies; (3) sustainability of Hero Honda’s dominant franchise; and (4) the position of stocks on P/B, CROCI, and DCF-based valuation metrics.

■ Bajaj Auto – Growth interrupted, rich valuations, Sell
We initiate coverage on Bajaj Auto (BAJA.BO) with a Sell rating and a 12- month FY11E P/E-based target price of Rs705 implying 25% potential downside. We believe that currently the market is overestimating the impact of new model launches on Bajaj Auto’s market share and profitability over FY09E-FY11E. Intensifying competition and macroeconomic demand headwinds in the premium segment of the market are the catalysts likely to drive stock-price underperformance in, our view.

■ Hero Honda – Structural leader, fairly valued, Neutral
We initiate coverage on Hero Honda (HROH.BO) with a Neutral rating and a 12-month FY11E P/E-based target price of Rs1,399 implying 10% potential upside. We believe that Hero Honda’s market leading growth and returns are already priced in at current levels; as a consequence, we would wait for a more attractive opportunity to gain exposure to this stock.

■ Risks
Key risks include: (1) Competitive pressure from operators such as Honda and Yamaha and (2) macroeconomic headwinds to demand growth.

To see full report: AUTOMOBILES SECTOR

INDIA: ENERGY: OIL - REFINING (GOLDMAN SACHS)

OMCs to depend on bonds despite reform; govt likely benefits most

Enthusiasm on potential pricing reforms has lifted OMC stocks
The stocks of Indian oil marketing companies (OMCs) have moved up sharply in the last few weeks on media reports (e.g., Reuters) suggesting that the government could free up auto fuel pricing up to oil price of US$75/bbl, (without reforms in cooking fuels). Though the petroleum minister is yet to take office, the government has remained noncommittal on this issue; as such, we remain unconvinced about the reforms actually happening, but take a look at how the OMCs would be impacted by potential reforms.

Partial reforms may not help OMCs; gov't likely main beneficiary
We believe that deregulation of only auto fuels may not boost the earnings of OMCs, since oil bonds and upstream payments would still remain critical for them due to large losses from cooking fuel sales. We find it hard to believe that the government would issue a large quantum of oil bonds to increase OMC profits and add to the fiscal deficit in the process. Collection from any windfall tax on oil producers would also likely be less than cooking fuel losses. Hence, we believe that partial reform would improve cash flows of OMCs but may not impact earnings.

The government could be the biggest beneficiary from this, in our view, as it would likely look to reduce issuance of oil bonds and also potentially increase upstream subsidy burden. We also believe that private refiners (RIL, Essar) could be included in the subsidy scheme going forward, rather than the government initiating pricing reforms to encourage private participation in domestic petroleum retailing.

With stock prices moving on expectations of reforms and oil price rising, significant scope for disappointment going forward
With hardly any impact on earnings on OMCs likely from partial reforms and the recent run-up in these stocks, we believe there is scope of disappointment in these stocks in the near term. Moreover, rising oil prices could make partial reform itself unlikely. We believe this sentiment-driven rally in OMC stocks is unlikely to get fundamental support.

Neutral on OMCs on lack of policy direction; move out on rallies
We remain Neutral on IOC, HPCL and BPCL with P/B-based 12-m TPs of Rs415, Rs260, Rs325, respectively, as we wait for some policy direction from the gov’t. We believe investors should reduce positions on any news flow-driven rally in the run-up to the Union budget in early July.

To see full report: OIL SECTOR

>ITC (GOLDMAN SACHS)

In line with expectations: Robust cigarette profit growth in FY09

What surprised us
ITC’s FY2009 results were broadly in line with our forecast, with EPS up 5% yoy to Rs8.64 vs. our expectation of 6% growth, despite a lower-than expected performance in 4Q. Cigarette segment volume was down 3%- 3.5% yoy, in line with our expectation, while its EBIT growth was strong at 15% and margin rose 140 bp yoy. FMCG – Others losses were below Rs5 bn in FY2009, a tad better than we forecast. However, EBIT in Hotels was lower than we forecast, reflecting a high base in 4QFY08 and a significant industry slowdown. Agri Business revenue and EBIT also fell short of our estimates, reflecting lower soya volumes and portfolio rationalization.

What to do with the stock
Maintain Buy on ITC; our 12-mo P/E-based TP of Rs211 implies 15% upside. FY2009 was a year of modest EPS growth as we had forecast, but we expect an acceleration to double-digit earnings growth in FY2010E, led by 1) robust cigarette EBIT growth – ITC delivered 15% pa growth in FY08-09 despite steep tax hikes and an increase in contraband volumes; ITC’s consistent market share gains over the years reflect the strength of its brands and pricing power over peers; 2) we expect FMCG – Others losses to narrow; 3) Hotels should also stabilize in FY10E, while we expect strong growth in the paper business. Risks include adverse cigarette tax hikes, or any prolonged weakness in FMCG – Others and Hotels.

To see full report: ITC

>ASIA ECONOMICS FLASH (GOLDMAN SACHS)

India: Voter stimulus to markets

■ The Congress-led UPA alliance unexpectedly won a big victory in the Parliamentary elections, ensuring that they will form the next government, which will not include the Left or other large regional parties.

■ We think the decisive result is a big positive for markets as it will lead to a stable government, removes months of uncertainty, and will allow the Congress the space to pursue reforms. We think pension, insurance, banking reforms and disinvestment may be back on the agenda.

■ The election’s positive impact on business confidence is the final tenor in the chorus of evidence arguing for a pickup in activity and investment demand in 2HFY10. Recent evidence from the PMI and demand indicators, a large easing of financial conditions, historical peak-to-trough declines, and a huge pent-up demand for infrastructure and affordable housing sing to the same tune.

■ These election results may help India “decouple” further from the global economy by giving a fillip to domestic demand, and there are now upside risks to our GDP growth forecast of 5.8% for FY10.

■ We think the equity market will react positively to the result, with sectors that will benefit including cyclical sectors as the investment cycle turns, and those that play on rural demand—a continuing priority for the UPA. We think that the positive impact on capital inflows will help buoy the INR and we reiterate our 3, 6 and 12-month USD/INR targets of 49.2, 47.3, and 46.0.


To see full report: ASIA ECONOMICS FLASH

>WNS LIMITED (GOLDMAN SACHS)

LT model intact, liquidity strengthening; adjust ests, price target

What's changed
We adjust our estimates following reported 4QFY09 results. For FY10, we lower our GAAP EPS estimate to $0.13 ($0.34 prior); however, on an “adjusted” basis ex. stock compensation and amortization, our FY10 EPS estimate of $1.15 remains unchanged, with lower revenues (due to FX) offset by higher margins and lower taxes. For FY11, we reduce our GAAP EPS estimate to $0.26 ($0.46 prior), reflecting lower margin assumptions, offset by lower taxes. Our adjusted EPS estimate now stands at $1.28 ($1.25 prior) also reflecting slightly lower margin assumptions offset by lower taxes. Our organic revenue growth assumption remains unchanged. We introduce a long-term FY12 EPS estimate of $0.36 ($1.38 adjusted). We raise our 12-month price target to $10 (from $5 previously) to reflect recent sector relative multiple expansion, as well as improved sentiment regarding management transition and liquidity.

Implications
WNS’ initial FY10 revenue outlook (7%-8% yoy organic growth) coupled with results from offshore BPO peers confirm long-term growth opportunities remains, albeit at a slower rate. Importantly, we view WNS’ proactive efforts to improve its working capital and capex management as positive steps in restoring investor confidence. Our fundamental view remains constructive; however, we retain our Neutral rating as the shares appear fairly valued at 9X our FTM adjusted EPS estimate.

Valuation
Our 12-month price target of $10 is derived using a weighted average model incorporating a sector-relative Investment Framework, FTM P/E, and EV/EBITDA multiples; implying a FTM P/E of 9X on adjusted EPS.

Key risks
(1) Lower than expected revenue growth and/or margin leverage. (2) M&A integration risk. (3) FX volatility

To see full report: WNS LIMITED

>INDIA VIEWS (GOLDMAN SACHS)

Election update—exit polls show Congress-led alliance ahead in close finish

Exit polls put the Congress as the single largest party and the ruling coalition UPA getting the most seats. The average of the polls puts the number of possible parliamentary seats for Congress at 154 and for the UPA at 196. The seats for the BJP are pegged at 146 and its alliance, the NDA, at 187. The Left is estimated to get 35 seats. If the exit polls are accurate, both the UPA and NDA would increase their seats in Parliament at the expense of the Left and other regional parties (see Exhibit 1).

The exit poll results are largely in line with expectations. Internal press polls and the grey market were expecting such an outcome (see The elections—the end of the beginning, India Views, May 11), although the race between the UPA and NDA appears to have become closer. If the exit polls are accurate, then the UPA would likely come to power after building a coalition with some regional parties, including the Left. The worst fears of the market would be alleviated, i.e., the likelihood of the Third Front playing a major role in the new government. However, neither would the best scenario play out— that of a government which does not include the Left parties. We believe the reduction in the seats of the regional parties is a positive sign for decision making. Further, given the experience of the past 5 years, the UPA is skilled at building coalitions, which could provide some comfort that a stable government will ensue post-elections.

Exit polls, however, have a dubious record of predicting the actual number of seats. In 2004, they famously got the results wrong when they predicted a big victory for the NDA, but the UPA won the elections (see Exhibit 2). The official results will be announced on May 16, after which the President will play a crucial role. She may invite either the single largest party (possibly Congress or BJP) or the single largest pre-poll coalition (UPA or NDA) to form a government. According to precedent, the single largest party usually gets invited to form the government (e.g., in 1996). That party will then start the process of building a coalition with regional parties in order to get a majority in Parliament. The entire process must be finished by June 2. We expect uncertainty about the nature and composition of the coalition which forms the next government to continue over the next several days, and equity and currency markets to be volatile as a result.

To see full report: INDIA VIEWS

>ICICI Bank (GOLDMAN SACHS)

Removed from Asia Pacific Conviction Buy List

Off Conviction list, but maintain Buy on still resilient prospects

What happened
We remove ICICI bank (ICICIB) from our Asia Pacific Conviction Buy list as the stock has breached our previous target price. ICICIB’s share price has risen by 22% since we added it to the Conviction Buy list on April 27, 2009 vs. a +7% move by the BSE index. Over last 12m, ICICIB fell by 39% vs. 31% decline for BSE. We reiterate our Buy due to: 1) improving earnings growth prospect; 2) reduced concerns about risk profile of assets; and 3) a mean reversion in its multiples as a result of the strengthening fundamentals. We raise our 12-m TP by 11% to Rs590 on upside to near term as well as long-term growth expectations.

Current view
Our constructive view on ICICIB is based on: 1) reduced stress on funding position from lower wholesale costs domestically and globally; 2) improving visibility on growth returning back to sustainable levels by 2010E; 3) cost reduction measures that would likely put the bank in an
advantageous position when growth returns back to sustainable levels; 4) continued focus on profitability; and 5) a moderate valuation (1.2X 09E P/B vs historic median of 1.6X) despite the run-up in share price since March 2009 lows. While the ROE would likely remain low through 2011E, rising ROA together with increase in leverage brightens the prospect of ROE returning back to historic mean of over 16% in the long-term. We believe this would likely remain as a catalyst for the mean reversion of valuation towards historic P/B median levels of 1.6X. We raise our 2009E/2010E EPS by 7%/5% on higher NIM, lower operating costs and progressively
declining credit costs. We also introduce 2011 estimates. Our 12-m TP of Rs590 is derived using SOTP methodology. We value the banking business at the mid-point of GS CAMELOT-derived P/B multiples and ex-growth value. We value the strategic investments of ICICIB using
multiple methodologies.

To see full report: ICICI BANK

>DLF (GOLDMAN SACHS)

Below expectations: Cash generation will be key; maintain Sell

What surprised us
DLF reported FY2009 net income of Rs46.3 bn, which was down 41% yoy, and 7% below our estimate. EBITDA margin for FY2009 was down to 60% from 69% in FY08. reflecting a fall in DLF Assets Limited (DAL) margins. Profit-before-tax margin for DAL stood at 57% for FY09 compared with 72% in FY08. In 4QFY2009, DLF took a one time charge of Rs3 bn on account of price resets and various customer schemes. DLF has withdrawn from 326mn sq ft of land resources, which includes Dankuni and Bidadi townships. It also deferred construction of some 26mn sq ft in FY2009.

What to do with the stock
We maintain our Sell rating and our 12-month target price of Rs124. DLF stock is up 31% in the past month vs. the Sensex up 15%, while results indicate that the backdrop remains challenging. DLF has indicated that it will focus on affordable housing, which we believe is the right strategy in the current difficult environment. Management has also refinanced debt and is looking to raise Rs55 bn from asset disposals. We believe the stock may remain on the sidelines until management is able to lower obligations to DAL-related debtors (DAL owes about Rs49 bn to DLF as at March 31 2009). Although the response to some middle income housing launches
has been encouraging, margins are lower and commercial lease volumes remain negligible. Risks include a significant pick up in sale/lease volume, cash flow from asset disposals and a favorable resolution on DAL debtors.

To see full report: DLF

>India IT Services (GOLDMAN SACHS)

Green shoots could turn to weeds, as growth prospects remain precarious. Still Cautious.

Industry context
We started 2009 with a clear view that the demand backdrop for Indian IT services would
remain weak for the year and that expectations remained too high. This view has essentially
proven out, with continued revenue and EPS reductions through the year. Since the beginning
of 2008 we have now trimmed our CY09 revenue expectations by an average of 28% and EPS by an average of 26%, while our CY10 average revenue reduction has come down 16%, and our EPS estimates have been reduced by 13% on average.

Source of opportunity
Despite reduced expectations, the Indian IT shares on both the local and ADR-listed side have
shown significant outperformance this year. We do not see the recent performance as sustainable given the lack of a turn in earnings, and which we believe remain susceptible to further downward revisions. Importantly, as a lagging model the Indian IT sector is not likely to lead a recovery, especially considering continued weakness in enterprise spending (note IBM, MSFT, SAP, etc.)

Maintain Cautious view on Indian IT
We maintain our Cautious coverage view on three factors: 1. Earnings are not at a trough, and
remain susceptible to reductions. 2. Stretched valuation on reduced growth expectations. 3.
Continued exposure to weak enterprise spending.

Estimate and price target changes
HCL Technologies—for FY09, our revised EPS est. is Rs.17.79. Our revised FY10/FY11 EPS ests. are now Rs.13.67/Rs.16.83. We raised our 12- month price target to Rs.120. Patni—for CY09, our revised USD EPS est. is now $0.95. For CY10/CY11, our revised EPS ests. now stand at $0.90/ $0.93. Our CY09/CY10/CY11 rupee EPS ests. are now Rs.24.8/Rs.23.5/Rs.25.47. Our 12-month price target is now $5.75 on the ADR, and Rs.144 on the local shares. Wipro—for FY10 and FY11, we trimmed our USD EPS ests. by $0.02 and $0.01 to $0.53 and $0.51. On a rupee basis, our FY10/FY11 EPS ests. are now Rs.25.54/Rs.24.09. Our 12-month price target is now $6.50 on the ADR, and to Rs.250 on the local shares.

To see full report: IT SERVICES

>ICICI Bank (GOLDMAN SACHS)

Upgrade to Buy on improving fundamentals; add to Conviction list

Source of opportunity
We upgrade ICICIB to Buy from Neutral and add it to our Asia Pacific Conviction Buy list. We believe 1) reduced stress on funding position from lower wholesale costs domestically and globally, 2) improving visibility on growth returning back to sustainable growth path in 2010E, 3) cost controls sufficiently offsetting headwinds to revenue, 4) continued focus on profitability, and 5) a moderate valuation (0.9X 09E P/B vs historic median of 1.6X) despite the run-up in share price since March 2009 lows, would likely be key drivers of stock price. We believe upside risk could stem from sustained improvement in the bank’s fundamentals.

Catalyst
Successful execution of the bank’s strategy to be evidenced by sequential improvement in its fundamentals, stabilization of macro economic environment mitigating concerns of a severe downturn in asset quality cycle, and stabilization of asset markets leading to improved outlook for the growth of life insurance business would be key catalysts for the stock, in our view. We raise our EPS estimates 7% and 5% for 2009E and 2010E to reflect lower funding costs. We raise our 12-m TP by 29% to Rs530 based on our earnings upgrade as well as improving prospects on long-term profitability.

Valuation
Our 12-m TP of Rs530 (from Rs410) is derived using SOTP methodology. We value the banking business at the mid-point of GS CAMELOT-derived P/B multiples and ex-growth value. We value the strategic investments of ICICIB using multiple methodologies.

Key risks
Risks: a) significant deterioration in the asset quality of wholesale banking segment; b) any additional recap needs for the international subsidiaries leading to BVPS erosion; and c) execution risks in consumer banking.

To see full report: ICICI BANK

>Reliance Industries Ltd. (GOLDMAN SACHS)

Positive News – Estimates Under Review

First Take: Petchem surprises to upside; other income boosts profits

News
Reliance Industries (RIL) reported 4QFY09 adjusted PAT of Rs38.7bn, down 1% yoy, but ahead of Bloomberg consensus of Rs36.5bn. The results also beat our estimate of Rs32.8bn on the back of: 1) higher-than-expected petrochem margins at 18% (up 4.6% qoq) owing to better-than-expected realization from demand recovery and depreciation of INR-USD rate; and
2) higher “other” income. Refining margin of US$9.9/bbl, however, came below our estimate due to weakness in middle distillate cracks.

Analysis
We believe 4Q results demonstrate that RIL’s core commodity businesses are best positioned among regional peers to withstand the down cycle, given 1) its low operating cost structure in refining (opex US$1.5-1.75/bbl) and 2) that it sells the majority of its petrochemical products in highdemand markets like India and China. Since limited fresh investments are likely to be made in the medium term in these core businesses, we believe their cash flow will be increasingly deployed towards the company’s targeted US$4.0-4.5bn of annual capex in the E&P division. With commencement of gas production from D-6 block on April 2, we believe RIL management will focus on developing its other discovered blocks over the next 12-18 months. RIL currently has a total of 35 blocks under NELP, more than 50% of which are in highly prospective KG and Mahanadi basins.

Implications
Our estimates, 12-month target price and rating for RIL are under review. Going forward, we believe the gas business will improve the company’s earnings profile by: 1) adding high proportion of non-cyclical earnings, and 2) improving overall operating margins.

To see full report: RIL

>US Economics Analysts (GOLDMAN SACHS)

The Budget Outlook—A Trillion Here, a Trillion There…

■ We now expect a US budget deficit of $1.86 trillion (13.2% of GDP) for fiscal year (FY) 2009, up from the $1.425 trillion (10%) we projected in late January. The main reasons for this change are greater weakness in the economy and a view that more funding will be needed for financial stabilization.

■ Over the next ten years, we expect the deficit to cumulate to $9.4 trillion, including a $1.5 trillion shortfall for FY 2010. Our ten-year figure is close to the CBO's estimate for President Obama's budget even though we don't include all his proposals. Our weaker economic outlook makes up the difference vis-à-vis CBO and puts our ten-year profile well above the administration's $7.0 trillion estimate for its own budget.

■ As a result, we now project that federal debt held by the public will double as a share of GDP over the next decade, to 83%. With a primary balance (excluding net interest) that remains in deficit throughout this period, policymakers have some wood to chop to keep the debt in check. While they work on that, market participants should take comfort in the fact that the Treasury will benefit from low borrowing costs as well as from yields on assets the government is acquiring in its efforts to stabilize the financial system, most of which will also be repaid.

■ To finance this surge, the US Treasury will need to ramp up its borrowing still further in coming months. We put the total borrowing need (gross coupon sales plus the net change in bills outstanding) at about $3¼ trillion and $2trn for FY 2009 and 2010, respectively. Current financing patterns can cover the FY 2010 need, but the Treasury will have to find another $800bn or so in the next few months if our FY 2009 numbers are right.

To see full report: US ECONOMICS ANALYSTS