>INDIA STRATEGY (MORGAN STANLEY)

THE KNOWN UNKNOWNS

• The global rally in stocks has seemingly stalled, and the euphoria of the election results seems to be in share prices. Several investors are arguing for a correction. The high volatility in share prices suggests that market participants are unsure of the market’s direction. We identify the following key drivers for the market in the coming months:

• Politics and Capital Flows: The change in our view in the middle of May following the elections was not a move away from our fundamental framework. Indeed, in the run up to the elections, we had argued that if a single party won in excess of 180 seats, Indian equities would likely beat emerging markets by more than 25% in the ensuing 12 months (see note dated 6 March 2009, entitled Dealing with Uncertainty - Part 1: The Forthcoming General Elections). This forecast was premised on our fundamental framework that India’s growth was being driven primarily by capital flows and strong election results would revive capital flows. However, our base case called for a fragmented verdict. We were wrong about our assumption on the election results and, hence, changed our view on both the economy as well as the market post the elections. In hindsight, we realize that we missed the growing maturity that the electorate had been displaying over the preceding 18 months in choosing its representatives for the country’s law-making bodies and that the general election results were only a continuation of this trend.

• Budget on July 6: History does not favor a move up in the market in the month post the budget. However, we have to make an assumption ahead of the budget as we did with the election result. Therefore, we expect the finance minister to deliver a solid reform-oriented budget that will incorporate tax cuts, fiscal consolidation, a divestment program, and infrastructure spending as well as announcements relating FDI and deregulation in the financial sector.

• Reforms and the upside to growth forecasts: We raised our growth forecast following the election as we expect capital flows to improve. Since then, we think the government has struck all the right chords on reforms, and this encourages us to further raise our earnings growth forecast. The recent quarterly earnings, which have been ahead of expectations, also influences this change. We now think that earnings growth for the Sensex will be 5% and 17.5% in F2010 and F2011, respectively, in our base case. If the government executes on reforms, we believe there will be more upside to growth, especially in F2011. A notable concern would be that the social agenda takes over the economic agenda, hurting confidence and growth. Another is whether the government’s lack of majority in the Rajya Sabha hampers law making. A key point to note here is that our current growth forecast does not take us back to trend or anywhere close to the heady growth rates of the past five years.

To see full report: INDIA STRATEGY

>WPI IN NEGATIVE TERRITORY (MORGAN STANLEY)

WHOLESALE PRICE INDEX(WPI) IN NEGATIVE TERRITORY

• WPI declines YoY during the week ended June 6: The Wholesale Price Index (WPI) declined 1.61%YoY during the week ended June 6, 2009 compared to +0.13% during the week ended May 30 and +0.48% during the week ended May 23, 2009. Indeed, this is the first time since December,1978 that WPI is in negative territory. This decline in WPI to - 1.61% during the week ended June 6 was below market consensus (as per Bloomberg survey) of -1.52%.

• The sub-zero WPI mainly on high base effect: As we have been highlighting, the decline in WPI this week has been mainly on account of high base effect. Inflation accelerated to 11.66%YoY during the corresponding week last year on pass through of fuel prices by the government and high commodity prices. See Table on next page for the key contributors to this decline in inflation.

• WPI/PPI decline YoY – A global phenomenon: WPI is primarily reflecting the industrial intermediary product prices, which are highly influenced by international prices. Like India, all the major countries in the world are witnessing a deflation in Producers Price Index (PPI), which is similar to India’s WPI. PPI for US, China and Japan declined sharply to -13.4%, -14.2%, -5.4%YoY respectively in May 2009.

• WPI to decline YoY during June-October 2009: We expect the WPI to decline on YoY basis during June-October 2009 on high base effect and slow domestic demand, before recovering to 6.5-7% by end-March 2010.

• CPI inflation to decelerate too: Currently, CPI-IW for April 2009 (the last data point available) is 8.7%YoY. We believe that CPI-Industrial Workers will follow the trend of WPI deceleration with a lag. However, we do not expect CPI deflation in 2009. The weights of CPI components are very different compared to the WPI. The most important differentiating factor is a weighting of food products. While in WPI, food products have a weight of 15.4%, in the case of the CPI it is 46.2%. In our view, food products prices are unlikely to decline YoY.

• No policy rate cuts going forward: We believe the RBI is unlikely to cut policy rates going forward. We expect the RBI to start increasing policy rates from the March 2010 quarter and expect the repo rate to increase to 6.25% by December 2010 from 4.75% currently.

To see full report: WPI

>INDIA PROPERTY (MORGAN STANLEY)

Ears On The Ground 8 – Vol Trends In New Launch Surge

What are we seeing in the market – 1) New launch (residential) momentum is picking up (see Exhibit 1: New Launch Tracker inside), 2) prices continue to fall (or stabilize) & 3) modest pick up in absorption.

New launches – Competition warming up - In May & June, we saw several launches from ‘non listed/non traditional’ property companies – BPTP, Jaypee, Emaar MGF, Hiranandani, Kumar Builders, Mantri, Nirmal etc – while DLF was relatively quiet. We also saw a few new launches by UT (NCR plots, Chennai) & IBREL.

Pricing trends - ‘Book building’ route to ascertain ‘right pricing’ for high volume absorption during ‘soft launch’ phase appears to be becoming common. Consequently, we are seeing high volume sales at deep discount prices soon after ‘hard launch’ happens. Recent price quotes
(BSP only; PLC, car parks etc extra) include – Rs2,100 psf for Noida (Jaypee), Rs1,400 psf – Faridabad (BPTP), Rs2,600 – Gurgaon Sector 65 (Emaar), Rs1,500 psf – Ahmedabad (IBREL), Rs2150 – Vadodra (IBREL), and Rs2,999 – Panvel (Hiranandani) – all of which appear at
30-50% discount to last peak/neighborhood. City centre launches are at a premium to suburbs – Rs4,500 psf – Pune (Kumar) and Rs5,500 psf – Mumbai (Nirmal).

Volume absorption - Even at deep discount pricing, only NCR and Mumbai markets appear to be doing good volumes. Jaypee (Noida, NCR) and BPTP (Faridabad, NCR) each sold 4,000 odd apartments. Most other recent launches sold 300-600 units.

Debates to settle - 1) Pick up in volumes (in the last 3-4 months) is pent-up demand (since little was sold in 2008) or steady state demand (return of GDP growth). 2) Price outlook - Pricing power appears squarely out of developers hand – there has been no price increase even in projects selling 4000 units. We believe that surge in volume sales (for non-Mumbai markets) & rise in rentals (Mumbai) should precede price increase. 3) Commercial demand is muted, recovery is uncertain.

To see full report: INDIA PROPERTY

>SUZLON ENERGY (MORGAN STANLEY)

Ready to Grow

Recuperation: Suzlon has largely restructured its balance sheet and hence some short-term risks have eased. The focus has shifted to a slower and perhaps longer part of the healing in terms of winning new customer orders and regaining its growth trajectory. With steady fossil fuel price increase, positive global policy risk for wind power and likely interest rate and export incentives from the Indian budget, we expect Suzlon’s growth and margin outlook to improve. Near-term worries may arise from lower shipments, lower margins and lingering concerns over stretched
balance sheet. We have lowered our shipment FY09 and FY10 estimates by about 250MW to reflect weak new orders in the domestic market this year and a smaller order backlog of 1,250MW.

Potential Positives: If the oil price were to continue to rise above US$85/barrel, it would make wind power cost competitive (with a nominal carbon cost), without any subsidy, thereby improving the FY11/beyond outlook.

What’s Changed?
Some near-term risks have eased, however, operating conditions remain difficult, in our view. In the interim, the stock price has increased by 85%+ over the past few weeks, outperforming the Sensex by 50%.

1. Shipment Estimates: Based on our recent discussions we gather that domestic orders in March quarter were weaker than our previous estimates. As a result, the shipments in FY09 were likely lower than our previous estimate of 2,750MW. We have lowered our estimate to 2,500 MW for FY09 and 2,450MW for FY10. Due to the high operating leverage, this has reduced our net profit by Rs1.8bn for FY09e and Rs1.9bn for FY10e.

2. Lower Margins: Due to higher costs related to capacity expansion and existing inventory at high costs, we believe that Suzlon’s EBITDA margins may be lower than our initial expectation for FY09 as well as FY10. We now factor in an EBITDA margin of 13.6% and 12.4% for FY09e and FY10e, respectively. This has reduced our net profit estimate by Rs3.5bn for FY09 and Rs450mn for FY10.

3. RE Power Results: Since our last report, RE power has released FY 09 results and FY 10 guidance as well, which were better than our expectation.

4. Balance Sheet Risk: Besides restructuring its CBs, Suzlon has also successfully renegotiated its outstanding acquisition debt of €503m. It has secured a covenant holiday. However, it has to pay an additional interest of 150bps only compared with our initial expectation of an additional 300bps.

5. CB and Debt Restructuring: Suzlon has restructured a large part of its outstanding CBs. As a result, there are now four categories of CBs outstanding, and in the process, it has reduced its outstanding debt by US$111mn. This has also resulted in exceptional gains of US$70mn (due to
buyback of the CBs at 55 and reissuance of CBs at 60) to be booked in FY10.

6. Equity Dilution: Due to new CBs issued with a conversion price of Rs76 per share, we believe that there could be an immediate equity dilution with up to 37mn new shares (2.5% of outstanding shares).

Where We Differ: Lower than Consensus
While our revenue, EBITDA and EBIT forecasts are slightly higher than the consensus expectations, our net profit and EPS estimates are lower than the consensus.

We believe that the consensus may be factoring a very weak new order and shipment outlook for the industry and the Suzlon group companies, resulting in the low revenue forecast. We are
assuming WTG shipments (Suzlon + RE Power) of 3.9GW and 4.4GW, respectively, for FY10e and FY11e, which implies growth of 2% in FY10e and 13% in FY11e. We believe that these are very conservative considering the long-term industry growth forecast of 14-15%.

1. Inflection in Global Wind Demand – While consensus expects about 9% growth in global wind demand in 2009 and 20% in 2010, we expect no growth in FY09 and 27% growth in FY10. We think FY10 should mark an inflection point for global wind demand and Suzlon should be well
positioned to grow strongly in FY11.

2. Inflection in India and US Demand – Due to potential decline in wind demand in India and the US (two of the largest markets for Suzlon) this year, we expect a strong rebound next year that should benefit the company

We suspect that the consensus estimates may be factoring a decline of 8–9% in FY10 and then 13% growth from this low base.

To see full report: SUZLON ENERGY

>INDIAN HOTELS COMPANY LIMITED (MORGAN STANLEY)

F2009: Dismal year

Quick Comment: Impact on our views: Indian Hotels reported F2009 standalone revenues of Rs16bn (down 8% YoY) and standalone net profit of Rs2.3bn (down 38% YoY). Standalone EBITDA was Rs4.9bn (down 30% YoY), while operating margin was lower by 959 bps YoY. On a consolidated basis, revenue in F2009 was Rs26.9bn (down 8% YoY), while reported net profit was Rs125m (down 96% YoY). Consolidated EBITDA was Rs5.6bn (down 37% YoY), while operating margin was lower by 976 bps YoY. The weak performance during the year was for various reasons, including a slowdown in the global economy and the Mumbai terrorist attacks in November 2008, which led to a slowdown in tourism traffic. The company has not disclosed any information on the financial performance of its subsidiary companies (primarily the US, UK and Australian properties) and hence we are unable to comment on the same.

What's new: The company commissioned 1,176 rooms in F2009 leading it to have a year-end room inventory of 11,546 rooms, thus making it the largest hotel company in India. In addition, IHCL will acquire an 85% stake in ELEL Hotels & Investments Limited (which owns the
Sea Rock hotel in Mumbai) for a total consideration of Rs6.8bn. This excludes any amount that the company would spend on refurbishing the property.

Consolidated debt stood at Rs46bn at the end of March 2009 (standalone debt was Rs17.7bn) and the company had a cash balance of close to Rs4.5bn.

Investment thesis: We believe F2010 will be worse for earnings for the company as weakening demand for rooms will force down both average room revenue and occupancy rates thus pressurizing operating margins. Rising interest costs due to high leverage will also affect earnings. As a result we maintain our Underweight rating on the stock.

To see full report: INDIAN HOTELS

>SHIPPING CORPORATION OF INDIA (MORGAN STANLEY)

F2009: In Line with Expectations

Quick Comment: SCI reported F2009 revenues of Rs 41.2 bn (up 12% YoY) vs. our estimate of Rs 41.3 bn, and EBITDA of Rs 10.9 bn (up 19% YoY) vs. our estimate of Rs 10.6 bn. Reported profits were Rs 9.4 bn (up 16% YoY while adjusted profits were Rs 9.8 bn (up 20% YoY). SCI has significant exposure to tanker rates, and we believe they were relatively stable during the first
9 months of the year compared to bulk carrier rates, which helped the company to avoid volatility in earnings.

What's new: For F4Q09, SCI reported revenues of Rs 8 bn (down 24%) and EBITDA of Rs 918 mn (down 61% YoY). EBITDA margins for F4Q09 were down 1,062 bps YoY at 11.4%. Reported profits were Rs2 bn (down 19% YoY); however, we believe adjusted profits (adjusted for forex impact) were Rs892 mn (down 64% YoY).

During the year, the company sold two vessels – a dry bulk carrier in F4Q09 and a crude oil tanker in F2Q09. It realized Rs345 mn as profit on the sale of these ships. In addition, during the year, the company is likely to have taken delivery of two container vessels and one VLCC. The company declared a dividend of Rs 6.5/share.

In our view, tanker freight rates could stabilize or improve from current levels after having been beaten down in the past few months.

To see full report: SCI

>RIL–RNRL: COURT CASE UPDATE (MORGAN STANLEY)

Quick Comment – What’s new: In the RIL-RNRL case, the Mumbai High Court has given a judgment upholding the plea of RNRL on getting assured gas supplies from RIL at US$2.34/mmbtu. The court has also asked the two counter parties to come up with an agreement over supplies within a month, based on Bloomberg.

What could happen? We believe this decision will be challenged at the Supreme Court. RIL is already producing close to 25 mmscmd of gas and contracted to 37 mmscmd of customers and selling to power plants as well as fertilizer plants at US$4.2/mmbtu. Some of the power plants include ADAG group (Samalkot plant in Andhra Pradesh) and we believe these agreements will
not be hampered though there is clause in the agreements which suggests the deal is subject to court approval of the RIL-RNRL case.

Our utility team believes that RNRL or its affiliate companies will take close to at least 2 years to build a power plant (gas based); similar for NTPC’s expansion plans in Gandhar and Kavas. Hence, in our earnings we have assumed US$4.2/mmbtu for RIL’s gas F2010 and F2011. Thereafter we have assumed US$2.52/mmbtu (average of US$2.34 to be sold to RNRL and US$2.7 to be sold to NTPC) for 40 mmscmd of gas which would go to RNRL and NTPC in our earnings; so the current judgment makes no impact to our earnings even if this does go to the supreme court and it gives the same judgment. The quantum of revenue impact due to lower
gas price equates a US$1bn a year effective F2012.

We would use any volatility in the stock to enter RIL – which has outperformed SENSEX by 23% YTD. Our understanding is RNRL cannot use the gas to trade and has to be the consumer of the gas (or its affiliate company) and hence the two year assumption in our earnings is real. However if the supreme court rules for a higher gas price of US$4.2/mmbtu for the NTPC/RNRL gas we would
have to raise our earnings by 15-20% and target price by approximately Rs380/share in the long term, all else equal.

To see full report: RIL-RNRL

>GAIL (MORGAN STANLEY)

F4Q09 Results: Back on Track

What’s New: GAIL reported an adjusted EBITDA of Rs8.7bn and an adjusted profit of Rs4.9bn for F4Q09. The company had a write back of Rs2.2bn of staff cost in F4Q09, due to excess provision in F3Q09. We believe the company, after a dismal F3Q09, is back on track to meet our F2010 estimates. The key positive surprise in the results was: a) better-than-expected petrochemical
business; and b) Improved margins of the LPG transmission division. However, margins for the gas
transmission division disappointed due to appreciation of the dollar against the rupee. We believe that with the recent dollar weakness and increase in gas transmission volumes from KGD6, GAIL is poised to meet our F2010 estimates for the division.

Improvement in Petrochemical division: Sales volumes grew 4.6% YoY but were down 13% QoQ. GAIL continued to clear its polymer inventory as domestic demand and price realizations improved on a QoQ basis. Price realizations improved by 22% on a QoQ basis, but fell 13% YoY. This led to EBITDA growth of 184% sequentially and almost doubling of its net realizations for the division (EBIT/tonne) on a QoQ basis. We believe that with improving demand for polymers, GAIL should meet our F2010 estimates for the division.

LPG transmission showed a 32% growth in margins on a QoQ basis despite a 6% QoQ drop in volumes. We believe that the increase in margins was due to lower operating costs; however, we need to clarify this with management.

Gas transmission volumes for the quarter increased by 0.5% YoY to 82.5mmscmd. Transmission tariffs for the quarter at Rs877/tscm were up 12.5% YoY. Gas sales were up 12.5% YoY but down 3% QoQ due to shutdown in Panna Mukta Tapti (PMT) gas fields. EBITDA for the division increased 3% QoQ, but dropped 14% YoY due to 25% appreciation of the dollar against the rupee, causing an increase in fuel costs for the division.

To see full report: GAIL

>PANTALOON RETAIL (MORGAN STANLEY)

Capital and Business Concerns Abating, No Transparency Yet

Upgrading PRIL to Overweight: In these volatile markets, it is difficult to time stock calls. However, we believe that two out of three of our concerns on PRIL have abated. Although the stock could be volatile in the medium term, we believe that any dip should be used an as entry opportunity. We are upgrading the stock to Overweight from Equal-weight.

Alleviating concerns about ability to fund the business: PRIL recently raised Rs3bn in equity and has plans to raise another Rs10bn. This is likely to increase its flexibility to fund its growth plans and reduce its financial leverage. More important, the company’s interest costs, which jumped from 3.7% of sales to 4.9% of sales in F2009, is likely to decline to 4.4% sales in F2010, contributing to profit growth.

Business conditions improving: We believe that PRIL’s business environment is likely to recover with an improving trend in IIP growth and consumer sentiment. SSG has seen consistent improvement over the last few months, EBITDA margin has picked up due to benign competition, and we expect the company to report positive operating cash flow for the first time in F2009.

Room for improvement in transparency: In our view, PRIL needs to enhance its transparency regarding consolidated financials, funding, and investment plans in subsidiary companies, and increase the clarity regarding holdings in subsidiary companies amongst other things.

Where could we go wrong? 1) PRIL is unable to raise equity to fund its growth plans; 2) it disproportionately funds its subsidiaries; and 3) it takes large inventory write-offs.

To see full report: PANTALOON RETAIL

>SESA GOA (MORGAN STANLEY)

Quick Comment; Dempo Acquisition – A Value Accretive Proposition

Impact on our views: We are encouraged by Sesa’s proposed acquisition of Dempo’s mining assets and by management’s ability to deliver on its promise to utilize its strong balance sheet to enhance Sesa’s size and competitiveness. In our view, the stock should react positively to this event. However, we would note the very strong performance that Sesa stock has displayed
in the last 3-4 weeks.

Sesa Goa announced that it has agreed to acquire VS Dempo Ltd for US$368mn (Rs17.5 bn) on a debt-free and cash-free basis. This will be funded out of Sesa’s cash balance of US$872mn. Dempo produced 4mt of iron ore (sales were higher at 4.4mt) in FY09. The acquisition would increase the size of Sesa Goa’s 16mt production during the same period by 25%. Based in Goa, Dempo is amongst the largest second tier ore exporters from India. We estimate the acquisition could lift our F10e EPS for Sesa by ~12%.

Looks like a value accretive acquisition to us, especially due to opportunities to share infrastructure in Goa and possibility of further exploration ay Dempo.

EV/t of US$90/t of production looks attractive for Sesa versus global average of over US$200/t of production of the major iron ore producers (and US$160/t for Sesa).

Reserves of Dempo at 70 mt seem to be on the smaller side (18 year mine life) but here too, the acquisition EV/t of US$5/t is less than that of Sesa of US$12/t.

EV/EBITDA multiple for proposed acquisition price works out to be 4x on F09 basis vs. 4.7x for Sesa. In F09 Dempo had an EBITDA margin of 43% vs. that of 51% for Sesa Goa. Notably, Vedanta had bought 51% stake in Sesa at EV/t of US$9 on reserves and US$160 on
production.

To see full report: SESA GOA

>INDIA'S VIRTUOUS CYCLE (MORGAN STANLEY)

In recent years, the global view of India has been couched in terms of the daunting China comparison. It wasn’t all that long ago—1991, to be precise—when Asia’s two giants had similar levels of income per capita. That was then. Now, China’s standard of living is more than three times that of India.

The China comparison has been India’s wake-up call— a striking example of how economic development can be galvanized by pro-active government policy. It’s not that India has floundered. To the contrary, over the 2001-07 timeframe, India’s real GDP growth averaged close to 7.5% —an impressive pick-up from the 5.5% pace of the 1990s. Perhaps the most remarkable aspect of this accomplishment was that it occurred despite the government—in the face of stiff political headwinds.

Courtesy of the stunning election victory of the Congress-led UPA, India could now benefit from development-friendly government policies.

Those headwinds could now quickly become tailwinds. Courtesy of the stunning victory of the Congress-led UPA in the recently concluded elections, there is a distinct chance that India could now benefit from its own strain of proactive, development-friendly government policies. The
same reformers that were so successful in opening up India in the early 1990s were stymied by the politics of coalition management over the past five years. The massive win of the Congress Party all but removes that impediment—hinting at a new era of reforms that could well unshackle the increasingly robust potential of the Indian economy.

The dirty little secret of the Indian economy is that it has actually been performing much better beneath the surface than the China comparison might otherwise suggest. India has long had a much better micro story than China: a large population of world-class companies, outstanding
entrepreneurs, a well-educated and IT-competent workforce, relatively sound financial markets and banks, a wellentrenched rule of law, and democracy.

By contrast, India has suffered more from its macro deficiencies—especially when compared with China. That’s especially been true of saving, foreign direct investment, and infrastructure. Yet in the past 3-4 years, India has made impressive progress on at least two of those counts. Gross domestic saving rates have moved from the low 20s (as a percent of GDP) in the late 1990s to the high 30s in 2007-08. Foreign direct investment accelerated to a $40 billion annual rate—still short of Chinese style numbers but a four-fold increase from the pace of India’s inflows as recently as 2005. Even on the infrastructure front—where development constraints remain quite serious—the GDP share of such investments is up from the rock-bottom levels of the late 1990s.

That points to a virtuous cycle for India— with the self-reinforcing interplay of its micro and macro drivers augmented by pro-active government policy and reforms.

Therein lies India’s great potential—an increasingly virtuous cycle brought about the self-reinforcing interplay of its micro and macro drivers that now stands a real chance of being augmented by pro-active government policy and reforms. The new government needs to seize this moment—moving aggressively on four fronts: public sector deficit reduction, infrastructure support, privatization, and deregulation of pension funds, retail, and banking. These are all tough battles for any politicians to wage. But if the government makes a down-payment on these critical initiatives, the Indian economy is well positioned to benefit for years to come.

With the world having fallen in love with China, the Indian economy now stands a real chance to emerge as Asia’s biggest surprise.

The world has fallen in love with the China miracle. India has slipped between the cracks in all this euphoria. Yet China now faces increasingly daunting challenges in coming to grips with long-simmering imbalances of its export- and investment-dominated macro structure. That could be a great opportunity for the “sleeper.” Shifting political winds now give a well-balanced Indian economy a real chance to emerge as Asia’s biggest surprise in the years immediately ahead.

>RELIANCE INFRASTRUCTURE LIMITED (MORGAN STANLEY)

Beneficiary of Improving Macro Outlook; Maintain OW

Investment conclusion: We maintain our Overweight rating on Reliance Infrastructure and raise our price target to Rs1,458 as we believe the improvement in the macro outlook and the positive outcome in the Indian general elections bode well for the power and infrastructure sectors in terms of emerging opportunities and easier availability of credit. In addition, improving visibility on execution and increased clarity on balance sheet strength should be positive triggers for the stock.
We believe the stock will trade between our base-case (Rs1,117/share) and bull-case (Rs1,671/share) values and will be a key risk-reward play in the current environment. Our price target tops up our base-case fair value with the investment in preference shares and 50% of the upside available between the bull case and base case for the other components in our sum-of-parts valuation as we believe the probability of our bull case unfolding has increased.

Recent developments: Key developments in the past few weeks include i) Proposed issuance of preferential warrants to be converted into 42.9mn equity shares to the promoters (ADA Group) at Rs1,000/share; ii) Achievement of financial closure by the 600 MW Rosa II power plant and WRSS transmission project; and iii) Possible scheme of arrangement to enable value unlocking in the future.

Where we could be wrong: Any significant slippages on execution or continued ambiguity concerning liquid assets would likely be negative for the stock. In addition, given its high beta, any weakness in the macro environment could put pressure on the stock.

To see full report: RELIANCE INFRASTRUCTURE

>RISKS OF AN ASIAN RELAPSE (MORGAN STANLEY)

■ The spin game is on as the world tries to talk itself out of the worst recession since the end of
World War II. The good news is that there is a slowing in the rate of deterioration in the global economy. The tougher news is that this is hardly surprising. In the aftermath of unprecedented annualized plunges in real global GDP on the order of 6–7% in the fourth quarter of 2008 and the first quarter of 2009, the pace of deterioration almost had to moderate.

■ Export-led Asia lacks support from internal private consumption and remains more dependent on external demand than ever before.

■ Unless Asia finds a new source of demand to replace the overextended American consumer, it will face surprisingly stiff headwinds for years to come.

■ China is vulnerable to a relapse in 2009, as a fading investment stimulus is not countered by a US-led snapback in external demand.

To see full report: RISKS OF AN ASIAN RELAPSE

>EXPORTS REMAIN WEAK (MORGAN STANLEY)

• Exports (in dollar terms) continued the double-digit decline in April: Exports (in dollar terms) declined 33.2%YoY in April, largely at the same pace as the decline of 33.3%YoY registered in March. In our view, the high-base effect of last year (46.8%YoY in April 2008) also accentuated the slowdown trend in export numbers in YoY terms. In rupee terms, exports contracted 16.4%YoY, compared with -15.3%YoY in March. In other Asian countries, exports (in dollar terms) declined 24.3%YoY in April, compared with -22.7% in the previous month.

• Imports (in dollar terms) contracted further: Imports (in dollar terms) declined by 36.6% YoY in April, compared with -34% in March. In rupee terms, imports declined 20.6%YoY, compared with -16.2% in March. Oil imports (in dollar terms) declined further to -58.5%, compared with -58.1% in March, in line with the fall in crude oil prices. Non-oil imports (in dollar terms) also weakened further to -24.6% in April, compared with -18.9% in the previous month, on slowing domestic demand.

• Monthly trade deficit widened to US$5 billion (5.2% of GDP, annualized) in April: This compares with a US$4 billion deficit in the previous month. The YoY monthly trade deficit declined by 42.8% in April, compared with average growth of 41.4% in the previous 12 months. On a trailing 12-month basis, the trade deficit narrowed to 9.1% of GDP in April, compared with 9.4% in the previous month.

• Exports to improve on the margin: While we maintain our view that exports will remain weak over the next two to three months, due to the global slowdown, we expect the YoY decline to turn narrower from here (i.e., exports should still decline, but by a smaller extent). The second-order derivative for the US ISM New Orders Index (three-month moving average), which leads export growth by about four months (Exhibit on Slide 4), has improved for the fourth consecutive month (40.5 in April 2009 vs. 35.8 in March 2009, and 29.8 in February 2009). We believe imports will remain weak, due to slowing domestic demand and a lower oil import bill, helping the trade deficit to narrow further.

To see full report: EXPORTS

>SUZLON ENERGY (MORGAN STANLEY)

Another Stock Placement

Quick Comment: Due to a strained B/S (being repaired) and large stock pledges (promoters), the market has been concerned about stock overhang. While we were not expecting it, the promoters have announced a stock placement. Positives such as strong RE Power results and guidance, successful renegotiation of the bulk of its CBs, potential for better domestic credit conditions, and likely higher domestic infrastructure investment are being partially negated by
weak Hansen results and potential stock overhang from second promoters’ sale of $120mn (after selling $45mn two weeks ago). While the future risk of dilution from a primary stock offer or overhang from secondary sale cannot be ruled out, we believe that the restructuring of the remaining debt, potential stake sale in Hansen, and new order wins are likely to serve as positive catalysts.

What's new: Suzlon’s negotiations with Martifer to delay the last payment of €175mn (Rs11.4bn) for acquisition of RE Power have been unsuccessful. To raise cash, promoters are in the process of selling 4%+ of Suzlon stock to raise ~Rs5.5bn. Proceeds will be loaned to Suzlon (via Inter Corporate Deposits). Furthermore, Suzlon has secured a new credit line to draw down an additional Rs6bn. Proceeds from these two borrowings will be used to pay Martifer.

What we like: First, a solution to Martifer payment via this route compared with issuance of new shares at Suzlon avoids dilution to existing shareholders. Second, uncertainty regarding payment to Martifer is eliminated.

What we do not like: First, we are concerned about the frequency of the promoter sell-downs. Unless promoters assure the market that there are not going to be further disposals, it is likely to create a significant overhang. Second, a disposal of a partial stake in Hansen to reduce acquisition debt may have been a better strategic alternative. Potentially freeing up debt capacity, it may have allowed it to raise bank debt for full payment. Third, we are concerned about the timing of stake sales during a period when the market is awaiting its FY09 results and the results of its debt restructuring.

To see full report: SUZLON ENERGY

>QE MARCH 2009 GDP GROWTH HIGHER THAN EXPECTATIONS (MORGAN STANLEY)

• GDP growth was at 5.8% in QE March 2009: The Central Statistical Organization (CSO) announced that GDP growth in the quarter ended March 2009 (QE March 2009) was at 5.8%. This compares with 5.8% registered in QE December 2008 (revised upwards from 5.3% earlier) and 7.7% (revised upwards from 7.6% earlier) in QE September 2008. The growth was above our and consensus expectation (as per Bloomberg survey) of 5%. The full-year F2009 (12 months ended March 2009) GDP growth stands at 6.7% YoY, compared to 9% growth registered in F2008.

• Agriculture growth rebounded; manufacturing segment contracted: The agriculture and allied activities segment accelerated 2.6% in QE March 2009 after declining 0.4% in the previous quarter. Within this, the agriculture sector rebounded 2.7% (vs. -0.8% earlier). Mining and quarrying, on the other hand, decelerated to 1.6% (vs. 4.9% earlier). The industry segment growth decelerated to 1.4% compared to 2.1% in the previous quarter. Within industry, while the
manufacturing segment declined 1.4% (the first time since the 1997-1998 crisis) vs. +0.9% earlier, growth in the electricity, gas & water supply, and construction segments accelerated to 3.6% and 6.8%, respectively, (vs. 3.5% and 4.2% earlier).

• Services segment growth decelerated: Growth in the services sector decelerated to 8.6% in QE March 2009, compared with 10.2% in the previous quarter. Within services, while growth in the community, social & personal services segment decelerated to 12.5% vs. 22.5% earlier, it remained strong, underpinned by fiscal stimulus measures undertaken by the government during QE March 2009. Growth in the other segments accelerated in QE March 2009 – financing, insurance, real estate & business services (9.5% vs. 8.3% earlier) and trade, hotels, transport & communication (6.3% vs. 5.9% earlier).

To see full report: INDIA ECONOMICS

>RELIANCE INFRASTRUCTURE LIMITED (MORGAN STANLEY)

Additional Capital Infusion Proposed

Quick Comment: The company announced plans to raise Rs43 bn through a fresh equity infusion. The offering is priced at Rs1,000/share (effective price of Rs1,183/share) and subject to shareholders approval.

Background: In January ‘08, the company allotted 43 mn warrants to promoters, which were to be converted at Rs1,822/share by July 19, 2009. The company consequently collected Rs7,835 mn as margin money through this issuance. At a board meeting held over the weekend, the company cancelled the 43 mn equity warrants that were issued then. Subsequently, the board proposed an equity infusion of 42.9 mn shares.

Implications

• The effective cost of purchase comes to Rs1,183/share (Rs1,000/share + 7,835 mn that the company had paid as margin in early 2008); this is 5.5% above the current market price.
  

• If the entire issuance is subscribed to by the promoter group, the promoter holding would increase from 37.6% at end-March 2009 to 47.5% post the issuance.
  

• At end-March 2009, consolidated book value was Rs169 bn, which would increase to Rs212 bn (Rs787/share). This implies a P/B of 1.4x at current levels.
  

Investment thesis: The equity issuance plans should be viewed positively, in our view, as it will allow the company to bid for additional infrastructure and power projects. In addition, it will further bolster its balance sheet. We maintain our Overweight rating on the stock.

To see full report: RELIANCE INFRASTRUCTURE LIMITED

>JAIPRAKASH ASSOCIATES LIMITED (MORGAN STANLEY)

Updating Price Target; Remains Top Reward Play

■ Investment conclusion: Over the next two to three years, we expect Jaiprakash to emerge as a top-5 player in India in each of its main businesses: cement, construction, power, and real estate. We believe the company has sustainable advantages in each of its businesses, and it remains the top pick in our coverage.

■ What's new: We update our price target to account for the uptick in valuations of the company’s peers in the cement and construction businesses. Our price target moves up 33% to Rs221, implying an upside potential of 27%. As one of the biggest beneficiaries of the improvement in the macro scenario, the run-up in Jaiprakash stock over the last few days, on the back of the positive surprise in the central elections, is more than justified, in our opinion. We raise our F2010e and F2011e EPS by 11% and 10% respectively, to account for the upside surprise in F2009 earnings, as well as an uptick in pricing assumptions for the cement sector.

■ Where we differ: We believe the market continues to lay a disproportionate emphasis on potential problems in funding. The courts have approved the intra-group mergers announced in March 2009, paving the way for the treasury stock (14.5% of equity) to become available in the next four weeks, giving the company significant flexibility to raise funds. In addition, while we
conservatively price the stock at or below peer valuations despite having a superior model in every business segment, we believe the market is allocating a large discount to peer multiples, which is unjustified, in our view.

To see full report: JAIPRAKASH ASSOCIATES LIMITED

>EM Equity Flows (MORGAN STANLEY)

EM Equity Flows: Inflows of $2.5bn

• Dedicated EM equity funds had aggregate inflows of $2.5bn for the week ended 05/20/09, compared to inflows of $3.6bn in the prior period. The pace of flows into dedicated EM funds suggests a swift move towards optimism after a period of very negative sentiment during 2H08 – 1Q09. We have now had 10 consecutive weeks of net inflows out of the last 10 weeks. We are therefore above the 8-of-10 weeks net inflow mark that has been associated with pullbacks
in the past. The two most recent episodes when flow momentum reached these levels were June-08 and October-07, providing good sell signals

• The EM benchmark is 66% above its 27th October low ad on a relative basis only 3% away from establishing a new high vs MSCI World. The resumed outperformance of EM to DM is supportive of such flows and validates our belief in the resilience of the secular bull market in EM equities. Although there remains upside to our MSCI EM year-end price target of 810, we continue to think that the risk-reward near term no longer warrants a fully invested position.
In our 22nd March report we advised clients to take some profits and reduced our equities overweight recommendation from maximum 10% position to 6%, raising some cash

• Technically we are 2.0 SDs overbought (vs. 3 month average) versus -3.0 SDs oversold last October. Prices have risen very rapidly and valuations are also not as attractive vs. just a few months ago. MSCI EM trailing P/B is currently 1.9x, up from 1.1x at the October market trough. MSCI EM is currently valued at 12.6x 2010E P/E

• This week we updated our country quants model recommendations. We are running lower risk positions in our country quant model as valuations converged significantly in the last month. Overweights are China, Taiwan, India, Malaysia and Israel. Underweights are Mexico, Indonesia, Thailand, Argentina and Philippines

• There is only 8% upside to our 810 MSCI EM price target through December 2009

To see full report: EM EQUITY FLOWS

>UNITECH LIMITED (MORGAN STANLEY)

Stock Is at the Crossroads of Demand; Moving to EW

■ Investment conclusion: We are upgrading our rating on Unitech to Equal-weight in view of initial repair of the balance sheet (182% net gearing in F09 could drop to 84% in F10) and improving macro (India F10 GDP growth upgraded to 5.8%, better foreign capital flows, and prospects of pro-market policy actions). Worst may be behind us, but not yet out of the woods, we believe.

■ Several challenges remain: 1) Portfolio of ongoing projects (27 msf) appears weak (since 80% is completed and recognized). 2) Therefore, reliance on new launches and sales to generate earnings/cash is high. 3) Even after significant fund raising (Rs24 bln odd), B/S will remain stretched (84% F10E net gearing and low interest coverage of 2.5x incl interest cost capitalised).

■ Where we differ: Valuations appear rich (16% discount to F10 NAV, 18x F10 EPSe, 1.9x F10 P/B) and seem to be already discounting revival in business cycle. Nearer term, we see downside risk to the stock price. Our new PT is Rs60 (at 30% discount to F10 NAVe of Rs85), and we would take profits on stock price appreciation.

■ Something for the bulls: Early monetization (regulations/Telenor permitting) of balance stake
(32.75%) in telecom business could further fix the b/s. We see deep value in Mumbai projects, though given the task of slum rehab, we expect slow delivery of land parcels (1-2 msf launches in F10, 50% share).

■ Something for the bears: There may be more equity dilution (preferential warrants to promoters, another QIP), economic recovery might be elusive, and low (YTD 2.5 msf) sales contracted (versus 18 msf at Rs3000 ASP to meet our F10 EPSe).

To see full report: UNITECH LIMITED